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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSRS
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-05583
Franklin Templeton Variable Insurance Products Trust
(Exact name of registrant as specified in charter)
One Franklin Parkway, San Mateo, CA 94403-1906
(Address of principal executive offices) (Zip code)
Craig S. Tyle, One Franklin Parkway, San Mateo, CA 94403-1906
(Name and address of agent for service)
Registrant’s telephone number, including area code: (650) 312-2000
Date of fiscal year end: 12/31
Date of reporting period: 06/30/09
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| Item 1. | Reports to Stockholders. |
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JUNE 30, 2009
FRANKLIN TEMPLETON
VARIABLE INSURANCE PRODUCTS TRUST
SEMIANNUAL REPORT
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FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST SEMIANNUAL REPORT
| i | ||
| SUPP-1 | ||
Fund Summaries | ||
| FGR-1 | ||
| FGI-1 | ||
| FH-1 | ||
| FI-1 | ||
| FI-8 | ||
| FLG-1 | ||
| FRD-1 | ||
| FSV-1 | ||
| FSC-1 | ||
| FSI-1 | ||
| FSI-10 | ||
| FFA-1 | ||
| FUS-1 | ||
| FUS-7 | ||
| FZ10-1 | ||
Mutual Global Discovery Securities Fund | MGD-1 | |
| MGD-9 | ||
| MS-1 | ||
| MS-10 | ||
| TD-1 | ||
| TD-8 | ||
| TF-1 | ||
| TF-7 | ||
| TGA-1 | ||
| TGA-10 | ||
Templeton Global Bond Securities Fund | TGB-1 | |
| TGB-9 | ||
| TG-1 | ||
| I-1 | ||
| SI-1 |
*Not part of the semiannual report
NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE
MASTER CLASS 1
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IMPORTANT NOTESTO PERFORMANCE INFORMATION
Performance data is historical and cannot predict or guarantee future results. Principal value and investment return will fluctuate with market conditions, and you may have a gain or loss when you withdraw your money. Inception dates of the funds may have preceded the effective dates of the subaccounts, contracts, or their availability in all states.
When reviewing the index comparisons, please keep in mind that indexes have a number of inherent performance differentials over the funds. First, unlike the funds, which must hold a minimum amount of cash to maintain liquidity, indexes do not have a cash component. Second, the funds are actively managed and, thus, are subject to management fees to cover salaries of securities analysts or portfolio managers in addition to other expenses. Indexes are unmanaged and do not include any commissions or other expenses typically associated with investing in securities. Third, indexes often contain a different mix of securities than the fund to which they are compared. Additionally, please remember that indexes are simply a measure of performance and cannot be invested in directly.
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SUPPLEMENT DATED JULY 22, 2009
TOTHE PROSPECTUSDATED MAY 1, 2009
OF
FRANKLIN FLEX CAP GROWTH SECURITIES FUND, CLASSES 2AND 4
FRANKLIN GLOBAL REAL ESTATE SECURITIES FUND, CLASSES 1, 2AND 4
FRANKLIN GROWTHAND INCOME SECURITIES FUND, CLASSES 1, 2AND 4
FRANKLIN HIGH INCOME SECURITIES FUND, CLASSES 1, 2AND 4
FRANKLIN INCOME SECURITIES FUND, CLASSES 1, 2AND 4
FRANKLIN LARGE CAP GROWTH SECURITIES FUND, CLASSES 1, 2AND 4
FRANKLIN LARGE CAP VALUE SECURITIES FUND, CLASSES 2AND 4
FRANKLIN RISING DIVIDENDS SECURITIES FUND, CLASSES 1, 2AND 4
FRANKLIN SMALL CAP VALUE SECURITIES FUND, CLASSES 1, 2AND 4
FRANKLIN SMALL-MID CAP GROWTH SECURITIES FUND, CLASSES 1, 2AND 4
FRANKLIN STRATEGIC INCOME SECURITIES FUND, CLASSES 1, 2AND 4
FRANKLIN TEMPLETON VIP FOUNDING FUNDS ALLOCATION FUND, CLASSES 1, 2AND 4
FRANKLIN U.S. GOVERNMENT FUND, CLASSES 1, 2AND 4
FRANKLIN ZERO COUPON FUND — MATURINGIN DECEMBER 2010, CLASSES 1AND 2
MUTUAL GLOBAL DISCOVERY SECURITIES FUND, CLASSES 1, 2AND 4
MUTUAL SHARES SECURITIES FUND, CLASSES 1, 2AND 4
TEMPLETON DEVELOPING MARKETS SECURITIES FUND, CLASSES 1, 2, 3AND 4
TEMPLETON FOREIGN SECURITIES FUND, CLASSES 1, 2, 3AND 4
TEMPLETON GLOBAL ASSET ALLOCATION FUND, CLASSES 1, 2,AND 4
TEMPLETON GLOBAL BOND SECURITIES FUND, CLASSES 1, 2, 3AND 4
TEMPLETON GROWTH SECURITIES FUND, CLASSES 1, 2AND 4
(Each a series of Franklin Templeton Variable Insurance
Products Trust)
The Prospectus is amended as follows:
I. For all Funds and Classes, under “Fees and Expenses — Annual Fund Operating Expenses” the following footnote is added:
Note: In periods of market volatility, assets may decline significantly, causing total annual fund operating expenses to become higher than the numbers shown in the table.
II. For Class 2 shares of Franklin Flex Cap Growth Securities Fund, Franklin Global Real Estate Securities Fund, Franklin Income Securities Fund, Franklin Large Cap Growth Securities Fund, Franklin Large Cap Value Securities Fund, Franklin Rising Dividends Securities Fund, Franklin Small Cap Value Securities Fund, Franklin Small-Mid Cap Growth Securities Fund, Franklin Templeton VIP Founding Funds Allocation Fund, Franklin U.S. Government Fund, Mutual Shares Securities Fund and Templeton Growth Securities Fund, footnote 1 or 2, as applicable, referencing the Funds’ rule 12b-1 plan, is amended to read as follows:
While the maximum amount payable under the Fund’s Class 2 rule 12b-1 plan is 0.35% per year of the Fund’s average daily net assets, the Fund’s board of trustees has set the current rate at 0.25% per year through April 30, 2010.
Please keep this supplement for future reference.
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FRANKLIN GLOBAL REAL ESTATE SECURITIES FUND
This semiannual report for Franklin Global Real Estate Securities Fund covers the period ended June 30, 2009.
Performance Summary as of 6/30/09
Franklin Global Real Estate Securities Fund – Class 1 had a -10.23% total return for the six-month period ended 6/30/09.
Performance reflects the Fund’s Class 1 operating expenses, but does not include any contract fees, expenses or sales charges. If they had been included, performance would be lower. These charges and deductions, particularly for variable life policies, can have a significant effect on contract values and insurance benefits. See the contract prospectus for a complete description of these expenses, including sales charges.
Franklin Global Real Estate Securities Fund Class 1
Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares.
Current performance may differ from figures shown.
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Fund Goal and Main Investments: Franklin Global Real Estate Securities Fund seeks high total return. The Fund normally invests at least 80% of its net assets in investments of companies located anywhere in the world that operate in the real estate sector and normally invests predominantly in equity securities.
Performance Overview
You can find the Fund’s six-month total return in the Performance Summary. The Fund underperformed its benchmark, the Standard & Poor’s Global REIT Index (hedged into U.S. dollars), which had a -6.27% total return.1
Economic and Market Overview
During the six months under review, global equities hit new bear market lows in March before delivering their biggest quarterly rally in more than a decade. At the beginning of the period, with investor sentiment depressed and risk aversion elevated, defensive, non-cyclical sectors like utilities, consumer staples and health care were market leaders. As data emerged suggesting a fledgling recovery in the financials sector and a moderating pace of global economic contraction, investors regained some risk appetite, rotating capital back into cyclical sectors such as financials, materials and consumer discretionary. Resurgent risk appetite also buoyed emerging markets stocks, which delivered their best three-month returns on record from March through May 2009. Emerging market optimism in turn supported higher commodity prices, which gained the most since the bubble in hard assets burst in the summer of 2008. Also supporting commodity prices was a weaker U.S. dollar. Although systemic risk aversion and the consensus belief that the U.S. could lead the global economy out of recession helped strengthen the dollar at the beginning of the period, investors soon began to worry about the currency’s ongoing stability in the face of aggressive and unconventional monetary policy, and the greenback lost value relative to most currencies for the six-month period.
In the reporting period’s final weeks, equity markets moderated as investors appeared to contemplate the rally’s merits and reassess their new positions. Although sentiment had improved and most seemed to believe the global economy had exited the worst stage of this recessionary cycle, indicators remained mixed and lacked the sustainable
1. Source: © 2009 Morningstar. One cannot invest directly in an index, nor is an index representative of the Fund’s portfolio. Please see Index Descriptions following the Fund Summaries.
Fund Risks: The Fund’s investments in stocks may offer the potential for long-term gains but can be subject to short-term price fluctuations. As a nondiversified Fund that invests at least 80% of its assets in companies located anywhere in the world that operate in the real estate sector, the Fund carries much greater risk of adverse developments affecting that sector than a fund that invests more broadly. Foreign investing, especially in emerging markets, involves additional risks, including currency fluctuations, economic instability, market volatility, and political and social instability. REITs may be affected by any change in the value of the properties owned and by their location, rental income, financing and management. The Fund’s prospectus also includes a description of the main investment risks.
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upward trajectory investors had hoped for. For example, initial U.S. jobless claims fell to their lowest levels in six months during May, but unemployment rose again at the end of the period to 9.5%.2 In Europe, policymakers committed to an easier monetary regime, but the eurozone’s industrial production declined, capacity utilization continued to shrink, and price deflation was recorded for the first time since data began in 1997.3 In China, a stimulative monetary campaign spurred lending and fueled an annualized money growth rate of 26%, a powerful measure against near-term economic headwinds but a potentially dangerous catalyst for longer-term inflation and asset bubble formation.4 In Japan, government stimulus programs including one to support debt issued by REITs helped those stocks there.
Global Real Estate Market Overview
The global real estate markets were mixed during 2009 with generally better results in developing countries. According to the S&P Global REIT Index (hedged into U.S. dollars), the worst performing real estate market was the U.K. with a -19.75% total return.1 The U.S. market also suffered with a -12.43% total return.1 Developing country real estate markets were standouts, led by Turkey (+52.19%) and Greece (+34.04%).1 Other markets that posted positive results included Hong Kong (+33.45%) and the China region, including China, Hong Kong and Taiwan (+30.84%).1
Investment Strategy
We are research-driven, fundamental investors. Our active investment strategy is centered on the belief that unsynchronized regional economic activity within the global economy provides consistent, attractive return opportunities in global real estate markets. When selecting investments for the Fund’s portfolio, we use a bottom-up, value-oriented stock selection process that incorporates macro-level views in the evaluation process.
Manager’s Discussion
The Fund had significant detractors from performance during the reporting period including Land Securities Group, Digital Realty Trust and GPT Group. U.K.-based REIT Land Securities Group was hurt by declining property values in the U.K and an overleveraged balance sheet. The Fund’s performance relative to the benchmark index suffered
2. Source: Bureau of Labor Statistics.
3. Source: European Communities Eurostat.
4. Source: People’s Bank of China.
REITs are real estate investment trust companies, usually with publicly traded stock, that manage a portfolio of income-producing real estate properties such as apartments, hotels, industrial properties, office buildings or shopping centers. The Fund predominantly invests in “equity” REITs, which also take ownership positions in real estate. Shareholders of equity REITs generally receive income from rents received and receive capital gains when properties are sold at a profit. REITs are generally operated by experienced property management teams and typically concentrate on a specific geographic region or property type.
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from our underweighting of U.S.-based data-center solutions provider Digital Realty Trust which, despite the faltering U.S. economy, experienced steady demand for its datacenter backup and Internet storage facilities. Australian REIT GPT Group’s performance was hurt by refinancing needs, declining property values among some of its core holdings and involvement in a troubled joint venture with infrastructure investor Babcock & Brown. By country, the U.S., U.K. and Australia hindered the Fund’s results.
During the period under review, the Fund’s cash position contributed to performance and helped to offset the overall market’s decline. On the stock level, significant contributors to performance during the period included Westfield Group, Simon Property Group and Kenedix Realty Investment Group. Westfield Group, the world’s largest REIT, benefited from the resiliency of its properties in its home market of Australia as well as in the U.S. and the U.K. Simon Property Group, a U.S. regional mall REIT, owns high-quality shopping malls whose sales held up well during the ongoing recession. Kenedix Realty Investment Group, a Japanese office REIT, performed well because it obtained a new sponsor and also because the Tokyo office market experienced only a modest increase in vacancy rates. By country, Hong Kong, a special administrative region of China, helped absolute and relative results. We maintained a slightly overweighted position in this market, and our stock selection improved results as many holdings appeared to benefit from advantageous real estate fundamentals, stable earnings and good balance sheets as well as the play on greater China the region offers.
We believe the REITs in our portfolio have quality management teams that have led their companies through past economic downturns and positioned them to navigate uncertain times with sufficient liquidity to survive and then capitalize on any distress in local property markets. With conservative balance sheets, free cash-flow generation exceeding dividend payout requirements and the ownership of higher quality “hard” assets in their respective markets, many REITs, we believe, should be able to survive the current economic downturn.
At the same time, REITs, including some of the strongest among them, traded at what we considered attractive valuations at period-end as measured by dividend yields, cash flow multiples and discounts to net asset value. In our analysis, distressed selling by some weaker REITs and overleveraged private real estate investors may occur in the near term, which could create opportunities for companies with solid balance sheets and access to capital to acquire quality assets.
Top 10 Holdings
Franklin Global Real Estate
Securities Fund
6/30/09
Company Sector/Industry, | % of Total Net Assets | |
| Westfield Group, ord. & 144A | 8.4% | |
| Retail REITs, Australia | ||
| Unibail-Rodamco SE | 4.5% | |
| Retail REITs, France | ||
| Simon Property Group Inc. | 4.4% | |
| Retail REITs, U.S. | ||
| Boston Properties Inc. | 3.2% | |
| Office REITs, U.S. | ||
| Ventas Inc. | 2.8% | |
| Specialized REITs, U.S. | ||
| British Land Co. PLC | 2.8% | |
| Diversified REITs, U.K. | ||
| Vornado Realty Trust | 2.3% | |
| Diversified REITs, U.S. | ||
| Public Storage | 2.1% | |
| Specialized REITs, U.S. | ||
| Host Hotels & Resorts Inc. | 2.1% | |
| Specialized REITs, U.S. | ||
| HCP Inc. | 2.1% | |
| Specialized REITs, U.S. | ||
The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund’s Statement of Investments.
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Thank you for your participation in Franklin Global Real Estate Securities Fund. We look forward to serving your future investment needs.
The foregoing information reflects our analysis, opinions and portfolio holdings as of June 30, 2009, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.
Geographic Breakdown
Franklin Global Real Estate Securities Fund
6/30/09
| Country | % of Total Net Assets | |
| U.S. | 49.9% | |
| Australia | 14.0% | |
| Japan | 9.8% | |
| U.K. | 8.2% | |
| France | 6.3% | |
| Hong Kong | 2.6% | |
| Netherlands | 2.5% | |
| Canada | 2.3% | |
| Singapore | 1.6% | |
| New Zealand | 1.0% | |
| Belgium | 0.8% | |
| Short-Term Investments & Other Net Assets | 1.0% | |
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Fund Expenses
As an investor in a variable insurance contract (Contract) that indirectly provides for investment in an underlying mutual fund, you can incur transaction and/or ongoing expenses at both the Fund level and the Contract level.
| • | Transaction expenses can include sales charges (loads) on purchases, surrender fees, transfer fees and premium taxes. |
| • | Ongoing expenses can include management fees, distribution and service (12b-1) fees, contract fees, annual maintenance fees, mortality and expense risk fees and other fees and expenses. All mutual funds and Contracts have some types of ongoing expenses. |
The expenses shown in the table are meant to highlight ongoing expenses at the Fund level only and do not include ongoing expenses at the Contract level, or transaction expenses at either the Fund or Contract levels. While the Fund does not have transaction expenses, if the transaction and ongoing expenses at the Contract level were included, the expenses shown below would be higher. You should consult your Contract prospectus or disclosure document for more information.
The table shows Fund-level ongoing expenses and can help you understand these expenses and compare them with those of other mutual funds offered through the Contract. The table assumes a $1,000 investment held for the six months indicated. Please refer to the Fund prospectus for additional information on operating expenses.
Actual Fund Expenses
The first line (Actual) of the table provides actual account values and expenses. The “Ending Account Value” is derived from the Fund’s actual return, which includes the effect of ongoing Fund expenses, but does not include the effect of ongoing Contract expenses.
You can estimate the Fund-level expenses you incurred during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:
| 1. | Divide your account value by $1,000. |
If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6.
| 2. | Multiply the result by the number under the heading “Fund-Level Expenses Incurred During Period.” |
If Fund-Level Expenses Incurred During Period were $7.50, then 8.6 x $7.50 = $64.50.
In this illustration, the estimated expenses incurred this period at the Fund level are $64.50.
Franklin Global Real Estate Securities Fund Class 1
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Hypothetical Example for Comparison with Other Mutual Funds
Information in the second line (Hypothetical) of the table can help you compare ongoing expenses of the Fund with those of other mutual funds offered through the Contract. This information may not be used to estimate the actual ending account balance or expenses you incurred during the period. The hypothetical “Ending Account Value” is based on the Fund’s actual expense ratio and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Fund-Level Expenses Incurred During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds offered through a Contract.
| Class 1 | Beginning Account Value 1/1/09 | Ending Account Value 6/30/09 | Fund-Level Expenses Incurred During Period* 1/1/09–6/30/09 | ||||||
Actual | $ | 1,000 | $ | 897.70 | $ | 3.67 | |||
Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,020.93 | $ | 3.91 | |||
*Expenses are calculated using the most recent six-month annualized expense ratio, net of expense waivers, for the Fund’s Class 1 shares (0.78%), which does not include any ongoing expenses of the Contract for which the Fund is an investment option, multiplied by the average account value over the period, multiplied by 181/365 to reflect the one-half year period.
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Franklin Templeton Variable Insurance Products Trust
Financial Highlights
Franklin Global Real Estate Securities Fund
| Six Months Ended June 30, 2009 (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 1 | 2008 | 2007 | 2006 | 2005 | 2004 | |||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 10.84 | $ | 25.42 | $ | 35.25 | $ | 32.55 | $ | 30.87 | $ | 23.91 | ||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.09 | 0.62 | 0.80 | 0.67 | 0.70 | 0.75 | ||||||||||||||||||
Net realized and unrealized gains (losses) | (1.20 | ) | (9.10 | ) | (7.56 | ) | 5.40 | 3.38 | 6.78 | |||||||||||||||
Total from investment operations | (1.11 | ) | (8.48 | ) | (6.76 | ) | 6.07 | 4.08 | 7.53 | |||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income and net realized foreign currency gains | (1.34 | ) | (0.32 | ) | (0.81 | ) | (0.75 | ) | (0.49 | ) | (0.53 | ) | ||||||||||||
Net realized gains | — | (5.78 | ) | (2.26 | ) | (2.62 | ) | (1.91 | ) | (0.04 | ) | |||||||||||||
Total distributions | (1.34 | ) | (6.10 | ) | (3.07 | ) | (3.37 | ) | (2.40 | ) | (0.57 | ) | ||||||||||||
Net asset value, end of period | $ | 8.39 | $ | 10.84 | $ | 25.42 | $ | 35.25 | $ | 32.55 | $ | 30.87 | ||||||||||||
Total returnc | (10.23)% | (42.22)% | (20.65)% | 20.87% | 13.74% | 32.19% | ||||||||||||||||||
Ratios to average net assetsd | ||||||||||||||||||||||||
Expenses before waiver and payments by affiliates | 1.16% | 1.08% | 0.84% | 0.50% | 0.49% | 0.50% | ||||||||||||||||||
Expenses net of waiver and payments by affiliatese | 0.78% | 0.60% | 0.52% | 0.50% | 0.49% | 0.50% | ||||||||||||||||||
Net investment income | 2.07% | 3.41% | 2.57% | 2.04% | 2.32% | 3.00% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 30,886 | $ | 39,018 | $ | 83,250 | $ | 140,487 | $ | 145,425 | $ | 152,451 | ||||||||||||
Portfolio turnover rate | 46.94% | 77.28% | 121.84% | 31.39% | 36.10% | 39.42% | ||||||||||||||||||
aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.
bBased on average daily shares outstanding.
cTotal return does not include any fees, charges or expenses imposed by the variable annuity and life insurance contracts for which the Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle. Total return is not annualized for periods less than one year.
dRatios are annualized for periods less than one year.
eBenefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
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Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Franklin Global Real Estate Securities Fund
| Six Months Ended June 30, 2009 (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 2 | 2008 | 2007 | 2006 | 2005 | 2004 | |||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 10.61 | $ | 24.97 | $ | 34.67 | $ | 32.08 | $ | 30.49 | $ | 23.65 | ||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.08 | 0.56 | 0.72 | 0.58 | 0.64 | 0.72 | ||||||||||||||||||
Net realized and unrealized gains (losses) | (1.18 | ) | (8.93 | ) | (7.43 | ) | 5.31 | 3.30 | 6.65 | |||||||||||||||
Total from investment operations | (1.10 | ) | (8.37 | ) | (6.71 | ) | 5.89 | 3.94 | 7.37 | |||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income and net realized foreign currency gains | (1.29 | ) | (0.21 | ) | (0.73 | ) | (0.68 | ) | (0.44 | ) | (0.49 | ) | ||||||||||||
Net realized gains | — | (5.78 | ) | (2.26 | ) | (2.62 | ) | (1.91 | ) | (0.04 | ) | |||||||||||||
Total distributions | (1.29 | ) | (5.99 | ) | (2.99 | ) | (3.30 | ) | (2.35 | ) | (0.53 | ) | ||||||||||||
Net asset value, end of period | $ | 8.22 | $ | 10.61 | $ | 24.97 | $ | 34.67 | $ | 32.08 | $ | 30.49 | ||||||||||||
Total returnc | (10.36)% | (42.39)% | (20.86)% | 20.58% | 13.47% | 31.80% | ||||||||||||||||||
Ratios to average net assetsd | ||||||||||||||||||||||||
Expenses before waiver and payments by affiliates | 1.41% | 1.33% | 1.09% | 0.75% | 0.74% | 0.75% | ||||||||||||||||||
Expenses net of waiver and payments by affiliatese | 1.03% | 0.85% | 0.77% | 0.75% | 0.74% | 0.75% | ||||||||||||||||||
Net investment income | 1.82% | 3.16% | 2.32% | 1.79% | 2.07% | 2.75% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 286,134 | $ | 343,701 | $ | 893,837 | $ | 1,491,571 | $ | 1,343,868 | $ | 1,005,647 | ||||||||||||
Portfolio turnover rate | 46.94% | 77.28% | 121.84% | 31.39% | 36.10% | 39.42% | ||||||||||||||||||
aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.
bBased on average daily shares outstanding.
cTotal return does not include any fees, charges or expenses imposed by the variable annuity and life insurance contracts for which the Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle. Total return is not annualized for periods less than one year.
dRatios are annualized for periods less than one year.
eBenefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
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Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Franklin Global Real Estate Securities Fund
| Class 4 | Six Months Ended June 30, 2009 (unaudited) | Period Ended December 31, 2008a | ||||||
Per share operating performance | ||||||||
(for a share outstanding throughout the period) | ||||||||
Net asset value, beginning of period | $ | 10.80 | $ | 23.34 | ||||
Income from investment operationsb: | ||||||||
Net investment incomec | 0.07 | 0.45 | ||||||
Net realized and unrealized gains (losses) | (1.19 | ) | (6.89 | ) | ||||
Total from investment operations | (1.12 | ) | (6.44 | ) | ||||
Less distributions from: | ||||||||
Net investment income and net realized foreign currency gains | (1.29 | ) | (0.32 | ) | ||||
Net realized gains | — | (5.78 | ) | |||||
Total distributions | (1.29 | ) | (6.10 | ) | ||||
Net asset value, end of period | $ | 8.39 | $ | 10.80 | ||||
Total returnd | (10.37)% | (37.28)% | ||||||
Ratios to average net assetse | ||||||||
Expenses before waiver and payments by affiliates | 1.51% | 1.43% | ||||||
Expenses net of waiver and payments by affiliatesf | 1.13% | 0.95% | ||||||
Net investment income | 1.72% | 3.06% | ||||||
Supplemental data | ||||||||
Net assets, end of period (000’s) | $ | 2 | $ | 2 | ||||
Portfolio turnover rate | 46.94% | 77.28% | ||||||
aFor the period February 29, 2008 (effective date) to December 31, 2008.
bThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.
cBased on average daily shares outstanding.
dTotal return does not include any fees, charges or expenses imposed by the variable annuity and life insurance contracts for which the Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle. Total return is not annualized for periods less than one year.
eRatios are annualized for periods less than one year.
fBenefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
FGR-10
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited)
| Franklin Global Real Estate Securities Fund | Country | Shares | Value | ||||
Common Stocks 99.0% | |||||||
Diversified REITs 14.8% | |||||||
British Land Co. PLC | United Kingdom | 1,394,000 | $ | 8,761,621 | |||
Canadian REIT | Canada | 108,700 | 2,299,342 | ||||
Dexus Property Group | Australia | 3,768,804 | 2,276,122 | ||||
a,bDexus Property Group, 144A | Australia | 1,343,000 | 811,088 | ||||
GPT Group | Australia | 4,187,560 | 1,652,296 | ||||
ICADE | France | 22,670 | 1,861,234 | ||||
Kenedix Realty Investment Corp. | Japan | 831 | 2,880,386 | ||||
Kiwi Income Property Trust | New Zealand | 3,586,968 | 2,082,558 | ||||
aKiwi Income Property Trust, 144A | New Zealand | 988,000 | 573,623 | ||||
Liberty Property Trust | United States | 174,100 | 4,011,264 | ||||
Mirvac Group | Australia | 2,983,747 | 2,594,875 | ||||
Premier Investment Co. | Japan | 353 | 1,260,191 | ||||
PS Business Parks Inc. | United States | 28,800 | 1,395,072 | ||||
Shaftesbury PLC | United Kingdom | 157,700 | 782,956 | ||||
Stockland | Australia | 728,702 | 1,883,587 | ||||
aStockland, 144A | Australia | 695,724 | 1,798,344 | ||||
Tokyu REIT Inc. | Japan | 166 | 899,253 | ||||
Vornado Realty Trust | United States | 162,149 | 7,301,569 | ||||
Wereldhave NV | Netherlands | 23,450 | 1,743,222 | ||||
| 46,868,603 | |||||||
Industrial REITs 4.7% | |||||||
AMB Property Corp. | United States | 195,800 | 3,682,998 | ||||
Ascendas REIT | Singapore | 962,000 | 1,055,829 | ||||
Brixton PLC | United Kingdom | 1,037,200 | 691,156 | ||||
EastGroup Properties Inc. | United States | 45,000 | 1,485,900 | ||||
Japan Logistics Fund Inc. | Japan | 223 | 1,490,369 | ||||
ProLogis | United States | 415,400 | 3,348,124 | ||||
Segro PLC | United Kingdom | 7,752,100 | 3,093,068 | ||||
| 14,847,444 | |||||||
Office REITs 18.0% | |||||||
Alexandria Real Estate Equities Inc. | United States | 53,400 | 1,911,186 | ||||
AMP NZ Office Trust | New Zealand | 1,308,759 | 590,996 | ||||
Befimmo SCA | Belgium | 22,900 | 1,737,988 | ||||
BioMed Realty Trust Inc. | United States | 78,400 | 802,032 | ||||
Boston Properties Inc. | United States | 214,100 | 10,212,570 | ||||
CapitaCommercial Trust | Singapore | 4,522,000 | 2,559,564 | ||||
Champion REIT | Hong Kong | 6,911,196 | 2,265,118 | ||||
Cofinimmo | Belgium | 7,390 | 860,313 | ||||
Commonwealth Property Office Fund | Australia | 1,758,668 | 1,175,419 | ||||
Corporate Office Properties Trust | United States | 92,400 | 2,710,092 | ||||
Digital Realty Trust Inc. | United States | 82,800 | 2,968,380 | ||||
Douglas Emmett Inc. | United States | 153,200 | 1,377,268 | ||||
Great Portland Estates PLC | United Kingdom | 764,636 | 2,764,661 | ||||
Highwoods Properties Inc. | United States | 116,900 | 2,615,053 | ||||
ING Office Fund | Australia | 4,564,834 | 1,690,883 | ||||
Japan Real Estate Investment Co. | Japan | 669 | 5,561,115 | ||||
Mack-Cali Realty Corp. | United States | 90,400 | 2,061,120 | ||||
Mori Hills REIT Investment Corp. | Japan | 114 | 433,001 | ||||
Nippon Building Fund Inc. | Japan | 624 | 5,348,941 | ||||
Nomura Real Estate Office Fund Inc. | Japan | 334 | 2,128,227 | ||||
ORIX JREIT Inc. | Japan | 450 | 2,064,135 | ||||
FGR-11
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Franklin Global Real Estate Securities Fund | Country | Shares | Value | ||||
Common Stocks (continued) | |||||||
Office REITs (continued) | |||||||
Silic | France | 20,830 | $ | 1,836,236 | |||
SL Green Realty Corp. | United States | 54,100 | 1,241,054 | ||||
| 56,915,352 | |||||||
Residential REITs 7.4% | |||||||
AvalonBay Communities Inc. | United States | 74,890 | 4,189,347 | ||||
Boardwalk REIT | Canada | 40,400 | 1,135,973 | ||||
Camden Property Trust | United States | 80,000 | 2,208,000 | ||||
Equity Lifestyle Properties Inc. | United States | 82,400 | 3,063,632 | ||||
Equity Residential | United States | 240,100 | 5,337,423 | ||||
Nippon Accommodations Fund Inc. | Japan | 352 | 1,581,735 | ||||
Nippon Residential Investment Corp. | Japan | 845 | 2,087,946 | ||||
UDR Inc. | United States | 378,070 | 3,905,463 | ||||
| 23,509,519 | |||||||
Retail REITs 41.0% | |||||||
CapitaMall Trust | Singapore | 1,311,660 | 1,267,567 | ||||
Cedar Shopping Centers Inc. | United States | 212,700 | 961,404 | ||||
CFS Retail Property Trust | Australia | 2,989,791 | 3,972,423 | ||||
Corio NV | Netherlands | 102,590 | 4,987,322 | ||||
Developers Diversified Realty Corp. | United States | 452,006 | 2,205,789 | ||||
Eurocommercial Properties NV | Netherlands | 36,060 | 1,110,182 | ||||
Federal Realty Investment Trust | United States | 94,600 | 4,873,792 | ||||
Frontier Real Estate Investment Corp. | Japan | 483 | 3,092,684 | ||||
Hammerson PLC | United Kingdom | 1,059,860 | 5,349,231 | ||||
Japan Retail Fund Investment Corp. | Japan | 491 | 2,272,582 | ||||
Kimco Realty Corp. | United States | 592,500 | 5,954,625 | ||||
Klepierre | France | 63,630 | 1,640,814 | ||||
Land Securities Group PLC | United Kingdom | 587,162 | 4,552,685 | ||||
Link REIT | Hong Kong | 2,819,600 | 6,017,650 | ||||
The Macerich Co. | United States | 158,218 | 2,786,219 | ||||
Mercialys | France | 19,840 | 612,207 | ||||
National Retail Properties Inc. | United States | 179,600 | 3,116,060 | ||||
Realty Income Corp. | United States | 225,500 | 4,942,960 | ||||
Regency Centers Corp. | United States | 116,900 | 4,080,979 | ||||
RioCan REIT | Canada | 295,400 | 3,881,261 | ||||
Simon Property Group Inc. | United States | 269,060 | 13,837,756 | ||||
Tanger Factory Outlet Centers Inc. | United States | 135,600 | 4,397,508 | ||||
Taubman Centers Inc. | United States | 130,200 | 3,497,172 | ||||
Unibail-Rodamco SE | France | 94,833 | 14,120,636 | ||||
Westfield Group | Australia | 2,503,480 | 22,941,251 | ||||
aWestfield Group, 144A | Australia | 392,800 | 3,599,519 | ||||
| 130,072,278 | |||||||
Specialized REITs 13.1% | |||||||
HCP Inc. | United States | 307,600 | 6,518,044 | ||||
Health Care REIT Inc. | United States | 159,000 | 5,421,900 | ||||
Hospitality Properties Trust | United States | 93,000 | 1,105,770 | ||||
Host Hotels & Resorts Inc. | United States | 780,614 | 6,549,352 | ||||
Nationwide Health Properties Inc. | United States | 174,000 | 4,478,760 | ||||
Public Storage | United States | 103,400 | 6,770,632 | ||||
Senior Housing Properties Trust | United States | 122,700 | 2,002,464 | ||||
Ventas Inc. | United States | 294,600 | 8,796,756 | ||||
| 41,643,678 | |||||||
Total Common Stocks (Cost $365,508,727) | 313,856,874 | ||||||
FGR-12
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Franklin Global Real Estate Securities Fund | Country | Principal Amount | Value | ||||||
Short Term Investments (Cost $8,545,902) 2.7% | |||||||||
Repurchase Agreements 2.7% | |||||||||
cJoint Repurchase Agreement, 0.023%, 7/01/09 (Maturity Value $8,545,908) | United States | $ | 8,545,902 | $ | 8,545,902 | ||||
Banc of America Securities LLC (Maturity Value $736,743) | |||||||||
Barclays Capital Inc. (Maturity Value $675,298) | |||||||||
BNP Paribas Securities Corp. (Maturity Value $2,455,667) | |||||||||
Credit Suisse Securities (USA) LLC (Maturity Value $2,455,667) | |||||||||
Deutsche Bank Securities Inc. (Maturity Value $871,852) | |||||||||
HSBC Securities (USA) Inc. (Maturity Value $736,743) | |||||||||
UBS Securities LLC (Maturity Value $613,938) | |||||||||
Collateralized by U.S. Government Agency Securities, 0.58% - 7.25%, 1/15/10 - 6/27/16; dU.S. Government Agency Discount Notes, 12/31/09; dU.S. Treasury Bills, 8/13/09; and U.S. Treasury Notes, 1.375% - 1.50%, 3/15/12 - 12/31/13. | |||||||||
Total Investments (Cost $374,054,629) 101.7% | 322,402,776 | ||||||||
Other Assets, less Liabilities (1.7)% | (5,381,016 | ) | |||||||
Net Assets 100.0% | $ | 317,021,760 | |||||||
aSecurity was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be sold in transactions exempt from registration only to qualified institutional buyers or in a public offering registered under the Securities Act of 1933. These securities have been deemed liquid under guidelines approved by the Trust’s Board of Trustees. At June 30, 2009, the aggregate value of these securities was $6,782,574, representing 2.14% of net assets.
bNon-income producing.
cSee Note 1(c) regarding joint repurchase agreement.
dThe security is traded on a discount basis with no stated coupon rate.
FGR-13
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Franklin Global Real Estate Securities Fund |
At June 30, 2009, the Fund had the following forward exchange contracts outstanding. See Note 1(d).
| Currency | Counterparty | Type | Quantity | Contract Amount | Settlement Date | Unrealized Appreciation | Unrealized Depreciation | |||||||||||
Australian Dollar | DBAB | Sell | 4,187,481 | $ | 3,120,943 | 7/15/09 | $ | — | $ | (246,928 | ) | |||||||
Japanese Yen | DBAB | Sell | 427,694,018 | 4,267,609 | 7/16/09 | — | (171,793 | ) | ||||||||||
British Pound | BOFA | Sell | 2,103,575 | 3,156,028 | 7/20/09 | — | (305,008 | ) | ||||||||||
British Pound | BOFA | Buy | 2,103,575 | 3,218,597 | 7/20/09 | 242,439 | — | |||||||||||
Euro | JPHQ | Sell | 6,006,526 | 7,964,222 | 7/20/09 | — | (460,636 | ) | ||||||||||
Euro | JPHQ | Buy | 1,202,573 | 1,638,000 | 7/20/09 | 48,749 | — | |||||||||||
Australian Dollar | HSBC | Sell | 8,031,708 | 5,783,633 | 7/21/09 | — | (672,900 | ) | ||||||||||
Australian Dollar | UBSW | Sell | 8,925,192 | 6,669,186 | 7/21/09 | — | (505,602 | ) | ||||||||||
Australian Dollar | JPHQ | Sell | 3,394,834 | 2,444,993 | 7/21/09 | — | (284,047 | ) | ||||||||||
Australian Dollar | UBSW | Buy | 3,495,918 | 2,462,000 | 7/21/09 | 348,300 | — | |||||||||||
British Pound | BZWS | Sell | 3,727,046 | 5,558,092 | 7/21/09 | — | (574,050 | ) | ||||||||||
British Pound | UBSW | Sell | 3,522,071 | 5,417,989 | 7/21/09 | — | (376,907 | ) | ||||||||||
Canadian Dollar | UBSW | Sell | 2,012,239 | 1,680,689 | 7/21/09 | — | (49,819 | ) | ||||||||||
Euro | UBSW | Sell | 5,585,644 | 7,503,039 | 7/21/09 | — | (331,487 | ) | ||||||||||
Japanese Yen | CITI | Sell | 343,273,797 | 3,468,907 | 7/21/09 | — | (94,452 | ) | ||||||||||
Singapore Dollar | CITI | Sell | 2,465,894 | 1,647,455 | 7/21/09 | — | (54,277 | ) | ||||||||||
Singapore Dollar | BZWS | Sell | 349,896 | 233,732 | 7/21/09 | — | (7,734 | ) | ||||||||||
Canadian Dollar | DBAB | Sell | 2,482,598 | 2,028,432 | 7/28/09 | — | (106,671 | ) | ||||||||||
Australian Dollar | JPHQ | Sell | 13,221,902 | 10,095,956 | 8/20/09 | — | (508,928 | ) | ||||||||||
Australian Dollar | BOFA | Sell | 4,982,000 | 3,874,879 | 8/20/09 | — | (121,031 | ) | ||||||||||
British Pound | BOFA | Sell | 5,261,024 | 8,114,187 | 8/20/09 | — | (541,383 | ) | ||||||||||
British Pound | BOFA | Buy | 2,994,616 | 4,581,403 | 8/20/09 | 345,415 | — | |||||||||||
Euro | BZWS | Sell | 3,848,024 | 5,193,677 | 8/20/09 | — | (203,354 | ) | ||||||||||
Japanese Yen | JPHQ | Sell | 100,796,081 | 1,053,141 | 8/20/09 | 6,445 | — | |||||||||||
Japanese Yen | BZWS | Sell | 328,128,712 | 3,428,543 | 8/20/09 | 21,159 | — | |||||||||||
Singapore Dollar | BOFA | Sell | 1,322,712 | 902,321 | 8/20/09 | — | (10,332 | ) | ||||||||||
Canadian Dollar | DBAB | Sell | 3,477,957 | 3,042,885 | 8/26/09 | 51,209 | — | |||||||||||
Euro | DBAB | Sell | 4,064,812 | 5,632,162 | 9/18/09 | — | (68,213 | ) | ||||||||||
Euro | DBAB | Buy | 1,468,667 | 2,046,000 | 9/18/09 | 13,617 | — | |||||||||||
Australian Dollar | HSBC | Sell | 5,878,471 | 4,612,836 | 9/21/09 | — | (91,065 | ) | ||||||||||
Australian Dollar | DBAB | Sell | 5,169,241 | 4,052,788 | 9/21/09 | — | (83,593 | ) | ||||||||||
Australian Dollar | CITI | Sell | 4,469,845 | 3,494,033 | 9/21/09 | — | (82,698 | ) | ||||||||||
Australian Dollar | BZWS | Sell | 3,574,502 | 2,809,201 | 9/21/09 | — | (51,084 | ) | ||||||||||
Australian Dollar | DBAB | Buy | 3,574,116 | 2,850,000 | 9/21/09 | 9,976 | — | |||||||||||
British Pound | DBAB | Sell | 5,334,167 | 8,730,166 | 9/21/09 | — | (50,988 | ) | ||||||||||
British Pound | CITI | Sell | 2,460,287 | 3,999,935 | 9/21/09 | — | (47,490 | ) | ||||||||||
British Pound | DBAB | Buy | 1,025,989 | 1,679,000 | 9/21/09 | 8,857 | — | |||||||||||
Hong Kong Dollar | HSBC | Sell | 61,294,411 | 7,914,164 | 9/21/09 | — | (674 | ) | ||||||||||
New Zealand Dollar | UBSW | Sell | 4,001,768 | 2,497,764 | 9/21/09 | — | (70,029 | ) | ||||||||||
New Zealand Dollar | DBAB | Sell | 2,431,357 | 1,520,279 | 9/21/09 | — | (39,838 | ) | ||||||||||
Singapore Dollar | DBAB | Sell | 5,219,462 | 3,584,244 | 9/22/09 | — | (16,800 | ) | ||||||||||
Japanese Yen | CITI | Sell | 255,028,605 | 2,659,346 | 9/24/09 | 9,939 | — | |||||||||||
Japanese Yen | HSBC | Sell | 368,614,831 | 3,850,970 | 9/24/09 | 21,554 | — | |||||||||||
Japanese Yen | DBAB | Sell | 461,635,448 | 4,826,046 | 9/24/09 | 30,270 | — | |||||||||||
Australian Dollar | BOFA | Sell | 1,959,408 | 1,538,351 | 9/25/09 | — | (29,090 | ) | ||||||||||
Euro | BOFA | Sell | 5,218,382 | 7,304,796 | 9/25/09 | — | (13,058 | ) | ||||||||||
Japanese Yen | BOFA | Sell | 737,907,965 | 7,725,767 | 9/28/09 | 59,517 | — | |||||||||||
Unrealized appreciation (depreciation) | $ | 1,217,446 | $ | (6,271,959 | ) | |||||||||||||
Net unrealized appreciation (depreciation) | $ | (5,054,513 | ) | |||||||||||||||
See Abbreviations on page FGR-24.
The accompanying notes are an integral part of these financial statements.
FGR-14
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements
Statement of Assets and Liabilities
June 30, 2009 (unaudited)
| Franklin Global Real Estate Securities Fund | ||||
Assets: | ||||
Investments in securities: | ||||
Cost - Unaffiliated issuers | $ | 365,508,727 | ||
Cost - Repurchase agreements | 8,545,902 | |||
Total cost of investments | $ | 374,054,629 | ||
Value - Unaffiliated issuers | $ | 313,856,874 | ||
Value - Repurchase agreements | 8,545,902 | |||
Total value of investments | 322,402,776 | |||
Foreign currency, at value (cost $946) | 944 | |||
Receivables: | ||||
Investment securities sold | 2,410,576 | |||
Capital shares sold | 4,398 | |||
Dividends | 2,283,253 | |||
Unrealized appreciation on forward exchange contracts | 1,217,446 | |||
Other assets | 537 | |||
Total assets | 328,319,930 | |||
Liabilities: | ||||
Payables: | ||||
Investment securities purchased | 4,165,999 | |||
Capital shares redeemed | 301,944 | |||
Affiliates | 313,950 | |||
Unrealized depreciation on forward exchange contracts | 6,271,959 | |||
Accrued expenses and other liabilities | 244,318 | |||
Total liabilities | 11,298,170 | |||
Net assets, at value | $ | 317,021,760 | ||
Net assets consist of: | ||||
Paid-in capital | $ | 747,959,094 | ||
Undistributed net investment income | 7,588,270 | |||
Net unrealized appreciation (depreciation) | (56,731,947 | ) | ||
Accumulated net realized gain (loss) | (381,793,657 | ) | ||
Net assets, at value | $ | 317,021,760 | ||
Class 1: | ||||
Net assets, at value | $ | 30,885,826 | ||
Shares outstanding | 3,681,414 | |||
Net asset value and maximum offering price per share | $ | 8.39 | ||
Class 2: | ||||
Net assets, at value | $ | 286,134,139 | ||
Shares outstanding | 34,791,188 | |||
Net asset value and maximum offering price per share | $ | 8.22 | ||
Class 4: | ||||
Net assets, at value | $ | 1,795 | ||
Shares outstanding | 214 | |||
Net asset value and maximum offering price per share | $ | 8.39 | ||
The accompanying notes are an integral part of these financial statements.
FGR-15
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Operations
for the six months ended June 30, 2009 (unaudited)
| Franklin Global Real Estate Securities Fund | ||||
Investment income: | ||||
Dividends (net of foreign taxes of $549,756) | $ | 4,371,034 | ||
Interest | 7,494 | |||
Total investment income | 4,378,528 | |||
Expenses: | ||||
Management fees (Note 3a) | 1,229,523 | |||
Administrative fees (Note 3b) | 384,226 | |||
Distribution fees: (Note 3c) | ||||
Class 2 | 345,232 | |||
Class 4 | 4 | |||
Unaffiliated transfer agent fees | 516 | |||
Custodian fees (Note 4) | 39,375 | |||
Reports to shareholders | 92,400 | |||
Professional fees | 17,572 | |||
Trustees’ fees and expenses | 1,222 | |||
Other | 12,822 | |||
Total expenses | 2,122,892 | |||
Expense reductions (Note 4) | (388 | ) | ||
Expenses waived/paid by affiliates (Note 3e) | (581,655 | ) | ||
Net expenses | 1,540,849 | |||
Net investment income | 2,837,679 | |||
Realized and unrealized gains (losses): | ||||
Net realized gain (loss) from: | ||||
Investments | (125,289,960 | ) | ||
Foreign currency transactions | (2,657,673 | ) | ||
Net realized gain (loss) | (127,947,633 | ) | ||
Net change in unrealized appreciation (depreciation) on: | ||||
Investments | 86,988,691 | |||
Translation of other assets and liabilities denominated in foreign currencies | (3,417,472 | ) | ||
Net change in unrealized appreciation (depreciation) | 83,571,219 | |||
Net realized and unrealized gain (loss) | (44,376,414 | ) | ||
Net increase (decrease) in net assets resulting from operations | $ | (41,538,735 | ) | |
The accompanying notes are an integral part of these financial statements.
FGR-16
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statements of Changes in Net Assets
| Franklin Global Real Estate Securities Fund | ||||||||
| Six Months Ended June 30, 2009 (unaudited) | Year Ended December 31, 2008 | |||||||
Increase (decrease) in net assets: | ||||||||
Operations: | ||||||||
Net investment income | $ | 2,837,679 | $ | 21,545,683 | ||||
Net realized gain (loss) from investments and foreign currency transactions | (127,947,633 | ) | (188,456,332 | ) | ||||
Net change in unrealized appreciation (depreciation) on investments and translation of other assets and liabilities denominated in foreign currencies | 83,571,219 | (163,343,453 | ) | |||||
Net increase (decrease) in net assets resulting from operations | (41,538,735 | ) | (330,254,102 | ) | ||||
Distributions to shareholders from: | ||||||||
Net investment income and net foreign currency gains: | ||||||||
Class 1 | (4,292,176 | ) | (938,439 | ) | ||||
Class 2 | (39,137,801 | ) | (6,327,844 | ) | ||||
Class 4 | (277 | ) | (68 | ) | ||||
Net realized gains: | ||||||||
Class 1 | — | (17,121,915 | ) | |||||
Class 2 | — | (172,823,447 | ) | |||||
Class 4 | — | (1,237 | ) | |||||
Total distributions to shareholders | (43,430,254 | ) | (197,212,950 | ) | ||||
Capital share transactions: (Note 2) | ||||||||
Class 1 | 408,422 | 5,111,100 | ||||||
Class 2 | 18,861,309 | (72,014,922 | ) | |||||
Class 4 | — | 5,000 | ||||||
Total capital share transactions | 19,269,731 | (66,898,822 | ) | |||||
Net increase (decrease) in net assets | (65,699,258 | ) | (594,365,874 | ) | ||||
Net assets: | ||||||||
Beginning of period | 382,721,018 | 977,086,892 | ||||||
End of period | $ | 317,021,760 | $ | 382,721,018 | ||||
Undistributed net investment income included in net assets: | ||||||||
End of period | $ | 7,588,270 | $ | 48,180,845 | ||||
The accompanying notes are an integral part of these financial statements.
FGR-17
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited)
Franklin Global Real Estate Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Templeton Variable Insurance Products Trust (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end investment company, consisting of twenty-two separate funds. The Franklin Global Real Estate Securities (Fund) is included in this report. The financial statements of the remaining funds in the Trust are presented separately. Shares of the Fund are sold only to insurance company separate accounts to fund the benefits of variable life insurance policies or variable annuity contracts. At June 30, 2009, 61.77% of the Fund’s shares were held through one insurance company. The Fund offers three classes of shares: Class 1, Class 2, and Class 4. Each class of shares differs by its distribution fees, voting rights on matters affecting a single class and its exchange privilege.
The following summarizes the Fund’s significant accounting policies.
a. Security Valuation
Equity and other securities listed on a securities exchange or on the NASDAQ National Market System are valued at the last quoted sale price or the official closing price of the day, respectively. Over-the-counter securities and listed securities for which there is no reported sale are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. Certain equity securities are valued based upon fundamental characteristics or relationships to similar securities.
Foreign equity securities are valued as of the close of trading on the foreign stock exchange on which the security is primarily traded, or the NYSE, whichever is earlier. If no sale is reported at that time, the foreign equity security will be valued within the range of the most recent quoted bid and ask prices. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at the close of the NYSE on the day that the value of the security is determined.
The Fund has procedures to determine the fair value of individual securities and other assets for which market prices are not readily available or which may not be reliably priced. Methods for valuing these securities may include: fundamental analysis based upon the underlying investment book value, anticipated future cash flows, market changes in comparable or similar securities, matrix pricing, discounts from market prices of similar securities, or discounts applied due to the nature and duration of restrictions on the disposition of the securities. Due to the inherent uncertainty of valuations of such securities, the fair values may differ significantly from the values that would have been used had a ready market for such investments existed. Occasionally, events occur between the time at which trading in a security is completed and the close of the NYSE that might call into question the availability (including the reliability) of the value of a portfolio security held by the Fund. The investment manager monitors price movements following the close of trading in foreign stock markets through a series of country specific market proxies (such as baskets of American Depository Receipts, futures contracts and exchange traded funds). These price movements are measured against established trigger thresholds for each specific market proxy to assist in determining if an event has occurred. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services. All security valuation procedures are approved by the Fund’s Board of Trustees.
b. Foreign Currency Translation
Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. Purchases and sales of securities, income and expense items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. Occasionally, events may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the Fund’s Board of Trustees.
The Fund does not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments on the Statement of Operations.
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Global Real Estate Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
b. Foreign Currency Translation (continued)
Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period.
c. Joint Repurchase Agreement
The Fund may enter into a joint repurchase agreement whereby its uninvested cash balance is deposited into a joint cash account with other funds managed by the investment manager or an affiliate of the investment manager and is used to invest in one or more repurchase agreements. The value and face amount of the joint repurchase agreement are allocated to the funds based on their pro-rata interest. A repurchase agreement is accounted for as a loan by the Fund to the seller, collateralized by securities which are delivered to the Fund’s custodian. The market value, including accrued interest, of the initial collateralization is required to be at least 102% of the dollar amount invested by the funds, with the value of the underlying securities marked to market daily to maintain coverage of at least 100%. The joint repurchase agreement held by the Fund at period end had been entered into on June 30, 2009. The joint repurchase agreement is valued at cost.
d. Derivative Financial Instruments
The Fund may invest in derivative financial instruments (derivatives) in order to manage risk or gain exposure to various other investments or markets. Derivatives are financial contracts based on an underlying or notional amount, require no initial investment or an initial net investment that is smaller than would normally be required to have a similar response to changes in market factors, and require or permit net settlement. Derivatives may contain various risks including the potential inability of the counterparty to fulfill their obligations under the terms of the contract, the potential for an illiquid secondary market, and the potential for market movements which may expose the Fund to gains or losses in excess of the amounts shown on the Statement of Assets and Liabilities.
Derivatives are marked to market daily based upon quotations from market makers or the Fund’s independent pricing services and the Fund’s net benefit or obligation under the contract, as measured by the fair market value of the contract, is included in net assets. Realized gain and loss and unrealized appreciation and depreciation on these contracts for the period are included in the Statement of Operations.
The Fund enters into forward exchange contracts in order to hedge against fluctuations in foreign exchange rates or to gain exposure to certain foreign currencies. A forward exchange contract is an agreement between the Fund and a counterparty to buy or sell a foreign currency for a specific exchange rate on a future date. Pursuant to the terms of the forward exchange contacts, cash or securities may be required to be deposited as collateral.
See Note 7 regarding other derivative information.
e. Foreign Currency Contracts
The Fund enters into foreign exchange contracts in order to manage foreign exchange rate risk between the trade date and settlement date of securities transactions. A foreign exchange contract is an agreement between the Fund and a counterparty to buy or sell a foreign currency for a specific exchange rate on a future date.
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Global Real Estate Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
f. Income Taxes
No provision has been made for U.S. income taxes because it is the Fund’s policy to qualify as a regulated investment company under the Internal Revenue Code and to distribute to shareholders substantially all of its taxable income and net realized gains.
The Fund has reviewed the tax positions, taken on federal income tax returns, for each of the three open tax years and as of June 30, 2009, and has determined that no provision for income tax is required in the Fund’s financial statements.
Foreign securities held by the Fund may be subject to foreign taxation on dividend income received. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist in the foreign markets in which the Fund invests.
g. Security Transactions, Investment Income, Expenses and Distributions
Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Dividend income is recorded on the ex-dividend date except that certain dividends from foreign securities are recognized as soon as the Fund is notified of the ex-dividend date. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with accounting principles generally accepted in the United States of America. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods.
Common expenses incurred by the Trust are allocated among the funds based on the ratio of net assets of each fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense.
Realized and unrealized gains and losses and net investment income, not including class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions, by class, are generally due to differences in class specific expenses.
Distributions received by the Trust from certain securities may be a return of capital (ROC). Such distributions reduce the cost basis of the securities, and any distributions in excess of the cost basis are recognized as capital gains.
h. Accounting Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
i. Guarantees and Indemnifications
Under the Trust’s organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, on behalf of the Fund, enters into contracts with service providers that contain general indemnification clauses. The Trust’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote.
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Global Real Estate Securities Fund
2. SHARES OF BENEFICIAL INTEREST
At June 30, 2009, there were an unlimited number of shares authorized (without par value). Transactions in the Fund’s shares were as follows:
| Six Months Ended June 30, 2009 | Year Ended December 31, 2008a | |||||||||||||
| Class 1 Shares: | Shares | Amount | Shares | Amount | ||||||||||
Shares sold | 19,389 | $ | 166,708 | 8,666 | $ | 137,517 | ||||||||
Shares issued in reinvestment of distributions | 510,366 | 4,292,176 | 1,051,855 | 18,060,354 | ||||||||||
Shares redeemed | (448,867 | ) | (4,050,462 | ) | (734,804 | ) | (13,086,771 | ) | ||||||
Net increase (decrease) | 80,888 | $ | 408,422 | 325,717 | $ | 5,111,100 | ||||||||
Class 2 Shares: | ||||||||||||||
Shares sold | 874,971 | $ | 7,287,097 | 1,073,979 | $ | 16,369,385 | ||||||||
Shares issued in reinvestment of distributions | 4,749,733 | 39,137,801 | 10,644,759 | 179,151,291 | ||||||||||
Shares redeemed | (3,226,823 | ) | (27,563,589 | ) | (15,122,736 | ) | (267,535,598 | ) | ||||||
Net increase (decrease) | 2,397,881 | $ | 18,861,309 | (3,403,998 | ) | $ | (72,014,922 | ) | ||||||
Class 4 Shares: | ||||||||||||||
Shares sold | — | $ | — | 214 | $ | 5,000 | ||||||||
| aFor | the period February 29, 2008 (effective date) to December 31, 2008 for Class 4. |
3. TRANSACTIONS WITH AFFILIATES
Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Trust are also officers and/or directors of the following subsidiaries:
| Subsidiary | Affiliation | |
Franklin Templeton Institutional, LLC (FT Institutional) | Investment manager | |
Franklin Templeton Services, LLC (FT Services) | Administrative manager | |
Franklin Templeton Distributors, Inc. (Distributors) | Principal underwriter | |
Franklin Templeton Investor Services, LLC (Investor Services) | Transfer agent |
a. Management Fees
The Fund pays an investment management fee to FT Institutional based on the average daily net assets of the Fund as follows:
| Annualized Fee Rate | Net Assets | |
| 0.800% | Up to and including $500 million | |
| 0.700% | over $500 million, up to and including $1 billion | |
| 0.650% | over $1 billion, up to and including $1.5 billion | |
| 0.600% | over $1.5 billion, up to and including $6.5 billion | |
| 0.580% | over $6.5 billion, up to and including $11.5 billion | |
| 0.560% | over $11.5 billion, up to and including $16.5 billion | |
| 0.540% | over $16.5 billion, up to and including $19 billion | |
| 0.530% | over $19 billion, up to and including $21.5 billion | |
| 0.520% | In excess of $21.5 billion |
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Global Real Estate Securities Fund
3. TRANSACTIONS WITH AFFILIATES (continued)
b. Administrative Fees
The Fund pays an administrative fee to FT Services of 0.25% per year of the average daily net assets of the Fund.
c. Distribution Fees
The Fund’s Board of Trustees has adopted distribution plans for Class 2 and Class 4 shares pursuant to Rule 12b-1 under the 1940 Act. Under the Fund’s compensation distribution plans, the Fund pays Distributors for costs incurred in connection with the servicing, sale and distribution of the Fund’s shares up to 0.35% per year of its average daily net assets of each class. The Board of Trustees has agreed to limit the current rate to 0.25% per year for Class 2.
d. Transfer Agent Fees
Investor Services, under terms of an agreement, performs shareholder servicing for the Fund and is not paid by the Fund for the services.
e. Waiver and Expense Reimbursements
FT Services and FT Institutional have agreed in advance to waive all or a portion of their respective fees through April 30, 2012. Total expenses waived or paid are not subject to reimbursement by the Fund subsequent to the Fund’s fiscal year end.
4. EXPENSE OFFSET ARRANGEMENT
The Fund has entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Fund’s custodian expenses. During the period ended June 30, 2009, the custodian fees were reduced as noted in the Statement of Operations.
5. INCOME TAXES
For tax purposes, capital losses may be carried over to offset future capital gains, if any. At December 31, 2008, the Fund had tax basis capital losses of $151,436,346 expiring in 2016.
For tax purposes, realized capital losses and realized currency losses occurring subsequent to October 31, may be deferred and treated as occurring on the first day of the following fiscal year. At December 31, 2008, the Fund deferred realized capital losses and realized currency losses of $49,557,736 and $5,502,294, respectively.
At June 30, 2009, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
Cost of investments | $ | 421,336,932 | ||
Unrealized appreciation | $ | 23,572,935 | ||
Unrealized depreciation | (122,507,091 | ) | ||
Net unrealized appreciation (depreciation) | $ | (98,934,156 | ) | |
Net investment income differs for financial statement and tax purposes primarily due to differing treatments of foreign currency transactions and passive foreign investment company shares.
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Global Real Estate Securities Fund
5. INCOME TAXES (continued)
Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatments of wash sales, foreign currency transactions, and passive foreign investment company shares.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the period ended June 30, 2009, aggregated $144,594,921 and $161,581,579, respectively.
7. OTHER DERIVATIVE INFORMATION
At June 30, 2009, the Fund has invested in derivative contracts which are reflected on the Statement of Assets and Liabilities as follows:
| Asset Derivatives | Liability Derivatives | |||||||||
| Derivative Contracts Not Accounted for as Hedging Instruments Under FASB Statement No. 133 | Statement of Assets and Liabilities Location | Fair Value Amount | Statement of Assets and Liabilities Location | Fair Value Amount | ||||||
Foreign exchange contracts | Unrealized appreciation on forward exchange contracts | $ | 1,217,446 | Unrealized depreciation on forward exchange contracts | $ | 6,271,959 | ||||
For the period ended June 30, 2009, the effect of derivative contracts on the Fund’s Statement of Operations was as follows:
| Derivative Contracts Not Accounted for as Hedging Instruments Under FASB Statement No. 133 | Statement of Operations Locations | Realized Gain (Loss) for the Period Ended June 30, 2009 | Unrealized Appreciation (Depreciation) for the Period Ended June 30, 2009 | Average Amount Outstanding During the Perioda | ||||||||
Foreign exchange contracts | Net realized gain (loss) from foreign currency transactions / Net change in unrealized appreciation (depreciation) on translation of other assets and liabilities denominated in foreign currencies | $ | (1,978,912 | ) | $ | (3,417,343 | ) | 234,145,205 | ||||
| aRepresents | the average notional amount outstanding during the period. For derivative contracts denominated in foreign currencies, notional amounts are converted into U.S. dollars. |
See Note 1(d) regarding derivative financial instruments.
8. CREDIT FACILITY
Effective January 23, 2009, the Fund, together with other U.S. registered and foreign investment funds managed by Franklin Templeton Investments (individually, “Borrower”; collectively “Borrowers”), entered into a joint syndicated senior unsecured credit facility totaling $725 million (Global Credit Facility) to provide a source of funds to the Borrowers for temporary and emergency purposes, including the ability to meet future unanticipated or unusually large redemption requests.
Under the terms of the Global Credit Facility, the Fund shall, in addition to interest charged on any borrowings made by the Fund and other costs incurred by the Fund, pay its share of fees and expenses incurred in connection with the implementation and maintenance of the Global Credit Facility, based upon its relative share of the aggregate net assets of all of the Borrowers,
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Global Real Estate Securities Fund
8. CREDIT FACILITY (continued)
including an annual commitment fee based upon the unused portion of the Global Credit Facility. During the period, the Fund incurred commitment fees of $422 of its pro rata portion of the Global Credit Facility, which is reflected in other expenses on the Statement of Operations. During the period ended June 30, 2009, the Fund did not utilize the Global Credit Facility.
9. FAIR VALUE MEASUREMENTS
Financial Accounting Standards Board (FASB) Statement No. 157, “Fair Value Measurement” (SFAS 157) establishes a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Fund’s own market assumptions (unobservable inputs). These inputs are used in determining the value of the Fund’s investments and are summarized in the following fair value hierarchy:
| • | Level 1 – quoted prices in active markets for identical securities |
| • | Level 2 – other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speed, credit risk, etc.) |
| • | Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments) |
The inputs or methodology used for valuing securities are not an indication of the risk associated with investing in those securities.
The following is a summary of the inputs used as of June 30, 2009, in valuing the Fund’s assets and liabilities carried at fair value:
| Level 1 | Level 2 | Level 3 | Total | |||||||||
Assets: | ||||||||||||
Investments in Securities: | ||||||||||||
Equity Investmentsa | $ | 313,856,874 | $ | — | $ | — | $ | 313,856,874 | ||||
Short Term Investments | — | 8,545,902 | — | 8,545,902 | ||||||||
Total Investments in Securities | $ | 313,856,874 | $ | 8,545,902 | $ | — | $ | 322,402,776 | ||||
Forward exchange contracts | — | 1,217,446 | — | 1,217,446 | ||||||||
Liabilities: | ||||||||||||
Forward exchange contracts | — | 6,271,959 | — | 6,271,959 | ||||||||
aFor detailed industry descriptions, see the accompanying Statement of Investments.
10. SUBSEQUENT EVENTS
Management has evaluated subsequent events through August 7, 2009 and determined that no events have occurred that require disclosure.
ABBREVIATIONS
Selected Portfolio
REIT - Real Estate Investment Trust
Counterparty
BZWS - Barclays Bank PLC
DBAB - Deutsche Bank AG
BOFA - Bank of America N.A
CITI - Citibank N.A.
JPHQ - JPMorgan Chase Bank, N.A.
HSBC - HSBC Bank USA
UBSW - UBS AG
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FRANKLIN GROWTHAND INCOME SECURITIES FUND
This semiannual report for Franklin Growth and Income Securities Fund covers the period ended June 30, 2009.
Performance Summary as of 6/30/09
Franklin Growth and Income Securities Fund – Class 1 delivered a +2.96% total return for the six-month period ended 6/30/09.
Performance reflects the Fund’s Class 1 operating expenses, but does not include any contract fees, expenses or sales charges. If they had been included, performance would be lower. These charges and deductions, particularly for variable life policies, can have a significant effect on contract values and insurance benefits. See the contract prospectus for a complete description of these expenses, including sales charges.
Franklin Growth and Income Securities Fund Class 1
Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares.
Current performance may differ from figures shown.
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Fund Goals and Main Investments: Franklin Growth and Income Securities Fund seeks capital appreciation with current income as a secondary goal. The Fund normally invests predominantly in equity securities, including securities convertible into common stock.
Performance Overview
You can find the Fund’s six-month total return in the Performance Summary. The Fund underperformed its benchmark, the Standard & Poor’s 500 Index (S&P 500), which had a +3.16% total return.1 The Fund outperformed its peers as measured by the Lipper VIP Equity Income Funds Classification Average, which had a +0.30% total return for the same period.2 Please note that the Fund invests primarily in stocks with above-average dividend yields. As a result, its holdings and returns may differ from those of the S&P 500, which include nondividend-paying stocks and do not focus on dividend yield.
Economic and Market Overview
During the six-month period ended June 30, 2009, the U.S. economy and stock markets seemed to stabilize after signs appeared that the recession’s severity had eased. Strains on the banking system and credit markets that surfaced in 2008 improved in 2009’s first half with the help of federal aid and tighter regulations. Although home sales fell for most of the period, they edged higher toward period-end. The pace of contraction in manufacturing activity decelerated. However, jobless claims mounted and the unemployment rate rose from 7.2% at the beginning of the year to 9.5% in June 2009, its highest rate since August 1983.3 Retail sales shrank from year-ago levels, and in February The Conference Board’s Consumer Confidence Index dropped to the lowest level since it began in 1967 before rebounding in the second quarter on improved expectations. Reflecting a broad-based contraction in consumer spending, falling corporate profits, slowing exports and reduced government spending, economic growth as measured by gross domestic product (GDP) fell at annualized rates of 6.4% and an estimated 1.0% in the first and second quarters of 2009.
Although the price of oil rose from $44 per barrel at the beginning of the period to $70 by period-end on speculation that the downturn was abating, it was still off more than 50% from its July 2008 record high.4
1. Source: © 2009 Morningstar.
2. Source: Lipper Inc.
One cannot invest directly in an index, nor is an index representative of the Fund’s portfolio. Please see Index Descriptions following the Fund Summaries.
3. Source: Bureau of Labor Statistics.
4. Source: New York Mercantile Exchange.
Fund Risks: The Fund’s investments in stocks may offer the potential for long-term gains but can be subject to short-term price fluctuations. The value of convertible securities may rise and fall with the market value of the underlying stock or, like a debt security, vary with changes in interest rates and the credit quality of the issuer. By having significant investments in particular sectors from time to time, such as financial services, energy, health care/pharmaceuticals, technology and telecommunications, the Fund may be at greater risk of adverse developments in a sector than a fund that invests more broadly. Foreign investing, especially in emerging markets, involves additional risks, including currency fluctuations, economic instability, market volatility, and political and social instability. The Fund’s prospectus also includes a description of the main investment risks.
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Prices for most other commodities followed similar trends. Partially as a result of reduced consumer spending and the late-2008 downward trajectory for energy prices, deflationary pressures surfaced. June’s inflation rate, as measured by the Consumer Price Index, was an annualized -1.4%, representing the steepest yearly decline in the cost of living in nearly six decades.3 Core inflation, which excludes food and energy costs, rose at a 1.7% annualized rate, which was within the Federal Reserve Board’s (Fed’s) informal target range of 1.5%–2.0%.3
A deepening recession and decelerating inflation prompted Washington policymakers to keep interest rates low and enact stimulus plans — including income tax cuts, aid to ailing state governments and funding for transportation infrastructure, school construction and high-tech projects. During the period under review, the Fed kept the federal funds target rate in a range of 0% to 0.25% and said the “pace of economic contraction is slowing” but the financial system had not yet returned to normal. The government also introduced various new measures to shore up financial markets and enhance market liquidity, proposed a sweeping financial regulatory system overhaul, and outlined details of its Public-Private Investment Program, with an objective of removing devalued real estate-related assets from banks’ balance sheets.
Most stocks suffered major losses through early March as investors worried about an uncertain future. Stocks then recovered somewhat from 12-year lows as investors perceived many bargains among the bear market fallout and data indicated the economy’s pace of contraction was moderating. By June, however, fresh investor concerns about the economy and stock valuations reemerged and dampened the rally’s momentum. For the six months under review, the blue chip stocks of the Dow Jones Industrial Average had a total return of -2.01%, while the broader S&P 500 posted a +3.16% total return and the technology-heavy NASDAQ Composite Index returned +16.99%.1 Information technology, consumer discretionary and materials stocks posted the largest gains while industrials, telecommunication services and financials stocks generally fell in value.
Investment Strategy
We invest in a broadly diversified portfolio of equity securities that we consider to be financially strong. To help identify such companies, we use a current relative yield analysis that focuses on a company’s dividend yield (calculated by dividing a stock’s annual per share dividends by its per share market price). This results in a relative yield range for
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each company that can assist us in determining whether we believe a stock is attractively priced for purchase or sale. A higher relative dividend yield is frequently accompanied by a lower stock price. Therefore, we seek to buy a stock when its relative dividend yield is high and to sell a stock when its relative dividend yield is low, which may be caused by an increase in the price of the stock.
Manager’s Discussion
During the period under review, several health care sector positions benefited the Fund’s absolute performance, including pharmaceuticals company Schering-Plough and drug maker Mylan. In the information technology sector, software company Microsoft, technology products and services company International Business Machines, and semiconductor manufacturers Intel and Microchip Technology boosted performance. In the financials sector, Bank of America convertible preferred stock helped results.
The Fund had several detractors from performance, including financials sector holdings such as insurer Aflac, Bank of America5 and financial services firm Citigroup5 common stock. In the industrials sector, heavy machinery manufacturer Caterpillar, industrial conglomerate General Electric and integrated waste management services company Waste Management hindered results. Integrated energy company ConocoPhillips in the energy sector and chemicals company Dow Chemical5 in the materials sector also hurt performance during the period.
Thank you for your participation in Franklin Growth and Income Securities Fund. We look forward to serving your future investment needs.
5. Sold by period-end.
The foregoing information reflects our analysis, opinions and portfolio holdings as of June 30, 2009, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.
Top 10 Holdings
Franklin Growth and Income Securities Fund 6/30/09
| Company Sector/Industry | % of Total Net Assets | |
| JPMorgan Chase & Co. | 3.7% | |
| Financials | ||
| Wells Fargo & Co. | 3.4% | |
| Financials | ||
| Schering-Plough Corp. | 3.2% | |
| Health Care | ||
| Microsoft Corp. | 3.1% | |
| Information Technology | ||
| Johnson & Johnson | 3.1% | |
| Health Care | ||
| Roche Holding AG (Switzerland) | 3.0% | |
| Health Care | ||
| Mylan Inc. | 3.0% | |
| Health Care | ||
| Bank of America Corp. | 2.8% | |
| Financials | ||
| The Coca-Cola Co. | 2.8% | |
| Consumer Staples | ||
| Aflac Inc. | 2.7% | |
| Financials |
The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund’s Statement of Investments.
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Fund Expenses
As an investor in a variable insurance contract (Contract) that indirectly provides for investment in an underlying mutual fund, you can incur transaction and/or ongoing expenses at both the Fund level and the Contract level.
| • | Transaction expenses can include sales charges (loads) on purchases, surrender fees, transfer fees and premium taxes. |
| • | Ongoing expenses can include management fees, distribution and service (12b-1) fees, contract fees, annual maintenance fees, mortality and expense risk fees and other fees and expenses. All mutual funds and Contracts have some types of ongoing expenses. |
The expenses shown in the table are meant to highlight ongoing expenses at the Fund level only and do not include ongoing expenses at the Contract level, or transaction expenses at either the Fund or Contract levels. While the Fund does not have transaction expenses, if the transaction and ongoing expenses at the Contract level were included, the expenses shown below would be higher. You should consult your Contract prospectus or disclosure document for more information.
The table shows Fund-level ongoing expenses and can help you understand these expenses and compare them with those of other mutual funds offered through the Contract. The table assumes a $1,000 investment held for the six months indicated. Please refer to the Fund prospectus for additional information on operating expenses.
Actual Fund Expenses
The first line (Actual) of the table provides actual account values and expenses. The “Ending Account Value” is derived from the Fund’s actual return, which includes the effect of ongoing Fund expenses, but does not include the effect of ongoing Contract expenses.
You can estimate the Fund-level expenses you incurred during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:
| 1. | Divide your account value by $1,000. |
If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6.
| 2. | Multiply the result by the number under the heading “Fund-Level Expenses Incurred During Period.” |
If Fund-Level Expenses Incurred During Period were $7.50, then 8.6 x $7.50 = $64.50.
In this illustration, the estimated expenses incurred this period at the Fund level are $64.50.
Franklin Growth and Income Securities Fund Class 1
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Hypothetical Example for Comparison with Other Mutual Funds
Information in the second line (Hypothetical) of the table can help you compare ongoing expenses of the Fund with those of other mutual funds offered through the Contract. This information may not be used to estimate the actual ending account balance or expenses you incurred during the period. The hypothetical “Ending Account Value” is based on the Fund’s actual expense ratio and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Fund-Level Expenses Incurred During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds offered through a Contract.
| Class 1 | Beginning Account Value 1/1/09 | Ending Account Value 6/30/09 | Fund-Level Expenses Incurred During Period* 1/1/09–6/30/09 | ||||||
Actual | $ | 1,000 | $ | 1,029.60 | $ | 3.07 | |||
Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,021.77 | $ | 3.06 | |||
*Expenses are calculated using the most recent six-month annualized expense ratio for the Fund’s Class 1 shares (0.61%), which does not include any ongoing expenses of the Contract for which the Fund is an investment option, multiplied by the average account value over the period, multiplied by 181/365 to reflect the one-half year period.
FGI-6
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Highlights
Franklin Growth and Income Securities Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 1 | 2008 | 2007 | 2006 | 2005 | 2004 | |||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 8.72 | $ | 15.07 | $ | 16.83 | $ | 15.60 | $ | 15.60 | $ | 14.44 | ||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.15 | 0.39 | 0.41 | 0.42 | 0.42 | 0.40 | ||||||||||||||||||
Net realized and unrealized gains (losses) | 0.11 | (5.17 | ) | (0.82 | ) | 2.05 | 0.15 | 1.14 | ||||||||||||||||
Total from investment operations | 0.26 | (4.78 | ) | (0.41 | ) | 2.47 | 0.57 | 1.54 | ||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income | (0.48 | ) | (0.45 | ) | (0.42 | ) | (0.43 | ) | (0.43 | ) | (0.38 | ) | ||||||||||||
Net realized gains | — | (1.12 | ) | (0.93 | ) | (0.81 | ) | (0.14 | ) | — | ||||||||||||||
Total distributions | (0.48 | ) | (1.57 | ) | (1.35 | ) | (1.24 | ) | (0.57 | ) | (0.38 | ) | ||||||||||||
Net asset value, end of period | $ | 8.50 | $ | 8.72 | $ | 15.07 | $ | 16.83 | $ | 15.60 | $ | 15.60 | ||||||||||||
Total returnc | 2.96% | (34.95)% | (3.46)% | 17.05% | 3.71% | 10.91% | ||||||||||||||||||
Ratios to average net assetsd | ||||||||||||||||||||||||
Expensese | 0.61% | 0.55% | 0.52% | 0.54% | 0.51% | 0.52% | ||||||||||||||||||
Net investment income | 3.71% | 3.17% | 2.47% | 2.63% | 2.74% | 2.77% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 151,780 | $ | 162,936 | $ | 306,691 | $ | 388,751 | $ | 405,245 | $ | 471,596 | ||||||||||||
Portfolio turnover rate | 24.15% | 30.66% | 36.66% | 23.05% | 43.89% | 40.15% | ||||||||||||||||||
aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.
bBased on average daily shares outstanding.
cTotal return does not include any fees, charges or expenses imposed by the variable annuity and life insurance contracts for which the Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle. Total return is not annualized for periods less than one year.
dRatios are annualized for periods less than one year.
eBenefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
FGI-8
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Franklin Growth and Income Securities Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 2 | 2008 | 2007 | 2006 | 2005 | 2004 | |||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 8.59 | $ | 14.86 | $ | 16.62 | $ | 15.42 | $ | 15.43 | $ | 14.31 | ||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.14 | 0.35 | 0.37 | 0.37 | 0.38 | 0.37 | ||||||||||||||||||
Net realized and unrealized gains (losses) | 0.11 | (5.10 | ) | (0.82 | ) | 2.03 | 0.15 | 1.12 | ||||||||||||||||
Total from investment operations | 0.25 | (4.75 | ) | (0.45 | ) | 2.40 | 0.53 | 1.49 | ||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income | (0.44 | ) | (0.40 | ) | (0.38 | ) | (0.39 | ) | (0.40 | ) | (0.37 | ) | ||||||||||||
Net realized gains | — | (1.12 | ) | (0.93 | ) | (0.81 | ) | (0.14 | ) | — | ||||||||||||||
Total distributions | (0.44 | ) | (1.52 | ) | (1.31 | ) | (1.20 | ) | (0.54 | ) | (0.37 | ) | ||||||||||||
Net asset value, end of period | $ | 8.40 | $ | 8.59 | $ | 14.86 | $ | 16.62 | $ | 15.42 | $ | 15.43 | ||||||||||||
Total returnc | 2.91% | (35.14)% | (3.71)% | 16.76% | 3.51% | 10.61% | ||||||||||||||||||
Ratios to average net assetsd | ||||||||||||||||||||||||
Expensese | 0.86% | 0.80% | 0.77% | 0.79% | 0.76% | 0.77% | ||||||||||||||||||
Net investment income | 3.46% | 2.92% | 2.22% | 2.38% | 2.49% | 2.52% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 132,088 | $ | 141,359 | $ | 312,692 | $ | 348,724 | $ | 313,286 | $ | 263,146 | ||||||||||||
Portfolio turnover rate | 24.15% | 30.66% | 36.66% | 23.05% | 43.89% | 40.15% | ||||||||||||||||||
aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.
bBased on average daily shares outstanding.
cTotal return does not include any fees, charges or expenses imposed by the variable annuity and life insurance contracts for which the Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle. Total return is not annualized for periods less than one year.
dRatios are annualized for periods less than one year.
eBenefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
FGI-9
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Franklin Growth and Income Securities Fund
Six Months (unaudited) | Period Ended December 31, | |||||||
| Class 4 | 2008a | |||||||
Per share operating performance | ||||||||
(for a share outstanding throughout the period) | ||||||||
Net asset value, beginning of period | $ | 8.70 | $ | 14.16 | ||||
Income from investment operationsb: | ||||||||
Net investment incomec | 0.14 | 0.29 | ||||||
Net realized and unrealized gains (losses) | 0.11 | (4.18 | ) | |||||
Total from investment operations | 0.25 | (3.89 | ) | |||||
Less distributions from: | ||||||||
Net investment income | (0.45 | ) | (0.45 | ) | ||||
Net realized gains | — | (1.12 | ) | |||||
Total distributions | (0.45 | ) | (1.57 | ) | ||||
Net asset value, end of period | $ | 8.50 | $ | 8.70 | ||||
Total returnd | 2.80% | (31.00)% | ||||||
Ratios to average net assetse | ||||||||
Expensesf | 0.96% | 0.90% | ||||||
Net investment income | 3.36% | 2.82% | ||||||
Supplemental data | ||||||||
Net assets, end of period (000’s) | $ | 3 | $ | 3 | ||||
Portfolio turnover rate | 24.15% | 30.66% | ||||||
aFor the period February 29, 2008 (effective date) to December 31, 2008.
bThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.
cBased on average daily shares outstanding.
dTotal return does not include any fees, charges or expenses imposed by the variable annuity and life insurance contracts for which the Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle. Total return is not annualized for periods less than one year.
eRatios are annualized for periods less than one year.
fBenefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
FGI-10
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited)
| Franklin Growth and Income Securities Fund | Country | Shares | Value | ||||
Common Stocks 71.2% | |||||||
Consumer Discretionary 3.5% | |||||||
Best Buy Co. Inc. | United States | 149,600 | $ | 5,010,104 | |||
The Home Depot Inc. | United States | 207,400 | 4,900,862 | ||||
| 9,910,966 | |||||||
Consumer Staples 7.2% | |||||||
The Coca-Cola Co. | United States | 165,300 | 7,932,747 | ||||
Diageo PLC, ADR | United Kingdom | 114,600 | 6,560,850 | ||||
Unilever NV, N.Y. shs. | Netherlands | 249,400 | 6,030,492 | ||||
| 20,524,089 | |||||||
Energy 11.0% | |||||||
Chesapeake Energy Corp. | United States | 220,587 | 4,374,240 | ||||
Chevron Corp. | United States | 79,000 | 5,233,750 | ||||
ConocoPhillips | United States | 141,000 | 5,930,460 | ||||
Exxon Mobil Corp. | United States | 71,244 | 4,980,668 | ||||
Halliburton Co. | United States | 228,100 | 4,721,670 | ||||
Spectra Energy Corp. | United States | 356,700 | 6,035,364 | ||||
| 31,276,152 | |||||||
Financials 5.7% | |||||||
Aflac Inc. | United States | 106,200 | 3,301,758 | ||||
iStar Financial Inc. | United States | 277,700 | 788,668 | ||||
JPMorgan Chase & Co. | United States | 126,570 | 4,317,303 | ||||
Marsh & McLennan Cos. Inc. | United States | 183,300 | 3,689,829 | ||||
Wells Fargo & Co. | United States | 171,500 | 4,160,590 | ||||
| 16,258,148 | |||||||
Health Care 9.6% | |||||||
Johnson & Johnson | United States | 154,500 | 8,775,600 | ||||
Merck & Co. Inc. | United States | 166,600 | 4,658,136 | ||||
Pfizer Inc. | United States | 343,200 | 5,148,000 | ||||
Roche Holding AG | Switzerland | 63,600 | 8,642,672 | ||||
| 27,224,408 | |||||||
Industrials 13.0% | |||||||
3M Co. | United States | 107,400 | 6,454,740 | ||||
The Boeing Co. | United States | 95,400 | 4,054,500 | ||||
Caterpillar Inc. | United States | 133,300 | 4,404,232 | ||||
General Electric Co. | United States | 301,300 | 3,531,236 | ||||
J.B. Hunt Transport Services Inc. | United States | 141,700 | 4,326,101 | ||||
Pitney Bowes Inc. | United States | 168,900 | 3,703,977 | ||||
United Parcel Service Inc., B | United States | 101,600 | 5,078,984 | ||||
Waste Management Inc. | United States | 192,400 | 5,417,984 | ||||
| 36,971,754 | |||||||
Information Technology 11.6% | |||||||
Intel Corp. | United States | 424,200 | 7,020,510 | ||||
International Business Machines Corp. | United States | 69,800 | 7,288,516 | ||||
Microsoft Corp. | United States | 373,800 | 8,885,226 | ||||
Nokia Corp., ADR | Finland | 268,100 | 3,908,898 | ||||
Paychex Inc. | United States | 224,000 | 5,644,800 | ||||
| 32,747,950 | |||||||
FGI-11
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Franklin Growth and Income Securities Fund | Country | Shares | Value | |||||
Common Stocks (continued) | ||||||||
Materials 2.1% | ||||||||
Newmont Mining Corp. | United States | 73,500 | $ | 3,003,945 | ||||
Weyerhaeuser Co. | United States | 93,000 | 2,829,990 | |||||
| 5,833,935 | ||||||||
Telecommunication Services 1.6% | ||||||||
AT&T Inc. | United States | 185,597 | 4,610,229 | |||||
Utilities 5.9% | ||||||||
Entergy Corp. | United States | 69,473 | 5,385,547 | |||||
PG&E Corp. | United States | 131,100 | 5,039,484 | |||||
The Southern Co. | United States | 203,100 | 6,328,596 | |||||
| 16,753,627 | ||||||||
Total Common Stocks (Cost $240,041,957) | 202,111,258 | |||||||
Preferred Stocks (Cost $8,133,100) 0.2% | ||||||||
Financials 0.2% | ||||||||
aFannie Mae, 8.25%, pfd. | United States | 325,000 | 435,500 | |||||
Convertible Preferred Stocks 10.9% | ||||||||
Consumer Discretionary 1.0% | ||||||||
Autoliv Inc., 8.00%, cvt. pfd. | Sweden | 66,000 | 2,766,324 | |||||
Financials 4.7% | ||||||||
Bank of America Corp., 7.25%, cvt. pfd., L | United States | 9,500 | 7,942,285 | |||||
Wells Fargo & Co., 7.50%, cvt. pfd., A | United States | 7,100 | 5,573,287 | |||||
| 13,515,572 | ||||||||
Health Care 3.2% | ||||||||
Schering-Plough Corp., 6.00%, cvt. pfd. | United States | 39,800 | 9,027,138 | |||||
Utilities 2.0% | ||||||||
Great Plains Energy Inc., 12.00%, cvt. pfd. | United States | 100,000 | 5,742,000 | |||||
Total Convertible Preferred Stocks (Cost $28,059,584) | 31,051,034 | |||||||
| Principal Amountb | ||||||||
Corporate Bonds 6.2% | ||||||||
Financials 6.2% | ||||||||
Aflac Inc., senior note, 8.50%, 5/15/19 | United States | $ | 4,000,000 | 4,281,328 | ||||
American Express Credit Corp., senior note, C, 7.30%, 8/20/13 | United States | 7,000,000 | 7,300,399 | |||||
cJPMorgan Chase & Co., junior sub. note, 1, 7.90%, Perpetual | United States | 7,000,000 | 6,142,710 | |||||
Total Corporate Bonds (Cost $17,265,170) | 17,724,437 | |||||||
Convertible Bonds 7.9% | ||||||||
Consumer Discretionary 1.1% | ||||||||
Carnival Corp., cvt., senior deb., 2.00%, 4/15/21 | United States | 3,156,000 | 3,037,650 | |||||
Health Care 3.0% | ||||||||
dMylan Inc., cvt., 144A, 3.75%, 9/15/15 | United States | 7,500,000 | 8,428,125 | |||||
Information Technology 2.6% | ||||||||
Microchip Technology Inc., cvt., 2.125%, 12/15/37 | United States | 10,000,000 | 7,575,000 | |||||
FGI-12
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Franklin Growth and Income Securities Fund | Country | Principal Amountb | Value | |||||
Convertible Bonds (continued) | ||||||||
Materials 1.2% | ||||||||
ArcelorMittal, cvt., senior note, 5.00%, 5/15/14 | Luxembourg | $ | 2,750,000 | $ | 3,454,281 | |||
Total Convertible Bonds (Cost $20,619,245) | 22,495,056 | |||||||
Total Investments before Short Term Investments (Cost $314,119,056) | 273,817,285 | |||||||
Short Term Investments (Cost $9,522,108) 3.4% | ||||||||
Repurchase Agreements 3.4% | ||||||||
eJoint Repurchase Agreement, 0.023%, 7/01/09 (Maturity Value $9,522,115) | United States | 9,522,108 | 9,522,108 | |||||
Banc of America Securities LLC (Maturity Value $820,902) | ||||||||
Barclays Capital Inc. (Maturity Value $752,438) | ||||||||
BNP Paribas Securities Corp. (Maturity Value $2,736,180) | ||||||||
Credit Suisse Securities (USA) LLC (Maturity Value $2,736,180) | ||||||||
Deutsche Bank Securities Inc. (Maturity Value $971,444) | ||||||||
HSBC Securities (USA) Inc. (Maturity Value $820,902) | ||||||||
UBS Securities LLC (Maturity Value $684,069) | ||||||||
Collateralized by U.S. Government Agency Securities, 0.58% - 7.25%, 1/15/10 - 6/27/16; | ||||||||
Total Investments (Cost $323,641,164) 99.8% | 283,339,393 | |||||||
Other Assets, less Liabilities 0.2% | 531,536 | |||||||
Net Assets 100.0% | $ | 283,870,929 | ||||||
See Abbreviations on page FGI-23.
aNon-income producing.
bPrincipal amount is stated in U.S. dollars unless otherwise indicated.
cPerpetual security with no stated maturity date.
dSecurity was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be sold in transactions exempt from registration only to qualified institutional buyers or in a public offering registered under the Securities Act of 1933. This security has been deemed liquid under guidelines approved by the Trust’s Board of Trustees. At June 30, 2009, the value of this security was $8,428,125, representing 2.97% of net assets.
eSee Note 1(c) regarding joint repurchase agreement.
fThe security is traded on a discount basis with no stated coupon rate.
The accompanying notes are an integral part of these financial statements.
FGI-13
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements
Statement of Assets and Liabilities
June 30, 2009 (unaudited)
| Franklin Growth and Income Securities Fund | ||||
Assets: | ||||
Investments in securities: | ||||
Cost - Unaffiliated issuers | $ | 314,119,056 | ||
Cost - Repurchase agreements | 9,522,108 | |||
Total cost of investments | $ | 323,641,164 | ||
Value - Unaffiliated issuers | $ | 273,817,285 | ||
Value - Repurchase agreements | 9,522,108 | |||
Total value of investments | 283,339,393 | |||
Receivables: | ||||
Capital shares sold | 13,400 | |||
Dividends and interest | 972,396 | |||
Other assets | 428 | |||
Total assets | 284,325,617 | |||
Liabilities: | ||||
Payables: | ||||
Capital shares redeemed | 182,641 | |||
Affiliates | 181,661 | |||
Reports to shareholders | 68,020 | |||
Accrued expenses and other liabilities | 22,366 | |||
Total liabilities | 454,688 | |||
Net assets, at value | $ | 283,870,929 | ||
Net assets consist of: | ||||
Paid-in capital | $ | 399,275,228 | ||
Undistributed net investment income | 5,164,570 | |||
Net unrealized appreciation (depreciation) | (40,300,762 | ) | ||
Accumulated net realized gain (loss) | (80,268,107 | ) | ||
Net assets, at value | $ | 283,870,929 | ||
Class 1: | ||||
Net assets, at value | $ | 151,779,623 | ||
Shares outstanding | 17,855,746 | |||
Net asset value and maximum offering price per share | $ | 8.50 | ||
Class 2: | ||||
Net assets, at value | $ | 132,088,307 | ||
Shares outstanding | 15,729,429 | |||
Net asset value and maximum offering price per share | $ | 8.40 | ||
Class 4: | ||||
Net assets, at value | $ | 2,999 | ||
Shares outstanding | 353 | |||
Net asset value and maximum offering price per share | $ | 8.50 | ||
The accompanying notes are an integral part of these financial statements.
FGI-14
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Operations
for the six months ended June 30, 2009 (unaudited)
| Franklin Growth and Income Securities Fund | ||||
Investment income: | ||||
Dividends | $ | 4,509,910 | ||
Interest | 1,316,226 | |||
Total investment income | 5,826,136 | |||
Expenses: | ||||
Management fees (Note 3a) | 730,736 | |||
Distribution fees: (Note 3c) | ||||
Class 2 | 155,979 | |||
Class 4 | 5 | |||
Unaffiliated transfer agent fees | 336 | |||
Custodian fees (Note 4) | 5,648 | |||
Reports to shareholders | 58,893 | |||
Professional fees | 18,261 | |||
Trustees’ fees and expenses | 1,063 | |||
Other | 11,544 | |||
Total expenses | 982,465 | |||
Expense reductions (Note 4) | (10 | ) | ||
Net expenses | 982,455 | |||
Net investment income | 4,843,681 | |||
Realized and unrealized gains (losses): | ||||
Net realized gain (loss) from: | ||||
Investments | (45,057,760 | ) | ||
Foreign currency transactions | 13,669 | |||
Net realized gain (loss) | (45,044,091 | ) | ||
Net change in unrealized appreciation (depreciation) on: | ||||
Investments | 45,996,169 | |||
Translation of other assets and liabilities denominated in foreign currencies | 4,052 | |||
Net change in unrealized appreciation (depreciation) | 46,000,221 | |||
Net realized and unrealized gain (loss) | 956,130 | |||
Net increase (decrease) in net assets resulting from operations | $ | 5,799,811 | ||
The accompanying notes are an integral part of these financial statements.
FGI-15
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statements of Changes in Net Assets
| Franklin Growth and Income Securities Fund | ||||||||
Six Months June 30, 2009 | Year Ended December 31, 2008 | |||||||
Increase (decrease) in net assets: | ||||||||
Operations: | ||||||||
Net investment income | $ | 4,843,681 | $ | 14,275,978 | ||||
Net realized gain (loss) from investments and foreign currency transactions | (45,044,091 | ) | (30,384,934 | ) | ||||
Net change in unrealized appreciation (depreciation) on investments and translation of other assets and liabilities denominated in foreign currencies | 46,000,221 | (174,276,787 | ) | |||||
Net increase (decrease) in net assets resulting from operations | 5,799,811 | (190,385,743 | ) | |||||
Distributions to shareholders from: | ||||||||
Net investment income: | ||||||||
Class 1 | (8,187,942 | ) | (8,476,479 | ) | ||||
Class 2 | (6,640,173 | ) | (7,499,080 | ) | ||||
Class 4 | (158 | ) | (160 | ) | ||||
Net realized gains: | ||||||||
Class 1 | — | (20,947,837 | ) | |||||
Class 2 | — | (20,755,554 | ) | |||||
Class 4 | — | (395 | ) | |||||
Total distributions to shareholders | (14,828,273 | ) | (57,679,505 | ) | ||||
Capital share transactions: (Note 2) | ||||||||
Class 1 | (6,293,254 | ) | (18,020,538 | ) | ||||
Class 2 | (5,105,592 | ) | (49,003,980 | ) | ||||
Class 4 | — | 5,000 | ||||||
Total capital share transactions | (11,398,846 | ) | (67,019,518 | ) | ||||
Net increase (decrease) in net assets | (20,427,308 | ) | (315,084,766 | ) | ||||
Net assets: | ||||||||
Beginning of period | 304,298,237 | 619,383,003 | ||||||
End of period | $ | 283,870,929 | $ | 304,298,237 | ||||
Undistributed net investment income included in net assets: | ||||||||
End of period | $ | 5,164,570 | $ | 15,149,162 | ||||
The accompanying notes are an integral part of these financial statements.
FGI-16
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited)
Franklin Growth and Income Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Templeton Variable Insurance Products Trust (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end investment company, consisting of twenty-two separate funds. The Franklin Growth and Income Securities (Fund) is included in this report. The financial statements of the remaining funds in the Trust are presented separately. Shares of the Fund are sold only to insurance company separate accounts to fund the benefits of variable life insurance policies or variable annuity contracts. At June 30, 2009, 74.79% of the Fund’s shares were held through one insurance company. The Fund offers three classes of shares: Class 1, Class 2, and Class 4. Each class of shares differs by its distribution fees, voting rights on matters affecting a single class and its exchange privilege.
The following summarizes the Fund’s significant accounting policies.
a. Security Valuation
Equity and other securities listed on a securities exchange or on the NASDAQ National Market System are valued at the last quoted sale price or the official closing price of the day, respectively. Over-the-counter securities and listed securities for which there is no reported sale are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. Certain equity securities are valued based upon fundamental characteristics or relationships to similar securities.
Corporate debt securities generally trade in the over-the-counter market rather than on a securities exchange. The Fund may utilize independent pricing services, quotations from bond dealers, and information with respect to bond and note transactions, to assist in determining a current market value for each security. The Fund’s pricing services may use valuation models or matrix pricing which considers information with respect to comparable bond and note transactions, quotations from bond dealers, or by reference to other securities that are considered comparable in such characteristics as rating, interest rate and maturity date, option adjusted spread models, prepayment projections, interest rate spreads and yield curves, to determine current value.
Foreign equity securities are valued as of the close of trading on the foreign stock exchange on which the security is primarily traded, or the NYSE, whichever is earlier. If no sale is reported at that time, the foreign equity security will be valued within the range of the most recent quoted bid and ask prices. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at the close of the NYSE on the day that the value of the security is determined.
The Fund has procedures to determine the fair value of individual securities and other assets for which market prices are not readily available or which may not be reliably priced. Methods for valuing these securities may include: fundamental analysis based upon the underlying investment book value, anticipated future cash flows, market changes in comparable or similar securities, matrix pricing, discounts from market prices of similar securities, or discounts applied due to the nature and duration of restrictions on the disposition of the securities. Due to the inherent uncertainty of valuations of such securities, the fair values may differ significantly from the values that would have been used had a ready market for such investments existed. Occasionally, events occur between the time at which trading in a security is completed and the close of the NYSE that might call into question the availability (including the reliability) of the value of a portfolio security held by the Fund. The investment manager monitors price movements following the close of trading in foreign stock markets through a series of country specific market proxies (such as baskets of American Depository Receipts, futures contracts and exchange traded funds). These price movements are measured against established trigger thresholds for each specific market proxy to assist in determining if an event has occurred. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services. All security valuation procedures are approved by the Fund’s Board of Trustees.
b. Foreign Currency Translation
Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. Purchases and sales of securities, income and
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Growth and Income Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
b. Foreign Currency Translation (continued)
expense items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. Occasionally, events may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the Fund’s Board of Trustees.
The Fund does not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments on the Statement of Operations.
Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period.
c. Joint Repurchase Agreement
The Fund may enter into a joint repurchase agreement whereby its uninvested cash balance is deposited into a joint cash account with other funds managed by the investment manager or an affiliate of the investment manager and is used to invest in one or more repurchase agreements. The value and face amount of the joint repurchase agreement are allocated to the funds based on their pro-rata interest. A repurchase agreement is accounted for as a loan by the Fund to the seller, collateralized by securities which are delivered to the Fund’s custodian. The market value, including accrued interest, of the initial collateralization is required to be at least 102% of the dollar amount invested by the funds, with the value of the underlying securities marked to market daily to maintain coverage of at least 100%. The joint repurchase agreement held by the Fund at period end had been entered into on June 30, 2009. The joint repurchase agreement is valued at cost.
d. Foreign Currency Contracts
The Fund enters into foreign exchange contracts in order to manage foreign exchange rate risk between the trade date and settlement date of securities transactions. A foreign exchange contract is an agreement between the Fund and a counterparty to buy or sell a foreign currency for a specific exchange rate on a future date.
e. Income Taxes
No provision has been made for U.S. income taxes because it is the Fund’s policy to qualify as a regulated investment company under the Internal Revenue Code and to distribute to shareholders substantially all of its taxable income and net realized gains.
The Fund has reviewed the tax positions, taken on federal income tax returns, for each of the three open tax years and as of June 30, 2009, and has determined that no provision for income tax is required in the Fund’s financial statements.
f. Security Transactions, Investment Income, Expenses and Distributions
Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Amortization of premium and accretion of discount on debt securities are included in interest income. Dividend income is recorded on the ex-dividend date except that certain dividends from foreign securities are recognized as soon as the Fund is notified of the ex-dividend date. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis).
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Growth and Income Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
f. Security Transactions, Investment Income, Expenses and Distributions (continued)
Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with accounting principles generally accepted in the United States of America. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods.
Common expenses incurred by the Trust are allocated among the funds based on the ratio of net assets of each fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense.
Realized and unrealized gains and losses and net investment income, not including class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions, by class, are generally due to differences in class specific expenses.
g. Accounting Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
h. Guarantees and Indemnifications
Under the Trust’s organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, on behalf of the Fund, enters into contracts with service providers that contain general indemnification clauses. The Trust’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote.
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Growth and Income Securities Fund
2. SHARES OF BENEFICIAL INTEREST
At June 30, 2009, there were an unlimited number of shares authorized (without par value). Transactions in the Fund’s shares were as follows:
| Six Months Ended June 30, 2009 | Year Ended December 31, 2008a | |||||||||||||
| Class 1 Shares: | Shares | Amount | Shares | Amount | ||||||||||
Shares sold | 7,138 | $ | 57,860 | 16,555 | $ | 196,921 | ||||||||
Shares issued in reinvestment of distributions | 956,535 | 8,187,942 | 2,324,196 | 29,424,315 | ||||||||||
Shares redeemed | (1,800,661 | ) | (14,539,056 | ) | (4,003,019 | ) | (47,641,774 | ) | ||||||
Net increase (decrease) | (836,988 | ) | $ | (6,293,254 | ) | (1,662,268 | ) | $ | (18,020,538 | ) | ||||
Class 2 Shares: | ||||||||||||||
Shares sold | 528,034 | $ | 4,203,391 | 705,175 | $ | 8,223,845 | ||||||||
Shares issued in reinvestment of distributions | 784,890 | 6,640,173 | 2,262,180 | 28,254,634 | ||||||||||
Shares redeemed | (2,039,181 | ) | (15,949,156 | ) | (7,557,698 | ) | (85,482,459 | ) | ||||||
Net increase (decrease) | (726,257 | ) | $ | (5,105,592 | ) | (4,590,343 | ) | $ | (49,003,980 | ) | ||||
Class 4 Shares: | ||||||||||||||
Shares sold | — | $ | — | 353 | $ | 5,000 | ||||||||
| aFor | the period February 29, 2008 (effective date) to December 31, 2008 for Class 4. |
3. TRANSACTIONS WITH AFFILIATES
Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Trust are also officers and/or directors of the following subsidiaries:
| Subsidiary | Affiliation | |
Franklin Advisers, Inc. (Advisers) | Investment manager | |
Franklin Templeton Services, LLC (FT Services) | Administrative manager | |
Franklin Templeton Distributors, Inc. (Distributors) | Principal underwriter | |
Franklin Templeton Investor Services, LLC (Investor Services) | Transfer agent |
a. Management Fees
The Fund pays an investment management fee to Advisers based on the average daily net assets of the Fund as follows:
| Annualized Fee Rate | Net Assets | |
| 0.625% | Up to and including $100 million | |
| 0.500% | Over $100 million, up to and including $250 million | |
| 0.450% | Over $250 million, up to and including $7.5 billion | |
| 0.440% | Over $7.5 billion, up to and including $10 billion | |
| 0.430% | Over $10 billion, up to and including $12.5 billion | |
| 0.420% | Over $12.5 billion, up to and including $15 billion | |
| 0.400% | In excess of $15 billion |
b. Administrative Fees
Under an agreement with Advisers, FT Services provides administrative services to the Fund. The fee is paid by Advisers based on average daily net assets, and is not an additional expense of the Fund.
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Growth and Income Securities Fund
3. TRANSACTIONS WITH AFFILIATES (continued)
c. Distribution Fees
The Fund’s Board of Trustees has adopted distribution plans for Class 2 and Class 4 shares pursuant to Rule 12b-1 under the 1940 Act. Under the Fund’s compensation distribution plans, the Fund pays Distributors for costs incurred in connection with the servicing, sale and distribution of the Fund’s shares up to 0.35% per year of its average daily net assets of each class. The Board of Trustees has agreed to limit the current rate to 0.25% per year for Class 2.
d. Transfer Agent Fees
Investor Services, under terms of an agreement, performs shareholder servicing for the Fund and is not paid by the Fund for the services.
4. EXPENSE OFFSET ARRANGEMENT
The Fund has entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Fund’s custodian expenses. During the period ended June 30, 2009, the custodian fees were reduced as noted in the Statement of Operations.
5. INCOME TAXES
For tax purposes, capital losses may be carried over to offset future capital gains, if any. At December 31, 2008, the Fund had tax basis capital losses of $20,500,338 expiring in 2016.
For tax purposes, realized capital losses and realized currency losses occurring subsequent to October 31, may be deferred and treated as occurring on the first day of the following fiscal year. At December 31, 2008, the Fund deferred realized capital losses and realized currency losses of $13,568,873 and $1,996, respectively.
At June 30, 2009, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
Cost of investments | $ | 324,804,824 | ||
Unrealized appreciation | $ | 24,072,686 | ||
Unrealized depreciation | (65,538,117 | ) | ||
Net unrealized appreciation (depreciation) | $ | (41,465,431 | ) | |
Net investment income differs for financial statement and tax purposes primarily due to differing treatments of foreign currency transactions and bond discounts and premiums.
Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatments of wash sales, foreign currency transactions, pass-through entity income and bond discounts and premiums.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the period ended June 30, 2009, aggregated $63,996,484 and $62,984,458, respectively.
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Growth and Income Securities Fund
7. CREDIT RISK
At June 30, 2009, the Fund had 11.61% of its portfolio invested in high yield or other securities rated below investment grade. These securities may be more sensitive to economic conditions causing greater price volatility and are potentially subject to a greater risk of loss due to default than higher rated securities.
8. CREDIT FACILITY
Effective January 23, 2009, the Fund, together with other U.S. registered and foreign investment funds managed by Franklin Templeton Investments (individually, “Borrower”; collectively “Borrowers”), entered into a joint syndicated senior unsecured credit facility totaling $725 million (Global Credit Facility) to provide a source of funds to the Borrowers for temporary and emergency purposes, including the ability to meet future unanticipated or unusually large redemption requests.
Under the terms of the Global Credit Facility, the Fund shall, in addition to interest charged on any borrowings made by the Fund and other costs incurred by the Fund, pay its share of fees and expenses incurred in connection with the implementation and maintenance of the Global Credit Facility, based upon its relative share of the aggregate net assets of all of the Borrowers, including an annual commitment fee based upon the unused portion of the Global Credit Facility. During the period, the Fund incurred commitment fees of $335 of its pro rata portion of the Global Credit Facility, which is reflected in other expenses on the Statement of Operations. During the period ended June 30, 2009, the Fund did not utilize the Global Credit Facility.
9. FAIR VALUE MEASUREMENTS
Financial Accounting Standards Board (FASB) Statement No. 157, “Fair Value Measurement” (SFAS 157) establishes a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Fund’s own market assumptions (unobservable inputs). These inputs are used in determining the value of the Fund’s investments and are summarized in the following fair value hierarchy:
| • | Level 1 – quoted prices in active markets for identical securities |
| • | Level 2 – other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speed, credit risk, etc.) |
| • | Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments) |
The inputs or methodology used for valuing securities are not an indication of the risk associated with investing in those securities.
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Growth and Income Securities Fund
9. FAIR VALUE MEASUREMENTS (continued)
The following is a summary of the inputs used as of June 30, 2009, in valuing the Fund’s assets carried at fair value:
| Level 1 | Level 2 | Level 3 | Total | |||||||||
Assets: | ||||||||||||
Investments in Securities: | ||||||||||||
Equity Investments:a | ||||||||||||
Consumer Discretionary | $ | 9,910,966 | $ | 2,766,324 | $ | — | $ | 12,677,290 | ||||
Health Care | 27,224,408 | 9,027,138 | — | 36,251,546 | ||||||||
Utilities | 16,753,627 | 5,742,000 | — | 22,495,627 | ||||||||
All other Equity Investmentsb | 162,173,329 | — | — | 162,173,329 | ||||||||
Corporate Bonds | — | 17,724,437 | — | 17,724,437 | ||||||||
Convertible Bonds | — | 22,495,056 | — | 22,495,056 | ||||||||
Short Term Investments | — | 9,522,108 | — | 9,522,108 | ||||||||
Total Investments in Securities | $ | 216,062,330 | $ | 67,277,063 | $ | — | $ | 283,339,393 | ||||
aIncludes common and preferred stock as well as other equity investments.
bFor detailed industry descriptions, see the accompanying Statement of Investments.
10. SUBSEQUENT EVENTS
Management has evaluated subsequent events through August 7, 2009 and determined that no events have occurred that require disclosure.
ABBREVIATIONS
Selected Portfolio Abbreviations
ADR - American Depository Receipt
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FRANKLIN HIGH INCOME SECURITIES FUND
This semiannual report for Franklin High Income Securities Fund covers the period ended June 30, 2009.
Performance Summary as of 6/30/09
Franklin High Income Securities Fund – Class 1 delivered a +21.75% total return for the six-month period ended 6/30/09.
Performance reflects the Fund’s Class 1 operating expenses, but does not include any contract fees, expenses or sales charges. If they had been included, performance would be lower. These charges and deductions, particularly for variable life policies, can have a significant effect on contract values and insurance benefits. See the contract prospectus for a complete description of these expenses, including sales charges.
Franklin High Income Securities Fund – Class 1
Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares.
Current performance may differ from figures shown.
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Fund Goals and Main Investments: Franklin High Income Securities Fund seeks a high level of current income with capital appreciation as a secondary goal. The Fund normally invests primarily to predominantly in debt securities offering high yield and expected total return.
Performance Overview
You can find the Fund’s six-month total return in the Performance Summary. The Fund underperformed its benchmark, the Credit Suisse (CS) High Yield Index, which had a +27.22% total return for the period under review.1 The Fund performed comparably to its peers, as measured by the +20.55% return of the Lipper VIP High Current Yield Funds Classification Average.2
Economic and Market Overview
During the six-month period ended June 30, 2009, economic conditions deteriorated. In February, The Conference Board’s Consumer Confidence Index fell to an all-time low since it began in 1967 as the U.S. economy faltered and as stock markets declined. Despite far-reaching government interventions, the nation’s economic troubles worsened as manufacturing activity weakened at its fastest pace in nearly 30 years and as home prices fell at an accelerated rate. Jobless claims mounted and the unemployment rate rose to 9.5% by period-end.3 Economic growth, as measured by gross domestic product, fell in 2009’s first and second quarters at annualized rates of 6.4% and an estimated 1.0%, reflecting broad-based slowdowns in consumer spending, corporate profits and export growth.
Oil prices rose from $44 per barrel in December 2008 to $70 per barrel at period-end; however, inflation remained muted as most commodity prices were well below 2008 levels. June’s inflation rate was an annualized -1.4%.3 Core inflation, which excludes food and energy costs, rose at a 1.7% annualized rate, which was within the Federal Reserve Board’s (Fed’s) informal target range of 1.5%–2.0%.4 The core personal consumption expenditures price index reported a 12-month increase of 1.5%.3
A slowing economy and decelerating inflation prompted policymakers to keep interest rates low and enact stimulus plans. During the period
1. Source: © 2009 Morningstar.
2. Source: Lipper Inc.
One cannot invest directly in an index, nor is an index representative of the Fund’s portfolio. Please see Index Descriptions following the Fund Summaries.
3. Source: Bureau of Labor Statistics.
4. Source: Bureau of Economic Analysis.
Fund Risks: Because the Fund invests in bonds and other debt obligations, its share price and yield will be affected by interest rate movements. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in the Fund adjust to a rise in interest rates, the Fund’s share price may decline. The Fund invests primarily to predominantly in high yield, lower rated (junk) bonds, which generally have greater price swings and higher risk of default and loss of principal than investment-grade bonds. Foreign investing, especially in emerging markets, involves additional risks including currency fluctuations, economic instability, market volatility, and political and social instability. The Fund’s prospectus also includes a description of the main investment risks.
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under review, the Fed kept the federal funds target rate in a range of 0% to 0.25%. The government implemented the American Recovery and Reinvestment Act, which included tax breaks, money for ailing state governments, aid to the poor and unemployed, and spending on infrastructure, renewable energy, health care and education. The Fed and U.S. Treasury Department also continued programs designed to shore up beleaguered banks’ capital, enable freer lending to businesses and consumers, and help struggling home buyers avoid foreclosure.
Most Treasury prices declined during the period. The spread between two-year and 10-year Treasury yields rose to 242 basis points (100 basis points equal one percentage point) at the end of June from 149 basis points at the beginning of the reporting period. The two-year Treasury bill yield rose slightly from 0.76% to 1.11% over the six-month period, while the 10-year Treasury note yield increased from 2.25% to 3.53%.
Investment Strategy
We are research-driven, fundamental investors who rely on a team of analysts to provide in-depth industry expertise and use qualitative and quantitative analyses to evaluate companies. As bottom-up investors, we focus primarily on individual securities. We also consider sectors when choosing investments. In selecting securities for the Fund’s investment portfolio, we do not rely principally on ratings assigned by rating agencies, but perform our own independent analysis to evaluate an issuer’s creditworthiness. We consider a variety of factors, including an issuer’s experience and managerial strength, its sensitivity to economic conditions and its current financial condition.
Manager’s Discussion
Following a difficult fourth quarter 2008 for almost all financial markets, some stability returned in early 2009. Although there were still some pockets of volatility during the period, the high yield market generally offered a positive tone, and yield spreads narrowed significantly from their record high levels reached in the fourth quarter of 2008. High absolute yields available early in the reporting period attracted new participants to the market, leading to heavy cash inflows and strong technical factors. At the same time, thawing credit markets allowed some companies to refinance impending debt maturities and substantially improve liquidity. Largely as a result, market sentiment improved dramatically, but given continued expectations for increased defaults and overall weak economic conditions, yield spreads remained higher than the market’s 10-year average.
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Although the economic environment showed some signs of recovery in 2009’s first half, indicators were mixed. However, with many investors’ increased risk appetites for some asset classes, such as high yield securities, positive technical factors outweighed investors’ fundamental concerns, and the market rallied. We had maintained a somewhat conservative positioning, from a risk perspective, relative to the benchmark CS High Yield Index in 2008, but given depressed valuations as we entered 2009, we added some higher risk positions to the Fund’s portfolio. Although our positioning versus the index remained slightly defensive and therefore proved to be a negative in such a strong rally, the repositioning helped us keep pace with our Lipper peer group’s performance. In addition, we used our fundamental research process to adjust the Fund’s industry weightings. Within that framework, we overweighted and underweighted certain industries relative to the index in an effort to outperform.
For example, we were underweighted in the telecommunications industry, which, given somewhat lower beta, a measure of volatility versus the overall market, underperformed the CS High Yield Index during the review period.5 This underweighting helped relative results. Conversely, the Fund was overweighted in the chemicals industry throughout the period.6 Despite its cyclical nature, the chemicals industry outperformed the index as bonds of certain companies rallied from very low levels as better credit conditions improved refinancing prospects for these companies and allowed bank covenants to be reset. Our overweighting thus helped performance relative to the index. Similarly, our overweighted financials sector position generated positive performance because the sector was among the index’s top performing.7 However, much of our financials exposure was in investment-grade rated holdings that, while offering what we viewed as attractive yields, did not keep pace with the gains for certain noninvestment-grade rated financial bonds not held by the Fund during the period.
Although the Fund’s industry positioning improved relative results in certain instances, some holdings and industry weightings had a negative impact. For example, the Fund’s positioning versus the index in utilities, consumer and housing was a drag on performance. 8 We overweighted
5. Telecommunications holdings are in telecommunication services in the SOI.
6. Chemicals holdings are in materials in the SOI.
7. Financials holdings are in banks, diversified financials and real estate in the SOI.
8. Consumer holdings are in consumer durables and apparel, and consumer services in the SOI; housing holdings are in consumer durables and apparel.
Top 10 Sectors/Industries
Franklin High Income Securities Fund
6/30/09
| % of Total Net Assets | ||
| Energy | 13.9% | |
| Materials | 10.4% | |
| Media | 10.3% | |
| Utilities | 9.8% | |
| Telecommunication Services | 9.2% | |
| Health Care Equipment & Services | 8.3% | |
| Consumer Services | 6.8% | |
| Capital Goods | 3.4% | |
| Food, Beverage & Tobacco | 3.4% | |
| Diversified Financials | 3.2% | |
The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund’s Statement of Investments (SOI).
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the utilities sector during the period, but given its perceived defensiveness in a strong market, the sector underperformed the index; therefore, the Fund’s positioning hurt relative results. Investors’ willingness to take on more risk during the period extended to cyclical sectors such as consumer, which therefore outperformed the index. Taking a conservative stance on expected consumer spending, we underweighted the sector, which hindered relative performance. Similarly, although fundamentals did not necessarily improve or stabilize for the housing industry, investors seemed to take a longer-term view of its survivability, and the industry rallied. Because the Fund was underweighted in housing, our relative performance suffered.
Thank you for your participation in Franklin High Income Securities Fund. We look forward to serving your future investment needs.
The foregoing information reflects our analysis, opinions and portfolio holdings as of June 30, 2009, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.
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Fund Expenses
As an investor in a variable insurance contract (Contract) that indirectly provides for investment in an underlying mutual fund, you can incur transaction and/or ongoing expenses at both the Fund level and the Contract level.
| • | Transaction expenses can include sales charges (loads) on purchases, surrender fees, transfer fees and premium taxes. |
| • | Ongoing expenses can include management fees, distribution and service (12b-1) fees, contract fees, annual maintenance fees, mortality and expense risk fees and other fees and expenses. All mutual funds and Contracts have some types of ongoing expenses. |
The expenses shown in the table are meant to highlight ongoing expenses at the Fund level only and do not include ongoing expenses at the Contract level, or transaction expenses at either the Fund or Contract levels. While the Fund does not have transaction expenses, if the transaction and ongoing expenses at the Contract level were included, the expenses shown below would be higher. You should consult your Contract prospectus or disclosure document for more information.
The table shows Fund-level ongoing expenses and can help you understand these expenses and compare them with those of other mutual funds offered through the Contract. The table assumes a $1,000 investment held for the six months indicated. Please refer to the Fund prospectus for additional information on operating expenses.
Actual Fund Expenses
The first line (Actual) of the table provides actual account values and expenses. The “Ending Account Value” is derived from the Fund’s actual return, which includes the effect of ongoing Fund expenses, but does not include the effect of ongoing Contract expenses.
You can estimate the Fund-level expenses you incurred during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:
| 1. | Divide your account value by $1,000. |
If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6.
| 2. | Multiply the result by the number under the heading “Fund-Level Expenses Incurred During Period.” |
If Fund-Level Expenses Incurred During Period were $7.50, then 8.6 x $7.50 = $64.50.
In this illustration, the estimated expenses incurred this period at the Fund level are $64.50.
Franklin High Income Securities Fund – Class 1
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Hypothetical Example for Comparison with Other Mutual Funds
Information in the second line (Hypothetical) of the table can help you compare ongoing expenses of the Fund with those of other mutual funds offered through the Contract. This information may not be used to estimate the actual ending account balance or expenses you incurred during the period. The hypothetical “Ending Account Value” is based on the Fund’s actual expense ratio and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Fund-Level Expenses Incurred During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds offered through a Contract.
| Class 1 | Beginning Account Value 1/1/09 | Ending Account Value 6/30/09 | Fund-Level Expenses Incurred During Period* 1/1/09–6/30/09 | ||||||
Actual | $ | 1,000 | $ | 1,217.50 | $ | 3.57 | |||
Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,021.57 | $ | 3.26 | |||
*Expenses are calculated using the most recent six-month annualized expense ratio for the Fund’s Class 1 shares (0.65%), which does not include any ongoing expenses of the Contract for which the Fund is an investment option, multiplied by the average account value over the period, multiplied by 181/365 to reflect the one-half year period.
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Franklin Templeton Variable Insurance Products Trust
Financial Highlights
Franklin High Income Securities Fund
| Six Months Ended June 30, 2009 (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 1 | 2008 | 2007 | 2006 | 2005 | 2004 | |||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 4.68 | $ | 6.72 | $ | 6.96 | $ | 6.82 | $ | 6.99 | $ | 6.81 | ||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.21 | 0.50 | 0.51 | 0.49 | 0.48 | 0.49 | ||||||||||||||||||
Net realized and unrealized gains (losses) | 0.82 | (1.92 | ) | (0.30 | ) | 0.12 | (0.23 | ) | 0.15 | |||||||||||||||
Total from investment operations | 1.03 | (1.42 | ) | 0.21 | 0.61 | 0.25 | 0.64 | |||||||||||||||||
Less distributions from net investment income | (0.38 | ) | (0.62 | ) | (0.45 | ) | (0.47 | ) | (0.42 | ) | (0.46 | ) | ||||||||||||
Net asset value, end of period | $ | 5.33 | $ | 4.68 | $ | 6.72 | $ | 6.96 | $ | 6.82 | $ | 6.99 | ||||||||||||
Total returnc | 21.75% | (23.16)% | 3.02% | 9.48% | 3.72% | 10.04% | ||||||||||||||||||
Ratios to average net assetsd | ||||||||||||||||||||||||
Expenses before expense reduction | 0.65% | 0.66% | 0.61% | 0.64% | 0.60% | 0.62% | ||||||||||||||||||
Expenses net of expense reduction | 0.65% | e | 0.66% | e | 0.61% | e | 0.63% | 0.60% | e | 0.62% | e | |||||||||||||
Net investment income | 8.15% | 8.30% | 7.38% | 7.14% | 6.96% | 7.17% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 43,955 | $ | 38,225 | $ | 61,286 | $ | 77,641 | $ | 87,814 | $ | 109,569 | ||||||||||||
Portfolio turnover rate | 9.39% | 21.75% | 40.65% | 37.99% | 47.60% | 59.87% | ||||||||||||||||||
aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.
bBased on average daily shares outstanding.
cTotal return does not include any fees, charges or expenses imposed by the variable annuity and life insurance contracts for which the Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle. Total return is not annualized for periods less than one year.
dRatios are annualized for periods less than one year.
eBenefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
FH-8
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Franklin High Income Securities Fund
| Class 2 | Six Months Ended June 30, 2009 (unaudited) | Year Ended December 31, | ||||||||||||||||||||||
| 2008 | 2007 | 2006 | 2005 | 2004 | ||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 4.59 | $ | 6.60 | $ | 6.85 | $ | 6.71 | $ | 6.90 | $ | 6.73 | ||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.20 | 0.47 | 0.48 | 0.46 | 0.45 | 0.46 | ||||||||||||||||||
Net realized and unrealized gains (losses) | 0.80 | (1.88 | ) | (0.29 | ) | 0.13 | (0.23 | ) | 0.16 | |||||||||||||||
Total from investment operations | 1.00 | (1.41 | ) | 0.19 | 0.59 | 0.22 | 0.62 | |||||||||||||||||
Less distributions from net investment income | (0.37 | ) | (0.60 | ) | (0.44 | ) | (0.45 | ) | (0.41 | ) | (0.45 | ) | ||||||||||||
Net asset value, end of period | $ | 5.22 | $ | 4.59 | $ | 6.60 | $ | 6.85 | $ | 6.71 | $ | 6.90 | ||||||||||||
Total returnc | 21.51% | (23.38)% | 2.72% | 9.36% | 3.31% | 9.87% | ||||||||||||||||||
Ratios to average net assetsd | ||||||||||||||||||||||||
Expenses before expense reduction | 0.90% | 0.91% | 0.86% | 0.89% | 0.85% | 0.87% | ||||||||||||||||||
Expenses net of expense reduction | 0.90% | e | 0.91% | e | 0.86% | e | 0.88% | 0.85% | e | 0.87% | e | |||||||||||||
Net investment income | 7.90% | 8.05% | 7.13% | 6.89% | 6.71% | 6.92% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 155,175 | $ | 84,396 | $ | 155,777 | $ | 166,318 | $ | 139,413 | $ | 122,579 | ||||||||||||
Portfolio turnover rate | 9.39% | 21.75% | 40.65% | 37.99% | 47.60% | 59.87% | ||||||||||||||||||
aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.
bBased on average daily shares outstanding.
cTotal return does not include any fees, charges or expenses imposed by the variable annuity and life insurance contracts for which the Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle. Total return is not annualized for periods less than one year.
dRatios are annualized for periods less than one year.
eBenefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
FH-9
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Franklin High Income Securities Fund
| Class 4 | Six Months Ended June 30, 2009 (unaudited) | Period Ended | ||||||
Per share operating performance | ||||||||
(for a share outstanding throughout the period) | ||||||||
Net asset value, beginning of period | $ | 4.67 | $ | 6.55 | ||||
Income from investment operationsb: | ||||||||
Net investment incomec | 0.20 | 0.39 | ||||||
Net realized and unrealized gains (losses) | 0.82 | (1.65 | ) | |||||
Total from investment operations | 1.02 | (1.26 | ) | |||||
Less distributions from net investment income | (0.38 | ) | (0.62 | ) | ||||
Net asset value, end of period | $ | 5.31 | $ | 4.67 | ||||
Total returnd | 21.53% | (21.34)% | ||||||
Ratios to average net assetse | ||||||||
Expenses before expense reduction | 1.00% | 1.01% | ||||||
Expenses net of expense reductionf | 1.00% | 1.01% | ||||||
Net investment income | 7.80% | 7.95% | ||||||
Supplemental data | ||||||||
Net assets, end of period (000’s) | $ | 7,553 | $ | 2,244 | ||||
Portfolio turnover rate | 9.39% | 21.75% | ||||||
aFor the period February 29, 2008 (effective date) to December 31, 2008.
bThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.
cBased on average daily shares outstanding.
dTotal return does not include any fees, charges or expenses imposed by the variable annuity and life insurance contracts for which the Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle. Total return is not annualized for periods less than one year.
eRatios are annualized for periods less than one year.
fBenefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
FH-10
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited)
| Franklin High Income Securities Fund | Country | Principal Amounta | Value | |||||
b,cSenior Floating Rate Interests 1.9% | ||||||||
Consumer Services 0.2% | ||||||||
OSI Restaurant Partners LLC (Outback), | ||||||||
Pre-Funded Revolving Credit, 0.449%, 6/14/13 | United States | $ | 54,086 | $ | 39,039 | |||
Term Loan B, 2.625%, 6/14/14 | United States | 639,150 | 461,329 | |||||
| 500,368 | ||||||||
Materials 0.7% | ||||||||
Novelis Corp., U.S Term Loan, 2.31% - 2.60%, 7/07/14 | United States | 1,591,909 | 1,397,564 | |||||
Media 0.4% | ||||||||
Univision Communications Inc., Initial Term Loan, 2.56%, 9/29/14 | United States | 1,000,000 | 750,357 | |||||
Utilities 0.6% | ||||||||
Dynegy Holdings Inc., | ||||||||
Term Loan B, 1.81%, 4/02/13 | United States | 112,154 | 101,079 | |||||
Term L/C Facility, 1.81%, 4/02/13 | United States | 1,386,133 | 1,249,253 | |||||
| 1,350,332 | ||||||||
Total Senior Floating Rate Interests (Cost $4,343,068) | 3,998,621 | |||||||
Corporate Bonds 93.6% | ||||||||
Automobiles & Components 2.6% | ||||||||
Ford Motor Credit Co. LLC, | ||||||||
7.80%, 6/01/12 | United States | 1,500,000 | 1,291,694 | |||||
senior note, 9.875%, 8/10/11 | United States | 3,200,000 | 2,961,926 | |||||
dTRW Automotive Inc., senior note, 144A, 7.25%, 3/15/17 | United States | 1,700,000 | 1,181,500 | |||||
| 5,435,120 | ||||||||
Banks 0.9% | ||||||||
eWells Fargo Capital XV, pfd., 9.75%, Perpetual | United States | 2,000,000 | 1,936,634 | |||||
Capital Goods 3.4% | ||||||||
dAllison Transmission Inc., senior note, 144A, 11.00%, 11/01/15 | United States | 2,200,000 | 1,749,000 | |||||
Case New Holland Inc., senior note, 7.125%, 3/01/14 | United States | 2,000,000 | 1,835,000 | |||||
L-3 Communications Corp., senior sub. note, 5.875%, 1/15/15 | United States | 2,000,000 | 1,785,000 | |||||
RBS Global & Rexnord Corp., senior note, 9.50%, 8/01/14 | United States | 2,000,000 | 1,720,000 | |||||
| 7,089,000 | ||||||||
Commercial & Professional Services 2.0% | ||||||||
ARAMARK Corp., senior note, 8.50%, 2/01/15 | United States | 2,000,000 | 1,950,000 | |||||
f,gGoss Graphic Systems Inc., senior sub. note, 12.25%, 11/19/05 | United States | 1,912,374 | 191 | |||||
Iron Mountain Inc., senior sub. note, 8.75%, 7/15/18 | United States | 400,000 | 396,000 | |||||
JohnsonDiversey Holdings Inc., senior disc. note, 10.67%, 5/15/13 | United States | 2,000,000 | 1,690,000 | |||||
| 4,036,191 | ||||||||
Consumer Durables & Apparel 2.6% | ||||||||
Jarden Corp., senior sub. note, 7.50%, 5/01/17 | United States | 2,200,000 | 1,936,000 | |||||
Jostens IH Corp., senior sub. note, 7.625%, 10/01/12 | United States | 2,100,000 | 2,105,250 | |||||
KB Home, senior note, 6.25%, 6/15/15 | United States | 1,600,000 | 1,376,000 | |||||
| 5,417,250 | ||||||||
Consumer Services 6.6% | ||||||||
d,gFontainebleau Las Vegas, 144A, 10.25%, 6/15/15 | United States | 1,700,000 | 72,250 | |||||
dHarrah’s Operating Escrow, senior secured note, 144A, 11.25%, 6/01/17 | United States | 2,500,000 | 2,375,000 | |||||
Host Hotels & Resorts LP, senior note, | ||||||||
d144A, 9.00%, 5/15/17 | United States | 300,000 | 287,250 | |||||
FH-11
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Franklin High Income Securities Fund | Country | Principal Amounta | Value | |||||
Corporate Bonds (continued) | ||||||||
Consumer Services (continued) | ||||||||
Host Hotels & Resorts LP, senior note, (continued) | ||||||||
M, 7.00%, 8/15/12 | United States | $ | 1,700,000 | $ | 1,649,000 | |||
MGM MIRAGE, senior note, | ||||||||
6.625%, 7/15/15 | United States | 2,500,000 | 1,643,750 | |||||
6.875%, 4/01/16 | United States | 600,000 | 394,500 | |||||
Pinnacle Entertainment Inc., senior sub. note, 8.75%, 10/01/13 | United States | 2,100,000 | 2,121,000 | |||||
Royal Caribbean Cruises Ltd., senior deb., 7.25%, 3/15/18 | United States | 1,800,000 | 1,431,000 | |||||
dSpeedway Motorsports Inc., senior note, 144A, 8.75%, 6/01/16 | United States | 1,900,000 | 1,933,250 | |||||
Starwood Hotels & Resorts Worldwide Inc., senior note, 6.75%, 5/15/18 | United States | 1,500,000 | 1,288,293 | |||||
gStation Casinos Inc., | ||||||||
senior note, 6.00%, 4/01/12 | United States | 300,000 | 105,000 | |||||
senior note, 7.75%, 8/15/16 | United States | 800,000 | 280,000 | |||||
senior sub. note, 6.50%, 2/01/14 | United States | 100,000 | 2,500 | |||||
senior sub. note, 6.875%, 3/01/16 | United States | 1,000,000 | 30,000 | |||||
| 13,612,793 | ||||||||
Diversified Financials 3.1% | ||||||||
dGMAC LLC, senior note, 144A, 6.875%, 8/28/12 | United States | 4,049,000 | 3,421,405 | |||||
eJPMorgan Chase & Co., junior sub. note, 1, 7.90%, Perpetual | United States | 1,500,000 | 1,316,295 | |||||
gLehman Brothers Holdings Inc., senior note, 6.20%, 9/26/14 | United States | 2,300,000 | 350,750 | |||||
Merrill Lynch & Co. Inc., 6.875%, 4/25/18 | United States | 1,500,000 | 1,390,557 | |||||
| 6,479,007 | ||||||||
Energy 13.9% | ||||||||
Berry Petroleum Co., senior note, 10.25%, 6/01/14 | United States | 600,000 | 609,000 | |||||
hBill Barrett Corp., senior note, 9.875%, 7/17/16 | United States | 400,000 | 380,688 | |||||
Chesapeake Energy Corp., senior note, 6.25%, 1/15/18 | United States | 3,700,000 | 3,089,500 | |||||
Compagnie Generale de Geophysique-Veritas, senior note, | ||||||||
7.50%, 5/15/15 | France | 800,000 | 738,000 | |||||
7.75%, 5/15/17 | France | 1,200,000 | 1,098,000 | |||||
El Paso Corp., senior note, | ||||||||
12.00%, 12/12/13 | United States | 400,000 | 442,000 | |||||
6.875%, 6/15/14 | United States | 2,000,000 | 1,877,098 | |||||
bEnterprise Products Operating LLP, junior sub. note, FRN, 7.034%, 1/15/68 | United States | 1,900,000 | 1,403,295 | |||||
Mariner Energy Inc., senior note, 7.50%, 4/15/13 | United States | 2,100,000 | 1,921,500 | |||||
MarkWest Energy Partners LP, senior note, 6.875%, 11/01/14 | United States | 2,200,000 | 1,848,000 | |||||
Peabody Energy Corp., senior note, B, 6.875%, 3/15/13 | United States | 2,000,000 | 1,990,000 | |||||
Petrohawk Energy Corp., senior note, 7.875%, 6/01/15 | United States | 1,800,000 | 1,674,000 | |||||
dPetroplus Finance Ltd., senior note, 144A, 6.75%, 5/01/14 | Switzerland | 2,100,000 | 1,827,000 | |||||
Plains Exploration & Production Co., senior note, 7.625%, 6/01/18 | United States | 2,200,000 | 1,985,500 | |||||
Quicksilver Resources Inc., senior note, 8.25%, 8/01/15 | United States | 2,000,000 | 1,790,000 | |||||
dSandRidge Energy Inc., senior note, 144A, 8.00%, 6/01/18 | United States | 2,000,000 | 1,720,000 | |||||
Tesoro Corp., senior note, 6.50%, 6/01/17 | United States | 2,000,000 | 1,720,000 | |||||
The Williams Cos. Inc., senior note, | ||||||||
7.625%, 7/15/19 | United States | 600,000 | 593,524 | |||||
7.875%, 9/01/21 | United States | 1,200,000 | 1,184,280 | |||||
8.75%, 3/15/32 | United States | 800,000 | 805,979 | |||||
| 28,697,364 | ||||||||
Food & Staples Retailing 1.6% | ||||||||
dRite Aid Corp., senior secured note, 144A, 9.75%, 6/12/16 | United States | 1,300,000 | 1,306,500 | |||||
SUPERVALU Inc., senior note, 8.00%, 5/01/16 | United States | 2,000,000 | 1,950,000 | |||||
| 3,256,500 | ||||||||
FH-12
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Franklin High Income Securities Fund | Country | Principal Amounta | Value | |||||
Corporate Bonds (continued) | ||||||||
Food, Beverage & Tobacco 3.4% | ||||||||
Altria Group Inc., senior bond, 9.25%, 8/06/19 | United States | $ | 1,150,000 | $ | 1,293,520 | |||
Dean Foods Inc., senior note, 7.00%, 6/01/16 | United States | 1,000,000 | 917,500 | |||||
dDole Food Co. Inc, senior note, 144A, 13.875%, 3/15/14 | United States | 1,700,000 | 1,878,500 | |||||
dJBS USA LLC, senior note, 144A, 11.625%, 5/01/14 | United States | 2,100,000 | 1,995,000 | |||||
dTyson Foods Inc., senior note, 144A, 10.50%, 3/01/14 | United States | 900,000 | 981,000 | |||||
| 7,065,520 | ||||||||
Health Care Equipment & Services 8.3% | ||||||||
DaVita Inc., senior sub. note, 7.25%, 3/15/15 | United States | 2,000,000 | 1,890,000 | |||||
FMC Finance III SA, senior note, 6.875%, 7/15/17 | Germany | 2,200,000 | 2,057,000 | |||||
dFresenius US Finance II, senior note, 144A, 9.00%, 7/15/15 | Germany | 1,000,000 | 1,047,500 | |||||
HCA Inc., senior secured note, 9.125%, 11/15/14 | United States | 4,000,000 | 3,970,000 | |||||
Tenet Healthcare Corp., senior note, 7.375%, 2/01/13 | United States | 2,400,000 | 2,172,000 | |||||
iUnited Surgical Partners International Inc., senior sub. note, PIK, 9.25%, 5/01/17 | United States | 2,300,000 | 1,886,000 | |||||
b,iUS Oncology Holdings Inc., senior note, PIK, FRN, 6.904%, 3/15/12 | United States | 2,589,000 | 2,194,177 | |||||
Vanguard Health Holding Co. II LLC, senior sub. note, 9.00%, 10/01/14 | United States | 2,000,000 | 1,925,000 | |||||
| 17,141,677 | ||||||||
Materials 9.7% | ||||||||
dAnglo American Capital PLC, senior note, 144A, 9.375%, 4/08/14 | United Kingdom | 1,100,000 | 1,196,024 | |||||
ArcelorMittal, senior note, 9.85%, 6/01/19 | Luxembourg | 1,900,000 | 2,053,526 | |||||
dClearwater Paper Corp., senior note, 144A, 10.625%, 6/15/16 | United States | 1,900,000 | 1,952,250 | |||||
Crown Americas Inc., senior note, 7.75%, 11/15/15 | United States | 2,000,000 | 1,965,000 | |||||
Freeport-McMoRan Copper & Gold Inc., senior note, 8.375%, 4/01/17 | United States | 1,700,000 | 1,715,161 | |||||
Huntsman International LLC, senior sub. note, 7.875%, 11/15/14 | United States | 2,000,000 | 1,595,000 | |||||
dIneos Group Holdings PLC, senior secured note, 144A, 8.50%, 2/15/16 | United Kingdom | 1,900,000 | 646,000 | |||||
dMacDermid Inc., senior sub. note, 144A, 9.50%, 4/15/17 | United States | 2,200,000 | 1,617,000 | |||||
Nalco Co., | ||||||||
dsenior note, 144A, 8.25%, 5/15/17 | United States | 100,000 | 101,000 | |||||
senior sub. note, 8.875%, 11/15/13 | United States | 1,700,000 | 1,742,500 | |||||
NewPage Corp., senior secured note, 10.00%, 5/01/12 | United States | 1,200,000 | 582,000 | |||||
Owens-Illinois Inc., senior note, 7.80%, 5/15/18 | United States | 2,000,000 | 1,897,500 | |||||
Solo Cup Co., | ||||||||
d,hsenior secured note, 144A, 10.50%, 11/01/13 | United States | 400,000 | 405,300 | |||||
senior sub. note, 8.50%, 2/15/14 | United States | 900,000 | 742,500 | |||||
dTeck Resources Ltd., senior secured note, 144A, 10.75%, 5/15/19 | Canada | 1,700,000 | 1,830,315 | |||||
| 20,041,076 | ||||||||
Media 9.9% | ||||||||
Cablevision Systems Corp., senior note, B, 8.00%, 4/15/12 | United States | 700,000 | 696,500 | |||||
gCanWest Media Inc., senior sub. note, 8.00%, 9/15/12 | Canada | 1,700,000 | 510,000 | |||||
g,jCCH II LLC, senior note, 10.25%, 9/15/10 | United States | 3,500,000 | 3,710,000 | |||||
dCSC Holdings Inc., senior note, 144A, 8.50%, 4/15/14 | United States | 500,000 | 498,125 | |||||
g,jDex Media Inc., | ||||||||
senior disc. note, 9.00%, 11/15/13 | United States | 700,000 | 108,500 | |||||
senior note, B, 8.00%, 11/15/13 | United States | 2,300,000 | 356,500 | |||||
DIRECTV Holdings LLC, senior note, 7.625%, 5/15/16 | United States | 1,800,000 | 1,759,500 | |||||
EchoStar DBS Corp., senior note, 7.125%, 2/01/16 | United States | 2,500,000 | 2,343,750 | |||||
Lamar Media Corp., senior sub. note, 7.25%, 1/01/13 | United States | 2,000,000 | 1,912,500 | |||||
Liberty Media Corp., senior note, 5.70%, 5/15/13 | United States | 2,000,000 | 1,740,000 | |||||
LIN Television Corp., senior sub. note, 6.50%, 5/15/13 | United States | 1,500,000 | 1,087,500 | |||||
Quebecor Media Inc., senior note, 7.75%, 3/15/16 | Canada | 2,000,000 | 1,822,500 | |||||
Radio One Inc., senior sub. note, 6.375%, 2/15/13 | United States | 2,000,000 | 612,500 | |||||
d,iUnivision Communications Inc., senior note, 144A, PIK, 10.50%, 3/15/15 | United States | 300,000 | 176,250 | |||||
dUPC Holding BV, senior note, 144A, 9.875%, 4/15/18 | Netherlands | 1,500,000 | 1,453,800 | |||||
FH-13
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Franklin High Income Securities Fund | Country | Principal Amounta | Value | |||||
Corporate Bonds (continued) | ||||||||
Media (continued) | ||||||||
dWMG Acquisition Corp., senior secured note, 144A, 9.50%, 6/15/16 | United States | $ | 1,600,000 | $ | 1,600,000 | |||
| 20,387,925 | ||||||||
Real Estate 0.7% | ||||||||
Forest City Enterprises Inc., senior note, | ||||||||
7.625%, 6/01/15 | United States | 2,000,000 | 1,270,000 | |||||
6.50%, 2/01/17 | United States | 300,000 | 166,500 | |||||
| 1,436,500 | ||||||||
Retailing 1.9% | ||||||||
Dollar General Corp., senior note, 10.625%, 7/15/15 | United States | 2,000,000 | 2,170,000 | |||||
Michaels Stores Inc., senior note, 10.00%, 11/01/14 | United States | 2,000,000 | 1,690,000 | |||||
| 3,860,000 | ||||||||
Semiconductors & Semiconductor Equipment 0.3% | ||||||||
Freescale Semiconductor Inc., senior note, 8.875%, 12/15/14 | United States | 1,300,000 | 663,000 | |||||
Software & Services 1.6% | ||||||||
First Data Corp., senior note, 9.875%, 9/24/15 | United States | 1,100,000 | 786,500 | |||||
SunGard Data Systems Inc., senior sub. note, 10.25%, 8/15/15 | United States | 2,600,000 | 2,414,750 | |||||
| 3,201,250 | ||||||||
Technology Hardware & Equipment 2.1% | ||||||||
Celestica Inc., senior sub. note, | ||||||||
7.875%, 7/01/11 | Canada | 1,000,000 | 1,005,000 | |||||
7.625%, 7/01/13 | Canada | 1,000,000 | 980,000 | |||||
gNortel Networks Ltd., senior note, 10.75%, 7/15/16 | Canada | 1,800,000 | 630,000 | |||||
Sanmina-SCI Corp., | ||||||||
b,dsenior note, 144A, FRN, 3.379%, 6/15/14 | United States | 1,000,000 | 825,000 | |||||
senior sub. note, 6.75%, 3/01/13 | United States | 1,200,000 | 936,000 | |||||
| 4,376,000 | ||||||||
Telecommunication Services 9.2% | ||||||||
dCC Holdings GS V LLC, senior secured note, 144A, 7.75%, 5/01/17 | United States | 200,000 | 196,000 | |||||
Centennial Communications Corp., senior note, 10.00%, 1/01/13 | United States | 1,000,000 | 1,060,000 | |||||
Crown Castle International Corp., senior note, 9.00%, 1/15/15 | United States | 2,000,000 | 2,045,000 | |||||
dDigicel Group Ltd., senior note, 144A, 8.875%, 1/15/15 | Jamaica | 2,000,000 | 1,670,000 | |||||
Inmarsat Finance PLC, senior note, 10.375%, 11/15/12 | United Kingdom | 2,000,000 | 2,080,000 | |||||
Intelsat Subsidiary Holding Co. Ltd., senior note, | ||||||||
8.50%, 1/15/13 | Bermuda | 2,000,000 | 1,930,000 | |||||
8.875%, 1/15/15 | Bermuda | 1,000,000 | 970,000 | |||||
MetroPCS Wireless Inc., senior note, 9.25%, 11/01/14 | United States | 2,000,000 | 1,997,500 | |||||
Millicom International Cellular SA, senior note, 10.00%, 12/01/13 | Luxembourg | 2,200,000 | 2,241,250 | |||||
Qwest Communications International Inc., senior note, B, 7.50%, 2/15/14 | United States | 2,200,000 | 2,018,500 | |||||
dQwest Corp., senior note, 144A, 8.375%, 5/01/16 | United States | 800,000 | 776,000 | |||||
dWind Acquisition Finance SA, senior note, 144A, 10.75%, 12/01/15 | Italy | 2,025,000 | 2,035,125 | |||||
| 19,019,375 | ||||||||
Transportation 0.6% | ||||||||
dCeva Group PLC, senior note, 144A, 10.00%, 9/01/14 | United Kingdom | 1,700,000 | 1,164,500 | |||||
Utilities 9.2% | ||||||||
The AES Corp., senior note, 8.00%, 10/15/17 | United States | 2,000,000 | 1,870,000 | |||||
Ameren Corp., senior note, 8.875%, 5/15/14 | United States | 1,900,000 | 1,963,597 | |||||
Aquila Inc., senior note, 11.875%, 7/01/12 | United States | 1,300,000 | 1,437,415 | |||||
CMS Energy Corp., senior note, 8.75%, 6/15/19 | United States | 2,000,000 | 2,033,180 | |||||
FH-14
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Franklin High Income Securities Fund | Country | Principal Amounta | Value | |||||
Corporate Bonds (continued) | ||||||||
Utilities (continued) | ||||||||
Dynegy Holdings Inc., senior note, 8.375%, 5/01/16 | United States | $ | 1,000,000 | $ | 852,500 | |||
Edison Mission Energy, senior note, 7.00%, 5/15/17 | United States | 2,400,000 | 1,854,000 | |||||
dIntergen NV, senior secured note, 144A, 9.00%, 6/30/17 | Netherlands | 2,000,000 | 1,905,000 | |||||
Mirant North America LLC, senior note, 7.375%, 12/31/13 | United States | 1,900,000 | 1,833,500 | |||||
NRG Energy Inc., senior note, | ||||||||
7.25%, 2/01/14 | United States | 700,000 | 680,750 | |||||
7.375%, 2/01/16 | United States | 2,200,000 | 2,087,250 | |||||
Texas Competitive Electric Holdings Co. LLC, senior note, A, 10.25%, 11/01/15 | United States | 4,000,000 | 2,510,000 | |||||
| 19,027,192 | ||||||||
Total Corporate Bonds (Cost $213,018,711) | 193,343,874 | |||||||
| Shares | ||||||||
Preferred Stocks (Cost $214,420) 0.1% | ||||||||
Diversified Financials 0.1% | ||||||||
dPreferred Blocker Inc., 9.00%, pfd., 144A | United States | 604 | 259,796 | |||||
Total Investments before Short Term Investments (Cost $217,576,199) | 197,602,291 | |||||||
| Principal Amounta | ||||||||
Short Term Investments (Cost $6,081,414) 2.9% | ||||||||
Repurchase Agreements 2.9% | ||||||||
kJoint Repurchase Agreement, 0.023%, 7/01/09 (Maturity Value $6,081,418) | United States | $ | 6,081,414 | 6,081,414 | ||||
Banc of America Securities LLC (Maturity Value $524,279) Barclays Capital Inc. (Maturity Value $480,554) BNP Paribas Securities Corp. (Maturity Value $1,747,495) Credit Suisse Securities (USA) LLC (Maturity Value $1,747,495) Deutsche Bank Securities Inc. (Maturity Value $620,427) HSBC Securities (USA) Inc. (Maturity Value $524,279) UBS Securities LLC (Maturity Value $436,889) | ||||||||
Collateralized by U.S. Government Agency Securities, 0.58% - 7.25%, 1/15/10 - 6/27/16; lU.S. Government Agency Discount Notes, 12/31/09; lU.S. Treasury Bills, 8/13/09; and U.S. Treasury Notes, 1.375% - 1.50%, 3/15/12 - 12/31/13 | ||||||||
Total Investments (Cost $223,657,613) 98.5% | 203,683,705 | |||||||
Other Assets, less Liabilities 1.5% | 2,999,078 | |||||||
Net Assets 100.0% | $ | 206,682,783 | ||||||
FH-15
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Franklin High Income Securities Fund |
See Abbreviations on page FH-27.
aThe principal amount is stated in U.S. dollars unless otherwise indicated.
bThe coupon rate shown represents the rate at period end.
cSee Note 1(d) regarding senior floating rate interests.
dSecurity was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be sold in transactions exempt from registration only to qualified institutional buyers or in a public offering registered under the Securities Act of 1933. These securities have been deemed liquid under guidelines approved by the Trust’s Board of Trustees. At June 30, 2009, the aggregate value of these securities was $42,082,640, representing 20.36% of net assets.
ePerpetual security with no stated maturity date.
fSecurity has been deemed illiquid because it may not be able to be sold within seven days. At June 30, 2009, the value of this security was $191, representing less than 0.01% of net assets.
gSee Note 7 regarding defaulted securities.
hSecurity purchased on a when-issued basis. See Note 1(c).
iIncome may be received in additional securities and/or cash.
jSee Note 8 regarding other considerations.
kSee Note 1(b) regarding joint repurchase agreement.
lThe security is traded on a discount basis with no stated coupon rate.
The accompanying notes are an integral part of these financial statements.
FH-16
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements
Statement of Assets and Liabilities
June 30, 2009 (unaudited)
| Franklin High Income Securities Fund | ||||
Assets: | ||||
Investments in securities: | ||||
Cost - Unaffiliated issuers | $ | 217,576,199 | ||
Cost - Repurchase agreements | 6,081,414 | |||
Total cost of investments | $ | 223,657,613 | ||
Value - Unaffiliated issuers | $ | 197,602,291 | ||
Value - Repurchase agreements | 6,081,414 | |||
Total value of investments | 203,683,705 | |||
Receivables: | ||||
Investment securities sold | 233,770 | |||
Capital shares sold | 140,206 | |||
Interest | 3,997,479 | |||
Other assets | 175 | |||
Total assets | 208,055,335 | |||
Liabilities: | ||||
Payables: | ||||
Investment securities purchased | 772,400 | |||
Capital shares redeemed | 319,442 | |||
Affiliates | 161,227 | |||
Funds advanced by custodian | 65,864 | |||
Accrued expenses and other liabilities | 53,619 | |||
Total liabilities | 1,372,552 | |||
Net assets, at value | $ | 206,682,783 | ||
Net assets consist of: | ||||
Paid-in capital | $ | 346,182,839 | ||
Undistributed net investment income | 5,808,899 | |||
Net unrealized appreciation (depreciation) | (19,973,908 | ) | ||
Accumulated net realized gain (loss) | (125,335,047 | ) | ||
Net assets, at value | $ | 206,682,783 | ||
The accompanying notes are an integral part of these financial statements.
FH-17
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Assets and Liabilities (continued)
June 30, 2009 (unaudited)
| Franklin High Income Securities Fund | |||
Class 1: | |||
Net assets, at value | $ | 43,955,113 | |
Shares outstanding | 8,247,101 | ||
Net asset value and maximum offering price per share | $ | 5.33 | |
Class 2: | |||
Net assets, at value | $ | 155,174,584 | |
Shares outstanding | 29,712,170 | ||
Net asset value and maximum offering price per share | $ | 5.22 | |
Class 4: | |||
Net assets, at value | $ | 7,553,086 | |
Shares outstanding | 1,422,949 | ||
Net asset value and maximum offering price per share | $ | 5.31 | |
The accompanying notes are an integral part of these financial statements.
FH-18
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Operations
for the six months ended June 30, 2009 (unaudited)
| Franklin High Income Securities Fund | ||||
Investment income: | ||||
Dividends | $ | 16,393 | ||
Interest | 7,190,370 | |||
Total investment income | 7,206,763 | |||
Expenses: | ||||
Management fees (Note 3a) | 470,404 | |||
Distribution fees: (Note 3c) | ||||
Class 2 | 149,158 | |||
Class 4 | 7,840 | |||
Unaffiliated transfer agent fees | 129 | |||
Custodian fees (Note 4) | 1,514 | |||
Reports to shareholders | 38,656 | |||
Professional fees | 15,037 | |||
Trustees’ fees and expenses | 454 | |||
Other | 4,245 | |||
Total expenses | 687,437 | |||
Expense reductions (Note 4) | (9 | ) | ||
Net expenses | 687,428 | |||
Net investment income | 6,519,335 | |||
Realized and unrealized gains (losses): | ||||
Net realized gain (loss) from investments | (7,874,722 | ) | ||
Net change in unrealized appreciation (depreciation) on investments | 34,183,887 | |||
Net realized and unrealized gain (loss) | 26,309,165 | |||
Net increase (decrease) in net assets resulting from operations | $ | 32,828,500 | ||
The accompanying notes are an integral part of these financial statements.
FH-19
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statements of Changes in Net Assets
| Franklin High Income Securities Fund | ||||||||
| Six Months Ended June 30, 2009 (unaudited) | Year Ended December 31, 2008 | |||||||
Increase (decrease) in net assets: | ||||||||
Operations: | ||||||||
Net investment income | $ | 6,519,335 | $ | 14,147,619 | ||||
Net realized gain (loss) from investments | (7,874,722 | ) | (12,094,569 | ) | ||||
Net change in unrealized appreciation (depreciation) on investments | 34,183,887 | (44,020,341 | ) | |||||
Net increase (decrease) in net assets resulting from operations | 32,828,500 | (41,967,291 | ) | |||||
Distributions to shareholders from net investment income: | ||||||||
Class 1 | (2,944,930 | ) | (5,331,940 | ) | ||||
Class 2 | (10,742,997 | ) | (12,613,674 | ) | ||||
Class 4 | (471,677 | ) | (40,112 | ) | ||||
Total distributions to shareholders | (14,159,604 | ) | (17,985,726 | ) | ||||
Capital share transactions: (Note 2) | ||||||||
Class 1 | 624,501 | (5,364,101 | ) | |||||
Class 2 | 57,741,493 | (29,589,130 | ) | |||||
Class 4 | 4,783,673 | 2,707,846 | ||||||
Total capital share transactions | 63,149,667 | (32,245,385 | ) | |||||
Net increase (decrease) in net assets | 81,818,563 | (92,198,402 | ) | |||||
Net assets: | ||||||||
Beginning of period | 124,864,220 | 217,062,622 | ||||||
End of period | $ | 206,682,783 | $ | 124,864,220 | ||||
Undistributed net investment income included in net assets: | ||||||||
End of period | $ | 5,808,899 | $ | 13,449,168 | ||||
The accompanying notes are an integral part of these financial statements.
FH-20
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited)
Franklin High Income Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Templeton Variable Insurance Products Trust (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end investment company, consisting of twenty-two separate funds. The Franklin High Income Securities Fund (Fund) is included in this report. The financial statements of the remaining funds in the Trust are presented separately. Shares of the Fund are sold only to insurance company separate accounts to fund the benefits of variable life insurance policies or variable annuity contracts. At June 30, 2009, 87.47% of the Fund’s shares were held through one insurance company. The Fund offers three classes of shares: Class 1, Class 2, and Class 4. Each class of shares differs by its distribution fees, voting rights on matters affecting a single class and its exchange privilege.
The following summarizes the Fund’s significant accounting policies.
a. Security Valuation
Equity and other securities listed on a securities exchange or on the NASDAQ National Market System are valued at the last quoted sale price or the official closing price of the day, respectively. Over-the-counter securities and listed securities for which there is no reported sale are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. Certain equity securities are valued based upon fundamental characteristics or relationships to similar securities.
Corporate debt securities generally trade in the over-the-counter market rather than on a securities exchange. The Fund may utilize independent pricing services, quotations from bond dealers, and information with respect to bond and note transactions, to assist in determining a current market value for each security. The Fund’s pricing services may use valuation models or matrix pricing which considers information with respect to comparable bond and note transactions, quotations from bond dealers, or by reference to other securities that are considered comparable in such characteristics as rating, interest rate and maturity date, option adjusted spread models, prepayment projections, interest rate spreads and yield curves, to determine current value.
The Fund has procedures to determine the fair value of individual securities and other assets for which market prices are not readily available or which may not be reliably priced. Methods for valuing these securities may include: fundamental analysis based upon the underlying investment book value, anticipated future cash flows, market changes in comparable or similar securities, matrix pricing, discounts from market prices of similar securities, or discounts applied due to the nature and duration of restrictions on the disposition of the securities. Due to the inherent uncertainty of valuations of such securities, the fair values may differ significantly from the values that would have been used had a ready market for such investments existed. Occasionally, events occur between the time at which trading in a security is completed and the close of the NYSE that might call into question the availability (including the reliability) of the value of a portfolio security held by the Fund. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services. All security valuation procedures are approved by the Fund’s Board of Trustees.
b. Joint Repurchase Agreement
The Fund may enter into a joint repurchase agreement whereby its uninvested cash balance is deposited into a joint cash account with other funds managed by the investment manager or an affiliate of the investment manager and is used to invest in one or more repurchase agreements. The value and face amount of the joint repurchase agreement are allocated to the funds based on their pro-rata interest. A repurchase agreement is accounted for as a loan by the Fund to the seller, collateralized by securities which are delivered to the Fund’s custodian. The market value, including accrued interest, of the initial collateralization is required to be at least 102% of the dollar amount invested by the funds, with the value of the underlying securities marked to market daily to maintain coverage of at least 100%. The joint repurchase agreement held by the Fund at period end had been entered into on June 30, 2009. The joint repurchase agreement is valued at cost.
FH-21
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin High Income Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
c. Securities Purchased on a When-Issued Basis
The Fund may purchase securities on a when-issued basis, with payment and delivery scheduled for a future date. These transactions are subject to market fluctuations and are subject to the risk that the value at delivery may be more or less than the trade date purchase price. Although the Fund will generally purchase these securities with the intention of holding the securities, it may sell the securities before the settlement date. Sufficient assets have been segregated for these securities.
d. Senior Floating Rate Interests
Senior secured corporate loans pay interest at rates which are periodically reset by reference to a base lending rate plus a spread. These base lending rates are generally the prime rate offered by a designated U.S. bank or the London InterBank Offered Rate (LIBOR). Senior secured corporate loans often require prepayment of principal from excess cash flows or at the discretion of the borrower. As a result, actual maturity may be substantially less than the stated maturity.
Senior secured corporate loans in which the Fund invests are generally readily marketable, but may be subject to some restrictions on resale.
e. Income Taxes
No provision has been made for U.S. income taxes because it is the Fund’s policy to qualify as a regulated investment company under the Internal Revenue Code and to distribute to shareholders substantially all of its taxable income and net realized gains.
The Fund has reviewed the tax positions, taken on federal income tax returns, for each of the three open tax years and as of June 30, 2009, and has determined that no provision for income tax is required in the Fund’s financial statements.
f. Security Transactions, Investment Income, Expenses and Distributions
Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Amortization of premium and accretion of discount on debt securities are included in interest income. Facility fees are recognized as income over the expected term of the loan. Dividend income is recorded on ex-dividend date. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with accounting principles generally accepted in the United States of America. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods.
Common expenses incurred by the Trust are allocated among the funds based on the ratio of net assets of each fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense.
Realized and unrealized gains and losses and net investment income, not including class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions, by class, are generally due to differences in class specific expenses.
g. Accounting Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
FH-22
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin High Income Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
h. Guarantees and Indemnifications
Under the Trust’s organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, on behalf of the Fund, enters into contracts with service providers that contain general indemnification clauses. The Trust’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote.
2. SHARES OF BENEFICIAL INTEREST
At June 30, 2009, there were an unlimited number of shares authorized (without par value). Transactions in the Fund’s shares were as follows:
| Six Months Ended June 30, 2009 | Year Ended December 31, 2008a | |||||||||||||
| Class 1 Shares: | Shares | Amount | Shares | Amount | ||||||||||
Shares sold | 548,821 | $ | 2,756,697 | 714,258 | $ | 4,273,846 | ||||||||
Shares issued in reinvestment of distributions | 549,427 | 2,944,930 | 864,172 | 5,331,940 | ||||||||||
Shares redeemed | (1,020,615 | ) | (5,077,126 | ) | (2,530,790 | ) | (14,969,887 | ) | ||||||
Net increase (decrease) | 77,633 | $ | 624,501 | (952,360 | ) | $ | (5,364,101 | ) | ||||||
Class 2 Shares: |
| |||||||||||||
Shares sold | 16,652,513 | $ | 83,233,083 | 4,825,096 | $ | 27,974,845 | ||||||||
Shares issued in reinvestment of distributions | 2,046,285 | 10,742,997 | 2,081,464 | 12,613,674 | ||||||||||
Shares redeemed | (7,378,900 | ) | (36,234,587 | ) | (12,129,167 | ) | (70,177,649 | ) | ||||||
Net increase (decrease) | 11,319,898 | $ | 57,741,493 | (5,222,607 | ) | $ | (29,589,130 | ) | ||||||
Class 4 Shares: |
| |||||||||||||
Shares sold | 857,627 | $ | 4,331,091 | 481,696 | $ | 2,702,636 | ||||||||
Shares issued on reinvestment of distributions | 88,329 | 471,677 | 6,424 | 39,636 | ||||||||||
Shares redeemed | (3,838 | ) | (19,095 | ) | (7,289 | ) | (34,426 | ) | ||||||
Net increase (decrease) | 942,118 | $ | 4,783,673 | 480,831 | $ | 2,707,846 | ||||||||
| a | For the period February 29, 2008 (effective date) to December 31, 2008 for Class 4. |
3. TRANSACTIONS WITH AFFILIATES
Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Trust are also officers and/or directors of the following subsidiaries:
| Subsidiary | Affiliation | |
Franklin Advisers, Inc. (Advisers) | Investment manager | |
Franklin Templeton Services, LLC (FT Services) | Administrative manager | |
Franklin Templeton Distributors, Inc. (Distributors) | Principal underwriter | |
Franklin Templeton Investor Services, LLC (Investor Services) | Transfer agent |
FH-23
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin High Income Securities Fund
3. TRANSACTIONS WITH AFFILIATES (continued)
a. Management Fees
The Fund pays an investment management fee to Advisers based on the average daily net assets of the Fund as follows:
| Annualized Fee Rate | Net Assets | |
| 0.625% | Up to and including $100 million | |
| 0.500% | Over $100 million, up to and including $250 million | |
| 0.450% | Over $250 million, up to and including $7.5 billion | |
| 0.440% | Over $7.5 billion, up to and including $10 billion | |
| 0.430% | Over $10 billion, up to and including $12.5 billion | |
| 0.420% | Over $12.5 billion, up to and including $15 billion | |
| 0.400% | In excess of $15 billion |
b. Administrative Fees
Under an agreement with Advisers, FT Services provides administrative services to the Fund. The fee is paid by Advisers based on average daily net assets, and is not an additional expense of the Fund.
c. Distribution Fees
The Fund’s Board of Trustees has adopted distribution plans for Class 2 and Class 4 shares pursuant to Rule 12b-1 under the 1940 Act. Under the Fund’s compensation distribution plans, the Fund pays Distributors for costs incurred in connection with the servicing, sale and distribution of the Fund’s shares up to 0.35% per year of its average daily net assets of each class. The Board of Trustees has agreed to limit the current rate to 0.25% per year for Class 2.
d. Transfer Agent Fees
Investor Services, under terms of an agreement, performs shareholder servicing for the Fund and is not paid by the Fund for the services.
4. EXPENSE OFFSET ARRANGEMENT
The Fund has entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Fund’s custodian expenses. During the period ended June 30, 2009, the custodian fees were reduced as noted in the Statement of Operations.
5. INCOME TAXES
For tax purposes, capital losses may be carried over to offset future capital gains, if any. At December 31, 2008, the capital loss carryforwards were as follows:
Capital loss carryforwards expiring in: | |||
2009 | $ | 14,152,532 | |
2010 | 46,366,314 | ||
2011 | 24,711,916 | ||
2012 | 9,009,590 | ||
2013 | 6,321,190 | ||
2014 | 40,420 | ||
2015 | 4,493,289 | ||
2016 | 8,150,741 | ||
| $ | 113,245,992 | ||
FH-24
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin High Income Securities Fund
5. INCOME TAXES (continued)
For tax purposes, realized capital losses occurring subsequent to October 31, may be deferred and treated as occurring on the first day of the following fiscal year. At December 31, 2008, the Fund deferred realized capital losses of $4,180,311.
At June 30, 2009, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
Cost of investments | $ | 224,399,726 | ||
Unrealized appreciation | $ | 4,529,624 | ||
Unrealized depreciation | (25,245,645 | ) | ||
Net unrealized appreciation (depreciation) | $ | (20,716,021 | ) | |
Net investment income differs for financial statement and tax purposes primarily due to differing treatments of defaulted securities, payments-in-kind and bond discounts and premiums.
Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatments of wash sales and bond discounts and premiums.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the period ended June 30, 2009, aggregated $73,443,337 and $13,935,267, respectively.
7. CREDIT RISK AND DEFAULTED SECURITIES
At June 30, 2009, the Fund had 90.22% of its portfolio invested in high yield, senior secured floating rate notes, or other securities rated below investment grade. These securities may be more sensitive to economic conditions causing greater price volatility and are potentially subject to a greater risk of loss due to default than higher rated securities.
The Fund held defaulted securities and/or other securities for which the income has been deemed uncollectible. At June 30, 2009, the aggregate value of these securities was $6,155,691, representing 2.98% of the Fund’s net assets. The Fund discontinues accruing income on securities for which income has been deemed uncollectible and provides an estimate for losses on interest receivable. The securities have been identified on the accompanying Statement of Investments.
8. OTHER CONSIDERATIONS
From time to time, officers, directors or employees of the Fund’s Investment Manager may have discussions or enter into agreements with issuers, underwriters or creditors’ committees which, pursuant to the Fund’s policies and requirements of applicable securities laws, could prevent the Fund from trading in the securities of such company for limited or extended periods of time.
9. CREDIT FACILITY
Effective January 23, 2009, the Fund, together with other U.S. registered and foreign investment funds managed by Franklin Templeton Investments (individually, “Borrower”; collectively “Borrowers”), entered into a joint syndicated senior unsecured credit facility totaling $725 million (Global Credit Facility) to provide a source of funds to the Borrowers for temporary and emergency purposes, including the ability to meet future unanticipated or unusually large redemption requests.
FH-25
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin High Income Securities Fund
9. CREDIT FACILITY (continued)
Under the terms of the Global Credit Facility, the Fund shall, in addition to interest charged on any borrowings made by the Fund and other costs incurred by the Fund, pay its share of fees and expenses incurred in connection with the implementation and maintenance of the Global Credit Facility, based upon its relative share of the aggregate net assets of all of the Borrowers, including an annual commitment fee based upon the unused portion of the Global Credit Facility. During the period, the Fund incurred commitment fees of $109 of its pro rata portion of the Global Credit Facility, which is reflected in other expenses on the Statement of Operations. During the period ended June 30, 2009, the Fund did not utilize the Global Credit Facility.
10. FAIR VALUE MEASUREMENTS
Financial Accounting Standards Board (FASB) Statement No. 157, “Fair Value Measurement” (SFAS 157) establishes a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Fund’s own market assumptions (unobservable inputs). These inputs are used in determining the value of the Fund’s investments and are summarized in the following fair value hierarchy:
| • | Level 1 – quoted prices in active markets for identical securities |
| • | Level 2 – other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speed, credit risk, etc.) |
| • | Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments) |
The inputs or methodology used for valuing securities are not an indication of the risk associated with investing in those securities.
The following is a summary of the inputs used as of June 30, 2009, in valuing the Fund’s assets and liabilities carried at fair value:
| Level 1 | Level 2 | Level 3 | Total | |||||||||
Assets: | ||||||||||||
Investments in Securities | ||||||||||||
Equity Investments:a | ||||||||||||
Diversified Financials | $ | — | $ | 259,796 | $ | — | $ | 259,796 | ||||
Senior Floating Rate Interests | — | 3,998,621 | — | 3,998,621 | ||||||||
Corporate Bonds & Notes | — | 193,343,683 | 191 | 193,343,874 | ||||||||
Short Term Investments | — | 6,081,414 | — | 6,081,414 | ||||||||
Total Investments in Securities | $ | — | $ | 203,683,514 | $ | 191 | $ | 203,683,705 | ||||
aIncludes preferred stock.
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin High Income Securities Fund
10. FAIR VALUE MEASUREMENTS (continued)
At June 30, 2009, the reconciliation of assets in which significant unobservable inputs (Level 3) were used in determining fair value, is as follows:
| Beginning Balance | Net Realized Gain (Loss) | Net Change in Unrealized Appreciation (Depreciation) | Net Purchases (Sales) | Transfer In (Out) of Level 3 | Ending Balance | Net Change in Unrealized Appreciation (Depreciation) on Assets Held at Period End | ||||||||||||||||||
Assets | ||||||||||||||||||||||||
Equity Securities - Diversified Financials | $ | 214,420 | $ | — | $ | — | $ | — | $ | (214,420 | ) | $ | — | $ | — | |||||||||
Corporate Bonds | 466 | (2,561,864 | ) | 2,618,308 | (56,719 | ) | — | 191 | — | |||||||||||||||
Total | $ | 214,886 | $ | (2,561,864 | ) | $ | 2,618,308 | $ | (56,719 | ) | $ | (214,420 | ) | $ | 191 | $ | — | |||||||
11. SUBSEQUENT EVENTS
Management has evaluated subsequent events through August 7, 2009 and determined that no events have occurred that require disclosure.
ABBREVIATIONS
Selected Portfolio
FRN - Floating Rate Note
PIK - Payment-In-Kind
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FRANKLIN INCOME SECURITIES FUND
We are pleased to bring you Franklin Income Securities Fund’s semiannual report for the period ended June 30, 2009.
Performance Summary as of 6/30/09
Franklin Income Securities Fund – Class 1 delivered a +12.91% total return for the six-month period ended 6/30/09.
Performance reflects the Fund’s Class 1 operating expenses, but does not include any contract fees, expenses or sales charges. If they had been included, performance would be lower. These charges and deductions, particularly for variable life policies, can have a significant effect on contract values and insurance benefits. See the contract prospectus for a complete description of these expenses, including sales charges.
Franklin Income Securities Fund – Class 1
Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares.
Current performance may differ from figures shown.
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Fund Goal and Main Investments: Franklin Income Securities Fund seeks to maximize income while maintaining prospects for capital appreciation. The Fund may invest in equity and debt securities and may invest all of its assets in below investment-grade debt securities.
Performance Overview
You can find the Fund’s six-month total return in the Performance Summary. The Fund outperformed its equity benchmark, the Standard & Poor’s 500 Index (S&P 500), which had a +3.16% total return, and also outperformed its fixed income benchmark, the Barclays Capital (BC) U.S. Aggregate Index, which had a +1.90% total return for the same period.1
Economic and Market Overview
During the six-month period ended June 30, 2009, the U.S. economy and stock markets seemed to stabilize after signs appeared that the recession’s severity had eased. Strains on the banking system and credit markets that surfaced in 2008 improved in 2009’s first half with the help of federal aid and tighter regulations. Although home sales fell for most of the period, they edged higher toward period-end. The pace of contraction in manufacturing activity decelerated. However, jobless claims mounted and the unemployment rate rose from 7.2% at the beginning of the year to 9.5% in June 2009, its highest rate since August 1983.2 Retail sales shrank from year-ago levels, and in February The Conference Board’s Consumer Confidence Index dropped to the lowest level since it began in 1967 before rebounding in the second quarter on improved expectations. Reflecting a broad-based contraction in consumer spending, falling corporate profits, slowing exports and reduced government spending, economic growth as measured by gross domestic product (GDP) fell at annualized rates of 6.4% and an estimated 1.0% in the first and second quarters of 2009.
Although the price of oil rose from $44 per barrel at the beginning of the period to $70 by period-end on speculation that the downturn was abating, it was still off more than 50% from its July 2008 record high.3 Prices for most other commodities followed similar trends. Partially as a result of reduced consumer spending and the late-2008 downward trajectory for energy prices, deflationary pressures surfaced. June’s inflation rate, as measured by the Consumer Price Index, was an
1. Source: © 2009 Morningstar. One cannot invest directly in an index, nor is an index representative of the Fund’s portfolio. Please see Index Descriptions following the Fund Summaries.
2. Source: Bureau of Labor Statistics.
3. Source: New York Mercantile Exchange.
Fund Risks: The Fund’s investments in stocks may offer the potential for long-term gains but can be subject to short-term price fluctuations. Changes in the financial strength of a debt issuer or in the rating of its securities may affect the securities’ value and, as a result, impact Fund performance. Because the Fund invests in bonds and other debt obligations, its share price and yield will be affected by interest rate movements. Bond prices generally move in the opposite direction of interest rates. Thus, as the prices of bonds in the Fund adjust to a rise in interest rates, the Fund’s share price may decline. The Fund may invest all of its assets in high yield, lower rated (junk) bonds, which generally have greater price swings and higher risk of default and loss of principal than investment-grade bonds. Foreign investing involves additional risks, including currency fluctuations, economic instability, market volatility, and political and social instability. The Fund’s prospectus also includes a description of the main investment risks.
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annualized -1.4%, representing the steepest yearly decline in the cost of living in nearly six decades.2 Core inflation, which excludes food and energy costs, rose at a 1.7% annualized rate, which was within the Federal Reserve Board’s (Fed’s) informal target range of 1.5%–2.0%.2
A deepening recession and decelerating inflation prompted Washington policymakers to keep interest rates low and enact stimulus plans — including income tax cuts, aid to ailing state governments and funding for transportation infrastructure, school construction and high-tech projects. During the period under review, the Fed kept the federal funds target rate in a range of 0% to 0.25% and said the “pace of economic contraction is slowing” but the financial system had not yet returned to normal. The government also introduced various new measures to shore up financial markets and enhance market liquidity, proposed a sweeping financial regulatory system overhaul, and outlined details of its Public-Private Investment Program, with an objective of removing devalued real estate-related assets from banks’ balance sheets.
Most stocks suffered major losses through early March as investors worried about an uncertain future. Stocks then recovered somewhat from 12-year lows as investors perceived many bargains among the bear market fallout and data indicated the economy’s pace of contraction was moderating. By June, however, fresh investor concerns about the economy and stock valuations reemerged and dampened the rally’s momentum. For the six months under review, the blue chip stocks of the Dow Jones Industrial Average had a total return of -2.01%, while the broader S&P 500 posted a +3.16% total return and the technology-heavy NASDAQ Composite Index returned +16.99%.1 Information technology, consumer discretionary and materials stocks posted the largest gains while industrials, telecommunication services and financials stocks generally fell in value.
Investment Strategy
We search for undervalued or out-of-favor securities we believe offer opportunities for income today and growth tomorrow. We generally perform independent analysis of the debt securities being considered for the Fund’s portfolio, rather than relying principally on ratings assigned by rating agencies. In analyzing debt and equity securities, we consider a variety of factors, including: a security’s relative value based on such factors as anticipated cash flow, interest or dividend coverage, asset coverage, and earnings prospects; the experience and strength of a company’s management; a company’s sensitivity to changes in interest
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rates and business conditions; a company’s debt maturity schedules and borrowing requirements; and a company’s changing financial condition and market recognition of the change.
Manager’s Discussion
The Fund outperformed its benchmark indexes during the reporting period due to our preference for fixed income securities, particularly corporate bonds. At period-end, our asset allocation was 65.4% fixed income, 29.5% equity and 5.1% short-term investments and other net assets (cash). We continued to look for attractive opportunities across a wide range of markets to invest the cash.
Investment-grade and high yield bonds led performance on the fixed income side as credit spreads contracted during the period. This offset the overall increase in long-term interest rates as evidenced by the 10-year U.S. Treasury yield’s rise from 2.25% on December 31, 2008, to 3.53% on June 30, 2009. According to Barclays Capital, corporate investment-grade bond spreads fell from 555 basis points (bps; one hundred basis points equal one percentage point) to 306 bps, while high yield corporate bond spreads fell from 1,662 bps to 955 bps.
The Fund had several fixed income holdings that boosted returns during the period. Charter Communications (CCH in the SOI), a major cable system operator that we think has stable fundamentals in its core businesses, worked toward a successful debt reorganization. Ford Motor Credit bonds appreciated as credit markets improved and funding markets for auto loans began to reappear. Tenet Healthcare bonds performed favorably as the company accessed capital markets and extended debt maturities, which enabled the company to continue to focus on improving operations. Discount retailer Dollar General benefited from strong demand as consumers sought lower-priced offerings given difficult economic conditions.
Despite the strong overall backdrop for corporate bonds, several Fund positions weighed on results including Freescale Semiconductor, which was hurt by declining demand for semiconductor chips, particularly those targeting the wireless phone and automotive end-markets. Additionally, publishing company R.H. Donnelley sought bankruptcy protection as the weak economy and declining advertising sales pressured revenues.
During the period under review, equity markets were volatile, reflecting the uncertainty surrounding the overall economy and prospects for corporate fundamentals. However, several equity holdings generated solid
Top Five Equity Holdings
Franklin Income Securities Fund
6/30/09
Company Sector/Industry | % of Total Net Assets | |
| Bank of America Corp. | 2.4% | |
| Financials | ||
| Wells Fargo & Co. | 1.5% | |
| Financials | ||
| Merck & Co. Inc. | 1.4% | |
| Health Care | ||
| Public Service Enterprise Group Inc. | 1.3% | |
| Utilities | ||
| PG&E Corp. | 1.3% | |
| Utilities | ||
Top Five Fixed Income and Senior Floating Rate Interests Holdings*
Franklin Income Securities Fund
6/30/09
Issuer Sector/Industry | % of Total Net Assets | |
| Tenet Healthcare Corp. | 3.4% | |
| Health Care | ||
| Ford Motor Credit Co. LLC | 3.0% | |
| Consumer Discretionary | ||
| Dynegy Holdings Inc. | 2.6% | |
| Utilities | ||
| GMAC LLC | 1.8% | |
| Financials | ||
| Chesapeake Energy Corp. | 1.8% | |
| Energy | ||
*Does not include convertible bonds.
The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund’s Statement of Investments.
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gains for the Fund including Canadian Oil Sands Trust, which benefited from the crude oil price recovery from a low of $34 per barrel on February 12 to $70 at period-end. A strong rally in financial institution shares also boosted results due to common stock and convertible security holdings in Bank of America, JPMorgan Chase and Citigroup.
Conversely, detractors among equity holdings included pharmaceutical company Pfizer, which cut its dividend by 50% amid the continued challenges of patent expirations and drug development. Utility stocks also underperformed the overall market given concerns about weak power markets and uncertainty regarding climate change initiatives.
Thank you for your participation in Franklin Income Securities Fund. We look forward to serving your future investment needs.
The foregoing information reflects our analysis, opinions and portfolio holdings as of June 30, 2009, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.
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Fund Expenses
As an investor in a variable insurance contract (Contract) that indirectly provides for investment in an underlying mutual fund, you can incur transaction and/or ongoing expenses at both the Fund level and the Contract level.
| • | Transaction expenses can include sales charges (loads) on purchases, surrender fees, transfer fees and premium taxes. |
| • | Ongoing expenses can include management fees, distribution and service (12b-1) fees, contract fees, annual maintenance fees, mortality and expense risk fees and other fees and expenses. All mutual funds and Contracts have some types of ongoing expenses. |
The expenses shown in the table are meant to highlight ongoing expenses at the Fund level only and do not include ongoing expenses at the Contract level, or transaction expenses at either the Fund or Contract levels. While the Fund does not have transaction expenses, if the transaction and ongoing expenses at the Contract level were included, the expenses shown below would be higher. You should consult your Contract prospectus or disclosure document for more information.
The table shows Fund-level ongoing expenses and can help you understand these expenses and compare them with those of other mutual funds offered through the Contract. The table assumes a $1,000 investment held for the six months indicated. Please refer to the Fund prospectus for additional information on operating expenses.
Actual Fund Expenses
The first line (Actual) of the table provides actual account values and expenses. The “Ending Account Value” is derived from the Fund’s actual return, which includes the effect of ongoing Fund expenses, but does not include the effect of ongoing Contract expenses.
You can estimate the Fund-level expenses you incurred during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:
| 1. | Divide your account value by $1,000. |
If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6.
| 2. | Multiply the result by the number under the heading “Fund-Level Expenses Incurred During Period.” |
If Fund-Level Expenses Incurred During Period were $7.50, then 8.6 x $7.50 = $64.50.
In this illustration, the estimated expenses incurred this period at the Fund level are $64.50.
Franklin Income Securities Fund – Class 1
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Hypothetical Example for Comparison with Other Mutual Funds
Information in the second line (Hypothetical) of the table can help you compare ongoing expenses of the Fund with those of other mutual funds offered through the Contract. This information may not be used to estimate the actual ending account balance or expenses you incurred during the period. The hypothetical “Ending Account Value” is based on the Fund’s actual expense ratio and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Fund-Level Expenses Incurred During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds offered through a Contract.
| Class 1 | Beginning Account Value 1/1/09 | Ending Account Value 6/30/09 | Fund-Level Expenses Incurred During Period* 1/1/09–6/30/09 | ||||||
Actual | $ | 1,000 | $ | 1,129.10 | $ | 2.53 | |||
Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,022.41 | $ | 2.41 | |||
*Expenses are calculated using the most recent six-month annualized expense ratio for the Fund’s Class 1 shares (0.48%), which does not include any ongoing expenses of the Contract for which the Fund is an investment option, multiplied by the average account value over the period, multiplied by 181/365 to reflect the one-half year period.
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SUPPLEMENT DATED JULY 24, 2009
TOTHE PROSPECTUS
DATED MAY 1, 2009
AS PREVIOUSLY AMENDED
OF FRANKLIN INCOME SECURITIES FUND (FUND)
(A series of Franklin Templeton Variable Insurance Products Trust)
The prospectus is amended as follows:
| I. | The fifth paragraph under “Goals and Strategies – Main Investments” is replaced with the following: |
The Fund may invest up to 100% of total assets in debt securities that are rated below investment grade. Securities rated in the top four ratings categories by independent rating organizations such as Standard & Poor’s (S&P®) and Moody’s Investors Service (Moody’s) are considered investment grade. However, such ratings are relative and subjective, are not absolute standards of quality, and do not evaluate the market risk of the securities. Securities rated Ba or lower by Moody’s or BB or lower by S&P are considered to be below investment grade.
| II. | The eighth paragraph under “Goals and Strategies – Main Investments” is replaced with the following: |
As of June 30, 2009, approximately 52.8% of the Fund’s net assets were invested in lower-rated and comparable quality unrated debt securities. The percentage of the Fund’s net assets invested in such securities at any given time may vary substantially from this number.
Please keep this supplement for future reference.
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SUPPLEMENT DATED AUGUST 7, 2009
TOTHE PROSPECTUS
DATED MAY 1, 2009
AS PREVIOUSLY AMENDED
OF
FRANKLIN INCOME SECURITIES FUND
(A series of Franklin Templeton Variable Insurance Products Trust)
The Prospectus is amended as follows:
| I. | Under “Goals and Strategies” the following changes are made to the section “Main Investments” on page FI-1: |
| a) | The second paragraph is replaced in its entirety with the following: |
Debt securities obligate the issuer to repay a loan of money at a future date and generally provide for the payment of interest to the bond or note holders. Debt securities include all varieties of fixed, floating and variable rate instruments including secured and unsecured bonds, bonds convertible into common stock, mortgage securities and other asset-backed securities, debentures, zero coupon bonds, notes, and short-term debt instruments. Debt securities tend to increase in value when interest rates decline and decrease in value when interest rates rise. Lower-rated debt securities generally pay higher yields than more highly rated securities to compensate investors for the higher risk.
| b) | The following paragraph is added to the end of the section: |
In connection with the purchase of certain asset-backed securities and commercial mortgage-backed securities (“TALF ABS”), the Fund may borrow from the Federal Reserve Bank of New York (“NY Fed”) under its Term Asset-Backed Securities Loan Facility (“TALF”). Pursuant to the TALF Program, the Fund may receive one or more three- to five-year term non-recourse loans to purchase TALF ABS in return for the payment of a haircut amount (usually 5-15% of the loan amount) and a pledge of the TALF ABS.
| II. | The following is added to the “Main Risks” sections on page FI-4: |
Mortgage Securities and Asset-Backed Securities
Mortgage securities differ from conventional debt securities because principal is paid back over the life of the security rather than at maturity. The Fund may receive unscheduled prepayments of principal before the security’s maturity date due to voluntary prepayments, refinancing or foreclosure on the underlying mortgage loans. To the Fund this means a loss of anticipated interest, and a portion of its principal investment represented by any premium the Fund may have paid. Mortgage prepayments generally increase when interest rates fall.
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Mortgage securities also are subject to extension risk. An unexpected rise in interest rates could reduce the rate of prepayments on mortgage securities and extend their life. This could cause the price of the mortgage securities and the Fund’s share price to fall and would make the mortgage securities more sensitive to interest rate changes.
Issuers of asset-backed securities may have limited ability to enforce the security interest in the underlying assets, and credit enhancements provided to support the securities, if any, may be inadequate to protect investors in the event of default. Like mortgage-backed securities, asset-backed securities are subject to prepayment and extension risks.
Borrowing
Because the Fund may borrow money from the NY Fed under the TALF Program, the Fund may engage in leverage by gaining exposure to a TALF ABS through the payment of a relatively small haircut amount and borrowing the remainder of the purchase price. Such borrowings may exaggerate the effect of any increase or decrease in the value of the TALF ABS on the Fund’s net asset value and will subject the Fund to interest and other costs (including administrative fees) associated with the TALF Program. However, such borrowings are non-recourse to the Fund, which should limit some of the risks of leverage.
Please keep this supplement for future reference.
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Franklin Templeton Variable Insurance Products Trust
Financial Highlights
Franklin Income Securities Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 1 | 2008 | 2007 | 2006 | 2005 | 2004 | |||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 11.53 | $ | 17.63 | $ | 17.65 | $ | 15.56 | $ | 15.89 | $ | 14.40 | ||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.43 | 1.10 | 1.03 | 0.94 | 0.85 | 0.83 | ||||||||||||||||||
Net realized and unrealized gains (losses) | 1.12 | (5.99 | ) | (0.31 | ) | 1.85 | (0.56 | ) | 1.14 | |||||||||||||||
Total from investment operations | 1.55 | (4.89 | ) | 0.72 | 2.79 | 0.29 | 1.97 | |||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income | (1.09 | ) | (0.86 | ) | (0.63 | ) | (0.62 | ) | (0.57 | ) | (0.48 | ) | ||||||||||||
Net realized gains | — | (0.35 | ) | (0.11 | ) | (0.08 | ) | (0.05 | ) | — | ||||||||||||||
Total distributions | (1.09 | ) | (1.21 | ) | (0.74 | ) | (0.70 | ) | (0.62 | ) | (0.48 | ) | ||||||||||||
Net asset value, end of period | $ | 11.99 | $ | 11.53 | $ | 17.63 | $ | 17.65 | $ | 15.56 | $ | 15.89 | ||||||||||||
Total returnc | 12.91% | (29.41)% | 4.01% | 18.47% | 1.83% | 14.13% | ||||||||||||||||||
Ratios to average net assetsd | ||||||||||||||||||||||||
Expensese | 0.48% | 0.47% | 0.47% | 0.47% | 0.48% | 0.49% | ||||||||||||||||||
Net investment income | 7.51% | 7.28% | 5.77% | 5.70% | 5.44% | 5.71% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 567,829 | $ | 433,370 | $ | 455,932 | $ | 458,613 | $ | 457,625 | $ | 530,742 | ||||||||||||
Portfolio turnover rate | 19.73% | 43.89% | 32.11% | 25.05% | 34.76% | 44.02% | ||||||||||||||||||
aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.
bBased on average daily shares outstanding.
cTotal return does not include any fees, charges or expenses imposed by the variable annuity and life insurance contracts for which the Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle. Total return is not annualized for periods less than one year.
dRatios are annualized for periods less than one year.
eBenefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
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Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Franklin Income Securities Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 2 | 2008 | 2007 | 2006 | 2005 | 2004 | |||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 11.30 | $ | 17.31 | $ | 17.36 | $ | 15.32 | $ | 15.67 | $ | 14.23 | ||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.41 | 1.04 | 0.97 | 0.89 | 0.80 | 0.80 | ||||||||||||||||||
Net realized and unrealized gains (losses) | 1.09 | (5.87 | ) | (0.30 | ) | 1.82 | (0.55 | ) | 1.11 | |||||||||||||||
Total from investment operations | 1.50 | (4.83 | ) | 0.67 | 2.71 | 0.25 | 1.91 | |||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income | (1.05 | ) | (0.83 | ) | (0.61 | ) | (0.59 | ) | (0.55 | ) | (0.47 | ) | ||||||||||||
Net realized gains | — | (0.35 | ) | (0.11 | ) | (0.08 | ) | (0.05 | ) | — | ||||||||||||||
Total distributions | (1.05 | ) | (1.18 | ) | (0.72 | ) | (0.67 | ) | (0.60 | ) | (0.47 | ) | ||||||||||||
Net asset value, end of period | $ | 11.75 | $ | 11.30 | $ | 17.31 | $ | 17.36 | $ | 15.32 | $ | 15.67 | ||||||||||||
Total returnc | 12.84% | (29.66)% | 3.76% | 18.24% | 1.60% | 13.85% | ||||||||||||||||||
Ratios to average net assetsd | ||||||||||||||||||||||||
Expensese | 0.73% | 0.72% | 0.72% | 0.72% | 0.73% | 0.74% | ||||||||||||||||||
Net investment income | 7.26% | 7.03% | 5.52% | 5.45% | 5.19% | 5.46% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 5,315,992 | $ | 4,944,457 | $ | 7,429,064 | $ | 5,109,373 | $ | 2,865,361 | $ | 1,631,184 | ||||||||||||
Portfolio turnover rate | 19.73% | 43.89% | 32.11% | 25.05% | 34.76% | 44.02% | ||||||||||||||||||
aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.
bBased on average daily shares outstanding.
cTotal return does not include any fees, charges or expenses imposed by the variable annuity and life insurance contracts for which the Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle. Total return is not annualized for periods less than one year.
dRatios are annualized for periods less than one year.
eBenefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
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Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Franklin Income Securities Fund
| Class 4 | Six Months Ended June 30, 2009 (unaudited) | Period Ended December 31, 2008a | ||||||
Per share operating performance | ||||||||
(for a share outstanding throughout the period) | ||||||||
Net asset value, beginning of period | $ | 11.49 | $ | 16.90 | ||||
Income from investment operationsb: | ||||||||
Net investment incomec | 0.40 | 0.87 | ||||||
Net realized and unrealized gains (losses) | 1.13 | (5.07 | ) | |||||
Total from investment operations | 1.53 | (4.20 | ) | |||||
Less distributions from: | ||||||||
Net investment income | (1.08 | ) | (0.86 | ) | ||||
Net realized gains | — | (0.35 | ) | |||||
Total distributions | (1.08 | ) | (1.21 | ) | ||||
Net asset value, end of period | $ | 11.94 | $ | 11.49 | ||||
Total returnd | 12.79% | (26.61)% | ||||||
Ratios to average net assetse | ||||||||
Expensesf | 0.83% | 0.82% | ||||||
Net investment income | 7.16% | 6.93% | ||||||
Supplemental data | ||||||||
Net assets, end of period (000’s) | $ | 237,125 | $ | 135,360 | ||||
Portfolio turnover rate | 19.73% | 43.89% | ||||||
aFor the period February 29, 2008 (effective date) to December 31, 2008.
bThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.
cBased on average daily shares outstanding.
dTotal return does not include any fees, charges or expenses imposed by the variable annuity and life insurance contracts for which the Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle. Total return is not annualized for periods less than one year.
eRatios are annualized for periods less than one year.
fBenefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
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Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited)
| Franklin Income Securities Fund | Country | Shares | Value | ||||
Common Stocks 25.3% | |||||||
Consumer Discretionary 0.0%a | |||||||
Comcast Corp., A | United States | 77,270 | $ | 1,119,642 | |||
Consumer Staples 0.3% | |||||||
Diageo PLC | United Kingdom | 1,150,000 | 16,490,110 | ||||
Energy 2.4% | |||||||
Canadian Oil Sands Trust | Canada | 2,338,950 | 55,891,845 | ||||
ConocoPhillips | United States | 1,250,000 | 52,575,000 | ||||
Spectra Energy Corp. | United States | 2,243,200 | 37,954,944 | ||||
| 146,421,789 | |||||||
Financials 4.6% | |||||||
Bank of America Corp. | United States | 7,100,000 | 93,720,000 | ||||
Barclays PLC | United Kingdom | 2,000,000 | 9,312,681 | ||||
Capital One Financial Corp. | United States | 1,963,702 | 42,965,800 | ||||
Duke Realty Corp. | United States | 750,000 | 6,577,500 | ||||
HSBC Holdings PLC | United Kingdom | 3,500,000 | 28,937,594 | ||||
iStar Financial Inc. | United States | 968,800 | 2,751,392 | ||||
JPMorgan Chase & Co. | United States | 1,100,000 | 37,521,000 | ||||
Wells Fargo & Co. | United States | 2,500,000 | 60,650,000 | ||||
| 282,435,967 | |||||||
Health Care 1.9% | |||||||
Johnson & Johnson | United States | 600,000 | 34,080,000 | ||||
Merck & Co. Inc. | United States | 3,000,000 | 83,880,000 | ||||
| 117,960,000 | |||||||
Information Technology 1.5% | |||||||
Intel Corp. | United States | 3,000,000 | 49,650,000 | ||||
Maxim Integrated Products Inc. | United States | 2,500,000 | 39,225,000 | ||||
| 88,875,000 | |||||||
Materials 0.8% | |||||||
Barrick Gold Corp. | Canada | 62,200 | 2,086,810 | ||||
Newmont Mining Corp. | United States | 1,100,000 | 44,957,000 | ||||
| 47,043,810 | |||||||
Telecommunication Services 1.0% | |||||||
AT&T Inc. | United States | 2,000,000 | 49,680,000 | ||||
Vodafone Group PLC | United Kingdom | 5,000,000 | 9,641,751 | ||||
| 59,321,751 | |||||||
Utilities 12.8% | |||||||
AGL Resources Inc. | United States | 550,000 | 17,490,000 | ||||
Ameren Corp. | United States | 1,600,000 | 39,824,000 | ||||
American Electric Power Co. Inc. | United States | 1,523,800 | 44,022,582 | ||||
CenterPoint Energy Inc. | United States | 300,000 | 3,324,000 | ||||
Consolidated Edison Inc. | United States | 1,000,000 | 37,420,000 | ||||
Constellation Energy Group | United States | 31,300 | 831,954 | ||||
Dominion Resources Inc. | United States | 1,600,000 | 53,472,000 | ||||
DTE Energy Co. | United States | 260,500 | 8,336,000 | ||||
Duke Energy Corp. | United States | 5,000,000 | 72,950,000 | ||||
FirstEnergy Corp. | United States | 600,000 | 23,250,000 | ||||
FPL Group Inc. | United States | 750,000 | 42,645,000 | ||||
NiSource Inc. | United States | 600,000 | 6,996,000 | ||||
PG&E Corp. | United States | 2,000,000 | 76,880,000 | ||||
Pinnacle West Capital Corp. | United States | 300,000 | 9,045,000 | ||||
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Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Franklin Income Securities Fund | Country | Shares | Value | ||||
Common Stocks (continued) | |||||||
Utilities (continued) | |||||||
Portland General Electric Co. | United States | 1,400,000 | $ | 27,272,000 | |||
Progress Energy Inc. | United States | 1,400,000 | 52,962,000 | ||||
Public Service Enterprise Group Inc. | United States | 2,500,000 | 81,575,000 | ||||
Sempra Energy | United States | 875,900 | 43,470,917 | ||||
The Southern Co. | United States | 2,100,000 | 65,436,000 | ||||
TECO Energy Inc. | United States | 2,500,000 | 29,825,000 | ||||
Xcel Energy Inc. | United States | 2,670,464 | 49,163,242 | ||||
| 786,190,695 | |||||||
Total Common Stocks (Cost $1,824,212,189) | 1,545,858,764 | ||||||
Convertible Preferred Stocks 2.7% | |||||||
Consumer Discretionary 0.1% | |||||||
General Motors Corp., 6.25%, cvt. pfd., C | United States | 1,400,000 | 4,032,000 | ||||
Energy 0.5% | |||||||
McMoRan Exploration Co., 8.00%, cvt. pfd. | United States | 4,400 | 4,609,000 | ||||
b,cSandRidge Energy Inc., 8.50%, cvt. pfd., 144A | United States | 250,000 | 30,487,500 | ||||
| 35,096,500 | |||||||
Financials 2.0% | |||||||
Bank of America Corp., 7.25%, cvt. pfd., L | United States | 60,000 | 50,161,800 | ||||
Citigroup Inc., 6.50%, cvt. pfd. | United States | 774,400 | 25,988,864 | ||||
bFannie Mae, 5.375%, cvt. pfd. | United States | 600 | 1,950,000 | ||||
bFannie Mae, 8.75%, cvt. pfd. | United States | 1,060,400 | 971,114 | ||||
Felcor Lodging Trust Inc., 7.80%, cvt. pfd., A | United States | 400,000 | 2,280,000 | ||||
Legg Mason Inc., 7.00%, cvt. pfd. | United States | 375,000 | 9,450,000 | ||||
Wells Fargo & Co., 7.50%, cvt. pfd., A | United States | 40,000 | 31,398,800 | ||||
| 122,200,578 | |||||||
Materials 0.1% | |||||||
Freeport-McMoRan Copper & Gold Inc., 6.75%, cvt. pfd. | United States | 86,500 | 6,870,695 | ||||
Total Convertible Preferred Stocks (Cost $297,580,074) | 168,199,773 | ||||||
dEquity-Linked Securities 1.2% | |||||||
Consumer Discretionary 0.1% | |||||||
Retail Ventures Inc. into DSW Inc., 6.625% | United States | 49,330 | 1,029,764 | ||||
b,cMorgan Stanley into Comcast Corp., 10.00%, 144A | United States | 400,000 | 6,427,800 | ||||
| 7,457,564 | |||||||
Energy 0.4% | |||||||
cThe Goldman Sachs Group Inc. into XTO Energy Inc., 9.00%, 144A | United States | 525,000 | 20,128,888 | ||||
Information Technology 0.1% | |||||||
b,cThe Goldman Sachs Group Inc. into Intel Corp., 10.00%, 144A | United States | 350,000 | 5,861,345 | ||||
Materials 0.6% | |||||||
cThe Goldman Sachs Group Inc. into Barrick Gold Corp., 12.5%, 144A | United States | 1,000,000 | 37,839,500 | ||||
Total Equity-Linked Securities (Cost $75,022,225) | 71,287,297 | ||||||
Preferred Stocks 0.3% | |||||||
Financials 0.3% | |||||||
bFannie Mae, 6.75%, pfd. | United States | 500,000 | 600,000 | ||||
bFannie Mae, 7.625%, pfd., R | United States | 800,000 | 880,000 | ||||
bFannie Mae, 8.25%, pfd. | United States | 851,500 | 1,141,010 | ||||
bFreddie Mac, 8.375%, pfd., Z | United States | 1,549,200 | 1,890,024 | ||||
cPreferred Blocker Inc., 9.00%, pfd., 144A | United States | 36,265 | 15,598,483 | ||||
Total Preferred Stocks (Cost $105,391,575) | 20,109,517 | ||||||
FI-15
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Franklin Income Securities Fund | Country | Principal Amounte | Value | ||||
f,gSenior Floating Rate Interests 5.8% | |||||||
Consumer Discretionary 1.3% | |||||||
Clear Channel Communications Inc., Term Loan B, 3.958%, 11/13/15 | United States | 88,500,000 | $ | 53,468,780 | |||
Dex Media West LLC, Term Loan B, 7.00%, 10/24/14 | United States | 7,552,098 | 6,268,241 | ||||
hIdearc Inc., Term Loan A, 5.75%, 11/17/13 | United States | 7,766,201 | 3,333,921 | ||||
Jarden Corp., Term Loan B-3, 3.098%, 1/24/12 | United States | 20,291,680 | 19,644,883 | ||||
| 82,715,825 | |||||||
Health Care 0.4% | |||||||
Bausch and Lomb Inc., | |||||||
iDelayed Draw Term Loan, 3.25% - 3.848%, 4/28/15 | United States | 1,320,000 | 1,215,107 | ||||
Parent Term Loan, 3.848%, 4/28/15 | United States | 6,934,400 | 6,383,365 | ||||
HCA Inc., | |||||||
Term Loan A-1, 2.348%, 11/19/12 | United States | 17,242,678 | 15,701,614 | ||||
Term Loan B-1, 2.848%, 11/18/13 | United States | 4,269,648 | 3,864,032 | ||||
| 27,164,118 | |||||||
Industrials 0.9% | |||||||
Allison Transmission Inc., Term Loan B, 3.07% - 3.08%, 8/07/14 | United States | 29,011,639 | 23,141,975 | ||||
Ceva Group PLC, | |||||||
Dollar Pre-Refunded L/C Commitment, 3.598%, 8/01/12 | United States | 2,105,263 | 1,445,615 | ||||
EGL Term Loans, 3.31%, 8/01/12 | United States | 17,536,842 | 12,305,023 | ||||
U.S. Investigations Services Inc., Term Loan B, 3.359%, 2/21/15 | United States | 19,649,123 | 17,340,351 | ||||
| 54,232,964 | |||||||
Information Technology 1.9% | |||||||
First Data Corp., | |||||||
Term Loan B-2, 3.06% - 3.065%, 9/24/14 | United States | 54,037,500 | 40,663,219 | ||||
Term Loan B-3, 3.06% - 3.065%, 9/24/14 | United States | 22,629,511 | 17,007,503 | ||||
Freescale Semiconductor Inc., | |||||||
Incremental Term Loan, 12.50%, 12/15/14 | United States | 60,788,333 | 53,645,704 | ||||
Term Loan, 2.07%, 12/01/13 | United States | 3,283,399 | 2,418,223 | ||||
| 113,734,649 | |||||||
Materials 0.4% | |||||||
Novelis Corp., U.S Term Loan, 2.31% - 2.60%, 7/07/14 | United States | 26,584,880 | 23,339,318 | ||||
Utilities 0.9% | |||||||
Texas Competitive Electric Holdings Co. LLC, | |||||||
Term Loan B-2, 3.81% - 3.821%, 10/10/14 | United States | 52,296,173 | 37,499,651 | ||||
Term Loan B-3, 3.81% - 3.821%, 10/10/14 | United States | 24,562,500 | 17,608,242 | ||||
| 55,107,893 | |||||||
Total Senior Floating Rate Interests (Cost $490,045,572) | 356,294,767 | ||||||
Corporate Bonds 57.3% | |||||||
Consumer Discretionary 13.7% | |||||||
Cablevision Systems Corp., senior note, B, 8.00%, 4/15/12 | United States | 65,000,000 | 64,675,000 | ||||
CBS Corp., senior note, 8.875%, 5/15/19 | United States | 10,000,000 | 9,761,790 | ||||
h,jCCH I Holdings LLC, senior note, | |||||||
13.50%, 1/15/14 | United States | 60,000,000 | 825,000 | ||||
11.75%, 5/15/14 | United States | 63,000,000 | 708,750 | ||||
h,jCCH I LLC, senior secured note, 11.00%, 10/01/15 | United States | 113,000,000 | 14,125,000 | ||||
h,jCCH II LLC, senior note, 10.25%, 9/15/10 | United States | 58,400,000 | 61,904,000 | ||||
h,jCCO Holdings LLC, senior note, 8.75%, 11/15/13 | United States | 30,000,000 | 28,650,000 | ||||
cCinemark USA Inc., senior note, 144A, 8.625%, 6/15/19 | United States | 5,000,000 | 4,962,500 | ||||
FI-16
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Franklin Income Securities Fund | Country | Principal Amounte | Value | ||||
Corporate Bonds (continued) | |||||||
Consumer Discretionary (continued) | |||||||
h,jDex Media Inc., | |||||||
senior disc. note, 9.00%, 11/15/13 | United States | 35,000,000 | $ | 5,425,000 | |||
senior note, B, 8.00%, 11/15/13 | United States | 25,800,000 | 3,999,000 | ||||
h,jDex Media West Finance, | |||||||
senior note, B, 8.50%, 8/15/10 | United States | 42,675,000 | 30,939,375 | ||||
senior sub. note, 9.875%, 8/15/13 | United States | 51,296,000 | 7,950,880 | ||||
DIRECTV Holdings LLC, senior note, 7.625%, 5/15/16 | United States | 40,000,000 | 39,100,000 | ||||
Dollar General Corp., | |||||||
senior note, 10.625%, 7/15/15 | United States | 65,000,000 | 70,525,000 | ||||
ksenior sub. note, PIK, 11.875%, 7/15/17 | United States | 26,500,000 | 28,752,500 | ||||
EchoStar DBS Corp., senior note, | |||||||
6.375%, 10/01/11 | United States | 2,750,000 | 2,674,375 | ||||
7.75%, 5/31/15 | United States | 25,000,000 | 23,937,500 | ||||
7.125%, 2/01/16 | United States | 27,500,000 | 25,781,250 | ||||
Ford Motor Credit Co. LLC, | United States | 55,000,000 | 52,253,905 | ||||
7.375%, 2/01/11 | United States | 50,000,000 | 45,280,850 | ||||
8.00%, 6/01/14 | United States | 25,000,000 | 20,254,850 | ||||
senior note, 9.75%, 9/15/10 | United States | 19,500,000 | 18,684,023 | ||||
senior note, 9.875%, 8/10/11 | United States | 22,000,000 | 20,363,244 | ||||
senior note, 7.25%, 10/25/11 | United States | 12,000,000 | 10,385,220 | ||||
senior note, 12.00%, 5/15/15 | United States | 15,000,000 | 14,250,000 | ||||
hGeneral Motors Corp., senior deb., 8.25%, 7/15/23 | United States | 25,000,000 | 3,187,500 | ||||
cHarrah’s Operating Escrow, senior secured note, 144A, 11.25%, 6/01/17 | United States | 10,000,000 | 9,500,000 | ||||
Host Hotels & Resorts LP, senior note, | United States | 16,635,000 | 15,054,675 | ||||
c144A, 9.00%, 5/15/17 | United States | 12,900,000 | 12,351,750 | ||||
M, 7.00%, 8/15/12 | United States | 3,000,000 | 2,910,000 | ||||
O, 6.375%, 3/15/15 | United States | 15,000,000 | 13,050,000 | ||||
Q, 6.75%, 6/01/16 | United States | 30,000,000 | 26,175,000 | ||||
Jarden Corp., senior note, 8.00%, 5/01/16 | United States | 3,600,000 | 3,447,000 | ||||
KB Home, senior note, | United States | 5,000,000 | 4,850,000 | ||||
5.75%, 2/01/14 | United States | 6,500,000 | 5,720,000 | ||||
6.25%, 6/15/15 | United States | 9,500,000 | 8,170,000 | ||||
7.25%, 6/15/18 | United States | 10,600,000 | 9,169,000 | ||||
cLamar Media Corp., senior note, 144A, 9.75%, 4/01/14 | United States | 8,700,000 | 9,037,125 | ||||
cLimited Brands Inc., senior note, 144A, 8.50%, 6/15/19 | United States | 5,000,000 | 4,798,275 | ||||
MGM MIRAGE, | |||||||
senior note, 8.50%, 9/15/10 | United States | 3,223,000 | 2,940,988 | ||||
senior note, 6.75%, 4/01/13 | United States | 10,000,000 | 6,700,000 | ||||
csenior secured note, 144A, 13.00%, 11/15/13 | United States | 15,000,000 | 16,500,000 | ||||
hR.H. Donnelley Corp., | United States | 30,000,000 | 1,687,500 | ||||
senior disc. note, A-2, 6.875%, 1/15/13 | United States | 70,125,000 | 3,944,531 | ||||
senior note, 6.875%, 1/15/13 | United States | 11,089,000 | 623,756 | ||||
senior note, 8.875%, 10/15/17 | United States | 83,000,000 | 4,668,750 | ||||
senior note, A-3, 8.875%, 1/15/16 | United States | 125,000,000 | 7,031,250 | ||||
cUnivision Communications Inc., | |||||||
ksenior note, 144A, PIK, 10.50%, 3/15/15 | United States | 40,000,000 | 23,500,000 | ||||
lsenior secured note, 144A, 12.00%, 7/01/14 | United States | 2,600,000 | 2,580,500 | ||||
Visant Holding Corp., senior note, 8.75%, 12/01/13 | United States | 17,000,000 | 16,787,500 | ||||
FI-17
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Franklin Income Securities Fund | Country | Principal Amounte | Value | ||||
Corporate Bonds (continued) | |||||||
Consumer Discretionary (continued) | |||||||
cWendy’s/Arby’s Group Inc., senior note, 144A, 10.00%, 7/15/16 | United States | 6,000,000 | $ | 5,767,500 | |||
Wyndham Worldwide Corp., senior note, 9.875%, 5/01/14 | United States | 15,000,000 | 14,969,820 | ||||
| 841,291,432 | |||||||
Consumer Staples 1.5% | |||||||
Altria Group Inc., senior note, | |||||||
8.50%, 11/10/13 | United States | 20,000,000 | 22,763,820 | ||||
9.70%, 11/10/18 | United States | 17,000,000 | 19,520,471 | ||||
cAnheuser-Busch InBev NV, senior note, 144A, 7.20%, 1/15/14 | United States | 15,000,000 | 16,148,655 | ||||
cJBS USA LLC, senior note, 144A, 11.625%, 5/01/14 | United States | 11,000,000 | 10,450,000 | ||||
SUPERVALU Inc., senior note, 8.00%, 5/01/16 | United States | 9,800,000 | 9,555,000 | ||||
cTyson Foods Inc., senior note, 144A, 10.50%, 3/01/14 | United States | 12,000,000 | 13,080,000 | ||||
| 91,517,946 | |||||||
Energy 9.5% | |||||||
lBill Barrett Corp., senior note, 9.875%, 7/17/16 | United States | 1,700,000 | 1,617,924 | ||||
Callon Petroleum Co., senior note, 9.75%, 12/08/10 | United States | 20,869,000 | 8,034,565 | ||||
Chesapeake Energy Corp., senior note, | United States | 15,000,000 | 14,325,000 | ||||
9.50%, 2/15/15 | United States | 30,000,000 | 30,375,000 | ||||
6.50%, 8/15/17 | United States | 29,000,000 | 24,505,000 | ||||
6.25%, 1/15/18 | United States | 20,000,000 | 16,700,000 | ||||
7.25%, 12/15/18 | United States | 28,000,000 | 24,500,000 | ||||
El Paso Corp., senior note, | |||||||
12.00%, 12/12/13 | United States | 2,000,000 | 2,210,000 | ||||
8.25%, 2/15/16 | United States | 14,000,000 | 13,685,000 | ||||
7.25%, 4/01/18 | United States | 9,000,000 | 8,354,565 | ||||
MTN, 7.75%, 1/15/32 | United States | 22,000,000 | 18,005,020 | ||||
cForest Oil Corp., senior note, 144A, 8.50%, 2/15/14 | United States | 11,000,000 | 10,862,500 | ||||
cHolly Corp., senior note, 144A, 9.875%, 6/15/17 | United States | 10,000,000 | 9,750,000 | ||||
Mariner Energy Inc., | |||||||
senior note, 7.50%, 4/15/13 | United States | 10,000,000 | 9,150,000 | ||||
senior sub. note, 11.75%, 6/30/16 | United States | 7,000,000 | 6,991,250 | ||||
Newfield Exploration Co., senior sub. note, 6.625%, 4/15/16 | United States | 18,200,000 | 16,516,500 | ||||
OPTI Canada Inc., senior note, 7.875%, 12/15/14 | Canada | 7,500,000 | 4,893,750 | ||||
Petrohawk Energy Corp., senior note, | |||||||
7.875%, 6/01/15 | United States | 23,000,000 | 21,390,000 | ||||
c144A, 10.50%, 8/01/14 | United States | 20,200,000 | 20,755,500 | ||||
cPetroplus Finance Ltd., senior note, 144A, | |||||||
6.75%, 5/01/14 | Switzerland | 3,000,000 | 2,610,000 | ||||
7.00%, 5/01/17 | Switzerland | 19,000,000 | 15,865,000 | ||||
Pioneer Natural Resources Co., | United States | 5,000,000 | 4,401,265 | ||||
senior bond, 6.875%, 5/01/18 | United States | 18,165,000 | 15,913,903 | ||||
Plains Exploration & Production Co., senior note, | United States | 15,000,000 | 14,100,000 | ||||
10.00%, 3/01/16 | United States | 10,000,000 | 10,325,000 | ||||
Pride International Inc., senior note, 8.50%, 6/15/19 | United States | 10,000,000 | 9,925,000 | ||||
Quicksilver Resources Inc., senior note, 11.75%, 1/01/16 | United States | 7,800,000 | 8,112,000 | ||||
Range Resources Corp., senior sub. note, 8.00%, 5/15/19 | United States | 10,000,000 | 9,887,500 | ||||
Sabine Pass LNG LP, senior secured note, | United States | 10,000,000 | 8,525,000 | ||||
7.50%, 11/30/16 | United States | 40,000,000 | 32,500,000 | ||||
FI-18
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Franklin Income Securities Fund | Country | Principal Amounte | Value | ||||
Corporate Bonds (continued) | |||||||
Energy (continued) | |||||||
cSandRidge Energy Inc., senior note, 144A, | United States | 12,200,000 | $ | 11,834,000 | |||
8.00%, 6/01/18 | United States | 6,000,000 | 5,160,000 | ||||
Sesi LLC, senior note, 6.875%, 6/01/14 | United States | 18,500,000 | 16,881,250 | ||||
Tesoro Corp., senior note, 9.75%, 6/01/19 | United States | 10,400,000 | 10,322,000 | ||||
Valero Energy Corp., senior note, 9.375%, 3/15/19 | United States | 20,000,000 | 22,817,620 | ||||
cW&T Offshore Inc., senior note, 144A, 8.25%, 6/15/14 | United States | 40,000,000 | 31,000,000 | ||||
Weatherford International Ltd., | United States | 10,000,000 | 12,185,955 | ||||
senior note, 9.625%, 3/01/19 | United States | 5,000,000 | 5,891,655 | ||||
cWestern Refining Inc., | United States | 5,000,000 | 4,506,250 | ||||
senior secured note, 144A, 11.25%, 6/15/17 | United States | 5,000,000 | 4,462,500 | ||||
cThe Williams Cos. Inc., senior note, 144A, 8.75%, 1/15/20 | United States | 9,000,000 | 9,398,682 | ||||
cWoodside Finance Ltd., | Australia | 20,000,000 | 21,983,800 | ||||
senior note, 144A, 8.125%, 3/01/14 | Australia | 27,500,000 | 29,636,640 | ||||
| 580,866,594 | |||||||
Financials 7.8% | |||||||
Aflac Inc., senior note, 8.50%, 5/15/19 | United States | 25,000,000 | 26,758,300 | ||||
American Express Co., senior note, 7.00%, 3/19/18 | United States | 10,000,000 | 9,725,910 | ||||
American Express Credit Corp., senior note, C, 7.30%, 8/20/13 | United States | 20,000,000 | 20,858,284 | ||||
mBank of America Corp., pfd., sub. bond, M, 8.125%, Perpetual | United States | 5,000,000 | 4,182,200 | ||||
cCB Richard Ellis Services Inc., senior sub. note, 144A, 11.625%, 6/15/17 | United States | 5,000,000 | 4,987,500 | ||||
Duke Realty LP, senior note, | United States | 4,000,000 | 3,831,608 | ||||
5.95%, 2/15/17 | United States | 1,950,000 | 1,534,194 | ||||
cGMAC LLC, senior note, 144A, | United States | 23,000,000 | 22,252,500 | ||||
7.25%, 3/02/11 | United States | 7,650,000 | 7,076,250 | ||||
6.875%, 9/15/11 | United States | 70,000,000 | 61,950,000 | ||||
6.875%, 8/28/12 | United States | 10,094,000 | 8,529,430 | ||||
6.75%, 12/01/14 | United States | 15,479,000 | 12,305,805 | ||||
The Goldman Sachs Group Inc., senior note, 7.50%, 2/15/19 | United States | 10,000,000 | 10,726,190 | ||||
HCP Inc., senior note, 6.70%, 1/30/18 | United States | 6,500,000 | 5,683,900 | ||||
iStar Financial Inc., | United States | 46,500,000 | 24,196,647 | ||||
senior note, 5.15%, 3/01/12 | United States | 20,000,000 | 10,105,300 | ||||
csenior secured note, 144A, 10.00%, 6/15/14 | United States | 5,500,000 | 4,073,597 | ||||
mJPMorgan Chase & Co., junior sub. note, 1, 7.90%, Perpetual | United States | 110,000,000 | 96,528,300 | ||||
c,fLiberty Mutual Group, junior sub. note, 144A, FRN, 10.75%, 6/15/88 | United States | 25,000,000 | 18,030,125 | ||||
Merrill Lynch & Co. Inc., 6.875%, 4/25/18 | United States | 5,000,000 | 4,635,190 | ||||
Morgan Stanley Dean Witter & Co., 5.30%, 3/01/13 | United States | 35,000,000 | 35,491,225 | ||||
Simon Property Group LP, senior note, 10.35%, 4/01/19 | United States | 25,000,000 | 28,064,078 | ||||
mWells Fargo Capital XIII, pfd., 7.70%, Perpetual | United States | 5,600,000 | 4,651,556 | ||||
mWells Fargo Capital XV, pfd., 9.75%, Perpetual | United States | 55,000,000 | 53,257,435 | ||||
| 479,435,524 | |||||||
Health Care 6.8% | |||||||
Community Health Systems Inc., senior sub. note, 8.875%, 7/15/15 | United States | 55,000,000 | 54,175,000 | ||||
FI-19
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Franklin Income Securities Fund | Country | Principal Amounte | Value | ||||
Corporate Bonds (continued) | |||||||
Health Care (continued) | |||||||
DaVita Inc., | |||||||
senior note, 6.625%, 3/15/13 | United States | 15,205,000 | $ | 14,406,738 | |||
senior sub. note, 7.25%, 3/15/15 | United States | 19,500,000 | 18,427,500 | ||||
HCA Inc., | |||||||
6.75%, 7/15/13 | United States | 2,000,000 | 1,770,000 | ||||
6.375%, 1/15/15 | United States | 5,000,000 | 4,087,500 | ||||
senior note, 6.50%, 2/15/16 | United States | 20,000,000 | 16,250,000 | ||||
senior secured note, 9.25%, 11/15/16 | United States | 20,000,000 | 19,750,000 | ||||
csenior secured note, 144A, 8.50%, 4/15/19 | United States | 27,500,000 | 27,087,500 | ||||
ksenior secured note, PIK, 9.625%, 11/15/16 | United States | 12,622,000 | 12,527,335 | ||||
Tenet Healthcare Corp., senior note, | |||||||
7.375%, 2/01/13 | United States | 65,000,000 | 58,825,000 | ||||
c144A, 9.00%, 05/01/15 | United States | 50,000,000 | 50,625,000 | ||||
c144A, 10.00%, 5/01/18 | United States | 46,250,000 | 48,793,750 | ||||
fFRN, 9.25%, 2/01/15 | United States | 53,500,000 | 49,220,000 | ||||
f,kUS Oncology Holdings Inc., senior note, PIK, FRN, 6.904%, 3/15/12 | United States | 22,382,000 | 18,968,745 | ||||
cUS Oncology Inc., senior secured note, 144A, 9.125%, 8/15/17 | United States | 11,900,000 | 11,870,250 | ||||
Vanguard Health Holding Co. I LLC, senior disc. note, zero cpn. to 10/01/09, 11.25% thereafter, 10/01/15 | United States | 7,200,000 | 7,056,000 | ||||
| 413,840,318 | |||||||
Industrials 4.5% | |||||||
Allied Waste North America Inc., | |||||||
senior note, B, 7.375%, 4/15/14 | United States | 22,500,000 | 22,972,882 | ||||
senior note, B, 7.125%, 5/15/16 | United States | 20,000,000 | 20,127,060 | ||||
senior secured note, 6.125%, 2/15/14 | United States | 22,445,000 | 22,691,985 | ||||
Browning-Ferris Industries Inc., 7.40%, 9/15/35 | United States | 4,500,000 | 4,222,696 | ||||
cCeva Group PLC, senior note, 144A, 10.00%, 9/01/14 | United Kingdom | 25,000,000 | 17,125,000 | ||||
Hertz Corp., | |||||||
senior note, 8.875%, 1/01/14 | United States | 48,000,000 | 44,400,000 | ||||
senior sub. note, 10.50%, 1/01/16 | United States | 15,000,000 | 13,425,000 | ||||
Ingersoll-Rand Global Holding Co. Ltd., senior note, 9.50%, 4/15/14 | United States | 9,700,000 | 10,636,700 | ||||
JohnsonDiversey Holdings Inc., senior disc. note, 10.67%, 5/15/13 | United States | 20,000,000 | 16,900,000 | ||||
JohnsonDiversey Inc., senior sub. note, B, 9.625%, 5/15/12 | United States | 23,000,000 | 22,942,500 | ||||
Nortek Inc., senior note, 10.00%, 12/01/13 | United States | 4,800,000 | 3,876,000 | ||||
RBS Global & Rexnord Corp., | |||||||
c144A, 9.50%, 8/01/14 | United States | 22,560,000 | 19,401,600 | ||||
senior note, 9.50%, 8/01/14 | United States | 13,000,000 | 11,180,000 | ||||
senior sub. note, 11.75%, 8/01/16 | United States | 13,500,000 | 10,023,750 | ||||
Terex Corp., senior sub. note, 8.00%, 11/15/17 | United States | 45,000,000 | 34,818,750 | ||||
| 274,743,923 | |||||||
Information Technology 2.2% | |||||||
Ceridian Corp., senior note, 11.50%, 11/15/15 | United States | 25,000,000 | 21,031,250 | ||||
First Data Corp., senior note, 9.875%, 9/24/15 | United States | 43,000,000 | 30,745,000 | ||||
Flextronics International Ltd., senior sub. note, 6.25%, 11/15/14 | Singapore | 10,000,000 | 9,400,000 | ||||
Freescale Semiconductor Inc., senior note, | |||||||
8.875%, 12/15/14 | United States | 3,000,000 | 1,530,000 | ||||
10.125%, 12/15/16 | United States | 18,789,000 | 6,482,205 | ||||
Lucent Technologies Inc., 6.45%, 3/15/29 | United States | 4,100,000 | 2,347,250 | ||||
hNortel Networks Ltd., senior note, 10.75%, 7/15/16 | Canada | 16,800,000 | 5,880,000 | ||||
FI-20
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Franklin Income Securities Fund | Country | Principal Amounte | Value | |||||
Corporate Bonds (continued) | ||||||||
Information Technology (continued) | ||||||||
Sanmina-SCI Corp., senior sub. note, | United States | 22,000,000 | $ | 17,160,000 | ||||
8.125%, 3/01/16 | United States | 18,100,000 | 13,280,875 | |||||
SunGard Data Systems Inc., | United States | 8,100,000 | 7,695,000 | |||||
csenior note, 144A, 10.625%, 5/15/15 | United States | 7,500,000 | 7,387,500 | |||||
senior sub. note, 10.25%, 8/15/15 | United States | 14,500,000 | 13,466,875 | |||||
| 136,405,955 | ||||||||
Materials 3.2% | ||||||||
cAnglo American Capital PLC, senior note, 144A, 9.375%, 4/08/14 | United Kingdom | 29,000,000 | 31,531,555 | |||||
ArcelorMittal, senior note, 9.85%, 6/01/19 | Luxembourg | 15,000,000 | 16,212,045 | |||||
Freeport-McMoRan Copper & Gold Inc., | United States | 5,000,000 | 5,055,700 | |||||
senior note, 8.375%, 4/01/17 | United States | 10,000,000 | 10,089,180 | |||||
senior secured note, 6.875%, 2/01/14 | United States | 11,500,000 | 11,798,954 | |||||
cIneos Group Holdings PLC, senior sub. note, 144A, 7.875%, 2/15/16 | United Kingdom | 25,000,000 | EUR | 11,483,788 | ||||
cNalco Co., senior note, 144A, 8.25%, 5/15/17 | United States | 5,500,000 | 5,555,000 | |||||
Nalco Finance Holdings, senior note, 9.00%, 2/01/14 | United States | 36,829,000 | 36,276,565 | |||||
NewPage Corp., senior secured note, 10.00%, 5/01/12 | United States | 13,000,000 | 6,305,000 | |||||
Rio Tinto Finance USA Ltd., senior note, | Australia | 20,000,000 | 22,253,880 | |||||
9.00%, 5/01/19 | Australia | 15,000,000 | 16,698,090 | |||||
cTeck Resources Ltd., senior secured note, 144A, | Canada | 11,700,000 | 12,121,153 | |||||
10.75%, 5/15/19 | Canada | 10,900,000 | 11,735,551 | |||||
| 197,116,461 | ||||||||
Telecommunication Services 0.8% | ||||||||
cCC Holdings GS V LLC, senior secured note, 144A, 7.75%, 5/01/17 | United States | 10,800,000 | 10,584,000 | |||||
Crown Castle International Corp., senior note, 9.00%, 1/15/15 | United States | 16,600,000 | 16,973,500 | |||||
cDigicel Group Ltd., senior note, 144A, 8.875%, 1/15/15 | Jamaica | 12,000,000 | 10,020,000 | |||||
cQwest Corp., senior note, 144A, 8.375%, 5/01/16 | United States | 9,300,000 | 9,021,000 | |||||
| 46,598,500 | ||||||||
Utilities 7.3% | ||||||||
Ameren Corp., senior note, 8.875%, 5/15/14 | United States | 17,100,000 | 17,672,371 | |||||
Arizona Public Service Co., senior note, 8.75%, 3/01/19 | United States | 12,500,000 | 13,649,275 | |||||
cCalpine Construction Finance, senior secured note, 144A, 8.00%, 6/01/16 | United States | 20,000,000 | 19,250,000 | |||||
CMS Energy Corp., senior note, 8.75%, 6/15/19 | United States | 14,400,000 | 14,638,896 | |||||
Dynegy Holdings Inc., senior note, | United States | 53,000,000 | 51,277,500 | |||||
8.75%, 2/15/12 | United States | 50,985,000 | 49,710,375 | |||||
7.50%, 6/01/15 | United States | 8,460,000 | 7,095,825 | |||||
8.375%, 5/01/16 | United States | 57,500,000 | 49,018,750 | |||||
7.75%, 6/01/19 | United States | 3,000,000 | 2,351,250 | |||||
Energy Future Holdings Corp., senior note, | United States | 37,500,000 | 27,562,500 | |||||
P, 5.55%, 11/15/14 | United States | 26,000,000 | 16,552,406 | |||||
kPIK, 12.00%, 11/01/17 | United States | 51,728,000 | 31,812,720 | |||||
Illinois Power Co., senior secured note, 9.75%, 11/15/18 | United States | 10,000,000 | 11,529,910 | |||||
cIntergen NV, senior secured note, 144A, 9.00%, 6/30/17 | Netherlands | 7,500,000 | 7,143,750 | |||||
Public Service Co. of New Mexico, senior note, 7.95%, 5/15/18 | United States | 14,500,000 | 14,097,321 | |||||
FI-21
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Franklin Income Securities Fund | Country | Principal Amounte | Value | ||||
Corporate Bonds (continued) | |||||||
Utilities (continued) | |||||||
Reliant Energy Inc., senior note, | United States | 19,500,000 | $ | 17,940,000 | |||
7.875%, 6/15/17 | United States | 17,500,000 | 15,750,000 | ||||
Sempra Energy, senior note, 8.90%, 11/15/13 | United States | 10,000,000 | 11,187,790 | ||||
Texas Competitive Electric Holdings Co. LLC, senior note, | United States | 70,200,000 | 44,050,500 | ||||
B, 10.25%, 11/01/15 | United States | 10,800,000 | 6,777,000 | ||||
kPIK, 10.50%, 11/01/16 | United States | 31,687,500 | 14,734,687 | ||||
| 443,802,826 | |||||||
Total Corporate Bonds (Cost $3,993,382,075) | 3,505,619,479 | ||||||
Convertible Bonds 2.3% | |||||||
Consumer Discretionary 0.3% | |||||||
cHost Marriott LP, cvt., senior deb., 144A, 3.25%, 3/15/24 | United States | 17,390,000 | 16,890,038 | ||||
Financials 1.0% | |||||||
cDuke Realty LP, cvt., senior note, 144A, 3.75%, 12/01/11 | United States | 13,295,000 | 11,616,506 | ||||
fiStar Financial Inc., cvt., senior note, FRN, 1.708%, 10/01/12 | United States | 40,000,000 | 15,328,000 | ||||
Vornado Realty Trust, cvt., senior bond, | United States | 12,000,000 | 10,920,000 | ||||
2.85%, 4/01/27 | United States | 27,000,000 | 23,625,000 | ||||
| 61,489,506 | |||||||
Health Care 0.3% | |||||||
cMylan Inc., cvt., 144A, 3.75%, 9/15/15 | United States | 20,000,000 | 22,475,000 | ||||
Information Technology 0.5% | |||||||
cAdvanced Micro Devices Inc., cvt., senior note, 144A, 5.75%, 8/15/12 | United States | 50,000,000 | 31,000,000 | ||||
Utilities 0.2% | |||||||
CMS Energy Corp., cvt., senior note, 5.50%, 6/15/29 | United States | 10,000,000 | 10,450,000 | ||||
Total Convertible Bonds (Cost $167,675,629) | 142,304,544 | ||||||
Total Investments before Short Term Investments (Cost $6,953,309,339) | 5,809,674,141 | ||||||
Short Term Investments (Cost $243,053,714) 4.0% | |||||||
Repurchase Agreements 4.0% | |||||||
nJoint Repurchase Agreement, 0.023%, 7/01/09 (Maturity Value $243,053,871) | United States | 243,053,714 | 243,053,714 | ||||
Banc of America Securities LLC (Maturity Value $20,953,674) | |||||||
Barclays Capital Inc. (Maturity Value $19,206,117) | |||||||
BNP Paribas Securities Corp. (Maturity Value $69,841,530) | |||||||
Credit Suisse Securities (USA) LLC (Maturity Value $69,841,530) | |||||||
Deutsche Bank Securities Inc. (Maturity Value $24,796,356) | |||||||
HSBC Securities (USA) Inc. (Maturity Value $20,953,674) | |||||||
UBS Securities LLC (Maturity Value $17,460,990) | |||||||
Collateralized by U.S. Government Agency Securities, 0.58% - 7.25%, 1/15/10 - 6/27/16; oU.S. Government Agency Discount Notes, 12/31/09; oU.S. Treasury Bills, 8/13/09; and U.S. Treasury Notes, 1.375% - 1.50%, 3/15/12 - 12/31/13. | |||||||
Total Investments (Cost $7,196,363,053) 98.9% | 6,052,727,855 | ||||||
Other Assets, less Liabilities 1.1% | 68,218,255 | ||||||
Net Assets 100.0% | $ | 6,120,946,110 | |||||
FI-22
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
See Abbreviations on page FI-35.
aRounds to less than 0.1% of net assets.
bNon-income producing.
cSecurity was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be sold in transactions exempt from registration only to qualified institutional buyers or in a public offering registered under the Securities Act of 1933. These securities have been deemed liquid under guidelines approved by the Trust’s Board of Trustees. At June 30, 2009, the aggregate value of these securities was $954,767,841, representing 15.60% of net assets.
dSee Note 1(f) regarding equity-linked securities.
eThe principal amount is stated in U.S. dollars unless otherwise indicated.
fThe coupon rate shown represents the rate at period end.
gSee Note 1(g) regarding senior floating rate interests.
hSee Note 7 regarding defaulted securities.
iSee Note 8 regarding unfunded loan commitments.
jSee Note 9 regarding other considerations.
kIncome may be received in additional securities and/or cash.
lSecurities purchased on a when-issued basis. See Note 1(d).
mPerpetual security with no stated maturity date.
nSee Note 1(c) regarding joint repurchase agreement.
oThe security is traded on a discount basis with no stated coupon rate.
The accompanying notes are an integral part of these financial statements.
FI-23
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements
Statement of Assets and Liabilities
June 30, 2009 (unaudited)
| Franklin Income Securities Fund | ||||
Assets: | ||||
Investments in securities: | ||||
Cost - Unaffiliated issuers | $ | 6,953,309,339 | ||
Cost - Repurchase agreements | 243,053,714 | |||
Total cost of investments | $ | 7,196,363,053 | ||
Value - Unaffiliated issuers | $ | 5,809,674,141 | ||
Value - Repurchase agreements | 243,053,714 | |||
Total value of investments | 6,052,727,855 | |||
Cash | 1,536,690 | |||
Foreign currency, at value (cost and $1,212,945) | 1,382,115 | |||
Receivables: | ||||
Investment securities sold | 3,300,212 | |||
Capital shares sold | 2,322,255 | |||
Dividends and interest | 81,927,696 | |||
Other assets | 7,775 | |||
Total assets | 6,143,204,598 | |||
Liabilities: | ||||
Payables: | ||||
Investment securities purchased | 9,887,925 | |||
Capital shares redeemed | 7,172,122 | |||
Affiliates | 4,563,108 | |||
Unrealized depreciation on unfunded loan commitments (Note 8) | 34,020 | |||
Accrued expenses and other liabilities | 601,313 | |||
Total liabilities | 22,258,488 | |||
Net assets, at value | $ | 6,120,946,110 | ||
Net assets consist of: | ||||
Paid-in capital | $ | 8,161,822,088 | ||
Undistributed net investment income | 193,157,935 | |||
Net unrealized appreciation (depreciation) | (1,143,435,384 | ) | ||
Accumulated net realized gain (loss) | (1,090,598,529 | ) | ||
Net assets, at value | $ | 6,120,946,110 | ||
The accompanying notes are an integral part of these financial statements.
FI-24
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Assets and Liabilities (continued)
June 30, 2009 (unaudited)
| Franklin Income Securities Fund | |||
Class 1: | |||
Net assets, at value | $ | 567,829,155 | |
Shares outstanding | 47,352,130 | ||
Net asset value and maximum offering price per share | $ | 11.99 | |
Class 2: | |||
Net assets, at value | $ | 5,315,992,415 | |
Shares outstanding | 452,362,320 | ||
Net asset value and maximum offering price per share | $ | 11.75 | |
Class 4: | |||
Net assets, at value | $ | 237,124,540 | |
Shares outstanding | 19,866,994 | ||
Net asset value and maximum offering price per share | $ | 11.94 | |
The accompanying notes are an integral part of these financial statements.
FI-25
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Operations
for the period ended June 30, 2009 (unaudited)
| Franklin Income Securities Fund | ||||
Investment income: | ||||
Dividends | $ | 38,908,718 | ||
Interest | 179,060,333 | |||
Total investment income | 217,969,051 | |||
Expenses: | ||||
Management fees (Note 3a) | 12,402,733 | |||
Distribution fees: (Note 3c) | ||||
Class 2 | 6,030,663 | |||
Class 4 | 307,073 | |||
Unaffiliated transfer agent fees | 1,695 | |||
Custodian fees (Note 4) | 54,063 | |||
Reports to shareholders | 304,617 | |||
Professional fees | 71,141 | |||
Trustees’ fees and expenses | 17,108 | |||
Other | 119,874 | |||
Total expenses | 19,308,967 | |||
Expense reductions (Note 4) | (757 | ) | ||
Net expenses | 19,308,210 | |||
Net investment income | 198,660,841 | |||
Realized and unrealized gains (losses): | ||||
Net realized gain (loss) from: | ||||
Investments | (414,575,388 | ) | ||
Foreign currency transactions | (169,000 | ) | ||
Net realized gain (loss) | (414,744,388 | ) | ||
Net change in unrealized appreciation (depreciation) on: | ||||
Investments | 921,983,764 | |||
Translation of other assets and liabilities denominated in foreign currencies | 217,728 | |||
Net change in unrealized appreciation (depreciation) | 922,201,492 | |||
Net realized and unrealized gain (loss) | 507,457,104 | |||
Net increase (decrease) in net assets resulting from operations | $ | 706,117,945 | ||
The accompanying notes are an integral part of these financial statements.
FI-26
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statements of Changes in Net Assets
| Franklin Income Securities Fund | ||||||||
| Six Months Ended June 30, 2009 (unaudited) | Year Ended December 31, 2008 | |||||||
Increase (decrease) in net assets: | ||||||||
Operations: | ||||||||
Net investment income | $ | 198,660,841 | $ | 497,775,375 | ||||
Net realized gain (loss) from investments and foreign currency transactions | (414,744,388 | ) | (630,979,497 | ) | ||||
Net change in unrealized appreciation (depreciation) on investments and translation of other assets and liabilities denominated in foreign currencies | 922,201,492 | (2,290,757,956 | ) | |||||
Net increase (decrease) in net assets resulting from operations | 706,117,945 | (2,423,962,078 | ) | |||||
Distributions to shareholders from: | ||||||||
Net investment income: | ||||||||
Class 1 | (46,648,798 | ) | (24,795,329 | ) | ||||
Class 2 | (437,720,445 | ) | (360,749,953 | ) | ||||
Class 4 | (19,056,945 | ) | (836,031 | ) | ||||
Net realized gains: | ||||||||
Class 1 | — | (9,933,051 | ) | |||||
Class 2 | — | (151,054,226 | ) | |||||
Class 4 | — | (334,915 | ) | |||||
Total distributions to shareholders | (503,426,188 | ) | (547,703,505 | ) | ||||
Capital share transactions: (Note 2) | ||||||||
Class 1 | 118,116,965 | 177,883,831 | ||||||
Class 2 | 193,067,976 | 262,081,415 | ||||||
Class 4 | 93,882,951 | 159,890,193 | ||||||
Total capital share transactions | 405,067,892 | 599,855,439 | ||||||
Net increase (decrease) in net assets | 607,759,649 | (2,371,810,144 | ) | |||||
Net assets: | ||||||||
Beginning of period | 5,513,186,461 | 7,884,996,605 | ||||||
End of period | $ | 6,120,946,110 | $ | 5,513,186,461 | ||||
Undistributed net investment income included in net assets: | ||||||||
End of period | $ | 193,157,935 | $ | 497,923,282 | ||||
The accompanying notes are an integral part of these financial statements.
FI-27
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited)
Franklin Income Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Templeton Variable Insurance Products Trust (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end investment company, consisting of twenty-two separate funds. The Franklin Income Securities Fund (Fund) is included in this report. The financial statements of the remaining funds in the Trust are presented separately. Shares of the Fund are sold only to insurance company separate accounts to fund the benefits of variable life insurance policies or variable annuity contracts. The Fund offers three classes of shares: Class 1, Class 2, and Class 4. Each class of shares differs by its distribution fees, voting rights on matters affecting a single class and its exchange privilege.
The following summarizes the Fund’s significant accounting policies.
a. Security Valuation
Equity and other securities listed on a securities exchange or on the NASDAQ National Market System are valued at the last quoted sale price or the official closing price of the day, respectively. Over-the-counter securities and listed securities for which there is no reported sale are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. Certain equity securities are valued based upon fundamental characteristics or relationships to similar securities.
Corporate debt securities generally trade in the over-the-counter market rather than on a securities exchange. The Fund may utilize independent pricing services, quotations from bond dealers, and information with respect to bond and note transactions, to assist in determining a current market value for each security. The Fund’s pricing services may use valuation models or matrix pricing which considers information with respect to comparable bond and note transactions, quotations from bond dealers, or by reference to other securities that are considered comparable in such characteristics as rating, interest rate and maturity date, option adjusted spread models, prepayment projections, interest rate spreads and yield curves, to determine current value. Debt securities denominated in a foreign currency are converted into their U.S. dollar equivalent at the foreign exchange rate in effect at the close of the NYSE on the date that the values of the foreign debt securities are determined.
Senior secured corporate loans with floating or variable interest rates generally trade in the over-the-counter market rather than on a securities exchange. The Fund may utilize independent pricing services, quotations from loan dealers and other financial institutions, and information with respect to bond and note transactions, to assist in determining a current market value for each security. The Fund’s pricing services use independent market quotations from loan dealers or financial institutions and may incorporate valuation methodologies that consider multiple bond characteristics such as dealer quotes, issuer type, coupon, maturity, weighted average maturity, interest rate spreads and yield curves, cash flow and credit risk/quality analysis, to determine current value.
Foreign equity securities are valued as of the close of trading on the foreign stock exchange on which the security is primarily traded, or the NYSE, whichever is earlier. If no sale is reported at that time, the foreign equity security will be valued within the range of the most recent quoted bid and ask prices. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at the close of the NYSE on the day that the value of the security is determined.
The Fund has procedures to determine the fair value of individual securities and other assets for which market prices are not readily available or which may not be reliably priced. Methods for valuing these securities may include: fundamental analysis based upon the underlying investment book value, anticipated future cash flows, market changes in comparable or similar securities, matrix pricing, discounts from market prices of similar securities, or discounts applied due to the nature and duration of restrictions on the disposition of the securities. Due to the inherent uncertainty of valuations of such securities, the fair values may differ significantly from the values that would have been used had a ready market for such investments existed. Occasionally, events occur between the time at which trading in a security is completed and the close of the NYSE that might call into question the availability (including the reliability) of the value of a portfolio security held by the Fund. The investment manager monitors price movements following the close of trading in foreign stock markets through a series of country specific market proxies (such as baskets of American Depository Receipts, futures contracts and exchange traded funds). These price
FI-28
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Income Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
a. Security Valuation (continued)
movements are measured against established trigger thresholds for each specific market proxy to assist in determining if an event has occurred. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services. All security valuation procedures are approved by the Fund’s Board of Trustees.
b. Foreign Currency Translation
Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. Purchases and sales of securities, income and expense items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. Occasionally, events may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the Fund’s Board of Trustees.
The Fund does not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments on the Statement of Operations.
Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period.
c. Joint Repurchase Agreement
The Fund may enter into a joint repurchase agreement whereby its uninvested cash balance is deposited into a joint cash account with other funds managed by the investment manager or an affiliate of the investment manager and is used to invest in one or more repurchase agreements. The value and face amount of the joint repurchase agreement are allocated to the funds based on their pro-rata interest. A repurchase agreement is accounted for as a loan by the Fund to the seller, collateralized by securities which are delivered to the Fund’s custodian. The market value, including accrued interest, of the initial collateralization is required to be at least 102% of the dollar amount invested by the funds, with the value of the underlying securities marked to market daily to maintain coverage of at least 100%. The joint repurchase agreement held by the Fund at period end had been entered into on June 30, 2009. The joint repurchase agreement is valued at cost.
d. Securities Purchased on a When-Issued Basis
The Fund may purchase securities on a when-issued basis, with payment and delivery scheduled for a future date. These transactions are subject to market fluctuations and are subject to the risk that the value at delivery may be more or less than the trade date purchase price. Although the Fund will generally purchase these securities with the intention of holding the securities, it may sell the securities before the settlement date. Sufficient assets have been segregated for these securities.
e. Foreign Currency Contracts
The Fund enters into foreign exchange contracts in order to manage foreign exchange rate risk between the trade date and settlement date of securities transactions. A foreign exchange contract is an agreement between the Fund and a counterparty to buy or sell a foreign currency for a specific exchange rate on a future date.
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Income Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
f. Equity-Linked Securities
The Fund may invest in equity-linked securities. Equity-linked securities are hybrid financial instruments that generally combine both debt and equity characteristics into a single note form. Income received from equity linked securities is recorded as realized gains in the Statement of Operations and may be based on the performance of an underlying equity security, an equity index, or an option position. The risks of investing in equity-linked securities include unfavorable price movements in the underlying security and the credit risk of the issuing financial institution. There may be no guarantee of a return of principal with equity linked securities and the appreciation potential may be limited. Equity-linked securities may be more volatile and less liquid than other investments held by the Fund.
g. Senior Floating Rate Interests
Senior secured corporate loans pay interest at rates which are periodically reset by reference to a base lending rate plus a spread. These base lending rates are generally the prime rate offered by a designated U.S. bank or the London InterBank Offered Rate (LIBOR). Senior secured corporate loans often require prepayment of principal from excess cash flows or at the discretion of the borrower. As a result, actual maturity may be substantially less than the stated maturity.
Senior secured corporate loans in which the Fund invests are generally readily marketable, but may be subject to some restrictions on resale.
h. Income Taxes
No provision has been made for U.S. income taxes because it is the Fund’s policy to qualify as a regulated investment company under the Internal Revenue Code and to distribute to shareholders substantially all of its taxable income and net realized gains.
The Fund has reviewed the tax positions, taken on federal income tax returns, for each of the three open tax years and as of June 30, 2009, and has determined that no provision for income tax is required in the Fund’s financial statements.
i. Security Transactions, Investment Income, Expenses and Distributions
Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Amortization of premium and accretion of discount on debt securities are included in interest income. Facility fees are recognized as income over the expected term of the loan. Dividend income is recorded on the ex-dividend date. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with accounting principles generally accepted in the United States of America. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods.
Common expenses incurred by the Trust are allocated among the funds based on the ratio of net assets of each fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense.
Realized and unrealized gains and losses and net investment income, not including class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions, by class, are generally due to differences in class specific expenses.
j. Accounting Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Income Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
k. Guarantees and Indemnifications
Under the Trust’s organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, on behalf of the Fund, enters into contracts with service providers that contain general indemnification clauses. The Trust’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote.
2. SHARES OF BENEFICIAL INTEREST
At June 30, 2009, there were an unlimited number of shares authorized (without par value). Transactions in the Fund’s shares were as follows:
| Six Months Ended June 30, 2009 | Year Ended December 31, 2008a | |||||||||||||
| Class 1 Shares: | Shares | Amount | Shares | Amount | ||||||||||
Shares sold | 10,177,153 | $ | 119,338,379 | 17,900,721 | $ | 257,601,912 | ||||||||
Shares issued in reinvestment of distributions | 3,884,163 | 46,648,798 | 2,143,727 | 34,728,380 | ||||||||||
Shares redeemed | (4,304,852 | ) | (47,870,212 | ) | (8,303,783 | ) | (114,446,461 | ) | ||||||
Net increase (decrease) | 9,756,464 | $ | 118,116,965 | 11,740,665 | $ | 177,883,831 | ||||||||
Class 2 Shares: |
| |||||||||||||
Shares sold | 14,834,859 | $ | 170,834,671 | 51,438,684 | $ | 783,774,483 | ||||||||
Shares issued in reinvestment of distributions | 37,189,503 | 437,720,445 | 32,188,942 | 511,804,179 | ||||||||||
Shares redeemed | (37,417,399 | ) | (415,487,140 | ) | (75,101,550 | ) | (1,033,497,247 | ) | ||||||
Net increase (decrease) | 14,606,963 | $ | 193,067,976 | 8,526,076 | $ | 262,081,415 | ||||||||
Class 4 Shares: |
| |||||||||||||
Shares sold | 6,996,216 | $ | 80,732,389 | 11,763,342 | $ | 159,393,310 | ||||||||
Shares issued on reinvestment of distributions | 1,593,390 | 19,056,945 | 72,348 | 1,170,589 | ||||||||||
Shares redeemed | (503,485 | ) | (5,906,383 | ) | (54,817 | ) | (673,706 | ) | ||||||
Net increase (decrease) | 8,086,121 | $ | 93,882,951 | 11,780,873 | $ | 159,890,193 | ||||||||
| aFor | the period February 29, 2008 (effective date) to December 31, 2008 for Class 4. |
3. TRANSACTIONS WITH AFFILIATES
Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Trust are also officers and/or directors of the following subsidiaries:
| Subsidiary | Affiliation | |
Franklin Advisers, Inc. (Advisers) | Investment manager | |
Franklin Templeton Services, LLC (FT Services) | Administrative manager | |
Franklin Templeton Distributors, Inc. (Distributors) | Principal underwriter | |
Franklin Templeton Investor Services, LLC (Investor Services) | Transfer agent |
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Income Securities Fund
3. TRANSACTIONS WITH AFFILIATES (continued)
a. Management Fees
The Fund pays an investment management fee to Advisers based on the average daily net assets of the Fund as follows:
| Annualized Fee Rate | Net Assets | |
| 0.625% | Up to and including $100 million | |
| 0.500% | Over $100 million, up to and including $250 million | |
| 0.450% | Over $250 million, up to and including $7.5 billion | |
| 0.440% | Over $7.5 billion, up to and including $10 billion | |
| 0.430% | Over $10 billion, up to and including $12.5 billion | |
| 0.420% | Over $12.5 billion, up to and including $15 billion | |
| 0.400% | In excess of $15 billion |
b. Administrative Fees
Under an agreement with Advisers, FT Services provides administrative services to the Fund. The fee is paid by Advisers based on average daily net assets, and is not an additional expense of the Fund.
c. Distribution Fees
The Fund’s Board of Trustees has adopted distribution plans for Class 2 and Class 4 shares pursuant to Rule 12b-1 under the 1940 Act. Under the Fund’s compensation distribution plans, the Fund pays Distributors for costs incurred in connection with the servicing, sale and distribution of the Fund’s shares up to 0.35% per year of its average daily net assets of each class. The Board of Trustees has agreed to limit the current rate to 0.25% per year for Class 2.
d. Transfer Agent Fees
Investor Services, under terms of an agreement, performs shareholder servicing for the Fund and is not paid by the Fund for the services.
4. EXPENSE OFFSET ARRANGEMENT
The Fund has entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Fund’s custodian expenses. During the period ended June 30, 2009, the custodian fees were reduced as noted in the Statement of Operations.
5. INCOME TAXES
For tax purposes, capital losses may be carried over to offset future capital gains, if any. At December 31, 2008, the Fund had tax basis capital losses of $524,982,657 expiring in 2016.
For tax purposes, realized capital losses and realized currency losses occurring subsequent to October 31, may be deferred and treated as occurring on the first day of the following fiscal year. At December 31, 2008, the Fund deferred realized capital losses and realized currency losses of $147,985,128 and 117,987, respectively.
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Income Securities Fund
5. INCOME TAXES (continued)
At June 30, 2009, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
Cost of investments | $ | 7,208,070,125 | ||
Unrealized appreciation | $ | 305,515,530 | ||
Unrealized depreciation | (1,460,857,800 | ) | ||
Net unrealized appreciation (depreciation) | $ | (1,155,342,270 | ) | |
Net investment income differs for financial statement and tax purposes primarily due to differing treatments of defaulted securities, foreign currency transactions, payments-in-kind, and bond discounts and premiums.
Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatments of wash sales, foreign currency transactions, payments-in-kind, and bond discounts and premiums.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the period ended June 30, 2009, aggregated $1,484,519,667 and $1,014,634,539, respectively.
7. CREDIT RISK AND DEFAULTED SECURITIES
At June 30, 2009, the Fund had 52.79% of its portfolio invested in high yield, senior secured floating rate notes, or other securities rated below investment grade. These securities may be more sensitive to economic conditions causing greater price volatility and are potentially subject to a greater risk of loss due to default than higher rated securities.
The Fund held defaulted securities and/or other securities for which the income has been deemed uncollectible. At June 30, 2009, the aggregate value of these securities was $184,884,213, representing 3.02% of the Fund’s net assets. The Fund discontinues accruing income on securities for which income has been deemed uncollectible and provides an estimate for losses on interest receivable. The securities have been identified on the accompanying Statement of Investments.
8. UNFUNDED LOAN COMMITMENTS
The Fund may enter into certain credit agreements, all or a portion of which may be unfunded. The Fund is obligated to fund these loan commitments at the borrowers’ discretion. Funded portions of credit agreements are presented on the Statement of Investments.
At June 30, 2009, unfunded commitments were as follows:
| Borrower | Unfunded Commitment | ||
Bausch & Lomb Inc., Delayed Draw Term Loan | $ | 440,000 | |
Unfunded loan commitments and funded portions of credit agreements are marked to market daily and any unrealized appreciation or depreciation is included in the Statement of Assets and Liabilities and Statement of Operations.
9. OTHER CONSIDERATIONS
From time to time, officers, directors or employees of the Fund’s Investment Manager may have discussions or enter into agreements with issuers, underwriters or creditors’ committees which, pursuant to the Fund’s policies and requirements of applicable securities laws, could prevent the Fund from trading in the securities of such company for limited or extended periods of time.
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Income Securities Fund
10. CREDIT FACILITY
Effective January 23, 2009, the Fund, together with other U.S. registered and foreign investment funds managed by Franklin Templeton Investments (individually, “Borrower”; collectively “Borrowers”), entered into a joint syndicated senior unsecured credit facility totaling $725 million (Global Credit Facility) to provide a source of funds to the Borrowers for temporary and emergency purposes, including the ability to meet future unanticipated or unusually large redemption requests.
Under the terms of the Global Credit Facility, the Fund shall, in addition to interest charged on any borrowings made by the Fund and other costs incurred by the Fund, pay its share of fees and expenses incurred in connection with the implementation and maintenance of the Global Credit Facility, based upon its relative share of the aggregate net assets of all of the Borrowers, including an annual commitment fee based upon the unused portion of the Global Credit Facility. During the period, the Fund incurred commitment fees of $3,524 of its pro rata portion of the Global Credit Facility, which is reflected in other expenses on the Statement of Operations. During the period ended June 30, 2009, the Fund did not utilize the Global Credit Facility.
11. FAIR VALUE MEASUREMENTS
Financial Accounting Standards Board (FASB) Statement No. 157, “Fair Value Measurement” (SFAS 157) establishes a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Fund’s own market assumptions (unobservable inputs). These inputs are used in determining the value of the Fund’s investments and are summarized in the following fair value hierarchy:
| • | Level 1 – quoted prices in active markets for identical securities |
| • | Level 2 – other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speed, credit risk, etc.) |
| • | Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments) |
The inputs or methodology used for valuing securities are not an indication of the risk associated with investing in those securities.
The following is a summary of the inputs used as of June 30 , 2009, in valuing the Fund’s assets and liabilities carried at fair value:
| Level 1 | Level 2 | Level 3 | Total | |||||||||
Assets: | ||||||||||||
Investments in Securities | ||||||||||||
Equity Investments:a | ||||||||||||
Consumer Discretionary | $ | 15,224,642 | $ | 7,457,564 | $ | — | $ | 22,682,206 | ||||
Energy | 146,421,789 | 55,225,388 | — | 201,647,177 | ||||||||
Financials | 406,226,465 | 18,519,597 | — | 424,746,062 | ||||||||
Information Technology | 88,875,000 | 5,861,345 | — | 94,736,345 | ||||||||
Materials | 53,914,505 | 37,839,500 | — | 91,754,005 | ||||||||
All other Equity Investmentsb | 969,889,556 | — | — | 969,889,556 | ||||||||
Senior Floating Rate Interests | — | 356,294,767 | — | 356,294,767 | ||||||||
Corporate Bonds | — | 3,505,619,479 | — | 3,505,619,479 | ||||||||
Convertible Bonds | — | 142,304,544 | — | 142,304,544 | ||||||||
Short Term Investments | — | 243,053,714 | — | 243,053,714 | ||||||||
Total Investments in Securities | $ | 1,680,551,957 | $ | 4,372,175,898 | $ | — | $ | 6,052,727,855 | ||||
Liabilities: | ||||||||||||
Unfunded Loan Commitments | — | 34,020 | — | 34,020 | ||||||||
aIncludes common and preferred stock as well as other equity investments.
bFor detailed industry descriptions, see the accompanying Statement of Investments.
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Income Securities Fund
11. FAIR VALUE MEASUREMENTS (continued)
At June 30, 2009, the reconciliation of assets in which significant unobservable inputs (Level 3) were used in determining fair value, is as follows:
| Beginning Balance | Net Realized Gain (Loss) | Net Change in Unrealized Appreciation (Depreciation) | Net Purchases (Sales) | Transfer In (Out) of Level 3 | Ending Balance | Net Change in Unrealized Appreciation (Depreciation) on Assets Held at Period End | ||||||||||||||||
Assets | ||||||||||||||||||||||
Equity Investments: | ||||||||||||||||||||||
Financials | $ | 12,874,075 | $ | — | $ | — | $ | — | $ | (12,874,075 | ) | $ | — | $ | — | |||||||
12. SUBSEQUENT EVENTS
Management has evaluated subsequent events through August 7, 2009 and determined that no events have occurred that require disclosure.
ABBREVIATIONS
Currency EUR - Euro | Selected Portfolio FRN - Floating Rate Note L/C - Letter of Credit MTN - Medium Term Note PIK - Payment-In-Kind |
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FRANKLIN LARGE CAP GROWTH SECURITIES FUND
We are pleased to bring you Franklin Large Cap Growth Securities Fund’s semiannual report for the period ended June 30, 2009.
Performance Summary as of 6/30/09
Franklin Large Cap Growth Securities Fund – Class 1 delivered a total return of +8.66% for the six-month period ended 6/30/09.
Performance reflects the Fund’s Class 1 operating expenses, but does not include any contract fees, expenses or sales charges. If they had been included, performance would be lower. These charges and deductions, particularly for variable life policies, can have a significant effect on contract values and insurance benefits. See the contract prospectus for a complete description of these expenses, including sales charges.
Franklin Large Cap Growth Securities Fund Class 1
Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares.
Current performance may differ from figures shown.
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Fund Goal and Main Investments: Franklin Large Cap Growth Securities Fund seeks capital appreciation. The Fund normally invests at least 80% of its net assets in investments of large capitalization companies and normally invests predominantly in equity securities. For this Fund, large capitalization companies are those with market capitalization values within those of the top 50% of companies in the Russell 1000® Index at the time of purchase.1
Performance Overview
You can find the Fund’s six-month total return in the Performance Summary. The Fund outperformed its primary benchmark, the Standard & Poor’s 500 Index (S&P 500), which had a +3.16% total return.2 The Fund underperformed its secondary benchmark, the Russell 1000 Growth Index, which had a total return of +11.53% for the same period.2
Economic and Market Overview
During the six-month period ended June 30, 2009, the U.S. economy and stock markets seemed to stabilize after signs appeared that the recession’s severity had eased. Strains on the banking system and credit markets that surfaced in 2008 improved in 2009’s first half with the help of federal aid and tighter regulations. Although home sales fell for most of the period, they edged higher toward period-end. The pace of contraction in manufacturing activity decelerated. However, jobless claims mounted and the unemployment rate rose from 7.2% at the beginning of the year to 9.5% in June 2009, its highest rate since August 1983.3 Retail sales shrank from year-ago levels, and in February The Conference Board’s Consumer Confidence Index dropped to the lowest level since it began in 1967 before rebounding in the second quarter on improved expectations. Reflecting a broad-based contraction in consumer spending, falling corporate profits, slowing exports and reduced government spending, economic growth as measured by gross domestic product (GDP) fell at annualized rates of 6.4% and an estimated 1.0% in the first and second quarters of 2009.
Although the price of oil rose from $44 per barrel at the beginning of the period to $70 by period-end on speculation that the downturn was abating, it was still off more than 50% from its July 2008 record high.4 Prices for most other commodities followed similar trends. Partially as a
1. Please see Index Descriptions following the Fund Summaries.
2. Source: © 2009 Morningstar. One cannot invest directly in an index, nor is an index representative of the Fund’s portfolio. Please see Index Descriptions following the Fund Summaries.
3. Source: Bureau of Labor Statistics.
4. Source: New York Mercantile Exchange.
Fund Risks: The Fund’s investments in stocks may offer the potential for long-term gains but can be subject to short-term price fluctuations. By having substantial investments in particular sectors from time to time, such as the technology sector (including health care technology, electronic technology and technology services), which has been among the market’s most volatile sectors, as well as the communications and financial services sectors, the Fund may be at greater risk from adverse developments in a sector than a fund that invests more broadly. Foreign investing involves additional risks, including currency fluctuations, economic instability, market volatility, and political and social instability. The Fund’s prospectus also includes a description of the main investment risks.
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result of reduced consumer spending and the late-2008 downward trajectory for energy prices, deflationary pressures surfaced. June’s inflation rate, as measured by the Consumer Price Index, was an annualized -1.4%, representing the steepest yearly decline in the cost of living in nearly six decades.3 Core inflation, which excludes food and energy costs, rose at a 1.7% annualized rate, which was within the Federal Reserve Board’s (Fed’s) informal target range of 1.5%–2.0%.3
A deepening recession and decelerating inflation prompted Washington policymakers to keep interest rates low and enact stimulus plans — including income tax cuts, aid to ailing state governments and funding for transportation infrastructure, school construction and high-tech projects. During the period under review, the Fed kept the federal funds target rate in a range of 0% to 0.25% and said the “pace of economic contraction is slowing” but the financial system had not yet returned to normal. The government also introduced various new measures to shore up financial markets and enhance market liquidity, proposed a sweeping financial regulatory system overhaul, and outlined details of its Public-Private Investment Program, with an objective of removing devalued real estate-related assets from banks’ balance sheets.
Most stocks suffered major losses through early March as investors worried about an uncertain future. Stocks then recovered somewhat from 12-year lows as investors perceived many bargains among the bear market fallout and data indicated the economy’s pace of contraction was moderating. By June, however, fresh investor concerns about the economy and stock valuations reemerged and dampened the rally’s momentum. For the six months under review, the blue chip stocks of the Dow Jones Industrial Average had a total return of -2.01%, while the broader S&P 500 posted a +3.16% total return and the technology-heavy NASDAQ Composite Index returned +16.99%.2 Information technology, consumer discretionary and materials stocks posted the largest gains while industrials, telecommunication services and financials stocks generally fell in value.
Investment Strategy
We are research-driven, fundamental investors pursuing a bottom-up strategy. As such, we focus primarily on individual securities that present, in our opinion, the best trade-off between potential return and risk. We seek out companies trading at the greatest discount to our estimates of their fair worth, with worth most often being a function of future growth potential. In making these judgments, we also take into account
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risks and uncertainties that are inherent to our growth and worth estimates. We rely on a team of analysts to help provide in-depth industry expertise and use both qualitative and quantitative analysis to evaluate companies for distinct, sustainable and competitive advantages likely to lead to growth in earnings and/or cash flow. Competitive advantages such as a particular product niche, proven technology, sound financial profits and records, or strong management are all factors we believe may contribute to future cash flow and earnings growth potential.
Manager’s Discussion
Looking back on the key factors impacting the Fund’s return during the period under review, we would like to remind shareholders that our investment strategy is primarily bottom up and driven by individual stock selection. However, we recognize that a sector-based discussion can be a helpful way to organize a portfolio review of key performance drivers.
The Fund’s performance relative to the S&P 500 was helped by stock selection in the health care sector. In particular, biotechnology company Genentech5 (no longer held by period-end), health care product developer Schering-Plough and diagnostic-device manufacturer Celgene contributed to relative results. The Fund’s performance was also aided by an underweighted allocation and stock selection in the industrials sector, where positions in diversified manufacturer General Electric, aerospace manufacturer Boeing and aerospace-equipment manufacturer Precision Castparts helped relative results. Stock selection in the consumer staples sector yielded positive results as well. Significant relative contributors included household goods producer Procter & Gamble, beverage company Hansen Natural5 (no longer held by period-end) and pharmacy giant Walgreen.
Other key contributors included technology hardware and equipment manufacturers QUALCOMM, Dell and International Business Machines.
From a sector perspective, the Fund’s performance relative to the S&P 500 was hurt by our underweighting of the consumer discretionary sector. The Fund’s underweighted allocation and stock selection in the materials sector also detracted from performance. Detractors from this sector included gold producer Harmony Gold Mining5 and precious metals producer Gold Fields.5 The Fund’s relative performance
5. This holding is not an index component.
Top 10 Holdings
Franklin Large Cap Growth Securities Fund 6/30/09
| Company Sector/Industry | % of Total Net Assets | |
| Schering-Plough Corp. | 4.3% | |
| Health Care | ||
| Exxon Mobil Corp. | 3.6% | |
| Energy | ||
| International Business Machines Corp. | 3.3% | |
| Information Technology | ||
| Microsoft Corp. | 2.9% | |
| Information Technology | ||
| Wal-Mart Stores Inc. | 2.8% | |
| Consumer Staples | ||
| Teva Pharmaceutical Industries Ltd., ADR (Israel) | 2.4% | |
| Health Care | ||
| Exelon Corp. | 2.2% | |
| Utilities | ||
| Abbot Laboratories | 2.1% | |
| Health Care | ||
| JPMorgan Chase & Co. | 2.0% | |
| Financials | ||
| CVS Caremark Corp. | 1.9% | |
| Consumer Staples |
The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund’s Statement of Investments.
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also suffered due to stock selection in the financials sector, where positions in common shares of financial services firm Bank of America (sold by period-end), conglomerate holding company Berkshire Hathaway and financial services firm JPMorgan Chase hindered results.
Other key detractors included public utility company Allegheny Energy, pharmaceutical producer Roche Holding5 and oil and gas producer Conoco Phillips.
Thank you for your participation in Franklin Large Cap Growth Securities Fund. We look forward to serving your future investment needs.
The foregoing information reflects our analysis, opinions and portfolio holdings as of June 30, 2009, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.
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Fund Expenses
As an investor in a variable insurance contract (Contract) that indirectly provides for investment in an underlying mutual fund, you can incur transaction and/or ongoing expenses at both the Fund level and the Contract level.
| • | Transaction expenses can include sales charges (loads) on purchases, surrender fees, transfer fees and premium taxes. |
| • | Ongoing expenses can include management fees, distribution and service (12b-1) fees, contract fees, annual maintenance fees, mortality and expense risk fees and other fees and expenses. All mutual funds and Contracts have some types of ongoing expenses. |
The expenses shown in the table are meant to highlight ongoing expenses at the Fund level only and do not include ongoing expenses at the Contract level, or transaction expenses at either the Fund or Contract levels. While the Fund does not have transaction expenses, if the transaction and ongoing expenses at the Contract level were included, the expenses shown below would be higher. You should consult your Contract prospectus or disclosure document for more information.
The table shows Fund-level ongoing expenses and can help you understand these expenses and compare them with those of other mutual funds offered through the Contract. The table assumes a $1,000 investment held for the six months indicated. Please refer to the Fund prospectus for additional information on operating expenses.
Actual Fund Expenses
The first line (Actual) of the table provides actual account values and expenses. The “Ending Account Value” is derived from the Fund’s actual return, which includes the effect of ongoing Fund expenses, but does not include the effect of ongoing Contract expenses.
You can estimate the Fund-level expenses you incurred during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:
| 1. | Divide your account value by $1,000. |
If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6.
| 2. | Multiply the result by the number under the heading “Fund-Level Expenses Incurred During Period.” |
If Fund-Level Expenses Incurred During Period were $7.50, then 8.6 x $7.50 = $64.50.
In this illustration, the estimated expenses incurred this period at the Fund level are $64.50.
Franklin Large Cap Growth Securities Fund Class 1
FLG-6
Table of Contents
Hypothetical Example for Comparison with Other Mutual Funds
Information in the second line (Hypothetical) of the table can help you compare ongoing expenses of the Fund with those of other mutual funds offered through the Contract. This information may not be used to estimate the actual ending account balance or expenses you incurred during the period. The hypothetical “Ending Account Value” is based on the Fund’s actual expense ratio and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Fund-Level Expenses Incurred During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds offered through a Contract.
| Class 1 | Beginning Account Value 1/1/09 | Ending Account Value 6/30/09 | Fund-Level Expenses Incurred During Period* 1/1/09–6/30/09 | ||||||
Actual | $ | 1,000 | $ | 1,086.60 | $ | 4.14 | |||
Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,020.83 | $ | 4.01 | |||
*Expenses are calculated using the most recent six-month annualized expense ratio for the Fund’s Class 1 shares (0.80%), which does not include any ongoing expenses of the Contract for which the Fund is an investment option, multiplied by the average account value over the period, multiplied by 181/365 to reflect the one-half year period.
FLG-7
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Highlights
Franklin Large Cap Growth Securities Fund
| Six Months Ended June 30, 2009 (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 1 | 2008 | 2007 | 2006 | 2005 | 2004 | |||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 10.66 | $ | 17.51 | $ | 16.70 | $ | 15.17 | $ | 15.08 | $ | 14.01 | ||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.06 | 0.17 | 0.21 | 0.17 | 0.17 | 0.13 | ||||||||||||||||||
Net realized and unrealized gains (losses) | 0.86 | (5.82 | ) | 0.89 | 1.51 | 0.02 | 1.02 | |||||||||||||||||
Total from investment operations | 0.92 | (5.65 | ) | 1.10 | 1.68 | 0.19 | 1.15 | |||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income | (0.20 | ) | (0.24 | ) | (0.16 | ) | (0.15 | ) | (0.10 | ) | (0.08 | ) | ||||||||||||
Net realized gains | — | (0.96 | ) | (0.13 | ) | — | — | — | ||||||||||||||||
Total distributions | (0.20 | ) | (1.20 | ) | (0.29 | ) | (0.15 | ) | (0.10 | ) | (0.08 | ) | ||||||||||||
Net asset value, end of period | $ | 11.38 | $ | 10.66 | $ | 17.51 | $ | 16.70 | $ | 15.17 | $ | 15.08 | ||||||||||||
Total returnc | 8.66% | (34.39)% | 6.53% | 11.17% | 1.31% | 8.23% | ||||||||||||||||||
Ratios to average net assetsd | ||||||||||||||||||||||||
Expensese | 0.80% | 0.77% | 0.74% | 0.76% | 0.76% | 0.79% | ||||||||||||||||||
Net investment income | 1.24% | 1.19% | 1.21% | 1.11% | 1.14% | 0.99% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 51,501 | $ | 51,651 | $ | 96,920 | $ | 114,929 | $ | 136,464 | $ | 169,107 | ||||||||||||
Portfolio turnover rate | 49.61% | 66.04% | 50.67% | 50.97% | 39.44% | 38.48% | ||||||||||||||||||
aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.
bBased on average daily shares outstanding.
cTotal return does not include any fees, charges or expenses imposed by the variable annuity and life insurance contracts for which the Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle. Total return is not annualized for periods less than one year.
dRatios are annualized for periods less than one year.
eBenefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
FLG-8
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Franklin Large Cap Growth Securities Fund
| Six Months Ended June 30, 2009 (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 2 | 2008 | 2007 | 2006 | 2005 | 2004 | |||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 10.50 | $ | 17.25 | $ | 16.47 | $ | 14.97 | $ | 14.90 | $ | 13.87 | ||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.05 | 0.13 | 0.17 | 0.13 | 0.13 | 0.11 | ||||||||||||||||||
Net realized and unrealized gains (losses) | 0.84 | (5.73 | ) | 0.87 | 1.49 | 0.03 | 0.99 | |||||||||||||||||
Total from investment operations | 0.89 | (5.60 | ) | 1.04 | 1.62 | 0.16 | 1.10 | |||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income | (0.16 | ) | (0.19 | ) | (0.13 | ) | (0.12 | ) | (0.09 | ) | (0.07 | ) | ||||||||||||
Net realized gains | — | (0.96 | ) | (0.13 | ) | — | — | — | ||||||||||||||||
Total distributions | (0.16 | ) | (1.15 | ) | (0.26 | ) | (0.12 | ) | (0.09 | ) | (0.07 | ) | ||||||||||||
Net asset value, end of period | $ | 11.23 | $ | 10.50 | $ | 17.25 | $ | 16.47 | $ | 14.97 | $ | 14.90 | ||||||||||||
Total returnc | 8.48% | (34.53)% | 6.23% | 10.90% | 1.06% | 7.93% | ||||||||||||||||||
Ratios to average net assetsd | ||||||||||||||||||||||||
Expensese | 1.05% | 1.02% | 0.99% | 1.01% | 1.01% | 1.04% | ||||||||||||||||||
Net investment income | 0.99% | 0.94% | 0.96% | 0.86% | 0.89% | 0.74% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 335,215 | $ | 328,597 | $ | 642,351 | $ | 636,592 | $ | 510,395 | $ | 340,465 | ||||||||||||
Portfolio turnover rate | 49.61% | 66.04% | 50.67% | 50.97% | 39.44% | 38.48% | ||||||||||||||||||
aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.
bBased on average daily shares outstanding.
cTotal return does not include any fees, charges or expenses imposed by the variable annuity and life insurance contracts for which the Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle. Total return is not annualized for periods less than one year.
dRatios are annualized for periods less than one year.
eBenefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
FLG-9
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Franklin Large Cap Growth Securities Fund
| Class 4 | Six Months Ended June 30, 2009 (unaudited) | Period Ended December 31, 2008a | ||||||
Per share operating performance | ||||||||
(for a share outstanding throughout the period) | ||||||||
Net asset value, beginning of period | $ | 10.62 | $ | 16.05 | ||||
Income from investment operationsb: | ||||||||
Net investment incomec | 0.06 | 0.11 | ||||||
Net realized and unrealized gains (losses) | 0.84 | (4.34 | ) | |||||
Total from investment operations | 0.90 | (4.23 | ) | |||||
Less distributions from: | ||||||||
Net investment income | (0.16 | ) | (0.24 | ) | ||||
Net realized gains | — | (0.96 | ) | |||||
Total distributions | (0.16 | ) | (1.20 | ) | ||||
Net asset value, end of period | $ | 11.36 | $ | 10.62 | ||||
Total returnd | 8.48% | (28.68)% | ||||||
Ratios to average net assetse | ||||||||
Expensesf | 1.15% | 1.12% | ||||||
Net investment income | 0.89% | 0.84% | ||||||
Supplemental data | ||||||||
Net assets, end of period (000’s) | $ | 4 | $ | 3 | ||||
Portfolio turnover rate | 49.61% | 66.04% | ||||||
aFor the period February 29, 2008 (effective date) to December 31, 2008.
bThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.
cBased on average daily shares outstanding.
dTotal return does not include any fees, charges or expenses imposed by the variable annuity and life insurance contracts for which the Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle. Total return is not annualized for periods less than one year.
eRatios are annualized for periods less than one year.
fBenefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
FLG-10
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited)
| Franklin Large Cap Growth Securities Fund | Country | Shares | Value | ||||
Common Stocks 95.0% | |||||||
Consumer Discretionary 1.4% | |||||||
Burger King Holdings Inc. | United States | 188,100 | $ | 3,248,488 | |||
CBS Corp., B | United States | 325,900 | 2,255,228 | ||||
| 5,503,716 | |||||||
Consumer Staples 13.6% | |||||||
Altria Group Inc. | United States | 130,000 | 2,130,700 | ||||
CVS Caremark Corp. | United States | 232,900 | 7,422,523 | ||||
Diageo PLC, ADR | United Kingdom | 109,200 | 6,251,700 | ||||
PepsiCo Inc. | United States | 86,600 | 4,759,536 | ||||
Philip Morris International Inc. | United States | 141,600 | 6,176,592 | ||||
The Procter & Gamble Co. | United States | 94,200 | 4,813,620 | ||||
Safeway Inc. | United States | 167,600 | 3,414,012 | ||||
Wal-Mart Stores Inc. | United States | 226,400 | 10,966,816 | ||||
Walgreen Co. | United States | 223,354 | 6,566,607 | ||||
| 52,502,106 | |||||||
Energy 9.7% | |||||||
ConocoPhillips | United States | 154,200 | 6,485,652 | ||||
Devon Energy Corp. | United States | 78,000 | 4,251,000 | ||||
Exxon Mobil Corp. | United States | 199,600 | 13,954,036 | ||||
Marathon Oil Corp. | United States | 224,200 | 6,755,146 | ||||
aNational Oilwell Varco Inc. | United States | 68,700 | 2,243,742 | ||||
Schlumberger Ltd. | United States | 73,900 | 3,998,729 | ||||
| 37,688,305 | |||||||
Financials 9.7% | |||||||
The Allstate Corp. | United States | 178,109 | 4,345,860 | ||||
aBerkshire Hathaway Inc., B | United States | 1,500 | 4,343,595 | ||||
Invesco Ltd. | United States | 186,100 | 3,316,302 | ||||
JPMorgan Chase & Co. | United States | 224,140 | 7,645,415 | ||||
State Street Corp. | United States | 96,100 | 4,535,920 | ||||
T. Rowe Price Group Inc. | United States | 64,600 | 2,691,882 | ||||
U.S. Bancorp | United States | 262,527 | 4,704,484 | ||||
Wells Fargo & Co. | United States | 236,100 | 5,727,786 | ||||
| 37,311,244 | |||||||
Health Care 24.7% | |||||||
Abbott Laboratories | United States | 176,690 | 8,311,498 | ||||
Aetna Inc. | United States | 120,400 | 3,016,020 | ||||
aAmgen Inc. | United States | 58,000 | 3,070,520 | ||||
Baxter International Inc. | United States | 39,400 | 2,086,624 | ||||
aCelgene Corp. | United States | 95,500 | 4,568,720 | ||||
aCovance Inc. | United States | 62,600 | 3,079,920 | ||||
aExpress Scripts Inc. | United States | 59,400 | 4,083,750 | ||||
aGenzyme Corp. | United States | 70,800 | 3,941,436 | ||||
aGilead Sciences Inc. | United States | 83,600 | 3,915,824 | ||||
Johnson & Johnson | United States | 130,100 | 7,389,680 | ||||
Medtronic Inc. | United States | 207,100 | 7,225,719 | ||||
Merck & Co. Inc. | United States | 89,400 | 2,499,624 | ||||
aMyriad Genetics Inc. | United States | 90,000 | 3,208,500 | ||||
Pharmaceutical Product Development Inc. | United States | 128,820 | 2,991,200 | ||||
Roche Holding AG, ADR | Switzerland | 201,600 | 6,876,576 | ||||
Schering-Plough Corp. | United States | 662,200 | 16,634,464 | ||||
Teva Pharmaceutical Industries Ltd., ADR | Israel | 188,900 | 9,320,326 | ||||
FLG-11
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Franklin Large Cap Growth Securities Fund | Country | Shares | Value | ||||
Common Stocks (continued) | |||||||
Health Care (continued) | |||||||
aWaters Corp. | United States | 66,600 | $ | 3,427,902 | |||
| 95,648,303 | |||||||
Industrials 5.3% | |||||||
The Boeing Co. | United States | 38,700 | 1,644,750 | ||||
FedEx Corp. | United States | 53,900 | 2,997,918 | ||||
Flowserve Corp. | United States | 32,860 | 2,293,957 | ||||
General Electric Co. | United States | 320,700 | 3,758,604 | ||||
Pitney Bowes Inc. | United States | 168,800 | 3,701,784 | ||||
Precision Castparts Corp. | United States | 37,400 | 2,731,322 | ||||
United Technologies Corp. | United States | 67,100 | 3,486,516 | ||||
| 20,614,851 | |||||||
Information Technology 20.8% | |||||||
aAgilent Technologies Inc. | United States | 239,900 | 4,872,369 | ||||
aApple Inc. | United States | 30,200 | 4,301,386 | ||||
aCisco Systems Inc. | United States | 305,300 | 5,690,792 | ||||
aDell Inc. | United States | 493,500 | 6,775,755 | ||||
aEMC Corp. | United States | 234,800 | 3,075,880 | ||||
aFLIR Systems Inc. | United States | 96,200 | 2,170,272 | ||||
aGoogle Inc., A | United States | 11,900 | 5,016,921 | ||||
Hewlett-Packard Co. | United States | 180,600 | 6,980,190 | ||||
Intel Corp. | United States | 327,000 | 5,411,850 | ||||
International Business Machines Corp. | United States | 123,700 | 12,916,754 | ||||
LogMeIn Inc. | United States | 23,300 | 372,800 | ||||
Microsoft Corp. | United States | 468,800 | 11,143,376 | ||||
aNetApp Inc. | United States | 219,800 | 4,334,456 | ||||
QUALCOMM Inc. | United States | 158,800 | 7,177,760 | ||||
| 80,240,561 | |||||||
Materials 1.4% | |||||||
Gold Fields Ltd., ADR | South Africa | 187,400 | 2,258,170 | ||||
aHarmony Gold Mining Co. Ltd., ADR | South Africa | 98,329 | 1,014,755 | ||||
Weyerhaeuser Co. | United States | 73,700 | 2,242,691 | ||||
| 5,515,616 | |||||||
Telecommunication Services 2.5% | |||||||
AT&T Inc. | United States | 292,600 | 7,268,184 | ||||
aNII Holdings Inc. | United States | 124,550 | 2,375,168 | ||||
| 9,643,352 | |||||||
Utilities 5.9% | |||||||
Allegheny Energy Inc. | United States | 196,200 | 5,032,530 | ||||
Constellation Energy Group | United States | 162,950 | 4,331,211 | ||||
Exelon Corp. | United States | 166,980 | 8,551,046 | ||||
Great Plains Energy Inc. | United States | 47,400 | 737,070 | ||||
NV Energy Inc. | United States | 190,600 | 2,056,574 | ||||
Public Service Enterprise Group Inc. | United States | 60,100 | 1,961,063 | ||||
| 22,669,494 | |||||||
Total Common Stocks (Cost $329,628,354) | 367,337,548 | ||||||
FLG-12
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Franklin Large Cap Growth Securities Fund | Country | Shares | Value | ||||||
Convertible Preferred Stocks (Cost $1,726,851) 0.7% | |||||||||
Financials 0.7% | |||||||||
Bank of America Corp., 7.25%, cvt. pfd., L | United States | 2,958 | $ | 2,472,977 | |||||
Total Investments before Short Term Investments | 369,810,525 | ||||||||
| Principal Amount | |||||||||
Short Term Investments (Cost $22,233,109) 5.7% | |||||||||
Repurchase Agreements 5.7% | |||||||||
bJoint Repurchase Agreement, 0.023%, 7/01/09 (Maturity Value $22,233,123) | United States | $ | 22,233,109 | 22,233,109 | |||||
Banc of America Securities LLC (Maturity Value $1,916,718) Barclays Capital Inc. (Maturity Value $1,756,861) BNP Paribas Securities Corp. (Maturity Value $6,388,688) Credit Suisse Securities (USA) LLC (Maturity Value $6,388,688) Deutsche Bank Securities Inc. (Maturity Value $2,268,222) HSBC Securities (USA) Inc. (Maturity Value $1,916,718) UBS Securities LLC (Maturity Value $1,597,228) | |||||||||
Collateralized by U.S. Government Agency Securities, 0.58% - 7.25%, 1/15/10 - 6/27/16; | |||||||||
Total Investments (Cost $353,588,314) 101.4% | 392,043,634 | ||||||||
Other Assets, less Liabilities (1.4)% | (5,324,065 | ) | |||||||
Net Assets 100.0% | $ | 386,719,569 | |||||||
See Abbreviations on page FLG-21.
aNon-income producing.
bSee Note 1(c) regarding joint repurchase agreement.
cThe security is traded on a discount basis with no stated coupon rate.
The accompanying notes are an integral part of these financial statements.
FLG-13
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements
Statement of Assets and Liabilities
June 30, 2009 (unaudited)
| Franklin Large Cap Growth Securities Fund | ||||
Assets: | ||||
Investments in securities: | ||||
Cost - Unaffiliated issuers | $ | 331,355,205 | ||
Cost - Repurchase agreements | 22,233,109 | |||
Total cost of investments | $ | 353,588,314 | ||
Value - Unaffiliated issuers | $ | 369,810,525 | ||
Value - Repurchase agreements | 22,233,109 | |||
Total value of investments | 392,043,634 | |||
Receivables: | ||||
Investment securities sold | 1,829,121 | |||
Capital shares sold | 42,283 | |||
Dividends | 393,325 | |||
Other assets | 5,446 | |||
Total assets | 394,313,809 | |||
Liabilities: | ||||
Payables: | ||||
Investment securities purchased | 6,074,752 | |||
Capital shares redeemed | 1,037,929 | |||
Affiliates | 379,307 | |||
Accrued expenses and other liabilities | 102,252 | |||
Total liabilities | 7,594,240 | |||
Net assets, at value | $ | 386,719,569 | ||
Net assets consist of: | ||||
Paid-in capital | $ | 499,911,387 | ||
Undistributed net investment income | 2,070,851 | |||
Net unrealized appreciation (depreciation) | 38,455,320 | |||
Accumulated net realized gain (loss) | (153,717,989 | ) | ||
Net assets, at value | $ | 386,719,569 | ||
Class 1: | ||||
Net assets, at value | $ | 51,501,198 | ||
Shares outstanding | 4,526,021 | |||
Net asset value and maximum offering price per share | $ | 11.38 | ||
Class 2: | ||||
Net assets, at value | $ | 335,214,827 | ||
Shares outstanding | 29,841,027 | |||
Net asset value and maximum offering price per share | $ | 11.23 | ||
Class 4: | ||||
Net assets, at value | $ | 3,544 | ||
Shares outstanding | 312 | |||
Net asset value and maximum offering price per share | $ | 11.36 | ||
The accompanying notes are an integral part of these financial statements.
FLG-14
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Operations
for the six months ended June 30, 2009 (unaudited)
| Franklin Large Cap Growth Securities Fund | ||||
Investment income: | ||||
Dividends | $ | 3,623,480 | ||
Interest | 16,796 | |||
Total investment income | 3,640,276 | |||
Expenses: | ||||
Management fees (Note 3a) | 1,341,587 | |||
Distribution fees: (Note 3c) | ||||
Class 2 | 387,051 | |||
Class 4 | 6 | |||
Unaffiliated transfer agent fees | 370 | |||
Custodian fees (Note 4) | 5,447 | |||
Reports to shareholders | 53,742 | |||
Professional fees | 15,079 | |||
Trustees’ fees and expenses | 1,633 | |||
Other | 11,620 | |||
Total expenses | 1,816,535 | |||
Expense reductions (Note 4) | (54 | ) | ||
Net expenses | 1,816,481 | |||
Net investment income | 1,823,795 | |||
Realized and unrealized gains (losses): | ||||
Net realized gain (loss) from: | ||||
Investments | (67,173,348 | ) | ||
Foreign currency transactions | 1,623 | |||
Net realized gain (loss) | (67,171,725 | ) | ||
Net change in unrealized appreciation (depreciation) on investments | 93,964,332 | |||
Net realized and unrealized gain (loss) | 26,792,607 | |||
Net increase (decrease) in net assets resulting from operations | $ | 28,616,402 | ||
The accompanying notes are an integral part of these financial statements.
FLG-15
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statements of Changes in Net Assets
| Franklin Large Cap Growth Securities Fund | ||||||||
| Six Months Ended June 30, 2009 (unaudited) | Year Ended December 31, 2008 | |||||||
Increase (decrease) in net assets: | ||||||||
Operations: | ||||||||
Net investment income | $ | 1,823,795 | $ | 5,551,250 | ||||
Net realized gain (loss) from investments and foreign currency transactions | (67,171,725 | ) | (83,485,431 | ) | ||||
Net change in unrealized appreciation (depreciation) on investments | 93,964,332 | (151,830,475 | ) | |||||
Net increase (decrease) in net assets resulting from operations | 28,616,402 | (229,764,656 | ) | |||||
Distributions to shareholders from: | ||||||||
Net investment income: | ||||||||
Class 1 | (896,286 | ) | (1,183,538 | ) | ||||
Class 2 | (4,724,247 | ) | (6,484,690 | ) | ||||
Class 4 | (50 | ) | (73 | ) | ||||
Net realized gains: | ||||||||
Class 1 | — | (4,817,075 | ) | |||||
Class 2 | — | (33,345,360 | ) | |||||
Class 4 | — | (298 | ) | |||||
Total distributions to shareholders | (5,620,583 | ) | (45,831,034 | ) | ||||
Capital share transactions: (Note 2) | ||||||||
Class 1 | (3,128,184 | ) | (9,557,762 | ) | ||||
Class 2 | (13,399,615 | ) | (73,871,480 | ) | ||||
Class 4 | — | 5,000 | ||||||
Total capital share transactions | (16,527,799 | ) | (83,424,242 | ) | ||||
Net increase (decrease) in net assets | 6,468,020 | (359,019,932 | ) | |||||
Net assets: | ||||||||
Beginning of period | 380,251,549 | 739,271,481 | ||||||
End of period | $ | 386,719,569 | $ | 380,251,549 | ||||
Undistributed net investment income included in net assets: | ||||||||
End of period | $ | 2,070,851 | $ | 5,867,639 | ||||
The accompanying notes are an integral part of these financial statements.
FLG-16
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited)
Franklin Large Cap Growth Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Templeton Variable Insurance Products Trust (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end investment company, consisting of twenty-two separate funds. The Franklin Large Cap Growth Securities Fund (Fund) is included in this report. The financial statements of the remaining funds in the Trust are presented separately. Shares of the Fund are sold only to insurance company separate accounts to fund the benefits of variable life insurance policies or variable annuity contracts. The Fund offers three classes of shares: Class 1, Class 2, and Class 4. Each class of shares differs by its distribution fees, voting rights on matters affecting a single class and its exchange privilege.
The following summarizes the Fund’s significant accounting policies.
a. Security Valuation
Equity and other securities listed on a securities exchange or on the NASDAQ National Market System are valued at the last quoted sale price or the official closing price of the day, respectively. Over-the-counter securities and listed securities for which there is no reported sale are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. Certain equity securities are valued based upon fundamental characteristics or relationships to similar securities.
The Fund has procedures to determine the fair value of individual securities and other assets for which market prices are not readily available or which may not be reliably priced. Methods for valuing these securities may include: fundamental analysis based upon the underlying investment book value, anticipated future cash flows, market changes in comparable or similar securities, matrix pricing, discounts from market prices of similar securities, or discounts applied due to the nature and duration of restrictions on the disposition of the securities. Due to the inherent uncertainty of valuations of such securities, the fair values may differ significantly from the values that would have been used had a ready market for such investments existed. Occasionally, events occur between the time at which trading in a security is completed and the close of the NYSE that might call into question the availability (including the reliability) of the value of a portfolio security held by the Fund. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services. All security valuation procedures are approved by the Fund’s Board of Trustees.
b. Foreign Currency Translation
Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. Purchases and sales of securities, income and expense items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. Occasionally, events may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the Fund’s Board of Trustees.
The Fund does not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments on the Statement of Operations.
Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period.
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Large Cap Growth Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
c. Joint Repurchase Agreement
The Fund may enter into a joint repurchase agreement whereby its uninvested cash balance is deposited into a joint cash account with other funds managed by the investment manager or an affiliate of the investment manager and is used to invest in one or more repurchase agreements. The value and face amount of the joint repurchase agreement are allocated to the funds based on their pro-rata interest. A repurchase agreement is accounted for as a loan by the Fund to the seller, collateralized by securities which are delivered to the Fund’s custodian. The market value, including accrued interest, of the initial collateralization is required to be at least 102% of the dollar amount invested by the funds, with the value of the underlying securities marked to market daily to maintain coverage of at least 100%. The joint repurchase agreement held by the Fund at period end had been entered into on June 30, 2009. The joint repurchase agreement is valued at cost.
d. Income Taxes
No provision has been made for U.S. income taxes because it is the Fund’s policy to qualify as a regulated investment company under the Internal Revenue Code and to distribute to shareholders substantially all of its taxable income and net realized gains.
The Fund has reviewed the tax positions, taken on federal income tax returns, for each of the three open tax years and as of June 30, 2009, and has determined that no provision for income tax is required in the Fund’s financial statements.
e. Security Transactions, Investment Income, Expenses and Distributions
Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Dividend income is recorded on the ex-dividend date. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with accounting principles generally accepted in the United States of America. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods.
Common expenses incurred by the Trust are allocated among the funds based on the ratio of net assets of each fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense.
Realized and unrealized gains and losses and net investment income, not including class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions, by class, are generally due to differences in class specific expenses.
f. Accounting Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
g. Guarantees and Indemnifications
Under the Trust’s organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, on behalf of the Fund, enters into contracts with service providers that contain general indemnification clauses. The Trust’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote.
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Large Cap Growth Securities Fund
2. SHARES OF BENEFICIAL INTEREST
At June 30, 2009, there were an unlimited number of shares authorized (without par value). Transactions in the Fund’s shares were as follows:
| Six Months Ended June 30, 2009 | Year Ended December 31, 2008a | |||||||||||||
| Class 1 Shares: | Shares | Amount | Shares | Amount | ||||||||||
Shares sold | 46,303 | $ | 498,465 | 42,013 | $ | 581,393 | ||||||||
Shares issued in reinvestment of distributions | 79,458 | 896,286 | 390,665 | 6,000,613 | ||||||||||
Shares redeemed | (446,527 | ) | (4,522,935 | ) | (1,122,371 | ) | (16,139,768 | ) | ||||||
Net increase (decrease) | (320,766 | ) | $ | (3,128,184 | ) | (689,693 | ) | $ | (9,557,762 | ) | ||||
Class 2 Shares: | ||||||||||||||
Shares sold | 1,099,923 | $ | 11,400,519 | 2,042,228 | $ | 30,356,073 | ||||||||
Shares issued in reinvestment of distributions | 424,080 | 4,724,247 | 2,630,783 | 39,830,049 | ||||||||||
Shares redeemed | (2,987,513 | ) | (29,524,381 | ) | (10,607,967 | ) | (144,057,602 | ) | ||||||
Net increase (decrease) | (1,463,510 | ) | $ | (13,399,615 | ) | (5,934,956 | ) | $ | (73,871,480 | ) | ||||
Class 4 Shares: | ||||||||||||||
Shares sold | — | $ | — | 312 | $ | 5,000 | ||||||||
| aFor | the period February 29, 2008 (effective date) to December 31, 2008 for Class 4. |
3. TRANSACTIONS WITH AFFILIATES
Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Trust are also officers and/or directors of the following subsidiaries:
| Subsidiary | Affiliation | |
Franklin Advisers, Inc. (Advisers) | Investment manager | |
Franklin Templeton Services, LLC (FT Services) | Administrative manager | |
Franklin Templeton Distributors, Inc. (Distributors) | Principal underwriter | |
Franklin Templeton Investor Services, LLC (Investor Services) | Transfer agent |
a. Management Fees
The Fund pays an investment management fee to Advisers based on the average daily net assets of the Fund as follows:
| Annualized Fee Rate | Net Assets | |
| 0.750% | Up to and including $500 million | |
| 0.625% | over $500 million, up to and including $1 billion | |
| 0.500% | In excess of $1 billion |
b. Administrative Fees
Under an agreement with Advisers, FT Services provides administrative services to the Fund. The fee is paid by Advisers based on average daily net assets, and is not an additional expense of the Fund.
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Large Cap Growth Securities Fund
3. TRANSACTIONS WITH AFFILIATES (continued)
c. Distribution Fees
The Fund’s Board of Trustees has adopted distribution plans for Class 2 and Class 4 shares pursuant to Rule 12b-1 under the 1940 Act. Under the Fund’s compensation distribution plans, the Fund pays Distributors for costs incurred in connection with the servicing, sale and distribution of the Fund’s shares up to 0.35% per year of its average daily net assets of each class. The Board of Trustees has agreed to limit the current rate to 0.25% per year for Class 2.
d. Transfer Agent Fees
Investor Services, under terms of an agreement, performs shareholder servicing for the Fund and is not paid by the Fund for the services.
4. EXPENSE OFFSET ARRANGEMENT
The Fund has entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Fund’s custodian expenses. During the period ended June 30, 2009, the custodian fees were reduced as noted in the Statement of Operations.
5. INCOME TAXES
For tax purposes, capital losses may be carried over to offset future capital gains, if any. At December 31, 2008, the Fund had tax basis capital losses of $67,544,988 expiring in 2016.
For tax purposes, realized capital losses and realized currency losses occurring subsequent to October 31, may be deferred and treated as occurring on the first day of the following fiscal year. At December 31, 2008, the Fund deferred realized capital losses and realized currency losses of $12,505,197 and $105, respectively.
At June 30, 2009, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
Cost of investments | $ | 363,899,540 | ||
Unrealized appreciation | $ | 50,592,329 | ||
Unrealized depreciation | (22,448,235 | ) | ||
Net unrealized appreciation (depreciation) | $ | 28,144,094 | ||
Net investment income differs for financial statement and tax purposes primarily due to differing treatment of foreign currency transactions.
Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatments of wash sales and foreign currency transactions.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the period ended June 30, 2009, aggregated $169,372,259 and $184,916,328, respectively.
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Large Cap Growth Securities Fund
7. CREDIT FACILITY
Effective January 23, 2009, the Fund, together with other U.S. registered and foreign investment funds managed by Franklin Templeton Investments (individually, “Borrower”; collectively “Borrowers”), entered into a joint syndicated senior unsecured credit facility totaling $725 million (Global Credit Facility) to provide a source of funds to the Borrowers for temporary and emergency purposes, including the ability to meet future unanticipated or unusually large redemption requests.
Under the terms of the Global Credit Facility, the Fund shall, in addition to interest charged on any borrowings made by the Fund and other costs incurred by the Fund, pay its share of fees and expenses incurred in connection with the implementation and maintenance of the Global Credit Facility, based upon its relative share of the aggregate net assets of all of the Borrowers, including an annual commitment fee based upon the unused portion of the Global Credit Facility. During the period, the Fund incurred commitment fees of $419 of its pro rata portion of the Global Credit Facility, which is reflected in other expenses on the Statement of Operations. During the period ended June 30, 2009, the Fund did not utilize the Global Credit Facility.
8. FAIR VALUE MEASUREMENTS
Financial Accounting Standards Board (FASB) Statement No. 157, “Fair Value Measurement” (SFAS 157) establishes a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Fund’s own market assumptions (unobservable inputs). These inputs are used in determining the value of the Fund’s investments and are summarized in the following fair value hierarchy:
| • | Level 1 – quoted prices in active markets for identical securities |
| • | Level 2 – other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speed, credit risk, etc.) |
| • | Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments) |
The inputs or methodology used for valuing securities are not an indication of the risk associated with investing in those securities.
The following is a summary of the inputs used as of June 30, 2009, in valuing the Fund’s assets carried at fair value:
| Level 1 | Level 2 | Level 3 | Total | |||||||||
Assets: | ||||||||||||
Investments in Securities: | ||||||||||||
Equity Investmentsa | $ | 369,810,525 | $ | — | $ | — | $ | 369,810,525 | ||||
Short Term Investments | — | 22,233,109 | — | 22,233,109 | ||||||||
Total Investments in Securities | $ | 369,810,525 | $ | 22,233,109 | $ | — | $ | 392,043,634 | ||||
| aIncludes | common and convertible preferred stock as well as other equity investments. For detailed industry descriptions, see the accompanying Statement of Investments. |
9. SUBSEQUENT EVENTS
Management has evaluated subsequent events through August 7, 2009 and determined that no events have occurred that require disclosure.
ABBREVIATIONS
Selected Portfolio
ADR - American Depository Receipt
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FRANKLIN RISING DIVIDENDS SECURITIES FUND
This semiannual report for Franklin Rising Dividends Securities Fund covers the period ended June 30, 2009.
Performance Summary as of 6/30/09
Franklin Rising Dividends Securities Fund – Class 1 had a -0.56% total return for the six-month period ended 6/30/09.
Performance reflects the Fund’s Class 1 operating expenses, but does not include any contract fees, expenses or sales charges. If they had been included, performance would be lower. These charges and deductions, particularly for variable life policies, can have a significant effect on contract values and insurance benefits. See the contract prospectus for a complete description of these expenses, including sales charges.
Franklin Rising Dividends Securities Fund – Class 1
Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares.
Current performance may differ from figures shown.
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Fund Goal and Main Investments: Franklin Rising Dividends Securities Fund seeks long-term capital appreciation, with preservation of capital as an important consideration. The Fund normally invests at least 80% of its net assets in investments of companies that have paid rising dividends, and normally invests predominantly in equity securities.
Performance Overview
You can find the Fund’s six-month total return in the Performance Summary. The Fund underperformed its benchmark, the Standard & Poor’s 500 Index (S&P 500), which rose 3.16% for the same period.1 Please note the Fund employs a bottom-up stock selection process, and the managers invest in securities without regard to benchmark comparisons.
Economic and Market Overview
During the six-month period ended June 30, 2009, the U.S. economy and stock markets seemed to stabilize after signs appeared that the recession’s severity had eased. Strains on the banking system and credit markets that surfaced in 2008 improved in 2009’s first half with the help of federal aid and tighter regulations. Although home sales fell for most of the period, they edged higher toward period-end. The pace of contraction in manufacturing activity decelerated. However, jobless claims mounted and the unemployment rate rose from 7.2% at the beginning of the year to 9.5% in June 2009, its highest rate since August 1983.2 Retail sales shrank from year-ago levels, and in February The Conference Board’s Consumer Confidence Index dropped to the lowest level since it began in 1967 before rebounding in the second quarter on improved expectations. Reflecting a broad-based contraction in consumer spending, falling corporate profits, slowing exports and reduced government spending, economic growth as measured by gross domestic product (GDP) fell at annualized rates of 6.4% and an estimated 1.0% in the first and second quarters of 2009.
Although the price of oil rose from $44 per barrel at the beginning of the period to $70 by period-end on speculation that the downturn was abating, it was still off more than 50% from its July 2008 record high.3 Prices for most other commodities followed similar trends. Partially as a result of reduced consumer spending and the late-2008 downward
1. Source: © 2009 Morningstar. One cannot invest directly in an index, nor is an index representative of the Fund’s portfolio. Please see Index Descriptions following the Fund Summaries.
2. Source: Bureau of Labor Statistics.
3. Source: New York Mercantile Exchange.
Fund Risks: The Fund’s investments in stocks may offer the potential for long-term gains but can be subject to short-term price fluctuations. Smaller and midsize company securities can increase the risk of greater price fluctuations, particularly over the short term. By having significant investments in particular sectors from time to time, such as financial services, the Fund may be at greater risk of adverse developments in a sector than a fund that invests more broadly. The Fund’s prospectus also includes a description of the main investment risks.
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trajectory for energy prices, deflationary pressures surfaced. June’s inflation rate, as measured by the Consumer Price Index, was an annualized -1.4%, representing the steepest yearly decline in the cost of living in nearly six decades.2 Core inflation, which excludes food and energy costs, rose at a 1.7% annualized rate, which was within the Federal Reserve Board’s (Fed’s) informal target range of 1.5%–2.0%.2
A deepening recession and decelerating inflation prompted Washington policymakers to keep interest rates low and enact stimulus plans — including income tax cuts, aid to ailing state governments and funding for transportation infrastructure, school construction and high-tech projects. During the period under review, the Fed kept the federal funds target rate in a range of 0% to 0.25% and said the “pace of economic contraction is slowing” but the financial system had not yet returned to normal. The government also introduced various new measures to shore up financial markets and enhance market liquidity, proposed a sweeping financial regulatory system overhaul, and outlined details of its Public-Private Investment Program, with an objective of removing devalued real estate-related assets from banks’ balance sheets.
Most stocks suffered major losses through early March as investors worried about an uncertain future. Stocks then recovered somewhat from 12-year lows as investors perceived many bargains among the bear market fallout and data indicated the economy’s pace of contraction was moderating. By June, however, fresh investor concerns about the economy and stock valuations reemerged and dampened the rally’s momentum. For the six months under review, the blue chip stocks of the Dow Jones Industrial Average declined 2.01%, the broader S&P 500 rose 3.16%, and the technology-heavy NASDAQ Composite Index increased 16.99%.1 Information technology, consumer discretionary and materials stocks posted the largest gains while industrials, telecommunication services and financials stocks generally fell in value.
Investment Strategy
We are a research-driven, fundamental investment adviser, pursuing a disciplined value-oriented strategy. As bottom-up investors concentrating primarily on individual securities, we seek fundamentally sound companies that we believe meet our screening criteria, which include consistent, substantial dividend increases; reinvested earnings; and strong balance sheets. We attempt to acquire such stocks at attractive prices, often when they are out of favor with other investors. In
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following these criteria, we do not necessarily focus on companies whose securities pay a high dividend but rather on companies that consistently raise their dividends.
Manager’s Discussion
During the reporting period, three holdings that detracted from Fund performance were Procter & Gamble, Aflac and General Electric (GE). Several issues caused weakness in personal products manufacturer Proctor & Gamble’s stock price including the strengthening dollar, possibly weakening demand from emerging markets, and concern that private label products would gain market share. Shares of supplemental health insurer Aflac and diversified manufacturing and financial services firm GE fell largely due to investors’ concerns about the underlying value of certain financial assets held by the companies. These concerns led to fears that the companies were not adequately capitalized, and their stock prices fell sharply given a perceived potential for the companies to dilute shares to raise capital.
Significant contributors to the Fund’s return included Praxair, Family Dollar Stores and Carlisle. Industrial gases company Praxair reported better-than-expected earnings and increased its dividend during the period. The company has 16 consecutive years of dividend increases. Discount retailer Family Dollar Stores experienced higher revenues and earnings as consumers became increasingly cost conscious. The company has increased its dividend for 33 years. Diversified global manufacturer Carlisle benefited during the period from expectations for a better outlook amid some improving economic data. Carlisle has 32 years of dividend increases.
We initiated positions in Abbott Laboratories, Air Products & Chemicals, International Business Machines (IBM) and Stryker during the reporting period. Health care products manufacturer Abbott Laboratories has 37 consecutive years of dividend increases. Air Products & Chemicals, which offers specialty gases and related products and services, has 27 years of dividend increases. Technology products manufacturer IBM has raised its dividend for 14 years. Stryker, a medical technology company specializing in orthopedic implants and surgical equipment, has increased its dividend for 17 years. We made small additions to six positions during the period. We liquidated one position during the period: PNC Financial Services Group. We reduced positions in Carlisle, GE and State Street and made smaller reductions to 20 other positions.
Top 10 Holdings
Franklin Rising Dividends Securities Fund 6/30/09
| Company Sector/Industry | % of Total Net Assets | |
| Becton Dickinson and Co. | 5.5% | |
| Health Care Equipment & Services | ||
| United Technologies Corp. | 5.4% | |
| Aerospace & Defense | ||
| Roper Industries Inc. | 5.3% | |
| Electrical Equipment | ||
| Praxair Inc. | 5.3% | |
| Materials | ||
| The Procter & Gamble Co. | 5.0% | |
| Household & Personal Products | ||
| Wal-Mart Stores Inc. | 5.0% | |
| Food & Staples Retailing | ||
| Family Dollar Stores Inc. | 4.4% | |
| Retailing | ||
| McCormick & Co. Inc. | 4.0% | |
| Food, Beverage & Tobacco | ||
| Dover Corp. | 4.0% | |
| Machinery | ||
| Erie Indemnity Co., A | 3.9% | |
| Insurance | ||
The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund’s Statement of Investments.
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Our 10 largest positions on June 30, 2009, represented 47.8% of the Fund’s total net assets. It is interesting to note how these 10 companies would, in aggregate, respond to the Fund’s screening criteria based on a simple average of statistical measures. On average, these 10 companies have raised their dividends 31 years in a row and by 262% in the past 10 years. Their most recent year-over-year dividend increases averaged 12.6% with a yield of 2.6% on June 30, 2009, and a dividend payout ratio of 40%, based on estimates of calendar year 2009 operating earnings. The average price/earnings ratio was 15.1 times calendar year 2009 estimates versus 15.8 for that of the unmanaged S&P 500.
Thank you for your participation in Franklin Rising Dividends Securities Fund. We look forward to serving your future investment needs.
The foregoing information reflects our analysis, opinions and portfolio holdings as of June 30, 2009, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.
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Fund Expenses
As an investor in a variable insurance contract (Contract) that indirectly provides for investment in an underlying mutual fund, you can incur transaction and/or ongoing expenses at both the Fund level and the Contract level.
| • | Transaction expenses can include sales charges (loads) on purchases, surrender fees, transfer fees and premium taxes. |
| • | Ongoing expenses can include management fees, distribution and service (12b-1) fees, contract fees, annual maintenance fees, mortality and expense risk fees and other fees and expenses. All mutual funds and Contracts have some types of ongoing expenses. |
The expenses shown in the table are meant to highlight ongoing expenses at the Fund level only and do not include ongoing expenses at the Contract level, or transaction expenses at either the Fund or Contract levels. While the Fund does not have transaction expenses, if the transaction and ongoing expenses at the Contract level were included, the expenses shown below would be higher. You should consult your Contract prospectus or disclosure document for more information.
The table shows Fund-level ongoing expenses and can help you understand these expenses and compare them with those of other mutual funds offered through the Contract. The table assumes a $1,000 investment held for the six months indicated. Please refer to the Fund prospectus for additional information on operating expenses.
Actual Fund Expenses
The first line (Actual) of the table provides actual account values and expenses. The “Ending Account Value” is derived from the Fund’s actual return, which includes the effect of ongoing Fund expenses, but does not include the effect of ongoing Contract expenses.
You can estimate the Fund-level expenses you incurred during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:
| 1. | Divide your account value by $1,000. |
If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6.
| 2. | Multiply the result by the number under the heading “Fund-Level Expenses Incurred During Period.” |
If Fund-Level Expenses Incurred During Period were $7.50, then 8.6 x $7.50 = $64.50.
In this illustration, the estimated expenses incurred this period at the Fund level are $64.50.
Franklin Rising Dividends Securities Fund – Class 1
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Hypothetical Example for Comparison with Other Mutual Funds
Information in the second line (Hypothetical) of the table can help you compare ongoing expenses of the Fund with those of other mutual funds offered through the Contract. This information may not be used to estimate the actual ending account balance or expenses you incurred during the period. The hypothetical “Ending Account Value” is based on the Fund’s actual expense ratio and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Fund-Level Expenses Incurred During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds offered through a Contract.
| Class 1 | Beginning Account Value 1/1/09 | Ending Account Value 6/30/09 | Fund-Level Expenses Incurred During Period* 1/1/09–6/30/09 | ||||||
Actual | $ | 1,000 | $ | 994.40 | $ | 3.21 | |||
Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,021.57 | $ | 3.26 | |||
*Expenses are calculated using the most recent six-month annualized expense ratio for the Fund’s Class 1 shares (0.65%), which does not include any ongoing expenses of the Contract for which the Fund is an investment option, multiplied by the average account value over the period, multiplied by 181/365 to reflect the one-half year period.
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Franklin Templeton Variable Insurance Products Trust
Financial Highlights
Franklin Rising Dividends Securities Fund
| Six Months Ended June 30, 2009 (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 1 | 2008 | 2007 | 2006 | 2005 | 2004 | |||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 13.96 | $ | 19.61 | $ | 20.88 | $ | 18.11 | $ | 17.75 | $ | 16.28 | ||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment income (loss)b | —c,d | 0.35 | 0.36 | 0.58 | 0.28 | 0.26 | ||||||||||||||||||
Net realized and unrealized gains (losses) | (0.08 | ) | (5.51 | ) | (0.80 | ) | 2.53 | 0.36 | 1.55 | |||||||||||||||
Total from investment operations | (0.08 | ) | (5.16 | ) | (0.44 | ) | 3.11 | 0.64 | 1.81 | |||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income | (0.25 | ) | (0.36 | ) | (0.53 | ) | (0.24 | ) | (0.18 | ) | (0.12 | ) | ||||||||||||
Net realized gains | — | (0.13 | ) | (0.30 | ) | (0.10 | ) | (0.10 | ) | (0.22 | ) | |||||||||||||
Total distributions | (0.25 | ) | (0.49 | ) | (0.83 | ) | (0.34 | ) | (0.28 | ) | (0.34 | ) | ||||||||||||
Net asset value, end of period | $ | 13.63 | $ | 13.96 | $ | 19.61 | $ | 20.88 | $ | 18.11 | $ | 17.75 | ||||||||||||
Total returne | (0.56)% | (26.94)% | (2.41)% | 17.43% | 3.68% | 11.25% | ||||||||||||||||||
Ratios to average net assetsf | ||||||||||||||||||||||||
Expenses | 0.65% | 0.61%g | 0.59%g | 0.61%g | 0.62%g | 0.69%g | ||||||||||||||||||
Net investment income (loss) | (0.09)% | c | 2.05% | 1.72% | 3.15% | 1.65% | 1.56% | |||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 127,790 | $ | 142,862 | $ | 235,946 | $ | 288,303 | $ | 292,223 | $ | 326,883 | ||||||||||||
Portfolio turnover rate | 11.24% | 5.39% | 3.29% | 6.19% | 2.26% | 2.78% | ||||||||||||||||||
aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.
bBased on average daily shares outstanding.
cNet investment income per share includes approximately $(0.15) per share as a return of capital adjustment to a previously recorded special dividend received by the Fund. Excluding this non-recurring amount, the ratio of net investment income to average net assets would have been 2.23%.
dAmount rounds to less than $0.01 per share.
eTotal return does not include any fees, charges or expenses imposed by the variable annuity and life insurance contracts for which the Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle. Total return is not annualized for periods less than one year.
fRatios are annualized for periods less than one year.
gBenefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
FRD-8
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Franklin Rising Dividends Securities Fund
| Six Months Ended June 30, 2009 (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 2 | 2008 | 2007 | 2006 | 2005 | 2004 | |||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 13.72 | $ | 19.27 | $ | 20.55 | $ | 17.84 | $ | 17.51 | $ | 16.09 | ||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment income (loss)b | (0.02 | )c | 0.31 | 0.30 | 0.56 | 0.24 | 0.22 | |||||||||||||||||
Net realized and unrealized gains (losses) | (0.08 | ) | (5.42 | ) | (0.79 | ) | 2.46 | 0.34 | 1.53 | |||||||||||||||
Total from investment operations | (0.10 | ) | (5.11 | ) | (0.49 | ) | 3.02 | 0.58 | 1.75 | |||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income | (0.20 | ) | (0.31 | ) | (0.49 | ) | (0.21 | ) | (0.15 | ) | (0.11 | ) | ||||||||||||
Net realized gains | — | (0.13 | ) | (0.30 | ) | (0.10 | ) | (0.10 | ) | (0.22 | ) | |||||||||||||
Total distributions | (0.20 | ) | (0.44 | ) | (0.79 | ) | (0.31 | ) | (0.25 | ) | (0.33 | ) | ||||||||||||
Net asset value, end of period | $ | 13.42 | $ | 13.72 | $ | 19.27 | $ | 20.55 | $ | 17.84 | $ | 17.51 | ||||||||||||
Total returnd | (0.71)% | (27.10)% | (2.69)% | 17.12% | 3.43% | 11.00% | ||||||||||||||||||
Ratios to average net assetse | ||||||||||||||||||||||||
Expenses | 0.90% | 0.86%f | 0.84%f | 0.86%f | 0.87%f | 0.94%f | ||||||||||||||||||
Net investment income (loss) | (0.34)% | c | 1.80% | 1.47% | 2.90% | 1.40% | 1.31% | |||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 1,213,936 | $ | 1,286,878 | $ | 2,079,366 | $ | 1,981,240 | $ | 1,423,827 | $ | 997,800 | ||||||||||||
Portfolio turnover rate | 11.24% | 5.39% | 3.29% | 6.19% | 2.26% | 2.78% | ||||||||||||||||||
aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.
bBased on average daily shares outstanding.
cNet investment income per share includes approximately $(0.15) per share as a return of capital adjustment to a previously recorded special dividend received by the Fund. Excluding this non-recurring amount, the ratio of net investment income to average net assets would have been 1.98%.
dTotal return does not include any fees, charges or expenses imposed by the variable annuity and life insurance contracts for which the Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle. Total return is not annualized for periods less than one year.
eRatios are annualized for periods less than one year.
fBenefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
FRD-9
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Franklin Rising Dividends Securities Fund
| Class 4 | Six Months Ended June 30, 2009 (unaudited) | Period Ended December 31, 2008a | ||||||
Per share operating performance | ||||||||
(for a share outstanding throughout the period) | ||||||||
Net asset value, beginning of period | $ | 13.92 | $ | 18.51 | ||||
Income from investment operationsb: | ||||||||
Net investment income (loss)c | (0.03 | )d | 0.26 | |||||
Net realized and unrealized gains (losses) | (0.08 | ) | (4.36 | ) | ||||
Total from investment operations | (0.11 | ) | (4.10 | ) | ||||
Less distributions from: | ||||||||
Net investment income | (0.20 | ) | (0.36 | ) | ||||
Net realized gains | — | (0.13 | ) | |||||
Total distributions | (0.20 | ) | (0.49 | ) | ||||
Net asset value, end of period | $ | 13.61 | $ | 13.92 | ||||
Total returne | (0.78)% | (22.82)% | ||||||
Ratios to average net assetsf | ||||||||
Expenses | 1.00% | 0.96%g | ||||||
Net investment income (loss) | (0.44)% | d | 1.70% | |||||
Supplemental data | ||||||||
Net assets, end of period (000’s) | $ | 4 | $ | 4 | ||||
Portfolio turnover rate | 11.24% | 5.39% | ||||||
aFor the period February 29, 2008 (effective date) to December 31, 2008.
bThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.
cBased on average daily shares outstanding.
dNet investment income per share includes approximately $(0.15) per share as a return of capital adjustment to a previously recorded special dividend received by the Fund. Excluding this non-recurring amount, the ratio of net investment income to average net assets would have been 1.88%.
eTotal return does not include any fees, charges or expenses imposed by the variable annuity and life insurance contracts for which the Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle. Total return is not annualized for periods less than one year.
fRatios are annualized for periods less than one year.
gBenefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
FRD-10
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited)
| Franklin Rising Dividends Securities Fund | Shares | Value | |||
Common Stocks 94.2% | |||||
Aerospace & Defense 5.4% | |||||
United Technologies Corp. | 1,390,100 | $ | 72,229,596 | ||
Banks 0.8% | |||||
Peoples Bancorp Inc. | 159,979 | 2,727,642 | |||
TrustCo Bank Corp. NY | 328,588 | 1,941,955 | |||
U.S. Bancorp | 324,449 | 5,814,126 | |||
| 10,483,723 | |||||
Commercial & Professional Services 2.7% | |||||
ABM Industries Inc. | 951,288 | 17,189,774 | |||
Cintas Corp. | 737,700 | 16,849,068 | |||
Superior Uniform Group Inc. | 237,100 | 1,718,975 | |||
| 35,757,817 | |||||
Consumer Durables & Apparel 1.1% | |||||
Leggett & Platt Inc. | 917,300 | 13,970,479 | |||
aRuss Berrie and Co. Inc. | 306,081 | 1,196,777 | |||
| 15,167,256 | |||||
Consumer Services 1.5% | |||||
Hillenbrand Inc. | 1,191,300 | 19,823,232 | |||
Diversified Financials 1.7% | |||||
State Street Corp. | 478,000 | 22,561,600 | |||
Electrical Equipment 9.0% | |||||
Brady Corp., A | 1,972,879 | 49,558,720 | |||
Roper Industries Inc. | 1,577,550 | 71,478,791 | |||
| 121,037,511 | |||||
Food & Staples Retailing 5.0% | |||||
Wal-Mart Stores Inc. | 1,384,600 | 67,070,024 | |||
Food, Beverage & Tobacco 4.0% | |||||
McCormick & Co. Inc. | 1,647,695 | 53,599,518 | |||
Health Care Equipment & Services 12.0% | |||||
Becton Dickinson and Co. | 1,043,443 | 74,407,920 | |||
Hill-Rom Holdings Inc. | 1,081,103 | 17,535,491 | |||
Stryker Corp. | 298,500 | 11,862,390 | |||
Teleflex Inc. | 379,200 | 16,999,536 | |||
West Pharmaceutical Services Inc. | 1,165,600 | 40,621,160 | |||
| 161,426,497 | |||||
Household & Personal Products 6.8% | |||||
Alberto-Culver Co. | 948,850 | 24,129,256 | |||
The Procter & Gamble Co. | 1,314,600 | 67,176,060 | |||
| 91,305,316 | |||||
Industrial Conglomerates 2.4% | |||||
Carlisle Cos. Inc. | 1,116,161 | 26,832,511 | |||
General Electric Co. | 472,200 | 5,534,184 | |||
| 32,366,695 | |||||
Insurance 12.6% | |||||
Aflac Inc. | 1,449,900 | 45,077,391 | |||
Arthur J. Gallagher & Co. | 753,000 | 16,069,020 | |||
Erie Indemnity Co., A | 1,456,733 | 52,092,772 | |||
FRD-11
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Franklin Rising Dividends Securities Fund | Shares | Value | ||||
Common Stocks (continued) | ||||||
Insurance (continued) | ||||||
Mercury General Corp. | 154,200 | $ | 5,154,906 | |||
Old Republic International Corp. | 3,587,208 | 35,333,999 | ||||
RLI Corp. | 335,848 | 15,045,990 | ||||
| 168,774,078 | ||||||
Machinery 6.4% | ||||||
Donaldson Co. Inc. | 435,000 | 15,068,400 | ||||
Dover Corp. | 1,604,500 | 53,092,905 | ||||
Graco Inc. | 351,112 | 7,731,486 | ||||
Nordson Corp. | 255,591 | 9,881,148 | ||||
| 85,773,939 | ||||||
Materials 12.0% | ||||||
Air Products and Chemicals Inc. | 381,594 | 24,647,156 | ||||
Bemis Co. Inc. | 1,231,300 | 31,028,760 | ||||
Nucor Corp. | 763,802 | 33,935,723 | ||||
Praxair Inc. | 1,004,500 | 71,389,815 | ||||
| 161,001,454 | ||||||
Pharmaceuticals, Biotechnology & Life Sciences 5.4% | ||||||
Abbott Laboratories | 755,900 | 35,557,536 | ||||
Pfizer Inc. | 2,478,100 | 37,171,500 | ||||
| 72,729,036 | ||||||
Retailing 4.6% | ||||||
Family Dollar Stores Inc. | 2,094,630 | 59,278,029 | ||||
aSally Beauty Holdings Inc. | 349,150 | 2,220,594 | ||||
| 61,498,623 | ||||||
Semiconductors & Semiconductor Equipment 0.0%b | ||||||
Cohu Inc. | 50,300 | 451,694 | ||||
Technology Hardware & Equipment 0.8% | ||||||
International Business Machines Corp. | 99,500 | 10,389,790 | ||||
Total Common Stocks (Cost $1,188,656,491) | 1,263,447,399 | |||||
Short Term Investments 6.0% | ||||||
Money Market Funds 6.0% | ||||||
cBank of New York Institutional Cash Reserve Fund, 0.12% | 632,226 | 625,904 | ||||
dInstitutional Fiduciary Trust Money Market Portfolio, 0.00% | 80,066,749 | 80,066,749 | ||||
Total Money Market Funds (Cost $80,698,975) | 80,692,653 | |||||
Total Investments (Cost $1,269,355,466) 100.2% | 1,344,140,052 | |||||
Other Assets, less Liabilities (0.2)% | (2,410,403 | ) | ||||
Net Assets 100.0% | $ | 1,341,729,649 | ||||
aNon-income producing.
bRounds to less than 0.1% of net assets.
cThe rate shown is the annualized seven-day yield at period end.
dSee Note 7 regarding investments in the Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end.
The accompanying notes are an integral part of these financial statements.
FRD-12
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements
Statement of Assets and Liabilities
June 30, 2009 (unaudited)
| Franklin Rising Dividends Securities Fund | ||||
Assets: | ||||
Investments in securities: | ||||
Cost - Unaffiliated issuers | $ | 1,189,288,717 | ||
Cost - Sweep Money Fund (Note 7) | 80,066,749 | |||
Total cost of investments | $ | 1,269,355,466 | ||
Value - Unaffiliated issuers | $ | 1,264,073,303 | ||
Value - Sweep Money Fund (Note 7) | 80,066,749 | |||
Total value of investments | 1,344,140,052 | |||
Receivables: | ||||
Capital shares sold | 90,694 | |||
Dividends | 1,515,101 | |||
Other assets | 2,009 | |||
Total assets | 1,345,747,856 | |||
Liabilities: | ||||
Payables: | ||||
Investment securities purchased | 744,161 | |||
Capital shares redeemed | 1,151,208 | |||
Affiliates | 1,192,852 | |||
Funds advanced by custodian | 632,226 | |||
Accrued expenses and other liabilities | 297,760 | |||
Total liabilities | 4,018,207 | |||
Net assets, at value | $ | 1,341,729,649 | ||
Net assets consist of: | ||||
Paid-in capital | $ | 1,567,916,522 | ||
Undistributed net investment income | 12,674,557 | |||
Net unrealized appreciation (depreciation) | 74,664,463 | |||
Accumulated net realized gain (loss) | (313,525,893 | ) | ||
Net assets, at value | $ | 1,341,729,649 | ||
Class 1: | ||||
Net assets, at value | $ | 127,790,200 | ||
Shares outstanding | 9,376,717 | |||
Net asset value and maximum offering price per share | $ | 13.63 | ||
Class 2: | ||||
Net assets, at value | $ | 1,213,935,773 | ||
Shares outstanding | 90,466,223 | |||
Net asset value and maximum offering price per share | $ | 13.42 | ||
Class 4: | ||||
Net assets, at value | $ | 3,676 | ||
Shares outstanding | 270 | |||
Net asset value and maximum offering price per share | $ | 13.61 | ||
The accompanying notes are an integral part of these financial statements.
FRD-13
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Operations
for the six months ended June 30, 2009 (unaudited)
| Franklin Rising Dividends Securities Fund | ||||
Investment income: | ||||
Dividends: | ||||
Unaffiliated issuers | $ | 3,510,867 | ||
Sweep Money Fund (Note 7) | 55,452 | |||
Total investment income | 3,566,319 | |||
Expenses: | ||||
Management fees (Note 3a) | 3,993,264 | |||
Distribution fees: (Note 3c) | ||||
Class 2 | 1,432,132 | |||
Class 4 | 6 | |||
Unaffiliated transfer agent fees | 447 | |||
Custodian fees (Note 4) | 13,807 | |||
Reports to shareholders | 97,169 | |||
Professional fees | 20,640 | |||
Trustees’ fees and expenses | 5,950 | |||
Other | 25,971 | |||
Total expenses | 5,589,386 | |||
Net investment income (loss)a | (2,023,067 | ) | ||
Realized and unrealized gains (losses): | ||||
Net realized gain (loss) from investments | (77,801,669 | ) | ||
Net change in unrealized appreciation (depreciation) on investments | 61,511,798 | |||
Net realized and unrealized gain (loss) | (16,289,871 | ) | ||
Net increase (decrease) in net assets resulting from operations | $ | (18,312,938 | ) | |
aNet investment income includes approximately $14,706,456 as a return of capital adjustment to a previously recorded special dividend received by the Fund. Excluding this non-recurring amount, the net investment income would have been $12,683,389.
The accompanying notes are an integral part of these financial statements.
FRD-14
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statements of Changes in Net Assets
| Franklin Rising Dividends Securities Fund | ||||||||
| Six Months Ended June 30,��2009 (unaudited) | Year Ended December 31, 2008 | |||||||
Increase (decrease) in net assets: | ||||||||
Operations: | ||||||||
Net investment income (loss)a | $ | (2,023,067 | ) | $ | 35,174,364 | |||
Net realized gain (loss) from investments | (77,801,669 | ) | (234,658,586 | ) | ||||
Net change in unrealized appreciation (depreciation) on investments | 61,511,798 | (387,942,691 | ) | |||||
Net increase (decrease) in net assets resulting from operations | (18,312,938 | ) | (587,426,913 | ) | ||||
Distributions to shareholders from: | ||||||||
Net investment income: | ||||||||
Class 1 | (2,324,786 | ) | (3,976,477 | ) | ||||
Class 2 | (18,134,021 | ) | (31,994,362 | ) | ||||
Class 4 | (54 | ) | (98 | ) | ||||
Net realized gains: | ||||||||
Class 1 | — | (1,471,627 | ) | |||||
Class 2 | — | (13,810,813 | ) | |||||
Class 4 | — | (36 | ) | |||||
Total distributions to shareholders | (20,458,861 | ) | (51,253,413 | ) | ||||
Capital share transactions: (Note 2) | ||||||||
Class 1 | (10,617,916 | ) | (30,501,392 | ) | ||||
Class 2 | (38,624,755 | ) | (216,391,575 | ) | ||||
Class 4 | — | 5,000 | ||||||
Total capital share transactions | (49,242,671 | ) | (246,887,967 | ) | ||||
Net increase (decrease) in net assets | (88,014,470 | ) | (885,568,293 | ) | ||||
Net assets: | ||||||||
Beginning of period | 1,429,744,119 | 2,315,312,412 | ||||||
End of period | $ | 1,341,729,649 | $ | 1,429,744,119 | ||||
Undistributed net investment income included in net assets: | ||||||||
End of period | $ | 12,674,557 | $ | 35,156,485 | ||||
aFor the period ended June 30, 2009, net investment income includes approximately $14,706,456 as a return of capital adjustment to a previously recorded special dividend received by the Fund. Excluding this non-recurring amount, the net investment income would have been $12,683,389.
The accompanying notes are an integral part of these financial statements.
FRD-15
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited)
Franklin Rising Dividends Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Templeton Variable Insurance Products Trust (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end investment company, consisting of twenty-two separate funds. The Franklin Rising Dividends Securities Fund (Fund) is included in this report. The financial statements of the remaining funds in the Trust are presented separately. Shares of the Fund are sold only to insurance company separate accounts to fund the benefits of variable life insurance policies or variable annuity contracts. At June 30, 2009, 65.24% of the Fund’s shares were held through one insurance company. The Fund offers three classes of shares: Class 1, Class 2, and Class 4. Each class of shares differs by its distribution fees, voting rights on matters affecting a single class and its exchange privilege.
The following summarizes the Fund’s significant accounting policies.
a. Security Valuation
Equity and other securities listed on a securities exchange or on the NASDAQ National Market System are valued at the last quoted sale price or the official closing price of the day, respectively. Over-the-counter securities and listed securities for which there is no reported sale are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. Certain equity securities are valued based upon fundamental characteristics or relationships to similar securities. Investments in open-end mutual funds and non-registered money market funds are valued at the closing net asset value.
The Fund has procedures to determine the fair value of individual securities and other assets for which market prices are not readily available or which may not be reliably priced. Methods for valuing these securities may include: fundamental analysis based upon the underlying investment book value, anticipated future cash flows, market changes in comparable or similar securities, matrix pricing, discounts from market prices of similar securities, or discounts applied due to the nature and duration of restrictions on the disposition of the securities. Due to the inherent uncertainty of valuations of such securities, the fair values may differ significantly from the values that would have been used had a ready market for such investments existed. Occasionally, events occur between the time at which trading in a security is completed and the close of the NYSE that might call into question the availability (including the reliability) of the value of a portfolio security held by the Fund. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services. All security valuation procedures are approved by the Fund’s Board of Trustees.
b. Securities Lending
The Fund participates in a principal based security lending program. The Fund receives cash collateral against the loaned securities in an amount equal to at least 102% of the market value of the loaned securities. Collateral is maintained over the life of the loan in an amount not less than 100% of the market value of loaned securities, as determined at the close of Fund business each day; any additional collateral required due to changes in security values is delivered to the Fund on the next business day. The collateral is invested in a non-registered money market fund managed by the Fund’s custodian on the Fund’s behalf. The Fund receives income from the investment of cash collateral, in addition to lending fees and rebates paid by the borrower. The Fund bears the market risk with respect to the collateral investment, securities loaned, and the risk that the principal may default on its obligations to the Fund. At June 30, 2009, the Fund had no securities on loan.
c. Income Taxes
No provision has been made for U.S. income taxes because it is the Fund’s policy to qualify as a regulated investment company under the Internal Revenue Code and to distribute to shareholders substantially all of its taxable income and net realized gains.
The Fund has reviewed the tax positions, taken on federal income tax returns, for each of the three open tax years and as of June 30, 2009, and has determined that no provision for income tax is required in the Fund’s financial statements.
FRD-16
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Rising Dividends Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
d. Security Transactions, Investment Income, Expenses and Distributions
Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Estimated expenses are accrued daily. Dividend income is recorded on the ex-dividend date. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with accounting principles generally accepted in the United States of America. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods.
Common expenses incurred by the Trust are allocated among the funds based on the ratio of net assets of each fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense.
Realized and unrealized gains and losses and net investment income, not including class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions, by class, are generally due to differences in class specific expenses.
Distributions received by the Fund from certain securities may be return of capital (ROC). Such distributions reduce the cost basis of the securities, and any distributions in excess of the cost basis are recognized as capital gains.
e. Accounting Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
f. Guarantees and Indemnifications
Under the Trust’s organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, on behalf of the Fund, enters into contracts with service providers that contain general indemnification clauses. The Trust’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote.
FRD-17
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Rising Dividends Securities Fund
2. SHARES OF BENEFICIAL INTEREST
At June 30, 2009, there were an unlimited number of shares authorized (without par value). Transactions in the Fund’s shares were as follows:
| Six Months Ended June 30, 2009 | Year Ended December 31, 2008a | |||||||||||||
| Class 1 Shares: | Shares | Amount | Shares | Amount | ||||||||||
Shares sold | 219,074 | $ | 2,800,612 | 277,877 | $ | 4,587,250 | ||||||||
Shares issued in reinvestment of distributions | 170,689 | 2,324,786 | 289,331 | 5,448,104 | ||||||||||
Shares redeemed | (1,246,232 | ) | (15,743,314 | ) | (2,366,622 | ) | (40,536,746 | ) | ||||||
Net increase (decrease) | (856,469 | ) | $ | (10,617,916 | ) | (1,799,414 | ) | $ | (30,501,392 | ) | ||||
Class 2 Shares: | ||||||||||||||
Shares sold | 2,219,560 | $ | 27,802,841 | 4,881,454 | $ | 84,391,025 | ||||||||
Shares issued in reinvestment of distributions | 1,352,276 | 18,134,021 | 2,471,947 | 45,805,175 | ||||||||||
Shares redeemed | (6,914,813 | ) | (84,561,617 | ) | (21,427,912 | ) | (346,587,775 | ) | ||||||
Net increase (decrease) | (3,342,977 | ) | $ | (38,624,755 | ) | (14,074,511 | ) | $ | (216,391,575 | ) | ||||
Class 4 Shares: | ||||||||||||||
Shares sold | — | $ | — | 270 | $ | 5,000 | ||||||||
| aFor | the period February 29, 2008 (effective date) to December 31, 2008 for class 4. |
3. TRANSACTIONS WITH AFFILIATES
Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Trust are also officers and/or directors of the following subsidiaries:
| Subsidiary | Affiliation | |
Franklin Advisory Services, LLC (Advisory Services) | Investment manager | |
Franklin Templeton Services, LLC (FT Services) | Administrative manager | |
Franklin Templeton Distributors, Inc. (Distributors) | Principal underwriter | |
Franklin Templeton Investor Services, LLC (Investor Services) | Transfer agent |
a. Management Fees
The Fund pays an investment management fee to Advisory Services based on the average daily net assets of the Fund as follows:
| Annualized Fee Rate | Net Assets | |
| 0.750% | Up to and including $500 million | |
| 0.625% | Over $500 million, up to and including $1 billion | |
| 0.500% | In excess of $1 billion |
b. Administrative Fees
Under an agreement with Advisory Services, FT Services provides administrative services to the Fund. The fee is paid by Advisory Services based on average daily net assets, and is not an additional expense of the Fund.
FRD-18
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Rising Dividends Securities Fund
3. TRANSACTIONS WITH AFFILIATES (continued)
c. Distribution Fees
The Fund’s Board of Trustees has adopted distribution plans for Class 2 and Class 4 shares pursuant to Rule 12b-1 under the 1940 Act. Under the Fund’s compensation distribution plans, the Fund pays Distributors for costs incurred in connection with the servicing, sale and distribution of the Fund’s shares up to 0.35% per year of its average daily net assets of each class. The Board of Trustees has agreed to limit the current rate to 0.25% per year for Class 2.
d. Transfer Agent Fees
Investor Services, under terms of an agreement, performs shareholder servicing for the Fund and is not paid by the Fund for the services.
4. EXPENSE OFFSET ARRANGEMENT
The Fund has entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Fund’s custodian expenses. During the period ended June 30, 2009, there were no credits earned.
5. INCOME TAXES
For tax purposes, capital losses may be carried over to offset future capital gains, if any. At December 31, 2008, the Fund had tax basis capital losses of $205,201,443 expiring in 2016.
For tax purposes, realized capital losses occurring subsequent to October 31, may be deferred and treated as occurring on the first day of the following fiscal year. At December 31, 2008, the Fund deferred realized capital losses of $23,900,601.
At June 30, 2009, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
Cost of investments | $ | 1,271,471,746 | ||
Unrealized appreciation | $ | 234,521,125 | ||
Unrealized depreciation | (161,852,819 | ) | ||
Net unrealized appreciation (depreciation) | $ | 72,668,306 | ||
Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatment of wash sales.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the period ended June 30, 2009, aggregated $136,966,170 and $186,615,980, respectively.
7. INVESTMENTS IN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO
The Fund may invest in the Institutional Fiduciary Trust Money Market Portfolio (Sweep Money Fund), an open-end investment company managed by Franklin Advisers, Inc. (an affiliate of the investment manager). Management fees paid by the Fund are reduced on assets invested in the Sweep Money Fund, in an amount not to exceed the management and administrative fees paid by the Sweep Money Fund.
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Rising Dividends Securities Fund
8. CREDIT FACILITY
Effective January 23, 2009, the Fund, together with other U.S. registered and foreign investment funds managed by Franklin Templeton Investments (individually, “Borrower”; collectively “Borrowers”), entered into a joint syndicated senior unsecured credit facility totaling $725 million (Global Credit Facility) to provide a source of funds to the Borrowers for temporary and emergency purposes, including the ability to meet future unanticipated or unusually large redemption requests.
Under the terms of the Global Credit Facility, the Fund shall, in addition to interest charged on any borrowings made by the Fund and other costs incurred by the Fund, pay its share of fees and expenses incurred in connection with the implementation and maintenance of the Global Credit Facility, based upon its relative share of the aggregate net assets of all of the Borrowers, including an annual commitment fee based upon the unused portion of the Global Credit Facility. During the period, the Fund incurred commitment fees of $1,577 of its pro rata portion of the Global Credit Facility, which is reflected in other expenses on the Statement of Operations. During the period ended June 30, 2009, the Fund did not utilize the Global Credit Facility.
9. FAIR VALUE MEASUREMENTS
Financial Accounting Standards Board (FASB) Statement No. 157, “Fair Value Measurement” (SFAS 157) establishes a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Fund’s own market assumptions (unobservable inputs). These inputs are used in determining the value of the Fund’s investments and are summarized in the following fair value hierarchy:
| • | Level 1 – quoted prices in active markets for identical securities |
| • | Level 2 – other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speed, credit risk, etc.) |
| • | Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments) |
The inputs or methodology used for valuing securities are not an indication of the risk associated with investing in those securities.
The following is a summary of the inputs used as of June 30, 2009, in valuing the Fund’s assets carried at fair value:
| Level 1 | Level 2 | Level 3 | Total | |||||||||
Assets: | ||||||||||||
Investments in Securities: | ||||||||||||
Equity Investmentsa | $ | 1,263,447,399 | $ | — | $ | — | $ | 1,263,447,399 | ||||
Short Term Investments | 80,066,749 | 625,904 | 80,692,653 | |||||||||
Total Investments in Securities | $ | 1,343,514,148 | $ | 625,904 | $ | — | $ | 1,344,140,052 | ||||
aFor detailed industry descriptions, see the accompanying Statement of Investments.
10. SUBSEQUENT EVENTS
Management has evaluated subsequent events through August 7, 2009 and determined that no events have occurred that require disclosure.
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FRANKLIN SMALL CAP VALUE SECURITIES FUND
We are pleased to bring you Franklin Small Cap Value Securities Fund’s semiannual report for the period ended June 30, 2009.
Performance Summary as of 6/30/09
Franklin Small Cap Value Securities Fund – Class 1 delivered a +4.33% total return for the six-month period ended 6/30/09.
Performance reflects the Fund’s Class 1 operating expenses, but does not include any contract fees, expenses or sales charges. If they had been included, performance would be lower. These charges and deductions, particularly for variable life policies, can have a significant effect on contract values and insurance benefits. See the contract prospectus for a complete description of these expenses, including sales charges.
Franklin Small Cap Value Securities Fund – Class 1
Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares.
Current performance may differ from figures shown.
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Fund Goal and Main Investments: Franklin Small Cap Value Securities Fund seeks long-term total return. The Fund normally invests at least 80% of its net assets in investments of small capitalization companies and normally invests predominantly in equity securities. For this Fund, small-capitalization companies are those with market capitalization values not exceeding $3.5 billion at the time of purchase. The Fund invests generally in equity securities of companies that the manager believes are currently undervalued.
Performance Overview
You can find the Fund’s six-month total return in the Performance Summary. The Fund outperformed its benchmark, the Russell 2500TM Value Index, which fell 0.62% for the same period.1 Please note that the Fund employs a bottom-up stock selection process, and the managers invest in securities without regard to benchmark comparisons.
Economic and Market Overview
During the six-month period ended June 30, 2009, the U.S. economy and stock markets seemed to stabilize after signs appeared that the recession’s severity had eased. Strains on the banking system and credit markets that surfaced in 2008 improved in 2009’s first half with the help of federal aid and tighter regulations. Although home sales fell for most of the period, they edged higher toward period-end. The pace of contraction in manufacturing activity decelerated. However, jobless claims mounted and the unemployment rate rose from 7.2% at the beginning of the year to 9.5% in June 2009, its highest rate since August 1983.2 Retail sales shrank from year-ago levels, and in February The Conference Board’s Consumer Confidence Index dropped to the lowest level since it began in 1967 before rebounding in the second quarter on improved expectations. Reflecting a broad-based contraction in consumer spending, falling corporate profits, slowing exports and reduced government spending, economic growth as measured by gross domestic product (GDP) fell at annualized rates of 6.4% and an estimated 1.0% in the first and second quarters of 2009.
Although the price of oil rose from $44 per barrel at the beginning of the period to $70 by period-end on speculation that the downturn was abating, it was still off more than 50% from its July 2008 record high.3 Prices for most other commodities followed similar trends. Partially as a
1. Source: © 2009 Morningstar. One cannot invest directly in an index, nor is an index representative of the Fund’s portfolio. Please see Index Descriptions following the Fund Summaries.
2. Source: Bureau of Labor Statistics.
3. Source: New York Mercantile Exchange.
Fund Risks: The Fund’s investments in stocks may offer the potential for long-term gains but can be subject to short-term price fluctuations. Smaller company securities can increase the risk of greater price volatility, particularly over the short term. Smaller or relatively new or unseasoned companies can also be particularly sensitive to changing economic conditions, and their prospects for growth are less certain than those of larger, more established companies. Foreign investing, especially in emerging markets, involves additional risks, including currency fluctuations, economic instability, market volatility, and political and social instability. The Fund’s prospectus also includes a description of the main investment risks.
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result of reduced consumer spending and the late-2008 downward trajectory for energy prices, deflationary pressures surfaced. June’s inflation rate, as measured by the Consumer Price Index, was an annualized -1.4%, representing the steepest yearly decline in the cost of living in nearly six decades.2 Core inflation, which excludes food and energy costs, rose at a 1.7% annualized rate, which was within the Federal Reserve Board’s (Fed’s) informal target range of 1.5%–2.0%.2
A deepening recession and decelerating inflation prompted Washington policymakers to keep interest rates low and enact stimulus plans — including income tax cuts, aid to ailing state governments and funding for transportation infrastructure, school construction and high-tech projects. During the period under review, the Fed kept the federal funds target rate in a range of 0% to 0.25% and said the “pace of economic contraction is slowing” but the financial system had not yet returned to normal. The government also introduced various new measures to shore up financial markets and enhance market liquidity, proposed a sweeping financial regulatory system overhaul, and outlined details of its Public-Private Investment Program, with an objective of removing devalued real estate-related assets from banks’ balance sheets.
Most stocks suffered major losses through early March as investors worried about an uncertain future. Stocks then recovered somewhat from 12-year lows as investors perceived many bargains among the bear market fallout and data indicated the economy’s pace of contraction was moderating. By June, however, fresh investor concerns about the economy and stock valuations reemerged and dampened the rally’s momentum. For the six months under review, the blue chip stocks of the Dow Jones Industrial Average declined 2.01%, the broader Standard & Poor’s 500 Index rose 3.16%, and the technology-heavy NASDAQ Composite Index increased 16.99%.1 Information technology, consumer discretionary and materials stocks posted the largest gains while industrials, telecommunication services and financials stocks generally fell in value.
Investment Strategy
We are a research-driven, fundamental investment adviser, pursuing a disciplined, value-oriented strategy for the Fund. As a bottom-up adviser concentrating primarily on individual securities, we focus on the market price of a company’s securities relative to our evaluation of the company’s potential long-term earnings, asset value or cash flow. We seek bargains among the “unloved,” out-of-favor companies that offer,
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in our opinion, attractive long-term potential. These might include current growth companies that are being ignored by the market, former growth companies that have stumbled recently, dropping sharply in price but that still have significant growth potential, in our opinion, or companies that may be potential turnaround candidates or takeover targets.
Manager’s Discussion
During the six months under review, the consumer discretionary sector was a top contributor to Fund performance, due largely to automotive products company Group 1 Automotive, recreational vehicle manufacturer Thor Industries and specialty retailer Men’s Wearhouse, which each appreciated in value amid some improving economic data.4 Reliance Steel & Aluminum in the materials sector also aided results. The energy sector, where offshore energy services company Helix Energy Solutions Group performed well, also helped results largely due to expectations of an improving operating environment and higher oil prices later in the period.
Detractors from performance included several financials and industrials sector holdings.5 In the financials sector, regional bank TrustCo Bank Corp. NY and insurer Montpelier Re Holdings hindered results. Building products manufacturer Gibraltar Industries, transportation equipment manufacturer Wabash National and airline SkyWest in the industrials sector also declined in value.
The Fund initiated three positions during the period in what we considered attractively valued securities: industrial goods provider Gardner Denver, department store operator J.C. Penney, and contract research firm Pharmaceutical Product Development. We also added significantly to several existing positions including D.R. Horton, Energen, Protective Life, Rowan Companies and Teleflex. We liquidated five positions, largely due to the companies’ deteriorating fundamentals. The positions sold were Avocent, General Maritime, Mercer International, Monaco Coach and Russ Berrie. We also reduced several holdings including IPC Holdings, MDC Holdings and Regis.
4. The consumer discretionary sector comprises automobiles and components, consumer durables and apparel, consumer services, and retailing in the SOI.
5. The financials sector comprises banks and insurance in the SOI. The industrials sector comprises capital goods, commercial and professional services, and transportation in the SOI.
Top 10 Holdings
Franklin Small Cap Value Securities Fund
6/30/09
| Company Sector/Industry | % of Total Net Assets | |
| Universal Forest Products Inc. | 2.0% | |
| Capital Goods | ||
| Reliance Steel & Aluminum Co. | 2.0% | |
| Materials | ||
| Westlake Chemical Corp. | 2.0% | |
| Materials | ||
| Steel Dynamics Inc. | 1.9% | |
| Materials | ||
| Old Republic International Corp. | 1.8% | |
| Insurance | ||
| Benchmark Electronics Inc. | 1.8% | |
| Technology Hardware & Equipment | ||
| NV Energy Inc. | 1.7% | |
| Utilities | ||
| Rowan Cos. Inc. | 1.6% | |
| Energy | ||
| IPC Holdings Ltd. | 1.6% | |
| Insurance | ||
| Thor Industries Inc. | 1.5% | |
| Automobiles & Components | ||
The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund’s Statement of Investments (SOI).
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Thank you for your participation in Franklin Small Cap Value Securities Fund. We look forward to serving your future investment needs.
The foregoing information reflects our analysis, opinions and portfolio holdings as of June 30, 2009, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.
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Fund Expenses
As an investor in a variable insurance contract (Contract) that indirectly provides for investment in an underlying mutual fund, you can incur transaction and/or ongoing expenses at both the Fund level and the Contract level.
| • | Transaction expenses can include sales charges (loads) on purchases, surrender fees, transfer fees and premium taxes. |
| • | Ongoing expenses can include management fees, distribution and service (12b-1) fees, contract fees, annual maintenance fees, mortality and expense risk fees and other fees and expenses. All mutual funds and Contracts have some types of ongoing expenses. |
The expenses shown in the table are meant to highlight ongoing expenses at the Fund level only and do not include ongoing expenses at the Contract level, or transaction expenses at either the Fund or Contract levels. While the Fund does not have transaction expenses, if the transaction and ongoing expenses at the Contract level were included, the expenses shown below would be higher. You should consult your Contract prospectus or disclosure document for more information.
The table shows Fund-level ongoing expenses and can help you understand these expenses and compare them with those of other mutual funds offered through the Contract. The table assumes a $1,000 investment held for the six months indicated. Please refer to the Fund prospectus for additional information on operating expenses.
Actual Fund Expenses
The first line (Actual) of the table provides actual account values and expenses. The “Ending Account Value” is derived from the Fund’s actual return, which includes the effect of ongoing Fund expenses, but does not include the effect of ongoing Contract expenses.
You can estimate the Fund-level expenses you incurred during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:
| 1. | Divide your account value by $1,000. |
If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6.
| 2. | Multiply the result by the number under the heading “Fund-Level Expenses Incurred During Period.” |
If Fund-Level Expenses Incurred During Period were $7.50, then 8.6 x $7.50 = $64.50.
In this illustration, the estimated expenses incurred this period at the Fund level are $64.50.
Franklin Small Cap Value Securities Fund – Class 1
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Hypothetical Example for Comparison with Other Mutual Funds
Information in the second line (Hypothetical) of the table can help you compare ongoing expenses of the Fund with those of other mutual funds offered through the Contract. This information may not be used to estimate the actual ending account balance or expenses you incurred during the period. The hypothetical “Ending Account Value” is based on the Fund’s actual expense ratio and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Fund-Level Expenses Incurred During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds offered through a Contract.
| Class 1 | Beginning Account Value 1/1/09 | Ending Account Value 6/30/09 | Fund-Level Expenses Incurred During Period* 1/1/09–6/30/09 | ||||||
Actual | $ | 1,000 | $ | 1,043.30 | $ | 3.55 | |||
Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,021.32 | $ | 3.51 | |||
*Expenses are calculated using the most recent six-month annualized expense ratio for the Fund’s Class 1 shares (0.70%), which does not include any ongoing expenses of the Contract for which the Fund is an investment option, multiplied by the average account value over the period, multiplied by 181/365 to reflect the one-half year period.
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Franklin Templeton Variable Insurance Products Trust
Financial Highlights
Franklin Small Cap Value Securities Fund
| Six Months Ended June 30, 2009 (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 1 | 2008 | 2007 | 2006 | 2005 | 2004 | |||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 10.73 | $ | 17.38 | $ | 19.07 | $ | 17.02 | $ | 15.85 | $ | 12.81 | ||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.08 | 0.24 | 0.22 | 0.18 | 0.17 | 0.21 | ||||||||||||||||||
Net realized and unrealized gains (losses) | 0.40 | (5.44 | ) | (0.44 | ) | 2.69 | 1.24 | 2.87 | ||||||||||||||||
Total from investment operations | 0.48 | (5.20 | ) | (0.22 | ) | 2.87 | 1.41 | 3.08 | ||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income | (0.22 | ) | (0.23 | ) | (0.17 | ) | (0.16 | ) | (0.14 | ) | (0.04 | ) | ||||||||||||
Net realized gains | (0.52 | ) | (1.22 | ) | (1.30 | ) | (0.66 | ) | (0.10 | ) | — | |||||||||||||
Total distributions | (0.74 | ) | (1.45 | ) | (1.47 | ) | (0.82 | ) | (0.24 | ) | (0.04 | ) | ||||||||||||
Net asset value, end of period | $ | 10.47 | $ | 10.73 | $ | 17.38 | $ | 19.07 | $ | 17.02 | $ | 15.85 | ||||||||||||
Total returnc | 4.33% | (32.87)% | (2.14)% | 17.30% | 8.99% | 24.09% | ||||||||||||||||||
Ratios to average net assetsd | ||||||||||||||||||||||||
Expensese | 0.70% | 0.67% | 0.64% | 0.65% | 0.64% | 0.67% | ||||||||||||||||||
Net investment income | 1.62% | 1.62% | 1.13% | 0.97% | 1.05% | 1.59% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 33,352 | $ | 34,901 | $ | 57,045 | $ | 73,154 | $ | 52,632 | $ | 50,401 | ||||||||||||
Portfolio turnover rate | 4.66% | 16.98% | 16.27% | 16.43% | f | 11.03% | 9.50% | |||||||||||||||||
aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.
bBased on average daily shares outstanding.
cTotal return does not include any fees, charges or expenses imposed by the variable annuity and life insurance contracts for which the Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle. Total return is not annualized for periods less than one year.
dRatios are annualized for periods less than one year.
eBenefit of expense reduction rounds to less than 0.01%.
fExcludes the value of portfolio securities delivered as a result of a redemption in-kind.
The accompanying notes are an integral part of these financial statements.
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Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Franklin Small Cap Value Securities Fund
| Six Months Ended June 30, 2009 (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 2 | 2008 | 2007 | 2006 | 2005 | 2004 | |||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 10.55 | $ | 17.10 | $ | 18.79 | $ | 16.79 | $ | 15.65 | $ | 12.67 | ||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.07 | 0.20 | 0.17 | 0.13 | 0.13 | 0.18 | ||||||||||||||||||
Net realized and unrealized gains (losses) | 0.39 | (5.35 | ) | (0.43 | ) | 2.65 | 1.23 | 2.82 | ||||||||||||||||
Total from investment operations | 0.46 | (5.15 | ) | (0.26 | ) | 2.78 | 1.36 | 3.00 | ||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income | (0.19 | ) | (0.18 | ) | (0.13 | ) | (0.12 | ) | (0.12 | ) | (0.02 | ) | ||||||||||||
Net realized gains | (0.52 | ) | (1.22 | ) | (1.30 | ) | (0.66 | ) | (0.10 | ) | — | |||||||||||||
Total distributions | (0.71 | ) | (1.40 | ) | (1.43 | ) | (0.78 | ) | (0.22 | ) | (0.02 | ) | ||||||||||||
Net asset value, end of period | $ | 10.30 | $ | 10.55 | $ | 17.10 | $ | 18.79 | $ | 16.79 | $ | 15.65 | ||||||||||||
Total returnc | 4.18% | (33.02)% | (2.38)% | 16.98% | 8.77% | 23.75% | ||||||||||||||||||
Ratios to average net assetsd | ||||||||||||||||||||||||
Expensese | 0.95% | 0.92% | 0.89% | 0.90% | 0.89% | 0.92% | ||||||||||||||||||
Net investment income | 1.37% | 1.37% | 0.88% | 0.72% | 0.80% | 1.34% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 798,607 | $ | 784,773 | $ | 1,177,367 | $ | 1,240,892 | $ | 1,094,120 | $ | 748,762 | ||||||||||||
Portfolio turnover rate | 4.66% | 16.98% | 16.27% | 16.43% | f | 11.03% | 9.50% | |||||||||||||||||
aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.
bBased on average daily shares outstanding.
cTotal return does not include any fees, charges or expenses imposed by the variable annuity and life insurance contracts for which the Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle. Total return is not annualized for periods less than one year.
dRatios are annualized for periods less than one year.
eBenefit of expense reduction rounds to less than 0.01%.
fExcludes the value of portfolio securities delivered as a result of a redemption in-kind.
The accompanying notes are an integral part of these financial statements.
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Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Franklin Small Cap Value Securities Fund
| Class 4 | Six Months Ended June 30, 2009 (unaudited) | Period Ended December 31, 2008a | ||||||
Per share operating performance | ||||||||
(for a share outstanding throughout the period) | ||||||||
Net asset value, beginning of period | $ | 10.70 | $ | 16.42 | ||||
Income from investment operationsb: | ||||||||
Net investment incomec | 0.06 | 0.15 | ||||||
Net realized and unrealized gains (losses) | 0.40 | (4.42 | ) | |||||
Total from investment operations | 0.46 | (4.27 | ) | |||||
Less distributions from: | ||||||||
Net investment income | (0.21 | ) | (0.23 | ) | ||||
Net realized gains | (0.52 | ) | (1.22 | ) | ||||
Total distributions | (0.73 | ) | (1.45 | ) | ||||
Net asset value, end of period | $ | 10.43 | $ | 10.70 | ||||
Total returnd | 4.17% | (29.14)% | ||||||
Ratios to average net assetse | ||||||||
Expensesf | 1.05% | 1.02% | ||||||
Net investment income | 1.27% | 1.27% | ||||||
Supplemental data | ||||||||
Net assets, end of period (000’s) | $ | 20,566 | $ | 14,850 | ||||
Portfolio turnover rate | 4.66% | 16.98% | ||||||
aFor the period February 29, 2008 (effective date) to December 31, 2008.
bThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.
cBased on average daily shares outstanding.
dTotal return does not include any fees, charges or expenses imposed by the variable annuity and life insurance contracts for which the Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle. Total return is not annualized for periods less than one year.
eRatios are annualized for periods less than one year.
fBenefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
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Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited)
| Franklin Small Cap Value Securities Fund | Shares | Value | |||
Common Stocks 97.2% | |||||
Automobiles & Components 4.2% | |||||
Autoliv Inc. (Sweden) | 343,000 | $ | 9,868,111 | ||
Gentex Corp. | 714,000 | 8,282,400 | |||
aThor Industries Inc. | 715,000 | 13,134,550 | |||
Winnebago Industries Inc. | 600,000 | 4,458,000 | |||
| 35,743,061 | |||||
Banks 2.7% | |||||
Chemical Financial Corp. | 461,354 | 9,185,558 | |||
bCorus Bankshares Inc. | 682,600 | 187,715 | |||
Peoples Bancorp Inc. | 199,400 | 3,399,770 | |||
aTrustCo Bank Corp. NY | 1,702,065 | 10,059,205 | |||
| 22,832,248 | |||||
Capital Goods 22.2% | |||||
A.O. Smith Corp. | 112,500 | 3,664,125 | |||
aAmerican Woodmark Corp. | 359,310 | 8,605,475 | |||
Apogee Enterprises Inc. | 864,000 | 10,627,200 | |||
Applied Industrial Technologies Inc. | 226,400 | 4,460,080 | |||
bAstec Industries Inc. | 103,100 | 3,061,039 | |||
Brady Corp., A | 424,000 | 10,650,880 | |||
Briggs & Stratton Corp. | 472,600 | 6,304,484 | |||
Carlisle Cos. Inc. | 433,000 | 10,409,320 | |||
CIRCOR International Inc. | 141,000 | 3,329,010 | |||
bCNH Global NV (Netherlands) | 84,000 | 1,179,360 | |||
bEMCOR Group Inc. | 264,000 | 5,311,680 | |||
Franklin Electric Co. Inc. | 131,232 | 3,401,533 | |||
bGardner Denver Inc. | 290,000 | 7,299,300 | |||
Gibraltar Industries Inc. | 1,079,800 | 7,418,226 | |||
Graco Inc. | 458,200 | 10,089,564 | |||
Kennametal Inc. | 490,000 | 9,398,200 | |||
Lincoln Electric Holdings Inc. | 216,000 | 7,784,640 | |||
Mueller Industries Inc. | 500,000 | 10,400,000 | |||
Nordson Corp. | 252,000 | 9,742,320 | |||
bPowell Industries Inc. | 62,600 | 2,320,582 | |||
Roper Industries Inc. | 202,000 | 9,152,620 | |||
Simpson Manufacturing Co. Inc. | 401,600 | 8,682,592 | |||
Timken Co. | 120,000 | 2,049,600 | |||
Trinity Industries Inc. | 612,000 | 8,335,440 | |||
Universal Forest Products Inc. | 528,000 | 17,471,520 | |||
Wabash National Corp. | 1,259,200 | 881,440 | |||
Watts Water Technologies Inc., A | 341,300 | 7,351,602 | |||
| 189,381,832 | |||||
Commercial & Professional Services 2.4% | |||||
ABM Industries Inc. | 649,000 | 11,727,430 | |||
Mine Safety Appliances Co. | 359,000 | 8,651,900 | |||
| 20,379,330 | |||||
Consumer Durables & Apparel 6.6% | |||||
Bassett Furniture Industries Inc. | 230,900 | 634,975 | |||
Brunswick Corp. | 906,000 | 3,913,920 | |||
D.R. Horton Inc. | 890,000 | 8,330,400 | |||
Ethan Allen Interiors Inc. | 470,000 | 4,869,200 | |||
cHooker Furniture Corp. | 555,100 | 6,372,548 | |||
FSV-11
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Franklin Small Cap Value Securities Fund | Shares | Value | |||
Common Stocks (continued) | |||||
Consumer Durables & Apparel (continued) | |||||
La-Z-Boy Inc. | 1,095,700 | $ | 5,171,704 | ||
bM/I Homes Inc. | 593,700 | 5,812,323 | |||
M.D.C. Holdings Inc. | 244,500 | 7,361,895 | |||
bTimberland Co., A | 250,700 | 3,326,789 | |||
bThe Warnaco Group Inc. | 336,000 | 10,886,400 | |||
| 56,680,154 | |||||
Consumer Services 0.5% | |||||
Regis Corp. | 266,000 | 4,631,060 | |||
Energy 9.8% | |||||
Arch Coal Inc. | 111,500 | 1,713,755 | |||
bAtwood Oceanics Inc. | 246,000 | 6,127,860 | |||
bBristow Group Inc. | 363,413 | 10,767,927 | |||
CARBO Ceramics Inc. | 23,000 | 786,600 | |||
CONSOL Energy Inc. | 87,000 | 2,954,520 | |||
bGlobal Industries Ltd. | 1,151,700 | 6,518,622 | |||
bHelix Energy Solutions Group Inc. | 743,000 | 8,076,410 | |||
bOil States International Inc. | 314,000 | 7,601,940 | |||
Overseas Shipholding Group Inc. | 150,000 | 5,106,000 | |||
Peabody Energy Corp. | 114,000 | 3,438,240 | |||
Rowan Cos. Inc. | 712,500 | 13,765,500 | |||
Teekay Corp. (Bahamas) | 232,500 | 4,889,475 | |||
Tidewater Inc. | 113,000 | 4,844,310 | |||
bUnit Corp. | 268,000 | 7,388,760 | |||
| 83,979,919 | |||||
Food & Staples Retailing 1.4% | |||||
Casey’s General Stores Inc. | 462,000 | 11,868,780 | |||
Health Care Equipment & Services 2.7% | |||||
STERIS Corp. | 253,000 | 6,598,240 | |||
Teleflex Inc. | 195,600 | 8,768,748 | |||
West Pharmaceutical Services Inc. | 215,800 | 7,520,630 | |||
| 22,887,618 | |||||
Insurance 11.3% | |||||
American National Insurance Co. | 86,000 | 6,499,880 | |||
Arthur J. Gallagher & Co. | 209,600 | 4,472,864 | |||
Aspen Insurance Holdings Ltd. | 555,500 | 12,409,870 | |||
Erie Indemnity Co., A | 194,000 | 6,937,440 | |||
IPC Holdings Ltd. | 502,000 | 13,724,680 | |||
Montpelier Re Holdings Ltd. (Bermuda) | 699,000 | 9,289,710 | |||
Old Republic International Corp. | 1,562,000 | 15,385,700 | |||
Protective Life Corp. | 910,100 | 10,411,544 | |||
RLI Corp. | 151,100 | 6,769,280 | |||
StanCorp Financial Group Inc. | 232,000 | 6,653,760 | |||
bSyncora Holdings Ltd. | 1,132,175 | 305,687 | |||
Zenith National Insurance Corp. | 148,100 | 3,219,694 | |||
| 96,080,109 | |||||
Materials 12.3% | |||||
Airgas Inc. | 297,700 | 12,065,781 | |||
AptarGroup Inc. | 250,700 | 8,466,139 | |||
Cabot Corp. | 384,000 | 4,830,720 | |||
FSV-12
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Franklin Small Cap Value Securities Fund | Shares | Value | |||
Common Stocks (continued) | |||||
Materials (continued) | |||||
Gerdau Ameristeel Corp. (Canada) | 1,316,000 | $ | 8,975,120 | ||
Glatfelter | 752,000 | 6,692,800 | |||
Reliance Steel & Aluminum Co. | 449,600 | 17,260,144 | |||
RPM International Inc. | 865,000 | 12,144,600 | |||
Steel Dynamics Inc. | 1,071,400 | 15,781,722 | |||
United States Steel Corp. | 49,000 | 1,751,260 | |||
Westlake Chemical Corp. | 832,521 | 16,975,103 | |||
| 104,943,389 | |||||
Pharmaceuticals, Biotechnology & Life Sciences 2.8% | |||||
bMettler-Toledo International Inc. | 150,000 | 11,572,500 | |||
Pharmaceutical Product Development Inc. | 520,700 | 12,090,654 | |||
| 23,663,154 | |||||
Retailing 9.0% | |||||
Brown Shoe Co. Inc. | 823,000 | 5,958,520 | |||
Christopher & Banks Corp. | 1,420,000 | 9,528,200 | |||
Fred’s Inc. | 641,000 | 8,076,600 | |||
Group 1 Automotive Inc. | 447,600 | 11,646,552 | |||
bGymboree Corp. | 146,200 | 5,187,176 | |||
J.C. Penney Co. Inc. | 273,000 | 7,837,830 | |||
The Men’s Wearhouse Inc. | 615,000 | 11,795,700 | |||
bPier 1 Imports Inc. | 770,000 | 1,532,300 | |||
bSaks Inc. | 766,000 | 3,393,380 | |||
bTuesday Morning Corp. | 1,227,000 | 4,134,990 | |||
bWest Marine Inc. | 845,600 | 4,659,256 | |||
bZale Corp. | 853,000 | 2,934,320 | |||
| 76,684,824 | |||||
Semiconductors & Semiconductor Equipment 1.1% | |||||
Cohu Inc. | 659,500 | 5,922,310 | |||
bOmniVision Technologies Inc. | 300,000 | 3,117,000 | |||
| 9,039,310 | |||||
Technology Hardware & Equipment 2.7% | |||||
bBenchmark Electronics Inc. | 1,068,000 | 15,379,200 | |||
Diebold Inc. | 46,400 | 1,223,104 | |||
bRofin-Sinar Technologies Inc. | 301,000 | 6,023,010 | |||
| 22,625,314 | |||||
Transportation 2.1% | |||||
bGenesee & Wyoming Inc. | 333,000 | 8,827,830 | |||
bKansas City Southern | 130,000 | 2,094,300 | |||
SkyWest Inc. | 719,195 | 7,335,789 | |||
| 18,257,919 | |||||
Utilities 3.4% | |||||
Atmos Energy Corp. | 170,100 | 4,259,304 | |||
Energen Corp. | 257,000 | 10,254,300 | |||
NV Energy Inc. | 1,375,000 | 14,836,250 | |||
| 29,349,854 | |||||
Total Common Stocks (Cost $1,045,664,792) | 829,027,875 | ||||
FSV-13
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Franklin Small Cap Value Securities Fund | Principal Amount | Value | |||||
Corporate Bonds (Cost $1,480,346) 0.2% | |||||||
Capital Goods 0.2% | |||||||
Mueller Industries Inc., 6.00%, 11/01/14 | $ | 1,494,000 | $ | 1,284,840 | |||
Total Investments before Short Term Investments (Cost $1,047,145,138) | 830,312,715 | ||||||
| Shares | |||||||
Short Term Investments 3.4% | |||||||
Money Market Funds (Cost $23,743,454) 2.8% | |||||||
dInstitutional Fiduciary Trust Money Market Portfolio, 0.00% | 23,743,454 | 23,743,454 | |||||
eInvestments from Cash Collateral Received for Loaned Securities 0.6% | |||||||
Money Market Funds (Cost $2,536,889) 0.3% | |||||||
fBank of New York Institutional Cash Reserve Fund, 0.12% | 2,536,889 | 2,511,520 | |||||
| Principal Amount | |||||||
gRepurchase Agreements 0.3% | |||||||
Credit Suisse Securities (USA) LLC, 0.09%, 7/01/09 (Maturity Value $1,543,004) | $ | 1,543,000 | 1,543,000 | ||||
Deutsche Bank Securities Inc., 0.08%, 7/01/09 (Maturity Value $947,002) | 947,000 | 947,000 | |||||
Total Repurchase Agreements (Cost $2,490,000) | 2,490,000 | ||||||
Total Investments from Cash Collateral Received for Loaned Securities | 5,001,520 | ||||||
Total Investments (Cost $1,075,915,481) 100.8% | 859,057,689 | ||||||
Other Assets, less Liabilities (0.8)% | (6,532,044 | ) | |||||
Net Assets 100.0% | $ | 852,525,645 | |||||
aA portion or all of the security is on loan at June 30, 2009. See Note 1(c).
bNon-income producing.
cSee Note 8 regarding holdings of 5% voting securities.
dSee Note 7 regarding investments in the Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end.
eSee Note 1(c) regarding securities on loan.
fThe rate shown is the annualized seven-day yield at period end.
gSee Note 1(b) regarding repurchase agreements.
hThe security is traded on a discount basis with no stated coupon rate.
The accompanying notes are an integral part of these financial statements.
FSV-14
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements
Statement of Assets and Liabilities
June 30, 2009 (unaudited)
| Franklin Small Cap Value Securities Fund | ||||
Assets: | ||||
Investments in securities: | ||||
Cost - Unaffiliated issuers | $ | 1,040,961,286 | ||
Cost - Non-controlled affiliated issuers (Note 8) | 8,720,741 | |||
Cost - Sweep Money Fund (Note 7) | 23,743,454 | |||
Cost - Repurchase agreements | 2,490,000 | |||
Total cost of investments | $ | 1,075,915,481 | ||
Value - Unaffiliated issuers | $ | 826,451,687 | ||
Value - Non-controlled affiliated issuers (Note 8) | 6,372,548 | |||
Value - Sweep Money Fund (Note 7) | 23,743,454 | |||
Value - Repurchase agreements | 2,490,000 | |||
Total value of investments (includes securities loaned in the amount of $4,780,560) | 859,057,689 | |||
Receivables: | ||||
Capital shares sold | 869,238 | |||
Dividends and interest | 844,000 | |||
Other assets | 1,606 | |||
Total assets | 860,772,533 | |||
Liabilities: | ||||
Payables: | ||||
Capital shares redeemed | 1,717,941 | |||
Affiliates | 809,092 | |||
Payable upon return of securities loaned | 5,026,889 | |||
Accrued expenses and other liabilities | 692,966 | |||
Total liabilities | 8,246,888 | |||
Net assets, at value | $ | 852,525,645 | ||
Net assets consist of: | ||||
Paid-in capital | $ | 1,134,503,456 | ||
Undistributed net investment income | 5,250,127 | |||
Net unrealized appreciation (depreciation) | (217,339,801 | ) | ||
Accumulated net realized gain (loss) | (69,888,137 | ) | ||
Net assets, at value | $ | 852,525,645 | ||
The accompanying notes are an integral part of these financial statements.
FSV-15
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Assets and Liabilities (continued)
June 30, 2009 (unaudited)
| Franklin Small Cap Value Securities Fund | |||
Class 1: | |||
Net assets, at value | $ | 33,352,426 | |
Shares outstanding | 3,184,645 | ||
Net asset value and maximum offering price per share | $ | 10.47 | |
Class 2: | |||
Net assets, at value | $ | 798,606,859 | |
Shares outstanding | 77,520,510 | ||
Net asset value and maximum offering price per share | $ | 10.30 | |
Class 4: | |||
Net assets, at value | $ | 20,566,360 | |
Shares outstanding | 1,971,313 | ||
Net asset value and maximum offering price per share | $ | 10.43 | |
The accompanying notes are an integral part of these financial statements.
FSV-16
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Operations
for the six months ended June 30, 2009 (unaudited)
| Franklin Small Cap Value Securities Fund | ||||
Investment income: | ||||
Dividends: | ||||
Unaffiliated issuers | $ | 8,646,779 | ||
Non-controlled affiliated issuers (Note 8) | 111,020 | |||
Sweep Money Fund (Note 7) | 25,254 | |||
Interest | 45,874 | |||
Income from securities loaned | 17,655 | |||
Total investment income | 8,846,582 | |||
Expenses: | ||||
Management fees (Note 3a) | 1,963,572 | |||
Administrative fees (Note 3b) | 515,610 | |||
Distribution fees: (Note 3c) | ||||
Class 2 | 896,367 | |||
Class 4 | 27,543 | |||
Unaffiliated transfer agent fees | 1,991 | |||
Custodian fees (Note 4) | 8,281 | |||
Reports to shareholders | 132,146 | |||
Professional fees | 17,519 | |||
Trustees’ fees and expenses | 2,389 | |||
Other | 18,187 | |||
Total expenses | 3,583,605 | |||
Expense reductions (Note 4) | (112 | ) | ||
Net expenses | 3,583,493 | |||
Net investment income | 5,263,089 | |||
Realized and unrealized gains (losses): | ||||
Net realized gain (loss) from investments | (67,336,821 | ) | ||
Net change in unrealized appreciation (depreciation) on investments | 91,424,702 | |||
Net realized and unrealized gain (loss) | 24,087,881 | |||
Net increase (decrease) in net assets resulting from operations | $ | 29,350,970 | ||
The accompanying notes are an integral part of these financial statements.
FSV-17
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statements of Changes in Net Assets
| Franklin Small Cap Value Securities Fund | ||||||||
| Six Months Ended June 30, 2009 (unaudited) | Year Ended December 31, 2008 | |||||||
Increase (decrease) in net assets: | ||||||||
Operations: | ||||||||
Net investment income | $ | 5,263,089 | $ | 14,806,129 | ||||
Net realized gain (loss) from investments | (67,336,821 | ) | 37,661,051 | |||||
Net change in unrealized appreciation (depreciation) on investments | 91,424,702 | (460,075,401 | ) | |||||
Net increase (decrease) in net assets resulting from operations | 29,350,970 | (407,608,221 | ) | |||||
Distributions to shareholders from: | ||||||||
Net investment income: | ||||||||
Class 1 | (665,043 | ) | (691,359 | ) | ||||
Class 2 | (13,687,827 | ) | (11,639,809 | ) | ||||
Class 4 | (385,972 | ) | (17,091 | ) | ||||
Net realized gains: | ||||||||
Class 1 | (1,544,298 | ) | (3,739,945 | ) | ||||
Class 2 | (37,694,393 | ) | (80,615,234 | ) | ||||
Class 4 | (931,849 | ) | (92,454 | ) | ||||
Total distributions to shareholders | (54,909,382 | ) | (96,795,892 | ) | ||||
Capital share transactions: (Note 2) | ||||||||
Class 1 | (320,559 | ) | (56,463 | ) | ||||
Class 2 | 37,733,380 | 85,951,774 | ||||||
Class 4 | 6,147,490 | 18,620,427 | ||||||
Total capital share transactions | 43,560,311 | 104,515,738 | ||||||
Net increase (decrease) in net assets | 18,001,899 | (399,888,375 | ) | |||||
Net assets: | ||||||||
Beginning of period | 834,523,746 | 1,234,412,121 | ||||||
End of period | $ | 852,525,645 | $ | 834,523,746 | ||||
Undistributed net investment income included in net assets: | ||||||||
End of period | $ | 5,250,127 | $ | 14,725,880 | ||||
The accompanying notes are an integral part of these financial statements.
FSV-18
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited)
Franklin Small Cap Value Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Templeton Variable Insurance Products Trust (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end investment company, consisting of twenty-two separate funds. The Franklin Small Cap Value Securities Fund (Fund) is included in this report. The financial statements of the remaining funds in the Trust are presented separately. Shares of the Fund are sold only to insurance company separate accounts to fund the benefits of variable life insurance policies or variable annuity contracts. The Fund offers three classes of shares: Class 1, Class 2, and Class 4. Each class of shares differs by its distribution fees, voting rights on matters affecting a single class and its exchange privilege.
The following summarizes the Fund’s significant accounting policies.
a. Security Valuation
Equity and other securities listed on a securities exchange or on the NASDAQ National Market System are valued at the last quoted sale price or the official closing price of the day, respectively. Over-the-counter securities and listed securities for which there is no reported sale are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. Certain equity securities are valued based upon fundamental characteristics or relationships to similar securities. Investments in open-end mutual funds and non-registered money market funds are valued at the closing net asset value.
The Fund has procedures to determine the fair value of individual securities and other assets for which market prices are not readily available or which may not be reliably priced. Methods for valuing these securities may include: fundamental analysis based upon the underlying investment book value, anticipated future cash flows, market changes in comparable or similar securities, matrix pricing, discounts from market prices of similar securities, or discounts applied due to the nature and duration of restrictions on the disposition of the securities. Due to the inherent uncertainty of valuations of such securities, the fair values may differ significantly from the values that would have been used had a ready market for such investments existed. Occasionally, events occur between the time at which trading in a security is completed and the close of the NYSE that might call into question the availability (including the reliability) of the value of a portfolio security held by the Fund. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services. All security valuation procedures are approved by the Fund’s Board of Trustees.
b. Repurchase Agreements
The Fund may enter into repurchase agreements, which are accounted for as a loan by the Fund to the seller, collateralized by securities which are delivered to the Fund’s custodian. The market value, including accrued interest, of the initial collateralization is required to be at least 102% of the dollar amount invested by the Fund, with the value of the underlying securities marked to market daily to maintain coverage of at least 100%. All repurchase agreements held by the Fund at period end had been entered into on June 30, 2009. Repurchase agreements are valued at cost.
c. Securities Lending
The Fund participates in a principal based security lending program. The Fund receives cash collateral against the loaned securities in an amount equal to at least 102% of the market value of the loaned securities. Collateral is maintained over the life of the loan in an amount not less than 100% of the market value of loaned securities, as determined at the close of Fund business each day; any additional collateral required due to changes in security values is delivered to the Fund on the next business day. The collateral is invested in repurchase agreements and a non-registered money market fund managed by the Fund’s custodian on the Fund’s behalf. The Fund receives income from the investment of cash collateral, in addition to lending fees and rebates paid by the borrower. The Fund bears the market risk with respect to the collateral investment, securities loaned, and the risk that the principal may default on its obligations to the Fund.
FSV-19
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Small Cap Value Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
d. Income Taxes
No provision has been made for U.S. income taxes because it is the Fund’s policy to qualify as a regulated investment company under the Internal Revenue Code and to distribute to shareholders substantially all of its taxable income and net realized gains.
The Fund has reviewed the tax positions, taken on federal income tax returns, for each of the three open tax years and as of June 30, 2009, and has determined that no provision for income tax is required in the Fund’s financial statements.
e. Security Transactions, Investment Income, Expenses and Distributions
Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Dividend income is recorded on the ex-dividend date. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with accounting principles generally accepted in the United States of America. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods.
Common expenses incurred by the Trust are allocated among the funds based on the ratio of net assets of each fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense.
Realized and unrealized gains and losses and net investment income, not including class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions, by class, are generally due to differences in class specific expenses.
f. Accounting Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
g. Guarantees and Indemnifications
Under the Trust’s organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, on behalf of the Fund, enters into contracts with service providers that contain general indemnification clauses. The Trust’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote.
FSV-20
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Small Cap Value Securities Fund
2. SHARES OF BENEFICIAL INTEREST
At June 30, 2009, there were an unlimited number of shares authorized (without par value). Transactions in the Fund’s shares were as follows:
| Six Months Ended June 30, 2009 | Year Ended December 31, 2008a | |||||||||||||
| Class 1 Shares: | Shares | Amount | Shares | Amount | ||||||||||
Shares sold | 327,539 | $ | 3,277,671 | 497,732 | $ | 7,402,544 | ||||||||
Shares issued in reinvestment of distributions | 206,867 | 2,209,342 | 267,107 | 4,431,305 | ||||||||||
Shares redeemed | (601,755 | ) | (5,807,572 | ) | (794,982 | ) | (11,890,312 | ) | ||||||
Net increase (decrease) | (67,349 | ) | $ | (320,559 | ) | (30,143 | ) | $ | (56,463 | ) | ||||
Class 2 Shares: | ||||||||||||||
Shares sold | 7,698,187 | $ | 75,084,200 | 18,734,933 | $ | 264,994,545 | ||||||||
Shares issued in reinvestment of distributions | 4,888,889 | 51,382,219 | 5,649,421 | 92,255,043 | ||||||||||
Shares redeemed | (9,465,147 | ) | (88,733,039 | ) | (18,829,303 | ) | (271,297,814 | ) | ||||||
Net increase (decrease) | 3,121,929 | $ | 37,733,380 | 5,555,051 | $ | 85,951,774 | ||||||||
Class 4 Shares: | ||||||||||||||
Shares sold | 793,146 | $ | 7,802,053 | 1,391,688 | $ | 18,668,696 | ||||||||
Shares issued on reinvestment of distributions | 123,855 | 1,317,820 | 6,580 | 109,104 | ||||||||||
Shares redeemed | (332,981 | ) | (2,972,383 | ) | (10,975 | ) | (157,373 | ) | ||||||
Net increase (decrease) | 584,020 | $ | 6,147,490 | 1,387,293 | $ | 18,620,427 | ||||||||
| aFor | the period February 29, 2008 (effective date) to December 31, 2008 for Class 4. |
3. TRANSACTIONS WITH AFFILIATES
Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Trust are also officers and/or directors of the following subsidiaries:
| Subsidiary | Affiliation | |
Franklin Advisory Services, LLC (Advisory Services) | Investment manager | |
Franklin Templeton Services, LLC (FT Services) | Administrative manager | |
Franklin Templeton Distributors, Inc. (Distributors) | Principal underwriter | |
Franklin Templeton Investor Services, LLC (Investor Services) | Transfer agent |
a. Management Fees
The Fund pays an investment management fee to Advisory Services based on the average daily net assets of the Fund as follows:
| Annualized Fee Rate | Net Assets | |
| 0.600% | Up to and including $200 million | |
| 0.500% | over $200 million, up to and including $1.3 billion | |
| 0.400% | In excess of $1.3 billion |
FSV-21
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Small Cap Value Securities Fund
3. TRANSACTIONS WITH AFFILIATES (continued)
b. Administrative Fees
The Fund pays an administrative fee to FT Services based on the Fund’s average daily net assets as follows:
| Annualized Fee Rate | Net Assets | |
| 0.150% | Up to and including $200 million | |
| 0.135% | over $200 million, up to and including $700 million | |
| 0.100% | over $700 million, up to and including $1.2 billion | |
| 0.075% | In excess of $1.2 billion |
c. Distribution Fees
The Fund’s Board of Trustees has adopted distribution plans for Class 2 and Class 4 shares pursuant to Rule 12b-1 under the 1940 Act. Under the Fund’s compensation distribution plans, the Fund pays Distributors for costs incurred in connection with the servicing, sale and distribution of the Fund’s shares up to 0.35% per year of its average daily net assets of each class. The Board of Trustees has agreed to limit the current rate to 0.25% per year for Class 2.
d. Transfer Agent Fees
Investor Services, under terms of an agreement, performs shareholder servicing for the Fund and is not paid by the Fund for the services.
4. EXPENSE OFFSET ARRANGEMENT
The Fund has entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Fund’s custodian expenses. During the period ended June 30, 2009, the custodian fees were reduced as noted in the Statement of Operations.
5. INCOME TAXES
For tax purposes, realized capital losses occurring subsequent to October 31, may be deferred and treated as occurring on the first day of the following fiscal year. At December 31, 2008, the Fund deferred realized capital losses of $2,556,232.
At June 30, 2009, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
Cost of investments | $ | 1,075,988,329 | ||
Unrealized appreciation | $ | 106,393,330 | ||
Unrealized depreciation | (323,323,970 | ) | ||
Net unrealized appreciation (depreciation) | $ | (216,930,640 | ) | |
Net investment income differs for financial statement and tax purposes primarily due to differing treatment of bond discounts and premiums.
Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatment of wash sales.
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Small Cap Value Securities Fund
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the period ended June 30, 2009, aggregated $52,639,433 and $34,778,307, respectively.
7. INVESTMENTS IN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO
The Fund may invest in the Institutional Fiduciary Trust Money Market Portfolio (Sweep Money Fund), an open-end investment company managed by Franklin Advisers, Inc. (an affiliate of the investment manager). Management fees paid by the Fund are reduced on assets invested in the Sweep Money Fund, in an amount not to exceed the management and administrative fees paid by the Sweep Money Fund.
8. HOLDINGS OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES
The 1940 Act defines “affiliated companies” to include investments in portfolio companies in which a fund owns 5% or more of the outstanding voting securities. Investments in “affiliated companies” for the Fund for the period ended June 30, 2009, were as shown below.
| Name of Issuer | Number of Shares Held at Beginning of Period | Gross Additions | Gross Reductions | Number of Shares Held at End of Period | Value at End of Period | Investment Income | Realized Capital Gain (Loss) | ||||||||||
Non-Controlled Affiliates | |||||||||||||||||
Hooker Furniture Corp. | 555,100 | — | — | 555,100 | $ | 6,372,548 | $ | 111,020 | $ | — | |||||||
Total Affiliated Securities (0.75% of Net Assets) | |||||||||||||||||
9. CREDIT FACILITY
Effective January 23, 2009, the Fund, together with other U.S. registered and foreign investment funds managed by Franklin Templeton Investments (individually, “Borrower”; collectively “Borrowers”), entered into a joint syndicated senior unsecured credit facility totaling $725 million (Global Credit Facility) to provide a source of funds to the Borrowers for temporary and emergency purposes, including the ability to meet future unanticipated or unusually large redemption requests.
Under the terms of the Global Credit Facility, the Fund shall, in addition to interest charged on any borrowings made by the Fund and other costs incurred by the Fund, pay its share of fees and expenses incurred in connection with the implementation and maintenance of the Global Credit Facility, based upon its relative share of the aggregate net assets of all of the Borrowers, including an annual commitment fee based upon the unused portion of the Global Credit Facility. During the period, the Fund incurred commitment fees of $920 of its pro rata portion of the Global Credit Facility, which is reflected in other expenses on the Statement of Operations. During the period ended June 30, 2009, the Fund did not utilize the Global Credit Facility.
10. FAIR VALUE MEASUREMENTS
Financial Accounting Standards Board (FASB) Statement No. 157, “Fair Value Measurement” (SFAS 157) establishes a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Fund’s own market assumptions (unobservable inputs). These inputs are used in determining the value of the Fund’s investments and are summarized in the following fair value hierarchy:
| • | Level 1 – quoted prices in active markets for identical securities |
| • | Level 2 – other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speed, credit risk, etc.) |
| • | Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments) |
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Small Cap Value Securities Fund
10. FAIR VALUE MEASUREMENTS (continued)
The inputs or methodology used for valuing securities are not an indication of the risk associated with investing in those securities.
The following is a summary of the inputs used as of June 30, 2009, in valuing the Fund’s assets and liabilities carried at fair value:
| Level 1 | Level 2 | Level 3 | Total | |||||||||
Assets: | ||||||||||||
Investments in Securities: | ||||||||||||
Equity Investmentsa | $ | 829,027,875 | $ | — | $ | — | $ | 829,027,875 | ||||
Convertible Bonds | — | 1,284,840 | — | 1,284,840 | ||||||||
Short Term Investments | 23,743,454 | 5,001,520 | 28,744,974 | |||||||||
Total Investments in Securities | $ | 852,771,329 | $ | 6,286,360 | $ | — | $ | 859,057,689 | ||||
aFor detailed industry descriptions, see the accompanying Statement of Investments.
11. SUBSEQUENT EVENTS
Management has evaluated subsequent events through August 7, 2009 and determined that no events have occurred that require disclosure.
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FRANKLIN SMALL-MID CAP GROWTH SECURITIES FUND
This semiannual report for Franklin Small-Mid Cap Growth Securities Fund covers the period ended June 30, 2009.
Performance Summary as of 6/30/09
Franklin Small-Mid Cap Growth Securities Fund – Class 1 delivered a +14.59% total return for the six-month period ended 6/30/09.
Performance reflects the Fund’s Class 1 operating expenses, but does not include any contract fees, expenses or sales charges. If they had been included, performance would be lower. These charges and deductions, particularly for variable life policies, can have a significant effect on contract values and insurance benefits. See the contract prospectus for a complete description of these expenses, including sales charges.
Franklin Small-Mid Cap Growth Securities Fund Class 1
Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares.
Current performance may differ from figures shown.
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Fund Goal and Main Investments: Franklin Small-Mid Cap Growth Securities Fund seeks long-term capital growth. The Fund normally invests at least 80% of its net assets in investments of small capitalization (small cap) and mid capitalization (mid cap) companies and normally invests predominantly in equity securities. For this Fund, small cap companies are those within the market capitalization range of companies in the Russell 2500™ Index at the time of purchase, and mid cap companies are companies within the market capitalization range of companies in the Russell Midcap® Index at the time of purchase.1
Performance Overview
You can find the Fund’s six-month total return in the Performance Summary. The Fund underperformed its narrow benchmark, the Russell Midcap Growth Index, which had a +16.61% total return, but outperformed its broad benchmark, the Standard & Poor’s 500 Index (S&P 500), which had a +3.16% total return, for the same period.2
Economic and Market Overview
During the six-month period ended June 30, 2009, the U.S. economy and stock markets seemed to stabilize after signs appeared that the recession’s severity had eased. Strains on the banking system and credit markets that surfaced in 2008 improved in 2009’s first half with the help of federal aid and tighter regulations. Although home sales fell for most of the period, they edged higher toward period-end. The pace of contraction in manufacturing activity decelerated. However, jobless claims mounted and the unemployment rate rose from 7.2% at the beginning of the year to 9.5% in June 2009, its highest rate since August 1983.3 Retail sales shrank from year-ago levels, and in February The Conference Board’s Consumer Confidence Index dropped to the lowest level since it began in 1967 before rebounding in the second quarter on improved expectations. Reflecting a broad-based contraction in consumer spending, falling corporate profits, slowing exports and reduced government spending, economic growth as measured by gross domestic product (GDP) fell at annualized rates of 6.4% and an estimated 1.0% in the first and second quarters of 2009.
Although the price of oil rose from $44 per barrel at the beginning of the period to $70 by period-end on speculation that the downturn was
1. Please see Index Descriptions following the Fund Summaries.
2. Source: © 2009 Morningstar. One cannot invest directly in an index, nor is an index representative of the Fund’s portfolio. Please see Index Descriptions following the Fund Summaries.
3. Source: Bureau of Labor Statistics.
Fund Risks: The Fund’s investments in stocks may offer the potential for long-term gains but can be subject to short-term price fluctuations. Smaller and midsize company securities can increase the risk of greater price fluctuations, particularly over the short term. Smaller or relatively new or unseasoned companies can also be particularly sensitive to changing economic conditions, and their prospects for growth are less certain than those of larger, more established companies. The Fund may have significant investments in the technology sector, which has been among the market’s most volatile sectors and involves special risks. The Fund’s prospectus also includes a description of the main investment risks.
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abating, it was still off more than 50% from its July 2008 record high.4 Prices for most other commodities followed similar trends. Partially as a result of reduced consumer spending and the late-2008 downward trajectory for energy prices, deflationary pressures surfaced. June’s inflation rate, as measured by the Consumer Price Index, was an annualized -1.4%, representing the steepest yearly decline in the cost of living in nearly six decades.1 Core inflation, which excludes food and energy costs, rose at a 1.7% annualized rate, which was within the Federal Reserve Board’s (Fed’s) informal target range of 1.5%–2.0%.3
A deepening recession and decelerating inflation prompted Washington policymakers to keep interest rates low and enact stimulus plans — including income tax cuts, aid to ailing state governments and funding for transportation infrastructure, school construction and high-tech projects. During the period under review, the Fed kept the federal funds target rate in a range of 0% to 0.25% and said the “pace of economic contraction is slowing” but the financial system had not yet returned to normal. The government also introduced various new measures to shore up financial markets and enhance market liquidity, proposed a sweeping financial regulatory system overhaul, and outlined details of its Public-Private Investment Program, with an objective of removing devalued real estate-related assets from banks’ balance sheets.
Most stocks suffered major losses through early March as investors worried about an uncertain future. Stocks then recovered somewhat from 12-year lows as investors perceived many bargains among the bear market fallout and data indicated the economy’s pace of contraction was moderating. By June, however, fresh investor concerns about the economy and stock valuations reemerged and dampened the rally’s momentum. For the six months under review, the blue chip stocks of the Dow Jones Industrial Average had a total return of -2.01%, while the broader S&P 500 posted a +3.16% total return and the technology-heavy NASDAQ Composite Index returned +16.99%.2 Information technology, materials and consumer discretionary stocks posted the largest gains while industrials, telecommunication services and financials stocks generally fell in value.
Investment Strategy
We use fundamental, bottom-up research to seek companies meeting our criteria of growth potential, quality and valuation. In seeking sustainable growth characteristics, we look for companies we believe can
4. Source: New York Mercantile Exchange.
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produce sustainable earnings and cash flow growth, evaluating the long-term market opportunity and competitive structure of an industry to target leaders and emerging leaders. We define quality companies as those with strong and improving competitive positions in attractive markets. We also believe important attributes of quality are experienced and talented management teams as well as financial strength reflected in the capital structure, gross and operating margins, free cash flow generation and returns on capital employed. Our valuation analysis includes a range of potential outcomes based on an assessment of multiple scenarios. In assessing value, we consider whether security prices fully reflect the balance of the sustainable growth opportunities relative to business and financial risks.
Manager’s Discussion
On a sector basis, stock selection in information technology, materials and consumer staples constrained the Fund’s performance relative to the Russell Midcap Growth Index during the reporting period. Significant detractors in the information technology sector included FLIR Systems, a specialized imaging systems manufacturer, and Alliance Data Systems, a credit and transaction services company. In the consumer staples sector, specialty foods and beverages company Hain Celestial Group5 underperformed. An underweighting in the materials sector, particularly in chemicals companies, had a negative impact on relative results. Other major detractors outside of these sectors included Orbital Sciences, 5 a communications satellites manufacturer, Sequenom,5 which makes a sequencing system to analyze DNA variations, and C.R. Bard, a medical devices manufacturer. We sold our position in Orbital Sciences by period-end.
On a positive note, stock selection in the consumer discretionary, energy and financials sectors contributed to relative Fund performance. Key holdings that performed well included apparel retailer Guess? in the consumer discretionary sector and oil and gas exploration and production company Petrohawk Energy in the energy sector. Our underweighted allocation to the financials sector, where asset management company Affiliated Managers Group was a contributor, supported relative Fund results. Additional significant contributors included semiconductor company Silicon Laboratories, hospital operator Community Health Systems, and industrial pumps and valves manufacturer Flowserve.
5. This holding is not an index component.
Top 10 Holdings
Franklin Small-Mid Cap Growth Securities Fund 6/30/09
| Company Sector/Industry | % of Total Net Assets | |
| Silicon Laboratories Inc. | 2.8% | |
| Information Technology | ||
| Flowserve Corp. | 2.4% | |
| Industrials | ||
| MasterCard Inc., A | 2.3% | |
| Information Technology | ||
| Express Scripts Inc. | 2.2% | |
| Health Care | ||
| Nuance Communications Inc. | 1.8% | |
| Information Technology | ||
| Affiliated Managers Group Inc. | 1.8% | |
| Financials | ||
| FLIR Systems Inc. | 1.8% | |
| Information Technology | ||
| AMETEK Inc. | 1.7% | |
| Industrials | ||
| Guess? Inc. | 1.7% | |
| Consumer Discretionary | ||
| Waters Corp. | 1.7% | |
| Health Care | ||
The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund’s Statement of Investments.
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Thank you for your participation in Franklin Small-Mid Cap Growth Securities Fund. We look forward to serving your future investment needs.
The foregoing information reflects our analysis, opinions and portfolio holdings as of June 30, 2009, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.
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Fund Expenses
As an investor in a variable insurance contract (Contract) that indirectly provides for investment in an underlying mutual fund, you can incur transaction and/or ongoing expenses at both the Fund level and the Contract level.
| • | Transaction expenses can include sales charges (loads) on purchases, surrender fees, transfer fees and premium taxes. |
| • | Ongoing expenses can include management fees, distribution and service (12b-1) fees, contract fees, annual maintenance fees, mortality and expense risk fees and other fees and expenses. All mutual funds and Contracts have some types of ongoing expenses. |
The expenses shown in the table are meant to highlight ongoing expenses at the Fund level only and do not include ongoing expenses at the Contract level, or transaction expenses at either the Fund or Contract levels. While the Fund does not have transaction expenses, if the transaction and ongoing expenses at the Contract level were included, the expenses shown below would be higher. You should consult your Contract prospectus or disclosure document for more information.
The table shows Fund-level ongoing expenses and can help you understand these expenses and compare them with those of other mutual funds offered through the Contract. The table assumes a $1,000 investment held for the six months indicated. Please refer to the Fund prospectus for additional information on operating expenses.
Actual Fund Expenses
The first line (Actual) of the table provides actual account values and expenses. The “Ending Account Value” is derived from the Fund’s actual return, which includes the effect of ongoing Fund expenses, but does not include the effect of ongoing Contract expenses.
You can estimate the Fund-level expenses you incurred during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:
| 1. | Divide your account value by $1,000. |
If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6.
| 2. | Multiply the result by the number under the heading “Fund-Level Expenses Incurred During Period.” |
If Fund-Level Expenses Incurred During Period were $7.50, then 8.6 x $7.50 = $64.50.
In this illustration, the estimated expenses incurred this period at the Fund level are $64.50.
Franklin Small-Mid Cap Growth Securities Fund Class 1
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Hypothetical Example for Comparison with Other Mutual Funds
Information in the second line (Hypothetical) of the table can help you compare ongoing expenses of the Fund with those of other mutual funds offered through the Contract. This information may not be used to estimate the actual ending account balance or expenses you incurred during the period. The hypothetical “Ending Account Value” is based on the Fund’s actual expense ratio and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Fund-Level Expenses Incurred During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds offered through a Contract.
| Class 1 | Beginning Account Value 1/1/09 | Ending Account Value 6/30/09 | Fund-Level Expenses Incurred During Period* 1/1/09–6/30/09 | ||||||
Actual | $ | 1,000 | $ | 1,145.90 | $ | 4.26 | |||
Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,020.83 | $ | 4.01 | |||
*Expenses are calculated using the most recent six-month annualized expense ratio for the Fund’s Class 1 shares (0.80%), which does not include any ongoing expenses of the Contract for which the Fund is an investment option, multiplied by the average account value over the period, multiplied by 181/365 to reflect the one-half year period.
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Franklin Templeton Variable Insurance Products Trust
Financial Highlights
Franklin Small-Mid Cap Growth Securities Fund
| Six Months Ended June 30, 2009 (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 1 | 2008 | 2007 | 2006 | 2005 | 2004 | |||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 12.06 | $ | 23.39 | $ | 22.51 | $ | 20.66 | $ | 19.66 | $ | 17.60 | ||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment income (loss)b | (0.07 | )c | 0.01 | (0.02 | ) | — | d | (0.02 | ) | (0.06 | ) | |||||||||||||
Net realized and unrealized gains (losses) | 1.83 | (8.98 | ) | 2.65 | 1.85 | 1.02 | 2.12 | |||||||||||||||||
Total from investment operations | 1.76 | (8.97 | ) | 2.63 | 1.85 | 1.00 | 2.06 | |||||||||||||||||
Less distributions from net realized gains | — | (2.36 | ) | (1.75 | ) | — | — | — | ||||||||||||||||
Net asset value, end of period | $ | 13.82 | $ | 12.06 | $ | 23.39 | $ | 22.51 | $ | 20.66 | $ | 19.66 | ||||||||||||
Total returne | 14.59% | (42.34)% | 11.51% | 8.95% | 5.09% | 11.70% | ||||||||||||||||||
Ratios to average net assetsf | ||||||||||||||||||||||||
Expenses | 0.80% | 0.76% | g | 0.74% | g | 0.76% | g | 0.74% | g | 0.74% | g | |||||||||||||
Net investment income (loss) | (1.07)% | c | 0.06% | (0.10)% | (0.02)% | (0.09)% | (0.33)% | |||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 67,669 | $ | 63,531 | $ | 127,602 | $ | 135,402 | $ | 157,085 | $ | 184,513 | ||||||||||||
Portfolio turnover rate | 33.06% | 60.12% | 66.94% | 50.08% | 74.39% | 32.55% | ||||||||||||||||||
aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.
bBased on average daily shares outstanding.
cNet investment income per share includes approximately $(0.06) per share as a return of capital adjustment to a previously recorded special dividend received by the Fund. Excluding this non-recurring amount, the ratio of net investment income to average net assets would have been (0.02)%.
dAmount rounds to less than $0.01 per share.
eTotal return does not include any fees, charges or expenses imposed by the variable annuity and life insurance contracts for which the Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle. Total return is not annualized for periods less than one year.
fRatios are annualized for periods less than one year.
gBenefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
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Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Franklin Small-Mid Cap Growth Securities Fund
| Six Months Ended June 30, 2009 (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 2 | 2008 | 2007 | 2006 | 2005 | 2004 | |||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 11.75 | $ | 22.91 | $ | 22.13 | $ | 20.36 | $ | 19.43 | $ | 17.43 | ||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment income (loss)b | (0.08 | )c | (0.03 | ) | (0.08 | ) | (0.06 | ) | (0.07 | ) | (0.10 | ) | ||||||||||||
Net realized and unrealized gains (losses) | 1.78 | (8.77 | ) | 2.61 | 1.83 | 1.00 | 2.10 | |||||||||||||||||
Total from investment operations | 1.70 | (8.80 | ) | 2.53 | 1.77 | 0.93 | 2.00 | |||||||||||||||||
Less distributions from net realized gains | — | (2.36 | ) | (1.75 | ) | — | — | — | ||||||||||||||||
Net asset value, end of period | $ | 13.45 | $ | 11.75 | $ | 22.91 | $ | 22.13 | $ | 20.36 | $ | 19.43 | ||||||||||||
Total returnd | 14.47% | (42.49)% | 11.24% | 8.69% | 4.79% | 11.47% | ||||||||||||||||||
Ratios to average net assetse | ||||||||||||||||||||||||
Expenses | 1.05% | 1.01% | f | 0.99% | f | 1.01% | f | 0.99% | f | 0.99% | f | |||||||||||||
Net investment income (loss) | (1.32)% | c | (0.19)% | (0.35)% | (0.27)% | (0.34)% | (0.58)% | |||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 677,490 | $ | 614,053 | $ | 1,217,177 | $ | 1,184,521 | $ | 1,166,806 | $ | 1,142,048 | ||||||||||||
Portfolio turnover rate | 33.06% | 60.12% | 66.94% | 50.08% | 74.39% | 32.55% | ||||||||||||||||||
aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.
bBased on average daily shares outstanding.
cNet investment income per share includes approximately $(0.06) per share as a return of capital adjustment to a previously recorded special dividend received by the Fund. Excluding this non-recurring amount, the ratio of net investment income to average net assets would have been (0.27)%.
dTotal return does not include any fees, charges or expenses imposed by the variable annuity and life insurance contracts for which the Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle. Total return is not annualized for periods less than one year.
eRatios are annualized for periods less than one year.
fBenefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
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Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Franklin Small-Mid Cap Growth Securities Fund
| Six Months Ended June 30, 2009 (unaudited) | Period Ended December 31, | |||||||
| Class 4 | 2008a | |||||||
Per share operating performance | ||||||||
(for a share outstanding throughout the period) | ||||||||
Net asset value, beginning of period | $ | 12.02 | $ | 20.60 | ||||
Income from investment operationsb: | ||||||||
Net investment income (loss)c | (0.09 | )d | 0.02 | |||||
Net realized and unrealized gains (losses) | 1.82 | (6.24 | ) | |||||
Total from investment operations | 1.73 | (6.22 | ) | |||||
Less distributions from net realized gains | — | (2.36 | ) | |||||
Net asset value, end of period | $ | 13.75 | $ | 12.02 | ||||
Total returne | 14.39% | (34.74)% | ||||||
Ratios to average net assetsf | ||||||||
Expenses | 1.15% | 1.11% | g | |||||
Net investment income (loss) | (1.42)% | d | (0.29)% | |||||
Supplemental data | ||||||||
Net assets, end of period (000’s) | $ | 7,502 | $ | 3,538 | ||||
Portfolio turnover rate | 33.06% | 60.12% | ||||||
aFor the period February 29, 2008 (effective date) to December 31, 2008.
bThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.
cBased on average daily shares outstanding.
dNet investment income per share includes approximately $(0.06) per share as a return of capital adjustment to a previously recorded special dividend received by the Fund. Excluding this non-recurring amount, the ratio of net investment income to average net assets would have been (0.37)%.
eTotal return does not include any fees, charges or expenses imposed by the variable annuity and life insurance contracts for which the Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle. Total return is not annualized for periods less than one year.
fRatios are annualized for periods less than one year.
gBenefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
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Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited)
| Franklin Small-Mid Cap Growth Securities Fund | Shares | Value | |||
Common Stocks 94.8% | |||||
Consumer Discretionary 14.4% | |||||
Abercrombie & Fitch Co., A | 244,800 | $ | 6,215,472 | ||
aApollo Group Inc., A | 85,600 | 6,087,872 | |||
BorgWarner Inc. | 278,400 | 9,507,360 | |||
aBuffalo Wild Wings Inc. | 120,000 | 3,902,400 | |||
aCapella Education Co. | 84,700 | 5,077,765 | |||
aChipotle Mexican Grill Inc., A | 52,100 | 4,168,000 | |||
aDick’s Sporting Goods Inc. | 357,500 | 6,149,000 | |||
Guess? Inc. | 498,900 | 12,861,642 | |||
aJarden Corp. | 188,900 | 3,541,875 | |||
Johnson Controls Inc. | 450,000 | 9,774,000 | |||
aLiberty Media Corp. - Entertainment, A | 315,000 | 8,426,250 | |||
NIKE Inc., B | 103,700 | 5,369,586 | |||
PetSmart Inc. | 150,100 | 3,221,146 | |||
aUnder Armour Inc., A | 146,330 | 3,274,865 | |||
aUrban Outfitters Inc. | 395,400 | 8,251,998 | |||
Wolverine World Wide Inc. | 558,000 | 12,309,480 | |||
| 108,138,711 | |||||
Consumer Staples 3.0% | |||||
Clorox Co. | 109,600 | 6,118,968 | |||
aHain Celestial Group Inc. | 324,200 | 5,060,762 | |||
aHansen Natural Corp. | 168,700 | 5,199,334 | |||
aMead Johnson Nutrition Co., A | 191,200 | 6,074,424 | |||
| 22,453,488 | |||||
Energy 6.2% | |||||
aCameron International Corp. | 220,200 | 6,231,660 | |||
aConcho Resources Inc. | 273,579 | 7,848,982 | |||
aFMC Technologies Inc. | 313,200 | 11,770,056 | |||
aPetrohawk Energy Corp. | 356,500 | 7,949,950 | |||
Range Resources Corp. | 178,700 | 7,399,967 | |||
Smith International Inc. | 221,000 | 5,690,750 | |||
| 46,891,365 | |||||
Financials 5.4% | |||||
aAffiliated Managers Group Inc. | 232,700 | 13,540,813 | |||
BlackRock Inc. | 20,000 | 3,508,400 | |||
The Charles Schwab Corp. | 425,700 | 7,466,778 | |||
FelCor Lodging Trust Inc. | 390,800 | 961,368 | |||
iStar Financial Inc. | 824,991 | 2,342,974 | |||
M&T Bancorp | 92,100 | 4,690,653 | |||
T. Rowe Price Group Inc. | 197,865 | 8,245,035 | |||
| 40,756,021 | |||||
Health Care 23.2% | |||||
Allscripts-Misys Healthcare Solutions Inc. | 339,600 | 5,386,056 | |||
aAthenahealth Inc. | 110,500 | 4,089,605 | |||
aBioMarin Pharmaceutical Inc. | 271,000 | 4,230,310 | |||
C. R. Bard Inc. | 124,000 | 9,231,800 | |||
aCelgene Corp. | 169,100 | 8,089,744 | |||
aCerner Corp. | 160,000 | 9,966,400 | |||
aCommunity Health Systems Inc. | 410,400 | 10,362,600 | |||
aDaVita Inc. | 131,500 | 6,503,990 | |||
aDendreon Corp. | 80,000 | 1,988,000 | |||
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Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Franklin Small-Mid Cap Growth Securities Fund | Shares | Value | |||
Common Stocks (continued) | |||||
Health Care (continued) | |||||
aExpress Scripts Inc. | 237,400 | $ | 16,321,250 | ||
aIllumina Inc. | 100,000 | 3,894,000 | |||
aIntuitive Surgical Inc. | 48,100 | 7,872,046 | |||
aLife Technologies Corp. | 207,600 | 8,661,072 | |||
aMasimo Corp. | 207,500 | 5,002,825 | |||
aMettler-Toledo International Inc. | 146,400 | 11,294,760 | |||
aMyriad Genetics Inc. | 287,300 | 10,242,245 | |||
aOSI Pharmaceuticals Inc. | 39,900 | 1,126,377 | |||
Perrigo Co. | 279,626 | 7,768,010 | |||
Pharmaceutical Product Development Inc. | 365,000 | 8,475,300 | |||
aQIAGEN NV (Netherlands) | 350,700 | 6,519,513 | |||
Quality Systems Inc. | 76,800 | 4,374,528 | |||
aSequenom Inc. | 267,400 | 1,045,534 | |||
aVarian Medical Systems Inc. | 276,940 | 9,731,672 | |||
aWaters Corp. | 241,500 | 12,430,005 | |||
| 174,607,642 | |||||
Industrials 13.3% | |||||
aAllegiant Travel Co. | 107,400 | 4,257,336 | |||
AMETEK Inc. | 374,600 | 12,953,668 | |||
C.H. Robinson Worldwide Inc. | 120,370 | 6,277,296 | |||
Danaher Corp. | 94,400 | 5,828,256 | |||
Expeditors International of Washington Inc. | 199,000 | 6,634,660 | |||
Flowserve Corp. | 263,800 | 18,415,878 | |||
Heico Corp. | 21,193 | 768,458 | |||
aJacobs Engineering Group Inc. | 116,100 | 4,886,649 | |||
Precision Castparts Corp. | 162,700 | 11,881,981 | |||
Robert Half International Inc. | 356,400 | 8,418,168 | |||
Rockwell Collins Inc. | 265,000 | 11,058,450 | |||
aRyanair Holdings PLC, ADR (Ireland) | 316,100 | 8,974,079 | |||
| 100,354,879 | |||||
Information Technology 25.1% | |||||
aActivision Blizzard Inc. | 910,600 | 11,500,878 | |||
aAffiliated Computer Services Inc., A | 214,600 | 9,532,532 | |||
aAlliance Data Systems Corp. | 195,400 | 8,048,526 | |||
aANSYS Inc. | 255,700 | 7,967,612 | |||
aConcur Technologies Inc. | 126,200 | 3,922,296 | |||
aF5 Networks Inc. | 170,000 | 5,880,300 | |||
FactSet Research Systems Inc. | 167,100 | 8,333,277 | |||
aFLIR Systems Inc. | 590,800 | 13,328,448 | |||
aFormFactor Inc. | 617,300 | 10,642,252 | |||
aHittite Microwave Corp. | 179,200 | 6,227,200 | |||
aJuniper Networks Inc. | 300,000 | 7,080,000 | |||
aLam Research Corp. | 249,400 | 6,484,400 | |||
MasterCard Inc., A | 104,200 | 17,433,702 | |||
aMcAfee Inc. | 150,000 | 6,328,500 | |||
aNetlogic Microsystems Inc. | 62,200 | 2,267,812 | |||
aNuance Communications Inc. | 1,132,290 | 13,689,386 | |||
aSAIC Inc. | 541,300 | 10,041,115 | |||
aSilicon Laboratories Inc. | 551,400 | 20,920,116 | |||
Tandberg ASA (Norway) | 611,800 | 10,295,100 | |||
aTrimble Navigation Ltd. | 358,300 | 7,033,429 | |||
aViaSat Inc. | 71,101 | 1,823,030 | |||
| 188,779,911 | |||||
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Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Franklin Small-Mid Cap Growth Securities Fund | Shares | Value | ||||
Common Stocks (continued) | ||||||
Materials 1.0% | ||||||
Ecolab Inc. | 186,900 | $ | 7,287,231 | |||
Telecommunication Services 2.2% | ||||||
aAmerican Tower Corp., A | 190,600 | 6,009,618 | ||||
aSBA Communications Corp. | 424,900 | 10,427,046 | ||||
| 16,436,664 | ||||||
Utilities 1.0% | ||||||
aCalpine Corp. | 713,400 | 7,954,410 | ||||
Total Common Stocks (Cost $678,645,972) | 713,660,322 | |||||
| Principal Amount | ||||||
Convertible Bonds 0.3% | ||||||
Information Technology 0.3% | ||||||
bAlliance Data Systems Corp., senior note, 144A, cvt., 4.75%, 5/15/14 | $ | 781,000 | 805,359 | |||
Microchip Technology Inc., cvt., 2.125%, 12/15/37 | 1,835,000 | 1,390,013 | ||||
Total Convertible Bonds (Cost $2,244,454) | 2,195,372 | |||||
Total Investments before Short Term Investments (Cost $680,890,426) | 715,855,694 | |||||
| Shares | ||||||
Short Term Investments (Cost $36,416,752) 4.8% | ||||||
Money Market Funds 4.8% | ||||||
cInstitutional Fiduciary Trust Money Market Portfolio, 0.00% | 36,416,752 | 36,416,752 | ||||
Total Investments (Cost $717,307,178) 99.9% | 752,272,446 | |||||
Other Assets, less Liabilities 0.1% | 388,483 | |||||
Net Assets 100.0% | $ | 752,660,929 | ||||
See Abbreviations on Page FSC-22.
aNon-income producing.
bSecurity was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be sold in transactions exempt from registration only to qualified institutional buyers or in a public offering registered under the Securities Act of 1933. This security has been deemed liquid under guidelines approved by the Trust’s Board of Trustees. At June 30, 2009, the value of this security was $805,359, representing 0.11% of net assets.
cSee Note 7 regarding investments in the Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end.
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Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements
Statement of Assets and Liabilities
June 30, 2009 (unaudited)
| Franklin Small-Mid Cap Growth Securities Fund | ||||
Assets: | ||||
Investments in securities: | ||||
Cost - Unaffiliated issuers | $ | 680,890,426 | ||
Cost - Sweep Money Fund (Note 7) | 36,416,752 | |||
Total cost of investments | $ | 717,307,178 | ||
Value - Unaffiliated issuers | $ | 715,855,694 | ||
Value - Sweep Money Fund (Note 7) | 36,416,752 | |||
Total value of investments | 752,272,446 | |||
Receivables: | ||||
Investment securities sold | 1,550,152 | |||
Capital shares sold | 436,990 | |||
Dividends and interest | 373,968 | |||
Other assets | 980 | |||
Total assets | 754,634,536 | |||
Liabilities: | ||||
Payables: | ||||
Investment securities purchased | 119,883 | |||
Capital shares redeemed | 872,143 | |||
Affiliates | 745,278 | |||
Reports to shareholders | 209,141 | |||
Accrued expenses and other liabilities | 27,162 | |||
Total liabilities | 1,973,607 | |||
Net assets, at value | $ | 752,660,929 | ||
Net assets consist of: | ||||
Paid-in capital | $ | 906,693,094 | ||
Undistributed net investment income (loss) | (4,459,200 | ) | ||
Net unrealized appreciation (depreciation) | 34,965,268 | |||
Accumulated net realized gain (loss) | (184,538,233 | ) | ||
Net assets, at value | $ | 752,660,929 | ||
Class 1: | ||||
Net assets, at value | $ | 67,668,707 | ||
Shares outstanding | 4,894,810 | |||
Net asset value and maximum offering price per share | $ | 13.82 | ||
Class 2: | ||||
Net assets, at value | $ | 677,490,300 | ||
Shares outstanding | 50,363,307 | |||
Net asset value and maximum offering price per share | $ | 13.45 | ||
Class 4: | ||||
Net assets, at value | $ | 7,501,922 | ||
Shares outstanding | 545,408 | |||
Net asset value and maximum offering price per share | $ | 13.75 | ||
The accompanying notes are an integral part of these financial statements.
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Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Operations
for the six months ended June 30, 2009 (unaudited)
| Franklin Small-Mid Cap Growth Securities Fund | ||||
Investment income: | ||||
Dividends: | ||||
Unaffiliated issuers | $ | (990,936 | )a | |
Sweep Money Fund (Note 7) | 28,265 | |||
Interest | 25,755 | |||
Total investment loss | (936,916 | ) | ||
Expenses: | ||||
Management fees (Note 3a) | 1,715,681 | |||
Administrative fees (Note 3b) | 852,146 | |||
Distribution fees: (Note 3c) | ||||
Class 2 | 767,593 | |||
Class 4 | 8,900 | |||
Unaffiliated transfer agent fees | 1,354 | |||
Custodian fees (Note 4) | 8,591 | |||
Reports to shareholders | 114,625 | |||
Professional fees | 15,892 | |||
Trustees’ fees and expenses | 2,571 | |||
Other | 14,825 | |||
Total expenses | 3,502,178 | |||
Net investment income (loss) | (4,439,094 | ) | ||
Realized and unrealized gains (losses): | ||||
Net realized gain (loss) from: | ||||
Investments | (50,455,464 | ) | ||
Foreign currency transactions | (31,509 | ) | ||
Net realized gain (loss) | (50,486,973 | ) | ||
Net change in unrealized appreciation (depreciation) on investments | 148,841,942 | |||
Net realized and unrealized gain (loss) | 98,354,969 | |||
Net increase (decrease) in net assets resulting from operations | $ | 93,915,875 | ||
aDividend income includes $(3,585,737) as a return of capital adjustment to a previously recorded special dividend received by the Fund. Excluding this non-recurring amount, the dividend income would have been $2,594,801.
The accompanying notes are an integral part of these financial statements.
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Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statements of Changes in Net Assets
| Franklin Small-Mid Cap Growth Securities Fund | ||||||||
| Six Months Ended June 30, 2009 (unaudited) | Year Ended December 31, 2008 | |||||||
Increase (decrease) in net assets: | ||||||||
Operations: | ||||||||
Net investment income (loss) | $ | (4,439,094 | ) | $ | (1,751,350 | ) | ||
Net realized gain (loss) from investments and foreign currency transactions | (50,486,973 | ) | (129,490,774 | ) | ||||
Net change in unrealized appreciation (depreciation) on investments | 148,841,942 | (402,574,863 | ) | |||||
Net increase (decrease) in net assets resulting from operations | 93,915,875 | (533,816,987 | ) | |||||
Distributions to shareholders from: | ||||||||
Net realized gains: | ||||||||
Class 1 | — | (12,125,691 | ) | |||||
Class 2 | — | (120,375,409 | ) | |||||
Class 4 | — | (60,013 | ) | |||||
Total distributions to shareholders | — | (132,561,113 | ) | |||||
Capital share transactions: (Note 2) | ||||||||
Class 1 | (4,380,200 | ) | (2,123,859 | ) | ||||
Class 2 | (21,121,655 | ) | 111,515 | |||||
Class 4 | 3,124,535 | 4,733,324 | ||||||
Total capital share transactions | (22,377,320 | ) | 2,720,980 | |||||
Net increase (decrease) in net assets | 71,538,555 | (663,657,120 | ) | |||||
Net assets: | ||||||||
Beginning of period | 681,122,374 | 1,344,779,494 | ||||||
End of period | $ | 752,660,929 | $ | 681,122,374 | ||||
Undistributed net investment income (loss) included in net assets: | ||||||||
End of period | $ | (4,459,200 | ) | $ | (20,106 | ) | ||
The accompanying notes are an integral part of these financial statements.
FSC-16
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited)
Franklin Small-Mid Cap Growth Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Templeton Variable Insurance Products Trust (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end investment company, consisting of twenty-two separate funds. The Franklin Small-Mid Cap Growth Securities Fund (Fund) is included in this report. The financial statements of the remaining funds in the Trust are presented separately. Shares of the Fund are sold only to insurance company separate accounts to fund the benefits of variable life insurance policies or variable annuity contracts. The Fund offers three classes of shares: Class 1, Class 2, and Class 4. Each class of shares differs by its distribution fees, voting rights on matters affecting a single class and its exchange privilege.
The following summarizes the Fund’s significant accounting policies.
a. Security Valuation
Equity and other securities listed on a securities exchange or on the NASDAQ National Market System are valued at the last quoted sale price or the official closing price of the day, respectively. Over-the-counter securities and listed securities for which there is no reported sale are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. Certain equity securities are valued based upon fundamental characteristics or relationships to similar securities. Investments in open-end mutual funds are valued at the closing net asset value.
Foreign equity securities are valued as of the close of trading on the foreign stock exchange on which the security is primarily traded, or the NYSE, whichever is earlier. If no sale is reported at that time, the foreign equity security will be valued within the range of the most recent quoted bid and ask prices. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at the close of the NYSE on the day that the value of the security is determined.
The Fund has procedures to determine the fair value of individual securities and other assets for which market prices are not readily available or which may not be reliably priced. Methods for valuing these securities may include: fundamental analysis based upon the underlying investment book value, anticipated future cash flows, market changes in comparable or similar securities, matrix pricing, discounts from market prices of similar securities, or discounts applied due to the nature and duration of restrictions on the disposition of the securities. Due to the inherent uncertainty of valuations of such securities, the fair values may differ significantly from the values that would have been used had a ready market for such investments existed. Occasionally, events occur between the time at which trading in a security is completed and the close of the NYSE that might call into question the availability (including the reliability) of the value of a portfolio security held by the Fund. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services. All security valuation procedures are approved by the Fund’s Board of Trustees.
b. Foreign Currency Translation
Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. Purchases and sales of securities, income and expense items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. Occasionally, events may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the Fund’s Board of Trustees.
The Fund does not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments on the Statement of Operations.
Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period.
FSC-17
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Small-Mid Cap Growth Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
c. Foreign Currency Contracts
The Fund enters into foreign exchange contracts in order to manage foreign exchange rate risk between the trade date and settlement date of securities transactions. A foreign exchange contract is an agreement between the Fund and a counterparty to buy or sell a foreign currency for a specific exchange rate on a future date.
d. Income Taxes
No provision has been made for U.S. income taxes because it is the Fund’s policy to qualify as a regulated investment company under the Internal Revenue Code and to distribute to shareholders substantially all of its taxable income and net realized gains.
The Fund has reviewed the tax positions, taken on federal income tax returns, for each of the three open tax years and as of June 30, 2009, and has determined that no provision for income tax is required in the Fund’s financial statements.
e. Security Transactions, Investment Income, Expenses and Distributions
Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Dividend income is recorded on the ex-dividend date. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with accounting principles generally accepted in the United States of America. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods.
Common expenses incurred by the Trust are allocated among the funds based on the ratio of net assets of each fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense.
Realized and unrealized gains and losses and net investment income, not including class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions, by class, are generally due to differences in class specific expenses.
Distributions received by the Fund from certain securities may be a return of capital (ROC). Such distributions reduce the cost basis of the securities, and any distributions in excess of the cost basis are recognized as capital gains.
f. Accounting Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
g. Guarantees and Indemnifications
Under the Trust’s organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, on behalf of the Fund, enters into contracts with service providers that contain general indemnification clauses. The Trust’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote.
FSC-18
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Small-Mid Cap Growth Securities Fund
2. SHARES OF BENEFICIAL INTEREST
At June 30, 2009, there were an unlimited number of shares authorized (without par value). Transactions in the Fund’s shares were as follows:
| Six Months Ended June 30, 2009 | Year Ended December 31, 2008a | |||||||||||||
| Class 1 Shares: | Shares | Amount | Shares | Amount | ||||||||||
Shares sold | 263,078 | $ | 3,203,193 | 227,516 | $ | 3,688,465 | ||||||||
Shares issued in reinvestment of distributions | — | — | 606,588 | 12,125,691 | ||||||||||
Shares redeemed | (635,758 | ) | (7,583,393 | ) | (1,022,106 | ) | (17,938,015 | ) | ||||||
Net increase (decrease) | (372,680 | ) | $ | (4,380,200 | ) | (188,002 | ) | $ | (2,123,859 | ) | ||||
Class 2 Shares: | ||||||||||||||
Shares sold | 3,245,563 | $ | 39,705,015 | 5,946,940 | $ | 107,425,372 | ||||||||
Shares issued in reinvestment of distributions | — | — | 6,173,098 | 120,375,409 | ||||||||||
Shares redeemed | (5,138,841 | ) | (60,826,670 | ) | (13,001,795 | ) | (227,689,266 | ) | ||||||
Net increase (decrease) | (1,893,278 | ) | $ | (21,121,655 | ) | (881,757 | ) | $ | 111,515 | |||||
Class 4 Shares: | ||||||||||||||
Shares sold | 266,898 | $ | 3,321,629 | 307,835 | $ | 4,910,005 | ||||||||
Shares issued on reinvestment of distributions | — | — | 2,978 | 59,439 | ||||||||||
Shares redeemed | (15,784 | ) | (197,094 | ) | (16,519 | ) | (236,120 | ) | ||||||
Net increase (decrease) | 251,114 | $ | 3,124,535 | 294,294 | $ | 4,733,324 | ||||||||
| aFor | the period February 29, 2008 (effective date) to December 31, 2008 for Class 4. |
3. TRANSACTIONS WITH AFFILIATES
Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Trust are also officers and/or directors of the following subsidiaries:
| Subsidiary | Affiliation | |
Franklin Advisers, Inc. (Advisers) | Investment manager | |
Franklin Templeton Services, LLC (FT Services) | Administrative manager | |
Franklin Templeton Distributors, Inc. (Distributors) | Principal underwriter | |
Franklin Templeton Investor Services, LLC (Investor Services) | Transfer agent |
a. Management Fees
The Fund pays an investment management fee to Advisers based on the average daily net assets of the Fund as follows:
| Annualized Fee Rate | Net Assets | |
| 0.550% | Up to and including $500 million | |
| 0.450% | Over $500 million, up to and including $1 billion | |
| 0.400% | Over $1 billion, up to and including $1.5 billion | |
| 0.350% | Over $1.5 billion, up to and including $6.5 billion | |
| 0.325% | Over $6.5 billion, up to and including $11.5 billion | |
| 0.300% | Over $11.5 billion, up to and including $16.5 billion | |
| 0.290% | Over $16.5 billion, up to and including $19 billion | |
| 0.280% | Over $19 billion, up to and including $21.5 billion | |
| 0.270% | In excess of $21.5 billion |
FSC-19
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Small-Mid Cap Growth Securities Fund
3. TRANSACTIONS WITH AFFILIATES (continued)
b. Administrative Fees
The Fund pays an administrative fee to FT Services of 0.25% per year of the average daily net assets of the Fund.
c. Distribution Fees
The Fund’s Board of Trustees has adopted distribution plans for Class 2 and Class 4 shares pursuant to Rule 12b-1 under the 1940 Act. Under the Fund’s compensation distribution plans, the Fund pays Distributors for costs incurred in connection with the servicing, sale and distribution of the Fund’s shares up to 0.35% per year of its average daily net assets of each class. The Board of Trustees has agreed to limit the current rate to 0.25% per year for Class 2.
d. Transfer Agent Fees
Investor Services, under terms of an agreement, performs shareholder servicing for the Fund and is not paid by the Fund for the services.
4. EXPENSE OFFSET ARRANGEMENT
The Fund has entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Fund’s custodian expenses. During the period ended June 30, 2009, there were no credits earned.
5. INCOME TAXES
For tax purposes, capital losses may be carried over to offset future capital gains, if any. At December 31, 2008, the Fund had tax basis capital losses of $75,079,787 expiring in 2016.
For tax purposes, realized capital losses and realized currency losses occurring subsequent to October 31, may be deferred and treated as occurring on the first day of the following fiscal year. At December 31, 2008, the Fund deferred realized capital losses and realized currency losses of $57,219,137 and $25,833, respectively.
At June 30, 2009, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
Cost of investments | $ | 717,417,800 | ||
Unrealized appreciation | $ | 127,964,205 | ||
Unrealized depreciation | (93,109,559 | ) | ||
Net unrealized appreciation (depreciation) | $ | 34,854,646 | ||
Net investment income (loss) differs for financial statement and tax purposes primarily due to differing treatment of foreign currency transactions, bond discounts and premiums and corporate actions.
Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatments of wash sales and foreign currency transactions.
FSC-20
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Small-Mid Cap Growth Securities Fund
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the period ended June 30, 2009, aggregated $214,256,272 and $236,383,589, respectively.
7. INVESTMENTS IN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO
The Fund may invest in the Institutional Fiduciary Trust Money Market Portfolio (Sweep Money Fund), an open-end investment company managed by Advisers. Management fees paid by the Fund are reduced on assets invested in the Sweep Money Fund, in an amount not to exceed the management and administrative fees paid by the Sweep Money Fund.
8. CREDIT FACILITY
Effective January 23, 2009, the Fund, together with other U.S. registered and foreign investment funds managed by Franklin Templeton Investments (individually, “Borrower”; collectively “Borrowers”), entered into a joint syndicated senior unsecured credit facility totaling $725 million (Global Credit Facility) to provide a source of funds to the Borrowers for temporary and emergency purposes, including the ability to meet future unanticipated or unusually large redemption requests.
Under the terms of the Global Credit Facility, the Fund shall, in addition to interest charged on any borrowings made by the Fund and other costs incurred by the Fund, pay its share of fees and expenses incurred in connection with the implementation and maintenance of the Global Credit Facility, based upon its relative share of the aggregate net assets of all of the Borrowers, including an annual commitment fee based upon the unused portion of the Global Credit Facility. During the period, the Fund incurred commitment fees of $751 of its pro rata portion of the Global Credit Facility, which is reflected in other expenses on the Statement of Operations. During the period ended June 30, 2009, the Fund did not utilize the Global Credit Facility.
9. FAIR VALUE MEASUREMENTS
Financial Accounting Standards Board (FASB) Statement No. 157, “Fair Value Measurement” (SFAS 157) establishes a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Fund’s own market assumptions (unobservable inputs). These inputs are used in determining the value of the Fund’s investments and are summarized in the following fair value hierarchy:
| • | Level 1 – quoted prices in active markets for identical securities |
| • | Level 2 – other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speed, credit risk, etc.) |
| • | Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments) |
The inputs or methodology used for valuing securities are not an indication of the risk associated with investing in those securities.
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Small-Mid Cap Growth Securities Fund
9. FAIR VALUE MEASUREMENTS (continued)
The following is a summary of the inputs used as of June 30, 2009, in valuing the Fund’s assets and liabilities carried at fair value:
| Level 1 | Level 2 | Level 3 | Total | |||||||||
Assets: | ||||||||||||
Investments in Securities | ||||||||||||
Equity Investmentsa | $ | 713,660,322 | $ | — | $ | — | $ | 713,660,322 | ||||
Convertible Bonds | — | 2,195,372 | — | 2,195,372 | ||||||||
Short Term Investments | 36,416,752 | — | — | 36,416,752 | ||||||||
Total Investments in Securities | $ | 750,077,074 | $ | 2,195,372 | $ | — | $ | 752,272,446 | ||||
aFor detailed industry descriptions, see the accompanying Statement of Investments.
10. SUBSEQUENT EVENTS
Management has evaluated subsequent events through August 7, 2009 and determined that no events have occurred that require disclosure.
ABBREVIATIONS
Selected Portfolio
ADR - American Depository Receipt
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FRANKLIN STRATEGIC INCOME SECURITIES FUND
This semiannual report for Franklin Strategic Income Securities Fund covers the period ended June 30, 2009.
Performance Summary as of 6/30/09
Franklin Strategic Income Securities Fund – Class 1 delivered a +12.86% total return for the six-month period ended 6/30/09.
Performance reflects the Fund’s Class 1 operating expenses, but does not include any contract fees, expenses or sales charges. If they had been included, performance would be lower. These charges and deductions, particularly for variable life policies, can have a significant effect on contract values and insurance benefits. See the contract prospectus for a complete description of these expenses, including sales charges.
Franklin Strategic Income Securities Fund – Class 1
Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares.
Current performance may differ from figures shown.
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Fund Goals and Main Investments: Franklin Strategic Income Securities Fund seeks a high level of current income, with capital appreciation over the long term as a secondary goal. The Fund normally invests primarily to predominantly in U.S. and foreign debt securities, including those in emerging markets. Debt securities may be high yield and lower rated and include all varieties of fixed and floating rate income securities, including bonds, mortgage securities and other asset-backed and convertible securities.
Performance Overview
You can find the Fund’s six-month total return in the Performance Summary. Compared with its benchmarks for the same period, the Fund outperformed the Barclay’s Capital (BC) U.S. Aggregate Index’s +1.90% total return, and performed comparably to the Lipper Multi-Sector Income Funds Classification Average’s +12.62% total return.1
Economic and Market Overview
During the six-month period ended June 30, 2009, economic conditions deteriorated. In February, The Conference Board’s Consumer Confidence Index fell to an all-time low since it began in 1967 as the U.S. economy faltered and as stock markets declined. Despite far-reaching government interventions, the nation’s economic troubles worsened as manufacturing activity weakened at its fastest pace in nearly 30 years and as home prices fell at an accelerated rate. Jobless claims mounted and the unemployment rate rose to 9.5% by period-end.2 Economic growth, as measured by gross domestic product, fell in 2009’s first and second quarters at annualized rates of 6.4% and an estimated 1.0%, reflecting broad-based slowdowns in consumer spending, corporate profits and export growth.
Oil prices rose from $44 per barrel in December 2008 to $70 per barrel at period-end; however, inflation remained muted as most commodity prices were well below 2008 levels. June’s inflation rate was an annualized -1.4%.2 Core inflation, which excludes food and energy costs, rose at a 1.7% annualized rate, which was within the Federal Reserve Board’s (Fed’s) informal target range of 1.5%–2.0%.2 The core personal consumption expenditures price index reported a 12-month increase of 1.5%.3
1. Sources: © 2009 Morningstar; Lipper Inc. One cannot invest directly in an index, nor is an index representative of the Fund’s portfolio. Please see Index Descriptions following the Fund Summaries.
2. Source: Bureau of Labor Statistics.
3. Source: Bureau of Economic Analysis.
Fund Risks: Because the Fund invests in bonds and other debt obligations, its share price and yield will be affected by interest rate movements. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in the Fund adjust to a rise in interest rates, the Fund’s share price may decline. High yield, lower rated (junk) bonds generally have greater price swings and higher default risks than investment-grade bonds. Foreign investing, especially in emerging markets, involves additional risks, including currency fluctuations, economic instability, market volatility, and political and social instability. The Fund’s prospectus also includes a description of the main investment risks.
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A slowing economy and decelerating inflation prompted policymakers to keep interest rates low and enact stimulus plans. During the period under review, the Fed kept the federal funds target rate in a range of 0% to 0.25%. The government implemented the American Recovery and Reinvestment Act, which included tax breaks, money for ailing state governments, aid to the poor and unemployed, and spending on infrastructure, renewable energy, health care and education. The Fed and U.S. Treasury Department also continued programs designed to shore up beleaguered banks’ capital, enable freer lending to businesses and consumers, and help struggling home buyers avoid foreclosure.
Most Treasury prices declined during the period. The spread between two-year and 10-year Treasury yields rose to 242 basis points (100 basis points equal one percentage point) at the end of June from 149 basis points at the beginning of the reporting period. The two-year Treasury bill yield rose slightly from 0.76% to 1.11% over the six-month period, while the 10-year Treasury note yield increased from 2.25% to 3.53%.
In first quarter 2009, global interest rate easing continued, and the U.S. and the U.K. implemented quantitative and credit easing policies. Governments worldwide boosted fiscal stimulus to counter the deepening global recession. Partially as a result of these significant policy measures, investor confidence began to improve in March, which translated into greater risk appetite in currency and nondeveloped bond markets in the second quarter. The turnaround led to an improved outlook that benefited the global economy through a shift in the inventory adjustment cycle and better equity market performance. Although financial markets improved, economic activity remained weak as deleveraging continued, unemployment rose and global trade contracted, albeit at a reduced pace.
Inflation fell during the period as weak global growth led to lower prices for commodities and slackening labor and capital markets pushed core prices down gradually. Monetary easing in the eurozone continued, although at a slower pace than many economists would have preferred, given the eurozone’s rate of economic contraction. However, the European Central Bank maintained its primary focus on inflation. Outside the eurozone, economic slowdown was more severe in many emerging European countries where several sought help from the International Monetary Fund.
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In Asia, growth differed between large economies with higher domestic demand and small economies more dependent on exports. The large economies, particularly China, were some of the world’s most resilient to the global recession as aggressive fiscal and monetary responses outweighed declining exports. In contrast, the smaller economies suffered quick, severe downturns as production dropped more than export demand to allow inventories to fall to levels more in line with the reduced global consumption pace. However, some smaller regional economies showed signs of improvement toward period-end. On the other hand, the Japanese economy contracted considerably due to subdued consumption, weak external demand and lackluster government spending. Japan’s trade balance worsened as the global recession negatively impacted the country’s main export sector, machinery.
Investment Strategy
We allocate our investments among the various types of debt available based on our assessment of changing economic, global market, industry and issuer conditions. We use a top-down analysis of macroeconomic trends, combined with a bottom-up fundamental analysis of market sectors, industries and issuers, seeking to take advantage of varying sector reactions to economic events. For example, we may evaluate business cycles, yield curves, country risk, and the relative interest rates among currencies, and values between and within markets. In selecting debt securities, we generally conduct our own analysis of the security’s intrinsic value rather than simply relying on the coupon rate or rating.
Manager’s Discussion
During the first half of 2009, many performance trends that moved the financial and fixed income markets experienced a substantial reversal. During the second half of 2008, the unfolding global economic recession combined with a breakdown in the credit markets pressured the fixed income market’s spread sectors, with just U.S. government and Treasury securities exhibiting strong performance. However, although the economic backdrop remained hazy as we entered 2009, historically cheap valuations drew investors into many of these same spread sectors and away from government bonds, partially recouping 2008 declines. In this environment, Franklin Strategic Income Securities Fund outperformed the BC U.S. Aggregate Index and performed in line with its peers as measured by the Lipper Multi-Sector Income Funds Classification Average. The Fund’s higher spread sector exposure and lower weightings in the more U.S. interest-rate sensitive fixed income sectors (U.S. Treasuries, agency bonds and mortgage-backed securities) aided
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Portfolio Breakdown
Franklin Strategic Income Securities Fund
Based on Total Net Assets
| 6/30/09 | 12/31/08 | ||||
| High Yield Corporate Bonds* | 25.3% | 19.3% | |||
| Mortgages & Other Asset-Backed Bonds | 16.3% | 21.9% | |||
| Investment Grade Corporate Bonds & Preferred Securities | 14.8% | 15.2% | |||
| Floating Rate Bank Loans** | 10.4% | 11.3% | |||
| U.S. Government & Agency Bonds*** | 9.3% | 8.0% | |||
| Other International Bonds (non-$US) | 7.9% | 9.1% | |||
| Emerging Market Bonds ($US) | 6.3% | 3.9% | |||
| Municipal Bonds | 2.9% | 1.5% | |||
| International Developed Country Bonds (non-$US) | 2.5% | 2.2% | |||
| Convertible Securities | 0.1% | 0.6% | |||
| Short-Term Investments & Other Net Assets**** | 4.2% | 7.0% | |||
*Includes preferred stocks and 0.7% of defaulted securities as of 6/30/09 and 0.15% as of 12/31/08.
**Includes 0.1% of defaulted securities as of 6/30/09.
***Includes agency preferred stocks and 2.2% in TIPS as of 6/30/09 and 1.9% in TIPS as of 12/31/08.
****Includes unrealized gains/losses on forward currency contracts. Does not include short-term foreign government securities.
The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund’s Statement of Investments.
performance compared to the index. Compared to the peer average, the Fund performed comparably given similar weightings in the spread sectors as certain other peer funds.
Overall, high-quality U.S. government securities were some of the worst performing assets during the period given the aforementioned rise in longer-term interest rates. Consequently, U.S. Treasuries had negative returns while agency debentures and agency mortgage-backed securities delivered flat to modestly positive total returns. Treasury Inflation Protected Securities (TIPS) provided stronger returns given increasing inflation expectations in the market. Although the Fund’s exposure to these sectors varied throughout the period, in general the Fund added exposure to TIPS early in the period, increased exposure to Treasuries following their sell-off during 2009’s second quarter, and maintained a heavier weighting in agency mortgage-backed securities relative to Treasuries. Our exposure to asset-backed securities and commercial mortgage-backed securities, while generally in AAA-rated tranches, contributed to performance. Despite increasing concerns regarding rising delinquencies for these securitized issuers, these sectors rebounded significantly from their 2009 lows, aided in part by government programs designed to improve liquidity and refinancing for these sectors. Given the
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seniority of the positions purchased for the Fund, we continued to maintain exposure in these sectors following their partial price rebound. The Fund also added to its municipal bond position largely due to continued cheap yield valuations relative to taxable government bonds.
Compared with other sectors, the corporate credit sector experienced the most dramatic reversal in performance between 2008 and 2009. After reaching the cheapest valuations in terms of yield spreads over government bonds in decades, credit sectors such as investment-grade bonds, high yield securities and leveraged bank loans rallied during the first six months of 2009. Although the fundamental outlook for the balance of 2009 remained challenging given the weak economic and corporate earnings outlooks combined with still less than ideal credit availability and cost, valuations in early 2009 appeared to price in expectations for higher defaults and ratings downgrades. We found what we considered value particularly in investment-grade corporate bonds, where we felt yield spreads provided attractive risk-adjusted return potential given these issuers’ generally better quality. We also maintained exposure to the noninvestment-grade sector including corporate bonds and bank loans. Overall, the corporate sector was the most significant contributor to performance during the period. The Fund maintained significant exposure at period-end given valuations that we believed still offered good long-term value. The Fund held a very small weighting in convertible securities given our assessment of more promising investment opportunities in straight corporate debt markets.
After experiencing strong appreciation amid a flight to quality by many investors during 2008’s second half, the U.S. dollar had more mixed performance versus a basket of foreign currencies year-to-date in 2009. As a result, the Fund’s non-U.S. dollar-denominated bond and currency positions had a varied impact on performance. The Fund’s long exposure to Brazilian and Indonesian local government bonds contributed to performance. On the other hand, weakness in the Polish zloty, Malaysian ringgit and Russian ruble negatively affected positions held in those currencies. The Fund’s hard currency U.S. dollar-denominated emerging market sovereign debt positions, which we began to add to during the second half of 2008, generally performed well as spread valuations tightened for sovereign bonds of countries such as Russia, Indonesia and South Africa.
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Thank you for your participation in Franklin Strategic Income Securities Fund. We look forward to serving your future investment needs.
The foregoing information reflects our analysis, opinions and portfolio holdings as of June 30, 2009, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.
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Fund Expenses
As an investor in a variable insurance contract (Contract) that indirectly provides for investment in an underlying mutual fund, you can incur transaction and/or ongoing expenses at both the Fund level and the Contract level.
| • | Transaction expenses can include sales charges (loads) on purchases, surrender fees, transfer fees and premium taxes. |
| • | Ongoing expenses can include management fees, distribution and service (12b-1) fees, contract fees, annual maintenance fees, mortality and expense risk fees and other fees and expenses. All mutual funds and Contracts have some types of ongoing expenses. |
The expenses shown in the table are meant to highlight ongoing expenses at the Fund level only and do not include ongoing expenses at the Contract level, or transaction expenses at either the Fund or Contract levels. While the Fund does not have transaction expenses, if the transaction and ongoing expenses at the Contract level were included, the expenses shown below would be higher. You should consult your Contract prospectus or disclosure document for more information.
The table shows Fund-level ongoing expenses and can help you understand these expenses and compare them with those of other mutual funds offered through the Contract. The table assumes a $1,000 investment held for the six months indicated. Please refer to the Fund prospectus for additional information on operating expenses.
Actual Fund Expenses
The first line (Actual) of the table provides actual account values and expenses. The “Ending Account Value” is derived from the Fund’s actual return, which includes the effect of ongoing Fund expenses, but does not include the effect of ongoing Contract expenses.
You can estimate the Fund-level expenses you incurred during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:
| 1. | Divide your account value by $1,000. |
If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6.
| 2. | Multiply the result by the number under the heading “Fund-Level Expenses Incurred During Period.” |
If Fund-Level Expenses Incurred During Period were $7.50, then 8.6 x $7.50 = $64.50.
In this illustration, the estimated expenses incurred this period at the Fund level are $64.50.
Franklin Strategic Income Securities Fund – Class 1
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Hypothetical Example for Comparison with Other Mutual Funds
Information in the second line (Hypothetical) of the table can help you compare ongoing expenses of the Fund with those of other mutual funds offered through the Contract. This information may not be used to estimate the actual ending account balance or expenses you incurred during the period. The hypothetical “Ending Account Value” is based on the Fund’s actual expense ratio and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Fund-Level Expenses Incurred During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds offered through a Contract.
| Class 1 | Beginning Account Value 1/1/09 | Ending Account Value 6/30/09 | Fund-Level Expenses Incurred During Period* 1/1/09–6/30/09 | ||||||
Actual | $ | 1,000 | $ | 1,128.60 | $ | 3.17 | |||
Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,021.82 | $ | 3.01 | |||
*Expenses are calculated using the most recent six-month annualized expense for the Fund’s Class 1 shares (0.60%), which does not include any ongoing expenses of the Contract for which the Fund is an investment option, multiplied by the average account value over the period, multiplied by 181/365 to reflect the one-half year period.
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SUPPLEMENT DATED JULY 27, 2009
TOTHE PROSPECTUS
DATED MAY 1, 2009
AS PREVIOUSLY AMENDED
FRANKLIN STRATEGIC INCOME SECURITIES FUND
(A series of Franklin Templeton Variable Insurance Products Trust)
The Prospectus is amended as follows:
| I. | The third and fourth full paragraphs under “Goals and Strategies” on page FSI-2 are deleted and replaced in their entirety with the following: |
Derivative investments may be used to help manage interest rate exposure, protect Fund assets, implement a cash or tax management strategy, to enhance Fund returns or to obtain net long or net short exposures to selected interest rates, countries, duration or credit risks. Derivatives may include the purchase and sale of credit default swaps, credit-linked securities and financial futures contracts (such as interest rate or bond futures). With derivatives, the manager attempts to predict whether an underlying investment will increase or decrease in value at some future time. The manager considers various factors, such as availability and cost, in deciding whether to use a particular instrument or strategy.
The Fund may also, from time to time, enter into forward currency contracts (including cross currency forwards) and currency futures contracts to try to hedge (protect) against currency exchange rate fluctuations or to generate income or returns for the Fund. The use of derivative currency transactions may allow the Fund to obtain net long or net short exposure to selected currencies. A forward currency contract is an agreement to buy or sell a specific currency at a future date and at a price set at the time of the contract. Cross currency forwards are forward contracts to sell an amount of a foreign currency when the Fund believes the foreign currency may suffer or enjoy a substantial movement against another foreign currency.
A futures contract is a standardized binding agreement to buy or sell a specified quantity of a currency or other underlying instrument that trades on an exchange, at a specified price at a specified later date. A “sale” of a futures contract means the acquisition of a contractual obligation to deliver the underlying instrument called for by the contract at a specified price on a specified date. A “purchase” of a futures contract means the acquisition of a contractual obligation to acquire the underlying instrument called for by the contract at a specified price on a specified date. The purchase or sale of a futures contract may allow the Fund to increase or decrease its exposure to the underlying instrument. Although most futures contracts by their terms require the actual delivery or acquisition of the underlying instrument, some require cash settlement. The Fund may buy and sell futures contracts that trade on U.S. and/or foreign exchanges.
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| II. | The subsection entitled “Derivative securities” under “Main Risks” on page FSI-7 is deleted and replaced in its entirety with the following: |
Derivative Securities
The performance of derivative instruments depends largely on the performance of an underlying instrument or index. Derivative instruments involve costs, may be volatile, and may involve a small initial investment relative to the risk assumed. Their successful use will usually depend on the manager’s ability to accurately forecast movements in the market relating to the underlying instrument. Should a market or markets, or prices of particular classes of investments move in an unexpected manner, especially in unusual or extreme market conditions, the Fund may not achieve the anticipated benefits of the transaction, and it may realize losses, which could be significant. If the manager is not successful in using such derivative instruments, the Fund’s performance may be worse than if the manager did not use such derivative instruments at all. To the extent that the Fund uses such instruments for hedging purposes, there is the risk of imperfect correlation between movements in the value of the derivative instrument and the value of the underlying investment or other asset being hedged. There is also the risk, especially under extreme market conditions, that an instrument, which usually would operate as a hedge, provides no hedging benefits at all.
Use of these instruments could also result in a loss if the counterparty to the transaction (with respect to swap agreements and forward currency contracts) does not perform as promised, including because of such counterparty’s bankruptcy or insolvency. This risk may be heightened during volatile market conditions. Other risks include the inability to close out a position because the trading market becomes illiquid (particularly in the over-the-counter markets) or the availability of counterparties becomes limited for a period of time. In addition, the presence of speculators in a particular market could lead to price distortions. To the extent that the Fund is unable to close out a position because of market illiquidity, the Fund may not be able to prevent further losses of value in its derivatives holdings and the Fund’s liquidity may be impaired to the extent that it has a substantial portion of its otherwise liquid assets marked as segregated to cover its obligations under such derivative instruments. The Fund may also be required to take or make delivery of an underlying instrument that the manager would otherwise have attempted to avoid. Some derivatives can be particularly sensitive to changes in interest rates or other market prices. Investors should bear in mind that, while the Fund intends to use derivative strategies on a regular basis, it is not obligated to actively engage in these transactions, generally or in any particular kind of derivative, if the manager elects not to do so due to availability, cost or other factors.
Please keep this supplement for future reference.
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SUPPLEMENT DATED AUGUST 7, 2009
TOTHE PROSPECTUS
DATED MAY 1, 2009
AS PREVIOUSLY AMENDED
OF
FRANKLIN STRATEGIC INCOME SECURITIES FUND
(A series of Franklin Templeton Variable Insurance Products Trust)
The Prospectus is amended as follows:
| 1. | Under “Goals and Strategies – Main Investments” the following is added on page FSI-2, after the second paragraph that starts “A mortgage-backed security…”: |
In connection with the purchase of certain asset-backed securities and commercial mortgage-backed securities (“TALF ABS”), the Fund may borrow from the Federal Reserve Bank of New York (“NY Fed”) under its Term Asset-Backed Securities Loan Facility (“TALF”). Pursuant to the TALF Program, the Fund may receive one or more three- to five-year term non-recourse loans to purchase TALF ABS in return for the payment of a haircut amount (usually 5-15% of the loan amount) and a pledge of the TALF ABS.
| 2. | The following is added to the “Main Risks” section on page FSI-6, after “Mortgage Securities and Asset-Backed Securities:” |
Borrowing
Because the Fund may borrow money from the NY Fed under the TALF Program, the Fund may engage in leverage by gaining exposure to a TALF ABS through the payment of a relatively small haircut amount and borrowing the remainder of the purchase price. Such borrowings may exaggerate the effect of any increase or decrease in the value of the TALF ABS on the Fund’s net asset value and will subject the Fund to interest and other costs (including administrative fees) associated with the TALF Program. However, such borrowings are non-recourse to the Fund, which should limit some of the risks of leverage.
Please keep this supplement for future reference.
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Franklin Templeton Variable Insurance Products Trust
Financial Highlights
Franklin Strategic Income Securities Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 1 | 2008 | 2007 | 2006 | 2005 | 2004 | |||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 10.58 | $ | 12.78 | $ | 12.73 | $ | 12.43 | $ | 12.92 | $ | 12.16 | ||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.34 | 0.69 | 0.73 | 0.69 | 0.65 | 0.67 | ||||||||||||||||||
Net realized and unrealized gains (losses) | 1.02 | (1.99 | ) | 0.04 | 0.32 | (0.44 | ) | 0.51 | ||||||||||||||||
Total from investment operations | 1.36 | (1.30 | ) | 0.77 | 1.01 | 0.21 | 1.18 | |||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income and net foreign currency gains | (0.95 | ) | (0.87 | ) | (0.68 | ) | (0.63 | ) | (0.60 | ) | (0.40 | ) | ||||||||||||
Net realized gains | — | (0.03 | ) | (0.04 | ) | (0.08 | ) | (0.10 | ) | (0.02 | ) | |||||||||||||
Total distributions | (0.95 | ) | (0.90 | ) | (0.72 | ) | (0.71 | ) | (0.70 | ) | (0.42 | ) | ||||||||||||
Net asset value, end of period | $ | 10.99 | $ | 10.58 | $ | 12.78 | $ | 12.73 | $ | 12.43 | $ | 12.92 | ||||||||||||
Total returnc | 12.86% | (11.03)% | 6.20% | 8.51% | 1.73% | 10.01% | ||||||||||||||||||
Ratios to average net assetsd | ||||||||||||||||||||||||
Expensese | 0.60% | 0.61% | 0.62% | 0.62% | 0.66% | 0.66% | ||||||||||||||||||
Net investment income | 6.26% | 5.83% | 5.72% | 5.51% | 5.21% | 5.45% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 1,049,537 | $ | 903,358 | $ | 1,086,850 | $ | 902,071 | $ | 740,352 | $ | 571,067 | ||||||||||||
Portfolio turnover rate | 24.40% | 47.68% | 46.88% | 47.88% | 40.56% | 50.21% | ||||||||||||||||||
Portfolio turnover rate excluding mortgage dollar rollsf | 24.40% | 47.68% | 46.43% | 44.58% | 40.07% | 38.39% | ||||||||||||||||||
aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.
bBased on average daily shares outstanding.
cTotal return does not include any fees, charges or expenses imposed by the variable annuity and life insurance contracts for which the Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle. Total return is not annualized for periods less than one year.
dRatios are annualized for periods less than one year.
eBenefit of expense reduction rounds to less than 0.01%.
fSee Note 1(f) regarding mortgage dollar rolls.
The accompanying notes are an integral part of these financial statements.
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Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Franklin Strategic Income Securities Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 2 | 2008 | 2007 | 2006 | 2005 | 2004 | |||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 10.41 | $ | 12.60 | $ | 12.56 | $ | 12.27 | $ | 12.78 | $ | 12.05 | ||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.33 | 0.65 | 0.69 | 0.65 | 0.61 | 0.63 | ||||||||||||||||||
Net realized and unrealized gains (losses) | 0.98 | (1.96 | ) | 0.05 | 0.31 | (0.44 | ) | 0.51 | ||||||||||||||||
Total from investment operations | 1.31 | (1.31 | ) | 0.74 | 0.96 | 0.17 | 1.14 | |||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income and net foreign currency gains | (0.93 | ) | (0.85 | ) | (0.66 | ) | (0.59 | ) | (0.58 | ) | (0.39 | ) | ||||||||||||
Net realized gains | — | (0.03 | ) | (0.04 | ) | (0.08 | ) | (0.10 | ) | (0.02 | ) | |||||||||||||
Total distributions | (0.93 | ) | (0.88 | ) | (0.70 | ) | (0.67 | ) | (0.68 | ) | (0.41 | ) | ||||||||||||
Net asset value, end of period | $ | 10.79 | $ | 10.41 | $ | 12.60 | $ | 12.56 | $ | 12.27 | $ | 12.78 | ||||||||||||
Total returnc | 12.60% | (11.24)% | 5.91% | 8.24% | 1.46% | 9.80% | ||||||||||||||||||
Ratios to average net assetsd | ||||||||||||||||||||||||
Expensese | 0.85% | 0.86% | 0.87% | 0.87% | 0.91% | 0.91% | ||||||||||||||||||
Net investment income | 6.01% | 5.58% | 5.47% | 5.26% | 4.96% | 5.20% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 47,973 | $ | 33,155 | $ | 24,613 | $ | 11,753 | $ | 19,514 | $ | 4,657 | ||||||||||||
Portfolio turnover rate | 24.40% | 47.68% | 46.88% | 47.88% | 40.56% | 50.21% | ||||||||||||||||||
Portfolio turnover rate excluding mortgage dollar rollsf | 24.40% | 47.68% | 46.43% | 44.58% | 40.07% | 38.39% | ||||||||||||||||||
aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.
bBased on average daily shares outstanding.
cTotal return does not include any fees, charges or expenses imposed by the variable annuity and life insurance contracts for which the Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle. Total return is not annualized for periods less than one year.
dRatios are annualized for periods less than one year.
eBenefit of expense reduction rounds to less than 0.01%.
fSee Note 1(f) regarding mortgage dollar rolls.
The accompanying notes are an integral part of these financial statements.
FSI-14
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Franklin Strategic Income Securities Fund
| Class 4 | Six Months (unaudited) | Period Ended December 31, 2008a | ||||||
Per share operating performance | ||||||||
(for a share outstanding throughout the period) | ||||||||
Net asset value, beginning of period | $ | 10.54 | $ | 12.84 | ||||
Income from investment operationsb: | ||||||||
Net investment incomec | 0.32 | 0.53 | ||||||
Net realized and unrealized gains (losses) | 1.01 | (1.93 | ) | |||||
Total from investment operations | 1.33 | (1.40 | ) | |||||
Less distributions from: | ||||||||
Net investment income and net foreign currency gains | (0.94 | ) | (0.87 | ) | ||||
Net realized gains | — | (0.03 | ) | |||||
Total distributions | (0.94 | ) | (0.90 | ) | ||||
Net asset value, end of period | $ | 10.93 | $ | 10.54 | ||||
Total returnd | 12.55% | (11.69)% | ||||||
Ratios to average net assetse | ||||||||
Expensesf | 0.95% | 0.96% | ||||||
Net investment income | 5.91% | 5.48% | ||||||
Supplemental data | ||||||||
Net assets, end of period (000’s) | $ | 108,658 | $ | 59,766 | ||||
Portfolio turnover rate | 24.40% | 47.68% | ||||||
aFor the period February 29, 2008 (effective date) to December 31, 2008.
bThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.
cBased on average daily shares outstanding.
dTotal return does not include any fees, charges or expenses imposed by the variable annuity and life insurance contracts for which the Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle. Total return is not annualized for periods less than one year.
eRatios are annualized for periods less than one year.
fBenefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
FSI-15
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited)
| Franklin Strategic Income Securities Fund | Country/ Organization | Shares | Value | ||||
Convertible Preferred Stocks (Cost $2,200,000) 0.0%a | |||||||
Banks 0.0%a | |||||||
bFannie Mae, 8.75%, cvt. pfd. | United States | 44,000 | $ | 40,295 | |||
Preferred Stocks 0.0%a | |||||||
Banks 0.0%a | |||||||
bFreddie Mac, 8.375%, pfd., Z | United States | 70,000 | 85,400 | ||||
Diversified Financials 0.0%a | |||||||
cPreferred Blocker Inc., 9.00%, pfd., 144A | United States | 804 | 345,821 | ||||
Total Preferred Stocks (Cost $2,035,420) | 431,221 | ||||||
| Principal Amountd | |||||||
e,fSenior Floating Rate Interests 10.4% | |||||||
Automobiles & Components 0.0%a | |||||||
gDayco Products LLC (Mark IV), Replacement Term Loan, 7.00%, 6/23/11 | United States | 854,002 | 207,523 | ||||
Key Safety Systems Inc., Term Loan B, 2.558% - 3.357%, 3/10/14 | United States | 537,354 | 211,358 | ||||
| 418,881 | |||||||
Capital Goods 0.4% | |||||||
RBS Global Inc. (Rexnord), | United States | 2,149,548 | 1,842,163 | ||||
Incremental Tranche B-2, 2.313%, 7/22/13 | United States | 1,611,919 | 1,368,116 | ||||
TransDigm Inc., Term Loan B, 2.317% - 2.612%, 6/23/13 | United States | 1,140,583 | 1,082,128 | ||||
| 4,292,407 | |||||||
Commercial & Professional Services 0.6% | |||||||
ARAMARK Corp., 2.246% | United States | 359,358 | 331,383 | ||||
Term Loan B, 2.473%, 1/26/14 | United States | 5,656,528 | 5,216,184 | ||||
hDuratek Inc. (EnergySolutions), Term Loan B, 2.57%, 6/07/13 | United States | 344,666 | 322,262 | ||||
hEnergySolutions LLC, | United States | 47,832 | 44,962 | ||||
Term Loan B, 2.57%, 6/07/13 | United States | 718,391 | 671,695 | ||||
iEnviroSolutions Inc., Initial Term Loan, PIK, 10.50%, 7/07/12 | United States | 1,605,983 | 1,007,754 | ||||
| 7,594,240 | |||||||
Consumer Durables & Apparel 0.4% | |||||||
Jarden Corp., | United States | 1,544,407 | 1,490,569 | ||||
Term Loan B2, 2.348%, 1/24/12 | United States | 2,390,214 | 2,306,891 | ||||
Jostens IH Corp. (Visant Holding Corp.), Term Loan C, 2.637%, 12/21/11 | United States | 1,650,997 | 1,605,594 | ||||
| 5,403,054 | |||||||
Consumer Services 1.0% | |||||||
Education Management LLC, Term Loan C, 2.375%, 6/01/13 | United States | 4,273,585 | 3,953,066 | ||||
h,iKuilima Resort Co. (Turtle Bay), First Lien Term Loan, PIK, 9.00%, 9/30/10 | United States | 12,942,153 | 3,526,737 | ||||
Penn National Gaming Inc., Term Loan B, 2.06% - 2.72%, 10/03/12 | United States | 4,421,845 | 4,256,945 | ||||
| 11,736,748 | |||||||
Diversified Financials 0.2% | |||||||
TD Ameritrade Holding Corp., Term Loan B, 1.82%, 12/31/12 | United States | 2,011,610 | 1,947,238 | ||||
FSI-16
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Franklin Strategic Income Securities Fund | Country/ Organization | Principal Amountd | Value | ||||
e,fSenior Floating Rate Interests (continued) | |||||||
Food, Beverage & Tobacco 0.5% | |||||||
Constellation Brands Inc., Term Loan B, 1.875%, 6/05/13 | United States | 2,109,262 | $ | 2,012,369 | |||
Dean Foods Co., Term Loan B, 1.685% - 1.975%, 4/02/14 | United States | 4,275,130 | 4,020,405 | ||||
| 6,032,774 | |||||||
Health Care Equipment & Services 1.8% | |||||||
Community Health Systems Inc., | |||||||
Delayed Draw Term Loan, 2.56%, 7/25/14 | United States | 384,697 | 347,233 | ||||
Term Loan, 2.56% - 2.924%, 7/25/14 | United States | 7,539,491 | 6,805,250 | ||||
DaVita Inc., Term Loan B-1, 1.81% - 2.71%, 10/05/12 | United States | 1,711,507 | 1,627,001 | ||||
DJO Finance LLC, Term Loan B, 3.31% - 3.598%, 5/20/14 | United States | 2,596,841 | 2,355,010 | ||||
Fresenius Medical Care Holdings Inc., Term Loan B, 1.973% - 2.514%, 3/31/13 | Germany | 3,117,282 | 2,990,366 | ||||
HCA Inc., | |||||||
Term Loan A-1, 2.348%, 11/19/12 | United States | 1,709,541 | 1,556,750 | ||||
Term Loan B-1, 2.848%, 11/18/13 | United States | 4,114,927 | 3,724,009 | ||||
LifePoint Hospitals Inc., Term Loan B, 2.295%, 4/15/12 | United States | 2,328,008 | 2,219,498 | ||||
| 21,625,117 | |||||||
Insurance 0.4% | |||||||
hConseco Inc., Term Loan, 6.50%, 10/10/13 | United States | 7,028,803 | 4,779,586 | ||||
Materials 1.6% | |||||||
Celanese U.S. Holdings LLC, Dollar Term Loan, 2.942%, 4/02/14 | United States | 5,678,411 | 5,280,133 | ||||
Georgia-Pacific LLC, | |||||||
Additional Term Loan, 2.31% - 2.323%, 12/20/12 | United States | 1,310,574 | 1,239,684 | ||||
Term Loan B, 2.31% - 2.65%, 12/20/12 | United States | 4,407,799 | 4,169,377 | ||||
Nalco Co., | |||||||
Term Loan, 6.50%, 5/13/16 | United States | 795,794 | 801,265 | ||||
Term Loan B, 2.125%, 5/13/16 | United States | 405,869 | 403,713 | ||||
Novelis Corp., U.S Term Loan, 2.31% - 2.60%, 7/07/14 | United States | 2,785,841 | 2,445,737 | ||||
Rockwood Specialties Group Inc., Term Loan H, 6.00%, 5/15/14 | United States | 4,498,006 | 4,489,572 | ||||
| 18,829,481 | |||||||
Media 1.9% | |||||||
hCinemark USA Inc., Term Loan, 2.07% - 2.67%, 10/05/13 | United States | 1,856,010 | 1,759,564 | ||||
CSC Holdings Inc., Incremental Term Loan B-2, 2.069%, 3/31/16 | United States | 3,687,411 | 3,541,231 | ||||
Cumulus Media Inc., Replacement Term Loan, 6.25%, 6/07/14 | United States | 371,747 | 249,071 | ||||
Dex Media East LLC, Term Loan B, 2.60% - 3.04%, 10/24/14 | United States | 504,384 | 390,897 | ||||
DIRECTV Holdings LLC, Term Loan B, 1.81%, 4/13/13 | United States | 2,027,864 | 1,950,130 | ||||
Discovery Communications Inc., Term Loan B, 2.598%, 5/14/14 | United States | 2,158,022 | 2,036,633 | ||||
Metro-Goldwyn-Mayer Inc., | |||||||
Term Loan B, 3.56%, 4/08/12 | United States | 7,178,348 | 4,001,929 | ||||
Tranche B-1 Term Loan, 5.50%, 4/08/12 | United States | 1,014,458 | 565,560 | ||||
Regal Cinemas Corp., Term Loan, 4.348%, 10/27/13 | United States | 2,223,116 | 2,171,706 | ||||
gTribune Co., Incremental Term Loan, 5.25%, 5/14/14 | United States | 4,943,155 | 1,515,389 | ||||
UPC Financing Partnership, | |||||||
Term Loan N, 2.065%, 12/31/16 | Netherlands | 2,875,426 | 2,670,552 | ||||
hTerm Loan T, 3.815%, 12/31/16 | Netherlands | 2,059,990 | 1,973,728 | ||||
| 22,826,390 | |||||||
Pharmaceuticals, Biotechnology & Life Sciences 0.0%a | |||||||
Mylan Inc., Term Loan B, 5.50%, 10/02/14 | United States | 444,456 | 430,104 | ||||
Software & Services 0.6% | |||||||
Affiliated Computer Services Inc., Additional Term Loan, 2.31% - 2.321%, 3/20/13 | United States | 3,699,269 | 3,527,600 | ||||
Lender Processing Services Inc., Term Loan B, 2.81%, 7/02/14 | United States | 379,872 | 374,649 | ||||
FSI-17
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Franklin Strategic Income Securities Fund | Country/ Organization | Principal Amountd | Value | |||||
e,fSenior Floating Rate Interests (continued) | ||||||||
Software & Services (continued) | ||||||||
SunGard Data Systems Inc., New U.S. Term Loan, 2.071% - 2.724%, 2/28/14 | United States | 3,907,486 | $ | 3,639,546 | ||||
| 7,541,795 | ||||||||
Telecommunication Services 0.7% | ||||||||
Hawaiian Telecom Communications Inc., Term Loan C, 4.75%, 6/01/14 | United States | 1,518,752 | 899,860 | |||||
Intelsat Corp. (Panamsat), | ||||||||
Tranche B-2-A, 2.819%, 1/03/14 | United States | 1,064,769 | 974,263 | |||||
Tranche B-2-B, 2.819%, 1/03/14 | United States | 1,064,445 | 973,967 | |||||
Tranche B-2-C, 2.819%, 1/03/14 | United States | 1,064,445 | 973,967 | |||||
Incremental Term Loan B-2-A, 2.819%, 1/03/14 | United States | 96,956 | 88,715 | |||||
Incremental Term Loan B-2-B, 2.819%, 1/03/14 | United States | 96,927 | 88,688 | |||||
Incremental Term Loan B-2-C, 2.819%, 1/03/14 | United States | 96,927 | 88,688 | |||||
NTELOS Inc., Term Loan B-1, 2.56%, 8/24/11 | United States | 1,238,604 | 1,212,283 | |||||
Windstream Corp., Tranche B-1, 1.82% - 2.62%, 7/17/13 | United States | 3,221,129 | 3,045,981 | |||||
| 8,346,412 | ||||||||
Utilities 0.3% | ||||||||
hNRG Energy Inc., | ||||||||
Credit Link, 0.498%, 2/01/13 | United States | 1,442,743 | 1,360,932 | |||||
Term Loan, 1.81% - 2.098%, 2/01/13 | United States | 2,694,243 | 2,541,466 | |||||
| 3,902,398 | ||||||||
Total Senior Floating Rate Interests (Cost $129,277,006) | 125,706,625 | |||||||
Corporate Bonds 40.2% | ||||||||
Automobiles & Components 0.6% | ||||||||
Ford Motor Credit Co. LLC, senior note, | ||||||||
9.75%, 9/15/10 | United States | 2,000,000 | 1,916,310 | |||||
9.875%, 8/10/11 | United States | 3,500,000 | 3,239,607 | |||||
cTRW Automotive Inc., senior note, 144A, 7.25%, 3/15/17 | United States | 2,900,000 | 2,015,500 | |||||
| 7,171,417 | ||||||||
Banks 1.8% | ||||||||
BB&T Capital Trust IV, junior sub. bond, 6.82%, 6/12/77 | United States | 3,200,000 | 2,294,480 | |||||
BB&T Corp., senior note, 6.85%, 4/30/19 | United States | 1,000,000 | 1,041,821 | |||||
c,jBNP Paribas, 144A, 7.195%, Perpetual | France | 3,500,000 | 2,561,209 | |||||
HSBC Holdings PLC, sub. note, 6.50%, 9/15/37 | United Kingdom | 3,500,000 | 3,392,014 | |||||
c,jRabobank Nederland, sub note, 11.00%, 144A, Perpetual | Netherlands | 1,300,000 | 1,450,579 | |||||
Svensk Exportkredit AB, senior note, 7.625%, 6/30/14 | Sweden | 1,335,000 | NZD | 873,100 | ||||
UBS AG Stamford, senior note, 5.875%, 12/20/17 | United States | 3,500,000 | 3,264,702 | |||||
Wells Fargo & Co., senior note, 5.625%, 12/11/17 | United States | 1,500,000 | 1,478,945 | |||||
jWells Fargo Capital XIII, pfd., 7.70%, Perpetual | United States | 2,900,000 | 2,408,842 | |||||
jWells Fargo Capital XV, pfd., 9.75%, Perpetual | United States | 2,300,000 | 2,227,129 | |||||
| 20,992,821 | ||||||||
Capital Goods 1.3% | ||||||||
cAllison Transmission Inc., senior note, 144A, 11.00%, 11/01/15 | United States | 3,200,000 | 2,544,000 | |||||
Case New Holland Inc., senior note, 7.125%, 3/01/14 | United States | 3,100,000 | 2,844,250 | |||||
Ingersoll-Rand Global Holding Co. Ltd., senior note, 9.50%, 4/15/14 | United States | 1,700,000 | 1,864,164 | |||||
L-3 Communications Corp., senior sub. note, | ||||||||
5.875%, 1/15/15 | United States | 2,000,000 | 1,785,000 | |||||
6.375%, 10/15/15 | United States | 1,000,000 | 912,500 | |||||
RBS Global & Rexnord Corp., senior note, 9.50%, 8/01/14 | United States | 3,400,000 | 2,924,000 | |||||
FSI-18
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Franklin Strategic Income Securities Fund | Country/ Organization | Principal Amountd | Value | |||||
Corporate Bonds (continued) | ||||||||
Capital Goods (continued) | ||||||||
RSC Equipment Rental Inc., senior note, 9.50%, 12/01/14 | United States | 3,400,000 | $ | 2,745,500 | ||||
| 15,619,414 | ||||||||
Commercial & Professional Services 0.6% | ||||||||
ARAMARK Corp., senior note, 8.50%, 2/01/15 | United States | 3,400,000 | 3,315,000 | |||||
Iron Mountain Inc., senior sub. note, 8.75%, 7/15/18 | United States | 1,000,000 | 990,000 | |||||
JohnsonDiversey Holdings Inc., senior disc. note, 10.67%, 5/15/13 | United States | 1,300,000 | 1,098,500 | |||||
JohnsonDiversey Inc., senior sub. note, B, 9.625%, 5/15/12 | United States | 1,900,000 | 1,895,250 | |||||
| 7,298,750 | ||||||||
Consumer Durables & Apparel 0.9% | ||||||||
D.R. Horton Inc., senior note, 6.50%, 4/15/16 | United States | 3,000,000 | 2,580,000 | |||||
Jarden Corp., senior sub. note, 7.50%, 5/01/17 | United States | 3,400,000 | 2,992,000 | |||||
Jostens IH Corp., senior sub. note, 7.625%, 10/01/12 | United States | 3,100,000 | 3,107,750 | |||||
KB Home, senior note, | ||||||||
6.25%, 6/15/15 | United States | 2,000,000 | 1,720,000 | |||||
7.25%, 6/15/18 | United States | 500,000 | 432,500 | |||||
| 10,832,250 | ||||||||
Consumer Services 1.7% | ||||||||
c,gFontainebleau Las Vegas, 144A, 10.25%, 6/15/15 | United States | 2,500,000 | 106,250 | |||||
cHarrah’s Operating Escrow, senior secured note, 144A, 11.25%, 6/01/17 | United States | 4,000,000 | 3,800,000 | |||||
Host Hotels & Resorts LP, senior note, | ||||||||
6.875%, 11/01/14 | United States | 200,000 | 181,000 | |||||
K, 7.125%, 11/01/13 | United States | 2,300,000 | 2,173,500 | |||||
M, 7.00%, 8/15/12 | United States | 1,100,000 | 1,067,000 | |||||
MGM MIRAGE, senior note, 6.625%, 7/15/15 | United States | 5,000,000 | 3,287,500 | |||||
Pinnacle Entertainment Inc., senior sub. note, | ||||||||
8.25%, 3/15/12 | United States | 200,000 | 200,000 | |||||
8.75%, 10/01/13 | United States | 2,200,000 | 2,222,000 | |||||
7.50%, 6/15/15 | United States | 800,000 | 688,000 | |||||
Royal Caribbean Cruises Ltd., | ||||||||
senior deb., 7.25%, 3/15/18 | United States | 3,500,000 | 2,782,500 | |||||
senior note, 11.875%, 7/15/15 | United States | 300,000 | 292,197 | |||||
Starwood Hotels & Resorts Worldwide Inc., senior note, 6.75%, 5/15/18 | United States | 3,500,000 | 3,006,017 | |||||
gStation Casinos Inc., | ||||||||
senior note, 6.00%, 4/01/12 | United States | 700,000 | 245,000 | |||||
senior note, 7.75%, 8/15/16 | United States | 700,000 | 245,000 | |||||
senior sub. note, 6.50%, 2/01/14 | United States | 300,000 | 7,500 | |||||
senior sub. note, 6.875%, 3/01/16 | United States | 1,000,000 | 30,000 | |||||
| 20,333,464 | ||||||||
Diversified Financials 4.1% | ||||||||
American Express Co., senior note, 7.00%, 3/19/18 | United States | 3,000,000 | 2,917,773 | |||||
American Express Credit Corp., senior note, C, 7.30%, 8/20/13 | United States | 1,200,000 | 1,251,497 | |||||
Bank of America Corp., | United States | 5,400,000 | 4,516,776 | |||||
senior note, 5.65%, 5/01/18 | United States | 1,500,000 | 1,327,664 | |||||
Capital One Financial Corp., senior note, 7.375%, 5/23/14 | United States | 3,100,000 | 3,201,212 | |||||
Citigroup Inc., | ||||||||
senior note, 6.125%, 11/21/17 | United States | 1,800,000 | 1,580,650 | |||||
sub. note, 5.00%, 9/15/14 | United States | 4,500,000 | 3,778,218 | |||||
The Export-Import Bank of Korea, senior note, 8.125%, 1/21/14 | South Korea | 2,770,000 | 3,035,942 | |||||
General Electric Capital Corp., senior note, A, 8.50%, 4/06/18 | United States | 64,000,000 | MXN | 4,081,122 | ||||
FSI-19
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Franklin Strategic Income Securities Fund | Country/ Organization | Principal Amountd | Value | ||||
Corporate Bonds (continued) | |||||||
Diversified Financials (continued) | |||||||
cGMAC LLC, senior note,144A, | |||||||
7.25%, 3/02/11 | United States | 1,583,000 | $ | 1,464,275 | |||
6.875%, 9/15/11 | United States | 1,400,000 | 1,239,000 | ||||
6.875%, 8/28/12 | United States | 1,139,000 | 962,455 | ||||
The Goldman Sachs Group Inc., | United States | 300,000 | 313,555 | ||||
sub. note, 6.75%, 10/01/37 | United States | 4,500,000 | 4,007,497 | ||||
JPMorgan Chase & Co., | United States | 1,500,000 | 1,492,568 | ||||
jjunior sub. note, 1, 7.90%, Perpetual | United States | 1,800,000 | 1,579,554 | ||||
JPMorgan Chase Capital XXII, sub. bond, 6.45%, 2/02/37 | United States | 5,000,000 | 4,006,015 | ||||
gLehman Brothers Holdings Inc., senior note, 6.20%, 9/26/14 | United States | 5,500,000 | 838,750 | ||||
Merrill Lynch & Co. Inc., senior note, 6.40%, 8/28/17 | United States | 3,500,000 | 3,105,692 | ||||
Morgan Stanley, senior note, | |||||||
6.00%, 4/28/15 | United States | 4,500,000 | 4,495,869 | ||||
7.30%, 5/13/19 | United States | 600,000 | 623,262 | ||||
| 49,819,346 | |||||||
Energy 5.3% | |||||||
Anadarko Petroleum Corp., senior note, 6.95%, 6/15/19 | United States | 2,300,000 | 2,325,289 | ||||
Berry Petroleum Co., senior note, 10.25%, 6/01/14 | United States | 1,100,000 | 1,116,500 | ||||
hBill Barrett Corp., senior note, 9.875%, 7/17/16 | United States | 600,000 | 571,032 | ||||
Canadian Natural Resources Ltd., 5.90%, 2/01/18 | Canada | 3,500,000 | 3,580,563 | ||||
Chesapeake Energy Corp., senior note, | |||||||
7.625%, 7/15/13 | United States | 700,000 | 668,500 | ||||
6.625%, 1/15/16 | United States | 100,000 | 88,250 | ||||
6.25%, 1/15/18 | United States | 3,300,000 | 2,755,500 | ||||
7.25%, 12/15/18 | United States | 300,000 | 262,500 | ||||
Compagnie Generale de Geophysique-Veritas, senior note, | |||||||
7.50%, 5/15/15 | France | 2,300,000 | 2,121,750 | ||||
7.75%, 5/15/17 | France | 900,000 | 823,500 | ||||
c144A, 9.50%, 5/15/16 | France | 100,000 | 101,812 | ||||
Copano Energy LLC, senior note, | United States | 3,200,000 | 3,024,000 | ||||
7.75%, 6/01/18 | United States | 200,000 | 181,500 | ||||
El Paso Corp., senior note, 12.00%, 12/12/13 | United States | 3,100,000 | 3,425,500 | ||||
eEnterprise Products Operating LLP, junior sub. note, FRN, 7.034%, 1/15/68 | United States | 3,300,000 | 2,437,301 | ||||
Mariner Energy Inc., | United States | 2,900,000 | 2,653,500 | ||||
senior sub. note, 11.75%, 6/30/16 | United States | 200,000 | 199,750 | ||||
MarkWest Energy Partners LP, senior note, 6.875%, 11/01/14 | United States | 3,200,000 | 2,688,000 | ||||
Peabody Energy Corp., senior note, B, 6.875%, 3/15/13 | United States | 3,000,000 | 2,985,000 | ||||
cPetrohawk Energy Corp., senior note, 144A, 10.50%, 8/01/14 | United States | 3,100,000 | 3,185,250 | ||||
cPetroplus Finance Ltd., senior note, 144A, 6.75%, 5/01/14 | Switzerland | 2,700,000 | 2,349,000 | ||||
Plains Exploration & Production Co., senior note, | United States | 500,000 | 516,250 | ||||
7.625%, 6/01/18 | United States | 3,200,000 | 2,888,000 | ||||
Quicksilver Resources Inc., senior note, | United States | 3,200,000 | 2,864,000 | ||||
11.75%, 1/01/16 | United States | 100,000 | 104,000 | ||||
cSandRidge Energy Inc., senior note, 144A, 8.00%, 6/01/18 | United States | 3,000,000 | 2,580,000 | ||||
Smith International Inc., senior note, 9.75%, 3/15/19 | United States | 3,500,000 | 4,049,342 | ||||
FSI-20
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Franklin Strategic Income Securities Fund | Country/ Organization | Principal Amountd | Value | ||||
Corporate Bonds (continued) | |||||||
Energy (continued) | |||||||
Tesoro Corp., senior note, 6.50%, 6/01/17 | United States | 3,800,000 | $ | 3,268,000 | |||
Weatherford International Ltd., senior note, | United States | 3,000,000 | 2,950,944 | ||||
9.625%, 3/01/19 | United States | 600,000 | 706,999 | ||||
The Williams Cos. Inc., senior note, | United States | 1,000,000 | 989,207 | ||||
7.875%, 9/01/21 | United States | 1,600,000 | 1,579,040 | ||||
8.75%, 3/15/32 | United States | 600,000 | 604,484 | ||||
cWoodside Finance Ltd., 144A, 8.75%, 3/01/19 | Australia | 3,400,000 | 3,737,246 | ||||
| 64,381,509 | |||||||
Food & Staples Retailing 0.8% | |||||||
The Kroger Co., | United States | 2,000,000 | 2,047,408 | ||||
senior note, 7.50%, 1/15/14 | United States | 1,600,000 | 1,792,779 | ||||
cRite Aid Corp., senior secured note, 144A, 9.75%, 6/12/16 | United States | 2,100,000 | 2,110,500 | ||||
SUPERVALU Inc., senior note, 8.00%, 5/01/16 | United States | 3,400,000 | 3,315,000 | ||||
| 9,265,687 | |||||||
Food, Beverage & Tobacco 2.3% | |||||||
Altria Group Inc., | United States | 1,000,000 | 1,124,800 | ||||
senior note, 9.70%, 11/10/18 | United States | 2,900,000 | 3,329,963 | ||||
cAnheuser-Busch InBev NV, senior note, 144A, 7.75%, 1/15/19 | United States | 4,300,000 | 4,710,744 | ||||
cBAT International Finance PLC, senior note, 144A, 9.50%, 11/15/18 | United Kingdom | 1,800,000 | 2,118,746 | ||||
cCargill Inc., | United States | 500,000 | 506,481 | ||||
144A, 6.00%, 11/27/17 | United States | 2,000,000 | 1,993,992 | ||||
senior note, 144A, 7.35%, 3/06/19 | United States | 1,000,000 | 1,064,235 | ||||
Dean Foods Inc., senior note, 7.00%, 6/01/16 | United States | 1,300,000 | 1,192,750 | ||||
cDole Food Co. Inc, senior note, 144A, 13.875%, 3/15/14 | United States | 3,100,000 | 3,425,500 | ||||
cJBS USA LLC, senior note, 144A, 11.625%, 5/01/14 | United States | 3,100,000 | 2,945,000 | ||||
Reynolds American Inc., senior secured note, 7.625%, 6/01/16 | United States | 2,700,000 | 2,711,794 | ||||
cTyson Foods Inc., senior note, 144A, 10.50%, 3/01/14 | United States | 2,400,000 | 2,616,000 | ||||
| 27,740,005 | |||||||
Health Care Equipment & Services 3.2% | |||||||
Coventry Health Care Inc., senior note, | United States | 1,500,000 | 1,324,795 | ||||
5.95%, 3/15/17 | United States | 1,300,000 | 1,020,656 | ||||
DaVita Inc., senior sub. note, 7.25%, 3/15/15 | United States | 3,400,000 | 3,213,000 | ||||
Express Scripts Inc., senior note, 7.25%, 6/15/19 | United States | 2,000,000 | 2,209,456 | ||||
FMC Finance III SA, senior note, 6.875%, 7/15/17 | Germany | 2,500,000 | 2,337,500 | ||||
Fresenius Medical Care Capital Trust IV, 7.875%, 6/15/11 | Germany | 700,000 | 715,750 | ||||
cFresenius US Finance II, senior note, 144A, 9.00%, 7/15/15 | Germany | 2,400,000 | 2,514,000 | ||||
HCA Inc., | United States | 800,000 | 650,000 | ||||
senior secured note, 9.125%, 11/15/14 | United States | 4,000,000 | 3,970,000 | ||||
isenior secured note, PIK, 9.625%, 11/15/16 | United States | 1,051,000 | 1,043,118 | ||||
Medco Health Solutions Inc., 7.125%, 3/15/18 | United States | 3,500,000 | 3,691,747 | ||||
Quest Diagnostics Inc., 6.40%, 7/01/17 | United States | 2,800,000 | 2,862,202 | ||||
FSI-21
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Franklin Strategic Income Securities Fund | Country/ Organization | Principal Amountd | Value | ||||
Corporate Bonds (continued) | |||||||
Health Care Equipment & Services (continued) | |||||||
cTenet Healthcare Corp., | United States | 1,150,000 | $ | 1,164,375 | |||
senior note, 144A, 10.00%, 5/01/18 | United States | 1,500,000 | 1,582,500 | ||||
senior secured note, 144A, 8.875%, 7/01/19 | United States | 900,000 | 906,750 | ||||
iUnited Surgical Partners International Inc., senior sub. note, PIK, | United States | 3,000,000 | 2,460,000 | ||||
e,iUS Oncology Holdings Inc., senior note, PIK, FRN, 6.904%, 3/15/12 | United States | 3,244,000 | 2,749,290 | ||||
cUS Oncology Inc., senior secured note, 144A, 9.125%, 8/15/17 | United States | 200,000 | 199,500 | ||||
Vanguard Health Holding Co. II LLC, senior sub. note, 9.00%, 10/01/14 | United States | 3,400,000 | 3,272,500 | ||||
| 37,887,139 | |||||||
Insurance 1.0% | |||||||
Aflac Inc., senior note, 8.50%, 5/15/19 | United States | 4,000,000 | 4,281,328 | ||||
Lincoln National Corp., senior note, 8.75%, 7/01/19 | United States | 4,000,000 | 4,040,544 | ||||
c,eMetLife Capital Trust X, secured bond, 144A, FRN, 9.25%, 4/08/68 | United States | 800,000 | 713,637 | ||||
MetLife Inc., | United States | 1,000,000 | 1,071,465 | ||||
ejunior sub. note, FRN, 6.40%, 12/15/66 | United States | 2,000,000 | 1,433,750 | ||||
senior note, A, 6.817%, 8/15/18 | United States | 1,000,000 | 1,008,802 | ||||
| 12,549,526 | |||||||
Materials 3.2% | |||||||
cAnglo American Capital PLC, senior note, 144A, 9.375%, 4/08/14 | United Kingdom | 3,000,000 | 3,261,885 | ||||
ArcelorMittal, senior note, 9.85%, 6/01/19 | Luxembourg | 4,100,000 | 4,431,292 | ||||
cClearwater Paper Corp., senior note, 144A, 10.625%, 6/15/16 | United States | 2,600,000 | 2,671,500 | ||||
Crown Americas Inc., senior note, 7.75%, 11/15/15 | United States | 3,200,000 | 3,144,000 | ||||
cCrown Americas LLC, senior note, 144A, 7.625%, 5/15/17 | United States | 200,000 | 194,000 | ||||
Freeport-McMoRan Copper & Gold Inc., senior note, 8.375%, 4/01/17 | United States | 2,900,000 | 2,925,862 | ||||
Huntsman International LLC, senior sub. note, 7.875%, 11/15/14 | United States | 3,400,000 | 2,711,500 | ||||
cIneos Group Holdings PLC, senior secured note, 144A, 8.50%, 2/15/16 | United Kingdom | 3,000,000 | 1,020,000 | ||||
cMacDermid Inc., senior sub. note, 144A, 9.50%, 4/15/17 | United States | 2,900,000 | 2,131,500 | ||||
Nalco Co., | United States | 300,000 | 303,000 | ||||
senior sub. note, 8.875%, 11/15/13 | United States | 3,100,000 | 3,177,500 | ||||
NewPage Corp., senior secured note, 10.00%, 5/01/12 | United States | 3,200,000 | 1,552,000 | ||||
Owens-Brockway Glass Container Inc., senior note, | United States | 2,800,000 | 2,688,000 | ||||
c144A, 7.375%, 5/15/16 | United States | 200,000 | 195,000 | ||||
RPM International Inc., 6.50%, 2/15/18 | United States | 600,000 | 545,568 | ||||
Solo Cup Co., | United States | 500,000 | 506,625 | ||||
senior sub. note, 8.50%, 2/15/14 | United States | 1,900,000 | 1,567,500 | ||||
cTeck Resources Ltd., senior secured note, 144A, 10.75%, 5/15/19 | Canada | 2,500,000 | 2,691,640 | ||||
cXstrata Finance Canada Ltd., 144A, 5.80%, 11/15/16 | United Kingdom | 3,400,000 | 3,050,994 | ||||
| 38,769,366 | |||||||
Media 4.4% | |||||||
cBritish Sky Broadcasting Group PLC, senior note, 144A, 6.10%, 2/15/18 | United Kingdom | 3,500,000 | 3,500,189 | ||||
gCanWest Media Inc., senior sub. note, 8.00%, 9/15/12 | Canada | 2,700,000 | 810,000 | ||||
g,kCCH I LLC, senior secured note, 11.00%, 10/01/15 | United States | 1,400,000 | 175,000 | ||||
g,kCCH II LLC, senior note, 10.25%, 9/15/10 | United States | 3,700,000 | 3,922,000 | ||||
Comcast Corp., senior note, 6.30%, 11/15/17 | United States | 3,600,000 | 3,815,834 | ||||
FSI-22
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Franklin Strategic Income Securities Fund | Country/ Organization | Principal Amountd | Value | ||||
Corporate Bonds (continued) | |||||||
Media (continued) | |||||||
CSC Holdings Inc., | |||||||
senior deb., 7.625%, 7/15/18 | United States | 2,100,000 | $ | 1,955,625 | |||
senior note, 6.75%, 4/15/12 | United States | 300,000 | 291,000 | ||||
csenior note, 144A, 8.50%, 4/15/14 | United States | 1,000,000 | 996,250 | ||||
g,kDex Media Inc., | |||||||
senior disc. note, 9.00%, 11/15/13 | United States | 600,000 | 93,000 | ||||
senior note, B, 8.00%, 11/15/13 | United States | 1,600,000 | 248,000 | ||||
g,kDex Media West Finance, senior sub. note, 9.875%, 8/15/13 | United States | 2,200,000 | 341,000 | ||||
DIRECTV Holdings LLC, senior note, 7.625%, 5/15/16 | United States | 2,700,000 | 2,639,250 | ||||
EchoStar DBS Corp., senior note, | United States | 2,900,000 | 2,820,250 | ||||
7.125%, 2/01/16 | United States | 1,500,000 | 1,406,250 | ||||
gIdearc Inc., senior note, 8.00%, 11/15/16 | United States | 3,400,000 | 106,250 | ||||
Lamar Media Corp., | |||||||
csenior note, 144A, 9.75%, 4/01/14 | United States | 300,000 | 311,625 | ||||
senior sub. note, 7.25%, 1/01/13 | United States | 2,800,000 | 2,677,500 | ||||
senior sub. note, B, 6.625%, 8/15/15 | United States | 400,000 | 340,000 | ||||
Liberty Media Corp., senior note, 5.70%, 5/15/13 | United States | 3,400,000 | 2,958,000 | ||||
LIN Television Corp., senior sub. note, 6.50%, 5/15/13 | United States | 3,000,000 | 2,175,000 | ||||
Quebecor Media Inc., senior note, 7.75%, 3/15/16 | Canada | 3,400,000 | 3,098,250 | ||||
Radio One Inc., senior sub. note, 6.375%, 2/15/13 | United States | 2,800,000 | 857,500 | ||||
Reed Elsevier PLC, senior note, 8.625%, 1/15/19 | United Kingdom | 3,400,000 | 3,869,435 | ||||
Time Warner Cable Inc., senior note, | United States | 1,100,000 | 1,234,559 | ||||
6.75%, 7/01/18 | United States | 2,000,000 | 2,086,362 | ||||
Time Warner Inc., 7.625%, 4/15/31 | United States | 3,200,000 | 3,116,403 | ||||
cUPC Holding BV, senior note, 144A, 9.875%, 4/15/18 | Netherlands | 800,000 | 775,360 | ||||
Viacom Inc., senior note, 6.875%, 4/30/36 | United States | 4,000,000 | 3,722,619 | ||||
cWMG Acquisition Corp., senior secured note, 144A, 9.50%, 6/15/16 | United States | 3,000,000 | 3,000,000 | ||||
| 53,342,511 | |||||||
Real Estate 0.5% | |||||||
Forest City Enterprises Inc., senior note, 7.625%, 6/01/15 | United States | 2,700,000 | 1,714,500 | ||||
Simon Property Group LP, senior note, 10.35%, 4/01/19 | United States | 4,200,000 | 4,714,765 | ||||
| 6,429,265 | |||||||
Retailing 0.5% | |||||||
Dollar General Corp., senior note, 10.625%, 7/15/15 | United States | 2,700,000 | 2,929,500 | ||||
Michaels Stores Inc., senior note, 10.00%, 11/01/14 | United States | 3,300,000 | 2,788,500 | ||||
| 5,718,000 | |||||||
Semiconductors & Semiconductor Equipment 0.1% | |||||||
Freescale Semiconductor Inc., senior note, 8.875%, 12/15/14 | United States | 2,400,000 | 1,224,000 | ||||
Software & Services 0.3% | |||||||
SunGard Data Systems Inc., | |||||||
senior note, 9.125%, 8/15/13 | United States | 2,100,000 | 1,995,000 | ||||
senior sub. note, 10.25%, 8/15/15 | United States | 1,900,000 | 1,764,625 | ||||
| 3,759,625 | |||||||
Technology Hardware & Equipment 0.4% | |||||||
gNortel Networks Ltd., senior note, 10.75%, 7/15/16 | Canada | 2,700,000 | 945,000 | ||||
Sanmina-SCI Corp., | |||||||
c,esenior note, 144A, FRN, 3.379%, 6/15/14 | United States | 500,000 | 412,500 | ||||
FSI-23
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Franklin Strategic Income Securities Fund | Country/ Organization | Principal Amountd | Value | ||||
Corporate Bonds (continued) | |||||||
Technology Hardware & Equipment (continued) | |||||||
Sanmina-SCI Corp., (continued) | |||||||
senior sub. note, 6.75%, 3/01/13 | United States | 2,300,000 | $ | 1,794,000 | |||
Xerox Corp., senior note, 8.25%, 5/15/14 | United States | 1,500,000 | 1,561,842 | ||||
| 4,713,342 | |||||||
Telecommunication Services 3.2% | |||||||
cCC Holdings GS V LLC, senior secured note, 144A, 7.75%, 5/01/17 | United States | 500,000 | 490,000 | ||||
Crown Castle International Corp., senior note, 9.00%, 1/15/15 | United States | 2,800,000 | 2,863,000 | ||||
cDigicel Group Ltd., senior note, 144A, 8.875%, 1/15/15 | Jamaica | 3,400,000 | 2,839,000 | ||||
Inmarsat Finance PLC, senior note, 10.375%, 11/15/12 | United Kingdom | 3,400,000 | 3,536,000 | ||||
Intelsat Bermuda Ltd., senior note, 11.25%, 6/15/16 | Bermuda | 1,200,000 | 1,230,000 | ||||
Intelsat Subsidiary Holding Co. Ltd., senior note, 8.50%, 1/15/13 | Bermuda | 3,500,000 | 3,377,500 | ||||
MetroPCS Wireless Inc., senior note, 9.25%, 11/01/14 | United States | 3,400,000 | 3,395,750 | ||||
Millicom International Cellular SA, senior note, 10.00%, 12/01/13 | Luxembourg | 2,800,000 | 2,852,500 | ||||
Qwest Communications International Inc., senior note, 7.50%, 2/15/14 | United States | 2,700,000 | 2,477,250 | ||||
cQwest Corp., senior note, 144A, 8.375%, 5/01/16 | United States | 1,200,000 | 1,164,000 | ||||
Telecom Italia Capital, senior note, | Italy | 3,500,000 | 3,393,707 | ||||
6.999%, 6/04/18 | Italy | 500,000 | 506,593 | ||||
hTelefonica SA, senior note, 5.877%, 7/15/19 | Spain | 4,000,000 | 4,131,140 | ||||
Verizon New York Inc., senior deb., | United States | 2,700,000 | 2,863,890 | ||||
B, 7.375%, 4/01/32 | United States | 400,000 | 390,430 | ||||
cWind Acquisition Finance SA, senior note, 144A, 10.75%, 12/01/15 | Italy | 3,400,000 | 3,417,000 | ||||
| 38,927,760 | |||||||
Transportation 0.2% | |||||||
cCeva Group PLC, senior note, 144A, 10.00%, 9/01/14 | United Kingdom | 3,100,000 | 2,123,500 | ||||
Utilities 3.8% | |||||||
The AES Corp., senior note, 8.00%, | United States | 2,900,000 | 2,711,500 | ||||
6/01/20 | United States | 600,000 | 541,500 | ||||
Ameren Corp., senior note, 8.875%, 5/15/14 | United States | 3,000,000 | 3,100,416 | ||||
CenterPoint Energy Inc., senior note, | United States | 1,800,000 | 1,669,820 | ||||
6.50%, 5/01/18 | United States | 1,000,000 | 894,701 | ||||
CMS Energy Corp., senior note, 8.75%, 6/15/19 | United States | 1,800,000 | 1,829,862 | ||||
Dominion Resources Inc., 6.40%, 6/15/18 | United States | 2,900,000 | 3,065,924 | ||||
Duke Energy Corp., senior note, 6.30%, 2/01/14 | United States | 3,500,000 | 3,783,703 | ||||
Dynegy Holdings Inc., senior note, 8.375%, 5/01/16 | United States | 3,500,000 | 2,983,750 | ||||
Edison Mission Energy, senior note, 7.00%, 5/15/17 | United States | 2,800,000 | 2,163,000 | ||||
cEnel Finance International, senior bond, 144A, 6.25%, 9/15/17 | Luxembourg | 1,100,000 | 1,150,173 | ||||
cIntergen NV, senior secured note, 144A, 9.00%, 6/30/17 | Netherlands | 3,400,000 | 3,238,500 | ||||
Mirant North America LLC, senior note, 7.375%, 12/31/13 | United States | 3,400,000 | 3,281,000 | ||||
NRG Energy Inc., senior note, | United States | 700,000 | 680,750 | ||||
7.375%, 2/01/16 | United States | 3,200,000 | 3,036,000 | ||||
PG&E Corp., senior note, 5.75%, 4/01/14 | United States | 3,500,000 | 3,734,420 | ||||
Sempra Energy, senior note, 9.80%, 2/15/19 | United States | 3,400,000 | 4,124,550 | ||||
Texas Competitive Electric Holdings Co. LLC, senior note, A, 10.25%, 11/01/15 | United States | 5,500,000 | 3,451,250 | ||||
| 45,440,819 | |||||||
Total Corporate Bonds (Cost $510,480,840) | 484,339,516 | ||||||
FSI-24
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Franklin Strategic Income Securities Fund | Country/ Organization | Principal Amountd | Value | ||||
Convertible Bonds (Cost $1,758,231) 0.1% | |||||||
Pharmaceuticals, Biotechnology & Life Sciences 0.1% | |||||||
Mylan Inc., cvt., senior note, 1.25%, 3/15/12 | United States | 2,000,000 | $ | 1,742,500 | |||
Asset-Backed Securities and Commercial Mortgage-Backed Securities 6.3% | |||||||
Banks 3.0% | |||||||
eBanc of America Commercial Mortgage Inc., 2005-6, A4, FRN, 5.179%, 9/10/47 | United States | 2,000,000 | 1,742,366 | ||||
eCitibank Credit Card Issuance Trust, 2005-A3, A3, FRN, 0.385%, 4/24/14 | United States | 1,000,000 | 964,308 | ||||
Citigroup/Deutsche Bank Commercial Mortgage Trust, | |||||||
e2005-CD1, A4, FRN, 5.399%, 7/15/44 | United States | 1,600,000 | 1,422,228 | ||||
2006-CD3, A5, 5.617%, 10/15/48 | United States | 9,800,000 | 8,049,965 | ||||
Countrywide Asset-Backed Certificates, | |||||||
2004-7, AF4, 4.774%, 8/25/32 | United States | 76,599 | 76,138 | ||||
2005-11, AF4, 5.21%, 3/25/34 | United States | 1,275,000 | 514,196 | ||||
GE Capital Commercial Mortgage Corp., 2003-C1, A4, 4.819%, 1/10/38 | United States | 934,225 | 869,435 | ||||
Greenwich Capital Commercial Funding Corp., | United States | 1,605,000 | 1,507,280 | ||||
2005-GG5, A5, 5.224%, 4/10/37 | United States | 4,995,000 | 4,284,497 | ||||
e2006-GG7, A4, FRN, 5.916%, 7/10/38 | United States | 4,000,000 | 3,292,052 | ||||
GS Mortgage Securities Corp. II, | United States | 1,100,000 | 1,054,470 | ||||
e2006-GG6, A4, FRN, 5.553%, 4/10/38 | United States | 4,000,000 | 3,304,694 | ||||
LB-UBS Commercial Mortgage Trust, | United States | 1,000,000 | 1,005,071 | ||||
2006-C1, A4, 5.156%, 2/15/31 | United States | 5,700,000 | 4,760,951 | ||||
eMorgan Stanley Capital I Trust, 2004-IQ7, A4, FRN, 5.403%, 6/15/38 | United States | 4,000,000 | 3,640,048 | ||||
| 36,487,699 | |||||||
Diversified Financials 3.3% | |||||||
eAdvanta Business Card Master Trust, 2007-A4, A4, FRN, 0.345%, 4/22/13 | United States | 4,417,281 | 3,876,164 | ||||
eAmerican Express Credit Account Master Trust, 2008-1, A, FRN, 0.794%, 8/15/13 | United States | 2,800,000 | 2,775,360 | ||||
eChase Issuance Trust, | United States | 1,000,000 | 999,371 | ||||
2007-A9, A9, FRN, 0.374%, 6/16/14 | United States | 5,000,000 | 4,804,172 | ||||
sub. note, 2006-A7, A, FRN, 0.354%, 2/15/13 | United States | 800,000 | 787,432 | ||||
Citigroup Commercial Mortgage Trust, | United States | 1,200,000 | 649,805 | ||||
2008-C7, A4, 6.095%, 12/10/49 | United States | 8,700,000 | 7,136,838 | ||||
JPMorgan Chase Commercial Mortgage Securities Corp., | United States | 5,096,445 | 4,410,493 | ||||
2004-LN2, A2, 5.115%, 7/15/41 | United States | 412,616 | 364,021 | ||||
2005-LDP2, AM, 4.78%, 7/15/42 | United States | 775,000 | 528,851 | ||||
e2005-LDP5, A4, FRN, 5.179%, 12/15/44 | United States | 3,400,000 | 2,882,643 | ||||
cKeystone Owner Trust, 1997-P3, M2, 144A, 7.98%, 12/25/24 | United States | 247 | 247 | ||||
eMBNA Credit Card Master Note Trust, 2005-A4, A4, FRN, 0.384%, 11/15/12 | United States | 1,000,000 | 991,118 | ||||
eMBNA Master Credit Card Trust II, 1997-B, A, FRN, 0.504%, 8/15/14 | United States | 10,000,000 | 9,645,089 | ||||
Residential Asset Securities Corp., 2004-KS1, AI4, 4.213%, 4/25/32 | United States | 144,351 | 114,916 | ||||
| 39,966,520 | |||||||
Total Asset-Backed Securities and Commercial Mortgage-Backed Securities (Cost $84,764,459) | 76,454,219 | ||||||
FSI-25
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Franklin Strategic Income Securities Fund | Country/ Organization | Principal Amountd | Value | ||||
Mortgage-Backed Securities 10.0% | |||||||
eFederal Home Loan Mortgage Corp. (FHLMC) Adjustable Rate 0.0%a | |||||||
FHLMC, 4.073%, 1/01/33 | United States | 146,576 | $ | 147,436 | |||
Federal Home Loan Mortgage Corp. (FHLMC) Fixed Rate 4.3% | |||||||
FHLMC Gold 15 Year, 4.50%, 10/01/18 - 9/01/19 | United States | 2,991,335 | 3,073,228 | ||||
FHLMC Gold 15 Year, 5.00%, 12/01/17 - 9/01/19 | United States | 3,209,134 | 3,349,282 | ||||
FHLMC Gold 15 Year, 5.50%, 7/01/17 - 7/01/19 | United States | 751,849 | 791,790 | ||||
FHLMC Gold 15 Year, 6.00%, 5/01/17 | United States | 27,594 | 29,373 | ||||
FHLMC Gold 15 Year, 6.50%, 5/01/16 | United States | 10,736 | 11,385 | ||||
FHLMC Gold 30 Year, 5.00%, 4/01/34 - 9/01/38 | United States | 15,532,536 | 15,830,825 | ||||
FHLMC Gold 30 Year, 5.50%, 3/01/33 - 6/01/36 | United States | 8,084,444 | 8,373,372 | ||||
FHLMC Gold 30 Year, 6.00%, 4/01/33 - 6/01/38 | United States | 9,974,076 | 10,441,329 | ||||
FHLMC Gold 30 Year, 6.50%, 12/01/23 - 8/01/38 | United States | 9,108,089 | 9,694,056 | ||||
FHLMC Gold 30 Year, 7.00%, 9/01/21 - 1/01/32 | United States | 125,387 | 136,773 | ||||
FHLMC Gold 30 Year, 7.50%, 3/01/30 - 7/01/31 | United States | 2,671 | 2,894 | ||||
| 51,734,307 | |||||||
eFederal National Mortgage Association (FNMA) Adjustable Rate 0.1% | |||||||
FNMA, 4.585%, 4/01/20 | United States | 129,942 | 132,997 | ||||
FNMA, 4.628%, 12/01/34 | United States | 728,594 | 739,167 | ||||
| 872,164 | |||||||
Federal National Mortgage Association (FNMA) Fixed Rate 5.2% | |||||||
FNMA 15 Year, 4.50%, 6/01/19 - 3/01/20 | United States | 596,786 | 617,707 | ||||
FNMA 15 Year, 5.00%, 10/01/17 - 6/01/18 | United States | 647,346 | 677,978 | ||||
FNMA 15 Year, 5.50%, 10/01/16 - 4/01/21 | United States | 568,011 | 596,115 | ||||
FNMA 15 Year, 6.00%, 4/01/16 - 7/01/16 | United States | 18,159 | 19,364 | ||||
FNMA 15 Year, 7.00%, 5/01/12 | United States | 1,660 | 1,738 | ||||
FNMA 30 Year, 4.50%, 4/01/39 | United States | 8,136,654 | 8,111,512 | ||||
FNMA 30 Year, 5.00%, 4/01/34 - 5/01/38 | United States | 11,368,472 | 11,600,381 | ||||
FNMA 30 Year, 5.50%, 8/01/33 - 5/01/36 | United States | 15,085,247 | 15,632,755 | ||||
FNMA 30 Year, 6.00%, 6/01/34 - 5/01/38 | United States | 16,144,200 | 16,927,336 | ||||
FNMA 30 Year, 6.50%, 6/01/28 - 10/01/37 | United States | 7,739,991 | 8,261,771 | ||||
FNMA 30 Year, 7.50%, 9/01/31 | United States | 3,038 | 3,317 | ||||
| 62,449,974 | |||||||
Government National Mortgage Association (GNMA) Fixed Rate 0.4% | |||||||
GNMA I SF 30 Year, 5.00%, 11/15/33 - 7/15/34 | United States | 1,634,120 | 1,675,839 | ||||
GNMA I SF 30 Year, 5.50%, 12/15/32 - 6/15/36 | United States | 2,198,618 | 2,282,226 | ||||
GNMA I SF 30 Year, 6.50%, 11/15/31 - 2/15/32 | United States | 15,270 | 16,445 | ||||
GNMA I SF 30 Year, 7.00%, 10/15/28 - 6/15/32 | United States | 110,210 | 120,177 | ||||
GNMA I SF 30 Year, 7.50%, 9/15/30 | United States | 2,403 | 2,632 | ||||
GNMA II SF 30 Year, 5.00%, 9/20/33 - 11/20/33 | United States | 457,520 | 466,267 | ||||
GNMA II SF 30 Year, 6.00%, 11/20/34 | United States | 541,358 | 563,884 | ||||
GNMA II SF 30 Year, 6.50%, 4/20/31 - 2/20/34 | United States | 198,124 | 211,854 | ||||
GNMA II SF 30 Year, 7.50%, 1/20/28 - 4/20/32 | United States | 56,436 | 61,432 | ||||
| 5,400,756 | |||||||
Total Mortgage-Backed Securities (Cost $116,444,149) | 120,604,637 | ||||||
U.S. Government and Agency Securities 9.3% | |||||||
FHLMC, | |||||||
2.125%, 3/23/12 | United States | 3,000,000 | 3,029,925 | ||||
3.75%, 6/28/13 | United States | 3,000,000 | 3,154,248 | ||||
5.00%, 2/16/17 | United States | 3,000,000 | 3,268,098 | ||||
FSI-26
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Franklin Strategic Income Securities Fund | Country/ Organization | Principal Amountd | Value | |||||
U.S. Government and Agency Securities (continued) | ||||||||
FHLMC, (continued) | ||||||||
5.625%, 3/15/11 | United States | 5,500,000 | $ | 5,920,690 | ||||
senior note, 4.75%, 3/05/12 | United States | 6,000,000 | 6,481,914 | |||||
FNMA, | ||||||||
1.375%, 4/28/11 | United States | 5,500,000 | 5,517,705 | |||||
4.125%, 4/15/14 | United States | 700,000 | 742,463 | |||||
U.S. Treasury Bond, | ||||||||
4.50%, 2/15/16 | United States | 5,600,000 | 6,076,442 | |||||
4.50%, 5/15/17 | United States | 7,500,000 | 8,095,320 | |||||
7.125%, 2/15/23 | United States | 4,980,000 | 6,505,125 | |||||
7.875%, 2/15/21 | United States | 3,600,000 | 4,887,565 | |||||
U.S. Treasury Note, | ||||||||
3.50%, 12/15/09 | United States | 2,500,000 | 2,536,428 | |||||
4.00%, 8/31/09 | United States | 2,900,000 | 2,919,033 | |||||
4.00%, 2/15/15 | United States | 4,700,000 | 4,996,692 | |||||
4.125%, 5/15/15 | United States | 10,400,000 | 11,102,010 | |||||
4.25%, 8/15/14 | United States | 1,800,000 | 1,942,454 | |||||
4.625%, 2/15/17 | United States | 4,400,000 | 4,788,441 | |||||
4.75%, 8/15/17 | United States | 2,900,000 | 3,180,033 | |||||
lIndex Linked, 1.625%, 1/15/15 | United States | 3,350,003 | 3,333,253 | |||||
lIndex Linked, 2.00%, 1/15/14 | United States | 7,846,938 | 8,023,494 | |||||
lIndex Linked, 2.00%, 7/15/14 | United States | 4,524,689 | 4,629,322 | |||||
lIndex Linked, 2.00%, 1/15/16 | United States | 4,404,589 | 4,469,283 | |||||
lIndex Linked, 2.50%, 7/15/16 | United States | 5,806,949 | 6,091,849 | |||||
Total U.S. Government and Agency Securities | 111,691,787 | |||||||
Foreign Government and Agency Securities 15.7% | ||||||||
Corporacion Andina De Fomento, 8.125%, 6/04/19 | Supranationalm | 3,810,000 | 4,091,940 | |||||
cEmirate of Abu Dhabi, 144A, 6.75%, 4/08/19 | United Arab Emirates | 3,210,000 | 3,327,165 | |||||
European Investment Bank, senior note, 1612/37, 6.50%, 9/10/14 | Supranationalm | 4,555,000 | NZD | 3,012,444 | ||||
e,nGovernment of Argentina, senior bond, FRN, 1.683%, 8/03/12 | Argentina | 36,637,000 | 8,701,287 | |||||
Government of Hungary, | ||||||||
3.50%, 7/18/16 | Hungary | 60,000 | EUR | 68,482 | ||||
4.375%, 7/04/17 | Hungary | 225,000 | EUR | 268,402 | ||||
5.75%, 6/11/18 | Hungary | 160,000 | EUR | 205,904 | ||||
senior note, 3.875%, 2/24/20 | Hungary | 95,000 | EUR | 102,545 | ||||
Government of Indonesia, | ||||||||
FR17, 13.15%, 1/15/12 | Indonesia | 2,300,000,000 | IDR | 245,604 | ||||
FR19, 14.25%, 6/15/13 | Indonesia | 35,480,000,000 | IDR | 3,997,258 | ||||
FR20, 14.275%, 12/15/13 | Indonesia | 23,637,000,000 | IDR | 2,688,470 | ||||
FR26, 11.00%, 10/15/14 | Indonesia | 1,800,000,000 | IDR | 183,835 | ||||
FR34, 12.80%, 6/15/21 | Indonesia | 39,455,000,000 | IDR | 4,222,833 | ||||
FR42, 10.25%, 7/15/27 | Indonesia | 28,000,000,000 | IDR | 2,359,050 | ||||
csenior bond, 144A, 6.625%, 2/17/37 | Indonesia | 330,000 | 273,900 | |||||
csenior bond, 144A, 7.75%, 1/17/38 | Indonesia | 4,000,000 | 3,680,000 | |||||
csenior bond, 144A, 8.50%, 10/12/35 | Indonesia | 360,000 | 367,200 | |||||
csenior note, 144A, 11.625%, 3/04/19 | Indonesia | 840,000 | 1,069,425 | |||||
oGovernment of Iraq, Reg S, 5.80%, 1/15/28 | Iraq | 1,190,000 | 780,938 | |||||
Government of Malaysia, | ||||||||
2.509%, 8/27/12 | Malaysia | 3,600,000 | MYR | 1,010,095 | ||||
3.461%, 7/31/13 | Malaysia | 6,400,000 | MYR | 1,825,691 | ||||
3.756%, 4/28/11 | Malaysia | 18,465,000 | MYR | 5,377,912 | ||||
3.814%, 2/15/17 | Malaysia | 11,400,000 | MYR | 3,182,076 | ||||
FSI-27
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Franklin Strategic Income Securities Fund | Country/ Organization | Principal Amountd | Value | |||||
Foreign Government and Agency Securities (continued) | ||||||||
Government of Malaysia, (continued) | ||||||||
4.24%, 2/07/18 | Malaysia | 6,600,000 | MYR | $ | 1,881,918 | |||
Government of Mexico, | ||||||||
8.00%, 12/17/15 | Mexico | 350,000 | p MXN | 2,692,655 | ||||
10.00%, 12/05/24 | Mexico | 1,289,000 | p MXN | 11,090,497 | ||||
Government of Poland, | ||||||||
5.75%, 4/25/14 | Poland | 8,010,000 | PLN | 2,520,458 | ||||
5.75%, 9/23/22 | Poland | 19,100,000 | PLN | 5,722,066 | ||||
6.25%, 10/24/15 | Poland | 9,100,000 | PLN | 2,917,220 | ||||
cGovernment of Qatar, senior note, 144A, 6.55%, 4/09/19 | Qatar | 3,270,000 | 3,364,012 | |||||
Government of Russia, | ||||||||
c144A, 7.50%, 3/31/30 | Russia | 22,268,160 | 22,056,612 | |||||
osenior bond, Reg S, 7.50%, 3/31/30 | Russia | 2,160,000 | 2,139,480 | |||||
Government of South Africa, | ||||||||
6.875%, 5/27/19 | South Africa | 3,245,000 | 3,354,356 | |||||
senior note, 5.875%, 5/30/22 | South Africa | 4,755,000 | 4,428,094 | |||||
Government of Sweden, | ||||||||
4.00%, 12/01/09 | Sweden | 95,600,000 | SEK | 12,575,469 | ||||
5.50%, 10/08/12 | Sweden | 13,990,000 | SEK | 2,007,450 | ||||
Government of Venezuela, | ||||||||
10.75%, 9/19/13 | Venezuela | 2,305,000 | 1,913,150 | |||||
osenior bond, Reg S, 5.375%, 8/07/10 | Venezuela | 3,035,000 | 2,860,488 | |||||
KfW Bankengruppe, senior note, 6.50%, 11/15/11 | Germany | 3,588,000 | NZD | 2,401,641 | ||||
Korea Development Bank, senior note, 8.00%, 1/23/14 | South Korea | 4,100,000 | 4,451,583 | |||||
Korea Treasury Bond, | South Korea | 871,340,000 | KRW | 681,794 | ||||
0475-1112, 4.75%, 12/10/11 | South Korea | 9,591,350,000 | KRW | 7,641,289 | ||||
0525-1209, 5.25%, 9/10/12 | South Korea | 1,700,000,000 | KRW | 1,369,199 | ||||
0525-2703, 5.25%, 3/10/27 | South Korea | 1,513,270,000 | KRW | 1,161,445 | ||||
0550-1106, 5.50%, 6/10/11 | South Korea | 3,097,760,000 | KRW | 2,501,949 | ||||
0550-1709, 5.50%, 9/10/17 | South Korea | 7,223,370,000 | KRW | 5,796,559 | ||||
0575-1809, 5.75%, 9/10/18 | South Korea | 1,250,000,000 | KRW | 1,023,768 | ||||
senior note, 7.125% 4/16/19 | South Korea | 4,190,000 | 4,526,943 | |||||
New South Wales Treasury Corp., senior note, 5.50%, 3/01/17 | Australia | 3,540,000 | AUD | 2,740,695 | ||||
Nota Do Tesouro Nacional, | ||||||||
10.082%, 1/01/12 | Brazil | 1,710 | q BRL | 852,736 | ||||
10.082%, 1/01/14 | Brazil | 2,700 | q BRL | 1,278,374 | ||||
10.082%, 1/01/17 | Brazil | 23,200 | q BRL | 10,351,899 | ||||
rIndex Linked, 6.00%, 5/15/15 | Brazil | 3,290 | q BRL | 2,979,730 | ||||
rIndex Linked, 6.00%, 5/15/45 | Brazil | 1,725 | q BRL | 1,499,658 | ||||
Province of Ontario, 6.25%, 6/16/15 | Canada | 997,000 | NZD | 630,261 | ||||
Queensland Treasury Corp., | ||||||||
13, 6.00%, 8/14/13 | Australia | 600,000 | AUD | 490,203 | ||||
17, 6.00%, 9/14/17 | Australia | 1,200,000 | AUD | 955,088 | ||||
c144A, 7.125%, 9/18/17 | Australia | 5,640,000 | NZD | 3,779,816 | ||||
Total Foreign Government and Agency Securities | 189,681,011 | |||||||
Municipal Bonds 2.9% | ||||||||
Bay Area Toll Authority Toll Bridge Revenue, San Francisco Bay Area, Refunding, Series F1, 5.00%, 4/01/39 | United States | 315,000 | 293,785 | |||||
California State GO, | ||||||||
6.00%, 4/01/38 | United States | 7,000,000 | 7,009,450 | |||||
Refunding, 5.00%, 4/01/38 | United States | 12,000,000 | 10,056,960 | |||||
Various Purpose, Refunding, 5.25%, 3/01/38 | United States | 2,335,000 | 2,044,129 | |||||
FSI-28
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Franklin Strategic Income Securities Fund | Country/ Organization | Principal Amountd | Value | ||||
Municipal Bonds (continued) | |||||||
Chicago Board of Education GO, Refunding, Series C, Assured Guaranty, | United States | 940,000 | $ | 994,266 | |||
Chicago GO, Project and Refunding, Series A, FSA Insured, 5.00%, 1/01/25 | United States | 250,000 | 255,410 | ||||
Clovis USD, GO, Capital Appreciation, Election of 2004, Series A, | |||||||
FGIC Insured, zero cpn., 8/01/27 | United States | 1,720,000 | 549,282 | ||||
NATL Guarantee, zero cpn., 8/01/25 | United States | 2,500,000 | 932,600 | ||||
NATL Guarantee, zero cpn., 8/01/26 | United States | 1,290,000 | 447,398 | ||||
NATL Guarantee, zero cpn., 8/01/29 | United States | 1,720,000 | 460,805 | ||||
District of Columbia University Revenue, Georgetown University, Refunding, Series D, BHAC Insured, 5.50%, 4/01/36 | United States | 805,000 | 827,218 | ||||
Energy Northwest Electric Revenue, Columbia Generating Station, Refunding, Series A, 5.00%, 7/01/24 | United States | 805,000 | 829,866 | ||||
Kentucky State Municipal Power Agency Power System Revenue, Prairie State Project, | United States | 1,250,000 | 1,252,375 | ||||
Las Vegas Valley Water District GO, Refunding, Series A, MBIA Insured, | United States | 205,000 | 206,656 | ||||
Lewisville ISD, GO, School Building, 5.00%, 8/15/26 | United States | 285,000 | 298,270 | ||||
Los Angeles USD, GO, Series I, 5.00%, | |||||||
7/01/26 | United States | 95,000 | 95,073 | ||||
7/01/27 | United States | 100,000 | 99,063 | ||||
Matanuska-Susitna Borough Lease Revenue, Goose Greek Correctional Center, Assured Guaranty, | |||||||
5.50%, 9/01/23 | United States | 835,000 | 915,962 | ||||
6.00%, 9/01/28 | United States | 1,045,000 | 1,143,011 | ||||
Metropolitan Water District of Southern California Waterworks Revenue, | United States | 750,000 | 750,480 | ||||
MTA Revenue, | |||||||
Series B, Assured Guaranty, 5.25%, 11/15/20 | United States | 355,000 | 380,088 | ||||
Transportation, Series A, FSA Insured, 5.50%, 11/15/21 | United States | 335,000 | 365,807 | ||||
Palomar Pomerado Health GO, Election of 2004, Series A, MBIA Insured, | United States | 1,085,000 | 992,840 | ||||
Philadelphia GO, Series B, Assured Guaranty, 7.125%, 7/15/38 | United States | 465,000 | 496,541 | ||||
Placentia-Yorba Linda USD, GO, 2008 Election, Series A, 5.25%, 8/01/32 | United States | 1,250,000 | 1,252,638 | ||||
Poway USD, GO, Election of 2008, ID 07-1-A, zero cpn., | |||||||
8/01/27 | United States | 370,000 | 118,322 | ||||
8/01/30 | United States | 370,000 | 92,482 | ||||
8/01/32 | United States | 460,000 | 97,262 | ||||
8/01/33 | United States | 245,000 | 47,981 | ||||
Regional Transportation District Sales Tax Revenue, Fastracks Project, Series A, AMBAC Insured, 5.00%, 11/01/27 | United States | 305,000 | 315,364 | ||||
San Bernardino Community College District GO, Election of 2002, | |||||||
6.375%, 8/01/26 | United States | 210,000 | 236,714 | ||||
6.50%, 8/01/27 | United States | 305,000 | 344,427 | ||||
6.50%, 8/01/28 | United States | 125,000 | 140,276 | ||||
6.25%, 8/01/33 | United States | 315,000 | 338,190 | ||||
San Mateo County Community College District GO, Election of 2001, Series C, MBIA Insured, zero cpn., | |||||||
9/01/30 | United States | 895,000 | 254,404 | ||||
3/01/31 | United States | 245,000 | 66,593 | ||||
Total Municipal Bonds (Cost $36,323,673) | 35,001,988 | ||||||
Total Investments before Short Term Investments (Cost $1,191,937,882) | 1,145,693,799 | ||||||
FSI-29
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Franklin Strategic Income Securities Fund | Country/ Organization | Principal Amountd | Value | ||||||
Short Term Investments 5.4% | |||||||||
Foreign Government and Agency Securities 0.9% | |||||||||
sEgypt Treasury Bills, 7/07/09 - 9/22/09 | Egypt | 32,375,000 | EGP | $ | 5,758,004 | ||||
Government of Argentina, senior bond, amortization and cpn., 8/03/09 | Argentina | 36,637,000 | 4,509,145 | ||||||
Total Foreign Government and Agency Securities (Cost $5,997,057) | 10,267,149 | ||||||||
Total Investments before Money Market Funds (Cost $1,197,934,939) | 1,155,960,948 | ||||||||
| Shares | |||||||||
Money Market Funds (Cost $54,380,680) 4.5% | |||||||||
tInstitutional Fiduciary Trust Money Market Portfolio, 0.00% | United States | 54,380,680 | 54,380,680 | ||||||
Total Investments (Cost $1,252,315,619) 100.3% | 1,210,341,628 | ||||||||
Other Assets, less Liabilities (0.3)% | (4,173,735 | ) | |||||||
Net Assets 100.0% | $ | 1,206,167,893 | |||||||
aRounds to less than 0.1% of net assets.
bNon-income producing.
cSecurity was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be sold in transactions exempt from registration only to qualified institutional buyers or in a public offering registered under the Securities Act of 1933. These securities have been deemed liquid under guidelines approved by the Trust’s Board of Trustees. At June 30, 2009, the aggregate value of these securities was $134,376,975, representing 11.14% of net assets.
dThe principal amount is stated in U.S. dollars unless otherwise indicated.
eThe coupon rate shown represents the rate at period end.
fSee Note 1(g) regarding senior floating rate interests.
gSee Note 8 regarding defaulted securities.
hA portion or all of the security purchased on a when-issued or delayed delivery basis. See Note 1(c).
iIncome may be received in additional securities and/or cash.
jPerpetual security with no stated maturity date.
kSee Note 10 regarding other considerations.
lPrincipal amount of security is adjusted for inflation. See Note 1(i).
mA supranational organization is an entity formed by two or more central governments through international treaties.
nThe principal amount is stated in original face, and scheduled paydowns are reflected in the market price on ex-date.
oSecurity was purchased pursuant to Regulation S under the Securities Act of 1933, which exempts from registration securities offered and sold outside of the United States. Such a security cannot be sold in the United States without either an effective registration statement filed pursuant to the Securities Act of 1933, or pursuant to an exemption from registration. These securities have been deemed liquid under guidelines approved by the Trust’s Board of Trustees. At June 30, 2009, the aggregate value of these securities was $5,780,906, representing 0.48% of net assets.
pPrincipal amount is stated in 100 Mexican Peso Units.
qPrincipal amount is stated in 1,000 Brazilian Real Units.
rRedemption price at maturity is adjusted for inflation. See Note 1(i).
sThe security is traded on a discount basis with no stated coupon rate.
tSee Note 7 regarding investments in the Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end.
FSI-30
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Franklin Strategic Income Securities Fund |
At June 30, 2009, the Fund had the following forward exchange contracts outstanding. See Note 1(d).
| Currency | Counterparty | Type | Quantity | Contract Amount* | Settlement Date | Unrealized Appreciation | Unrealized Depreciation | ||||||||||||
Russian Ruble | MLCO | Buy | 80,526,837 | 36,540,189 | MXN | 7/01/09 | $ | — | $ | (190,282 | ) | ||||||||
South Korean Won | JPHQ | Buy | 2,568,000,000 | 2,130,943 | CHF | 7/09/09 | 54,764 | — | |||||||||||
South Korean Won | JPHQ | Sell | 2,568,000,000 | 2,603,934 | CHF | 7/09/09 | 380,463 | — | |||||||||||
United States Dollar | JPHQ | Buy | 2,500,000 | 1,625,678 | EUR | 7/10/09 | 219,810 | — | |||||||||||
South Korean Won | JPHQ | Buy | 507,000,000 | 420,834 | CHF | 7/24/09 | 10,996 | — | |||||||||||
South Korean Won | JPHQ | Sell | 507,000,000 | 510,625 | CHF | 7/24/09 | 71,643 | — | |||||||||||
Mexican Peso | CITI | Sell | 3,907,000 | 277,507 | 7/31/09 | — | (17,602 | ) | |||||||||||
New Zealand Dollar | DBAB | Sell | 979,356 | 545,217 | 7/31/09 | — | (85,324 | ) | |||||||||||
New Zealand Dollar | UBSW | Sell | 394,863 | 218,087 | 7/31/09 | — | (36,139 | ) | |||||||||||
New Zealand Dollar | DBAB | Sell | 975,630 | 545,217 | 8/03/09 | — | (82,800 | ) | |||||||||||
New Zealand Dollar | BZWS | Sell | 381,918 | 218,087 | 8/03/09 | — | (27,756 | ) | |||||||||||
Brazilian Real | DBAB | Sell | 3,989,000 | 1,768,879 | 8/04/09 | — | (253,589 | ) | |||||||||||
Indonesian Rupiah | HSBC | Buy | 72,038,406,663 | 10,695,649 | NZD | 8/04/09 | 115,593 | — | |||||||||||
New Zealand Dollar | CITI | Sell | 968,880 | 545,217 | 8/04/09 | — | (78,414 | ) | |||||||||||
New Zealand Dollar | DBAB | Sell | 386,535 | 218,087 | 8/04/09 | — | (30,711 | ) | |||||||||||
New Zealand Dollar | BZWS | Sell | 352,796 | 198,377 | 8/04/09 | — | (28,704 | ) | |||||||||||
New Zealand Dollar | DBAB | Sell | 526,935 | 297,566 | 8/05/09 | — | (41,580 | ) | |||||||||||
New Zealand Dollar | CITI | Sell | 695,629 | 396,754 | 8/06/09 | — | (50,936 | ) | |||||||||||
New Zealand Dollar | FBCO | Sell | 347,171 | 198,377 | 8/06/09 | — | (25,054 | ) | |||||||||||
New Zealand Dollar | DBAB | Sell | 689,485 | 394,364 | 8/07/09 | — | (49,341 | ) | |||||||||||
New Zealand Dollar | CITI | Sell | 686,387 | 394,364 | 8/07/09 | — | (47,348 | ) | |||||||||||
New Zealand Dollar | FBCO | Sell | 678,558 | 394,364 | 8/07/09 | — | (42,310 | ) | |||||||||||
New Zealand Dollar | FBCO | Sell | 339,958 | 197,182 | 8/10/09 | — | (21,548 | ) | |||||||||||
New Zealand Dollar | FBCO | Sell | 339,791 | 197,182 | 8/11/09 | — | (21,426 | ) | |||||||||||
New Zealand Dollar | DBAB | Sell | 1,636,187 | 964,287 | 8/12/09 | — | (88,303 | ) | |||||||||||
Russian Ruble | DBAB | Buy | 34,603,842 | 2,062,207 | NZD | 8/12/09 | — | (228,981 | ) | ||||||||||
New Zealand Dollar | DBAB | Sell | 1,935,551 | 23,455,969,704 | VND | 8/14/09 | 65,339 | — | |||||||||||
Russian Ruble | DBAB | Buy | 34,287,311 | 2,048,716 | NZD | 8/14/09 | — | (230,730 | ) | ||||||||||
New Zealand Dollar | FBCO | Sell | 1,598,800 | 964,332 | 8/24/09 | — | (63,385 | ) | |||||||||||
New Zealand Dollar | DBAB | Sell | 1,591,000 | 962,125 | 8/26/09 | — | (60,442 | ) | |||||||||||
South Korean Won | JPHQ | Buy | 2,166,048,000 | 1,798,954 | CHF | 8/28/09 | 47,863 | — | |||||||||||
South Korean Won | JPHQ | Sell | 2,166,048,000 | 2,154,178 | CHF | 8/28/09 | 279,215 | — | |||||||||||
Mexican Peso | DBAB | Sell | 17,883,017 | 42,761,871 | RUB | 9/17/09 | 1,386 | — | |||||||||||
United States Dollar | UBSW | Buy | 3,000,000 | 2,153,888 | EUR | 9/17/09 | — | (20,566 | ) | ||||||||||
Chinese Yuan | HSBC | Buy | 38,481,000 | 5,609,475 | 9/23/09 | 29,662 | — | ||||||||||||
Russian Ruble | BZWS | Buy | 25,213,795 | 1,199,478 | AUD | 9/24/09 | — | (169,245 | ) | ||||||||||
Russian Ruble | BZWS | Buy | 38,830,178 | 1,866,434 | AUD | 9/28/09 | — | (276,957 | ) | ||||||||||
Vietnamese Dong | HSBC | Buy | 9,689,431,018 | 786,825 | AUD | 10/07/09 | — | (92,828 | ) | ||||||||||
Chinese Yuan | HSBC | Buy | 3,198,979 | 691,178 | AUD | 10/13/09 | — | (83,073 | ) | ||||||||||
Chinese Yuan | HSBC | Buy | 3,285,166 | 697,590 | AUD | 10/19/09 | — | (75,192 | ) | ||||||||||
Chinese Yuan | HSBC | Buy | 4,344,052 | 628,025 | 10/23/09 | 9,215 | — | ||||||||||||
Chinese Yuan | HSBC | Buy | 7,365,718 | 1,059,186 | 10/26/09 | 21,436 | — | ||||||||||||
Chinese Yuan | HSBC | Buy | 4,405,928 | 628,969 | 10/27/09 | 17,447 | — | ||||||||||||
Swiss Franc | UBSW | Buy | 8,080,000 | 5,454,852 | EUR | 10/27/09 | — | (201,927 | ) | ||||||||||
Swiss Franc | UBSW | Sell | 8,080,000 | 5,467,587 | EUR | 10/27/09 | 219,786 | — | |||||||||||
New Zealand Dollar | CITI | Sell | 1,568,941 | 964,332 | 11/30/09 | — | (38,085 | ) | |||||||||||
New Zealand Dollar | UBSW | Sell | 590,051 | 362,085 | 11/30/09 | — | (14,907 | ) | |||||||||||
New Zealand Dollar | DBAB | Sell | 586,497 | 360,901 | 11/30/09 | — | (13,820 | ) | |||||||||||
Euro | UBSW | Sell | 3,920,000 | 5,459,776 | 12/01/09 | — | (36,911 | ) | |||||||||||
Mexican Peso | CITI | Sell | 3,870,000 | 285,662 | 12/01/09 | — | (1,584 | ) | |||||||||||
New Zealand Dollar | DBAB | Sell | 1,189,026 | 723,249 | 12/02/09 | — | (36,343 | ) | |||||||||||
FSI-31
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Franklin Strategic Income Securities Fund |
| Currency | Counterparty | Type | Quantity | Contract Amount* | Settlement Date | Unrealized Appreciation | Unrealized Depreciation | ||||||||||||
New Zealand Dollar | BZWS | Sell | 978,196 | 604,525 | 12/02/09 | $ | — | $ | (20,381 | ) | |||||||||
New Zealand Dollar | FBCO | Sell | 392,380 | 242,675 | 12/02/09 | — | (7,991 | ) | |||||||||||
Euro | CITI | Sell | 3,868,000 | 5,417,637 | 12/16/09 | — | (6,058 | ) | |||||||||||
Mexican Peso | DBAB | Sell | 27,600,000 | 2,000,797 | 12/17/09 | — | (43,071 | ) | |||||||||||
Euro | DBAB | Sell | 2,187,000 | 2,971,040 | 1/12/10 | — | (95,552 | ) | |||||||||||
Singapore Dollar | HSBC | Sell | 7,535,000 | 5,000,000 | 2/17/10 | — | (197,496 | ) | |||||||||||
Singapore Dollar | BZWS | Sell | 7,527,500 | 5,000,000 | 2/17/10 | — | (192,322 | ) | |||||||||||
Singapore Dollar | UBSW | Sell | 2,278,000 | 1,499,819 | 3/23/10 | — | (71,439 | ) | |||||||||||
Indian Rupee | DBAB | Buy | 20,841,000 | 402,771 | 4/09/10 | 25,304 | — | ||||||||||||
Indian Rupee | DBAB | Buy | 44,691,000 | 863,094 | 4/12/10 | 54,707 | — | ||||||||||||
Indian Rupee | JPHQ | Buy | 30,019,000 | 575,407 | 4/13/10 | 41,046 | — | ||||||||||||
Indian Rupee | JPHQ | Buy | 29,466,000 | 575,395 | 4/15/10 | 29,635 | — | ||||||||||||
Indian Rupee | JPHQ | Buy | 14,719,000 | 288,495 | 4/19/10 | 13,665 | — | ||||||||||||
Indian Rupee | DBAB | Buy | 10,360,000 | 201,949 | 4/19/10 | 10,727 | — | ||||||||||||
Indian Rupee | DBAB | Buy | 20,931,000 | 403,906 | 4/26/10 | 25,609 | — | ||||||||||||
Chilean Peso | CITI | Buy | 235,141,000 | 400,410 | 4/27/10 | 41,750 | — | ||||||||||||
Chilean Peso | JPHQ | Buy | 234,301,000 | 400,412 | 4/27/10 | 40,169 | — | ||||||||||||
Indian Rupee | JPHQ | Buy | 2,986,000 | 57,700 | 4/27/10 | 3,570 | — | ||||||||||||
Chilean Peso | CITI | Buy | 377,668,000 | 640,658 | 4/28/10 | 69,511 | — | ||||||||||||
Chilean Peso | UBSW | Buy | 47,289,000 | 80,083 | 4/28/10 | 8,840 | — | ||||||||||||
Indian Rupee | JPHQ | Buy | 14,815,000 | 288,510 | 4/28/10 | 15,468 | — | ||||||||||||
Indian Rupee | JPHQ | Buy | 14,829,000 | 288,502 | 4/30/10 | 15,729 | — | ||||||||||||
Indian Rupee | DBAB | Buy | 28,359,000 | 577,824 | 6/01/10 | 2,950 | — | ||||||||||||
Indian Rupee | HSBC | Buy | 841,000 | 17,340 | 6/02/10 | — | (118 | ) | |||||||||||
Indian Rupee | HSBC | Buy | 4,160,000 | 86,667 | 6/03/10 | — | (1,482 | ) | |||||||||||
Indian Rupee | HSBC | Buy | 27,770,000 | 577,819 | 6/04/10 | — | (9,203 | ) | |||||||||||
Indian Rupee | DBAB | Buy | 13,885,000 | 288,910 | 6/07/10 | — | (4,649 | ) | |||||||||||
Indian Rupee | DBAB | Buy | 7,004,000 | 145,311 | 6/08/10 | — | (1,930 | ) | |||||||||||
Indian Rupee | HSBC | Buy | 5,576,000 | 115,565 | 6/08/10 | — | (1,416 | ) | |||||||||||
Indian Rupee | DBAB | Buy | 5,655,000 | 116,238 | 6/10/10 | — | (486 | ) | |||||||||||
Indian Rupee | BZWS | Buy | 8,457,000 | 174,371 | 6/11/10 | — | (1,274 | ) | |||||||||||
Indian Rupee | HSBC | Buy | 5,667,000 | 116,246 | 6/11/10 | — | (254 | ) | |||||||||||
Indian Rupee | DBAB | Buy | 14,156,000 | 290,618 | 6/16/10 | — | (954 | ) | |||||||||||
Indian Rupee | DBAB | Buy | 12,894,000 | 261,542 | 6/21/10 | 2,225 | — | ||||||||||||
Euro | UBSW | Sell | 4,274,000 | 5,960,264 | 6/29/10 | — | (35,723 | ) | |||||||||||
Unrealized appreciation (depreciation) | 1,945,523 | (3,555,942 | ) | ||||||||||||||||
Net unrealized appreciation (depreciation) | $ | (1,610,419 | ) | ||||||||||||||||
*In U.S. dollars unless otherwise indicated.
See Abbreviations on page FSI-45.
The accompanying notes are an integral part of these financial statements.
FSI-32
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements
Statement of Assets and Liabilities
June 30, 2009 (unaudited)
| Franklin Strategic Income Securities Fund | ||||
Assets: | ||||
Investments in securities: | ||||
Cost - Unaffiliated issuers | $ | 1,197,934,939 | ||
Cost - Sweep Money Fund (Note 7) | 54,380,680 | |||
Total cost of investments | $ | 1,252,315,619 | ||
Value - Unaffiliated issuers | $ | 1,155,960,948 | ||
Value - Sweep Money Fund (Note 7) | 54,380,680 | |||
Total value of investments | 1,210,341,628 | |||
Cash | 665,519 | |||
Foreign currency, at value (cost $1,306,662) | 1,310,783 | |||
Receivables: | ||||
Investment securities sold | 1,065,072 | |||
Capital shares sold | 934,786 | |||
Dividends and interest | 16,034,119 | |||
Unrealized appreciation on forward exchange contracts | 1,945,523 | |||
Other assets | 1,401 | |||
Total assets | 1,232,298,831 | |||
Liabilities: | ||||
Payables: | ||||
Investment securities purchased | 21,067,167 | |||
Capital shares redeemed | 628,205 | |||
Affiliates | 607,780 | |||
Unrealized depreciation on forward exchange contracts | 3,555,942 | |||
Accrued expenses and other liabilities | 271,844 | |||
Total liabilities | 26,130,938 | |||
Net assets, at value | $ | 1,206,167,893 | ||
Net assets consist of: | ||||
Paid-in capital | $ | 1,306,167,159 | ||
Undistributed net investment income | 12,700,268 | |||
Net unrealized appreciation (depreciation) | (43,414,931 | ) | ||
Accumulated net realized gain (loss) | (69,284,603 | ) | ||
Net assets, at value | $ | 1,206,167,893 | ||
The accompanying notes are an integral part of these financial statements.
FSI-33
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Assets and Liabilities (continued)
June 30, 2009 (unaudited)
| Franklin Strategic Income Securities Fund | |||
Class 1: | |||
Net assets, at value | $ | 1,049,537,207 | |
Shares outstanding | 95,529,513 | ||
Net asset value and maximum offering price per share | $ | 10.99 | |
Class 2: | |||
Net assets, at value | $ | 47,973,151 | |
Shares outstanding | 4,444,651 | ||
Net asset value and maximum offering price per share | $ | 10.79 | |
Class 4: | |||
Net assets, at value | $ | 108,657,535 | |
Shares outstanding | 9,940,039 | ||
Net asset value and maximum offering price per share | $ | 10.93 | |
The accompanying notes are an integral part of these financial statements.
FSI-34
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Operations
for the six months ended June 30, 2009 (unaudited)
| Franklin Strategic Income Securities Fund | ||||
Investment income: | ||||
Dividends: | ||||
Unaffiliated issuers | $ | 466,859 | ||
Sweep Money Fund (Note 7) | 22,812 | |||
Interest | 35,995,861 | |||
Total investment income | 36,485,532 | |||
Expenses: | ||||
Management fees (Note 3a) | 1,911,181 | |||
Administrative fees (Note 3b) | 1,062,725 | |||
Distribution fees: (Note 3c) | ||||
Class 2 | 48,810 | |||
Class 4 | 141,334 | |||
Unaffiliated transfer agent fees | 625 | |||
Custodian fees (Note 4) | 94,527 | |||
Reports to shareholders | 50,432 | |||
Professional fees | 35,443 | |||
Trustees’ fees and expenses | 2,997 | |||
Other | 35,308 | |||
Total expenses | 3,383,382 | |||
Expense reductions (Note 4) | (1,852 | ) | ||
Net expenses | 3,381,530 | |||
Net investment income | 33,104,002 | |||
Realized and unrealized gains (losses): | ||||
Net realized gain (loss) from: | ||||
Investments | (32,319,885 | ) | ||
Foreign currency transactions | 21,359,558 | |||
Net realized gain (loss) | (10,960,327 | ) | ||
Net change in unrealized appreciation (depreciation) on: | ||||
Investments | 130,035,803 | |||
Translation of other assets and liabilities denominated in foreign currencies | (21,339,823 | ) | ||
Net change in unrealized appreciation (depreciation) | 108,695,980 | |||
Net realized and unrealized gain (loss) | 97,735,653 | |||
Net increase (decrease) in net assets resulting from operations | $ | 130,839,655 | ||
The accompanying notes are an integral part of these financial statements.
FSI-35
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statements of Changes in Net Assets
| Franklin Strategic Income Securities Fund | ||||||||
| Six Months Ended June 30, 2009 (unaudited) | Year Ended December 31, 2008 | |||||||
Increase (decrease) in net assets: | ||||||||
Operations: | ||||||||
Net investment income | $ | 33,104,002 | $ | 64,527,920 | ||||
Net realized gain (loss) from investments and foreign currency transactions | (10,960,327 | ) | (45,932,001 | ) | ||||
Net change in unrealized appreciation (depreciation) on investments and translation of other assets and liabilities denominated in foreign currencies | 108,695,980 | (149,242,637 | ) | |||||
Net increase (decrease) in net assets resulting from operations | 130,839,655 | (130,646,718 | ) | |||||
Distributions to shareholders from: | ||||||||
Net investment income and net foreign currency gains: | ||||||||
Class 1 | (82,420,054 | ) | (75,447,333 | ) | ||||
Class 2 | (3,695,069 | ) | (2,134,730 | ) | ||||
Class 4 | (8,181,980 | ) | (378,318 | ) | ||||
Net realized gains: | ||||||||
Class 1 | — | (2,612,141 | ) | |||||
Class 2 | — | (75,424 | ) | |||||
Class 4 | — | (13,098 | ) | |||||
Total distributions to shareholders | (94,297,103 | ) | (80,661,044 | ) | ||||
Capital share transactions: (Note 2) | ||||||||
Class 1 | 112,639,402 | 17,384,945 | ||||||
Class 2 | 13,721,864 | 14,711,199 | ||||||
Class 4 | 46,984,622 | 64,028,404 | ||||||
Total capital share transactions | 173,345,888 | 96,124,548 | ||||||
Net increase (decrease) in net assets | 209,888,440 | (115,183,214 | ) | |||||
Net assets: | ||||||||
Beginning of period | 996,279,453 | 1,111,462,667 | ||||||
End of period | $ | 1,206,167,893 | $ | 996,279,453 | ||||
Undistributed net investment income included in net assets: | ||||||||
End of period | $ | 12,700,268 | $ | 73,893,369 | ||||
The accompanying notes are an integral part of these financial statements.
FSI-36
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited)
Franklin Strategic Income Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Templeton Variable Insurance Products Trust (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end investment company, consisting of twenty-two separate funds. The Franklin Strategic Income Securities Fund (Fund) is included in this report. The financial statements of the remaining funds in the Trust are presented separately. Shares of the Fund are sold only to insurance company separate accounts to fund the benefits of variable life insurance policies or variable annuity contracts. At June 30, 2009, 96.70% of the Fund’s shares were held through one insurance company. The Fund offers three classes of shares: Class 1, Class 2, and Class 4. Each class of shares differs by its distribution fees, voting rights on matters affecting a single class and its exchange privilege.
The following summarizes the Fund’s significant accounting policies.
a. Security Valuation
Equity and other securities listed on a securities exchange or on the NASDAQ National Market System are valued at the last quoted sale price or the official closing price of the day, respectively. Over-the-counter securities and listed securities for which there is no reported sale are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. Certain equity securities are valued based upon fundamental characteristics or relationships to similar securities. Investments in open-end mutual funds are valued at the closing net asset value.
Corporate debt securities, government securities, municipal securities, mortgage backed securities, asset-backed securities, collateralized debt obligations and other debt securities generally trade in the over-the-counter market rather than on a securities exchange. The Fund may utilize independent pricing services, quotations from bond dealers, and information with respect to bond and note transactions, to assist in determining a current market value for each security. The Fund’s pricing services may use valuation models or matrix pricing which considers information with respect to comparable bond and note transactions, quotations from bond dealers, or by reference to other securities that are considered comparable in such characteristics as rating, interest rate and maturity date, option adjusted spread models, prepayment projections, interest rate spreads and yield curves, to determine current value. Debt securities denominated in a foreign currency are converted into their U.S. dollar equivalent at the foreign exchange rate in effect at the close of the NYSE on the date that the values of the foreign debt securities are determined.
Senior secured corporate loans with floating or variable interest rates generally trade in the over-the-counter market rather than on a securities exchange. The Fund may utilize independent pricing services, quotations from loan dealers and other financial institutions, and information with respect to bond and note transactions, to assist in determining a current market value for each security. The Fund’s pricing services use independent market quotations from loan dealers or financial institutions and may incorporate valuation methodologies that consider multiple bond characteristics such as dealer quotes, issuer type, coupon, maturity, weighted average maturity, interest rate spreads and yield curves, cash flow and credit risk/quality analysis, to determine current value.
Foreign equity securities are valued as of the close of trading on the foreign stock exchange on which the security is primarily traded, or the NYSE, whichever is earlier. If no sale is reported at that time, the foreign equity security will be valued within the range of the most recent quoted bid and ask prices. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at the close of the NYSE on the day that the value of the security is determined.
The Fund has procedures to determine the fair value of individual securities and other assets for which market prices are not readily available or which may not be reliably priced. Methods for valuing these securities may include: fundamental analysis based upon the underlying investment book value, anticipated future cash flows, market changes in comparable or similar securities, matrix pricing, discounts from market prices of similar securities, or discounts applied due to the nature and duration of restrictions on the disposition of the securities. Due to the inherent uncertainty of valuations of such securities, the fair values may differ significantly from the values that would have been used had a ready market for such investments existed. Occasionally, events occur between the time at which trading in a security is completed and the close of the NYSE that might call
FSI-37
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Strategic Income Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
a. Security Valuation (continued)
into question the availability (including the reliability) of the value of a portfolio security held by the Fund. The investment manager monitors price movements following the close of trading in foreign stock markets through a series of country specific market proxies (such as baskets of American Depository Receipts, futures contracts and exchange traded funds). These price movements are measured against established trigger thresholds for each specific market proxy to assist in determining if an event has occurred. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services. All security valuation procedures are approved by the Fund’s Board of Trustees.
b. Foreign Currency Translation
Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. Purchases and sales of securities, income and expense items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. Occasionally, events may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the Fund’s Board of Trustees.
The Fund does not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments on the Statement of Operations.
Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period.
c. Securities Purchased on a When-Issued and Delayed Delivery Basis
The Fund may purchase securities on a when-issued and delayed delivery basis, with payment and delivery scheduled for a future date. These transactions are subject to market fluctuations and are subject to the risk that the value at delivery may be more or less than the trade date purchase price. Although the Fund will generally purchase these securities with the intention of holding the securities, it may sell the securities before the settlement date. Sufficient assets have been segregated for these securities.
d. Derivative Financial Instruments
The Fund may invest in derivative financial instruments (derivatives) in order to manage risk or gain exposure to various other investments or markets. Derivatives are financial contracts based on an underlying or notional amount, require no initial investment or an initial net investment that is smaller than would normally be required to have a similar response to changes in market factors, and require or permit net settlement. Derivatives may contain various risks including the potential inability of the counterparty to fulfill their obligations under the terms of the contract, the potential for an illiquid secondary market, and the potential for market movements which may expose the Fund to gains or losses in excess of the amounts shown on the Statement of Assets and Liabilities.
Derivatives are marked to market daily based upon quotations from market makers or the Fund’s independent pricing services and the Fund’s net benefit or obligation under the contract, as measured by the fair market value of the contract, is included in net assets. Realized gain and loss and unrealized appreciation and depreciation on these contracts for the period are included in the Statement of Operations.
FSI-38
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Strategic Income Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
d. Derivative Financial Instruments (continued)
The Fund enters into forward exchange contracts in order to hedge against fluctuations in foreign exchange rates or to gain exposure to certain foreign currencies. A forward exchange contract is an agreement between the Fund and a counterparty to buy or sell a foreign currency for a specific exchange rate on a future date. Pursuant to the terms of the forward exchange contracts, cash or securities may be required to be deposited as collateral.
See Note 9 regarding other derivative information.
e. Foreign Currency Contracts
The Fund enters into foreign exchange contracts in order to manage foreign exchange rate risk between the trade date and settlement date of securities transactions. A foreign exchange contract is an agreement between the Fund and a counterparty to buy or sell a foreign currency for a specific exchange rate on a future date.
f. Mortgage Dollar Rolls
The Fund may enter into mortgage dollar rolls, typically on a TBA basis. Mortgage dollar rolls are agreements between the Fund and a financial institution to simultaneously sell and repurchase mortgage-backed securities at a future date. Gains or losses are realized on the initial sale, and the difference between the repurchase price and the sale price is recorded as an unrealized gain or loss to the Fund upon entering into the mortgage dollar roll. In addition, the Fund may invest the cash proceeds that are received from the initial sale. During the period between the sale and repurchase, the Fund is not entitled to principal and interest paid on the mortgage backed securities. The risks of mortgage dollar roll transactions include the potential inability of the counterparty to fulfill its obligations.
g. Senior Floating Rate Interests
Senior secured corporate loans pay interest at rates which are periodically reset by reference to a base lending rate plus a spread. These base lending rates are generally the prime rate offered by a designated U.S. bank or the London InterBank Offered Rate (LIBOR). Senior secured corporate loans often require prepayment of principal from excess cash flows or at the discretion of the borrower. As a result, actual maturity may be substantially less than the stated maturity.
Senior secured corporate loans in which the Fund invests are generally readily marketable, but may be subject to some restrictions on resale.
h. Income Taxes
No provision has been made for U.S. income taxes because it is the Fund’s policy to qualify as a regulated investment company under the Internal Revenue Code and to distribute to shareholders substantially all of its taxable income and net realized gains.
The Fund has reviewed the tax positions, taken on federal income tax returns, for each of the three open tax years and as of June 30, 2009, and has determined that no provision for income tax is required in the Fund’s financial statements.
i. Security Transactions, Investment Income, Expenses and Distributions
Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Amortization of premium and accretion of discount on debt securities are included in interest income. Facility fees are recognized as income over the expected term of the loan. Dividend income is recorded on the ex-dividend date. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with accounting principles generally accepted in the United States of America. These
FSI-39
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Strategic Income Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
i. Security Transactions, Investment Income, Expenses and Distributions (continued)
differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods.
Common expenses incurred by the Trust are allocated among the funds based on the ratio of net assets of each fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense.
Realized and unrealized gains and losses and net investment income, not including class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions, by class, are generally due to differences in class specific expenses.
Inflation-indexed bonds provide an inflation hedge through periodic increases or decreases in the security’s interest accruals and principal redemption value, by amounts corresponding to the current rate of inflation. Any such adjustments, including adjustments to principal redemption value, are recorded as interest income.
j. Accounting Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
k. Guarantees and Indemnifications
Under the Trust’s organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, on behalf of the Fund, enters into contracts with service providers that contain general indemnification clauses. The Trust’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote.
2. SHARES OF BENEFICIAL INTEREST
At June 30, 2009, there were an unlimited number of shares authorized (without par value). Transactions in the Fund’s shares were as follows:
| Six Months Ended June 30, 2009 | Year Ended December 31, 2008a | |||||||||||||
| Class 1 Shares: | Shares | Amount | Shares | Amount | ||||||||||
Shares sold | 6,228,818 | $ | 69,506,055 | 6,009,961 | $ | 75,187,150 | ||||||||
Shares issued in reinvestment of distributions | 7,520,078 | 82,420,054 | 6,504,956 | 78,059,474 | ||||||||||
Shares redeemed | (3,610,659 | ) | (39,286,707 | ) | (12,154,687 | ) | (135,861,679 | ) | ||||||
Net increase (decrease) | 10,138,237 | $ | 112,639,402 | 360,230 | $ | 17,384,945 | ||||||||
Class 2 Shares: |
| |||||||||||||
Shares sold | 1,342,039 | $ | 14,650,160 | 1,884,648 | $ | 21,711,802 | ||||||||
Shares issued in reinvestment of distributions | 343,408 | 3,695,069 | 186,984 | 2,210,154 | ||||||||||
Shares redeemed | (426,226 | ) | (4,623,365 | ) | (839,920 | ) | (9,210,757 | ) | ||||||
Net increase (decrease) | 1,259,221 | $ | 13,721,864 | 1,231,712 | $ | 14,711,199 | ||||||||
FSI-40
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Strategic Income Securities Fund
2. SHARES OF BENEFICIAL INTEREST (continued)
| Six Months Ended June 30, 2009 | Year Ended December 31, 2008a | |||||||||||||
| Class 4 Shares: | Shares | Amount | Shares | Amount | ||||||||||
Shares sold | 3,757,653 | $ | 41,401,080 | 5,781,965 | $ | 65,263,343 | ||||||||
Shares issued on reinvestment of distributions | 750,642 | 8,181,980 | 32,643 | 391,067 | ||||||||||
Shares redeemed | (237,272 | ) | (2,598,438 | ) | (145,592 | ) | (1,626,006 | ) | ||||||
Net increase (decrease) | 4,271,023 | $ | 46,984,622 | 5,669,016 | $ | 64,028,404 | ||||||||
| aFor | the period February 29, 2008 (effective date) to December 31, 2008 for Class 4. |
3. TRANSACTIONS WITH AFFILIATES
Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Trust are also officers and/or directors of the following subsidiaries:
| Subsidiary | Affiliation | |
Franklin Advisers, Inc. (Advisers) | Investment manager | |
Franklin Templeton Services, LLC (FT Services) | Administrative manager | |
Franklin Templeton Distributors, Inc. (Distributors) | Principal underwriter | |
Franklin Templeton Investor Services, LLC (Investor Services) | Transfer agent |
a. Management Fees
The Fund pays an investment management fee to Advisers based on the average daily net assets of the Fund as follows:
| Annualized Fee Rate | Net Assets | |
| 0.425% | Up to and including $500 million | |
| 0.325% | Over $500 million, up to and including $1 billion | |
| 0.280% | Over $1 billion, up to and including $1.5 billion | |
| 0.235% | Over $1.5 billion, up to and including $6.5 billion | |
| 0.215% | Over $6.5 billion, up to and including $11.5 billion | |
| 0.200% | Over $11.5 billion, up to and including $16.5 billion | |
| 0.190% | Over $16.5 billion, up to and including $19 billion | |
| 0.180% | Over $19 billion, up to and including $21.5 billion | |
| 0.170% | In excess of $21.5 billion |
b. Administrative Fees
The Fund pays an administrative fee to FT Services of 0.20% per year of the average daily net assets of the Fund.
c. Distribution Fees
The Fund’s Board of Trustees has adopted distribution plans for Class 2 and Class 4 shares pursuant to Rule 12b-1 under the 1940 Act. Under the Fund’s compensation distribution plans, the Fund pays Distributors for costs incurred in connection with the servicing, sale and distribution of the Fund’s shares up to 0.25% and 0.35% per year of its average daily net assets of Class 2 and Class 4, respectively.
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Strategic Income Securities Fund
3. TRANSACTIONS WITH AFFILIATES (continued)
d. Transfer Agent Fees
Investor Services, under terms of an agreement, performs shareholder servicing for the Fund and is not paid by the Fund for the services.
4. EXPENSE OFFSET ARRANGEMENT
The Fund has entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Fund’s custodian expenses. During the period ended June 30, 2009, the custodian fees were reduced as noted in the Statement of Operations.
5. INCOME TAXES
For tax purposes, capital losses may be carried over to offset future capital gains, if any. At December 31, 2008, the Fund had tax basis capital losses of $40,547,914 expiring in 2016.
For tax purposes, realized capital losses and realized currency losses occurring subsequent to October 31, may be deferred and treated as occurring on the first day of the following fiscal year. At December 31, 2008, the Fund deferred realized capital losses and realized currency losses of $16,985,425 and $694,309, respectively.
At June 30, 2009, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
Cost of investments | $ | 1,255,178,621 | ||
Unrealized appreciation | $ | 41,967,439 | ||
Unrealized depreciation | (86,804,432 | ) | ||
Net unrealized appreciation (depreciation) | $ | (44,836,993 | ) | |
Net investment income differs for financial statement and tax purposes primarily due to differing treatments of defaulted securities, foreign currency transactions, mortgage dollar rolls, paydown losses, payments-in-kind, bond discounts and premiums and inflation related adjustments on foreign securities.
Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatments of wash sales, foreign currency transactions, mortgage dollar rolls, paydown losses and bond discounts and premiums.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the period ended June 30, 2009, aggregated $387,004,063 and $249,780,600, respectively.
7. INVESTMENTS IN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO
The Fund may invest in the Institutional Fiduciary Trust Money Market Portfolio (Sweep Money Fund), an open-end investment company managed by Advisers. Management fees paid by the Fund are reduced on assets invested in the Sweep Money Fund, in an amount not to exceed the management and administrative fees paid by the Sweep Money Fund.
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Strategic Income Securities Fund
8. CREDIT RISK AND DEFAULTED SECURITIES
At June 30, 2009, the Fund had 38.80% of its portfolio invested in high yield, senior secured floating rate notes, or other securities rated below investment grade. These securities may be more sensitive to economic conditions causing greater price volatility and are potentially subject to a greater risk of loss due to default than higher rated securities.
The Fund held defaulted securities and/or other securities for which the income has been deemed uncollectible. At June 30, 2009, the aggregate value of these securities was $9,835,662, representing 0.82% of the Fund’s net assets. The Fund discontinues accruing income on securities for which income has been deemed uncollectible and provides an estimate for losses on interest receivable. The securities have been identified on the accompanying Statement of Investments.
9. OTHER DERIVATIVE INFORMATION
At June 30, 2009, the Fund has invested in derivative contracts which are reflected on the Statement of Assets and Liabilities as follows:
| Asset Derivatives | Liability Derivatives | |||||||||
| Derivative Contracts Not Accounted for as Hedging Instruments Under FASB Statement No. 133 | Statement of Assets and Liabilities Location | Fair Value Amount | Statement of Assets and Liabilities Location | Fair Value Amount | ||||||
Foreign exchange contracts | Unrealized appreciation on forward exchange contracts | $ | 1,945,523 | Unrealized depreciation on forward exchange contracts | $ | 3,555,942 | ||||
For the period ended June 30, 2009, the effect of derivative contracts on the Fund’s Statement of Operations was as follows:
| Derivative Contracts Not Accounted for as Hedging Instruments Under FASB Statement No. 133 | Statement of Operations Locations | Realized Gain (Loss) for the Period Ended June 30, 2009 | Unrealized Appreciation (Depreciation) for the Period Ended June 30, 2009 | Average Amount Outstanding During the Perioda | |||||||
Foreign exchange contracts | Net realized gain (loss) from foreign currency transactions/Net change in unrealized appreciation (depreciation) on translation of other assets and liabilities denominated in foreign currencies | $ | 21,850,523 | $ | (21,658,688 | ) | 220,796,309 | ||||
aRepresents the average notional amount outstanding during the period. For derivative contracts denominated in foreign currencies, notional amounts are converted into US dollars.
See Note 1(d) regarding derivative financial instruments.
10. OTHER CONSIDERATIONS
From time to time, officers, directors or employees of the Fund’s Investment Manager may have discussions or enter into agreements with issuers, underwriters or creditors’ committees which, pursuant to the Fund’s policies and requirements of applicable securities laws, could prevent the Fund from trading in the securities of such company for limited or extended periods of time.
11. CREDIT FACILITY
Effective January 23, 2009, the Fund, together with other U.S. registered and foreign investment funds managed by Franklin Templeton Investments (individually, “Borrower”; collectively “Borrowers”), entered into a joint syndicated senior
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Strategic Income Securities Fund
11. CREDIT FACILITY (continued)
unsecured credit facility totaling $725 million (Global Credit Facility) to provide a source of funds to the Borrowers for temporary and emergency purposes, including the ability to meet future unanticipated or unusually large redemption requests.
Under the terms of the Global Credit Facility, the Fund shall, in addition to interest charged on any borrowings made by the Fund and other costs incurred by the Fund, pay its share of fees and expenses incurred in connection with the implementation and maintenance of the Global Credit Facility, based upon its relative share of the aggregate net assets of all of the Borrowers, including an annual commitment fee based upon the unused portion of the Global Credit Facility. During the period, the Fund incurred commitment fees of $870 of its pro rata portion of the Global Credit Facility, which is reflected in other expenses on the Statement of Operations. During the period ended June 30, 2009, the Fund did not utilize the Global Credit Facility.
12. FAIR VALUE MEASUREMENTS
Financial Accounting Standards Board (FASB) Statement No. 157, “Fair Value Measurement” (SFAS 157) establishes a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Fund’s own market assumptions (unobservable inputs). These inputs are used in determining the value of the Fund’s investments and are summarized in the following fair value hierarchy:
| • | Level 1 – quoted prices in active markets for identical securities |
| • | Level 2 – other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speed, credit risk, etc.) |
| • | Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments) |
The inputs or methodology used for valuing securities are not an indication of the risk associated with investing in those securities.
The following is a summary of the inputs used as of June 30, 2009, in valuing the Fund’s assets and liabilities carried at fair value:
| Level 1 | Level 2 | Level 3 | Total | |||||||||
Assets: | ||||||||||||
Investments in Securities | ||||||||||||
Equity Investments:a | ||||||||||||
Banks | $ | 85,400 | $ | 40,295 | $ | — | $ | 125,695 | ||||
Diversified Financials | — | 345,821 | — | 345,821 | ||||||||
Senior Floating Rate Interests | 4,779,586 | 120,927,039 | — | 125,706,625 | ||||||||
Corporate Bonds & Notes | — | 484,339,516 | — | 484,339,516 | ||||||||
Convertible Bonds | — | 1,742,500 | — | 1,742,500 | ||||||||
Asset-Backed Securities and Commercial Mortgage-Backed Securities | — | 76,454,219 | — | 76,454,219 | ||||||||
Mortgage-Backed Securities | — | 120,604,637 | — | 120,604,637 | ||||||||
U.S. Government and Agency Securities | — | 111,691,787 | — | 111,691,787 | ||||||||
Foreign Government and Agency Securities | 10,840,767 | 178,840,244 | — | 189,681,011 | ||||||||
Municipal Bonds | — | 35,001,988 | — | 35,001,988 | ||||||||
Short Term Investments | 54,380,680 | 10,267,149 | — | 64,647,829 | ||||||||
Total Investments in Securities | $ | 70,086,433 | $ | 1,140,255,195 | $ | — | $ | 1,210,341,628 | ||||
Forward Exchange Contracts | — | 1,945,523 | — | 1,945,523 | ||||||||
Liabilities: | ||||||||||||
Forward Exchange Contracts | — | 3,555,942 | — | 3,555,942 | ||||||||
aIncludes preferred stock.
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Strategic Income Securities Fund
12. FAIR VALUE MEASUREMENTS (continued)
At June 30, 2009, the reconciliation of assets in which significant unobservable inputs (Level 3) were used in determining fair value, is as follows:
| Beginning Balance | Net Realized Gain (Loss) | Net Change in Unrealized Appreciation (Depreciation) | Net Purchases (Sales) | Transfer In (Out) of Level 3 | Ending Balance | Net Change in Unrealized Appreciation (Depreciation) on Assets Held at Period End | ||||||||||||||||
Assets | ||||||||||||||||||||||
Equity Securities - Diversified Financials | $ | 285,420 | $ | — | $ | — | $ | — | $ | (285,420 | ) | $ | — | $ | — | |||||||
13. SUBSEQUENT EVENTS
Management has evaluated subsequent events through August 7, 2009 and determined that no events have occurred that require disclosure.
ABBREVIATIONS
Currency AUD - Australian Dollar BRL - Brazilian Real CHF - Swiss Franc EGP - Egyptian Pound EUR - Euro IDR - Indonesian Rupiah KRW - South Korean Won MXN - Mexican Peso MYR - Malaysian Ringgit NZD - New Zealand Dollar PLN - Polish Zloty RUB - Russian Ruble SEK - Swedish Krona VND - Vietnamese Dong | Selected Portfolio AMBAC - American Municipal Bond Assurance Corp. BHAC - Berkshire Hathaway Assurance Corp. FGIC - Financial Guaranty Insurance Co. FHLMC - Federal Home Loan Mortgage Corp. FNMA - - Federal National Mortgage Association FRN - Floating Rate Note FSA - - Financial Security Assurance Inc. GNMA - Government National Mortgage Association GO - General Obligation ID - Improvement District ISD - - Independent School District L/C - Letter to Credit MBIA - Municipal Bond Investors Assurance Corp. (effective February 18, 2009, MBIA spun-off and established National Public Financial Guarantee Corp. as a subsidiary under MBIA) MTA - Metropolitan Transit Authority NATL - National Public Financial Guarantee Corp. PIK - Payment-In-Kind SF - Single Family USD - Unified/Union School District | Counterparty BZWS - Barclays Bank PLC CITI - Citibank N.A. DBAB - Deutsche Bank AG FBCO - Credit Suisse International HSBC - HSBC Bank USA JPHQ - JPMorgan Chase Bank, N.A. MLCO - Merrill Lynch Capital Services, Inc. UBSW - UBS AG |
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FRANKLIN TEMPLETON VIP FOUNDING FUNDS ALLOCATION FUND
We are pleased to bring you Franklin Templeton VIP Founding Funds Allocation Fund’s semiannual report for the period ended June 30, 2009.
Performance Summary as of 6/30/09
Franklin Templeton VIP Founding Funds Allocation Fund – Class 1 delivered a +7.51% total return for the six-month period ended 6/30/09.
Performance reflects the Fund’s Class 1 operating expenses, but does not include any contract fees, expenses or sales charges. If they had been included, performance would be lower. These charges and deductions, particularly for variable life policies, can have a significant effect on contract values and insurance benefits. See the contract prospectus for a complete description of these expenses, including sales charges.
Franklin Templeton VIP Founding Funds Allocation Fund – Class 1
Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares.
Current performance may differ from figures shown.
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Fund Goals and Main Investments: Franklin Templeton VIP Founding Funds Allocation Fund seeks capital appreciation, with income as a secondary goal. The Fund normally invests equal portions in Class 1 shares of Franklin Income Securities Fund, Mutual Shares Securities Fund and Templeton Growth Securities Fund.
Performance Overview
You can find the Fund’s six-month total return in the Performance Summary. The Fund outperformed its benchmarks, the Standard & Poor’s 500 Index (S&P 500) and the Morgan Stanley Capital International (MSCI) World Index, which had total returns of +3.16% and +6.79% for the same period.1
Economic and Market Overview
During the six-month period ended June 30, 2009, the U.S. economy and stock markets seemed to stabilize after signs appeared that the recession’s severity had eased. Strains on the banking system and credit markets that surfaced in 2008 improved in 2009’s first half with the help of federal aid and tighter regulations. Despite rising unemployment, near period-end home sales edged higher, the decline in manufacturing activity slowed and consumer confidence started to pick up. Economic growth as measured by gross domestic product (GDP) fell at annualized rates of 6.4% and an estimated 1.0% in the first and second quarters of 2009.
Although the price of oil rose from $44 per barrel at the beginning of the period to $70 by period-end on speculation that the downturn was abating, it was still off more than 50% from its July 2008 record high.2 June’s inflation rate, as measured by the Consumer Price Index, was an annualized -1.4%, representing the steepest yearly decline in the cost of living in nearly six decades.3 Core inflation, which excludes food and energy costs, rose at a 1.7% annualized rate, which was within the Federal Reserve Board’s (Fed’s) informal target range of 1.5%–2.0%.3
A deepening recession and decelerating inflation prompted Washington policymakers to keep interest rates low and enact stimulus plans — including income tax cuts, aid to ailing state governments and funding for transportation infrastructure, school construction and high-tech
1. Source: © 2009 Morningstar. One cannot invest directly in an index, nor is an index representative of the Fund’s portfolio. Please see Index Descriptions following the Fund Summaries.
2. Source: New York Mercantile Exchange.
3. Source: Bureau of Labor Statistics.
Fund Risks: Because the Fund invests in underlying funds that may engage in a variety of investment strategies involving certain risks, this Fund may be subject to those same risks. Investments in stocks may offer the potential for long-term gains but can be subject to short-term price fluctuations. Because the underlying funds invest in bonds and other debt obligations, the Fund’s share price and yield will be affected by interest rate movements. Bond prices generally move in the opposite direction from interest rates. Thus, as prices of bonds in the Fund adjust to a rise in interest rates, the Fund’s share price may decline. High yield, lower rated (junk) bonds generally have greater price swings and higher default risks than investment grade bonds. Foreign investing, especially in emerging markets, involves additional risks, including currency fluctuations, economic instability, market volatility, and political and social instability. The Fund’s and underlying funds’ prospectuses also include descriptions of the main investment risks.
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projects. During the period under review, the Fed kept the federal funds target rate in a range of 0% to 0.25% and said the “pace of economic contraction is slowing” but the financial system had not yet returned to normal.
Most U.S. stocks suffered major losses through early March as investors worried about an uncertain future. Stocks then recovered somewhat from 12-year lows as investors perceived many bargains among the bear market fallout and data indicated the economy’s pace of contraction was moderating. By June, however, fresh investor concerns about the economy and stock valuations reemerged and dampened the rally’s momentum. For the six months under review, the blue chip stocks of the Dow Jones Industrial Average had a total return of -2.01%, while the broader S&P 500 posted a +3.16% total return and the technology-heavy NASDAQ Composite Index returned +16.99%.1
Global equities followed the same trend. At the beginning of the period, with investor sentiment depressed and risk aversion elevated, defensive, non-cyclical sectors like utilities, consumer staples and health care were market leaders. As data emerged suggesting a fledgling recovery in the financials sector and a moderating pace of global economic contraction, investors regained some risk appetite, rotating capital back into cyclical sectors such as financials, materials and consumer discretionary. Resurgent risk appetite also buoyed emerging markets stocks, which delivered their best three-month returns on record from March through May 2009. Emerging market optimism in turn supported higher commodity prices, which gained the most since the bubble in hard assets burst in the summer of 2008. Also supporting commodity prices was a weaker U.S. dollar. Although systemic risk aversion and the consensus belief that the U.S. could lead the global economy out of recession helped strengthen the dollar at the beginning of the period, investors soon began to worry about the currency’s ongoing stability in the face of aggressive and unconventional monetary policy, and the greenback lost value relative to most currencies for the six-month period.
In the reporting period’s final weeks, global equity markets moderated as investors appeared to contemplate the rally’s merits and reassess their new positions. Although sentiment had improved and most seemed to believe the global economy had exited the worst stage of this recessionary cycle, indicators remained mixed and lacked the sustainable upward trajectory investors had hoped for. In Europe, policymakers committed to an easier monetary regime, but the eurozone’s industrial production declined, capacity utilization continued to shrink, and price
The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund’s SOI.
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deflation was recorded for the first time since data began in 1997.4 In China, a stimulative monetary campaign spurred lending and fueled an annualized money growth rate of 26%, a powerful measure against near-term economic headwinds but a potentially dangerous catalyst for longer-term inflation and asset bubble formation.5
Investment Strategy
The Fund invests its assets in an equally weighted combination of Franklin Income Securities Fund, Mutual Shares Securities Fund and Templeton Growth Securities Fund. These underlying funds, in turn, invest in a variety of U.S. and foreign equity securities and, to a lesser extent, fixed income and money market securities. As market conditions affect the underlying funds, we rebalance the Fund’s allocations seeking to maintain equal weightings of approximately 33 1/3% of total net assets in each underlying fund whenever the actual allocations exceed plus or minus 3% of the fixed allocation percentages.
Manager’s Discussion
The Fund’s performance can be attributed largely to its allocation among the underlying funds and their investments in domestic and foreign equities, fixed income securities, and short-term investments and other net assets.
During the period under review, Franklin Income Securities Fund – Class 1 and Mutual Shares Securities Fund – Class 1 each outperformed the S&P 500. On the other hand, Templeton Growth Securities Fund – Class 1 underperformed the MSCI World Index.
Thank you for your participation in Franklin Templeton VIP Founding Funds Allocation Fund. We look forward to serving your future investment needs.
4. Source: European Communities Eurostat.
5. Source: People’s Bank of China.
The foregoing information reflects our analysis, opinions and portfolio holdings as of June 30, 2009, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.
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Fund Expenses
As an investor in a variable insurance contract (Contract) that indirectly provides for investment in an underlying mutual fund, you can incur transaction and/or ongoing expenses at both the Fund level and the Contract level.
| • | Transaction expenses can include sales charges (loads) on purchases, surrender fees, transfer fees and premium taxes. |
| • | Ongoing expenses can include management fees, distribution and service (12b-1) fees, contract fees, annual maintenance fees, mortality and expense risk fees and other fees and expenses. All mutual funds and Contracts have some types of ongoing expenses. |
The expenses shown in the table are meant to highlight ongoing expenses at the Fund level only and do not include ongoing expenses at the Contract level, or transaction expenses at either the Fund or Contract levels. While the Fund does not have transaction expenses, if the transaction and ongoing expenses at the Contract level were included, the expenses shown below would be higher. You should consult your Contract prospectus or disclosure document for more information.
The table shows Fund-level ongoing expenses and can help you understand these expenses and compare them with those of other mutual funds offered through the Contract. The table assumes a $1,000 investment held for the six months indicated. Please refer to the Fund prospectus for additional information on operating expenses.
Actual Fund Expenses
The first line (Actual) of the table provides actual account values and expenses. The “Ending Account Value” is derived from the Fund’s actual return, which includes the effect of ongoing Fund expenses, but does not include the effect of ongoing Contract expenses.
You can estimate the Fund-level expenses you incurred during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:
| 1. | Divide your account value by $1,000. |
If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6.
| 2. | Multiply the result by the number under the heading “Fund-Level Expenses Incurred During Period.” |
If Fund-Level Expenses Incurred During Period were $7.50, then 8.6 x $7.50 = $64.50.
In this illustration, the estimated expenses incurred this period at the Fund level are $64.50.
Franklin Templeton VIP Founding Funds Allocation Fund – Class 1
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Hypothetical Example for Comparison with Other Mutual Funds
Information in the second line (Hypothetical) of the table can help you compare ongoing expenses of the Fund with those of other mutual funds offered through the Contract. This information may not be used to estimate the actual ending account balance or expenses you incurred during the period. The hypothetical “Ending Account Value” is based on the Fund’s actual expense ratio and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Fund-Level Expenses Incurred During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds offered through a Contract.
| Class 1 | Beginning Account Value 1/1/09 | Ending Account Value 6/30/09 | Fund-Level Expenses Incurred During Period* 1/1/09–6/30/09 | Fund-Level Expenses Incurred During Period** 1/1/09–6/30/09 | ||||||||
Actual | $ | 1,000 | $ | 1,075.10 | $ | 0.57 | $ | 3.96 | ||||
Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,024.25 | $ | 0.55 | $ | 3.86 | ||||
*Expenses are calculated using the most recent six-month annualized expense ratio excluding expenses of the underlying funds, net of expense waivers, for the Fund’s Class 1 shares (0.11%), which does not include any ongoing expenses of the Contract for which the Fund is an investment option, multiplied by the average account value over the period, multiplied by 181/365 to reflect the one-half year period.
**Expenses are calculated using the most recent six-month annualized expense ratio including expenses of the underlying funds, net of expense waivers, for the Fund’s Class 1 shares (0.77%), which does not include any ongoing expenses of the Contract for which the Fund is an investment option, multiplied by the average account value over the period, multiplied by 181/365 to reflect the one-half year period.
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Franklin Templeton Variable Insurance Products Trust
Financial Highlights
Franklin Templeton VIP Founding Funds Allocation Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||
| Class 1 | 2008 | 2007a | ||||||||||
Per share operating performance | ||||||||||||
(for a share outstanding throughout the period) | ||||||||||||
Net asset value, beginning of period | $ | 5.61 | $ | 9.33 | $ | 10.00 | ||||||
Income from investment operationsb: | ||||||||||||
Net investment income (loss)c,d | 0.24 | 0.28 | (0.19 | ) | ||||||||
Net realized and unrealized gains (losses) | 0.19 | (3.64 | ) | (0.48 | ) | |||||||
Total from investment operations | 0.43 | (3.36 | ) | (0.67 | ) | |||||||
Less distributions from: | ||||||||||||
Net investment income | — | e | (0.19 | ) | — | |||||||
Net realized gains | — | (0.17 | ) | — | ||||||||
Total distributions | — | e | (0.36 | ) | — | |||||||
Net asset value, end of period | $ | 6.04 | $ | 5.61 | $ | 9.33 | ||||||
Total returnf | 7.51% | (35.75)% | (6.70)% | |||||||||
Ratios to average net assetsg | ||||||||||||
Expenses before waiver and payments by affiliatesh | 0.12% | 0.13% | 0.41% | |||||||||
Expenses net of waiver and payments by affiliatesh | 0.11% | 0.13% | 0.41% | |||||||||
Net investment income (loss) | 10.42% | 3.81% | (0.41)% | |||||||||
Supplemental data | ||||||||||||
Net assets, end of period (000’s) | $ | 393 | $ | 339 | $ | 466 | ||||||
Portfolio turnover rate | 6.11% | 22.09% | 0.04% | |||||||||
aFor the period July 2, 2007 (commencement of operations) to December 31, 2007.
bThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.
cBased on average daily shares outstanding.
dRecognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests.
eAmount rounds to less than $0.01 per share.
fTotal return does not include any fees, charges or expenses imposed by the variable annuity and life insurance contracts for which the Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle. Total return is not annualized for periods less than one year.
gRatios are annualized for periods less than one year.
hDoes not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.66% for the period ended June 30, 2009.
The accompanying notes are an integral part of these financial statements.
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Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Franklin Templeton VIP Founding Funds Allocation Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||
| Class 2 | 2008 | 2007a | ||||||||||
Per share operating performance | ||||||||||||
(for a share outstanding throughout the period) | ||||||||||||
Net asset value, beginning of period | $ | 5.61 | $ | 9.31 | $ | 10.00 | ||||||
Income from investment operationsb: | ||||||||||||
Net investment income (loss)c,d | 0.23 | 0.27 | (0.03 | ) | ||||||||
Net realized and unrealized gains (losses) | 0.18 | (3.63 | ) | (0.66 | ) | |||||||
Total from investment operations | 0.41 | (3.36 | ) | (0.69 | ) | |||||||
Less distributions from: | ||||||||||||
Net investment income | — | e | (0.17 | ) | — | |||||||
Net realized gains | — | (0.17 | ) | — | ||||||||
Total distributions | — | e | (0.34 | ) | — | |||||||
Net asset value, end of period | $ | 6.02 | $ | 5.61 | $ | 9.31 | ||||||
Total returnf | 7.34% | (35.87)% | (6.90)% | |||||||||
Ratios to average net assetsg | ||||||||||||
Expenses before waiver and payments by affiliatesh | 0.37% | 0.38% | 0.66% | |||||||||
Expenses net of waiver and payments by affiliatesh | 0.36% | 0.38% | 0.66% | |||||||||
Net investment income (loss) | 10.17% | 3.56% | (0.66)% | |||||||||
Supplemental data | ||||||||||||
Net assets, end of period (000’s) | $ | 398,669 | $ | 338,320 | $ | 131,710 | ||||||
Portfolio turnover rate | 6.11% | 22.09% | 0.04% | |||||||||
aFor the period July 2, 2007 (commencement of operations) to December 31, 2007.
bThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.
cBased on average daily shares outstanding.
dRecognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests.
eAmount rounds to less than $0.01 per share.
fTotal return does not include any fees, charges or expenses imposed by the variable annuity and life insurance contracts for which the Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle. Total return is not annualized for periods less than one year.
gRatios are annualized for periods less than one year.
hDoes not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.66% for the period ended June 30, 2009.
The accompanying notes are an integral part of these financial statements.
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Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Franklin Templeton VIP Founding Funds Allocation Fund
Six Months (unaudited) | Period Ended December 31, | |||||||
| Class 4 | 2008a | |||||||
Per share operating performance | ||||||||
(for a share outstanding throughout the period) | ||||||||
Net asset value, beginning of period | $ | 5.62 | $ | 8.65 | ||||
Income from investment operationsb: | ||||||||
Net investment incomec,d | 0.32 | 0.19 | ||||||
Net realized and unrealized gains (losses) | 0.09 | (2.87 | ) | |||||
Total from investment operations | 0.41 | (2.68 | ) | |||||
Less distributions from: | ||||||||
Net investment income | — | e | (0.18 | ) | ||||
Net realized gains | — | (0.17 | ) | |||||
Total distributions | — | e | (0.35 | ) | ||||
Net asset value, end of period | $ | 6.03 | $ | 5.62 | ||||
Total returnf | 7.33% | (30.81)% | ||||||
Ratios to average net assetsg | ||||||||
Expenses before waiver and payments by affiliatesh | 0.47% | 0.48% | ||||||
Expenses net of waiver and payments by affiliatesh | 0.46% | 0.48% | ||||||
Net investment income | 10.07% | 3.46% | ||||||
Supplemental data | ||||||||
Net assets, end of period (000’s) | $ | 582,570 | $ | 263,001 | ||||
Portfolio turnover rate | 6.11% | 22.09% | ||||||
aFor the period February 29, 2008 (effective date) to December 31, 2008.
bThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.
cBased on average daily shares outstanding.
dRecognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests.
eAmount rounds to less than $0.01 per share.
fTotal return does not include any fees, charges or expenses imposed by the variable annuity and life insurance contracts for which the Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle. Total return is not annualized for periods less than one year.
gRatios are annualized for periods less than one year.
hDoes not include expenses of the Underlying Funds in which the Fund invests. The annualized weighted average expense ratio of the Underlying Funds was 0.66% for the period ended June 30, 2009.
The accompanying notes are an integral part of these financial statements.
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Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited)
| Franklin Templeton VIP Founding Funds Allocation Fund | Shares | Value | |||
Investments in Underlying Fundsa | |||||
Domestic Equity 32.8% | |||||
Mutual Shares Securities Fund, Class 1 | 25,740,260 | $ | 321,753,246 | ||
Domestic Hybrid 32.9% | |||||
Franklin Income Securities Fund, Class 1 | 26,911,647 | 322,670,641 | |||
Foreign Equity 32.7% | |||||
Templeton Growth Securities Fund, Class 1 | 37,842,350 | 321,281,554 | |||
Total Investments in Underlying Funds (Cost $1,089,129,178) 98.4% | 965,705,441 | ||||
Other Assets, less Liabilities 1.6% | 15,925,935 | ||||
Net Assets 100.0% | $ | 981,631,376 | |||
aSee Note 6 regarding investments in Underlying Funds.
The accompanying notes are an integral part of these financial statements.
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Franklin Templeton Variable Insurance Products Trust
Financial Statements
Statement of Assets and Liabilities
June 30, 2009 (unaudited)
| Franklin Templeton VIP Founding Funds Allocation Fund | ||||
Assets: | ||||
Investments in Underlying Funds (Note 6) : | ||||
Cost | $ | 1,089,129,178 | ||
Value | $ | 965,705,441 | ||
Cash | 13,427,630 | |||
Receivables from capital shares sold | 3,574,974 | |||
Other assets | 844 | |||
Total assets | 982,708,889 | |||
Liabilities: | ||||
Payables: | ||||
Capital shares redeemed | 514,546 | |||
Affiliates | 522,383 | |||
Accrued expenses and other liabilities | 40,584 | |||
Total liabilities | 1,077,513 | |||
Net assets, at value | $ | 981,631,376 | ||
Net assets consist of: | ||||
Paid-in capital | $ | 1,145,528,786 | ||
Undistributed net investment income | 35,764,119 | |||
Net unrealized appreciation (depreciation) | (123,423,737 | ) | ||
Accumulated net realized gain (loss) | (76,237,792 | ) | ||
Net assets, at value | $ | 981,631,376 | ||
Class 1: | ||||
Net assets, at value | $ | 393,154 | ||
Shares outstanding | 65,116 | |||
Net asset value and maximum offering price per share | $ | 6.04 | ||
Class 2: | ||||
Net assets, at value | $ | 398,668,597 | ||
Shares outstanding | 66,206,945 | |||
Net asset value and maximum offering price per share | $ | 6.02 | ||
Class 4: | ||||
Net assets, at value | $ | 582,569,625 | ||
Shares outstanding | 96,637,644 | |||
Net asset value and maximum offering price per share | $ | 6.03 | ||
The accompanying notes are an integral part of these financial statements.
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Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Operations
for the period ended June 30, 2009 (unaudited)
| Franklin Templeton VIP Founding Funds Allocation Fund | ||||
Investment income: | ||||
Dividends from Underlying Funds (Note 6) | $ | 37,238,714 | ||
Expenses: | ||||
Administrative fees (Note 3a) | 352,447 | |||
Distribution fees: (Note 3b) | ||||
Class 2 | 439,934 | |||
Class 4 | 618,620 | |||
Unaffiliated transfer agent fees | 841 | |||
Reports to shareholders | 45,722 | |||
Registration and filing fees | 5,291 | |||
Professional fees | 13,768 | |||
Trustees’ fees and expenses | 1,579 | |||
Other | 8,525 | |||
Total expenses | 1,486,727 | |||
Expenses waived/paid by affiliates (Note 3d) | (27,817 | ) | ||
Net expenses | 1,458,910 | |||
Net investment income | 35,779,804 | |||
Realized and unrealized gains (losses): | ||||
Net realized gain (loss) from sale of investments in Underlying Funds | (31,994,812 | ) | ||
Net change in unrealized appreciation (depreciation) on investments in Underlying Funds | 65,275,621 | |||
Net realized and unrealized gain (loss) | 33,280,809 | |||
Net increase (decrease) in net assets resulting from operations | $ | 69,060,613 | ||
The accompanying notes are an integral part of these financial statements.
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Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statements of Changes in Net Assets
| Franklin Templeton VIP Founding Funds Allocation Fund | ||||||||
| Six Months Ended June 30, 2009 (unaudited) | Year Ended December 31, 2008 | |||||||
Increase (decrease) in net assets: | ||||||||
Operations: | ||||||||
Net investment income | $ | 35,779,804 | $ | 13,322,810 | ||||
Net realized gain (loss) from Underlying Funds | (31,994,812 | ) | (25,937,367 | ) | ||||
Net change in unrealized appreciation (depreciation) on investments in Underlying Funds | 65,275,621 | (187,235,978 | ) | |||||
Net increase (decrease) in net assets resulting from operations | 69,060,613 | (199,850,535 | ) | |||||
Distributions to shareholders from: | ||||||||
Net investment income: | ||||||||
Class 1 | (130 | ) | (10,512 | ) | ||||
Class 2 | (132,931 | ) | (9,341,768 | ) | ||||
Class 4 | (181,405 | ) | (6,456,197 | ) | ||||
Net realized gains: | ||||||||
Class 1 | — | (9,690 | ) | |||||
Class 2 | — | (9,265,863 | ) | |||||
Class 4 | — | (6,240,747 | ) | |||||
Total distributions to shareholders | (314,466 | ) | (31,324,777 | ) | ||||
Capital share transactions: (Note 2) | ||||||||
Class 1 | 25,043 | 90,126 | ||||||
Class 2 | 31,440,691 | 361,467,772 | ||||||
Class 4 | 279,759,168 | 339,101,312 | ||||||
Total capital share transactions | 311,224,902 | 700,659,210 | ||||||
Net increase (decrease) in net assets | 379,971,049 | 469,483,898 | ||||||
Net assets: | ||||||||
Beginning of period | 601,660,327 | 132,176,429 | ||||||
End of period | $ | 981,631,376 | $ | 601,660,327 | ||||
Undistributed net investment income included in net assets: | ||||||||
End of period | $ | 35,764,119 | $ | 298,781 | ||||
The accompanying notes are an integral part of these financial statements.
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited)
Franklin Templeton VIP Founding Funds Allocation Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Templeton Variable Insurance Products Trust (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end investment company, consisting of twenty-two separate funds. The Franklin Templeton VIP Founding Funds Allocation Fund (Fund) is included in this report. The financial statements of the remaining funds in the Trust are presented separately. Shares of the Fund are sold only to insurance company separate accounts to fund the benefits of variable life insurance policies or variable annuity contracts. The Fund offers three classes of shares: Class 1, Class 2, and Class 4. Each class of shares differs by its distribution fees, voting rights on matters affecting a single class and its exchange privilege.
The following summarizes the Fund’s significant accounting policies.
a. Security Valuation
Net asset value per share is calculated as of the close of trading of the NYSE. Investments in the Underlying Funds are valued at their closing net asset value each trading day.
b. Income Taxes
No provision has been made for U.S. income taxes because it is the Fund’s policy to qualify as a regulated investment company under the Internal Revenue Code and to distribute to shareholders substantially all of its taxable income and net realized gains.
The Fund has reviewed the tax positions, taken on federal income tax returns, for the two open tax years and as of June 30, 2009, and has determined that no provision for income tax is required in the Fund’s financial statements.
c. Security Transactions, Investment Income, Expenses and Distributions
Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Estimated expenses are accrued daily. Dividend income and realized gain distributions by Underlying Funds are recorded on the ex-dividend date. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with accounting principles generally accepted in the United States of America. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods.
Common expenses incurred by the Trust are allocated among the funds based on the ratio of net assets of each fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense.
The Fund indirectly bears its proportionate share of expenses from the Underlying Funds. Since the Underlying Funds have varied expense levels and the Fund may own different proportions of the Underlying Funds at different times, the amount of expenses incurred indirectly by the Fund will vary.
Realized and unrealized gains and losses and net investment income, not including class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions, by class, are generally due to differences in class specific expenses.
d. Accounting Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Templeton VIP Founding Funds Allocation Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
e. Guarantees and Indemnifications
Under the Trust’s organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, on behalf of the Fund, enters into contracts with service providers that contain general indemnification clauses. The Trust’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote.
2. SHARES OF BENEFICIAL INTEREST
At June 30, 2009, there were an unlimited number of shares authorized (without par value). Transactions in the Fund’s shares were as follows:
| 2009 | 2008 | |||||||||||||
| Six Months Ended June 30, 2009 | Year Ended December 31, 2008a | |||||||||||||
| Class 1 Shares: | Shares | Amount | Shares | Amount | ||||||||||
Shares sold | 6,587 | $ | 35,104 | 13,307 | $ | 107,831 | ||||||||
Shares issued in reinvestment of distributions | 22 | 130 | 3,776 | 20,201 | ||||||||||
Shares redeemed | (1,913 | ) | (10,191 | ) | (6,663 | ) | (37,906 | ) | ||||||
Net increase (decrease) | 4,696 | $ | 25,043 | 10,420 | $ | 90,126 | ||||||||
Class 2 Shares: | ||||||||||||||
Shares sold | 9,898,115 | $ | 53,341,193 | 47,997,548 | $ | 380,425,736 | ||||||||
Shares issued in reinvestment of distributions | 22,118 | 132,931 | 3,484,575 | 18,607,631 | ||||||||||
Shares redeemed | (4,059,113 | ) | (22,033,433 | ) | (5,276,048 | ) | (37,565,595 | ) | ||||||
Net increase (decrease) | 5,861,120 | $ | 31,440,691 | 46,206,075 | $ | 361,467,772 | ||||||||
Class 4 Shares: | ||||||||||||||
Shares sold | 63,688,967 | $ | 350,919,899 | 62,420,570 | $ | 442,309,673 | ||||||||
Shares issued on reinvestment of distributions | 30,134 | 181,405 | 2,373,260 | 12,696,943 | ||||||||||
Shares redeemed | (13,913,201 | ) | (71,342,136 | ) | (17,962,086 | ) | (115,905,304 | ) | ||||||
Net increase (decrease) | 49,805,900 | $ | 279,759,168 | 46,831,744 | $ | 339,101,312 | ||||||||
| aFor | the period February 29, 2008 (effective date) to December 31, 2008 for Class 4. |
3. TRANSACTIONS WITH AFFILIATES
Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Trust are also officers and/or directors of certain of the Underlying Funds and of the following subsidiaries:
| Subsidiary | Affiliation | |
Franklin Templeton Services, LLC (FT Services) | Administrative manager | |
Franklin Templeton Distributors, Inc. (Distributors) | Principal underwriter | |
Franklin Templeton Investor Services, LLC (Investor Services) | Transfer agent |
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Templeton VIP Founding Funds Allocation Fund
3. TRANSACTIONS WITH AFFILIATES (continued)
a. Administrative Fees
The Fund pays an administrative fee to FT Services of 0.10% per year of the average daily net assets of the Fund for administrative services including monitoring and rebalancing the percentage of the Fund’s investment in the Underlying Funds.
b. Distribution Fees
The Fund’s Board of Trustees has adopted distribution plans for Class 2 and Class 4 shares pursuant to Rule 12b-1 under the 1940 Act. Under the Fund’s compensation distribution plans, the Fund pays Distributors for costs incurred in connection with the servicing, sale and distribution of the Fund’s shares up to 0.35% per year of its average daily net assets of each class. The Board of Trustees has agreed to limit the current rate to 0.25% per year for Class 2.
c. Transfer Agent Fees
Investor Services, under terms of an agreement, performs shareholder servicing for the Fund and is not paid by the Fund for the services.
d. Waiver and Expense Reimbursements
FT Services agreed in advance to waive all or a portion of its fees and to assume payment of other expenses through April 30, 2010. Total expenses waived or paid are not subject to reimbursement by the Fund subsequent to the Fund’s fiscal year end. After April 30, 2010, FT Services may discontinue this waiver at any time upon notice to the Fund’s Board of Trustees.
4. INCOME TAXES
For tax purposes, realized capital losses occurring subsequent to October 31, may be deferred and treated as occurring on the first day of the following fiscal year. At December 31, 2008, the Fund deferred realized capital losses of $24,704.
At June 30, 2009, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
Cost of investments | $ | 1,165,342,266 | ||
Unrealized appreciation | $ | — | ||
Unrealized depreciation | (199,636,825 | ) | ||
Net unrealized appreciation (depreciation) | $ | (199,636,825 | ) | |
Net investment income differs for financial statement and tax purposes primarily due to differing treatments of offering costs and short term capital gains distributions from Underlying Funds.
Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatments of wash sales and short term capital gains distributions from Underlying Funds.
5. INVESTMENT TRANSACTIONS
Purchases and sales of Underlying Funds (excluding short term securities) for the period ended June 30, 2009, aggregated $384,238,714 and $43,220,163, respectively.
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Templeton VIP Founding Funds Allocation Fund
6. INVESTMENTS IN UNDERLYING FUNDS
The Fund invests primarily in the Underlying Funds which are managed by Franklin Advisers Inc. (Advisers), an affiliate of FT Services, or an affiliate of Advisers. The Fund does not invest in the Underlying Funds for the purpose of exercising management or control. At June 30, 2009, the Fund held the following positions which exceed 5% of the Underlying Funds’ shares outstanding:
| Name of Issuer | % of Shares Held | ||
Templeton Growth Securities Fund | 15.80 | % | |
Mutual Shares Securities Fund | 8.14 | % | |
Franklin Income Securities Fund | 5.18 | % |
7. CREDIT FACILITY
Effective January 23, 2009, the Fund, together with other U.S. registered and foreign investment funds managed by Franklin Templeton Investments (individually, “Borrower”; collectively “Borrowers”), entered into a joint syndicated senior unsecured credit facility totaling $725 million (Global Credit Facility) to provide a source of funds to the Borrowers for temporary and emergency purposes, including the ability to meet future unanticipated or unusually large redemption requests.
Under the terms of the Global Credit Facility, the Fund shall, in addition to interest charged on any borrowings made by the Fund and other costs incurred by the Fund, pay its share of fees and expenses incurred in connection with the implementation and maintenance of the Global Credit Facility, based upon its relative share of the aggregate net assets of all of the Borrowers, including an annual commitment fee based upon the unused portion of the Global Credit Facility. During the period, the Fund incurred commitment fees of $662 of its pro rata portion of the Global Credit Facility, which is reflected in other expenses on the Statement of Operations. During the period ended June 30, 2009, the Fund did not utilize the Global Credit Facility.
8. FAIR VALUE MEASUREMENTS
Financial Accounting Standards Board (FASB) Statement No. 157, “Fair Value Measurement” (SFAS 157) establishes a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Fund’s own market assumptions (unobservable inputs). These inputs are used in determining the value of the Fund’s investments and are summarized in the following fair value hierarchy:
| • | Level 1 – quoted prices in active markets for identical securities |
| • | Level 2 – other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speed, credit risk, etc.) |
| • | Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments) |
The inputs or methodology used for valuing securities are not an indication of the risk associated with investing in those securities
At June 30, 2009, all the Fund’s investments in securities carried at fair value were in Level 1 inputs. For detailed industry descriptions, see the accompanying Statement of Investments.
9. SUBSEQUENT EVENT
Management has evaluated subsequent events through August 7, 2009 and determined that no events have occurred that require disclosure.
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This semiannual report for Franklin U.S. Government Fund covers the period ended June 30, 2009.
Performance Summary as of 6/30/09
Franklin U.S. Government Fund – Class 1 delivered a +1.13% total return for the six-month period ended 6/30/09.
Performance reflects the Fund’s Class 1 operating expenses, but does not include any contract fees, expenses or sales charges. If they had been included, performance would be lower. These charges and deductions, particularly for variable life policies, can have a significant effect on contract values and insurance benefits. See the contract prospectus for a complete description of these expenses, including sales charges.
Franklin U.S. Government Fund – Class 1
Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares.
Current performance may differ from figures shown.
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Fund Goal and Main Investments: Franklin U.S. Government Fund seeks income. The Fund normally invests at least 80% of its net assets in U.S. government securities and normally invests primarily in fixed and variable rate mortgage-backed securities.
Performance Overview
You can find the Fund’s six-month total return in the Performance Summary. Compared with its benchmarks for the same period, the Fund outperformed the Barclays Capital U.S. Government: Intermediate Index’s -1.52% total return and underperformed the Lipper VIP General U.S. Government Funds Classification Average’s +1.81% total return.1
Economic and Market Overview
During the six-month period ended June 30, 2009, economic conditions deteriorated. In February, The Conference Board’s Consumer Confidence Index fell to an all-time low since it began in 1967 as the U.S. economy faltered and as stock markets declined. Despite far-reaching government interventions, the nation’s economic troubles worsened as manufacturing activity weakened at its fastest pace in nearly 30 years and as home prices fell at an accelerated rate. Jobless claims mounted and the unemployment rate rose to 9.5% by period-end.2 Economic growth, as measured by gross domestic product (GDP), fell in 2009’s first and second quarters at annualized rates of 6.4% and an estimated 1.0%, reflecting broad-based slowdowns in consumer spending, corporate profits and export growth.
Oil prices rose from $44 per barrel in December 2008 to $70 per barrel at period-end; however, inflation remained muted as most commodity prices were well below 2008 levels. June’s inflation rate was an annualized -1.4%.2 Core inflation, which excludes food and energy costs, rose at a 1.7% annualized rate, which was within the Federal Reserve Board’s (Fed’s) informal target range of 1.5%–2.0%.2 The core personal consumption expenditures price index reported a 12-month increase of 1.5%.3
A slowing economy and decelerating inflation prompted policymakers to keep interest rates low and enact stimulus plans. During the period under review, the Fed kept the federal funds target rate in a range of
1. Sources: © 2009 Morningstar; Lipper, Inc. One cannot invest directly in an index, nor is an index representative of the Fund’s portfolio. Please see Index Descriptions following the Fund Summaries.
2. Source: Bureau of Labor Statistics.
3. Source: Bureau of Economic Analysis.
Fund Risks: Interest rate movements and mortgage prepayment rates may impact the Fund’s share price and yield. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in the Fund’s portfolio adjust to a rise in interest rates, the Fund’s share price may decline. U.S. government securities owned by the Fund, but not shares of the Fund, may be guaranteed by the U.S. government, its agencies or instrumentalities as to the timely payment of principal and interest. The Fund’s yield and share price are not guaranteed and will fluctuate with market conditions. The Fund’s prospectus also includes a description of the main investment risks.
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0% to 0.25%. The government implemented the American Recovery and Reinvestment Act, which included tax breaks, money for ailing state governments, aid to the poor and unemployed, and spending on infrastructure, renewable energy, health care and education. The Fed and U.S. Treasury Department also continued programs designed to shore up beleaguered banks’ capital, enable freer lending to businesses and consumers, and help struggling home buyers avoid foreclosure.
Most Treasury prices declined during the period, and fixed income spreads were generally wide relative to Treasury yields due to heightened market turbulence and risk aversion. The spread between two-year and 10-year Treasury yields rose to 242 basis points (100 basis points equal one percentage point) at the end of June from 149 basis points at the beginning of the reporting period. The two-year Treasury bill yield rose slightly from 0.76% to 1.11% over the six-month period, while the 10-year Treasury note yield increased from 2.25% to 3.53%.
Investment Strategy
Using our straightforward investment approach, we seek to produce current income with a high degree of credit safety from a conservatively managed portfolio of U.S. government securities. Analyzing securities using proprietary and nonproprietary research, we seek to identify attractive investment opportunities.
Manager’s Discussion
The six-month period ended June 30, 2009 offered several months of encouraging economic news. Even with the return of volatility and a rise in interest rates toward the latter part of the period, rates remained low on a historical basis at period-end. In addition, credit markets improved and spreads tightened across sectors. Despite some volatility, the overall mortgage-backed securities (MBS) market posted positive returns during the period. Ginnie Mae (GNMA) MBS remained relatively attractive as they outperformed comparable high credit-quality U.S. Treasuries, with 3.01% excess returns for the period.4 At the end of the period, the GNMA current coupon yielded 4.58%, which offered us an income opportunity we viewed as attractive over both the five- and 10-year Treasury notes, which yielded 2.56% and 3.53%.
4. Source: Barclays Capital. Excess returns are the difference between total returns of the securities and an implied Treasury portfolio matching the term-structure profile of those securities.
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Over the period, the GNMA II sector (composed of multiple-issuer pools) richened versus the GNMA I sector (composed of single-issuer pools). Overall, higher coupon GNMAs (6.0% and 6.5%) outperformed their lower coupon counterparts (4.5% and 5.0%).
The Fed continued to steadily buy agency MBS, and we believe its continued presence could provide MBS some protection from the downside. The announcement of the Fed’s MBS purchase programs at the end of November initially boosted MBS performance. However, the market started to focus on the end dates for these programs, creating less favorable technical conditions. As rates rose in June, MBS performance stalled and mortgage basis volatility increased. The rise in Treasury and mortgage rates lessened prepayment risk for higher coupon MBS. According to our research, declining home price appreciation, loss of home equity and tighter underwriting standards could also curb current prepayment activity.
Franklin U.S. Government Fund uses a consistent and disciplined approach when applying its investment strategy. The Fund takes a collateral-based research approach to uncover opportunities across the GNMA universe. We believe our experience and investment in new technologies can help us identify specified pools and individual securities that offer strong cash-flow fundamentals and valuations. Over the period, we marginally decreased the Fund’s allocation to GNMA II securities, as we believed GNMA Is offered better value. In some cases we swapped GNMA IIs into GNMA Is. We reduced the Fund’s allocation to some higher coupon MBS in favor of lower coupon MBS.
Thank you for your participation in Franklin U.S. Government Fund. We look forward to serving your future investment needs.
The foregoing information reflects our analysis, opinions and portfolio holdings as of June 30, 2009, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.
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Fund Expenses
As an investor in a variable insurance contract (Contract) that indirectly provides for investment in an underlying mutual fund, you can incur transaction and/or ongoing expenses at both the Fund level and the Contract level.
| • | Transaction expenses can include sales charges (loads) on purchases, surrender fees, transfer fees and premium taxes. |
| • | Ongoing expenses can include management fees, distribution and service (12b-1) fees, contract fees, annual maintenance fees, mortality and expense risk fees and other fees and expenses. All mutual funds and Contracts have some types of ongoing expenses. |
The expenses shown in the table are meant to highlight ongoing expenses at the Fund level only and do not include ongoing expenses at the Contract level, or transaction expenses at either the Fund or Contract levels. While the Fund does not have transaction expenses, if the transaction and ongoing expenses at the Contract level were included, the expenses shown below would be higher. You should consult your Contract prospectus or disclosure document for more information.
The table shows Fund-level ongoing expenses and can help you understand these expenses and compare them with those of other mutual funds offered through the Contract. The table assumes a $1,000 investment held for the six months indicated. Please refer to the Fund prospectus for additional information on operating expenses.
Actual Fund Expenses
The first line (Actual) of the table provides actual account values and expenses. The “Ending Account Value” is derived from the Fund’s actual return, which includes the effect of ongoing Fund expenses, but does not include the effect of ongoing Contract expenses.
You can estimate the Fund-level expenses you incurred during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:
| 1. | Divide your account value by $1,000. |
If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6.
| 2. | Multiply the result by the number under the heading “Fund-Level Expenses Incurred During Period.” |
If Fund-Level Expenses Incurred During Period were $7.50, then 8.6 x $7.50 = $64.50.
In this illustration, the estimated expenses incurred this period at the Fund level are $64.50.
Franklin U.S. Government Fund – Class 1
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Hypothetical Example for Comparison with Other Mutual Funds
Information in the second line (Hypothetical) of the table can help you compare ongoing expenses of the Fund with those of other mutual funds offered through the Contract. This information may not be used to estimate the actual ending account balance or expenses you incurred during the period. The hypothetical “Ending Account Value” is based on the Fund’s actual expense ratio and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Fund-Level Expenses Incurred During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds offered through a Contract.
| Class 1 | Beginning Account Value 1/1/09 | Ending Account Value 6/30/09 | Fund-Level Expenses Incurred During Period* 1/1/09–6/30/09 | ||||||
Actual | $ | 1,000 | $ | 1,011.30 | $ | 2.59 | |||
Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,022.22 | $ | 2.61 | |||
*Expenses are calculated using the most recent six-month annualized expense ratio for the Fund’s Class 1 shares (0.52%), which does not include any ongoing expenses of the Contract for which the Fund is an investment option, multiplied by the average account value over the period, multiplied by 181/365 to reflect the one-half year period.
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SUPPLEMENT DATED JULY 22, 2009
TOTHE PROSPECTUSDATED MAY 1, 2009
AS PREVIOUSLY AMENDED
OF FRANKLIN U.S. GOVERNMENT FUND (FUND)
(A series of Franklin Templeton Variable Insurance Products Trust)
The prospectus is amended by replacing the disclosure under “Main Risks – Mortgage Dollar Rolls” in its entirety with the following:
Mortgage Dollar Rolls
In a mortgage dollar roll, the Fund takes the risk that the market price of the mortgage-backed securities will drop below their future purchase price. The Fund also takes the risk that the mortgage-backed securities that it repurchases at a later date will have less favorable market characteristics than the securities originally sold (e.g., greater prepayment risk). When the Fund uses a mortgage dollar roll, it is also subject to the risk that the other party to the agreement will not be able to perform. Mortgage dollar rolls add leverage to the Fund’s portfolio and increase the Fund’s sensitivity to interest rate changes.
Please keep this supplement for future reference.
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Franklin Templeton Variable Insurance Products Trust
Financial Highlights
Franklin U.S. Government Fund
| Six Months Ended June 30, 2009 (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 1 | 2008 | 2007 | 2006 | 2005 | 2004 | |||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 13.19 | $ | 12.89 | $ | 12.69 | $ | 12.75 | $ | 12.99 | $ | 13.22 | ||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.27 | 0.58 | 0.61 | 0.59 | 0.54 | 0.51 | ||||||||||||||||||
Net realized and unrealized gains (losses) | (0.12 | ) | 0.39 | 0.22 | (0.07 | ) | (0.20 | ) | (0.05 | ) | ||||||||||||||
Total from investment operations | 0.15 | 0.97 | 0.83 | 0.52 | 0.34 | 0.46 | ||||||||||||||||||
Less distributions from net investment income | (0.54 | ) | (0.67 | ) | (0.63 | ) | (0.58 | ) | (0.58 | ) | (0.69 | ) | ||||||||||||
Net asset value, end of period | $ | 12.80 | $ | 13.19 | $ | 12.89 | $ | 12.69 | $ | 12.75 | $ | 12.99 | ||||||||||||
Total returnc | 1.13% | 7.91% | 6.85% | 4.31% | 2.65% | 3.71% | ||||||||||||||||||
Ratios to average net assetsd | ||||||||||||||||||||||||
Expensese | 0.52% | 0.53% | 0.53% | 0.54% | 0.52% | 0.54% | ||||||||||||||||||
Net investment income | 4.08% | 4.54% | 4.83% | 4.67% | 4.18% | 3.90% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 168,062 | $ | 173,018 | $ | 167,700 | $ | 187,867 | $ | 217,165 | $ | 259,833 | ||||||||||||
Portfolio turnover rate | 10.38% | 17.06% | 27.50% | 23.46% | 21.46% | 75.93% | ||||||||||||||||||
Portfolio turnover rate excluding mortgage dollar rollsf | 10.38% | 17.06% | 27.50% | 23.46% | 15.62% | 33.63% | ||||||||||||||||||
aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.
bBased on average daily shares outstanding.
cTotal return does not include any fees, charges or expenses imposed by the variable annuity and life insurance contracts for which the Franklin Templeton
Variable Insurance Products Trust serves as an underlying investment vehicle. Total return is not annualized for periods less than one year.
dRatios are annualized for periods less than one year.
eBenefit of expense reduction rounds to less than 0.01%.
fSee Note 1(c) regarding mortgage dollar rolls.
The accompanying notes are an integral part of these financial statements.
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Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Franklin U.S. Government Fund
| Six Months Ended June 30, 2009 (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 2 | 2008 | 2007 | 2006 | 2005 | 2004 | |||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 12.99 | $ | 12.71 | $ | 12.52 | $ | 12.59 | $ | 12.84 | $ | 13.08 | ||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.25 | 0.54 | 0.57 | 0.55 | 0.50 | 0.47 | ||||||||||||||||||
Net realized and unrealized gains (losses) | (0.12 | ) | 0.38 | 0.22 | (0.07 | ) | (0.20 | ) | (0.04 | ) | ||||||||||||||
Total from investment operations | 0.13 | 0.92 | 0.79 | 0.48 | 0.30 | 0.43 | ||||||||||||||||||
Less distributions from net investment income | (0.51 | ) | (0.64 | ) | (0.60 | ) | (0.55 | ) | (0.55 | ) | (0.67 | ) | ||||||||||||
Net asset value, end of period | $ | 12.61 | $ | 12.99 | $ | 12.71 | $ | 12.52 | $ | 12.59 | $ | 12.84 | ||||||||||||
Total returnc | 1.01% | 7.59% | 6.61% | 4.02% | 2.40% | 3.48% | ||||||||||||||||||
Ratios to average net assetsd | ||||||||||||||||||||||||
Expensese | 0.77% | 0.78% | 0.78% | 0.79% | 0.77% | 0.79% | ||||||||||||||||||
Net investment income | 3.83% | 4.29% | 4.58% | 4.42% | 3.93% | 3.65% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 501,188 | $ | 450,603 | $ | 379,386 | $ | 374,323 | $ | 379,662 | $ | 332,373 | ||||||||||||
Portfolio turnover rate | 10.38% | 17.06% | 27.50% | 23.46% | 21.46% | 75.93% | ||||||||||||||||||
Portfolio turnover rate excluding mortgage dollar rollsf | 10.38% | 17.06% | 27.50% | 23.46% | 15.62% | 33.63% | ||||||||||||||||||
aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.
bBased on average daily shares outstanding.
cTotal return does not include any fees, charges or expenses imposed by the variable annuity and life insurance contracts for which the Franklin Templeton
Variable Insurance Products Trust serves as an underlying investment vehicle. Total return is not annualized for periods less than one year.
dRatios are annualized for periods less than one year.
eBenefit of expense reduction rounds to less than 0.01%.
fSee Note 1(c) regarding mortgage dollar rolls.
The accompanying notes are an integral part of these financial statements.
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Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Franklin U.S. Government Fund
| Class 4 | Six Months Ended June 30, 2009 (unaudited) | Period Ended December 31, 2008a | ||||||
Per share operating performance | ||||||||
(for a share outstanding throughout the period) | ||||||||
Net asset value, beginning of period | $ | 13.15 | $ | 13.19 | ||||
Income from investment operationsb: | ||||||||
Net investment incomec | 0.24 | 0.45 | ||||||
Net realized and unrealized gains (losses) | (0.11 | ) | 0.18 | |||||
Total from investment operations | 0.13 | 0.63 | ||||||
Less distributions from net investment income | (0.50 | ) | (0.67 | ) | ||||
Net asset value, end of period | $ | 12.78 | $ | 13.15 | ||||
Total returnd | 1.00% | 5.14% | ||||||
Ratios to average net assetse | ||||||||
Expenses | 0.87% | 0.88% | ||||||
Net investment income | 3.73% | 4.19% | ||||||
Supplemental data | ||||||||
Net assets, end of period (000’s) | $ | 5 | $ | 5 | ||||
Portfolio turnover rate | 10.38% | 17.06% | ||||||
aFor the period February 29, 2008 (effective date) to December 31, 2008.
bThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales
and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.
cBased on average daily shares outstanding.
dTotal return does not include any fees, charges or expenses imposed by the variable annuity and life insurance contracts for which the Franklin Templeton
Variable Insurance Products Trust serves as an underlying investment vehicle. Total return is not annualized for periods less than one year.
eRatios are annualized for periods less than one year.
The accompanying notes are an integral part of these financial statements.
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Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited)
| Franklin U.S. Government Fund | Principal Amount | Value | ||||
Mortgage-Backed Securities 62.9% | ||||||
aFederal Home Loan Mortgage Corp. (FHLMC) Adjustable Rate 0.1% | ||||||
FHLMC, 4.005%, 2/01/19 | $ | 146,419 | $ | 147,920 | ||
FHLMC, 4.395%, 6/01/22 | 208,395 | 210,643 | ||||
| 358,563 | ||||||
Federal Home Loan Mortgage Corp. (FHLMC) Fixed Rate 6.1% | ||||||
FHLMC Gold 30 Year, 5.00%, 9/01/33 - 6/01/37 | 13,224,826 | 13,502,336 | ||||
FHLMC Gold 30 Year, 5.50%, 11/01/34 | 7,902,927 | 8,194,270 | ||||
FHLMC Gold 30 Year, 5.50%, 7/01/33 - 1/01/35 | 3,608,278 | 3,742,072 | ||||
FHLMC Gold 30 Year, 6.00%, 1/01/24 - 8/01/35 | 8,797,138 | 9,247,334 | ||||
FHLMC Gold 30 Year, 6.50%, 11/01/23 - 5/01/35 | 3,119,850 | 3,342,049 | ||||
FHLMC Gold 30 Year, 7.00%, 4/01/24 - 10/01/32 | 1,160,808 | 1,265,414 | ||||
FHLMC Gold 30 Year, 7.50%, 12/01/22 - 5/01/24 | 64,541 | 70,256 | ||||
FHLMC Gold 30 Year, 8.00%, 7/01/21 - 5/01/22 | 46,575 | 51,191 | ||||
FHLMC Gold 30 Year, 8.50%, 7/01/21 - 7/01/31 | 1,585,566 | 1,762,384 | ||||
FHLMC PC 30 Year, 8.00%, 1/01/17 - 9/01/17 | 8,598 | 9,280 | ||||
FHLMC PC 30 Year, 8.50%, 9/01/20 | 2,384 | 2,589 | ||||
| 41,189,175 | ||||||
aFederal National Mortgage Association (FNMA) Adjustable Rate 0.3% | ||||||
FNMA, 4.041%, 1/01/18 | 1,242,897 | 1,249,815 | ||||
FNMA, 4.218%, 9/01/18 | 412,630 | 416,733 | ||||
FNMA, 4.26%, 2/01/19 | 179,646 | 180,917 | ||||
FNMA, 6.259%, 3/01/20 | 117,736 | 121,113 | ||||
FNMA, 6.335%, 7/01/19 | 165,889 | 166,922 | ||||
| 2,135,500 | ||||||
Federal National Mortgage Association (FNMA) Fixed Rate 11.6% | ||||||
FNMA 15 Year, 5.50%, 6/01/16 - 11/01/17 | 1,316,005 | 1,390,701 | ||||
FNMA 15 Year, 6.00%, 8/01/17 - 9/01/17 | 1,374,001 | 1,464,376 | ||||
FNMA 30 Year, 5.00%, 3/01/34 - 7/01/35 | 7,938,940 | 8,114,791 | ||||
FNMA 30 Year, 5.50%, 12/01/32 - 8/01/35 | 14,466,625 | 15,006,501 | ||||
FNMA 30 Year, 6.00%, 1/01/24 - 12/01/34 | 2,919,839 | 3,070,953 | ||||
FNMA 30 Year, 6.00%, 2/01/36 | 6,390,167 | 6,694,823 | ||||
FNMA 30 Year, 6.00%, 2/01/36 | 6,523,361 | 6,834,367 | ||||
FNMA 30 Year, 6.00%, 3/01/36 | 11,288,581 | 11,826,773 | ||||
FNMA 30 Year, 6.00%, 2/01/37 | 6,395,751 | 6,694,678 | ||||
FNMA 30 Year, 6.50%, 1/01/24 - 8/01/32 | 2,749,262 | 2,964,895 | ||||
FNMA 30 Year, 6.50%, 9/01/36 | 6,582,266 | 7,022,584 | ||||
FNMA 30 Year, 7.50%, 4/01/23 - 8/01/25 | 129,456 | 141,185 | ||||
FNMA 30 Year, 8.00%, 7/01/16 - 2/01/25 | 236,186 | 257,618 | ||||
FNMA 30 Year, 8.50%, 10/01/19 - 8/01/21 | 4,891 | 5,362 | ||||
FNMA 30 Year, 9.00%, 10/01/26 | 629,150 | 689,205 | ||||
FNMA GL 30 Year, 8.00%, 8/01/19 - 6/01/20 | 65,970 | 72,274 | ||||
FNMA PL 30 Year, 5.50%, 4/01/34 | 5,155,557 | 5,325,852 | ||||
| 77,576,938 | ||||||
Government National Mortgage Association (GNMA) Fixed Rate 44.8% | ||||||
GNMA I SF 30 Year, 4.50%, 1/15/39 - 3/15/39 | 15,342,293 | 15,350,329 | ||||
GNMA I SF 30 Year, 4.50%, 3/15/39 | 7,917,588 | 7,922,227 | ||||
GNMA I SF 30 Year, 4.50%, 3/15/39 | 7,968,660 | 7,973,329 | ||||
GNMA I SF 30 Year, 5.00%, 6/15/30 - 3/15/39 | 34,827,591 | 35,670,900 | ||||
GNMA I SF 30 Year, 5.50%, 4/15/37 | 6,673,512 | 6,906,563 | ||||
GNMA I SF 30 Year, 5.50%, 11/15/28 - 8/15/38 | 50,999,300 | 52,875,019 | ||||
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Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Franklin U.S. Government Fund | Principal Amount | Value | ||||
Mortgage-Backed Securities (continued) | ||||||
Government National Mortgage Association (GNMA) Fixed Rate (continued) | ||||||
GNMA I SF 30 Year, 6.00%, 11/15/23 - 9/15/38 | $ | 37,259,446 | $ | 38,917,721 | ||
GNMA I SF 30 Year, 6.50%, 5/15/23 - 9/15/38 | 9,791,281 | 10,498,032 | ||||
GNMA I SF 30 Year, 7.00%, 3/15/22 - 1/15/32 | 2,519,713 | 2,744,827 | ||||
GNMA I SF 30 Year, 7.50%, 2/15/17 - 8/15/33 | 2,294,828 | 2,507,895 | ||||
GNMA I SF 30 Year, 8.00%, 2/15/17 - 6/15/24 | 677,269 | 742,629 | ||||
GNMA I SF 30 Year, 8.25%, 4/15/25 | 20,621 | 22,214 | ||||
GNMA I SF 30 Year, 8.50%, 6/15/22 - 12/15/24 | 211,458 | 229,083 | ||||
GNMA I SF 30 Year, 9.00%, 6/15/16 - 5/15/20 | 81,476 | 88,345 | ||||
GNMA I SF 30 Year, 9.50%, 7/15/16 - 6/15/21 | 259,155 | 284,154 | ||||
GNMA I SF 30 Year, 10.00%, 10/15/17 - 8/15/21 | 153,578 | 167,568 | ||||
GNMA II SF 30 Year, 5.00%, 9/20/33 | 8,046,579 | 8,197,076 | ||||
GNMA II SF 30 Year, 5.00%, 10/20/33 - 11/20/33 | 4,515,672 | 4,602,794 | ||||
GNMA II SF 30 Year, 5.00%, 8/20/35 | 7,262,591 | 7,396,613 | ||||
GNMA II SF 30 Year, 5.50%, 2/20/36 | 18,912,390 | 19,511,398 | ||||
GNMA II SF 30 Year, 5.50%, 5/20/34 - 7/20/38 | 37,232,646 | 38,422,568 | ||||
GNMA II SF 30 Year, 6.00%, 1/20/36 | 8,626,697 | 8,982,602 | ||||
GNMA II SF 30 Year, 6.00%, 11/20/23 - 7/20/38 | 18,439,086 | 19,233,575 | ||||
GNMA II SF 30 Year, 6.00%, 12/20/38 | 6,688,221 | 6,975,376 | ||||
GNMA II SF 30 Year, 6.50%, 12/20/27 - 4/20/34 | 2,704,865 | 2,905,123 | ||||
GNMA II SF 30 Year, 7.00%, 5/20/32 | 44,570 | 48,241 | ||||
GNMA II SF 30 Year, 7.50%, 5/20/17 - 5/20/33 | 502,934 | 547,708 | ||||
GNMA II SF 30 Year, 8.00%, 7/20/16 - 8/20/26 | 44,534 | 48,724 | ||||
GNMA II SF 30 Year, 9.50%, 4/20/25 | 3,243 | 3,600 | ||||
| 299,776,233 | ||||||
Total Mortgage-Backed Securities (Cost $409,282,696) | 421,036,409 | |||||
U.S. Government and Agency Securities 31.5% | ||||||
FFCB, 4.45%, 8/27/10 | 15,000,000 | 15,657,015 | ||||
FHLB, | ||||||
2.75%, 6/18/10 | 6,000,000 | 6,130,998 | ||||
3.625%, 5/29/13 | 4,500,000 | 4,686,548 | ||||
4.875%, 5/14/10 | 10,000,000 | 10,383,140 | ||||
5.125%, 8/14/13 | 11,000,000 | 12,071,631 | ||||
5.375%, 8/19/11 | 12,000,000 | 12,970,092 | ||||
FHLMC, | ||||||
3.75%, 3/27/19 | 13,000,000 | 12,800,177 | ||||
5.125%, 11/17/17 | 10,000,000 | 10,994,140 | ||||
bFICO, | ||||||
15, Strip, 3/07/16 | 15,000,000 | 11,257,740 | ||||
16, Strip, 10/05/10 | 4,745,000 | 4,647,637 | ||||
FNMA, | ||||||
1.75%, 3/23/11 | 7,000,000 | 7,070,756 | ||||
2.875%, 10/12/10 | 29,500,000 | 30,318,212 | ||||
HUD, 96-A, | ||||||
7.63%, 8/01/14 | 2,080,000 | 2,086,700 | ||||
7.66%, 8/01/15 | 2,350,000 | 2,358,014 | ||||
SBA, | ||||||
1995-20L, 1, PC, 6.45%, 12/01/15 | 589,973 | 635,581 | ||||
1996-20L, 1, PC, 6.70%, 12/01/16 | 624,615 | 676,579 | ||||
1997-20G, 1, PC, 6.85%, 7/01/17 | 771,263 | 819,206 | ||||
1998-20I, 1, PC, 6.00%, 9/01/18 | 2,073,260 | 2,205,217 | ||||
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Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Franklin U.S. Government Fund | Principal Amount | Value | ||||
U.S. Government and Agency Securities (continued) | ||||||
SBA, (continued) | ||||||
aFRN, 2.85%, 6/25/19 | $ | 430,516 | $ | 428,524 | ||
aFRN, 3.125%, 3/25/18 | 656,342 | 656,744 | ||||
TVA, | ||||||
5.88%, 4/01/36 | 10,000,000 | 10,671,090 | ||||
zero cpn. to 4/15/12, 8.25% thereafter, 4/15/42 | 6,000,000 | 5,567,082 | ||||
U.S. Treasury Bond, 2.75%, 2/15/19 | 20,500,000 | 19,204,257 | ||||
U.S. Treasury Note, | ||||||
3.125%, 8/31/13 | 12,000,000 | 12,439,692 | ||||
3.125%, 5/15/19 | 5,000,000 | 4,836,715 | ||||
4.75%, 5/15/14 | 8,000,000 | 8,825,632 | ||||
Total U.S. Government and Agency Securities (Cost $200,726,245) | 210,399,119 | |||||
Total Investments before Short Term Investments (Cost $610,008,941) | 631,435,528 | |||||
Short Term Investments (Cost $33,673,280) 5.0% | ||||||
Repurchase Agreements 5.0% | ||||||
cJoint Repurchase Agreement, 0.023%, 7/01/09 (Maturity Value $33,673,302) | 33,673,280 | 33,673,280 | ||||
Banc of America Securities LLC (Maturity Value $2,902,975) | ||||||
Barclays Capital Inc. (Maturity Value $2,660,864) | ||||||
BNP Paribas Securities Corp. (Maturity Value $9,676,023) | ||||||
Credit Suisse Securities (USA) LLC (Maturity Value $9,676,023) | ||||||
Deutsche Bank Securities Inc. (Maturity Value $3,435,352) | ||||||
HSBC Securities (USA) Inc. (Maturity Value $2,902,975) | ||||||
UBS Securities LLC (Maturity Value $2,419,090) | ||||||
Collateralized by U.S. Government Agency Securities, 0.58% - 7.25%, 1/15/10 - 6/27/16; | ||||||
Total Investments (Cost $643,682,221) 99.4% | 665,108,808 | |||||
Other Assets, less Liabilities 0.6% | 4,146,488 | |||||
Net Assets 100.0% | $ | 669,255,296 | ||||
See Abbreviations on page FUS-22.
aThe coupon rate shown represents the rate at period end.
bThe security is traded on a discount basis with no stated coupon rate.
cSee Note 1(b) regarding joint repurchase agreement.
The accompanying notes are an integral part of these financial statements.
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Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements
Statement of Assets and Liabilities
June 30, 2009 (unaudited)
| Franklin U.S. Government Fund | ||||
Assets: | ||||
Investments in securities: | ||||
Cost - Unaffiliated issuers | $ | 610,008,941 | ||
Cost - Repurchase agreements | 33,673,280 | |||
Total cost of investments | $ | 643,682,221 | ||
Value - Unaffiliated issuers | $ | 631,435,528 | ||
Value - Repurchase agreements | 33,673,280 | |||
Total value of investments | 665,108,808 | |||
Receivables: | ||||
Investment securities sold | 48,291 | |||
Capital shares sold | 1,483,592 | |||
Interest | 3,756,663 | |||
Other assets | 874 | |||
Total assets | 670,398,228 | |||
Liabilities: | ||||
Payables: | ||||
Capital shares redeemed | 598,448 | |||
Affiliates | 471,033 | |||
Accrued expenses and other liabilities | 73,451 | |||
Total liabilities | 1,142,932 | |||
Net assets, at value | $ | 669,255,296 | ||
Net assets consist of: | ||||
Paid-in capital | $ | 650,418,686 | ||
Undistributed net investment income | 12,034,791 | |||
Net unrealized appreciation (depreciation) | 21,426,587 | |||
Accumulated net realized gain (loss) | (14,624,768 | ) | ||
Net assets, at value | $ | 669,255,296 | ||
Class 1: | ||||
Net assets, at value | $ | 168,062,404 | ||
Shares outstanding | 13,125,617 | |||
Net asset value and maximum offering price per share | $ | 12.80 | ||
Class 2: | ||||
Net assets, at value | $ | 501,188,047 | ||
Shares outstanding | 39,731,062 | |||
Net asset value and maximum offering price per share | $ | 12.61 | ||
Class 4: | ||||
Net assets, at value | $ | 4,845 | ||
Shares outstanding | 379 | |||
Net asset value and maximum offering price per share | $ | 12.78 | ||
The accompanying notes are an integral part of these financial statements.
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Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Operations
for the period ended June 30, 2009 (unaudited)
| Franklin U.S. Government Fund | ||||
Investment income: | ||||
Interest | $ | 14,940,748 | ||
Expenses: | ||||
Management fees (Note 3a) | 1,583,367 | |||
Distribution fees: (Note 3c) | ||||
Class 2 | 599,391 | |||
Class 4 | 9 | |||
Unaffiliated transfer agent fees | 424 | |||
Custodian fees (Note 4) | 5,398 | |||
Reports to shareholders | 71,914 | |||
Professional fees | 16,269 | |||
Trustees’ fees and expenses | 1,841 | |||
Other | 15,998 | |||
Total expenses | 2,294,611 | |||
Net investment income | 12,646,137 | |||
Realized and unrealized gains (losses): | ||||
Net realized gain (loss) from investments | 251,743 | |||
Net change in unrealized appreciation (depreciation) on investments | (5,931,955 | ) | ||
Net realized and unrealized gain (loss) | (5,680,212 | ) | ||
Net increase (decrease) in net assets resulting from operations | $ | 6,965,925 | ||
The accompanying notes are an integral part of these financial statements.
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Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statements of Changes in Net Assets
| Franklin U.S. Government Fund | ||||||||
| Six Months Ended June 30, 2009 (unaudited) | Year Ended December 31, 2008 | |||||||
Increase (decrease) in net assets: | ||||||||
Operations: | ||||||||
Net investment income | $ | 12,646,137 | $ | 24,862,789 | ||||
Net realized gain (loss) from investments | 251,743 | (160,442 | ) | |||||
Net change in unrealized appreciation (depreciation) on investments | (5,931,955 | ) | 18,507,270 | |||||
Net increase (decrease) in net assets resulting from operations | 6,965,925 | 43,209,617 | ||||||
Distributions to shareholders from net investment income: | ||||||||
Class 1 | (6,764,185 | ) | (8,197,357 | ) | ||||
Class 2 | (18,929,900 | ) | (19,267,295 | ) | ||||
Class 4 | (189 | ) | (253 | ) | ||||
Total distributions to shareholders | (25,694,274 | ) | (27,464,905 | ) | ||||
Capital share transactions: (Note 2) | ||||||||
Class 1 | (168,337 | ) | 1,035,597 | |||||
Class 2 | 64,526,122 | 59,754,476 | ||||||
Class 4 | — | 5,000 | ||||||
Total capital share transactions | 64,357,785 | 60,795,073 | ||||||
Net increase (decrease) in net assets | 45,629,436 | 76,539,785 | ||||||
Net assets: | ||||||||
Beginning of period | 623,625,860 | 547,086,075 | ||||||
End of period | $ | 669,255,296 | $ | 623,625,860 | ||||
Undistributed net investment income included in net assets: | ||||||||
End of period | $ | 12,034,791 | $ | 25,082,928 | ||||
The accompanying notes are an integral part of these financial statements.
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited)
Franklin U.S. Government Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Templeton Variable Insurance Products Trust (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end investment company, consisting of twenty-two separate funds. The Franklin U.S. Government Fund (Fund) is included in this report. The financial statements of the remaining funds in the Trust are presented separately. Shares of the Fund are sold only to insurance company separate accounts to fund the benefits of variable life insurance policies or variable annuity contracts. At June 30, 2009, 71.73% of the Fund’s shares were held through one insurance company. The Fund offers three classes of shares: Class 1, Class 2, and Class 4. Each class of shares differs by its distribution fees, voting rights on matters affecting a single class and its exchange privilege.
The following summarizes the Fund’s significant accounting policies.
a. Security Valuation
Government securities, mortgage backed securities, asset-backed securities, collateralized debt obligations and other debt securities generally trade in the over-the-counter market rather than on a securities exchange. The Fund may utilize independent pricing services, quotations from bond dealers, and information with respect to bond and note transactions, to assist in determining a current market value for each security. The Fund’s pricing services may use valuation models or matrix pricing which considers information with respect to comparable bond and note transactions, quotations from bond dealers, or by reference to other securities that are considered comparable in such characteristics as rating, interest rate and maturity date, option adjusted spread models, prepayment projections, interest rate spreads and yield curves, to determine current value.
The Fund has procedures to determine the fair value of individual securities and other assets for which market prices are not readily available or which may not be reliably priced. Methods for valuing these securities may include: fundamental analysis based upon the underlying investment book value, anticipated future cash flows, market changes in comparable or similar securities, matrix pricing, discounts from market prices of similar securities, or discounts applied due to the nature and duration of restrictions on the disposition of the securities. Due to the inherent uncertainty of valuations of such securities, the fair values may differ significantly from the values that would have been used had a ready market for such investments existed. Occasionally, events occur between the time at which trading in a security is completed and the close of the NYSE that might call into question the availability (including the reliability) of the value of a portfolio security held by the Fund. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services. All security valuation procedures are approved by the Fund’s Board of Trustees.
b. Joint Repurchase Agreement
The Fund may enter into a joint repurchase agreement whereby its uninvested cash balance is deposited into a joint cash account with other funds managed by the investment manager or an affiliate of the investment manager and is used to invest in one or more repurchase agreements. The value and face amount of the joint repurchase agreement are allocated to the funds based on their pro-rata interest. A repurchase agreement is accounted for as a loan by the Fund to the seller, collateralized by securities which are delivered to the Fund’s custodian. The market value, including accrued interest, of the initial collateralization is required to be at least 102% of the dollar amount invested by the funds, with the value of the underlying securities marked to market daily to maintain coverage of at least 100%. The joint repurchase agreement held by the Fund at period end had been entered into on June 30, 2009. The joint repurchase agreement is valued at cost.
c. Mortgage Dollar Rolls
The Fund may enter into mortgage dollar rolls, typically on a TBA basis. Mortgage dollar rolls are agreements between the Fund and a financial institution to simultaneously sell and repurchase mortgage-backed securities at a future date. Gains or losses are realized on the initial sale, and the difference between the repurchase price and the sale price is recorded as an unrealized gain or
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin U.S. Government Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
c. Mortgage Dollar Rolls (continued)
loss to the Fund upon entering into the mortgage dollar roll. In addition, the Fund may invest the cash proceeds that are received from the initial sale. During the period between the sale and repurchase, the Fund is not entitled to principal and interest paid on the mortgage backed securities. The risks of mortgage dollar roll transactions include the potential inability of the counterparty to fulfill its obligations.
d. Income Taxes
No provision has been made for U.S. income taxes because it is the Fund’s policy to qualify as a regulated investment company under the Internal Revenue Code and to distribute to shareholders substantially all of its taxable income and net realized gains.
The Fund has reviewed the tax positions, taken on federal income tax returns, for each of the three open tax years and as of June 30, 2009, and has determined that no provision for income tax is required in the Fund’s financial statements.
e. Security Transactions, Investment Income, Expenses and Distributions
Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Amortization of premium and accretion of discount on debt securities are included in interest income. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with accounting principles generally accepted in the United States of America. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods.
Common expenses incurred by the Trust are allocated among the funds based on the ratio of net assets of each fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense.
Realized and unrealized gains and losses and net investment income, not including class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions, by class, are generally due to differences in class specific expenses.
f. Accounting Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
g. Guarantees and Indemnifications
Under the Trust’s organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, on behalf of the Fund, enters into contracts with service providers that contain general indemnification clauses. The Trust’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote.
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin U.S. Government Fund
2. SHARES OF BENEFICIAL INTEREST
At June 30, 2009, there were an unlimited number of shares authorized (without par value). Transactions in the Fund’s shares were as follows:
| Six Months Ended June 30, 2009 | Year Ended December 31, 2008a | |||||||||||||
| Class 1 Shares: | Shares | Amount | Shares | Amount | ||||||||||
Shares sold | 437,633 | $ | 5,793,921 | 1,508,316 | $ | 19,454,640 | ||||||||
Shares issued in reinvestment of distributions | 531,776 | 6,764,185 | 670,267 | 8,197,357 | ||||||||||
Shares redeemed | (962,189 | ) | (12,726,443 | ) | (2,067,820 | ) | (26,616,400 | ) | ||||||
Net increase (decrease) | 7,220 | $ | (168,337 | ) | 110,763 | $ | 1,035,597 | |||||||
Class 2 Shares: | ||||||||||||||
Shares sold | 10,584,753 | $ | 137,572,843 | 13,882,490 | $ | 175,369,056 | ||||||||
Shares issued in reinvestment of distributions | 1,510,766 | 18,929,900 | 1,597,620 | 19,267,295 | ||||||||||
Shares redeemed | (7,051,146 | ) | (91,976,621 | ) | (10,646,552 | ) | (134,881,875 | ) | ||||||
Net increase (decrease) | 5,044,373 | $ | 64,526,122 | 4,833,558 | $ | 59,754,476 | ||||||||
Class 4 Shares: | ||||||||||||||
Shares sold | — | $ | — | 379 | $ | 5,000 | ||||||||
| aFor | the period February 29, 2008 (effective date) to December 31, 2008 for Class 4. |
3. TRANSACTIONS WITH AFFILIATES
Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Trust are also officers and/or directors of the following subsidiaries:
| Subsidiary | Affiliation | |
Franklin Advisers, Inc. (Advisers) | Investment manager | |
Franklin Templeton Services, LLC (FT Services) | Administrative manager | |
Franklin Templeton Distributors, Inc. (Distributors) | Principal underwriter | |
Franklin Templeton Investor Services, LLC (Investor Services) | Transfer agent |
a. Management Fees
The Fund pays an investment management fee to Advisers based on the average daily net assets of the Fund as follows:
| Annualized Fee Rate | Net Assets | |
| 0.625% | Up to and including $100 million | |
| 0.500% | over $100 million, up to and including $250 million | |
| 0.450% | over $250 million, up to and including $7.5 billion | |
| 0.440% | over $7.5 billion, up to and including $10 billion | |
| 0.430% | over $10 billion, up to and including $12.5 billion | |
| 0.420% | over $12.5 billion, up to and including $15 billion | |
| 0.400% | In excess of $15 billion |
b. Administrative Fees
Under an agreement with Advisers, FT Services provides administrative services to the Fund. The fee is paid by Advisers based on average daily net assets, and is not an additional expense of the Fund.
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin U.S. Government Fund
3. TRANSACTIONS WITH AFFILIATES (continued)
c. Distribution Fees
The Fund’s Board of Trustees has adopted distribution plans for Class 2 and Class 4 shares pursuant to Rule 12b-1 under the 1940 Act. Under the Fund’s compensation distribution plans, the Fund pays Distributors for costs incurred in connection with the servicing, sale and distribution of the Fund’s shares up to 0.35% per year of its average daily net assets of each class. The Board of Trustees has agreed to limit the current rate to 0.25% per year for Class 2.
d. Transfer Agent Fees
Investor Services, under terms of an agreement, performs shareholder servicing for the Fund and is not paid by the Fund for the services.
4. EXPENSE OFFSET ARRANGEMENT
The Fund has entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Fund’s custodian expenses. During the period ended June 30, 2009, there were no credits earned.
5. INCOME TAXES
For tax purposes, capital losses may be carried over to offset future capital gains, if any. At December 31, 2008, the capital loss carryforwards were as follows:
Capital loss carryforwards expiring in: | |||
2011 | $ | 4,558,723 | |
2012 | 3,331,578 | ||
2013 | 2,102,640 | ||
2014 | 1,618,397 | ||
2015 | 2,329,071 | ||
2016 | 841,479 | ||
| $ | 14,781,888 | ||
For tax purposes, realized capital losses occurring subsequent to October 31, may be deferred and treated as occurring on the first day of the following fiscal year. At December 31, 2008, the Fund deferred realized capital losses of $93,640.
At June 30, 2009, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
Cost of investments | $ | 644,319,969 | ||
Unrealized appreciation | $ | 22,332,271 | ||
Unrealized depreciation | (1,543,432 | ) | ||
Net unrealized appreciation (depreciation) | $ | 20,788,839 | ||
Net investment income differs for financial statement and tax purposes primarily due to differing treatments of mortgage dollar rolls, paydown losses, and bond discounts and premiums.
Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatments of wash sales, mortgage dollar rolls, paydown losses, and bond discounts and premiums.
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin U.S. Government Fund
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the period ended June 30, 2009, aggregated $106,853,330 and $65,136,049, respectively.
7. CREDIT FACILITY
Effective January 23, 2009, the Fund, together with other U.S. registered and foreign investment funds managed by Franklin Templeton Investments (individually, “Borrower”; collectively “Borrowers”), entered into a joint syndicated senior unsecured credit facility totaling $725 million (Global Credit Facility) to provide a source of funds to the Borrowers for temporary and emergency purposes, including the ability to meet future unanticipated or unusually large redemption requests.
Under the terms of the Global Credit Facility, the Fund shall, in addition to interest charged on any borrowings made by the Fund and other costs incurred by the Fund, pay its share of fees and expenses incurred in connection with the implementation and maintenance of the Global Credit Facility, based upon its relative share of the aggregate net assets of all of the Borrowers, including an annual commitment fee based upon the unused portion of the Global Credit Facility. During the period, the Fund incurred commitment fees of $686 of its pro rata portion of the Global Credit Facility, which is reflected in other expenses on the Statement of Operations. During the period ended June 30, 2009, the Fund did not utilize the Global Credit Facility.
8. FAIR VALUE MEASUREMENTS
Financial Accounting Standards Board (FASB) Statement No. 157, “Fair Value Measurement” (SFAS 157) establishes a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Fund’s own market assumptions (unobservable inputs). These inputs are used in determining the value of the Fund’s investments and are summarized in the following fair value hierarchy:
| • | Level 1 – quoted prices in active markets for identical securities |
| • | Level 2 – other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speed, credit risk, etc.) |
| • | Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments) |
The inputs or methodology used for valuing securities are not an indication of the risk associated with investing in those securities.
At June 30, 2009, all the Fund’s investments in securities carried at fair value were in Level 2 inputs. For detailed industry descriptions, see the accompanying Statement of Investments.
9. SUBSEQUENT EVENTS
Management has evaluated subsequent events through August 7, 2009 and determined that no events have occurred that require disclosure.
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin U.S. Government Fund
ABBREVIATIONS
Selected Portfolio
FFCB - Federal Farm Credit Bank
FHLB - Federal Home Loan Bank
FICO - Financing Corp.
FRN - Floating Rate Note
GL - Government Loan
HUD - Housing and Urban Development
PC - Participation Certificate
PL - Project Loan
SBA - Small Business Administration
SF - Single Family
TVA - Tennessee Valley Authority
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FRANKLIN ZERO COUPON FUND 2010
This semiannual report for Franklin Zero Coupon Fund 2010 covers the period ended June 30, 2009.
Performance Summary as of 6/30/09
Franklin Zero Coupon Fund 2010 – Class 1 had a -0.25% total return for the six-month period ended 6/30/09.
Performance reflects the Fund’s Class 1 operating expenses, but does not include any contract fees, expenses or sales charges. If they had been included, performance would be lower. These charges and deductions, particularly for variable life policies, can have a significant effect on contract values and insurance benefits. See the contract prospectus for a complete description of these expenses, including sales charges.
Franklin Zero Coupon Fund 2010 – Class 1
Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares.
Current performance may differ from figures shown.
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Fund Goal and Main Investments: Franklin Zero Coupon Fund 2010 seeks as high an investment return as is consistent with capital preservation. The Fund normally invests at least 80% of its net assets in zero coupon debt securities.
Performance Overview
You can find the Fund’s six-month total return in the Performance Summary. The Fund underperformed its benchmark, the Merrill Lynch (ML) 2-Year Zero Coupon Bond Index, which had a -0.12% total return for the same period.1 The Fund underperformed its peers in the Lipper VIP General Bond Funds Classification Average, which had a total return of +8.03%.2
Economic and Market Overview
During the six-month period ended June 30, 2009, economic conditions deteriorated. In February, The Conference Board’s Consumer Confidence Index fell to an all-time low since it began in 1967 as the U.S. economy faltered and as stock markets declined. Despite far-reaching government interventions, the nation’s economic troubles worsened as manufacturing activity weakened at its fastest pace in nearly 30 years and as home prices fell at an accelerated rate. Jobless claims mounted and the unemployment rate rose to 9.5% by period-end.3 Economic growth, as measured by gross domestic product (GDP), fell in 2009’s first and second quarters at annualized rates of 6.4% and an estimated 1.0%, reflecting broad-based slowdowns in consumer spending, corporate profits and export growth.
Oil prices rose from $44 per barrel in December 2008 to $70 per barrel at period-end; however, inflation remained muted as most commodity prices were well below 2008 levels. June’s inflation rate was an annualized -1.4%.3 Core inflation, which excludes food and energy costs, rose at a 1.7% annualized rate, which was within the Federal Reserve Board’s (Fed’s) informal target range of 1.5%–2.0%.3 The core personal consumption expenditures price index reported a 12-month increase of 1.5%.4
A slowing economy and decelerating inflation prompted policymakers to keep interest rates low and enact stimulus plans. During the period under review, the Fed kept the federal funds target rate in a range of 0% to 0.25%. The government implemented the American Recovery
1. Source: © 2009 Morningstar.
2. Source: Lipper Inc.
One cannot invest directly in an index, nor is an index representative of the Fund’s portfolio. Please see Index Descriptions following the Fund Summaries.
3. Source: Bureau of Labor Statistics.
4. Source: Bureau of Economic Analysis.
Fund Risks: Changes in interest rates affect the prices of the Fund’s debt securities. If interest rates rise, the value of the Fund’s debt securities will fall and so will the Fund’s share price. Because zero coupon securities do not pay interest, their market value can fall more dramatically when interest rates rise than interest-paying securities of similar maturities. The Fund’s prospectus also includes a description of the main investment risks.
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and Reinvestment Act, which included tax breaks, money for ailing state governments, aid to the poor and unemployed, and spending on infrastructure, renewable energy, health care and education. The Fed and U.S. Treasury Department also continued programs designed to shore up beleaguered banks’ capital, enable freer lending to businesses and consumers, and help struggling home buyers avoid foreclosure.
Most Treasury prices declined during the period, and fixed income spreads were generally wide relative to Treasury yields due to heightened market turbulence and risk aversion. The spread between two-year and 10-year Treasury yields rose to 242 basis points (100 basis points equal one percentage point) at the end of June from 149 basis points at the beginning of the reporting period. The two-year Treasury bill yield rose slightly from 0.76% to 1.11% over the six-month period, while the 10-year Treasury note yield increased from 2.25% to 3.53%.
Investment Strategy
In selecting investments for the Fund, we seek to keep the Fund’s average duration to within 12 months of its maturity Target Date. Duration is a measure of the length of an investment, taking into account the timing and amount of any interest payments and the principal repayment. Duration is also a measure of a bond’s price sensitivity to interest rates. We analyze securities using both proprietary and nonproprietary research seeking to identify attractive investment opportunities.
Manager’s Discussion
The six-month period ended June 30, 2009 offered several months of encouraging economic news. Even with the return of volatility and a rise in interest rates toward the latter part of the period, rates remained low on a historical basis at period-end. In addition, credit markets improved and spreads tightened across sectors.
During the review period, the Fund was substantially invested in zero coupon and stripped securities issued by government-related entities and other high-quality issuers, which underperformed lower-quality sectors such as corporate high yield bonds. Treasuries generally underperformed other government-related issues. The Fund’s investments are short-term, high-quality assets that offer relatively lower volatility. However, yields on the one- to two-year part of the yield curve increased during the period, which resulted in slightly negative returns for the Fund.
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During the review period, we remained committed to our investment process as we remained invested in high-quality investments with what we believed were attractive valuations. Consistent with our investment strategy, we also continued to emphasize zero coupon and stripped securities with maturities near the Fund’s target date.
Thank you for your participation in Franklin Zero Coupon Fund 2010. We look forward to serving your future investment needs.
The foregoing information reflects our analysis, opinions and portfolio holdings as of June 30, 2009, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.
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Fund Expenses
As an investor in a variable insurance contract (Contract) that indirectly provides for investment in an underlying mutual fund, you can incur transaction and/or ongoing expenses at both the Fund level and the Contract level.
| • | Transaction expenses can include sales charges (loads) on purchases, surrender fees, transfer fees and premium taxes. |
| • | Ongoing expenses can include management fees, distribution and service (12b-1) fees, contract fees, annual maintenance fees, mortality and expense risk fees and other fees and expenses. All mutual funds and Contracts have some types of ongoing expenses. |
The expenses shown in the table are meant to highlight ongoing expenses at the Fund level only and do not include ongoing expenses at the Contract level, or transaction expenses at either the Fund or Contract levels. While the Fund does not have transaction expenses, if the transaction and ongoing expenses at the Contract level were included, the expenses shown below would be higher. You should consult your Contract prospectus or disclosure document for more information.
The table shows Fund-level ongoing expenses and can help you understand these expenses and compare them with those of other mutual funds offered through the Contract. The table assumes a $1,000 investment held for the six months indicated. Please refer to the Fund prospectus for additional information on operating expenses.
Actual Fund Expenses
The first line (Actual) of the table provides actual account values and expenses. The “Ending Account Value” is derived from the Fund’s actual return, which includes the effect of ongoing Fund expenses, but does not include the effect of ongoing Contract expenses.
You can estimate the Fund-level expenses you incurred during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:
| 1. | Divide your account value by $1,000. |
If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6.
| 2. | Multiply the result by the number under the heading “Fund-Level Expenses Incurred During Period.” |
If Fund-Level Expenses Incurred During Period were $7.50, then 8.6 x $7.50 = $64.50.
In this illustration, the estimated expenses incurred this period at the Fund level are $64.50.
Franklin Zero Coupon Fund 2010 – Class 1
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Hypothetical Example for Comparison with Other Mutual Funds
Information in the second line (Hypothetical) of the table can help you compare ongoing expenses of the Fund with those of other mutual funds offered through the Contract. This information may not be used to estimate the actual ending account balance or expenses you incurred during the period. The hypothetical “Ending Account Value” is based on the Fund’s actual expense ratio and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Fund-Level Expenses Incurred During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds offered through a Contract.
| Class 1 | Beginning Account Value 1/1/09 | Ending Account | Fund-Level Expenses Incurred During Period* 1/1/09–6/30/09 | ||||||
Actual | $ | 1,000 | $ | 997.50 | $ | 3.27 | |||
Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,021.52 | $ | 3.31 | |||
*Expenses are calculated using the most recent six-month annualized expense ratio for the Fund’s Class 1 shares (0.66%), which does not include any ongoing expenses of the Contract for which the Fund is an investment option, multiplied by the average account value over the period, multiplied by 181/365 to reflect the one-half year period.
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Franklin Templeton Variable Insurance Products Trust
Financial Highlights
Franklin Zero Coupon Fund – 2010
Six Months (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 1 | 2008 | 2007 | 2006 | 2005 | 2004 | |||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 16.68 | $ | 16.30 | $ | 15.80 | $ | 16.02 | $ | 16.49 | $ | 16.55 | ||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.37 | 0.78 | 0.78 | 0.77 | 0.80 | 0.81 | ||||||||||||||||||
Net realized and unrealized gains (losses) | (0.41 | ) | 0.39 | 0.52 | (0.36 | ) | (0.54 | ) | (0.08 | ) | ||||||||||||||
Total from investment operations | (0.04 | ) | 1.17 | 1.30 | 0.41 | 0.26 | 0.73 | |||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income | (0.75 | ) | (0.79 | ) | (0.80 | ) | (0.63 | ) | (0.72 | ) | (0.79 | ) | ||||||||||||
Net realized gains | — | — | — | — | (0.01 | ) | — | |||||||||||||||||
Total distributions | (0.75 | ) | (0.79 | ) | (0.80 | ) | (0.63 | ) | (0.73 | ) | (0.79 | ) | ||||||||||||
Net asset value, end of period | $ | 15.89 | $ | 16.68 | $ | 16.30 | $ | 15.80 | $ | 16.02 | $ | 16.49 | ||||||||||||
Total returnc | (0.25)% | 7.50% | 8.62% | 2.71% | 1.54% | 4.72% | ||||||||||||||||||
Ratios to average net assetsd | ||||||||||||||||||||||||
Expenses | 0.66% | 0.68% | 0.66% | e | 0.67% | e | 0.69% | 0.68% | ||||||||||||||||
Net investment income | 4.55% | 4.74% | 4.94% | 4.89% | 4.93% | 4.91% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 117,546 | $ | 122,058 | $ | 95,583 | $ | 93,184 | $ | 101,555 | $ | 78,978 | ||||||||||||
Portfolio turnover rate | 1.47% | 10.39% | 4.49% | 2.00% | —% | 11.74% | ||||||||||||||||||
aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.
bBased on average daily shares outstanding.
cTotal return does not include any fees, charges or expenses imposed by the variable annuity and life insurance contracts for which the Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle. Total return is not annualized for periods less than one year.
dRatios are annualized for periods less than one year.
eBenefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
FZ10-7
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Franklin Zero Coupon Fund – 2010
Six Months (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 2 | 2008 | 2007 | 2006 | 2005 | 2004 | |||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 16.61 | $ | 16.22 | $ | 15.72 | $ | 15.96 | $ | 16.43 | $ | 16.52 | ||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.35 | 0.74 | 0.73 | 0.73 | 0.76 | 0.77 | ||||||||||||||||||
Net realized and unrealized gains (losses) | (0.41 | ) | 0.39 | 0.53 | (0.37 | ) | (0.54 | ) | (0.08 | ) | ||||||||||||||
Total from investment operations | (0.06 | ) | 1.13 | 1.26 | 0.36 | 0.22 | 0.69 | |||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income | (0.70 | ) | (0.74 | ) | (0.76 | ) | (0.60 | ) | (0.68 | ) | (0.78 | ) | ||||||||||||
Net realized gains | — | — | — | — | (0.01 | ) | — | |||||||||||||||||
Total distributions | (0.70 | ) | (0.74 | ) | (0.76 | ) | (0.60 | ) | (0.69 | ) | (0.78 | ) | ||||||||||||
Net asset value, end of period | $ | 15.85 | $ | 16.61 | $ | 16.22 | $ | 15.72 | $ | 15.96 | $ | 16.43 | ||||||||||||
Total returnc | (0.35)% | 7.23% | 8.41% | 2.39% | 1.32% | 4.45% | ||||||||||||||||||
Ratios to average net assetsd | ||||||||||||||||||||||||
Expenses | 0.91% | 0.93% | 0.91% | e | 0.92% | e | 0.94% | 0.93% | ||||||||||||||||
Net investment income | 4.30% | 4.49% | 4.69% | 4.64% | 4.68% | 4.66% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 15,247 | $ | 17,392 | $ | 17,424 | $ | 25,982 | $ | 24,040 | $ | 14,251 | ||||||||||||
Portfolio turnover rate | 1.47% | 10.39% | 4.49% | 2.00% | —% | 11.74% | ||||||||||||||||||
aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.
bBased on average daily shares outstanding.
cTotal return does not include any fees, charges or expenses imposed by the variable annuity and life insurance contracts for which the Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle. Total return is not annualized for periods less than one year.
dRatios are annualized for periods less than one year.
eBenefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
FZ10-8
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited)
| Franklin Zero Coupon Fund – 2010 | Principal Amount | Value | |||||
U.S. Government and Agency Securities 95.6% | |||||||
FHLMC, Strip, | $ | 11,150,000 | $ | 11,017,182 | |||
1/15/11 | 10,629,000 | 10,332,026 | |||||
FICO, Strip, | 9,800,000 | 9,693,797 | |||||
A, 8/08/10 | 7,000,000 | 6,892,431 | |||||
FNMA, Strip, | 1,975,000 | 1,972,974 | |||||
8/01/10 | 8,250,000 | 8,102,911 | |||||
8/12/10 | 1,230,000 | 1,213,089 | |||||
International Bank for Reconstruction & Development (Supranationala), | 500,000 | 489,016 | |||||
zero cpn., 2/15/11 | 1,392,000 | 1,361,420 | |||||
zero cpn., 2/15/12 | 2,800,000 | 2,663,920 | |||||
zero cpn., 2/15/13 | 3,287,000 | 2,998,312 | |||||
zero cpn., 8/15/13 | 4,100,000 | 3,646,487 | |||||
Resolution Funding, Strip, 10/15/10 | 10,000,000 | 9,865,200 | |||||
TVA, Strip, | 412,000 | 409,916 | |||||
4/15/10 | 12,000,000 | 11,913,660 | |||||
10/15/10 | 1,320,000 | 1,297,378 | |||||
1/15/11 | 10,669,000 | 10,421,223 | |||||
10/15/11 | 7,295,000 | 7,001,369 | |||||
U.S. Treasury, Strip, | 25,000,000 | 24,636,875 | |||||
2/15/11 | 1,000,000 | 985,825 | |||||
Total U.S. Government and Agency Securities (Cost $119,456,099) | 126,915,011 | ||||||
Short Term Investments (Cost $6,144,912) 4.6% | |||||||
Repurchase Agreements 4.6% | |||||||
bJoint Repurchase Agreement, 0.023%, 7/01/09 (Maturity Value $6,144,916) | 6,144,912 | 6,144,912 | |||||
Banc of America Securities LLC (Maturity Value $529,753) Barclays Capital Inc. (Maturity Value $485,571) BNP Paribas Securities Corp. (Maturity Value $1,765,742) Credit Suisse Securities (USA) LLC (Maturity Value $1,765,742) Deutsche Bank Securities Inc. (Maturity Value $626,904) HSBC Securities (USA) Inc. (Maturity Value $529,753) UBS Securities LLC (Maturity Value $441,451) | |||||||
Collateralized by U.S. Government Agency Securities, 0.58% - 7.25%, 1/15/10 - 6/27/16; cU.S. Government Agency Discount Notes, 12/31/09; cU.S. Treasury Bills, 8/13/09; and U.S. Treasury Notes, 1.375% - 1.50%, | |||||||
Total Investments (Cost $125,601,011) 100.2% | 133,059,923 | ||||||
Other Assets, less Liabilities (0.2)% | (266,861 | ) | |||||
Net Assets 100.0% | $ | 132,793,062 | |||||
See Abbreviations on page FZ10-17.
aA supranational organization is an entity formed by two or more central governments through international treaties.
bSee Note 1(b) regarding joint repurchase agreement.
cThe security is traded on a discount basis with no stated coupon rate.
The accompanying notes are an integral part of these financial statements.
FZ10-9
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements
Statement of Assets and Liabilities
June 30, 2009 (unaudited)
| Franklin Zero Coupon Fund – 2010 | ||||
Assets: | ||||
Investments in securities: | ||||
Cost - Unaffiliated issuers | $ | 119,456,099 | ||
Cost - Repurchase agreements | 6,144,912 | |||
Total cost of investments | $ | 125,601,011 | ||
Value - Unaffiliated issuers | $ | 126,915,011 | ||
Value - Repurchase agreements | 6,144,912 | |||
Total value of investments | 133,059,923 | |||
Receivables from capital shares sold | 2,105 | |||
Other assets | 195 | |||
Total assets | 133,062,223 | |||
Liabilities: | ||||
Payables: | ||||
Capital shares redeemed | 140,869 | |||
Affiliates | 70,524 | |||
Reports to shareholders | 43,262 | |||
Accrued expenses and other liabilities | 14,506 | |||
Total liabilities | 269,161 | |||
Net assets, at value | $ | 132,793,062 | ||
Net assets consist of: | ||||
Paid-in capital | $ | 122,643,356 | ||
Undistributed net investment income | 3,068,388 | |||
Net unrealized appreciation (depreciation) | 7,458,912 | |||
Accumulated net realized gain (loss) | (377,594 | ) | ||
Net assets, at value | $ | 132,793,062 | ||
Class 1: | ||||
Net assets, at value | $ | 117,546,105 | ||
Shares outstanding | 7,395,632 | |||
Net asset value and maximum offering price per share | $ | 15.89 | ||
Class 2: | ||||
Net assets, at value | $ | 15,246,957 | ||
Shares outstanding | 961,990 | |||
Net asset value and maximum offering price per share | $ | 15.85 | ||
The accompanying notes are an integral part of these financial statements.
FZ10-10
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Operations
for the six months ended June 30, 2009 (unaudited)
| Franklin Zero Coupon Fund – 2010 | ||||
Investment income: | ||||
Interest | $ | 3,535,966 | ||
Expenses: | ||||
Management fees (Note 3a) | 401,612 | |||
Distribution fees - Class 2 (Note 3c) | 20,324 | |||
Unaffiliated transfer agent fees | 131 | |||
Custodian fees (Note 4) | 1,160 | |||
Reports to shareholders | 27,486 | |||
Professional fees | 12,942 | |||
Trustees’ fees and expenses | 297 | |||
Other | 4,616 | |||
Total expenses | 468,568 | |||
Net investment income | 3,067,398 | |||
Realized and unrealized gains (losses): | ||||
Net realized gain (loss) from investments | 154,879 | |||
Net change in unrealized appreciation (depreciation) on investments | (3,558,814 | ) | ||
Net realized and unrealized gain (loss) | (3,403,935 | ) | ||
Net increase (decrease) in net assets resulting from operations | $ | (336,537 | ) | |
The accompanying notes are an integral part of these financial statements.
FZ10-11
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statements of Changes in Net Assets
| Franklin Zero Coupon Fund – 2010 | ||||||||
| Six Months Ended June 30, 2009 (unaudited) | Year Ended December 31, 2008 | |||||||
Increase (decrease) in net assets: | ||||||||
Operations: | ||||||||
Net investment income | $ | 3,067,398 | $ | 5,854,864 | ||||
Net realized gain (loss) from investments | 154,879 | 86,934 | ||||||
Net change in unrealized appreciation (depreciation) on investments | (3,558,814 | ) | 2,912,702 | |||||
Net increase (decrease) in net assets resulting from operations | (336,537 | ) | 8,854,500 | |||||
Distributions to shareholders from: | ||||||||
Net investment income: | ||||||||
Class 1 | (5,207,491 | ) | (4,956,480 | ) | ||||
Class 2 | (646,473 | ) | (757,070 | ) | ||||
Total distributions to shareholders | (5,853,964 | ) | (5,713,550 | ) | ||||
Capital share transactions: (Note 2) | ||||||||
Class 1 | 963,538 | 23,777,343 | ||||||
Class 2 | (1,430,099 | ) | (475,241 | ) | ||||
Total capital share transactions | (466,561 | ) | 23,302,102 | |||||
Net increase (decrease) in net assets | (6,657,062 | ) | 26,443,052 | |||||
Net assets: | ||||||||
Beginning of period | 139,450,124 | 113,007,072 | ||||||
End of period | $ | 132,793,062 | $ | 139,450,124 | ||||
Undistributed net investment income included in net assets: | ||||||||
End of period | $ | 3,068,388 | $ | 5,854,954 | ||||
The accompanying notes are an integral part of these financial statements.
FZ10-12
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited)
Franklin Zero Coupon Fund – 2010
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Templeton Variable Insurance Products Trust (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end investment company, consisting of twenty-two separate funds. The Franklin Zero Coupon Fund – 2010 (Fund) is included in this report. The financial statements of the remaining funds in the Trust are presented separately. Shares of the Fund are sold only to insurance company separate accounts to fund the benefits of variable life insurance policies or variable annuity contracts. At June 30, 2009, 88.49% of the Fund’s shares were held through one insurance company. The Fund offers two classes of shares: Class 1 and Class 2. Each class of shares differs by its distribution fees, voting rights on matters affecting a single class and its exchange privilege.
The following summarizes the Fund’s significant accounting policies.
a. Security Valuation
Government securities generally trade in the over-the-counter market rather than on a securities exchange. The Fund may utilize independent pricing services, quotations from bond dealers, and information with respect to bond and note transactions, to assist in determining a current market value for each security. The Fund’s pricing services may use valuation models or matrix pricing which considers information with respect to comparable bond and note transactions, quotations from bond dealers, or by reference to other securities that are considered comparable in such characteristics as rating, interest rate and maturity date, option adjusted spread models, prepayment projections, interest rate spreads and yield curves, to determine current value.
The Fund has procedures to determine the fair value of individual securities and other assets for which market prices are not readily available or which may not be reliably priced. Methods for valuing these securities may include: fundamental analysis based upon the underlying investment book value, anticipated future cash flows, market changes in comparable or similar securities, matrix pricing, discounts from market prices of similar securities, or discounts applied due to the nature and duration of restrictions on the disposition of the securities. Due to the inherent uncertainty of valuations of such securities, the fair values may differ significantly from the values that would have been used had a ready market for such investments existed. Occasionally, events occur between the time at which trading in a security is completed and the close of the NYSE that might call into question the availability (including the reliability) of the value of a portfolio security held by the Fund. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services. All security valuation procedures are approved by the Fund’s Board of Trustees.
b. Joint Repurchase Agreement
The Fund may enter into a joint repurchase agreement whereby its uninvested cash balance is deposited into a joint cash account with other funds managed by the investment manager or an affiliate of the investment manager and is used to invest in one or more repurchase agreements. The value and face amount of the joint repurchase agreement are allocated to the funds based on their pro-rata interest. A repurchase agreement is accounted for as a loan by the Fund to the seller, collateralized by securities which are delivered to the Fund’s custodian. The market value, including accrued interest, of the initial collateralization is required to be at least 102% of the dollar amount invested by the funds, with the value of the underlying securities marked to market daily to maintain coverage of at least 100%. The joint repurchase agreement held by the Fund at period end had been entered into on June 30, 2009. The joint repurchase agreement is valued at cost.
c. Income Taxes
No provision has been made for U.S. income taxes because it is the Fund’s policy to qualify as a regulated investment company under the Internal Revenue Code and to distribute to shareholders substantially all of its taxable income and net realized gains.
The Fund has reviewed the tax positions, taken on federal income tax returns, for each of the three open tax years and as of June 30, 2009, and has determined that no provision for income tax is required in the Fund’s financial statements.
FZ10-13
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Zero Coupon Fund – 2010
d. Security Transactions, Investment Income, Expenses and Distributions
Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Amortization of premium and accretion of discount on debt securities are included in interest income. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with accounting principles generally accepted in the United States of America. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods.
Common expenses incurred by the Trust are allocated among the funds based on the ratio of net assets of each fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense.
Realized and unrealized gains and losses and net investment income, not including class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions, by class, are generally due to differences in class specific expenses.
e. Accounting Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
f. Guarantees and Indemnifications
Under the Trust’s organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, on behalf of the Fund, enters into contracts with service providers that contain general indemnification clauses. The Trust’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote.
FZ10-14
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Zero Coupon Fund – 2010
2. SHARES OF BENEFICIAL INTEREST
At June 30, 2009, there were an unlimited number of shares authorized (without par value). Transactions in the Fund’s shares were as follows:
| Six Months Ended June 30, 2009 | Year Ended December 31, 2008 | |||||||||||||
| Class 1 Shares: | Shares | Amount | Shares | Amount | ||||||||||
Shares sold | 1,454,426 | $ | 23,987,647 | 3,323,480 | $ | 54,740,507 | ||||||||
Shares issued in reinvestment of distributions | 328,756 | 5,207,491 | 315,699 | 4,956,480 | ||||||||||
Shares redeemed | (1,703,311 | ) | (28,231,600 | ) | (2,186,691 | ) | (35,919,644 | ) | ||||||
Net increase (decrease) | 79,871 | $ | 963,538 | 1,452,488 | $ | 23,777,343 | ||||||||
Class 2 Shares: | ||||||||||||||
Shares sold | 50,845 | $ | 840,141 | 352,198 | $ | 5,796,144 | ||||||||
Shares issued in reinvestment of distributions | 40,916 | 646,473 | 48,375 | 757,070 | ||||||||||
Shares redeemed | (176,666 | ) | (2,916,713 | ) | (427,878 | ) | (7,028,455 | ) | ||||||
Net increase (decrease) | (84,905 | ) | $ | (1,430,099 | ) | (27,305 | ) | $ | (475,241 | ) | ||||
3. TRANSACTIONS WITH AFFILIATES
Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Trust are also officers and/or directors of the following subsidiaries:
| Subsidiary | Affiliation | |
Franklin Advisers, Inc. (Advisers) | Investment manager | |
Franklin Templeton Services, LLC (FT Services) | Administrative manager | |
Franklin Templeton Distributors, Inc. (Distributors) | Principal underwriter | |
Franklin Templeton Investor Services, LLC (Investor Services) | Transfer agent |
a. Management Fees
The Fund pays an investment management fee to Advisers based on the average daily net assets of the Fund as follows:
| Annualized Fee Rate | Net Assets | |
| 0.625% | Up to and including $100 million | |
| 0.500% | Over $100 million, up to and including $250 million | |
| 0.450% | Over $250 million, up to and including $7.5 billion | |
| 0.440% | Over $7.5 billion, up to and including $10 billion | |
| 0.430% | Over $10 billion, up to and including $12.5 billion | |
| 0.420% | Over $12.5 billion, up to and including $15 billion | |
| 0.400% | In excess of $15 billion |
b. Administrative Fees
Under an agreement with Advisers, FT Services provides administrative services to the Fund. The fee is paid by Advisers based on average daily net assets, and is not an additional expense of the Fund.
FZ10-15
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Zero Coupon Fund – 2010
3. TRANSACTIONS WITH AFFILIATES (continued)
c. Distribution Fees
The Fund’s Board of Trustees has adopted distribution plans for Class 2 shares pursuant to Rule 12b-1 under the 1940 Act. Under the Fund’s compensation distribution plans, the Fund pays Distributors for costs incurred in connection with the servicing, sale and distribution of the Fund’s shares up to 0.35% per year of its average daily net assets. The Board of Trustees has agreed to limit the current rate to 0.25% per year for Class 2.
d. Transfer Agent Fees
Investor Services, under terms of an agreement, performs shareholder servicing for the Fund and is not paid by the Fund for the services.
4. EXPENSE OFFSET ARRANGEMENT
The Fund has entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Fund’s custodian expenses. During the period ended June 30, 2009, there were no credits earned.
5. INCOME TAXES
For tax purposes, capital losses may be carried over to offset future capital gains, if any. At December 31, 2008, the capital loss carryforwards were as follows:
Capital loss carryforwards expiring in: | |||
2014 | $ | 241,922 | |
2015 | 222,565 | ||
| $ | 464,487 | ||
At June 30, 2009, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
Cost of investments | $ | 125,665,720 | ||
Unrealized appreciation | $ | 7,499,114 | ||
Unrealized depreciation | (104,911 | ) | ||
Net unrealized appreciation (depreciation) | $ | 7,394,203 | ||
Net investment income differs for financial statement and tax purposes primarily due to differing treatment of bond discounts.
Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatment of wash sales.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the period ended June 30, 2009, aggregated $1,964,000 and $9,857,580, respectively.
FZ10-16
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Zero Coupon Fund – 2010
7. CREDIT FACILITY
Effective January 23, 2009, the Fund, together with other U.S. registered and foreign investment funds managed by Franklin Templeton Investments (individually, “Borrower”; collectively “Borrowers”), entered into a joint syndicated senior unsecured credit facility totaling $725 million (Global Credit Facility) to provide a source of funds to the Borrowers for temporary and emergency purposes, including the ability to meet future unanticipated or unusually large redemption requests.
Under the terms of the Global Credit Facility, the Fund shall, in addition to interest charged on any borrowings made by the Fund and other costs incurred by the Fund, pay its share of fees and expenses incurred in connection with the implementation and maintenance of the Global Credit Facility, based upon its relative share of the aggregate net assets of all of the Borrowers, including an annual commitment fee based upon the unused portion of the Global Credit Facility. During the period, the Fund incurred commitment fees of $149 of its pro rata portion of the Global Credit Facility, which is reflected in other expenses on the Statement of Operations. During the period ended June 30, 2009, the Fund did not utilize the Global Credit Facility.
8. FAIR VALUE MEASUREMENTS
Financial Accounting Standards Board (FASB) Statement No. 157, “Fair Value Measurement” (SFAS 157) establishes a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Fund’s own market assumptions (unobservable inputs). These inputs are used in determining the value of the Fund’s investments and are summarized in the following fair value hierarchy:
| • | Level 1 – quoted prices in active markets for identical securities |
| • | Level 2 – other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speed, credit risk, etc.) |
| • | Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments) |
The inputs or methodology used for valuing securities are not an indication of the risk associated with investing in those securities.
At June 30, 2009, all the Fund’s investments in securities carried at fair value were in Level 2 inputs. For detailed industry descriptions, see the accompanying Statement of Investments.
9. SUBSEQUENT EVENTS
Management has evaluated subsequent events through August 7, 2009 and determined that no events have occurred that required disclosure.
ABBREVIATIONS
Selected Portfolio
FHLMC - Federal Home Loan Mortgage Corp.
FICO - Financing Corp.
FNMA - Federal National Mortgage Association
TVA - Tennessee Valley Authority
FZ10-17
Table of Contents
MUTUAL GLOBAL DISCOVERY SECURITIES FUND
(MUTUAL DISCOVERY SECURITIES FUNDBEFORE MAY 1, 2009)
We are pleased to bring you Mutual Global Discovery Securities Fund’s semiannual report for the period ended June 30, 2009.
Performance Summary as of 6/30/09
Mutual Global Discovery Securities Fund – Class 1 delivered a total return of +8.62% for the six-month period ended 6/30/09.
Performance reflects the Fund’s Class 1 operating expenses, but does not include any contract fees, expenses or sales charges. If they had been included, performance would be lower. These charges and deductions, particularly for variable life policies, can have a significant effect on contract values and insurance benefits. See the contract prospectus for a complete description of these expenses, including sales charges.
Mutual Global Discovery Securities Fund – Class 1
Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares.
Current performance may differ from figures shown.
MGD-1
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Fund Goal and Main Investments: Mutual Global Discovery Securities Fund seeks capital appreciation. The Fund normally invests primarily in U.S. and foreign equity securities that the manager believes are undervalued. The Fund invests, to a lesser extent, in risk arbitrage securities and distressed companies.
Performance Overview
You can find the Fund’s six-month total return in the Performance Summary. Compared with its benchmarks, the Fund outperformed the Morgan Stanley Capital International (MSCI) World Index, which had a +6.79% total return, and the Standard & Poor’s 500 Index (S&P 500), which had a +3.16% total return for the same period.1 The Fund’s goal and main investment strategy have not changed; however, we changed the Fund’s name to better reflect its strategy of seeking opportunities around the world.
Economic and Market Overview
During the six months under review, global equities hit new bear market lows in March before delivering their biggest quarterly rally in more than a decade. At the beginning of the period, with investor sentiment depressed and risk aversion elevated, defensive, non-cyclical sectors like utilities, consumer staples and health care were market leaders. As data emerged suggesting a fledgling recovery in the financials sector and a moderating pace of global economic contraction, investors regained some risk appetite, rotating capital back into cyclical sectors such as financials, materials and consumer discretionary. Resurgent risk appetite also buoyed emerging markets stocks, which delivered their best three-month returns on record from March through May 2009. Emerging market optimism in turn supported higher commodity prices, which gained the most since the bubble in hard assets burst in the summer of 2008. Also supporting commodity prices was a weaker U.S. dollar. Although systemic risk aversion and the consensus belief that the U.S. could lead the global economy out of recession helped strengthen the dollar at the beginning of the period, investors soon began to worry about the currency’s ongoing stability in the face of aggressive and unconventional monetary policy, and the greenback lost value relative to most currencies for the six-month period.
1. Source: © 2009 Morningstar. One cannot invest directly in an index, nor is an index representative of the Fund’s portfolio. Please see Index Descriptions following the Fund Summaries.
Fund Risks: The Fund’s investments in stocks may offer the potential for long-term gains but can be subject to short-term price fluctuations. Investments in companies involved in mergers, liquidations, reorganizations and distressed bankruptcy, which may include defaulted debt, involve higher credit and other risks. Foreign investing, especially in emerging markets, involves additional risks, including currency fluctuations, economic instability, market volatility, and political and social instability. Smaller and midsize company securities involve special risks, such as relatively small revenues, limited product lines and small market share. The Fund’s prospectus also includes a description of the main investment risks.
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In the reporting period’s final weeks, global equity markets moderated as investors appeared to contemplate the rally’s merits and reassess their new positions. Although sentiment had improved and most seemed to believe the global economy had exited the worst stage of this recessionary cycle, indicators remained mixed and lacked the sustainable upward trajectory investors had hoped for. For example, initial U.S. jobless claims fell to their lowest levels in six months during May, but unemployment rose again at the end of the period to 9.5%.2 In Europe, policymakers committed to an easier monetary regime, but the eurozone’s industrial production declined, capacity utilization continued to shrink, and price deflation was recorded for the first time since data began in 1997.3 In China, a stimulative monetary campaign spurred lending and fueled an annualized money growth rate of 26%, a powerful measure against near-term economic headwinds but a potentially dangerous catalyst for longer-term inflation and asset bubble formation.4
Investment Strategy
At Mutual Series, we are committed to our distinctive value approach to investing. Our major investment strategy is investing in undervalued stocks. When selecting undervalued equities, we are attracted to fundamentally strong companies with healthy balance sheets, high-quality assets, substantial free cash flow and shareholder-oriented management teams and whose stocks are trading at discounts to our assessment of the companies’ intrinsic or business value. We also look for asset rich companies whose shares may be trading at depressed levels due to concerns over short-term earnings disappointments, litigation, management strategy or other perceived negatives. While the vast majority of our undervalued equity investments are made in publicly traded companies globally, we may invest occasionally in privately held companies as well.
We complement this more traditional investment strategy with two others. One is distressed investing, which is complex and can take many forms. The most common distressed investment the Fund undertakes is the purchase of financially troubled or bankrupt companies’ debt at a substantial discount to face value. After the financially distressed company is reorganized, often in bankruptcy court, the old debt is typically replaced with new securities issued by the financially stronger company.
2. Source: Bureau of Labor Statistics.
3. Source: European Communities Eurostat.
4. Source: People’s Bank of China.
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The other piece of our investment strategy is participating in arbitrage situations, another highly specialized field. When companies announce proposed mergers or takeovers, commonly referred to as “deals,” the target company may trade at a discount to the bid it ultimately accepts. One form of arbitrage involves purchasing the target company’s stock when it is trading below the value we believe it would receive in a deal. In keeping with our commitment to a relatively conservative investment approach, we typically focus our arbitrage efforts on announced deals, and eschew rumored deals or other situations we consider relatively risky.
In addition, it is our practice to hedge the Fund’s currency exposure when we deem it advantageous for our shareholders.
Manager’s Discussion
During the fist half of 2009, the Fund’s top performers included Carlsberg, a leading European brewer headquartered in Denmark; Seadrill, a Norwegian deepwater contract driller; and Marine Harvest, a Norway-based salmon producer with far-reaching global operations.
Carlsberg’s share price almost doubled during the reporting period, due in part to diminishing concerns over a possible devaluation of the Russian ruble as oil prices strengthened in 2009’s second quarter. Aside from currency-related influences, Carlsberg also delivered a very strong set of results, including excellent price momentum that more than offset a decline in sales volume; market share gains, especially in Russia, where the company now controls more than 40% of the beer market; and margin progression as the company delivered on its cost savings program. Also, market concerns about Carlsberg’s balance sheet were successfully addressed by management, who remained focused on free cash flow generation and debt reduction.
Seadrill’s share price benefited from the resilience of the deepwater drilling segment in terms of day rates. Brazilian national oil company Petrobras continued its multiyear effort to tender for additional deepwater offshore drilling rigs and develop the country’s claim to the vast and recently discovered Tupi underwater oil field. According to our analysis, Seadrill is extremely well positioned in this regard because it still had some of its modern, highly specialized rigs available for use, while being among the very few suppliers not facing financing issues, and while also being able to deliver its equipment on schedule. At period-end, Seadrill was in the process of refinancing its debt and was seeking to begin paying a dividend in the second half of 2009.
Top 10 Sectors/Industries
Mutual Global Discovery Securities Fund
Based on Equity Securities 6/30/09
| % of Total Net Assets | ||
| Tobacco | 15.5% | |
| Food Products | 9.0% | |
| Pharmaceuticals | 7.0% | |
| Beverages | 5.9% | |
| Industrial Conglomerates | 3.9% | |
| Energy Equipment & Services | 3.8% | |
| Insurance | 3.6% | |
| Commercial Banks | 3.5% | |
| Media | 2.6% | |
| Food & Staples Retailing | 2.0% | |
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Investor concerns about Chilean salmon production sent Marine Harvest’s share price plunging in 2008. In our view, investors had forgotten that lower salmon supply would normally translate into higher prices. As salmon prices increased by more than 40% during the first half of 2009, Marine Harvest’s cash flow increased and it regained investor interest. Besides operational gearing, financial gearing also positively affected Marine Harvest’s share price. Largely as a result of these conditions, Marine Harvest’s share price roughly quadrupled during the six-month period.
As always, there were some detractors from Fund performance. These included U.K.-based Imperial Tobacco, a leading international tobacco company; Berkshire Hathaway, a U.S. conglomerate headed by Warren Buffet; and E-L Financial, a Canadian investment holding company.
Imperial Tobacco shares declined after investors grew wary about the company’s balance sheet and dividend policy, and they generally rotated away from typically defensive sectors as cyclical stocks rallied strongly during the second quarter. At period-end, we still believed Imperial shares were an attractive investment trading at a single-digit 2010 price-to-earnings multiple and boasting more than 10% in free cash flow yield.
Berkshire Hathaway shares underperformed as investors switched into financials that were perceived to be more sensitive to the upside in capital markets. Investors also continued to exhibit concern over the long-term put options written by Berkshire that would be triggered if equity markets continued to sustain substantial declines.
E-L Financial has direct exposure to capital markets through its investment company, United Corporations Ltd., and indirect exposure through its control of The Dominion of Canada General Insurance and The Empire Life Insurance companies. The stock suffered early in the year as a consequence of this capital markets exposure, but subsequently recovered somewhat through period-end.
Top 10 Holdings
Mutual Global Discovery Securities Fund
6/30/09
Company Sector/Industry, | % of Total Net Assets | |
| British American Tobacco PLC | 4.6% | |
| Tobacco, U.K. | ||
| Schering-Plough Corp. | 3.5% | |
| Pharmaceuticals, U.S. | ||
| Wyeth | 3.3% | |
| Pharmaceuticals, U.S. | ||
| Imperial Tobacco Group PLC | 3.2% | |
| Tobacco, U.K. | ||
| Danone | 2.7% | |
| Food Products, France | ||
| Berkshire Hathaway Inc., A & B | 2.4% | |
| Insurance, U.S. | ||
| Nestle SA | 2.4% | |
| Food Products, Switzerland | ||
| Lorillard Inc. | 2.2% | |
| Tobacco, U.S. | ||
| Pernod Ricard SA | 2.2% | |
| Beverages, France | ||
| Carlsberg AS, A & B | 2.2% | |
| Beverages, Denmark | ||
The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund’s Statement of Investments.
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Finally, investors should note that we maintained our currency hedging posture of being generally hedged to the U.S. dollar for most of our non-U.S. holdings. Since the dollar was weaker compared with most foreign currencies during the first half of 2009, our hedging strategy negatively impacted performance.
Thank you for your participation in Mutual Global Discovery Securities Fund. We look forward to serving your future investment needs.
The foregoing information reflects our analysis, opinions and portfolio holdings as of June 30, 2009, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.
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Fund Expenses
As an investor in a variable insurance contract (Contract) that indirectly provides for investment in an underlying mutual fund, you can incur transaction and/or ongoing expenses at both the Fund level and the Contract level.
| • | Transaction expenses can include sales charges (loads) on purchases, surrender fees, transfer fees and premium taxes. |
| • | Ongoing expenses can include management fees, distribution and service (12b-1) fees, contract fees, annual maintenance fees, mortality and expense risk fees and other fees and expenses. All mutual funds and Contracts have some types of ongoing expenses. |
The expenses shown in the table are meant to highlight ongoing expenses at the Fund level only and do not include ongoing expenses at the Contract level, or transaction expenses at either the Fund or Contract levels. While the Fund does not have transaction expenses, if the transaction and ongoing expenses at the Contract level were included, the expenses shown below would be higher. You should consult your Contract prospectus or disclosure document for more information.
The table shows Fund-level ongoing expenses and can help you understand these expenses and compare them with those of other mutual funds offered through the Contract. The table assumes a $1,000 investment held for the six months indicated. Please refer to the Fund prospectus for additional information on operating expenses.
Actual Fund Expenses
The first line (Actual) of the table provides actual account values and expenses. The “Ending Account Value” is derived from the Fund’s actual return, which includes the effect of ongoing Fund expenses, but does not include the effect of ongoing Contract expenses.
You can estimate the Fund-level expenses you incurred during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:
| 1. | Divide your account value by $1,000. |
If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6.
| 2. | Multiply the result by the number under the heading “Fund-Level Expenses Incurred During Period.” |
If Fund-Level Expenses Incurred During Period were $7.50, then 8.6 x $7.50 = $64.50.
In this illustration, the estimated expenses incurred this period at the Fund level are $64.50.
Mutual Global Discovery Securities Fund – Class 1
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Hypothetical Example for Comparison with Other Mutual Funds
Information in the second line (Hypothetical) of the table can help you compare ongoing expenses of the Fund with those of other mutual funds offered through the Contract. This information may not be used to estimate the actual ending account balance or expenses you incurred during the period. The hypothetical “Ending Account Value” is based on the Fund’s actual expense ratio and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Fund-Level Expenses Incurred During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds offered through a Contract.
| Class 1 | Beginning Account Value 1/1/09 | Ending Account Value 6/30/09 | Fund-Level Expenses Incurred During Period* 1/1/09–6/30/09 | ||||||
Actual | $ | 1,000 | $ | 1,086.20 | $ | 5.53 | |||
Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,019.49 | $ | 5.36 | |||
*Expenses are calculated using the most recent six-month annualized expense ratio for the Fund’s Class 1 shares (1.07%), which does not include any ongoing expenses of the Contract for which the Fund is an investment option, multiplied by the average account value over the period, multiplied by 181/365 to reflect the one-half year period.
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SUPPLEMENT DATED JULY 23, 2009
TOTHE PROSPECTUS
DATED MAY 1, 2009
AS PREVIOUSLY AMENDED
MUTUAL GLOBAL DISCOVERY SECURITIES FUND
(A series of Franklin Templeton Variable Insurance Products Trust)
The prospectus is amended as follows:
| I. | The paragraph beginning “The Fund may attempt, . . ” under “Goals and Strategies – Main Investments” is replaced with the following: |
The Fund may attempt, from time to time, to hedge (protect) against currency risks, largely using forward foreign currency exchange contracts and currency futures contracts (including currency index futures contracts) when, in the manager’s opinion, it would be advantageous to the Fund to do so. The Fund may also, from time to time, attempt to hedge against market risk using a variety of derivatives (together, “Hedging Instruments”).
| II | The section “Hedging Instruments” under “Main Risks” is replaced in its entirety with the following: |
Hedging Instruments
The Fund may attempt, from time to time, to hedge (protect) against currency risks, largely using forward foreign currency exchange contracts and currency futures contracts, where available and when, in the manager’s opinion, it would be advantageous to the Fund. A forward foreign currency exchange contract is an agreement to buy or sell a specific amount of currency at a future date and at a price set at the time of the contract. A currency futures contract is similar to a forward foreign currency exchange contract except that the futures contract is in a standardized form that trades on an exchange instead of being privately negotiated with a particular counterparty. Forward foreign currency exchange contracts and currency futures contracts (collectively, “currency contracts”) may reduce the risk of loss from a change in value of a currency, but they also limit any potential gains and do not protect against fluctuations in the value of the underlying position. For example, during periods when the U.S. dollar weakens in relation to a foreign currency, the Fund’s use of a currency hedging program will result in lower returns than if no currency hedging program were in effect.
The Fund may also attempt, from time to time, to hedge against market risks by using derivative investments, which may include purchasing put options. A put option gives the purchaser of the option, upon payment of a premium, the right to sell, and the seller of the option the obligation to buy, the underlying instrument at the exercise price.
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Currency contracts are considered derivative investments, because their value and performance depend, at least in part, on the value of an underlying asset. The Fund’s investments in derivatives may involve a small investment relative to the amount of risk assumed. To the extent the Fund enters into these transactions, its success will depend on the manager’s ability to predict market movements, and their use may have the opposite effect of that intended. Risks include potential loss due to the imposition of controls by a government on the exchange of foreign currencies, delivery failure, default by the other party (particularly with respect to forward foreign currency exchange contracts), or inability to close out a position because the trading market becomes illiquid. These risks may be heightened during volatile market conditions. To the extent that the Fund is unable to close out a position because of market illiquidity, the Fund may not be able to prevent further losses of value in its derivative holdings. The Fund’s liquidity may also be impaired to the extent that it has a substantial portion of its otherwise liquid assets marked as segregated to cover its obligations under such derivative instruments.
Investors should bear in mind that, while the Fund intends to use derivative strategies on a regular basis, it is not obligated to actively engage in these transactions, generally or in any particular kind of derivative, if the manager elects not to do so due to availability, cost or other factors.
Please keep this supplement for future reference.
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SUPPLEMENT DATED AUGUST 7, 2009
TOTHE PROSPECTUS
DATED MAY 1, 2009
AS PREVIOUSLY AMENDED
OF
MUTUAL GLOBAL DISCOVERY SECURITIES FUND
(A series of Franklin Templeton Variable Insurance Products Trust)
The Prospectus is amended as follows:
| I. | Under “Goals and Strategies” the following is added to the end of “Main Investments” on page MGD-2: |
The Fund may purchase asset-backed and mortgage-backed securities. In connection with the purchase of certain asset-backed securities and commercial mortgage-backed securities (“TALF ABS”), the Fund may borrow from the Federal Reserve Bank of New York (“NY Fed”) under its Term Asset-Backed Securities Loan Facility (“TALF”). Pursuant to the TALF Program, the Fund may receive one or more three- to five-year term non-recourse loans to purchase TALF ABS in return for the payment of a haircut amount (usually 5-15% of the loan amount) and a pledge of the TALF ABS.
| II. | The following is added to the end of the “Main Risks” section on page MGD-5: |
Borrowing
Because the Fund may borrow money from the NY Fed under the TALF Program, the Fund may engage in leverage by gaining exposure to a TALF ABS through the payment of a relatively small haircut amount and borrowing the remainder of the purchase price. Such borrowings may exaggerate the effect of any increase or decrease in the value of the TALF ABS on the Fund’s net asset value and will subject the Fund to interest and other costs (including administrative fees) associated with the TALF Program. However, such borrowings are non-recourse to the Fund, which should limit some of the risks of leverage.
Please keep this supplement for future reference.
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Franklin Templeton Variable Insurance Products Trust
Financial Highlights
Mutual Global Discovery Securities Fund
| Six Months Ended June 30, 2009 (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 1 | 2008 | 2007 | 2006 | 2005 | 2004 | |||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 16.12 | $ | 24.08 | $ | 22.05 | $ | 18.85 | $ | 16.44 | $ | 14.04 | ||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.14 | c | 0.37 | 0.47 | 0.52 | 0.25 | 0.26 | |||||||||||||||||
Net realized and unrealized gains (losses) | 1.25 | (6.95 | ) | 2.22 | 3.69 | 2.40 | 2.31 | |||||||||||||||||
Total from investment operations | 1.39 | (6.58 | ) | 2.69 | 4.21 | 2.65 | 2.57 | |||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income | — | (0.52 | ) | (0.38 | ) | (0.25 | ) | (0.24 | ) | (0.17 | ) | |||||||||||||
Net realized gains | — | (0.86 | ) | (0.28 | ) | (0.76 | ) | — | — | |||||||||||||||
Total distributions | — | (1.38 | ) | (0.66 | ) | (1.01 | ) | (0.24 | ) | (0.17 | ) | |||||||||||||
Net asset value, end of period | $ | 17.51 | $ | 16.12 | $ | 24.08 | $ | 22.05 | $ | 18.85 | $ | 16.44 | ||||||||||||
Total returnd | 8.62% | (28.29)% | 12.17% | 23.32% | 16.28% | 18.55% | ||||||||||||||||||
Ratios to average net assetse | ||||||||||||||||||||||||
Expenses before expense reductionf | 1.08% | 0.98% | 0.97% | 1.03% | 1.02% | 1.01% | ||||||||||||||||||
Expenses net of expense reductionf | 1.07% | 0.98% | 0.97% | 1.03% | 1.02% | 1.01% | ||||||||||||||||||
Ratios to average net assets, excluding dividend expense on securities sold short: | ||||||||||||||||||||||||
Expenses before expense reduction | 0.99% | 0.97% | 0.97% | 1.00% | 1.00% | 1.00% | ||||||||||||||||||
Expenses net of expense reduction | 0.98% | 0.97% | 0.97% | 1.00% | 1.00% | 1.00% | ||||||||||||||||||
Net investment income | 1.80% | c | 1.82% | 1.96% | 2.44% | 1.37% | 1.71% | |||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 80,457 | $ | 81,320 | $ | 142,751 | $ | 146,229 | $ | 136,508 | $ | 137,703 | ||||||||||||
Portfolio turnover rate | 12.15% | 22.76% | 28.20% | 19.83% | 22.94% | 29.81% | ||||||||||||||||||
aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.
bBased on average daily shares outstanding.
cNet investment income per share includes approximately ($0.03) per share related to a reserve for uncollectible interest as disclosed on the Statement of Operations. Excluding the effect of this adjustment, the ratio of net investment income to average net assets would have been 2.21%. See Note 7.
dTotal return does not include any fees, charges or expenses imposed by the variable annuity and life insurance contracts for which the Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle. Total return is not annualized for periods less than one year.
eRatios are annualized for periods less than one year.
fIncludes dividend expense on securities sold short which varies from period to period. See below for expense ratios that reflect only operating expenses.
The accompanying notes are an integral part of these financial statements.
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Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Mutual Global Discovery Securities Fund
| Six Months Ended June 30, 2009 (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 2 | 2008 | 2007 | 2006 | 2005 | 2004 | |||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 15.85 | $ | 23.69 | $ | 21.73 | $ | 18.60 | $ | 16.25 | $ | 13.90 | ||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.12 | c | 0.32 | 0.40 | 0.43 | 0.19 | 0.21 | |||||||||||||||||
Net realized and unrealized gains (losses) | 1.22 | (6.84 | ) | 2.18 | 3.68 | 2.38 | 2.30 | |||||||||||||||||
Total from investment operations | 1.34 | (6.52 | ) | 2.58 | 4.11 | 2.57 | 2.51 | |||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income | — | (0.46 | ) | (0.34 | ) | (0.22 | ) | (0.22 | ) | (0.16 | ) | |||||||||||||
Net realized gains | — | (0.86 | ) | (0.28 | ) | (0.76 | ) | — | — | |||||||||||||||
Total distributions | — | (1.32 | ) | (0.62 | ) | (0.98 | ) | (0.22 | ) | (0.16 | ) | |||||||||||||
Net asset value, end of period | $ | 17.19 | $ | 15.85 | $ | 23.69 | $ | 21.73 | $ | 18.60 | $ | 16.25 | ||||||||||||
Total returnd | 8.45% | (28.45)% | 11.85% | 23.06% | 15.97% | 18.19% | ||||||||||||||||||
Ratios to average net assetse | ||||||||||||||||||||||||
Expenses before expense reductionf | 1.33% | 1.23% | 1.22% | 1.28% | 1.28% | 1.26% | ||||||||||||||||||
Expenses net of expense reductionf | 1.32% | 1.23% | 1.22% | 1.28% | 1.28% | 1.26% | ||||||||||||||||||
Ratios to average net assets, excluding dividend expense on securities sold short: | ||||||||||||||||||||||||
Expenses before expense reduction | 1.24% | 1.22% | 1.22% | 1.25% | 1.25% | 1.25% | ||||||||||||||||||
Expenses net of expense reduction | 1.23% | 1.22% | 1.22% | 1.25% | 1.25% | 1.25% | ||||||||||||||||||
Net investment income | 1.55% | c | 1.57% | 1.71% | 2.19% | 1.12% | 1.46% | |||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 1,180,902 | $ | 1,113,720 | $ | 1,867,484 | $ | 1,365,575 | $ | 811,975 | $ | 403,560 | ||||||||||||
Portfolio turnover rate | 12.15% | 22.76% | 28.20% | 19.83% | 22.94% | 29.81% | ||||||||||||||||||
aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.
bBased on average daily shares outstanding.
cNet investment income per share includes approximately ($0.03) per share related to a reserve for uncollectible interest as disclosed on the Statement of Operations. Excluding the effect of this adjustment, the ratio of net investment income to average net assets would have been 1.96%. See Note 7.
dTotal return does not include any fees, charges or expenses imposed by the variable annuity and life insurance contracts for which the Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle. Total return is not annualized for periods less than one year.
eRatios are annualized for periods less than one year.
fIncludes dividend expense on securities sold short which varies from period to period. See below for expense ratios that reflect only operating expenses.
The accompanying notes are an integral part of these financial statements.
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Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Mutual Global Discovery Securities Fund
| Six Months Ended June 30, 2009 (unaudited) | Period 2008a | |||||||
| Class 4 | ||||||||
Per share operating performance | ||||||||
(for a share outstanding throughout the period) | ||||||||
Net asset value, beginning of period | $ | 16.07 | $ | 22.50 | ||||
Income from investment operationsb: | ||||||||
Net investment incomec | 0.13 | d | 0.09 | |||||
Net realized and unrealized gains (losses) | 1.23 | (5.14 | ) | |||||
Total from investment operations | 1.36 | (5.05 | ) | |||||
Less distributions from: | ||||||||
Net investment income | — | (0.52 | ) | |||||
Net realized gains | — | (0.86 | ) | |||||
Total distributions | — | (1.38 | ) | |||||
Net asset value, end of period | $ | 17.43 | $ | 16.07 | ||||
Total returne | 8.46% | (23.48)% | ||||||
Ratios to average net assetsf | ||||||||
Expenses before expense reductiong | 1.43% | 1.33% | ||||||
Expenses net of expense reductiong | 1.42% | 1.33% | ||||||
Ratios to average net assets, excluding dividend expense on securities sold short: | ||||||||
Expenses before expense reduction | 1.34% | 1.32% | ||||||
Expenses net of expense reduction | 1.33% | 1.32% | g | |||||
Net investment income | 1.45% | d | 1.47% | |||||
Supplemental data | ||||||||
Net assets, end of period (000’s) | $ | 43,761 | $ | 23,981 | ||||
Portfolio turnover rate | 12.15% | 22.76% | ||||||
aFor the period February 29, 2008 (effective date) to December 31, 2008.
bThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.
cBased on average daily shares outstanding.
dNet investment income per share includes approximately ($0.03) per share related to a reserve for uncollectible interest as disclosed on the Statement of Operations. Excluding the effect of this adjustment, the ratio of net investment income to average net assets would have been 1.86%. See Note 7.
eTotal return does not include any fees, charges or expenses imposed by the variable annuity and life insurance contracts for which the Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle. Total return is not annualized for periods less than one year.
fRatios are annualized for periods less than one year.
gIncludes dividend expense on securities sold short which varies from period to period. See below for expense ratios that reflect only operating expenses.
The accompanying notes are an integral part of these financial statements.
MGD-14
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited)
| Mutual Global Discovery Securities Fund | Country | Shares/ Warrants/ Contracts | Value | ||||
Common Stocks and Other Equity Interests 77.7% | |||||||
Airlines 0.0%a | |||||||
bACE Aviation Holdings Inc., A | Canada | 111,545 | $ | 508,353 | |||
bDelta Air Lines Inc. | United States | 675 | 3,908 | ||||
b,cNorthwest Airlines Corp., Contingent Distribution | United States | 8,167,000 | 5,145 | ||||
| 517,406 | |||||||
Auto Components 0.1% | |||||||
b,c,dCollins & Aikman Products Co., Contingent Distribution | United States | 218,708 | 2,187 | ||||
b,c,dDana Holding Corp., Contingent Distribution | United States | 2,673,000 | — | ||||
b,eIACNA Investor LLC | United States | 47,271 | 473 | ||||
b,e,fInternational Automotive Components Group Brazil LLC | Brazil | 424,073 | 379,732 | ||||
b,e,fInternational Automotive Components Group Japan LLC | Japan | 74,174 | 205,187 | ||||
b,e,fInternational Automotive Components Group LLC | Luxembourg | 1,512,200 | 343,118 | ||||
b,e,fInternational Automotive Components Group NA LLC, A | United States | 1,353,608 | 51,573 | ||||
| 982,270 | |||||||
Beverages 5.9% | |||||||
Brown-Forman Corp., A | United States | 7,400 | 341,214 | ||||
Brown-Forman Corp., B | United States | 1,850 | 79,513 | ||||
Carlsberg AS, A | Denmark | 7,100 | 464,686 | ||||
Carlsberg AS, B | Denmark | 442,162 | 28,355,996 | ||||
bDr. Pepper Snapple Group Inc. | United States | 398,777 | 8,450,085 | ||||
Fomento Economico Mexicano SAB de CV, ADR | Mexico | 259,600 | 8,369,504 | ||||
Lion Nathan Ltd. | Australia | 233,672 | 2,177,062 | ||||
gPernod Ricard SA | France | 463,760 | 29,186,580 | ||||
| 77,424,640 | |||||||
Capital Markets 0.4% | |||||||
Marfin Investment Group Holdings SA | Greece | 381,560 | 1,637,639 | ||||
Man Group PLC | United Kingdom | 904,960 | 4,131,908 | ||||
| 5,769,547 | |||||||
Chemicals 1.1% | |||||||
b,c,dDow Corning Corp., Contingent Distribution | United States | 300,000 | — | ||||
Sika AG | Switzerland | 12,390 | 13,747,668 | ||||
| 13,747,668 | |||||||
Commercial Banks 3.5% | |||||||
Barclays PLC | United Kingdom | 2,489,861 | 11,593,641 | ||||
BNP Paribas SA | France | 202,518 | 13,137,394 | ||||
b,eElephant Capital Holdings Ltd. | Japan | 1,903 | — | ||||
bIntesa Sanpaolo SpA | Italy | 2,854,636 | 9,188,980 | ||||
b,eNCB Warrant Holdings Ltd., A | Japan | 9,306 | — | ||||
bRoyal Bank of Scotland Group PLC | United Kingdom | 2,199,470 | 1,398,342 | ||||
Societe Generale, A | France | 173,954 | 9,487,469 | ||||
SunTrust Banks Inc. | United States | 21,900 | 360,255 | ||||
| 45,166,081 | |||||||
MGD-15
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Mutual Global Discovery Securities Fund | Country | Shares/ Warrants/ Contracts | Value | ||||
Common Stocks and Other Equity Interests (continued) | |||||||
Commercial Services & Supplies 0.0%a | |||||||
bComdisco Holding Co. Inc. | United States | 44 | $ | 321 | |||
b,cComdisco Holding Co. Inc., Contingent Distribution | United States | 1,863,000 | — | ||||
| 321 | |||||||
Computers & Peripherals 1.2% | |||||||
b,eDecisionOne Corp. | United States | 21,716 | 35,831 | ||||
b,eDecisionOne Corp., wts., 6/08/17 | United States | 11,923 | — | ||||
bDell Inc. | United States | 332,550 | 4,565,912 | ||||
bSun Microsystems Inc. | United States | 1,175,300 | 10,836,266 | ||||
| 15,438,009 | |||||||
Construction Materials 0.3% | |||||||
Ciments Francais SA | France | 22,650 | 1,916,299 | ||||
Hanil Cement Co. Ltd. | South Korea | 32,560 | 1,895,162 | ||||
| 3,811,461 | |||||||
Consumer Finance 0.1% | |||||||
b,eCerberus CG Investor I LLC | United States | 2,161,828 | 410,747 | ||||
b,eCerberus CG Investor II LLC | United States | 2,161,828 | 410,747 | ||||
b,eCerberus CG Investor III LLC | United States | 1,080,914 | 205,374 | ||||
b,eCerberus FIM Investors Holdco LLC | United States | 2,077,368 | 151,233 | ||||
| 1,178,101 | |||||||
Diversified Banks 0.2% | |||||||
b,e,hThe Bankshares Inc. | United States | 800,000 | 3,043,095 | ||||
Diversified Financial Services 1.9% | |||||||
Deutsche Boerse AG | Germany | 251,827 | 19,525,591 | ||||
bFortis | Belgium | 1,276,120 | 4,349,423 | ||||
Guinness Peat Group PLC | United Kingdom | 2,811,171 | 1,233,171 | ||||
b,cMarconi Corp., Contingent Distribution | United Kingdom | 1,739,100 | — | ||||
| 25,108,185 | |||||||
Diversified Telecommunication Services 1.2% | |||||||
b,eAboveNet Inc. | United States | 18,411 | 1,490,923 | ||||
b,eAboveNet Inc., stock grant, grant price $20.95, expiration date 9/09/13 | United States | 23 | 1,381 | ||||
b,eAboveNet Inc., wts., 9/08/10 | United States | 739 | 42,492 | ||||
b,c,dGlobal Crossing Holdings Ltd., Contingent Distribution | United States | 2,236,777 | — | ||||
gKoninklijke (Royal) KPN NV | Netherlands | 1,064,800 | 14,634,694 | ||||
| 16,169,490 | |||||||
Electric Utilities 1.8% | |||||||
gE.ON AG | Germany | 654,500 | 23,161,184 | ||||
Energy Equipment & Services 3.8% | |||||||
iBourbon SA | France | 132,626 | 5,196,499 | ||||
bBW Offshore Ltd. | Norway | 3,825,934 | 4,757,959 | ||||
bCompagnie Generale de Geophysique SA | France | 345,440 | 6,206,627 | ||||
bDockwise Ltd. | Norway | 1,450,420 | 1,634,651 | ||||
b,eMPF Corp. Ltd. | Norway | 1,460,000 | — | ||||
bPetroleum Geo-Services ASA | Norway | 204,624 | 1,267,588 | ||||
bPride International Inc. | United States | 319,600 | 8,009,176 | ||||
Seadrill Ltd. | Bermuda | 941,356 | 13,433,518 | ||||
MGD-16
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Mutual Global Discovery Securities Fund | Country | Shares/ Warrants/ Contracts | Value | ||||
Common Stocks and Other Equity Interests (continued) | |||||||
Energy Equipment & Services (continued) | |||||||
bTransocean Ltd. | United States | 117,343 | $ | 8,717,411 | |||
| 49,223,429 | |||||||
Food & Staples Retailing 2.0% | |||||||
gCarrefour SA | France | 613,729 | 26,186,033 | ||||
Food Products 9.0% | |||||||
Cadbury PLC | United Kingdom | 1,390,193 | 11,848,495 | ||||
bCermaq ASA | Norway | 113,664 | 905,545 | ||||
CSM NV | Netherlands | 462,612 | 6,826,003 | ||||
gDanone | France | 721,986 | 35,625,295 | ||||
Farmer Brothers Co. | United States | 61,700 | 1,411,696 | ||||
bLighthouse Caledonia ASA | Norway | 161,457 | 7,028 | ||||
Lotte Confectionary Co. Ltd. | South Korea | 5,166 | 4,052,400 | ||||
b,iMarine Harvest | Norway | 20,520,644 | 13,780,594 | ||||
Nestle SA | Switzerland | 815,931 | 30,718,462 | ||||
Nong Shim Co. Ltd. | South Korea | 24,215 | 4,349,886 | ||||
bPremier Foods PLC | United Kingdom | 9,500,906 | 5,783,957 | ||||
Rieber & Son ASA | Norway | 400,605 | 2,646,662 | ||||
| 117,956,023 | |||||||
Health Care Providers & Services 0.8% | |||||||
bKindred Healthcare Inc. | United States | 69,953 | 865,319 | ||||
Rhoen-Klinikum AG | Germany | 456,430 | 10,076,571 | ||||
| 10,941,890 | |||||||
Hotels, Restaurants & Leisure 0.0%a | |||||||
bTrump Entertainment Resorts Inc. | United States | 30,704 | 5,220 | ||||
Independent Power Producers & Energy Traders 0.7% | |||||||
Constellation Energy Group | United States | 315,250 | 8,379,345 | ||||
bNRG Energy Inc. | United States | 981 | 25,467 | ||||
| 8,404,812 | |||||||
Industrial Conglomerates 3.9% | |||||||
Jardine Matheson Holdings Ltd. | Hong Kong | 398,522 | 10,927,473 | ||||
Jardine Strategic Holdings Ltd. | Hong Kong | 1,157,650 | 17,063,761 | ||||
Keppel Corp. Ltd. | Singapore | 1,865,494 | 8,885,145 | ||||
fOrkla ASA | Norway | 2,009,757 | 14,589,944 | ||||
| 51,466,323 | |||||||
Insurance 3.6% | |||||||
ACE Ltd. | United States | 71,880 | 3,179,252 | ||||
bAlleghany Corp. | United States | 4,067 | 1,102,157 | ||||
bBerkshire Hathaway Inc., A | United States | 45 | 4,050,000 | ||||
bBerkshire Hathaway Inc., B | United States | 9,527 | 27,587,620 | ||||
E-L Financial Corp. Ltd. | Canada | 8,478 | 2,737,499 | ||||
b,eImagine Group Holdings Ltd. | Bermuda | 451,787 | 4,115,644 | ||||
Old Republic International Corp. | United States | 132,325 | 1,303,401 | ||||
b,eOlympus Re Holdings Ltd. | United States | 2,140 | 4,677 | ||||
White Mountains Insurance Group Ltd. | United States | 9,496 | 2,173,729 | ||||
| 46,253,979 | |||||||
MGD-17
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Mutual Global Discovery Securities Fund | Country | Shares/ Warrants/ Contracts | Value | ||||
Common Stocks and Other Equity Interests (continued) | |||||||
Machinery 1.5% | |||||||
b,e,fMotor Coach Industries International Inc. | United States | 383 | $ | 498,092 | |||
Schindler Holding AG, PC | Switzerland | 266,386 | 16,531,176 | ||||
Schindler Holding AG, Registered | Switzerland | 42,060 | 2,606,257 | ||||
| 19,635,525 | |||||||
Media 2.6% | |||||||
bAdelphia Recovery Trust | United States | 5,379,562 | 134,489 | ||||
b,cAdelphia Recovery Trust, Arahova Contingent Value Vehicle, Contingent Distribution | United States | 386,774 | 73,487 | ||||
b,cCentury Communications Corp., Contingent Distribution | United States | 1,074,000 | — | ||||
CJ CGV Co. Ltd. | South Korea | 92,310 | 1,564,085 | ||||
Daekyo Co. Ltd. | South Korea | 374,300 | 1,523,860 | ||||
Eutelsat Communications | France | 989,249 | 25,509,569 | ||||
bJC Decaux SA | France | 86,520 | 1,373,109 | ||||
b,dTVMAX Holdings Inc. | United States | 8,935 | — | ||||
Virgin Media Inc. | United Kingdom | 420,638 | 3,932,965 | ||||
| 34,111,564 | |||||||
Multi-Utilities 1.5% | |||||||
gGDF Suez | France | 205,963 | 7,666,974 | ||||
b,cNorthWestern Corp., Contingent Distribution | United States | 550,000 | — | ||||
gRWE AG | Germany | 149,000 | 11,765,991 | ||||
Suez Environnement SA | France | 11,316 | 197,525 | ||||
| 19,630,490 | |||||||
Multiline Retail 0.3% | |||||||
Jelmoli Holding AG | Switzerland | 11,425 | 4,141,549 | ||||
Oil, Gas & Consumable Fuels 1.8% | |||||||
gBP PLC | United Kingdom | 1,561,423 | 12,275,100 | ||||
BP PLC, ADR | United Kingdom | 9,000 | 429,120 | ||||
gRoyal Dutch Shell PLC, A | United Kingdom | 283,000 | 7,065,458 | ||||
Total SA, B | France | 49,296 | 2,660,606 | ||||
Total SA, B, ADR | France | 19,340 | 1,048,808 | ||||
| 23,479,092 | |||||||
Paper & Forest Products 0.3% | |||||||
Weyerhaeuser Co. | United States | 121,910 | 3,709,721 | ||||
Personal Products 0.4% | |||||||
L’Oreal SA | France | 60,350 | 4,509,564 | ||||
Pharmaceuticals 7.0% | |||||||
Novartis AG | Switzerland | 74,005 | 2,998,602 | ||||
Schering-Plough Corp. | United States | 1,801,350 | 45,249,912 | ||||
Wyeth | United States | 958,890 | 43,524,017 | ||||
| 91,772,531 | |||||||
Professional Services 0.5% | |||||||
Teleperformance | France | 216,676 | 6,585,725 | ||||
Real Estate Investment Trusts (REITs) 1.8% | |||||||
Link REIT | Hong Kong | 10,505,000 | 22,419,992 | ||||
Ventas Inc. | United States | 33,500 | 1,000,310 | ||||
| 23,420,302 | |||||||
MGD-18
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Mutual Global Discovery Securities Fund | Country | Shares/ Warrants/ Contracts | Value | ||||
Common Stocks and Other Equity Interests (continued) | |||||||
Real Estate Management & Development 1.4% | |||||||
b,dCanary Wharf Group PLC | United Kingdom | 185,900 | $ | 535,274 | |||
Great Eagle Holdings Ltd. | Hong Kong | 1,613,524 | 3,385,321 | ||||
Swire Pacific Ltd., A | Hong Kong | 950,615 | 9,592,136 | ||||
Swire Pacific Ltd., B | Hong Kong | 2,440,700 | 4,673,607 | ||||
| 18,186,338 | |||||||
Software 1.1% | |||||||
Microsoft Corp. | United States | 577,880 | 13,736,208 | ||||
Tobacco 15.5% | |||||||
Altria Group Inc. | United States | 604,821 | 9,913,016 | ||||
gBritish American Tobacco PLC | United Kingdom | 2,165,988 | 59,622,516 | ||||
gImperial Tobacco Group PLC | United Kingdom | 1,612,985 | 41,878,936 | ||||
ITC Ltd. | India | 1,453,259 | 5,796,297 | ||||
Japan Tobacco Inc. | Japan | 7,606 | 23,837,817 | ||||
KT&G Corp. | South Korea | 201,576 | 11,384,901 | ||||
gLorillard Inc. | United States | 432,290 | 29,296,293 | ||||
Philip Morris International Inc. | United States | 204,981 | 8,941,271 | ||||
Reynolds American Inc. | United States | 314,950 | 12,163,369 | ||||
| 202,834,416 | |||||||
Trading Companies & Distributors 0.5% | |||||||
bKloeckner & Co. SE | Germany | 327,096 | 6,950,591 | ||||
Transportation Infrastructure 0.0%a | |||||||
bGroupe Eurotunnel SA | France | 390 | 2,210 | ||||
bGroupe Eurotunnel SA, wts., 12/30/11 | France | 11,181 | 1,772 | ||||
| 3,982 | |||||||
Total Common Stocks and Other Equity Interests | 1,014,662,765 | ||||||
Preferred Stocks 0.2% | |||||||
Diversified Telecommunication Services 0.0%a | |||||||
b,ePTV Inc., 10.00%, pfd., A | United Kingdom | 4,289 | 1,029 | ||||
Machinery 0.2% | |||||||
b,e,fMotor Coach Industries International Inc., pfd. | United States | 2,745 | 2,745,000 | ||||
Total Preferred Stocks (Cost $2,747,702) | 2,746,029 | ||||||
| Principal Amountj | |||||||
Corporate Bonds & Notes 4.1% | |||||||
American General Finance Corp., | United States | 95,000 | 54,554 | ||||
senior note, J, 6.90%, 12/15/17 | United States | 1,340,000 | 726,541 | ||||
kBP Capital Markets PLC, FRN, 1.614%, 3/17/11 | United Kingdom | 9,894,000 | 10,016,488 | ||||
kCalpine Corp., Exit Term Loan, FRN, 4.095%, 3/29/14 | United States | 4,464,724 | 3,963,684 | ||||
e,lCerberus CG Investor I LLC, 12.00%, 7/31/14 | United States | 1,897,400 | 360,506 | ||||
e,lCerberus CG Investor II LLC, 12.00%, 7/31/14 | United States | 1,897,400 | 360,506 | ||||
e,lCerberus CG Investor III LLC, 12.00%, 7/31/14 | United States | 948,700 | 180,253 | ||||
e,lCerberus FIM Investors Holdco LLC, 12.00%, 11/22/13 | United States | 6,148,028 | 447,275 | ||||
MGD-19
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Mutual Global Discovery Securities Fund | Country | Principal Amountj | Value | |||||
Corporate Bonds & Notes (continued) | ||||||||
ConocoPhillips, senior note, 8.75%, 5/25/10 | United States | 796,000 | $ | 849,831 | ||||
DecisionOne Corp., | ||||||||
esenior secured note, 15.00%, 11/30/13 | United States | 28,521 | 31,843 | |||||
dTerm Loan B, 15.00%, 8/29/13 | United States | 5,008 | 5,591 | |||||
Groupe Eurotunnel SA, cvt., sub. bond, NRS I, | France | 500 | EUR | 561 | ||||
T2, 3.00%, 7/28/09 | France | 682 | GBP | 1,178 | ||||
T3, 3.00%, 7/28/10 | France | 394,500 | EUR | 442,661 | ||||
T3, 3.00%, 7/28/10 | France | 267,617 | GBP | 462,340 | ||||
d,f,kInternational Automotive Components Group NA Inc., Revolver, FRN, | United States | 268,430 | 268,430 | |||||
e,f,lInternational Automotive Components Group NA LLC, 9.00%, 4/01/17 | United States | 407,500 | 184,896 | |||||
kJP Morgan Chase & Co., senior note, C, FRN, 0.734%, 12/21/11 | United States | 3,129,000 | 3,031,460 | |||||
e,f,k,mPontus I LLC, junior note, 144A, FRN, 4.856%, 7/24/09 | United States | 5,485,436 | 5,263,567 | |||||
e,f,k,mPontus II Trust, junior profit-participating note, 144A, FRN, 7.66%, 6/25/09 | United States | 869,935 | 1,515,496 | |||||
k,nRoche Holdings Inc., 144A, FRN, 1.661%, 2/25/10 | Switzerland | 9,322,000 | 9,329,271 | |||||
Seadrill Ltd., cvt., senior note, 3.625%, 11/08/12 | Bermuda | 1,400,000 | 1,100,400 | |||||
Telecom Italia Capital, | Italy | 2,309,000 | 2,334,831 | |||||
senior note, 4.00%, 1/15/10 | Italy | 4,389,000 | 4,410,796 | |||||
d,oTVMAX Holdings Inc., PIK, | United States | 33,039 | 9,278 | |||||
14.00%, 9/30/09 | United States | 64,011 | 17,290 | |||||
Vodafone Group PLC, senior note, 7.75%, 2/15/10 | United Kingdom | 7,253,000 | 7,499,718 | |||||
Total Corporate Bonds & Notes (Cost $65,969,067) | 52,869,245 | |||||||
Corporate Bonds & Notes in Reorganization 0.0%a | ||||||||
k,lCharter Communications Operating LLC, Term Loan B, FRN, 6.25%, 3/06/14 | United States | 449,415 | 407,563 | |||||
d,lSafety Kleen Services, senior sub. note, 9.25%, 6/01/08 | United States | 3,000 | 15 | |||||
lTrump Entertainment Resorts Inc., 8.50%, 6/01/15 | United States | 1,460,337 | 188,019 | |||||
Total Corporate Bonds & Notes in Reorganization | 595,597 | |||||||
Total Investments before Short Term Investments | 1,070,873,636 | |||||||
Short Term Investments 21.8% | ||||||||
U.S. Government and Agency Securities 21.6% | ||||||||
pU.S. Treasury Bills, | United States | 18,000,000 | 17,999,982 | |||||
7/09/09 | United States | 20,000,000 | 19,999,620 | |||||
7/16/09 | United States | 20,000,000 | 19,999,200 | |||||
7/23/09 | United States | 20,000,000 | 19,998,660 | |||||
7/30/09 | United States | 20,000,000 | 19,997,560 | |||||
8/06/09 | United States | 20,000,000 | 19,997,100 | |||||
8/13/09 | United States | 20,000,000 | 19,996,540 | |||||
q8/20/09 | United States | 20,000,000 | 19,995,920 | |||||
q9/03/09 - 12/24/09 | United States | 104,000,000 | 103,906,372 | |||||
q10/15/09 | United States | 20,000,000 | 19,989,400 | |||||
Total U.S. Government and Agency Securities (Cost $281,814,543) | 281,880,354 | |||||||
Total Investments before Money Market Funds (Cost $1,363,234,017) | 1,352,753,990 | |||||||
MGD-20
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Mutual Global Discovery Securities Fund | Country | Shares | Value | |||||
rInvestments from Cash Collateral Received for Loaned Securities 0.2% | ||||||||
Money Market Funds (Cost $2,022,953) 0.2% | ||||||||
sBank of New York Institutional Cash Reserve Fund, 0.12% | United States | 2,022,953 | $ | 2,002,724 | ||||
Total Investments (Cost $1,365,256,970) 103.8% | 1,354,756,714 | |||||||
Options Written (1.1)% | (13,919,534 | ) | ||||||
Securities Sold Short (3.3)% | (43,215,245 | ) | ||||||
Other Assets, less Liabilities 0.6% | 7,497,996 | |||||||
Net Assets 100.0% | $ | 1,305,119,931 | ||||||
| Contracts | ||||||||
tOptions Written 1.1% | ||||||||
Call Options 1.1% | ||||||||
Beverages 0.1% | ||||||||
Pernod Ricard SA, Sep. 37.73 Calls, 9/18/09 | France | 106,000 | $ | 1,163,422 | ||||
Diversified Telecommunication Services 0.0%a | ||||||||
Koninklijke (Royal) KPN NV, Sep. 10 Calls, 9/18/09 | Netherlands | 215,000 | 75,390 | |||||
Electric Utilities 0.2% | ||||||||
E.ON AG, Sep. 19 Calls, 9/18/09 | Germany | 358,000 | 3,213,637 | |||||
Food & Staples Retailing 0.2% | ||||||||
Carrefour SA, Sep. 22 Calls, 9/18/09 | France | 165,000 | 1,997,232 | |||||
Food Products 0.1% | ||||||||
Danone, Sep. 32.08 Calls, 9/18/09 | France | 126,000 | 703,376 | |||||
Multi-Utilities 0.2% | ||||||||
GDF Suez, Sep. 23.30 Calls, 9/18/09 | France | 145,000 | 833,724 | |||||
RWE AG, Sep. 48 Calls, 9/18/09 | Germany | 149,000 | 1,828,640 | |||||
| 2,662,364 | ||||||||
Oil, Gas & Consumable Fuels 0.1% | ||||||||
BP PLC, Sep. 4.40 Calls, 9/18/09 | United Kingdom | 938,000 | 721,511 | |||||
Royal Dutch Shell PLC, Sep. 16 Calls, 9/18/09 | United Kingdom | 283,000 | 813,718 | |||||
| 1,535,229 | ||||||||
Tobacco 0.2% | ||||||||
British American Tobacco PLC, Sep. 15 Calls, 9/18/09 | United Kingdom | 370,000 | 1,129,286 | |||||
Imperial Tobacco Group PLC, Sep. 16 Calls, 9/18/09 | United Kingdom | 195,000 | 208,548 | |||||
Lorillard Inc., Sep. 60 Calls, 9/19/09 | United States | 1,415 | 1,231,050 | |||||
| 2,568,884 | ||||||||
Total Options Written (Premiums received $7,520,571) | $ | 13,919,534 | ||||||
| Shares | ||||||||
uSecurities Sold Short 3.3% | ||||||||
Pharmaceuticals 3.3% | ||||||||
Merck & Co. Inc. | United States | 1,038,836 | $ | 29,045,855 | ||||
Pfizer Inc. | United States | 944,626 | 14,169,390 | |||||
Total Securities Sold Short (Proceeds $38,371,817) | $ | 43,215,245 | ||||||
MGD-21
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Mutual Global Discovery Securities Fund |
aRounds to less than 0.1% of net assets.
bNon-income producing.
cContingent distributions represent the right to receive additional distributions, if any, during the reorganization of the underlying company. Shares represent total underlying principal of debt securities.
dSecurity has been deemed illiquid because it may not be able to be sold within seven days. At June 30, 2009, the aggregate value of these securities was $838,065, representing 0.06% of net assets.
eSee Note 9 regarding restricted securities.
fSee Note 13 regarding other considerations.
gA portion or all of the security is held in connection with written option contracts open at period end.
hSee Note 12 regarding holdings of 5% voting securities.
iA portion or all of the security is on loan at June 30, 2009. See Note 1(g).
jThe principal amount is stated in U.S. dollars unless otherwise indicated.
kThe coupon rate shown represents the rate at period end.
lSee Note 7 regarding credit risk and defaulted securities.
mSee Note 1(f) regarding special purpose entities.
nSecurity was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be sold in transactions exempt from registration only to qualified institutional buyers or in a public offering registered under the Securities Act of 1933. This security has been deemed liquid under guidelines approved by the Trust’s Board of Trustees. At June 30, 2009, the value of this security was $9,329,271, representing 0.71% of net assets.
oIncome may be received in additional securities and/or cash.
pThe security is traded on a discount basis with no stated coupon rate.
qSecurity or a portion of the security has been segregated as collateral for securities sold short and open option contracts. At June 30, 2009, the value of securities and/or cash pledged amounted to $70,900,518.
rSee Note 1(g) regarding securities on loan.
sThe rate shown is the annualized seven-day yield at period end.
tSee Note 1(c) regarding written options.
uSee Note 1(e) regarding securities sold short.
The accompanying notes are an integral part of these financial statements.
MGD-22
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Mutual Global Discovery Securities Fund |
At June 30, 2009, the Fund had the following forward exchange contracts outstanding. See Note 1(c).
| Currency | Counterparty | Type | Quantity | Contract Amount | Settlement Date | Unrealized Appreciation | Unrealized Depreciation | |||||||||||
South Korean Won | BANT | Sell | 30,747,092,190 | $ | 23,198,000 | 7/08/09 | $ | — | $ | (933,265 | ) | |||||||
South Korean Won | BBU | Sell | 4,372,500,000 | 3,300,000 | 7/08/09 | — | (131,673 | ) | ||||||||||
South Korean Won | BANT | Buy | 5,538,000,000 | 4,419,108 | 7/08/09 | — | (72,715 | ) | ||||||||||
British Pound | SSBT | Sell | 23,976,026 | 35,091,779 | 7/13/09 | — | (4,356,569 | ) | ||||||||||
British Pound | BANT | Sell | 3,847,383 | 5,926,821 | 7/13/09 | — | (404,766 | ) | ||||||||||
British Pound | HSBC | Sell | 1,510,000 | 2,304,903 | 7/13/09 | — | (179,537 | ) | ||||||||||
British Pound | BBU | Sell | 450,000 | 680,603 | 7/13/09 | — | (59,794 | ) | ||||||||||
British Pound | DBFX | Sell | 410,000 | 658,481 | 7/13/09 | — | (16,103 | ) | ||||||||||
British Pound | BANT | Buy | 195,000 | 280,771 | 7/13/09 | 40,068 | — | |||||||||||
British Pound | SSBT | Buy | 530,000 | 752,165 | 7/13/09 | 119,857 | — | |||||||||||
British Pound | HSBC | Buy | 1,000,000 | 1,429,000 | 7/13/09 | 216,325 | — | |||||||||||
Euro | SSBT | Sell | 15,046,919 | 19,678,449 | 7/27/09 | — | (1,426,713 | ) | ||||||||||
Euro | DBFX | Sell | 3,410,000 | 4,672,100 | 7/27/09 | — | (110,846 | ) | ||||||||||
Euro | HSBC | Sell | 1,540,000 | 2,105,099 | 7/27/09 | — | (54,942 | ) | ||||||||||
Euro | BANT | Sell | 390,000 | 537,986 | 7/27/09 | — | (9,038 | ) | ||||||||||
Swiss Franc | SSBT | Sell | 25,072,480 | 21,630,470 | 8/10/09 | — | (1,450,021 | ) | ||||||||||
Swiss Franc | HSBC | Sell | 17,538,507 | 15,080,402 | 8/10/09 | — | (1,064,685 | ) | ||||||||||
Swiss Franc | BANT | Sell | 8,832,126 | 7,799,771 | 8/10/09 | — | (345,325 | ) | ||||||||||
Swiss Franc | HAND | Sell | 656,647 | 590,001 | 8/10/09 | — | (14,476 | ) | ||||||||||
Swiss Franc | BBU | Sell | 564,993 | 510,000 | 8/10/09 | — | (10,105 | ) | ||||||||||
Swiss Franc | DBFX | Sell | 1,106,037 | 1,020,000 | 8/10/09 | 1,837 | — | |||||||||||
British Pound | BBU | Sell | 1,900,064 | 2,860,841 | 8/12/09 | — | (265,241 | ) | ||||||||||
British Pound | DBFX | Sell | 4,381,938 | 7,132,919 | 8/12/09 | — | (76,468 | ) | ||||||||||
Euro | BANT | Sell | 10,042,141 | 13,129,531 | 8/13/09 | — | (963,415 | ) | ||||||||||
Euro | BBU | Sell | 4,200,000 | 5,607,924 | 8/13/09 | — | (282,882 | ) | ||||||||||
Euro | SSBT | Sell | 6,518,846 | 9,008,991 | 8/13/09 | — | (134,167 | ) | ||||||||||
Norwegian Krone | HAND | Sell | 162,252,365 | 24,926,013 | 8/19/09 | — | (262,874 | ) | ||||||||||
Norwegian Krone | HAND | Buy | 1,444,058 | 220,000 | 8/19/09 | 4,183 | — | |||||||||||
Norwegian Krone | BBU | Sell | 4,054,878 | 630,000 | 8/19/09 | 500 | — | |||||||||||
Norwegian Krone | DBFX | Sell | 5,930,234 | 940,000 | 8/19/09 | 19,360 | — | |||||||||||
Canadian Dollar | SSBT | Sell | 3,558,415 | 2,869,689 | 8/31/09 | — | (191,293 | ) | ||||||||||
Euro | SSBT | Sell | 19,632,747 | 26,018,227 | 8/31/09 | — | (1,516,663 | ) | ||||||||||
Euro | BANT | Sell | 12,468,761 | 16,409,938 | 8/31/09 | — | (1,077,475 | ) | ||||||||||
Euro | HSBC | Sell | 3,490,000 | 4,703,916 | 8/31/09 | — | (190,802 | ) | ||||||||||
Euro | BBU | Sell | 2,950,000 | 4,040,058 | 8/31/09 | — | (97,312 | ) | ||||||||||
Euro | DBFX | Sell | 480,000 | 686,664 | 8/31/09 | 13,465 | — | |||||||||||
British Pound | SSBT | Sell | 43,400,000 | 61,209,624 | 9/10/09 | — | (10,189,793 | ) | ||||||||||
New Zealand Dollar | BANT | Sell | 2,777,445 | 1,470,441 | 9/10/09 | — | (312,977 | ) | ||||||||||
New Zealand Dollar | SSBT | Sell | 149,500 | 84,056 | 9/10/09 | — | (11,939 | ) | ||||||||||
New Zealand Dollar | HSBC | Sell | 130,000 | 78,620 | 9/10/09 | — | (4,854 | ) | ||||||||||
New Zealand Dollar | BANT | Buy | 752,000 | 388,890 | 9/10/09 | 93,975 | — | |||||||||||
New Zealand Dollar | SSBT | Buy | 450,000 | 223,963 | 9/10/09 | 64,986 | — | |||||||||||
British Pound | BBU | Sell | 2,575,451 | 3,819,393 | 9/14/09 | — | (417,562 | ) | ||||||||||
British Pound | BANT | Sell | 750,000 | 1,079,385 | 9/14/09 | — | (154,464 | ) | ||||||||||
British Pound | SSBT | Sell | 610,000 | 906,750 | 9/14/09 | — | (96,780 | ) | ||||||||||
Euro | BANT | Sell | 35,360,000 | 45,210,648 | 9/14/09 | — | (4,378,202 | ) | ||||||||||
Euro | SSBT | Sell | 20,032,725 | 25,640,294 | 9/14/09 | — | (2,453,591 | ) | ||||||||||
Euro | BBU | Sell | 5,000,000 | 6,804,675 | 9/14/09 | — | (207,323 | ) | ||||||||||
Euro | BANT | Buy | 2,280,000 | 3,143,276 | 9/14/09 | 54,195 | — | |||||||||||
Euro | AESX | Buy | 570,000 | 785,038 | 9/14/09 | 14,330 | — | |||||||||||
Euro | BBU | Buy | 2,850,000 | 3,926,089 | 9/14/09 | 70,750 | — | |||||||||||
MGD-23
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Mutual Global Discovery Securities Fund |
| Currency | Counterparty | Type | Quantity | Contract Amount | Settlement Date | Unrealized Appreciation | Unrealized Depreciation | |||||||||||
Australian Dollar | HSBC | Sell | 619,471 | $ | 476,770 | 9/17/09 | $ | — | $ | (19,071 | ) | |||||||
Australian Dollar | SSBT | Sell | 1,360,991 | 1,080,498 | 9/17/09 | — | (8,875 | ) | ||||||||||
Australian Dollar | BANT | Sell | 573,101 | 452,996 | 9/17/09 | — | (5,951 | ) | ||||||||||
Australian Dollar | SSBT | Buy | 10,200 | 8,118 | 9/17/09 | 46 | — | |||||||||||
Singapore Dollar | SSBT | Sell | 6,944,576 | 4,580,740 | 9/24/09 | — | (210,484 | ) | ||||||||||
Singapore Dollar | BANT | Sell | 2,494,316 | 1,673,416 | 9/24/09 | — | (47,471 | ) | ||||||||||
Singapore Dollar | HSBC | Sell | 1,069,479 | 724,569 | 9/24/09 | — | (13,289 | ) | ||||||||||
Singapore Dollar | SSBT | Buy | 391,754 | 267,263 | 9/24/09 | 3,017 | — | |||||||||||
Singapore Dollar | BBU | Sell | 646,988 | 450,000 | 9/24/09 | 3,628 | — | |||||||||||
Euro | BBU | Sell | 5,000,000 | 6,803,600 | 10/13/09 | — | (207,806 | ) | ||||||||||
Japanese Yen | SSBT | Sell | 1,582,122,135 | 16,013,382 | 10/20/09 | — | (429,823 | ) | ||||||||||
Japanese Yen | BBU | Sell | 67,284,660 | 690,000 | 10/20/09 | — | (9,298 | ) | ||||||||||
Japanese Yen | HSBC | Sell | 130,134,720 | 1,350,000 | 10/20/09 | — | (2,507 | ) | ||||||||||
Japanese Yen | SSBT | Buy | 118,000,000 | 1,198,651 | 10/20/09 | 27,739 | — | |||||||||||
Japanese Yen | BANT | Buy | 35,166,300 | 355,000 | 10/20/09 | 10,488 | — | |||||||||||
Japanese Yen | BANT | Sell | 30,571,200 | 320,000 | 10/20/09 | 2,269 | — | |||||||||||
Japanese Yen | DBFX | Sell | 65,367,150 | 690,000 | 10/20/09 | 10,631 | — | |||||||||||
Japanese Yen | AESX | Sell | 129,520,492 | 1,350,000 | 10/20/09 | 3,876 | — | |||||||||||
Danish Krone | HAND | Sell | 121,071,367 | 21,091,209 | 10/23/09 | — | (1,672,884 | ) | ||||||||||
Danish Krone | BANT | Sell | 23,357,056 | 4,137,165 | 10/23/09 | — | (254,477 | ) | ||||||||||
Danish Krone | SSBT | Sell | 6,725,824 | 1,153,291 | 10/23/09 | — | (111,313 | ) | ||||||||||
Danish Krone | BBU | Sell | 10,137,478 | 1,850,000 | 10/23/09 | — | (56,070 | ) | ||||||||||
Danish Krone | BBU | Buy | 3,226,290 | 610,000 | 10/23/09 | — | (3,386 | ) | ||||||||||
Danish Krone | HAND | Buy | 11,743,514 | 2,061,440 | 10/23/09 | 146,601 | — | |||||||||||
Euro | BANT | Sell | 8,006,467 | 10,312,330 | 11/13/09 | — | (914,659 | ) | ||||||||||
Euro | SSBT | Sell | 12,302,616 | 16,677,501 | 11/13/09 | — | (573,719 | ) | ||||||||||
Euro | HSBC | Sell | 1,160,000 | 1,550,920 | 11/13/09 | — | (75,679 | ) | ||||||||||
Euro | BBU | Sell | 17,000,000 | 23,623,200 | 11/30/09 | — | (214,494 | ) | ||||||||||
Euro | BONY | Sell | 4,181,893 | 5,804,885 | 11/30/09 | — | (59,038 | ) | ||||||||||
Unrealized appreciation (depreciation) | 922,126 | (38,816,944 | ) | |||||||||||||||
Net unrealized appreciation (depreciation) | $ | (37,894,818 | ) | |||||||||||||||
See Abbreviations on page MGD-40.
MGD-24
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements
Statement of Assets and Liabilities
June 30, 2009 (unaudited)
| Mutual Global Discovery Securities Fund | ||||
Assets: | ||||
Investments in securities: | ||||
Cost - Unaffiliated issuers | $ | 1,357,256,970 | ||
Cost - Non-controlled affiliated issuers (Note 12) | 8,000,000 | |||
Total cost of investments | $ | 1,365,256,970 | ||
Value - Unaffiliated issuers | $ | 1,351,713,619 | ||
Value - Non-controlled affiliated issuers (Note 12) | 3,043,095 | |||
Total value of investments (includes securities loaned in the amount of and $1,921,355) | 1,354,756,714 | |||
Cash | 257,455 | |||
Cash on deposit with brokers | 42,278,940 | |||
Foreign currency, at value (cost $15,162,336) | 15,228,814 | |||
Receivables: | ||||
Investment securities sold | 2,639,560 | |||
Capital shares sold | 331,633 | |||
Dividends and interest | 3,822,664 | |||
Unrealized appreciation on forward exchange contracts | 922,126 | |||
Other assets | 1,743 | |||
Total assets | 1,420,239,649 | |||
Liabilities: | ||||
Payables: | ||||
Investment securities purchased | 14,765,720 | |||
Capital shares redeemed | 504,171 | |||
Affiliates | 1,495,321 | |||
Options written, at value (premiums received $7,520,571) | 13,919,534 | |||
Securities sold short, at value (proceeds $38,371,817) | 43,215,245 | |||
Payable upon return of securities loaned | 2,022,953 | |||
Unrealized depreciation on forward exchange contracts | 38,816,944 | |||
Accrued expenses and other liabilities | 379,830 | |||
Total liabilities | 115,119,718 | |||
Net assets, at value | $ | 1,305,119,931 | ||
Net assets consist of: | ||||
Paid-in capital | $ | 1,297,573,716 | ||
Undistributed net investment income | 24,806,883 | |||
Net unrealized appreciation (depreciation) | (59,506,933 | ) | ||
Accumulated net realized gain (loss) | 42,246,265 | |||
Net assets, at value | $ | 1,305,119,931 | ||
The accompanying notes are an integral part of these financial statements.
MGD-25
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Assets and Liabilities (continued)
June 30, 2009 (unaudited)
| Mutual Global Discovery Securities Fund | |||
Class 1: | |||
Net assets, at value | $ | 80,456,880 | |
Shares outstanding | 4,595,668 | ||
Net asset value and maximum offering price per share | $ | 17.51 | |
Class 2: | |||
Net assets, at value | $ | 1,180,901,920 | |
Shares outstanding | 68,689,388 | ||
Net asset value and maximum offering price per share | $ | 17.19 | |
Class 4: | |||
Net assets, at value | $ | 43,761,131 | |
Shares outstanding | 2,511,157 | ||
Net asset value and maximum offering price per share | $ | 17.43 | |
The accompanying notes are an integral part of these financial statements.
MGD-26
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Operations
for the six months ended June 30, 2009 (unaudited)
| Mutual Global Discovery Securities Fund | ||||
Investment income: | ||||
Dividends (net of foreign taxes withheld of $1,585,841) | $ | 17,518,548 | ||
Interest | 2,265,964 | |||
Reserve for uncollectible interest (Note 7) | (2,475,271 | ) | ||
Income from securities loaned | 13,470 | |||
Total investment income | 17,322,711 | |||
Expenses: | ||||
Management fees (Note 3a) | 4,827,074 | |||
Administrative fees (Note 3b) | 735,925 | |||
Distribution fees: (Note 3c) | ||||
Class 2 | 1,371,729 | |||
Class 4 | 56,216 | |||
Unaffiliated transfer agent fees | 552 | |||
Custodian fees (Note 4) | 104,531 | |||
Reports to shareholders | 150,152 | |||
Registration and filing fees | 2,226 | |||
Professional fees | 88,012 | |||
Trustees’ fees and expenses | 4,665 | |||
Dividends on securities sold short | 556,114 | |||
Other | 43,660 | |||
Total expenses | 7,940,856 | |||
Expense reductions (Note 4) | (45,723 | ) | ||
Net expenses | 7,895,133 | |||
Net investment income | 9,427,578 | |||
Realized and unrealized gains (losses): | ||||
Net realized gain (loss) from: | ||||
Investments | (2,726,485 | ) | ||
Written options | 3,745,878 | |||
Foreign currency transactions | 35,750,221 | |||
Securities sold short | (803,905 | ) | ||
Net realized gain (loss) | 35,965,709 | |||
Net change in unrealized appreciation (depreciation) on: | ||||
Investments | 110,456,000 | |||
Translation of other assets and liabilities denominated in foreign currencies | (55,395,085 | ) | ||
Net change in unrealized appreciation (depreciation) | 55,060,915 | |||
Net realized and unrealized gain (loss) | 91,026,624 | |||
Net increase (decrease) in net assets resulting from operations | $ | 100,454,202 | ||
The accompanying notes are an integral part of these financial statements.
MGD-27
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statements of Changes in Net Assets
| Mutual Global Discovery Securities Fund | ||||||||
| Six Months Ended June 30, 2009 (unaudited) | Year Ended | |||||||
Increase (decrease) in net assets: | ||||||||
Operations: | ||||||||
Net investment income | $ | 9,427,578 | $ | 26,038,671 | ||||
Net realized gain (loss) from investments, written options, securities sold short, and foreign currency transactions | 35,965,709 | (12,964 | ) | |||||
Net change in unrealized appreciation (depreciation) on investments and translation of other assets and liabilities denominated in foreign currencies | 55,060,915 | (568,610,877 | ) | |||||
Net increase (decrease) in net assets resulting from operations | 100,454,202 | (542,585,170 | ) | |||||
Distributions to shareholders from: | ||||||||
Net investment income: | ||||||||
Class 1 | — | (2,657,059 | ) | |||||
Class 2 | — | (34,278,128 | ) | |||||
Class 4 | — | (368,895 | ) | |||||
Net realized gains: | ||||||||
Class 1 | — | (4,424,672 | ) | |||||
Class 2 | — | (64,218,477 | ) | |||||
Class 4 | — | (614,304 | ) | |||||
Total distributions to shareholders | — | (106,561,535 | ) | |||||
Capital share transactions: (Note 2) | ||||||||
Class 1 | (7,180,617 | ) | (18,342,463 | ) | ||||
Class 2 | (23,734,923 | ) | (152,581,891 | ) | ||||
Class 4 | 16,559,327 | 28,857,728 | ||||||
Total capital share transactions | (14,356,213 | ) | (142,066,626 | ) | ||||
Net increase (decrease) in net assets | 86,097,989 | (791,213,331 | ) | |||||
Net assets: | ||||||||
Beginning of period | 1,219,021,942 | 2,010,235,273 | ||||||
End of period | $ | 1,305,119,931 | $ | 1,219,021,942 | ||||
Undistributed net investment income included in net assets: | ||||||||
End of period | $ | 24,806,883 | $ | 15,379,305 | ||||
The accompanying notes are an integral part of these financial statements.
MGD-28
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited)
Mutual Global Discovery Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Templeton Variable Insurance Products Trust (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end investment company, consisting of twenty-two separate funds. The Mutual Global Discovery Securities Fund (Fund) is included in this report. The financial statements of the remaining funds in the Trust are presented separately. Shares of the Fund are sold only to insurance company separate accounts to fund the benefits of variable life insurance policies or variable annuity contracts. At June 30, 2009, 55.05% of the Fund’s shares held through one insurance company. The Fund offers three classes of shares: Class 1, Class 2, and Class 4. Each class of shares differs by its distribution fees, voting rights on matters affecting a single class and its exchange privilege.
Effective May 1, 2009, the Mutual Discovery Securities Fund was renamed the Mutual Global Discovery Securities Fund.
The following summarizes the Fund’s significant accounting policies.
a. Security Valuation
Equity and other securities listed on a securities exchange or on the NASDAQ National Market System are valued at the last quoted sale price or the official closing price of the day, respectively. Over-the-counter securities and listed securities for which there is no reported sale are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. Certain equity securities are valued based upon fundamental characteristics or relationships to similar securities. Investments in non-registered money market funds are valued based on other significant observable inputs.
Corporate debt securities and government securities generally trade in the over-the-counter market rather than on a securities exchange. The Fund may utilize independent pricing services, quotations from bond dealers, and information with respect to bond and note transactions, to assist in determining a current market value for each security. The Fund’s pricing services may use valuation models or matrix pricing which considers information with respect to comparable bond and note transactions, quotations from bond dealers, or by reference to other securities that are considered comparable in such characteristics as rating, interest rate and maturity date, option adjusted spread models, prepayment projections, interest rate spreads and yield curves, to determine current value.
Foreign equity securities are valued as of the close of trading on the foreign stock exchange on which the security is primarily traded, or the NYSE, whichever is earlier. If no sale is reported at that time, the foreign equity security will be valued within the range of the most recent quoted bid and ask prices. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at the close of the NYSE on the day that the value of the security is determined.
The Fund has procedures to determine the fair value of individual securities and other assets for which market prices are not readily available or which may not be reliably priced. Methods for valuing these securities may include: fundamental analysis based upon the underlying investment book value, anticipated future cash flows, market changes in comparable or similar securities, matrix pricing, discounts from market prices of similar securities, or discounts applied due to the nature and duration of restrictions on the disposition of the securities. Due to the inherent uncertainty of valuations of such securities, the fair values may differ significantly from the values that would have been used had a ready market for such investments existed. Occasionally, events occur between the time at which trading in a security is completed and the close of the NYSE that might call into question the availability (including the reliability) of the value of a portfolio security held by the Fund. The investment manager monitors price movements following the close of trading in foreign stock markets through a series of country specific market proxies (such as baskets of American Depository Receipts, futures contracts and exchange traded funds). These price movements are measured against established trigger thresholds for each specific market proxy to assist in determining if an event has occurred. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services. All security valuation procedures are approved by the Fund’s Board of Trustees.
MGD-29
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Mutual Global Discovery Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
b. Foreign Currency Translation
Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. Purchases and sales of securities, income and expense items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. Occasionally, events may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the Fund’s Board of Trustees.
The Fund does not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments on the Statement of Operations.
Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period.
c. Derivative Financial Instruments
The Fund may invest in derivative financial instruments (derivatives) in order to manage risk or gain exposure to various other investments or markets. Derivatives are financial contracts based on an underlying or notional amount, require no initial investment or an initial net investment that is smaller than would normally be required to have a similar response to changes in market factors, and require or permit net settlement. Derivatives may contain various risks including the potential inability of the counterparty to fulfill their obligations under the terms of the contract, the potential for an illiquid secondary market, and the potential for market movements which may expose the Fund to gains or losses in excess of the amounts shown on the Statement of Assets and Liabilities.
Derivatives are marked to market daily based upon quotations from market makers or the Fund’s independent pricing services and the Fund’s net benefit or obligation under the contract, as measured by the fair market value of the contract, is included in net assets. Realized gain and loss and unrealized appreciation and depreciation on these contracts for the period are included in the Statement of Operations.
The Fund enters into forward exchange contracts in order to hedge against fluctuations in foreign exchange rates. A forward exchange contract is an agreement between the Fund and a counterparty to buy or sell a foreign currency for a specific exchange rate on a future date. Pursuant to the terms of the forward exchange contacts, cash or securities may be required to be deposited as collateral.
The Fund purchases or writes option contracts in order to manage equity price risk. An option is a contract entitling the holder to purchase or sell a specific amount of shares or units of a particular security, currency or index at a specified price. Options purchased are recorded as an asset while options written are recorded as a liability. Upon exercise of an option, the acquisition cost or sales proceeds of the security is adjusted by any premium paid or received. Upon expiration of an option, any premium paid or received is recorded as a realized loss or gain. Upon closing an option other than through expiration or exercise, the difference between the premium and the cost to close the position is recorded as a realized gain or loss.
See Note 11 regarding other derivative information.
MGD-30
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Mutual Global Discovery Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
d. Foreign Currency Contracts
The Fund enters into foreign exchange contracts in order to manage foreign exchange rate risk between the trade date and settlement date of securities transactions. A foreign exchange contract is an agreement between the Fund and a counterparty to buy or sell a foreign currency for a specific exchange rate on a future date.
e. Securities Sold Short
The Fund is engaged in selling securities short, which obligates the Fund to replace a borrowed security with the same security at current market value. The Fund incurs a loss if the price of the security increases between the date of the short sale and the date on which the Fund replaces the borrowed security. The Fund realizes a gain if the price of the security declines between those dates. Gains are limited to the price at which the Fund sold the security short, while losses are potentially unlimited in size.
The Fund is required to establish a margin account with the broker lending the security sold short. While the short sale is outstanding, the broker retains the proceeds of the short sale and the Fund must maintain a deposit with broker consisting of cash and securities having a value equal to a specified percentage of the value of the securities sold short. The Fund is obligated to pay the counterparty any dividends or interest due on securities sold short. Such dividends and interest are recorded as an expense to the Fund.
f. Special Purpose Entities
At June 30, 2009, the Fund had contributed an additional $3,453,827 as a subordinated note holder of certain special purpose entities (“SPEs”). Such contributions, while made at the discretion of the Fund, represent additional capital contributions to the SPE in support of its underlying investments and are subject first to the claims of the senior note holders of the SPE. These contributions are recorded as an addition to the Fund’s cost basis in the SPE and are subject to the risk of loss in the event of continued unfavorable market conditions related to the SPE’s underlying investments.
g. Securities Lending
The Fund participates in an agency based security lending program. The Fund receives cash collateral against the loaned securities in an amount equal to at least 102% of the market value of the loaned securities. Collateral is maintained over the life of the loan in an amount not less than 100% of the market value of loaned securities, as determined at the close of Fund business each day; any additional collateral required due to changes in security values is delivered to the Fund on the next business day. The collateral is invested in a non-registered money market fund managed by the Fund’s custodian on the Fund’s behalf. The Fund receives income from the investment of cash collateral, in addition to lending fees and rebates paid by the borrower. The Fund bears the market risk with respect to the collateral investment, securities loaned, and the risk that the agent may default on its obligations to the Fund. The securities lending agent has agreed to indemnify the Fund in the event of default by a third party borrower.
h. Income Taxes
No provision has been made for U.S. income taxes because it is the Fund’s policy to qualify as a regulated investment company under the Internal Revenue Code and to distribute to shareholders substantially all of its taxable income and net realized gains.
The Fund has reviewed the tax positions, taken on federal income tax returns, for each of the three open tax years and as of June 30, 2009, and has determined that no provision for income tax is required in the Fund’s financial statements.
Foreign securities held by the Fund may be subject to foreign taxation on dividend and interest income received. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist in the foreign markets in which the Fund invests.
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Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Mutual Global Discovery Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
i. Security Transactions, Investment Income, Expenses and Distributions
Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Amortization of premium and accretion of discount on debt securities are included in interest income. Dividend income and dividends declared on securities sold short are recorded on the ex-dividend date except that certain dividends from foreign securities are recognized as soon as the Fund is notified of the ex-dividend date. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with accounting principles generally accepted in the United States of America. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods.
Common expenses incurred by the Trust are allocated among the funds based on the ratio of net assets of each fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense.
Realized and unrealized gains and losses and net investment income, not including class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions, by class, are generally due to differences in class specific expenses.
j. Accounting Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
k. Guarantees and Indemnifications
Under the Trust’s organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, on behalf of the Fund, enters into contracts with service providers that contain general indemnification clauses. The Trust’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote.
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Mutual Global Discovery Securities Fund
2. SHARES OF BENEFICIAL INTEREST
At June 30, 2009, there were an unlimited number of shares authorized (without par value). Transactions in the Fund’s shares were as follows:
| Six Months Ended June 30, 2009 | Year Ended December 31, 2008a | |||||||||||||
| Class 1 Shares: | Shares | Amount | Shares | Amount | ||||||||||
Shares sold | 38,933 | $ | 651,028 | 91,837 | $ | 2,015,607 | ||||||||
Shares issued in reinvestment of distributions | — | — | 365,038 | 7,081,731 | ||||||||||
Shares redeemed | (488,070 | ) | (7,831,645 | ) | (1,340,440 | ) | (27,439,801 | ) | ||||||
Net increase (decrease) | (449,137 | ) | $ | (7,180,617 | ) | (883,565 | ) | $ | (18,342,463 | ) | ||||
| Class 2 Shares: | ||||||||||||||
Shares sold | 3,280,854 | $ | 52,497,955 | 7,042,696 | $ | 147,206,623 | ||||||||
Shares issued in reinvestment of distributions | — | — | 5,159,592 | 98,496,605 | ||||||||||
Shares redeemed | (4,862,100 | ) | (76,232,878 | ) | (20,749,426 | ) | (398,285,119 | ) | ||||||
Net increase (decrease) | (1,581,246 | ) | $ | (23,734,923 | ) | (8,547,138 | ) | $ | (152,581,891 | ) | ||||
Class 4 Shares: |
| |||||||||||||
Shares sold | 1,062,925 | $ | 17,276,133 | 1,455,745 | $ | 28,125,030 | ||||||||
Shares issued on reinvestment of distributions | — | — | 50,743 | 982,892 | ||||||||||
Shares redeemed | (43,765 | ) | (716,806 | ) | (14,491 | ) | (250,194 | ) | ||||||
Net increase (decrease) | 1,019,160 | $ | 16,559,327 | 1,491,997 | $ | 28,857,728 | ||||||||
| aFor | the period February 29, 2008 (effective date) to December 31, 2008 for Class 4. |
3. TRANSACTIONS WITH AFFILIATES
Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Trust are also officers and/or directors of the following subsidiaries:
| Subsidiary | Affiliation | |
Franklin Mutual Advisers, LLC (Franklin Mutual) | Investment manager | |
Franklin Templeton Investment Management Limited (Investment Management) | Investment manager | |
Franklin Templeton Services, LLC (FT Services) | Administrative manager | |
Franklin Templeton Distributors, Inc. (Distributors) | Principal underwriter | |
Franklin Templeton Investor Services, LLC (Investor Services) | Transfer agent |
a. Management Fees
The Fund pays an investment management fee to Franklin Mutual based on the average daily net assets of the Fund as follows:
| Annualized Fee Rate | Net Assets | |
| 0.800% | Up to and including $4 billion | |
| 0.770% | Over $4 billion, up to and including $7 billion | |
| 0.750% | Over $7 billion, up to and including $10 billion | |
| 0.730% | In excess of $10 billion |
Under a subadvisory agreement, Investment Management, an affiliate of Franklin Mutual, provides subadvisory services to the Fund and receives from Franklin Mutual fees based on the average daily net assets of the Fund.
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Mutual Global Discovery Securities Fund
3. TRANSACTIONS WITH AFFILIATES (continued)
b. Administrative Fees
The Fund pays an administrative fee to FT Services based on the Fund’s average daily net assets as follows:
| Annualized Fee Rate | Net Assets | |
| 0.150% | Up to and including $200 million | |
| 0.135% | Over $200 million, up to and including $700 million | |
| 0.100% | Over $700 million, up to and including $1.2 billion | |
| 0.075% | In excess of $1.2 billion |
c. Distribution Fees
The Fund’s Board of Trustees has adopted distribution plans for Class 2 and Class 4 shares pursuant to Rule 12b-1 under the 1940 Act. Under the Fund’s compensation distribution plans, the Fund pays Distributors for costs incurred in connection with the servicing, sale and distribution of the Fund’s shares up to 0.35% per year of its average daily net assets of each class, respectively. The Board of Trustees has agreed to limit the current rate to 0.25% per year for Class 2.
d. Transfer Agent Fees
Investor Services, under terms of an agreement, performs shareholder servicing for the Fund and is not paid by the Fund for the services.
4. EXPENSE OFFSET ARRANGEMENT
The Fund has entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Fund’s custodian expenses. During the period ended June 30, 2009, the custodian fees were reduced as noted in the Statement of Operations.
5. INCOME TAXES
For tax purposes, realized capital losses and realized currency losses occurring subsequent to October 31, may be deferred and treated as occurring on the first day of the following fiscal year. At December 31, 2008, the Fund deferred realized capital losses and realized currency losses of $16,144,610 and $515,519, respectively.
At June 30, 2009, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
Cost of investments | $ | 1,369,005,892 | ||
Unrealized appreciation | $ | 125,090,264 | ||
Unrealized depreciation | (139,339,442 | ) | ||
Net unrealized appreciation (depreciation) | $ | (14,249,178 | ) | |
Net investment income differs for financial statement and tax purposes primarily due to differing treatments of defaulted securities, foreign currency transactions, passive foreign investment company shares, pass-through entity income, bond discounts and premiums, and certain dividends on securities sold short.
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Mutual Global Discovery Securities Fund
5. INCOME TAXES (continued)
Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatments of wash sales, tax straddles, defaulted securities, foreign currency transactions, passive foreign investment company shares, pass-through entity income, bond discounts and premiums, and certain dividends on securities sold short.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities and securities sold short) for the period ended June 30, 2009, aggregated $359,511,353 and $ 96,479,069, respectively.
Transactions in options written during the period ended June 30, 2009, were as follows:
| Number of Contracts | Premiums Received | ||||||
Options outstanding at December 31, 2008 | 7,628 | $ | 3,243,889 | ||||
Options written | 3,051,784 | 8,022,560 | |||||
Options expired | (7,997 | ) | (3,745,878 | ) | |||
Options exercised | — | — | |||||
Options closed | — | — | |||||
Options outstanding at June 30, 2009 | 3,051,415 | $ | 7,520,571 | ||||
7. CREDIT RISK AND DEFAULTED SECURITIES
The Fund may purchase the pre-default or defaulted debt of distressed companies. Distressed companies are financially troubled and are about to be/or are already involved in financial restructuring or bankruptcy. Risks associated with purchasing these securities include the possibility that the bankruptcy or other restructuring process takes longer than expected, or that distributions in restructuring are less than anticipated, either or both of which may result in unfavorable consequences to the Fund. If it becomes probable that income on debt securities, including those of distressed companies, will not be collected, the Fund discontinues accruing income and recognizes a reserve for uncollectible interest.
At June 30, 2009, the aggregate value of distressed company securities and securities for which interest has been discontinued was $2,129,033, representing 0.16% of the Fund’s net assets. For information as to specific securities, see the accompanying Statement of Investments.
8. CONCENTRATION OF RISK
Investing in foreign securities may include certain risks and considerations not typically associated with investing in U.S. securities, such as fluctuating currency values and changing local and regional economic, political and social conditions, which may result in greater market volatility. In addition, certain foreign securities may not be as liquid as U.S. securities.
9. RESTRICTED SECURITIES
The Fund may invest in securities that are restricted under the Securities Act of 1933 (1933 Act) or which are subject to legal, contractual, or other agreed upon restrictions on resale. Restricted securities are often purchased in private placement transactions, and cannot be sold without prior registration unless the sale is pursuant to an exemption under the 1933 Act. Disposal of these securities may require greater effort and expense, and prompt sale at an acceptable price may be difficult. The Fund may have registration rights for restricted securities. The issuer generally incurs all registration costs.
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Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Mutual Global Discovery Securities Fund
9. RESTRICTED SECURITIES (continued)
At June 30, 2009, the Fund held investments in restricted securities, excluding 144A securities deemed to be liquid, valued in accordance with procedures approved by the Fund’s Board of Trustees as reflecting fair value, as follows:
| Principal Amount/ Shares/ Warrants/ Contracts | Issuer | Acquisition Dates | Cost | Value | ||||||
| 18,411 | AboveNet Inc. | 10/02/01 - 8/08/08 | $ | 910,432 | $ | 1,490,923 | ||||
| 23 | AboveNet Inc., stock grant, grant price $20.95, expiration date 9/09/13 | 4/17/06 - 9/08/06 | — | 1,381 | ||||||
| 739 | AboveNet Inc., wts., 9/08/10 | 10/02/01 - 9/07/07 | 76,964 | 42,492 | ||||||
| 800,000 | The Bankshares Inc. | 3/22/07 | 8,000,000 | 3,043,095 | ||||||
| 2,161,828 | Cerberus CG Investor I LLC | 7/26/07 - 6/17/08 | 2,154,425 | 410,747 | ||||||
| 1,897,400 | Cerberus CG Investor I LLC, 12.00%, 7/31/14 | 7/26/07 | 1,897,400 | 360,506 | ||||||
| 2,161,828 | Cerberus CG Investor II LLC | 7/26/07 - 6/17/08 | 2,154,424 | 410,747 | ||||||
| 1,897,400 | Cerberus CG Investor II LLC, 12.00%, 7/31/14 | 7/26/07 | 1,897,400 | 360,506 | ||||||
| 1,080,914 | Cerberus CG Investor III LLC | 7/26/07 - 6/17/08 | 1,077,212 | 205,374 | ||||||
| 948,700 | Cerberus CG Investor III LLC, 12.00%, 7/31/14 | 7/26/07 | 948,700 | 180,253 | ||||||
| 2,077,368 | Cerberus FIM Investors Holdco LLC | 11/20/06 - 6/02/09 | 2,077,368 | 151,233 | ||||||
| 6,148,028 | Cerberus FIM Investors Holdco LLC, 12.00%, 11/22/13 | 11/20/06 | 6,148,028 | 447,275 | ||||||
| 21,716 | aDecisionOne Corp | 9/28/99 - 7/18/00 | 16,482 | 35,831 | ||||||
| 28,521 | aDecisionOne Corp., senior secured note, 15.00%, 11/30/13 | 6/01/09 | 28,521 | 31,843 | ||||||
| 11,923 | aDecisionOne Corp., wts., 6/08/17 | 7/09/07 | — | — | ||||||
| 1,903 | Elephant Capital Holdings Ltd. | 8/23/04 - 3/10/08 | 221,298 | — | ||||||
| 47,271 | IACNA Investor LLC | 7/24/08 | 48,411 | 473 | ||||||
| 451,787 | Imagine Group Holdings Ltd. | 8/31/04 | 4,626,976 | 4,115,644 | ||||||
| 424,073 | bInternational Automotive Components Group Brazil LLC | 4/13/06 - 12/26/08 | 284,478 | 379,732 | ||||||
| 74,174 | bInternational Automotive Components Group Japan LLC | 9/26/06 - 3/27/07 | 643,935 | 205,187 | ||||||
| 1,512,200 | bInternational Automotive Components Group LLC | 1/12/06 - 10/16/06 | 1,512,594 | 343,118 | ||||||
| 407,500 | bInternational Automotive Components Group NA LLC, 9.00%, 4/01/17 | 3/30/07 | 413,613 | 184,896 | ||||||
| 1,353,608 | bInternational Automotive Components Group NA LLC, A | 3/30/07 - 10/10/07 | 1,268,161 | 51,573 | ||||||
| 1,460,000 | MPF Corp. Ltd. | 5/08/06 | 7,500,856 | — | ||||||
| 383 | Motor Coach Industries International Inc. | 4/17/09 | 440,952 | 498,092 | ||||||
| 2,745 | Motor Coach Industries International Inc., pfd., | 4/17/09 | 2,745,000 | 2,745,000 | ||||||
| 9,306 | NCB Warrant Holdings Ltd., A | 12/16/05 - 3/10/08 | 97,943 | — | ||||||
| 2,140 | Olympus Re Holdings Ltd. | 12/19/01 | 206,942 | 4,677 | ||||||
| 5,485,436 | Pontus I LLC, junior note, 144A, FRN, 4.856%, 7/24/09 | 1/22/08 - 2/25/08 | 7,632,722 | 5,263,567 | ||||||
| 869,935 | Pontus II Trust, junior profit-participating note, 144A, FRN, 7.66%, 6/25/09 | 2/29/08 | 2,176,476 | 1,515,496 | ||||||
| 4,289 | PTV Inc., 10.00%, pfd., A | 12/07/01 - 3/06/02 | 2,702 | 1,029 | ||||||
Total Restricted Securities (1.72% of Net Assets) | $ | 22,480,690 | ||||||||
aThe Fund also invests in unrestricted securities of the issuer, valued at $5,591 as of June 30, 2009.
bThe Fund also invests in unrestricted securities of the issuer, valued at $268,430 as of June 30, 2009.
10. UNFUNDED CAPITAL COMMITMENTS
The Fund may enter into certain capital commitments and may be obligated to perform on such agreements at a future date. Unfunded capital commitments requiring recognition are monitored for impairment and any unrealized deprecation is included in the Statement of Assets and Liabilities and the Statement of Operations. At June 30, 2009, the Fund had aggregate unfunded capital commitments of $945,360, for which no depreciation has been recognized.
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Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Mutual Global Discovery Securities Fund
11. OTHER DERIVATIVE INFORMATION
At June 30, 2009, the Fund has invested in derivative contracts which are reflected in the Statement of Assets and Liabilities as follows:
| Asset Derivatives | Liability Derivatives | |||||||||
| Derivative Contracts Not Accounted for as Hedging Instruments Under FASB Statement No. 133 | Statement of Assets and Liabilities Location | Fair Value Amount | Statement of Assets and Liabilities Location | Fair Value Amount | ||||||
Foreign exchange contracts | Unrealized appreciation on forward exchange contracts | $ | 922,126 | Unrealized depreciation on forward exchange contracts | $ | 38,816,944 | ||||
Equity contracts | Investments, at value | 1,381 | Options written, at value | 13,919,534 | ||||||
For the period ended June 30, 2009, the effect of derivative contracts on the Fund’s Statement of Operations was as follows:
| Derivative Contracts Not Accounted for as Hedging Instruments Under FASB Statement No. 133 | Statement of Operations Locations | Realized Gain (Loss) for the Period Ended June 30, 2009 | Unrealized for the | Average Amount Outstanding During the Perioda | |||||||
Foreign exchange contracts | Net realized gain (loss) from foreign currency transactions / Net change in unrealized appreciation (depreciation) on investments | $ | 36,596,471 | $ | (55,594,920 | ) | 507,074,593 | ||||
Equity contracts | Net realized gain (loss) from written options / Net change in unrealized appreciation (depreciation) on investments | 3,745,878 | (6,370,085 | ) | 1,633,139 | ||||||
| aRepresents | the average number of option contracts or notional amount for other derivative contracts outstanding during the period. For derivative contracts denominated in foreign currencies, notional amounts are converted into US Dollars. |
See Note 1(c) regarding derivative financial instruments.
12. HOLDINGS OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES
The 1940 Act defines “affiliated companies” to include investments in portfolio companies in which a fund owns 5% or more of the outstanding voting securities. Investments in “affiliated companies” for the Fund for the period ended June 30, 2009, were as shown below.
| Name of Issuer | Number of Shares Held at Beginning of Period | Gross Additions | Gross Reductions | Number of Shares Held at End of Period | Value at End of Period | Investment Income | Realized Capital Gain (Loss) | ||||||||||
Non-Controlled Affiliates | |||||||||||||||||
The Bankshares Inc. (0.23% of Net Assets) | 800,000 | — | — | 800,000 | $ | 3,043,095 | $ | — | $ | — | |||||||
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Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Mutual Global Discovery Securities Fund
13. OTHER CONSIDERATIONS
Officers, directors or employees of the Fund’s Investment Managers, may serve from time to time as members of bondholders’ steering committees, official creditors’ committees, or boards of directors of companies in which the Fund invests. Such participation may result in the possession by the Investment Manager of material non-public information which, pursuant to the Fund’s policies and the requirements of applicable securities laws, could prevent the Fund from trading in the securities of such companies for limited or extended periods of time.
Franklin Mutual serves as investment manager to certain special purpose entities that issue securities held by the Fund. Franklin Mutual is not compensated for such services and does not invest in or exercise control over such entities. As investment manager, Franklin Mutual is primarily responsible for recommending investments in unaffiliated issuers to be held by the special purpose entities. Securities issued by these special purpose entities are restricted under the Securities Act of 1933 and are deemed to be illiquid.
14. CREDIT FACILITY
Effective January 23, 2009, the Fund, together with other U.S. registered and foreign investment funds managed by Franklin Templeton Investments (individually, “Borrower”; collectively “Borrowers”), entered into a joint syndicated senior unsecured credit facility totaling $725 million (Global Credit Facility) to provide a source of funds to the Borrowers for temporary and emergency purposes, including the ability to meet future unanticipated or unusually large redemption requests.
Under the terms of the Global Credit Facility, the Fund shall, in addition to interest charged on any borrowings made by the Fund and other costs incurred by the Fund, pay its share of fees and expenses incurred in connection with the implementation and maintenance of the Global Credit Facility, based upon its relative share of the aggregate net assets of all of the Borrowers, including an annual commitment fee based upon the unused portion of the Global Credit Facility. During the period, the Fund incurred commitment fees of $3,780 of its pro rata portion of the Global Credit Facility, which is reflected in other expenses on the Statement of Operations. During the period ended June 30, 2009, the Fund did not utilize the Global Credit Facility.
15. FAIR VALUE MEASUREMENTS
Financial Accounting Standards Board (FASB) Statement No. 157, “Fair Value Measurement” (SFAS 157) establishes a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Fund’s own market assumptions (unobservable inputs). These inputs are used in determining the value of the Fund’s investments and are summarized in the following fair value hierarchy:
| • | Level 1 – quoted prices in active markets for identical securities |
| • | Level 2 – other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speed, credit risk, etc.) |
| • | Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments) |
The inputs or methodology used for valuing securities are not an indication of the risk associated with investing in those securities.
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Mutual Global Discovery Securities Fund
15. FAIR VALUE MEASUREMENTS (continued)
The following is a summary of the inputs used as of June 30, 2009, in valuing the Fund’s assets and liabilities carried at fair value:
| Level 1 | Level 2 | Level 3 | Total | ||||||||||
Assets: | |||||||||||||
Investments in Securities | |||||||||||||
Equity Investments:a | |||||||||||||
Airlines | $ | 512,261 | $ | 5,145 | $ | — | $ | 517,406 | |||||
Auto Components | — | — | 982,270 | 982,270 | |||||||||
Chemicals | 13,747,668 | — | — | b | 13,747,668 | ||||||||
Commercial Banks | 45,166,081 | — | — | b | 45,166,081 | ||||||||
Commercial Services & Supplies | 321 | — | — | b | 321 | ||||||||
Computers & Peripherals | 15,402,178 | — | 35,831 | 15,438,009 | |||||||||
Consumer Finance | — | — | 1,178,101 | 1,178,101 | |||||||||
Diversified Banks | — | — | 3,043,095 | 3,043,095 | |||||||||
Diversified Financial Services | 25,108,185 | — | — | b | 25,108,185 | ||||||||
Diversified Telecommunication Services | 16,170,519 | — | — | b | 16,170,519 | ||||||||
Energy Equipment & Services | 49,223,429 | — | — | b | 49,223,429 | ||||||||
Insurance | 42,133,658 | — | 4,120,321 | 46,253,979 | |||||||||
Machinery | 19,137,433 | — | 3,243,092 | 22,380,525 | |||||||||
Media | 33,903,588 | 207,976 | — | b | 34,111,564 | ||||||||
Multi-Utilities | 19,630,490 | — | — | b | 19,630,490 | ||||||||
Real Estate Management & Development | 17,651,064 | — | 535,274 | 18,186,338 | |||||||||
All other Equity Investmentsc | 706,270,814 | — | — | 706,270,814 | |||||||||
Corporate Bonds & Notes | — | 44,224,314 | 8,644,931 | 52,869,245 | |||||||||
Corporate Bonds & Notes in Reorganization | — | 595,582 | 15 | 595,597 | |||||||||
Short Term Investments | 231,891,554 | 51,991,524 | — | 283,883,078 | |||||||||
Total Investments in Securities | $ | 1,235,949,243 | $ | 97,024,541 | $ | 21,782,930 | $ | 1,354,756,714 | |||||
Forward Exchange Contracts | $ | — | $ | 922,126 | $ | — | $ | 922,126 | |||||
Liabilities: | |||||||||||||
Options Written | 13,919,534 | — | — | 13,919,534 | |||||||||
Securities Sold Short | 43,215,245 | — | — | 43,215,245 | |||||||||
Forward Exchange Contracts | — | 38,816,944 | — | 38,816,944 | |||||||||
aIncludes common and preferred stock as well as other equity investments.
bIncludes securities determined to have no value at June 30, 2009.
cFor detailed industry descriptions, see the accompanying Statement of Investments.
MGD-39
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Mutual Global Discovery Securities Fund
15. FAIR VALUE MEASUREMENTS (continued)
At June 30, 2009, the reconciliation of assets in which significant unobservable inputs (Level 3) were used in determining fair value, is as follows:
| Beginning Balance | Net Realized Gain (Loss) | Net Change in Unrealized Appreciation (Depreciation) | Net Purchases (Sales) | Transfer In (Out) of Level 3 | Ending Balance | Net Change in Unrealized Appreciation (Depreciation) Attributable to Assets Still Held at Period End | |||||||||||||||||||||
Assets | |||||||||||||||||||||||||||
Investments in Securities | |||||||||||||||||||||||||||
Equity Investments:a | |||||||||||||||||||||||||||
Auto Components | $ | 897,816 | $ | — | $ | 85,834 | $ | (1,381 | ) | $ | — | $ | 982,269 | $ | 85,834 | ||||||||||||
Chemicals | — | — | — | — | — | — | b | — | |||||||||||||||||||
Commercial Banks | — | — | — | — | — | — | b | — | |||||||||||||||||||
Commercial Services & Supplies | — | — | — | — | — | — | b | — | |||||||||||||||||||
Computers & Peripherals | — | — | 35,831 | — | — | 35,831 | 35,831 | ||||||||||||||||||||
Consumer Finance | 1,515,047 | — | (346,054 | ) | 9,108 | — | 1,178,101 | (346,054 | ) | ||||||||||||||||||
Diversified Banks | 5,163,550 | — | (2,120,455 | ) | — | — | 3,043,095 | (2,120,455 | ) | ||||||||||||||||||
Diversified Financial Services | — | — | — | — | — | — | b | — | |||||||||||||||||||
Diversified Telecommunication Services | 923,558 | — | 551,290 | — | (1,474,848 | ) | — | b | — | ||||||||||||||||||
Energy Equipment & Services | — | — | — | — | — | — | b | — | |||||||||||||||||||
Food Products | 3,714 | — | (721 | ) | — | (2,993 | ) | — | — | ||||||||||||||||||
Health Care Providers & Services | 865,249 | — | 41,202 | — | (906,451 | ) | — | — | |||||||||||||||||||
Insurance | 3,705,159 | — | 415,162 | — | — | 4,120,321 | 415,162 | ||||||||||||||||||||
Machinery | — | — | 57,140 | 3,185,952 | — | 3,243,092 | 57,140 | ||||||||||||||||||||
Media | — | — | — | — | — | — | b | — | |||||||||||||||||||
Multi-Utilities | — | — | — | — | — | — | b | — | |||||||||||||||||||
Real Estate Management & Development | 716,584 | — | (181,310 | ) | — | — | 535,274 | (181,310 | ) | ||||||||||||||||||
Corporate Bonds & Notes | 8,965,397 | (7,930 | ) | 740,786 | (1,053,321 | ) | — | 8,644,932 | 732,856 | ||||||||||||||||||
Corporate Bonds & Notes in Reorganization | 63,418 | (1,881,500 | ) | 2,259,049 | (440,952 | ) | — | 15 | — | ||||||||||||||||||
Total | $ | 22,819,492 | $ | (1,889,430 | ) | $ | 1,537,754 | $ | 1,699,406 | $ | (2,384,292 | ) | $ | 21,782,930 | $ | (1,320,996 | ) | ||||||||||
aIncludes common and preferred stock as well as other equity investments.
bIncludes securities determined to have no value at June 30, 2009.
16. SUBSEQUENT EVENTS
Management has evaluated subsequent events through August 7, 2009 and determined that no events have occurred that required disclosure.
ABBREVIATIONS
Currency EUR - Euro GBP - British Pound
Selected Portfolio ADR - American Depository Receipt FRN - Floating Rate Note PC - Participation Certificate PIK - Payment-In-Kind | Counterparty AESX - Credit Suisse International BANT - Bank of America N.A. BBU - Barclays Bank BONY - Bank of New York Mellon DBFX - Deutsche Bank AG HAND - Svenska Handelsbanken HSBC - HSBC Bank USA SSBT - State Street Bank and Trust Co. |
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We are pleased to bring you Mutual Shares Securities Fund’s semiannual report for the period ended June 30, 2009.
Performance Summary as of 6/30/09
Mutual Shares Securities Fund – Class 1 delivered a +4.87% total return for the six-month period ended 6/30/09.
Performance reflects the Fund’s Class 1 operating expenses, but does not include any contract fees, expenses or sales charges. If they had been included, performance would be lower. These charges and deductions, particularly for variable life policies, can have a significant effect on contract values and insurance benefits. See the contract prospectus for a complete description of these expenses, including sales charges.
Mutual Shares Securities Fund – Class 1
Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares.
Current performance may differ from figures shown.
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Fund Goals and Main Investments: Mutual Shares Securities Fund seeks capital appreciation, with income as a secondary goal. The Fund normally invests primarily in U.S. and foreign equity securities that the manager believes are undervalued. The Fund also invests, to a lesser extent, in risk arbitrage securities and distressed companies.
Performance Overview
You can find the Fund’s six-month total return in the Performance Summary. The Fund outperformed its benchmark, the Standard & Poor’s 500 Index (S&P 500), which had a +3.16% total return for the period under review.1
Economic and Market Overview
During the six-month period ended June 30, 2009, the U.S. economy and stock markets seemed to stabilize after signs appeared that the recession’s severity had eased. Strains on the banking system and credit markets that surfaced in 2008 improved in 2009’s first half with the help of federal aid and tighter regulations. Despite rising unemployment, near period-end home sales edged higher, the decline in manufacturing activity slowed and consumer confidence started to pick up. Economic growth as measured by gross domestic product (GDP) fell at annualized rates of 6.4% and an estimated 1.0% in the first and second quarters of 2009.
Although the price of oil rose from $44 per barrel at the beginning of the period to $70 by period-end on speculation that the downturn was abating, it was still off more than 50% from its July 2008 record high.2 June’s inflation rate, as measured by the Consumer Price Index, was an annualized -1.4%, representing the steepest yearly decline in the cost of living in nearly six decades.3 Core inflation, which excludes food and energy costs, rose at a 1.7% annualized rate, which was within the Federal Reserve Board’s (Fed’s) informal target range of 1.5%–2.0%.3
A deepening recession and decelerating inflation prompted Washington policymakers to keep interest rates low and enact stimulus plans — including income tax cuts, aid to ailing state governments and funding for transportation infrastructure, school construction and high-tech projects. During the period under review, the Fed kept the federal funds target rate
1. Source: © 2009 Morningstar. One cannot invest directly in an index, nor is an index representative of the Fund’s portfolio. Please see Index Descriptions following the Fund Summaries.
2. Source: New York Mercantile Exchange.
3. Source: Bureau of Labor Statistics.
Fund Risks: The Fund’s investments in stocks may offer the potential for long-term gains but can be subject to short-term price fluctuations. Investments in companies involved in mergers, liquidations, reorganizations and distressed bankruptcy, which may include defaulted debt, involve higher credit and other risks. Foreign investing, especially in emerging markets, involves additional risks, including currency fluctuations, economic instability, market volatility, and political and social instability. Smaller and midsize company securities involve special risks, such as relatively small revenues, limited product lines and small market share. The Fund’s prospectus also includes a description of the main investment risks.
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in a range of 0% to 0.25% and said the “pace of economic contraction is slowing” but the financial system had not yet returned to normal.
Most U.S. stocks suffered major losses through early March as investors worried about an uncertain future. Stocks then recovered somewhat from 12-year lows as investors perceived many bargains among the bear market fallout and data indicated the economy’s pace of contraction was moderating. By June, however, fresh investor concerns about the economy and stock valuations reemerged and dampened the rally’s momentum. For the six months under review, the blue chip stocks of the Dow Jones Industrial Average had a total return of -2.01%, while the broader S&P 500 posted a +3.16% total return and the technology-heavy NASDAQ Composite Index returned +16.99%.1
Global equities followed the same trend. At the beginning of the period, with investor sentiment depressed and risk aversion elevated, defensive, non-cyclical sectors like utilities, consumer staples and health care were market leaders. As data emerged suggesting a fledgling recovery in the financials sector and a moderating pace of global economic contraction, investors regained some risk appetite, rotating capital back into cyclical sectors such as financials, materials and consumer discretionary. Resurgent risk appetite also buoyed emerging markets stocks, which delivered their best three-month returns on record from March through May 2009. Emerging market optimism in turn supported higher commodity prices, which gained the most since the bubble in hard assets burst in the summer of 2008. Also supporting commodity prices was a weaker U.S. dollar. Although systemic risk aversion and the consensus belief that the U.S. could lead the global economy out of recession helped strengthen the dollar at the beginning of the period, investors soon began to worry about the currency’s ongoing stability in the face of aggressive and unconventional monetary policy, and the greenback lost value relative to most currencies for the six-month period.
In the reporting period’s final weeks, global equity markets moderated as investors appeared to contemplate the rally’s merits and reassess their new positions. Although sentiment had improved and most seemed to believe the global economy had exited the worst stage of this recessionary cycle, indicators remained mixed and lacked the sustainable upward trajectory investors had hoped for. In Europe, policymakers committed to an easier monetary regime, but the eurozone’s industrial production declined, capacity utilization continued to shrink, and price deflation was recorded for the first time since data
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began in 1997.4 In China, a stimulative monetary campaign spurred lending and fueled an annualized money growth rate of 26%, a powerful measure against near-term economic headwinds but a potentially dangerous catalyst for longer-term inflation and asset bubble formation.5
Investment Strategy
At Mutual Series, we are committed to our distinctive value approach to investing. Our major investment strategy is investing in undervalued stocks. When selecting undervalued equities, we are attracted to fundamentally strong companies with healthy balance sheets, high-quality assets, substantial free cash flow and shareholder-oriented management teams and whose stocks are trading at discounts to our assessment of the companies’ intrinsic or business value. We also look for asset rich companies whose shares may be trading at depressed levels due to concerns over short-term earnings disappointments, litigation, management strategy or other perceived negatives. While the vast majority of our undervalued equity investments are made in publicly traded companies globally, we may invest occasionally in privately held companies as well.
We complement this more traditional investment strategy with two others. One is distressed investing, which is complex and can take many forms. The most common distressed investment the Fund undertakes is the purchase of financially troubled or bankrupt companies’ debt at a substantial discount to face value. After the financially distressed company is reorganized, often in bankruptcy court, the old debt is typically replaced with new securities issued by the financially stronger company.
The other piece of our investment strategy is participating in arbitrage situations, another highly specialized field. When companies announce proposed mergers or takeovers, commonly referred to as “deals,” the target company may trade at a discount to the bid it ultimately accepts. One form of arbitrage involves purchasing the target company’s stock when it is trading below the value we believe it would receive in a deal. In keeping with our commitment to a relatively conservative investment approach, we typically focus our arbitrage efforts on announced deals, and eschew rumored deals or other situations we consider relatively risky.
In addition, it is our practice to hedge the Fund’s currency exposure when we deem it advantageous for our shareholders.
4. Source: European Communities Eurostat.
5. Source: People’s Bank of China.
Top 10 Sectors/Industries
Mutual Shares Securities Fund
Based on Equity Securities 6/30/09
| % of Total Net Assets | ||
| Tobacco | 9.6% | |
| Pharmaceuticals | 6.2% | |
| Insurance | 5.8% | |
| Food Products | 5.7% | |
| Food & Staples Retailing | 5.4% | |
| Media | 5.1% | |
| Beverages | 4.4% | |
| Industrial Conglomerates | 3.9% | |
| Oil, Gas & Consumable Fuels | 3.9% | |
| Diversified Telecommunication Services | 3.1% | |
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Manager’s Discussion
During the first half of 2009, three of the Fund’s best performing investments were oil and gas drilling company Transocean, U.K.-based cable services provider Virgin Media and software provider Microsoft.
Transocean is a leading global provider of offshore drilling contract services for oil and gas companies. New drilling and seismic technologies have led to significant oil and gas discoveries in very deep water accessible only to modern, highly specialized rigs. The offshore drilling industry has benefited from these discoveries as customers entered into multi-year contracts at rates exceeding $500,000 per day. Transocean’s shares appreciated dramatically as investors began to anticipate strong demand from Brazilian national oil company Petrobras for deepwater drilling rigs to develop the vast and recently discovered Tupi underwater oil field, an improving supply-demand picture for new deepwater projects, and better cost controls by the company. We continued to believe that the supply-and-demand outlook for deepwater drilling rigs was favorable.
Virgin Media’s share price rose after the company successfully extended the maturity profile of its debt and subscriber metrics, while pricing and profitability measures continued to show improvement. In addition, the company refocused on its core strength in data, leveraging its superior communications network to offer faster speeds than competitors. These efforts have proven effective as Virgin Media’s subscriber trends outperformed market averages while the company also raised prices. Meanwhile, we believe consolidation among broadband communications companies in the U.K. market signaled a more stable pricing environment in the future. The company also reached an agreement with British Sky Broadcasting Group, the U.K.’s top pay-TV provider, regarding redistribution of content, thereby strengthening Virgin’s video offerings. Ofcom, U.K.’s broadcasting and communications regulator, recently issued a report supporting wider access to exclusive content through lower, and potentially regulated, wholesale pricing that could further strengthen Virgin Media’s video products. The company’s stock received further support after investors began to anticipate that future efficiency gains could result from subscriber growth and pricing improvement, and a more stable competitive market could drive earnings growth in the second half of the year.
Top 10 Holdings
Mutual Shares Securities Fund
6/30/09
Company Sector/Industry, | % of Total Net Assets | |
| Wyeth | 3.2% | |
| Pharmaceuticals, U.S. | ||
| British American Tobacco PLC, ord. & ADR | 3.0% | |
| Tobacco, U.K. | ||
| Berkshire Hathaway Inc., A & B | 2.3% | |
| Insurance, U.S. | ||
| Microsoft Corp. | 2.3% | |
| Software, U.S. | ||
| Comcast Corp., A | 2.2% | |
| Media, U.S. | ||
| CVS Caremark Corp. | 2.2% | |
| Food & Staples Retailing, U.S. | ||
| Schering-Plough Corp. | 2.2% | |
| Pharmaceuticals, U.S. | ||
| Imperial Tobacco Group PLC | 2.1% | |
| Tobacco, U.K. | ||
| Nestle SA | 1.8% | |
| Food Products, Switzerland | ||
| Mattel Inc. | 1.5% | |
| Leisure Equipment & Products, U.S. | ||
The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund’s Statement of Investments.
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Microsoft manufactures, licenses and supports a wide range of proprietary software products and services, and is the world’s largest software company. Companywide cost controls implemented in late 2008 gained traction and began to benefit operating results in 2009. Microsoft also announced several new products, including a rebranded search engine, Bing, and the next version of the Windows operating system. The combination of cost discipline and new revenue opportunities appeared to revitalize the company and Microsoft’s image with investors.
Although the Fund outperformed the S&P 500 during the first half of 2009, it had some disappointments. Three investments that declined in value were U.S. Bancorp, a diversified financial services company; Comcast, a cable services provider; and U.K.-based Imperial Tobacco, a leading international tobacco company.
U.S. Bancorp reported higher-than-anticipated securities losses and a subsequent 25% decrease in tangible book value in 2009’s first quarter. Investor fears about continued deterioration in the value of the company’s assets led to further pressure on the shares, as well as those of its peers. We exited the position during the period under review.
Comcast shares fell after the company reported a decline in subscriber growth across all products — video, data and telephony — when it reported 2008 fourth quarter results. In addition, given the improvement in corporate debt markets during the second quarter and Comcast’s relatively underleveraged balance sheet, investors began to anticipate a more significant increase in the dividend and/or an increase in share repurchase activity. The fact that the company undertook neither appeared to create uncertainty and sparked speculation about potential merger and acquisition activity.
Imperial Tobacco shares declined after investors grew wary about the company’s balance sheet and dividend policy, and investors generally rotated away from typically defensive sectors as cyclical stocks rallied strongly during the second quarter. At period-end, we still believed Imperial shares were an attractive investment trading at a single-digit 2010 price-to-earnings multiple and boasting more than 10% in free cash flow yield.
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Finally, investors should note that we maintained our currency hedging posture of being generally hedged to the U.S. dollar for most of our non-U.S. holdings. Since the dollar was weaker compared with most foreign currencies during the first half of 2009, our hedging strategy negatively impacted performance.
Thank you for your participation in Mutual Shares Securities Fund. We look forward to serving your future investment needs.
The foregoing information reflects our analysis, opinions and portfolio holdings as of June 30, 2009, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.
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Fund Expenses
As an investor in a variable insurance contract (Contract) that indirectly provides for investment in an underlying mutual fund, you can incur transaction and/or ongoing expenses at both the Fund level and the Contract level.
| • | Transaction expenses can include sales charges (loads) on purchases, surrender fees, transfer fees and premium taxes. |
| • | Ongoing expenses can include management fees, distribution and service (12b-1) fees, contract fees, annual maintenance fees, mortality and expense risk fees and other fees and expenses. All mutual funds and Contracts have some types of ongoing expenses. |
The expenses shown in the table are meant to highlight ongoing expenses at the Fund level only and do not include ongoing expenses at the Contract level, or transaction expenses at either the Fund or Contract levels. While the Fund does not have transaction expenses, if the transaction and ongoing expenses at the Contract level were included, the expenses shown below would be higher. You should consult your Contract prospectus or disclosure document for more information.
The table shows Fund-level ongoing expenses and can help you understand these expenses and compare them with those of other mutual funds offered through the Contract. The table assumes a $1,000 investment held for the six months indicated. Please refer to the Fund prospectus for additional information on operating expenses.
Actual Fund Expenses
The first line (Actual) of the table provides actual account values and expenses. The “Ending Account Value” is derived from the Fund’s actual return, which includes the effect of ongoing Fund expenses, but does not include the effect of ongoing Contract expenses.
You can estimate the Fund-level expenses you incurred during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:
| 1. | Divide your account value by $1,000. |
If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6.
| 2. | Multiply the result by the number under the heading “Fund-Level Expenses Incurred During Period.” |
If Fund-Level Expenses Incurred During Period were $7.50, then 8.6 x $7.50 = $64.50.
In this illustration, the estimated expenses incurred this period at the Fund level are $64.50.
Mutual Shares Securities Fund – Class 1
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Hypothetical Example for Comparison with Other Mutual Funds
Information in the second line (Hypothetical) of the table can help you compare ongoing expenses of the Fund with those of other mutual funds offered through the Contract. This information may not be used to estimate the actual ending account balance or expenses you incurred during the period. The hypothetical “Ending Account Value” is based on the Fund’s actual expense ratio and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Fund-Level Expenses Incurred During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds offered through a Contract.
| Class 1 | Beginning Account Value 1/1/09 | Ending Account Value 6/30/09 | Fund-Level Expenses Incurred During Period* 1/1/09–6/30/09 | ||||||
Actual | $ | 1,000 | $ | 1,048.70 | $ | 4.11 | |||
Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,020.78 | $ | 4.06 | |||
*Expenses are calculated using the most recent six-month annualized expense ratio for the Fund’s Class 1 shares (0.81%), which does not include any ongoing expenses of the Contract for which the Fund is an investment option, multiplied by the average account value over the period, multiplied by 181/365 to reflect the one-half year period.
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SUPPLEMENT DATED JULY 23, 2009
TOTHE PROSPECTUS
DATED MAY 1, 2009
AS PREVIOUSLY AMENDED
MUTUAL SHARES SECURITIES FUND
(A series of Franklin Templeton Variable Insurance Products Trust)
The prospectus is amended as follows:
| I. | The paragraph beginning “The Fund may attempt . . ” under “Goals and Strategies – Main Investments” is replaced with the following: |
The Fund may attempt, from time to time, to hedge (protect) against currency risks, largely using forward foreign currency exchange contracts and currency futures contracts (including currency index futures contracts) when, in the manager’s opinion, it would be advantageous to the Fund to do so. The Fund may also, from time to time, attempt to hedge against market risk using a variety of derivatives (together, “Hedging Instruments”).
| II | The section “Hedging Instruments” under “Main Risks” is replaced in its entirety with the following: |
Hedging Instruments
The Fund may attempt, from time to time, to hedge (protect) against currency risks, largely using forward foreign currency exchange contracts and currency futures contracts, where available and when, in the manager’s opinion, it would be advantageous to the Fund. A forward foreign currency exchange contract is an agreement to buy or sell a specific amount of currency at a future date and at a price set at the time of the contract. A currency futures contract is similar to a forward foreign currency exchange contract except that the futures contract is in a standardized form that trades on an exchange instead of being privately negotiated with a particular counterparty. Forward foreign currency exchange contracts and currency futures contracts (collectively, “currency contracts”) may reduce the risk of loss from a change in value of a currency, but they also limit any potential gains and do not protect against fluctuations in the value of the underlying position. For example, during periods when the U.S. dollar weakens in relation to a foreign currency, the Fund’s use of a currency hedging program will result in lower returns than if no currency hedging program were in effect.
The Fund may also attempt, from time to time, to hedge against market risks by using derivative investments, which may include purchasing put options. A put option gives the purchaser of the option, upon payment of a premium, the right to sell, and the seller of the option the obligation to buy, the underlying instrument at the exercise price.
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Currency contracts are considered derivative investments, because their value and performance depend, at least in part, on the value of an underlying asset. The Fund’s investments in derivatives may involve a small investment relative to the amount of risk assumed. To the extent the Fund enters into these transactions, its success will depend on the manager’s ability to predict market movements, and their use may have the opposite effect of that intended. Risks include potential loss due to the imposition of controls by a government on the exchange of foreign currencies, delivery failure, default by the other party (particularly with respect to forward foreign currency exchange contracts), or inability to close out a position because the trading market becomes illiquid. These risks may be heightened during volatile market conditions. To the extent that the Fund is unable to close out a position because of market illiquidity, the Fund may not be able to prevent further losses of value in its derivative holdings. The Fund’s liquidity may also be impaired to the extent that it has a substantial portion of its otherwise liquid assets marked as segregated to cover its obligations under such derivative instruments.
Investors should bear in mind that, while the Fund intends to use derivative strategies on a regular basis, it is not obligated to actively engage in these transactions, generally or in any particular kind of derivative, if the manager elects not to do so due to availability, cost or other factors.
Please keep this supplement for future reference.
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SUPPLEMENT DATED AUGUST 7, 2009
TOTHE PROSPECTUS
DATED MAY 1, 2009
AS PREVIOUSLY AMENDED
OF
MUTUAL SHARES SECURITIES FUND
(A series of Franklin Templeton Variable Insurance Products Trust)
The Prospectus is amended as follows:
| I. | Under “Goals and Strategies” the following is added to the end of “Main Investments” on page MS-2: |
The Fund may purchase asset-backed and mortgage-backed securities. In connection with the purchase of certain asset-backed securities and commercial mortgage-backed securities (“TALF ABS”), the Fund may borrow from the Federal Reserve Bank of New York (“NY Fed”) under its Term Asset-Backed Securities Loan Facility (“TALF”). Pursuant to the TALF Program, the Fund may receive one or more three- to five-year term non-recourse loans to purchase TALF ABS in return for the payment of a haircut amount (usually 5-15% of the loan amount) and a pledge of the TALF ABS.
| II. | The following is added to the end of the “Main Risks” section on page MS-5: |
Mortgage Securities and Asset-Backed Securities
Mortgage securities differ from conventional debt securities because principal is paid back over the life of the security rather than at maturity. The Fund may receive unscheduled prepayments of principal before the security’s maturity date due to voluntary prepayments, refinancing or foreclosure on the underlying mortgage loans. To the Fund this means a loss of anticipated interest, and a portion of its principal investment represented by any premium the Fund may have paid. Mortgage prepayments generally increase when interest rates fall.
Mortgage securities also are subject to extension risk. An unexpected rise in interest rates could reduce the rate of prepayments on mortgage securities and extend their life. This could cause the price of the mortgage securities and the Fund’s share price to fall and would make the mortgage securities more sensitive to interest rate changes.
Issuers of asset-backed securities may have limited ability to enforce the security interest in the underlying assets, and credit enhancements provided to support the securities, if any, may be inadequate to protect investors in the event of default. Like mortgage-backed securities, asset-backed securities are subject to prepayment and extension risks.
Borrowing
Because the Fund may borrow money from the NY Fed under the TALF Program, the Fund may engage in leverage by gaining exposure to a TALF ABS through the payment
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of a relatively small haircut amount and borrowing the remainder of the purchase price. Such borrowings may exaggerate the effect of any increase or decrease in the value of the TALF ABS on the Fund’s net asset value and will subject the Fund to interest and other costs (including administrative fees) associated with the TALF Program. However, such borrowings are non-recourse to the Fund, which should limit some of the risks of leverage.
Please keep this supplement for future reference.
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Franklin Templeton Variable Insurance Products Trust
Financial Highlights
Mutual Shares Securities Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 1 | 2008 | 2007 | 2006 | 2005 | 2004 | |||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 11.92 | $ | 20.42 | $ | 20.67 | $ | 18.35 | $ | 16.78 | $ | 15.00 | ||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.14 | c | 0.34 | 0.54 | 0.40 | 0.34 | 0.21 | |||||||||||||||||
Net realized and unrealized gains (losses) | 0.44 | (7.54 | ) | 0.31 | 2.86 | 1.47 | 1.71 | |||||||||||||||||
Total from investment operations | 0.58 | (7.20 | ) | 0.85 | 3.26 | 1.81 | 1.92 | |||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income | — | (0.57 | ) | (0.35 | ) | (0.29 | ) | (0.18 | ) | (0.14 | ) | |||||||||||||
Net realized gains | — | (0.73 | ) | (0.75 | ) | (0.65 | ) | (0.06 | ) | — | ||||||||||||||
Total distributions | — | (1.30 | ) | (1.10 | ) | (0.94 | ) | (0.24 | ) | (0.14 | ) | |||||||||||||
Net asset value, end of period | $ | 12.50 | $ | 11.92 | $ | 20.42 | $ | 20.67 | $ | 18.35 | $ | 16.78 | ||||||||||||
Total returnd | 4.87% | (36.93)% | 3.72% | 18.66% | 10.83% | 12.88% | ||||||||||||||||||
Ratios to average net assetse | ||||||||||||||||||||||||
Expensesf,g | 0.81% | 0.73% | 0.72% | 0.81% | 0.78% | 0.75% | ||||||||||||||||||
Expenses - excluding dividend expense on securities sold shortg | 0.73% | 0.73% | 0.72% | 0.74% | 0.74% | 0.73% | ||||||||||||||||||
Net investment income | 2.35% | c | 2.16% | 2.58% | 2.02% | 1.97% | 1.40% | |||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 441,502 | $ | 319,703 | $ | 272,509 | $ | 259,943 | $ | 260,317 | $ | 287,324 | ||||||||||||
Portfolio turnover rate | 23.59% | 44.11% | 41.73% | h | 19.75% | 19.59% | 31.49% | |||||||||||||||||
aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.
bBased on average daily shares outstanding.
cNet investment income per share includes approximately ($0.03) per share related to a reserve for uncollectible interest as disclosed on the Statement of Operations. Excluding the effect of this adjustment, the ratio of net investment income to average net assets would have been 2.89%. See Note 7.
dTotal return does not include any fees, charges or expenses imposed by the variable annuity and life insurance contracts for which the Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle. Total return is not annualized for periods less than one year.
eRatios are annualized for periods less than one year.
fIncludes dividend expense on securities sold short which varies from period to period. See below for expense ratios that reflect only operating expenses.
gBenefit of expense reduction rounds to less than 0.01%.
hExcludes the value of portfolio securities delivered as a result of redemption in-kind.
The accompanying notes are an integral part of these financial statements.
MS-14
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Mutual Shares Securities Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 2 | 2008 | 2007 | 2006 | 2005 | 2004 | |||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 11.78 | $ | 20.19 | $ | 20.46 | $ | 18.18 | $ | 16.64 | $ | 14.90 | ||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.12 | c | 0.32 | 0.48 | 0.34 | 0.29 | 0.18 | |||||||||||||||||
Net realized and unrealized gains (losses) | 0.44 | (7.49 | ) | 0.31 | 2.84 | 1.46 | 1.68 | |||||||||||||||||
Total from investment operations | 0.56 | (7.17 | ) | 0.79 | 3.18 | 1.75 | 1.86 | |||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income | — | (0.51 | ) | (0.31 | ) | (0.25 | ) | (0.15 | ) | (0.12 | ) | |||||||||||||
Net realized gains | — | (0.73 | ) | (0.75 | ) | (0.65 | ) | (0.06 | ) | — | ||||||||||||||
Total distributions | — | (1.24 | ) | (1.06 | ) | (0.90 | ) | (0.21 | ) | (0.12 | ) | |||||||||||||
Net asset value, end of period | $ | 12.34 | $ | 11.78 | $ | 20.19 | $ | 20.46 | $ | 18.18 | $ | 16.64 | ||||||||||||
Total returnd | 4.75% | (37.11)% | 3.48% | 18.38% | 10.55% | 12.63% | ||||||||||||||||||
Ratios to average net assetse | ||||||||||||||||||||||||
Expensesf,g | 1.06% | 0.98% | 0.97% | 1.06% | 1.03% | 1.00% | ||||||||||||||||||
Expenses - excluding dividend expense on securities sold shortg | 0.98% | 0.98% | 0.97% | �� | 0.99% | 0.99% | 0.98% | |||||||||||||||||
Net investment income | 2.10% | c | 1.91% | 2.33% | 1.77% | 1.72% | 1.15% | |||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 3,371,762 | $ | 3,303,761 | $ | 5,925,551 | $ | 5,140,878 | $ | 3,596,889 | $ | 2,464,374 | ||||||||||||
Portfolio turnover rate | 23.59% | 44.11% | 41.73% | h | 19.75% | 19.59% | 31.49% | |||||||||||||||||
aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.
bBased on average daily shares outstanding.
cNet investment income per share includes approximately ($0.03) per share related to a reserve for uncollectible interest as disclosed on the Statement of Operations. Excluding the effect of this adjustment, the ratio of net investment income to average net assets would have been 2.64%. See Note 7.
dTotal return does not include any fees, charges or expenses imposed by the variable annuity and life insurance contracts for which the Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle. Total return is not annualized for periods less than one year.
eRatios are annualized for periods less than one year.
fIncludes dividend expense on securities sold short which varies from period to period. See below for expense ratios that reflect only operating expenses.
gBenefit of expense reduction rounds to less than 0.01%.
hExcludes the value of portfolio securities delivered as a result of redemption in-kind.
The accompanying notes are an integral part of these financial statements.
MS-15
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Mutual Shares Securities Fund
| Class 4 | Six Months (unaudited) | Period Ended December 31, 2008a | ||||||
Per share operating performance | ||||||||
(for a share outstanding throughout the period) | ||||||||
Net asset value, beginning of period | $ | 11.88 | $ | 18.91 | ||||
Income from investment operationsb: | ||||||||
Net investment incomec | 0.12 | d | 0.17 | |||||
Net realized and unrealized gains (losses) | 0.44 | (5.90 | ) | |||||
Total from investment operations | 0.56 | (5.73 | ) | |||||
Less distributions from: | ||||||||
Net investment income | — | (0.57 | ) | |||||
Net realized gains | — | (0.73 | ) | |||||
Total distributions | — | (1.30 | ) | |||||
Net asset value, end of period | $ | 12.44 | $ | 11.88 | ||||
Total returne | 4.71% | (32.12)% | ||||||
Ratios to average net assetsf | ||||||||
Expensesg,h | 1.16% | 1.08% | ||||||
Expenses - excluding dividend expense on securities sold shorth | 1.08% | 1.08% | ||||||
Net investment income | 2.00% | d | 1.81% | |||||
Supplemental data | ||||||||
Net assets, end of period (000’s) | $ | 94,958 | $ | 57,266 | ||||
Portfolio turnover rate | 23.59% | 44.11% | ||||||
aFor the period February 29, 2008 (effective date) to December 31, 2008.
bThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.
cBased on average daily shares outstanding.
dNet investment income per share includes approximately ($0.03) per share related to a reserve for uncollectible interest as disclosed on the Statement of Operations. Excluding the effect of this adjustment, the ratio of net investment income to average net assets would have been 2.54%. See Note 7.
eTotal return does not include any fees, charges or expenses imposed by the variable annuity and life insurance contracts for which the Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle. Total return is not annualized for periods less than one year.
fRatios are annualized for periods less than one year.
gIncludes dividend expense on securities sold short which varies from period to period. See below for expense ratios that reflect only operating expenses.
hBenefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
MS-16
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited)
| Mutual Shares Securities Fund | Country | Shares/ Warrants/ Contracts | Value | ||||
Common Stocks and Other Equity Interests 84.5% | |||||||
Aerospace & Defense 1.0% | |||||||
aGenCorp Inc. | United States | 494,180 | $ | 943,884 | |||
United Technologies Corp. | United States | 745,913 | 38,757,639 | ||||
| 39,701,523 | |||||||
Air Freight & Logistics 0.4% | |||||||
TNT NV | Netherlands | 868,685 | 16,868,992 | ||||
Airlines 0.0%b | |||||||
aACE Aviation Holdings Inc., A | Canada | 280,360 | 1,277,706 | ||||
a,cNorthwest Airlines Corp., Contingent Distribution | United States | 27,670,000 | 17,432 | ||||
| 1,295,138 | |||||||
Auto Components 0.4% | |||||||
a,c,dCollins & Aikman Products Co., Contingent Distribution | United States | 929,505 | 9,295 | ||||
a,c,dDana Holding Corp., Contingent Distribution | United States | 10,339,000 | — | ||||
aGoodyear Tire & Rubber Co. | United States | 1,068,854 | 12,035,296 | ||||
a,eIACNA Investor LLC | United States | 168,957 | 1,690 | ||||
a,e,fInternational Automotive Components Group Brazil LLC | Brazil | 1,730,515 | 1,549,573 | ||||
a,e,fInternational Automotive Components Group Japan LLC | Japan | 269,643 | 745,912 | ||||
a,e,fInternational Automotive Components Group LLC | Luxembourg | 6,170,474 | 1,400,080 | ||||
a,e,fInternational Automotive Components Group NA LLC, A | United States | 4,838,053 | 184,330 | ||||
| 15,926,176 | |||||||
Automobiles 0.3% | |||||||
Daimler AG | Germany | 350,712 | 12,651,891 | ||||
Beverages 4.4% | |||||||
Brown-Forman Corp., A | United States | 7,455 | 343,750 | ||||
Brown-Forman Corp., B | United States | 107,219 | 4,608,272 | ||||
Carlsberg AS, B | Denmark | 296,066 | 18,986,811 | ||||
aDr. Pepper Snapple Group Inc. | United States | 2,647,917 | 56,109,361 | ||||
Lion Nathan Ltd. | Australia | 718,012 | 6,689,533 | ||||
Pepsi Bottling Group Inc. | United States | 1,004,700 | 33,999,048 | ||||
PepsiAmericas Inc. | United States | 264,200 | 7,083,202 | ||||
Pernod Ricard SA | France | 684,286 | 43,065,311 | ||||
| 170,885,288 | |||||||
Building Products 0.3% | |||||||
aOwens Corning Inc. | United States | 820,981 | 10,492,137 | ||||
Capital Markets 0.2% | |||||||
Ameriprise Financial Inc. | United States | 310,900 | 7,545,543 | ||||
Chemicals 1.7% | |||||||
a,c,dDow Corning Corp., Contingent Distribution | United States | 650,000 | 25,000 | ||||
Koninklijke DSM NV | Netherlands | 884,580 | 27,705,099 | ||||
Linde AG | Germany | 469,701 | 38,493,839 | ||||
| 66,223,938 | |||||||
Commercial Banks 1.1% | |||||||
Barclays PLC | United Kingdom | 4,986,542 | 23,219,038 | ||||
a,eElephant Capital Holdings Ltd. | Japan | 11,728 | — | ||||
aGuaranty Bancorp | United States | 1,288,316 | 2,460,684 | ||||
MS-17
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Mutual Shares Securities Fund | Country | Shares/ Warrants/ Contracts | Value | ||||
Common Stocks and Other Equity Interests (continued) | |||||||
Commercial Banks (continued) | |||||||
aIntesa Sanpaolo SpA | Italy | 5,663,270 | $ | 18,229,880 | |||
a,eNCB Warrant Holdings Ltd., A | Japan | 57,295 | — | ||||
| 43,909,602 | |||||||
Commercial Services & Supplies 0.0%b | |||||||
aComdisco Holding Co. Inc. | United States | 180 | 1,314 | ||||
a,cComdisco Holding Co. Inc., Contingent Distribution | United States | 7,473,000 | — | ||||
| 1,314 | |||||||
Communications Equipment 0.8% | |||||||
Motorola Inc. | United States | 4,535,313 | 30,069,125 | ||||
Computers & Peripherals 1.9% | |||||||
a,eDecisionOne Corp. | United States | 108,227 | 178,574 | ||||
a,eDecisionOne Corp., wts., 6/08/17 | United States | 59,425 | — | ||||
aDell Inc. | United States | 3,772,456 | 51,795,821 | ||||
aSun Microsystems Inc. | United States | 2,511,539 | 23,156,390 | ||||
| 75,130,785 | |||||||
Consumer Finance 0.5% | |||||||
a,e,f,gCB FIM Coinvestors LLC | United States | 6,400,507 | 14,613,638 | ||||
a,eCerberus CG Investor I LLC | United States | 8,172,654 | 1,552,804 | ||||
a,eCerberus CG Investor II LLC | United States | 8,172,654 | 1,552,804 | ||||
a,eCerberus CG Investor III LLC | United States | 4,086,327 | 776,402 | ||||
a,eCerberus FIM Investors Holdco LLC | United States | 8,006,950 | 582,906 | ||||
| 19,078,554 | |||||||
Containers & Packaging 0.3% | |||||||
Temple-Inland Inc. | United States | 842,289 | 11,050,832 | ||||
Diversified Consumer Services 0.4% | |||||||
H&R Block Inc. | United States | 650,320 | 11,205,014 | ||||
Hillenbrand Inc. | United States | 342,585 | 5,700,614 | ||||
| 16,905,628 | |||||||
Diversified Financial Services 0.7% | |||||||
Bank of America Corp. | United States | 775,900 | 10,241,880 | ||||
Deutsche Boerse AG | Germany | 228,714 | 17,733,508 | ||||
a,e,gGLCP Harrah’s Investment LP | United States | 5,565,600 | — | ||||
a,cMarconi Corp., Contingent Distribution | United Kingdom | 9,945,700 | — | ||||
| 27,975,388 | |||||||
Diversified Telecommunication Services 3.1% | |||||||
a,eAboveNet Inc. | United States | 62,453 | 5,057,444 | ||||
a,eAboveNet Inc., stock grant, grant price $20.95, expiration date 9/09/13 | United States | 78 | 4,682 | ||||
a,eAboveNet Inc., wts., 9/08/10 | United States | 2,995 | 172,213 | ||||
a,c,dGlobal Crossing Holdings Ltd., Contingent Distribution | United States | 9,005,048 | — | ||||
Koninklijke (Royal) KPN NV | Netherlands | 3,824,676 | 52,566,646 | ||||
Qwest Communications International Inc. | United States | 6,643,239 | 27,569,442 | ||||
Telefonica SA | Spain | 1,502,812 | 33,978,449 | ||||
| 119,348,876 | |||||||
MS-18
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Mutual Shares Securities Fund | Country | Shares/ Warrants/ Contracts | Value | ||||
Common Stocks and Other Equity Interests (continued) | |||||||
Electric Utilities 2.7% | |||||||
E.ON AG | Germany | 1,536,873 | $ | 54,386,247 | |||
Entergy Corp. | United States | 260,290 | 20,177,681 | ||||
Exelon Corp. | United States | 571,467 | 29,264,825 | ||||
| 103,828,753 | |||||||
Electronic Equipment, Instruments & Component 0.7% | |||||||
Tyco Electronics Ltd. | United States | 1,456,842 | 27,082,693 | ||||
Energy Equipment & Services 2.3% | |||||||
Baker Hughes Inc. | United States | 294,972 | 10,748,780 | ||||
aExterran Holding Inc. | United States | 613,890 | 9,846,796 | ||||
aPride International Inc. | United States | 453,060 | 11,353,683 | ||||
aTransocean Ltd. | United States | 753,747 | 55,995,865 | ||||
| 87,945,124 | |||||||
Food & Staples Retailing 5.4% | |||||||
Carrefour SA | France | 936,985 | 39,978,427 | ||||
CVS Caremark Corp. | United States | 2,726,355 | 86,888,934 | ||||
Kroger Co. | United States | 1,906,376 | 42,035,591 | ||||
SUPERVALU Inc. | United States | 1,115,540 | 14,446,243 | ||||
Wal-Mart Stores Inc. | United States | 588,754 | 28,519,244 | ||||
| 211,868,439 | |||||||
Food Products 5.7% | |||||||
Cadbury PLC | United Kingdom | 4,163,441 | 35,484,647 | ||||
Danone | France | 659,471 | 32,540,588 | ||||
General Mills Inc. | United States | 486,290 | 27,241,966 | ||||
Kraft Foods Inc., A | United States | 2,269,151 | 57,500,286 | ||||
Nestle SA | Switzerland | 1,873,973 | 70,552,006 | ||||
| 223,319,493 | |||||||
Health Care Providers & Services 1.3% | |||||||
aCommunity Health Systems Inc. | United States | 1,277,022 | 32,244,806 | ||||
aKindred Healthcare Inc. | United States | 167,311 | 2,069,637 | ||||
aTenet Healthcare Corp. | United States | 6,379,987 | 17,991,563 | ||||
| 52,306,006 | |||||||
Hotels, Restaurants & Leisure 0.0%b | |||||||
aTrump Entertainment Resorts Inc. | United States | 169,038 | 28,736 | ||||
Independent Power Producers & Energy Traders 0.9% | |||||||
Constellation Energy Group | United States | 1,036,736 | 27,556,443 | ||||
aNRG Energy Inc. | United States | 279,070 | 7,244,657 | ||||
| 34,801,100 | |||||||
Industrial Conglomerates 3.9% | |||||||
Keppel Corp. Ltd. | Singapore | 3,905,323 | 18,600,627 | ||||
Koninklijke Philips Electronics NV | Netherlands | 1,315,064 | 24,209,179 | ||||
fOrkla ASA | Norway | 5,362,549 | 38,929,727 | ||||
Siemens AG | Germany | 638,515 | 44,089,462 | ||||
Tyco International Ltd. | United States | 1,019,893 | 26,496,820 | ||||
| 152,325,815 | |||||||
MS-19
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Mutual Shares Securities Fund | Country | Shares/ Warrants/ Contracts | Value | ||||
Common Stocks and Other Equity Interests (continued) | |||||||
Insurance 5.8% | |||||||
ACE Ltd. | United States | 797,505 | $ | 35,273,646 | |||
aAlleghany Corp. | United States | 23,818 | 6,454,678 | ||||
aBerkshire Hathaway Inc., A | United States | 149 | 13,410,000 | ||||
aBerkshire Hathaway Inc., B | United States | 25,810 | 74,738,791 | ||||
aConseco Inc. | United States | 1,091,457 | 2,586,753 | ||||
Old Republic International Corp. | United States | 2,329,142 | 22,942,049 | ||||
a,eOlympus Re Holdings Ltd. | United States | 16,280 | 35,578 | ||||
The Travelers Cos. Inc. | United States | 320,496 | 13,153,156 | ||||
White Mountains Insurance Group Ltd. | United States | 140,935 | 32,261,431 | ||||
Zurich Financial Services AG | Switzerland | 137,066 | 24,136,933 | ||||
| 224,993,015 | |||||||
Leisure Equipment & Products 1.7% | |||||||
Eastman Kodak Co. | United States | 2,112,040 | 6,251,638 | ||||
Mattel Inc. | United States | 3,654,069 | 58,647,808 | ||||
| 64,899,446 | |||||||
Life Sciences Tools & Services 0.6% | |||||||
aMDS Inc. | Canada | 825,217 | 4,335,591 | ||||
aThermo Fisher Scientific Inc. | United States | 460,841 | 18,788,488 | ||||
| 23,124,079 | |||||||
Machinery 0.9% | |||||||
AB SKF, B | Sweden | 1,095,590 | 13,488,291 | ||||
Federal Signal Corp. | United States | 930,921 | 7,121,546 | ||||
a,e,f,gMotor Coach Industries International Inc. | United States | 2,219 | 2,885,810 | ||||
Parker Hannifin Corp. | United States | 263,420 | 11,316,523 | ||||
| 34,812,170 | |||||||
Marine 0.8% | |||||||
A.P. Moller - Maersk AS | Denmark | 5,500 | 32,940,955 | ||||
Media 5.1% | |||||||
aAdelphia Recovery Trust | United States | 29,283,354 | 732,084 | ||||
a,cAdelphia Recovery Trust, Arahova Contingent Value Vehicle, Contingent Distribution | United States | 1,955,453 | 371,536 | ||||
a,cCentury Communications Corp., Contingent Distribution | United States | 5,487,000 | — | ||||
Comcast Corp., A | United States | 5,979,493 | 84,310,851 | ||||
News Corp., A | United States | 6,371,079 | 58,040,530 | ||||
Time Warner Cable Inc. | United States | 682,949 | 21,628,995 | ||||
a,dTVMAX Holdings Inc. | United States | 35,609 | — | ||||
Virgin Media Inc. | United Kingdom | 3,623,690 | 33,881,501 | ||||
| 198,965,497 | |||||||
Metals & Mining 0.6% | |||||||
Anglo American PLC | United Kingdom | 800,870 | 23,237,842 | ||||
Multi-Utilities 0.7% | |||||||
GDF Suez | France | 746,422 | 27,785,564 | ||||
a,cNorthWestern Corp., Contingent Distribution | United States | 3,348,000 | — | ||||
| 27,785,564 | |||||||
Oil, Gas & Consumable Fuels 3.9% | |||||||
BP PLC | United Kingdom | 2,580,641 | 20,287,664 | ||||
BP PLC, ADR | United Kingdom | 5,003 | 238,543 | ||||
MS-20
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Mutual Shares Securities Fund | Country | Shares/ Warrants/ Contracts | Value | ||||
Common Stocks and Other Equity Interests (continued) | |||||||
Oil, Gas & Consumable Fuels (continued) | |||||||
Marathon Oil Corp. | United States | 1,632,214 | $ | 49,178,608 | |||
Noble Energy Inc. | United States | 151,570 | 8,938,083 | ||||
Royal Dutch Shell PLC, A | United Kingdom | 1,813,808 | 45,284,041 | ||||
Total SA, B | France | 548,419 | 29,599,299 | ||||
| 153,526,238 | |||||||
Paper & Forest Products 2.9% | |||||||
aDomtar Corp. | United States | 304,139 | 5,042,625 | ||||
International Paper Co. | United States | 2,706,902 | 40,955,427 | ||||
MeadWestvaco Corp. | United States | 1,553,006 | 25,484,829 | ||||
Weyerhaeuser Co. | United States | 1,407,287 | 42,823,743 | ||||
| 114,306,624 | |||||||
Pharmaceuticals 6.2% | |||||||
Novartis AG | Switzerland | 681,230 | 27,602,695 | ||||
Schering-Plough Corp. | United States | 3,391,212 | 85,187,245 | ||||
aValeant Pharmaceuticals International | United States | 234,816 | 6,039,468 | ||||
Wyeth | United States | 2,755,000 | 125,049,450 | ||||
| 243,878,858 | |||||||
Real Estate Investment Trusts (REITs) 1.1% | |||||||
Alexander’s Inc. | United States | 49,326 | 13,298,290 | ||||
Link REIT | Hong Kong | 8,630,556 | 18,419,515 | ||||
Ventas Inc. | United States | 119,989 | 3,582,871 | ||||
Vornado Realty Trust | United States | 170,000 | 7,655,100 | ||||
| 42,955,776 | |||||||
Real Estate Management & Development 0.4% | |||||||
a,dCanary Wharf Group PLC | United Kingdom | 1,535,898 | 4,422,407 | ||||
aForestar Real Estate Group | United States | 330,463 | 3,925,901 | ||||
aThe St. Joe Co. | United States | 314,282 | 8,325,330 | ||||
| 16,673,638 | |||||||
Semiconductors & Semiconductor Equipment 1.4% | |||||||
aLSI Corp. | United States | 7,019,253 | 32,007,794 | ||||
Maxim Integrated Products Inc. | United States | 1,542,747 | 24,205,700 | ||||
| 56,213,494 | |||||||
Software 2.4% | |||||||
hMicrosoft Corp. | United States | 3,846,293 | 91,426,385 | ||||
Tobacco 9.6% | |||||||
Altria Group Inc. | United States | 3,268,024 | 53,562,913 | ||||
British American Tobacco PLC | United Kingdom | 4,320,987 | 118,942,541 | ||||
British American Tobacco PLC, ADR | United Kingdom | 4,218 | 235,364 | ||||
Imperial Tobacco Group PLC | United Kingdom | 3,149,559 | 81,773,965 | ||||
Japan Tobacco Inc. | Japan | 8,960 | 28,081,362 | ||||
KT&G Corp. | South Korea | 554,296 | 31,306,332 | ||||
Lorillard Inc. | United States | 170,740 | 11,571,050 | ||||
Philip Morris International Inc. | United States | 455,680 | 19,876,762 | ||||
Reynolds American Inc. | United States | 782,231 | 30,209,761 | ||||
| 375,560,050 | |||||||
MS-21
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Mutual Shares Securities Fund | Country | Shares/ Warrants/ Contracts | Value | |||||
Common Stocks and Other Equity Interests (continued) | ||||||||
Transportation Infrastructure 0.0%b | ||||||||
aGroupe Eurotunnel SA | France | 3,017 | $ | 17,096 | ||||
aGroupe Eurotunnel SA, wts., 12/30/11 | France | 160,159 | 25,384 | |||||
| 42,480 | ||||||||
Total Common Stocks and Other Equity Interests (Cost $3,985,320,483) | 3,303,909,000 | |||||||
Preferred Stocks 0.4% | ||||||||
Diversified Telecommunication Services 0.0%b | ||||||||
a,ePTV Inc., 10.00%, pfd., A | United Kingdom | 17,300 | 4,152 | |||||
Machinery 0.4% | ||||||||
a,e,f,gMotor Coach Industries International Inc., pfd., | United States | 15,923 | 15,923,000 | |||||
Total Preferred Stocks (Cost $15,933,899) | 15,927,152 | |||||||
Options Purchased 0.1% | ||||||||
Put Options (Cost $13,157,787) 0.1% | ||||||||
aS&P 500 Index, exercise price $775, expiration date 12/19/09, contracts | United States | 2,229 | 5,795,400 | |||||
| Principal Amounti | ||||||||
Corporate Bonds & Notes 3.9% | ||||||||
American General Finance Corp., | United States | 1,430,000 | 821,182 | |||||
senior note, J, 6.90%, 12/15/17 | United States | 20,010,000 | 10,849,322 | |||||
j,kBoston Generating LLC, FRN, | United States | 469,092 | 341,851 | |||||
Synthetic Letter of Credit, 1.095%, 12/21/13 | United States | 1,675,285 | 1,220,864 | |||||
Term Loan B, 2.569%, 12/21/13 | United States | 7,402,624 | 5,394,662 | |||||
kCalpine Corp., Exit Term Loan, FRN, 4.095%, 3/29/14 | United States | 48,789,697 | 43,314,420 | |||||
e,lCerberus CG Investor I LLC, 12.00%, 7/31/14 | United States | 7,173,000 | 1,362,870 | |||||
e,lCerberus CG Investor II LLC, 12.00%, 7/31/14 | United States | 7,173,000 | 1,362,870 | |||||
e,lCerberus CG Investor III LLC, 12.00%, 7/31/14 | United States | 3,586,500 | 681,435 | |||||
e,lCerberus FIM Investors Holdco LLC, 12.00%, 11/22/13 | United States | 23,696,793 | 1,723,965 | |||||
DecisionOne Corp., | United States | 142,137 | 158,696 | |||||
dTerm Loan B, 15.00%, 8/29/13 | United States | 24,958 | 27,866 | |||||
Exterran Holding Inc., senior note, cvt., 4.25%, 6/15/14 | United States | 4,517,000 | 4,217,749 | |||||
kFirst Data Corp., Term Loan, FRN, 3.065%, 9/24/14 | ||||||||
B-1 | United States | 5,968,340 | 4,487,858 | |||||
B-2 | United States | 13,446,046 | 10,118,149 | |||||
B-3 | United States | 1,474,147 | 1,107,914 | |||||
Groupe Eurotunnel SA, cvt., sub. bond, NRS I, | France | 4,300 | EUR | 4,825 | ||||
T2, 3.00%, 7/28/09 | France | 4,979 | GBP | 8,601 | ||||
T3, 3.00%, 7/28/10 | France | 2,425,100 | EUR | 2,721,156 | ||||
T3, 3.00%, 7/28/10 | France | 1,688,564 | GBP | 2,917,192 | ||||
d,f,kInternational Automotive Components Group NA Inc., Revolver, FRN, 5.75%, 1/18/14 | United States | 959,420 | 959,420 | |||||
e,f,lInternational Automotive Components Group NA LLC, 9.00%, 4/01/17 | United States | 1,456,500 | 660,862 | |||||
e,f,k,mPontus I LLC, junior note, 144A, FRN, 4.856%, 7/24/09 | United States | 17,671,292 | 16,956,543 | |||||
e,f,k,mPontus II Trust, junior profit-participating note, 144A, FRN, 7.66%, 6/25/09 | United States | 2,802,782 | 4,882,673 | |||||
MS-22
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Mutual Shares Securities Fund | Country | Principal Amounti | Value | ||||||
Corporate Bonds & Notes (continued) | |||||||||
kRealogy Corp., FRN, | United States | 688,587 | $ | 502,177 | |||||
Initial Term Loan B, 4.177%, 10/10/13 | United States | 6,841,595 | 4,989,480 | ||||||
nRevolver, 3.427%, 4/10/13 | United States | 9,012,140 | 5,812,831 | ||||||
Synthetic Letter of Credit, 0.185%, 10/10/13 | United States | 1,841,983 | 1,343,332 | ||||||
kTexas Competitive Electric Holdings Co. LLC, FRN, | United States | 18,771,705 | 13,429,597 | ||||||
Term Loan B3, 3.821%, 10/10/14 | United States | 10,466,967 | 7,503,507 | ||||||
Tranche B-2 Term Loan, 3.821%, 10/10/14 | United States | 2,960,005 | 2,122,510 | ||||||
d,oTVMAX Holdings Inc., PIK, | United States | 69,699 | 19,572 | ||||||
14.00%, 9/30/09 | United States | 221,250 | 59,762 | ||||||
Total Corporate Bonds & Notes (Cost $202,914,138) | 152,085,713 | ||||||||
Corporate Bonds & Notes in Reorganization 1.1% | |||||||||
k,lCharter Communications Operating LLC, FRN, | United States | 4,500,420 | 4,435,726 | ||||||
Term Loan B, 6.25%, 3/06/14 | United States | 25,801,268 | 23,398,525 | ||||||
k,lQuebecor World Inc., DIP Term Loan, FRN, 8.25%, 7/21/09 | Canada | 7,798,013 | 7,583,568 | ||||||
d,lSafety Kleen Services, senior sub. note, 9.25%, 6/01/08 | United States | 5,000 | 25 | ||||||
j,k,lSpectrum Brands Inc., FRN, | United States | 924,032 | 828,549 | ||||||
Euro Term Loan, 5.41%, 4/01/13 | United States | 2,906,445 | EUR | 3,556,816 | |||||
Letter of Credit Commitment, 6.25%, 4/01/13 | United States | 47,217 | 42,338 | ||||||
lTrump Entertainment Resorts Inc., 8.50%, 6/01/15 | United States | 7,582,630 | 976,263 | ||||||
f,lWimar OPCO LLC/Finance Corp., senior sub. note, 9.625%, 12/15/14 | United States | 18,305,000 | 251,694 | ||||||
Total Corporate Bonds & Notes in Reorganization | 41,073,504 | ||||||||
Companies in Liquidation 0.0% | |||||||||
dPeregrine Investments Holdings Ltd., 6.70%, 1/15/98 | Hong Kong | 5,000,000 | JPY | — | |||||
dPIV Investment Finance (Cayman) Ltd., 4.50%, 12/01/00 | Hong Kong | 12,200,000 | — | ||||||
Total Companies in Liquidation (Cost $—) | — | ||||||||
Total Investments before Short Term Investments | 3,518,790,769 | ||||||||
Short Term Investments 11.8% | |||||||||
U.S. Government and Agency Securities 11.8% | |||||||||
pFHLB, | United States | 40,600,000 | 40,600,000 | ||||||
7/02/09 - 12/04/09 | United States | 151,000,000 | 150,953,722 | ||||||
p,qU.S. Treasury Bills, 7/02/09 - 12/24/09 | United States | 270,000,000 | 269,837,915 | ||||||
Total U.S. Government and Agency Securities | 461,391,637 | ||||||||
Total Investments (Cost $4,730,344,617) 101.8% | 3,980,182,406 | ||||||||
Options Written (0.0)%b | (757,662 | ) | |||||||
Securities Sold Short (2.0)% | (79,623,950 | ) | |||||||
Other Assets, less Liabilities 0.2% | 8,421,986 | ||||||||
Net Assets 100.0% | $ | 3,908,222,780 | |||||||
MS-23
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Mutual Shares Securities Fund | Country | Contracts | Value | ||||
rOptions Written (Premium Received $293,416) 0.0%b | |||||||
Software 0.0%b | |||||||
Microsoft Corp., Jul. 22 Calls, 7/18/09 | United States | 3,846 | $ | 757,662 | |||
| Shares | |||||||
sSecurities Sold Short 2.0% | |||||||
Pharmaceuticals 2.0% | |||||||
Merck & Co. Inc. | United States | 1,955,711 | 54,681,680 | ||||
Pfizer Inc. | United States | 1,662,818 | 24,942,270 | ||||
Total Securities Sold Short (Proceeds $73,500,202) | $ | 79,623,950 | |||||
aNon-income producing.
bRounds to less than 0.1% of net assets.
cContingent distributions represent the right to receive additional distributions, if any, during the reorganization of the underlying company. Shares represent total underlying principal of debt securities.
dSecurity has been deemed illiquid because it may not be able to be sold within seven days. At June 30, 2009, the aggregate value of these securities was $5,523,347, representing 0.14% of net assets.
eSee Note 8 regarding restricted securities.
fSee Note 13 regarding other considerations.
gSee Note 12 regarding holdings of 5% voting securities.
hA portion or all of the security is held in connection with written option contracts open at period end.
iThe principal amount is stated in U.S. dollars unless otherwise indicated.
jA portion or all of the security purchased on a delayed delivery basis. See Note 1(c).
kThe coupon rate shown represents the rate at period end.
lSee Note 7 regarding credit risk and defaulted securities.
mSee Note 1(g) regarding special purpose entities.
nSee Note 9 regarding unfunded loan commitments.
oIncome may be received in additional securities and/or cash.
pThe security is traded on a discount basis with no stated coupon rate.
qSecurity or a portion of the security has been segregated as collateral for securities sold short. At June 30, 2009, the value of securities and/or cash pledged amounted to $124,876,614.
rSee Note 1(d) regarding written options.
sSee Note 1(f) regarding securities sold short.
The accompanying notes are an integral part of these financial statements.
MS-24
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Mutual Shares Securities Fund |
At June 30, 2009, the Fund had the following forward exchange contracts outstanding. See Note 1(d).
| Currency | Counterparty | Type | Quantity | Contract Amount | Settlement Date | Unrealized Appreciation | Unrealized Depreciation | |||||||||||
South Korean Won | BANT | Sell | 21,694,845,045 | $ | 16,467,307 | 7/08/09 | $ | — | $ | (559,475 | ) | |||||||
South Korean Won | BBU | Sell | 2,848,750,000 | 2,150,000 | 7/08/09 | — | (85,787 | ) | ||||||||||
South Korean Won | BANT | Buy | 1,050,000,000 | 822,240 | 7/08/09 | 1,833 | — | |||||||||||
British Pound | SSBT | Sell | 19,045,766 | 28,413,305 | 7/13/09 | — | (2,923,164 | ) | ||||||||||
British Pound | BANT | Sell | 5,160,000 | 7,366,436 | 7/13/09 | — | (1,123,439 | ) | ||||||||||
British Pound | HSBC | Sell | 4,980,000 | 7,515,447 | 7/13/09 | — | (678,270 | ) | ||||||||||
British Pound | BBU | Sell | 740,000 | 1,119,213 | 7/13/09 | — | (98,327 | ) | ||||||||||
British Pound | DBFX | Sell | 870,000 | 1,397,264 | 7/13/09 | — | (34,169 | ) | ||||||||||
British Pound | BANT | Buy | 3,925,000 | 5,599,702 | 7/13/09 | 858,197 | — | |||||||||||
British Pound | SSBT | Buy | 635,000 | 901,179 | 7/13/09 | 143,602 | — | |||||||||||
Norwegian Krone | BANT | Sell | 137,143,577 | 19,513,884 | 7/13/09 | — | (1,797,519 | ) | ||||||||||
Norwegian Krone | HAND | Sell | 78,000,000 | 11,041,590 | 7/13/09 | — | (1,079,207 | ) | ||||||||||
Euro | BBU | Sell | 30,850,000 | 39,889,050 | 7/27/09 | — | (3,381,884 | ) | ||||||||||
Euro | BANT | Sell | 29,670,000 | 38,442,844 | 7/27/09 | — | (3,172,994 | ) | ||||||||||
Euro | HSBC | Sell | 12,327,012 | 16,932,309 | 7/27/09 | — | (357,847 | ) | ||||||||||
Euro | DBFX | Sell | 7,680,000 | 10,524,920 | 7/27/09 | — | (247,228 | ) | ||||||||||
Swiss Franc | BANT | Sell | 32,561,813 | 28,153,399 | 8/10/09 | — | (1,821,403 | ) | ||||||||||
Swiss Franc | SSBT | Sell | 21,276,249 | 18,286,249 | 8/10/09 | — | (1,299,619 | ) | ||||||||||
Swiss Franc | HSBC | Sell | 21,498,944 | 18,596,752 | 8/10/09 | — | (1,194,118 | ) | ||||||||||
Swiss Franc | HAND | Sell | 612,128 | 550,000 | 8/10/09 | — | (13,495 | ) | ||||||||||
Swiss Franc | DBFX | Sell | 288,340 | 260,000 | 8/10/09 | — | (5,432 | ) | ||||||||||
Swiss Franc | BBU | Sell | 288,035 | 259,999 | 8/10/09 | — | (5,152 | ) | ||||||||||
British Pound | BBU | Sell | 30,935,178 | 46,577,706 | 8/12/09 | — | (4,318,416 | ) | ||||||||||
British Pound | DBFX | Sell | 11,103,273 | 18,073,907 | 8/12/09 | — | (193,759 | ) | ||||||||||
Euro | BANT | Sell | 33,560,000 | 43,445,144 | 8/13/09 | — | (3,625,202 | ) | ||||||||||
Euro | SSBT | Sell | 21,569,177 | 29,928,795 | 8/13/09 | — | (323,549 | ) | ||||||||||
Euro | BBU | Sell | 4,400,000 | 5,874,968 | 8/13/09 | — | (296,353 | ) | ||||||||||
Euro | HSBC | Sell | 4,659,601 | 6,502,241 | 8/13/09 | — | (33,190 | ) | ||||||||||
Norwegian Krone | HAND | Sell | 10,000,000 | 1,535,108 | 8/19/09 | — | (17,343 | ) | ||||||||||
Norwegian Krone | HAND | Buy | 5,251,120 | 800,000 | 8/19/09 | 15,211 | — | |||||||||||
Norwegian Krone | BBU | Sell | 7,329,615 | 1,140,000 | 8/19/09 | 2,113 | — | |||||||||||
Norwegian Krone | DBFX | Sell | 11,150,278 | 1,760,000 | 8/19/09 | 28,974 | — | |||||||||||
Canadian Dollar | SSBT | Sell | 3,482,462 | 2,808,437 | 8/31/09 | — | (187,210 | ) | ||||||||||
Canadian Dollar | BANT | Sell | 446,000 | 356,900 | 8/31/09 | — | (26,754 | ) | ||||||||||
Canadian Dollar | SSBT | Buy | 2,447,610 | 2,077,806 | 8/31/09 | 27,651 | — | |||||||||||
Euro | SSBT | Sell | 20,830,000 | 27,242,416 | 8/31/09 | — | (1,971,619 | ) | ||||||||||
Euro | BANT | Sell | 14,866,889 | 19,852,378 | 8/31/09 | — | (998,405 | ) | ||||||||||
Euro | HSBC | Sell | 1,610,000 | 2,183,434 | 8/31/09 | — | (74,588 | ) | ||||||||||
Euro | BBU | Sell | 5,475,000 | 7,687,306 | 8/31/09 | 8,629 | — | |||||||||||
Euro | DBFX | Sell | 1,960,000 | 2,803,878 | 8/31/09 | 54,982 | — | |||||||||||
British Pound | SSBT | Sell | 48,500,000 | 68,402,460 | 9/10/09 | — | (11,387,211 | ) | ||||||||||
British Pound | BBU | Sell | 48,305,000 | 71,636,315 | 9/14/09 | — | (7,831,759 | ) | ||||||||||
British Pound | SSBT | Sell | 810,000 | 1,204,045 | 9/14/09 | — | (128,512 | ) | ||||||||||
British Pound | SSBT | Buy | 1,170,052 | 1,926,113 | 9/14/09 | — | (1,225 | ) | ||||||||||
British Pound | AESX | Buy | 770,000 | 1,254,586 | 9/14/09 | 12,165 | — | |||||||||||
Euro | BANT | Sell | 71,800,000 | 91,806,380 | 9/14/09 | — | (8,885,911 | ) | ||||||||||
Euro | BBU | Sell | 23,000,000 | 31,301,505 | 9/14/09 | — | (953,686 | ) | ||||||||||
Euro | HSBC | Sell | 800,000 | 1,031,040 | 9/14/09 | — | (90,880 | ) | ||||||||||
Euro | SSBT | Sell | 500,000 | 642,710 | 9/14/09 | — | (58,490 | ) | ||||||||||
MS-25
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Mutual Shares Securities Fund |
| Currency | Counterparty | Type | Quantity | Contract Amount | Settlement Date | Unrealized Appreciation | Unrealized Depreciation | |||||||||||
Swedish Krona | HAND | Sell | 95,958,313 | $ | 11,171,292 | 9/16/09 | $ | — | $ | (1,262,387 | ) | |||||||
Swedish Krona | HAND | Buy | 5,292,665 | 670,000 | 9/16/09 | 15,790 | — | |||||||||||
Australian Dollar | HSBC | Sell | 1,903,458 | 1,464,979 | 9/17/09 | — | (58,599 | ) | ||||||||||
Australian Dollar | SSBT | Sell | 4,182,162 | 3,327,655 | 9/17/09 | — | (19,858 | ) | ||||||||||
Australian Dollar | BANT | Sell | 1,760,994 | 1,391,943 | 9/17/09 | — | (18,286 | ) | ||||||||||
Australian Dollar | SSBT | Buy | 31,400 | 24,991 | 9/17/09 | 143 | — | |||||||||||
Singapore Dollar | SSBT | Sell | 9,089,913 | 5,995,786 | 9/24/09 | — | (275,556 | ) | ||||||||||
Singapore Dollar | BANT | Sell | 3,212,903 | 2,155,137 | 9/24/09 | — | (61,520 | ) | ||||||||||
Singapore Dollar | HSBC | Sell | 1,750,212 | 1,189,030 | 9/24/09 | — | (18,481 | ) | ||||||||||
Singapore Dollar | SSBT | Buy | 820,118 | 559,502 | 9/24/09 | 6,316 | — | |||||||||||
Singapore Dollar | BBU | Sell | 905,783 | 630,000 | 9/24/09 | 5,080 | — | |||||||||||
Euro | BBU | Sell | 18,000,000 | 24,492,960 | 10/13/09 | — | (748,101 | ) | ||||||||||
Japanese Yen | SSBT | Sell | 1,666,613,242 | 16,884,830 | 10/20/09 | — | (436,502 | ) | ||||||||||
Japanese Yen | BBU | Sell | 70,210,080 | 720,000 | 10/20/09 | — | (9,703 | ) | ||||||||||
Japanese Yen | SSBT | Buy | 110,000,000 | 1,117,387 | 10/20/09 | 25,858 | — | |||||||||||
Japanese Yen | BANT | Buy | 38,138,100 | 385,000 | 10/20/09 | 11,374 | — | |||||||||||
Japanese Yen | HSBC | Sell | 107,721,220 | 1,120,000 | 10/20/09 | 439 | — | |||||||||||
Japanese Yen | BANT | Sell | 34,392,600 | 360,000 | 10/20/09 | 2,553 | — | |||||||||||
Japanese Yen | DBFX | Sell | 65,367,150 | 690,000 | 10/20/09 | 10,631 | — | |||||||||||
Japanese Yen | AESX | Sell | 141,040,037 | 1,470,000 | 10/20/09 | 4,152 | — | |||||||||||
Danish Krone | HAND | Sell | 77,623,060 | 13,509,072 | 10/23/09 | — | (1,085,779 | ) | ||||||||||
Danish Krone | BANT | Sell | 14,623,853 | 2,588,110 | 10/23/09 | — | (161,497 | ) | ||||||||||
Danish Krone | BBU | Sell | 6,137,496 | 1,120,000 | 10/23/09 | — | (33,985 | ) | ||||||||||
Danish Krone | SSBT | Sell | 470,000 | 84,548 | 10/23/09 | — | (3,823 | ) | ||||||||||
Danish Krone | BBU | Buy | 1,745,370 | 330,000 | 10/23/09 | — | (1,832 | ) | ||||||||||
Danish Krone | HAND | Buy | 5,637,327 | 965,093 | 10/23/09 | 94,849 | — | |||||||||||
Euro | BANT | Sell | 33,261,474 | 42,840,778 | 11/13/09 | — | (3,799,791 | ) | ||||||||||
Euro | SSBT | Sell | 4,889,334 | 6,469,713 | 11/13/09 | — | (386,306 | ) | ||||||||||
Euro | HSBC | Sell | 2,090,000 | 2,804,146 | 11/13/09 | — | (126,536 | ) | ||||||||||
Euro | BBU | Sell | 12,500,000 | 17,370,000 | 11/30/09 | — | (157,717 | ) | ||||||||||
Euro | BONY | Sell | 2,990,000 | 4,150,419 | 11/30/09 | — | (42,211 | ) | ||||||||||
Unrealized appreciation (depreciation) | 1,330,542 | (69,991,061 | ) | |||||||||||||||
Net unrealized appreciation (depreciation) | $ | (68,660,519 | ) | |||||||||||||||
See Abbreviations on page MS-42.
MS-26
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements
Statement of Assets and Liabilities
June 30, 2009 (unaudited)
| Mutual Shares Securities Fund | ||||
Assets: | ||||
Investments in securities: | ||||
Cost - Unaffiliated issuers | $ | 4,699,900,753 | ||
Cost - Non-controlled affiliated issuers (Note 12) | 30,443,864 | |||
Total cost of investments | $ | 4,730,344,617 | ||
Value - Unaffiliated issuers | $ | 3,946,759,958 | ||
Value - Non-controlled affiliated issuers (Note 12) | 33,422,448 | |||
Total value of investments | 3,980,182,406 | |||
Cash | 1,135,328 | |||
Cash on deposit with brokers | 79,922,764 | |||
Foreign currency, at value (cost $1,496,227) | 1,495,061 | |||
Receivables: | ||||
Investment securities sold | 8,830,870 | |||
Capital shares sold | 1,878,853 | |||
Dividends and interest | 7,606,948 | |||
Unrealized appreciation on forward exchange contracts | 1,330,542 | |||
Other assets | 5,170 | |||
Total assets | 4,082,387,942 | |||
Liabilities: | ||||
Payables: | ||||
Investment securities purchased | 15,323,896 | |||
Capital shares redeemed | 3,271,355 | |||
Affiliates | 3,684,043 | |||
Options written, at value (premiums received $293,416) | 757,662 | |||
Securities sold short, at value (proceeds $73,500,202) | 79,623,950 | |||
Unrealized depreciation on forward exchange contracts | 69,991,061 | |||
Unrealized depreciation on unfunded loan commitments (Note 9) | 261,759 | |||
Accrued expenses and other liabilities | 1,251,436 | |||
Total liabilities | 174,165,162 | |||
Net assets, at value | $ | 3,908,222,780 | ||
Net assets consist of: | ||||
Paid-in capital | $ | 5,086,140,332 | ||
Undistributed net investment income | 119,930,675 | |||
Net unrealized appreciation (depreciation) | (825,809,456 | ) | ||
Accumulated net realized gain (loss) | (472,038,771 | ) | ||
Net assets, at value | $ | 3,908,222,780 | ||
The accompanying notes are an integral part of these financial statements.
MS-27
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Assets and Liabilities (continued)
June 30, 2009 (unaudited)
| Mutual Shares Securities Fund | |||
Class 1: | |||
Net assets, at value | $ | 441,501,958 | |
Shares outstanding | 35,310,198 | ||
Net asset value and maximum offering price per share | $ | 12.50 | |
Class 2: | |||
Net assets, at value | $ | 3,371,762,395 | |
Shares outstanding | 273,206,704 | ||
Net asset value and maximum offering price per share | $ | 12.34 | |
Class 4: | |||
Net assets, at value | $ | 94,958,427 | |
Shares outstanding | 7,631,088 | ||
Net asset value and maximum offering price per share | $ | 12.44 | |
The accompanying notes are an integral part of these financial statements.
MS-28
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Operations
for the six months ended June 30, 2009 (unaudited)
| Mutual Shares Securities Fund | ||||
Investment income: | ||||
Dividends (net of foreign taxes of $3,698,862) | $ | 52,608,267 | ||
Interest | 12,562,043 | |||
Reserve for uncollectible interest (Note 7) | (9,452,062 | ) | ||
Income from securities loaned | 28,774 | |||
Total investment income | 55,747,022 | |||
Expenses: | ||||
Management fees (Note 3a) | 10,583,297 | |||
Administrative fees (Note 3b) | 1,608,049 | |||
Distribution fees: (Note 3c) | ||||
Class 2 | 3,885,833 | |||
Class 4 | 126,294 | |||
Unaffiliated transfer agent fees | 1,018 | |||
Custodian fees (Note 4) | 164,909 | |||
Reports to shareholders | 272,655 | |||
Registration and filing fees | 5,137 | |||
Professional fees | 228,977 | |||
Trustees’ fees and expenses | 11,724 | |||
Dividends on securities sold short | 1,338,170 | |||
Other | 106,826 | |||
Total expenses | 18,332,889 | |||
Expense reductions (Note 4) | (33,330 | ) | ||
Net expenses | 18,299,559 | |||
Net investment income | 37,447,463 | |||
Realized and unrealized gains (losses): | ||||
Net realized gain (loss) from: | ||||
Investments | (303,383,926 | ) | ||
Written options | 315,789 | |||
Foreign currency transactions | 66,985,145 | |||
Securities sold short | 418,960 | |||
Net realized gain (loss) | (235,664,032 | ) | ||
Net change in unrealized appreciation (depreciation) on: | ||||
Investments | 461,349,537 | |||
Translation of other assets and liabilities denominated in foreign currencies | (92,378,629 | ) | ||
Net change in unrealized appreciation (depreciation) | 368,970,908 | |||
Net realized and unrealized gain (loss) | 133,306,876 | |||
Net increase (decrease) in net assets resulting from operations | $ | 170,754,339 | ||
The accompanying notes are an integral part of these financial statements.
MS-29
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statements of Changes in Net Assets
| Mutual Shares Securities Fund | ||||||||
| Six Months Ended June 30, 2009 (unaudited) | Year Ended December 31, 2008 | |||||||
Increase (decrease) in net assets: | ||||||||
Operations: | ||||||||
Net investment income | $ | 37,447,463 | $ | 96,055,146 | ||||
Net realized gain (loss) from investments, written options, securities sold short and foreign currency transactions | (235,664,032 | ) | (246,411,311 | ) | ||||
Net change in unrealized appreciation (depreciation) on investments and translation of other assets and liabilities denominated in foreign currencies | 368,970,908 | (2,068,869,893 | ) | |||||
Net increase (decrease) in net assets resulting from operations | 170,754,339 | (2,219,226,058 | ) | |||||
Distributions to shareholders from: | ||||||||
Net investment income: | ||||||||
Class 1 | — | (11,945,567 | ) | |||||
Class 2 | — | (141,276,754 | ) | |||||
Class 4 | — | (1,103,934 | ) | |||||
Net realized gains: | ||||||||
Class 1 | — | (15,383,580 | ) | |||||
Class 2 | — | (200,942,848 | ) | |||||
Class 4 | — | (1,421,653 | ) | |||||
Total distributions to shareholders | — | (372,074,336 | ) | |||||
Capital share transactions: (Note 2) | ||||||||
Class 1 | 101,164,052 | 217,189,228 | ||||||
Class 2 | (76,544,588 | ) | (215,728,827 | ) | ||||
Class 4 | 32,118,911 | 72,510,540 | ||||||
Total capital share transactions | 56,738,375 | 73,970,941 | ||||||
Net increase (decrease) in net assets | 227,492,714 | (2,517,329,453 | ) | |||||
Net assets: | ||||||||
Beginning of period | 3,680,730,066 | 6,198,059,519 | ||||||
End of period | $ | 3,908,222,780 | $ | 3,680,730,066 | ||||
Undistributed net investment income included in net assets: | ||||||||
End of period | $ | 119,930,675 | $ | 82,483,212 | ||||
The accompanying notes are an integral part of these financial statements.
MS-30
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited)
Mutual Shares Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Templeton Variable Insurance Products Trust (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end investment company, consisting of twenty-two separate funds. The Mutual Shares Securities Fund (Fund) is included in this report. The financial statements of the remaining funds in the Trust are presented separately. Shares of the Fund are sold only to insurance company separate accounts to fund the benefits of variable life insurance policies or variable annuity contracts. The Fund offers three classes of shares: Class 1, Class 2, and Class 4. Each class of shares differs by its distribution fees, voting rights on matters affecting a single class and its exchange privilege.
The following summarizes the Fund’s significant accounting policies.
a. Security Valuation
Equity and other securities listed on a securities exchange or on the NASDAQ National Market System are valued at the last quoted sale price or the official closing price of the day, respectively. Over-the-counter securities and listed securities for which there is no reported sale are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. Certain equity securities are valued based upon fundamental characteristics or relationships to similar securities.
Corporate debt securities and government securities generally trade in the over-the-counter market rather than on a securities exchange. The Fund may utilize independent pricing services, quotations from bond dealers, and information with respect to bond and note transactions, to assist in determining a current market value for each security. The Fund’s pricing services may use valuation models or matrix pricing which considers information with respect to comparable bond and note transactions, quotations from bond dealers, or by reference to other securities that are considered comparable in such characteristics as rating, interest rate and maturity date, option adjusted spread models, prepayment projections, interest rate spreads and yield curves, to determine current value.
Foreign equity securities are valued as of the close of trading on the foreign stock exchange on which the security is primarily traded, or the NYSE, whichever is earlier. If no sale is reported at that time, the foreign equity security will be valued within the range of the most recent quoted bid and ask prices. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at the close of the NYSE on the day that the value of the security is determined.
The Fund has procedures to determine the fair value of individual securities and other assets for which market prices are not readily available or which may not be reliably priced. Methods for valuing these securities may include: fundamental analysis based upon the underlying investment book value, anticipated future cash flows, market changes in comparable or similar securities, matrix pricing, discounts from market prices of similar securities, or discounts applied due to the nature and duration of restrictions on the disposition of the securities. Due to the inherent uncertainty of valuations of such securities, the fair values may differ significantly from the values that would have been used had a ready market for such investments existed. Occasionally, events occur between the time at which trading in a security is completed and the close of the NYSE that might call into question the availability (including the reliability) of the value of a portfolio security held by the Fund. The investment manager monitors price movements following the close of trading in foreign stock markets through a series of country specific market proxies (such as baskets of American Depository Receipts, futures contracts and exchange traded funds). These price movements are measured against established trigger thresholds for each specific market proxy to assist in determining if an event has occurred. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services. All security valuation procedures are approved by the Fund’s Board of Trustees.
b. Foreign Currency Translation
Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. Purchases and sales of securities, income and
MS-31
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Mutual Shares Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
b. Foreign Currency Translation (continued)
expense items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. Occasionally, events may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the Fund’s Board of Trustees.
The Fund does not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments on the Statement of Operations.
Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period.
c. Securities Purchased on a Delayed Delivery Basis
The Fund may purchase securities on a delayed delivery basis, with payment and delivery scheduled for a future date. These transactions are subject to market fluctuations and are subject to the risk that the value at delivery may be more or less than the trade date purchase price. Although the Fund will generally purchase these securities with the intention of holding the securities, it may sell the securities before the settlement date. Sufficient assets have been segregated for these securities.
d. Derivative Financial Instruments
The Fund may invest in derivative financial instruments (derivatives) in order to manage risk or gain exposure to various other investments or markets. Derivatives are financial contracts based on an underlying or notional amount, require no initial investment or an initial net investment that is smaller than would normally be required to have a similar response to changes in market factors, and require or permit net settlement. Derivatives may contain various risks including the potential inability of the counterparty to fulfill their obligations under the terms of the contract, the potential for an illiquid secondary market, and the potential for market movements which may expose the Fund to gains or losses in excess of the amounts shown on the Statement of Assets and Liabilities.
Derivatives are marked to market daily based upon quotations from market makers or the Fund’s independent pricing services and the Fund’s net benefit or obligation under the contract, as measured by the fair market value of the contract, is included in net assets. Realized gain and loss and unrealized appreciation and depreciation on these contracts for the period are included in the Statement of Operations.
The Fund enters into forward exchange contracts in order to hedge against fluctuations in foreign exchange rates. A forward exchange contract is an agreement between the Fund and a counterparty to buy or sell a foreign currency for a specific exchange rate on a future date. Pursuant to the terms of the forward exchange contacts, cash or securities may be required to be deposited as collateral.
The Fund purchases or writes option contracts in order to manage equity price risk. An option is a contract entitling the holder to purchase or sell a specific amount of shares or units of a particular security, currency or index at a specified price. Options purchased are recorded as an asset while options written are recorded as a liability. Upon exercise of an option, the acquisition cost or sales proceeds of the security is adjusted by any premium paid or received. Upon expiration of an option, any premium
MS-32
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Mutual Shares Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
d. Derivative Financial Instruments (continued)
paid or received is recorded as a realized loss or gain. Upon closing an option other than through expiration or exercise, the difference between the premium and the cost to close the position is recorded as a realized gain or loss.
See Note 11 regarding other derivative information.
e. Foreign Currency Contracts
The Fund enters into foreign exchange contracts in order to manage foreign exchange rate risk between the trade date and settlement date of securities transactions. A foreign exchange contract is an agreement between the Fund and a counterparty to buy or sell a foreign currency for a specific exchange rate on a future date.
f. Securities Sold Short
The Fund is engaged in selling securities short, which obligates the Fund to replace a borrowed security with the same security at current market value. The Fund incurs a loss if the price of the security increases between the date of the short sale and the date on which the Fund replaces the borrowed security. The Fund realizes a gain if the price of the security declines between those dates. Gains are limited to the price at which the Fund sold the security short, while losses are potentially unlimited in size.
The Fund is required to establish a margin account with the broker lending the security sold short. While the short sale is outstanding, the broker retains the proceeds of the short sale and the Fund must maintain a deposit with broker consisting of cash and securities having a value equal to a specified percentage of the value of the securities sold short. The Fund is obligated to pay the counterparty any dividends or interest due on securities sold short. Such dividends and interest are recorded as an expense to the Fund.
g. Special Purpose Entities
At June 30, 2009, the Fund had contributed an additional $11,126,926 as a subordinated note holder of certain special purpose entities (“SPEs”). Such contributions, while made at the discretion of the Fund, represent additional capital contributions to the SPE in support of its underlying investments and are subject first to the claims of the senior note holders of the SPE. These contributions are recorded as an addition to the Fund’s cost basis in the SPE and are subject to the risk of loss in the event of continued unfavorable market conditions related to the SPE’s underlying investments.
h. Securities Lending
The Fund participates in an agency based security lending program. The Fund receives cash collateral against the loaned securities in an amount equal to at least 102% of the market value of the loaned securities. Collateral is maintained over the life of the loan in an amount not less than 100% of the market value of loaned securities, as determined at the close of Fund business each day; any additional collateral required due to changes in security values is delivered to the Fund on the next business day. The collateral is invested in a non-registered money market fund managed by the Fund’s custodian on the Fund’s behalf. The Fund receives income from the investment of cash collateral, in addition to lending fees and rebates paid by the borrower. The Fund bears the market risk with respect to the collateral investment, securities loaned, and the risk that the agent may default on its obligations to the Fund. The securities lending agent has agreed to indemnify the Fund in the event of default by a third party borrower. At June 30, 2009, the Fund had no securities on loan.
i. Income Taxes
No provision has been made for U.S. income taxes because it is the Fund’s policy to qualify as a regulated investment company under the Internal Revenue Code and to distribute to shareholders substantially all of its taxable income and net realized gains.
MS-33
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Mutual Shares Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
i. Income Taxes (continued)
The Fund has reviewed the tax positions, taken on federal income tax returns, for each of the three open tax years and as of June 30, 2009, and has determined that no provision for income tax is required in the Fund’s financial statements.
Foreign securities held by the Fund may be subject to foreign taxation on dividend and interest income received. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist in the foreign markets in which the Fund invests.
j. Security Transactions, Investment Income, Expenses and Distributions
Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Amortization of premium and accretion of discount on debt securities are included in interest income. Dividend income and dividends declared on securities sold short are recorded on the ex-dividend date except that certain dividends from foreign securities are recognized as soon as the Fund is notified of the ex-dividend date. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with accounting principles generally accepted in the United States of America. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods.
Common expenses incurred by the Trust are allocated among the funds based on the ratio of net assets of each fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense.
Realized and unrealized gains and losses and net investment income, not including class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions, by class, are generally due to differences in class specific expenses.
k. Accounting Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
l. Guarantees and Indemnifications
Under the Trust’s organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, on behalf of the Fund, enters into contracts with service providers that contain general indemnification clauses. The Trust’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote.
MS-34
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Mutual Shares Securities Fund
2. SHARES OF BENEFICIAL INTEREST
At June 30, 2009, there were an unlimited number of shares authorized (without par value). Transactions in the Fund’s shares were as follows:
| Six Months Ended June 30, 2009 | Year Ended December 31, 2008a | |||||||||||||
| Class 1 Shares: | Shares | Amount | Shares | Amount | ||||||||||
Shares sold | 11,152,167 | $ | 129,933,445 | 15,807,156 | $ | 251,864,457 | ||||||||
Shares issued in reinvestment of distributions | — | — | 1,694,305 | 27,329,147 | ||||||||||
Shares redeemed | (2,670,334 | ) | (28,769,393 | ) | (4,017,273 | ) | (62,004,376 | ) | ||||||
Net increase (decrease) | 8,481,833 | $ | 101,164,052 | 13,484,188 | $ | 217,189,228 | ||||||||
Class 2 Shares: | ||||||||||||||
Shares sold | 14,470,464 | $ | 164,504,015 | 29,551,202 | $ | 460,631,440 | ||||||||
Shares issued in reinvestment of distributions | — | — | 21,455,774 | 342,219,602 | ||||||||||
Shares redeemed | (21,798,355 | ) | (241,048,603 | ) | (64,008,262 | ) | (1,018,579,869 | ) | ||||||
Net increase (decrease) | (7,327,891 | ) | $ | (76,544,588 | ) | (13,001,286 | ) | $ | (215,728,827 | ) | ||||
Class 4 Shares: | ||||||||||||||
Shares sold | 2,840,585 | $ | 32,455,989 | 4,692,500 | $ | 70,463,022 | ||||||||
Shares issued on reinvestment of distributions | — | — | 156,848 | 2,525,245 | ||||||||||
Shares redeemed | (29,742 | ) | (337,078 | ) | (29,103 | ) | (477,727 | ) | ||||||
Net increase (decrease) | 2,810,843 | $ | 32,118,911 | 4,820,245 | $ | 72,510,540 | ||||||||
| aFor | the period February 29, 2008 (effective date) to December 31, 2008 for Class 4. |
3. TRANSACTIONS WITH AFFILIATES
Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Trust are also officers and/or directors of the following subsidiaries:
| Subsidiary | Affiliation | |
Franklin Mutual Advisers, LLC (Franklin Mutual) | Investment manager | |
Franklin Templeton Services, LLC (FT Services) | Administrative manager | |
Franklin Templeton Distributors, Inc. (Distributors) | Principal underwriter | |
Franklin Templeton Investor Services, LLC (Investor Services) | Transfer agent |
a. Management Fees
The Fund pays an investment management fee to Franklin Mutual based on the average daily net assets of the Fund as follows:
| Annualized Fee Rate | Net Assets | |
| 0.600% | Up to and including $5 billion | |
| 0.570% | Over $5 billion, up to and including $10 billion | |
| 0.550% | Over $10 billion, up to and including $15 billion | |
| 0.530% | Over $15 billion, up to and including $20 billion | |
| 0.510% | In excess of $20 billion |
MS-35
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Mutual Shares Securities Fund
3. TRANSACTIONS WITH AFFILIATES (continued)
b. Administrative Fees
The Fund pays an administrative fee to FT Services based on the Fund’s average daily net assets as follows:
| Annualized Fee Rate | Net Assets | |
| 0.150% | Up to and including $200 million | |
| 0.135% | Over $200 million, up to and including $700 million | |
| 0.100% | Over $700 million, up to and including $1.2 billion | |
| 0.075% | In excess of $1.2 billion |
c. Distribution Fees
The Fund’s Board of Trustees has adopted distribution plans for Class 2 and Class 4 shares pursuant to Rule 12b-1 under the 1940 Act. Under the Fund’s compensation distribution plans, the Fund pays Distributors for costs incurred in connection with the servicing, sale and distribution of the Fund’s shares up to 0.35% per year of its average daily net assets of each class, respectively. The Board of Trustees has agreed to limit the current rate to 0.25% per year for Class 2.
d. Transfer Agent Fees
Investor Services, under terms of an agreement, performs shareholder servicing for the Fund and is not paid by the Fund for the services.
4. EXPENSE OFFSET ARRANGEMENT
The Fund has entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Fund’s custodian expenses. During the period ended June 30, 2009, the custodian fees were reduced as noted in the Statement of Operations.
5. INCOME TAXES
For tax purposes, capital losses may be carried over to offset future capital gains, if any. At December 31, 2008, the Fund had tax basis capital losses of $49,737,496 expiring in 2016.
For tax purposes, realized capital losses occurring subsequent to October 31, may be deferred and treated as occurring on the first day of the following fiscal year. At December 31, 2008, the Fund deferred realized capital losses of $141,606,007.
At June 30, 2009, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
Cost of investments | $ | 4,751,553,594 | ||
Unrealized appreciation | $ | 295,860,467 | ||
Unrealized depreciation | (1,067,231,655 | ) | ||
Net unrealized appreciation (depreciation) | $ | (771,371,188 | ) | |
Net investment income differs for financial statement and tax purposes primarily due to differing treatments of defaulted securities, foreign currency transactions, passive foreign investment company shares, pass-through entity income, bond discounts and premiums, and certain dividends on securities sold short.
MS-36
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Mutual Shares Securities Fund
5. INCOME TAXES (continued)
Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatments of wash sales, tax straddles, foreign currency transactions, index stock options, pass-through entity income and bond discounts and premiums.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities and securities sold short) for the period ended June 30, 2009, aggregated $919,050,297 and $722,574,842, respectively.
Transactions in options written during the period ended June 30, 2009, were as follows:
| Number of Contracts | Premiums Received | ||||||
Options outstanding at December 31, 2008 | 1,958 | $ | 315,789 | ||||
Options written | 3,846 | 293,416 | |||||
Options expired | (1,958 | ) | (315,789 | ) | |||
Options exercised | — | — | |||||
Options closed | — | — | |||||
Options outstanding at June 30, 2009 | 3,846 | $ | 293,416 | ||||
7. CREDIT RISK AND DEFAULTED SECURITIES
The Fund may purchase the pre-default or defaulted debt of distressed companies. Distressed companies are financially troubled and are about to be/or are already involved in financial restructuring or bankruptcy. Risks associated with purchasing these securities include the possibility that the bankruptcy or other restructuring process takes longer than expected, or that distributions in restructuring are less than anticipated, either or both of which may result in unfavorable consequences to the Fund. If it becomes probable that income on debt securities, including those of distressed companies, will not be collected, the Fund discontinues accruing income and recognizes a reserve for uncollectible interest.
At June 30, 2009, the aggregate value of distressed company securities and securities for which interest has been discontinued was $46,865,506, representing 1.20% of the Fund’s net assets. For information as to specific securities, see the accompanying Statement of Investments.
8. RESTRICTED SECURITIES
The Fund may invest in securities that are restricted under the Securities Act of 1933 (1933 Act) or which are subject to legal, contractual, or other agreed upon restrictions on resale. Restricted securities are often purchased in private placement transactions, and cannot be sold without prior registration unless the sale is pursuant to an exemption under the 1933 Act. Disposal of these securities may require greater effort and expense, and prompt sale at an acceptable price may be difficult. The Fund may have registration rights for restricted securities. The issuer generally incurs all registration costs.
MS-37
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Mutual Shares Securities Fund
8. RESTRICTED SECURITIES (continued)
At June 30, 2009, the Fund held investments in restricted securities, excluding 144A securities deemed to be liquid, valued in accordance with procedures approved by the Fund’s Board of Trustees as reflecting fair value, as follows:
| Principal Amount/ Shares/ Warrants/ Contracts | Issuer | Acquisition Dates | Cost | Value | ||||||
| 62,453 | AboveNet Inc. | 10/02/01 - 8/08/08 | $ | 3,452,922 | $ | 5,057,444 | ||||
| 78 | AboveNet Inc., stock grant, grant price $20.95, expiration date 9/09/13 | 4/17/06 - 9/08/06 | — | 4,682 | ||||||
| 2,995 | AboveNet Inc., wts., 9/08/10 | 10/02/01 - 9/07/07 | 315,092 | 172,213 | ||||||
| 6,400,507 | CB FIM Coinvestors LLC | 1/15/09 - 6/02/09 | 6,400,507 | 14,613,638 | ||||||
| 8,172,654 | Cerberus CG Investor I LLC | 7/26/07 - 6/17/08 | 8,144,664 | 1,552,804 | ||||||
| 7,173,000 | Cerberus CG Investor I LLC, 12.00%, 7/31/14 | 7/26/07 | 7,173,000 | 1,362,870 | ||||||
| 8,172,654 | Cerberus CG Investor II LLC | 7/26/07 - 6/17/08 | 8,144,664 | 1,552,804 | ||||||
| 7,173,000 | Cerberus CG Investor II LLC, 12.00%, 7/31/14 | 7/26/07 | 7,173,000 | 1,362,870 | ||||||
| 4,086,327 | Cerberus CG Investor III LLC | 7/26/07 - 6/17/08 | 4,072,332 | 776,402 | ||||||
| 3,586,500 | Cerberus CG Investor III LLC, 12.00%, 7/31/14 | 7/26/07 | 3,586,500 | 681,435 | ||||||
| 8,006,950 | Cerberus FIM Investors Holdco LLC | 11/20/06 - 6/02/09 | 8,006,950 | 582,906 | ||||||
| 23,696,793 | Cerberus FIM Investors Holdco LLC, 12.00%, 11/22/13 | 11/20/06 | 23,696,793 | 1,723,965 | ||||||
| 108,227 | aDecisionOne Corp. | 3/12/99 - 7/18/00 | 76,619 | 178,574 | ||||||
| 142,137 | aDecisionOne Corp., senior secured note, 15.00%, 11/30/13 | 6/01/09 | 142,137 | 158,696 | ||||||
| 59,425 | aDecisionOne Corp., wts., 6/08/17 | 7/09/07 | — | — | ||||||
| 11,728 | Elephant Capital Holdings Ltd. | 8/29/03 - 3/10/08 | 1,364,048 | — | ||||||
| 5,565,600 | GLCP Harrah’s Investment LP | 1/15/08 | 5,565,600 | — | ||||||
| 168,957 | IACNA Investor LLC | 7/24/08 | 173,030 | 1,690 | ||||||
| 1,730,515 | bInternational Automotive Components Group Brazil LLC | 4/13/06 - 12/26/08 | 1,160,868 | 1,549,573 | ||||||
| 269,643 | bInternational Automotive Components Group Japan LLC | 9/26/06 - 3/27/07 | 2,340,891 | 745,912 | ||||||
| 6,170,474 | bInternational Automotive Components Group LLC | 1/12/06 - 10/16/06 | 6,172,073 | 1,400,080 | ||||||
| 1,456,500 | bInternational Automotive Components Group NA LLC, 9.00%, 4/01/17 | 3/30/07 | 1,478,348 | 660,862 | ||||||
| 4,838,053 | bInternational Automotive Components Group NA LLC, A | 3/30/07 - 10/10/07 | 4,789,127 | 184,330 | ||||||
| 2,219 | Motor Coach Industries International Inc. | 4/17/09 | 2,554,757 | 2,885,810 | ||||||
| 15,923 | Motor Coach Industries International Inc., pfd., | 4/17/09 | 15,923,000 | 15,923,000 | ||||||
| 57,295 | NCB Warrant Holdings Ltd., A | 12/16/05 - 3/10/08 | 603,247 | — | ||||||
| 16,280 | Olympus Re Holdings Ltd. | 12/19/01 | 1,574,304 | 35,578 | ||||||
| 17,671,292 | Pontus I LLC, junior note, 144A, FRN, 4.856%, 7/24/09 | 1/22/08 - 2/25/08 | 24,588,761 | 16,956,543 | ||||||
| 2,802,782 | Pontus II Trust, junior profit-participating note, 144A, FRN, 7.66%, 6/25/09 | 2/29/08 | 7,012,239 | 4,882,673 | ||||||
| 17,300 | PTV Inc., 10.00%, pfd., A | 12/07/01 - 3/06/02 | 10,899 | 4,152 | ||||||
Total Restricted Securities (1.92% of Net Assets) | $ | 75,011,506 | ||||||||
| aThe | Fund also invests in unrestricted securities of the issuer, valued at $27,866 as of June 30, 2009. |
| bThe | Fund also invests in unrestricted securities of the issuer, valued at $959,420 as of June 30, 2009. |
9. UNFUNDED LOAN COMMITMENTS
The Fund may enter into certain credit agreements, all or a portion of which may be unfunded. The Fund is obligated to fund these loan commitments at the borrowers’ discretion. Funded portions of credit agreements are presented on the Statement of Investments.
MS-38
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Mutual Shares Securities Fund
9. UNFUNDED LOAN COMMITMENTS (continued)
At June 30, 2009, unfunded commitments were as follows:
| Borrower | Unfunded Commitment | |
Realogy Corp., FRN, Revolver, 3.427%, 4/10/13 | $2,068,360 | |
Unfunded loan commitments and funded portions of credit agreements are marked to market daily and any unrealized appreciation or depreciation is included in the Statement of Assets and Liabilities and Statement of Operations.
10. UNFUNDED CAPITAL COMMITMENTS
The Fund may enter into certain capital commitments and may be obligated to perform on such agreements at a future date. Unfunded capital commitments requiring recognition are monitored for impairment and any unrealized deprecation is included in the Statement of Assets and Liabilities and the Statement of Operations. At June 30, 2009, the Fund had aggregate unfunded capital commitments of $3,536,052, for which no depreciation has been recognized.
11. OTHER DERIVATIVE INFORMATION
At June 30, 2009, the Fund has invested in derivative contracts which are reflected on the Statement of Assets and Liabilities as follows:
| Asset Derivatives | Liability Derivatives | |||||||||
| Derivative Contracts Not Accounted for as Hedging Instruments Under FASB Statement No. 133 | Statement of Assets and Liabilities Location | Fair Value Amount | Statement of Assets and Liabilities Location | Fair Value Amount | ||||||
Foreign exchange contracts | Unrealized appreciation on forward exchange contracts | $ | 1,330,542 | Unrealized depreciation on forward exchange contracts | $ | 69,991,061 | ||||
Equity contracts | Investments, at value | 5,800,082 | Options written, at value | 757,662 | ||||||
For the period ended June 30, 2009, the effect of derivative contracts on the Fund’s Statement of Operations was as follows:
| Derivative Contracts Not Accounted for as Hedging Instruments Under FASB Statement No. 133 | Statement of Operations Locations | Realized Gain (Loss) for the Period Ended June 30, 2009 | Unrealized Appreciation (Depreciation) for the Period Ended June 30, 2009 | Average Amount Outstanding During the Perioda | |||||||
Foreign exchange contracts | Net realized gain (loss) from foreign currency transactions/Net change in unrealized appreciation (depreciation) on translation of other assets and liabilities denominated in foreign currencies | $ | 66,191,233 | $ | (92,283,504 | ) | 962,599,886 | ||||
Equity contracts | Net realized gain (loss) from investments and written options/Net change in unrealized appreciation (depreciation) on investments | 308,122 | (8,049,380 | ) | 2,820 | ||||||
aRepresents the average number of option contracts or notional amount for other derivate contracts outstanding during the period. For derivative contracts denominated in foreign currencies, notional amounts are converted into US dollars.
See Note 1(d) regarding derivative financial instruments.
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Mutual Shares Securities Fund
12. HOLDINGS OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES
The 1940 Act defines “affiliated companies” to include investments in portfolio companies in which a fund owns 5% or more of the outstanding voting securities. Investments in “affiliated companies” for the Fund for the period ended June 30, 2009, were as shown below.
| Name of Issuer | Number of Shares Held at Beginning of Period | Gross Additions | Gross Reductions | Number of Shares Held at End of Period | Value at End of Period | Investment Income | Realized Capital Gain (Loss) | ||||||||||
Non-Controlled Affiliates | |||||||||||||||||
CB FIM Coinvestors LLC | — | 6,400,507 | — | 6,400,507 | $ | 14,613,638 | $ | — | $ | — | |||||||
GLCP Harrah’s Investment LP | 5,565,600 | — | — | 5,565,600 | — | — | — | ||||||||||
Motor Coach Industries International Inc. | — | 2,219 | — | 2,219 | 2,885,810 | — | — | ||||||||||
Motor Coach Industries International Inc, pfd. | — | 15,923 | — | 15,923 | 15,923,000 | — | — | ||||||||||
Total Affiliated Securities (0.86% of Net Assets) | $ | 33,422,448 | $ | — | $ | — | |||||||||||
13. OTHER CONSIDERATIONS
Officers, directors or employees of the Fund’s Investment Manager, may serve from time to time as members of bondholders’ steering committees, official creditors’ committees, or boards of directors of companies in which the Fund invests. Such participation may result in the possession by the Investment Manager of material non-public information which, pursuant to the Fund’s policies and the requirements of applicable securities laws, could prevent the Fund from trading in the securities of such companies for limited or extended periods of time.
Franklin Mutual serves as investment manager to certain special purpose entities that issue securities held by the Fund. Franklin Mutual is not compensated for such services and does not invest in or exercise control over such entities. As investment manager, Franklin Mutual is primarily responsible for recommending investments in unaffiliated issuers to be held by the special purpose entities. Securities issued by these special purpose entities are restricted under the Securities Act of 1933 and are deemed to be illiquid.
14. CREDIT FACILITY
Effective January 23, 2009, the Fund, together with other U.S. registered and foreign investment funds managed by Franklin Templeton Investments (individually, “Borrower”; collectively “Borrowers”), entered into a joint syndicated senior unsecured credit facility totaling $725 million (Global Credit Facility) to provide a source of funds to the Borrowers for temporary and emergency purposes, including the ability to meet future unanticipated or unusually large redemption requests.
Under the terms of the Global Credit Facility, the Fund shall, in addition to interest charged on any borrowings made by the Fund and other costs incurred by the Fund, pay its share of fees and expenses incurred in connection with the implementation and maintenance of the Global Credit Facility, based upon its relative share of the aggregate net assets of all of the Borrowers, including an annual commitment fee based upon the unused portion of the Global Credit Facility. During the period, the Fund incurred commitment fees of $11,541 of its pro rata portion of the Global Credit Facility, which is reflected in other expenses on the Statement of Operations. During the period ended June 30, 2009, the Fund did not utilize the Global Credit Facility.
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Mutual Shares Securities Fund
15. FAIR VALUE MEASUREMENTS
Financial Accounting Standards Board (FASB) Statement No. 157, “Fair Value Measurement” (SFAS 157) establishes a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Fund’s own market assumptions (unobservable inputs). These inputs are used in determining the value of the Fund’s investments and are summarized in the following fair value hierarchy:
| • | Level 1 – quoted prices in active markets for identical securities |
| • | Level 2 – other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speed, credit risk, etc.) |
| • | Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments) |
The inputs or methodology used for valuing securities are not an indication of the risk associated with investing in those securities.
The following is a summary of the inputs used as of June 30, 2009, in valuing the Fund’s assets and liabilities carried at fair value:
| Level 1 | Level 2 | Level 3 | Total | ||||||||||
Assets: | |||||||||||||
Investments in Securities | |||||||||||||
Equity Investmentsa | |||||||||||||
Airlines | $ | 1,277,706 | $ | 17,432 | $ | — | $ | 1,295,138 | |||||
Auto Components | 12,035,296 | — | 3,890,880 | 15,926,176 | |||||||||
Chemicals | 66,198,938 | — | 25,000 | 66,223,938 | |||||||||
Commercial Banks | 43,909,602 | — | — | b | 43,909,602 | ||||||||
Commercial Services & Supplies | 1,314 | — | — | b | 1,314 | ||||||||
Computers & Peripherals | 74,952,211 | — | 178,574 | 75,130,785 | |||||||||
Consumer Finance | — | — | 19,078,554 | 19,078,554 | |||||||||
Diversified Financial Services | 27,975,388 | — | — | b | 27,975,388 | ||||||||
Diversified Telecommunication Services | 119,353,028 | — | — | b | 119,353,028 | ||||||||
Insurance | 224,957,437 | — | 35,578 | 224,993,015 | |||||||||
Machinery | 31,926,360 | — | 18,808,810 | 50,735,170 | |||||||||
Media | 197,861,877 | 1,103,620 | — | b | 198,965,497 | ||||||||
Multi-Utilities | 27,785,564 | — | — | b | 27,785,564 | ||||||||
Real Estate Management & Development | 12,251,231 | — | 4,422,407 | 16,673,638 | |||||||||
All Other Equity Investmentsc | 2,431,789,345 | — | — | 2,431,789,345 | |||||||||
Options Purchased | 5,795,400 | — | — | 5,795,400 | |||||||||
Corporate Bonds & Notes | — | 123,229,179 | 28,856,534 | 152,085,713 | |||||||||
Corporate Bonds & Notes in Reorganization | — | 41,073,479 | 25 | 41,073,504 | |||||||||
Short Term Investments | 269,837,915 | 191,553,722 | — | 461,391,637 | |||||||||
Total Investments in Securities | $ | 3,547,908,612 | $ | 356,977,432 | $ | 75,296,362 | $ | 3,980,182,406 | |||||
Forward Exchange Contracts | $ | — | $ | 1,330,542 | $ | — | $ | 1,330,542 | |||||
Liabilities: | |||||||||||||
Options Written | 757,662 | — | — | 757,662 | |||||||||
Securities Sold Short | 79,623,950 | — | — | 79,623,950 | |||||||||
Forward Exchange Contracts | — | 69,991,061 | — | 69,991,061 | |||||||||
Unfunded Loan Commitments | — | 261,759 | — | 261,759 | |||||||||
aIncludes common and preferred stock as well as other equity investments.
bIncludes securities determined to have no value at June 30, 2009.
cFor detailed industry descriptions, see the accompanying Statement of Investments.
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Mutual Shares Securities Fund
15. FAIR VALUE MEASUREMENTS (continued)
At June 30, 2009, the reconciliation of assets in which significant unobservable inputs (Level 3) were used in determining fair value, is as follows:
| Beginning Balance | Net Realized Gain (Loss) | Net Change in Unrealized Appreciation (Depreciation) | Net Purchases (Sales) | Transfer In (Out) of Level 3 | Ending Balance | Net Change in Unrealized Appreciation (Depreciation) Attributable to Assets Still Held at Period End | |||||||||||||||||||||
Assets | |||||||||||||||||||||||||||
Investments in Securities | |||||||||||||||||||||||||||
Equity Investments:a | |||||||||||||||||||||||||||
Auto Components | $ | 3,516,464 | $ | — | $ | 380,286 | $ | (5,870 | ) | $ | — | $ | 3,890,880 | $ | 338,998 | ||||||||||||
Chemicals | 25,000 | — | — | — | — | 25,000 | — | ||||||||||||||||||||
Commercial Banks | — | — | — | — | — | — | b | — | |||||||||||||||||||
Commercial Services & Supplies | — | — | — | — | — | — | b | — | |||||||||||||||||||
Computers & Peripherals | — | — | 178,574 | — | — | 178,574 | 178,574 | ||||||||||||||||||||
Consumer Finance | 5,759,632 | — | 6,881,941 | 6,436,981 | — | 19,078,554 | 6,881,941 | ||||||||||||||||||||
Diversified Financial Services | 1,669,680 | — | (1,669,680 | ) | — | — | — | b | (1,669,680 | ) | |||||||||||||||||
Diversified Telecommunication Services | 3,134,806 | — | 1,895,935 | — | (5,030,741 | ) | — | b | — | ||||||||||||||||||
Health Care Providers & Services | 2,069,470 | — | 98,546 | — | (2,168,016 | ) | — | — | |||||||||||||||||||
Insurance | 38,219 | — | (2,641 | ) | — | — | 35,578 | (2,641 | ) | ||||||||||||||||||
Machinery | — | — | 331,053 | 18,477,757 | — | 18,808,810 | 331,053 | ||||||||||||||||||||
Media | — | — | — | — | — | — | b | — | |||||||||||||||||||
Multi-Utilities | — | — | — | — | — | — | b | — | |||||||||||||||||||
Real Estate Management & Development | 5,920,384 | — | (1,497,977 | ) | — | — | 4,422,407 | (1,497,977 | ) | ||||||||||||||||||
Corporate Bonds & Notes | 30,352,686 | (37,487 | ) | 1,844,810 | (3,303,475 | ) | — | 28,856,534 | 1,848,611 | ||||||||||||||||||
Corporate Bonds & Notes in Reorganization | 367,870 | (10,919,436 | ) | 13,106,348 | (2,554,757 | ) | — | 25 | — | ||||||||||||||||||
Total | $ | 52,854,211 | $ | (10,956,923 | ) | $ | 21,547,195 | $ | 19,050,636 | $ | (7,198,757 | ) | $ | 75,296,362 | $ | 6,408,879 | |||||||||||
aIncludes common and preferred stock as well as other equity investments.
bIncludes securities determined to have no value at June 30, 2009.
16. SUBSEQUENT EVENTS
Management has evaluated subsequent events through August 7, 2009 and determined that no events have occurred that require disclosure.
ABBREVIATIONS
Currency EUR - Euro GBP - British Pound JPY - Japanese Yen
Selected Portfolio ADR - American Depository Receipt DIP - Debtor-In-Possession FHLB - Federal Home Loan Bank FRN - Floating Rate Note PIK - Payment-In-Kind | Counterparty AESX - Credit Suisse International BANT - Bank of America N.A. BBU - Barclays Bank BONY - The Bank of New York Mellon DBFX - Deutsche Bank AG HAND - Svenska Handelsbanken HSBC - HSBC Bank USA SSBT - State Street Bank and Trust Co. |
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TEMPLETON DEVELOPING MARKETS SECURITIES FUND
This semiannual report for Templeton Developing Markets Securities Fund covers the period ended June 30, 2009.
Performance Summary as of 6/30/09
Templeton Developing Markets Securities Fund – Class 1 delivered a +28.72% total return for the six-month period ended 6/30/09.
Performance reflects the Fund’s Class 1 operating expenses, but does not include any contract fees, expenses or sales charges. If they had been included, performance would be lower. These charges and deductions, particularly for variable life policies, can have a significant effect on contract values and insurance benefits. See the contract prospectus for a complete description of these expenses, including sales charges.
Templeton Developing Markets Securities Fund Class 1
Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares.
Current performance may differ from figures shown.
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Fund Goal and Main Investments: Templeton Developing Markets Securities Fund seeks long-term capital appreciation. The Fund normally invests at least 80% of its net assets in emerging market investments and normally invests predominantly in equity securities.
Performance Overview
You can find the Fund’s six-month total return in the Performance Summary. The Fund underperformed the Morgan Stanley Capital International (MSCI) Emerging Markets (EM) Index’s +36.22% total return, and the Standard & Poor’s/International Finance Corporation Investable (S&P/IFCI) Composite Index’s +37.78% total return for the same period.1 Please note that index performance numbers are purely for reference and that we do not attempt to track an index, but rather undertake investments on the basis of fundamental research.
Economic and Market Overview
After a dismal 2008, emerging markets recovered to some degree in the first half of 2009 as renewed investor confidence, coupled with a return of risk appetite and bargain hunters, drove strong fund inflows into the asset class. Fiscal measures and easing monetary policies undertaken by governments and central banks also began to show signs of rejuvenating economic growth in emerging markets. As a result, the MSCI EM Index delivered a +36.22% total return in U.S. dollar terms for the first six months of the year, recovering much of 2008’s decline.1
Latin American equity markets were the top performers as a rebound in commodity prices and stronger local currencies supported returns. Stock markets of major commodity exporters Brazil and Chile returned more than 50% in U.S. dollar terms during the period.1 Asian markets continued to attract fund inflows, which helped markets such as India, China, Thailand and Indonesia to outperform their regional counterparts. Eastern European markets also recorded double-digit returns as support from the International Monetary Fund and European Union alleviated investor concerns about the health of the region’s banking sector. Moreover, Russia and Turkey outperformed their regional peers with returns of +45.94% and +37.27%.1
The growing assertiveness and importance of emerging markets in the global economy was illustrated when key emerging markets Brazil, Russia, India and China held an inaugural summit meeting in Russia.
1. Source: © 2009 Morningstar. One cannot invest directly in an index, nor is an index representative of the Fund’s portfolio. Please see Index Descriptions following the Fund Summaries.
Fund Risks: The Fund’s investments in stocks may offer the potential for long-term gains but can be subject to short-term price fluctuations. Investing in emerging markets is subject to all the risks of foreign investing generally as well as additional, heightened risks, including currency fluctuations, economic instability, market volatility, political and social instability, the relatively smaller size and lesser liquidity of these markets, and less government supervision and regulation of business and industry practices. By having significant investments in one or more countries or in particular sectors or industries from time to time, the Fund may carry greater risk of adverse developments in a country, sector or industry than a fund that invests more broadly. The Fund’s prospectus also includes a description of the main investment risks.
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Drawing on their collective clout, the countries pushed for greater influence in global economic affairs including more significant involvement in multinational financial institutions and increased economic reform.
Investment Strategy
Our investment philosophy is bottom up, value oriented and long term. In choosing investments, we may make on-site visits to companies to assess critical factors such as management strength and local conditions. In addition, we focus on the market price of a company’s securities relative to our evaluation of the company’s potential long-term (typically five years) earnings, asset value and cash flow potential. Among factors we consider are a company’s historical value measures, including price/earnings ratio, profit margins and liquidation value. We perform in-depth research to construct an action list from which we make our investment decisions.
Manager’s Discussion
During the six months under review, among the most significant detractors from the Fund’s absolute performance were China Mobile, the country’s market leader in wireless services, Telmex (Telefonos de Mexico), a telecommunications conglomerate, and Russia’s Norilsk Nickel (Mining and Metallurgical Co. Norilsk Nickel), one of the world’s largest producers of nickel, palladium and platinum. We ended the period with an increased position in Norilsk Nickel largely due to the company’s dominant market position in an environment of higher commodity prices. On the other hand, we trimmed the Fund’s exposure to China Mobile and Telmex as we repositioned the portfolio to take advantage of developments in emerging markets. In our view, the two telecommunications stocks lost value because investors switched from defensive holdings to stocks with higher correlation to the broader market in a rising market environment.
On a positive note, the largest contributors to the Fund’s absolute performance during the reporting period included Brazil’s two resources giants, Petrobras (Petroleo Brasileiro) in oil and gas, and Vale in iron ore. As the rebound in commodity prices fueled energy and metals and mining stocks, we increased the Fund’s exposure to Petrobras and Vale to capitalize on what we believed to be a long-term uptrend in commodity prices. Another key contributor to Fund performance was Taiwan-based integrated circuit design company MediaTek. We reduced the Fund’s position in the stock after price appreciation during the period made valuations relatively expensive in our view.
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In general, we held a positive long-term outlook on commodities-related companies and believed they could make attractive investment opportunities. Although commodity prices remained below their 2008 peaks, many related companies were still profitable at recent price levels. Based on our analysis, we do not expect commodity prices to return to extremely low levels in the near future, partly because of commodities’ relatively inelastic supply and continued demand from emerging markets, even though growth has slowed.
It is also important to recognize the effect of currency movements on the Fund’s performance. In general, if the value of the U.S. dollar goes up compared with a foreign currency, an investment traded in that foreign currency will go down in value because it will be worth fewer U.S. dollars. This can have a negative effect on Fund performance. Conversely, when the U.S. dollar weakens in relation to a foreign currency, an investment traded in that foreign currency will increase in value, which can contribute to Fund performance. For the six months ended June 30, 2009, the U.S. dollar declined in value relative to most non-U.S. currencies. As a result, the Fund’s performance was positively affected by the portfolio’s predominant investment in securities with non-U.S. currency exposure. However, one cannot expect the same result in future periods.
During the reporting period, we increased the Fund’s holdings in Russia, South Korea, India and Thailand as we searched for attractive investment opportunities. We also made select purchases in Hungary, Brazil and Austria due to what we considered attractive valuations. Major purchases were made in the aforementioned Petrobras, Russia’s largest oil company LUKOIL Holdings, South Korean oil refiner SK Energy, and Hungary’s largest bank OTP Bank. By industry, we made key investments in oil and gas, diversified metals and mining, and construction and engineering companies, including Vale, Russia’s Gazprom, the world’s largest gas producer, and South Korea’s GS Engineering and Construction, a leading construction company.
On the other hand, we reduced the Fund’s exposure to South Africa, Taiwan and China via Hong Kong-listed China H and Red Chip shares.2 In addition to MediaTek, key sales included major Chinese commercial banks ICBC (Industrial and Commercial Bank of China) and China Construction Bank, and BAT (British American Tobacco).
2. “China H” denotes shares of China-incorporated, Hong Kong-listed companies with most businesses in China. “Red Chip” denotes shares of Hong Kong-listed companies with significant exposure to China. China H and Red Chip shares are traded on the Hong Kong Stock Exchange.
Top 10 Holdings
Templeton Developing Markets Securities Fund 6/30/09
Company Sector/Industry, | % of Total Net Assets | |
| Petrobras (Petroleo Brasileiro SA), ADR, pfd. | 4.1% | |
| Oil, Gas & Consumable Fuels, Brazil | ||
| PetroChina Co. Ltd., H | 3.4% | |
| Oil, Gas & Consumable Fuels, China | ||
| Vale SA, ADR, pfd., A | 3.2% | |
| Metals & Mining, Brazil | ||
| Gazprom, ADR | 3.0% | |
| Oil, Gas & Consumable Fuels, Russia | ||
| China Mobile Ltd. | 3.0% | |
| Wireless Telecommunication Services, China | ||
| LUKOIL Holdings, ADR | 2.8% | |
| Oil, Gas & Consumable Fuels, Russia | ||
| America Movil SAB de CV, L, ADR | 2.2% | |
| Wireless Telecommunication Services, Mexico | ||
| Itau Unibanco Holding SA, ADR | 2.1% | |
| Commercial Banks, Brazil | ||
| Anglo American PLC | 2.1% | |
| Metals & Mining, U.K. | ||
| AmBev (Companhia de Bebidas das Americas), IDR | 1.8% | |
| Beverages, Brazil | ||
The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund’s Statement of Investments.
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These sales allowed us to focus on stocks that we deemed to be relatively more attractively valued within our investment universe. As a result, the Fund’s investments in telecommunication services, diversified banks and tobacco companies fell.
Thank you for your participation in Templeton Developing Markets Securities Fund. We look forward to serving your future investment needs.
The foregoing information reflects our analysis, opinions and portfolio holdings as of June 30, 2009, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.
Top 10 Countries
Templeton Developing Markets
Securities Fund
6/30/09
| % of Total Net Assets | ||
| Brazil | 16.7% | |
| China | 14.1% | |
| Russia | 11.8% | |
| India | 7.6% | |
| Mexico | 6.5% | |
| South Korea | 6.4% | |
| South Africa | 6.4% | |
| Turkey | 3.5% | |
| U.K. | 3.3% | |
| Thailand | 2.6% | |
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Fund Expenses
As an investor in a variable insurance contract (Contract) that indirectly provides for investment in an underlying mutual fund, you can incur transaction and/or ongoing expenses at both the Fund level and the Contract level.
| • | Transaction expenses can include sales charges (loads) on purchases, surrender fees, transfer fees and premium taxes. |
| • | Ongoing expenses can include management fees, distribution and service (12b-1) fees, contract fees, annual maintenance fees, mortality and expense risk fees and other fees and expenses. All mutual funds and Contracts have some types of ongoing expenses. |
The expenses shown in the table are meant to highlight ongoing expenses at the Fund level only and do not include ongoing expenses at the Contract level, or transaction expenses at either the Fund or Contract levels. While the Fund does not have transaction expenses, if the transaction and ongoing expenses at the Contract level were included, the expenses shown below would be higher. You should consult your Contract prospectus or disclosure document for more information.
The table shows Fund-level ongoing expenses and can help you understand these expenses and compare them with those of other mutual funds offered through the Contract. The table assumes a $1,000 investment held for the six months indicated. Please refer to the Fund prospectus for additional information on operating expenses.
Actual Fund Expenses
The first line (Actual) of the table provides actual account values and expenses. The “Ending Account Value” is derived from the Fund’s actual return, which includes the effect of ongoing Fund expenses, but does not include the effect of ongoing Contract expenses.
You can estimate the Fund-level expenses you incurred during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:
| 1. | Divide your account value by $1,000. |
If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6.
| 2. | Multiply the result by the number under the heading “Fund-Level Expenses Incurred During Period.” |
If Fund-Level Expenses Incurred During Period were $7.50, then 8.6 x $7.50 = $64.50.
In this illustration, the estimated expenses incurred this period at the Fund level are $64.50.
Templeton Developing Markets Securities Fund Class 1
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Hypothetical Example for Comparison with Other Mutual Funds
Information in the second line (Hypothetical) of the table can help you compare ongoing expenses of the Fund with those of other mutual funds offered through the Contract. This information may not be used to estimate the actual ending account balance or expenses you incurred during the period. The hypothetical “Ending Account Value” is based on the Fund’s actual expense ratio and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Fund-Level Expenses Incurred During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds offered through a Contract.
| Class 1 | Beginning Account Value 1/1/09 | Ending Account Value 6/30/09 | Fund-Level Expenses Incurred During Period* 1/1/09–6/30/09 | ||||||
Actual | $ | 1,000 | $ | 1,287.20 | $ | 8.96 | |||
Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,016.96 | $ | 7.90 | |||
*Expenses are calculated using the most recent six-month annualized expense ratio for the Fund’s Class 1 shares (1.58%), which does not include any ongoing expenses of the Contract for which the Fund is an investment option, multiplied by the average account value over the period, multiplied by 181/365 to reflect the one-half year period.
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SUPPLEMENT DATED JULY 23, 2009
TOTHE PROSPECTUS DATED
MAY 1, 2009
AS PREVIOUSLY AMENDED
TEMPLETON DEVELOPING MARKETS SECURITIES FUND
(A series of Franklin Templeton Variable Insurance Products Trust)
The prospectus is amended by replacing the section “Portfolio Selection” under “Goals and Strategies” (page 1) with the following:
PORTFOLIO SELECTION
The manager’s investment philosophy is “bottom-up,” value-oriented, and long-term, focusing on the market price of a company’s securities relative to the manager’s evaluation of the company’s potential long-term (typically five years) earnings, asset value and cash flow potential. In choosing investments, the Fund’s manager normally makes onsite visits to companies to assess critical factors such as management strength and local conditions. A company’s historical value measures, including price/earnings ratio, profit margins and liquidation value, may also be considered. The manager invests in securities without regard to benchmark comparisons.
Please keep this supplement for future reference.
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Franklin Templeton Variable Insurance Products Trust
Financial Highlights
Templeton Developing Markets Securities Fund
| Six Months Ended June 30, 2009 (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 1 | 2008 | 2007 | 2006 | 2005 | 2004 | |||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 6.11 | $ | 16.16 | $ | 13.92 | $ | 10.99 | $ | 8.73 | $ | 7.14 | ||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.10 | 0.16 | 0.32 | 0.24 | 0.17 | 0.11 | ||||||||||||||||||
Net realized and unrealized gains (losses) | 1.51 | (7.40 | ) | 3.51 | 2.84 | 2.23 | 1.62 | |||||||||||||||||
Total from investment operations | 1.61 | (7.24 | ) | 3.83 | 3.08 | 2.40 | 1.73 | |||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income | (0.36 | ) | (0.37 | ) | (0.38 | ) | (0.15 | ) | (0.14 | ) | (0.14 | ) | ||||||||||||
Net realized gains | (0.03 | ) | (2.44 | ) | (1.21 | ) | — | — | — | |||||||||||||||
Total distributions | (0.39 | ) | (2.81 | ) | (1.59 | ) | (0.15 | ) | (0.14 | ) | (0.14 | ) | ||||||||||||
Redemption fees | — | c | — | c | — | c | — | c | — | c | — | |||||||||||||
Net asset value, end of period | $ | 7.33 | $ | 6.11 | $ | 16.16 | $ | 13.92 | $ | 10.99 | $ | 8.73 | ||||||||||||
Total returnd | 28.72% | (52.62)% | 29.09% | 28.43% | 27.76% | 24.83% | ||||||||||||||||||
Ratios to average net assetse | ||||||||||||||||||||||||
Expensesf | 1.58% | 1.52% | 1.48% | 1.47% | 1.53% | 1.54% | ||||||||||||||||||
Net investment income | 3.36% | 1.52% | 2.07% | 1.93% | 1.77% | 1.52% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 222,211 | $ | 234,213 | $ | 753,843 | $ | 749,120 | $ | 651,826 | $ | 477,290 | ||||||||||||
Portfolio turnover rate | 41.31% | g | 75.11% | g | 98.32% | 53.65% | 31.24% | 55.67% | ||||||||||||||||
aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.
bBased on average daily shares outstanding.
cAmount rounds to less than $0.01 per share.
dTotal return does not include any fees, charges or expenses imposed by the variable annuity and life insurance contracts for which the Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle. Total return is not annualized for periods less than one year.
eRatios are annualized for periods less than one year.
fBenefit of expense reduction rounds to less than 0.01%.
gExcludes the value of portfolio securities delivered as a result of redemptions in-kind. See Note 10.
The accompanying notes are an integral part of these financial statements.
TD-9
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Templeton Developing Markets Securities Fund
| Six Months Ended June 30, 2009 (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 2 | 2008 | 2007 | 2006 | 2005 | 2004 | |||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 6.04 | $ | 15.99 | $ | 13.79 | $ | 10.90 | $ | 8.67 | $ | 7.09 | ||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.10 | 0.15 | 0.27 | 0.20 | 0.14 | 0.09 | ||||||||||||||||||
Net realized and unrealized gains (losses) | 1.49 | (7.33 | ) | 3.49 | 2.82 | 2.21 | 1.63 | |||||||||||||||||
Total from investment operations | 1.59 | (7.18 | ) | 3.76 | 3.02 | 2.35 | 1.72 | |||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income | (0.32 | ) | (0.33 | ) | (0.35 | ) | (0.13 | ) | (0.12 | ) | (0.14 | ) | ||||||||||||
Net realized gains | (0.03 | ) | (2.44 | ) | (1.21 | ) | — | — | — | |||||||||||||||
Total distributions | (0.35 | ) | (2.77 | ) | (1.56 | ) | (0.13 | ) | (0.12 | ) | (0.14 | ) | ||||||||||||
Redemption fees | — | c | — | c | — | c | — | c | — | c | — | |||||||||||||
Net asset value, end of period | $ | 7.28 | $ | 6.04 | $ | 15.99 | $ | 13.79 | $ | 10.90 | $ | 8.67 | ||||||||||||
Total returnd | 28.47% | (52.70)% | 28.78% | 28.09% | 27.43% | 24.71% | ||||||||||||||||||
Ratios to average net assetse | ||||||||||||||||||||||||
Expensesf | 1.83% | 1.77% | 1.73% | 1.72% | 1.78% | 1.79% | ||||||||||||||||||
Net investment income | 3.11% | 1.27% | 1.82% | 1.68% | 1.52% | 1.27% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 325,359 | $ | 264,186 | $ | 1,090,549 | $ | 857,514 | $ | 650,646 | $ | 327,569 | ||||||||||||
Portfolio turnover rate | 41.31% | g | 75.11% | g | 98.32% | 53.65% | 31.24% | 55.67% | ||||||||||||||||
aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.
bBased on average daily shares outstanding.
cAmount rounds to less than $0.01 per share.
dTotal return does not include any fees, charges or expenses imposed by the variable annuity and life insurance contracts for which the Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle. Total return is not annualized for periods less than one year.
eRatios are annualized for periods less than one year.
fBenefit of expense reduction rounds to less than 0.01%.
gExcludes the value of portfolio securities delivered as a result of redemptions in-kind. See Note 10.
The accompanying notes are an integral part of these financial statements.
TD-10
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Templeton Developing Markets Securities Fund
| Six Months Ended June 30, 2009 (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 3 | 2008 | 2007 | 2006 | 2005 | 2004a | |||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 6.02 | $ | 15.96 | $ | 13.78 | $ | 10.90 | $ | 8.68 | $ | 7.13 | ||||||||||||
Income from investment operationsb: | ||||||||||||||||||||||||
Net investment incomec | 0.10 | 0.11 | 0.24 | 0.20 | 0.04 | 0.08 | ||||||||||||||||||
Net realized and unrealized gains (losses) | 1.48 | (7.27 | ) | 3.52 | 2.83 | 2.32 | 1.61 | |||||||||||||||||
Total from investment operations | 1.58 | (7.16 | ) | 3.76 | 3.03 | 2.36 | 1.69 | |||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income | (0.33 | ) | (0.34 | ) | (0.37 | ) | (0.15 | ) | (0.14 | ) | (0.14 | ) | ||||||||||||
Net realized gains | (0.03 | ) | (2.44 | ) | (1.21 | ) | — | — | — | |||||||||||||||
Total distributions | (0.36 | ) | (2.78 | ) | (1.58 | ) | (0.15 | ) | (0.14 | ) | (0.14 | ) | ||||||||||||
Redemption fees | — | d | — | d | — | d | — | d | — | d | — | |||||||||||||
Net asset value, end of period | $ | 7.24 | $ | 6.02 | $ | 15.96 | $ | 13.78 | $ | 10.90 | $ | 8.68 | ||||||||||||
Total returne | 28.45% | (52.67)% | 28.70% | 28.17% | 27.45% | 24.15% | ||||||||||||||||||
Ratios to average net assetsf | ||||||||||||||||||||||||
Expensesg | 1.83% | 1.77% | 1.73% | 1.72% | 1.78% | 1.54% | ||||||||||||||||||
Net investment income | 3.11% | 1.27% | 1.82% | 1.68% | 1.52% | 1.52% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 47,445 | $ | 32,953 | $ | 100,961 | $ | 43,372 | $ | 11,521 | $ | 12 | ||||||||||||
Portfolio turnover rate | 41.31% | h | 75.11% | h | 98.32% | 53.65% | 31.24% | 55.67% | ||||||||||||||||
aFor the period May 1, 2004 (effective date) to December 31, 2004.
bThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.
cBased on average daily shares outstanding.
dAmount rounds to less than $0.01 per share.
eTotal return does not include any fees, charges or expenses imposed by the variable annuity and life insurance contracts for which the Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle. Total return is not annualized for periods less than one year.
fRatios are annualized for periods less than one year.
gBenefit of expense reduction rounds to less than 0.01%.
hExcludes the value of portfolio securities delivered as a result of redemptions in-kind. See Note 10.
The accompanying notes are an integral part of these financial statements.
TD-11
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Templeton Developing Markets Securities Fund
| Class 4 | Six Months Ended June 30, 2009 (unaudited) | Period Ended December 31, 2008a | ||||||
Per share operating performance | ||||||||
(for a share outstanding throughout the period) | ||||||||
Net asset value, beginning of period | $ | 6.09 | $ | 14.88 | ||||
Income from investment operationsb: | ||||||||
Net investment income (loss)c | 0.10 | (0.33 | ) | |||||
Net realized and unrealized gains (losses) | 1.49 | (5.65 | ) | |||||
Total from investment operations | 1.59 | (5.98 | ) | |||||
Less distributions from: | ||||||||
Net investment income | (0.35 | ) | (0.37 | ) | ||||
Net realized gains | (0.03 | ) | (2.44 | ) | ||||
Total distributions | (0.38 | ) | (2.81 | ) | ||||
Redemption feesd | — | — | ||||||
Net asset value, end of period | $ | 7.30 | $ | 6.09 | ||||
Total returne | 28.46% | (48.66)% | ||||||
Ratios to average net assetsf | ||||||||
Expensesg | 1.93% | 1.87% | ||||||
Net investment income | 3.01% | 1.17% | ||||||
Supplemental data | ||||||||
Net assets, end of period (000’s) | $ | 14,505 | $ | 7,208 | ||||
Portfolio turnover rate | 41.31% | h | 75.11% | h | ||||
aFor the period February 29, 2008 (effective date) to December 31, 2008.
bThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.
cBased on average daily shares outstanding.
dAmount rounds to less than $0.01 per share.
eTotal return does not include any fees, charges or expenses imposed by the variable annuity and life insurance contracts for which the Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle. Total return is not annualized for periods less than one year.
fRatios are annualized for periods less than one year.
gBenefit of expense reduction rounds to less than 0.01%.
hExcludes the value of portfolio securities delivered as a result of redemptions in-kind. See Note 10.
The accompanying notes are an integral part of these financial statements.
TD-12
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited)
| Templeton Developing Markets Securities Fund | Industry | Shares | Value | ||||
Common Stocks 85.2% | |||||||
Argentina 0.4% | |||||||
a,bGrupo Clarin S.A., GDR, Reg S | Media | 8,000 | $ | 28,240 | |||
Tenaris SA, ADR | Energy Equipment & Services | 84,900 | 2,295,696 | ||||
| 2,323,936 | |||||||
Austria 1.5% | |||||||
Erste Group bank AG | Commercial Banks | 45,680 | 1,232,081 | ||||
aIMMOEAST AG | Real Estate Management & Development | 106,544 | 267,495 | ||||
OMV AG | Oil, Gas & Consumable Fuels | 205,368 | 7,688,032 | ||||
Raiffeisen International Bank Holding AG | Commercial Banks | 800 | 27,772 | ||||
aWienerberger AG | Building Products | 8,000 | 99,080 | ||||
| 9,314,460 | |||||||
Brazil 7.5% | |||||||
AES Tiete SA | Independent Power Producers & Energy Traders | 729,394 | 6,885,959 | ||||
Companhia de Bebidas das Americas (AmBev) | Beverages | 205,313 | 11,101,400 | ||||
Companhia de Bebidas das Americas (AmBev), IDR | Beverages | 659 | 35,632 | ||||
Itau Unibanco Holding SA, ADR | Commercial Banks | 808,886 | 12,804,673 | ||||
Natura Cosmeticos SA | Personal Products | 688,648 | 9,092,664 | ||||
Souza Cruz SA | Tobacco | 199,070 | 5,673,630 | ||||
| 45,593,958 | |||||||
China 14.1% | |||||||
Aluminum Corp. of China Ltd., H | Metals & Mining | 7,701,000 | 7,293,686 | ||||
Angang Steel Co. Ltd., H | Metals & Mining | 1,772,000 | 2,940,415 | ||||
China Coal Energy Co., H | Oil, Gas & Consumable Fuels | 6,513,000 | 7,714,853 | ||||
China Mobile Ltd. | Wireless Telecommunication Services | 1,847,000 | 18,494,071 | ||||
China Molybdenum Co. Ltd., H | Metals & Mining | 3,120,391 | 2,250,737 | ||||
China Petroleum and Chemical Corp., H | Oil, Gas & Consumable Fuels | 1,212,000 | 924,260 | ||||
China Shipping Development Co. Ltd., H | Marine | 2,614,000 | 3,372,947 | ||||
CNOOC Ltd. | Oil, Gas & Consumable Fuels | 3,077,000 | 3,815,529 | ||||
Denway Motors Ltd. | Automobiles | 12,353,959 | 4,941,647 | ||||
aHidili Industry International Development Ltd. | Metals & Mining | 8,689,000 | 6,827,960 | ||||
Lonking Holdings Ltd. | Machinery | 4,468,000 | 2,167,729 | ||||
PetroChina Co. Ltd., H | Oil, Gas & Consumable Fuels | 18,642,000 | 20,686,873 | ||||
Soho China Ltd. | Real Estate Management & Development | 1,102,000 | 682,538 | ||||
Zijin Mining Group Co. Ltd., H | Metals & Mining | 4,092,000 | 3,701,328 | ||||
| 85,814,573 | |||||||
Hong Kong 1.6% | |||||||
Dairy Farm International Holdings Ltd. | Food & Staples Retailing | 1,014,733 | 6,555,175 | ||||
VTech Holdings Ltd. | Communications Equipment | 456,000 | 3,112,608 | ||||
| 9,667,783 | |||||||
Hungary 2.5% | |||||||
Magyar Telekom PLC | Diversified Telecommunication Services | 567,158 | 1,669,058 | ||||
MOL Hungarian Oil and Gas Nyrt. | Oil, Gas & Consumable Fuels | 39,364 | 2,424,366 | ||||
aOTP Bank Ltd. | Commercial Banks | 617,917 | 11,114,417 | ||||
| 15,207,841 | |||||||
TD-13
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Templeton Developing Markets Securities Fund | Industry | Shares | Value | ||||
Common Stocks (continued) | |||||||
India 7.6% | |||||||
GAIL India Ltd. | Gas Utilities | 955,643 | $ | 5,762,877 | |||
Grasim Industries Ltd. | Construction Materials | 17,818 | 862,074 | ||||
Hindalco Industries Ltd. | Metals & Mining | 2,630,791 | 4,762,971 | ||||
Infosys Technologies Ltd. | IT Services | 135,890 | 5,056,816 | ||||
National Aluminium Co. Ltd. | Metals & Mining | 181,978 | 1,161,991 | ||||
Oil & Natural Gas Corp. Ltd. | Oil, Gas & Consumable Fuels | 438,603 | 9,801,744 | ||||
Sesa Goa Ltd. | Metals & Mining | 1,224,963 | 4,688,209 | ||||
Steel Authority of India Ltd. | Metals & Mining | 973,892 | 3,081,782 | ||||
Tata Chemicals Ltd. | Chemicals | 574,670 | 2,621,819 | ||||
Tata Consultancy Services Ltd. | IT Services | 1,020,100 | 8,325,298 | ||||
| 46,125,581 | |||||||
Indonesia 2.3% | |||||||
PT Astra International Tbk | Automobiles | 2,815,500 | 6,564,673 | ||||
PT Bank Central Asia Tbk | Commercial Banks | 9,120,500 | 3,149,622 | ||||
PT Telekomunikasi Indonesia, B | Diversified Telecommunication Services | 5,711,000 | 4,196,179 | ||||
| 13,910,474 | |||||||
Israel 0.8% | |||||||
aTaro Pharmaceutical Industries Ltd. | Pharmaceuticals | 543,219 | 4,753,166 | ||||
Kenya 0.0%c | |||||||
East African Breweries Ltd. | Beverages | 61,282 | 124,247 | ||||
Kuwait 0.1% | |||||||
National Mobile Telecommunications Co. | Wireless Telecommunication Services | 127,500 | 762,438 | ||||
Mexico 6.5% | |||||||
America Movil SAB de CV, L, ADR | Wireless Telecommunication Services | 349,558 | 13,534,886 | ||||
Grupo Televisa SA | Media | 3,015,575 | 10,242,072 | ||||
Kimberly Clark de Mexico SAB de CV, A | Household Products | 2,024,792 | 7,722,202 | ||||
Telefonos de Mexico SAB de CV, L, ADR | Diversified Telecommunication Services | 141,064 | 2,286,647 | ||||
Wal-Mart de Mexico SAB de CV, V | Food & Staples Retailing | 1,994,643 | 5,898,054 | ||||
| 39,683,861 | |||||||
Netherlands 0.0%c | |||||||
aVimetco NV, GDR | Metals & Mining | 2,145 | 1,866 | ||||
Pakistan 1.3% | |||||||
MCB Bank Ltd. | Commercial Banks | 1,747,793 | 3,337,866 | ||||
Oil & Gas Development Co. Ltd. | Oil, Gas & Consumable Fuels | 3,155,700 | 3,041,405 | ||||
aPakistan Telecommunications Corp., A | Diversified Telecommunication Services | 8,881,808 | 1,875,594 | ||||
| 8,254,865 | |||||||
Peru 0.5% | |||||||
Credicorp Ltd. | Commercial Banks | 58,700 | 3,416,340 | ||||
Qatar 0.3% | |||||||
Qatar National Bank | Commercial Banks | 53,570 | 1,766,044 | ||||
Russia 11.8% | |||||||
Gazprom, ADR | Oil, Gas & Consumable Fuels | 678,000 | 13,749,840 | ||||
Gazprom, ADR (London Exchange) | Oil, Gas & Consumable Fuels | 235,100 | 4,758,424 | ||||
TD-14
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Templeton Developing Markets Securities Fund | Industry | Shares | Value | ||||
Common Stocks (continued) | |||||||
Russia (continued) | |||||||
LUKOIL Holdings, ADR | Oil, Gas & Consumable Fuels | 65,808 | $ | 2,941,618 | |||
LUKOIL Holdings, ADR (London Exchange) | Oil, Gas & Consumable Fuels | 317,168 | 14,056,886 | ||||
aMining and Metallurgical Co. Norilsk Nickel, ADR | Metals & Mining | 870,600 | 7,922,460 | ||||
Mobile TeleSystems | Wireless Telecommunication Services | 617,683 | 3,304,604 | ||||
Mobile TeleSystems, ADR | Wireless Telecommunication Services | 209,000 | 7,718,370 | ||||
aRusHydro | Electric Utilities | 14,592,600 | 553,060 | ||||
aRusHydro, GDR | Electric Utilities | 92,074 | 348,960 | ||||
Sberbank RF | Commercial Banks | 5,005,590 | 6,332,071 | ||||
Sibirtelecom | Diversified Telecommunication Services | 2,860,000 | 61,490 | ||||
TNK-BP | Oil, Gas & Consumable Fuels | 4,531,950 | 4,781,207 | ||||
bUralkali, GDR, Reg S | Chemicals | 220,500 | 3,543,435 | ||||
Vsmpo-Avisma Corp. | Metals & Mining | 4,100 | 274,888 | ||||
aWimm-Bill-Dann Foods | Food Products | 43,728 | 1,367,701 | ||||
| 71,715,014 | |||||||
Singapore 0.5% | |||||||
Fraser and Neave Ltd. | Industrial Conglomerates | 1,139,041 | 3,050,652 | ||||
South Africa 6.4% | |||||||
Barloworld Ltd. | Industrial Conglomerates | 21,000 | 105,640 | ||||
Foschini Ltd. | Specialty Retail | 521,633 | 3,398,426 | ||||
Impala Platinum Holdings Ltd. | Metals & Mining | 134,450 | 2,971,218 | ||||
Lewis Group Ltd. | Specialty Retail | 654,170 | 4,088,032 | ||||
MTN Group Ltd. | Wireless Telecommunication Services | 359,217 | 5,510,043 | ||||
Naspers Ltd., N | Media | 218,591 | 5,753,141 | ||||
Pretoria Portland Cement Co. Ltd. | Construction Materials | 102,621 | 386,109 | ||||
Remgro Ltd. | Diversified Financial Services | 465,961 | 4,477,164 | ||||
Standard Bank Group Ltd. | Commercial Banks | 710,861 | 8,174,948 | ||||
Tiger Brands Ltd. | Food Products | 192,059 | 3,588,189 | ||||
aVodacom Group (pty) Ltd. | Wireless Telecommunication Services | 77,800 | 576,969 | ||||
| 39,029,879 | |||||||
South Korea 6.4% | |||||||
CJ Internet Corp. | Media | 92,827 | 1,023,078 | ||||
GS Engineering & Construction Corp. | Construction & Engineering | 106,518 | 6,183,191 | ||||
GS Holdings Corp. | Oil, Gas & Consumable Fuels | 103,531 | 2,428,284 | ||||
Hyundai Development Co. | Construction & Engineering | 121,970 | 3,860,597 | ||||
Kangwon Land Inc. | Hotels, Restaurants & Leisure | 512,665 | 6,555,099 | ||||
aNHN Corp. | Internet Software & Services | 3,282 | 454,403 | ||||
Samsung Electronics Co. Ltd. | Semiconductors & Semiconductor Equipment | 12,822 | 5,954,365 | ||||
aShinhan Financial Group Co. Ltd. | Commercial Banks | 221,655 | 5,607,447 | ||||
SK Energy Co. Ltd. | Oil, Gas & Consumable Fuels | 87,734 | 7,054,232 | ||||
| 39,120,696 | |||||||
Sweden 1.1% | |||||||
Oriflame Cosmetics SA, SDR | Personal Products | 149,765 | 6,511,606 | ||||
TD-15
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Templeton Developing Markets Securities Fund | Industry | Shares | Value | ||||
Common Stocks (continued) | |||||||
Taiwan 2.5% | |||||||
MediaTek Inc. | Semiconductors & Semiconductor Equipment | 162,300 | $ | 1,936,141 | |||
President Chain Store Corp. | Food & Staples Retailing | 3,742,144 | 9,577,429 | ||||
Siliconware Precision Industries Co. | Semiconductors & Semiconductor Equipment | 700,000 | 810,560 | ||||
Taiwan Semiconductor Manufacturing Co. Ltd. | Semiconductors & Semiconductor Equipment | 1,834,000 | 3,052,946 | ||||
| 15,377,076 | |||||||
Thailand 2.6% | |||||||
Kasikornbank Public Co. Ltd., fgn. | Commercial Banks | 752,200 | 1,601,130 | ||||
PTT Exploration and Production Public Co. Ltd., fgn. | Oil, Gas & Consumable Fuels | 665,700 | 2,658,109 | ||||
PTT Public Co. Ltd., fgn. | Oil, Gas & Consumable Fuels | 1,064,000 | 7,309,924 | ||||
Thai Beverages Co. Ltd., fgn. | Beverages | 27,472,000 | 4,077,090 | ||||
| 15,646,253 | |||||||
Turkey 3.5% | |||||||
Akbank TAS | Commercial Banks | 2,034,234 | 9,108,806 | ||||
Anadolu Efes Biracilik Ve Malt Sanayii AS | Beverages | 291,931 | 2,633,337 | ||||
Tupras-Turkiye Petrol Rafinerileri AS | Oil, Gas & Consumable Fuels | 450,004 | 5,490,168 | ||||
Turkcell Iletisim Hizmetleri AS | Wireless Telecommunication Services | 786,337 | 4,363,011 | ||||
| 21,595,322 | |||||||
United Arab Emirates 0.1% | |||||||
National Bank of Abu Dhabi | Commercial Banks | 245,223 | 654,302 | ||||
United Kingdom 3.3% | |||||||
Anglo American PLC | Metals & Mining | 441,920 | 12,776,891 | ||||
Antofagasta PLC | Metals & Mining | 583,879 | 5,644,026 | ||||
HSBC Holdings PLC | Commercial Banks | 194,827 | 1,650,395 | ||||
| 20,071,312 | |||||||
Total Common Stocks (Cost $460,311,468) | 519,493,545 | ||||||
Preferred Stocks 9.8% | |||||||
Brazil 9.2% | |||||||
Banco Bradesco SA, ADR, pfd. | Commercial Banks | 471,013 | 6,956,862 | ||||
Itausa - Investimentos Itau SA, pfd. | Commercial Banks | 1,011,868 | 4,505,113 | ||||
Petroleo Brasileiro SA, ADR, pfd. | Oil, Gas & Consumable Fuels | 755,488 | 25,203,079 | ||||
Vale SA, ADR, pfd., A | Metals & Mining | 1,255,825 | 19,276,914 | ||||
| 55,941,968 | |||||||
Chile 0.6% | |||||||
Embotelladora Andina SA, pfd., A | Beverages | 1,482,049 | 3,599,163 | ||||
Total Preferred Stocks (Cost $32,369,884) | 59,541,131 | ||||||
Total Investments before Short Term Investments | 579,034,676 | ||||||
TD-16
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Templeton Developing Markets Securities Fund | Shares | Value | |||||
Short Term Investments (Cost $19,447,378) 3.2% | |||||||
Money Market Funds 3.2% | |||||||
dInstitutional Fiduciary Trust Money Market Portfolio, 0.00% | 19,447,378 | $ | 19,447,378 | ||||
Total Investments (Cost $512,128,730) 98.2% | 598,482,054 | ||||||
Other Assets, less Liabilities 1.8% | 11,038,495 | ||||||
Net Assets 100.0% | $ | 609,520,549 | |||||
See Abbreviations on page TD-28.
aNon-income producing.
bSecurity was purchased pursuant to Regulation S under the Securities Act of 1933, which exempts from registration securities offered and sold outside of the United States. Such a security cannot be sold in the United States without either an effective registration statement filed pursuant to the Securities Act of 1933, or pursuant to an exemption from registration. These securities have been deemed liquid under guidelines approved by the Trust’s Board of Trustees. At June 30, 2009, the aggregate value of these securities was $3,571,675, representing 0.59% of net assets.
cRounds to less than 0.1% of net assets.
dSee Note 7 regarding investments in the Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end.
The accompanying notes are an integral part of these financial statements.
TD-17
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements
Statement of Assets and Liabilities
June 30, 2009 (unaudited)
| Templeton Developing Markets Securities Fund | ||||
Assets: | ||||
Investments in securities: | ||||
Cost - Unaffiliated issuers | $ | 492,681,352 | ||
Cost - Sweep Money Fund (Note 7) | 19,447,378 | |||
Total cost of investments | $ | 512,128,730 | ||
Value - Unaffiliated issuers | $ | 579,034,676 | ||
Value - Sweep Money Fund (Note 7) | 19,447,378 | |||
Total value of investments | 598,482,054 | |||
Cash | 314,817 | |||
Foreign currency, at value (cost $90,811) | 77,903 | |||
Receivables: | ||||
Investment securities sold | 8,678,664 | |||
Capital shares sold | 2,703,675 | |||
Dividends | 2,726,793 | |||
Foreign tax | 244,317 | |||
Other assets | 36,060 | |||
Total assets | 613,264,283 | |||
Liabilities: | ||||
Payables: | ||||
Investment securities purchased | 688,373 | |||
Capital shares redeemed | 1,170,171 | |||
Affiliates | 865,465 | |||
Custodian fees | 771,119 | |||
Reports to shareholders | 206,028 | |||
Accrued expenses and other liabilities | 42,578 | |||
Total liabilities | 3,743,734 | |||
Net assets, at value | $ | 609,520,549 | ||
Net assets consist of: | ||||
Paid-in capital | $ | 753,103,532 | ||
Distributions in excess of net investment income | (854,940 | ) | ||
Net unrealized appreciation (depreciation) | 86,447,036 | |||
Accumulated net realized gain (loss) | (229,175,079 | ) | ||
Net assets, at value | $ | 609,520,549 | ||
The accompanying notes are an integral part of these financial statements.
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Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Assets and Liabilities (continued)
June 30, 2009 (unaudited)
| Templeton Developing Markets Securities Fund | |||
Class 1: | |||
Net assets, at value | $ | 222,211,363 | |
Shares outstanding | 30,308,993 | ||
Net asset value and maximum offering price per share | $ | 7.33 | |
Class 2: | |||
Net assets, at value | $ | 325,359,060 | |
Shares outstanding | 44,694,419 | ||
Net asset value and maximum offering price per share | $ | 7.28 | |
Class 3: | |||
Net assets, at value | $ | 47,444,634 | |
Shares outstanding | 6,554,157 | ||
Net asset value and maximum offering price per sharea | $ | 7.24 | |
Class 4: | |||
Net assets, at value | $ | 14,505,492 | |
Shares outstanding | 1,988,260 | ||
Net asset value and maximum offering price per share | $ | 7.30 | |
aRedemption price is equal to net asset value less any redemption fees retained by the Fund.
The accompanying notes are an integral part of these financial statements.
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Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Operations
for the six months ended June 30, 2009 (unaudited)
| Templeton Developing Markets Securities Fund | ||||
Investment income: | ||||
Dividends (net of foreign taxes of $1,057,236 ) | ||||
Unaffiliated issuers | $ | 12,559,919 | ||
Sweep Money Fund (Note 7) | 15,597 | |||
Interest | 1,317 | |||
Total investment income | 12,576,833 | |||
Expenses: | ||||
Management fees (Note 3a) | 3,147,715 | |||
Administrative fees (Note 3b) | 358,286 | |||
Distribution fees: (Note 3c) | ||||
Class 2 | 341,403 | |||
Class 3 | 43,288 | |||
Class 4 | 16,973 | |||
Unaffiliated transfer agent fees | 1,477 | |||
Custodian fees (Note 4) | 323,912 | |||
Reports to shareholders | 131,633 | |||
Professional fees | 33,355 | |||
Trustees’ fees and expenses | 2,018 | |||
Other | 23,835 | |||
Total expenses | 4,423,895 | |||
Expense reductions (Note 4) | (398 | ) | ||
Net expenses | 4,423,497 | |||
Net investment income | 8,153,336 | |||
Realized and unrealized gains (losses): | ||||
Net realized gain (loss) from: | ||||
Investments (includes losses from a redemption in-kind of $6,207,989) (Note 10) | (68,128,574 | ) | ||
Foreign currency transactions | (158,370 | ) | ||
Net realized gain (loss) | (68,286,944 | ) | ||
Net change in unrealized appreciation (depreciation) on: | ||||
Investments | 185,822,809 | |||
Translation of other assets and liabilities denominated in foreign currencies | 108,133 | |||
Net change in unrealized appreciation (depreciation) | 185,930,942 | |||
Net realized and unrealized gain (loss) | 117,643,998 | |||
Net increase (decrease) in net assets resulting from operations | $ | 125,797,334 | ||
The accompanying notes are an integral part of these financial statements.
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Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statements of Changes in Net Assets
| Templeton Developing Markets Securities Fund | ||||||||
| Six Months Ended June 30, 2009 (unaudited) | Year Ended December 31, 2008 | |||||||
Increase (decrease) in net assets: | ||||||||
Operations: | ||||||||
Net investment income | $ | 8,153,336 | $ | 17,230,649 | ||||
Net realized gain (loss) from investments and foreign currency transactions | (68,286,944 | ) | (131,179,941 | ) | ||||
Net change in unrealized appreciation (depreciation) on investments and translation of | 185,930,942 | (761,427,069 | ) | |||||
Net increase (decrease) in net assets resulting from operations | 125,797,334 | (875,376,361 | ) | |||||
Distributions to shareholders from: | ||||||||
Net investment income: | ||||||||
Class 1 | (13,652,950 | ) | (15,246,189 | ) | ||||
Class 2 | (13,921,115 | ) | (18,272,202 | ) | ||||
Class 3 | (1,779,543 | ) | (1,805,309 | ) | ||||
Class 4 | (467,339 | ) | (58,997 | ) | ||||
Net realized gains: | ||||||||
Class 1 | (1,172,623 | ) | (101,141,199 | ) | ||||
Class 2 | (1,344,137 | ) | (136,962,950 | ) | ||||
Class 3 | (166,799 | ) | (13,097,616 | ) | ||||
Class 4 | (41,022 | ) | (391,385 | ) | ||||
Total distributions to shareholders | (32,545,528 | ) | (286,975,847 | ) | ||||
Capital share transactions (Note 2) | ||||||||
Class 1 | (39,952,756 | ) | (54,850,288 | ) | ||||
Class 2 | 5,137,113 | (192,193,242 | ) | |||||
Class 3 | 7,511,485 | (8,380,444 | ) | |||||
Class 4 | 5,008,357 | 10,948,393 | ||||||
Total capital share transactions | (22,295,801 | ) | (244,475,581 | ) | ||||
Redemption fees | 4,967 | 34,017 | ||||||
Net increase (decrease) in net assets | 70,960,972 | (1,406,793,772 | ) | |||||
Net assets: | ||||||||
Beginning of period | 538,559,577 | 1,945,353,349 | ||||||
End of period | $ | 609,520,549 | $ | 538,559,577 | ||||
Undistributed net investment income (distributions in excess of net investment income) included | ||||||||
End of period | $ | (854,940 | ) | $ | 20,812,671 | |||
The accompanying notes are an integral part of these financial statements.
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Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited)
Templeton Developing Markets Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Templeton Variable Insurance Products Trust (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end investment company, consisting of twenty-two separate funds. The Templeton Developing Markets Securities Fund (Fund) is included in this report. The financial statements of the remaining funds in the Trust are presented separately. Shares of the Fund are sold only to insurance company separate accounts to fund the benefits of variable life insurance policies or variable annuity contracts. The Fund offers four classes of shares: Class 1, Class 2, Class 3, and Class 4. Each class of shares differs by its distribution fees, voting rights on matters affecting a single class and its exchange privilege.
The following summarizes the Fund’s significant accounting policies.
a. Security Valuation
Equity and other securities listed on a securities exchange or on the NASDAQ National Market System are valued at the last quoted sale price or the official closing price of the day, respectively. Over-the-counter securities and listed securities for which there is no reported sale are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. Certain equity securities are valued based upon fundamental characteristics or relationships to similar securities. Investments in open-end mutual funds are valued at the closing net asset value.
Foreign equity securities are valued as of the close of trading on the foreign stock exchange on which the security is primarily traded, or the NYSE, whichever is earlier. If no sale is reported at that time, the foreign equity security will be valued within the range of the most recent quoted bid and ask prices. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at the close of the NYSE on the day that the value of the security is determined.
The Fund has procedures to determine the fair value of individual securities and other assets for which market prices are not readily available or which may not be reliably priced. Methods for valuing these securities may include: fundamental analysis based upon the underlying investment book value, anticipated future cash flows, market changes in comparable or similar securities, matrix pricing, discounts from market prices of similar securities, or discounts applied due to the nature and duration of restrictions on the disposition of the securities. Due to the inherent uncertainty of valuations of such securities, the fair values may differ significantly from the values that would have been used had a ready market for such investments existed. Occasionally, events occur between the time at which trading in a security is completed and the close of the NYSE that might call into question the availability (including the reliability) of the value of a portfolio security held by the Fund. The investment manager monitors price movements following the close of trading in foreign stock markets through a series of country specific market proxies (such as baskets of American Depository Receipts, futures contracts and exchange traded funds). These price movements are measured against established trigger thresholds for each specific market proxy to assist in determining if an event has occurred. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services. All security valuation procedures are approved by the Fund’s Board of Trustees.
b. Foreign Currency Translation
Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. Purchases and sales of securities, income and expense items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. Occasionally, events may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the Fund’s Board of Trustees.
The Fund does not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments on the Statement of Operations.
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Developing Markets Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
b. Foreign Currency Translation (continued)
Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period.
c. Foreign Currency Contracts
The Fund enters into foreign exchange contracts in order to manage foreign exchange rate risk between the trade date and settlement date of securities transactions. A foreign exchange contract is an agreement between the Fund and a counterparty to buy or sell a foreign currency for a specific exchange rate on a future date.
d. Income and Deferred Taxes
No provision has been made for U.S. income taxes because it is the Fund’s policy to qualify as a regulated investment company under the Internal Revenue Code and to distribute to shareholders substantially all of its taxable income and net realized gains.
The Fund has reviewed the tax positions, taken on federal income tax returns, for each of the three open tax years and as of June 30, 2009, and has determined that no provision for income tax is required in the Fund’s financial statements.
Foreign securities held by the Fund may be subject to foreign taxation on dividend and interest income received. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist in the foreign markets in which the Fund invests.
The Fund may be subject to a tax imposed on net realized gains on securities of certain foreign countries. The Fund records an estimated deferred tax liability for net unrealized gains on these securities in an amount that would be payable if the securities were disposed of on the valuation date.
e. Security Transactions, Investment Income, Expenses and Distributions
Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Estimated expenses are accrued daily. Dividend income is recorded on the ex-dividend date except that certain dividends from foreign securities are recognized as soon as the Fund is notified of the ex-dividend date. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with accounting principles generally accepted in the United States of America. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods.
Common expenses incurred by the Trust are allocated among the funds based on the ratio of net assets of each fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense.
Realized and unrealized gains and losses and net investment income, not including class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions, by class, are generally due to differences in class specific expenses.
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Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Developing Markets Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
f. Accounting Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
g. Redemption Fees
Redemptions and exchanges of Class 3 shares held 60 days or less may be subject to the Fund’s redemption fee, which is 1% of the amount redeemed. Such fees are retained by the Fund and accounted for as an addition to paid-in capital.
h. Guarantees and Indemnifications
Under the Trust’s organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, on behalf of the Fund, enters into contracts with service providers that contain general indemnification clauses. The Trust’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote.
2. SHARES OF BENEFICIAL INTEREST
At June 30, 2009, there were an unlimited number of shares authorized (without par value). Transactions in the Fund’s shares were as follows:
| Six Months Ended June 30, 2009 | Year Ended December 31, 2008a | |||||||||||||
| Class 1 Shares: | Shares | Amount | Shares | Amount | ||||||||||
Shares sold | 3,774,488 | $ | 25,365,676 | 2,353,700 | $ | 25,940,524 | ||||||||
Shares issued in reinvestment of distributions | 2,750,570 | 14,825,573 | 10,523,272 | 116,387,388 | ||||||||||
Shares redeemed in-kind (Note 10) | (7,688,598 | ) | (41,966,671 | ) | (4,035,054 | ) | (26,002,704 | ) | ||||||
Shares redeemed | (6,841,049 | ) | (38,177,334 | ) | (17,164,161 | ) | (171,175,496 | ) | ||||||
Net increase (decrease) | (8,004,589 | ) | $ | (39,952,756 | ) | (8,322,243 | ) | $ | (54,850,288 | ) | ||||
Class 2 Shares: |
| |||||||||||||
Shares sold | 4,924,259 | $ | 32,015,140 | 11,623,915 | $ | 125,237,066 | ||||||||
Shares issued in reinvestment of distributions | 2,847,995 | 15,265,252 | 14,189,685 | 155,235,152 | ||||||||||
Shares redeemed in-kind (Note 10) | — | — | (16,334,498 | ) | (160,666,736 | ) | ||||||||
Shares redeemed | (6,821,213 | ) | (42,143,279 | ) | (33,921,710 | ) | (311,998,724 | ) | ||||||
Net increase (decrease) | 951,041 | $ | 5,137,113 | (24,442,608 | ) | $ | (192,193,242 | ) | ||||||
Class 3 Shares: |
| |||||||||||||
Shares sold | 1,538,269 | $ | 10,278,763 | 1,019,532 | $ | 12,310,616 | ||||||||
Shares issued in reinvestment of distributions | 365,167 | 1,946,341 | 1,367,241 | 14,902,925 | ||||||||||
Shares redeemed | (825,185 | ) | (4,713,619 | ) | (3,236,638 | ) | (35,593,985 | ) | ||||||
Net increase (decrease) | 1,078,251 | $ | 7,511,485 | (849,865 | ) | $ | (8,380,444 | ) | ||||||
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Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Developing Markets Securities Fund
2. SHARES OF BENEFICIAL INTEREST (continued)
| Six Months Ended June 30, 2009 | Year Ended December 31, 2008a | |||||||||||||
| Class 4 Shares: | Shares | Amount | Shares | Amount | ||||||||||
Shares sold | 756,997 | $ | 4,777,405 | 1,437,741 | $ | 12,416,230 | ||||||||
Shares issued on reinvestment of distributions | 94,491 | 508,362 | 40,710 | 449,439 | ||||||||||
Shares redeemed | (47,068 | ) | (277,410 | ) | (294,611 | ) | (1,917,276 | ) | ||||||
Net increase (decrease) | 804,420 | $ | 5,008,357 | 1,183,840 | $ | 10,948,393 | ||||||||
| aFor | the period February 29, 2008 (effective date) to December 31, 2008 for Class 4. |
3. TRANSACTIONS WITH AFFILIATES
Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Trust are also officers and/or directors of the following subsidiaries:
| Subsidiary | Affiliation | |
Templeton Asset Management Ltd. (TAML) | Investment manager | |
Franklin Templeton Services, LLC (FT Services) | Administrative manager | |
Franklin Templeton Distributors, Inc. (Distributors) | Principal underwriter | |
Franklin Templeton Investor Services, LLC (Investor Services) | Transfer agent |
a. Management Fees
The Fund pays an investment management fee to TAML based on the average daily net assets of the Fund as follows:
| Annualized Fee Rate | Net Assets | |
| 1.250% | Up to and including $1 billion | |
| 1.200% | Over $1 billion, up to and including $5 billion | |
| 1.150% | Over $5 billion, up to and including $10 billion | |
| 1.100% | Over $10 billion, up to and including $15 billion | |
| 1.050% | Over $15 billion, up to and including $20 billion | |
| 1.000% | In excess of $20 billion |
b. Administrative Fees
The Fund pays an administrative fee to FT Services based on the Fund’s average daily net assets as follows:
| Annualized Fee Rate | Net Assets | |
| 0.150% | Up to and including $200 million | |
| 0.135% | Over $200 million, up to and including $700 million | |
| 0.100% | Over $700 million, up to and including $1.2 billion | |
| 0.075% | In excess of $1.2 billion |
c. Distribution Fees
The Fund’s Board of Trustees has adopted distribution plans for Class 2, Class 3, and Class 4 shares pursuant to Rule 12b-1 under the 1940 Act. Under the Fund’s compensation distribution plans, the Fund pays Distributors for costs incurred in connection with the servicing, sale and distribution of the Fund’s shares up to 0.25%, 0.35%, and 0.35% per year of its average daily net assets of Class 2, Class 3, and Class 4, respectively. The Board of Trustees has agreed to limit the current rate to 0.25% per year for Class 3.
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Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Developing Markets Securities Fund
3. TRANSACTIONS WITH AFFILIATES (continued)
d. Transfer Agent Fees
Investor Services, under terms of an agreement, performs shareholder servicing for the Fund and is not paid by the Fund for the services.
4. EXPENSE OFFSET ARRANGEMENT
The Fund has entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Fund’s custodian expenses. During the period ended June 30, 2009, the custodian fees were reduced as noted in the Statement of Operations.
5. INCOME TAXES
For tax purposes, realized capital losses and realized currency losses occurring subsequent to October 31, may be deferred and treated as occurring on the first day of the following fiscal year. At December 31, 2008, the Fund deferred realized capital losses and realized currency losses of $152,508,979 and $229,868, respectively.
At June 30, 2009, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
Cost of investments | $ | 525,745,606 | ||
Unrealized appreciation | $ | 121,846,853 | ||
Unrealized depreciation | (49,110,405 | ) | ||
Net unrealized appreciation (depreciation) | $ | 72,736,448 | ||
Net investment income differs for financial statement and tax purposes primarily due to differing treatments of foreign currency transactions, passive foreign investment company shares, and foreign capital gains tax.
Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatments of wash sales, foreign currency transactions, passive foreign investment company shares, foreign capital gains tax, gains (losses) realized on in-kind shareholder redemptions, and corporate actions.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the period ended June 30, 2009, aggregated $204,547,155 and $231,333,008, respectively. Sales of investments exclude redemption in-kind of $41,966,671.
7. INVESTMENTS IN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO
The Fund may invest in the Institutional Fiduciary Trust Money Market Portfolio (Sweep Money Fund), an open-end investment company managed by Franklin Advisers, Inc. (an affiliate of the investment manager). Management fees paid by the Fund are reduced on assets invested in the Sweep Money Fund, in an amount not to exceed the management and administrative fees paid by the Sweep Money Fund.
8. CONCENTRATION OF RISK
Investing in foreign securities may include certain risks and considerations not typically associated with investing in U.S. securities, such as fluctuating currency values and changing local and regional economic, political and social conditions, which may result in greater market volatility. In addition, certain foreign securities may not be as liquid as U.S. securities.
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Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Developing Markets Securities Fund
9. CREDIT FACILITY
Effective January 23, 2009, the Fund, together with other U.S. registered and foreign investment funds managed by Franklin Templeton Investments (individually, “Borrower”; collectively “Borrowers”), entered into a joint syndicated senior unsecured credit facility totaling $725 million (Global Credit Facility) to provide a source of funds to the Borrowers for temporary and emergency purposes, including the ability to meet future unanticipated or unusually large redemption requests.
Under the terms of the Global Credit Facility, the Fund shall, in addition to interest charged on any borrowings made by the Fund and other costs incurred by the Fund, pay its share of fees and expenses incurred in connection with the implementation and maintenance of the Global Credit Facility, based upon its relative share of the aggregate net assets of all of the Borrowers, including an annual commitment fee based upon the unused portion of the Global Credit Facility. During the period, the Fund incurred commitment fees of $594 of its pro rata portion of the Global Credit Facility, which is reflected in other expenses on the Statement of Operations. During the period ended June 30, 2009, the Fund did not utilize the Global Credit Facility.
10. REDEMPTION IN-KIND
During the period ended June 30, 2009, the Fund realized $6,207,989 of net losses resulting from a redemption in-kind in which a shareholder redeemed fund shares for securities held by the Fund rather than for cash. Because such losses are not taxable to the Fund and are not netted with capital gains that are distributed to remaining shareholders, they have been reclassified from accumulated net realized losses to paid-in capital.
During the year ended December 31, 2008, the Fund realized $8,268,018 of net gains resulting from redemptions in-kind in which a shareholder redeemed fund shares for securities held by the Fund rather than for cash. Because such gains are not taxable to the Fund and are not distributed to remaining shareholders, they have been reclassified from accumulated net realized gains to paid-in capital.
11. FAIR VALUE MEASUREMENTS
Financial Accounting Standards Board (FASB) Statement No. 157, “Fair Value Measurement” (SFAS 157) establishes a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Fund’s own market assumptions (unobservable inputs). These inputs are used in determining the value of the Fund’s investments and are summarized in the following fair value hierarchy:
| • | Level 1 – quoted prices in active markets for identical securities |
| • | Level 2 – other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speed, credit risk, etc.) |
| • | Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments) |
The inputs or methodology used for valuing securities are not an indication of the risk associated with investing in those securities.
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Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Developing Markets Securities Fund
11. FAIR VALUE MEASUREMENTS (continued)
The following is a summary of the inputs used as of June 30, 2009, in valuing the Fund’s assets and liabilities carried at fair value:
| Level 1 | Level 2 | Level 3 | Total | |||||||||
Assets: | ||||||||||||
Investments in Securities: | ||||||||||||
Equity Investments:a | ||||||||||||
Russia | $ | 71,091,166 | $ | 623,848 | $ | — | $ | 71,715,014 | ||||
All other Equity Investmentsb | 507,319,662 | — | — | 507,319,662 | ||||||||
Short Term Investments | 19,447,378 | — | — | 19,447,378 | ||||||||
Total Investments in Securities | $ | 597,858,206 | $ | 623,848 | $ | — | $ | 598,482,054 | ||||
aIncludes common and preferred stock as well as other equity investments.
bFor detailed country breakdown, see the accompanying Statement of Investments.
12. SUBSEQUENT EVENTS
Management has evaluated subsequent events through August 7, 2009 and determined that no events have occurred that require disclosure.
ABBREVIATIONS
Selected Portfolio
ADR - American Depository Receipt
GDR - Global Depository Receipt
IDR - International Depository Receipt
SDR - Swedish Depository Receipt
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Table of Contents
Franklin Templeton Variable Insurance Products Trust
Tax Designation (unaudited)
Templeton Developing Markets Securities Fund
At December 31, 2008, more than 50% of the Fund’s total assets were invested in securities of foreign issuers. In most instances, foreign taxes were withheld from income paid to the Fund on these investments. As shown in the table below, the Fund designates to shareholders the foreign source income and foreign taxes paid, pursuant to Section 853 of the Internal Revenue Code. This designation will allow shareholders of record on February 11, 2009, to treat their proportionate share of foreign taxes paid by the Fund as having been paid directly by them. The shareholder shall consider these amounts as foreign taxes paid in the tax year in which they receive the Fund distribution.
The following table provides a detailed analysis of foreign tax paid and foreign source income as designated by the Fund, to Class 1, Class 2, Class 3, and Class 4 shareholders of record.
| Class | Foreign Tax Paid Per Share | Foreign Source Income Per Share | ||||
Class 1 | $ | 0.0405 | $ | 0.3507 | ||
Class 2 | $ | 0.0405 | $ | 0.3155 | ||
Class 3 | $ | 0.0405 | $ | 0.3241 | ||
Class 4 | $ | 0.0405 | $ | 0.3438 | ||
Foreign Tax Paid Per Share (Column 1) is the amount per share available to you, as a tax credit (assuming you held your shares in the Fund for a minimum of 16 days during the 31-day period beginning 15 days before the ex-dividend date of the Fund’s distribution to which the foreign taxes relate), or, as a tax deduction.
Foreign Source Income Per Share (Column 2) is the amount per share of income dividends paid to you that is attributable to foreign securities held by the Fund, plus any foreign taxes withheld on these dividends.
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TEMPLETON FOREIGN SECURITIES FUND
We are pleased to bring you Templeton Foreign Securities Fund’s semiannual report for the period ended June 30, 2009.
Performance Summary as of 6/30/09
Templeton Foreign Securities Fund – Class 1 delivered a +9.33% total return for the six-month period ended 6/30/09.
Performance reflects the Fund’s Class 1 operating expenses, but does not include any contract fees, expenses or sales charges. If they had been included, performance would be lower. These charges and deductions, particularly for variable life policies, can have a significant effect on contract values and insurance benefits. See the contract prospectus for a complete description of these expenses, including sales charges.
Templeton Foreign Securities Fund – Class 1
Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares.
Current performance may differ from figures shown.
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Fund Goal and Main Investments: Templeton Foreign Securities Fund seeks long-term capital growth. The Fund normally invests at least 80% of its net assets in investments of issuers located outside the U.S., including those in emerging markets, and normally invests predominantly in equity securities.
Performance Overview
You can find the Fund’s six-month total return in the Performance Summary. The Fund outperformed its benchmark, the Morgan Stanley Capital International (MSCI) Europe, Australasia, Far East (EAFE) Index, which delivered a total return of +8.42% for the same period.1 Please note that index performance information is provided for reference and that we do not attempt to track the index but rather undertake investments on the basis of fundamental research.
Economic and Market Overview
During the six months under review, global equities hit new bear market lows in March before delivering their biggest quarterly rally in more than a decade. At the beginning of the period, with investor sentiment depressed and risk aversion elevated, defensive, non-cyclical sectors like utilities, consumer staples and health care were market leaders. As data emerged suggesting a fledgling recovery in the financials sector and a moderating pace of global economic contraction, investors regained some risk appetite, rotating capital back into cyclical sectors such as financials, materials and consumer discretionary. Resurgent risk appetite also buoyed emerging markets stocks, which delivered their best three-month returns on record from March through May 2009. Emerging market optimism in turn supported higher commodity prices, which gained the most since the bubble in hard assets burst in the summer of 2008. Also supporting commodity prices was a weaker U.S. dollar. Although systemic risk aversion and the consensus belief that the U.S. could lead the global economy out of recession helped strengthen the dollar at the beginning of the period, investors soon began to worry about the currency’s ongoing stability in the face of aggressive and unconventional monetary policy, and the greenback lost value relative to most currencies for the six-month period.
In the reporting period’s final weeks, equity markets moderated as investors appeared to contemplate the rally’s merits and reassess their new positions. Although sentiment had improved and most seemed to
1. Source: © 2009 Morningstar. One cannot invest directly in an index, nor is an index representative of the Fund’s portfolio. Please see Index Descriptions following the Fund Summaries.
Fund Risks: The Fund’s investments in stocks may offer the potential for long-term gains but can be subject to short-term price fluctuations. Foreign investing, especially in emerging markets, involves additional risks, including currency fluctuations, economic instability, market volatility, and political and social instability. By having significant investments in one or more countries or in particular sectors (such as financial services) from time to time, the Fund may carry greater risk of adverse developments in a country or sector than a fund that invests more broadly. The Fund’s prospectus also includes a description of the main investment risks.
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believe the global economy had exited the worst stage of this recessionary cycle, indicators remained mixed and lacked the sustainable upward trajectory investors had hoped for. For example, initial U.S. jobless claims fell to their lowest levels in six months during May, but unemployment rose again at the end of the period to 9.5%.2 In Europe, policymakers committed to an easier monetary regime, but the eurozone’s industrial production declined, capacity utilization continued to shrink, and price deflation was recorded for the first time since data began in 1997.3 In China, a stimulative monetary campaign spurred lending and fueled an annualized money growth rate of 26%, a powerful measure against near-term economic headwinds but a potentially dangerous catalyst for longer-term inflation and asset bubble formation.4
Investment Strategy
Our investment philosophy is bottom up, value oriented and long term. In choosing investments, we generally focus on the market price of a company’s securities relative to our evaluation of the company’s potential long-term earnings, asset value and cash flow. Among factors we consider are a company’s historical value measures, including price/earnings ratio, profit margins and liquidation value. We do in-depth research to construct a bargain list from which we buy.
Manager’s Discussion
During the reporting period, stock selection in the information technology, utilities and telecommunication services sectors supported the Fund’s performance relative to the benchmark index.5 Our three semiconductor and semiconductor equipment holdings — Taiwan Semiconductor Manufacturing,6 South Korea’s Samsung Electronics6 and Germany’s Infineon Technologies — performed well and boosted relative performance of the Fund’s information technology sector. An underweighting in the utilities sector, where electric utility British Energy Group (no longer held by period-end) was a contributor, helped relative results. Also aiding performance was China Telecom6 in the telecommunication services sector. Additional key contributors outside of these sectors included Indian
2. Source: Bureau of Labor Statistics.
3. Source: European Communities Eurostat.
4. Source: People’s Bank of China.
5. The information technology sector comprises communications equipment; computers and peripherals; electronic equipment, instruments and components; semiconductors and semiconductor equipment; and software in the SOI. The utilities sector comprises electric utilities and multi-utilities in the SOI. The telecommunication services sector comprises diversified telecommunication services and wireless telecommunication services in the SOI.
6. This holding is not an index component.
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petrochemical product manufacturer Reliance Industries6 and U.K. home improvement retail chain Kingfisher.
On the other hand, an underweighting and stock selection in the materials and financials sectors had a negative impact on relative Fund performance.7 Significant detractors included Finnish paper products manufacturer UPM-Kymmene in the materials sector and Swiss insurers ACE6 and Swiss Reinsurance in the financials sector. Other holdings that underperformed included France Telecom and French media and telecommunications conglomerate Vivendi.
It is important to recognize the effect of currency movements on the Fund’s performance. In general, if the value of the U.S. dollar goes up compared with a foreign currency, an investment traded in that foreign currency will go down in value because it will be worth fewer U.S. dollars. This can have a negative effect on Fund performance. Conversely, when the U.S. dollar weakens in relation to a foreign currency, an investment traded in that foreign currency will increase in value, which can contribute to Fund performance. For the six months ended June 30, 2009, the U.S. dollar declined in value relative to most non-U.S. currencies. As a result, the Fund’s performance was positively affected by the portfolio’s investment predominantly in securities with non-U.S. currency exposure. However, one cannot expect the same result in future periods.
From a geographic perspective, the Fund’s exposure to Asia benefited relative Fund performance, as our investments in India and non-index country Taiwan outperformed the benchmark index. In contrast, the Fund’s exposure to Europe constrained relative results as our French and Swiss holdings underperformed.
Thank you for your participation in Templeton Foreign Securities Fund. We look forward to serving your future investment needs.
7. The materials sector comprises metals and mining, and paper and forest products in the SOI. The financials sector comprises capital markets, commercial banks, diversified financial services, insurance, and real estate management and development in the SOI.
The foregoing information reflects our analysis, opinions and portfolio holdings as of June 30, 2009, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.
Top 10 Holdings
Templeton Foreign Securities Fund
6/30/09
Company Sector/Industry, | % of Total Net Assets | |
| Telefonica SA, ADR | 2.4% | |
| Diversified Telecommunication Services, Spain | ||
| BP PLC | 2.4% | |
| Oil, Gas & Consumable Fuels, U.K. | ||
| Samsung Electronics Co. Ltd. | 2.3% | |
| Semiconductors & Semiconductor Equipment, South Korea | ||
| Taiwan Semiconductor Manufacturing Co. Ltd. | 2.2% | |
| Semiconductors & Semiconductor Equipment, Taiwan | ||
| Vodafone Group PLC, ADR | 2.0% | |
| Wireless Telecommunication Services, U.K. | ||
| GlaxoSmithKline PLC | 2.0% | |
| Pharmaceuticals, U.K. | ||
| Check Point Software Technologies Ltd. | 2.0% | |
| Software, Israel | ||
| Total SA, B | 2.0% | |
| Oil, Gas & Consumable Fuels, France | ||
| Kingfisher PLC | 2.0% | |
| Specialty Retail, U.K. | ||
| Royal Dutch Shell PLC, B | 1.9% | |
| Oil, Gas & Consumable Fuels, U.K. | ||
The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund’s Statement of Investments (SOI).
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Fund Expenses
As an investor in a variable insurance contract (Contract) that indirectly provides for investment in an underlying mutual fund, you can incur transaction and/or ongoing expenses at both the Fund level and the Contract level.
| • | Transaction expenses can include sales charges (loads) on purchases, surrender fees, transfer fees and premium taxes. |
| • | Ongoing expenses can include management fees, distribution and service (12b-1) fees, contract fees, annual maintenance fees, mortality and expense risk fees and other fees and expenses. All mutual funds and Contracts have some types of ongoing expenses. |
The expenses shown in the table are meant to highlight ongoing expenses at the Fund level only and do not include ongoing expenses at the Contract level, or transaction expenses at either the Fund or Contract levels. While the Fund does not have transaction expenses, if the transaction and ongoing expenses at the Contract level were included, the expenses shown below would be higher. You should consult your Contract prospectus or disclosure document for more information.
The table shows Fund-level ongoing expenses and can help you understand these expenses and compare them with those of other mutual funds offered through the Contract. The table assumes a $1,000 investment held for the six months indicated. Please refer to the Fund prospectus for additional information on operating expenses.
Actual Fund Expenses
The first line (Actual) of the table provides actual account values and expenses. The “Ending Account Value” is derived from the Fund’s actual return, which includes the effect of ongoing Fund expenses, but does not include the effect of ongoing Contract expenses.
You can estimate the Fund-level expenses you incurred during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:
| 1. | Divide your account value by $1,000. |
If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6.
| 2. | Multiply the result by the number under the heading “Fund-Level Expenses Incurred During Period.” |
If Fund-Level Expenses Incurred During Period were $7.50, then 8.6 x $7.50 = $64.50.
In this illustration, the estimated expenses incurred this period at the Fund level are $64.50.
Templeton Foreign Securities Fund – Class 1
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Hypothetical Example for Comparison with Other Mutual Funds
Information in the second line (Hypothetical) of the table can help you compare ongoing expenses of the Fund with those of other mutual funds offered through the Contract. This information may not be used to estimate the actual ending account balance or expenses you incurred during the period. The hypothetical “Ending Account Value” is based on the Fund’s actual expense ratio and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Fund-Level Expenses Incurred During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds offered through a Contract.
| Class 1 | Beginning Account Value 1/1/09 | Ending Account Value 6/30/09 | Fund-Level Expenses Incurred During Period* 1/1/09–6/30/09 | ||||||
Actual | $ | 1,000 | $ | 1,093.30 | $ | 4.20 | |||
Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,020.78 | $ | 4.06 | |||
*Expenses are calculated using the most recent six-month annualized expense ratio for the Fund’s Class 1 shares (0.81%), which does not include any ongoing expenses of the Contract for which the Fund is an investment option, multiplied by the average account value over the period, multiplied by 181/365 to reflect the one-half year period.
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SUPPLEMENT DATED JULY 27, 2009
TOTHE PROSPECTUS
DATED MAY 1, 2009
AS PREVIOUSLY AMENDED
TEMPLETON FOREIGN SECURITIES FUND
(A series of Franklin Templeton Variable Insurance Products Trust)
The prospectus is amended by replacing the section “Portfolio Selection” under “Goals and Strategies” (page 1) with the following:
PORTFOLIO SELECTION
The manager’s investment philosophy is “bottom-up,” value-oriented, and long-term. In choosing investments, the Fund’s manager focuses on the market price of a company’s securities relative to its evaluation of the company’s potential long-term earnings, asset value and cash flow. A company’s historical value measures, including price/earnings ratio, profit margins and liquidation value, may also be considered, but are not limiting factors.
Please keep this supplement for future reference.
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Franklin Templeton Variable Insurance Products Trust
Financial Highlights
Templeton Foreign Securities Fund
| Class 1 | Six Months Ended June 30, 2009 (unaudited) | Year Ended December 31, | ||||||||||||||||||||||
| 2008 | 2007 | 2006 | 2005 | 2004 | ||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 10.95 | $ | 20.57 | $ | 19.00 | $ | 15.84 | $ | 14.53 | $ | 12.37 | ||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.16 | 0.45 | 0.45 | 0.46 | 0.30 | 0.26 | ||||||||||||||||||
Net realized and unrealized gains (losses) | 0.69 | (8.01 | ) | 2.46 | 2.94 | 1.20 | 2.05 | |||||||||||||||||
Total from investment operations | 0.85 | (7.56 | ) | 2.91 | 3.40 | 1.50 | 2.31 | |||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income | (0.43 | ) | (0.45 | ) | (0.44 | ) | (0.24 | ) | (0.19 | ) | (0.15 | ) | ||||||||||||
Net realized gains | (0.48 | ) | (1.61 | ) | (0.90 | ) | — | — | — | |||||||||||||||
Total distributions | (0.91 | ) | (2.06 | ) | (1.34 | ) | (0.24 | ) | (0.19 | ) | (0.15 | ) | ||||||||||||
Redemption feesc | — | — | — | — | — | — | ||||||||||||||||||
Net asset value, end of period | $ | 10.89 | $ | 10.95 | $ | 20.57 | $ | 19.00 | $ | 15.84 | $ | 14.53 | ||||||||||||
Total returnd | 9.33% | (40.23)% | 15.79% | 21.70% | 10.48% | 18.87% | ||||||||||||||||||
Ratios to average net assetse | ||||||||||||||||||||||||
Expensesf | 0.81% | 0.77% | 0.75% | 0.75% | 0.77% | 0.82% | ||||||||||||||||||
Net investment income | 3.21% | 2.82% | 2.22% | 2.63% | 2.03% | 1.95% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 265,083 | $ | 262,725 | $ | 531,377 | $ | 594,991 | $ | 531,775 | $ | 506,456 | ||||||||||||
Portfolio turnover rate | 11.25% | 18.27% | 26.74% | 18.97% | g | 14.61% | 10.91% | |||||||||||||||||
aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.
bBased on average daily shares outstanding.
cAmount rounds to less than $0.01 per share.
dTotal return does not include any fees, charges or expenses imposed by the variable annuity and life insurance contracts for which the Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle. Total return is not annualized for periods less than one year.
eRatios are annualized for periods less than one year.
fBenefit of expense reduction rounds to less than 0.01%.
gExcludes the value of portfolio securities delivered as a result of redemption in-kind.
The accompanying notes are an integral part of these financial statements.
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Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Templeton Foreign Securities Fund
| Class 2 | Six Months Ended June 30, 2009 (unaudited) | Year Ended December 31, | ||||||||||||||||||||||
| 2008 | 2007 | 2006 | 2005 | 2004 | ||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 10.76 | $ | 20.25 | $ | 18.73 | $ | 15.63 | $ | 14.35 | $ | 12.24 | ||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.14 | 0.40 | 0.38 | 0.40 | 0.26 | 0.22 | ||||||||||||||||||
Net realized and unrealized gains (losses) | 0.69 | (7.89 | ) | 2.44 | 2.91 | 1.19 | 2.03 | |||||||||||||||||
Total from investment operations | 0.83 | (7.49 | ) | 2.82 | 3.31 | 1.45 | 2.25 | |||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income | (0.39 | ) | (0.39 | ) | (0.40 | ) | (0.21 | ) | (0.17 | ) | (0.14 | ) | ||||||||||||
Net realized gains | (0.48 | ) | (1.61 | ) | (0.90 | ) | — | — | — | |||||||||||||||
Total distributions | (0.87 | ) | (2.00 | ) | (1.30 | ) | (0.21 | ) | (0.17 | ) | (0.14 | ) | ||||||||||||
Redemption feesc | — | — | — | — | — | — | ||||||||||||||||||
Net asset value, end of period | $ | 10.72 | $ | 10.76 | $ | 20.25 | $ | 18.73 | $ | 15.63 | $ | 14.35 | ||||||||||||
Total returnd | 9.23% | (40.38)% | 15.46% | 21.44% | 10.17% | 18.53% | ||||||||||||||||||
Ratios to average net assetse | ||||||||||||||||||||||||
Expensesf | 1.06% | 1.02% | 1.00% | 1.00% | 1.02% | 1.07% | ||||||||||||||||||
Net investment income | 2.96% | 2.57% | 1.97% | 2.38% | 1.78% | 1.70% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 1,727,439 | $ | 1,702,038 | $ | 3,255,154 | $ | 2,941,374 | $ | 2,232,990 | $ | 1,445,928 | ||||||||||||
Portfolio turnover rate | 11.25% | 18.27% | 26.74% | 18.97% | g | 14.61% | 10.91% | |||||||||||||||||
aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.
bBased on average daily shares outstanding.
cAmount rounds to less than $0.01 per share.
dTotal return does not include any fees, charges or expenses imposed by the variable annuity and life insurance contracts for which the Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle. Total return is not annualized for periods less than one year.
eRatios are annualized for periods less than one year.
fBenefit of expense reduction rounds to less than 0.01%.
gExcludes the value of portfolio securities delivered as a result of redemption in-kind.
The accompanying notes are an integral part of these financial statements.
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Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Templeton Foreign Securities Fund
| Six Months Ended June 30, 2009 (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 3 | 2008 | 2007 | 2006 | 2005 | 2004a | |||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 10.70 | $ | 20.18 | $ | 18.68 | $ | 15.60 | $ | 14.35 | $ | 12.48 | ||||||||||||
Income from investment operationsb: | ||||||||||||||||||||||||
Net investment incomec | 0.14 | 0.39 | 0.37 | 0.37 | 0.25 | 0.09 | ||||||||||||||||||
Net realized and unrealized gains (losses) | 0.68 | (7.84 | ) | 2.45 | 2.94 | 1.18 | 1.92 | |||||||||||||||||
Total from investment operations | 0.82 | (7.45 | ) | 2.82 | 3.31 | 1.43 | 2.01 | |||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income | (0.40 | ) | (0.42 | ) | (0.42 | ) | (0.23 | ) | (0.18 | ) | (0.14 | ) | ||||||||||||
Net realized gains | (0.48 | ) | (1.61 | ) | (0.90 | ) | — | — | — | |||||||||||||||
Total distributions | (0.88 | ) | (2.03 | ) | (1.32 | ) | (0.23 | ) | (0.18 | ) | (0.14 | ) | ||||||||||||
Redemption feesd | — | — | — | — | — | — | ||||||||||||||||||
Net asset value, end of period | $ | 10.64 | $ | 10.70 | $ | 20.18 | $ | 18.68 | $ | 15.60 | $ | 14.35 | ||||||||||||
Total returne | 9.18% | (40.39)% | 15.45% | 21.46% | 10.13% | 16.25% | ||||||||||||||||||
Ratios to average net assetsf | ||||||||||||||||||||||||
Expensesg | 1.06% | 1.02% | 1.00% | 1.00% | 1.02% | 1.07% | ||||||||||||||||||
Net investment income | 2.96% | 2.57% | 1.97% | 2.38% | 1.78% | 1.70% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 307,688 | $ | 271,061 | $ | 313,505 | $ | 150,417 | $ | 47,462 | $ | 16,559 | ||||||||||||
Portfolio turnover rate | 11.25% | 18.27% | 26.74% | 18.97% | h | 14.61% | 10.91% | |||||||||||||||||
aFor the period May 1, 2004 (effective date) to December 31, 2004.
bThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.
cBased on average daily shares outstanding.
dAmount rounds to less than $0.01 per share.
eTotal return does not include any fees, charges or expenses imposed by the variable annuity and life insurance contracts for which the Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle. Total return is not annualized for periods less than one year.
fRatios are annualized for periods less than one year.
gBenefit of expense reduction rounds to less than 0.01%.
hExcludes the value of portfolio securities delivered as a result of redemption in-kind.
The accompanying notes are an integral part of these financial statements.
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Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Templeton Foreign Securities Fund
| Class 4 | Six Months Ended June 30, 2009 (unaudited) | Period Ended December 31, 2008a | ||||||
Per share operating performance | ||||||||
(for a share outstanding throughout the period) | ||||||||
Net asset value, beginning of period | $ | 10.91 | $ | 18.90 | ||||
Income from investment operationsb: | ||||||||
Net investment incomec | 0.15 | 0.15 | ||||||
Net realized and unrealized gains (losses) | 0.68 | (6.08 | ) | |||||
Total from investment operations | 0.83 | (5.93 | ) | |||||
Less distributions from: | ||||||||
Net investment income | (0.42 | ) | (0.45 | ) | ||||
Net realized gains | (0.48 | ) | (1.61 | ) | ||||
Total distributions | (0.90 | ) | (2.06 | ) | ||||
Redemption feesd | — | — | ||||||
Net asset value, end of period | $ | 10.84 | $ | 10.91 | ||||
Total returne | 9.15% | (35.15)% | ||||||
Ratios to average net assetsf | ||||||||
Expensesg | 1.16% | 1.12% | ||||||
Net investment income | 2.86% | 2.47% | ||||||
Supplemental data | ||||||||
Net assets, end of period (000’s) | $ | 29,804 | $ | 14,287 | ||||
Portfolio turnover rate | 11.25% | 18.27% | ||||||
aFor the period February 29, 2008 (effective date) to December 31, 2008.
bThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.
cBased on average daily shares outstanding.
dAmount rounds to less than $0.01 per share.
eTotal return does not include any fees, charges or expenses imposed by the variable annuity and life insurance contracts for which the Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle. Total return is not annualized for periods less than one year.
fRatios are annualized for periods less than one year.
gBenefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
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Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited)
| Templeton Foreign Securities Fund | Country | Shares/ Units | Value | ||||
Common Stocks and Other Equity Interests 91.3% | |||||||
Aerospace & Defense 1.6% | |||||||
BAE Systems PLC | United Kingdom | 4,494,870 | $ | 25,034,223 | |||
Embraer-Empresa Brasileira de Aeronautica SA, ADR | Brazil | 700,030 | 11,592,497 | ||||
| 36,626,720 | |||||||
Air Freight & Logistics 0.6% | |||||||
Deutsche Post AG | Germany | 1,087,912 | 14,091,737 | ||||
Auto Components 0.6% | |||||||
Compagnie Generale des Etablissements Michelin, B | France | 241,710 | 13,766,007 | ||||
Automobiles 1.8% | |||||||
Bayerische Motoren Werke AG | Germany | 354,040 | 13,323,148 | ||||
Toyota Motor Corp., ADR | Japan | 380,380 | 28,730,102 | ||||
| 42,053,250 | |||||||
Capital Markets 1.6% | |||||||
Invesco Ltd. | United States | 1,744,177 | 31,081,234 | ||||
aKKR Private Equity Investors LP | United States | 1,155,000 | 6,930,000 | ||||
| 38,011,234 | |||||||
Commercial Banks 4.1% | |||||||
DBS Group Holdings Ltd. | Singapore | 2,585,520 | 21,059,665 | ||||
aKB Financial Group Inc., ADR | South Korea | 530,407 | 17,667,857 | ||||
Mitsubishi UFJ Financial Group Inc. | Japan | 3,429,500 | 21,283,115 | ||||
Sumitomo Mitsui Financial Group Inc. | Japan | 563,700 | 22,990,255 | ||||
aUniCredit SpA | Italy | 4,709,815 | 11,857,747 | ||||
| 94,858,639 | |||||||
Commercial Services & Supplies 0.5% | |||||||
Brambles Ltd. | Australia | 2,375,538 | 11,400,895 | ||||
Communications Equipment 1.2% | |||||||
Telefonaktiebolaget LM Ericsson, B, ADR | Sweden | 2,929,600 | 28,651,488 | ||||
Computers & Peripherals 1.3% | |||||||
Compal Electronics Inc. | Taiwan | 12,917,247 | 10,476,099 | ||||
Lite-On Technology Corp. | Taiwan | 22,816,681 | 19,789,270 | ||||
| 30,265,369 | |||||||
Diversified Financial Services 0.9% | |||||||
ING Groep NV | Netherlands | 2,046,888 | 20,590,563 | ||||
Diversified Telecommunication Services 10.6% | |||||||
China Telecom Corp. Ltd., H | China | 73,292,357 | 36,504,793 | ||||
Chunghwa Telecom Co. Ltd., ADR | Taiwan | 1,108,463 | 21,980,821 | ||||
France Telecom SA | France | 1,868,953 | 42,361,721 | ||||
Singapore Telecommunications Ltd. | Singapore | 20,278,000 | 41,992,131 | ||||
Telefonica SA, ADR | Spain | 829,094 | 56,287,192 | ||||
Telekom Austria AG | Austria | 727,240 | 11,363,099 | ||||
aTelenor ASA | Norway | 4,844,334 | 37,238,620 | ||||
| 247,728,377 | |||||||
Electric Utilities 1.6% | |||||||
E.ON AG | Germany | 519,730 | 18,391,998 | ||||
Hong Kong Electric Holdings Ltd. | Hong Kong | 3,453,969 | 19,208,772 | ||||
| 37,600,770 | |||||||
TF-12
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Templeton Foreign Securities Fund | Country | Shares/ Units | Value | ||||
Common Stocks and Other Equity Interests (continued) | |||||||
Electrical Equipment 0.7% | |||||||
Shanghai Electric Group Co. Ltd. | China | 35,850,000 | $ | 15,357,875 | |||
Electronic Equipment, Instruments & Components 1.4% | |||||||
aFlextronics International Ltd. | Singapore | 8,099,170 | 33,287,589 | ||||
Energy Equipment & Services 0.5% | |||||||
Aker Solutions ASA | Norway | 1,386,290 | 11,443,050 | ||||
Food Products 2.9% | |||||||
Nestle SA | Switzerland | 1,035,090 | 38,969,438 | ||||
Unilever PLC | United Kingdom | 1,170,483 | 27,424,165 | ||||
| 66,393,603 | |||||||
Health Care Providers & Services 0.4% | |||||||
Celesio AG | Germany | 440,310 | 10,109,766 | ||||
Hotels, Restaurants & Leisure 1.4% | |||||||
Autogrill SpA | Italy | 1,429,290 | 12,038,357 | ||||
Compass Group PLC | United Kingdom | 3,611,978 | 20,310,094 | ||||
| 32,348,451 | |||||||
Industrial Conglomerates 2.7% | |||||||
Hutchison Whampoa Ltd. | Hong Kong | 3,276,709 | 21,415,155 | ||||
Siemens AG | Germany | 598,694 | 41,339,822 | ||||
| 62,754,977 | |||||||
Insurance 7.8% | |||||||
ACE Ltd. | United States | 729,799 | 32,279,010 | ||||
Aviva PLC | United Kingdom | 4,658,581 | 26,175,963 | ||||
AXA SA | France | 1,616,269 | 30,354,849 | ||||
Muenchener Rueckversicherungs-Gesellschaft AG | Germany | 215,170 | 29,011,790 | ||||
Old Mutual PLC | United Kingdom | 19,529,314 | 26,004,879 | ||||
Partnerre Ltd. | Bermuda | 169,680 | 11,020,716 | ||||
Swiss Reinsurance Co. | Switzerland | 792,220 | 26,195,958 | ||||
| 181,043,165 | |||||||
Life Sciences Tools & Services 0.7% | |||||||
Lonza Group AG | Switzerland | 175,440 | 17,416,484 | ||||
Media 4.2% | |||||||
British Sky Broadcasting Group PLC | United Kingdom | 2,941,216 | 22,018,951 | ||||
Pearson PLC | United Kingdom | 3,409,246 | 34,189,312 | ||||
Reed Elsevier NV | Netherlands | 1,742,483 | 19,168,345 | ||||
Vivendi SA | France | 980,449 | 23,426,155 | ||||
| 98,802,763 | |||||||
Metals & Mining 1.5% | |||||||
Barrick Gold Corp. | Canada | 663,561 | 22,338,375 | ||||
POSCO, ADR | South Korea | 141,230 | 11,675,484 | ||||
| 34,013,859 | |||||||
Multi-Utilities 1.1% | |||||||
GDF Suez | France | 602,301 | 22,420,659 | ||||
Suez Environnement SA | France | 157,749 | 2,753,565 | ||||
| 25,174,224 | |||||||
TF-13
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Templeton Foreign Securities Fund | Country | Shares/ Units | Value | ||||
Common Stocks and Other Equity Interests (continued) | |||||||
Oil, Gas & Consumable Fuels 11.5% | |||||||
BP PLC | United Kingdom | 6,982,462 | $ | 54,892,503 | |||
Gazprom, ADR | Russia | 1,132,600 | 22,969,128 | ||||
aReliance Industries Ltd. | India | 700,577 | 29,686,125 | ||||
Royal Dutch Shell PLC, B | United Kingdom | 1,736,593 | 43,602,450 | ||||
Sasol, ADR | South Africa | 971,480 | 33,826,934 | ||||
StatoilHydro ASA | Norway | 1,856,170 | 36,529,578 | ||||
Total SA, B | France | 846,266 | 45,674,712 | ||||
| 267,181,430 | |||||||
Paper & Forest Products 0.6% | |||||||
UPM-Kymmene OYJ | Finland | 1,477,599 | 12,870,104 | ||||
Pharmaceuticals 8.0% | |||||||
GlaxoSmithKline PLC | United Kingdom | 2,685,335 | 47,209,708 | ||||
Merck KGaA | Germany | 276,540 | 28,159,727 | ||||
Novartis AG | Switzerland | 825,010 | 33,428,503 | ||||
Roche Holding AG | Switzerland | 152,830 | 20,768,232 | ||||
Sanofi-Aventis | France | 697,965 | 40,989,297 | ||||
Takeda Pharmaceutical Co. Ltd. | Japan | 421,454 | 16,445,278 | ||||
| 187,000,745 | |||||||
Professional Services 2.8% | |||||||
Adecco SA | Switzerland | 956,590 | 39,833,714 | ||||
aRandstad Holding NV | Netherlands | 931,390 | 25,755,039 | ||||
| 65,588,753 | |||||||
Real Estate Management & Development 1.2% | |||||||
Cheung Kong (Holdings) Ltd. | Hong Kong | 2,483,922 | 28,557,459 | ||||
Semiconductors & Semiconductor Equipment 5.0% | |||||||
aInfineon Technologies AG | Germany | 3,757,123 | 13,306,096 | ||||
Samsung Electronics Co. Ltd. | South Korea | 113,407 | 52,664,688 | ||||
Taiwan Semiconductor Manufacturing Co. Ltd. | Taiwan | 30,524,907 | 50,812,916 | ||||
| 116,783,700 | |||||||
Software 4.5% | |||||||
aCheck Point Software Technologies Ltd. | Israel | 1,990,881 | 46,725,977 | ||||
Nintendo Co. Ltd. | Japan | 65,900 | 18,212,090 | ||||
SAP AG, ADR | Germany | 1,002,230 | 40,279,624 | ||||
| 105,217,691 | |||||||
Specialty Retail 2.0% | |||||||
Kingfisher PLC | United Kingdom | 15,543,496 | 45,471,447 | ||||
Textiles, Apparel & Luxury Goods 0.5% | |||||||
Burberry Group PLC | United Kingdom | 1,561,687 | 10,869,077 | ||||
Wireless Telecommunication Services 3.5% | |||||||
Mobile TeleSystems, ADR | Russia | 316,030 | 11,670,988 | ||||
Turkcell Iletisim Hizmetleri AS, ADR | Turkey | 1,669,150 | 23,134,419 | ||||
Vodafone Group PLC, ADR | United Kingdom | 2,442,360 | 47,601,596 | ||||
| 82,407,003 | |||||||
Total Common Stocks and Other Equity Interests | 2,125,738,264 | ||||||
TF-14
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Templeton Foreign Securities Fund | Country | Shares/ Units | Value | ||||
Preferred Stocks (Cost $5,545,353) 1.0% | |||||||
Metals & Mining 1.0% | |||||||
Vale SA, ADR, pfd., A | Brazil | 1,548,762 | $ | 23,773,497 | |||
Total Investments before Short Term Investments | 2,149,511,761 | ||||||
Short Term Investments (Cost $178,048,965) 7.6% | |||||||
Money Market Funds 7.6% | |||||||
bInstitutional Fiduciary Trust Money Market Portfolio, 0.00% | United States | 178,048,965 | 178,048,965 | ||||
Total Investments (Cost $2,746,048,420) 99.9% | 2,327,560,726 | ||||||
Other Assets, less Liabilities 0.1% | 2,454,490 | ||||||
Net Assets 100.0% | $ | 2,330,015,216 | |||||
See Abbreviations on page TF-25.
aNon-income producing.
bSee Note 7 regarding investments in the Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end.
The accompanying notes are an integral part of these financial statements.
TF-15
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements
Statement of Assets and Liabilities
June 30, 2009 (unaudited)
| Templeton Foreign Securities Fund | ||||
Assets: | ||||
Investments in securities: | ||||
Cost - Unaffiliated issuers | $ | 2,567,999,455 | ||
Cost - Sweep Money Fund (Note 7) | 178,048,965 | |||
Total cost of investments | $ | 2,746,048,420 | ||
Value - Unaffiliated issuers | $ | 2,149,511,761 | ||
Value - Sweep Money Fund (Note 7) | 178,048,965 | |||
Total value of investments | 2,327,560,726 | |||
Cash | 2,503,000 | |||
Receivables: | ||||
Capital shares sold | 888,720 | |||
Dividends | 6,894,953 | |||
Other assets | 3,160 | |||
Total assets | 2,337,850,559 | |||
Liabilities: | ||||
Payables: | ||||
Capital shares redeemed | 4,266,576 | |||
Affiliates | 2,267,713 | |||
Custodian fees | 628,460 | |||
Reports to shareholders | 633,056 | |||
Accrued expenses and other liabilities | 39,538 | |||
Total liabilities | 7,835,343 | |||
Net assets, at value | $ | 2,330,015,216 | ||
Net assets consist of: | ||||
Paid-in capital | $ | 2,933,744,612 | ||
Undistributed net investment income | 29,413,640 | |||
Net unrealized appreciation (depreciation) | (418,438,531 | ) | ||
Accumulated net realized gain (loss) | (214,704,505 | ) | ||
Net assets, at value | $ | 2,330,015,216 | ||
The accompanying notes are an integral part of these financial statements.
TF-16
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Assets and Liabilities (continued)
June 30, 2009 (unaudited)
| Templeton Foreign Securities Fund | |||
Class 1: | |||
Net assets, at value | $ | 265,083,060 | |
Shares outstanding | 24,348,889 | ||
Net asset value and maximum offering price per share | $ | 10.89 | |
Class 2: | |||
Net assets, at value | $ | 1,727,439,479 | |
Shares outstanding | 161,190,760 | ||
Net asset value and maximum offering price per share | $ | 10.72 | |
Class 3: | |||
Net assets, at value | $ | 307,688,369 | |
Shares outstanding | 28,911,686 | ||
Net asset value and maximum offering price per sharea | $ | 10.64 | |
Class 4: | |||
Net assets, at value | $ | 29,804,308 | |
Shares outstanding | 2,749,831 | ||
Net asset value and maximum offering price per share | $ | 10.84 | |
aRedemption price is equal to net asset value less any redemption fees retained by the Fund.
The accompanying notes are an integral part of these financial statements.
TF-17
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Operations
for the six months ended June 30, 2009 (unaudited)
| Templeton Foreign Securities Fund | ||||
Investment income: | ||||
Dividends (net of foreign taxes of $3,949,304) | ||||
Unaffiliated issuers | $ | 42,093,371 | ||
Sweep Money Fund (Note 7) | 120,719 | |||
Total investment income | 42,214,090 | |||
Expenses: | ||||
Management fees (Note 3a) | 6,608,209 | |||
Administrative fees (Note 3b) | 1,071,961 | |||
Distribution fees: (Note 3c) | ||||
Class 2 | 1,952,831 | |||
Class 3 | 340,482 | |||
Class 4 | 34,262 | |||
Unaffiliated transfer agent fees | 3,103 | |||
Custodian fees (Note 4) | 383,530 | |||
Reports to shareholders | 339,894 | |||
Professional fees | 38,170 | |||
Trustees’ fees and expenses | 10,468 | |||
Other | 43,259 | |||
Total expenses | 10,826,169 | |||
Expense reductions (Note 4) | (511 | ) | ||
Net expenses | 10,825,658 | |||
Net investment income | 31,388,432 | |||
Realized and unrealized gains (losses): | ||||
Net realized gain (loss) from: | ||||
Investments | (181,366,348 | ) | ||
Foreign currency transactions | (1,284,928 | ) | ||
Net realized gain (loss) | (182,651,276 | ) | ||
Net change in unrealized appreciation (depreciation) on: | ||||
Investments | 337,236,957 | |||
Translation of other assets and liabilities denominated in foreign currencies | 154,627 | |||
Net change in unrealized appreciation (depreciation) | 337,391,584 | |||
Net realized and unrealized gain (loss) | 154,740,308 | |||
Net increase (decrease) in net assets resulting from operations | $ | 186,128,740 | ||
The accompanying notes are an integral part of these financial statements.
TF-18
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statements of Changes in Net Assets
| Templeton Foreign Securities Fund | ||||||||
| Six Months Ended June 30, 2009 (unaudited) | Year Ended December 31, 2008 | |||||||
Increase (decrease) in net assets: | ||||||||
Operations: | ||||||||
Net investment income | $ | 31,388,432 | $ | 84,658,819 | ||||
Net realized gain (loss) from investments and foreign currency transactions | (182,651,276 | ) | 63,949,798 | |||||
Net change in unrealized appreciation (depreciation) on investments, translation of other assets and liabilities denominated in foreign currencies and deferred taxes | 337,391,584 | (1,758,879,925 | ) | |||||
Net increase (decrease) in net assets resulting from operations | 186,128,740 | (1,610,271,308 | ) | |||||
Distributions to shareholders from: | ||||||||
Net investment income: | ||||||||
Class 1 | (10,082,097 | ) | (10,823,949 | ) | ||||
Class 2 | (60,860,305 | ) | (60,137,896 | ) | ||||
Class 3 | (10,601,203 | ) | (8,627,614 | ) | ||||
Class 4 | (654,024 | ) | (47,077 | ) | ||||
Net realized gains: | ||||||||
Class 1 | (11,279,713 | ) | (39,165,092 | ) | ||||
Class 2 | (75,080,881 | ) | (246,128,397 | ) | ||||
Class 3 | (12,814,465 | ) | (33,305,113 | ) | ||||
Class 4 | (749,197 | ) | (170,343 | ) | ||||
Total distributions to shareholders | (182,121,885 | ) | (398,405,481 | ) | ||||
Capital share transactions: (Note 2) | ||||||||
Class 1 | 2,075,229 | (20,239,535 | ) | |||||
Class 2 | 25,823,986 | (11,580,062 | ) | |||||
Class 3 | 33,660,128 | 173,017,254 | ||||||
Class 4 | 14,328,589 | 17,522,726 | ||||||
Total capital share transactions | 75,887,932 | 158,720,383 | ||||||
Redemption fees | 9,639 | 31,545 | ||||||
Net increase (decrease) in net assets | 79,904,426 | (1,849,924,861 | ) | |||||
Net assets: | ||||||||
Beginning of period | 2,250,110,790 | 4,100,035,651 | ||||||
End of period | $ | 2,330,015,216 | $ | 2,250,110,790 | ||||
Undistributed net investment income included in net assets: | ||||||||
End of period | $ | 29,413,640 | $ | 80,222,837 | ||||
The accompanying notes are an integral part of these financial statements.
TF-19
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited)
Templeton Foreign Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Templeton Variable Insurance Products Trust (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end investment company, consisting of twenty-two separate funds. The Templeton Foreign Securities Fund (Fund) is included in this report. The financial statements of the remaining funds in the Trust are presented separately. Shares of the Fund are sold only to insurance company separate accounts to fund the benefits of variable life insurance policies or variable annuity contracts. The Fund offers four classes of shares: Class 1, Class 2, Class 3, and Class 4. Each class of shares differs by its distribution fees, voting rights on matters affecting a single class and its exchange privilege.
The following summarizes the Fund’s significant accounting policies.
a. Security Valuation
Equity and other securities listed on a securities exchange or on the NASDAQ National Market System are valued at the last quoted sale price or the official closing price of the day, respectively. Over-the-counter securities and listed securities for which there is no reported sale are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. Certain equity securities are valued based upon fundamental characteristics or relationships to similar securities. Investments in open-end mutual funds are valued at the closing net asset value.
Foreign equity securities are valued as of the close of trading on the foreign stock exchange on which the security is primarily traded, or the NYSE, whichever is earlier. If no sale is reported at that time, the foreign equity security will be valued within the range of the most recent quoted bid and ask prices. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at the close of the NYSE on the day that the value of the security is determined.
The Fund has procedures to determine the fair value of individual securities and other assets for which market prices are not readily available or which may not be reliably priced. Methods for valuing these securities may include: fundamental analysis based upon the underlying investment book value, anticipated future cash flows, market changes in comparable or similar securities, matrix pricing, discounts from market prices of similar securities, or discounts applied due to the nature and duration of restrictions on the disposition of the securities. Due to the inherent uncertainty of valuations of such securities, the fair values may differ significantly from the values that would have been used had a ready market for such investments existed. Occasionally, events occur between the time at which trading in a security is completed and the close of the NYSE that might call into question the availability (including the reliability) of the value of a portfolio security held by the Fund. The investment manager monitors price movements following the close of trading in foreign stock markets through a series of country specific market proxies (such as baskets of American Depository Receipts, futures contracts and exchange traded funds). These price movements are measured against established trigger thresholds for each specific market proxy to assist in determining if an event has occurred. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services. All security valuation procedures are approved by the Fund’s Board of Trustees.
b. Foreign Currency Translation
Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. Purchases and sales of securities, income and expense items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. Occasionally, events may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the Fund’s Board of Trustees.
The Fund does not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments on the Statement of Operations.
TF-20
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Foreign Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
b. Foreign Currency Translation (continued)
Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period.
c. Foreign Currency Contracts
The Fund enters into foreign exchange contracts in order to manage foreign exchange rate risk between the trade date and settlement date of securities transactions. A foreign exchange contract is an agreement between the Fund and a counterparty to buy or sell a foreign currency for a specific exchange rate on a future date.
d. Income and Deferred Taxes
No provision has been made for U.S. income taxes because it is the Fund’s policy to qualify as a regulated investment company under the Internal Revenue Code and to distribute to shareholders substantially all of its taxable income and net realized gains.
The Fund has reviewed the tax positions, taken on federal income tax returns, for each of the three open tax years and as of June 30, 2009, and has determined that no provision for income tax is required in the Fund’s financial statements.
Foreign securities held by the Fund may be subject to foreign taxation on dividend income received. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist in the foreign markets in which the Fund invests.
The Fund may be subject to a tax imposed on net realized gains on securities of certain foreign countries. The Fund records an estimated deferred tax liability for net unrealized gains on these securities in an amount that would be payable if the securities were disposed of on the valuation date.
e. Security Transactions, Investment Income, Expenses and Distributions
Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Estimated expenses are accrued daily. Dividend income, is recorded on the ex-dividend date except that certain dividends from foreign securities are recognized as soon as the Fund is notified of the ex-dividend date. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with accounting principles generally accepted in the United States of America. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods.
Common expenses incurred by the Trust are allocated among the funds based on the ratio of net assets of each fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense.
Realized and unrealized gains and losses and net investment income, not including class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions, by class, are generally due to differences in class specific expenses.
TF-21
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Foreign Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
f. Accounting Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
g. Redemption Fees
Redemptions and exchanges of Class 3 shares held 60 days or less may be subject to the Fund’s redemption fee, which is 1% of the amount redeemed. Such fees are retained by the Fund and accounted for as an addition to paid-in capital.
h. Guarantees and Indemnifications
Under the Trust’s organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, on behalf of the Fund, enters into contracts with service providers that contain general indemnification clauses. The Trust’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote.
2. SHARES OF BENEFICIAL INTEREST
At June 30, 2009, there were an unlimited number of shares authorized (without par value). Transactions in the Fund’s shares were as follows:
| Six Months Ended June 30, 2009 | Year Ended December 31, 2008a | |||||||||||||
| Class 1 Shares: | Shares | Amount | Shares | Amount | ||||||||||
Shares sold | 380,552 | $ | 3,697,608 | 1,086,211 | $ | 16,606,956 | ||||||||
Shares issued in reinvestment of distributions | 2,337,178 | 21,361,810 | 2,996,945 | 49,989,041 | ||||||||||
Shares redeemed | (2,364,657 | ) | (22,984,189 | ) | (5,914,630 | ) | (86,835,532 | ) | ||||||
Net increase (decrease) | 353,073 | $ | 2,075,229 | (1,831,474 | ) | $ | (20,239,535 | ) | ||||||
Class 2 Shares: | ||||||||||||||
Shares sold | 11,403,653 | $ | 111,610,281 | 18,662,528 | $ | 282,933,070 | ||||||||
Shares issued in reinvestment of distributions | 15,030,410 | 135,423,993 | 18,582,156 | 305,119,000 | ||||||||||
Shares redeemed | (23,398,034 | ) | (221,210,288 | ) | (39,817,365 | ) | (599,632,132 | ) | ||||||
Net increase (decrease) | 3,036,029 | $ | 25,823,986 | (2,572,681 | ) | $ | (11,580,062 | ) | ||||||
Class 3 Shares: | ||||||||||||||
Shares sold | 2,072,360 | $ | 20,561,776 | 8,547,568 | $ | 149,148,052 | ||||||||
Shares issued in reinvestment of distributions | 2,619,202 | 23,415,668 | 2,567,834 | 41,932,727 | ||||||||||
Shares redeemed | (1,105,853 | ) | (10,317,316 | ) | (1,325,100 | ) | (18,063,525 | ) | ||||||
Net increase (decrease) | 3,585,709 | $ | 33,660,128 | 9,790,302 | $ | 173,017,254 | ||||||||
TF-22
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Foreign Securities Fund
2. SHARES OF BENEFICIAL INTEREST (continued)
| Six Months Ended June 30, 2009 | Year Ended December 31, 2008a | |||||||||||||
| Class 4 Shares: | Shares | Amount | Shares | Amount | ||||||||||
Shares sold | 1,576,236 | $ | 15,713,539 | 1,321,338 | $ | 17,596,379 | ||||||||
Shares issued on reinvestment of distributions | 154,031 | 1,403,221 | 13,018 | 216,877 | ||||||||||
Shares redeemed | (289,805 | ) | (2,788,171 | ) | (24,987 | ) | (290,530 | ) | ||||||
Net increase (decrease) | 1,440,462 | $ | 14,328,589 | 1,309,369 | $ | 17,522,726 | ||||||||
| aFor | the period February 29, 2008 (effective date) to December 31, 2008, for Class 4. |
3. TRANSACTIONS WITH AFFILIATES
Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Trust are also officers and/or directors of the following subsidiaries:
| Subsidiary | Affiliation | |
Templeton Investment Counsel, LLC (TIC) | Investment manager | |
Franklin Templeton Services, LLC (FT Services) | Administrative manager | |
Franklin Templeton Distributors, Inc. (Distributors) | Principal underwriter | |
Franklin Templeton Investor Services, LLC (Investor Services) | Transfer agent |
a. Management Fees
The Fund pays an investment management fee to TIC based on the average daily net assets of the Fund as follows:
| Annualized Fee Rate | Net Assets | |
| 0.750% | Up to and including $200 million | |
| 0.675% | Over $200 million, up to and including $1.3 billion | |
| 0.600% | Over $1.3 billion, up to and including $10 billion | |
| 0.580% | Over $10 billion, up to and including $15 billion | |
| 0.560% | Over $15 billion, up to and including $20 billion | |
| 0.540% | In excess of $20 billion |
b. Administrative Fees
The Fund pays an administrative fee to FT Services based on the Fund’s average daily net assets as follows:
| Annualized Fee Rate | Net Assets | |
| 0.150% | Up to and including $200 million | |
| 0.135% | Over $200 million, up to and including $700 million | |
| 0.100% | Over $700 million, up to and including $1.2 billion | |
| 0.075% | In excess of $1.2 billion |
c. Distribution Fees
The Fund’s Board of Trustees has adopted distribution plans for Class 2, Class 3, and Class 4 shares pursuant to Rule 12b-1 under the 1940 Act. Under the Fund’s compensation distribution plans, the Fund pays Distributors for costs incurred in
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Foreign Securities Fund
3. TRANSACTIONS WITH AFFILIATES (continued)
c. Distribution Fees (continued)
connection with the servicing, sale and distribution of the Fund’s shares up to 0.25%, 0.35%, and 0.35% per year of its average daily net assets of Class 2, Class 3, and Class 4, respectively. The Board of Trustees has agreed to limit the current rate to 0.25% per year for Class 3.
d. Transfer Agent Fees
Investor Services, under terms of an agreement, performs shareholder servicing for the Fund and is not paid by the Fund for the services.
4. EXPENSE OFFSET ARRANGEMENT
The Fund has entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Fund’s custodian expenses. During the period ended June 30, 2009, the custodian fees were reduced as noted in the Statement of Operations.
5. INCOME TAXES
For tax purposes, realized capital losses occurring subsequent to October 31, may be deferred and treated as occurring on the first day of the following fiscal year. At December 31, 2008, the Fund deferred realized capital losses of $31,680,299.
At June 30, 2009, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
Cost of investments | $ | 2,747,089,729 | ||
Unrealized appreciation | $ | 179,744,036 | ||
Unrealized depreciation | (599,273,039 | ) | ||
Net unrealized appreciation (depreciation) | $ | (419,529,003 | ) | |
Net investment income differs for financial statement and tax purposes primarily due to differing treatments of foreign currency transactions and pass-through entity income.
Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatments of wash sales, foreign currency transactions and pass-through entity income.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the period ended June 30, 2009, aggregated $222,566,470 and $285,171,458.
7. INVESTMENTS IN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO
The Fund may invest in the Institutional Fiduciary Trust Money Market Portfolio (Sweep Money Fund), an open-end investment company managed by Franklin Advisers, Inc. (an affiliate of the investment manager). Management fees paid by the Fund are reduced on assets invested in the Sweep Money Fund, in an amount not to exceed the management and administrative fees paid by the Sweep Money Fund.
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Foreign Securities Fund
8. CONCENTRATION OF RISK
Investing in foreign securities may include certain risks and considerations not typically associated with investing in U.S. securities, such as fluctuating currency values and changing local and regional economic, political and social conditions, which may result in greater market volatility. In addition, certain foreign securities may not be as liquid as U.S. securities.
9. CREDIT FACILITY
Effective January 23, 2009, the Fund, together with other U.S. registered and foreign investment funds managed by Franklin Templeton Investments (individually, “Borrower”; collectively “Borrowers”), entered into a joint syndicated senior unsecured credit facility totaling $725 million (Global Credit Facility) to provide a source of funds to the Borrowers for temporary and emergency purposes, including the ability to meet future unanticipated or unusually large redemption requests.
Under the terms of the Global Credit Facility, the Fund shall, in addition to interest charged on any borrowings made by the Fund and other costs incurred by the Fund, pay its share of fees and expenses incurred in connection with the implementation and maintenance of the Global Credit Facility, based upon its relative share of the aggregate net assets of all of the Borrowers, including an annual commitment fee based upon the unused portion of the Global Credit Facility. During the period, the Fund incurred commitment fees of $2,413 of its pro rata portion of the Global Credit Facility, which is reflected in other expenses on the Statement of Operations. During the period ended June 30, 2009, the Fund did not utilize the Global Credit Facility.
10. FAIR VALUE MEASUREMENTS
Financial Accounting Standards Board (FASB) Statement No. 157, “Fair Value Measurement” (SFAS 157) establishes a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Fund’s own market assumptions (unobservable inputs). These inputs are used in determining the value of the Fund’s investments and are summarized in the following fair value hierarchy:
| • | Level 1 – quoted prices in active markets for identical securities |
| • | Level 2 – other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speed, credit risk, etc.) |
| • | Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments) |
The inputs or methodology used for valuing securities are not an indication of the risk associated with investing in those securities.
At June 30, 2009, all the Fund’s investments in securities carried at fair value were in Level 1 inputs. For detailed industry descriptions, see the accompanying Statement of Investments.
11. SUBSEQUENT EVENTS
Management has evaluated subsequent events through August 7, 2009 and determined that no events have occurred that require disclosure.
ABBREVIATIONS
Selected Portfolio
ADR - American Depository Receipt
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Franklin Templeton Variable Insurance Products Trust
Tax Designation (unaudited)
Templeton Foreign Securities Fund
At December 31, 2008, more than 50% of the Fund’s total assets were invested in securities of foreign issuers. In most instances, foreign taxes were withheld from income paid to the Fund on these investments. As shown in the table below, the Fund designates to shareholders the foreign source income and foreign taxes paid, pursuant to Section 853 of the Internal Revenue Code. This designation will allow shareholders of record on February 11, 2009, to treat their proportionate share of foreign taxes paid by the Fund as having been paid directly by them. The shareholder shall consider these amounts as foreign taxes paid in the tax year in which they receive the Fund distribution.
The following table provides a detailed analysis of foreign tax paid, and foreign source income as designated by the Fund, to Class 1, Class 2, Class 3, and Class 4 shareholders of record.
| Class | Foreign Tax Paid Per Share | Foreign Source Income Per Share | ||
Class 1 | 0.0562 | 0.4803 | ||
Class 2 | 0.0562 | 0.4415 | ||
Class 3 | 0.0562 | 0.4493 | ||
Class 4 | 0.0562 | 0.4705 |
Foreign Tax Paid Per Share (Column 1) is the amount per share available to you, as a tax credit (assuming you held your shares in the Fund for a minimum of 16 days during the 31-day period beginning 15 days before the ex-dividend date of the Fund’s distribution to which the foreign taxes relate), or, as a tax deduction.
Foreign Source Income Per Share (Column 2) is the amount per share of income dividends paid to you that is attributable to foreign securities held by the Fund, plus any foreign taxes withheld on these dividends.
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TEMPLETON GLOBAL ASSET ALLOCATION FUND
This semiannual report for Templeton Global Asset Allocation Fund covers the period ended June 30, 2009.
Performance Summary as of 6/30/09
Templeton Global Asset Allocation Fund – Class 1 delivered a +3.65% total return for the six-month period ended 6/30/09.
Performance reflects the Fund’s Class 1 operating expenses, but does not include any contract fees, expenses or sales charges. If they had been included, performance would be lower. These charges and deductions, particularly for variable life policies, can have a significant effect on contract values and insurance benefits. See the contract prospectus for a complete description of these expenses, including sales charges.
Templeton Global Asset Allocation Fund – Class 1
Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares.
Current performance may differ from figures shown.
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Fund Goal and Main Investments: Templeton Global Asset Allocation Fund seeks high total return. The Fund normally invests in equity securities of companies of any country, debt securities of companies and governments of any country, and in money market securities. The Fund normally invests substantially to primarily in equity securities.
Performance Overview
You can find the Fund’s six-month total return in the Performance Summary. The Fund underperformed its broad equity benchmark, the Morgan Stanley Capital International (MSCI) All Country (AC) World Index, which had a +9.59% total return for the period under review, and outperformed its fixed income benchmark, the J.P. Morgan (JPM) Government Bond Index (GBI) Global, which had a -1.94% total return for the same period.1
Economic and Market Overview
During the six months under review, global equities hit new bear market lows in March before delivering their biggest quarterly rally in more than a decade. At the beginning of the period, with investor sentiment depressed and risk aversion elevated, defensive, non-cyclical sectors like utilities, consumer staples and health care were market leaders. As data emerged suggesting a fledgling recovery in the financials sector and a moderating pace of global economic contraction, investors regained some risk appetite, rotating capital back into cyclical sectors such as financials, materials and consumer discretionary. Resurgent risk appetite also buoyed emerging markets stocks, which delivered their best three-month returns on record from March through May 2009. Emerging market optimism in turn supported higher commodity prices, which gained the most since the bubble in hard assets burst in the summer of 2008. Also supporting commodity prices was a weaker U.S. dollar. Although systemic risk aversion and the consensus belief that the U.S. could lead the global economy out of recession helped strengthen the dollar at the beginning of the period, investors soon began to worry about the currency’s ongoing stability in the face of aggressive and unconventional monetary policy, and the greenback lost value relative to most currencies for the six-month period.
In the reporting period’s final weeks, equity markets moderated as investors appeared to contemplate the rally’s merits and reassess their new positions. Although sentiment had improved and most seemed to
1. Source: © 2009 Morningstar. One cannot invest directly in an index, nor is an index representative of the Fund’s portfolio. Please see Index Descriptions following the Fund Summaries.
Fund Risks: The Fund’s investments in stocks may offer the potential for long-term gains but can be subject to short-term price fluctuations. Foreign investing, especially in emerging markets, involves additional risks, including currency fluctuations, economic instability, market volatility, and political and social instability. Because the Fund invests in bonds and other debt obligations, its share price and yield will be affected by interest rate movements. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in the Fund adjust to a rise in interest rates, the Fund’s share price may decline. High yield, lower rated (junk) bonds generally have greater price swings and higher default risks than investment-grade bonds. The Fund’s prospectus also includes a description of the main investment risks.
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believe the global economy had exited the worst stage of this recessionary cycle, indicators remained mixed and lacked the sustainable upward trajectory investors had hoped for. For example, initial U.S. jobless claims fell to their lowest levels in six months during May, but unemployment rose again at the end of the period to 9.5%.2 In Europe, policymakers committed to an easier monetary regime, but the eurozone’s industrial production declined, capacity utilization continued to shrink, and price deflation was recorded for the first time since data began in 1997.3 In China, a stimulative monetary campaign spurred lending and fueled an annualized money growth rate of 26%, a powerful measure against near-term economic headwinds but a potentially dangerous catalyst for longer-term inflation and asset bubble formation.4
In first quarter 2009, global interest rate easing continued, and the U.S. and the U.K. implemented quantitative and credit easing policies. Governments worldwide boosted fiscal stimulus to counter the deepening global recession. Partially as a result of these significant policy measures, investor confidence began to improve in March, which translated into greater risk appetite in currency and nondeveloped bond markets in the second quarter. The turnaround led to an improved outlook that benefited the global economy through a shift in the inventory adjustment cycle and better equity market performance. Although financial markets improved, economic activity remained weak as deleveraging continued, unemployment rose and global trade contracted, albeit at a reduced pace.
Inflation fell during the period as weak global growth led to lower prices for commodities from the previous year, and slackening labor and capital markets pushed core prices down gradually. Monetary easing in the eurozone continued, although at a slower pace than many economists would have preferred, given the eurozone’s rate of economic contraction. However, the European Central Bank maintained its primary focus on inflation. Outside the eurozone, economic slowdown was more severe in many emerging European countries where several sought help from the International Monetary Fund (IMF).
In Asia, growth differed between large economies with higher domestic demand and small economies more dependent on exports. The large economies, particularly China, were some of the world’s most resilient to the global recession as aggressive fiscal and monetary responses outweighed declining exports. In contrast, the smaller economies suffered quick, severe downturns as production dropped more than export demand to allow inventories to fall to levels more in line with the
2. Source: Bureau of Labor Statistics.
3. Source: European Communities Eurostat.
4. Source: People’s Bank of China.
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reduced global consumption pace. However, some smaller regional economies showed signs of improvement toward period-end. On the other hand, the Japanese economy contracted considerably due to subdued consumption, weak external demand and lackluster government spending. Japan’s trade balance worsened as the global recession negatively impacted the country’s main export sector, machinery.
Investment Strategy
Our investment philosophy is bottom up, value oriented and long term. In choosing equity investments, we will focus on the market price of a company’s securities relative to our evaluation of the company’s potential long-term earnings, asset value and cash flow. Among factors we may consider are a company’s historical value measures, including price/earnings ratio, profit margins and liquidation value.
In choosing debt investments, we allocate our assets among issuers, geographic regions and currencies based upon our assessment of relative interest rates among currencies, our outlook for changes in interest rates among currencies, and credit risks. With respect to debt securities, we may utilize forward currency exchange contracts.
Manager’s Discussion
Equity
During the reporting period, underweightings and stock selection in the financials, materials and information technology sectors had a negative impact on the Fund’s performance relative to the MSCI AC World Index.5 In the financials sector, Swiss insurer ACE was a significant detractor. In the materials sector, a lack of exposure to the metals and mining industry and a position in Finnish paper products manufacturer UPM-Kymmene (sold by period-end) were particularly detrimental. The Fund’s information technology holdings, such as Japanese video game publisher and console maker Nintendo, hampered relative performance. Other significant detractors outside of these sectors included France Telecom,6 Japan’s Takeda Pharmaceutical and U.S. cable company Comcast.
On a positive note, stock selection in the consumer staples, utilities and telecommunication services sectors benefited the Fund’s relative
5. The financials sector comprises capital markets, commercial banks, consumer finance, diversified financial services, insurance, and real estate management and development in the SOI. The materials sector comprises construction materials in the SOI. The information technology sector comprises communications equipment; computers and peripherals; electronic equipment, instruments and components; IT services; semiconductors and semiconductor equipment; and software in the SOI.
6. This holding is not an index component.
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performance.7 An underweighting in the consumer staples sector and our position in American beverages company Dr. Pepper Snapple Group were key contributors. The Fund’s underweighted allocation to the utilities sector, specifically electric utilities, aided performance. China Telecom and Singapore Telecommunications in the diversified telecommunication services industry boosted the Fund’s results. Additional positions that had a significant positive impact on relative Fund performance included U.S. holdings Seagate Technology, a hard drives and digital storage solutions provider, and Watson Pharmaceuticals. DBS Group Holdings, a holding company for the largest bank in Singapore, and Brazil’s Vale, 6 an iron ore producer, were also notable contributors.
It is important to recognize the effect of currency movements on the Fund’s performance. In general, if the value of the U.S. dollar goes up compared with a foreign currency, an investment traded in that foreign currency will go down in value because it will be worth fewer U.S. dollars. This can have a negative effect on Fund performance. Conversely, when the U.S. dollar weakens in relation to a foreign currency, an investment traded in that foreign currency will increase in value, which can contribute to Fund performance. For the six months ended June 30, 2009, the U.S. dollar declined in value relative to most non-U.S. currencies. As a result, the Fund’s performance (equity portion) was positively affected by the portfolio’s substantial investment in securities with non-U.S. currency exposure. However, one cannot expect the same result in future periods.
From a geographic perspective, the Fund’s exposure to Europe negatively affected relative Fund performance, with investments in such countries as Poland, Sweden and France underperforming the MSCI AC World Index. On the other hand, underweighted exposure to North America and stock selection in the U.S. helped relative results.
Fixed Income
The Fund’s total return was influenced by various factors, including interest rate developments, currency movements and exposure to sovereign debt markets.
Interest Rate Strategy
Toward the end of the six months under review, the Fund reduced duration exposure in select countries, seeking to take profits as interest rates neared historical lows. Prospects for increased government debt
7. The consumer staples sector comprises beverages and food products in the SOI. The utilities sector comprises electric utilities and multi-utilities in the SOI. The telecommunication services sector comprises diversified telecommunication services and wireless telecommunication services in the SOI.
Top Five Countries
Templeton Global Asset Allocation Fund
6/30/09
| % of Total Net Assets | ||
| U.S. | 22.7% | |
| U.K. | 9.7% | |
| Malaysia | 7.5% | |
| South Korea | 7.5% | |
| Brazil | 5.6% | |
Top Five Sectors/Industries
Templeton Global Asset Allocation Fund
Based on Equity Securities
6/30/09
| % of Total Net Assets | ||
| Pharmaceuticals | 8.0% | |
| Diversified Telecommunication Services | 5.7% | |
Media | 5.3% | |
| Oil, Gas & Consumable Fuels | 4.8% | |
| Software | 4.6% | |
The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund’s Statement of Investments (SOI).
What is duration?
Duration is a measure of a bond’s price sensitivity to interest rate changes. In general, a portfolio of securities with a lower duration can be expected to be less sensitive to interest rate changes than a portfolio with a higher duration.
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issuance and potentially higher inflation over the medium term began to be reflected in government bond yields despite still weak economic activity levels. Thus, the Fund sought to protect itself from the potential for increased interest rates. During the period, the Fund’s duration positioning slightly benefited relative performance. Government bond yields in nondeveloped economies lagged the decline in G3 (U.S., eurozone and Japan) Treasury yields seen in the early stages of the financial crisis. However, as economic weakness spread and monetary policy loosened in response, government bond yields in these economies fell despite the rise in U.S. Treasury yields. Generally, bond yield and price move in opposite directions. Our duration exposures in Brazil, Chile and Indonesia benefited the Fund during the period. In contrast, our New Zealand and Mexican interest rate exposures detracted from results. The Fund’s underweighted exposures to U.S. and Japanese Treasuries contributed to relative performance but our underweighted eurozone government bond allocation hurt the Fund.
Currency Strategy
Although several major currencies ended the period close to where they began it, currency movement during the period reflected the striking difference in sentiment between the first and second quarters of 2009. During the first quarter, the U.S. dollar benefited from increased risk aversion and deleveraging as loans taken in U.S. dollars and invested in other currencies or securities that lost value had to be repaid. The second quarter, however, saw a weaker dollar fueled by concerns about the implications of the U.S.’s aggressive policy response to the recession, leading to strong returns for most currencies for the period overall. Currency exposure contributed to the Fund’s better performance relative to its benchmarks during the period.
Strong relative growth and solid external balances led us to favor Asian currencies versus those of developed markets. The Indonesian rupiah and South Korean won benefited Fund performance, but our underweighted New Zealand dollar exposure detracted. Toward period-end, the Fund added net negative exposures to the New Zealand dollar and Singapore dollar partly to hedge against a rebound in global risk aversion as we believed these currencies looked overvalued. Still, the Fund’s Asian currency exposure contributed on the whole, though not as much as Latin American currencies. Within that region, the Mexican peso, Chilean peso and Brazilian real contributed to relative Fund performance. Lastly, our relative currency positioning in Europe drove less of the Fund’s performance, but still contributed to returns. The Fund’s underweighted euro exposure benefited performance as did our Russian
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ruble and Egyptian pound allocations. Conversely, our overweighted Swiss franc exposure and no exposure to the British pound hampered Fund performance.
Global Sovereign Debt Strategy
The Fund purchased investment-grade and subinvestment-grade sovereign debt that typically compensates for greater credit risk by offering higher yields relative to U.S. and European benchmark Treasury securities. Improved risk appetite benefited high yield products during the period, particularly sovereign bonds, following the G20 summit in April 2009.8 It was decided at the summit that the IMF would receive additional resources, and the IMF eased conditions to help countries in need of balance of payments support or access to liquidity. Largely as a result, U.S. dollar-denominated emerging market debt posted a +14.56% total return during the period as measured by the JPM Emerging Markets Bond Index Global (EMBIG).1 Thus, the Fund benefited from its increased sovereign bond exposure during the period. Sovereign interest rate credit spreads fell 40.23% during the reporting period, though some countries adversely impacted by the financial crisis experienced credit rating downgrades.1 Regionally, Latin American sovereign debt had a +11.65% total return, Asian debt +14.98% and central and eastern European debt +18.57%.1 Our analysis indicated that sovereign spreads were at distressed levels during the early stages of the financial crisis, reflecting a higher probability of default than we thought was appropriate. In our opinion, most emerging market sovereign bonds were in much better positions than in previous crises and unlikely to suffer to the same extent as they have in the past. Disregarding these fundamentals, forced and panicked selling hit sovereign bonds and so we sought to capitalize on this market inefficiency. Given what we viewed as attractive valuations, we added exposure, and still believed that many of these valuations were out of line with fundamentals.
Thank you for your participation in Templeton Global Asset Allocation Fund. We look forward to serving your future investment needs.
8. The G20 is an informal forum that promotes open and constructive discussion between industrial and emerging market countries on key issues related to global economic stability. It is made up of the finance ministers and central bank governors of 19 countries and the European Union.
The foregoing information reflects our analysis, opinions and portfolio holdings as of June 30, 2009, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.
What is a current account?
A current account is that part of the balance of payments where all of one country’s international transactions in goods and services are recorded.
What is balance of payments?
Balance of payments is a record of all of a country’s exports and imports of goods and services, borrowing and lending with the rest of the world during a particular time period. It helps a country evaluate its competitive strengths and weaknesses and forecast the strength of its currency.
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Fund Expenses
As an investor in a variable insurance contract (Contract) that indirectly provides for investment in an underlying mutual fund, you can incur transaction and/or ongoing expenses at both the Fund level and the Contract level.
| • | Transaction expenses can include sales charges (loads) on purchases, surrender fees, transfer fees and premium taxes. |
| • | Ongoing expenses can include management fees, distribution and service (12b-1) fees, contract fees, annual maintenance fees, mortality and expense risk fees and other fees and expenses. All mutual funds and Contracts have some types of ongoing expenses. |
The expenses shown in the table are meant to highlight ongoing expenses at the Fund level only and do not include ongoing expenses at the Contract level, or transaction expenses at either the Fund or Contract levels. While the Fund does not have transaction expenses, if the transaction and ongoing expenses at the Contract level were included, the expenses shown below would be higher. You should consult your Contract prospectus or disclosure document for more information.
The table shows Fund-level ongoing expenses and can help you understand these expenses and compare them with those of other mutual funds offered through the Contract. The table assumes a $1,000 investment held for the six months indicated. Please refer to the Fund prospectus for additional information on operating expenses.
Actual Fund Expenses
The first line (Actual) of the table provides actual account values and expenses. The “Ending Account Value” is derived from the Fund’s actual return, which includes the effect of ongoing Fund expenses, but does not include the effect of ongoing Contract expenses.
You can estimate the Fund-level expenses you incurred during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:
| 1. | Divide your account value by $1,000. |
If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6.
| 2. | Multiply the result by the number under the heading “Fund-Level Expenses Incurred During Period.” |
If Fund-Level Expenses Incurred During Period were $7.50, then 8.6 x $7.50 = $64.50.
In this illustration, the estimated expenses incurred this period at the Fund level are $64.50.
Templeton Global Asset Allocation Fund – Class 1
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Hypothetical Example for Comparison with Other Mutual Funds
Information in the second line (Hypothetical) of the table can help you compare ongoing expenses of the Fund with those of other mutual funds offered through the Contract. This information may not be used to estimate the actual ending account balance or expenses you incurred during the period. The hypothetical “Ending Account Value” is based on the Fund’s actual expense ratio and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Fund-Level Expenses Incurred During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds offered through a Contract.
| Class 1 | Beginning Account Value 1/1/09 | Ending Account | Fund-Level 1/1/09–6/30/09 | ||||||
Actual | $ | 1,000 | $ | 1,036.50 | $ | 4.19 | |||
Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,020.68 | $ | 4.16 | |||
*Expenses are calculated using the most recent six-month annualized expense ratio, net of expense waivers, for the Fund’s Class 1 shares (0.83%), which does not include any ongoing expenses of the Contract for which the Fund is an investment option, multiplied by the average account value over the period, multiplied by 181/365 to reflect the one-half year period.
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SUPPLEMENT DATED JULY 22, 2009TOTHE PROSPECTUSDATED MAY 1, 2009AS PREVIOUSLY AMENDEDOF TEMPLETON GLOBAL ASSET ALLOCATION FUND(A series of Franklin Templeton Variable Insurance Products Trust)
The prospectus is amended to add the following:
On July 9, 2009, the Board of Trustees (the “Board”) of Franklin Templeton Variable Insurance Products Trust (the “Trust”) approved a proposal to liquidate the Templeton Global Asset Allocation Fund (the “Fund”) on or after April 23, 2010 (the “liquidation”). The liquidation may be delayed if unforeseen circumstances arise.
The Board approved the liquidation in the ordinary course of business after considering a number of factors including the Fund’s significant decline in assets over the last decade as well as limited future opportunities for asset growth.
Contract owners should refer to documents provided by their insurance companies concerning the effect of the liquidation and any steps they may need to take. In addition, in considering new purchases or transfers, contract owners may want to refer to their contract and Trust prospectuses or consult with their investment representatives to consider other investment options.
Please keep this supplement for future reference.
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Franklin Templeton Variable Insurance Products Trust
Financial Highlights
Templeton Global Asset Allocation Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 1 | 2008 | 2007 | 2006 | 2005 | 2004 | |||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 8.63 | $ | 14.75 | $ | 21.96 | $ | 21.06 | $ | 21.11 | $ | 18.78 | ||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.16 | 0.39 | 0.53 | 0.64 | 0.49 | 0.48 | ||||||||||||||||||
Net realized and unrealized gains (losses) | 0.14 | (3.40 | ) | 1.58 | 3.36 | 0.28 | 2.42 | |||||||||||||||||
Total from investment operations | 0.30 | (3.01 | ) | 2.11 | 4.00 | 0.77 | 2.90 | |||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income and net foreign currency gains | (0.87 | ) | (1.40 | ) | (4.06 | ) | (1.66 | ) | (0.82 | ) | (0.57 | ) | ||||||||||||
Net realized gains | (0.13 | ) | (1.71 | ) | (5.26 | ) | (1.44 | ) | — | — | ||||||||||||||
Total distributions | (1.00 | ) | (3.11 | ) | (9.32 | ) | (3.10 | ) | (0.82 | ) | (0.57 | ) | ||||||||||||
Net asset value, end of period | $ | 7.93 | $ | 8.63 | $ | 14.75 | $ | 21.96 | $ | 21.06 | $ | 21.11 | ||||||||||||
Total returnc | 3.65% | (24.97)% | 10.32% | 21.39% | 3.85% | 15.94% | ||||||||||||||||||
Ratios to average net assetsd | ||||||||||||||||||||||||
Expenses before waiver and payments by affiliates | 0.98% | 0.94% | 0.88% | 0.84% | 0.85% | 0.84% | ||||||||||||||||||
Expenses net of waiver and payments by affiliates | 0.83% | 0.83% | e | 0.85% | e | 0.84% | e | 0.85% | e | 0.84% | e | |||||||||||||
Net investment income | 3.90% | 3.34% | 2.77% | 2.91% | 2.36% | 2.52% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 35,932 | $ | 37,619 | $ | 63,316 | $ | 276,790 | $ | 638,006 | $ | 625,728 | ||||||||||||
Portfolio turnover rate | 10.58% | 20.11% | 30.08% | f | 23.74%f | 26.23% | 27.43% | |||||||||||||||||
aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.
bBased on average daily shares outstanding.
cTotal return does not include any fees, charges or expenses imposed by the variable annuity and life insurance contracts for which the Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle. Total return is not annualized for periods less than one year.
dRatios are annualized for periods less than one year.
eBenefit of expense reduction rounds to less than 0.01%.
fExcludes the value of portfolio securities delivered as a result of a redemption in-kind.
The accompanying notes are an integral part of these financial statements.
TGA-11
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Templeton Global Asset Allocation Fund
| Six Months Ended June 30, 2009 (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 2 | 2008 | 2007 | 2006 | 2005 | 2004 | |||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 8.46 | $ | 14.52 | $ | 21.75 | $ | 20.88 | $ | 20.94 | $ | 18.64 | ||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.14 | 0.35 | 0.46 | 0.52 | 0.43 | 0.43 | ||||||||||||||||||
Net realized and unrealized gains (losses) | 0.15 | (3.34 | ) | 1.58 | 3.40 | 0.29 | 2.41 | |||||||||||||||||
Total from investment operations | 0.29 | (2.99 | ) | 2.04 | 3.92 | 0.72 | 2.84 | |||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income and net foreign currency gains | (0.84 | ) | (1.36 | ) | (4.01 | ) | (1.61 | ) | (0.78 | ) | (0.54 | ) | ||||||||||||
Net realized gains | (0.13 | ) | (1.71 | ) | (5.26 | ) | (1.44 | ) | — | — | ||||||||||||||
Total distributions | (0.97 | ) | (3.07 | ) | (9.27 | ) | (3.05 | ) | (0.78 | ) | (0.54 | ) | ||||||||||||
Net asset value, end of period | $ | 7.78 | $ | 8.46 | $ | 14.52 | $ | 21.75 | $ | 20.88 | $ | 20.94 | ||||||||||||
Total returnc | 3.46% | (25.10)% | 10.01% | 21.11% | 3.55% | 15.72% | ||||||||||||||||||
Ratios to average net assetsd | ||||||||||||||||||||||||
Expenses before waiver and payments by affiliates | 1.23% | 1.19% | 1.13% | 1.09% | 1.10% | 1.09% | ||||||||||||||||||
Expenses net of waiver and payments by affiliates | 1.08% | 1.08% | e | 1.10% | e | 1.09% | e | 1.10% | e | 1.09% | e | |||||||||||||
Net investment income | 3.65% | 3.09% | 2.52% | 2.66% | 2.11% | 2.27% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 46,669 | $ | 48,351 | $ | 78,613 | $ | 78,021 | $ | 68,385 | $ | 65,806 | ||||||||||||
Portfolio turnover rate | 10.58% | 20.11% | 30.08% | f | 23.74% | f | 26.23% | 27.43% | ||||||||||||||||
aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.
bBased on average daily shares outstanding.
cTotal return does not include any fees, charges or expenses imposed by the variable annuity and life insurance contracts for which the Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle. Total return is not annualized for periods less than one year.
dRatios are annualized for periods less than one year.
eBenefit of expense reduction rounds to less than 0.01%.
fExcludes the value of portfolio securities delivered as a result of a redemption in-kind.
The accompanying notes are an integral part of these financial statements.
TGA-12
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Templeton Global Asset Allocation Fund
Six Months (unaudited) | Period Ended December 31, 2008a | |||||||
| Class 4 | ||||||||
Per share operating performance | ||||||||
(for a share outstanding throughout the period) | ||||||||
Net asset value, beginning of period | $ | 8.61 | $ | 14.23 | ||||
Income from investment operationsb: | ||||||||
Net investment incomec | 0.13 | 0.31 | ||||||
Net realized and unrealized gains (losses) | 0.15 | (2.82 | ) | |||||
Total from investment operations | 0.28 | (2.51 | ) | |||||
Less distributions from: | ||||||||
Net investment income and net foreign currency gains | (0.83 | ) | (1.40 | ) | ||||
Net realized gains | (0.13 | ) | (1.71 | ) | ||||
Total distributions | (0.96 | ) | (3.11 | ) | ||||
Net asset value, end of period | $ | 7.93 | $ | 8.61 | ||||
Total returnd | 3.49% | (22.39)% | ||||||
Ratios to average net assetse | ||||||||
Expenses before waiver and payments by affiliates | 1.33% | 1.29% | ||||||
Expenses net of waiver and payments by affiliates | 1.18% | 1.18% | f | |||||
Net investment income | 3.55% | 2.99% | ||||||
Supplemental data | ||||||||
Net assets, end of period (000’s) | $ | 3 | $ | 3 | ||||
Portfolio turnover rate | 10.58% | 20.11% | ||||||
aFor the period February 29, 2008 (effective date) to December 31, 2008.
bThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.
cBased on average daily shares outstanding.
dTotal return does not include any fees, charges or expenses imposed by the variable annuity and life insurance contracts for which the Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle. Total return is not annualized for periods less than one year.
eRatios are annualized for periods less than one year.
fBenefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
TGA-13
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited)
| Templeton Global Asset Allocation Fund | Country/ Organization | Shares/ Warrants | Value | ||||
Common Stocks and Other Equity Interests 57.6% | |||||||
Aerospace & Defense 1.4% | |||||||
BAE Systems PLC | United Kingdom | 117,072 | $ | 652,034 | |||
aRaytheon Co., wts., 6/16/11 | United States | 63 | 590 | ||||
aRolls-Royce Group PLC | United Kingdom | 83,152 | 494,583 | ||||
a,bRolls-Royce Group PLC, C | United Kingdom | 7,134,441 | 11,739 | ||||
| 1,158,946 | |||||||
Air Freight & Logistics 1.3% | |||||||
Deutsche Post AG | Germany | 44,767 | 579,868 | ||||
United Parcel Service Inc., B | United States | 9,570 | 478,404 | ||||
| 1,058,272 | |||||||
Automobiles 1.1% | |||||||
Bayerische Motoren Werke AG | Germany | 17,098 | 643,428 | ||||
Toyota Motor Corp., ADR | Japan | 3,590 | 271,152 | ||||
| 914,580 | |||||||
Beverages 1.0% | |||||||
aDr. Pepper Snapple Group Inc. | United States | 38,290 | 811,365 | ||||
Biotechnology 1.0% | |||||||
aAmgen Inc. | United States | 16,290 | 862,393 | ||||
Capital Markets 0.5% | |||||||
The Bank of New York Mellon Corp. | United States | 15,410 | 451,667 | ||||
Nomura Holdings Inc. | Japan | 6 | 51 | ||||
| 451,718 | |||||||
Commercial Banks 2.5% | |||||||
DBS Group Holdings Ltd. | Singapore | 89,229 | 726,791 | ||||
HSBC Holdings PLC | United Kingdom | 22,723 | 192,488 | ||||
aIntesa Sanpaolo SpA | Italy | 111,770 | 359,784 | ||||
aKB Financial Group Inc., ADR | South Korea | 10,329 | 344,059 | ||||
Mitsubishi UFJ Financial Group Inc. | Japan | 36,000 | 223,412 | ||||
Sumitomo Mitsui Financial Group Inc. | Japan | 4,800 | 195,766 | ||||
| 2,042,300 | |||||||
Commercial Services & Supplies 0.6% | |||||||
G4S PLC | United Kingdom | 151,608 | 520,099 | ||||
Communications Equipment 0.8% | |||||||
aCisco Systems Inc. | United States | 35,880 | 668,803 | ||||
Computers & Peripherals 1.1% | |||||||
Lite-On Technology Corp. | Taiwan | 423,931 | 367,682 | ||||
Seagate Technology | United States | 50,128 | 524,339 | ||||
| 892,021 | |||||||
Construction Materials 0.2% | |||||||
CRH PLC | Ireland | 7,908 | 180,796 | ||||
Consumer Finance 0.0%c | |||||||
Aiful Corp. | Japan | 49 | 189 | ||||
Diversified Financial Services 0.5% | |||||||
ING Groep NV | Netherlands | 36,961 | 371,807 | ||||
TGA-14
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Templeton Global Asset Allocation Fund | Country/ Organization | Shares/ Warrants | Value | ||||
Common Stocks and Other Equity Interests (continued) | |||||||
Diversified Telecommunication Services 5.7% | |||||||
China Telecom Corp. Ltd., H | China | 657,000 | $ | 327,233 | |||
Chunghwa Telecom Co. Ltd., ADR | Taiwan | 13,099 | 259,753 | ||||
France Telecom SA, ADR | France | 47,413 | 1,081,491 | ||||
Singapore Telecommunications Ltd. | Singapore | 403,525 | 835,628 | ||||
Telefonica SA, ADR | Spain | 17,573 | 1,193,031 | ||||
Telekom Austria AG, ADR | Austria | 12,980 | 406,014 | ||||
aTelenor ASA | Norway | 74,594 | 573,408 | ||||
| 4,676,558 | |||||||
Electric Utilities 0.7% | |||||||
E.ON AG | Germany | 17,130 | 606,189 | ||||
Electrical Equipment 0.4% | |||||||
aVestas Wind Systems AS | Denmark | 4,342 | 311,165 | ||||
Electronic Equipment, Instruments & Components 0.8% | |||||||
FUJIFILM Holdings Corp. | Japan | 15,011 | 476,688 | ||||
Tyco Electronics Ltd. | United States | 8,326 | 154,780 | ||||
| 631,468 | |||||||
Food Products 0.9% | |||||||
Unilever PLC | United Kingdom | 30,710 | 719,529 | ||||
Health Care Equipment & Supplies 1.5% | |||||||
aBoston Scientific Corp. | United States | 56,897 | 576,936 | ||||
Covidien PLC | United States | 8,326 | 311,725 | ||||
Olympus Corp. | Japan | 16,000 | 379,410 | ||||
| 1,268,071 | |||||||
Health Care Providers & Services 0.9% | |||||||
Quest Diagnostics Inc. | United States | 13,890 | 783,813 | ||||
Hotels, Restaurants & Leisure 0.5% | |||||||
Compass Group PLC | United Kingdom | 71,608 | 402,651 | ||||
Industrial Conglomerates 2.1% | |||||||
General Electric Co. | United States | 23,450 | 274,834 | ||||
Koninklijke Philips Electronics NV | Netherlands | 21,170 | 389,721 | ||||
Siemens AG, ADR | Germany | 12,220 | 845,502 | ||||
Tyco International Ltd. | United States | 8,326 | 216,309 | ||||
| 1,726,366 | |||||||
Insurance 3.4% | |||||||
ACE Ltd. | United States | 17,838 | 788,975 | ||||
Aviva PLC | United Kingdom | 62,828 | 353,022 | ||||
AXA SA | France | 36,961 | 694,158 | ||||
aProgressive Corp. | United States | 34,660 | 523,713 | ||||
Swiss Reinsurance Co. | Switzerland | 5,310 | 175,583 | ||||
Torchmark Corp. | United States | 6,350 | 235,204 | ||||
| 2,770,655 | |||||||
IT Services 0.9% | |||||||
Accenture Ltd., A | United States | 22,100 | 739,466 | ||||
Media 5.3% | |||||||
British Sky Broadcasting Group PLC | United Kingdom | 35,591 | 266,446 | ||||
Comcast Corp., A | United States | 53,133 | 749,175 | ||||
TGA-15
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Templeton Global Asset Allocation Fund | Country/ Organization | Shares/ Warrants | Value | ||||
Common Stocks and Other Equity Interests (continued) | |||||||
Media (continued) | |||||||
News Corp., A | United States | 64,570 | $ | 588,233 | |||
Pearson PLC | United Kingdom | 63,912 | 640,936 | ||||
Reed Elsevier NV | Netherlands | 37,947 | 417,440 | ||||
Time Warner Cable Inc. | United States | 5,057 | 160,155 | ||||
Time Warner Inc. | United States | 20,149 | 507,553 | ||||
aViacom Inc., B | United States | 28,204 | 640,231 | ||||
Vivendi SA | France | 16,213 | 387,382 | ||||
| 4,357,551 | |||||||
Multi-Utilities 0.7% | |||||||
PG&E Corp. | United States | 15,830 | 608,505 | ||||
Multiline Retail 0.9% | |||||||
Target Corp. | United States | 18,767 | 740,733 | ||||
Oil, Gas & Consumable Fuels 4.5% | |||||||
BP PLC | United Kingdom | 128,318 | 1,008,770 | ||||
El Paso Corp. | United States | 49,332 | 455,334 | ||||
Eni SpA | Italy | 24,592 | 581,203 | ||||
Royal Dutch Shell PLC, B | United Kingdom | 38,652 | 970,476 | ||||
Total SA, B | France | 12,240 | 660,618 | ||||
| 3,676,401 | |||||||
Pharmaceuticals 8.0% | |||||||
Abbott Laboratories | United States | 9,627 | 452,854 | ||||
Bristol-Myers Squibb Co. | United States | 23,584 | 478,991 | ||||
GlaxoSmithKline PLC | United Kingdom | 30,757 | 540,726 | ||||
Merck & Co. Inc. | United States | 24,820 | 693,967 | ||||
Merck KGaA | Germany | 4,760 | 484,705 | ||||
Novartis AG | Switzerland | 11,760 | 476,502 | ||||
Pfizer Inc. | United States | 60,304 | 904,560 | ||||
Roche Holding AG | Switzerland | 1,610 | 218,785 | ||||
Sanofi-Aventis | France | 13,311 | 781,713 | ||||
Takeda Pharmaceutical Co. Ltd. | Japan | 14,786 | 576,955 | ||||
aWatson Pharmaceuticals Inc. | United States | 29,652 | 998,976 | ||||
| 6,608,734 | |||||||
Professional Services 0.3% | |||||||
Adecco SA | Switzerland | 6,810 | 283,578 | ||||
Real Estate Management & Development 0.5% | |||||||
Cheung Kong (Holdings) Ltd. | Hong Kong | 37,748 | 433,986 | ||||
Semiconductors & Semiconductor Equipment 1.4% | |||||||
Samsung Electronics Co. Ltd. | South Korea | 2,200 | 1,021,651 | ||||
Taiwan Semiconductor Manufacturing Co. Ltd. | Taiwan | 90,000 | 149,817 | ||||
| 1,171,468 | |||||||
Software 4.6% | |||||||
aCheck Point Software Technologies Ltd. | Israel | 27,306 | 640,872 | ||||
Microsoft Corp. | United States | 39,012 | 927,315 | ||||
Nintendo Co. Ltd. | Japan | 2,341 | 646,958 | ||||
Oracle Corp. | United States | 61,267 | 1,312,339 | ||||
SAP AG, ADR | Germany | 7,470 | 300,219 | ||||
| 3,827,703 | |||||||
TGA-16
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Templeton Global Asset Allocation Fund | Country/ Organization | Shares/ Warrants | Value | |||||
Common Stocks and Other Equity Interests (continued) | ||||||||
Specialty Retail 0.1% | ||||||||
The Home Depot Inc. | United States | 5,020 | $ | 118,623 | ||||
Trading Companies & Distributors 0.3% | ||||||||
aWolseley PLC | United Kingdom | 11,609 | 221,188 | |||||
Wireless Telecommunication Services 1.2% | ||||||||
Vodafone Group PLC, ADR | United Kingdom | 50,593 | 986,057 | |||||
Total Common Stocks and Other Equity Interests | 47,603,747 | |||||||
Preferred Stocks 0.9% | ||||||||
Metals & Mining 0.6% | ||||||||
Vale SA, ADR, pfd., A | Brazil | 33,728 | 517,725 | |||||
Oil, Gas & Consumable Fuels 0.3% | ||||||||
Petroleo Brasileiro SA, ADR, pfd. | Brazil | 6,070 | 202,495 | |||||
Total Preferred Stocks (Cost $194,930) | 720,220 | |||||||
| Principal Amountd | ||||||||
Foreign Government and Agency Securities 37.7% | ||||||||
European Investment Bank, senior note, 1612/37, 6.50%, 9/10/14 | Supranationale | 291,000 | NZD | 192,452 | ||||
f,gGovernment of Argentina, senior bond, FRN, 1.683%, 8/03/12 | Argentina | 1,334,000 | 316,825 | |||||
Government of Indonesia, | Indonesia | 12,000,000,000 | IDR | 1,152,094 | ||||
FR37, 12.00%, 9/15/26 | Indonesia | 3,140,000,000 | IDR | 304,541 | ||||
FR40, 11.00%, 9/15/25 | Indonesia | 9,900,000,000 | IDR | 897,134 | ||||
Government of Malaysia, | Malaysia | 13,480,000 | MYR | 3,926,036 | ||||
3.833%, 9/28/11 | Malaysia | 35,000 | MYR | 10,224 | ||||
3.461%, 7/31/13 | Malaysia | 1,340,000 | MYR | 382,254 | ||||
3.814%, 2/15/17 | Malaysia | 6,640,000 | MYR | 1,853,420 | ||||
Government of Mexico, 10.00%, 12/05/24 | Mexico | 142,000 | h MXN | 1,221,761 | ||||
Government of New Zealand, 7.00%, 7/15/09 | New Zealand | 3,204,000 | NZD | 2,070,608 | ||||
Government of Poland, | Poland | 10,050,000 | PLN | 3,111,628 | ||||
5.75%, 9/23/22 | Poland | 4,075,000 | PLN | 1,220,807 | ||||
Government of Sweden, | Sweden | 8,510,000 | SEK | 1,119,427 | ||||
5.25%, 3/15/11 | Sweden | 13,920,000 | SEK | 1,928,386 | ||||
5.50%, 10/08/12 | Sweden | 8,620,000 | SEK | 1,236,899 | ||||
KfW Bankengruppe, senior note, 6.50%, 11/15/11 | Germany | 250,000 | NZD | 167,338 | ||||
Korea Treasury Bond, | South Korea | 282,400,000 | KRW | 220,968 | ||||
0475-1112, 4.75%, 12/10/11 | South Korea | 1,029,770,000 | KRW | 820,403 | ||||
0525-1209, 5.25%, 9/10/12 | South Korea | 1,840,000,000 | KRW | 1,481,956 | ||||
0525-2703, 5.25%, 3/10/27 | South Korea | 489,280,000 | KRW | 375,526 | ||||
0550-1106, 5.50%, 6/10/11 | South Korea | 705,880,000 | KRW | 570,114 | ||||
0550-1709, 5.50%, 9/10/17 | South Korea | 1,646,050,000 | KRW | 1,320,911 | ||||
New South Wales Treasury Corp., 6.00%, 5/01/12 | Australia | 1,025,000 | AUD | 846,164 | ||||
Nota Do Tesouro Nacional, | Brazil | 1,900 | i BRL | 947,485 | ||||
TGA-17
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Templeton Global Asset Allocation Fund | Country/ Organization | Principal Amountd | Value | |||||
Foreign Government and Agency Securities (continued) | ||||||||
Nota Do Tesouro Nacional, (continued) | ||||||||
jIndex Linked, 6.00%, 5/15/15 | Brazil | 1,885 | i BRL | $ | 1,707,231 | |||
jIndex Linked, 6.00%, 5/15/45 | Brazil | 1,430 | i BRL | 1,243,195 | ||||
Province of Ontario, 6.25%, 6/16/15 | Canada | 64,000 | NZD | 40,458 | ||||
Queensland Treasury Corp., 09G, 6.00%, 7/14/09 | Australia | 540,000 | AUD | 435,194 | ||||
Svensk Exportkredit AB, senior note, 7.625%, 6/30/14 | Sweden | 85,000 | NZD | 55,591 | ||||
Total Foreign Government and Agency Securities (Cost $33,119,682) | 31,177,030 | |||||||
Total Investments before Short Term Investments (Cost $85,852,106) | 79,500,997 | |||||||
Short Term Investments 3.3% | ||||||||
Foreign Government and Agency Securities 2.0% | ||||||||
kEgypt Treasury Bills, 7/07/09 - 9/22/097 | Egypt | 8,275,000 | EGP | 1,458,496 | ||||
Government of Argentina, senior bond, amortization and cpn., 8/03/09 | Argentina | 1,334,000 | 164,184 | |||||
Total Foreign Government and Agency Securities (Cost $1,515,627) | 1,622,680 | |||||||
Total Investments before Money Market Fund (Cost $87,367,733) | 81,123,677 | |||||||
| Shares | ||||||||
Money Market Funds (Cost $1,070,254) 1.3% | ||||||||
lInstitutional Fiduciary Trust Money Market Portfolio, 0.00% | United States | 1,070,254 | 1,070,254 | |||||
Total Investments (Cost $88,437,987) 99.5% | 82,193,931 | |||||||
Other Assets, less Liabilities 0.5% | 409,180 | |||||||
Net Assets 100.0% | $ | 82,603,111 | ||||||
aNon-income producing.
bSecurity has been deemed illiquid because it may not be able to be sold within seven days. At June 30, 2009, the value of this security was $11,739, representing 0.01% of net assets.
cRounds to less than 0.1% of net assets.
dThe principal amount is stated in U.S. dollars unless otherwise indicated.
eA supranational organization is an entity formed by two or more central governments through international treaties.
fThe coupon rate shown represents the rate at period end.
gThe principal amount is stated in original face, and scheduled paydowns are reflected in the market price on ex-date.
hPrincipal amount is stated in 100 Mexican Peso Units.
iPrincipal amount is stated in 1,000 Brazilian Real Units.
jRedemption price at maturity is adjusted for inflation. See Note 1(f).
kThe security is traded on a discount basis with no stated coupon rate.
lSee Note 7 regarding investments in the Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end.
TGA-18
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Templeton Global Asset Allocation Fund | �� |
At June 30, 2009, the Fund had the following forward exchange contracts outstanding. See Note 1(c).
| Currency | Counterparty | Type | Quantity | Contract Amount* | Settlement Date | Unrealized Appreciation | Unrealized Depreciation | ||||||||||||
Malaysian Ringgit | JPHQ | Sell | 1,685,000 | $ | 340,969 | EUR | 7/07/09 | $ | — | $ | (1,002 | ) | |||||||
Malaysian Ringgit | JPHQ | Buy | 1,685,000 | 333,465 | EUR | 7/07/09 | 11,526 | 0 | |||||||||||
Singapore Dollar | JPHQ | Buy | 777,000 | 373,468 | EUR | 7/07/09 | 12,471 | 0 | |||||||||||
Singapore Dollar | JPHQ | Sell | 777,000 | 399,055 | EUR | 7/07/09 | 23,417 | 0 | |||||||||||
Mexican Peso | DBAB | Sell | 3,500,000 | 328,022 | 7/29/09 | 63,578 | 0 | ||||||||||||
Mexican Peso | CITI | Sell | 1,099,000 | 78,060 | 7/31/09 | 0 | (4,951 | ) | |||||||||||
New Zealand Dollar | DBAB | Sell | 439,116 | 244,460 | 7/31/09 | 0 | (38,257 | ) | |||||||||||
New Zealand Dollar | UBSW | Sell | 177,046 | 97,784 | 7/31/09 | 0 | (16,204 | ) | |||||||||||
New Zealand Dollar | DBAB | Sell | 437,445 | 244,460 | 8/03/09 | 0 | (37,125 | ) | |||||||||||
New Zealand Dollar | BZWS | Sell | 171,242 | 97,784 | 8/03/09 | 0 | (12,445 | ) | |||||||||||
Brazilian Real | DBAB | Sell | 893,000 | 395,991 | 8/04/09 | 0 | (56,770 | ) | |||||||||||
Indonesian Rupiah | HSBC | Buy | 4,745,710,835 | 704,603 | NZD | 8/04/09 | 7,615 | 0 | |||||||||||
New Zealand Dollar | CITI | Sell | 434,419 | 244,460 | 8/04/09 | 0 | (35,158 | ) | |||||||||||
New Zealand Dollar | DBAB | Sell | 173,312 | 97,784 | 8/04/09 | 0 | (13,770 | ) | |||||||||||
New Zealand Dollar | BZWS | Sell | 86,282 | 48,516 | 8/04/09 | 0 | (7,020 | ) | |||||||||||
New Zealand Dollar | DBAB | Sell | 128,871 | 72,775 | 8/05/09 | 0 | (10,169 | ) | |||||||||||
New Zealand Dollar | CITI | Sell | 170,128 | 97,033 | 8/06/09 | 0 | (12,457 | ) | |||||||||||
New Zealand Dollar | FBCO | Sell | 84,907 | 48,516 | 8/06/09 | 0 | (6,127 | ) | |||||||||||
New Zealand Dollar | DBAB | Sell | 168,625 | 96,448 | 8/07/09 | 0 | (12,067 | ) | |||||||||||
New Zealand Dollar | CITI | Sell | 167,867 | 96,448 | 8/07/09 | 0 | (11,580 | ) | |||||||||||
New Zealand Dollar | FBCO | Sell | 165,953 | 96,448 | 8/07/09 | 0 | (10,348 | ) | |||||||||||
New Zealand Dollar | FBCO | Sell | 83,142 | 48,224 | 8/10/09 | 0 | (5,270 | ) | |||||||||||
New Zealand Dollar | FBCO | Sell | 83,101 | 48,224 | 8/11/09 | 0 | (5,240 | ) | |||||||||||
New Zealand Dollar | DBAB | Sell | 156,084 | 91,988 | 8/12/09 | 0 | (8,424 | ) | |||||||||||
Japanese Yen | DBAB | Buy | 22,282,800 | 142,779 | EUR | 8/21/09 | 31,140 | 0 | |||||||||||
Japanese Yen | JPHQ | Buy | 22,358,000 | 143,717 | EUR | 8/21/09 | 30,606 | 0 | |||||||||||
New Zealand Dollar | FBCO | Sell | 152,518 | 91,993 | 8/24/09 | 0 | (6,047 | ) | |||||||||||
Japanese Yen | DBAB | Buy | 22,139,600 | 141,957 | EUR | 8/26/09 | 30,823 | 0 | |||||||||||
New Zealand Dollar | DBAB | Sell | 152,000 | 91,919 | 8/26/09 | 0 | (5,774 | ) | |||||||||||
Swedish Krona | UBSW | Buy | 3,000,000 | 311,912 | EUR | 9/23/09 | 0 | (48,688 | ) | ||||||||||
Japanese Yen | UBSW | Buy | 156,783,181 | 1,201,956 | EUR | 10/15/09 | 0 | (56,151 | ) | ||||||||||
Japanese Yen | UBSW | Sell | 156,783,181 | 1,177,758 | EUR | 10/15/09 | 22,218 | 0 | |||||||||||
Chinese Yuan | HSBC | Buy | 205,268 | 29,676 | 10/23/09 | 435 | 0 | ||||||||||||
Chinese Yuan | HSBC | Buy | 351,200 | 50,502 | 10/26/09 | 1,022 | 0 | ||||||||||||
Chinese Yuan | HSBC | Buy | 213,420 | 30,467 | 10/27/09 | 845 | 0 | ||||||||||||
New Zealand Dollar | UBSW | Sell | 264,563 | 162,349 | 11/30/09 | 0 | (6,684 | ) | |||||||||||
New Zealand Dollar | DBAB | Sell | 262,969 | 161,818 | 11/30/09 | 0 | (6,196 | ) | |||||||||||
New Zealand Dollar | CITI | Sell | 149,669 | 91,993 | 11/30/09 | 0 | (3,633 | ) | |||||||||||
Mexican Peso | CITI | Sell | 1,088,000 | 80,310 | 12/01/09 | 0 | (446 | ) | |||||||||||
New Zealand Dollar | BZWS | Sell | 438,596 | 271,052 | 12/02/09 | 0 | (9,138 | ) | |||||||||||
New Zealand Dollar | DBAB | Sell | 113,427 | 68,994 | 12/02/09 | 0 | (3,467 | ) | |||||||||||
New Zealand Dollar | FBCO | Sell | 37,431 | 23,150 | 12/02/09 | 0 | (762 | ) | |||||||||||
Chinese Yuan | HSBC | Buy | 277,000 | 30,076 | EUR | 12/04/09 | 0 | (1,473 | ) | ||||||||||
Chinese Yuan | HSBC | Buy | 220,000 | 30,096 | 12/04/09 | 2,229 | 0 | ||||||||||||
Mexican Peso | DBAB | Sell | 15,131,805 | 1,115,981 | 12/22/09 | 0 | (3,772 | ) | |||||||||||
Mexican Peso | DBAB | Buy | 15,131,805 | 1,068,819 | 12/22/09 | 50,933 | 0 | ||||||||||||
Mexican Peso | DBAB | Sell | 6,284,207 | 463,844 | 12/23/09 | 0 | (1,120 | ) | |||||||||||
Mexican Peso | DBAB | Buy | 6,284,207 | 445,341 | 12/23/09 | 19,623 | 0 | ||||||||||||
Mexican Peso | DBAB | Sell | 10,076,041 | 741,049 | 12/24/09 | 0 | (4,363 | ) | |||||||||||
Mexican Peso | DBAB | Buy | 10,076,041 | 712,546 | 12/24/09 | 32,866 | 0 | ||||||||||||
Chilean Peso | DBAB | Buy | 51,350,000 | 81,301 | 1/28/10 | 15,263 | 0 | ||||||||||||
Chilean Peso | DBAB | Buy | 118,180,000 | 188,366 | 1/29/10 | 33,874 | 0 | ||||||||||||
Chilean Peso | JPHQ | Buy | 15,570,000 | 24,793 | 1/29/10 | 4,487 | 0 | ||||||||||||
TGA-19
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Templeton Global Asset Allocation Fund |
| Currency | Counterparty | Type | Quantity | Contract Amount* | Settlement Date | Unrealized Appreciation | Unrealized Depreciation | |||||||||||
Chilean Peso | DBAB | Buy | 24,790,000 | $ | 39,664 | 2/02/10 | $ | 6,954 | 0 | |||||||||
New Zealand Dollar | DBAB | Sell | 892,571 | 451,230 | 2/02/10 | 0 | (116,880 | ) | ||||||||||
Chilean Peso | DBAB | Buy | 46,510,000 | 74,357 | 2/03/10 | 13,106 | 0 | |||||||||||
Chinese Yuan | DBAB | Buy | 2,351,000 | 333,322 | 2/03/10 | 12,832 | 0 | |||||||||||
Chilean Peso | DBAB | Buy | 24,390,000 | 39,659 | 2/12/10 | 6,207 | 0 | |||||||||||
Chilean Peso | DBAB | Buy | 60,030,000 | 99,141 | 2/16/10 | 13,744 | 0 | |||||||||||
Chilean Peso | DBAB | Buy | 59,930,000 | 99,717 | 2/17/10 | 12,980 | 0 | |||||||||||
Chilean Peso | CITI | Buy | 102,710,000 | 169,521 | 2/26/10 | 23,621 | 0 | |||||||||||
Chilean Peso | DBAB | Buy | 30,220,000 | 49,852 | 2/26/10 | 6,976 | 0 | |||||||||||
New Zealand Dollar | DBAB | Sell | 2,625,063 | 1,316,469 | 2/26/10 | 0 | (352,019 | ) | ||||||||||
Chilean Peso | DBAB | Buy | 30,070,000 | 49,851 | 3/03/10 | 6,694 | 0 | |||||||||||
Chilean Peso | DBAB | Buy | 48,850,000 | 79,768 | 3/04/10 | 12,092 | 0 | |||||||||||
Chilean Peso | DBAB | Buy | 30,610,000 | 49,853 | 3/05/10 | 7,707 | 0 | |||||||||||
Chilean Peso | DBAB | Buy | 28,870,000 | 46,926 | 3/08/10 | 7,363 | 0 | |||||||||||
Chilean Peso | DBAB | Buy | 30,670,000 | 49,850 | 3/09/10 | 7,823 | 0 | |||||||||||
Indian Rupee | DBAB | Buy | 3,875,000 | 74,888 | 4/09/10 | 4,705 | 0 | |||||||||||
Indian Rupee | DBAB | Buy | 8,310,000 | 160,487 | 4/12/10 | 10,172 | 0 | |||||||||||
Indian Rupee | JPHQ | Buy | 5,581,000 | 106,977 | 4/13/10 | 7,631 | 0 | |||||||||||
Indian Rupee | JPHQ | Buy | 5,479,000 | 106,991 | 4/15/10 | 5,510 | 0 | |||||||||||
Indian Rupee | DBAB | Buy | 1,921,000 | 37,446 | 4/19/10 | 1,989 | 0 | |||||||||||
Indian Rupee | JPHQ | Buy | 2,737,000 | 53,646 | 4/19/10 | 2,541 | 0 | |||||||||||
Chilean Peso | CITI | Buy | 58,723,000 | 100,090 | 4/23/10 | 10,333 | 0 | |||||||||||
Chilean Peso | CITI | Buy | 57,341,000 | 97,825 | 4/26/10 | 10,000 | 0 | |||||||||||
Indian Rupee | DBAB | Buy | 3,892,000 | 75,104 | 4/26/10 | 4,762 | 0 | |||||||||||
Chilean Peso | CITI | Buy | 45,505,000 | 77,488 | 4/27/10 | 8,080 | 0 | |||||||||||
Chilean Peso | JPHQ | Buy | 45,343,000 | 77,490 | 4/27/10 | 7,774 | 0 | |||||||||||
Indian Rupee | JPHQ | Buy | 555,000 | 10,725 | 4/27/10 | 664 | 0 | |||||||||||
Chilean Peso | UBSW | Buy | 9,151,000 | 15,497 | 4/28/10 | 1,711 | 0 | |||||||||||
Chilean Peso | CITI | Buy | 73,088,000 | 123,983 | 4/28/10 | 13,452 | 0 | |||||||||||
Indian Rupee | JPHQ | Buy | 2,755,000 | 53,651 | 4/28/10 | 2,876 | 0 | |||||||||||
Indian Rupee | JPHQ | Buy | 2,757,000 | 53,638 | 4/30/10 | 2,924 | 0 | |||||||||||
Indian Rupee | DBAB | Buy | 5,273,000 | 107,439 | 6/01/10 | 549 | 0 | |||||||||||
Indian Rupee | HSBC | Buy | 156,000 | 3,216 | 6/02/10 | 0 | (22 | ) | ||||||||||
Indian Rupee | HSBC | Buy | 774,000 | 16,125 | 6/03/10 | 0 | (276 | ) | ||||||||||
Indian Rupee | HSBC | Buy | 5,163,000 | 107,428 | 6/04/10 | 0 | (1,711 | ) | ||||||||||
Indian Rupee | DBAB | Buy | 2,582,000 | 53,725 | 6/07/10 | 0 | (865 | ) | ||||||||||
Indian Rupee | DBAB | Buy | 1,302,000 | 27,012 | 6/08/10 | 0 | (359 | ) | ||||||||||
Indian Rupee | HSBC | Buy | 1,037,000 | 21,492 | 6/08/10 | 0 | (263 | ) | ||||||||||
Indian Rupee | DBAB | Buy | 1,051,000 | 21,603 | 6/10/10 | 0 | (90 | ) | ||||||||||
Indian Rupee | BZWS | Buy | 1,572,000 | 32,412 | 6/11/10 | 0 | (237 | ) | ||||||||||
Indian Rupee | HSBC | Buy | 1,054,000 | 21,621 | 6/11/10 | 0 | (47 | ) | ||||||||||
Indian Rupee | DBAB | Buy | 2,632,000 | 54,034 | 6/16/10 | 0 | (177 | ) | ||||||||||
Indian Rupee | DBAB | Buy | 2,397,000 | 48,621 | 6/21/10 | 414 | 0 | |||||||||||
Indian Rupee | JPHQ | Buy | 2,756,000 | 55,903 | 6/22/10 | 472 | 0 | |||||||||||
Indian Rupee | DBAB | Buy | 4,171,000 | 83,864 | 6/24/10 | 1,446 | 0 | |||||||||||
Indian Rupee | HSBC | Buy | 2,801,000 | 55,908 | 6/25/10 | 1,378 | 0 | |||||||||||
Malaysian Ringgit | JPHQ | Buy | 1,685,000 | 474,849 | 6/29/10 | 1,266 | 0 | |||||||||||
Unrealized appreciation (depreciation) | $ | 633,719 | $ | (935,044 | ) | |||||||||||||
Net unrealized appreciation (depreciation) | $ | (301,325 | ) | |||||||||||||||
*In U.S. dollars unless otherwise indicated.
See Abbreviations on page TGA-32.
The accompanying notes are an integral part of these financial statements.
TGA-20
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements
Statement of Assets and Liabilities
June 30, 2009 (unaudited)
| Templeton Global Asset Allocation Fund | ||||
Assets: | ||||
Investments in securities: | ||||
Cost - Unaffiliated issuers | $ | 87,367,733 | ||
Cost - Sweep Money Fund (Note 7) | 1,070,254 | |||
Total cost of investments | $ | 88,437,987 | ||
Value - Unaffiliated issuers | $ | 81,123,677 | ||
Value - Sweep Money Fund (Note 7) | 1,070,254 | |||
Total value of investments | 82,193,931 | |||
Cash | 8,577 | |||
Foreign currency, at value (cost and $71,639) | 71,829 | |||
Receivables: | ||||
Capital shares sold | 60,341 | |||
Dividends and interest | 756,115 | |||
Unrealized appreciation on forward exchange contracts | 633,719 | |||
Other assets | 120 | |||
Total assets | 83,724,632 | |||
Liabilities: | ||||
Payables: | ||||
Capital shares redeemed | 91,313 | |||
Affiliates | 63,227 | |||
Unrealized depreciation on forward exchange contracts | 935,044 | |||
Accrued expenses and other liabilities | 31,937 | |||
Total liabilities | 1,121,521 | |||
Net assets, at value | $ | 82,603,111 | ||
Net assets consist of: | ||||
Paid-in capital | $ | 91,163,317 | ||
Distributions in excess of net investment income | (154,514 | ) | ||
Net unrealized appreciation (depreciation) | (6,492,633 | ) | ||
Accumulated net realized gain (loss) | (1,913,059 | ) | ||
Net assets, at value | $ | 82,603,111 | ||
The accompanying notes are an integral part of these financial statements.
TGA-21
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Assets and Liabilities (continued)
June 30, 2009 (unaudited)
| Templeton Global Asset Allocation Fund | |||
Class 1: | |||
Net assets, at value | $ | 35,931,576 | |
Shares outstanding | 4,531,573 | ||
Net asset value and maximum offering price per share | $ | 7.93 | |
Class 2: | |||
Net assets, at value | $ | 46,668,752 | |
Shares outstanding | 5,998,390 | ||
Net asset value and maximum offering price per share | $ | 7.78 | |
Class 4: | |||
Net assets, at value | $ | 2,783 | |
Shares outstanding | 351 | ||
Net asset value and maximum offering price per share | $ | 7.93 | |
The accompanying notes are an integral part of these financial statements.
TGA-22
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statements of Operations
for the period ended June 30, 2009 (unaudited)
| Templeton Global Asset Allocation Fund | ||||
Investment income: | ||||
Dividends: (net of foreign taxes of $64,436) | ||||
Unaffiliated issuers | $ | 926,509 | ||
Sweep Money Fund (Note 7) | 515 | |||
Interest (net of foreign taxes of $29,466) | 908,460 | |||
Total investment income | 1,835,484 | |||
Expenses: | ||||
Management fees (Note 3a) | 250,440 | |||
Administrative fees (Note 3b) | 58,282 | |||
Distribution fees - (Note 3c) | ||||
Class 2 | 54,785 | |||
Class 4 | 5 | |||
Unaffiliated transfer agent fees | 618 | |||
Custodian fees (Note 4) | 19,301 | |||
Reports to shareholders | 28,413 | |||
Professional fees | 15,452 | |||
Trustees’ fees and expenses | 310 | |||
Other | 6,565 | |||
Total expenses | 434,171 | |||
Expenses waived/paid by affiliates (Note 3e) | (60,362 | ) | ||
Net expenses | 373,809 | |||
Net investment income | 1,461,675 | |||
Realized and unrealized gains (losses): | ||||
Net realized gain (loss) from: | ||||
Investments | (2,565,110 | ) | ||
Foreign currency transactions | 1,567,560 | |||
Net realized gain (loss) | (997,550 | ) | ||
Net change in unrealized appreciation (depreciation) on: | ||||
Investments | 4,072,765 | |||
Translation of other assets and liabilities denominated in foreign currencies | (2,147,814 | ) | ||
Net change in unrealized appreciation (depreciation) | 1,924,951 | |||
Net realized and unrealized gain (loss) | 927,401 | |||
Net increase (decrease) in net assets resulting from operations | $ | 2,389,076 | ||
The accompanying notes are an integral part of these financial statements.
TGA-23
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statements of Changes in Net Assets
| Templeton Global Asset Allocation Fund | ||||||||
| Six Months Ended June 30, 2009 (unaudited) | Year Ended December 31, 2008 | |||||||
Increase (decrease) in net assets: | ||||||||
Operations: | ||||||||
Net investment income | $ | 1,461,675 | $ | 3,746,471 | ||||
Net realized gain (loss) from investments and foreign currency transactions | (997,550 | ) | 3,371,334 | |||||
Net change in unrealized appreciation (depreciation) on investments and translation of other assets and liabilities denominated in foreign currencies | 1,924,951 | (39,963,692 | ) | |||||
Net increase (decrease) in net assets resulting from operations | 2,389,076 | (32,845,887 | ) | |||||
Distributions to shareholders from: | ||||||||
Net investment income and net foreign currency gains: | ||||||||
Class 1 | (3,515,579 | ) | (5,575,011 | ) | ||||
Class 2 | (4,506,554 | ) | (7,025,343 | ) | ||||
Class 4 | (293 | ) | (492 | ) | ||||
Net realized gains: | ||||||||
Class 1 | (545,877 | ) | (6,781,816 | ) | ||||
Class 2 | (725,422 | ) | (8,788,767 | ) | ||||
Class 4 | (47 | ) | (599 | ) | ||||
Total distributions to shareholders | (9,293,772 | ) | (28,172,028 | ) | ||||
Capital share transactions: (Note 2) | ||||||||
Class 1 | 1,332,103 | 756,427 | ||||||
Class 2 | 2,202,944 | 4,300,548 | ||||||
Class 4 | — | 5,000 | ||||||
Total capital share transactions | 3,535,047 | 5,061,975 | ||||||
Net increase (decrease) in net assets | (3,369,649 | ) | (55,955,940 | ) | ||||
Net assets: | ||||||||
Beginning of period | 85,972,760 | 141,928,700 | ||||||
End of period | $ | 82,603,111 | $ | 85,972,760 | ||||
Undistributed net investment income (distributions in excess of net investment income) included in net assets: | ||||||||
End of period | $ | (154,514 | ) | $ | 6,406,237 | |||
The accompanying notes are an integral part of these financial statements.
TGA-24
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited)
Templeton Global Asset Allocation Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Templeton Variable Insurance Products Trust (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end investment company, consisting of twenty-two separate funds. The Templeton Global Asset Allocation Fund (Fund) is included in this report. The financial statements of the remaining funds in the Trust are presented separately. Shares of the Fund are sold only to insurance company separate accounts to fund the benefits of variable life insurance policies or variable annuity contracts. The Fund offers three classes of shares: Class 1, Class 2, and Class 4. Each class of shares differs by its distribution fees, voting rights on matters affecting a single class and its exchange privilege.
The following summarizes the Fund’s significant accounting policies.
a. Security Valuation
Equity and other securities listed on a securities exchange or on the NASDAQ National Market System are valued at the last quoted sale price or the official closing price of the day, respectively. Over-the-counter securities and listed securities for which there is no reported sale are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. Certain equity securities are valued based upon fundamental characteristics or relationships to similar securities. Investments in open-end mutual funds are valued at the closing net asset value.
Government securities, generally trade in the over-the-counter market rather than on a securities exchange. The Fund may utilize independent pricing services, quotations from bond dealers, and information with respect to bond and note transactions, to assist in determining a current market value for each security. The Fund’s pricing services may use valuation models or matrix pricing which considers information with respect to comparable bond and note transactions, quotations from bond dealers, or by reference to other securities that are considered comparable in such characteristics as rating, interest rate and maturity date, option adjusted spread models, prepayment projections, interest rate spreads and yield curves, to determine current value. Debt securities denominated in a foreign currency are converted into their U.S. dollar equivalent at the foreign exchange rate in effect at the close of the NYSE on the date that the values of the foreign debt securities are determined.
Foreign equity securities are valued as of the close of trading on the foreign stock exchange on which the security is primarily traded, or the NYSE, whichever is earlier. If no sale is reported at that time, the foreign equity security will be valued within the range of the most recent quoted bid and ask prices. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at the close of the NYSE on the day that the value of the security is determined.
The Fund has procedures to determine the fair value of individual securities and other assets for which market prices are not readily available or which may not be reliably priced. Methods for valuing these securities may include: fundamental analysis based upon the underlying investment book value, anticipated future cash flows, market changes in comparable or similar securities, matrix pricing, discounts from market prices of similar securities, or discounts applied due to the nature and duration of restrictions on the disposition of the securities. Due to the inherent uncertainty of valuations of such securities, the fair values may differ significantly from the values that would have been used had a ready market for such investments existed. Occasionally, events occur between the time at which trading in a security is completed and the close of the NYSE that might call into question the availability (including the reliability) of the value of a portfolio security held by the Fund. The investment manager monitors price movements following the close of trading in foreign stock markets through a series of country specific market proxies (such as baskets of American Depository Receipts, futures contracts and exchange traded funds). These price movements are measured against established trigger thresholds for each specific market proxy to assist in determining if an event has occurred. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services. All security valuation procedures are approved by the Fund’s Board of Trustees.
TGA-25
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Global Asset Allocation Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
b. Foreign Currency Translation
Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. Purchases and sales of securities, income and expense items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. Occasionally, events may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the Fund’s Board of Trustees.
The Fund does not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments on the Statement of Operations.
Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period.
c. Derivative Financial Instruments
The Fund may invest in derivative financial instruments (derivatives) in order to manage risk or gain exposure to various other investments or markets. Derivatives are financial contracts based on an underlying or notional amount, require no initial investment or an initial net investment that is smaller than would normally be required to have a similar response to changes in market factors, and require or permit net settlement. Derivatives may contain various risks including the potential inability of the counterparty to fulfill their obligations under the terms of the contract, the potential for an illiquid secondary market, and the potential for market movements which may expose the Fund to gains or losses in excess of the amounts shown on the Statement of Assets and Liabilities.
Derivatives are marked to market daily based upon quotations from market makers or the Fund’s independent pricing services and the Fund’s net benefit or obligation under the contract, as measured by the fair market value of the contract, is included in net assets. Realized gain and loss and unrealized appreciation and depreciation on these contracts for the period are included in the Statement of Operations.
The Fund enters into forward exchange contracts in order to hedge against fluctuations in foreign exchange rates or to gain exposure to certain foreign currencies. A forward exchange contract is an agreement between the Fund and a counterparty to buy or sell a foreign currency for a specific exchange rate on a future date. Pursuant to the terms of the forward exchange contacts, cash or securities may be required to be deposited as collateral.
See Note 9 regarding other derivative information.
d. Foreign Currency Contracts
The Fund enters into foreign exchange contracts in order to manage foreign exchange rate risk between the trade date and settlement date of securities transactions. A foreign exchange contract is an agreement between the Fund and a counterparty to buy or sell a foreign currency for a specific exchange rate on a future date.
e. Income Taxes
No provision has been made for U.S. income taxes because it is the Fund’s policy to qualify as a regulated investment company under the Internal Revenue Code and to distribute to shareholders substantially all of its taxable income and net realized gains.
TGA-26
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Global Asset Allocation Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
e. Income Taxes (continued)
The Fund has reviewed the tax positions, taken on federal income tax returns, for each of the three open tax years and as of June 30, 2009, and has determined that no provision for income tax is required in the Fund’s financial statements.
Foreign securities held by the Fund may be subject to foreign taxation on dividend and interest income received. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist in the foreign markets in which the Fund invests.
f. Security Transactions, Investment Income, Expenses and Distributions
Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Amortization of premium and accretion of discount on debt securities are included in interest income. Dividend income is recorded on the ex-dividend date except that certain dividends from foreign securities are recognized as soon as the Fund is notified of the ex-dividend date. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with accounting principles generally accepted in the United States of America. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods.
Common expenses incurred by the Trust are allocated among the funds based on the ratio of net assets of each fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense.
Realized and unrealized gains and losses and net investment income, not including class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions, by class, are generally due to differences in class specific expenses.
Inflation-indexed bonds provide an inflation hedge through periodic increases or decreases in the security’s interest accruals and principal redemption value, by amounts corresponding to the current rate of inflation. Any such adjustments, including adjustments to principal redemption value, are recorded as interest income.
g. Accounting Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
h. Guarantees and Indemnifications
Under the Trust’s organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, on behalf of the Fund, enters into contracts with service providers that contain general indemnification clauses. The Trust’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote.
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Global Asset Allocation Fund
2. SHARES OF BENEFICIAL INTEREST
At June 30, 2009, there were an unlimited number of shares authorized (without par value). Transactions in the Fund’s shares were as follows:
| Six Months Ended June 30, 2009 | Year Ended December 31, 2008a | |||||||||||||
| Class 1 Shares: | Shares | Amount | Shares | Amount | ||||||||||
Shares sold | 114,452 | $ | 906,247 | 55,105 | $ | 667,145 | ||||||||
Shares issued in reinvestment of distributions | 518,705 | 4,061,456 | 1,123,348 | 12,356,827 | ||||||||||
Shares redeemed | (461,201 | ) | (3,635,600 | ) | (1,111,660 | ) | (12,267,545 | ) | ||||||
Net increase (decrease) | 171,956 | $ | 1,332,103 | 66,793 | $ | 756,427 | ||||||||
Class 2 Shares: | ||||||||||||||
Shares sold | 429,862 | $ | 3,409,533 | 806,174 | $ | 9,220,122 | ||||||||
Shares issued in reinvestment of distributions | 680,361 | 5,231,976 | 1,464,269 | 15,814,110 | ||||||||||
Shares redeemed | (823,931 | ) | (6,438,565 | ) | (1,971,137 | ) | (20,733,684 | ) | ||||||
Net increase (decrease) | 286,292 | $ | 2,202,944 | 299,306 | $ | 4,300,548 | ||||||||
Class 4 Shares: | ||||||||||||||
Shares sold | — | $ | — | 351 | $ | 5,000 | ||||||||
Net increase (decrease) | — | $ | — | 351 | $ | 5,000 | ||||||||
| aFor | the period February 29, 2008 (effective date) to December 31, 2008 for Class 4. |
3. TRANSACTIONS WITH AFFILIATES
Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Trust are also officers and/or directors of the following subsidiaries:
| Subsidiary | Affiliation | |
Templeton Investment Counsel, LLC (Investment Counsel) | Investment manager | |
Franklin Advisers, Inc. (Advisers) | Investment manager | |
Franklin Templeton Services, LLC (FT Services) | Administrative manager | |
Franklin Templeton Distributors, Inc. (Distributors) | Principal underwriter | |
Franklin Templeton Investor Services, LLC (Investor Services) | Transfer agent |
a. Management Fees
The Fund pays an investment management fee to Investment Counsel based on the average daily net assets of the Fund as follows:
| Annualized Fee Rate | Net Assets | |
| 0.650% | Up to and including $200 million | |
| 0.585% | Over $200 million, up to and including $1.3 billion | |
| 0.520% | In excess of $1.3 billion |
Under a subadvisory agreement, Advisers, an affiliate of Investment Counsel, provides subadvisory services to the Fund and receives from Investment Counsel fees based on the average daily net assets of the Fund.
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Global Asset Allocation Fund
3. TRANSACTIONS WITH AFFILIATES (continued)
b. Administrative Fees
The Fund pays an administrative fee to FT Services based on the Fund’s average daily net assets as follows:
| Annualized Fee Rate | Net Assets | |
| 0.150% | Up to and including $200 million | |
| 0.135% | Over $200 million, up to and including $700 million | |
| 0.100% | Over $700 million, up to and including $1.2 billion | |
| 0.075% | In excess of $1.2 billion |
c. Distribution Fees
The Fund’s Board of Trustees has adopted distribution plans for Class 2 and Class 4 shares pursuant to Rule 12b-1 under the 1940 Act. Under the Fund’s compensation distribution plans, the Fund pays Distributors for costs incurred in connection with the servicing, sale and distribution of the Fund’s shares up to 0.25% and 0.35% per year of its average daily net assets of Class 2, and Class 4, respectively.
d. Transfer Agent Fees
Investor Services, under terms of an agreement, performs shareholder servicing for the Fund and is not paid by the Fund for the services.
e. Waiver and Expense Reimbursements
FT Services and Investment Counsel have agreed in advance to waive all or a portion of their respective fees and to assume payment of other expenses through April 30, 2010. Total expenses waived or paid are not subject to reimbursement by the Fund subsequent to the Fund’s fiscal year end. After April 30, 2010, FT Services and Investment Counsel may discontinue this waiver at any time upon notice to the Fund’s Board of Trustees.
4. EXPENSE OFFSET ARRANGEMENT
The Fund has entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Fund’s custodian expenses. During the period ended June 30, 2009, there were no credits earned.
5. INCOME TAXES
For tax purposes, realized capital losses and realized currency losses occurring subsequent to October 31, may be deferred and treated as occurring on the first day of the following fiscal year. At December 31, 2008, the Fund deferred realized capital losses and realized currency losses of $659,910 and $254,710, respectively.
At June 30, 2009, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
Cost of investments | $ | 88,577,401 | ||
Unrealized appreciation | $ | 7,237,031 | ||
Unrealized depreciation | (13,620,501 | ) | ||
Net unrealized appreciation (depreciation) | $ | (6,383,470 | ) | |
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Global Asset Allocation Fund
5. INCOME TAXES (continued)
Net investment income differs for financial statement and tax purposes primarily due to differing treatments of foreign currency transactions, bond discounts and premiums, and inflation related adjustments on foreign securities.
Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatments of foreign currency transactions and bond discounts and premiums.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the period ended June 30, 2009, aggregated $7,974,517 and $11,707,777, respectively.
7. INVESTMENTS IN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO
The Fund may invest in the Institutional Fiduciary Trust Money Market Portfolio (Sweep Money Fund), an open-end investment company managed by Advisers. Management fees paid by the Fund are reduced on assets invested in the Sweep Money Fund, in an amount not to exceed the management and administrative fees paid by the Sweep Money Fund.
8. CONCENTRATION OF RISK
Investing in foreign securities may include certain risks and considerations not typically associated with investing in U.S. securities, such as fluctuating currency values and changing local and regional economic, political and social conditions, which may result in greater market volatility. In addition, certain foreign securities may not be as liquid as U.S. securities.
9. OTHER DERIVATIVE INFORMATION
At June 30, 2009, the Fund has invested in derivative contracts which are reflected on the Statement of Assets and Liabilities as follows:
| Asset Derivatives | Liability Derivatives | |||||||||
| Derivative Contracts Not Accounted for as Hedging Instruments Under FASB Statement No. 133 | Statement of Assets and Liabilities Location | Fair Value Amount | Statement of Assets and Liabilities Location | Fair Value Amount | ||||||
Foreign exchange contracts | Unrealized appreciation on forward exchange contracts | $ | 633,719 | Unrealized depreciation on forward exchange contracts | $ | 935,044 | ||||
For the period ended June 30, 2009, the effect of derivative contracts on the Fund’s Statement of Operations was as follows:
| Derivative Contracts Not Accounted for as Hedging Instruments Under FASB Statement No. 133 | Statement of Operations Locations | Realized Gain (Loss) for the Period Ended June 30, 2009 | Unrealized Appreciation (Depreciation) for the Period Ended June 30, 2009 | Average Amount Outstanding During the Perioda | |||||||
Foreign exchange contracts | Net realized gain (loss) from foreign currency transactions / Net change in unrealized appreciation (depreciation) on translation of other assets and liabilities denominated in foreign currencies | $ | 1,546,912 | $ | (2,181,948 | ) | 18,292,043 | ||||
aRepresents the average notional amount outstanding during the period. For derivative contracts denominated in foreign currencies, notional amounts are converted into US dollars.
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Global Asset Allocation Fund
See Note 1(c) regarding derivative financial instruments.
10. CREDIT FACILITY
Effective January 23, 2009, the Fund, together with other U.S. registered and foreign investment funds managed by Franklin Templeton Investments (individually, “Borrower”; collectively “Borrowers”), entered into a joint syndicated senior unsecured credit facility totaling $725 million (Global Credit Facility) to provide a source of funds to the Borrowers for temporary and emergency purposes, including the ability to meet future unanticipated or unusually large redemption requests.
Under the terms of the Global Credit Facility, the Fund shall, in addition to interest charged on any borrowings made by the Funds and other costs incurred by the Funds, pay its share of fees and expenses incurred in connection with the implementation and maintenance of the Global Credit Facility, based upon its relative share of the aggregate net assets of all of the Borrowers, including an annual commitment fee based upon the unused portion of the Global Credit Facility. During the period, the Funds incurred commitment fees of $95 of its pro rata portion of the Global Credit Facility, which is reflected in other expenses on the Statement of Operations. During the period ended June 30, 2009, the Funds did not utilize the Global Credit Facility.
11. FAIR VALUE MEASUREMENTS
Financial Accounting Standards Board (FASB) Statement No. 157, “Fair Value Measurement” (SFAS 157) establishes a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Fund’s own market assumptions (unobservable inputs). These inputs are used in determining the value of the Fund’s investments and are summarized in the following fair value hierarchy:
| • | Level 1 – quoted prices in active markets for identical securities |
| • | Level 2 – other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speed, credit risk, etc.) |
| • | Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments) |
The inputs or methodology used for valuing securities are not an indication of the risk associated with investing in those securities.
The following is a summary of the inputs used as of June 30, 2009, in valuing the Fund’s assets and liabilities carried at fair value:
| Level 1 | Level 2 | Level 3 | Total | |||||||||
Assets: | ||||||||||||
Investments in Securities | ||||||||||||
Equity Investmentsa: | ||||||||||||
Aerospace & Defense | $ | 1,147,207 | $ | — | $ | 11,739 | $ | 1,158,946 | ||||
All other Equity Investmentsb | 47,165,021 | — | — | 47,165,021 | ||||||||
Foreign Government and Agency Securities | 316,825 | 30,860,205 | — | 31,177,030 | ||||||||
Short Term Investments | 1,070,254 | 1,622,680 | — | 2,692,934 | ||||||||
Total Investments in Securities | $ | 49,699,307 | $ | 32,482,885 | $ | 11,739 | $ | 82,193,931 | ||||
Forward Exchange Contracts | — | 633,719 | — | 633,719 | ||||||||
Liabilities: | ||||||||||||
Forward Exchange Contracts | — | 935,044 | — | 935,044 | ||||||||
aIncludes common and preferred stock.
bFor detailed industry descriptions, see the accompanying Statement of Investments.
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Global Asset Allocation Fund
11. FAIR VALUE MEASUREMENTS (continued)
At June 30, 2009, the reconciliation of assets in which significant unobservable inputs (Level 3) were used in determining fair value, is as follows:
| Investments in Securities | |||
Beginning Balance - January 1, 2009 | $ | — | |
Net realized gain (loss) | — | ||
Net change in unrealized appreciation (depreciation) | — | ||
Net purchases (sales) | — | ||
Transfers in and/or out of Level 3 | 11,739 | ||
Ending Balance | $ | 11,739 | |
Net change in unrealized appreciation (depreciation) attributable to assets still held at end of period | $ | — | |
12. SUBSEQUENT EVENTS
Management has evaluated subsequent events through August 7, 2009 and determined disclosure of the following is necessary:
On July 9, 2009, the Board of Trustees for the Fund approved a proposal to liquidate the Fund. The Fund is scheduled to liquidate on or after April 23, 2010.
ABBREVIATIONS
Currency AUD - Australian Dollar BRL - Brazilian Real EGP - Egyptian Pound EUR - Euro IDR - Indonesian Rupiah KRW - South Korean Won MXN - Mexican Peso MYR - Malaysian Ringgit NZD - New Zealand Dollar PLN - Polish Zloty SEK - Swedish Krona | Selected Portfolio ADR - American Depository Receipt FRN - Floating Rate Note | Counterparty BZWS - Barclay Bank PLC CITI - Citibank N.A. DBAB - Deutsche Bank AG FBCO - Credit Suisse International HSBC - HSBC Bank USA JPHQ - JPMorgan Chase Bank, N.A. UBSW - UBS AG |
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Franklin Templeton Variable Insurance Products Trust
Tax Designation (unaudited)
Templeton Global Asset Allocation Fund
At December 31, 2008, more than 50% of the Fund’s total assets were invested in securities of foreign issuers. In most instances, foreign taxes were withheld from income paid to the Fund on these investments. As shown in the table below, the Fund designates to shareholders the foreign source income and foreign taxes paid, pursuant to Section 853 of the Internal Revenue Code. This designation will allow shareholders of record on June 12, 2009, to treat their proportionate share of foreign taxes paid by the Fund as having been paid directly by them. The shareholder shall consider these amounts as foreign taxes paid in the tax year in which they receive the Fund distribution.
The following table provides a detailed analysis of foreign tax paid, and foreign source income as designated by the Fund, to Class 1, Class 2, and Class 4 shareholders of record.
| Class | Foreign Tax Paid Per Share | Foreign Source Income Per Share | ||||
Class 1 | $ | 0.0282 | $ | 0.4620 | ||
Class 2 | $ | 0.0282 | $ | 0.4462 | ||
Class 4 | $ | 0.0282 | $ | 0.4564 | ||
Foreign Tax Paid Per Share (Column 1) is the amount per share available to you, as a tax credit (assuming you held your shares in the Fund for a minimum of 16 days during the 31-day period beginning 15 days before the ex-dividend date of the Fund’s distribution to which the foreign taxes relate), or, as a tax deduction.
Foreign Source Income Per Share (Column 2) is the amount per share of income dividends paid to you that is attributable to foreign securities held by the Fund, plus any foreign taxes withheld on these dividends.
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TEMPLETON GLOBAL BOND SECURITIES FUND
(TEMPLETON GLOBAL INCOME SECURITIES FUNDBEFORE MAY 1, 2009)
We are pleased to bring you Templeton Global Bond Securities Fund’s semiannual report for the period ended June 30, 2009.
Performance Summary as of 6/30/09
Templeton Global Bond Securities Fund – Class 1 delivered a +7.57% total return for the six-month period ended 6/30/09.
Performance reflects the Fund’s Class 1 operating expenses, but does not include any contract fees, expenses or sales charges. If they had been included, performance would be lower. These charges and deductions, particularly for variable life policies, can have a significant effect on contract values and insurance benefits. See the contract prospectus for a complete description of these expenses, including sales charges.
Templeton Global Bond Securities Fund – Class 1
Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares.
Current performance may differ from figures shown.
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Fund Goal and Main Investments: Templeton Global Bond Securities Fund seeks high current income, consistent with preservation of capital, with capital appreciation as a secondary consideration. The Fund normally invests at least 80% of its net assets in bonds, which include debt securities of any maturity. The Fund normally invests at least 40% of its net assets in foreign securities, may invest a portion of its total assets in bonds rated below investment grade and a significant portion of its assets in emerging markets.
Performance Overview
You can find the Fund’s six-month total return in the Performance Summary. The Fund outperformed its benchmarks, the J.P. Morgan (JPM) Government Bond Index (GBI) Global, which had a -1.94% total return in U.S. dollar terms for the six months under review, and the Citigroup World Government Bond Index (WGBI), which had a -1.50% total return for the same period.1
Economic and Market Overview
The six-month reporting period had two distinct halves. In first quarter 2009, the financial crisis intensified with economic activity and security prices falling sharply. Frozen credit markets and depressed consumer sentiment levels caused a steep drop in economic activity despite policymakers’ best efforts. In addition to continued global interest rate easing, the U.S. and the U.K. implemented quantitative and credit easing policies, and governments worldwide boosted fiscal stimulus to counter the deepening global recession. Partially as a result of these significant policy measures, investor confidence began to improve in March, which translated into greater risk appetite in currency and nondeveloped bond markets in the second quarter. The turnaround led to an improved outlook that benefited the global economy through a shift in the inventory adjustment cycle and better equity market performance. Many investors appeared to believe the worst of the financial crisis was over. Furthermore, credit markets began to function again as interbank lending and trade financing eased. Although financial markets improved, economic activity remained weak as deleveraging continued, unemployment rose and global trade contracted, albeit at a reduced pace.
Inflation fell during the period as weak global growth led to lower prices for commodities from the previous year, and slackening labor
Fund Risks: Because the Fund invests in bonds and other debt obligations, its share price and yield will be affected by interest rate movements. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in the Fund adjust to a rise in interest rates, the Fund’s share price may decline. High yield, lower rated (junk) bonds generally have greater price swings and higher default risks than investment-grade bonds. Foreign investing, especially in emerging markets, involves additional risks, including currency fluctuations, economic instability, market volatility, and political and social instability. The Fund’s prospectus also includes a description of the main investment risks.
1. Source: © 2009 Morningstar. One cannot invest directly in an index, nor is an index representative of the Fund’s portfolio. Please see Index Descriptions following the Fund Summaries.
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and capital markets pushed core prices down gradually. Monetary
easing in the eurozone continued, although at a slower pace than many economists would have preferred, given the recession’s depth and lesser fiscal policy action compared with the U.S. In the first quarter of 2009 compared with the first quarter of 2008 (year-over-year), the eurozone’s gross domestic product (GDP) contracted 4.8%, which was greater than the U.S. economy’s 3.9% contraction.2 However, the European Central Bank maintained its primary focus on inflation. Outside the eurozone, economic slowdown was more severe in many emerging European countries. Central and eastern Europe was one of the regions most damaged by the financial crisis as it exposed those countries’ external imbalances characterized by large foreign borrowing to finance substantial current account deficits. Several countries including Ukraine, Hungary and Latvia sought help from the International Monetary Fund (IMF). Even Poland, which was in a comparatively strong position relative to its regional peers, took advantage of the IMF’s new, prequalified loan facility, though it did not draw on these resources.
In Asia, growth differed between large economies with higher domestic demand and small economies more dependent on exports. The large economies, particularly China, were some of the world’s most resilient to the global recession as aggressive fiscal and monetary responses outweighed declining exports. In contrast, the smaller economies suffered quick, severe downturns as production dropped more than export demand to allow inventories to fall to levels more in line with the reduced global consumption pace. However, some smaller regional economies showed signs of improvement toward period-end. On the other hand, the Japanese economy was the weakest among the G3 (U.S., eurozone and Japan). GDP contracted 8.8% year-over-year in first quarter 2009 due to subdued consumption, weak external demand and lackluster government spending.3 Japan’s trade balance worsened as the global recession negatively impacted the country’s main export sector, machinery.
Investment Strategy
We allocate the Fund’s assets among issuers, geographic regions, and currencies based upon our assessment of relative interest rates among currencies, our outlook for changes in interest rates and currencies, and credit risks. In considering these factors, we may evaluate a country’s changing market, economic and political conditions, such as inflation
What is a current account?
A current account is that part of the balance of payments where all of one country’s international transactions in goods and services are recorded.
What is balance of payments?
Balance of payments is a record of all of a country’s exports and imports of goods and services, borrowing and lending with the rest of the world during a particular time period. It helps a country evaluate its competitive strengths and weaknesses and forecast the strength of its currency.
2. Source: Eurostat.
3. Source: Economic and Social Research Institute.
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rate, growth prospects, global trade patterns and government policies. We seek to manage the Fund’s exposure to various currencies and may utilize forward currency exchange contracts.
Manager’s Discussion
The Fund’s total return was influenced by various factors, including interest rate developments, currency movements and exposure to sovereign debt markets.
Interest Rate Strategy
Toward the end of the six months under review, the Fund reduced duration exposure in select countries, seeking to take profits as interest rates neared historical lows. Prospects for increased government debt issuance and potentially higher inflation over the medium term began to be reflected in government bond yields despite still weak economic activity levels. Thus, the Fund sought to protect itself from the potential for increased interest rates. During the period, the Fund’s duration positioning slightly benefited relative performance. Government bond yields in nondeveloped economies lagged the decline in G3 Treasury yields seen in the early stages of the financial crisis. However, as economic weakness spread and monetary policy loosened in response, government bond yields in these economies fell despite the rise in U.S. Treasury yields. Generally, bond yield and price move in opposite directions. Our duration exposures in Brazil, Chile and Indonesia benefited the Fund during the period. In contrast, our New Zealand and Mexican interest rate exposures detracted from results. The Fund’s underweighted exposures to U.S. and Japanese Treasuries contributed to relative performance but our underweighted eurozone government bond allocation hurt the Fund.
Currency Strategy
Although several major currencies ended the period close to where they began it, currency movement during the period reflected the striking difference in sentiment between the first and second quarters of 2009. During the first quarter, the U.S. dollar benefited from increased risk aversion and deleveraging as loans taken in U.S. dollars and invested in other currencies or securities that lost value had to be repaid. The second quarter, however, saw a weaker dollar fueled by concerns about the implications of the U.S.’s aggressive policy response to the recession, leading to strong returns for most currencies for the period overall. Currency exposure contributed to the Fund’s better performance relative to its benchmarks during the period.
Currency Breakdown
Templeton Global Bond Securities Fund 6/30/09
| % of Total Net Assets | ||
Americas | 53.7% | |
U.S. Dollar | 34.7% | |
Mexican Peso | 7.3% | |
Chilean Peso | 6.5% | |
Brazilian Real | 3.3% | |
Peruvian Nuevo Sol | 1.9% | |
Asia Pacific | 34.1% | |
Malaysian Ringgit | 12.9% | |
South Korean Won | 11.7% | |
Indonesian Rupiah | 9.8% | |
Chinese Yuan | 9.2% | |
Indian Rupee | 4.6% | |
Japanese Yen | 3.3% | |
Vietnamese Dong | 1.7% | |
Australian Dollar | 1.0% | |
Kazakhstani Tenge | 0.2% | |
Singapore Dollar* | -9.8% | |
New Zealand Dollar* | -10.5% | |
Europe | 9.6% | |
Swedish Krona | 7.6% | |
Russian Ruble | 5.3% | |
Polish Zloty | 5.3% | |
Norwegian Krone | 2.3% | |
Swiss Franc | 0.2% | |
Euro* | -11.1% | |
Middle East & Africa | 2.6% | |
Egyptian Pound | 2.6% | |
*Singapore dollar = -9.8%, New Zealand dollar = -10.5%, and euro = -11.1% due to forward exchange contracts.
The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund’s Statement of Investments.
What is duration?
Duration is a measure of a bond’s price sensitivity to interest rate changes. In general, a portfolio of securities with a lower duration can be expected to be less sensitive to interest rate changes than a portfolio with a higher duration.
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Strong relative growth and solid external balances led us to favor Asian currencies versus those of developed markets. The Indonesian rupiah and South Korean won benefited Fund performance, but our underweighted New Zealand dollar exposure detracted. Toward period-end, the Fund added net negative exposures to the New Zealand dollar and Singapore dollar partly to hedge against a rebound in global risk aversion as we believed these currencies looked overvalued. Still, the Fund’s Asian currency exposure contributed on the whole, though not as much as Latin American currencies. Within that region, the Mexican peso, Chilean peso and Brazilian real contributed to relative Fund performance. Lastly, our relative currency positioning in Europe drove less of the Fund’s performance, but still contributed to returns. The Fund’s underweighted euro exposure benefited performance as did our Russian ruble and Egyptian pound allocations. Conversely, our overweighted Swiss franc exposure and no exposure to the British pound hampered Fund performance.
Global Sovereign Debt Strategy
The Fund purchased investment-grade and subinvestment-grade sovereign debt that typically compensates for greater credit risk by offering higher yields relative to U.S. and European benchmark Treasury securities. Improved risk appetite benefited high yield products during the period, particularly sovereign bonds, following the G20 summit in April 2009.4 It was decided at the summit that the IMF would receive additional resources, and the IMF eased conditions to help countries in need of balance of payments support or access to liquidity. Largely as a result, U.S. dollar-denominated emerging market debt posted a +14.56% total return during the period as measured by the JPM Emerging Markets Bond Index Global (EMBIG).1 Thus, the Fund benefited from its increased sovereign bond exposure during the period. Sovereign interest rate credit spreads fell 40.23% during the reporting period, though some countries adversely impacted by the financial crisis experienced credit rating downgrades.1 Regionally, Latin American sovereign debt had a +11.65% total return, Asian debt +14.98% and central and eastern European debt +18.57%.1 Our analysis indicated that sovereign spreads were at distressed levels during the early stages of the financial crisis, reflecting a higher probability of default than we thought was appropriate. In our opinion, most emerging market
4. The G20 is an informal forum that promotes open and constructive discussion between industrial and emerging market countries on key issues related to global economic stability. It is made up of the finance ministers and central bank governors of 19 countries and the European Union.
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sovereign bonds were in much better positions than in previous crises and unlikely to suffer to the same extent as they have in the past. Disregarding these fundamentals, forced and panicked selling hit sovereign bonds and so we sought to capitalize on this market inefficiency. Given what we viewed as attractive valuations, we added exposure and still believed that many of these valuations were out of line with fundamentals.
Thank you for your participation in Templeton Global Bond Securities Fund. We look forward to serving your future investment needs.
The foregoing information reflects our analysis, opinions and portfolio holdings as of June 30, 2009, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.
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Fund Expenses
As an investor in a variable insurance contract (Contract) that indirectly provides for investment in an underlying mutual fund, you can incur transaction and/or ongoing expenses at both the Fund level and the Contract level.
| • | Transaction expenses can include sales charges (loads) on purchases, surrender fees, transfer fees and premium taxes. |
| • | Ongoing expenses can include management fees, distribution and service (12b-1) fees, contract fees, annual maintenance fees, mortality and expense risk fees and other fees and expenses. All mutual funds and Contracts have some types of ongoing expenses. |
The expenses shown in the table are meant to highlight ongoing expenses at the Fund level only and do not include ongoing expenses at the Contract level, or transaction expenses at either the Fund or Contract levels. While the Fund does not have transaction expenses, if the transaction and ongoing expenses at the Contract level were included, the expenses shown below would be higher. You should consult your Contract prospectus or disclosure document for more information.
The table shows Fund-level ongoing expenses and can help you understand these expenses and compare them with those of other mutual funds offered through the Contract. The table assumes a $1,000 investment held for the six months indicated. Please refer to the Fund prospectus for additional information on operating expenses.
Actual Fund Expenses
The first line (Actual) of the table provides actual account values and expenses. The “Ending Account Value” is derived from the Fund’s actual return, which includes the effect of ongoing Fund expenses, but does not include the effect of ongoing Contract expenses.
You can estimate the Fund-level expenses you incurred during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:
| 1. | Divide your account value by $1,000. |
If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6.
| 2. | Multiply the result by the number under the heading “Fund-Level Expenses Incurred During Period.” |
If Fund-Level Expenses Incurred During Period were $7.50, then 8.6 x $7.50 = $64.50.
In this illustration, the estimated expenses incurred this period at the Fund level are $64.50.
Templeton Global Bond Securities Fund – Class 1
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Hypothetical Example for Comparison with Other Mutual Funds
Information in the second line (Hypothetical) of the table can help you compare ongoing expenses of the Fund with those of other mutual funds offered through the Contract. This information may not be used to estimate the actual ending account balance or expenses you incurred during the period. The hypothetical “Ending Account Value” is based on the Fund’s actual expense ratio and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Fund-Level Expenses Incurred During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds offered through a Contract.
| Class 1 | Beginning Account Value 1/1/09 | Ending Account Value 6/30/09 | Fund-Level Expenses Incurred During Period* 1/1/09–6/30/09 | ||||||
Actual | $ | 1,000 | $ | 1,075.70 | $ | 2.88 | |||
Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,022.02 | $ | 2.81 | |||
*Expenses are calculated using the most recent six-month annualized expense ratio for the Fund’s Class 1 shares (0.56%), which does not include any ongoing expenses of the Contract for which the Fund is an investment option, multiplied by the average account value over the period, multiplied by 181/365 to reflect the one-half year period.
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SUPPLEMENT DATED JULY 27, 2009
TOTHE PROSPECTUS
DATED MAY 1, 2009
AS PREVIOUSLY AMENDED
TEMPLETON GLOBAL BOND SECURITIES FUND
(A series of Franklin Templeton Variable Insurance Products Trust)
The Prospectus is amended by replacing in its entirety the subsection entitled “Derivative securities” under “Main Risks,” on page TGB-4, with the following:
Derivative Securities
The performance of derivative instruments depends largely on the performance of an underlying instrument or index. Derivative instruments involve costs, may be volatile, and may involve a small initial investment relative to the risk assumed. Their successful use will usually depend on the manager’s ability to accurately forecast movements in the market relating to the underlying instrument. Should a market or markets, or prices of particular classes of investments move in an unexpected manner, especially in unusual or extreme market conditions, the Fund may not achieve the anticipated benefits of the transaction, and it may realize losses, which could be significant. If the manager is not successful in using such derivative instruments, the Fund’s performance may be worse than if the manager did not use such derivative instruments at all. To the extent that the Fund uses such instruments for hedging purposes, there is the risk of imperfect correlation between movements in the value of the derivative instrument and the value of the underlying investment or other asset being hedged. There is also the risk, especially under extreme market conditions, that an instrument, which usually would operate as a hedge, provides no hedging benefits at all.
Use of these instruments could also result in a loss if the counterparty to the transaction (with respect to swap agreements and forward currency contracts) does not perform as promised, including because of such counterparty’s bankruptcy or insolvency. This risk may be heightened during volatile market conditions. Other risks include the inability to close out a position because the trading market becomes illiquid (particularly in the over-the-counter markets) or the availability of counterparties becomes limited for a period of time. In addition, the presence of speculators in a particular market could lead to price distortions. To the extent that the Fund is unable to close out a position because of market illiquidity, the Fund may not be able to prevent further losses of value in its derivatives holdings and the Fund’s liquidity may be impaired to the extent that it has a substantial portion of its otherwise liquid assets marked as segregated to cover its obligations under such derivative instruments. The Fund may also be required to take or make delivery of an underlying instrument that the manager would otherwise have attempted to avoid. Some derivatives can be particularly sensitive to changes in interest
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rates or other market prices. Investors should bear in mind that, while the Fund intends to use derivative strategies on a regular basis, it is not obligated to actively engage in these transactions, generally or in any particular kind of derivative, if the manager elects not to do so due to availability, cost or other factors.
Please keep this supplement for future reference.
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Franklin Templeton Variable Insurance Products Trust
Financial Highlights
Templeton Global Bond Securities Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 1 | 2008 | 2007 | 2006 | 2005 | 2004 | |||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 17.42 | $ | 17.00 | $ | 15.73 | $ | 14.36 | $ | 15.80 | $ | 15.54 | ||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.50 | 0.80 | 0.77 | 0.61 | 0.57 | 0.66 | ||||||||||||||||||
Net realized and unrealized gains (losses) | 0.80 | 0.27 | 0.97 | 1.24 | (1.03 | ) | 1.37 | |||||||||||||||||
Total from investment operations | 1.30 | 1.07 | 1.74 | 1.85 | (0.46 | ) | 2.03 | |||||||||||||||||
Less distributions from net investment income and net foreign currency gains | (2.70 | ) | (0.65 | ) | (0.47 | ) | (0.48 | ) | (0.98 | ) | (1.77 | ) | ||||||||||||
Redemption fees | — | c | — | c | — | c | — | c | — | c | — | |||||||||||||
Net asset value, end of period | $ | 16.02 | $ | 17.42 | $ | 17.00 | $ | 15.73 | $ | 14.36 | $ | 15.80 | ||||||||||||
Total returnd | 7.57% | 6.46% | 11.27% | 13.14% | (2.91)% | 15.09% | ||||||||||||||||||
Ratios to average net assetse | ||||||||||||||||||||||||
Expenses before expense reduction | 0.56% | 0.58% | 0.64% | 0.80% | 0.78% | 0.79% | ||||||||||||||||||
Expenses net of expense reduction | 0.56% | 0.58% | 0.64% | 0.72% | 0.74% | 0.78% | ||||||||||||||||||
Net investment income | 5.79% | 4.66% | 4.70% | 4.09% | 3.81% | 4.40% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 167,915 | $ | 220,588 | $ | 137,700 | $ | 75,843 | $ | 53,115 | $ | 49,845 | ||||||||||||
Portfolio turnover rate | 14.46% | 28.46% | 47.33% | 30.65% | 30.28% | 37.39% | ||||||||||||||||||
aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.
bBased on average daily shares outstanding.
cAmount rounds to less than $0.01 per share.
dTotal return does not include any fees, charges or expenses imposed by the variable annuity and life insurance contracts for which the Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle. Total return is not annualized for periods less than one year.
eRatios are annualized for periods less than one year.
The accompanying notes are an integral part of these financial statements.
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Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Templeton Global Bond Securities Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 2 | 2008 | 2007 | 2006 | 2005 | 2004 | |||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 17.10 | $ | 16.72 | $ | 15.50 | $ | 14.19 | $ | 15.64 | $ | 15.42 | ||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.47 | 0.74 | 0.72 | 0.57 | 0.52 | 0.60 | ||||||||||||||||||
Net realized and unrealized gains (losses) | 0.79 | 0.27 | 0.96 | 1.21 | (1.00 | ) | 1.36 | |||||||||||||||||
Total from investment operations | 1.26 | 1.01 | 1.68 | 1.78 | (0.48 | ) | 1.96 | |||||||||||||||||
Less distributions from net investment income and net foreign currency gains | (2.67 | ) | (0.63 | ) | (0.46 | ) | (0.47 | ) | (0.97 | ) | (1.74 | ) | ||||||||||||
Redemption fees | — | c | — | c | — | c | — | c | — | c | — | |||||||||||||
Net asset value, end of period | $ | 15.69 | $ | 17.10 | $ | 16.72 | $ | 15.50 | $ | 14.19 | $ | 15.64 | ||||||||||||
Total returnd | 7.45% | 6.21% | 11.00% | 12.77% | (3.08)% | 14.74% | ||||||||||||||||||
Ratios to average net assetse | ||||||||||||||||||||||||
Expenses before expense reduction | 0.81% | 0.83% | 0.89% | 1.05% | 1.03% | 1.04% | ||||||||||||||||||
Expenses net of expense reduction | 0.81% | 0.83% | 0.89% | 0.97% | 0.99% | 1.03% | ||||||||||||||||||
Net investment income | 5.54% | 4.41% | 4.45% | 3.84% | 3.56% | 4.15% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 979,277 | $ | 793,881 | $ | 480,649 | $ | 205,768 | $ | 61,255 | $ | 19,779 | ||||||||||||
Portfolio turnover rate | 14.46% | 28.46% | 47.33% | 30.65% | 30.28% | 37.39% | ||||||||||||||||||
aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.
bBased on average daily shares outstanding.
cAmount rounds to less than $0.01 per share.
dTotal return does not include any fees, charges or expenses imposed by the variable annuity and life insurance contracts for which the Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle. Total return is not annualized for periods less than one year.
eRatios are annualized for periods less than one year.
The accompanying notes are an integral part of these financial statements.
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Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Templeton Global Bond Securities Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||||||||||
| Class 3 | 2008 | 2007 | 2006 | 2005a | ||||||||||||||||
Per share operating performance | ||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||
Net asset value, beginning of period | $ | 17.08 | $ | 16.70 | $ | 15.49 | $ | 14.18 | $ | 15.27 | ||||||||||
Income from investment operationsb: | ||||||||||||||||||||
Net investment incomec | 0.47 | 0.74 | 0.72 | 0.58 | 0.38 | |||||||||||||||
Net realized and unrealized gains (losses) | 0.79 | 0.27 | 0.95 | 1.21 | (0.50 | ) | ||||||||||||||
Total from investment operations | 1.26 | 1.01 | 1.67 | 1.79 | (0.12 | ) | ||||||||||||||
Less distributions from net investment income and net foreign currency gains | (2.66 | ) | (0.63 | ) | (0.46 | ) | (0.48 | ) | (0.97 | ) | ||||||||||
Redemption feesd | — | — | — | — | — | |||||||||||||||
Net asset value, end of period | $ | 15.68 | $ | 17.08 | $ | 16.70 | $ | 15.49 | $ | 14.18 | ||||||||||
Total returne | 7.39% | 6.21% | 11.03% | 12.84% | (0.80)% | |||||||||||||||
Ratios to average net assetsf | ||||||||||||||||||||
Expenses before expense reduction | 0.81% | 0.83% | 0.89% | 1.05% | 1.03% | |||||||||||||||
Expenses net of expense reduction | 0.81% | 0.83% | 0.89% | 0.97% | 0.99% | |||||||||||||||
Net investment income | 5.54% | 4.41% | 4.45% | 3.84% | 3.56% | |||||||||||||||
Supplemental data | ||||||||||||||||||||
Net assets, end of period (000’s) | $ | 127,608 | $ | 128,155 | $ | 91,162 | $ | 35,572 | $ | 5,769 | ||||||||||
Portfolio turnover rate | 14.46% | 28.46% | 47.33% | 30.65% | 30.28% | |||||||||||||||
aFor the period April 1, 2005 (effective date) to December 31, 2005.
bThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.
cBased on average daily shares outstanding.
dAmount rounds to less than $0.01 per share.
eTotal return does not include any fees, charges or expenses imposed by the variable annuity and life insurance contracts for which the Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle. Total return is not annualized for periods less than one year.
fRatios are annualized for periods less than one year.
The accompanying notes are an integral part of these financial statements.
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Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Templeton Global Bond Securities Fund
Six Months (unaudited) | Period Ended 2008a | |||||||
| Class 4 | ||||||||
Per share operating performance | ||||||||
(for a share outstanding throughout the period) | ||||||||
Net asset value, beginning of period | $ | 17.37 | $ | 18.00 | ||||
Income from investment operationsb: | ||||||||
Net investment incomec | 0.48 | 0.66 | ||||||
Net realized and unrealized gains (losses) | 0.79 | (0.64 | ) | |||||
Total from investment operations | 1.27 | 0.02 | ||||||
Less distributions from net investment income and net foreign currency gains | (2.69 | ) | (0.65 | ) | ||||
Redemption feesd | — | — | ||||||
Net asset value, end of period | $ | 15.95 | $ | 17.37 | ||||
Total returne | 7.41% | 0.26% | ||||||
Ratios to average net assetsf | ||||||||
Expensesg | 0.91% | 0.93% | ||||||
Net investment income | 5.44% | 4.31% | ||||||
Supplemental data | ||||||||
Net assets, end of period (000’s) | $ | 72,800 | $ | 43,068 | ||||
Portfolio turnover rate | 14.46% | 28.46% | ||||||
aFor the period February 29, 2008 (effective date) to December 31, 2008.
bThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.
cBased on average daily shares outstanding.
dAmount rounds to less than $0.01 per share.
eTotal return does not include any fees, charges or expenses imposed by the variable annuity and life insurance contracts for which the Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle. Total return is not annualized for periods less than one year.
fRatios are annualized for periods less than one year.
gBenefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
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Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited)
| Templeton Global Bond Securities Fund | Principal Amounta | Value | ||||
Foreign Government and Agency Securities 82.1% | ||||||
Argentina 1.9% | ||||||
b,cGovernment of Argentina, senior bond, FRN, 1.683%, 8/03/12 | 107,485,000 | $ | 25,527,687 | |||
Australia 5.7% | ||||||
New South Wales Treasury Corp., | ||||||
6.00%, 5/01/12 | 13,180,000 | AUD | 10,880,435 | |||
senior note, 5.50%, 3/01/17 | 32,225,000 | AUD | 24,948,839 | |||
Queensland Treasury Corp., | ||||||
09G, 6.00%, 7/14/09 | 3,195,000 | AUD | 2,574,899 | |||
13, 6.00%, 8/14/13 | 6,580,000 | AUD | 5,375,898 | |||
17, 6.00%, 9/14/17 | 13,160,000 | AUD | 10,474,132 | |||
d144A, 7.125%, 9/18/17 | 33,340,000 | NZD | 22,343,807 | |||
| 76,598,010 | ||||||
Austria 0.1% | ||||||
dGovernment of Austria, senior bond, 144A, 5.00%, 7/15/12 | 400,000 | EUR | 605,111 | |||
Brazil 3.7% | ||||||
Nota Do Tesouro Nacional, | ||||||
10.082%, 1/01/12 | 26,845 | e BRL | 13,386,959 | |||
10.082%, 1/01/14 | 7,100 | e BRL | 3,361,649 | |||
10.082%, 1/01/17 | 22,490 | e BRL | 10,035,095 | |||
fIndex Linked, 6.00%, 5/15/15 | 15,250 | e BRL | 13,811,819 | |||
fIndex Linked, 6.00%, 5/15/45 | 10,825 | e BRL | 9,410,896 | |||
| 50,006,418 | ||||||
Canada 2.8% | ||||||
Province of Manitoba, 6.375%, 9/01/15 | 39,310,000 | NZD | 24,429,579 | |||
Province of Ontario, 6.25%, 6/16/15 | 20,165,000 | NZD | 12,747,453 | |||
| 37,177,032 | ||||||
France 3.2% | ||||||
Government of France, | ||||||
4.00%, 10/25/09 | 195,000 | EUR | 276,137 | |||
4.25%, 10/25/17 | 27,650,000 | EUR | 40,791,105 | |||
4.25%, 4/25/19 | 1,520,000 | EUR | 2,220,910 | |||
| 43,288,152 | ||||||
Germany 1.2% | ||||||
KfW Bankengruppe, senior note, 6.375%, 2/17/15 | 8,730,000 | NZD | 5,705,572 | |||
Landwirtschaftliche Rentenbank, senior note, 8.50%, 2/22/16 | 137,707,000 | MXN | 10,004,223 | |||
| 15,709,795 | ||||||
Hungary 2.1% | ||||||
Government of Hungary, | ||||||
3.50%, 7/18/16 | 1,055,000 | EUR | 1,204,141 | |||
4.375%, 7/04/17 | 5,380,000 | EUR | 6,417,788 | |||
5.75%, 6/11/18 | 13,795,000 | EUR | 17,752,780 | |||
senior note, 3.875%, 2/24/20 | 3,120,000 | EUR | 3,367,793 | |||
| 28,742,502 | ||||||
Indonesia 9.6% | ||||||
Government of Indonesia, | ||||||
FR20, 14.275%, 12/15/13 | 14,267,000,000 | IDR | 1,622,727 | |||
FR31, 11.00%, 11/15/20 | 167,351,000,000 | IDR | 16,067,001 | |||
FR34, 12.80%, 6/15/21 | 207,810,000,000 | IDR | 22,241,717 | |||
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Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Templeton Global Bond Securities Fund | Principal Amounta | Value | ||||
Foreign Government and Agency Securities (continued) | ||||||
Indonesia (continued) | ||||||
FR35, 12.90%, 6/15/22 | 66,582,000,000 | IDR | $ | 7,109,906 | ||
FR36, 11.50%, 9/15/19 | 30,075,000,000 | IDR | 3,040,646 | |||
FR37, 12.00%, 9/15/26 | 8,230,000,000 | IDR | 798,207 | |||
FR39, 11.75%, 8/15/23 | 5,491,000,000 | IDR | 535,248 | |||
FR40, 11.00%, 9/15/25 | 61,856,000,000 | IDR | 5,605,366 | |||
FR42, 10.25%, 7/15/27 | 88,574,000,000 | IDR | 7,462,519 | |||
FR43, 10.25%, 7/15/22 | 68,340,000,000 | IDR | 6,059,045 | |||
FR44, 10.00%, 9/15/24 | 4,454,000,000 | IDR | 378,530 | |||
FR46, 9.50%, 7/15/23 | 226,780,000,000 | IDR | 18,840,021 | |||
FR47, 10.00%, 2/15/28 | 61,737,000,000 | IDR | 5,080,486 | |||
FR48, 9.00%, 9/15/18 | 16,920,000,000 | IDR | 1,487,699 | |||
FR49, 9.00%, 9/15/13 | 35,030,000,000 | IDR | 3,363,153 | |||
dsenior bond, 144A, 8.50%, 10/12/35 | 9,119,000 | 9,301,380 | ||||
dsenior bond, 144A, 6.625%, 2/17/37 | 2,240,000 | 1,859,200 | ||||
dsenior bond, 144A, 7.75%, 1/17/38 | 10,980,000 | 10,101,600 | ||||
dsenior note, 144A, 11.625%, 3/04/19 | 6,410,000 | 8,160,731 | ||||
| 129,115,182 | ||||||
Iraq 0.4% | ||||||
Government of Iraq, | ||||||
d144A, 5.80%, 1/15/28 | 5,055,000 | 3,317,344 | ||||
gReg S, 5.80%, 1/15/28 | 3,440,000 | 2,257,500 | ||||
| 5,574,844 | ||||||
Malaysia 4.0% | ||||||
Government of Malaysia, | 1,690,000 | MYR | 487,716 | |||
3.756%, 4/28/11 | 106,560,000 | MYR | 31,035,486 | |||
3.833%, 9/28/11 | 3,660,000 | MYR | 1,069,121 | |||
3.461%, 7/31/13 | 12,600,000 | MYR | 3,594,330 | |||
3.814%, 2/15/17 | 18,885,000 | MYR | 5,271,360 | |||
4.24%, 2/07/18 | 44,360,000 | MYR | 12,648,771 | |||
| 54,106,784 | ||||||
Mexico 10.3% | ||||||
Government of Mexico, | 265,000 | h MXN | 2,161,265 | |||
8.00%, 12/19/13 | 794,500 | h MXN | 6,220,572 | |||
8.00%, 12/17/15 | 726,000 | h MXN | 5,585,336 | |||
7.25%, 12/15/16 | 250,000 | h MXN | 1,825,042 | |||
10.00%, 12/05/24 | 8,569,800 | h MXN | 73,734,167 | |||
10.00%, 11/20/36 | 1,755,000 | h MXN | 14,874,360 | |||
d144A, 7.50%, 3/08/10 | 450,000 | EUR | 658,026 | |||
M 10, 7.75%, 12/14/17 | 4,473,000 | h MXN | 33,223,654 | |||
| 138,282,422 | ||||||
Netherlands 1.4% | ||||||
Government of the Netherlands, 4.50%, 7/15/17 | 12,280,000 | EUR | 18,345,810 | |||
New Zealand 0.1% | ||||||
Government of New Zealand, 7.00%, 7/15/09 | 2,435,000 | NZD | 1,573,636 | |||
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Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Templeton Global Bond Securities Fund | Principal Amounta | Value | ||||
Foreign Government and Agency Securities (continued) | ||||||
Norway 1.0% | ||||||
Government of Norway, | 29,300,000 | NOK | $ | 4,896,770 | ||
6.50%, 5/15/13 | 49,400,000 | NOK | 8,653,389 | |||
| 13,550,159 | ||||||
Peru 0.3% | ||||||
Government of Peru, | 4,945,000 | PEN | 1,883,287 | |||
Series 7, 8.60%, 8/12/17 | 6,185,000 | PEN | 2,461,718 | |||
| 4,345,005 | ||||||
Philippines 0.0%i | ||||||
gGovernment of the Philippines, Reg S, 9.125%, 2/22/10 | 330,000 | EUR | 477,207 | |||
Poland 4.4% | ||||||
Government of Poland, | 4,100,000 | PLN | 1,269,420 | |||
5.75%, 4/25/14 | 92,590,000 | PLN | 29,134,734 | |||
6.25%, 10/24/15 | 44,730,000 | PLN | 14,339,259 | |||
5.75%, 9/23/22 | 48,750,000 | PLN | 14,604,748 | |||
| 59,348,161 | ||||||
Qatar 0.9% | ||||||
dGovernment of Qatar, senior note, 144A, 6.55%, 4/09/19 | 12,060,000 | 12,406,725 | ||||
Russia 5.0% | ||||||
Government of Russia, | ||||||
d144A, 7.50%, 3/31/30 | 39,352,320 | 38,978,473 | ||||
gsenior bond, Reg S, 7.50%, 3/31/30 | 28,651,200 | 28,379,014 | ||||
| 67,357,487 | ||||||
South Africa 2.5% | ||||||
Government of South Africa, | 3,590,000 | EUR | 5,103,311 | |||
4.50%, 4/05/16 | 1,874,000 | EUR | 2,361,683 | |||
6.875%, 5/27/19 | 21,215,000 | 21,929,946 | ||||
senior note, 6.50%, 6/02/14 | 805,000 | 841,571 | ||||
senior note, 5.875%, 5/30/22 | 3,485,000 | 3,245,406 | ||||
| 33,481,917 | ||||||
South Korea 12.7% | ||||||
The Export-Import Bank of Korea, | ||||||
5.125%, 3/16/15 | 350,000 | 334,680 | ||||
4.625%, 2/20/17 | 230,000 | EUR | 292,566 | |||
gReg S, 5.25%, 2/10/14 | 345,000 | 329,924 | ||||
senior note, 8.125%, 1/21/14 | 1,170,000 | 1,282,329 | ||||
Government of Korea, senior bond, 5.625%, 11/03/25 | 730,000 | 641,482 | ||||
Korea Deposit Insurance Corp., | ||||||
07-1, 5.57%, 9/14/12 | 6,600,000,000 | KRW | 5,319,135 | |||
08-1, 5.28%, 2/15/13 | 880,000,000 | KRW | 702,351 | |||
Korea Development Bank, senior note, 8.00%, 1/23/14 | 3,875,000 | 4,207,289 | ||||
Korea Treasury Bond, | ||||||
0400-1206, 4.00%, 6/10/12 | 2,501,550,000 | KRW | 1,957,377 | |||
0475-1112, 4.75%, 12/10/11 | 77,103,490,000 | KRW | 61,427,232 | |||
TGB-17
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Templeton Global Bond Securities Fund | Principal Amounta | Value | ||||
Foreign Government and Agency Securities (continued) | ||||||
South Korea (continued) | ||||||
0500-1609, 5.00%, 9/10/16 | 2,806,000,000 | KRW | $ | 2,195,546 | ||
0525-1209, 5.25%, 9/10/12 | 28,539,000,000 | KRW | 22,985,622 | |||
0525-2703, 5.25%, 3/10/27 | 4,352,640,000 | KRW | 3,340,679 | |||
0550-1106, 5.50%, 6/10/11 | 17,458,060,000 | KRW | 14,100,245 | |||
0550-1709, 5.50%, 9/10/17 | 40,708,200,000 | KRW | 32,667,227 | |||
senior note, 7.125% 4/16/19 | 18,370,000 | 19,847,242 | ||||
| 171,630,926 | ||||||
jSupranational 2.6% | ||||||
Corporacion Andina De Fomento, 8.125%, 6/04/19 | 9,880,000 | 10,611,120 | ||||
European Investment Bank, senior note, | ||||||
4.50%, 5/15/13 | 33,700,000 | NOK | 5,449,572 | |||
1612/37, 6.50%, 9/10/14 | 7,850,000 | NZD | 5,191,588 | |||
Inter-American Development Bank, | ||||||
1.90%, 7/08/09 | 175,000,000 | JPY | 1,816,429 | |||
6.00%, 12/15/17 | 575,000 | NZD | 361,333 | |||
senior note, 7.50%, 12/05/24 | 200,000,000 | MXN | 11,890,025 | |||
| 35,320,067 | ||||||
Sweden 3.9% | ||||||
Government of Sweden, | ||||||
4.00%, 12/01/09 | 163,000,000 | SEK | 21,441,437 | |||
5.25%, 3/15/11 | 220,290,000 | SEK | 30,517,548 | |||
| 51,958,985 | ||||||
United Arab Emirates 0.9% | ||||||
dEmirate of Abu Dhabi, 144A, 6.75%, 4/08/19 | 11,840,000 | 12,272,160 | ||||
Venezuela 1.4% | ||||||
Government of Venezuela, | ||||||
10.75%, 9/19/13 | 10,500,000 | 8,715,000 | ||||
gsenior bond, Reg S, 5.375%, 8/07/10 | 11,235,000 | 10,588,987 | ||||
| 19,303,987 | ||||||
Total Foreign Government and Agency Securities | 1,106,106,171 | |||||
Municipal Bonds 4.7% | ||||||
United States and U.S. Territories 4.7% | ||||||
Alabama Public Housing Authorities Capital Program Revenue, Series B, FSA Insured, 4.45%, 1/01/24 | 680,000 | 669,297 | ||||
Bay Area Toll Authority Toll Bridge Revenue, San Francisco Bay Area, Refunding, Series F1, | 1,330,000 | 1,240,425 | ||||
5.50%, 4/01/43 | 2,810,000 | 2,811,658 | ||||
Bexar County Hospital District GO, Certificates of Obligation, 5.00%, 2/15/32 | 1,615,000 | 1,539,240 | ||||
Bexar County Revenue, Venue Project, Refunding, Series A, BHAC Insured, 5.25%, 8/15/47 | 1,450,000 | 1,403,557 | ||||
California State GO, | 11,650,000 | 11,665,727 | ||||
Refunding, 5.13%, 4/01/33 | 4,725,000 | 4,132,579 | ||||
Refunding, 5.00%, 4/01/38 | 1,985,000 | 1,663,589 | ||||
Chicago Board of Education GO, Refunding, Series C, Assured Guaranty, 5.25%, 12/01/26 | 530,000 | 560,597 | ||||
Chicago GO, Project and Refunding, Series A, FSA Insured, 5.00%, 1/01/25 | 1,045,000 | 1,067,614 | ||||
Florida State Hurricane Catastrophe Fund Finance Corp. Revenue, Series A, 4.25%, 7/01/14 | 4,545,000 | 4,474,825 | ||||
Hamilton County Sales Tax Revenue, sub. bond, Refunding, Series A, FSA Insured, 5.00%, 12/01/32 | 3,650,000 | 3,590,469 | ||||
Illinois Municipal Electricity Agency Power Supply Revenue, Series A, BHAC Insured, 5.00%, 2/01/35 | 2,155,000 | 2,142,609 | ||||
TGB-18
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Templeton Global Bond Securities Fund | Principal Amounta | Value | ||||
Municipal Bonds (continued) | ||||||
United States and U.S. Territories (continued) | ||||||
Las Vegas Valley Water District GO, Refunding, Series A, MBIA Insured, 5.00%, 6/01/26 | 860,000 | $ | 866,949 | |||
Lewisville ISD, GO, School Building, 5.00%, 8/15/26 | 1,200,000 | 1,255,872 | ||||
Los Angeles USD, GO, Series I, 5.00%, | 400,000 | 400,308 | ||||
7/01/27 | 425,000 | 421,018 | ||||
Metropolitan Atlanta Rapid Transit Authority Sales Tax Revenue, Refunding, Third Indenture Series A, FGIC Insured, 5.00%, 7/01/19 | 1,500,000 | 1,674,840 | ||||
Metropolitan Water District of Southern California Waterworks Revenue, Series A, 5.00%, 7/01/37 | 885,000 | 885,566 | ||||
Minneapolis Health Care System Revenue, Fairview Health Services, Series B, Assured Guaranty, 6.50%, 11/15/38 | 1,790,000 | 1,946,732 | ||||
MTA Revenue, Series B, Assured Guaranty, 5.25%, 11/15/20 | 950,000 | 1,017,137 | ||||
New Jersey State Transportation Trust Fund Authority Revenue, Transportation System, Series A, Assured Guaranty, 5.50%, 12/15/38 | 3,015,000 | 3,136,474 | ||||
New York City GO, Series L, Sub Series L-1, 5.00%, 4/01/26 | 700,000 | 708,351 | ||||
North Carolina Eastern Municipal Power Agency Power System Revenue, Refunding, Series A, Assured Guaranty, 5.25%, 1/01/19 | 2,400,000 | 2,537,928 | ||||
Palomar Pomerado Health GO, Election of 2004, Series A, MBIA Insured, 5.13%, 8/01/37 | 4,570,000 | 4,181,824 | ||||
Puerto Rico Commonwealth GO, Public Improvement, Refunding, Series A, MBIA Insured, 5.50%, 7/01/21 | 875,000 | 853,274 | ||||
Regional Transportation District Sales Tax Revenue, Fastracks Project, Series A, AMBAC Insured, 5.00%, 11/01/27 | 1,290,000 | 1,333,834 | ||||
Seattle Water System Revenue, BHAC Insured, 5.00%, 9/01/34 | 1,860,000 | 1,866,584 | ||||
Tarrant County Cultural Education Facilities Finance Corp. Revenue, Christus Health, Refunding, Series A, Assured Guaranty, 6.25%, 7/01/28 | 1,500,000 | 1,562,025 | ||||
Transportation, Series A, FSA Insured, 5.50%, 11/15/21 | 900,000 | 982,764 | ||||
Wisconsin State GO, Series A, FGIC Insured, 5.00%, 5/01/21 | 500,000 | 533,865 | ||||
Total Municipal Bonds (Cost $62,991,712) | 63,127,531 | |||||
Total Investments before Short Term Investments (Cost $1,225,452,689) | 1,169,233,702 | |||||
Short Term Investments 11.4% | ||||||
Foreign Government and Agency Securities 4.3% | ||||||
Argentina 1.0% | ||||||
Government of Argentina, senior bond, amortization and cpn., 8/03/09 | 107,485,000 | 13,228,851 | ||||
Egypt 2.5% | ||||||
kEgypt Treasury Bills, 7/07/09 - 9/22/09 | 189,500,000 | EGP | 33,491,979 | |||
Norway 0.8% | ||||||
kNorwegian Treasury Bill, 3/17/10 | 76,400,000 | NOK | 11,749,785 | |||
Total Foreign Government and Agency Securities (Cost $46,734,108) | 58,470,615 | |||||
Total Investments before Repurchase Agreements (Cost $1,272,186,797) | 1,227,704,317 | |||||
TGB-19
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Templeton Global Bond Securities Fund | Principal Amounta | Value | |||
Short Term Investments (continued) | |||||
United States 7.1% | |||||
Repurchase Agreements (Cost $95,120,060) 7.1% | |||||
lJoint Repurchase Agreement, 0.023%, 7/01/09 (Maturity Value $95,120,121) | 95,120,060 | $ | 95,120,060 | ||
Banc of America Securities LLC (Maturity Value $8,200,306) Barclays Capital Inc. (Maturity Value $7,516,392) BNP Paribas Securities Corp. (Maturity Value $27,332,767) Credit Suisse Securities (USA) LLC (Maturity Value $27,332,767) Deutsche Bank Securities Inc. (Maturity Value $9,704,154) HSBC Securities (USA) Inc. (Maturity Value $8,200,306) UBS Securities LLC (Maturity Value $6,833,429) | |||||
Collateralized by U.S. Government Agency Securities, 0.58% - 7.25%, 1/15/10 - 6/27/16; | |||||
Total Investments (Cost $1,367,306,857) 98.2% | 1,322,824,377 | ||||
Other Assets, less Liabilities 1.8% | 24,774,989 | ||||
Net Assets 100.0% | $ | 1,347,599,366 | |||
aThe principal amount is stated in U.S. dollars unless otherwise indicated.
bThe coupon rate shown represents the rate at period end.
cThe principal amount is stated in original face, and scheduled paydowns are reflected in the market price on ex-date.
dSecurity was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be sold in transactions exempt from registration only to qualified institutional buyers or in a public offering registered under the Securities Act of 1933. These securities have been deemed liquid under guidelines approved by the Trust’s Board of Trustees. At June 30, 2009, the aggregate value of these securities was $120,004,557, representing 8.91% of net assets.
ePrincipal amount is stated in 1,000 Brazilian Real Units.
fRedemption price at maturity is adjusted for inflation. See Note 1(g).
gSecurity was purchased pursuant to Regulation S under the Securities Act of 1933, which exempts from registration securities offered and sold outside of the United States. Such a security cannot be sold in the United States without either an effective registration statement filed pursuant to the Securities Act of 1933, or pursuant to an exemption from registration. These securities have been deemed liquid under guidelines approved by the Trust’s Board of Trustees. At June 30, 2009, the aggregate value of these securities was $42,032,632, representing 3.12% of net assets.
hPrincipal amount is stated in 100 Mexican Peso Units.
iRounds to less than 0.1% of net assets.
jA supranational organization is an entity formed by two or more central governments through international treaties.
kThe security is traded on a discount basis with no stated coupon rate.
lSee Note 1(c) regarding joint repurchase agreement.
TGB-20
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Templeton Global Bond Securities Fund |
At June 30, 2009, the Fund had the following forward exchange contracts outstanding. See Note 1(d).
| Currency | Counterparty | Type | Quantity | Contract Amount* | Settlement Date | Unrealized Appreciation | Unrealized Depreciation | ||||||||||||
Malaysian Ringgit | JPHQ | Sell | 14,772,000 | 2,989,194 | EUR | 7/07/09 | $ | — | $ | (8,783 | ) | ||||||||
Malaysian Ringgit | JPHQ | Buy | 14,772,000 | 2,923,412 | EUR | 7/07/09 | 101,049 | — | |||||||||||
Singapore Dollar | JPHQ | Buy | 8,370,000 | 4,023,071 | EUR | 7/07/09 | 134,344 | — | |||||||||||
Singapore Dollar | JPHQ | Sell | 8,370,000 | 4,240,766 | EUR | 7/07/09 | 170,996 | — | |||||||||||
Malaysian Ringgit | HSBC | Buy | 18,131,900 | 5,184,646 | 7/09/09 | — | (27,971 | ) | |||||||||||
Malaysian Ringgit | DBAB | Buy | 9,014,572 | 2,576,181 | 7/09/09 | — | (12,455 | ) | |||||||||||
Malaysian Ringgit | JPHQ | Buy | 7,600,000 | 1,529,390 | EUR | 7/09/09 | 16,289 | — | |||||||||||
Malaysian Ringgit | DBAB | Buy | 22,869,610 | 6,504,440 | 7/10/09 | — | (617 | ) | |||||||||||
Mexican Peso | HSBC | Sell | 61,955,606 | 136,619,484 | RUB | 7/10/09 | — | (323,756 | ) | ||||||||||
Euro | CITI | Buy | 2,359,476 | 3,142,185 | 7/13/09 | 167,243 | — | ||||||||||||
Euro | UBSW | Buy | 2,359,476 | 3,137,867 | 7/13/09 | 171,561 | — | ||||||||||||
Euro | UBSW | Buy | 2,359,476 | 4,666,808 | SGD | 7/13/09 | 88,533 | — | |||||||||||
Euro | UBSW | Sell | 2,359,476 | 3,647,986 | 7/13/09 | 338,558 | — | ||||||||||||
Euro | CITI | Sell | 2,359,476 | 3,647,160 | 7/13/09 | 337,732 | — | ||||||||||||
Euro | UBSW | Sell | 2,359,476 | 4,877,391 | SGD | 7/13/09 | 56,805 | — | |||||||||||
Malaysian Ringgit | HSBC | Buy | 3,886,306 | 1,104,472 | 7/13/09 | 618 | — | ||||||||||||
Mexican Peso | HSBC | Sell | 30,888,068 | 68,008,329 | RUB | 7/13/09 | — | (165,342 | ) | ||||||||||
Euro | HSBC | Buy | 1,814,981 | 2,415,104 | 7/14/09 | 130,610 | — | ||||||||||||
Euro | BZWS | Buy | 2,903,970 | 3,866,346 | 7/14/09 | 206,798 | — | ||||||||||||
Euro | HSBC | Buy | 2,359,476 | 4,652,391 | SGD | 7/14/09 | 98,522 | — | |||||||||||
Euro | HSBC | Sell | 2,359,476 | 4,884,752 | SGD | 7/14/09 | 61,845 | — | |||||||||||
Euro | HSBC | Sell | 1,814,981 | 2,804,872 | 7/14/09 | 259,157 | — | ||||||||||||
Euro | BZWS | Sell | 2,903,970 | 4,498,395 | 7/14/09 | 425,251 | — | ||||||||||||
Malaysian Ringgit | DBAB | Buy | 9,040,420 | 1,814,981 | EUR | 7/14/09 | 24,875 | — | |||||||||||
Taiwan Dollar | DBAB | Buy | 16,697,816 | 362,996 | EUR | 7/14/09 | — | (992 | ) | ||||||||||
Taiwan Dollar | DBAB | Sell | 16,697,816 | 379,668 | EUR | 7/14/09 | 24,377 | — | |||||||||||
Euro | JPHQ | Buy | 725,993 | 1,432,312 | SGD | 7/15/09 | 29,770 | — | |||||||||||
Euro | JPHQ | Buy | 1,633,483 | 2,174,084 | 7/15/09 | 117,060 | — | ||||||||||||
Euro | UBSW | Buy | 3,085,468 | 4,103,395 | 7/15/09 | 224,323 | — | ||||||||||||
Euro | UBSW | Buy | 1,633,483 | 3,230,049 | SGD | 7/15/09 | 61,910 | — | |||||||||||
Euro | JPHQ | Sell | 1,633,483 | 2,555,502 | 7/15/09 | 264,358 | — | ||||||||||||
Euro | UBSW | Sell | 1,633,483 | 3,409,569 | SGD | 7/15/09 | 61,986 | — | |||||||||||
Euro | UBSW | Sell | 3,085,468 | 4,823,049 | 7/15/09 | 495,332 | — | ||||||||||||
Euro | JPHQ | Sell | 725,993 | 1,516,113 | SGD | 7/15/09 | 28,066 | — | |||||||||||
Malaysian Ringgit | HSBC | Buy | 14,511,138 | 2,903,970 | EUR | 7/15/09 | 52,853 | — | |||||||||||
Malaysian Ringgit | CITI | Buy | 6,007,648 | 1,197,888 | EUR | 7/15/09 | 28,001 | — | |||||||||||
Malaysian Ringgit | DBAB | Buy | 1,818,610 | 362,996 | EUR | 7/15/09 | 7,948 | — | |||||||||||
Taiwan Dollar | CITI | Buy | 72,282,977 | 1,560,884 | EUR | 7/15/09 | 10,409 | — | |||||||||||
Taiwan Dollar | DBAB | Buy | 8,439,657 | 181,498 | EUR | 7/15/09 | 2,265 | — | |||||||||||
Taiwan Dollar | CITI | Sell | 72,282,977 | 1,641,191 | EUR | 7/15/09 | 102,231 | — | |||||||||||
Taiwan Dollar | DBAB | Sell | 8,439,657 | 191,904 | EUR | 7/15/09 | 12,330 | — | |||||||||||
Malaysian Ringgit | JPHQ | Buy | 10,022,795 | 2,860,550 | 7/16/09 | — | (10,844 | ) | |||||||||||
Malaysian Ringgit | HSBC | Buy | 5,072,765 | 1,447,583 | 7/16/09 | — | (5,282 | ) | |||||||||||
Malaysian Ringgit | DBAB | Buy | 5,809,102 | 1,161,588 | EUR | 7/16/09 | 22,399 | — | |||||||||||
Taiwan Dollar | DBAB | Buy | 23,529,429 | 508,195 | EUR | 7/16/09 | 3,249 | — | |||||||||||
Taiwan Dollar | DBAB | Sell | 23,529,429 | 535,021 | EUR | 7/16/09 | 34,377 | — | |||||||||||
Euro | BZWS | Buy | 2,359,476 | 3,141,454 | 7/17/09 | 167,982 | — | ||||||||||||
Euro | BZWS | Sell | 2,359,476 | 3,703,905 | 7/17/09 | 394,469 | — | ||||||||||||
Malaysian Ringgit | HSBC | Buy | 5,902,465 | 1,179,738 | EUR | 7/17/09 | 23,422 | — | |||||||||||
Malaysian Ringgit | JPHQ | Buy | 10,550,000 | 2,115,415 | EUR | 7/17/09 | 32,375 | — | |||||||||||
Euro | BOFA | Buy | 1,814,982 | 2,328,377 | 7/22/09 | 217,352 | — | ||||||||||||
TGB-21
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Templeton Global Bond Securities Fund |
| Currency | Counterparty | Type | Quantity | Contract Amount* | Settlement Date | Unrealized Appreciation | Unrealized Depreciation | ||||||||||||
Euro | BOFA | Sell | 1,814,982 | 2,826,381 | 7/22/09 | $ | 280,652 | $ | — | ||||||||||
Euro | UBSW | Buy | 4,174,457 | 5,551,903 | 7/24/09 | 303,278 | — | ||||||||||||
Euro | UBSW | Buy | 1,179,738 | 2,332,106 | SGD | 7/24/09 | 45,377 | — | |||||||||||
Euro | UBSW | Sell | 1,179,738 | 2,454,044 | SGD | 7/24/09 | 38,770 | — | |||||||||||
Euro | UBSW | Sell | 4,174,457 | 6,530,103 | 7/24/09 | 674,923 | — | ||||||||||||
Malaysian Ringgit | HSBC | Buy | 4,109,111 | 816,742 | EUR | 7/24/09 | 22,379 | — | |||||||||||
Mexican Peso | DBAB | Sell | 14,610,919 | 32,786,902 | RUB | 7/24/09 | — | (59,609 | ) | ||||||||||
Taiwan Dollar | DBAB | Buy | 40,787,841 | 14,610,919 | MXN | 7/24/09 | 136,462 | — | |||||||||||
Taiwan Dollar | DBAB | Sell | 40,787,841 | 18,006,684 | MXN | 7/24/09 | 120,308 | — | |||||||||||
Euro | CITI | Sell | 1,533,000 | 56,491,050 | RUB | 7/28/09 | — | (351,266 | ) | ||||||||||
Malaysian Ringgit | HSBC | Buy | 3,004,709 | 598,906 | EUR | 7/31/09 | 13,788 | — | |||||||||||
Mexican Peso | CITI | Sell | 54,328,000 | 3,858,824 | 7/31/09 | — | (244,768 | ) | |||||||||||
Mexican Peso | MLCO | Buy | 53,331,307 | 3,572,688 | 7/31/09 | 455,620 | — | ||||||||||||
Mexican Peso | MLCO | Sell | 53,331,307 | 5,036,244 | 7/31/09 | 1,007,936 | — | ||||||||||||
New Zealand Dollar | DBAB | Sell | 18,763,956 | 10,446,082 | 7/31/09 | — | (1,634,765 | ) | |||||||||||
New Zealand Dollar | UBSW | Sell | 7,565,376 | 4,178,433 | 7/31/09 | — | (692,403 | ) | |||||||||||
New Zealand Dollar | DBAB | Sell | 18,692,571 | 10,446,082 | 8/03/09 | — | (1,586,401 | ) | |||||||||||
New Zealand Dollar | BZWS | Sell | 7,317,361 | 4,178,433 | 8/03/09 | — | (531,782 | ) | |||||||||||
Brazilian Real | DBAB | Sell | 11,590,000 | 5,139,462 | 8/04/09 | — | (736,800 | ) | |||||||||||
Mexican Peso | DBAB | Buy | 31,280,607 | 2,093,399 | 8/04/09 | 267,996 | — | ||||||||||||
Mexican Peso | DBAB | Sell | 77,997,607 | 6,316,669 | 8/04/09 | 428,576 | — | ||||||||||||
New Zealand Dollar | CITI | Sell | 18,563,255 | 10,446,082 | 8/04/09 | — | (1,502,364 | ) | |||||||||||
New Zealand Dollar | DBAB | Sell | 7,405,811 | 4,178,433 | 8/04/09 | — | (588,400 | ) | |||||||||||
New Zealand Dollar | BZWS | Sell | 3,686,939 | 2,073,166 | 8/04/09 | — | (299,974 | ) | |||||||||||
Indonesian Rupiah | HSBC | Buy | 53,990,411,006 | 8,135,006 | NZD | 8/05/09 | 9,259 | — | |||||||||||
Malaysian Ringgit | JPHQ | Buy | 6,015,055 | 1,213,740 | EUR | 8/05/09 | 6,586 | — | |||||||||||
New Zealand Dollar | DBAB | Sell | 5,506,806 | 3,109,749 | 8/05/09 | — | (434,533 | ) | |||||||||||
New Zealand Dollar | CITI | Sell | 7,269,764 | 4,146,331 | 8/06/09 | — | (532,310 | ) | |||||||||||
New Zealand Dollar | FBCO | Sell | 3,628,158 | 2,073,166 | 8/06/09 | — | (261,828 | ) | |||||||||||
Malaysian Ringgit | JPHQ | Buy | 1,100,000 | 221,828 | EUR | 8/07/09 | 1,375 | — | |||||||||||
New Zealand Dollar | DBAB | Sell | 7,205,549 | 4,121,358 | 8/07/09 | — | (515,648 | ) | |||||||||||
New Zealand Dollar | CITI | Sell | 7,173,180 | 4,121,358 | 8/07/09 | — | (494,817 | ) | |||||||||||
New Zealand Dollar | FBCO | Sell | 7,091,362 | 4,121,358 | 8/07/09 | — | (442,165 | ) | |||||||||||
Japanese Yen | FBCO | Buy | 279,885,550 | 1,726,090 | EUR | 8/10/09 | 485,080 | — | |||||||||||
New Zealand Dollar | FBCO | Sell | 3,552,772 | 2,060,679 | 8/10/09 | — | (225,189 | ) | |||||||||||
Japanese Yen | DBAB | Buy | 154,325,250 | 972,679 | EUR | 8/11/09 | 238,126 | — | |||||||||||
New Zealand Dollar | FBCO | Sell | 3,551,027 | 2,060,679 | 8/11/09 | — | (223,915 | ) | |||||||||||
New Zealand Dollar | DBAB | Sell | 6,669,679 | 3,930,775 | 8/12/09 | — | (359,952 | ) | |||||||||||
Russian Ruble | DBAB | Buy | 306,833,000 | 18,285,638 | NZD | 8/12/09 | — | (2,030,380 | ) | ||||||||||
New Zealand Dollar | DBAB | Sell | 8,432,616 | 102,190,660,510 | VND | 8/14/09 | 284,663 | — | |||||||||||
Russian Ruble | DBAB | Buy | 149,379,561 | 8,925,643 | NZD | 8/14/09 | — | (1,005,223 | ) | ||||||||||
Japanese Yen | DBAB | Buy | 144,838,200 | 928,063 | EUR | 8/21/09 | 202,412 | — | |||||||||||
Japanese Yen | JPHQ | Buy | 145,327,000 | 934,158 | EUR | 8/21/09 | 198,939 | — | |||||||||||
New Zealand Dollar | FBCO | Sell | 6,517,276 | 3,930,960 | 8/24/09 | — | (258,378 | ) | |||||||||||
Japanese Yen | DBAB | Buy | 143,907,400 | 922,720 | EUR | 8/26/09 | 200,347 | — | |||||||||||
New Zealand Dollar | DBAB | Sell | 6,486,000 | 3,922,279 | 8/26/09 | — | (246,401 | ) | |||||||||||
Japanese Yen | DBAB | Buy | 27,917,500 | 184,077 | EUR | 9/04/09 | 31,793 | — | |||||||||||
Indonesian Rupiah | HSBC | Buy | 115,797,066,700 | 8,323,000 | EUR | 9/08/09 | — | (507,773 | ) | ||||||||||
Taiwan Dollar | JPHQ | Buy | 372,881,400 | 8,340,000 | EUR | 9/08/09 | — | (348,786 | ) | ||||||||||
Taiwan Dollar | JPHQ | Sell | 372,881,400 | 8,463,037 | EUR | 9/08/09 | 521,338 | — | |||||||||||
United States Dollar | JPHQ | Buy | 11,099,031 | 7,821,727 | EUR | 9/08/09 | 129,514 | — | |||||||||||
Vietnamese Dong | DBAB | Buy | 243,055,778,970 | 144,871,783 | MXN | 9/08/09 | 2,634,772 | — | |||||||||||
Euro | HSBC | Sell | 7,998,680 | 11,079,425 | 9/11/09 | — | (138,089 | ) | |||||||||||
TGB-22
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Templeton Global Bond Securities Fund |
| Currency | Counterparty | Type | Quantity | Contract Amount* | Settlement Date | Unrealized Appreciation | Unrealized Depreciation | ||||||||||||
Euro | HSBC | Buy | 7,998,680 | 10,946,033 | 9/11/09 | $ | 271,481 | $ | — | ||||||||||
Euro | BOFA | Sell | 2,800,000 | 408,189,600 | JPY | 9/14/09 | 313,314 | — | |||||||||||
Russian Ruble | DBAB | Buy | 295,496,613 | 17,768,247 | NZD | 9/15/09 | — | (2,118,846 | ) | ||||||||||
Russian Ruble | MLCO | Buy | 101,991,966 | 42,848,809 | MXN | 9/15/09 | — | (10,413 | ) | ||||||||||
United States Dollar | CITI | Buy | 7,760,297 | 5,685,033 | EUR | 9/15/09 | — | (212,351 | ) | ||||||||||
United States Dollar | UBSW | Buy | 7,760,297 | 5,684,783 | EUR | 9/15/09 | — | (212,000 | ) | ||||||||||
Mexican Peso | DBAB | Sell | 2,017,928 | 4,825,270 | RUB | 9/17/09 | 156 | — | |||||||||||
United States Dollar | UBSW | Buy | 9,232,854 | 6,619,292 | EUR | 9/17/09 | — | (49,899 | ) | ||||||||||
United States Dollar | HSBC | Buy | 14,772,566 | 10,464,158 | EUR | 9/17/09 | 97,856 | — | |||||||||||
Chinese Yuan | JPHQ | Buy | 14,296,000 | 1,489,167 | EUR | 9/18/09 | 6,492 | — | |||||||||||
Chinese Yuan | DBAB | Buy | 35,600,000 | 3,722,973 | EUR | 9/23/09 | — | (3,915 | ) | ||||||||||
Chinese Yuan | HSBC | Buy | 53,474,900 | 5,584,455 | EUR | 9/23/09 | 5,110 | — | |||||||||||
Swedish Krona | UBSW | Buy | 30,000,000 | 3,119,119 | EUR | 9/23/09 | — | (486,878 | ) | ||||||||||
Chinese Yuan | JPHQ | Buy | 39,743,000 | 4,095,317 | EUR | 9/24/09 | 81,163 | — | |||||||||||
Russian Ruble | BZWS | Buy | 468,694,201 | 22,297,983 | AUD | 9/24/09 | — | (3,146,955 | ) | ||||||||||
Indian Rupee | DBAB | Buy | 25,000,000 | 818,331 | NZD | 9/25/09 | — | (5,043 | ) | ||||||||||
Japanese Yen | CITI | Buy | 335,000,000 | 2,238,706 | EUR | 9/28/09 | 341,031 | — | |||||||||||
Japanese Yen | UBSW | Buy | 502,000,000 | 3,363,552 | EUR | 9/28/09 | 498,650 | — | |||||||||||
Russian Ruble | BZWS | Buy | 258,201,997 | 12,410,890 | AUD | 9/28/09 | — | (1,841,632 | ) | ||||||||||
Malaysian Ringgit | JPHQ | Buy | 8,340,000 | 1,704,998 | EUR | 9/30/09 | — | (25,217 | ) | ||||||||||
Mexican Peso | DBAB | Sell | 22,711,151 | 52,371,914 | RUB | 10/02/09 | — | (62,867 | ) | ||||||||||
Russian Ruble | DBAB | Buy | 53,312,773 | 23,225,918 | MXN | 10/06/09 | — | (73,211 | ) | ||||||||||
Vietnamese Dong | HSBC | Buy | 44,923,725,686 | 3,648,005 | AUD | 10/07/09 | — | (430,385 | ) | ||||||||||
Chinese Yuan | HSBC | Buy | 14,831,631 | 3,204,553 | AUD | 10/13/09 | — | (385,156 | ) | ||||||||||
Kazakhstn Tenge | CITI | Buy | 361,308,750 | 2,795,426 | 10/13/09 | — | (412,101 | ) | |||||||||||
Chinese Yuan | HSBC | Buy | 35,001,331 | 3,714,063 | EUR | 10/15/09 | — | (75,284 | ) | ||||||||||
Chinese Yuan | HSBC | Buy | 35,172,030 | 3,761,574 | EUR | 10/16/09 | — | (116,672 | ) | ||||||||||
Chinese Yuan | HSBC | Buy | 25,132,672 | 5,336,806 | AUD | 10/19/09 | — | (575,246 | ) | ||||||||||
Chinese Yuan | HSBC | Buy | 47,143,455 | 5,062,450 | EUR | 10/19/09 | — | (184,397 | ) | ||||||||||
Chinese Yuan | HSBC | Buy | 29,130,000 | 4,208,017 | 10/21/09 | 64,813 | — | ||||||||||||
Russian Ruble | DBAB | Buy | 92,110,000 | 3,050,000 | 10/22/09 | — | (189,072 | ) | |||||||||||
Chinese Yuan | HSBC | Buy | 36,599,833 | 5,291,287 | 10/23/09 | 77,641 | — | ||||||||||||
Chilean Peso | CITI | Buy | 921,291,798 | 1,395,897 | 10/26/09 | 336,725 | — | ||||||||||||
Chinese Yuan | HSBC | Buy | 62,115,025 | 8,932,101 | 10/26/09 | 180,767 | — | ||||||||||||
Chinese Yuan | HSBC | Buy | 37,116,032 | 5,298,506 | 10/27/09 | 146,979 | — | ||||||||||||
Russian Ruble | DBAB | Buy | 89,097,000 | 2,663,587 | 10/27/09 | 99,156 | — | ||||||||||||
Chilean Peso | CITI | Buy | 597,827,644 | 872,435 | 10/28/09 | 251,864 | — | ||||||||||||
Swiss Franc | DBAB | Buy | 3,423,000 | 2,343,397 | EUR | 11/05/09 | — | (130,583 | ) | ||||||||||
Indonesian Rupiah | HSBC | Buy | 3,465,000,000 | 275,000 | 11/09/09 | 54,399 | — | ||||||||||||
Vietnamese Dong | DBAB | Buy | 25,294,025,000 | 1,315,000 | 11/09/09 | 76,528 | — | ||||||||||||
Indonesian Rupiah | JPHQ | Buy | 34,531,000,000 | 2,746,004 | 11/10/09 | 535,934 | — | ||||||||||||
Russian Ruble | DBAB | Buy | 92,000,000 | 2,870,694 | 11/10/09 | — | (31,151 | ) | |||||||||||
Indonesian Rupiah | JPHQ | Buy | 6,870,000,000 | 549,161 | 11/12/09 | 103,493 | — | ||||||||||||
Japanese Yen | UBSW | Buy | 1,250,000,000 | 10,198,254 | EUR | 11/12/09 | — | (1,303,813 | ) | ||||||||||
Japanese Yen | UBSW | Sell | 1,250,000,000 | 12,460,749 | 11/12/09 | — | (535,851 | ) | |||||||||||
Japanese Yen | UBSW | Buy | 1,250,000,000 | 12,938,619 | 11/12/09 | 57,981 | — | ||||||||||||
Indonesian Rupiah | JPHQ | Buy | 36,430,000,000 | 2,746,325 | 11/16/09 | 711,444 | — | ||||||||||||
Indonesian Rupiah | JPHQ | Buy | 7,386,000,000 | 523,088 | 11/17/09 | 177,800 | — | ||||||||||||
Euro | DBAB | Sell | 6,223,000 | 753,263,035 | JPY | 11/18/09 | — | (893,396 | ) | ||||||||||
Indonesian Rupiah | JPHQ | Buy | 35,999,000,000 | 2,613,358 | 11/18/09 | 801,972 | — | ||||||||||||
United States Dollar | JPHQ | Buy | 7,050,000 | 706,656,750 | JPY | 11/18/09 | — | (298,073 | ) | ||||||||||
United States Dollar | JPHQ | Sell | 7,050,000 | 670,455,000 | JPY | 11/18/09 | — | (78,366 | ) | ||||||||||
Euro | DBAB | Sell | 265,338 | 335,865 | 11/19/09 | — | (36,201 | ) | |||||||||||
TGB-23
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Templeton Global Bond Securities Fund |
| Currency | Counterparty | Type | Quantity | Contract Amount* | Settlement Date | Unrealized Appreciation | Unrealized Depreciation | ||||||||||||
Euro | UBSW | Sell | 2,876,071 | 3,620,686 | 11/20/09 | $ | — | $ | (412,229 | ) | |||||||||
Russian Ruble | JPHQ | Buy | 29,201,000 | 653,339 | EUR | 11/20/09 | — | (17,828 | ) | ||||||||||
Indonesian Rupiah | HSBC | Buy | 40,074,000,000 | 2,613,408 | 11/23/09 | 1,184,275 | — | ||||||||||||
Euro | UBSW | Sell | 1,918,356 | 2,390,367 | 11/24/09 | — | (299,600 | ) | |||||||||||
Euro | DBAB | Sell | 668,538 | 836,676 | 11/25/09 | — | (100,765 | ) | |||||||||||
Euro | DBAB | Sell | 1,300,570 | 1,697,244 | 11/30/09 | — | (126,438 | ) | |||||||||||
New Zealand Dollar | UBSW | Sell | 11,305,079 | 6,937,362 | 11/30/09 | — | (285,602 | ) | |||||||||||
New Zealand Dollar | DBAB | Sell | 11,236,978 | 6,914,674 | 11/30/09 | — | (264,779 | ) | |||||||||||
New Zealand Dollar | CITI | Sell | 6,395,559 | 3,930,960 | 11/30/09 | — | (155,247 | ) | |||||||||||
Mexican Peso | CITI | Sell | 53,811,000 | 3,972,024 | 12/01/09 | — | (22,054 | ) | |||||||||||
New Zealand Dollar | BZWS | Sell | 18,741,737 | 11,582,393 | 12/02/09 | — | (390,486 | ) | |||||||||||
New Zealand Dollar | DBAB | Sell | 4,846,894 | 2,948,220 | 12/02/09 | — | (148,146 | ) | |||||||||||
New Zealand Dollar | FBCO | Sell | 1,599,481 | 989,231 | 12/02/09 | — | (32,574 | ) | |||||||||||
Chinese Yuan | HSBC | Buy | 18,870,000 | 2,048,829 | EUR | 12/04/09 | — | (100,341 | ) | ||||||||||
Chinese Yuan | HSBC | Buy | 14,977,000 | 2,048,837 | 12/04/09 | 151,719 | — | ||||||||||||
Euro | UBSW | Sell | 1,343,551 | 1,698,853 | 12/08/09 | — | (185,083 | ) | |||||||||||
Chinese Yuan | JPHQ | Buy | 11,237,841 | 1,594,020 | 12/14/09 | 57,779 | — | ||||||||||||
Chinese Yuan | HSBC | Buy | 22,539,443 | 3,188,040 | 12/14/09 | 124,930 | — | ||||||||||||
Chinese Yuan | JPHQ | Buy | 22,548,910 | 3,198,427 | 12/15/09 | 116,062 | — | ||||||||||||
Chinese Yuan | HSBC | Buy | 22,626,632 | 3,198,427 | 12/15/09 | 127,486 | — | ||||||||||||
Chinese Yuan | HSBC | Buy | 26,468,158 | 3,761,017 | 12/16/09 | 129,716 | — | ||||||||||||
Malaysian Ringgit | JPHQ | Buy | 13,361,013 | 3,761,017 | 12/16/09 | 21,309 | — | ||||||||||||
Chinese Yuan | HSBC | Buy | 24,500,148 | 3,465,367 | 12/17/09 | 136,212 | — | ||||||||||||
Malaysian Ringgit | JPHQ | Buy | 12,406,016 | 3,465,368 | 12/17/09 | 46,520 | — | ||||||||||||
Chinese Yuan | HSBC | Buy | 73,686,535 | 10,396,103 | 12/18/09 | 436,409 | — | ||||||||||||
Chinese Yuan | HSBC | Buy | 20,029,614 | 2,857,292 | 12/21/09 | 87,561 | — | ||||||||||||
Malaysian Ringgit | JPHQ | Buy | 14,845,634 | 4,158,441 | 12/21/09 | 43,613 | — | ||||||||||||
Malaysian Ringgit | HSBC | Buy | 7,615,404 | 2,142,969 | 12/21/09 | 12,570 | — | ||||||||||||
Chinese Yuan | HSBC | Buy | 23,558,279 | 3,384,810 | 12/22/09 | 78,978 | — | ||||||||||||
Malaysian Ringgit | HSBC | Buy | 12,127,039 | 3,466,651 | 12/22/09 | — | (34,184 | ) | |||||||||||
Mexican Peso | DBAB | Sell | 160,558,056 | 11,841,263 | 12/22/09 | — | (40,020 | ) | |||||||||||
Mexican Peso | DBAB | Buy | 160,558,056 | 11,340,848 | 12/22/09 | 540,436 | — | ||||||||||||
Malaysian Ringgit | HSBC | Buy | 9,639,266 | 2,772,294 | 12/23/09 | — | (44,044 | ) | |||||||||||
Mexican Peso | DBAB | Sell | 66,679,470 | 4,921,684 | 12/23/09 | — | (11,881 | ) | |||||||||||
Mexican Peso | DBAB | Buy | 66,679,470 | 4,725,354 | 12/23/09 | 208,212 | — | ||||||||||||
Mexican Peso | DBAB | Sell | 106,913,202 | 7,862,999 | 12/24/09 | — | (46,293 | ) | |||||||||||
Mexican Peso | HSBC | Sell | 26,553,000 | 1,939,421 | 12/24/09 | — | (24,934 | ) | |||||||||||
Mexican Peso | DBAB | Buy | 106,913,202 | 7,560,566 | 12/24/09 | 348,727 | — | ||||||||||||
Malaysian Ringgit | HSBC | Buy | 10,905,927 | 3,118,831 | 12/28/09 | — | (32,432 | ) | |||||||||||
Mexican Peso | DBAB | Sell | 27,554,000 | 2,019,496 | 12/28/09 | — | (17,754 | ) | |||||||||||
Mexican Peso | DBAB | Sell | 28,091,000 | 2,060,062 | 12/29/09 | — | (16,609 | ) | |||||||||||
Malaysian Ringgit | JPHQ | Buy | 56,089,316 | 16,085,264 | 1/04/10 | — | (213,275 | ) | |||||||||||
Swedish Krona | DBAB | Buy | 136,332,733 | 12,649,755 | EUR | 1/05/10 | — | (70,577 | ) | ||||||||||
Mexican Peso | DBAB | Sell | 15,775,146 | 1,158,021 | 1/20/10 | — | (4,693 | ) | |||||||||||
Mexican Peso | DBAB | Buy | 15,775,146 | 1,063,374 | 1/20/10 | 99,341 | — | ||||||||||||
Mexican Peso | HSBC | Sell | 234,622,679 | 17,218,370 | 1/21/10 | — | (72,251 | ) | |||||||||||
Mexican Peso | HSBC | Buy | 234,622,679 | 15,950,603 | 1/21/10 | 1,340,018 | — | ||||||||||||
Chilean Peso | DBAB | Buy | 2,227,910,000 | 3,527,407 | 1/28/10 | 662,223 | — | ||||||||||||
New Zealand Dollar | BZWS | Sell | 12,970,535 | 6,582,546 | 1/28/10 | — | (1,675,434 | ) | |||||||||||
Chilean Peso | DBAB | Buy | 5,127,860,000 | 8,173,239 | 1/29/10 | 1,469,795 | — | ||||||||||||
Chilean Peso | JPHQ | Buy | 675,370,000 | 1,075,430 | 1/29/10 | 194,616 | — | ||||||||||||
Singapore Dollar | HSBC | Sell | 53,093,000 | 35,406,213 | 1/29/10 | — | (1,217,100 | ) | |||||||||||
Singapore Dollar | BZWS | Sell | 13,275,000 | 8,821,800 | 1/29/10 | — | (335,236 | ) | |||||||||||
TGB-24
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Templeton Global Bond Securities Fund |
| Currency | Counterparty | Type | Quantity | Contract Amount* | Settlement Date | Unrealized Appreciation | Unrealized Depreciation | ||||||||||||
Singapore Dollar | UBSW | Sell | 13,281,000 | 8,826,989 | 1/29/10 | $ | — | $ | (334,185 | ) | |||||||||
Chilean Peso | DBAB | Buy | 1,075,430,000 | 1,720,688 | 2/02/10 | 301,669 | — | ||||||||||||
New Zealand Dollar | DBAB | Sell | 9,712,629 | 4,910,123 | 2/02/10 | — | (1,271,840 | ) | |||||||||||
Singapore Dollar | HSBC | Sell | 13,298,000 | 8,849,581 | 2/02/10 | — | (323,277 | ) | |||||||||||
Singapore Dollar | BZWS | Sell | 5,320,000 | 3,539,587 | 2/02/10 | — | (130,108 | ) | |||||||||||
Chilean Peso | DBAB | Buy | 2,018,040,000 | 3,226,283 | 2/03/10 | 568,658 | — | ||||||||||||
Chinese Yuan | DBAB | Buy | 102,053,000 | 14,468,949 | 2/03/10 | 557,038 | — | ||||||||||||
New Zealand Dollar | DBAB | Sell | 12,744,985 | 6,363,571 | 2/03/10 | — | (1,747,975 | ) | |||||||||||
Singapore Dollar | HSBC | Sell | 16,660,000 | 11,062,490 | 2/03/10 | — | (429,437 | ) | |||||||||||
Indian Rupee | JPHQ | Buy | 21,500,000 | 423,228 | 2/04/10 | 20,007 | — | ||||||||||||
Singapore Dollar | HSBC | Sell | 16,752,000 | 11,062,099 | 2/04/10 | — | (493,276 | ) | |||||||||||
Singapore Dollar | HSBC | Sell | 13,362,000 | 8,849,886 | 2/05/10 | — | (367,088 | ) | |||||||||||
Mexican Peso | DBAB | Sell | 81,332,000 | 5,956,199 | 2/08/10 | — | (22,969 | ) | |||||||||||
Mexican Peso | DBAB | Buy | 81,332,000 | 5,299,365 | 2/08/10 | 679,803 | — | ||||||||||||
Singapore Dollar | JPHQ | Sell | 10,525,000 | 6,991,033 | 2/08/10 | — | (268,981 | ) | |||||||||||
Singapore Dollar | JPHQ | Sell | 13,338,000 | 8,857,750 | 2/09/10 | — | (342,626 | ) | |||||||||||
Singapore Dollar | BZWS | Sell | 5,284,900 | 3,543,037 | 2/11/10 | — | (102,409 | ) | |||||||||||
Chilean Peso | DBAB | Buy | 1,058,220,000 | 1,720,683 | 2/12/10 | 269,290 | — | ||||||||||||
Malaysian Ringgit | DBAB | Buy | 97,443,480 | 26,843,934 | 2/12/10 | 716,816 | — | ||||||||||||
New Zealand Dollar | HSBC | Sell | 2,945,715 | 1,530,005 | 2/12/10 | — | (343,815 | ) | |||||||||||
South Korean Won | HSBC | Buy | 16,244,000,000 | 11,944,118 | 2/12/10 | 878,968 | — | ||||||||||||
Chilean Peso | DBAB | Buy | 2,604,680,000 | 4,301,701 | 2/16/10 | 596,355 | — | ||||||||||||
Chilean Peso | DBAB | Buy | 2,600,220,000 | 4,326,489 | 2/17/10 | 563,175 | — | ||||||||||||
Malaysian Ringgit | HSBC | Buy | 4,899,000 | 1,343,480 | 2/17/10 | 42,058 | — | ||||||||||||
New Zealand Dollar | HSBC | Sell | 3,931,416 | 1,966,495 | 2/22/10 | — | (532,892 | ) | |||||||||||
Chilean Peso | CITI | Buy | 4,456,290,000 | 7,355,035 | 2/26/10 | 1,024,854 | — | ||||||||||||
Chilean Peso | DBAB | Buy | 1,311,360,000 | 2,163,246 | 2/26/10 | 302,718 | — | ||||||||||||
New Zealand Dollar | DBAB | Sell | 2,852,731 | 1,430,644 | 2/26/10 | — | (382,549 | ) | |||||||||||
Chilean Peso | DBAB | Buy | 1,304,870,000 | 2,163,246 | 3/03/10 | 290,501 | — | ||||||||||||
Chilean Peso | DBAB | Buy | 2,119,640,000 | 3,461,202 | 3/04/10 | 524,678 | — | ||||||||||||
Chilean Peso | DBAB | Buy | 1,328,230,000 | 2,163,241 | 3/05/10 | 334,428 | — | ||||||||||||
Chilean Peso | DBAB | Buy | 1,252,750,000 | 2,036,230 | 3/08/10 | 319,495 | — | ||||||||||||
Chilean Peso | DBAB | Buy | 1,330,940,000 | 2,163,251 | 3/09/10 | 339,504 | — | ||||||||||||
New Zealand Dollar | DBAB | Sell | 11,084,376 | 5,470,140 | 3/12/10 | — | (1,569,355 | ) | |||||||||||
New Zealand Dollar | DBAB | Sell | 11,089,511 | 5,596,876 | 3/16/10 | — | (1,444,244 | ) | |||||||||||
Singapore Dollar | JPHQ | Sell | 8,859,000 | 5,757,083 | 3/17/10 | — | (353,485 | ) | |||||||||||
Singapore Dollar | DBAB | Sell | 8,849,000 | 5,756,683 | 3/17/10 | — | (346,988 | ) | |||||||||||
Australian Dollar | BZWS | Sell | 4,356,970 | 2,963,393 | 3/24/10 | — | (474,985 | ) | |||||||||||
Indian Rupee | DBAB | Buy | 159,915,000 | 3,090,503 | 4/09/10 | 194,158 | — | ||||||||||||
Indian Rupee | DBAB | Buy | 342,913,000 | 6,622,499 | 4/12/10 | 419,768 | — | ||||||||||||
Indian Rupee | JPHQ | Buy | 230,330,000 | 4,414,989 | 4/13/10 | 314,941 | — | ||||||||||||
Indian Rupee | JPHQ | Buy | 226,092,000 | 4,414,997 | 4/15/10 | 227,385 | — | ||||||||||||
Indian Rupee | DBAB | Buy | 79,271,000 | 1,545,244 | 4/19/10 | 82,076 | — | ||||||||||||
Indian Rupee | JPHQ | Buy | 112,941,000 | 2,213,661 | 4/19/10 | 104,855 | — | ||||||||||||
Malaysian Ringgit | JPHQ | Buy | 4,069,213 | 1,123,999 | 4/19/10 | 26,184 | — | ||||||||||||
Malaysian Ringgit | JPHQ | Buy | 11,659,000 | 3,246,999 | 4/20/10 | 48,459 | — | ||||||||||||
Chilean Peso | CITI | Buy | 1,945,145,000 | 3,315,400 | 4/23/10 | 342,263 | — | ||||||||||||
Chilean Peso | CITI | Buy | 1,899,362,000 | 3,240,347 | 4/26/10 | 331,225 | — | ||||||||||||
Indian Rupee | DBAB | Buy | 160,601,000 | 3,099,125 | 4/26/10 | 196,494 | — | ||||||||||||
Chilean Peso | JPHQ | Buy | 1,501,938,000 | 2,566,757 | 4/27/10 | 257,496 | — | ||||||||||||
Chilean Peso | CITI | Buy | 1,507,329,000 | 2,566,759 | 4/27/10 | 267,632 | — | ||||||||||||
Indian Rupee | JPHQ | Buy | 22,911,000 | 442,725 | 4/27/10 | 27,395 | — | ||||||||||||
Chilean Peso | UBSW | Buy | 303,134,000 | 513,351 | 4/28/10 | 56,664 | — | ||||||||||||
TGB-25
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Templeton Global Bond Securities Fund |
| Currency | Counterparty | Type | Quantity | Contract Amount* | Settlement Date | Unrealized Appreciation | Unrealized Depreciation | |||||||||||||
Chilean Peso | CITI | Buy | 2,420,966,000 | 4,106,813 | 4/28/10 | $ | 445,587 | $ | — | |||||||||||
Indian Rupee | DBAB | Buy | 71,377,981 | 1,394,101 | 4/28/10 | 70,450 | — | |||||||||||||
Indian Rupee | JPHQ | Buy | 113,671,000 | 2,213,651 | 4/28/10 | 118,678 | — | |||||||||||||
New Zealand Dollar | DBAB | Sell | 2,329,569 | 1,274,973 | 4/28/10 | — | (200,361 | ) | ||||||||||||
Peruvian Nuevo Sol | DBAB | Buy | 32,777,510 | 10,568,277 | 4/29/10 | 208,446 | — | |||||||||||||
Indian Rupee | JPHQ | Buy | 113,782,000 | 2,213,658 | 4/30/10 | 120,689 | — | |||||||||||||
Swedish Krona | BZWS | Buy | 122,773,200 | 11,484,864 | EUR | 4/30/10 | — | (188,690 | ) | |||||||||||
Peruvian Nuevo Sol | DBAB | Buy | 1,998,991 | 665,222 | 5/07/10 | — | (8,077 | ) | ||||||||||||
Peruvian Nuevo Sol | DBAB | Buy | 5,300,000 | 1,771,983 | 5/10/10 | — | (29,763 | ) | ||||||||||||
Chilean Peso | DBAB | Buy | 420,740,000 | 733,840 | 5/18/10 | 57,322 | — | |||||||||||||
Peruvian Nuevo Sol | DBAB | Buy | 19,235,857 | 6,268,181 | 5/18/10 | 54,156 | — | |||||||||||||
Chilean Peso | CITI | Buy | 41,560,000 | 74,480 | 5/26/10 | 3,669 | — | |||||||||||||
Chilean Peso | DBAB | Buy | 145,512,000 | 260,681 | 5/26/10 | 12,941 | — | |||||||||||||
Chilean Peso | CITI | Buy | 187,520,000 | 331,776 | 5/28/10 | 20,837 | — | |||||||||||||
Chilean Peso | DBAB | Buy | 187,450,000 | 331,770 | 5/28/10 | 20,712 | — | |||||||||||||
Chilean Peso | CITI | Buy | 74,780,000 | 132,706 | 6/01/10 | 7,910 | — | |||||||||||||
Indian Rupee | DBAB | Buy | 217,594,000 | 4,433,546 | 6/01/10 | 22,639 | — | |||||||||||||
Indian Rupee | HSBC | Buy | 6,451,000 | 133,010 | 6/02/10 | — | (905 | ) | ||||||||||||
Indian Rupee | HSBC | Buy | 31,921,000 | 665,021 | 6/03/10 | — | (11,372 | ) | ||||||||||||
Indian Rupee | HSBC | Buy | 213,076,000 | 4,433,541 | 6/04/10 | — | (70,612 | ) | ||||||||||||
Poland Zloty | DBAB | Buy | 15,778,000 | 3,468,378 | EUR | 6/04/10 | 17,116 | — | ||||||||||||
Indian Rupee | DBAB | Buy | 106,538,000 | 2,216,771 | 6/07/10 | — | (35,671 | ) | ||||||||||||
Poland Zloty | DBAB | Buy | 14,926,000 | 3,251,639 | EUR | 6/07/10 | 56,908 | — | ||||||||||||
Indian Rupee | DBAB | Buy | 53,739,000 | 1,114,917 | 6/08/10 | — | (14,806 | ) | ||||||||||||
Indian Rupee | HSBC | Buy | 42,784,000 | 886,715 | 6/08/10 | — | (10,868 | ) | ||||||||||||
Poland Zloty | CITI | Buy | 5,990,000 | 1,300,545 | EUR | 6/08/10 | 28,903 | — | ||||||||||||
Mexican Peso | DBAB | Sell | 266,049,641 | 19,073,710 | 6/09/10 | — | (172,222 | ) | ||||||||||||
Indian Rupee | DBAB | Buy | 43,392,000 | 891,922 | 6/10/10 | — | (3,727 | ) | ||||||||||||
Indian Rupee | BZWS | Buy | 64,888,000 | 1,337,897 | 6/11/10 | — | (9,773 | ) | ||||||||||||
Indian Rupee | HSBC | Buy | 43,481,000 | 891,918 | 6/11/10 | — | (1,951 | ) | ||||||||||||
Indian Rupee | DBAB | Buy | 108,614,000 | 2,229,809 | 6/16/10 | — | (7,323 | ) | ||||||||||||
Indian Rupee | DBAB | Buy | 98,937,000 | 2,006,836 | 6/21/10 | 17,073 | — | |||||||||||||
Indian Rupee | JPHQ | Buy | 79,054,000 | 1,603,529 | 6/22/10 | 13,552 | — | |||||||||||||
Indian Rupee | DBAB | Buy | 119,627,000 | 2,405,288 | 6/24/10 | 41,458 | — | |||||||||||||
Indian Rupee | HSBC | Buy | 80,337,000 | 1,603,533 | 6/25/10 | 39,519 | — | |||||||||||||
Peruvian Nuevo Sol | DBAB | Buy | 6,318,000 | 2,063,020 | 6/28/10 | 12,054 | — | |||||||||||||
Swedish Krona | UBSW | Buy | 60,129,000 | 5,405,923 | EUR | 6/28/10 | 215,158 | — | ||||||||||||
Malaysian Ringgit | JPHQ | Buy | 14,772,000 | 4,162,886 | 6/29/10 | 11,096 | — | |||||||||||||
Swedish Krona | UBSW | Buy | 43,662,000 | 3,940,258 | EUR | 6/29/10 | 135,468 | — | ||||||||||||
Unrealized appreciation (depreciation) | 39,840,506 | (49,181,429 | ) | |||||||||||||||||
Net unrealized appreciation (depreciation) | $ | (9,340,923 | ) | |||||||||||||||||
*In U.S. dollars unless otherwise indicated.
TGB-26
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Templeton Global Bond Securities Fund |
At June 30, 2009, the Fund had the following interest rate swap contracts outstanding. See Note 1(d).
| Counterparty | Pay/Receive Floating Rate | Fixed Rate | Floating Rate | Notional Amount | Expiration Date | Unrealized Appreciation | Unrealized Depreciation | |||||||||||
MLCO | Pay | 7.053% | Tasa Nominal Annual Rate | 7,200,000,000 | CLP | 6/13/18 | $ | 1,836,780 | $ | — | ||||||||
JPHQ | Pay | 7.06% | Tasa Nominal Annual Rate | 2,425,500,000 | CLP | 6/13/18 | 621,109 | — | ||||||||||
MLCO | Pay | 7.094% | Tasa Nominal Annual Rate | 7,950,000,000 | CLP | 6/16/18 | 2,058,450 | — | ||||||||||
JPHQ | Pay | 7.15% | Tasa Nominal Annual Rate | 2,475,000,000 | CLP | 6/18/18 | 661,660 | — | ||||||||||
JPHQ | Pay | 7.85% | Tasa Nominal Annual Rate | 702,800,000 | CLP | 7/11/18 | 279,752 | — | ||||||||||
JPHQ | Pay | 7.855% | Tasa Nominal Annual Rate | 705,600,000 | CLP | 7/17/18 | 280,065 | — | ||||||||||
MLCO | Pay | 7.40% | Tasa Nominal Annual Rate | 765,000,000 | CLP | 7/30/18 | 252,490 | — | ||||||||||
MLCO | Pay | 7.40% | Tasa Nominal Annual Rate | 765,000,000 | CLP | 8/06/18 | 253,074 | — | ||||||||||
JPHQ | Pay | 7.50% | Tasa Nominal Annual Rate | 1,590,300,000 | CLP | 8/07/18 | 550,267 | — | ||||||||||
MLCO | Pay | 7.51% | Tasa Nominal Annual Rate | 765,000,000 | CLP | 8/07/18 | 265,818 | — | ||||||||||
JPHQ | Pay | 7.50% | Tasa Nominal Annual Rate | 1,587,200,000 | CLP | 8/13/18 | 546,935 | — | ||||||||||
JPHQ | Pay | 7.67% | Tasa Nominal Annual Rate | 570,900,000 | CLP | 8/29/18 | 208,240 | — | ||||||||||
Unrealized appreciation (depreciation) | 7,814,640 | — | ||||||||||||||||
Net unrealized appreciation (depreciation) | $ | 7,814,640 | ||||||||||||||||
See Abbreviations on page TGB-39.
The accompanying notes are an integral part of these financial statements.
TGB-27
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements
Statement of Assets and Liabilities
June 30, 2009 (unaudited)
| Templeton Global Bond Securities Fund | ||||
Assets: | ||||
Investments in securities: | ||||
Cost - Unaffiliated issuers | $ | 1,272,186,797 | ||
Cost - Repurchase agreements | 95,120,060 | |||
Total cost of investments | $ | 1,367,306,857 | ||
Value - Unaffiliated issuers | $ | 1,227,704,317 | ||
Value - Repurchase agreements | 95,120,060 | |||
Total value of investments | 1,322,824,377 | |||
Cash | 8,280,000 | |||
Foreign currency, at value (cost $3,367,444) | 3,132,302 | |||
Receivables: | ||||
Capital shares sold | 3,340,785 | |||
Interest | 21,203,626 | |||
Unrealized appreciation on forward exchange contracts | 39,840,506 | |||
Unrealized appreciation on swap contracts | 7,814,640 | |||
Other assets | 1,664 | |||
Total assets | 1,406,437,900 | |||
Liabilities: | ||||
Payables: | ||||
Capital shares redeemed | 584,456 | |||
Affiliates | 989,304 | |||
Payable due to brokers | 7,490,000 | |||
Unrealized depreciation on forward exchange contracts | 49,181,429 | |||
Accrued expenses and other liabilities | 593,345 | |||
Total liabilities | 58,838,534 | |||
Net assets, at value | $ | 1,347,599,366 | ||
Net assets consist of: | ||||
Paid-in capital | $ | 1,379,738,680 | ||
Distributions in excess of net investment income | (48,302,855 | ) | ||
Net unrealized appreciation (depreciation) | (45,215,544 | ) | ||
Accumulated net realized gain (loss) | 61,379,085 | |||
Net assets, at value | $ | 1,347,599,366 | ||
The accompanying notes are an integral part of these financial statements.
TGB-28
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Assets and Liabilities (continued)
June 30, 2009 (unaudited)
| Templeton Global Bond Securities Fund | |||
Class 1: | |||
Net assets, at value | $ | 167,914,561 | |
Shares outstanding | 10,481,398 | ||
Net asset value and maximum offering price per share | $ | 16.02 | |
Class 2: | |||
Net assets, at value | $ | 979,276,795 | |
Shares outstanding | 62,417,041 | ||
Net asset value and maximum offering price per share | $ | 15.69 | |
Class 3: | |||
Net assets, at value | $ | 127,608,245 | |
Shares outstanding | 8,136,397 | ||
Net asset value and maximum offering price per sharea | $ | 15.68 | |
Class 4: | |||
Net assets, at value | $ | 72,799,765 | |
Shares outstanding | 4,565,086 | ||
Net asset value and maximum offering price per share | $ | 15.95 | |
aRedemption price is equal to net asset value less contingent deferred sales charges, if applicable.
The accompanying notes are an integral part of these financial statements.
TGB-29
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Operations
for the six months ended June 30, 2009 (unaudited)
| Templeton Global Bond Securities Fund | ||||
Investment income: | ||||
Interest (net of foreign taxes of $948,718) | $ | 39,116,756 | ||
Expenses: | ||||
Management fees (Note 3a) | 2,894,773 | |||
Distribution fees: (Note 3c) | ||||
Class 2 | 1,066,950 | |||
Class 3 | 157,726 | |||
Class 4 | 98,238 | |||
Unaffiliated transfer agent fees | 1,795 | |||
Custodian fees (Note 4) | 370,903 | |||
Reports to shareholders | 129,554 | |||
Professional fees | 25,136 | |||
Trustees’ fees and expenses | 2,775 | |||
Other | 25,346 | |||
Total expenses | 4,773,196 | |||
Expense reductions (Note 4) | (1,149 | ) | ||
Net expenses | 4,772,047 | |||
Net investment income | 34,344,709 | |||
Realized and unrealized gains (losses): | ||||
Net realized gain (loss) from: | ||||
Investments | (16,130,031 | ) | ||
Foreign currency transactions | 108,245,242 | |||
Swap contracts | 475,374 | |||
Net realized gain (loss) | 92,590,585 | |||
Net change in unrealized appreciation (depreciation) on: | ||||
Investments | 74,770,582 | |||
Translation of other assets and liabilities denominated in foreign currencies | (111,662,627 | ) | ||
Net change in unrealized appreciation (depreciation) | (36,892,045 | ) | ||
Net realized and unrealized gain (loss) | 55,698,540 | |||
Net increase (decrease) in net assets resulting from operations | $ | 90,043,249 | ||
The accompanying notes are an integral part of these financial statements.
TGB-30
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statements of Changes in Net Assets
| Templeton Global Bond Securities Fund | ||||||||
| Six Months Ended June 30, 2009 (unaudited) | Year Ended December 31, 2008 | |||||||
Increase (decrease) in net assets: | ||||||||
Operations: | ||||||||
Net investment income | $ | 34,344,709 | $ | 47,173,150 | ||||
Net realized gain (loss) from investments, foreign currency transactions and swap contracts | 92,590,585 | 36,014,213 | ||||||
Net change in unrealized appreciation (depreciation) on investments and translation of other assets and liabilities denominated in foreign currencies | (36,892,045 | ) | (32,739,812 | ) | ||||
Net increase (decrease) in net assets resulting from operations | 90,043,249 | 50,447,551 | ||||||
Distributions to shareholders from: | ||||||||
Net investment income and net foreign currency gains: | ||||||||
Class 1 | (23,763,176 | ) | (8,184,833 | ) | ||||
Class 2 | (139,472,843 | ) | (26,397,120 | ) | ||||
Class 3 | (18,449,432 | ) | (4,932,732 | ) | ||||
Class 4 | (10,152,433 | ) | (162,330 | ) | ||||
Total distributions to shareholders | (191,837,884 | ) | (39,677,015 | ) | ||||
Capital share transactions: (Note 2) | ||||||||
Class 1 | (42,747,410 | ) | 81,904,183 | |||||
Class 2 | 261,757,414 | 305,411,151 | ||||||
Class 3 | 9,152,753 | 36,362,798 | ||||||
Class 4 | 35,521,512 | 41,657,210 | ||||||
Total capital share transactions | 263,684,269 | 465,335,342 | ||||||
Redemption fees | 17,035 | 75,291 | ||||||
Net increase (decrease) in net assets | 161,906,669 | 476,181,169 | ||||||
Net assets: | ||||||||
Beginning of period | 1,185,692,697 | 709,511,528 | ||||||
End of period | $ | 1,347,599,366 | $ | 1,185,692,697 | ||||
Undistributed net investment income (distributions in excess of net investment income) included in net assets: | ||||||||
End of period | $ | (48,302,855 | ) | $ | 109,190,320 | |||
The accompanying notes are an integral part of these financial statements.
TGB-31
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited)
Templeton Global Bond Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Templeton Variable Insurance Products Trust (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end investment company, consisting of twenty-two separate funds. The Templeton Global Bond Securities Fund (Fund) is included in this report. The financial statements of the remaining funds in the Trust are presented separately. Shares of the Fund are sold only to insurance company separate accounts to fund the benefits of variable life insurance policies or variable annuity contracts. The Fund offers four classes of shares: Class 1, Class 2, Class 3, and Class 4. Each class of shares differs by its distribution fees, voting rights on matters affecting a single class and its exchange privilege.
Effective May 1, 2009, the Templeton Global Income Securities Fund was renamed the Templeton Global Bond Securities Fund.
The following summarizes the Fund’s significant accounting policies.
a. Security Valuation
Equity and other securities listed on a securities exchange or on the NASDAQ National Market System are valued at the last quoted sale price or the official closing price of the day, respectively. Over-the-counter securities and listed securities for which there is no reported sale are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. Certain equity securities are valued based upon fundamental characteristics or relationships to similar securities.
Government securities and municipal securities generally trade in the over-the-counter market rather than on a securities exchange. The Fund may utilize independent pricing services, quotations from bond dealers, and information with respect to bond and note transactions, to assist in determining a current market value for each security. The Fund’s pricing services may use valuation models or matrix pricing which considers information with respect to comparable bond and note transactions, quotations from bond dealers, or by reference to other securities that are considered comparable in such characteristics as rating, interest rate and maturity date, option adjusted spread models, prepayment projections, interest rate spreads and yield curves, to determine current value. Debt securities denominated in a foreign currency are converted into their U.S. dollar equivalent at the foreign exchange rate in effect at the close of the NYSE on the date that the values of the foreign debt securities are determined.
The Fund has procedures to determine the fair value of individual securities and other assets for which market prices are not readily available or which may not be reliably priced. Methods for valuing these securities may include: fundamental analysis based upon the underlying investment book value, anticipated future cash flows, market changes in comparable or similar securities, matrix pricing, discounts from market prices of similar securities, or discounts applied due to the nature and duration of restrictions on the disposition of the securities. Due to the inherent uncertainty of valuations of such securities, the fair values may differ significantly from the values that would have been used had a ready market for such investments existed. Occasionally, events occur between the time at which trading in a security is completed and the close of the NYSE that might call into question the availability (including the reliability) of the value of a portfolio security held by the Fund. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services. All security valuation procedures are approved by the Fund’s Board of Trustees.
b. Foreign Currency Translation
Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. Purchases and sales of securities, income and expense items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. Occasionally, events may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the Fund’s Board of Trustees.
TGB-32
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Global Bond Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
b. Foreign Currency Translation (continued)
The Fund does not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments on the Statement of Operations.
Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period.
c. Joint Repurchase Agreement
The Fund may enter into a joint repurchase agreement whereby its uninvested cash balance is deposited into a joint cash account with other funds managed by the investment manager or an affiliate of the investment manager and is used to invest in one or more repurchase agreements. The value and face amount of the joint repurchase agreement are allocated to the funds based on their pro-rata interest. A repurchase agreement is accounted for as a loan by the Fund to the seller, collateralized by securities which are delivered to the Fund’s custodian. The market value, including accrued interest, of the initial collateralization is required to be at least 102% of the dollar amount invested by the funds, with the value of the underlying securities marked to market daily to maintain coverage of at least 100%. The joint repurchase agreement held by the Fund at period end had been entered into on June 30, 2009. The joint repurchase agreement is valued at cost.
d. Derivative Financial Instruments
The Fund may invest in derivative financial instruments (derivatives) in order to manage risk or gain exposure to various other investments or markets. Derivatives are financial contracts based on an underlying or notional amount, require no initial investment or an initial net investment that is smaller than would normally be required to have a similar response to changes in market factors, and require or permit net settlement. Derivatives may contain various risks including the potential inability of the counterparty to fulfill their obligations under the terms of the contract, the potential for an illiquid secondary market, and the potential for market movements which may expose the Fund to gains or losses in excess of the amounts shown on the Statement of Assets and Liabilities.
Derivatives are marked to market daily based upon quotations from market makers or the Fund’s independent pricing services and the Fund’s net benefit or obligation under the contract, as measured by the fair market value of the contract, is included in net assets. Realized gain and loss and unrealized appreciation and depreciation on these contracts for the period are included in the Statement of Operations.
The Fund enters into forward exchange contracts in order to hedge against fluctuations in foreign exchange rates or to gain exposure to certain foreign currencies. A forward exchange contract is an agreement between the Fund and a counterparty to buy or sell a foreign currency for a specific exchange rate on a future date. Pursuant to the terms of the forward exchange contacts, cash or securities may be required to be deposited as collateral.
The Fund enters into interest rate swap contracts in order to manage interest rate risk. An interest rate swap is an agreement between the Fund and a counterparty to exchange cash flows based on the difference between two interest rates, applied to a notional principal amount. Over the term of the contract, contractually required payments to be paid and to be received are accrued daily and recorded as unrealized depreciation and appreciation until the payments are made, at which time they are realized. Pursuant to the terms of the interest rate swap contract, cash or securities may be required to be deposited as collateral. Any cash received may be invested according to the Fund’s investment objectives.
TGB-33
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Global Bond Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
d. Derivative Financial Instruments (continued)
See Note 9 regarding other derivative information.
e. Foreign Currency Contracts
The Fund enters into foreign exchange contracts in order to manage foreign exchange rate risk between the trade date and settlement date of securities transactions. A foreign exchange contract is an agreement between the Fund and a counterparty to buy or sell a foreign currency for a specific exchange rate on a future date.
f. Income Taxes
No provision has been made for U.S. income taxes because it is the Fund’s policy to qualify as a regulated investment company under the Internal Revenue Code and to distribute to shareholders substantially all of its taxable income and net realized gains.
The Fund has reviewed the tax positions, taken on federal income tax returns, for each of the three open tax years and as of June 30, 2009, and has determined that no provision for income tax is required in the Fund’s financial statements.
Foreign securities held by the Fund may be subject to foreign taxation on interest income received. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist in the foreign markets in which the Fund invests.
g. Security Transactions, Investment Income, Expenses and Distributions
Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Amortization of premium and accretion of discount on debt securities are included in interest income. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with accounting principles generally accepted in the United States of America. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods.
Common expenses incurred by the Trust are allocated among the funds based on the ratio of net assets of each fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense.
Realized and unrealized gains and losses and net investment income, not including class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions, by class, are generally due to differences in class specific expenses.
Inflation-indexed bonds provide an inflation hedge through periodic increases or decreases in the security’s interest accruals and principal redemption value, by amounts corresponding to the current rate of inflation. Any such adjustments, including adjustments to principal redemption value, are recorded as interest income.
h. Accounting Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
TGB-34
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Global Bond Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
i. Redemption Fees
Redemptions and exchanges of Class 3 shares held 60 days or less may be subject to the Fund’s redemption fee, which is 1% of the amount redeemed. Such fees are retained by the Fund and accounted for as an addition to paid-in capital.
j. Guarantees and Indemnifications
Under the Trust’s organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, on behalf of the Fund, enters into contracts with service providers that contain general indemnification clauses. The Trust’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote.
2. SHARES OF BENEFICIAL INTEREST
At June 30, 2009, there were an unlimited number of shares authorized (without par value). Transactions in the Fund’s shares were as follows:
| Six Months Ended June 30, 2009 | Year Ended December 31, 2008a | |||||||||||||
| Class 1 Shares: | Shares | Amount | Shares | Amount | ||||||||||
Shares sold | 1,466,636 | $ | 25,416,322 | 8,101,454 | $ | 141,208,761 | ||||||||
Shares issued in reinvestment of distributions | 1,490,789 | 23,763,176 | 492,765 | 8,184,833 | ||||||||||
Shares redeemed | (5,142,070 | ) | (91,926,908 | ) | (4,030,383 | ) | (67,489,411 | ) | ||||||
Net increase (decrease) | (2,184,645 | ) | $ | (42,747,410 | ) | 4,563,836 | $ | 81,904,183 | ||||||
Class 2 Shares: | ||||||||||||||
Shares sold | 10,488,419 | $ | 181,076,355 | 26,653,241 | $ | 454,110,268 | ||||||||
Shares issued in reinvestment of distributions | 8,934,839 | 139,472,843 | 1,616,480 | 26,397,120 | ||||||||||
Shares redeemed | (3,433,698 | ) | (58,791,784 | ) | (10,588,115 | ) | (175,096,237 | ) | ||||||
Net increase (decrease) | 15,989,560 | $ | 261,757,414 | 17,681,606 | $ | 305,411,151 | ||||||||
Class 3 Shares: | ||||||||||||||
Shares sold | 916,700 | $ | 15,730,323 | 4,221,478 | $ | 72,520,138 | ||||||||
Shares issued in reinvestment of distributions | 1,182,656 | 18,449,432 | 302,251 | 4,932,732 | ||||||||||
Shares redeemed | (1,464,503 | ) | (25,027,002 | ) | (2,479,464 | ) | (41,090,072 | ) | ||||||
Net increase (decrease) | 634,853 | $ | 9,152,753 | 2,044,265 | $ | 36,362,798 | ||||||||
Class 4 Shares: | ||||||||||||||
Shares sold | 1,534,196 | $ | 26,902,336 | 2,552,445 | $ | 42,834,654 | ||||||||
Shares issued on reinvestment of distributions | 639,725 | 10,152,433 | 9,768 | 162,150 | ||||||||||
Shares redeemed | (88,590 | ) | (1,533,257 | ) | (82,458 | ) | (1,339,594 | ) | ||||||
Net increase (decrease) | 2,085,331 | $ | 35,521,512 | 2,479,755 | $ | 41,657,210 | ||||||||
| aFor | the period February 29, 2008 (effective date) to December 31, 2008 for Class 4. |
TGB-35
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Global Bond Securities Fund
3. TRANSACTIONS WITH AFFILIATES
Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Trust are also officers and/or directors of the following subsidiaries:
| Subsidiary | Affiliation | |
Franklin Advisers, Inc. (Advisers) | Investment manager | |
Franklin Templeton Services, LLC (FT Services) | Administrative manager | |
Franklin Templeton Distributors, Inc. (Distributors) | Principal underwriter | |
Franklin Templeton Investor Services, LLC (Investor Services) | Transfer agent |
a. Management Fees
The Fund pays an investment management fee to Advisers based on the average daily net assets of the Fund as follows:
| Annualized Fee Rate | Net Assets | |
| 0.625% | Up to and including $100 million | |
| 0.500% | Over $100 million, up to and including $250 million | |
| 0.450% | Over $250 million, up to and including $7.5 billion | |
| 0.440% | Over $7.5 billion, up to and including $10 billion | |
| 0.430% | Over $10 billion, up to and including $12.5 billion | |
| 0.420% | Over $12.5 billion, up to and including $15 billion | |
| 0.400% | In excess of $15 billion |
b. Administrative Fees
Under an agreement with Advisers, FT Services provides administrative services to the Fund. The fee is paid by Advisers based on average daily net assets, and is not an additional expense of the Fund.
c. Distribution Fees
The Fund’s Board of Trustees has adopted distribution plans for Class 2, Class 3, and Class 4 shares pursuant to Rule 12b-1 under the 1940 Act. Under the Fund’s compensation distribution plans, the Fund pays Distributors for costs incurred in connection with the servicing, sale and distribution of the Fund’s shares up to 0.25%, 0.35%, and 0.35% per year of its average daily net assets of Class 2, Class 3, and Class 4, respectively. The Board of Trustees has agreed to limit the current rate to 0.25% per year for Class 3.
d. Transfer Agent Fees
Investor Services, under terms of an agreement, performs shareholder servicing for the Fund and is not paid by the Fund for the services.
4. EXPENSE OFFSET ARRANGEMENT
The Fund has entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Fund’s custodian expenses. During the period ended June 30, 2009, the custodian fees were reduced as noted in the Statement of Operations.
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Global Bond Securities Fund
5. INCOME TAXES
For tax purposes, capital losses may be carried over to offset future capital gains, if any. At December 31, 2008, the capital loss carryforwards were as follows:
Capital loss carryforwards expiring in: | |||
2009 | $ | 1,649,033 | |
2010 | 177,731 | ||
| $ | 1,826,764 | ||
For tax purposes, realized capital losses and realized currency losses occurring subsequent to October 31, may be deferred and treated as occurring on the first day of the following fiscal year. At December 31, 2008, the Fund deferred realized capital losses and realized currency losses of $1,732,457 and $28,031,402, respectively.
At June 30, 2009, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
Cost of investments | $ | 1,370,446,890 | ||
Unrealized appreciation | $ | 63,076,531 | ||
Unrealized depreciation | (110,699,044 | ) | ||
Net unrealized appreciation (depreciation) | $ | (47,622,513 | ) | |
Net investment income differs for financial statement and tax purposes primarily due to differing treatments of foreign currency transactions, bond discounts and premiums, swaps, tax straddles, and inflation related adjustments on foreign securities.
Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatments of wash sales, foreign currency transactions, bond discounts and premiums, swaps, and tax straddles.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the period ended June 30, 2009, aggregated $339,413,370 and $147,737,750, respectively.
7. CREDIT RISK
At June 30, 2009, the Fund had 15.8% of its portfolio invested in high yield or other securities rated below investment grade. These securities may be more sensitive to economic conditions causing greater price volatility and are potentially subject to a greater risk of loss due to default than higher rated securities.
8. CONCENTRATION OF RISK
Investing in foreign securities may include certain risks and considerations not typically associated with investing in U.S. securities, such as fluctuating currency values and changing local and regional economic, political and social conditions, which may result in greater market volatility. In addition, certain foreign securities may not be as liquid as U.S. securities.
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Global Bond Securities Fund
9. OTHER DERIVATIVE INFORMATION
At June 30, 2009, the Fund has invested in derivative contracts which are reflected on the Statement of Assets and Liabilities as follows:
| Asset Derivatives | Liability Derivatives | |||||||||
| Derivative Contracts Not Accounted for as Hedging Instruments Under FASB Statement No. 133 | Statement of Assets and Liabilities Location | Fair Value Amount | Statement of Assets and Liabilities Location | Fair Value Amount | ||||||
Interest rate contracts | Unrealized appreciation on swap contracts | $ | 7,814,640 | Unrealized depreciation on swap contracts | $ | — | ||||
Foreign exchange contracts | Unrealized appreciation on forward exchange contracts | 39,840,506 | Unrealized depreciation on forward exchange contracts | 49,181,429 | ||||||
For the period ended June 30, 2009, the effect of derivative contracts on the Fund’s Statement of Operations was as follows:
| Derivative Contracts Not Accounted for as Hedging Instruments Under FASB Statement No. 133 | Statement of Operations Locations | Realized Gain (Loss) for the Period Ended June 30, 2009 | Unrealized Appreciation (Depreciation) for the Period Ended June 30, 2009 | Average Notional Amount Outstanding During the Perioda | ||||||||
Interest rate contracts | Net realized gain (loss) from swap contracts / Net change in unrealized appreciation (depreciation) on investments | $ | 475,374 | $ | 3,841,362 | $ | 46,871,865 | |||||
Foreign exchange contracts | Net realized gain (loss) from foreign currency transactions/Net change in unrealized appreciation (depreciation) on translation of other assets and liabilities denominated in foreign currencies | 110,623,843 | (114,562,651 | ) | — | |||||||
aNotional amount represents the U.S. dollar equivalent based on the foreign exchange rate at the time of contract entry.
See Note 1(d) regarding derivative financial instruments.
10. CREDIT FACILITY
Effective January 23, 2009, the Fund, together with other U.S. registered and foreign investment funds managed by Franklin Templeton Investments (individually, “Borrower”; collectively “Borrowers”), entered into a joint syndicated senior unsecured credit facility totaling $725 million (Global Credit Facility) to provide a source of funds to the Borrowers for temporary and emergency purposes, including the ability to meet future unanticipated or unusually large redemption requests.
Under the terms of the Global Credit Facility, the Fund shall, in addition to interest charged on any borrowings made by the Fund and other costs incurred by the Fund, pay its share of fees and expenses incurred in connection with the implementation and maintenance of the Global Credit Facility, based upon its relative share of the aggregate net assets of all of the Borrowers, including an annual commitment fee based upon the unused portion of the Global Credit Facility. During the period, the Fund incurred commitment fees of $8,439 of its pro rata portion of the Global Credit Facility, which is reflected in other expenses on the Statement of Operations. During the period ended June 30, 2009, the Fund did not utilize the Global Credit Facility.
11. FAIR VALUE MEASUREMENTS
Financial Accounting Standards Board (FASB) Statement No. 157, “Fair Value Measurement” (SFAS 157) establishes a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Fund’s own
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Global Bond Securities Fund
11. FAIR VALUE MEASUREMENTS (continued)
market assumptions (unobservable inputs). These inputs are used in determining the value of the Fund’s investments and are summarized in the following fair value hierarchy:
Level 1 – quoted prices in active markets for identical securities
Level 2 – other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speed, credit risk, etc.)
Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments)
The inputs or methodology used for valuing securities are not an indication of the risk associated with investing in those securities.
The following is a summary of the inputs used as of June 30, 2009, in valuing the Fund’s assets and liabilities carried at fair value:
| Level 1 | Level 2 | Level 3 | Total | |||||||||
Assets: | ||||||||||||
Investments in Securities: | ||||||||||||
Foreign Government and Agency Securities | $ | 53,906,701 | $ | 1,052,199,470 | $ | — | $ | 1,106,106,171 | ||||
Municipal Bonds | — | 63,127,531 | — | 63,127,531 | ||||||||
Short Term Investments: | ||||||||||||
Foreign Government and Agency Securities | — | 58,470,615 | — | 58,470,615 | ||||||||
Repurchase Agreements | — | 95,120,060 | — | 95,120,060 | ||||||||
Total Investments in Securities | $ | 53,906,701 | $ | 1,268,917,676 | $ | — | $ | 1,322,824,377 | ||||
Swaps | — | 7,814,640 | — | 7,814,640 | ||||||||
Forward Exchange Contracts | — | 39,840,506 | — | 39,840,506 | ||||||||
Liabilities: | ||||||||||||
Forward Exchange Contracts | — | 49,181,429 | — | 49,181,429 | ||||||||
12. SUBSEQUENT EVENTS
Management has evaluated subsequent events through August 7, 2009 and determined that no events have occurred that require disclosure.
ABBREVIATIONS
Currency AUD - Australian Dollar EGP - Egyptian Pound EUR - Euro IDR - Indonesian Rupiah JPY - Japanese Yen KRW - South Korean Won MXN - Mexican Peso MYR - Malaysian Ringgit NOK - Norwegian Krone NZD - New Zealand Dollar PEN - Peruvian Nuevo Sol PLN - Polish Zloty RUB - Russian Ruble SEK - Swedish Krona SGD - Singapore Dollar VND - Vietnamese Dong | Selected Portfolio AMBAC - American Municipal Bond Assurance Corp. BHAC - Berkshire Hathaway Assurance Corp. FGIC - Financial Guaranty Insurance Co. FRN - Floating Rate Note FSA - Financial Security Assurance Inc. GO - General Obligation ISD - Independent School District MBIA - Municipal Bond Investors Assurance Corp. (effective February 18, 2009, MBIA spun-off and established National Public Financial Guarantee Corp. as a subsidiary under MBIA) MTA - Metropolitan Transit Authority USD - Unified/Union School District | Counterparty BOFA - Bank of America N.A. BZWS - Barclays Bank PLC CITI - Citibank N.A. DBAB - Deutsche Bank AG FBCO - Credit Suisse International HSBC - HSBC Bank USA JPHQ - JPMorgan Chase Bank, N.A. MLCO - Merrill Lynch Capital Services, Inc. UBSW - UBS AG |
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Franklin Templeton Variable Insurance Products Trust
Tax Designation (unaudited)
Templeton Global Bond Securities Fund
At December 31, 2008, more than 50% of the Fund’s total assets were invested in securities of foreign issuers. In most instances, foreign taxes were withheld from income paid to the Fund on these investments. As shown in the table below, the Fund designates to shareholders the foreign source income and foreign taxes paid, pursuant to Section 853 of the Internal Revenue Code. This designation will allow shareholders of record on June 12, 2009, to treat their proportionate share of foreign taxes paid by the Fund as having been paid directly by them. The shareholder shall consider these amounts as foreign taxes paid in the tax year in which they receive the Fund distribution.
The following table provides a detailed analysis of foreign tax paid and foreign source income as designated by the Fund, to Class 1, Class 2, Class 3 and Class 4 shareholders of record.
| Class | Foreign Tax Paid Per Share | Foreign Source Income Per Share | ||
Class 1 | 0.0157 | 0.7345 | ||
Class 2 | 0.0157 | 0.7253 | ||
Class 3 | 0.0157 | 0.7220 | ||
Class 4 | 0.0157 | 0.7312 |
Foreign Tax Paid Per Share (Column 1) is the amount per share available to you, as a tax credit (assuming you held your shares in the Fund for a minimum of 16 days during the 31-day period beginning 15 days before the ex-dividend date of the Fund’s distribution to which the foreign taxes relate), or, as a tax deduction.
Foreign Source Income Per Share (Column 2) is the amount per share of income dividends paid to you that is attributable to foreign securities held by the Fund, plus any foreign taxes withheld on these dividends.
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TEMPLETON GROWTH SECURITIES FUND
This semiannual report for Templeton Growth Securities Fund covers the period ended June 30, 2009.
Performance Summary as of 6/30/09
Templeton Growth Securities Fund – Class 1 delivered a +5.59% total return for the six-month period ended 6/30/09.
Performance reflects the Fund’s Class 1 operating expenses, but does not include any contract fees, expenses or sales charges. If they had been included, performance would be lower. These charges and deductions, particularly for variable life policies, can have a significant effect on contract values and insurance benefits. See the contract prospectus for a complete description of these expenses, including sales charges.
Templeton Growth Securities Fund – Class 1
Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares.
Current performance may differ from figures shown.
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Fund Goal and Main Investments: Templeton Growth Securities Fund seeks long-term capital growth. The Fund normally invests primarily in equity securities of companies located anywhere in the world, including those in the U.S. and in emerging markets.
Performance Overview
You can find the Fund’s six-month total return in the Performance Summary. The Fund underperformed the +6.79% total return of the Morgan Stanley Capital International (MSCI) World Index for the period under review.1
Economic and Market Overview
During the six months under review, global equities hit new bear market lows in March before delivering their biggest quarterly rally in more than a decade. At the beginning of the period, with investor sentiment depressed and risk aversion elevated, defensive, non-cyclical sectors like utilities, consumer staples and health care were market leaders. As data emerged suggesting a fledgling recovery in the financials sector and a moderating pace of global economic contraction, investors regained some risk appetite, rotating capital back into cyclical sectors such as financials, materials and consumer discretionary. Resurgent risk appetite also buoyed emerging markets stocks, which delivered their best three-month returns on record from March through May 2009. Emerging market optimism in turn supported higher commodity prices, which gained the most since the bubble in hard assets burst in the summer of 2008. Also supporting commodity prices was a weaker U.S. dollar. Although systemic risk aversion and the consensus belief that the U.S. could lead the global economy out of recession helped strengthen the dollar at the beginning of the period, investors soon began to worry about the currency’s ongoing stability in the face of aggressive and unconventional monetary policy, and the greenback lost value relative to most currencies for the six-month period.
In the reporting period’s final weeks, equity markets moderated as investors appeared to contemplate the rally’s merits and reassess their new positions. Although sentiment had improved and most seemed to believe the global economy had exited the worst stage of this recessionary cycle, indicators remained mixed and lacked the sustainable upward trajectory investors had hoped for. For example, initial U.S.
1. Source: © 2009 Morningstar. One cannot invest directly in an index, nor is an index representative of the Fund’s portfolio. Please see Index Descriptions following the Fund Summaries.
Fund Risks: The Fund’s investments in stocks may offer the potential for long-term gains but can be subject to short-term price fluctuations. Foreign investing, especially in emerging markets, involves additional risks, including currency fluctuations, economic instability, market volatility, and political and social instability. By having significant investments in one or more countries or in particular sectors from time to time, the Fund may be at greater risk of adverse developments in a country or sector than a fund that invests more broadly. The Fund’s prospectus also includes a description of the main investment risks.
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jobless claims fell to their lowest levels in six months during May, but unemployment rose again at the end of the period to 9.5%.2 In Europe, policymakers committed to an easier monetary regime, but the eurozone’s industrial production declined, capacity utilization continued to shrink, and price deflation was recorded for the first time since data began in 1997.3 In China, a stimulative monetary campaign spurred lending and fueled an annualized money growth rate of 26%, a powerful measure against near-term economic headwinds but a potentially dangerous catalyst for longer-term inflation and asset bubble formation.4
Investment Strategy
Our investment philosophy is bottom up, value oriented and long term. In choosing investments, we will focus on the market price of a company’s securities relative to our evaluation of the company’s potential long-term earnings, asset value and cash flow. Among factors we may consider are a company’s historical value measures, including price/earnings ratio, profit margins and liquidation value. We do in-depth research to construct a bargain list from which we buy.
Manager’s Discussion
During the six months under review, the Fund had several detractors from performance relative to the MSCI World Index including U.S. biotechnology firm Amgen, French media conglomerate Vivendi and U.S.-based pharmaceuticals company Pfizer. Contributors to relative performance included U.S.-based companies Seagate Technology, a technology hardware and equipment manufacturer, and Sprint Nextel, a wireless telecommunication services provider. Retailer Kingfisher, in the U.K., was also a significant contributor to relative results.
Several sectors weighed on the Fund’s relative performance. For example, our underweighted allocation and stock selection in the financials sector hampered results relative to the index.5 Within the sector, U.K.-based commercial bank HSBC Holdings was a notable detractor. Our overweighted allocation and stock selection in the health care sector also hurt relative performance, and significant sector detractors besides the aforementioned Amgen and Pfizer included Swiss pharmaceuticals
2. Source: Bureau of Labor Statistics.
3. Source: European Communities Eurostat.
4. Source: People’s Bank of China.
5. The financials sector comprises capital markets, commercial banks, consumer finance, diversified financial services, insurance, and real estate management and development in the SOI.
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manufacturer Novartis.6 In addition, stock selection and an underweighted allocation in the materials sector weighed on results.7 Within the sector, Finnish paper and forest products company UPM-Kymmene was a major detractor. Sectors that contributed to relative results included information technology, utilities and consumer staples.8 An overweighted allocation in information technology, where U.S.-based Oracle, Microsoft and the aforementioned Seagate Technology performed well, helped relative performance as the sector was one of the index’s best performing. The Fund’s lack of exposure to utilities during the period aided relative Fund performance, as the sector was one of the index’s worst performing. Stock selection and an underweighting in consumer staples also boosted relative results. Within the sector, U.S.-based beverage company Dr. Pepper Snapple Group performed well.
From a geographic perspective, stock selection in Europe hindered results relative to the MSCI World Index, particularly in France and the U.K. An underweighted allocation in Australia also detracted from relative performance. On the other hand, stock selection in Asia helped relative results, particularly in Japan. Exposure to South Korea, which is not part of the index, also boosted performance. In addition, stock selection in the U.S. was a key contributor to relative results.
It is important to recognize the effect of currency movements on the Fund’s performance. In general, if the value of the U.S. dollar goes up compared with a foreign currency, an investment traded in that foreign currency will go down in value because it will be worth fewer U.S. dollars. This can have a negative effect on Fund performance. Conversely, when the U.S. dollar weakens in relation to a foreign currency, an investment traded in that foreign currency will increase in value, which can contribute to Fund performance. For the six months ended June 30, 2009, the U.S. dollar fell in value relative to most non-U.S. currencies. As a result, the Fund’s performance was positively affected by the portfolio’s substantial investment in securities with non-U.S. currency exposure. However, one cannot expect the same result in future periods.
6. The health care sector comprises biotechnology, health care equipment and supplies, health care providers and services, and pharmaceuticals in the SOI.
7. The materials sector comprises metals and mining, and paper and forest products in the SOI.
8. The information technology sector comprises communications equipment; computers and peripherals; electronic equipment, instruments and components; IT services; office electronics; semiconductors and semiconductor equipment; and software in the SOI. The consumer staples sector comprises beverages, food and staples retailing, and food products in the SOI.
Top 10 Holdings
Templeton Growth Securities Fund 6/30/09
| Company Sector/Industry, Country | % of Total Net Assets | |
| Microsoft Corp. | 3.4% | |
| Software, U.S. | ||
| Oracle Corp. | 3.3% | |
| Software, U.S. | ||
| Amgen Inc. | 2.7% | |
| Biotechnology, U.S. | ||
| Accenture Ltd., A | 2.5% | |
| IT Services, U.S. | ||
| Pfizer Inc. | 2.5% | |
| Pharmaceuticals, U.S. | ||
| BP PLC | 1.9% | |
| Oil, Gas & Consumable Fuels, U.K. | ||
| Siemens AG | 1.9% | |
| Industrial Conglomerates, Germany | ||
| Total SA, B | 1.9% | |
| Oil, Gas & Consumable Fuels, France | ||
| GlaxoSmithKline PLC | 1.9% | |
| Pharmaceuticals, U.K. | ||
| Sanofi-Aventis | 1.9% | |
| Pharmaceuticals, France |
The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund’s Statement of Investments (SOI).
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Thank you for your participation in Templeton Growth Securities Fund. We look forward to serving your future investment needs.
The foregoing information reflects our analysis, opinions and portfolio holdings as of June 30, 2009, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.
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Fund Expenses
As an investor in a variable insurance contract (Contract) that indirectly provides for investment in an underlying mutual fund, you can incur transaction and/or ongoing expenses at both the Fund level and the Contract level.
| • | Transaction expenses can include sales charges (loads) on purchases, surrender fees, transfer fees and premium taxes. |
| • | Ongoing expenses can include management fees, distribution and service (12b-1) fees, contract fees, annual maintenance fees, mortality and expense risk fees and other fees and expenses. All mutual funds and Contracts have some types of ongoing expenses. |
The expenses shown in the table are meant to highlight ongoing expenses at the Fund level only and do not include ongoing expenses at the Contract level, or transaction expenses at either the Fund or Contract levels. While the Fund does not have transaction expenses, if the transaction and ongoing expenses at the Contract level were included, the expenses shown below would be higher. You should consult your Contract prospectus or disclosure document for more information.
The table shows Fund-level ongoing expenses and can help you understand these expenses and compare them with those of other mutual funds offered through the Contract. The table assumes a $1,000 investment held for the six months indicated. Please refer to the Fund prospectus for additional information on operating expenses.
Actual Fund Expenses
The first line (Actual) of the table provides actual account values and expenses. The “Ending Account Value” is derived from the Fund’s actual return, which includes the effect of ongoing Fund expenses, but does not include the effect of ongoing Contract expenses.
You can estimate the Fund-level expenses you incurred during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:
| 1. | Divide your account value by $1,000. |
If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6.
| 2. | Multiply the result by the number under the heading “Fund-Level Expenses Incurred During Period.” |
If Fund-Level Expenses Incurred During Period were $7.50, then 8.6 x $7.50 = $64.50.
In this illustration, the estimated expenses incurred this period at the Fund level are $64.50.
Templeton Growth Securities Fund – Class 1
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Hypothetical Example for Comparison with Other Mutual Funds
Information in the second line (Hypothetical) of the table can help you compare ongoing expenses of the Fund with those of other mutual funds offered through the Contract. This information may not be used to estimate the actual ending account balance or expenses you incurred during the period. The hypothetical “Ending Account Value” is based on the Fund’s actual expense ratio and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Fund-Level Expenses Incurred During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds offered through a Contract.
| Class 1 | Beginning Account Value 1/1/09 | Ending Account Value 6/30/09 | Fund-Level Expenses Incurred During Period* 1/1/09–6/30/09 | ||||||
Actual | $ | 1,000 | $ | 1,055.90 | $ | 4.08 | |||
Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,020.83 | $ | 4.01 | |||
*Expenses are calculated using the most recent six-month annualized expense ratio for the Fund’s Class 1 shares (0.80%), which does not include any ongoing expenses of the Contract for which the Fund is an investment option, multiplied by the average account value over the period, multiplied by 181/365 to reflect the one-half year period.
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Franklin Templeton Variable Insurance Products Trust
Financial Highlights
Templeton Growth Securities Fund
| Six Months Ended June 30, 2009 (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 1 | 2008 | 2007 | 2006 | 2005 | 2004 | |||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 8.34 | $ | 15.68 | $ | 16.16 | $ | 13.98 | $ | 12.98 | $ | 11.31 | ||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.13 | 0.29 | 0.27 | 0.29 | 0.24 | 0.21 | ||||||||||||||||||
Net realized and unrealized gains (losses) | 0.33 | (6.50 | ) | 0.19 | 2.67 | 0.92 | 1.61 | |||||||||||||||||
Total from investment operations | 0.46 | (6.21 | ) | 0.46 | 2.96 | 1.16 | 1.82 | |||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income | (0.31 | ) | (0.26 | ) | (0.25 | ) | (0.23 | ) | (0.16 | ) | (0.15 | ) | ||||||||||||
Net realized gains | — | (0.87 | ) | (0.69 | ) | (0.55 | ) | — | — | |||||||||||||||
Total distributions | (0.31 | ) | (1.13 | ) | (0.94 | ) | (0.78 | ) | (0.16 | ) | (0.15 | ) | ||||||||||||
Net asset value, end of period | $ | 8.49 | $ | 8.34 | $ | 15.68 | $ | 16.16 | $ | 13.98 | $ | 12.98 | ||||||||||||
Total returnc | 5.59% | (42.13)% | 2.55% | 22.20% | 9.06% | 16.25% | ||||||||||||||||||
Ratios to average net assetsd | ||||||||||||||||||||||||
Expenses before expense reduction | 0.80% | 0.78% | 0.77% | 0.78% | 0.82% | 0.86% | ||||||||||||||||||
Expenses net of expense reduction | 0.80% | e | 0.78% | e | 0.76% | 0.78% | e | 0.82% | e | 0.86% | e | |||||||||||||
Net investment income | 3.26% | 2.64% | 1.64% | 1.93% | 1.81% | 1.75% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 489,049 | $ | 371,700 | $ | 406,538 | $ | 413,871 | $ | 779,347 | $ | 800,118 | ||||||||||||
Portfolio turnover rate | 8.74% | 18.37% | 20.45% | 20.29% | f | 22.16% | 19.13% | |||||||||||||||||
aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.
bBased on average daily shares outstanding.
cTotal return does not include any fees, charges or expenses imposed by the variable annuity and life insurance contracts for which the Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle. Total return is not annualized for periods less than one year.
dRatios are annualized for periods less than one year.
eBenefit of expense reduction rounds to less than 0.01%.
fExcludes the value of portfolio securities delivered as a result of a redemption in-kind.
The accompanying notes are an integral part of these financial statements.
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Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Templeton Growth Securities Fund
| Six Months Ended June 30, 2009 (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 2 | 2008 | 2007 | 2006 | 2005 | 2004 | |||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 8.20 | $ | 15.44 | $ | 15.93 | $ | 13.81 | $ | 12.83 | $ | 11.19 | ||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.12 | 0.29 | 0.22 | 0.24 | 0.20 | 0.17 | ||||||||||||||||||
Net realized and unrealized gains (losses) | 0.33 | (6.44 | ) | 0.20 | 2.63 | 0.93 | 1.61 | |||||||||||||||||
Total from investment operations | 0.45 | (6.15 | ) | 0.42 | 2.87 | 1.13 | 1.78 | |||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income | (0.28 | ) | (0.22 | ) | (0.22 | ) | (0.20 | ) | (0.15 | ) | (0.14 | ) | ||||||||||||
Net realized gains | — | (0.87 | ) | (0.69 | ) | (0.55 | ) | — | — | |||||||||||||||
Total distributions | (0.28 | ) | (1.09 | ) | (0.91 | ) | (0.75 | ) | (0.15 | ) | (0.14 | ) | ||||||||||||
Net asset value, end of period | $ | 8.37 | $ | 8.20 | $ | 15.44 | $ | 15.93 | $ | 13.81 | $ | 12.83 | ||||||||||||
Total returnc | 5.51% | (42.32)% | 2.35% | 21.81% | 8.86% | 16.03% | ||||||||||||||||||
Ratios to average net assetsd | ||||||||||||||||||||||||
Expenses before expense reduction | 1.05% | 1.03% | 1.02% | 1.03% | 1.07% | 1.11% | ||||||||||||||||||
Expenses net of expense reduction | 1.05% | e | 1.03% | e | 1.01% | 1.03% | e | 1.07% | e | 1.11% | e | |||||||||||||
Net investment income | 3.01% | 2.39% | 1.39% | 1.68% | 1.56% | 1.50% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 1,483,914 | $ | 1,513,557 | $ | 3,182,203 | $ | 2,821,818 | $ | 1,912,825 | $ | 1,189,112 | ||||||||||||
Portfolio turnover rate | 8.74% | 18.37% | 20.45% | 20.29%f | 22.16% | 19.13% | ||||||||||||||||||
aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.
bBased on average daily shares outstanding.
cTotal return does not include any fees, charges or expenses imposed by the variable annuity and life insurance contracts for which the Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle. Total return is not annualized for periods less than one year.
dRatios are annualized for periods less than one year.
eBenefit of expense reduction rounds to less than 0.01%.
fExcludes the value of portfolio securities delivered as a result of a redemption in-kind.
The accompanying notes are an integral part of these financial statements.
TG-9
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Templeton Growth Securities Fund
| Six Months Ended June 30, 2009 (unaudited) | Period Ended December 31, 2008a | |||||||
| Class 4 | ||||||||
Per share operating performance | ||||||||
(for a share outstanding throughout the period) | ||||||||
Net asset value, beginning of period | $ | 8.31 | $ | 14.08 | ||||
Income from investment operationsb: | ||||||||
Net investment incomec | 0.12 | 0.09 | ||||||
Net realized and unrealized gains (losses) | 0.33 | (4.73 | ) | |||||
Total from investment operations | 0.45 | (4.64 | ) | |||||
Less distributions from: | ||||||||
Net investment income | (0.31 | ) | (0.26 | ) | ||||
Net realized gains | — | (0.87 | ) | |||||
Total distributions | (0.31 | ) | (1.13 | ) | ||||
Net asset value, end of period | $ | 8.45 | $ | 8.31 | ||||
Total returnd | 5.41% | (35.79)% | ||||||
Ratios to average net assetse | ||||||||
Expensesf | 1.15% | 1.13% | ||||||
Net investment income | 2.91% | 2.29% | ||||||
Supplemental data | ||||||||
Net assets, end of period (000’s) | $ | 38,683 | $ | 24,877 | ||||
Portfolio turnover rate | 8.74% | 18.37% | ||||||
aFor the period February 29, 2008 (effective date) to December 31, 2008.
bThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.
cBased on average daily shares outstanding.
dTotal return does not include any fees, charges or expenses imposed by the variable annuity and life insurance contracts for which the Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle. Total return is not annualized for periods less than one year.
eRatios are annualized for periods less than one year.
fBenefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
TG-10
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited)
| Templeton Growth Securities Fund | Country | Shares | Value | ||||
Common Stocks 96.0% | |||||||
Aerospace & Defense 0.4% | |||||||
BAE Systems PLC | United Kingdom | 1,273,800 | $ | 7,094,442 | |||
aBAE Systems PLC, 144A | United Kingdom | 369 | 2,055 | ||||
| 7,096,497 | |||||||
Air Freight & Logistics 3.0% | |||||||
Deutsche Post AG | Germany | 1,087,062 | 14,080,727 | ||||
FedEx Corp. | United States | 243,460 | 13,541,245 | ||||
United Parcel Service Inc., B | United States | 657,270 | 32,856,927 | ||||
| 60,478,899 | |||||||
Airlines 0.4% | |||||||
bBritish Airways PLC | United Kingdom | 1,690,910 | 3,469,327 | ||||
Qantas Airways Ltd. | Australia | 2,761,530 | 4,469,681 | ||||
| �� | 7,939,008 | ||||||
Auto Components 0.8% | |||||||
Compagnie Generale des Etablissements Michelin, B | France | 180,850 | 10,299,873 | ||||
Sumitomo Rubber Industries Ltd. | Japan | 663,000 | 5,339,228 | ||||
| 15,639,101 | |||||||
Automobiles 3.0% | |||||||
Bayerische Motoren Werke AG | Germany | 540,077 | 20,324,048 | ||||
Harley-Davidson Inc. | United States | 299,480 | 4,854,571 | ||||
Hyundai Motor Co. Ltd. | South Korea | 268,950 | 15,633,193 | ||||
Toyota Motor Corp. | Japan | 514,400 | 19,591,615 | ||||
| 60,403,427 | |||||||
Beverages 0.7% | |||||||
bDr. Pepper Snapple Group Inc. | United States | 634,020 | 13,434,884 | ||||
Biotechnology 2.7% | |||||||
bAmgen Inc. | United States | 1,032,850 | 54,679,079 | ||||
Capital Markets 0.6% | |||||||
The Bank of New York Mellon Corp. | United States | 133,400 | 3,909,954 | ||||
bUBS AG | Switzerland | 725,948 | 8,876,483 | ||||
| 12,786,437 | |||||||
Commercial Banks 4.0% | |||||||
HSBC Holdings PLC | United Kingdom | 2,139,357 | 18,122,658 | ||||
ICICI Bank Ltd., ADR | India | 174,110 | 5,136,245 | ||||
bIntesa Sanpaolo SpA | Italy | 5,720,440 | 18,413,909 | ||||
bKB Financial Group Inc. | South Korea | 426,140 | 14,307,179 | ||||
Mitsubishi UFJ Financial Group Inc. | Japan | 1,535,570 | 9,529,585 | ||||
bUniCredit SpA | Italy | 5,673,777 | 14,284,682 | ||||
| 79,794,258 | |||||||
Commercial Services & Supplies 0.3% | |||||||
Brambles Ltd. | Australia | 1,236,083 | 5,932,321 | ||||
Communications Equipment 1.5% | |||||||
bCisco Systems Inc. | United States | 1,108,480 | 20,662,067 | ||||
Telefonaktiebolaget LM Ericsson, B | Sweden | 952,704 | 9,346,288 | ||||
| 30,008,355 | |||||||
TG-11
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Templeton Growth Securities Fund | Country | Shares | Value | ||||
Common Stocks (continued) | |||||||
Computers & Peripherals 0.9% | |||||||
Seagate Technology | United States | 1,658,008 | $ | 17,342,764 | |||
Construction Materials 0.3% | |||||||
CRH PLC | Ireland | 277,752 | 6,350,072 | ||||
Consumer Finance 0.4% | |||||||
American Express Co. | United States | 359,270 | 8,349,435 | ||||
Diversified Financial Services 0.6% | |||||||
ING Groep NV | Netherlands | 1,279,530 | 12,871,365 | ||||
Diversified Telecommunication Services 6.7% | |||||||
AT&T Inc. | United States | 358,660 | 8,909,114 | ||||
Belgacom | Belgium | 233,162 | 7,435,096 | ||||
France Telecom SA | France | 1,547,880 | 35,084,275 | ||||
KT Corp., ADR | South Korea | 862,201 | 12,381,206 | ||||
Singapore Telecommunications Ltd. | Singapore | 15,434,000 | 31,961,069 | ||||
Telefonica SA | Spain | 990,090 | 22,385,849 | ||||
Telekom Austria AG | Austria | 793,940 | 12,405,285 | ||||
bTelenor ASA | Norway | 682,327 | 5,245,079 | ||||
| 135,806,973 | |||||||
Electronic Equipment, Instruments & Components 1.9% | |||||||
bFlextronics International Ltd. | Singapore | 1,843,660 | 7,577,443 | ||||
FUJIFILM Holdings Corp. | Japan | 428,310 | 13,601,376 | ||||
Tyco Electronics Ltd. | United States | 967,238 | 17,980,954 | ||||
| 39,159,773 | |||||||
Energy Equipment & Services 0.9% | |||||||
Aker Solutions ASA | Norway | 559,800 | 4,620,837 | ||||
Halliburton Co. | United States | 490,070 | 10,144,449 | ||||
SBM Offshore NV | Netherlands | 250,484 | 4,275,672 | ||||
| 19,040,958 | |||||||
Food & Staples Retailing 0.4% | |||||||
CVS Caremark Corp. | United States | 165,290 | 5,267,792 | ||||
Tesco PLC | United Kingdom | 636,580 | 3,703,596 | ||||
| 8,971,388 | |||||||
Food Products 1.5% | |||||||
Nestle SA | Switzerland | 480,840 | 18,102,837 | ||||
Unilever NV | Netherlands | 462,727 | 11,140,444 | ||||
| 29,243,281 | |||||||
Health Care Equipment & Supplies 2.1% | |||||||
bBoston Scientific Corp. | United States | 1,957,720 | 19,851,281 | ||||
Covidien PLC | United States | 594,418 | 22,255,010 | ||||
Olympus Corp. | Japan | 800 | 18,970 | ||||
| 42,125,261 | |||||||
Health Care Providers & Services 0.7% | |||||||
Quest Diagnostics Inc. | United States | 265,060 | 14,957,336 | ||||
Hotels, Restaurants & Leisure 1.1% | |||||||
Accor SA | France | 172,217 | 6,825,040 | ||||
Compass Group PLC | United Kingdom | 2,715,936 | 15,271,664 | ||||
| 22,096,704 | |||||||
TG-12
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Templeton Growth Securities Fund | Country | Shares | Value | ||||
Common Stocks (continued) | |||||||
Industrial Conglomerates 3.9% | |||||||
General Electric Co. | United States | 645,640 | $ | 7,566,901 | |||
Koninklijke Philips Electronics NV | Netherlands | 660,198 | 12,153,668 | ||||
Siemens AG | Germany | 553,094 | 38,191,142 | ||||
Tyco International Ltd. | United States | 775,748 | 20,153,933 | ||||
| 78,065,644 | |||||||
Insurance 3.9% | |||||||
ACE Ltd. | United States | 145,530 | 6,436,792 | ||||
Aviva PLC | United Kingdom | 3,808,161 | 21,397,563 | ||||
Muenchener Rueckversicherungs-Gesellschaft AG | Germany | 132,810 | 17,907,031 | ||||
bProgressive Corp. | United States | 1,285,020 | 19,416,652 | ||||
Standard Life PLC | United Kingdom | 1,947,262 | 5,962,510 | ||||
Torchmark Corp. | United States | 183,507 | 6,797,099 | ||||
| 77,917,647 | |||||||
Internet & Catalog Retail 0.5% | |||||||
bExpedia Inc. | United States | 694,780 | 10,498,126 | ||||
IT Services 2.5% | |||||||
Accenture Ltd., A | United States | 1,524,537 | 51,011,008 | ||||
Media 9.9% | |||||||
Comcast Corp., A | United States | 2,085,382 | 29,403,886 | ||||
News Corp., A | United States | 3,614,422 | 32,927,384 | ||||
Pearson PLC | United Kingdom | 1,650,758 | 16,554,476 | ||||
Reed Elsevier NV | Netherlands | 1,194,760 | 13,143,068 | ||||
Time Warner Cable Inc. | United States | 330,550 | 10,468,518 | ||||
Time Warner Inc. | United States | 1,091,790 | 27,502,190 | ||||
bViacom Inc., B | United States | 1,325,938 | 30,098,793 | ||||
Vivendi SA | France | 1,363,265 | 32,572,889 | ||||
The Walt Disney Co. | United States | 267,720 | 6,245,908 | ||||
| 198,917,112 | |||||||
Metals & Mining 0.8% | |||||||
Alcoa Inc. | United States | 1,488,820 | 15,379,511 | ||||
Multiline Retail 0.3% | |||||||
Target Corp. | United States | 157,530 | 6,217,709 | ||||
Office Electronics 0.9% | |||||||
Konica Minolta Holdings Ltd. | Japan | 1,733,800 | 18,136,887 | ||||
Oil, Gas & Consumable Fuels 8.9% | |||||||
BG Group PLC | United Kingdom | 538,800 | 9,024,719 | ||||
BP PLC | United Kingdom | 4,893,895 | 38,473,270 | ||||
El Paso Corp. | United States | 2,309,384 | 21,315,614 | ||||
Eni SpA | Italy | 1,110,817 | 26,252,840 | ||||
Gazprom, ADR | Russia | 475,980 | 9,652,874 | ||||
Royal Dutch Shell PLC, B | United Kingdom | 1,245,697 | 31,277,012 | ||||
StatoilHydro ASA | Norway | 291,950 | 5,745,600 | ||||
Total SA, B | France | 703,120 | 37,948,829 | ||||
| 179,690,758 | |||||||
Paper & Forest Products 1.0% | |||||||
Svenska Cellulosa AB, B | Sweden | 999,463 | 10,491,486 | ||||
UPM-Kymmene OYJ | Finland | 1,087,262 | 9,470,211 | ||||
| 19,961,697 | |||||||
TG-13
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Templeton Growth Securities Fund | Country | Shares | Value | ||||
Common Stocks (continued) | |||||||
Pharmaceuticals 11.4% | |||||||
Bristol-Myers Squibb Co. | United States | 282,710 | $ | 5,741,840 | |||
GlaxoSmithKline PLC | United Kingdom | 2,156,543 | 37,913,245 | ||||
Merck & Co. Inc. | United States | 770,771 | 21,550,757 | ||||
Merck KGaA | Germany | 234,690 | 23,898,193 | ||||
Novartis AG | Switzerland | 762,074 | 30,878,406 | ||||
Pfizer Inc. | United States | 3,358,463 | 50,376,945 | ||||
Roche Holding AG | Switzerland | 154,210 | 20,955,762 | ||||
Sanofi-Aventis | France | 640,537 | 37,616,730 | ||||
| 228,931,878 | |||||||
Professional Services 1.0% | |||||||
Adecco SA | Switzerland | 261,060 | 10,870,895 | ||||
bRandstad Holding NV | Netherlands | 339,150 | 9,378,264 | ||||
| 20,249,159 | |||||||
Real Estate Management & Development 1.0% | |||||||
Cheung Kong (Holdings) Ltd. | Hong Kong | 1,199,833 | 13,794,387 | ||||
Swire Pacific Ltd., A | Hong Kong | 619,546 | 6,251,500 | ||||
| 20,045,887 | |||||||
Semiconductors & Semiconductor Equipment 2.6% | |||||||
Samsung Electronics Co. Ltd. | South Korea | 80,600 | 37,429,557 | ||||
Taiwan Semiconductor Manufacturing Co. Ltd. | Taiwan | 8,673,261 | 14,437,839 | ||||
| 51,867,396 | |||||||
Software 7.7% | |||||||
Microsoft Corp. | United States | 2,836,279 | 67,418,352 | ||||
Oracle Corp. | United States | 3,116,770 | 66,761,213 | ||||
SAP AG | Germany | 497,760 | 19,967,325 | ||||
| 154,146,890 | |||||||
Specialty Retail 1.4% | |||||||
Inditex SA | Spain | 101,730 | 4,875,598 | ||||
Kingfisher PLC | United Kingdom | 7,853,356 | 22,974,462 | ||||
| 27,850,060 | |||||||
Trading Companies & Distributors 0.2% | |||||||
bWolseley PLC | United Kingdom | 205,324 | 3,912,070 | ||||
Wireless Telecommunication Services 3.2% | |||||||
bSprint Nextel Corp. | United States | 3,471,890 | 16,699,791 | ||||
Turkcell Iletisim Hizmetleri AS | Turkey | 465,865 | 2,584,864 | ||||
Turkcell Iletisim Hizmetleri AS, ADR | Turkey | 536,560 | 7,436,721 | ||||
Vodafone Group PLC | United Kingdom | 19,128,624 | 36,886,687 | ||||
| 63,608,063 | |||||||
Total Common Stocks (Cost $2,485,353,461) | 1,930,915,078 | ||||||
Preferred Stocks 0.6% | |||||||
Metals & Mining 0.3% | |||||||
Vale SA, ADR, pfd., A | Brazil | 421,400 | 6,468,490 | ||||
Oil, Gas & Consumable Fuels 0.3% | |||||||
Petroleo Brasileiro SA, ADR, pfd. | Brazil | 145,750 | 4,862,220 | ||||
Total Preferred Stocks (Cost $11,946,016) | 11,330,710 | ||||||
Total Investments before Short Term Investments | 1,942,245,788 | ||||||
TG-14
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2009 (unaudited) (continued)
| Templeton Growth Securities Fund | Country | Principal Amount | Value | ||||||
Short Term Investments 4.3% | |||||||||
U.S. Government and Agency Securities 4.3% | |||||||||
cFHLB, 7/01/09 | United States | $ | 18,242,000 | $ | 18,242,000 | ||||
cFHLMC, 9/02/09 - 9/14/09 | United States | 35,000,000 | 34,991,515 | ||||||
cU.S. Treasury Bill, 7/02/09 | United States | 34,000,000 | 33,999,966 | ||||||
Total U.S. Government and Agency Securities | 87,233,481 | ||||||||
Total Investments (Cost $2,584,510,166) 100.9% | 2,029,479,269 | ||||||||
Other Assets, less Liabilities (0.9)% | (17,833,518 | ) | |||||||
Net Assets 100.0% | $ | 2,011,645,751 | |||||||
See Abbreviations on page TG-24.
aSecurity was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be sold in transactions exempt from registration only to qualified institutional buyers or in a public offering registered under the Securities Act of 1933. This security has been deemed liquid under guidelines approved by the Trust’s Board of Trustees. At June 30, 2009, the value of this security was $2,055, representing less than 0.01% of net assets.
bNon-income producing.
cThe security is traded on a discount basis with no stated coupon rate.
The accompanying notes are an integral part of these financial statements.
TG-15
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements
Statement of Assets and Liabilities
June 30, 2009 (unaudited)
| Templeton Growth Securities Fund | ||||
Assets: | ||||
Investments in securities: | ||||
Cost - Unaffiliated issuers | $ | 2,584,510,166 | ||
Value - Unaffiliated issuers | $ | 2,029,479,269 | ||
Cash | 52,069 | |||
Receivables: | ||||
Investment securities sold | 5,156,549 | |||
Capital shares sold | 253,552 | |||
Dividends | 5,354,999 | |||
Other assets | 2,682 | |||
Total assets | 2,040,299,120 | |||
Liabilities: | ||||
Payables: | ||||
Investment securities purchased | 24,441,210 | |||
Capital shares redeemed | 1,806,255 | |||
Affiliates | 1,889,893 | |||
Accrued expenses and other liabilities | 516,011 | |||
Total liabilities | 28,653,369 | |||
Net assets, at value | $ | 2,011,645,751 | ||
Net assets consist of: | ||||
Paid-in capital | $ | 2,938,279,399 | ||
Undistributed net investment income | 27,403,644 | |||
Net unrealized appreciation (depreciation) | (554,936,123 | ) | ||
Accumulated net realized gain (loss) | (399,101,169 | ) | ||
Net assets, at value | $ | 2,011,645,751 | ||
Class 1: | ||||
Net assets, at value | $ | 489,049,483 | ||
Shares outstanding | 57,634,647 | |||
Net asset value and maximum offering price per share | $ | 8.49 | ||
Class 2: | ||||
Net assets, at value | $ | 1,483,913,553 | ||
Shares outstanding | 177,356,644 | |||
Net asset value and maximum offering price per share | $ | 8.37 | ||
Class 4: | ||||
Net assets, at value | $ | 38,682,715 | ||
Shares outstanding | 4,577,230 | |||
Net asset value and maximum offering price per share | $ | 8.45 | ||
The accompanying notes are an integral part of these financial statements.
TG-16
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Operations
for the six months ended June 30, 2009 (unaudited)
| Templeton Growth Securities Fund | ||||
Investment income: | ||||
Dividends (net of foreign taxes of $3,221,678) | $ | 36,228,064 | ||
Interest | 127,624 | |||
Total investment income | 36,355,688 | |||
Expenses: | ||||
Management fees (Note 3a) | 6,798,862 | |||
Distribution fees: (Note 3c) | ||||
Class 2 | 1,710,244 | |||
Class 4 | 51,722 | |||
Unaffiliated transfer agent fees | 1,140 | |||
Custodian fees (Note 4) | 165,621 | |||
Reports to shareholders | 150,812 | |||
Professional fees | 30,836 | |||
Trustees’ fees and expenses | 6,546 | |||
Other | 38,561 | |||
Total expenses | 8,954,344 | |||
Expense reductions (Note 4) | (6,596 | ) | ||
Net expenses | 8,947,748 | |||
Net investment income | 27,407,940 | |||
Realized and unrealized gains (losses): | ||||
Net realized gain (loss) from: | ||||
Investments | (232,467,065 | ) | ||
Foreign currency transactions | 45,974 | |||
Net realized gain (loss) | (232,421,091 | ) | ||
Net change in unrealized appreciation (depreciation) on: | ||||
Investments | 302,601,111 | |||
Translation of other assets and liabilities denominated in foreign currencies | 152,302 | |||
Net change in unrealized appreciation (depreciation) | 302,753,413 | |||
Net realized and unrealized gain (loss) | 70,332,322 | |||
Net increase (decrease) in net assets resulting from operations | $ | 97,740,262 | ||
The accompanying notes are an integral part of these financial statements.
TG-17
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statements of Changes in Net Assets
| Templeton Growth Securities Fund | ||||||||
| Six Months Ended June 30, 2009 (unaudited) | Year Ended December 31, 2008 | |||||||
Increase (decrease) in net assets: | ||||||||
Operations: | ||||||||
Net investment income | $ | 27,407,940 | $ | 66,716,886 | ||||
Net realized gain (loss) from investments and foreign currency transactions | (232,421,091 | ) | (164,782,328 | ) | ||||
Net change in unrealized appreciation (depreciation) on investments and translation of other assets and liabilities denominated in foreign currencies | 302,753,413 | (1,358,004,510 | ) | |||||
Net increase (decrease) in net assets resulting from operations | 97,740,262 | (1,456,069,952 | ) | |||||
Distributions to shareholders from: | ||||||||
Net investment income: | ||||||||
Class 1 | (17,057,443 | ) | (7,929,338 | ) | ||||
Class 2 | (48,545,883 | ) | (42,575,426 | ) | ||||
Class 4 | (1,318,174 | ) | (69,174 | ) | ||||
Net realized gains: | ||||||||
Class 1 | — | (26,359,362 | ) | |||||
Class 2 | — | (167,773,428 | ) | |||||
Class 4 | — | (229,952 | ) | |||||
Total distributions to shareholders | (66,921,500 | ) | (244,936,680 | ) | ||||
Capital share transactions: (Note 2) | ||||||||
Class 1 | 106,273,106 | 216,063,635 | ||||||
Class 2 | (48,033,904 | ) | (225,196,478 | ) | ||||
Class 4 | 12,453,561 | 31,532,804 | ||||||
Total capital share transactions | 70,692,763 | 22,399,961 | ||||||
Net increase (decrease) in net assets | 101,511,525 | (1,678,606,671 | ) | |||||
Net assets: | ||||||||
Beginning of period | 1,910,134,226 | 3,588,740,897 | ||||||
End of period | $ | 2,011,645,751 | $ | 1,910,134,226 | ||||
Undistributed net investment income included in net assets: | ||||||||
End of period | $ | 27,403,644 | $ | 66,917,204 | ||||
The accompanying notes are an integral part of these financial statements.
TG-18
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited)
Templeton Growth Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Templeton Variable Insurance Products Trust (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end investment company, consisting of twenty-two separate funds. The Templeton Growth Securities Fund (Fund) is included in this report. The financial statements of the remaining funds in the Trust are presented separately. Shares of the Fund are sold only to insurance company separate accounts to fund the benefits of variable life insurance policies or variable annuity contracts. The Fund offers three classes of shares: Class 1, Class 2, and Class 4. Each class of shares differs by its distribution fees, voting rights on matters affecting a single class and its exchange privilege.
The following summarizes the Fund’s significant accounting policies.
a. Security Valuation
Equity and other securities listed on a securities exchange or on the NASDAQ National Market System are valued at the last quoted sale price or the official closing price of the day, respectively. Over-the-counter securities and listed securities for which there is no reported sale are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. Certain equity securities are valued based upon fundamental characteristics or relationships to similar securities.
Government securities generally trade in the over-the-counter market rather than on a securities exchange. The Fund may utilize independent pricing services, quotations from bond dealers, and information with respect to bond and note transactions, to assist in determining a current market value for each security. The Fund’s pricing services may use valuation models or matrix pricing which considers information with respect to comparable bond and note transactions, quotations from bond dealers, or by reference to other securities that are considered comparable in such characteristics as rating, interest rate and maturity date, option adjusted spread models, prepayment projections, interest rate spreads and yield curves, to determine current value.
Foreign equity securities are valued as of the close of trading on the foreign stock exchange on which the security is primarily traded, or the NYSE, whichever is earlier. If no sale is reported at that time, the foreign equity security will be valued within the range of the most recent quoted bid and ask prices. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at the close of the NYSE on the day that the value of the security is determined.
The Fund has procedures to determine the fair value of individual securities and other assets for which market prices are not readily available or which may not be reliably priced. Methods for valuing these securities may include: fundamental analysis based upon the underlying investment book value, anticipated future cash flows, market changes in comparable or similar securities, matrix pricing, discounts from market prices of similar securities, or discounts applied due to the nature and duration of restrictions on the disposition of the securities. Due to the inherent uncertainty of valuations of such securities, the fair values may differ significantly from the values that would have been used had a ready market for such investments existed. Occasionally, events occur between the time at which trading in a security is completed and the close of the NYSE that might call into question the availability (including the reliability) of the value of a portfolio security held by the Fund. The investment manager monitors price movements following the close of trading in foreign stock markets through a series of country specific market proxies (such as baskets of American Depository Receipts, futures contracts and exchange traded funds). These price movements are measured against established trigger thresholds for each specific market proxy to assist in determining if an event has occurred. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services. All security valuation procedures are approved by the Fund’s Board of Trustees.
b. Foreign Currency Translation
Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. Purchases and sales of securities, income and expense items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Growth Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
b. Foreign Currency Translation (continued)
date. Occasionally, events may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the Fund’s Board of Trustees.
The Fund does not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments on the Statement of Operations.
Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period.
c. Foreign Currency Contracts
The Fund enters into foreign exchange contracts in order to manage foreign exchange rate risk between the trade date and settlement date of securities transactions. A foreign exchange contract is an agreement between the Fund and a counterparty to buy or sell a foreign currency for a specific exchange rate on a future date.
d. Income Taxes
No provision has been made for U.S. income taxes because it is the Fund’s policy to qualify as a regulated investment company under the Internal Revenue Code and to distribute to shareholders substantially all of its taxable income and net realized gains.
The Fund has reviewed the tax positions, taken on federal income tax returns, for each of the three open tax years and as of June 30, 2009, and has determined that no provision for income tax is required in the Fund’s financial statements.
Foreign securities held by the Fund may be subject to foreign taxation on dividend and interest income received. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist in the foreign markets in which the Fund invests.
e. Security Transactions, Investment Income, Expenses and Distributions
Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Amortization of premium and accretion of discount on debt securities are included in interest income. Dividend income is recorded on the ex-dividend date except that certain dividends from foreign securities are recognized as soon as the Fund is notified of the ex-dividend date. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with accounting principles generally accepted in the United States of America. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods.
Common expenses incurred by the Trust are allocated among the funds based on the ratio of net assets of each fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense.
Realized and unrealized gains and losses and net investment income, not including class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions, by class, are generally due to differences in class specific expenses.
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Growth Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
f. Accounting Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
g. Guarantees and Indemnifications
Under the Trust’s organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, on behalf of the Fund, enters into contracts with service providers that contain general indemnification clauses. The Trust’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote.
2. SHARES OF BENEFICIAL INTEREST
At June 30, 2009, there were an unlimited number of shares authorized (without par value). Transactions in the Fund’s shares were as follows:
| Six Months Ended June 30, 2009 | Year Ended December 31, 2008a | |||||||||||||
| Class 1 Shares: | Shares | Amount | Shares | Amount | ||||||||||
Shares sold | 13,467,644 | $ | 107,656,872 | 22,693,927 | $ | 256,698,452 | ||||||||
Shares issued in reinvestment of distributions | 2,018,632 | 17,057,443 | 2,666,306 | 34,288,699 | ||||||||||
Shares redeemed | (2,441,247 | ) | (18,441,209 | ) | (6,697,989 | ) | (74,923,516 | ) | ||||||
Net increase (decrease) | 13,045,029 | $ | 106,273,106 | 18,662,244 | $ | 216,063,635 | ||||||||
Class 2 Shares: | ||||||||||||||
Shares sold | 4,735,545 | $ | 36,932,802 | 11,250,052 | $ | 134,476,026 | ||||||||
Shares issued in reinvestment of distributions | 5,813,228 | 48,424,190 | 16,568,591 | 209,924,044 | ||||||||||
Shares redeemed | (17,736,960 | ) | (133,390,896 | ) | (49,397,331 | ) | (569,596,548 | ) | ||||||
Net increase (decrease) | (7,188,187 | ) | $ | (48,033,904 | ) | (21,578,688 | ) | $ | (225,196,478 | ) | ||||
Class 4 Shares: | ||||||||||||||
Shares sold | 1,481,205 | $ | 11,542,116 | 2,983,902 | $ | 31,388,775 | ||||||||
Shares issued on reinvestment of distributions | 156,739 | 1,318,174 | 23,247 | 298,725 | ||||||||||
Shares redeemed | (53,830 | ) | (406,729 | ) | (14,033 | ) | (154,696 | ) | ||||||
Net increase (decrease) | 1,584,114 | $ | 12,453,561 | 2,993,116 | $ | 31,532,804 | ||||||||
| a | For the period February 29, 2008 (effective date) to December 31, 2008 for Class 4. |
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Growth Securities Fund
3. TRANSACTIONS WITH AFFILIATES
Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Trust are also officers and/or directors of the following subsidiaries:
| Subsidiary | Affiliation | |
Templeton Global Advisors Limited (TGAL) | Investment manager | |
Templeton Asset Management Ltd. (TAML) | Investment manager | |
Franklin Templeton Services, LLC (FT Services) | Administrative manager | |
Franklin Templeton Distributors, Inc. (Distributors) | Principal underwriter | |
Franklin Templeton Investor Services, LLC (Investor Services) | Transfer agent |
a. Management Fees
The Fund pays an investment management fee to TGAL based on the average daily net assets of the Fund as follows:
| Annualized Fee Rate | Net Assets | |
| 1.000% | Up to and including $100 million | |
| 0.900% | over $100 million, up to and including $250 million | |
| 0.800% | over $250 million, up to and including $500 million | |
| 0.750% | over $500 million, up to and including $1 billion | |
| 0.700% | over $1 billion, up to and including $5 billion | |
| 0.675% | over $5 billion, up to and including $10 billion | |
| 0.655% | over $10 billion, up to and including $15 billion | |
| 0.635% | over $15 billion, up to and including $20 billion | |
| 0.615% | In excess of $20 billion |
Under a subadvisory agreement, TAML, an affiliate of TGAL, provides subadvisory services to the Fund and receives from TGAL fees based on the average daily net assets of the Fund.
b. Administrative Fees
Under an agreement with TGAL, FT Services provides administrative services to the Fund. The fee is paid by TGAL based on average daily net assets, and is not an additional expense of the Fund.
c. Distribution Fees
The Fund’s Board of Trustees has adopted distribution plans for Class 2 and Class 4 shares pursuant to Rule 12b-1 under the 1940 Act. Under the Fund’s compensation distribution plans, the Fund pays Distributors for costs incurred in connection with the servicing, sale and distribution of the Fund’s shares up to 0.35% per year of its average daily net assets of each class. The Board of Trustees has agreed to limit the current rate to 0.25% per year for Class 2.
d. Transfer Agent Fees
Investor Services, under terms of an agreement, performs shareholder servicing for the Fund and is not paid by the Fund for the services.
4. EXPENSE OFFSET ARRANGEMENT
The Fund has entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Fund’s custodian expenses. During the period ended June 30, 2009, the custodian fees were reduced as noted in the Statement of Operations.
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Growth Securities Fund
5. INCOME TAXES
For tax purposes, capital losses may be carried over to offset future capital gains, if any. At December 31, 2008, the Fund had tax basis capital losses of $103,405,910 expiring in 2016.
For tax purposes, realized capital losses and realized currency losses occurring subsequent to October 31, may be deferred and treated as occurring on the first day of the following fiscal year. At December 31, 2008, the Fund deferred realized capital losses and realized currency losses of $63,077,397 and $196,772, respectively.
At June 30, 2009, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
Cost of investments | $ | 2,592,409,180 | ||
Unrealized appreciation | $ | 85,889,380 | ||
Unrealized depreciation | (648,819,291 | ) | ||
Net unrealized appreciation (depreciation) | $ | (562,929,911 | ) | |
Net investment income differs for financial statement and tax purposes primarily due to differing treatment of foreign currency transactions.
Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatments of wash sales and foreign currency transactions.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the period ended June 30, 2009, aggregated $227,546,077 and $149,805,247, respectively.
7. CONCENTRATION OF RISK
Investing in foreign securities may include certain risks and considerations not typically associated with investing in U.S. securities, such as fluctuating currency values and changing local and regional economic, political and social conditions, which may result in greater market volatility. In addition, certain foreign securities may not be as liquid as U.S. securities.
8. CREDIT FACILITY
Effective January 23, 2009, the Fund, together with other U.S. registered and foreign investment funds managed by Franklin Templeton Investments (individually, “Borrower”; collectively “Borrowers”), entered into a joint syndicated senior unsecured credit facility totaling $725 million (Global Credit Facility) to provide a source of funds to the Borrowers for temporary and emergency purposes, including the ability to meet future unanticipated or unusually large redemption requests.
Under the terms of the Global Credit Facility, the Fund shall, in addition to interest charged on any borrowings made by the Fund and other costs incurred by the Fund, pay its share of fees and expenses incurred in connection with the implementation and maintenance of the Global Credit Facility, based upon its relative share of the aggregate net assets of all of the Borrowers, including an annual commitment fee based upon the unused portion of the Global Credit Facility. During the period, the Fund incurred commitment fees of $2,106 of its pro rata portion of the Global Credit Facility, which is reflected in other expenses on the Statement of Operations. During the period ended June 30, 2009, the Fund did not utilize the Global Credit Facility.
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Growth Securities Fund
9. FAIR VALUE MEASUREMENTS
Financial Accounting Standards Board (FASB) Statement No. 157, “Fair Value Measurement” (SFAS 157) establishes a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Fund’s own market assumptions (unobservable inputs). These inputs are used in determining the value of the Fund’s investments and are summarized in the following fair value hierarchy:
| • | Level 1 – quoted prices in active markets for identical securities |
| • | Level 2 – other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speed, credit risk, etc.) |
| • | Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments) |
The inputs or methodology used for valuing securities are not an indication of the risk associated with investing in those securities.
The following is a summary of the inputs used as of June 30, 2009, in valuing the Fund’s assets and liabilities carried at fair value:
| Level 1 | Level 2 | Level 3 | Total | |||||||||
Assets: | ||||||||||||
Investments in Securities: | ||||||||||||
Equity Investmentsa,b | $ | 1,942,245,788 | $ | — | $ | — | $ | 1,942,245,788 | ||||
Short Term Investments | 33,999,966 | 53,233,515 | — | 87,233,481 | ||||||||
Total Investments in Securities | $ | 1,976,245,754 | $ | 53,233,515 | $ | — | $ | 2,029,479,269 | ||||
| aIncludes | common and preferred stock. |
| bFor | detailed industry descriptions, see the accompanying Statement of Investments. |
10. SUBSEQUENT EVENTS
Management has evaluated subsequent events through August 7, 2009 and determined that no events have occurred that require disclosure.
ABBREVIATIONS
Selected Portfolio
ADR - American Depository Receipt
FHLB - Federal Home Loan Bank
FHLMC - Federal Home Loan Mortgage Corp.
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Franklin Templeton Variable Insurance Products Trust
Tax Designation (unaudited)
Templeton Growth Securities Fund
At December 31, 2008, more than 50% of the Fund’s total assets were invested in securities of foreign issuers. In most instances, foreign taxes were withheld from income paid to the Fund on these investments. As shown in the table below, the Fund designates to shareholders the foreign source income and foreign taxes paid, pursuant to Section 853 of the Internal Revenue Code. This designation will allow shareholders of record on June 12, 2009, to treat their proportionate share of foreign taxes paid by the Fund as having been paid directly by them. The shareholder shall consider these amounts as foreign taxes paid in the tax year in which they receive the Fund distribution.
The following table provides a detailed analysis of foreign tax paid and foreign source income as designated by the Fund, to Class 1, Class 2, and Class 4 shareholders of record.
| Class | Foreign Tax Paid Per Share | Foreign Source Income Per Share | ||||
Class 1 | $ | 0.0355 | $ | 0.2838 | ||
Class 2 | $ | 0.0355 | $ | 0.2562 | ||
Class 4 | $ | 0.0355 | $ | 0.2782 | ||
Foreign Tax Paid Per Share (Column 1) is the amount per share available to you, as a tax credit (assuming you held your shares in the Fund for a minimum of 16 days during the 31-day period beginning 15 days before the ex-dividend date of the Fund’s distribution to which the foreign taxes relate), or, as a tax deduction.
Foreign Source Income Per Share (Column 2) is the amount per share of income dividends paid to you that is attributable to foreign securities held by the Fund, plus any foreign taxes withheld on these dividends.
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The indexes are unmanaged and include reinvested distributions.
Barclays Capital (BC) U.S. Aggregate Index is a market capitalization-weighted index representing the U.S. investment-grade, fixed-rate, taxable bond market with index components for government and corporate, mortgage pass-through and asset-backed securities. All issues included are SEC registered, taxable, dollar denominated and nonconvertible, must have at least one year to final maturity and must be rated investment grade (Baa3/BBB-/BBB- or higher) by Moody’s, Standard & Poor’s or Fitch, respectively.
Barclays Capital (BC) U.S. Government: Intermediate Index is the intermediate component of the BC U.S. Government Index. The index includes securities issued by the U.S. government or agency. These include obligations of the U.S. Treasury with remaining maturity of one year or more and publicly issued debt of U.S. governmental agencies, quasi-federal corporations, and corporate or foreign debt guaranteed by the U.S. government.
Citigroup World Government Bond Index is market capitalization weighted and tracks total returns of government bonds in 23 developed countries globally.
Consumer Price Index (CPI), calculated by the U.S. Bureau of Labor Statistics, is a commonly used measure of the inflation rate.
Credit Suisse (CS) High Yield Index is designed to mirror the investible universe of the U.S. dollar-denominated high yield debt market.
Dow Jones Industrial Average is price weighted based on the average market price of 30 blue chip stocks of companies that are generally industry leaders.
J.P. Morgan (JPM) Emerging Markets Bond Index (EMBI) Global tracks total returns for U.S. dollar-denominated debt instruments issued by emerging market sovereign and quasi-sovereign entities: Brady bonds, loans and Eurobonds.
J.P. Morgan (JPM) Government Bond Index (GBI) Global tracks total returns for liquid, fixed-rate, domestic government bonds with maturities greater than one year issued by developed countries globally.
Lipper Multi-Sector Income Funds Classification Average is an equally weighted average calculation of performance figures for all funds within the Lipper Multi-Sector Income Funds classification in the Lipper Open-End underlying funds universe. Lipper Multi-Sector Income Funds are defined as funds that seek current income by allocating assets among different fixed income securities sectors (not primarily in one sector except for defensive purposes), including U.S. and foreign governments, with a significant portion rated below investment grade. For the six-month period ended 6/30/09, there were 162 funds in this category. Lipper calculations do not include contract fees, expenses or sales charges, and may have been different if such charges had been considered.
Lipper VIP Equity Income Funds Classification Average is an equally weighted average calculation of performance figures for all funds within the Lipper Equity Income Funds classification in the Lipper VIP underlying funds universe. Lipper Equity Income Funds seek relatively high current income and growth of income through investing 65% or more of their portfolios in equities. For the six-month period ended 6/30/09, there were 71 funds in this category. Lipper calculations do not include contract fees, expenses or sales charges, and may have been different if such charges had been considered.
Lipper VIP General Bond Funds Classification Average is an equally weighted average calculation of performance figures for all funds within the Lipper General Bond Funds classification in the Lipper VIP underlying funds universe. Lipper General Bond Funds do not have any quality or maturity restrictions, and tend to keep a bulk of assets in corporate and government debt issues. For the six-month period ended 6/30/09, there were 64 funds in this category. Lipper calculations do not include contract fees, expenses or sales charges, and may have been different if such charges had been considered.
Lipper VIP General U.S. Government Funds Classification Average is an equally weighted average calculation of performance figures for all funds within the Lipper General U.S. Government Funds classification in the Lipper VIP underlying funds universe. Lipper General U.S. Government Funds invest at least 65% of assets in U.S. government and agency issues. For the six-month period ended 6/30/09, there were 72 funds in this category. Lipper calculations do not include contract fees, expenses or sales charges, and may have been different if such charges had been considered.
Lipper VIP High Current Yield Funds Classification Average is an equally weighted average calculation of performance figures for all funds within the Lipper High Current Yield Funds in the Lipper VIP underlying funds universe. Lipper High Current Yield Funds aim at high (relative) current yield from fixed income securities, have no quality or maturity restrictions,
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and tend to invest in lower grade debt issues. For the six-month period ended 6/30/09, there were 115 funds in this category. Lipper calculations do not include contract fees, expenses or sales charges, and may have been different if such charges had been considered.
Merrill Lynch (ML) 2-Year Zero Coupon Bond Index includes zero coupon bonds that pay no interest and are issued at a discount from redemption price.
Morgan Stanley Capital International (MSCI) All Country (AC) World Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in global developed and emerging markets.
Morgan Stanley Capital International (MSCI) Emerging Markets (EM) Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in global emerging markets.
Morgan Stanley Capital International (MSCI) Europe, Australasia, Far East (EAFE) Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in global developed markets excluding the U.S. and Canada.
Morgan Stanley Capital International (MSCI) Europe, Australasia, Far East (EAFE) Index Net Return (Local Currency) is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance of global developed markets excluding the U.S. and Canada. The index is calculated in local currency and includes reinvested daily net dividends.
Morgan Stanley Capital International (MSCI) World Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in global developed markets.
NASDAQ Composite Index measures all NASDAQ domestic and international based common type stocks listed on The NASDAQ Stock Market. The index is market value weighted and includes more than 3,000 companies.
Russell 1000® Index is market capitalization weighted and measures performance of the 1,000 largest companies in the Russell 3000 Index, which represent approximately 92% of total market capitalization of the Russell 3000 Index.
Russell 1000 Value Index is market capitalization weighted and measures performance of those Russell 1000 Index companies with lower price-to-book ratios and lower forecasted growth values.
Russell 2500™ Index is market capitalization weighted and measures performance of the 2,500 smallest companies in the Russell 3000 Index, which represent approximately 17% of total market capitalization of the Russell 3000 Index.
Russell 2500 Value Index is market capitalization weighted and measures performance of those Russell 2500 Index companies with lower price-to-book ratios and lower forecasted growth values.
Russell 3000® Growth Index is market capitalization weighted and measures performance of those Russell 3000 Index companies with higher price-to-book ratios and higher forecasted growth values.
Russell 3000 Index is market capitalization weighted and measures performance of the 3,000 largest U.S. companies based on total market capitalization, which represent approximately 98% of the investible U.S. equity market.
Russell Midcap® Growth Index is market capitalization weighted and measures performance of those Russell Midcap Index companies with higher price-to-book ratios and higher forecasted growth values.
Russell Midcap Index is market capitalization weighted and measures performance of the 800 smallest companies in the Russell 1000 Index, which represent approximately 26% of total market capitalization of the Russell 1000 Index.
Standard & Poor’s 500 Index (S&P 500) consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock’s weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance.
Standard & Poor’s Global REIT Index is designed to measure performance of the investible universe of publicly traded real estate investment trusts. Index constituents generally derive more than 60% of revenue from real estate development, management, rental, and/or direct investment in physical property and with local REIT or property trust tax status.
Standard & Poor’s/International Finance Corporation Investable (S&P/IFCI) Composite Index is a free float-adjusted, market capitalization-weighted index designed to measure equity performance in global emerging markets.
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Franklin Templeton Variable Insurance Products Trust
Board Review of Investment Management Agreement
At a meeting held April 14, 2009, the Board of Trustees (Board), including a majority of non-interested or independent Trustees, approved renewal of the investment management agreement for each of the separate funds within the Trust (Fund(s)). In reaching this decision, the Board took into account information furnished throughout the year at regular Board meetings, as well as information prepared specifically in connection with the annual renewal review process. Information furnished and discussed throughout the year included investment performance reports and related financial information for each Fund, as well as periodic reports on shareholder services, legal, compliance, pricing, brokerage commissions and execution and other services provided by the Investment Manager (Manager) and its affiliates. Information furnished specifically in connection with the renewal process included reports prepared by Lipper, Inc. (Lipper), an independent organization, as well as additional material, including a Fund profitability analysis report prepared by management. The Lipper reports compared a Fund’s investment performance and expenses with those of other mutual funds deemed comparable to the Fund as selected by Lipper. The Fund profitability analysis report discussed the profitability to Franklin Templeton Investments from its overall U.S. fund operations, as well as on an individual fund-by-fund basis. Included with such profitability analysis report was information on a fund-by-fund basis listing portfolio managers and other accounts they manage, as well as information on management fees charged by the Manager and its affiliates including management’s explanation of differences where relevant and a three-year expense analysis with an explanation for any increase in expense ratios. Additional material accompanying such report was a memorandum prepared by management describing project initiatives and capital investments relating to the services provided to the Funds by the Franklin Templeton Investments organization, as well as a memorandum relating to economies of scale and a comparative analysis concerning transfer agent fees charged each Fund. Such material also discussed some of the actions taken by management in coping with problems arising out of the past year’s financial upheaval.
In considering such materials, the independent Trustees received assistance and advice from and met separately with independent counsel. While the investment management agreements for all Funds were considered at the same Board meeting, the Board dealt with each Fund separately. In approving continuance of the investment management agreement for each Fund, the Board, including a majority of independent Trustees, determined that the existing management fee structure was fair and reasonable and that continuance of the investment management agreement was in the best interests of each Fund and its shareholders. While attention was given to all information furnished, the following discusses some primary factors relevant to the Board’s decision.
NATURE, EXTENT AND QUALITY OF SERVICE. The Board was satisfied with the nature and quality of the overall services provided by the Manager and its affiliates to the Funds and their shareholders. In addition to investment performance and expenses discussed later, the Board’s opinion was based, in part, upon periodic reports furnished it showing that the investment policies and restrictions for each Fund were consistently complied with as well as other reports periodically furnished the Board covering matters such as the compliance of portfolio managers and other management personnel with the code of ethics adopted throughout the Franklin Templeton fund complex, the adherence to fair value pricing procedures established by the Board, and the accuracy of net asset value calculations. Favorable consideration was given to management’s continuous efforts and expenditures in establishing back-up systems and recovery procedures to function in the event of a natural disaster, it being noted that such systems and procedures had functioned smoothly during the Florida hurricanes and blackouts experienced in recent years. Among other factors taken into account by the Board were the Manager’s best execution trading policies, including a favorable report by an independent portfolio trading analytical firm. Consideration was also given to the experience of each Fund’s portfolio management team, the number of accounts managed and general method of compensation. In this latter respect, the Board noted that a primary factor in management’s determination of a portfolio manager’s bonus compensation was the relative investment performance of the funds he or she managed and that a portion of such bonus was required to be invested in a predesignated list of funds within such person’s fund management area so as to be aligned with the interests of Fund shareholders. Particular attention was given to the overall performance and actions taken by the Manager and its affiliates in response to problems arising out of the market turmoil and financial crisis experienced during the past year. In this respect, the Board noted that management’s independent credit analysis and diligent risk management procedures had minimized exposure of funds within the Franklin Templeton complex to subprime mortgages and that its continuous monitoring of counterparty credit risk had limited fund exposure to firms experiencing financial difficulties like Bear Stearns and AIG. The same type of conservative approach and attention to risk had also prevented any structured investment products or other volatile instruments
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Franklin Templeton Variable Insurance Products Trust
Shareholder Information (continued)
Board Review of Investment Management Agreement (continued)
from being held in the portfolios of any of the money market funds within the Franklin Templeton complex, including the sweep money fund utilized by many of the funds as part of their cash management. The Board also took into account, among other things, management’s efforts in establishing a $725 million global credit facility for the benefit of the funds and other accounts managed by Franklin Templeton Investments to provide a source of cash for temporary and emergency purposes or to meet unusual redemption requests as well as the strong financial position of the Manager’s parent company and its commitment to the mutual fund business. The Board also noted that during the past year Franklin Templeton Investments, like many other fund managers, had announced a hiring freeze and implemented employee reductions, and the Board discussed with management the nature of such reductions and steps being taken to minimize any negative impact on the nature and quality of services being provided the funds.
INVESTMENT PERFORMANCE. The Board placed significant emphasis on the investment performance of each of the Funds in view of its importance to shareholders. While consideration was given to performance reports and discussions with portfolio managers at Board meetings throughout the year, particular attention in assessing performance was given to the Lipper reports furnished for the agreement renewals of all Funds other than Franklin Global Communications Securities Fund and Franklin Money Market Fund, which were in the process of liquidating. The Lipper reports prepared for each individual Fund showed the investment performance of Class 1 shares, or Class 2 shares for those Funds without Class 1 shares, in comparison to a performance universe selected by Lipper. Comparative performance for each Fund was shown for the one-year period ended January 31, 2009, and previous periods ended that date of up to 10 years unless otherwise noted. Performance was shown on a total return basis for each Fund and in certain cases, as indicated, on an income return basis as well. The following summarizes the performance results for each of the Funds and the Board’s view of such performance.
Franklin Flex Cap Growth Securities Fund – The performance universe for this Fund, which has been in operation for only three full years, consisted of the Fund and all multi-cap growth funds underlying variable insurance products as selected by Lipper. Consistent with the market sell-off that occurred in 2008, the Fund and all other funds within the performance universe experienced losses for the one-year period. The Lipper report showed the Fund’s comparative total return for the one-year period to be in the highest quintile of its performance universe, and on an annualized basis to be in the second-highest quintile of such universe for its three-year period of operation. The Board noted such favorable comparative performance.
Franklin Global Real Estate Securities Fund – The performance universe for this Fund consisted of the Fund and all real estate funds underlying variable insurance products as selected by Lipper. Consistent with the market sell-off that occurred in 2008, the Fund and all other funds within the performance universe experienced losses for the one-year period. The Lipper report showed the Fund’s comparative total return to be in the second-highest quintile of such universe for the one-year period, but on an annualized basis to be in the lowest quintile of such universe for the previous three-, five- and 10-year periods. The Board noted that on May 1, 2007, the Fund had changed portfolio managers and also had adopted a global investment mandate. The Board noted the Fund’s favorable comparative performance for the one-year period but believed that the limited period of operations since such change in managers and mandate provided no meaningful measure of performance.
Franklin Growth and Income Securities Fund – The performance universe for this Fund consisted of the Fund and all equity income funds underlying variable insurance products as selected by Lipper. The Lipper report showed the Fund’s income return during the one-year period to be in the second-highest quintile of its performance universe, and on an annualized basis in each of the previous three-, five- and 10-year periods to be in the highest quintile of such universe. Consistent with the market sell-off that occurred in 2008, the Fund and all other funds within the performance universe experienced losses for the one-year period. The Lipper report showed the Fund’s comparative total return for the one-year period to be above the median of its performance universe, and on an annualized basis for each of the previous three- and five-year periods to be in the second-lowest quintile and for the previous 10-year period to be in the middle quintile of such performance universe. While intending to monitor management’s efforts to improve total return, the Board did not believe the Fund’s overall performance warranted any change in portfolio management.
Franklin High Income Securities Fund – The performance universe for this Fund consisted of the Fund and all high current yield funds underlying variable insurance products as selected by Lipper. The Lipper report showed the Fund’s income return for the
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Franklin Templeton Variable Insurance Products Trust
Shareholder Information (continued)
Board Review of Investment Management Agreement (continued)
one-year period to be in the middle quintile of such universe, and on an annualized basis to be in the middle quintile for the previous three- and five-year periods, and the highest quintile of such universe for the previous 10-year period. Consistent with the market sell-off that occurred in 2008, the Fund and all other funds within the performance universe experienced losses for the one-year period. The Lipper report showed the Fund’s comparative total return to be in the second-highest quintile of its performance universe for the one-year period as well as the previous three- and five-year periods on an annualized basis and in the second-lowest quintile of such universe for the previous 10-year period on an annualized basis. The Board noted the Fund’s overall comparative performance as shown in the Lipper report and did not believe that any change in portfolio management or investment approach was warranted.
Franklin Income Securities Fund – The performance universe for this Fund consisted of the Fund and all mixed-asset target allocation moderate funds underlying variable insurance products as selected by Lipper. The Lipper report showed the Fund’s income return to be in the highest quintile of such universe for the one-year period and to also be in the highest quintile of such universe for each of the previous three-, five- and 10-year periods on an annualized basis. Consistent with the market sell-off that occurred in 2008, the Fund and all other funds within the performance universe experienced losses for the one-year period. The Lipper report showed the Fund’s comparative total return to be in the second-lowest quintile of its performance universe for the one-year period and on an annualized basis to be in the middle, second-highest and highest quintiles of such universe, respectively, for each of the previous three-, five- and 10-year periods. The Board discussed with management the reasons for the Fund’s total return performance for the recent one-year period, but believed its overall comparative performance was consistent with its objective of maximizing income while maintaining prospects for capital appreciation.
Franklin Large Cap Growth Securities Fund – The performance universe for this Fund consisted of the Fund and all large-cap core funds underlying variable insurance products as selected by Lipper. Consistent with the market sell-off that occurred in 2008, the Fund and all other funds within the performance universe experienced losses for the one-year period. The Lipper report showed the Fund’s comparative total return to be in the highest quintile of such universe for the one-year period, and on an annualized basis to be in the highest quintile of such universe for the previous three- and 10-year periods, and the middle quintile of such universe for the previous five-year period. The Board noted such favorable comparative performance.
Franklin Large Cap Value Securities Fund – The performance universe for this Fund, which has been in operation for only three full years, consisted of the Fund and all large-cap value funds underlying variable insurance products as selected by Lipper. Consistent with the market sell-off that occurred in 2008, the Fund and all other funds within the performance universe experienced losses for the one-year period. The Lipper report showed the Fund’s comparative total return to be in the middle quintile of such universe for the one-year period and to also be in the middle quintile of such universe on an annualized basis for its three-year period of operation. The Board did not believe such comparative performance warranted any change in portfolio management, noting also the Fund’s limited period of operation.
Franklin Rising Dividends Securities Fund – The performance universe for this Fund consisted of the Fund and all multi-cap value funds underlying variable insurance products as selected by Lipper. Consistent with the market sell-off that occurred in 2008, the Fund and all other funds within the performance universe experienced losses for the one-year period. The Lipper report showed the Fund’s comparative total return to be in the highest quintile of the performance universe for the one-year period and on an annualized basis to be in the highest or second-highest quintile of such universe for each of the three-, five- and 10-year periods. The Board noted such favorable comparative performance.
Franklin Small Cap Value Securities Fund – The performance universe for this Fund consists of the Fund and all small-cap value funds underlying variable insurance products as selected by Lipper. Consistent with the market sell-off that occurred in 2008, the Fund and all other funds within the performance universe experienced losses for the one-year period. The Lipper report showed the Fund’s comparative total return for the one-year period to be in the middle quintile of such performance universe, and on an annualized basis to be in the middle quintile of such universe for the previous three-year period, and the second-highest quintile of such universe for the previous five- and 10-year periods. The Board did not believe the Fund’s investment performance warranted any change in portfolio management or investment approach.
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Franklin Templeton Variable Insurance Products Trust
Shareholder Information (continued)
Board Review of Investment Management Agreement (continued)
Franklin Small-Mid Cap Growth Securities Fund – The performance universe for this Fund consisted of the Fund and all mid-cap growth funds underlying variable insurance products as selected by Lipper. Consistent with the market sell-off that occurred in 2008, the Fund and all other funds within the performance universe experienced losses for the one-year period. The Lipper report showed the Fund’s comparative total return for the one-year period to be in the second-highest quintile of such universe, and on an annualized basis to be in the middle quintile of such universe for the previous three-year period, the second- lowest quintile of such universe for the previous five-year period, and the second-highest quintile of such universe for the previous 10-year period. The Board did not believe the Fund’s investment performance warranted any change in portfolio management or investment approach.
Franklin Strategic Income Securities Fund – The performance universe for this Fund consisted of the Fund and all general bond funds underlying variable insurance products as selected by Lipper. The Lipper report showed the Fund’s income return to be in the second-highest quintile of such performance universe for the one-year period, and on an annualized basis to be in the second-highest and middle quintiles, respectively, during the previous three- and five-year periods. The Fund has not been in existence for a full 10-year period. The Lipper report showed the Fund’s total return to be in the middle quintile of such universe during the one-year period, and on an annualized basis to be in the second-highest quintile of such universe for the previous three- and five-year periods. The Board was satisfied with such comparative performance.
Franklin Templeton VIP Founding Funds Allocation Fund – The performance universe for this Fund consisted of the Fund and all mixed-asset target allocation growth funds underlying variable insurance products as selected by Lipper. The Fund has been in existence for only one full year and the Lipper report showed its total return to be in the lowest quintile of such performance universe for the one-year period. The Fund’s total return reflected the composite underperformance of the three underlying funds in which it invests and such performance was discussed with management. In view of the Fund’s short period of operation, the Board did not believe such performance to be sufficiently meaningful so as to warrant any change in portfolio management or investment approach.
Franklin U.S. Government Fund – The performance universe for this Fund consisted of the Fund and all general U.S. government funds underlying variable insurance products as selected by Lipper. The Lipper report showed the Fund’s income return for the one-year period to be in the highest quintile of such universe and on an annualized basis to also be in the highest quintile of such universe for the previous three-, five- and 10-year periods. The Lipper report showed the Fund’s total return to be in the highest quintile of such universe for the one-year period, and on an annualized basis to also be in the highest quintile of such universe for the previous three-, five- and 10-year periods. The Board was satisfied with such performance.
Franklin Zero Coupon Fund 2010 – The performance universe for this Fund consisted of the Fund and all general bond funds underlying variable insurance products as selected by Lipper. The Lipper report showed the Fund’s income return for the one-year period to be in the middle quintile of such universe and on an annualized basis to also be in the middle quintile of such universe for each of the previous three-, five- and 10-year periods. The Lipper report showed the Fund’s total return to be in the highest quintile of the performance universe for the one-year period, and on an annualized basis to also be in the highest quintile of such universe for each of the previous three-, five- and 10-year periods. The Board was satisfied with such performance.
Mutual Discovery Securities Fund (Mutual Global Discovery Securities Fund after May 1, 2009) – The performance universe for this Fund consisted of the Fund and all global value funds underlying variable insurance products as selected by Lipper. Consistent with the market sell-off that occurred in 2008, the Fund and all other funds within the performance universe experienced losses for the one-year period. The Lipper report showed the Fund’s comparative total return to be in the highest quintile of such universe for the one-year period and on an annualized basis to also be in the highest quintile of such universe for each of the previous three-, five- and 10-year periods. The Board noted such favorable comparative performance.
Mutual Shares Securities Fund – The performance universe for this Fund consisted of the Fund and all multi-cap value funds underlying variable insurance products as selected by Lipper. The Lipper report showed the Fund’s income return for the one-year period to be in the highest quintile of such universe, and on an annualized basis to be in the highest or second-highest quintile for each of the previous three-, five- and 10-year periods. Consistent with the market sell-off that occurred in 2008, the Fund and all other funds within the performance universe experienced losses for the one-year period. The Lipper report showed
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Franklin Templeton Variable Insurance Products Trust
Shareholder Information (continued)
Board Review of Investment Management Agreement (continued)
the Fund’s comparative total return for the one-year period to be in the second-highest quintile of the performance universe, and on an annualized basis to be in the highest quintile of such universe for each of the previous three-, five- and 10-year periods. The Board noted such favorable comparative performance.
Templeton Developing Markets Securities Fund – The performance universe for this Fund consisted of the Fund and all emerging markets funds underlying variable insurance products as selected by Lipper. Consistent with the market sell-off that occurred in 2008, the Fund and all other funds within the performance universe experienced losses for the one-year period. The Lipper report showed the Fund’s comparative total return for the one-year period to be in the highest quintile of such performance universe and on an annualized basis to be in the second-lowest quintile during the previous three-year period and the lowest quintile of such universe for the previous five- and 10-year periods. With respect to its longer term performance, the Board noted the Fund’s conservative, value-oriented approach and the fact that during each of the six one-year periods prior to January 31, 2009, the Fund experienced double digit gains as shown in the Lipper report. The Board did not believe such performance warranted any change in portfolio management.
Templeton Foreign Securities Fund – The performance universe for this Fund consisted of the Fund and all international value funds underlying variable insurance products as selected by Lipper. Consistent with the market sell-off that occurred in 2008, the Fund and all other funds within the performance universe experienced losses for the one-year period. The Lipper report showed the Fund’s comparative total return for the one-year period to be in the highest quintile of such performance universe and on an annualized basis to be in the highest or second-highest quintile of such universe in each of the previous three-, five- and 10-year periods. The Board noted such favorable comparative performance.
Templeton Global Asset Allocation Fund – The performance universe for this Fund consisted of the Fund and all global flexible portfolio funds underlying variable insurance products as selected by Lipper. Consistent with the market sell-off that occurred in 2008, the Fund and all other funds within the performance universe experienced losses for the one-year period. The Lipper report showed the Fund’s comparative total return for the one-year period to be in the second-highest quintile of such performance universe and on an annualized basis to be in the middle quintile of such universe for the previous three-year period, and in the second-highest quintile of such universe for each of the previous five- and 10-year periods. The Board noted such favorable comparative performance.
Templeton Global Income Securities Fund (Templeton Global Bond Securities Fund after May 1, 2009) – The performance universe for this Fund consisted of the Fund and all global income funds underlying variable insurance products as selected by Lipper. The Lipper report showed the Fund’s income return for the one-year period to be in the middle quintile of such performance universe, and on an annualized basis to be in the second-lowest quintile of such universe for the previous three-year period and the second-highest quintile of such universe during each of the previous five- and 10-year periods. The Lipper report showed the Fund’s total return for the one-year period to be in the highest quintile of its performance universe and on an annualized basis to be in the highest quintile of such universe during each of the previous three-, five- and 10-year periods. The Board was satisfied with such comparative performance.
Templeton Growth Securities Fund – The performance universe for this Fund consisted of the Fund and all global value funds underlying variable insurance products as selected by Lipper. Consistent with the market sell-off that occurred in 2008, the Fund and all other funds within the performance universe experienced losses for the one-year period. The Lipper report showed the Fund’s total return for the one-year period to be in the second-lowest quintile of such performance universe and on an annualized basis to be in the lowest quintile of such universe for the previous three-year period, the second-lowest quintile for the previous five-year period, and the second-highest quintile for the previous 10-year period. Management discussed the reasons for the Fund’s relative underperformance in recent years emphasizing its disciplined, value-oriented, long-term approach to investments and noting changes in the Fund’s portfolio managers that had taken place during the past two years. The Board was not satisfied with the Fund’s performance, but believed management was taking positive steps to improve such performance and that there should be no immediate change in portfolio management.
COMPARATIVE EXPENSES. Consideration was given to information contained in the Lipper reports as to the management fee and total expense ratios of each Fund compared with those of a group of other funds selected by Lipper as its appropriate Lipper
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Franklin Templeton Variable Insurance Products Trust
Shareholder Information (continued)
Board Review of Investment Management Agreement (continued)
expense group. Lipper expense data is based upon historical information taken from each fund’s most recent annual report and, as a result of the severe decline in mutual fund industry assets during the last quarter of 2008, is based on asset levels that are higher than the level currently existing for most funds. While recognizing the limitations inherent in Lipper’s methodology and recognizing that current expense ratios may increase as assets decline, the Board believed that the independent analysis conducted by Lipper remained an appropriate measure of comparative expenses. In reviewing comparative costs, Lipper provides information on the Funds’ contractual investment management fee in comparison with the contractual investment management fee that would have been charged by other funds within its Lipper expense group assuming they were similar in size to the Fund, as well as the actual total expenses of the Fund in comparison with those of its Lipper expense group. The Lipper contractual investment management fee analysis includes administrative charges at the fund level as being part of a management fee, and actual total expenses, for comparative consistency, are shown by Lipper for Fund Class 1 shares, or Class 2 shares for those Funds without Class 1 shares. The results of such comparisons showed that both the contractual investment management fee rates and actual total expenses of the following Funds were in the least expensive quintile of their respective Lipper expense group: Franklin Income Securities Fund, Franklin Small Cap Value Securities Fund, Franklin Growth and Income Securities Fund, Franklin High Income Securities Fund, Templeton Global Income Securities Fund and Franklin Zero Coupon Fund 2010. The Board was satisfied with the comparative contractual investment management fees and expenses of these Funds. The contractual investment management fee rate for Franklin Strategic Income Securities Fund and Franklin U.S. Government Fund were below the median of their Lipper expense groups, with total expenses also below the median of their respective Lipper expense groups. The Board was satisfied with the comparative contractual investment management fees and expenses of these Funds. The contractual investment management fee rate for Franklin Rising Dividends Securities Fund was above the median of its Lipper expense group, but its actual total expenses were below the median of such expense group. The Board found such comparative expenses to be acceptable. The contractual investment management fee rates for Franklin Flex Cap Growth Securities Fund and Franklin Large Cap Value Securities Fund were in the most expensive quintiles of their Lipper expense groups, and in each case their actual total expense rates were below the median of such groups. The Board was satisfied with the comparative expenses of these Funds, noting that expenses were subsidized through fee waivers. The contractual investment management fee rate as well as actual expenses for Franklin Large Cap Growth Securities Fund was at the median of its Lipper expense group. The Board found the comparative expenses of this Fund to be acceptable. The contractual investment management fee rate and actual total expense rate of Templeton Global Asset Allocation Fund were each above but within five and three basis points, respectively, of its Lipper expense group median and the Board found such comparative expenses acceptable, noting that its expenses were partially subsidized through fee waivers. The contractual investment fee rate and actual total expense rate of Templeton Growth Securities Fund were in each case above but within three basis points of the median of its Lipper expense group, and the Board found such expenses acceptable. The contractual investment management fee rate and actual total expense rate of Templeton Developing Markets Securities Fund were both in the most expensive quintiles of its Lipper expense group. The Board found such expenses acceptable, noting factors raised by management, such as the quality and experience of its portfolio managers and research staff and the depth of its physical presence and coverage in developing markets geographical areas. The contractual investment management fee rate of Mutual Discovery Securities Fund, as well as the actual total expense rate of such Fund, was in the most expensive quintile of its respective Lipper expense group. The contractual investment management fee rate of Mutual Shares Securities Fund was in the most expensive quintile of its expense group, while its total expenses were in the second most expensive quintile of such group. In discussing these comparative expenses, management stated its view that the expenses of both Funds were at an appropriate level in view of their consistently superior investment performance, the quality and experience of their portfolio managers and the research-driven, fundamental value strategy employed in their portfolio selections. The Board found the comparative expenses of these Funds to be acceptable noting the points raised by management. The contractual investment fee rate for Franklin Global Real Estate Securities Fund was in the most expensive quintile of its Lipper expense group, while its total expenses were in the least expensive quintile of such group. The Board was satisfied with such comparative expenses, noting that due to fee waivers this Fund’s actual management fee was in the least expensive quintile of its expense group. The contractual investment management fee rate for Templeton Foreign Securities Fund was at the median of its Lipper expense group, while its actual total expense rate was in the least expensive quintile of such group, and the Board was satisfied with these expenses. The contractual management fee rate for Franklin Small Mid-Cap Growth Securities Fund was at the median of its Lipper expense group, while its actual total expense rate was below the median of such group, and the Board was satisfied with these expenses. The contractual management fee rate for Franklin
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Franklin Templeton Variable Insurance Products Trust
Shareholder Information (continued)
Board Review of Investment Management Agreement (continued)
Templeton VIP Founding Funds Allocation Fund was in the lowest quintile of its Lipper expense group, while its actual total expense rate was below the median of such expense group. The Board was satisfied with such comparative expenses, noting also that such expenses were partially subsidized through fee waivers.
MANAGEMENT PROFITABILITY. The Board also considered the level of profits realized by the Manager and its affiliates in connection with the operation of each Fund. In this respect, the Board reviewed the Fund profitability analysis that addresses the overall profitability of Franklin Templeton’s U.S. fund business, as well as its profits in providing management and other services to each of the individual funds during the 12-month period ended September 30, 2008, being the most recent fiscal year end for Franklin Resources, Inc., the Manager’s parent. During such period, the assets of the Franklin Templeton U.S. fund business were significantly higher than currently existing, and to such extent the profitability analysis does not reflect current fund operations. While taking this into account in assessing the significance of the Fund profitability analysis, the Board recognized such analysis was made at a given point in time and that the decline in assets and effect on profitability would be reflected in the profitability analysis covering Franklin Resources’ 2009 fiscal year period. In reviewing the analysis, specific attention was given to the methodology followed in allocating costs to each Fund, it being recognized that allocation methodologies are inherently subjective and various allocation methodologies may each be reasonable while producing different results. In this respect, the Board noted that, while being continuously refined and reflecting changes in the Manager’s own cost accounting, the allocation methodology was consistent with that followed in profitability report presentations for the Funds made in prior years and that the Funds’ independent registered public accounting firm had been engaged by the Manager to perform certain procedures on a biennial basis, specified and approved by the Manager and the Funds’ Board solely for their purposes and use in reference to the profitability analysis. In reviewing and discussing such analysis, management discussed with the Board its belief that costs incurred in establishing the infrastructure necessary for the type of mutual fund operations conducted by the Manager and its affiliates may not be fully reflected in the expenses allocated to each Fund in determining its profitability, as well as the fact that the level of profits, to a certain extent, reflected operational cost savings and efficiencies initiated by management. The Board also took into account management’s expenditures in improving shareholder services provided the Funds, as well as the need to meet additional regulatory and compliance requirements resulting from the Sarbanes-Oxley Act and recent SEC and other regulatory requirements. In addition, the Board considered a third-party study comparing the profitability of the Manager’s parent on an overall basis as compared to other publicly held managers broken down to show profitability from management operations exclusive of distribution expenses, as well as profitability including distribution expenses. Based upon its consideration of all these factors, the Board determined that the level of profits realized by the Manager and its affiliates from providing services to each Fund was not excessive in view of the nature, quality and extent of services provided.
ECONOMIES OF SCALE. The Board also considered whether economies of scale are realized by the Manager as the Funds grow larger and the extent to which this is reflected in the level of management fees charged. While recognizing that any precise determination is inherently subjective, the Board noted that based upon the Fund profitability analysis, it appears that as some funds get larger, at some point economies of scale do result in the Manager realizing a larger profit margin on management services provided such a fund. The Board also noted that economies of scale are shared with a fund and its shareholders through management fee breakpoints so that as a fund grows in size, its effective management fee rate declines. In the case of Franklin Templeton VIP Founding Funds Allocation Fund, the management fees of the underlying funds in which it invests have management fee breakpoints that extend beyond their existing asset size, and in the case of each of the other Funds, their management fees contain breakpoints that extend beyond their existing asset size. To the extent economies of scale may be realized by the manager and its affiliates, the Board believed the schedule of investment management fees provided a sharing of benefits for each Fund and its shareholders.
Proxy Voting Policies and Procedures
The Trust’s investment manager has established Proxy Voting Policies and Procedures (Policies) that the Trust uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Trust’s complete Policies online at franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at (954) 527-7678 or by sending a written request to: Franklin Templeton Companies, LLC, 500 East Broward Boulevard,
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Franklin Templeton Variable Insurance Products Trust
Shareholder Information (continued)
Proxy Voting Policies and Procedures (continued)
Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy Group. Copies of the Trust’s proxy voting records are also made available online at franklintempleton.com and posted on the U.S. Securities and Exchange Commission’s website at sec.gov and reflect the most recent 12-month period ended June 30.
Quarterly Statement of Investments
The Trust files a complete statement of investments with the U.S. Securities and Exchange Commission for the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission’s website at sec.gov. The filed form may also be viewed and copied at the Commission’s Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling (800) SEC-0330.
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 | One Franklin Parkway San Mateo, CA 94403-1906 |
Semiannual Report
FRANKLIN TEMPLETON
VARIABLE INSURANCE PRODUCTS TRUST
Investment Managers
Franklin Advisers, Inc.
Franklin Advisory Services, LLC
Franklin Mutual Advisers, LLC
Franklin Templeton Institutional, LLC
Templeton Asset Management, Ltd.
Templeton Global Advisors Limited
Templeton Investment Counsel, LLC
Fund Administrator
Franklin Templeton Services, LLC
Distributor
Franklin Templeton Distributors, Inc.
Franklin Templeton Variable Insurance Products Trust (FTVIP) shares are generally sold only to insurance company separate accounts (Separate Account) to serve as the investment vehicles for both variable annuity and variable life insurance contracts.
Authorized for distribution to investors in Separate Accounts only when accompanied or preceded by the current prospectus for the applicable contract, which includes the Separate Account and the FTVIP prospectuses. Investors should carefully consider a fund’s investment goals, risks, charges and expenses before investing. The prospectus contains this and other information; please read it carefully before investing.
To ensure the highest quality of service, telephone calls to or from our service departments may be monitored, recorded and accessed. These calls can be identified by the presence of a regular beeping tone.
FTVIP S2009 08/09
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| Item 2. | Code of Ethics. |
| (a) | The Registrant has adopted a code of ethics that applies to its principal executive officers and principal financial and accounting officer. |
| (c) | N/A |
| (d) | N/A |
| (f) | Pursuant to Item 12(a)(1), the Registrant is attaching as an exhibit a copy of its code of ethics that applies to its principal executive officers and principal financial and accounting officer. |
| Item 3. | Audit Committee Financial Expert. |
| (a) (1) | The Registrant has an audit committee financial expert serving on its audit committee. |
| (2) | The audit committee financial expert is John B. Wilson and he is “Independent” as defined under the relevant Securities and Exchange Commission Rules and Releases. |
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| Item 4. | Principal Accountant Fees and Services. N/A |
| Item 5. | Audit Committee of Listed Registrants. N/A |
| Item 6. | Schedule of Investments. N/A |
| Item 7. | Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. N/A |
| Item 8. | Portfolio Managers of Closed-End Management Investment Companies. N/A |
| Item 9. | Purchases of Equity Securities by Closed-End Management Investment Companies and Affiliated Purchases. N/A |
| Item 10. | Submission of Matters to a vote of Security Holders. |
There have been no changes to the procedures by which shareholders may recommend nominees to the Registrant’s Board of Trustees that would require disclosure herein.
| Item 11. | Controls and Procedures. |
(a) Evaluation of Disclosure Controls and Procedures. The Registrant maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Registrant’s filings under the Securities Exchange Act of 1934 and the Investment Company Act of 1940 is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission. Such information is accumulated and communicated to the Registrant’s management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. The Registrant’s management, including the principal executive officer and the principal financial officer, recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
Within 90 days prior to the filing date of this Shareholder Report on Form N-CSR, the Registrant had carried out an evaluation, under the supervision and with the participation of the Registrant’s management, including the Registrant’s principal executive officer and the Registrant’s principal financial officer, of the effectiveness of the design and operation of the Registrant’s disclosure controls and procedures. Based on such evaluation, the Registrant’s principal executive officer and principal financial officer concluded that the Registrant’s disclosure controls and procedures are effective.
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(b) Changes in Internal Controls. There have been no significant changes in the Registrant’s internal controls or in other factors that could significantly affect the internal controls subsequent to the date of their evaluation in connection with the preparation of this Shareholder Report on Form N-CSR.
| Item 12. | Exhibits. |
(a) (1) Code of Ethics
(a) (2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Laura F. Fergerson, Chief Executive Officer - Finance and Administration, and Gaston Gardey, Chief Financial Officer and Chief Accounting Officer
(b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Laura F. Fergerson, Chief Executive Officer - Finance and Administration, and Gaston Gardey, Chief Financial Officer and Chief Accounting Officer
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST | ||
| By | ||
| Laura F. Fergerson | ||
| Chief Executive Officer – | ||
| Finance and Administration | ||
Date August 27, 2009 | ||
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| By | ||
| Laura F. Fergerson | ||
| Chief Executive Officer – | ||
| Finance and Administration | ||
Date August 27, 2009 | ||
| By | ||
| Gaston Gardey | ||
| Chief Financial Officer and | ||
| Chief Accounting Officer | ||
Date August 27, 2009 | ||