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: 06/30/11
| Item 1. | Reports to Stockholders. |
JUNE 30, 2011
FRANKLIN TEMPLETON
VARIABLE INSURANCE PRODUCTS TRUST
SEMIANNUAL
REPORT
FRANKLIN TEMPLETON VARIABLE INSURANCE
PRODUCTS TRUST SEMIANNUAL REPORT
TABLEOF CONTENTS
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*Not part of the semiannual report
NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE
MASTER CLASS 4
IMPORTANT NOTESTOPERFORMANCE 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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FRANKLIN FLEX CAP GROWTH SECURITIES FUND
This semiannual report for Franklin Flex Cap Growth Securities Fund covers the period ended June 30, 2011.
Performance Summary as of 6/30/11
Franklin Flex Cap Growth Securities Fund – Class 4 delivered a +5.30% total return* for the six-month period ended 6/30/11.
*The investment manager and administrator have contractually agreed to waive or assume certain expenses so that common expenses of the Fund (excluding Rule 12b-1 fees and acquired fund fees and expenses) do not exceed 0.68% (other than certain nonroutine expenses) until 4/30/12. If the manager and administrator had not waived fees, the Fund’s total returns would have been lower.
Performance reflects the Fund’s Class 4 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 Flex Cap Growth Securities Fund – Class 4
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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FRANKLIN FLEX CAP GROWTH SECURITIES FUND
This semiannual report for Franklin Flex Cap Growth Securities Fund covers the period ended June 30, 2011.
Performance Summary as of 6/30/11
Franklin Flex Cap Growth Securities Fund – Class 2 delivered a +5.35% total return* for the six-month period ended 6/30/11.
*The investment manager and administrator have contractually agreed to waive or assume certain expenses so that common expenses of the Fund (excluding Rule 12b-1 fees and acquired fund fees and expenses) do not exceed 0.68% (other than certain nonroutine expenses) until 4/30/12. If the manager and administrator had not waived fees, the Fund’s total returns would have been lower.
Performance reflects the Fund’s Class 2 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 Flex Cap Growth Securities Fund – Class 2
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 Flex Cap Growth Securities Fund seeks capital appreciation. The Fund normally invests predominantly in equity securities of companies that the manager believes have the potential for capital appreciation.
Performance Overview
You can find the Fund’s six-month total return in the Performance Summary. The Fund underperformed its benchmarks, the Russell 1000® Growth Index, which generated a +6.83% total return, and the Russell 3000® Growth Index, which produced a +6.98% total return, for the same period.1
Economic and Market Overview
The U.S. economy expanded despite geopolitical and inflationary pressures from around the globe during the six-month period ended June 30, 2011. Business activity increased and consumer spending stayed above pre-recession levels. The U.S. has been a key engine in a sustained global manufacturing expansion as international trade volume continued to increase, albeit at a moderate pace. Worldwide demand for capital goods aided U.S. manufacturing profits and increased employment in the industry.
The unemployment rate improved in the first quarter when job creation began to gain some traction. However, government payrolls continued to trend down and job creation slowed in the second quarter, causing the unemployment rate to end the period at 9.2%.2 Consumer spending rose for 11 consecutive months through May but declined in June as concerns about job growth and rising gasoline and food prices dampened consumer confidence. To offset the disruption of global oil supply caused by the conflicts in Libya, the International Energy Agency announced in June the release of 60 million barrels of oil in July from strategic reserves of the U.S. and 27 other nations. The U.S. financial system appeared closer to a full recovery, although the country still faced challenges dealing with housing market weakness and massive debt at period-end.
Inflation at the consumer, producer and trade levels rose across much of the world, but in the U.S. it remained relatively contained. As a result, the Federal Reserve Board (Fed) maintained its accommodative monetary policy while ending its second round of quantitative easing
1. Source: © 2011 Morningstar. One cannot invest directly in an index, and an index is not representative of the Fund’s portfolio. Please see Index Descriptions following the Fund Summaries.
2. 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, newer 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 involves additional risks, including currency fluctuations, economic instability, market volatility, and political and social instability. The Fund may from time to time have significant investments in particular sectors such as technology, which can be highly volatile. The manager applies various techniques and analyses in making investment decisions for the Fund, but there can be no guarantee that these decisions will produce the desired results. The Fund’s prospectus also includes a description of the main investment risks.
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on June 30. The Fed said, however, it would continue to purchase Treasuries with proceeds from maturing debt in an effort to support economic growth.
Investors’ attitudes shifted with each release of economic, regulatory and geopolitical news, causing equity market volatility to increase globally. U.S. investors weathered international events that included revolutions and civil unrest across the Middle East and North Africa, the multiple crises triggered by Japan’s earthquake and tsunami, and sovereign debt worries and credit downgrades in Europe. Ultimately, stock indexes produced solid gains during the six months under review as domestic and global equity markets rose amid generally improving economic signs and record-high corporate earnings growth.
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 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
During the six months under review, most sectors represented in the Fund’s portfolio contributed to absolute performance as the broad market delivered solid returns. Stock selection in the information technology and materials sectors benefited the Fund’s performance relative to the Russell 3000 Growth Index.3 Major contributors from the information technology sector included data integration and business software solutions provider Informatica and complete programmable logic solutions developer Xilinx. Visa and MasterCard, the world’s largest payment networks, boosted relative returns as their share prices
3. The information technology sector comprises semiconductors and semiconductor equipment, software and services, and technology hardware and equipment in the SOI.
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surged at period-end following the Fed’s decision to cap debit-card transaction fees. Chemical and advanced materials producer Celanese in the materials sector produced strong returns as the company delivered better-than-expected first quarter earnings and raised its long-term earnings growth outlook. Outside of these sectors, a new health care holding, worldwide health care solutions and services company Cerner, which benefited from demand driven by federal stimulus, health care reform and other regulatory requirements, also supported the Fund’s performance.4
In contrast, stock selection in the consumer discretionary, financials and health care sectors weighed on the Fund’s relative performance.5 In the consumer discretionary sector, worldwide hotel operator and franchisor Marriott International declined in value due to a slower growth rate in its domestic market and weakness in its timeshare unit, which the company planned to spin off under the name Marriott Vacations Worldwide. Insurance business holding company Aflac in the financials sector hurt relative returns as the company recorded losses tied to investments in Greek, Irish and Portuguese banks. A health care sector detractor was prescription pharmaceutical product developer Salix Pharmaceuticals, which failed to gain expanded Food and Drug Administration approval for its key drug, and we sold it by period-end. Stock selection and an underweighted allocation in the energy sector, where coal explorer and miner Alpha Natural Resources was a major detractor, also hindered relative results. Although our information technology holdings generally benefited the Fund’s absolute and relative performance, lower-than-expected semiconductor capital expenditure negatively affected the shares of some equipment providers including Lam Research, which supplies wafer fabrication and equipment to the worldwide semiconductor industry.
Thank you for your participation in Franklin Flex Cap Growth Securities Fund. We look forward to serving your future investment needs.
4. The health care sector comprises health care equipment and services; and pharmaceuticals, biotechnology and life sciences in the SOI.
5. The consumer discretionary sector comprises automobiles and components, consumer durables and apparel, consumer services, media, and retailing in the SOI. The financials sector comprises banks, diversified financials and insurance in the SOI.
The foregoing information reflects our analysis, opinions and portfolio holdings as of June 30, 2011, 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 Flex Cap Growth Securities Fund
6/30/11
| Company Sector/Industry | % of Total Net Assets | |||
| Apple Inc. | 4.1% | |||
| Technology Hardware & Equipment | ||||
| Praxair Inc. | 2.4% | |||
| Materials | ||||
| EMC Corp. | 2.2% | |||
| Technology Hardware & Equipment | ||||
| Celanese Corp. | 2.0% | |||
| Materials | ||||
| Johnson Controls Inc. | 1.9% | |||
| Automobiles & Components | ||||
| International Business Machines Corp. | 1.8% | |||
| Software & Services | ||||
| United Technologies Corp. | 1.8% | |||
| Capital Goods | ||||
| Kansas City Southern | 1.8% | |||
| Transportation | ||||
| Oracle Corp. | 1.7% | |||
| Software & Services | ||||
| Polo Ralph Lauren Corp. | 1.6% | |||
| Consumer Durables & Apparel | ||||
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.
Franklin Flex Cap Growth Securities Fund – Class 4
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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 4 | Beginning Account Value 1/1/11 | Ending Account Value 6/30/11 | Fund-Level Expenses Incurred During Period* 1/1/11–6/30/11 | |||||||||
Actual | $ | 1,000 | $ | 1,053.00 | $ | 5.24 | ||||||
Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,019.69 | $ | 5.16 | ||||||
*Expenses are calculated using the most recent six-month annualized expense ratio, net of expense waivers, for the Fund’s Class 4 shares (1.03%), 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 Flex Cap Growth Securities Fund
| Six Months Ended June 30, 2011 (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 2 | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 12.70 | $ | 10.93 | $ | 8.22 | $ | 12.72 | $ | 11.14 | $ | 10.59 | ||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment income (loss)b | (0.02 | ) | (0.02 | ) | (— | )c | — | c | 0.04 | 0.02 | ||||||||||||||
Net realized and unrealized gains (losses) | 0.70 | 1.79 | 2.71 | (4.49 | ) | 1.55 | 0.53 | |||||||||||||||||
Total from investment operations | 0.68 | 1.77 | 2.71 | (4.49 | ) | 1.59 | 0.55 | |||||||||||||||||
Less distributions from net investment income | — | — | — | (0.01 | ) | (0.01 | ) | (— | )c | |||||||||||||||
Net asset value, end of period | $ | 13.38 | $ | 12.70 | $ | 10.93 | $ | 8.22 | $ | 12.72 | $ | 11.14 | ||||||||||||
Total returnd | 5.35% | 16.19% | 32.97% | (35.31)% | 14.32% | 5.20% | ||||||||||||||||||
Ratios to average net assetse | ||||||||||||||||||||||||
Expenses before waiver and payments by affiliates | 1.17% | 1.18% | 1.19% | 1.21% | 1.25% | 1.32% | ||||||||||||||||||
Expenses net of waiver and payments by affiliates | 0.93% | 0.93% | 0.93% | f | 0.93% | 0.93% | f | 0.93% | f | |||||||||||||||
Net investment income (loss) | (0.23)% | (0.17)% | (0.01)% | 0.04% | 0.31% | 0.19% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 214,379 | $ | 227,774 | $ | 244,768 | $ | 195,425 | $ | 206,218 | $ | 60,520 | ||||||||||||
Portfolio turnover rate | 31.80% | 60.00% | 33.64% | 32.76% | 30.15% | 67.01% | ||||||||||||||||||
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 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 Flex Cap Growth Securities Fund
| Six Months Ended June 30, 2011 (unaudited) | Year Ended December 31, | |||||||||||||||
| Class 4 | 2010 | 2009 | 2008a | |||||||||||||
Per share operating performance | ||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||
Net asset value, beginning of period | $ | 12.63 | $ | 10.88 | $ | 8.21 | $ | 11.22 | ||||||||
Income from investment operationsb: | ||||||||||||||||
Net investment income (loss)c | (0.02 | ) | (0.03 | ) | (0.01 | ) | — | d | ||||||||
Net realized and unrealized gains (losses) | 0.69 | 1.78 | 2.69 | (2.98 | ) | |||||||||||
Total from investment operations | 0.67 | 1.75 | 2.68 | (2.98 | ) | |||||||||||
Less distributions from net investment income | — | — | (0.01 | ) | (0.03 | ) | ||||||||||
Net asset value, end of period | $ | 13.30 | $ | 12.63 | $ | 10.88 | $ | 8.21 | ||||||||
Total returne | 5.30% | 16.08% | 32.69% | (26.68)% | ||||||||||||
Ratios to average net assetsf | ||||||||||||||||
Expenses before waiver and payments by affiliates | 1.27% | 1.28% | 1.29% | 1.31% | ||||||||||||
Expenses net of waiver and payments by affiliates | 1.03% | 1.03% | 1.03% | g | 1.03% | |||||||||||
Net investment income (loss) | (0.33)% | (0.27)% | (0.11)% | (0.06)% | ||||||||||||
Supplemental data | ||||||||||||||||
Net assets, end of period (000’s) | $ | 265,911 | $ | 263,746 | $ | 218,798 | $ | 50,268 | ||||||||
Portfolio turnover rate | 31.80% | 60.00% | 33.64% | 32.76% | ||||||||||||
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.
dAmount rounds to less than $0.01 per share.
eTotal return does not include 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, 2011 (unaudited)
| Franklin Flex Cap Growth Securities Fund | Shares | Value | ||||||
Common Stocks 98.6% | ||||||||
Automobiles & Components 3.2% | ||||||||
aBorgWarner Inc. | 80,180 | $ | 6,477,742 | |||||
Johnson Controls Inc. | 213,800 | 8,906,908 | ||||||
| 15,384,650 | ||||||||
Banks 0.6% | ||||||||
Wells Fargo & Co. | 102,450 | 2,874,747 | ||||||
Capital Goods 10.7% | ||||||||
Cummins Inc. | 72,420 | 7,494,746 | ||||||
Danaher Corp. | 90,250 | 4,782,348 | ||||||
Emerson Electric Co. | 89,080 | 5,010,750 | ||||||
Flowserve Corp. | 22,280 | 2,448,349 | ||||||
General Electric Co. | 178,170 | 3,360,286 | ||||||
Joy Global Inc. | 62,360 | 5,939,166 | ||||||
Precision Castparts Corp. | 37,420 | 6,161,203 | ||||||
Rockwell Automation Inc. | 84,630 | 7,342,499 | ||||||
United Technologies Corp. | 97,990 | 8,673,095 | ||||||
| 51,212,442 | ||||||||
Commercial & Professional Services 1.3% | ||||||||
aStericycle Inc. | 71,540 | 6,375,645 | ||||||
Consumer Durables & Apparel 3.0% | ||||||||
NIKE Inc., B | 75,720 | 6,813,286 | ||||||
Polo Ralph Lauren Corp. | 57,900 | 7,678,119 | ||||||
| 14,491,405 | ||||||||
Consumer Services 1.5% | ||||||||
Arcos Dorados Holdings Inc. (Argentina) | 35,990 | 759,029 | ||||||
Marriott International Inc., A | 71,270 | 2,529,373 | ||||||
Wynn Resorts Ltd. | 26,730 | 3,836,824 | ||||||
| 7,125,226 | ||||||||
Diversified Financials 3.6% | ||||||||
BlackRock Inc. | 31,180 | 5,980,636 | ||||||
JPMorgan Chase & Co. | 65,630 | 2,686,892 | ||||||
Lazard Ltd., A | 115,810 | 4,296,551 | ||||||
T. Rowe Price Group Inc. | 71,270 | 4,300,432 | ||||||
| 17,264,511 | ||||||||
Energy 6.8% | ||||||||
aAlpha Natural Resources Inc. | 75,720 | 3,440,717 | ||||||
aConcho Resources Inc. | 57,900 | 5,318,115 | ||||||
aFMC Technologies Inc. | 57,900 | 2,593,341 | ||||||
Halliburton Co. | 80,180 | 4,089,180 | ||||||
aPetrohawk Energy Corp. | 253,890 | 6,263,466 | ||||||
Schlumberger Ltd. | 44,540 | 3,848,256 | ||||||
SM Energy Co. | 97,990 | 7,200,305 | ||||||
| 32,753,380 | ||||||||
Food, Beverage & Tobacco 3.0% | ||||||||
aHansen Natural Corp. | 37,860 | 3,064,767 | ||||||
Mead Johnson Nutrition Co., A | 92,620 | 6,256,481 | ||||||
PepsiCo Inc. | 71,270 | 5,019,546 | ||||||
| 14,340,794 | ||||||||
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Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Franklin Flex Cap Growth Securities Fund | Shares | Value | ||||||
Common Stocks (continued) | ||||||||
Health Care Equipment & Services 6.5% | ||||||||
aAllscripts Healthcare Solutions Inc. | 159,642 | $ | 3,100,247 | |||||
aCerner Corp. | 106,900 | 6,532,659 | ||||||
aDaVita Inc. | 30,290 | 2,623,417 | ||||||
aEdwards Lifesciences Corp. | 57,900 | 5,047,722 | ||||||
aExpress Scripts Inc. | 106,910 | 5,771,002 | ||||||
aIntuitive Surgical Inc. | 8,020 | 2,984,322 | ||||||
Universal Health Services Inc., B | 48,990 | 2,524,455 | ||||||
aVarian Medical Systems Inc. | 35,640 | 2,495,513 | ||||||
| 31,079,337 | ||||||||
Household & Personal Products 0.5% | ||||||||
The Procter & Gamble Co. | 40,090 | 2,548,521 | ||||||
Insurance 1.8% | ||||||||
ACE Ltd. | 36,530 | 2,404,405 | ||||||
Aflac Inc. | 133,620 | 6,237,381 | ||||||
| 8,641,786 | ||||||||
Materials 5.5% | ||||||||
Celanese Corp., A | 178,170 | 9,498,243 | ||||||
Ecolab Inc. | 102,440 | 5,775,567 | ||||||
Praxair Inc. | 104,230 | 11,297,490 | ||||||
| 26,571,300 | ||||||||
Media 3.3% | ||||||||
aDIRECTV, A | 126,090 | 6,407,894 | ||||||
aDiscovery Communications Inc., C | 160,350 | 5,860,792 | ||||||
The Walt Disney Co. | 89,080 | 3,477,683 | ||||||
| 15,746,369 | ||||||||
Pharmaceuticals, Biotechnology & Life Sciences 4.2% | ||||||||
aCelgene Corp. | 67,710 | 4,084,267 | ||||||
aGilead Sciences Inc. | 75,190 | 3,113,618 | ||||||
aHuman Genome Sciences Inc. | 92,940 | 2,280,748 | ||||||
aIllumina Inc. | 36,000 | 2,705,400 | ||||||
Merck & Co. Inc. | 80,180 | 2,829,552 | ||||||
aWaters Corp. | 53,450 | 5,117,303 | ||||||
| 20,130,888 | ||||||||
Retailing 1.7% | ||||||||
aAmazon.com Inc. | 14,250 | 2,913,982 | ||||||
aHomeAway Inc. | 11,700 | 452,790 | ||||||
aPriceline.com Inc. | 9,360 | 4,791,665 | ||||||
| 8,158,437 | ||||||||
Semiconductors & Semiconductor Equipment 4.9% | ||||||||
Avago Technologies Ltd. (Singapore) | 97,990 | 3,723,620 | ||||||
aFirst Solar Inc. | 15,590 | 2,062,089 | ||||||
aFreescale Semiconductor Holdings I Ltd. | 45,440 | 835,642 | ||||||
aLam Research Corp. | 60,940 | 2,698,423 | ||||||
Microchip Technology Inc. | 191,530 | 7,260,902 | ||||||
Xilinx Inc. | 182,620 | 6,660,152 | ||||||
| 23,240,828 | ||||||||
Software & Services 16.9% | ||||||||
aBottomline Technologies Inc. | 111,360 | 2,751,706 | ||||||
aCitrix Systems Inc. | 89,080 | 7,126,400 | ||||||
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Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Franklin Flex Cap Growth Securities Fund | Shares | Value | ||||||
Common Stocks (continued) | ||||||||
Software & Services (continued) | ||||||||
aCognizant Technology Solutions Corp., A | 69,490 | $ | 5,096,397 | |||||
FactSet Research Systems Inc. | 44,190 | 4,521,521 | ||||||
aFortinet Inc. | 133,620 | 3,646,490 | ||||||
aInformatica Corp. | 122,050 | 7,131,381 | ||||||
International Business Machines Corp. | 50,780 | 8,711,309 | ||||||
MasterCard Inc., A | 22,280 | 6,713,855 | ||||||
aNuance Communications Inc. | 191,530 | 4,112,149 | ||||||
Oracle Corp. | 253,890 | 8,355,520 | ||||||
aRed Hat Inc. | 146,990 | 6,746,841 | ||||||
aSalesforce.com Inc. | 37,420 | 5,574,831 | ||||||
aTaleo Corp., A | 106,910 | 3,958,877 | ||||||
Visa Inc., A | 80,180 | 6,755,967 | ||||||
|
| |||||||
| 81,203,244 | ||||||||
|
| |||||||
Technology Hardware & Equipment 14.6% | ||||||||
aAcme Packet Inc. | 46,320 | 3,248,422 | ||||||
aApple Inc. | 58,170 | 19,525,924 | ||||||
aAruba Networks Inc. | 100,000 | 2,955,000 | ||||||
aEMC Corp. | 384,750 | 10,599,862 | ||||||
aF5 Networks Inc. | 35,630 | 3,928,208 | ||||||
aFabrinet | 115,810 | 2,811,867 | ||||||
FLIR Systems Inc. | 115,810 | 3,903,955 | ||||||
aFusion-io-Inc. | 5,350 | 160,982 | ||||||
National Instruments Corp. | 144,990 | 4,304,753 | ||||||
aNetApp Inc. | 115,810 | 6,112,452 | ||||||
QUALCOMM Inc. | 111,360 | 6,324,134 | ||||||
aTrimble Navigation Ltd. | 159,460 | 6,320,994 | ||||||
|
| |||||||
| 70,196,553 | ||||||||
|
| |||||||
Telecommunication Services 1.0% | ||||||||
aAmerican Tower Corp., A | 93,540 | 4,894,948 | ||||||
|
| |||||||
Transportation 4.0% | ||||||||
C.H. Robinson Worldwide Inc. | 32,250 | 2,542,591 | ||||||
Expeditors International of Washington Inc. | 84,630 | 4,332,210 | ||||||
FedEx Corp. | 40,090 | 3,802,536 | ||||||
aKansas City Southern | 145,000 | 8,602,850 | ||||||
|
| |||||||
| 19,280,187 | ||||||||
|
| |||||||
Total Common Stocks (Cost $334,537,874) | 473,515,198 | |||||||
|
| |||||||
Short Term Investments (Cost $45,892,789) 9.5% | ||||||||
Money Market Funds 9.5% | ||||||||
a,bInstitutional Fiduciary Trust Money Market Portfolio | 45,892,789 | 45,892,789 | ||||||
|
| |||||||
Total Investments (Cost $380,430,663) 108.1% | 519,407,987 | |||||||
Other Assets, less Liabilities (8.1)% | (39,117,657 | ) | ||||||
|
| |||||||
Net Assets 100.0% | $ | 480,290,330 | ||||||
|
| |||||||
aNon-income producing.
bSee Note 7 regarding investments in the Institutional Fiduciary Trust Money Market Portfolio.
The accompanying notes are an integral part of these financial statements.
FFC-11
Franklin Templeton Variable Insurance Products Trust
Financial Statements
Statement of Assets and Liabilities
June 30, 2011 (unaudited)
| Franklin Flex Cap Growth Securities Fund | ||||
Assets: | ||||
Investments in securities: | ||||
Cost - Unaffiliated issuers | $ | 334,537,874 | ||
Cost - Sweep Money Fund (Note 7) | 45,892,789 | |||
Total cost of investments | $ | 380,430,663 | ||
Value - Unaffiliated issuers | $ | 473,515,198 | ||
Value - Sweep Money Fund (Note 7) | 45,892,789 | |||
Total value of investments | 519,407,987 | |||
Receivables: | ||||
Investment securities sold | 34,319,581 | |||
Capital shares sold | 289,927 | |||
Dividends | 237,206 | |||
Other assets | 15,790 | |||
Total assets | 554,270,491 | |||
Liabilities: | ||||
Payables: | ||||
Investment securities purchased | 5,952,069 | |||
Capital shares redeemed | 67,360,127 | |||
Affiliates | 552,298 | |||
Accrued expenses and other liabilities | 115,667 | |||
Total liabilities | 73,980,161 | |||
Net assets, at value | $ | 480,290,330 | ||
Net assets consist of: | ||||
Paid-in capital | $ | 377,065,109 | ||
Undistributed net investment income (loss) | (750,054 | ) | ||
Net unrealized appreciation (depreciation) | 138,977,324 | |||
Accumulated net realized gain (loss) | (35,002,049 | ) | ||
Net assets, at value | $ | 480,290,330 | ||
Class 2: | ||||
Net assets, at value | $ | 214,379,431 | ||
Shares outstanding | 16,024,934 | |||
Net asset value and maximum offering price per share | $ | 13.38 | ||
Class 4: | ||||
Net assets, at value | $ | 265,910,899 | ||
Shares outstanding | 19,988,104 | |||
Net asset value and maximum offering price per share | $ | 13.30 | ||
The accompanying notes are an integral part of these financial statements.
FFC-12
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Operations
for the six months ended June 30, 2011 (unaudited)
| Franklin Flex Cap Growth Securities Fund | ||||
Investment income: | ||||
Dividends | $ | 1,823,307 | ||
Expenses: | ||||
Management fees (Note 3a) | 1,663,605 | |||
Administrative fees (Note 3b) | 652,802 | |||
Distribution fees: (Note 3c) | ||||
Class 2 | 292,685 | |||
Class 4 | 505,054 | |||
Unaffiliated transfer agent fees | 383 | |||
Custodian fees (Note 4) | 3,484 | |||
Reports to shareholders | 58,569 | |||
Professional fees | 17,689 | |||
Trustees’ fees and expenses | 987 | |||
Other | 10,635 | |||
Total expenses | 3,205,893 | |||
Expenses waived/paid by affiliates (Note 3e) | (632,532 | ) | ||
Net expenses | 2,573,361 | |||
Net investment income (loss) | (750,054 | ) | ||
Realized and unrealized gains (losses): | ||||
Net realized gain (loss) from investments | 20,831,449 | |||
Net change in unrealized appreciation (depreciation) on investments | 6,809,817 | |||
Net realized and unrealized gain (loss) | 27,641,266 | |||
Net increase (decrease) in net assets resulting from operations | $ | 26,891,212 | ||
The accompanying notes are an integral part of these financial statements.
FFC-13
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statements of Changes in Net Assets
| Franklin Flex Cap Growth Securities Fund | ||||||||
| Six Months Ended June 30, 2011 (unaudited) | Year Ended December 31, 2010 | |||||||
Increase (decrease) in net assets: | ||||||||
Operations: | ||||||||
Net investment income (loss) | $ | (750,054 | ) | $ | (1,037,499 | ) | ||
Net realized gain (loss) from investments | 20,831,449 | (4,167,287 | ) | |||||
Net change in unrealized appreciation (depreciation) on investments | 6,809,817 | 66,627,082 | ||||||
Net increase (decrease) in net assets resulting from operations | 26,891,212 | 61,422,296 | ||||||
Capital share transactions: (Note 2) | ||||||||
Class 2 | (25,559,404 | ) | (46,447,755 | ) | ||||
Class 4 | (12,561,212 | ) | 12,979,114 | |||||
Total capital share transactions | (38,120,616 | ) | (33,468,641 | ) | ||||
Net increase (decrease) in net assets | (11,229,404 | ) | 27,953,655 | |||||
Net assets: | ||||||||
Beginning of period | 491,519,734 | 463,566,079 | ||||||
End of period | $ | 480,290,330 | $ | 491,519,734 | ||||
Undistributed net investment income (loss) included in net assets: | ||||||||
End of period | $ | (750,054 | ) | $ | — | |||
The accompanying notes are an integral part of these financial statements.
FFC-14
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited)
Franklin Flex 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 separate funds. The Franklin Flex Cap Growth 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 generally sold only to insurance company separate accounts to fund the benefits of variable life insurance policies or variable annuity contracts. At June 30, 2011, 76.47% of the Fund’s shares were held through one insurance company. The Fund offers two classes of shares: 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. Financial Instrument Valuation
The Fund’s investments in securities and other financial instruments are carried at fair value daily. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. Under procedures approved by the Trust’s Board of Trustees, the Fund may utilize independent pricing services, quotations from securities and financial instrument dealers, and other market sources to determine fair value.
Equity securities listed on an 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. 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. 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. Over-the-counter securities 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.
The Fund has procedures to determine the fair value of securities and other financial instruments for which market prices are not readily available or which may not be reliably priced. Under these procedures, the Fund primarily employs a market-based approach which may use related or comparable assets or liabilities, recent transactions, market multiples, book values, and other relevant information for the investment to determine the fair value of the investment. The Fund may also use an income-based valuation approach in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the investments. Due to the inherent uncertainty of valuations of such investments, the fair values may differ significantly from the values that would have been used had an active market existed.
Trading in securities on foreign securities stock exchanges and over-the-counter markets may be completed before the daily close of business on the NYSE. Occasionally, events occur between the time at which trading in a foreign security is completed and the close of the NYSE that might call into question the reliability of the value of a portfolio security held by the Fund. As a result, differences may arise between the value of the Fund’s portfolio securities as determined at the foreign market close and the latest indications of value at the close of the NYSE. In order to minimize the potential for these differences, 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 that may call into question the reliability of the values of the foreign securities 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.
FFC-15
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Flex Cap Growth 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. The Fund may enter into foreign currency exchange contracts to facilitate transactions denominated in a foreign currency. 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. Portfolio securities and assets and liabilities denominated in foreign currencies contain risks that those currencies will decline in value relative to the U.S. dollar. 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 Trust’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. Income Taxes
It is the Fund’s policy to qualify as a regulated investment company under the Internal Revenue Code. The Fund intends to distribute to shareholders substantially all of its taxable income and net realized gains to relieve it from federal income and excise taxes. As a result, no provision for U.S. federal income taxes is required. The Fund files U.S. income tax returns as well as tax returns in certain other jurisdictions. The Fund records a provision for taxes in its financial statements including penalties and interest, if any, for a tax position taken on a tax return (or expected to be taken) when it fails to meet the more likely than not (a greater than 50% probability) threshold and based on the technical merits, the tax position may not be sustained upon examination by the tax authorities. As of June 30, 2011, and for all open tax years, the Fund has determined that no provision for income tax is required in the Fund’s financial statements. Open tax years are those that remain subject to examination and are based on each tax jurisdiction statute of limitation.
The Fund may be subject to foreign taxation related to income received, capital gains on the sale of securities and certain foreign currency transactions in the foreign jurisdictions in which it invests. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist in the foreign markets in which the Fund invests. When a capital gain tax is determined to apply the Fund records an estimated deferred tax liability for unrealized gains on these securities in an amount that would be payable if the securities were disposed of on the valuation date.
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 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.
FFC-16
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Flex Cap Growth Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
d. Security Transactions, Investment Income, Expenses and Distributions (continued)
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.
2. SHARES OF BENEFICIAL INTEREST
At June 30, 2011, 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, 2011 | Year Ended December 31, 2010 | |||||||||||||||
| Class 2 Shares: | Shares | Amount | Shares | Amount | ||||||||||||
Shares sold | 1,457,418 | $ | 19,198,361 | 2,712,486 | $ | 30,583,993 | ||||||||||
Shares redeemed | (3,371,464 | ) | (44,757,765 | ) | (7,177,369 | ) | (77,031,748 | ) | ||||||||
Net increase (decrease) | (1,914,046 | ) | $ | (25,559,404 | ) | (4,464,883 | ) | $ | (46,447,755 | ) | ||||||
Class 4 Shares: | ||||||||||||||||
Shares sold | 4,396,198 | $ | 57,493,181 | 9,474,153 | $ | 105,454,276 | ||||||||||
Shares redeemed | (5,287,150 | ) | (70,054,393 | ) | (8,700,670 | ) | (92,475,162 | ) | ||||||||
Net increase (decrease) | (890,952 | ) | $ | (12,561,212 | ) | 773,483 | $ | 12,979,114 | ||||||||
FFC-17
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Flex Cap 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 Fund 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 $100 million | |
| 0.650% | Over $100 million, up to and including $250 million | |
| 0.600% | Over $250 million, up to and including $10 billion | |
| 0.550% | Over $10 billion, up to and including $12.5 billion | |
| 0.525% | Over $12.5 billion, up to and including $15 billion | |
| 0.500% | In excess of $15 billion |
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 Trust’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 has contractually agreed in advance to waive or limit its respective fees and to assume as its own expense certain expenses otherwise payable by the fund so that the common expenses (i.e. a combination of management fees, administrative fees, and other expenses, but excluding distribution fees, and acquired fund fees and expenses) for each class of the Fund do not exceed 0.68% (other than certain non-routine expenses or costs, including those relating to litigation, indemnification, reorganizations, and liquidations) until April 30, 2012.
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, 2011, there were no credits earned.
FFC-18
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Flex Cap 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, 2010, the capital loss carryforwards were as follows:
Capital loss carryforwards expiring in: | ||||
2013 | $ | 233,183 | ||
2014 | 2,517,251 | |||
2015 | 777,263 | |||
2016 | 15,495,131 | |||
2017 | 30,645,725 | |||
2018 | 4,113,202 | |||
|
| |||
| $ | 53,781,755 | |||
|
|
Under the Regulated Investment Company Modernization Act of 2010, the Fund will be permitted to carry forward capital losses incurred in taxable years beginning after December 22, 2010 for an unlimited period. Post-enactment capital loss carryforwards will retain their character as either short-term or long-term capital losses rather than being considered short-term as under previous law. Any post-enactment capital losses generated will be required to be utilized prior to the losses incurred in pre-enactment tax years.
At June 30, 2011, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
Cost of investments | $ | 381,889,071 | ||
|
| |||
Unrealized appreciation | $ | 138,942,605 | ||
Unrealized depreciation | (1,423,689 | ) | ||
|
| |||
Net unrealized appreciation (depreciation) | $ | 137,518,916 | ||
|
|
Net investment income (loss) differs for financial statement and tax purposes primarily due to differing treatment of pass-through entity income.
Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatments of wash sales and pass-through entity income.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the period ended June 30, 2011, aggregated $160,439,965 and $196,871,568, respectively.
7. INVESTMENTS IN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO
The Fund invests 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
The Fund, together with other U.S. registered and foreign investment funds (collectively, Borrowers), managed by Franklin Templeton Investments, are borrowers in a joint syndicated senior unsecured credit facility totaling $750 million (Global Credit
FFC-19
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Flex Cap Growth Securities Fund
8. CREDIT FACILITY (continued)
Facility) which matures on January 20, 2012. This Global Credit Facility provides 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 of 0.08% based upon the unused portion of the Global Credit Facility, which is reflected in other expenses on the Statement of Operations. During the period ended June 30, 2011, the Fund did not use the Global Credit Facility.
9. FAIR VALUE MEASUREMENTS
The Fund follows 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.
For movements between the levels within the fair value hierarchy, the Fund has adopted a policy of recognizing the transfers as of the date of the underlying event which caused the movement.
At June 30, 2011, all of the Fund’s investments in securities carried at fair value were in Level 1 inputs. For detailed categories, see the accompanying Statement of Investments.
10. NEW ACCOUNTING PRONOUNCEMENTS
In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (IFRS). The amendments in the ASU will improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRS and include new guidance for certain fair value measurement principles and disclosure requirements. The ASU is effective for interim and annual periods beginning after December 15, 2011. The Fund is currently evaluating the impact, if any, of applying this provision.
11. SUBSEQUENT EVENTS
The Fund has evaluated subsequent events through the issuance of the financial statements and determined that no events have occurred that require disclosure.
FFC-20
FRANKLIN HIGH INCOME SECURITIES FUND
This semiannual report for Franklin High Income Securities Fund covers the period ended June 30, 2011.
Performance Summary as of 6/30/11
Franklin High Income Securities Fund – Class 4 delivered a +4.55% total return for the six-month period ended 6/30/11.
Performance reflects the Fund’s Class 4 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 4
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.
FH-1
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 high yield, lower rated debt securities and preferred stocks.
Performance Overview
You can find the Fund’s six-month total return in the Performance Summary. In comparison, the Fund’s benchmark, the Credit Suisse (CS) High Yield Index, posted a +4.84% total return for the period under review.1 The Fund’s peers, as measured by the Lipper VIP High Current Yield Funds Classification Average, posted a +4.38% total return.2
Economic and Market Overview
As consumer spending rose during the six-month reporting period, the U.S. economy expanded, although the pace of growth slowed. The Federal Reserve Board (Fed) announced in November it intended to buy $600 billion of longer term Treasury securities by the end of the second quarter of 2011. It sought to promote a stronger recovery and help maintain inflation levels the Fed believed consistent with its dual mandate to foster maximum employment and price stability. Despite the Fed’s actions, the economic recovery stalled. U.S. home prices fell sharply during the first quarter of 2011, and unemployment remained stubbornly high. After showing solid improvement during the period, manufacturing activity weakened partly because of auto supply-chain disruptions following Japan’s natural disasters.
Geopolitical instability in North Africa and the Middle East drove up oil prices for most of the period. However, investor concerns over weak economic data caused crude oil prices to drop from their six-month high of $114 per barrel on April 29 to $95 at period-end. Storms and droughts in several states reduced crop yields, pushing up grain prices. As oil and food prices rose, the pace of inflation accelerated during the period.
Despite turmoil in North Africa and the Middle East, the multiple crises triggered by Japan’s earthquake and headwinds facing the U.S. economy, generally favorable economic improvements and positive corporate earnings reports gave investors confidence. While equity and fixed
1. Source: © 2011 Morningstar.
2. Source: Lipper Inc.
One cannot invest directly in an index, and an index is not representative of the Fund’s portfolio. Please see Index Descriptions following the Fund Summaries.
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 developing markets, involves additional risks including currency fluctuations, economic instability, market volatility, and political and social instability. Derivative instruments may be volatile and illiquid, may give rise to leverage and may involve a small investment relative to the risk assumed. Bank loans, corporate loans and loan participations involve credit, interest rate and illiquidity risks. The manager applies various techniques and analyses in making investment decisions for the Fund, but there can be no guarantee that these decisions will produce the desired results. The Fund’s prospectus also includes a description of the main investment risks.
FH-2
income markets performed well overall for the six months under review, investors reacted to reports on the Greek debt crisis by seeking the perceived safe haven of U.S. Treasuries. At period-end, the Greek government approved an austerity bill to secure a bailout loan from international creditors, which helped relieve investor anxiety.
Although the high yield market lost some steam in 2010’s fourth quarter, market sentiment was generally positive in early 2011 with a rally that extended through May. In June, however, a confluence of factors weighed heavily on equity markets, which in turn pressured the high yield market. Increased oil prices coupled with still weak U.S. housing data and spotty consumer confidence heightened concerns about the domestic economic recovery. Overseas, Greece’s fiscal crisis was coming to a head, which also increased market volatility. These factors combined to make investors skittish, leading to technical selling pressure in June as some high yield mutual fund investors redeemed shares. This selling contributed to the high yield market’s first negative monthly total return of 2011.
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. We may also enter into various transactions involving certain currency-, interest rate- or credit-related derivative instruments for hedging purposes, to enhance returns or to obtain exposure to various market sectors.
Manager’s Discussion
With continued overall strength in the high yield market, Franklin High Income Securities Fund generated a positive total return for the six-month period ended June 30, 2011. The Fund performed in line with its benchmark, the CS High Yield Index, and its peer group, the Lipper VIP High Current Yield Funds Classification Average.
Overall, given the health of corporate balance sheets and indications the U.S. economy would slowly continue to improve, somewhat offset by
FH-3
tighter high yield spreads relative to U.S. Treasury securities, we maintained a generally neutral risk stance for most of the reporting period. In addition, as typical, we drew on our fundamental research process to set the Fund’s industry positioning. Within that framework, we over- and underweighted certain industries relative to our benchmark in an effort to outperform the benchmark CS High Yield Index.
For instance, given our lack of confidence that the U.S. housing market had bottomed, we underweighted the building industry, which underperformed the benchmark index.3 Although the industry rallied in the latter part of 2010 on hopes homebuyers would return in force, actual housing data continued to disappoint the market during the review period, causing bonds to sell off and, ultimately, underperform the index. Our underweighted positioning therefore aided relative performance. Similarly, we continued to be cautious regarding a strong consumer recovery and therefore underweighted the retail industry.4 This industry showed periodic pockets of strength but underperformed the CS High Yield Index for the six months under review. The paper industry was another poor performer.5 Companies in this industry faced declining demand and heavy price competition as well as increased input costs in some subsectors. Thus, we limited our exposure and underweighted the industry, which benefited relative Fund performance.
Although some Fund industry positioning enhanced relative performance, certain weightings had a negative impact. For example, the Fund’s weightings in the technology, financials and industrials sectors hindered relative performance.6 Although the Fund increased its technology sector exposure during the period, it remained slightly underweighted versus the benchmark index while the sector finished among the index’s top performers. Some bonds in the sector rallied as certain large-capitalization, highly leveraged issuers experienced improved operating results and used the debt markets to improve liquidity. Our relatively underweighted financials sector exposure also negatively impacted performance as the sector was a strong performer. Conversely, the Fund was overweighted in the industrials sector as a result of our bottom-up analysis. However, the sector slightly underperformed the benchmark index as it suffered more than many other
3. Building holdings are in consumer durables and apparel, and materials in the SOI.
4. Retail holdings are in food and staples retailing, and retailing in the SOI.
5. Paper holdings are in materials in the SOI.
6. Technology holdings are in semiconductors and semiconductor equipment, software and services, and technology hardware and equipment in the SOI. Financials holdings are in banks, commercial and professional services, diversified financials, and real estate in the SOI. Industrials holdings are in capital goods, commercial and professional services, materials, and transportation in the SOI.
Top 10 Sectors/Industries
Franklin High Income Securities Fund
6/30/11
| % of Total Net Assets | ||||
| Energy | 19.9% | |||
| Media | 9.1% | |||
| Telecommunication Services | 8.4% | |||
| Materials | 8.2% | |||
| Diversified Financials | 5.8% | |||
| Health Care Equipment & Services | 5.7% | |||
| Consumer Services | 5.4% | |||
| Automobiles & Components | 5.3% | |||
| Capital Goods | 4.9% | |||
| Utilities | 3.8% | |||
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).
FH-4
sectors during the market’s June sell-off. Therefore, the Fund’s overweighted positioning negatively impacted relative performance.
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, 2011, 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.
FH-5
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 4
FH-6
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 4 | Beginning Account Value 1/1/11 | Ending Account Value 6/30/11 | Fund-Level 1/1/11–6/30/11 | |||||||||
Actual | $ | 1,000 | $ | 1,045.50 | $ | 4.67 | ||||||
Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,020.23 | $ | 4.61 | ||||||
*Expenses are calculated using the most recent six-month annualized expense ratio for the Fund’s Class 4 shares (0.92%), 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.
FH-7
Franklin Templeton Variable Insurance Products Trust
Financial Highlights
Franklin High Income Securities Fund
Six Months June 30, 2011 | Year Ended December 31, | |||||||||||||||||||||||
| Class 1 | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 6.63 | $ | 6.26 | $ | 4.68 | $ | 6.72 | $ | 6.96 | $ | 6.82 | ||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.25 | 0.49 | 0.46 | 0.50 | 0.51 | 0.49 | ||||||||||||||||||
Net realized and unrealized gains (losses) | 0.07 | 0.32 | 1.50 | (1.92 | ) | (0.30 | ) | 0.12 | ||||||||||||||||
Total from investment operations | 0.32 | 0.81 | 1.96 | (1.42 | ) | 0.21 | 0.61 | |||||||||||||||||
Less distributions from net investment income | (0.42 | ) | (0.44 | ) | (0.38 | ) | (0.62 | ) | (0.45 | ) | (0.47 | ) | ||||||||||||
Net asset value, end of period | $ | 6.53 | $ | 6.63 | $ | 6.26 | $ | 4.68 | $ | 6.72 | $ | 6.96 | ||||||||||||
Total returnc | 4.79% | 13.71% | 42.99% | (23.16)% | 3.02% | 9.48% | ||||||||||||||||||
Ratios to average net assetsd | ||||||||||||||||||||||||
Expenses before expense reduction | 0.57% | 0.61% | 0.63% | 0.66% | 0.61% | 0.64% | ||||||||||||||||||
Expenses net of expense reduction | 0.57% | 0.61% | 0.63% | e | 0.66% | e | 0.61% | e | 0.63% | |||||||||||||||
Net investment income | 7.41% | 7.71% | 8.33% | 8.30% | 7.38% | 7.14% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 46,047 | $ | 48,051 | $ | 48,855 | $ | 38,225 | $ | 61,286 | $ | 77,641 | ||||||||||||
Portfolio turnover rate | 25.12% | 60.80% | 26.41% | 21.75% | 40.65% | 37.99% | ||||||||||||||||||
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 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
Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Franklin High Income Securities Fund
Six Months June 30, 2011 | Year Ended December 31, | |||||||||||||||||||||||
| Class 2 | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 6.47 | $ | 6.13 | $ | 4.59 | $ | 6.60 | $ | 6.85 | $ | 6.71 | ||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.24 | 0.47 | 0.44 | 0.47 | 0.48 | 0.46 | ||||||||||||||||||
Net realized and unrealized gains (losses) | 0.06 | 0.30 | 1.47 | (1.88 | ) | (0.29 | ) | 0.13 | ||||||||||||||||
Total from investment operations | 0.30 | 0.77 | 1.91 | (1.41 | ) | 0.19 | 0.59 | |||||||||||||||||
Less distributions from net investment income | (0.40 | ) | (0.43 | ) | (0.37 | ) | (0.60 | ) | (0.44 | ) | (0.45 | ) | ||||||||||||
Net asset value, end of period | $ | 6.37 | $ | 6.47 | $ | 6.13 | $ | 4.59 | $ | 6.60 | $ | 6.85 | ||||||||||||
Total returnc | 4.72% | 13.26% | 42.70% | (23.38)% | 2.72% | 9.36% | ||||||||||||||||||
Ratios to average net assetsd | ||||||||||||||||||||||||
Expenses before expense reduction | 0.82% | 0.86% | 0.88% | 0.91% | 0.86% | 0.89% | ||||||||||||||||||
Expenses net of expense reduction | 0.82% | 0.86% | 0.88% | e | 0.91% | e | 0.86% | e | 0.88% | |||||||||||||||
Net investment income | 7.16% | 7.46% | 8.08% | 8.05% | 7.13% | 6.89% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 277,012 | $ | 239,824 | $ | 198,567 | $ | 84,396 | $ | 155,777 | $ | 166,318 | ||||||||||||
Portfolio turnover rate | 25.12% | 60.80% | 26.41% | 21.75% | 40.65% | 37.99% | ||||||||||||||||||
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 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
Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Franklin High Income Securities Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||||||
| Class 4 | 2010 | 2009 | 2008a | |||||||||||||
Per share operating performance | ||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||
Net asset value, beginning of period | $ | 6.57 | $ | 6.22 | $ | 4.67 | $ | 6.55 | ||||||||
Income from investment operationsb: | ||||||||||||||||
Net investment incomec | 0.24 | 0.47 | 0.45 | 0.39 | ||||||||||||
Net realized and unrealized gains (losses) | 0.06 | 0.31 | 1.48 | (1.65 | ) | |||||||||||
Total from investment operations | 0.30 | 0.78 | 1.93 | (1.26 | ) | |||||||||||
Less distributions from net investment income | (0.40 | ) | (0.43 | ) | (0.38 | ) | (0.62 | ) | ||||||||
Net asset value, end of period | $ | 6.47 | $ | 6.57 | $ | 6.22 | $ | 4.67 | ||||||||
Total returnd | 4.55% | 13.31% | 42.36% | (21.34)% | ||||||||||||
Ratios to average net assetse | ||||||||||||||||
Expenses | 0.92% | 0.96% | 0.98% | f | 1.01% | f | ||||||||||
Net investment income | 7.06% | 7.36% | 7.98% | 7.95% | ||||||||||||
Supplemental data | ||||||||||||||||
Net assets, end of period (000’s) | $ | 28,010 | $ | 25,934 | $ | 15,105 | $ | 2,244 | ||||||||
Portfolio turnover rate | 25.12% | 60.80% | 26.41% | 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 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 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
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited)
| Franklin High Income Securities Fund | Country | Shares | Value | |||||||
Common Stocks (Cost $865,221) 0.0%† | ||||||||||
Media 0.0%† | ||||||||||
aDex One Corp. | United States | 27,909 | $ | 70,610 | ||||||
|
| |||||||||
Preferred Stocks (Cost $770,000) 0.2% | ||||||||||
Diversified Financials 0.2% | ||||||||||
GMAC Capital Trust I, 8.125%, pfd. | United States | 30,800 | 788,480 | |||||||
|
| |||||||||
| Principal Amount* | ||||||||||
Corporate Bonds 95.5% | ||||||||||
Automobiles & Components 5.3% | ||||||||||
bChrysler Group LLC/CG Co-Issuer Inc., senior secured note, 144A, 8.25%, 6/15/21 | United States | 1,500,000 | 1,477,500 | |||||||
bExide Technologies, senior secured note, 144A, 8.625%, 2/01/18 | United States | 800,000 | 836,000 | |||||||
Ford Motor Credit Co. LLC, | ||||||||||
7.80%, 6/01/12 | United States | 500,000 | 523,002 | |||||||
senior note, 7.00%, 4/15/15 | United States | 2,000,000 | 2,165,318 | |||||||
senior note, 6.625%, 8/15/17 | United States | 1,000,000 | 1,063,788 | |||||||
senior note, 5.00%, 5/15/18 | United States | 1,000,000 | 998,566 | |||||||
senior note, 8.125%, 1/15/20 | United States | 1,000,000 | 1,161,505 | |||||||
senior note, 5.75%, 2/01/21 | United States | 1,000,000 | 1,000,615 | |||||||
The Goodyear Tire & Rubber Co., senior note, 8.25%, 8/15/20 | United States | 3,500,000 | 3,797,500 | |||||||
International Automotive Components Group SL, senior secured note, 9.125%, 6/01/18 | Luxembourg | 1,400,000 | 1,429,750 | |||||||
bPittsburgh Glass Works LLC., secured senior note, 144A, 8.50%, 4/15/16 | United States | 2,300,000 | 2,374,750 | |||||||
bTRW Automotive Inc., senior note, 144A, 7.25%, 3/15/17 | United States | 1,700,000 | 1,895,500 | |||||||
|
| |||||||||
| 18,723,794 | ||||||||||
|
| |||||||||
Banks 0.6% | ||||||||||
cWells Fargo Capital XV, pfd., 9.75% to 9/26/13, FRN thereafter, Perpetual | United States | 2,000,000 | 2,120,000 | |||||||
|
| |||||||||
Capital Goods 4.9% | ||||||||||
bAbengoa Finance SAU, senior note, 144A, 8.875%, 11/01/17 | Spain | 3,000,000 | 3,074,985 | |||||||
bAllison Transmission Holdings Inc., senior note, 144A, 7.125%, 5/15/19 | United States | 1,000,000 | 977,500 | |||||||
The Manitowoc Co. Inc., senior note, | ||||||||||
9.50%, 2/15/18 | United States | 1,400,000 | 1,527,750 | |||||||
8.50%, 11/01/20 | United States | 500,000 | 536,250 | |||||||
Meritor Inc., senior note, 10.625%, 3/15/18 | United States | 1,900,000 | 2,142,250 | |||||||
bPinafore LLC/Inc., senior secured note, 144A, 9.00%, 10/01/18 | United States | 200,000 | 216,500 | |||||||
RBS Global & Rexnord Corp., senior note, 8.50%, 5/01/18 | United States | 3,000,000 | 3,183,750 | |||||||
RSC Equipment Rental Inc. and RSC Holdings III LLC, senior note, 10.25%, 11/15/19 | United States | 2,500,000 | 2,750,000 | |||||||
United Rentals North America Inc., senior sub. note, 8.375%, 9/15/20 | United States | 2,800,000 | 2,849,000 | |||||||
|
| |||||||||
| 17,257,985 | ||||||||||
|
| |||||||||
Commercial & Professional Services 0.3% | ||||||||||
b,dARAMARK Holdings Corp., senior note, 144A, PIK, 8.625%, 5/01/16 | United States | 600,000 | 613,500 | |||||||
e,fGoss Graphic Systems Inc., senior sub. note, 12.25%, 11/19/05 | United States | 1,912,374 | 191 | |||||||
bInteractive Data Corp., senior note, 144A, 10.25%, 8/01/18 | United States | 500,000 | 546,250 | |||||||
|
| |||||||||
| 1,159,941 | ||||||||||
|
| |||||||||
Consumer Durables & Apparel 3.1% | ||||||||||
Jarden Corp., | United States | 500,000 | 498,125 | |||||||
senior sub. note, 7.50%, 5/01/17 | United States | 2,200,000 | 2,296,250 | |||||||
KB Home, senior note, 6.25%, 6/15/15 | United States | 2,000,000 | 1,920,000 | |||||||
M/I Homes Inc., senior note, 8.625%, 11/15/18 | United States | 1,500,000 | 1,483,125 | |||||||
bShea Homes LP/Funding Corp., senior secured note, 144A, 8.625%, 5/15/19 | United States | 1,600,000 | 1,580,000 | |||||||
Visant Corp., senior note, 10.00%, 10/01/17 | United States | 3,100,000 | 3,224,000 | |||||||
|
| |||||||||
| 11,001,500 | ||||||||||
|
| |||||||||
FH-11
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Franklin High Income Securities Fund | Country | Principal Amount* | Value | |||||||
Corporate Bonds (continued) | ||||||||||
Consumer Services 5.4% | ||||||||||
bCityCenter Holdings/Finance, senior secured note, 144A, 7.625%, 1/15/16 | United States | 1,000,000 | $ | 1,037,500 | ||||||
CKE Restaurants Inc., senior secured note, 11.375%, 7/15/18 | United States | 2,200,000 | 2,414,500 | |||||||
bClubCorp Club Operations Inc., senior note, 144A, 10.00%, 12/01/18 | United States | 2,200,000 | 2,189,000 | |||||||
b,eFontainebleau Las Vegas, 144A, 11.00%, 6/15/15 | United States | 1,700,000 | 850 | |||||||
Harrah’s Operating Co. Inc., senior secured note, 11.25%, 6/01/17 | United States | 3,000,000 | 3,326,250 | |||||||
MGM Resorts International, | United States | 2,000,000 | 1,885,000 | |||||||
senior note, 6.875%, 4/01/16 | United States | 1,200,000 | 1,131,000 | |||||||
senior secured note, 9.00%, 3/15/20 | United States | 600,000 | 660,000 | |||||||
bNCL Corp. Ltd., senior note, 144A, 9.50%, 11/15/18 | United States | 500,000 | 535,000 | |||||||
Norwegian Cruise Line Ltd., senior secured note, 11.75%, 11/15/16 | United States | 800,000 | 925,000 | |||||||
Pinnacle Entertainment Inc., | United States | 2,200,000 | 2,373,250 | |||||||
senior sub. note, 7.50%, 6/15/15 | United States | 400,000 | 409,000 | |||||||
bShingle Springs Tribal Gaming Authority, senior note, 144A, 9.375%, 6/15/15 | United States | 1,200,000 | 834,000 | |||||||
eStation Casinos Inc., | United States | 200,000 | 20 | |||||||
senior note, 7.75%, 8/15/16 | United States | 1,000,000 | 100 | |||||||
senior sub. note, 6.50%, 2/01/14 | United States | 100,000 | 10 | |||||||
senior sub. note, 6.875%, 3/01/16 | United States | 1,000,000 | 100 | |||||||
bSugarhouse HSP Gaming Prop Mezz LP/Finance Corp., senior secured note, 144A, 8.625%, 4/15/16 | United States | 1,200,000 | 1,242,000 | |||||||
|
| |||||||||
| 18,962,580 | ||||||||||
|
| |||||||||
Diversified Financials 5.6% | ||||||||||
Ally Financial Inc., senior note, 7.50%, 9/15/20 | United States | 500,000 | 525,000 | |||||||
cBank of America Corp., pfd., sub. bond, M, 8.125% to 5/15/18, FRN thereafter, Perpetual | United States | 2,500,000 | 2,613,900 | |||||||
bCIT Group Inc., | United States | 6,000,000 | 6,000,000 | |||||||
secured note, 144A, 6.625%, 4/01/18 | United States | 300,000 | 314,250 | |||||||
GMAC Inc., | United States | 3,000,000 | 3,112,500 | |||||||
sub. note, 8.00%, 12/31/18 | United States | 800,000 | 860,000 | |||||||
International Lease Finance Corp., | United States | 1,200,000 | 1,299,000 | |||||||
senior note, R, 5.65%, 6/01/14 | United States | 2,800,000 | 2,814,000 | |||||||
bsenior secured note, 144A, 6.75%, 9/01/16 | United States | 1,200,000 | 1,284,000 | |||||||
TransUnion LLC/TransUnion FICO, senior note, 11.375%, 6/15/18 | United States | 600,000 | 681,000 | |||||||
|
| |||||||||
| 19,503,650 | ||||||||||
|
| |||||||||
Energy 19.9% | ||||||||||
Alpha Natural Resources Inc., senior note, | United States | 1,100,000 | 1,102,750 | |||||||
6.25%, 6/01/21 | United States | 1,100,000 | 1,111,000 | |||||||
Antero Resources Finance, senior note, 9.375%, 12/01/17 | United States | 2,600,000 | 2,808,000 | |||||||
bArch Coal Inc., senior note, 144A, | ||||||||||
7.00%, 6/15/19 | United States | 700,000 | 701,750 | |||||||
7.25%, 6/15/21 | United States | 1,000,000 | 1,006,250 | |||||||
BreitBurn Energy Partners LP, senior note, 8.625%, 10/15/20 | United States | 1,200,000 | 1,272,000 | |||||||
Brigham Exploration Co., senior note, 8.75%, 10/01/18 | United States | 2,800,000 | 3,066,000 | |||||||
bCalumet Specialty Products Partners LP/Finance Corp., senior note, 144A, 9.375%, 5/01/19 | United States | 900,000 | 931,500 | |||||||
Carrizo Oil & Gas Inc., senior note, 8.625%, 10/15/18 | United States | 800,000 | 828,000 | |||||||
FH-12
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Franklin High Income Securities Fund | Country | Principal Amount* | Value | |||||||
Corporate Bonds (continued) | ||||||||||
Energy (continued) | ||||||||||
Chaparral Energy Inc., senior note, | ||||||||||
9.875%, 10/01/20 | United States | 1,400,000 | $ | 1,519,000 | ||||||
8.25%, 9/01/21 | United States | 600,000 | 607,500 | |||||||
bCHC Helicopter SA, senior secured note, 144A, 9.25%, 10/15/20 | Canada | 3,500,000 | 3,176,250 | |||||||
Chesapeake Energy Corp., senior note, | ||||||||||
6.625%, 8/15/20 | United States | 2,900,000 | 3,066,750 | |||||||
6.125%, 2/15/21 | United States | 1,000,000 | 1,013,750 | |||||||
bClayton Williams Energy Inc., senior note, 144A, 7.75%, 4/01/19 | United States | 1,400,000 | 1,375,500 | |||||||
bCompagnie Generale de Geophysique-Veritas, senior note, 144A, 6.50%, 6/01/21 | France | 2,500,000 | 2,422,500 | |||||||
CONSOL Energy Inc., senior note, | ||||||||||
8.00%, 4/01/17 | United States | 500,000 | 547,500 | |||||||
8.25%, 4/01/20 | United States | 500,000 | 547,500 | |||||||
b144A, 6.375%, 3/01/21 | United States | 300,000 | 300,000 | |||||||
Copano Energy LLC/Copano Energy Finance Corp., senior note, 7.125%, 4/01/21 | United States | 800,000 | 792,000 | |||||||
Crosstex Energy LP/Crosstex Energy Finance Corp., senior note, 8.875%, 2/15/18 | United States | 500,000 | 535,000 | |||||||
bEagle Rock Energy Partners LP/Finance Corp., senior note, 144A, 8.375%, 6/01/19 | United States | 1,400,000 | 1,401,750 | |||||||
El Paso Corp., | United States | 400,000 | 439,057 | |||||||
senior note, 6.875%, 6/15/14 | United States | 1,500,000 | 1,683,196 | |||||||
bEnergy XXI Gulf Coast Inc., senior note, 144A, 9.25%, 12/15/17 | United States | 2,500,000 | 2,668,750 | |||||||
gEnterprise Products Operating LLC, junior sub. note, FRN, 7.034%, 1/15/68 | United States | 1,900,000 | 1,999,984 | |||||||
bExpro Finance Luxembourg, senior secured note, 144A, 8.50%, 12/15/16 | United Kingdom | 3,000,000 | 2,910,000 | |||||||
bGoodrich Petroleum Corp., senior note, 144A, 8.875%, 3/15/19 | United States | 2,200,000 | 2,211,000 | |||||||
Linn Energy Corp., senior note, | ||||||||||
8.625%, 4/15/20 | United States | 2,000,000 | 2,180,000 | |||||||
b144A, 6.50%, 5/15/19 | United States | 600,000 | 595,500 | |||||||
b144A, 7.75%, 2/01/21 | United States | 700,000 | 731,500 | |||||||
MarkWest Energy Partners LP/Finance Corp., senior note, | ||||||||||
6.75%, 11/01/20 | United States | 1,500,000 | 1,537,500 | |||||||
6.50%, 8/15/21 | United States | 600,000 | 597,000 | |||||||
Martin Midstream Partners LP, senior note, 8.875%, 4/01/18 | United States | 1,500,000 | 1,582,500 | |||||||
bOasis Petroleum Inc., senior note, 144A, 7.25%, 2/01/19 | United States | 500,000 | 497,500 | |||||||
Offshore Group Investment Ltd., senior secured note, | ||||||||||
11.50%, 8/01/15 | United States | 1,300,000 | 1,420,250 | |||||||
b144A, 11.50%, 8/01/15 | United States | 400,000 | 437,000 | |||||||
bOPTI Canada Inc., senior secured note, 144A, | ||||||||||
9.00%, 12/15/12 | Canada | 700,000 | 707,000 | |||||||
9.75%, 8/15/13 | Canada | 1,000,000 | 997,500 | |||||||
Peabody Energy Corp., senior note, 6.50%, 9/15/20 | United States | 1,700,000 | 1,836,000 | |||||||
Petrohawk Energy Corp., senior note, | ||||||||||
7.875%, 6/01/15 | United States | 1,800,000 | 1,894,500 | |||||||
7.25%, 8/15/18 | United States | 1,000,000 | 1,031,250 | |||||||
b144A, 6.25%, 6/01/19 | United States | 600,000 | 587,250 | |||||||
bPetroplus Finance Ltd., senior note, 144A, 6.75%, 5/01/14 | Switzerland | 1,600,000 | 1,576,000 | |||||||
Plains Exploration & Production Co., senior note, 7.625%, 6/01/18 | United States | 2,200,000 | 2,321,000 | |||||||
Quicksilver Resources Inc., senior note, | ||||||||||
8.25%, 8/01/15 | United States | 2,000,000 | 2,117,500 | |||||||
9.125%, 8/15/19 | United States | 300,000 | 328,500 | |||||||
SandRidge Energy Inc., senior note, | ||||||||||
8.75%, 1/15/20 | United States | 300,000 | 321,000 | |||||||
b144A, 8.00%, 6/01/18 | United States | 2,500,000 | 2,562,500 | |||||||
b144A, 7.50%, 3/15/21 | United States | 400,000 | 405,500 | |||||||
bW&T Offshore Inc., senior note, 144A, 8.50%, 6/15/19 | United States | 1,500,000 | 1,522,500 | |||||||
| 69,830,987 | ||||||||||
FH-13
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Franklin High Income Securities Fund | Country | Principal Amount* | Value | |||||||
Corporate Bonds (continued) | ||||||||||
Food & Staples Retailing 0.9% | ||||||||||
Rite Aid Corp., senior secured note, | ||||||||||
9.75%, 6/12/16 | United States | 1,800,000 | $ | 1,995,750 | ||||||
8.00%, 8/15/20 | United States | 1,000,000 | 1,082,500 | |||||||
| 3,078,250 | ||||||||||
Food, Beverage & Tobacco 2.4% | ||||||||||
bBlue Merger Sub Inc., senior note, 144A, 7.625%, 2/15/19 | United States | 2,200,000 | 2,233,000 | |||||||
bCEDC Finance Corp. International Inc., senior secured note, 144A, 9.125%, 12/01/16 | Poland | 700,000 | 642,250 | |||||||
bDean Foods Co., senior note, 144A, 9.75%, 12/15/18 | United States | 2,800,000 | 2,989,000 | |||||||
Pinnacle Foods Finance LLC, senior note, | ||||||||||
9.25%, 4/01/15 | United States | 1,300,000 | 1,355,250 | |||||||
8.25%, 9/01/17 | United States | 1,000,000 | 1,042,500 | |||||||
| 8,262,000 | ||||||||||
Health Care Equipment & Services 5.7% | ||||||||||
bAviv Healthcare Properties LP, senior note, 144A, 7.75%, 2/15/19 | United States | 2,000,000 | 2,055,000 | |||||||
bCDRT Merger Sub Inc., senior note, 144A, 8.125%, 6/01/19 | United States | 900,000 | 902,250 | |||||||
Community Health Systems Inc., senior note, 8.875%, 7/15/15 | United States | 3,000,000 | 3,097,500 | |||||||
bDJO Finance LLC, senior note, 144A, 7.75%, 4/15/18 | United States | 600,000 | 600,000 | |||||||
FMC Finance III SA, senior note, 6.875%, 7/15/17 | Germany | 1,000,000 | 1,045,133 | |||||||
HCA Inc., | United States | 900,000 | 970,875 | |||||||
senior secured note, 7.875%, 2/15/20 | United States | 1,500,000 | 1,635,000 | |||||||
bMedAssets Inc., senior note, 144A, 8.00%, 11/15/18 | United States | 2,000,000 | 1,990,000 | |||||||
dUnited Surgical Partners International Inc., senior sub. note, PIK, 9.25%, 5/01/17 | United States | 2,300,000 | 2,415,000 | |||||||
Universal Health Services Inc., senior note, 7.00%, 10/01/18 | United States | 2,600,000 | 2,691,000 | |||||||
Vanguard Health Holding Co. II LLC, senior note, 8.00%, 2/01/18 | United States | 1,300,000 | 1,348,750 | |||||||
Vanguard Health Systems Inc., senior note, zero cpn., 2/01/16 | United States | 1,900,000 | 1,261,125 | |||||||
| 20,011,633 | ||||||||||
Materials 8.2% | ||||||||||
bAleris International Inc., senior note, 144A, 7.625%, 2/15/18 | United States | 700,000 | 701,750 | |||||||
bAtkore International Inc., senior secured note, 144A, 9.875%, 1/01/18 | United States | 1,900,000 | 2,004,500 | |||||||
bCemex SAB de CV, senior secured note, 144A, 9.00%, 1/11/18 | Mexico | 1,900,000 | 1,946,673 | |||||||
bEuramax International Inc., senior secured note, 144A, 9.50%, 4/01/16 | United States | 2,000,000 | 1,950,000 | |||||||
bExopack Holding Corp., senior note, 144A, 10.00%, 6/01/18 | United States | 1,400,000 | 1,396,500 | |||||||
bFMG Resources August 2006 Pty. Ltd., senior note, 144A, | ||||||||||
7.00%, 11/01/15 | Australia | 800,000 | 818,576 | |||||||
6.875%, 2/01/18 | Australia | 2,000,000 | 2,040,000 | |||||||
bIneos Finance PLC, senior secured note, 144A, 9.00%, 5/15/15 | United Kingdom | 200,000 | 211,000 | |||||||
bIneos Group Holdings PLC, senior secured note, 144A, 8.50%, 2/15/16 | United Kingdom | 2,000,000 | 1,985,000 | |||||||
bKinove German Bondco GmbH, senior secured note, 144A, 9.625%, 6/15/18 | Germany | 1,600,000 | 1,668,000 | |||||||
bMacDermid Inc., senior sub. note, 144A, 9.50%, 4/15/17 | United States | 2,500,000 | 2,612,500 | |||||||
NewPage Corp., senior secured note, 11.375%, 12/31/14 | United States | 2,500,000 | 2,343,750 | |||||||
Novelis Inc., senior note, 8.75%, 12/15/20 | India | 1,300,000 | 1,410,500 | |||||||
bOMNOVA Solutions Inc., senior note, 144A, 7.875%, 11/01/18 | United States | 2,100,000 | 2,029,125 | |||||||
bReynolds Group Holdings Ltd., senior note, 144A, 8.25%, 2/15/21 | New Zealand | 400,000 | 376,000 | |||||||
bReynolds Group Issuer Inc./LLC/SA, senior note, 144A, | ||||||||||
8.75%, 5/15/18 | New Zealand | 2,800,000 | 2,765,000 | |||||||
9.00%, 4/15/19 | New Zealand | 200,000 | 198,500 | |||||||
Solo Cup Co., senior sub. note, 8.50%, 2/15/14 | United States | 1,500,000 | 1,406,250 | |||||||
Vulcan Materials Co., senior note, 7.50%, 6/15/21 | United States | 900,000 | 899,806 | |||||||
| 28,763,430 | ||||||||||
FH-14
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Franklin High Income Securities Fund | Country | Principal Amount* | Value | |||||||
Corporate Bonds (continued) | ||||||||||
Media 8.8% | ||||||||||
bAMC Networks Inc., senior note, 144A, 7.75%, 7/15/21 | United States | 1,100,000 | $ | 1,152,250 | ||||||
bBresnan Broadband Holdings LLC, senior note, 144A, 8.00%, 12/15/18 | United States | 700,000 | 725,375 | |||||||
Cablevision Systems Corp., senior note, | ||||||||||
8.625%, 9/15/17 | United States | 1,000,000 | 1,088,750 | |||||||
7.75%, 4/15/18 | United States | 1,000,000 | 1,071,250 | |||||||
CCH II LLC/CCH II Capital Corp., senior note, 13.50%, 11/30/16 | United States | 1,000,000 | 1,182,500 | |||||||
CCO Holdings LLC/CCO Holdings Capital Corp., senior note, | ||||||||||
8.125%, 4/30/20 | United States | 700,000 | 759,500 | |||||||
6.50%, 4/30/21 | United States | 2,200,000 | 2,180,750 | |||||||
bCitadel Broadcasting Corp., senior note, 144A, 7.75%, 12/15/18 | United States | 500,000 | 533,750 | |||||||
bClear Channel Communications Inc., senior note, 144A, 9.00%, 3/01/21 | United States | 4,000,000 | 3,850,000 | |||||||
Clear Channel Worldwide Holdings Inc., senior note, B, 9.25%, 12/15/17 | United States | 1,000,000 | 1,095,000 | |||||||
bCumulus Media Inc., senior note, 144A, 7.75%, 5/01/19 | United States | 600,000 | 582,000 | |||||||
DISH DBS Corp., senior note, | ||||||||||
7.125%, 2/01/16 | United States | 3,000,000 | 3,180,000 | |||||||
b144A, 6.75%, 6/01/21 | United States | 1,500,000 | 1,545,000 | |||||||
bLive Nation Entertainment Inc., senior note, 144A, 8.125%, 5/15/18 | United States | 2,500,000 | 2,537,500 | |||||||
Media General Inc., senior secured note, 11.75%, 2/15/17 | United States | 1,400,000 | 1,368,500 | |||||||
b,dRadio One Inc., senior sub. note, 144A, PIK, 9.00%, 5/24/16 | United States | 1,533,750 | 1,547,170 | |||||||
bUnitymedia Hessen/NRW, senior secured note, 144A, 8.125%, 12/01/17 | Germany | 1,500,000 | 1,605,000 | |||||||
bUnivision Communications Inc., senior secured note, 144A, | ||||||||||
6.875%, 5/15/19 | United States | 1,500,000 | 1,492,500 | |||||||
7.875%, 11/01/20 | United States | 700,000 | 721,000 | |||||||
bUPCB Finance III Ltd., senior secured note, 144A, 6.625%, 7/01/20 | Cayman Islands | 1,000,000 | 992,500 | |||||||
WMG Acquisition Corp., senior secured note, 9.50%, 6/15/16 | United States | 1,600,000 | 1,696,000 | |||||||
|
| |||||||||
| 30,906,295 | ||||||||||
|
| |||||||||
Pharmaceuticals, Biotechnology & Life Sciences 2.4% | ||||||||||
bEndo Pharmaceuticals Holdings Inc., senior note, 144A, 7.00%, | ||||||||||
7/15/19 | United States | 600,000 | 618,000 | |||||||
12/15/20 | United States | 1,000,000 | 1,032,500 | |||||||
bGiant Funding Corp., senior note, 144A, 8.25%, 2/01/18 | Spain | 1,800,000 | 1,849,500 | |||||||
binVentiv Health Inc., senior note, 144A, | ||||||||||
10.00%, 8/15/18 | United States | 2,200,000 | 2,161,500 | |||||||
h10.00%, 8/15/18 | United States | 200,000 | 190,000 | |||||||
bMylan Inc., senior note, 144A, 7.875%, 7/15/20 | United States | 2,200,000 | 2,425,500 | |||||||
|
| |||||||||
| 8,277,000 | ||||||||||
|
| |||||||||
Real Estate 0.6% | ||||||||||
Forest City Enterprises Inc., senior note, | ||||||||||
7.625%, 6/01/15 | United States | 2,000,000 | 1,970,000 | |||||||
6.50%, 2/01/17 | United States | 300,000 | 286,500 | |||||||
|
| |||||||||
| 2,256,500 | ||||||||||
|
| |||||||||
Retailing 2.2% | ||||||||||
bAsbury Automotive Group Inc., senior sub. note, 144A, 8.375%, 11/15/20 | United States | 1,400,000 | 1,431,500 | |||||||
bMichaels Stores Inc., senior note, 144A, 7.75%, 11/01/18 | United States | 2,500,000 | 2,518,750 | |||||||
bNeedle Merger Sub Corp., senior note, 144A, 8.125%, 3/15/19 | United States | 1,100,000 | 1,113,750 | |||||||
bPetco Animal Supplies Inc., senior note, 144A, 9.25%, 12/01/18 | United States | 2,500,000 | 2,668,750 | |||||||
|
| |||||||||
| 7,732,750 | ||||||||||
|
| |||||||||
FH-15
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Franklin High Income Securities Fund | Country | Principal Amount* | Value | |||||||
Corporate Bonds (continued) | ||||||||||
Semiconductors & Semiconductor Equipment 1.8% | ||||||||||
Advanced Micro Devices Inc., senior note, | ||||||||||
8.125%, 12/15/17 | United States | 500,000 | $ | 525,000 | ||||||
7.75%, 8/01/20 | United States | 1,000,000 | 1,035,000 | |||||||
Freescale Semiconductor Inc., senior note, | ||||||||||
10.125%, 12/15/16 | United States | 200,000 | 216,250 | |||||||
b144A, 8.05%, 2/01/20 | United States | 1,200,000 | 1,212,000 | |||||||
b144A, 10.75%, 8/01/20 | United States | 1,600,000 | 1,816,000 | |||||||
bNXP BV/NXP Funding LLC, senior secured note, 144A, 9.75%, 8/01/18 | Netherlands | 1,300,000 | 1,457,625 | |||||||
|
| |||||||||
| 6,261,875 | ||||||||||
|
| |||||||||
Software & Services 1.5% | ||||||||||
First Data Corp., | United States | 808,000 | 868,600 | |||||||
senior note, 9.875%, 9/24/15 | United States | 71,000 | 72,420 | |||||||
senior note, 9.875%, 9/24/15 | United States | 111,000 | 114,608 | |||||||
bsenior secured bond, 144A, 8.25%, 1/15/21 | United States | 808,000 | 795,880 | |||||||
Sitel LLC/Finance Corp., senior note, 11.50%, 4/01/18 | United States | 1,300,000 | 1,196,000 | |||||||
SunGard Data Systems Inc., senior note, 7.625%, 11/15/20 | United States | 2,300,000 | 2,334,500 | |||||||
|
| |||||||||
| 5,382,008 | ||||||||||
|
| |||||||||
Technology Hardware & Equipment 1.4% | ||||||||||
bCDW Escrow Corp., senior note, 144A, 8.50%, 4/01/19 | United States | 2,600,000 | 2,561,000 | |||||||
bCommScope Inc., senior note, 144A, 8.25%, 1/15/19 | United States | 2,300,000 | 2,380,500 | |||||||
|
| |||||||||
| 4,941,500 | ||||||||||
|
| |||||||||
Telecommunication Services 8.4% | ||||||||||
Cricket Communications Inc., senior note, | ||||||||||
7.75%, 10/15/20 | United States | 3,000,000 | 2,947,500 | |||||||
b144A, 7.75%, 10/15/20 | United States | 500,000 | 491,250 | |||||||
Crown Castle International Corp., | United States | 600,000 | 634,500 | |||||||
senior note, 9.00%, 1/15/15 | United States | 2,000,000 | 2,180,000 | |||||||
bDigicel Group Ltd., senior note, 144A, 8.875%, 1/15/15 | Jamaica | 2,600,000 | 2,671,500 | |||||||
beAccess Ltd., senior note, 144A, 8.25%, 4/01/18 | Japan | 1,800,000 | 1,823,625 | |||||||
Frontier Communications Corp., senior note, | ||||||||||
8.25%, 4/15/17 | United States | 400,000 | 437,000 | |||||||
8.50%, 4/15/20 | United States | 2,000,000 | 2,190,000 | |||||||
8.75%, 4/15/22 | United States | 900,000 | 985,500 | |||||||
bIntegra Telecom Inc., senior secured note, 144A, 10.75%, 4/15/16 | United States | 2,200,000 | 2,227,500 | |||||||
bIntelsat Jackson Holding SA, senior note, 144A, | ||||||||||
7.25%, 10/15/20 | Luxembourg | 900,000 | 897,750 | |||||||
7.50%, 4/01/21 | Luxembourg | 3,500,000 | 3,486,875 | |||||||
MetroPCS Wireless Inc., senior note, 7.875%, 9/01/18 | United States | 1,500,000 | 1,595,625 | |||||||
Sprint Nextel Corp., senior note, 8.375%, 8/15/17 | United States | 3,000,000 | 3,311,250 | |||||||
bWest Corp., senior note, 144A, 7.875%, 1/15/19 | United States | 3,000,000 | 2,917,500 | |||||||
b,dWind Acquisition Holdings Finance SA, senior secured note, 144A, PIK, 12.25%, 7/15/17 | Italy | 482,692 | EUR | 767,421 | ||||||
|
| |||||||||
| 29,564,796 | ||||||||||
|
| |||||||||
Transportation 2.6% | ||||||||||
bAmerican Airlines Inc., senior secured note, 144A, 7.50%, 3/15/16 | United States | 3,300,000 | 3,250,500 | |||||||
bCeva Group PLC, senior secured note, 144A, | ||||||||||
11.625%, 10/01/16 | United Kingdom | 200,000 | 218,500 | |||||||
8.375%, 12/01/17 | United Kingdom | 500,000 | 508,125 | |||||||
11.50%, 4/01/18 | United Kingdom | 1,800,000 | 1,903,500 | |||||||
FH-16
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Franklin High Income Securities Fund | Country | Principal Amount* | Value | |||||||
Corporate Bonds (continued) | ||||||||||
Transportation (continued) | ||||||||||
bHertz Corp., senior note, 144A, | ||||||||||
7.50%, 10/15/18 | United States | 1,100,000 | $ | 1,138,500 | ||||||
6.75%, 4/15/19 | United States | 2,000,000 | 1,990,000 | |||||||
|
| |||||||||
| 9,009,125 | ||||||||||
|
| |||||||||
Utilities 3.5% | ||||||||||
bAES Corp., senior note, 144A, 7.375%, 7/01/21 | United States | 1,000,000 | 1,016,250 | |||||||
bCalpine Corp., senior secured note, 144A, | ||||||||||
7.875%, 7/31/20 | United States | 800,000 | 840,000 | |||||||
7.50%, 2/15/21 | United States | 1,500,000 | 1,537,500 | |||||||
7.875%, 1/15/23 | United States | 1,000,000 | 1,031,250 | |||||||
Dynegy Holdings Inc., senior note, 8.375%, 5/01/16 | United States | 1,000,000 | 805,000 | |||||||
bIntergen NV, senior secured note, 144A, 9.00%, 6/30/17 | Netherlands | 2,000,000 | 2,125,000 | |||||||
bKinder Morgan Finance Co. LLC, senior secured note, 144A, 6.00%, 1/15/18 | United States | 2,000,000 | 2,085,000 | |||||||
Texas Competitive Electric Holdings Co. LLC, senior note, A, 10.25%, 11/01/15 | United States | 1,000,000 | 610,000 | |||||||
bTexas Competitive Electric Holdings Co. LLC/Texas Competitive Electric Holdings Finance Inc., | United States | 852,000 | 702,900 | |||||||
senior secured note, 144A, 11.50%, 10/01/20 | United States | 1,500,000 | 1,481,250 | |||||||
|
| |||||||||
| 12,234,150 | ||||||||||
|
| |||||||||
Total Corporate Bonds (Cost $327,020,491) | 335,241,749 | |||||||||
|
| |||||||||
g,iSenior Floating Rate Interests 0.6% | ||||||||||
Media 0.3% | ||||||||||
Univision Communications Inc., Initial Term Loan, 2.186%, 9/29/14 | United States | 874,148 | 837,870 | |||||||
|
| |||||||||
Utilities 0.3% | ||||||||||
Texas Competitive Electric Holdings Co. LLC, 2017 Term Loan, 4.69% - 4.768%, 10/10/17 | United States | 1,431,288 | 1,120,241 | |||||||
|
| |||||||||
Total Senior Floating Rate Interests (Cost $1,942,927) | 1,958,111 | |||||||||
|
| |||||||||
Total Investments before Short Term Investments | 338,058,950 | |||||||||
|
| |||||||||
Short Term Investments (Cost $5,539,431) 1.6% | ||||||||||
Repurchase Agreements 1.6% | ||||||||||
jJoint Repurchase Agreement, 0.005%, 7/01/11 (Maturity Value $5,539,432) | United States | 5,539,431 | 5,539,431 | |||||||
Barclays Capital Inc. (Maturity Value $474,675) | ||||||||||
Collateralized by U.S. Government Agency Securities, 0.75% - 5.375%, 10/15/11 - 9/13/19; kU.S. Government Agency Discount Notes, 9/28/11 - 12/28/11; kU.S. Treasury Bills, 8/04/11 - 8/25/11; U.S. Treasury Bonds, 7.25% - 11.25%, 2/15/15 - 5/15/16; and U.S. Treasury Notes, 0.375% - 5.00%, 7/31/11 - 6/30/16 (valued at $5,664,344 ) | ||||||||||
|
| |||||||||
Total Investments (Cost $336,138,070) 97.9% | 343,598,381 | |||||||||
Other Assets, less Liabilities 2.1% | 7,471,103 | |||||||||
|
| |||||||||
Net Assets 100.0% | $ | 351,069,484 | ||||||||
|
| |||||||||
FH-17
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Franklin High Income Securities Fund |
†Rounds to less than 0.1% of net assets.
*The principal amount is stated in U.S. dollars unless otherwise indicated.
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. These securities have been deemed liquid under guidelines approved by the Trust’s Board of Trustees. At June 30, 2011, the aggregate value of these securities was $170,365,805, representing 48.53% of net assets.
cPerpetual security with no stated maturity date.
dIncome may be received in additional securities and/or cash.
eSee Note 7 regarding defaulted securities.
fSecurity has been deemed illiquid because it may not be able to be sold within seven days. At June 30, 2011, the value of this security was $191, representing less than 0.01% of net assets.
gThe coupon rate shown represents the rate at period end.
hSecurity purchased on a delayed delivery basis. See Note 1(d).
iSee Note 1(f) regarding senior floating rate interests.
jSee Note 1(c) regarding joint repurchase agreement.
kThe security is traded on a discount basis with no stated coupon rate.
At June 30, 2011, the Fund had the following forward exchange contracts outstanding. See Note 1(e).
Forward Exchange Contracts
| Currency | Counterparty | Type | Quantity | Contract Amount | Settlement Date | Unrealized Appreciation | Unrealized Depreciation | |||||||||||||||||||||
Euro | DBAB | Sell | 464,500 | $ | 617,441 | 12/15/11 | $ | — | $ | (52,716 | ) | |||||||||||||||||
See Abbreviations on page FH-30.
The accompanying notes are an integral part of these financial statements.
FH-18
Franklin Templeton Variable Insurance Products Trust
Financial Statements
Statement of Assets and Liabilities
June 30, 2011 (unaudited)
| Franklin High Income Securities Fund | ||||
Assets: | ||||
Investments in securities: | ||||
Cost - Unaffiliated issuers | $ | 330,598,639 | ||
Cost - Repurchase agreements | 5,539,431 | |||
|
| |||
Total cost of investments | $ | 336,138,070 | ||
|
| |||
Value - Unaffiliated issuers | $ | 338,058,950 | ||
Value - Repurchase agreements | 5,539,431 | |||
|
| |||
Total value of investments | 343,598,381 | |||
Receivables: | ||||
Investment securities sold | 709,698 | |||
Capital shares sold | 1,068,318 | |||
Interest | 6,366,332 | |||
Other assets | 81 | |||
|
| |||
Total assets | 351,742,810 | |||
|
| |||
Liabilities: | ||||
Payables: | ||||
Investment securities purchased | 198,222 | |||
Capital shares redeemed | 20,598 | |||
Affiliates | 288,337 | |||
Reports to shareholders | 89,904 | |||
Unrealized depreciation on forward exchange contracts | 52,716 | |||
Accrued expenses and other liabilities | 23,549 | |||
|
| |||
Total liabilities | 673,326 | |||
|
| |||
Net assets, at value | $ | 351,069,484 | ||
|
| |||
Net assets consist of: | ||||
Paid-in capital | $ | 389,744,931 | ||
Undistributed net investment income | 10,689,485 | |||
Net unrealized appreciation (depreciation) | 7,407,337 | |||
Accumulated net realized gain (loss) | (56,772,269 | ) | ||
|
| |||
Net assets, at value | $ | 351,069,484 | ||
|
| |||
The accompanying notes are an integral part of these financial statements.
FH-19
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Assets and Liabilities (continued)
June 30, 2011 (unaudited)
| Franklin High Income Securities Fund | ||||
Class 1: | ||||
Net assets, at value | $ | 46,047,433 | ||
Shares outstanding | 7,054,958 | |||
Net asset value and maximum offering price per share | $ | 6.53 | ||
Class 2: | ||||
Net assets, at value | $ | 277,011,964 | ||
Shares outstanding | 43,491,802 | |||
Net asset value and maximum offering price per share | $ | 6.37 | ||
Class 4: | ||||
Net assets, at value | $ | 28,010,087 | ||
Shares outstanding | 4,325,964 | |||
Net asset value and maximum offering price per share | $ | 6.47 | ||
The accompanying notes are an integral part of these financial statements.
FH-20
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Operations
for the six months ended June 30, 2011 (unaudited)
| Franklin High Income Securities Fund | ||||
Investment income: | ||||
Dividends | $ | 53,628 | ||
Interest | 13,743,828 | |||
Total investment income | 13,797,456 | |||
Expenses: | ||||
Management fees (Note 3a) | 901,079 | |||
Distribution fees: (Note 3c) | ||||
Class 2 | 338,207 | |||
Class 4 | 47,742 | |||
Unaffiliated transfer agent fees | 164 | |||
Custodian fees (Note 4) | 2,420 | |||
Reports to shareholders | 57,394 | |||
Professional fees | 20,910 | |||
Trustees’ fees and expenses | 579 | |||
Other | 8,704 | |||
Total expenses | 1,377,199 | |||
Net investment income | 12,420,257 | |||
Realized and unrealized gains (losses): | ||||
Net realized gain (loss) from: | ||||
Investments | 6,576,386 | |||
Foreign currency transactions | (155 | ) | ||
Net realized gain (loss) | 6,576,231 | |||
Net change in unrealized appreciation (depreciation) on: | ||||
Investments | (3,893,561 | ) | ||
Translation of other assets and liabilities denominated in foreign currencies | (51,792 | ) | ||
Net change in unrealized appreciation (depreciation) | (3,945,353 | ) | ||
Net realized and unrealized gain (loss) | 2,630,878 | |||
Net increase (decrease) in net assets resulting from operations | $ | 15,051,135 | ||
The accompanying notes are an integral part of these financial statements.
FH-21
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, 2011 (unaudited) | Year Ended December 31, 2010 | |||||||
Increase (decrease) in net assets: | ||||||||
Operations: | ||||||||
Net investment income | $ | 12,420,257 | $ | 20,367,704 | ||||
Net realized gain (loss) from investments and foreign currency transactions | 6,576,231 | 8,248,722 | ||||||
Net change in unrealized appreciation (depreciation) on investments and translation of other assets and liabilities denominated in foreign currencies | (3,945,353 | ) | 5,468,339 | |||||
Net increase (decrease) in net assets resulting from operations | 15,051,135 | 34,084,765 | ||||||
Distributions to shareholders from: | ||||||||
Net investment income: | ||||||||
Class 1 | (2,826,791 | ) | (3,172,829 | ) | ||||
Class 2 | (16,984,105 | ) | (12,418,978 | ) | ||||
Class 4 | (1,620,002 | ) | (1,394,573 | ) | ||||
Total distributions to shareholders | (21,430,898 | ) | (16,986,380 | ) | ||||
Capital share transactions: (Note 2) | ||||||||
Class 1 | (1,433,012 | ) | (3,710,324 | ) | ||||
Class 2 | 42,580,194 | 28,368,422 | ||||||
Class 4 | 2,493,649 | 9,525,024 | ||||||
Total capital share transactions | 43,640,831 | 34,183,122 | ||||||
Net increase (decrease) in net assets | 37,261,068 | 51,281,507 | ||||||
Net assets: | ||||||||
Beginning of period | 313,808,416 | 262,526,909 | ||||||
End of period | $ | 351,069,484 | $ | 313,808,416 | ||||
Undistributed net investment income included in net assets: | ||||||||
End of period | $ | 10,689,485 | $ | 19,700,126 | ||||
The accompanying notes are an integral part of these financial statements.
FH-22
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 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 generally sold only to insurance company separate accounts to fund the benefits of variable life insurance policies or variable annuity contracts. At June 30, 2011, 86.74% 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. Financial Instrument Valuation
The Fund’s investments in securities and other financial instruments are carried at fair value daily. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. Under procedures approved by the Trust’s Board of Trustees, the Fund may utilize independent pricing services, quotations from securities and financial instrument dealers, and other market sources to determine fair value.
Equity securities listed on an 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 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.
Debt securities generally trade in the over-the-counter market rather than on a securities exchange. The Fund’s pricing services use multiple valuation techniques to determine fair value. In instances where sufficient market activity exists, the pricing services may utilize a market-based approach through which quotes from market makers are used to determine fair value. In instances where sufficient market activity may not exist or is limited, the pricing services also utilize proprietary valuation models which may consider market characteristics such as benchmark yield curves, option-adjusted spreads, credit spreads, estimated default rates, coupon rates, anticipated timing of principal repayments, underlying collateral, and other unique security features in order to estimate the relevant cash flows, which are then discounted to calculate the fair value. 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. Repurchase agreements are valued at cost, which approximates market value.
Certain derivative financial instruments (derivatives) trade in the over-the-counter market. The Fund’s pricing services use various techniques including industry standard option pricing models and proprietary discounted cash flow models to determine the fair value of those instruments. The Fund’s net benefit or obligation under the derivative contract, as measured by the fair market value of the contract, is included in net assets.
The Fund has procedures to determine the fair value of securities and other financial instruments for which market prices are not readily available or which may not be reliably priced. Under these procedures, the Fund primarily employs a market-based approach which may use related or comparable assets or liabilities, recent transactions, market multiples, book values, and other relevant information for the investment to determine the fair value of the investment. The Fund may also use an income-based valuation approach in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the investments. Due to the inherent uncertainty of valuations of such investments, the fair values may differ significantly from the values that would have been used had an active market existed.
FH-23
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin High Income 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. The Fund may enter into foreign currency exchange contracts to facilitate transactions denominated in a foreign currency. 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. Portfolio securities and assets and liabilities denominated in foreign currencies contain risks that those currencies will decline in value relative to the U.S. dollar. 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 Trust’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 enters 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, 2011.
d. Securities Purchased on a Delayed Delivery Basis
The Fund purchases 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.
e. Derivative Financial Instruments
The Fund invested in 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 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/or the potential for market movements which expose the Fund to gains or losses in excess of the amounts shown on the Statement of Assets and Liabilities. Realized gain and loss and unrealized appreciation and depreciation on these contracts for the period are included in the Statement of Operations.
FH-24
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin High Income Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
e. Derivative Financial Instruments (continued)
The Fund entered into forward exchange contracts primarily to manage and/or 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. Unrestricted cash may be invested according to the Fund’s investment objectives.
See Note 8 regarding other derivative information.
f. Senior Floating Rate Interests
The Fund invests in senior secured corporate loans that 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.
g. Income Taxes
It is the Fund’s policy to qualify as a regulated investment company under the Internal Revenue Code. The Fund intends to distribute to shareholders substantially all of its taxable income and net realized gains to relieve it from federal income and excise taxes. As a result, no provision for U.S. federal income taxes is required. The Fund files U.S. income tax returns as well as tax returns in certain other jurisdictions. The Fund records a provision for taxes in its financial statements including penalties and interest, if any, for a tax position taken on a tax return (or expected to be taken) when it fails to meet the more likely than not (a greater than 50% probability) threshold and based on the technical merits, the tax position may not be sustained upon examination by the tax authorities. As of June 30, 2011, and for all open tax years, the Fund has determined that no provision for income tax is required in the Fund’s financial statements. Open tax years are those that remain subject to examination and are based on each tax jurisdiction statute of limitation.
h. 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.
FH-25
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin High Income Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
i. 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.
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, 2011, 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, 2011 | Year Ended December 31, 2010 | |||||||||||||||
| Class 1 Shares: | Shares | Amount | Shares | Amount | ||||||||||||
Shares sold | 95,525 | $ | 658,876 | 472,188 | $ | 3,062,794 | ||||||||||
Shares issued in reinvestment of distributions | 434,223 | 2,826,791 | 533,249 | 3,172,829 | ||||||||||||
Shares redeemed | (723,793 | ) | (4,918,679 | ) | (1,559,378 | ) | (9,945,947 | ) | ||||||||
Net increase (decrease) | (194,045 | ) | $ | (1,433,012 | ) | (553,941 | ) | $ | (3,710,324 | ) | ||||||
Class 2 Shares: | ||||||||||||||||
Shares sold | 8,153,251 | $ | 54,496,416 | 12,032,804 | $ | 75,255,716 | ||||||||||
Shares issued in reinvestment of distributions | 2,674,662 | 16,984,105 | 2,133,845 | 12,418,978 | ||||||||||||
Shares redeemed | (4,376,384 | ) | (28,900,327 | ) | (9,532,012 | ) | (59,306,272 | ) | ||||||||
Net increase (decrease) | 6,451,529 | $ | 42,580,194 | 4,634,637 | $ | 28,368,422 | ||||||||||
Class 4 Shares: | ||||||||||||||||
Shares sold | 274,007 | $ | 1,859,099 | 1,337,992 | $ | 8,481,976 | ||||||||||
Shares issued on reinvestment of distributions | 250,774 | 1,620,002 | 235,968 | 1,394,573 | ||||||||||||
Shares redeemed | (144,446 | ) | (985,452 | ) | (55,035 | ) | (351,525 | ) | ||||||||
Net increase (decrease) | 380,335 | $ | 2,493,649 | 1,518,925 | $ | 9,525,024 | ||||||||||
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 Fund 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-26
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 Trust’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, 2011, 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, 2010, the capital loss carryforwards were as follows:
Capital loss carryforwards expiring in: | ||||
2011 | $ | 24,711,916 | ||
2012 | 9,009,590 | |||
2013 | 6,321,190 | |||
2014 | 40,420 | |||
2015 | 4,493,289 | |||
2016 | 8,150,741 | |||
2017 | 10,621,353 | |||
| $63,348,499 | ||||
FH-27
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin High Income Securities Fund
5. INCOME TAXES (continued)
Under the Regulated Investment Company Modernization Act of 2010, the Fund will be permitted to carry forward capital losses incurred in taxable years beginning after December 22, 2010 for an unlimited period. Post-enactment capital loss carryforwards will retain their character as either short-term or long-term capital losses rather than being considered short-term as under previous law. Any post-enactment capital losses generated will be required to be utilized prior to the losses incurred in pre-enactment tax years.
At June 30, 2011, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
Cost of investments | $ | 336,737,674 | ||
|
| |||
Unrealized appreciation | $ | 14,337,010 | ||
Unrealized depreciation | (7,476,303 | ) | ||
|
| |||
Net unrealized appreciation (depreciation) | $ | 6,860,707 | ||
|
| |||
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, defaulted securities, 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, 2011, aggregated $128,125,851 and $82,850,854, respectively.
7. CREDIT RISK AND DEFAULTED SECURITIES
At June 30, 2011, the Fund had 97.15% of its portfolio invested in high yield securities, 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, 2011, the aggregate value of these securities represents less than 0.05% 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 DERIVATIVE INFORMATION
At June 30, 2011, 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 | 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 | $ | — | Unrealized depreciation on forward exchange contracts | $ | 52,716 | ||||||
FH-28
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin High Income Securities Fund
8. OTHER DERIVATIVE INFORMATION (continued)
For the period ended June 30, 2011, the effect of derivative contracts on the Fund’s Statement of Operations was as follows:
| Derivative Contracts Not Accounted for as Hedging Instruments | Statement of Operations Locations | Realized Gain (Loss) for the Period | Change in Unrealized Appreciation (Depreciation) for the Period | |||||||
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 | $ | — | $ | (51,792 | ) | ||||
For the period ended June 30, 2011, the average month end market value of derivatives represented 0.01% of average month end net assets. The average month end number of open derivative contracts for the period was 2.
See Note 1(e) regarding derivative financial instruments.
9. CREDIT FACILITY
The Fund, together with other U.S. registered and foreign investment funds (collectively, Borrowers), managed by Franklin Templeton Investments, are borrowers in a joint syndicated senior unsecured credit facility totaling $750 million (Global Credit Facility) which matures on January 20, 2012. This Global Credit Facility provides 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 of 0.08% based upon the unused portion of the Global Credit Facility, which is reflected in other expenses on the Statement of Operations. During the period ended June 30, 2011, the Fund did not use the Global Credit Facility.
10. FAIR VALUE MEASUREMENTS
The Fund follows 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.
For movements between the levels within the fair value hierarchy, the Fund has adopted a policy of recognizing the transfers as of the date of the underlying event which caused the movement.
FH-29
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin High Income Securities Fund
10. FAIR VALUE MEASUREMENTS (continued)
The following is a summary of the inputs used as of June 30, 2011, 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 | $ | 859,090 | $ | — | $ | — | $ | 859,090 | ||||||||
Corporate Bonds | — | 335,241,558 | 191 | 335,241,749 | ||||||||||||
Senior Floating Rate Interests | — | 1,958,111 | — | 1,958,111 | ||||||||||||
Short Term Investments | — | 5,539,431 | — | 5,539,431 | ||||||||||||
|
| |||||||||||||||
Total Investments in Securities | $ | 859,090 | $ | 342,739,100 | $ | 191 | $ | 343,598,381 | ||||||||
|
| |||||||||||||||
Liabilities: | ||||||||||||||||
Forward Exchange Contracts | — | 52,716 | — | 52,716 | ||||||||||||
aFor detailed industry descriptions, see the accompanying Statement of Investments.
bIncludes common and preferred stocks.
11. NEW ACCOUNTING PRONOUNCEMENTS
In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (IFRS). The amendments in the ASU will improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRS and include new guidance for certain fair value measurement principles and disclosure requirements. The ASU is effective for interim and annual periods beginning after December 15, 2011. The Fund is currently evaluating the impact, if any, of applying this provision.
12. SUBSEQUENT EVENTS
The Fund has evaluated subsequent events through the issuance of the financial statements and determined that no events have occurred that require disclosure.
ABBREVIATIONS | ||||
| Counterparty | Currency | Selected Portfolio | ||
| DBAB - Deutsche Bank AG | EUR - Euro | FICO - Financing Corp. | ||
| FRN - Floating Rate Note | ||||
| PIK - Payment-In-Kind |
FH-30
FRANKLIN INCOME SECURITIES FUND
This semiannual report for Franklin Income Securities Fund covers the period ended June 30, 2011.
Performance Summary as of 6/30/11
Franklin Income Securities Fund – Class 4 delivered a +5.38% total return for the six-month period ended 6/30/11.
Performance reflects the Fund’s Class 4 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 4
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 normally invests in both equity and debt securities.
Performance Overview
You can find the Fund’s six-month total return in the Performance Summary. The Fund underperformed its equity benchmark, the Standard & Poor’s 500 Index, which produced a +6.02% total return, but outperformed its fixed income benchmark, the Barclays Capital U.S. Aggregate Index, which posted a +2.72% total return for the same period.1
Economic and Market Overview
The U.S. economy expanded despite geopolitical and inflationary pressures from around the globe during the six-month period ended June 30, 2011. Business activity increased and consumer spending stayed above pre-recession levels. The U.S. has been a key engine in a sustained global manufacturing expansion as international trade volume continued to increase, albeit at a moderate pace. Worldwide demand for capital goods aided U.S. manufacturing profits and increased employment in the industry.
The unemployment rate improved in the first quarter when job creation began to gain some traction. However, government payrolls continued to trend down and job creation slowed in the second quarter, causing the unemployment rate to end the period at 9.2%.2 Consumer spending rose noticeably for 11 consecutive months through May but declined in June as concerns about job growth and rising gasoline and food prices dampened consumer confidence. To offset the disruption of global oil supply caused by the conflicts in Libya, the International Energy Agency announced in June the release of 60 million barrels of oil in July from strategic reserves of the U.S. and 27 other nations. The U.S. financial system appeared closer to a full recovery, although the country still faced challenges dealing with housing market weakness and massive debt at period-end.
Inflation at the consumer, producer and trade levels rose across much of the world, but in the U.S. it remained relatively contained. As a result, the Federal Reserve Board (Fed) maintained its accommodative
1. Source: © 2011 Morningstar. One cannot invest directly in an index, and an index is not representative of the Fund’s portfolio. Please see Index Descriptions following the Fund Summaries.
2. 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. 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 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. The Fund may from time to time have significant investments in particular sectors, which can be highly volatile. Foreign investing involves additional risks, including currency fluctuations, economic instability, market volatility, and political and social instability. Derivative instruments may be volatile and illiquid, may give rise to leverage and may involve a small investment relative to the risk assumed. The manager applies various techniques and analyses in making investment decisions for the Fund, but there can be no guarantee that these decisions will produce the desired results. The Fund’s prospectus also includes a description of the main investment risks.
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monetary policy while ending its second round of quantitative easing on June 30. The Fed said, however, it would continue to purchase Treasuries with proceeds from maturing debt in an effort to support economic growth.
Investors’ attitudes shifted with each release of economic, regulatory and geopolitical news, causing equity market volatility to increase globally. U.S. investors weathered international events that included revolutions and civil unrest across the Middle East and North Africa, the multiple crises triggered by Japan’s earthquake and tsunami, and sovereign debt worries and credit downgrades in Europe. Ultimately, stock indexes produced solid gains during the six months under review as domestic and global equity markets rose amid generally improving economic signs and record-high corporate earnings growth.
Despite turmoil in North Africa and the Middle East, the multiple crises triggered by Japan’s earthquake and headwinds facing the U.S. economy, generally favorable economic improvements and positive corporate earnings reports gave investors confidence. Equity and fixed income markets performed well overall for the six months under review.
Manager’s Discussion
Fixed income markets benefited from continued low, long-term interest rates and generally stable credit spreads for both investment-grade and high yield corporate bonds. Within equity markets, stocks appreciated in part due to continued economic growth in the U.S. and abroad, although investor uncertainty increased over the slowing pace of economic growth as the end of the period approached. Investor concerns impacting markets included European sovereign debt issues and economic headwinds caused by fiscal austerity measures, monetary policies in select emerging economies that targeted rising inflationary pressures and hampered growth, and rising domestic fears related to efforts to reduce the federal deficits amid political gridlock in Washington.
Among the Fund’s fixed income holdings, top contributors to performance included utility company Energy Future Holdings, which benefited from a comprehensive debt maturity extension; transaction data processing company First Data, which advanced in part following clarity around regulatory reform; and natural gas provider Chesapeake Energy, which benefited from improved energy demand and a strong production and reserve profile. Detractors included NewPage, which struggled with higher material costs; CHC Helicopter, which
Portfolio Breakdown
Franklin Income Securities Fund
6/30/11
| % of Total Net Assets | ||||
Equity | 45.0% | |||
Utilities | 12.4% | |||
Financials | 8.9% | |||
Energy | 7.3% | |||
Health Care | 5.7% | |||
Telecommunication Services | 3.0% | |||
Information Technology | 2.2% | |||
Consumer Discretionary | 2.0% | |||
Other | 3.5% | |||
Fixed Income | 53.5% | |||
Financials | 9.0% | |||
Consumer Discretionary | 8.5% | |||
Energy | 7.8% | |||
Utilities | 7.8% | |||
Information Technology | 7.6% | |||
Health Care | 4.1% | |||
Industrials | 3.5% | |||
Materials | 2.4% | |||
Other | 2.8% | |||
Short-Term Investments & Other Net Assets | 1.5% | |||
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experienced higher-than-expected repair costs leading to lower profitability; and R.H. Donnelley (no longer held by period-end), which suffered from declining print and Internet-based sales.
Top contributors among equity holdings included major pharmaceutical companies Roche Holding and Pfizer, as well as diversified health care company Johnson & Johnson. Energy and utility investments generally also aided performance. Strong total returns came from energy sector holdings Exxon Mobil, ConocoPhillips and Canadian Oil Sands, and electric utility holdings Dominion Resources and FirstEnergy. Equity detractors included financials holdings Bank of America, Citigroup and Wells Fargo. These companies suffered from regulatory concerns and investor fears related to continued mortgage losses and potential exposure to the debt of certain European nations.
At period-end, the Fund held 53.5% of total net assets in fixed income securities, 45.0% in equity securities and 1.5% in cash equivalents. As of December 31, 2010, the Fund held 52.0% of total net assets in fixed income securities, 44.3% in equity securities and 3.7% in cash equivalents. Within our fixed income sector allocation, the Fund continued to emphasize corporate debt securities, particularly high yield corporate bonds. Our largest fixed income sector allocations included financials, electric utility and technology.3 Our equity allocation was primarily composed of dividend paying common stocks and convertible securities. Top equity sector exposures included utilities, energy and health care.
We continued to favor investment opportunities where fundamental research may drive results while seeking to limit fixed income investments that may show greater sensitivity to rises in long-term interest rates going forward.
3. Electric utility holdings are in utilities in the SOI. Technology holdings are in information technology in the SOI.
Top Five Equity Holdings*
Franklin Income Securities Fund
6/30/11
| Company Sector/Industry | % of Total Net Assets | |||
| Roche Holding AG (Switzerland) | 1.9% | |||
| Health Care | ||||
| Merck & Co. Inc. | 1.6% | |||
| Health Care | ||||
| The Southern Co. | 1.4% | |||
| Utilities | ||||
| Canadian Oil Sands Ltd. (Canada) | 1.2% | |||
| Energy | ||||
| BP PLC, ADR (U.K.) | 1.2% | |||
| Energy | ||||
*Does not include convertible preferred stocks.
Top Five Fixed Income and Senior Floating Rate Interests Holdings**
Franklin Income Securities Fund
6/30/11
| Issuer Sector/Industry | % of Total Net Assets | |||
| Texas Competitive Electric Holdings Co. LLC | 4.8% | |||
| Utilities | ||||
| CIT Group Inc. | 4.1% | |||
| Financials | ||||
| First Data Corp. | 3.5% | |||
| Information Technology | ||||
| Freescale Semiconductor Inc. | 2.6% | |||
| Information Technology | ||||
| Tenet Healthcare Corp. | 1.5% | |||
| Health Care | ||||
**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 (SOI).
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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, 2011, 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 4
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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 4 | Beginning Account Value 1/1/11 | Ending Account Value 6/30/11 | Fund-Level Expenses Incurred During Period* 1/1/11–6/30/11 | |||||||||
Actual | $ | 1,000 | $ | 1,053.80 | $ | 4.18 | ||||||
Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,020.73 | $ | 4.11 | ||||||
*Expenses are calculated using the most recent six-month annualized expense ratio for the Fund’s Class 4 shares (0.82%), 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.
FI-7
Franklin Templeton Variable Insurance Products Trust
Financial Highlights
Franklin Income Securities Fund
| Six Months Ended June 30, 2011 (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 1 | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||||||
| ||||||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 15.16 | $ | 14.43 | $ | 11.53 | $ | 17.63 | $ | 17.65 | $ | 15.56 | ||||||||||||
|
| |||||||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.49 | 0.89 | 0.91 | 1.10 | 1.03 | 0.94 | ||||||||||||||||||
Net realized and unrealized gains (losses) | 0.34 | 0.85 | 3.08 | (5.99 | ) | (0.31 | ) | 1.85 | ||||||||||||||||
|
| |||||||||||||||||||||||
Total from investment operations | 0.83 | 1.74 | 3.99 | (4.89 | ) | 0.72 | 2.79 | |||||||||||||||||
|
| |||||||||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income | (0.90 | ) | (1.01 | ) | (1.09 | ) | (0.86 | ) | (0.63 | ) | (0.62 | ) | ||||||||||||
Net realized gains | — | — | — | (0.35 | ) | (0.11 | ) | (0.08 | ) | |||||||||||||||
|
| |||||||||||||||||||||||
Total distributions | (0.90 | ) | (1.01 | ) | (1.09 | ) | (1.21 | ) | (0.74 | ) | (0.70 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ | 15.09 | $ | 15.16 | $ | 14.43 | $ | 11.53 | $ | 17.63 | $ | 17.65 | ||||||||||||
|
| |||||||||||||||||||||||
Total returnc | 5.58% | 12.87% | 35.88% | (29.41)% | 4.01% | 18.47% | ||||||||||||||||||
Ratios to average net assetsd | ||||||||||||||||||||||||
Expensese | 0.47% | 0.47% | 0.47% | 0.47% | 0.47% | 0.47% | ||||||||||||||||||
Net investment income | 6.22% | 6.28% | 7.23% | 7.28% | 5.77% | 5.70% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 1,715,055 | $ | 1,449,028 | $ | 910,504 | $ | 433,370 | $ | 455,932 | $ | 458,613 | ||||||||||||
Portfolio turnover rate | 13.01% | 41.65% | 42.30% | 43.89% | 32.11% | 25.05% | ||||||||||||||||||
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 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 | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||||||
| ||||||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 14.82 | $ | 14.12 | $ | 11.30 | $ | 17.31 | $ | 17.36 | $ | 15.32 | ||||||||||||
|
| |||||||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.46 | 0.86 | 0.86 | 1.04 | 0.97 | 0.89 | ||||||||||||||||||
Net realized and unrealized gains (losses) | 0.33 | 0.82 | 3.01 | (5.87 | ) | (0.30 | ) | 1.82 | ||||||||||||||||
|
| |||||||||||||||||||||||
Total from investment operations | 0.79 | 1.68 | 3.87 | (4.83 | ) | 0.67 | 2.71 | |||||||||||||||||
|
| |||||||||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income | (0.87 | ) | (0.98 | ) | (1.05 | ) | (0.83 | ) | (0.61 | ) | (0.59 | ) | ||||||||||||
Net realized gains | — | — | — | (0.35 | ) | (0.11 | ) | (0.08 | ) | |||||||||||||||
|
| |||||||||||||||||||||||
Total distributions | (0.87 | ) | (0.98 | ) | (1.05 | ) | (1.18 | ) | (0.72 | ) | (0.67 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ | 14.74 | $ | 14.82 | $ | 14.12 | $ | 11.30 | $ | 17.31 | $ | 17.36 | ||||||||||||
|
| |||||||||||||||||||||||
Total returnc | 5.39% | 12.67% | 35.59% | (29.66)% | 3.76% | 18.24% | ||||||||||||||||||
Ratios to average net assetsd | ||||||||||||||||||||||||
Expensese | 0.72% | 0.72% | 0.72% | 0.72% | 0.72% | 0.72% | ||||||||||||||||||
Net investment income | 5.97% | 6.03% | 6.98% | 7.03% | 5.52% | 5.45% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 6,403,468 | $ | 6,309,207 | $ | 6,114,898 | $ | 4,944,457 | $ | 7,429,064 | $ | 5,109,373 | ||||||||||||
Portfolio turnover rate | 13.01% | 41.65% | 42.30% | 43.89% | 32.11% | 25.05% | ||||||||||||||||||
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 reflect sales commissions or contingent deferred sales charges, if applicable, and 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 4 | 2010 | 2009 | 2008a | |||||||||||||
| ||||||||||||||||
Per share operating performance | ||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||
Net asset value, beginning of period | $ | 15.04 | $ | 14.33 | $ | 11.49 | $ | 16.90 | ||||||||
|
| |||||||||||||||
Income from investment operationsb: | ||||||||||||||||
Net investment incomec | 0.46 | 0.85 | 0.86 | 0.87 | ||||||||||||
Net realized and unrealized gains (losses) | 0.34 | 0.84 | 3.06 | (5.07 | ) | |||||||||||
|
| |||||||||||||||
Total from investment operations | 0.80 | 1.69 | 3.92 | (4.20 | ) | |||||||||||
|
| |||||||||||||||
Less distributions from: | ||||||||||||||||
Net investment income | (0.86 | ) | (0.98 | ) | (1.08 | ) | (0.86 | ) | ||||||||
Net realized gains | — | — | — | (0.35 | ) | |||||||||||
|
| |||||||||||||||
Total distributions | (0.86 | ) | (0.98 | ) | (1.08 | ) | (1.21 | ) | ||||||||
|
| |||||||||||||||
Net asset value, end of period | $ | 14.98 | $ | 15.04 | $ | 14.33 | $ | 11.49 | ||||||||
|
| |||||||||||||||
Total returnd | 5.38% | 12.54% | 35.37% | (26.61)% | ||||||||||||
Ratios to average net assetse | ||||||||||||||||
Expensesf | 0.82% | 0.82% | 0.82% | 0.82% | ||||||||||||
Net investment income | 5.87% | 5.93% | 6.88% | 6.93% | ||||||||||||
Supplemental data | ||||||||||||||||
Net assets, end of period (000’s) | $ | 454,518 | $ | 415,541 | $ | 347,733 | $ | 135,360 | ||||||||
Portfolio turnover rate | 13.01% | 41.65% | 42.30% | 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 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, 2011 (unaudited)
| Franklin Income Securities Fund | Country | Shares/ Warrants | Value | |||||||
Common Stocks and Other Equity Interests 38.7% |
| |||||||||
Consumer Discretionary 1.7% | ||||||||||
aCharter Communications Inc., A | United States | 1,100,000 | $ | 59,686,000 | ||||||
aCharter Communications Inc., wts., 11/30/14 | United States | 311,018 | 4,354,252 | |||||||
Comcast Corp., A | United States | 900,000 | 22,806,000 | |||||||
a,bDex One Corp. | United States | 2,642,381 | 6,685,224 | |||||||
aGeneral Motors Co. | United States | 136,218 | 4,135,578 | |||||||
aGeneral Motors Co., wts., 7/10/16 | United States | 123,835 | 2,650,069 | |||||||
aGeneral Motors Co., wts., 7/10/19 | United States | 123,835 | 1,972,692 | |||||||
The Home Depot Inc. | United States | 615,800 | 22,304,276 | |||||||
aSuperMedia Inc., Litigation Trust | United States | 3,472,135 | 13,020 | |||||||
Target Corp. | United States | 453,900 | 21,292,449 | |||||||
|
| |||||||||
| 145,899,560 | ||||||||||
|
| |||||||||
Consumer Staples 0.8% | ||||||||||
Diageo PLC | United Kingdom | 1,150,000 | 23,504,161 | |||||||
PepsiCo Inc. | United States | 672,500 | 47,364,175 | |||||||
|
| |||||||||
| 70,868,336 | ||||||||||
|
| |||||||||
Energy 6.2% | ||||||||||
aAlpha Natural Resources Inc. | United States | 135,000 | 6,134,400 | |||||||
Baker Hughes Inc. | United States | 250,000 | 18,140,000 | |||||||
BP PLC, ADR | United Kingdom | 2,300,000 | 101,867,000 | |||||||
aCallon Petroleum Co. | United States | 782,594 | 5,493,810 | |||||||
Canadian Oil Sands Ltd. | Canada | 3,700,000 | 106,799,772 | |||||||
Chesapeake Energy Corp. | United States | 400,000 | 11,876,000 | |||||||
Chevron Corp. | United States | 250,000 | 25,710,000 | |||||||
ConocoPhillips | United States | 1,000,000 | 75,190,000 | |||||||
Exxon Mobil Corp. | United States | 1,082,350 | 88,081,643 | |||||||
Schlumberger Ltd. | United States | 251,000 | 21,686,400 | |||||||
Spectra Energy Corp. | United States | 1,900,000 | 52,079,000 | |||||||
aWeatherford International Ltd. | United States | 1,000,000 | 18,750,000 | |||||||
|
| |||||||||
| 531,808,025 | ||||||||||
|
| |||||||||
Financials 5.2% | ||||||||||
Banco Santander SA | Spain | 2,030,769 | 23,450,396 | |||||||
Bank of America Corp. | United States | 6,100,000 | 66,856,000 | |||||||
Barclays PLC | United Kingdom | 4,000,000 | 16,464,669 | |||||||
aCIT Group Inc. | United States | 691,600 | 30,610,216 | |||||||
Citigroup Inc. | United States | 580,000 | 24,151,200 | |||||||
aFannie Mae | United States | 1,928,019 | 638,174 | |||||||
HSBC Holdings PLC | United Kingdom | 5,000,000 | 49,599,433 | |||||||
JPMorgan Chase & Co. | United States | 1,850,000 | 75,739,000 | |||||||
M&T Bank Corp. | United States | 500,000 | 43,975,000 | |||||||
QBE Insurance Group Ltd. | Australia | 957,800 | 17,718,246 | |||||||
Wells Fargo & Co. | United States | 2,750,000 | 77,165,000 | |||||||
Westfield Retail Trust | Australia | 6,384,600 | 18,554,950 | |||||||
|
| |||||||||
| 444,922,284 | ||||||||||
|
| |||||||||
Health Care 5.5% | ||||||||||
Johnson & Johnson | United States | 1,500,000 | 99,780,000 | |||||||
Merck & Co. Inc. | United States | 4,000,000 | 141,160,000 | |||||||
Pfizer Inc. | United States | 3,518,775 | 72,486,765 | |||||||
Roche Holding AG | Switzerland | 950,000 | 158,973,597 | |||||||
|
| |||||||||
| 472,400,362 | ||||||||||
|
| |||||||||
FI-11
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Franklin Income Securities Fund | Country | Shares/ Warrants | Value | |||||||
Common Stocks and Other Equity Interests (continued) |
| |||||||||
Industrials 0.8% | ||||||||||
The Boeing Co. | United States | 250,000 | $ | 18,482,500 | ||||||
General Electric Co. | United States | 2,808,700 | 52,972,082 | |||||||
|
| |||||||||
| 71,454,582 | ||||||||||
|
| |||||||||
Information Technology 1.7% | ||||||||||
Cisco Systems Inc. | United States | 1,000,000 | 15,610,000 | |||||||
aFirst Solar Inc. | United States | 28,694 | 3,795,355 | |||||||
Intel Corp. | United States | 3,000,000 | 66,480,000 | |||||||
Maxim Integrated Products Inc. | United States | 1,825,507 | 46,659,959 | |||||||
Xerox Corp. | United States | 1,000,000 | 10,410,000 | |||||||
|
| |||||||||
| 142,955,314 | ||||||||||
|
| |||||||||
Materials 1.4% | ||||||||||
Barrick Gold Corp. | Canada | 700,000 | 31,703,000 | |||||||
Freeport-McMoRan Copper & Gold Inc., B | United States | 237,286 | 12,552,429 | |||||||
Newmont Mining Corp. | United States | 1,015,000 | 54,779,550 | |||||||
Nucor Corp. | United States | 400,000 | 16,488,000 | |||||||
|
| |||||||||
| 115,522,979 | ||||||||||
|
| |||||||||
Telecommunication Services 3.0% | ||||||||||
AT&T Inc. | United States | 2,600,000 | 81,666,000 | |||||||
CenturyLink Inc. | United States | 500,000 | 20,215,000 | |||||||
Frontier Communications Corp. | United States | 988,047 | 7,973,539 | |||||||
Telstra Corp. Ltd. | Australia | 10,000,000 | 30,992,360 | |||||||
Verizon Communications Inc. | United States | 1,200,000 | 44,676,000 | |||||||
Vodafone Group PLC | United Kingdom | 27,500,000 | 72,976,807 | |||||||
|
| |||||||||
| 258,499,706 | ||||||||||
|
| |||||||||
Utilities 12.4% | ||||||||||
AGL Resources Inc. | United States | 550,000 | 22,390,500 | |||||||
American Electric Power Co. Inc. | United States | 1,523,800 | 57,416,784 | |||||||
CenterPoint Energy Inc. | United States | 850,000 | 16,447,500 | |||||||
Consolidated Edison Inc. | United States | 750,000 | 39,930,000 | |||||||
Dominion Resources Inc. | United States | 1,600,000 | 77,232,000 | |||||||
DTE Energy Co. | United States | 240,000 | 12,004,800 | |||||||
Duke Energy Corp. | United States | 5,000,000 | 94,150,000 | |||||||
a,cDynegy Inc. | United States | 2,250,000 | 13,927,500 | |||||||
Entergy Corp. | United States | 850,000 | 58,038,000 | |||||||
FirstEnergy Corp. | United States | 750,000 | 33,112,500 | |||||||
NextEra Energy Inc. | United States | 1,075,000 | 61,769,500 | |||||||
NiSource Inc. | United States | 500,000 | 10,125,000 | |||||||
PG&E Corp. | United States | 1,900,000 | 79,857,000 | |||||||
Pinnacle West Capital Corp. | United States | 300,000 | 13,374,000 | |||||||
PPL Corp. | United States | 1,250,000 | 34,787,500 | |||||||
Progress Energy Inc. | United States | 1,400,000 | 67,214,000 | |||||||
Public Service Enterprise Group Inc. | United States | 2,500,000 | 81,600,000 | |||||||
Sempra Energy | United States | 1,100,000 | 58,168,000 | |||||||
The Southern Co. | United States | 3,000,000 | 121,140,000 | |||||||
TECO Energy Inc. | United States | 2,500,000 | 47,225,000 | |||||||
Xcel Energy Inc. | United States | 2,670,464 | 64,892,275 | |||||||
|
| |||||||||
| 1,064,801,859 | ||||||||||
|
| |||||||||
Total Common Stocks and Other Equity Interests (Cost $3,003,755,058) | 3,319,133,007 | |||||||||
|
| |||||||||
FI-12
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Franklin Income Securities Fund | Country | Shares/ Warrants | Value | |||||||
dEquity-Linked Securities 1.1% | ||||||||||
Consumer Discretionary 0.1% | ||||||||||
Credit Suisse into Lowe’s Cos. Inc., 7.00% | United States | 400,000 | $ | 9,197,080 | ||||||
|
| |||||||||
Energy 0.3% | ||||||||||
Credit Suisse into Schlumberger Ltd., 8.00% | United States | 100,000 | 7,463,460 | |||||||
eDeutsche Bank AG into Chesapeake Energy Corp., 8.50%, 144A | United States | 500,000 | 15,048,850 | |||||||
|
| |||||||||
| 22,512,310 | ||||||||||
|
| |||||||||
Industrials 0.2% | ||||||||||
Citgroup into General Electric Co., 8.00% | United States | 358,000 | 6,769,780 | |||||||
eJPMorgan Chase & Co. into General Electric Co., 0.70%, 144A | United States | 500,000 | 9,636,900 | |||||||
|
| |||||||||
| 16,406,680 | ||||||||||
|
| |||||||||
Information Technology 0.5% | ||||||||||
eDeutsche Bank AG into Intel Corp., 8.00%, 144A | United States | 500,000 | 11,172,000 | |||||||
eThe Goldman Sachs Group Inc. into Research In Motion Ltd., 8.00%, 144A | United States | 200,000 | 6,063,200 | |||||||
eThe Goldman Sachs Group Inc. into Xerox Corp., 8.00%, 144A | United States | 1,260,000 | 13,498,254 | |||||||
eMorgan Stanley into Apple Inc., 7.50%, 144A | United States | 40,000 | 13,760,960 | |||||||
|
| |||||||||
| 44,494,414 | ||||||||||
|
| |||||||||
Total Equity-Linked Securities (Cost $97,797,600) | 92,610,484 | |||||||||
|
| |||||||||
Convertible Preferred Stocks 3.8% | ||||||||||
Consumer Discretionary 0.2% | ||||||||||
General Motors Co., 4.75%, cvt. pfd., B | United States | 322,400 | 15,713,776 | |||||||
|
| |||||||||
Energy 0.8% | ||||||||||
ATP Oil & Gas Corp., 8.00%, cvt. pfd., B | United States | 50,000 | 4,599,500 | |||||||
eChesapeake Energy Corp., 5.75%, cvt. pfd., 144A | United States | 30,000 | 37,881,900 | |||||||
eSandRidge Energy Inc., 7.00%, cvt. pfd., 144A | United States | 190,000 | 30,564,920 | |||||||
|
| |||||||||
| 73,046,320 | ||||||||||
|
| |||||||||
Financials 2.5% | ||||||||||
Bank of America Corp., 7.25%, cvt. pfd., L | United States | 86,000 | 86,103,200 | |||||||
Citigroup Inc., 7.50%, cvt. pfd. | United States | 54,200 | 6,512,130 | |||||||
aFannie Mae, 5.375%, cvt. pfd. | United States | 600 | 5,040,000 | |||||||
Felcor Lodging Trust Inc., 7.80%, cvt. pfd., A | United States | 400,000 | 10,444,000 | |||||||
Metlife Inc., 5.00%, cvt. pfd. | United States | 525,000 | 43,275,750 | |||||||
Wells Fargo & Co., 7.50%, cvt. pfd., A | United States | 61,000 | 64,660,000 | |||||||
|
| |||||||||
| 216,035,080 | ||||||||||
|
| |||||||||
Health Care 0.2% | ||||||||||
Tenet Healthcare Corp., 7.00%, cvt. pfd. | United States | 13,500 | 13,635,000 | |||||||
|
| |||||||||
Materials 0.1% | ||||||||||
AngloGold Ashanti Holdings Finance PLC, 6.00%, cvt. pfd. | South Africa | 200,000 | 9,978,000 | |||||||
|
| |||||||||
Total Convertible Preferred Stocks (Cost $329,336,604) | 328,408,176 | |||||||||
|
| |||||||||
Preferred Stocks 0.5% | ||||||||||
Consumer Discretionary 0.0%† | ||||||||||
aMotors Liquidation Co., Escrow pfd, C | United States | 1,400,000 | 910,000 | |||||||
|
| |||||||||
Financials 0.5% | ||||||||||
Ally Financial Inc., 8.50%, pfd., A | United States | 75,000 | 1,877,250 | |||||||
aFannie Mae, 6.75%, pfd. | United States | 500,000 | 1,087,500 | |||||||
aFannie Mae, 7.625%, pfd., R | United States | 800,000 | 1,680,000 | |||||||
aFannie Mae, 8.25%, pfd. | United States | 851,500 | 1,830,725 | |||||||
aFreddie Mac, 8.375%, pfd., Z | United States | 1,549,200 | 4,570,140 | |||||||
FI-13
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Franklin Income Securities Fund | Country | Shares/ Warrants | Value | |||||||
Preferred Stocks (continued) | ||||||||||
Financials (continued) | ||||||||||
eGMAC Inc., 7.00%, pfd., 144A | United States | 36,265 | $ | 34,084,567 | ||||||
|
| |||||||||
| 45,130,182 | ||||||||||
|
| |||||||||
Total Preferred Stocks (Cost $109,624,886) | 46,040,182 | |||||||||
|
| |||||||||
| Principal Amount* | ||||||||||
Convertible Bonds 0.9% | ||||||||||
Financials 0.7% | ||||||||||
CapitalSource Inc., cvt., senior sub. note, 4.00%, 7/15/34 | United States | 5,000,000 | 5,025,000 | |||||||
fiStar Financial Inc., cvt., senior note, FRN, 0.805%, 10/01/12 | United States | 57,500,000 | 51,750,000 | |||||||
|
| |||||||||
| 56,775,000 | ||||||||||
|
| |||||||||
Information Technology 0.0%† | ||||||||||
Advanced Micro Devices Inc., cvt., senior note, 6.00%, 5/01/15 | United States | 2,383,000 | 2,427,681 | |||||||
|
| |||||||||
Materials 0.2% | ||||||||||
eCemex SAB de CV, cvt., sub. note, 144A, | ||||||||||
3.25%, 3/15/16 | Mexico | 9,100,000 | 9,032,660 | |||||||
3.75%, 3/15/18 | Mexico | 5,420,000 | 5,406,992 | |||||||
|
| |||||||||
| 14,439,652 | ||||||||||
|
| |||||||||
Total Convertible Bonds (Cost $71,361,553) | 73,642,333 | |||||||||
|
| |||||||||
Corporate Bonds 46.0% | ||||||||||
Consumer Discretionary 7.2% | ||||||||||
eAMC Networks Inc., senior note, 144A, 7.75%, 7/15/21 | United States | 4,700,000 | 4,923,250 | |||||||
Cablevision Systems Corp., senior note, | ||||||||||
7.75%, 4/15/18 | United States | 35,000,000 | 37,493,750 | |||||||
8.00%, 4/15/20 | United States | 35,000,000 | 37,712,500 | |||||||
CCH II LLC/CCH II Capital Corp., senior note, 13.50%, 11/30/16 | United States | 42,829,272 | 50,645,614 | |||||||
CCO Holdings LLC/CCO Holdings Capital Corp., senior note, | ||||||||||
8.125%, 4/30/20 | United States | 22,200,000 | 24,087,000 | |||||||
6.50%, 4/30/21 | United States | 20,000,000 | 19,825,000 | |||||||
eCequel Communications Holdings I LLC, senior note, 144A, 8.625%, 11/15/17 | United States | 10,000,000 | 10,450,000 | |||||||
eChrysler Group LLC/CG Co-Issuer Inc., senior secured note, 144A, | ||||||||||
8.00%, 6/15/19 | United States | 25,000,000 | 24,687,500 | |||||||
8.25%, 6/15/21 | United States | 12,800,000 | 12,608,000 | |||||||
eCityCenter Holdings/Finance, senior secured note, 144A, | ||||||||||
7.625%, 1/15/16 | United States | 4,100,000 | 4,253,750 | |||||||
gPIK, 11.50%, 1/15/17 | United States | 6,400,000 | 6,650,931 | |||||||
CKE Restaurants Inc., senior secured note, 11.375%, 7/15/18 | United States | 6,000,000 | 6,585,000 | |||||||
Clear Channel Communications Inc., senior note, | ||||||||||
10.75%, 8/01/16 | United States | 2,000,000 | 1,815,000 | |||||||
e144A, 9.00%, 3/01/21 | United States | 69,100,000 | 66,508,750 | |||||||
Clear Channel Worldwide Holdings Inc., senior note, B, 9.25%, 12/15/17 | United States | 17,000,000 | 18,615,000 | |||||||
eClubCorp Club Operations Inc., senior note, 144A, 10.00%, 12/01/18 | United States | 15,000,000 | 14,925,000 | |||||||
eCumulus Media Inc., senior note, 144A, 7.75%, 5/01/19 | United States | 10,000,000 | 9,700,000 | |||||||
b,gDex One Corp., senior sub. note, PIK, 12.00%, 1/29/17 | United States | 32,511,674 | 14,223,857 | |||||||
eDISH DBS Corp., senior note, 144A, 6.75%, 6/01/21 | United States | 15,000,000 | 15,450,000 | |||||||
Ford Motor Credit Co. LLC, | ||||||||||
8.00%, 6/01/14 | United States | 5,000,000 | 5,487,215 | |||||||
senior note, 7.00%, 4/15/15 | United States | 15,000,000 | 16,239,885 | |||||||
FI-14
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Franklin Income Securities Fund | Country | Principal Amount* | Value | |||||||
Corporate Bonds (continued) | ||||||||||
Consumer Discretionary (continued) | ||||||||||
Ford Motor Credit Co. LLC, (continued) | ||||||||||
senior note, 12.00%, 5/15/15 | United States | 12,900,000 | $ | 16,004,695 | ||||||
The Goodyear Tire & Rubber Co., senior note, 8.25%, 8/15/20 | United States | 9,700,000 | 10,524,500 | |||||||
Harrah’s Operating Co. Inc., senior secured note, 11.25%, 6/01/17 | United States | 10,000,000 | 11,087,500 | |||||||
Host Hotels & Resorts LP, senior note, T, 9.00%, 5/15/17 | United States | 12,900,000 | 14,577,000 | |||||||
KB Home, senior note, | ||||||||||
5.75%, 2/01/14 | United States | 6,500,000 | 6,370,000 | |||||||
6.25%, 6/15/15 | United States | 15,000,000 | 14,400,000 | |||||||
7.25%, 6/15/18 | United States | 10,600,000 | 9,632,750 | |||||||
MGM Resorts International, senior note, | ||||||||||
6.75%, 4/01/13 | United States | 10,000,000 | 10,075,000 | |||||||
e144A, 10.00%, 11/01/16 | United States | 20,000,000 | 21,250,000 | |||||||
eShea Homes LP/Funding Corp., senior secured note, 144A, 8.625%, 5/15/19 | United States | 11,700,000 | 11,553,750 | |||||||
eUnitymedia Hessen/NRW, senior secured note, 144A, 8.125%, | ||||||||||
12/01/17 | Germany | 6,300,000 | 6,741,000 | |||||||
12/01/17 | Germany | 5,500,000 | EUR | 8,367,558 | ||||||
eUPC Germany GmbH, senior secured note, 144A, 9.625%, 12/01/19 | Germany | 3,000,000 | EUR | 4,706,730 | ||||||
eUPCB Finance III Ltd., senior secured note, 144A, 6.625%, 7/01/20 | Cayman Islands | 20,000,000 | 19,850,000 | |||||||
Virgin Media Secured Finance, senior secured note, 7.00%, 1/15/18 | United Kingdom | 10,000,000 | GBP | 17,052,544 | ||||||
Visant Corp., senior note, 10.00%, 10/01/17 | United States | 32,800,000 | 34,112,000 | |||||||
|
| |||||||||
| 619,192,029 | ||||||||||
|
| |||||||||
Consumer Staples 0.7% | ||||||||||
eBoparan Holdings Ltd., senior note, 144A, | ||||||||||
9.75%, 4/30/18 | United Kingdom | 7,000,000 | EUR | 9,706,942 | ||||||
9.875%, 4/30/18 | United Kingdom | 7,500,000 | GBP | 11,457,120 | ||||||
JBS USA LLC/Finance Inc., senior note, | ||||||||||
11.625%, 5/01/14 | Brazil | 10,000,000 | 11,550,000 | |||||||
e144A, 7.25%, 6/01/21 | Brazil | 7,500,000 | 7,331,250 | |||||||
SUPERVALU Inc., senior note, 8.00%, 5/01/16 | United States | 16,000,000 | 16,400,000 | |||||||
|
| |||||||||
| 56,445,312 | ||||||||||
|
| |||||||||
Energy 7.8% | ||||||||||
Antero Resources Finance, senior note, 9.375%, 12/01/17 | United States | 14,600,000 | 15,768,000 | |||||||
eArch Coal Inc., senior note, 144A, 7.25%, 6/15/21 | United States | 11,100,000 | 11,169,375 | |||||||
ATP Oil & Gas Corp., senior secured note, 11.875%, 5/01/15 | United States | 15,000,000 | 15,300,000 | |||||||
Callon Petroleum Co., senior secured note, 13.00%, 9/15/16 | United States | 7,765,750 | 8,192,866 | |||||||
eCHC Helicopter SA, senior secured note, 144A, 9.25%, 10/15/20 | Canada | 25,000,000 | 22,687,500 | |||||||
Chesapeake Energy Corp., senior note, | ||||||||||
9.50%, 2/15/15 | United States | 10,000,000 | 11,650,000 | |||||||
6.50%, 8/15/17 | United States | 34,000,000 | 36,125,000 | |||||||
6.875%, 8/15/18 | United States | 16,200,000 | 17,091,000 | |||||||
7.25%, 12/15/18 | United States | 33,000,000 | 36,135,000 | |||||||
eCompagnie Generale de Geophysique-Veritas, senior note, 144A, 6.50%, 6/01/21 | France | 12,500,000 | 12,112,500 | |||||||
eConnacher Oil and Gas Ltd., secured note, 144A, 8.50%, 8/01/19 | Canada | 7,500,000 | 7,143,750 | |||||||
CONSOL Energy Inc., senior note, 8.25%, 4/01/20 | United States | 6,800,000 | 7,446,000 | |||||||
El Paso Corp., senior note, MTN, 7.75%, 1/15/32 | United States | 22,000,000 | 25,701,984 | |||||||
Energy Transfer Equity LP, senior note, 7.50%, 10/15/20 | United States | 8,100,000 | 8,626,500 | |||||||
eEnergy XXI Gulf Coast Inc., senior note, 144A, 9.25%, 12/15/17 | United States | 15,000,000 | 16,012,500 | |||||||
EXCO Resources Inc., senior note, 7.50%, 9/15/18 | United States | 10,500,000 | 10,263,750 | |||||||
eExpro Finance Luxembourg, senior secured note, 144A, 8.50%, 12/15/16 | United Kingdom | 27,500,000 | 26,675,000 | |||||||
Holly Corp., senior note, 9.875%, 6/15/17 | United States | 2,300,000 | 2,576,000 | |||||||
Linn Energy Corp., senior note, 8.625%, 4/15/20 | United States | 20,000,000 | 21,800,000 | |||||||
eOGX Petroleo E Gas Participacoes SA, senior note, 144A, 8.50%, 6/01/18 | Brazil | 15,000,000 | 15,398,250 | |||||||
FI-15
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Franklin Income Securities Fund | Country | Principal Amount* | Value | |||||||
Corporate Bonds (continued) | ||||||||||
Energy (continued) | ||||||||||
Petrohawk Energy Corp., senior note, | ||||||||||
10.50%, 8/01/14 | United States | 20,200,000 | $ | 22,826,000 | ||||||
7.875%, 6/01/15 | United States | 23,000,000 | 24,207,500 | |||||||
e144A, 6.25%, 6/01/19 | United States | 7,500,000 | 7,340,625 | |||||||
ePetroplus Finance Ltd., senior note, 144A, | ||||||||||
6.75%, 5/01/14 | Switzerland | 14,365,000 | 14,149,525 | |||||||
7.00%, 5/01/17 | Switzerland | 30,000,000 | 28,350,000 | |||||||
Pioneer Natural Resources Co., senior bond, 6.875%, 5/01/18 | United States | 7,965,000 | 8,635,287 | |||||||
Quicksilver Resources Inc., senior note, 9.125%, 8/15/19 | United States | 20,000,000 | 21,900,000 | |||||||
cSabine Pass LNG LP, senior secured note, | ||||||||||
7.25%, 11/30/13 | United States | 10,000,000 | 10,300,000 | |||||||
7.50%, 11/30/16 | United States | 35,000,000 | 36,050,000 | |||||||
SandRidge Energy Inc., senior note, | ||||||||||
8.75%, 1/15/20 | United States | 23,500,000 | 25,145,000 | |||||||
e144A, 9.875%, 5/15/16 | United States | 20,000,000 | 22,050,000 | |||||||
e144A, 8.00%, 6/01/18 | United States | 21,000,000 | 21,525,000 | |||||||
e144A, 7.50%, 3/15/21 | United States | 13,300,000 | 13,482,875 | |||||||
SESI LLC, senior note, 6.875%, 6/01/14 | United States | 18,500,000 | 18,823,750 | |||||||
Tesoro Corp., senior note, 9.75%, 6/01/19 | United States | 10,400,000 | 11,674,000 | |||||||
eW&T Offshore Inc., senior note, 144A, 8.50%, 6/15/19 | United States | 40,500,000 | 41,107,500 | |||||||
eWestern Refining Inc., | ||||||||||
fsenior note, 144A, FRN, 10.75%, 6/15/14 | United States | 5,000,000 | 5,375,000 | |||||||
senior secured note, 144A, 11.25%, 6/15/17 | United States | 5,000,000 | 5,650,000 | |||||||
|
| |||||||||
| 666,467,037 | ||||||||||
|
| |||||||||
Financials 7.9% | ||||||||||
hBank of America Corp., pfd., sub. bond, M, 8.125% to 5/15/18, FRN thereafter, Perpetual | United States | 5,000,000 | 5,227,800 | |||||||
CIT Group Inc., | ||||||||||
7.00%, 5/01/14 | United States | 19,518,516 | 19,786,895 | |||||||
esecured bond, 144A, 7.00%, 5/04/15 | United States | 72,500,000 | 72,771,875 | |||||||
esecured bond, 144A, 7.00%, 5/02/16 | United States | 150,000,000 | 149,812,500 | |||||||
esecured bond, 144A, 7.00%, 5/02/17 | United States | 110,000,000 | 110,000,000 | |||||||
eCNL Income Properties Inc., senior note, 144A, 7.25%, 4/15/19 | United States | 15,000,000 | 13,650,000 | |||||||
FelCor Lodging LP, senior secured note, 10.00%, 10/01/14 | United States | 10,003,000 | 11,278,383 | |||||||
Ally Financial Inc., senior note, 8.00%, 3/15/20 | United States | 10,000,000 | 10,650,000 | |||||||
Hexion U.S. Finance Corp., senior secured note, 8.875%, 2/01/18 | United States | 8,000,000 | 8,360,000 | |||||||
International Lease Finance Corp., senior note, | ||||||||||
8.625%, 9/15/15 | United States | 2,100,000 | 2,283,750 | |||||||
8.75%, 3/15/17 | United States | 20,000,000 | 21,925,000 | |||||||
8.875%, 9/01/17 | United States | 20,000,000 | 22,100,000 | |||||||
hJPMorgan Chase & Co., junior sub. note, 1, 7.90% to 4/30/18, FRN thereafter, Perpetual | United States | 110,000,000 | 118,551,950 | |||||||
e,fLiberty Mutual Group, junior sub. note, 144A, FRN, 10.75%, 6/15/88 | United States | 25,000,000 | 33,437,500 | |||||||
e,hM&T Bank Corp., 144A, 6.875% to 6/15/16, FRN thereafter, Perpetual | United States | 12,000,000 | 11,984,400 | |||||||
hWells Fargo Capital XIII, pfd., 7.70% to 3/26/13, FRN thereafter, Perpetual | United States | 5,600,000 | 5,740,000 | |||||||
hWells Fargo Capital XV, pfd., 9.75% to 9/26/13, FRN thereafter, Perpetual | United States | 55,000,000 | 58,300,000 | |||||||
|
| |||||||||
| 675,860,053 | ||||||||||
|
| |||||||||
Health Care 4.1% | ||||||||||
Community Health Systems Inc., senior note, 8.875%, 7/15/15 | United States | 55,000,000 | 56,787,500 | |||||||
eGiant Funding Corp., senior note, 144A, 8.25%, 2/01/18 | Spain | 4,900,000 | 5,034,750 | |||||||
eHCA Holdings Inc., senior note, 144A, 7.75%, 5/15/21 | United States | 10,000,000 | 10,425,000 | |||||||
HCA Inc., | United States | 5,000,000 | 5,125,000 | |||||||
senior note, 6.50%, 2/15/16 | United States | 20,000,000 | 20,450,000 | |||||||
FI-16
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Franklin Income Securities Fund | Country | Principal Amount* | Value | |||||||
Corporate Bonds (continued) | ||||||||||
Health Care (continued) | ||||||||||
HCA Inc., (continued) | ||||||||||
senior secured note, 9.25%, 11/15/16 | United States | 10,000,000 | $ | 10,662,500 | ||||||
senior secured note, 8.50%, 4/15/19 | United States | 20,000,000 | 22,200,000 | |||||||
senior secured note, 7.875%, 2/15/20 | United States | 20,000,000 | 21,800,000 | |||||||
eMylan Inc., senior note, 144A, 6.00%, 11/15/18 | United States | 5,000,000 | 5,106,250 | |||||||
e,gQuintiles Transnational Corp., senior note, 144A, PIK, 9.50%, 12/30/14 | United States | 30,000,000 | 30,825,000 | |||||||
Tenet Healthcare Corp., | ||||||||||
senior note, 8.00%, 8/01/20 | United States | 24,600,000 | 25,122,750 | |||||||
fsenior note, FRN, 9.25%, 2/01/15 | United States | 13,500,000 | 14,833,125 | |||||||
senior secured note, 9.00%, 5/01/15 | United States | 40,000,000 | 43,100,000 | |||||||
senior secured note, 10.00%, 5/01/18 | United States | 41,250,000 | 47,076,562 | |||||||
Vanguard Health Holding Co. II LLC, senior note, 8.00%, 2/01/18 | United States | 23,100,000 | 23,966,250 | |||||||
Vanguard Health Holding Co. II LLC/Inc., senior note, 7.75%, 2/01/19 | United States | 4,000,000 | 4,070,000 | |||||||
Vanguard Health Systems Inc., zero cpn., 2/01/16 | United States | 10,300,000 | 6,836,625 | |||||||
|
| |||||||||
| 353,421,312 | ||||||||||
|
| |||||||||
Industrials 2.7% | ||||||||||
eAbengoa Finance SAU, senior note, 144A, 8.875%, 11/01/17 | Spain | 11,900,000 | 12,197,441 | |||||||
eAmerican Airlines Inc., senior secured note, 144A, 7.50%, 3/15/16 | United States | 25,000,000 | 24,625,000 | |||||||
eCeva Group PLC, senior secured note, 144A, | ||||||||||
8.375%, 12/01/17 | United Kingdom | 6,800,000 | 6,910,500 | |||||||
11.50%, 4/01/18 | United Kingdom | 30,300,000 | 32,042,250 | |||||||
eDelta Air Lines Inc., senior secured note, 144A, 9.50%, 9/15/14 | United States | 10,860,000 | 11,633,775 | |||||||
Diversey Inc., senior note, 8.25%, 11/15/19 | United States | 9,000,000 | 10,597,500 | |||||||
Hertz Corp., senior note, | ||||||||||
8.875%, 1/01/14 | United States | 6,951,000 | 7,159,530 | |||||||
e144A, 6.75%, 4/15/19 | United States | 4,500,000 | 4,477,500 | |||||||
eInteractive Data Corp., senior note, 144A, 10.25%, 8/01/18 | United States | 5,000,000 | 5,462,500 | |||||||
The Manitowoc Co. Inc., senior note, 9.50%, 2/15/18 | United States | 10,000,000 | 10,912,500 | |||||||
ePinafore LLC/Inc., senior secured note, 144A, 9.00%, 10/01/18 | United States | 3,600,000 | 3,897,000 | |||||||
RBS Global & Rexnord Corp., | ||||||||||
senior note, 8.50%, 5/01/18 | United States | 26,900,000 | 28,547,625 | |||||||
senior sub. note, 11.75%, 8/01/16 | United States | 13,500,000 | 14,343,750 | |||||||
Terex Corp., senior sub. note, 8.00%, 11/15/17 | United States | 45,000,000 | 46,350,000 | |||||||
United Rentals North America Inc., senior sub. note, 8.375%, 9/15/20 | United States | 9,800,000 | 9,971,500 | |||||||
|
| |||||||||
| 229,128,371 | ||||||||||
|
| |||||||||
Information Technology 6.4% | ||||||||||
Advanced Micro Devices Inc., senior note, 8.125%, 12/15/17 | United States | 5,000,000 | 5,250,000 | |||||||
eCDW Escrow Corp., senior note, 144A, 8.50%, 4/01/19 | United States | 22,300,000 | 21,965,500 | |||||||
CDW LLC/Finance Corp., | ||||||||||
senior note, 11.00%, 10/12/15 | United States | 442,000 | 467,415 | |||||||
senior sub. note, 12.535%, 10/12/17 | United States | 5,000,000 | 5,412,500 | |||||||
Ceridian Corp., senior note, 11.25%, 11/15/15 | United States | 20,000,000 | 20,100,000 | |||||||
eCommScope Inc., senior note, 144A, 8.25%, 1/15/19 | United States | 4,000,000 | 4,140,000 | |||||||
First Data Corp., | ||||||||||
esenior bond, 144A, 12.625%, 1/15/21 | United States | 76,298,000 | 82,020,350 | |||||||
senior note, 9.875%, 9/24/15 | United States | 4,758,000 | 4,912,635 | |||||||
esenior secured bond, 144A, 8.25%, 1/15/21 | United States | 45,000,000 | 44,325,000 | |||||||
e,gsenior secured note, 144A, PIK, 10.00%, 1/15/22 | United States | 33,188,000 | 30,948,042 | |||||||
senior sub. note, 11.25%, 3/31/16 | United States | 40,000,000 | 39,600,000 | |||||||
Freescale Semiconductor Inc., | ||||||||||
senior note, 10.125%, 12/15/16 | United States | 20,000,000 | 21,625,000 | |||||||
e,isenior note, 144A, 8.05%, 2/01/20 | United States | 25,000,000 | 25,250,000 | |||||||
FI-17
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Franklin Income Securities Fund | Country | Principal Amount* | Value | |||||||
Corporate Bonds (continued) | ||||||||||
Information Technology (continued) | ||||||||||
Freescale Semiconductor Inc., (continued) | ||||||||||
esenior note, 144A, 10.75%, 8/01/20 | United States | 96,750,000 | $ | 109,811,250 | ||||||
esenior secured note, 144A, 10.125%, 3/15/18 | United States | 5,000,000 | 5,575,000 | |||||||
esenior secured note, 144A, 9.25%, 4/15/18 | United States | 51,700,000 | 55,965,250 | |||||||
eNXP BV/NXP Funding LLC, senior secured note, 144A, 9.75%, 8/01/18 | Netherlands | 8,600,000 | 9,642,750 | |||||||
Sanmina-SCI Corp., | ||||||||||
esenior note, 144A, 7.00%, 5/15/19 | United States | 15,000,000 | 14,250,000 | |||||||
senior sub. note, 8.125%, 3/01/16 | United States | 15,600,000 | 16,282,500 | |||||||
SunGard Data Systems Inc., | ||||||||||
senior note, 10.625%, 5/15/15 | United States | 7,500,000 | 8,156,250 | |||||||
senior note, 7.625%, 11/15/20 | United States | 10,000,000 | 10,150,000 | |||||||
senior sub. note, 10.25%, 8/15/15 | United States | 14,500,000 | 15,043,750 | |||||||
|
| |||||||||
| 550,893,192 | ||||||||||
|
| |||||||||
Materials 2.1% | ||||||||||
Berry Plastics Corp., senior secured note, 9.75%, 1/15/21 | United States | 5,000,000 | 4,862,500 | |||||||
eBuilding Materials Corp. of America, senior note, 144A, 6.75%, 5/01/21 | United States | 10,000,000 | 10,075,000 | |||||||
eFMG Resources August 2006 Pty. Ltd., senior note, 144A, | ||||||||||
7.00%, 11/01/15 | Australia | 14,000,000 | 14,325,080 | |||||||
6.875%, 2/01/18 | Australia | 11,900,000 | 12,138,000 | |||||||
Huntsman International LLC, senior note, 5.50%, 6/30/16 | United States | 1,750,000 | 1,730,313 | |||||||
eIneos Group Holdings PLC, | ||||||||||
senior secured note, 144A, 8.50%, 2/15/16 | United Kingdom | 5,000,000 | 4,962,500 | |||||||
senior sub. note, 144A, 7.875%, 2/15/16 | United Kingdom | 30,000,000 | EUR | 42,694,666 | ||||||
eKerling PLC, senior secured note, 144A, 10.625%, 1/28/17 | United Kingdom | 9,400,000 | EUR | 14,483,374 | ||||||
eKinove German Bondco GmbH, | ||||||||||
senior secured bond, 144A, 10.00%, 6/15/18 | Germany | 9,900,000 | EUR | 14,993,555 | ||||||
senior secured note, 144A, 9.625%, 6/15/18 | Germany | 13,100,000 | 13,656,750 | |||||||
NewPage Corp., senior secured note, | ||||||||||
10.00%, 5/01/12 | United States | 10,800,000 | 3,294,000 | |||||||
11.375%, 12/31/14 | United States | 6,000,000 | 5,625,000 | |||||||
eReynolds Group Holdings Ltd., | ||||||||||
senior note, 144A, 8.25%, 2/15/21 | New Zealand | 5,200,000 | 4,888,000 | |||||||
senior secured note, 144A, 6.875%, 2/15/21 | New Zealand | 10,000,000 | 9,706,250 | |||||||
Vulcan Materials Co., senior note, | ||||||||||
6.50%, 12/01/16 | United States | 11,200,000 | 11,138,030 | |||||||
7.50%, 6/15/21 | United States | 13,500,000 | 13,497,084 | |||||||
|
| |||||||||
| 182,070,102 | ||||||||||
|
| |||||||||
Telecommunication Services 1.4% | ||||||||||
eClearwire Corp., senior secured note, 144A, 12.00%, 12/01/15 | United States | 23,100,000 | 24,861,375 | |||||||
Cricket Communications Inc., senior note, | ||||||||||
7.75%, 10/15/20 | United States | 40,000,000 | 39,300,000 | |||||||
e144A, 7.75%, 10/15/20 | United States | 5,000,000 | 4,912,500 | |||||||
Frontier Communications Corp., senior note, | ||||||||||
8.25%, 4/15/17 | United States | 6,600,000 | 7,210,500 | |||||||
8.50%, 4/15/20 | United States | 12,900,000 | 14,125,500 | |||||||
eIntelsat Jackson Holding SA, senior note, 144A, 7.50%, 4/01/21 | Luxembourg | 20,000,000 | 19,925,000 | |||||||
Sprint Nextel Corp., senior note, 8.375%, 8/15/17 | United States | 7,700,000 | 8,498,875 | |||||||
|
| |||||||||
| 118,833,750 | ||||||||||
|
| |||||||||
Utilities 5.7% | ||||||||||
eAES Corp., senior note, 144A, 7.375%, 7/01/21 | United States | 5,800,000 | 5,894,250 | |||||||
FI-18
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Franklin Income Securities Fund | Country | Principal Amount* | Value | |||||||
Corporate Bonds (continued) | ||||||||||
Utilities (continued) | ||||||||||
eCalpine Corp., senior secured note, 144A, | ||||||||||
7.25%, 10/15/17 | United States | 5,000,000 | $ | 5,100,000 | ||||||
7.875%, 7/31/20 | United States | 10,700,000 | 11,235,000 | |||||||
7.50%, 2/15/21 | United States | 15,000,000 | 15,375,000 | |||||||
7.875%, 1/15/23 | United States | 15,000,000 | 15,468,750 | |||||||
Dynegy Holdings Inc., senior note, | ||||||||||
7.50%, 6/01/15 | United States | 20,000,000 | 16,400,000 | |||||||
7.50%, 6/01/15 | United States | 15,000,000 | 12,150,000 | |||||||
8.375%, 5/01/16 | United States | 82,699,000 | 66,572,695 | |||||||
7.75%, 6/01/19 | United States | 24,500,000 | 17,946,250 | |||||||
Energy Future Holdings Corp., senior note, R, 6.55%, 11/15/34 | United States | 35,000,000 | 17,325,000 | |||||||
GenOn Energy Inc., senior note, | ||||||||||
7.625%, 6/15/14 | United States | 9,500,000 | 9,832,500 | |||||||
7.875%, 6/15/17 | United States | 25,000,000 | 25,250,000 | |||||||
eIntergen NV, senior secured note, 144A, 9.00%, 6/30/17 | Netherlands | 7,500,000 | 7,968,750 | |||||||
Niska Gas Storage U.S./Canada, senior note, 8.875%, 3/15/18 | United States | 15,000,000 | 15,825,000 | |||||||
Public Service Co. of New Mexico, senior note, 7.95%, 5/15/18 | United States | 6,400,000 | 7,229,830 | |||||||
eTexas Competitive Electric Holdings Co. LLC/Texas Competitive Electric Holdings Finance Inc., | ||||||||||
secured note, B, 144A, 15.00%, 4/01/21 | United States | 17,800,000 | 17,577,500 | |||||||
senior secured note, 144A, 11.50%, 10/01/20 | United States | 100,125,000 | 82,603,125 | |||||||
Texas Competitive Electric Holdings Co. LLC, senior note, | ||||||||||
A, 10.25%, 11/01/15 | United States | 149,690,000 | 91,310,900 | |||||||
B, 10.25%, 11/01/15 | United States | 64,193,000 | 38,836,765 | |||||||
gPIK, 11.25%, 11/01/16 | United States | 13,000,014 | 8,360,855 | |||||||
|
| |||||||||
| 488,262,170 | ||||||||||
|
| |||||||||
Total Corporate Bonds (Cost $3,751,406,877) | 3,940,573,328 | |||||||||
|
| |||||||||
f,jSenior Floating Rate Interests 6.4% | ||||||||||
Consumer Discretionary 1.3% | ||||||||||
Chrysler Group LLC, Tranche B Term Loan, 6.00%, 5/24/17 | United States | 39,700,000 | 38,773,680 | |||||||
Clear Channel Communications Inc., Tranche B Term Loan, 3.836%, 1/29/16 | United States | 72,254,969 | 61,089,336 | |||||||
Club Operations Inc., Term B Loan, 6.00%, 11/30/16 | United States | 9,950,000 | 9,968,656 | |||||||
bDex Media West LLC, Term Loan B, 7.00%, 10/24/14 | United States | 4,400,730 | 3,692,948 | |||||||
SuperMedia Inc., Exit Term Loan, 11.00%, 12/31/15 | United States | 2,733,904 | 1,661,822 | |||||||
|
| |||||||||
| 115,186,442 | ||||||||||
|
| |||||||||
Financials 0.7% | ||||||||||
iStar Financial Inc., Tranche A2 Term Loan, 7.00%, 6/30/14 | United States | 60,000,000 | 59,785,500 | |||||||
|
| |||||||||
Industrials 0.8% | ||||||||||
Allison Transmission Inc., Term Loan B, 2.94%, 8/07/14 | United States | 26,987,071 | 26,504,246 | |||||||
Altegrity Inc., | ||||||||||
Term Loan B, 2.997%, 2/21/15 | United States | 14,758,644 | 14,500,368 | |||||||
Tranche D Term Loan, 7.75%, 2/21/15 | United States | 14,887,500 | 15,022,425 | |||||||
Ceva Group PLC, | ||||||||||
Dollar Tranche B L/C, 5.246%, 8/31/16 | United Kingdom | 2,105,263 | 2,067,105 | |||||||
EGL Tranche B Term Loans, 5.273%, 8/31/16 | United Kingdom | 12,291,882 | 12,199,693 | |||||||
|
| |||||||||
| 70,293,837 | ||||||||||
|
| |||||||||
Information Technology 1.2% | ||||||||||
First Data Corp., | ||||||||||
2018 Term Loan, 4.00% - 4.186%, 3/24/18 | United States | 22,436,455 | 20,626,618 | |||||||
Term Loan B-1, 2.936%, 9/24/14 | United States | 13,650,417 | 12,669,293 | |||||||
FI-19
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Franklin Income Securities Fund | Country | Principal Amount* | Value | |||||||
Senior Floating Rate Interests (continued) | ||||||||||
Information Technology (continued) | ||||||||||
First Data Corp., (continued) | ||||||||||
Term Loan B-2, 2.936%, 9/24/14 | United States | 64,638,495 | $ | 59,992,603 | ||||||
Term Loan B-3, 2.936%, 9/24/14 | United States | 2,387,693 | 2,216,078 | |||||||
Freescale Semiconductor Inc., Extended Term Loan, 4.441%, 12/01/16 | United States | 2,590,375 | 2,581,876 | |||||||
|
| |||||||||
| 98,086,468 | ||||||||||
|
| |||||||||
Materials 0.3% | ||||||||||
kDynacast International Ltd., Bridge Loan, 9.75%, 6/22/12 | United Kingdom | 25,000,000 | 25,032,750 | |||||||
|
| |||||||||
Utilities 2.1% | ||||||||||
Texas Competitive Electric Holdings Co. LLC, 2017 Term Loan, 4.69% - 4.768%, 10/10/17 | United States | 224,606,875 | 175,795,309 | |||||||
|
| |||||||||
Total Senior Floating Rate Interests (Cost $561,840,735) | 544,180,306 | |||||||||
|
| |||||||||
Asset-Backed Securities and Commercial Mortgage-Backed Securities (Cost $33,941,142) 0.4% | ||||||||||
Financials 0.4% | ||||||||||
e,fBanc of America Large Loan, 2010-HLTN, 144A, FRN, 1.937%, 11/15/15 | United States | 39,012,806 | 36,235,621 | |||||||
|
| |||||||||
Municipal Bonds 0.7% | ||||||||||
California State GO, | ||||||||||
7.95%, 3/01/36 | United States | 25,000,000 | 27,263,500 | |||||||
5.25%, 11/01/40 | United States | 2,815,000 | 2,777,448 | |||||||
Build America Bonds, 7.60%, 11/01/40 | United States | �� | 13,920,000 | 16,054,911 | ||||||
Various Purpose, 6.00%, 11/01/39 | United States | 830,000 | 884,116 | |||||||
Various Purpose, Refunding, NATL Insured, 4.50%, 12/01/32 | United States | 1,510,000 | 1,349,019 | |||||||
Various Purpose, Refunding, Series 1, AGMC Insured, 4.75%, 9/01/31 | United States | 1,460,000 | 1,413,893 | |||||||
Puerto Rico Sales Tax FICO Sales Tax Revenue, first sub., Series A, 5.50%, 8/01/42 | United States | 3,800,000 | 3,804,978 | |||||||
San Joaquin County Transportation Authority Sales Tax Revenue, Refunding, | United States | 7,820,000 | 7,983,829 | |||||||
|
| |||||||||
Total Municipal Bonds (Cost $55,827,256) | 61,531,694 | |||||||||
|
| |||||||||
Total Investments before Short Term Investments | 8,442,355,131 | |||||||||
|
| |||||||||
Short Term Investments 1.0% | ||||||||||
Repurchase Agreements (Cost $77,890,659) 0.9% | ||||||||||
lJoint Repurchase Agreement, 0.005%, 7/01/11 (Maturity Value $77,890,670) | United States | 77,890,659 | 77,890,659 | |||||||
Barclays Capital Inc. (Maturity Value $6,674,451) | ||||||||||
BNP Paribas Securities Corp. (Maturity Value $17,798,018) | ||||||||||
Credit Suisse Securities (USA) LLC (Maturity Value $13,348,124) | ||||||||||
Deutsche Bank Securities Inc. (Maturity Value $8,923,934) | ||||||||||
HSBC Securities (USA) Inc. (Maturity Value $6,674,452) | ||||||||||
Merrill Lynch, Pierce, Fenner & Smith Inc. (Maturity Value $4,449,115) | ||||||||||
Morgan Stanley & Co. LLC (Maturity Value $6,674,452) | ||||||||||
UBS Securities LLC (Maturity Value $13,348,124) | ||||||||||
Collateralized by U.S. Government Agency Securities, 0.75% - 5.375%, 10/15/11 - 9/13/19; mU.S. Government Agency Discount Notes, 9/28/11 - 12/28/11; mU.S. Treasury Bills, 8/04/11 - 8/25/11; U.S. Treasury Bonds, 7.25% - 11.25%, 2/15/15 - 5/15/16; and U.S. Treasury Notes, 0.375% - 5.00%, 7/31/11 - 6/30/16 (valued at $79,647,087) | ||||||||||
|
| |||||||||
FI-20
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Franklin Income Securities Fund | Country | Shares | Value | |||||||
Short Term Investments (continued) | ||||||||||
nInvestments from Cash Collateral Received for Loaned Securities (Cost $6,810,310) 0.1% | ||||||||||
Money Market Funds 0.1% | ||||||||||
oBNY Mellon Overnight Government Fund, 0.05% | United States | 6,810,310 | $ | 6,810,310 | ||||||
|
| |||||||||
Total Investments (Cost $8,099,592,680) 99.5% | 8,527,056,100 | |||||||||
Other Assets, less Liabilities 0.5% | 45,984,367 | |||||||||
|
| |||||||||
Net Assets 100.0% | $ | 8,573,040,467 | ||||||||
|
| |||||||||
See Abbreviations on page FI-35.
†Rounds to less than 0.1% of net assets.
*The principal amount is stated in U.S. dollars unless otherwise indicated.
aNon-income producing.
bSee Note 9 regarding holdings of 5% voting securities.
cAt June 30, 2011, pursuant to the Fund’s policies and the requirements of applicable securities law, the Fund may be restricted from trading these securities for a limited or extended period of time due to ownership limits and/or potential possession of material non-public information.
dSee Note 1(f) regarding equity-linked securities.
eSecurity 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, 2011, the aggregate value of these securities was $2,064,768,563, representing 24.08% of net assets.
fThe coupon rate shown represents the rate at period end.
gIncome may be received in additional securities and/or cash.
hPerpetual security with no stated maturity date.
iA portion or all of the security is on loan at June 30, 2011. See Note 1(g).
jSee Note 1(h) regarding senior floating rate interests.
kSecurity purchased on a delayed delivery basis. See Note 1(d).
lSee Note 1(c) regarding joint repurchase agreement.
mThe security is traded on a discount basis with no stated coupon rate.
nSee Note 1(g) regarding securities on loan.
oThe rate shown is the annualized seven-day yield at period end.
The accompanying notes are an integral part of these financial statements.
FI-21
Franklin Templeton Variable Insurance Products Trust
Financial Statements
Statement of Assets and Liabilities
June 30, 2011 (unaudited)
| Franklin Income Securities Fund | ||||
Assets: | ||||
Investments in securities: | ||||
Cost - Unaffiliated issuers | $ | 7,877,096,993 | ||
Cost - Non-controlled affiliated issuers (Note 9) | 144,605,028 | |||
Cost - Repurchase agreements | 77,890,659 | |||
|
| |||
Total cost of investments | $ | 8,099,592,680 | ||
|
| |||
Value - Unaffiliated issuers | $ | 8,424,563,412 | ||
Value - Non-controlled affiliated issuers (Note 9) | 24,602,029 | |||
Value - Repurchase agreements | 77,890,659 | |||
|
| |||
Total value of investments (includes securities loaned in the amount of $6,642,770) | 8,527,056,100 | |||
Cash | 602,037 | |||
Receivables: | ||||
Investment securities sold | 8,253,429 | |||
Capital shares sold | 3,178,289 | |||
Dividends and interest | 92,660,318 | |||
Other assets | 714,007 | |||
|
| |||
Total assets | 8,632,464,180 | |||
|
| |||
Liabilities: | ||||
Payables: | ||||
Investment securities purchased | 41,699,679 | |||
Capital shares redeemed | 3,792,864 | |||
Affiliates | 6,131,594 | |||
Payable upon return of securities loaned | 6,810,310 | |||
Accrued expenses and other liabilities | 989,266 | |||
|
| |||
Total liabilities | 59,423,713 | |||
|
| |||
Net assets, at value | $ | 8,573,040,467 | ||
|
| |||
Net assets consist of: | ||||
Paid-in capital | $ | 9,003,119,417 | ||
Undistributed net investment income | 237,360,854 | |||
Net unrealized appreciation (depreciation) | 427,399,199 | |||
Accumulated net realized gain (loss) | (1,094,839,003 | ) | ||
|
| |||
Net assets, at value | $ | 8,573,040,467 | ||
|
| |||
The accompanying notes are an integral part of these financial statements.
FI-22
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Assets and Liabilities (continued)
June 30, 2011 (unaudited)
| Franklin Income Securities Fund | ||||
Class 1: | ||||
Net assets, at value | $ | 1,715,055,274 | ||
|
| |||
Shares outstanding | 113,653,147 | |||
|
| |||
Net asset value and maximum offering price per share | $ | 15.09 | ||
|
| |||
Class 2: | ||||
Net assets, at value | $ | 6,403,467,535 | ||
|
| |||
Shares outstanding | 434,406,667 | |||
|
| |||
Net asset value and maximum offering price per share | $ | 14.74 | ||
|
| |||
Class 4: | ||||
Net assets, at value | $ | 454,517,658 | ||
|
| |||
Shares outstanding | 30,341,167 | |||
|
| |||
Net asset value and maximum offering price per share | $ | 14.98 | ||
|
| |||
The accompanying notes are an integral part of these financial statements.
FI-23
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Operations
for the six months ended June 30, 2011 (unaudited)
| Franklin Income Securities Fund | ||||
Investment income: | ||||
Dividends | $ | 72,779,618 | ||
Interest: | ||||
Unaffiliated issuers | 208,650,737 | |||
Non-controlled affiliated issuers (Note 9) | 2,077,560 | |||
Income from securities loaned | 168,305 | |||
|
| |||
Total investment income | 283,676,220 | |||
|
| |||
Expenses: | ||||
Management fees (Note 3a) | 19,156,293 | |||
Distribution fees: (Note 3c) | ||||
Class 2 | 8,038,428 | |||
Class 4 | 768,254 | |||
Unaffiliated transfer agent fees | 1,889 | |||
Custodian fees (Note 4) | 86,909 | |||
Reports to shareholders | 406,815 | |||
Professional fees | 88,935 | |||
Trustees’ fees and expenses | 15,856 | |||
Other | 81,590 | |||
|
| |||
Total expenses | 28,644,969 | |||
Expense reductions (Note 4) | (19 | ) | ||
|
| |||
Net expenses | 28,644,950 | |||
|
| |||
Net investment income | 255,031,270 | |||
|
| |||
Realized and unrealized gains (losses): | ||||
Net realized gain (loss) from: | ||||
Investments: | ||||
Unaffiliated issuers | 108,257,344 | |||
Non-controlled affiliated issuers (Note 9) | 110,799 | |||
Written options | 415,499 | |||
Foreign currency transactions | 50,340 | |||
|
| |||
Net realized gain (loss) | 108,833,982 | |||
|
| |||
Net change in unrealized appreciation (depreciation) on: | ||||
Investments | 81,712,603 | |||
Translation of other assets and liabilities denominated in foreign currencies | (26,123 | ) | ||
|
| |||
Net change in unrealized appreciation (depreciation) | 81,686,480 | |||
|
| |||
Net realized and unrealized gain (loss) | 190,520,462 | |||
|
| |||
Net increase (decrease) in net assets resulting from operations | $ | 445,551,732 | ||
|
| |||
The accompanying notes are an integral part of these financial statements.
FI-24
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statements of Changes in Net Assets
| Franklin Income Securities Fund | ||||||||
| Six Months Ended June 30, 2011 (unaudited) | Year Ended December 31, 2010 | |||||||
| ||||||||
Increase (decrease) in net assets: | ||||||||
Operations: | ||||||||
Net investment income | $ | 255,031,270 | $ | 459,831,319 | ||||
Net realized gain (loss) from investments, written options and foreign currency transactions | 108,833,982 | 1,566,016 | ||||||
Net change in unrealized appreciation (depreciation) on investments and translation of other assets and liabilities denominated in foreign currencies | 81,686,480 | 446,658,211 | ||||||
| ||||||||
Net increase (decrease) in net assets resulting from operations | 445,551,732 | 908,055,546 | ||||||
| ||||||||
Distributions to shareholders from: | ||||||||
Net investment income: | ||||||||
Class 1 | (96,601,395 | ) | (70,751,613 | ) | ||||
Class 2 | (356,087,463 | ) | (403,393,475 | ) | ||||
Class 4 | (24,430,578 | ) | (24,551,628 | ) | ||||
| ||||||||
Total distributions to shareholders | (477,119,436 | ) | (498,696,716 | ) | ||||
| ||||||||
Capital share transactions: (Note 2) | ||||||||
Class 1 | 280,302,927 | 469,690,616 | ||||||
Class 2 | 109,587,489 | (125,499,592 | ) | |||||
Class 4 | 40,942,376 | 47,090,132 | ||||||
| ||||||||
Total capital share transactions | 430,832,792 | 391,281,156 | ||||||
| ||||||||
Net increase (decrease) in net assets | 399,265,088 | 800,639,986 | ||||||
Net assets: | ||||||||
Beginning of period | 8,173,775,379 | 7,373,135,393 | ||||||
| ||||||||
End of period | $ | 8,573,040,467 | $ | 8,173,775,379 | ||||
| ||||||||
Undistributed net investment income included in net assets: | ||||||||
End of period | $ | 237,360,854 | $ | 459,449,020 | ||||
| ||||||||
The accompanying notes are an integral part of these financial statements.
FI-25
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 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 generally 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. Financial Instrument Valuation
The Fund’s investments in securities and other financial instruments are carried at fair value daily. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. Under procedures approved by the Trust’s Board of Trustees, the Fund may utilize independent pricing services, quotations from securities and financial instrument dealers, and other market sources to determine fair value.
Equity securities and derivative financial instruments listed on an 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. 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. 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. Over-the-counter securities 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 at the closing net asset value.
Debt securities generally trade in the over-the-counter market rather than on a securities exchange. The Fund’s pricing services use multiple valuation techniques to determine fair value. In instances where sufficient market activity exists, the pricing services may utilize a market-based approach through which quotes from market makers are used to determine fair value. In instances where sufficient market activity may not exist or is limited, the pricing services also utilize proprietary valuation models which may consider market characteristics such as benchmark yield curves, option-adjusted spreads, credit spreads, estimated default rates, coupon rates, anticipated timing of principal repayments, underlying collateral, and other unique security features in order to estimate the relevant cash flows, which are then discounted to calculate the fair value. 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. Repurchase agreements are valued at cost, which approximates market value.
The Fund has procedures to determine the fair value of securities and other financial instruments for which market prices are not readily available or which may not be reliably priced. Under these procedures, the Fund primarily employs a market-based approach which may use related or comparable assets or liabilities, recent transactions, market multiples, book values, and other relevant information for the investment to determine the fair value of the investment. The Fund may also use an income-based valuation approach in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the investments. Due to the inherent uncertainty of valuations of such investments, the fair values may differ significantly from the values that would have been used had an active market existed.
Trading in securities on foreign securities stock exchanges and over-the-counter markets may be completed before the daily close of business on the NYSE. Occasionally, events occur between the time at which trading in a foreign security is completed and the close of the NYSE that might call into question the reliability of the value of a portfolio security held by the Fund. As a result,
FI-26
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Income Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
a. Financial Instrument Valuation (continued)
differences may arise between the value of the Fund’s portfolio securities as determined at the foreign market close and the latest indications of value at the close of the NYSE. In order to minimize the potential for these differences, 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 that may call into question the reliability of the values of the foreign securities 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.
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. The Fund may enter into foreign currency exchange contracts to facilitate transactions denominated in a foreign currency. 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. Portfolio securities and assets and liabilities denominated in foreign currencies contain risks that those currencies will decline in value relative to the U.S. dollar. 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 Trust’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 enters 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, 2011.
d. Securities Purchased on a Delayed Delivery Basis
The Fund purchases 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.
FI-27
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Income Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
e. Derivative Financial Instruments
The Fund invested in 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 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/or the potential for market movements which expose the Fund to gains or losses in excess of the amounts shown on the Statement of Assets and Liabilities. Realized gain and loss and unrealized appreciation and depreciation on these contracts for the period are included in the Statement of Operations.
The Fund purchased or wrote option contracts primarily to manage and/or gain exposure to 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, or notional amount of a swap (swaption), 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 6 and 8 regarding investment transactions and other derivative information, respectively.
f. Equity-Linked Securities
The Fund invests 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. 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 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. Senior Floating Rate Interests
The Fund invests in senior secured corporate loans that 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.
FI-28
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Income Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
h. Senior Floating Rate Interests (continued)
Senior secured corporate loans in which the Fund invests are generally readily marketable, but may be subject to some restrictions on resale.
i. Income Taxes
It is the Fund’s policy to qualify as a regulated investment company under the Internal Revenue Code. The Fund intends to distribute to shareholders substantially all of its taxable income and net realized gains to relieve it from federal income and excise taxes. As a result, no provision for U.S. federal income taxes is required. The Fund files U.S. income tax returns as well as tax returns in certain other jurisdictions. The Fund records a provision for taxes in its financial statements including penalties and interest, if any, for a tax position taken on a tax return (or expected to be taken) when it fails to meet the more likely than not (a greater than 50% probability) threshold and based on the technical merits, the tax position may not be sustained upon examination by the tax authorities. As of June 30, 2011, and for all open tax years, the Fund has determined that no provision for income tax is required in the Fund’s financial statements. Open tax years are those that remain subject to examination and are based on each tax jurisdiction statute of limitation.
The Fund may be subject to foreign taxation related to income received, capital gains on the sale of securities and certain foreign currency transactions in the foreign jurisdictions in which it invests. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist in the foreign markets in which the Fund invests. When a capital gain tax is determined to apply the Fund records an estimated deferred tax liability for unrealized gains on these securities in an amount that would be payable if the securities were disposed of on the valuation date.
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. 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.
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.
FI-29
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Income Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
2. SHARES OF BENEFICIAL INTEREST
At June 30, 2011, 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, 2011 | Year Ended December 31, 2010 | |||||||||||||||
| Class 1 Shares: | Shares | Amount | Shares | Amount | ||||||||||||
Shares sold | 13,568,291 | $ | 214,732,411 | 44,758,864 | $ | 645,042,814 | ||||||||||
Shares issued in reinvestment of distributions | 6,487,669 | 96,601,395 | 5,206,153 | 70,751,613 | ||||||||||||
Shares redeemed | (1,961,720 | ) | (31,030,879 | ) | (17,515,669 | ) | (246,103,811 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | 18,094,240 | $ | 280,302,927 | 32,449,348 | $ | 469,690,616 | ||||||||||
| ||||||||||||||||
Class 2 Shares: | ||||||||||||||||
Shares sold | 17,084,824 | $ | 262,506,301 | 26,818,536 | $ | 380,019,084 | ||||||||||
Shares issued in reinvestment of distributions | 24,473,365 | 356,087,463 | 30,330,336 | 403,393,475 | ||||||||||||
Shares redeemed | (33,009,436 | ) | (509,006,275 | ) | (64,334,274 | ) | (908,912,151 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | 8,548,753 | $ | 109,587,489 | (7,185,402 | ) | $ | (125,499,592 | ) | ||||||||
| ||||||||||||||||
Class 4 Shares: | ||||||||||||||||
Shares sold | 2,443,626 | $ | 38,175,821 | 4,608,224 | $ | 66,369,834 | ||||||||||
Shares issued on reinvestment of distributions | 1,652,948 | 24,430,578 | 1,817,293 | 24,551,628 | ||||||||||||
Shares redeemed | (1,381,695 | ) | (21,664,023 | ) | (3,057,456 | ) | (43,831,330 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | 2,714,879 | $ | 40,942,376 | 3,368,061 | $ | 47,090,132 | ||||||||||
| ||||||||||||||||
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 Fund 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 |
FI-30
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 Trust’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. Other Affiliated Transactions
At June 30, 2011, Franklin Templeton Variable Insurance Products Trust - Franklin Templeton VIP Founding Funds Allocation Fund owned 16.40% of the Fund’s outstanding shares.
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, 2011, the custodian fees were reduced as noted in the Statement of Operations.
FI-31
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Income Securities Fund
5. INCOME TAXES
For tax purposes, capital losses may be carried over to offset future capital gains, if any. At December 31, 2010, the capital loss carryforwards were as follows:
Capital loss carryforwards expiring in: | ||||
2016 | $ | 524,982,657 | ||
2017 | 521,405,875 | |||
2018 | 158,391,805 | |||
|
| |||
| $ | 1,204,780,337 | |||
|
|
Under the Regulated Investment Company Modernization Act of 2010, the Fund will be permitted to carry forward capital losses incurred in taxable years beginning after December 22, 2010 for an unlimited period. Post-enactment capital loss carryforwards will retain their character as either short-term or long-term capital losses rather than being considered short-term as under previous law. Any post-enactment capital losses generated will be required to be utilized prior to the losses incurred in pre-enactment tax years.
At June 30, 2011, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
Cost of investments | $ | 8,114,095,045 | ||
|
| |||
Unrealized appreciation | $ | 956,718,231 | ||
Unrealized depreciation | (543,757,176 | ) | ||
|
| |||
Net unrealized appreciation (depreciation) | $ | 412,961,055 | ||
|
| |||
Net investment income differs for financial statement and tax purposes primarily due to differing treatments of defaulted securities, foreign currency transactions, payments-in-kind, bond discounts and premiums, and corporate actions.
Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatments of defaulted securities, wash sales, foreign currency transactions, payments-in-kind, bond discounts and premiums, and corporate actions.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the period ended June 30, 2011, aggregated $1,446,214,769 and $1,081,306,100, respectively.
Transactions in options written during the period ended June 30, 2011, were as follows:
| Number of Contracts | Premiums Received | |||||||
Options outstanding at December 31, 2010 | 3,690 | $ | 415,499 | |||||
Options written | — | — | ||||||
Options expired | (3,690 | ) | (415,499 | ) | ||||
Options exercised | — | — | ||||||
Options closed | — | — | ||||||
| ||||||||
Options outstanding at June 30, 2011 | — | $ | — | |||||
| ||||||||
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Income Securities Fund
7. CREDIT RISK
At June 30, 2011, the Fund had 50.17% of its portfolio invested in high yield securities, 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.
8. OTHER DERIVATIVE INFORMATION
For the period ended June 30, 2011, the effect of derivative contracts on the Fund’s Statement of Operations was as follows:
Derivative Contracts Not Accounted for as Hedging Instruments | Statement of Operations Locations | Realized Gain (Loss) for the Period | Change in Unrealized Appreciation (Depreciation) for the Period | |||||
Equity contracts | Net realized gain (loss) from written options / Net change in unrealized appreciation (depreciation) on investments | $415,499 | $3,501 | |||||
For the period ended June 30, 2011, the average month end market value of derivatives represented less than 0.01% of average month end net assets. The average month end number of open derivative contracts for the period was 1.
See Note 1(e) regarding derivative financial instruments.
9. 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, 2011, were as shown below.
| Name of Issuer | Number of Shares/Principal Amount Held at Beginning of Period | Gross Additions | Gross Reductions | Number of Shares/Principal Amount Held at End of Period | Value at End of Period | Investment Income | Realized Capital Gain (Loss) | |||||||||||||||||||||
Non-Controlled Affiliates | ||||||||||||||||||||||||||||
aDex Media West LLC, Term Loan B, 7.00%, 10/24/14 | 4,783,951 | — | 383,221 | 4,400,730 | $ | 3,692,948 | $ | 137,697 | $ | 110,799 | ||||||||||||||||||
Dex One Corp. | 2,642,381 | — | — | 2,642,381 | 6,685,224 | — | — | |||||||||||||||||||||
Dex One Corp., senior sub. note, PIK, 12.00%, 1/29/17 | 32,511,674 | — | — | 32,511,674 | 14,223,857 | 1,939,863 | — | |||||||||||||||||||||
|
| |||||||||||||||||||||||||||
Total Affiliated Securities (0.29% of Net Assets) | $ | 24,602,029 | $ | 2,077,560 | $ | 110,799 | ||||||||||||||||||||||
|
| |||||||||||||||||||||||||||
aCompany is a wholly owned subsidiary of Dex One Corp.
10. CREDIT FACILITY
The Fund, together with other U.S. registered and foreign investment funds (collectively, Borrowers), managed by Franklin Templeton Investments, are borrowers in a joint syndicated senior unsecured credit facility totaling $750 million (Global Credit Facility) which matures on January 20, 2012. This Global Credit Facility provides a source of funds to the Borrowers for temporary and emergency purposes, including the ability to meet future unanticipated or unusually large redemption requests.
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Income Securities Fund
10. 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 of 0.08% based upon the unused portion of the Global Credit Facility, which is reflected in other expenses on the Statement of Operations. During the period ended June 30, 2011, the Fund did not use the Global Credit Facility.
11. FAIR VALUE MEASUREMENTS
The Fund follows 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.
For movements between the levels within the fair value hierarchy, the Fund has adopted a policy of recognizing the transfers as of the date of the underlying event which caused the movement.
The following is a summary of the inputs used as of June 30, 2011, 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 | $ | 157,246,064 | $ | 5,277,272 | $ | — | $ | 162,523,336 | ||||||||
Energy | 531,808,025 | 73,046,320 | — | 604,854,345 | ||||||||||||
Financials | 666,962,979 | 39,124,567 | — | 706,087,546 | ||||||||||||
Health Care | 472,400,362 | 13,635,000 | — | 486,035,362 | ||||||||||||
All Other Equity Investmentsb | 1,734,080,776 | — | — | 1,734,080,776 | ||||||||||||
Equity-Linked Securities | 92,610,484 | — | 92,610,484 | |||||||||||||
Convertible Bonds | — | 73,642,333 | — | 73,642,333 | ||||||||||||
Corporate Bonds | — | 3,940,573,328 | — | 3,940,573,328 | ||||||||||||
Senior Floating Rate Interests | — | 544,180,306 | — | 544,180,306 | ||||||||||||
Asset-Backed Securities and Commercial Mortgage-Backed Securities | — | 36,235,621 | — | 36,235,621 | ||||||||||||
Municipal Bonds | — | 61,531,694 | — | 61,531,694 | ||||||||||||
Short Term Investments | — | 84,700,969 | — | 84,700,969 | ||||||||||||
|
| |||||||||||||||
Total Investments in Securities | $ | 3,562,498,206 | $ | 4,964,557,894 | $ | — | $ | 8,527,056,100 | ||||||||
|
| |||||||||||||||
aIncludes common, preferred, and convertible preferred stocks as well as other equity investments.
bFor detailed industry descriptions, see the accompanying Statement of Investments.
FI-34
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Income Securities Fund
12. NEW ACCOUNTING PRONOUNCEMENTS
In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (IFRS). The amendments in the ASU will improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRS and include new guidance for certain fair value measurement principles and disclosure requirements. The ASU is effective for interim and annual periods beginning after December 15, 2011. The Fund is currently evaluating the impact, if any, of applying this provision.
13. SUBSEQUENT EVENTS
The Fund has evaluated subsequent events through the issuance of the financial statements and determined that no events have occurred that require disclosure.
ABBREVIATIONS | ||||
| Currency | Selected Portfolio | |||
| Euro - Euro | ADR - American Depository Receipt | |||
| GBP - British Pound | AGMC - Assured Guaranty Municipal Corp. | |||
| FICO - Financing Corp. | ||||
| FRN - Floating Rate Note | ||||
| GO - General Obligation | ||||
| L/C - Letter of Credit | ||||
| MTN - Medium Term Note | ||||
| NATL - National Public Financial Guarantee Corp. | ||||
| PIK - Payment-In-Kind |
FI-35
FRANKLIN RISING DIVIDENDS SECURITIES FUND
We are pleased to bring you Franklin Rising Dividends Securities Fund’s semiannual report for the period ended June 30, 2011.
Performance Summary as of 6/30/11
Franklin Rising Dividends Securities Fund – Class 4 delivered a +6.48% total return for the six-month period ended 6/30/11.
Performance reflects the Fund’s Class 4 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 4
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.
FRD-1
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.
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 rose 6.02% 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
The U.S. economy expanded despite geopolitical and inflationary pressures from around the globe during the six-month period ended June 30, 2011. Business activity increased and consumer spending stayed above pre-recession levels. The U.S. has been a key engine in a sustained global manufacturing expansion as international trade volume continued to increase, albeit at a moderate pace. Worldwide demand for capital goods aided U.S. manufacturing profits and increased employment in the industry.
The unemployment rate improved in the first quarter when job creation began to gain some traction. However, government payrolls continued to trend down and job creation slowed in the second quarter, causing the unemployment rate to end the period at 9.2%.2 Consumer spending rose for 11 consecutive months through May but declined in June as concerns about job growth and rising gasoline and food prices dampened consumer confidence. To offset the disruption of global oil supply caused by the conflicts in Libya, the International Energy Agency announced in June the release of 60 million barrels of oil in July from strategic reserves of the U.S. and 27 other nations. The U.S. financial system appeared closer to a full recovery, although the country still faced challenges dealing with housing market weakness and massive debt at period-end.
Inflation at the consumer, producer and trade levels rose across much of the world, but in the U.S. it remained relatively contained. As a result, the Federal Reserve Board (Fed) maintained its accommodative
1. Source: © 2011 Morningstar. One cannot invest directly in an index, and an index is not representative of the Fund’s portfolio. Please see Index Descriptions following the Fund Summaries.
2. 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. The Fund may have significant investments in particular sectors from time to time, such as financial institutions and health care, and may be at greater risk of 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 manager applies various techniques and analyses in making investment decisions for the Fund, but there can be no guarantee that these decisions will produce the desired results. The Fund’s prospectus also includes a description of the main investment risks.
FRD-2
monetary policy while ending its second round of quantitative easing on June 30. The Fed said, however, it would continue to purchase Treasuries with proceeds from maturing debt in an effort to support economic growth.
Investors’ attitudes shifted with each release of economic, regulatory and geopolitical news, causing equity market volatility to increase globally. U.S. investors weathered international events that included revolutions and civil unrest across the Middle East and North Africa, the multiple crises triggered by Japan’s earthquake and tsunami, and sovereign debt worries and credit downgrades in Europe. Ultimately, stock indexes produced solid gains during the six months under review as domestic and global equity markets rose amid generally improving economic signs and record-high corporate earnings growth.
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 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 six months under review, significant contributors to Fund performance included Praxair, Dover and United Technologies. Shares appreciated in value for each of these companies as they experienced improved operating results and reported strong quarterly revenue growth. Industrial gases company Praxair has 18 consecutive years of dividend increases, while industrial conglomerates Dover and United Technologies have raised their dividends for 55 years and 17 years, respectively.
Detractors from performance included Hudson City Bancorp, Old Republic International and Aflac. Declining net interest margin led large savings bank Hudson City to restructure its balance sheet and reduce its dividend. In our analysis, prospective net interest margin may improve after the company reduces its high-cost borrowings and low-yielding securities. Multiline insurer Old Republic’s shares have been pressured
FRD-3
by continuing losses in the company’s mortgage insurance business. Supplemental insurance provider Aflac’s shares fell in value after the company disclosed that its decision to more conservatively position its investment portfolio would result in lower 2012 earnings than analysts’ estimates.
During the period, we initiated eight new positions: specialty chemicals company Albemarle (17 years of dividend increases), integrated energy company Chevron (23 years), insurer Chubb (46 years), consumer products manufacturer and marketer Colgate-Palmolive (48 years), integrated energy company Exxon Mobil (29 years), memorialization and related products manufacturer Matthews International (16 years), global athletic footwear and apparel maker Nike (9 years), and industrial equipment manufacturer Pentair (35 years). We made significant additions to holdings of restaurant operator McDonald’s and global snacks and beverage manufacturer PepsiCo and made smaller additions to eight other positions. During the period, Unilever completed its cash purchase of long-time Fund holding Alberto-Culver. We liquidated our position in Nordson during the period and made smaller reductions to 18 other holdings.
Our 10 largest positions on June 30, 2011, represented 45.1% of the Fund’s total net assets. It is interesting to note how these 10 companies would respond, in aggregate, to the Fund’s screening criteria based on a simple average of statistical measures. On average, these 10 companies have raised their dividends 33 years in a row and by 285% in the past 10 years. Their most recent year-over-year dividend increases averaged 12.7% with a yield of 2.1% on June 30, 2011, and a dividend payout ratio of 30.7%, based on estimates of calendar year 2011 operating earnings. The average price/earnings ratio was 15.5 times calendar year 2011 estimates versus 13.8 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, 2011, 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 Rising Dividends Securities Fund
6/30/11
Company Sector/Industry | % of Total Net Assets | |||
| Abbott Laboratories | 5.0% | |||
| Pharmaceuticals, Biotechnology & Life Sciences | ||||
| Becton, Dickinson and Co. | 5.0% | |||
| Health Care Equipment & Services | ||||
| United Technologies Corp. | 5.0% | |||
| Aerospace & Defense | ||||
| Praxair Inc. | 4.8% | |||
| Materials | ||||
| The Procter & Gamble Co. | 4.7% | |||
| Household & Personal Products | ||||
| Wal-Mart Stores Inc. | 4.6% | |||
| Food & Staples Retailing | ||||
| Dover Corp. | 4.2% | |||
| Machinery | ||||
| International Business Machines Corp. | 4.2% | |||
| Software & Services | ||||
| Roper Industries Inc. | 4.1% | |||
| Electrical Equipment | ||||
| Family Dollar Stores Inc. | 3.5% | |||
| Retailing | ||||
The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund’s Statement of Investments.
FRD-4
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 4
FRD-5
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 4 | Beginning Account Value 1/1/11 | Ending Account Value 6/30/11 | Fund-Level Expenses Incurred During Period* 1/1/11–6/30/11 | |||||||||
Actual | $ | 1,000 | $ | 1,064.80 | $ | 4.97 | ||||||
Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,019.98 | $ | 4.86 | ||||||
*Expenses are calculated using the most recent six-month annualized expense ratio for the Fund’s Class 4 shares (0.97%), 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.
FRD-6
Franklin Templeton Variable Insurance Products Trust
Financial Highlights
Franklin Rising Dividends Securities Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 1 | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 19.15 | $ | 16.13 | $ | 13.96 | $ | 19.61 | $ | 20.88 | $ | 18.11 | ||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.16 | 0.32 | 0.14 | c | 0.35 | 0.36 | 0.58 | d | ||||||||||||||||
Net realized and unrealized gains (losses) | 1.11 | 3.01 | 2.28 | (5.51 | ) | (0.80 | ) | 2.53 | ||||||||||||||||
Total from investment operations | 1.27 | 3.33 | 2.42 | (5.16 | ) | (0.44 | ) | 3.11 | ||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income | (0.33 | ) | (0.31 | ) | (0.25 | ) | (0.36 | ) | (0.53 | ) | (0.24 | ) | ||||||||||||
Net realized gains | — | — | — | (0.13 | ) | (0.30 | ) | (0.10 | ) | |||||||||||||||
Total distributions | (0.33 | ) | (0.31 | ) | (0.25 | ) | (0.49 | ) | (0.83 | ) | (0.34 | ) | ||||||||||||
Net asset value, end of period | $ | 20.09 | $ | 19.15 | $ | 16.13 | $ | 13.96 | $ | 19.61 | $ | 20.88 | ||||||||||||
Total returne | 6.72% | 20.94% | 17.67% | (26.94)% | (2.41)% | 17.43% | ||||||||||||||||||
Ratios to average net assetsf | ||||||||||||||||||||||||
Expenses | 0.62% | 0.64% | 0.65% | g | 0.61% | g | 0.59% | g | 0.61% | g | ||||||||||||||
Net investment income | 1.67% | 1.88% | 0.99% | c | 2.05% | 1.72% | 3.15% | d | ||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 149,222 | $ | 148,544 | $ | 139,816 | $ | 142,862 | $ | 235,946 | $ | 288,303 | ||||||||||||
Portfolio turnover rate | 9.51% | 8.97% | 16.99% | 5.39% | 3.29% | 6.19% | ||||||||||||||||||
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 2.07%.
dNet investment income per share includes approximately $0.30 per share received in the form of a special dividend paid in connection with a corporate spin-off. Excluding this non-recurring amount, the ratio of net investment income to average net assets would have been 1.57%.
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-7
Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Franklin Rising Dividends Securities Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 2 | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 18.82 | $ | 15.86 | $ | 13.72 | $ | 19.27 | $ | 20.55 | $ | 17.84 | ||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.14 | 0.28 | 0.10 | c | 0.31 | 0.30 | 0.56 | d | ||||||||||||||||
Net realized and unrealized gains (losses) | 1.09 | 2.95 | 2.24 | (5.42 | ) | (0.79 | ) | 2.46 | ||||||||||||||||
Total from investment operations | 1.23 | 3.23 | 2.34 | (5.11 | ) | (0.49 | ) | 3.02 | ||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income | (0.29 | ) | (0.27 | ) | (0.20 | ) | (0.31 | ) | (0.49 | ) | (0.21 | ) | ||||||||||||
Net realized gains | — | — | — | (0.13 | ) | (0.30 | ) | (0.10 | ) | |||||||||||||||
Total distributions | (0.29 | ) | (0.27 | ) | (0.20 | ) | (0.44 | ) | (0.79 | ) | (0.31 | ) | ||||||||||||
Net asset value, end of period | $ | 19.76 | $ | 18.82 | $ | 15.86 | $ | 13.72 | $ | 19.27 | $ | 20.55 | ||||||||||||
Total returne | 6.59% | 20.64% | 17.34% | (27.10)% | (2.69)% | 17.12% | ||||||||||||||||||
Ratios to average net assetsf | ||||||||||||||||||||||||
Expenses | 0.87% | 0.89% | 0.90% | g | 0.86% | g | 0.84% | g | 0.86% | g | ||||||||||||||
Net investment income | 1.42% | 1.63% | 0.74% | c | 1.80% | 1.47% | 2.90% | d | ||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 1,593,608 | $ | 1,572,732 | $ | 1,371,351 | $ | 1,286,878 | $ | 2,079,366 | $ | 1,981,240 | ||||||||||||
Portfolio turnover rate | 9.51% | 8.97% | 16.99% | 5.39% | 3.29% | 6.19% | ||||||||||||||||||
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 1.82%.
dNet investment income per share includes approximately $0.30 per share received in the form of a special dividend paid in connection with a corporate spin-off. Excluding this non-recurring amount, the ratio of net investment income to average net assets would have been 1.32%.
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
Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Franklin Rising Dividends Securities Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||||||
| Class 4 | 2010 | 2009 | 2008a | |||||||||||||
Per share operating performance | ||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||
Net asset value, beginning of period | $ | 19.04 | $ | 16.09 | $ | 13.92 | $ | 18.51 | ||||||||
Income from investment operationsb: | ||||||||||||||||
Net investment incomec | 0.13 | 0.32 | 0.13 | d | 0.26 | |||||||||||
Net realized and unrealized gains (losses) | 1.09 | 2.94 | 2.24 | (4.36 | ) | |||||||||||
Total from investment operations | 1.22 | 3.26 | 2.37 | (4.10 | ) | |||||||||||
Less distributions from: | ||||||||||||||||
Net investment income | (0.32 | ) | (0.31 | ) | (0.20 | ) | (0.36 | ) | ||||||||
Net realized gains | — | — | — | (0.13 | ) | |||||||||||
Total distributions | (0.32 | ) | (0.31 | ) | (0.20 | ) | (0.49 | ) | ||||||||
Net asset value, end of period | $ | 19.94 | $ | 19.04 | $ | 16.09 | $ | 13.92 | ||||||||
Total returne | 6.48% | 20.62% | 17.22% | (22.82)% | ||||||||||||
Ratios to average net assetsf | ||||||||||||||||
Expenses | 0.97% | 0.99% | 1.00% | g | 0.96% | g | ||||||||||
Net investment income | 1.32% | 1.53% | 0.64% | d | 1.70% | |||||||||||
Supplemental data | ||||||||||||||||
Net assets, end of period (000’s) | $ | 2,053 | $ | 1,007 | $ | 15 | $ | 4 | ||||||||
Portfolio turnover rate | 9.51% | 8.97% | 16.99% | 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 1.72%.
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-9
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited)
| Franklin Rising Dividends Securities Fund | Shares | Value | ||||||
Common Stocks 96.8% | ||||||||
Aerospace & Defense 5.1% | ||||||||
General Dynamics Corp. | 28,000 | $ | 2,086,560 | |||||
United Technologies Corp. | 970,400 | 85,890,104 | ||||||
|
| |||||||
| 87,976,664 | ||||||||
|
| |||||||
Banks 1.1% | ||||||||
Hudson City Bancorp Inc. | 1,560,300 | 12,778,857 | ||||||
Peoples Bancorp Inc. | 102,065 | 1,150,273 | ||||||
aTrustCo Bank Corp. NY | 299,985 | 1,469,926 | ||||||
U.S. Bancorp | 146,449 | 3,735,914 | ||||||
|
| |||||||
| 19,134,970 | ||||||||
|
| |||||||
Commercial & Professional Services 2.4% | ||||||||
ABM Industries Inc. | 951,288 | 22,203,062 | ||||||
Cintas Corp. | 481,200 | 15,894,036 | ||||||
Superior Uniform Group Inc. | 237,100 | 2,785,925 | ||||||
|
| |||||||
| 40,883,023 | ||||||||
|
| |||||||
Consumer Durables & Apparel 2.6% | ||||||||
bKid Brands Inc. | 265,947 | 1,372,286 | ||||||
Leggett & Platt Inc. | 775,800 | 18,914,004 | ||||||
NIKE Inc., B | 277,000 | 24,924,460 | ||||||
|
| |||||||
| 45,210,750 | ||||||||
|
| |||||||
Consumer Services 2.7% | ||||||||
Hillenbrand Inc. | 1,191,300 | 28,174,245 | ||||||
Matthews International Corp., A | 24,572 | 986,566 | ||||||
McDonald’s Corp. | 212,345 | 17,904,930 | ||||||
|
| |||||||
| 47,065,741 | ||||||||
|
| |||||||
Diversified Financials 0.8% | ||||||||
State Street Corp. | 324,500 | 14,631,705 | ||||||
|
| |||||||
Electrical Equipment 6.9% | ||||||||
Brady Corp., A | 1,515,579 | 48,589,463 | ||||||
Roper Industries Inc. | 854,250 | 71,159,025 | ||||||
|
| |||||||
| 119,748,488 | ||||||||
|
| |||||||
Energy 3.9% | ||||||||
Chevron Corp. | 478,500 | 49,208,940 | ||||||
Exxon Mobil Corp. | 226,500 | 18,432,570 | ||||||
|
| |||||||
| 67,641,510 | ||||||||
|
| |||||||
Food & Staples Retailing 4.6% | ||||||||
Wal-Mart Stores Inc. | 1,519,100 | 80,724,974 | ||||||
|
| |||||||
Food, Beverage & Tobacco 4.2% | ||||||||
Archer-Daniels-Midland Co. | 195,500 | 5,894,325 | ||||||
McCormick & Co. Inc. | 1,015,000 | 50,313,550 | ||||||
PepsiCo Inc. | 240,000 | 16,903,200 | ||||||
|
| |||||||
| 73,111,075 | ||||||||
|
| |||||||
Health Care Equipment & Services 13.4% | ||||||||
Becton, Dickinson and Co. | 1,002,143 | 86,354,663 | ||||||
Hill-Rom Holdings Inc. | 434,103 | 19,986,102 | ||||||
Medtronic Inc. | 402,000 | 15,489,060 | ||||||
Stryker Corp. | 508,500 | 29,843,865 | ||||||
FRD-10
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Franklin Rising Dividends Securities Fund | Shares | Value | ||||||
Common Stocks (continued) | ||||||||
Health Care Equipment & Services (continued) | ||||||||
Teleflex Inc. | 530,753 | $ | 32,407,778 | |||||
West Pharmaceutical Services Inc. | 1,132,941 | 49,577,498 | ||||||
|
| |||||||
| 233,658,966 | ||||||||
|
| |||||||
Household & Personal Products 5.0% | ||||||||
Colgate-Palmolive Co. | 69,000 | 6,031,290 | ||||||
The Procter & Gamble Co. | 1,281,600 | 81,471,312 | ||||||
|
| |||||||
| 87,502,602 | ||||||||
|
| |||||||
Industrial Conglomerates 0.4% | ||||||||
Carlisle Cos. Inc. | 125,261 | 6,166,599 | ||||||
|
| |||||||
Insurance 8.9% | ||||||||
Aflac Inc. | 309,200 | 14,433,456 | ||||||
Arthur J. Gallagher & Co. | 753,000 | 21,490,620 | ||||||
Chubb Corp. | 45,000 | 2,817,450 | ||||||
Erie Indemnity Co., A | 727,775 | 51,468,248 | ||||||
Mercury General Corp. | 154,200 | 6,089,358 | ||||||
Old Republic International Corp. | 3,429,708 | 40,299,069 | ||||||
RLI Corp. | 304,246 | 18,838,912 | ||||||
|
| |||||||
| 155,437,113 | ||||||||
|
| |||||||
Machinery 5.4% | ||||||||
Donaldson Co. Inc. | 317,300 | 19,253,764 | ||||||
Dover Corp. | 1,096,700 | 74,356,260 | ||||||
Pentair Inc. | 23,000 | 928,280 | ||||||
|
| |||||||
| 94,538,304 | ||||||||
|
| |||||||
Materials 11.9% | ||||||||
Air Products and Chemicals Inc. | 530,500 | 50,705,190 | ||||||
Albemarle Corp. | 78,000 | 5,397,600 | ||||||
Bemis Co. Inc. | 1,178,300 | 39,802,974 | ||||||
Nucor Corp. | 699,002 | 28,812,863 | ||||||
Praxair Inc. | 769,260 | 83,380,091 | ||||||
|
| |||||||
| 208,098,718 | ||||||||
|
| |||||||
Pharmaceuticals, Biotechnology & Life Sciences 9.8% | ||||||||
Abbott Laboratories | 1,652,800 | 86,970,336 | ||||||
Johnson & Johnson | 601,000 | 39,978,520 | ||||||
Pfizer Inc. | 2,158,100 | 44,456,860 | ||||||
|
| |||||||
| 171,405,716 | ||||||||
|
| |||||||
Retailing 3.5% | ||||||||
Family Dollar Stores Inc. | 1,168,130 | 61,396,913 | ||||||
|
| |||||||
Semiconductors & Semiconductor Equipment 0.0%† | ||||||||
Cohu Inc. | 50,300 | 659,433 | ||||||
|
| |||||||
Software & Services 4.2% | ||||||||
International Business Machines Corp. | 426,000 | 73,080,300 | ||||||
|
| |||||||
Total Common Stocks (Cost $1,180,248,528) | 1,688,073,564 | |||||||
|
| |||||||
FRD-11
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Franklin Rising Dividends Securities Fund | Shares | Value | ||||||
Short Term Investments 2.7% | ||||||||
Money Market Funds (Cost $47,241,502) 2.7% | ||||||||
b,cInstitutional Fiduciary Trust Money Market Portfolio | 47,241,502 | $ | 47,241,502 | |||||
|
| |||||||
dInvestments from Cash Collateral Received for Loaned Securities 0.0%† | ||||||||
Money Market Funds (Cost $632,226) 0.0%† | ||||||||
bBNY Institutional Cash Reserve Fund, Series B | 632,226 | 505,781 | ||||||
|
| |||||||
Total Investments (Cost $1,228,122,257) 99.5% | 1,735,820,847 | |||||||
Other Assets, less Liabilities 0.5% | 9,061,816 | |||||||
|
| |||||||
Net Assets 100.0% | $ | 1,744,882,663 | ||||||
|
| |||||||
†Rounds to less than 0.1% of net assets.
aA portion or all of the security is on loan at June 30, 2011. See Note 1(b).
bNon-income producing.
cSee Note 7 regarding investments in the Institutional Fiduciary Trust Money Market Portfolio.
dSee Note 1(b) regarding securities on loan.
The accompanying notes are an integral part of these financial statements.
FRD-12
Franklin Templeton Variable Insurance Products Trust
Financial Statements
Statement of Assets and Liabilities
June 30, 2011 (unaudited)
| Franklin Rising Dividends Securities Fund | ||||
Assets: | ||||
Investments in securities: | ||||
Cost - Unaffiliated issuers | $ | 1,180,880,755 | ||
Cost - Sweep Money Fund (Note 7) | 47,241,502 | |||
|
| |||
Total cost of investments | $ | 1,228,122,257 | ||
|
| |||
Value - Unaffiliated issuers | $ | 1,688,579,345 | ||
Value - Sweep Money Fund (Note 7) | 47,241,502 | |||
|
| |||
Total value of investments (includes securities loaned in the amount of $428,260) | 1,735,820,847 | |||
Receivables: | ||||
Investment securities sold | 11,863,200 | |||
Capital shares sold | 57,279 | |||
Dividends | 1,557,978 | |||
Other assets | 441 | |||
|
| |||
Total assets | 1,749,299,745 | |||
|
| |||
Liabilities: | ||||
Payables: | ||||
Capital shares redeemed | 1,926,258 | |||
Affiliates | 1,531,868 | |||
Reports to shareholders | 271,763 | |||
Funds advanced by custodian | 173,376 | |||
Payable upon return of securities loaned | 458,850 | |||
Accrued expenses and other liabilities | 54,967 | |||
|
| |||
Total liabilities | 4,417,082 | |||
|
| |||
Net assets, at value | $ | 1,744,882,663 | ||
|
| |||
Net assets consist of: | ||||
Paid-in capital | $ | 1,373,929,710 | ||
Undistributed net investment income | 12,605,812 | |||
Net unrealized appreciation (depreciation) | 507,698,590 | |||
Accumulated net realized gain (loss) | (149,351,449 | ) | ||
|
| |||
Net assets, at value | $ | 1,744,882,663 | ||
|
| |||
The accompanying notes are an integral part of these financial statements.
FRD-13
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Assets and Liabilities (continued)
June 30, 2011 (unaudited)
| Franklin Rising Dividends Securities Fund | ||||
Class 1: | ||||
Net assets, at value | $ | 149,222,237 | ||
Shares outstanding | 7,429,423 | |||
Net asset value and maximum offering price per share | $ | 20.09 | ||
Class 2: | ||||
Net assets, at value | $ | 1,593,607,680 | ||
Shares outstanding | 80,666,006 | |||
Net asset value and maximum offering price per share | $ | 19.76 | ||
Class 4: | ||||
Net assets, at value | $ | 2,052,746 | ||
Shares outstanding | 102,945 | |||
Net asset value and maximum offering price per share | $ | 19.94 | ||
The accompanying notes are an integral part of these financial statements.
FRD-14
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Operations
for the six months ended June 30, 2011 (unaudited)
| Franklin Rising Dividends Securities Fund | ||||
Investment income: | ||||
Dividends | $ | 20,037,335 | ||
Expenses: | ||||
Management fees (Note 3a) | 5,221,380 | |||
Distribution fees: (Note 3c) | ||||
Class 2 | 1,992,001 | |||
Class 4 | 2,546 | |||
Unaffiliated transfer agent fees | 838 | |||
Custodian fees (Note 4) | 12,179 | |||
Reports to shareholders | 150,922 | |||
Professional fees | 26,583 | |||
Trustees’ fees and expenses | 3,307 | |||
Other | 18,975 | |||
Total expenses | 7,428,731 | |||
Net investment income | 12,608,604 | |||
Realized and unrealized gains (losses): | ||||
Net realized gain (loss) from investments | 96,865,848 | |||
Net change in unrealized appreciation (depreciation) on investments | 2,004,361 | |||
Net realized and unrealized gain (loss) | 98,870,209 | |||
Net increase (decrease) in net assets resulting from operations | $ | 111,478,813 | ||
The accompanying notes are an integral part of these financial statements.
FRD-15
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, 2011 (unaudited) | Year Ended December 31, 2010 | |||||||
| ||||||||
Increase (decrease) in net assets: | ||||||||
Operations: | ||||||||
Net investment income | $ | 12,608,604 | $ | 25,813,336 | ||||
Net realized gain (loss) from investments | 96,865,848 | 67,941,220 | ||||||
Net change in unrealized appreciation (depreciation) on investments | 2,004,361 | 203,294,325 | ||||||
| ||||||||
Net increase (decrease) in net assets resulting from operations | 111,478,813 | 297,048,881 | ||||||
| ||||||||
Distributions to shareholders from: | ||||||||
Net investment income: | ||||||||
Class 1 | (2,458,866 | ) | (2,516,672 | ) | ||||
Class 2 | (23,318,583 | ) | (22,710,892 | ) | ||||
Class 4 | (30,729 | ) | (5,357 | ) | ||||
| ||||||||
Total distributions to shareholders | (25,808,178 | ) | (25,232,921 | ) | ||||
| ||||||||
Capital share transactions: (Note 2) | ||||||||
Class 1 | (6,619,897 | ) | (15,601,529 | ) | ||||
Class 2 | (57,428,481 | ) | (46,034,000 | ) | ||||
Class 4 | 977,254 | 920,381 | ||||||
| ||||||||
Total capital share transactions | (63,071,124 | ) | (60,715,148 | ) | ||||
| ||||||||
Net increase (decrease) in net assets | 22,599,511 | 211,100,812 | ||||||
Net assets: | ||||||||
Beginning of period | 1,722,283,152 | 1,511,182,340 | ||||||
| ||||||||
End of period | $ | 1,744,882,663 | $ | 1,722,283,152 | ||||
| ||||||||
Undistributed net investment income included in net assets: | ||||||||
End of period | $ | 12,605,812 | $ | 25,805,386 | ||||
| ||||||||
The accompanying notes are an integral part of these financial statements.
FRD-16
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 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 generally sold only to insurance company separate accounts to fund the benefits of variable life insurance policies or variable annuity contracts. At June 30, 2011, 61.33% 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. Financial Instrument Valuation
The Fund’s investments in securities and other financial instruments are carried at fair value daily. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. Under procedures approved by the Trust’s Board of Trustees, the Fund may utilize independent pricing services, quotations from securities and financial instrument dealers, and other market sources to determine fair value.
Equity securities listed on an 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 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.
The Fund has procedures to determine the fair value of securities and other financial instruments for which market prices are not readily available or which may not be reliably priced. Under these procedures, the Fund primarily employs a market-based approach which may use related or comparable assets or liabilities, recent transactions, market multiples, book values, and other relevant information for the investment to determine the fair value of the investment. The Fund may also use an income-based valuation approach in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the investments. Due to the inherent uncertainty of valuations of such investments, the fair values may differ significantly from the values that would have been used had an active market existed.
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 repurchase agreements or in a non-registered money 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.
c. Income Taxes
It is the Fund’s policy to qualify as a regulated investment company under the Internal Revenue Code. The Fund intends to distribute to shareholders substantially all of its taxable income and net realized gains to relieve it from federal income and excise
FRD-17
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Rising Dividends Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
c. Income Taxes (continued)
taxes. As a result, no provision for U.S. federal income taxes is required. The Fund files U.S. income tax returns as well as tax returns in certain other jurisdictions. The Fund records a provision for taxes in its financial statements including penalties and interest, if any, for a tax position taken on a tax return (or expected to be taken) when it fails to meet the more likely than not (a greater than 50% probability) threshold and based on the technical merits, the tax position may not be sustained upon examination by the tax authorities. As of June 30, 2011, and for all open tax years, the Fund has determined that no provision for income tax is required in the Fund’s financial statements. Open tax years are those that remain subject to examination and are based on each tax jurisdiction statute of limitation.
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 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.
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-18
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, 2011, 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, 2011 | Year Ended December 31, 2010 | |||||||||||||||
| Class 1 Shares: | Shares | Amount | Shares | Amount | ||||||||||||
Shares sold | 323,324 | $ | 6,413,561 | 257,133 | $ | 4,557,190 | ||||||||||
Shares issued in reinvestment of distributions | 126,876 | 2,458,866 | 150,879 | 2,516,672 | ||||||||||||
Shares redeemed | (777,719 | ) | (15,492,324 | ) | (1,321,083 | ) | (22,675,391 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | (327,519 | ) | $ | (6,619,897 | ) | (913,071 | ) | $ | (15,601,529 | ) | ||||||
| ||||||||||||||||
Class 2 Shares: | ||||||||||||||||
Shares sold | 2,781,274 | $ | 53,592,015 | 5,148,488 | $ | 89,372,157 | ||||||||||
Shares issued in reinvestment of distributions | 1,222,789 | 23,318,583 | 1,383,124 | 22,710,892 | ||||||||||||
Shares redeemed | (6,899,815 | ) | (134,339,079 | ) | (9,446,580 | ) | (158,117,049 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | (2,895,752 | ) | $ | (57,428,481 | ) | (2,914,968 | ) | $ | (46,034,000 | ) | ||||||
| ||||||||||||||||
Class 4 Shares: | ||||||||||||||||
Shares sold | 57,741 | $ | 1,130,320 | 55,672 | $ | 986,798 | ||||||||||
Shares issued on reinvestment of distributions | 1,596 | 30,729 | 317 | 5,273 | ||||||||||||
Shares redeemed | (9,274 | ) | (183,795 | ) | (4,068 | ) | (71,690 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | 50,063 | $ | 977,254 | 51,921 | $ | 920,381 | ||||||||||
| ||||||||||||||||
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 Fund 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-19
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 Trust’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, 2011, 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, 2010, the capital loss carryforwards were as follows:
Capital loss carryforwards expiring in: | ||||
2016 | $ | 136,099,518 | ||
2017 | 107,931,803 | |||
|
| |||
| $ | 244,031,321 | |||
|
|
Under the Regulated Investment Company Modernization Act of 2010, the Fund will be permitted to carry forward capital losses incurred in taxable years beginning after December 22, 2010 for an unlimited period. Post-enactment capital loss carryforwards will retain their character as either short-term or long-term capital losses rather than being considered short-term as under previous law. Any post-enactment capital losses generated will be required to be utilized prior to the losses incurred in pre-enactment tax years.
At June 30, 2011, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
Cost of investments | $ | 1,230,193,351 | ||
|
| |||
Unrealized appreciation | $ | 557,187,764 | ||
Unrealized depreciation | (51,560,268 | ) | ||
|
| |||
Net unrealized appreciation (depreciation) | $ | 505,627,496 | ||
|
| |||
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, 2011, aggregated $159,672,982 and $207,880,797, respectively.
FRD-20
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Rising Dividends Securities Fund
7. INVESTMENTS IN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO
The Fund invests 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. CREDIT FACILITY
The Fund, together with other U.S. registered and foreign investment funds (collectively, Borrowers), managed by Franklin Templeton Investments, are borrowers in a joint syndicated senior unsecured credit facility totaling $750 million (Global Credit Facility) which matures on January 20, 2012. This Global Credit Facility provides 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 of 0.08% based upon the unused portion of the Global Credit Facility, which is reflected in other expenses on the Statement of Operations. During the period ended June 30, 2011, the Fund did not use the Global Credit Facility.
9. FAIR VALUE MEASUREMENTS
The Fund follows 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.
For movements between the levels within the fair value hierarchy, the Fund has adopted a policy of recognizing the transfers as of the date of the underlying event which caused the movement.
The following is a summary of the inputs used as of June 30, 2011, 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 | $ | 1,688,073,564 | $ | — | $ | — | $ | 1,688,073,564 | ||||||||
Short term investments | 47,241,502 | 505,781 | — | 47,747,283 | ||||||||||||
|
| |||||||||||||||
Total Investments in Securities | $ | 1,735,315,066 | $ | 505,781 | $ | — | $ | 1,735,820,847 | ||||||||
|
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aFor detailed industry descriptions, see the accompanying Statement of Investments.
FRD-21
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Rising Dividends Securities Fund
10. NEW ACCOUNTING PRONOUNCEMENTS
In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (IFRS). The amendments in the ASU will improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRS and include new guidance for certain fair value measurement principles and disclosure requirements. The ASU is effective for interim and annual periods beginning after December 15, 2011. The Fund is currently evaluating the impact, if any, of applying this provision.
11. SUBSEQUENT EVENTS
The Fund has evaluated subsequent events through the issuance of the financial statements and determined that no events have occurred that require disclosure.
FRD-22
FRANKLIN SMALL CAP VALUE SECURITIES FUND
This semiannual report for Franklin Small Cap Value Securities Fund covers the period ended June 30, 2011.
Performance Summary as of 6/30/11
Franklin Small Cap Value Securities Fund – Class 4 delivered a +2.25% total return for the six-month period ended 6/30/11.
Performance reflects the Fund’s Class 4 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 4
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. For this Fund, small-capitalization companies are those with market capitalizations under $3.5 billion at the time of purchase. The Fund invests generally in equity securities of companies that the manager believes are undervalued and have the potential for capital appreciation.
Performance Overview
You can find the Fund’s six-month total return in the Performance Summary. The Fund underperformed its benchmark, the Russell 2500TM Value Index, which rose 6.10% 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
The U.S. economy expanded despite geopolitical and inflationary pressures from around the globe during the six-month period ended June 30, 2011. Business activity increased and consumer spending stayed above pre-recession levels. The U.S. has been a key engine in a sustained global manufacturing expansion as international trade volume continued to increase, albeit at a moderate pace. Worldwide demand for capital goods aided U.S. manufacturing profits and increased employment in the industry.
The unemployment rate improved in the first quarter when job creation began to gain some traction. However, government payrolls continued to trend down and job creation slowed in the second quarter, causing the unemployment rate to end the period at 9.2% in June.2 Consumer spending rose for 11 consecutive months through May but declined in June as concerns about job growth and rising gasoline and food prices dampened consumer confidence. To offset the disruption of global oil supply caused by the conflicts in Libya, the International Energy Agency announced in June the release of 60 million barrels of oil in July from strategic reserves of the U.S. and 27 other nations. The U.S. financial system appeared closer to a full recovery, although the country still faced challenges dealing with housing market weakness and massive debt at period-end.
1. Source: © 2011 Morningstar. One cannot invest directly in an index, and an index is not representative of the Fund’s portfolio. Please see Index Descriptions following the Fund Summaries.
2. 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 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. The Fund may have significant investments in particular sectors from time to time, such as financial services and energy, and may be at greater risk of 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 manager applies various techniques and analyses in making investment decisions for the Fund, but there can be no guarantee that these decisions will produce the desired results. The Fund’s prospectus also includes a description of the main investment risks.
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Inflation at the consumer, producer and trade levels rose across much of the world, but in the U.S. it remained relatively contained. As a result, the Federal Reserve Board (Fed) maintained its accommodative monetary policy while ending its second round of quantitative easing on June 30. The Fed said, however, it would continue to purchase Treasuries with proceeds from maturing debt in an effort to support economic growth.
Investors’ attitudes shifted with each release of economic, regulatory and geopolitical news, causing equity market volatility to increase globally. U.S. investors weathered international events that included revolutions and civil unrest across the Middle East and North Africa, the multiple crises triggered by Japan’s earthquake and tsunami, and sovereign debt worries and credit downgrades in Europe. Ultimately, stock indexes produced solid gains during the six months under review as domestic and global equity markets rose amid generally improving economic signs and record-high corporate earnings growth.
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, 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, significant contributors to Fund performance came from the industrials and energy sectors.3 In the industrials sector, railcar and wind tower manufacturer Trinity Industries, fluid handling products manufacturer Graco, air compressor and blower manufacturer Gardner Denver, industrial goods manufacturer Nordson and construction materials manufacturer Carlisle boosted
3. The industrials sector comprises aerospace and defense, building products, commercial and professional services, construction and engineering, electrical equipment, industrial conglomerates, machinery, trading companies and distributors, and transportation in the SOI.
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results. Diversified energy company Unit Corp., oil and gas equipment and services company Oil States International, and offshore energy company Helix Energy Solutions Group were among energy sector holdings that benefited performance. In the consumer discretionary sector, men’s apparel retailer The Men’s Wearhouse and new holding GameStop, a video game retailer, also helped results.4
Detractors from performance included some financials sector holdings such as regional bank TrustCo Bank Corp. NY and insurers Protective Life and Old Republic International.5 Several consumer discretionary holdings also hindered results, including home furnishing provider Hooker Furniture, shoe wholesaler and retailer Brown Shoe, and recreational vehicle manufacturers Thor Industries and Winnebago Industries. Lumber and building products provider Universal Forest Products and cabinet manufacturer American Woodmark in the industrials sector also detracted from performance, as did semiconductor equipment manufacturer Cohu in the information technology sector.6
In addition to purchasing shares of GameStop during the reporting period, the Fund initiated five positions in what we considered attractively valued securities: aircraft-related aftermarket services provider AAR Corp., specialty industrial components manufacturer Enpro Industries, flexible circuit material provider Multi Fineline Electronix, regional financial services company Oriental Financial Group and graphics services company Schawk. We also added to existing positions in Cato, A. Schulman and Transatlantic Holdings, among others. We liquidated three positions during the period: Bassett Furniture Industries, Erie Indemnity and Westlake Chemical. We made significant reductions to holdings in Graco, Mettler-Toledo International, Nordson and Warnaco Group and made smaller reductions to several other positions.
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.
6. The information technology sector comprises semiconductors and semiconductor equipment, and technology hardware and equipment in the SOI.
Top 10 Holdings
Franklin Small Cap Value Securities Fund
6/30/11
Company Sector/Industry | % of Total Net Assets | |||
| Trinity Industries Inc. | 1.9% | |||
| Machinery | ||||
| Bristow Group Inc. | 1.8% | |||
| Energy | ||||
| Autoliv Inc. (Sweden) | 1.8% | |||
| Automobiles & Components | ||||
| Rowan Cos. Inc. | 1.8% | |||
| Energy | ||||
| Tidewater Inc. | 1.7% | |||
| Energy | ||||
| Protective Life Corp. | 1.7% | |||
| Insurance | ||||
| Thor Industries Inc. | 1.6% | |||
| Automobiles & Components | ||||
| Mueller Industries Inc. | 1.5% | |||
| Machinery | ||||
| Gardner Denver Inc. | 1.5% | |||
| Machinery | ||||
| Benchmark Electronics Inc. | 1.5% | |||
| Technology Hardware & Equipment | ||||
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).
FSV-4
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, 2011, 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.
FSV-5
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 4
FSV-6
\
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 4 | Beginning Account Value 1/1/11 | Ending Account Value 6/30/11 | Fund-Level Expenses Incurred During Period* 1/1/11–6/30/11 | |||||||||
Actual | $ | 1,000 | $ | 1,022.50 | $ | 5.01 | ||||||
Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,019.84 | $ | 5.01 | ||||||
*Expenses are calculated using the most recent six-month annualized expense ratio for the Fund’s Class 4 shares (1.00%), 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.
FSV-7
Franklin Templeton Variable Insurance Products Trust
Financial Highlights
Franklin Small Cap Value Securities Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 1 | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 16.55 | $ | 13.00 | $ | 10.73 | $ | 17.38 | $ | 19.07 | $ | 17.02 | ||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.07 | 0.14 | 0.15 | 0.24 | 0.22 | 0.18 | ||||||||||||||||||
Net realized and unrealized gains (losses) | 0.33 | 3.54 | 2.86 | (5.44 | ) | (0.44 | ) | 2.69 | ||||||||||||||||
Total from investment operations | 0.40 | 3.68 | 3.01 | (5.20 | ) | (0.22 | ) | 2.87 | ||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income | (0.15 | ) | (0.13 | ) | (0.22 | ) | (0.23 | ) | (0.17 | ) | (0.16 | ) | ||||||||||||
Net realized gains | — | — | (0.52 | ) | (1.22 | ) | (1.30 | ) | (0.66 | ) | ||||||||||||||
Total distributions | (0.15 | ) | (0.13 | ) | (0.74 | ) | (1.45 | ) | (1.47 | ) | (0.82 | ) | ||||||||||||
Net asset value, end of period | $ | 16.80 | $ | 16.55 | $ | 13.00 | $ | 10.73 | $ | 17.38 | $ | 19.07 | ||||||||||||
Total returnc | 2.45% | 28.49% | 29.54% | (32.87)% | (2.14)% | 17.30% | ||||||||||||||||||
Ratios to average net assetsd | ||||||||||||||||||||||||
Expenses | 0.65% | 0.67% | 0.68% | e | 0.67% | e | 0.64% | e | 0.65% | e | ||||||||||||||
Net investment income | 0.84% | 0.98% | 1.29% | 1.62% | 1.13% | 0.97% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 45,007 | $ | 47,300 | $ | 42,428 | $ | 34,901 | $ | 57,045 | $ | 73,154 | ||||||||||||
Portfolio turnover rate | 7.11% | 15.92% | 6.68% | 16.98% | 16.27% | 16.43% | f | |||||||||||||||||
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 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.
FSV-8
Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Franklin Small Cap Value Securities Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 2 | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 16.25 | $ | 12.77 | $ | 10.55 | $ | 17.10 | $ | 18.79 | $ | 16.79 | ||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.05 | 0.10 | 0.12 | 0.20 | 0.17 | 0.13 | ||||||||||||||||||
Net realized and unrealized gains (losses) | 0.31 | 3.48 | 2.81 | (5.35 | ) | (0.43 | ) | 2.65 | ||||||||||||||||
Total from investment operations | 0.36 | 3.58 | 2.93 | (5.15 | ) | (0.26 | ) | 2.78 | ||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income | (0.11 | ) | (0.10 | ) | (0.19 | ) | (0.18 | ) | (0.13 | ) | (0.12 | ) | ||||||||||||
Net realized gains | — | — | (0.52 | ) | (1.22 | ) | (1.30 | ) | (0.66 | ) | ||||||||||||||
Total distributions | (0.11 | ) | (0.10 | ) | (0.71 | ) | (1.40 | ) | (1.43 | ) | (0.78 | ) | ||||||||||||
Net asset value, end of period | $ | 16.50 | $ | 16.25 | $ | 12.77 | $ | 10.55 | $ | 17.10 | $ | 18.79 | ||||||||||||
Total returnc | 2.25% | 28.22% | 29.16% | (33.02)% | (2.38)% | 16.98% | ||||||||||||||||||
Ratios to average net assetsd | ||||||||||||||||||||||||
Expenses | 0.90% | 0.92% | 0.93% | e | 0.92% | e | 0.89% | e | 0.90% | e | ||||||||||||||
Net investment income | 0.59% | 0.73% | 1.04% | 1.37% | 0.88% | 0.72% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 1,317,643 | $ | 1,362,292 | $ | 1,109,855 | $ | 784,773 | $ | 1,177,367 | $ | 1,240,892 | ||||||||||||
Portfolio turnover rate | 7.11% | 15.92% | 6.68% | 16.98% | 16.27% | 16.43% | f | |||||||||||||||||
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 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.
FSV-9
Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Franklin Small Cap Value Securities Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||||||
| Class 4 | 2010 | 2009 | 2008a | |||||||||||||
Per share operating performance | ||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||
Net asset value, beginning of period | $ | 16.44 | $ | 12.92 | $ | 10.70 | $ | 16.42 | ||||||||
Income from investment operationsb: | ||||||||||||||||
Net investment incomec | 0.04 | 0.09 | 0.11 | 0.15 | ||||||||||||
Net realized and unrealized gains (losses) | 0.32 | 3.53 | 2.84 | (4.42 | ) | |||||||||||
Total from investment operations | 0.36 | 3.62 | 2.95 | (4.27 | ) | |||||||||||
Less distributions from: | ||||||||||||||||
Net investment income | (0.09 | ) | (0.10 | ) | (0.21 | ) | (0.23 | ) | ||||||||
Net realized gains | — | — | (0.52 | ) | (1.22 | ) | ||||||||||
Total distributions | (0.09 | ) | (0.10 | ) | (0.73 | ) | (1.45 | ) | ||||||||
Net asset value, end of period | $ | 16.71 | $ | 16.44 | $ | 12.92 | $ | 10.70 | ||||||||
Total returnd | 2.25% | 28.14% | 29.04% | (29.14)% | ||||||||||||
Ratios to average net assetse | ||||||||||||||||
Expenses | 1.00% | 1.02% | 1.03% | f | 1.02% | f | ||||||||||
Net investment income | 0.49% | 0.63% | 0.94% | 1.27% | ||||||||||||
Supplemental data | ||||||||||||||||
Net assets, end of period (000’s) | $ | 35,284 | $ | 39,075 | $ | 28,599 | $ | 14,850 | ||||||||
Portfolio turnover rate | 7.11% | 15.92% | 6.68% | 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 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.
FSV-10
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited)
| Franklin Small Cap Value Securities Fund | Shares | Value | ||||||||
Common Stocks 97.6% | ||||||||||
Aerospace & Defense 1.5% | ||||||||||
AAR Corp. | 318,900 | $ | 8,639,001 | |||||||
aCeradyne Inc. | 310,000 | 12,086,900 | ||||||||
| 20,725,901 | ||||||||||
Automobiles & Components 5.3% | ||||||||||
Autoliv Inc. (Sweden) | 326,800 | 25,637,460 | ||||||||
Drew Industries Inc. | 90,700 | 2,242,104 | ||||||||
Gentex Corp. | 662,500 | 20,027,375 | ||||||||
Thor Industries Inc. | 755,000 | 21,774,200 | ||||||||
aWinnebago Industries Inc. | 485,000 | 4,685,100 | ||||||||
| 74,366,239 | ||||||||||
Banks 1.9% | ||||||||||
Chemical Financial Corp. | 405,554 | 7,608,193 | ||||||||
Oriental Financial Group Inc. | 602,000 | 7,759,780 | ||||||||
Peoples Bancorp Inc. | 158,000 | 1,780,660 | ||||||||
bTrustCo Bank Corp. NY | 1,889,400 | 9,258,060 | ||||||||
| 26,406,693 | ||||||||||
Building Products 4.3% | ||||||||||
A.O. Smith Corp. | 126,700 | 5,359,410 | ||||||||
American Woodmark Corp. | 423,303 | 7,331,608 | ||||||||
Apogee Enterprises Inc. | 778,100 | 9,967,461 | ||||||||
aGibraltar Industries Inc. | 900,100 | 10,189,132 | ||||||||
Simpson Manufacturing Co. Inc. | 462,800 | 13,823,836 | ||||||||
Universal Forest Products Inc. | 528,720 | 12,668,131 | ||||||||
| 59,339,578 | ||||||||||
Commercial & Professional Services 3.0% | ||||||||||
ABM Industries Inc. | 636,100 | 14,846,574 | ||||||||
Insperity Inc. | 296,100 | 8,767,521 | ||||||||
Mine Safety Appliances Co. | 328,300 | 12,258,722 | ||||||||
Schawk Inc. | 379,300 | 6,281,208 | ||||||||
| 42,154,025 | ||||||||||
Construction & Engineering 1.8% | ||||||||||
aEMCOR Group Inc. | 273,270 | 8,009,544 | ||||||||
Granite Construction Inc. | 703,000 | 17,244,590 | ||||||||
| 25,254,134 | ||||||||||
Consumer Durables & Apparel 3.9% | ||||||||||
Brunswick Corp. | 500,000 | 10,200,000 | ||||||||
D.R. Horton Inc. | 448,900 | 5,171,328 | ||||||||
Ethan Allen Interiors Inc. | 159,000 | 3,385,110 | ||||||||
Hooker Furniture Corp. | 510,700 | 4,524,802 | ||||||||
aLa-Z-Boy Inc. | 1,089,000 | 10,748,430 | ||||||||
M.D.C. Holdings Inc. | 240,700 | 5,930,848 | ||||||||
aM/I Homes Inc. | 500,000 | 6,130,000 | ||||||||
aThe Warnaco Group Inc. | 162,600 | 8,495,850 | ||||||||
| 54,586,368 | ||||||||||
Consumer Services 1.8% | ||||||||||
Hillenbrand Inc. | 401,000 | 9,483,650 | ||||||||
Regis Corp. | 992,000 | 15,197,440 | ||||||||
| 24,681,090 | ||||||||||
FSV-11
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Franklin Small Cap Value Securities Fund | Shares | Value | ||||||||
Common Stocks (continued) | ||||||||||
Electrical Equipment 3.2% | ||||||||||
Brady Corp., A | 453,000 | $ | 14,523,180 | |||||||
Franklin Electric Co. Inc. | 199,232 | 9,353,942 | ||||||||
aPowell Industries Inc. | 168,400 | 6,146,600 | ||||||||
Roper Industries Inc. | 170,000 | 14,161,000 | ||||||||
| 44,184,722 | ||||||||||
Energy 14.0% | ||||||||||
Arch Coal Inc. | 111,500 | 2,972,590 | ||||||||
aAtwood Oceanics Inc. | 405,400 | 17,890,302 | ||||||||
Bristow Group Inc. | 503,800 | 25,703,876 | ||||||||
CONSOL Energy Inc. | 68,500 | 3,320,880 | ||||||||
Energen Corp. | 219,000 | 12,373,500 | ||||||||
aGlobal Industries Ltd. | 1,575,600 | 8,634,288 | ||||||||
aHelix Energy Solutions Group Inc. | 768,900 | 12,732,984 | ||||||||
aOil States International Inc. | 255,200 | 20,393,032 | ||||||||
bOverseas Shipholding Group Inc. | 371,000 | 9,994,740 | ||||||||
Peabody Energy Corp. | 103,200 | 6,079,512 | ||||||||
aRowan Cos. Inc. | 638,100 | 24,764,661 | ||||||||
Teekay Corp. (Canada) | 245,431 | 7,578,909 | ||||||||
Tidewater Inc. | 443,700 | 23,875,497 | ||||||||
aUnit Corp. | 323,400 | 19,704,762 | ||||||||
| 196,019,533 | ||||||||||
Food & Staples Retailing 0.7% | ||||||||||
Casey’s General Stores Inc. | 215,600 | 9,486,400 | ||||||||
Food, Beverage & Tobacco 1.0% | ||||||||||
Lancaster Colony Corp. | 238,900 | 14,529,898 | ||||||||
Health Care Equipment & Services 2.6% | ||||||||||
STERIS Corp. | 412,500 | 14,429,250 | ||||||||
Teleflex Inc. | 241,300 | 14,733,778 | ||||||||
West Pharmaceutical Services Inc. | 172,700 | 7,557,352 | ||||||||
| 36,720,380 | ||||||||||
Industrial Conglomerates 1.2% | ||||||||||
Carlisle Cos. Inc. | 353,400 | 17,397,882 | ||||||||
Insurance 11.7% | ||||||||||
American National Insurance Co. | 79,000 | 6,122,500 | ||||||||
Arthur J. Gallagher & Co. | 168,200 | 4,800,428 | ||||||||
Aspen Insurance Holdings Ltd. | 550,100 | 14,154,073 | ||||||||
The Hanover Insurance Group Inc. | 278,000 | 10,483,380 | ||||||||
HCC Insurance Holdings Inc. | 188,200 | 5,928,300 | ||||||||
Montpelier Re Holdings Ltd. (Bermuda) | 649,000 | 11,682,000 | ||||||||
Old Republic International Corp. | 1,513,000 | 17,777,750 | ||||||||
Protective Life Corp. | 1,015,000 | 23,476,950 | ||||||||
RLI Corp. | 138,700 | 8,588,304 | ||||||||
StanCorp Financial Group Inc. | 373,000 | 15,736,870 | ||||||||
Tower Group Inc. | 659,900 | 15,718,818 | ||||||||
Transatlantic Holdings Inc. | 335,000 | 16,418,350 | ||||||||
Validus Holdings Ltd. (Bermuda) | 422,700 | 13,082,565 | ||||||||
| 163,970,288 | ||||||||||
FSV-12
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Franklin Small Cap Value Securities Fund | Shares | Value | ||||||||
Common Stocks (continued) | ||||||||||
Machinery 13.7% | ||||||||||
aAstec Industries Inc. | 330,200 | $ | 12,210,796 | |||||||
Briggs & Stratton Corp. | 448,200 | 8,901,252 | ||||||||
CIRCOR International Inc. | 131,502 | 5,632,231 | ||||||||
aCNH Global NV (Netherlands) | 72,700 | 2,809,855 | ||||||||
aEnPro Industries Inc. | 221,400 | 10,642,698 | ||||||||
Gardner Denver Inc. | 256,900 | 21,592,445 | ||||||||
Graco Inc. | 343,800 | 17,416,908 | ||||||||
Kennametal Inc. | 397,300 | 16,770,033 | ||||||||
Lincoln Electric Holdings Inc. | 419,000 | 15,021,150 | ||||||||
Mueller Industries Inc. | 531,200 | 20,137,792 | ||||||||
Nordson Corp. | 209,800 | 11,507,530 | ||||||||
Timken Co. | 90,000 | 4,536,000 | ||||||||
Trinity Industries Inc. | 764,400 | 26,662,272 | ||||||||
aWabash National Corp. | 923,300 | 8,651,321 | ||||||||
Watts Water Technologies Inc., A | 257,200 | 9,107,452 | ||||||||
| 191,599,735 | ||||||||||
Materials 7.1% | ||||||||||
A. Schulman Inc. | 425,100 | 10,708,269 | ||||||||
AptarGroup Inc. | 198,600 | 10,394,724 | ||||||||
Cabot Corp. | 324,100 | 12,921,867 | ||||||||
Glatfelter | 311,200 | 4,786,256 | ||||||||
Reliance Steel & Aluminum Co. | 377,500 | 18,742,875 | ||||||||
RPM International Inc. | 753,600 | 17,347,872 | ||||||||
Sensient Technologies Corp. | 195,300 | 7,239,771 | ||||||||
Steel Dynamics Inc. | 937,100 | 15,227,875 | ||||||||
United States Steel Corp. | 43,600 | 2,007,344 | ||||||||
| 99,376,853 | ||||||||||
Pharmaceuticals, Biotechnology & Life Sciences 1.5% | ||||||||||
aMettler-Toledo International Inc. | 47,500 | 8,011,825 | ||||||||
Pharmaceutical Product Development Inc. | 495,800 | 13,307,272 | ||||||||
| 21,319,097 | ||||||||||
Retailing 9.1% | ||||||||||
Brown Shoe Co. Inc. | 982,000 | 10,458,300 | ||||||||
The Cato Corp., A | 433,800 | 12,493,440 | ||||||||
Christopher & Banks Corp. | 1,260,000 | 7,245,000 | ||||||||
Fred’s Inc. | 818,300 | 11,808,069 | ||||||||
aGameStop Corp., A | 569,000 | 15,175,230 | ||||||||
Group 1 Automotive Inc. | 502,000 | 20,672,360 | ||||||||
J.C. Penney Co. Inc. | 273,000 | 9,429,420 | ||||||||
The Men’s Wearhouse Inc. | 526,317 | 17,736,883 | ||||||||
aPier 1 Imports Inc. | 624,500 | 7,225,465 | ||||||||
a,bSaks Inc. | 532,548 | 5,948,561 | ||||||||
aTuesday Morning Corp. | 507,900 | 2,361,735 | ||||||||
aWest Marine Inc. | 678,900 | 7,040,193 | ||||||||
| 127,594,656 | ||||||||||
Semiconductors & Semiconductor Equipment 0.8% | ||||||||||
Cohu Inc. | 826,500 | 10,835,415 | ||||||||
Technology Hardware & Equipment 2.6% | ||||||||||
aBenchmark Electronics Inc. | 1,271,000 | 20,971,500 | ||||||||
aMulti-Fineline Electronix Inc. | 82,900 | 1,791,469 | ||||||||
aRofin-Sinar Technologies Inc. | 395,800 | 13,516,570 | ||||||||
| 36,279,539 | ||||||||||
FSV-13
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Franklin Small Cap Value Securities Fund | Shares | Value | ||||||||
Common Stocks (continued) | ||||||||||
Trading Companies & Distributors 0.5% | ||||||||||
Applied Industrial Technologies Inc. | 178,700 | $ | 6,363,507 | |||||||
Transportation 2.3% | ||||||||||
aGenesee & Wyoming Inc. | 292,500 | 17,152,200 | ||||||||
SkyWest Inc. | 953,500 | 14,359,710 | ||||||||
| 31,511,910 | ||||||||||
Utilities 2.1% | ||||||||||
NV Energy Inc. | 1,171,400 | 17,980,990 | ||||||||
PNM Resources Inc. | 708,000 | 11,851,920 | ||||||||
| 29,832,910 | ||||||||||
Total Common Stocks (Cost $1,034,965,499) | 1,364,536,753 | |||||||||
| Principal Amount | ||||||||||
Corporate Bonds (Cost $1,484,925) 0.1% | ||||||||||
Machinery 0.1% | ||||||||||
Mueller Industries Inc., 6.00%, 11/01/14 | $ | 1,494,000 | 1,494,000 | |||||||
Total Investments before Short Term Investments (Cost $1,036,450,424) | 1,366,030,753 | |||||||||
| Shares | ||||||||||
Short Term Investments 3.5% | ||||||||||
Money Market Funds (Cost $33,128,039) 2.4% | ||||||||||
a,cInstitutional Fiduciary Trust Money Market Portfolio | 33,128,039 | 33,128,039 | ||||||||
dInvestments from Cash Collateral Received for Loaned Securities 1.1% | ||||||||||
Money Market Funds (Cost $2,536,889) 0.2% | ||||||||||
aBNY Institutional Cash Reserve Fund, Series B | 2,536,889 | 2,029,511 | ||||||||
| Principal Amount | ||||||||||
eRepurchase Agreements 0.9% | ||||||||||
Barclays Capital Inc., 0.01%, 7/01/11 (Maturity Value $2,500,001) | $ | 2,500,000 | 2,500,000 | |||||||
BNP Paribas Securities Corp., 0.04%, 7/01/11 (Maturity Value $3,049,665) | 3,049,662 | 3,049,662 | ||||||||
Credit Suisse Securities (USA) LLC, 0.01%, 7/01/11 (Maturity Value $2,500,001) | 2,500,000 | 2,500,000 | ||||||||
Deutsche Bank Securities Inc., 0.02%, 7/01/11 (Maturity Value $2,500,001) | 2,500,000 | 2,500,000 | ||||||||
HSBC Securities (USA) Inc., 0.01%, 7/01/11 (Maturity Value $2,000,001) | 2,000,000 | 2,000,000 | ||||||||
FSV-14
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Franklin Small Cap Value Securities Fund | Principal Amount | Value | ||||||||
Repurchase Agreements (continued) | ||||||||||
RBS Securities Inc., 0.01%, 7/01/11 (Maturity Value $291,020) | $ | 291,020 | $ | 291,020 | ||||||
Total Repurchase Agreements (Cost $12,840,682) | 12,840,682 | |||||||||
Total Investments from Cash Collateral Received for Loaned Securities | 14,870,193 | |||||||||
Total Investments (Cost $1,084,956,034) 101.2% | 1,414,028,985 | |||||||||
Other Assets, less Liabilities (1.2)% | (16,094,715 | ) | ||||||||
Net Assets 100.0% | $ | 1,397,934,270 | ||||||||
aNon-income producing.
bA portion or all of the security is on loan at June 30, 2011. See Note 1(c).
cSee Note 7 regarding investments in the Institutional Fiduciary Trust Money Market Portfolio.
dSee Note 1(c) regarding securities on loan.
eSee Note 1(b) regarding repurchase agreements.
The accompanying notes are an integral part of these financial statements.
FSV-15
Franklin Templeton Variable Insurance Products Trust
Financial Statements
Statement of Assets and Liabilities
June 30, 2011 (unaudited)
| Franklin Small Cap Value Securities Fund | ||||
Assets: | ||||
Investments in securities: | ||||
Cost - Unaffiliated issuers | $ | 1,038,987,313 | ||
Cost - Sweep Money Fund (Note 7) | 33,128,039 | |||
Cost - Repurchase agreements | 12,840,682 | |||
Total cost of investments | $ | 1,084,956,034 | ||
Value - Unaffiliated issuers | $ | 1,368,060,264 | ||
Value - Sweep Money Fund (Note 7) | 33,128,039 | |||
Value - Repurchase agreements | 12,840,682 | |||
Total value of investments (includes securities loaned in the amount of $14,669,319) | 1,414,028,985 | |||
Receivables: | ||||
Investment securities sold | 543,312 | |||
Capital shares sold | 795,399 | |||
Dividends and interest | 770,071 | |||
Other assets | 371 | |||
Total assets | 1,416,138,138 | |||
Liabilities: | ||||
Payables: | ||||
Investment securities purchased | 135,696 | |||
Capital shares redeemed | 1,091,343 | |||
Affiliates | 1,271,897 | |||
Payable upon return of securities loaned | 15,377,571 | |||
Accrued expenses and other liabilities | 327,361 | |||
Total liabilities | 18,203,868 | |||
Net assets, at value | $ | 1,397,934,270 | ||
Net assets consist of: | ||||
Paid-in capital | $ | 1,111,717,857 | ||
Undistributed net investment income | 4,279,415 | |||
Net unrealized appreciation (depreciation) | 329,072,951 | |||
Accumulated net realized gain (loss) | (47,135,953 | ) | ||
Net assets, at value | $ | 1,397,934,270 | ||
Class 1: | ||||
Net assets, at value | $ | 45,007,122 | ||
Shares outstanding | 2,679,569 | |||
Net asset value and maximum offering price per share | $ | 16.80 | ||
Class 2: | ||||
Net assets, at value | $ | 1,317,643,109 | ||
Shares outstanding | 79,843,565 | |||
Net asset value and maximum offering price per share | $ | 16.50 | ||
Class 4: | ||||
Net assets, at value | $ | 35,284,039 | ||
Shares outstanding | 2,111,984 | |||
Net asset value and maximum offering price per share | $ | 16.71 | ||
The accompanying notes are an integral part of these financial statements.
FSV-16
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Operations
for the six months ended June 30, 2011 (unaudited)
| Franklin Small Cap Value Securities Fund | ||||
Investment income: | ||||
Dividends | $ | 10,647,429 | ||
Interest | 46,011 | |||
Income from securities loaned | 40,613 | |||
Total investment income | 10,734,053 | |||
Expenses: | ||||
Management fees (Note 3a) | 3,584,146 | |||
Administrative fees (Note 3b) | 824,260 | |||
Distribution fees: (Note 3c) | ||||
Class 2 | 1,710,993 | |||
Class 4 | 65,709 | |||
Unaffiliated transfer agent fees | 2,236 | |||
Custodian fees (Note 4) | 10,462 | |||
Reports to shareholders | 218,015 | |||
Professional fees | 23,307 | |||
Trustees’ fees and expenses | 2,650 | |||
Other | 18,021 | |||
Total expenses | 6,459,799 | |||
Net investment income | 4,274,254 | |||
Realized and unrealized gains (losses): | ||||
Net realized gain (loss) from investments | 51,416,487 | |||
Net change in unrealized appreciation (depreciation) on investments | (22,757,763 | ) | ||
Net realized and unrealized gain (loss) | 28,658,724 | |||
Net increase (decrease) in net assets resulting from operations | $ | 32,932,978 | ||
The accompanying notes are an integral part of these financial statements.
FSV-17
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, 2011 (unaudited) | Year December 31, | |||||||
Increase (decrease) in net assets: | ||||||||
Operations: | ||||||||
Net investment income | $ | 4,274,254 | $ | 9,370,933 | ||||
Net realized gain (loss) from investments | 51,416,487 | (9,121,196 | ) | |||||
Net change in unrealized appreciation (depreciation) on investments | (22,757,763 | ) | 315,120,022 | |||||
Net increase (decrease) in net assets resulting from operations | 32,932,978 | 315,369,759 | ||||||
Distributions to shareholders from: | ||||||||
Net investment income: | ||||||||
Class 1 | (392,860 | ) | (391,013 | ) | ||||
Class 2 | (8,773,166 | ) | (9,354,014 | ) | ||||
Class 4 | (201,936 | ) | (225,374 | ) | ||||
Total distributions to shareholders | (9,367,962 | ) | (9,970,401 | ) | ||||
Capital share transactions: (Note 2) | ||||||||
Class 1 | (2,979,969 | ) | (5,400,815 | ) | ||||
Class 2 | (66,894,808 | ) | (34,566,603 | ) | ||||
Class 4 | (4,422,602 | ) | 2,352,541 | |||||
Total capital share transactions | (74,297,379 | ) | (37,614,877 | ) | ||||
Net increase (decrease) in net assets | (50,732,363 | ) | 267,784,481 | |||||
Net assets: | ||||||||
Beginning of period | 1,448,666,633 | 1,180,882,152 | ||||||
End of period | $ | 1,397,934,270 | $ | 1,448,666,633 | ||||
Undistributed net investment income included in net assets: | ||||||||
End of period | $ | 4,279,415 | $ | 9,373,123 | ||||
The accompanying notes are an integral part of these financial statements.
FSV-18
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 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 generally 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. Financial Instrument Valuation
The Fund’s investments in securities and other financial instruments are carried at fair value daily. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. Under procedures approved by the Trust’s Board of Trustees, the Fund may utilize independent pricing services, quotations from securities and financial instrument dealers, and other market sources to determine fair value.
Equity securities listed on an 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 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.
Debt securities generally trade in the over-the-counter market rather than on a securities exchange. The Fund’s pricing services use multiple valuation techniques to determine fair value. In instances where sufficient market activity exists, the pricing services may utilize a market-based approach through which quotes from market makers are used to determine fair value. In instances where sufficient market activity may not exist or is limited, the pricing services also utilize proprietary valuation models which may consider market characteristics such as benchmark yield curves, option-adjusted spreads, credit spreads, estimated default rates, coupon rates, anticipated timing of principal repayments, underlying collateral, and other unique security features in order to estimate the relevant cash flows, which are then discounted to calculate the fair value. Repurchase agreements are valued at cost, which approximates market value.
The Fund has procedures to determine the fair value of securities and other financial instruments for which market prices are not readily available or which may not be reliably priced. Under these procedures, the Fund primarily employs a market-based approach which may use related or comparable assets or liabilities, recent transactions, market multiples, book values, and other relevant information for the investment to determine the fair value of the investment. The Fund may also use an income-based valuation approach in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the investments. Due to the inherent uncertainty of valuations of such investments, the fair values may differ significantly from the values that would have been used had an active market existed.
b. Repurchase Agreements
The Fund enters 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, 2011.
FSV-19
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)
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 in a non-registered money 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.
d. Income Taxes
It is the Fund’s policy to qualify as a regulated investment company under the Internal Revenue Code. The Fund intends to distribute to shareholders substantially all of its taxable income and net realized gains to relieve it from federal income and excise taxes. As a result, no provision for U.S. federal income taxes is required. The Fund files U.S. income tax returns as well as tax returns in certain other jurisdictions. The Fund records a provision for taxes in its financial statements including penalties and interest, if any, for a tax position taken on a tax return (or expected to be taken) when it fails to meet the more likely than not (a greater than 50% probability) threshold and based on the technical merits, the tax position may not be sustained upon examination by the tax authorities. As of June 30, 2011, and for all open tax years, the Fund has determined that no provision for income tax is required in the Fund’s financial statements. Open tax years are those that remain subject to examination and are based on each tax jurisdiction statute of limitation.
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.
FSV-20
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)
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, 2011, 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, 2011 | Year Ended December 31, 2010 | |||||||||||||||
| Class 1 Shares: | Shares | Amount | Shares | Amount | ||||||||||||
Shares sold | 307,753 | $ | 5,309,769 | 487,990 | $ | 7,004,812 | ||||||||||
Shares issued in reinvestment of distributions | 24,646 | 392,860 | 28,110 | 391,013 | ||||||||||||
Shares redeemed | (510,015 | ) | (8,682,598 | ) | (923,527 | ) | (12,796,640 | ) | ||||||||
Net increase (decrease) | (177,616 | ) | $ | (2,979,969 | ) | (407,427 | ) | $ | (5,400,815 | ) | ||||||
Class 2 Shares: | ||||||||||||||||
Shares sold | 5,828,924 | $ | 97,013,525 | 16,505,195 | $ | 234,092,954 | ||||||||||
Shares issued in reinvestment of distributions | 559,870 | 8,773,166 | 684,273 | 9,354,014 | ||||||||||||
Shares redeemed | (10,379,199 | ) | (172,681,499 | ) | (20,285,779 | ) | (278,013,571 | ) | ||||||||
Net increase (decrease) | (3,990,405 | ) | $ | (66,894,808 | ) | (3,096,311 | ) | $ | (34,566,603 | ) | ||||||
Class 4 Shares: | ||||||||||||||||
Shares sold | 136,220 | $ | 2,302,328 | 706,330 | $ | 9,842,641 | ||||||||||
Shares issued on reinvestment of distributions | 12,732 | 201,936 | 16,284 | 225,374 | ||||||||||||
Shares redeemed | (413,556 | ) | (6,926,866 | ) | (558,980 | ) | (7,715,474 | ) | ||||||||
Net increase (decrease) | (264,604 | ) | $ | (4,422,602 | ) | 163,634 | $ | 2,352,541 | ||||||||
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 Fund 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 |
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Small Cap Value Securities Fund
3. TRANSACTIONS WITH AFFILIATES (continued)
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 |
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 Trust’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, 2011, 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, 2010, the capital loss carryforwards were as follows:
Capital loss carryforwards expiring in: | ||||
2017 | $ | 76,440,230 | ||
2018 | 22,008,308 | |||
|
| |||
| $ | 98,448,538 | |||
|
|
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Small Cap Value Securities Fund
5. INCOME TAXES (continued)
Under the Regulated Investment Company Modernization Act of 2010, the Fund will be permitted to carry forward capital losses incurred in taxable years beginning after December 22, 2010 for an unlimited period. Post-enactment capital loss carryforwards will retain their character as either short-term or long-term capital losses rather than being considered short-term as under previous law. Any post-enactment capital losses generated will be required to be utilized prior to the losses incurred in pre-enactment tax years.
At June 30, 2011, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
Cost of investments | $ | 1,085,032,749 | ||
|
| |||
Unrealized appreciation | $ | 441,658,245 | ||
Unrealized depreciation | (112,662,009 | ) | ||
|
| |||
Net unrealized appreciation (depreciation) | $ | 328,996,236 | ||
|
| |||
Net investment income differs for financial statement and tax purposes primarily due to differing treatments of bond discounts and premiums.
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, 2011, aggregated $100,709,550 and $145,326,666, respectively.
7. INVESTMENTS IN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO
The Fund invests 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. CREDIT FACILITY
The Fund, together with other U.S. registered and foreign investment funds (collectively, Borrowers), managed by Franklin Templeton Investments, are borrowers in a joint syndicated senior unsecured credit facility totaling $750 million (Global Credit Facility) which matures on January 20, 2012. This Global Credit Facility provides 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 of 0.08% based upon the unused portion of the Global Credit Facility, which is reflected in other expenses on the Statement of Operations. During the period ended June 30, 2011, the Fund did not use the Global Credit Facility.
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Small Cap Value Securities Fund
9. FAIR VALUE MEASUREMENTS
The Fund follows 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.
For movements between the levels within the fair value hierarchy, the Fund has adopted a policy of recognizing the transfers as of the date of the underlying event which caused the movement.
The following is a summary of the inputs used as of June 30, 2011, 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 | $ | 1,364,536,753 | $ | — | $ | — | $ | 1,364,536,753 | ||||||||
Corporate Bonds | — | 1,494,000 | — | 1,494,000 | ||||||||||||
Short Term Investments | 33,128,039 | 14,870,193 | — | 47,998,232 | ||||||||||||
|
| |||||||||||||||
Total Investments in Securities | $ | 1,397,664,792 | $ | 16,364,193 | $ | — | $ | 1,414,028,985 | ||||||||
|
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aFor detailed industry descriptions, see the accompanying Statement of Investments.
10. NEW ACCOUNTING PRONOUNCEMENTS
In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (IFRS). The amendments in the ASU will improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRS and include new guidance for certain fair value measurement principles and disclosure requirements. The ASU is effective for interim and annual periods beginning after December 15, 2011. The Fund is currently evaluating the impact, if any, of applying this provision.
11. SUBSEQUENT EVENTS
The Fund has evaluated subsequent events through the issuance of the financial statements 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, 2011.
Performance Summary as of 6/30/11
Franklin Small-Mid Cap Growth Securities Fund – Class 4 delivered a +7.64% total return for the six-month period ended 6/30/11.
Performance reflects the Fund’s Class 4 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 4
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 (midcap) companies. For this Fund, small cap companies are those within the market capitalization range of companies in the Russell 2500TM 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 produced a +9.59% total return, but outperformed its broad benchmark, the Standard and Poor’s 500 Index, which posted a 6.02% total return, for the same period.2
Economic and Market Overview
The U.S. economy expanded despite geopolitical and inflationary pressures from around the globe during the six-month period ended June 30, 2011. Business activity increased and consumer spending stayed above pre-recession levels. The U.S. has been a key engine in a sustained global manufacturing expansion as international trade volume continued to increase, albeit at a moderate pace. Worldwide demand for capital goods aided U.S. manufacturing profits and increased employment in the industry.
The unemployment rate improved in the first quarter when job creation began to gain some traction. However, government payrolls continued to trend down and job creation slowed in the second quarter, causing the unemployment rate to end the period at 9.2%.3 Consumer spending rose noticeably for 11 consecutive months through May but declined in June as concerns about job growth and rising gasoline and food prices dampened consumer confidence. To offset the disruption of global oil supply caused by the conflicts in Libya, the International Energy Agency announced in June the release of 60 million barrels of oil in July from strategic reserves of the U.S. and 27 other nations. The U.S. financial system appeared closer to a full recovery, although the country still faced challenges dealing with housing market weakness and massive debt at period-end.
1. Please see Index Descriptions following the Fund Summaries.
2. Source: © 2011Morningstar. One cannot invest directly in an index, and an index is not 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 particular sectors from time to time, such as technology, which has been among the most volatile sectors in the market and involves special risks. The manager applies various techniques and analyses in making investment decisions for the Fund, but there can be no guarantee that these decisions will produce the desired results. The Fund’s prospectus also includes a description of the main investment risks.
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Inflation at the consumer, producer and trade levels rose across much of the world, but in the U.S. it remained relatively contained. As a result, the Federal Reserve Board (Fed) maintained its accommodative monetary policy while ending its second round of quantitative easing on June 30. The Fed said, however, it would continue to purchase Treasuries with proceeds from maturing debt in an effort to support economic growth.
Investors’ attitudes shifted with each release of economic, regulatory and geopolitical news, causing equity market volatility to increase globally. U.S. investors weathered international events that included revolutions and civil unrest across the Middle East and North Africa, the multiple crises triggered by Japan’s earthquake and tsunami, and sovereign debt worries and credit downgrades in Europe. Ultimately, stock indexes produced solid gains during the six months under review as domestic and global equity markets rose amid generally improving economic signs and record-high corporate earnings growth.
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 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
During the six months under review, stock selection in the information technology sector boosted Fund performance relative to the Russell Midcap Growth Index. Our position in wireless technology provider Atheros Communications, which was acquired by Qualcomm in January, contributed to relative results.4 Semiconductor manufacturer Varian Semiconductor Equipment rose in value and also supported the
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Fund’s relative performance.4 In addition, significant individual contributors included consumer discretionary holding Ulta Salon Cosmetics & Fragrance, a cosmetic retailer; consumer staples stock Hansen Natural, a popular consumer beverage maker; and energy holding SM Energy, an oil and gas company.
In contrast, stock selection in the health care sector, more specifically weak returns from rural hospital operator Community Health Systems and pharmaceutical holding Salix Pharmaceuticals,5 hindered relative performance. In addition, stock selection in the financials sector detracted from the Fund’s relative performance, where banking and trust services provider Northern Trust lost value.5 Major individual detractors included energy sector company and major coal producer Alpha Natural Resources, and information technology holding SMART Technologies,5 a leading provider of interactive whiteboards.
Thank you for your participation in Franklin Small-Mid Cap Growth Securities Fund. We look forward to serving your future investment needs.
4. Sold by period-end.
5. This holding is not an index component.
The foregoing information reflects our analysis, opinions and portfolio holdings as of June 30, 2011 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 Small-Mid Cap Growth Securities Fund
6/30/11
Company Sector/Industry | % of Total Net Assets | |||
| SM Energy Co. | 2.3% | |||
| Energy | ||||
| Celanese Corp. | 2.0% | |||
| Materials | ||||
| Mettler-Toledo International Inc. | 1.6% | |||
| Health Care | ||||
| AMETEK Inc. | 1.6% | |||
| Industrials | ||||
| Nuance Communications Inc. | 1.6% | |||
| Information Technology | ||||
| BorgWarner Inc. | 1.5% | |||
| Consumer Discretionary | ||||
| Gardner Denver Inc. | 1.4% | |||
| Industrials | ||||
| Trimble Navigation Ltd. | 1.4% | |||
| Information Technology | ||||
| Waters Corp. | 1.4% | |||
| Health Care | ||||
| Wolverine World Wide Inc. | 1.4% | |||
| Consumer Discretionary | ||||
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 Small-Mid Cap Growth Securities Fund Class 4
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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 4 | Beginning Account Value 1/1/11 | Ending Account Value 6/30/11 | Fund-Level Expenses Incurred During Period* 1/1/11–6/30/11 | |||||||||
Actual | $ | 1,000 | $ | 1,076.40 | $ | 5.82 | ||||||
Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,019.19 | $ | 5.66 | ||||||
*Expenses are calculated using the most recent six-month annualized expense ratio for the Fund’s Class 4 shares (1.13%), 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 (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 1 | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||||||
| ||||||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 22.21 | $ | 17.36 | $ | 12.06 | $ | 23.39 | $ | 22.51 | $ | 20.66 | ||||||||||||
| ||||||||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment income (loss)b | (0.03 | ) | (0.01 | ) | (0.10 | )c | 0.01 | (0.02 | ) | — | d | |||||||||||||
Net realized and unrealized gains (losses) | 1.78 | 4.86 | 5.40 | (8.98 | ) | 2.65 | 1.85 | |||||||||||||||||
| ||||||||||||||||||||||||
Total from investment operations | 1.75 | 4.85 | 5.30 | (8.97 | ) | 2.63 | 1.85 | |||||||||||||||||
| ||||||||||||||||||||||||
Less distributions from net realized gains | — | — | — | (2.36 | ) | (1.75 | ) | — | ||||||||||||||||
| ||||||||||||||||||||||||
Net asset value, end of period | $ | 23.96 | $ | 22.21 | $ | 17.36 | $ | 12.06 | $ | 23.39 | $ | 22.51 | ||||||||||||
| ||||||||||||||||||||||||
Total returne | 7.88% | 27.94% | 43.95% | (42.34)% | 11.51% | 8.95% | ||||||||||||||||||
Ratios to average net assetsf | ||||||||||||||||||||||||
Expenses | 0.78% | 0.79% | 0.80% | g | 0.76% | g | 0.74% | g | 0.76% | g | ||||||||||||||
Net investment income (loss) | (0.23)% | (0.07)% | (0.72)% | c | 0.06% | (0.10)% | (0.02)% | |||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 90,969 | $ | 89,826 | $ | 79,670 | $ | 63,531 | $ | 127,602 | $ | 135,402 | ||||||||||||
Portfolio turnover rate | 22.46% | 46.69% | 63.93% | 60.12% | 66.94% | 50.08% | ||||||||||||||||||
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 (0.22)%.
dAmount rounds to less than $0.01 per share.
eTotal return does not include 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 (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 2 | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 21.54 | $ | 16.87 | $ | 11.75 | $ | 22.91 | $ | 22.13 | $ | 20.36 | ||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment income (loss)b | (0.05 | ) | (0.06 | ) | (0.13 | )c | (0.03 | ) | (0.08 | ) | (0.06 | ) | ||||||||||||
Net realized and unrealized gains (losses) | 1.70 | 4.73 | 5.25 | (8.77 | ) | 2.61 | 1.83 | |||||||||||||||||
Total from investment operations | 1.65 | 4.67 | 5.12 | (8.80 | ) | 2.53 | 1.77 | |||||||||||||||||
Less distributions from net realized gains | — | — | — | (2.36 | ) | (1.75 | ) | — | ||||||||||||||||
Net asset value, end of period | $ | 23.19 | $ | 21.54 | $ | 16.87 | $ | 11.75 | $ | 22.91 | $ | 22.13 | ||||||||||||
Total returnd | 7.66% | 27.68% | 43.57% | (42.49)% | 11.24% | 8.69% | ||||||||||||||||||
Ratios to average net assetse | ||||||||||||||||||||||||
Expenses | 1.03% | 1.04% | 1.05% | f | 1.01% | f | 0.99% | f | 1.01% | f | ||||||||||||||
Net investment income (loss) | (0.48)% | (0.32)% | (0.97)% | c | (0.19)% | (0.35)% | (0.27)% | |||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 900,543 | $ | 939,481 | $ | 813,480 | $ | 614,053 | $ | 1,217,177 | $ | 1,184,521 | ||||||||||||
Portfolio turnover rate | 22.46% | 46.69% | 63.93% | 60.12% | 66.94% | 50.08% | ||||||||||||||||||
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 (0.47)%.
dTotal return does not include 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 (unaudited) | Year Ended December 31, | |||||||||||||||
| Class 4 | 2010 | 2009 | 2008a | |||||||||||||
Per share operating performance | ||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||
Net asset value, beginning of period | $ | 21.98 | $ | 17.24 | $ | 12.02 | $ | 20.60 | ||||||||
Income from investment operationsb: | ||||||||||||||||
Net investment income (loss)c | (0.07 | ) | (0.07 | ) | (0.15 | )d | 0.02 | |||||||||
Net realized and unrealized gains (losses) | 1.75 | 4.81 | 5.37 | (6.24 | ) | |||||||||||
Total from investment operations | 1.68 | 4.74 | 5.22 | (6.22 | ) | |||||||||||
Less distributions from net realized gains | — | — | — | (2.36 | ) | |||||||||||
Net asset value, end of period | $ | 23.66 | $ | 21.98 | $ | 17.24 | $ | 12.02 | ||||||||
Total returne | 7.64% | 27.49% | 43.43% | (34.74)% | ||||||||||||
Ratios to average net assetsf | ||||||||||||||||
Expenses | 1.13% | 1.14% | 1.15% | g | 1.11% | g | ||||||||||
Net investment income (loss) | (0.58)% | (0.42)% | (1.07)% | d | (0.29)% | |||||||||||
Supplemental data | ||||||||||||||||
Net assets, end of period (000’s) | $ | 16,001 | $ | 15,413 | $ | 11,029 | $ | 3,538 | ||||||||
Portfolio turnover rate | 22.46% | 46.69% | 63.93% | 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 (0.57)%.
eTotal return does not include 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.
FSC-9
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited)
| Franklin Small-Mid Cap Growth Securities Fund | Shares | Value | ||||||
Common Stocks 97.1% | ||||||||
Consumer Discretionary 20.7% | ||||||||
Arcos Dorados Holdings Inc. (Argentina) | 168,100 | $ | 3,545,230 | |||||
a,bBlue Nile Inc. | 73,500 | 3,232,530 | ||||||
aBorgWarner Inc. | 192,000 | 15,511,680 | ||||||
aBuffalo Wild Wings Inc. | 139,300 | 9,236,983 | ||||||
aChipotle Mexican Grill Inc. | 35,500 | 10,940,745 | ||||||
aCtrip.com International Ltd., ADR (China) | 72,000 | 3,101,760 | ||||||
aDick’s Sporting Goods Inc. | 259,300 | 9,970,085 | ||||||
aDiscovery Communications Inc., A | 142,700 | 5,844,992 | ||||||
aDiscovery Communications Inc., C | 62,400 | 2,280,720 | ||||||
aDollar General Corp. | 326,500 | 11,065,085 | ||||||
aDreamWorks Animation SKG Inc., A | 84,500 | 1,698,450 | ||||||
Guess? Inc. | 240,100 | 10,098,606 | ||||||
aIconix Brand Group Inc. | 168,100 | 4,068,020 | ||||||
International Game Technology | 360,200 | 6,332,316 | ||||||
Jarden Corp. | 312,200 | 10,774,022 | ||||||
Limited Brands Inc. | 211,300 | 8,124,485 | ||||||
Nordstrom Inc. | 168,100 | 7,890,614 | ||||||
aPeet’s Coffee & Tea Inc. | 170,649 | 9,846,447 | ||||||
Polo Ralph Lauren Corp. | 67,300 | 8,924,653 | ||||||
aPriceline.com Inc. | 12,000 | 6,143,160 | ||||||
Starwood Hotels & Resorts Worldwide Inc. | 96,100 | 5,385,444 | ||||||
aTenneco Inc. | 201,600 | 8,884,512 | ||||||
Tractor Supply Co. | 48,500 | 3,243,680 | ||||||
aUlta Salon Cosmetics & Fragrance Inc. | 96,100 | 6,206,138 | ||||||
aUnder Armour Inc., A | 96,100 | 7,429,491 | ||||||
aUrban Outfitters Inc. | 297,700 | 8,380,255 | ||||||
Wolverine World Wide Inc. | 327,176 | 13,659,598 | ||||||
Wynn Resorts Ltd. | 48,000 | 6,889,920 | ||||||
| 208,709,621 | ||||||||
Consumer Staples 2.6% | ||||||||
aHansen Natural Corp. | 144,100 | 11,664,895 | ||||||
Mead Johnson Nutrition Co., A | 110,400 | 7,457,520 | ||||||
aTreeHouse Foods Inc. | 129,600 | 7,077,456 | ||||||
| 26,199,871 | ||||||||
Energy 7.0% | ||||||||
aAlpha Natural Resources Inc. | 182,500 | 8,292,800 | ||||||
aCameron International Corp. | 153,700 | 7,729,573 | ||||||
aFMC Technologies Inc. | 192,000 | 8,599,680 | ||||||
aKey Energy Services Inc. | 288,100 | 5,185,800 | ||||||
aOil States International Inc. | 72,000 | 5,753,520 | ||||||
Patterson-UTI Energy Inc. | 168,100 | 5,313,641 | ||||||
aPetrohawk Energy Corp. | 285,300 | 7,038,351 | ||||||
SM Energy Co. | 312,200 | 22,940,456 | ||||||
| 70,853,821 | ||||||||
Financials 5.9% | ||||||||
aAffiliated Managers Group Inc. | 96,100 | 9,749,345 | ||||||
First Niagara Financial Group Inc. | 489,900 | 6,466,680 | ||||||
Hancock Holding Co. | 156,000 | 4,832,880 | ||||||
aIntercontinentalExchange Inc. | 42,800 | 5,337,588 | ||||||
Lazard Ltd., A | 276,500 | 10,258,150 | ||||||
Northern Trust Corp. | 99,900 | 4,591,404 | ||||||
FSC-10
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Franklin Small-Mid Cap Growth Securities Fund | Shares | Value | ||||||
Common Stocks (continued) | ||||||||
Financials (continued) | ||||||||
aSignature Bank | 120,000 | $ | 6,864,000 | |||||
T. Rowe Price Group Inc. | 188,165 | 11,353,876 | ||||||
| 59,453,923 | ||||||||
Health Care 14.7% | ||||||||
aAgilent Technologies Inc. | 264,100 | 13,498,151 | ||||||
aAllscripts Healthcare Solutions Inc. | 275,600 | 5,352,152 | ||||||
aArQule Inc. | 398,000 | 2,487,500 | ||||||
aAuxilium Pharmaceuticals Inc. | 120,100 | 2,353,960 | ||||||
C. R. Bard Inc. | 105,700 | 11,612,202 | ||||||
aCerner Corp. | 144,000 | 8,799,840 | ||||||
aCommunity Health Systems Inc. | 326,600 | 8,387,088 | ||||||
aCoventry Health Care Inc. | 162,400 | 5,922,728 | ||||||
aDaVita Inc. | 111,700 | 9,674,337 | ||||||
aDendreon Corp. | 144,100 | 5,683,304 | ||||||
aEdwards Lifesciences Corp. | 148,900 | 12,981,102 | ||||||
aHeartWare International Inc. | 36,500 | 2,703,920 | ||||||
aHuman Genome Sciences Inc. | 216,100 | 5,303,094 | ||||||
aMettler-Toledo International Inc. | 96,100 | 16,209,187 | ||||||
Pharmaceutical Product Development Inc. | 247,300 | 6,637,532 | ||||||
aSalix Pharmaceuticals Ltd. | 124,900 | 4,974,767 | ||||||
aStereotaxis Inc. | 631,400 | 2,216,214 | ||||||
aThoratec Corp. | 72,000 | 2,363,040 | ||||||
aVarian Medical Systems Inc. | 96,100 | 6,728,922 | ||||||
aWaters Corp. | 144,100 | 13,796,134 | ||||||
| 147,685,174 | ||||||||
Industrials 16.6% | ||||||||
aAllegiant Travel Co. | 86,500 | 4,281,750 | ||||||
AMETEK Inc. | 360,200 | 16,172,980 | ||||||
C.H. Robinson Worldwide Inc. | 62,400 | 4,919,616 | ||||||
Cooper Industries PLC, A | 110,400 | 6,587,568 | ||||||
Cummins Inc. | 115,300 | 11,932,397 | ||||||
aEsterline Technologies Corp. | 91,200 | 6,967,680 | ||||||
Expeditors International of Washington Inc. | 84,900 | 4,346,031 | ||||||
Fastenal Co. | 192,000 | 6,910,080 | ||||||
Flowserve Corp. | 67,300 | 7,395,597 | ||||||
Fluor Corp. | 90,300 | 5,838,798 | ||||||
Gardner Denver Inc. | 168,100 | 14,128,805 | ||||||
aHigher One Holdings Inc. | 97,659 | 1,847,708 | ||||||
J.B. Hunt Transport Services Inc. | 124,300 | 5,853,287 | ||||||
Joy Global Inc. | 134,500 | 12,809,780 | ||||||
aKansas City Southern | 72,000 | 4,271,760 | ||||||
Marten Transport Ltd. | 6,719 | 145,130 | ||||||
Robert Half International Inc. | 192,000 | 5,189,760 | ||||||
Rockwell Automation Inc. | 144,100 | 12,502,116 | ||||||
Rockwell Collins Inc. | 72,000 | 4,441,680 | ||||||
Roper Industries Inc. | 72,000 | 5,997,600 | ||||||
aSensata Technologies Holding NV | 330,000 | 12,424,500 | ||||||
aTerex Corp. | 240,100 | 6,830,845 | ||||||
Textron Inc. | 216,100 | 5,102,121 | ||||||
| 166,897,589 | ||||||||
FSC-11
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Franklin Small-Mid Cap Growth Securities Fund | Shares | Value | ||||||
Common Stocks (continued) | ||||||||
Information Technology 24.6% | ||||||||
aAcme Packet Inc. | 25,000 | $ | 1,753,250 | |||||
aAlliance Data Systems Corp. | 81,600 | 7,676,112 | ||||||
Analog Devices Inc. | 206,500 | 8,082,410 | ||||||
aANSYS Inc. | 187,300 | 10,239,691 | ||||||
aAruba Networks Inc. | 240,100 | 7,094,955 | ||||||
Avago Technologies Ltd. (Singapore) | 216,100 | 8,211,800 | ||||||
aBottomline Technologies Inc. | 84,097 | 2,078,037 | ||||||
aCitrix Systems Inc. | 124,900 | 9,992,000 | ||||||
aCommVault Systems Inc. | 15,400 | 684,530 | ||||||
aF5 Networks Inc. | 70,000 | 7,717,500 | ||||||
FactSet Research Systems Inc. | 120,100 | 12,288,632 | ||||||
a,bFirst Solar Inc. | 68,500 | 9,060,495 | ||||||
FLIR Systems Inc. | 259,300 | 8,741,003 | ||||||
aFortinet Inc. | 144,100 | 3,932,489 | ||||||
Global Payments Inc. | 152,800 | 7,792,800 | ||||||
aHittite Microwave Corp. | 165,800 | 10,264,678 | ||||||
aInformatica Corp. | 100,000 | 5,843,000 | ||||||
aLam Research Corp. | 100,800 | 4,463,424 | ||||||
aNetlogic Microsystems Inc. | 249,700 | 10,092,874 | ||||||
aNuance Communications Inc. | 734,800 | 15,776,156 | ||||||
aNXP Semiconductors NV (Netherlands) | 480,300 | 12,838,419 | ||||||
aPolycom Inc. | 100,000 | 6,430,000 | ||||||
a,bRealD Inc. | 92,843 | 2,171,598 | ||||||
aRed Hat Inc. | 264,200 | 12,126,780 | ||||||
aShoretel Inc. | 288,100 | 2,938,620 | ||||||
aSilicon Laboratories Inc. | 222,700 | 9,188,602 | ||||||
aSMART Technologies Inc., A (Canada) | 480,400 | 2,738,280 | ||||||
aTaleo Corp., A | 88,800 | 3,288,264 | ||||||
aTeradata Corp. | 158,500 | 9,541,700 | ||||||
aTrimble Navigation Ltd. | 349,900 | 13,870,036 | ||||||
aViaSat Inc. | 163,300 | 7,065,991 | ||||||
Western Union Co. | 192,000 | 3,845,760 | ||||||
Xilinx Inc. | 264,200 | 9,635,374 | ||||||
| 247,465,260 | ||||||||
Materials 3.8% | ||||||||
Celanese Corp., A | 384,200 | 20,481,702 | ||||||
CF Industries Holdings Inc. | 25,000 | 3,541,750 | ||||||
Ecolab Inc. | 105,700 | 5,959,366 | ||||||
The Scotts Miracle-Gro Co., A | 138,100 | 7,085,911 | ||||||
a,bSTR Holdings Inc. | 109,200 | 1,629,264 | ||||||
| 38,697,993 | ||||||||
Telecommunication Services 0.7% | ||||||||
aSBA Communications Corp. | 192,000 | 7,332,480 | ||||||
Utilities 0.5% | ||||||||
aCalpine Corp. | 336,200 | 5,422,906 | ||||||
Total Common Stocks (Cost $663,887,260) | 978,718,638 | |||||||
Short Term Investments 3.6% | ||||||||
Money Market Funds (Cost $21,194,837) 2.1% | ||||||||
a,cInstitutional Fiduciary Trust Money Market Portfolio | 21,194,837 | 21,194,837 | ||||||
FSC-12
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Franklin Small-Mid Cap Growth Securities Fund | Shares | Value | ||||||
dInvestments from Cash Collateral Received for Loaned Securities | ||||||||
Money Market Funds 1.5% | ||||||||
eBNY Mellon Overnight Government Fund, 0.05% | 15,130,907 | $ | 15,130,907 | |||||
Total Investments (Cost $700,213,004) 100.7% | 1,015,044,382 | |||||||
Other Assets, less Liabilities (0.7)% | (7,531,511 | ) | ||||||
Net Assets 100.0% | $ | 1,007,512,871 | ||||||
See Abbreviations on page FSC-23.
aNon-income producing.
bA portion or all of the security is on loan at June 30, 2011. See Note 1(c).
cSee Note 7 regarding investments in the Institutional Fiduciary Trust Money Market Portfolio.
dSee Note 1(c) regarding securities on loan.
eThe rate shown is the annualized seven-day yield at period end.
The accompanying notes are an integral part of these financial statements.
FSC-13
Franklin Templeton Variable Insurance Products Trust
Financial Statements
Statement of Assets and Liabilities
June 30, 2011 (unaudited)
| Franklin Small-Mid Cap Growth Securities Fund | ||||
Assets: | ||||
Investments in securities: | ||||
Cost - Unaffiliated issuers | $ | 679,018,167 | ||
Cost - Sweep Money Fund (Note 7) | 21,194,837 | |||
|
| |||
Total cost of investments | $ | 700,213,004 | ||
|
| |||
Value - Unaffiliated issuers | $ | 993,849,545 | ||
Value - Sweep Money Fund (Note 7) | 21,194,837 | |||
|
| |||
Total value of investments (includes securities loaned in the amount of $14,960,292) | 1,015,044,382 | |||
Receivables: | ||||
Investment securities sold | 22,859,628 | |||
Capital shares sold | 122,128 | |||
Dividends and interest | 556,270 | |||
Other assets | 151,791 | |||
|
| |||
Total assets | 1,038,734,199 | |||
|
| |||
Liabilities: | ||||
Payables: | ||||
Investment securities purchased | 12,828,449 | |||
Capital shares redeemed | 1,946,744 | |||
Affiliates | 1,007,047 | |||
Payable upon return of securities loaned | 15,130,907 | |||
Accrued expenses and other liabilities | 308,181 | |||
|
| |||
Total liabilities | 31,221,328 | |||
|
| |||
Net assets, at value | $ | 1,007,512,871 | ||
|
| |||
Net assets consist of: | ||||
Paid-in capital | $ | 660,545,717 | ||
Undistributed net investment income (loss) | (2,449,587 | ) | ||
Net unrealized appreciation (depreciation) | 314,831,378 | |||
Accumulated net realized gain (loss) | 34,585,363 | |||
|
| |||
Net assets, at value | $ | 1,007,512,871 | ||
|
| |||
The accompanying notes are an integral part of these financial statements.
FSC-14
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Assets and Liabilities (continued)
June 30, 2011 (unaudited)
| Franklin Small-Mid Cap Growth Securities Fund | ||||
Class 1: | ||||
Net assets, at value | $ | 90,968,513 | ||
Shares outstanding | 3,797,311 | |||
Net asset value and maximum offering price per share | $ | 23.96 | ||
Class 2: | ||||
Net assets, at value | $ | 900,543,000 | ||
Shares outstanding | 38,826,329 | |||
Net asset value and maximum offering price per share | $ | 23.19 | ||
Class 4: | ||||
Net assets, at value | $ | 16,001,358 | ||
Shares outstanding | 676,296 | |||
Net asset value and maximum offering price per share | $ | 23.66 | ||
The accompanying notes are an integral part of these financial statements.
FSC-15
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Operations
for the six months ended June 30, 2011 (unaudited)
| Franklin Small-Mid Cap Growth Securities Fund | ||||
Investment income: | ||||
Dividends | $ | 2,648,856 | ||
Income from securities loaned | 231,302 | |||
Total investment income | 2,880,158 | |||
Expenses: | ||||
Management fees (Note 3a) | 2,580,083 | |||
Administrative fees (Note 3b) | 1,323,409 | |||
Distribution fees: (Note 3c) | ||||
Class 2 | 1,186,860 | |||
Class 4 | 31,151 | |||
Unaffiliated transfer agent fees | 1,586 | |||
Custodian fees (Note 4) | 7,799 | |||
Reports to shareholders | 160,784 | |||
Professional fees | 21,220 | |||
Trustees’ fees and expenses | 1,965 | |||
Other | 14,888 | |||
Total expenses | 5,329,745 | |||
Net investment income (loss) | (2,449,587 | ) | ||
Realized and unrealized gains (losses): | ||||
Net realized gain (loss) from investments | 73,650,885 | |||
Net change in unrealized appreciation (depreciation) on investments | 5,031,200 | |||
Net realized and unrealized gain (loss) | 78,682,085 | |||
Net increase (decrease) in net assets resulting from operations | $ | 76,232,498 | ||
The accompanying notes are an integral part of these financial statements.
FSC-16
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, 2011 (unaudited) | Year Ended December 31, 2010 | |||||||
| ||||||||
Increase (decrease) in net assets: | ||||||||
Operations: | ||||||||
Net investment income (loss) | $ | (2,449,587 | ) | $ | (2,680,101 | ) | ||
Net realized gain (loss) from investments and foreign currency transactions | 73,650,885 | 110,745,622 | ||||||
Net change in unrealized appreciation (depreciation) on investments | 5,031,200 | 119,428,953 | ||||||
|
| |||||||
Net increase (decrease) in net assets resulting from operations | 76,232,498 | 227,494,474 | ||||||
|
| |||||||
Capital share transactions: (Note 2) | ||||||||
Class 1 | (5,705,664 | ) | (10,074,842 | ) | ||||
Class 2 | (107,169,369 | ) | (78,124,046 | ) | ||||
Class 4 | (565,133 | ) | 1,246,003 | |||||
|
| |||||||
Total capital share transactions | (113,440,166 | ) | (86,952,885 | ) | ||||
|
| |||||||
Net increase (decrease) in net assets | (37,207,668 | ) | 140,541,589 | |||||
Net assets: | ||||||||
Beginning of period | 1,044,720,539 | 904,178,950 | ||||||
|
| |||||||
End of period | $ | 1,007,512,871 | $ | 1,044,720,539 | ||||
|
| |||||||
Undistributed net investment income (loss) included in net assets: | ||||||||
End of period | $ | (2,449,587 | ) | $ | — | |||
|
| |||||||
The accompanying notes are an integral part of these financial statements.
FSC-17
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 separate funds. The Franklin Small-Mid Cap Growth 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 generally 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. Financial Instrument Valuation
The Fund’s investments in securities and other financial instruments are carried at fair value daily. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. Under procedures approved by the Trust’s Board of Trustees, the Fund may utilize independent pricing services, quotations from securities and financial instrument dealers, and other market sources to determine fair value.
Equity securities listed on an 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. 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. 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. Over-the-counter securities 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 securities and other financial instruments for which market prices are not readily available or which may not be reliably priced. Under these procedures, the Fund primarily employs a market-based approach which may use related or comparable assets or liabilities, recent transactions, market multiples, book values, and other relevant information for the investment to determine the fair value of the investment. The Fund may also use an income-based valuation approach in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the investments. Due to the inherent uncertainty of valuations of such investments, the fair values may differ significantly from the values that would have been used had an active market existed.
Trading in securities on foreign securities stock exchanges and over-the-counter markets may be completed before the daily close of business on the NYSE. Occasionally, events occur between the time at which trading in a foreign security is completed and the close of the NYSE that might call into question the reliability of the value of a portfolio security held by the Fund. As a result, differences may arise between the value of the Fund’s portfolio securities as determined at the foreign market close and the latest indications of value at the close of the NYSE. In order to minimize the potential for these differences, 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 that may call into question the reliability of the values of the foreign securities 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.
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. The Fund may enter into foreign currency
FSC-18
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)
b. Foreign Currency Translation (continued)
exchange contracts to facilitate transactions denominated in a foreign currency. 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. Portfolio securities and assets and liabilities denominated in foreign currencies contain risks that those currencies will decline in value relative to the U.S. dollar. 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 Trust’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 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 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.
d. Income Taxes
It is the Fund’s policy to qualify as a regulated investment company under the Internal Revenue Code. The Fund intends to distribute to shareholders substantially all of its taxable income and net realized gains to relieve it from federal income and excise taxes. As a result, no provision for U.S. federal income taxes is required. The Fund files U.S. income tax returns as well as tax returns in certain other jurisdictions. The Fund records a provision for taxes in its financial statements including penalties and interest, if any, for a tax position taken on a tax return (or expected to be taken) when it fails to meet the more likely than not (a greater than 50% probability) threshold and based on the technical merits, the tax position may not be sustained upon examination by the tax authorities. As of June 30, 2011, and for all open tax years, the Fund has determined that no provision for income tax is required in the Fund’s financial statements. Open tax years are those that remain subject to examination and are based on each tax jurisdiction statute of limitation.
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
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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)
e. Security Transactions, Investment Income, Expenses and Distributions (continued)
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.
2. SHARES OF BENEFICIAL INTEREST
At June 30, 2011, 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, 2011 | Year Ended December 31, 2010 | |||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||
Class 1 Shares: | ||||||||||||||||
Shares sold | 123,166 | $ | 2,935,527 | 293,329 | $ | 5,660,759 | ||||||||||
Shares redeemed | (369,399 | ) | (8,641,191 | ) | (838,792 | ) | (15,735,601 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | (246,233 | ) | $ | (5,705,664 | ) | (545,463 | ) | $ | (10,074,842 | ) | ||||||
| ||||||||||||||||
Class 2 Shares: | ||||||||||||||||
Shares sold | 2,212,999 | $ | 50,147,467 | 4,961,508 | $ | 92,319,522 | ||||||||||
Shares redeemed | (7,012,073 | ) | (157,316,836 | ) | (9,551,006 | ) | (170,443,568 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | (4,799,074 | ) | $ | (107,169,369 | ) | (4,589,498 | ) | $ | (78,124,046 | ) | ||||||
| ||||||||||||||||
Class 4 Shares: | ||||||||||||||||
Shares sold | 244,772 | $ | 5,649,705 | 320,420 | $ | 6,087,006 | ||||||||||
Shares redeemed | (269,685 | ) | (6,214,838 | ) | (258,807 | ) | (4,841,003 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | (24,913 | ) | $ | (565,133 | ) | 61,613 | $ | 1,246,003 | ||||||||
| ||||||||||||||||
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Small-Mid Cap 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 Fund 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 |
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 Trust’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, 2011, there were no credits earned.
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Small-Mid Cap 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, 2010, the Fund had tax basis capital losses of $38,029,637 expiring in 2017.
Under the Regulated Investment Company Modernization Act of 2010, the Fund will be permitted to carry forward capital losses incurred in taxable years beginning after December 22, 2010 for an unlimited period. Post-enactment capital loss carryforwards will retain their character as either short-term or long-term capital losses rather than being considered short-term as under previous law. Any post-enactment capital losses generated will be required to be utilized prior to the losses incurred in pre-enactment tax years.
At June 30, 2011, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
Cost of investments | $ | 700,623,198 | ||
|
| |||
Unrealized appreciation | $ | 324,608,835 | ||
Unrealized depreciation | (10,187,651 | ) | ||
|
| |||
Net unrealized appreciation (depreciation) | $ | 314,421,184 | ||
|
| |||
Net investment income (loss) 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, 2011, aggregated $231,860,138 and $331,923,101, respectively.
7. INVESTMENTS IN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO
The Fund invests 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
The Fund, together with other U.S. registered and foreign investment funds (collectively, Borrowers), managed by Franklin Templeton Investments, are borrowers in a joint syndicated senior unsecured credit facility totaling $750 million (Global Credit Facility) which matures on January 20, 2012. This Global Credit Facility provides 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 of 0.08% based upon the unused portion of the Global Credit Facility, which is reflected in other expenses on the Statement of Operations. During the period ended June 30, 2011, the Fund did not use the Global Credit Facility.
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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
The Fund follows 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.
For movements between the levels within the fair value hierarchy, the Fund has adopted a policy of recognizing the transfers as of the date of the underlying event which caused the movement.
The following is a summary of the inputs used as of June 30, 2011, 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 | $ | 978,718,638 | $ | — | $ | — | $ | 978,718,638 | ||||||||
Short Term Investments | 21,194,837 | 15,130,907 | — | 36,325,744 | ||||||||||||
|
| |||||||||||||||
Total Investments in Securities | $ | 999,913,475 | $ | 15,130,907 | $ | — | $ | 1,015,044,382 | ||||||||
|
| |||||||||||||||
aFor detailed industry descriptions, see the accompanying Statement of Investments.
10. NEW ACCOUNTING PRONOUNCEMENTS
In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (IFRS). The amendments in the ASU will improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRS and include new guidance for certain fair value measurement principles and disclosure requirements. The ASU is effective for interim and annual periods beginning after December 15, 2011. The Fund is currently evaluating the impact, if any, of applying this provision.
11. SUBSEQUENT EVENTS
The Fund has evaluated subsequent events through the issuance of the financial statements and determined that no events have occurred that require disclosure.
ABBREVIATIONS | ||||
| Selected Portfolio | ||||
| ADR - American Depository Receipt |
FSC-23
FRANKLIN STRATEGIC INCOME SECURITIES FUND
We are pleased to bring you Franklin Strategic Income Securities Fund’s semiannual report for the period ended June 30, 2011.
Performance Summary as of 6/30/11
Franklin Strategic Income Securities Fund – Class 4 delivered a +4.19% total return for the six-month period ended 6/30/11.
Performance reflects the Fund’s Class 4 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 4
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.
Performance Overview
You can find the Fund’s six-month total return in the Performance Summary. The Fund outperformed its benchmark, the Barclays Capital (BC) U.S. Aggregate Index, which produced a +2.72% total return over the same period.1 The Fund also outperformed its peers as measured by the Lipper Multi-Sector Income Funds Classification Average, which posted a +3.18% total return.2
Economic and Market Overview
As consumer spending rose during the six-month reporting period, the U.S. economy expanded, although the pace of growth slowed. The Federal Reserve Board (Fed) announced in November it intended to buy $600 billion of longer term Treasury securities by the end of the second quarter of 2011. It sought to promote a stronger recovery and help maintain inflation levels the Fed believed consistent with its dual mandate to foster maximum employment and price stability. Despite the Fed’s actions, the economic recovery stalled. U.S. home prices fell sharply during the first quarter of 2011, and unemployment remained stubbornly high. After showing solid improvement during the year, manufacturing activity weakened partly because of auto supply-chain disruptions following Japan’s natural disasters.
Geopolitical instability in North Africa and the Middle East drove up oil prices for most of the period. However, investor concerns over weak economic data caused crude oil prices to drop from their six-month high of $114 per barrel on April 29 to $95 at period-end. Storms and droughts in several states reduced crop yields, pushing up grain prices. As oil and food prices rose, the pace of inflation accelerated during the period. Many developing economies, which have closed their output gaps and have a higher sensitivity to commodity prices, continued to tighten policy in the face of rising inflationary pressures. This policy
1. Source: © 2011 Morningstar.
2. Source: Lipper Inc.
One cannot invest directly in an index, and an index is not representative of the Fund’s portfolio. Please see Index Descriptions following the Fund Summaries.
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. Bank loans and loan participations involve credit, interest rate and illiquidity risks. Foreign investing, especially in developing markets, involves additional risks, including currency fluctuations, economic instability, market volatility, and political and social instability. Mortgage- and asset-backed securities are subject to prepayment and extension risks. 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. The Fund may also use certain derivative instruments, which may be volatile and illiquid, may give rise to leverage and may involve a small investment relative to the risk assumed. The manager applies various techniques and analyses in making investment decisions for the Fund, but there can be no guarantee that these decisions will produce the desired results. The Fund’s prospectus also includes a description of the main investment risks.
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tightening included raising interest rates, allowing currency appreciation and implementing regulations. In contrast, the G-3 (U.S., eurozone and Japan) continued to struggle with weak labor markets and concerns regarding public sector balances. The eurozone joined the list of those raising interest rates from historically low levels by increasing its policy rate in the second quarter. Although the eurozone raised rates and the U.S. planned to end quantitative easing, the G-3 continued to supply liquidity to governments and the financial sector.
Despite turmoil in North Africa and the Middle East, the multiple crises triggered by Japan’s earthquake and headwinds facing the U.S. economy, generally favorable economic improvements and positive corporate earnings reports gave investors confidence. While equity and fixed income markets performed well overall for the six months under review, investors reacted to reports on the Greek debt crisis by seeking the perceived safe haven of U.S. Treasuries. At period-end, the Greek government approved an austerity bill to secure a bailout loan from international creditors, which helped relieve investor anxiety.
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. We may also enter into various transactions involving certain currency-, interest rate- or credit-related derivative instruments for hedging purposes, to enhance returns or to obtain exposure to various market sectors.
Manager’s Discussion
During the first half of 2011, market concerns included certain European countries’ debt crises, the expected end of the U.S. Fed’s second round of quantitative easing, political uprisings in North Africa and the Middle East, and the earthquake and subsequent nuclear disaster in Japan. In reaction to such concerns, U.S. Treasuries experienced some volatility, with the 10-year Treasury note yield rising from 3.30% at the
FSI-3
beginning of the period to an intra-period high of 3.75% in February. The yield subsequently fell to a period-low 2.86% in June before ending the period at 3.18%. Despite this interest rate volatility, most financial market sectors experienced generally positive results for the period. For example, the Standard & Poor’s 500 Index delivered a +6.02% total return for the six months ended June 30, 2011.1 In fixed income markets, the credit sectors (investment grade corporate bonds, high yield corporate bonds and leveraged bank loans) also posted positive return performance, supported by healthy credit fundamentals and strong demand for much of the period. U.S. dollar weakness continued, given a combination of superior growth prospects in certain developing countries and more aggressive short-term interest rate policies in some developed countries. Overall, the fixed income environment during the reporting period favored higher beta spread sectors and foreign currency investments. However, toward period-end renewed concerns regarding the process of fiscal restructuring for certain European countries dampened financial market momentum heading into the second half of 2011.
In this environment, Franklin Strategic Income Securities Fund provided positive results, outperforming the benchmark BC U.S. Aggregate Index and its peers as measured by the Lipper Multi-Sector Income Fund Classification Average. The Fund’s lower weighting in longer duration, U.S. interest rate-sensitive fixed income sectors (Treasury securities and U.S. agency bonds) positively impacted performance relative to the benchmark index, while the Fund’s exposure to credit sectors (below investment-grade and investment-grade securities) delivered strong performance during the period. Certain of the Fund’s non-U.S. dollar holdings also provided positive returns given currency appreciation relative to the dollar, as did the Fund’s municipal securities exposure. However, a lower weighting in emerging market, hard-currency sovereign bonds limited returns relative to peers.
The slight decline in longer term U.S. interest rates helped most Treasuries post returns modestly above their coupon income. Relative to similar-duration Treasuries, agency mortgage-backed securities (MBS) generally outperformed given the increase in current yield. Although core U.S. inflationary pressures were anticipated by many to remain relatively low over the near term, moderate economic growth and our longer term concerns regarding the impact of the fiscal deficit on interest rates led us to maintain a low exposure to Treasuries and agency debentures. We favored the current yield advantage of agency MBS,
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Portfolio Breakdown
Franklin Strategic Income Securities Fund
Based on Total Net Assets
| 6/30/11 | 12/31/10 | |||||||
| High Yield Corporate Bonds & Preferred Securities | 28.3% | 29.6% | ||||||
| International Government & Agency Bonds (non-$US) | 24.3% | 21.9% | ||||||
| Floating Rate Bank Loans | 15.8% | 15.7% | ||||||
| Mortgage-Backed Securities | 6.2% | 6.9% | ||||||
| Municipal Bonds | 5.6% | 5.8% | ||||||
| Investment Grade Corporate Bonds & Preferred Securities | 5.5% | 7.1% | ||||||
| International Government & Agency Bonds ($US) | 3.7% | 3.2% | ||||||
| Commercial Mortgage-Backed Securities | 2.3% | 3.6% | ||||||
| U.S. Treasury Securities | 1.3% | 1.3% | ||||||
| Asset-Backed Securities | 1.1% | 1.9% | ||||||
| Equities | 0.5% | 0.2% | ||||||
| Convertible Securities | 0.3% | 0.0% | * | |||||
| Short-Term Investments & Other Net Assets** | 5.1% | 2.8% | ||||||
*Rounds to less than 0.1% of total net assets.
**Includes unrealized gains/losses on forward currency contracts and credit default swap 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.
although our exposure to that sector was also relatively low. Commercial MBS posted gains during the period following a very healthy rebound in calendar years 2009 and 2010. We took advantage of this positive performance by reducing commercial MBS exposure during the period. Conversely, negative news battered the municipal bond market over the past several quarters. Although such stories may continue to garner media attention, we remained comfortable with the longer term credit quality of the state and municipal obligations we held. In fact, municipal bonds rebounded sharply during the second half of the reporting period, providing one of the strongest sector returns for the Fund. During the period, the Fund added to its tax-exempt municipal bond positions, while taking gains on certain taxable, Build-America municipal bond holdings.
Corporate credit markets generally continued the positive relative performance that began in 2009. Supported by the global economy’s rebound, corporate earnings and cash flow growth improved, which supported many issuers’ credit fundamentals. In addition, a very accommodative new-issue market allowed many issuers to refinance their debt obligations at attractive rates. Largely as a result, default rates
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moved lower, ending the period in the very low single digits for both high yield corporate bonds and bank loans. Demand for the higher yield of below investment-grade securities (including high yield bonds and bank loans) provided ongoing price support. Although positive bank loan performance stalled in early 2011 as certain issuers sought to reprice their loan obligations at lower interest rate levels, corporate credit sectors generally were strong contributors to the Fund’s performance during the period. Overall, high yield corporate bond exposure, including to some derivative issues, remained relatively steady, while we took some gains from our investment-grade holdings and deployed the proceeds into the less interest rate-sensitive bank loan sector, including derivative issues.
The Fund incrementally added exposure to its non-U.S. dollar exposure during the period, given our view of greater fundamental and technical support for certain foreign currencies, particularly in various developing markets. With the dollar’s recent weakness, the Fund’s holdings in currencies and countries in the Asian region, particularly in South Korea, provided positive returns. However, the Japanese yen’s strength negatively impacted the Fund’s short forward currency position in that country. Similarly, euro strength offset gains we would have had from currencies of some non-eurozone European countries, such as those of Norway, Sweden and Poland, given our proxy short euro hedge against those holdings. However, our position in Hungarian forint-denominated securities outperformed the euro. Supported by strong fundamental credit trends, particularly relative to certain developed markets, the hard-currency, U.S. dollar emerging market performed well during the period. However, considering historically rich valuations, the Fund held a relatively small position in this sector during the period.
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, 2011, 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 4
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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 4 | Beginning Account Value 1/1/11 | Ending Account Value 6/30/11 | Fund-Level Expenses Incurred During Period* 1/1/11–6/30/11 | |||||||||
Actual | $ | 1,000 | $ | 1,041.90 | $ | 4.71 | ||||||
Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,020.18 | $ | 4.66 | ||||||
*Expenses are calculated using the most recent six-month annualized expense ratio for the Fund’s Class 4 shares (0.93%), 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 Strategic Income Securities Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 1 | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||||||
| ||||||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 12.99 | $ | 12.28 | $ | 10.58 | $ | 12.78 | $ | 12.73 | $ | 12.43 | ||||||||||||
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| |||||||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.36 | 0.72 | 0.70 | 0.69 | 0.73 | 0.69 | ||||||||||||||||||
Net realized and unrealized gains (losses) | 0.20 | 0.61 | 1.95 | (1.99 | ) | 0.04 | 0.32 | |||||||||||||||||
|
| |||||||||||||||||||||||
Total from investment operations | 0.56 | 1.33 | 2.65 | (1.30 | ) | 0.77 | 1.01 | |||||||||||||||||
|
| |||||||||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income and net foreign currency gains | (0.81 | ) | (0.62 | ) | (0.95 | ) | (0.87 | ) | (0.68 | ) | (0.63 | ) | ||||||||||||
Net realized gains | — | — | — | (0.03 | ) | (0.04 | ) | (0.08 | ) | |||||||||||||||
|
| |||||||||||||||||||||||
Total distributions | (0.81 | ) | (0.62 | ) | (0.95 | ) | (0.90 | ) | (0.72 | ) | (0.71 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ | 12.74 | $ | 12.99 | $ | 12.28 | $ | 10.58 | $ | 12.78 | $ | 12.73 | ||||||||||||
|
| |||||||||||||||||||||||
Total returnc | 4.33% | 11.21% | 26.11% | (11.03)% | 6.20% | 8.51% | ||||||||||||||||||
Ratios to average net assetsd | ||||||||||||||||||||||||
Expenses | 0.58% | 0.59% | e | 0.58% | e | 0.61% | e | 0.62% | e | 0.62% | e | |||||||||||||
Net investment income | 5.51% | 5.71% | 6.13% | 5.83% | 5.72% | 5.51% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 1,155,500 | $ | 1,195,149 | $ | 1,173,313 | $ | 903,358 | $ | 1,086,850 | $ | 902,071 | ||||||||||||
Portfolio turnover rate | 34.27% | 56.46% | 56.19% | 47.68% | 46.88% | 47.88% | ||||||||||||||||||
Portfolio turnover rate excluding mortgage dollar rollsf | 34.27% | 56.46% | 56.19% | 47.68% | 46.43% | 44.58% | ||||||||||||||||||
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-9
Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Franklin Strategic Income Securities Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 2 | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||||||
| ||||||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 12.72 | $ | 12.05 | $ | 10.41 | $ | 12.60 | $ | 12.56 | $ | 12.27 | ||||||||||||
|
| |||||||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.34 | 0.68 | 0.66 | 0.65 | 0.69 | 0.65 | ||||||||||||||||||
Net realized and unrealized gains (losses) | 0.20 | 0.59 | 1.91 | (1.96 | ) | 0.05 | 0.31 | |||||||||||||||||
|
| |||||||||||||||||||||||
Total from investment operations | 0.54 | 1.27 | 2.57 | (1.31 | ) | 0.74 | 0.96 | |||||||||||||||||
|
| |||||||||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income and net foreign currency gains | (0.79 | ) | (0.60 | ) | (0.93 | ) | (0.85 | ) | (0.66 | ) | (0.59 | ) | ||||||||||||
Net realized gains | — | — | — | (0.03 | ) | (0.04 | ) | (0.08 | ) | |||||||||||||||
|
| |||||||||||||||||||||||
Total distributions | (0.79 | ) | (0.60 | ) | (0.93 | ) | (0.88 | ) | (0.70 | ) | (0.67 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ | 12.47 | $ | 12.72 | $ | 12.05 | $ | 10.41 | $ | 12.60 | $ | 12.56 | ||||||||||||
|
| |||||||||||||||||||||||
Total returnc | 4.25% | 10.91% | 25.75% | (11.24)% | 5.91% | 8.24% | ||||||||||||||||||
Ratios to average net assetsd | ||||||||||||||||||||||||
Expenses | 0.83% | 0.84% | e | 0.83% | e | 0.86% | e | 0.87% | e | 0.87% | e | |||||||||||||
Net investment income | 5.26% | 5.46% | 5.88% | 5.58% | 5.47% | 5.26% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 124,463 | $ | 101,347 | $ | 68,240 | $ | 33,155 | $ | 24,613 | $ | 11,753 | ||||||||||||
Portfolio turnover rate | 34.27% | 56.46% | 56.19% | 47.68% | 46.88% | 47.88% | ||||||||||||||||||
Portfolio turnover rate excluding mortgage dollar rollsf | 34.27% | 56.46% | 56.19% | 47.68% | 46.43% | 44.58% | ||||||||||||||||||
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-10
Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Franklin Strategic Income Securities Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||||||
| Class 4 | 2010 | 2009 | 2008a | |||||||||||||
| ||||||||||||||||
Per share operating performance | ||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||
Net asset value, beginning of period | $ | 12.88 | $ | 12.20 | $ | 10.54 | $ | 12.84 | ||||||||
|
| |||||||||||||||
Income from investment operationsb: | ||||||||||||||||
Net investment incomec | 0.34 | 0.67 | 0.66 | 0.53 | ||||||||||||
Net realized and unrealized gains (losses) | 0.20 | 0.60 | 1.94 | (1.93 | ) | |||||||||||
|
| |||||||||||||||
Total from investment operations | 0.54 | 1.27 | 2.60 | (1.40 | ) | |||||||||||
|
| |||||||||||||||
Less distributions from: | ||||||||||||||||
Net investment income and net foreign currency gains | (0.77 | ) | (0.59 | ) | (0.94 | ) | (0.87 | ) | ||||||||
Net realized gains | — | — | — | (0.03 | ) | |||||||||||
|
| |||||||||||||||
Total distributions | (0.77 | ) | (0.59 | ) | (0.94 | ) | (0.90 | ) | ||||||||
|
| |||||||||||||||
Net asset value, end of period | $ | 12.65 | $ | 12.88 | $ | 12.20 | $ | 10.54 | ||||||||
|
| |||||||||||||||
Total returnd | 4.19% | 10.88% | 25.52% | (11.69)% | ||||||||||||
Ratios to average net assetse | ||||||||||||||||
Expenses | 0.93% | 0.94% | f | 0.93% | f | 0.96% | f | |||||||||
Net investment income | 5.16% | 5.36% | 5.78% | 5.48% | ||||||||||||
Supplemental data | ||||||||||||||||
Net assets, end of period (000’s) | $ | 201,742 | $ | 188,178 | $ | 162,074 | $ | 59,766 | ||||||||
Portfolio turnover rate | 34.27% | 56.46% | 56.19% | 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 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-11
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited)
| Franklin Strategic Income Securities Fund | Country | Shares | Value | |||||||
Common Stocks 0.5% | ||||||||||
Consumer Durables & Apparel 0.0%† | ||||||||||
a,bComfort Co. Inc. | United States | 6,137 | $ | 115,253 | ||||||
|
| |||||||||
Consumer Services 0.1% | ||||||||||
a,c,dTurtle Bay Resort | United States | 1,901,449 | 1,948,985 | |||||||
|
| |||||||||
Media 0.4% | ||||||||||
aCharter Communications Inc., A | United States | 7,456 | 404,563 | |||||||
aDex One Corp. | United States | 40,000 | 101,200 | |||||||
aMGM Holdings Inc., A | United States | 240,995 | 5,436,437 | |||||||
|
| |||||||||
| 5,942,200 | ||||||||||
|
| |||||||||
Total Common Stocks (Cost $10,688,751) | 8,006,438 | |||||||||
|
| |||||||||
Preferred Stocks (Cost $865,000) 0.1% | ||||||||||
Diversified Financials 0.1% | ||||||||||
GMAC Capital Trust I, 8.125%, pfd. | United States | 34,600 | 885,760 | |||||||
|
| |||||||||
| Principal Amount* | ||||||||||
Convertible Bonds 0.3% | ||||||||||
Materials 0.3% | ||||||||||
eCemex SAB de CV, cvt., sub. note, 144A, | ||||||||||
3.25%, 3/15/16 | Mexico | 2,000,000 | 1,985,200 | |||||||
3.75%, 3/15/18 | Mexico | 2,000,000 | 1,995,200 | |||||||
|
| |||||||||
Total Convertible Bonds (Cost $3,994,108) | 3,980,400 | |||||||||
|
| |||||||||
Corporate Bonds 34.5% | ||||||||||
Automobiles & Components 1.0% | ||||||||||
eExide Technologies, senior secured note, 144A, 8.625%, 2/01/18 | United States | 1,100,000 | 1,149,500 | |||||||
Ford Motor Credit Co. LLC, senior note, | ||||||||||
7.00%, 4/15/15 | United States | 2,000,000 | 2,165,318 | |||||||
6.625%, 8/15/17 | United States | 1,000,000 | 1,063,788 | |||||||
5.00%, 5/15/18 | United States | 1,000,000 | 998,566 | |||||||
8.125%, 1/15/20 | United States | 1,200,000 | 1,393,806 | |||||||
5.75%, 2/01/21 | United States | 1,000,000 | 1,000,615 | |||||||
The Goodyear Tire & Rubber Co., senior note, 8.25%, 8/15/20 | United States | 4,000,000 | 4,340,000 | |||||||
eTRW Automotive Inc., senior note, 144A, 7.25%, 3/15/17 | United States | 2,500,000 | 2,787,500 | |||||||
|
| |||||||||
| 14,899,093 | ||||||||||
|
| |||||||||
Banks 2.0% | ||||||||||
eBanco do Brasil SA, sub. note, 144A, 5.875%, 1/26/22 | Brazil | 4,000,000 | 3,973,940 | |||||||
BB&T Capital Trust IV, junior sub. bond, 6.82%, 6/12/77 | United States | 3,000,000 | 3,048,750 | |||||||
HSBC USA Inc., sub. note, 5.00%, 9/27/20 | United States | 4,000,000 | 3,961,268 | |||||||
eLloyds TSB Bank PLC, senior note, 144A, 5.80%, 1/13/20 | United Kingdom | 4,000,000 | 3,998,060 | |||||||
Regions Bank, sub. note, 7.50%, 5/15/18 | United States | 100,000 | 104,660 | |||||||
Regions Financial Corp., senior note, | ||||||||||
7.75%, 11/10/14 | United States | 2,500,000 | 2,649,845 | |||||||
5.75%, 6/15/15 | United States | 300,000 | 295,757 | |||||||
Royal Bank of Scotland Group PLC, senior note, 6.40%, 10/21/19 | United Kingdom | 4,000,000 | 4,115,300 | |||||||
UBS AG Stamford, senior note, 5.875%, 12/20/17 | United States | 3,000,000 | 3,293,400 | |||||||
fWells Fargo Capital XIII, pfd., 7.70% to 3/26/13, FRN thereafter, Perpetual | United States | 2,000,000 | 2,050,000 | |||||||
fWells Fargo Capital XV, pfd., 9.75% to 9/26/13, FRN thereafter, Perpetual | United States | 1,500,000 | 1,590,000 | |||||||
|
| |||||||||
| 29,080,980 | ||||||||||
|
| |||||||||
FSI-12
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Franklin Strategic Income Securities Fund | Country | Principal Amount* | Value | |||||||
Corporate Bonds (continued) | ||||||||||
Capital Goods 1.1% | ||||||||||
eAbengoa Finance SAU, senior note, 144A, 8.875%, 11/01/17 | Spain | 4,000,000 | $ | 4,099,980 | ||||||
The Manitowoc Co. Inc., senior note, | ||||||||||
9.50%, 2/15/18 | United States | 2,500,000 | 2,728,125 | |||||||
8.50%, 11/01/20 | United States | 300,000 | 321,750 | |||||||
Meritor Inc., senior note, 10.625%, 3/15/18 | United States | 2,500,000 | 2,818,750 | |||||||
ePinafore LLC/Inc., senior secured note, 144A, 9.00%, 10/01/18 | United States | 300,000 | 324,750 | |||||||
RBS Global & Rexnord Corp., senior note, 8.50%, 5/01/18 | United States | 3,500,000 | 3,714,375 | |||||||
United Rentals North America Inc., senior sub. note, 8.375%, 9/15/20 | United States | 2,200,000 | 2,238,500 | |||||||
|
| |||||||||
| 16,246,230 | ||||||||||
|
| |||||||||
Commercial & Professional Services 0.1% | ||||||||||
e,gARAMARK Holdings Corp., senior note, 144A, PIK, 8.625%, 5/01/16 | United States | 700,000 | 715,750 | |||||||
|
| |||||||||
Consumer Durables & Apparel 1.0% | ||||||||||
Jarden Corp., senior sub. note, 7.50%, | ||||||||||
5/01/17 | United States | 3,000,000 | 3,131,250 | |||||||
1/15/20 | United States | 500,000 | 522,500 | |||||||
KB Home, senior note, 6.25%, 6/15/15 | United States | 2,400,000 | 2,304,000 | |||||||
M/I Homes Inc., senior note, 8.625%, 11/15/18 | United States | 2,500,000 | 2,471,875 | |||||||
eShea Homes LP/Funding Corp., senior secured note, 144A, 8.625%, 5/15/19 | United States | 2,000,000 | 1,975,000 | |||||||
Visant Corp., senior note, 10.00%, 10/01/17 | United States | 3,900,000 | 4,056,000 | |||||||
|
| |||||||||
| 14,460,625 | ||||||||||
|
| |||||||||
Consumer Services 2.4% | ||||||||||
eCityCenter Holdings/Finance, senior secured note, 144A, 7.625%, 1/15/16 | United States | 1,200,000 | 1,245,000 | |||||||
CKE Restaurants Inc., senior secured note, 11.375%, 7/15/18 | United States | 2,400,000 | 2,634,000 | |||||||
eClubCorp Club Operations Inc., senior note, 144A, 10.00%, 12/01/18 | United States | 2,700,000 | 2,686,500 | |||||||
e,hFontainebleau Las Vegas, 144A, 11.00%, 6/15/15 | United States | 2,500,000 | 1,250 | |||||||
eGala Group Finance Ltd, senior secured bond, 144A, 8.875%, 9/01/18 | United Kingdom | 2,300,000 | GBP | 3,424,040 | ||||||
Harrah’s Operating Co. Inc., senior secured note, 11.25%, 6/01/17 | United States | 6,000,000 | 6,652,500 | |||||||
MGM Resorts International, senior note, 6.625%, 7/15/15 | United States | 4,500,000 | 4,241,250 | |||||||
Norwegian Cruise Line Ltd., senior secured note, 11.75%, 11/15/16 | United States | 1,300,000 | 1,503,125 | |||||||
Pinnacle Entertainment Inc., | ||||||||||
senior note, 8.625%, 8/01/17 | United States | 1,500,000 | 1,618,125 | |||||||
senior sub. note, 7.50%, 6/15/15 | United States | 1,000,000 | 1,022,500 | |||||||
Royal Caribbean Cruises Ltd., senior deb., 7.25%, 3/15/18 | United States | 2,100,000 | 2,252,250 | |||||||
eShingle Springs Tribal Gaming Authority, senior note, 144A, 9.375%, 6/15/15 | United States | 2,000,000 | 1,390,000 | |||||||
Starwood Hotels & Resorts Worldwide Inc., senior note, | ||||||||||
6.75%, 5/15/18 | United States | 2,000,000 | 2,225,000 | |||||||
7.15%, 12/01/19 | United States | 500,000 | 561,250 | |||||||
hStation Casinos Inc., | ||||||||||
senior note, 6.00%, 4/01/12 | United States | 500,000 | 50 | |||||||
senior note, 7.75%, 8/15/16 | United States | 1,000,000 | 100 | |||||||
senior sub. note, 6.50%, 2/01/14 | United States | 300,000 | 30 | |||||||
senior sub. note, 6.875%, 3/01/16 | United States | 1,000,000 | 100 | |||||||
Universal City Development, | ||||||||||
senior note, 8.875%, 11/15/15 | United States | 2,000,000 | 2,235,000 | |||||||
senior sub. note, 10.875%, 11/15/16 | United States | 400,000 | 478,000 | |||||||
|
| |||||||||
| 34,170,070 | ||||||||||
|
| |||||||||
Diversified Financials 4.0% | ||||||||||
Ally Financial Inc., senior note, 7.50%, 9/15/20 | United States | 1,500,000 | 1,575,000 | |||||||
Bank of America Corp., | ||||||||||
fpfd., sub. bond, M, 8.125% to 5/15/18, FRN thereafter, Perpetual, | United States | 4,000,000 | 4,182,240 | |||||||
senior note, 5.65%, 5/01/18 | United States | 1,500,000 | 1,582,928 | |||||||
FSI-13
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Franklin Strategic Income Securities Fund | Country | Principal Amount* | Value | |||||||
Corporate Bonds (continued) | ||||||||||
Diversified Financials (continued) | ||||||||||
Capital One Capital VI, pfd., junior sub. bond, 8.875%, 5/15/40 | United States | 3,000,000 | $ | 3,109,224 | ||||||
eCIT Group Inc., | ||||||||||
secured bond, 144A, 7.00%, 5/02/17 | United States | 5,500,000 | 5,500,000 | |||||||
secured note, 144A, 6.625%, 4/01/18 | United States | 300,000 | 314,250 | |||||||
Citigroup Inc., | ||||||||||
senior note, 6.125%, 11/21/17 | United States | 1,500,000 | 1,657,914 | |||||||
senior note, 5.375%, 8/09/20 | United States | 1,500,000 | 1,567,145 | |||||||
sub. note, 5.00%, 9/15/14 | United States | 3,000,000 | 3,145,173 | |||||||
General Electric Capital Corp., | ||||||||||
senior note, A, 8.50%, 4/06/18 | United States | 64,000,000 | MXN | 5,323,193 | ||||||
sub. note, 5.30%, 2/11/21 | United States | 1,800,000 | 1,875,227 | |||||||
GMAC Inc., | ||||||||||
senior note, 6.875%, 8/28/12 | United States | 2,000,000 | 2,075,000 | |||||||
sub. note, 8.00%, 12/31/18 | United States | 900,000 | 967,500 | |||||||
International Lease Finance Corp., | ||||||||||
senior note, 8.25%, 12/15/20 | United States | 800,000 | 866,000 | |||||||
esenior secured note, 144A, 6.75%, 9/01/16 | United States | 4,000,000 | 4,280,000 | |||||||
JPMorgan Chase & Co., | ||||||||||
6.00%, 1/15/18 | United States | 1,500,000 | 1,669,686 | |||||||
senior note, 4.25%, 10/15/20 | United States | 1,000,000 | 979,521 | |||||||
JPMorgan Chase Capital XXII, sub. bond, 6.45%, 2/02/37 | United States | 4,000,000 | 4,042,916 | |||||||
eKKR Group Finance Co., senior note, 144A, 6.375%, 9/29/20 | United States | 4,000,000 | 4,234,840 | |||||||
Merrill Lynch & Co. Inc., senior note, 6.40%, 8/28/17 | United States | 2,500,000 | 2,730,903 | |||||||
Moody’s Corp., senior note, 5.50%, 9/01/20 | United States | 3,000,000 | 3,077,406 | |||||||
Morgan Stanley, senior note, | ||||||||||
6.00%, 4/28/15 | United States | 3,000,000 | 3,253,758 | |||||||
5.50%, 7/24/20 | United States | 500,000 | 506,669 | |||||||
TransUnion LLC/TransUnion FICO, senior note, 11.375%, 6/15/18 | United States | 1,000,000 | 1,135,000 | |||||||
|
| |||||||||
| 59,651,493 | ||||||||||
|
| |||||||||
Energy 6.3% | ||||||||||
Alpha Natural Resources Inc., senior note, | ||||||||||
6.00%, 6/01/19 | United States | 1,200,000 | 1,203,000 | |||||||
6.25%, 6/01/21 | United States | 1,200,000 | 1,212,000 | |||||||
Anadarko Petroleum Corp., senior note, 8.70%, 3/15/19 | United States | 2,000,000 | 2,551,022 | |||||||
Antero Resources Finance, senior note, 9.375%, 12/01/17 | United States | 3,000,000 | 3,240,000 | |||||||
eArch Coal Inc., senior note, 144A, | ||||||||||
7.00%, 6/15/19 | United States | 800,000 | 802,000 | |||||||
7.25%, 6/15/21 | United States | 1,100,000 | 1,106,875 | |||||||
Berry Petroleum Co., senior note, 6.75%, 11/01/20 | United States | 2,000,000 | 2,015,000 | |||||||
Chaparral Energy Inc., senior note, | ||||||||||
9.875%, 10/01/20 | United States | 2,400,000 | 2,604,000 | |||||||
8.25%, 9/01/21 | United States | 1,000,000 | 1,012,500 | |||||||
eCHC Helicopter SA, senior secured note, 144A, 9.25%, 10/15/20 | Canada | 4,400,000 | 3,993,000 | |||||||
Chesapeake Energy Corp., senior note, | ||||||||||
7.25%, 12/15/18 | United States | 300,000 | 328,500 | |||||||
6.625%, 8/15/20 | United States | 3,300,000 | 3,489,750 | |||||||
6.125%, 2/15/21 | United States | 1,500,000 | 1,520,625 | |||||||
Compagnie Generale de Geophysique-Veritas, senior note, | ||||||||||
9.50%, 5/15/16 | France | 100,000 | 109,750 | |||||||
7.75%, 5/15/17 | France | 2,100,000 | 2,173,500 | |||||||
e144A, 6.50%, 6/01/21 | France | 1,000,000 | 969,000 | |||||||
FSI-14
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Franklin Strategic Income Securities Fund | Country | Principal Amount* | Value | |||||||
Corporate Bonds (continued) | ||||||||||
Energy (continued) | ||||||||||
CONSOL Energy Inc., senior note, | ||||||||||
8.00%, 4/01/17 | United States | 1,000,000 | $ | 1,095,000 | ||||||
8.25%, 4/01/20 | United States | 800,000 | 876,000 | |||||||
e144A, 6.375%, 3/01/21 | United States | 200,000 | 200,000 | |||||||
Copano Energy LLC, senior note, 7.75%, 6/01/18 | United States | 200,000 | 207,000 | |||||||
Crosstex Energy LP/Crosstex Energy Finance Corp., senior note, 8.875%, 2/15/18 | United States | 3,500,000 | 3,745,000 | |||||||
El Paso Corp., | ||||||||||
senior bond, 6.50%, 9/15/20 | United States | 2,300,000 | 2,524,576 | |||||||
senior note, 7.00%, 6/15/17 | United States | 1,000,000 | 1,135,874 | |||||||
Energy Transfer Equity LP, senior note, 7.50%, 10/15/20 | United States | 2,000,000 | 2,130,000 | |||||||
eEnergy XXI Gulf Coast Inc., senior note, 144A, 9.25%, 12/15/17 | United States | 2,500,000 | 2,668,750 | |||||||
iEnterprise Products Operating LLC, junior sub. note, FRN, 7.034%, 1/15/68 | United States | 2,000,000 | 2,105,246 | |||||||
eExpro Finance Luxembourg, senior secured note, 144A, 8.50%, 12/15/16 | United Kingdom | 4,000,000 | 3,880,000 | |||||||
eGaz Capital SA, senior note, 144A, 5.092%, 11/29/15 | Russia | 3,000,000 | 3,126,180 | |||||||
Holly Corp., senior note, 9.875%, 6/15/17 | United States | 1,900,000 | 2,128,000 | |||||||
Linn Energy Corp., senior note, | ||||||||||
8.625%, 4/15/20 | United States | 3,000,000 | 3,270,000 | |||||||
e144A, 7.75%, 2/01/21 | United States | 1,000,000 | 1,045,000 | |||||||
MarkWest Energy Partners LP/Finance Corp., senior note, | ||||||||||
6.75%, 11/01/20 | United States | 2,500,000 | 2,562,500 | |||||||
6.50%, 8/15/21 | United States | 600,000 | 597,000 | |||||||
Martin Midstream Partners LP, senior note, 8.875%, 4/01/18 | United States | 1,500,000 | 1,582,500 | |||||||
Offshore Group Investment Ltd., senior secured note, | ||||||||||
11.50%, 8/01/15 | United States | 1,800,000 | 1,966,500 | |||||||
e144A, 11.50%, 8/01/15 | United States | 300,000 | 327,750 | |||||||
eOPTI Canada Inc., senior secured note, 144A, | ||||||||||
9.00%, 12/15/12 | Canada | 1,500,000 | 1,515,000 | |||||||
9.75%, 8/15/13 | Canada | 1,200,000 | 1,197,000 | |||||||
Peabody Energy Corp., senior note, 6.50%, 9/15/20 | United States | 2,500,000 | 2,700,000 | |||||||
Petrohawk Energy Corp., senior note, | ||||||||||
10.50%, 8/01/14 | United States | 1,500,000 | 1,695,000 | |||||||
7.25%, 8/15/18 | United States | 600,000 | 618,750 | |||||||
e144A, 6.25%, 6/01/19 | United States | 1,000,000 | 978,750 | |||||||
Petroleos de Venezuela SA, senior bond, zero cpn., 7/10/11 | Venezuela | 4,000,000 | 3,995,320 | |||||||
ePetroplus Finance Ltd., senior note, 144A, 6.75%, 5/01/14 | Switzerland | 2,100,000 | 2,068,500 | |||||||
Plains Exploration & Production Co., senior note, | ||||||||||
7.75%, 6/15/15 | United States | 500,000 | 520,625 | |||||||
10.00%, 3/01/16 | United States | 500,000 | 565,000 | |||||||
7.625%, 6/01/18 | United States | 3,200,000 | 3,376,000 | |||||||
Quicksilver Resources Inc., senior note, | ||||||||||
8.25%, 8/01/15 | United States | 3,500,000 | 3,705,625 | |||||||
9.125%, 8/15/19 | United States | 300,000 | 328,500 | |||||||
SandRidge Energy Inc., senior note, | ||||||||||
8.75%, 1/15/20 | United States | 500,000 | 535,000 | |||||||
e144A, 8.00%, 6/01/18 | United States | 3,000,000 | 3,075,000 | |||||||
eW&T Offshore Inc., senior note, 144A, 8.50%, 6/15/19 | United States | 1,500,000 | 1,522,500 | |||||||
|
| |||||||||
| 93,899,968 | ||||||||||
|
| |||||||||
Food & Staples Retailing 0.3% | ||||||||||
Rite Aid Corp., senior secured note, | ||||||||||
9.75%, 6/12/16 | United States | 2,000,000 | 2,217,500 | |||||||
8.00%, 8/15/20 | United States | 1,500,000 | 1,623,750 | |||||||
|
| |||||||||
| 3,841,250 | ||||||||||
|
| |||||||||
FSI-15
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Franklin Strategic Income Securities Fund | Country | Principal Amount* | Value | |||||||
Corporate Bonds (continued) | ||||||||||
Food, Beverage & Tobacco 1.3% | ||||||||||
eBlue Merger Sub Inc., senior note, 144A, 7.625%, 2/15/19 | United States | 2,600,000 | $ | 2,639,000 | ||||||
eBoparan Holdings Ltd., senior note, 144A, 9.75%, 4/30/18 | United Kingdom | 1,900,000 | EUR | 2,634,741 | ||||||
eCampofrio Food Group SA, senior note, 144A, 8.25%, 10/31/16 | Spain | 2,500,000 | EUR | 3,685,538 | ||||||
eCEDC Finance Corp. International Inc., senior secured note, 144A, 9.125%, 12/01/16 | United States | 1,700,000 | 1,559,750 | |||||||
eDean Foods Co., senior note, 144A, 9.75%, 12/15/18 | United States | 2,800,000 | 2,989,000 | |||||||
JBS USA LLC/Finance Inc., senior note, 11.625%, 5/01/14 | Brazil | 2,000,000 | 2,310,000 | |||||||
Pinnacle Foods Finance LLC, senior note, 9.25%, 4/01/15 | United States | 3,000,000 | 3,127,500 | |||||||
eRefresco Group BV, senior secured sub. bond, 144A, 7.375%, 5/15/18 | Netherlands | 600,000 | EUR | 886,209 | ||||||
|
| |||||||||
| 19,831,738 | ||||||||||
|
| |||||||||
Health Care Equipment & Services 1.5% | ||||||||||
Boston Scientific Corp., senior note, 6.00%, 1/15/20 | United States | 2,500,000 | 2,709,287 | |||||||
eCDRT Merger Sub Inc., senior note, 144A, 8.125%, 6/01/19 | United States | 1,000,000 | 1,002,500 | |||||||
Community Health Systems Inc., senior note, 8.875%, 7/15/15 | United States | 3,500,000 | 3,613,750 | |||||||
Coventry Health Care Inc., senior note, | ||||||||||
6.30%, 8/15/14 | United States | 500,000 | 538,493 | |||||||
5.95%, 3/15/17 | United States | 2,000,000 | 2,139,300 | |||||||
DaVita Inc., senior note, 6.375%, 11/01/18 | United States | 1,000,000 | 1,015,000 | |||||||
eFresenius US Finance II, senior note, 144A, 9.00%, 7/15/15 | Germany | 700,000 | 795,375 | |||||||
HCA Inc., | ||||||||||
senior note, 6.50%, 2/15/16 | United States | 800,000 | 818,000 | |||||||
senior secured bond, 7.25%, 9/15/20 | United States | 300,000 | 323,625 | |||||||
gsenior secured note, PIK, 9.625%, 11/15/16 | United States | 2,000,000 | 2,132,500 | |||||||
e,jInventiv Health Inc., senior note, 144A, 10.00%, 8/15/18 | United States | 1,100,000 | 1,045,000 | |||||||
gUnited Surgical Partners International Inc., senior sub. note, PIK, 9.25%, 5/01/17 | United States | 3,000,000 | 3,150,000 | |||||||
Vanguard Health Holding Co. II LLC, senior note, 8.00%, 2/01/18 | United States | 2,500,000 | 2,593,750 | |||||||
Vanguard Health Systems Inc., zero cpn., 2/01/16 | United States | 600,000 | 398,250 | |||||||
|
| |||||||||
| 22,274,830 | ||||||||||
|
| |||||||||
Insurance 0.1% | ||||||||||
iMetLife Inc., junior sub. note, FRN, 6.40%, 12/15/66 | United States | 2,000,000 | 1,960,000 | |||||||
|
| |||||||||
Materials 2.9% | ||||||||||
eAleris International Inc., senior note, 144A, 7.625%, 2/15/18 | United States | 800,000 | 802,000 | |||||||
ArcelorMittal, senior note, 5.50%, 3/01/21 | Luxembourg | 4,000,000 | 3,987,860 | |||||||
eAtkore International Inc., senior secured note, 144A, 9.875%, 1/01/18 | United States | 1,200,000 | 1,266,000 | |||||||
eCemex SAB de CV, senior secured note, 144A, 9.00%, 1/11/18 | Mexico | 3,000,000 | 3,073,695 | |||||||
eEuramax International Inc., senior secured note, 144A, 9.50%, 4/01/16 | United States | 2,500,000 | 2,437,500 | |||||||
eFMG Resources August 2006 Pty. Ltd., senior note, 144A, | ||||||||||
7.00%, 11/01/15 | Australia | 1,200,000 | 1,227,864 | |||||||
6.875%, 2/01/18 | Australia | 2,700,000 | 2,754,000 | |||||||
Huntsman International LLC, senior sub. note, 8.625%, 3/15/21 | United States | 500,000 | 546,250 | |||||||
eIneos Finance PLC, senior secured note, 144A, 9.25%, 5/15/15 | United Kingdom | 100,000 | EUR | 152,868 | ||||||
eIneos Group Holdings PLC, senior secured note, 144A, 8.50%, 2/15/16 | United Kingdom | 3,500,000 | 3,473,750 | |||||||
eKerling PLC, senior secured note, 144A, 10.625%, 1/28/17 | United Kingdom | 2,900,000 | EUR | 4,468,275 | ||||||
eKinove German Bondco GmbH, senior secured bond, 144A, 10.00%, 6/15/18 | Germany | 2,000,000 | EUR | 3,029,001 | ||||||
eMacDermid Inc., senior sub. note, 144A, 9.50%, 4/15/17 | United States | 3,400,000 | 3,553,000 | |||||||
NewPage Corp., senior secured note, 11.375%, 12/31/14 | United States | 4,000,000 | 3,750,000 | |||||||
Novelis Inc., senior note, 8.75%, 12/15/20 | India | 1,600,000 | 1,736,000 | |||||||
eReynolds Group Holdings Ltd., senior note, 144A, 8.25%, 2/15/21 | New Zealand | 500,000 | 470,000 | |||||||
eReynolds Group Issuer Inc./LLC/SA, senior note, 144A, 8.75%, 5/15/18 | United States | 4,000,000 | 3,950,000 | |||||||
Solo Cup Co., senior sub. note, 8.50%, 2/15/14 | United States | 1,500,000 | 1,406,250 | |||||||
Vulcan Materials Co., senior note, 7.50%, 6/15/21 | United States | 1,100,000 | 1,099,762 | |||||||
|
| |||||||||
| 43,184,075 | ||||||||||
|
| |||||||||
FSI-16
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Franklin Strategic Income Securities Fund | Country | Principal Amount* | Value | |||||||
Corporate Bonds (continued) | ||||||||||
Media 3.2% | ||||||||||
eAMC Networks Inc., senior note, 144A, 7.75%, 7/15/21 | United States | 1,300,000 | $ | 1,361,750 | ||||||
Cablevision Systems Corp., senior note, 8.625%, 9/15/17 | United States | 500,000 | 544,375 | |||||||
CCH II LLC/CCH II Capital Corp., senior note, 13.50%, 11/30/16 | United States | 1,500,000 | 1,773,750 | |||||||
CCO Holdings LLC/CCO Holdings Capital Corp., senior note, | ||||||||||
8.125%, 4/30/20 | United States | 900,000 | 976,500 | |||||||
6.50%, 4/30/21 | United States | 2,500,000 | 2,478,125 | |||||||
eClear Channel Communications Inc., senior note, 144A, 9.00%, 3/01/21 | United States | 5,000,000 | 4,812,500 | |||||||
CSC Holdings Inc., senior deb., 7.625%, 7/15/18 | United States | 2,100,000 | 2,283,750 | |||||||
DIRECTV Holdings LLC/DIRECTV Financing Co. Inc., senior note, 4.60%, 2/15/21 | United States | 2,500,000 | 2,514,953 | |||||||
DISH DBS Corp., senior note, | ||||||||||
7.75%, 5/31/15 | United States | 1,000,000 | 1,087,500 | |||||||
7.125%, 2/01/16 | United States | 4,000,000 | 4,240,000 | |||||||
Media General Inc., senior secured note, 11.75%, 2/15/17 | United States | 2,000,000 | 1,955,000 | |||||||
eMusketeer GmbH, senior secured note, 144A, 9.50%, 3/15/21 | Germany | 1,500,000 | EUR | 2,308,121 | ||||||
eMyriad International Holding BV, senior note, 144A, 6.375%, 7/28/17 | South Africa | 300,000 | 323,778 | |||||||
e,gRadio One Inc., senior sub. note, 144A, PIK, 15.00%, 5/24/16 | United States | 2,086,411 | 2,104,667 | |||||||
eSeat Pagine Gialle SpA, senior secured note, 144A, 10.50%, 1/31/17 | Italy | 2,600,000 | EUR | 3,416,464 | ||||||
Time Warner Inc., | ||||||||||
7.625%, 4/15/31 | United States | 2,500,000 | 3,007,705 | |||||||
6.10%, 7/15/40 | United States | 1,000,000 | 1,020,033 | |||||||
eUnivision Communications Inc., senior secured note, 144A, | ||||||||||
6.875%, 5/15/19 | United States | 400,000 | 398,000 | |||||||
7.875%, 11/01/20 | United States | 2,000,000 | 2,060,000 | |||||||
eUPCB Finance Ltd., senior secured note, 144A, 6.375%, 7/01/20 | Cayman Islands | 2,000,000 | EUR | 2,746,584 | ||||||
WMG Acquisition Corp., senior secured note, 9.50%, 6/15/16 | United States | 2,500,000 | 2,650,000 | |||||||
eZiggo Bond Co., senior bond, 144A, 8.00%, 5/15/18 | Netherlands | 2,500,000 | EUR | 3,755,689 | ||||||
|
| |||||||||
| 47,819,244 | ||||||||||
|
| |||||||||
Pharmaceuticals, Biotechnology & Life Sciences 0.4% | ||||||||||
eEndo Pharmaceuticals Holdings Inc., senior note, 144A, 7.00%, 7/15/19 | United States | 900,000 | 927,000 | |||||||
eGiant Funding Corp., senior note, 144A, 8.25%, 2/01/18 | Spain | 1,500,000 | 1,541,250 | |||||||
eMylan Inc., senior note, 144A, 7.875%, 7/15/20 | United States | 3,500,000 | 3,858,750 | |||||||
|
| |||||||||
| 6,327,000 | ||||||||||
|
| |||||||||
Real Estate 0.2% | ||||||||||
Forest City Enterprises Inc., senior note, 7.625%, 6/01/15 | United States | 3,100,000 | 3,053,500 | |||||||
|
| |||||||||
Retailing 0.8% | ||||||||||
e,iEdcon Pty. Ltd., senior secured note, 144A, FRN, 4.721%, 6/15/14 | South Africa | 3,000,000 | EUR | 3,842,557 | ||||||
eMatalan Finance Ltd., senior secured note, 144A, 8.875%, 4/29/16 | United Kingdom | 2,000,000 | GBP | 3,065,567 | ||||||
eMichaels Stores Inc., senior note, 144A, 7.75%, 11/01/18 | United States | 4,000,000 | 4,030,000 | |||||||
ePetco Animal Supplies Inc., senior note, 144A, 9.25%, 12/01/18 | United States | 1,400,000 | 1,494,500 | |||||||
|
| |||||||||
| 12,432,624 | ||||||||||
|
| |||||||||
Semiconductors & Semiconductor Equipment 0.7% | ||||||||||
Advanced Micro Devices Inc., senior note, | ||||||||||
8.125%, 12/15/17 | United States | 800,000 | 840,000 | |||||||
7.75%, 8/01/20 | United States | 2,000,000 | 2,070,000 | |||||||
Freescale Semiconductor Inc., | United States | 2,000,000 | 2,095,000 | |||||||
senior note, 10.125%, 12/15/16 | United States | 100,000 | 108,125 | |||||||
esenior note, 144A, 8.05%, 2/01/20 | United States | 1,600,000 | 1,616,000 | |||||||
esenior note, 144A, 10.75%, 8/01/20 | United States | 2,000,000 | 2,270,000 | |||||||
esenior secured note, 144A, 9.25%, 4/15/18 | United States | 100,000 | 108,250 | |||||||
FSI-17
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Franklin Strategic Income Securities Fund | Country | Principal Amount* | Value | |||||||
Corporate Bonds (continued) | ||||||||||
Semiconductors & Semiconductor Equipment (continued) | ||||||||||
eNXP BV/NXP Funding LLC, senior secured note, 144A, 9.75%, 8/01/18 | Netherlands | 1,700,000 | $ | 1,906,125 | ||||||
|
| |||||||||
| 11,013,500 | ||||||||||
|
| |||||||||
Software & Services 0.4% | ||||||||||
Sitel LLC/Finance Corp., senior note, 11.50%, 4/01/18 | United States | 2,500,000 | 2,300,000 | |||||||
SunGard Data Systems Inc., | ||||||||||
senior note, 7.625%, 11/15/20 | United States | 2,500,000 | 2,537,500 | |||||||
senior sub. note, 10.25%, 8/15/15 | United States | 800,000 | 830,000 | |||||||
|
| |||||||||
| 5,667,500 | ||||||||||
|
| |||||||||
Technology Hardware & Equipment 0.4% | ||||||||||
eCDW Escrow Corp., senior note, 144A, 8.50%, 4/01/19 | United States | 3,500,000 | 3,447,500 | |||||||
eCommScope Inc., senior note, 144A, 8.25%, 1/15/19 | United States | 2,500,000 | 2,587,500 | |||||||
|
| |||||||||
| 6,035,000 | ||||||||||
|
| |||||||||
Telecommunication Services 2.5% | ||||||||||
CenturyLink Inc., senior note, 6.45%, 6/15/21 | United States | 1,000,000 | 989,714 | |||||||
Centurytel Inc., senior note, 6.00%, 4/01/17 | United States | 3,000,000 | 3,132,090 | |||||||
Cricket Communications Inc., senior note, 7.75%, 10/15/20 | United States | 4,000,000 | 3,930,000 | |||||||
Crown Castle International Corp., senior bond, 7.125%, 11/01/19 | United States | 200,000 | 211,500 | |||||||
eDigicel Group Ltd., senior note, 144A, | ||||||||||
8.875%, 1/15/15 | Jamaica | 3,000,000 | 3,082,500 | |||||||
8.25%, 9/01/17 | Jamaica | 300,000 | 312,750 | |||||||
eeAccess Ltd., senior note, 144A, 8.25%, 4/01/18 | Japan | 1,800,000 | 1,823,625 | |||||||
eEH Holding Corp., senior note, 144A, 7.625%, 6/15/21 | United States | 800,000 | 820,000 | |||||||
Frontier Communications Corp., senior note, | ||||||||||
8.50%, 4/15/20 | United States | 3,000,000 | 3,285,000 | |||||||
8.75%, 4/15/22 | United States | 1,400,000 | 1,533,000 | |||||||
eIntegra Telecom Inc., senior secured note, 144A, 10.75%, 4/15/16 | United States | 2,700,000 | 2,733,750 | |||||||
Intelsat Jackson Holding SA, senior note, | ||||||||||
11.25%, 6/15/16 | Luxembourg | 2,500,000 | 2,656,250 | |||||||
e144A, 7.50%, 4/01/21 | Luxembourg | 1,500,000 | 1,494,375 | |||||||
MetroPCS Wireless Inc., senior note, 7.875%, 9/01/18 | United States | 2,000,000 | 2,127,500 | |||||||
Sprint Nextel Corp., senior note, 8.375%, 8/15/17 | United States | 4,000,000 | 4,415,000 | |||||||
eWest Corp., senior note, 144A, 7.875%, 1/15/19 | United States | 4,000,000 | 3,890,000 | |||||||
e,gWind Acquisition Holdings Finance SA, senior secured note, 144A, PIK, 12.25%, 7/15/17 | Italy | 603,365 | EUR | 959,277 | ||||||
|
| |||||||||
| 37,396,331 | ||||||||||
|
| |||||||||
Transportation 0.5% | ||||||||||
eAmerican Airlines Inc., senior secured note, 144A, 7.50%, 3/15/16 | United States | 3,700,000 | 3,644,500 | |||||||
eCeva Group PLC, senior secured note, 144A, | ||||||||||
11.625%, 10/01/16 | United Kingdom | 300,000 | 327,750 | |||||||
8.375%, 12/01/17 | United Kingdom | 500,000 | 508,125 | |||||||
11.50%, 4/01/18 | United Kingdom | 2,900,000 | 3,066,750 | |||||||
|
| |||||||||
| 7,547,125 | ||||||||||
|
| |||||||||
Utilities 1.4% | ||||||||||
eAES Corp., senior note, 144A, 7.375%, 7/01/21 | United States | 1,200,000 | 1,219,500 | |||||||
eCalpine Corp., senior secured note, 144A, | ||||||||||
7.875%, 7/31/20 | United States | 1,100,000 | 1,155,000 | |||||||
7.50%, 2/15/21 | United States | 2,500,000 | 2,562,500 | |||||||
7.875%, 1/15/23 | United States | 500,000 | 515,625 | |||||||
CMS Energy Corp., senior note, 8.75%, 6/15/19 | United States | 2,000,000 | 2,449,980 | |||||||
FSI-18
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Franklin Strategic Income Securities Fund | Country | Principal Amount* | Value | |||||||
Corporate Bonds (continued) | ||||||||||
Utilities (continued) | ||||||||||
eInfinis PLC, senior note, 144A, 9.125%, 12/15/14 | United Kingdom | 600,000 | GBP | $ | 1,005,670 | |||||
eIntergen NV, senior secured note, 144A, 9.00%, 6/30/17 | Netherlands | 3,500,000 | 3,718,750 | |||||||
eKinder Morgan Finance Co. LLC, senior secured note, 144A, 6.00%, 1/15/18 | United States | 2,500,000 | 2,606,250 | |||||||
eTexas Competitive Electric Holdings Co. LLC/Texas Competitive Electric Holdings Finance Inc., | United States | 2,500,000 | 2,468,750 | |||||||
secured note, B, 144A, 15.00%, 4/01/21 | United States | 2,130,000 | 1,757,250 | |||||||
Texas Competitive Electric Holdings Co. LLC, senior note, A, 10.25%, 11/01/15 | United States | 1,500,000 | 915,000 | |||||||
|
| |||||||||
| 20,374,275 | ||||||||||
|
| |||||||||
Total Corporate Bonds (Cost $487,911,402) | 511,882,201 | |||||||||
|
| |||||||||
i,kSenior Floating Rate Interests 15.8% | ||||||||||
Automobiles & Components 0.6% | ||||||||||
Federal-Mogul Corp., | ||||||||||
Term Loan B, 2.128%, 12/27/14 | United States | 6,800,467 | 6,450,726 | |||||||
Term Loan C, 2.128%, 12/27/15 | United States | 1,733,398 | 1,644,251 | |||||||
Key Safety Systems Inc., Term Loan B, 2.435% - 2.436%, 3/10/14 | United States | 1,604,349 | 1,505,079 | |||||||
|
| |||||||||
| 9,600,056 | ||||||||||
|
| |||||||||
Capital Goods 1.2% | ||||||||||
jGoodman Global Inc., Initial Term Loan, 5.75%, 10/28/16 | United States | 2,941,324 | 2,955,819 | |||||||
RBS Global Inc. (Rexnord), | ||||||||||
Incremental Tranche B-2, 2.438%, 7/22/13 | United States | 2,296,797 | 2,276,700 | |||||||
Tranche B-1 Term B Loan, 2.688% - 2.813%, 7/22/13 | United States | 4,561,406 | 4,527,196 | |||||||
Sensus USA Inc., Second Lien Term Loan, 8.50%, 5/09/18 | United States | 1,026,077 | 1,045,957 | |||||||
Tomkins LLC and Tomkins Inc., Term B-1 Loan, 4.25%, 9/29/16 | Netherlands | 2,037,787 | 2,040,510 | |||||||
TransDigm Inc., Term Loan B, 4.00%, 2/14/17 | United States | 4,479,462 | 4,500,811 | |||||||
|
| |||||||||
| 17,346,993 | ||||||||||
|
| |||||||||
Commercial & Professional Services 1.1% | ||||||||||
ARAMARK Corp., | ||||||||||
jExtended Synthetic L/C, 3.286%, 7/26/16 | United States | 182,628 | 182,009 | |||||||
Synthetic L/C, 1.911%, 1/26/14 | United States | 91,726 | 89,891 | |||||||
Term Loan B, 2.121%, 1/26/14 | United States | 1,138,629 | 1,115,857 | |||||||
jTerm Loan B Extended, 3.496%, 7/26/16 | United States | 2,775,382 | 2,765,965 | |||||||
Brock Holdings III Inc., Second Lien Term Loan, 10.00%, 3/16/18 | United States | 2,047,000 | 2,098,052 | |||||||
jDiversey Inc., Tranche B Dollar Term Loan, 4.00%, 11/24/15 | United States | 2,832,988 | 2,836,530 | |||||||
bEnviroSolutions Real Property Holdings Inc., Second Lien Term Loan, 8.00%, 7/29/14 | United States | 670,585 | 674,642 | |||||||
Interactive Data Corp., Term B Loans, 4.75%, 2/11/18 | United States | 3,233,033 | 3,239,852 | |||||||
jKAR Auction Services Inc., Term Loan, 5.00%, 5/19/17 | United States | 3,318,318 | 3,331,279 | |||||||
|
| |||||||||
| 16,334,077 | ||||||||||
|
| |||||||||
Consumer Durables & Apparel 0.0%† | ||||||||||
b,gSleep Innovations Inc., Term Loan, PIK, 11.50%, 3/05/15 | United States | 718,566 | 718,566 | |||||||
|
| |||||||||
Consumer Services 1.9% | ||||||||||
jAmeristar Casinos Inc., B Term Loan, 4.00%, 4/14/18 | United States | 2,616,048 | 2,628,220 | |||||||
Burger King Holdings Inc., Tranche B Term Loan, 4.50%, 10/19/16 | United States | 8,234,343 | 8,224,758 | |||||||
DineEquity Inc., Term B-1 Loan, 4.25%, 10/19/17 | United States | 1,648,454 | 1,650,957 | |||||||
jPenn National Gaming Inc., Term B Facility Loan, 5.00%, 7/14/18 | United States | 732,800 | 735,314 | |||||||
Revel AC Inc., Tranche B Term Loan, 9.00%, 2/17/17 | United States | 1,407,936 | 1,330,499 | |||||||
d,gTurtle Bay Holdings LLC, | ||||||||||
Term Loan A, PIK, 10.25%, 3/01/13 | United States | 1,960,891 | 1,941,282 | |||||||
Term Loan B, PIK, 3.00%, 2/09/15 | United States | 3,983,237 | 3,345,919 | |||||||
Visant Corp., Term Loan B, 5.25%, 12/22/16 | United States | 8,915,200 | 8,912,419 | |||||||
|
| |||||||||
| 28,769,368 | ||||||||||
|
| |||||||||
FSI-19
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Franklin Strategic Income Securities Fund | Country | Principal Amount* | Value | |||||||
i,kSenior Floating Rate Interests (continued) | ||||||||||
Diversified Financials 0.6% | ||||||||||
jAsurion LLC, Second Lien Term Loan, 9.00%, 5/24/19 | United States | 2,814,806 | $ | 2,832,837 | ||||||
MoneyGram Payment Systems Worldwide Inc., Term Loan, 4.50% - 5.50%, 11/18/17 | United States | 1,016,429 | 1,018,653 | |||||||
MSCI Inc., Term Loan B, 3.75%, 3/09/17 | United States | 2,596,739 | 2,614,052 | |||||||
TransUnion LLC, Term Loan, 4.75%, 2/10/18 | United States | 2,771,250 | 2,779,910 | |||||||
|
| |||||||||
| 9,245,452 | ||||||||||
|
| |||||||||
Food & Staples Retailing 0.5% | ||||||||||
SUPERVALU Inc., Term Loan B-2, 3.436%, 10/05/15 | United States | 6,953,446 | 6,858,233 | |||||||
|
| |||||||||
Food, Beverage & Tobacco 0.5% | ||||||||||
Dean Foods Co., 2016 Tranche B Term Loan, 3.50%, 4/02/16 | United States | 2,158,987 | 2,114,907 | |||||||
jDel Monte Foods Co., Initial Term Loan, 4.50%, 3/08/18 | United States | 5,092,088 | 5,086,517 | |||||||
|
| |||||||||
| 7,201,424 | ||||||||||
|
| |||||||||
Health Care Equipment & Services 2.3% | ||||||||||
Bausch & Lomb Inc., | ||||||||||
Delayed Draw Term Loan, 3.436%, 4/28/15 | United States | 1,283,716 | 1,277,619 | |||||||
Parent Term Loan, 3.436% - 3.496%, 4/28/15 | United States | 5,273,769 | 5,248,718 | |||||||
Community Health Systems Inc., | ||||||||||
Delayed Draw Term Loan, 2.504%, 7/25/14 | United States | 161,853 | 156,683 | |||||||
Extended Term Loan, 3.754%, 1/25/17 | United States | 5,377,169 | 5,256,166 | |||||||
Term Loan, 2.504%, 7/25/14 | United States | 3,147,054 | 3,046,537 | |||||||
DaVita Inc., Tranche B Term Loan, 4.50%, 10/20/16 | United States | 4,143,929 | 4,160,949 | |||||||
jHCA Inc., Tranche B-2 Term Loan, 3.496%, 3/31/17 | United States | 7,779,253 | 7,684,424 | |||||||
Universal Health Services Inc., New Tranche B Term Loan, 4.00%, 11/15/16 | United States | 7,420,587 | 7,449,445 | |||||||
|
| |||||||||
| 34,280,541 | ||||||||||
|
| |||||||||
Materials 1.9% | ||||||||||
American Rock Salt Co. LLC, Initial Loan, 5.50%, 4/25/17 | United States | 2,861,872 | 2,867,834 | |||||||
Anchor Glass Container Corp., Second Lien Term Loan, 10.00%, 9/02/16 | United States | 5,813,900 | 5,937,445 | |||||||
Celanese U.S. Holdings LLC, Term Loan C, 3.303%, 10/31/16 | United States | 1,782,946 | 1,792,351 | |||||||
Consolidated Container Co. LLC, Second Lien Term Loan, 5.688%, 9/28/14 | United States | 1,933,702 | 1,764,503 | |||||||
Graham Packaging Co. LP, Term Loan C, 6.75%, 4/05/14 | United States | 1,351,466 | 1,357,187 | |||||||
Nalco Co., | ||||||||||
Term Loan B-1, 4.50%, 10/05/17 | United States | 4,925,043 | 4,955,440 | |||||||
Term Loan C-1, 1.996%, 5/13/16 | United States | 589,354 | 586,407 | |||||||
Potters Industries Inc., Second Lien Term Loan, 10.25%, 11/06/17 | United States | 225,533 | 232,299 | |||||||
Reynolds Group Holdings Inc., U.S. Term Loan, 4.25%, 2/09/18 | United States | 2,100,580 | 2,091,974 | |||||||
Rockwood Specialties Group Inc., Term Loan, 3.75%, 2/10/18 | United States | 4,258,220 | 4,286,733 | |||||||
Walter Energy Inc., B Term Loan, 4.00%, 4/01/18 | United States | 2,077,775 | 2,082,099 | |||||||
|
| |||||||||
| 27,954,272 | ||||||||||
|
| |||||||||
Media 2.3% | ||||||||||
Cinemark USA Inc., Extended Term Loan, 3.44% - 3.52%, 4/30/16 | United States | 2,488,860 | 2,501,519 | |||||||
Clear Channel Communications Inc., | United States | 1,693,252 | 1,527,252 | |||||||
Tranche B Term Loan, 3.836%, 1/29/16 | United States | 5,477,638 | 4,631,173 | |||||||
CSC Holdings Inc. (Cablevision), Incremental Term Loan B-2, 1.936%, 3/29/16 | United States | 6,308,304 | 6,300,091 | |||||||
Hubbard Radio LLC, Second Lien Term Loan, 8.75%, 4/29/18 | United States | 798,716 | 813,691 | |||||||
R.H. Donnelley Inc., Term Loan B, 9.00%, 10/24/14 | United States | 6,543,376 | 4,523,108 | |||||||
Regal Cinemas Corp., Term Loan, 3.496%, 8/23/17 | United States | 2,113,686 | 2,115,762 | |||||||
Summit Entertainment LLC, Term Loan, 7.50%, 9/07/16 | United States | 6,043,044 | 6,001,498 | |||||||
jTWCC Holding Corp., Term Loan, 4.25%, 2/11/17 | United States | 2,123,301 | 2,134,583 | |||||||
FSI-20
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Franklin Strategic Income Securities Fund | Country | Principal Amount* | Value | |||||||
i,kSenior Floating Rate Interests (continued) | ||||||||||
Media (continued) | ||||||||||
Univision Communications Inc., Extended First Lien Term Loan, 4.436%, 3/31/17 | United States | 2,141,315 | $ | 2,038,386 | ||||||
UPC Financing Partnership, Term Loan T, 3.691%, 12/31/16 | Netherlands | 1,491,092 | 1,492,491 | |||||||
|
| |||||||||
| 34,079,554 | ||||||||||
|
| |||||||||
Pharmaceuticals, Biotechnology & Life Sciences 0.4% | ||||||||||
Warner Chilcott Co. LLC, Term B-2 Loan, 4.25%, 3/15/18 | Puerto Rico | 1,185,925 | 1,187,870 | |||||||
Warner Chilcott Corp., Term B-1 Loan, 4.25%, 3/15/18 | United States | 2,371,850 | 2,375,740 | |||||||
WC Luxco S.A.R.L., Term B-3 Loan, 4.25%, 3/15/18 | Luxembourg | 1,630,647 | 1,633,322 | |||||||
|
| |||||||||
| 5,196,932 | ||||||||||
|
| |||||||||
Retailing 0.2% | ||||||||||
Dollar General Corp., Tranche B-1 Term Loan, 2.936% - 3.023%, 7/07/14 | United States | 2,725,120 | 2,729,592 | |||||||
|
| |||||||||
Software & Services 1.1% | ||||||||||
AVG Technologies NV, Term Loan, 7.50%, 3/15/16 | Netherlands | 6,763,438 | 6,563,240 | |||||||
Fidelity National Information Services Inc., Term Loan B, 5.25%, 7/18/16 | United States | 2,068,602 | 2,078,198 | |||||||
First Data Corp., | ||||||||||
Term Loan B-1, 2.936%, 9/24/14 | United States | 3,687,802 | 3,422,741 | |||||||
Term Loan B-2, 2.936%, 9/24/14 | United States | 328,445 | 304,838 | |||||||
Term Loan B-3, 2.936%, 9/24/14 | United States | 328,445 | 304,838 | |||||||
SunGard Data Systems Inc., Tranche B U.S. Term Loan, 3.845% - 3.893%, 2/28/16 | United States | 2,219,034 | 2,217,638 | |||||||
Vertafore Inc., Second Lien Term Loan, 9.75%, 10/27/17 | United States | 1,832,000 | 1,868,640 | |||||||
|
| |||||||||
| 16,760,133 | ||||||||||
|
| |||||||||
Telecommunication Services 0.7% | ||||||||||
Intelsat Jackson Holdings SA, Tranche B Term Loan, 5.25%, 4/02/18 | Luxembourg | 8,278,733 | 8,316,674 | |||||||
jSBA Senior Finance II LLC, Term Loan B, 5.00%, 6/30/18 | United States | 1,343,000 | 1,346,358 | |||||||
|
| |||||||||
| 9,663,032 | ||||||||||
|
| |||||||||
Transportation 0.5% | ||||||||||
Evergreen International Aviation Inc., Term Loan, 12.25%, 6/30/15 | United States | 1,190,000 | 1,206,101 | |||||||
Hertz Corp., | ||||||||||
Credit Linked Deposit, 3.75%, 3/11/18 | United States | 1,736,300 | 1,710,186 | |||||||
Tranche B Term Loan, 3.75%, 3/11/18 | United States | 3,900,225 | 3,886,207 | |||||||
|
| |||||||||
| 6,802,494 | ||||||||||
| �� | |||||||||
Total Senior Floating Rate Interests (Cost $231,353,665) | 233,540,719 | |||||||||
|
| |||||||||
Foreign Government and Agency Securities 20.3% | ||||||||||
eArab Republic of Egypt, 144A, 5.75%, 4/29/20 | Egypt | 3,560,000 | 3,583,122 | |||||||
The Export-Import Bank of Korea, senior note, 8.125%, 1/21/14 | South Korea | 2,770,000 | 3,179,572 | |||||||
i,lGovernment of Argentina, senior bond, FRN, 0.467%, 8/03/12 | Argentina | 30,000,000 | 7,348,500 | |||||||
Government of Australia, senior bond, 123, 5.75%, 4/15/12 | Australia | 20,350,000 | AUD | 21,997,839 | ||||||
Government of Hungary, | ||||||||||
5.50%, 2/12/14 | Hungary | 1,119,700,000 | HUF | 5,959,851 | ||||||
5.50%, 2/12/16 | Hungary | 1,769,700,000 | HUF | 9,116,342 | ||||||
6.50%, 6/24/19 | Hungary | 206,000,000 | HUF | 1,074,468 | ||||||
7.50%, 11/12/20 | Hungary | 312,600,000 | HUF | 1,729,922 | ||||||
senior note, 6.25%, 1/29/20 | Hungary | 6,230,000 | 6,590,032 | |||||||
Government of Indonesia, | ||||||||||
FR19, 14.25%, 6/15/13 | Indonesia | 35,480,000,000 | IDR | 4,759,589 | ||||||
FR20, 14.275%, 12/15/13 | Indonesia | 23,637,000,000 | IDR | 3,260,963 | ||||||
FR26, 11.00%, 10/15/14 | Indonesia | 1,800,000,000 | IDR | 238,045 | ||||||
FSI-21
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Franklin Strategic Income Securities Fund | Country | Principal Amount* | Value | |||||||
Foreign Government and Agency Securities (continued) | ||||||||||
Government of Indonesia (continued) | ||||||||||
FR34, 12.80%, 6/15/21 | Indonesia | 49,955,000,000 | IDR | $ | 7,902,691 | |||||
FR42, 10.25%, 7/15/27 | Indonesia | 2,000,000,000 | IDR | 269,230 | ||||||
FR44, 10.00%, 9/15/24 | Indonesia | 23,400,000,000 | IDR | 3,117,004 | ||||||
Government of Malaysia, senior bond, | ||||||||||
3.833%, 9/28/11 | Malaysia | 31,790,000 | MYR | 10,567,114 | ||||||
2.711%, 2/14/12 | Malaysia | 490,000 | MYR | 162,417 | ||||||
3.718%, 6/15/12 | Malaysia | 12,650,000 | MYR | 4,224,371 | ||||||
2.509%, 8/27/12 | Malaysia | 18,275,000 | MYR | 6,025,357 | ||||||
3.461%, 7/31/13 | Malaysia | 6,400,000 | MYR | 2,132,931 | ||||||
3.814%, 2/15/17 | Malaysia | 11,400,000 | MYR | 3,812,788 | ||||||
4.24%, 2/07/18 | Malaysia | 600,000 | MYR | 204,499 | ||||||
Government of Mexico, | ||||||||||
M, 9.00%, 6/20/13 | Mexico | 259,800 | m MXN | 2,375,969 | ||||||
M 10, 8.00%, 12/17/15 | Mexico | 350,000 | m MXN | 3,208,858 | ||||||
MI10, 8.00%, 12/19/13 | Mexico | 1,177,700 | m MXN | 10,660,656 | ||||||
Government of Poland, | ||||||||||
4.75%, 4/25/12 | Poland | 44,240,000 | PLN | 16,140,979 | ||||||
6.25%, 10/24/15 | Poland | 9,100,000 | PLN | 3,450,117 | ||||||
5.75%, 4/25/14 - 9/23/22 | Poland | 12,310,000 | PLN | 4,534,336 | ||||||
senior note, 6.375%, 7/15/19 | Poland | 4,000,000 | 4,567,660 | |||||||
Strip, 1/25/13 | Poland | 1,330,000 | PLN | 450,746 | ||||||
eGovernment of Russia, 144A, 7.50%, 3/31/30 | Russia | 5,398,465 | 6,362,496 | |||||||
Government of Sri Lanka, | ||||||||||
A, 12.00%, 7/15/11 | Sri Lanka | 14,460,000 | LKR | 132,305 | ||||||
A, 6.90%, 8/01/12 | Sri Lanka | 1,900,000 | LKR | 17,245 | ||||||
A, 8.50%, 1/15/13 | Sri Lanka | 50,900,000 | LKR | 470,289 | ||||||
A, 13.50%, 2/01/13 | Sri Lanka | 59,500,000 | LKR | 589,283 | ||||||
A, 7.00%, 3/01/14 | Sri Lanka | 7,020,000 | LKR | 62,263 | ||||||
A, 11.25%, 7/15/14 | Sri Lanka | 176,100,000 | LKR | 1,733,704 | ||||||
A, 11.75%, 3/15/15 | Sri Lanka | 1,160,000 | LKR | 11,587 | ||||||
A, 6.50%, 7/15/15 | Sri Lanka | 14,920,000 | LKR | 126,104 | ||||||
A, 11.00%, 8/01/15 | Sri Lanka | 200,400,000 | LKR | 1,965,425 | ||||||
B, 6.60%, 6/01/14 | Sri Lanka | 7,100,000 | LKR | 62,047 | ||||||
Government of Sweden, 5.50%, 10/08/12 | Sweden | 95,865,000 | SEK | 15,788,313 | ||||||
Government of the Philippines, senior bond, | ||||||||||
5.75%, 2/21/12 | Philippines | 19,830,000 | PHP | 463,832 | ||||||
5.25%, 1/07/13 | Philippines | 34,600,000 | PHP | 806,911 | ||||||
8.75%, 3/03/13 | Philippines | 55,690,000 | PHP | 1,370,456 | ||||||
eGovernment of Ukraine, 144A, 7.75%, 9/23/20 | Ukraine | 4,000,000 | 4,152,960 | |||||||
Government of Venezuela, 10.75%, 9/19/13 | Venezuela | 5,500,000 | 5,487,625 | |||||||
eGovernment of Vietnam, 144A, 6.75%, 1/29/20 | Vietnam | 4,500,000 | 4,699,688 | |||||||
Korea Treasury Bond, | ||||||||||
4.75%, 12/10/11 | South Korea | 18,681,350,000 | KRW | 17,612,965 | ||||||
5.25%, 9/10/12 - 3/10/13 | South Korea | 3,196,570,000 | KRW | 3,054,730 | ||||||
senior bond, 4.00%, 6/10/12 | South Korea | 31,013,880,000 | KRW | 29,186,616 | ||||||
senior bond, 4.25%, 12/10/12 | South Korea | 3,560,000,000 | KRW | 3,365,356 | ||||||
senior bond, 3.75%, 6/10/13 | South Korea | 393,000,000 | KRW | 368,652 | ||||||
jsenior bond, 3.00%, 12/10/13 | South Korea | 2,110,200,000 | KRW | 1,942,639 | ||||||
New South Wales Treasury Corp., | ||||||||||
6.00%, 5/01/12 | Australia | 280,000 | AUD | 303,110 | ||||||
5.50%, 8/01/13 | Australia | 860,000 | AUD | 931,797 | ||||||
senior note, 5.50%, 3/01/17 | Australia | 3,540,000 | AUD | 3,836,324 | ||||||
FSI-22
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Franklin Strategic Income Securities Fund | Country | Principal Amount* | Value | |||||||
Foreign Government and Agency Securities (continued) | ||||||||||
Nota Do Tesouro Nacional, | ||||||||||
10.00%, 1/01/12 | Brazil | 6,910 | n BRL | $ | 4,373,882 | |||||
10.00%, 1/01/14 | Brazil | 2,700 | n BRL | 1,634,336 | ||||||
10.00%, 1/01/17 | Brazil | 7,400 | n BRL | 4,289,633 | ||||||
oIndex Linked, 6.00%, 5/15/15 | Brazil | 3,890 | n BRL | 5,001,555 | ||||||
Queensland Treasury Corp., | ||||||||||
6.00%, 8/14/13 | Australia | 600,000 | AUD | 657,841 | ||||||
6.00%, 9/14/17 | Australia | 1,200,000 | AUD | 1,334,564 | ||||||
senior note, 6.00%, 8/21/13 | Australia | 2,705,000 | AUD | 2,955,355 | ||||||
United Kingdom Treasury Bond, 5.00%, 3/07/12 | United Kingdom | 6,979,000 | GBP | 11,535,517 | ||||||
Western Australia Treasury Corp., | ||||||||||
5.50%, 7/17/12 | Australia | 9,065,000 | AUD | 9,782,744 | ||||||
8.00%, 6/15/13 | Australia | 1,000,000 | AUD | 1,133,028 | ||||||
|
| |||||||||
Total Foreign Government and Agency Securities (Cost $267,242,138) | 300,249,145 | |||||||||
|
| |||||||||
U.S. Government and Agency Securities 1.3% | ||||||||||
U.S. Treasury Bond, | ||||||||||
4.50%, 2/15/16 - 5/15/17 | United States | 4,000,000 | 4,526,016 | |||||||
7.875%, 2/15/21 | United States | 2,600,000 | 3,644,469 | |||||||
7.125%, 2/15/23 | United States | 1,980,000 | 2,680,116 | |||||||
U.S. Treasury Note, | ||||||||||
2.375%, 3/31/16 | United States | 4,800,000 | 4,963,877 | |||||||
4.625%, 2/15/17 | United States | 600,000 | 684,094 | |||||||
4.75%, 8/15/17 | United States | 2,900,000 | 3,333,640 | |||||||
|
| |||||||||
Total U.S. Government and Agency Securities (Cost $18,597,408) | 19,832,212 | |||||||||
|
| |||||||||
Asset-Backed Securities and Commercial Mortgage-Backed Securities 3.4% | ||||||||||
Banks 1.4% | ||||||||||
e,iBanc of America Large Loan, 2010-HLTN, 144A, FRN, 1.937%, 11/15/15 | United States | 4,388,941 | 4,076,507 | |||||||
Countrywide Asset-Backed Certificates, 2005-11, AF4, 5.21%, 3/25/34 | United States | 1,275,000 | 754,219 | |||||||
iGS Mortgage Securities Corp. II, 2006-GG6, A4, FRN, 5.553%, 4/10/38 | United States | 2,405,000 | 2,616,418 | |||||||
iHomebanc Mortgage Trust, 2005-4, A1, FRN, 0.456%, 10/25/35 | United States | 2,191,348 | 1,608,319 | |||||||
e,iWachovia Bank Commercial Mortgage Trust, 2007-WHL8, A1, 144A, FRN, 0.267%, 6/15/20 | United States | 6,654,404 | 6,034,247 | |||||||
Wells Fargo Mortgage Backed Securities Trust, | United States | 2,312,053 | 2,245,248 | |||||||
2007-3, 3A1, 5.50%, 4/25/37 | United States | 3,348,910 | 3,488,571 | |||||||
|
| |||||||||
| 20,823,529 | ||||||||||
|
| |||||||||
Diversified Financials 2.0% | ||||||||||
e,iARES CLO Funds, 2007-12A, B, 144A, FRN, 1.257%, 11/25/20 | Cayman Islands | 1,380,000 | 1,181,314 | |||||||
e,iArmstrong Loan Funding Ltd., 2008-1A, B, 144A, FRN, 1.273%, 8/01/16 | Cayman Islands | 5,361,142 | 5,182,992 | |||||||
e,iCent CDO Ltd., 2007-15A, A2B, 144A, FRN, 0.59%, 3/11/21 | Cayman Islands | 1,251,000 | 1,076,354 | |||||||
Citigroup Commercial Mortgage Trust, | United States | 475,099 | 465,140 | |||||||
i2007-C6, AM, FRN, 5.698%, 6/10/17 | United States | 1,700,000 | 1,676,891 | |||||||
2008-C7, A4, 6.099%, 12/10/49 | United States | 8,700,000 | 9,646,398 | |||||||
iCitigroup/Deutsche Bank Commercial Mortgage Trust, 2005-CD1, AJ, FRN, 5.22%, 10/15/15 | United States | 1,150,000 | 1,086,761 | |||||||
e,iColumbus Nova CLO Ltd., 2007-2A, A2, 144A, FRN, 1.278%, 10/15/21 | Cayman Islands | 860,000 | 786,578 | |||||||
e,iCommercial Industrial Finance Corp., 2007-3A, A1J, 144A, FRN, 0.674%, 7/26/21 | Cayman Islands | 960,000 | 884,371 | |||||||
FSI-23
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Franklin Strategic Income Securities Fund | Country | Principal Amount* | Value | |||||||
Asset-Backed Securities and Commercial Mortgage-Backed Securities (continued) | ||||||||||
Diversified Financials (continued) | ||||||||||
e,iCredit Suisse Mortgage Capital Certificates, 2006-TF2A, A2, 144A, FRN, 0.357%, 10/15/21 | United States | 756,195 | $ | 713,445 | ||||||
e,iGleneagles CLO Ltd., 2005-1A, 144A, FRN, 0.673%, 11/01/17 | Cayman Islands | 1,000,000 | 855,030 | |||||||
JPMorgan Chase Commercial Mortgage Securities Corp., 2005-LDP2, AM, 4.78%, 7/15/42 | United States | 775,000 | 779,953 | |||||||
e,iMAPS CLO Fund LLC, 2005-1A, B, 144A, FRN, 0.747%, 12/21/17 | United States | 1,400,000 | 1,289,645 | |||||||
Residential Asset Securities Corp., 2004-KS1, AI4, 4.213%, 4/25/32 | United States | 71,205 | 70,483 | |||||||
e,iWestchester CLO Ltd., 2007-1A, A1A, 144A, FRN, 0.498%, 8/01/22 | Cayman Islands | 4,729,178 | 4,394,589 | |||||||
|
| |||||||||
| 30,089,944 | ||||||||||
|
| |||||||||
Total Asset-Backed Securities and Commercial Mortgage-Backed Securities (Cost $48,167,449) | 50,913,473 | |||||||||
|
| |||||||||
Mortgage-Backed Securities 6.2% | ||||||||||
iFederal Home Loan Mortgage Corp. (FHLMC) Adjustable Rate 0.0%† | ||||||||||
FHLMC, 2.473%, 1/01/33 | United States | 90,356 | 94,737 | |||||||
|
| |||||||||
Federal Home Loan Mortgage Corp. (FHLMC) Fixed Rate 2.3% | ||||||||||
FHLMC Gold 15 Year, 4.50%, 10/01/18 - 6/01/19 | United States | 1,314,981 | 1,402,220 | |||||||
FHLMC Gold 15 Year, 5.00%, 12/01/17 - 9/01/19 | United States | 1,538,348 | 1,663,330 | |||||||
FHLMC Gold 15 Year, 5.50%, 7/01/17 - 7/01/19 | United States | 392,949 | 426,352 | |||||||
FHLMC Gold 15 Year, 6.00%, 5/01/17 | United States | 15,127 | 16,561 | |||||||
FHLMC Gold 15 Year, 6.50%, 5/01/16 | United States | 5,001 | 5,400 | |||||||
FHLMC Gold 30 Year, 4.50%, 9/01/40 - 5/01/41 | United States | 9,555,328 | 9,888,449 | |||||||
FHLMC Gold 30 Year, 5.00%, 4/01/34 - 5/01/41 | United States | 10,422,486 | 11,090,875 | |||||||
FHLMC Gold 30 Year, 5.50%, 3/01/33 - 6/01/36 | United States | 4,118,645 | 4,483,740 | |||||||
FHLMC Gold 30 Year, 6.00%, 4/01/33 - 6/01/37 | United States | 4,029,265 | 4,447,298 | |||||||
FHLMC Gold 30 Year, 6.50%, 12/01/23 - 6/01/36 | United States | 286,643 | 324,609 | |||||||
FHLMC Gold 30 Year, 7.00%, 9/01/21 - 4/01/30 | United States | 71,066 | 82,529 | |||||||
FHLMC Gold 30 Year, 7.50%, 3/01/30 - 7/01/31 | United States | 2,103 | 2,460 | |||||||
|
| |||||||||
| 33,833,823 | ||||||||||
|
| |||||||||
iFederal National Mortgage Association (FNMA) Adjustable Rate 0.0%† | ||||||||||
FNMA, 2.441%, 12/01/34 | United States | 342,428 | 357,903 | |||||||
FNMA, 2.491%, 4/01/20 | United States | 64,925 | 65,719 | |||||||
|
| |||||||||
| 423,622 | ||||||||||
|
| |||||||||
Federal National Mortgage Association (FNMA) Fixed Rate 3.6% | ||||||||||
FNMA 15 Year, 4.50%, 6/01/19 - 3/01/20 | United States | 340,510 | 364,338 | |||||||
FNMA 15 Year, 5.00%, 10/01/17 - 6/01/18 | United States | 348,637 | 376,912 | |||||||
FNMA 15 Year, 5.50%, 11/01/13 - 11/01/18 | United States | 3,593,073 | 3,883,352 | |||||||
FNMA 15 Year, 6.00%, 4/01/16 - 7/01/16 | United States | 6,215 | 6,796 | |||||||
FNMA 15 Year, 7.00%, 5/01/12 | United States | 236 | 240 | |||||||
FNMA 30 Year, 4.50%, 4/01/39 - 5/01/41 | United States | 14,540,235 | 15,071,710 | |||||||
FNMA 30 Year, 5.00%, 4/01/34 - 11/01/40 | United States | 18,112,051 | 19,302,112 | |||||||
FNMA 30 Year, 5.50%, 8/01/33 - 9/01/35 | United States | 2,342,377 | 2,549,413 | |||||||
FNMA 30 Year, 6.00%, 6/01/34 - 5/01/38 | United States | 9,091,708 | 10,021,344 | |||||||
FNMA 30 Year, 6.50%, 6/01/28 - 10/01/37 | United States | 1,639,951 | 1,860,817 | |||||||
|
| |||||||||
| 53,437,034 | ||||||||||
|
| |||||||||
Government National Mortgage Association (GNMA) Fixed Rate 0.3% | ||||||||||
GNMA I SF 30 Year, 5.00%, 11/15/33 - 7/15/34 | United States | 1,110,658 | 1,211,106 | |||||||
GNMA I SF 30 Year, 5.50%, 12/15/32 - 6/15/36 | United States | 1,174,550 | 1,300,133 | |||||||
GNMA I SF 30 Year, 6.50%, 11/15/31 - 2/15/32 | United States | 6,776 | 7,732 | |||||||
FSI-24
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Franklin Strategic Income Securities Fund | Country | Principal Amount* | Value | |||||||
Mortgage-Backed Securities (continued) | ||||||||||
Government National Mortgage Association (GNMA) Fixed Rate (continued) | ||||||||||
GNMA I SF 30 Year, 7.00%, 10/15/28 - 6/15/32 | United States | 96,923 | $ | 113,064 | ||||||
GNMA I SF 30 Year, 7.50%, 9/15/30 | United States | 2,010 | 2,367 | |||||||
GNMA II SF 30 Year, 5.00%, 9/20/33 - 11/20/33 | United States | 313,942 | 343,260 | |||||||
GNMA II SF 30 Year, 6.00%, 11/20/34 | United States | 346,208 | 384,760 | |||||||
GNMA II SF 30 Year, 6.50%, 4/20/31 - 2/20/34 | United States | 130,943 | 148,353 | |||||||
GNMA II SF 30 Year, 7.50%, 1/20/28 - 4/20/32 | United States | 32,800 | 38,530 | |||||||
|
| |||||||||
| 3,549,305 | ||||||||||
|
| |||||||||
Total Mortgage-Backed Securities (Cost $88,354,987) | 91,338,521 | |||||||||
|
| |||||||||
Municipal Bonds 5.6% | ||||||||||
Bay Area Toll Authority Toll Bridge Revenue, Build America Bonds, Series S1, 7.043%, 4/01/50 | United States | 6,100,000 | 6,685,112 | |||||||
California State GO, | ||||||||||
7.625%, 3/01/40 | United States | 2,400,000 | 2,765,304 | |||||||
5.25%, 11/01/40 | United States | 560,000 | 552,530 | |||||||
Refunding, 5.00%, 4/01/38 | United States | 10,000,000 | 9,614,400 | |||||||
Various Purpose, 6.00%, 4/01/38 | United States | 3,500,000 | 3,717,350 | |||||||
Various Purpose, 6.00%, 11/01/39 | United States | 160,000 | 170,432 | |||||||
Various Purpose, Refunding, 5.25%, 3/01/38 | United States | 2,335,000 | 2,311,697 | |||||||
Various Purpose, Refunding, NATL Insured, 4.50%, 12/01/32 | United States | 300,000 | 268,017 | |||||||
Various Purpose, Refunding, Series 1, AGMC Insured, 4.75%, 9/01/31 | United States | 290,000 | 280,842 | |||||||
California State Public Works Board Lease Revenue, Various Capital Projects, Series I, 6.125%, 11/01/29 | United States | 1,405,000 | 1,485,914 | |||||||
Chicago Waterworks Revenue, second lien, Refunding, 5.25%, 11/01/38 | United States | 1,895,000 | 1,900,552 | |||||||
Clovis USD, GO, Capital Appreciation, Election of 2004, Series A, NATL RE, FGIC Insured, zero cpn., | ||||||||||
8/01/25 | United States | 2,500,000 | 1,089,525 | |||||||
8/01/26 | United States | 1,290,000 | 525,907 | |||||||
8/01/27 | United States | 1,720,000 | 657,986 | |||||||
8/01/29 | United States | 1,720,000 | 567,669 | |||||||
Cook County GO, Build America Bonds, Series D, 6.229%, 11/15/34 | United States | 3,200,000 | 3,222,880 | |||||||
Detroit School District GO, Qualified School Construction Bonds, 6.645%, 5/01/29 | United States | 8,000,000 | 8,078,240 | |||||||
Illinois State GO, | ||||||||||
5.877%, 3/01/19 | United States | 3,575,000 | 3,678,210 | |||||||
Build America Bonds, 7.35%, 7/01/35 | United States | 4,600,000 | 4,895,412 | |||||||
Metropolitan Water District of Southern California Waterworks Revenue, Authorization, | United States | 1,790,000 | 1,797,088 | |||||||
eNew York City IDA, 144A, 11.00%, 3/01/29 | United States | 600,000 | 754,746 | |||||||
New York City Municipal Water Finance Authority Water and Sewer System Revenue, Second General Resolution, Build America Bonds, Series CC, 6.282%, 6/15/42 | United States | 4,500,000 | 4,635,990 | |||||||
New York City Transitional Finance Authority Revenue, sub. bond, Future Tax Secured, Series C, 5.00%, 11/01/39 | United States | 7,000,000 | 7,188,440 | |||||||
Poway USD, GO, Election of 2008, ID No. 2007-1, Series A, zero cpn., | ||||||||||
8/01/27 | United States | 370,000 | 139,353 | |||||||
8/01/30 | United States | 370,000 | 110,885 | |||||||
8/01/32 | United States | 460,000 | 116,633 | |||||||
8/01/33 | United States | 245,000 | 57,215 | |||||||
Puerto Rico Commonwealth GO, Public Improvement, Refunding, Series C, 5.75%, 7/01/36 | United States | 900,000 | 885,924 | |||||||
Puerto Rico Sales Tax FICO Sales Tax Revenue, first sub., Series A, 5.50%, 8/01/42 | United States | 6,180,000 | 6,188,096 | |||||||
Redondo Beach USD, GO, Build America Bonds, Election of 2008, Direct Payment to District, Series D, 6.461%, 8/01/40 | United States | 1,510,000 | 1,510,015 | |||||||
Salt River Project Agricultural Improvement and Power District Electric System Revenue, | United States | 1,990,000 | 2,031,949 | |||||||
FSI-25
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Franklin Strategic Income Securities Fund | Country | Principal Amount* | Value | |||||||
Municipal Bonds (continued) | ||||||||||
San Francisco City and County GO, Build America Bonds, | ||||||||||
5.75%, 6/15/27 | United States | 1,700,000 | $ | 1,768,612 | ||||||
5.93%, 6/15/28 | United States | 1,520,000 | 1,589,206 | |||||||
San Mateo County Community College District GO, Election of 2001, Series C, NATL Insured, zero cpn., | ||||||||||
9/01/30 | United States | 895,000 | 303,888 | |||||||
3/01/31 | United States | 245,000 | 78,011 | |||||||
Sonoma County Pension Obligation Revenue, Series A, 6.00%, 12/01/29 | United States | 2,100,000 | 2,030,427 | |||||||
|
| |||||||||
Total Municipal Bonds (Cost $80,022,651) | 83,654,457 | |||||||||
|
| |||||||||
Total Investments before Short Term Investments | 1,304,283,326 | |||||||||
|
| |||||||||
Short Term Investments 12.2% | ||||||||||
Foreign Government and Agency Securities 6.9% | ||||||||||
pBank of Negara Monetary Note, 7/19/11 - 3/29/12 | Malaysia | 35,120,000 | MYR | 11,479,252 | ||||||
pEgypt Treasury Bills, 7/12/11 - 2/21/12 | Egypt | 102,975,000 | EGP | 16,727,184 | ||||||
Government of Israel, 4.00%, 3/30/12 | Israel | 3,315,000 | ILS | 977,616 | ||||||
pSweden Treasury Bills, 9/21/11 | Sweden | 70,190,000 | SEK | 11,053,825 | ||||||
pIsrael Treasury Bills, 7/06/11 - 5/02/12 | Israel | 65,505,300 | ILS | 18,877,755 | ||||||
pMalaysia Treasury Bills, 7/08/11 - 3/23/12 | Malaysia | 2,080,000 | MYR | 680,715 | ||||||
pNorway Treasury Bills, | ||||||||||
12/21/11 | Norway | 32,480,000 | NOK | 5,952,439 | ||||||
3/21/12 | Norway | 114,510,000 | NOK | 20,877,689 | ||||||
pPhilippine Treasury Bills, 7/13/11 - 1/11/12 | Philippines | 18,290,000 | PHP | 418,153 | ||||||
pSri Lanka Treasury Bills, 7/08/11 - 2/17/12 | Sri Lanka | 26,620,000 | LKR | 235,762 | ||||||
pUnited Kingdom Treasury Bills, 8/01/11 - 8/08/11 | United Kingdom | 1,389,000 | GBP | 2,228,105 | ||||||
United Kingdom Treasury Note, | ||||||||||
9.00%, 7/12/11 | United Kingdom | 520,000 | GBP | 836,676 | ||||||
3.25%, 12/07/11 | United Kingdom | 4,968,000 | GBP | 8,069,219 | ||||||
j5.25%, 6/07/12 | United Kingdom | 1,800,000 | GBP | 3,011,522 | ||||||
|
| |||||||||
Total Foreign Government and Agency Securities | 101,425,912 | |||||||||
|
| |||||||||
Total Investments before Money Market Funds | 1,405,709,238 | |||||||||
|
| |||||||||
| Shares | ||||||||||
Money Market Funds (Cost $79,117,488) 5.3% | ||||||||||
a,qInstitutional Fiduciary Trust Money Market Portfolio | United States | 79,117,488 | 79,117,488 | |||||||
|
| |||||||||
Total Investments (Cost $1,418,053,780) 100.2% | 1,484,826,726 | |||||||||
Other Assets, less Liabilities (0.2)% | (3,122,342 | ) | ||||||||
|
| |||||||||
Net Assets 100.0% | $ | 1,481,704,384 | ||||||||
|
| |||||||||
FSI-26
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Franklin Strategic Income Securities Fund |
†Rounds to less than 0.1% of net assets.
*The principal amount is stated in U.S. dollars unless otherwise indicated.
aNon-income producing.
bSecurity has been deemed illiquid because it may not be able to be sold within seven days. At June 30, 2011, the aggregate value of these securities was $1,508,461, representing 0.10% of net assets.
cSee Note 1(e) regarding investment in FT Holdings Corporation III.
dAt June 30, 2011, pursuant to the Fund’s policies and the requirements of applicable securities law, the Fund may be restricted from trading these securities for a limited or extended period of time due to ownership limits and/or potential possession of material non-public information.
eSecurity 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, 2011, the aggregate value of these securities was $262,599,604, representing 17.72% of net assets.
fPerpetual security with no stated maturity date.
gIncome may be received in additional securities and/or cash.
hSee Note 8 regarding defaulted securities.
iThe coupon rate shown represents the rate at period end.
jA portion or all of the security purchased on a delayed delivery basis. See Note 1(c).
kSee Note 1(g) regarding senior floating rate interests.
lThe principal amount is stated in original face, and scheduled paydowns are reflected in the market price on ex-date.
mPrincipal amount is stated in 100 Mexican Peso Units.
nPrincipal amount is stated in 1,000 Brazilian Real Units.
oRedemption price at maturity is adjusted for inflation. See Note 1(j).
pThe security is traded on a discount basis with no stated coupon rate.
qSee Note 7 regarding investments in the Institutional Fiduciary Trust Money Market Portfolio.
FSI-27
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Franklin Strategic Income Securities Fund |
At June 30, 2011, the Fund had the following forward exchange contracts outstanding. See Note 1(d).
Forward Exchange Contracts |
| |||||||||||||||||||||||||||||||
| Currency | Counterparty | Type | Quantity | Contract Amount* | Settlement Date | Unrealized Appreciation | Unrealized Depreciation | |||||||||||||||||||||||||
Euro | DBAB | Sell | 1,485,071 | 1,870,595 | 7/07/11 | $ | — | $ | (282,557 | ) | ||||||||||||||||||||||
Indian Rupee | JPHQ | Buy | 192,280,000 | 4,000,000 | 7/14/11 | 297,024 | — | |||||||||||||||||||||||||
Euro | DBAB | Sell | 1,056,111 | 1,384,562 | 8/08/11 | — | (145,232 | ) | ||||||||||||||||||||||||
Chilean Peso | JPHQ | Buy | 1,543,470,600 | 2,982,552 | 8/18/11 | 299,717 | — | |||||||||||||||||||||||||
Japanese Yen | UBSW | Sell | 32,055,000 | 377,220 | 8/18/11 | — | (21,060 | ) | ||||||||||||||||||||||||
Japanese Yen | DBAB | Sell | 19,550,000 | 230,068 | 8/18/11 | — | (12,839 | ) | ||||||||||||||||||||||||
Japanese Yen | JPHQ | Sell | 15,928,000 | 186,467 | 8/18/11 | — | (11,437 | ) | ||||||||||||||||||||||||
Chilean Peso | JPHQ | Buy | 509,866,000 | 983,822 | 8/19/11 | 100,307 | — | |||||||||||||||||||||||||
Japanese Yen | HSBC | Sell | 15,854,000 | 186,546 | 8/19/11 | — | (10,439 | ) | ||||||||||||||||||||||||
Euro | BZWS | Sell | 2,124,000 | 2,728,809 | 8/22/11 | — | (346,476 | ) | ||||||||||||||||||||||||
Euro | UBSW | Sell | 1,750,000 | 2,253,510 | 8/22/11 | — | (280,270 | ) | ||||||||||||||||||||||||
Japanese Yen | BZWS | Sell | 15,895,000 | 187,119 | 8/22/11 | — | (10,379 | ) | ||||||||||||||||||||||||
Japanese Yen | DBAB | Sell | 15,915,000 | 187,588 | 8/22/11 | — | (10,158 | ) | ||||||||||||||||||||||||
Japanese Yen | MSCO | Sell | 12,500,000 | 147,156 | 8/22/11 | — | (8,159 | ) | ||||||||||||||||||||||||
Euro | UBSW | Sell | 1,750,000 | 2,249,835 | 8/23/11 | — | (283,865 | ) | ||||||||||||||||||||||||
Japanese Yen | FBCO | Sell | 31,524,000 | 370,871 | 8/23/11 | — | (20,823 | ) | ||||||||||||||||||||||||
Japanese Yen | CITI | Sell | 31,757,000 | 374,480 | 8/23/11 | — | (20,109 | ) | ||||||||||||||||||||||||
Japanese Yen | DBAB | Sell | 15,708,000 | 185,538 | 8/23/11 | — | (9,638 | ) | ||||||||||||||||||||||||
Japanese Yen | JPHQ | Sell | 31,689,000 | 373,471 | 8/24/11 | — | (20,275 | ) | ||||||||||||||||||||||||
Japanese Yen | BZWS | Sell | 31,584,000 | 373,175 | 8/24/11 | — | (19,267 | ) | ||||||||||||||||||||||||
Euro | BZWS | Sell | 2,785,000 | 3,524,418 | 8/25/11 | — | (507,530 | ) | ||||||||||||||||||||||||
Euro | DBAB | Sell | 993,304 | 1,275,551 | 8/25/11 | — | (162,491 | ) | ||||||||||||||||||||||||
Japanese Yen | DBAB | Sell | 660,099,000 | 7,771,673 | 8/25/11 | — | (430,322 | ) | ||||||||||||||||||||||||
Japanese Yen | BZWS | Sell | 12,568,000 | 148,103 | 8/25/11 | — | (8,060 | ) | ||||||||||||||||||||||||
Japanese Yen | HSBC | Sell | 100,248,000 | 1,199,235 | 8/26/11 | — | (46,394 | ) | ||||||||||||||||||||||||
Japanese Yen | UBSW | Sell | 34,903,000 | 415,794 | 8/26/11 | — | (17,892 | ) | ||||||||||||||||||||||||
Japanese Yen | JPHQ | Sell | 15,991,000 | 188,831 | 8/26/11 | — | (9,865 | ) | ||||||||||||||||||||||||
United States Dollar | UBSW | Buy | 3,000,000 | 2,370,230 | EUR | 8/26/11 | — | (431,361 | ) | |||||||||||||||||||||||
Japanese Yen | BZWS | Sell | 37,600,000 | 446,588 | 8/30/11 | — | (20,622 | ) | ||||||||||||||||||||||||
Japanese Yen | JPHQ | Sell | 15,743,000 | 185,561 | 9/01/11 | — | (10,061 | ) | ||||||||||||||||||||||||
Philippine Peso | DBAB | Buy | 21,010,000 | 466,930 | 10/04/11 | 13,686 | — | |||||||||||||||||||||||||
Philippine Peso | HSBC | Buy | 16,853,000 | 373,963 | 10/04/11 | 11,560 | — | |||||||||||||||||||||||||
Euro | UBSW | Sell | 2,850,000 | 3,899,028 | 10/05/11 | — | (222,186 | ) | ||||||||||||||||||||||||
Philippine Peso | HSBC | Buy | 25,126,000 | 561,375 | 10/05/11 | 13,355 | — | |||||||||||||||||||||||||
Philippine Peso | DBAB | Buy | 25,119,000 | 560,905 | 10/05/11 | 13,665 | — | |||||||||||||||||||||||||
Philippine Peso | JPHQ | Buy | 6,636,000 | 148,244 | 10/06/11 | 3,536 | — | |||||||||||||||||||||||||
Euro | BZWS | Sell | 2,749,000 | 3,825,508 | 10/07/11 | — | (149,400 | ) | ||||||||||||||||||||||||
Philippine Peso | DBAB | Buy | 20,621,000 | 463,539 | 10/07/11 | 8,073 | — | |||||||||||||||||||||||||
Philippine Peso | HSBC | Buy | 16,532,000 | 372,771 | 10/11/11 | 5,211 | — | |||||||||||||||||||||||||
Philippine Peso | CITI | Buy | 8,254,000 | 186,624 | 10/11/11 | 2,092 | — | |||||||||||||||||||||||||
Philippine Peso | JPHQ | Buy | 8,232,000 | 185,828 | 10/11/11 | 2,385 | — | |||||||||||||||||||||||||
Philippine Peso | DBAB | Buy | 16,501,000 | 372,660 | 10/11/11 | 4,613 | — | |||||||||||||||||||||||||
Philippine Peso | DBAB | Buy | 4,913,000 | 111,492 | 10/12/11 | 829 | — | |||||||||||||||||||||||||
Euro | DBAB | Sell | 595,343 | 823,419 | 10/13/11 | — | (37,250 | ) | ||||||||||||||||||||||||
Philippine Peso | HSBC | Buy | 8,192,000 | 184,525 | 10/13/11 | 2,745 | — | |||||||||||||||||||||||||
Philippine Peso | JPHQ | Buy | 18,311,000 | 413,201 | 10/13/11 | 5,392 | — | |||||||||||||||||||||||||
Japanese Yen | DBAB | Sell | 382,080,000 | 4,725,379 | 10/20/11 | — | (24,279 | ) | ||||||||||||||||||||||||
Philippine Peso | JPHQ | Buy | 237,550,000 | 5,353,601 | 10/21/11 | 73,584 | — | |||||||||||||||||||||||||
Japanese Yen | JPHQ | Sell | 270,990,000 | 3,355,498 | 10/25/11 | — | (13,368 | ) | ||||||||||||||||||||||||
Euro | BZWS | Sell | 1,993,000 | 2,780,235 | 10/26/11 | — | (99,780 | ) | ||||||||||||||||||||||||
FSI-28
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Franklin Strategic Income Securities Fund |
Forward Exchange Contracts (continued) |
| |||||||||||||||||||||||||||
| Currency | Counterparty | Type | Quantity | Contract Amount* | Settlement Date | Unrealized Appreciation | Unrealized Depreciation | |||||||||||||||||||||
Euro | UBSW | Sell | 2,679,000 | 3,731,177 | 10/27/11 | $ | — | $ | (140,028 | ) | ||||||||||||||||||
Japanese Yen | JPHQ | Sell | 360,360,000 | 4,441,076 | 10/31/11 | — | (39,086 | ) | ||||||||||||||||||||
Euro | UBSW | Sell | 1,480,440 | 2,005,404 | 11/17/11 | — | (132,419 | ) | ||||||||||||||||||||
Philippine Peso | JPHQ | Buy | 191,280,000 | 4,322,712 | 11/25/11 | 35,942 | — | |||||||||||||||||||||
Japanese Yen | BOFA | Sell | 620,288,000 | 7,491,401 | 11/28/11 | — | (222,525 | ) | ||||||||||||||||||||
Euro | UBSW | Sell | 3,920,000 | 5,143,236 | 12/01/11 | — | (514,881 | ) | ||||||||||||||||||||
Japanese Yen | BZWS | Sell | 257,790,000 | 3,082,875 | 12/05/11 | — | (123,242 | ) | ||||||||||||||||||||
Euro | DBAB | Sell | 3,210,000 | 4,245,546 | 12/08/11 | — | (386,719 | ) | ||||||||||||||||||||
Euro | DBAB | Sell | 2,870,000 | 3,822,697 | 12/09/11 | — | (318,791 | ) | ||||||||||||||||||||
Euro | UBSW | Sell | 3,400,000 | 4,491,128 | 12/12/11 | — | (414,692 | ) | ||||||||||||||||||||
Euro | DBAB | Sell | 1,410,000 | 1,858,380 | 12/12/11 | — | (176,093 | ) | ||||||||||||||||||||
Japanese Yen | UBSW | Sell | 351,760,000 | 4,208,159 | 12/12/11 | — | (166,971 | ) | ||||||||||||||||||||
Euro | CITI | Sell | 3,868,000 | 5,157,398 | 12/15/11 | — | (423,158 | ) | ||||||||||||||||||||
Euro | DBAB | Sell | 486,875 | 649,092 | 12/15/11 | — | (53,347 | ) | ||||||||||||||||||||
British Pound | DBAB | Sell | 600,000 | 943,620 | 12/16/11 | — | (17,316 | ) | ||||||||||||||||||||
Euro | UBSW | Sell | 2,137,312 | 2,847,413 | 12/19/11 | — | (235,798 | ) | ||||||||||||||||||||
Chilean Peso | DBAB | Buy | 2,449,000,000 | 4,829,994 | 1/10/12 | 291,164 | — | |||||||||||||||||||||
Indian Rupee | HSBC | Buy | 139,650,000 | 2,922,159 | 1/10/12 | 101,080 | — | |||||||||||||||||||||
Japanese Yen | HSBC | Sell | 183,560,000 | 2,246,756 | 1/10/12 | — | (37,132 | ) | ||||||||||||||||||||
Euro | UBSW | Sell | 3,940,000 | 5,100,035 | 1/11/12 | — | (579,320 | ) | ||||||||||||||||||||
Euro | DBAB | Sell | 2,187,000 | 2,834,111 | 1/11/12 | — | (318,363 | ) | ||||||||||||||||||||
Euro | BZWS | Sell | 1,691,484 | 2,188,781 | 1/11/12 | — | (249,427 | ) | ||||||||||||||||||||
Euro | JPHQ | Sell | 1,802,953 | 2,331,669 | 1/13/12 | — | (267,040 | ) | ||||||||||||||||||||
Japanese Yen | BZWS | Sell | 460,675,000 | 5,577,179 | 1/13/12 | — | (154,867 | ) | ||||||||||||||||||||
Philippine Peso | JPHQ | Buy | 35,843,000 | 814,151 | 1/13/12 | — | (174 | ) | ||||||||||||||||||||
Philippine Peso | HSBC | Buy | 5,750,000 | 130,732 | 1/17/12 | — | (184 | ) | ||||||||||||||||||||
Euro | BZWS | Sell | 2,912,410 | 3,881,369 | 1/19/12 | — | (315,615 | ) | ||||||||||||||||||||
Japanese Yen | DBAB | Sell | 271,680,000 | 3,293,490 | 1/19/12 | — | (87,231 | ) | ||||||||||||||||||||
Euro | DBAB | Sell | 2,000,000 | 2,716,500 | 1/26/12 | — | (164,953 | ) | ||||||||||||||||||||
Euro | BZWS | Sell | 1,007,118 | 1,357,595 | 1/26/12 | — | (93,387 | ) | ||||||||||||||||||||
Euro | DBAB | Sell | 1,587,264 | 2,146,426 | 1/27/12 | — | (140,311 | ) | ||||||||||||||||||||
Euro | DBAB | Sell | 3,014,151 | 4,103,767 | 2/02/12 | — | (237,770 | ) | ||||||||||||||||||||
Chilean Peso | BZWS | Buy | 486,100,000 | 981,227 | 2/08/12 | 31,922 | — | |||||||||||||||||||||
Chilean Peso | DBAB | Buy | 725,000,000 | 1,472,081 | 2/08/12 | 38,993 | — | |||||||||||||||||||||
Chilean Peso | JPHQ | Buy | 482,900,000 | 976,049 | 2/08/12 | 30,431 | — | |||||||||||||||||||||
Indian Rupee | HSBC | Buy | 186,760,000 | 3,883,552 | 2/08/12 | 142,916 | — | |||||||||||||||||||||
Chilean Peso | BZWS | Buy | 1,001,200,000 | 2,020,789 | 2/09/12 | 65,716 | — | |||||||||||||||||||||
Euro | UBSW | Sell | 2,151,000 | 2,920,563 | 2/13/12 | — | (176,548 | ) | ||||||||||||||||||||
Euro | DBAB | Sell | 1,250,438 | 1,690,529 | 2/14/12 | — | (109,849 | ) | ||||||||||||||||||||
Singapore Dollar | DBAB | Buy | 1,158,000 | 905,912 | 2/24/12 | 37,716 | — | |||||||||||||||||||||
Singapore Dollar | DBAB | Buy | 722,000 | 566,230 | 2/27/12 | 22,122 | — | |||||||||||||||||||||
Singapore Dollar | DBAB | Buy | 723,000 | 566,295 | 2/29/12 | 22,879 | — | |||||||||||||||||||||
Euro | UBSW | Sell | 2,581,000 | 3,523,246 | 3/01/12 | — | (190,858 | ) | ||||||||||||||||||||
Japanese Yen | UBSW | Sell | 95,700,000 | 1,177,209 | 3/01/12 | — | (14,362 | ) | ||||||||||||||||||||
Japanese Yen | JPHQ | Sell | 85,800,000 | 1,055,610 | 3/01/12 | — | (12,694 | ) | ||||||||||||||||||||
Japanese Yen | HSBC | Sell | 85,800,000 | 1,056,000 | 3/01/12 | — | (12,304 | ) | ||||||||||||||||||||
Euro | DBAB | Sell | 1,500,000 | 2,101,800 | 3/15/12 | — | (55,702 | ) | ||||||||||||||||||||
Singapore Dollar | HSBC | Buy | 1,113,000 | 872,284 | 3/19/12 | 34,805 | — | |||||||||||||||||||||
Singapore Dollar | DBAB | Buy | 973,400 | 763,050 | 3/19/12 | 30,266 | — | |||||||||||||||||||||
Singapore Dollar | JPHQ | Buy | 1,394,000 | 1,089,999 | 3/19/12 | 46,104 | — | |||||||||||||||||||||
Singapore Dollar | HSBC | Buy | 837,000 | 653,676 | 3/21/12 | 28,483 | — | |||||||||||||||||||||
FSI-29
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Franklin Strategic Income Securities Fund |
Forward Exchange Contracts (continued) |
| |||||||||||||||||||||||||||
| Currency | Counterparty | Type | Quantity | Contract Amount* | Settlement Date | Unrealized Appreciation | Unrealized Depreciation | |||||||||||||||||||||
Singapore Dollar | DBAB | Buy | 1,048,000 | 817,536 | 3/21/12 | $ | 36,588 | $ | — | |||||||||||||||||||
Euro | DBAB | Sell | 714,000 | 999,343 | 4/05/12 | — | (26,887 | ) | ||||||||||||||||||||
British Pound | DBAB | Sell | 1,089,000 | 1,762,547 | 4/11/12 | 21,293 | — | |||||||||||||||||||||
Indian Rupee | DBAB | Buy | 20,841,000 | 444,845 | 4/11/12 | 682 | — | |||||||||||||||||||||
Indian Rupee | DBAB | Buy | 44,691,000 | 957,391 | 4/13/12 | — | (2,230 | ) | ||||||||||||||||||||
Chilean Peso | MSCO | Buy | 116,230,000 | 236,120 | 4/16/12 | 4,271 | — | |||||||||||||||||||||
Indian Rupee | JPHQ | Buy | 30,019,000 | 641,432 | 4/16/12 | — | (70 | ) | ||||||||||||||||||||
Indian Rupee | JPHQ | Buy | 29,466,000 | 625,871 | 4/18/12 | 3,532 | — | |||||||||||||||||||||
Euro | DBAB | Sell | 1,888,220 | 2,692,035 | 4/19/12 | — | (20,571 | ) | ||||||||||||||||||||
Indian Rupee | DBAB | Buy | 10,360,000 | 219,352 | 4/19/12 | 1,915 | — | |||||||||||||||||||||
Indian Rupee | JPHQ | Buy | 14,719,000 | 312,373 | 4/19/12 | 1,994 | — | |||||||||||||||||||||
Chilean Peso | MSCO | Buy | 104,150,000 | 210,404 | 4/20/12 | 4,904 | — | |||||||||||||||||||||
Euro | DBAB | Sell | 1,001,008 | 1,416,527 | 4/23/12 | — | (21,315 | ) | ||||||||||||||||||||
Indian Rupee | DBAB | Buy | 20,931,000 | 444,489 | 4/26/12 | 2,194 | — | |||||||||||||||||||||
Singapore Dollar | DBAB | Buy | 6,168,500 | 5,000,000 | 4/26/12 | 28,248 | — | |||||||||||||||||||||
Chilean Peso | JPHQ | Buy | 234,301,000 | 475,159 | 4/27/12 | 8,824 | — | |||||||||||||||||||||
Indian Rupee | JPHQ | Buy | 17,801,000 | 377,540 | 4/27/12 | 2,304 | — | |||||||||||||||||||||
Chilean Peso | CITI | Buy | 377,668,000 | 776,296 | 4/30/12 | 3,567 | — | |||||||||||||||||||||
Indian Rupee | JPHQ | Buy | 14,829,000 | 314,841 | 4/30/12 | 1,477 | — | |||||||||||||||||||||
Chilean Peso | DBAB | Buy | 1,554,000,000 | 3,233,458 | 5/04/12 | — | (25,995 | ) | ||||||||||||||||||||
Euro | DBAB | Sell | 180,000 | 264,204 | 5/04/12 | 5,752 | — | |||||||||||||||||||||
Philippine Peso | JPHQ | Buy | 91,360,000 | 2,135,228 | 5/04/12 | — | (74,778 | ) | ||||||||||||||||||||
British Pound | DBAB | Sell | 913,406 | 1,489,364 | 5/10/12 | 29,557 | — | |||||||||||||||||||||
Euro | DBAB | Sell | 600,000 | 844,476 | 5/10/12 | — | (16,849 | ) | ||||||||||||||||||||
Singapore Dollar | DBAB | Buy | 3,707,640 | 3,000,000 | 5/10/12 | 22,481 | — | |||||||||||||||||||||
Euro | DBAB | Sell | 429,000 | 605,386 | 5/11/12 | — | (10,440 | ) | ||||||||||||||||||||
British Pound | DBAB | Sell | 2,287,500 | 3,700,489 | 5/17/12 | 45,015 | — | |||||||||||||||||||||
Indian Rupee | DBAB | Buy | 28,359,000 | 594,279 | 6/01/12 | 8,441 | — | |||||||||||||||||||||
Indian Rupee | HSBC | Buy | 32,771,000 | 694,154 | 6/04/12 | 2,097 | — | |||||||||||||||||||||
Euro | DBAB | Sell | 1,053,792 | 1,505,279 | 6/06/12 | — | (6,061 | ) | ||||||||||||||||||||
Singapore Dollar | JPHQ | Buy | 4,945,200 | 4,000,000 | 6/06/12 | 31,862 | — | |||||||||||||||||||||
Euro | DBAB | Sell | 2,000,000 | 2,831,300 | 6/07/12 | — | (36,982 | ) | ||||||||||||||||||||
Indian Rupee | DBAB | Buy | 20,889,000 | 440,510 | 6/07/12 | 3,145 | — | |||||||||||||||||||||
Indian Rupee | HSBC | Buy | 5,576,000 | 118,412 | 6/08/12 | 2 | — | |||||||||||||||||||||
Euro | DBAB | Sell | 937,500 | 1,350,563 | 6/11/12 | 6,243 | — | |||||||||||||||||||||
Indian Rupee | DBAB | Buy | 5,655,000 | 120,038 | 6/11/12 | 12 | — | |||||||||||||||||||||
Indian Rupee | HSBC | Buy | 14,080,000 | 298,938 | 6/13/12 | — | (101 | ) | ||||||||||||||||||||
Indian Rupee | DBAB | Buy | 14,156,000 | 299,852 | 6/18/12 | 427 | — | |||||||||||||||||||||
Indian Rupee | DBAB | Buy | 12,894,000 | 272,083 | 6/20/12 | 1,364 | — | |||||||||||||||||||||
Euro | DBAB | Sell | 242,890 | 340,313 | 6/27/12 | — | (7,782 | ) | ||||||||||||||||||||
Euro | UBSW | Sell | 4,274,000 | 5,999,841 | 6/29/12 | — | (124,982 | ) | ||||||||||||||||||||
|
| |||||||||||||||||||||||||||
Unrealized appreciation (depreciation) |
| 2,096,504 | (10,662,044 | ) | ||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||
Net unrealized appreciation (depreciation) |
| $ | (8,565,540 | ) | ||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||
| *In | U.S. dollars unless otherwise indicated. |
FSI-30
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Franklin Strategic Income Securities Fund |
At June 30, 2011, the Fund had the following credit default swap contracts outstanding. See Note 1(d).
Credit Default Swap Contracts | ||||||||||||||||||||||||||||||||||
| Description | Counter- partya | Notional Amountb | Periodic Payment Rate | Expiration Date | Upfront Premiums Paid (Received) | Unrealized Appreciation | Unrealized Depreciation | Market Value | Ratingc | |||||||||||||||||||||||||
Contracts to Sell Protectiond |
| |||||||||||||||||||||||||||||||||
Traded Index | ||||||||||||||||||||||||||||||||||
CDX.NA.HY.16 | CITI | 9,000,000 | 5.00% | 6/20/16 | $ | 56,250 | $ | 85,050 | $ | — | $ | 141,300 | Non Investment Grade | |||||||||||||||||||||
CDX.NA.HY.16 | FBCO | 11,000,000 | 5.00% | 6/20/16 | 68,750 | 103,950 | — | 172,700 | Non Investment Grade | |||||||||||||||||||||||||
LCDX.NA.16 | BZWS | 16,000,000 | 2.50% | 6/20/16 | 19,559 | — | (384,448 | ) | (364,889 | ) | Non Investment Grade | |||||||||||||||||||||||
LCDX.NA.16 | FBCO | 2,000,000 | 2.50% | 6/20/16 | 3,667 | — | (49,278 | ) | (45,611 | ) | Non Investment Grade | |||||||||||||||||||||||
LCDX.NA.16 | GSCO | 7,000,000 | 2.50% | 6/20/16 | — | — | (159,639 | ) | (159,639 | ) | Non Investment Grade | |||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||
Unrealized appreciation (depreciation) |
| 189,000 | (593,365 | ) | ||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||
Net unrealized appreciation (depreciation) |
| $ | (404,365 | ) | ||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||
aPositions are generally not collateralized if the market value is under $250,000. Collateral requirements may be net of current positions at the individual counterparty for the fund. The table below summarizes the cash and/or securities held as collateral for each applicable counterparty at period end:
| Counterparty | Collateral Posted (Received) | |||
BZWS | $ | 280,000 | ||
CITI | 255,000 | |||
GSCO | 110,000 | |||
|
| |||
Total collateral for credit default swaps | $ | 645,000 | ||
|
| |||
bIn U.S. dollars unless otherwise indicated. For contracts to sell protection, the notional amount is equal to the maximum potential amount of the future payments and no recourse provisions have been entered into in association with the contracts.
cBased on Standard and Poor’s (S&P) Rating for single name swaps and internal ratings for index swaps. Internal ratings based on mapping into equivalent ratings from external vendors.
dThe fund enters contracts to sell protection to create a long credit position. Performance triggers include failure to pay or bankruptcy for traded index swaps.
See Abbreviations on page FSI-46.
The accompanying notes are an integral part of these financial statements.
FSI-31
Franklin Templeton Variable Insurance Products Trust
Financial Statements
Statement of Assets and Liabilities
June 30, 2011 (unaudited)
| Franklin Strategic Income Securities Fund | ||||
Assets: | ||||
Investments in securities: | ||||
Cost - Unaffiliated issuers | $ | 1,338,936,292 | ||
Cost - Sweep Money Fund (Note 7) | 79,117,488 | |||
|
| |||
Total cost of investments | $ | 1,418,053,780 | ||
|
| |||
Value - Unaffiliated issuers | $ | 1,405,709,238 | ||
Value - Sweep Money Fund (Note 7) | 79,117,488 | |||
|
| |||
Total value of investments | 1,484,826,726 | |||
Cash | 1,258,850 | |||
Foreign currency, at value (cost $136,534) | 137,097 | |||
Receivables: | ||||
Investment securities sold | 8,868,141 | |||
Capital shares sold | 913,960 | |||
Interest | 17,468,405 | |||
Due from brokers | 645,000 | |||
Swaps (premiums paid $148,750) | 148,226 | |||
Unrealized appreciation on forward exchange contracts | 2,096,504 | |||
Unrealized appreciation on swap contracts | 189,000 | |||
Other assets | 380 | |||
|
| |||
Total assets | 1,516,552,289 | |||
|
| |||
Liabilities: | ||||
Payables: | ||||
Investment securities purchased | 19,048,572 | |||
Capital shares redeemed | 2,811,301 | |||
Affiliates | 817,528 | |||
Due to brokers | 468,865 | |||
Unrealized depreciation on forward exchange contracts | 10,662,044 | |||
Unrealized depreciation on swap contracts | 593,365 | |||
Unrealized depreciation on unfunded loan commitments (Note 9) | 3,519 | |||
Accrued expenses and other liabilities | 442,711 | |||
|
| |||
Total liabilities | 34,847,905 | |||
|
| |||
Net assets, at value | $ | 1,481,704,384 | ||
|
| |||
Net assets consist of: | ||||
Paid-in capital | $ | 1,378,340,985 | ||
Undistributed net investment income | 35,183,760 | |||
Net unrealized appreciation (depreciation) | 57,880,688 | |||
Accumulated net realized gain (loss) | 10,298,951 | |||
|
| |||
Net assets, at value | $ | 1,481,704,384 | ||
|
| |||
The accompanying notes are an integral part of these financial statements.
FSI-32
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Assets and Liabilities (continued)
June 30, 2011 (unaudited)
| Franklin Strategic Income Securities Fund | ||||
Class 1: | ||||
Net assets, at value | $ | 1,155,500,248 | ||
|
| |||
Shares outstanding | 90,691,027 | |||
|
| |||
Net asset value and maximum offering price per share | $ | 12.74 | ||
|
| |||
Class 2: | ||||
Net assets, at value | $ | 124,462,585 | ||
|
| |||
Shares outstanding | 9,983,225 | |||
|
| |||
Net asset value and maximum offering price per share | $ | 12.47 | ||
|
| |||
Class 4: | ||||
Net assets, at value | $ | 201,741,551 | ||
|
| |||
Shares outstanding | 15,952,312 | |||
|
| |||
Net asset value and maximum offering price per share | $ | 12.65 | ||
|
| |||
The accompanying notes are an integral part of these financial statements.
FSI-33
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Operations
for the six months ended June 30, 2011 (unaudited)
| Franklin Strategic Income Securities Fund | ||||
Investment income: | ||||
Dividends | $ | 14,070 | ||
Interest | 44,731,828 | |||
|
| |||
Total investment income | 44,745,898 | |||
|
| |||
Expenses: | ||||
Management fees (Note 3a) | 2,493,284 | |||
Administrative fees (Note 3b) | 1,468,215 | |||
Distribution fees: (Note 3c) | ||||
Class 2 | 137,845 | |||
Class 4 | 335,766 | |||
Unaffiliated transfer agent fees | 642 | |||
Custodian fees (Note 4) | 145,223 | |||
Reports to shareholders | 75,864 | |||
Professional fees | 53,954 | |||
Trustees’ fees and expenses | 3,218 | |||
Other | 40,025 | |||
|
| |||
Total expenses | 4,754,036 | |||
|
| |||
Net investment income | 39,991,862 | |||
|
| |||
Realized and unrealized gains (losses): | ||||
Net realized gain (loss) from: | ||||
Investments | 28,574,453 | |||
Foreign currency transactions | 1,009,615 | |||
Swap contracts | 365,497 | |||
|
| |||
Net realized gain (loss) | 29,949,565 | |||
|
| |||
Net change in unrealized appreciation (depreciation) on: | ||||
Investments | 1,337,192 | |||
Translation of other assets and liabilities denominated in foreign currencies | (9,175,063 | ) | ||
|
| |||
Net change in unrealized appreciation (depreciation) | (7,837,871 | ) | ||
|
| |||
Net realized and unrealized gain (loss) | 22,111,694 | |||
|
| |||
Net increase (decrease) in net assets resulting from operations | $ | 62,103,556 | ||
|
| |||
The accompanying notes are an integral part of these financial statements.
FSI-34
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, 2011 | Year Ended 2010 | |||||||
| ||||||||
Increase (decrease) in net assets: | ||||||||
Operations: | ||||||||
Net investment income | $ | 39,991,862 | $ | 82,801,087 | ||||
Net realized gain (loss) from investments, foreign currency transactions and swap contracts | 29,949,565 | 57,948,653 | ||||||
Net change in unrealized appreciation (depreciation) on investments and translation of other assets and liabilities denominated in foreign currencies | (7,837,871 | ) | 13,730,001 | |||||
| ||||||||
Net increase (decrease) in net assets resulting from operations | 62,103,556 | 154,479,741 | ||||||
| ||||||||
Distributions to shareholders from and net foreign currency gains: | ||||||||
Net investment income: | ||||||||
Class 1 | (69,631,166 | ) | (57,255,268 | ) | ||||
Class 2 | (7,304,903 | ) | (3,841,288 | ) | ||||
Class 4 | (11,235,444 | ) | (8,302,315 | ) | ||||
| ||||||||
Total distributions to shareholders | (88,171,513 | ) | (69,398,871 | ) | ||||
| ||||||||
Capital share transactions: (Note 2) | ||||||||
Class 1 | (19,836,628 | ) | (48,613,654 | ) | ||||
Class 2 | 25,958,532 | 28,343,361 | ||||||
Class 4 | 16,975,927 | 16,237,324 | ||||||
| ||||||||
Total capital share transactions | 23,097,831 | (4,032,969 | ) | |||||
| ||||||||
Net increase (decrease) in net assets | (2,980,126 | ) | 81,047,901 | |||||
Net assets: | ||||||||
Beginning of period | 1,484,674,510 | 1,403,626,609 | ||||||
| ||||||||
End of period | $ | 1,481,704,384 | $ | 1,484,674,510 | ||||
| ||||||||
Undistributed net investment income included in net assets: | ||||||||
End of period | $ | 35,183,760 | $ | 83,363,411 | ||||
| ||||||||
The accompanying notes are an integral part of these financial statements.
FSI-35
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 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 generally sold only to insurance company separate accounts to fund the benefits of variable life insurance policies or variable annuity contracts. At June 30, 2011, 92.71% 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 initial sales load, contingent deferred sales charges, distribution fees, voting rights on matters affecting a single class and its exchange privilege.
The following summarizes the Fund’s significant accounting policies.
a. Financial Instrument Valuation
The Fund’s investments in securities and other financial instruments are carried at fair value daily. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. Under procedures approved by the Trust’s Board of Trustees, the Fund may utilize independent pricing services, quotations from securities and financial instrument dealers, and other market sources to determine fair value.
Equity securities listed on an 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 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.
Debt securities generally trade in the over-the-counter market rather than on a securities exchange. The Fund’s pricing services use multiple valuation techniques to determine fair value. In instances where sufficient market activity exists, the pricing services may utilize a market-based approach through which quotes from market makers are used to determine fair value. In instances where sufficient market activity may not exist or is limited, the pricing services also utilize proprietary valuation models which may consider market characteristics such as benchmark yield curves, option-adjusted spreads, credit spreads, estimated default rates, coupon rates, anticipated timing of principal repayments, underlying collateral, and other unique security features in order to estimate the relevant cash flows, which are then discounted to calculate the fair value. 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.
Certain derivative financial instruments (derivatives) trade in the over-the-counter market. The Fund’s pricing services use various techniques including industry standard option pricing models and proprietary discounted cash flow models to determine the fair value of those instruments. The Fund’s net benefit or obligation under the derivative contract, as measured by the fair market value of the contract, is included in net assets.
The Fund has procedures to determine the fair value of securities and other financial instruments for which market prices are not readily available or which may not be reliably priced. Under these procedures, the Fund primarily employs a market-based approach which may use related or comparable assets or liabilities, recent transactions, market multiples, book values, and other relevant information for the investment to determine the fair value of the investment. The Fund may also use an income-based valuation approach in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the investments. Due to the inherent uncertainty of valuations of such investments, the fair values may differ significantly from the values that would have been used had an active market existed.
FSI-36
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Strategic Income 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. The Fund may enter into foreign currency exchange contracts to facilitate transactions denominated in a foreign currency. 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. Portfolio securities and assets and liabilities denominated in foreign currencies contain risks that those currencies will decline in value relative to the U.S. dollar. 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 Trust’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 purchases 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 invested in 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 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/or the potential for market movements which expose the Fund to gains or losses in excess of the amounts shown on the Statement of Assets and Liabilities. Realized gain and loss and unrealized appreciation and depreciation on these contracts for the period are included in the Statement of Operations.
The Fund entered into forward exchange contracts primarily to manage and/or 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. Unrestricted cash may be invested according to the Fund’s investment objectives.
The Fund entered into credit default swap contracts primarily to manage and/or gain exposure to credit risk. A credit default swap is an agreement between the Fund and a counterparty whereby the buyer of the contract receives credit protection and the seller of the contract guarantees the credit worthiness of a referenced debt obligation. In the event of a default of the underlying referenced debt obligation, the buyer is entitled to receive the notional amount of the credit default swap contract (or other agreed upon amount) from the seller. Over the term of the contract, the buyer pays the seller a periodic stream of payments, provided that no event of default has occurred. Such periodic payments are accrued daily as an unrealized appreciation or depreciation until the payments are made, at which time they are realized. Payments received or paid to initiate a credit default
FSI-37
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)
swap contract are reflected on the Statement of Assets and Liabilities and represent compensating factors between stated terms of the credit default swap agreement and prevailing market conditions (credit spreads and other relevant factors). These upfront payments are amortized over the term of the contract as a realized gain or loss on the Statement of Operations. Pursuant to the terms of the credit default swap contract, cash or securities may be required to be deposited as collateral. Unrestricted cash may be invested according to the Fund’s investment objectives.
See Note 10 regarding other derivative information.
e. FT HOLDINGS CORPORATION III
The Fund invests in certain securities through its investment in FT Holdings Corporation III, a Delaware Corporation and a wholly-owned subsidiary (Subsidiary) of the Fund. The Subsidiary has the ability to invest in securities consistent with the investment objective of the Fund. At June 30, 2011, all Subsidiary investments as well as any other assets and liabilities are reflected in the Fund’s Statement of Investments and Statement of Assets and Liabilities. All income and expenses of the Subsidiary during the period ended June 30, 2011, have been included in the Fund’s Statement of Operations.
f. Mortgage Dollar Rolls
The Fund enters 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
The Fund invests in senior secured corporate loans that 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
It is the Fund’s policy to qualify as a regulated investment company under the Internal Revenue Code. The Fund intends to distribute to shareholders substantially all of its taxable income and net realized gains to relieve it from federal income and excise taxes. As a result, no provision for U.S. federal income taxes is required. The Fund files U.S. income tax returns as well as tax returns in certain other jurisdictions. The Fund records a provision for taxes in its financial statements including penalties and interest, if any, for a tax position taken on a tax return (or expected to be taken) when it fails to meet the more likely than not (a greater than 50% probability) threshold and based on the technical merits, the tax position may not be sustained upon examination by the tax authorities. As of June 30, 2011, and for all open tax years, the Fund has determined that no provision for income tax is required in the Fund’s financial statements. Open tax years are those that remain subject to examination and are based on each tax jurisdiction statute of limitation.
FSI-38
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Strategic Income Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
h. Income Taxes (continued)
The Fund may be subject to foreign taxation related to income received, capital gains on the sale of securities and certain foreign currency transactions in the foreign jurisdictions in which it invests. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist in the foreign markets in which the Fund invests. When a capital gain tax is determined to apply the Fund records an estimated deferred tax liability for unrealized gains on these securities in an amount that would be payable if the securities were disposed of on the valuation date.
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.
Inflation-indexed bonds are adjusted for inflation through periodic increases or decreases in the security’s interest accruals, face amount, or principal redemption value, by amounts corresponding to the rate of inflation as measured by an index. Any increase or decrease in the face amount or principal redemption value will be included as interest income on the Statement of Operations.
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.
FSI-39
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Strategic Income Securities Fund
2. SHARES OF BENEFICIAL INTEREST
At June 30, 2011, 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, 2011 | Year Ended December 31, 2010 | |||||||||||||||
| Class 1 Shares: | Shares | Amount | Shares | Amount | ||||||||||||
Shares sold | 1,226,775 | $ | 16,272,518 | 4,513,968 | $ | 56,940,927 | ||||||||||
Shares issued in reinvestment of distributions | 5,474,148 | 69,631,166 | 4,747,535 | 57,255,268 | ||||||||||||
Shares redeemed | (7,990,687 | ) | (105,740,312 | ) | (12,820,410 | ) | (162,809,849 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | (1,289,764 | ) | $ | (19,836,628 | ) | (3,558,907 | ) | $ | (48,613,654 | ) | ||||||
| ||||||||||||||||
Class 2 Shares: | ||||||||||||||||
Shares sold | 2,255,130 | $ | 29,332,186 | 3,451,058 | $ | 42,785,482 | ||||||||||
Shares issued in reinvestment of distributions | 586,739 | 7,304,903 | 324,982 | 3,841,288 | ||||||||||||
Shares redeemed | (823,350 | ) | (10,678,557 | ) | (1,474,432 | ) | (18,283,409 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | 2,018,519 | $ | 25,958,532 | 2,301,608 | $ | 28,343,361 | ||||||||||
| ||||||||||||||||
Class 4 Shares: | ||||||||||||||||
Shares sold | 1,423,879 | $ | 18,428,624 | 2,251,182 | $ | 28,170,784 | ||||||||||
Shares issued on reinvestment of distributions | 889,584 | 11,235,444 | 693,015 | 8,302,315 | ||||||||||||
Shares redeemed | (966,811 | ) | (12,688,141 | ) | (1,626,043 | ) | (20,235,775 | ) | ||||||||
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Net increase (decrease) | 1,346,652 | $ | 16,975,927 | 1,318,154 | $ | 16,237,324 | ||||||||||
| ||||||||||||||||
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 Fund 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 |
FSI-40
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Strategic Income Securities Fund
3. TRANSACTIONS WITH AFFILIATES (continued)
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 Trust’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.
e. 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, 2011, 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, 2010, the Fund had tax basis capital losses of $19,427,750 expiring in 2017.
Under the Regulated Investment Company Modernization Act of 2010, the Fund will be permitted to carry forward capital losses incurred in taxable years beginning after December 22, 2010 for an unlimited period. Post-enactment capital loss carryforwards will retain their character as either short-term or long-term capital losses rather than being considered short-term as under previous law. Any post-enactment capital losses generated will be required to be utilized prior to the losses incurred in pre-enactment tax years.
At June 30, 2011, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
Cost of investments | $ | 1,421,370,261 | ||
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Unrealized appreciation | $ | 80,529,591 | ||
Unrealized depreciation | (17,073,126 | ) | ||
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Net unrealized appreciation (depreciation) | $ | 63,456,465 | ||
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Net investment income (loss) 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, tax straddles, non-deductible expenses and inflation related adjustments on foreign securities.
Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatments of defaulted securities, wash sales, foreign currency transactions, mortgage dollar rolls, paydown losses, payments-in-kind, bond discounts and premiums, tax straddles and inflation related adjustments on foreign securities.
FSI-41
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Strategic Income Securities Fund
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the period ended June 30, 2011, aggregated $468,898,927 and $585,691,196, respectively.
7. INVESTMENTS IN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO
The Fund invests 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 RISK AND DEFAULTED SECURITIES
At June 30, 2011, the Fund had 54.49% of its portfolio invested in high yield securities, 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, 2011, the aggregate value of these securities represents less than 0.05% 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. UNFUNDED LOAN COMMITMENTS
The Fund enters 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, 2011, unfunded commitments were as follows:
| Borrower | Unfunded Commitment | |||
EnviroSolutions Real Property Holdings Inc., Revolver, FRN, 6.50%, 7/29/13 | $ | 703,908 | ||
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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. OTHER DERIVATIVE INFORMATION
At June 30, 2011, 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 | 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 | $ | 2,096,504 | Unrealized depreciation on forward exchange contracts | $ | 10,662,044 | ||||||
Credit contracts | Unrealized appreciation on swap contracts | 189,000 | Unrealized depreciation on swap contracts | 593,365 | ||||||||
FSI-42
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Strategic Income Securities Fund
10. OTHER DERIVATIVE INFORMATION (continued)
For the period ended June 30, 2011, the effect of derivative contracts on the Fund’s Statement of Operations was as follows:
| Derivative Contracts Not Accounted for as Hedging Instruments | Statement of Operations Locations | Realized Gain (Loss) for the Period | Change in Unrealized Appreciation (Depreciation) for the Period | |||||
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 | $ | 428,265 | $(9,052,183) | ||||
Credit contracts | Net realized gain (loss) from swap contracts / Net change in unrealized appreciation (depreciation) on investments | 365,497 | (404,365) | |||||
For the period ended June 30, 2011, the average month end market value of derivatives represented 0.80% of average month end net assets. The average month end number of open derivative contracts for the period was 151.
See Note 1(d) regarding derivative financial instruments.
11. CREDIT FACILITY
The Fund, together with other U.S. registered and foreign investment funds (collectively, Borrowers), managed by Franklin Templeton Investments, are borrowers in a joint syndicated senior unsecured credit facility totaling $750 million (Global Credit Facility) which matures on January 20, 2012. This Global Credit Facility provides 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 of 0.08% based upon the unused portion of the Global Credit Facility, which is reflected in other expenses on the Statement of Operations. During the period ended June 30, 2011, the Fund did not use the Global Credit Facility.
12. FAIR VALUE MEASUREMENTS
The Fund follows 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.
FSI-43
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Strategic Income Securities Fund
12. FAIR VALUE MEASUREMENTS (continued)
For movements between the levels within the fair value hierarchy, the Fund has adopted a policy of recognizing the transfers as of the date of the underlying event which caused the movement.
The following is a summary of the inputs used as of June 30, 2011, in valuing the Fund’s assets and liabilities carried at fair value:
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
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Assets: | ||||||||||||||||
Investments in Securities: | ||||||||||||||||
Equity Investmentsa | ||||||||||||||||
Consumer Durables & Apparel | $ | — | $ | — | $ | 115,253 | $ | 115,253 | ||||||||
Media | 505,763 | 5,436,437 | — | 5,942,200 | ||||||||||||
Other Equity Investmentsb | 2,834,745 | — | — | 2,834,745 | ||||||||||||
Convertible Bonds | — | 3,980,400 | — | 3,980,400 | ||||||||||||
Corporate Bonds | — | 511,882,201 | — | 511,882,201 | ||||||||||||
Senior Floating Rate Interests | — | 232,822,153 | 718,566 | 233,540,719 | ||||||||||||
Foreign Government and Agency Securities | — | 300,249,145 | — | 300,249,145 | ||||||||||||
U.S. Government and Agency Securities | — | 19,832,212 | — | 19,832,212 | ||||||||||||
Asset-Backed Securities and Commercial Mortgage-Backed Securities | — | 50,913,473 | — | 50,913,473 | ||||||||||||
Mortgage-Backed Securities | — | 91,338,521 | — | 91,338,521 | ||||||||||||
Municipal Bonds | — | 83,654,457 | — | 83,654,457 | ||||||||||||
Short Term Investments | 79,117,488 | 101,425,912 | — | 180,543,400 | ||||||||||||
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Total Investments in Securities | $ | 82,457,996 | $ | 1,401,534,911 | $ | 833,819 | $ | 1,484,826,726 | ||||||||
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Forward Exchange Contracts | — | 2,096,504 | — | 2,096,504 | ||||||||||||
Swaps | — | 189,000 | — | 189,000 | ||||||||||||
Liabilities: | ||||||||||||||||
Swaps | — | 593,365 | — | 593,365 | ||||||||||||
Forward Exchange Contracts | — | 10,662,044 | — | 10,662,044 | ||||||||||||
Unfunded Loan Commitments | — | 3,519 | — | 3,519 | ||||||||||||
aIncludes common, preferred and convertible preferred stock.
bFor detailed industry descriptions, see the accompanying Statement of Investments.
FSI-44
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, 2011, the reconciliation of assets in which significant unobservable inputs (Level 3) were used in determining fair value, is as follows:
| Balance at Beginning of Period | Purchases | Sales | Transfers Into Level 3 | Transfers Out of Level 3a | Cost Basis Adjustments | Net Realized Gain (Loss) | Net Unrealized Gain (Loss) | Balance at End of Period | Net Change in Unrealized Appreciation (Depreciation) on Assets Held at Period End | |||||||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||||||||||
Investments in Securities: | ||||||||||||||||||||||||||||||||||||||||
Equity Investments:b | ||||||||||||||||||||||||||||||||||||||||
Consumer Services | $ | 1,901,449 | $ | — | $ | — | $ | — | $ | (1,901,449 | ) | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||
Consumer Durables & Apparel | —c | — | — | — | — | — | — | 115,253 | 115,253 | 115,253 | ||||||||||||||||||||||||||||||
Senior Floating Rate Interests | 835,411 | 38,254 | (155,892 | ) | — | — | — | 35,823 | (35,030 | ) | 718,566 | (179,642 | ) | |||||||||||||||||||||||||||
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Total | $ | 2,736,860 | $ | 38,254 | $ | (155,892 | ) | $ | — | $ | (1,901,449 | ) | $ | — | $ | 35,823 | $ | 80,223 | $ | 833,819 | $ | (64,389 | ) | |||||||||||||||||
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aThe investment was transferred out of Level 3 as a result of the availability of a quoted price in an active market for identical securities and other significant observable valuation inputs.
bIncludes common and preferred stocks as well as other equity investments.
cIncludes securities determined to have no value.
13. NEW ACCOUNTING PRONOUNCEMENTS
In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (IFRS). The amendments in the ASU will improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRS and include new guidance for certain fair value measurement principles and disclosure requirements. The ASU is effective for interim and annual periods beginning after December 15, 2011. The Fund is currently evaluating the impact, if any, of applying this provision.
14. SUBSEQUENT EVENTS
The Fund has evaluated subsequent events through the issuance of the financial statements and determined that no events have occurred that require disclosure.
FSI-45
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Strategic Income Securities Fund
ABBREVIATIONS | ||||
| Counterparty | Currency | Selected Portfolio | ||
| BOFA - Bank of America Corp. | AUD - Australian Dollar | AGMC - Assured Guaranty Municipal Corp. | ||
| BZWS - Barclays Bank PLC | BRL - Brazilian Real | CDO - Collateralized Debt Obligation | ||
| CITI - Citigroup, Inc. | EGP - Egyptian Pound | CLO - Collateralized Loan Obligation | ||
| DBAB - Deutsche Bank AG | EUR - Euro | FGIC - Financial Guaranty Insurance Co. | ||
| FBCO - Credit Suisse Group AG | GBP - British Pound | FICO - Financing Corp. | ||
| GSCO - The Goldman Sachs Group, Inc. | HUF - Hungarian Forint | FRN - Floating Rate Note | ||
| HSBC - HSBC Bank USA, NA | IDR - Indonesian Rupiah | GO - General Obligation | ||
| JPHQ - JP Morgan Chase & Co. | ILS - New Israeli Shekel | ID - Improvement District | ||
| MSCO - Morgan Stanley | KRW - South Korean Won | IDA - Industrial Development Authority/Agency | ||
| UBSW - UBS AG | LKR - Sri Lankan Rupee | L/C - Letter of Credit | ||
| MXN - Mexican Peso | NATL - National Public Financial Guarantee Corp. | |||
| MYR - Malaysian Ringgit | NATL RE - National Public Financial Guarantee | |||
| NOK - Norwegian Krone | Corp. Reinsured | |||
| PHP - Philippine Peso | PIK - Payment-In-Kind | |||
| PLN - Polish Zloty | SBA - Small Business Administration | |||
| SEK - Swedish Krona | SF - Single Family | |||
| USD - Unified/Union School District | ||||
FSI-46
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, 2011.
Performance Summary as of 6/30/11
Franklin Templeton VIP Founding Funds Allocation Fund – Class 4 delivered a +6.37% total return* for the six-month period ended 6/30/11.
*The administrator has contractually agreed to waive or assume certain expenses so that common expenses of the Fund (excluding Rule 12b-1 fees and acquired fund fees and expenses) do not exceed 0.10% (other than certain nonroutine expenses), until 4/30/12. If the administrator had not waived fees, the Fund’s total returns would have been lower.
Performance reflects the Fund’s Class 4 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 4
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.
FFA-1
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 the Standard & Poor’s 500 Index’s (S&P 500’s) +6.02% total return and the MSCI World Index’s +5.62% total return for the same period.1
Economic and Market Overview
The global economy expanded despite geopolitical and inflationary pressures during the six-month period ended June 30, 2011. In the U.S., business activity increased and consumer spending stayed above pre-recession levels. The U.S. was a key engine in a sustained global manufacturing expansion as international trade volume continued to increase, albeit at a moderate pace. The U.S. financial system appeared closer to a full recovery, although the country still faced challenges dealing with persistent unemployment, housing market weakness and massive debt. During the period, signs emerged of a global economic slowdown. Officials at the U.S. Federal Reserve Board (Fed) cut their growth forecast for the world’s largest economy, and manufacturing slowed in most major regions of the world. Japan’s earthquake, an early surge in commodity prices and a fading inventory restocking cycle were all blamed for declining economic leading indicators. Some monetary policy tightening in most parts of the world was also thought to inhibit growth and cool the commodities rally.
Inflation at the consumer, producer and trade levels rose across much of the world, but in the U.S. it remained relatively contained. As a result, the Federal Reserve Board (Fed) maintained its accommodative monetary policy while ending its second round of quantitative easing on June 30. The Fed said, however, it would continue to purchase Treasuries with proceeds from maturing debt in an effort to support economic growth. This move deviated from many other central banks around the world that raised interest rates to dampen inflation pressures.
1. Source: © 2011 Morningstar. One cannot invest directly in an index, and an index is not representative of the Fund’s portfolio. Please see Index Descriptions following the Fund Summaries.
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 developing markets, involves additional risks, including currency fluctuations, economic instability, market volatility, and political and social instability. Smaller and midsize company securities can increase the risk of greater price fluctuations, particularly over the short term. Underlying funds may use certain derivative instruments that may be volatile and illiquid, may give rise to leverage and may involve a small investment relative to the risk assumed. The manager applies various techniques and analyses in making investment decisions for the Fund, but there can be no guarantee that these decisions will produce the desired results. These and other risks are described more fully in the Fund’s and underlying funds’ prospectuses.
FFA-2
Continued corporate profit strength and still favorable economic growth prospects in some regions of the world supported equities. Global stock markets made gains in the first half of 2011, though the positive momentum from the previous year waned as investors weathered international events that included revolutions and civil unrest across the Middle East and North Africa, the multiple crises triggered by Japan’s earthquake and tsunami, and sovereign debt worries and credit downgrades in Europe. The dollar declined during the period against most currencies, however, broadly reflecting divergent interest rate and/or economic growth expectations.
Investment Strategy
The Fund invests its assets in an equally weighted combination of Class 1 shares 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 underperformed the S&P 500, and Mutual Shares Securities Fund – Class 1 performed comparably to the S&P 500. Templeton Growth Securities Fund – Class 1 outperformed 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.
The foregoing information reflects our analysis, opinions and portfolio holdings as of June 30, 2011, 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.
*The asset allocation is based on the Statement of Investments (SOI), which classifies each underlying fund into a broad asset class.
The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund’s SOI.
FFA-3
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 4
FFA-4
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 4 | Beginning Account Value 1/1/11 | Ending Account Value 6/30/11 | Fund-Level Expenses Incurred During Period* 1/1/11–6/30/11 | Fund-Level 1/1/11–6/30/11 | ||||||||||||
Actual | $ | 1,000 | $ | 1,063.70 | $ | 2.30 | $ | 5.72 | ||||||||
Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,022.56 | $ | 2.26 | $ | 5.59 | ||||||||
*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 4 shares (0.45%), 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 4 shares (1.12%), 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.
FFA-5
Franklin Templeton Variable Insurance Products Trust
Financial Highlights
Franklin Templeton VIP Founding Funds Allocation Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||||||||||
| Class 1 | 2010 | 2009 | 2008 | 2007a | ||||||||||||||||
| ||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||
Net asset value, beginning of period | $ | 7.73 | $ | 7.15 | $ | 5.61 | $ | 9.33 | $ | 10.00 | ||||||||||
|
| |||||||||||||||||||
Income from investment operationsb: | ||||||||||||||||||||
Net investment income (loss)c,d | 0.19 | 0.24 | 0.26 | 0.28 | (0.19 | ) | ||||||||||||||
Net realized and unrealized gains (losses) | 0.32 | 0.52 | 1.46 | (3.64 | ) | (0.48 | ) | |||||||||||||
|
| |||||||||||||||||||
Total from investment operations | 0.51 | 0.76 | 1.72 | (3.36 | ) | (0.67 | ) | |||||||||||||
|
| |||||||||||||||||||
Less distributions from: | ||||||||||||||||||||
Net investment income | — | e | (0.18 | ) | (0.18 | ) | (0.19 | ) | — | |||||||||||
Net realized gains | — | — | e | — | (0.17 | ) | — | |||||||||||||
|
| |||||||||||||||||||
Total distributions | — | e | (0.18 | ) | (0.18 | ) | (0.36 | ) | — | |||||||||||
|
| |||||||||||||||||||
Net asset value, end of period | $ | 8.24 | $ | 7.73 | $ | 7.15 | $ | 5.61 | $ | 9.33 | ||||||||||
|
| |||||||||||||||||||
Total returnf | 6.61% | 10.64% | 30.47% | (35.75)% | (6.70)% | |||||||||||||||
Ratios to average net assetsg | ||||||||||||||||||||
Expenses before waiver and payments by affiliatesh | 0.11% | 0.11% | 0.12% | 0.13% | 0.41% | |||||||||||||||
Expenses net of waiver and payments by affiliatesh | 0.10% | 0.10% | 0.10% | 0.13% | 0.41% | |||||||||||||||
Net investment income (loss)d | 4.97% | 3.04% | 4.16% | 3.81% | (0.41)% | |||||||||||||||
Supplemental data | ||||||||||||||||||||
Net assets, end of period (000’s) | $ | 512 | $ | 437 | $ | 629 | $ | 339 | $ | 466 | ||||||||||
Portfolio turnover rate | 0.36% | 17.81% | 4.23% | 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 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 0.67% for the period ended June 30, 2011.
The accompanying notes are an integral part of these financial statements.
FFA-6
Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Franklin Templeton VIP Founding Funds Allocation Fund
| Six Months Ended June 30, 2011 (unaudited) | Year Ended December 31, | |||||||||||||||||||
| Class 2 | 2010 | 2009 | 2008 | 2007a | ||||||||||||||||
| ||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||
Net asset value, beginning of period | $ | 7.71 | $ | 7.14 | $ | 5.61 | $ | 9.31 | $ | 10.00 | ||||||||||
|
| |||||||||||||||||||
Income from investment operationsb: | ||||||||||||||||||||
Net investment income (loss)c,d | 0.18 | 0.21 | 0.26 | 0.27 | (0.03 | ) | ||||||||||||||
Net realized and unrealized gains (losses) | 0.32 | 0.52 | 1.44 | (3.63 | ) | (0.66 | ) | |||||||||||||
|
| |||||||||||||||||||
Total from investment operations | 0.50 | 0.73 | 1.70 | (3.36 | ) | (0.69 | ) | |||||||||||||
|
| |||||||||||||||||||
Less distributions from: | ||||||||||||||||||||
Net investment income | — | e | (0.16 | ) | (0.17 | ) | (0.17 | ) | — | |||||||||||
Net realized gains | — | — | e | — | (0.17 | ) | — | |||||||||||||
|
| |||||||||||||||||||
Total distributions | — | e | (0.16 | ) | (0.17 | ) | (0.34 | ) | — | |||||||||||
|
| |||||||||||||||||||
Net asset value, end of period | $ | 8.21 | $ | 7.71 | $ | 7.14 | $ | 5.61 | $ | 9.31 | ||||||||||
|
| |||||||||||||||||||
Total returnf | 6.50% | 10.25% | 30.25% | (35.87)% | (6.90)% | |||||||||||||||
Ratios to average net assetsg | ||||||||||||||||||||
Expenses before waiver and payments by affiliatesh | 0.36% | 0.36% | 0.37% | 0.38% | 0.66% | |||||||||||||||
Expenses net of waiver and payments by affiliatesh | 0.35% | 0.35% | 0.35% | 0.38% | 0.66% | |||||||||||||||
Net investment income (loss)d | 4.72% | 2.79% | 3.91% | 3.56% | (0.66)% | |||||||||||||||
Supplemental data | ||||||||||||||||||||
Net assets, end of period (000’s) | $ | 503,189 | $ | 488,057 | $ | 474,176 | $ | 338,320 | $ | 131,710 | ||||||||||
Portfolio turnover rate | 0.36% | 17.81% | 4.23% | 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 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 0.67% for the period ended June 30, 2011.
The accompanying notes are an integral part of these financial statements.
FFA-7
Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Franklin Templeton VIP Founding Funds Allocation Fund
| Six Months Ended June 30, 2011 (unaudited) | Year Ended December 31, | |||||||||||||||
| Class 4 | 2010 | 2009 | 2008a | |||||||||||||
| ||||||||||||||||
Per share operating performance | ||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||
Net asset value, beginning of period | $ | 7.71 | $ | 7.14 | $ | 5.62 | $ | 8.65 | ||||||||
|
| |||||||||||||||
Income from investment operationsb: | ||||||||||||||||
Net investment incomec,d | 0.19 | 0.19 | 0.23 | 0.19 | ||||||||||||
Net realized and unrealized gains (losses) | 0.30 | 0.54 | 1.46 | (2.87 | ) | |||||||||||
|
| |||||||||||||||
Total from investment operations | 0.49 | 0.73 | 1.69 | (2.68 | ) | |||||||||||
|
| |||||||||||||||
Less distributions from: | ||||||||||||||||
Net investment income | — | e | (0.16 | ) | (0.17 | ) | (0.18 | ) | ||||||||
Net realized gains | — | — | e | — | (0.17 | ) | ||||||||||
|
| |||||||||||||||
Total distributions | — | e | (0.16 | ) | (0.17 | ) | (0.35 | ) | ||||||||
|
| |||||||||||||||
Net asset value, end of period | $ | 8.20 | $ | 7.71 | $ | 7.14 | $ | 5.62 | ||||||||
|
| |||||||||||||||
Total returnf | 6.37% | 10.24% | 30.06% | (30.81)% | ||||||||||||
Ratios to average net assetsg | ||||||||||||||||
Expenses before waiver and payments by affiliatesh | 0.46% | 0.46% | 0.47% | 0.48% | ||||||||||||
Expenses net of waiver and payments by affiliatesh | 0.45% | 0.45% | 0.45% | 0.48% | ||||||||||||
Net investment incomed | 4.62% | 2.69% | 3.81% | 3.46% | ||||||||||||
Supplemental data | ||||||||||||||||
Net assets, end of period (000’s) | $ | 3,834,125 | $ | 3,036,272 | $ | 1,424,479 | $ | 263,001 | ||||||||
Portfolio turnover rate | 0.36% | 17.81% | 4.23% | 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 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 0.67% for the period ended June 30, 2011.
The accompanying notes are an integral part of these financial statements.
FFA-8
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited)
| Franklin Templeton VIP Founding Funds Allocation Fund | Shares | Value | ||||||||
Investments in Underlying Fundsa | ||||||||||
Domestic Equity 33.1% | ||||||||||
Mutual Shares Securities Fund, Class 1 | 84,153,255 | $ | 1,438,179,133 | |||||||
Domestic Hybrid 33.0% | ||||||||||
Franklin Income Securities Fund, Class 1 | 94,870,849 | 1,431,601,108 | ||||||||
Foreign Equity 33.5% | ||||||||||
Templeton Growth Securities Fund, Class 1 | 121,340,450 | 1,452,445,188 | ||||||||
Total Investments in Underlying Funds (Cost $3,746,382,744) 99.6% | 4,322,225,429 | |||||||||
Other Assets, less Liabilities 0.4% | 15,600,803 | |||||||||
Net Assets 100.0% | $ | 4,337,826,232 | ||||||||
aSee Note 6 regarding investments in Underlying Funds.
FFA-9
Franklin Templeton Variable Insurance Products Trust
Financial Statements
Statement of Assets and Liabilities
June 30, 2011 (unaudited)
| Franklin Templeton VIP Founding Funds Allocation Fund | ||||
Assets: | ||||
Investments in Underlying Funds: (Note 6) | ||||
Cost | $ | 3,746,382,744 | ||
|
| |||
Value | $ | 4,322,225,429 | ||
Cash | 15,208,801 | |||
Receivables: | ||||
Investment securities sold | 320,372 | |||
Capital shares sold | 3,140,291 | |||
Other assets | 901 | |||
|
| |||
Total assets | 4,340,895,794 | |||
|
| |||
Liabilities: | ||||
Payables: | ||||
Capital shares redeemed | 293,966 | |||
Affiliates | 2,740,614 | |||
Accrued expenses and other liabilities | 34,982 | |||
|
| |||
Total liabilities | 3,069,562 | |||
|
| |||
Net assets, at value | $ | 4,337,826,232 | ||
|
| |||
Net assets consist of: | ||||
Paid-in capital | $ | 3,849,672,067 | ||
Undistributed net investment income | 92,910,956 | |||
Net unrealized appreciation (depreciation) | 575,842,685 | |||
Accumulated net realized gain (loss) | (180,599,476 | ) | ||
|
| |||
Net assets, at value | $ | 4,337,826,232 | ||
|
| |||
Class 1: | ||||
Net assets, at value | $ | 512,342 | ||
|
| |||
Shares outstanding | 62,159 | |||
|
| |||
Net asset value and maximum offering price per share | $ | 8.24 | ||
|
| |||
Class 2: | ||||
Net assets, at value | $ | 503,189,210 | ||
|
| |||
Shares outstanding | 61,263,167 | |||
|
| |||
Net asset value and maximum offering price per share | $ | 8.21 | ||
|
| |||
Class 4: | ||||
Net assets, at value | $ | 3,834,124,680 | ||
|
| |||
Shares outstanding | 467,315,466 | |||
|
| |||
Net asset value and maximum offering price per share | $ | 8.20 | ||
|
| |||
The accompanying notes are an integral part of these financial statements.
FFA-10
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Operations
for the six months ended June 30, 2011 (unaudited)
| Franklin Templeton VIP Founding Funds Allocation Fund | ||||
Investment income: | ||||
Dividends from Underlying Funds (Note 6) | $ | 101,711,002 | ||
|
| |||
Expenses: | ||||
Administrative fees (Note 3a) | 2,004,517 | |||
Distribution fees: (Note 3b) | ||||
Class 2 | 626,660 | |||
Class 4 | 6,146,331 | |||
Unaffiliated transfer agent fees | 1,395 | |||
Reports to shareholders | 107,610 | |||
Professional fees | 25,505 | |||
Trustees’ fees and expenses | 5,138 | |||
Other | 24,633 | |||
|
| |||
Total expenses | 8,941,789 | |||
Expenses waived/paid by affiliates (Note 3d) | (164,280 | ) | ||
|
| |||
Net expenses | 8,777,509 | |||
|
| |||
Net investment income | 92,933,493 | |||
|
| |||
Realized and unrealized gains (losses): | ||||
Net realized gain (loss) from sale of investments in Underlying Funds (Note 6) | (204,661 | ) | ||
Net change in unrealized appreciation (depreciation) on investments in Underlying Funds | 143,750,828 | |||
|
| |||
Net realized and unrealized gain (loss) | 143,546,167 | |||
|
| |||
Net increase (decrease) in net assets resulting from operations | $ | 236,479,660 | ||
|
| |||
The accompanying notes are an integral part of these financial statements.
FFA-11
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, 2011 (unaudited) | Year Ended December 31, 2010 | |||||||
Increase (decrease) in net assets: | ||||||||
Operations: | ||||||||
Net investment income | $ | 92,933,493 | $ | 69,934,841 | ||||
Net realized gain (loss) from Underlying Funds | (204,661 | ) | (102,829,602 | ) | ||||
Net change in unrealized appreciation (depreciation) on investments in Underlying Funds | 143,750,828 | 305,671,809 | ||||||
| ||||||||
Net increase (decrease) in net assets resulting from operations | 236,479,660 | 272,777,048 | ||||||
| ||||||||
Distributions to shareholders from: | ||||||||
Net investment income: | ||||||||
Class 1 | (68 | ) | (19,195 | ) | ||||
Class 2 | (73,496 | ) | (9,975,426 | ) | ||||
Class 4 | (555,926 | ) | (59,699,243 | ) | ||||
Net realized gains: | ||||||||
Class 1 | — | (64 | ) | |||||
Class 2 | — | (37,379 | ) | |||||
Class 4 | — | (225,645 | ) | |||||
| ||||||||
Total distributions to shareholders | (629,490 | ) | (69,956,952 | ) | ||||
| ||||||||
Capital share transactions: (Note 2) | ||||||||
Class 1 | 46,268 | (249,343 | ) | |||||
Class 2 | (16,361,229 | ) | (22,011,518 | ) | ||||
Class 4 | 593,525,176 | 1,444,922,739 | ||||||
| ||||||||
Total capital share transactions | 577,210,215 | 1,422,661,878 | ||||||
| ||||||||
Net increase (decrease) in net assets | 813,060,385 | 1,625,481,974 | ||||||
Net assets: | ||||||||
Beginning of period | 3,524,765,847 | 1,899,283,873 | ||||||
| ||||||||
End of period | $ | 4,337,826,232 | $ | 3,524,765,847 | ||||
| ||||||||
Undistributed net investment income included in net assets: | ||||||||
End of period | $ | 92,910,956 | $ | 606,953 | ||||
| ||||||||
The accompanying notes are an integral part of these financial statements.
FFA-12
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 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. The Fund invests primarily in other funds of the Trust (Underlying Funds). Shares of the Fund are generally 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. Financial Instrument 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
It is the Fund’s policy to qualify as a regulated investment company under the Internal Revenue Code. The Fund intends to distribute to shareholders substantially all of its taxable income and net realized gains to relieve it from federal income and excise taxes. As a result, no provision for U.S. federal income taxes is required. The Fund files U.S. income tax returns as well as tax returns in certain other jurisdictions. The Fund records a provision for taxes in its financial statements including penalties and interest, if any, for a tax position taken on a tax return (or expected to be taken) when it fails to meet the more likely than not (a greater than 50% probability) threshold and based on the technical merits, the tax position may not be sustained upon examination by the tax authorities. As of June 30, 2011, and for all open tax years, the Fund has determined that no provision for income tax is required in the Fund’s financial statements. Open tax years are those that remain subject to examination and are based on each tax jurisdiction statute of limitation.
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.
FFA-13
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)
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.
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, 2011, 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, 2011 | Year Ended December 31, 2010 | |||||||||||||||
| Class 1 Shares: | Shares | Amount | Shares | Amount | ||||||||||||
Shares sold | 7,288 | $ | 59,401 | 28,887 | $ | 212,938 | ||||||||||
Shares issued in reinvestment of distributions | 9 | 68 | 2,512 | 19,259 | ||||||||||||
Shares redeemed | (1,636 | ) | (13,201 | ) | (62,828 | ) | (481,540 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | 5,661 | $ | 46,268 | (31,429 | ) | $ | (249,343 | ) | ||||||||
| ||||||||||||||||
| Class 2 Shares: | ||||||||||||||||
Shares sold | 3,166,531 | $ | 25,484,468 | 5,965,854 | $ | 43,444,607 | ||||||||||
Shares issued in reinvestment of distributions | 9,187 | 73,496 | 1,309,697 | 10,012,805 | ||||||||||||
Shares redeemed | (5,174,745 | ) | (41,919,193 | ) | (10,412,128 | ) | (75,468,930 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | (1,999,027 | ) | $ | (16,361,229 | ) | (3,136,577 | ) | $ | (22,011,518 | ) | ||||||
| ||||||||||||||||
| Class 4 Shares: | ||||||||||||||||
Shares sold | 82,932,605 | $ | 669,289,405 | 260,520,140 | $ | 1,895,056,899 | ||||||||||
Shares issued on reinvestment of distributions | 69,578 | 555,926 | 7,836,782 | 59,924,888 | ||||||||||||
Shares redeemed | (9,485,700 | ) | (76,320,155 | ) | (73,968,871 | ) | (510,059,048 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | 73,516,483 | $ | 593,525,176 | 194,388,051 | $ | 1,444,922,739 | ||||||||||
| ||||||||||||||||
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 Fund 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 |
FFA-14
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 each Fund’s investment in the Underlying Funds.
b. Distribution Fees
The Trust’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 has contractually agreed in advance to waive or limit its fees and to assume as its own expense certain expenses otherwise payable by the Fund so that the common expenses (i.e. a combination of administrative fees and other expenses, but excluding distribution fees and acquired fund fees and expenses) for each class of the Fund do not exceed 0.10% (other than certain non-routine expenses or costs, including those relating to litigation, indemnification, reorganizations, and liquidations) until April 30, 2012.
4. INCOME TAXES
At June 30, 2011, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
Cost of investments | $ | 3,926,991,090 | ||
|
| |||
Unrealized appreciation | $ | 395,234,339 | ||
Unrealized depreciation | — | |||
|
| |||
Net unrealized appreciation (depreciation) | $ | 395,234,339 | ||
|
| |||
Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatments of wash sales.
5. INVESTMENT TRANSACTIONS
Purchases and sales of Underlying Funds (excluding short term securities) for the period ended June 30, 2011, aggregated $697,711,001 and $14,310,540, respectively.
FFA-15
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 affiliates of the Fund’s administrative manager, FT Services. The Fund does not invest in the Underlying Funds for the purpose of exercising a controlling influence over the management or policies. Investments in Underlying Funds for the period ended June 30, 2011, were as follows:
| Underlying Funds | 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) | % of Underlying Fund Shares Outstanding Held at End of Period | ||||||||||||||||||||||||
Franklin Income Securities Fund, Class 1 | 77,056,138 | 18,241,551 | 426,840 | 94,870,849 | $ | 1,431,601,108 | $ | 80,509,469 | $ | (116,046 | ) | 16.40% | ||||||||||||||||||||
Mutual Shares Securities Fund, Class 1 | 72,027,638 | 12,288,839 | 163,222 | 84,153,255 | 1,438,179,133 | — | (5,702 | ) | 23.58% | |||||||||||||||||||||||
Templeton Growth Securities Fund, Class 1 | 104,073,430 | 17,671,638 | 404,618 | 121,340,450 | 1,452,445,188 | 21,201,533 | (82,913 | ) | 44.31% | |||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||
Total | $ | 4,322,225,429 | $ | 101,711,002 | $ | (204,661 | ) | |||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||
7. CREDIT FACILITY
The Fund, together with other U.S. registered and foreign investment funds (collectively, Borrowers), managed by Franklin Templeton Investments, are borrowers in a joint syndicated senior unsecured credit facility totaling $750 million (Global Credit Facility) which matures on January 20, 2012. This Global Credit Facility provides 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 of 0.08% based upon the unused portion of the Global Credit Facility, which is reflected in other expenses on the Statement of Operations. During the period ended June 30, 2011, the Fund did not use the Global Credit Facility.
8. FAIR VALUE MEASUREMENTS
The Fund follows 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.
For movements between the levels within the fair value hierarchy, the Fund has adopted a policy of recognizing the transfers as of the date of the underlying event which caused the movement.
FFA-16
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Templeton VIP Founding Funds Allocation Fund
8. FAIR VALUE MEASUREMENTS (continued)
At June 30, 2011, all of the Fund’s investments in Underlying Funds carried at fair value were in Level 1 inputs. For detailed categories, see the accompanying Statement of Investments.
9. NEW ACCOUNTING PRONOUNCEMENTS
In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (IFRS). The amendments in the ASU will improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRS and include new guidance for certain fair value measurement principles and disclosure requirements. The ASU is effective for interim and annual periods beginning after December 15, 2011. The Fund is currently evaluating the impact, if any, of applying this provision.
10. SUBSEQUENT EVENTS
The Fund has evaluated subsequent events through the issuance of the financial statements and determined that no events have occurred that require disclosure except for the following:
Subsequent to June 30, 2011, the Fund received net redemptions representing approximately 19% of the Fund’s outstanding shares as of June 30, 2011.
FFA-17
MUTUAL GLOBAL DISCOVERY SECURITIES FUND
This semiannual report for Mutual Global Discovery Securities Fund covers the period ended June 30, 2011.
Performance Summary as of 6/30/11
Mutual Global Discovery Securities Fund – Class 4 delivered a +5.23% total return for the six-month period ended 6/30/11.
Performance reflects the Fund’s Class 4 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 4
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: 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.
Performance Overview
You can find the Fund’s six-month total return in the Performance Summary. In comparison, the MSCI World Index generated a +5.62% total return, and the Standard & Poor’s 500 Index posted a +6.02% total return for the same period.1
Economic and Market Overview
Global stock markets rose in the first half of 2011, though the positive momentum from the previous year waned as European sovereign debt turmoil escalated and signs emerged of an economic slowdown. Furthermore, geopolitical unrest sweeping the Middle East and North Africa roiled oil markets, and a devastating earthquake and tsunami in Japan severely disrupted global supply chains during the period. While the market recovered from these interferences, economic growth concerns persisted. Officials at the U.S. Federal Reserve Board (Fed) cut their growth forecast for the world’s largest economy, and manufacturing slowed in most major regions of the world. Japan’s earthquake, an early surge in commodity prices and a fading inventory restocking cycle were all blamed for declining economic leading indicators. Nascent monetary policy tightening in most parts of the world was also thought to inhibit growth and cool the commodities rally. Asian and emerging market policymakers tightened aggressively as inflation reached post-crisis highs in many regions, while the European Central Bank raised interest rates for the first time in two years, deviating from the extraordinarily accommodative path of the Fed, which undertook a second round of quantitative easing during the reporting period.
Amid concerns of sustained accommodative monetary policy and declining economic growth rates in the U.S., politicians debated whether to raise the nation’s debt ceiling. Sovereign debt concerns continued to plague Europe, with Greece, Ireland, Portugal and Spain subject to rating downgrades in the first half of 2011. At period-end, European politicians were working to pass painful austerity budgets despite fierce popular resistance, and discussions were ongoing about restructuring debt payments of the region’s most troubled sovereigns. Despite these
1. Source: © 2011 Morningstar. One cannot invest directly in an index, and an index is not 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 developing markets, involves additional risks, including currency fluctuations, economic instability, market volatility, and political and social instability. Investments in companies involved in mergers, liquidations, reorganizations and distressed bankruptcy, which may include defaulted debt, involve higher credit and other risks. Smaller and midsize company securities involve special risks, such as relatively small revenues, limited product lines and small market share. The Fund’s investment in certain hedging and derivative instruments may involve a small investment relative to the risk assumed. The manager applies various techniques and analyses in making investment decisions for the Fund, but there can be no guarantee that these decisions will produce the desired results The Fund’s prospectus also includes a description of the main investment risks.
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challenges, continued corporate profit strength and still favorable economic growth prospects in some regions of the world supported stock prices. Equity market leadership rotated toward defensive sectors as risk aversion increased, buoying even U.S. Treasuries toward period-end as near-term demand for perceived safe havens outweighed longer term concerns about the deteriorating U.S. credit profile. The dollar ultimately declined, however, against most currencies, broadly reflecting divergent interest rate and/or economic growth expectations.
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.
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In addition, it is our practice to hedge the Fund’s currency exposure when we deem it advantageous for our shareholders.
Manager’s Discussion
As stock markets advanced unevenly in the first half of 2011, several Fund investments increased in value. Three particularly strong performers were U.S. managed health care provider UnitedHealth Group, U.S. cigarette maker Lorillard and U.K.-based British American Tobacco (BAT).
Shares of UnitedHealth rose sharply in value during the first half of 2011. In January, its share price was fueled by a combination of the company’s announcement of better-than-expected fourth quarter 2010 earnings and, more significantly, its higher revenue guidance for 2011. Other positive catalysts included the company’s ongoing efforts to increase shareholder value through share buybacks and dividends. In our view, UnitedHealth’s long-term earnings growth is supported by a diversified business mix and a growing percentage of earnings generated by its increasingly successful health care services business. Although there was no specific catalyst for the continued increase in the company’s stock price in the second quarter, we believe many investors may have recognized the low earnings multiple at which the company’s shares had been trading. In addition, investors seemed to become more comfortable with the implications of pending U.S. health care reforms on the company’s business model.
Lorillard, another key contributor for the period, was spun out of Loews Corporation in May 2008. Lorillard is the third-largest U.S. cigarette manufacturer and the country’s oldest continuously operating tobacco company. Its flagship premium brand, Newport, is the country’s top selling menthol brand, generating approximately 90% of the company’s revenues. Lorillard shares appreciated during the first half of the year, with some of the biggest gains coming in March 2011. Prior to March, the shares were under pressure as many investors grew concerned that a report being produced by the Tobacco Products Scientific Advisory Committee (TPSAC) would recommend that the Food and Drug Administration (FDA) ban menthol cigarettes. However, the findings and recommendations of the TPSAC report regarding the effects of menthol cigarettes were less harsh than anticipated. A sharp relief rally in Lorillard shares followed TPSAC’s release of the final report. Also during the period under review, the company announced that it would be expanding its share buyback program from $1 billion to $1.4 billion. While we
Top 10 Sectors/Industries
Mutual Global Discovery Securities Fund
Based on Equity Securities
6/30/11
| % of Total Net Assets | ||||
| Tobacco | 11.3% | |||
| Pharmaceuticals | 6.1% | |||
| Commercial Banks | 6.0% | |||
| Insurance | 4.4% | |||
| Food Products | 4.4% | |||
| Media | 4.4% | |||
| Industrial Conglomerates | 4.2% | |||
| Oil, Gas & Consumable Fuels | 4.1% | |||
| Diversified Financial Services | 3.1% | |||
| Automobiles | 2.9% | |||
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think Lorillard does not have the extensive cost-saving opportunities that we believe BAT might enjoy (outlined below), we view the shares as an attractive investment because the industry has pricing power, we feel Newport is a well-positioned brand and Lorillard management is shareholder friendly and continues to return excess cash to shareholders through dividends and buybacks. Like BAT, Lorillard shares have been a solid investment for the Fund.
BAT is the world’s second-largest publicly traded tobacco company, with a presence in more than 180 countries. During the period under review, the stock performed well. In February, the company reported full-year 2010 operating results that exceeded market expectations. In addition, BAT management reported it had delivered on its five-year goal to realize £800 million in cost savings two years ahead of schedule. In May, the company held an investor relations day during which its top executives discussed further cost-cutting opportunities. Management believes it can continue to grow operating margins for the next six to seven years aided by price increases and cost-cutting programs. Management explained that cost savings will come from myriad opportunities including simplifying its business structure, improvements in procurement, a reduction in logistics costs, further rationalization of manufacturing facilities, and the standardization and consolidation of back-office centers and processes. The company also reaffirmed its goal to grow medium-term earnings per share in the high single-digit range, although management also mentioned it would likely exceed that goal in 2011. At period-end, we continued to believe BAT was an attractive investment due to the industry’s pricing power, the company’s additional cost savings opportunities and a shareholder friendly management team that often has returned excess cash to shareholders through dividends and share buybacks.
In contrast, several Fund investments decreased in value. Among the largest detractors from Fund performance were Japanese video game software and console maker Nintendo, U.S. network equipment provider Cisco Systems and U.S.-based Bank of America.
Nintendo’s share price deteriorated after the company reported sales of its new handheld console, the Nintendo 3DS, were slower than anticipated. In particular, sales of this new gaming device were weak in its home market of Japan, where the March 11 earthquake and tsunami hurt consumer sentiment, and in other parts of the world due to a lack of compelling software titles at launch date and the console’s relatively high initial sales price. At period-end, net cash accounted for more than 50% of Nintendo’s market capitalization, and we believe the company
Top 10 Holdings
Mutual Global Discovery Securities Fund
6/30/11
| Company Sector/Industry, Country | % of Total Net Assets | |||
| British American Tobacco PLC | 3.3% | |||
| Tobacco, U.K. | ||||
| Nestle SA | 2.7% | |||
| Food Products, Switzerland | ||||
| Imperial Tobacco Group PLC | 2.4% | |||
| Tobacco, U.K. | ||||
| Jardine Strategic Holdings Ltd. | 2.3% | |||
| Industrial Conglomerates, Hong Kong | ||||
| Vodafone Group PLC | 2.1% | |||
| Wireless Telecommunication Services, U.K. | ||||
| Lorillard Inc. | 2.0% | |||
| Tobacco, U.S. | ||||
| Royal Dutch Shell PLC | 2.0% | |||
| Oil, Gas & Consumable Fuels, U.K. | ||||
| CVS Caremark Corp. | 1.9% | |||
| Food & Staples Retailing, U.S. | ||||
| Pfizer Inc. | 1.9% | |||
| Pharmaceuticals, U.S. | ||||
| Pernod Ricard SA | 1.8% | |||
| Beverages, 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.
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can successfully leverage its software intellectual property in the next gaming console cycle. With this in mind, we continued to hold Nintendo in the portfolio at period-end.
Cisco Systems is a relatively new addition to the portfolio, initiated in early 2011. Early in the first quarter, Cisco issued lower-than-expected earnings guidance citing economic pressures such as subdued spending by government agencies, a key revenue stream, and missteps in its consumer-focused businesses. In mid-May, Cisco shares declined further when the company confirmed it had completed another disappointing quarter. However, management announced significant cost realignment and an exit from certain consumer markets, both of which we believe should improve financial results. Cisco’s competitive position remained strong, its balance sheet appeared overcapitalized to us at period-end, and the company announced it would begin paying a dividend as well as continuing to buy back stock. For these reasons, along with management’s commitment to repair the company’s current cost structure, we found Cisco’s valuation appealing.
Bank of America detracted from performance during the six-month period largely due to concerns about potential mortgage losses, particularly from Countrywide Financial, a mortgage-finance company it acquired in 2008. In addition, uncertainty regarding the systemically important financial institutions (SIFI) capital surcharge, a potential additional capital requirement for large banks, weighed on Bank of America’s share price. While potential regulatory and other risks to the company’s business prospects remained, we think they were priced into the stock at period-end. In our view, Bank of America has leading positions across all of its businesses, its capital position is adequate and the need to raise further capital is unlikely. Furthermore, its credit costs continued to decline, and the mortgage loss issue appeared manageable to us.
Finally, investors should note that we maintained our currency hedging posture of being more hedged than not to the U.S. dollar, largely through the use of forward currency exchange contracts. Certain currencies strengthened in relation to the U.S. dollar in the first six months of 2011, and so our hedging strategy hindered Fund performance during the reporting period.
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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, 2011, 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 4
MGD-8
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 4 | Beginning Account Value 1/1/11 | Ending Account Value 6/30/11 | Fund-Level Expenses Incurred During Period* 1/1/11–6/30/11 | |||||||||
Actual | $ | 1,000 | $ | 1,052.30 | $ | 6.67 | ||||||
Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,018.30 | $ | 6.56 | ||||||
*Expenses are calculated using the most recent six-month annualized expense ratio for the Fund’s Class 4 shares (1.31%), 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.
MGD-9
Franklin Templeton Variable Insurance Products Trust
Financial Highlights
Mutual Global Discovery Securities Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 1 | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||||||
| ||||||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 21.16 | $ | 19.14 | $ | 16.12 | $ | 24.08 | $ | 22.05 | $ | 18.85 | ||||||||||||
|
| |||||||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.31 | 0.38 | 0.19 | c | 0.37 | 0.47 | 0.52 | |||||||||||||||||
Net realized and unrealized gains (losses) | 0.85 | 1.94 | 3.57 | (6.95 | ) | 2.22 | 3.69 | |||||||||||||||||
|
| |||||||||||||||||||||||
Total from investment operations | 1.16 | 2.32 | 3.76 | (6.58 | ) | 2.69 | 4.21 | |||||||||||||||||
|
| |||||||||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income | — | (0.30 | ) | (0.26 | ) | (0.52 | ) | (0.38 | ) | (0.25 | ) | |||||||||||||
Net realized gains | — | — | (0.48 | ) | (0.86 | ) | (0.28 | ) | (0.76 | ) | ||||||||||||||
|
| |||||||||||||||||||||||
Total distributions | — | (0.30 | ) | (0.74 | ) | (1.38 | ) | (0.66 | ) | (1.01 | ) | |||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ | 22.32 | $ | 21.16 | $ | 19.14 | $ | 16.12 | $ | 24.08 | $ | 22.05 | ||||||||||||
|
| |||||||||||||||||||||||
Total returnd | 5.48% | 12.24% | 23.63% | (28.29)% | 12.17% | 23.32% | ||||||||||||||||||
Ratios to average net assetse | ||||||||||||||||||||||||
Expensesf | 0.96% | 1.00% | g | 1.06% | g | 0.98% | g | 0.97% | g | 1.03% | g | |||||||||||||
Expenses incurred in connection with securities sold short | —% | 0.02% | 0.09% | 0.01% | —% | h | 0.03% | |||||||||||||||||
Net investment income | 2.82% | 1.93% | 1.07% | c | 1.82% | 1.96% | 2.44% | |||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 81,063 | $ | 84,213 | $ | 86,755 | $ | 81,320 | $ | 142,751 | $ | 146,229 | ||||||||||||
Portfolio turnover rate | 15.55% | 49.31% | 43.35% | 22.76% | 28.20% | 19.83% | ||||||||||||||||||
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 an adjustment for uncollectible interest. Excluding the effect of this adjustment, the ratio of net investment income to average net assets would have been 1.26%.
dTotal return does not include 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 and borrowing fees, if any. See below for the ratios of such expenses to average net assets for the periods presented. See Note 1(d).
gBenefit of expense reduction rounds to less than 0.01%.
hRounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
MGD-10
Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Mutual Global Discovery Securities Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 2 | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||||||
| ||||||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 20.80 | $ | 18.81 | $ | 15.85 | $ | 23.69 | $ | 21.73 | $ | 18.60 | ||||||||||||
|
| |||||||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.28 | 0.33 | 0.14 | c | 0.32 | 0.40 | 0.43 | |||||||||||||||||
Net realized and unrealized gains (losses) | 0.82 | 1.91 | 3.50 | (6.84 | ) | 2.18 | 3.68 | |||||||||||||||||
|
| |||||||||||||||||||||||
Total from investment operations | 1.10 | 2.24 | 3.64 | (6.52 | ) | 2.58 | 4.11 | |||||||||||||||||
|
| |||||||||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income | — | (0.25 | ) | (0.20 | ) | (0.46 | ) | (0.34 | ) | (0.22 | ) | |||||||||||||
Net realized gains | — | — | (0.48 | ) | (0.86 | ) | (0.28 | ) | (0.76 | ) | ||||||||||||||
|
| |||||||||||||||||||||||
Total distributions | — | (0.25 | ) | (0.68 | ) | (1.32 | ) | (0.62 | ) | (0.98 | ) | |||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ | 21.90 | $ | 20.80 | $ | 18.81 | $ | 15.85 | $ | 23.69 | $ | 21.73 | ||||||||||||
|
| |||||||||||||||||||||||
Total returnd | 5.29% | 11.96% | 23.31% | (28.45)% | 11.85% | 23.06% | ||||||||||||||||||
Ratios to average net assetse | ||||||||||||||||||||||||
Expensesf | 1.21% | 1.25% | g | 1.31% | g | 1.23% | g | 1.22% | g | 1.28% | g | |||||||||||||
Expenses incurred in connection with securities sold short | —% | 0.02% | 0.09% | 0.01% | —% | h | 0.03% | |||||||||||||||||
Net investment income | 2.57% | 1.68% | 0.82% | c | 1.57% | 1.71% | 2.19% | |||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 1,334,732 | $ | 1,351,223 | $ | 1,309,852 | $ | 1,113,720 | $ | 1,867,484 | $ | 1,365,575 | ||||||||||||
Portfolio turnover rate | 15.55% | 49.31% | 43.35% | 22.76% | 28.20% | 19.83% | ||||||||||||||||||
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 an adjustment for uncollectible interest. Excluding the effect of this adjustment, the ratio of net investment income to average net assets would have been 1.01%.
dTotal return does not include 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 and borrowing fees, if any. See below for the ratios of such expenses to average net assets for the periods presented. See Note 1(d).
gBenefit of expense reduction rounds to less than 0.01%.
hRounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
MGD-11
Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Mutual Global Discovery Securities Fund
| Six Months Ended June 30, 2011 (unaudited) | Year Ended December 31, | |||||||||||||||
| Class 4 | 2010 | 2009 | 2008a | |||||||||||||
| ||||||||||||||||
Per share operating performance | ||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||
Net asset value, beginning of period | $ | 21.02 | $ | 19.02 | $ | 16.07 | $ | 22.50 | ||||||||
|
| |||||||||||||||
Income from investment operationsb: | ||||||||||||||||
Net investment incomec | 0.27 | 0.31 | 0.11 | d | 0.09 | |||||||||||
Net realized and unrealized gains (losses) | 0.83 | 1.94 | 3.56 | (5.14 | ) | |||||||||||
|
| |||||||||||||||
Total from investment operations | 1.10 | 2.25 | 3.67 | (5.05 | ) | |||||||||||
|
| |||||||||||||||
Less distributions from: | ||||||||||||||||
Net investment income | — | (0.25 | ) | (0.24 | ) | (0.52 | ) | |||||||||
Net realized gains | — | — | (0.48 | ) | (0.86 | ) | ||||||||||
|
| |||||||||||||||
Total distributions | — | (0.25 | ) | (0.72 | ) | (1.38 | ) | |||||||||
|
| |||||||||||||||
Net asset value, end of period | $ | 22.12 | $ | 21.02 | $ | 19.02 | $ | 16.07 | ||||||||
|
| |||||||||||||||
Total returne | 5.23% | 11.87% | 23.19% | (23.48)% | ||||||||||||
Ratios to average net assetsf | ||||||||||||||||
Expensesg | 1.31% | 1.35% | h | 1.41% | h | 1.33% | h | |||||||||
Expenses incurred in connection with securities sold short | —% | 0.02% | 0.09% | 0.01% | ||||||||||||
Net investment income | 2.47% | 1.58% | 0.72% | d | 1.47% | |||||||||||
Supplemental data | ||||||||||||||||
Net assets, end of period (000’s) | $ | 76,333 | $ | 70,613 | $ | 59,178 | $ | 23,981 | ||||||||
Portfolio turnover rate | 15.55% | 49.31% | 43.35% | 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 an adjustment for uncollectible interest. Excluding the effect of this adjustment, the ratio of net investment income to average net assets would have been 0.91%.
eTotal return does not include 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 and borrowing fees, if any. See below for the ratios of such expenses to average net assets for the periods presented. See Note 1(d).
hBenefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
MGD-12
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited)
| Mutual Global Discovery Securities Fund | Country | Shares/ Rights | Value | |||||||
Common Stocks and Other Equity Interests 91.8% | ||||||||||
Airlines 0.0% | ||||||||||
a,b,cNorthwest Airlines Corp., Contingent Distribution | United States | 8,167,000 | $ | — | ||||||
|
| |||||||||
Auto Components 0.2% | ||||||||||
a,b,cCollins & Aikman Products Co., Contingent Distribution | United States | 218,708 | 2,187 | |||||||
a,b,cDana Holding Corp., Contingent Distribution | United States | 2,673,000 | — | |||||||
a,dIACNA Investor LLC | United States | 47,271 | 473 | |||||||
a,dInternational Automotive Components Group Brazil LLC | Brazil | 424,073 | 534,900 | |||||||
d,eInternational Automotive Components Group North America, LLC | United States | 3,000,220 | 2,804,846 | |||||||
|
| |||||||||
| 3,342,406 | ||||||||||
|
| |||||||||
Automobiles 2.0% | ||||||||||
Daimler AG (EUR Traded) | Germany | 323,994 | 24,286,027 | |||||||
Daimler AG (USD Traded) | Germany | 2,800 | 209,883 | |||||||
aGeneral Motors Co. | United States | 168,060 | 5,102,301 | |||||||
|
| |||||||||
| 29,598,211 | ||||||||||
|
| |||||||||
Beverages 2.7% | ||||||||||
Coca-Cola Enterprises Inc. | United Kingdom | 170,820 | 4,984,528 | |||||||
Dr. Pepper Snapple Group Inc. | United States | 191,410 | 8,025,821 | |||||||
fPernod Ricard SA | France | 275,378 | 27,143,101 | |||||||
|
| |||||||||
| 40,153,450 | ||||||||||
|
| |||||||||
Biotechnology 1.2% | ||||||||||
aAmgen Inc. | United States | 215,320 | 12,563,922 | |||||||
aCephalon Inc. | United States | 60,050 | 4,797,995 | |||||||
|
| |||||||||
| 17,361,917 | ||||||||||
|
| |||||||||
Capital Markets 2.9% | ||||||||||
Morgan Stanley | United States | 718,000 | 16,521,180 | |||||||
aUBS AG (CHF Traded) | Switzerland | 1,445,336 | 26,352,285 | |||||||
|
| |||||||||
| 42,873,465 | ||||||||||
|
| |||||||||
Chemicals 1.1% | ||||||||||
a,b,cDow Corning Corp., Contingent Distribution | United States | 300,000 | — | |||||||
Linde AG | Germany | 97,340 | 17,065,955 | |||||||
|
| |||||||||
| 17,065,955 | ||||||||||
|
| |||||||||
Commercial Banks 6.0% | ||||||||||
a,d,gThe Bankshares Inc. | United States | 800,000 | 2,694,072 | |||||||
Barclays PLC | United Kingdom | 3,900,124 | 16,053,562 | |||||||
BNP Paribas | France | 155,716 | 12,019,950 | |||||||
aCIT Group Inc. | United States | 130,472 | 5,774,691 | |||||||
a,dElephant Capital Holdings Ltd. | Japan | 1,903 | — | |||||||
Intesa Sanpaolo SpA | Italy | 5,899,704 | 15,707,818 | |||||||
a,dNCB Warrant Holdings Ltd., A | Japan | 9,306 | — | |||||||
PNC Financial Services Group Inc. | United States | 242,430 | 14,451,252 | |||||||
Wells Fargo & Co. | United States | 802,340 | 22,513,660 | |||||||
|
| |||||||||
| 89,215,005 | ||||||||||
|
| |||||||||
Commercial Services & Supplies 0.4% | ||||||||||
aComdisco Holding Co. Inc. | United States | 44 | 274 | |||||||
a,b,cComdisco Holding Co. Inc., Contingent Distribution | United States | 1,863,000 | — | |||||||
Edenred | France | 192,246 | 5,865,648 | |||||||
|
| |||||||||
| 5,865,922 | ||||||||||
|
| |||||||||
MGD-13
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Mutual Global Discovery Securities Fund | Country | Shares/ Rights | Value | |||||||
Common Stocks and Other Equity Interests (continued) | ||||||||||
Communications Equipment 0.8% | ||||||||||
Cisco Systems Inc. | United States | 636,250 | $ | 9,931,862 | ||||||
aMotorola Solutions Inc. | United States | 47,699 | 2,196,062 | |||||||
|
| |||||||||
| 12,127,924 | ||||||||||
|
| |||||||||
Computers & Peripherals 0.8% | ||||||||||
a,b,cDecisionOne Corp., Contingent Distribution | United States | 33,639 | — | |||||||
Hewlett-Packard Co. | United States | 343,240 | 12,493,936 | |||||||
|
| |||||||||
| 12,493,936 | ||||||||||
|
| |||||||||
Construction & Engineering 0.7% | ||||||||||
Vinci SA | France | 158,174 | 10,131,540 | |||||||
|
| |||||||||
Construction Materials 0.5% | ||||||||||
CRH PLC | Ireland | 337,406 | 7,471,448 | |||||||
|
| |||||||||
Containers & Packaging 0.7% | ||||||||||
Rexam PLC | United Kingdom | 1,657,079 | 10,179,030 | |||||||
|
| |||||||||
Diversified Financial Services 2.9% | ||||||||||
Bank of America Corp. | United States | 1,311,930 | 14,378,753 | |||||||
Deutsche Boerse AG | Germany | 247,739 | 18,825,157 | |||||||
a,b,cMarconi Corp., Contingent Distribution | United Kingdom | 1,739,100 | 32,518 | |||||||
a,hNorth American Financial Holdings Inc., A, 144A | United States | 84,454 | 1,446,275 | |||||||
a,hNorth American Financial Holdings Inc., B, 144A, non-voting | United States | 263,962 | 4,520,349 | |||||||
NYSE Euronext Inc. | United States | 123,422 | 4,229,672 | |||||||
|
| |||||||||
| 43,432,724 | ||||||||||
|
| |||||||||
Diversified Telecommunication Services 1.5% | ||||||||||
AboveNet Inc. | United States | 38,361 | 2,702,916 | |||||||
Cable & Wireless Communication PLC | United Kingdom | 3,585,816 | 2,330,725 | |||||||
a,b,cGlobal Crossing Holdings Ltd., Contingent Distribution | United States | 2,236,777 | — | |||||||
Telefonica SA | Spain | 743,937 | 18,188,910 | |||||||
|
| |||||||||
| 23,222,551 | ||||||||||
|
| |||||||||
Electric Utilities 2.9% | ||||||||||
Brookfield Infrastructure Partners LP | Canada | 254,871 | 6,384,519 | |||||||
a,b,cCalpine Corp., Contingent Distribution | United States | 1,400,000 | — | |||||||
E.ON AG | Germany | 585,820 | 16,680,461 | |||||||
Exelon Corp. | United States | 459,650 | 19,691,406 | |||||||
a,dPrime AET&D Holdings No. 1 Pty. Ltd. | Australia | 1,361,600 | — | |||||||
|
| |||||||||
| 42,756,386 | ||||||||||
|
| |||||||||
Electrical Equipment 0.6% | ||||||||||
fAlstom SA | France | 149,906 | 9,243,261 | |||||||
|
| |||||||||
Energy Equipment & Services 1.4% | ||||||||||
Ensco PLC, ADR | United States | 152,704 | 8,139,123 | |||||||
aPetroleum Geo-Services ASA | Norway | 11,710 | 165,792 | |||||||
Seadrill Ltd. | Bermuda | 124,443 | 4,381,357 | |||||||
Transocean Ltd. | United States | 117,343 | 7,575,664 | |||||||
|
| |||||||||
| 20,261,936 | ||||||||||
|
| |||||||||
Food & Staples Retailing 2.9% | ||||||||||
CVS Caremark Corp. | United States | 765,292 | 28,759,673 | |||||||
Koninklijke Ahold NV | Netherlands | 1,032,646 | 13,875,758 | |||||||
|
| |||||||||
| 42,635,431 | ||||||||||
|
| |||||||||
MGD-14
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Mutual Global Discovery Securities Fund | Country | Shares/ Rights | Value | |||||||
Common Stocks and Other Equity Interests (continued) | ||||||||||
Food Products 4.4% | ||||||||||
Farmer Brothers Co. | United States | 60,060 | $ | 609,008 | ||||||
Kraft Foods Inc., A | United States | 695,676 | 24,508,666 | |||||||
Lotte Confectionery Co. Ltd. | South Korea | 42 | 66,956 | |||||||
Nestle SA | Switzerland | 653,031 | 40,581,434 | |||||||
|
| |||||||||
| 65,766,064 | ||||||||||
|
| |||||||||
Health Care Equipment & Supplies 1.8% | ||||||||||
aBoston Scientific Corp. | United States | 883,480 | 6,104,847 | |||||||
Medtronic Inc. | United States | 404,120 | 15,570,744 | |||||||
aZimmer Holdings Inc. | United States | 93,887 | 5,933,658 | |||||||
|
| |||||||||
| 27,609,249 | ||||||||||
|
| |||||||||
Health Care Providers & Services 2.0% | ||||||||||
Rhoen-Klinikum AG | Germany | 608,573 | 14,685,169 | |||||||
UnitedHealth Group Inc. | United States | 301,789 | 15,566,277 | |||||||
|
| |||||||||
| 30,251,446 | ||||||||||
|
| |||||||||
Hotels, Restaurants & Leisure 1.6% | ||||||||||
Accor SA | France | 278,320 | 12,445,184 | |||||||
Ladbrokes PLC | United Kingdom | 4,875,840 | 11,929,571 | |||||||
|
| |||||||||
| 24,374,755 | ||||||||||
|
| |||||||||
Independent Power Producers & Energy Traders 0.9% | ||||||||||
aNRG Energy Inc. | United States | 580,167 | 14,260,505 | |||||||
|
| |||||||||
Industrial Conglomerates 4.2% | ||||||||||
Jardine Matheson Holdings Ltd. | Hong Kong | 398,522 | 22,851,252 | |||||||
Jardine Strategic Holdings Ltd. | Hong Kong | 1,097,650 | 33,588,090 | |||||||
Koninklijke Philips Electronics NV | Netherlands | 254,720 | 6,541,759 | |||||||
|
| |||||||||
| 62,981,101 | ||||||||||
|
| |||||||||
Insurance 4.4% | ||||||||||
ACE Ltd. | United States | 356,360 | 23,455,615 | |||||||
aAlleghany Corp. | United States | 4,230 | 1,409,055 | |||||||
American International Group Inc. | United States | 443,920 | 13,015,735 | |||||||
E-L Financial Corp. Ltd. | Canada | 8,478 | 4,058,079 | |||||||
a,dImagine Group Holdings Ltd. | Bermuda | 172,409 | 2,100,183 | |||||||
MetLife Inc. | United States | 106,300 | 4,663,381 | |||||||
a,dOlympus Re Holdings Ltd. | United States | 2,140 | 595 | |||||||
PartnerRe Ltd. | Bermuda | 151,240 | 10,412,874 | |||||||
Zurich Financial Services AG | Switzerland | 27,980 | 7,074,867 | |||||||
|
| |||||||||
| 66,190,384 | ||||||||||
|
| |||||||||
IT Services 0.0%† | ||||||||||
Glodyne Technoserve Ltd. | India | 2,218 | 17,175 | |||||||
|
| |||||||||
Machinery 1.6% | ||||||||||
Schindler Holding AG, PC | Switzerland | 138,017 | 16,776,091 | |||||||
Stanley Black & Decker Inc. | United States | 93,467 | 6,734,297 | |||||||
|
| |||||||||
| 23,510,388 | ||||||||||
|
| |||||||||
Marine 1.4% | ||||||||||
A.P. Moller - Maersk AS, B | Denmark | 2,494 | 21,509,447 | |||||||
|
| |||||||||
MGD-15
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Mutual Global Discovery Securities Fund | Country | Shares/ Rights | Value | |||||||
Common Stocks and Other Equity Interests (continued) | ||||||||||
Media 4.4% | ||||||||||
Daekyo Co. Ltd. | South Korea | 5,820 | $ | 31,145 | ||||||
Eutelsat Communications | France | 520,271 | 23,388,602 | |||||||
News Corp., A | United States | 357,500 | 6,327,750 | |||||||
Time Warner Cable Inc. | United States | 105,970 | 8,269,899 | |||||||
Time Warner Inc. | United States | 222,200 | 8,081,414 | |||||||
Viacom Inc., B | United States | 222,432 | 11,344,032 | |||||||
Vivendi SA | France | 282,930 | 7,867,329 | |||||||
|
| |||||||||
| 65,310,171 | ||||||||||
|
| |||||||||
Metals & Mining 1.3% | ||||||||||
ThyssenKrupp AG | Germany | 372,096 | 19,239,261 | |||||||
|
| |||||||||
Multi-Utilities 1.8% | ||||||||||
GDF Suez | France | 630,284 | 23,064,951 | |||||||
Hera SpA | Italy | 1,864,274 | 3,947,077 | |||||||
|
| |||||||||
| 27,012,028 | ||||||||||
|
| |||||||||
Office Electronics 1.4% | ||||||||||
Xerox Corp. | United States | 2,010,717 | 20,931,564 | |||||||
|
| |||||||||
Oil, Gas & Consumable Fuels 4.1% | ||||||||||
BP PLC | United Kingdom | 769,413 | 5,661,082 | |||||||
Marathon Oil Corp. | United States | 173,570 | 9,143,668 | |||||||
Murphy Oil Corp. | United States | 120,518 | 7,913,212 | |||||||
Royal Dutch Shell PLC, A | United Kingdom | 828,027 | 29,394,688 | |||||||
Total SA, B | France | 27,532 | 1,592,230 | |||||||
The Williams Cos. Inc. | United States | 225,950 | 6,834,988 | |||||||
|
| |||||||||
| 60,539,868 | ||||||||||
|
| |||||||||
Pharmaceuticals 6.1% | ||||||||||
Eli Lilly & Co. | United States | 539,140 | 20,233,924 | |||||||
Merck & Co. Inc. | United States | 707,040 | 24,951,442 | |||||||
Novartis AG, ADR | Switzerland | 201,264 | 12,299,243 | |||||||
Pfizer Inc. | United States | 1,342,441 | 27,654,285 | |||||||
aSanofi, Contingent Value rts., 12/31/20 | France | 207,050 | 498,990 | |||||||
Teva Pharmaceutical Industries Ltd., ADR | Israel | 116,220 | 5,604,128 | |||||||
|
| |||||||||
| 91,242,012 | ||||||||||
|
| |||||||||
Real Estate Investment Trusts (REITs) 1.3% | ||||||||||
The Link REIT | Hong Kong | 5,510,376 | 18,835,866 | |||||||
|
| |||||||||
Real Estate Management & Development 0.9% | ||||||||||
cCanary Wharf Group PLC | United Kingdom | 487,324 | 2,356,314 | |||||||
Great Eagle Holdings Ltd. | Hong Kong | 1,613,524 | 5,359,925 | |||||||
Swire Pacific Ltd., B | Hong Kong | 1,949,472 | 5,586,562 | |||||||
|
| |||||||||
| 13,302,801 | ||||||||||
|
| |||||||||
Software 2.6% | ||||||||||
Microsoft Corp. | United States | 806,798 | 20,976,748 | |||||||
Nintendo Co. Ltd. | Japan | 47,500 | 8,891,684 | |||||||
aSymantec Corp. | United States | 431,550 | 8,510,166 | |||||||
|
| |||||||||
| 38,378,598 | ||||||||||
|
| |||||||||
MGD-16
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Mutual Global Discovery Securities Fund | Country | Shares/ Rights | Value | |||||||
Common Stocks and Other Equity Interests (continued) | ||||||||||
Tobacco 11.3% | ||||||||||
Altria Group Inc. | United States | 604,821 | $ | 15,973,323 | ||||||
British American Tobacco PLC | United Kingdom | 1,112,353 | 48,758,692 | |||||||
Imperial Tobacco Group PLC | United Kingdom | 1,082,017 | 35,954,833 | |||||||
Lorillard Inc. | United States | 279,918 | 30,474,673 | |||||||
Philip Morris International Inc. | United States | 204,981 | 13,686,581 | |||||||
Reynolds American Inc. | United States | 629,900 | 23,337,795 | |||||||
|
| |||||||||
| 168,185,897 | ||||||||||
|
| |||||||||
Wireless Telecommunication Services 2.1% | ||||||||||
Vodafone Group PLC | United Kingdom | 12,007,170 | 31,863,452 | |||||||
|
| |||||||||
Total Common Stocks and Other Equity Interests | 1,370,744,530 | |||||||||
|
| |||||||||
Preferred Stocks 1.1% | ||||||||||
Automobiles 0.9% | ||||||||||
Volkswagen AG, pfd. | Germany | 66,093 | 13,646,377 | |||||||
|
| |||||||||
Diversified Financial Services 0.2% | ||||||||||
a,dHightower Holding LLC, pfd., A, Series 2 | United States | 1,114,214 | 2,461,489 | |||||||
|
| |||||||||
Total Preferred Stocks (Cost $8,478,218) | 16,107,866 | |||||||||
|
| |||||||||
| Principal Amount* | ||||||||||
Corporate Bonds, Notes and Senior Floating Rate Interests 3.1% | ||||||||||
dBroadband Ventures III LLC, secured promissory note, 5.00%, 2/01/12 | United States | 825 | 825 | |||||||
iCIT Group Inc., Term Loan Tranche 3, 6.25%, 8/11/15 | United States | 1,242,135 | 1,251,895 | |||||||
Clear Channel Communications Inc., | ||||||||||
iDelayed Draw 2 Term Loan, 3.836%, 1/29/16 | United States | 1,509,000 | 1,246,811 | |||||||
jsenior note, PIK, 11.00%, 8/01/16 | United States | 3,187,000 | 2,836,430 | |||||||
iTranche B Term Loan, 3.836%, 1/29/16 | United States | 8,869,000 | 7,443,042 | |||||||
iTranche C Term Loan, 3.836%, 1/29/16 | United States | 1,802,075 | 1,504,733 | |||||||
NewPage Corp., senior secured note, 11.375%, 12/31/14 | United States | 7,734,000 | 7,250,625 | |||||||
hOPTI Canada Inc., senior secured note, 144A, | ||||||||||
9.00%, 12/15/12 | Canada | 825,000 | 833,250 | |||||||
f9.75%, 8/15/13 | Canada | 2,215,000 | 2,209,462 | |||||||
Realogy Corp., | ||||||||||
iExtended First Lien Term Loan, 4.518%, 10/10/16 | United States | 10,563,406 | 9,427,840 | |||||||
iExtended Synthetic Letter of Credit, 3.221%, 10/10/16 | United States | 856,631 | 764,543 | |||||||
hsenior secured note, 144A, 7.875%, 2/15/19 | United States | 653,000 | 649,735 | |||||||
iTexas Competitive Electric Holdings Co. LLC, Extended Term Loan, 4.69%, 10/10/17 | United States | 12,912,264 | 10,106,171 | |||||||
hTexas Competitive Electric Holdings Co. LLC/Texas Competitive Electric Holdings | ||||||||||
Finance Inc., secured note, B, 144A, 11.50%, 10/01/20 | United States | 949,000 | 937,138 | |||||||
|
| |||||||||
Total Corporate Bonds, Notes and Senior Floating Rate Interests (Cost $48,316,257) | 46,462,500 | |||||||||
|
| |||||||||
MGD-17
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Mutual Global Discovery Securities Fund | Country | Shares | Value | |||||||
Companies in Liquidation 0.0%† | ||||||||||
aAdelphia Recovery Trust | United States | 5,379,562 | $ | 538 | ||||||
a,bAdelphia Recovery Trust, Arahova Contingent Value Vehicle, Contingent Distribution | United States | 386,774 | 15,471 | |||||||
a,b,cCentury Communications Corp., Contingent Distribution | United States | 1,074,000 | — | |||||||
a,dFIM Coinvestor Holdings I, LLC | United States | 2,077,368 | — | |||||||
|
| |||||||||
Total Companies in Liquidation (Cost $497,457) | 16,009 | |||||||||
|
| |||||||||
Total Investments before Short Term Investments | 1,433,330,905 | |||||||||
|
| |||||||||
| Principal Amount* | ||||||||||
Short Term Investments 6.0% | ||||||||||
U.S. Government and Agency Securities 2.5% | ||||||||||
kFHLB, 7/01/11 | United States | 10,000,000 | 10,000,000 | |||||||
k,lU.S. Treasury Bills, 7/07/11 - 11/17/11 | United States | 26,500,000 | 26,498,602 | |||||||
|
| |||||||||
Total U.S. Government and Agency Securities (Cost $36,493,956) | 36,498,602 | |||||||||
|
| |||||||||
Total Investments before Money Market Funds | 1,469,829,507 | |||||||||
|
| |||||||||
| Shares | ||||||||||
mInvestments from Cash Collateral Received for Loaned | ||||||||||
Money Market Funds 3.5% | ||||||||||
aBNY Institutional Cash Reserve Fund, Series B | United States | 31,953 | 25,563 | |||||||
nBNY Mellon Overnight Government Fund, 0.05% | United States | 52,503,026 | 52,503,026 | |||||||
|
| |||||||||
Total Money Market Funds (Cost $52,534,979) | 52,528,589 | |||||||||
|
| |||||||||
Total Investments (Cost $1,234,498,723) 102.0% | 1,522,358,096 | |||||||||
Other Assets, less Liabilities (2.0)% | (30,230,305 | ) | ||||||||
|
| |||||||||
Net Assets 100.0% | $ | 1,492,127,791 | ||||||||
|
| |||||||||
†Rounds to less than 0.1% of net assets.
*The principal amount is stated in U.S. dollars unless otherwise indicated.
aNon-income producing.
bContingent distributions represent the right to receive additional distributions, if any, during the reorganization of the underlying company.
cSecurity has been deemed illiquid because it may not be able to be sold within seven days. At June 30, 2011, the aggregate value of these securities was $2,391,019, representing 0.16% of net assets.
dSee Note 9 regarding restricted securities.
eAt June 30, 2011, pursuant to the Fund’s policies and the requirements of applicable securities law, the Fund may be restricted from trading this security for a limited or extended period of time due to ownership limits and/or potential possession of material non-public information.
fA portion or all of the security is on loan at June 30, 2011. See Note 1(e).
gSee Note 12 regarding holdings of 5% voting securities.
hSecurity 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, 2011, the aggregate value of these securities was $10,596,209, representing 0.71% of net assets.
iThe coupon rate shown represents the rate at period end.
jIncome may be received in additional securities and/or cash.
kThe security is traded on a discount basis with no stated coupon rate.
lSecurity or a portion of the security has been segregated as collateral for open future contracts. At June 30, 2011, the value of this security amounted to $460,877, representing 0.03% of net assets.
mSee Note 1(e) regarding securities on loan.
nThe rate shown is the annualized seven-day yield at period end.
MGD-18
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Mutual Global Discovery Securities Fund |
At June 30, 2011, the Fund had the following futures contracts outstanding. See Note 1(c).
Futures Contracts
Description | Type | Number of Contracts | Notional Value | Expiration Date | Unrealized Appreciation | Unrealized Depreciation | ||||||||||||||||||
EUR/USD | Short | 86 | $ | 15,574,600 | 9/19/11 | $ | 29,034 | $ | — | |||||||||||||||
GBP/USD | Short | 50 | 5,015,938 | 9/19/11 | 102,402 | — | ||||||||||||||||||
|
| |||||||||||||||||||||||
Unrealized appreciation (depreciation) | 131,436 | — | ||||||||||||||||||||||
|
| |||||||||||||||||||||||
Net unrealized appreciation (depreciation) | $ | 131,436 | ||||||||||||||||||||||
|
| |||||||||||||||||||||||
At June 30, 2011, the Fund had the following forward exchange contracts outstanding. See Note 1(c).
Forward Exchange Contracts
Currency | Counterparty | Type | Quantity | Contract Amount | Settlement Date | Unrealized Appreciation | Unrealized Depreciation | |||||||||||||||||||||
British Pound | BZWS | Sell | 18,916,015 | $ | 30,284,541 | 7/15/11 | $ | — | $ | (68,002 | ) | |||||||||||||||||
British Pound | SSBT | Buy | 2,700,000 | 4,361,769 | 7/15/11 | — | (29,363 | ) | ||||||||||||||||||||
British Pound | SSBT | Sell | 15,000,000 | 24,420,000 | 7/15/11 | 351,076 | — | |||||||||||||||||||||
British Pound | DBAB | Sell | 829,950 | 1,349,466 | 7/15/11 | 17,732 | — | |||||||||||||||||||||
Euro | BOFA | Sell | 18,430,398 | 26,552,757 | 7/15/11 | — | (162,829 | ) | ||||||||||||||||||||
Euro | DBAB | Sell | 5,080,000 | 7,227,612 | 7/15/11 | — | (136,048 | ) | ||||||||||||||||||||
Euro | BZWS | Sell | 17,850,398 | 25,739,818 | 7/15/11 | — | (135,036 | ) | ||||||||||||||||||||
Canadian Dollar | BOFA | Sell | 3,182,146 | 3,340,467 | 7/29/11 | 42,486 | — | |||||||||||||||||||||
Euro | DBAB | Sell | 23,432,810 | 32,322,254 | 7/29/11 | — | (1,631,178 | ) | ||||||||||||||||||||
Euro | BOFA | Sell | 19,253,124 | 27,116,577 | 7/29/11 | — | (780,617 | ) | ||||||||||||||||||||
Euro | DBAB | Buy | 357,348 | 505,112 | 7/29/11 | 12,675 | — | |||||||||||||||||||||
Swiss Franc | BOFA | Sell | 20,374,793 | 23,314,787 | 8/10/11 | — | (923,796 | ) | ||||||||||||||||||||
Swiss Franc | DBAB | Sell | 19,089,697 | 21,791,891 | 8/10/11 | — | (917,896 | ) | ||||||||||||||||||||
Swiss Franc | SSBT | Sell | 13,438,180 | 15,375,492 | 8/10/11 | — | (611,049 | ) | ||||||||||||||||||||
Swiss Franc | DBAB | Buy | 934,100 | 1,124,649 | 8/10/11 | — | (13,411 | ) | ||||||||||||||||||||
Swiss Franc | DBAB | Buy | 1,169,880 | 1,378,530 | 8/10/11 | 13,201 | — | |||||||||||||||||||||
Swiss Franc | BOFA | Buy | 1,234,991 | 1,460,018 | 8/10/11 | 9,172 | — | |||||||||||||||||||||
British Pound | BZWS | Buy | 504,000 | 815,774 | 8/12/11 | — | (7,351 | ) | ||||||||||||||||||||
British Pound | BOFA | Sell | 16,004,745 | 26,167,758 | 8/12/11 | 495,898 | — | |||||||||||||||||||||
British Pound | BZWS | Sell | 9,657,755 | 15,790,430 | 8/12/11 | 299,240 | — | |||||||||||||||||||||
Euro | SSBT | Sell | 15,983,432 | 22,661,310 | 8/18/11 | — | (483,621 | ) | ||||||||||||||||||||
Euro | HSBC | Sell | 15,983,432 | 22,680,490 | 8/18/11 | — | (464,441 | ) | ||||||||||||||||||||
Euro | DBAB | Sell | 10,000,000 | 14,350,000 | 8/18/11 | — | (130,577 | ) | ||||||||||||||||||||
Euro | BOFA | Sell | 1,500,000 | 2,124,309 | 8/18/11 | — | (47,777 | ) | ||||||||||||||||||||
Euro | DBAB | Buy | 318,500 | 453,888 | 8/18/11 | 7,318 | — | |||||||||||||||||||||
Euro | BZWS | Sell | 21,648,358 | 30,451,662 | 8/31/11 | — | (883,779 | ) | ||||||||||||||||||||
Euro | BOFA | Sell | 18,496,832 | 26,154,521 | 8/31/11 | — | (619,169 | ) | ||||||||||||||||||||
Euro | DBAB | Sell | 560,000 | 801,578 | 8/31/11 | — | (9,007 | ) | ||||||||||||||||||||
Euro | DBAB | Buy | 266,407 | 387,670 | 8/31/11 | — | (2,053 | ) | ||||||||||||||||||||
Euro | BZWS | Buy | 230,194 | 334,847 | 8/31/11 | — | (1,647 | ) | ||||||||||||||||||||
Euro | DBAB | Sell | 11,673,232 | 16,739,274 | 9/15/11 | — | (150,490 | ) | ||||||||||||||||||||
Euro | HSBC | Sell | 10,809,631 | 15,498,849 | 9/15/11 | — | (141,388 | ) | ||||||||||||||||||||
Euro | DBAB | Buy | 190,934 | 272,720 | 9/15/11 | 3,539 | — | |||||||||||||||||||||
British Pound | BOFA | Buy | 490,000 | 794,290 | 9/16/11 | — | (8,661 | ) | ||||||||||||||||||||
British Pound | SSBT | Sell | 31,073,061 | 50,605,587 | 9/16/11 | 785,400 | — | |||||||||||||||||||||
Japanese Yen | DBAB | Sell | 157,431,290 | 1,910,000 | 10/20/11 | — | (47,038 | ) | ||||||||||||||||||||
Japanese Yen | BZWS | Sell | 128,248,820 | 1,563,767 | 10/20/11 | — | (30,502 | ) | ||||||||||||||||||||
Japanese Yen | HSBC | Sell | 64,467,680 | 780,000 | 10/20/11 | — | (21,401 | ) | ||||||||||||||||||||
Japanese Yen | BOFA | Sell | 36,535,840 | 440,000 | 10/20/11 | — | (14,179 | ) | ||||||||||||||||||||
Japanese Yen | DBAB | Buy | 51,400,000 | 640,682 | 10/20/11 | — | (1,726 | ) | ||||||||||||||||||||
Japanese Yen | DBAB | Buy | 27,750,000 | 342,801 | 10/20/11 | 2,161 | — | |||||||||||||||||||||
Japanese Yen | BOFA | Buy | 4,700,000 | 58,163 | 10/20/11 | 264 | — | |||||||||||||||||||||
|
| |||||||||||||||||||||||||||
Unrealized appreciation (depreciation) |
| 2,040,162 | (8,474,032 | ) | ||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||
Net unrealized appreciation (depreciation) |
| $ | (6,433,870 | ) | ||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||
See Abbreviations on page MGD-34.
The accompanying notes are an integral part of these financial statements.
MGD-19
Franklin Templeton Variable Insurance Products Trust
Financial Statements
Statement of Assets and Liabilities
June 30, 2011 (unaudited)
| Mutual Global Discovery Securities Fund | ||||
Assets: | ||||
Investments in securities: | ||||
Cost - Unaffiliated issuers | $ | 1,226,498,723 | ||
Cost - Non-controlled affiliated issuers | 8,000,000 | |||
|
| |||
Total cost of investments | $ | 1,234,498,723 | ||
|
| |||
Value - Unaffiliated issuers | $ | 1,519,664,024 | ||
Value - Non-controlled affiliated issuers | 2,694,072 | |||
|
| |||
Total value of investments (includes securities loaned in the amount of $34,041,354) | 1,522,358,096 | |||
Cash | 793,922 | |||
Foreign currency, at value (cost $5,368,610) | 5,374,257 | |||
Receivables: | ||||
Investment securities sold (includes securities loaned in the amount of $18,428,474) | 20,067,490 | |||
Capital shares sold | 215,920 | |||
Dividends and interest | 5,514,322 | |||
Unrealized appreciation on forward exchange contracts | 2,040,162 | |||
Other assets | 113,706 | |||
|
| |||
Total assets | 1,556,477,875 | |||
|
| |||
Liabilities: | ||||
Payables: | ||||
Investment securities purchased | 151,738 | |||
Capital shares redeemed | 799,278 | |||
Affiliates | 1,722,480 | |||
Variation margin | 105,112 | |||
Payable upon return of securities loaned | 52,534,979 | |||
Unrealized depreciation on forward exchange contracts | 8,474,032 | |||
Accrued expenses and other liabilities | 562,465 | |||
|
| |||
Total liabilities | 64,350,084 | |||
|
| |||
Net assets, at value | $ | 1,492,127,791 | ||
|
| |||
Net assets consist of: | ||||
Paid-in capital | $ | 1,135,704,849 | ||
Undistributed net investment income | 42,102,868 | |||
Net unrealized appreciation (depreciation) | 282,031,653 | |||
Accumulated net realized gain (loss) | 32,288,421 | |||
|
| |||
Net assets, at value | $ | 1,492,127,791 | ||
|
| |||
The accompanying notes are an integral part of these financial statements.
MGD-20
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Assets and Liabilities (continued)
June 30, 2011 (unaudited)
| Mutual Global Discovery Securities Fund | ||||
Class 1: | ||||
Net assets, at value | $ | 81,063,164 | ||
|
| |||
Shares outstanding | 3,631,948 | |||
|
| |||
Net asset value and maximum offering price per share | $ | 22.32 | ||
|
| |||
Class 2: | ||||
Net assets, at value | $ | 1,334,732,003 | ||
|
| |||
Shares outstanding | 60,934,428 | |||
|
| |||
Net asset value and maximum offering price per share | $ | 21.90 | ||
|
| |||
Class 4: | ||||
Net assets, at value | $ | 76,332,624 | ||
|
| |||
Shares outstanding | 3,450,094 | |||
|
| |||
Net asset value and maximum offering price per share | $ | 22.12 | ||
|
| |||
The accompanying notes are an integral part of these financial statements.
MGD-21
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Operations
for the six months ended June 30, 2011 (unaudited)
| Mutual Global Discovery Securities Fund | ||||
Investment income: | ||||
Dividends (net of foreign taxes of $1,642,768) | $ | 26,209,927 | ||
Interest | 1,586,978 | |||
Income from securities loaned | 781,469 | |||
|
| |||
Total investment income | 28,578,374 | |||
|
| |||
Expenses: | ||||
Management fees (Note 3a) | 6,042,614 | |||
Administrative fees (Note 3b) | 851,632 | |||
Distribution fees: (Note 3c) | ||||
Class 2 | 1,691,229 | |||
Class 4 | 130,028 | |||
Unaffiliated transfer agent fees | 1,263 | |||
Custodian fees (Note 4) | 108,229 | |||
Reports to shareholders | 154,134 | |||
Professional fees | 93,530 | |||
Trustees’ fees and expenses | 2,871 | |||
Other | 25,535 | |||
|
| |||
Total expenses | 9,101,065 | |||
|
| |||
Net investment income | 19,477,309 | |||
|
| |||
Realized and unrealized gains (losses): | ||||
Net realized gain (loss) from: | ||||
Investments (net of foreign taxes of $723,733) | 40,131,592 | |||
Foreign currency transactions | (33,564,553 | ) | ||
Futures contracts | (335,115 | ) | ||
|
| |||
Net realized gain (loss) | 6,231,924 | |||
|
| |||
Net change in unrealized appreciation (depreciation) on: | ||||
Investments | 53,442,713 | |||
Translation of other assets and liabilities denominated in foreign currencies | (798,321 | ) | ||
Change in deferred taxes on unrealized appreciation | 734,375 | |||
|
| |||
Net change in unrealized appreciation (depreciation) | 53,378,767 | |||
|
| |||
Net realized and unrealized gain (loss) | 59,610,691 | |||
|
| |||
Net increase (decrease) in net assets resulting from operations | $ | 79,088,000 | ||
|
| |||
The accompanying notes are an integral part of these financial statements.
MGD-22
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, 2011 (unaudited) | Year Ended December 31, 2010 | |||||||
| ||||||||
Increase (decrease) in net assets: | ||||||||
Operations: | ||||||||
Net investment income | $ | 19,477,309 | $ | 24,486,967 | ||||
Net realized gain (loss) from investments, written options, foreign currency transactions, futures contracts and securities sold short | 6,231,924 | 99,792,243 | ||||||
Net change in unrealized appreciation (depreciation) on investments, translation of other assets and liabilities denominated in foreign currencies and deferred taxes | 53,378,767 | 38,245,944 | ||||||
| ||||||||
Net increase (decrease) in net assets resulting from operations | 79,088,000 | 162,525,154 | ||||||
| ||||||||
Distributions to shareholders from: | ||||||||
Net investment income: | ||||||||
Class 1 | — | (1,245,461 | ) | |||||
Class 2 | — | (16,267,624 | ) | |||||
Class 4 | — | (816,963 | ) | |||||
| ||||||||
Total distributions to shareholders | — | (18,330,048 | ) | |||||
| ||||||||
Capital share transactions: (Note 2) | ||||||||
Class 1 | (7,641,385 | ) | (10,957,474 | ) | ||||
Class 2 | (87,336,078 | ) | (87,938,794 | ) | ||||
Class 4 | 1,967,806 | 4,965,152 | ||||||
| ||||||||
Total capital share transactions | (93,009,657 | ) | (93,931,116 | ) | ||||
| ||||||||
Net increase (decrease) in net assets | (13,921,657 | ) | 50,263,990 | |||||
Net assets: | ||||||||
Beginning of period | 1,506,049,448 | 1,455,785,458 | ||||||
| ||||||||
End of period | $ | 1,492,127,791 | $ | 1,506,049,448 | ||||
| ||||||||
Undistributed net investment income included in net assets: | ||||||||
End of period | $ | 42,102,868 | $ | 22,625,559 | ||||
| ||||||||
The accompanying notes are an integral part of these financial statements.
MGD-23
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 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 generally sold only to insurance company separate accounts to fund the benefits of variable life insurance policies or variable annuity contracts. At June 30, 2011, 54.83% 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. Financial Instrument Valuation
The Fund’s investments in securities and other financial instruments are carried at fair value daily. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. Under procedures approved by the Trust’s Board of Trustees, the Fund may utilize independent pricing services, quotations from securities and financial instrument dealers, and other market sources to determine fair value.
Equity securities and derivative financial instruments (derivatives) listed on an 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. 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. 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. Over-the-counter securities 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 at the closing net asset value.
Debt securities generally trade in the over-the-counter market rather than on a securities exchange. The Fund’s pricing services use multiple valuation techniques to determine fair value. In instances where sufficient market activity exists, the pricing services may utilize a market-based approach through which quotes from market makers are used to determine fair value. In instances where sufficient market activity may not exist or is limited, the pricing services also utilize proprietary valuation models which may consider market characteristics such as benchmark yield curves, option-adjusted spreads, credit spreads, estimated default rates, coupon rates, anticipated timing of principal repayments, underlying collateral, and other unique security features in order to estimate the relevant cash flows, which are then discounted to calculate the fair value. 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.
Certain derivatives trade in the over-the-counter market. The Fund’s pricing services use various techniques including industry standard option pricing models and proprietary discounted cash flow models to determine the fair value of those instruments. The Fund’s net benefit or obligation under the derivative contract, as measured by the fair market value of the contract, is included in net assets.
The Fund has procedures to determine the fair value of securities and other financial instruments for which market prices are not readily available or which may not be reliably priced. Under these procedures, the Fund primarily employs a market-based approach which may use related or comparable assets or liabilities, recent transactions, market multiples, book values, and other relevant information for the investment to determine the fair value of the investment. The Fund may also use an income-based valuation approach in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the investments. Due to the inherent uncertainty of valuations of such investments, the fair values may differ significantly from the values that would have been used had an active market existed.
MGD-24
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Mutual Global Discovery Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
a. Financial Instrument Valuation (continued)
Trading in securities on foreign securities stock exchanges and over-the-counter markets may be completed before the daily close of business on the NYSE. Occasionally, events occur between the time at which trading in a foreign security is completed and the close of the NYSE that might call into question the reliability of the value of a portfolio security held by the Fund. As a result, differences may arise between the value of the Fund’s portfolio securities as determined at the foreign market close and the latest indications of value at the close of the NYSE. In order to minimize the potential for these differences, 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 that may call into question the reliability of the values of the foreign securities 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.
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. The Fund may enter into foreign currency exchange contracts to facilitate transactions denominated in a foreign currency. 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. Portfolio securities and assets and liabilities denominated in foreign currencies contain risks that those currencies will decline in value relative to the U.S. dollar. 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 Trust’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 invested in 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 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/or the potential for market movements which expose the Fund to gains or losses in excess of the amounts shown on the Statement of Assets and Liabilities. Realized gain and loss and unrealized appreciation and depreciation on these contracts for the period are included in the Statement of Operations.
The Fund entered into futures contracts primarily to manage interest rate and/or foreign exchange rate risk. A futures contract is an agreement between the Fund and a counterparty to buy or sell an underlying instrument for a specified price on a future date. Required initial margin deposits of cash or securities are pledged by the Fund. Subsequent payments, known as variation margin, are made or received by the Fund, depending on fluctuations in the value of the underlying security. Such variation margin is accounted for as unrealized appreciation or depreciation until the contract is closed, at which time the gains or losses are realized.
MGD-25
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Mutual Global Discovery Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
c. Derivative Financial Instruments (continued)
The Fund entered into forward exchange contracts primarily to manage and/or 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. Unrestricted cash may be invested according to the Fund’s investment objectives.
The Fund purchased or wrote option contracts primarily to manage and/or gain exposure to 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, or notional amount of a swap (swaption), 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.
d. 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/or securities having a value equal to a specified percentage of the value of the securities sold short. The Fund is obligated to pay fees for borrowing the securities sold short and is required to pay the counterparty any dividends or interest due on securities sold short. Such dividends or interest and any security borrowing fees are recorded as an expense to the Fund.
e. 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 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.
f. Income and Deferred Taxes
It is the Fund’s policy to qualify as a regulated investment company under the Internal Revenue Code. The Fund intends to distribute to shareholders substantially all of its taxable income and net realized gains to relieve it from federal income and excise taxes. As a result, no provision for U.S. federal income taxes is required. The Fund files U.S. income tax returns as well as tax returns in certain other jurisdictions. The Fund records a provision for taxes in its financial statements including penalties and interest, if any, for a tax position taken on a tax return (or expected to be taken) when it fails to meet the more likely than not (a
MGD-26
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Mutual Global Discovery Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
f. Income and Deferred Taxes (continued)
greater than 50% probability) threshold and based on the technical merits, the tax position may not be sustained upon examination by the tax authorities. As of June 30, 2011, and for all open tax years, the Fund has determined that no provision for income tax is required in the Fund’s financial statements. Open tax years are those that remain subject to examination and are based on each tax jurisdiction statute of limitation.
The Fund may be subject to foreign taxation related to income received, capital gains on the sale of securities and certain foreign currency transactions in the foreign jurisdictions in which it invests. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist in the foreign markets in which the Fund invests. When a capital gain tax is determined to apply the Fund records an estimated deferred tax liability for unrealized gains on these securities in an amount that would be payable if the securities were disposed of on the valuation date.
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. Facility fees are recognized as income over the expected term of the loan. 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.
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.
MGD-27
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, 2011, 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, 2011 | Year Ended December 31, 2010 | |||||||||||||||
| Class 1 Shares: | Shares | Amount | Shares | Amount | ||||||||||||
Shares sold | 119,048 | $ | 2,688,296 | 105,161 | $ | 2,092,188 | ||||||||||
Shares issued in reinvestment of distributions | — | — | 63,093 | 1,245,461 | ||||||||||||
Shares redeemed | (466,031 | ) | (10,329,681 | ) | (722,443 | ) | (14,295,123 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | (346,983 | ) | $ | (7,641,385 | ) | (554,189 | ) | $ | (10,957,474 | ) | ||||||
| ||||||||||||||||
Class 2 Shares: | ||||||||||||||||
Shares sold | 1,139,852 | $ | 24,446,643 | 3,059,169 | $ | 60,514,460 | ||||||||||
Shares issued in reinvestment of distributions | — | — | 837,674 | 16,267,624 | ||||||||||||
Shares redeemed | (5,177,512 | ) | (111,782,721 | ) | (8,564,469 | ) | (164,720,878 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | (4,037,660 | ) | $ | (87,336,078 | ) | (4,667,626 | ) | $ | (87,938,794 | ) | ||||||
| ||||||||||||||||
Class 4 Shares: | ||||||||||||||||
Shares sold | 262,051 | $ | 5,716,421 | 535,481 | $ | 10,579,920 | ||||||||||
Shares issued on reinvestment of distributions | — | — | 41,618 | 816,963 | ||||||||||||
Shares redeemed | (171,795 | ) | (3,748,615 | ) | (327,974 | ) | (6,431,731 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | 90,256 | $ | 1,967,806 | 249,125 | $ | 4,965,152 | ||||||||||
| ||||||||||||||||
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 Fund 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 | |
| 0.800% | 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 |
MGD-28
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 Trust’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, 2011, there were no credits earned.
5. INCOME TAXES
At June 30, 2011, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
Cost of investments | $ | 1,236,778,135 | ||
|
| |||
Unrealized appreciation | $ | 334,746,253 | ||
Unrealized depreciation | (49,166,292 | ) | ||
|
| |||
Net unrealized appreciation (depreciation) | $ | 285,579,961 | ||
|
| |||
Net investment income differs for financial statement and tax purposes primarily due to differing treatments of foreign currency transactions, passive foreign investment company shares, pass-through entity income, bond discounts and premiums, and certain corporate actions.
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, pass-through entity income, futures transactions, bond discounts and premiums, tax straddles, and certain corporate actions.
MGD-29
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Mutual Global Discovery Securities Fund
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the period ended June 30, 2011, aggregated $225,331,365 and $234,110,038, respectively.
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 the income on debt securities, including those of distressed companies, will not be collected, the Fund discontinues accruing income and recognizes an adjustment for uncollectible interest. At June 30, 2011, the Fund did not hold any distressed company securities for which interest recognition has been discontinued.
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 invests 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.
At June 30, 2011, the Fund held investments in restricted securities, excluding certain securities exempt from registration under the 1933 Act deemed to be liquid, as follows:
| Principal Amount/ Shares | Issuer | Acquisition Dates | Cost | Value | ||||||||||
| 800,000 | The Bankshares Inc. | 3/22/07 | $ | 8,000,000 | $ | 2,694,072 | ||||||||
| 825 | Broadband Ventures III LLC, secured promissory note, 5.00%, 2/01/12 | 7/01/10 | 825 | 825 | ||||||||||
| 1,903 | Elephant Capital Holdings Ltd. | 8/23/04 - 3/10/08 | 294,226 | — | ||||||||||
| 2,077,368 | FIM Coinvestor Holdings I, LLC | 11/20/06 - 6/02/09 | — | — | ||||||||||
| 1,114,214 | Hightower Holding LLC, pfd., A, Series 2 | 6/10/10 - 3/31/11 | 2,785,536 | 2,461,489 | ||||||||||
| 47,271 | IACNA Investor LLC | 7/24/08 | 17,613 | 473 | ||||||||||
| 172,409 | Imagine Group Holdings Ltd. | 8/31/04 | 1,765,727 | 2,100,183 | ||||||||||
| 424,073 | International Automotive Components Group Brazil LLC | 4/13/06 - 12/26/08 | 281,629 | 534,900 | ||||||||||
| 3,000,220 | International Automotive Components Group North America, LLC | 1/12/06 - 10/10/07 | 3,599,443 | 2,804,846 | ||||||||||
| 9,306 | NCB Warrant Holdings Ltd., A | 12/16/05 - 3/10/08 | 87,597 | — | ||||||||||
| 2,140 | Olympus Re Holdings Ltd. | 12/19/01 | 202,484 | 595 | ||||||||||
| 1,361,600 | Prime AET&D Holdings No. 1 Pty. Ltd. | 10/13/10 | — | — | ||||||||||
|
| |||||||||||||
Total Restricted Securities (0.71% of Net Assets) | $ | 10,597,383 | ||||||||||||
|
| |||||||||||||
MGD-30
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Mutual Global Discovery Securities Fund
10. UNFUNDED CAPITAL COMMITMENTS
The Fund enters into certain capital commitments and may be obligated to perform on such agreements at a future date. The Fund monitors these commitments and assesses the probability of required performance. For any agreements whose probability of performance is determined to be greater than remote, the Fund assesses the fair value of the commitment. In instances where the probability of performance is greater than remote and the performance under the commitment would result in an unrealized loss, the Fund recognizes such losses on the Statement of Assets and Liabilities and the Statement of Operations.
At June 30, 2011, the Fund had aggregate unfunded capital commitments of $2,644,464, for which no depreciation has been recognized.
11. OTHER DERIVATIVE INFORMATION
At June 30, 2011, 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 | 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/Net assets consist of – net unrealized appreciation (depreciation) | $ | 2,171,598 | a | Unrealized depreciation on forward exchange contracts | $ | 8,474,032 | |||||
aIncludes cumulative appreciation (depreciation) of futures contracts as reported in the Statement of Investments. Only current day’s variation margin is reported within the Statement of Assets and Liabilities.
For the period ended June 30, 2011, the effect of derivative contracts on the Fund’s Statement of Operations was as follows:
| Derivative Contracts Not Accounted for as Hedging Instruments | Statement of Operations Locations | Realized Gain (Loss) for the Period | Change in Unrealized Appreciation (Depreciation) for the Period | |||||
Foreign exchange contracts | Net realized gain (loss) from foreign currency transactions and futures contracts/Net change in unrealized appreciation (depreciation) on translation of other assets and liabilities denominated in foreign currencies | $ | (33,911,940 | ) | $(1,164,601) | |||
For the period ended June 30, 2011, the average month end market value of derivatives represented 1.06% of average month end net assets. The average month end number of open derivative contracts for the period was 90.
See Note 1(c) regarding derivative financial instruments.
MGD-31
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Mutual Global Discovery 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, 2011, 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. (0.18% of Net Assets) | 800,000 | — | — | 800,000 | $ | 2,694,072 | $ | — | $ | — | ||||||||||||||
|
| |||||||||||||||||||||||
13. CREDIT FACILITY
The Fund, together with other U.S. registered and foreign investment funds (collectively, Borrowers), managed by Franklin Templeton Investments, are borrowers in a joint syndicated senior unsecured credit facility totaling $750 million (Global Credit Facility) which matures on January 20, 2012. This Global Credit Facility provides 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 of 0.08% based upon the unused portion of the Global Credit Facility, which is reflected in other expenses on the Statement of Operations. During the period ended June 30, 2011, the Fund did not use the Global Credit Facility.
14. FAIR VALUE MEASUREMENTS
The Fund follows 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.
For movements between the levels within the fair value hierarchy, the Fund has adopted a policy of recognizing the transfers as of the date of the underlying event which caused the movement.
MGD-32
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Mutual Global Discovery Securities Fund
14. FAIR VALUE MEASUREMENTS (continued)
The following is a summary of the inputs used as of June 30, 2011, 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 | ||||||||||||||||
Auto Components | $ | — | $ | — | $ | 3,342,406 | b | $ | 3,342,406 | |||||||
Commercial Banks | 86,520,933 | — | 2,694,072 | b | 89,215,005 | |||||||||||
Commercial Services & Supplies | 5,865,648 | 274 | — | b | 5,865,922 | |||||||||||
Diversified Financial Services | 37,433,582 | 5,966,624 | 2,494,007 | 45,894,213 | ||||||||||||
Insurance | 64,089,606 | — | 2,100,778 | 66,190,384 | ||||||||||||
Real Estate Management & Development | 10,946,487 | — | 2,356,314 | 13,302,801 | ||||||||||||
Other Equity Investmentsc | 1,163,041,665 | — | — | b | 1,163,041,665 | |||||||||||
Corporate Bonds, Notes and Senior Floating Rate Interests | — | 46,461,675 | 825 | 46,462,500 | ||||||||||||
Companies in Liquidation | — | 16,009 | — | b | 16,009 | |||||||||||
Short Term Investments | 26,498,602 | 62,528,589 | — | 89,027,191 | ||||||||||||
|
| |||||||||||||||
Total Investments in Securities | $ | 1,394,396,523 | $ | 114,973,171 | $ | 12,988,402 | $ | 1,522,358,096 | ||||||||
|
| |||||||||||||||
Forward Exchange Contracts | — | 2,040,162 | — | 2,040,162 | ||||||||||||
Futures Contracts | 131,436 | — | — | 131,436 | ||||||||||||
Liabilities: | ||||||||||||||||
Forward Exchange Contracts | — | 8,474,032 | — | 8,474,032 | ||||||||||||
aIncludes common and preferred stocks as well as other equity investments.
bIncludes securities determined to have no value at June 30, 2011.
cFor detailed industry descriptions, see the accompanying Statement of Investments.
At June 30, 2011, the reconciliation of assets in which significant unobservable inputs (Level 3) were used in determining fair value, is as follows:
| Balance at Beginning of Period | Purchases | Sales | Transfers Into Level 3 | Transfers Out of Level 3a | Cost Basis Adjustmentsb | Net Realized Gain (Loss) | Net Unrealized Gain (Loss) | Balance at End of Period | Net Change in Unrealized Appreciation (Depreciation) on Assets Held at Period End | |||||||||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||||||||||
Investments in Securities: | ||||||||||||||||||||||||||||||||||||||||
Equity Investments:c | ||||||||||||||||||||||||||||||||||||||||
Auto Compo | $ | 4,555,503 | d | $ | — | $ | — | $ | — | $ | — | $ | (6,389 | ) | $ | 6,389 | $ | (1,213,097 | ) | $ | 3,342,406 | d | $ | (1,213,097 | ) | |||||||||||||||
Commercial Banks | 2,905,224 | d | — | — | — | — | — | — | (211,152 | ) | 2,694,072 | d | (211,152 | ) | ||||||||||||||||||||||||||
Consumer Finance | 4,924,234 | — | (4,924,234 | ) | — | — | — | (1,136,557 | ) | 1,136,557 | — | — | ||||||||||||||||||||||||||||
Diversified Financial Services | 1,158,855 | d | 1,392,768 | — | — | — | — | — | (57,616 | ) | 2,494,007 | (57,616 | ) | |||||||||||||||||||||||||||
Diversified Telecomm | — | d | — | — | — | — | (49 | ) | 49 | — | — | d | — | |||||||||||||||||||||||||||
Electric Utilities | 6,878,803 | d | — | (6,475,783 | ) | — | — | — | — | (403,020 | ) | — | d | — | ||||||||||||||||||||||||||
Insurance | 2,143,167 | — | — | — | — | — | — | (42,389 | ) | 2,100,778 | (42,389 | ) | ||||||||||||||||||||||||||||
IT Services | 19,161 | — | — | — | (17,139 | ) | — | — | (2,022 | ) | — | — | ||||||||||||||||||||||||||||
Real Estate Management & Development | 2,112,892 | — | — | — | — | — | — | 243,422 | 2,356,314 | 243,422 | ||||||||||||||||||||||||||||||
Corporate Bonds, Notes and Senior Floating Rate Interests | 4,251,178 | — | (4,250,353 | ) | — | — | — | (901,265 | ) | 901,265 | 825 | — | ||||||||||||||||||||||||||||
Companies in Liquidation | — | d | — | — | — | — | (4,203 | ) | 4,203 | — | — | d | — | |||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||
Total | $ | 28,949,017 | $ | 1,392,768 | $ | (15,650,370 | ) | $ | — | $ | (17,139 | ) | $ | (10,641 | ) | $ | (2,027,181 | ) | $ | 351,948 | $ | 12,988,402 | $ | (1,280,832 | ) | |||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||
MGD-33
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Mutual Global Discovery Securities Fund
14. FAIR VALUE MEASUREMENTS (continued)
aThe investment was transferred out of Level 3 as a result of the availability of a quoted price in an active market for identical securities.
bMay include accretion, amortization, partnership adjustments, and/or other cost basis adjustments.
cIncludes common and preferred stocks as well as other equity investments.
dIncludes securities determined to have no value.
15. NEW ACCOUNTING PRONOUNCEMENTS
In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (IFRS). The amendments in the ASU will improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRS and include new guidance for certain fair value measurement principles and disclosure requirements. The ASU is effective for interim and annual periods beginning after December 15, 2011. The Fund is currently evaluating the impact, if any, of applying this provision.
16. SUBSEQUENT EVENTS
The Fund has evaluated subsequent events through the issuance of the financial statements and determined that no events have occurred that require disclosure.
ABBREVIATIONS | ||||
| Counterparty | Currency | Selected Portfolio | ||
| BOFA - Bank of America Corp. | CHF - Swiss Franc | ADR - American Depository Receipt | ||
| BZWS - Barclays Bank PLC | EUR - Euro | FHLB - Federal Home Loan Bank | ||
| DBAB - Deutsche Bank AG | GBP - British Pound | PC - Participation Certificate | ||
| HSBC - HSBC Bank USA, N.A. | USD - United States Dollar | PIK - Payment-In-Kind | ||
| SSBT - State Street Bank and Trust Co. |
MGD-34
MUTUAL INTERNATIONAL SECURITIES FUND
We are pleased to bring you Mutual International Securities Fund’s semiannual report for the period ended June 30, 2011.
Performance Summary as of 6/30/11
Mutual International Securities Fund – Class 4 delivered a +3.24% total return* for the six-month period ended 6/30/11.
*The investment manager and administrator have contractually agreed to waive or assume certain expenses so that common expenses of the Fund (excluding Rule 12b-1 fees and acquired fund fees and other expenses) do not exceed 0.95% (other than certain nonroutine expenses), until 4/30/12. If the manager and administrator had not waived fees, the Fund’s total returns would have been lower.
Performance reflects the Fund’s Class 4 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 International Securities Fund – Class 4
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 International Securities Fund seeks capital appreciation, which may occasionally be short term, with income as a secondary goal. The fund normally invests at least 80% of its net assets in securities of non-U.S. issuers.
Performance Overview
You can find the Fund’s six-month total return in the Performance Summary. The Fund outperformed its benchmark, the MSCI Europe, Australasia, Far East Index Net Return (Local Currency), which posted a total return of +0.18% for the same period.1
Economic and Market Overview
Global stock markets rose in the first half of 2011, though the positive momentum from the previous year waned as European sovereign debt turmoil escalated and signs emerged of an economic slowdown. Furthermore, geopolitical unrest sweeping the Middle East and North Africa roiled oil markets, and a devastating earthquake and tsunami in Japan severely disrupted global supply chains during the period. While the market recovered from these interferences, economic growth concerns persisted. Officials at the U.S. Federal Reserve Board (Fed) cut their growth forecast for the world’s largest economy, and manufacturing slowed in most major regions of the world. Japan’s earthquake, an early surge in commodity prices and a fading inventory restocking cycle were all blamed for declining economic leading indicators. Nascent monetary policy tightening in most parts of the world was also thought to inhibit growth and cool the commodities rally. Asian and emerging market policymakers tightened aggressively as inflation reached post-crisis highs in many regions, while the European Central Bank raised interest rates for the first time in two years, deviating from the extraordinarily accommodative path of the Fed, which undertook a second round of quantitative easing during the reporting period.
Amid concerns of sustained accommodative monetary policy and declining economic growth rates in the U.S., politicians debated whether to raise the nation’s debt ceiling. Sovereign debt concerns continued to plague Europe, with Greece, Ireland, Portugal and Spain subject to rating downgrades in the first half of 2011. At period-end, European politicians were working to pass painful austerity budgets despite fierce popular resistance, and discussions were ongoing about restructuring
1. Source: © 2011 Morningstar. One cannot invest directly in an index, and an index is not 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 developing markets, involves additional risks, including currency fluctuations, economic instability, market volatility, and political and social instability. Investments in companies involved in mergers, liquidations, reorganizations and distressed bankruptcy, which may include defaulted debt, involve higher credit and other risks. Smaller and midsize company securities involve special risks, such as relatively small revenues, limited product lines and small market share. The Fund’s investment in certain hedging and derivative instruments may involve a small investment relative to the risk assumed. The manager applies various techniques and analyses in making investment decisions for the Fund, but there can be no guarantee that these decisions will produce the desired results. The Fund’s prospectus also includes a description of the main investment risks.
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debt payments of the region’s most troubled sovereigns. Despite these challenges, continued corporate profit strength and still favorable economic growth prospects in some regions of the world supported stock prices. Equity market leadership rotated toward defensive sectors as risk aversion increased, buoying even U.S. Treasuries toward period-end as near-term demand for perceived safe havens outweighed longer term concerns about the deteriorating U.S. credit profile. The dollar ultimately declined, however, against most currencies, broadly reflecting divergent interest rate and/or economic growth expectations.
Investment Strategy
At Mutual Series, we are committed to our distinctive value approach to investing. Our major investment strategy is investing in undervalued stocks in Asia and Europe. 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 internationally, 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,
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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 six months under review, Fund performance benefited from several investments. Three of the largest contributors during the period were U.K.-based holding company Resolution Ltd., an acquisition and consolidation vehicle that buys and restructures financial services firms in western Europe; French insurance conglomerate AXA; and ThyssenKrupp, a German steel and engineering company.
Early in 2011, shares of Resolution and AXA lost value along with most other capital market-sensitive life insurers. However, Resolution created value through attention to its Friends Provident operating business, which markets life insurance and a variety of pension and disability plans throughout the U.K. In AXA’s case, the accretive acquisition of the majority of the company’s U.K. life insurance business seemed to us an encouraging sign that it was executing its strategy to consolidate the U.K. life insurance industry. AXA shareholders benefited considerably from the U.K. sale, as well as a better articulation of management’s increased focus on profitability, earnings and cash flow.
ThyssenKrupp’s performance was enhanced by the company’s May 2011 announcement regarding the details surrounding an anticipated restructuring of its portfolio of businesses. The market reacted positively to the news, bolstering the company’s stock price for the remainder of the Fund’s semiannual period. We believe ThyssenKrupp’s pending restructuring stands to be a meaningful catalyst in streamlining its disparate businesses, a move that holds the potential to unlock shareholder value.
Despite the Fund’s positive performance the first half of 2011, there were a few disappointments in the portfolio. Among the top detractors were Japanese video game software and console maker Nintendo; Royal TNT Post (TNT), the postal service for the Netherlands; and Koninklijke Philips Electronics (Philips), a Netherlands-based diversified manufacturer.
Nintendo’s share price deteriorated after the company reported sales of its new handheld console, the Nintendo 3DS, were slower than anticipated. In particular, sales of this new gaming device were weak in its
Top 10 Sectors/Industries
Mutual International Securities Fund
Based on Equity Securities
6/30/11
| % of Total Net Assets | ||||
| Insurance | 9.9% | |||
| Commercial Banks | 8.8% | |||
| Construction & Engineering | 5.1% | |||
| Industrial Conglomerates | 4.7% | |||
| Media | 4.0% | |||
| Food Products | 3.9% | |||
| Automobiles | 3.5% | |||
| Pharmaceuticals | 3.5% | |||
| Food & Staples Retailing | 3.2% | |||
| Diversified Financial Services | 3.1% | |||
MI-4
home market of Japan, where the March 11 earthquake and tsunami hurt consumer sentiment, and in other parts of the world due to a lack of compelling software titles at launch date and the console’s relatively high initial sales price. At period-end, cash accounted for more than 50% of Nintendo’s market capitalization, and we believe the company can successfully leverage its software intellectual property in the next gaming console cycle. With this in mind, we continued to hold Nintendo in the portfolio at period-end.
TNT is Europe’s second-largest express package carrier and the Netherlands’ primary postal operator. During the first four months of 2011, its share price declined following the announcement of disappointing operating results. Specifically, execution issues in its Brazil operations led to operating losses in that division, and a lack of pricing power in its European operations led to lower profits compared with analysts’ expectations. TNT’s stock price decline continued into the spring following the announcement of lower first-quarter profits. In late May, the company split into two separately traded companies, TNT Express and PostNL, a traditional mail operator. Shares in both of the spun-off entities declined as investors’ expectations faded that there would be a bid for TNT Express. For PostNL, the market became concerned that despite its high dividend yield, the company will need to sell assets (namely a stake in TNT Express) in the near term to fund those dividend payments.
Philips’ share price declined in March when the company reported a reduction in profits for the first quarter due to losses within its consumer electronics division, stemming primarily from lackluster television sales. Its share price came under additional pressure in June after management warned the company would not meet analysts’ profit expectations for the second quarter, either. Philips’ health care division continued to generate strong results, but performance in the consumer and lighting divisions were comparatively weak. The consumer division has suffered from faltering western European demand, especially for its higher priced products. Meanwhile, Philips’ lighting division has been negatively affected by reduced construction activity and the company’s inability to fully pass on rising raw material costs. We continued to favor our investment in Philips due to its strong balance sheet with virtually no net debt, as well as a newly appointed CEO and CFO.
Finally, investors should note that we maintained our currency hedging posture of being more hedged than not to the U.S. dollar, largely through the use of forward currency exchange contracts. Certain
Top 10 Holdings
Mutual International Securities Fund
6/30/11
| Company Sector/Industry, Country | % of Total Net Assets | |||
| China Fishery Group Ltd. | 1.8% | |||
| Food Products, China | ||||
| ThyssenKrupp AG | 1.7% | |||
| Metals & Mining, Germany | ||||
| Resolution Ltd. | 1.7% | |||
| Insurance, U.K. | ||||
| Aozora Bank Ltd. | 1.5% | |||
| Commercial Banks, Japan | ||||
| Rexam PLC | 1.5% | |||
| Containers & Packaging, U.K. | ||||
| Vinci SA | 1.4% | |||
| Construction & Engineering, France | ||||
| Boart Longyear Group | 1.4% | |||
| Construction & Engineering, Australia | ||||
| Nestle SA | 1.3% | |||
| Food Products, Switzerland | ||||
| KHD Humboldt Wedag International AG | 1.3% | |||
| Construction & Engineering, Germany | ||||
| Porsche Automobile Holding SE | 1.3% | |||
| Automobiles, Germany | ||||
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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currencies strengthened in relation to the U.S. dollar in the first six months of 2011, and so our hedging strategy hindered Fund performance during the reporting period.
Thank you for your continued participation in Mutual International 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, 2011, 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 International Securities Fund – Class 4
MI-7
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 4 | Beginning Account Value 1/1/11 | Ending Account Value 6/30/11 | Fund-Level Expenses Incurred During Period* 1/1/11–6/30/11 | |||||||||
Actual | $ | 1,000 | $ | 1,032.40 | $ | 6.55 | ||||||
Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,018.35 | $ | 6.51 | ||||||
*Expenses are calculated using the most recent six-month annualized expense ratio, net of expense waivers, for the Fund’s Class 4 shares (1.30%), 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
Mutual International Securities Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||
| Class 2 | 2010 | 2009a | ||||||||||
| ||||||||||||
Per share operating performance | ||||||||||||
(for a share outstanding throughout the period) | ||||||||||||
Net asset value, beginning of period | $ | 12.04 | $ | 11.82 | $ | 10.00 | ||||||
|
| |||||||||||
Income from investment operationsb: | ||||||||||||
Net investment incomec | 0.18 | 0.25 | 0.08 | |||||||||
Net realized and unrealized gains (losses) | 0.22 | 1.51 | 2.30 | |||||||||
|
| |||||||||||
Total from investment operations | 0.40 | 1.76 | 2.38 | |||||||||
|
| |||||||||||
Less distributions from: | ||||||||||||
Net investment income | — | (0.67 | ) | (0.13 | ) | |||||||
Net realized gains | — | (0.87 | ) | (0.43 | ) | |||||||
|
| |||||||||||
Total distributions | — | (1.54 | ) | (0.56 | ) | |||||||
|
| |||||||||||
Net asset value, end of period | $ | 12.44 | $ | 12.04 | $ | 11.82 | ||||||
|
| |||||||||||
Total returnd | 3.32% | 15.49% | 23.91% | |||||||||
Ratios to average net assetse | ||||||||||||
Expenses before waiver and payments by affiliates | 4.86% | 4.97% | 8.61% | f | ||||||||
Expenses net of waiver and payments by affiliates | 1.20% | 1.20% | g | 1.21% | f,g | |||||||
Expenses incurred in connection with securities sold short | — | — | 0.01% | |||||||||
Net investment income | 3.01% | 2.07% | 1.27% | |||||||||
Supplemental data | ||||||||||||
Net assets, end of period (000’s) | $ | 1,244 | $ | 1,204 | $ | 1,182 | ||||||
Portfolio turnover rate | 44.01% | 41.11% | 41.84% | |||||||||
aFor the period June 15, 2009 (commencement of operations) to December 31, 2009.
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 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 and borrowing fees, if any. See below for the ratios of such expenses to average net assets for the period presented. See Note 1(d).
gBenefit of expense reduction round 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)
Mutual International Securities Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||
| Class 4 | 2010 | 2009a | ||||||||||
| ||||||||||||
Per share operating performance | ||||||||||||
(for a share outstanding throughout the period) | ||||||||||||
Net asset value, beginning of period | $ | 12.04 | $ | 11.81 | $ | 10.00 | ||||||
|
| |||||||||||
Income from investment operationsb: | ||||||||||||
Net investment incomec | 0.18 | 0.24 | 0.07 | |||||||||
Net realized and unrealized gains (losses) | 0.21 | 1.51 | 2.29 | |||||||||
|
| |||||||||||
Total from investment operations | 0.39 | 1.75 | 2.36 | |||||||||
|
| |||||||||||
Less distributions from: | ||||||||||||
Net investment income | — | (0.65 | ) | (0.12 | ) | |||||||
Net realized gains | — | (0.87 | ) | (0.43 | ) | |||||||
|
| |||||||||||
Total distributions | — | (1.52 | ) | (0.55 | ) | |||||||
|
| |||||||||||
Net asset value, end of period | $ | 12.43 | $ | 12.04 | $ | 11.81 | ||||||
|
| |||||||||||
Total returnd | 3.24% | 15.49% | 23.76% | |||||||||
Ratios to average net assetse | ||||||||||||
Expenses before waiver and payments by affiliates | 4.96% | 5.07% | 8.71% | f | ||||||||
Expenses net of waiver and payments by affiliates | 1.30% | 1.30% | g | 1.31% | f,g | |||||||
Expenses incurred in connection with securities sold short | — | — | 0.01% | |||||||||
Net investment income | 2.91% | 1.97% | 1.17% | |||||||||
Supplemental data | ||||||||||||
Net assets, end of period (000’s) | $ | 1,243 | $ | 1,204 | $ | 1,181 | ||||||
Portfolio turnover rate | 44.01% | 41.11% | 41.84% | |||||||||
aFor the period June 15, 2009 (commencement of operations) to December 31, 2009.
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 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 and borrowing fees, if any. See below for the ratios of such expenses to average net assets for the period presented. See Note 1(d).
gBenefit of expense reduction round to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
MI-10
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited)
| Mutual International Securities Fund | Country | Shares | Value | |||||||
Common Stocks 90.8% | ||||||||||
Air Freight & Logistics 1.7% | ||||||||||
PostNL NV | Netherlands | 900 | $ | 7,638 | ||||||
Sinotrans Ltd., H | China | 103,980 | 24,586 | |||||||
TNT Express NV | Netherlands | 900 | 9,334 | |||||||
|
| |||||||||
| 41,558 | ||||||||||
|
| |||||||||
Automobiles 1.2% | ||||||||||
Daimler AG (EUR Traded) | Germany | 404 | 30,283 | |||||||
|
| |||||||||
Beverages 2.2% | ||||||||||
Asahi Breweries Ltd. | Japan | 683 | 13,702 | |||||||
Foster’s Group Ltd. | Australia | 3,800 | 20,987 | |||||||
Pernod Ricard SA | France | 200 | 19,713 | |||||||
|
| |||||||||
| 54,402 | ||||||||||
|
| |||||||||
Capital Markets 2.8% | ||||||||||
F&C Asset Management PLC | United Kingdom | 19,390 | 23,316 | |||||||
Mirae Asset Securities Co. Ltd. | South Korea | 570 | 23,959 | |||||||
aUBS AG (CHF Traded) | Switzerland | 1,253 | 22,846 | |||||||
|
| |||||||||
| 70,121 | ||||||||||
|
| |||||||||
Chemicals 2.6% | ||||||||||
Linde AG | Germany | 179 | 31,383 | |||||||
Yingde Gases Group Co. Ltd. | China | 35,500 | 32,709 | |||||||
|
| |||||||||
| 64,092 | ||||||||||
|
| |||||||||
Commercial Banks 8.8% | ||||||||||
Aozora Bank Ltd. | Japan | 16,000 | 36,967 | |||||||
Barclays PLC | United Kingdom | 4,971 | 20,462 | |||||||
BNP Paribas | France | 261 | 20,147 | |||||||
Hana Financial Group Inc. | South Korea | 810 | 28,316 | |||||||
Intesa Sanpaolo SpA | Italy | 8,176 | 21,768 | |||||||
Intesa Sanpaolo SpA, di Risp | Italy | 3,977 | 8,587 | |||||||
KB Financial Group Inc. | South Korea | 253 | 11,974 | |||||||
KB Financial Group Inc., ADR | South Korea | 120 | 5,736 | |||||||
Korea Exchange Bank | South Korea | 3,020 | 27,172 | |||||||
Societe Generale, A | France | 294 | 17,446 | |||||||
Woori Finance Holdings Co. Ltd. | South Korea | 1,500 | 19,611 | |||||||
|
| |||||||||
| 218,186 | ||||||||||
|
| |||||||||
Commercial Services & Supplies 1.0% | ||||||||||
Edenred | France | 813 | 24,806 | |||||||
|
| |||||||||
Construction & Engineering 5.1% | ||||||||||
Boart Longyear Group | Australia | 7,955 | 34,039 | |||||||
Henderson Investment Ltd. | Hong Kong | 291,605 | 25,856 | |||||||
aKHD Humboldt Wedag International AG | Germany | 3,790 | 33,328 | |||||||
Vinci SA | France | 540 | 34,589 | |||||||
|
| |||||||||
| 127,812 | ||||||||||
|
| |||||||||
Construction Materials 1.8% | ||||||||||
CRH PLC | Ireland | 992 | 21,967 | |||||||
SA des Ciments Vicat | France | 261 | 21,918 | |||||||
|
| |||||||||
| 43,885 | ||||||||||
|
| |||||||||
Containers & Packaging 1.5% | ||||||||||
Rexam PLC | United Kingdom | 5,985 | 36,764 | |||||||
|
| |||||||||
MI-11
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Mutual International Securities Fund | Country | Shares | Value | |||||||
Common Stocks (continued) | ||||||||||
Diversified Financial Services 3.1% | ||||||||||
Deutsche Boerse AG | Germany | 183 | $ | 13,906 | ||||||
First Pacific Co. Ltd. | Hong Kong | 27,752 | 24,892 | |||||||
Guoco Group Ltd. | Hong Kong | 563 | 6,895 | |||||||
aOsaka Securities Exchange Co. Ltd. | Japan | 7 | 31,172 | |||||||
|
| |||||||||
| 76,865 | ||||||||||
|
| |||||||||
Diversified Telecommunication Services 1.5% | ||||||||||
Telecom Italia SpA | Italy | 11,739 | 13,661 | |||||||
Telefonica SA | Spain | 997 | 24,376 | |||||||
|
| |||||||||
| 38,037 | ||||||||||
|
| |||||||||
Electric Utilities 1.1% | ||||||||||
E.ON AG | Germany | 927 | 26,395 | |||||||
a,bPrime AET&D Holdings No. 1 Pty. Ltd. | Australia | 6,987 | — | |||||||
|
| |||||||||
| 26,395 | ||||||||||
|
| |||||||||
Electrical Equipment 0.3% | ||||||||||
Alstom SA | France | 118 | 7,276 | |||||||
|
| |||||||||
Energy Equipment & Services 0.4% | ||||||||||
aDockwise Ltd. | Norway | 410 | 11,267 | |||||||
|
| |||||||||
Food & Staples Retailing 3.2% | ||||||||||
FamilyMart Co. Ltd. | Japan | 725 | 26,567 | |||||||
Koninklijke Ahold NV | Netherlands | 1,794 | 24,106 | |||||||
Lawson Inc. | Japan | 556 | 29,110 | |||||||
|
| |||||||||
| 79,783 | ||||||||||
|
| |||||||||
Food Products 3.9% | ||||||||||
China Fishery Group Ltd. | China | 31,605 | 44,257 | |||||||
Nestle SA | Switzerland | 537 | 33,371 | |||||||
People’s Food Holdings Ltd. | China | 31,000 | 19,181 | |||||||
|
| |||||||||
| 96,809 | ||||||||||
|
| |||||||||
Hotels, Restaurants & Leisure 2.9% | ||||||||||
Accor SA | France | 493 | 22,045 | |||||||
Ladbrokes PLC | United Kingdom | 7,896 | 19,319 | |||||||
REXLot Holdings Ltd. | Hong Kong | 324,568 | 31,281 | |||||||
|
| |||||||||
| 72,645 | ||||||||||
|
| |||||||||
Household Durables 2.2% | ||||||||||
aBerkeley Group Holdings PLC | United Kingdom | 1,204 | 24,869 | |||||||
Skyworth Digital Holdings Ltd. | Hong Kong | 48,000 | 28,806 | |||||||
|
| |||||||||
| 53,675 | ||||||||||
|
| |||||||||
Industrial Conglomerates 4.7% | ||||||||||
aGallant Venture Ltd. | Singapore | 38,000 | 12,684 | |||||||
Jardine Matheson Holdings Ltd. | Hong Kong | 473 | 27,122 | |||||||
Jardine Strategic Holdings Ltd. | Hong Kong | 364 | 11,138 | |||||||
Koninklijke Philips Electronics NV | Netherlands | 536 | 13,766 | |||||||
Shanghai Industrial Holdings Ltd. | China | 7,000 | 25,772 | |||||||
Shun Tak Holdings Ltd. | Hong Kong | 42,000 | 25,475 | |||||||
|
| |||||||||
| 115,957 | ||||||||||
|
| |||||||||
MI-12
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Mutual International Securities Fund | Country | Shares | Value | |||||||
Common Stocks (continued) | ||||||||||
Insurance 9.9% | ||||||||||
ACE Ltd. | United States | 400 | $ | 26,328 | ||||||
Ageas | Belgium | 9,870 | 26,780 | |||||||
AXA SA | France | 1,237 | 28,109 | |||||||
Catlin Group Ltd. | United Kingdom | 3,861 | 24,929 | |||||||
Hiscox Ltd. | United Kingdom | 3,863 | 25,958 | |||||||
Lancashire Holdings Ltd. | United Kingdom | 2,305 | 24,156 | |||||||
Resolution Ltd. | United Kingdom | 8,811 | 41,567 | |||||||
RSA Insurance Group PLC | United Kingdom | 12,020 | 26,033 | |||||||
Zurich Financial Services AG | Switzerland | 93 | 23,516 | |||||||
|
| |||||||||
| 247,376 | ||||||||||
|
| |||||||||
Machinery 0.5% | ||||||||||
aKUKA AG | Germany | 510 | 13,719 | |||||||
|
| |||||||||
Marine 1.0% | ||||||||||
A.P. Moller-Maersk AS, B | Denmark | 3 | 25,873 | |||||||
|
| |||||||||
Media 4.0% | ||||||||||
aAustar United Communications Ltd. | Australia | 18,623 | 26,861 | |||||||
Eutelsat Communications | France | 283 | 12,722 | |||||||
Sinomedia Holding Ltd. | China | 59,017 | 20,704 | |||||||
aVisionChina Media Inc., ADR | China | 5,560 | 15,735 | |||||||
Vivendi SA | France | 830 | 23,080 | |||||||
|
| |||||||||
| 99,102 | ||||||||||
|
| |||||||||
Metals & Mining 1.7% | ||||||||||
ThyssenKrupp AG | Germany | 826 | 42,708 | |||||||
|
| |||||||||
Multi-Utilities 2.9% | ||||||||||
GDF Suez | France | 798 | 29,203 | |||||||
Hera SpA | Italy | 9,780 | 20,706 | |||||||
Iren SpA | Italy | 11,997 | 21,573 | |||||||
|
| |||||||||
| 71,482 | ||||||||||
|
| |||||||||
Multiline Retail 1.5% | ||||||||||
Marks & Spencer Group PLC | United Kingdom | 1,424 | 8,265 | |||||||
New World Department Store China | China | 36,000 | 28,312 | |||||||
|
| |||||||||
| 36,577 | ||||||||||
|
| |||||||||
Oil, Gas & Consumable Fuels 2.0% | ||||||||||
Royal Dutch Shell PLC, A | United Kingdom | 681 | 24,175 | |||||||
Total SA, B | France | 430 | 24,868 | |||||||
|
| |||||||||
| 49,043 | ||||||||||
|
| |||||||||
Pharmaceuticals 3.5% | ||||||||||
Novartis AG | Switzerland | 445 | 27,257 | |||||||
Roche Holding AG | Switzerland | 168 | 28,113 | |||||||
Sanofi | France | 390 | 31,355 | |||||||
|
| |||||||||
| 86,725 | ||||||||||
|
| |||||||||
Real Estate Investment Trusts (REITs) 0.6% | ||||||||||
The Link REIT | Hong Kong | 4,500 | 15,382 | |||||||
|
| |||||||||
Real Estate Management & Development 2.6% | ||||||||||
Franshion Properties China Ltd. | China | 114,390 | 29,106 | |||||||
Parkway Life REIT | Singapore | 13,000 | 19,474 | |||||||
Renhe Commercial Holdings Co. Ltd. | China | 82,000 | 15,701 | |||||||
|
| |||||||||
| 64,281 | ||||||||||
|
| |||||||||
MI-13
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Mutual International Securities Fund | Country | Shares | Value | |||||||
Common Stocks (continued) | ||||||||||
Software 1.7% | ||||||||||
Nintendo Co. Ltd. | Japan | 100 | $ | 18,719 | ||||||
Polaris Software Lab Ltd. | India | 6,060 | 24,407 | |||||||
|
| |||||||||
| 43,126 | ||||||||||
|
| |||||||||
Tobacco 1.9% | ||||||||||
British American Tobacco PLC | United Kingdom | 591 | 25,906 | |||||||
Imperial Tobacco Group PLC | United Kingdom | 620 | 20,602 | |||||||
|
| |||||||||
| 46,508 | ||||||||||
|
| |||||||||
Trading Companies & Distributors 3.0% | ||||||||||
Mitsubishi Corp. | Japan | 800 | 19,874 | |||||||
Mitsui & Co. Ltd. | Japan | 1,300 | 22,349 | |||||||
Seven Group Holdings Ltd. | Australia | 3,150 | 32,531 | |||||||
|
| |||||||||
| 74,754 | ||||||||||
|
| |||||||||
Water Utilities 1.0% | ||||||||||
Guangdong Investment Ltd. | China | 46,000 | 24,709 | |||||||
|
| |||||||||
Wireless Telecommunication Services 1.0% | ||||||||||
Vodafone Group PLC | United Kingdom | 9,586 | 25,438 | |||||||
|
| |||||||||
Total Common Stocks (Cost $1,942,380) | 2,257,421 | |||||||||
|
| |||||||||
Preferred Stocks 2.3% | ||||||||||
Automobiles 2.3% | ||||||||||
Porsche Automobile Holding SE, pfd. | Germany | 417 | 33,199 | |||||||
Volkswagen AG, pfd. | Germany | 116 | 23,951 | |||||||
|
| |||||||||
Total Preferred Stocks (Cost $38,648) | 57,150 | |||||||||
|
| |||||||||
Total Investments before Short Term Investments (Cost $1,981,028) | 2,314,571 | |||||||||
|
| |||||||||
Short Term Investments (Cost $12,696) 0.5% | ||||||||||
cInvestments from Cash Collateral Received for Loaned Securities (Cost $12,696) 0.5% | ||||||||||
Money Market Funds 0.5% | ||||||||||
dBNY Mellon Overnight Government Fund, 0.05% | United States | 12,696 | 12,696 | |||||||
|
| |||||||||
Total Investments (Cost $1,993,724) 93.6% | 2,327,267 | |||||||||
Other Assets, less Liabilities 6.4% | 159,783 | |||||||||
|
| |||||||||
Net Assets 100.0% | $ | 2,487,050 | ||||||||
|
| |||||||||
aNon-income producing.
bSee Note 8 regarding restricted securities.
cSee Note 1(e) regarding securities on loan.
dThe rate shown is the annualized seven-day yield at period end.
MI-14
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Mutual International Securities Fund |
At June 30, 2011, the Fund had the following forward exchange contracts outstanding. See Note 1(c).
Forward Exchange Contracts
| Currency | Counterparty | Type | Quantity | Contract Amount | Settlement Date | Unrealized Appreciation | Unrealized Depreciation | |||||||||||||||||||||
Swiss Franc | SSBT | Sell | 89,635 | $ | 102,557 | 8/10/11 | $ | — | $ | (4,076 | ) | |||||||||||||||||
Swiss Franc | DBAB | Buy | 3,258 | 3,888 | 8/10/11 | — | (12 | ) | ||||||||||||||||||||
Swiss Franc | DBAB | Buy | 2,830 | 3,359 | 8/10/11 | 8 | — | |||||||||||||||||||||
British Pound | BOFA | Sell | 172,556 | 282,129 | 8/12/11 | 5,347 | — | |||||||||||||||||||||
British Pound | DBAB | Sell | 4,000 | 6,501 | 8/12/11 | 85 | — | |||||||||||||||||||||
Australian Dollar | DBAB | Sell | 73,000 | 77,833 | 8/23/11 | — | (324 | ) | ||||||||||||||||||||
Euro | DBAB | Sell | 482,637 | 692,150 | 9/15/11 | — | (6,168 | ) | ||||||||||||||||||||
Euro | BZWS | Sell | 43,000 | 61,988 | 9/15/11 | — | (246 | ) | ||||||||||||||||||||
Euro | DBAB | Buy | 29,301 | 41,418 | 9/15/11 | 977 | — | |||||||||||||||||||||
British Pound | BZWS | Buy | 4,750 | 7,700 | 9/16/11 | — | (84 | ) | ||||||||||||||||||||
Japanese Yen | BOFA | Sell | 9,062,045 | 110,072 | 10/20/11 | — | (2,579 | ) | ||||||||||||||||||||
Japanese Yen | DBAB | Sell | 1,461,200 | 17,716 | 10/20/11 | — | (448 | ) | ||||||||||||||||||||
Japanese Yen | SSBT | Sell | 677,000 | 8,154 | 10/20/11 | — | (262 | ) | ||||||||||||||||||||
Japanese Yen | DBAB | Buy | 171,128 | 2,130 | 10/20/11 | — | (3 | ) | ||||||||||||||||||||
Japanese Yen | SSBT | Buy | 373,000 | 4,565 | 10/20/11 | 71 | — | |||||||||||||||||||||
Japanese Yen | DBAB | Buy | 10,000 | 123 | 10/20/11 | 2 | — | |||||||||||||||||||||
Japanese Yen | DBAB | Sell | 1,169,000 | 14,571 | 10/20/11 | 64 | — | |||||||||||||||||||||
|
| |||||||||||||||||||||||||||
Unrealized appreciation (depreciation) |
| 6,554 | (14,202 | ) | ||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||
Net unrealized appreciation (depreciation) |
| $ | (7,648 | ) | ||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||
See Abbreviations on page MI-27.
The accompanying notes are an integral part of these financial statements.
MI-15
Franklin Templeton Variable Insurance Products Trust
Financial Statements
Statement of Assets and Liabilities
June 30, 2011 (unaudited)
| Mutual International Securities Fund | ||||
Assets: | ||||
Investments in securities: | ||||
Cost | $ | 1,993,724 | ||
|
| |||
Value | $ | 2,327,267 | ||
Cash | 12,446 | |||
Foreign currency, at value (cost $158,788) | 159,332 | |||
Receivables: | ||||
Investment securities sold (includes securities loaned in the amount of $13,101) | 24,274 | |||
Dividends and interest | 7,433 | |||
Affiliates | 30,816 | |||
Unrealized appreciation on forward exchange contracts | 6,554 | |||
|
| |||
Total assets | 2,568,122 | |||
|
| |||
Liabilities: | ||||
Payables: | ||||
Investment securities purchased | 20,492 | |||
Professional fees | 26,083 | |||
Pricing fees | 3,829 | |||
Payable upon return of securities loaned | 12,696 | |||
Unrealized depreciation on forward exchange contracts | 14,202 | |||
Accrued expenses and other liabilities | 3,770 | |||
|
| |||
Total liabilities | 81,072 | |||
|
| |||
Net assets, at value | $ | 2,487,050 | ||
|
| |||
Net assets consist of: | ||||
Paid-in capital | $ | 1,997,280 | ||
Distributions in excess of net investment income | (4,288 | ) | ||
Net unrealized appreciation (depreciation) | 326,975 | |||
Accumulated net realized gain (loss) | 167,083 | |||
|
| |||
Net assets, at value | $ | 2,487,050 | ||
|
| |||
Class 2: | ||||
Net assets, at value | $ | 1,244,073 | ||
|
| |||
Shares outstanding | 100,000 | |||
|
| |||
Net asset value and maximum offering price per share | $ | 12.44 | ||
|
| |||
Class 4: | ||||
Net assets, at value | $ | 1,242,977 | ||
|
| |||
Shares outstanding | 100,000 | |||
|
| |||
Net asset value and maximum offering price per share | $ | 12.43 | ||
|
| |||
The accompanying notes are an integral part of these financial statements.
MI-16
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Operations
for the six months ended June 30, 2011 (unaudited)
| Mutual International Securities Fund | ||||
Investment income: | ||||
Dividends (net of foreign taxes of $4,511) | $ | 51,137 | ||
Income from securities loaned | 609 | |||
|
| |||
Total investment income | 51,746 | |||
|
| |||
Expenses: | ||||
Management fees (Note 3a) | 9,842 | |||
Administrative fees (Note 3b) | 3,076 | |||
Distribution fees: (Note 3c) | ||||
Class 2 | 1,538 | |||
Class 4 | 2,152 | |||
Custodian fees (Note 4) | 813 | |||
Reports to shareholders | 6,179 | |||
Registration and filing fees | 588 | |||
Professional fees | 27,150 | |||
Pricing fees | 8,507 | |||
Other | 513 | |||
|
| |||
Total expenses | 60,358 | |||
Expenses waived/paid by affiliates (Note 3e) | (44,979 | ) | ||
|
| |||
Net expenses | 15,379 | |||
|
| |||
Net investment income | 36,367 | |||
|
| |||
Realized and unrealized gains (losses): | ||||
Net realized gain (loss) from: | ||||
Investments | 156,604 | |||
Foreign currency transactions | (66,398 | ) | ||
|
| |||
Net realized gain (loss) | 90,206 | |||
|
| |||
Net change in unrealized appreciation (depreciation) on: | ||||
Investments | (45,166 | ) | ||
Translation of other assets and liabilities denominated in foreign currencies | (2,357 | ) | ||
|
| |||
Net change in unrealized appreciation (depreciation) | (47,523 | ) | ||
|
| |||
Net realized and unrealized gain (loss) | 42,683 | |||
|
| |||
Net increase (decrease) in net assets resulting from operations | $ | 79,050 | ||
|
| |||
The accompanying notes are an integral part of these financial statements.
MI-17
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statements of Changes in Net Assets
| Mutual International Securities Fund | ||||||||
| Six Months Ended June 30, 2011 (unaudited) | Year Ended December 31, 2010 | |||||||
Increase (decrease) in net assets: | ||||||||
Operations: | ||||||||
Net investment income | $ | 36,367 | $ | 48,399 | ||||
Net realized gain (loss) from investments, foreign currency transactions and securities sold short | 90,206 | 250,886 | ||||||
Net change in unrealized appreciation (depreciation) on investments and translation of other assets and liabilities denominated in foreign currencies | (47,523 | ) | 52,674 | |||||
Net increase (decrease) in net assets resulting from operations | 79,050 | 351,959 | ||||||
Distributions to shareholders from: | ||||||||
Net investment income: | ||||||||
Class 2 | — | (66,680 | ) | |||||
Class 4 | — | (65,490 | ) | |||||
Net realized gains: | ||||||||
Class 2 | — | (87,300 | ) | |||||
Class 4 | — | (87,300 | ) | |||||
Total distributions to shareholders | — | (306,770 | ) | |||||
Net increase (decrease) in net assets | 79,050 | 45,189 | ||||||
Net assets: | ||||||||
Beginning of period | 2,408,000 | 2,362,811 | ||||||
End of period | $ | 2,487,050 | $ | 2,408,000 | ||||
Distributions in excess of net investment income included in net assets: | ||||||||
End of period | $ | (4,288 | ) | $ | (40,655 | ) | ||
The accompanying notes are an integral part of these financial statements.
MI-18
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited)
Mutual International 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 separate funds. The Mutual International 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 generally sold only to insurance company separate accounts to fund the benefits of variable life insurance policies or variable annuity contracts. The Fund offers two classes of shares: 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. Financial Instrument Valuation
The Fund’s investments in securities and other financial instruments are carried at fair value daily. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. Under procedures approved by the Trust’s Board of Trustees, the Fund may utilize independent pricing services, quotations from securities and financial instrument dealers, and other market sources to determine fair value.
Equity securities listed on an 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. 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. 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. Over-the-counter securities 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 at the closing net asset value.
Certain derivative financial instruments (derivatives) trade in the over-the-counter market. The Fund’s pricing services use various techniques including industry standard option pricing models and proprietary discounted cash flow models to determine the fair value of those instruments. The Fund’s net benefit or obligation under the derivative contract, as measured by the fair market value of the contract, is included in net assets.
The Fund has procedures to determine the fair value of securities and other financial instruments for which market prices are not readily available or which may not be reliably priced. Under these procedures, the Fund primarily employs a market-based approach which may use related or comparable assets or liabilities, recent transactions, market multiples, book values, and other relevant information for the investment to determine the fair value of the investment. The Fund may also use an income-based valuation approach in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the investments. Due to the inherent uncertainty of valuations of such investments, the fair values may differ significantly from the values that would have been used had an active market existed.
Trading in securities on foreign securities stock exchanges and over-the-counter markets may be completed before the daily close of business on the NYSE. Occasionally, events occur between the time at which trading in a foreign security is completed and the close of the NYSE that might call into question the reliability of the value of a portfolio security held by the Fund. As a result, differences may arise between the value of the Fund’s portfolio securities as determined at the foreign market close and the latest indications of value at the close of the NYSE. In order to minimize the potential for these differences, 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 that may call into question the reliability of the values of the foreign securities 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.
MI-19
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Mutual International 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. The Fund may enter into foreign currency exchange contracts to facilitate transactions denominated in a foreign currency. 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. Portfolio securities and assets and liabilities denominated in foreign currencies contain risks that those currencies will decline in value relative to the U.S. dollar. 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 Trust’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 invested in 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 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/or the potential for market movements which expose the Fund to gains or losses in excess of the amounts shown on the Statement of Assets and Liabilities. Realized gain and loss and unrealized appreciation and depreciation on these contracts for the period are included in the Statement of Operations.
The Fund entered into forward exchange contracts primarily to manage 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. Unrestricted cash may be invested according to the Fund’s investment objectives.
See Note 9 regarding other derivative information.
d. 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/or securities having a value equal to a specified percentage of the value of the securities sold short. The Fund is obligated to pay fees for borrowing the securities sold short and is required to pay the counterparty any dividends or interest due on securities sold short. Such dividends or interest and any security borrowing fees are recorded as an expense to the Fund.
MI-20
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Mutual International Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
e. 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 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.
f. Income Taxes
It is the Fund’s policy to qualify as a regulated investment company under the Internal Revenue Code. The Fund intends to distribute to shareholders substantially all of its taxable income and net realized gains to relieve it from federal income and excise taxes. As a result, no provision for U.S. federal income taxes is required. The Fund files U.S. income tax returns as well as tax returns in certain other jurisdictions. The Fund records a provision for taxes in its financial statements including penalties and interest, if any, for a tax position taken on a tax return (or expected to be taken) when it fails to meet the more likely than not (a greater than 50% probability) threshold and based on the technical merits, the tax position may not be sustained upon examination by the tax authorities. As of June 30, 2011, and for all open tax years, the Fund has determined that no provision for income tax is required in the Fund’s financial statements. Open tax years are those that remain subject to examination and are based on each tax jurisdiction statute of limitation.
The Fund may be subject to foreign taxation related to income received, capital gains on the sale of securities and certain foreign currency transactions in the foreign jurisdictions in which it invests. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist in the foreign markets in which the Fund invests. When a capital gain tax is determined to apply the Fund records an estimated deferred tax liability for unrealized gains on these securities in an amount that would be payable if the securities were disposed of on the valuation date.
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. 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.
MI-21
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Mutual International Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
2. SHARES OF BENEFICIAL INTEREST
At June 30, 2011, there were an unlimited number of shares authorized (without par value). During the period ended June 30, 2011 and the year ended December 31, 2010, there were no transactions in the Fund’s shares.
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 | |
| 0.800% | 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 |
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.
MI-22
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Mutual International Securities Fund
3. TRANSACTIONS WITH AFFILIATES (continued)
c. Distribution Fees
The Trust’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 Franklin Mutual have contractually agreed in advance to waive or limit their respective fees and to assume as their own expense certain expenses otherwise payable by the fund so that the common expenses (i.e. a combination of management fees, administrative fees, and other expenses, but excluding distribution fees and acquired fund fees and expenses) for each class of the Fund do not exceed 0.95% (other than certain non-routine expenses or costs, including those relating to litigation, indemnification, reorganizations, and liquidations) until April 30, 2012.
f. Other Affiliated Transactions
At June 30, 2011, Franklin Advisers owned 100% of the Fund’s outstanding shares.
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, 2011, there were no credits earned.
5. INCOME TAXES
At June 30, 2011, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
Cost of investments | $ | 2,051,828 | ||
|
| |||
Unrealized appreciation | $ | 367,672 | ||
Unrealized depreciation | (92,233 | ) | ||
|
| |||
Net unrealized appreciation (depreciation) | $ | 275,439 | ||
|
| |||
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 corporate actions.
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.
MI-23
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Mutual International Securities Fund
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the period ended June 30, 2011, aggregated $1,025,377 and $1,075,183, 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. RESTRICTED SECURITIES
The Fund invests 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.
At June 30, 2011, the Fund held an investment in a restricted security, excluding certain securities exempt from registration under the 1933 Act deemed to be liquid, as follows:
| Shares | Issuer | Acquisition Date | Cost | Value | ||||||||||||
| 6,987 | Prime AET&H Holdings No.1 Pty. Ltd. (0.00% of Net Assets) | 10/13/10 | $ | — | $ | — | ||||||||||
9. OTHER DERIVATIVE INFORMATION
At June 30, 2011, 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 | 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 | $ | 6,554 | Unrealized depreciation on forward exchange contracts | $ | 14,202 | ||||||
For the period ended June 30, 2011, the effect of derivative contracts on the Fund’s Statement of Operations was as follows:
| Derivative Contracts Not Accounted for as Hedging Instruments | Statement of Operations Locations | Realized Gain (Loss) for the Period | Change in Unrealized Appreciation (Depreciation) for the Period | |||||
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 | $ | (69,018 | ) | $(3,260) | |||
MI-24
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Mutual International Securities Fund
9. OTHER DERIVATIVE INFORMATION (continued)
MI-25
For the period ended June 30, 2011, the average month end market value of derivatives represented 1.34% of average month end net assets. The average month end number of open derivative contracts for the period was 21.
See Note 1(c) regarding derivative financial instruments.
10. CREDIT FACILITY
The Fund, together with other U.S. registered and foreign investment funds (collectively, Borrowers), managed by Franklin Templeton Investments, are borrowers in a joint syndicated senior unsecured credit facility totaling $750 million (Global Credit Facility) which matures on January 20, 2012. This Global Credit Facility provides 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 of 0.08% based upon the unused portion of the Global Credit Facility, which is reflected in other expenses on the Statement of Operations. During the period ended June 30, 2011, the Fund did not use the Global Credit Facility.
11. FAIR VALUE MEASUREMENTS
The Fund follows 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.
For movements between the levels within the fair value hierarchy, the Fund has adopted a policy of recognizing the transfers as of the date of the underlying event which caused the movement.
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Mutual International Securities Fund
11. FAIR VALUE MEASUREMENTS (continued)
The following is a summary of the inputs used as of June 30, 2011, 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 | $ | 2,314,571 | $ | — | $ | — | c | $ | 2,314,571 | |||||||
Short Term Investments | — | 12,696 | — | 12,696 | ||||||||||||
|
| |||||||||||||||
Total Investments in Securities | $ | 2,314,571 | $ | 12,696 | $ | — | $ | 2,327,267 | ||||||||
|
| |||||||||||||||
Forward Exchange Contracts | — | 6,554 | — | 6,554 | ||||||||||||
Liabilities: | ||||||||||||||||
Forward Exchange Contracts | — | 14,202 | — | 14,202 | ||||||||||||
aIncludes common and preferred stock.
bFor detailed industry descriptions, see the accompanying Statement of Investments.
cIncludes securities determined to have no value at June 30, 2011.
At June 30, 2011, the reconciliation of assets in which significant unobservable inputs (level 3) were used in determining fair value, is as follows:
| Balance at Beginning of Period | Purchases | Sales | Transfers Into Level 3 | Transfers Out of Level 3 | Cost Basis Adjustments | Net Realized Gain (Loss) | Net Unrealized Gain (Loss) | Balance at End of Period | Net Change in Unrealized Appreciation (Depreciation) on Assets Held at Period End | |||||||||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||||||||||
Equity Investments-Electric Utilities | $ | 35,298a | $ | — | $ | (27,071 | ) | $ | — | $ | — | $ | — | $ | — | $ | (8,227 | ) | $ | —a | $ | — | ||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||
aIncludes securities determined to have no value.
12. NEW ACCOUNTING PRONOUNCEMENTS
In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (IFRS). The amendments in the ASU will improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRS and include new guidance for certain fair value measurement principles and disclosure requirements. The ASU is effective for interim and annual periods beginning after December 15, 2011. The Fund is currently evaluating the impact, if any, of applying this provision.
MI-26
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Mutual International Securities Fund
13. SUBSEQUENT EVENTS
The Fund has evaluated subsequent events through the issuance of the financial statements and determined that no events have occurred that require disclosure.
ABBREVIATIONS | ||
| Counterparty | Selected Portfolio | |
| BOFA - Bank of America Corp. | ADR - American Depository Receipt | |
| BZWS - Barclays Bank PLC | ||
| DBAB - Deutsche Bank AG | ||
| SSBT - State Street Bank and Trust Co. |
MI-27
MUTUAL SHARES SECURITIES FUND
This semiannual report for Mutual Shares Securities Fund covers the period ended June 30, 2011.
Performance Summary as of 6/30/11
Mutual Shares Securities Fund – Class 4 delivered a +5.68% total return for the six-month period ended 6/30/11.
Performance reflects the Fund’s Class 4 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 4
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.
MS-1
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.
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, which delivered a +6.02% total return for the period under review.1
Economic and Market Overview
The global economy expanded despite geopolitical and inflationary pressures during the six-month period ended June 30, 2011. In the U.S., business activity increased and consumer spending stayed above pre-recession levels. The U.S. was a key engine in a sustained global manufacturing expansion as international trade volume continued to increase, albeit at a moderate pace. The U.S. financial system appeared closer to a full recovery, although the country still faced challenges dealing with persistent unemployment, housing market weakness and massive debt. During the period, signs emerged of a global economic slowdown. Officials at the U.S. Federal Reserve Board (Fed) cut their growth forecast for the world’s largest economy, and manufacturing growth slowed in most major regions of the world. Japan’s earthquake, an early surge in commodity prices and a fading inventory restocking cycle were all blamed for declining economic leading indicators. Some monetary policy tightening in most parts of the world was also thought to inhibit growth and cool the commodities rally.
Inflation at the consumer, producer and trade levels rose across much of the world, but in the U.S. it remained relatively contained. As a result, the Fed maintained its accommodative monetary policy while ending its second round of quantitative easing on June 30. The Fed said, however, it would continue to purchase Treasuries with proceeds from maturing debt in an effort to support economic growth. This move deviated from many other central banks around the world that raised interest rates to dampen inflation pressures.
Continued corporate profit strength and still favorable economic growth prospects in some regions of the world supported equities.
1. Source: © 2011 Morningstar. One cannot invest directly in an index, and an index is not 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 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 investment in certain hedging and derivative instruments may involve a small investment relative to the risk assumed. The manager applies various techniques and analyses in making investment decisions for the Fund, but there can be no guarantee that these decisions will produce the desired results. The Fund’s prospectus also includes a description of the main investment risks.
MS-2
Global stock markets made gains in the first half of 2011, though the positive momentum from the previous year waned as investors weathered international events that included revolutions and civil unrest across the Middle East and North Africa, the multiple crises triggered by Japan’s earthquake and tsunami, and sovereign debt worries and credit downgrades in Europe. The dollar declined during the period against most currencies, however, broadly reflecting divergent interest rate and/or economic growth expectations.
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.
MS-3
In addition, it is our practice to hedge the Fund’s currency exposure when we deem it advantageous for our shareholders.
Manager’s Discussion
As stock markets advanced unevenly in the first half of 2011, several Fund investments increased in value. Three particularly strong performers were UnitedHealth Group, a U.S. managed health care provider; Marathon Oil, a U.S.-based oil and gas exploration and production company with interests worldwide; and U.K.-based British American Tobacco (BAT).
Shares of UnitedHealth rose sharply in value during the first half of 2011. In January, its share price was fueled by a combination of the company’s announcement of better-than-expected fourth quarter 2010 earnings and, more significantly, its higher revenue guidance for 2011. Other positive catalysts included the company’s ongoing efforts to increase shareholder value through share buybacks and dividends. In our view, UnitedHealth’s long-term earnings growth is supported by a diversified business mix and a growing percentage of earnings generated by its increasingly successful health care services business. Although there was no specific catalyst for the continued increase in the company’s stock price in the second quarter, we believe many investors may have recognized the low earnings multiple at which the company’s shares had been trading. In addition, investors seemed to become more comfortable with the implications of pending U.S. health care reforms on the company’s business model.
The value of our investment in Marathon Oil surged in early 2011, initially driven by management’s announced plans to spin off its downstream operations (refining and selling) to shareholders to become a pure-play exploration and production company. Investors pushed Marathon shares higher as they began to recognize the value of the underlying businesses. The share price showed continuing strength in the spring as the July spin-off date approached, oil prices rose, and refining margins improved considerably, driven primarily by the company’s strong Midwestern refining system, which benefited from recent investments and widening crude oil price differentials in a land-locked market.
BAT is the world’s second-largest publicly traded tobacco company, with a presence in more than 180 countries. During the period under review, the stock performed well. In February, the company reported full-year 2010 operating results that exceeded market expectations. In
Top 10 Sectors/Industries
Mutual Shares Securities Fund
Based on Equity Securities
6/30/11
| % of Total Net Assets | ||||
| Tobacco | 8.2% | |||
| Pharmaceuticals | 6.3% | |||
| Media | 6.1% | |||
| Oil, Gas & Consumable Fuels | 4.9% | |||
| Food & Staples Retailing | 4.8% | |||
| Insurance | 4.7% | |||
| Food Products | 4.6% | |||
| Beverages | 3.9% | |||
| Commercial Banks | 3.6% | |||
| Health Care Providers & Services | 3.4% | |||
MS-4
addition, BAT management reported it had delivered on its five-year goal to realize £800 million in cost savings two years ahead of schedule. In May, the company held an investor relations day during which its top executives discussed further cost-cutting opportunities. Management believes it can continue to grow operating margins for the next six to seven years aided by price increases and cost-cutting programs. Management explained that cost savings will come from myriad opportunities including simplifying its business structure, improvements in procurement, a reduction in logistics costs, further rationalization of manufacturing facilities, and the standardization and consolidation of back-office centers and processes. The company also reaffirmed its goal to grow medium-term earnings per share in the high single-digit range, although management also mentioned it would likely exceed that goal in 2011. At period-end, we continued to believe BAT was an attractive investment due to the industry’s pricing power, the company’s additional cost savings opportunities and a shareholder friendly management team that often has returned excess cash to shareholders through dividends and share buybacks.
In contrast, some of the Fund’s investments lost value. Key detractors included Community Health Systems, a U.S. hospital management company operating in small cities and rural areas; Japanese video game software and console maker Nintendo; and U.S. network equipment provider Cisco Systems.
Community Health Systems reported earnings ahead of expectations and reaffirmed its 2011 earnings-per-share forecasts. However, rival hospital operator Tenet Healthcare filed a lawsuit during the period alleging that Community Health had engaged in inappropriate patient admissions practices and had therefore made false statements in proxy documents relating to the company’s proposed offer to acquire Tenet Healthcare. The disclosure of the lawsuit, combined with subsequent government investigations, led to a significant decline in Community Health shares that continued for the rest of the reporting period. In May, after increasing its offer for Tenet Healthcare and changing it to an all-cash bid, Community Health withdrew the previous proposal to acquire Tenet that had been announced in late 2010.
Nintendo’s share price deteriorated after the company reported sales of its new handheld console, the Nintendo 3DS, were slower than anticipated. In particular, sales of this new gaming device were weak in its home market of Japan, where the March 11 earthquake and tsunami hurt consumer sentiment, and in other parts of the world due to a lack
Top 10 Holdings
Mutual Shares Securities Fund
6/30/11
| Company Sector/Industry, Country | % of Total Net Assets | |||
| British American Tobacco PLC, ord. & ADR | 2.6% | |||
| Tobacco, U.K. | ||||
| CVS Caremark Corp. | 2.6% | |||
| Food & Staples Retailing, U.S. | ||||
| Kraft Foods Inc., A | 2.3% | |||
| Food Products, U.S. | ||||
| Marathon Oil Corp. | 2.0% | |||
| Oil, Gas & Consumable Fuels, U.S. | ||||
| Pfizer Inc. | 1.9% | |||
| Pharmaceuticals, U.S. | ||||
| Microsoft Corp. | 1.9% | |||
| Software, U.S. | ||||
| UnitedHealth Group Inc. | 1.8% | |||
| Health Care Providers & Services, U.S. | ||||
| Merck & Co. Inc. | 1.8% | |||
| Pharmaceuticals, U.S. | ||||
| Xerox Corp. | 1.7% | |||
| Office Electronics, U.S. | ||||
| Altria Group Inc. | 1.7% | |||
| Tobacco, 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.
MS-5
of compelling software titles at launch date and the console’s relatively high initial sales price. At period-end, cash accounted for more than 50% of Nintendo’s market capitalization, and we believe the company can successfully leverage its software intellectual property in the next gaming console cycle. With this in mind, we continued to hold Nintendo in the portfolio at period-end.
Cisco Systems is a relatively new addition to the portfolio, initiated in early 2011. Early in the first quarter, Cisco issued lower-than-expected earnings guidance citing economic pressures such as subdued spending by government agencies, a key revenue stream, and missteps in its consumer-focused businesses. In mid-May, Cisco shares declined further when the company confirmed it had completed another disappointing quarter. However, management announced significant cost realignment and an exit from certain consumer markets, both of which we believe should improve financial results. Cisco’s competitive position remained strong, its balance sheet appeared overcapitalized to us at period-end, and the company announced it would begin paying a dividend as well as continuing to buy back stock. For these reasons, along with management’s commitment to repair the company’s current cost structure, we found Cisco’s valuation appealing.
Finally, investors should note that we maintained our currency hedging posture of being more hedged than not to the U.S. dollar, largely through the use of forward currency exchange contracts. Certain currencies strengthened in relation to the U.S. dollar in the first six months of 2011, and so our hedging strategy hindered Fund performance during the reporting period.
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, 2011, 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.
MS-6
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 4
MS-7
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 4 | Beginning Account Value 1/1/11 | Ending Account Value 6/30/11 | Fund-Level Expenses Incurred During Period* 1/1/11–6/30/11 | |||||||||
Actual | $ | 1,000 | $ | 1,056.80 | $ | 5.46 | ||||||
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 4 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.
MS-8
Franklin Templeton Variable Insurance Products Trust
Financial Highlights
Mutual Shares Securities Fund
| Six Months Ended June 30, 2011 (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 1 | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||||||
| ||||||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 16.14 | $ | 14.75 | $ | 11.92 | $ | 20.42 | $ | 20.67 | $ | 18.35 | ||||||||||||
|
| |||||||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.22c | 0.40 | d | 0.23 | e | 0.34 | 0.54 | 0.40 | ||||||||||||||||
Net realized and unrealized gains (losses) | 0.73 | 1.27 | 2.89 | (7.54 | ) | 0.31 | 2.86 | |||||||||||||||||
|
| |||||||||||||||||||||||
Total from investment operations | 0.95 | 1.67 | 3.12 | (7.20 | ) | 0.85 | 3.26 | |||||||||||||||||
|
| |||||||||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income | — | (0.28 | ) | (0.29 | ) | (0.57 | ) | (0.35 | ) | (0.29 | ) | |||||||||||||
Net realized gains | — | — | — | (0.73 | ) | (0.75 | ) | (0.65 | ) | |||||||||||||||
|
| |||||||||||||||||||||||
Total distributions | — | (0.28 | ) | (0.29 | ) | (1.30 | ) | (1.10 | ) | (0.94 | ) | |||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ | 17.09 | $ | 16.14 | $ | 14.75 | $ | 11.92 | $ | 20.42 | $ | 20.67 | ||||||||||||
|
| |||||||||||||||||||||||
Total returnf | 5.89% | 11.47% | 26.35% | (36.93)% | 3.72% | 18.66% | ||||||||||||||||||
Ratios to average net assetsg | ||||||||||||||||||||||||
Expensesh | 0.72% | 0.74% | i | 0.78% | i | 0.73% | i | 0.72% | i | 0.81% | i | |||||||||||||
Expenses incurred in connection with securities sold short | —% | 0.02% | 0.06% | —% | j | —% | j | 0.07% | ||||||||||||||||
Net investment income | 2.63% | c | 2.66% | d | 1.85% | e | 2.16% | 2.58% | 2.02% | |||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 1,579,343 | $ | 1,301,520 | $ | 767,553 | $ | 319,703 | $ | 272,509 | $ | 259,943 | ||||||||||||
Portfolio turnover rate | 14.64% | 32.05% | 49.33% | 44.11% | 41.73% | k | 19.75% | |||||||||||||||||
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 $0.02 per share related to interest income received that had previously been deemed uncollectible. Excluding this amount, the ratio of net investment income to average net assets would have been 2.36%.
dNet investment income per share includes approximately $0.11 per share received in the form of a special dividend paid in connection with a corporate real estate investment trust (REIT) conversion. Excluding this non-recurring amount, the ratio of the net investment income to average net assets would have been 1.93%.
eNet investment income per share includes approximately $(0.03) per share related to an adjustment for uncollectible interest. Excluding the effect of this adjustment, the ratio of net investment income to average net assets would have been 2.08%.
fTotal return does not include 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.
hIncludes dividend expense on securities sold short and borrowing fees, if any. See below for the ratios of such expenses to average net assets for the periods presented. See Note 1(d).
iBenefit of expense reduction rounds to less than 0.01%.
jRounds to less than 0.01%.
kExcludes 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-9
Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Mutual Shares Securities Fund
| Six Months Ended June 30, 2011 (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 2 | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||||||
| ||||||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 15.95 | $ | 14.58 | $ | 11.78 | $ | 20.19 | $ | 20.46 | $ | 18.18 | ||||||||||||
|
| |||||||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.20c | 0.36 | d | 0.20 | e | 0.32 | 0.48 | 0.34 | ||||||||||||||||
Net realized and unrealized gains (losses) | 0.72 | 1.25 | 2.85 | (7.49 | ) | 0.31 | 2.84 | |||||||||||||||||
|
| |||||||||||||||||||||||
Total from investment operations | 0.92 | 1.61 | 3.05 | (7.17 | ) | 0.79 | 3.18 | |||||||||||||||||
|
| |||||||||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income | — | (0.24 | ) | (0.25 | ) | (0.51 | ) | (0.31 | ) | (0.25 | ) | |||||||||||||
Net realized gains | — | — | — | (0.73 | ) | (0.75 | ) | (0.65 | ) | |||||||||||||||
|
| |||||||||||||||||||||||
Total distributions | — | (0.24 | ) | (0.25 | ) | (1.24 | ) | (1.06 | ) | (0.90 | ) | |||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ | 16.87 | $ | 15.95 | $ | 14.58 | $ | 11.78 | $ | 20.19 | $ | 20.46 | ||||||||||||
|
| |||||||||||||||||||||||
Total returnf | 5.77% | 11.19% | 26.05% | (37.11)% | 3.48% | 18.38% | ||||||||||||||||||
Ratios to average net assetsg | ||||||||||||||||||||||||
Expensesh | 0.97% | 0.99% | i | 1.03% | i | 0.98% | i | 0.97% | i | 1.06% | i | |||||||||||||
Expenses incurred in connection with securities sold short | —% | 0.02% | 0.06% | —% | j | —% | j | 0.07% | ||||||||||||||||
Net investment income | 2.38%c | 2.41% | d | 1.60% | e | 1.91% | 2.33% | 1.77% | ||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 4,288,322 | $ | 4,188,821 | $ | 3,953,435 | $ | 3,303,761 | $ | 5,925,551 | $ | 5,140,878 | ||||||||||||
Portfolio turnover rate | 14.64% | 32.05% | 49.33% | 44.11% | 41.73% | k | 19.75% | |||||||||||||||||
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 $0.02 per share related to interest income received that had previously been deemed uncollectible. Excluding this amount, the ratio of net investment income to average net assets would have been 2.11%.
dNet investment income per share includes approximately $0.11 per share received in the form of a special dividend paid in connection with a corporate REIT conversion. Excluding this non-recurring amount, the ratio of the net investment income to average net assets would have been 1.68%.
eNet investment income per share includes approximately $(0.03) per share related to an adjustment for uncollectible interest. Excluding the effect of this adjustment, the ratio of net investment income to average net assets would have been 1.83%.
fTotal return does not include 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.
hIncludes dividend expense on securities sold short and borrowing fees, if any. See below for the ratios of such expenses to average net assets for the periods presented. See Note 1(d).
iBenefit of expense reduction rounds to less than 0.01%.
jRounds to less than 0.01%.
kExcludes 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-10
Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Mutual Shares Securities Fund
| Six Months Ended June 30, 2011 (unaudited) | Year Ended December 31, | |||||||||||||||
| Class 4 | 2010 | 2009 | 2008a | |||||||||||||
| ||||||||||||||||
Per share operating performance | ||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||
Net asset value, beginning of period | $ | 16.03 | $ | 14.66 | $ | 11.88 | $ | 18.91 | ||||||||
|
| |||||||||||||||
Income from investment operationsb: | ||||||||||||||||
Net investment incomec | 0.19d | 0.35 | e | 0.19 | f | 0.17 | ||||||||||
Net realized and unrealized gains (losses) | 0.72 | 1.26 | 2.87 | (5.90 | ) | |||||||||||
|
| |||||||||||||||
Total from investment operations | 0.91 | 1.61 | 3.06 | (5.73 | ) | |||||||||||
|
| |||||||||||||||
Less distributions from: | ||||||||||||||||
Net investment income | — | (0.24 | ) | (0.28 | ) | (0.57 | ) | |||||||||
Net realized gains | — | — | — | (0.73 | ) | |||||||||||
|
| |||||||||||||||
Total distributions | — | (0.24 | ) | (0.28 | ) | (1.30 | ) | |||||||||
|
| |||||||||||||||
Net asset value, end of period | $ | 16.94 | $ | 16.03 | $ | 14.66 | $ | 11.88 | ||||||||
|
| |||||||||||||||
Total returng | 5.68% | 11.06% | 25.94% | (32.12)% | ||||||||||||
Ratios to average net assetsh | ||||||||||||||||
Expensesi | 1.07% | 1.09% | j | 1.13% | j | 1.08% | j | |||||||||
Expenses incurred in connection with securities sold short | —% | 0.02% | 0.06% | —% | k | |||||||||||
Net investment income | 2.28%d | 2.31% | e | 1.50% | f | 1.81% | ||||||||||
Supplemental data | ||||||||||||||||
Net assets, end of period (000’s) | $ | 173,808 | $ | 167,274 | $ | 141,446 | $ | 57,266 | ||||||||
Portfolio turnover rate | 14.64% | 32.05% | 49.33% | 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 $0.02 per share related to interest income received that had previously been deemed uncollectible. Excluding this amount, the ratio of net investment income to average net assets would have been 2.01%.
eNet investment income per share includes approximately $0.11 per share received in the form of a special dividend paid in connection with a corporate REIT conversion. Excluding this non-recurring amount, the ratio of the net investment income to average net assets would have been 1.58%.
fNet investment income per share includes approximately $(0.03) per share related to an adjustment for uncollectible interest. Excluding the effect of this adjustment, the ratio of net investment income to average net assets would have been 1.73%.
gTotal return does not include 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.
hRatios are annualized for periods less than one year.
iIncludes dividend expense on securities sold short and borrowing fees, if any. See below for the ratios of such expenses to average net assets for the periods presented. See Note 1(d).
jBenefit of expense reduction rounds to less than 0.01%.
kRounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
MS-11
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited)
| Mutual Shares Securities Fund | Country | Shares/Rights | Value | |||||||
Common Stocks and Other Equity Interests 88.3% | ||||||||||
Aerospace & Defense 0.4% | ||||||||||
aGenCorp Inc. | United States | 494,180 | $ | 3,172,636 | ||||||
aHuntington Ingalls Industries Inc. | United States | 638,442 | 22,026,249 | |||||||
|
| |||||||||
| 25,198,885 | ||||||||||
|
| |||||||||
Air Freight & Logistics 0.4% | ||||||||||
PostNL NV | Netherlands | 1,225,295 | 10,398,194 | |||||||
TNT Express NV | Netherlands | 1,225,295 | 12,708,115 | |||||||
|
| |||||||||
| 23,106,309 | ||||||||||
|
| |||||||||
Airlines 0.0% | ||||||||||
a,b,cNorthwest Airlines Corp., Contingent Distribution | United States | 27,670,000 | — | |||||||
|
| |||||||||
Auto Components 0.2% | ||||||||||
a,b,cCollins & Aikman Products Co., Contingent Distribution | United States | 929,505 | 9,295 | |||||||
a,b,cDana Holding Corp., Contingent Distribution | United States | 10,339,000 | — | |||||||
a,dIACNA Investor LLC | United States | 168,957 | 1,690 | |||||||
a,dInternational Automotive Components Group Brazil LLC | Brazil | 1,730,515 | 2,182,768 | |||||||
d,eInternational Automotive Components Group North America, LLC | United States | 11,387,027 | 10,645,504 | |||||||
|
| |||||||||
| 12,839,257 | ||||||||||
|
| |||||||||
Automobiles 1.4% | ||||||||||
Daimler AG (EUR Traded) | Germany | 575,677 | 43,151,745 | |||||||
aGeneral Motors Co. | United States | 1,329,590 | 40,366,352 | |||||||
|
| |||||||||
| 83,518,097 | ||||||||||
|
| |||||||||
Beverages 3.9% | ||||||||||
Brown-Forman Corp., A | United States | 1,759 | 126,648 | |||||||
Coca-Cola Enterprises Inc. | United Kingdom | 1,211,330 | 35,346,609 | |||||||
Dr. Pepper Snapple Group Inc. | United States | 1,296,514 | 54,362,832 | |||||||
Foster’s Group Ltd. | Australia | 3,560,630 | 19,664,861 | |||||||
PepsiCo Inc. | United States | 677,058 | 47,685,195 | |||||||
fPernod Ricard SA | France | 792,451 | 78,109,280 | |||||||
|
| |||||||||
| 235,295,425 | ||||||||||
|
| |||||||||
Biotechnology 1.4% | ||||||||||
aAmgen Inc. | United States | 1,165,850 | 68,027,348 | |||||||
aCephalon Inc. | United States | 236,970 | 18,933,903 | |||||||
|
| |||||||||
| 86,961,251 | ||||||||||
|
| |||||||||
Building Products 0.8% | ||||||||||
aOwens Corning Inc. | United States | 1,293,251 | 48,302,925 | |||||||
|
| |||||||||
Capital Markets 1.7% | ||||||||||
Morgan Stanley | United States | 2,582,478 | 59,422,819 | |||||||
aUBS AG (CHF Traded) | Switzerland | 2,389,048 | 43,558,641 | |||||||
|
| |||||||||
| 102,981,460 | ||||||||||
|
| |||||||||
Chemicals 1.3% | ||||||||||
a,b,cDow Corning Corp., Contingent Distribution | United States | 650,000 | 25,000 | |||||||
Linde AG | Germany | 455,240 | 79,814,108 | |||||||
|
| |||||||||
| 79,839,108 | ||||||||||
|
| |||||||||
Commercial Banks 3.6% | ||||||||||
Barclays PLC | United Kingdom | 11,141,292 | 45,859,420 | |||||||
aCIT Group Inc. | United States | 517,223 | 22,892,290 | |||||||
a,dElephant Capital Holdings Ltd. | Japan | 11,728 | — | |||||||
MS-12
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Mutual Shares Securities Fund | Country | Shares/Rights | Value | |||||||
Common Stocks and Other Equity Interests (continued) | ||||||||||
Commercial Banks (continued) | ||||||||||
a,dFirst Southern Bancorp Inc. | United States | 140,952 | $ | 1,665,869 | ||||||
aGuaranty Bancorp | United States | 1,288,316 | 1,726,343 | |||||||
a,dNCB Warrant Holdings Ltd., A | Japan | 57,295 | — | |||||||
PNC Financial Services Group Inc. | United States | 1,091,270 | 65,050,605 | |||||||
aState Bank Financial Corp. | United States | 433,000 | 7,088,210 | |||||||
Wells Fargo & Co. | United States | 2,629,460 | 73,782,648 | |||||||
|
| |||||||||
| 218,065,385 | ||||||||||
|
| |||||||||
Commercial Services & Supplies 0.0%† | ||||||||||
aComdisco Holding Co. Inc. | United States | 180 | 1,121 | |||||||
a,b,cComdisco Holding Co. Inc., Contingent Distribution | United States | 7,473,000 | — | |||||||
|
| |||||||||
| 1,121 | ||||||||||
|
| |||||||||
Communications Equipment 1.0% | ||||||||||
Cisco Systems Inc. | United States | 2,643,550 | 41,265,815 | |||||||
aMotorola Solutions Inc. | United States | 405,474 | 18,668,023 | |||||||
|
| |||||||||
| 59,933,838 | ||||||||||
|
| |||||||||
Computers & Peripherals 1.1% | ||||||||||
a,b,cDecisionOne Corp., Contingent Distribution | United States | 167,652 | — | |||||||
Hewlett-Packard Co. | United States | 1,779,263 | 64,765,173 | |||||||
|
| |||||||||
| 64,765,173 | ||||||||||
|
| |||||||||
Consumer Finance 0.3% | ||||||||||
a,dAlly Financial Inc. | United States | 1,376 | 10,461,096 | |||||||
a,dCerberus CG Investor I LLC | United States | 16,365,671 | 2,495,765 | |||||||
a,dCerberus CG Investor II LLC | United States | 16,365,425 | 2,495,727 | |||||||
a,dCerberus CG Investor III LLC | United States | 8,183,816 | 1,248,032 | |||||||
|
| |||||||||
| 16,700,620 | ||||||||||
|
| |||||||||
Diversified Financial Services 2.1% | ||||||||||
Bank of America Corp. | United States | 4,328,920 | 47,444,963 | |||||||
a,gBond Street Holdings LLC, A, 144A | United States | 477,632 | 10,269,088 | |||||||
Deutsche Boerse AG | Germany | 500,640 | 38,042,564 | |||||||
a,b,cMarconi Corp., Contingent Distribution | United Kingdom | 9,945,700 | 185,913 | |||||||
NYSE Euronext Inc. | United States | 888,040 | 30,433,131 | |||||||
|
| |||||||||
| 126,375,659 | ||||||||||
|
| |||||||||
Diversified Telecommunication Services 1.4% | ||||||||||
AboveNet Inc. | United States | 131,103 | 9,237,517 | |||||||
Cable & Wireless Communication PLC | United Kingdom | 20,212,409 | 13,137,752 | |||||||
a,b,cGlobal Crossing Holdings Ltd., Contingent Distribution | United States | 9,005,048 | — | |||||||
Telefonica SA | Spain | 2,577,369 | 63,015,462 | |||||||
|
| |||||||||
| 85,390,731 | ||||||||||
|
| |||||||||
Electric Utilities 2.7% | ||||||||||
Brookfield Infrastructure Partners LP | Canada | 1,090,066 | 27,306,153 | |||||||
a,b,cCalpine Corp., Contingent Distribution | United States | 4,555,000 | — | |||||||
E.ON AG | Germany | 2,156,953 | 61,416,426 | |||||||
Entergy Corp. | United States | 319,190 | 21,794,293 | |||||||
Exelon Corp. | United States | 1,196,059 | 51,239,168 | |||||||
a,dPrime AET&D Holdings No. 1 Pty. Ltd. | Australia | 4,709,226 | — | |||||||
|
| |||||||||
| 161,756,040 | ||||||||||
|
| |||||||||
MS-13
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Mutual Shares Securities Fund | Country | Shares/Rights | Value | |||||||
Common Stocks and Other Equity Interests (continued) | ||||||||||
Electrical Equipment 0.1% | ||||||||||
Alstom SA | France | 131,610 | $ | 8,115,123 | ||||||
|
| |||||||||
Electronic Equipment, Instruments & Components 0.7% | ||||||||||
TE Connectivity Ltd. | United States | 1,199,372 | 44,088,915 | |||||||
|
| |||||||||
Energy Equipment & Services 1.7% | ||||||||||
Ensco PLC, ADR | United States | 390,875 | 20,833,637 | |||||||
aExterran Holding Inc. | United States | 613,890 | 12,173,439 | |||||||
Transocean Ltd. | United States | 1,037,787 | 66,999,529 | |||||||
|
| |||||||||
| 100,006,605 | ||||||||||
|
| |||||||||
Food & Staples Retailing 4.8% | ||||||||||
fCarrefour SA | France | 531,251 | 21,817,549 | |||||||
CVS Caremark Corp. | United States | 4,127,273 | 155,102,919 | |||||||
The Kroger Co. | United States | 2,826,498 | 70,097,150 | |||||||
Wal-Mart Stores Inc. | United States | 781,682 | 41,538,582 | |||||||
|
| |||||||||
| 288,556,200 | ||||||||||
|
| |||||||||
Food Products 4.6% | ||||||||||
General Mills Inc. | United States | 1,253,560 | 46,657,503 | |||||||
Kraft Foods Inc., A | United States | 3,883,322 | 136,809,434 | |||||||
Nestle SA | Switzerland | 1,570,453 | 97,592,970 | |||||||
|
| |||||||||
| 281,059,907 | ||||||||||
|
| |||||||||
Health Care Equipment & Supplies 2.0% | ||||||||||
aBoston Scientific Corp. | United States | 4,521,950 | 31,246,674 | |||||||
Medtronic Inc. | United States | 1,691,120 | 65,158,854 | |||||||
aZimmer Holdings Inc. | United States | 391,631 | 24,751,079 | |||||||
|
| |||||||||
| 121,156,607 | ||||||||||
|
| |||||||||
Health Care Providers & Services 3.4% | ||||||||||
aCommunity Health Systems Inc. | United States | 1,277,022 | 32,793,925 | |||||||
aCoventry Health Care Inc. | United States | 603,600 | 22,013,292 | |||||||
aTenet Healthcare Corp. | United States | 6,379,987 | 39,811,119 | |||||||
UnitedHealth Group Inc. | United States | 2,164,589 | 111,649,500 | |||||||
|
| |||||||||
| 206,267,836 | ||||||||||
|
| |||||||||
Hotels, Restaurants & Leisure 0.1% | ||||||||||
a,d,hGLCP Harrah’s Investment LP | United States | 5,565,600 | 1,336,857 | |||||||
Thomas Cook Group PLC | United Kingdom | 1,474,171 | 3,147,826 | |||||||
|
| |||||||||
| 4,484,683 | ||||||||||
|
| |||||||||
Independent Power Producers & Energy Traders 0.8% | ||||||||||
aNRG Energy Inc. | United States | 1,951,380 | 47,964,920 | |||||||
|
| |||||||||
Industrial Conglomerates 0.9% | ||||||||||
Koninklijke Philips Electronics NV | Netherlands | 958,590 | 24,618,660 | |||||||
Orkla ASA | Norway | 3,238,639 | 30,682,917 | |||||||
|
| |||||||||
| 55,301,577 | ||||||||||
|
| |||||||||
Insurance 4.7% | ||||||||||
ACE Ltd. | United States | 939,785 | 61,856,649 | |||||||
aAlleghany Corp. | United States | 24,779 | 8,254,133 | |||||||
American International Group Inc. | United States | 1,888,540 | 55,371,993 | |||||||
aCNO Financial Group Inc. | United States | 964,957 | 7,632,810 | |||||||
MetLife Inc. | United States | 649,210 | 28,480,843 | |||||||
MS-14
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Mutual Shares Securities Fund | Country | Shares/Rights | Value | |||||||
Common Stocks and Other Equity Interests (continued) | ||||||||||
Insurance (continued) | ||||||||||
Old Republic International Corp. | United States | 2,329,142 | $ | 27,367,418 | ||||||
a,dOlympus Re Holdings Ltd. | United States | 16,280 | 4,524 | |||||||
White Mountains Insurance Group Ltd. | United States | 140,935 | 59,215,250 | |||||||
Zurich Financial Services AG | Switzerland | 137,066 | 34,657,744 | |||||||
|
| |||||||||
| 282,841,364 | ||||||||||
|
| |||||||||
IT Services 0.0%† | ||||||||||
Glodyne Technoserve Ltd. | India | 11,058 | 85,630 | |||||||
|
| |||||||||
Leisure Equipment & Products 0.7% | ||||||||||
Mattel Inc. | United States | 1,509,886 | 41,506,766 | |||||||
|
| |||||||||
Machinery 0.6% | ||||||||||
Federal Signal Corp. | United States | 930,921 | 6,106,842 | |||||||
Stanley Black & Decker Inc. | United States | 436,490 | 31,449,104 | |||||||
|
| |||||||||
| 37,555,946 | ||||||||||
|
| |||||||||
Marine 1.1% | ||||||||||
A.P. Moller - Maersk AS, B | Denmark | 7,669 | 66,141,118 | |||||||
|
| |||||||||
Media 6.1% | ||||||||||
British Sky Broadcasting Group PLC | United Kingdom | 4,160,735 | 56,542,268 | |||||||
News Corp., A | United States | 4,342,369 | 76,859,931 | |||||||
Time Warner Cable Inc. | United States | 964,069 | 75,235,945 | |||||||
Time Warner Inc. | United States | 1,929,216 | 70,165,586 | |||||||
Viacom Inc., B | United States | 964,552 | 49,192,152 | |||||||
Virgin Media Inc. | United Kingdom | 1,324,299 | 39,636,269 | |||||||
|
| |||||||||
| 367,632,151 | ||||||||||
|
| |||||||||
Metals & Mining 1.3% | ||||||||||
ThyssenKrupp AG | Germany | 1,476,769 | 76,356,490 | |||||||
|
| |||||||||
Multi-Utilities 0.7% | ||||||||||
GDF Suez | France | 1,100,662 | 40,278,217 | |||||||
|
| |||||||||
Office Electronics 1.7% | ||||||||||
Xerox Corp. | United States | 9,760,804 | 101,609,970 | |||||||
|
| |||||||||
Oil, Gas & Consumable Fuels 4.9% | ||||||||||
BP PLC | United Kingdom | 4,211,280 | 30,985,183 | |||||||
Marathon Oil Corp. | United States | 2,325,884 | 122,527,569 | |||||||
Murphy Oil Corp. | United States | 518,902 | 34,071,105 | |||||||
Royal Dutch Shell PLC, A | United Kingdom | 2,313,887 | 82,142,234 | |||||||
The Williams Cos. Inc. | United States | 884,304 | 26,750,196 | |||||||
|
| |||||||||
| 296,476,287 | ||||||||||
|
| |||||||||
Paper & Forest Products 2.4% | ||||||||||
Domtar Corp. | United States | 203,789 | 19,302,894 | |||||||
International Paper Co. | United States | 2,508,784 | 74,811,939 | |||||||
MeadWestvaco Corp. | United States | 1,464,799 | 48,792,455 | |||||||
|
| |||||||||
| 142,907,288 | ||||||||||
|
| |||||||||
Pharmaceuticals 6.3% | ||||||||||
Eli Lilly & Co. | United States | 2,461,070 | 92,363,957 | |||||||
Merck & Co. Inc. | United States | 3,007,790 | 106,144,909 | |||||||
Novartis AG, ADR | Switzerland | 746,058 | 45,591,604 | |||||||
Pfizer Inc. | United States | 5,598,414 | 115,327,329 | |||||||
aSanofi, Contingent Value rts., 12/31/20 | France | 849,460 | 2,047,199 | |||||||
MS-15
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Mutual Shares Securities Fund | Country | Shares/Rights | Value | |||||||
Common Stocks and Other Equity Interests (continued) | ||||||||||
Pharmaceuticals (continued) | ||||||||||
Teva Pharmaceutical Industries Ltd., ADR | Israel | 461,170 | $ | 22,237,617 | ||||||
|
| |||||||||
| 383,712,615 | ||||||||||
|
| |||||||||
Real Estate Investment Trusts (REITs) 1.4% | ||||||||||
Alexander’s Inc. | United States | 49,326 | 19,582,422 | |||||||
Weyerhaeuser Co. | United States | 3,122,690 | 68,262,003 | |||||||
|
| |||||||||
| 87,844,425 | ||||||||||
|
| |||||||||
Real Estate Management & Development 0.2% | ||||||||||
cCanary Wharf Group PLC | United Kingdom | 1,535,898 | 7,426,390 | |||||||
aForestar Group Inc. | United States | 320,853 | 5,271,615 | |||||||
|
| |||||||||
| 12,698,005 | ||||||||||
|
| |||||||||
Semiconductors & Semiconductor Equipment 0.9% | ||||||||||
aLSI Corp. | United States | 7,984,446 | 56,849,256 | |||||||
|
| |||||||||
Software 2.8% | ||||||||||
Microsoft Corp. | United States | 4,335,303 | 112,717,878 | |||||||
Nintendo Co. Ltd. | Japan | 123,923 | 23,197,561 | |||||||
aSymantec Corp. | United States | 1,739,900 | 34,310,828 | |||||||
|
| |||||||||
| 170,226,267 | ||||||||||
|
| |||||||||
Tobacco 8.2% | ||||||||||
Altria Group Inc. | United States | 3,812,114 | 100,677,931 | |||||||
British American Tobacco PLC | United Kingdom | 3,534,227 | 154,918,705 | |||||||
British American Tobacco PLC, ADR | United Kingdom | 4,218 | 371,184 | |||||||
Imperial Tobacco Group PLC | United Kingdom | 2,931,169 | 97,401,144 | |||||||
Japan Tobacco Inc. | Japan | 2,843 | 10,929,862 | |||||||
Lorillard Inc. | United States | 405,204 | 44,114,559 | |||||||
Philip Morris International Inc. | United States | 648,530 | 43,302,348 | |||||||
Reynolds American Inc. | United States | 1,129,732 | 41,856,571 | |||||||
|
| |||||||||
| 493,572,304 | ||||||||||
|
| |||||||||
Wireless Telecommunication Services 1.5% | ||||||||||
Vodafone Group PLC | United Kingdom | 33,562,610 | 89,065,168 | |||||||
|
| |||||||||
Total Common Stocks and Other Equity Interests | 5,335,392,924 | |||||||||
|
| |||||||||
Convertible Preferred Stocks (Cost $241,000) 0.0%† | ||||||||||
Commercial Banks 0.0%† | ||||||||||
a,dFirst Southern Bancorp Inc., cvt. pfd., C | United States | 241 | 985,129 | |||||||
|
| |||||||||
| Principal Amount* | ||||||||||
Corporate Bonds, Notes and Senior Floating Rate Interests 3.3% | ||||||||||
i,jBoston Generating LLC, | United States | 9,108 | 3,108 | |||||||
Synthetic Letter of Credit, 6.878%, 12/21/13 | United States | 17,059 | 5,821 | |||||||
Term Loan B, 6.50%, 12/21/13 | United States | 535,469 | 182,729 | |||||||
dBroadband Ventures III LLC, secured promissory note, 5.00%, 2/01/12 | United States | 2,432 | 2,432 | |||||||
i,jCIT Group Inc., Term Loan Tranche 3, 6.25%, 8/11/15 | United States | 11,079,747 | 11,166,801 | |||||||
Clear Channel Communications Inc., | United States | 5,945,000 | 4,912,056 | |||||||
ksenior note, PIK, 11.00%, 8/01/16 | United States | 12,556,000 | 11,174,840 | |||||||
MS-16
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Mutual Shares Securities Fund | Country | Principal Amount* | Value | |||||||
Corporate Bonds, Notes and Senior Floating Rate Interests (continued) | ||||||||||
Clear Channel Communications Inc. (continued) | ||||||||||
i,jTranche B Term Loan, 3.836%, 1/29/16 | United States | 35,406,000 | $ | 29,713,423 | ||||||
i,jTranche C Term Loan, 3.836%, 1/29/16 | United States | 6,902,668 | 5,763,728 | |||||||
gOPTI Canada Inc., senior secured note, 144A, | Canada | 3,143,000 | 3,174,430 | |||||||
f9.75%, 8/15/13 | Canada | 8,435,000 | 8,413,912 | |||||||
Realogy Corp., | United States | 38,503,226 | 34,364,129 | |||||||
i,j,lExtended Revolver, 3.44%, 4/10/16 | United States | 2,218,314 | 1,927,160 | |||||||
i,jExtended Synthetic Letter of Credit, 3.221%, 10/10/16 | United States | 3,488,079 | 3,113,111 | |||||||
Second Lien Term Loan, 13.50%, 10/15/17 | United States | 1,642,000 | 1,743,257 | |||||||
gsenior secured note, 144A, 7.875%, 2/15/19 | United States | 2,218,000 | 2,206,910 | |||||||
i,jTexas Competitive Electric Holdings Co. LLC, Extended Term Loan, 4.69%, 10/10/17 | United States | 90,618,405 | 70,925,213 | |||||||
gTexas Competitive Electric Holdings Co. LLC/Texas Competitive Electric Holdings Finance Inc., senior secured note, 144A, 11.50%, 10/01/20 | United States | 6,672,000 | 6,588,600 | |||||||
|
| |||||||||
Total Corporate Bonds, Notes and Senior Floating Rate Interests (Cost $199,177,269) | 195,381,660 | |||||||||
|
| |||||||||
| Shares | ||||||||||
Companies in Liquidation 0.0%† | ||||||||||
aAdelphia Recovery Trust | United States | 29,283,354 | 2,928 | |||||||
a,bAdelphia Recovery Trust, Arahova Contingent Value Vehicle, Contingent Distribution | United States | 1,955,453 | 78,218 | |||||||
a,d,e,hCB FIM Coinvestors LLC | United States | 6,400,507 | — | |||||||
a,b,cCentury Communications Corp., Contingent Distribution | United States | 5,487,000 | — | |||||||
a,dFIM Coinvestor Holdings I, LLC | United States | 8,006,950 | — | |||||||
a,b,cTropicana Litigation Trust | United States | 18,305,000 | — | |||||||
| Principal Amount* | ||||||||||
c,mPeregrine Investments Holdings Ltd., 1/15/98 | Hong Kong | 5,000,000 | JPY | — | ||||||
c,mPIV Investment Finance (Cayman) Ltd., 12/01/00 | Hong Kong | 12,200,000 | — | |||||||
|
| |||||||||
Total Companies in Liquidation (Cost $2,791,061) | 81,146 | |||||||||
|
| |||||||||
Total Investments before Short Term Investments (Cost $4,857,252,979) | 5,531,840,859 | |||||||||
|
| |||||||||
Short Term Investments 9.3% | ||||||||||
U.S. Government and Agency Securities 7.9% | ||||||||||
nFHLB, 7/01/11 - 7/11/11 | United States | 65,000,000 | 64,999,920 | |||||||
nU.S. Treasury Bills, | United States | 65,000,000 | 64,988,235 | |||||||
o7/07/11 - 12/22/11 | United States | 344,900,000 | 344,869,819 | |||||||
|
| |||||||||
Total U.S. Government and Agency Securities (Cost $474,786,185) | 474,857,974 | |||||||||
|
| |||||||||
Total Investments before Money Market Funds (Cost $5,332,039,164) | 6,006,698,833 | |||||||||
|
| |||||||||
MS-17
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Mutual Shares Securities Fund | Country | Shares | Value | |||||||
pInvestments from Cash Collateral Received for Loaned Securities | ||||||||||
Money Market Funds 1.4% | ||||||||||
qBNY Mellon Overnight Government Fund, 0.05% | United States | 87,091,445 | $ | 87,091,445 | ||||||
|
| |||||||||
Total Investments (Cost $5,419,130,609) 100.9% | 6,093,790,278 | |||||||||
Other Assets, less Liabilities (0.9)% | (52,317,872 | ) | ||||||||
|
| |||||||||
Net Assets 100.0% | $ | 6,041,472,406 | ||||||||
|
| |||||||||
†Rounds to less than 0.1% of net assets.
*The principal amount is stated in U.S. dollars unless otherwise indicated.
aNon-income producing.
bContingent distributions represent the right to receive additional distributions, if any, during the reorganization of the underlying company.
cSecurity has been deemed illiquid because it may not be able to be sold within seven days. At June 30, 2011, the aggregate value of these securities was $7,646,598, representing 0.13% of net assets.
dSee Note 9 regarding restricted securities.
eAt June 30, 2011, pursuant to the Fund’s policies and the requirements of applicable securities law, the Fund may be restricted from trading these securities for a limited or extended period of time due to ownership limits and/or potential possession of material non-public information.
fA portion or all of the security is on loan at June 30, 2011. See Note 1(e).
gSecurity 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, 2011, the aggregate value of these securities was $30,652,940, representing 0.51% of net assets.
hSee Note 13 regarding holdings of 5% voting securities.
iThe coupon rate shown represents the rate at period end.
jSee Note 1(f) regarding senior floating rate interests.
kIncome may be received in additional securities and/or cash.
lSee Note 10 regarding unfunded loan commitments.
mSee Note 7 regarding credit risk and defaulted securities.
nThe security is traded on a discount basis with no stated coupon rate.
oSecurity or a portion of the security has been segregated as collateral for open future contracts. At June 30, 2011, the aggregate value of this security amounted to $636,968, representing 0.01% of net assets.
pSee Note 1(e) regarding securities on loan.
qThe rate shown is the annualized seven-day yield at period end.
MS-18
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Mutual Shares Securities Fund |
At June 30, 2011, the Fund had the following futures contracts outstanding. See Note 1(c).
Futures Contracts
| Description | Type | Number of Contracts | Notional Value | Expiration Date | Unrealized Appreciation | Unrealized Depreciation | ||||||||||||||||||
EUR/USD | Short | 111 | $ | 20,102,100 | 9/19/11 | $ | 127,240 | $ | — | |||||||||||||||
GBP/USD | Short | 126 | 12,640,163 | 9/19/11 | 258,812 | — | ||||||||||||||||||
|
| |||||||||||||||||||||||
Unrealized appreciation (depreciation) | 386,052 | — | ||||||||||||||||||||||
|
| |||||||||||||||||||||||
Net unrealized appreciation (depreciation) | $ | 386,052 | ||||||||||||||||||||||
|
| |||||||||||||||||||||||
At June 30, 2011, the Fund had the following forward exchange contracts outstanding. See Note 1(c).
Forward Exchange Contracts
| Currency | Counterparty | Type | Quantity | Contract Amount | Settlement Date | Unrealized Appreciation | Unrealized Depreciation | |||||||||||||||||||||
British Pound | BOFA | Sell | 33,450,932 | $ | 53,554,942 | 7/15/11 | $ | — | $ | (120,253 | ) | |||||||||||||||||
British Pound | SSBT | Sell | 45,000,000 | 73,260,000 | 7/15/11 | 1,053,229 | — | |||||||||||||||||||||
British Pound | DBAB | Sell | 1,861,100 | 3,026,074 | 7/15/11 | 39,763 | — | |||||||||||||||||||||
Euro | BZWS | Sell | 32,944,493 | 47,596,062 | 7/15/11 | — | (158,276 | ) | ||||||||||||||||||||
Euro | BOFA | Sell | 32,944,493 | 47,598,204 | 7/15/11 | — | (156,135 | ) | ||||||||||||||||||||
Euro | DBAB | Sell | 2,420,000 | 3,448,481 | 7/15/11 | — | (59,404 | ) | ||||||||||||||||||||
Euro | BOFA | Buy | 92,275 | 130,035 | 7/15/11 | 3,722 | — | |||||||||||||||||||||
Euro | DBAB | Sell | 39,677,814 | 54,596,673 | 7/29/11 | — | (2,895,280 | ) | ||||||||||||||||||||
Euro | BZWS | Sell | 30,871,126 | 43,372,059 | 7/29/11 | — | (1,359,268 | ) | ||||||||||||||||||||
Euro | DBAB | Buy | 13,954,619 | 19,724,854 | 7/29/11 | 494,967 | — | |||||||||||||||||||||
Swiss Franc | BZWS | Sell | 27,017,354 | 30,915,842 | 8/10/11 | — | (1,224,971 | ) | ||||||||||||||||||||
Swiss Franc | DBAB | Sell | 25,313,293 | 28,896,453 | 8/10/11 | — | (1,217,147 | ) | ||||||||||||||||||||
Swiss Franc | SSBT | Sell | 17,819,277 | 20,388,189 | 8/10/11 | — | (810,262 | ) | ||||||||||||||||||||
Swiss Franc | DBAB | Buy | 1,560,000 | 1,878,228 | 8/10/11 | — | (22,396 | ) | ||||||||||||||||||||
Swiss Franc | BOFA | Sell | 4,121,617 | 4,902,601 | 8/10/11 | — | (622 | ) | ||||||||||||||||||||
Swiss Franc | DBAB | Buy | 1,505,126 | 1,773,633 | 8/10/11 | 16,918 | — | |||||||||||||||||||||
Swiss Franc | BZWS | Buy | 1,607,066 | 1,900,023 | 8/10/11 | 11,801 | — | |||||||||||||||||||||
British Pound | BOFA | Buy | 1,848,000 | 2,991,173 | 8/12/11 | — | (26,952 | ) | ||||||||||||||||||||
British Pound | DBAB | Sell | 7,000,000 | 11,391,100 | 8/12/11 | 162,991 | — | |||||||||||||||||||||
British Pound | BZWS | Sell | 42,986,539 | 70,282,991 | 8/12/11 | 1,331,913 | — | |||||||||||||||||||||
British Pound | BOFA | Sell | 25,939,399 | 42,410,918 | 8/12/11 | 803,717 | — | |||||||||||||||||||||
Euro | SSBT | Sell | 28,758,497 | 40,773,797 | 8/18/11 | — | (870,165 | ) | ||||||||||||||||||||
Euro | HSBC | Sell | 28,758,497 | 40,808,307 | 8/18/11 | — | (835,654 | ) | ||||||||||||||||||||
Euro | DBAB | Sell | 13,000,000 | 18,655,000 | 8/18/11 | — | (169,749 | ) | ||||||||||||||||||||
Euro | DBAB | Buy | 1,588,250 | 2,263,383 | 8/18/11 | 36,494 | — | |||||||||||||||||||||
Euro | BZWS | Buy | 4,900,000 | 6,939,409 | 8/18/11 | 156,073 | — | |||||||||||||||||||||
Norwegian Krone | BZWS | Sell | 214,126,262 | 38,445,951 | 8/19/11 | — | (1,122,696 | ) | ||||||||||||||||||||
Norwegian Krone | HAND | Buy | 7,078,315 | 1,315,783 | 8/19/11 | — | (7,773 | ) | ||||||||||||||||||||
Norwegian Krone | HAND | Buy | 23,117,394 | 4,212,727 | 8/19/11 | 59,164 | — | |||||||||||||||||||||
Norwegian Krone | DBAB | Buy | 30,710,182 | 5,648,491 | 8/19/11 | 26,480 | — | |||||||||||||||||||||
Australian Dollar | BZWS | Sell | 9,144,031 | 9,556,780 | 8/23/11 | — | (179,478 | ) | ||||||||||||||||||||
Australian Dollar | DBAB | Sell | 7,958,176 | 8,317,553 | 8/23/11 | — | (156,048 | ) | ||||||||||||||||||||
Australian Dollar | DBAB | Buy | 69,513 | 74,115 | 8/23/11 | 309 | — | |||||||||||||||||||||
Euro | BOFA | Sell | 42,060,105 | 59,163,846 | 8/31/11 | — | (1,717,075 | ) | ||||||||||||||||||||
Euro | BZWS | Sell | 37,157,077 | 52,572,998 | 8/31/11 | — | (1,210,916 | ) | ||||||||||||||||||||
Euro | DBAB | Buy | 1,122,487 | 1,633,420 | 8/31/11 | — | (8,650 | ) | ||||||||||||||||||||
Euro | BOFA | Buy | 969,988 | 1,410,973 | 8/31/11 | — | (6,941 | ) | ||||||||||||||||||||
Euro | DBAB | Sell | 760,000 | 1,099,386 | 8/31/11 | — | (2,573 | ) | ||||||||||||||||||||
Euro | SSBT | Buy | 108,984 | 159,545 | 8/31/11 | — | (1,792 | ) | ||||||||||||||||||||
Euro | HSBC | Sell | 30,306,682 | 43,453,721 | 9/15/11 | — | (396,407 | ) | ||||||||||||||||||||
MS-19
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Mutual Shares Securities Fund |
Forward Exchange Contracts (continued)
| Currency | Counterparty | Type | Quantity | Contract Amount | Settlement Date | Unrealized Appreciation | Unrealized Depreciation | |||||||||||||||||||||
Euro | DBAB | Sell | 28,659,919 | $ | 41,101,190 | 9/15/11 | $ | — | $ | (366,269 | ) | |||||||||||||||||
Euro | BZWS | Sell | 584,230 | 846,403 | 9/15/11 | — | (348 | ) | ||||||||||||||||||||
Euro | DBAB | Buy | 804,562 | 1,149,191 | 9/15/11 | 14,914 | — | |||||||||||||||||||||
British Pound | BZWS | Buy | 1,800,000 | 2,917,800 | 9/16/11 | — | (31,817 | ) | ||||||||||||||||||||
British Pound | SSBT | Sell | 84,265,623 | 137,234,993 | 9/16/11 | 2,129,890 | — | |||||||||||||||||||||
Japanese Yen | BOFA | Sell | 1,889,485,796 | 22,960,903 | 10/20/11 | — | (527,404 | ) | ||||||||||||||||||||
Japanese Yen | DBAB | Sell | 468,004,435 | 5,695,000 | 10/20/11 | — | (122,790 | ) | ||||||||||||||||||||
Japanese Yen | HSBC | Sell | 156,205,120 | 1,890,000 | 10/20/11 | — | (51,795 | ) | ||||||||||||||||||||
Japanese Yen | BZWS | Sell | 88,018,160 | 1,060,000 | 10/20/11 | — | (34,159 | ) | ||||||||||||||||||||
Japanese Yen | DBAB | Buy | 231,344,368 | 2,881,017 | 10/20/11 | — | (7,904 | ) | ||||||||||||||||||||
Japanese Yen | BOFA | Buy | 89,103,679 | 1,111,981 | 10/20/11 | — | (4,328 | ) | ||||||||||||||||||||
Japanese Yen | BZWS | Buy | 51,320,790 | 639,953 | 10/20/11 | — | (1,981 | ) | ||||||||||||||||||||
Japanese Yen | BOFA | Buy | 359,530,635 | 4,397,462 | 10/20/11 | 71,885 | — | |||||||||||||||||||||
Japanese Yen | DBAB | Buy | 202,414,034 | 2,502,014 | 10/20/11 | 14,207 | — | |||||||||||||||||||||
Japanese Yen | SSBT | Buy | 39,329,874 | 487,946 | 10/20/11 | 966 | — | |||||||||||||||||||||
Japanese Yen | BZWS | Buy | 36,000,000 | 445,500 | 10/20/11 | 2,017 | — | |||||||||||||||||||||
|
| |||||||||||||||||||||||||||
Unrealized appreciation (depreciation) |
| 6,431,420 | (15,885,678 | ) | ||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||
Net unrealized appreciation (depreciation) |
| $ | (9,454,258 | ) | ||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||
See Abbreviations on page MS-37.
The accompanying notes are an integral part of these financial statements.
MS-20
Franklin Templeton Variable Insurance Products Trust
Financial Statements
Statement of Assets and Liabilities
June 30, 2011 (unaudited)
| Mutual Shares Securities Fund | ||||
Assets: | ||||
Investments in securities: | ||||
Cost - Unaffiliated issuers | $ | 5,413,562,676 | ||
Cost - Non-controlled affiliated issuers (Note 13) | 5,567,933 | |||
|
| |||
Total cost of investments | $ | 5,419,130,609 | ||
|
| |||
Value - Unaffiliated issuers | $ | 6,092,453,421 | ||
Value - Non-controlled affiliated issuers (Note 13) | 1,336,857 | |||
|
| |||
Total value of investments (includes securities loaned in the amount of $82,627,615) | 6,093,790,278 | |||
Cash | 1,135,265 | |||
Foreign currency, at value (cost $35,679,628) | 35,664,588 | |||
Receivables: | ||||
Investment securities sold (includes securities loaned in the amount of $5,377,189) | 19,678,611 | |||
Capital shares sold | 938,968 | |||
Dividends and interest | 16,003,082 | |||
Unrealized appreciation on forward exchange contracts | 6,431,420 | |||
Other assets | 329,270 | |||
|
| |||
Total assets | 6,173,971,482 | |||
|
| |||
Liabilities: | ||||
Payables: | ||||
Investment securities purchased | 18,565,560 | |||
Capital shares redeemed | 3,743,824 | |||
Affiliates | 5,249,503 | |||
Variation margin | 140,663 | |||
Payable upon return of securities loaned | 87,091,445 | |||
Unrealized depreciation on forward exchange contracts | 15,885,678 | |||
Unrealized depreciation on unfunded loan commitments (Note 10) | 641,280 | |||
Accrued expenses and other liabilities | 1,181,123 | |||
|
| |||
Total liabilities | 132,499,076 | |||
|
| |||
Net assets, at value | $ | 6,041,472,406 | ||
|
| |||
Net assets consist of: | ||||
Paid-in capital | $ | 5,699,074,393 | ||
Undistributed net investment income | 187,226,371 | |||
Net unrealized appreciation (depreciation) | 665,360,368 | |||
Accumulated net realized gain (loss) | (510,188,726 | ) | ||
|
| |||
Net assets, at value | $ | 6,041,472,406 | ||
|
| |||
The accompanying notes are an integral part of these financial statements.
MS-21
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Assets and Liabilities (continued)
June 30, 2011 (unaudited)
| Mutual Shares Securities Fund | ||||
Class 1: | ||||
Net assets, at value | $ | 1,579,342,522 | ||
Shares outstanding | 92,392,189 | |||
Net asset value and maximum offering price per share | $ | 17.09 | ||
Class 2: | ||||
Net assets, at value | $ | 4,288,321,615 | ||
Shares outstanding | 254,209,197 | |||
Net asset value and maximum offering price per share | $ | 16.87 | ||
Class 4: | ||||
Net assets, at value | $ | 173,808,269 | ||
Shares outstanding | 10,259,616 | |||
Net asset value and maximum offering price per share | $ | 16.94 | ||
The accompanying notes are an integral part of these financial statements.
MS-22
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Operations
for the six months ended June 30, 2011 (unaudited)
| Mutual Shares Securities Fund | ||||
Investment income: | ||||
Dividends (net of foreign taxes of $3,315,817) | $ | 82,832,371 | ||
Interest | 14,647,118 | |||
Income from securities loaned | 1,880,014 | |||
|
| |||
Total investment income | 99,359,503 | |||
|
| |||
Expenses: | ||||
Management fees (Note 3a) | 17,613,088 | |||
Administrative fees (Note 3b) | 2,504,776 | |||
Distribution fees: (Note 3c) | ||||
Class 2 | 5,351,399 | |||
Class 4 | 299,955 | |||
Unaffiliated transfer agent fees | 1,706 | |||
Custodian fees (Note 4) | 202,401 | |||
Reports to shareholders | 425,819 | |||
Professional fees | 857,120 | |||
Trustees’ fees and expenses | 11,093 | |||
Other | 62,246 | |||
|
| |||
Total expenses | 27,329,603 | |||
|
| |||
Net investment income | 72,029,900 | |||
|
| |||
Realized and unrealized gains (losses): | ||||
Net realized gain (loss) from: | ||||
Investments | 84,985,119 | |||
Foreign currency transactions | (73,056,202 | ) | ||
Futures contracts | (630,415 | ) | ||
|
| |||
Net realized gain (loss) | 11,298,502 | |||
|
| |||
Net change in unrealized appreciation (depreciation) on: | ||||
Investments | 242,114,394 | |||
Translation of other assets and liabilities denominated in foreign currencies | 2,521,441 | |||
|
| |||
Net change in unrealized appreciation (depreciation) | 244,635,835 | |||
|
| |||
Net realized and unrealized gain (loss) | 255,934,337 | |||
|
| |||
Net increase (decrease) in net assets resulting from operations | $ | 327,964,237 | ||
|
| |||
The accompanying notes are an integral part of these financial statements.
MS-23
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statements of Changes in Net Assets
| Mutual Shares Securities Fund | ||||||||
| Six Months Ended June 30, 2011 (unaudited) | Year Ended December 31, 2010 | |||||||
| ||||||||
Increase (decrease) in net assets: | ||||||||
Operations: | ||||||||
Net investment income | $ | 72,029,900 | $ | 125,525,670 | ||||
Net realized gain (loss) from investments, foreign currency transactions, futures contracts and securities sold short | 11,298,502 | 126,268,882 | ||||||
Net change in unrealized appreciation (depreciation) on investments and translation of other assets and liabilities denominated in foreign currencies | 244,635,835 | 300,848,655 | ||||||
| ||||||||
Net increase (decrease) in net assets resulting from operations | 327,964,237 | 552,643,207 | ||||||
| ||||||||
Distributions to shareholders from: | ||||||||
Net investment income: | ||||||||
Class 1 | — | (18,628,775 | ) | |||||
Class 2 | — | (62,378,105 | ) | |||||
Class 4 | — | (2,455,400 | ) | |||||
| ||||||||
Total distributions to shareholders | — | (83,462,280 | ) | |||||
| ||||||||
Capital share transactions: (Note 2) | ||||||||
Class 1 | 198,330,308 | 440,450,926 | ||||||
Class 2 | (139,537,389 | ) | (125,986,124 | ) | ||||
Class 4 | (2,899,965 | ) | 11,534,796 | |||||
| ||||||||
Total capital share transactions | 55,892,954 | 325,999,598 | ||||||
| ||||||||
Net increase (decrease) in net assets | 383,857,191 | 795,180,525 | ||||||
Net assets: | ||||||||
Beginning of period | 5,657,615,215 | 4,862,434,690 | ||||||
| ||||||||
End of period | $ | 6,041,472,406 | $ | 5,657,615,215 | ||||
| ||||||||
Undistributed net investment income included in net assets: | ||||||||
End of period | $ | 187,226,371 | $ | 115,196,471 | ||||
| ||||||||
The accompanying notes are an integral part of these financial statements.
MS-24
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 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 generally 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. Financial Instrument Valuation
The Fund’s investments in securities and other financial instruments are carried at fair value daily. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. Under procedures approved by the Trust’s Board of Trustees, the Fund may utilize independent pricing services, quotations from securities and financial instrument dealers, and other market sources to determine fair value.
Equity securities and derivative financial instruments (derivatives) listed on an 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. 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. 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. Over-the-counter securities 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 at the closing net asset value.
Debt securities generally trade in the over-the-counter market rather than on a securities exchange. The Fund’s pricing services use multiple valuation techniques to determine fair value. In instances where sufficient market activity exists, the pricing services may utilize a market-based approach through which quotes from market makers are used to determine fair value. In instances where sufficient market activity may not exist or is limited, the pricing services also utilize proprietary valuation models which may consider market characteristics such as benchmark yield curves, option-adjusted spreads, credit spreads, estimated default rates, coupon rates, anticipated timing of principal repayments, underlying collateral, and other unique security features in order to estimate the relevant cash flows, which are then discounted to calculate the fair value. 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.
Certain derivatives trade in the over-the-counter market. The Fund’s pricing services use various techniques including industry standard option pricing models and proprietary discounted cash flow models to determine the fair value of those instruments. The Fund’s net benefit or obligation under the derivative contract, as measured by the fair market value of the contract, is included in net assets.
The Fund has procedures to determine the fair value of securities and other financial instruments for which market prices are not readily available or which may not be reliably priced. Under these procedures, the Fund primarily employs a market-based approach which may use related or comparable assets or liabilities, recent transactions, market multiples, book values, and other relevant information for the investment to determine the fair value of the investment. The Fund may also use an income-based valuation approach in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the investments. Due to the inherent uncertainty of valuations of such investments, the fair values may differ significantly from the values that would have been used had an active market existed.
MS-25
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Mutual Shares Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
a. Financial Instrument Valuation (continued)
Trading in securities on foreign securities stock exchanges and over-the-counter markets may be completed before the daily close of business on the NYSE. Occasionally, events occur between the time at which trading in a foreign security is completed and the close of the NYSE that might call into question the reliability of the value of a portfolio security held by the Fund. As a result, differences may arise between the value of the Fund’s portfolio securities as determined at the foreign market close and the latest indications of value at the close of the NYSE. In order to minimize the potential for these differences, 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 that may call into question the reliability of the values of the foreign securities 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.
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. The Fund may enter into foreign currency exchange contracts to facilitate transactions denominated in a foreign currency. 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. Portfolio securities and assets and liabilities denominated in foreign currencies contain risks that those currencies will decline in value relative to the U.S. dollar. 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 Trust’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 invested in 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 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/or the potential for market movements which expose the Fund to gains or losses in excess of the amounts shown on the Statement of Assets and Liabilities. Realized gain and loss and unrealized appreciation and depreciation on these contracts for the period are included in the Statement of Operations.
The Fund entered into futures contracts primarily to manage foreign exchange rate risk. A futures contract is an agreement between the Fund and a counterparty to buy or sell an underlying instrument for a specified price on a future date. Required initial margin deposits of cash or securities are pledged by the Fund. Subsequent payments, known as variation margin, are made or received by the Fund, depending on fluctuations in the value of the underlying security. Such variation margin is accounted for as unrealized appreciation or depreciation until the contract is closed, at which time the gains or losses are realized.
MS-26
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Mutual Shares Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
c. Derivative Financial Instruments (continued)
The Fund entered into forward exchange contracts primarily to manage 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. Unrestricted cash may be invested according to the Fund’s investment objectives.
See Note 12 regarding other derivative information.
d. 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/or securities having a value equal to a specified percentage of the value of the securities sold short. The Fund is obligated to pay fees for borrowing the securities sold short and is required to pay the counterparty any dividends or interest due on securities sold short. Such dividends or interest and any security borrowing fees are recorded as an expense to the Fund.
e. 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 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.
f. Senior Floating Rate Interests
The Fund invests in senior secured corporate loans that 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.
g. Income Taxes
It is the Fund’s policy to qualify as a regulated investment company under the Internal Revenue Code. The Fund intends to distribute to shareholders substantially all of its taxable income and net realized gains to relieve it from federal income and excise taxes. As a result, no provision for U.S. federal income taxes is required. The Fund files U.S. income tax returns as well as tax
MS-27
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Mutual Shares Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
g. Income Taxes (continued)
returns in certain other jurisdictions. The Fund records a provision for taxes in its financial statements including penalties and interest, if any, for a tax position taken on a tax return (or expected to be taken) when it fails to meet the more likely than not (a greater than 50% probability) threshold and based on the technical merits, the tax position may not be sustained upon examination by the tax authorities. As of June 30, 2011, and for all open tax years, the Fund has determined that no provision for income tax is required in the Fund’s financial statements. Open tax years are those that remain subject to examination and are based on each tax jurisdiction statute of limitation.
The Fund may be subject to foreign taxation related to income received, capital gains on the sale of securities and certain foreign currency transactions in the foreign jurisdictions in which it invests. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist in the foreign markets in which the Fund invests. When a capital gain tax is determined to apply the Fund records an estimated deferred tax liability for unrealized gains on these securities in an amount that would be payable if the securities were disposed of on the valuation date.
h. 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 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.
i. 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.
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.
MS-28
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Mutual Shares Securities Fund
2. SHARES OF BENEFICIAL INTEREST
At June 30, 2011, 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, 2011 | Year Ended December 31, 2010 | |||||||||||||||
| Class 1 Shares: | Shares | Amount | Shares | Amount | ||||||||||||
Shares sold | 12,990,815 | $ | 218,913,005 | 37,999,296 | $ | 576,826,047 | ||||||||||
Shares issued in reinvestment of distributions | — | — | 1,260,404 | 18,628,775 | ||||||||||||
Shares redeemed | (1,215,089 | ) | (20,582,697 | ) | (10,669,332 | ) | (155,003,896 | ) | ||||||||
Net increase (decrease) | 11,775,726 | $ | 198,330,308 | 28,590,368 | $ | 440,450,926 | ||||||||||
Class 2 Shares: | ||||||||||||||||
Shares sold | 11,241,447 | $ | 187,341,289 | 24,723,011 | $ | 370,497,941 | ||||||||||
Shares issued in reinvestment of distributions | — | — | 4,269,549 | 62,378,105 | ||||||||||||
Shares redeemed | (19,616,350 | ) | (326,878,678 | ) | (37,538,246 | ) | (558,862,170 | ) | ||||||||
Net increase (decrease) | (8,374,903 | ) | $ | (139,537,389 | ) | (8,545,686 | ) | $ | (125,986,124 | ) | ||||||
Class 4 Shares: | ||||||||||||||||
Shares sold | 205,216 | $ | 3,443,958 | 1,277,647 | $ | 19,039,058 | ||||||||||
Shares issued on reinvestment of distributions | — | — | 167,148 | 2,455,400 | ||||||||||||
Shares redeemed | (382,057 | ) | (6,343,923 | ) | (654,528 | ) | (9,959,662 | ) | ||||||||
Net increase (decrease) | (176,841 | ) | $ | (2,899,965 | ) | 790,267 | $ | 11,534,796 | ||||||||
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 Fund 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-29
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 Trust’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. Other Affiliated Transactions
At June 30, 2011, Franklin Templeton Variable Insurance Products Trust – Franklin Templeton VIP Founding Funds Allocation Fund owned 18.08% of the Fund’s outstanding shares.
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, 2011, 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, 2010, the Fund had tax basis capital losses of $510,953,703 expiring in 2017.
Under the Regulated Investment Company Modernization Act of 2010, the Fund will be permitted to carry forward capital losses incurred in taxable years beginning after December 22, 2010 for an unlimited period. Post-enactment capital loss carryforwards will retain their character as either short-term or long-term capital losses rather than being considered short-term as under previous law. Any post-enactment capital losses generated will be required to be utilized prior to the losses incurred in pre-enactment tax years.
MS-30
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Mutual Shares Securities Fund
5. INCOME TAXES (continued)
At June 30, 2011, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
Cost of investments | $ | 5,453,377,217 | ||
|
| |||
Unrealized appreciation | $ | 994,370,950 | ||
Unrealized depreciation | (353,957,889 | ) | ||
|
| |||
Net unrealized appreciation (depreciation) | $ | 640,413,061 | ||
|
| |||
Net investment income differs for financial statement and tax purposes primarily due to differing treatments of foreign currency transactions, passive foreign investment company shares, pass-through entity income, 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, foreign currency transactions, pass-through entity income, bond discounts and premiums, and corporate actions.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the period ended June 30, 2011, aggregated $943,791,516 and $800,718,291, respectively.
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 the income on debt securities, including those of distressed companies, will not be collected, the Fund discontinues accruing income and recognizes an adjustment for uncollectible interest.
At June 30, 2011, the aggregate value of distressed company securities for which interest recognition has been discontinued was $0. 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 invests 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-31
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Mutual Shares Securities Fund
9. RESTRICTED SECURITIES (continued)
At June 30, 2011, the Fund held investments in restricted securities, excluding certain securities exempt from registration under the 1933 Act deemed to be liquid, as follows:
| Principal Amount/ Shares | Issuer | Acquisition Dates | Cost | Value | ||||||||||
| 1,376 | Ally Financial Inc. | 11/20/06 - 6/02/09 | $ | 6,501,522 | $ | 10,461,096 | ||||||||
| 2,432 | Broadband Ventures III LLC, secured promissory note, 5.00%, 2/01/12 | 7/01/10 | 2,432 | 2,432 | ||||||||||
| 6,400,507 | CB FIM Coinvestors LLC | 1/15/09 - 6/02/09 | — | — | ||||||||||
| 16,365,671 | Cerberus CG Investor I LLC | 7/26/07 - 4/28/10 | 8,338,044 | 2,495,765 | ||||||||||
| 16,365,425 | Cerberus CG Investor II LLC | 7/26/07 - 4/28/10 | 8,337,906 | 2,495,727 | ||||||||||
| 8,183,816 | Cerberus CG Investor III LLC | 7/26/07 - 4/28/10 | 4,169,573 | 1,248,032 | ||||||||||
| 11,728 | Elephant Capital Holdings Ltd. | 8/29/03 - 3/10/08 | 1,813,542 | — | ||||||||||
| 8,006,950 | FIM Coinvestor Holdings I, LLC | 11/20/06 - 6/02/09 | — | — | ||||||||||
| 140,952 | First Southern Bancorp Inc. | 1/27/10 - 7/07/10 | 2,974,087 | 1,665,869 | ||||||||||
| 241 | First Southern Bancorp Inc., cvt. pfd., C | 1/27/10 - 7/07/10 | 241,000 | 985,129 | ||||||||||
| 5,565,600 | GLCP Harrah’s Investment LP | 1/15/08 | 5,567,933 | 1,336,857 | ||||||||||
| 168,957 | IACNA Investor LLC | 7/24/08 | 62,949 | 1,690 | ||||||||||
| 1,730,515 | International Automotive Components Group Brazil LLC | 4/13/06 - 12/26/08 | 1,149,241 | 2,182,768 | ||||||||||
| 11,387,027 | International Automotive Components Group North America, LLC | 1/12/06 - 10/10/07 | 13,926,539 | 10,645,504 | ||||||||||
| 57,295 | NCB Warrant Holdings Ltd., A | 12/16/05 - 3/10/08 | 539,528 | — | ||||||||||
| 16,280 | Olympus Re Holdings Ltd. | 12/19/01 | 1,540,390 | 4,524 | ||||||||||
| 4,709,226 | Prime AET&D Holdings No. 1 Pty. Ltd. | 10/13/10 | — | — | ||||||||||
|
| |||||||||||||
Total Restricted Securities (0.55% of Net Assets) | $ | 33,525,393 | ||||||||||||
|
| |||||||||||||
10. UNFUNDED LOAN COMMITMENTS
The Fund enters 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, 2011, unfunded commitments were as follows:
| Borrower | Unfunded Commitment | |||
Realogy Corp., Extended Revolver, 3.44%, 4/10/16 | $ | 5,815,049 | ||
|
| |||
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.
11. UNFUNDED CAPITAL COMMITMENTS
The Fund enters into certain capital commitments and may be obligated to perform on such agreements at a future date. The Fund monitors these commitments and assesses the probability of required performance. For any agreements whose probability of performance is determined to be greater than remote, the Fund assesses the fair value of the commitment. In instances where the probability of performance is greater than remote and the performance under the commitment would result in an unrealized loss, the Fund recognizes such losses on the Statement of Assets and Liabilities and the Statement of Operations.
At June 30, 2011, the Fund had aggregate unfunded capital commitments of $329,837, for which no depreciation has been recognized.
MS-32
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Mutual Shares Securities Fund
12. OTHER DERIVATIVE INFORMATION
At June 30, 2011, 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 | 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 / Net assets consists of net unrealized appreciation (depreciation) | $ | 6,817,472a | Unrealized depreciation on forward exchange contracts | $ | 15,885,678 | ||||||
aIncludes cumulative appreciation (depreciation) of futures contracts as reported in the Statement of Investments. Only current day’s variation margin is reported within the Statement of Assets and Liabilities.
For the period ended June 30, 2011, the effect of derivative contracts on the Fund’s Statement of Operations was as follows:
| Derivative Contracts Not Accounted for as Hedging Instruments | Statement of Operations Locations | Realized Gain (Loss) for the Period | Change in Unrealized Appreciation (Depreciation) for the Period | |||||||
Foreign exchange contracts | Net realized gain (loss) from foreign currency transactions and futures contracts / Net change in unrealized appreciation (depreciation) on translation of other assets and liabilities denominated in foreign currencies | $ | (72,779,047 | ) | $ | 2,594,949 | ||||
For the period ended June 30, 2011, the average month end market value of derivatives represented 0.55% of average month end net assets. The average month end number of open derivative contracts for the period was 105.
See Note 1(c) regarding derivative financial instruments.
13. 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, 2011, 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 | $ | — | $ | — | $ | — | ||||||||||||||||||
GLCP Harrah’s Investment LP | 5,565,600 | — | — | 5,565,600 | 1,336,857 | — | — | |||||||||||||||||||||
|
| |||||||||||||||||||||||||||
Total Affiliated Securities (0.02% of Net Assets) |
| $ | 1,336,857 | $ | — | $ | — | |||||||||||||||||||||
|
| |||||||||||||||||||||||||||
MS-33
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Mutual Shares Securities Fund
14. CREDIT FACILITY
The Fund, together with other U.S. registered and foreign investment funds (collectively, Borrowers), managed by Franklin Templeton Investments, are borrowers in a joint syndicated senior unsecured credit facility totaling $750 million (Global Credit Facility) which matures on January 20, 2012. This Global Credit Facility provides 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 of 0.08% based upon the unused portion of the Global Credit Facility, which is reflected in other expenses on the Statement of Operations. During the period ended June 30, 2011, the Fund did not use the Global Credit Facility.
15. FAIR VALUE MEASUREMENTS
The Fund follows 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.
For movements between the levels within the fair value hierarchy, the Fund has adopted a policy of recognizing the transfers as of the date of the underlying event which caused the movement.
MS-34
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Mutual Shares Securities Fund
15. FAIR VALUE MEASUREMENTS (continued)
The following is a summary of the inputs used as of June 30, 2011, 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 | ||||||||||||||||
Auto Components | $ | — | $ | — | $ | 12,839,257 | b | $ | 12,839,257 | |||||||
Chemicals | 79,814,108 | — | 25,000 | 79,839,108 | ||||||||||||
Commercial Banks | 216,399,516 | — | 2,650,998 | b | 219,050,514 | |||||||||||
Commercial Services & Supplies | — | 1,121 | — | b | 1,121 | |||||||||||
Consumer Finance | — | — | 16,700,620 | 16,700,620 | ||||||||||||
Diversified Financial Services | 115,920,658 | 10,269,088 | 185,913 | 126,375,659 | ||||||||||||
Hotels, Restaurants & Leisure | 3,147,826 | — | 1,336,857 | 4,484,683 | ||||||||||||
Insurance | 282,836,840 | — | 4,524 | 282,841,364 | ||||||||||||
Real Estate Management & Development | 5,271,615 | — | 7,426,390 | 12,698,005 | ||||||||||||
Other Equity Investmentsc | 4,581,547,722 | — | — | b | 4,581,547,722 | |||||||||||
Corporate Bonds, Notes and Senior Floating Rate Interests | — | 195,379,228 | 2,432 | 195,381,660 | ||||||||||||
Companies in Liquidation | — | 81,146 | — | b | 81,146 | |||||||||||
Short Term Investments | 409,858,054 | 152,091,365 | — | 561,949,419 | ||||||||||||
|
| |||||||||||||||
Total Investments in Securities | $ | 5,694,796,339 | $ | 357,821,948 | $ | 41,171,991 | $ | 6,093,790,278 | ||||||||
|
| |||||||||||||||
Forward Exchange Contracts | — | 6,431,420 | — | 6,431,420 | ||||||||||||
Futures Contracts | | 386,052 | | — | — | 386,052 | ||||||||||
Liabilities: | ||||||||||||||||
Forward Exchange Contracts | — | 15,885,678 | — | 15,885,678 | ||||||||||||
Unfunded Loan Commitments | — | 641,280 | — | 641,280 | ||||||||||||
aIncludes common and convertible preferred stocks as well as other equity investments.
bIncludes securities determined to have no value at June 30, 2011.
cFor detailed industry descriptions, see the accompanying Statement of Investments.
MS-35
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Mutual Shares Securities Fund
15. FAIR VALUE MEASUREMENTS (continued)
At June 30, 2011, the reconciliation of assets in which significant unobservable inputs (Level 3) were used in determining fair value, is as follows:
| Balance at Beginning of Period | Purchases | Sales | Transfers Into Level 3 | Transfers Out of Level 3a | Cost Basis Adjustmentsb | Net Realized Gain (Loss) | Net Unrealized Gain (Loss) | Balance at End of Period | Net Change in Unrealized Appreciation (Depreciation) on Assets Held at Period End | |||||||||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||||||||||
Investments in Securities: | ||||||||||||||||||||||||||||||||||||||||
Equity Investments:c | ||||||||||||||||||||||||||||||||||||||||
Auto Components | $ | 17,504,881 | d | $ | — | $ | — | $ | — | $ | — | $ | (27,152 | ) | $ | 27,152 | $ | (4,665,624 | ) | $ | 12,839,257 | d | $ | (4,665,624 | ) | |||||||||||||||
Chemicals | 25,000 | — | — | — | — | — | — | — | 25,000 | — | ||||||||||||||||||||||||||||||
Commercial Banks | 2,688,630 | d | — | — | — | — | — | — | (37,632 | ) | 2,650,998 | d | (37,632 | ) | ||||||||||||||||||||||||||
Consumer Finance | 28,388,621 | — | — | — | — | (2,066,915 | ) | — | (9,621,086 | ) | 16,700,620 | (9,621,086 | ) | |||||||||||||||||||||||||||
Diversified Financial Services | — | d | — | — | — | — | — | — | 185,913 | 185,913 | 185,913 | |||||||||||||||||||||||||||||
Diversified Telecommunication Services | — | d | — | — | — | — | (194 | ) | 194 | — | — | d | — | |||||||||||||||||||||||||||
Electric Utilities | 23,791,010 | d | — | (22,079,951 | ) | — | — | — | — | (1,711,059 | ) | — | — | |||||||||||||||||||||||||||
Hotels, Restaurants & Leisure | 2,369,832 | — | — | — | — | — | — | (1,032,975 | ) | 1,336,857 | (1,032,975 | ) | ||||||||||||||||||||||||||||
Insurance | 6,186 | — | — | — | — | — | — | (1,662 | ) | 4,524 | (1,662 | ) | ||||||||||||||||||||||||||||
IT Services | 95,515 | — | — | — | (51,270 | ) | — | — | (44,245 | ) | — | — | ||||||||||||||||||||||||||||
Real Estate Management & Development | 6,659,198 | — | — | — | — | — | — | 767,192 | 7,426,390 | 767,192 | ||||||||||||||||||||||||||||||
Corporate Bonds, Notes and Senior Floating Rate Interests | 15,986,080 | — | (19,390,824 | ) | — | — | — | — | 3,407,176 | 2,432 | — | |||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||
Total | $ | 97,514,953 | $ | — | $ | (41,470,775 | ) | $ | — | $ | (51,270 | ) | $ | (2,094,261 | ) | $ | 27,346 | $ | (12,754,002 | ) | $ | 41,171,991 | $ | (14,405,874 | ) | |||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||
aThe investment was transferred out of Level 3 as a result of the availability of a quoted price in an active market for identical securities.
bMay include accretion, amortization, partnership adjustments, and/or other cost basis adjustments.
cIncludes common and convertible preferred stocks as well as other equity investments.
dIncludes securities determined to have no value.
16. NEW ACCOUNTING PRONOUNCEMENTS
In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (IFRS). The amendments in the ASU will improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRS and include new guidance for certain fair value measurement principles and disclosure requirements. The ASU is effective for interim and annual periods beginning after December 15, 2011. The Fund is currently evaluating the impact, if any, of applying this provision.
MS-36
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Mutual Shares Securities Fund
17. SUBSEQUENT EVENTS
The Fund has evaluated subsequent events through the issuance of the financial statements and determined that no events have occurred that require disclosure.
ABBREVIATIONS | ||||
| Counterparty | Currency | Selected Portfolio | ||
| BOFA - Bank of America Corp. | CHF - Swiss Franc | ADR - American Depository Receipt | ||
| BZWS - Barclays Bank PLC | EUR - Euro | FHLB - Federal Home Loan Bank | ||
| DBAB - Deutsche Bank AG | GBP - British Pound | PIK - Payment-In-Kind | ||
| HAND - Svenska Handelsbanken | JPY - Japanese Yen | |||
| HSBC - HSBC Bank USA, N.A. | USD - United States Dollar | |||
| SSBT - State Street Bank and Trust Co. |
MS-37
TEMPLETON DEVELOPING MARKETS SECURITIES FUND
We are pleased to bring you Templeton Developing Markets Securities Fund’s semiannual report for the period ended June 30, 2011.
Performance Summary as of 6/30/11
Templeton Developing Markets Securities Fund – Class 4 delivered a +1.08% total return for the six-month period ended 6/30/11.
Performance reflects the Fund’s Class 4 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 4
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.
TD-1
Fund Goal and Main Investments: Franklin 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.
Performance Overview
You can find the Fund’s six-month total return in the Performance Summary. In comparison, the MSCI Emerging Markets Index generated a +1.03% total return, and the Standard & Poor’s International Finance Corporation Investable Composite Index posted a +0.70% total return for the same period.1 Please note that index performance numbers are for reference and we do not attempt to track an index but rather undertake investments on the basis of fundamental research.
Economic and Market Overview
During the first six months of 2011, global markets experienced heightened volatility. Although the year started on a positive note, markets quickly declined following political instability and riots in the Middle East and North Africa. Investors grew increasingly worried that contagion from the region could spread further and subsequently derail the global economic recovery. On the economic front, rising inflationary pressures and the implementation of monetary tightening measures in some emerging markets further fueled slower global economic growth concerns. The correction in stock prices was, however, short-lived as investors focused on the long-term opportunities and prospects of the wider emerging market asset class. This led investment into emerging markets to turn positive in April, after two consecutive months of net outflows.
Markets, however, fell again in May as focus shifted to debt restructuring issues in the eurozone. Investors adopted a more risk-averse position over Greece’s credit rating downgrade and concerns the debt crisis could spread to larger economies such as Spain. The postponed disbursement of European Union (EU) funds to Greece coupled with that country’s political uncertainty further heightened market volatility in June. However, the survival of Prime Minister George Papandreou in a vote of confidence, the passing of austerity measures in Greece and the EU’s promises of a second bailout in July led markets to turn around. Within this environment, emerging markets ended the first half of the year with a slightly positive return.
1. Source: © 2011 Morningstar. One cannot invest directly in an index, and an index is not 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 or developing 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. The Fund may have significant investments in one or more countries or in particular sectors or industries from time to time, and may carry greater risk of adverse developments in a country, sector or industry than a fund that invests more broadly. Smaller and midsize company securities can increase the risk of greater price fluctuations, particularly over the short term. The manager applies various techniques and analyses in making investment decisions for the Fund, but there can be no guarantee that these decisions will produce the desired results. The Fund’s prospectus also includes a description of the main investment risks.
TD-2
Investment Strategy
We employ a fundamental research, value-oriented, long-term investment approach. We focus on the market price of a company’s securities relative to our evaluation of its long-term earnings, asset value and cash flow potential. We also consider a company’s profit and loss outlook, balance sheet strength, cash flow trends and asset value in relation to the current price. Our analysis considers the company’s corporate governance behavior as well as its position in its sector, the economic framework and political environment. We invest in securities without regard to benchmark comparisons.
Manager’s Discussion
During the six-month reporting period, key contributors to Fund performance included Astra International, Indonesia’s leading car and motorcycle company, Gazprom, a major Russian global gas producer, and President Chain Store, operator of leading, global convenience store chain 7-Eleven in Taiwan. Astra recorded significantly higher net income in the first quarter of 2011 due to greater domestic demand for motor vehicles and higher profits from its heavy equipment and palm oil businesses. The company profited from Indonesia’s robust economic growth, higher incomes and affordable credit. Gazprom benefited from higher earnings due to strong demand and expectations of greater European demand in 2011. In our analysis, Gazprom is well positioned to gain from the long-term trend in rising commodity prices and supply shocks in regions such as the Middle East. President Chain Store also showed solid corporate results, superior brand franchise and higher domestic demand, which supported its share price performance. Our analysis indicates a strong growth outlook for President Chain Store as it could be a beneficiary of Taiwan’s domestic recovery and rising Chinese tourism.
In contrast, three notable detractors were from India. The Indian market was one of the worst emerging market performers in the first half of 2011. The major domestic factors leading to the market correction were concerns of easing gross domestic product growth, higher inflation and interest rates, as well as uncertainty surrounding the implementation of a tax policy on Mauritius fund flows into India’s stock market. Weighing on Fund performance were Hindalco Industries, a major Indian producer of aluminum, Sesa Goa, India’s leading iron ore producer, and Infosys, one of the top information technology consulting companies in India. Weakening commodity prices during the period also adversely affected the share prices of Hindalco and Sesa Goa, while a stronger
TD-3
Indian rupee impacted Infosys. Taking a longer term view, however, our analysis shows Hindalco and Sesa Goa could benefit from global demand for metals supporting higher commodity prices. In addition, in our view Infosys is well positioned to benefit from the outsourcing trend of services to Indian consulting companies.
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, 2011, the U.S. dollar declined in value relative to most 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 past six months, we increased the Fund’s holdings in Singapore, Australia, Indonesia and Thailand as we searched for attractive investment opportunities. We added to our holdings in construction, Internet software and services, industrial machinery, and industrial conglomerates companies. Key purchases included Australia’s BHP Billiton, a major diversified natural resources company with significant sales in emerging markets, SembCorp Marine, Singapore’s premier global marine and offshore engineering group, and Tencent Holdings, China’s leading provider of Internet and mobile phone value-added services.
Conversely, the Fund reduced its investments in Brazil, India, Mexico, South Africa and China via China H shares to focus on attractively valued stocks within our investment universe.2 We trimmed our holdings primarily in catalog retail, marine, wireless telecommunication services, coal and consumable fuels, and diversified metals and mining companies. In addition, we identified and reduced several holdings that had reached their target prices by the end of the reporting period including Brazilian cosmetics company Natura Cosmeticos, Russian wireless service provider Mobile Telesystems, and Chinese coal producer China Coal Energy. The Fund eliminated its positions in China Coal Energy and Mobile Telesystems by period-end.
2. “China-H” denotes shares of China-incorporated, Hong Kong Stock Exchange-listed companies with most businesses in China.
Top 10 Holdings
Templeton Developing Markets
Securities Fund
6/30/11
| Company Sector/Industry, Country | % of Total Net Assets | |||
| Vale SA, ADR, pfd., A | 6.5% | |||
| Metals & Mining, Brazil | ||||
| Tata Consultancy Services Ltd. | 6.4% | |||
| IT Services, India | ||||
AmBev (Companhia de Bebidas das Americas), ord. & IDR | 4.9% | |||
| Beverages, Brazil | ||||
| Norilsk Nickel (Mining and Metallurgical Co. Norilsk Nickel), ADR | 4.5% | |||
| Metals & Mining, Russia | ||||
| Itau Unibanco Holding SA, ADR | 4.3% | |||
| Commercial Banks, Brazil | ||||
| Gazprom, ADR | 4.1% | |||
| Oil, Gas & Consumable Fuels, Russia | ||||
| PT Astra International Tbk | 3.7% | |||
| Automobiles, Indonesia | ||||
| LUKOIL Holdings, ADR | 3.2% | |||
| Oil, Gas & Consumable Fuels, Russia | ||||
| Sberbank RF | 2.9% | |||
| Commercial Banks, Russia | ||||
| President Chain Store Corp. | 2.7% | |||
| Food & Staples Retailing, Taiwain | ||||
The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund’s Statement of Investments.
TD-4
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, 2011, 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
6/30/11
| % of Total Net Assets | ||||
| Brazil | 21.3% | |||
| Russia | 17.6% | |||
| India | 14.6% | |||
| China | 11.3% | |||
| Indonesia | 6.7% | |||
| Thailand | 4.2% | |||
| U.K. | 4.1% | |||
| Turkey | 3.5% | |||
| Taiwan | 3.0% | |||
| Hong Kong | 2.2% | |||
TD-5
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 4
TD-6
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 4 | Beginning Account Value 1/1/11 | Ending Account Value 6/30/11 | Fund-Level Expenses Incurred During Period* 1/1/11–6/30/11 | |||||||||
Actual | $ | 1,000 | $ | 1,001.80 | $ | 8.87 | ||||||
Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,015.97 | $ | 8.90 | ||||||
*Expenses are calculated using the most recent six-month annualized expense ratio for the Fund’s Class 4 shares (1.78%), 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.
TD-7
SUPPLEMENT DATED JULY 15, 2011
TOTHE PROSPECTUS
DATED MAY 1, 2011
OF
TEMPLETON DEVELOPING MARKETS SECURITIES FUND – CLASS 4
(a series of Franklin Templeton Variable Insurance Products Trust (the “Trust”)).
The prospectus is amended as follows:
1. On page TD-S1 of the Fund Summary, under “Fees and Expenses of the Fund,” the “Annual Fund Operating Expenses” table and “Example” are replaced with the following:
| ANNUAL FUND OPERATING EXPENSES | (expenses that you pay each year as a percentage of the value of your investment) | |||
| Class 4 | ||||
Management fees1 | 1.11% | |||
Distribution and service (12b-1) fees | 0.35% | |||
Other expenses | 0.26% | |||
Acquired fund fees and expenses1 | 0.01% | |||
Total annual Fund operating expenses | 1.73% | |||
Fee waiver and/or expense reimbursement1 | -0.01% | |||
Total annual Fund operating expenses after fee waiver | 1.72% | |||
| 1. | Restated to reflect the decrease in the investment management fee effective May 1, 2011. The investment manager has contractually agreed in advance to reduce its fee as a result of the Fund’s investment in a Franklin Templeton money fund (acquired fund) for at least the next 12-month period. Contractual fee waiver and/or expense reimbursement agreement may not be terminated during the term set forth above. Total annual Fund operating expenses differ from the ratio of expenses to average net assets shown in the Financial Highlights, which do not reflect the decrease in management fee and the acquired fund fees and expenses. |
| 2. | Total annual Fund operating expenses differ from the ratio of expenses to average net assets shown in the Financial Highlights, which reflect the operating expenses of the Fund and do not include acquired fund fees and expenses. |
Example
This Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of the period. The Example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. The Example reflects adjustments made to the Fund’s operating expenses due to the fee waiver and/or expense reimbursement by the investment manager and/or administrator for the 1 Year numbers only. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
| 1 Year | 3 Years | 5 Years | 10 Years | |||||||||||||
Class 4 | $ | 175 | $ | 544 | $ | 938 | $ | 2,041 | ||||||||
TD-8
2. The text under the heading “Portfolio Turnover” on page TD-S1 of the Fund Summary is replaced with the following:
The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 24.41% of the average value of its portfolio.
Please keep this supplement for future reference.
TD-9
Franklin Templeton Variable Insurance Products Trust
Financial Highlights
Templeton Developing Markets Securities Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 1 | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||||||
| ||||||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 11.40 | $ | 9.86 | $ | 6.11 | $ | 16.16 | $ | 13.92 | $ | 10.99 | ||||||||||||
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Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.08 | 0.09 | 0.12 | 0.16 | 0.32 | 0.24 | ||||||||||||||||||
Net realized and unrealized gains (losses) | 0.05 | 1.63 | 4.02 | (7.40 | ) | 3.51 | 2.84 | |||||||||||||||||
|
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Total from investment operations | 0.13 | 1.72 | 4.14 | (7.24 | ) | 3.83 | 3.08 | |||||||||||||||||
|
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Less distributions from: | ||||||||||||||||||||||||
Net investment income | (0.13 | ) | (0.18 | ) | (0.36 | ) | (0.37 | ) | (0.38 | ) | (0.15 | ) | ||||||||||||
Net realized gains | — | — | (0.03 | ) | (2.44 | ) | (1.21 | ) | — | |||||||||||||||
|
| |||||||||||||||||||||||
Total distributions | (0.13 | ) | (0.18 | ) | (0.39 | ) | (2.81 | ) | (1.59 | ) | (0.15 | ) | ||||||||||||
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Redemption feesc | — | — | — | — | — | — | ||||||||||||||||||
|
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Net asset value, end of period | $ | 11.40 | $ | 11.40 | $ | 9.86 | $ | 6.11 | $ | 16.16 | $ | 13.92 | ||||||||||||
|
| |||||||||||||||||||||||
Total returnd | 1.20% | 17.83% | 73.32% | (52.62)% | 29.09% | 28.43% | ||||||||||||||||||
Ratios to average net assetse | ||||||||||||||||||||||||
Expenses | 1.43% | 1.49% | f | 1.45% | f | 1.52% | f | 1.48% | f | 1.47% | f | |||||||||||||
Net investment income | 1.47% | 0.87% | 1.64% | 1.52% | 2.07% | 1.93% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 309,910 | $ | 347,242 | $ | 325,927 | $ | 234,213 | $ | 753,843 | $ | 749,120 | ||||||||||||
Portfolio turnover rate | 4.70% | 24.41% | 56.58% | g | 75.11% | g | 98.32% | 53.65% | ||||||||||||||||
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 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.
The accompanying notes are an integral part of these financial statements.
TD-10
Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Templeton Developing Markets Securities Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 2 | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||||||
| ||||||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 11.30 | $ | 9.78 | $ | 6.04 | $ | 15.99 | $ | 13.79 | $ | 10.90 | ||||||||||||
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| |||||||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.07 | 0.06 | 0.11 | 0.15 | 0.27 | 0.20 | ||||||||||||||||||
Net realized and unrealized gains (losses) | 0.05 | 1.62 | 3.98 | (7.33 | ) | 3.49 | 2.82 | |||||||||||||||||
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Total from investment operations | 0.12 | 1.68 | 4.09 | (7.18 | ) | 3.76 | 3.02 | |||||||||||||||||
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Less distributions from: | ||||||||||||||||||||||||
Net investment income | (0.10 | ) | (0.16 | ) | (0.32 | ) | (0.33 | ) | (0.35 | ) | (0.13 | ) | ||||||||||||
Net realized gains | — | — | (0.03 | ) | (2.44 | ) | (1.21 | ) | — | |||||||||||||||
|
| |||||||||||||||||||||||
Total distributions | (0.10 | ) | (0.16 | ) | (0.35 | ) | (2.77 | ) | (1.56 | ) | (0.13 | ) | ||||||||||||
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Redemption feesc | — | — | — | — | — | — | ||||||||||||||||||
|
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Net asset value, end of period | $ | 11.32 | $ | 11.30 | $ | 9.78 | $ | 6.04 | $ | 15.99 | $ | 13.79 | ||||||||||||
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| |||||||||||||||||||||||
Total returnd | 1.12% | 17.58% | 72.59% | (52.70)% | 28.78% | 28.09% | ||||||||||||||||||
Ratios to average net assetse | ||||||||||||||||||||||||
Expenses | 1.68% | 1.74% | f | 1.70% | f | 1.77% | f | 1.73% | f | 1.72% | f | |||||||||||||
Net investment income | 1.22% | 0.62% | 1.39% | 1.27% | 1.82% | 1.68% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 366,156 | $ | 392,546 | $ | 435,947 | $ | 264,186 | $ | 1,090,549 | $ | 857,514 | ||||||||||||
Portfolio turnover rate | 4.70% | 24.41% | 56.58% | g | 75.11% | g | 98.32% | 53.65% | ||||||||||||||||
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 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.
The accompanying notes are an integral part of these financial statements.
TD-11
Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Templeton Developing Markets Securities Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 3 | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||||||
| ||||||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 11.23 | $ | 9.73 | $ | 6.02 | $ | 15.96 | $ | 13.78 | $ | 10.90 | ||||||||||||
|
| |||||||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.07 | 0.06 | 0.10 | 0.11 | 0.24 | 0.20 | ||||||||||||||||||
Net realized and unrealized gains (losses) | 0.05 | 1.60 | 3.97 | (7.27 | ) | 3.52 | 2.83 | |||||||||||||||||
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Total from investment operations | 0.12 | 1.66 | 4.07 | (7.16 | ) | 3.76 | 3.03 | |||||||||||||||||
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Less distributions from: | ||||||||||||||||||||||||
Net investment income | (0.10 | ) | (0.16 | ) | (0.33 | ) | (0.34 | ) | (0.37 | ) | (0.15 | ) | ||||||||||||
Net realized gains | — | — | (0.03 | ) | (2.44 | ) | (1.21 | ) | — | |||||||||||||||
|
| |||||||||||||||||||||||
Total distributions | (0.10 | ) | (0.16 | ) | (0.36 | ) | (2.78 | ) | (1.58 | ) | (0.15 | ) | ||||||||||||
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Redemption feesc | — | — | — | — | — | — | ||||||||||||||||||
|
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Net asset value, end of period | $ | 11.25 | $ | 11.23 | $ | 9.73 | $ | 6.02 | $ | 15.96 | $ | 13.78 | ||||||||||||
|
| |||||||||||||||||||||||
Total returnd | 1.13% | 17.51% | 72.63% | (52.67)% | 28.70% | 28.17% | ||||||||||||||||||
Ratios to average net assetse | ||||||||||||||||||||||||
Expenses | 1.68% | 1.74% | f | 1.70% | f | 1.77% | f | 1.73% | f | 1.72% | f | |||||||||||||
Net investment income | 1.22% | 0.62% | 1.39% | 1.27% | 1.82% | 1.68% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 60,517 | $ | 66,484 | $ | 66,718 | $ | 32,953 | $ | 100,961 | $ | 43,372 | ||||||||||||
Portfolio turnover rate | 4.70% | 24.41% | 56.58% | g | 75.11% | g | 98.32% | 53.65% | ||||||||||||||||
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 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.
The accompanying notes are an integral part of these financial statements.
TD-12
Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Templeton Developing Markets Securities Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||||||
| Class 4 | 2010 | 2009 | 2008a | |||||||||||||
| ||||||||||||||||
Per share operating performance | ||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||
Net asset value, beginning of period | $ | 11.30 | $ | 9.80 | $ | 6.09 | $ | 14.88 | ||||||||
|
| |||||||||||||||
Income from investment operationsb: | ||||||||||||||||
Net investment income (loss)c | 0.06 | 0.05 | 0.09 | (0.33 | ) | |||||||||||
Net realized and unrealized gains (losses) | 0.06 | 1.61 | 4.00 | (5.65 | ) | |||||||||||
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Total from investment operations | 0.12 | 1.66 | 4.09 | (5.98 | ) | |||||||||||
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Less distributions from: | ||||||||||||||||
Net investment income | (0.10 | ) | (0.16 | ) | (0.35 | ) | (0.37 | ) | ||||||||
Net realized gains | — | — | (0.03 | ) | (2.44 | ) | ||||||||||
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Total distributions | (0.10 | ) | (0.16 | ) | (0.38 | ) | (2.81 | ) | ||||||||
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Redemption feesd | — | — | — | — | ||||||||||||
|
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Net asset value, end of period | $ | 11.32 | $ | 11.30 | $ | 9.80 | $ | 6.09 | ||||||||
|
| |||||||||||||||
Total returne | 1.08% | 17.41% | 72.45% | (48.66)% | ||||||||||||
Ratios to average net assetsf | ||||||||||||||||
Expenses | 1.78% | 1.84% | g | 1.80% | g | 1.87% | g | |||||||||
Net investment income | 1.12% | 0.52% | 1.29% | 1.17% | ||||||||||||
Supplemental data | ||||||||||||||||
Net assets, end of period (000’s) | $ | 33,809 | $ | 37,198 | $ | 26,362 | $ | 7,208 | ||||||||
Portfolio turnover rate | 4.70% | 24.41% | 56.58% | 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 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.
The accompanying notes are an integral part of these financial statements.
TD-13
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited)
| Templeton Developing Markets Securities Fund | Industry | Shares | Value | |||||||
Common Stocks 89.6% | ||||||||||
Australia 1.0% | ||||||||||
BHP Billiton Ltd. | Metals & Mining | 166,062 | $ | 7,800,118 | ||||||
|
| |||||||||
Brazil 11.8% | ||||||||||
Companhia de Bebidas das Americas (AmBev) | Beverages | 1,356,585 | 37,358,324 | |||||||
Companhia de Bebidas das Americas (AmBev), IDR | Beverages | 5,765 | 158,759 | |||||||
Itau Unibanco Holding SA, ADR | Commercial Banks | 1,419,474 | 33,428,613 | |||||||
aItausa - Investimentos Itau SA, IDR | Commercial Banks | 10,108 | 77,682 | |||||||
Natura Cosmeticos SA | Personal Products | 277,532 | 6,931,857 | |||||||
Souza Cruz SA | Tobacco | 995,350 | 12,659,804 | |||||||
|
| |||||||||
| 90,615,039 | ||||||||||
|
| |||||||||
China 11.3% | ||||||||||
bAluminum Corp. of China Ltd., H | Metals & Mining | 6,214,000 | 5,238,390 | |||||||
Anta Sports Products Ltd. | Textiles, Apparel & Luxury Goods | 2,131,000 | 3,800,980 | |||||||
Changsha Zoomlion Heavy Industry Science and Technology Development Co. Ltd., H | Machinery | 2,475,720 | 4,708,537 | |||||||
CNOOC Ltd. | Oil, Gas & Consumable Fuels | 7,181,000 | 16,794,963 | |||||||
Golden Eagle Retail Group Ltd. | Multiline Retail | 1,234,000 | 3,139,808 | |||||||
Great Wall Motor Co. Ltd., H | Automobiles | 3,354,000 | 5,516,908 | |||||||
Guangzhou Automobile Group Co. Ltd., H | Automobiles | 9,006,396 | 10,995,054 | |||||||
Inner Mongolia Yitai Coal Co. Ltd., B | Oil, Gas & Consumable Fuels | 1,019,967 | 5,959,667 | |||||||
PetroChina Co. Ltd., H | Oil, Gas & Consumable Fuels | 13,880,000 | 20,262,383 | |||||||
Tencent Holdings Ltd. | Internet Software & Services | 130,600 | 3,547,896 | |||||||
Travelsky Technology Ltd., H | IT Services | 1,967,000 | 1,238,577 | |||||||
Yantai Changyu Pioneer Wine Co. Ltd., B | Beverages | 532,200 | 5,954,102 | |||||||
|
| |||||||||
| 87,157,265 | ||||||||||
|
| |||||||||
Hong Kong 2.2% | ||||||||||
Dairy Farm International Holdings Ltd. | Food & Staples Retailing | 1,014,733 | 8,320,811 | |||||||
VTech Holdings Ltd. | Communications Equipment | 724,000 | 8,624,641 | |||||||
|
| |||||||||
| 16,945,452 | ||||||||||
|
| |||||||||
India 14.6% | ||||||||||
Coal India Ltd. | Oil, Gas & Consumable Fuels | 759,353 | 6,676,453 | |||||||
Grasim Industries Ltd. | Chemicals | 40,253 | 1,888,184 | |||||||
Hindalco Industries Ltd. | Metals & Mining | 1,732,548 | 7,026,466 | |||||||
Infosys Ltd. | IT Services | 238,290 | 15,523,288 | |||||||
National Aluminium Co. Ltd. | Metals & Mining | 2,244,416 | 4,163,963 | |||||||
Oil & Natural Gas Corp. Ltd. | Oil, Gas & Consumable Fuels | 1,826,624 | 11,212,271 | |||||||
Sesa Goa Ltd. | Metals & Mining | 1,076,310 | 6,804,411 | |||||||
Tata Chemicals Ltd. | Chemicals | 1,172,718 | 9,773,526 | |||||||
Tata Consultancy Services Ltd. | IT Services | 1,857,283 | 49,120,412 | |||||||
|
| |||||||||
| 112,188,974 | ||||||||||
|
| |||||||||
Indonesia 6.7% | ||||||||||
PT Astra International Tbk | Automobiles | 3,806,000 | 28,201,633 | |||||||
PT Bank Central Asia Tbk | Commercial Banks | 15,933,532 | 14,212,268 | |||||||
PT Bank Rakyat Indonesia (Persero) Tbk | Commercial Banks | 12,208,000 | 9,252,259 | |||||||
|
| |||||||||
| 51,666,160 | ||||||||||
|
| |||||||||
Mexico 1.9% | ||||||||||
America Movil SAB de CV, L, ADR | Wireless Telecommunication Services | 189,267 | 10,197,706 | |||||||
Kimberly Clark de Mexico SAB de CV, A | Household Products | 650,871 | 4,280,546 | |||||||
|
| |||||||||
| 14,478,252 | ||||||||||
|
| |||||||||
TD-14
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Templeton Developing Markets Securities Fund | Industry | Shares | Value | |||||||
Common Stocks (continued) | ||||||||||
Nigeria 0.1% | ||||||||||
Nigerian Breweries PLC | Beverages | 1,586,265 | $ | 900,790 | ||||||
|
| |||||||||
Pakistan 1.7% | ||||||||||
MCB Bank Ltd. | Commercial Banks | 2,533,287 | 5,858,502 | |||||||
Oil & Gas Development Co. Ltd. | Oil, Gas & Consumable Fuels | 4,258,312 | 7,571,432 | |||||||
|
| |||||||||
| 13,429,934 | ||||||||||
|
| |||||||||
Qatar 0.1% | ||||||||||
Industries Qatar | Industrial Conglomerates | 10,230 | 382,624 | |||||||
|
| |||||||||
Russia 17.6% | ||||||||||
aGazprom, ADR | Oil, Gas & Consumable Fuels | 1,703,600 | 24,787,380 | |||||||
aGazprom, ADR (London Stock Exchange) | Oil, Gas & Consumable Fuels | 470,200 | 6,860,218 | |||||||
cLUKOIL Holdings, ADR | Oil, Gas & Consumable Fuels | 75,208 | 4,794,510 | |||||||
cLUKOIL Holdings, ADR (London Stock Exchange) | Oil, Gas & Consumable Fuels | 317,168 | 20,156,027 | |||||||
aMining and Metallurgical Co. Norilsk Nickel, ADR | Metals & Mining | 1,316,100 | 34,310,727 | |||||||
Sberbank RF | Commercial Banks | 6,061,420 | 22,306,026 | |||||||
TNK-BP | Oil, Gas & Consumable Fuels | 5,340,274 | 16,759,500 | |||||||
dUralkali, GDR, Reg S | Chemicals | 122,196 | 5,489,655 | |||||||
|
| |||||||||
| 135,464,043 | ||||||||||
|
| |||||||||
Singapore 1.9% | ||||||||||
Keppel Corp. Ltd. | Industrial Conglomerates | 790,557 | 7,131,297 | |||||||
SembCorp Marine Ltd. | Machinery | 1,778,000 | 7,671,904 | |||||||
|
| |||||||||
| 14,803,201 | ||||||||||
|
| |||||||||
South Africa 1.2% | ||||||||||
Remgro Ltd. | Diversified Financial Services | 504,061 | 8,319,511 | |||||||
Tiger Brands Ltd. | Food Products | 25,250 | 737,529 | |||||||
|
| |||||||||
| 9,057,040 | ||||||||||
|
| |||||||||
South Korea 1.2% | ||||||||||
SK Innovation Co. Ltd. | Oil, Gas & Consumable Fuels | 48,967 | 9,201,390 | |||||||
|
| |||||||||
Sweden 0.5% | ||||||||||
Oriflame Cosmetics SA, SDR | Personal Products | 75,287 | 3,705,108 | |||||||
|
| |||||||||
Taiwan 3.0% | ||||||||||
President Chain Store Corp. | Food & Staples Retailing | 3,628,075 | 20,912,910 | |||||||
Uni-President China Holdings Ltd. | Food Products | 3,767,000 | 2,333,272 | |||||||
|
| |||||||||
| 23,246,182 | ||||||||||
|
| |||||||||
Thailand 4.2% | ||||||||||
Kasikornbank PCL, fgn. | Commercial Banks | 2,759,300 | 11,220,316 | |||||||
PTT Exploration and Production PCL, fgn. | Oil, Gas & Consumable Fuels | 2,021,223 | 11,243,628 | |||||||
PTT PCL, fgn. | Oil, Gas & Consumable Fuels | 938,100 | 10,223,276 | |||||||
|
| |||||||||
| 32,687,220 | ||||||||||
|
| |||||||||
Turkey 3.5% | ||||||||||
Akbank TAS | Commercial Banks | 2,712,311 | 12,532,240 | |||||||
Tupras-Turkiye Petrol Rafinerileri AS | Oil, Gas & Consumable Fuels | 600,504 | 14,724,039 | |||||||
|
| |||||||||
| 27,256,279 | ||||||||||
|
| |||||||||
United Arab Emirates 1.0% | ||||||||||
Emaar Properties PJSC | Real Estate Management & Development | 8,942,377 | 7,352,567 | |||||||
|
| |||||||||
TD-15
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Templeton Developing Markets Securities Fund | Industry | Shares | Value | |||||||
Common Stocks (continued) | ||||||||||
United Kingdom 4.1% | ||||||||||
Anglo American PLC | Metals & Mining | 316,849 | $ | 15,691,092 | ||||||
Antofagasta PLC | Metals & Mining | 704,479 | 15,755,166 | |||||||
|
| |||||||||
| 31,446,258 | ||||||||||
|
| |||||||||
Vietnam 0.0%† | ||||||||||
Petrovietnam Fertilizer and Chemical JSC | Chemicals | 217,810 | 343,883 | |||||||
|
| |||||||||
Total Common Stocks (Cost $399,485,124) | 690,127,779 | |||||||||
|
| |||||||||
Preferred Stocks 10.6% | ||||||||||
Brazil 9.5% | ||||||||||
Banco Bradesco SA, ADR, pfd. | Commercial Banks | 582,431 | 11,934,011 | |||||||
Itausa - Investimentos Itau SA, pfd. | Commercial Banks | 1,018,810 | 7,823,197 | |||||||
Petroleo Brasileiro SA, ADR, pfd. | Oil, Gas & Consumable Fuels | 130,588 | 4,006,440 | |||||||
Vale SA, ADR, pfd., A | Metals & Mining | 1,717,475 | 49,738,076 | |||||||
|
| |||||||||
| 73,501,724 | ||||||||||
|
| |||||||||
Chile 1.1% | ||||||||||
Embotelladora Andina SA, pfd., A | Beverages | 1,918,947 | 8,212,034 | |||||||
|
| |||||||||
Total Preferred Stocks (Cost $34,455,712) | 81,713,758 | |||||||||
|
| |||||||||
Total Investments before Short Term Investments | 771,841,537 | |||||||||
|
| |||||||||
eInvestments from Cash Collateral Received for Loaned Securities | ||||||||||
Money Market Funds 0.5% | ||||||||||
United States 0.5% | ||||||||||
fBNY Mellon Overnight Government Fund, 0.05% | 4,194,000 | 4,194,000 | ||||||||
|
| |||||||||
Total Investments (Cost $438,134,836) 100.7% | 776,035,537 | |||||||||
Other Assets, less Liabilities (0.7)% | (5,643,547 | ) | ||||||||
|
| |||||||||
Net Assets 100.0% | $ | 770,391,990 | ||||||||
|
| |||||||||
See Abbreviations on page TD-27.
†Rounds to less than 0.1% of net assets.
aNon-income producing.
bA portion or all of the security is on loan at June 30, 2011. See Note 1(c).
cAt June 30,2011, pursuant to the Fund’s policies and the requirements of applicable securities law, the Fund may be restricted from trading these securities for a limited or extended period of time due to ownership limits and/or potential possession of material non-public information.
dSecurity 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. This security has been deemed liquid under guidelines approved by the Trust’s Board of Trustees. At June 30, 2011, the value of this security was $5,489,655, representing 0.71% of net assets.
eSee Note 1(c) regarding securities on loan.
fThe rate shown is the annualized seven-day yield at period end.
The accompanying notes are an integral part of these financial statements.
TD-16
Franklin Templeton Variable Insurance Products Trust
Financial Statements
Statement of Assets and Liabilities
June 30, 2011 (unaudited)
| Templeton Developing Markets Securities Fund | ||||
Assets: | ||||
Investments in securities: | ||||
Cost | $ | 438,134,836 | ||
|
| |||
Value (includes securities loaned in the amount of $3,928,371) | $ | 776,035,537 | ||
Foreign currency, at value (cost $407,859) | 407,864 | |||
Receivables: | ||||
Investment securities sold | 1,460,083 | |||
Capital shares sold | 120,371 | |||
Dividends and interest | 2,622,298 | |||
Foreign tax | 51,726 | |||
Other assets | 217 | |||
|
| |||
Total assets | 780,698,096 | |||
|
| |||
Liabilities: | ||||
Payables: | ||||
Investment securities purchased | 1,357,869 | |||
Capital shares redeemed | 2,367,420 | |||
Affiliates | 974,341 | |||
Funds advanced by custodian | 1,058,070 | |||
Payable upon return of securities loaned | 4,194,000 | |||
Accrued expenses and other liabilities | 354,406 | |||
|
| |||
Total liabilities | 10,306,106 | |||
|
| |||
Net assets, at value | $ | 770,391,990 | ||
|
| |||
Net assets consist of: | ||||
Paid-in capital | $ | 587,441,133 | ||
Distributions in excess of net investment income | (2,379,872 | ) | ||
Net unrealized appreciation (depreciation) | 337,901,879 | |||
Accumulated net realized gain (loss) | (152,571,150 | ) | ||
|
| |||
Net assets, at value | $ | 770,391,990 | ||
|
| |||
The accompanying notes are an integral part of these financial statements.
TD-17
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Assets and Liabilities (continued)
June 30, 2011 (unaudited)
| Templeton Developing Markets Securities Fund | ||||
Class 1: | ||||
Net assets, at value | $ | 309,910,041 | ||
|
| |||
Shares outstanding | 27,178,783 | |||
|
| |||
Net asset value and maximum offering price per share | $ | 11.40 | ||
|
| |||
Class 2: | ||||
Net assets, at value | $ | 366,155,982 | ||
|
| |||
Shares outstanding | 32,339,010 | |||
|
| |||
Net asset value and maximum offering price per share | $ | 11.32 | ||
|
| |||
Class 3: | ||||
Net assets, at value | $ | 60,517,340 | ||
|
| |||
Shares outstanding | 5,377,835 | |||
|
| |||
Net asset value and maximum offering price per sharea | $ | 11.25 | ||
|
| |||
Class 4: | ||||
Net assets, at value | $ | 33,808,627 | ||
|
| |||
Shares outstanding | 2,985,862 | |||
|
| |||
Net asset value and maximum offering price per share | $ | 11.32 | ||
|
| |||
aRedemption price is equal to net asset value less redemption fees retained by the Fund.
The accompanying notes are an integral part of these financial statements.
TD-18
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Operations
for the six months ended June 30, 2011 (unaudited)
| Templeton Developing Markets Securities Fund | ||||
Investment income: | ||||
Dividends (net of foreign taxes of $1,214,070) | $ | 11,485,071 | ||
Interest | 22,148 | |||
Income from securities loaned | 14,616 | |||
|
| |||
Total investment income | 11,521,835 | |||
|
| |||
Expenses: | ||||
Management fees (Note 3a) | 4,718,273 | |||
Administrative fees (Note 3b) | 533,743 | |||
Distribution fees: (Note 3c) | ||||
Class 2 | 465,234 | |||
Class 3 | 77,298 | |||
Class 4 | 63,919 | |||
Unaffiliated transfer agent fees | 1,447 | |||
Custodian fees (Note 4) | 270,747 | |||
Reports to shareholders | 112,393 | |||
Professional fees | 28,299 | |||
Trustees’ fees and expenses | 1,631 | |||
Other | 14,673 | |||
|
| |||
Total expenses | 6,287,657 | |||
|
| |||
Net investment income | 5,234,178 | |||
|
| |||
Realized and unrealized gains (losses): | ||||
Net realized gain (loss) from: | ||||
Investments | 20,407,170 | |||
Foreign currency transactions | 127,417 | |||
|
| |||
Net realized gain (loss) | 20,534,587 | |||
|
| |||
Net change in unrealized appreciation (depreciation) on: | ||||
Investments | (18,382,970 | ) | ||
Translation of other assets and liabilities denominated in foreign currencies | 19,816 | |||
Change in deferred taxes on unrealized appreciation | 53,321 | |||
|
| |||
Net change in unrealized appreciation (depreciation) | (18,309,833 | ) | ||
|
| |||
Net realized and unrealized gain (loss) | 2,224,754 | |||
|
| |||
Net increase (decrease) in net assets resulting from operations | $ | 7,458,932 | ||
|
| |||
The accompanying notes are an integral part of these financial statements.
TD-19
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, 2011 (unaudited) | Year Ended December 31, 2010 | |||||||
Increase (decrease) in net assets: | ||||||||
Operations: | ||||||||
Net investment income | $ | 5,234,178 | $ | 5,592,076 | ||||
Net realized gain (loss) from investments and foreign currency transactions | 20,534,587 | 49,761,078 | ||||||
Net change in unrealized appreciation (depreciation) on investments, translation of other assets and liabilities denominated in foreign currencies and deferred taxes | (18,309,833 | ) | 68,457,067 | |||||
Net increase (decrease) in net assets resulting from operations | 7,458,932 | 123,810,221 | ||||||
Distributions to shareholders from: | ||||||||
Net investment income: | ||||||||
Class 1 | (3,575,470 | ) | (5,483,924 | ) | ||||
Class 2 | (3,331,863 | ) | (5,656,521 | ) | ||||
Class 3 | (556,039 | ) | (947,886 | ) | ||||
Class 4 | (314,405 | ) | (471,295 | ) | ||||
Total distributions to shareholders | (7,777,777 | ) | (12,559,626 | ) | ||||
Capital share transactions: (Note 2) | ||||||||
Class 1 | (37,035,335 | ) | (22,233,537 | ) | ||||
Class 2 | (26,553,617 | ) | (97,764,544 | ) | ||||
Class 3 | (5,886,229 | ) | (9,001,736 | ) | ||||
Class 4 | (3,309,847 | ) | 6,238,252 | |||||
Total capital share transactions | (72,785,028 | ) | (122,761,565 | ) | ||||
Redemption fees | 25,916 | 26,367 | ||||||
Net increase (decrease) in net assets | (73,077,957 | ) | (11,484,603 | ) | ||||
Net assets: | ||||||||
Beginning of period | 843,469,947 | 854,954,550 | ||||||
End of period | $ | 770,391,990 | $ | 843,469,947 | ||||
Undistributed net investment income (distributions in excess of net investment income) included in net assets: | ||||||||
End of period | $ | (2,379,872 | ) | $ | 163,727 | |||
The accompanying notes are an integral part of these financial statements.
TD-20
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited)
Templeton Developing Market 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 separate funds. The Templeton Developing Markets 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 generally 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. Financial Instrument Valuation
The Fund’s investments in securities and other financial instruments are carried at fair value daily. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. Under procedures approved by the Trust’s Board of Trustees, the Fund may utilize independent pricing services, quotations from securities and financial instrument dealers, and other market sources to determine fair value.
Equity securities listed on an 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. 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. 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. Over-the-counter securities 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 at the closing net asset value.
The Fund has procedures to determine the fair value of securities and other financial instruments for which market prices are not readily available or which may not be reliably priced. Under these procedures, the Fund primarily employs a market-based approach which may use related or comparable assets or liabilities, recent transactions, market multiples, book values, and other relevant information for the investment to determine the fair value of the investment. The Fund may also use an income-based valuation approach in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the investments. Due to the inherent uncertainty of valuations of such investments, the fair values may differ significantly from the values that would have been used had an active market existed.
Trading in securities on foreign securities stock exchanges and over-the-counter markets may be completed before the daily close of business on the NYSE. Occasionally, events occur between the time at which trading in a foreign security is completed and the close of the NYSE that might call into question the reliability of the value of a portfolio security held by the Fund. As a result, differences may arise between the value of the Fund’s portfolio securities as determined at the foreign market close and the latest indications of value at the close of the NYSE. In order to minimize the potential for these differences, 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 that may call into question the reliability of the values of the foreign securities 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.
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. The Fund may enter into foreign currency
TD-21
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Developing Market Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
b. Foreign Currency Translation (continued)
exchange contracts to facilitate transactions denominated in a foreign currency. 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. Portfolio securities and assets and liabilities denominated in foreign currencies contain risks that those currencies will decline in value relative to the U.S. dollar. 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 Trust’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 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 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.
d. Income and Deferred Taxes
It is the Fund’s policy to qualify as a regulated investment company under the Internal Revenue Code. The Fund intends to distribute to shareholders substantially all of its taxable income and net realized gains to relieve it from federal income and excise taxes. As a result, no provision for U.S. federal income taxes is required. The Fund files U.S. income tax returns as well as tax returns in certain other jurisdictions. The Fund records a provision for taxes in its financial statements including penalties and interest, if any, for a tax position taken on a tax return (or expected to be taken) when it fails to meet the more likely than not (a greater than 50% probability) threshold and based on the technical merits, the tax position may not be sustained upon examination by the tax authorities. As of June 30, 2011, and for all open tax years, the Fund has determined that no provision for income tax is required in the Fund’s financial statements. Open tax years are those that remain subject to examination and are based on each tax jurisdiction statute of limitation.
The Fund may be subject to foreign taxation related to income received, capital gains on the sale of securities and certain foreign currency transactions in the foreign jurisdictions in which it invests. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist in the foreign markets in which the Fund invests. When a capital gain tax is determined to apply the Fund records an estimated deferred tax liability for unrealized gains on these securities in an amount that would be payable if the securities were disposed of on the valuation date.
TD-22
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Developing Market Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
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 interests in an insurance company subaccount that invests in Class 3 shares of the Fund will be subject to a 1.0% short term trading fee if the interest in the subaccount has been held for less than 60 days. Such fees are retained by the Fund and accounted for as an addition to paid-in capital, allocated to each class of shares based upon the relative proportion of net assets of each class.
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.
TD-23
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Developing Market Securities Fund
2. SHARES OF BENEFICIAL INTEREST
At June 30, 2011, 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, 2011 | Year Ended December 31, 2010 | |||||||||||||||
| Class 1 Shares: | Shares | Amount | Shares | Amount | ||||||||||||
Shares sold | 1,842,420 | $ | 20,496,589 | 4,235,745 | $ | 44,045,245 | ||||||||||
Shares issued in reinvestment of distributions | 324,453 | 3,575,470 | 603,956 | 5,483,924 | ||||||||||||
Shares redeemed | (5,450,810 | ) | (61,107,394 | ) | (7,418,014 | ) | (71,762,706 | ) | ||||||||
Net increase (decrease) | (3,283,937 | ) | $ | (37,035,335 | ) | (2,578,313 | ) | $ | (22,233,537 | ) | ||||||
Class 2 Shares: | ||||||||||||||||
Shares sold | 3,188,055 | $ | 35,975,742 | 9,770,557 | $ | 97,538,996 | ||||||||||
Shares issued in reinvestment of distributions | 304,558 | 3,331,863 | 627,805 | 5,656,521 | ||||||||||||
Shares redeemed | (5,885,349 | ) | (65,861,222 | ) | (20,231,375 | ) | (200,960,061 | ) | ||||||||
Net increase (decrease) | (2,392,736 | ) | $ | (26,553,617 | ) | (9,833,013 | ) | $ | (97,764,544 | ) | ||||||
Class 3 Shares: | ||||||||||||||||
Shares sold | 637,604 | $ | 7,230,771 | 1,343,547 | $ | 13,467,640 | ||||||||||
Shares issued in reinvestment of distributions | 51,154 | 556,039 | 105,791 | 947,886 | ||||||||||||
Shares redeemed | (1,228,743 | ) | (13,673,039 | ) | (2,390,224 | ) | (23,417,262 | ) | ||||||||
Net increase (decrease) | (539,985 | ) | $ | (5,886,229 | ) | (940,886 | ) | $ | (9,001,736 | ) | ||||||
Class 4 Shares: | ||||||||||||||||
Shares sold | 327,116 | $ | 3,668,307 | 1,189,893 | $ | 11,893,157 | ||||||||||
Shares issued on reinvestment of distributions | 28,739 | 314,405 | 52,250 | 471,295 | ||||||||||||
Shares redeemed | (660,667 | ) | (7,292,559 | ) | (641,932 | ) | (6,126,200 | ) | ||||||||
Net increase (decrease) | (304,812 | ) | $ | (3,309,847 | ) | 600,211 | $ | 6,238,252 | ||||||||
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 Fund 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 |
TD-24
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Developing Market Securities Fund
3. TRANSACTIONS WITH AFFILIATES (continued)
a. Management Fees
Effective May 1, 2011, 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 | |
| 1.100% | Up to and including $1 billion | |
| 1.050% | Over $1 billion, up to and including $5 billion | |
| 1.000% | Over $5 billion, up to and including $10 billion | |
| 0.950% | Over $10 billion, up to and including $15 billion | |
| 0.900% | Over $15 billion, up to and including $20 billion | |
| 0.850% | In excess of $20 billion |
Prior to May 1, 2011, the Fund paid 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 $500 million | |
| 1.200% | Over $500 million, up to and including $3 billion | |
| 1.150% | Over $3 billion, up to and including $4 billion | |
| 1.100% | Over $4 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 Trust’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, 2011, there were no credits earned.
TD-25
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Developing Market Securities Fund
5. INCOME TAXES
For tax purposes, capital losses may be carried over to offset future capital gains, if any. At December 31, 2010, the Fund had tax basis capital losses of $166,405,957 expiring in 2017.
Under the Regulated Investment Company Modernization Act of 2010, the Fund will be permitted to carry forward capital losses incurred in taxable years beginning after December 22, 2010 for an unlimited period. Post-enactment capital loss carryforwards will retain their character as either short-term or long-term capital losses rather than being considered short-term as under previous law. Any post-enactment capital losses generated will be required to be utilized prior to the losses incurred in pre-enactment tax years.
At June 30, 2011, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
Cost of investments | $ | 452,361,264 | ||
|
| |||
Unrealized appreciation | $ | 332,029,941 | ||
Unrealized depreciation | (8,355,668 | ) | ||
|
| |||
Net unrealized appreciation (depreciation) | $ | 323,674,273 | ||
|
| |||
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 corporate actions.
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, and corporate actions.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the period ended June 30, 2011, aggregated $37,796,019 and $100,495,194, 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
The Fund, together with other U.S. registered and foreign investment funds (collectively, Borrowers), managed by Franklin Templeton Investments, are borrowers in a joint syndicated senior unsecured credit facility totaling $750 million (Global Credit Facility) which matures on January 20, 2012. This Global Credit Facility provides 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 of 0.08% based upon the unused portion of the Global Credit Facility, which is reflected in other expenses on the Statement of Operations. During the period ended June 30, 2011, the Fund did not use the Global Credit Facility.
TD-26
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Developing Market Securities Fund
9. FAIR VALUE MEASUREMENTS
The Fund follows 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.
For movements between the levels within the fair value hierarchy, the Fund has adopted a policy of recognizing the transfers as of the date of the underlying event which caused the movement.
The following is a summary of the inputs used as of June 30, 2011, in valuing the Fund’s assets carried at fair value:
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
|
| |||||||||||||||
Assets: | ||||||||||||||||
Investments in Securities: | ||||||||||||||||
Equity Investmentsa,b | $ | 771,841,537 | $ | — | $ | — | $ | 771,841,537 | ||||||||
Short Term Investments | — | 4,194,000 | — | 4,194,000 | ||||||||||||
|
| |||||||||||||||
Total Investments in Securities | $ | 771,841,537 | $ | 4,194,000 | $ | — | $ | 776,035,537 | ||||||||
|
| |||||||||||||||
aIncludes common and preferred stocks.
bFor detailed country descriptions, see the accompanying Statement of Investments.
10. NEW ACCOUNTING PRONOUNCEMENTS
In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (IFRS). The amendments in the ASU will improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRS and include new guidance for certain fair value measurement principles and disclosure requirements. The ASU is effective for interim and annual periods beginning after December 15, 2011. The Fund is currently evaluating the impact, if any, of applying this provision.
11. SUBSEQUENT EVENTS
The Fund has evaluated subsequent events through the issuance of the financial statements 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 |
TD-27
Franklin Templeton Variable Insurance Products Trust
Tax Designation (unaudited)
Templeton Developing Markets Securities Fund
At December 31, 2010, 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 14, 2011, 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 | $ | 0.0279 | $ | 0.1512 | ||||
Class 2 | $ | 0.0279 | $ | 0.1247 | ||||
Class 3 | $ | 0.0279 | $ | 0.1255 | ||||
Class 4 | $ | 0.0279 | $ | 0.1215 | ||||
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 attributable to foreign securities held by the Fund, plus any foreign taxes withheld on these dividends.
TD-28
TEMPLETON FOREIGN SECURITIES FUND
We are pleased to bring you Templeton Foreign Securities Fund’s semiannual report for the period ended June 30, 2011.
Performance Summary as of 6/30/11
Templeton Foreign Securities Fund – Class 4 delivered a +5.97% total return for the six-month period ended 6/30/11.
Performance reflects the Fund’s Class 4 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 4
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.
TF-1
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.
Performance Overview
You can find the Fund’s six-month total return in the Performance Summary. The Fund outperformed its benchmark, the MSCI Europe, Australasia, Far East (EAFE) Index, which produced a +5.35% total return for the same period.1 Please note, index performance information is provided for reference and we do not attempt to track the index but rather undertake investments on the basis of fundamental research.
Economic and Market Overview
Global stock markets rose in the first half of 2011, though the positive momentum from the previous year waned as European sovereign debt turmoil escalated and signs emerged of an economic slowdown. Furthermore, geopolitical unrest sweeping the Middle East and North Africa roiled oil markets, and a devastating earthquake and tsunami in Japan severely disrupted global supply chains during the period. While the market recovered from these interferences, economic growth concerns persisted. Officials at the U.S. Federal Reserve Board (Fed) cut their growth forecast for the world’s largest economy, and manufacturing slowed in most major regions of the world. Japan’s earthquake, an early surge in commodity prices and a fading inventory restocking cycle were all blamed for declining economic leading indicators. Nascent monetary policy tightening in most parts of the world was also thought to inhibit growth and cool the commodities rally. Asian and emerging market policymakers tightened aggressively as inflation reached post-crisis highs in many regions, while the European Central Bank raised interest rates for the first time in two years, deviating from the extraordinarily accommodative path of the Fed, which undertook a second round of quantitative easing during the reporting period.
Amid concerns of sustained accommodative monetary policy and declining economic growth rates in the U.S., politicians debated whether to raise the nation’s debt ceiling. Sovereign debt concerns continued to plague Europe, with Greece, Ireland, Portugal and Spain subject to rating downgrades in the first half of 2011. At period-end,
1. Source: © 2011 Morningstar. One cannot invest directly in an index, and an index is not 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 or developing markets, involves additional risks, including currency fluctuations, economic instability, market volatility, and political and social instability. The Fund may have significant investments in one or more countries or in particular sectors, such as technology and financial services, from time to time, and may carry greater risk of adverse developments in a country or sector than a fund that invests more broadly. Smaller and midsize company securities can increase the risk of greater price fluctuations, particularly over the short term. The manager applies various techniques and analyses in making investment decisions for the Fund, but there can be no guarantee that these decisions will produce the desired results. The Fund’s prospectus also includes a description of the main investment risks.
TF-2
European politicians were working to pass painful austerity budgets despite fierce popular resistance, and discussions were ongoing about restructuring debt payments of the region’s most troubled sovereigns. Despite these challenges, continued corporate profit strength and still favorable economic growth prospects in some regions of the world supported stock prices. Equity market leadership rotated toward defensive sectors as risk aversion increased, buoying even U.S. Treasuries toward period-end as near-term demand for perceived safe havens outweighed longer term concerns about the deteriorating U.S. credit profile. The dollar ultimately declined, however, against most currencies, broadly reflecting divergent interest rate and/or economic growth expectations.
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 six months under review, our stock selection in the financials sector benefited the Fund’s performance relative to the benchmark MSCI EAFE Index.2 Within the sector, overweighted positions in diversified financial services company ING Groep (Netherlands), life assurance and pension products provider Aviva (U.K.) and insurance and asset management company AXA (France) delivered strong returns. Our overweighting and stock selection in the health care sector also aided performance, and major contributors included relatively large positions in pharmaceutical companies Merck KGaA (Germany), Roche Holding (Switzerland) and Sanofi (France).3 Other positions that helped relative results included telecommunication and Internet services provider China Telecom4 (China) in the telecommunication services sector and business software solutions company SAP (Germany) in the information technology sector.5
2. The financials sector comprises capital markets, commercial banks, diversified financial services, insurance, and real estate management and development in the SOI.
3. The health care sector comprises life sciences tools and services and pharmaceuticals in the SOI.
4. Not an index component.
5. The telecommunication services sector comprises diversified telecommunication services and wireless telecommunication services in the SOI. The information technology sector comprises communications equipment; computers and peripherals; electronic equipment, instruments and components; semiconductors and semiconductor equipment; and software in the SOI.
TF-3
In contrast, our overweighted allocation in the information technology sector detracted from relative performance, largely due to positions in electronic manufacturing services provider Flextronics International4 (Singapore), electronics and microchip maker Samsung Electronics4 (South Korea), and video game hardware and software manufacturer Nintendo (Japan). Stock selection in the industrials sector also hindered relative results, largely due to our position in Hays4 (U.K.), a provider of business-to-business services including distribution, recruitment and office support.6 Other key detractors were commercial bank KB Financial Group4 (South Korea) and oil and gas producer Reliance Industries4 (India).
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, 2011, the U.S. dollar declined in value relative to most 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, our stock selection in Europe boosted the Fund’s relative performance, as our investments in France, the Netherlands, Norway, Russia4 and the U.K. generally outperformed. Our decision to underweight Japan and our stock selection in Asia were also beneficial, particularly stocks in China4 and Hong Kong. In contrast, the Fund’s overweighting and stock selection in North America hindered results due to the underperformance of our investments in Canada4 and Bermuda.
Thank you for your participation in Templeton Foreign Securities Fund. We look forward to serving your future investment needs.
6. The industrials sector comprises aerospace and defense, commercial services and supplies, electrical equipment, industrial conglomerates, and professional services in the SOI.
The foregoing information reflects our analysis, opinions and portfolio holdings as of June 30, 2011, 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
6/30/11
| Company Sector/Industry, Country | % of Total Net Assets | |||
| Sanofi | 3.2% | |||
| Pharmaceuticals, France | ||||
| Vodafone Group PLC | 2.8% | |||
| Wireless Telecommunication Services, U.K. | ||||
| Roche Holding AG | 2.7% | |||
| Pharmaceuticals, Switzerland | ||||
| ING Groep NV | 2.5% | |||
| Diversified Financial Services, Netherlands | ||||
| Taiwan Semiconductor Manufacturing Co. Ltd. | 2.4% | |||
| Semiconductors & Semiconductor Equipment, Taiwan | ||||
| Samsung Electronics Co. Ltd. | 2.4% | |||
| Semiconductors & Semiconductor Equipment, South Korea | ||||
| Aviva PLC | 2.3% | |||
| Insurance, U.K. | ||||
| Statoil ASA | 2.2% | |||
| Oil, Gas & Consumable Fuels, Norway | ||||
| Tesco PLC | 2.1% | |||
| Food & Staples Retailing, U.K. | ||||
| GlaxoSmithKline PLC | 2.1% | |||
| Pharmaceuticals, 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).
TF-4
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 4
TF-5
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 4 | Beginning Account Value 1/1/11 | Ending Account Value 6/30/11 | Fund-Level Expenses Incurred During Period* 1/1/11–6/30/11 | |||||||||
Actual | $ | 1,000 | $ | 1,059.70 | $ | 5.77 | ||||||
Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,019.19 | $ | 5.66 | ||||||
*Expenses are calculated using the most recent six-month annualized expense ratio for the Fund’s Class 4 shares (1.13%), 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.
TF-6
Franklin Templeton Variable Insurance Products Trust
Financial Highlights
Templeton Foreign Securities Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 1 | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 14.54 | $ | 13.68 | $ | 10.95 | $ | 20.57 | $ | 19.00 | $ | 15.84 | ||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.30 | 0.28 | 0.25 | 0.45 | 0.45 | 0.46 | ||||||||||||||||||
Net realized and unrealized gains (losses) | 0.59 | 0.86 | 3.39 | (8.01 | ) | 2.46 | 2.94 | |||||||||||||||||
Total from investment operations | 0.89 | 1.14 | 3.64 | (7.56 | ) | 2.91 | 3.40 | |||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income | (0.28 | ) | (0.28 | ) | (0.43 | ) | (0.45 | ) | (0.44 | ) | (0.24 | ) | ||||||||||||
Net realized gains | — | — | (0.48 | ) | (1.61 | ) | (0.90 | ) | — | |||||||||||||||
Total distributions | (0.28 | ) | (0.28 | ) | (0.91 | ) | (2.06 | ) | (1.34 | ) | (0.24 | ) | ||||||||||||
Redemption feesc | — | — | — | — | — | — | ||||||||||||||||||
Net asset value, end of period | $ | 15.15 | $ | 14.54 | $ | 13.68 | $ | 10.95 | $ | 20.57 | $ | 19.00 | ||||||||||||
Total returnd | 6.16% | 8.67% | 37.34% | (40.23)% | 15.79% | 21.70% | ||||||||||||||||||
Ratios to average net assetse | ||||||||||||||||||||||||
Expenses | 0.78% | 0.78% | f | 0.78% | f | 0.77% | f | 0.75% | f | 0.75% | f | |||||||||||||
Net investment income | 3.98% | 2.10% | 2.28% | 2.82% | 2.22% | 2.63% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 319,477 | $ | 321,282 | $ | 318,173 | $ | 262,725 | $ | 531,377 | $ | 594,991 | ||||||||||||
Portfolio turnover rate | 11.67% | 19.16% | 22.50% | 18.27% | 26.74% | 18.97% | g | |||||||||||||||||
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 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.
TF-7
Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Templeton Foreign Securities Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 2 | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 14.29 | $ | 13.45 | $ | 10.76 | $ | 20.25 | $ | 18.73 | $ | 15.63 | ||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.28 | 0.25 | 0.22 | 0.40 | 0.38 | 0.40 | ||||||||||||||||||
Net realized and unrealized gains (losses) | 0.57 | 0.84 | 3.34 | (7.89 | ) | 2.44 | 2.91 | |||||||||||||||||
Total from investment operations | 0.85 | 1.09 | 3.56 | (7.49 | ) | 2.82 | 3.31 | |||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income | (0.24 | ) | (0.25 | ) | (0.39 | ) | (0.39 | ) | (0.40 | ) | (0.21 | ) | ||||||||||||
Net realized gains | — | — | (0.48 | ) | (1.61 | ) | (0.90 | ) | — | |||||||||||||||
Total distributions | (0.24 | ) | (0.25 | ) | (0.87 | ) | (2.00 | ) | (1.30 | ) | (0.21 | ) | ||||||||||||
Redemption feesc | — | — | — | — | — | — | ||||||||||||||||||
Net asset value, end of period | $ | 14.90 | $ | 14.29 | $ | 13.45 | $ | 10.76 | $ | 20.25 | $ | 18.73 | ||||||||||||
Total returnd | 6.02% | 8.41% | 37.04% | (40.38)% | 15.46% | 21.44% | ||||||||||||||||||
Ratios to average net assetse | ||||||||||||||||||||||||
Expenses | 1.03% | 1.03% | f | 1.03% | f | 1.02% | f | 1.00% | f | 1.00% | f | |||||||||||||
Net investment income | 3.73% | 1.85% | 2.03% | 2.57% | 1.97% | 2.38% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 2,065,643 | $ | 2,090,757 | $ | 2,010,268 | $ | 1,702,038 | $ | 3,255,154 | $ | 2,941,374 | ||||||||||||
Portfolio turnover rate | 11.67% | 19.16% | 22.50% | 18.27% | 26.74% | 18.97% | g | |||||||||||||||||
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 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.
TF-8
Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Templeton Foreign Securities Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 3 | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||||||
| ||||||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 14.24 | $ | 13.37 | $ | 10.70 | $ | 20.18 | $ | 18.68 | $ | 15.60 | ||||||||||||
|
| |||||||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.27 | 0.25 | 0.25 | 0.39 | 0.37 | 0.37 | ||||||||||||||||||
Net realized and unrealized gains (losses) | 0.58 | 0.84 | 3.30 | (7.84 | ) | 2.45 | 2.94 | |||||||||||||||||
|
| |||||||||||||||||||||||
Total from investment operations | 0.85 | 1.09 | 3.55 | (7.45 | ) | 2.82 | 3.31 | |||||||||||||||||
|
| |||||||||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income | (0.24 | ) | (0.22 | ) | (0.40 | ) | (0.42 | ) | (0.42 | ) | (0.23 | ) | ||||||||||||
Net realized gains | — | — | (0.48 | ) | (1.61 | ) | (0.90 | ) | — | |||||||||||||||
|
| |||||||||||||||||||||||
Total distributions | (0.24 | ) | (0.22 | ) | (0.88 | ) | (2.03 | ) | (1.32 | ) | (0.23 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Redemption feesc | — | — | — | — | — | — | ||||||||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ | 14.85 | $ | 14.24 | $ | 13.37 | $ | 10.70 | $ | 20.18 | $ | 18.68 | ||||||||||||
|
| |||||||||||||||||||||||
Total returnd | 6.03% | 8.41% | 37.20% | (40.39)% | 15.45% | 21.46% | ||||||||||||||||||
Ratios to average net assetse | ||||||||||||||||||||||||
Expenses | 1.03% | 1.03% | f | 1.03% | f | 1.02% | f | 1.00% | f | 1.00% | f | |||||||||||||
Net investment income | 3.73% | 1.85% | 2.03% | 2.57% | 1.97% | 2.38% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 108,767 | $ | 108,766 | $ | 115,364 | $ | 271,061 | $ | 313,505 | $ | 150,417 | ||||||||||||
Portfolio turnover rate | 11.67% | 19.16% | 22.50% | 18.27% | 26.74% | 18.97% | g | |||||||||||||||||
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 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.
TF-9
Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Templeton Foreign Securities Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||||||
| Class 4 | 2010 | 2009 | 2008 | |||||||||||||
Per share operating performance | ||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||
Net asset value, beginning of period | $ | 14.43 | $ | 13.59 | $ | 10.91 | $ | 18.90 | ||||||||
Income from investment operationsb: | ||||||||||||||||
Net investment incomec | 0.28 | 0.17 | 0.21 | 0.15 | ||||||||||||
Net realized and unrealized gains (losses) | 0.57 | 0.92 | 3.37 | (6.08 | ) | |||||||||||
Total from investment operations | 0.85 | 1.09 | 3.58 | (5.93 | ) | |||||||||||
Less distributions from: | ||||||||||||||||
Net investment income | (0.25 | ) | (0.25 | ) | (0.42 | ) | (0.45 | ) | ||||||||
Net realized gains | — | — | (0.48 | ) | (1.61 | ) | ||||||||||
Total distributions | (0.25 | ) | (0.25 | ) | (0.90 | ) | (2.06 | ) | ||||||||
Redemption feesd | — | — | — | — | ||||||||||||
Net asset value, end of period | $ | 15.03 | $ | 14.43 | $ | 13.59 | $ | 10.91 | ||||||||
Total returne | 5.97% | 8.38% | 36.84% | (35.15)% | ||||||||||||
Ratios to average net assetsf | ||||||||||||||||
Expenses | 1.13% | 1.13% | g | 1.13% | g | 1.12% | g | |||||||||
Net investment income | 3.63% | 1.75% | 1.93% | 2.47% | ||||||||||||
Supplemental data | ||||||||||||||||
Net assets, end of period (000’s) | $ | 363,438 | $ | 305,505 | $ | 48,501 | $ | 14,287 | ||||||||
Portfolio turnover rate | 11.67% | 19.16% | 22.50% | 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 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.
TF-10
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited)
| Templeton Foreign Securities Fund | Country | Shares/Units | Value | |||||||
Common Stocks and Other Equity Interests 95.7% | ||||||||||
Aerospace & Defense 0.7% | ||||||||||
BAE Systems PLC | United Kingdom | 3,909,200 | $ | 19,985,429 | ||||||
Automobiles 1.8% | ||||||||||
aMazda Motor Corp. | Japan | 5,453,000 | 14,292,069 | |||||||
Toyota Motor Corp., ADR | �� | Japan | 440,460 | 36,302,713 | ||||||
| 50,594,782 | ||||||||||
Capital Markets 2.7% | ||||||||||
Credit Suisse Group AG | Switzerland | 748,380 | 29,105,645 | |||||||
KKR & Co., LP | United States | 1,155,000 | 18,849,600 | |||||||
Nomura Holdings Inc. | Japan | 5,636,100 | 27,723,689 | |||||||
| 75,678,934 | ||||||||||
Commercial Banks 6.4% | ||||||||||
BNP Paribas | France | 430,520 | 33,232,480 | |||||||
DBS Group Holdings Ltd. | Singapore | 2,993,520 | 35,728,245 | |||||||
HSBC Holdings PLC | United Kingdom | 1,865,200 | 18,468,039 | |||||||
KB Financial Group Inc., ADR | South Korea | 1,220,681 | 58,348,552 | |||||||
UniCredit SpA | Italy | 10,439,019 | 22,101,690 | |||||||
United Overseas Bank Ltd. | Singapore | 985,000 | 15,781,812 | |||||||
| 183,660,818 | ||||||||||
Commercial Services & Supplies 1.4% | ||||||||||
Downer EDI Ltd. | Australia | 4,000,712 | 15,874,345 | |||||||
G4S PLC | United Kingdom | 5,045,810 | 22,646,113 | |||||||
| 38,520,458 | ||||||||||
Communications Equipment 0.8% | ||||||||||
Telefonaktiebolaget LM Ericsson, B, ADR | Sweden | 1,675,840 | 24,098,579 | |||||||
Computers & Peripherals 1.8% | ||||||||||
Compal Electronics Inc. | Taiwan | 28,536,431 | 34,879,677 | |||||||
Lite-On Technology Corp. | Taiwan | 11,743,407 | 15,414,024 | |||||||
| 50,293,701 | ||||||||||
Construction Materials 0.5% | ||||||||||
CRH PLC | Ireland | 659,820 | 14,610,917 | |||||||
Containers & Packaging 0.7% | ||||||||||
Rexam PLC | United Kingdom | 3,021,290 | 18,559,043 | |||||||
Diversified Financial Services 2.5% | ||||||||||
aING Groep NV | Netherlands | 5,880,644 | 72,392,633 | |||||||
Diversified Telecommunication Services 9.2% | ||||||||||
China Telecom Corp. Ltd., H | China | 69,378,357 | 44,845,072 | |||||||
France Telecom SA | France | 2,164,143 | 46,023,641 | |||||||
Singapore Telecommunications Ltd. | Singapore | 20,651,000 | 53,128,030 | |||||||
Telefonica SA, ADR | Spain | 1,813,382 | 44,409,725 | |||||||
Telekom Austria AG | Austria | 1,711,400 | 21,839,724 | |||||||
Telenor ASA | Norway | 3,226,804 | 52,396,604 | |||||||
| 262,642,796 | ||||||||||
Electric Utilities 2.0% | ||||||||||
E.ON AG | Germany | 917,590 | 26,127,180 | |||||||
Iberdrola SA | Spain | 3,537,921 | 31,485,979 | |||||||
| 57,613,159 | ||||||||||
TF-11
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Templeton Foreign Securities Fund | Country | Shares/Units | Value | |||||||
Common Stocks and Other Equity Interests (continued) | ||||||||||
Electronic Equipment, Instruments & Components 1.1% | ||||||||||
aFlextronics International Ltd. | Singapore | 4,961,670 | $ | 31,853,921 | ||||||
Energy Equipment & Services 1.1% | ||||||||||
Aker Solutions ASA | Norway | 1,617,940 | 32,252,821 | |||||||
Food & Staples Retailing 2.1% | ||||||||||
Tesco PLC | United Kingdom | 9,326,670 | 60,169,114 | |||||||
Food Products 0.9% | ||||||||||
Nestle SA | Switzerland | 407,850 | 25,345,103 | |||||||
Hotels, Restaurants & Leisure 0.8% | ||||||||||
bAutogrill SpA | Italy | 1,655,033 | 21,720,418 | |||||||
Industrial Conglomerates 3.5% | ||||||||||
Hutchison Whampoa Ltd. | Hong Kong | 3,794,709 | 40,961,937 | |||||||
Koninklijke Philips Electronics NV | Netherlands | 801,670 | 20,588,616 | |||||||
Siemens AG | Germany | 285,414 | 39,133,596 | |||||||
| 100,684,149 | ||||||||||
Insurance 11.1% | ||||||||||
ACE Ltd. | United States | 377,449 | 24,843,693 | |||||||
aAIA Group Ltd. | Hong Kong | 11,111,000 | 38,551,354 | |||||||
Aviva PLC | United Kingdom | 9,269,960 | 65,319,042 | |||||||
AXA SA | France | 2,547,968 | 57,899,647 | |||||||
Muenchener Rueckversicherungs-Gesellschaft AG | Germany | 249,150 | 38,063,471 | |||||||
NKSJ Holdings Inc. | Japan | 4,218,000 | 27,716,564 | |||||||
PartnerRe Ltd. | Bermuda | 196,480 | 13,527,648 | |||||||
aSwiss Re Ltd. | Switzerland | 917,340 | 51,507,637 | |||||||
| 317,429,056 | ||||||||||
Life Sciences Tools & Services 0.5% | ||||||||||
Lonza Group AG | Switzerland | 175,440 | 13,729,724 | |||||||
Media 2.1% | ||||||||||
Reed Elsevier NV | Netherlands | 2,017,693 | 27,079,738 | |||||||
Vivendi SA | France | 1,178,959 | 32,782,874 | |||||||
| 59,862,612 | ||||||||||
Metals & Mining 0.5% | ||||||||||
POSCO | South Korea | 34,202 | 14,873,222 | |||||||
Multi-Utilities 0.9% | ||||||||||
GDF Suez | France | 697,431 | 25,522,165 | |||||||
Multiline Retail 0.5% | ||||||||||
Marks & Spencer Group PLC | United Kingdom | 2,350,320 | 13,641,541 | |||||||
Oil, Gas & Consumable Fuels 10.7% | ||||||||||
BP PLC | United Kingdom | 4,406,715 | 32,423,127 | |||||||
Gazprom, ADR | Russia | 2,623,000 | 38,164,650 | |||||||
Reliance Industries Ltd. | India | 998,145 | 20,074,724 | |||||||
Royal Dutch Shell PLC, B | United Kingdom | 1,292,973 | 46,124,114 | |||||||
Sasol, ADR | South Africa | 372,840 | 19,719,508 | |||||||
Statoil ASA | Norway | 2,455,740 | 62,193,686 | |||||||
Talisman Energy Inc. | Canada | 1,506,600 | 30,955,501 | |||||||
Total SA, B | France | 979,926 | 56,671,066 | |||||||
| 306,326,376 | ||||||||||
TF-12
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Templeton Foreign Securities Fund | Country | Shares/Units | Value | |||||||
Common Stocks and Other Equity Interests (continued) | ||||||||||
Pharmaceuticals 10.3% | ||||||||||
GlaxoSmithKline PLC | United Kingdom | 2,772,585 | $ | 59,370,410 | ||||||
Merck KGaA | Germany | 405,300 | 44,069,182 | |||||||
Novartis AG | Switzerland | 360,330 | 22,070,641 | |||||||
Roche Holding AG | Switzerland | 468,100 | 78,332,148 | |||||||
Sanofi | France | 1,127,925 | 90,681,019 | |||||||
| 294,523,400 | ||||||||||
Professional Services 1.4% | ||||||||||
Adecco SA | Switzerland | 318,420 | 20,412,510 | |||||||
Hays PLC | United Kingdom | 11,353,070 | 18,776,268 | |||||||
| 39,188,778 | ||||||||||
Real Estate Management & Development 1.0% | ||||||||||
Cheung Kong (Holdings) Ltd. | Hong Kong | 1,973,922 | 28,866,556 | |||||||
Semiconductors & Semiconductor Equipment 5.9% | ||||||||||
Infineon Technologies AG | Germany | 1,103,225 | 12,387,575 | |||||||
Samsung Electronics Co. Ltd. | South Korea | 89,088 | 68,965,968 | |||||||
Siliconware Precision Industries Co. | Taiwan | 14,515,000 | 18,623,514 | |||||||
Taiwan Semiconductor Manufacturing Co. Ltd. | Taiwan | 27,781,526 | 69,650,370 | |||||||
| 169,627,427 | ||||||||||
Software 2.8% | ||||||||||
Nintendo Co. Ltd. | Japan | 166,400 | 31,148,972 | |||||||
SAP AG, ADR | Germany | 370,760 | 22,486,594 | |||||||
Trend Micro Inc. | Japan | 868,100 | 26,839,338 | |||||||
| 80,474,904 | ||||||||||
Specialty Retail 2.8% | ||||||||||
Kingfisher PLC | United Kingdom | 11,166,186 | 47,892,834 | |||||||
USS Co. Ltd. | Japan | 431,520 | 33,393,821 | |||||||
| 81,286,655 | ||||||||||
Textiles, Apparel & Luxury Goods 0.2% | ||||||||||
Yue Yuen Industrial Holdings Ltd. | Hong Kong | 2,093,000 | 6,643,377 | |||||||
Trading Companies & Distributors 0.8% | ||||||||||
Itochu Corp. | Japan | 2,102,500 | 21,754,953 | |||||||
Wireless Telecommunication Services 4.2% | ||||||||||
China Mobile Ltd. | China | 2,340,000 | 21,680,728 | |||||||
Mobile TeleSystems, ADR | Russia | 914,865 | 17,400,732 | |||||||
Vodafone Group PLC, ADR | United Kingdom | 2,996,800 | 80,074,496 | |||||||
| 119,155,956 | ||||||||||
Total Common Stocks and Other Equity Interests | 2,733,583,477 | |||||||||
Preferred Stocks (Cost $2,178,441) 1.2% | ||||||||||
Metals & Mining 1.2% | ||||||||||
Vale SA, ADR, pfd., A | Brazil | 1,210,222 | 35,048,029 | |||||||
Total Investments before Short Term Investments | 2,768,631,506 | |||||||||
TF-13
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Templeton Foreign Securities Fund | Country | Shares/Units | Value | |||||||
Short Term Investments 3.3% | ||||||||||
Money Market Funds (Cost $80,534,394) 2.8% | ||||||||||
a,cInstitutional Fiduciary Trust Money Market Portfolio | United States | 80,534,394 | $ | 80,534,394 | ||||||
dInvestments from Cash Collateral Received for Loaned Securities | ||||||||||
Money Market Funds 0.5% | ||||||||||
eBNY Mellon Overnight Government Fund, 0.05% | United States | 12,457,015 | 12,457,015 | |||||||
Total Investments (Cost $2,494,165,699) 100.2% | 2,861,622,915 | |||||||||
Other Assets, less Liabilities (0.2)% | (4,297,400 | ) | ||||||||
Net Assets 100.0% | $ | 2,857,325,515 | ||||||||
See Abbreviations on page TF-25.
aNon-income producing.
bA portion or all of the security is on loan at June 30, 2011. See Note 1(c).
cSee Note 7 regarding investments in the Institutional Fiduciary Trust Money Market Portfolio.
dSee Note 1(c) regarding securities on loan.
eThe rate shown is the annualized seven-day yield at period end.
The accompanying notes are an integral part of these financial statements.
TF-14
Franklin Templeton Variable Insurance Products Trust
Financial Statements
Statement of Assets and Liabilities
June 30, 2011 (unaudited)
| Templeton Foreign Securities Fund | ||||
Assets: | ||||
Investments in securities: | ||||
Cost - Unaffiliated issuers | $ | 2,413,631,305 | ||
Cost - Sweep Money Fund (Note 7) | 80,534,394 | |||
|
| |||
Total cost of investments | $ | 2,494,165,699 | ||
|
| |||
Value - Unaffiliated issuers | $ | 2,781,088,521 | ||
Value - Sweep Money Fund (Note 7) | 80,534,394 | |||
|
| |||
Total value of investments (includes securities loaned in the amount $12,018,634) | 2,861,622,915 | |||
Cash | 1,652,499 | |||
Receivables: | ||||
Capital shares sold | 596,367 | |||
Dividends | 13,192,332 | |||
Other assets | 724 | |||
|
| |||
Total assets | 2,877,064,837 | |||
|
| |||
Liabilities: | ||||
Payables: | ||||
Capital shares redeemed | 3,838,837 | |||
Affiliates | 2,836,079 | |||
Payable upon return of securities loaned | 12,457,015 | |||
Accrued expenses and other liabilities | 607,391 | |||
|
| |||
Total liabilities | 19,739,322 | |||
|
| |||
Net assets, at value | $ | 2,857,325,515 | ||
|
| |||
Net assets consist of: | ||||
Paid-in capital | $ | 2,609,256,192 | ||
Undistributed net investment income | 53,463,787 | |||
Net unrealized appreciation (depreciation) | 367,819,795 | |||
Accumulated net realized gain (loss) | (173,214,259 | ) | ||
|
| |||
Net assets, at value | $ | 2,857,325,515 | ||
|
| |||
The accompanying notes are an integral part of these financial statements.
TF-15
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Assets and Liabilities (continued)
June 30, 2011 (unaudited)
| Templeton Foreign Securities Fund | ||||
Class 1: | ||||
Net assets, at value | $ | 319,476,897 | ||
Shares outstanding | 21,085,114 | |||
Net asset value and maximum offering price per share | $ | 15.15 | ||
Class 2: | ||||
Net assets, at value | $ | 2,065,643,225 | ||
Shares outstanding | 138,608,418 | |||
Net asset value and maximum offering price per share | $ | 14.90 | ||
Class 3: | ||||
Net assets, at value | $ | 108,767,171 | ||
Shares outstanding | 7,324,953 | |||
Net asset value and maximum offering price per sharea | $ | 14.85 | ||
Class 4: | ||||
Net assets, at value | $ | 363,438,222 | ||
Shares outstanding | 24,182,943 | |||
Net asset value and maximum offering price per share | $ | 15.03 | ||
aRedemption price is equal to net asset value less redemption fees retained by the fund.
The accompanying notes are an integral part of these financial statements.
TF-16
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Operations
for the six months ended June 30, 2011 (unaudited)
| Templeton Foreign Securities Fund | ||||
Investment income: | ||||
Dividends (net of foreign taxes of $7,409,801) | $ | 65,444,900 | ||
Income from securities loaned | 3,193,310 | |||
|
| |||
Total investment income | 68,638,210 | |||
|
| |||
Expenses: | ||||
Management fees (Note 3a) | 9,160,229 | |||
Administrative fees (Note 3b) | 1,366,364 | |||
Distribution fees: (Note 3c) | ||||
Class 2 | 2,640,889 | |||
Class 3 | 138,214 | |||
Class 4 | 589,614 | |||
Unaffiliated transfer agent fees | 3,174 | |||
Custodian fees (Note 4) | 284,486 | |||
Reports to shareholders | 321,977 | |||
Professional fees | 37,595 | |||
Trustees’ fees and expenses | 5,121 | |||
Other | 29,049 | |||
|
| |||
Total expenses | 14,576,712 | |||
|
| |||
Net investment income | 54,061,498 | |||
|
| |||
Realized and unrealized gains (losses): | ||||
Net realized gain (loss) from: | ||||
Investments | 92,741,145 | |||
Foreign currency transactions | 214,920 | |||
|
| |||
Net realized gain (loss) | 92,956,065 | |||
|
| |||
Net change in unrealized appreciation (depreciation) on: | ||||
Investments | 21,751,629 | |||
Translation of other assets and liabilities denominated in foreign currencies | 173,398 | |||
|
| |||
Net change in unrealized appreciation (depreciation) | 21,925,027 | |||
|
| |||
Net realized and unrealized gain (loss) | 114,881,092 | |||
|
| |||
Net increase (decrease) in net assets resulting from operations | $ | 168,942,590 | ||
|
| |||
The accompanying notes are an integral part of these financial statements.
TF-17
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statements of Changes in Net Assets
| Templeton Foreign Securities Fund | ||||||||
| Six Months Ended June 30, 2011 (unaudited) | Year Ended December 31, 2010 | |||||||
Increase (decrease) in net assets: | ||||||||
Operations: | ||||||||
Net investment income | $ | 54,061,498 | $ | 47,212,887 | ||||
Net realized gain (loss) from investments and foreign currency transactions | 92,956,065 | 35,915,484 | ||||||
Net change in unrealized appreciation (depreciation) on investments and translation of other assets and liabilities denominated in foreign currencies | 21,925,027 | 171,263,300 | ||||||
Net increase (decrease) in net assets resulting from operations | 168,942,590 | 254,391,671 | ||||||
Distributions to shareholders from: | ||||||||
Net investment income: | ||||||||
Class 1 | (5,782,491 | ) | (6,186,591 | ) | ||||
Class 2 | (33,309,204 | ) | (35,909,578 | ) | ||||
Class 3 | (1,749,311 | ) | (1,738,264 | ) | ||||
Class 4 | (5,966,192 | ) | (1,159,055 | ) | ||||
Total distributions to shareholders | (46,807,198 | ) | (44,993,488 | ) | ||||
Capital share transactions: (Note 2) | ||||||||
Class 1 | (15,547,422 | ) | (16,391,025 | ) | ||||
Class 2 | (116,087,783 | ) | (56,686,127 | ) | ||||
Class 3 | (4,751,771 | ) | (13,133,254 | ) | ||||
Class 4 | 45,264,268 | 210,807,534 | ||||||
Total capital share transactions | (91,122,708 | ) | 124,597,128 | |||||
Redemption fees | 2,672 | 9,228 | ||||||
Net increase (decrease) in net assets | 31,015,356 | 334,004,539 | ||||||
Net assets: | ||||||||
Beginning of period | 2,826,310,159 | 2,492,305,620 | ||||||
End of period | $ | 2,857,325,515 | $ | 2,826,310,159 | ||||
Undistributed net investment income included in net assets: | ||||||||
End of period | $ | 53,463,787 | $ | 46,209,487 | ||||
The accompanying notes are an integral part of these financial statements.
TF-18
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 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 generally 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.
The following summarizes the Fund’s significant accounting policies.
a. Financial Instrument Valuation
The Fund’s investments in securities and other financial instruments are carried at fair value daily. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. Under procedures approved by the Trust’s Board of Trustees, the Fund may utilize independent pricing services, quotations from securities and financial instrument dealers, and other market sources to determine fair value.
Equity securities listed on an 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. 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. 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. Over-the-counter securities 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 securities and other financial instruments for which market prices are not readily available or which may not be reliably priced. Under these procedures, the Fund primarily employs a market-based approach which may use related or comparable assets or liabilities, recent transactions, market multiples, book values, and other relevant information for the investment to determine the fair value of the investment. The Fund may also use an income-based valuation approach in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the investments. Due to the inherent uncertainty of valuations of such investments, the fair values may differ significantly from the values that would have been used had an active market existed.
Trading in securities on foreign securities stock exchanges and over-the-counter markets may be completed before the daily close of business on the NYSE. Occasionally, events occur between the time at which trading in a foreign security is completed and the close of the NYSE that might call into question the reliability of the value of a portfolio security held by the Fund. As a result, differences may arise between the value of the Fund’s portfolio securities as determined at the foreign market close and the latest indications of value at the close of the NYSE. In order to minimize the potential for these differences, 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 that may call into question the reliability of the values of the foreign securities 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.
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. The Fund may enter into foreign currency
TF-19
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)
exchange contracts to facilitate transactions denominated in a foreign currency. 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. Portfolio securities and assets and liabilities denominated in foreign currencies contain risks that those currencies will decline in value relative to the U.S. dollar. 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 Trust’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 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 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.
d. Income Taxes
It is the Fund’s policy to qualify as a regulated investment company under the Internal Revenue Code. The Fund intends to distribute to shareholders substantially all of its taxable income and net realized gains to relieve it from federal income and excise taxes. As a result, no provision for U.S. federal income taxes is required. The Fund files U.S. income tax returns as well as tax returns in certain other jurisdictions. The Fund records a provision for taxes in its financial statements including penalties and interest, if any, for a tax position taken on a tax return (or expected to be taken) when it fails to meet the more likely than not (a greater than 50% probability) threshold and based on the technical merits, the tax position may not be sustained upon examination by the tax authorities. As of June 30, 2011, and for all open tax years, the Fund has determined that no provision for income tax is required in the Fund’s financial statements. Open tax years are those that remain subject to examination and are based on each tax jurisdiction statute of limitation.
The Fund may be subject to foreign taxation related to income received, capital gains on the sale of securities and certain foreign currency transactions in the foreign jurisdictions in which it invests. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist in the foreign markets in which the Fund invests. When a capital gain tax is determined to apply the Fund records an estimated deferred tax liability for unrealized gains on these securities in an amount that would be payable if the securities were disposed of on the valuation date.
TF-20
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Foreign Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
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 interests in an insurance company subaccount that invests in Class 3 shares of the Fund will be subject to a 1.0% short term trading fee if the interest in the subaccount has been held for less than 60 days. Such fees are retained by the Fund and accounted for as an addition to paid-in capital, allocated to each class of shares based upon the relative proportion of net assets of each class.
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.
TF-21
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Foreign Securities Fund
2. SHARES OF BENEFICIAL INTEREST
At June 30, 2011, 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, 2011 | Year Ended December 31, 2010 | |||||||||||||||
| Class 1 Shares: | Shares | Amount | Shares | Amount | ||||||||||||
Shares sold | 360,037 | $ | 5,500,124 | 1,834,739 | $ | 24,009,210 | ||||||||||
Shares issued in reinvestment of distributions | 392,832 | 5,782,491 | 500,533 | 6,186,591 | ||||||||||||
Shares redeemed | (1,757,208 | ) | (26,830,037 | ) | (3,507,687 | ) | (46,586,826 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | (1,004,339 | ) | $ | (15,547,422 | ) | (1,172,415 | ) | $ | (16,391,025 | ) | ||||||
| ||||||||||||||||
Class 2 Shares: | ||||||||||||||||
Shares sold | 6,101,254 | $ | 91,105,850 | 24,359,823 | $ | 304,453,001 | ||||||||||
Shares issued in reinvestment of distributions | 2,300,359 | 33,309,203 | 2,950,664 | 35,909,578 | ||||||||||||
Shares redeemed | (16,069,753 | ) | (240,502,836 | ) | (30,526,296 | ) | (397,048,706 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | (7,668,140 | ) | $ | (116,087,783 | ) | (3,215,809 | ) | $ | (56,686,127 | ) | ||||||
| ||||||||||||||||
Class 3 Shares: | ||||||||||||||||
Shares sold | 366,841 | $ | 5,465,038 | 488,049 | $ | 6,145,010 | ||||||||||
Shares issued in reinvestment of distributions | 121,227 | 1,749,311 | 143,421 | 1,738,264 | ||||||||||||
Shares redeemed | (800,456 | ) | (11,966,120 | ) | (1,625,745 | ) | (21,016,528 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | (312,388 | ) | $ | (4,751,771 | ) | (994,275 | ) | $ | (13,133,254 | ) | ||||||
| ||||||||||||||||
Class 4 Shares: | ||||||||||||||||
Shares sold | 4,488,433 | $ | 67,795,298 | 19,836,996 | $ | 240,414,850 | ||||||||||
Shares issued on reinvestment of distributions | 408,643 | 5,966,192 | 94,309 | 1,159,055 | ||||||||||||
Shares redeemed | (1,885,338 | ) | (28,497,222 | ) | (2,328,115 | ) | (30,766,371 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | 3,011,738 | $ | 45,264,268 | 17,603,190 | $ | 210,807,534 | ||||||||||
| ||||||||||||||||
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 Fund 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 |
TF-22
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Foreign 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:
| 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 Trust’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.
e. 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, 2011, 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, 2010, the Fund had tax basis capital losses of $265,728,291 expiring in 2017.
Under the Regulated Investment Company Modernization Act of 2010, the Fund will be permitted to carry forward capital losses incurred in taxable years beginning after December 22, 2010 for an unlimited period. Post-enactment capital loss carryforwards will retain their character as either short-term or long-term capital losses rather than being considered short-term as under previous law. Any post-enactment capital losses generated will be required to be utilized prior to the losses incurred in pre-enactment tax years.
At June 30, 2011, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
Cost of investments | $ | 2,494,607,736 | ||
|
| |||
Unrealized appreciation | $ | 512,240,125 | ||
Unrealized depreciation | (145,224,946 | ) | ||
|
| |||
Net unrealized appreciation (depreciation) | $ | 367,015,179 | ||
|
| |||
TF-23
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Foreign Securities Fund
5. INCOME TAXES (continued)
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, 2011, aggregated $332,560,124 and $427,908,723, respectively.
7. INVESTMENTS IN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO
The Fund invests 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.
9. CREDIT FACILITY
The Fund, together with other U.S. registered and foreign investment funds (collectively, Borrowers), managed by Franklin Templeton Investments, are borrowers in a joint syndicated senior unsecured credit facility totaling $750 million (Global Credit Facility) which matures on January 20, 2012. This Global Credit Facility provides 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 of 0.08% based upon the unused portion of the Global Credit Facility, which is reflected in other expenses on the Statement of Operations. During the period ended June 30, 2011, the Fund did not use the Global Credit Facility.
10. FAIR VALUE MEASUREMENTS
The Fund follows 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.) |
TF-24
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Foreign Securities Fund
10. FAIR VALUE MEASUREMENTS (continued)
| • | 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.
For movements between the levels within the fair value hierarchy, the Fund has adopted a policy of recognizing the transfers as of the date of the underlying event which caused the movement.
The following is a summary of the inputs used as of June 30, 2011, 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 | $ | 2,768,631,506 | $ | — | $ | — | $ | 2,768,631,506 | ||||||||
Short Term Investments | 80,534,394 | 12,457,015 | — | 92,991,409 | ||||||||||||
|
| |||||||||||||||
Total Investments in Securities | $ | 2,849,165,900 | $ | 12,457,015 | $ | — | $ | 2,861,622,915 | ||||||||
|
| |||||||||||||||
aIncludes common and preferred stock as well as other equity investments.
bFor detailed industry descriptions, see the accompanying Statement of Investments.
11. NEW ACCOUNTING PRONOUNCEMENTS
In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (IFRS). The amendments in the ASU will improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRS and include new guidance for certain fair value measurement principles and disclosure requirements. The ASU is effective for interim and annual periods beginning after December 15, 2011. The Fund is currently evaluating the impact, if any, of applying this provision.
12. SUBSEQUENT EVENTS
The Fund has evaluated subsequent events through the issuance of the financial statements and determined that no events have occurred that require disclosure.
ABBREVIATIONS | ||||
| Selected Portfolio | ||||
| ADR - American Depository Receipt |
TF-25
Franklin Templeton Variable Insurance Products Trust
Tax Designation (unaudited)
Templeton Foreign Securities Fund
At December 31, 2010, 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 (Code). This designation will allow shareholders of record on June 14, 2011, 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 | $ | 0.0382 | $ | 0.3182 | ||||
Class 2 | $ | 0.0382 | $ | 0.2831 | ||||
Class 3 | $ | 0.0382 | $ | 0.2821 | ||||
Class 4 | $ | 0.0382 | $ | 0.2942 | ||||
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 3 1-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 attributable to foreign securities held by the Fund, plus any foreign taxes withheld on these dividends.
TF-26
TEMPLETON GLOBAL BOND SECURITIES FUND
We are pleased to bring you Templeton Global Bond Securities Fund’s semiannual report for the period ended June 30, 2011.
Performance Summary as of 6/30/11
Templeton Global Bond Securities Fund – Class 4 delivered a +5.27% total return for the six-month period ended 6/30/11.
Performance reflects the Fund’s Class 4 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 4
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.
TGB-1
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, such as bonds, notes, bills and debentures.
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 Global Government Bond Index, which posted a +3.89% total return in U.S. dollar terms, and the Citigroup World Government Bond Index, which produced a +4.00% total return for the same period.1
Economic and Market Overview
The global economy continued to experience a healthy recovery during the first half of 2011 despite weaker economic activity toward the end of the period. During the reporting period, many policymakers in developing economies continued to tighten policy in response to growth and rising commodity prices. In contrast, the G-3 (U.S., eurozone and Japan) struggled with economic growth that was not as robust as in previous recoveries. Labor markets remained weak, and concerns regarding public sector balances led to periods of market volatility. Worries over sovereign risks in the eurozone, combined with political unrest in the Middle East and the earthquake in Japan, also contributed to periods of high volatility in financial markets.
Global growth was solid in the first quarter of 2011. Many developing economies closed their output gaps and without policy action would have been at risk of overheating. This prompted many policymakers in these economies to continue raising interest rates, tightening fiscal policies and implementing regulations to keep growth at sustainable levels. Many countries increasingly used currency appreciation to try to control inflation from commodity and other import prices. The recovery was not as strong within the G-3. Even as parts of the eurozone, particularly Germany, showed relatively strong recoveries, Greece and, more broadly, southern Europe continued to lag with contractions in several economic indicators.
1. Source: © 2011 Morningstar. One cannot invest directly in an index, and an index is not representative of the Fund’s portfolio. Please see Index Descriptions following the Fund Summaries.
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 or developing markets, involves additional risks, including currency fluctuations, economic instability, market volatility, and political and social instability. The Fund’s investment in certain hedging and derivative instruments may involve a small investment relative to the risk assumed. As a nondiversified fund, the Fund may be more sensitive to economic, business, political or other changes affecting similar issuers or securities, which may result in greater fluctuation in the value of the Fund’s shares. The manager applies various techniques and analyses in making investment decisions for the Fund, but there can be no guarantee that these decisions will produce the desired results. The Fund’s prospectus also includes a description of the main investment risks.
TGB-2
In early 2011, risk assets and commodities experienced periods of volatility in response to global events. Commodity prices, particularly for energy, rose in the first quarter due to unrest in the Middle East and North Africa. Regimes throughout the region faced unprecedented popular uprisings that brought down governments in Tunisia and Egypt and sparked violent confrontations in Libya, Yemen and elsewhere in the region. The March earthquake in Japan led to risk aversion globally and a disruption of supply chains. The disaster prompted Japanese policymakers to ease monetary policy.
Economic activity slowed in the second quarter, which relieved some of the upward pressure on commodity prices. This slowdown showed signs of being more transitory, reflecting in part supply-chain disruptions resulting from the earthquake in Japan. Early signs from Japan indicated that activity started slowly recovering late in the period. In the U.S., housing and consumer confidence data worsened, and already sluggish labor markets showed signs of further weakness. Many other countries experienced slowdowns in activity as well, particularly within manufacturing sectors. However, even though manufacturing numbers were lower in most economies, they remained solidly in expansionary territory, particularly in many of the countries that were quick to recover from the crisis. In many emerging markets, moderating economic growth helped policymakers who had tightened fiscal and monetary policies to prevent overheating. Despite higher interest rates in the eurozone and the planned end of quantitative easing in the U.S., the G-3 continued to supply liquidity to governments and the financial sector.
In the period’s second half, investors exhibited heightened risk aversion as attention returned to highly indebted eurozone nations. Portugal became the third eurozone country to seek official aid from the International Monetary Fund (IMF) and European Union (EU), and the EU struggled to agree upon a coordinated course of action to provide continued assistance to Greece. The period ended with Greece’s government winning a vote of confidence and gaining parliamentary approval for budget cuts, which were needed for disbursement of the next round of funds from the EU and IMF.
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
*The Fund’s supranational investments were denominated in the Mexican peso, Norwegian krone and U.S. dollar.
TGB-3
credit risks. In considering these factors, we may evaluate a country’s changing market, economic and political conditions, such as inflation 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. During the period under review, each of these sources of return benefited absolute and relative results.
Interest Rate Strategy
The Fund’s duration exposure was a major contributor to relative performance during the six months under review. Although the prospect of higher interest rates is generally a challenge for many fixed income investors, the Fund was somewhat cushioned from rising yields with an average duration of less than half that of the benchmark index, no exposure to U.S. Treasuries or Japanese government bonds, and minimal exposure to eurozone government bonds. Actively managed global fixed income investing in a rising interest rate environment can also offer an opportunity to pursue relatively high yields without taking much duration or credit risk. We favored short maturity bonds in places like Australia, Israel and South Korea where yields between about 3% and 5% were available on bonds with less than two years of duration and strong creditworthiness, in our assessment.
This strategy contributed to relative performance over the period because of some select, overweighted exposures. In addition, long duration, local government bonds in Indonesia, Mexico and Brazil were significant contributors.
Currency Strategy
The Fund’s diverse, actively managed currency exposure provided strong returns during the period. Global currency markets increasingly reflected the underlying strengths of their respective economies. The U.S. dollar fell 5.62% against its major trading partners over the period, a broad-based decline against most currencies outside the Middle East and Africa.2 In the Americas, we concentrated the Fund’s currency exposure in a few emerging Latin American economies, which benefited relative performance. The Chilean peso, Mexican peso and Brazilian
2. Source: Federal Reserve H10 Report.
What is a forward currency exchange contract?
A forward currency 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.
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.
TGB-4
real each appreciated against the U.S. dollar as their domestically led recoveries outpaced that of the U.S. In addition, these economies benefited from high prices for the commodities they exported.
The Fund’s exposure to Asia-Pacific region currencies also contributed to results. The currencies of emerging Asian economies and those of more developed economies, such as South Korea and Australia, appreciated as the region again had the world’s strongest growth. Although China’s economy led, with robust domestic demand despite steps by policymakers to tighten policy, the country’s demand and investment had a positive impact throughout the region. For example, Australia was one of the first developed economies to recover from the global financial crisis not only because it had not gone through a housing bubble and had much better government finances, but also because it has close links with China, which is Australia’s largest trading partner. Chinese demand supported prices for Australia’s commodity exports, and the Australian dollar appreciated against the U.S. dollar. The Fund experienced similar benefits from currencies of regional emerging market countries closely integrated with China, such as Malaysia and Indonesia.
The Fund’s European currency exposure was a major detractor from relative performance. The Fund’s significantly underweighted euro exposure, through the use of forward currency exchange contracts, detracted from relative performance, but this was partially offset by overweighted exposure to currencies from non-eurozone European countries such as the Norwegian krone, Swedish krona and Polish zloty.
Global Sovereign Debt Strategy
Sovereign credit exposure benefited performance as the broadly supportive risk environment led to yield spread tightening in most credits. Despite sovereign credits’ significant tightening since the financial crisis, we found opportunities we considered attractive as we felt relative fundamentals continued to favor emerging markets. The enhanced resilience of such economies and the significant challenges facing highly indebted non-eurozone European countries drove a reevaluation of traditional perceptions of sovereign risk. This situation, in conjunction with developed economies’ low interest rates, brought new investors to the asset class and pushed credit spreads lower for some of the largest, traditional emerging markets. We were selective in our sovereign credit exposure as the period progressed, but we managed to benefit from these positions. Specifically, exposures in Hungary and Indonesia were
Currency Breakdown
Templeton Global Bond Securities Fund
6/30/11
| % of Total Net Assets | ||||
Americas | 53.1% | |||
U.S. Dollar | 35.5% | |||
Mexican Peso | 7.7% | |||
Chilean Peso | 5.8% | |||
Brazilian Real | 3.9% | |||
Peruvian Nuevo Sol | 0.2% | |||
Asia Pacific | 38.0% | |||
South Korean Won | 14.1% | |||
Malaysian Ringgit | 10.8% | |||
Australian Dollar | 10.5% | |||
Indonesian Rupiah | 6.2% | |||
Philippine Peso | 4.9% | |||
Indian Rupee | 4.3% | |||
Singapore Dollar | 4.1% | |||
Sri Lankan Rupee | 1.6% | |||
Japanese Yen* | -18.5% | |||
Middle East & Africa | 5.8% | |||
New Israeli Shekel | 4.2% | |||
Egyptian Pound | 1.6% | |||
Europe | 3.1% | |||
Swedish Krona | 9.5% | |||
Polish Zloty | 9.4% | |||
Norwegian Krone | 7.7% | |||
British Pound | 5.8% | |||
Euro* | -29.3% | |||
*Holding is a negative percentage because of the Fund’s holdings of forward currency 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.
TGB-5
top contributing sovereign credit positions, and positions in Russia, Lithuania and Venezuela also helped performance.
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, 2011, 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.
TGB-6
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 4
TGB-7
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 4 | Beginning Account Value 1/1/11 | Ending Account Value 6/30/11 | Fund-Level Expenses Incurred During Period* 1/1/11–6/30/11 | |||||||||
Actual | $ | 1,000 | $ | 1,052.70 | $ | 4.58 | ||||||
Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,020.33 | $ | 4.51 | ||||||
*Expenses are calculated using the most recent six-month annualized expense ratio for the Fund’s Class 4 shares (0.90%), 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.
TGB-8
Franklin Templeton Variable Insurance Products Trust
Financial Highlights
Templeton Global Bond Securities Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 1 | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||||||
| ||||||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 19.94 | $ | 17.72 | $ | 17.42 | $ | 17.00 | $ | 15.73 | $ | 14.36 | ||||||||||||
|
| |||||||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.48 | 1.00 | 0.99 | 0.80 | 0.77 | 0.61 | ||||||||||||||||||
Net realized and unrealized gains (losses) | 0.60 | 1.58 | 2.01 | 0.27 | 0.97 | 1.24 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Total from investment operations | 1.08 | 2.58 | 3.00 | 1.07 | 1.74 | 1.85 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income and net foreign currency gains | (1.15 | ) | (0.31 | ) | (2.70 | ) | (0.65 | ) | (0.47 | ) | (0.48 | ) | ||||||||||||
Net realized gains | (0.13 | ) | (0.05 | ) | — | — | — | — | ||||||||||||||||
|
| |||||||||||||||||||||||
Total distributions | (1.28 | ) | (0.36 | ) | (2.70 | ) | (0.65 | ) | (0.47 | ) | (0.48 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Redemption feesc | — | — | — | — | — | — | ||||||||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ | 19.74 | $ | 19.94 | $ | 17.72 | $ | 17.42 | $ | 17.00 | $ | 15.73 | ||||||||||||
|
| |||||||||||||||||||||||
Total returnd | 5.43% | 14.71% | 18.98% | 6.46% | 11.27% | 13.14% | ||||||||||||||||||
Ratios to average net assetse | ||||||||||||||||||||||||
Expenses before expense reduction | 0.55% | 0.55% | 0.54% | 0.58% | 0.64% | 0.80% | ||||||||||||||||||
Expenses net of expense reduction | 0.55% | 0.55% | f | 0.54% | f | 0.58% | f | 0.64% | f | 0.72% | ||||||||||||||
Net investment income | 4.72% | 5.27% | 5.73% | 4.66% | 4.70% | 4.09% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 291,254 | $ | 272,232 | $ | 195,662 | $ | 220,588 | $ | 137,700 | $ | 75,843 | ||||||||||||
Portfolio turnover rate | 23.86% | 8.77% | 20.84% | 28.46% | 47.33% | 30.65% | ||||||||||||||||||
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 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.
TGB-9
Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Templeton Global Bond Securities Fund
| Six Months Ended June 30, 2011 (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 2 | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||||||
| ||||||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 19.49 | $ | 17.34 | $ | 17.10 | $ | 16.72 | $ | 15.50 | $ | 14.19 | ||||||||||||
|
| |||||||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.44 | 0.93 | 0.93 | 0.74 | 0.72 | 0.57 | ||||||||||||||||||
Net realized and unrealized gains (losses) | 0.59 | 1.54 | 1.98 | 0.27 | 0.96 | 1.21 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Total from investment operations | 1.03 | 2.47 | 2.91 | 1.01 | 1.68 | 1.78 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income and net foreign currency gains | (1.11 | ) | (0.27 | ) | (2.67 | ) | (0.63 | ) | (0.46 | ) | (0.47 | ) | ||||||||||||
Net realized gains | (0.13 | ) | (0.05 | ) | — | — | — | — | ||||||||||||||||
|
| |||||||||||||||||||||||
Total distributions | (1.24 | ) | (0.32 | ) | (2.67 | ) | (0.63 | ) | (0.46 | ) | (0.47 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Redemption feesc | — | — | — | — | — | — | ||||||||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ | 19.28 | $ | 19.49 | $ | 17.34 | $ | 17.10 | $ | 16.72 | $ | 15.50 | ||||||||||||
|
| |||||||||||||||||||||||
Total returnd | 5.30% | 14.45% | 18.68% | 6.21% | 11.00% | 12.77% | ||||||||||||||||||
Ratios to average net assetse | ||||||||||||||||||||||||
Expenses before expense reduction | 0.80% | 0.80% | 0.79% | 0.83% | 0.89% | 1.05% | ||||||||||||||||||
Expenses net of expense reduction | 0.80% | 0.80% | f | 0.79% | f | 0.83% | f | 0.89% | f | 0.97% | ||||||||||||||
Net investment income | 4.47% | 5.02% | 5.48% | 4.41% | 4.45% | 3.84% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 1,757,266 | $ | 1,490,794 | $ | 1,262,783 | $ | 793,881 | $ | 480,649 | $ | 205,768 | ||||||||||||
Portfolio turnover rate | 23.86% | 8.77% | 20.84% | 28.46% | 47.33% | 30.65% | ||||||||||||||||||
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 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.
TGB-10
Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Templeton Global Bond Securities Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 3 | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||||||
| ||||||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 19.48 | $ | 17.33 | $ | 17.08 | $ | 16.70 | $ | 15.49 | $ | 14.18 | ||||||||||||
|
| |||||||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.44 | 0.93 | 0.93 | 0.74 | 0.72 | 0.58 | ||||||||||||||||||
Net realized and unrealized gains (losses) | 0.58 | 1.54 | 1.98 | 0.27 | 0.95 | 1.21 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Total from investment operations | 1.02 | 2.47 | 2.91 | 1.01 | 1.67 | 1.79 | ||||||||||||||||||
|
| |||||||||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income and net foreign currency gains | �� | (1.10 | ) | (0.27 | ) | (2.66 | ) | (0.63 | ) | (0.46 | ) | (0.48 | ) | |||||||||||
Net realized gains | (0.13 | ) | (0.05 | ) | — | — | — | — | ||||||||||||||||
|
| |||||||||||||||||||||||
Total distributions | (1.23 | ) | (0.32 | ) | (2.66 | ) | (0.63 | ) | (0.46 | ) | (0.48 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Redemption feesc | — | — | — | — | — | — | ||||||||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ | 19.27 | $ | 19.48 | $ | 17.33 | $ | 17.08 | $ | 16.70 | $ | 15.49 | ||||||||||||
|
| |||||||||||||||||||||||
Total returnd | 5.29% | 14.38% | 18.69% | 6.21% | 11.03% | 12.84% | ||||||||||||||||||
Ratios to average net assetse | ||||||||||||||||||||||||
Expenses before expense reduction | 0.80% | 0.80% | 0.79% | 0.83% | 0.89% | 1.05% | ||||||||||||||||||
Expenses net of expense reduction | 0.80% | 0.80% | f | 0.79% | f | 0.83% | f | 0.89% | f | 0.97% | ||||||||||||||
Net investment income | 4.47% | 5.02% | 5.48% | 4.41% | 4.45% | 3.84% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 202,111 | $ | 183,380 | $ | 143,264 | $ | 128,155 | $ | 91,162 | $ | 35,572 | ||||||||||||
Portfolio turnover rate | 23.86% | 8.77% | 20.84% | 28.46% | 47.33% | 30.65% | ||||||||||||||||||
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 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.
TGB-11
Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Templeton Global Bond Securities Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||||||
| Class 4 | 2010 | 2009 | 2008a | |||||||||||||
| ||||||||||||||||
Per share operating performance | ||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||
Net asset value, beginning of period | $ | 19.78 | $ | 17.61 | $ | 17.37 | $ | 18.00 | ||||||||
|
| |||||||||||||||
Income from investment operationsb: | ||||||||||||||||
Net investment incomec | 0.44 | 0.93 | 0.93 | 0.66 | ||||||||||||
Net realized and unrealized gains (losses) | 0.60 | 1.56 | 2.00 | (0.64 | ) | |||||||||||
|
| |||||||||||||||
Total from investment operations | 1.04 | 2.49 | 2.93 | 0.02 | ||||||||||||
|
| |||||||||||||||
Less distributions from: | ||||||||||||||||
Net investment income and net foreign currency gains | (1.09 | ) | (0.27 | ) | (2.69 | ) | (0.65 | ) | ||||||||
Net realized gains | (0.13 | ) | (0.05 | ) | — | — | ||||||||||
|
| |||||||||||||||
Total distributions | (1.22 | ) | (0.32 | ) | (2.69 | ) | (0.65 | ) | ||||||||
|
| |||||||||||||||
Redemption feesd | — | — | — | — | ||||||||||||
|
| |||||||||||||||
Net asset value, end of period | $ | 19.60 | $ | 19.78 | $ | 17.61 | $ | 17.37 | ||||||||
|
| |||||||||||||||
Total returne | 5.27% | 14.28% | 18.58% | 0.26% | ||||||||||||
Ratios to average net assetsf | ||||||||||||||||
Expensesg | 0.90% | 0.90% | 0.89% | 0.93% | ||||||||||||
Net investment income | 4.37% | 4.92% | 5.38% | 4.31% | ||||||||||||
Supplemental data | ||||||||||||||||
Net assets, end of period (000’s) | $ | 165,765 | $ | 150,891 | $ | 108,910 | $ | 43,069 | ||||||||
Portfolio turnover rate | 23.86% | 8.77% | 20.84% | 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 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.
TGB-12
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited)
| Templeton Global Bond Securities Fund | Principal Amount* | Value | ||||||
Foreign Government and Agency Securities 72.4% | ||||||||
Argentina 1.1% | ||||||||
a,bGovernment of Argentina, senior bond, FRN, 0.467%, 8/03/12 | 107,485,000 | $ | 26,328,451 | |||||
|
| |||||||
Australia 8.1% | ||||||||
Government of Australia, senior bond, 123, 5.75%, 4/15/12 | 43,700,000 | AUD | 47,238,602 | |||||
New South Wales Treasury Corp., | ||||||||
6.00%, 5/01/12 | 10,590,000 | AUD | 11,464,037 | |||||
6.00%, 5/01/12 (London Exchange) | 13,180,000 | AUD | 14,268,508 | |||||
5.50%, 8/01/13 | 3,710,000 | AUD | 4,019,727 | |||||
senior note, 5.50%, 3/01/17 | 32,225,000 | AUD | 34,922,470 | |||||
Queensland Treasury Corp., | ||||||||
6.00%, 8/14/13 | 24,450,000 | AUD | 26,807,013 | |||||
6.00%, 9/14/17 | 13,160,000 | AUD | 14,635,719 | |||||
senior note, 6.00%, 8/21/13 | 7,830,000 | AUD | 8,554,686 | |||||
Western Australia Treasury Corp., | ||||||||
5.50%, 7/17/12 | 26,480,000 | AUD | 28,576,621 | |||||
8.00%, 6/15/13 | 4,350,000 | AUD | 4,928,672 | |||||
|
| |||||||
| 195,416,055 | ||||||||
|
| |||||||
Brazil 3.9% | ||||||||
Nota Do Tesouro Nacional, | ||||||||
10.00%, 1/01/12 | 38,245 | c BRL | 24,208,266 | |||||
10.00%, 1/01/14 | 7,100 | c BRL | 4,297,700 | |||||
10.00%, 1/01/17 | 22,490 | c BRL | 13,037,005 | |||||
dIndex Linked, 6.00%, 5/15/15 | 29,822 | c BRL | 38,343,544 | |||||
dIndex Linked, 6.00%, 5/15/45 | 10,825 | c BRL | 14,664,632 | |||||
|
| |||||||
| 94,551,147 | ||||||||
|
| |||||||
Hungary 2.3% | ||||||||
Government of Hungary, senior note, | ||||||||
3.50%, 7/18/16 | 1,055,000 | EUR | 1,410,996 | |||||
4.375%, 7/04/17 | 5,380,000 | EUR | 7,260,557 | |||||
5.75%, 6/11/18 | 13,795,000 | EUR | 19,837,680 | |||||
6.25%, 1/29/20 | 6,420,000 | 6,791,012 | ||||||
3.875%, 2/24/20 | 3,120,000 | EUR | 3,890,817 | |||||
6.375%, 3/29/21 | 14,820,000 | 15,672,150 | ||||||
|
| |||||||
| 54,863,212 | ||||||||
|
| |||||||
Indonesia 7.8% | ||||||||
Government of Indonesia, | ||||||||
FR20, 14.275%, 12/15/13 | 14,267,000,000 | IDR | 1,968,277 | |||||
FR31, 11.00%, 11/15/20 | 167,351,000,000 | IDR | 24,017,345 | |||||
FR34, 12.80%, 6/15/21 | 207,810,000,000 | IDR | 32,874,752 | |||||
FR35, 12.90%, 6/15/22 | 66,582,000,000 | IDR | 10,555,031 | |||||
FR36, 11.50%, 9/15/19 | 30,075,000,000 | IDR | 4,363,356 | |||||
FR37, 12.00%, 9/15/26 | 8,230,000,000 | IDR | 1,260,909 | |||||
FR39, 11.75%, 8/15/23 | 5,491,000,000 | IDR | 818,147 | |||||
FR40, 11.00%, 9/15/25 | 61,856,000,000 | IDR | 8,834,014 | |||||
FR42, 10.25%, 7/15/27 | 88,574,000,000 | IDR | 11,923,380 | |||||
FR43, 10.25%, 7/15/22 | 68,340,000,000 | IDR | 9,305,721 | |||||
FR44, 10.00%, 9/15/24 | 4,454,000,000 | IDR | 593,296 | |||||
FR46, 9.50%, 7/15/23 | 226,780,000,000 | IDR | 29,392,162 | |||||
FR47, 10.00%, 2/15/28 | 61,737,000,000 | IDR | 8,102,043 | |||||
FR48, 9.00%, 9/15/18 | 16,920,000,000 | IDR | 2,156,928 | |||||
FR49, 9.00%, 9/15/13 | 35,030,000,000 | IDR | 4,326,153 | |||||
esenior bond, 144A, 8.50%, 10/12/35 | 9,119,000 | 12,244,309 | ||||||
TGB-13
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Templeton Global Bond Securities Fund | Principal Amount* | Value | ||||||
Foreign Government and Agency Securities (continued) | ||||||||
Indonesia (continued) | ||||||||
Government of Indonesia (continued) | ||||||||
esenior bond, 144A, 6.625%, 2/17/37 | 2,240,000 | $ | 2,480,509 | |||||
esenior bond, 144A, 7.75%, 1/17/38 | 10,980,000 | 13,682,178 | ||||||
esenior note, 144A, 11.625%, 3/04/19 | 6,410,000 | 9,448,981 | ||||||
|
| |||||||
| 188,347,491 | ||||||||
|
| |||||||
Iraq 0.3% | ||||||||
Government of Iraq, | ||||||||
e144A, 5.80%, 1/15/28 | 5,055,000 | 4,593,681 | ||||||
fReg S, 5.80%, 1/15/28 | 3,440,000 | 3,126,065 | ||||||
|
| |||||||
| 7,719,746 | ||||||||
|
| |||||||
Israel 0.1% | ||||||||
Government of Israel, 5.00%, 3/31/13 | 8,880,000 | ILS | 2,699,202 | |||||
|
| |||||||
Lithuania 1.6% | ||||||||
eGovernment of Lithuania, 144A, | ||||||||
6.75%, 1/15/15 | 19,480,000 | 21,507,381 | ||||||
7.375%, 2/11/20 | 12,690,000 | 14,677,127 | ||||||
6.125%, 3/09/21 | 3,240,000 | 3,450,503 | ||||||
|
| |||||||
| 39,635,011 | ||||||||
|
| |||||||
Malaysia 2.5% | ||||||||
Government of Malaysia, senior bond, | ||||||||
3.833%, 9/28/11 | 3,860,000 | MYR | 1,283,078 | |||||
2.711%, 2/14/12 | 720,000 | MYR | 238,654 | |||||
3.718%, 6/15/12 | 50,265,000 | MYR | 16,785,613 | |||||
2.509%, 8/27/12 | 24,825,000 | MYR | 8,184,925 | |||||
3.702%, 2/25/13 | 23,300,000 | MYR | 7,798,034 | |||||
3.461%, 7/31/13 | 12,600,000 | MYR | 4,199,207 | |||||
3.814%, 2/15/17 | 18,885,000 | MYR | 6,316,184 | |||||
4.24%, 2/07/18 | 44,360,000 | MYR | 15,119,304 | |||||
|
| |||||||
| 59,924,999 | ||||||||
|
| |||||||
Mexico 7.0% | ||||||||
Government of Mexico, | ||||||||
M, 9.00%, 6/20/13 | 2,982,300 | g MXN | 27,274,261 | |||||
M 10, 8.00%, 12/17/15 | 726,000 | g MXN | 6,656,088 | |||||
M 10, 7.25%, 12/15/16 | 250,000 | g MXN | 2,226,173 | |||||
M 10, 7.75%, 12/14/17 | 4,473,000 | g MXN | 40,829,938 | |||||
MI10, 9.00%, 12/20/12 | 265,000 | g MXN | 2,392,585 | |||||
MI10, 8.00%, 12/19/13 | 9,939,900 | g MXN | 89,976,954 | |||||
|
| |||||||
| 169,355,999 | ||||||||
|
| |||||||
Norway 0.4% | ||||||||
Government of Norway, 6.50%, 5/15/13 | 49,400,000 | NOK | 9,815,980 | |||||
|
| |||||||
Peru 0.2% | ||||||||
Government of Peru, 7.84%, 8/12/20 | 11,090,000 | PEN | 4,458,325 | |||||
|
| |||||||
Philippines 0.3% | ||||||||
Government of the Philippines, senior bond, | ||||||||
5.75%, 2/21/12 | 134,520,000 | PHP | 3,146,481 | |||||
5.25%, 1/07/13 | 61,770,000 | PHP | 1,440,547 | |||||
8.75%, 3/03/13 | 160,310,000 | PHP | 3,945,013 | |||||
|
| |||||||
| 8,532,041 | ||||||||
|
| |||||||
TGB-14
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Templeton Global Bond Securities Fund | Principal Amount* | Value | ||||||
Foreign Government and Agency Securities (continued) | ||||||||
Poland 8.3% | ||||||||
Government of Poland, | ||||||||
4.75%, 4/25/12 | 58,025,000 | PLN | $ | 21,170,440 | ||||
5.25%, 4/25/13 | 18,510,000 | PLN | 6,804,502 | |||||
5.00%, 10/24/13 | 6,190,000 | PLN | 2,263,671 | |||||
5.75%, 4/25/14 | 92,590,000 | PLN | 34,434,723 | |||||
6.25%, 10/24/15 | 44,730,000 | PLN | 16,958,651 | |||||
5.75%, 9/23/22 | 48,750,000 | PLN | 17,633,593 | |||||
senior note, 6.375%, 7/15/19 | 27,200,000 | 31,060,088 | ||||||
Strip, 7/25/12 | 4,110,000 | PLN | 1,426,931 | |||||
Strip, 10/25/12 | 79,825,000 | PLN | 27,374,268 | |||||
Strip, 1/25/13 | 88,905,000 | PLN | 30,130,519 | |||||
Strip, 7/25/13 | 37,390,000 | PLN | 12,376,994 | |||||
|
| |||||||
| 201,634,380 | ||||||||
|
| |||||||
Qatar 0.6% | ||||||||
eGovernment of Qatar, senior note, 144A, 6.55%, 4/09/19 | 12,060,000 | 14,039,408 | ||||||
|
| |||||||
Russia 3.0% | ||||||||
eGovernment of Russia, 144A, 7.50%, 3/31/30 | 61,274,005 | 72,216,011 | ||||||
|
| |||||||
South Africa 1.6% | ||||||||
Government of South Africa, | ||||||||
5.25%, 5/16/13 | 3,590,000 | EUR | 5,423,235 | |||||
4.50%, 4/05/16 | 1,874,000 | EUR | 2,782,886 | |||||
6.875%, 5/27/19 | 21,215,000 | 25,264,413 | ||||||
senior note, 6.50%, 6/02/14 | 805,000 | 902,506 | ||||||
senior note, 5.875%, 5/30/22 | 3,485,000 | 3,866,995 | ||||||
|
| |||||||
| 38,240,035 | ||||||||
|
| |||||||
South Korea 13.3% | ||||||||
The Export-Import Bank of Korea, senior note, 4.625%, 2/20/17 | 230,000 | EUR | 341,388 | |||||
KDICB Redemption Fund Bond, senior bond, | ||||||||
07-1, 5.57%, 9/14/12 | 6,600,000,000 | KRW | 6,312,309 | |||||
08-1, 5.28%, 2/15/13 | 880,000,000 | KRW | 842,612 | |||||
Korea Treasury Bond, | ||||||||
4.75%, 12/10/11 | 77,103,490,000 | KRW | 72,693,949 | |||||
5.25%, 9/10/12 | 28,539,000,000 | KRW | 27,257,941 | |||||
5.25%, 3/10/13 | 6,483,790,000 | KRW | 6,223,576 | |||||
5.00%, 9/10/16 | 2,806,000,000 | KRW | 2,741,708 | |||||
senior bond, 4.00%, 6/10/12 | 132,027,650,000 | KRW | 124,248,898 | |||||
senior bond, 4.25%, 12/10/12 | 23,404,000,000 | KRW | 22,124,379 | |||||
senior bond, 3.75%, 6/10/13 | 47,488,000,000 | KRW | 44,545,905 | |||||
senior bond, 3.00%, 12/10/13 | 15,159,610,000 | KRW | 13,955,855 | |||||
|
| |||||||
| 321,288,520 | ||||||||
|
| |||||||
Sri Lanka 1.5% | ||||||||
Government of Sri Lanka, | ||||||||
A, 12.00%, 7/15/11 | 115,200,000 | LKR | 1,054,044 | |||||
A, 6.90%, 8/01/12 | 14,600,000 | LKR | 132,514 | |||||
A, 8.50%, 1/15/13 | 694,400,000 | LKR | 6,415,882 | |||||
A, 13.50%, 2/01/13 | 674,300,000 | LKR | 6,678,215 | |||||
A, 7.00%, 3/01/14 | 43,380,000 | LKR | 384,754 | |||||
A, 11.25%, 7/15/14 | 773,000,000 | LKR | 7,610,181 | |||||
A, 11.75%, 3/15/15 | 8,520,000 | LKR | 85,107 | |||||
TGB-15
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Templeton Global Bond Securities Fund | Principal Amount* | Value | ||||||
Foreign Government and Agency Securities (continued) | ||||||||
Sri Lanka (continued) | ||||||||
Government of Sri Lanka (continued) | ||||||||
A, 6.50%, 7/15/15 | 106,480,000 | LKR | $ | 899,970 | ||||
A, 11.00%, 8/01/15 | 1,349,700,000 | LKR | 13,237,198 | |||||
B, 6.60%, 6/01/14 | 56,800,000 | LKR | 496,377 | |||||
|
| |||||||
| 36,994,242 | ||||||||
|
| |||||||
hSupranational 1.5% | ||||||||
Corporacion Andina De Fomento, 8.125%, 6/04/19 | 9,880,000 | 12,022,972 | ||||||
European Investment Bank, senior note, 4.50%, 5/15/13 | 33,700,000 | NOK | 6,395,768 | |||||
Inter-American Development Bank, senior note, 7.50%, 12/05/24 | 200,000,000 | MXN | 17,346,965 | |||||
|
| |||||||
| 35,765,705 | ||||||||
|
| |||||||
Sweden 3.4% | ||||||||
Government of Sweden, 5.50%, 10/08/12 | 481,950,000 | SEK | 79,373,882 | |||||
Kommuninvest I Sverige AB, senior note, 1.75%, 10/08/12 | 24,400,000 | SEK | 3,809,541 | |||||
|
| |||||||
| 83,183,423 | ||||||||
|
| |||||||
Ukraine 0.7% | ||||||||
eGovernment of Ukraine, senior note, 144A, 7.95%, 2/23/21 | 16,330,000 | 17,030,067 | ||||||
|
| |||||||
United Arab Emirates 0.6% | ||||||||
eEmirate of Abu Dhabi, 144A, 6.75%, 4/08/19 | 11,840,000 | 14,060,000 | ||||||
|
| |||||||
United Kingdom 0.6% | ||||||||
United Kingdom Treasury Bond, 5.00%, 3/07/12 | 8,752,000 | GBP | 14,466,090 | |||||
|
| |||||||
Venezuela 1.1% | ||||||||
Government of Venezuela, 10.75%, 9/19/13 | 13,570,000 | 13,539,466 | ||||||
Petroleos de Venezuela SA, senior bond, zero cpn., 7/10/11 | 12,205,000 | 12,190,720 | ||||||
|
| |||||||
| 25,730,186 | ||||||||
|
| |||||||
Vietnam 0.6% | ||||||||
eGovernment of Vietnam, 144A, 6.75%, 1/29/20 | 13,110,000 | 13,691,756 | ||||||
|
| |||||||
Total Foreign Government and Agency Securities (Cost $1,521,804,537) | 1,749,987,482 | |||||||
|
| |||||||
Municipal Bonds 1.5% | ||||||||
United States 1.5% | ||||||||
Alabama State University Revenue, General Tuition and Fee, Assured Guaranty, 5.00%, 9/01/29 | 175,000 | 182,119 | ||||||
Bay Area Toll Authority Toll Bridge Revenue, Build America Bonds, Series S1, 6.793%, 4/01/30 | 3,460,000 | 3,722,441 | ||||||
Bexar County Revenue, Venue Project, Refunding, Series A, BHAC Insured, 5.25%, 8/15/47 | 1,450,000 | 1,519,064 | ||||||
California State GO, | ||||||||
7.625%, 3/01/40 | 1,320,000 | 1,520,917 | ||||||
Refunding, 5.125%, 4/01/33 | 4,725,000 | 4,736,624 | ||||||
Refunding, 5.00%, 4/01/38 | 1,985,000 | 1,908,458 | ||||||
Various Purpose, 6.00%, 4/01/38 | 11,650,000 | 12,373,465 | ||||||
Illinois Municipal Electricity Agency Power Supply Revenue, Series A, BHAC Insured, 5.00%, 2/01/35 | 2,155,000 | 2,143,104 | ||||||
Los Angeles Community College District GO, Election of 2008, Series D, 6.68%, 8/01/36 | 1,700,000 | 1,703,859 | ||||||
Los Angeles USD, GO, Series KRY, 5.25%, 7/01/26 | 765,000 | 813,417 | ||||||
North Carolina Eastern Municipal Power Agency Power System Revenue, Refunding, Series A, Assured Guaranty, 5.25%, 1/01/19 | 2,400,000 | 2,672,736 | ||||||
Philadelphia GO, Refunding, Series A, Assured Guaranty, 5.00%, 8/01/24 | 500,000 | 505,940 | ||||||
Tarrant County Cultural Education Facilities Finance Corp. Revenue, Christus Health, Refunding, Series A, Assured Guaranty, 6.25%, 7/01/28 | 1,500,000 | 1,653,240 | ||||||
|
| |||||||
Total Municipal Bonds (Cost $33,788,334) | 35,455,384 | |||||||
|
| |||||||
Total Investments before Short Term Investments (Cost $1,555,592,871) | 1,785,442,866 | |||||||
|
| |||||||
TGB-16
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Templeton Global Bond Securities Fund | Principal Amount* | Value | ||||||
Short Term Investments 25.4% | ||||||||
Foreign Government and Agency Securities 17.5% | ||||||||
Egypt 1.6% | ||||||||
iEgypt Treasury Bills, 7/12/11 - 2/21/12 | 240,250,000 | EGP | $ | 39,368,126 | ||||
|
| |||||||
Israel 3.9% | ||||||||
Government of Israel, 4.00%, 3/30/12 | 26,865,000 | ILS | 7,922,671 | |||||
iIsrael Treasury Bills, 7/06/11 - 5/02/12 | 302,472,900 | ILS | 87,626,797 | |||||
|
| |||||||
| 95,549,468 | ||||||||
|
| |||||||
Malaysia 4.4% | ||||||||
iBank of Negara Monetary Note, 7/28/11 - 3/29/12 | 317,655,000 | MYR | 104,011,563 | |||||
iMalaysia Treasury Bills, 7/08/11 - 3/23/12 | 3,780,000 | MYR | 1,236,553 | |||||
|
| |||||||
| 105,248,116 | ||||||||
|
| |||||||
Norway 2.3% | ||||||||
iNorway Treasury Bills, | ||||||||
12/21/11 | 68,140,000 | NOK | 12,487,659 | |||||
3/21/12 | 240,230,000 | NOK | 43,799,206 | |||||
|
| |||||||
| 56,286,865 | ||||||||
|
| |||||||
Philippines 0.2% | ||||||||
iPhilippine Treasury Bills, 7/13/11 - 2/22/12 | 175,620,000 | PHP | 4,015,686 | |||||
|
| |||||||
Poland 0.1% | ||||||||
Government of Poland, Strip, 1/25/12 | 5,580,000 | PLN | 1,983,578 | |||||
|
| |||||||
Sri Lanka 0.1% | ||||||||
iSri Lanka Treasury Bills, 7/08/11 - 2/17/12 | 188,660,000 | LKR | 1,668,879 | |||||
|
| |||||||
Sweden 1.2% | ||||||||
iSweden Treasury Bills, | ||||||||
9/21/11 | 166,200,000 | SEK | 26,173,896 | |||||
12/21/11 | 16,190,000 | SEK | 2,536,848 | |||||
|
| |||||||
| 28,710,744 | ||||||||
|
| |||||||
United Kingdom 3.7% | ||||||||
iUnited Kingdom Treasury Bills, | ||||||||
7/25/11 | 22,170,000 | GBP | 35,568,890 | |||||
8/01/11 - 8/08/11 | 7,181,000 | GBP | 11,519,434 | |||||
United Kingdom Treasury Note, | ||||||||
9.00%, 7/12/11 | 4,320,000 | GBP | 6,950,848 | |||||
3.25%, 12/07/11 | 18,942,000 | GBP | 30,766,335 | |||||
5.25%, 6/07/12 | 3,277,000 | GBP | 5,482,644 | |||||
|
| |||||||
| 90,288,151 | ||||||||
|
| |||||||
Total Foreign Government and Agency Securities (Cost $420,348,381) | 423,119,613 | |||||||
|
| |||||||
Total Investments before Repurchase Agreements (Cost $1,975,941,252) | 2,208,562,479 | |||||||
|
| |||||||
TGB-17
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Templeton Global Bond Securities Fund | Principal Amount* | Value | ||||||
Repurchase Agreements (Cost $191,085,986) 7.9% | ||||||||
United States 7.9% | ||||||||
jJoint Repurchase Agreement, 0.005%, 7/01/11 (Maturity Value $191,086,013) | 191,085,986 | $ | 191,085,986 | |||||
Barclays Capital Inc. (Maturity Value $16,374,161) | ||||||||
BNP Paribas Securities Corp. (Maturity Value $43,663,154) | ||||||||
Credit Suisse Securities (USA) LLC (Maturity Value $32,746,410) | ||||||||
Deutsche Bank Securities Inc. (Maturity Value $21,892,725) | ||||||||
HSBC Securities (USA) Inc. (Maturity Value $16,374,160) | ||||||||
Merrill Lynch, Pierce, Fenner & Smith Inc. (Maturity Value $10,914,833) | ||||||||
Morgan Stanley & Co. LLC (Maturity Value $16,374,160) | ||||||||
UBS Securities LLC (Maturity Value $32,746,410) | ||||||||
Collateralized by U.S. Government Agency Securities, 0.75% - 5.375%, 10/15/11 - 9/13/19; iU.S. Government Agency Discount Notes, 9/28/11 – 12/28/11; iU.S. Treasury Bills, 8/04/11 - 8/25/11; U.S. Treasury Bonds, 7.25% 11.25%, 2/15/15 - 5/15/16; and U.S. Treasury Notes, 0.375% - 5.00%, 7/31/11 - 6/30/16 (valued at $195,394,959) | ||||||||
|
| |||||||
Total Investments (Cost $2,167,027,238) 99.3% | 2,399,648,465 | |||||||
Other Assets, less Liabilities 0.7% | 16,747,886 | |||||||
|
| |||||||
Net Assets 100.0% | $ | 2,416,396,351 | ||||||
|
| |||||||
See Abbreviations on page TGB-38.
*The principal amount is stated in U.S. dollars unless otherwise indicated.
aThe coupon rate shown represents the rate at period end.
bThe principal amount is stated in original face, and scheduled paydowns are reflected in the market price on ex-date.
cPrincipal amount is stated in 1,000 Brazilian Real Units.
dRedemption price at maturity is adjusted for inflation. See Note 1(f).
eSecurity 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, 2011, the aggregate value of these securities was $213,121,911, representing 8.82% of net assets.
fSecurity 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. This security has been deemed liquid under guidelines approved by the Trust’s Board of Trustees. At June 30, 2011, the value of this security was $3,126,065, representing 0.13% of net assets.
gPrincipal amount is stated in 100 Mexican Peso Units.
hA supranational organization is an entity formed by two or more central governments through international treaties.
iThe security is traded on a discount basis with no stated coupon rate.
jSee Note 1(c) regarding joint repurchase agreement.
TGB-18
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Templeton Global Bond Securities Fund |
At June 30, 2011, the Fund had the following forward exchange contracts outstanding. See Note 1(d).
Forward Exchange Contracts
| Currency | Counterparty | Type | Quantity | Contract Amount* | Settlement Date | Unrealized Appreciation | Unrealized Depreciation | |||||||||||||||||||||||||
Indian Rupee | DBAB | Buy | 79,423,000 | 1,637,588 | 7/11/11 | $ | 138,334 | $ | — | |||||||||||||||||||||||
Indian Rupee | JPHQ | Buy | 127,745,000 | 2,632,289 | 7/12/11 | 223,592 | — | |||||||||||||||||||||||||
Indian Rupee | DBAB | Buy | 40,128,000 | 829,948 | 7/12/11 | 67,158 | — | |||||||||||||||||||||||||
Malaysian Ringgit | DBAB | Buy | 18,006,622 | 5,559,659 | 7/12/11 | 398,222 | — | |||||||||||||||||||||||||
Malaysian Ringgit | DBAB | Buy | 13,610,000 | 4,207,760 | 7/13/11 | 295,053 | — | |||||||||||||||||||||||||
Indian Rupee | CITI | Buy | 19,711,000 | 408,349 | 7/18/11 | 31,818 | — | |||||||||||||||||||||||||
Malaysian Ringgit | DBAB | Buy | 11,455,000 | 2,778,014 | EUR | 7/18/11 | — | (238,133 | ) | |||||||||||||||||||||||
Malaysian Ringgit | DBAB | Buy | 2,637,000 | 813,763 | 7/18/11 | 58,338 | — | |||||||||||||||||||||||||
Indian Rupee | JPHQ | Buy | 19,711,000 | 407,673 | 7/20/11 | 32,329 | — | |||||||||||||||||||||||||
Malaysian Ringgit | DBAB | Buy | 12,933,000 | 3,082,647 | EUR | 7/20/11 | — | (191,288 | ) | |||||||||||||||||||||||
Malaysian Ringgit | DBAB | Buy | 4,160,000 | 1,279,252 | 7/20/11 | 96,318 | — | |||||||||||||||||||||||||
Malaysian Ringgit | DBAB | Buy | 16,628,000 | 3,962,661 | EUR | 7/25/11 | — | (246,243 | ) | |||||||||||||||||||||||
Malaysian Ringgit | DBAB | Buy | 5,058,000 | 1,555,111 | 7/25/11 | 116,747 | — | |||||||||||||||||||||||||
Malaysian Ringgit | JPHQ | Buy | 16,628,000 | 3,979,799 | EUR | 7/27/11 | — | (271,608 | ) | |||||||||||||||||||||||
Malaysian Ringgit | JPHQ | Buy | 5,318,000 | 1,638,526 | 7/27/11 | 119,000 | — | |||||||||||||||||||||||||
Malaysian Ringgit | HSBC | Buy | 3,005,000 | 926,268 | 7/29/11 | 66,688 | — | |||||||||||||||||||||||||
Malaysian Ringgit | HSBC | Buy | 6,100,000 | 1,897,297 | 8/08/11 | 116,772 | — | |||||||||||||||||||||||||
Malaysian Ringgit | JPHQ | Buy | 1,100,000 | 341,827 | 8/09/11 | 21,337 | — | |||||||||||||||||||||||||
South Korean Won | HSBC | Buy | 21,363,430,000 | 19,122,297 | 8/09/11 | 847,880 | — | |||||||||||||||||||||||||
Polish Zloty | DBAB | Buy | 59,155,000 | 14,545,119 | EUR | 8/12/11 | 403,203 | — | ||||||||||||||||||||||||
New Zealand Dollar | HSBC | Sell | 2,945,715 | 2,217,269 | 8/15/11 | — | (214,954 | ) | ||||||||||||||||||||||||
New Zealand Dollar | HSBC | Buy | 2,945,715 | 2,325,348 | 8/15/11 | 106,876 | — | |||||||||||||||||||||||||
Japanese Yen | UBSW | Sell | 758,781,000 | 8,929,251 | 8/18/11 | — | (498,508 | ) | ||||||||||||||||||||||||
Japanese Yen | DBAB | Sell | 461,885,000 | 5,435,540 | 8/18/11 | — | (303,324 | ) | ||||||||||||||||||||||||
Japanese Yen | JPHQ | Sell | 377,047,000 | 4,414,037 | 8/18/11 | — | (270,726 | ) | ||||||||||||||||||||||||
Japanese Yen | HSBC | Sell | 375,298,000 | 4,415,946 | 8/19/11 | — | (247,113 | ) | ||||||||||||||||||||||||
Euro | UBSW | Sell | 6,270,000 | 8,074,004 | 8/22/11 | — | (1,004,168 | ) | ||||||||||||||||||||||||
Euro | UBSW | Buy | 6,270,000 | 8,938,199 | 8/22/11 | 139,974 | — | |||||||||||||||||||||||||
Japanese Yen | BZWS | Sell | 376,247,000 | 4,429,249 | 8/22/11 | — | (245,686 | ) | ||||||||||||||||||||||||
Japanese Yen | DBAB | Sell | 376,727,000 | 4,440,441 | 8/22/11 | — | (240,458 | ) | ||||||||||||||||||||||||
Japanese Yen | MSCO | Sell | 300,000,000 | 3,531,739 | 8/22/11 | — | (195,814 | ) | ||||||||||||||||||||||||
Euro | UBSW | Sell | 6,274,000 | 8,065,980 | 8/23/11 | — | (1,017,696 | ) | ||||||||||||||||||||||||
Euro | UBSW | Buy | 6,274,000 | 8,943,587 | 8/23/11 | 140,089 | — | |||||||||||||||||||||||||
Japanese Yen | FBCO | Sell | 746,218,000 | 8,779,035 | 8/23/11 | — | (492,911 | ) | ||||||||||||||||||||||||
Japanese Yen | CITI | Sell | 751,731,000 | 8,864,439 | 8/23/11 | — | (476,008 | ) | ||||||||||||||||||||||||
Japanese Yen | DBAB | Sell | 371,821,000 | 4,391,829 | 8/23/11 | — | (228,141 | ) | ||||||||||||||||||||||||
Indian Rupee | HSBC | Buy | 143,891,000 | 2,979,171 | 8/24/11 | 211,095 | — | |||||||||||||||||||||||||
Indian Rupee | DBAB | Buy | 124,700,000 | 2,577,511 | 8/24/11 | 187,264 | — | |||||||||||||||||||||||||
Japanese Yen | JPHQ | Sell | 750,133,000 | 8,840,695 | 8/24/11 | — | (479,952 | ) | ||||||||||||||||||||||||
Japanese Yen | BZWS | Sell | 747,636,000 | 8,833,546 | 8/24/11 | — | (456,075 | ) | ||||||||||||||||||||||||
Euro | BZWS | Sell | 7,656,600 | 9,689,427 | 8/25/11 | — | (1,395,315 | ) | ||||||||||||||||||||||||
Japanese Yen | DBAB | Sell | 685,950,000 | 8,081,836 | 8/25/11 | — | (441,368 | ) | ||||||||||||||||||||||||
Japanese Yen | BZWS | Sell | 337,439,000 | 3,976,420 | 8/25/11 | — | (216,395 | ) | ||||||||||||||||||||||||
United States Dollar | CITI | Buy | 7,760,297 | 6,137,727 | EUR | 8/25/11 | — | (1,125,517 | ) | |||||||||||||||||||||||
Euro | UBSW | Sell | 9,307,428 | 11,777,806 | 8/26/11 | — | (1,696,475 | ) | ||||||||||||||||||||||||
Euro | HSBC | Sell | 8,279,000 | 10,443,296 | 8/26/11 | — | (1,542,138 | ) | ||||||||||||||||||||||||
Euro | UBSW | Buy | 9,307,428 | 13,266,808 | 8/26/11 | 207,472 | — | |||||||||||||||||||||||||
Japanese Yen | HSBC | Sell | 2,493,199,000 | 29,825,345 | 8/26/11 | — | (1,153,841 | ) | ||||||||||||||||||||||||
Japanese Yen | UBSW | Sell | 937,086,000 | 11,163,361 | 8/26/11 | — | (480,379 | ) | ||||||||||||||||||||||||
Japanese Yen | JPHQ | Sell | 751,903,000 | 8,880,234 | 8/26/11 | — | (462,519 | ) | ||||||||||||||||||||||||
Swedish Krona | UBSW | Buy | 30,000,000 | 3,154,541 | EUR | 8/26/11 | 159,389 | — | ||||||||||||||||||||||||
TGB-19
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Templeton Global Bond Securities Fund |
Forward Exchange Contracts (continued)
| Currency | Counterparty | Type | Quantity | Contract Amount* | Settlement Date | Unrealized Appreciation | Unrealized Depreciation | |||||||||||||||||||||||||
United States Dollar | UBSW | Buy | 16,993,151 | 13,425,892 | EUR | 8/26/11 | $ | — | $ | (2,443,392 | ) | |||||||||||||||||||||
United States Dollar | HSBC | Buy | 14,772,566 | 11,710,875 | EUR | 8/26/11 | — | (2,181,163 | ) | |||||||||||||||||||||||
United States Dollar | JPHQ | Buy | 11,099,031 | 8,794,794 | EUR | 8/26/11 | — | (1,633,115 | ) | |||||||||||||||||||||||
Euro | JPHQ | Sell | 4,095,317 | 5,170,338 | 8/29/11 | — | (757,853 | ) | ||||||||||||||||||||||||
Euro | JPHQ | Sell | 2,095,000 | 2,647,452 | 8/29/11 | — | (385,173 | ) | ||||||||||||||||||||||||
Malaysian Ringgit | JPHQ | Buy | 8,340,000 | 2,611,555 | 8/29/11 | 137,564 | — | |||||||||||||||||||||||||
Japanese Yen | BZWS | Sell | 890,300,000 | 10,574,388 | 8/30/11 | — | (488,290 | ) | ||||||||||||||||||||||||
Indian Rupee | DBAB | Buy | 88,183,000 | 1,811,855 | 9/01/11 | 140,338 | — | |||||||||||||||||||||||||
Japanese Yen | JPHQ | Sell | 372,662,000 | 4,392,527 | 9/01/11 | — | (238,155 | ) | ||||||||||||||||||||||||
Indian Rupee | DBAB | Buy | 25,000,000 | 511,876 | 9/27/11 | 39,063 | — | |||||||||||||||||||||||||
Japanese Yen | JPHQ | Sell | 172,207,000 | 2,055,712 | 9/30/11 | — | (84,564 | ) | ||||||||||||||||||||||||
Philippine Peso | HSBC | Buy | 49,600,000 | 1,097,709 | 9/30/11 | 37,262 | — | |||||||||||||||||||||||||
Philippine Peso | HSBC | Buy | 39,700,000 | 878,562 | 10/03/11 | 29,669 | — | |||||||||||||||||||||||||
Philippine Peso | HSBC | Buy | 156,866,000 | 3,480,806 | 10/04/11 | 107,601 | — | |||||||||||||||||||||||||
Philippine Peso | DBAB | Buy | 195,560,000 | 4,346,164 | 10/04/11 | 127,392 | — | |||||||||||||||||||||||||
Euro | UBSW | Sell | 6,370,000 | 8,714,670 | 10/05/11 | — | (496,604 | ) | ||||||||||||||||||||||||
Philippine Peso | HSBC | Buy | 233,867,000 | 5,225,144 | 10/05/11 | 124,307 | — | |||||||||||||||||||||||||
Philippine Peso | DBAB | Buy | 233,811,000 | 5,220,977 | 10/05/11 | 127,193 | — | |||||||||||||||||||||||||
Philippine Peso | JPHQ | Buy | 61,767,000 | 1,379,836 | 10/06/11 | 32,910 | — | |||||||||||||||||||||||||
Philippine Peso | DBAB | Buy | 191,936,000 | 4,314,526 | 10/07/11 | 75,141 | — | |||||||||||||||||||||||||
Philippine Peso | JPHQ | Buy | 76,627,000 | 1,729,768 | 10/11/11 | 22,202 | — | |||||||||||||||||||||||||
Philippine Peso | DBAB | Buy | 153,588,000 | 3,468,642 | 10/11/11 | 42,935 | — | |||||||||||||||||||||||||
Philippine Peso | CITI | Buy | 76,826,000 | 1,737,044 | 10/11/11 | 19,476 | — | |||||||||||||||||||||||||
Philippine Peso | HSBC | Buy | 153,878,000 | 3,469,706 | 10/11/11 | 48,502 | — | |||||||||||||||||||||||||
Malaysian Ringgit | DBAB | Buy | 11,434,805 | 3,645,721 | 10/12/11 | 111,926 | — | |||||||||||||||||||||||||
Philippine Peso | DBAB | Buy | 45,732,000 | 1,037,807 | 10/12/11 | 7,714 | — | |||||||||||||||||||||||||
Malaysian Ringgit | DBAB | Buy | 4,934,783 | 1,573,040 | 10/13/11 | 48,488 | — | |||||||||||||||||||||||||
Philippine Peso | HSBC | Buy | 76,252,000 | 1,717,581 | 10/13/11 | 25,554 | — | |||||||||||||||||||||||||
Philippine Peso | JPHQ | Buy | 194,374,000 | 4,386,190 | 10/13/11 | 57,237 | — | |||||||||||||||||||||||||
Euro | HSBC | Sell | 3,762,000 | 5,229,932 | 10/17/11 | — | (207,973 | ) | ||||||||||||||||||||||||
Philippine Peso | JPHQ | Buy | 108,152,000 | 2,463,767 | 10/17/11 | 7,867 | — | |||||||||||||||||||||||||
Euro | HSBC | Sell | 3,753,000 | 5,264,333 | 10/18/11 | — | (160,389 | ) | ||||||||||||||||||||||||
Norwegian Krone | BZWS | Buy | 30,824,000 | 3,765,775 | EUR | 10/18/11 | 229,421 | — | ||||||||||||||||||||||||
Euro | HSBC | Sell | 5,054,000 | 7,058,416 | 10/19/11 | — | (246,584 | ) | ||||||||||||||||||||||||
Norwegian Krone | BZWS | Buy | 30,949,000 | 3,765,727 | EUR | 10/19/11 | 252,258 | — | ||||||||||||||||||||||||
Philippine Peso | HSBC | Buy | 154,149,000 | 3,493,699 | 10/19/11 | 28,593 | — | |||||||||||||||||||||||||
Philippine Peso | DBAB | Buy | 41,880,000 | 950,954 | 10/19/11 | 6,001 | — | |||||||||||||||||||||||||
Philippine Peso | JPHQ | Buy | 84,061,000 | 1,894,460 | 10/21/11 | 26,039 | — | |||||||||||||||||||||||||
Philippine Peso | DBAB | Buy | 167,411,000 | 3,771,877 | 10/21/11 | 52,877 | — | |||||||||||||||||||||||||
Chilean Peso | CITI | Buy | 921,291,798 | 1,849,984 | 10/25/11 | 93,014 | — | |||||||||||||||||||||||||
Indian Rupee | DBAB | Buy | 208,500,000 | 4,488,698 | 10/26/11 | 82,925 | — | |||||||||||||||||||||||||
Indian Rupee | HSBC | Buy | 213,392,000 | 4,601,941 | 10/26/11 | 76,944 | — | |||||||||||||||||||||||||
Philippine Peso | HSBC | Buy | 154,149,000 | 3,489,745 | 10/26/11 | 30,702 | — | |||||||||||||||||||||||||
Philippine Peso | DBAB | Buy | 165,158,000 | 3,744,145 | 10/26/11 | 27,724 | — | |||||||||||||||||||||||||
Philippine Peso | JPHQ | Buy | 82,631,000 | 1,873,634 | 10/26/11 | 13,488 | — | |||||||||||||||||||||||||
Indian Rupee | DBAB | Buy | 440,314,000 | 9,473,193 | 10/27/11 | 179,558 | — | |||||||||||||||||||||||||
Indian Rupee | HSBC | Buy | 317,880,000 | 6,876,055 | 10/27/11 | 92,646 | — | |||||||||||||||||||||||||
Norwegian Krone | BZWS | Buy | 61,766,000 | 7,531,521 | EUR | 10/27/11 | 476,346 | — | ||||||||||||||||||||||||
Philippine Peso | HSBC | Buy | 40,030,000 | 911,637 | 10/27/11 | 2,497 | — | |||||||||||||||||||||||||
Chilean Peso | BZWS | Buy | 199,342,000 | 393,568 | 10/28/11 | 26,704 | — | |||||||||||||||||||||||||
Chilean Peso | DBAB | Buy | 398,486,000 | 787,133 | 10/28/11 | 52,994 | — | |||||||||||||||||||||||||
Philippine Peso | DBAB | Buy | 146,355,000 | 3,332,312 | 10/28/11 | 9,635 | — | |||||||||||||||||||||||||
Philippine Peso | HSBC | Buy | 26,680,000 | 607,745 | 10/28/11 | 1,480 | — | |||||||||||||||||||||||||
TGB-20
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Templeton Global Bond Securities Fund |
Forward Exchange Contracts (continued)
| Currency | Counterparty | Type | Quantity | Contract Amount* | Settlement Date | Unrealized Appreciation | Unrealized Depreciation | |||||||||||||||||||||||||
Philippine Peso | HSBC | Buy | 52,110,000 | 1,185,126 | 10/31/11 | $ | 4,514 | $ | — | |||||||||||||||||||||||
Philippine Peso | DBAB | Buy | 26,150,000 | 607,843 | 11/04/11 | — | (11,033 | ) | ||||||||||||||||||||||||
Norwegian Krone | UBSW | Buy | 47,173,200 | 5,682,902 | EUR | 11/07/11 | 459,839 | — | ||||||||||||||||||||||||
Japanese Yen | CITI | Sell | 341,992,119 | 4,230,534 | 11/08/11 | — | (21,620 | ) | ||||||||||||||||||||||||
Japanese Yen | BZWS | Sell | 335,950,000 | 4,156,254 | 11/10/11 | — | (20,861 | ) | ||||||||||||||||||||||||
Japanese Yen | BZWS | Sell | 429,663,000 | 5,357,394 | 11/14/11 | 14,857 | — | |||||||||||||||||||||||||
Japanese Yen | UBSW | Sell | 340,600,700 | 4,246,521 | 11/14/11 | 11,407 | — | |||||||||||||||||||||||||
Philippine Peso | DBAB | Buy | 48,500,000 | 1,126,545 | 11/14/11 | — | (20,477 | ) | ||||||||||||||||||||||||
Japanese Yen | DBAB | Sell | 796,770,000 | 9,733,480 | 11/16/11 | — | (173,961 | ) | ||||||||||||||||||||||||
Japanese Yen | JPHQ | Sell | 397,873,000 | 4,862,190 | 11/16/11 | — | (85,164 | ) | ||||||||||||||||||||||||
Euro | UBSW | Sell | 4,794,427 | 6,494,531 | 11/17/11 | — | (428,839 | ) | ||||||||||||||||||||||||
Japanese Yen | BZWS | Sell | 986,239,000 | 11,990,310 | 11/17/11 | — | (273,210 | ) | ||||||||||||||||||||||||
Japanese Yen | UBSW | Sell | 317,836,000 | 3,860,044 | 11/17/11 | — | (92,130 | ) | ||||||||||||||||||||||||
Japanese Yen | HSBC | Sell | 207,909,000 | 2,515,231 | 11/17/11 | — | (70,041 | ) | ||||||||||||||||||||||||
Euro | DBAB | Sell | 933,877 | 1,259,295 | 11/18/11 | — | (89,222 | ) | ||||||||||||||||||||||||
Japanese Yen | BZWS | Sell | 1,107,834,000 | 13,360,275 | 11/21/11 | — | (415,801 | ) | ||||||||||||||||||||||||
Norwegian Krone | MSCO | Buy | 15,002,870 | 1,807,891 | EUR | 11/25/11 | 143,432 | — | ||||||||||||||||||||||||
Euro | DBAB | Sell | 1,300,570 | 1,737,236 | 11/28/11 | — | (140,183 | ) | ||||||||||||||||||||||||
Japanese Yen | BOFA | Sell | 859,147,000 | 10,376,172 | 11/28/11 | — | (308,214 | ) | ||||||||||||||||||||||||
Norwegian Krone | UBSW | Buy | 75,812,000 | 9,179,975 | EUR | 11/28/11 | 658,946 | — | ||||||||||||||||||||||||
Norwegian Krone | MSCO | Buy | 23,130,000 | 2,781,921 | EUR | 11/28/11 | 228,268 | — | ||||||||||||||||||||||||
Japanese Yen | BZWS | Sell | 1,251,786,000 | 15,116,363 | 11/29/11 | — | (451,056 | ) | ||||||||||||||||||||||||
Japanese Yen | CITI | Sell | 310,702,000 | 3,754,253 | 11/29/11 | — | (109,689 | ) | ||||||||||||||||||||||||
Japanese Yen | DBAB | Sell | 770,370,000 | 9,205,042 | 12/01/11 | — | (375,604 | ) | ||||||||||||||||||||||||
Norwegian Krone | UBSW | Buy | 23,030,000 | 2,791,515 | EUR | 12/01/11 | 195,542 | — | ||||||||||||||||||||||||
Euro | DBAB | Sell | 5,440,000 | 7,078,800 | 12/02/11 | — | (773,029 | ) | ||||||||||||||||||||||||
Euro | HSBC | Sell | 2,155,292 | 2,824,079 | 12/06/11 | — | (286,365 | ) | ||||||||||||||||||||||||
Euro | UBSW | Sell | 1,343,551 | 1,789,315 | 12/07/11 | — | (149,590 | ) | ||||||||||||||||||||||||
Euro | BZWS | Sell | 5,095,000 | 6,732,533 | 12/12/11 | — | (618,983 | ) | ||||||||||||||||||||||||
Malaysian Ringgit | JPHQ | Buy | 13,361,013 | 4,220,289 | 12/16/11 | 150,165 | — | |||||||||||||||||||||||||
Japanese Yen | CITI | Sell | 286,112,008 | 3,445,887 | 12/28/11 | — | (113,323 | ) | ||||||||||||||||||||||||
Japanese Yen | BZWS | Sell | 285,057,504 | 3,434,883 | 12/28/11 | — | (111,209 | ) | ||||||||||||||||||||||||
Japanese Yen | JPHQ | Sell | 285,510,329 | 3,463,124 | 12/28/11 | — | (88,602 | ) | ||||||||||||||||||||||||
Swedish Krona | DBAB | Buy | 136,332,733 | 15,020,408 | EUR | 1/05/12 | — | (346,212 | ) | |||||||||||||||||||||||
Euro | CITI | Sell | 5,040,000 | 6,519,290 | 1/10/12 | — | (745,917 | ) | ||||||||||||||||||||||||
Japanese Yen | BZWS | Sell | 277,330,000 | 3,353,446 | 1/10/12 | — | (97,146 | ) | ||||||||||||||||||||||||
Japanese Yen | UBSW | Sell | 138,650,000 | 1,676,805 | 1/10/12 | — | (48,304 | ) | ||||||||||||||||||||||||
Japanese Yen | CITI | Sell | 138,680,000 | 1,677,960 | 1/10/12 | — | (47,523 | ) | ||||||||||||||||||||||||
Euro | UBSW | Sell | 13,846,000 | 17,922,609 | 1/11/12 | — | (2,035,853 | ) | ||||||||||||||||||||||||
Euro | DBAB | Sell | 9,460,000 | 12,259,119 | 1/11/12 | — | (1,377,097 | ) | ||||||||||||||||||||||||
Euro | BZWS | Sell | 1,726,000 | 2,233,444 | 1/11/12 | — | (254,517 | ) | ||||||||||||||||||||||||
Japanese Yen | DBAB | Sell | 139,110,000 | 1,682,491 | 1/12/12 | — | (48,391 | ) | ||||||||||||||||||||||||
Japanese Yen | HSBC | Sell | 139,250,000 | 1,687,572 | 1/12/12 | — | (45,051 | ) | ||||||||||||||||||||||||
Chilean Peso | MSCO | Buy | 2,254,600,000 | 4,442,999 | 1/13/12 | 270,034 | — | |||||||||||||||||||||||||
Euro | JPHQ | Sell | 937,000 | 1,211,775 | 1/13/12 | — | (138,782 | ) | ||||||||||||||||||||||||
Japanese Yen | BZWS | Sell | 394,150,000 | 4,771,792 | 1/13/12 | — | (132,503 | ) | ||||||||||||||||||||||||
Japanese Yen | HSBC | Sell | 397,130,000 | 4,811,539 | 1/13/12 | — | (129,835 | ) | ||||||||||||||||||||||||
Japanese Yen | UBSW | Sell | 313,510,000 | 3,797,176 | 1/13/12 | — | (103,739 | ) | ||||||||||||||||||||||||
Philippine Peso | JPHQ | Buy | 374,905,000 | 8,515,730 | 1/13/12 | — | (1,816 | ) | ||||||||||||||||||||||||
Philippine Peso | HSBC | Buy | 60,160,000 | 1,367,801 | 1/17/12 | — | (1,920 | ) | ||||||||||||||||||||||||
Euro | DBAB | Sell | 4,856,000 | 6,438,109 | 1/18/12 | — | (559,960 | ) | ||||||||||||||||||||||||
Philippine Peso | DBAB | Buy | 66,125,000 | 1,484,121 | 1/18/12 | 17,101 | — | |||||||||||||||||||||||||
Philippine Peso | HSBC | Buy | 115,942,000 | 2,602,806 | 1/18/12 | 29,401 | — | |||||||||||||||||||||||||
Philippine Peso | DBAB | Buy | 41,372,000 | 931,592 | 1/19/12 | 7,612 | — | |||||||||||||||||||||||||
Philippine Peso | JPHQ | Buy | 165,119,000 | 3,670,535 | 1/19/12 | 77,906 | — | |||||||||||||||||||||||||
British Pound | BZWS | Buy | 906,238 | 1,435,872 | 1/24/12 | 14,768 | — | |||||||||||||||||||||||||
TGB-21
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Templeton Global Bond Securities Fund |
Forward Exchange Contracts (continued)
| Currency | Counterparty | Type | Quantity | Contract Amount* | Settlement Date | Unrealized Appreciation | Unrealized Depreciation | |||||||||||||||||||||||||
British Pound | DBAB | Buy | 903,679 | 1,430,452 | 1/24/12 | $ | 16,092 | $ | — | |||||||||||||||||||||||
British Pound | CITI | Buy | 603,463 | 953,634 | 1/24/12 | 12,345 | — | |||||||||||||||||||||||||
British Pound | DBAB | Buy | 474,519 | 755,031 | 1/26/12 | 4,523 | — | |||||||||||||||||||||||||
Japanese Yen | BZWS | Sell | 1,079,470,000 | 13,122,660 | 1/26/12 | — | (311,326 | ) | ||||||||||||||||||||||||
Japanese Yen | UBSW | Sell | 944,420,000 | 11,488,596 | 1/26/12 | — | (264,695 | ) | ||||||||||||||||||||||||
Japanese Yen | DBAB | Sell | 897,860,782 | 10,935,263 | 1/26/12 | — | (238,599 | ) | ||||||||||||||||||||||||
Philippine Peso | HSBC | Buy | 154,149,000 | 3,423,251 | 1/26/12 | 74,703 | — | |||||||||||||||||||||||||
British Pound | MSCO | Buy | 358,395 | 564,198 | 1/27/12 | 9,471 | — | |||||||||||||||||||||||||
British Pound | JPHQ | Buy | 119,423 | 190,002 | 1/27/12 | 1,154 | — | |||||||||||||||||||||||||
British Pound | BZWS | Buy | 601,378 | 945,862 | 1/27/12 | 16,740 | — | |||||||||||||||||||||||||
Chilean Peso | DBAB | Buy | 2,227,910,000 | 4,404,290 | 1/27/12 | 245,542 | — | |||||||||||||||||||||||||
Euro | CITI | Sell | 4,998,400 | 6,758,487 | 1/27/12 | — | (442,597 | ) | ||||||||||||||||||||||||
Japanese Yen | HSBC | Sell | 1,162,462,488 | 14,183,290 | 1/27/12 | — | (283,738 | ) | ||||||||||||||||||||||||
British Pound | JPHQ | Buy | 237,230 | 373,367 | 1/30/12 | 6,342 | — | |||||||||||||||||||||||||
Chilean Peso | DBAB | Buy | 5,127,860,000 | 10,218,932 | 1/30/12 | 479,687 | — | |||||||||||||||||||||||||
Chilean Peso | JPHQ | Buy | 675,370,000 | 1,337,102 | 1/30/12 | 71,971 | — | |||||||||||||||||||||||||
British Pound | MSCO | Buy | 116,956 | 185,153 | 1/31/12 | 2,043 | — | |||||||||||||||||||||||||
Chilean Peso | DBAB | Buy | 3,093,470,000 | 6,161,677 | 1/31/12 | 291,716 | — | |||||||||||||||||||||||||
Euro | DBAB | Sell | 31,205,000 | 42,438,800 | 1/31/12 | — | (2,511,449 | ) | ||||||||||||||||||||||||
British Pound | CITI | Buy | 391,619 | 619,451 | 2/01/12 | 7,355 | — | |||||||||||||||||||||||||
British Pound | MSCO | Buy | 450,886 | 710,738 | 2/01/12 | 10,927 | — | |||||||||||||||||||||||||
British Pound | BZWS | Buy | 48,594 | 76,617 | 2/01/12 | 1,160 | — | |||||||||||||||||||||||||
Euro | UBSW | Sell | 5,540,000 | 7,543,763 | 2/01/12 | — | (436,238 | ) | ||||||||||||||||||||||||
Philippine Peso | HSBC | Buy | 99,500,000 | 2,237,354 | 2/03/12 | 19,433 | — | |||||||||||||||||||||||||
Philippine Peso | DBAB | Buy | 155,800,000 | 3,505,772 | 2/03/12 | 27,972 | — | |||||||||||||||||||||||||
Indian Rupee | JPHQ | Buy | 21,500,000 | 445,873 | 2/06/12 | 17,790 | — | |||||||||||||||||||||||||
Philippine Peso | HSBC | Buy | 84,800,000 | 1,916,384 | 2/06/12 | 6,647 | — | |||||||||||||||||||||||||
Philippine Peso | JPHQ | Buy | 60,500,000 | 1,362,613 | 2/07/12 | 9,280 | — | |||||||||||||||||||||||||
Singapore Dollar | DBAB | Buy | 6,207,000 | 4,860,459 | 2/07/12 | 196,972 | — | |||||||||||||||||||||||||
Singapore Dollar | HSBC | Buy | 6,206,000 | 4,860,284 | 2/07/12 | 196,331 | — | |||||||||||||||||||||||||
Australian Dollar | UBSW | Buy | 10,557,970 | 10,238,591 | 2/08/12 | 766,009 | — | |||||||||||||||||||||||||
Australian Dollar | MSCO | Buy | 10,560,886 | 10,268,877 | 2/08/12 | 738,762 | — | |||||||||||||||||||||||||
Euro | CITI | Sell | 6,572,000 | 8,878,181 | 2/08/12 | — | (586,100 | ) | ||||||||||||||||||||||||
Euro | UBSW | Sell | 4,929,000 | 6,676,084 | 2/08/12 | — | (422,126 | ) | ||||||||||||||||||||||||
Euro | HSBC | Sell | 1,200,000 | 1,621,680 | 2/08/12 | — | (106,430 | ) | ||||||||||||||||||||||||
Norwegian Krone | UBSW | Buy | 72,121,400 | 9,100,722 | EUR | 2/08/12 | 55,835 | — | ||||||||||||||||||||||||
Singapore Dollar | DBAB | Buy | 12,363,000 | 9,721,129 | 2/08/12 | 352,238 | — | |||||||||||||||||||||||||
Australian Dollar | BZWS | Buy | 3,351,000 | 265,734,300 | JPY | 2/09/12 | 184,611 | — | ||||||||||||||||||||||||
Australian Dollar | CITI | Buy | 3,351,000 | 265,901,850 | JPY | 2/09/12 | 182,525 | — | ||||||||||||||||||||||||
Australian Dollar | DBAB | Buy | 3,351,000 | 265,995,678 | JPY | 2/09/12 | 181,357 | — | ||||||||||||||||||||||||
Euro | BZWS | Sell | 800,000 | 1,078,400 | 2/09/12 | — | (73,634 | ) | ||||||||||||||||||||||||
Euro | HSBC | Sell | 600,000 | 806,880 | 2/09/12 | — | (57,146 | ) | ||||||||||||||||||||||||
Euro | JPHQ | Sell | 300,000 | 405,840 | 2/09/12 | — | (26,173 | ) | ||||||||||||||||||||||||
Euro | DBAB | Sell | 180,000 | 242,431 | 2/09/12 | — | (16,776 | ) | ||||||||||||||||||||||||
Norwegian Krone | UBSW | Buy | 100,802,700 | 12,673,686 | EUR | 2/09/12 | 143,790 | — | ||||||||||||||||||||||||
Norwegian Krone | DBAB | Buy | 144,025,000 | 18,112,935 | EUR | 2/09/12 | 198,229 | — | ||||||||||||||||||||||||
Polish Zloty | DBAB | Buy | 17,528,000 | 4,407,896 | EUR | 2/09/12 | — | (93,595 | ) | |||||||||||||||||||||||
Singapore Dollar | BZWS | Buy | 1,717,028 | 1,347,894 | 2/09/12 | 51,148 | — | |||||||||||||||||||||||||
Chilean Peso | DBAB | Buy | 1,145,000,000 | 2,326,290 | 2/10/12 | 59,624 | — | |||||||||||||||||||||||||
Euro | BZWS | Sell | 612,000 | 829,872 | 2/10/12 | — | (51,404 | ) | ||||||||||||||||||||||||
Japanese Yen | HSBC | Sell | 413,563,000 | 5,052,077 | 2/10/12 | — | (95,791 | ) | ||||||||||||||||||||||||
Japanese Yen | MSCO | Sell | 394,373,000 | 4,826,319 | 2/10/12 | — | (82,680 | ) | ||||||||||||||||||||||||
Polish Zloty | BZWS | Buy | 17,528,000 | 4,405,238 | EUR | 2/10/12 | — | (90,106 | ) | |||||||||||||||||||||||
Chilean Peso | DBAB | Buy | 1,058,220,000 | 2,149,980 | 2/13/12 | 54,354 | — | |||||||||||||||||||||||||
TGB-22
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Templeton Global Bond Securities Fund |
Forward Exchange Contracts (continued)
| Currency | Counterparty | Type | Quantity | Contract Amount* | Settlement Date | Unrealized Appreciation | Unrealized Depreciation | |||||||||||||||||||||||||
Chilean Peso | BZWS | Buy | 1,142,900,000 | 2,319,196 | 2/13/12 | $ | 61,531 | $ | — | |||||||||||||||||||||||
Euro | UBSW | Sell | 657,000 | 892,055 | 2/13/12 | �� | — | (53,925 | ) | |||||||||||||||||||||||
Singapore Dollar | HSBC | Buy | 6,117,200 | 4,803,595 | 2/13/12 | 180,846 | — | |||||||||||||||||||||||||
British Pound | BZWS | Buy | 2,562,230 | 4,082,606 | 2/14/12 | 17,637 | — | |||||||||||||||||||||||||
Chilean Peso | DBAB | Buy | 1,130,600,000 | 2,305,465 | 2/14/12 | 49,374 | — | |||||||||||||||||||||||||
Chilean Peso | MSCO | Buy | 1,963,430,000 | 4,038,733 | 2/14/12 | 50,743 | — | |||||||||||||||||||||||||
Malaysian Ringgit | DBAB | Buy | 97,443,480 | 31,603,632 | 2/14/12 | 148,378 | — | |||||||||||||||||||||||||
Polish Zloty | DBAB | Buy | 17,528,000 | 4,365,194 | EUR | 2/14/12 | — | (33,811 | ) | |||||||||||||||||||||||
Singapore Dollar | HSBC | Buy | 4,404,400 | 3,458,582 | 2/14/12 | 130,251 | — | |||||||||||||||||||||||||
Japanese Yen | JPHQ | Sell | 144,920,000 | 1,765,595 | 2/15/12 | — | (38,439 | ) | ||||||||||||||||||||||||
Japanese Yen | DBAB | Sell | 123,057,280 | 1,497,958 | 2/15/12 | — | (33,917 | ) | ||||||||||||||||||||||||
Chilean Peso | MSCO | Buy | 3,554,470,000 | 7,382,077 | 2/16/12 | 19,574 | — | |||||||||||||||||||||||||
Euro | JPHQ | Sell | 1,971,000 | 2,636,410 | 2/16/12 | — | (201,240 | ) | ||||||||||||||||||||||||
Euro | UBSW | Sell | 1,971,000 | 2,637,533 | 2/16/12 | — | (200,117 | ) | ||||||||||||||||||||||||
Euro | DBAB | Sell | 2,038,000 | 2,734,629 | 2/17/12 | — | (199,381 | ) | ||||||||||||||||||||||||
Malaysian Ringgit | HSBC | Buy | 4,899,000 | 1,582,569 | 2/17/12 | 13,474 | — | |||||||||||||||||||||||||
Singapore Dollar | DBAB | Buy | 7,334,000 | 5,736,544 | 2/17/12 | 239,518 | — | |||||||||||||||||||||||||
Singapore Dollar | HSBC | Buy | 7,334,000 | 5,736,724 | 2/17/12 | 239,338 | — | |||||||||||||||||||||||||
Singapore Dollar | BZWS | Buy | 4,886,000 | 3,824,209 | 2/17/12 | 157,117 | — | |||||||||||||||||||||||||
Chilean Peso | DBAB | Buy | 1,455,470,000 | 3,009,657 | 2/21/12 | 19,424 | — | |||||||||||||||||||||||||
Chilean Peso | JPHQ | Buy | 1,055,800,000 | 2,167,411 | 2/21/12 | 29,889 | — | |||||||||||||||||||||||||
Euro | UBSW | Sell | 2,038,000 | 2,728,495 | 2/21/12 | — | (205,118 | ) | ||||||||||||||||||||||||
Chilean Peso | JPHQ | Buy | 1,792,000,000 | 3,719,772 | 2/22/12 | 9,263 | — | |||||||||||||||||||||||||
Japanese Yen | HSBC | Sell | 385,460,000 | 4,651,662 | 2/22/12 | — | (147,199 | ) | ||||||||||||||||||||||||
Chilean Peso | DBAB | Buy | 1,435,490,000 | 2,965,643 | 2/23/12 | 21,179 | — | |||||||||||||||||||||||||
Japanese Yen | JPHQ | Sell | 385,700,000 | 4,652,313 | 2/23/12 | — | (149,604 | ) | ||||||||||||||||||||||||
Singapore Dollar | DBAB | Buy | 9,547,000 | 7,468,688 | 2/24/12 | 310,949 | — | |||||||||||||||||||||||||
Chilean Peso | DBAB | Buy | 2,094,920,000 | 4,297,757 | 2/27/12 | 59,167 | — | |||||||||||||||||||||||||
Chilean Peso | CITI | Buy | 2,285,090,000 | 4,709,098 | 2/27/12 | 43,332 | — | |||||||||||||||||||||||||
Chilean Peso | MSCO | Buy | 2,254,540,000 | 4,646,859 | 2/27/12 | 42,034 | — | |||||||||||||||||||||||||
Euro | DBAB | Sell | 5,346,000 | 7,284,299 | 2/27/12 | — | (409,470 | ) | ||||||||||||||||||||||||
Singapore Dollar | DBAB | Buy | 5,952,000 | 4,667,869 | 2/27/12 | 182,370 | — | |||||||||||||||||||||||||
Chilean Peso | JPHQ | Buy | 593,800,000 | 1,223,069 | 2/28/12 | 11,751 | — | |||||||||||||||||||||||||
Chilean Peso | MSCO | Buy | 1,559,200,000 | 3,181,392 | 2/28/12 | 60,997 | — | |||||||||||||||||||||||||
Chilean Peso | DBAB | Buy | 790,050,000 | 1,632,200 | 2/29/12 | 10,540 | — | |||||||||||||||||||||||||
Chilean Peso | BZWS | Buy | 2,006,200,000 | 4,086,779 | 2/29/12 | 84,683 | — | |||||||||||||||||||||||||
Euro | DBAB | Sell | 3,252,140 | 4,444,049 | 2/29/12 | — | (235,996 | ) | ||||||||||||||||||||||||
Singapore Dollar | DBAB | Buy | 5,960,000 | 4,668,212 | 2/29/12 | 188,604 | — | |||||||||||||||||||||||||
Chilean Peso | BZWS | Buy | 1,004,500,000 | 2,043,328 | 3/01/12 | 45,078 | — | |||||||||||||||||||||||||
Chilean Peso | DBAB | Buy | 1,253,970,000 | 2,553,390 | 3/01/12 | 53,676 | — | |||||||||||||||||||||||||
Euro | DBAB | Sell | 1,530,900 | 2,087,306 | 3/01/12 | — | (115,686 | ) | ||||||||||||||||||||||||
Japanese Yen | UBSW | Sell | 447,200,000 | 5,501,021 | 3/01/12 | — | (67,111 | ) | ||||||||||||||||||||||||
Japanese Yen | JPHQ | Sell | 401,100,000 | 4,934,793 | 3/01/12 | — | (59,343 | ) | ||||||||||||||||||||||||
Japanese Yen | HSBC | Sell | 400,800,000 | 4,932,923 | 3/01/12 | — | (57,477 | ) | ||||||||||||||||||||||||
Chilean Peso | DBAB | Buy | 1,253,970,000 | 2,553,390 | 3/02/12 | 53,381 | — | |||||||||||||||||||||||||
Chilean Peso | DBAB | Buy | 1,328,230,000 | 2,706,255 | 3/05/12 | 53,952 | — | |||||||||||||||||||||||||
Euro | DBAB | Sell | 1,536,000 | 2,099,251 | 3/05/12 | — | (110,780 | ) | ||||||||||||||||||||||||
Chilean Peso | DBAB | Buy | 1,320,220,000 | 2,682,556 | 3/07/12 | 60,385 | — | |||||||||||||||||||||||||
Euro | UBSW | Sell | 6,915,000 | 9,567,248 | 3/08/12 | — | (381,197 | ) | ||||||||||||||||||||||||
Euro | MSCO | Sell | 5,225,000 | 7,228,526 | 3/08/12 | — | (288,556 | ) | ||||||||||||||||||||||||
Euro | HSBC | Sell | 1,844,000 | 2,548,408 | 3/08/12 | — | (104,511 | ) | ||||||||||||||||||||||||
Chilean Peso | DBAB | Buy | 1,284,460,000 | 2,629,396 | 3/09/12 | 38,645 | — | |||||||||||||||||||||||||
TGB-23
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Templeton Global Bond Securities Fund |
Forward Exchange Contracts (continued)
| Currency | Counterparty | Type | Quantity | Contract Amount* | Settlement Date | Unrealized Appreciation | Unrealized Depreciation | |||||||||||||||||||||||||
Chilean Peso | MSCO | Buy | 662,100,000 | 1,346,279 | 3/12/12 | $ | 28,548 | $ | — | |||||||||||||||||||||||
Chilean Peso | DBAB | Buy | 2,600,220,000 | 5,301,695 | 3/15/12 | 95,740 | — | |||||||||||||||||||||||||
Australian Dollar | CITI | Buy | 16,742,000 | 15,737,313 | 3/19/12 | 1,626,031 | — | |||||||||||||||||||||||||
Japanese Yen | CITI | Sell | 407,702,000 | 5,074,644 | 3/19/12 | — | (2,977 | ) | ||||||||||||||||||||||||
Japanese Yen | MSCO | Sell | 244,700,000 | 3,044,896 | 3/19/12 | — | (2,659 | ) | ||||||||||||||||||||||||
Japanese Yen | UBSW | Sell | 330,530,000 | 4,114,396 | 3/19/12 | — | (2,106 | ) | ||||||||||||||||||||||||
Singapore Dollar | DBAB | Buy | 7,978,100 | 6,254,047 | 3/19/12 | 248,064 | — | |||||||||||||||||||||||||
Singapore Dollar | JPHQ | Buy | 11,426,000 | 8,934,240 | 3/19/12 | 377,892 | — | |||||||||||||||||||||||||
Singapore Dollar | HSBC | Buy | 9,120,000 | 7,147,559 | 3/19/12 | 285,194 | — | |||||||||||||||||||||||||
Australian Dollar | DBAB | Buy | 8,192,166 | 7,679,992 | 3/21/12 | 814,094 | — | |||||||||||||||||||||||||
Chilean Peso | JPHQ | Buy | 1,065,000,000 | 2,137,481 | 3/21/12 | 71,706 | — | |||||||||||||||||||||||||
Singapore Dollar | DBAB | Buy | 8,589,700 | 6,700,757 | 3/21/12 | 299,889 | — | |||||||||||||||||||||||||
Singapore Dollar | HSBC | Buy | 6,864,000 | 5,360,615 | 3/21/12 | 233,577 | — | |||||||||||||||||||||||||
Australian Dollar | DBAB | Buy | 537,776 | 503,606 | 3/22/12 | 53,920 | — | |||||||||||||||||||||||||
Japanese Yen | UBSW | Sell | 242,774,840 | 3,005,643 | 3/23/12 | — | (18,104 | ) | ||||||||||||||||||||||||
Euro | DBAB | Sell | 2,736,000 | 3,829,333 | 3/26/12 | — | (104,485 | ) | ||||||||||||||||||||||||
British Pound | MSCO | Buy | 2,852,773 | 4,545,238 | 3/29/12 | 17,152 | — | |||||||||||||||||||||||||
British Pound | DBAB | Buy | 2,853,149 | 4,545,238 | 3/29/12 | 17,753 | — | |||||||||||||||||||||||||
British Pound | BZWS | Buy | 5,722,896 | 9,090,477 | 3/30/12 | 61,902 | — | |||||||||||||||||||||||||
Chilean Peso | DBAB | Buy | 1,252,750,000 | 2,510,018 | 3/30/12 | 85,978 | — | |||||||||||||||||||||||||
New Israeli Shekel | MSCO | Buy | 9,296,110 | 2,596,996 | 3/30/12 | 100,186 | — | |||||||||||||||||||||||||
British Pound | FBCO | Buy | 3,431,879 | 5,454,285 | 4/02/12 | 33,904 | — | |||||||||||||||||||||||||
Chilean Peso | DBAB | Buy | 1,330,940,000 | 2,656,408 | 4/02/12 | 100,674 | — | |||||||||||||||||||||||||
Euro | DBAB | Sell | 3,712,000 | 5,214,432 | 4/04/12 | — | (121,000 | ) | ||||||||||||||||||||||||
Euro | DBAB | Sell | 2,488,000 | 3,482,304 | 4/05/12 | — | (93,690 | ) | ||||||||||||||||||||||||
Euro | HSBC | Sell | 8,692,000 | 12,212,434 | 4/10/12 | — | (278,369 | ) | ||||||||||||||||||||||||
Euro | DBAB | Sell | 7,243,000 | 10,201,041 | 4/10/12 | — | (207,482 | ) | ||||||||||||||||||||||||
Euro | UBSW | Sell | 4,346,000 | 6,102,436 | 4/10/12 | — | (142,966 | ) | ||||||||||||||||||||||||
Indian Rupee | DBAB | Buy | 159,915,000 | 3,413,340 | 4/11/12 | 5,233 | — | |||||||||||||||||||||||||
Euro | UBSW | Sell | 3,907,000 | 5,569,722 | 4/12/12 | — | (44,425 | ) | ||||||||||||||||||||||||
Indian Rupee | DBAB | Buy | 342,913,000 | 7,346,037 | 4/13/12 | — | (17,113 | ) | ||||||||||||||||||||||||
Chilean Peso | MSCO | Buy | 2,645,530,000 | 5,374,363 | 4/16/12 | 97,204 | — | |||||||||||||||||||||||||
Euro | HSBC | Sell | 6,919,000 | 9,915,481 | 4/16/12 | — | (25,357 | ) | ||||||||||||||||||||||||
Indian Rupee | JPHQ | Buy | 230,330,000 | 4,921,581 | 4/16/12 | — | (535 | ) | ||||||||||||||||||||||||
Indian Rupee | JPHQ | Buy | 226,092,000 | 4,802,294 | 4/18/12 | 27,101 | — | |||||||||||||||||||||||||
Indian Rupee | DBAB | Buy | 79,271,000 | 1,678,404 | 4/19/12 | 14,655 | — | |||||||||||||||||||||||||
Indian Rupee | JPHQ | Buy | 112,941,000 | 2,396,880 | 4/19/12 | 15,298 | — | |||||||||||||||||||||||||
Malaysian Ringgit | JPHQ | Buy | 4,069,213 | 1,329,330 | 4/19/12 | — | (8,965 | ) | ||||||||||||||||||||||||
Chilean Peso | MSCO | Buy | 2,370,410,000 | 4,788,707 | 4/20/12 | 111,619 | — | |||||||||||||||||||||||||
Japanese Yen | UBSW | Sell | 261,900,000 | 3,188,653 | 4/20/12 | — | (74,801 | ) | ||||||||||||||||||||||||
Japanese Yen | CITI | Sell | 261,800,000 | 3,189,299 | 4/20/12 | — | (72,909 | ) | ||||||||||||||||||||||||
Euro | DBAB | Sell | 4,545,000 | 6,425,948 | 4/23/12 | — | (102,462 | ) | ||||||||||||||||||||||||
Malaysian Ringgit | JPHQ | Buy | 11,659,000 | 3,812,498 | 4/23/12 | — | (30,472 | ) | ||||||||||||||||||||||||
Indian Rupee | DBAB | Buy | 160,601,000 | 3,410,512 | 4/26/12 | 16,835 | — | |||||||||||||||||||||||||
Chilean Peso | JPHQ | Buy | 1,501,938,000 | 3,045,910 | 4/27/12 | 56,563 | — | |||||||||||||||||||||||||
Indian Rupee | JPHQ | Buy | 136,582,000 | 2,896,755 | 4/27/12 | 17,675 | — | |||||||||||||||||||||||||
Chilean Peso | CITI | Buy | 2,420,966,000 | 4,976,292 | 4/30/12 | 22,864 | — | |||||||||||||||||||||||||
Indian Rupee | JPHQ | Buy | 113,782,000 | 2,415,754 | 4/30/12 | 11,330 | — | |||||||||||||||||||||||||
Indian Rupee | DBAB | Buy | 71,377,981 | 1,505,547 | 4/30/12 | 17,016 | — | |||||||||||||||||||||||||
Swedish Krona | BZWS | Buy | 122,773,200 | 13,607,901 | EUR | 4/30/12 | — | (485,468 | ) | |||||||||||||||||||||||
Euro | MSCO | Sell | 1,259,000 | 1,851,970 | 5/07/12 | 44,434 | — | |||||||||||||||||||||||||
Euro | DBAB | Sell | 2,045,000 | 2,991,017 | 5/07/12 | 55,026 | — | |||||||||||||||||||||||||
Euro | BZWS | Sell | 1,259,000 | 1,850,818 | 5/07/12 | 43,282 | — | |||||||||||||||||||||||||
Euro | FBCO | Sell | 1,731,000 | 2,537,646 | 5/07/12 | 52,463 | — | |||||||||||||||||||||||||
Euro | UBSW | Sell | 629,000 | 902,238 | 5/09/12 | — | (750 | ) | ||||||||||||||||||||||||
Euro | DBAB | Sell | 1,259,000 | 1,816,422 | 5/09/12 | 9,012 | — | |||||||||||||||||||||||||
TGB-24
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Templeton Global Bond Securities Fund |
Forward Exchange Contracts (continued)
| Currency | Counterparty | Type | Quantity | Contract Amount* | Settlement Date | Unrealized Appreciation | Unrealized Depreciation | |||||||||||||||||||||||||
Japanese Yen | CITI | Sell | 733,721,000 | 9,128,949 | 5/10/12 | $ | — | $ | (16,784 | ) | ||||||||||||||||||||||
Chilean Peso | MSCO | Buy | 1,150,200,000 | 2,368,958 | 5/11/12 | 3,176 | — | |||||||||||||||||||||||||
Japanese Yen | UBSW | Sell | 733,361,000 | 9,122,540 | 5/11/12 | — | (18,859 | ) | ||||||||||||||||||||||||
Japanese Yen | DBAB | Sell | 490,555,000 | 6,101,962 | 5/11/12 | — | (12,843 | ) | ||||||||||||||||||||||||
Euro | DBAB | Sell | 1,812,000 | 2,538,521 | 5/18/12 | — | (61,955 | ) | ||||||||||||||||||||||||
Euro | DBAB | Sell | 2,642,000 | 3,691,346 | 5/21/12 | — | (99,901 | ) | ||||||||||||||||||||||||
Euro | UBSW | Sell | 1,812,000 | 2,531,002 | 5/21/12 | — | (69,203 | ) | ||||||||||||||||||||||||
Chilean Peso | MSCO | Buy | 420,740,000 | 852,512 | 5/22/12 | 14,127 | — | |||||||||||||||||||||||||
Indian Rupee | DBAB | Buy | 217,594,000 | 4,559,807 | 6/01/12 | 64,766 | — | |||||||||||||||||||||||||
Indian Rupee | HSBC | Buy | 251,448,000 | 5,326,160 | 6/04/12 | 16,094 | — | |||||||||||||||||||||||||
Euro | DBAB | Sell | 785,200 | 1,123,692 | 6/06/12 | — | (2,435 | ) | ||||||||||||||||||||||||
Euro | UBSW | Sell | 1,057,200 | 1,517,505 | 6/07/12 | 1,331 | — | |||||||||||||||||||||||||
Euro | DBAB | Sell | 2,033,100 | 2,927,969 | 6/07/12 | 12,216 | — | |||||||||||||||||||||||||
Indian Rupee | DBAB | Buy | 160,277,000 | 3,379,945 | 6/07/12 | 24,130 | — | |||||||||||||||||||||||||
Indian Rupee | HSBC | Buy | 42,784,000 | 908,558 | 6/08/12 | 15 | — | |||||||||||||||||||||||||
Polish Zloty | DBAB | Buy | 30,704,000 | 7,583,856 | EUR | 6/08/12 | — | (34,251 | ) | |||||||||||||||||||||||
Polish Zloty | CITI | Buy | 5,990,000 | 1,480,328 | EUR | 6/08/12 | — | (7,836 | ) | |||||||||||||||||||||||
Euro | DBAB | Sell | 16,210,600 | 23,377,407 | 6/11/12 | 132,358 | — | |||||||||||||||||||||||||
Indian Rupee | DBAB | Buy | 43,392,000 | 921,078 | 6/11/12 | 92 | — | |||||||||||||||||||||||||
Swedish Krona | MSCO | Buy | 55,369,800 | 6,074,660 | EUR | �� | 6/11/12 | — | (137,303 | ) | ||||||||||||||||||||||
Swedish Krona | DBAB | Buy | 41,300,000 | 4,531,649 | EUR | 6/11/12 | — | (103,269 | ) | |||||||||||||||||||||||
Euro | DBAB | Sell | 6,935,000 | 9,949,645 | 6/13/12 | 5,954 | — | |||||||||||||||||||||||||
Indian Rupee | HSBC | Buy | 108,000,000 | 2,292,994 | 6/13/12 | — | (780 | ) | ||||||||||||||||||||||||
Swedish Krona | MSCO | Buy | 27,990,100 | 3,064,681 | EUR | 6/13/12 | — | (60,806 | ) | |||||||||||||||||||||||
Swedish Krona | BZWS | Buy | 24,372,000 | 2,664,986 | EUR | 6/13/12 | — | (47,866 | ) | |||||||||||||||||||||||
Euro | DBAB | Sell | 1,448,000 | 2,068,989 | 6/14/12 | — | (7,141 | ) | ||||||||||||||||||||||||
Swedish Krona | MSCO | Buy | 21,992,000 | 2,398,444 | EUR | 6/14/12 | — | (34,237 | ) | |||||||||||||||||||||||
Indian Rupee | DBAB | Buy | 108,614,000 | 2,300,657 | 6/18/12 | 3,278 | — | |||||||||||||||||||||||||
Indian Rupee | DBAB | Buy | 98,937,000 | 2,087,719 | 6/20/12 | 10,468 | — | |||||||||||||||||||||||||
Indian Rupee | JPHQ | Buy | 79,054,000 | 1,669,567 | 6/22/12 | 6,573 | — | |||||||||||||||||||||||||
Indian Rupee | DBAB | Buy | 119,627,000 | 2,538,773 | 6/25/12 | — | (3,249 | ) | ||||||||||||||||||||||||
Indian Rupee | HSBC | Buy | 80,337,000 | 1,702,416 | 6/27/12 | — | (40 | ) | ||||||||||||||||||||||||
Malaysian Ringgit | JPHQ | Buy | 14,772,000 | 4,766,853 | 6/29/12 | 2,817 | — | |||||||||||||||||||||||||
Swedish Krona | UBSW | Buy | 302,991,000 | 32,586,637 | EUR | 6/29/12 | 168,310 | — | ||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||
Unrealized appreciation (depreciation) |
| 22,618,204 | (48,338,114 | ) | ||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||
Net unrealized appreciation (depreciation) |
| $ | (25,719,910 | ) | ||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||
*In U.S. dollars unless otherwise indicated.
At June 30, 2011, the Fund had the following interest rate swap contracts outstanding. See Note 1(d).
Interest Rate Swap Contracts
| Counterparty | Pay/Receive Floating Rate | Fixed Rate | Floating Rate | Notional Amount* | Expiration Date | Unrealized Appreciation | Unrealized Depreciation | |||||||||||||||||||
JPHQ | Receive | 3.558% | 3-month USD BBA LIBOR | 3,240,000 | 3/4/21 | $ | — | $ | (98,040 | ) | ||||||||||||||||
DBAB | Receive | 3.523% | 3-month USD BBA LIBOR | 14,630,000 | 3/28/21 | — | (487,771 | ) | ||||||||||||||||||
CITI | Receive | 4.347% | 3-month USD BBA LIBOR | 7,460,000 | 2/25/41 | — | (462,306 | ) | ||||||||||||||||||
JPHQ | Receive | 4.349% | 3-month USD BBA LIBOR | 7,460,000 | 2/25/41 | — | (384,750 | ) | ||||||||||||||||||
JPHQ | Receive | 4.320% | 3-month USD BBA LIBOR | 5,600,000 | 2/28/41 | — | (325,694 | ) | ||||||||||||||||||
JPHQ | Receive | 4.299% | 3-month USD BBA LIBOR | 1,870,000 | 3/1/41 | — | (98,769 | ) | ||||||||||||||||||
|
| |||||||||||||||||||||||||
Unrealized appreciation (depreciation) |
| — | (1,857,330 | ) | ||||||||||||||||||||||
|
| |||||||||||||||||||||||||
Net unrealized appreciation (depreciation) |
| $ | (1,857,330 | ) | ||||||||||||||||||||||
|
| |||||||||||||||||||||||||
*In U.S. Dollars unless otherwise indicated.
The accompanying notes are an integral part of these financial statements.
TGB-25
Franklin Templeton Variable Insurance Products Trust
Financial Statements
Statement of Assets and Liabilities
June 30, 2011 (unaudited)
| Templeton Global Bond Securities Fund | ||||
Assets: | ||||
Investments in securities: | ||||
Cost - Unaffiliated issuers | $ | 1,975,941,252 | ||
Cost - Repurchase agreements | 191,085,986 | |||
|
| |||
Total cost of investments | $ | 2,167,027,238 | ||
|
| |||
Value - Unaffiliated issuers | $ | 2,208,562,479 | ||
Value - Repurchase agreements | 191,085,986 | |||
|
| |||
Total value of investments | 2,399,648,465 | |||
Foreign currency, at value (cost $10,874,041) | 10,923,473 | |||
Receivables: | ||||
Capital shares sold | 1,573,669 | |||
Interest | 27,020,047 | |||
Due from brokers | 11,917,000 | |||
Unrealized appreciation on forward exchange contracts | 22,618,204 | |||
Other assets | 537 | |||
|
| |||
Total assets | 2,473,701,395 | |||
|
| |||
Liabilities: | ||||
Payables: | ||||
Capital shares redeemed | 4,199,569 | |||
Affiliates | 1,787,119 | |||
Unrealized depreciation on forward exchange contracts | 48,338,114 | |||
Unrealized depreciation on swap contracts | 1,857,330 | |||
Accrued expenses and other liabilities | 1,122,912 | |||
|
| |||
Total liabilities | 57,305,044 | |||
|
| |||
Net assets, at value | $ | 2,416,396,351 | ||
|
| |||
Net assets consist of: | ||||
Paid-in capital | $ | 2,113,086,314 | ||
Undistributed net investment income | 22,804,966 | |||
Net unrealized appreciation (depreciation) | 205,708,999 | |||
Accumulated net realized gain (loss) | 74,796,072 | |||
|
| |||
Net assets, at value | $ | 2,416,396,351 | ||
|
| |||
The accompanying notes are an integral part of these financial statements.
TGB-26
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Assets and Liabilities (continued)
June 30, 2011 (unaudited)
| Templeton Global Bond Securities Fund | ||||
Class 1: | ||||
Net assets, at value | $ | 291,254,073 | ||
|
| |||
Shares outstanding | 14,753,773 | |||
|
| |||
Net asset value and maximum offering price per share | $ | 19.74 | ||
|
| |||
Class 2: | ||||
Net assets, at value | $ | 1,757,266,464 | ||
|
| |||
Shares outstanding | 91,154,316 | |||
|
| |||
Net asset value and maximum offering price per share | $ | 19.28 | ||
|
| |||
Class 3: | ||||
Net assets, at value | $ | 202,111,008 | ||
|
| |||
Shares outstanding | 10,485,915 | |||
|
| |||
Net asset value and maximum offering price per sharea | $ | 19.27 | ||
|
| |||
Class 4: | ||||
Net assets, at value | $ | 165,764,806 | ||
|
| |||
Shares outstanding | 8,458,875 | |||
|
| |||
Net asset value and maximum offering price per share | $ | 19.60 | ||
|
| |||
aRedemption price is equal to net asset value less redemption fees retained by the Fund.
The accompanying notes are an integral part of these financial statements.
TGB-27
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Operations
for the six months ended June 30, 2011 (unaudited)
| Templeton Global Bond Securities Fund | ||||
Investment income: | ||||
Interest (net of foreign taxes of $2,283,349) | $ | 58,283,832 | ||
|
| |||
Expenses: | ||||
Management fees (Note 3a) | 5,098,431 | |||
Distribution fees: (Note 3c) | ||||
Class 2 | 1,991,157 | |||
Class 3 | 234,378 | |||
Class 4 | 275,327 | |||
Unaffiliated transfer agent fees | 1,662 | |||
Custodian fees (Note 4) | 646,579 | |||
Reports to shareholders | 239,989 | |||
Professional fees | 35,786 | |||
Trustees' fees and expenses | 3,877 | |||
Other | 21,717 | |||
|
| |||
Total expenses | 8,548,903 | |||
|
| |||
Net investment income | 49,734,929 | |||
|
| |||
Realized and unrealized gains (losses): | ||||
Net realized gain (loss) from: | ||||
Investments | 40,892,757 | |||
Foreign currency transactions | 34,658,636 | |||
Futures contracts | 3,393 | |||
Swap contracts | (464,772 | ) | ||
|
| |||
Net realized gain (loss) | 75,090,014 | |||
|
| |||
Net change in unrealized appreciation (depreciation) on: | ||||
Investments | 39,232,551 | |||
Translation of other assets and liabilities denominated in foreign currencies | (47,662,121 | ) | ||
|
| |||
Net change in unrealized appreciation (depreciation) | (8,429,570 | ) | ||
|
| |||
Net realized and unrealized gain (loss) | 66,660,444 | |||
|
| |||
Net increase (decrease) in net assets resulting from operations | $ | 116,395,373 | ||
|
| |||
The accompanying notes are an integral part of these financial statements.
TGB-28
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, 2011 (unaudited) | Year Ended December 31, 2010 | |||||||
| ||||||||
Increase (decrease) in net assets: | ||||||||
Operations: | ||||||||
Net investment income | $ | 49,734,929 | $ | 93,415,601 | ||||
Net realized gain (loss) from investments, foreign currency transactions, futures contracts and swap contracts | 75,090,014 | 26,725,973 | ||||||
Net change in unrealized appreciation (depreciation) on investments and translation of other assets and liabilities denominated in foreign currencies | (8,429,570 | ) | 123,023,722 | |||||
| ||||||||
Net increase (decrease) in net assets resulting from operations | 116,395,373 | 243,165,296 | ||||||
| ||||||||
Distributions to shareholders from: | ||||||||
Net investment income and net foreign currency gains: | ||||||||
Class 1 | (15,683,467 | ) | (3,860,853 | ) | ||||
Class 2 | (93,946,669 | ) | (17,334,382 | ) | ||||
Class 3 | (10,753,201 | ) | (2,167,994 | ) | ||||
Class 4 | (8,615,701 | ) | (1,885,595 | ) | ||||
Net realized gains: | ||||||||
Class 1 | (1,762,080 | ) | (610,541 | ) | ||||
Class 2 | (10,925,216 | ) | (3,135,836 | ) | ||||
Class 3 | (1,252,885 | ) | (394,847 | ) | ||||
Class 4 | (1,020,280 | ) | (338,834 | ) | ||||
| ||||||||
Total distributions to shareholders | (143,959,499 | ) | (29,728,882 | ) | ||||
| ||||||||
Capital share transactions (Note 2) | ||||||||
Class 1 | 21,845,503 | 48,911,860 | ||||||
Class 2 | 287,500,724 | 75,615,219 | ||||||
Class 3 | 20,981,651 | 21,722,929 | ||||||
Class 4 | 16,329,709 | 26,968,281 | ||||||
| ||||||||
Total capital share transactions | 346,657,587 | 173,218,289 | ||||||
| ||||||||
Redemption fees | 5,389 | 23,708 | ||||||
| ||||||||
Net increase (decrease) in net assets | 319,098,850 | 386,678,411 | ||||||
Net assets: | ||||||||
Beginning of period | 2,097,297,501 | 1,710,619,090 | ||||||
| ||||||||
End of period | $ | 2,416,396,351 | $ | 2,097,297,501 | ||||
| ||||||||
Undistributed net investment income included in net assets: | ||||||||
End of period | $ | 22,804,966 | $ | 102,069,075 | ||||
| ||||||||
The accompanying notes are an integral part of these financial statements.
TGB-29
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 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 generally 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. Financial Instrument Valuation
The Fund's investments in securities and other financial instruments are carried at fair value daily. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. Under procedures approved by the Trust's Board of Trustees, the Fund may utilize independent pricing services, quotations from securities and financial instrument dealers, and other market sources to determine fair value.
Debt securities generally trade in the over-the-counter market rather than on a securities exchange. The Fund's pricing services use multiple valuation techniques to determine fair value. In instances where sufficient market activity exists, the pricing services may utilize a market-based approach through which quotes from market makers are used to determine fair value. In instances where sufficient market activity may not exist or is limited, the pricing services also utilize proprietary valuation models which may consider market characteristics such as benchmark yield curves, option-adjusted spreads, credit spreads, estimated default rates, coupon rates, anticipated timing of principal repayments, underlying collateral, and other unique security features in order to estimate the relevant cash flows, which are then discounted to calculate the fair value. 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. Repurchase agreements are valued at cost, which approximates market value.
Certain derivative financial instruments (derivatives) trade in the over-the-counter market. The Fund’s pricing services use various techniques including industry standard option pricing models and proprietary discounted cash flow models to determine the fair value of those instruments. The Fund’s net benefit or obligation under the derivative contract, as measured by the fair market value of the contract, is included in net assets.
The Fund has procedures to determine the fair value of securities and other financial instruments for which market prices are not readily available or which may not be reliably priced. Under these procedures, the Fund primarily employs a market-based approach which may use related or comparable assets or liabilities, recent transactions, market multiples, book values, and other relevant information for the investment to determine the fair value of the investment. The Fund may also use an income-based valuation approach in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the investments. Due to the inherent uncertainty of valuations of such investments, the fair values may differ significantly from the values that would have been used had an active market existed.
Trading in securities on foreign securities stock exchanges and over-the-counter markets may be completed before the daily close of business on the NYSE. Occasionally, events occur between the time at which trading in a foreign security is completed and the close of the NYSE that might call into question the reliability of the value of a portfolio security held by the Fund. As a result, differences may arise between the value of the Fund’s portfolio securities as determined at the foreign market close and the latest indications of value at the close of the NYSE. In order to minimize the potential for these differences, 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
TGB-30
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Global Bond Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
a. Financial Instrument Valuation (continued)
are measured against established trigger thresholds for each specific market proxy to assist in determining if an event has occurred that may call into question the reliability of the values of the foreign securities 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.
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. The Fund may enter into foreign currency exchange contracts to facilitate transactions denominated in a foreign currency. 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. Portfolio securities and assets and liabilities denominated in foreign currencies contain risks that those currencies will decline in value relative to the U.S. dollar. 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 Trust’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 enters 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, 2011.
d. Derivative Financial Instruments
The Fund invested in 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 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/or the potential for market movements which expose the Fund to gains or losses in excess of the amounts shown on the Statement of Assets and Liabilities. Realized gain and loss and unrealized appreciation and depreciation on these contracts for the period are included in the Statement of Operations.
TGB-31
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)
The Fund entered into futures contracts primarily to manage interest rate and/or foreign exchange rate risk. A futures contract is an agreement between the Fund and a counterparty to buy or sell an underlying financial instrument for a specified price on a future date. Required initial margin deposits of cash or securities are pledged by the Fund. Subsequent payments, known as variation margin, are made or received by the Fund, depending on fluctuations in the value of the underlying security. Such variation margin is accounted for as unrealized appreciation or depreciation until the contract is closed, at which time the gains or losses are realized.
The Fund entered into forward exchange contracts primarily to manage and/or 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. Unrestricted cash may be invested according to the Fund’s investment objectives.
The Fund entered into interest rate swap contracts primarily 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. Unrestricted cash may be invested according to the Fund’s investment objectives.
See Note 9 regarding other derivative information.
e. Income Taxes
It is the Fund's policy to qualify as a regulated investment company under the Internal Revenue Code. The Fund intends to distribute to shareholders substantially all of its taxable income and net realized gains to relieve it from federal income and excise taxes. As a result, no provision for U.S. federal income taxes is required. The Fund files U.S. income tax returns as well as tax returns in certain other jurisdictions. The Fund records a provision for taxes in its financial statements including penalties and interest, if any, for a tax position taken on a tax return (or expected to be taken) when it fails to meet the more likely than not (a greater than 50% probability) threshold and based on the technical merits, the tax position may not be sustained upon examination by the tax authorities. As of June 30, 2011, and for all open tax years, the Fund has determined that no provision for income tax is required in the Fund's financial statements. Open tax years are those that remain subject to examination and are based on each tax jurisdiction statute of limitation.
The Fund may be subject to foreign taxation related to income received, capital gains on the sale of securities and certain foreign currency transactions in the foreign jurisdictions in which it invests. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist in the foreign markets in which the Fund invests. When a capital gain tax is determined to apply the Fund records an estimated deferred tax liability for unrealized gains on these securities in an amount that would be payable if the securities were disposed of on the valuation date.
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. 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.
TGB-32
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Global Bond Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
f. Security Transactions, Investment Income, Expenses and Distributions (continued)
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 are adjusted for inflation through periodic increases or decreases in the security's interest accruals, face amount, or principal redemption value, by amounts corresponding to the rate of inflation as measured by an index. Any increase or decrease in the face amount or principal redemption value will be included as interest income on the Statement of Operations.
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. Redemption Fees
Redemptions and exchanges of interests in an insurance company subaccount that invests in Class 3 shares of the Fund will be subject to a 1.0% short term trading fee if the interest in the subaccount has been held for less than 60 days. Such fees are retained by the Fund and accounted for as an addition to paid-in capital, allocated to each class of shares based upon the relative proportion of net assets of each class.
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.
2. SHARES OF BENEFICIAL INTEREST
At June 30, 2011, 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, 2011 | Year Ended December 31, 2010 | |||||||||||||||
| Class 1 Shares: | Shares | Amount | Shares | Amount | ||||||||||||
Shares sold | 1,183,367 | $ | 24,027,973 | 4,522,323 | $ | 85,300,049 | ||||||||||
Shares issued in reinvestment of distributions | 889,172 | 17,445,546 | 243,806 | 4,471,394 | ||||||||||||
Shares redeemed | (972,226 | ) | (19,628,016 | ) | (2,152,653 | ) | (40,859,583 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | 1,100,313 | $ | 21,845,503 | 2,613,476 | $ | 48,911,860 | ||||||||||
| ||||||||||||||||
TGB-33
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Global Bond Securities Fund
2. SHARES OF BENEFICIAL INTEREST (continued)
| Six Months Ended June 30, 2011 | Year Ended December 31, 2010 | |||||||||||||||
| Class 2 Shares: | Shares | Amount | Shares | Amount | ||||||||||||
Shares sold | 13,321,166 | $ | 264,665,255 | 23,116,184 | $ | 432,400,311 | ||||||||||
Shares issued in reinvestment of distributions | 5,473,480 | 104,871,884 | 1,140,402 | 20,470,218 | ||||||||||||
Shares redeemed | (4,143,657 | ) | (82,036,415 | ) | (20,598,509 | ) | (377,255,310 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | 14,650,989 | $ | 287,500,724 | 3,658,077 | $ | 75,615,219 | ||||||||||
| ||||||||||||||||
Class 3 Shares: | ||||||||||||||||
Shares sold | 1,078,647 | $ | 21,430,695 | 2,390,123 | $ | 44,722,862 | ||||||||||
Shares issued in reinvestment of distributions | 626,622 | 12,006,087 | 142,856 | 2,562,841 | ||||||||||||
Shares redeemed | (632,520 | ) | (12,455,131 | ) | (1,387,144 | ) | (25,562,774 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | 1,072,749 | $ | 20,981,651 | 1,145,835 | $ | 21,722,929 | ||||||||||
| ||||||||||||||||
Class 4 Shares: | ||||||||||||||||
Shares sold | 678,360 | $ | 13,617,725 | 1,871,353 | $ | 34,938,015 | ||||||||||
Shares issued on reinvestment of distributions | 494,660 | 9,635,982 | 122,020 | 2,224,429 | ||||||||||||
Shares redeemed | (342,579 | ) | (6,923,998 | ) | (549,061 | ) | (10,194,163 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | 830,441 | $ | 16,329,709 | 1,444,312 | $ | 26,968,281 | ||||||||||
| ||||||||||||||||
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 Fund 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.
TGB-34
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Global Bond Securities Fund
3. TRANSACTIONS WITH AFFILIATES (continued)
c. Distribution Fees
The Trust'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, 2011, there were no credits earned.
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, 2010, the Fund deferred realized capital losses of $1,905,817.
At June 30, 2011, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
Cost of investments | $ | 2,177,035,599 | ||
|
| |||
Unrealized appreciation | $ | 234,025,218 | ||
Unrealized depreciation | (11,412,352 | ) | ||
|
| |||
Net unrealized appreciation (depreciation) | $ | 222,612,866 | ||
|
| |||
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 foreign currency transactions, financial futures 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, 2011, aggregated $484,979,649 and $421,746,627, respectively.
7. CREDIT RISK
At June 30, 2011, the Fund had 15.40% 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.
TGB-35
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Global Bond 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. OTHER DERIVATIVE INFORMATION
At June 30, 2011, 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 | 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 | $ | — | Unrealized depreciation on swap contracts | $ | 1,857,330 | ||||||
Foreign exchange contracts | Unrealized appreciation on forward exchange contracts | 22,618,204 | Unrealized depreciation on forward exchange contracts | 48,338,114 | ||||||||
For the period ended June 30, 2011, the effect of derivative contracts on the Fund’s Statement of Operations was as follows:
| Derivative Contracts Not Accounted for as Hedging Instruments | Statement of Operations Locations | Realized Gain (Loss) for the Period | Change in Unrealized Appreciation (Depreciation) for the Period | |||||||
Interest rate contracts | Net realized gain (loss) from futures and swap contracts / Net change in unrealized appreciation (depreciation) on investments | $ | (461,379 | ) | $ | (1,860,382 | ) | |||
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 | 31,169,870 | (47,228,665 | ) | ||||||
For the period ended June 30, 2011, the average month end market value of derivatives represented 2.95% of average month end net assets. The average month end number of open derivative contracts for the period was 381.
See Note 1(d) regarding derivative financial instruments.
10. CREDIT FACILITY
The Fund, together with other U.S. registered and foreign investment funds (collectively, Borrowers), managed by Franklin Templeton Investments, are borrowers in a joint syndicated senior unsecured credit facility totaling $750 million (Global Credit Facility) which matures on January 20, 2012. This Global Credit Facility provides 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
TGB-36
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Global Bond Securities Fund
10. CREDIT FACILITY (continued)
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 of 0.08% based upon the unused portion of the Global Credit Facility, which is reflected in other expenses on the Statement of Operations. During the period ended June 30, 2011, the Fund did not use the Global Credit Facility.
11. FAIR VALUE MEASUREMENTS
The Fund follows 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.
For movements between the levels within the fair value hierarchy, the Fund has adopted a policy of recognizing the transfers as of the date of the underlying event which caused the movement.
The following is a summary of the inputs used as of June 30, 2011, 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 | $ | — | $ | 1,737,796,762 | $ | — | 1,737,796,762 | |||||||||
Corporate Bonds | 12,190,720 | 12,190,720 | ||||||||||||||
Municipal Bonds | — | 35,455,384 | — | 35,455,384 | ||||||||||||
Short Term Investments | — | 614,205,599 | — | 614,205,599 | ||||||||||||
|
| |||||||||||||||
Total Investments in Securities | $ | — | $ | 2,399,648,465 | $ | — | 2,399,648,465 | |||||||||
|
| |||||||||||||||
Forward Exchange Contracts | — | 22,618,204 | — | 22,618,204 | ||||||||||||
Liabilities: | ||||||||||||||||
Swaps | — | 1,857,330 | — | 1,857,330 | ||||||||||||
Forward Exchange Contracts | — | 48,338,114 | — | 48,338,114 | ||||||||||||
12. NEW ACCOUNTING PRONOUNCEMENTS
In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (IFRS). The amendments in the ASU will improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRS and include new guidance for certain fair value measurement principles and disclosure requirements. The ASU is effective for interim and annual periods beginning after December 15, 2011. The Fund is currently evaluating the impact, if any, of applying this provision.
TGB-37
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Global Bond Securities Fund
13. SUBSEQUENT EVENTS
The Fund has evaluated subsequent events through the issuance of the financial statements and determined that no events have occurred that require disclosure.
ABBREVIATIONS | ||||
| Counterparty | Currency | Selected Portfolio | ||
| BOFA - Bank of America Corp. | AUD - Australian Dollar | BHAC - Berkshire Hathaway Assurance Corp. | ||
| BZWS - Barclays Bank PLC | BRL - Brazilian Real | FRN - Floating Rate Note | ||
| CITI - Citigroup, Inc. | EGP - Egyptian Pound | GO - General Obligation | ||
| DBAB - Deutsche Bank AG | EUR - Euro | USD - Unified/Union School District | ||
| FBCO - Credit Suisse Group AG | GBP - British Pound | |||
| HSBC - HSBC Bank USA, N.A. | IDR - Indonesian Rupiah | |||
| JPHQ - JP Morgan Chase & Co. | ILS - New Israeli Shekel | |||
| MSCO - Morgan Stanley | KRW - South Korean Won | |||
| UBSW - UBS AG | LKR - Sri Lankan Rupee | |||
| MXN - Mexican Peso | ||||
| MYR - Malaysian Ringgit | ||||
| NOK - Norwegian Krone | ||||
| PEN - Peruvian Nuevo Sol | ||||
| PHP - Philippine Peso | ||||
| PLN - Polish Zloty | ||||
| SEK - Swedish Krona |
TGB-38
Franklin Templeton Variable Insurance Products Trust
Tax Designation (unaudited)
Templeton Global Bond Securities Fund
At December 31, 2010, 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 14, 2011, 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 | $ | 0.0148 | $ | 0.9287 | ||||
Class 2 | $ | 0.0148 | $ | 0.8980 | ||||
Class 3 | $ | 0.0148 | $ | 0.8963 | ||||
Class 4 | $ | 0.0148 | $ | 0.8823 | ||||
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 attributable to foreign securities held by the Fund, plus any foreign taxes withheld on these dividends.
TGB-39
TEMPLETON GROWTH SECURITIES FUND
We are pleased to bring you Templeton Growth Securities Fund’s semiannual report for the period ended June 30, 2011.
Performance Summary as of 6/30/11
Templeton Growth Securities Fund – Class 4 delivered a total return of +8.53% for the six-month period ended 6/30/11.
Performance reflects the Fund’s Class 4 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 4
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.
TG-1
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 outperformed the +5.62% total return of the MSCI World Index for the period under review.1
Economic and Market Overview
Global stock markets rose in the first half of 2011, though the positive momentum from the previous year waned as European sovereign debt turmoil escalated and signs emerged of an economic slowdown. Furthermore, geopolitical unrest sweeping the Middle East and North Africa roiled oil markets, and a devastating earthquake and tsunami in Japan severely disrupted global supply chains during the period. While the market recovered from these interferences, economic growth concerns persisted. Officials at the U.S. Federal Reserve Board (Fed) cut their growth forecast for the world’s largest economy, and manufacturing slowed in most major regions of the world. Japan’s earthquake, an early surge in commodity prices and a fading inventory restocking cycle were all blamed for declining economic leading indicators. Nascent monetary policy tightening in most parts of the world was also thought to inhibit growth and cool the commodities rally. Asian and emerging market policymakers tightened aggressively as inflation reached post-crisis highs in many regions, while the European Central Bank raised interest rates for the first time in two years, deviating from the extraordinarily accommodative path of the Fed, which undertook a second round of quantitative easing during the reporting period.
Amid concerns of sustained accommodative monetary policy and declining economic growth rates in the U.S., politicians debated whether to raise the nation’s debt ceiling. Sovereign debt concerns continued to plague Europe, with Greece, Ireland, Portugal and Spain subject to rating downgrades in the first half of 2011. At period-end, European politicians were working to pass painful austerity budgets despite fierce popular resistance, and discussions were ongoing about restructuring
1. Source: © 2011 Morningstar. One cannot invest directly in an index, and an index is not 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 or developing markets, involves additional risks, including currency fluctuations, economic instability, market volatility, and political and social instability. The Fund may have significant investments in one or more countries or in particular sectors, such as financial services, from time to time and may be at greater risk of adverse developments in a country or sector than a fund that invests more broadly. Because the Fund may invest in bonds and other debt obligations, its share price and yield may be affected by interest rate movements. The manager applies various techniques and analyses in making investment decisions for the Fund, but there can be no guarantee that these decisions will produce the desired results. The Fund’s prospectus also includes a description of the main investment risks.
TG-2
debt payments of the region’s most troubled sovereigns. Despite these challenges, continued corporate profit strength and still favorable economic growth prospects in some regions of the world supported stock prices. Equity market leadership rotated toward defensive sectors as risk aversion increased, buoying even U.S. Treasuries toward period-end as near-term demand for perceived safe havens outweighed longer term concerns about the deteriorating U.S. credit profile. The dollar ultimately declined, however, against most currencies, broadly reflecting divergent interest rate and/or economic growth expectations.
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
Despite gathering market headwinds, during the first half of 2011, most of the Fund’s sector groups and major regions delivered absolute gains. As signs of an economic slowdown emerged during the period, market leadership transitioned from economically sensitive, cyclical sectors such as materials and information technology, to defensive, counter-cyclical sectors such as health care and consumer staples. In this environment, a number of the Fund’s overweighted sectors and regions, including health care and Europe, were strong contributors.
The Fund’s overweighted position and stock selection in the health care sector benefited performance relative to the benchmark index.2 French pharmaceuticals manufacturer Sanofi was a top contributor, finding support in broker upgrades, positive clinical trials and early success with the integration of recently acquired biotechnology firm Genzyme. Major U.S. pharmaceutical manufacturer Pfizer and U.S. biotechnology firm Biogen Idec were also strong performers. Although investors’ rotation into defensive sectors largely drove health care’s outperformance during the period, we continued to believe that select sector stocks remained fundamentally undervalued and traded at levels that ignored the progress companies have made by prioritizing emerging market
2. The health care sector comprises biotechnology, health care providers and services, health care equipment and supplies, life sciences tools and services, and pharmaceuticals in the SOI.
TG-3
growth, restructuring their cost bases, diversifying away from patent-exposed products and directing robust cash flows to productive uses such as shareholder returns and mergers and acquisitions.
Many consumer discretionary companies also generated robust cash flows and began to return more of that cash to shareholders.3 During the period, the diverse sector was a major contributor to absolute and relative performance, primarily due to stock selection. Among media stocks, U.S. cable operators Comcast and Time Warner Cable were strong performers, growing earnings and raising their dividends during the period as demand for their bundled services drove broadband market share gains and supported operating results. Elsewhere in the media industry, content producer Viacom also delivered strong returns, supported by growing content demand and affiliate fees from traditional cable operators and new web-based services such as Netflix and Hulu. The Fund’s automotive industry holdings also drove consumer discretionary sector outperformance. Shares of Hyundai Motor surged during the period as South Korea’s largest auto manufacturer boosted profitability and increased capacity to meet demand arising from production stoppages at earthquake-stricken Japanese competitors.4 The Fund’s Hyundai stake has been a very successful investment and we liquidated the position during the period to realize a gain as shares looked fairly valued to us.
While the Fund’s overweighted positions in the consumer discretionary and health care sectors were long-standing, so too has been our underweighted position in the financials sector, a result of what we believed was poor balance sheet transparency and limited valuation opportunities in recent years.5 Yet, we began to believe there are some increasingly compelling value propositions in the sector, which, after enjoying a liquidity-fueled rebound as governments intervened to avert systemic bankruptcy, was recently one of the market’s main laggards. Such weakness created what we considered attractive opportunities among select stocks, notably among European banks and insurers whose valuations were indiscriminately depressed due to the debt crisis in some regional countries. In the banking and diversified financials industries, balance sheets were repaired and business models realigned to focus on core areas of profitability. Yet we believe the market remained concerned about economic headwinds, and valuations
3. The consumer discretionary sector comprises auto components; automobiles; hotels, restaurants and leisure; media; multiline retail and specialty retail in the SOI.
4. This holding is not an index component.
5. The financials sector comprises capital markets, commercial banks, consumer finance, diversified financial services, insurance, and real estate management and development in the SOI.
Top 10 Holdings
Templeton Growth Securities Fund 6/30/11
Company Sector/Industry, | % of Total Net Assets | |||
| Pfizer Inc. | 2.2% | |||
| Pharmaceuticals, U.S. | ||||
| Sanofi | 2.1% | |||
| Pharmaceuticals, France | ||||
| Comcast Corp. | 2.1% | |||
| Media, U.S. | ||||
| Vodafone Group PLC | 2.1% | |||
| Wireless Telecommunication Services, U.K. | ||||
| Microsoft Corp. | 2.0% | |||
| Software, U.S. | ||||
| Amgen Inc. | 1.9% | |||
| Biotechnology, U.S. | ||||
| Siemens AG | 1.7% | |||
| Industrial Conglomerates, Germany | ||||
| GlaxoSmithKline PLC | 1.6% | |||
| Pharmaceuticals, U.K. | ||||
| News Corp. | 1.6% | |||
| Media, U.S. | ||||
| Royal Dutch Shell PLC | 1.5% | |||
| 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).
TG-4
ignored growth opportunities inherent in a wave of industry restructuring and expansion focused on underleveraged markets and underserved consumers. Dutch financial services conglomerate ING Groep, whose ongoing restructuring initiatives began to generate positive operating results during the period, was a top performer and is an excellent example of the type of values we found in the sector. Similarly, in the insurance industry, many firms — such as French life insurer AXA, another top sector performer — divested underpriced businesses, rebuilt significant excess capital and avoided risk assets, and we continued to find what we considered attractive valuation opportunities in the insurance industry as well.
Stock selection and underweighting in the materials sector helped relative results, as did stock selection in the energy sector.6 Both sectors also delivered absolute gains despite heightened commodity price volatility and investors’ rotation out of cyclically leveraged stocks. We found few long-term value opportunities among metals and mining stocks given historically high current valuations and profit levels, and we largely avoided the industry. Energy stock performance is also closely correlated to the price of industrial commodities, yet we found what we considered significantly more attractive valuation opportunities in this cyclical sector. Tightening oil fundamentals and the increasing cost and complexity of extracting oil and gas from the ground could improve the market environment for energy producers and oilfield services providers, and we will seek to use near-term volatility to uncover select opportunities in the energy sector.
The Fund’s information technology stocks outperformed those of the benchmark index as weakness among hardware holdings such as Cisco Systems and Japanese tech firms such as film manufacturer Konica Minolta Holdings and video game developer Nintendo was nearly offset by the strength of software holdings.7 Notably, shares of information technology consultant Accenture rallied on strong earnings results and company management’s forecast that global expansion and heightened regulation could increase demand for its services. We believe sector valuations remained attractive and businesses targeting productivity-enhancing investments in an uncertain economic climate
6. The materials sector comprises construction materials, and metals and mining in the SOI. The energy sector comprises energy equipment and services; and oil, gas and consumable fuels in the SOI.
7. 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.
TG-5
will help support tech demand, particularly after an extended period of modest corporate spending on technology.
We found fewer opportunities in the consumer staples sector, where we believe elevated valuations did not adequately protect investors from risks associated with rising input costs and increasing price competition.8 Most of the Fund’s consumer staples holdings delivered absolute gains, but our stock selection and underweighted position dampened relative performance during a period when the sector benefited from investors’ defensive rotation. The industrials sector, in contrast, was negatively impacted by investors’ rotation into defensive sectors, and the Fund’s nearly even-weighted holdings were relative detractors.9 Netherlands-based Koninklijke Philips Electronics, which missed earnings targets and forecast near-term headwinds based on supply-chain disruptions related to the Japanese earthquake, was a sector laggard. Shares were weak in recent quarters due to the introduction of a new management team and cyclical pressures on the company’s health care and lighting divisions; yet, such concerns appeared to us discounted in the company’s share price, while investors appeared to largely ignore the potential for structural improvements in each of its divisions.
Another sector that hindered relative performance was our overweighted telecommunication services position.10 The sector’s performance was largely attributable to weakness at Turkish incumbent mobile operator Turkcell Iletisim Hizmetleri, which declined due to weaker-than-expected earnings, an ongoing shareholder dispute and concerns about escalating geopolitical turmoil in the Mediterranean region.4 Nonetheless, we remained favorable toward the stock, which we regarded as low valued, and continued to find what we considered attractive opportunities in the global telecommunications sector at large in light of the modest valuations, generous dividend yields and significant emerging market growth exposure of select stocks, in our view.
From a geographic perspective, Europe and the U.S. were significant relative contributors to Fund performance, largely due to stock selection in the U.S. and overweighting and stock selection in Europe.
8. The consumer staples sector comprises food and staples retailing, and food products in the SOI.
9. The industrials sector comprises aerospace and defense, air freight and logistics, airlines, commercial services and supplies, construction and engineering, electrical equipment, industrial conglomerates, machinery, professional services, road and rail, and trading companies and distributors in the SOI.
10. The telecommunications services sector comprises diversified telecommunication services and wireless telecommunication services in the SOI.
TG-6
Also aiding Fund performance was stock selection in Asia, as well as an underweighting in Japan.
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, 2011, the U.S. dollar declined in value relative to most 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.
At Templeton, we continued to find long-term opportunities we feel are attractive in regions and sectors around the world, particularly those impaired by negative sentiment. After a two-year market rally, global equities were no longer indiscriminately cheap; however, we think selective values remained for disciplined investors with long-term horizons. While a gathering economic slowdown certainly posed a threat to equity performance in the near term, we were not surprised to see lead indicators moderating at this stage of the economic cycle. We would note that we believe the depressed valuation profile of Templeton’s core holdings could provide downside support in the event of further retrenchment. Over the longer term, we see excellent potential for growth opportunities in the global marketplace and believe that high-quality large cap stocks with robust and diversified cash flows remained among the market’s cheapest.
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, 2011, 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.
TG-7
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 4
TG-8
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 4 | Beginning Account Value 1/1/11 | Ending Account Value 6/30/11 | Fund-Level Expenses Incurred During Period* Actual 1/1/11–6/30/11 | |||||||||
Actual | $ | 1,000 | $ | 1,085.30 | $ | 5.79 | ||||||
Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,019.24 | $ | 5.61 | ||||||
*Expenses are calculated using the most recent six-month annualized expense ratio for the Fund’s Class 4 shares (1.12%), 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.
TG-9
Franklin Templeton Variable Insurance Products Trust
Financial Highlights
Templeton Growth Securities Fund
| Six Months Ended June 30, 2011 (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 1 | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||||||
| ||||||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 11.19 | $ | 10.56 | $ | 8.34 | $ | 15.68 | $ | 16.16 | $ | 13.98 | ||||||||||||
|
| |||||||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.17 | 0.17 | 0.17 | 0.29 | 0.27 | 0.29 | ||||||||||||||||||
Net realized and unrealized gains (losses) | 0.79 | 0.62 | 2.36 | (6.50 | ) | 0.19 | 2.67 | |||||||||||||||||
|
| |||||||||||||||||||||||
Total from investment operations | 0.96 | 0.79 | 2.53 | (6.21 | ) | 0.46 | 2.96 | |||||||||||||||||
|
| |||||||||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income | (0.18 | ) | (0.16 | ) | (0.31 | ) | (0.26 | ) | (0.25 | ) | (0.23 | ) | ||||||||||||
Net realized gains | — | — | — | (0.87 | ) | (0.69 | ) | (0.55 | ) | |||||||||||||||
|
| |||||||||||||||||||||||
Total distributions | (0.18 | ) | (0.16 | ) | (0.31 | ) | (1.13 | ) | (0.94 | ) | (0.78 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ | 11.97 | $ | 11.19 | $ | 10.56 | $ | 8.34 | $ | 15.68 | $ | 16.16 | ||||||||||||
|
| |||||||||||||||||||||||
Total returnc | 8.63% | 7.74% | 31.33% | (42.13)% | 2.55% | 22.20% | ||||||||||||||||||
Ratios to average net assetsd | ||||||||||||||||||||||||
Expenses before expense reduction | 0.77% | 0.77% | 0.79% | 0.78% | 0.77% | 0.78% | ||||||||||||||||||
Expenses net of expense reduction | 0.77% | e | 0.77% | e | 0.79% | e | 0.78% | e | 0.76% | 0.78% | e | |||||||||||||
Net investment income | 2.86% | 1.71% | 2.00% | 2.64% | 1.64% | 1.93% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 1,639,428 | $ | 1,348,622 | $ | 824,575 | $ | 371,700 | $ | 406,538 | $ | 413,871 | ||||||||||||
Portfolio turnover rate | 9.72% | f | 9.61% | 14.95% | 18.37% | 20.45% | 20.29% | f | ||||||||||||||||
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 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-10
Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Templeton Growth Securities Fund
| Six Months Ended June 30, 2011 (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 2 | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||||||
| ||||||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 11.01 | $ | 10.40 | $ | 8.20 | $ | 15.44 | $ | 15.93 | $ | 13.81 | ||||||||||||
|
| |||||||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.15 | 0.15 | 0.16 | 0.29 | 0.22 | 0.24 | ||||||||||||||||||
Net realized and unrealized gains (losses) | 0.79 | 0.60 | 2.32 | (6.44 | ) | 0.20 | 2.63 | |||||||||||||||||
|
| |||||||||||||||||||||||
Total from investment operations | 0.94 | 0.75 | 2.48 | (6.15 | ) | 0.42 | 2.87 | |||||||||||||||||
|
| |||||||||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income | (0.15 | ) | (0.14 | ) | (0.28 | ) | (0.22 | ) | (0.22 | ) | (0.20 | ) | ||||||||||||
Net realized gains | — | — | — | (0.87 | ) | (0.69 | ) | (0.55 | ) | |||||||||||||||
|
| |||||||||||||||||||||||
Total distributions | (0.15 | ) | (0.14 | ) | (0.28 | ) | (1.09 | ) | (0.91 | ) | (0.75 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ | 11.80 | $ | 11.01 | $ | 10.40 | $ | 8.20 | $ | 15.44 | $ | 15.93 | ||||||||||||
|
| |||||||||||||||||||||||
Total returnc | 8.58% | 7.39% | 31.10% | (42.32)% | 2.35% | 21.81% | ||||||||||||||||||
Ratios to average net assetsd | ||||||||||||||||||||||||
Expenses before expense reduction | 1.02% | 1.02% | 1.04% | 1.03% | 1.02% | 1.03% | ||||||||||||||||||
Expenses net of expense reduction | 1.02% | e | 1.02% | e | 1.04% | e | 1.03% | e | 1.01% | 1.03% | e | |||||||||||||
Net investment income | 2.61% | 1.46% | 1.75% | 2.39% | 1.39% | 1.68% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 1,550,927 | $ | 1,626,885 | $ | 1,718,894 | $ | 1,513,557 | $ | 3,182,203 | $ | 2,821,818 | ||||||||||||
Portfolio turnover rate | 9.72%f | 9.61% | 14.95% | 18.37% | 20.45% | 20.29% | f | |||||||||||||||||
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 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-11
Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Templeton Growth Securities Fund
| Six Months Ended June 30, 2011 (unaudited) | Year Ended December 31, | |||||||||||||||
| Class 4 | 2010 | 2009 | 2008a | |||||||||||||
| ||||||||||||||||
Per share operating performance | ||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||
Net asset value, beginning of period | $ | 11.11 | $ | 10.50 | $ | 8.31 | $ | 14.08 | ||||||||
|
| |||||||||||||||
Income from investment operationsb: | ||||||||||||||||
Net investment incomec | 0.15 | 0.14 | 0.14 | 0.09 | ||||||||||||
Net realized and unrealized gains (losses) | 0.79 | 0.61 | 2.36 | (4.73 | ) | |||||||||||
|
| |||||||||||||||
Total from investment operations | 0.94 | 0.75 | 2.50 | (4.64 | ) | |||||||||||
|
| |||||||||||||||
Less distributions from: | ||||||||||||||||
Net investment income | (0.14 | ) | (0.14 | ) | (0.31 | ) | (0.26 | ) | ||||||||
Net realized gains | — | — | — | (0.87 | ) | |||||||||||
|
| |||||||||||||||
Total distributions | (0.14 | ) | (0.14 | ) | (0.31 | ) | (1.13 | ) | ||||||||
|
| |||||||||||||||
Net asset value, end of period | $ | 11.91 | $ | 11.11 | $ | 10.50 | $ | 8.31 | ||||||||
|
| |||||||||||||||
Total returnd | 8.53% | 7.31% | 30.98% | (35.79)% | ||||||||||||
Ratios to average net assetse | ||||||||||||||||
Expensesf | 1.12% | 1.12% | 1.14% | 1.13% | ||||||||||||
Net investment income | 2.51% | 1.36% | 1.65% | 2.29% | ||||||||||||
Supplemental data | ||||||||||||||||
Net assets, end of period (000’s) | $ | 64,909 | $ | 60,569 | $ | 56,218 | �� | $ | 24,877 | |||||||
Portfolio turnover rate | 9.72% | g | 9.61% | 14.95% | 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 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 a redemption in-kind.
The accompanying notes are an integral part of these financial statements.
TG-12
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited)
| Templeton Growth Securities Fund | Country | Shares | Value | |||||||
Common Stocks 95.3% | ||||||||||
Aerospace & Defense 0.3% | ||||||||||
BAE Systems PLC | United Kingdom | 2,203,809 | $ | 11,266,773 | ||||||
aBAE Systems PLC, 144A | United Kingdom | 377 | 1,927 | |||||||
|
| |||||||||
| 11,268,700 | ||||||||||
|
| |||||||||
Air Freight & Logistics 2.0% | ||||||||||
Deutsche Post AG | Germany | 753,314 | 14,496,392 | |||||||
FedEx Corp. | United States | 157,810 | 14,968,278 | |||||||
United Parcel Service Inc., B | United States | 491,100 | 35,815,923 | |||||||
|
| |||||||||
| 65,280,593 | ||||||||||
|
| |||||||||
Airlines 0.9% | ||||||||||
Deutsche Lufthansa AG | Germany | 806,124 | 17,511,632 | |||||||
bInternational Consolidated Airlines Group SA | United Kingdom | 2,676,290 | 10,899,013 | |||||||
|
| |||||||||
| 28,410,645 | ||||||||||
|
| |||||||||
Auto Components 0.8% | ||||||||||
Compagnie Generale des Etablissements Michelin, B | France | 258,072 | 25,238,957 | |||||||
|
| |||||||||
Automobiles 2.0% | ||||||||||
bMazda Motor Corp. | Japan | 6,772,000 | 17,749,109 | |||||||
Nissan Motor Co. Ltd. | Japan | 1,809,400 | 18,924,474 | |||||||
Toyota Motor Corp. | Japan | 702,100 | 28,779,951 | |||||||
|
| |||||||||
| 65,453,534 | ||||||||||
|
| |||||||||
Biotechnology 2.3% | ||||||||||
bAmgen Inc. | United States | 1,033,710 | 60,316,979 | |||||||
bBiogen Idec Inc. | United States | 147,610 | 15,782,461 | |||||||
|
| |||||||||
| 76,099,440 | ||||||||||
|
| |||||||||
Capital Markets 1.8% | ||||||||||
Credit Suisse Group AG | Switzerland | 391,996 | 15,245,325 | |||||||
Morgan Stanley | United States | 593,320 | 13,652,293 | |||||||
Nomura Holdings Inc. | Japan | 3,459,000 | 17,014,645 | |||||||
bUBS AG | Switzerland | 700,659 | 12,774,860 | |||||||
|
| |||||||||
| 58,687,123 | ||||||||||
|
| |||||||||
Commercial Banks 3.8% | ||||||||||
DBS Group Holdings Ltd. | Singapore | 1,906,000 | 22,748,482 | |||||||
HSBC Holdings PLC | United Kingdom | 2,467,624 | 24,432,863 | |||||||
ICICI Bank Ltd., ADR | India | 306,200 | 15,095,660 | |||||||
Intesa Sanpaolo SpA | Italy | 5,569,481 | 14,828,607 | |||||||
KB Financial Group Inc. | South Korea | 595,044 | 28,162,813 | |||||||
UniCredit SpA | Italy | 8,377,550 | 17,737,109 | |||||||
|
| |||||||||
| 123,005,534 | ||||||||||
|
| |||||||||
Commercial Services & Supplies 0.1% | ||||||||||
bRentokil Initial PLC | United Kingdom | 2,761,340 | 4,214,522 | |||||||
|
| |||||||||
TG-13
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Templeton Growth Securities Fund | Country | Shares | Value | |||||||
Common Stocks (continued) | ||||||||||
Communications Equipment 2.6% | ||||||||||
bBrocade Communications Systems Inc. | United States | 2,757,190 | $ | 17,811,448 | ||||||
Cisco Systems Inc. | United States | 1,954,030 | 30,502,408 | |||||||
Telefonaktiebolaget LM Ericsson, B | Sweden | 2,422,581 | 34,928,091 | |||||||
|
| |||||||||
| 83,241,947 | ||||||||||
|
| |||||||||
Computers & Peripherals 1.0% | ||||||||||
bDell Inc. | United States | 1,006,930 | 16,785,523 | |||||||
Seagate Technology | United States | 990,888 | 16,012,750 | |||||||
|
| |||||||||
| 32,798,273 | ||||||||||
|
| |||||||||
Construction & Engineering 0.2% | ||||||||||
Carillion PLC | United Kingdom | 788,930 | 4,763,296 | |||||||
|
| |||||||||
Construction Materials 1.0% | ||||||||||
CRH PLC | Ireland | 1,537,069 | 34,036,536 | |||||||
|
| |||||||||
Consumer Finance 1.0% | ||||||||||
American Express Co. | United States | 637,570 | 32,962,369 | |||||||
|
| |||||||||
Diversified Financial Services 3.0% | ||||||||||
Bank of America Corp. | United States | 1,205,300 | 13,210,088 | |||||||
Citigroup Inc. | United States | 439,420 | 18,297,449 | |||||||
bING Groep NV | Netherlands | 4,012,279 | 49,392,455 | |||||||
JPMorgan Chase & Co. | United States | 434,210 | 17,776,557 | |||||||
|
| |||||||||
| 98,676,549 | ||||||||||
|
| |||||||||
Diversified Telecommunication Services 4.1% | ||||||||||
France Telecom SA | France | 1,631,460 | 34,695,364 | |||||||
KT Corp., ADR | South Korea | 839,501 | 16,319,900 | |||||||
Singapore Telecommunications Ltd. | Singapore | 16,293,000 | 41,916,372 | |||||||
Telefonica SA | Spain | 1,200,988 | 29,363,593 | |||||||
Telekom Austria AG | Austria | 512,129 | 6,535,442 | |||||||
Telenor ASA | Norway | 205,011 | 3,328,953 | |||||||
|
| |||||||||
| 132,159,624 | ||||||||||
|
| |||||||||
Electrical Equipment 0.5% | ||||||||||
cAlstom SA | France | 282,195 | 17,400,251 | |||||||
|
| |||||||||
Electronic Equipment, Instruments & Components 1.0% | ||||||||||
bFlextronics International Ltd. | Singapore | 1,795,060 | 11,524,285 | |||||||
TE Connectivity Ltd. | United States | 590,638 | 21,711,853 | |||||||
|
| |||||||||
| 33,236,138 | ||||||||||
|
| |||||||||
Energy Equipment & Services 3.1% | ||||||||||
Baker Hughes Inc. | United States | 392,860 | 28,505,921 | |||||||
Halliburton Co. | United States | 665,650 | 33,948,150 | |||||||
Noble Corp. | United States | 604,890 | 23,838,715 | |||||||
SBM Offshore NV | Netherlands | 552,865 | 14,623,687 | |||||||
|
| |||||||||
| 100,916,473 | ||||||||||
|
| |||||||||
TG-14
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Templeton Growth Securities Fund | Country | Shares | Value | |||||||
Common Stocks (continued) | ||||||||||
Food & Staples Retailing 2.0% | ||||||||||
CVS Caremark Corp. | United States | 959,390 | $ | 36,053,876 | ||||||
Tesco PLC | United Kingdom | 4,559,350 | 29,413,719 | |||||||
|
| |||||||||
| 65,467,595 | ||||||||||
|
| |||||||||
Food Products 1.3% | ||||||||||
Nestle SA | Switzerland | 468,151 | 29,092,400 | |||||||
Unilever NV | Netherlands | 372,730 | 12,218,329 | |||||||
|
| |||||||||
| 41,310,729 | ||||||||||
|
| |||||||||
Health Care Equipment & Supplies 1.3% | ||||||||||
Covidien PLC | United States | 290,868 | 15,482,904 | |||||||
Medtronic Inc. | United States | 718,180 | 27,671,475 | |||||||
|
| |||||||||
| 43,154,379 | ||||||||||
|
| |||||||||
Health Care Providers & Services 0.5% | ||||||||||
Quest Diagnostics Inc. | United States | 258,160 | 15,257,256 | |||||||
|
| |||||||||
Hotels, Restaurants & Leisure 0.7% | ||||||||||
Compass Group PLC | United Kingdom | 2,392,572 | 23,067,831 | |||||||
|
| |||||||||
Industrial Conglomerates 4.5% | ||||||||||
General Electric Co. | United States | 1,819,420 | 34,314,261 | |||||||
Koninklijke Philips Electronics NV | Netherlands | 1,203,241 | 30,901,825 | |||||||
Siemens AG | Germany | 402,466 | 55,182,793 | |||||||
Tyco International Ltd. | United States | 523,578 | 25,880,461 | |||||||
|
| |||||||||
| 146,279,340 | ||||||||||
|
| |||||||||
Insurance 6.0% | ||||||||||
ACE Ltd. | United States | 253,230 | 16,667,599 | |||||||
bAIA Group Ltd. | Hong Kong | 4,310,600 | 14,956,302 | |||||||
Aviva PLC | United Kingdom | 5,310,492 | 37,419,390 | |||||||
AXA SA | France | 914,986 | 20,792,006 | |||||||
Muenchener Rueckversicherungs-Gesellschaft AG | Germany | 192,637 | 29,429,792 | |||||||
Progressive Corp. | United States | 1,065,400 | 22,778,252 | |||||||
RenaissanceRe Holdings Ltd. | United States | 226,430 | 15,838,778 | |||||||
bSwiss Re Ltd. | Switzerland | 494,332 | 27,756,201 | |||||||
Torchmark Corp. | United States | 126,697 | 8,126,346 | |||||||
|
| |||||||||
| 193,764,666 | ||||||||||
|
| |||||||||
IT Services 1.7% | ||||||||||
Accenture PLC, A | United States | 723,627 | 43,721,543 | |||||||
bSAIC Inc. | United States | 711,490 | 11,967,262 | |||||||
|
| |||||||||
| 55,688,805 | ||||||||||
|
| |||||||||
Life Sciences Tools & Services 0.4% | ||||||||||
Lonza Group AG | Switzerland | 174,647 | 13,667,665 | |||||||
|
| |||||||||
TG-15
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Templeton Growth Securities Fund | Country | Shares | Value | |||||||
Common Stocks (continued) | ||||||||||
Machinery 0.2% | ||||||||||
bNavistar International Corp. | United States | 138,080 | $ | 7,795,997 | ||||||
|
| |||||||||
Media 9.5% | ||||||||||
Comcast Corp., Special A | United States | 2,767,322 | 67,052,212 | |||||||
News Corp., A | United States | 2,900,232 | 51,334,107 | |||||||
Pearson PLC | United Kingdom | 1,096,488 | 20,703,500 | |||||||
Reed Elsevier NV | Netherlands | 529,505 | 7,106,560 | |||||||
Time Warner Cable Inc. | United States | 431,770 | 33,695,331 | |||||||
Time Warner Inc. | United States | 590,340 | 21,470,666 | |||||||
Viacom Inc., B | United States | 881,788 | 44,971,188 | |||||||
Vivendi SA | France | 1,553,352 | 43,193,481 | |||||||
The Walt Disney Co. | United States | 503,560 | 19,658,982 | |||||||
|
| |||||||||
| 309,186,027 | ||||||||||
|
| |||||||||
Metals & Mining 0.4% | ||||||||||
Alcoa Inc. | United States | 810,780 | 12,858,971 | |||||||
|
| |||||||||
Multiline Retail 0.4% | ||||||||||
Target Corp. | United States | 271,200 | 12,721,992 | |||||||
|
| |||||||||
Office Electronics 0.4% | ||||||||||
Konica Minolta Holdings Ltd. | Japan | 1,688,300 | 14,029,845 | |||||||
|
| |||||||||
Oil, Gas & Consumable Fuels 7.0% | ||||||||||
BP PLC | United Kingdom | 5,428,147 | 39,938,481 | |||||||
Chevron Corp. | United States | 322,660 | 33,182,354 | |||||||
Eni SpA | Italy | 1,014,315 | 23,990,525 | |||||||
Gazprom, ADR | Russia | 1,402,740 | 20,409,867 | |||||||
Royal Dutch Shell PLC, A | United Kingdom | 16,649 | 592,582 | |||||||
Royal Dutch Shell PLC, B | United Kingdom | 1,386,931 | 49,475,870 | |||||||
Statoil ASA | Norway | 793,092 | 20,085,724 | |||||||
Total SA, B | France | 684,566 | 39,589,811 | |||||||
|
| |||||||||
| 227,265,214 | ||||||||||
|
| |||||||||
Pharmaceuticals 10.8% | ||||||||||
Bristol-Myers Squibb Co. | United States | 275,310 | 7,972,978 | |||||||
GlaxoSmithKline PLC | United Kingdom | 2,495,101 | 53,428,540 | |||||||
Merck & Co. Inc. | United States | 996,091 | 35,152,051 | |||||||
Merck KGaA | Germany | 228,497 | 24,844,993 | |||||||
Novartis AG | Switzerland | 808,393 | 49,515,033 | |||||||
Pfizer Inc. | United States | 3,415,963 | 70,368,838 | |||||||
Roche Holding AG | Switzerland | 249,478 | 41,747,805 | |||||||
Sanofi | France | 854,497 | 68,698,414 | |||||||
|
| |||||||||
| 351,728,652 | ||||||||||
|
| |||||||||
Professional Services 0.9% | ||||||||||
Adecco SA | Switzerland | 141,340 | 9,060,687 | |||||||
Hays PLC | United Kingdom | 3,935,963 | 6,509,490 | |||||||
Randstad Holding NV | Netherlands | 301,421 | 13,932,744 | |||||||
|
| |||||||||
| 29,502,921 | ||||||||||
|
| |||||||||
TG-16
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Templeton Growth Securities Fund | Country | Shares | Value | |||||||
Common Stocks (continued) | ||||||||||
Real Estate Management & Development 1.0% | ||||||||||
Cheung Kong (Holdings) Ltd. | Hong Kong | 1,581,833 | $ | 23,132,663 | ||||||
Swire Pacific Ltd., A | Hong Kong | 565,046 | 8,314,038 | |||||||
|
| |||||||||
| 31,446,701 | ||||||||||
|
| |||||||||
Road & Rail 0.4% | ||||||||||
East Japan Railway Co. | Japan | 233,070 | 13,317,458 | |||||||
|
| |||||||||
Semiconductors & Semiconductor Equipment 2.5% | ||||||||||
Samsung Electronics Co. Ltd. | South Korea | 58,710 | 45,449,354 | |||||||
Taiwan Semiconductor Manufacturing Co. Ltd. | Taiwan | 14,281,625 | 35,805,105 | |||||||
|
| |||||||||
| 81,254,459 | ||||||||||
|
| |||||||||
Software 4.9% | ||||||||||
Microsoft Corp. | United States | 2,504,479 | 65,116,454 | |||||||
Nintendo Co. Ltd. | Japan | 63,900 | 11,961,655 | |||||||
Oracle Corp. | United States | 1,437,470 | 47,307,138 | |||||||
SAP AG | Germany | 595,763 | 35,974,701 | |||||||
|
| |||||||||
| 160,359,948 | ||||||||||
|
| |||||||||
Specialty Retail 1.9% | ||||||||||
The Home Depot Inc. | United States | 376,990 | 13,654,578 | |||||||
Inditex SA | Spain | 143,666 | 13,091,913 | |||||||
Kingfisher PLC | United Kingdom | 7,778,598 | 33,363,147 | |||||||
|
| |||||||||
| 60,109,638 | ||||||||||
|
| |||||||||
Trading Companies & Distributors 1.2% | ||||||||||
Itochu Corp. | Japan | 2,322,840 | 24,034,852 | |||||||
Wolseley PLC | United Kingdom | 490,655 | 15,997,091 | |||||||
|
| |||||||||
| 40,031,943 | ||||||||||
|
| |||||||||
Wireless Telecommunication Services 3.9% | ||||||||||
China Mobile Ltd. | China | 856,000 | 7,931,069 | |||||||
bSprint Nextel Corp. | United States | 5,177,840 | 27,908,558 | |||||||
bTurkcell Iletisim Hizmetleri AS, ADR | Turkey | 1,743,960 | 23,630,658 | |||||||
Vodafone Group PLC | United Kingdom | 25,224,948 | 66,939,497 | |||||||
|
| |||||||||
| 126,409,782 | ||||||||||
|
| |||||||||
Total Common Stocks (Cost $2,862,553,628) | 3,103,528,318 | |||||||||
|
| |||||||||
Preferred Stocks 0.8% | ||||||||||
Metals & Mining 0.5% | ||||||||||
Vale SA, ADR, pfd., A | Brazil | 515,880 | 14,939,885 | |||||||
|
| |||||||||
Oil, Gas & Consumable Fuels 0.3% | ||||||||||
Petroleo Brasileiro SA, ADR, pfd. | Brazil | 374,650 | 11,494,262 | |||||||
|
| |||||||||
Total Preferred Stocks (Cost $21,935,721) | 26,434,147 | |||||||||
|
| |||||||||
Non-Registered Mutual Funds (Cost $11,910,000) 0.5% | ||||||||||
Diversified Financial Services 0.5% | ||||||||||
b,d,e,fTempleton China Opportunities Fund, Ltd., Reg D | China | 1,192,192 | 15,260,060 | |||||||
|
| |||||||||
Total Investments before Short Term Investments | 3,145,222,525 | |||||||||
|
| |||||||||
TG-17
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2011 (unaudited) (continued)
| Templeton Growth Securities Fund | Country | Principal Amount | Value | |||||||
Short Term Investments 3.5% | ||||||||||
Time Deposits 0.8% | ||||||||||
Paribas Corp., 0.04%, 7/01/11 | United States | $ | 25,000,000 | 25,000,000 | ||||||
|
| |||||||||
U.S. Government and Agency Securities 2.1% | ||||||||||
gFHLB, 8/31/11 - 9/14/11 | United States | 35,000,000 | 34,999,030 | |||||||
gFNMA, 8/31/11 - 9/28/11 | United States | 35,000,000 | 34,999,085 | |||||||
|
| |||||||||
Total U.S. Government and Agency Securities | 69,998,115 | |||||||||
|
| |||||||||
| Shares | ||||||||||
hInvestments from Cash Collateral Received for Loaned Securities 0.6% | ||||||||||
Money Market Funds 0.6% | ||||||||||
iBNY Mellon Overnight Government Fund, 0.05% | United States | 16,928,388 | 16,928,388 | |||||||
|
| |||||||||
Total Short Term Investments (Cost $111,918,405) | 111,926,503 | |||||||||
|
| |||||||||
Total Investments (Cost $3,008,317,754) 100.1% | 3,257,149,028 | |||||||||
Other Assets, less Liabilities (0.1)% | (1,885,776 | ) | ||||||||
|
| |||||||||
Net Assets 100.0% | $ | 3,255,263,252 | ||||||||
|
| |||||||||
See Abbreviations on page TG-30.
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, 2011, the value of this security was $1,927, representing less than 0.01% of net assets.
bNon-income producing.
cA portion or all of the security is on loan at June 30, 2011. See Note 1(d).
dSee Note 1(c) regarding investment in Templeton China Opportunities Fund, Ltd.
eSee Note 8 regarding restricted securities.
fSee Note 9 regarding holdings of 5% voting securities.
gThe security is traded on a discount basis with no stated coupon rate.
hSee Note 1(d) regarding securities on loan.
iThe rate shown is the annualized seven-day yield at period end.
The accompanying notes are an integral part of these financial statements.
TG-18
Franklin Templeton Variable Insurance Products Trust
��
Financial Statements
Statement of Assets and Liabilities
June 30, 2011 (unaudited)
| Templeton Growth Securities Fund | ||||
Assets: | ||||
Investments in securities: | ||||
Cost - Unaffiliated issuers | $ | 2,996,407,754 | ||
Cost - Non-controlled affiliated issuers (Note 9) | 11,910,000 | |||
|
| |||
Total cost of investments | $ | 3,008,317,754 | ||
|
| |||
Value - Unaffiliated issuers | $ | 3,241,888,968 | ||
Value - Non-controlled affiliated issuers (Note 9) | 15,260,060 | |||
|
| |||
Total value of investments (includes securities loaned in the amount $16,332,003) | 3,257,149,028 | |||
Cash | 1,207,155 | |||
Receivables: | ||||
Investment securities sold | 14,207,717 | |||
Capital shares sold | 119,335 | |||
Dividends | 9,887,934 | |||
Other assets | 778 | |||
|
| |||
Total assets | 3,282,571,947 | |||
|
| |||
Liabilities: | ||||
Payables: | ||||
Investment securities purchased | 5,220,186 | |||
Capital shares redeemed | 1,972,159 | |||
Affiliates | 2,612,902 | |||
Payable upon return of securities loaned | 16,928,388 | |||
Accrued expenses and other liabilities | 575,060 | |||
|
| |||
Total liabilities | 27,308,695 | |||
|
| |||
Net assets, at value | $ | 3,255,263,252 | ||
|
| |||
Net assets consist of: | ||||
Paid-in capital | $ | 3,296,413,934 | ||
Undistributed net investment income | 40,971,861 | |||
Net unrealized appreciation (depreciation) | 249,057,214 | |||
Accumulated net realized gain (loss) | (331,179,757 | ) | ||
|
| |||
Net assets, at value | $ | 3,255,263,252 | ||
|
| |||
Class 1: | ||||
Net assets, at value | $ | 1,639,427,903 | ||
|
| |||
Shares outstanding | 136,945,055 | |||
|
| |||
Net asset value and maximum offering price per share | $ | 11.97 | ||
|
| |||
Class 2: | ||||
Net assets, at value | $ | 1,550,926,769 | ||
|
| |||
Shares outstanding | 131,429,638 | |||
|
| |||
Net asset value and maximum offering price per share | $ | 11.80 | ||
|
| |||
Class 4: | ||||
Net assets, at value | $ | 64,908,580 | ||
|
| |||
Shares outstanding | 5,452,070 | |||
|
| |||
Net asset value and maximum offering price per share | $ | 11.91 | ||
|
| |||
The accompanying notes are an integral part of these financial statements.
TG-19
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Operations
for the six months ended June 30, 2011 (unaudited)
| Templeton Growth Securities Fund | ||||
Investment income: | ||||
Dividends (net of foreign taxes of $5,073,115) | $ | 55,851,358 | ||
Interest | 62,423 | |||
Income from securities loaned | 2,288,184 | |||
|
| |||
Total investment income | 58,201,965 | |||
|
| |||
Expenses: | ||||
Management fees (Note 3a) | 11,759,459 | |||
Distribution fees: (Note 3c) | ||||
Class 2 | 2,028,377 | |||
Class 4 | 110,521 | |||
Unaffiliated transfer agent fees | 2,354 | |||
Custodian fees (Note 4) | 186,902 | |||
Reports to shareholders | 351,658 | |||
Professional fees | 61,867 | |||
Trustees’ fees and expenses | 6,522 | |||
Other | 34,298 | |||
|
| |||
Total expenses | 14,541,958 | |||
Expense reductions (Note 4) | (75 | ) | ||
|
| |||
Net expenses | 14,541,883 | |||
|
| |||
Net investment income | 43,660,082 | |||
|
| |||
Realized and unrealized gains (losses): | ||||
Net realized gain (loss) from: | ||||
Investments (includes gains from a redemption in-kind of $9,941,638) (Note 11) | 130,313,335 | |||
Foreign currency transactions | 275,183 | |||
|
| |||
Net realized gain (loss) | 130,588,518 | |||
|
| |||
Net change in unrealized appreciation (depreciation) on: | ||||
Investments | 92,698,112 | |||
Translation of other assets and liabilities denominated in foreign currencies | (41,043 | ) | ||
|
| |||
Net change in unrealized appreciation (depreciation) | 92,657,069 | |||
|
| |||
Net realized and unrealized gain (loss) | 223,245,587 | |||
|
| |||
Net increase (decrease) in net assets resulting from operations | $ | 266,905,669 | ||
|
| |||
The accompanying notes are an integral part of these financial statements.
TG-20
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statements of Changes in Net Assets
| Templeton Growth Securities Fund | ||||||||
| Six Months Ended June 30, 2011 (unaudited) | Year Ended December 31, 2010 | |||||||
Increase (decrease) in net assets: | ||||||||
Operations: | ||||||||
Net investment income | $ | 43,660,082 | $ | 41,851,542 | ||||
Net realized gain (loss) from investments and foreign currency transactions | 130,588,518 | (42,734,201 | ) | |||||
Net change in unrealized appreciation (depreciation) on investments and translation of other assets and liabilities denominated in foreign currencies | 92,657,069 | 206,309,126 | ||||||
Net increase (decrease) in net assets resulting from operations | 266,905,669 | 205,426,467 | ||||||
Distributions to shareholders from: | ||||||||
Net investment income: | ||||||||
Class 1 | (23,962,804 | ) | (15,588,191 | ) | ||||
Class 2 | (19,367,342 | ) | (21,721,910 | ) | ||||
Class 4 | (766,075 | ) | (762,562 | ) | ||||
Total distributions to shareholders | (44,096,221 | ) | (38,072,663 | ) | ||||
Capital share transactions: (Note 2) | ||||||||
Class 1 | 192,054,002 | 446,712,026 | ||||||
Class 2 | (195,666,983 | ) | (178,452,057 | ) | ||||
Class 4 | (9,942 | ) | 774,782 | |||||
Total capital share transactions | (3,622,923 | ) | 269,034,751 | |||||
Net increase (decrease) in net assets | 219,186,525 | 436,388,555 | ||||||
Net assets: | ||||||||
Beginning of period | 3,036,076,727 | 2,599,688,172 | ||||||
End of period | $ | 3,255,263,252 | $ | 3,036,076,727 | ||||
Undistributed net investment income included in net assets: | ||||||||
End of period | $ | 40,971,861 | $ | 41,408,000 | ||||
The accompanying notes are an integral part of these financial statements.
TG-21
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 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 generally 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. Financial Instrument Valuation
The Fund’s investments in securities and other financial instruments are carried at fair value daily. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. Under procedures approved by the Trust’s Board of Trustees, the Fund may utilize independent pricing services, quotations from securities and financial instrument dealers, and other market sources to determine fair value.
Equity securities listed on an 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. 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. 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. Over-the-counter securities 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.
Debt securities generally trade in the over-the-counter market rather than on a securities exchange. The Fund’s pricing services use multiple valuation techniques to determine fair value. In instances where sufficient market activity exists, the pricing services may utilize a market-based approach through which quotes from market makers are used to determine fair value. In instances where sufficient market activity may not exist or is limited, the pricing services also utilize proprietary valuation models which may consider market characteristics such as benchmark yield curves, option-adjusted spreads, credit spreads, estimated default rates, coupon rates, anticipated timing of principal repayments, underlying collateral, and other unique security features in order to estimate the relevant cash flows, which are then discounted to calculate the fair value. Investments in non-registered money market funds are valued at the net asset value. Time deposits are valued at cost, which approximates market value.
The Fund has procedures to determine the fair value of securities and other financial instruments for which market prices are not readily available or which may not be reliably priced. Under these procedures, the Fund primarily employs a market-based approach which may use related or comparable assets or liabilities, recent transactions, market multiples, book values, and other relevant information for the investment to determine the fair value of the investment. The Fund may also use an income-based valuation approach in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the investments. Due to the inherent uncertainty of valuations of such investments, the fair values may differ significantly from the values that would have been used had an active market existed.
Trading in securities on foreign securities stock exchanges and over-the-counter markets may be completed before the daily close of business on the NYSE. Occasionally, events occur between the time at which trading in a foreign security is completed and the close of the NYSE that might call into question the reliability of the value of a portfolio security held by the Fund. As a result, differences may arise between the value of the Fund’s portfolio securities as determined at the foreign market close and the latest indications of value at the close of the NYSE. In order to minimize the potential for these differences, the investment manager monitors price movements following the close of trading in foreign stock markets through a series of country specific market
TG-22
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Growth Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
a. Financial Instrument Valuation (continued)
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 that may call into question the reliability of the values of the foreign securities 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.
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. The Fund may enter into foreign currency exchange contracts to facilitate transactions denominated in a foreign currency. 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. Portfolio securities and assets and liabilities denominated in foreign currencies contain risks that those currencies will decline in value relative to the U.S. dollar. 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 Trust’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. Investment in Templeton China Opportunities Fund, Ltd.
The Fund invests in Templeton China Opportunities Fund, Ltd. (China Fund), a private offering of unregistered shares in a Cayman Islands Exempt Company. The China Fund investment objective is to seek capital growth primarily through investments in A-shares of Chinese companies listed on the Shanghai and Shenzhen stock exchanges. Chinese A-shares are traded in Chinese Renminbi and are only available as an investment to domestic (Chinese) investors and holders of a Qualified Foreign Institutional Investors license. The China Fund is managed by Templeton Investment Counsel, LLC (an affiliate of the investment manager). No additional management or administrative fees are incurred on assets invested in the China Fund.
The China Fund may be subject to certain restrictions and administrative processes relating to its ability to repatriate cash balances, investment proceeds and earnings associated with its investment, as such activities are subject to approval by agencies of the Chinese government and thus the Fund may incur delays in redeeming its investment in the China Fund. The Fund’s investment in the China Fund is valued based upon the fair value of the China Fund’s portfolio securities and other assets and liabilities.
d. 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
TG-23
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Growth Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
d. Securities Lending (continued)
day. The collateral is invested in a 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.
e. Income Taxes
It is the Fund’s policy to qualify as a regulated investment company under the Internal Revenue Code. The Fund intends to distribute to shareholders substantially all of its taxable income and net realized gains to relieve it from federal income and excise taxes. As a result, no provision for U.S. federal income taxes is required. The Fund files U.S. income tax returns as well as tax returns in certain other jurisdictions. The Fund records a provision for taxes in its financial statements including penalties and interest, if any, for a tax position taken on a tax return (or expected to be taken) when it fails to meet the more likely than not (a greater than 50% probability) threshold and based on the technical merits, the tax position may not be sustained upon examination by the tax authorities. As of June 30, 2011, and for all open tax years, the Fund has determined that no provision for income tax is required in the Fund’s financial statements. Open tax years are those that remain subject to examination and are based on each tax jurisdiction statute of limitation.
The Fund may be subject to foreign taxation related to income received, capital gains on the sale of securities and certain foreign currency transactions in the foreign jurisdictions in which it invests. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist in the foreign markets in which the Fund invests. When a capital gain tax is determined to apply the Fund records an estimated deferred tax liability for unrealized gains on these securities in an amount that would be payable if the securities were disposed of on the valuation date.
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.
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.
TG-24
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Growth 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, 2011, 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, 2011 | Year Ended December 31, 2010 | |||||||||||||||
| Class 1 Shares: | Shares | Amount | Shares | Amount | ||||||||||||
Shares sold | 16,146,214 | $ | 189,857,050 | 56,324,674 | $ | 579,159,138 | ||||||||||
Shares issued in reinvestment of distributions | 2,081,912 | 23,962,804 | 1,592,257 | 15,588,191 | ||||||||||||
Shares redeemed in-kind (Note 11) | (62,046 | ) | (778,675 | ) | — | — | ||||||||||
Shares redeemed | (1,767,228 | ) | (20,987,177 | ) | (15,424,906 | ) | (148,035,303 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | 16,398,852 | $ | 192,054,002 | 42,492,025 | $ | 446,712,026 | ||||||||||
| ||||||||||||||||
Class 2 Shares: | ||||||||||||||||
Shares sold | 3,620,129 | $ | 42,172,599 | 7,805,671 | $ | 79,205,936 | ||||||||||
Shares issued in reinvestment of distributions | 1,706,374 | 19,367,342 | 2,250,975 | 21,721,910 | ||||||||||||
Shares redeemed in-kind (Note 11) | (7,322,431 | ) | (90,358,797 | ) | — | — | ||||||||||
Shares redeemed | (14,277,159 | ) | (166,848,127 | ) | (27,579,182 | ) | (279,379,903 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | (16,273,087 | ) | $ | (195,666,983 | ) | (17,522,536 | ) | $ | (178,452,057 | ) | ||||||
| ||||||||||||||||
Class 4 Shares: | ||||||||||||||||
Shares sold | 248,066 | $ | 2,908,129 | 792,359 | $ | 8,038,832 | ||||||||||
Shares issued on reinvestment of distributions | 66,906 | 766,075 | 78,292 | 762,562 | ||||||||||||
Shares redeemed | (314,152 | ) | (3,684,146 | ) | (772,020 | ) | (8,026,612 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | 820 | $ | (9,942 | ) | 98,631 | $ | 774,782 | |||||||||
| ||||||||||||||||
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 Fund are also officers and/or directors of the following subsidiaries:
| Subsidiary | Affiliation | |
Templeton Global Advisors Limited (TGAL) | 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 |
TG-25
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Growth Securities Fund
3. TRANSACTIONS WITH AFFILIATES (continued)
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 |
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 Trust’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.
e. 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.
g. Other Affiliated Transactions
At June 30, 2011, Franklin Templeton Variable Insurance Products Trust – Franklin Templeton VIP Founding Funds Allocation Fund owned 44.3% of the Fund’s outstanding shares.
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, 2011, the custodian fees were reduced as noted in the Statement of Operations.
TG-26
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, 2010, the capital loss carryforwards were as follows:
Capital loss carryforwards expiring in: | ||||
2016 | $ | 103,613,248 | ||
2017 | 294,580,232 | |||
2018 | 55,299,629 | |||
|
| |||
| $ | 453,493,110 | |||
|
|
Under the Regulated Investment Company Modernization Act of 2010, the Fund will be permitted to carry forward capital losses incurred in taxable years beginning after December 22, 2010 for an unlimited period. Post-enactment capital loss carryforwards will retain their character as either short-term or long-term capital losses rather than being considered short-term as under previous law. Any post-enactment capital losses generated will be required to be utilized prior to the losses incurred in pre-enactment tax years.
At June 30, 2011, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
Cost of investments | $ | 3,020,098,804 | ||
|
| |||
Unrealized appreciation | $ | 517,350,018 | ||
Unrealized depreciation | (280,299,794 | ) | ||
|
| |||
Net unrealized appreciation (depreciation) | $ | 237,050,224 | ||
|
| |||
Net investment income differs for financial statement and tax purposes primarily due to differing treatments of passive foreign investment company shares and 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, 2011, aggregated $445,639,869 and $313,468,817, respectively. Sales of investments excludes redemptions in-kind of $86,085,875.
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. RESTRICTED SECURITIES
The Fund invests 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.
TG-27
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Growth Securities Fund
8. RESTRICTED SECURITIES (continued)
At June 30, 2011, the Fund held investments in restricted securities, excluding certain securities exempt from registration under the 1933 Act deemed to be liquid, as follows:
| Shares | Issuer | Acquisition Date | Cost | Value | ||||||||||||
| 1,192,192 | Templeton China Opportunities Fund Ltd., Reg D (0.47% of Net Assets) | 3/17/10 | $ | 11,910,000 | $ | 15,260,060 | ||||||||||
|
|
|
| |||||||||||||
9. 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, 2011, 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 | ||||||||||||||||||||||||||||
Templeton China Opportunities Fund Ltd., Reg D | 1,192,192 | — | — | 1,192,192 | $ | 15,260,060 | $ | — | $ | — | ||||||||||||||||||
|
| |||||||||||||||||||||||||||
Total Affiliated Securities (0.47% of Net Assets) |
| |||||||||||||||||||||||||||
10. CREDIT FACILITY
The Fund, together with other U.S. registered and foreign investment funds (collectively, Borrowers), managed by Franklin Templeton Investments, are borrowers in a joint syndicated senior unsecured credit facility totaling $750 million (Global Credit Facility) which matures on January 20, 2012. This Global Credit Facility provides 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 of 0.08% based upon the unused portion of the Global Credit Facility, which is reflected in other expenses on the Statement of Operations. During the period ended June 30, 2011, the Fund did not use the Global Credit Facility.
11. REDEMPTION IN-KIND
During the period ended June 30, 2011, the Fund realized $9,941,638 of net gains 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 gains are not taxable to the Fund, and are not distributed to remaining shareholders they will be reclassified from accumulated net realized gains to paid-in capital.
TG-28
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Growth Securities Fund
12. FAIR VALUE MEASUREMENTS
The Fund follows 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.
For movements between the levels within the fair value hierarchy, the Fund has adopted a policy of recognizing the transfers as of the date of the underlying event which caused the movement.
The following is a summary of the inputs used as of June 30, 2011, 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: | ||||||||||||||||
Diversified Financial Services | $ | 98,676,549 | $ | — | $ | 15,260,060 | $ | 113,936,609 | ||||||||
Other Equity Investmentsa,b | 3,031,285,916 | — | — | 3,031,285,916 | ||||||||||||
Short Term Investments | — | 111,926,503 | — | 111,926,503 | ||||||||||||
|
| |||||||||||||||
Total Investments in Securities | $ | 3,129,962,465 | $ | 111,926,503 | $ | 15,260,060 | $ | 3,257,149,028 | ||||||||
|
| |||||||||||||||
aIncludes common preferred stocks as well as other equity investments
bFor detailed industry descriptions, see the accompanying Statement of Investments.
At June 30, 2011, the reconciliation of assets in which significant unobservable inputs (Level 3) were used in determining fair value, is as follows:
| Balance at Beginning of Period | Purchases (Sales) | Transfers Into (Out of) Level 3 | Net Realized Gain (Loss) | Net Unrealized Gain (Loss) | Balance at End of Period | Net Change in Unrealized Appreciation (Depreciation) on Assets Held at Period End | ||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||
Equity Investments-Diversified Financial Services | $ | 14,592,433 | $ | — | $ | — | $ | — | $ | 667,627 | $ | 15,260,060 | $ | 667,627 | ||||||||||||||
| ||||||||||||||||||||||||||||
13. NEW ACCOUNTING PRONOUNCEMENTS
In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (IFRS). The amendments in the ASU will improve the comparability
TG-29
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Growth Securities Fund
13. NEW ACCOUNTING PRONOUNCEMENTS (continued)
of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRS and include new guidance for certain fair value measurement principles and disclosure requirements. The ASU is effective for interim and annual periods beginning after December 15, 2011. The Fund is currently evaluating the impact, if any, of applying this provision.
14. SUBSEQUENT EVENTS
The Fund has evaluated subsequent events through the issuance of the financial statements and determined that no events have occurred that require disclosure.
ABBREVIATIONS | ||||
| Currency | Selected Portfolio | |||
| CHF - Swiss Franc | ADR - American Depository Receipt | |||
| FHLB - Federal Home Loan Bank | ||||
| FNMA - Federal National Mortgage Association |
TG-30
Franklin Templeton Variable Insurance Products Trust
Tax Designation (unaudited)
Templeton Growth Securities Fund
At December 31, 2010, 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 14, 2011, 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 | $ | 0.0172 | $ | 0.1440 | ||||
Class 2 | $ | 0.0172 | $ | 0.1217 | ||||
Class 4 | $ | 0.0172 | $ | 0.1171 | ||||
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 attributable to foreign securities held by the Fund, plus any foreign taxes withheld on these dividends.
TG-31
INDEX DESCRIPTIONS
The indexes are unmanaged and include reinvested distributions.
For indexes sourced by Morningstar: © 2011 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.
Russell® is a trademark and RussellTM is a servicemark of the Frank Russell Company.
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) using the middle rating of Moody’s, Standard & Poor’s and Fitch, respectively. STANDARD & POOR’S®, S&P® and S&P 500® are registered trademarks of Standard & Poor’s Financial Services LLC. Standard & Poor’s does not sponsor, endorse, sell or promote any S&P index-based product.
Barclays Capital (BC) U.S. Government Index: Intermediate Component is the intermediate component of the BC U.S. Government Index, which includes public obligations of the U.S. Treasury with at least one year to final maturity and publicly issued debt of U.S. government agencies, quasi-federal corporations, and corporate or foreign debt guaranteed by the U.S. government.
Citigroup World Government Bond Index is a market capitalization-weighted index consisting of investment-grade world government bond markets.
Credit Suisse (CS) High Yield Index is designed to mirror the investable universe of the U.S. dollar-denominated high yield debt market.
FTSE EPRA/NAREIT Developed Index is a free float-adjusted index designed to measure the performance of publicly traded real estate securities in the North American, European and Asian real estate markets. FTSE® is a trademark of London Stock Exchange Plc and The Financial Times Limited and is used by FTSE under license. All rights in and to the FTSE MPF Index series (including currency adjusted indices) are vested in FTSE. All information is provided for information purposes only. Every effort is made to ensure that all information given in this publication is accurate, but no responsibility or liability can be accepted by FTSE for any errors or for any loss arising from use of this publication.
J.P. Morgan (JPM) Global Government Bond Index (GGBI) 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 calculated by averaging the total returns of 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 6/30/11, there were 189 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 60% or more of their portfolios in equities. For the six-month period ended 6/30/11, there were 65 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 primarily in U.S. government and agency issues. For the six-month period ended 6/30/11, there were 75 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 Classification 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
I-1
restrictions, and tend to invest in lower grade debt issues. For the six-month period ended 6/30/11, there were 122 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.
MSCI Emerging Markets (EM) Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in global emerging markets.
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.
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.
MSCI World Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in global developed markets.
Russell 1000® Growth Index is market capitalization weighted and measures performance of those Russell 1000 Index companies with higher price-to-book ratios and higher forecasted growth values.
Russell 1000 Index is market capitalization weighted and measures performance of the largest companies in the Russell 3000 Index, which represents the majority of the U.S. market’s total capitalization.
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 smallest companies in the Russell 3000 Index, which represent a modest amount of the Russell 3000 Index’s total market capitalization.
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 largest U.S. companies based on total market capitalization and represents the majority of the investable 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 smallest companies in the Russell 1000 Index, which represent a modest amount of the Russell 1000 Index’s total market capitalization.
Standard & Poor’s 500 Index (S&P 500) is a market capitalization-weighted index of 500 stocks designed to measure total U.S. equity market performance.
Standard & Poor’s Global REIT Index is designed to measure performance of the investable universe of publicly traded real estate investment trusts. Index constituents generally derive the majority of their 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.
I-2
Franklin Templeton Variable Insurance Products Trust
Shareholder Information
Board Review of Investment Management Agreement
At a meeting held April 19, 2011, 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 expenses, 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 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 discussed the profitability to Franklin Templeton Investments from its overall U.S. fund operations, as well as on an individual fund-by-fund basis. Additional material accompanying such profitability analysis included 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 to U.S. mutual funds and other accounts, including management’s explanation of differences where relevant. Such material also included 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.
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 previous 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 shareholders. Particular attention was given to management’s conservative approach and diligent risk management procedures, including continuous monitoring of counterparty credit risk and attention given to derivatives and other complex instruments. The Board also took into account, among other things, management’s efforts in establishing a 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 as evidenced by its subsidization of money market 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
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Franklin Templeton Variable Insurance Products Trust
Shareholder Information (continued)
Board Review of Investment Management Agreement (continued)
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. The Lipper reports prepared for each of the individual Funds showed the investment performance of Class 1 shares for those having such class of shares and Class 2 shares for those Funds that did not have 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, 2011, 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 five full years, consisted of the Fund and all multi-cap growth funds underlying variable insurance products as selected by Lipper. The Lipper report showed the Fund’s comparative total return for the one-year period to be in the second-lowest quintile of its performance universe, and on an annualized basis to be in the middle quintile of such universe for its previous three- and five-year periods. In discussing the one-year performance, management pointed out that it largely reflected portfolio stock selections within the health care, consumer discretionary, materials and financials sectors and discussed steps being taken to improve performance. The Board found the Fund’s performance as set forth in the Lipper report to be acceptable and did not warrant any change in portfolio management, noting that the Fund’s actual total return for the one-year period as shown in the Lipper report exceeded 23%.
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. The Lipper report showed the Fund’s total return to be in the second-lowest quintile of such universe for the one-year period, and on an annualized basis to also 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 and that management had taken steps to improve the Fund’s performance, including the appointment of an additional portfolio manager in 2010. The Board intends to continue monitoring the Fund’s results, but was satisfied with the efforts being made by management to improve 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 highest or best performing quintile of its performance universe, and on an annualized basis in each of the previous three-, five- and 10-year periods to also be in the highest quintile of such universe. The Lipper report showed the Fund’s total return for the one-year period to also be in the highest quintile of its performance universe, and on an annualized basis for the previous three-year period to be in the second-highest quintile of such universe, and for each of the previous five- and 10-year periods to be in the middle quintile of such performance universe. The Board was satisfied with the Fund’s performance as shown in the Lipper report.
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 one-year period to be in the second-lowest quintile of such universe, and on an annualized basis to also be in the second-lowest quintile for the previous three- and five-year periods, but to be in the highest quintile of such universe for the previous 10-year period. The Lipper report showed the Fund’s total return to be in the middle quintile of its performance universe for the one-year period, and, on an annualized basis to be in the second-highest quintile of such universe for the previous three-year period, and to be in the middle quintile of such universe for each of the previous five- and 10-year periods. In discussing the Fund’s performance with the Board, management pointed out, among other things, the Fund’s somewhat higher quality, lower risk bias, including its underweighted positioning at the start of 2010 in the financials industry, which was a top performer during the first quarter of 2010. The Board believed the Fund’s performance was acceptable and did not warrant any change in portfolio management, noting the Fund’s actual income and total returns for the one-year period as shown in the Lipper report were 7.36% and 15%, respectively, and that its income return for each of the one-year and annualized three- and five-year periods was in each case within 68 basis points or less of the performance universe median.
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Franklin Templeton Variable Insurance Products Trust
Shareholder Information (continued)
Board Review of Investment Management Agreement (continued)
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 or best performing 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. The Lipper report showed the Fund’s total return to be in the second-highest quintile of its performance universe for the one-year period 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 was satisfied with the Fund’s performance as shown in the Lipper report.
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. The Lipper report showed the Fund’s comparative total return to be in the second-lowest quintile of such universe for the one-year period, but on an annualized basis to be in the highest or best performing quintile of such universe for the previous three-year period, the second-highest quintile of such universe for the previous five-year period, and the second-lowest quintile of such universe for the previous 10-year period. In reviewing the Fund’s one-year performance, management pointed out, among other things, that it reflected the Fund’s overweighted position in the health care industry and discussed with the Board steps being taken to position the Fund to benefit from a continuing recovery of the U.S. economy. The Board believed the Fund’s overall performance as set forth in the Lipper report to be acceptable, noting that its one-year return exceeded 18%.
Franklin Large Cap Value Securities Fund – The performance universe for this Fund, which has been in operation for only five full years, consisted of the Fund and all large-cap value funds underlying variable insurance products as selected by Lipper. The Lipper report showed the Fund’s total return to be in the upper half of such universe for the one-year period and to be in the second-highest quintile of such universe on an annualized basis for its previous three- and five-year periods. The Board was satisfied with the Fund’s performance as set forth in the Lipper report.
Franklin Rising Dividends Securities Fund – The performance universe for this Fund consisted of the Fund and all multi-cap core funds underlying variable insurance products as selected by Lipper. The Lipper report showed the Fund’s comparative total return to be in the upper half 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 was satisfied with the Fund’s performance as set forth in the Lipper report.
Franklin Small Cap Value Securities Fund – The performance universe for this Fund consisted of the Fund and all small-cap value funds underlying variable insurance products as selected by Lipper. The Lipper report showed the Fund’s total return for the one-year period to be in the highest or best performing quintile of such performance universe, and on an annualized basis to be in the middle quintile of such universe for each of the previous three- and 10-year periods, and the second-highest quintile for the previous five-year period. The Board found the Fund’s performance as set forth in the Lipper report to be satisfactory.
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. The Lipper report showed the Fund’s total return for the one-year period to be in the upper half of such universe, and on an annualized basis to be in the second-highest performing quintile of such universe for the previous three-year period, and to be in the middle quintile of such universe for each of the previous five- and 10-year periods. The Board found the Fund’s investment performance as set forth in the Lipper report to be satisfactory.
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 also be in the second-highest quintiles of such universe during the previous three- and five-year periods, and in the lowest quintile of such universe for the previous 10-year period. The Lipper report showed the Fund’s total return to be in the second-highest quintile of such universe during the one-year period, and on an annualized basis to be in either the highest or second-highest quintile of such universe for each of the previous three-, five- and 10-year periods. The Board was satisfied with the Fund’s performance as shown in the Lipper report.
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Franklin Templeton Variable Insurance Products Trust
Shareholder Information (continued)
Board Review of Investment Management Agreement (continued)
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 three full years and the Lipper report showed its income return to be in the highest quintile of such performance universe for the one-year period, and to be in the second-highest quintile of such universe for each of the previous two years. The Lipper report showed the Fund’s total return for the one-year period to be in the second-lowest quintile of such universe and to be in the highest quintile of such universe for the previous year and lowest quintile of such universe for the year before that. The Fund’s performance, which reflects those of the three underlying funds in which it invests, was discussed with management and the Board believed that no change in investment strategy or portfolio management was warranted, noting the Fund’s short period of operations, as well as the fact that the Fund’s total return for the one-year period was nearly 16% as shown in the Lipper report.
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 second-highest quintile of such universe and on an annualized basis to be in the highest or second-highest 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 also be in the second-highest quintile of such universe for the one-year period, as well as for each of the previous three-, five- and 10-year periods on an annualized basis. The Board was satisfied with the Fund’s performance as shown in the Lipper report.
Mutual Global Discovery Securities Fund – The performance universe for this Fund consisted of the Fund and all global core funds underlying variable insurance products as selected by Lipper. The Lipper report showed the Fund’s total return to be in the lowest quintile of such universe for the one-year period, but on an annualized basis to be in the highest or best performing quintile of such universe for each of the previous three-, five- and 10-year periods. In discussing the Fund’s performance during the one-year period, management explained that it reflected the Fund’s relatively high cash position, which hurt performance in a rising market, as well as other factors such as the Fund’s portfolio being underweighted in the materials and energy sectors. The Board found the Fund’s overall performance as set forth in the Lipper report to be satisfactory, noting the Fund’s total return for the one-year period exceeded 15%.
Mutual International Securities Fund – The performance universe for this Fund consisted of the Fund and all other international core funds underlying variable insurance products as selected by Lipper. The Fund has been in existence for one full year at the date of the Lipper report, which showed its total return during such year to be in the highest or best performing quintile of such universe. The Board was pleased with such performance, but did not believe it to be particularly meaningful in view of the Fund’s short period of operations.
Mutual Shares Securities Fund – The performance universe for this Fund consisted of the Fund and all large-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 or best performing quintile of such universe, and on an annualized basis to be in the second-highest quintile for each of the previous three-, five- and 10-year periods. The Lipper report showed the Fund’s total return for the one-year period to be in the lowest quintile of the performance universe, but on an annualized basis to be in the upper half of such universe for the previous three-year period, the second-highest quintile of such universe for the previous five-year period, and the highest quintile of such universe for the previous 10-year period. In discussing the Fund’s total return for the one-year period, management explained that it reflected the Fund’s relatively high cash position, which hurt performance in a rising market, as well as other factors, such as the Fund’s portfolio being underweighted in certain sectors such as industrials, energy, and high-multiple technology stocks. The Board was satisfied with the Fund’s overall performance as shown in the Lipper report, noting that its total return for the one-year period exceeded 15%.
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. The Lipper report showed the Fund’s comparative 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 highest quintile of such universe during the previous three-year period, and the second-lowest
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Franklin Templeton Variable Insurance Products Trust
Shareholder Information (continued)
Board Review of Investment Management Agreement (continued)
quintile of such universe during each of the previous five- and 10-year periods. The Board had discussed with management steps being taken to improve the Fund’s investment portfolio process and noted that investment flexibility had been limited by significant net redemptions during the one-year period. The Board also noted that the Fund’s total return as shown in the Lipper report for the one-year period exceeded 20% and was within 90 basis points of the performance universe median during such period. While intending to continuously monitor future performance, the Board believed the Fund’s performance as set forth in the Lipper report did not warrant any change in portfolio management or overall investment approach.
Templeton Foreign Securities Fund – The performance universe for this Fund consisted of the Fund and all international core funds underlying variable insurance products as selected by Lipper. 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 highest or best performing quintile of such universe in each of the previous three- and five-year periods, and the second-highest quintile of such universe for the previous 10-year period. The Board was satisfied with the Fund’s investment performance as set forth in the Lipper report.
Templeton Global Bond Securities Fund – 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 second-lowest quintile of such performance universe, but on an annualized basis to be in the highest or best performing quintile of such universe for each of the previous three-, five- and 10-year periods. The Lipper report showed the Fund’s total return for the one-year period to be in the highest or best performing quintile of its performance universe and on an annualized basis to also be in the highest quintile of such universe during each of the previous three-, five- and 10-year periods. Management discussed the Fund’s income return for the one-year period, pointing out that underperformance was primarily due to mark to market losses on currency forwards held in the Fund’s portfolio during the prior year that offset regular income such as bond coupons. The Board was satisfied with the Fund’s performance as set forth in the Lipper report, noting such explanation of one-year income return 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. The Lipper report showed the Fund’s 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 quintiles of such universe for each of the previous three- and five-year periods, and to be in the second-highest quintile of such universe for the previous 10-year period. The Board noted steps taken by management to improve performance, including changes in the Fund’s portfolio managers that had taken place in recent years and found the Fund’s performance as shown in the Lipper report to be acceptable.
COMPARATIVE EXPENSES. Consideration was given to expense comparison information contained in the Lipper reports furnished for each Fund that compared its management fees and total expense ratio with those of a group of other funds selected by Lipper as its appropriate Lipper expense group. Lipper expense data is based upon information taken from each fund’s most recent annual report, which reflects historical asset levels that may be quite different from those currently existing, particularly in a period of market volatility. While recognizing such inherent limitation and the fact that expense ratios generally increase as assets decline and decrease as assets grow, the Board believed the independent analysis conducted by Lipper to be an appropriate measure of comparative expenses. In reviewing comparative costs, Lipper provides information on each Fund’s contractual investment management fee rate in comparison with the contractual investment management fee rate 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 expense ratio 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 the same class of shares for all funds within a particular Lipper expense group. The results of such comparisons showed that both the contractual investment management fee rates and actual total expense ratios 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, Franklin Strategic Income Securities Fund, Templeton Global Bond Securities Fund and Franklin U.S. Government Fund. The Board was satisfied with the comparative contractual investment management fees and expenses of these
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Franklin Templeton Variable Insurance Products Trust
Shareholder Information (continued)
Board Review of Investment Management Agreement (continued)
Funds as shown in their Lipper reports. The contractual investment management fee rates and actual total expense ratio of each of Franklin Rising Dividends Securities Fund, Franklin Small-Mid Cap Growth Securities Fund and Franklin Templeton VIP Founding Funds Allocation Fund were below the medians of their Lipper expense groups. The contractual investment management fee rate of Templeton Foreign Securities Fund was at the median of its Lipper expense group, but its actual total expense ratio was below the median of such group. The Board was satisfied with the comparative contractual investment management fees and expenses of these Funds as shown in their Lipper reports. The contractual investment management fee rates for Mutual International Securities Fund, Templeton Growth Securities Fund, Franklin Global Real Estate Securities Fund and Franklin Large Cap Value Securities Fund were in the most expensive quintiles of their Lipper expense groups, but in each case their actual total expense ratios were at or below the medians of such groups. The Board was satisfied with the comparative expenses of these Funds as shown in their Lipper reports, noting that, with the exception of Templeton Growth Securities Fund, the expenses of these Funds were subsidized through fee waivers. The contractual investment management fee rate and actual total expense ratio of Franklin Flex Cap Growth Securities Fund were both within 20 basis points above the median of its Lipper expense group, while its actual total expense ratio, excluding 12b-1 fees, was below the median of such expenses for the expense group. The Board found the comparative expenses of this Fund as shown in its Lipper report to be acceptable, noting its expenses were subsidized through fee waivers. The contractual investment management fee rate and actual expense ratio for Franklin Large Cap Growth Securities Fund were in each case above, but within 10 basis points of the medians of its Lipper expense group. The Board found the comparative expenses of this Fund as shown in its Lipper reports to be acceptable. The contractual investment management fee rate and actual total expense ratio of Templeton Developing Markets Securities Fund were each in the most expensive quintile of its Lipper expense group. While acknowledging cost factors relating to the Fund’s operations, 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 Board believed it appropriate to reduce the Fund’s investment management fee and negotiated with the Manager downward revisions in such fee as discussed under “Economies of Scale.” The contractual investment management fee rates and total expense ratios of both Mutual Global Discovery Securities Fund and Mutual Shares Securities Fund were in the most expensive quintiles of their Lipper expense groups, but the actual total expense ratio of Mutual Global Discovery Securities Fund was within 11 basis points of its expense group median, and the actual total expense ratio of Mutual Shares Securities Fund was within nine basis points of its expense group median. In discussing these comparative expenses, management stated its view that the expenses of these Funds were at an appropriate level in view of their 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.
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, 2010, being the most recent fiscal year-end for Franklin Resources, Inc., the Manager’s parent. 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 review the reasonableness of the allocation methodologies solely for use by the Funds’ Board 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 to other publicly held managers broken
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Franklin Templeton Variable Insurance Products Trust
Shareholder Information (continued)
Board Review of Investment Management Agreement (continued)
down to show profitability from management operations exclusive of distribution expenses, as well as profitability including distribution expenses. The Board also considered the extent to which the Manager and its affiliates might derive ancillary benefits from Fund operations, including potential benefits resulting from allocation of fund brokerage and the use of commission dollars to pay for research. 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 sizes, and in the case of each of the other Funds, their management fees contain breakpoints that extend beyond their existing asset sizes. To the extent economies of scale may be realized by the Manager and its affiliates, the Board believed the schedule of investment management fees provides a sharing of benefits for each Fund and its shareholders. The current management advisory fee schedule for Templeton Developing Markets Securities Fund, reflecting reductions implemented effective May 1, 2010, provides a rate of 1.25% on the first $500 million of Fund net assets; 1.20% on the next $2.5 billion of Fund net assets; 1.15% on the next $1 billion of Fund net assets; 1.10% on the next $11 billion of Fund net assets; 1.05% on the next $5 billion of Fund net assets; and 1.00% on net assets in excess of $20 billion. The Board negotiated with management downward revisions in such fee effective May 1, 2011, so as to be at a rate of 1.10% on the first $1 billion of Fund net assets; 1.05% on the next $4 billion of Fund net assets; 1.00% on the next $5 billion of Fund net assets; 0.95% on the next $5 billion of Fund net assets; 0.90% on the next $5 billion of Fund net assets; and 0.85% on Fund net assets in excess of $20 billion. The Fund is also charged a separate fee for administrative services that starts at 0.15% on the first $200 million of Fund net assets, and declines through breakpoints to a fixed rate of 0.075% after net assets reach the $1.2 billion level. At the end of 2010, the Fund’s net assets were approximately $843 million, and to the extent economies of scale may be realized by the Manager and its affiliates, the Board believes the schedules of management advisory and administrative fees provide a sharing of benefits with this 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, 300 S.E. 2nd Street, Fort Lauderdale, FL 33301, 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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| VALUE | BLEND | GROWTH | SECTOR | GLOBAL | INTERNATIONAL | HYBRID | ASSET ALLOCATION | FIXED INCOME |
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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 not offered to the public; they are offered and sold only to: (1) insurance company separate accounts (Separate Account) to serve as the underlying investment vehicle for variable contracts; (2) certain qualified plans; and (3) other mutual funds (funds of funds).
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.
| © 2011 Franklin Templeton Investments. All rights reserved. | FTVIP S 08/11 |
| 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. |
| 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 Purchasers. 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.
(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
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 | /s/ LAURA F. FERGERSON | |
| Laura F. Fergerson | ||
| Chief Executive Officer – | ||
| Finance and Administration | ||
| Date August 25, 2011 | ||
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 | /s/ LAURA F. FERGERSON | |
| Laura F. Fergerson | ||
| Chief Executive Officer – | ||
| Finance and Administration | ||
| Date August 25, 2011 | ||
| By | /s/ GASTON GARDEY | |
| Gaston Gardey | ||
| Chief Financial Officer and | ||
| Chief Accounting Officer | ||
| Date August 25, 2011 | ||