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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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: 06/30/13
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| Item 1. | Reports to Stockholders. |
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JUNE 30, 2013
FRANKLIN TEMPLETON
VARIABLE INSURANCE PRODUCTS TRUST
SEMIANNUAL
REPORT
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FRANKLIN TEMPLETON VARIABLE INSURANCE
PRODUCTS TRUST SEMIANNUAL REPORT
| i | ||||
*Group of Funds Statement of Additional Information Supplements | SAI-1 | |||
Fund Summaries | ||||
| FGR-1 | ||||
| FGI-1 | ||||
| FH-1 | ||||
| FI-1 | ||||
| FI-8 | ||||
| FLG-1 | ||||
| FRD-1 | ||||
| FSV-1 | ||||
| FSC-1 | ||||
| FSI-1 | ||||
| FSI-9 | ||||
| FFA-1 | ||||
| FUS-1 | ||||
| MGD-1 | ||||
| MS-1 | ||||
| TD-1 | ||||
| TD-9 | ||||
| TF-1 | ||||
| TF-8 | ||||
| TGB-1 | ||||
| TG-1 | ||||
| TG-11 | ||||
| I-1 | ||||
| SI-1 |
*Not part of the semiannual report. Retain for your records.
NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE
MASTER CLASS - 1
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PERFORMANCE INFORMATION
Performance data is historical and cannot predict or guarantee future results. Principal value and investment return will fluctuate with market conditions, and you may have a gain or loss when you withdraw your money. Inception dates of the funds may have preceded the effective dates of the subaccounts, contracts, or their availability in all states.
When reviewing the index comparisons, please keep in mind that indexes have a number of inherent performance differentials over the funds. First, unlike the funds, which must hold a minimum amount of cash to maintain liquidity, indexes do not have a cash component. Second, the funds are actively managed and, thus, are subject to management fees to cover salaries of securities analysts or portfolio managers in addition to other expenses. Indexes are unmanaged and do not include any commissions or other expenses typically associated with investing in securities. Third, indexes often contain a different mix of securities than the fund to which they are compared. Additionally, please remember that indexes are simply a measure of performance and cannot be invested in directly.
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SUPPLEMENT DATED MAY 15, 2013
TOTHE STATEMENTOF ADDITIONAL INFORMATION
DATED MAY 1, 2013
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
The Statement of Additional Information is amended as follows:
The following “Independent Board Members” table on page 63 has been revised as follows:
Independent Board Members
Name of Board Member | Dollar Range of Equity | Aggregate Dollar Range of Equity Securities in All Funds Overseen by the Board Member in the Franklin Templeton Fund Complex | ||
Harris J. Ashton | None | Over $100,000 | ||
Sam Ginn | None | Over $100,000 | ||
Edith E. Holiday | None | Over $100,000 | ||
J. Michael Luttig | None | Over $100,000 | ||
Frank A. Olson | None | Over $100,000 | ||
Larry D. Thompson | Developing Markets $10,001 – $50,000 Flex Cap Growth $50,001 – $100,000 Foreign Securities $10,001 – $50,000 Global Bond Securities Over $100,000 Income Securities Over $100,000 Small Cap Value $10,001 – $50,000 Small Mid-Cap Growth $50,001 – $100,000 Strategic Income Securities $50,001 – $100,000 Mutual Global Discovery $10,001 – $50,000 Mutual Shares Securities Over $100,000 | Over $100,000 | ||
John B. Wilson | None | Over $100,000 |
Please keep this supplement for future reference.
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SUPPLEMENT DATED JUNE 13, 2013
TOTHE STATEMENTOF ADDITIONAL INFORMATION
DATED MAY 1, 2013
OF
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
The Statement of Additional Information is amended as follows:
Effective June 13, 2013, Charles B. Johnson has retired as chairman, director/trustee and officer of certain US-registered Franklin and Templeton funds (the “FT funds”). In addition, effective June 13, 2013, Rupert H. Johnson, Jr., director/trustee and vice president of certain FT funds, was appointed: to the boards of the FT funds for which he was not already a director/trustee, and was also appointed as chairman of the board for the FT funds. Gregory E. Johnson, director/trustee of certain FT funds, was appointed to the boards of the FT funds for which he was not already a director/trustee. Accordingly, the “Officers and Trustees – Interested Board Members and Officers” section has been revised as follows:
| Name, Year of Birth and Address | Position | Length of Time Served | Number of Portfolios in Fund Complex Overseen by Board Member* | Other Directorships Held During at Least the Past 5 Years | ||||
**Gregory E. Johnson (1961) | Trustee | Since June 2013 | 145 | None | ||||
| Principal Occupation During at Least the Past 5 Years: | ||||||||
| Chairman of the Board, Member – Office of the Chairman, Director, President and Chief Executive Officer, Franklin Resources, Inc.; officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 45 of the investment companies in Franklin Templeton Investments; and Chairman, Investment Company Institute. | ||||||||
***Rupert H. Johnson, Jr. (1940) | Chairman of the Board and Trustee | Chairman of the Board since June 2013 and Trustee since 1988 | 135 | None | ||||
| Principal Occupation During at Least the Past 5 Years: | ||||||||
| Vice Chairman, Member – Office of the Chairman and Director, Franklin Resources, Inc.; Director, Franklin Advisers, Inc.; Senior Vice President, Franklin Advisory Services, LLC; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 42 of the investment companies in Franklin Templeton Investments. | ||||||||
Note 1: Rupert H. Johnson, Jr. is the uncle of Gregory E. Johnson.
Note 3: Effective June 13, 2013, Charles B. Johnson ceased to be a trustee of the Trust.
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**Gregory E. Johnson is considered to be an interested person of the Fund under the federal securities laws due to his position as an officer and director of Franklin Resources, Inc., which is the parent company of the Fund’s investment manager and distributor.
***Rupert H. Johnson, Jr. is considered to be interested person of the Fund under the federal securities laws due to his position as officer and director and major shareholder of Franklin Resources, Inc., which is the parent company of the Fund’s investment manager and distributor.
Please keep this supplement for future reference.
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SUPPLEMENT DATED JULY 25, 2013
TOTHE STATEMENTOF ADDITIONAL INFORMATION
DATED MAY 1, 2013
OF
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
The Statement of Additional Information is amended as follows:
I. For the Templeton Developing Markets Securities Fund, the section entitled “The Funds – Goals, Additional Strategies and Risks – Other Investments and Strategies” on page 10 is amended to reflect that the Fund may invest up to 10% of its net assets in participatory notes.
II. In the section entitled “The Underwriter,” text on page 89 under the heading “Dealer Compensation” is revised to read as follows:
Dealer Compensation
In addition to the payments above, Distributors and/or its affiliates may make the following payments out of its own assets to certain dealers who sell shares of Franklin Templeton funds, or participate in the offering of variable insurance products that invest directly or indirectly in the Trust (VIP Qualifying Dealers):
Marketing support payments. Distributors may make payments to VIP Qualifying Dealers out of its own resources. A VIP Qualifying Dealer’s marketing support services may include business planning assistance, marketing and advertising, training and ongoing education and support for dealer personnel about the Franklin Templeton funds (including the Trust) and financial planning needs of shareholders of the Franklin Templeton funds or contract owners that allocate contract value indirectly to one or more Franklin Templeton funds, placement on the VIP Qualifying Dealer’s list of offered funds, access to sales meetings, sales representatives and management representatives of the dealer, and contract owner assistance in allocating contract value directly or indirectly to the Trust. Distributors compensates VIP Qualifying Dealers differently depending upon, among other factors, whether the VIP Qualifying Dealer is directly selling Franklin Templeton funds, or participating in the offering of variable insurance products that invest directly or indirectly in the Trust, sales and asset levels, redemption rates and the level and/or type of marketing and educational activities provided by the VIP Qualifying Dealer. Such compensation may include financial assistance to such dealers that enable Distributors to develop, manage or participate in and/or present at conferences or seminars, sales or training programs for invited registered representatives and other employees, client and investor events, and other dealer-sponsored events. These payments may vary depending upon the nature of the event. Distributors will, on an annual basis, determine whether to continue such payments. Currently, Distributors does not make marketing support payments in connection with the Trust except under limited circumstances for one Fund of the Trust offered through a unique product.
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Marketing support payments will not exceed 0.20% of the relevant Fund’s average daily net assets attributable to an insurance company, on an annual basis.
Other payments. From time to time, Distributors, at its expense, may provide additional compensation to VIP Qualifying Dealers which sell or arrange for the direct or indirect sale of shares of Franklin Templeton funds, including the Trust. Such compensation may include financial assistance to VIP Qualifying Dealers that enable Distributors to participate in and/or present at conferences or seminars, sales or training programs for invited registered representatives and other employees, client and investor events and other dealer-sponsored events. These payments may vary depending upon the nature of the event.
Distributors routinely sponsors due diligence meetings for registered representatives during which they receive updates on various Franklin Templeton funds and are afforded the opportunity to speak with portfolio managers. Invitation to these meetings is not conditioned on selling a specific number of shares. Those who have shown an interest in Franklin Templeton funds, however, are more likely to be considered. To the extent permitted by their firm’s policies and procedures, registered representatives’ expenses in attending these meetings may be covered by Distributors.
Other compensation may be offered to the extent not prohibited by federal or state laws or any self-regulatory agency, such as FINRA. Distributors makes payments for events it deems appropriate, subject to Distributors’ guidelines and applicable law. Distributors and/or its affiliates may also reimburse VIP Qualifying Dealers and/or their affiliates for certain costs associated with obtaining voting instructions from contract owners and the solicitation process in connection with Trust-sponsored proxy statements.
You can ask your insurance company and VIP Qualifying Dealer for information about any payments they receive from Distributors and any services provided. Additional disclosure may be included in the insurance contract prospectus.
Please keep this supplement for future reference.
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VIP SAI-2 06/13
SUPPLEMENT DATED JUNE 4, 2013
TOTHE STATEMENTOF ADDITIONAL INFORMATION
DATED MAY 1, 2013
OF
FRANKLIN INCOME SECURITIES FUND
FRANKLIN MANAGED VOLATILITY GLOBAL ALLOCATION VIP FUND
FRANKLIN STRATEGIC INCOME FUND
TEMPLETON DEVELOPING MARKETS SECURITIES FUND
TEMPLETON FOREIGN SECURITIES FUND
TEMPLETON GLOBAL BOND SECURITIES FUND
(Series of Franklin Templeton Variable Insurance Products Trust)
The Statement of additional information is amended as follows:
I. For the Franklin Income Securities Fund, the Section entitled “The Funds – Goals, Additional Strategies and Risks – Other Investments and Strategies” is amended to reflect that the Fund may invest up to 15% of its assets in equity-linked notes.
II. For the Franklin Strategic Income Securities Fund, the Section entitled “The Funds – Goals, Additional Strategies and Risks – Other Investments and Strategies” is amended to reflect that the Fund may invest in credit default swaps.
III. For the Franklin Strategic Income Securities Fund, the Section entitled “The Funds – Goals, Additional Strategies and Risks – Other Investments and Strategies” is amended to reflect that the Fund may invest in currency swaps for hedging purposes.
IV. For the Franklin Strategic Income Securities Fund, Franklin Managed Volatility Global Allocation VIP Fund and Templeton Global Bond Securities Fund, the section entitled Section entitled “The Funds – Goals, Additional Strategies and Risks – Other Investments and Strategies” is amended to reflect that the Fund may invest in inflation indexed swaps.
V. For the Templeton Developing Markets Securities Fund, the section entitled “The Funds – Goals, Additional Strategies and Risks – Other Investments and Strategies” is amended to reflect that the Fund may invest up to 20% of its net assets in participatory notes.
VI. For the Templeton Foreign Securities Fund, the Section entitled “The Funds – Goals, Additional Strategies and Risks – Other Investments and Strategies” is amended to reflect that the Fund may invest in exchange traded equity options.
VII. For the Franklin Strategic Income Securities Fund and Templeton Global Bond Securities Fund, the section entitled “Glossary of Investments, Techniques, Strategies and Their Risks – Derivative Instruments – Swap Agreements” is amended to add the following:
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Inflation Index Swaps. An inflation index swap is a contract between two parties, whereby one party makes payments based on the cumulative percentage increase in an index that serves as a measure of inflation (typically, the Consumer Price Index) and the other party makes a regular payment based on a compounded fixed rate. Each party’s payment obligation under is determined by reference to a specified “notional” amount of money. Typically, an inflation index swap has payment obligations netted and exchanged upon maturity. The value of an inflation index swap is expected to change in response to changes in the rate of inflation. If inflation increases at a faster rate than anticipated at the time the swap is entered into, the swap will increase in value. Similarly, if inflation increases at a rate slower than anticipated at the time the swap is entered into, the swap will decrease in value.
Risks of Swaps. The use of swap transactions is a highly specialized activity, which involves investment techniques and risks different from those associated with ordinary portfolio securities transactions. Whether the Fund will be successful in using swap agreements to achieve its investment goal depends on the ability of the investment manager correctly to predict which types of investments are likely to produce greater returns. If the investment manager, in using swap agreements, is incorrect in its forecasts of market values, interest rates, inflation, currency exchange rates or other applicable factors, the investment performance of the Fund will be less than its performance would have been if it had not used the swap agreements.
Please keep this supplement for future reference.
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FRANKLIN GLOBAL REAL ESTATE SECURITIES FUND
This semiannual report for Franklin Global Real Estate Securities Fund covers the period ended June 30, 2013.
Performance Summary as of 6/30/13
Franklin Global Real Estate Securities Fund – Class 1 posted a +1.10% total return for the six-month period ended 6/30/13.
Performance reflects the Fund’s Class 1 operating expenses, but does not include any contract fees, expenses or sales charges. If they had been included, performance would be lower. These charges and deductions, particularly for variable life policies, can have a significant effect on contract values and insurance benefits. See the contract prospectus for a complete description of these expenses, including sales charges.
Franklin Global Real Estate Securities Fund Class 1
Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares.
Current performance may differ from figures shown.
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Fund Goal and Main Investments: Franklin Global Real Estate Securities Fund seeks high total return. Under normal market conditions, the Fund invests at least 80% of its net assets in investments of companies located anywhere in the world that operate in the real estate sector.
Performance Overview
You can find the Fund’s six-month total return in the Performance Summary. In comparison, the FTSE EPRA/NAREIT Developed Index posted a total return of +2.40% for the same period.1
Economic and Market Overview
Modest U.S. economic growth, as measured by gross domestic product, characterized the six-month period ended June 30, 2013. Increasing job creation helped lower the unemployment rate and absorb new job seekers, and consumer spending remained strong. Accelerating new and existing home sales accompanied record-low mortgage rates, affordable housing prices, low new-home inventories and a six-year low in U.S. foreclosures. Manufacturing, a mainstay of economic productivity, expanded every month except May.
Budgetary agreement between Congress and the President on January 1 preserved lower income tax rates for most U.S. households, but concerns remained about how the expired payroll tax cut, far-reaching federal spending cuts, and future federal debt ceiling negotiations could affect the U.S. economic recovery. Washington’s lack of consensus on proposed expenditure reductions resulted in further across-the-board federal spending cuts starting in March. In May, Federal Reserve Board (Fed) Chairman Ben Bernanke said the Fed could gradually wind down its monthly purchases of mortgage-backed securities and Treasuries, assuming continued U.S. economic improvement. He clarified in June that such action could begin in the near future.
Amid these fiscal and monetary developments, a slow and steady U.S. recovery continued. U.S. stocks generated healthy returns as the Standard & Poor’s® 500 Index (S&P 500®) and Dow Jones Industrial Average reached all-time highs during the period even though Chairman Bernanke’s statements sparked volatility.2 Rising corporate profits and generally favorable economic data bolstered investor
1. Source: © 2013 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. Please see Index Descriptions following the Fund Summaries.
Fund Risks: All investments involve risks, including possible loss of principal. The Fund concentrates in real estate securities, which involve special risks, such as declines in the value of real estate and increased susceptibility to adverse economic or regulatory developments affecting the sector. The Fund’s investments in REITs involve additional risks; since REITs typically are invested in a limited number of projects or in a particular market segment, they are more susceptible to adverse developments affecting a single project or market segment than more broadly diversified investments. Foreign investing, especially in emerging markets, involves additional risks such as currency and market volatility, as well as political and social instability. Also, the Fund is a nondiversified fund, and investing in a nondiversified fund involves the risk of greater price fluctuation than a more diversified portfolio. The Fund is actively managed but there is no guarantee that the manager’s investment decisions will produce the desired results. The Fund’s prospectus also includes a description of the main investment risks.
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confidence, but caution remained about the extent to which positive business and market results were dependent on continuation of the Fed’s accommodative monetary policy.
The global economic recovery was mixed during the first half of 2013. Emerging markets continued to lead the recovery, although they showed signs of slowing. Growth in the U.S. and eurozone continued to be slow by the standards of previous recoveries. As fears eased surrounding the issues of sovereign debt in Europe, the possibility of another recession in the U.S., and a potential “hard landing” in China, financial market performance was positive. Improving sentiment, relatively strong fundamentals, and continued provision of global liquidity supported risk assets as equity markets performed well and bond prices generally declined. Policymakers in the largest developed economies increased their already unprecedented efforts to supply liquidity. Actions elsewhere in the world were mixed, with some policymakers less willing to reverse previous tightening efforts in response to the external environment.
Global developed and emerging market stocks, as measured by the MSCI All Country World Index, advanced during the first six months of 2013. Although emerging markets declined, the losses were more than offset by developed market gains. Regional performance was more consistent with local economic trends, although periodic volatility reflected the global economy’s fragility. Given the rise in rates near period-end, longer duration U.S. Treasury and emerging market bond prices experienced meaningful price declines. In the second quarter, gold, traditionally a safe haven, posted its worst quarterly performance since 1974 as inflation expectations remained subdued and global commodities stayed under pressure. Investor sentiment improved in the last week of the period, and global stock prices rebounded from period lows after China’s central bank intervened to calm the country’s interbank market, positive economic reports helped stabilize Japanese government bond yields, and several Fed members reassured investors that the Fed’s accommodative monetary policy would continue.
Global Real Estate Market Overview
Global real estate markets exhibited mixed performance during the reporting period, as real estate securities in some countries benefited from generally improved global economic fundamentals while others
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lagged. According to the FTSE EPRA/NAREIT Developed Index, in U.S. dollar terms, Greece, Israel and Japan led country real estate markets. Italy, Finland and the U.S. posted moderate results. Some markets represented in the index made smaller gains and a number of countries in Europe, Asia, and other regions lost value, notably Austria, Norway, New Zealand, Singapore and Canada.
Investment Strategy
We seek to limit price volatility by investing across markets and property types and seek to provide a consistently high level of income. When selecting investments for the Fund’s portfolio, we apply a “bottom-up” stock selection process that incorporates macro-level views in the evaluation process. Our portfolio construction process combines bottom-up analysis of individual stock and real estate market fundamentals and top-down macro overlays to provide country/regional, property type and company size perspectives in identifying international/local cyclical and thematic trends that highlight investment opportunities.
Manager’s Discussion
During the six months under review, key contributors to the Fund’s performance relative to the FTSE EPRA/NAREIT Developed Index included diversified real estate activities holdings such as Mitsui Fudosan and Mitsubishi Estate, in which the Fund has maintained overweightings. Both companies were among the three largest Japanese property developers and outperformed the global benchmark. Property stocks in Japan, including developers and Japanese REITs (JREITs), outperformed the global property benchmark during the period largely because of positive expectations of Prime Minister Shinzo Abe’s economic policies (also called “Abenomics”) along with recovery in the Tokyo office market and positive condominium sales results. In our view, Mitsui Fudosan in particular was well positioned to take advantage of the office market recovery in central Tokyo. The Fund’s relative performance was also supported by an overweighting in Kilroy Realty. The company’s shares outperformed U.S. REITs, the U.S. REIT office sector and the global benchmark. Kilroy’s exposure to West Coast office markets with positive demand and rental growth trends continued to attract investors. The company also maintained a strong balance sheet in comparison to other office REITs. Investors were likely encouraged by the company’s capital allocation strategy for new developments and acquisitions in markets with positive trends.
In contrast, key detractors from the Fund’s relative performance included having no position in another large Japanese property developer,
Top 10 Holdings
Franklin Global Real Estate Securities Fund
6/30/13
| Company Sector/Industry, Country | % of Total Net Assets | |||
| Mitsubishi Estate Co. Ltd. | 5.0% | |||
| Diversified Real Estate Activities, Japan | ||||
| Simon Property Group Inc. | 5.0% | |||
| Retail REITs, U.S. | ||||
| Mitsui Fudosan Co. Ltd. | 4.3% | |||
| Diversified Real Estate Activities, Japan | ||||
| Unibail-Rodamco SE | 3.0% | |||
| Retail REITs, France | ||||
| Westfield Group | 3.0% | |||
| Retail REITs, Australia | ||||
| Prologis Inc. | 2.3% | |||
| Industrial REITs, U.S. | ||||
| Ventas Inc. | 2.3% | |||
| Specialized REITs, U.S. | ||||
| Health Care REIT Inc. | 2.2% | |||
| Specialized REITs, U.S. | ||||
| The Wharf Holdings Ltd. | 2.1% | |||
| Diversified Real Estate Activities, Hong Kong | ||||
| HCP Inc. | 2.0% | |||
| Specialized REITs, U.S. | ||||
The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund’s Statement of Investments (SOI).
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Sumitomo Realty. Along with other JREITs, shares of Sumitomo Realty benefited from positive expectations of Abenomics and a general recovery in the Tokyo office and condominium markets. The company also carried more financial leverage, which was deemed positive by investors expecting growth. An overweighting in Keppel Land versus the benchmark dragged down the Fund’s relative returns over the period. This high-quality developer in Singapore and the Asia Pacific region underperformed the Singapore property stock average and global benchmark. Primary reasons included investor concerns related to additional government policy measures that sought to slow Singapore residential market appreciation. Economic concerns related to possible slowing in China, where the company has numerous residential and mixed-use developments, also dampened performance. An off-benchmark allocation to Chinese Overseas Land hurt relative performance. Shares underperformed the China property average and the global benchmark. Although progress on its residential sales programs was ahead of expectations, shares of Chinese Overseas Land underperformed primarily because of economic concerns about China’s slowing growth and potential credit tightening regarding mortgages for condominium buyers.
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, 2013, the U.S. dollar increased in value relative to most major currencies. As a result, the Fund’s performance was negatively affected by the portfolio’s substantial investment in securities with non-U.S. currency exposure.
Thank you for your participation in Franklin Global Real Estate Securities Fund. We look forward to serving your future investment needs.
The foregoing information reflects our analysis, opinions and portfolio holdings as of June 30, 2013, 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 Global Real Estate Securities Fund Class 1
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Hypothetical Example for Comparison with Other Mutual Funds
Information in the second line (Hypothetical) of the table can help you compare ongoing expenses of the Fund with those of other mutual funds offered through the Contract. This information may not be used to estimate the actual ending account balance or expenses you incurred during the period. The hypothetical “Ending Account Value” is based on the Fund’s actual expense ratio and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Fund-Level Expenses Incurred During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds offered through a Contract.
| Class 1 | Beginning Account Value 1/1/13 | Ending Account Value 6/30/13 | Fund-Level Expenses Incurred During Period* 1/1/13–6/30/13 | |||||||||
Actual | $ | 1,000 | $ | 1,011.00 | $ | 5.58 | ||||||
Hypothetical (5% return | $ | 1,000 | $ | 1,019.24 | $ | 5.61 | ||||||
*Expenses are calculated using the most recent six-month annualized expense ratio for the Fund’s Class 1 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.
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Franklin Templeton Variable Insurance Products Trust
Financial Highlights
Franklin Global Real Estate Securities Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 1 | 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||||||
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Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 14.66 | $ | 11.47 | $ | 13.12 | $ | 11.16 | $ | 10.84 | $ | 25.42 | ||||||||||||
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Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.12 | 0.25 | 0.21 | 0.38 | 0.30 | 0.62 | ||||||||||||||||||
Net realized and unrealized gains (losses) | 0.04 | 2.94 | (0.83 | ) | 1.94 | 1.36 | (9.10 | ) | ||||||||||||||||
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Total from investment operations | 0.16 | 3.19 | (0.62 | ) | 2.32 | 1.66 | (8.48 | ) | ||||||||||||||||
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Less distributions from: | ||||||||||||||||||||||||
Net investment income and net realized foreign currency gains | (0.74 | ) | — | (1.03 | ) | (0.36 | ) | (1.34 | ) | (0.32 | ) | |||||||||||||
Net realized gains | — | — | — | — | — | (5.78 | ) | |||||||||||||||||
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Total distributions | (0.74 | ) | — | (1.03 | ) | (0.36 | ) | (1.34 | ) | (6.10 | ) | |||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ | 14.08 | $ | 14.66 | $ | 11.47 | $ | 13.12 | $ | 11.16 | $ | 10.84 | ||||||||||||
|
| |||||||||||||||||||||||
Total returnc | 1.10% | 27.81% | (5.45)% | 21.24% | 19.41% | (42.22)% | ||||||||||||||||||
Ratios to average net assetsd | ||||||||||||||||||||||||
Expenses before waiver and payments by affiliates | 1.12% | 1.11% | 1.12% | 1.11% | 1.11% | 1.08% | ||||||||||||||||||
Expenses net of waiver and payments by affiliates | 1.12% | 1.07% | 0.98% | 0.86% | 0.76% | e | 0.60% | e | ||||||||||||||||
Net investment income | 1.58% | 1.92% | 1.64% | 3.24% | 3.13% | 3.41% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 36,144 | $ | 38,329 | $ | 33,670 | $ | 40,430 | $ | 38,486 | $ | 39,018 | ||||||||||||
Portfolio turnover rate | 11.91% | 22.29% | 28.95% | 76.52% | 87.34% | 77.28% | ||||||||||||||||||
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.
FGR-8
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Franklin Global Real Estate Securities Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 2 | 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||||||
| ||||||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 14.27 | $ | 11.20 | $ | 12.83 | $ | 10.92 | $ | 10.61 | $ | 24.97 | ||||||||||||
|
| |||||||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.10 | 0.21 | 0.17 | 0.34 | 0.27 | 0.56 | ||||||||||||||||||
Net realized and unrealized gains (losses) | 0.04 | 2.86 | (0.81 | ) | 1.90 | 1.33 | (8.93 | ) | ||||||||||||||||
|
| |||||||||||||||||||||||
Total from investment operations | 0.14 | 3.07 | (0.64 | ) | 2.24 | 1.60 | (8.37 | ) | ||||||||||||||||
|
| |||||||||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income and net realized foreign currency gains | (0.67 | ) | — | (0.99 | ) | (0.33 | ) | (1.29 | ) | (0.21 | ) | |||||||||||||
Net realized gains | — | — | — | — | — | (5.78 | ) | |||||||||||||||||
|
| |||||||||||||||||||||||
Total distributions | (0.67 | ) | — | (0.99 | ) | (0.33 | ) | (1.29 | ) | (5.99 | ) | |||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ | 13.74 | $ | 14.27 | $ | 11.20 | $ | 12.83 | $ | 10.92 | $ | 10.61 | ||||||||||||
|
| |||||||||||||||||||||||
Total returnc | 0.92% | 27.41% | (5.65)% | 20.97% | 19.08% | (42.39)% | ||||||||||||||||||
Ratios to average net assetsd | ||||||||||||||||||||||||
Expenses before waiver and payments by affiliates | 1.37% | 1.36% | 1.37% | 1.36% | 1.36% | 1.33% | ||||||||||||||||||
Expenses net of waiver and payments by affiliates | 1.37% | 1.32% | 1.23% | 1.11% | 1.01% | e | 0.85% | e | ||||||||||||||||
Net investment income | 1.33% | 1.67% | 1.39% | 2.99% | 2.88% | 3.16% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 337,106 | $ | 344,044 | $ | 292,356 | $ | 352,854 | $ | 345,445 | $ | 343,701 | ||||||||||||
Portfolio turnover rate | 11.91% | 22.29% | 28.95% | 76.52% | 87.34% | 77.28% | ||||||||||||||||||
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.
FGR-9
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited)
| Franklin Global Real Estate Securities Fund | Country | Shares/Units | Value | |||||||
Common Stocks and Other Equity Interests 99.0% | ||||||||||
Consumer Discretionary 0.5% | ||||||||||
SPDR S&P Homebuilders ETF | United States | 65,697 | $ | 1,932,806 | ||||||
|
| |||||||||
Diversified Real Estate Activities 15.7% | ||||||||||
CapitaLand Ltd. | Singapore | 1,355,500 | 3,294,488 | |||||||
Hang Lung Properties Ltd. | Hong Kong | 1,111,000 | 3,874,774 | |||||||
Mitsubishi Estate Co. Ltd. | Japan | 697,600 | 18,574,066 | |||||||
Mitsui Fudosan Co. Ltd. | Japan | 550,000 | 16,174,514 | |||||||
Sun Hung Kai Properties Ltd. | Hong Kong | 406,000 | 5,239,925 | |||||||
Tokyo Tatemono Co. Ltd. | Japan | 282,000 | 2,348,342 | |||||||
Tokyu Land Corp. | Japan | 136,000 | 1,247,706 | |||||||
The Wharf Holdings Ltd. | Hong Kong | 920,500 | 7,732,202 | |||||||
|
| |||||||||
| 58,486,017 | ||||||||||
|
| |||||||||
Diversified REITs 9.5% | ||||||||||
American Assets Trust Inc. | United States | 75,339 | 2,324,961 | |||||||
British Land Co. PLC | United Kingdom | 403,731 | 3,479,926 | |||||||
Canadian REIT | Canada | 62,914 | 2,606,082 | |||||||
Dexus Property Group | Australia | 1,933,678 | 1,892,754 | |||||||
GPT Group | Australia | 1,030,760 | 3,620,887 | |||||||
Kenedix Realty Investment Corp. | Japan | 537 | 2,138,472 | |||||||
Land Securities Group PLC | United Kingdom | 356,581 | 4,796,699 | |||||||
Liberty Property Trust | United States | 64,306 | 2,376,750 | |||||||
Mirvac Group | Australia | 1,319,816 | 1,937,825 | |||||||
Shaftesbury PLC | United Kingdom | 92,633 | 836,833 | |||||||
Suntec REIT | Singapore | 1,690,000 | 2,100,414 | |||||||
United Urban Investment Corp. | Japan | 829 | 1,120,767 | |||||||
Vornado Realty Trust | United States | 73,874 | 6,120,461 | |||||||
|
| |||||||||
| 35,352,831 | ||||||||||
|
| |||||||||
Industrial REITs 5.8% | ||||||||||
Ascendas REIT | Singapore | 772,000 | 1,358,501 | |||||||
a Ascendas REIT, 144A | Singapore | 171,000 | 300,911 | |||||||
Goodman Group | Australia | 1,051,014 | 4,691,962 | |||||||
Mapletree Logistics Trust | Singapore | 2,114,380 | 1,835,327 | |||||||
Nippon Prologis REIT Inc. | Japan | 164 | 1,426,878 | |||||||
a Nippon Prologis REIT Inc., 144A | Japan | 124 | 1,078,859 | |||||||
Prologis Inc. | United States | 230,164 | 8,681,786 | |||||||
STAG Industrial Inc. | United States | 105,952 | 2,113,742 | |||||||
|
| |||||||||
| 21,487,966 | ||||||||||
|
| |||||||||
Office REITs 9.7% | ||||||||||
Alexandria Real Estate Equities Inc. | United States | 15,207 | 999,404 | |||||||
Boston Properties Inc. | United States | 62,815 | 6,625,098 | |||||||
Brandywine Realty Trust | United States | 188,646 | 2,550,494 | |||||||
Commonwealth Property Office Fund | Australia | 1,768,817 | 1,779,925 | |||||||
Coresite Realty Corp. | United States | 18,487 | 588,071 | |||||||
Derwent London PLC | United Kingdom | 59,694 | 2,087,615 | |||||||
Digital Realty Trust Inc. | United States | 25,543 | 1,558,123 | |||||||
Douglas Emmett Inc. | United States | 87,067 | 2,172,322 | |||||||
Great Portland Estates PLC | United Kingdom | 410,326 | 3,318,356 | |||||||
Highwoods Properties Inc. | United States | 75,537 | 2,689,873 | |||||||
Japan Real Estate Investment Corp. | Japan | 280 | 3,124,912 | |||||||
Kilroy Realty Corp. | United States | 81,898 | 4,341,413 | |||||||
SL Green Realty Corp. | United States | 48,010 | 4,234,002 | |||||||
|
| |||||||||
| 36,069,608 | ||||||||||
|
| |||||||||
FGR-10
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Franklin Global Real Estate Securities Fund | Country | Shares/Units | Value | |||||||
Common Stocks and Other Equity Interests (continued) | ||||||||||
Real Estate Development 2.0% | ||||||||||
China Overseas Land & Investment Ltd. | China | 550,000 | $ | 1,435,994 | ||||||
Keppel Land Ltd. | Singapore | 876,000 | 2,315,723 | |||||||
Sino Land Co. Ltd. | Hong Kong | 1,598,000 | 2,237,544 | |||||||
Sunac China Holdings Ltd. | China | 2,243,000 | 1,480,691 | |||||||
|
| |||||||||
| 7,469,952 | ||||||||||
|
| |||||||||
Real Estate Operating Companies 7.5% | ||||||||||
Brookfield Office Properties Inc. | Canada | 139,049 | 2,313,185 | |||||||
Deutsche Euroshop AG | Germany | 30,681 | 1,221,041 | |||||||
a Deutsche Euroshop AG, 144A | Germany | 9,909 | 394,358 | |||||||
Global Logistic Properties Ltd. | Singapore | 1,782,000 | 3,867,035 | |||||||
GSW Immobilien AG | Germany | 38,876 | 1,504,172 | |||||||
Hongkong Land Holdings Ltd. | Hong Kong | 865,100 | 5,943,237 | |||||||
Hufvudstaden AB, A | Sweden | 262,186 | 3,135,294 | |||||||
Hysan Development Co. Ltd. | Hong Kong | 601,000 | 2,595,878 | |||||||
a,b LEG Immobilien AG, 144A | Germany | 11,659 | 607,037 | |||||||
Norwegian Property ASA | Norway | 726,430 | 920,970 | |||||||
a Norwegian Property ASA, 144A | Norway | 259,120 | 328,513 | |||||||
PSP Swiss Property AG | Switzerland | 25,434 | 2,201,938 | |||||||
Sponda OYJ | Finland | 304,011 | 1,432,492 | |||||||
Swire Properties Ltd. | Hong Kong | 334,200 | 995,367 | |||||||
a Swire Properties Ltd., 144A | Hong Kong | 239,200 | 712,423 | |||||||
|
| |||||||||
| 28,172,940 | ||||||||||
|
| |||||||||
Residential REITs 8.9% | ||||||||||
Apartment Investment & Management Co., A | United States | 97,105 | 2,917,034 | |||||||
AvalonBay Communities Inc. | United States | 37,967 | 5,122,128 | |||||||
Boardwalk REIT | Canada | 43,036 | 2,386,045 | |||||||
BRE Properties Inc. | United States | 33,395 | 1,670,418 | |||||||
Camden Property Trust | United States | 51,385 | 3,552,759 | |||||||
Campus Crest Communities Inc. | United States | 95,317 | 1,099,958 | |||||||
Canadian Apartment Properties REIT | Canada | 115,195 | 2,481,730 | |||||||
Equity Lifestyle Properties Inc. | United States | 23,456 | 1,843,407 | |||||||
Equity Residential | United States | 109,828 | 6,376,614 | |||||||
Essex Property Trust Inc. | United States | 21,448 | 3,408,516 | |||||||
Post Properties Inc. | United States | 18,188 | 900,124 | |||||||
UDR Inc. | United States | 60,002 | 1,529,451 | |||||||
|
| |||||||||
| 33,288,184 | ||||||||||
|
| |||||||||
Retail REITs 25.9% | ||||||||||
a CapitaMall Trust, 144A | Singapore | 464,100 | 730,621 | |||||||
CBL & Associates Properties Inc. | United States | 93,428 | 2,001,228 | |||||||
Charter Hall Retail REIT | Australia | 423,666 | 1,476,640 | |||||||
DDR Corp. | United States | 238,716 | 3,974,621 | |||||||
Eurocommercial Properties NV | Netherlands | 41,595 | 1,526,808 | |||||||
Federal Realty Investment Trust | United States | 14,809 | 1,535,397 | |||||||
Federation Centres | Australia | 1,166,709 | 2,529,514 | |||||||
Frontier Real Estate Investment Corp. | Japan | 174 | 1,596,330 | |||||||
General Growth Properties Inc. | United States | 198,983 | 3,953,792 | |||||||
Hammerson PLC | United Kingdom | 491,653 | 3,644,065 | |||||||
Japan Retail Fund Investment Corp. | Japan | 1,139 | 2,379,280 | |||||||
Kimco Realty Corp. | United States | 233,969 | 5,013,956 | |||||||
Klepierre | France | 76,432 | 3,012,488 | |||||||
The Link REIT | Hong Kong | 1,038,600 | 5,115,366 | |||||||
FGR-11
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Franklin Global Real Estate Securities Fund | Country | Shares/Units | Value | |||||||
Common Stocks and Other Equity Interests (continued) | ||||||||||
Retail REITs (continued) | ||||||||||
The Macerich Co. | United States | 36,864 | $ | 2,247,598 | ||||||
Ramco-Gershenson Properties Trust | United States | 95,913 | 1,489,529 | |||||||
Realty Income Corp. | United States | 33,703 | 1,412,830 | |||||||
Regency Centers Corp. | United States | 33,693 | 1,711,941 | |||||||
RioCan REIT | Canada | 110,226 | 2,649,366 | |||||||
Simon Property Group Inc. | United States | 119,115 | 18,810,641 | |||||||
Tanger Factory Outlet Centers Inc. | United States | 52,279 | 1,749,255 | |||||||
Taubman Centers Inc. | United States | 31,208 | 2,345,281 | |||||||
Unibail-Rodamco SE | France | 48,804 | 11,371,105 | |||||||
Weingarten Realty Investors | United States | 63,710 | 1,960,357 | |||||||
Westfield Group | Australia | 1,064,271 | 11,137,928 | |||||||
Westfield Retail Trust | Australia | 501,487 | 1,422,157 | |||||||
|
| |||||||||
| 96,798,094 | ||||||||||
|
| |||||||||
Specialized REITs 13.5% | ||||||||||
CDL Hospitality Trusts | Singapore | 744,000 | 998,067 | |||||||
CubeSmart | United States | 111,021 | 1,774,115 | |||||||
Extra Space Storage Inc. | United States | 56,454 | 2,367,116 | |||||||
HCP Inc. | United States | 160,717 | 7,302,980 | |||||||
Health Care REIT Inc. | United States | 120,264 | 8,061,296 | |||||||
Host Hotels & Resorts Inc. | United States | 349,899 | 5,902,796 | |||||||
Pebblebrook Hotel Trust | United States | 115,722 | 2,991,414 | |||||||
Public Storage | United States | 36,973 | 5,669,070 | |||||||
Sabra Health Care REIT Inc. | United States | 44,726 | 1,167,796 | |||||||
Senior Housing Properties Trust | United States | 38,663 | 1,002,532 | |||||||
Starwood Hotels & Resorts Worldwide Inc. | United States | 46,564 | 2,942,379 | |||||||
b Sunstone Hotel Investors Inc. | United States | 126,327 | 1,526,030 | |||||||
Ventas Inc. | United States | 124,687 | 8,660,759 | |||||||
|
| |||||||||
| 50,366,350 | ||||||||||
|
| |||||||||
Total Common Stocks and Other Equity Interests (Cost $252,409,708) | 369,424,748 | |||||||||
|
| |||||||||
FGR-12
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Franklin Global Real Estate Securities Fund | Country | Principal Amount | Value | |||||||
Short Term Investments (Cost $1,756,979) 0.4% | ||||||||||
Repurchase Agreements 0.4% | ||||||||||
c Joint Repurchase Agreement, 0.088%, 7/01/13 (Maturity Value $1,756,992) | United States | $ | 1,756,979 | $ | 1,756,979 | |||||
Barclays Capital Inc. (Maturity Value $200,262) | ||||||||||
BNP Paribas Securities Corp. (Maturity Value $222,523) | ||||||||||
Credit Suisse Securities (USA) LLC (Maturity Value $278,149) | ||||||||||
Deutsche Bank Securities Inc. (Maturity Value $221,592) | ||||||||||
HSBC Securities (USA) Inc. (Maturity Value $472,860) | ||||||||||
Merrill Lynch, Pierce, Fenner & Smith Inc. (Maturity Value $222,523) | ||||||||||
Morgan Stanley & Co. LLC (Maturity Value $139,083) | ||||||||||
Collateralized by U.S. Government Agency Securities, 0.13% - 4.625%, 7/09/13 - 8/07/17; dU.S.Government Agency Discount Notes, 8/01/13 - 4/21/14; dU.S. Treasury Bills, 7/11/13 - 5/01/14; U.S. Treasury Notes, 0.125% - 4.625%, 6/30/13 - 4/30/20; U.S. Treasury Notes, Index Linked, 1.875% - 2.00%, 7/15/13 - 1/15/14; and U.S. Treasury Bonds, 8.75%, 5/15/17 (valued at $1,793,610) | ||||||||||
|
| |||||||||
Total Investments (Cost $254,166,687) 99.4% | 371,181,727 | |||||||||
Other Assets, less Liabilities 0.6% | 2,068,609 | |||||||||
|
| |||||||||
Net Assets 100.0% | $ | 373,250,336 | ||||||||
|
| |||||||||
See Abbreviations on page FGR-24.
aSecurity was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be sold in transactions exempt from registration only to qualified institutional buyers or in a public offering registered under the Securities Act of 1933. These securities have been deemed liquid under guidelines approved by the Trust’s Board of Trustees. At June 30, 2013, the aggregate value of these securities was $4,152,722, representing 1.11% of net assets.
bNon-income producing.
cSee Note 1(c) regarding joint repurchase agreement.
dThe security is traded on a discount basis with no stated coupon rate.
The accompanying notes are an integral part of these financial statements.
FGR-13
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements
Statement of Assets and Liabilities
June 30, 2013 (unaudited)
| Franklin Global Real Estate Securities Fund | ||||
Assets: | ||||
Investments in securities: | ||||
Cost - Unaffiliated issuers | $ | 252,409,708 | ||
Cost - Repurchase agreements | 1,756,979 | |||
|
| |||
Total cost of investments | $ | 254,166,687 | ||
|
| |||
Value - Unaffiliated issuers | $ | 369,424,748 | ||
Value - Repurchase agreements | 1,756,979 | |||
|
| |||
Total value of investments | 371,181,727 | |||
Cash | 109,634 | |||
Foreign currency, at value (cost and $16,757) | 16,744 | |||
Receivables: | ||||
Investment securities sold | 2,160,686 | |||
Capital shares sold | 74,099 | |||
Dividends | 1,243,406 | |||
Other assets | 107 | |||
|
| |||
Total assets | 374,786,403 | |||
|
| |||
Liabilities: | ||||
Payables: | ||||
Investment securities purchased | 751,422 | |||
Capital shares redeemed | 155,559 | |||
Affiliates | 474,230 | |||
Deferred tax | 22,276 | |||
Accrued expenses and other liabilities | 132,580 | |||
|
| |||
Total liabilities | 1,536,067 | |||
|
| |||
Net assets, at value | $ | 373,250,336 | ||
|
| |||
Net assets consist of: | ||||
Paid-in capital | $ | 618,508,759 | ||
Distributions in excess of net investment income | (13,679,720 | ) | ||
Net unrealized appreciation (depreciation) | 116,988,203 | |||
Accumulated net realized gain (loss) | (348,566,906 | ) | ||
|
| |||
Net assets, at value | $ | 373,250,336 | ||
|
| |||
Class 1: | ||||
Net assets, at value | $ | 36,144,140 | ||
|
| |||
Shares outstanding | 2,567,357 | |||
|
| |||
Net asset value and maximum offering price per share | $ | 14.08 | ||
|
| |||
Class 2: | ||||
Net assets, at value | $ | 337,106,196 | ||
|
| |||
Shares outstanding | 24,526,126 | |||
|
| |||
Net asset value and maximum offering price per share | $ | 13.74 | ||
|
| |||
The accompanying notes are an integral part of these financial statements.
FGR-14
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Operations
for the six months ended June 30, 2013 (unaudited)
| Franklin Global Real Estate Securities Fund | ||||
Investment income: | ||||
Dividends (net of foreign taxes of $445,878) | $ | 5,310,866 | ||
Interest | 2,076 | |||
|
| |||
Total investment income | 5,312,942 | |||
|
| |||
Expenses: | ||||
Management fees (Note 3a) | 1,737,468 | |||
Administrative fees (Note 3b) | 324,753 | |||
Distribution fees - Class 2 (Note 3c) | 443,044 | |||
Unaffiliated transfer agent fees | 152 | |||
Custodian fees (Note 4) | 28,726 | |||
Reports to shareholders | 76,832 | |||
Professional fees | 31,918 | |||
Trustees’ fees and expenses | 731 | |||
Other | 6,912 | |||
|
| |||
Total expenses | 2,650,536 | |||
|
| |||
Net investment income | 2,662,406 | |||
|
| |||
Realized and unrealized gains (losses): | ||||
Net realized gain (loss) from: | ||||
Investments | 9,284,533 | |||
Realized gain distributions from REITs | 736,775 | |||
Foreign currency transactions | (71,432 | ) | ||
|
| |||
Net realized gain (loss) | 9,949,876 | |||
|
| |||
Net change in unrealized appreciation (depreciation) on: | ||||
Investments | (8,942,085 | ) | ||
Translation of other assets and liabilities denominated in foreign currencies | 4,890 | |||
Change in deferred taxes on unrealized appreciation | (2,104 | ) | ||
|
| |||
Net change in unrealized appreciation (depreciation) | (8,939,299 | ) | ||
|
| |||
Net realized and unrealized gain (loss) | 1,010,577 | |||
|
| |||
Net increase (decrease) in net assets resulting from operations | $ | 3,672,983 | ||
|
| |||
The accompanying notes are an integral part of these financial statements.
FGR-15
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statements of Changes in Net Assets
| Franklin Global Real Estate Securities Fund | ||||||||
| Six Months Ended June 30, 2013 (unaudited) | Year Ended December 31, 2012 | |||||||
| ||||||||
Increase (decrease) in net assets: | ||||||||
Operations: | ||||||||
Net investment income | $ | 2,662,406 | $ | 6,085,560 | ||||
Net realized gain (loss) from investments, realized gain distributions from REITs and foreign currency transactions | 9,949,876 | 16,658,509 | ||||||
Net change in unrealized appreciation (depreciation) on investments, translation of other assets and liabilities denominated in foreign currencies and deferred taxes | (8,939,299 | ) | 63,401,420 | |||||
| ||||||||
Net increase (decrease) in net assets resulting from operations | 3,672,983 | 86,145,489 | ||||||
| ||||||||
Distributions to shareholders from net investment income and net foreign currency gains: | ||||||||
Class 1 | (1,817,696 | ) | — | |||||
Class 2 | (15,833,743 | ) | — | |||||
| ||||||||
Total distributions to shareholders | (17,651,439 | ) | — | |||||
| ||||||||
Capital share transactions: (Note 2) | ||||||||
Class 1 | (861,232 | ) | (4,213,180 | ) | ||||
Class 2 | 5,717,243 | (25,586,397 | ) | |||||
| ||||||||
Total capital share transactions | 4,856,011 | (29,799,577 | ) | |||||
| ||||||||
Net increase (decrease) in net assets | (9,122,445 | ) | 56,345,912 | |||||
Net assets: | ||||||||
Beginning of period | 382,372,781 | 326,026,869 | ||||||
| ||||||||
End of period | $ | 373,250,336 | $ | 382,372,781 | ||||
| ||||||||
Undistributed net investment income (distributions in excess of net investment income) included in net assets: | ||||||||
End of period | $ | (13,679,720 | ) | $ | 1,309,313 | |||
| ||||||||
The accompanying notes are an integral part of these financial statements.
FGR-16
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited)
Franklin Global Real Estate Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Templeton Variable Insurance Products Trust (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end investment company, consisting of twenty one separate funds. The Franklin Global Real Estate 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, 2013, 58.19% of the Fund’s shares were held through one insurance company. Investment activities of these insurance company separate accounts could have a material impact on the Fund. The Fund offers two classes of shares: Class 1 and Class 2. Each class of shares differs by its distribution fees, voting rights on matters affecting a single class and its exchange privilege.
The following summarizes the Fund’s significant accounting policies.
a. Financial Instrument Valuation
The Fund’s investments in 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 Board), the Fund’s administrator, investment manager and other affiliates have formed the Valuation and Liquidity Oversight Committee (VLOC). The VLOC provides administration and oversight of the Fund’s valuation policies and procedures, which are approved annually by the Board. Among other things, these procedures allow the Fund to utilize independent pricing services, quotations from securities and financial instrument dealers, and other market sources to determine fair value.
Equity securities and exchange traded funds 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 (OTC) 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. Repurchase agreements are valued at cost, which approximates market value.
The Fund has procedures to determine the fair value of financial instruments for which market prices are not reliable or readily available. Under these procedures, the VLOC convenes on a regular basis to review such financial instruments and considers a number of factors, including significant unobservable valuation inputs, when arriving at fair value. The VLOC 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. An income-based valuation approach may also be used 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. The VLOC employs various methods for calibrating these valuation approaches including a regular review of key inputs and assumptions, transactional back-testing or disposition analysis, and reviews of any related market activity.
Trading in securities on foreign securities stock exchanges and OTC 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 VLOC monitors price movements following the close of trading in foreign stock markets through a series of country specific market proxies (such as baskets of
FGR-17
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Global Real Estate Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
a. Financial Instrument Valuation (continued)
American Depositary 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.
In addition, certain foreign markets may be open on days that the NYSE is closed, which could result in differences between the value of the Fund’s portfolio securities on the last business day and the last calendar day of the reporting period. Any significant security valuation changes due to an open foreign market are adjusted and reflected by the Fund for financial reporting purposes.
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 Board.
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%. Repurchase agreements are subject to the terms of Master Repurchase Agreements (MRAs) with approved counterparties (sellers). The MRAs contain various provisions, including but not limited to events of default and maintenance of collateral for repurchase agreements. In the event of default by either the seller or the Fund, certain MRAs may permit the non-defaulting party to net and close-out all transactions, if any, traded under such agreements. The Fund may sell securities it holds as collateral and apply the proceeds towards the repurchase price and any other amounts owed by the seller to the Fund in the event of default by the seller. This could involve costs or delays in addition to a loss on the securities if their value falls below the repurchase price owed by the seller. The joint repurchase agreement held by the Fund at period end, as indicated in the Statement of Investments, had been entered into on June 28, 2013.
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Global Real Estate Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
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 if applicable, excise taxes. As a result, no provision for U.S. federal income taxes is required.
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 in an amount that would be payable if the securities were disposed of on the valuation date.
The Fund recognizes the tax benefits of uncertain tax positions only when the position is “more likely than not” to be sustained upon examination by the tax authorities based on the technical merits of the tax position. As of June 30, 2013, and for all open tax years, the Fund has determined that no liability for unrecognized tax benefits is required in the Fund’s financial statements related to uncertain tax positions taken on a tax return (or expected to be taken on future tax returns). 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 except that certain dividends from foreign securities are recognized as soon as the Fund is notified of the ex-dividend date. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with accounting principles generally accepted in the United States of America. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods.
Common expenses incurred by the Trust are allocated among the funds based on the ratio of net assets of each fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense.
Realized and unrealized gains and losses and net investment income, not including class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions, by class, are generally due to differences in class specific expenses.
Distributions received by the Fund from certain securities may be a return of capital (ROC). Such distributions reduce the cost basis of the securities, and any distributions in excess of the cost basis are recognized as capital gains.
f. Accounting Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Global Real Estate Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
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, 2013, 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, 2013 | Year Ended December 31, 2012 | |||||||||||||||
| Class 1 Shares: | Shares | Amount | Shares | Amount | ||||||||||||
Shares sold | 29,416 | $ | 450,922 | 24,042 | $ | 319,447 | ||||||||||
Shares issued in reinvestment of distributions | 127,468 | 1,817,696 | — | — | ||||||||||||
Shares redeemed | (204,834 | ) | (3,129,850 | ) | (343,706 | ) | (4,532,627 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | (47,950 | ) | $ | (861,232 | ) | (319,664 | ) | $ | (4,213,180 | ) | ||||||
| ||||||||||||||||
Class 2 Shares: | ||||||||||||||||
Shares sold | 747,132 | $ | 11,346,822 | 1,413,036 | $ | 18,012,410 | ||||||||||
Shares issued in reinvestment of distributions | 1,136,665 | 15,833,743 | — | — | ||||||||||||
Shares redeemed | (1,458,915 | ) | (21,463,322 | ) | (3,409,902 | ) | (43,598,807 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | 424,882 | $ | 5,717,243 | (1,996,866 | ) | $ | (25,586,397 | ) | ||||||||
| ||||||||||||||||
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 Templeton Institutional, LLC (FT Institutional) | Investment manager | |
Franklin Templeton Services, LLC (FT Services) | Administrative manager | |
Franklin Templeton Distributors, Inc. (Distributors) | Principal underwriter | |
Franklin Templeton Investor Services, LLC (Investor Services) | Transfer agent |
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Global Real Estate Securities Fund
3. TRANSACTIONS WITH AFFILIATES (continued)
a. Management Fees
The Fund pays an investment management fee to FT Institutional based on the average daily net assets of the Fund as follows:
| Annualized Fee Rate | Net Assets | |
| 1.050% | Up to and including $500 million | |
| 0.950% | Over $500 million, up to and including $1 billion | |
| 0.900% | Over $1 billion, up to and including $1.5 billion | |
| 0.850% | Over $1.5 billion, up to and including $6.5 billion | |
| 0.830% | Over $6.5 billion, up to and including $11.5 billion | |
| 0.810% | Over $11.5 billion, up to and including $16.5 billion | |
| 0.790% | Over $16.5 billion, up to and including $19 billion | |
| 0.780% | Over $19 billion, up to and including $21.5 billion | |
| 0.770% | In excess of $21.5 billion |
Effective May 1, 2013, the Fund combined its investment management and administration agreements as approved by the Board. The fees paid under the combined agreement do not exceed the aggregate fees that were paid under the separate agreements.
Prior to May 1, 2013, the Fund paid fees to FT Institutional based on the average daily net assets of the Fund as follows:
| Annualized Fee Rate | Net Assets | |
| 0.800% | Up to and including $500 million | |
| 0.700% | Over $500 million, up to and including $1 billion | |
| 0.650% | Over $1 billion, up to and including $1.5 billion | |
| 0.600% | Over $1.5 billion, up to and including $6.5 billion | |
| 0.580% | Over $6.5 billion, up to and including $11.5 billion | |
| 0.560% | Over $11.5 billion, up to and including $16.5 billion | |
| 0.540% | Over $16.5 billion, up to and including $19 billion | |
| 0.530% | Over $19 billion, up to and including $21.5 billion | |
| 0.520% | In excess of $21.5 billion |
b. Administrative Fees
Effective May 1, 2013, under an agreement with FT Institutional, FT Services provides administrative services to the Fund. The fee is paid by FT Institutional based on the average daily net assets, and is not an additional expense of the Fund.
Prior to May 1, 2013, the Fund paid administrative fees to FT Services of 0.25% per year of the average daily net assets of the Fund.
c. Distribution Fees
The Board has adopted distribution plans for Class 2 shares pursuant to Rule 12b-1 under the 1940 Act. Under the Fund’s compensation distribution plans, the Fund pays Distributors for costs incurred in connection with the servicing, sale and distribution of the Fund’s shares up to 0.35% per year of its average daily net assets. Some distribution fees are not charged on shares held by affiliates. The Board has agreed to limit the current rate to 0.25% per year for Class 2.
Investor Services, under terms of an agreement, performs shareholder servicing for the Fund and is not paid by the Fund for the services.
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Global Real Estate Securities Fund
3. TRANSACTIONS WITH AFFILIATES (continued)
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, 2013, there were no credits earned.
5. INCOME TAXES
For tax purposes, capital losses may be carried over to offset future capital gains. Capital loss carryforwards with no expiration, if any, must be fully utilized before those losses with expiration dates.
At December 31, 2012, capital loss carryforwards were as follows:
Capital loss carryforwards expiring in: | ||||
2016 | $ | 135,057,288 | ||
2017 | 207,448,609 | |||
2018 | 2,192,369 | |||
|
| |||
| $ | 344,698,266 | |||
|
|
At June 30, 2013, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
Cost of investments | $ | 282,958,016 | ||
|
| |||
Unrealized appreciation | $ | 110,659,305 | ||
Unrealized depreciation | (22,435,594 | ) | ||
|
| |||
Net unrealized appreciation (depreciation) | $ | 88,223,711 | ||
|
| |||
Differences between income and/or capital gains as determined on a book basis and a tax basis are primarily due to differing treatments of passive foreign investment company shares and wash sales.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the period ended June 30, 2013, aggregated $46,048,329 and $54,174,301, 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 $1.5 billion (Global Credit
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Global Real Estate Securities Fund
8. CREDIT FACILITY (continued)
Facility) which matures on January 17, 2014. 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 0.07% based upon the unused portion of the Global Credit Facility. These fees are reflected in other expenses on the Statement of Operations. During the period ended June 30, 2013, 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 financial instruments and are summarized in the following fair value hierarchy:
| • | Level 1 – quoted prices in active markets for identical financial instruments |
| • | Level 2 – other significant observable inputs (including quoted prices for similar financial instruments, interest rates, prepayment speed, credit risk, etc.) |
| • | Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of financial instruments) |
The inputs or methodology used for valuing financial instruments are not an indication of the risk associated with investing in those financial instruments.
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.
A summary of inputs used as of June 30, 2013, in valuing the Fund’s assets carried at fair value, is as follows:
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
|
| |||||||||||||||
Assets: | ||||||||||||||||
Investments in Securities: | ||||||||||||||||
Equity Investmentsa | $ | 369,424,748 | $ | — | $ | — | $ | 369,424,748 | ||||||||
Short Term Investments | — | 1,756,979 | — | 1,756,979 | ||||||||||||
|
| |||||||||||||||
Total Investments in Securities | $ | 369,424,748 | $ | 1,756,979 | $ | — | $ | 371,181,727 | ||||||||
|
| |||||||||||||||
aFor detailed categories, see the accompanying Statement of Investments.
10. NEW ACCOUNTING PRONOUNCEMENTS
In June 2013, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2013-08, Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements. The ASU modifies the criteria used in defining an investment company under U.S. Generally Accepted Accounting Principles and also sets forth certain measurement and disclosure requirements. Under the ASU, an entity that is registered under the 1940 Act automatically qualifies as an investment company. The ASU is effective for interim and annual reporting periods beginning after December 15, 2013. The Fund is currently reviewing the requirements and believes the adoption of this ASU will not have a material impact on its financial statements.
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Global Real Estate Securities Fund
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 | ||||
| ETF - Exchange Traded Fund | ||||
| REIT - Real Estate Investment Trust | ||||
| SPDR - S&P Depositary Receipt |
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Franklin Templeton Variable Insurance Products Trust
Tax Designation (unaudited)
Franklin Global Real Estate Securities Fund
At December 31, 2012, 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 hereby reports to shareholders the foreign source income and foreign taxes paid, pursuant to Section 853 of the Internal Revenue Code (Code). This written statement will allow shareholders of record on June 13, 2013, 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 tables provides a detailed analysis of foreign tax paid, and foreign source income as reported by the Fund, to Class 1 and Class 2 shareholders of record.
| Class | Foreign Tax Paid Per Share | Foreign Source Income Per Share | ||||||
Class 1 | $ | 0.0199 | $ | 0.2385 | ||||
Class 2 | $ | 0.0199 | $ | 0.2273 | ||||
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’ 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.
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FRANKLIN GROWTHAND INCOME SECURITIES FUND
This semiannual report for Franklin Growth and Income Securities Fund covers the period ended June 30, 2013.
Performance Summary as of 6/30/13
Franklin Growth and Income Securities Fund – Class 1 delivered a +13.11% total return for the six-month period ended 6/30/13.
Performance reflects the Fund’s Class 1 operating expenses, but does not include any contract fees, expenses or sales charges. If they had been included, performance would be lower. These charges and deductions, particularly for variable life policies, can have a significant effect on contract values and insurance benefits. See the contract prospectus for a complete description of these expenses, including sales charges.
Franklin Growth and Income Securities Fund Class 1
Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares.
Current performance may differ from figures shown.
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Fund Goals and Main Investments: Franklin Growth and Income Securities Fund seeks capital appreciation with current income as a secondary goal. Under normal market conditions, the Fund invests predominantly in equity securities, including securities convertible into common stock.
Performance Overview
You can find the Fund’s six-month total return in the Performance Summary. In comparison, the Fund’s benchmark, the Standard & Poor’s® 500 Index (S&P 500®), produced a +13.82% total return.1 The Fund’s peers as measured by the Lipper VIP Equity Income Funds Classification Average, posted a +13.63% return for the same period.2
Economic and Market Overview
Modest U.S. economic growth, as measured by gross domestic product, characterized the six-month period ended June 30, 2013. Increasing job creation helped lower the unemployment rate and absorb new job seekers, and consumer spending remained strong. Accelerating new and existing home sales accompanied record-low mortgage rates, affordable housing prices, low new-home inventories and a six-year low in U.S. foreclosures. Manufacturing, a mainstay of economic productivity, expanded every month except May.
Budgetary agreement between Congress and the President on January 1 preserved lower income tax rates for most U.S. households, but concerns remained about how the expired payroll tax cut, far-reaching federal spending cuts, and future federal debt ceiling negotiations could affect the U.S. economic recovery. Washington’s lack of consensus on proposed expenditure reductions resulted in further across-the-board federal spending cuts starting in March. In May, Federal Reserve Board (Fed) Chairman Ben Bernanke said the Fed could gradually wind down its monthly purchases of mortgage-backed securities and Treasuries, assuming continued U.S. economic improvement. He clarified in June that such action could begin in the near future.
Amid these fiscal and monetary developments, a slow and steady U.S. recovery continued. U.S. stocks generated healthy returns as the S&P 500 and Dow Jones Industrial Average reached all-time highs during the period even though Chairman Bernanke’s statements sparked volatility.1 Rising corporate profits and generally favorable
1. Source: © 2013 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: All investments involve risks, including possible loss of principal. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Convertible securities are subject to the risks of stocks when the underlying stock price is high relative to the conversion price and debt securities when the underlying stock price is low relative to the conversion price. The Fund’s investment in foreign securities also involves special risks, including currency fluctuations and economic as well as political uncertainty. The Fund is actively managed but there is no guarantee that the manager’s investment decisions will produce the desired results. The Fund’s prospectus also includes a description of the main investment risks.
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economic data bolstered investor confidence, but caution remained about the extent to which positive business and market results were dependent on continuation of the Fed’s accommodative monetary policy.
Investment Strategy
We seek to invest in a broadly diversified portfolio of equity securities that we consider to be financially strong, with a focus on “blue chip” companies. We apply a bottom-up approach to investing in individual securities. We will assess the market price of a company’s securities relative to our evaluation of the company’s long-term earnings, asset value and cash flow potential. We also consider a company’s price/earnings ratio, profit margins, balance sheet and liquidation value. We consider dividend yield in selecting stocks for the Fund because we believe that, over time, dividend income can contribute significantly to total return and can be a more consistent source of investment return than capital appreciation. We seek to take advantage of price dislocations that result from the market’s short-term focus and choose to invest in those companies that, in our opinion, offer the best trade-off between growth opportunity, business and financial risk, and valuation.
Manager’s Discussion
During the six-month review period, nearly every sector the Fund invested in rose in value, as did most of the portfolio’s individual securities, supporting overall performance. Key contributing sectors included financials, industrials and consumer discretionary. Within the financials sector, capital markets firm BlackRock, diversified financial services provider JPMorgan Chase and commercial bank Wells Fargo supported results. Among industrials, leading performers included conglomerate Honeywell International, aerospace firm Boeing and waste management company Republic Services. The Fund’s consumer discretionary holdings were led by athletic equipment and apparel maker NIKE, discount retailer Target and restaurant chain McDonald’s.
In contrast, our investments in the poorly performing materials sector hindered the Fund’s results as several commodities suffered from price volatility during the period. Major detractors included a convertible bond of gold miner AngloGold Ashanti, stock of metals and mining corporation Rio Tinto (sold by period-end) and a Freeport-McMoRan Copper & Gold equity-linked security. Other individual positions that detracted from performance included an Apple equity-linked security and our positions in diversified resources company BHP Billiton and engine manufacturer Cummins.
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Thank you for your participation in Franklin Growth and 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, 2013, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.
Top 10 Holdings
Franklin Growth and Income Securities Fund
6/30/13
Company Sector/Industry | % of Total Net Assets | |||
| JPMorgan Chase & Co. | 2.6% | |||
| Financials | ||||
| Microsoft Corp. | 2.3% | |||
| Information Technology | ||||
| Cisco Systems Inc. | 2.3% | |||
| Information Technology | ||||
| Roche Holding AG | 2.1% | |||
| Health Care | ||||
| Sanofi | 2.0% | |||
| Health Care | ||||
| Republic Services Inc. | 2.0% | |||
| Industrials | ||||
| NIKE Inc., B | 2.0% | |||
| Consumer Discretionary | ||||
| BlackRock Inc. | 2.0% | |||
| Financials | ||||
| Exxon Mobil Corp. | 2.0% | |||
| Energy | ||||
| Royal Dutch Shell PLC, A | 2.0% | |||
| Energy | ||||
The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund’s Statement of Investments.
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Fund Expenses
As an investor in a variable insurance contract (Contract) that indirectly provides for investment in an underlying mutual fund, you can incur transaction and/or ongoing expenses at both the Fund level and the Contract level.
| • | Transaction expenses can include sales charges (loads) on purchases, surrender fees, transfer fees and premium taxes. |
| • | Ongoing expenses can include management fees, distribution and service (12b-1) fees, contract fees, annual maintenance fees, mortality and expense risk fees and other fees and expenses. All mutual funds and Contracts have some types of ongoing expenses. |
The expenses shown in the table are meant to highlight ongoing expenses at the Fund level only and do not include ongoing expenses at the Contract level, or transaction expenses at either the Fund or Contract levels. While the Fund does not have transaction expenses, if the transaction and ongoing expenses at the Contract level were included, the expenses shown below would be higher. You should consult your Contract prospectus or disclosure document for more information.
The table shows Fund-level ongoing expenses and can help you understand these expenses and compare them with those of other mutual funds offered through the Contract. The table assumes a $1,000 investment held for the six months indicated. Please refer to the Fund prospectus for additional information on operating expenses.
Actual Fund Expenses
The first line (Actual) of the table provides actual account values and expenses. The “Ending Account Value” is derived from the Fund’s actual return, which includes the effect of ongoing Fund expenses, but does not include the effect of ongoing Contract expenses.
You can estimate the Fund-level expenses you incurred during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:
| 1. | Divide your account value by $1,000. |
If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6.
| 2. | Multiply the result by the number under the heading “Fund-Level Expenses Incurred During Period.” |
If Fund-Level Expenses Incurred During Period were $7.50, then 8.6 x $7.50 = $64.50.
In this illustration, the estimated expenses incurred this period at the Fund level are $64.50.
Franklin Growth and Income Securities Fund Class 1
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Hypothetical Example for Comparison with Other Mutual Funds
Information in the second line (Hypothetical) of the table can help you compare ongoing expenses of the Fund with those of other mutual funds offered through the Contract. This information may not be used to estimate the actual ending account balance or expenses you incurred during the period. The hypothetical “Ending Account Value” is based on the Fund’s actual expense ratio and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Fund-Level Expenses Incurred During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds offered through a Contract.
| Class 1 | Beginning Account Value 1/1/13 | Ending Account Value 6/30/13 | Fund-Level Expenses Incurred During Period* 1/1/13–6/30/13 | |||||||||
Actual | $ | 1,000 | $ | 1,131.10 | $ | 3.12 | ||||||
Hypothetical (5% return | $ | 1,000 | $ | 1,021.87 | $ | 2.96 | ||||||
*Expenses are calculated using the most recent six-month annualized expense ratio for the Fund’s Class 1 shares (0.59%), 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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Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Highlights
Franklin Growth and Income Securities Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 1 | 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||||||
| ||||||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 12.64 | $ | 11.60 | $ | 11.76 | $ | 10.47 | $ | 8.72 | $ | 15.07 | ||||||||||||
|
| |||||||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.16 | 0.35 | 0.33 | 0.38 | 0.31 | 0.39 | ||||||||||||||||||
Net realized and unrealized gains (losses) | 1.50 | 1.08 | (0.03 | ) | 1.32 | 1.92 | (5.17 | ) | ||||||||||||||||
|
| |||||||||||||||||||||||
Total from investment operations | 1.66 | 1.43 | 0.30 | 1.70 | 2.23 | (4.78 | ) | |||||||||||||||||
|
| |||||||||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income | (0.40 | ) | (0.39 | ) | (0.46 | ) | (0.41 | ) | (0.48 | ) | (0.45 | ) | ||||||||||||
Net realized gains | — | — | — | — | — | (1.12 | ) | |||||||||||||||||
|
| |||||||||||||||||||||||
Total distributions | (0.40 | ) | (0.39 | ) | (0.46 | ) | (0.41 | ) | (0.48 | ) | (1.57 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ | 13.90 | $ | 12.64 | $ | 11.60 | $ | 11.76 | $ | 10.47 | $ | 8.72 | ||||||||||||
|
| |||||||||||||||||||||||
Total returnc | 13.11% | 12.53% | 2.64% | 16.93% | 26.82% | (34.95)% | ||||||||||||||||||
Ratios to average net assetsd | ||||||||||||||||||||||||
Expenses | 0.59% | 0.60% | 0.59% | 0.59% | 0.60% | e | 0.55% | e | ||||||||||||||||
Net investment income | 2.40% | 2.86% | 2.80% | 3.62% | 3.46% | 3.17% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 162,630 | $ | 154,463 | $ | 156,830 | $ | 176,590 | $ | 174,403 | $ | 162,936 | ||||||||||||
Portfolio turnover rate | 19.74% | 30.00% | 32.93% | 26.83% | 51.05% | 30.66% | ||||||||||||||||||
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 Growth and Income Securities Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 2 | 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||||||
| ||||||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 12.46 | $ | 11.44 | $ | 11.60 | $ | 10.33 | $ | 8.59 | $ | 14.86 | ||||||||||||
|
| |||||||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.15 | 0.32 | 0.29 | 0.35 | 0.28 | 0.35 | ||||||||||||||||||
Net realized and unrealized gains (losses) | 1.46 | 1.05 | (0.02 | ) | 1.31 | 1.90 | (5.10 | ) | ||||||||||||||||
|
| |||||||||||||||||||||||
Total from investment operations | 1.61 | 1.37 | 0.27 | 1.66 | 2.18 | (4.75 | ) | |||||||||||||||||
|
| |||||||||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income | (0.37 | ) | (0.35 | ) | (0.43 | ) | (0.39 | ) | (0.44 | ) | (0.40 | ) | ||||||||||||
Net realized gains | — | — | — | — | — | (1.12 | ) | |||||||||||||||||
|
| |||||||||||||||||||||||
Total distributions | (0.37 | ) | (0.35 | ) | (0.43 | ) | (0.39 | ) | (0.44 | ) | (1.52 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ | 13.70 | $ | 12.46 | $ | 11.44 | $ | 11.60 | $ | 10.33 | $ | 8.59 | ||||||||||||
|
| |||||||||||||||||||||||
Total returnc | 12.88% | 12.23% | 2.41% | 16.68% | 26.55% | (35.14)% | ||||||||||||||||||
Ratios to average net assetsd | ||||||||||||||||||||||||
Expenses | 0.84% | 0.85% | 0.84% | 0.84% | 0.85% | e | 0.80% | e | ||||||||||||||||
Net investment income | 2.15% | 2.61% | 2.55% | 3.37% | 3.21% | 2.92% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 139,300 | $ | 131,400 | $ | 129,309 | $ | 151,481 | $ | 152,077 | $ | 141,359 | ||||||||||||
Portfolio turnover rate | 19.74% | 30.00% | 32.93% | 26.83% | 51.05% | 30.66% | ||||||||||||||||||
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
Statement of Investments, June 30, 2013 (unaudited)
| Franklin Growth and Income Securities Fund | Country | Shares | Value | |||||||
Common Stocks 86.9% | ||||||||||
Consumer Discretionary 10.2% | ||||||||||
Comcast Corp., A | United States | 108,180 | $ | 4,530,578 | ||||||
Las Vegas Sands Corp. | United States | 82,100 | 4,345,553 | |||||||
Lowe’s Cos. Inc. | United States | 108,600 | 4,441,740 | |||||||
McDonald’s Corp. | United States | 58,600 | 5,801,400 | |||||||
NIKE Inc., B | United States | 96,300 | 6,132,384 | |||||||
Target Corp. | United States | 82,900 | 5,708,494 | |||||||
|
| |||||||||
| 30,960,149 | ||||||||||
|
| |||||||||
Consumer Staples 8.4% | ||||||||||
The Coca-Cola Co. | United States | 77,500 | 3,108,525 | |||||||
Diageo PLC, ADR | United Kingdom | 41,300 | 4,747,435 | |||||||
Kellogg Co. | United States | 73,900 | 4,746,597 | |||||||
Mead Johnson Nutrition Co., A | United States | 48,600 | 3,850,578 | |||||||
PepsiCo Inc. | United States | 67,700 | 5,537,183 | |||||||
The Procter & Gamble Co. | United States | 42,800 | 3,295,172 | |||||||
|
| |||||||||
| 25,285,490 | ||||||||||
|
| |||||||||
Energy 7.2% | ||||||||||
BP PLC, ADR | United Kingdom | 69,800 | 2,913,452 | |||||||
Chevron Corp. | United States | 31,600 | 3,739,544 | |||||||
Exxon Mobil Corp. | United States | 66,644 | 6,021,285 | |||||||
Royal Dutch Shell PLC, A, ADR | United Kingdom | 93,600 | 5,971,680 | |||||||
Schlumberger Ltd. | United States | 44,800 | 3,210,368 | |||||||
|
| |||||||||
| 21,856,329 | ||||||||||
|
| |||||||||
Financials 14.6% | ||||||||||
Aflac Inc. | United States | 98,300 | 5,713,196 | |||||||
Bank of America Corp. | United States | 172,500 | 2,218,350 | |||||||
BlackRock Inc. | United States | 23,600 | 6,061,660 | |||||||
JPMorgan Chase & Co. | United States | 151,270 | 7,985,543 | |||||||
Marsh & McLennan Cos. Inc. | United States | 89,900 | 3,588,808 | |||||||
MetLife Inc. | United States | 38,882 | 1,779,240 | |||||||
People’s United Financial Inc. | United States | 218,100 | 3,249,690 | |||||||
QBE Insurance Group Ltd. | Australia | 241,600 | 3,335,127 | |||||||
T. Rowe Price Group Inc. | United States | 62,800 | 4,593,820 | |||||||
Wells Fargo & Co. | United States | 132,500 | 5,468,275 | |||||||
|
| |||||||||
| 43,993,709 | ||||||||||
|
| |||||||||
Health Care 8.3% | ||||||||||
Bristol-Myers Squibb Co. | United States | 53,300 | 2,381,977 | |||||||
Johnson & Johnson | United States | 60,600 | 5,203,116 | |||||||
Pfizer Inc. | United States | 178,700 | 5,005,387 | |||||||
Roche Holding AG | Switzerland | 25,100 | 6,242,790 | |||||||
Sanofi, ADR | France | 119,900 | 6,176,049 | |||||||
|
| |||||||||
| 25,009,319 | ||||||||||
|
| |||||||||
Industrials 13.3% | ||||||||||
The Boeing Co. | United States | 39,400 | 4,036,136 | |||||||
Cummins Inc. | United States | 40,100 | 4,349,246 | |||||||
Emerson Electric Co. | United States | 90,600 | 4,941,324 | |||||||
General Electric Co. | United States | 222,200 | 5,152,818 | |||||||
Honeywell International Inc. | United States | 71,300 | 5,656,942 | |||||||
Lockheed Martin Corp. | United States | 46,200 | 5,010,852 | |||||||
Republic Services Inc. | United States | 181,500 | 6,160,110 | |||||||
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Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Franklin Growth and Income Securities Fund | Country | Shares | Value | |||||||
Common Stocks (continued) | ||||||||||
Industrials (continued) | ||||||||||
United Parcel Service Inc., B | United States | 55,800 | $ | 4,825,584 | ||||||
|
| |||||||||
| 40,133,012 | ||||||||||
|
| |||||||||
Information Technology 12.7% | ||||||||||
Analog Devices Inc. | United States | 106,200 | 4,785,372 | |||||||
CA Inc. | United States | 156,300 | 4,474,869 | |||||||
Cisco Systems Inc. | United States | 282,208 | 6,860,477 | |||||||
Intel Corp. | United States | 219,100 | 5,306,602 | |||||||
Microsoft Corp. | United States | 199,600 | 6,892,188 | |||||||
Molex Inc. | United States | 196,500 | 5,765,310 | |||||||
Paychex Inc. | United States | 114,200 | 4,170,584 | |||||||
|
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| 38,255,402 | ||||||||||
|
| |||||||||
Materials 4.1% | ||||||||||
BHP Billiton PLC | United Kingdom | 152,600 | 3,903,034 | |||||||
The Dow Chemical Co. | United States | 110,300 | 3,548,351 | |||||||
E. I. du Pont de Nemours and Co. | United States | 96,400 | 5,061,000 | |||||||
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| 12,512,385 | ||||||||||
|
| |||||||||
Telecommunication Services 2.6% | ||||||||||
AT&T Inc. | United States | 115,497 | 4,088,594 | |||||||
Vodafone Group PLC, ADR | United Kingdom | 126,900 | 3,647,106 | |||||||
|
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| 7,735,700 | ||||||||||
|
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Utilities 5.5% | ||||||||||
Dominion Resources Inc. | United States | 70,200 | 3,988,764 | |||||||
Duke Energy Corp. | United States | 76,803 | 5,184,203 | |||||||
Great Plains Energy Inc. | United States | 104,648 | 2,358,766 | |||||||
PG&E Corp. | United States | 113,200 | 5,176,636 | |||||||
|
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| 16,708,369 | ||||||||||
|
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Total Common Stocks (Cost $204,118,570) | 262,449,864 | |||||||||
|
| |||||||||
a Equity-Linked Securities 4.8% | ||||||||||
Consumer Discretionary 1.4% | ||||||||||
b Deutsche Bank AG into Amazon.com Inc., 5.50%, 144A | United States | 15,000 | 4,145,145 | |||||||
|
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Energy 1.4% | ||||||||||
b Bank of America Corp. into Halliburton Co., 5.00%, 144A | United States | 105,000 | 4,292,190 | |||||||
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Information Technology 0.8% | ||||||||||
b Barclays Bank PLC into Apple Inc., 7.50%, 144A | United States | 6,000 | 2,459,652 | |||||||
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Materials 1.2% | ||||||||||
Credit Suisse New York into Freeport-McMoRan Copper & Gold Inc., B, 8.40% | United States | 120,000 | 3,437,256 | |||||||
|
| |||||||||
Total Equity-Linked Securities (Cost $15,831,351) | 14,334,243 | |||||||||
|
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Convertible Preferred Stocks 5.7% | ||||||||||
Consumer Discretionary 1.2% | ||||||||||
General Motors Co., 4.75%, cvt. pfd., B | United States | 77,000 | 3,708,320 | |||||||
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Energy 0.9% | ||||||||||
b Chesapeake Energy Corp., 5.75%, cvt. pfd., 144A | United States | 2,700 | 2,786,670 | |||||||
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Financials 2.2% | ||||||||||
Bank of America Corp., 7.25%, cvt. pfd., L | United States | 3,100 | 3,442,550 | |||||||
MetLife Inc., 5.00%, cvt. pfd. | United States | 55,100 | 3,018,929 | |||||||
|
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| 6,461,479 | ||||||||||
|
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Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Franklin Growth and Income Securities Fund | Country | Shares | Value | |||||||
Convertible Preferred Stocks (continued) | ||||||||||
Industrials 0.4% | ||||||||||
Genesee & Wyoming Inc., 5.00%, cvt. pfd. | United States | 9,200 | $ | 1,102,390 | ||||||
|
| |||||||||
Materials 0.5% | ||||||||||
AngloGold Ashanti Holdings Finance PLC, 6.00%, cvt. pfd. | South Africa | 94,000 | 1,617,740 | |||||||
|
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Utilities 0.5% | ||||||||||
NextEra Energy Inc., 5.889%, cvt. pfd. | United States | 28,100 | 1,560,674 | |||||||
|
| |||||||||
Total Convertible Preferred Stocks (Cost $17,480,402) | 17,237,273 | |||||||||
|
| |||||||||
Preferred Stocks (Cost $8,133,100) 0.5% | ||||||||||
Financials 0.5% | ||||||||||
c Fannie Mae, 8.25%, pfd. | United States | 325,000 | 1,478,750 | |||||||
|
| |||||||||
Total Investments before Short Term Investments | 295,500,130 | |||||||||
|
| |||||||||
| Principal Amount | ||||||||||
Short Term Investments (Cost $5,611,302) 1.8% | ||||||||||
Repurchase Agreements 1.8% | ||||||||||
d Joint Repurchase Agreement, 0.088%, 7/01/13 (Maturity Value $5,611,343) | United States | $ | 5,611,302 | 5,611,302 | ||||||
Barclays Capital Inc. (Maturity Value $639,581) | ||||||||||
BNP Paribas Securities Corp. (Maturity Value $710,677) | ||||||||||
Credit Suisse Securities (USA) LLC (Maturity Value $888,331) | ||||||||||
Deutsche Bank Securities Inc. (Maturity Value $707,703) | ||||||||||
HSBC Securities (USA) Inc. (Maturity Value $1,510,180) | ||||||||||
Merrill Lynch, Pierce, Fenner & Smith Inc. (Maturity Value $710,677) | ||||||||||
Morgan Stanley & Co. LLC (Maturity Value $444,194) | ||||||||||
Collateralized by U.S. Government Agency Securities, 0.13% - 4.625%, 7/09/13 - 8/07/17; | ||||||||||
|
| |||||||||
Total Investments (Cost $251,174,725) 99.7% | 301,111,432 | |||||||||
Other Assets, less Liabilities 0.3% | 818,195 | |||||||||
|
| |||||||||
Net Assets 100.0% | $ | 301,929,627 | ||||||||
|
| |||||||||
See Abbreviations on page FGI-21.
aSee Note 1(d) regarding equity-linked securities.
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, 2013, the aggregate value of these securities was $13,683,657, representing 4.53% of net assets.
cNon-income producing.
dSee Note 1(c) regarding joint repurchase agreement.
eThe security is traded on a discount basis with no stated coupon rate.
The accompanying notes are an integral part of these financial statements.
FGI-11
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements
Statement of Assets and Liabilities
June 30, 2013 (unaudited)
| Franklin Growth and Income Securities Fund | ||||
Assets: | ||||
Investments in securities: | ||||
Cost - Unaffiliated issuers | $ | 245,563,423 | ||
Cost - Repurchase agreements | 5,611,302 | |||
|
| |||
Total cost of investments | $ | 251,174,725 | ||
|
| |||
Value - Unaffiliated issuers | $ | 295,500,130 | ||
Value - Repurchase agreements | 5,611,302 | |||
|
| |||
Total value of investments | 301,111,432 | |||
Receivables: | ||||
Investment securities sold | 10,689,470 | |||
Capital shares sold | 56,826 | |||
Dividends | 611,975 | |||
Other assets | 80 | |||
|
| |||
Total assets | 312,469,783 | |||
|
| |||
Liabilities: | ||||
Payables: | ||||
Investment securities purchased | 10,115,364 | |||
Capital shares redeemed | 143,303 | |||
Affiliates | 194,384 | |||
Accrued expenses and other liabilities | 87,105 | |||
|
| |||
Total liabilities | 10,540,156 | |||
|
| |||
Net assets, at value | $ | 301,929,627 | ||
|
| |||
Net assets consist of: | ||||
Paid-in capital | $ | 266,873,819 | ||
Undistributed net investment income | 4,161,465 | |||
Net unrealized appreciation (depreciation) | 49,935,097 | |||
Accumulated net realized gain (loss) | (19,040,754 | ) | ||
|
| |||
Net assets, at value | $ | 301,929,627 | ||
|
| |||
Class 1: | ||||
Net assets, at value | $ | 162,629,698 | ||
|
| |||
Shares outstanding | 11,703,627 | |||
|
| |||
Net asset value and maximum offering price per share | $ | 13.90 | ||
|
| |||
Class 2: | ||||
Net assets, at value | $ | 139,299,929 | ||
|
| |||
Shares outstanding | 10,165,083 | |||
|
| |||
Net asset value and maximum offering price per share | $ | 13.70 | ||
|
| |||
The accompanying notes are an integral part of these financial statements.
FGI-12
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Operations
for the six months ended June 30, 2013 (unaudited)
| Franklin Growth and Income Securities Fund | ||||
Investment income: | ||||
Dividends | $ | 4,513,276 | ||
Interest | 1,857 | |||
|
| |||
Total investment income | 4,515,133 | |||
|
| |||
Expenses: | ||||
Management fees (Note 3a) | 802,548 | |||
Distribution fees - Class 2 (Note 3c) | 174,600 | |||
Unaffiliated transfer agent fees | 73 | |||
Custodian fees (Note 4) | 3,253 | |||
Reports to shareholders | 54,697 | |||
Professional fees | 20,375 | |||
Trustees’ fees and expenses | 599 | |||
Other | 6,734 | |||
|
| |||
Total expenses | 1,062,879 | |||
|
| |||
Net investment income | 3,452,254 | |||
|
| |||
Realized and unrealized gains (losses): | ||||
Net realized gain (loss) from: | ||||
Investments | 26,127,543 | |||
Foreign currency transactions | (33,325 | ) | ||
|
| |||
Net realized gain (loss) | 26,094,218 | |||
|
| |||
Net change in unrealized appreciation (depreciation) on: | ||||
Investments | 7,021,066 | |||
Translation of other assets and liabilities denominated in foreign currencies | (2,382 | ) | ||
|
| |||
Net change in unrealized appreciation (depreciation) | 7,018,684 | |||
|
| |||
Net realized and unrealized gain (loss) | 33,112,902 | |||
|
| |||
Net increase (decrease) in net assets resulting from operations | $ | 36,565,156 | ||
|
| |||
The accompanying notes are an integral part of these financial statements.
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Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statements of Changes in Net Assets
| Franklin Growth and Income Securities Fund | ||||||||
| Six Months Ended June 30, 2013 (unaudited) | Year Ended December 31, 2012 | |||||||
| ||||||||
Increase (decrease) in net assets: | ||||||||
Operations: | ||||||||
Net investment income | $ | 3,452,254 | $ | 8,006,258 | ||||
Net realized gain (loss) from investments and foreign currency transactions | 26,094,218 | 14,591,826 | ||||||
Net change in unrealized appreciation (depreciation) on investments and translation of other assets and liabilities denominated in foreign currencies | 7,018,684 | 11,480,221 | ||||||
| ||||||||
Net increase (decrease) in net assets resulting from operations | 36,565,156 | 34,078,305 | ||||||
| ||||||||
Distributions to shareholders from: | ||||||||
Net investment income: | ||||||||
Class 1 | (4,583,247 | ) | (4,951,744 | ) | ||||
Class 2 | (3,711,240 | ) | (3,811,748 | ) | ||||
| ||||||||
Total distributions to shareholders | (8,294,487 | ) | (8,763,492 | ) | ||||
| ||||||||
Capital share transactions: (Note 2) | ||||||||
Class 1 | (7,053,942 | ) | (16,240,212 | ) | ||||
Class 2 | (5,150,695 | ) | (9,349,674 | ) | ||||
| ||||||||
Total capital share transactions | (12,204,637 | ) | (25,589,886 | ) | ||||
| ||||||||
Net increase (decrease) in net assets | 16,066,032 | (275,073 | ) | |||||
Net assets: | ||||||||
Beginning of period | 285,863,595 | 286,138,668 | ||||||
| ||||||||
End of period | $ | 301,929,627 | $ | 285,863,595 | ||||
| ||||||||
Undistributed net investment income included in net assets: | ||||||||
End of period | $ | 4,161,465 | $ | 8,455,201 | ||||
| ||||||||
The accompanying notes are an integral part of these financial statements.
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Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited)
Franklin Growth and Income Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Templeton Variable Insurance Products Trust (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end investment company, consisting of twenty-one separate funds. The Franklin Growth and 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, 2013, 78.25% of the Fund’s shares were held through one insurance company. Investment activities of these insurance company separate accounts could have a material impact on the Fund. The Fund offers two classes of shares: Class 1, and Class 2. Each class of shares differs by its distribution fees, voting rights on matters affecting a single class and its exchange privilege.
The following summarizes the Fund’s significant accounting policies.
a. Financial Instrument Valuation
The Fund’s investments in 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 Board), the Fund’s administrator, investment manager and other affiliates have formed the Valuation and Liquidity Oversight Committee (VLOC). The VLOC provides administration and oversight of the Fund’s valuation policies and procedures, which are approved annually by the Board. Among other things, these procedures allow the Fund to 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 (OTC) 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 and certain preferred securities generally trade in the OTC 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, credit spreads, estimated default rates, anticipated market interest rate volatility, 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 financial instruments for which market prices are not reliable or readily available. Under these procedures, the VLOC convenes on a regular basis to review such financial instruments and considers a number of factors, including significant unobservable valuation inputs, when arriving at fair value. The VLOC 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. An income-based valuation approach may also be used 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
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Growth and Income Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
a. Financial Instrument Valuation (continued)
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. The VLOC employs various methods for calibrating these valuation approaches including a regular review of key inputs and assumptions, transactional back-testing or disposition analysis, and reviews of any related market activity.
Trading in securities on foreign securities stock exchanges and OTC 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 VLOC 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 Depositary 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.
In addition, certain foreign markets may be open on days that the NYSE is closed, which could result in differences between the value of the Fund’s portfolio securities on the last business day and the last calendar day of the reporting period. Any significant security valuation changes due to an open foreign market are adjusted and reflected by the Fund for financial reporting purposes.
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 Board.
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
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Growth and Income Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
c. Joint Repurchase Agreement (continued)
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%. Repurchase agreements are subject to the terms of Master Repurchase Agreements (MRAs) with approved counterparties (sellers). The MRAs contain various provisions, including but not limited to events of default and maintenance of collateral for repurchase agreements. In the event of default by either the seller or the Fund, certain MRAs may permit the non-defaulting party to net and close-out all transactions, if any, traded under such agreements. The Fund may sell securities it holds as collateral and apply the proceeds towards the repurchase price and any other amounts owed by the seller to the Fund in the event of default by the seller. This could involve costs or delays in addition to a loss on the securities if their value falls below the repurchase price owed by the seller. The joint repurchase agreement held by the Fund at period end, as indicated in the Statement of Investments, had been entered into on June 28, 2013.
d. 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.
e. 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 if applicable, excise taxes. As a result, no provision for U.S. federal income taxes is required.
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 in an amount that would be payable if the securities were disposed of on the valuation date.
The Fund recognizes the tax benefits of uncertain tax positions only when the position is “more likely than not” to be sustained upon examination by the tax authorities based on the technical merits of the tax position. As of June 30, 2013, and for all open tax years, the Fund has determined that no liability for unrecognized tax benefits is required in the Fund’s financial statements related to uncertain tax positions taken on a tax return (or expected to be taken on future tax returns). Open tax years are those that remain subject to examination and are based on each tax jurisdiction statute of limitation.
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
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Growth and Income Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
f. Security Transactions, Investment Income, Expenses and Distributions (continued)
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.
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, 2013, 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, 2013 | Year Ended December 31, 2012 | |||||||||||||||
| Class 1 Shares: | Shares | Amount | Shares | Amount | ||||||||||||
Shares sold | 15,811 | $ | 215,492 | 8,936 | $ | 109,900 | ||||||||||
Shares issued in reinvestment of distributions | 326,675 | 4,583,247 | 419,284 | 4,951,744 | ||||||||||||
Shares redeemed | (855,162 | ) | (11,852,681 | ) | (1,731,505 | ) | (21,301,856 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | (512,676 | ) | $ | (7,053,942 | ) | (1,303,285 | ) | $ | (16,240,212 | ) | ||||||
| ||||||||||||||||
Class 2 Shares: | ||||||||||||||||
Shares sold | 435,388 | $ | 5,936,174 | 876,993 | $ | 10,575,390 | ||||||||||
Shares issued in reinvestment of distributions | 268,347 | 3,711,240 | 327,189 | 3,811,748 | ||||||||||||
Shares redeemed | (1,083,444 | ) | (14,798,109 | ) | (1,967,485 | ) | (23,736,812 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | (379,709 | ) | $ | (5,150,695 | ) | (763,303 | ) | $ | (9,349,674 | ) | ||||||
| ||||||||||||||||
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Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Growth and Income 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 | |
| 0.625% | 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 Board has adopted a distribution plan for Class 2 shares pursuant to Rule 12b-1 under the 1940 Act. Under the Fund’s compensation distribution plan, 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. Some distribution fees are not charged on shares held by affiliates. The Board 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, 2013, there were no credits earned.
5. INCOME TAXES
For tax purposes, capital losses may be carried over to offset future capital gains. Capital loss carryforwards with no expiration, if any, must be fully utilized before those losses with expiration dates.
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Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Growth and Income Securities Fund
5. INCOME TAXES (continued)
At December 31, 2012, the Fund had capital loss carryforwards of $44,304,559 expiring in 2017.
At June 30, 2013, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
Cost of investments | $ | 251,520,028 | ||
|
| |||
Unrealized appreciation | $ | 64,725,506 | ||
Unrealized depreciation | (15,134,102 | ) | ||
|
| |||
Net unrealized appreciation (depreciation) | $ | 49,591,404 | ||
|
| |||
Differences between income and/or capital gains as determined on a book basis and a tax basis are primarily due to differing treatments of 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, 2013, aggregated $58,591,468 and $79,660,793, respectively.
7. CREDIT RISK
At June 30, 2013, the Fund had 10.98% of its portfolio invested in high yield or other securities rated below investment grade. These securities may be more sensitive to economic conditions causing greater price volatility and are potentially subject to a greater risk of loss due to default than higher rated securities.
8. CREDIT FACILITY
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 $1.5 billion (Global Credit Facility) which matures on January 17, 2014. 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 0.07% based upon the unused portion of the Global Credit Facility. These fees are reflected in other expenses on the Statement of Operations. During the period ended June 30, 2013, 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 financial instruments and are summarized in the following fair value hierarchy:
| • | Level 1 – quoted prices in active markets for identical financial instruments |
| • | Level 2 – other significant observable inputs (including quoted prices for similar financial instruments, interest rates, prepayment speed, credit risk, etc.) |
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Growth and Income Securities Fund
9. FAIR VALUE MEASUREMENTS (continued)
| • | Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of financial instruments) |
The inputs or methodology used for valuing financial instruments are not an indication of the risk associated with investing in those financial instruments.
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.
A summary of inputs used as of June 30, 2013, in valuing the Fund’s assets carried at fair value, is as follows:
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
|
| |||||||||||||||
Assets: | ||||||||||||||||
Investments in Securities: | ||||||||||||||||
Equity Investments:a | ||||||||||||||||
Energy | $ | 21,856,329 | $ | 2,786,670 | $ | — | $ | 24,642,999 | ||||||||
All Other Equity Investmentsb | 256,522,888 | — | — | 256,522,888 | ||||||||||||
Equity-Linked Securities | — | 14,334,243 | — | 14,334,243 | ||||||||||||
Short Term Investments | — | 5,611,302 | — | 5,611,302 | ||||||||||||
|
| |||||||||||||||
Total Investments in Securities | $ | 278,379,217 | $ | 22,732,215 | $ | — | $ | 301,111,432 | ||||||||
|
| |||||||||||||||
aIncludes common, preferred and convertible preferred stocks as well as other equity investments.
bFor detailed categories, see the accompanying Statement of Investments.
10. NEW ACCOUNTING PRONOUNCEMENTS
In June 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2013-08, Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements. The ASU modifies the criteria used in defining an investment company under U.S. Generally Accepted Accounting Principles and also sets forth certain measurement and disclosure requirements. Under the ASU, an entity that is registered under the 1940 Act automatically qualifies as an investment company. The ASU is effective for interim and annual reporting periods beginning after December 15, 2013. The Fund is currently reviewing the requirements and believes the adoption of this ASU will not have a material impact on its financial statements.
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 Depositary Receipt |
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FRANKLIN HIGH INCOME SECURITIES FUND
We are pleased to bring you Franklin High Income Securities Fund’s semiannual report for the period ended June 30, 2013.
Performance Summary as of 6/30/13
Franklin High Income Securities Fund – Class 1 delivered a +1.55% total return for the six-month period ended 6/30/13.
Performance reflects the Fund’s Class 1 operating expenses, but does not include any contract fees, expenses or sales charges. If they had been included, performance would be lower. These charges and deductions, particularly for variable life policies, can have a significant effect on contract values and insurance benefits. See the contract prospectus for a complete description of these expenses, including sales charges.
Franklin High Income Securities Fund – Class 1
Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares.
Current performance may differ from figures shown.
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Fund Goals and Main Investments: Franklin High Income Securities Fund seeks a high level of current income with capital appreciation as a secondary goal. Under normal market conditions, the Fund invests 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 +1.52% total return for the period under review.1 The Fund’s peers, as measured by the Lipper VIP High Yield Funds Classification Average, delivered a +1.23% total return.2
Economic and Market Overview
The U.S. economy, as measured by gross domestic product, grew slowly during the six months ended June 30, 2013. Lackluster consumer spending and declines in exports and commercial real estate hindered first-quarter growth. Large cuts in federal and local government spending, volatile energy prices, business disruptions caused by Superstorm Sandy and the continuing effects of extreme weather conditions on farm production also hurt the economy during the period. However, generally positive labor market, manufacturing, and home sales and construction trends suggested the U.S. economic recovery remained largely intact. Consumer sentiment rose to a five-year high, although potential U.S. tax hikes and spending cuts that took effect in 2013 contributed to fluctuations in consumer and business confidence.
In December 2012, the Federal Reserve Board (Fed) announced a 6.5% unemployment target as a guide to maintaining the historically low federal funds target rate. The Fed also agreed to continue purchases of mortgage-backed securities and long-term Treasuries at a monthly pace of $85 billion until conditions improve. Although inflation rose slightly during the reporting period, the Fed noted little evidence of wage pressures. On January 1, 2013, Congress agreed to a budget bill that maintained some tax cuts for most Americans but increased rates on the wealthiest. Congress, however, was unable to resolve differences related to a series of automatic federal spending cuts known as the “sequester.” The cuts will reduce funding for domestic and defense programs by $85 billion in the current U.S. fiscal year. Near period-end, the Fed stated it could begin slowing its monthly quantitative easing purchases in 2013
1. Source: © 2013 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: All investments involve risks, including possible loss of principal. The risks associated with higher-yielding, lower-rated securities include higher risk of default and loss of principal. Investment in foreign securities also involves special risks, including currency fluctuations, and political and economic uncertainty. In addition, interest rate movements will affect the Fund’s share price and yield. Bond prices generally move in the opposite direction of interest rates. Thus, as the prices of bonds in the Fund adjust to a rise in interest rates, the Fund’s share price may decline. Changes in the financial strength of a bond issuer or in a bond’s credit rating may affect its value. The Fund is actively managed but there is no guarantee that the manager’s investment decisions will produce the desired results. The Fund’s prospectus also includes a description of the main investment risks.
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if economic conditions improved and terminate the program in mid-2014 if the unemployment rate fell to 7%.
Anticipating an interest rate rise, many investors abruptly sold their fixed income instruments, and the 10-year U.S. Treasury yield rose to 2.52% at period-end from 1.78% on December 31, 2012.
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
Although financial markets and the Fund experienced a challenging environment toward period-end, the Fund generated a positive return for the six-month period ended June 30, 2013. Similar to the past two years, a strong fourth quarter for the high yield market precipitated a solid start for the new year. This 2013 rally continued until May when momentum slowed, followed by a more significant June sell-off. Although earlier in the year the financial markets focused on the U.S. economic recovery’s sustainability and expected growth in key countries such as China, comments from Fed Chairman Ben Bernanke unnerved many investors. Citing the domestic economy’s stabilization as well as some improvements in employment, Bernanke noted the Fed could slow its QE program during the second half of 2013 and could stop its Treasury buying program by mid-2014. Financial market participants focused on the end of QE and the potential for future interest rate increases from the Fed. As a result, the benchmark 10-year Treasury rate jumped and stock markets declined. Some of this negative reaction reversed by the end of June.
We remained favorable toward the fundamental outlook for the high yield sector based on many companies’ fairly stable earnings and
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generally fortified balance sheets. At the same time, as valuations steadily rose during the period, we maintained generally neutral risk positioning in the Fund compared with the high yield market for most of the period. However, we believe the sell-off across the high yield corporate market toward period-end has created more attractive opportunities for the Fund.
We relied on our fundamental research process to build industry positioning in the Fund. Within that framework, we over- and underweighted certain industries relative to the benchmark. For example, with continued pricing pressures and several large, distressed companies in the utilities sector, we maintained an underweighted position. The sector notably underperformed the benchmark, buoying the Fund’s relative performance. In contrast, we remained positive toward the chemicals industry as balance sheets strengthened, demand began to stabilize, and merger and acquisition activity increased.3 Our industry overweighting contributed to relative performance as the sector outperformed, although our security selection within the chemicals industry was a detractor. Similarly, we continued to view the packaging industry favorably as robust consolidation over the past several years resulted in reduced excess capacity.4 Demand also strengthened and the combination of these factors led to higher profit margins. The Fund’s overweighted allocation to the outperforming industry favorably impacted relative performance.
Although some of the Fund’s industry positioning enhanced relative performance versus the benchmark, certain weightings had a negative impact. We maintained a cautious view on the supermarket and retail sectors amid still fragile U.S. consumer demand and stiff competition in both sectors. We avoided supermarkets; however, a large supermarket issuer recovered from low trading levels and drove that sector to outperform. Retail, which we underweighted, benefited from being a less defensive sector in a strong overall high yield market and also outperformed, hampering the Fund’s relative performance. In contrast, we maintained a positive outlook for the energy sector as we viewed valuations as low, and we overweighted the sector. Low natural gas prices, continued production growth and significant new-issue supply during the period drove the energy sector to slightly underperform the index,
detracting from the Fund’s relative performance. However, our security selection aided the Fund’s relative performance and offset the negative
Top 10 Sectors/Industries
Franklin High Income Securities Fund
Based on Total Net Assets
6/30/13
| Energy | 22.0% | |||
| Materials | 13.1% | |||
| Telecommunication Services | 9.5% | |||
| Media | 8.0% | |||
| Health Care Equipment & Services | 5.4% | |||
| Consumer Services | 4.4% | |||
| Diversified Financials | 4.4% | |||
| Software & Services | 4.3% | |||
| Capital Goods | 3.4% | |||
| Pharmaceuticals, Biotechnology & Life Sciences | 3.3% |
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).
3. Chemicals are part of materials in the SOI.
4. Packaging is part of materials in the SOI.
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effect of overweighting. For example, the Fund’s position in Plains Exploration and Production, an independent oil and gas company, contributed to performance as that company was merged with an investment-grade rated mining company.
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, 2013, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.
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Fund Expenses
As an investor in a variable insurance contract (Contract) that indirectly provides for investment in an underlying mutual fund, you can incur transaction and/or ongoing expenses at both the Fund level and the Contract level.
| • | Transaction expenses can include sales charges (loads) on purchases, surrender fees, transfer fees and premium taxes. |
| • | Ongoing expenses can include management fees, distribution and service (12b-1) fees, contract fees, annual maintenance fees, mortality and expense risk fees and other fees and expenses. All mutual funds and Contracts have some types of ongoing expenses. |
The expenses shown in the table are meant to highlight ongoing expenses at the Fund level only and do not include ongoing expenses at the Contract level, or transaction expenses at either the Fund or Contract levels. While the Fund does not have transaction expenses, if the transaction and ongoing expenses at the Contract level were included, the expenses shown below would be higher. You should consult your Contract prospectus or disclosure document for more information.
The table shows Fund-level ongoing expenses and can help you understand these expenses and compare them with those of other mutual funds offered through the Contract. The table assumes a $1,000 investment held for the six months indicated. Please refer to the Fund prospectus for additional information on operating expenses.
Actual Fund Expenses
The first line (Actual) of the table provides actual account values and expenses. The “Ending Account Value” is derived from the Fund’s actual return, which includes the effect of ongoing Fund expenses, but does not include the effect of ongoing Contract expenses.
You can estimate the Fund-level expenses you incurred during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:
| 1. | Divide your account value by $1,000. |
If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6.
| 2. | Multiply the result by the number under the heading “Fund-Level Expenses Incurred During Period.” |
If Fund-Level Expenses Incurred During Period were $7.50, then 8.6 x $7.50 = $64.50.
In this illustration, the estimated expenses incurred this period at the Fund level are $64.50.
Franklin High Income Securities Fund – Class 1
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Hypothetical Example for Comparison with Other Mutual Funds
Information in the second line (Hypothetical) of the table can help you compare ongoing expenses of the Fund with those of other mutual funds offered through the Contract. This information may not be used to estimate the actual ending account balance or expenses you incurred during the period. The hypothetical “Ending Account Value” is based on the Fund’s actual expense ratio and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Fund-Level Expenses Incurred During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds offered through a Contract.
| Class 1 | Beginning Account Value 1/1/13 | Ending Account Value 6/30/13 | Fund-Level Expenses Incurred During Period* 1/1/13–6/30/13 | |||||||||
Actual | $ | 1,000 | $ | 1,015.50 | $ | 2.85 | ||||||
Hypothetical (5% return | $ | 1,000 | $ | 1,021.97 | $ | 2.86 | ||||||
*Expenses are calculated using the most recent six-month annualized expense ratio for the Fund’s Class 1 shares (0.57%), which does not include any ongoing expenses of the Contract for which the Fund is an investment option, multiplied by the average account value over the period, multiplied by 181/365 to reflect the one-half year period.
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Franklin Templeton Variable Insurance Products Trust
Financial Highlights
Franklin High Income Securities Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 1 | 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||||||
| ||||||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 7.01 | $ | 6.52 | $ | 6.63 | $ | 6.26 | $ | 4.68 | $ | 6.72 | ||||||||||||
|
| |||||||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.24 | 0.48 | 0.50 | 0.49 | 0.46 | 0.50 | ||||||||||||||||||
Net realized and unrealized gains (losses) | (0.12 | ) | 0.51 | (0.19 | ) | 0.32 | 1.50 | (1.92 | ) | |||||||||||||||
|
| |||||||||||||||||||||||
Total from investment operations | 0.12 | 0.99 | 0.31 | 0.81 | 1.96 | (1.42 | ) | |||||||||||||||||
|
| |||||||||||||||||||||||
Less distributions from net investment income | (0.54 | ) | (0.50 | ) | (0.42 | ) | (0.44 | ) | (0.38 | ) | (0.62 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ | 6.59 | $ | 7.01 | $ | 6.52 | $ | 6.63 | $ | 6.26 | $ | 4.68 | ||||||||||||
|
| |||||||||||||||||||||||
Total returnc | 1.55% | 15.94% | 4.63% | 13.71% | 42.99% | (23.16)% | ||||||||||||||||||
Ratios to average net assetsd | ||||||||||||||||||||||||
Expenses | 0.57% | 0.58% | 0.58% | 0.61% | 0.63% | e | 0.66% | e | ||||||||||||||||
Net investment income | 6.76% | 7.15% | 7.52% | 7.71% | 8.33% | 8.30% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 39,731 | $ | 42,166 | $ | 41,971 | $ | 48,051 | $ | 48,855 | $ | 38,225 | ||||||||||||
Portfolio turnover rate | 17.13% | 37.03% | 45.11% | 60.80% | 26.41% | 21.75% | ||||||||||||||||||
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.
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 High Income Securities Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 2 | 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||||||
| ||||||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 6.82 | $ | 6.36 | $ | 6.47 | $ | 6.13 | $ | 4.59 | $ | 6.60 | ||||||||||||
|
| |||||||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.22 | 0.46 | 0.47 | 0.47 | 0.44 | 0.47 | ||||||||||||||||||
Net realized and unrealized gains (losses) | (0.12 | ) | 0.48 | (0.18 | ) | 0.30 | 1.47 | (1.88 | ) | |||||||||||||||
|
| |||||||||||||||||||||||
Total from investment operations | 0.10 | 0.94 | 0.29 | 0.77 | 1.91 | (1.41 | ) | |||||||||||||||||
|
| |||||||||||||||||||||||
Less distributions from net investment income | (0.52 | ) | (0.48 | ) | (0.40 | ) | (0.43 | ) | (0.37 | ) | (0.60 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ | 6.40 | $ | 6.82 | $ | 6.36 | $ | 6.47 | $ | 6.13 | $ | 4.59 | ||||||||||||
|
| |||||||||||||||||||||||
Total returnc | 1.34% | 15.56% | 4.56% | 13.26% | 42.70% | (23.38)% | ||||||||||||||||||
Ratios to average net assetsd | ||||||||||||||||||||||||
Expenses | 0.82% | 0.83% | 0.83% | 0.86% | 0.88% | e | 0.91% | e | ||||||||||||||||
Net investment income | 6.51% | 6.90% | 7.27% | 7.46% | 8.08% | 8.05% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 263,003 | $ | 281,851 | $ | 249,452 | $ | 239,824 | $ | 198,567 | $ | 84,396 | ||||||||||||
Portfolio turnover rate | 17.13% | 37.03% | 45.11% | 60.80% | 26.41% | 21.75% | ||||||||||||||||||
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.
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 High Income Securities Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 4 | 2012 | 2011 | 2010 | 2009 | 2008a | |||||||||||||||||||
| ||||||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 6.94 | $ | 6.46 | $ | 6.57 | $ | 6.22 | $ | 4.67 | $ | 6.55 | ||||||||||||
|
| |||||||||||||||||||||||
Income from investment operationsb: | ||||||||||||||||||||||||
Net investment incomec | 0.23 | 0.46 | 0.47 | 0.47 | 0.45 | 0.39 | ||||||||||||||||||
Net realized and unrealized gains (losses) | (0.14 | ) | 0.49 | (0.18 | ) | 0.31 | 1.48 | (1.65 | ) | |||||||||||||||
|
| |||||||||||||||||||||||
Total from investment operations | 0.09 | 0.95 | 0.29 | 0.78 | 1.93 | (1.26 | ) | |||||||||||||||||
|
| |||||||||||||||||||||||
Less distributions from net investment income | (0.51 | ) | (0.47 | ) | (0.40 | ) | (0.43 | ) | (0.38 | ) | (0.62 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ | 6.52 | $ | 6.94 | $ | 6.46 | $ | 6.57 | $ | 6.22 | $ | 4.67 | ||||||||||||
|
| |||||||||||||||||||||||
Total returnd | 1.20% | 15.50% | 4.39% | 13.31% | 42.36% | (21.34)% | ||||||||||||||||||
Ratios to average net assetse | ||||||||||||||||||||||||
Expenses | 0.92% | 0.93% | 0.93% | �� | 0.96% | 0.98% | f | 1.01% | f | |||||||||||||||
Net investment income | 6.41% | 6.80% | 7.17% | 7.36% | 7.98% | 7.95% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 27,389 | $ | 27,664 | $ | 27,055 | $ | 25,934 | $ | 15,105 | $ | 2,244 | ||||||||||||
Portfolio turnover rate | 17.13% | 37.03% | 45.11% | 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.
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Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited)
| Franklin High Income Securities Fund | Country | Shares | Value | |||||||
Common Stocks and Other Equity Interests 0.3% | ||||||||||
Materials 0.2% | ||||||||||
a,b NewPage Corp., Litigation Trust | United States | 2,500,000 | $ | — | ||||||
a NewPage Holdings Inc. | United States | 10,000 | 875,000 | |||||||
|
| |||||||||
| 875,000 | ||||||||||
|
| |||||||||
Transportation 0.1% | ||||||||||
a,c CEVA Holdings LLC | United Kingdom | 224 | 201,852 | |||||||
|
| |||||||||
Total Common Stocks and Other Equity Interests | 1,076,852 | |||||||||
|
| |||||||||
Convertible Preferred Stocks 0.1% | ||||||||||
Transportation 0.1% | ||||||||||
a,c CEVA Holdings LLC, cvt. pfd., A-1 | United Kingdom | 6 | 7,200 | |||||||
a,c CEVA Holdings LLC, cvt. pfd., A-2 | United Kingdom | 486 | 436,959 | |||||||
|
| |||||||||
Total Convertible Preferred Stocks (Cost $723,816) | 444,159 | |||||||||
|
| |||||||||
Preferred Stocks (Cost $770,000) 0.3% | ||||||||||
Diversified Financials 0.3% | ||||||||||
GMAC Capital Trust I, 8.125%, pfd. | United States | 30,800 | 802,340 | |||||||
|
| |||||||||
| Principal Amount* | ||||||||||
Corporate Bonds 94.2% | ||||||||||
Automobiles & Components 1.2% | ||||||||||
The Goodyear Tire & Rubber Co., senior note, 6.50%, 3/01/21 | United States | 2,200,000 | 2,246,750 | |||||||
d International Automotive Components Group SL, senior secured note, 144A, | United States | 1,600,000 | 1,616,000 | |||||||
|
| |||||||||
| 3,862,750 | ||||||||||
|
| |||||||||
Banks 2.1% | ||||||||||
CIT Group Inc., senior note, | ||||||||||
5.375%, 5/15/20 | United States | 1,700,000 | 1,748,875 | |||||||
5.00%, 8/15/22 | United States | 2,700,000 | 2,691,760 | |||||||
d Provident Fund Associates LP/Finance Corp., senior note, 144A, 6.75%, 6/15/21 | United States | 600,000 | 601,500 | |||||||
Royal Bank of Scotland Group PLC, sub. note, 6.125%, 12/15/22 | United Kingdom | 2,000,000 | 1,908,750 | |||||||
|
| |||||||||
| 6,950,885 | ||||||||||
| �� |
|
| ||||||||
Capital Goods 3.2% | ||||||||||
d Abengoa Finance SAU, senior note, 144A, 8.875%, 11/01/17 | Spain | 2,500,000 | 2,357,813 | |||||||
d BC Mountain LLC/Finance Inc., senior note, 144A, 7.00%, 2/01/21 | United States | 2,100,000 | 2,147,250 | |||||||
Meritor Inc., senior note, 10.625%, 3/15/18 | United States | 1,900,000 | 2,066,250 | |||||||
Navistar International Corp., senior note, 8.25%, 11/01/21 | United States | 1,500,000 | 1,481,250 | |||||||
Terex Corp., senior note, 6.00%, 5/15/21 | United States | 1,200,000 | 1,203,000 | |||||||
d Zachry Holdings Inc., senior note, 144A, 7.50%, 2/01/20 | United States | 1,400,000 | 1,449,000 | |||||||
|
| |||||||||
| 10,704,563 | ||||||||||
|
| |||||||||
Commercial & Professional Services 1.9% | ||||||||||
d ADS Waste Escrow Corp., senior note, 144A, 8.25%, 10/01/20 | United States | 3,100,000 | 3,177,500 | |||||||
d Algeco Scotsman Global Finance PLC, secured note, 144A, 8.50%, 10/15/18 | United Kingdom | 2,500,000 | 2,500,000 | |||||||
b,e Goss Graphic Systems Inc., senior sub. note, 12.25%, 11/19/05 | United States | 1,912,374 | 191 | |||||||
d,f Igloo Holdings Corp., senior note, 144A, PIK, 8.25%, 12/15/17 | United States | 600,000 | 615,000 | |||||||
|
| |||||||||
| 6,292,691 | ||||||||||
|
| |||||||||
Consumer Durables & Apparel 3.2% | ||||||||||
KB Home, senior bond, 7.50%, 9/15/22 | United States | 2,100,000 | 2,262,750 | |||||||
M/I Homes Inc., senior note, 8.625%, 11/15/18 | United States | 1,500,000 | 1,635,000 | |||||||
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Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Franklin High Income Securities Fund | Country | Principal Amount* | Value | |||||||
Corporate Bonds (continued) | ||||||||||
Consumer Durables & Apparel (continued) | ||||||||||
Shea Homes LP/Funding Corp., senior secured note, 8.625%, 5/15/19 | United States | 1,600,000 | $ | 1,716,000 | ||||||
d SIWF Merger Sub Inc./Springs Industries Inc., senior secured note, 144A, 6.25%, 6/01/21 | United States | 500,000 | 491,250 | |||||||
d Taylor Morrison Communities Inc./Monarch Communities Inc., senior note, 144A, | ||||||||||
7.75%, 4/15/20 | United States | 1,140,000 | 1,234,050 | |||||||
5.25%, 4/15/21 | United States | 900,000 | 857,250 | |||||||
Visant Corp., senior note, 10.00%, 10/01/17 | United States | 2,500,000 | 2,318,750 | |||||||
|
| |||||||||
| 10,515,050 | ||||||||||
|
| |||||||||
Consumer Services 4.4% | ||||||||||
d Caesars Entertainment Operating Co. Inc., secured note, 144A, 9.00%, 2/15/20 | United States | 500,000 | 478,750 | |||||||
d Caesars Operating Escrow LLC/Corp., first lien, 144A, 9.00%, 2/15/20 | United States | 300,000 | 287,250 | |||||||
ClubCorp Club Operations Inc., senior note, 10.00%, 12/01/18 | United States | 2,200,000 | 2,387,000 | |||||||
d,e Fontainebleau Las Vegas, 144A, 11.00%, 6/15/15 | United States | 1,700,000 | 1,071 | |||||||
Harrah’s Operating Co. Inc., senior secured note, 11.25%, 6/01/17 | United States | 3,000,000 | 3,131,250 | |||||||
d Landry’s Inc., senior note, 144A, 9.375%, 5/01/20 | United States | 1,600,000 | 1,696,000 | |||||||
MGM Resorts International, senior note, | ||||||||||
6.625%, 7/15/15 | United States | 2,000,000 | 2,142,500 | |||||||
6.875%, 4/01/16 | United States | 1,200,000 | 1,290,000 | |||||||
8.625%, 2/01/19 | United States | 400,000 | 454,000 | |||||||
6.625%, 12/15/21 | United States | 300,000 | 309,750 | |||||||
Pinnacle Entertainment Inc., senior sub. note, 7.75%, 4/01/22 | United States | 1,100,000 | 1,155,000 | |||||||
d Shingle Springs Tribal Gaming Authority, senior note, 144A, 9.375%, 6/15/15 | United States | 1,300,000 | 1,290,250 | |||||||
|
| |||||||||
| 14,622,821 | ||||||||||
|
| |||||||||
Diversified Financials 4.1% | ||||||||||
Ally Financial Inc., senior note, 7.50%, 9/15/20 | United States | 1,500,000 | 1,734,375 | |||||||
g Bank of America Corp., pfd., sub. bond, M, 8.125% to 5/15/18, FRN thereafter, Perpetual | United States | 2,500,000 | 2,825,000 | |||||||
E*TRADE Financial Corp., senior note, 6.375%, 11/15/19 | United States | 1,400,000 | 1,428,000 | |||||||
d General Motors Financial Co. Inc., senior note, 144A, 3.25%, 5/15/18 | United States | 900,000 | 877,500 | |||||||
GMAC Inc., sub. note, 8.00%, 12/31/18 | United States | 800,000 | 910,000 | |||||||
International Lease Finance Corp., | ||||||||||
senior note, 5.65%, 6/01/14 | United States | 1,600,000 | 1,634,000 | |||||||
d senior secured note, 144A, 6.75%, 9/01/16 | United States | 1,200,000 | 1,302,000 | |||||||
d Neuberger Berman Group LLC/Finance Corp., senior note, 144A, | ||||||||||
5.625%, 3/15/20 | United States | 500,000 | 520,000 | |||||||
5.875%, 3/15/22 | United States | 600,000 | 615,000 | |||||||
d Nuveen Investments Inc., senior note, 144A, 9.50%, 10/15/20 | United States | 1,600,000 | 1,600,000 | |||||||
SLM Corp., senior note, 8.45%, 6/15/18 | United States | 100,000 | 111,500 | |||||||
|
| |||||||||
| 13,557,375 | ||||||||||
|
| |||||||||
Energy 22.0% | ||||||||||
Calumet Specialty Products Partners LP/Finance Corp., senior note, | ||||||||||
9.375%, 5/01/19 | United States | 1,700,000 | 1,827,500 | |||||||
d 144A, 9.625%, 8/01/20 | United States | 600,000 | 655,500 | |||||||
Carrizo Oil & Gas Inc., senior note, | ||||||||||
8.625%, 10/15/18 | United States | 2,000,000 | 2,150,000 | |||||||
7.50%, 9/15/20 | United States | 500,000 | 522,500 | |||||||
Chaparral Energy Inc., senior note, | ||||||||||
9.875%, 10/01/20 | United States | 1,400,000 | 1,561,000 | |||||||
8.25%, 9/01/21 | United States | 600,000 | 634,500 | |||||||
CHC Helicopter SA, | ||||||||||
d senior note, 144A, 9.375%, 6/01/21 | Canada | 400,000 | 398,000 | |||||||
senior secured note, first lien, 9.25%, 10/15/20 | Canada | 3,000,000 | 3,080,625 | |||||||
FH-12
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Franklin High Income Securities Fund | Country | Principal Amount* | Value | |||||||
Corporate Bonds (continued) | ||||||||||
Energy (continued) | ||||||||||
Chesapeake Energy Corp., senior note, | ||||||||||
6.625%, 8/15/20 | United States | 3,000,000 | $ | 3,240,000 | ||||||
6.125%, 2/15/21 | United States | 1,000,000 | 1,055,000 | |||||||
Clayton Williams Energy Inc., senior note, 7.75%, 4/01/19 | United States | 2,400,000 | 2,400,000 | |||||||
CONSOL Energy Inc., senior note, | ||||||||||
8.00%, 4/01/17 | United States | 500,000 | 528,750 | |||||||
8.25%, 4/01/20 | United States | 1,000,000 | 1,052,500 | |||||||
6.375%, 3/01/21 | United States | 300,000 | 300,000 | |||||||
d Drill Rigs Holdings Inc., secured note, 144A, 6.50%, 10/01/17 | United States | 1,500,000 | 1,503,750 | |||||||
Eagle Rock Energy Partners LP/Finance Corp., senior note, 8.375%, 6/01/19 | United States | 2,500,000 | 2,556,250 | |||||||
Energy Transfer Equity LP, senior note, 7.50%, 10/15/20 | United States | 3,000,000 | 3,292,500 | |||||||
EPL Oil & Gas Inc., senior note, 8.25%, 2/15/18 | United States | 1,400,000 | 1,449,000 | |||||||
Goodrich Petroleum Corp., senior note, 8.875%, 3/15/19 | United States | 2,500,000 | 2,475,000 | |||||||
Halcon Resources Corp., senior note, 8.875%, 5/15/21 | United States | 1,500,000 | 1,462,500 | |||||||
d Kinder Morgan Finance Co. LLC, senior secured note, 144A, 6.00%, 1/15/18 | United States | 1,500,000 | 1,581,830 | |||||||
Kodiak Oil & Gas Corp., senior note, | ||||||||||
8.125%, 12/01/19 | United States | 1,400,000 | 1,526,000 | |||||||
d 144A, 5.50%, 1/15/21 | United States | 500,000 | 488,125 | |||||||
d LBC Tank Terminal Holding Netherlands BV, senior bond, 144A, 6.875%, 5/15/23 | Belgium | 200,000 | 201,500 | |||||||
Linn Energy LLC/Finance Corp., senior note, | ||||||||||
6.50%, 5/15/19 | United States | 600,000 | 588,000 | |||||||
8.625%, 4/15/20 | United States | 2,000,000 | 2,110,000 | |||||||
7.75%, 2/01/21 | United States | 700,000 | 705,250 | |||||||
Martin Midstream Partners LP/Martin Midstream Finance Corp., senior note, | ||||||||||
8.875%, 4/01/18 | United States | 1,316,000 | 1,391,670 | |||||||
d 144A, 7.25%, 2/15/21 | United States | 1,100,000 | 1,108,250 | |||||||
d Midstates Petroleum Co. Inc. /LLC, senior note, 144A, 9.25%, 6/01/21 | United States | 1,000,000 | 941,250 | |||||||
Offshore Group Investment Ltd., | ||||||||||
d first lien, 144A, 7.125%, 4/01/23 | United States | 1,000,000 | 987,500 | |||||||
senior secured note, first lien, 7.50%, 11/01/19 | United States | 1,400,000 | 1,464,750 | |||||||
PBF Holding Co. LLC, first lien, 8.25%, 2/15/20 | United States | 2,200,000 | 2,315,500 | |||||||
Peabody Energy Corp., senior note, | ||||||||||
6.50%, 9/15/20 | United States | 1,700,000 | 1,712,750 | |||||||
6.25%, 11/15/21 | United States | 1,700,000 | 1,649,000 | |||||||
d Penn Virginia Corp., senior note, 144A, 8.50%, 5/01/20 | United States | 1,200,000 | 1,167,000 | |||||||
Penn Virginia Resource Partners LP/Finance Corp. II, senior note, | ||||||||||
8.375%, 6/01/20 | United States | 1,400,000 | 1,484,000 | |||||||
d 144A, 6.50%, 5/15/21 | United States | 600,000 | 579,000 | |||||||
Plains Exploration & Production Co., senior note, | ||||||||||
6.125%, 6/15/19 | United States | 600,000 | 636,646 | |||||||
6.875%, 2/15/23 | United States | 900,000 | 963,918 | |||||||
QEP Resources Inc., senior note, | ||||||||||
5.375%, 10/01/22 | United States | 1,500,000 | 1,492,500 | |||||||
5.25%, 5/01/23 | United States | 800,000 | 784,000 | |||||||
QR Energy LP/QRE Finance, senior note, 9.25%, 8/01/20 | United States | 1,800,000 | 1,858,500 | |||||||
Quicksilver Resources Inc., | ||||||||||
d,h secured note, second lien, 144A, FRN, 7.00%, 6/21/19 | United States | 1,300,000 | 1,176,500 | |||||||
senior note, 9.125%, 8/15/19 | United States | 1,000,000 | 855,000 | |||||||
d Sabine Pass Liquefaction LLC, | ||||||||||
144A, 5.625%, 4/15/23 | United States | 900,000 | 852,750 | |||||||
secured note, 144A, 5.625%, 2/01/21 | United States | 2,400,000 | 2,334,000 | |||||||
d Samson Investment Co., senior note, 144A, 9.75%, 2/15/20 | United States | 3,200,000 | 3,388,000 | |||||||
d Sanchez Energy Corp., senior note, 144A, 7.75%, 6/15/21 | United States | 1,400,000 | 1,386,000 | |||||||
FH-13
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Franklin High Income Securities Fund | Country | Principal Amount* | Value | |||||||
Corporate Bonds (continued) | ||||||||||
Energy (continued) | ||||||||||
W&T Offshore Inc., senior note, 8.50%, 6/15/19 | United States | 2,600,000 | $ | 2,697,500 | ||||||
|
| |||||||||
| 72,571,564 | ||||||||||
|
| |||||||||
Food & Staples Retailing 0.3% | ||||||||||
Rite Aid Corp., senior secured note, 8.00%, 8/15/20 | United States | 1,000,000 | 1,112,500 | |||||||
|
| |||||||||
Food, Beverage & Tobacco 2.0% | ||||||||||
d Barry Callebaut Services SA, senior note, 144A, 5.50%, 6/15/23 | Belgium | 900,000 | 916,875 | |||||||
Del Monte Corp., senior note, 7.625%, 2/15/19 | United States | 3,000,000 | 3,097,500 | |||||||
d JBS USA LLC/Finance Inc., senior note, 144A, 8.25%, 2/01/20 | United States | 2,600,000 | 2,736,500 | |||||||
|
| |||||||||
| 6,750,875 | ||||||||||
|
| |||||||||
Health Care Equipment & Services 5.4% | ||||||||||
d Alere Inc., | ||||||||||
senior note, 144A, 7.25%, 7/01/18 | United States | 2,200,000 | 2,343,000 | |||||||
senior sub. note, 144A, 6.50%, 6/15/20 | United States | 300,000 | 292,125 | |||||||
Aviv Healthcare Properties LP/Aviv Healthcare Capital Corp., senior note, 7.75%, 2/15/19 | United States | 1,500,000 | 1,608,750 | |||||||
CHS/Community Health Systems Inc., | ||||||||||
senior note, 8.00%, 11/15/19 | United States | 1,700,000 | 1,816,875 | |||||||
senior note, 7.125%, 7/15/20 | United States | 700,000 | 722,750 | |||||||
senior secured note, 5.125%, 8/15/18 | United States | 1,500,000 | 1,526,250 | |||||||
Emergency Medical Services Corp., senior note, 8.125%, 6/01/19 | United States | 800,000 | 854,000 | |||||||
ExamWorks Group Inc., senior note, 9.00%, 7/15/19 | United States | 1,300,000 | 1,407,250 | |||||||
HCA Inc., | United States | 800,000 | 888,000 | |||||||
senior note, 5.875%, 5/01/23 | United States | 2,500,000 | 2,506,250 | |||||||
senior secured bond, 7.25%, 9/15/20 | United States | 900,000 | 968,625 | |||||||
senior secured note, 7.875%, 2/15/20 | United States | 1,000,000 | 1,079,375 | |||||||
senior secured note, 5.875%, 3/15/22 | United States | 1,000,000 | 1,028,750 | |||||||
MedAssets Inc., senior note, 8.00%, 11/15/18 | United States | 800,000 | 852,000 | |||||||
|
| |||||||||
| 17,894,000 | ||||||||||
|
| |||||||||
Materials 12.9% | ||||||||||
ArcelorMittal, senior note, 6.00%, 3/01/21 | Luxembourg | 1,100,000 | 1,097,189 | |||||||
d Ardagh Packaging Finance PLC, senior note, 144A, 9.125%, 10/15/20 | Luxembourg | 600,000 | 640,500 | |||||||
d Ardagh Packaging Finance PLC/Ardagh MP Holdings USA Inc., | ||||||||||
secured note, 144A, 4.875%, 11/15/22 | Luxembourg | 200,000 | 186,500 | |||||||
senior note, 144A, 7.00%, 11/15/20 | Luxembourg | 800,000 | 773,500 | |||||||
senior secured note, first lien, 144A, 7.375%, 10/15/17 | Luxembourg | 600,000 | 642,750 | |||||||
d Barminco Finance Pty. Ltd., senior note, 144A, 9.00%, 6/01/18 | Australia | 1,500,000 | 1,385,625 | |||||||
d BlueScope Steel Ltd./BlueScope Steel Finance, senior note, 144A, 7.125%, 5/01/18 | Australia | 2,500,000 | 2,518,750 | |||||||
d Cemex SAB de CV, senior secured note, 144A, 9.00%, 1/11/18 | Mexico | 3,500,000 | 3,692,500 | |||||||
d Eldorado Gold Corp., senior note, 144A, 6.125%, 12/15/20 | Canada | 1,500,000 | 1,455,000 | |||||||
Euramax International Inc., senior secured note, 9.50%, 4/01/16 | United States | 1,400,000 | 1,347,500 | |||||||
Exopack Holding Corp., senior note, 10.00%, 6/01/18 | United States | 1,600,000 | 1,628,000 | |||||||
d FMG Resources (August 2006) Pty. Ltd., senior note, 144A, | ||||||||||
7.00%, 11/01/15 | Australia | 800,000 | 805,452 | |||||||
6.875%, 2/01/18 | Australia | 2,000,000 | 1,982,500 | |||||||
8.25%, 11/01/19 | Australia | 500,000 | 517,500 | |||||||
6.875%, 4/01/22 | Australia | 200,000 | 194,750 | |||||||
d Ineos Finance PLC, senior secured note, 144A, | ||||||||||
8.375%, 2/15/19 | United Kingdom | 200,000 | 218,000 | |||||||
7.50%, 5/01/20 | United Kingdom | 500,000 | 533,750 | |||||||
d Ineos Group Holdings SA, senior note, 144A, 6.125%, 8/15/18 | United Kingdom | 1,300,000 | 1,244,750 | |||||||
FH-14
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Franklin High Income Securities Fund | Country | Principal Amount* | Value | |||||||||
Corporate Bonds (continued) | ||||||||||||
Materials (continued) | ||||||||||||
d Inmet Mining Corp., senior note, 144A, | ||||||||||||
8.75%, 6/01/20 | Canada | 2,500,000 | $ | 2,568,750 | ||||||||
7.50%, 6/01/21 | Canada | 300,000 | 288,750 | |||||||||
d Murray Energy Corp., senior secured note, 144A, 8.625%, 6/15/21 | United States | 700,000 | 703,500 | |||||||||
Novelis Inc., senior note, 8.75%, 12/15/20 | Canada | 1,300,000 | 1,400,750 | |||||||||
Olin Corp., senior bond, 5.50%, 8/15/22 | United States | 3,200,000 | 3,248,000 | |||||||||
d Orion Engineered Carbons Bondco GmbH, senior secured note, first lien, 144A, | Germany | 1,600,000 | 1,746,000 | |||||||||
d,f Orion Engineered Carbons Finance & Co. SCA, senior note, 144A, PIK, 9.25%, 8/01/19 | Germany | 500,000 | 502,500 | |||||||||
d Perstorp Holding AB, first lien, 144A, 8.75%, 5/15/17 | Sweden | 2,500,000 | 2,512,500 | |||||||||
d Rain CII Carbon LLC/Corp., second lien, 144A, 8.25%, 1/15/21 | United States | 700,000 | 703,500 | |||||||||
Reynolds Group Issuer Inc./LLC/SA, | United States | 1,400,000 | 1,414,000 | |||||||||
senior note, 8.50%, 5/15/18 | United States | 2,800,000 | 2,898,000 | |||||||||
senior note, 9.00%, 4/15/19 | United States | 200,000 | 207,500 | |||||||||
senior note, 9.875%, 8/15/19 | United States | 200,000 | 215,000 | |||||||||
senior note, 8.25%, 2/15/21 | United States | 400,000 | 397,500 | |||||||||
d Sealed Air Corp., senior note, 144A, | ||||||||||||
8.125%, 9/15/19 | United States | 800,000 | 896,000 | |||||||||
6.50%, 12/01/20 | United States | 500,000 | 530,000 | |||||||||
8.375%, 9/15/21 | United States | 600,000 | 681,000 | |||||||||
d U.S. Coatings Acquisition Inc./Flash Dutch 2 BV, senior note, 144A, 7.375%, 5/01/21 | United States | 700,000 | 721,000 | |||||||||
|
| |||||||||||
| 42,498,766 | ||||||||||||
|
| |||||||||||
Media 7.5% | ||||||||||||
Cablevision Systems Corp., senior note, 7.75%, 4/15/18 | United States | 1,000,000 | 1,080,000 | |||||||||
CCO Holdings LLC/CCO Holdings Capital Corp., senior note, 6.50%, 4/30/21 | United States | 1,500,000 | 1,571,250 | |||||||||
Clear Channel Communications Inc., senior note, 9.00%, 3/01/21 | United States | 3,800,000 | 3,629,000 | |||||||||
Clear Channel Worldwide Holdings Inc., | ||||||||||||
d senior note, 144A, 6.50%, 11/15/22 | United States | 1,000,000 | 1,035,000 | |||||||||
senior sub. note, 7.625%, 3/15/20 | United States | 200,000 | 207,000 | |||||||||
senior sub. note, 7.625%, 3/15/20 | United States | 1,100,000 | 1,144,000 | |||||||||
CSC Holdings LLC, senior note, 6.75%, 11/15/21 | United States | 1,500,000 | 1,623,750 | |||||||||
DISH DBS Corp., senior note, | ||||||||||||
7.125%, 2/01/16 | United States | 3,000,000 | 3,262,500 | |||||||||
6.75%, 6/01/21 | United States | 1,500,000 | 1,601,250 | |||||||||
f Radio One Inc., senior sub. note, PIK, 12.50%, 5/24/16 | United States | 1,676,514 | 1,697,470 | |||||||||
d Univision Communications Inc., senior secured note, 144A, | ||||||||||||
6.875%, 5/15/19 | United States | 2,500,000 | 2,637,500 | |||||||||
7.875%, 11/01/20 | United States | 700,000 | 761,250 | |||||||||
d UPCB Finance III Ltd., senior secured note, 144A, 6.625%, 7/01/20 | Netherlands | 1,000,000 | 1,040,000 | |||||||||
d UPCB Finance VI Ltd., senior secured note, 144A, 6.875%, 1/15/22 | Netherlands | 500,000 | 518,750 | |||||||||
d WMG Acquisition Corp., secured note, 144A, 6.00%, 1/15/21 | United States | 2,782,000 | 2,844,595 | |||||||||
|
| |||||||||||
| 24,653,315 | ||||||||||||
|
| |||||||||||
Pharmaceuticals, Biotechnology & Life Sciences 3.3% | ||||||||||||
d inVentiv Health Inc., senior note, 144A, | ||||||||||||
9.00%, 1/15/18 | United States | 600,000 | 628,500 | |||||||||
10.00%, 8/15/18 | United States | 1,900,000 | 1,596,000 | |||||||||
d,f Jaguar Holding Co. I, senior note, 144A, PIK, 9.375%, 10/15/17 | United States | 1,200,000 | 1,260,000 | |||||||||
d Jaguar Holding Co. II/Merger Sub Inc., senior note, 144A, 9.50%, 12/01/19 | United States | 700,000 | 777,000 | |||||||||
d Par Pharmaceutical Cos. Inc., senior note, 144A, 7.375%, 10/15/20 | United States | 3,300,000 | 3,399,000 | |||||||||
d VPI Escrow Corp., senior note, 144A, 6.375%, 10/15/20 | United States | 3,000,000 | 2,981,250 | |||||||||
d,i VPII Escrow Corp., senior note, 144A, 7.50%, 7/15/21 | United States | 200,000 | 200,000 | |||||||||
|
| |||||||||||
| 10,841,750 | ||||||||||||
|
| |||||||||||
FH-15
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Franklin High Income Securities Fund | Country | Principal Amount* | Value | |||||||
Corporate Bonds (continued) | ||||||||||
Retailing 0.9% | ||||||||||
d American Builders & Contractors Supply Co. Inc., senior note, 144A, 5.625%, 4/15/21 | United States | 2,100,000 | $ | 2,068,500 | ||||||
d New Look Bondco I PLC, secured note, 144A, 8.375%, 5/14/18 | United Kingdom | 800,000 | 780,000 | |||||||
|
| |||||||||
| 2,848,500 | ||||||||||
|
| |||||||||
Semiconductors & Semiconductor Equipment 1.0% | ||||||||||
Freescale Semiconductor Inc., senior note, | ||||||||||
8.05%, 2/01/20 | United States | 2,000,000 | 2,035,000 | |||||||
10.75%, 8/01/20 | United States | 1,104,000 | 1,219,920 | |||||||
|
| |||||||||
| 3,254,920 | ||||||||||
|
| |||||||||
Software & Services 4.3% | ||||||||||
d Ceridian Corp., | ||||||||||
secured note, 144A, 8.875%, 7/15/19 | United States | 800,000 | 893,000 | |||||||
senior note, 144A, 11.00%, 3/15/21 | United States | 1,200,000 | 1,326,000 | |||||||
Equinix Inc., senior bond, 5.375%, 4/01/23 | United States | 2,100,000 | 2,068,500 | |||||||
First Data Corp., | ||||||||||
senior bond, 12.625%, 1/15/21 | United States | 1,000,000 | 1,062,500 | |||||||
d senior note, 144A, 11.25%, 1/15/21 | United States | 1,000,000 | 1,002,500 | |||||||
d senior secured bond, 144A, 8.25%, 1/15/21 | United States | 2,500,000 | 2,562,500 | |||||||
d Sitel LLC/Finance Corp., senior secured note, 144A, 11.00%, 8/01/17 | United States | 700,000 | 749,000 | |||||||
Sterling International Inc., senior note, 11.00%, 10/01/19 | United States | 1,200,000 | 1,248,000 | |||||||
West Corp., senior note, 7.875%, 1/15/19 | United States | 3,000,000 | 3,131,250 | |||||||
|
| |||||||||
| 14,043,250 | ||||||||||
|
| |||||||||
Technology Hardware & Equipment 1.2% | ||||||||||
CDW LLC/Finance Corp., senior note, 8.50%, 4/01/19 | United States | 1,000,000 | 1,080,000 | |||||||
d,f CommScope Holdings Inc., senior note, 144A, PIK, 6.625%, 6/01/20 | United States | 400,000 | 384,000 | |||||||
d CommScope Inc., senior note, 144A, 8.25%, 1/15/19 | United States | 2,300,000 | 2,466,750 | |||||||
|
| |||||||||
| 3,930,750 | ||||||||||
|
| |||||||||
Telecommunication Services 9.5% | ||||||||||
CenturyLink Inc., senior note, | ||||||||||
6.45%, 6/15/21 | United States | 400,000 | 419,000 | |||||||
5.80%, 3/15/22 | United States | 2,500,000 | 2,481,250 | |||||||
Cricket Communications Inc., senior note, 7.75%, 10/15/20 | United States | 2,500,000 | 2,412,500 | |||||||
d Digicel Group Ltd., senior note, 144A, 8.25%, 9/30/20 | Bermuda | 2,000,000 | 2,076,250 | |||||||
d Digicel Ltd., senior note, 144A, 6.00%, 4/15/21 | Bermuda | 1,200,000 | 1,152,000 | |||||||
d eAccess Ltd., senior note, 144A, 8.25%, 4/01/18 | Japan | 1,800,000 | 1,995,750 | |||||||
Frontier Communications Corp., | ||||||||||
senior bond, 7.625%, 4/15/24 | United States | 400,000 | 403,000 | |||||||
senior note, 8.50%, 4/15/20 | United States | 2,000,000 | 2,215,000 | |||||||
senior note, 8.75%, 4/15/22 | United States | 900,000 | 985,500 | |||||||
Intelsat Jackson Holdings SA, | ||||||||||
d senior bond, 144A, 5.50%, 8/01/23 | Luxembourg | 500,000 | 470,938 | |||||||
senior note, 7.25%, 10/15/20 | Luxembourg | 900,000 | 949,500 | |||||||
senior note, 7.50%, 4/01/21 | Luxembourg | 3,800,000 | 4,009,000 | |||||||
d Lynx II Corp., senior bond, 144A, 6.375%, 4/15/23 | United Kingdom | 700,000 | 708,750 | |||||||
MetroPCS Wireless Inc., senior note, 7.875%, 9/01/18 | United States | 300,000 | 321,000 | |||||||
Sprint Nextel Corp., senior note, | ||||||||||
8.375%, 8/15/17 | United States | 3,000,000 | 3,382,500 | |||||||
d 144A, 9.00%, 11/15/18 | United States | 3,000,000 | 3,517,500 | |||||||
d 144A, 7.00%, 3/01/20 | United States | 300,000 | 324,750 | |||||||
d Wind Acquisition Finance SA, senior secured note, 144A, 11.75%, 7/15/17 | Italy | 2,000,000 | 2,090,000 | |||||||
FH-16
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Franklin High Income Securities Fund | Country | Principal Amount* | Value | |||||||
Corporate Bonds (continued) | ||||||||||
Telecommunication Services (continued) | ||||||||||
d,f Wind Acquisition Holdings Finance SA, senior secured note, 144A, PIK, 12.25%, | ||||||||||
7/15/17 | Italy | 576,927 | EUR | $ | 728,356 | |||||
7/15/17 | Italy | 597,616 | 571,532 | |||||||
|
| |||||||||
| 31,214,076 | ||||||||||
|
| |||||||||
Transportation 1.4% | ||||||||||
c CEVA Group PLC, senior note, first lien, 144A, 4.00%, 5/01/18 | United Kingdom | 1,400,000 | 1,148,000 | |||||||
Hertz Corp., senior note, | ||||||||||
7.50%, 10/15/18 | United States | 1,100,000 | 1,185,250 | |||||||
6.75%, 4/15/19 | United States | 2,200,000 | 2,337,500 | |||||||
|
| |||||||||
| 4,670,750 | ||||||||||
|
| |||||||||
Utilities 2.4% | ||||||||||
d Calpine Corp., senior secured note, 144A, | ||||||||||
7.25%, 10/15/17 | United States | 650,000 | 680,875 | |||||||
7.875%, 7/31/20 | United States | 726,000 | 791,340 | |||||||
7.50%, 2/15/21 | United States | 1,330,000 | 1,426,425 | |||||||
7.875%, 1/15/23 | United States | 892,000 | 963,360 | |||||||
d InterGen NV, secured bond, 144A, 7.00%, 6/30/23 | Netherlands | 1,700,000 | 1,658,563 | |||||||
d Texas Competitive Electric Holdings Co. LLC/Texas Competitive Electric Holdings Finance Inc., senior secured note, 144A, 11.50%, 10/01/20 | United States | 3,500,000 | 2,633,750 | |||||||
|
| |||||||||
| 8,154,313 | ||||||||||
|
| |||||||||
Total Corporate Bonds (Cost $303,759,543) | 310,945,464 | |||||||||
|
| |||||||||
h,j Senior Floating Rate Interests 1.7% | ||||||||||
Capital Goods 0.2% | ||||||||||
Navistar Inc., Tranche B Term Loan, 5.75%, 8/17/17 | United States | 760,128 | 765,829 | |||||||
|
| |||||||||
Household & Personal Products 0.7% | ||||||||||
Sun Products Corp., Tranche B Term Loan, 5.50%, 3/23/20 | United States | 2,394,000 | 2,372,054 | |||||||
|
| |||||||||
Media 0.5% | ||||||||||
Cumulus Media Holdings Inc., Second Lien Term Loan, 7.50%, 9/16/19 | United States | 1,500,000 | 1,534,687 | |||||||
|
| |||||||||
Utilities 0.3% | ||||||||||
Texas Competitive Electric Holdings Co. LLC, 2017 Term Loan, 4.693% - 4.775%, 10/10/17 | United States | 1,431,288 | 1,006,196 | |||||||
|
| |||||||||
Total Senior Floating Rate Interests (Cost $5,831,002) | 5,678,766 | |||||||||
|
| |||||||||
Total Investments before Short Term Investments | 318,947,581 | |||||||||
|
| |||||||||
FH-17
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Franklin High Income Securities Fund | Country | Principal Amount* | Value | |||||||
Short Term Investments (Cost $5,162,279) 1.6% | ||||||||||
Repurchase Agreements 1.6% | ||||||||||
k Joint Repurchase Agreement, 0.088%, 7/01/13 (Maturity Value $5,162,317) | United States | 5,162,279 | $ | 5,162,279 | ||||||
Barclays Capital Inc. (Maturity Value $588,402) BNP Paribas Securities Corp. (Maturity Value $653,807) Credit Suisse Securities (USA) LLC (Maturity Value $817,246) Deutsche Bank Securities Inc. (Maturity Value $651,071) HSBC Securities (USA) Inc. (Maturity Value $1,389,335) Merrill Lynch, Pierce, Fenner & Smith Inc. (Maturity Value $653,807) Morgan Stanley & Co. LLC (Maturity Value $408,649) | ||||||||||
Collateralized by U.S. Government Agency Securities, 0.13% - 4.625%, 7/09/13 - 8/07/17; lU.S.Government Agency Discount Notes, 8/01/13 - 4/21/14; lU.S. Treasury Bills, 7/11/13 -5/01/14; U.S. Treasury Notes, 0.125% - 4.625%, 6/30/13 - 4/30/20; U.S. Treasury Notes, Index Linked, 1.875% - 2.00%, 7/15/13 - 1/15/14; and U.S. Treasury Bonds, 8.75%, 5/15/17 (valued at $5,269,906) | ||||||||||
|
| |||||||||
Total Investments (Cost $318,853,426) 98.2% | 324,109,860 | |||||||||
Other Assets, less Liabilities 1.8% | 6,012,582 | |||||||||
|
| |||||||||
Net Assets 100.0% | $ | 330,122,442 | ||||||||
|
| |||||||||
*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, 2013, the aggregate value of these securities was $191, representing less than 0.01% of net assets.
cSee Note 8 regarding restricted securities.
dSecurity was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be sold in transactions exempt from registration only to qualified institutional buyers or in a public offering registered under the Securities Act of 1933. These securities have been deemed liquid under guidelines approved by the Trust’s Board of Trustees. At June 30, 2013, the aggregate value of these securities was $133,098,450, representing 40.32% of net assets.
eSee Note 7 regarding defaulted securities.
fIncome may be received in additional securities and/or cash.
gPerpetual security with no stated maturity date.
hThe coupon rate shown represents the rate at period end.
iSecurity purchased on a when-issued basis. See Note 1(d).
jSee Note 1(f) regarding senior floating rate interests.
kSee Note 1(c) regarding joint repurchase agreement.
lThe security is traded on a discount basis with no stated coupon rate.
FH-18
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Franklin High Income Securities Fund |
At June 30, 2013, 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 | 400,000 | $ | 528,280 | 12/18/13 | $ | 7,167 | $ | — | ||||||||||||||||||
|
| |||||||||||||||||||||||||||
See Abbreviations on page FH-33.
The accompanying notes are an integral part of these financial statements.
FH-19
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements
Statement of Assets and Liabilities
June 30, 2013 (unaudited)
| Franklin High Income Securities Fund | ||||
Assets: | ||||
Investments in securities: | ||||
Cost - Unaffiliated issuers | $ | 313,691,147 | ||
Cost - Repurchase agreements | 5,162,279 | |||
|
| |||
Total cost of investments | $ | 318,853,426 | ||
|
| |||
Value - Unaffiliated issuers | $ | 318,947,581 | ||
Value - Repurchase agreements | 5,162,279 | |||
|
| |||
Total value of investments | 324,109,860 | |||
Cash | 45,919 | |||
Receivables: | ||||
Investment securities sold | 666,835 | |||
Capital shares sold | 161,767 | |||
Interest | 5,926,173 | |||
Unrealized appreciation on forward exchange contracts | 7,167 | |||
Other assets | 98 | |||
|
| |||
Total assets | 330,917,819 | |||
|
| |||
Liabilities: | ||||
Payables: | ||||
Investment securities purchased | 311,899 | |||
Capital shares redeemed | 88,477 | |||
Affiliates | 279,901 | |||
Reports to shareholders | 51,826 | |||
Unrealized depreciation on unfunded commitments (Note 9) | 23,890 | |||
Accrued expenses and other liabilities | 39,384 | |||
|
| |||
Total liabilities | 795,377 | |||
|
| |||
Net assets, at value | $ | 330,122,442 | ||
|
| |||
Net assets consist of: | ||||
Paid-in capital | $ | 341,211,214 | ||
Undistributed net investment income | 9,470,805 | |||
Net unrealized appreciation (depreciation) | 5,240,171 | |||
Accumulated net realized gain (loss) | (25,799,748 | ) | ||
|
| |||
Net assets, at value | $ | 330,122,442 | ||
|
| |||
The accompanying notes are an integral part of these financial statements.
FH-20
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Assets and Liabilities (continued)
June 30, 2013 (unaudited)
| Franklin High Income Securities Fund | ||||
Class 1: | ||||
Net assets, at value | $ | 39,731,303 | ||
|
| |||
Shares outstanding | 6,033,445 | |||
|
| |||
Net asset value and maximum offering price per share | $ | 6.59 | ||
|
| |||
Class 2: | ||||
Net assets, at value | $ | 263,002,639 | ||
|
| |||
Shares outstanding | 41,092,291 | |||
|
| |||
Net asset value and maximum offering price per share | $ | 6.40 | ||
|
| |||
Class 4: | ||||
Net assets, at value | $ | 27,388,500 | ||
|
| |||
Shares outstanding | 4,197,582 | |||
|
| |||
Net asset value and maximum offering price per share | $ | 6.52 | ||
|
| |||
The accompanying notes are an integral part of these financial statements.
FH-21
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Operations
for the six months ended June 30, 2013 (unaudited)
| Franklin High Income Securities Fund | ||||
Investment income: | ||||
Dividends | $ | 90,366 | ||
Interest | 12,860,159 | |||
|
| |||
Total investment income | 12,950,525 | |||
|
| |||
Expenses: | ||||
Management fees (Note 3a) | 919,685 | |||
Distribution fees: (Note 3c) | ||||
Class 2 | 354,192 | |||
Class 4 | 48,707 | |||
Unaffiliated transfer agent fees | 67 | |||
Custodian fees (Note 4) | 2,709 | |||
Reports to shareholders | 50,267 | |||
Professional fees | 24,068 | |||
Trustees’ fees and expenses | 690 | |||
Other | 12,095 | |||
|
| |||
Total expenses | 1,412,480 | |||
|
| |||
Net investment income | 11,538,045 | |||
|
| |||
Realized and unrealized gains (losses): | ||||
Net realized gain (loss) from investments | 3,673,403 | |||
Net change in unrealized appreciation (depreciation) on: | ||||
Investments | (9,931,390 | ) | ||
Translation of other assets and liabilities denominated in foreign currencies | 9,167 | |||
|
| |||
Net change in unrealized appreciation (depreciation) | (9,922,223 | ) | ||
|
| |||
Net realized and unrealized gain (loss) | (6,248,820 | ) | ||
|
| |||
Net increase (decrease) in net assets resulting from operations | $ | 5,289,225 | ||
|
| |||
The accompanying notes are an integral part of these financial statements.
FH-22
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statements of Changes in Net Assets
| Franklin High Income Securities Fund | ||||||||
| Six Months Ended June 30, 2013 (unaudited) | Year Ended December 31, 2012 | |||||||
| ||||||||
Increase (decrease) in net assets: | ||||||||
Operations: | ||||||||
Net investment income | $ | 11,538,045 | $ | 23,416,924 | ||||
Net realized gain (loss) from investments, foreign currency transactions and swap contracts | 3,673,403 | 3,511,154 | ||||||
Net change in unrealized appreciation (depreciation) on investments and translation of other assets and liabilities denominated in foreign currencies | (9,922,223 | ) | 21,969,531 | |||||
| ||||||||
Net increase (decrease) in net assets resulting from operations | 5,289,225 | 48,897,609 | ||||||
| ||||||||
Distributions to shareholders from: | ||||||||
Net investment income: | ||||||||
Class 1 | (2,998,716 | ) | (2,935,357 | ) | ||||
Class 2 | (20,021,935 | ) | (18,731,686 | ) | ||||
Class 4 | (1,982,283 | ) | (1,858,828 | ) | ||||
| ||||||||
Total distributions to shareholders | (25,002,934 | ) | (23,525,871 | ) | ||||
| ||||||||
Capital share transactions: (Note 2) | ||||||||
Class 1 | (135,253 | ) | (3,084,036 | ) | ||||
Class 2 | (3,038,007 | ) | 12,381,383 | |||||
Class 4 | 1,327,742 | (1,465,915 | ) | |||||
| ||||||||
Total capital share transactions | (1,845,518 | ) | 7,831,432 | |||||
| ||||||||
Net increase (decrease) in net assets | (21,559,227 | ) | 33,203,170 | |||||
Net assets: | ||||||||
Beginning of period | 351,681,669 | 318,478,499 | ||||||
| ||||||||
End of period | $ | 330,122,442 | $ | 351,681,669 | ||||
| ||||||||
Undistributed net investment income included in net assets: | ||||||||
End of period | $ | 9,470,805 | $ | 22,935,694 | ||||
| ||||||||
The accompanying notes are an integral part of these financial statements.
FH-23
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited)
Franklin High Income Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Templeton Variable Insurance Products Trust (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end investment company, consisting of twenty-one 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, 2013, 87.47% of the Fund’s shares were held through one insurance company. Investment activities of these insurance company separate accounts could have a material impact on the Fund. 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 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 Board), the Fund’s administrator, investment manager and other affiliates have formed the Valuation and Liquidity Oversight Committee (VLOC). The VLOC provides administration and oversight of the Fund’s valuation policies and procedures, which are approved annually by the Board. Among other things, these procedures allow the Fund to 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 (OTC) 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 OTC 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, credit spreads, estimated default rates, anticipated market interest rate volatility, 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 OTC 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 financial instruments for which market prices are not reliable or readily available. Under these procedures, the VLOC convenes on a regular basis to review such financial instruments and considers a number of factors, including significant unobservable valuation inputs, when arriving at fair value. The VLOC primarily employs
FH-24
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin High Income Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
a. Financial Instrument Valuation (continued)
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. An income-based valuation approach may also be used 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. The VLOC employs various methods for calibrating these valuation approaches including a regular review of key inputs and assumptions, transactional back-testing or disposition analysis, and reviews of any related market activity.
Trading in securities on foreign securities stock exchanges and OTC 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 VLOC 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 Depositary 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.
In addition, certain foreign markets may be open on days that the NYSE is closed, which could result in differences between the value of the Fund’s portfolio securities on the last business day and the last calendar day of the reporting period. Any significant security valuation changes due to an open foreign market are adjusted and reflected by the Fund for financial reporting purposes.
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 Board.
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.
FH-25
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin High Income Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
c. 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%. Repurchase agreements are subject to the terms of Master Repurchase Agreements (MRAs) with approved counterparties (sellers). The MRAs contain various provisions, including but not limited to events of default and maintenance of collateral for repurchase agreements. In the event of default by either the seller or the Fund, certain MRAs may permit the non-defaulting party to net and close-out all transactions, if any, traded under such agreements. The Fund may sell securities it holds as collateral and apply the proceeds towards the repurchase price and any other amounts owed by the seller to the Fund in the event of default by the seller. This could involve costs or delays in addition to a loss on the securities if their value falls below the repurchase price owed by the seller. The joint repurchase agreement held by the Fund at period end, as indicated in the Statement of Investments, had been entered into on June 28, 2013.
d. Securities Purchased on a When-Issued Basis
The Fund purchases securities on a when-issued basis, with payment and delivery scheduled for a future date. These transactions are subject to market fluctuations and are subject to the risk that the value at delivery may be more or less than the trade date purchase price. Although the Fund will generally purchase these securities with the intention of holding the securities, it may sell the securities before the settlement date. Sufficient assets have been segregated for these securities.
e. 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.
Derivative counterparty credit risk is managed through a formal evaluation of the creditworthiness of all potential counterparties. The Fund attempts to reduce its exposure to counterparty credit risk on OTC derivatives, whenever possible, by entering into International Swaps and Derivatives Association (ISDA) master agreements with certain counterparties. These agreements contain various provisions, including but not limited to collateral requirements, events of default, or early termination. Termination events applicable to the counterparty include certain deteriorations in the credit quality of the counterparty. Termination events applicable to the Fund include failure of the Fund to maintain certain net asset levels and/or limit the decline in net assets over various periods of time. In the event of default or early termination, the ISDA master agreement gives the non-defaulting party the right to net and close-out all transactions traded, whether or not arising under the ISDA agreement, to one net amount payable by one counterparty to the other. Early termination by the counterparty may result in an immediate payment by the Fund of any net liability owed to that counterparty under the ISDA agreement. At June 30, 2013, the Fund had no OTC derivatives in a net liability position for such contracts. However, absent an event of default or early termination, OTC derivative assets and liabilities are presented gross and not offset in the Statement of Assets and Liabilities.
Collateral requirements differ by type of derivative. Collateral terms are contract specific for OTC derivatives. For OTC derivatives traded under an ISDA master agreement, posting of collateral is required by either the fund or the applicable
FH-26
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin High Income Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
e. Derivative Financial Instruments (continued)
counterparty if the total net exposure of all OTC derivatives with the applicable counterparty exceeds the minimum transfer amount, which typically ranges from $100,000 to $250,000, and can vary depending on the counterparty and the type of the agreement. Generally, collateral is determined at the close of fund business each day and any additional collateral required due to changes in derivative values may be delivered by the fund or the counterparty within a few business days. Collateral pledged and/or received by the fund, if any, is held in segregated accounts with the fund’s custodian/counterparty broker and can be in the form of cash and/or securities. Unrestricted cash may be invested according to the Fund’s investment objectives.
The Fund entered into OTC 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 at a specific exchange rate on a future date.
See Note 10 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 certain restrictions on resale.
g. 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 if applicable, excise taxes. As a result, no provision for U.S. federal income taxes is required.
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 in an amount that would be payable if the securities were disposed of on the valuation date.
The Fund recognizes the tax benefits of uncertain tax positions only when the position is “more likely than not” to be sustained upon examination by the tax authorities based on the technical merits of the tax position. As of June 30, 2013, and for all open tax years, the Fund has determined that no liability for unrecognized tax benefits is required in the Fund’s financial statements related to uncertain tax positions taken on a tax return (or expected to be taken on future tax returns). 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 except that certain dividends from foreign securities are recognized
FH-27
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin High Income Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
h. Security Transactions, Investment Income, Expenses and Distributions (continued)
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.
2. SHARES OF BENEFICIAL INTEREST
At June 30, 2013, 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, 2013 | Year Ended December 31, 2012 | |||||||||||||||
Class 1 Shares: | Shares | Amount | Shares | Amount | ||||||||||||
Shares sold | 227,193 | $ | 1,625,005 | 237,071 | $ | 1,594,666 | ||||||||||
Shares issued in reinvestment of distributions | 448,910 | 2,998,716 | 461,534 | 2,935,357 | ||||||||||||
Shares redeemed | (658,786 | ) | (4,758,974 | ) | (1,118,303 | ) | (7,614,059 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | 17,317 | $ | (135,253 | ) | (419,698 | ) | $ | (3,084,036 | ) | |||||||
| ||||||||||||||||
Class 2 Shares: | ||||||||||||||||
Shares sold | 2,491,953 | $ | 17,440,660 | 6,520,319 | $ | 43,016,960 | ||||||||||
Shares issued in reinvestment of distributions | 3,085,044 | 20,021,935 | 3,021,240 | 18,731,686 | ||||||||||||
Shares redeemed | (5,821,302 | ) | (40,500,602 | ) | (7,450,705 | ) | (49,367,263 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | (244,305 | ) | $ | (3,038,007 | ) | 2,090,854 | $ | 12,381,383 | ||||||||
| ||||||||||||||||
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin High Income Securities Fund
2. SHARES OF BENEFICIAL INTEREST (continued)
| Six Months Ended June 30, 2013 | Year Ended December 31, 2012 | |||||||||||||||
| Class 4 Shares: | Shares | Amount | Shares | Amount | ||||||||||||
Shares sold | 122,392 | $ | 847,205 | 86,672 | $ | 581,663 | ||||||||||
Shares issued on reinvestment of distributions | 299,438 | 1,982,283 | 294,584 | 1,858,828 | ||||||||||||
Shares redeemed | (211,925 | ) | (1,501,746 | ) | (582,921 | ) | (3,906,406 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | 209,905 | $ | 1,327,742 | (201,665 | ) | $ | (1,465,915 | ) | ||||||||
| ||||||||||||||||
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.
c. Distribution Fees
The Board has adopted a 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. Some distribution fees are not charged on shares held by affiliates. The Board 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.
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin High Income Securities Fund
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, 2013, there were no credits earned.
5. INCOME TAXES
For tax purposes, capital losses may be carried over to offset future capital gains. Capital loss carryforwards with no expiration, if any, must be fully utilized before those losses with expiration dates.
At December 31, 2012, capital loss carryforwards were as follows:
Capital loss carryforwards expiring in: | ||||
2013 | $ | 6,321,190 | ||
2014 | 40,420 | |||
2015 | 4,493,289 | |||
2016 | 8,150,741 | |||
2017 | 10,621,353 | |||
|
| |||
| $ | 29,626,993 | |||
|
|
At June 30, 2013, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
Cost of investments | $ | 319,488,091 | ||
|
| |||
Unrealized appreciation | $ | 12,430,537 | ||
Unrealized depreciation | (7,808,768 | ) | ||
|
| |||
Net unrealized appreciation (depreciation) | $ | 4,621,769 | ||
|
| |||
Differences between income and/or capital gains as determined on a book basis and a tax basis are primarily due to differing treatments of defaulted securities, foreign currency transactions, payments-in-kind, bond discounts and premiums, and wash sales.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the period ended June 30, 2013, aggregated $58,224,284 and $71,157,736, respectively.
7. CREDIT RISK AND DEFAULTED SECURITIES
At June 30, 2013, the Fund had 97.04% of its portfolio invested in high yield, senior secured floating rate notes, or other securities rated below investment grade. These securities may be more sensitive to economic conditions causing greater price volatility and are potentially subject to a greater risk of loss due to default than higher rated securities.
The Fund held defaulted securities and/or other securities for which the income has been deemed uncollectible. At June 30, 2013, 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.
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin High Income Securities Fund
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, 2013, 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 | ||||||||||||
| 1,400,000 | CEVA Group PLC, senior note, first lien, 144A, 4.00%, 5/01/18 | 12/09/10 - 5/02/13 | $ | 1,397,403 | $ | 1,148,000 | ||||||||||
| 224 | CEVA Holdings LLC | 3/10/10 - 5/02/13 | 334,368 | 201,852 | ||||||||||||
| 6 | CEVA Holdings LLC, cvt. pfd., A-1 | 5/02/13 | — | 7,200 | ||||||||||||
| 486 | CEVA Holdings LLC, cvt. pfd., A-2 | 3/10/10 - 5/02/13 | 723,816 | 436,959 | ||||||||||||
|
| |||||||||||||||
Total Restricted Securities (Value is 0.54% of Net Assets) | $ | 2,455,587 | $ | 1,794,011 | ||||||||||||
|
| |||||||||||||||
9. UNFUNDED COMMITMENTS
The Fund enters into certain credit agreements, all or a portion of which may be unfunded. The Fund is obligated to fund these commitments at the borrowers’ discretion. Funded portions of credit agreements are presented on the Statement of Investments.
At June 30, 2013, unfunded commitments were as follows:
| Borrower | Unfunded Commitment | |||
CEVA Group PLC, 4.00%, 12/01/13 | 100,000 EUR | |||
|
| |||
Unfunded 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 the Statement of Operations.
10. OTHER DERIVATIVE INFORMATION
At June 30, 2013, the Fund’s investments in derivative contracts 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 | $ | 7,167 | Unrealized depreciation on forward exchange contracts | $ | — | ||||||
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin High Income Securities Fund
10. OTHER DERIVATIVE INFORMATION (continued)
For the period ended June 30, 2013, 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 | $ | — | $ | 8,707 | |||||
For the period ended June 30, 2013, the average month end market value of derivatives represented less than 0.01% of average month end assets. The average month end number of open derivatives contracts for the period was 1.
See Note 1(e) 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 $1.5 billion (Global Credit Facility) which matures on January 17, 2014. 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 0.07% based upon the unused portion of the Global Credit Facility. These fees are reflected in other expenses on the Statement of Operations. During the period ended June 30, 2013, 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 financial instruments and are summarized in the following fair value hierarchy:
| • | Level 1 – quoted prices in active markets for identical financial instruments |
| • | Level 2 – other significant observable inputs (including quoted prices for similar financial instruments, interest rates, prepayment speed, credit risk, etc.) |
| • | Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of financial instruments) |
The inputs or methodology used for valuing financial instruments are not an indication of the risk associated with investing in those financial instruments
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.
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin High Income Securities Fund
12. FAIR VALUE MEASUREMENTS (continued)
A summary of inputs used as of June 30, 2013, in valuing the Fund’s assets and liabilities carried at fair value, is as follows:
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
|
| |||||||||||||||
Assets: | ||||||||||||||||
Investments in Securities: | ||||||||||||||||
Equity Investments:a,b | ||||||||||||||||
Diversified Financials | $ | 802,340 | $ | — | $ | — | $ | 802,340 | ||||||||
Materials | — | 875,000 | — | c | 875,000 | |||||||||||
Transportation | — | — | 646,011 | 646,011 | ||||||||||||
Corporate Bonds | — | 309,797,273 | 1,148,191 | 310,945,464 | ||||||||||||
Senior Floating Rate Interests | — | 5,678,766 | — | 5,678,766 | ||||||||||||
Short Term Investments | — | 5,162,279 | — | 5,162,279 | ||||||||||||
|
| |||||||||||||||
Total Investments in Securities | $ | 802,340 | $ | 321,513,318 | $ | 1,794,202 | $ | 324,109,860 | ||||||||
|
| |||||||||||||||
Forward Exchange Contracts | — | 7,167 | — | 7,167 | ||||||||||||
Liabilities: | ||||||||||||||||
Unfunded Commitments | — | — | 23,890 | 23,890 | ||||||||||||
aIncludes common, preferred and convertible preferred stocks.
bFor detailed categories, see the accompanying Statement of Investments.
cIncludes securities determined to have no value at June 30, 2013.
A reconciliation of assets in which Level 3 inputs are used in determining fair value is presented when there are significant Level 3 investments at the end of the period.
13. NEW ACCOUNTING PRONOUNCEMENTS
In June 2013, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2013-08, Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements. The ASU modifies the criteria used in defining an investment company under U.S. Generally Accepted Accounting Principles and also sets forth certain measurement and disclosure requirements. Under the ASU, an entity that is registered under the 1940 Act automatically qualifies as an investment company. The ASU is effective for interim and annual reporting periods beginning after December 15, 2013. The Fund is currently reviewing the requirements and believes the adoption of this ASU will not have a material impact on its financial statements.
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 | Counterparty | ||
| EUR - Euro | FRN - Floating Rate Note | DBAB - Deutsche Bank AG | ||
| PIK - Payment-In-Kind |
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FRANKLIN INCOME SECURITIES FUND
This semiannual report for Franklin Income Securities Fund covers the period ended June 30, 2013.
Performance Summary as of 6/30/13
Franklin Income Securities Fund – Class 1 delivered a +4.37% total return for the six-month period ended 6/30/13.
Performance reflects the Fund’s Class 1 operating expenses, but does not include any contract fees, expenses or sales charges. If they had been included, performance would be lower. These charges and deductions, particularly for variable life policies, can have a significant effect on contract values and insurance benefits. See the contract prospectus for a complete description of these expenses, including sales charges.
Franklin Income Securities Fund – Class 1
Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares.
Current performance may differ from figures shown.
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Fund Goal and Main Investments: Franklin Income Securities Fund seeks to maximize income while maintaining prospects for capital appreciation. Under normal market conditions, the Fund invests in both equity and debt securities.
Performance Overview
You can find the Fund’s six-month total return in the Performance Summary. In comparison, the Fund’s equity benchmark, the Standard & Poor’s® 500 Index (S&P 500®), produced a +13.82% total return, and its fixed income benchmark, the Barclays U.S. Aggregate Index, posted a -2.44% total return for the same period.1
Economic and Market Overview
Modest U.S. economic growth, as measured by gross domestic product, characterized the six-month period ended June 30, 2013. Increasing job creation helped lower the unemployment rate and absorb new job seekers, and consumer spending remained strong. Accelerating new and existing home sales accompanied record-low mortgage rates, affordable housing prices, low new-home inventories and a six-year low in U.S. foreclosures. Manufacturing, a mainstay of economic productivity, expanded every month except May.
Budgetary agreement between Congress and the President on January 1 preserved lower income tax rates for most U.S. households, but concerns remained about how the expired payroll tax cut, far-reaching federal spending cuts, and future federal debt ceiling negotiations could affect the U.S. economic recovery. Washington’s lack of consensus on proposed expenditure reductions resulted in further across-the-board federal spending cuts starting in March. In May, Federal Reserve Board (Fed) Chairman Ben Bernanke said the Fed could gradually wind down its monthly purchases of mortgage-backed securities and Treasuries, assuming continued U.S. economic improvement. He clarified in June that such action could begin in the near future.
Amid these fiscal and monetary developments, a slow and steady U.S. recovery continued. U.S. stocks generated healthy returns as the S&P 500 and Dow Jones Industrial Average reached all-time highs during the period, even though Chairman Bernanke’s statements sparked volatility.2 Rising corporate profits and generally favorable economic
1. Source: © 2013 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. Please see Index Descriptions following the Fund Summaries.
Fund Risks: All investments involve risks, including possible loss of principal. The Fund’s 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. Changes in the financial strength of a bond issuer or in a bond’s credit rating may affect its value. Investments in lower rated, higher yielding instruments include higher risk of default and loss of principal. These securities carry a greater degree of credit risk relative to investment-grade securities. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. The Fund is actively managed but there is no guarantee that the manager’s investment decisions will produce the desired results. The Fund’s prospectus also includes a description of the main investment risks.
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data bolstered investor confidence, but caution remained about the extent to which positive business and market results were dependent on continuation of the Fed’s accommodative monetary policy. Anticipating an interest rate rise, many investors abruptly sold their fixed income instruments, and the 10-year U.S. Treasury yield rose to 2.52% at period-end from 1.78% on December 31, 2012.
Investment Strategy
We search for undervalued or out-of-favor securities we believe offer opportunities for income today and growth tomorrow. We generally perform independent analysis of the debt securities being considered for the Fund’s portfolio, rather than relying principally on ratings assigned by rating agencies. In analyzing debt and equity securities, we consider a variety of factors, including: a security’s relative value based on such factors as anticipated cash flow, interest or dividend coverage, asset coverage, and earnings prospects; the experience and strength of a company’s management; a company’s sensitivity to changes in interest rates and business conditions; a company’s debt maturity schedules and borrowing requirements; and a company’s changing financial condition and market recognition of the change.
Manager’s Discussion
During the six-month period, U.S. stocks initially rallied, supported by modest U.S. economic growth. However, the prices of stocks, bonds and other investments fell near period-end after the Fed signaled it could begin reducing its monthly bond purchases. Despite this volatility, stocks generated healthy gains and outperformed fixed income markets.
The Fund’s asset allocation shifted with an increase in equity holdings and a decrease in fixed income holdings. Both asset classes contributed to the Fund’s total return for the period. The equity allocation rose with an emphasis on common stocks and other equity interests. The fixed income allocation declined, driven largely by reduced holdings of corporate bonds and senior floating rate interests.
The Fund’s equity allocation rose during the period, as we found opportunities in the troubled materials and energy sectors. In the recent environment, we focused our purchases on mining companies that in our view have strong balance sheets and greater diversification, in terms of geography and the types of metals they produce, as we believe they may be better able to weather a cyclical downturn and reduced profitability than smaller, single-asset or development-stage miners that tend to be more sensitive to commodity price changes. In the energy sector,
Portfolio Breakdown
Franklin Income Securities Fund
6/30/13
| % of Total Net Assets | ||||
| Equity* | 58.5% | |||
| Utilities | 13.3% | |||
| Energy | 10.2% | |||
| Financials | 9.8% | |||
| Materials | 7.9% | |||
| Health Care | 6.5% | |||
| Information Technology | 3.1% | |||
| Industrials | 3.0% | |||
| Telecommunication Services | 2.6% | |||
| Other | 2.1% | |||
| Fixed Income | 40.8% | |||
| Energy | 8.5% | |||
| Consumer Discretionary | 8.2% | |||
| Information Technology | 7.0% | |||
| Materials | 3.5% | |||
| Financials | 3.4% | |||
| Telecommunication Services | 2.8% | |||
| Industrials | 2.1% | |||
| Health Care | 2.0% | |||
| Utilities | 2.0% | |||
| Consumer Staples | 1.3% | |||
| Short-Term Investments & Other Net Assets | 0.7% | |||
*Includes convertible bonds.
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pressure on coal demand arose during the period because of a shift toward natural gas usage by power producers and industrial consumers that was being further supported by the U.S. government’s active campaign to extract and use cleaner sources of domestic energy. The materials and energy sectors presented us with what we considered opportunities as we believe some related stocks may have been sold indiscriminately, belying what we view as their longer term potential. In our view, these companies possess strong asset bases but have been suffering from cyclical downturns in some of their downstream markets, which has reduced their market valuations.
The Fund’s fixed income weighting dropped during the period, particularly in the first several months as yields in the high yield market approached record lows and companies flooded the market with record-level new issuance. We decided to sell some positions that offered gains and others were eliminated through tenders and calls. Our high yield bond positions’ modest absolute returns were strong relative to the broader fixed income market. Near period-end, high yield securities once again became attractive to us, and we found some opportunities as large outflows from high yield funds forced managers to sell. In this environment, prices fell and yields increased substantially for the high yield market as a whole.
Most of the Fund’s equity sectors delivered positive performance, led by utilities, financials and health care. Utilities, as one of the more bond-like equity sectors, performed well for most of the period largely because of their historically consistent returns, high degree of visibility and general past predictability of results, as well as the recent favorable backdrop of declining interest rates and corporate bond yields, but they sold abruptly as interest rates began to climb near period-end. Utilities holdings that benefited performance included Dynegy and PG&E. We felt the financials and health care sectors delivered improved fundamentals, attractive and rising dividend yields and what we considered reasonable valuations. Our positions in banking stocks Wells Fargo and JPMorgan Chase and asset manager BlackRock were strong contributors to performance. We felt banks seemed to look more appealing to investors after independent credit rating agency Moody’s Investors Service raised its outlook on the U.S. banking industry for the first time since 2008, to stable from negative, citing fundamental improvements. Within health care, Swiss pharmaceutical giant Roche Holding contributed to Fund results, as did health care and pharmaceutical products conglomerate Johnson & Johnson and U.S. drugmaker Merck.
Top Five Equity Holdings*
Franklin Income Securities Fund
6/30/13
| Company Sector/Industry | % of Total Net Assets | |||
| Wells Fargo & Co. | 2.8% | |||
| Financials | ||||
| Merck & Co. Inc. | 2.3% | |||
| Health Care | ||||
| Bank of America Corp. | 2.1% | |||
| Financials | ||||
| Royal Dutch Shell PLC, A, ADR | 1.7% | |||
| Energy | ||||
| BP PLC, ADR | 1.5% | |||
| Energy | ||||
Top Five Fixed Income and Senior Floating Rate Interests Holdings*
Franklin Income Securities Fund
6/30/13
| Issuer Sector/Industry | % of Total Net Assets | |||
| First Data Corp. | 3.4% | |||
| Information Technology | ||||
| Freescale Semiconductor Inc. | 2.6% | |||
| Information Technology | ||||
| Chesapeake Energy Corp. | 1.6% | |||
| Energy | ||||
| Clear Channel Communications Inc. | 1.5% | |||
| Consumer Discretionary | ||||
| Sprint Nextel Corp. | 1.5% | |||
| Telecommunication Services | ||||
*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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Our materials sector positions detracted from results as gold and diversified metals and mining companies were hit hard by lower demand that led to plummeting precious and industrial metals prices. Contributing to the price declines were a relatively strong U.S. dollar, limited signs of inflation globally, weak global growth prospects, the anticipated end of the Fed’s stimulus program, and an uptick in supply. Barrick Gold,2 BHP Billiton and Rio Tinto were among the major detractors during the period.
Significant fixed income contributors included the technology, communications and consumer non-cyclical sectors.3 Notable among these were global payment processing company First Data, hardware manufacturer Freescale Semiconductor, mass media company CC Media Holdings,4 marketing company Dex Media, retail grocery network SUPERVALU, and marketing and publishing services provider Visant. In contrast, the electric utility, transportation and energy sectors weighed on performance.5 Key fixed income detractors included electric utility Texas Energy Future Capital Holdings;6 freight management solutions provider CEVA; and oil and gas companies OGX Petroleo e Gas Participacoes, SandRidge Energy and Connacher Oil and Gas.2
Thank you for your participation in Franklin Income Securities Fund. We look forward to serving your future investment needs.
2. Sold by period-end.
3. Technology fixed income holdings are in information technology in the SOI. Communications fixed income holdings are in consumer discretionary and telecommunication services in the SOI. Consumer non-cyclical holdings are in consumer discretionary, consumer staples and health care in the SOI.
4. CC Media Holdings comprises Clear Channel Communications, Inc. and Clear Channel Worldwide Holdings, Inc. in the SOI.
5. Electric utility fixed income holdings are in utilities in the SOI. Transportation fixed income holdings are in industrials and utilities in the SOI. Energy fixed income holdings are in energy and materials in the SOI.
6. Texas Competitive Electric Holdings in the SOI.
The foregoing information reflects our analysis, opinions and portfolio holdings as of June 30, 2013, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.
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Fund Expenses
As an investor in a variable insurance contract (Contract) that indirectly provides for investment in an underlying mutual fund, you can incur transaction and/or ongoing expenses at both the Fund level and the Contract level.
| • | Transaction expenses can include sales charges (loads) on purchases, surrender fees, transfer fees and premium taxes. |
| • | Ongoing expenses can include management fees, distribution and service (12b-1) fees, contract fees, annual maintenance fees, mortality and expense risk fees and other fees and expenses. All mutual funds and Contracts have some types of ongoing expenses. |
The expenses shown in the table are meant to highlight ongoing expenses at the Fund level only and do not include ongoing expenses at the Contract level, or transaction expenses at either the Fund or Contract levels. While the Fund does not have transaction expenses, if the transaction and ongoing expenses at the Contract level were included, the expenses shown below would be higher. You should consult your Contract prospectus or disclosure document for more information.
The table shows Fund-level ongoing expenses and can help you understand these expenses and compare them with those of other mutual funds offered through the Contract. The table assumes a $1,000 investment held for the six months indicated. Please refer to the Fund prospectus for additional information on operating expenses.
Actual Fund Expenses
The first line (Actual) of the table provides actual account values and expenses. The “Ending Account Value” is derived from the Fund’s actual return, which includes the effect of ongoing Fund expenses, but does not include the effect of ongoing Contract expenses.
You can estimate the Fund-level expenses you incurred during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:
| 1. | Divide your account value by $1,000. |
If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6.
| 2. | Multiply the result by the number under the heading “Fund-Level Expenses Incurred During Period.” |
If Fund-Level Expenses Incurred During Period were $7.50, then 8.6 x $7.50 = $64.50.
In this illustration, the estimated expenses incurred this period at the Fund level are $64.50.
Franklin Income Securities Fund – Class 1
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Hypothetical Example for Comparison with Other Mutual Funds
Information in the second line (Hypothetical) of the table can help you compare ongoing expenses of the Fund with those of other mutual funds offered through the Contract. This information may not be used to estimate the actual ending account balance or expenses you incurred during the period. The hypothetical “Ending Account Value” is based on the Fund’s actual expense ratio and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Fund-Level Expenses Incurred During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds offered through a Contract.
| Class 1 | Beginning Account Value 1/1/13 | Ending Account Value 6/30/13 | Fund-Level Expenses Incurred During Period* 1/1/13–6/30/13 | |||||||||
Actual | $ | 1,000 | $ | 1,043.70 | $ | 2.38 | ||||||
Hypothetical (5% return | $ | 1,000 | $ | 1,022.46 | $ | 2.36 | ||||||
*Expenses are calculated using the most recent six-month annualized expense ratio for the Fund’s Class 1 shares (0.47%), 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
Table of Contents
SUPPLEMENT DATED MAY 1, 2013
TO THE PROSPECTUS
DATED MAY 1, 2013 OF
FRANKLIN INCOME SECURITIES FUND
(Series of Franklin Templeton Variable Insurance Products Trust)
The Prospectus is amended as follows:
The last paragraph of the “Principal Investment Policies and Practices” section beginning on page FI-D1 is revised as follows:
The Fund may invest up to 15% of its net assets in equity-linked notes (ELNs), which are hybrid derivative-type instruments that are specially designed to combine the characteristics of one or more reference securities (usually a single stock, a stock index or a basket of stocks (underlying securities)) and a related equity derivative, such as a put or call option, in a single note form. The Fund may engage in all types of ELNs, including those that: (1) provide for protection of the Fund’s principal in exchange for limited participation in the appreciation of the underlying securities, and (2) do not provide for such protection and subject the Fund to the risk of loss of the Fund’s principal investment. ELNs can provide the Fund with an efficient investment tool that may be less expensive than investing directly in the underlying securities and the related equity derivative.
Please keep this supplement for future reference
FI-8
Table of Contents
SUPPLEMENT DATED JULY 24, 2013
TOTHE PROSPECTUSES
DATED MAY 1, 2013
OF
FRANKLIN INCOME SECURITIES FUND
TEMPLETON DEVELOPING MARKETS SECURITIES FUND
TEMPLETON FOREIGN SECURITIES FUND
(A series of Franklin Templeton Variable Insurance Products Trust)
The prospectus is amended as follows:
I. The “Fund Summaries – Portfolio Managers” section on page FI-S5 is revised to read as follows:
Portfolio Managers
EDWARD D. PERKS, CFA Senior Vice President of Advisers and portfolio manager of the Fund since 2002.
MATTHEW QUINLAN Portfolio Manager of Advisers and portfolio manager of the Fund since December 2012.
ALEX W. PETERS, CFA Vice President of Advisers and portfolio manager of the Fund since December 2012.
CHARLES B. JOHNSON Portfolio Manager of Investment Counsel and portfolio manager of the Fund since 1989.
II. The “Fund Details – Management” section disclosure concerning the portfolio management team beginning on page FI-D9 is revised to read as follows:
The Fund is managed by a team of dedicated professionals focused on investments in debt and equity securities. The portfolio managers of the team are as follows:
EDWARD D. PERKS, CFA Senior Vice President of Advisers | Mr. Perks has been the lead portfolio manager of the Fund since 2002. He has primary responsibility for the investments of the Fund. He has final authority over all aspects of the Fund’s investment portfolio, including but not limited to, purchases and sales of individual securities, portfolio risk assessment, and the management of daily cash balances in accordance with anticipated investment management requirements. The degree to which he may perform these functions, and the nature of these functions, may change from time to time. He joined Franklin Templeton Investments in 1992. |
FI-9
Table of Contents
MATTHEW QUINLAN Portfolio Manager of Advisers | Mr. Quinlan has been a portfolio manager of the Fund since December 2012, providing research and advice on the purchases and sales of individual securities, and portfolio risk assessment. He joined Franklin Templeton Investments in 2005. | |
ALEX W. PETERS, CFA Vice President of Advisers | Mr. Peters has been a portfolio manager of the Fund since December 2012, providing research and advice on the purchases and sales of individual securities, and portfolio risk assessment. He joined Franklin Templeton Investments in 1992. | |
CHARLES B. JOHNSON Portfolio Manager of Investment Counsel | Mr. Johnson has been a portfolio manager of the Fund since 1989, providing research, advice and portfolio risk assessment on the Fund’s investment portfolio. He joined Franklin Templeton Investments in 1957. | |
CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.
III. The “Fund Details – Principal Risks” section beginning on page TD-D3 for the Templeton Developing Markets Securities Fund is amended to add the following:
Participatory Notes
Participatory notes involve risks that are in addition to the risks normally associated with a direct investment in the underlying equity securities. In addition, the Fund is subject to the risk that the issuer of the participatory note (i.e., the issuing bank or broker-dealer), which is the only responsible party under the note, is unable or refuses to perform under the terms of the participatory note. While the holder of a participatory note is entitled to receive from the issuing bank or broker-dealer any dividends or other distributions paid on the underlying securities, the holder is not entitled to the same rights as an owner of the underlying securities, such as voting rights. Participatory notes are also not traded on exchanges, are privately issued, and may be illiquid. To the extent a participatory note is determined to be illiquid, it would be subject to the Fund’s limitation on investments in illiquid securities. There can be no assurance that the trading price or value of participatory notes will equal the value of the underlying value of the equity securities they seek to replicate.
IV. The fifth paragraph of the “Fund Details – Principal Investment Policies and Practices” section on page TF-D1 for the Templeton Foreign Securities Fund is amended as follows:
The Fund may also buy and sell (write) exchange traded and over-the-counter equity call options on individual securities held in its portfolio in an amount up to 10% of its net assets, to generate additional income for the Fund. A call option gives the purchaser of the option, upon payment of a premium, the right to buy, and the seller the obligation to sell, the underlying instrument at the exercise price. For example, the Fund may write an option with a strike price that is generally equal to the price target at which the investment manager would sell (in the case of a call option) a particular stock, and in return the Fund would earn a premium from the buyer of the option. The investment manager considers various factors, such as availability and cost, in deciding whether, when and to what extent to enter into derivative transactions.
Please keep this supplement for future reference.
FI-10
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Highlights
Franklin Income Securities Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 1 | 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||||||
| ||||||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 15.47 | $ | 14.68 | $ | 15.16 | $ | 14.43 | $ | 11.53 | $ | 17.63 | ||||||||||||
|
| |||||||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.44 | 0.91 | 0.96 | 0.89 | 0.91 | 1.10 | ||||||||||||||||||
Net realized and unrealized gains (losses) | 0.25 | 0.90 | (0.54 | ) | 0.85 | 3.08 | (5.99 | ) | ||||||||||||||||
|
| |||||||||||||||||||||||
Total from investment operations | 0.69 | 1.81 | 0.42 | 1.74 | 3.99 | (4.89 | ) | |||||||||||||||||
|
| |||||||||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income | (1.06 | ) | (1.02 | ) | (0.90 | ) | (1.01 | ) | (1.09 | ) | (0.86 | ) | ||||||||||||
Net realized gains | — | — | — | — | — | (0.35 | ) | |||||||||||||||||
|
| |||||||||||||||||||||||
Total distributions | (1.06 | ) | (1.02 | ) | (0.90 | ) | (1.01 | ) | (1.09 | ) | (1.21 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ | 15.10 | $ | 15.47 | $ | 14.68 | $ | 15.16 | $ | 14.43 | $ | 11.53 | ||||||||||||
|
| |||||||||||||||||||||||
Total returnc | 4.37% | 12.91% | 2.71% | 12.87% | 35.88% | (29.41)% | ||||||||||||||||||
Ratios to average net assetsd | ||||||||||||||||||||||||
Expenses | 0.47% | e | 0.47% | 0.47% | e | 0.47% | e | 0.47% | e | 0.47% | e | |||||||||||||
Net investment income | 5.56% | 6.03% | 6.35% | 6.28% | 7.23% | 7.28% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 612,483 | $ | 584,391 | $ | 1,300,935 | $ | 1,449,028 | $ | 910,504 | $ | 433,370 | ||||||||||||
Portfolio turnover rate | 13.88% | 26.66%f | 28.65% | 41.65% | 42.30% | 43.89% | ||||||||||||||||||
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. See Note 11.
The accompanying notes are an integral part of these financial statements.
FI-11
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Franklin Income Securities Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 2 | 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||||||
| ||||||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 15.07 | $ | 14.32 | $ | 14.82 | $ | 14.12 | $ | 11.30 | $ | 17.31 | ||||||||||||
|
| |||||||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.41 | 0.85 | 0.90 | 0.86 | 0.86 | 1.04 | ||||||||||||||||||
Net realized and unrealized gains (losses) | 0.24 | 0.88 | (0.53 | ) | 0.82 | 3.01 | (5.87 | ) | ||||||||||||||||
|
| |||||||||||||||||||||||
Total from investment operations | 0.65 | 1.73 | 0.37 | 1.68 | 3.87 | (4.83 | ) | |||||||||||||||||
|
| |||||||||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income | (1.02 | ) | (0.98 | ) | (0.87 | ) | (0.98 | ) | (1.05 | ) | (0.83 | ) | ||||||||||||
Net realized gains | — | — | — | — | — | (0.35 | ) | |||||||||||||||||
|
| |||||||||||||||||||||||
Total distributions | (1.02 | ) | (0.98 | ) | (0.87 | ) | (0.98 | ) | (1.05 | ) | (1.18 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ | 14.70 | $ | 15.07 | $ | 14.32 | $ | 14.82 | $ | 14.12 | $ | 11.30 | ||||||||||||
|
| |||||||||||||||||||||||
Total returnc | 4.23% | 12.65% | 2.38% | 12.67% | 35.59% | (29.66)% | ||||||||||||||||||
Ratios to average net assetsd | ||||||||||||||||||||||||
Expenses | 0.72% | e | 0.72% | 0.72% | e | 0.72% | e | 0.72% | e | 0.72% | e | |||||||||||||
Net investment income | 5.31% | 5.78% | 6.10% | 6.03% | 6.98% | 7.03% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 6,103,615 | $ | 6,182,997 | $ | 5,915,637 | $ | 6,309,207 | $ | 6,114,898 | $ | 4,944,457 | ||||||||||||
Portfolio turnover rate | 13.88% | 26.66% | f | 28.65% | 41.65% | 42.30% | 43.89% | |||||||||||||||||
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. See Note 11.
The accompanying notes are an integral part of these financial statements.
FI-12
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Franklin Income Securities Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 4 | 2012 | 2011 | 2010 | 2009 | 2008a | |||||||||||||||||||
| ||||||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 15.32 | $ | 14.54 | $ | 15.04 | $ | 14.33 | $ | 11.49 | $ | 16.90 | ||||||||||||
|
| |||||||||||||||||||||||
Income from investment operationsb: | ||||||||||||||||||||||||
Net investment incomec | 0.41 | 0.85 | 0.90 | 0.85 | 0.86 | 0.87 | ||||||||||||||||||
Net realized and unrealized gains (losses) | 0.25 | 0.90 | (0.54 | ) | 0.84 | 3.06 | (5.07 | ) | ||||||||||||||||
|
| |||||||||||||||||||||||
Total from investment operations | 0.66 | 1.75 | 0.36 | 1.69 | 3.92 | (4.20 | ) | |||||||||||||||||
|
| |||||||||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income | (1.01 | ) | (0.97 | ) | (0.86 | ) | (0.98 | ) | (1.08 | ) | (0.86 | ) | ||||||||||||
Net realized gains | — | — | — | — | — | (0.35 | ) | |||||||||||||||||
|
| |||||||||||||||||||||||
Total distributions | (1.01 | ) | (0.97 | ) | (0.86 | ) | (0.98 | ) | (1.08 | ) | (1.21 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ | 14.97 | $ | 15.32 | $ | 14.54 | $ | 15.04 | $ | 14.33 | $ | 11.49 | ||||||||||||
|
| |||||||||||||||||||||||
Total returnd | 4.18% | 12.56% | 2.29% | 12.54% | 35.37% | (26.61)% | ||||||||||||||||||
Ratios to average net assetse | ||||||||||||||||||||||||
Expenses | 0.82% | f | 0.82% | 0.82% | f | 0.82% | f | 0.82% | f | 0.82% | f | |||||||||||||
Net investment income | 5.21% | 5.68% | 6.00% | 5.93% | 6.88% | 6.93% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 433,793 | $ | 436,405 | $ | 431,435 | $ | 415,541 | $ | 347,733 | $ | 135,360 | ||||||||||||
Portfolio turnover rate | 13.88% | 26.66% | g | 28.65% | 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%.
gExcludes the value of portfolio securities delivered as a result of a redemption in-kind. See Note 11.
The accompanying notes are an integral part of these financial statements.
FI-13
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited)
| Franklin Income Securities Fund | Country | Shares/ Warrants | Value | |||||||
Common Stocks and Other Equity Interests 51.0% | ||||||||||
Consumer Discretionary 0.6% | ||||||||||
a Dex Media Inc. | United States | 458,876 | $ | 8,062,451 | ||||||
a General Motors Co., wts., 7/10/16 | United States | 112,731 | 2,705,544 | |||||||
a General Motors Co., wts., 7/10/19 | United States | 112,731 | 1,843,152 | |||||||
a,b SuperMedia Inc., Litigation Trust | United States | 3,472,135 | — | |||||||
Target Corp. | United States | 394,200 | 27,144,612 | |||||||
|
| |||||||||
| 39,755,759 | ||||||||||
|
| |||||||||
Consumer Staples 0.8% | ||||||||||
PepsiCo Inc. | United States | 584,000 | 47,765,360 | |||||||
Safeway Inc. | United States | 445,700 | 10,545,262 | |||||||
|
| |||||||||
| 58,310,622 | ||||||||||
|
| |||||||||
Energy 9.1% | ||||||||||
BP PLC, ADR | United Kingdom | 2,580,479 | 107,709,194 | |||||||
a Callon Petroleum Co. | United States | 615,000 | 2,072,550 | |||||||
Canadian Oil Sands Ltd. | Canada | 3,212,700 | 59,496,142 | |||||||
Chesapeake Energy Corp. | United States | 781,500 | 15,926,970 | |||||||
Chevron Corp. | United States | 561,000 | 66,388,740 | |||||||
Devon Energy Corp. | United States | 500,000 | 25,940,000 | |||||||
Exxon Mobil Corp. | United States | 698,750 | 63,132,063 | |||||||
Halliburton Co. | United States | 1,251,700 | 52,220,924 | |||||||
Royal Dutch Shell PLC, A, ADR | United Kingdom | 1,951,748 | 124,521,522 | |||||||
Schlumberger Ltd. | United States | 546,600 | 39,169,356 | |||||||
Spectra Energy Corp. | United States | 600,000 | 20,676,000 | |||||||
Total SA, B, ADR | France | 600,000 | 29,220,000 | |||||||
Transocean Ltd. | United States | 300,000 | 14,385,000 | |||||||
a Weatherford International Ltd. | United States | 651,300 | 8,922,810 | |||||||
The Williams Cos. Inc. | United States | 563,900 | 18,309,833 | |||||||
|
| |||||||||
| 648,091,104 | ||||||||||
|
| |||||||||
Financials 6.5% | ||||||||||
Banco Santander SA | Spain | 2,137,312 | 13,637,521 | |||||||
Bank of America Corp. | United States | 4,909,800 | 63,140,028 | |||||||
Barclays PLC | United Kingdom | 3,473,166 | 14,706,867 | |||||||
BlackRock Inc. | United States | 209,100 | 53,707,335 | |||||||
Commonwealth Bank of Australia | Australia | 374,700 | 23,713,214 | |||||||
HSBC Holdings PLC | United Kingdom | 4,341,457 | 45,027,149 | |||||||
JPMorgan Chase & Co. | United States | 1,606,400 | 84,801,856 | |||||||
QBE Insurance Group Ltd. | Australia | 868,292 | 11,986,191 | |||||||
Wells Fargo & Co. | United States | 3,363,100 | 138,795,137 | |||||||
Westfield Retail Trust | Australia | 5,543,693 | 15,721,248 | |||||||
|
| |||||||||
| 465,236,546 | ||||||||||
|
| |||||||||
Health Care 6.5% | ||||||||||
Johnson & Johnson | United States | 867,800 | 74,509,308 | |||||||
Merck & Co. Inc. | United States | 3,473,200 | 161,330,140 | |||||||
Pfizer Inc. | United States | 3,055,375 | 85,581,054 | |||||||
Roche Holding AG | Switzerland | 407,719 | 101,406,535 | |||||||
Sanofi, ADR | France | 868,292 | 44,725,721 | |||||||
|
| |||||||||
| 467,552,758 | ||||||||||
|
| |||||||||
Industrials 2.8% | ||||||||||
a,c CEVA Holdings LLC | United Kingdom | 13,012 | 11,711,034 | |||||||
FI-14
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Franklin Income Securities Fund | Country | Shares/ Warrants | Value | |||||||
Common Stocks and Other Equity Interests (continued) | ||||||||||
Industrials (continued) | ||||||||||
Deere & Co. | United States | 100,000 | $ | 8,125,000 | ||||||
General Electric Co. | United States | 4,341,500 | 100,679,385 | |||||||
Lockheed Martin Corp. | United States | 200,000 | 21,692,000 | |||||||
Republic Services Inc. | United States | 527,300 | 17,896,562 | |||||||
Waste Management Inc. | United States | 1,028,200 | 41,467,306 | |||||||
|
| |||||||||
| 201,571,287 | ||||||||||
|
| |||||||||
Information Technology 3.0% | ||||||||||
Apple Inc. | United States | 50,000 | 19,804,000 | |||||||
Broadcom Corp., A | United States | 527,000 | 17,791,520 | |||||||
Cisco Systems Inc. | United States | 739,700 | 17,982,107 | |||||||
Intel Corp. | United States | 3,679,300 | 89,112,646 | |||||||
Microsoft Corp. | United States | 1,000,000 | 34,530,000 | |||||||
QUALCOMM Inc. | United States | 200,000 | 12,216,000 | |||||||
Texas Instruments Inc. | United States | 585,300 | 20,409,411 | |||||||
|
| |||||||||
| 211,845,684 | ||||||||||
|
| |||||||||
Materials 6.1% | ||||||||||
Agrium Inc. | Canada | 650,000 | 56,524,000 | |||||||
BHP Billiton PLC | United Kingdom | 1,646,892 | 42,122,386 | |||||||
The Dow Chemical Co. | United States | 3,207,200 | 103,175,624 | |||||||
E. I. du Pont de Nemours and Co. | United States | 1,047,500 | 54,993,750 | |||||||
Goldcorp Inc. | Canada | 897,800 | 22,202,594 | |||||||
LyondellBasell Industries NV, A | United States | 1,050,000 | 69,573,000 | |||||||
Newmont Mining Corp. | United States | 735,317 | 22,022,744 | |||||||
Rio Tinto PLC, ADR | United Kingdom | 1,500,000 | 61,620,000 | |||||||
|
| |||||||||
| 432,234,098 | ||||||||||
|
| |||||||||
Telecommunication Services 2.6% | ||||||||||
AT&T Inc. | United States | 1,736,600 | 61,475,640 | |||||||
CenturyLink Inc. | United States | 434,200 | 15,348,970 | |||||||
France Telecom SA | France | 458,892 | 4,341,298 | |||||||
Frontier Communications Corp. | United States | 1,736,600 | 7,033,230 | |||||||
Telstra Corp. Ltd. | Australia | 4,946,331 | 21,583,790 | |||||||
Vivendi SA | France | 448,617 | 8,496,361 | |||||||
Vodafone Group PLC | United Kingdom | 23,878,012 | 68,235,654 | |||||||
|
| |||||||||
| 186,514,943 | ||||||||||
|
| |||||||||
Utilities 13.0% | ||||||||||
AGL Resources Inc. | United States | 390,732 | 16,746,773 | |||||||
American Electric Power Co. Inc. | United States | 1,300,000 | 58,214,000 | |||||||
Dominion Resources Inc. | United States | 1,000,000 | 56,820,000 | |||||||
Duke Energy Corp. | United States | 1,302,500 | 87,918,750 | |||||||
a,b Dynegy Holdings Inc., Escrow Account | United States | 149,699,000 | — | |||||||
a Dynegy Inc. | United States | 3,500,000 | 78,925,000 | |||||||
a Dynegy Inc., wts., 10/02/17 | United States | 242,666 | 448,932 | |||||||
Entergy Corp. | United States | 738,100 | 51,430,808 | |||||||
Exelon Corp. | United States | 2,500,000 | 77,200,000 | |||||||
FirstEnergy Corp. | United States | 1,095,900 | 40,920,906 | |||||||
NextEra Energy Inc. | United States | 651,300 | 53,067,924 | |||||||
PG&E Corp. | United States | 1,736,600 | 79,414,718 | |||||||
Pinnacle West Capital Corp. | United States | 260,500 | 14,449,935 | |||||||
PPL Corp. | United States | 1,615,400 | 48,882,004 | |||||||
Public Service Enterprise Group Inc. | United States | 1,823,500 | 59,555,510 | |||||||
FI-15
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Franklin Income Securities Fund | Country | Shares/ Warrants | Value | |||||||
Common Stocks and Other Equity Interests (continued) | ||||||||||
Utilities (continued) | ||||||||||
Sempra Energy | United States | 868,300 | $ | 70,992,208 | ||||||
The Southern Co. | United States | 1,251,200 | 55,215,456 | |||||||
TECO Energy Inc. | United States | 1,953,700 | 33,584,103 | |||||||
Xcel Energy Inc. | United States | 1,710,964 | 48,488,720 | |||||||
|
| |||||||||
| 932,275,747 | ||||||||||
|
| |||||||||
Total Common Stocks and Other Equity Interests | 3,643,388,548 | |||||||||
|
| |||||||||
d Equity-Linked Securities 2.3% | ||||||||||
Energy 0.7% | ||||||||||
e Deutsche Bank AG into Alpha Natural Resources Inc., 15.00%, 144A | United States | 180,000 | 1,010,626 | |||||||
e Deutsche Bank AG into Peabody Energy Corp., 12.50%, 144A | United States | 550,000 | 8,576,975 | |||||||
e JPMorgan Chase & Co. into Anadarko Petroleum Corp., 5.00%, 144A | United States | 450,000 | 38,450,340 | |||||||
|
| |||||||||
| 48,037,941 | ||||||||||
|
| |||||||||
Information Technology 0.1% | ||||||||||
Credit Suisse New York into Corning Inc., 9.00% | United States | 525,000 | 7,446,968 | |||||||
|
| |||||||||
Materials 1.5% | ||||||||||
e Deutsche Bank AG into Freeport-McMoRan Copper & Gold Inc., 10.00%, 144A | United States | 500,000 | 14,579,700 | |||||||
e Deutsche Bank AG into LyondellBasell Industries NV, 9.00%, 144A | United States | 250,000 | 15,058,900 | |||||||
e JPMorgan Chase & Co. into Freeport-McMoRan Copper & Gold Inc., 9.00%, 144A | United States | 1,170,000 | 34,175,349 | |||||||
e JPMorgan Chase & Co. into Nucor Corp., 7.50%, 144A | United States | 285,000 | 12,083,515 | |||||||
e Morgan Stanley into Barrick Gold Corp., 9.00%, 144A | Canada | 1,980,000 | 34,904,826 | |||||||
|
| |||||||||
| 110,802,290 | ||||||||||
|
| |||||||||
Total Equity-Linked Securities (Cost $200,301,950) | 166,287,199 | |||||||||
|
| |||||||||
Convertible Preferred Stocks 3.9% | ||||||||||
Consumer Discretionary 0.2% | ||||||||||
General Motors Co., 4.75%, cvt. pfd., B | United States | 279,950 | 13,482,392 | |||||||
|
| |||||||||
Energy 0.4% | ||||||||||
a Halcon Resources Corp., 5.75%, cvt. pfd., A | United States | 10,000 | 10,300,000 | |||||||
e Sanchez Energy Corp., 6.50%, cvt. pfd., B, 144A | United States | 200,000 | 11,886,000 | |||||||
SandRidge Energy Inc., 7.00%, cvt. pfd. | United States | 121,600 | 10,453,539 | |||||||
|
| |||||||||
| 32,639,539 | ||||||||||
|
| |||||||||
Financials 2.7% | ||||||||||
Bank of America Corp., 7.25%, cvt. pfd., L | United States | 78,200 | 86,841,100 | |||||||
a Fannie Mae, 5.375%, cvt. pfd. | United States | 525 | 7,743,802 | |||||||
FelCor Lodging Trust Inc., 7.80%, cvt. pfd., A | United States | 347,325 | 8,544,195 | |||||||
MetLife Inc., 5.00%, cvt. pfd. | United States | 455,925 | 24,980,131 | |||||||
Wells Fargo & Co., 7.50%, cvt. pfd., A | United States | 53,000 | 63,494,000 | |||||||
|
| |||||||||
| 191,603,228 | ||||||||||
|
| |||||||||
Industrials 0.2% | ||||||||||
a,c CEVA Holdings LLC, cvt. pfd., A-1 | United Kingdom | 397 | 476,400 | |||||||
a,c CEVA Holdings LLC, cvt. pfd., A-2 | United Kingdom | 14,711 | 13,239,810 | |||||||
|
| |||||||||
| 13,716,210 | ||||||||||
|
| |||||||||
Materials 0.1% | ||||||||||
AngloGold Ashanti Holdings Finance PLC, 6.00%, cvt. pfd. | South Africa | 173,700 | 2,989,377 | |||||||
FI-16
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Franklin Income Securities Fund | Country | Shares/ Warrants | Value | |||||||
Convertible Preferred Stocks (continued) | ||||||||||
Materials (continued) | ||||||||||
ArcelorMittal, 6.00%, cvt. pfd. | Luxembourg | 160,000 | $ | 3,117,760 | ||||||
|
| |||||||||
| 6,107,137 | ||||||||||
|
| |||||||||
Utilities 0.3% | ||||||||||
Dominion Resources Inc., 6.00%, cvt. pfd., B | United States | 145,000 | 7,257,250 | |||||||
Dominion Resources Inc., 6.125%, cvt. pfd., A | United States | 145,000 | 7,279,000 | |||||||
NextEra Energy Inc., 5.889%, cvt. pfd. | United States | 83,100 | 4,615,374 | |||||||
| 19,151,624 | ||||||||||
|
| |||||||||
Total Convertible Preferred Stocks (Cost $285,707,852) | 276,700,130 | |||||||||
|
| |||||||||
Preferred Stocks 0.6% | ||||||||||
Consumer Discretionary 0.0%† | ||||||||||
a Motors Liquidation Co., Escrow Account, pfd., C | United States | 1,400,000 | 14,000 | |||||||
|
| |||||||||
Financials 0.6% | ||||||||||
e Ally Financial Inc., 7.00%, pfd., 144A | United States | 31,489 | 29,931,280 | |||||||
Ally Financial Inc., 8.50%, pfd., A | United States | 65,125 | 1,684,133 | |||||||
a Fannie Mae, 6.75%, pfd. | United States | 434,150 | 1,780,015 | |||||||
a Fannie Mae, 7.625%, pfd., R | United States | 694,650 | 2,813,332 | |||||||
a Fannie Mae, 8.25%, pfd. | United States | 739,375 | 3,364,156 | |||||||
a Freddie Mac, 8.375%, pfd., Z | United States | 1,345,175 | 6,255,064 | |||||||
|
| |||||||||
| 45,827,980 | ||||||||||
|
| |||||||||
Total Preferred Stocks (Cost $93,154,229) | 45,841,980 | |||||||||
|
| |||||||||
| Principal Amount* | ||||||||||
Convertible Bonds 0.7% | ||||||||||
Consumer Discretionary 0.5% | ||||||||||
e Volkswagen International Finance, cvt., sub. note, 144A, 5.50%, 11/09/15 | Germany | 25,000,000 | EUR | 33,489,338 | ||||||
|
| |||||||||
Materials 0.2% | ||||||||||
Cemex SAB de CV, cvt., sub. note, | ||||||||||
3.25%, 3/15/16 | Mexico | 6,700,000 | 8,144,447 | |||||||
3.75%, 3/15/18 | Mexico | 7,920,000 | 9,816,246 | |||||||
|
| |||||||||
| 17,960,693 | ||||||||||
|
| |||||||||
Total Convertible Bonds (Cost $45,939,657) | 51,450,031 | |||||||||
|
| |||||||||
Corporate Bonds 36.7% | ||||||||||
Consumer Discretionary 6.7% | ||||||||||
e Academy Ltd./Finance Corp., senior note, 144A, 9.25%, 8/01/19 | United States | 5,300,000 | 5,896,250 | |||||||
Cablevision Systems Corp., senior note, | ||||||||||
7.75%, 4/15/18 | United States | 20,000,000 | 21,600,000 | |||||||
8.00%, 4/15/20 | United States | 12,700,000 | 13,906,500 | |||||||
e Caesars Entertainment Operating Co. Inc., secured note, 144A, 9.00%, 2/15/20 | United States | 15,000,000 | 14,362,500 | |||||||
Caesars Operating Escrow LLC/Corp., | ||||||||||
e first lien, 144A, 9.00%, 2/15/20 | United States | 10,000,000 | 9,600,000 | |||||||
senior secured note, 8.50%, 2/15/20 | United States | 8,900,000 | 8,416,063 | |||||||
CCO Holdings LLC/CCO Holdings Capital Corp., senior bond, 5.75%, 1/15/24 | United States | 15,000,000 | 14,512,500 | |||||||
CCO Holdings LLC/CCO Holdings Capital Corp., senior note, 6.50%, 4/30/21 | United States | 15,000,000 | 15,712,500 | |||||||
Chrysler Group LLC/CG Co-Issuer Inc., senior secured note, | ||||||||||
8.00%, 6/15/19 | United States | 25,000,000 | 27,406,250 | |||||||
FI-17
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Franklin Income Securities Fund | Country | Principal Amount* | Value | |||||||
Corporate Bonds (continued) | ||||||||||
Consumer Discretionary (continued) | ||||||||||
Chrysler Group LLC/CG Co-Issuer Inc., senior secured note, (continued) | ||||||||||
8.25%, 6/15/21 | United States | 12,800,000 | $ | 14,192,000 | ||||||
CityCenter Holdings/Finance, senior secured note, 7.625%, 1/15/16 | United States | 4,100,000 | 4,346,000 | |||||||
Clear Channel Communications Inc., | ||||||||||
senior note, 10.75%, 8/01/16 | United States | 12,000,000 | 10,470,000 | |||||||
senior note, 9.00%, 3/01/21 | United States | 24,100,000 | 23,015,500 | |||||||
e senior secured note, first lien, 144A, 9.00%, 12/15/19 | United States | 18,000,000 | 17,550,000 | |||||||
Clear Channel Worldwide Holdings Inc., senior sub. note, 7.625%, 3/15/20 | United States | 8,750,000 | 9,100,000 | |||||||
ClubCorp Club Operations Inc., senior note, 10.00%, 12/01/18 | United States | 15,000,000 | 16,275,000 | |||||||
CSC Holdings LLC, senior note, 6.75%, 11/15/21 | United States | 15,400,000 | 16,670,500 | |||||||
Cumulus Media Holdings Inc., senior note, 7.75%, 5/01/19 | United States | 10,000,000 | 9,825,000 | |||||||
f Dex Media Inc., senior sub. note, PIK, 14.00%, 1/29/17 | United States | 14,922,308 | 9,825,997 | |||||||
DISH DBS Corp., senior bond, 5.00%, 3/15/23 | United States | 10,000,000 | 9,675,000 | |||||||
The Goodyear Tire & Rubber Co., senior note, | ||||||||||
8.25%, 8/15/20 | United States | 4,900,000 | 5,390,000 | |||||||
6.50%, 3/01/21 | United States | 12,600,000 | 12,867,750 | |||||||
Harrah’s Operating Co. Inc., senior secured note, 11.25%, 6/01/17 | United States | 10,000,000 | 10,437,500 | |||||||
HD Supply Inc., | ||||||||||
first lien, 8.125%, 4/15/19 | United States | 5,000,000 | 5,500,000 | |||||||
e senior note, 144A, 7.50%, 7/15/20 | United States | 10,000,000 | 10,150,000 | |||||||
e Jaguar Land Rover PLC, 144A, 8.125%, 5/15/21 | United Kingdom | 2,118,000 | 2,321,603 | |||||||
KB Home, | ||||||||||
senior bond, 7.50%, 9/15/22 | United States | 6,500,000 | 7,003,750 | |||||||
senior note, 6.25%, 6/15/15 | United States | 11,500,000 | 12,276,250 | |||||||
senior note, 7.25%, 6/15/18 | United States | 10,600,000 | 11,289,000 | |||||||
e Landry’s Inc., senior note, 144A, 9.375%, 5/01/20 | United States | 7,500,000 | 7,950,000 | |||||||
e Laureate Education Inc., 144A, 9.25%, 9/01/19 | United States | 5,000,000 | 5,375,000 | |||||||
MGM Resorts International, senior note, | ||||||||||
6.625%, 7/15/15 | United States | 3,200,000 | 3,428,000 | |||||||
10.00%, 11/01/16 | United States | 20,000,000 | 23,550,000 | |||||||
8.625%, 2/01/19 | United States | 3,700,000 | 4,199,500 | |||||||
6.75%, 10/01/20 | United States | 5,500,000 | 5,706,250 | |||||||
Shea Homes LP/Funding Corp., senior secured note, 8.625%, 5/15/19 | United States | 11,700,000 | 12,548,250 | |||||||
e Unitymedia Hessen/NRW, senior secured note, 144A, 8.125%, 12/01/17 | Germany | 2,123,644 | EUR | 2,920,835 | ||||||
e Univision Communications Inc., senior secured note, 144A, | ||||||||||
6.875%, 5/15/19 | United States | 15,000,000 | 15,825,000 | |||||||
5.125%, 5/15/23 | United States | 10,000,000 | 9,500,000 | |||||||
e UPCB Finance III Ltd., senior secured note, 144A, 6.625%, 7/01/20 | Netherlands | 7,500,000 | 7,800,000 | |||||||
Visant Corp., senior note, 10.00%, 10/01/17 | United States | 32,800,000 | 30,422,000 | |||||||
|
| |||||||||
| 478,818,248 | ||||||||||
|
| |||||||||
Consumer Staples 1.1% | ||||||||||
e Boparan Finance PLC, senior note, 144A, | ||||||||||
9.75%, 4/30/18 | United Kingdom | 2,000,000 | EUR | 2,834,343 | ||||||
9.875%, 4/30/18 | United Kingdom | 7,500,000 | GBP | 12,411,562 | ||||||
e Innovation Ventures LLC/Finance Corp., secured note, 144A, 9.50%, 8/15/19 | United States | 5,000,000 | 4,200,000 | |||||||
JBS USA LLC/Finance Inc., senior note, | ||||||||||
11.625%, 5/01/14 | United States | 10,000,000 | 10,575,000 | |||||||
e 144A, 8.25%, 2/01/20 | United States | 10,000,000 | 10,525,000 | |||||||
e 144A, 7.25%, 6/01/21 | United States | 12,500,000 | 12,562,500 | |||||||
FI-18
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Franklin Income Securities Fund | Country | Principal Amount* | Value | |||||||
Corporate Bonds (continued) | ||||||||||
Consumer Staples (continued) | ||||||||||
SUPERVALU Inc., senior note, 8.00%, 5/01/16 | United States | 15,000,000 | $ | 16,218,750 | ||||||
U.S. Foods Inc., 8.50%, 6/30/19 | United States | 10,000,000 | 10,500,000 | |||||||
|
| |||||||||
| 79,827,155 | ||||||||||
|
| |||||||||
Energy 7.9% | ||||||||||
Alpha Natural Resources Inc., senior note, 6.25%, 6/01/21 | United States | 2,500,000 | 2,006,250 | |||||||
Antero Resources Finance Corp., senior note, | ||||||||||
9.375%, 12/01/17 | United States | 14,600,000 | 15,549,000 | |||||||
7.25%, 8/01/19 | United States | 3,900,000 | 4,085,250 | |||||||
Arch Coal Inc., senior note, | ||||||||||
7.00%, 6/15/19 | United States | 5,500,000 | 4,606,250 | |||||||
g 7.25%, 6/15/21 | United States | 12,500,000 | 10,375,000 | |||||||
Bill Barrett Corp., senior note, 7.00%, 10/15/22 | United States | 5,000,000 | 5,025,000 | |||||||
Callon Petroleum Co., senior secured note, 13.00%, 9/15/16 | United States | 7,765,750 | 8,134,623 | |||||||
CGG, senior note, 6.50%, 6/01/21 | France | 12,500,000 | 12,687,500 | |||||||
CHC Helicopter SA, senior secured note, first lien, 9.25%, 10/15/20 | Canada | 25,000,000 | 25,671,875 | |||||||
Chesapeake Energy Corp., senior note, | ||||||||||
g 6.50%, 8/15/17 | United States | 34,000,000 | 36,635,000 | |||||||
7.25%, 12/15/18 | United States | 33,000,000 | 36,960,000 | |||||||
5.75%, 3/15/23 | United States | 21,500,000 | 21,822,500 | |||||||
CONSOL Energy Inc., senior note, 8.25%, 4/01/20 | United States | 1,800,000 | 1,894,500 | |||||||
El Paso Corp., senior note, MTN, 7.75%, 1/15/32 | United States | 22,000,000 | 23,500,136 | |||||||
Energy XXI Gulf Coast Inc., senior note, 9.25%, 12/15/17 | United States | 15,000,000 | 16,537,500 | |||||||
EP Energy LLC/Finance Inc., senior note, 9.375%, 5/01/20 | United States | 10,000,000 | 11,325,000 | |||||||
EXCO Resources Inc., senior note, 7.50%, 9/15/18 | United States | 10,500,000 | 9,870,000 | |||||||
e Expro Finance Luxembourg, senior secured note, 144A, 8.50%, 12/15/16 | United Kingdom | 16,840,000 | 17,766,200 | |||||||
e Gibson Energy Inc., senior note, 144A, 6.75%, 7/15/21 | Canada | 7,000,000 | 7,017,500 | |||||||
Halcon Resources Corp., senior note, 9.75%, 7/15/20 | United States | 10,000,000 | 10,025,000 | |||||||
Linn Energy LLC/Finance Corp., senior note, 8.625%, 4/15/20 | United States | 20,000,000 | 21,100,000 | |||||||
e Magnum Hunter Resources Corp., senior note, 144A, 9.75%, 5/15/20 | United States | 5,000,000 | 5,100,000 | |||||||
e Midstates Petroleum Inc./LLC, senior note, 144A, 10.75%, 10/01/20 | United States | 5,000,000 | 5,050,000 | |||||||
Offshore Group Investment Ltd., senior secured note, first lien, 7.50%, 11/01/19 | United States | 17,900,000 | 18,727,875 | |||||||
e OGX Petroleo e Gas Participacoes SA, senior note, 144A, 8.50%, 6/01/18 | Brazil | 15,000,000 | 4,931,250 | |||||||
Peabody Energy Corp., senior note, 6.25%, 11/15/21 | United States | 10,000,000 | 9,700,000 | |||||||
e Penn Virginia Corp., senior note, 144A, 8.50%, 5/01/20 | United States | 8,600,000 | 8,363,500 | |||||||
Plains Exploration & Production Co., senior note, 6.50%, 11/15/20 | United States | 10,000,000 | 10,610,480 | |||||||
Quicksilver Resources Inc., senior note, 9.125%, 8/15/19 | United States | 20,000,000 | 17,100,000 | |||||||
e Sabine Pass Liquefaction LLC, secured note, 144A, 5.625%, 2/01/21 | United States | 15,100,000 | 14,684,750 | |||||||
Sabine Pass LNG LP, | ||||||||||
e 144A, 6.50%, 11/01/20 | United States | 10,000,000 | 10,150,000 | |||||||
senior secured note, 7.50%, 11/30/16 | United States | 25,000,000 | 27,031,250 | |||||||
e Samson Investment Co., senior note, 144A, 9.75%, 2/15/20 | United States | 26,300,000 | 27,845,125 | |||||||
e Sanchez Energy Corp., senior note, 144A, 7.75%, 6/15/21 | United States | 9,300,000 | 9,207,000 | |||||||
SandRidge Energy Inc., senior note, | ||||||||||
8.75%, 1/15/20 | United States | 25,000,000 | 25,625,000 | |||||||
7.50%, 3/15/21 | United States | 13,300,000 | 12,768,000 | |||||||
8.125%, 10/15/22 | United States | 10,000,000 | 9,950,000 | |||||||
7.50%, 2/15/23 | United States | 6,600,000 | 6,303,000 | |||||||
W&T Offshore Inc., senior note, 8.50%, 6/15/19 | United States | 40,500,000 | 42,018,750 | |||||||
|
| |||||||||
| 567,760,064 | ||||||||||
|
| |||||||||
FI-19
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Franklin Income Securities Fund | Country | Principal Amount* | Value | |||||||
Corporate Bonds (continued) | ||||||||||
Financials 3.4% | ||||||||||
Ally Financial Inc., senior note, 6.25%, 12/01/17 | United States | 5,000,000 | $ | 5,365,885 | ||||||
h Bank of America Corp., pfd., sub. bond, M, 8.125% to 5/15/18, FRN thereafter, Perpetual | United States | 5,000,000 | 5,650,000 | |||||||
E*TRADE Financial Corp., senior note, 6.00%, 11/15/17 | United States | 12,500,000 | 12,687,500 | |||||||
International Lease Finance Corp., senior note, | ||||||||||
8.75%, 3/15/17 | United States | 15,000,000 | 16,781,250 | |||||||
8.875%, 9/01/17 | United States | 20,000,000 | 22,650,000 | |||||||
h JPMorgan Chase & Co., junior sub. note, 1, 7.90% to 4/30/19, FRN thereafter, Perpetual | United States | 85,000,000 | 96,147,495 | |||||||
Kinetic Concepts Inc./USA, senior note, 12.50%, 11/01/19 | United States | 5,000,000 | 5,200,000 | |||||||
e Ladder Capital Finance Holdings LLC/Corp., senior note, 144A, 7.375%, 10/01/17 | United States | 1,600,000 | 1,640,000 | |||||||
e Liberty Mutual Group Inc., junior sub. note, 144A, 10.75% to 6/15/38, FRN thereafter, 6/15/58 | United States | 25,000,000 | 38,250,000 | |||||||
Morgan Stanley, senior note, 5.50%, 1/26/20 | United States | 15,000,000 | 16,116,435 | |||||||
Nationstar Mortgage LLC/Nationstar Capital Corp., senior note, 9.625%, 5/01/19 | United States | 5,000,000 | 5,625,000 | |||||||
e Nuveen Investments Inc., senior note, 144A, 9.50%, 10/15/20 | United States | 13,600,000 | 13,600,000 | |||||||
|
| |||||||||
| 239,713,565 | ||||||||||
|
| |||||||||
Health Care 2.0% | ||||||||||
Grifols Inc., senior note, 8.25%, 2/01/18 | Spain | 4,900,000 | 5,292,000 | |||||||
HCA Inc., | ||||||||||
senior note, 7.50%, 2/15/22 | United States | 25,000,000 | 27,750,000 | |||||||
senior note, 5.875%, 5/01/23 | United States | 7,500,000 | 7,518,750 | |||||||
senior secured note, 6.50%, 2/15/20 | United States | 16,500,000 | 17,892,187 | |||||||
e,f Jaguar Holding Co. I, senior note, 144A, PIK, 9.375%, 10/15/17 | United States | 10,200,000 | 10,710,000 | |||||||
Tenet Healthcare Corp., senior note, | ||||||||||
8.00%, 8/01/20 | United States | 24,879,000 | 25,780,864 | |||||||
i FRN, 9.25%, 2/01/15 | United States | 13,000,000 | 14,121,250 | |||||||
Vanguard Health Holding Co. II LLC/Inc., senior note, | ||||||||||
8.00%, 2/01/18 | United States | 23,100,000 | 24,601,500 | |||||||
7.75%, 2/01/19 | United States | 4,000,000 | 4,260,000 | |||||||
e,j VPII Escrow Corp., senior note, 144A, 7.50%, 7/15/21 | United States | 7,700,000 | 7,700,000 | |||||||
|
| |||||||||
| 145,626,551 | ||||||||||
|
| |||||||||
Industrials 1.6% | ||||||||||
e Abengoa Finance SAU, senior note, 144A, 8.875%, 11/01/17 | Spain | 12,900,000 | 12,166,313 | |||||||
e Algeco Scotsman Global Finance PLC, | ||||||||||
secured note, 144A, 8.50%, 10/15/18 | United Kingdom | 9,900,000 | 9,900,000 | |||||||
senior note, 144A, 10.75%, 10/15/19 | United Kingdom | 5,000,000 | 4,800,000 | |||||||
e Bombardier Inc., senior bond, 144A, 6.125%, 1/15/23 | Canada | 7,500,000 | 7,481,250 | |||||||
c CEVA Group PLC, senior note, first lien, 144A, 4.00%, 5/01/18 | United Kingdom | 24,591,882 | 20,165,343 | |||||||
Hertz Corp., senior note, 6.75%, 4/15/19 | United States | 4,500,000 | 4,781,250 | |||||||
The Manitowoc Co. Inc., senior note, 9.50%, 2/15/18 | United States | 10,000,000 | 10,800,000 | |||||||
Navistar International Corp., senior note, 8.25%, 11/01/21 | United States | 16,300,000 | 16,096,250 | |||||||
RBS Global & Rexnord Corp., senior note, 8.50%, 5/01/18 | United States | 13,900,000 | 14,838,250 | |||||||
United Rentals North America Inc., senior sub. note, 8.375%, 9/15/20 | United States | 8,800,000 | 9,570,000 | |||||||
|
| |||||||||
| 110,598,656 | ||||||||||
|
| |||||||||
Information Technology 6.3% | ||||||||||
CDW LLC/Finance Corp., | ||||||||||
senior note, 8.50%, 4/01/19 | United States | 13,725,000 | 14,823,000 | |||||||
senior sub. note, 12.535%, 10/12/17 | United States | 3,998,000 | 4,237,880 | |||||||
Ceridian Corp., senior note, 11.25%, 11/15/15 | United States | 4,500,000 | 4,584,375 | |||||||
e,f CommScope Holdings Inc., senior note, 144A, PIK, 7.375%, 6/01/20 | United States | 11,200,000 | 10,752,000 | |||||||
e CommScope Inc., senior note, 144A, 8.25%, 1/15/19 | United States | 2,400,000 | 2,574,000 | |||||||
FI-20
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Franklin Income Securities Fund | Country | Principal Amount* | Value | |||||||
Corporate Bonds (continued) | ||||||||||
Information Technology (continued) | ||||||||||
First Data Corp., | ||||||||||
senior bond, 12.625%, 1/15/21 | United States | 80,000,000 | $ | 85,000,000 | ||||||
e senior secured bond, 144A, 8.25%, 1/15/21 | United States | 45,000,000 | 46,125,000 | |||||||
e,f senior secured note, 144A, PIK, 8.75%, 1/15/22 | United States | 33,188,000 | 34,266,610 | |||||||
senior sub. note, 11.25%, 3/31/16 | United States | 59,490,000 | 58,448,925 | |||||||
Freescale Semiconductor Inc., | ||||||||||
senior note, 8.05%, 2/01/20 | United States | 35,000,000 | 35,612,500 | |||||||
senior note, 10.75%, 8/01/20 | United States | 64,846,000 | 71,654,830 | |||||||
e senior secured note, 144A, 10.125%, 3/15/18 | United States | 1,482,000 | 1,611,675 | |||||||
e senior secured note, 144A, 9.25%, 4/15/18 | United States | 51,700,000 | 55,965,250 | |||||||
Infor US Inc., senior note, 9.375%, 4/01/19 | United States | 4,100,000 | 4,463,875 | |||||||
e Sanmina Corp., senior note, 144A, 7.00%, 5/15/19 | United States | 15,000,000 | 15,525,000 | |||||||
Sterling International Inc., senior note, 11.00%, 10/01/19 | United States | 7,500,000 | 7,800,000 | |||||||
|
| |||||||||
| 453,444,920 | ||||||||||
|
| |||||||||
Materials 3.5% | ||||||||||
e Cemex Finance LLC, senior secured note, 144A, | ||||||||||
9.50%, 12/14/16 | Mexico | 3,000,000 | 3,187,500 | |||||||
9.375%, 10/12/22 | Mexico | 7,100,000 | 7,774,500 | |||||||
e Cemex SAB de CV, senior secured note, 144A, | ||||||||||
9.00%, 1/11/18 | Mexico | 26,000,000 | 27,430,000 | |||||||
9.50%, 6/15/18 | Mexico | 12,000,000 | 13,057,500 | |||||||
Dynacast International LLC/Finance Inc., 9.25%, 7/15/19 | United States | 5,000,000 | 5,475,000 | |||||||
e Edgen Murray Corp., secured note, 144A, 8.75%, 11/01/20 | United States | 5,000,000 | 5,000,000 | |||||||
e FMG Resources (August 2006) Pty. Ltd., senior note, 144A, | ||||||||||
7.00%, 11/01/15 | Australia | 10,000,000 | 10,068,150 | |||||||
6.875%, 2/01/18 | Australia | 11,900,000 | 11,795,875 | |||||||
8.25%, 11/01/19 | Australia | 15,000,000 | 15,525,000 | |||||||
e Hudbay Minerals Inc., senior note, 144A, 9.50%, 10/01/20 | Canada | 10,000,000 | 9,800,000 | |||||||
e Ineos Finance PLC, senior secured note, 144A, 8.375%, 2/15/19 | United Kingdom | 5,100,000 | 5,559,000 | |||||||
e Ineos Group Holdings SA, secured note, second lien, 144A, 7.875%, 2/15/16 | Switzerland | 20,209,708 | EUR | 26,425,395 | ||||||
e Inmet Mining Corp., senior note, 144A, 8.75%, 6/01/20 | Canada | 4,500,000 | 4,623,750 | |||||||
e Kerling PLC, senior secured note, 144A, 10.625%, 2/01/17 | United Kingdom | 9,400,000 | EUR | 12,851,384 | ||||||
e Orion Engineered Carbons Bondco GmbH, | ||||||||||
senior secured bond, 144A, 10.00%, 6/15/18 | Germany | 8,910,000 | EUR | 12,742,974 | ||||||
senior secured note, first lien, 144A, 9.625%, 6/15/18 | Germany | 11,100,000 | 12,112,875 | |||||||
e,f Orion Engineered Carbons Finance & Co. SCA, senior note, 144A, PIK, 9.25%, 8/01/19 | Luxembourg | 4,800,000 | 4,824,000 | |||||||
Reynolds Group Issuer Inc./LLC/SA, | ||||||||||
first lien, 5.75%, 10/15/20 | United States | 14,200,000 | 14,342,000 | |||||||
senior note, 9.00%, 4/15/19 | United States | 5,000,000 | 5,187,500 | |||||||
senior note, 9.875%, 8/15/19 | United States | 16,800,000 | 18,060,000 | |||||||
senior note, 8.25%, 2/15/21 | United States | 5,200,000 | 5,167,500 | |||||||
senior secured note, 6.875%, 2/15/21 | United States | 10,000,000 | 10,525,000 | |||||||
e Walter Energy Inc., senior note, 144A, 9.875%, 12/15/20 | United States | 7,000,000 | 6,125,000 | |||||||
|
| |||||||||
| 247,659,903 | ||||||||||
|
| |||||||||
Telecommunication Services 2.8% | ||||||||||
Cricket Communications Inc., senior note, 7.75%, 10/15/20 | United States | 45,000,000 | 43,425,000 | |||||||
FI-21
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Franklin Income Securities Fund | Country | Principal Amount* | Value | |||||||
Corporate Bonds (continued) | ||||||||||
Telecommunication Services (continued) | ||||||||||
Frontier Communications Corp., senior note, | ||||||||||
8.50%, 4/15/20 | United States | 12,900,000 | $ | 14,286,750 | ||||||
9.25%, 7/01/21 | United States | 7,400,000 | 8,491,500 | |||||||
7.125%, 1/15/23 | United States | 8,800,000 | 8,789,000 | |||||||
e MetroPCS Wireless Inc., senior bond, 144A, 6.625%, 4/01/23 | United States | 15,000,000 | 15,318,750 | |||||||
Sprint Nextel Corp., | ||||||||||
6.00%, 12/01/16 | United States | 10,000,000 | 10,575,000 | |||||||
11.50%, 11/15/21 | United States | 30,000,000 | 40,050,000 | |||||||
senior note, 9.125%, 3/01/17 | United States | 13,300,000 | 15,361,500 | |||||||
senior note, 8.375%, 8/15/17 | United States | 12,700,000 | 14,319,250 | |||||||
senior note, 7.00%, 8/15/20 | United States | 5,000,000 | 5,300,000 | |||||||
e senior note, 144A, 9.00%, 11/15/18 | United States | 20,000,000 | 23,450,000 | |||||||
|
| |||||||||
| 199,366,750 | ||||||||||
|
| |||||||||
Utilities 1.4% | ||||||||||
e Calpine Corp., senior secured note, 144A, | ||||||||||
7.875%, 7/31/20 | United States | 5,154,000 | 5,617,860 | |||||||
7.50%, 2/15/21 | United States | 13,514,000 | 14,493,765 | |||||||
7.875%, 1/15/23 | United States | 5,020,000 | 5,421,600 | |||||||
GenOn Energy Inc., senior note, 7.875%, 6/15/17 | United States | 25,000,000 | 26,687,500 | |||||||
e InterGen NV, secured bond, 144A, 7.00%, 6/30/23 | Netherlands | 25,000,000 | 24,390,625 | |||||||
e Intergen NV, senior secured note, 144A, 9.00%, 6/30/17 | Netherlands | 7,500,000 | 7,743,750 | |||||||
e LBC Tank Terminal Holding Netherlands BV, senior bond, 144A, 6.875%, 5/15/23 | Belgium | 1,700,000 | 1,712,750 | |||||||
Niska Gas Storage U.S./Canada, senior note, 8.875%, 3/15/18 | United States | 15,000,000 | 15,637,500 | |||||||
|
| |||||||||
| 101,705,350 | ||||||||||
|
| |||||||||
Total Corporate Bonds (Cost $2,456,713,602) | 2,624,521,162 | |||||||||
|
| |||||||||
i,kSenior Floating Rate Interests 4.1% | ||||||||||
Consumer Discretionary 1.5% | ||||||||||
Clear Channel Communications Inc., Tranche B Term Loan, | ||||||||||
3.845%, 1/29/16 | United States | 13,854,445 | 12,704,526 | |||||||
6.945%, 1/30/19 | United States | 50,864,664 | 46,493,507 | |||||||
Cumulus Media Holdings Inc., Second Lien Term Loan, 7.50%, 9/16/19 | United States | 40,000,000 | 40,925,000 | |||||||
Dex Media West LLC, Term Loan B, 8.00%, 12/30/16 | United States | 3,329,039 | 2,781,828 | |||||||
Supermedia Inc., Exit Term Loan, 11.60%, 12/31/16 | United States | 2,149,082 | 1,694,192 | |||||||
|
| |||||||||
| 104,599,053 | ||||||||||
|
| |||||||||
Consumer Staples 0.2% | ||||||||||
j U.S. Foods Inc., Term Loan, 5.75%, 3/31/19 | United States | 15,000,000 | 14,895,000 | |||||||
|
| |||||||||
Energy 0.6% | ||||||||||
Chesapeake Energy Corp., Senior Unsecured Term Loan, 5.75%, 12/02/17 | United States | 20,000,000 | 20,263,880 | |||||||
j Quicksilver Resources Inc., Second Lien Loans, 8.00%, 6/21/19 | United States | 25,000,000 | 24,250,000 | |||||||
|
| |||||||||
| 44,513,880 | ||||||||||
|
| |||||||||
Industrials 0.5% | ||||||||||
Altegrity Inc., | ||||||||||
Term Loan B, 5.00%, 2/21/15 | United States | 12,476,821 | 11,977,749 | |||||||
Tranche D Term Loan, 7.75%, 2/21/15 | United States | 12,585,755 | 12,491,362 | |||||||
CEVA Group PLC, Dollar Tranche B L/C, 5.276%, 8/31/16 | United Kingdom | 2,105,263 | 2,004,589 | |||||||
Navistar Inc., Tranche B Term Loan, 5.75%, 8/17/17 | United States | 6,081,022 | 6,126,629 | |||||||
|
| |||||||||
| 32,600,329 | ||||||||||
|
| |||||||||
FI-22
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Franklin Income Securities Fund | Country | Principal Amount* | Value | |||||||
i,kSenior Floating Rate Interests (continued) | ||||||||||
Information Technology 0.7% | ||||||||||
First Data Corp., 2018 Term Loan, 4.193%, 3/24/18 | United States | 22,436,455 | $ | 21,917,612 | ||||||
Freescale Semiconductor Inc., Tranche B-4 Term Loan, 5.00%, 2/28/20 | United States | 19,950,000 | 19,819,088 | |||||||
SRA International Inc., Term Loan, 6.50%, 7/20/18 | United States | 8,171,429 | 8,137,378 | |||||||
|
| |||||||||
| 49,874,078 | ||||||||||
|
| |||||||||
Utilities 0.6% | ||||||||||
Texas Competitive Electric Holdings Co. LLC, 2014 Term Loan, 3.693% - 3.775%, 10/10/14 | United States | 59,500,000 | 42,641,687 | |||||||
|
| |||||||||
Total Senior Floating Rate Interests (Cost $293,090,546) | 289,124,027 | |||||||||
|
| |||||||||
Total Investments before Short Term Investments | 7,097,313,077 | |||||||||
|
| |||||||||
Short Term Investments 1.3% | ||||||||||
Repurchase Agreements (Cost $89,102,386) 1.2% | ||||||||||
l Joint Repurchase Agreement, 0.088%, 7/01/13 (Maturity Value $89,103,036) | United States | 89,102,386 | 89,102,386 | |||||||
Barclays Capital Inc. (Maturity Value $10,155,964) | ||||||||||
BNP Paribas Securities Corp. (Maturity Value $11,284,900) | ||||||||||
Credit Suisse Securities (USA) LLC (Maturity Value $14,105,902) | ||||||||||
Deutsche Bank Securities Inc. (Maturity Value $11,237,675) | ||||||||||
HSBC Securities (USA) Inc. (Maturity Value $23,980,299) | ||||||||||
Merrill Lynch, Pierce, Fenner & Smith Inc. (Maturity Value $11,284,900) | ||||||||||
Morgan Stanley & Co. LLC (Maturity Value $7,053,396) | ||||||||||
Collateralized by U.S. Government Agency Securities, 0.13% - 4.625%, 7/09/13 - 8/07/17; | ||||||||||
| Shares | ||||||||||
nInvestments from Cash Collateral Received for Loaned Securities (Cost $4,665,600) 0.1% | ||||||||||
Money Market Funds 0.1% | ||||||||||
|
| |||||||||
o BNY Mellon Overnight Government Fund, 0.074% | United States | 4,665,600 | 4,665,600 | |||||||
|
| |||||||||
Total Investments (Cost $6,689,791,552) 100.6% | 7,191,081,063 | |||||||||
Other Assets, less Liabilities (0.6)% | (41,190,183 | ) | ||||||||
|
| |||||||||
Net Assets 100.0% | $ | 7,149,890,880 | ||||||||
|
| |||||||||
See Abbreviations on page FI-38.
FI-23
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
†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.
cSee Note 8 regarding restricted securities.
dSee Note 1(e) 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, 2013, the aggregate value of these securities was $1,056,165,868, representing 14.77% of net assets.
fIncome may be received in additional securities and/or cash.
gA portion or all of the security is on loan at June 30, 2013. See Note 1(f).
hPerpetual security with no stated maturity date.
iThe coupon rate shown represents the rate at period end.
jA portion or all of the security purchased on a when-issued or delayed delivery basis. See Note 1(d).
kSee Note 1(g) regarding senior floating rate interests.
lSee Note 1(c) regarding joint repurchase agreement.
mThe security is traded on a discount basis with no stated coupon rate.
nSee Note 1(f) 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-24
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements
Statement of Assets and Liabilities
June 30, 2013 (unaudited)
| Franklin Income Securities Fund | ||||
Assets: | ||||
Investments in securities: | ||||
Cost - Unaffiliated issuers | $ | 6,600,689,166 | ||
Cost - Repurchase agreements | 89,102,386 | |||
|
| |||
Total cost of investments | $ | 6,689,791,552 | ||
|
| |||
Value - Unaffiliated issuers | $ | 7,101,978,677 | ||
Value - Repurchase agreements | 89,102,386 | |||
|
| |||
Total value of investments (Includes securities loaned in the amount of $4,552,200) | 7,191,081,063 | |||
Cash | 281,720 | |||
Receivables: | ||||
Investment securities sold | 1,048,557 | |||
Capital shares sold | 2,018,532 | |||
Dividends and interest | 73,157,654 | |||
Other assets | 2,014 | |||
|
| |||
Total assets | 7,267,589,540 | |||
|
| |||
Liabilities: | ||||
Payables: | ||||
Investment securities purchased | 96,776,805 | |||
Capital shares redeemed | 8,058,313 | |||
Affiliates | 5,621,166 | |||
Payable upon return of securities loaned | 4,665,600 | |||
Unrealized depreciation on unfunded commitments (Note 9) | 1,481,162 | |||
Accrued expenses and other liabilities | 1,095,614 | |||
|
| |||
Total liabilities | 117,698,660 | |||
|
| |||
Net assets, at value | $ | 7,149,890,880 | ||
|
| |||
Net assets consist of: | ||||
Paid-in capital | $ | 7,635,171,810 | ||
Undistributed net investment income | 170,758,740 | |||
Net unrealized appreciation (depreciation) | 499,731,225 | |||
Accumulated net realized gain (loss) | (1,155,770,895 | ) | ||
|
| |||
Net assets, at value | $ | 7,149,890,880 | ||
|
| |||
The accompanying notes are an integral part of these financial statements.
FI-25
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Assets and Liabilities (continued)
June 30, 2013 (unaudited)
| Franklin Income Securities Fund | ||||
Class 1: | ||||
Net assets, at value | $ | 612,482,739 | ||
|
| |||
Shares outstanding | 40,557,787 | |||
|
| |||
Net asset value and maximum offering price per share | $ | 15.10 | ||
|
| |||
Class 2: | ||||
Net assets, at value | $ | 6,103,614,963 | ||
|
| |||
Shares outstanding | 415,177,594 | |||
|
| |||
Net asset value and maximum offering price per share | $ | 14.70 | ||
|
| |||
Class 4: | ||||
Net assets, at value | $ | 433,793,178 | ||
|
| |||
Shares outstanding | 28,971,226 | |||
|
| |||
Net asset value and maximum offering price per share | $ | 14.97 | ||
|
| |||
The accompanying notes are an integral part of these financial statements.
FI-26
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Operations
for the six months ended June 30, 2013 (unaudited)
| Franklin Income Securities Fund | ||||
Investment income: | ||||
Dividends | $ | 69,298,772 | ||
Interest | 151,345,622 | |||
Income from securities loaned | 471,762 | |||
|
| |||
Total investment income | 221,116,156 | |||
|
| |||
Expenses: | ||||
Management fees (Note 3a) | 16,623,513 | |||
Distribution fees: (Note 3c) | ||||
Class 2 | 7,847,956 | |||
Class 4 | 783,729 | |||
Unaffiliated transfer agent fees | 681 | |||
Custodian fees (Note 4) | 106,276 | |||
Reports to shareholders | 355,414 | |||
Professional fees | 95,547 | |||
Trustees’ fees and expenses | 16,037 | |||
Other | 73,160 | |||
|
| |||
Total expenses | 25,902,313 | |||
Expense reductions (Note 4) | (20 | ) | ||
|
| |||
Net expenses | 25,902,293 | |||
|
| |||
Net investment income | 195,213,863 | |||
|
| |||
Realized and unrealized gains (losses): | ||||
Net realized gain (loss) from: | ||||
Investments | (69,500,521 | ) | ||
Foreign currency transactions | (86,206 | ) | ||
|
| |||
Net realized gain (loss) | (69,586,727 | ) | ||
|
| |||
Net change in unrealized appreciation (depreciation) on: | ||||
Investments | 181,615,188 | |||
Translation of other assets and liabilities denominated in foreign currencies | (141,152 | ) | ||
|
| |||
Net change in unrealized appreciation (depreciation) | 181,474,036 | |||
|
| |||
Net realized and unrealized gain (loss) | 111,887,309 | |||
|
| |||
Net increase (decrease) in net assets resulting from operations | $ | 307,101,172 | ||
|
| |||
The accompanying notes are an integral part of these financial statements.
FI-27
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statements of Changes in Net Assets
| Franklin Income Securities Fund | ||||||||
| Six Months Ended June 30, 2013 (unaudited) | Year Ended December 31, 2012 | |||||||
| ||||||||
Increase (decrease) in net assets: | ||||||||
Operations: | ||||||||
Net investment income | $ | 195,213,863 | $ | 454,020,826 | ||||
Net realized gain (loss) from investments and foreign currency transactions | (69,586,727 | ) | (46,865,158 | ) | ||||
Net change in unrealized appreciation (depreciation) on investments and translation of other assets and liabilities denominated in foreign currencies | 181,474,036 | 534,865,658 | ||||||
| ||||||||
Net increase (decrease) in net assets resulting from operations | 307,101,172 | 942,021,326 | ||||||
| ||||||||
Distributions to shareholders from: | ||||||||
Net investment income: | ||||||||
Class 1 | (40,171,484 | ) | (90,282,701 | ) | ||||
Class 2 | (401,855,498 | ) | (392,684,736 | ) | ||||
Class 4 | (27,978,841 | ) | (28,048,130 | ) | ||||
| ||||||||
Total distributions to shareholders | (470,005,823 | ) | (511,015,567 | ) | ||||
| ||||||||
Capital share transactions: (Note 2) | ||||||||
Class 1 | 42,634,513 | (793,290,008 | ) | |||||
Class 2 | 59,358,444 | (63,192,261 | ) | |||||
Class 4 | 7,008,995 | (18,736,873 | ) | |||||
| ||||||||
Total capital share transactions | 109,001,952 | (875,219,142 | ) | |||||
| ||||||||
Net increase (decrease) in net assets | (53,902,699 | ) | (444,213,383 | ) | ||||
Net assets: | ||||||||
Beginning of period | 7,203,793,579 | 7,648,006,962 | ||||||
| ||||||||
End of period | $ | 7,149,890,880 | $ | 7,203,793,579 | ||||
| ||||||||
Undistributed net investment income included in net assets: | ||||||||
End of period | $ | 170,758,740 | $ | 445,550,700 | ||||
| ||||||||
The accompanying notes are an integral part of these financial statements.
FI-28
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited)
Franklin Income Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Templeton Variable Insurance Products Trust (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end investment company, consisting of twenty-one 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 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 Board), the Fund’s administrator, investment manager and other affiliates have formed the Valuation and Liquidity Oversight Committee (VLOC). The VLOC provides administration and oversight of the Fund’s valuation policies and procedures, which are approved annually by the Board. Among other things, these procedures allow the Fund to 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 (OTC) 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 OTC 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, credit spreads, estimated default rates, anticipated market interest rate volatility, 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 financial instruments for which market prices are not reliable or readily available. Under these procedures, the VLOC convenes on a regular basis to review such financial instruments and considers a number of factors, including significant unobservable valuation inputs, when arriving at fair value. The VLOC 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. An income-based valuation approach may also be used 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
FI-29
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Income Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
a. Financial Instrument Valuation (continued)
have been used had an active market existed. The VLOC employs various methods for calibrating these valuation approaches including a regular review of key inputs and assumptions, transactional back-testing or disposition analysis, and reviews of any related market activity.
Trading in securities on foreign securities stock exchanges and OTC 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 VLOC 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 Depositary 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.
In addition, certain foreign markets may be open on days that the NYSE is closed, which could result in differences between the value of the Fund’s portfolio securities on the last business day and the last calendar day of the reporting period. Any significant security valuation changes due to an open foreign market are adjusted and reflected by the Fund for financial reporting purposes.
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 Board.
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
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Income Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
c. Joint Repurchase Agreement (continued)
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%. Repurchase agreements are subject to the terms of Master Repurchase Agreements (MRAs) with approved counterparties (sellers). The MRAs contain various provisions, including but not limited to events of default and maintenance of collateral for repurchase agreements. In the event of default by either the seller or the Fund, certain MRAs may permit the non-defaulting party to net and close-out all transactions, if any, traded under such agreements. The Fund may sell securities it holds as collateral and apply the proceeds towards the repurchase price and any other amounts owed by the seller to the Fund in the event of default by the seller. This could involve costs or delays in addition to a loss on the securities if their value falls below the repurchase price owed by the seller. The joint repurchase agreement held by the Fund at period end, as indicated in the Statement of Investments, had been entered into on June 28, 2013.
d. Securities Purchased on a When-Issued and Delayed Delivery Basis
The Fund purchases securities on a when-issued and delayed delivery basis, with payment and delivery scheduled for a future date. These transactions are subject to market fluctuations and are subject to the risk that the value at delivery may be more or less than the trade date purchase price. Although the Fund will generally purchase these securities with the intention of holding the securities, it may sell the securities before the settlement date. Sufficient assets have been segregated for these securities.
e. 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.
f. Securities Lending
The Fund participates in an agency based securities 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 as indicated on the Statement of Investments. 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.
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.
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Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Income Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
g. Senior Floating Rate Interests (continued)
Senior secured corporate loans in which the Fund invests are generally readily marketable, but may be subject to certain restrictions on resale.
h. 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 if applicable, excise taxes. As a result, no provision for U.S. federal income taxes is required.
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 in an amount that would be payable if the securities were disposed of on the valuation date.
The Fund recognizes the tax benefits of uncertain tax positions only when the position is “more likely than not” to be sustained upon examination by the tax authorities based on the technical merits of the tax position. As of June 30, 2013, and for all open tax years, the Fund has determined that no liability for unrecognized tax benefits is required in the Fund’s financial statements related to uncertain tax positions taken on a tax return (or expected to be taken on future tax returns). Open tax years are those that remain subject to examination and are based on each tax jurisdiction statute of limitation.
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 except that certain dividends from foreign securities are recognized as soon as the Fund is notified of the ex-dividend date. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with accounting principles generally accepted in the United States of America. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods.
Common expenses incurred by the Trust are allocated among the funds based on the ratio of net assets of each fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense.
Realized and unrealized gains and losses and net investment income, not including class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions, by class, are generally due to differences in class specific expenses.
j. Accounting Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
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Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Income Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
k. Guarantees and Indemnifications
Under the Trust’s organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, on behalf of the Fund, enters into contracts with service providers that contain general indemnification clauses. The Trust’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote.
2. SHARES OF BENEFICIAL INTEREST
At June 30, 2013, 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, 2013 | Year Ended December 31, 2012 | |||||||||||||||
| Class 1 Shares: | Shares | Amount | Shares | Amount | ||||||||||||
Shares sold | 1,520,199 | $ | 24,319,696 | 39,214,078 | $ | 586,304,676 | ||||||||||
Shares issued in reinvestment of distributions | 2,620,449 | 40,171,484 | 6,331,185 | 90,282,701 | ||||||||||||
Shares redeemed in-kind (Note 11) | — | — | (29,484,492 | ) | (458,420,903 | ) | ||||||||||
Shares redeemed | (1,355,567 | ) | (21,856,667 | ) | (66,431,278 | ) | (1,011,456,482 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | 2,785,081 | $ | 42,634,513 | (50,870,507 | ) | $ | (793,290,008 | ) | ||||||||
| ||||||||||||||||
Class 2 Shares: | ||||||||||||||||
Shares sold | 17,311,823 | $ | 272,450,742 | 37,383,185 | $ | 550,351,184 | ||||||||||
Shares issued in reinvestment of distributions | 26,915,974 | 401,855,498 | 28,230,391 | 392,684,736 | ||||||||||||
Shares redeemed | (39,349,964 | ) | (614,947,796 | ) | (68,491,604 | ) | (1,006,228,181 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | 4,877,833 | $ | 59,358,444 | (2,878,028 | ) | $ | (63,192,261 | ) | ||||||||
| ||||||||||||||||
Class 4 Shares: | ||||||||||||||||
Shares sold | 1,532,147 | $ | 24,510,157 | 2,795,409 | $ | 41,861,767 | ||||||||||
Shares issued on reinvestment of distributions | 1,839,503 | 27,978,841 | 1,982,200 | 28,048,130 | ||||||||||||
Shares redeemed | (2,882,079 | ) | (45,480,003 | ) | (5,962,592 | ) | (88,646,770 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | 489,571 | $ | 7,008,995 | (1,184,983 | ) | $ | (18,736,873 | ) | ||||||||
| ||||||||||||||||
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 | |
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 |
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Income Securities Fund
3. TRANSACTIONS WITH AFFILIATES (continued)
a. Management Fees
The Fund pays an investment management fee to Advisers based on the average daily net assets of the Fund as follows:
| Annualized Fee Rate | Net Assets | |
| 0.625% | Up to and including $100 million | |
| 0.500% | Over $100 million, up to and including $250 million | |
| 0.450% | Over $250 million, up to and including $7.5 billion | |
| 0.440% | Over $7.5 billion, up to and including $10 billion | |
| 0.430% | Over $10 billion, up to and including $12.5 billion | |
| 0.420% | Over $12.5 billion, up to and including $15 billion | |
| 0.400% | In excess of $15 billion |
Under a subadvisory agreement, TIC, an affiliate of Advisers, provides subadvisory services to the Fund. The subadvisory fee is paid by Advisers based on the average daily net assets, and is not an additional expense of the Fund.
b. Administrative Fees
FT Services, under terms of an agreement, provides administrative services to the Fund and is not paid by the Fund for the services.
c. Distribution Fees
The Board 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. Some distribution fees are not charged on shares held by affiliates. The Board 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, 2013, Franklin Templeton Variable Insurance Products Trust – Franklin Templeton VIP Founding Funds Allocation Fund owned 4.98% 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, 2013, the custodian fees were reduced as noted in the Statement of Operations.
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Income Securities Fund
5. INCOME TAXES
For tax purposes, capital losses may be carried over to offset future capital gains. Capital loss carryforwards with no expiration, if any, must be fully utilized before those losses with expiration dates.
At December 31, 2012, capital loss carryforwards were as follows:
Capital loss carryforwards subject to expiration: | ||||
2016 | $ | 310,746,276 | ||
2017 | 521,405,875 | |||
2018 | 157,561,044 | |||
Capital loss carryforwards not subject to expiration: | ||||
Long term | 93,754,582 | |||
|
| |||
Total capital loss carryforwards | $ | 1,083,467,777 | ||
|
| |||
At June 30, 2013, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
Cost of investments | $ | 6,710,679,211 | ||
|
| |||
Unrealized appreciation | $ | 973,219,230 | ||
Unrealized depreciation | (492,817,378 | ) | ||
|
| |||
Net unrealized appreciation (depreciation) | $ | 480,401,852 | ||
|
| |||
Differences between income and/or capital gains as determined on a book basis and a tax basis are primarily due to differing treatments of defaulted securities, payments-in-kind, bond discounts and premiums, corporate actions, and gains realized on in-kind shareholder redemptions.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the period ended June 30, 2013, aggregated $992,384,845 and $1,139,869,071, respectively.
7. CREDIT RISK
At June 30, 2013, the Fund had 38.70% of its portfolio invested in high yield, senior secured floating rate notes, or other securities rated below investment grade. These securities may be more sensitive to economic conditions causing greater price volatility and are potentially subject to a greater risk of loss due to default than higher rated securities.
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.
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Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Income Securities Fund
8. RESTRICTED SECURITIES (continued)
At June 30, 2013, 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 Date | Cost | Value | ||||||||||||
| 24,591,882 | CEVA Group PLC, senior note, first lien, 144A, 4.00%, 5/01/18a | 12/09/10 - 5/02/13 | $ | 24,553,682 | $ | 20,165,343 | ||||||||||
| 13,012 | CEVA Holdings LLCa | 3/10/10 - 5/02/13 | 26,075,289 | 11,711,034 | ||||||||||||
| 397 | CEVA Holdings LLC, cvt. pfd., A-1a | 5/02/13 | 531,980 | 476,400 | ||||||||||||
| 14,711 | CEVA Holdings LLC, cvt. pfd., A-2a | 3/10/10 - 5/02/13 | 21,931,613 | 13,239,810 | ||||||||||||
|
|
|
| |||||||||||||
Total Restricted Securities (Value is 0.64% of Net Assets) | $ | 73,092,564 | $ | 45,592,587 | ||||||||||||
|
|
|
| |||||||||||||
aThe Fund also invests in unrestricted securities of other investments in the issuer, valued at $2,004,589 as of June 30, 2013.
9. UNFUNDED COMMITMENTS
The Fund enters into certain credit agreements, all or a portion of which may be unfunded. The Fund is obligated to fund these commitments at the borrowers’ discretion. Funded portions of credit agreements are presented on the Statement of Investments.
At June 30, 2013, unfunded commitments were as follows:
| Borrower | Unfunded Commitment | |||
CEVA Group PLC, 4.00%, 12/01/13 | 6,200,000 | EUR | ||
|
| |||
Unfunded 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 the Statement of Operations.
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 $1.5 billion (Global Credit Facility) which matures on January 17, 2014. 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 0.07% based upon the unused portion of the Global Credit Facility. These fees are reflected in other expenses on the Statement of Operations. During the period ended June 30, 2013, the Fund did not use the Global Credit Facility.
11. REDEMPTION IN-KIND
During the year ended December 31, 2012, the Fund realized $38,277,774 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 netted with capital gains that are distributed to remaining shareholders, they have been reclassified from accumulated net realized gains to paid-in capital.
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Income 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 financial instruments and are summarized in the following fair value hierarchy:
| • | Level 1 – quoted prices in active markets for identical financial instruments |
| • | Level 2 – other significant observable inputs (including quoted prices for similar financial instruments, interest rates, prepayment speed, credit risk, etc.) |
| • | Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of financial instruments) |
The inputs or methodology used for valuing financial instruments are not an indication of the risk associated with investing in those financial instruments.
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.
A summary of inputs used as of June 30, 2013, in valuing the Fund’s assets and liabilities carried at fair value, is as follows:
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
|
| |||||||||||||||
Assets: | ||||||||||||||||
Investments in Securities: | ||||||||||||||||
Equity Investments:a | ||||||||||||||||
Consumer Discretionary | $ | 53,238,151 | $ | 14,000 | $ | — | c | $ | 53,252,151 | |||||||
Energy | 658,391,104 | 22,339,539 | — | 680,730,643 | ||||||||||||
Financials | 601,498,672 | 101,169,082 | — | 702,667,754 | ||||||||||||
Industrials | 189,860,253 | — | 25,427,244 | 215,287,497 | ||||||||||||
Materials | 435,223,475 | 3,117,760 | — | 438,341,235 | ||||||||||||
Utilities | 951,427,371 | — | — | c | 951,427,371 | |||||||||||
All Other Equity Investmentsb | 924,224,007 | — | — | 924,224,007 | ||||||||||||
Equity-Linked Securities | — | 166,287,199 | — | 166,287,199 | ||||||||||||
Convertible Bonds | — | 51,450,031 | — | 51,450,031 | ||||||||||||
Corporate Bonds | — | 2,604,355,819 | 20,165,343 | 2,624,521,162 | ||||||||||||
Senior Floating Rate Interests | — | 289,124,027 | — | 289,124,027 | ||||||||||||
Short Term Investments | — | 93,767,986 | — | 93,767,986 | ||||||||||||
|
| |||||||||||||||
Total Investments in Securities | $ | 3,813,863,033 | $ | 3,331,625,443 | $ | 45,592,587 | $ | 7,191,081,063 | ||||||||
|
| |||||||||||||||
Liabilities: | ||||||||||||||||
Unfunded Loan Commitments | — | — | 1,481,162 | 1,481,162 | ||||||||||||
aIncludes common, preferred, and convertible preferred stocks as well as other equity investments.
bFor detailed categories, see the accompanying Statement of Investments.
c Includes securities determined to have no value at June 30, 2013.
A reconciliation of assets in which Level 3 inputs are used in determining fair value is presented when there are significant Level 3 investments at the end of the period.
13. NEW ACCOUNTING PRONOUNCEMENTS
In June 2013, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2013-08, Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements. The ASU modifies the criteria used in defining an investment company under U.S. Generally Accepted Accounting Principles and also sets forth certain
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Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Income Securities Fund
13. NEW ACCOUNTING PRONOUNCEMENTS (continued)
measurement and disclosure requirements. Under the ASU, an entity that is registered under the 1940 Act automatically qualifies as an investment company. The ASU is effective for interim and annual reporting periods beginning after December 15, 2013. The Fund is currently reviewing the requirements and believes the adoption of this ASU will not have a material impact on its financial statements.
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 | |||
| EUR - Euro | ADR - American Depositary Receipt | |||
| GBP - British Pound | FRN - Floating Rate Note | |||
| L/C - Letter of Credit | ||||
| MTN - Medium Term Note | ||||
| PIK - Payment-In-Kind |
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FRANKLIN LARGE CAP GROWTH SECURITIES FUND
This semiannual report for Franklin Large Cap Growth Securities Fund covers the period ended June 30, 2013.
Performance Summary as of 6/30/13
Franklin Large Cap Growth Securities Fund – Class 1 delivered a +12.95% total return for the six-month period ended 6/30/13.
Performance reflects the Fund’s Class 1 operating expenses, but does not include any contract fees, expenses or sales charges. If they had been included, performance would be lower. These charges and deductions, particularly for variable life policies, can have a significant effect on contract values and insurance benefits. See the contract prospectus for a complete description of these expenses, including sales charges.
Franklin Large Cap Growth Securities Fund Class 1
Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares.
Current performance may differ from figures shown.
FLG-1
Table of Contents
Fund Goal and Main Investments: Franklin Large Cap Growth Securities Fund seeks capital appreciation. Under normal market conditions, the Fund invests at least 80% of its net assets in investments of large capitalization companies. For this Fund, large capitalization companies are those with market capitalization values within those of the top 50% of companies in the Russell 1000® Index at the time of purchase.1
Performance Overview
You can find the Fund’s six-month total return in the Performance Summary. In comparison, the Fund’s benchmark, the Standard & Poor’s® 500 Index (S&P 500®), posted a +13.82% total return.2
Economic and Market Overview
Modest U.S. economic growth, as measured by gross domestic product, characterized the six-month period ended June 30, 2013. Increasing job creation helped lower the unemployment rate and absorb new job seekers, and consumer spending remained strong. Accelerating new and existing home sales accompanied record-low mortgage rates, affordable housing prices, low new-home inventories and a six-year low in U.S. foreclosures. Manufacturing, a mainstay of economic productivity, expanded every month except May.
Budgetary agreement between Congress and the President on January 1 preserved lower income tax rates for most U.S. households, but concerns remained about how the expired payroll tax cut, far-reaching federal spending cuts, and future federal debt ceiling negotiations could affect the U.S. economic recovery. Washington’s lack of consensus on proposed expenditure reductions resulted in further across-the-board federal spending cuts starting in March. In May, Federal Reserve Board (Fed) Chairman Ben Bernanke said the Fed could gradually wind down its monthly purchases of mortgage-backed securities and Treasuries, assuming continued U.S. economic improvement. He clarified in June that such action could begin in the near future.
Amid these fiscal and monetary developments, a slow and steady U.S. recovery continued. U.S. stocks generated healthy returns as the S&P 500 and Dow Jones Industrial Average reached all-time highs during the period, even though Chairman Bernanke’s statements sparked volatility.1 Rising corporate profits and generally favorable
1. Please see Index Descriptions following the Fund Summaries.
2. © 2013 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: All investments involve risks, including possible loss of principal. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. The Fund may focus on particular sectors of the market from time to time, which can carry greater risks of adverse developments in such sectors. Smaller or midsized companies can be particularly sensitive to changing economic conditions, and their prospects for growth are less certain than those of larger, more established companies. Investments in foreign securities may involve special risks including currency fluctuations and economic and political uncertainty. The Fund is actively managed but there is no guarantee that the manager’s investment decisions will produce the desired results. The Fund’s prospectus also includes a description of the main investment risks.
FLG-2
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economic data bolstered investor confidence, but caution remained about the extent to which positive business and market results were dependent on continuation of the Fed’s accommodative monetary policy.
Investment Strategy
We employ our long-held strategy: bottom-up, individual-company, fundamental research aimed at opportunistically finding what we believe to be outstanding large-cap companies across all sectors, at valuations we believe understate their fair worth, with future growth potential being a key driver of estimated worth. In doing so, we work hard to ensure we are being adequately compensated for the risks that are inherent to all forecasting efforts, aiming to own those stocks that make the most sense from a risk/return perspective. We believe this disciplined, bottom-up analysis of future growth potential, current valuation and other risks on a stock-by-stock basis best supports our efforts to maintain a portfolio with superior risk/return characteristics and thus affords us the best prospects for strong performance over the long term.
Manager’s Discussion
Looking back on the key factors impacting the Fund’s returns during the six months under review, we would like to remind shareholders that our investment strategy is primarily bottom-up and driven by individual stock selection. However, we recognize that a sector-based discussion can be a helpful way to organize a portfolio review of key performance drivers.
From a sector perspective, our stock selection in financials and health care helped the Fund’s performance relative to the S&P 500. Particularly beneficial holdings in the financials sector were in benchmark futures and options products distributor CME Group, diversified financial services provider Wells Fargo and bank holding company Comerica.
In health care, health care benefits provider Aetna, global generic prescription drugmaker Actavis (formerly Watson Pharmaceuticals), Swiss diagnostic and therapeutic products manufacturer Roche Holding3 and biopharmaceutical firm Gilead Sciences aided relative results. Aetna’s share price steadily increased during the reporting period. Despite
3. This holding is not an index component.
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decreased profits as members resumed former health care usage, revenue and membership levels grew and the company raised its earnings guidance and its dividend in 2013. Aetna also expected its planned acquisition of Coventry Health Care to enhance its long-term strategy. Investors reacted positively to Actavis’ effort to acquire a specialty drugmaker. In other sectors, contributors included integrated energy company Exxon Mobil, diversified international family entertainment and media enterprise Walt Disney, and personal computing and mobile communication device manufacturer Apple, where our underweighting was beneficial as Apple lost value.
In contrast, the Fund’s stock selection in energy and materials detracted from returns relative to the S&P 500. Major detractors in these sectors included coal producer Walter Energy,3,4 oil and gas company Devon Energy, Africa-focused gold miner Randgold Resources3 and chemicals firms Potash Corp. of Saskatchewan3 and Celanese.3 Walter Energy suffered from decreased demand and lower prices for sales of metallurgical coal for the steel industry. However, the company increased its coal production and reduced related costs as it anticipated coal prices to recover. Stock selection and overweighting in information technology also hindered results, including our positions in information infrastructure provider EMC, electronic payment vendor VeriFone Systems3 and telecommunications products manufacturer QUALCOMM.
Thank you for your participation in Franklin Large Cap Growth Securities Fund. We look forward to serving your future investment needs.
4. Sold by period-end.
The foregoing information reflects our analysis, opinions and portfolio holdings as of June 30, 2013, 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 Large Cap Growth Securities Fund
6/30/13
Company Sector/Industry | % of Total Net Assets | |||
| Wells Fargo & Co. | 3.7% | |||
| Financials | ||||
| General Electric Co. | 2.5% | |||
| Industrials | ||||
| Apple Inc. | 2.5% | |||
| Information Technology | ||||
| Anadarko Petroleum Corp. | 2.3% | |||
| Energy | ||||
| Google Inc., A | 2.2% | |||
| Information Technology | ||||
| AT&T Inc. | 2.2% | |||
| Telecommunication Services | ||||
| Aetna Inc. | 2.1% | |||
| Health Care | ||||
| International Business Machines Corp. | 2.0% | |||
| Information Technology | ||||
| JPMorgan Chase & Co. | 1.9% | |||
| Financials | ||||
| QUALCOMM Inc. | 1.9% | |||
| Information Technology | ||||
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 Large Cap Growth Securities Fund Class 1
FLG-5
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Hypothetical Example for Comparison with Other Mutual Funds
Information in the second line (Hypothetical) of the table can help you compare ongoing expenses of the Fund with those of other mutual funds offered through the Contract. This information may not be used to estimate the actual ending account balance or expenses you incurred during the period. The hypothetical “Ending Account Value” is based on the Fund’s actual expense ratio and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Fund-Level Expenses Incurred During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds offered through a Contract.
| Class 1 | Beginning Account Value 1/1/13 | Ending Account Value 6/30/13 | Fund-Level Expenses Incurred During Period* 1/1/13–6/30/13 | |||||||||
Actual | $ | 1,000 | $ | 1,129.50 | $ | 4.22 | ||||||
Hypothetical (5% return | $ | 1,000 | $ | 1,020.83 | $ | 4.01 | ||||||
*Expenses are calculated using the most recent six-month annualized expense ratio for the Fund’s Class 1 shares (0.80%), which does not include any ongoing expenses of the Contract for which the Fund is an investment option, multiplied by the average account value over the period, multiplied by 181/365 to reflect the one-half year period.
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Franklin Templeton Variable Insurance Products Trust
Financial Highlights
Franklin Large Cap Growth Securities Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 1 | 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||||||
| ||||||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 16.43 | $ | 14.75 | $ | 15.07 | $ | 13.62 | $ | 10.66 | $ | 17.51 | ||||||||||||
|
| |||||||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.12 | 0.21 | 0.15 | 0.12 | 0.12 | 0.17 | ||||||||||||||||||
Net realized and unrealized gains (losses) | 2.01 | 1.65 | (0.33 | ) | 1.48 | 3.04 | (5.82 | ) | ||||||||||||||||
|
| |||||||||||||||||||||||
Total from investment operations | 2.13 | 1.86 | (0.18 | ) | 1.60 | 3.16 | (5.65 | ) | ||||||||||||||||
|
| |||||||||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income | (0.24 | ) | (0.18 | ) | (0.14 | ) | (0.15 | ) | (0.20 | ) | (0.24 | ) | ||||||||||||
Net realized gains | — | — | — | — | — | (0.96 | ) | |||||||||||||||||
|
| |||||||||||||||||||||||
Total distributions | (0.24 | ) | (0.18 | ) | (0.14 | ) | (0.15 | ) | (0.20 | ) | (1.20 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ | 18.32 | $ | 16.43 | $ | 14.75 | $ | 15.07 | $ | 13.62 | $ | 10.66 | ||||||||||||
|
| |||||||||||||||||||||||
Total returnc | 12.95% | 12.65% | (1.22)% | 11.85% | 30.04% | (34.39)% | ||||||||||||||||||
Ratios to average net assetsd | ||||||||||||||||||||||||
Expenses | 0.80% | 0.80% | 0.80% | 0.79% | 0.81% | e | 0.77% | e | ||||||||||||||||
Net investment income | 1.32% | 1.31% | 0.99% | 0.86% | 1.03% | 1.19% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 50,046 | $ | 46,756 | $ | 48,666 | $ | 58,265 | $ | 58,287 | $ | 51,651 | ||||||||||||
Portfolio turnover rate | 9.99% | 33.88% | 56.61% | 46.75% | 71.95% | 66.04% | ||||||||||||||||||
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 Large Cap Growth Securities Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 2 | 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||||||
| ||||||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 16.20 | $ | 14.54 | $ | 14.86 | $ | 13.43 | $ | 10.50 | $ | 17.25 | ||||||||||||
|
| |||||||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.09 | 0.17 | 0.11 | 0.08 | 0.09 | 0.13 | ||||||||||||||||||
Net realized and unrealized gains (losses) | 1.99 | 1.62 | (0.33 | ) | 1.46 | 3.00 | (5.73 | ) | ||||||||||||||||
|
| |||||||||||||||||||||||
Total from investment operations | 2.08 | 1.79 | (0.22 | ) | 1.54 | 3.09 | (5.60 | ) | ||||||||||||||||
|
| |||||||||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income | (0.19 | ) | (0.13 | ) | (0.10 | ) | (0.11 | ) | (0.16 | ) | (0.19 | ) | ||||||||||||
Net realized gains | — | — | — | — | — | (0.96 | ) | |||||||||||||||||
|
| |||||||||||||||||||||||
Total distributions | (0.19 | ) | (0.13 | ) | (0.10 | ) | (0.11 | ) | (0.16 | ) | (1.15 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ | 18.09 | $ | 16.20 | $ | 14.54 | $ | 14.86 | $ | 13.43 | $ | 10.50 | ||||||||||||
|
| |||||||||||||||||||||||
Total returnc | 12.85% | 12.37% | (1.51)% | 11.59% | 29.73% | (34.53)% | ||||||||||||||||||
Ratios to average net assetsd | ||||||||||||||||||||||||
Expenses | 1.05% | 1.05% | 1.05% | 1.04% | 1.06% | e | 1.02% | e | ||||||||||||||||
Net investment income | 1.07% | 1.06% | 0.74% | 0.61% | 0.78% | 0.94% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 283,156 | $ | 278,989 | $ | 293,226 | $ | 357,405 | $ | 373,821 | $ | 328,597 | ||||||||||||
Portfolio turnover rate | 9.99% | 33.88% | 56.61% | 46.75% | 71.95% | 66.04% | ||||||||||||||||||
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.
FLG-8
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited)
| Franklin Large Cap Growth Securities Fund | Country | Shares | Value | |||||||
Common Stocks 97.1% | ||||||||||
Consumer Discretionary 9.8% | ||||||||||
a Amazon.com Inc. | United States | 6,600 | $ | 1,832,754 | ||||||
a BorgWarner Inc. | United States | 70,900 | 6,108,035 | |||||||
Comcast Corp., A | United States | 123,700 | 5,180,556 | |||||||
a Dollar General Corp. | United States | 45,780 | 2,318,757 | |||||||
Lowe’s Cos. Inc. | United States | 40,500 | 1,656,450 | |||||||
McDonald’s Corp. | United States | 31,300 | 3,098,700 | |||||||
NIKE Inc., B | United States | 65,800 | 4,190,144 | |||||||
Target Corp. | United States | 32,900 | 2,265,494 | |||||||
The Walt Disney Co. | United States | 97,241 | 6,140,769 | |||||||
|
| |||||||||
| 32,791,659 | ||||||||||
|
| |||||||||
Consumer Staples 9.0% | ||||||||||
Altria Group Inc. | United States | 57,400 | 2,008,426 | |||||||
The Coca-Cola Co. | United States | 81,000 | 3,248,910 | |||||||
CVS Caremark Corp. | United States | 64,500 | 3,688,110 | |||||||
Mead Johnson Nutrition Co., A | United States | 27,300 | 2,162,979 | |||||||
PepsiCo Inc. | United States | 69,200 | 5,659,868 | |||||||
Philip Morris International Inc. | United States | 59,800 | 5,179,876 | |||||||
The Procter & Gamble Co. | United States | 57,045 | 4,391,895 | |||||||
Wal-Mart Stores Inc. | United States | 27,000 | 2,011,230 | |||||||
Whole Foods Market Inc. | United States | 32,600 | 1,678,248 | |||||||
|
| |||||||||
| 30,029,542 | ||||||||||
|
| |||||||||
Energy 9.6% | ||||||||||
Anadarko Petroleum Corp. | United States | 87,850 | 7,548,951 | |||||||
Chevron Corp. | United States | 27,200 | 3,218,848 | |||||||
ConocoPhillips | United States | 64,700 | 3,914,350 | |||||||
Devon Energy Corp. | United States | 100,200 | 5,198,376 | |||||||
Exxon Mobil Corp. | United States | 38,000 | 3,433,300 | |||||||
Halliburton Co. | United States | 74,700 | 3,116,484 | |||||||
a McDermott International Inc. | United States | 194,700 | 1,592,646 | |||||||
Schlumberger Ltd. | United States | 54,070 | 3,874,656 | |||||||
|
| |||||||||
| 31,897,611 | ||||||||||
|
| |||||||||
Financials 15.0% | ||||||||||
American Express Co. | United States | 26,400 | 1,973,664 | |||||||
Bank of America Corp. | United States | 179,100 | 2,303,226 | |||||||
BlackRock Inc. | United States | 12,900 | 3,313,365 | |||||||
Citigroup Inc. | United States | 62,190 | 2,983,254 | |||||||
CME Group Inc. | United States | 67,050 | 5,094,459 | |||||||
Comerica Inc. | United States | 58,400 | 2,326,072 | |||||||
a IntercontinentalExchange Inc. | United States | 4,400 | 782,144 | |||||||
Invesco Ltd. | United States | 81,300 | 2,585,340 | |||||||
JPMorgan Chase & Co. | United States | 122,545 | 6,469,151 | |||||||
MetLife Inc. | United States | 40,100 | 1,834,976 | |||||||
Prudential Financial Inc. | United States | 35,100 | 2,563,353 | |||||||
U.S. Bancorp | United States | 152,127 | 5,499,391 | |||||||
Wells Fargo & Co. | United States | 298,300 | 12,310,841 | |||||||
|
| |||||||||
| 50,039,236 | ||||||||||
|
| |||||||||
Health Care 14.4% | ||||||||||
a Actavis Inc. | United States | 34,000 | 4,291,480 | |||||||
Aetna Inc. | United States | 112,600 | 7,154,604 | |||||||
a Express Scripts Holding Co. | United States | 84,700 | 5,225,143 | |||||||
FLG-9
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Franklin Large Cap Growth Securities Fund | Country | Shares | Value | |||||||
Common Stocks (continued) | ||||||||||
Health Care (continued) | ||||||||||
a Gilead Sciences Inc. | United States | 77,600 | $ | 3,973,896 | ||||||
a HMS Holdings Corp. | United States | 30,300 | 705,990 | |||||||
Johnson & Johnson | United States | 52,600 | 4,516,236 | |||||||
Merck & Co. Inc. | United States | 100,975 | 4,690,289 | |||||||
Pfizer Inc. | United States | 149,800 | 4,195,898 | |||||||
Roche Holding AG, ADR | Switzerland | 100,000 | 6,186,500 | |||||||
Teva Pharmaceutical Industries Ltd., ADR | Israel | 77,500 | 3,038,000 | |||||||
a Thoratec Corp. | United States | 78,100 | 2,445,311 | |||||||
Zoetis Inc. | United States | 47,213 | 1,458,409 | |||||||
|
| |||||||||
| 47,881,756 | ||||||||||
|
| |||||||||
Industrials 9.0% | ||||||||||
The Boeing Co. | United States | 20,700 | 2,120,508 | |||||||
Caterpillar Inc. | United States | 20,900 | 1,724,041 | |||||||
Emerson Electric Co. | United States | 28,600 | 1,559,844 | |||||||
FedEx Corp. | United States | 56,600 | 5,579,628 | |||||||
General Electric Co. | United States | 363,500 | 8,429,565 | |||||||
Honeywell International Inc. | United States | 15,200 | 1,205,968 | |||||||
Norfolk Southern Corp. | United States | 15,800 | 1,147,870 | |||||||
Union Pacific Corp. | United States | 23,200 | 3,579,296 | |||||||
United Technologies Corp. | United States | 50,100 | 4,656,294 | |||||||
|
| |||||||||
| 30,003,014 | ||||||||||
|
| |||||||||
Information Technology 19.9% | ||||||||||
Apple Inc. | United States | 21,100 | 8,357,288 | |||||||
Broadcom Corp., A | United States | 38,900 | 1,313,264 | |||||||
Cisco Systems Inc. | United States | 96,400 | 2,343,484 | |||||||
Corning Inc. | United States | 140,100 | 1,993,623 | |||||||
a eBay Inc. | United States | 23,100 | 1,194,732 | |||||||
EMC Corp. | United States | 119,100 | 2,813,142 | |||||||
a Google Inc., A | United States | 8,500 | 7,483,145 | |||||||
Hewlett-Packard Co. | United States | 55,600 | 1,378,880 | |||||||
Intel Corp. | United States | 176,300 | 4,269,986 | |||||||
International Business Machines Corp. | United States | 35,000 | 6,688,850 | |||||||
MasterCard Inc., A | United States | 6,330 | 3,636,585 | |||||||
Microsoft Corp. | United States | 125,800 | 4,343,874 | |||||||
a Nuance Communications Inc. | United States | 123,600 | 2,271,768 | |||||||
Oracle Corp. | United States | 88,700 | 2,724,864 | |||||||
QUALCOMM Inc. | United States | 104,290 | 6,370,033 | |||||||
a Semtech Corp. | United States | 33,900 | 1,187,517 | |||||||
a VeriFone Systems Inc. | United States | 66,300 | 1,114,503 | |||||||
Visa Inc., A | United States | 25,700 | 4,696,675 | |||||||
Xilinx Inc. | United States | 48,400 | 1,917,124 | |||||||
a Yahoo! Inc. | United States | 13,200 | 331,452 | |||||||
|
| |||||||||
| 66,430,789 | ||||||||||
|
| |||||||||
Materials 4.1% | ||||||||||
Carpenter Technology Corp. | United States | 14,600 | 658,022 | |||||||
Celanese Corp., A | United States | 58,400 | 2,616,320 | |||||||
E. I. du Pont de Nemours and Co. | United States | 48,600 | 2,551,500 | |||||||
Freeport-McMoRan Copper & Gold Inc., B | United States | 62,900 | 1,736,669 | |||||||
LyondellBasell Industries NV, A | United States | 22,790 | 1,510,065 | |||||||
Potash Corp. of Saskatchewan Inc. | Canada | 70,900 | 2,705,577 | |||||||
Randgold Resources Ltd., ADR | United Kingdom | 27,921 | 1,788,340 | |||||||
|
| |||||||||
| 13,566,493 | ||||||||||
|
| |||||||||
FLG-10
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Franklin Large Cap Growth Securities Fund | Country | Shares | Value | |||||||
Common Stocks (continued) | ||||||||||
Telecommunication Services 3.0% | ||||||||||
AT&T Inc. | United States | 211,362 | $ | 7,482,215 | ||||||
Vodafone Group PLC, ADR | United Kingdom | 85,100 | 2,445,774 | |||||||
|
| |||||||||
| 9,927,989 | ||||||||||
|
| |||||||||
Utilities 3.3% | ||||||||||
American Electric Power Co. Inc. | United States | 38,400 | 1,719,552 | |||||||
Exelon Corp. | United States | 82,100 | 2,535,248 | |||||||
FirstEnergy Corp. | United States | 29,600 | 1,105,264 | |||||||
PG&E Corp. | United States | 104,650 | 4,785,644 | |||||||
The Southern Co. | United States | 19,600 | 864,948 | |||||||
|
| |||||||||
| 11,010,656 | ||||||||||
|
| |||||||||
Total Common Stocks (Cost $199,817,206) | 323,578,745 | |||||||||
|
| |||||||||
| Principal Amount | ||||||||||
Short Term Investments (Cost $10,234,790) 3.1% | ||||||||||
Repurchase Agreements 3.1% | ||||||||||
b Joint Repurchase Agreement, 0.088%, 7/01/13 (Maturity Value $10,234,865) | United States | $ | 10,234,790 | 10,234,790 | ||||||
Barclays Capital Inc. (Maturity Value $1,166,570) | ||||||||||
BNP Paribas Securities Corp. (Maturity Value $1,296,246) | ||||||||||
Credit Suisse Securities (USA) LLC (Maturity Value $1,620,281) | ||||||||||
Deutsche Bank Securities Inc. (Maturity Value $1,290,821) | ||||||||||
HSBC Securities (USA) Inc. (Maturity Value $2,754,509) | ||||||||||
Merrill Lynch, Pierce, Fenner & Smith Inc. (Maturity Value $1,296,246) | ||||||||||
Morgan Stanley & Co. LLC (Maturity Value $810,192) | ||||||||||
Collateralized by U.S. Government Agency Securities, 0.13% - 4.625%, 7/09/13 - 8/07/17; cU.S.Government Agency Discount Notes, 8/01/13 - 4/21/14; cU.S. Treasury Bills, 7/11/13 - 5/01/14; U.S. Treasury Notes, 0.125% - 4.625%, 6/30/13 - 4/30/20; U.S. Treasury Notes, Index Linked, 1.875% - 2.00%, 7/15/13 -1/15/14; and U.S. Treasury Bonds, 8.75%, 5/15/17 (valued at $10,448,173) | ||||||||||
|
| |||||||||
Total Investments (Cost $210,051,996) 100.2% | 333,813,535 | |||||||||
Other Assets, less Liabilities (0.2)% | (611,393 | ) | ||||||||
|
| |||||||||
Net Assets 100.0% | $ | 333,202,142 | ||||||||
|
| |||||||||
See Abbreviations on page FLG-20.
aNon-income producing.
bSee Note 1(c) regarding joint repurchase agreement.
cThe security is traded on a discount basis with no stated coupon rate.
The accompanying notes are an integral part of these financial statements.
FLG-11
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements
Statement of Assets and Liabilities
June 30, 2013 (unaudited)
| Franklin Large Cap Growth Securities Fund | ||||
Assets: | ||||
Investments in securities: | ||||
Cost - Unaffiliated issuers | $ | 199,817,206 | ||
Cost - Repurchase agreements | 10,234,790 | |||
|
| |||
Total cost of investments | $ | 210,051,996 | ||
|
| |||
Value - Unaffiliated issuers | $ | 323,578,745 | ||
Value - Repurchase agreements | 10,234,790 | |||
|
| |||
Total value of investments | 333,813,535 | |||
Receivables: | ||||
Capital shares sold | 57,936 | |||
Dividends | 554,067 | |||
|
| |||
Total assets | 334,425,538 | |||
|
| |||
Liabilities: | ||||
Payables: | ||||
Investment securities purchased | 199,444 | |||
Capital shares redeemed | 554,088 | |||
Affiliates | 335,976 | |||
Reports to shareholders | 100,818 | |||
Accrued expenses and other liabilities | 33,070 | |||
|
| |||
Total liabilities | 1,223,396 | |||
|
| |||
Net assets, at value | $ | 333,202,142 | ||
|
| |||
Net assets consist of: | ||||
Paid-in capital | $ | 264,199,068 | ||
Undistributed net investment income | 1,929,483 | |||
Net unrealized appreciation (depreciation) | 123,761,379 | |||
Accumulated net realized gain (loss) | (56,687,788 | ) | ||
|
| |||
Net assets, at value | $ | 333,202,142 | ||
|
| |||
Class 1: | ||||
Net assets, at value | $ | 50,046,464 | ||
|
| |||
Shares outstanding | 2,731,895 | |||
|
| |||
Net asset value and maximum offering price per share | $ | 18.32 | ||
|
| |||
Class 2: | ||||
Net assets, at value | $ | 283,155,678 | ||
|
| |||
Shares outstanding | 15,656,389 | |||
|
| |||
Net asset value and maximum offering price per share | $ | 18.09 | ||
|
| |||
The accompanying notes are an integral part of these financial statements.
FLG-12
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Operations
for the six months ended June 30, 2013 (unaudited)
| Franklin Large Cap Growth Securities Fund | ||||
Investment income: | ||||
Dividends | $ | 3,602,458 | ||
Interest | 4,612 | |||
|
| |||
Total investment income | 3,607,070 | |||
|
| |||
Expenses: | ||||
Management fees (Note 3a) | 1,275,712 | |||
Distribution fees - Class 2 (Note 3c) | 365,026 | |||
Unaffiliated transfer agent fees | 45 | |||
Custodian fees (Note 4) | 3,465 | |||
Reports to shareholders | 55,300 | |||
Professional fees | 20,145 | |||
Trustees’ fees and expenses | 708 | |||
Other | 8,922 | |||
|
| |||
Total expenses | 1,729,323 | |||
|
| |||
Net investment income | 1,877,747 | |||
|
| |||
Realized and unrealized gains (losses): | ||||
Net realized gain (loss) from: | ||||
Investments | 8,477,383 | |||
Foreign currency transactions | (9,925 | ) | ||
|
| |||
Net realized gain (loss) | 8,467,458 | |||
|
| |||
Net change in unrealized appreciation (depreciation) on: | ||||
Investments | 30,653,964 | |||
Translation of other assets and liabilities denominated in foreign currencies | (160 | ) | ||
|
| |||
Net change in unrealized appreciation (depreciation) | 30,653,804 | |||
|
| |||
Net realized and unrealized gain (loss) | 39,121,262 | |||
|
| |||
Net increase (decrease) in net assets resulting from operations | $ | 40,999,009 | ||
|
| |||
The accompanying notes are an integral part of these financial statements.
FLG-13
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statements of Changes in Net Assets
| Franklin Large Cap Growth Securities Fund | ||||||||
| Six Months Ended June 30, 2013 (unaudited) | Year Ended December 31, 2012 | |||||||
| ||||||||
Increase (decrease) in net assets: | ||||||||
Operations: | ||||||||
Net investment income | $ | 1,877,747 | $ | 3,771,324 | ||||
Net realized gain (loss) from investments and foreign currency transactions | 8,467,458 | 26,402,844 | ||||||
Net change in unrealized appreciation (depreciation) on investments and translation of other assets and liabilities denominated in foreign currencies | 30,653,804 | 10,750,316 | ||||||
| ||||||||
Net increase (decrease) in net assets resulting from operations | 40,999,009 | 40,924,484 | ||||||
| ||||||||
Distributions to shareholders from: | ||||||||
Net investment income: | ||||||||
Class 1 | (652,010 | ) | (544,179 | ) | ||||
Class 2 | (3,061,884 | ) | (2,394,442 | ) | ||||
| ||||||||
Total distributions to shareholders | (3,713,894 | ) | (2,938,621 | ) | ||||
| ||||||||
Capital share transactions: (Note 2) | ||||||||
Class 1 | (2,048,093 | ) | (7,366,150 | ) | ||||
Class 2 | (27,780,124 | ) | (46,766,651 | ) | ||||
| ||||||||
Total capital share transactions | (29,828,217 | ) | (54,132,801 | ) | ||||
| ||||||||
Net increase (decrease) in net assets | 7,456,898 | (16,146,938 | ) | |||||
Net assets: | ||||||||
Beginning of period | 325,745,244 | 341,892,182 | ||||||
| ||||||||
End of period | $ | 333,202,142 | $ | 325,745,244 | ||||
| ||||||||
Undistributed net investment income included in net assets: | ||||||||
End of period | $ | 1,929,483 | $ | 3,765,630 | ||||
| ||||||||
The accompanying notes are an integral part of these financial statements.
FLG-14
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited)
Franklin Large Cap Growth Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Templeton Variable Insurance Products Trust (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end investment company, consisting of twenty-one separate funds. The Franklin Large 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, 2013, 41.18% of the Fund’s shares were held through one insurance company. Investment activities of these insurance company separate accounts could have a material impact on the Fund. The Fund offers two classes of shares: Class 1 and Class 2. Each class of shares differs by its distribution fees, voting rights on matters affecting a single class and its exchange privilege.
The following summarizes the Fund’s significant accounting policies.
a. Financial Instrument Valuation
The Fund’s investments in 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 Board), the Fund’s administrator, investment manager and other affiliates have formed the Valuation and Liquidity Oversight Committee (VLOC). The VLOC provides administration and oversight of the Fund’s valuation policies and procedures, which are approved annually by the Board. Among other things, these procedures allow the Fund to 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 (OTC) 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. Repurchase agreements are valued at cost, which approximates market value.
The Fund has procedures to determine the fair value of financial instruments for which market prices are not reliable or readily available. Under these procedures, the VLOC convenes on a regular basis to review such financial instruments and considers a number of factors, including significant unobservable valuation inputs, when arriving at fair value. The VLOC 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. An income-based valuation approach may also be used 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. The VLOC employs various methods for calibrating these valuation approaches including a regular review of key inputs and assumptions, transactional back-testing or disposition analysis, and reviews of any related market activity.
Trading in securities on foreign securities stock exchanges and OTC 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 VLOC monitors price movements following the close of trading in foreign stock markets through a series of country specific market proxies (such as baskets of
FLG-15
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Large Cap Growth Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
a. Financial Instrument Valuation (continued)
American Depositary 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.
In addition, certain foreign markets may be open on days that the NYSE is closed, which could result in differences between the value of the Fund’s portfolio securities on the last business day and the last calendar day of the reporting period. Any significant security valuation changes due to an open foreign market are adjusted and reflected by the Funds for financial reporting purposes.
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 Board.
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%. Repurchase agreements are subject to the terms of Master Repurchase Agreements (MRAs) with approved counterparties (sellers). The MRAs contain various provisions, including but not limited to events of default and maintenance of collateral for repurchase agreements. In the event of default by either the seller or the Fund, certain MRAs may permit the non-defaulting party to net and close-out all transactions, if any, traded under such agreements. The Fund may sell securities it holds as collateral and apply the proceeds towards the repurchase price and any other amounts owed by the seller to the Fund in the event of default by the seller. This could involve costs or delays in addition to a loss on the securities if their value falls below the repurchase price owed by the seller. The joint repurchase agreement held by the Fund at period end, as indicated in the Statement of Investments, had been entered into on June 28, 2013.
FLG-16
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Large Cap Growth Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
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 if applicable, excise taxes. As a result, no provision for U.S. federal income taxes is required.
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 in an amount that would be payable if the securities were disposed of on the valuation date.
The Fund recognizes the tax benefits of uncertain tax positions only when the position is “more likely than not” to be sustained upon examination by the tax authorities based on the technical merits of the tax position. As of June 30, 2013, and for all open tax years, the Fund has determined that no liability for unrecognized tax benefits is required in the Fund’s financial statements related to uncertain tax positions taken on a tax return (or expected to be taken on future tax returns). 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 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. 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.
FLG-17
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Large Cap Growth Securities Fund
2. SHARES OF BENEFICIAL INTEREST
At June 30, 2013, 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, 2013 | Year Ended December 31, 2012 | |||||||||||||||
| Class 1 Shares: | Shares | Amount | Shares | Amount | ||||||||||||
Shares sold | 20,488 | $ | 354,199 | 9,386 | $ | 151,925 | ||||||||||
Shares issued in reinvestment of distributions | 35,282 | 652,010 | 35,290 | 544,179 | ||||||||||||
Shares redeemed | (169,265 | ) | (3,054,302 | ) | (499,073 | ) | (8,062,254 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | (113,495 | ) | $ | (2,048,093 | ) | (454,397 | ) | $ | (7,366,150 | ) | ||||||
| ||||||||||||||||
Class 2 Shares: | ||||||||||||||||
Shares sold | 521,355 | $ | 9,092,727 | 1,271,914 | $ | 20,054,584 | ||||||||||
Shares issued in reinvestment of distributions | 167,774 | 3,061,884 | 157,219 | 2,394,442 | ||||||||||||
Shares redeemed | (2,249,290 | ) | (39,934,735 | ) | (4,380,008 | ) | (69,215,677 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | (1,560,161 | ) | $ | (27,780,124 | ) | (2,950,875 | ) | $ | (46,766,651 | ) | ||||||
| ||||||||||||||||
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 $500 million | |
| 0.625% | Over $500 million, up to and including $1 billion | |
| 0.500% | In excess of $1 billion |
b. Administrative Fees
FT Services, under terms of an agreement, provides administrative services to the Fund and is not paid by the Fund for the services.
c. Distribution Fees
The Board has adopted a distribution plan for Class 2 shares pursuant to Rule 12b-1 under the 1940 Act. Under the Fund’s compensation distribution plan, 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. Some distribution fees are not charged on shares held by affiliates. The Board has agreed to limit the current rate to 0.25% per year for Class 2.
FLG-18
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Large Cap Growth Securities Fund
3. TRANSACTIONS WITH AFFILIATES (continued)
d. Transfer Agent Fees
Investor Services, under terms of an agreement, performs shareholder servicing for the Fund and is not paid by the Fund for the services.
4. EXPENSE OFFSET ARRANGEMENT
The Fund has entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Fund’s custodian expenses. During the period ended June 30, 2013, there were no credits earned.
5. INCOME TAXES
For tax purposes, capital losses may be carried over to offset future capital gains. Capital loss carryforwards with no expiration, if any, must be fully utilized before those losses with expiration dates. At December 31, 2012, the Fund had capital loss carryforwards of $58,674,865 expiring in 2017.
At June 30, 2013, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
Cost of investments | $ | 215,324,494 | ||
|
| |||
Unrealized appreciation | $ | 121,779,296 | ||
Unrealized depreciation | (3,290,255 | ) | ||
|
| |||
Net unrealized appreciation (depreciation) | $ | 118,489,041 | ||
|
| |||
Differences between income and/or capital gains as determined on a book basis and a tax basis are 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, 2013, aggregated $32,697,944 and $62,505,565, respectively.
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 $1.5 billion (Global Credit Facility) which matures on January 17, 2014. 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 0.07% based upon the unused portion of the Global Credit Facility. These fees are reflected in other expenses on the Statement of Operations. During the period ended June 30, 2013, the Fund did not use the Global Credit Facility.
FLG-19
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Large Cap Growth Securities Fund
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 financial instruments and are summarized in the following fair value hierarchy:
| • | Level 1 – quoted prices in active markets for identical financial instruments |
| • | Level 2 – other significant observable inputs (including quoted prices for similar financial instruments, interest rates, prepayment speed, credit risk, etc.) |
| • | Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of financial instruments) |
The inputs or methodology used for valuing financial instruments are not an indication of the risk associated with investing in those financial instruments.
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.
A summary of inputs used as of June 30, 2013, in valuing the Fund’s assets carried at fair value, is as follows:
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
|
| |||||||||||||||
Assets: | ||||||||||||||||
Investments in Securities: | ||||||||||||||||
Equity Investmentsa | $ | 323,578,745 | $ | — | $ | — | $ | 323,578,745 | ||||||||
Short Term Investments | — | 10,234,790 | — | 10,234,790 | ||||||||||||
|
| |||||||||||||||
Total Investments in Securities | $ | 323,578,745 | $ | 10,234,790 | $ | — | $ | 333,813,535 | ||||||||
|
| |||||||||||||||
aFor detailed categories, see the accompanying Statement of Investments.
9. NEW ACCOUNTING PRONOUNCEMENTS
In June 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2013-08, Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements. The ASU modifies the criteria used in defining an investment company under U.S. Generally Accepted Accounting Principles and also sets forth certain measurement and disclosure requirements. Under the ASU, an entity that is registered under the 1940 Act automatically qualifies as an investment company. The ASU is effective for interim and annual reporting periods beginning after December 15, 2013. The Fund is currently reviewing the requirements and believes the adoption of this ASU will not have a material impact on its financial statements.
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.
ABBREVIATIONS | ||||
| Selected Portfolio | ||||
| ADR - American Depositary Receipt |
FLG-20
Table of Contents
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, 2013.
Performance Summary as of 6/30/13
Franklin Rising Dividends Securities Fund – Class 1 delivered a +13.32% total return for the six-month period ended 6/30/13.
Performance reflects the Fund’s Class 1 operating expenses, but does not include any contract fees, expenses or sales charges. If they had been included, performance would be lower. These charges and deductions, particularly for variable life policies, can have a significant effect on contract values and insurance benefits. See the contract prospectus for a complete description of these expenses, including sales charges.
Franklin Rising Dividends Securities Fund – Class 1
Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares.
Current performance may differ from figures shown.
FRD-1
Table of Contents
Fund Goal and Main Investments: Franklin Rising Dividends Securities Fund seeks long-term capital appreciation, with preservation of capital as an important consideration. Under normal market conditions, the Fund invests at least 80% of its net assets in equity securities of companies that have paid rising dividends.
Performance Overview
You can find the Fund’s six-month total return in the Performance Summary. In comparison, the Standard & Poor’s® 500 Index (S&P 500®) rose 13.82% 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
Modest U.S. economic growth, as measured by gross domestic product, characterized the six-month period ended June 30, 2013. Increasing job creation helped lower the unemployment rate and absorb new job seekers, and consumer spending remained strong. Accelerating new and existing home sales accompanied record-low mortgage rates, affordable housing prices, low new-home inventories and a six-year low in U.S. foreclosures. Manufacturing, a mainstay of economic productivity, expanded every month except May.
Budgetary agreement between Congress and the President on January 1 preserved lower income tax rates for most U.S. households, but concerns remained about how the expired payroll tax cut, far-reaching federal spending cuts, and future federal debt ceiling negotiations could affect the U.S. economic recovery. Washington’s lack of consensus on proposed expenditure reductions resulted in further across-the-board federal spending cuts starting in March. In May, Federal Reserve Board (Fed) Chairman Ben Bernanke said the Fed could gradually wind down its monthly purchases of mortgage-backed securities and Treasuries, assuming continued U.S. economic improvement. He clarified in June that such action could begin in the near future.
Amid these fiscal and monetary developments, a slow and steady U.S. recovery continued. U.S. stocks generated healthy returns as the S&P 500 and Dow Jones Industrial Average reached all-time highs during the period, even though Chairman Bernanke’s statements sparked
1. Source: © 2013 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: All investments involve risks, including possible loss of principal. Value securities may not increase in price as anticipated or may decline further in value. While smaller and midsized companies may offer substantial opportunities for capital growth, they also involve heightened risks and should be considered speculative. Historically, smaller- and midsized-company securities have been more volatile in price than larger company securities, especially over the short term. The Fund is actively managed but there is no guarantee that the manager’s investment decisions will produce the desired results. The Fund’s prospectus also includes a description of the main investment risks.
FRD-2
Table of Contents
volatility.2 Rising corporate profits and generally favorable economic data bolstered investor confidence, but caution remained about the extent to which positive business and market results were dependent on continuation of the Fed’s accommodative monetary policy.
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, three holdings that helped absolute Fund performance were West Pharmaceutical Services, Dover and Becton, Dickinson. The stock price of West Pharmaceutical Services, a medical devices manufacturer, rose as the company modestly raised its earnings guidance as its business mix continued to shift toward higher value products. West Pharmaceutical Services has raised its dividend for the past 20 years. Dover, a manufacturer of equipment and industrial products, recovered during the period as investors grew more comfortable that operating results were poised to improve in its communications technologies segment. The company has had 57 consecutive years of dividend increases. Shares of Becton, Dickinson, a manufacturer of medical devices, rebounded after a poor 2012 as its organic sales growth rate reaccelerated in the most recent quarter. Becton, Dickinson has raised its dividend for the past 41 years.
Detractors from performance included Brady, Family Dollar Stores and Superior Uniform Group. Brady, a manufacturer of industrial identification solutions, reported disappointing sales of workplace safety products, which overshadowed the announcement of its intention to divest its die cut business. Family Dollar Stores decreased its earnings guidance for 2013 based on the impact of ongoing economic uncertainty for discretionary merchandise sales. Superior Uniform Group, a manufacturer of
2. Please see Index Descriptions following the Fund Summaries.
FRD-3
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uniforms, corporate identification, career apparel and accessories, declined late in the period partly as a result of the sharp increase in long-term interest rates.
During the period, we initiated new positions in Bunge, a global agribusiness and food company, which has 13 years of consecutive dividend increases; QUALCOMM, a leading developer and innovator of advanced wireless technologies, which has a long history of dividend increases; and Honeywell International, a diversified technology and manufacturing company, which has raised its dividend in eight out of the past 10 years. We did not add to or completely liquidate any existing positions. However, we did reduce our holdings in West Pharmaceutical Services, Roper Industries and Procter & Gamble, among others.
Our 10 largest positions on June 30, 2013, represented 39.2% 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 308% in the past 10 years. Their most recent year-over-year dividend increases averaged 12.5% with a yield of 2.1% on June 30, 2013, and a dividend payout ratio of 31%, based on estimates of calendar year 2013 operating earnings. The average price/earnings ratio was 15.5 times calendar year 2013 estimates versus 14.5 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, 2013, 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
6/30/13
Company Sector/Industry | % of Total Net Assets | |||
| Praxair Inc. | 4.6% | |||
| Materials | ||||
| Roper Industries Inc. | 4.5% | |||
| Electrical Equipment | ||||
| Dover Corp. | 4.5% | |||
| Machinery | ||||
| United Technologies Corp. | 4.4% | |||
| Aerospace & Defense | ||||
| International Business Machines Corp. | 4.1% | |||
| Software & Services | ||||
| Chevron Corp. | 4.0% | |||
| Energy | ||||
| Johnson & Johnson | 3.5% | |||
| Pharmaceuticals, Biotechnology & Life Sciences | ||||
| Wal-Mart Stores Inc. | 3.3% | |||
| Food & Staples Retailing | ||||
| Becton, Dickinson and Co. | 3.2% | |||
| Health Care Equipment & Services | ||||
| Family Dollar Stores Inc. | 3.1% | |||
| 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 (SOI).
FRD-4
Table of Contents
Fund Expenses
As an investor in a variable insurance contract (Contract) that indirectly provides for investment in an underlying mutual fund, you can incur transaction and/or ongoing expenses at both the Fund level and the Contract level.
| • | Transaction expenses can include sales charges (loads) on purchases, surrender fees, transfer fees and premium taxes. |
| • | Ongoing expenses can include management fees, distribution and service (12b-1) fees, contract fees, annual maintenance fees, mortality and expense risk fees and other fees and expenses. All mutual funds and Contracts have some types of ongoing expenses. |
The expenses shown in the table are meant to highlight ongoing expenses at the Fund level only and do not include ongoing expenses at the Contract level, or transaction expenses at either the Fund or Contract levels. While the Fund does not have transaction expenses, if the transaction and ongoing expenses at the Contract level were included, the expenses shown below would be higher. You should consult your Contract prospectus or disclosure document for more information.
The table shows Fund-level ongoing expenses and can help you understand these expenses and compare them with those of other mutual funds offered through the Contract. The table assumes a $1,000 investment held for the six months indicated. Please refer to the Fund prospectus for additional information on operating expenses.
Actual Fund Expenses
The first line (Actual) of the table provides actual account values and expenses. The “Ending Account Value” is derived from the Fund’s actual return, which includes the effect of ongoing Fund expenses, but does not include the effect of ongoing Contract expenses.
You can estimate the Fund-level expenses you incurred during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:
| 1. | Divide your account value by $1,000. |
If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6.
| 2. | Multiply the result by the number under the heading “Fund-Level Expenses Incurred During Period.” |
If Fund-Level Expenses Incurred During Period were $7.50, then 8.6 x $7.50 = $64.50.
In this illustration, the estimated expenses incurred this period at the Fund level are $64.50.
Franklin Rising Dividends Securities Fund – Class 1
FRD-5
Table of Contents
Hypothetical Example for Comparison with Other Mutual Funds
Information in the second line (Hypothetical) of the table can help you compare ongoing expenses of the Fund with those of other mutual funds offered through the Contract. This information may not be used to estimate the actual ending account balance or expenses you incurred during the period. The hypothetical “Ending Account Value” is based on the Fund’s actual expense ratio and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Fund-Level Expenses Incurred During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds offered through a Contract.
| Class 1 | Beginning Account Value 1/1/13 | Ending Account Value 6/30/13 | Fund-Level Expenses Incurred During Period* 1/1/13–6/30/13 | |||||||||
Actual | $ | 1,000 | $ | 1,133.20 | $ | 3.28 | ||||||
Hypothetical (5% return | $ | 1,000 | $ | 1,021.72 | $ | 3.11 | ||||||
*Expenses are calculated using the most recent six-month annualized expense ratio for the Fund’s Class 1 shares (0.62%), 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
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Highlights
Franklin Rising Dividends Securities Fund
| Six Months Ended June 30, 2013 (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 1 | 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||||||
| ||||||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 22.03 | $ | 20.01 | $ | 19.15 | $ | 16.13 | $ | 13.96 | $ | 19.61 | ||||||||||||
|
| |||||||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.19 | 0.41 | 0.36 | 0.32 | 0.14 | c | 0.35 | |||||||||||||||||
Net realized and unrealized gains (losses) | 2.75 | 2.00 | 0.83 | 3.01 | 2.28 | (5.51 | ) | |||||||||||||||||
|
| |||||||||||||||||||||||
Total from investment operations | 2.94 | 2.41 | 1.19 | 3.33 | 2.42 | (5.16 | ) | |||||||||||||||||
|
| |||||||||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income | (0.45 | ) | (0.39 | ) | (0.33 | ) | (0.31 | ) | (0.25 | ) | (0.36 | ) | ||||||||||||
Net realized gains | — | — | — | — | — | (0.13 | ) | |||||||||||||||||
|
| |||||||||||||||||||||||
Total distributions | (0.45 | ) | (0.39 | ) | (0.33 | ) | (0.31 | ) | (0.25 | ) | (0.49 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ | 24.52 | $ | 22.03 | $ | 20.01 | $ | 19.15 | $ | 16.13 | $ | 13.96 | ||||||||||||
|
| |||||||||||||||||||||||
Total returnd | 13.32% | 12.18% | 6.29% | 20.94% | 17.67% | (26.94)% | ||||||||||||||||||
Ratios to average net assetse | ||||||||||||||||||||||||
Expenses | 0.62% | 0.63% | 0.63% | 0.64% | 0.65% | f | 0.61% | f | ||||||||||||||||
Net investment income | 1.56% | 1.96% | 1.87% | 1.88% | 0.99% | c | 2.05% | |||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 154,044 | $ | 141,455 | $ | 140,297 | $ | 148,544 | $ | 139,816 | $ | 142,862 | ||||||||||||
Portfolio turnover rate | 0.04% | 11.19% | 12.76% | 8.97% | 16.99% | 5.39% | ||||||||||||||||||
aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.
bBased on average daily shares outstanding.
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%. See Note 1(c).
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.
FRD-7
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Franklin Rising Dividends Securities Fund
| Six Months Ended June 30, 2013 (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 2 | 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||||||
| ||||||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 21.64 | $ | 19.65 | $ | 18.82 | $ | 15.86 | $ | 13.72 | $ | 19.27 | ||||||||||||
|
| |||||||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.15 | 0.35 | 0.31 | 0.28 | 0.10 | c | 0.31 | |||||||||||||||||
Net realized and unrealized gains (losses) | 2.70 | 1.98 | 0.81 | 2.95 | 2.24 | (5.42 | ) | |||||||||||||||||
|
| |||||||||||||||||||||||
Total from investment operations | 2.85 | 2.33 | 1.12 | 3.23 | 2.34 | (5.11 | ) | |||||||||||||||||
|
| |||||||||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income | (0.39 | ) | (0.34 | ) | (0.29 | ) | (0.27 | ) | (0.20 | ) | (0.31 | ) | ||||||||||||
Net realized gains | — | — | — | — | — | (0.13 | ) | |||||||||||||||||
|
| |||||||||||||||||||||||
Total distributions | (0.39 | ) | (0.34 | ) | (0.29 | ) | (0.27 | ) | (0.20 | ) | (0.44 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ | 24.10 | $ | 21.64 | $ | 19.65 | $ | 18.82 | $ | 15.86 | $ | 13.72 | ||||||||||||
|
| |||||||||||||||||||||||
Total returnd | 13.16% | 11.96% | 6.00% | 20.64% | 17.34% | (27.10)% | ||||||||||||||||||
Ratios to average net assetse | ||||||||||||||||||||||||
Expenses | 0.87% | 0.88% | 0.88% | 0.89% | 0.90% | f | 0.86% | f | ||||||||||||||||
Net investment income | 1.31% | 1.71% | 1.62% | 1.63% | 0.74% | c | 1.80% | |||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 1,637,253 | $ | 1,550,084 | $ | 1,523,396 | $ | 1,572,732 | $ | 1,371,351 | $ | 1,286,878 | ||||||||||||
Portfolio turnover rate | 0.04% | 11.19% | 12.76% | 8.97% | 16.99% | 5.39% | ||||||||||||||||||
aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.
bBased on average daily shares outstanding.
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%. See Note 1(c).
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.
FRD-8
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Franklin Rising Dividends Securities Fund
| Six Months Ended June 30, 2013 (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 4 | 2012 | 2011 | 2010 | 2009 | 2008a | |||||||||||||||||||
| ||||||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 21.78 | $ | 19.83 | $ | 19.04 | $ | 16.09 | $ | 13.92 | $ | 18.51 | ||||||||||||
|
| |||||||||||||||||||||||
Income from investment operationsb: | ||||||||||||||||||||||||
Net investment incomec | 0.15 | 0.35 | 0.31 | 0.32 | 0.13 | d | 0.26 | |||||||||||||||||
Net realized and unrealized gains (losses) | 2.71 | 1.96 | 0.80 | 2.94 | 2.24 | (4.36 | ) | |||||||||||||||||
|
| |||||||||||||||||||||||
Total from investment operations | 2.86 | 2.31 | 1.11 | 3.26 | 2.37 | (4.10 | ) | |||||||||||||||||
|
| |||||||||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income | (0.41 | ) | (0.36 | ) | (0.32 | ) | (0.31 | ) | (0.20 | ) | (0.36 | ) | ||||||||||||
Net realized gains | — | — | — | — | — | (0.13 | ) | |||||||||||||||||
|
| |||||||||||||||||||||||
Total distributions | (0.41 | ) | (0.36 | ) | (0.32 | ) | (0.31 | ) | (0.20 | ) | (0.49 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ | 24.23 | $ | 21.78 | $ | 19.83 | $ | 19.04 | $ | 16.09 | $ | 13.92 | ||||||||||||
|
| |||||||||||||||||||||||
Total returne | 13.10% | 11.78% | 5.89% | 20.62% | 17.22% | (22.82)% | ||||||||||||||||||
Ratios to average net assetsf | ||||||||||||||||||||||||
Expenses | 0.97% | 0.98% | 0.98% | 0.99% | 1.00% | g | 0.96% | g | ||||||||||||||||
Net investment income | 1.21% | 1.61% | 1.52% | 1.53% | 0.64% | d | 1.70% | |||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 10,098 | $ | 6,432 | $ | 3,020 | $ | 1,007 | $ | 15 | $ | 4 | ||||||||||||
Portfolio turnover rate | 0.04% | 11.19% | 12.76% | 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%. See Note 1(c).
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.
FRD-9
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited)
| Franklin Rising Dividends Securities Fund | Shares | Value | ||||||
Common Stocks 98.3% | ||||||||
Aerospace & Defense 4.6% | ||||||||
General Dynamics Corp. | 38,000 | $ | 2,976,539 | |||||
Honeywell International Inc. | 2,500 | 198,350 | ||||||
United Technologies Corp. | 855,000 | 79,463,700 | ||||||
|
| |||||||
| 82,638,589 | ||||||||
|
| |||||||
Automobiles & Components 2.1% | ||||||||
Johnson Controls Inc. | 1,040,500 | 37,239,495 | ||||||
|
| |||||||
Commercial & Professional Services 1.9% | ||||||||
ABM Industries Inc. | 951,288 | 23,316,069 | ||||||
Cintas Corp. | 225,700 | 10,278,378 | ||||||
|
| |||||||
| 33,594,447 | ||||||||
|
| |||||||
Consumer Durables & Apparel 3.0% | ||||||||
a Kid Brands Inc. | 265,947 | 409,558 | ||||||
Leggett & Platt Inc. | 512,800 | 15,942,952 | ||||||
NIKE Inc., B | 554,000 | 35,278,720 | ||||||
Superior Uniform Group Inc. | 237,100 | 2,558,309 | ||||||
|
| |||||||
| 54,189,539 | ||||||||
|
| |||||||
Consumer Services 3.1% | ||||||||
Hillenbrand Inc. | 1,191,300 | 28,245,723 | ||||||
Matthews International Corp., A | 39,000 | 1,470,300 | ||||||
McDonald’s Corp. | 254,345 | 25,180,155 | ||||||
|
| |||||||
| 54,896,178 | ||||||||
|
| |||||||
Diversified Financials 0.4% | ||||||||
State Street Corp. | 110,500 | 7,205,705 | ||||||
|
| |||||||
Electrical Equipment 6.0% | ||||||||
Brady Corp., A | 878,579 | 26,998,733 | ||||||
Roper Industries Inc. | 658,915 | 81,850,421 | ||||||
|
| |||||||
| 108,849,154 | ||||||||
|
| |||||||
Energy 7.2% | ||||||||
Chevron Corp. | 601,000 | 71,122,340 | ||||||
Exxon Mobil Corp. | 330,500 | 29,860,675 | ||||||
Occidental Petroleum Corp. | 312,190 | 27,856,714 | ||||||
|
| |||||||
| 128,839,729 | ||||||||
|
| |||||||
Food & Staples Retailing 4.6% | ||||||||
Wal-Mart Stores Inc. | 785,800 | 58,534,242 | ||||||
Walgreen Co. | 531,300 | 23,483,460 | ||||||
|
| |||||||
| 82,017,702 | ||||||||
|
| |||||||
Food, Beverage & Tobacco 4.7% | ||||||||
Archer-Daniels-Midland Co. | 713,000 | 24,177,830 | ||||||
Bunge Ltd. | 5,000 | 353,850 | ||||||
McCormick & Co. Inc. | 441,000 | 31,028,760 | ||||||
PepsiCo Inc. | 363,900 | 29,763,381 | ||||||
|
| |||||||
| 85,323,821 | ||||||||
|
| |||||||
Health Care Equipment & Services 14.5% | ||||||||
Abbott Laboratories | 681,800 | 23,781,184 | ||||||
Becton, Dickinson and Co. | 578,143 | 57,137,873 | ||||||
Hill-Rom Holdings Inc. | 221,103 | 7,446,749 | ||||||
FRD-10
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Franklin Rising Dividends Securities Fund | Shares | Value | ||||||
Common Stocks (continued) | ||||||||
Health Care Equipment & Services (continued) | ||||||||
Medtronic Inc. | 730,000 | $ | 37,573,100 | |||||
Stryker Corp. | 630,400 | 40,774,272 | ||||||
Teleflex Inc. | 506,753 | 39,268,290 | ||||||
West Pharmaceutical Services Inc. | 782,706 | 54,992,923 | ||||||
|
| |||||||
| 260,974,391 | ||||||||
|
| |||||||
Household & Personal Products 3.6% | ||||||||
Colgate-Palmolive Co. | 191,000 | 10,942,390 | ||||||
The Procter & Gamble Co. | 707,600 | 54,478,124 | ||||||
|
| |||||||
| 65,420,514 | ||||||||
|
| |||||||
Industrial Conglomerates 0.3% | ||||||||
Carlisle Cos. Inc. | 96,261 | 5,998,023 | ||||||
|
| |||||||
Insurance 6.9% | ||||||||
Aflac Inc. | 276,200 | 16,052,744 | ||||||
Arthur J. Gallagher & Co. | 753,000 | 32,898,570 | ||||||
The Chubb Corp. | 45,000 | 3,809,250 | ||||||
Erie Indemnity Co., A | 538,085 | 42,879,994 | ||||||
Mercury General Corp. | 154,200 | 6,778,632 | ||||||
Old Republic International Corp. | 994,708 | 12,801,892 | ||||||
RLI Corp. | 125,971 | 9,625,444 | ||||||
|
| |||||||
| 124,846,526 | ||||||||
|
| |||||||
Machinery 7.9% | ||||||||
Donaldson Co. Inc. | 350,068 | 12,483,425 | ||||||
Dover Corp. | 1,052,500 | 81,737,150 | ||||||
Pentair Ltd. | 844,000 | 48,690,360 | ||||||
|
| |||||||
| 142,910,935 | ||||||||
|
| |||||||
Materials 12.4% | ||||||||
Air Products and Chemicals Inc. | 580,700 | 53,174,699 | ||||||
Albemarle Corp. | 694,700 | 43,272,863 | ||||||
Bemis Co. Inc. | 399,300 | 15,628,602 | ||||||
Ecolab Inc. | 66,000 | 5,622,540 | ||||||
Nucor Corp. | 499,002 | 21,616,767 | ||||||
Praxair Inc. | 725,260 | 83,520,941 | ||||||
|
| |||||||
| 222,836,412 | ||||||||
|
| |||||||
Media 0.3% | ||||||||
John Wiley & Sons Inc., A | 116,500 | 4,670,485 | ||||||
|
| |||||||
Pharmaceuticals, Biotechnology & Life Sciences 7.6% | ||||||||
AbbVie Inc. | 505,300 | 20,889,102 | ||||||
Johnson & Johnson | 726,100 | 62,342,946 | ||||||
Pfizer Inc. | 1,922,100 | 53,838,021 | ||||||
|
| |||||||
| 137,070,069 | ||||||||
|
| |||||||
Retailing 3.1% | ||||||||
Family Dollar Stores Inc. | 886,335 | 55,227,534 | ||||||
Ross Stores Inc. | 3,000 | 194,430 | ||||||
|
| |||||||
| 55,421,964 | ||||||||
|
| |||||||
Semiconductors & Semiconductor Equipment 0.0%† | ||||||||
Cohu Inc. | 50,300 | 628,750 | ||||||
|
| |||||||
FRD-11
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Franklin Rising Dividends Securities Fund | Shares | Value | ||||||
Common Stocks (continued) | ||||||||
Software & Services 4.1% | ||||||||
International Business Machines Corp. | 388,000 | $ | 74,150,680 | |||||
|
| |||||||
Technology Hardware & Equipment 0.0%† | ||||||||
QUALCOMM Inc. | 3,000 | 183,240 | ||||||
|
| |||||||
Trading Companies & Distributors 0.0%† | ||||||||
W.W. Grainger Inc. | 1,000 | 252,180 | ||||||
|
| |||||||
Total Common Stocks (Cost $1,041,892,170) | 1,770,158,528 | |||||||
|
| |||||||
Short Term Investments (Cost $28,871,939) 1.6% | ||||||||
Money Market Funds 1.6% | ||||||||
a,b Institutional Fiduciary Trust Money Market Portfolio | 28,871,939 | 28,871,939 | ||||||
|
| |||||||
Total Investments (Cost $1,070,764,109) 99.9% | 1,799,030,467 | |||||||
Other Assets, less Liabilities 0.1% | 2,365,169 | |||||||
|
| |||||||
Net Assets 100.0% | $ | 1,801,395,636 | ||||||
|
| |||||||
†Rounds to less than 0.1% of net assets.
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.
FRD-12
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements
Statement of Assets and Liabilities
June 30, 2013 (unaudited)
| Franklin Rising Dividends Securities Fund | ||||
Assets: | ||||
Investments in securities: | ||||
Cost - Unaffiliated issuers | $ | 1,041,892,170 | ||
Cost - Sweep Money Fund (Note 7) | 28,871,939 | |||
|
| |||
Total cost of investments | $ | 1,070,764,109 | ||
|
| |||
Value - Unaffiliated issuers | $ | 1,770,158,528 | ||
Value - Sweep Money Fund (Note 7) | 28,871,939 | |||
|
| |||
Total value of investments | 1,799,030,467 | |||
Receivables: | ||||
Investment securities sold | 3,612,354 | |||
Capital shares sold | 609,246 | |||
Dividends | 1,918,313 | |||
Other assets | 474 | |||
|
| |||
Total assets | 1,805,170,854 | |||
|
| |||
Liabilities: | ||||
Payables: | ||||
Capital shares redeemed | 1,821,704 | |||
Affiliates | 1,608,695 | |||
Reports to shareholders | 293,482 | |||
Accrued expenses and other liabilities | 51,337 | |||
|
| |||
Total liabilities | 3,775,218 | |||
|
| |||
Net assets, at value | $ | 1,801,395,636 | ||
|
| |||
Net assets consist of: | ||||
Paid-in capital | $ | 1,089,473,488 | ||
Undistributed net investment income | 11,956,669 | |||
Net unrealized appreciation (depreciation) | 728,266,358 | |||
Accumulated net realized gain (loss) | (28,300,879 | ) | ||
|
| |||
Net assets, at value | $ | 1,801,395,636 | ||
|
| |||
Class 1: | ||||
Net assets, at value | $ | 154,044,398 | ||
|
| |||
Shares outstanding | 6,282,783 | |||
|
| |||
Net asset value and maximum offering price per share | $ | 24.52 | ||
|
| |||
Class 2: | ||||
Net assets, at value | $ | 1,637,252,932 | ||
|
| |||
Shares outstanding | 67,942,681 | |||
|
| |||
Net asset value and maximum offering price per share | $ | 24.10 | ||
|
| |||
Class 4: | ||||
Net assets, at value | $ | 10,098,306 | ||
|
| |||
Shares outstanding | 416,737 | |||
|
| |||
Net asset value and maximum offering price per share | $ | 24.23 | ||
|
| |||
The accompanying notes are an integral part of these financial statements.
FRD-13
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Operations
for the six months ended June 30, 2013 (unaudited)
| Franklin Rising Dividends Securities Fund | ||||
Investment income: | ||||
Dividends | $ | 19,617,970 | ||
|
| |||
Expenses: | ||||
Management fees (Note 3a) | 5,399,745 | |||
Distribution fees: (Note 3c) | ||||
Class 2 | 2,048,735 | |||
Class 4 | 14,631 | |||
Unaffiliated transfer agent fees | 374 | |||
Custodian fees (Note 4) | 12,796 | |||
Reports to shareholders | 129,655 | |||
Professional fees | 31,958 | |||
Trustees’ fees and expenses | 3,490 | |||
Other | 13,687 | |||
|
| |||
Total expenses | 7,655,071 | |||
|
| |||
Net investment income | 11,962,899 | |||
|
| |||
Realized and unrealized gains (losses): | ||||
Net realized gain (loss) from investments | 46,491,375 | |||
Net change in unrealized appreciation (depreciation) on investments | 162,232,180 | |||
|
| |||
Net realized and unrealized gain (loss) | 208,723,555 | |||
|
| |||
Net increase (decrease) in net assets resulting from operations | $ | 220,686,454 | ||
|
| |||
The accompanying notes are an integral part of these financial statements.
FRD-14
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statements of Changes in Net Assets
| Franklin Rising Dividends Securities Fund | ||||||||
| Six Months Ended June 30, 2013 (unaudited) | Year Ended December 31, 2012 | |||||||
| ||||||||
Increase (decrease) in net assets: | ||||||||
Operations: | ||||||||
Net investment income | $ | 11,962,899 | $ | 29,425,590 | ||||
Net realized gain (loss) from investments | 46,491,375 | 50,961,507 | ||||||
Net change in unrealized appreciation (depreciation) on investments | 162,232,180 | 110,558,680 | ||||||
| ||||||||
Net increase (decrease) in net assets resulting from operations | 220,686,454 | 190,945,777 | ||||||
| ||||||||
Distributions to shareholders from: | ||||||||
Net investment income: | ||||||||
Class 1 | (2,772,388 | ) | (2,577,724 | ) | ||||
Class 2 | (26,490,890 | ) | (24,994,784 | ) | ||||
Class 4 | (163,605 | ) | (85,528 | ) | ||||
| ||||||||
Total distributions to shareholders | (29,426,883 | ) | (27,658,036 | ) | ||||
| ||||||||
Capital share transactions: (Note 2) | ||||||||
Class 1 | (3,282,192 | ) | (12,542,862 | ) | ||||
Class 2 | (87,463,835 | ) | (122,472,505 | ) | ||||
Class 4 | 2,910,807 | 2,986,631 | ||||||
| ||||||||
Total capital share transactions | (87,835,220 | ) | (132,028,736 | ) | ||||
| ||||||||
Net increase (decrease) in net assets | 103,424,351 | 31,259,005 | ||||||
Net assets: | ||||||||
Beginning of period | 1,697,971,285 | 1,666,712,280 | ||||||
| ||||||||
End of period | $ | 1,801,395,636 | $ | 1,697,971,285 | ||||
| ||||||||
Undistributed net investment income included in net assets: | ||||||||
End of period | $ | 11,956,669 | $ | 29,420,653 | ||||
| ||||||||
The accompanying notes are an integral part of these financial statements.
FRD-15
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited)
Franklin Rising Dividends Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Templeton Variable Insurance Products Trust (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end investment company, consisting of twenty-one 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, 2013, 50.23% of the Fund’s shares were held through one insurance company. Investment activities of these insurance company separate acccounts could have a material impact on the Fund. 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 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 Board), the Fund’s administrator, investment manager and other affiliates have formed the Valuation and Liquidity Oversight Committee (VLOC). The VLOC provides administration and oversight of the Fund’s valuation policies and procedures, which are approved annually by the Board. Among other things, these procedures allow the Fund to 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 financial instruments for which market prices are not reliable or readily available. Under these procedures, the VLOC convenes on a regular basis to review such financial instruments and considers a number of factors, including significant unobservable valuation inputs, when arriving at fair value. The VLOC 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. An income-based valuation approach may also be used 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. The VLOC employs various methods for calibrating these valuation approaches including a regular review of key inputs and assumptions, transactional back-testing or disposition analysis, and reviews of any related market activity.
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 if applicable, excise taxes. As a result, no provision for U.S. federal income taxes is required.
The Fund recognizes the tax benefits of uncertain tax positions only when the position is “more likely than not” to be sustained upon examination by the tax authorities based on the technical merits of the tax position. As of June 30, 2013, and for all open tax years, the Fund has determined that no liability for unrecognized tax benefits is required in the Fund’s financial statements related to uncertain tax positions taken on a tax return (or expected to be taken on future tax returns). Open tax years are those that remain subject to examination and are based on each tax jurisdiction statute of limitation.
FRD-16
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Rising Dividends Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
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 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.
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, 2013, 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, 2013 | Year Ended December 31, 2012 | |||||||||||||||
| Class 1 Shares: | Shares | Amount | Shares | Amount | ||||||||||||
Shares sold | 239,361 | $ | 5,791,025 | 217,372 | $ | 4,539,862 | ||||||||||
Shares issued in reinvestment of distributions | 111,610 | 2,772,388 | 125,681 | 2,577,724 | ||||||||||||
Shares redeemed | (488,405 | ) | (11,845,605 | ) | (935,039 | ) | (19,660,448 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | (137,434 | ) | $ | (3,282,192 | ) | (591,986 | ) | $ | (12,542,862 | ) | ||||||
| ||||||||||||||||
FRD-17
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Rising Dividends Securities Fund
2. SHARES OF BENEFICIAL INTEREST (continued)
| Six Months Ended June 30, 2013 | Year Ended December 31, 2012 | |||||||||||||||
| Class 2 Shares: | Shares | Amount | Shares | Amount | ||||||||||||
Shares sold | 3,191,942 | $ | 76,174,699 | 5,224,743 | $ | 107,681,716 | ||||||||||
Shares issued in reinvestment of distributions | 1,085,247 | 26,490,890 | 1,239,206 | 24,994,784 | ||||||||||||
Shares redeemed | (7,971,353 | ) | (190,129,424 | ) | (12,335,885 | ) | (255,149,005 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | (3,694,164 | ) | $ | (87,463,835 | ) | (5,871,936 | ) | $ | (122,472,505 | ) | ||||||
| ||||||||||||||||
Class 4 Shares: | ||||||||||||||||
Shares sold | 145,648 | $ | 3,493,888 | 179,113 | $ | 3,742,720 | ||||||||||
Shares issued on reinvestment of distributions | 6,664 | 163,605 | 4,211 | 85,528 | ||||||||||||
Shares redeemed | (30,888 | ) | (746,686 | ) | (40,291 | ) | (841,617 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | 121,424 | $ | 2,910,807 | 143,033 | $ | 2,986,631 | ||||||||||
| ||||||||||||||||
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 the average daily net assets, and is not additional expense of the Fund.
c. Distribution Fees
The Board 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. Some distribution fees are not charged on shares held by affiliates. The Board has agreed to limit the current rate to 0.25% per year for Class 2.
FRD-18
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Rising Dividends Securities Fund
3. TRANSACTIONS WITH AFFILIATES (continued)
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, 2013, there were no credits earned.
5. INCOME TAXES
For tax purposes, capital losses may be carried over to offset future capital gains. Capital loss carryforwards with no expiration, if any, must be fully utilized before those losses with expiration dates.
At December 31, 2012, the Fund had capital loss carryforwards of $73,203,872 expiring in 2017.
At June 30, 2013, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
Cost of investments | $ | 1,072,352,490 | ||
|
| |||
Unrealized appreciation | $ | 739,549,478 | ||
Unrealized depreciation | (12,871,501 | ) | ||
|
| |||
Net unrealized appreciation (depreciation) | $ | 726,677,977 | ||
|
| |||
Differences between income and/or capital gains as determined on a book basis and a tax basis are 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, 2013, aggregated $728,348 and $108,797,711, 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 $1.5 billion (Global Credit
FRD-19
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Rising Dividends Securities Fund
8. CREDIT FACILITY (continued)
Facility) which matures on January 17, 2014. 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 0.07% based upon the unused portion of the Global Credit Facility. These fees are reflected in other expenses on the Statement of Operations. During the period ended June 30, 2013, 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 financial instruments and are summarized in the following fair value hierarchy:
| • | Level 1 – quoted prices in active markets for identical financial instruments |
| • | Level 2 – other significant observable inputs (including quoted prices for similar financial instruments, interest rates, prepayment speed, credit risk, etc.) |
| • | Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of financial instruments) |
The inputs or methodology used for valuing financial instruments are not an indication of the risk associated with investing in those financial instruments.
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, 2013, all of the Fund’s investments in financial instruments carried at fair value were valued using Level 1 inputs. For detailed categories, see the accompanying Statement of Investments.
10. NEW ACCOUNTING PRONOUNCEMENTS
In June 2013, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2013-08, Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements. The ASU modifies the criteria used in defining an investment company under U.S. Generally Accepted Accounting Principles and also sets forth certain measurement and disclosure requirements. Under the ASU, an entity that is registered under the 1940 Act automatically qualifies as an investment company. The ASU is effective for interim and annual reporting periods beginning after December 15, 2013. The Fund is currently reviewing the requirements and believes the adoption of this ASU will not have a material impact on its financial statements.
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-20
Table of Contents
FRANKLIN SMALL CAP VALUE SECURITIES FUND
This semiannual report for Franklin Small Cap Value Securities Fund covers the period ended June 30, 2013.
Performance Summary as of 6/30/13
Franklin Small Cap Value Securities Fund – Class 1 delivered a +12.36% total return for the six-month period ended 6/30/13.
Performance reflects the Fund’s Class 1 operating expenses, but does not include any contract fees, expenses or sales charges. If they had been included, performance would be lower. These charges and deductions, particularly for variable life policies, can have a significant effect on contract values and insurance benefits. See the contract prospectus for a complete description of these expenses, including sales charges.
Franklin Small Cap Value Securities Fund – Class 1
Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares.
Current performance may differ from figures shown.
FSV-1
Table of Contents
Fund Goal and Main Investments: Franklin Small Cap Value Securities Fund seeks long-term total return. Under normal market conditions, the Fund 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 generally invests 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. For comparison, the Fund’s benchmark, the Russell 2500TM Value Index, rose 15.10% 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
Modest U.S. economic growth, as measured by gross domestic product, characterized the six-month period ended June 30, 2013. Increasing job creation helped lower the unemployment rate and absorb new job seekers, and consumer spending remained strong. Accelerating new and existing home sales accompanied record-low mortgage rates, affordable housing prices, low new-home inventories and a six-year low in U.S. foreclosures. Manufacturing, a mainstay of economic productivity, expanded every month except May.
Budgetary agreement between Congress and the President on January 1 preserved lower income tax rates for most U.S. households, but concerns remained about how the expired payroll tax cut, far-reaching federal spending cuts, and future federal debt ceiling negotiations could affect the U.S. economic recovery. Washington’s lack of consensus on proposed expenditure reductions resulted in further across-the-board federal spending cuts starting in March. In May, Federal Reserve Board (Fed) Chairman Ben Bernanke said the Fed could gradually wind down its monthly purchases of mortgage-backed securities and Treasuries, assuming continued U.S. economic improvement. He clarified in June that such action could begin in the near future.
Amid these fiscal and monetary developments, a slow and steady U.S. recovery continued. U.S. stocks generated healthy returns as the Standard & Poor’s® 500 Index (S&P 500®) and Dow Jones Industrial
1. Source: © 2013 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: All investments involve risks, including possible loss of principal. The Fund’s investments in smaller company stocks carry special risks as such stocks have historically exhibited greater price volatility than large-company stocks, particularly over the short term. Additionally, smaller companies often have relatively small revenues, limited product lines and a small market share. In addition, the Fund may invest up to 25% of its total assets in foreign securities, which involve special risks, including currency fluctuations and economic and political uncertainty. The Fund is actively managed but there is no guarantee that the manager’s investment decisions will produce the desired results. The Fund’s prospectus also includes a description of the main investment risks.
FSV-2
Table of Contents
Average reached all-time highs during the period, even though Chairman Bernanke’s statements sparked volatility.2 Rising corporate profits and generally favorable economic data bolstered investor confidence, but caution remained about the extent to which positive business and market results were dependent on continuation of the Fed’s accommodative monetary policy.
Investment Strategy
We generally invest in stocks that we believe are undervalued and have the potential for capital appreciation. We consider a stock price a “value” when it trades at less than the price at which we believe it would trade if the market reflected all factors relating to the company’s worth. Accordingly, we invest in companies that we believe have, for example, stock prices that are low relative to current, or historical or future earnings, book value, cash flow or sales; recent sharp price declines but the potential for good long-term earnings prospects; and valuable intangibles not reflected in the stock price. Companies in which we may invest include those that may be considered out of favor, such as companies attempting to recover from bankruptcy, business setbacks, adverse events or cyclical downturns, or that may be considered potential takeover targets.
Manager’s Discussion
During the six months under review, contributors to absolute Fund performance included insurers Protective Life and StanCorp Financial Group. Other contributors included video game retailer GameStop, recreational vehicle manufacturer Thor Industries and furniture retailer La-Z-Boy.
Detractors from performance during the reporting period included heavy construction contractor Granite Construction, single-family home sales and construction company M/I Homes, steel building products manufacturer Gibraltar Industries, structural connectors and shear walls manufacturer Simpson Manufacturing and flexible circuit materials manufacturer Multi-Fineline Electronix.
The Fund initiated positions in auto parts and service retailer The Pep Boys — Manny, Moe & Jack, high performance specialty metals manufacturer Carpenter Technology, specialty insurer Assurant and global chemical manufacturing company Stepan. We added to several existing
2. Please see Index Descriptions following the Fund Summaries.
FSV-3
Table of Contents
positions including audio and infotainment manufacturer Harman International Industries, business-to-business rental equipment provider McGrath RentCorp, and specialty chemicals and materials company Cabot, among others.
We liquidated our positions in Graco, West Pharmaceutical Services, A.O. Smith, Teekay, Lancaster Colony, Ethan Allen Interiors, American Woodmark, Fred’s and Gardner Denver, which was subject to an all cash takeover offer from KKR. We also reduced our holdings in several other stocks including Protective Life, Pier 1 Imports and Nordson.
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, 2013, 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 Cap Value Securities Fund
6/30/13
Company Sector/Industry | % of Total Net Assets | |||
| Thor Industries Inc. | 2.7% | |||
| Automobiles & Components | ||||
| Protective Life Corp. | 2.2% | |||
| Insurance | ||||
| Group 1 Automotive Inc. | 2.0% | |||
| Retailing | ||||
| Bristow Group Inc. | 2.0% | |||
| Energy | ||||
| Reliance Steel & Aluminum Co. | 1.9% | |||
| Materials | ||||
| Trinity Industries Inc. | 1.9% | |||
| Machinery | ||||
| Tidewater Inc. | 1.7% | |||
| Energy | ||||
| StanCorp Financial Group Inc. | 1.7% | |||
| Insurance | ||||
| GameStop Corp., A | 1.7% | |||
| Retailing | ||||
| Benchmark Electronics Inc. | 1.7% | |||
| 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
Table of Contents
Fund Expenses
As an investor in a variable insurance contract (Contract) that indirectly provides for investment in an underlying mutual fund, you can incur transaction and/or ongoing expenses at both the Fund level and the Contract level.
| • | Transaction expenses can include sales charges (loads) on purchases, surrender fees, transfer fees and premium taxes. |
| • | Ongoing expenses can include management fees, distribution and service (12b-1) fees, contract fees, annual maintenance fees, mortality and expense risk fees and other fees and expenses. All mutual funds and Contracts have some types of ongoing expenses. |
The expenses shown in the table are meant to highlight ongoing expenses at the Fund level only and do not include ongoing expenses at the Contract level, or transaction expenses at either the Fund or Contract levels. While the Fund does not have transaction expenses, if the transaction and ongoing expenses at the Contract level were included, the expenses shown below would be higher. You should consult your Contract prospectus or disclosure document for more information.
The table shows Fund-level ongoing expenses and can help you understand these expenses and compare them with those of other mutual funds offered through the Contract. The table assumes a $1,000 investment held for the six months indicated. Please refer to the Fund prospectus for additional information on operating expenses.
Actual Fund Expenses
The first line (Actual) of the table provides actual account values and expenses. The “Ending Account Value” is derived from the Fund’s actual return, which includes the effect of ongoing Fund expenses, but does not include the effect of ongoing Contract expenses.
You can estimate the Fund-level expenses you incurred during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:
| 1. | Divide your account value by $1,000. |
If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6.
| 2. | Multiply the result by the number under the heading “Fund-Level Expenses Incurred During Period.” |
If Fund-Level Expenses Incurred During Period were $7.50, then 8.6 x $7.50 = $64.50.
In this illustration, the estimated expenses incurred this period at the Fund level are $64.50.
Franklin Small Cap Value Securities Fund – Class 1
FSV-5
Table of Contents
Hypothetical Example for Comparison with Other Mutual Funds
Information in the second line (Hypothetical) of the table can help you compare ongoing expenses of the Fund with those of other mutual funds offered through the Contract. This information may not be used to estimate the actual ending account balance or expenses you incurred during the period. The hypothetical “Ending Account Value” is based on the Fund’s actual expense ratio and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Fund-Level Expenses Incurred During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds offered through a Contract.
| Class 1 | Beginning Account Value 1/1/13 | Ending Account Value 6/30/13 | Fund-Level Expenses Incurred During Period* 1/1/13–6/30/13 | |||||||||
Actual | $ | 1,000 | $ | 1,123.60 | $ | 3.42 | ||||||
Hypothetical (5% return | $ | 1,000 | $ | 1,021.57 | $ | 3.26 | ||||||
*Expenses are calculated using the most recent six-month annualized expense ratio for the Fund’s Class 1 shares (0.65%), which does not include any ongoing expenses of the Contract for which the Fund is an investment option, multiplied by the average account value over the period, multiplied by 181/365 to reflect the one-half year period.
FSV-6
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Highlights
Franklin Small Cap Value Securities Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 1 | 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||||||
| ||||||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 18.58 | $ | 15.82 | $ | 16.55 | $ | 13.00 | $ | 10.73 | $ | 17.38 | ||||||||||||
|
| |||||||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.09 | 0.29 | c | 0.16 | 0.14 | 0.15 | 0.24 | |||||||||||||||||
Net realized and unrealized gains (losses) | 2.21 | 2.64 | (0.74 | ) | 3.54 | 2.86 | (5.44 | ) | ||||||||||||||||
|
| |||||||||||||||||||||||
Total from investment operations | 2.30 | 2.93 | (0.58 | ) | 3.68 | 3.01 | (5.20 | ) | ||||||||||||||||
|
| |||||||||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income | (0.32 | ) | (0.17 | ) | (0.15 | ) | (0.13 | ) | (0.22 | ) | (0.23 | ) | ||||||||||||
Net realized gains | (0.36 | ) | — | — | — | (0.52 | ) | (1.22 | ) | |||||||||||||||
|
| |||||||||||||||||||||||
Total distributions | (0.68 | ) | (0.17 | ) | (0.15 | ) | (0.13 | ) | (0.74 | ) | (1.45 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ | 20.20 | $ | 18.58 | $ | 15.82 | $ | 16.55 | $ | 13.00 | $ | 10.73 | ||||||||||||
|
| |||||||||||||||||||||||
Total returnd | 12.36% | 18.75% | (3.53)% | 28.49% | 29.54% | (32.87)% | ||||||||||||||||||
Ratios to average net assetse | ||||||||||||||||||||||||
Expenses | 0.65% | 0.67% | 0.66% | 0.67% | 0.68% | f | 0.67% | f | ||||||||||||||||
Net investment income | 0.89% | 1.70% | c | 1.02% | 0.98% | 1.29% | 1.62% | |||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 54,181 | $ | 40,133 | $ | 39,374 | $ | 47,300 | $ | 42,428 | $ | 34,901 | ||||||||||||
Portfolio turnover rate | 4.22% | 5.84% | 14.39% | 15.92% | 6.68% | 16.98% | ||||||||||||||||||
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 $0.10 per share received in the form of special dividends. Excluding these amounts, the ratio of net investment income to average net assets would have been 1.10%.
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-7
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Franklin Small Cap Value Securities Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 2 | 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||||||
| ||||||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 18.23 | $ | 15.53 | $ | 16.25 | $ | 12.77 | $ | 10.55 | $ | 17.10 | ||||||||||||
|
| |||||||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.06 | 0.24 | c | 0.12 | 0.10 | 0.12 | 0.20 | |||||||||||||||||
Net realized and unrealized gains (losses) | 2.18 | 2.59 | (0.73 | ) | 3.48 | 2.81 | (5.35 | ) | ||||||||||||||||
|
| |||||||||||||||||||||||
Total from investment operations | 2.24 | 2.83 | (0.61 | ) | 3.58 | 2.93 | (5.15 | ) | ||||||||||||||||
|
| |||||||||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income | (0.28 | ) | (0.13 | ) | (0.11 | ) | (0.10 | ) | (0.19 | ) | (0.18 | ) | ||||||||||||
Net realized gains | (0.36 | ) | — | — | — | (0.52 | ) | (1.22 | ) | |||||||||||||||
|
| |||||||||||||||||||||||
Total distributions | (0.64 | ) | (0.13 | ) | (0.11 | ) | (0.10 | ) | (0.71 | ) | (1.40 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ | 19.83 | $ | 18.23 | $ | 15.53 | $ | 16.25 | $ | 12.77 | $ | 10.55 | ||||||||||||
|
| |||||||||||||||||||||||
Total returnd | 12.24% | 18.39% | (3.76)% | 28.22% | 29.16% | (33.02)% | ||||||||||||||||||
Ratios to average net assetse | ||||||||||||||||||||||||
Expenses | 0.90% | 0.92% | 0.91% | 0.92% | 0.93% | f | 0.92%f | |||||||||||||||||
Net investment income | 0.64% | 1.45% | c | 0.77% | �� | 0.73% | 1.04% | 1.37% | ||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 1,387,326 | $ | 1,286,573 | $ | 1,211,168 | $ | 1,362,292 | $ | 1,109,855 | $ | 784,773 | ||||||||||||
Portfolio turnover rate | 4.22% | 5.84% | 14.39% | 15.92% | 6.68% | 16.98% | ||||||||||||||||||
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 $0.10 per share received in the form of special dividends. Excluding these amounts, the ratio of net investment income to average net assets would have been 0.85%.
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-8
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Franklin Small Cap Value Securities Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 4 | 2012 | 2011 | 2010 | 2009 | 2008a | |||||||||||||||||||
| ||||||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 18.44 | $ | 15.71 | $ | 16.44 | $ | 12.92 | $ | 10.70 | $ | 16.42 | ||||||||||||
|
| |||||||||||||||||||||||
Income from investment operationsb: | ||||||||||||||||||||||||
Net investment incomec | 0.05 | 0.22 | d | 0.11 | 0.09 | 0.11 | 0.15 | |||||||||||||||||
Net realized and unrealized gains (losses) | 2.21 | 2.63 | (0.75 | ) | 3.53 | 2.84 | (4.42 | ) | ||||||||||||||||
|
| |||||||||||||||||||||||
Total from investment operations | 2.26 | 2.85 | (0.64 | ) | 3.62 | 2.95 | (4.27 | ) | ||||||||||||||||
|
| |||||||||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income | (0.25 | ) | (0.12 | ) | (0.09 | ) | (0.10 | ) | (0.21 | ) | (0.23 | ) | ||||||||||||
Net realized gains | (0.36 | ) | — | — | — | (0.52 | ) | (1.22 | ) | |||||||||||||||
|
| |||||||||||||||||||||||
Total distributions | (0.61 | ) | (0.12 | ) | (0.09 | ) | (0.10 | ) | (0.73 | ) | (1.45 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ | 20.09 | $ | 18.44 | $ | 15.71 | $ | 16.44 | $ | 12.92 | $ | 10.70 | ||||||||||||
|
| |||||||||||||||||||||||
Total returne | 12.22% | 18.27% | (3.87)% | 28.14% | 29.04% | (29.14)% | ||||||||||||||||||
Ratios to average net assetsf | ||||||||||||||||||||||||
Expenses | 1.00% | 1.02% | 1.01% | 1.02% | 1.03% | g | 1.02% | g | ||||||||||||||||
Net investment income | 0.54% | 1.35% | d | 0.67% | 0.63% | 0.94% | 1.27% | |||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 33,712 | $ | 32,424 | $ | 34,284 | $ | 39,075 | $ | 28,599 | $ | 14,850 | ||||||||||||
Portfolio turnover rate | 4.22% | 5.84% | 14.39% | 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.
dNet investment income per share includes approximately $0.10 per share received in the form of special dividends. Excluding these amounts, the ratio of net investment income to average net assets would have been 0.75%.
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.
FSV-9
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited)
| Franklin Small Cap Value Securities Fund | Shares | Value | ||||||
Common Stocks 96.7% | ||||||||
Aerospace & Defense 1.5% | ||||||||
AAR Corp. | 1,009,100 | $ | 22,180,018 | |||||
|
| |||||||
Automobiles & Components 6.9% | ||||||||
a Autoliv Inc. | 295,000 | 22,830,050 | ||||||
Drew Industries Inc. | 244,700 | 9,621,604 | ||||||
Gentex Corp. | 855,000 | 19,707,750 | ||||||
Thor Industries Inc. | 820,000 | 40,327,600 | ||||||
b Winnebago Industries Inc. | 423,100 | 8,880,869 | ||||||
|
| |||||||
| 101,367,873 | ||||||||
|
| |||||||
Banks 2.2% | ||||||||
Chemical Financial Corp. | 360,854 | 9,378,595 | ||||||
OFG Bancorp. | 602,000 | 10,902,220 | ||||||
Peoples Bancorp Inc. | 158,000 | 3,330,640 | ||||||
TrustCo Bank Corp. NY | 1,690,000 | 9,193,600 | ||||||
|
| |||||||
| 32,805,055 | ||||||||
|
| |||||||
Building Products 4.5% | ||||||||
Apogee Enterprises Inc. | 778,000 | 18,672,000 | ||||||
b Gibraltar Industries Inc. | 951,133 | 13,848,497 | ||||||
Simpson Manufacturing Co. Inc. | 433,400 | 12,750,628 | ||||||
Universal Forest Products Inc. | 542,984 | 21,675,921 | ||||||
|
| |||||||
| 66,947,046 | ||||||||
|
| |||||||
Commercial & Professional Services 3.1% | ||||||||
Insperity Inc. | 296,100 | 8,971,830 | ||||||
McGrath RentCorp | 439,000 | 14,996,240 | ||||||
Mine Safety Appliances Co. | 328,300 | 15,282,365 | ||||||
Schawk Inc. | 496,600 | 6,520,358 | ||||||
|
| |||||||
| 45,770,793 | ||||||||
|
| |||||||
Construction & Engineering 2.3% | ||||||||
EMCOR Group Inc. | 272,700 | 11,085,255 | ||||||
Granite Construction Inc. | 747,000 | 22,230,720 | ||||||
|
| |||||||
| 33,315,975 | ||||||||
|
| |||||||
Consumer Durables & Apparel 6.1% | ||||||||
Brunswick Corp. | 475,000 | 15,176,250 | ||||||
Harman International Industries Inc. | 302,500 | 16,395,500 | ||||||
Hooker Furniture Corp. | 445,000 | 7,235,700 | ||||||
La-Z-Boy Inc. | 1,089,000 | 22,074,030 | ||||||
M.D.C. Holdings Inc. | 213,800 | 6,950,638 | ||||||
b M/I Homes Inc. | 435,900 | 10,008,264 | ||||||
b Maidenform Brands Inc. | 671,100 | 11,630,163 | ||||||
|
| |||||||
| 89,470,545 | ||||||||
|
| |||||||
Consumer Services 1.8% | ||||||||
Hillenbrand Inc. | 495,000 | 11,736,450 | ||||||
Regis Corp. | 867,100 | 14,237,782 | ||||||
|
| |||||||
| 25,974,232 | ||||||||
|
| |||||||
Electrical Equipment 2.9% | ||||||||
Brady Corp., A | 453,000 | 13,920,690 | ||||||
EnerSys | 24,100 | 1,181,864 | ||||||
Franklin Electric Co. Inc. | 398,464 | 13,408,314 | ||||||
FSV-10
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Franklin Small Cap Value Securities Fund | Shares | Value | ||||||
Common Stocks (continued) | ||||||||
Electrical Equipment (continued) | ||||||||
General Cable Corp. | 103,500 | $ | 3,182,625 | |||||
b Powell Industries Inc. | 210,000 | 10,846,500 | ||||||
|
| |||||||
| 42,539,993 | ||||||||
|
| |||||||
Energy 11.2% | ||||||||
b Atwood Oceanics Inc. | 380,400 | 19,799,820 | ||||||
Bristow Group Inc. | 440,000 | 28,740,800 | ||||||
Energen Corp. | 242,000 | 12,646,920 | ||||||
b Helix Energy Solutions Group Inc. | 819,500 | 18,881,280 | ||||||
b Oil States International Inc. | 255,200 | 23,641,728 | ||||||
b Rowan Cos. PLC | 615,000 | 20,953,050 | ||||||
Tidewater Inc. | 450,000 | 25,636,500 | ||||||
b Unit Corp. | 333,900 | 14,217,462 | ||||||
|
| |||||||
| 164,517,560 | ||||||||
|
| |||||||
Health Care Equipment & Services 2.9% | ||||||||
Hill-Rom Holdings Inc. | 306,000 | 10,306,080 | ||||||
STERIS Corp. | 350,000 | 15,008,000 | ||||||
Teleflex Inc. | 227,900 | 17,659,971 | ||||||
|
| |||||||
| 42,974,051 | ||||||||
|
| |||||||
Industrial Conglomerates 1.4% | ||||||||
Carlisle Cos. Inc. | 334,800 | 20,861,388 | ||||||
|
| |||||||
Insurance 10.9% | ||||||||
Arthur J. Gallagher & Co. | 168,200 | 7,348,658 | ||||||
Aspen Insurance Holdings Ltd. | 455,000 | 16,875,950 | ||||||
Assurant Inc. | 51,800 | 2,637,138 | ||||||
The Hanover Insurance Group Inc. | 372,200 | 18,211,746 | ||||||
HCC Insurance Holdings Inc. | 188,200 | 8,113,302 | ||||||
Montpelier Re Holdings Ltd. | 649,000 | 16,231,490 | ||||||
Old Republic International Corp. | 1,401,500 | 18,037,305 | ||||||
Protective Life Corp. | 840,000 | 32,264,400 | ||||||
RLI Corp. | 5,700 | 435,537 | ||||||
StanCorp Financial Group Inc. | 515,000 | 25,446,150 | ||||||
Validus Holdings Ltd. (Bermuda) | 422,700 | 15,267,924 | ||||||
|
| |||||||
| 160,869,600 | ||||||||
|
| |||||||
Machinery 13.0% | ||||||||
Astec Industries Inc. | 380,000 | 13,030,200 | ||||||
Briggs & Stratton Corp. | 740,000 | 14,652,000 | ||||||
CIRCOR International Inc. | 155,702 | 7,919,004 | ||||||
b EnPro Industries Inc. | 390,000 | 19,796,400 | ||||||
Kaydon Corp. | 389,000 | 10,716,950 | ||||||
Kennametal Inc. | 397,300 | 15,427,159 | ||||||
Lincoln Electric Holdings Inc. | 400,000 | 22,908,000 | ||||||
Mueller Industries Inc. | 367,500 | 18,533,025 | ||||||
Nordson Corp. | 60,000 | 4,158,600 | ||||||
Pentair Ltd. | 214,800 | 12,391,812 | ||||||
Trinity Industries Inc. | 718,800 | 27,630,672 | ||||||
b Wabash National Corp. | 1,350,000 | 13,743,000 | ||||||
Watts Water Technologies Inc., A | 235,000 | 10,654,900 | ||||||
|
| |||||||
| 191,561,722 | ||||||||
|
| |||||||
FSV-11
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Franklin Small Cap Value Securities Fund | Shares | Value | ||||||
Common Stocks (continued) | ||||||||
Materials 8.7% | ||||||||
A. Schulman Inc. | 504,266 | $ | 13,524,414 | |||||
AptarGroup Inc. | 65,000 | 3,588,650 | ||||||
Cabot Corp. | 468,600 | 17,535,012 | ||||||
Carpenter Technology Corp. | 160,000 | 7,211,200 | ||||||
H.B. Fuller Co. | 304,700 | 11,520,707 | ||||||
Reliance Steel & Aluminum Co. | 436,000 | 28,584,160 | ||||||
RPM International Inc. | 712,800 | 22,766,832 | ||||||
Sensient Technologies Corp. | 201,700 | 8,162,799 | ||||||
Steel Dynamics Inc. | 1,038,000 | 15,476,580 | ||||||
Stepan Co. | 4,548 | 252,914 | ||||||
|
| |||||||
| 128,623,268 | ||||||||
|
| |||||||
Retailing 9.5% | ||||||||
Brown Shoe Co. Inc. | 870,000 | 18,731,100 | ||||||
The Cato Corp., A | 438,600 | 10,947,456 | ||||||
GameStop Corp., A | 595,000 | 25,007,850 | ||||||
Group 1 Automotive Inc. | 450,000 | 28,948,500 | ||||||
b Jos. A. Bank Clothiers Inc. | 247,800 | 10,239,096 | ||||||
The Men’s Wearhouse Inc. | 603,700 | 22,850,045 | ||||||
b The Pep Boys - Manny, Moe & Jack | 930,000 | 10,769,400 | ||||||
Pier 1 Imports Inc. | 235,000 | 5,520,150 | ||||||
b West Marine Inc. | 610,700 | 6,717,700 | ||||||
|
| |||||||
| 139,731,297 | ||||||||
|
| |||||||
Semiconductors & Semiconductor Equipment 0.6% | ||||||||
Cohu Inc. | 736,000 | 9,200,000 | ||||||
|
| |||||||
Technology Hardware & Equipment 3.7% | ||||||||
b Benchmark Electronics Inc. | 1,220,000 | 24,522,000 | ||||||
b Ingram Micro Inc., A | 507,100 | 9,629,829 | ||||||
b Multi-Fineline Electronix Inc. | 274,100 | 4,059,421 | ||||||
b Rofin-Sinar Technologies Inc. | 674,900 | 16,832,006 | ||||||
|
| |||||||
| 55,043,256 | ||||||||
|
| |||||||
Trading Companies & Distributors 0.5% | ||||||||
Applied Industrial Technologies Inc. | 165,000 | 7,974,450 | ||||||
|
| |||||||
Transportation 2.2% | ||||||||
b Genesee & Wyoming Inc. | 228,300 | 19,368,972 | ||||||
SkyWest Inc. | 990,000 | 13,404,600 | ||||||
|
| |||||||
| 32,773,572 | ||||||||
|
| |||||||
Utilities 0.8% | ||||||||
NV Energy Inc. | 495,000 | 11,612,700 | ||||||
|
| |||||||
Total Common Stocks (Cost $952,187,586) | 1,426,114,394 | |||||||
|
| |||||||
Short Term Investments 3.4% | ||||||||
Money Market Funds (Cost $37,876,109) 2.6% | ||||||||
b,c Institutional Fiduciary Trust Money Market Portfolio | 37,876,109 | 37,876,109 | ||||||
|
| |||||||
FSV-12
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Franklin Small Cap Value Securities Fund | Principal Amount | Value | ||||||
dInvestments from Cash Collateral Received for Loaned Securities 0.8% | ||||||||
eRepurchase Agreements 0.8% | ||||||||
BNP Paribas Securities Corp., 0.13%, 7/01/13 (Maturity Value $2,880,790) | $ | 2,880,759 | $ | 2,880,759 | ||||
Deutsche Bank Securities Inc., 0.18%, 7/01/13 (Maturity Value $2,880,802) | 2,880,759 | 2,880,759 | ||||||
HSBC Securities (USA) Inc., 0.11%, 7/01/13 (Maturity Value $2,880,785) | 2,880,759 | 2,880,759 | ||||||
J.P. Morgan Securities LLC, 0.11%, 7/01/13 (Maturity Value $606,475) | 606,469 | 606,469 | ||||||
RBS Securities Inc., 0.12%, 7/01/13 (Maturity Value $2,880,788) | 2,880,759 | 2,880,759 | ||||||
|
| |||||||
Total Repurchase Agreements (Cost $12,129,505) | 12,129,505 | |||||||
|
| |||||||
Total Investments (Cost $1,002,193,200) 100.1% | 1,476,120,008 | |||||||
Other Assets, less Liabilities (0.1)% | (900,648 | ) | ||||||
|
| |||||||
Net Assets 100.0% | $ | 1,475,219,360 | ||||||
|
| |||||||
aA portion or all of the security is on loan at June 30, 2013. See Note 1(c).
bNon-income producing.
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.
fThe security is traded on a discount basis with no stated coupon rate.
The accompanying notes are an integral part of these financial statements.
FSV-13
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements
Statement of Assets and Liabilities
June 30, 2013 (unaudited)
| Franklin Small Cap Value Securities Fund | ||||
Assets: | ||||
Investments in securities: | ||||
Cost - Unaffiliated issuers | $ | 952,187,586 | ||
Cost - Sweep Money Fund (Note 7) | 37,876,109 | |||
Cost - Repurchase agreements | 12,129,505 | |||
|
| |||
Total cost of investments | $ | 1,002,193,200 | ||
|
| |||
Value - Unaffiliated issuers | $ | 1,426,114,394 | ||
Value - Sweep Money Fund (Note 7) | 37,876,109 | |||
Value - Repurchase agreements | 12,129,505 | |||
|
| |||
Total value of investments (includes securities loaned in the amount of $11,956,755) | 1,476,120,008 | |||
Receivables: | ||||
Investment securities sold | 13,439,343 | |||
Capital shares sold | 384,754 | |||
Dividends | 706,056 | |||
Other assets | 379 | |||
|
| |||
Total assets | 1,490,650,540 | |||
|
| |||
Liabilities: | ||||
Payables: | ||||
Investment securities purchased | 236,367 | |||
Capital shares redeemed | 1,239,789 | |||
Affiliates | 1,345,550 | |||
Payable upon return of securities loaned | 12,129,505 | |||
Accrued expenses and other liabilities | 479,969 | |||
|
| |||
Total liabilities | 15,431,180 | |||
|
| |||
Net assets, at value | $ | 1,475,219,360 | ||
|
| |||
Net assets consist of: | ||||
Paid-in capital | $ | 940,934,888 | ||
Undistributed net investment income | 4,078,498 | |||
Net unrealized appreciation (depreciation) | 473,926,808 | |||
Accumulated net realized gain (loss) | 56,279,166 | |||
|
| |||
Net assets, at value | $ | 1,475,219,360 | ||
|
| |||
The accompanying notes are an integral part of these financial statements.
FSV-14
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Assets and Liabilities (continued)
June 30, 2013 (unaudited)
| Franklin Small Cap Value Securities Fund | ||||
Class 1: | ||||
Net assets, at value | $ | 54,181,125 | ||
|
| |||
Shares outstanding | 2,682,642 | |||
|
| |||
Net asset value and maximum offering price per share | $ | 20.20 | ||
|
| |||
Class 2: | ||||
Net assets, at value | $ | 1,387,325,736 | ||
|
| |||
Shares outstanding | 69,962,576 | |||
|
| |||
Net asset value and maximum offering price per share | $ | 19.83 | ||
|
| |||
Class 4: | ||||
Net assets, at value | $ | 33,712,499 | ||
|
| |||
Shares outstanding | 1,678,179 | |||
|
| |||
Net asset value and maximum offering price per share | $ | 20.09 | ||
|
| |||
The accompanying notes are an integral part of these financial statements.
FSV-15
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Operations
for the six months ended June 30, 2013 (unaudited)
| Franklin Small Cap Value Securities Fund | ||||
Investment income: | ||||
Dividends | $ | 10,763,655 | ||
Income from securities loaned | 329,385 | |||
|
| |||
Total investment income | 11,093,040 | |||
|
| |||
Expenses: | ||||
Management fees (Note 3a) | 3,588,302 | |||
Administrative fees (Note 3b) | 823,421 | |||
Distribution fees: (Note 3c) | ||||
Class 2 | 1,700,302 | |||
Class 4 | 58,446 | |||
Unaffiliated transfer agent fees | 1,021 | |||
Custodian fees (Note 4) | 10,069 | |||
Reports to shareholders | 214,045 | |||
Professional fees | 29,346 | |||
Trustees’ fees and expenses | 2,701 | |||
Other | 15,388 | |||
|
| |||
Total expenses | 6,443,041 | |||
|
| |||
Net investment income | 4,649,999 | |||
|
| |||
Realized and unrealized gains (losses): | ||||
Net realized gain (loss) from investments | 56,370,889 | |||
Net change in unrealized appreciation (depreciation) on investments | 103,583,473 | |||
|
| |||
Net realized and unrealized gain (loss) | 159,954,362 | |||
|
| |||
Net increase (decrease) in net assets resulting from operations | $ | 164,604,361 | ||
|
| |||
The accompanying notes are an integral part of these financial statements.
FSV-16
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statements of Changes in Net Assets
| Franklin Small Cap Value Securities Fund | ||||||||
| Six Months Ended June 30, 2013 (unaudited) | Year Ended December 31, 2012 | |||||||
| ||||||||
Increase (decrease) in net assets: | ||||||||
Operations: | ||||||||
Net investment income | $ | 4,649,999 | $ | 19,229,549 | ||||
Net realized gain (loss) from investments | 56,370,889 | 44,247,459 | ||||||
Net change in unrealized appreciation (depreciation) on investments | 103,583,473 | 158,357,883 | ||||||
| ||||||||
Net increase (decrease) in net assets resulting from operations | 164,604,361 | 221,834,891 | ||||||
| ||||||||
Distributions to shareholders from: | ||||||||
Net investment income: | ||||||||
Class 1 | (615,112 | ) | (407,505 | ) | ||||
Class 2 | (18,772,536 | ) | (9,757,412 | ) | ||||
Class 4 | (406,547 | ) | (256,129 | ) | ||||
Net realized gains: | ||||||||
Class 1 | (681,161 | ) | — | |||||
Class 2 | (24,226,581 | ) | — | |||||
Class 4 | (585,151 | ) | — | |||||
| ||||||||
Total distributions to shareholders | (45,287,088 | ) | (10,421,046 | ) | ||||
| ||||||||
Capital share transactions: (Note 2) | ||||||||
Class 1 | 10,476,146 | (5,634,630 | ) | |||||
Class 2 | (12,154,547 | ) | (124,579,807 | ) | ||||
Class 4 | (1,549,043 | ) | (6,896,088 | ) | ||||
| ||||||||
Total capital share transactions | (3,227,444 | ) | (137,110,525 | ) | ||||
| ||||||||
Net increase (decrease) in net assets | 116,089,829 | 74,303,320 | ||||||
Net assets: | ||||||||
Beginning of period | 1,359,129,531 | 1,284,826,211 | ||||||
| ||||||||
End of period | $ | 1,475,219,360 | $ | 1,359,129,531 | ||||
| ||||||||
Undistributed net investment income included in net assets: | ||||||||
End of period | $ | 4,078,498 | $ | 19,222,694 | ||||
| ||||||||
The accompanying notes are an integral part of these financial statements.
FSV-17
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited)
Franklin Small Cap Value Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Templeton Variable Insurance Products Trust (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end investment company, consisting of twenty-one 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 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 Board), the Fund’s administrator, investment manager and other affiliates have formed the Valuation and Liquidity Oversight Committee (VLOC). The VLOC provides administration and oversight of the Fund’s valuation policies and procedures, which are approved annually by the Board. Among other things, these procedures allow the Fund to 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. Repurchase agreements are valued at cost, which approximates market value.
The Fund has procedures to determine the fair value of financial instruments for which market prices are not reliable or readily available. Under these procedures, the VLOC convenes on a regular basis to review such financial instruments and considers a number of factors, including significant unobservable valuation inputs, when arriving at fair value. The VLOC 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. An income-based valuation approach may also be used 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. The VLOC employs various methods for calibrating these valuation approaches including a regular review of key inputs and assumptions, transactional back-testing or disposition analysis, and reviews of any related market activity.
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%. Repurchase agreements are subject to the terms of
FSV-18
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Small Cap Value Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
b. Repurchase Agreements (continued)
Master Repurchase Agreements (MRAs) with approved counterparties (sellers). The MRAs contain various provisions, including but not limited to events of default and maintenance of collateral for repurchase agreements. In the event of default by either the seller or the Fund, certain MRAs may permit the non-defaulting party to net and close-out all transactions, if any, traded under such agreements. The Fund may sell securities it holds as collateral and apply the proceeds towards the repurchase price and any other amounts owed by the seller to the Fund in the event of default by the seller. This could involve costs or delays in addition to a loss on the securities if their value falls below the repurchase price owed by the seller. All repurchase agreements held by the Fund at period end, as indicated in the Statement of Investments, had been entered into on June 28, 2013.
c. Securities Lending
The Fund participates in an agency based securities 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 as indicated on the Statement of Investments. 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 if applicable, excise taxes. As a result, no provision for U.S. federal income taxes is required.
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 in an amount that would be payable if the securities were disposed of on the valuation date.
The Fund recognizes the tax benefits of uncertain tax positions only when the position is “more likely than not” to be sustained upon examination by the tax authorities based on the technical merits of the tax position. As of June 30, 2013, and for all open tax years, the Fund has determined that no liability for unrecognized tax benefits is required in the Fund’s financial statements related to uncertain tax positions taken on a tax return (or expected to be taken on future tax returns). 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 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.
FSV-19
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Small Cap Value Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
e. 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.
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, 2013, 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, 2013 | Year Ended December 31, 2012 | |||||||||||||||
| Class 1 Shares: | Shares | Amount | Shares | Amount | ||||||||||||
Shares sold | 776,323 | $ | 15,668,376 | 120,340 | $ | 2,031,518 | ||||||||||
Shares issued in reinvestment of distributions | 64,172 | 1,296,273 | 26,308 | 407,505 | ||||||||||||
Shares redeemed | (318,400 | ) | (6,488,503 | ) | (474,365 | ) | (8,073,653 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | 522,095 | $ | 10,476,146 | (327,717 | ) | $ | (5,634,630 | ) | ||||||||
| ||||||||||||||||
Class 2 Shares: | ||||||||||||||||
Shares sold | 3,634,307 | �� | $ | 70,989,361 | 8,509,192 | $ | 140,217,286 | |||||||||
Shares issued in reinvestment of distributions | 2,167,294 | 42,999,117 | 641,091 | 9,757,412 | ||||||||||||
Shares redeemed | (6,412,779 | ) | (126,143,025 | ) | (16,570,761 | ) | (274,554,505 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | (611,178 | ) | $ | (12,154,547 | ) | (7,420,478 | ) | $ | (124,579,807 | ) | ||||||
| ||||||||||||||||
Class 4 Shares: | ||||||||||||||||
Shares sold | 89,594 | $ | 1,770,709 | 402,254 | $ | 6,818,504 | ||||||||||
Shares issued on reinvestment of distributions | 49,338 | 991,698 | 16,621 | 256,129 | ||||||||||||
Shares redeemed | (218,677 | ) | (4,311,450 | ) | (843,050 | ) | (13,970,721 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | (79,745 | ) | $ | (1,549,043 | ) | (424,175 | ) | $ | (6,896,088 | ) | ||||||
| ||||||||||||||||
FSV-20
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Small Cap Value Securities Fund
3. TRANSACTIONS WITH AFFILIATES
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 | |
| 0.600% | 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 Board 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. Some distribution fees are not charged on shares held by affiliates. The Board 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, 2013, there were no credits earned.
FSV-21
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Small Cap Value Securities Fund
5. INCOME TAXES
At June 30, 2013, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
Cost of investments | $ | 1,002,846,777 | ||
|
| |||
Unrealized appreciation | $ | 514,813,287 | ||
Unrealized depreciation | (41,540,056 | ) | ||
|
| |||
Net unrealized appreciation (depreciation) | $ | 473,273,231 | ||
|
| |||
Differences between income and/or capital gains as determined on a book basis and a tax basis are primarily due to differing treatment of passive foreign investment company shares.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the period ended June 30, 2013, aggregated $58,738,536 and $104,201,950, 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 $1.5 billion (Global Credit Facility) which matures on January 17, 2014. 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 0.07% based upon the unused portion of the Global Credit Facility. These fees are reflected in other expenses on the Statement of Operations. During the period ended June 30, 2013, 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 financial instruments and are summarized in the following fair value hierarchy:
| • | Level 1 – quoted prices in active markets for identical financial instruments |
| • | Level 2 – other significant observable inputs (including quoted prices for similar financial instruments, interest rates, prepayment speed, credit risk, etc.) |
| • | Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of financial instruments) |
FSV-22
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Small Cap Value Securities Fund
9. FAIR VALUE MEASUREMENTS (continued)
The inputs or methodology used for valuing financial instruments are not an indication of the risk associated with investing in those financial instruments.
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.
A summary of inputs used as of June 30, 2013, in valuing the Fund’s assets carried at fair value, is as follows:
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
|
| |||||||||||||||
Assets: | ||||||||||||||||
Investments in Securities: | ||||||||||||||||
Equity Investmentsa | $ | 1,426,114,394 | $ | — | $ | — | $ | 1,426,114,394 | ||||||||
Short Term Investments | 37,876,109 | 12,129,505 | — | 50,005,614 | ||||||||||||
|
| |||||||||||||||
Total Investments in Securities | $ | 1,463,990,503 | $ | 12,129,505 | $ | — | $ | 1,476,120,008 | ||||||||
|
| |||||||||||||||
aFor detailed categories, see the accompanying Statement of Investments.
10. NEW ACCOUNTING PRONOUNCEMENTS
In June 2013, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2013-08, Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements. The ASU modifies the criteria used in defining an investment company under U.S. Generally Accepted Accounting Principles and also sets forth certain measurement and disclosure requirements. Under the ASU, an entity that is registered under the 1940 Act automatically qualifies as an investment company. The ASU is effective for interim and annual reporting periods beginning after December 15, 2013. The Fund is currently reviewing the requirements and believes the adoption of this ASU will not have a material impact on its financial statements.
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.
FSV-23
Table of Contents
FRANKLIN SMALL-MID CAP GROWTH SECURITIES FUND
We are pleased to bring you Franklin Small-Mid Cap Growth Securities Fund’s semiannual report for the period ended June 30, 2013.
Performance Summary as of 6/30/13
Franklin Small-Mid Cap Growth Securities Fund – Class 1 delivered a +14.88% total return* for the six-month period ended 6/30/13.
*Total return information is based on net asset values calculated for shareholder transactions. Certain adjustments were made to the net assets of the Fund at 6/30/13 for financial reporting purposes, and as a result, the net values for shareholder transactions and the total returns based on those net asset values differ from the adjusted net asset values and total returns reported in the Financial Highlights.
Performance reflects the Fund’s Class 1 operating expenses, but does not include any contract fees, expenses or sales charges. If they had been included, performance would be lower. These charges and deductions, particularly for variable life policies, can have a significant effect on contract values and insurance benefits. See the contract prospectus for a complete description of these expenses, including sales charges.
Franklin Small-Mid Cap Growth Securities Fund Class 1
Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares.
Current performance may differ from figures shown.
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Fund Goal and Main Investments: Franklin Small-Mid Cap Growth Securities Fund seeks long-term capital growth. Under normal market conditions, the Fund invests at least 80% of its net assets in equity securities of small capitalization and mid-capitalization 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 midcap companies are those 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. In comparison, the Fund’s narrow benchmark, the Russell Midcap® Growth Index, generated a +14.70% total return, and its broad benchmark, the Standard & Poor’s® 500 Index (S&P 500®), produced a +13.82% total return, for the same period.2
Economic and Market Overview
Modest U.S. economic growth, as measured by gross domestic product, characterized the six-month period ended June 30, 2013. Increasing job creation helped lower the unemployment rate and absorb new job seekers, and consumer spending remained strong. Accelerating new and existing home sales accompanied record-low mortgage rates, affordable housing prices, low new-home inventories and a six-year low in U.S. foreclosures. Manufacturing, a mainstay of economic productivity, expanded every month except May.
Budgetary agreement between Congress and the President on January 1 preserved lower income tax rates for most U.S. households, but concerns remained about how the expired payroll tax cut, far-reaching federal spending cuts, and future federal debt ceiling negotiations could affect the U.S. economic recovery. Washington’s lack of consensus on proposed expenditure reductions resulted in further across-the-board federal spending cuts starting in March. In May, Federal Reserve Board (Fed) Chairman Ben Bernanke said the Fed could gradually wind down its monthly purchases of mortgage-backed securities and Treasuries, assuming continued U.S. economic improvement. He clarified in June that such action could begin in the near future.
Amid these fiscal and monetary developments, a slow and steady U.S. recovery continued. U.S. stocks generated healthy returns as the
1. Please see Index Descriptions following the Fund Summaries.
2. Source: © 2013 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: All investments involve risks, including possible loss of principal. Investors should be comfortable with fluctuations in the value of their investment, as small and midsized company stocks can be volatile, especially over the short term. Smaller or relatively new or unseasoned companies can 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 focus on particular sectors of the market from time to time, which can carry greater risks of adverse developments in such sectors. The Fund is actively managed but there is no guarantee that the manager’s investment decisions will produce the desired results. The Fund’s prospectus also includes a description of the main investment risks.
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S&P 500 and Dow Jones Industrial Average reached all-time highs during the period, even though Chairman Bernanke’s statements sparked volatility.1 Rising corporate profits and generally favorable economic data bolstered investor confidence, but caution remained about the extent to which positive business and market results were dependent on continuation of the Fed’s accommodative monetary policy.
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
All sectors represented in the Fund’s portfolio delivered positive returns during the six months under review as the broad market rallied, with most sectors contributing to performance relative to the Russell Midcap® Growth Index. Stock selection, especially in the industrials, information technology (IT) and consumer discretionary sectors, was a major contributor to relative performance. In the industrials sector, an off-benchmark position in Allegiant Travel benefited relative results as the airline company continued to generate strong earnings driven by increased passenger capacities, higher fares, additional routes, lower operating costs resulting from its use of more fuel-efficient planes, and higher ancillary revenue and third-party sales.
Among the Fund’s IT holdings, major contributors included an off-benchmark investment in ViaSat, a provider of fixed and mobile satellite network services, and a position in FleetCor Technologies, a leading provider of payment products to commercial fleets and major oil companies. ViaSat generated record revenues and improved earnings
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for its fiscal year 2013, resulting from strong growth across all its business segments, including government systems. We believe its contract with Boeing for ViaSat-2 technology, scheduled for a mid-2016 launch, could help ViaSat improve its position in many broadband markets, including residential, in-flight connectivity, enterprise and government. FleetCor continued to generate stronger-than-expected earnings driven by higher domestic and international transactions, larger revenue per transaction and lower operating expenses. Having demonstrated an ability to develop acquired businesses, FleetCor raised its fiscal year 2013 financial guidance as it expected its recent acquisitions in Australia and New Zealand to contribute to revenue and profit.
In the consumer discretionary sector, key contributors included off-benchmark investments in Wolverine World Wide, a designer and manufacturer of branded footwear, apparel and accessories, and Buffalo Wild Wings, a restaurant owner, operator and franchiser, as well as a position in GNC Holdings, a specialty retailer of health and wellness products. Wolverine continued to generate better-than-expected earnings resulting largely from the strength of its international business and solid performance of recent acquisitions, particularly Sperry Top-Sider. Buffalo Wild Wings reported greater-than-expected first-quarter 2013 revenue as same-store sales improved. Investors were further encouraged by a decline in chicken wing prices, which could help the company’s profit margins, driving the company’s share price to a 52-week high during the period. GNC’s share price reached a record high during the period as the company continued to generate stronger-than-expected earnings and reaffirmed its fiscal year 2013 guidance.
Key individual contributors included positions in Actavis (formerly Watson Pharmaceuticals), one of the world’s largest generic pharmaceutical manufacturers, and Affiliated Managers Group, an asset management company.
In contrast, key detractors from the Fund’s relative performance included an underweighting in the strongly performing consumer staples sector and stock selection in the health care sector. Notable detractors in the health care sector included an off-benchmark investment in U.K.-based Amarin, a biopharmaceutical company focused on developing and commercializing therapeutic products to improve cardiovascular health. Amarin continued to make progress with its recently launched flagship product, Vascepa, a prescription-grade Omega-3 fatty acid approved by the Food and Drug Administration for treating adult patients with very high triglycerides. Prescription of Vascepa accelerated in
Top 10 Holdings
Franklin Small-Mid Cap Growth Securities Fund
6/30/13
| Company Sector/Industry | % of Total Net Assets | |||
| Wolverine World Wide Inc. | 2.0% | |||
| Consumer Discretionary | ||||
| Affiliated Managers Group Inc. | 1.9% | |||
| Financials | ||||
| AMETEK Inc. | 1.8% | |||
| Industrials | ||||
| Roper Industries Inc. | 1.7% | |||
| Industrials | ||||
| Actavis Inc. | 1.6% | |||
| Health Care | ||||
| GNC Holdings Inc., A | 1.5% | |||
| Consumer Discretionary | ||||
| SBA Communications Corp. | 1.5% | |||
| Telecommunication Services | ||||
| Xilinx Inc. | 1.4% | |||
| Information Technology | ||||
| IntercontinentalExchange Inc. | 1.3% | |||
| Financials | ||||
| Trimble Navigation Ltd. | 1.3% | |||
| Information Technology | ||||
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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recent months as the company secured wider managed care coverage and reinforced its marketing message.
Although the Fund’s overall IT holdings outperformed the index’s and contributed to relative performance, some investments lost value. Notable detractors included an off-benchmark investment in high-performance integrated circuits developer Hittite Microwave, as well as positions in voice recognition software solutions provider Nuance Communications and technology solutions company Trimble Navigation. Hittite Microwave’s share price reached a multi-year high in early 2013 as the company generated better-than-expected revenues and earnings. However, its share price declined as the company provided a lower-than-expected second-quarter 2013 financial guidance. Nuance Communication’s share price was pressured by weaker-than-expected fiscal second-quarter 2013 profits and sales. In our analysis, Nuance, as a leading voice-recognition software solutions provider, could potentially benefit from solid growth trends in the mobile and health care markets. After reaching a record high in early 2013, technology solutions provider Trimble Navigation’s share price corrected as the company’s first-quarter 2013 revenue was negatively affected by the U.S. automatic budget cuts that took effect in March, as well as delayed agricultural and construction seasons in Europe and North America stemming from severe weather conditions. Despite missing revenue estimates, the company continued to produce near record-high operating margins as it diversified into higher-margin software and services. In the long term, we believe Trimble’s strong product portfolio could potentially help the company benefit from industries that were late in adopting technology, such as agriculture and construction.
Thank you for your participation in Franklin Small-Mid Cap Growth Securities Fund. We look forward to serving your future investment needs.
The foregoing information reflects our analysis, opinions and portfolio holdings as of June 30, 2013, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.
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Fund Expenses
As an investor in a variable insurance contract (Contract) that indirectly provides for investment in an underlying mutual fund, you can incur transaction and/or ongoing expenses at both the Fund level and the Contract level.
| • | Transaction expenses can include sales charges (loads) on purchases, surrender fees, transfer fees and premium taxes. |
| • | Ongoing expenses can include management fees, distribution and service (12b-1) fees, contract fees, annual maintenance fees, mortality and expense risk fees and other fees and expenses. All mutual funds and Contracts have some types of ongoing expenses. |
The expenses shown in the table are meant to highlight ongoing expenses at the Fund level only and do not include ongoing expenses at the Contract level, or transaction expenses at either the Fund or Contract levels. While the Fund does not have transaction expenses, if the transaction and ongoing expenses at the Contract level were included, the expenses shown below would be higher. You should consult your Contract prospectus or disclosure document for more information.
The table shows Fund-level ongoing expenses and can help you understand these expenses and compare them with those of other mutual funds offered through the Contract. The table assumes a $1,000 investment held for the six months indicated. Please refer to the Fund prospectus for additional information on operating expenses.
Actual Fund Expenses
The first line (Actual) of the table provides actual account values and expenses. The “Ending Account Value” is derived from the Fund’s actual return, which includes the effect of ongoing Fund expenses, but does not include the effect of ongoing Contract expenses.
You can estimate the Fund-level expenses you incurred during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:
| 1. | Divide your account value by $1,000. |
If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6.
| 2. | Multiply the result by the number under the heading “Fund-Level Expenses Incurred During Period.” |
If Fund-Level Expenses Incurred During Period were $7.50, then 8.6 x $7.50 = $64.50.
In this illustration, the estimated expenses incurred this period at the Fund level are $64.50.
Franklin Small-Mid Cap Growth Securities Fund Class 1
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Hypothetical Example for Comparison with Other Mutual Funds
Information in the second line (Hypothetical) of the table can help you compare ongoing expenses of the Fund with those of other mutual funds offered through the Contract. This information may not be used to estimate the actual ending account balance or expenses you incurred during the period. The hypothetical “Ending Account Value” is based on the Fund’s actual expense ratio and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Fund-Level Expenses Incurred During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds offered through a Contract.
| Class 1 | Beginning Account Value 1/1/13 | Ending Account Value 6/30/13 | Fund-Level Expenses Incurred During Period* 1/1/13–6/30/13 | |||||||||
Actual | $ | 1,000 | $ | 1,148.80 | $ | 4.32 | ||||||
Hypothetical (5% return before expenses) | $ | 1,000 | $ | 1,020.78 | $ | 4.06 | ||||||
*Expenses are calculated using the most recent six-month annualized expense ratio for the Fund’s Class 1 shares (0.81%), which does not include any ongoing expenses of the Contract for which the Fund is an investment option, multiplied by the average account value over the period, multiplied by 181/365 to reflect the one-half year period.
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Franklin Templeton Variable Insurance Products Trust
Financial Highlights
Franklin Small-Mid Cap Growth Securities Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 1 | 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||||||
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Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 21.87 | $ | 21.19 | $ | 22.21 | $ | 17.36 | $ | 12.06 | $ | 23.39 | ||||||||||||
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Income from investment operationsa: | ||||||||||||||||||||||||
Net investment income (loss)b | (0.06 | ) | (0.01 | )c | (0.05 | ) | (0.01 | ) | (0.10 | )d | 0.01 | |||||||||||||
Net realized and unrealized gains (losses) | 3.35 | 2.27 | (0.97 | ) | 4.86 | 5.40 | (8.98 | ) | ||||||||||||||||
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Total from investment operations | 3.29 | 2.26 | (1.02 | ) | 4.85 | 5.30 | (8.97 | ) | ||||||||||||||||
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Less distributions from net realized gains | (1.59 | ) | (1.58 | ) | — | — | — | (2.36 | ) | |||||||||||||||
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Net asset value, end of period | $ | 23.57 | $ | 21.87 | $ | 21.19 | $ | 22.21 | $ | 17.36 | $ | 12.06 | ||||||||||||
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Total returne | 15.03% | 11.12% | (4.59)% | 27.94% | 43.95% | (42.34)% | ||||||||||||||||||
Ratios to average net assetsf | ||||||||||||||||||||||||
Expenses | 0.81% | 0.80% | 0.79% | 0.79% | 0.80% | g | 0.76% | g | ||||||||||||||||
Net investment income (loss) | (0.47)% | (0.03)% | c | (0.21)% | (0.07)% | (0.72)% | d | 0.06% | ||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 83,407 | $ | 75,977 | $ | 76,384 | $ | 89,826 | $ | 79,670 | $ | 63,531 | ||||||||||||
Portfolio turnover rate | 24.45% | 41.44% | 45.00% | 46.69% | 63.93% | 60.12% | ||||||||||||||||||
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 received in the form of special dividends. Excluding these amounts, the ratio of net investment income to average net assets would have been (0.16)%.
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 (0.22)%.
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 | 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||||||
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Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 21.04 | $ | 20.49 | $ | 21.54 | $ | 16.87 | $ | 11.75 | $ | 22.91 | ||||||||||||
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Income from investment operationsa: | ||||||||||||||||||||||||
Net investment income (loss)b | (0.08 | ) | (0.06 | )c | (0.10 | ) | (0.06 | ) | (0.13 | )d | (0.03 | ) | ||||||||||||
Net realized and unrealized gains (losses) | 3.21 | 2.19 | (0.95 | ) | 4.73 | 5.25 | (8.77 | ) | ||||||||||||||||
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Total from investment operations | 3.13 | 2.13 | (1.05 | ) | 4.67 | 5.12 | (8.80 | ) | ||||||||||||||||
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Less distributions from net realized gains | (1.59 | ) | (1.58 | ) | — | — | — | (2.36 | ) | |||||||||||||||
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Net asset value, end of period | $ | 22.58 | $ | 21.04 | $ | 20.49 | $ | 21.54 | $ | 16.87 | $ | 11.75 | ||||||||||||
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Total returne | 14.86% | 10.85% | (4.87)% | 27.68% | 43.57% | (42.49)% | ||||||||||||||||||
Ratios to average net assetsf | ||||||||||||||||||||||||
Expenses | 1.06% | 1.05% | 1.04% | 1.04% | 1.05% | g | 1.01% | g | ||||||||||||||||
Net investment income (loss) | (0.72)% | (0.28)% | c | (0.46)% | (0.32)% | (0.92)% | d | (0.19)% | ||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 591,139 | $ | 670,193 | $ | 717,086 | $ | 939,481 | $ | 813,480 | $ | 614,053 | ||||||||||||
Portfolio turnover rate | 24.45% | 41.44% | 45.00% | 46.69% | 63.93% | 60.12% | ||||||||||||||||||
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 received in the form of special dividends. Excluding these amounts, the ratio of net investment income to average net assets would have been (0.41)%.
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 (0.47)%.
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 4 | 2012 | 2011 | 2010 | 2009 | 2008a | |||||||||||||||||||
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Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 21.47 | $ | 20.90 | $ | 21.98 | $ | 17.24 | $ | 12.02 | $ | 20.60 | ||||||||||||
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Income from investment operationsb: | ||||||||||||||||||||||||
Net investment income (loss)c | (0.10 | ) | (0.09 | )d | (0.12 | ) | (0.07 | ) | (0.15 | )e | 0.02 | |||||||||||||
Net realized and unrealized gains (losses) | 3.28 | 2.24 | (0.96 | ) | 4.81 | 5.37 | (6.24 | ) | ||||||||||||||||
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Total from investment operations | 3.18 | 2.15 | (1.08 | ) | 4.74 | 5.22 | (6.22 | ) | ||||||||||||||||
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Less distributions from net realized gains | (1.59 | ) | (1.58 | ) | — | — | — | (2.36 | ) | |||||||||||||||
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Net asset value, end of period | $ | 23.06 | $ | 21.47 | $ | 20.90 | $ | 21.98 | $ | 17.24 | $ | 12.02 | ||||||||||||
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Total returnf | 14.79% | 10.79% | (4.91)% | 27.49% | 43.43% | (34.74)% | ||||||||||||||||||
Ratios to average net assetsg | ||||||||||||||||||||||||
Expenses | 1.16% | 1.15% | 1.14% | 1.14% | 1.15% | h | 1.11% | h | ||||||||||||||||
Net investment income (loss) | (0.82)% | (0.38)% | d | (0.56)% | (0.42)% | (1.07)% | e | (0.29)% | ||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 13,225 | $ | 12,000 | $ | 12,664 | $ | 15,413 | $ | 11,029 | $ | 3,538 | ||||||||||||
Portfolio turnover rate | 24.45% | 41.44% | 45.00% | 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 $0.03 per share received in the form of special dividends. Excluding these amounts, the ratio of net investment income to average net assets would have been (0.51)%.
eNet 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)%.
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.
hBenefit 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, 2013 (unaudited)
| Franklin Small-Mid Cap Growth Securities Fund | Country | Shares/ Warrants | Value | |||||||
Common Stocks and Other Equity Interests 98.2% | ||||||||||
Consumer Discretionary 23.9% | ||||||||||
a AMC Networks Inc., A | United States | 89,100 | $ | 5,828,031 | ||||||
a BorgWarner Inc. | United States | 71,400 | 6,151,110 | |||||||
a BRP Inc. | Canada | 106,800 | 2,488,800 | |||||||
a,b BRP Inc., 144A | Canada | 30,400 | 708,423 | |||||||
a Buffalo Wild Wings Inc. | United States | 76,800 | 7,538,688 | |||||||
a Charter Communications Inc., A | United States | 25,700 | 3,182,945 | |||||||
a Chipotle Mexican Grill Inc. | United States | 24,000 | 8,744,400 | |||||||
Delphi Automotive PLC | United Kingdom | 139,200 | 7,056,048 | |||||||
Dick’s Sporting Goods Inc. | United States | 145,700 | 7,293,742 | |||||||
a Discovery Communications Inc., A | United States | 25,300 | 1,953,413 | |||||||
a Dollar General Corp. | United States | 151,700 | 7,683,605 | |||||||
GNC Holdings Inc., A | United States | 240,100 | 10,614,821 | |||||||
a HomeAway Inc. | United States | 150,300 | 4,860,702 | |||||||
a Jarden Corp. | United States | 181,700 | 7,949,375 | |||||||
a Liberty Media Corp., A | United States | 45,500 | 5,767,580 | |||||||
a Lululemon Athletica Inc. | Canada | 62,600 | 4,101,552 | |||||||
a Michael Kors Holdings Ltd. | United States | 71,600 | 4,440,632 | |||||||
PetSmart Inc. | United States | 72,300 | 4,843,377 | |||||||
Ralph Lauren Corp. | United States | 44,100 | 7,661,934 | |||||||
Ross Stores Inc. | United States | 68,100 | 4,413,561 | |||||||
The Ryland Group Inc. | United States | 61,300 | 2,458,743 | |||||||
Starwood Hotels & Resorts Worldwide Inc. | United States | 96,100 | 6,072,559 | |||||||
a Tenneco Inc. | United States | 129,800 | 5,877,344 | |||||||
Tractor Supply Co. | United States | 61,800 | 7,268,298 | |||||||
a Ulta Salon Cosmetics & Fragrance Inc. | United States | 45,800 | 4,587,328 | |||||||
a Under Armour Inc., A | United States | 100,288 | 5,988,196 | |||||||
Wolverine World Wide Inc. | United States | 253,000 | 13,816,330 | |||||||
Wynn Resorts Ltd. | United States | 40,300 | 5,158,400 | |||||||
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| 164,509,937 | ||||||||||
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Consumer Staples 4.8% | ||||||||||
a,c Boston Beer Inc., A | United States | 37,000 | 6,313,680 | |||||||
Mead Johnson Nutrition Co., A | United States | 111,000 | 8,794,530 | |||||||
a Monster Beverage Corp. | United States | 68,400 | 4,156,668 | |||||||
a TreeHouse Foods Inc. | United States | 85,900 | 5,629,886 | |||||||
Whole Foods Market Inc. | United States | 159,000 | 8,185,320 | |||||||
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| 33,080,084 | ||||||||||
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Energy 5.3% | ||||||||||
Cabot Oil & Gas Corp., A | United States | 39,600 | 2,812,392 | |||||||
a Cameron International Corp. | United States | 85,800 | 5,247,528 | |||||||
a Cobalt International Energy Inc. | United States | 126,200 | 3,353,134 | |||||||
a FMC Technologies Inc. | United States | 88,500 | 4,927,680 | |||||||
a McDermott International Inc. | United States | 235,000 | 1,922,300 | |||||||
Oceaneering International Inc. | United States | 59,700 | 4,310,340 | |||||||
Range Resources Corp. | United States | 21,200 | 1,639,184 | |||||||
SM Energy Co. | United States | 60,800 | 3,646,784 | |||||||
a Southwestern Energy Co. | United States | 94,700 | 3,459,391 | |||||||
a Superior Energy Services Inc. | United States | 191,300 | 4,962,322 | |||||||
|
| |||||||||
| 36,281,055 | ||||||||||
|
| |||||||||
Financials 6.4% | ||||||||||
a Affiliated Managers Group Inc. | United States | 80,800 | 13,246,352 | |||||||
FSC-11
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Franklin Small-Mid Cap Growth Securities Fund | Country | Shares/ Warrants | Value | |||||||
Common Stocks and Other Equity Interests (continued) | ||||||||||
Financials (continued) | ||||||||||
c Digital Realty Trust Inc. | United States | 40,700 | $ | 2,482,700 | ||||||
a IntercontinentalExchange Inc. | United States | 51,908 | 9,227,166 | |||||||
Jones Lang LaSalle Inc. | United States | 35,300 | 3,217,242 | |||||||
Lazard Ltd., A | United States | 168,100 | 5,404,415 | |||||||
a Signature Bank/New York NY | United States | 88,300 | 7,330,666 | |||||||
T. Rowe Price Group Inc. | United States | 42,000 | 3,072,300 | |||||||
|
| |||||||||
| 43,980,841 | ||||||||||
|
| |||||||||
Health Care 15.6% | ||||||||||
a Actavis Inc. | United States | 89,500 | 11,296,690 | |||||||
Agilent Technologies Inc. | United States | 108,800 | 4,652,288 | |||||||
a Alexion Pharmaceuticals Inc. | United States | 42,900 | 3,957,096 | |||||||
a,c Amarin Corp. PLC, ADR | United Kingdom | 188,600 | 1,093,880 | |||||||
a ARIAD Pharmaceuticals Inc. | United States | 171,500 | 2,999,535 | |||||||
a BioMarin Pharmaceutical Inc. | United States | 37,400 | 2,086,546 | |||||||
a CareFusion Corp. | United States | 102,100 | 3,762,385 | |||||||
a Catamaran Corp. | Canada | 104,000 | 5,066,880 | |||||||
a Celldex Therapeutics Inc. | United States | 291,600 | 4,551,876 | |||||||
a Cerner Corp. | United States | 72,900 | 7,028,289 | |||||||
The Cooper Cos. Inc. | United States | 40,700 | 4,845,335 | |||||||
a DaVita HealthCare Partners Inc. | United States | 51,700 | 6,245,360 | |||||||
a Edwards Lifesciences Corp. | United States | 38,100 | 2,560,320 | |||||||
a HeartWare International Inc. | United States | 33,406 | 3,177,245 | |||||||
a HMS Holdings Corp. | United States | 42,900 | 999,570 | |||||||
a Hologic Inc. | United States | 85,800 | 1,655,940 | |||||||
a Illumina Inc. | United States | 45,700 | 3,420,188 | |||||||
a Jazz Pharmaceuticals PLC | United States | 27,520 | 1,891,450 | |||||||
a Laboratory Corp. of America Holdings | United States | 85,800 | 8,588,580 | |||||||
a Medivation Inc. | United States | 63,800 | 3,138,960 | |||||||
a Mettler-Toledo International Inc. | United States | 32,200 | 6,478,640 | |||||||
a Onyx Pharmaceuticals Inc. | United States | 17,100 | 2,268,486 | |||||||
St. Jude Medical Inc. | United States | 80,900 | 3,691,467 | |||||||
a,c Stereotaxis Inc. | United States | 53,040 | 82,742 | |||||||
a,b Stereotaxis Inc., 144A | United States | 122,843 | 191,635 | |||||||
a,d Stereotaxis Inc., wts., 144A, 5/07/18 | United States | 122,843 | 108,323 | |||||||
a Vertex Pharmaceuticals Inc. | United States | 65,900 | 5,263,433 | |||||||
a Waters Corp. | United States | 61,400 | 6,143,070 | |||||||
|
| |||||||||
| 107,246,209 | ||||||||||
|
| |||||||||
Industrials 19.8% | ||||||||||
a The Advisory Board Co. | United States | 34,300 | 1,874,495 | |||||||
Allegiant Travel Co. | United States | 64,800 | 6,868,152 | |||||||
AMETEK Inc. | United States | 285,100 | 12,059,730 | |||||||
a B/E Aerospace Inc. | United States | 85,800 | 5,412,264 | |||||||
a Colfax Corp. | United States | 101,600 | 5,294,376 | |||||||
a Delta Air Lines Inc. | United States | 318,400 | 5,957,264 | |||||||
a DigitalGlobe Inc. | United States | 184,000 | 5,705,840 | |||||||
Fastenal Co. | United States | 140,600 | 6,446,510 | |||||||
Flowserve Corp. | United States | 89,100 | 4,812,291 | |||||||
a Genesee & Wyoming Inc. | United States | 61,400 | 5,209,176 | |||||||
a Hertz Global Holdings Inc. | United States | 68,500 | 1,698,800 | |||||||
a Hexcel Corp. | United States | 144,800 | 4,930,440 | |||||||
Hubbell Inc., B | United States | 29,600 | 2,930,400 | |||||||
FSC-12
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Franklin Small-Mid Cap Growth Securities Fund | Country | Shares/ Warrants | Value | |||||||
Common Stocks and Other Equity Interests (continued) | ||||||||||
Industrials (continued) | ||||||||||
a IHS Inc., A | United States | 49,400 | $ | 5,156,372 | ||||||
Interface Inc. | United States | 95,800 | 1,625,726 | |||||||
J.B. Hunt Transport Services Inc. | United States | 68,400 | 4,941,216 | |||||||
Kansas City Southern | United States | 47,100 | 4,990,716 | |||||||
The Manitowoc Co. Inc. | United States | 283,400 | 5,075,694 | |||||||
Nielsen Holdings NV | United States | 60,000 | 2,015,400 | |||||||
Pall Corp. | United States | 76,900 | 5,108,467 | |||||||
Robert Half International Inc. | United States | 161,400 | 5,363,322 | |||||||
Rockwell Automation Inc. | United States | 53,100 | 4,414,734 | |||||||
Roper Industries Inc. | United States | 91,870 | 11,412,091 | |||||||
Triumph Group Inc. | United States | 64,200 | 5,081,430 | |||||||
a United Rentals Inc. | United States | 102,300 | 5,105,793 | |||||||
a Verisk Analytics Inc., A | United States | 55,500 | 3,313,350 | |||||||
W.W. Grainger Inc. | United States | 13,700 | 3,454,866 | |||||||
|
| |||||||||
| 136,258,915 | ||||||||||
|
| |||||||||
Information Technology 17.5% | ||||||||||
a Alliance Data Systems Corp. | United States | 38,300 | 6,933,449 | |||||||
a ANSYS Inc. | United States | 111,800 | 8,172,580 | |||||||
Avago Technologies Ltd. | Singapore | 213,900 | 7,995,582 | |||||||
a Bottomline Technologies Inc. | United States | 121,900 | 3,082,851 | |||||||
a BroadSoft Inc. | United States | 150,100 | 4,142,760 | |||||||
a Electronic Arts Inc. | United States | 167,700 | 3,852,069 | |||||||
a Equinix Inc. | United States | 11,000 | 2,031,920 | |||||||
a FleetCor Technologies Inc. | United States | 79,000 | 6,422,700 | |||||||
a Hittite Microwave Corp. | United States | 123,200 | 7,145,600 | |||||||
a LinkedIn Corp., A | United States | 34,200 | 6,097,860 | |||||||
National Instruments Corp. | United States | 78,300 | 2,187,702 | |||||||
a NetSuite Inc. | United States | 44,600 | 4,091,604 | |||||||
a Nortel Networks Corp. | Canada | 4 | — | |||||||
a Nuance Communications Inc. | United States | 408,300 | 7,504,554 | |||||||
a NXP Semiconductors NV | Netherlands | 201,600 | 6,245,568 | |||||||
a,c Pandora Media Inc. | United States | 150,000 | 2,760,000 | |||||||
RDA Microelectronics Inc., ADR | China | 90,000 | 997,200 | |||||||
a Red Hat Inc. | United States | 60,800 | 2,907,456 | |||||||
a Semtech Corp. | United States | 102,500 | 3,590,575 | |||||||
a Silicon Laboratories Inc. | United States | 144,000 | 5,963,040 | |||||||
a,c Stratasys Ltd. | United States | 26,804 | 2,244,567 | |||||||
a Trimble Navigation Ltd. | United States | 352,900 | 9,178,929 | |||||||
a VeriSign Inc. | United States | 27,600 | 1,232,616 | |||||||
a ViaSat Inc. | United States | 75,300 | 5,380,938 | |||||||
a Workday Inc. | United States | 6,100 | 390,949 | |||||||
Xilinx Inc. | United States | 240,900 | 9,542,049 | |||||||
|
| |||||||||
| 120,095,118 | ||||||||||
|
| |||||||||
Materials 2.4% | ||||||||||
Airgas Inc. | United States | 48,500 | 4,629,810 | |||||||
Celanese Corp., A | United States | 103,700 | 4,645,760 | |||||||
Cytec Industries Inc. | United States | 50,000 | 3,662,500 | |||||||
H.B. Fuller Co. | United States | 85,713 | 3,240,809 | |||||||
|
| |||||||||
| 16,178,879 | ||||||||||
|
| |||||||||
FSC-13
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Franklin Small-Mid Cap Growth Securities Fund | Country | Shares/ Warrants | Value | |||||||
Common Stocks and Other Equity Interests (continued) | ||||||||||
Telecommunication Services 1.5% | ||||||||||
a SBA Communications Corp. | United States | 138,400 | $ | 10,258,208 | ||||||
|
| |||||||||
Utilities 1.0% | ||||||||||
a Calpine Corp. | United States | 333,700 | 7,084,451 | |||||||
|
| |||||||||
Total Common Stocks and Other Equity Interests (Cost $426,703,131) | 674,973,697 | |||||||||
|
| |||||||||
Short Term Investments 3.0% | ||||||||||
Money Market Funds (Cost $12,583,832) 1.8% | ||||||||||
a,e Institutional Fiduciary Trust Money Market Portfolio | United States | 12,583,832 | 12,583,832 | |||||||
|
| |||||||||
fInvestments from Cash Collateral Received for Loaned Securities (Cost $8,431,630) 1.2% | ||||||||||
Money Market Funds 1.2% | ||||||||||
g BNY Mellon Overnight Government Fund, 0.074% | United States | 8,431,630 | 8,431,630 | |||||||
|
| |||||||||
Total Investments (Cost $447,718,593) 101.2% | 695,989,159 | |||||||||
Other Assets, less Liabilities (1.2)% | (8,219,071 | ) | ||||||||
|
| |||||||||
Net Assets 100.0% | $ | 687,770,088 | ||||||||
|
| |||||||||
See Abbreviations on page FSC-26.
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, 2013, the aggregate value of these securities was $900,058, representing 0.13% of net assets.
cA portion or all of the security is on loan at June 30, 2013. See Note 1(c).
dSee Note 8 regarding restricted securities.
eSee Note 7 regarding investments in the Institutional Fiduciary Trust Money Market Portfolio.
fSee Note 1(c) regarding securities on loan.
gThe rate shown is the annualized seven-day yield at period end.
The accompanying notes are an integral part of these financial statements.
FSC-14
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements
Statement of Assets and Liabilities
June 30, 2013 (unaudited)
| Franklin Small-Mid Cap Growth Securities Fund | ||||
Assets: | ||||
Investments in securities: | ||||
Cost - Unaffiliated issuers | $ | 435,134,761 | ||
Cost - Sweep Money Fund (Note 7) | 12,583,832 | |||
|
| |||
Total cost of investments | $ | 447,718,593 | ||
|
| |||
Value - Unaffiliated issuers | $ | 683,405,327 | ||
Value - Sweep Money Fund (Note 7) | 12,583,832 | |||
|
| |||
Total value of investments (includes securities loaned in the amount of $8,291,175) | 695,989,159 | |||
Receivables: | ||||
Investment securities sold | 2,705,244 | |||
Capital shares sold | 219,592 | |||
Dividends and interest | 144,407 | |||
Other assets | 212 | |||
|
| |||
Total assets | 699,058,614 | |||
|
| |||
Liabilities: | ||||
Payables: | ||||
Investment securities purchased | 746,649 | |||
Capital shares redeemed | 1,110,494 | |||
Affiliates | 707,369 | |||
Payable upon return of securities loaned | 8,431,630 | |||
Accrued expenses and other liabilities | 292,384 | |||
|
| |||
Total liabilities | 11,288,526 | |||
|
| |||
Net assets, at value | $ | 687,770,088 | ||
|
| |||
Net assets consist of: | ||||
Paid-in capital | $ | 360,709,472 | ||
Undistributed net investment income (loss) | (2,662,450 | ) | ||
Net unrealized appreciation (depreciation) | 248,270,566 | |||
Accumulated net realized gain (loss) | 81,452,500 | |||
|
| |||
Net assets, at value | $ | 687,770,088 | ||
|
| |||
The accompanying notes are an integral part of these financial statements.
FSC-15
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Assets and Liabilities (continued)
June 30, 2013 (unaudited)
| Franklin Small-Mid Cap Growth Securities Fund | ||||
Class 1: | ||||
Net assets, at value | $ | 83,406,995 | ||
|
| |||
Shares outstanding | 3,538,940 | |||
|
| |||
Net asset value and maximum offering price per share | $ | 23.57 | ||
|
| |||
Class 2: | ||||
Net assets, at value | $ | 591,138,555 | ||
|
| |||
Shares outstanding | 26,179,724 | |||
|
| |||
Net asset value and maximum offering price per share | $ | 22.58 | ||
|
| |||
Class 4: | ||||
Net assets, at value | $ | 13,224,538 | ||
|
| |||
Shares outstanding | 573,554 | |||
|
| |||
Net asset value and maximum offering price per share | $ | 23.06 | ||
|
| |||
The accompanying notes are an integral part of these financial statements.
FSC-16
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Operations
for the six months ended June 30, 2013 (unaudited)
| Franklin Small-Mid Cap Growth Securities Fund | ||||
Investment income: | ||||
Dividends | $ | 1,258,932 | ||
Income from securities loaned | 45,936 | |||
|
| |||
Total investment income | 1,304,868 | |||
|
| |||
Expenses: | ||||
Management fees (Note 3a) | 2,274,780 | |||
Administrative fees (Note 3b) | 656,155 | |||
Distribution fees: (Note 3c) | ||||
Class 2 | 842,894 | |||
Class 4 | 22,348 | |||
Unaffiliated transfer agent fees | 699 | |||
Custodian fees (Note 4) | 5,819 | |||
Reports to shareholders | 122,957 | |||
Professional fees | 25,451 | |||
Trustees’ fees and expenses | 1,684 | |||
Other | 15,356 | |||
|
| |||
Total expenses | 3,968,143 | |||
|
| |||
Net investment income (loss) | (2,663,275 | ) | ||
|
| |||
Realized and unrealized gains (losses): | ||||
Net realized gain (loss) from: | ||||
Investments | 84,106,516 | |||
Foreign currency transactions | 11,913 | |||
|
| |||
Net realized gain (loss) | 84,118,429 | |||
|
| |||
Net change in unrealized appreciation (depreciation) on investments | 30,700,497 | |||
|
| |||
Net realized and unrealized gain (loss) | 114,818,926 | |||
|
| |||
Net increase (decrease) in net assets resulting from operations | $ | 112,155,651 | ||
|
| |||
The accompanying notes are an integral part of these financial statements.
FSC-17
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statements of Changes in Net Assets
| Franklin Small-Mid Cap Growth Securities Fund | ||||||||
| Six Months Ended June 30, 2013 (unaudited) | Year Ended December 31, 2012 | |||||||
| ||||||||
Increase (decrease) in net assets: | ||||||||
Operations: | ||||||||
Net investment income (loss) | $ | (2,663,275 | ) | $ | (2,100,633 | ) | ||
Net realized gain (loss) from investments and foreign currency transactions | 84,118,429 | 45,009,702 | ||||||
Net change in unrealized appreciation (depreciation) on investments | 30,700,497 | 40,911,343 | ||||||
| ||||||||
Net increase (decrease) in net assets resulting from operations | 112,155,651 | 83,820,412 | ||||||
| ||||||||
Distributions to shareholders from: | ||||||||
Net realized gains: | ||||||||
Class 1 | (5,305,025 | ) | (5,398,642 | ) | ||||
Class 2 | (39,304,696 | ) | (51,973,132 | ) | ||||
Class 4 | (836,392 | ) | (1,174,175 | ) | ||||
| ||||||||
Total distributions to shareholders | (45,446,113 | ) | (58,545,949 | ) | ||||
| ||||||||
Capital share transactions: (Note 2) | ||||||||
Class 1 | 1,496,972 | (3,317,419 | ) | |||||
Class 2 | (138,912,430 | ) | (69,375,316 | ) | ||||
Class 4 | 306,279 | (546,347 | ) | |||||
| ||||||||
Total capital share transactions | (137,109,179 | ) | (73,239,082 | ) | ||||
| ||||||||
Net increase (decrease) in net assets | (70,399,641 | ) | (47,964,619 | ) | ||||
Net assets: | ||||||||
Beginning of period | 758,169,729 | 806,134,348 | ||||||
| ||||||||
End of period | $ | 687,770,088 | $ | 758,169,729 | ||||
| ||||||||
Undistributed net investment income (loss) included in net assets: | ||||||||
End of period | $ | (2,662,450 | ) | $ | 825 | |||
| ||||||||
The accompanying notes are an integral part of these financial statements.
FSC-18
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited)
Franklin Small-Mid Cap Growth Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Templeton Variable Insurance Products Trust (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end investment company, consisting of twenty-one separate funds. The Franklin Small-Mid Cap Growth Securities Fund (Fund) is included in this report. The financial statements of the remaining funds in the Trust are presented separately. Shares of the Fund are generally sold only to insurance company separate accounts to fund the benefits of variable life insurance policies or variable annuity contracts. At June 30, 2013, 46.18% of the Fund’s shares were held through one insurance company. Investment activities of these insurance company separate accounts could have a material impact on the Fund. 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 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 Board), the Fund’s administrator, investment manager and other affiliates have formed the Valuation and Liquidity Oversight Committee (VLOC). The VLOC provides administration and oversight of the Fund’s valuation policies and procedures, which are approved annually by the Board. Among other things, these procedures allow the Fund to 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 (OTC) 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 financial instruments for which market prices are not reliable or readily available. Under these procedures, the VLOC convenes on a regular basis to review such financial instruments and considers a number of factors, including significant unobservable valuation inputs, when arriving at fair value. The VLOC 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. An income-based valuation approach may also be used 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. The VLOC employs various methods for calibrating these valuation approaches including a regular review of key inputs and assumptions, transactional back-testing or disposition analysis, and reviews of any related market activity.
Trading in securities on foreign securities stock exchanges and OTC 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 VLOC monitors price movements following the close of trading in foreign stock markets through a series of country specific market proxies (such as baskets of
FSC-19
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Small-Mid Cap Growth Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
a. Financial Instrument Valuation (continued)
American Depositary 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. At June 30, 2013, a market event occurred resulting in a portion of the securities being valued using fair value procedures.
In addition, certain foreign markets may be open on days that the NYSE is closed, which could result in differences between the value of the Fund’s portfolio securities on the last business day and the last calendar day of the reporting period. Any significant security valuation changes due to an open foreign market are adjusted and reflected by the Fund for financial reporting purposes.
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 Board.
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 securities 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 as indicated on the Statement of Investments. 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 if applicable, excise taxes. As a result, no provision for U.S. federal income taxes is required.
FSC-20
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Small-Mid Cap Growth Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
d. Income and Deferred 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 in an amount that would be payable if the securities were disposed of on the valuation date.
The Fund recognizes the tax benefits of uncertain tax positions only when the position is “more likely than not” to be sustained upon examination by the tax authorities based on the technical merits of the tax position. As of June 30, 2013, and for all open tax years, the Fund has determined that no liability for unrecognized tax benefits is required in the Fund’s financial statements related to uncertain tax positions taken on a tax return (or expected to be taken on future tax returns). 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 generally accepted in the United States of America. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods.
Common expenses incurred by the Trust are allocated among the funds based on the ratio of net assets of each fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense.
Realized and unrealized gains and losses and net investment income, not including class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions, by class, are generally due to differences in class specific expenses.
f. Accounting Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
g. Guarantees and Indemnifications
Under the Trust’s organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, on behalf of the Fund, enters into contracts with service providers that contain general indemnification clauses. The Trust’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote.
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Small-Mid Cap Growth Securities Fund
2. SHARES OF BENEFICIAL INTEREST
At June 30, 2013, 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, 2013 | Year Ended December 31, 2012 | |||||||||||||||
| Class 1 Shares: | Shares | Amount | Shares | Amount | ||||||||||||
Shares sold | 77,155 | $ | 1,843,912 | 113,036 | $ | 2,509,688 | ||||||||||
Shares issued in reinvestment of distributions | 224,030 | 5,305,025 | 261,943 | 5,398,642 | ||||||||||||
Shares redeemed | (235,699 | ) | (5,651,965 | ) | (505,605 | ) | (11,225,749 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | 65,486 | $ | 1,496,972 | (130,626 | ) | $ | (3,317,419 | ) | ||||||||
| ||||||||||||||||
Class 2 Shares: | ||||||||||||||||
Shares sold | 675,902 | $ | 15,602,197 | 2,025,093 | $ | 43,908,851 | ||||||||||
Shares issued in reinvestment of distributions | 1,732,248 | 39,304,696 | 2,618,294 | 51,973,132 | ||||||||||||
Shares redeemed | (8,081,161 | ) | (193,819,323 | ) | (7,781,173 | ) | (165,257,299 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | (5,673,011 | ) | $ | (138,912,430 | ) | (3,137,786 | ) | $ | (69,375,316 | ) | ||||||
| ||||||||||||||||
Class 4 Shares: | ||||||||||||||||
Shares sold | 63,578 | $ | 1,475,878 | 217,367 | $ | 4,998,926 | ||||||||||
Shares issued on reinvestment of distributions | 36,098 | 836,392 | 57,955 | 1,174,175 | ||||||||||||
Shares redeemed | (85,153 | ) | (2,005,991 | ) | (322,353 | ) | (6,719,448 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | 14,523 | $ | 306,279 | (47,031 | ) | $ | (546,347 | ) | ||||||||
| ||||||||||||||||
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 Advisors based on the average daily net assets of the Fund as follows:
| Annualized Fee Rate | Net Assets | |
| 0.800% | Up to and including $500 million | |
| 0.700% | Over $500 million, up to and including $1 billion | |
| 0.650% | Over $1 billion, up to and including $1.5 billion | |
| 0.600% | Over $1.5 billion, up to and including $6.5 billion | |
| 0.575% | Over $6.5 billion, up to and including $11.5 billion | |
| 0.550% | Over $11.5 billion, up to and including $16.5 billion | |
| 0.540% | Over $16.5 billion, up to and including $19 billion | |
| 0.530% | Over $19 billion, up to and including $21.5 billion | |
| 0.520% | In excess of $21.5 billion |
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Small-Mid Cap Growth Securities Fund
3. TRANSACTIONS WITH AFFILIATES (continued)
a. Management Fees (continued)
Effective May 1, 2013, the Fund combined its investment management and administration agreements as approved by the Board. The fees paid under the combined agreement do not exceed the aggregate fees that were paid under the separate agreements.
Prior to May 1, 2013, the Fund paid fees to Advisors 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
Effective May 1, 2013, under an agreement with Advisers, FT Services provides administrative services to the Fund. The fee is paid by Advisers based on the average daily net assets, and is not an additional expense of the Fund.
Prior to May 1, 2013, the Fund paid administrative fees to FT Services of 0.25% per year of the average daily net assets of the Fund.
c. Distribution Fees
The Board 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. Some distribution fees are not charged on shares held by affiliates. The Board 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, 2013, 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
At June 30, 2013, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
Cost of investments | $ | 448,279,274 | ||
|
| |||
Unrealized appreciation | $ | 255,616,419 | ||
Unrealized depreciation | (7,906,534 | ) | ||
|
| |||
Net unrealized appreciation (depreciation) | $ | 247,709,885 | ||
|
| |||
Differences between income and/or capital gains as determined on a book basis and a tax basis are primarily due to differing treatments of wash sales.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the period ended June 30, 2013, aggregated $182,855,132 and $370,549,574, 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. 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, 2013, the Fund held investments in restricted securities, excluding certain securities exempt from registration under the 1933 Act deemed to be liquid, as follows:
| Warrants | Issuer | Acquisition Date | Cost | Value | ||||||||||||
| 122,843 | aStereotaxis Inc., wts., 144A, 5/07/18 (Value is 0.02% of Net Assets) | 5/07/12 | $ | 153,554 | $ | 108,323 | ||||||||||
|
| |||||||||||||||
| a | The Fund also invests in unrestricted securities of the issuer, valued at $274,377 as of June 30, 2013. |
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 $1.5 billion (Global Credit Facility) which matures on January 17, 2014. 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 Small-Mid Cap Growth Securities Fund
9. CREDIT FACILITY (continued)
Under the terms of the Global Credit Facility, the Fund shall, in addition to interest charged on any borrowings made by the Fund and other costs incurred by the Fund, pay its share of fees and expenses incurred in connection with the implementation and maintenance of the Global Credit Facility, based upon its relative share of the aggregate net assets of all of the Borrowers, including an annual commitment fee of 0.07% based upon the unused portion of the Global Credit Facility. These fees are reflected in other expenses on the Statement of Operations. During the period ended June 30, 2013, 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 financial instruments and are summarized in the following fair value hierarchy:
| • | Level 1 – quoted prices in active markets for identical financial instruments |
| • | Level 2 – other significant observable inputs (including quoted prices for similar financial instruments, interest rates, prepayment speed, credit risk, etc.) |
| • | Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of financial instruments) |
The inputs or methodology used for valuing financial instruments are not an indication of the risk associated with investing in those financial instruments
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
A summary of inputs used as of June 30, 2013, in valuing the Fund’s assets carried at fair value, is as follows:
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
|
| |||||||||||||||
Assets: | ||||||||||||||||
Investments in Securities: | ||||||||||||||||
Equity Investments: | ||||||||||||||||
Health Care | $ | 104,869,400 | $ | 2,268,486 | $ | 108,323 | $ | 107,246,209 | ||||||||
All Other Equity Investmentsa | 567,727,488 | — | — | 567,727,488 | ||||||||||||
Short Term Investments | 12,583,832 | 8,431,630 | — | 21,015,462 | ||||||||||||
|
| |||||||||||||||
Total Investments in Securities | $ | 685,180,720 | $ | 10,700,116 | $ | 108,323 | $ | 695,989,159 | ||||||||
|
| |||||||||||||||
aFor detailed categories, see the accompanying Statement of Investments.
11. NEW ACCOUNTING PRONOUNCEMENTS
In June 2013, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2013-08, Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements. The ASU modifies the criteria used in defining an investment company under U.S. Generally Accepted Accounting Principles and also sets forth certain measurement and disclosure requirements. Under the ASU, an entity that is registered under the 1940 Act automatically qualifies as an investment company. The ASU is effective for interim and annual reporting periods beginning after December 15, 2013. The Fund is currently reviewing the requirements and believes the adoption of this ASU will not have a material impact on its financial statements.
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Small-Mid Cap Growth Securities Fund
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 Depositary Receipt |
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FRANKLIN STRATEGIC INCOME SECURITIES FUND
This semiannual report for Franklin Strategic Income Securities Fund covers the period ended June 30, 2013.
Performance Summary as of 6/30/13
Franklin Strategic Income Securities Fund – Class 1 had a -0.08% total return for the six-month period ended 6/30/13.
Performance reflects the Fund’s Class 1 operating expenses, but does not include any contract fees, expenses or sales charges. If they had been included, performance would be lower. These charges and deductions, particularly for variable life policies, can have a significant effect on contract values and insurance benefits. See the contract prospectus for a complete description of these expenses, including sales charges.
Franklin Strategic Income Securities Fund – Class 1
Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares.
Current performance may differ from figures shown.
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Fund Goals and Main Investments: Franklin Strategic Income Securities Fund seeks a high level of current income, with capital appreciation over the long term as a secondary goal. Under normal market conditions, the Fund 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. For comparison, the Fund’s benchmark, the Barclays U.S. Aggregate Index, had a -2.44% total return for the period under review.1 The Fund’s peers, as measured by the Lipper Multi-Sector Income Funds Classification Average, had a -1.21% return.2
Economic and Market Overview
The U.S. economy, as measured by gross domestic product, grew slowly during the six months ended June 30, 2013. Lackluster consumer spending and declines in exports and commercial real estate hindered first-quarter growth. Large cuts in federal and local government spending, volatile energy prices, business disruptions caused by Superstorm Sandy and the continuing effects of extreme weather conditions on farm production also hurt the economy during the period. However, generally positive labor market, manufacturing, and home sales and construction trends suggested the U.S. economic recovery remained largely intact. Consumer sentiment rose to a five-year high, although potential U.S. tax hikes and spending cuts that took effect in 2013 contributed to fluctuations in consumer and business confidence.
The global economic recovery was mixed during the first half of 2013. Emerging markets continued to lead the recovery, although they showed signs of slowing. Growth in the U.S. and eurozone continued to be slow by the standards of previous recoveries. As fears eased surrounding the issues of sovereign debt in Europe, the possibility of another recession in the U.S., and a potential “hard landing” in China, financial market performance was positive. Improving sentiment, relatively strong fundamentals, and continued provision of global liquidity supported risk assets as equity markets performed well and bond prices generally declined. Policymakers in the largest developed economies increased their already unprecedented efforts to supply liquidity. Actions elsewhere in the world
1. Source: © 2013 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: All investments involve risks, including possible loss of principal. Bond prices generally move in the opposite direction of interest rates. Thus, as the prices of bonds in the Fund adjust to a rise in interest rates, the Fund’s share price may decline. High yields reflect the higher credit risks associated with certain lower rated securities held in the portfolio. Floating rate loans and high yield corporate bonds are rated below investment grade and are subject to greater risk of default, which could result in loss of principal — a risk that may be heightened in a slowing economy. The risks of foreign securities include currency fluctuations and political uncertainty. Investments in developing markets involve heightened risks related to the same factors, in addition to those associated with their relatively small size and lesser liquidity. Investing in derivative securities and the use of foreign currency techniques involve special risks as such may not achieve the anticipated benefits and/or may result in losses to the Fund. Changes in the financial strength of a bond issuer or in a bond’s credit rating may affect its value. The Fund is actively managed but there is no guarantee that the manager’s investment decisions will produce the desired results. The Fund’s prospectus also includes a description of the main investment risks.
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were mixed, with some policymakers less willing to reverse previous tightening efforts in response to the external environment.
In December 2012, the U.S. Federal Reserve Board (Fed) announced a 6.5% unemployment target as a guide to maintaining the historically low federal funds target rate. The Fed also agreed to continue purchases of mortgage-backed securities and long-term Treasuries at a monthly pace of $85 billion until conditions improve. Although inflation rose slightly during the reporting period, the Fed noted little evidence of wage pressures. On January 1, 2013, Congress agreed to a budget bill that maintained some tax cuts for most Americans but increased rates on the wealthiest. Congress, however, was unable to resolve differences related to a series of automatic federal spending cuts known as the “sequester.” The cuts will reduce funding for domestic and defense programs by $85 billion in the current U.S. fiscal year. Near period-end, the Fed stated it could begin slowing its monthly quantitative easing purchases in 2013 if economic conditions improved and terminate the program in mid-2014 if the unemployment rate fell to 7%.
Anticipating an interest rate rise, many investors abruptly sold their fixed income instruments, and the 10-year U.S. Treasury yield rose to 2.52% at period-end from 1.78% on December 31, 2012. Given the rise in rates near period-end, longer duration U.S. Treasury and emerging market bond prices experienced meaningful price declines. In the second quarter, gold, traditionally a safe haven, posted its worst quarterly performance since 1974 as inflation expectations remained subdued and global commodities stayed under pressure.
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.
What is a credit derivative?
A credit derivative is a contract agreement between the Fund and a counterparty that is principally used by the Fund to gain or increase exposure to certain high yield securities or segments of the high yield bond market and/or to hedge against credit risk.
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Manager’s Discussion
A more supportive global economic backdrop and the easing of certain market-perceived risks broadly supported financial markets during the six-month review period. Although economic and political headlines challenged financial markets during the first half of 2013, underlying trends of optimism rose during the period, particularly in the first quarter. The optimism seemed to arise from a combination of easy money programs from U.S., eurozone and Japanese central banks, and the stabilization of many global economic indicators. However, comments from the U.S. Fed chairman in the second quarter regarding the potential tapering of the central bank’s quantitative easing program later in 2013 led financial volatility to climb. U.S. long-term interest rates moved higher following the chairman’s comments; the 10-year Treasury rate rose from 1.78% at the start of the year to a peak of 2.60% before ending the period at 2.52%. The rise in rates led to increased outflows from certain fixed income-related investment vehicles, which in turn pressured the fixed income market’s spread and currency sectors.
During the period, the Fund had a slightly negative total return, although the Fund performed better than the Barclays U.S. Aggregate Index and the Fund’s peers, as measured by the Lipper Multi-Sector Income Funds Classification Average. The Fund’s overweighted exposure to non-investment-grade corporate credit sectors positively impacted performance compared to the longer duration, more rate-sensitive Barclays U.S. Aggregate Index. Compared to the Lipper average, the Fund’s higher exposure to the floating rate loan market boosted returns.
In the corporate credit market, defaults rates remained below longer term averages and balance sheets remained broadly supportive. Even with increasing signs of shareholder-friendly activity, such as stock buybacks, dividend increases and mergers and acquisitions, companies appeared to remain primarily focused on maintaining adequate liquidity. Similarly, although the use of proceeds from new corporate issues started to shift, the primary use for new-issue proceeds remained refinancing of existing debt at a lower cost. Corporate profit margins and earnings growth slowed during the period; however, many companies’ abilities to maintain cost discipline in the face of relatively muted top-line revenue growth allowed profit margins to hold at historically high levels. Overall, corporate bond yield spreads over Treasuries narrowed during the first four months of 2013, and then widened as financial market volatility rose near period-end. Given their lower sensitivity to longer term rate moves as well as still healthy demand for the asset class,
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leveraged loans delivered the strongest performance during the period, followed by high yield corporate bonds. Given their longer maturity and duration profiles, investment-grade corporates underperformed the broader corporate credit market. Although we added to the Fund’s loan positions earlier in the year, their outperformance led us to pare the Fund’s corporate loan exposure toward period-end, and we added to certain high yield and investment-grade corporate bond positions (including through the use of certain derivative instruments).
Concerns regarding a potential slowdown of Chinese economic growth and investment demand contributed to weakness in global non-U.S. dollar positions during the period. In particular, the rise in U.S. rates during the second quarter strengthened the U.S. dollar, placing pressure on Fund non-U.S. dollar holdings, including securities denominated in the South Korean won, Australian dollar, Philippine peso and Indian rupee. Also weighing on Fund performance were positions in the Polish zloty and the Uruguayan peso. On the other hand, weakness in the Japanese yen, exacerbated by Japan’s announcement of a major quantitative easing program, benefited the Fund, given our short position in the yen, achieved through forward currency contracts. In the U.S. dollar hard currency emerging market sector, absolute yield and spread valuations remained on the tighter end of their historical range. However, similar to the corporate credit sectors, prices declined toward period-end following the rise in U.S. rates. Although the Fund held a relatively small weighting in hard currency emerging market sovereign debt, we added exposure following these price declines.
Given the rise in intermediate and longer term U.S. interest rates, the more rate-sensitive U.S. fixed income sectors, including Treasuries, agencies and mortgage-backed securities, generated negative total returns during the period. The Fund maintained a lower exposure to these sectors, considering historically low U.S. rates, preferring higher income opportunities in the corporate, global and securitized markets. The Fund added to its commercial mortgage-backed securities exposure during the period (including through the use of certain derivative instruments), given improving delinquency rates and still attractive spread valuations for certain of these securities.
For municipal holdings, the Fund continued to realize gains by selling certain longer maturity municipal bonds, while gaining diversified floating rate exposure to a basket of municipal issuers through a derivatives index instrument.
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What is a currency forward contract?
A currency forward contract is an agreement between the Fund and a counterparty to buy or sell a foreign currency at 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.
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Thank you for your participation in Franklin Strategic Income Securities Fund. We look forward to serving your future investment needs.
The foregoing information reflects our analysis, opinions and portfolio holdings as of June 30, 2013, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.
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Fund Expenses
As an investor in a variable insurance contract (Contract) that indirectly provides for investment in an underlying mutual fund, you can incur transaction and/or ongoing expenses at both the Fund level and the Contract level.
| • | Transaction expenses can include sales charges (loads) on purchases, surrender fees, transfer fees and premium taxes. |
| • | Ongoing expenses can include management fees, distribution and service (12b-1) fees, contract fees, annual maintenance fees, mortality and expense risk fees and other fees and expenses. All mutual funds and Contracts have some types of ongoing expenses. |
The expenses shown in the table are meant to highlight ongoing expenses at the Fund level only and do not include ongoing expenses at the Contract level, or transaction expenses at either the Fund or Contract levels. While the Fund does not have transaction expenses, if the transaction and ongoing expenses at the Contract level were included, the expenses shown below would be higher. You should consult your Contract prospectus or disclosure document for more information.
The table shows Fund-level ongoing expenses and can help you understand these expenses and compare them with those of other mutual funds offered through the Contract. The table assumes a $1,000 investment held for the six months indicated. Please refer to the Fund prospectus for additional information on operating expenses.
Actual Fund Expenses
The first line (Actual) of the table provides actual account values and expenses. The “Ending Account Value” is derived from the Fund’s actual return, which includes the effect of ongoing Fund expenses, but does not include the effect of ongoing Contract expenses.
You can estimate the Fund-level expenses you incurred during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:
| 1. | Divide your account value by $1,000. |
If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6.
| 2. | Multiply the result by the number under the heading “Fund-Level Expenses Incurred During Period.” |
If Fund-Level Expenses Incurred During Period were $7.50, then 8.6 x $7.50 = $64.50.
In this illustration, the estimated expenses incurred this period at the Fund level are $64.50.
Franklin Strategic Income Securities Fund – Class 1
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Hypothetical Example for Comparison with Other Mutual Funds
Information in the second line (Hypothetical) of the table can help you compare ongoing expenses of the Fund with those of other mutual funds offered through the Contract. This information may not be used to estimate the actual ending account balance or expenses you incurred during the period. The hypothetical “Ending Account Value” is based on the Fund’s actual expense ratio and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Fund-Level Expenses Incurred During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds offered through a Contract.
| Class 1 | Beginning Account Value 1/1/13 | Ending Account Value 6/30/13 | Fund-Level Expenses Incurred During Period* 1/1/13–6/30/13 | |||||||||
Actual | $ | 1,000 | $ | 999.20 | $ | 2.92 | ||||||
Hypothetical (5% return | $ | 1,000 | $ | 1,021.87 | $ | 2.96 | ||||||
*Expenses are calculated using the most recent six-month annualized expense ratio for the Fund’s Class 1 shares (0.59%), which does not include any ongoing expenses of the Contract for which the Fund is an investment option, multiplied by the average account value over the period, multiplied by 181/365 to reflect the one-half year period.
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SUPPLEMENT DATED JUNE 28, 2013
TOTHE PROSPECTUS
DATED MAY 1, 2013
OF
FRANKLIN STRATEGIC INCOME SECURITIES FUND
(A series of Franklin Templeton Variable Insurance Products Trust)
The Prospectus is amended as follows:
I. The fourth paragraph of the “Fund Summary – Principal Investment Strategies” section beginning on page FSI-SI is amended as follows:
For purposes of pursuing its investment goals, the Fund may enter into various currency-related transactions involving derivative instruments, including currency and cross currency forwards, currency swaps, and currency and currency index futures contracts. The Fund may also enter into interest rate and credit-related transactions involving derivative instruments, including interest rate and credit default swaps and bond/interest rate futures contracts. The use of these derivative transactions may allow the Fund to obtain net long or net short exposures to selected currencies, interest rates, durations or credit risks. These derivative instruments may be used for hedging purposes, to enhance Fund returns or to obtain exposure to various market sectors.
II. The eighth paragraph of the “Fund Details – Principal Investment Policies and Practices” section on page FSI-D2 is amended as follows:
For purposes of pursuing its investment goals, the Fund regularly enters into currency-related derivative transactions, including currency and cross currency forwards, currency swaps and currency and currency index futures contracts. The Fund may also enter into interest rate and credit-related transactions involving certain derivative instruments, including interest rate and credit default swaps and interest rate and/or bond futures contracts (including U.S. Treasury futures contracts) and options thereon. The use of such derivative transactions may allow the Fund to obtain net long or net short exposures to selected currencies, interest rates, countries, durations or credit risks. The Fund may use currency, interest rate or credit-related derivative strategies for the purposes of enhancing Fund returns, increasing liquidity, gaining exposure to particular instruments in more efficient or less expensive ways and/or hedging risks relating to changes in currency exchange rates, interest rates and other market factors.
III. The thirteenth paragraph of the “Fund Details – Principal Investment Policies and Practices” section on page FSI-D3 is amended as follows:
Swap agreements, such as interest rate, currency, and credit default swaps, are contracts between the Fund and, typically, a brokerage firm, bank, or other financial institution (the
FSI-9
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swap counterparty) for periods ranging from a few days to multiple years. In a basic swap transaction, the Fund agrees with its counterparty to exchange the returns (or differentials in rates of return) earned or realized on a particular “notional amount” of underlying instruments. The notional amount is the set amount selected by the parties as the basis on which to calculate the obligations that they have agreed to exchange. The parties typically do not actually exchange the notional amount. Instead, they agree to exchange the returns that would be earned or realized if the notional amount were invested in given instruments or at given interest rates.
IV. The following paragraph has been added the “Fund Details – Principal Investment Policies and Practices” section beginning on page FSI-D3 after the thirteenth paragraph:
A currency swap is generally a contract between two parties to exchange one currency for another currency at the start of the contract and then exchange periodic floating or fixed rates during the term of the contract based upon the relative value differential between the two currencies. Unlike other types of swaps, currency swaps typically involve the delivery of the entire principal (notional) amounts of the two currencies at the time the swap is entered into. At the end of the swap contract, the parties receive back the principal amounts of the two currencies.
V. The “Fund Details – Principal Risks – Derivative Instruments” section beginning on page FSI-D7 is amended as follows:
The performance of derivative instruments (including currency-related derivatives) depends largely on the performance of an underlying currency, security or index and such instruments often have risks similar to their underlying instrument in addition to other risks. Derivative instruments involve costs and can create economic leverage in the Fund’s portfolio which may result in significant volatility and cause the Fund to participate in losses (as well as gains) in an amount that significantly exceeds the Fund’s initial investment. Certain derivatives have the potential for unlimited loss, regardless of the size of the initial investment. Other risks include illiquidity, mispricing or improper valuation of the derivative instrument, and imperfect correlation between the value of the derivative and the underlying instrument so that the Fund may not realize the intended benefits. Their successful use will usually depend on the investment manager’s ability to accurately forecast movements in the market relating to the underlying instrument. Should a market or markets, or prices of particular classes of investments move in an unexpected manner, especially in unusual or extreme market conditions, the Fund may not achieve the anticipated benefits of the transaction, and it may realize losses, which could be significant. If the investment manager is not successful in using such derivative instruments, the Fund’s performance may be worse than if the investment manager did not use such derivative instruments at all. To the extent that the Fund uses such instruments for hedging purposes, there is the risk of imperfect correlation between movements in the value of the derivative instrument and the value of the underlying
FSI-10
Table of Contents
investment or other asset being hedged. There is also the risk, especially under extreme market conditions, that an instrument, which usually would operate as a hedge, provides no hedging benefits at all. Use of these instruments could also result in a loss if the counterparty to the transaction (with respect to over-the-counter (OTC) derivatives) does not perform as promised, including because of such counterparty’s bankruptcy or insolvency. This risk may be heightened during volatile market conditions. Other risks include the inability to close out a position because the trading market becomes illiquid (particularly in the OTC markets) or the availability of counterparties becomes limited for a period of time. In addition, the presence of speculators in a particular market could lead to price distortions. To the extent that the Fund is unable to close out a position because of market illiquidity, the Fund may not be able to prevent further losses of value in its derivatives holdings and the Fund’s liquidity may be impaired to the extent that it has a substantial portion of its otherwise liquid assets marked as segregated to cover its obligations under such derivative instruments. The Fund may also be required to take or make delivery of an underlying instrument that the investment manager would otherwise have attempted to avoid. Some derivatives can be particularly sensitive to changes in interest rates or other market prices. Investors should bear in mind that, while the Fund intends to use derivative strategies on a regular basis, it is not obligated to actively engage in these transactions, generally or in any particular kind of derivative, if the investment manager elects not to do so due to availability, cost or other factors.
The use of derivative strategies may also have a tax impact on the Fund. The timing and character of income, gains or losses from these strategies could impair the ability of the investment manager to utilize derivatives when it wishes to do so.
Please keep this supplement for future reference.
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Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Highlights
Franklin Strategic Income Securities Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 1 | 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||||||
| ||||||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 13.17 | $ | 12.55 | $ | 12.99 | $ | 12.28 | $ | 10.58 | $ | 12.78 | ||||||||||||
|
| |||||||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.29 | 0.65 | 0.69 | 0.72 | 0.70 | 0.69 | ||||||||||||||||||
Net realized and unrealized gains (losses) | (0.29 | ) | 0.92 | (0.32 | ) | 0.61 | 1.95 | (1.99 | ) | |||||||||||||||
|
| |||||||||||||||||||||||
Total from investment operations | — | 1.57 | 0.37 | 1.33 | 2.65 | (1.30 | ) | |||||||||||||||||
|
| |||||||||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income and net of foreign currency gains | (0.80 | ) | (0.93 | ) | (0.81 | ) | (0.62 | ) | (0.95 | ) | (0.87 | ) | ||||||||||||
Net realized gains | (0.17 | ) | (0.02 | ) | — | — | — | (0.03 | ) | |||||||||||||||
|
| |||||||||||||||||||||||
Total distributions | (0.97 | ) | (0.95 | ) | (0.81 | ) | (0.62 | ) | (0.95 | ) | (0.90 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ | 12.20 | $ | 13.17 | $ | 12.55 | $ | 12.99 | $ | 12.28 | $ | 10.58 | ||||||||||||
|
| |||||||||||||||||||||||
Total returnc | (0.08)% | 13.12% | 2.78% | 11.21% | 26.11% | (11.03)% | ||||||||||||||||||
Ratios to average net assetsd | ||||||||||||||||||||||||
Expenses | 0.59% | e | 0.58% | 0.60% | e | 0.59% | e | 0.58% | e | 0.61% | e | |||||||||||||
Net investment income | 4.47% | 5.04% | 5.36% | 5.71% | 6.13% | 5.83% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 863,210 | $ | 1,019,537 | $ | 1,043,690 | $ | 1,195,149 | $ | 1,173,313 | $ | 903,358 | ||||||||||||
Portfolio turnover rate | 25.69% | 49.98% | 55.65% | 56.46% | 56.19% | 47.68% | ||||||||||||||||||
Portfolio turnover rate excluding mortgage dollar rollsf | 24.73% | 48.75% | 55.65% | 56.46% | 56.19% | 47.68% | ||||||||||||||||||
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%.
fSee Note 1(h) regarding mortgage dollar rolls.
The accompanying notes are an integral part of these financial statements.
FSI-12
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Franklin Strategic Income Securities Fund
| Six Months Ended June 30, 2013 (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 2 | 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||||||
| ||||||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 12.84 | $ | 12.27 | $ | 12.72 | $ | 12.05 | $ | 10.41 | $ | 12.60 | ||||||||||||
|
| |||||||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.27 | 0.60 | 0.64 | 0.68 | 0.66 | 0.65 | ||||||||||||||||||
Net realized and unrealized gains (losses) | (0.28 | ) | 0.89 | (0.30 | ) | 0.59 | 1.91 | (1.96 | ) | |||||||||||||||
|
| |||||||||||||||||||||||
Total from investment operations | (0.01 | ) | 1.49 | 0.34 | 1.27 | 2.57 | (1.31 | ) | ||||||||||||||||
|
| |||||||||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income and net of foreign currency gains | (0.78 | ) | (0.90 | ) | (0.79 | ) | (0.60 | ) | (0.93 | ) | (0.85 | ) | ||||||||||||
Net realized gains | (0.17 | ) | (0.02 | ) | — | — | — | (0.03 | ) | |||||||||||||||
|
| |||||||||||||||||||||||
Total distributions | (0.95 | ) | (0.92 | ) | (0.79 | ) | (0.60 | ) | (0.93 | ) | (0.88 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ | 11.88 | $ | 12.84 | $ | 12.27 | $ | 12.72 | $ | 12.05 | $ | 10.41 | ||||||||||||
|
| |||||||||||||||||||||||
Total returnc | (0.21)% | 12.75% | 2.57% | 10.91% | 25.75% | (11.24)% | ||||||||||||||||||
Ratios to average net assetsd | ||||||||||||||||||||||||
Expenses | 0.84% | e | 0.83% | 0.85% | e | 0.84% | e | 0.83% | e | 0.86% | e | |||||||||||||
Net investment income | 4.22% | 4.79% | 5.11% | 5.46% | 5.88% | 5.58% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 170,025 | $ | 158,451 | $ | 123,749 | $ | 101,347 | $ | 68,240 | $ | 33,155 | ||||||||||||
Portfolio turnover rate | 25.69% | 49.98% | 55.65% | 56.46% | 56.19% | 47.68% | ||||||||||||||||||
Portfolio turnover rate excluding mortgage dollar rollsf | 24.73% | 48.75% | 55.65% | 56.46% | 56.19% | 47.68% | ||||||||||||||||||
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%.
fSee Note 1(h) regarding mortgage dollar rolls.
The accompanying notes are an integral part of these financial statements.
FSI-13
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Franklin Strategic Income Securities Fund
| Six Months Ended June 30, 2013 (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 4 | 2012 | 2011 | 2010 | 2009 | 2008a | |||||||||||||||||||
| ||||||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 13.04 | $ | 12.44 | $ | 12.88 | $ | 12.20 | $ | 10.54 | $ | 12.84 | ||||||||||||
|
| |||||||||||||||||||||||
Income from investment operationsb: | ||||||||||||||||||||||||
Net investment incomec | 0.27 | 0.60 | 0.64 | 0.67 | 0.66 | 0.53 | ||||||||||||||||||
Net realized and unrealized gains (losses) | (0.29 | ) | 0.91 | (0.31 | ) | 0.60 | 1.94 | (1.93 | ) | |||||||||||||||
|
| |||||||||||||||||||||||
Total from investment operations | (0.02 | ) | 1.51 | 0.33 | 1.27 | 2.60 | (1.40 | ) | ||||||||||||||||
|
| |||||||||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income and net of foreign currency gains | (0.76 | ) | (0.89 | ) | (0.77 | ) | (0.59 | ) | (0.94 | ) | (0.87 | ) | ||||||||||||
Net realized gains | (0.17 | ) | (0.02 | ) | — | — | — | (0.03 | ) | |||||||||||||||
|
| |||||||||||||||||||||||
Total distributions | (0.93 | ) | (0.91 | ) | (0.77 | ) | (0.59 | ) | (0.94 | ) | (0.90 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ | 12.09 | $ | 13.04 | $ | 12.44 | $ | 12.88 | $ | 12.20 | $ | 10.54 | ||||||||||||
|
| |||||||||||||||||||||||
Total returnd | (0.30)% | 12.67% | 2.46% | 10.88% | 25.52% | (11.69)% | ||||||||||||||||||
Ratios to average net assetse | ||||||||||||||||||||||||
Expenses | 0.94% | f | 0.93% | 0.95% | f | 0.94% | f | 0.93% | f | 0.96% | f | |||||||||||||
Net investment income | 4.12% | 4.69% | 5.01% | 5.36% | 5.78% | 5.48% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 171,822 | $ | 196,479 | $ | 188,786 | $ | 188,178 | $ | 162,074 | $ | 59,766 | ||||||||||||
Portfolio turnover rate | 25.69% | 49.98% | 55.65% | 56.46% | 56.19% | 47.68% | ||||||||||||||||||
Portfolio turnover rate excluding mortgage dollar rollsg | 24.73% | 48.75% | 55.65% | 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%.
gSee Note 1(h) regarding mortgage dollar rolls.
The accompanying notes are an integral part of these financial statements.
FSI-14
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited)
| Franklin Strategic Income Securities Fund | Country | Shares | Value | |||||||
Common Stocks and Other Equity Interests 0.4% | ||||||||||
Consumer Durables & Apparel 0.0% | ||||||||||
a,b Comfort Co. Inc., Escrow Account | United States | 13,427 | $ | — | ||||||
|
| |||||||||
Consumer Services 0.2% | ||||||||||
a,c,d Turtle Bay Resort | United States | 1,901,449 | 1,730,318 | |||||||
|
| |||||||||
Materials 0.1% | ||||||||||
a,b NewPage Corp., Litigation Trust | United States | 2,500,000 | — | |||||||
a NewPage Holdings Inc. | United States | 10,000 | 875,000 | |||||||
|
| |||||||||
| 875,000 | ||||||||||
|
| |||||||||
Media 0.1% | ||||||||||
a MGM Holdings Inc., A | United States | 25,789 | 1,295,897 | |||||||
|
| |||||||||
Transportation 0.0%† | ||||||||||
a,e CEVA Holdings LLC | United Kingdom | 224 | 201,852 | |||||||
|
| |||||||||
Total Common Stocks and Other Equity Interests | 4,103,067 | |||||||||
|
| |||||||||
Convertible Preferred Stocks 0.0%† | ||||||||||
Transportation 0.0%† | ||||||||||
a,e CEVA Holdings LLC, cvt. pfd., A-1 | United Kingdom | 6 | 7,200 | |||||||
a,e CEVA Holdings LLC, cvt. pfd., A-2 | United Kingdom | 486 | 436,959 | |||||||
|
| |||||||||
Total Convertible Preferred Stocks (Cost $731,856) | 444,159 | |||||||||
|
| |||||||||
Preferred Stocks (Cost $865,000) 0.1% | ||||||||||
Diversified Financials 0.1% | ||||||||||
GMAC Capital Trust I, 8.125%, pfd. | United States | 34,600 | 901,330 | |||||||
|
| |||||||||
| Principal Amount* | ||||||||||
Corporate Bonds 35.7% | ||||||||||
Automobiles & Components 0.7% | ||||||||||
f Avis Budget Finance PLC, senior note, 144A, 6.00%, 3/01/21 | United States | 1,400,000 | EUR | 1,838,255 | ||||||
Ford Motor Credit Co. LLC, senior note, | ||||||||||
6.625%, 8/15/17 | United States | 500,000 | 566,241 | |||||||
5.00%, 5/15/18 | United States | 1,000,000 | 1,068,540 | |||||||
8.125%, 1/15/20 | United States | 1,200,000 | 1,449,427 | |||||||
5.75%, 2/01/21 | United States | 600,000 | 650,957 | |||||||
The Goodyear Tire & Rubber Co., senior note, 6.50%, 3/01/21 | United States | 2,200,000 | 2,246,750 | |||||||
|
| |||||||||
| 7,820,170 | ||||||||||
|
| |||||||||
Banks 1.5% | ||||||||||
f Banco do Brasil SA, sub. note, 144A, 5.875%, 1/26/22 | Brazil | 4,000,000 | 3,920,000 | |||||||
CIT Group Inc., senior note, | ||||||||||
5.375%, 5/15/20 | United States | 1,600,000 | 1,646,000 | |||||||
5.00%, 8/15/22 | United States | 2,500,000 | 2,492,370 | |||||||
f 144A, 6.625%, 4/01/18 | United States | 500,000 | 542,500 | |||||||
HSBC USA Inc., sub. note, 5.00%, 9/27/20 | United States | 3,500,000 | 3,670,510 | |||||||
Regions Bank, sub. note, 7.50%, 5/15/18 | United States | 1,000,000 | 1,168,907 | |||||||
Regions Financial Corp., senior note, | ||||||||||
7.75%, 11/10/14 | United States | 705,000 | 762,057 | |||||||
5.75%, 6/15/15 | United States | 300,000 | 323,776 | |||||||
Royal Bank of Scotland Group PLC, sub. note, 6.125%, 12/15/22 | United Kingdom | 1,000,000 | 954,375 | |||||||
The Royal Bank of Scotland PLC, sub. note, 6.934%, 4/09/18 | United Kingdom | 2,300,000 | EUR | 3,139,742 | ||||||
|
| |||||||||
| 18,620,237 | ||||||||||
|
| |||||||||
FSI-15
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Franklin Strategic Income Securities Fund | Country | Principal Amount* | Value | |||||||
Corporate Bonds (continued) | ||||||||||
Capital Goods 0.9% | ||||||||||
f Abengoa Finance SAU, senior note, 144A, 8.875%, 11/01/17 | Spain | 3,000,000 | $ | 2,829,375 | ||||||
f KM Germany Holdings GmbH, secured note, 144A, 8.75%, 12/15/20 | Germany | 1,500,000 | EUR | 2,017,151 | ||||||
f Loxam SAS, senior sub. note, 144A, 7.375%, 1/24/20 | France | 1,000,000 | EUR | 1,295,955 | ||||||
Meritor Inc., senior note, 10.625%, 3/15/18 | United States | 2,500,000 | 2,718,750 | |||||||
Navistar International Corp., senior note, 8.25%, 11/01/21 | United States | 2,300,000 | 2,271,250 | |||||||
|
| |||||||||
| 11,132,481 | ||||||||||
|
| |||||||||
Commercial & Professional Services 0.2% | ||||||||||
f Algeco Scotsman Global Finance PLC, secured note, 144A, 8.50%, 10/15/18 | United Kingdom | 2,500,000 | 2,500,000 | |||||||
|
| |||||||||
Consumer Durables & Apparel 0.5% | ||||||||||
M/I Homes Inc., senior note, 8.625%, 11/15/18 | United States | 1,900,000 | 2,071,000 | |||||||
Shea Homes LP/Funding Corp., senior secured note, 8.625%, 5/15/19 | United States | 1,500,000 | 1,608,750 | |||||||
Visant Corp., senior note, 10.00%, 10/01/17 | United States | 2,800,000 | 2,597,000 | |||||||
|
| |||||||||
| 6,276,750 | ||||||||||
|
| |||||||||
Consumer Services 1.1% | ||||||||||
ClubCorp Club Operations Inc., senior note, 10.00%, 12/01/18 | United States | 2,500,000 | 2,712,500 | |||||||
f,g Fontainebleau Las Vegas, 144A, 11.00%, 6/15/15 | United States | 2,500,000 | 1,575 | |||||||
Harrah’s Operating Co. Inc., senior secured note, 11.25%, 6/01/17 | United States | 4,000,000 | 4,175,000 | |||||||
MGM Resorts International, senior note, | ||||||||||
6.625%, 7/15/15 | United States | 3,500,000 | 3,749,375 | |||||||
6.75%, 10/01/20 | United States | 200,000 | 207,500 | |||||||
6.625%, 12/15/21 | United States | 500,000 | 516,250 | |||||||
f Shingle Springs Tribal Gaming Authority, senior note, 144A, 9.375%, 6/15/15 | United States | 1,500,000 | 1,488,750 | |||||||
|
| |||||||||
| 12,850,950 | ||||||||||
|
| |||||||||
Diversified Financials 4.2% | ||||||||||
Ally Financial Inc., senior note, 7.50%, 9/15/20 | United States | 2,600,000 | 3,006,250 | |||||||
Bank of America Corp., | ||||||||||
h pfd., sub. bond, M, 8.125% to 5/15/18, FRN thereafter, Perpetual | United States | 3,500,000 | 3,955,000 | |||||||
senior note, 5.65%, 5/01/18 | United States | 1,500,000 | 1,667,657 | |||||||
Citigroup Inc., | ||||||||||
senior note, 6.125%, 11/21/17 | United States | 1,500,000 | 1,705,930 | |||||||
senior note, 5.375%, 8/09/20 | United States | 2,000,000 | 2,213,912 | |||||||
sub. note, 4.05%, 7/30/22 | United States | 300,000 | 288,711 | |||||||
Deutsche Bank AG, sub. bond, 4.296% to 5/24/23, FRN thereafter, 5/24/28 | Germany | 4,000,000 | 3,711,800 | |||||||
E*TRADE Financial Corp., senior note, 6.375%, 11/15/19 | United States | 1,400,000 | 1,428,000 | |||||||
General Electric Capital Corp., | ||||||||||
senior note, A, 8.50%, 4/06/18 | United States | 29,000,000 | ��MXN | 2,509,419 | ||||||
sub. note, 5.30%, 2/11/21 | United States | 1,000,000 | 1,098,187 | |||||||
f General Motors Financial Co. Inc., senior note, 144A, 3.25%, 5/15/18 | United States | 900,000 | 877,500 | |||||||
GMAC Inc., sub. note, 8.00%, 12/31/18 | United States | 900,000 | 1,023,750 | |||||||
The Goldman Sachs Group Inc., senior note, 2.375%, 1/22/18 | United States | 3,000,000 | 2,947,599 | |||||||
f International Lease Finance Corp., senior secured note, 144A, 6.75%, 9/01/16 | United States | 2,000,000 | 2,170,000 | |||||||
JPMorgan Chase & Co., | ||||||||||
6.00%, 1/15/18 | United States | 1,500,000 | 1,712,890 | |||||||
senior note, 4.25%, 10/15/20 | United States | 2,500,000 | 2,601,447 | |||||||
senior note, 3.25%, 9/23/22 | United States | 2,000,000 | 1,901,424 | |||||||
sub. note, 3.375%, 5/01/23 | United States | 1,000,000 | 932,504 | |||||||
f KKR Group Finance Co., senior note, 144A, 6.375%, 9/29/20 | United States | 3,500,000 | 3,982,209 | |||||||
Merrill Lynch & Co. Inc., senior note, 6.40%, 8/28/17 | United States | 2,000,000 | 2,259,718 | |||||||
FSI-16
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Franklin Strategic Income Securities Fund | Country | Principal Amount* | Value | |||||||
Corporate Bonds (continued) | ||||||||||
Diversified Financials (continued) | ||||||||||
Morgan Stanley, senior note, | ||||||||||
6.00%, 4/28/15 | United States | 2,000,000 | $ | 2,145,030 | ||||||
5.50%, 7/24/20 | United States | 1,500,000 | 1,616,993 | |||||||
5.50%, 7/28/21 | United States | 800,000 | 855,243 | |||||||
f Neuberger Berman Group LLC/Finance Corp., senior note, 144A, | ||||||||||
5.625%, 3/15/20 | United States | 600,000 | 624,000 | |||||||
5.875%, 3/15/22 | United States | 1,400,000 | 1,435,000 | |||||||
f Nuveen Investments Inc., senior note, 144A, | ||||||||||
9.125%, 10/15/17 | United States | 200,000 | 201,500 | |||||||
9.50%, 10/15/20 | United States | 1,800,000 | 1,800,000 | |||||||
SLM Corp., senior note, 8.45%, 6/15/18 | United States | 100,000 | 111,500 | |||||||
|
| |||||||||
| 50,783,173 | ||||||||||
|
| |||||||||
Energy 7.4% | ||||||||||
Access Midstream Partner LP/ACMP Finance Corp., senior note, 6.125%, 7/15/22 | United States | 600,000 | 610,500 | |||||||
Apache Corp., senior bond, 2.625%, 1/15/23 | United States | 4,000,000 | 3,693,512 | |||||||
CGG, senior note, | ||||||||||
7.75%, 5/15/17 | France | 1,000,000 | 1,020,000 | |||||||
6.50%, 6/01/21 | France | 2,000,000 | 2,030,000 | |||||||
CHC Helicopter SA, | ||||||||||
f senior note, 144A, 9.375%, 6/01/21 | Canada | 400,000 | 398,000 | |||||||
senior secured note, first lien, 9.25%, 10/15/20 | Canada | 3,000,000 | 3,080,625 | |||||||
Chesapeake Energy Corp., senior note, | ||||||||||
6.625%, 8/15/20 | United States | 3,000,000 | 3,240,000 | |||||||
6.125%, 2/15/21 | United States | 1,500,000 | 1,582,500 | |||||||
5.75%, 3/15/23 | United States | 800,000 | 812,000 | |||||||
CONSOL Energy Inc., senior note, | ||||||||||
8.00%, 4/01/17 | United States | 1,000,000 | 1,057,500 | |||||||
8.25%, 4/01/20 | United States | 1,500,000 | 1,578,750 | |||||||
6.375%, 3/01/21 | United States | 200,000 | 200,000 | |||||||
Crosstex Energy LP/Crosstex Energy Finance Corp., senior note, 8.875%, 2/15/18 | United States | 2,500,000 | 2,662,500 | |||||||
El Paso Corp., senior bond, 6.50%, 9/15/20 | United States | 1,500,000 | 1,606,020 | |||||||
Energy Transfer Equity LP, senior note, 7.50%, 10/15/20 | United States | 3,600,000 | 3,951,000 | |||||||
Energy Transfer Partners LP, senior note, 5.20%, 2/01/22 | United States | 1,500,000 | 1,589,301 | |||||||
Energy XXI Gulf Coast Inc., senior note, 9.25%, 12/15/17 | United States | 2,500,000 | 2,756,250 | |||||||
Enterprise Products Operating LLC, junior sub. note, 7.034% to 1/15/18, FRN thereafter, 1/15/68 | United States | 1,800,000 | 2,020,500 | |||||||
f Expro Finance Luxembourg, senior secured note, 144A, 8.50%, 12/15/16 | United Kingdom | 3,113,000 | 3,284,215 | |||||||
f,i Gaz Capital SA (OJSC Gazprom), loan participation, | ||||||||||
senior bond, 144A, 6.51%, 3/07/22 | Russia | 500,000 | 531,250 | |||||||
senior note, 144A, 5.092%, 11/29/15 | Russia | 3,000,000 | 3,172,245 | |||||||
senior note, 144A, 3.85%, 2/06/20 | Russia | 500,000 | 478,430 | |||||||
Halcon Resources Corp., senior note, 8.875%, 5/15/21 | United States | 2,000,000 | 1,950,000 | |||||||
f Kinder Morgan Finance Co. LLC, senior secured note, 144A, 6.00%, 1/15/18 | United States | 3,000,000 | 3,163,659 | |||||||
Linn Energy LLC/Finance Corp., senior note, | ||||||||||
8.625%, 4/15/20 | United States | 3,000,000 | 3,165,000 | |||||||
7.75%, 2/01/21 | United States | 1,400,000 | 1,410,500 | |||||||
f LUKOIL International Finance BV, senior note, 144A, 4.563%, 4/24/23 | Russia | 4,500,000 | 4,189,208 | |||||||
Martin Midstream Partners LP/Martin Midstream Finance Corp., senior note, | ||||||||||
8.875%, 4/01/18 | United States | 1,754,000 | 1,854,855 | |||||||
f 144A, 7.25%, 2/15/21 | United States | 600,000 | 604,500 | |||||||
f Midstates Petroleum Co. Inc. /LLC, senior note, 144A, 9.25%, 6/01/21 | United States | 900,000 | 847,125 | |||||||
FSI-17
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Franklin Strategic Income Securities Fund | Country | Principal Amount* | Value | |||||||
Corporate Bonds (continued) | ||||||||||
Energy (continued) | ||||||||||
Offshore Group Investment Ltd., | ||||||||||
f first lien, 144A, 7.125%, 4/01/23 | United States | 700,000 | $ | 691,250 | ||||||
senior secured note, first lien, 7.50%, 11/01/19 | United States | 2,200,000 | 2,301,750 | |||||||
PBF Holding Co. LLC, first lien, 8.25%, 2/15/20 | United States | 2,400,000 | 2,526,000 | |||||||
Peabody Energy Corp., senior note, | ||||||||||
6.00%, 11/15/18 | United States | 700,000 | 704,375 | |||||||
6.50%, 9/15/20 | United States | 2,500,000 | 2,518,750 | |||||||
6.25%, 11/15/21 | United States | 1,500,000 | 1,455,000 | |||||||
f Penn Virginia Corp., senior note, 144A, 8.50%, 5/01/20 | United States | 1,500,000 | 1,458,750 | |||||||
Penn Virginia Resource Partners LP/Finance Corp. II, senior note, | ||||||||||
8.375%, 6/01/20 | United States | 1,800,000 | 1,908,000 | |||||||
f 144A, 6.50%, 5/15/21 | United States | 400,000 | 386,000 | |||||||
Plains Exploration & Production Co., senior note, | ||||||||||
6.125%, 6/15/19 | United States | 600,000 | 636,646 | |||||||
6.875%, 2/15/23 | United States | 1,000,000 | 1,071,020 | |||||||
QR Energy LP/QRE Finance, senior note, 9.25%, 8/01/20 | United States | 2,000,000 | 2,065,000 | |||||||
Quicksilver Resources Inc., | ||||||||||
f,j secured note, second lien, 144A, FRN, 7.00%, 6/21/19 | United States | 1,800,000 | 1,629,000 | |||||||
senior note, 9.125%, 8/15/19 | United States | 500,000 | 427,500 | |||||||
f Sabine Pass Liquefaction LLC, | ||||||||||
144A, 5.625%, 4/15/23 | United States | 900,000 | 852,750 | |||||||
secured note, 144A, 5.625%, 2/01/21 | United States | 2,300,000 | 2,236,750 | |||||||
f Samson Investment Co., senior note, 144A, 9.75%, 2/15/20 | United States | 3,500,000 | 3,705,625 | |||||||
f Sanchez Energy Corp., senior note, 144A, 7.75%, 6/15/21 | United States | 1,400,000 | 1,386,000 | |||||||
W&T Offshore Inc., senior note, 8.50%, 6/15/19 | United States | 2,800,000 | 2,905,000 | |||||||
|
| |||||||||
| 89,405,111 | ||||||||||
|
| |||||||||
Food & Staples Retailing 0.7% | ||||||||||
f Cencosud SA, senior note, 144A, 4.875%, 1/20/23 | Chile | 3,500,000 | 3,430,052 | |||||||
Rite Aid Corp., senior secured note, 8.00%, 8/15/20 | United States | 1,300,000 | 1,446,250 | |||||||
Safeway Inc., senior bond, 3.95%, 8/15/20 | United States | 3,500,000 | 3,435,824 | |||||||
|
| |||||||||
| 8,312,126 | ||||||||||
|
| |||||||||
Food, Beverage & Tobacco 1.1% | ||||||||||
f Barry Callebaut Services SA, senior note, 144A, 5.50%, 6/15/23 | Belgium | 700,000 | 713,125 | |||||||
f Boparan Finance PLC, senior note, 144A, 9.75%, 4/30/18 | United Kingdom | 2,000,000 | EUR | 2,834,343 | ||||||
Constellation Brands Inc., senior note, 4.25%, 5/01/23 | United States | 700,000 | 662,375 | |||||||
Del Monte Corp., senior note, 7.625%, 2/15/19 | United States | 3,500,000 | 3,613,750 | |||||||
JBS USA LLC/Finance Inc., senior note, | ||||||||||
11.625%, 5/01/14 | United States | 1,000,000 | 1,057,500 | |||||||
f 144A, 8.25%, 2/01/20 | United States | 1,700,000 | 1,789,250 | |||||||
Kraft Foods Group Inc., senior bond, 3.50%, 6/06/22 | United States | 3,000,000 | 2,974,800 | |||||||
|
| |||||||||
| 13,645,143 | ||||||||||
|
| |||||||||
Health Care Equipment & Services 1.2% | ||||||||||
f Alere Inc., senior sub. note, 144A, 6.50%, 6/15/20 | United States | 800,000 | 779,000 | |||||||
f Cegedim SA, senior note, 144A, 6.75%, 4/01/20 | France | 1,400,000 | EUR | 1,766,502 | ||||||
CHS/Community Health Systems Inc., | ||||||||||
senior note, 8.00%, 11/15/19 | United States | 2,100,000 | 2,244,375 | |||||||
senior secured note, 5.125%, 8/15/18 | United States | 1,100,000 | 1,119,250 | |||||||
DaVita HealthCare Partners Inc., senior note, 5.75%, 8/15/22 | United States | 1,500,000 | 1,503,750 | |||||||
Emergency Medical Services Corp., senior note, 8.125%, 6/01/19 | United States | 1,300,000 | 1,387,750 | |||||||
FSI-18
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Franklin Strategic Income Securities Fund | Country | Principal Amount* | Value | |||||||
Corporate Bonds (continued) | ||||||||||
Health Care Equipment & Services (continued) | ||||||||||
HCA Inc., | ||||||||||
senior note, 7.50%, 2/15/22 | United States | 2,000,000 | $ | 2,220,000 | ||||||
senior note, 5.875%, 5/01/23 | United States | 500,000 | 501,250 | |||||||
senior secured bond, 7.25%, 9/15/20 | United States | 300,000 | 322,875 | |||||||
senior secured note, 5.875%, 3/15/22 | United States | 1,400,000 | 1,440,250 | |||||||
Hologic Inc., senior note, 6.25%, 8/01/20 | United States | 900,000 | 937,687 | |||||||
|
| |||||||||
| 14,222,689 | ||||||||||
|
| |||||||||
Household & Personal Products 0.1% | ||||||||||
Avon Products Inc., senior bond, 5.00%, 3/15/23 | United States | 800,000 | 796,252 | |||||||
|
| |||||||||
Insurance 0.6% | ||||||||||
MetLife Inc., junior sub. note, 6.40% to 12/15/36, FRN thereafter, 12/15/66 | United States | 3,500,000 | 3,600,625 | |||||||
fMitsui Sumitomo Insurance Co. Ltd., junior sub. note, 144A, 7.00% to 3/15/22, FRN thereafter, 3/15/72 | Japan | 3,000,000 | 3,282,735 | |||||||
|
| |||||||||
| 6,883,360 | ||||||||||
|
| |||||||||
Materials 4.2% | ||||||||||
ArcelorMittal, senior note, | ||||||||||
6.00%, 3/01/21 | Luxembourg | 4,000,000 | 3,989,780 | |||||||
6.75%, 2/25/22 | Luxembourg | 900,000 | 924,804 | |||||||
f Ardagh Packaging Finance PLC, senior note, 144A, 9.125%, 10/15/20 | Luxembourg | 900,000 | 960,750 | |||||||
f Ardagh Packaging Finance PLC/Ardagh MP Holdings USA Inc., | ||||||||||
secured note, 144A, 4.875%, 11/15/22 | Luxembourg | 200,000 | 186,500 | |||||||
senior note, 144A, 7.00%, 11/15/20 | Luxembourg | 600,000 | 580,125 | |||||||
senior secured note, first lien, 144A, 7.375%, 10/15/17 | Luxembourg | 600,000 | 642,750 | |||||||
f Ashland Inc., senior note, 144A, 4.75%, 8/15/22 | United States | 2,200,000 | 2,183,500 | |||||||
f Barminco Finance Pty. Ltd., senior note, 144A, 9.00%, 6/01/18 | Australia | 1,500,000 | 1,385,625 | |||||||
f Cemex SAB de CV, | ||||||||||
secured note, 144A, 5.875%, 3/25/19 | Mexico | 500,000 | 487,187 | |||||||
senior secured note, 144A, 9.00%, 1/11/18 | Mexico | 3,500,000 | 3,692,500 | |||||||
Euramax International Inc., senior secured note, 9.50%, 4/01/16 | United States | 1,400,000 | 1,347,500 | |||||||
f FMG Resources (August 2006) Pty. Ltd., senior note, 144A, | ||||||||||
7.00%, 11/01/15 | Australia | 700,000 | 704,770 | |||||||
6.00%, 4/01/17 | Australia | 500,000 | 488,750 | |||||||
6.875%, 2/01/18 | Australia | 2,500,000 | 2,478,125 | |||||||
f Glencore Funding LLC, senior note, 144A, 4.125%, 5/30/23 | United States | 1,000,000 | 893,122 | |||||||
f Ineos Finance PLC, senior secured note, 144A, | ||||||||||
8.375%, 2/15/19 | United Kingdom | 200,000 | 218,000 | |||||||
7.50%, 5/01/20 | United Kingdom | 300,000 | 320,250 | |||||||
f Ineos Group Holdings SA, | ||||||||||
secured note, second lien, 144A, 7.875%, 2/15/16 | Switzerland | 1,010,485 | EUR | 1,321,270 | ||||||
senior note, 144A, 6.50%, 8/15/18 | Switzerland | 700,000 | EUR | 873,620 | ||||||
f Inmet Mining Corp., senior note, 144A, 8.75%, 6/01/20 | Canada | 3,500,000 | 3,596,250 | |||||||
f Kerling PLC, senior secured note, 144A, 10.625%, 2/01/17 | United Kingdom | 2,800,000 | EUR | 3,828,072 | ||||||
Novelis Inc., senior note, | ||||||||||
8.375%, 12/15/17 | Canada | 1,500,000 | 1,597,500 | |||||||
8.75%, 12/15/20 | Canada | 1,600,000 | 1,724,000 | |||||||
f Orion Engineered Carbons Bondco GmbH, senior secured bond, 144A, 10.00%, 6/15/18 | Germany | 2,250,000 | EUR | 3,217,923 | ||||||
f,k Orion Engineered Carbons Finance & Co. SCA, senior note, 144A, PIK, 9.25%, 8/01/19 | Germany | 200,000 | 201,000 | |||||||
Reynolds Group Issuer Inc./LLC/SA, | United States | 900,000 | 909,000 | |||||||
senior note, 8.50%, 5/15/18 | United States | 2,500,000 | 2,587,500 | |||||||
senior note, 8.25%, 2/15/21 | United States | 600,000 | 596,250 | |||||||
senior secured note, 7.125%, 4/15/19 | United States | 1,000,000 | 1,061,250 | |||||||
FSI-19
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Franklin Strategic Income Securities Fund | Country | Principal Amount* | Value | |||||||
Corporate Bonds (continued) | ||||||||||
Materials (continued) | ||||||||||
f Sealed Air Corp., senior note, 144A, | ||||||||||
8.125%, 9/15/19 | United States | 1,000,000 | $ | 1,120,000 | ||||||
8.375%, 9/15/21 | United States | 800,000 | 908,000 | |||||||
f U.S. Coatings Acquisition Inc./Flash Dutch 2 BV, 144A, 5.75%, 2/01/21 | United States | 1,000,000 | EUR | 1,316,294 | ||||||
f Xstrata Finance Canada Ltd., senior note, 144A, 4.95%, 11/15/21 | Canada | 4,000,000 | 3,877,052 | |||||||
|
| |||||||||
| 50,219,019 | ||||||||||
|
| |||||||||
Media 2.7% | ||||||||||
f Central European Media Enterprises Ltd., secured note, 144A, 11.625%, 9/15/16 | Czech Republic | 300,000 | EUR | 417,830 | ||||||
f CET 21 spol sro, senior secured note, 144A, 9.00%, 11/01/17 | Czech Republic | 300,000 | EUR | 428,324 | ||||||
Clear Channel Communications Inc., senior note, 9.00%, 3/01/21 | United States | 5,000,000 | 4,775,000 | |||||||
Clear Channel Worldwide Holdings Inc., | ||||||||||
f senior note, 144A, 6.50%, 11/15/22 | United States | 1,000,000 | 1,035,000 | |||||||
senior sub. note, 7.625%, 3/15/20 | United States | 200,000 | 207,000 | |||||||
senior sub. note, 7.625%, 3/15/20 | United States | 1,300,000 | 1,352,000 | |||||||
CSC Holdings Inc., senior deb., 7.625%, 7/15/18 | United States | 1,500,000 | 1,698,750 | |||||||
CSC Holdings LLC, senior note, 6.75%, 11/15/21 | United States | 3,000,000 | 3,247,500 | |||||||
DISH DBS Corp., senior note, | ||||||||||
7.125%, 2/01/16 | United States | 4,000,000 | 4,350,000 | |||||||
6.75%, 6/01/21 | United States | 500,000 | 533,750 | |||||||
5.875%, 7/15/22 | United States | 500,000 | 510,000 | |||||||
Media General Inc., senior secured note, 11.75%, 2/15/17 | United States | 1,300,000 | 1,443,000 | |||||||
f Nara Cable Funding Ltd., senior note, 144A, 8.875%, 12/01/18 | Spain | 100,000 | 103,750 | |||||||
k Radio One Inc., senior sub. note, PIK, 12.50%, 5/24/16 | United States | 1,500,000 | 1,518,750 | |||||||
f,g Seat Pagine Gialle SpA, senior secured note, 144A, 10.50%, 1/31/17 | Italy | 1,000,000 | EUR | 338,429 | ||||||
Time Warner Inc., | ||||||||||
7.625%, 4/15/31 | United States | 2,000,000 | 2,529,714 | |||||||
senior bond, 3.40%, 6/15/22 | United States | 500,000 | 485,284 | |||||||
fUnitymedia Hessen GmbH & Co.KG/Unitymedia NRW GmbH, senior secured note, 144A, 5.625%, 4/15/23 | Germany | 800,000 | EUR | 1,004,874 | ||||||
f Univision Communications Inc., | ||||||||||
senior secured bond, 144A, 6.75%, 9/15/22 | United States | 500,000 | 527,500 | |||||||
senior secured note, 144A, 7.875%, 11/01/20 | United States | 2,500,000 | 2,718,750 | |||||||
f UPC Holding BV, senior note, 144A, 6.375%, 9/15/22 | Netherlands | 500,000 | EUR | 627,233 | ||||||
f UPCB Finance II Ltd., senior secured note, 144A, 6.375%, 7/01/20 | Netherlands | 2,000,000 | EUR | 2,666,000 | ||||||
f UPCB Finance VI Ltd., senior secured note, 144A, 6.875%, 1/15/22 | Netherlands | 500,000 | 518,750 | |||||||
|
| |||||||||
| 33,037,188 | ||||||||||
|
| |||||||||
Pharmaceuticals, Biotechnology & Life Sciences 1.6% | ||||||||||
f AbbVie Inc., senior note, 144A, 2.90%, 11/06/22 | United States | 1,500,000 | 1,404,696 | |||||||
f Capsugel FinanceCo SCA, senior note, 144A, 9.875%, 8/01/19 | United States | 2,000,000 | EUR | 2,892,917 | ||||||
Gilead Sciences Inc., senior note, | ||||||||||
4.50%, 4/01/21 | United States | 1,500,000 | 1,627,327 | |||||||
4.40%, 12/01/21 | United States | 1,000,000 | 1,075,134 | |||||||
Grifols Inc., senior note, 8.25%, 2/01/18 | Spain | 1,500,000 | 1,620,000 | |||||||
f inVentiv Health Inc., senior note, 144A, | ||||||||||
9.00%, 1/15/18 | United States | 600,000 | 628,500 | |||||||
10.00%, 8/15/18 | United States | 1,800,000 | 1,512,000 | |||||||
f,k Jaguar Holding Co. I, senior note, 144A, PIK, 9.375%, 10/15/17 | United States | 1,900,000 | 1,995,000 | |||||||
f VPI Escrow Corp., senior note, 144A, 6.375%, 10/15/20 | United States | 2,900,000 | 2,881,875 | |||||||
f,l VPII Escrow Corp., senior note, 144A, 7.50%, 7/15/21 | United States | 1,200,000 | 1,200,000 | |||||||
f Zoetis Inc., senior bond, 144A, 3.25%, 2/01/23 | United States | 2,000,000 | 1,902,942 | |||||||
|
| |||||||||
| 18,740,391 | ||||||||||
|
| |||||||||
FSI-20
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Franklin Strategic Income Securities Fund | Country | Principal Amount* | Value | |||||||
Corporate Bonds (continued) | ||||||||||
Retailing 0.6% | ||||||||||
f Edcon Pty. Ltd., secured note, 144A, 9.50%, 3/01/18 | South Africa | 2,400,000 | EUR | $ | 2,913,093 | |||||
f Matalan Finance Ltd., senior secured note, 144A, 8.875%, 4/29/16 | United Kingdom | 1,500,000 | GBP | 2,306,392 | ||||||
f New Look Bondco I PLC, 144A, 8.75%, 5/14/18 | United Kingdom | 1,300,000 | GBP | 1,912,849 | ||||||
|
| |||||||||
| 7,132,334 | ||||||||||
|
| |||||||||
Semiconductors & Semiconductor Equipment 0.3% | ||||||||||
Freescale Semiconductor Inc., | ||||||||||
senior note, 8.875%, 12/15/14 | United States | 182,000 | 182,910 | |||||||
senior note, 8.05%, 2/01/20 | United States | 1,600,000 | 1,628,000 | |||||||
senior note, 10.75%, 8/01/20 | United States | 1,382,000 | 1,527,110 | |||||||
f senior secured note, 144A, 9.25%, 4/15/18 | United States | 500,000 | 541,250 | |||||||
|
| |||||||||
| 3,879,270 | ||||||||||
|
| |||||||||
Software & Services 1.0% | ||||||||||
f Ceridian Corp., secured note, 144A, 8.875%, 7/15/19 | United States | 1,000,000 | 1,116,250 | |||||||
Equinix Inc., senior bond, 5.375%, 4/01/23 | United States | 2,100,000 | 2,068,500 | |||||||
First Data Corp., | ||||||||||
senior bond, 12.625%, 1/15/21 | United States | 300,000 | 318,750 | |||||||
f senior secured bond, 144A, 8.25%, 1/15/21 | United States | 4,500,000 | 4,612,500 | |||||||
Sterling International Inc., senior note, 11.00%, 10/01/19 | United States | 1,100,000 | 1,144,000 | |||||||
West Corp., senior note, 7.875%, 1/15/19 | United States | 2,500,000 | 2,609,375 | |||||||
|
| |||||||||
| 11,869,375 | ||||||||||
|
| |||||||||
Technology Hardware & Equipment 0.5% | ||||||||||
CDW LLC/Finance Corp., senior note, 8.50%, 4/01/19 | United States | 2,500,000 | 2,700,000 | |||||||
f,k CommScope Holdings Inc., senior note, 144A, PIK, 6/01/20 | United States | 200,000 | 192,000 | |||||||
f CommScope Inc., senior note, 144A, 8.25%, 1/15/19 | United States | 3,000,000 | 3,217,500 | |||||||
|
| |||||||||
| 6,109,500 | ||||||||||
|
| |||||||||
Telecommunication Services 3.3% | ||||||||||
CC Holdings GS V LLC / Crown Castle GS III Corp., senior secured bond, 3.849%, 4/15/23 | United States | 2,300,000 | 2,171,849 | |||||||
CenturyLink Inc., senior note, | ||||||||||
6.00%, 4/01/17 | United States | 1,500,000 | 1,623,750 | |||||||
6.45%, 6/15/21 | United States | 1,000,000 | 1,047,500 | |||||||
Cricket Communications Inc., senior note, 7.75%, 10/15/20 | United States | 3,000,000 | 2,895,000 | |||||||
Crown Castle International Corp., senior bond, 5.25%, 1/15/23 | United States | 500,000 | 481,875 | |||||||
f Digicel Group Ltd., senior note, 144A, 8.25%, 9/30/20 | Bermuda | 2,000,000 | 2,076,250 | |||||||
f Digicel Ltd., senior note, 144A, | ||||||||||
8.25%, 9/01/17 | Bermuda | 300,000 | 313,500 | |||||||
6.00%, 4/15/21 | Bermuda | 800,000 | 768,000 | |||||||
f eAccess Ltd., senior note, 144A, | ||||||||||
8.25%, 4/01/18 | Japan | 1,400,000 | 1,552,250 | |||||||
8.375%, 4/01/18 | Japan | 600,000 | EUR | 867,387 | ||||||
Frontier Communications Corp., senior note, | ||||||||||
8.50%, 4/15/20 | United States | 2,500,000 | 2,768,750 | |||||||
8.75%, 4/15/22 | United States | 1,000,000 | 1,095,000 | |||||||
Intelsat Jackson Holdings SA, senior note, | ||||||||||
7.25%, 10/15/20 | Luxembourg | 2,000,000 | 2,110,000 | |||||||
7.50%, 4/01/21 | Luxembourg | 2,000,000 | 2,110,000 | |||||||
f 144A, 6.625%, 12/15/22 | Luxembourg | 1,600,000 | 1,560,000 | |||||||
MetroPCS Wireless Inc., senior note, 7.875%, 9/01/18 | United States | 500,000 | 535,000 | |||||||
f,k Mobile Challenger Intermediate Group SA, secured note, 144A, PIK, 8.75%, 3/15/19 | Switzerland | 600,000 | EUR | 761,465 | ||||||
FSI-21
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Franklin Strategic Income Securities Fund | Country | Principal Amount* | Value | |||||||
Corporate Bonds (continued) | ||||||||||
Telecommunication Services (continued) | ||||||||||
Sprint Nextel Corp., senior note, | ||||||||||
8.375%, 8/15/17 | United States | 3,000,000 | $ | 3,382,500 | ||||||
6.00%, 11/15/22 | United States | 500,000 | 492,500 | |||||||
f 144A, 9.00%, 11/15/18 | United States | 1,500,000 | 1,758,750 | |||||||
f 144A, 7.00%, 3/01/20 | United States | 800,000 | 866,000 | |||||||
Telefonica Emisiones SAU, senior note, | ||||||||||
5.462%, 2/16/21 | Spain | 2,000,000 | 2,063,970 | |||||||
4.57%, 4/27/23 | Spain | 2,000,000 | 1,918,200 | |||||||
f Wind Acquisition Finance SA, senior secured note, 144A, 11.75%, 7/15/17 | Italy | 3,000,000 | 3,135,000 | |||||||
f,k Wind Acquisition Holdings Finance SA, senior secured note, 144A, PIK, 12.25%, 7/15/17 | Italy | 721,161 | EUR | 910,448 | ||||||
|
| |||||||||
| 39,264,944 | ||||||||||
|
| |||||||||
Transportation 0.3% | ||||||||||
e CEVA Group PLC, senior note, first lien, 144A, 4.00%, 5/01/18 | United Kingdom | 1,600,000 | 1,312,000 | |||||||
HDTFS Inc., 6.25%, 10/15/22 | United States | 700,000 | 734,125 | |||||||
Hertz Corp., senior note, 6.75%, 4/15/19 | United States | 2,000,000 | 2,125,000 | |||||||
|
| |||||||||
| 4,171,125 | ||||||||||
|
| |||||||||
Utilities 1.0% | ||||||||||
f Calpine Corp., senior secured note, 144A, | ||||||||||
7.875%, 7/31/20 | United States | 982,000 | 1,070,380 | |||||||
7.50%, 2/15/21 | United States | 1,700,000 | 1,823,250 | |||||||
f,h EDF SA, sub. note, 144A, 5.25% to 1/29/23, FRN thereafter, Perpetual | France | 4,000,000 | 3,831,060 | |||||||
f InterGen NV, secured bond, 144A, 7.00%, 6/30/23 | Netherlands | 1,700,000 | 1,658,562 | |||||||
f Texas Competitive Electric Holdings Co. LLC/Texas Competitive Electric Holdings Finance Inc., senior secured note, 144A, 11.50%, 10/01/20 | United States | 5,000,000 | 3,762,500 | |||||||
|
| |||||||||
| 12,145,752 | ||||||||||
|
| |||||||||
Total Corporate Bonds (Cost $417,927,966) | 429,817,340 | |||||||||
|
| |||||||||
j,m Senior Floating Rate Interests 17.3% | ||||||||||
Automobiles & Components 0.3% | ||||||||||
August Luxuk Holding Co., Lux Second Lien, 10.50%, 4/27/19 | Luxembourg | 1,246,997 | 1,256,349 | |||||||
August U.S. Holding Co. Inc., U.S. Second Lien, 10.50%, 4/27/19 | United States | 408,309 | 411,371 | |||||||
l FRAM Group Holdings Inc. (Autoparts Holdings), Second Lien Term Loan, 10.50%, 1/29/18 | United States | 2,308,371 | 2,244,891 | |||||||
|
| |||||||||
| 3,912,611 | ||||||||||
|
| |||||||||
Capital Goods 1.4% | ||||||||||
Accudyne Industries LLC (Silver II U.S. Holdings/Hamilton), 2013 Specified Refinancing Term Loan, 4.00%, 12/13/19 | Luxembourg | 2,467,401 | 2,436,953 | |||||||
Air Distribution Technologies (Tomkins Air Distr.), Second Lien Initial Loan, 9.25%, 5/09/20 | United States | 737,891 | 761,873 | |||||||
Allison Transmission Inc., | ||||||||||
Term B-2 Loan, 3.20%, 8/07/17 | United States | 224,841 | 225,918 | |||||||
Term B-3 Loan, 4.25%, 8/23/19 | United States | 1,774,179 | 1,785,545 | |||||||
b Erickson Air-Crane Inc., Purchase Price Notes, 6.00%, 11/02/20 | United States | 190,406 | 190,406 | |||||||
Sensus USA Inc., Second Lien Term Loan, 8.50%, 5/09/18 | United States | 2,582,186 | 2,590,255 | |||||||
Terex Corp., U.S. Term Loan, 4.50%, 4/28/17 | United States | 2,701,610 | 2,732,003 | |||||||
Tomkins LLC and Tomkins Inc., Term B-2 Loan, 3.75%, 9/21/16 | United States | 2,791,626 | 2,809,947 | |||||||
TransDigm Inc., | ||||||||||
Term Loan C, 5.25%, 2/28/20 | United States | 1,400,000 | 1,387,166 | |||||||
Tranche C Term Loan, 3.75%, 2/28/20 | United States | 1,233,110 | 1,221,806 | |||||||
|
| |||||||||
| 16,141,872 | ||||||||||
|
| |||||||||
FSI-22
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Franklin Strategic Income Securities Fund | Country | Principal Amount* | Value | |||||||
j,mSenior Floating Rate Interests (continued) | ||||||||||
Commercial & Professional Services 1.0% | ||||||||||
Altegrity Inc., Tranche D Term Loan, 7.75%, 2/21/15 | United States | 928,600 | $ | 921,635 | ||||||
ARAMARK Corp., | ||||||||||
Extended Synthetic L/C, 3.545%, 7/26/16 | United States | 143,344 | 143,858 | |||||||
Synthetic L/C-3, 3.545%, 7/26/16 | United States | 91,726 | 92,219 | |||||||
Term Loan B Extended, 3.776%, 7/26/16 | United States | 2,178,033 | 2,185,848 | |||||||
U.S. Term C Loan, 3.776%, 7/26/16 | United States | 1,196,190 | 1,202,613 | |||||||
EnviroSolutions Real Property Holdings, Second Lien Term Loan, 8.00%, 7/29/14 | United States | 483,330 | 483,330 | |||||||
Interactive Data Corp., Term B Loan, 3.75%, 2/11/18 | United States | 4,011,624 | 3,999,087 | |||||||
KAR Auction Services Inc. (Adesa), Term Loan, 3.75%, 5/19/17 | United States | 3,101,419 | 3,114,988 | |||||||
|
| |||||||||
| 12,143,578 | ||||||||||
|
| |||||||||
Consumer Services 1.2% | ||||||||||
Ameristar Casinos Inc., B Term Loan, 4.00%, 4/14/18 | United States | 1,764,937 | 1,770,452 | |||||||
l Caesars Entertainment Operating Co. Inc., Term Loan B-4, 9.50%, 10/31/16 | United States | 802,465 | 799,233 | |||||||
Centaur Acquisition LLC, Second Lien Term Loan, 8.75%, 2/20/20 | United States | 410,000 | 414,100 | |||||||
DineEquity Inc., Term B-2 Loan, 3.75%, 10/19/17 | United States | 1,363,884 | 1,367,863 | |||||||
Dunkin’ Brands Inc., Term B-3 Loan, 3.75%, 2/14/20 | United States | 1,822,407 | 1,821,126 | |||||||
d,k Turtle Bay Holdings LLC, Term Loan B, PIK, 3.00%, 3/01/15 | United States | 5,534,372 | 5,174,638 | |||||||
Weight Watchers International Inc., Initial Tranche B-2 Term Loan, 3.75%, 4/02/20 | United States | 2,941,450 | 2,929,487 | |||||||
|
| |||||||||
| 14,276,899 | ||||||||||
|
| |||||||||
Diversified Financials 0.6% | ||||||||||
Asurion LLC, | ||||||||||
Amortizing Term Loans (B1), 4.75%, 7/23/17 | United States | 662,016 | 658,430 | |||||||
Incremental Tranche B-1 Term Loan, 4.50%, 5/24/19 | United States | 3,035,511 | 3,014,642 | |||||||
Trans Union LLC, 2013 Replacement Term Loan, 4.25%, 2/10/19 | United States | 3,947,368 | 3,972,039 | |||||||
|
| |||||||||
| 7,645,111 | ||||||||||
|
| |||||||||
Energy 0.8% | ||||||||||
l Arch Coal Inc., Term Loans, 5.75%, 5/16/18 | United States | 4,836,225 | 4,819,603 | |||||||
k ATP Oil & Gas Corp., | ||||||||||
Additional NM Loans (DIP), PIK, 4.50% - 10.00%, 2/28/14 | United States | 5,694 | 3,416 | |||||||
New Money (DIP), PIK, 4.50% - 10.00%, 2/28/14 | United States | 40,342 | 24,205 | |||||||
Refinancing Loan (DIP), PIK, 4.50% - 10.00%, 2/28/14 | United States | 86,141 | 51,685 | |||||||
Pacific Drilling SA, Term Loan, 4.50%, 6/03/18 | Luxembourg | 682,498 | 681,047 | |||||||
Patriot Coal Corp., DIP Term Loan, 9.25%, 10/03/13 | United States | 2,925,503 | 2,908,134 | |||||||
l Quicksilver Resources Inc., Second Lien Loans, 8.00%, 6/21/19 | United States | 907,929 | 880,691 | |||||||
|
| |||||||||
| 9,368,781 | ||||||||||
|
| |||||||||
Food & Staples Retailing 0.2% | ||||||||||
AdvancePierre Foods Inc., | ||||||||||
Loans, 5.75%, 7/10/17 | United States | 1,058,748 | 1,067,130 | |||||||
Second Lien Term Loan, 9.50%, 10/10/17 | United States | 1,619,009 | 1,654,088 | |||||||
|
| |||||||||
| 2,721,218 | ||||||||||
|
| |||||||||
Food, Beverage & Tobacco 0.9% | ||||||||||
l Allflex Holidngs III Inc., 2nd Lien Term Loan, 9.25%, 6/24/21 | United States | 1,060,000 | 1,069,275 | |||||||
l CSM Bakery Supplies LLC, Second Lien Term Loan, 9.75%, 6/03/21 | United States | 370,000 | 368,150 | |||||||
Del Monte Foods Co., Initial Term Loans, 4.00%, 3/08/18 | United States | 8,360,854 | 8,344,274 | |||||||
Pinnacle Foods Finance LLC, Tranche G Term Loan, 3.25%, 4/29/20 | United States | 1,168,135 | 1,163,633 | |||||||
|
| |||||||||
| 10,945,332 | ||||||||||
|
| |||||||||
Health Care Equipment & Services 1.9% | ||||||||||
Ardent Medical Services Inc., Second Lien Term Loan, 11.00%, 1/02/19 | United States | 1,195,436 | 1,214,862 | |||||||
FSI-23
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Franklin Strategic Income Securities Fund | Country | Principal Amount* | Value | |||||||
j,mSenior Floating Rate Interests (continued) | ||||||||||
Health Care Equipment & Services (continued) | ||||||||||
Bausch & Lomb Inc., Parent Term Loans, 4.00%, 5/18/19 | United States | 2,579,772 | $ | 2,586,544 | ||||||
Carestream Health Inc., Second Lien Loan, 9.50%, 12/07/19 | United States | 3,260,000 | 3,200,235 | |||||||
l Community Health Systems Inc., New Extended Term Loan, 3.773% - 3.776%, 1/25/17 | United States | 7,781,206 | 7,800,659 | |||||||
DaVita HealthCare Partners Inc., | ||||||||||
Tranche B Term Loan, 4.50%, 10/20/16 | United States | 2,646,744 | 2,664,096 | |||||||
Tranche B-2 Term Loan, 4.00%, 8/24/19 | United States | 3,614,051 | 3,627,267 | |||||||
HCA Inc., Tranche B-4 Term Loan, 2.945%, 5/01/18 | United States | 170,000 | 169,522 | |||||||
Hologic Inc., Tranche B Term Loan, 4.50%, 8/01/19 | United States | 2,089,290 | 2,098,920 | |||||||
|
| |||||||||
| 23,362,105 | ||||||||||
|
| |||||||||
Insurance 0.0%† | ||||||||||
Affirmative Insurance Holdings Inc., Term Loan, 11.25%, 1/31/14 | United States | 240,149 | 158,499 | |||||||
|
| |||||||||
Materials 2.9% | ||||||||||
American Rock Salt Co. LLC, Initial Loan, 5.50%, 4/25/17 | United States | 1,888,587 | 1,887,171 | |||||||
Axalta Coating Systems U.S. Holdings Inc., Initial Term B Loans, 4.75%, 2/01/20 | United States | 2,813,815 | 2,819,594 | |||||||
Berry Plastics Corp., Term D Loan, 3.50%, 2/08/20 | United States | 2,976,799 | 2,947,871 | |||||||
Caraustar Industries Inc., Initial Term Loan, 7.50%, 5/01/19 | United States | 696,923 | 702,847 | |||||||
FMG America Finance Inc. (Fortescue Metals Group), Loans, 5.25%, 10/18/17 | United States | 2,523,134 | 2,512,796 | |||||||
Ineos U.S. Finance LLC, Dollar Term Loan, 4.00%, 5/04/18 | United States | 1,708,812 | 1,680,866 | |||||||
Macdermid Holdings LLC, | ||||||||||
First Lien Tranche B Term Loan, 4.00%, 6/07/20 | United States | 650,000 | 648,781 | |||||||
l Second Lien Tranche B Term Loan, 7.75%, 12/07/20 | United States | 602,504 | 611,541 | |||||||
l OXEA German Luxembourg and U.S. Co-Borrowers, Second Lien Term Loan, 9.50%, 7/15/20 | Luxembourg | 765,404 | 762,763 | |||||||
Pact Group (USA) LLC, Term Loans, 3.75%, 5/29/20 | United States | 1,060,000 | 1,056,025 | |||||||
Reynolds Group Holdings Inc., U.S. Term Loan, 4.75%, 9/28/18 | United States | 6,909,817 | 6,937,166 | |||||||
Road Infrastructure Investment LLC (Ennis Flint), Second Lien Term Loan, 10.25%, 9/30/18 | United States | 5,633,952 | 5,718,461 | |||||||
l Tronox Pigments (Netherlands) BV, Term Loan, 4.50%, 3/19/20 | Netherlands | 3,409,134 | 3,431,051 | |||||||
Walter Energy Inc., B Term Loan, 5.75%, 4/01/18 | United States | 2,981,236 | 2,937,346 | |||||||
|
| |||||||||
| 34,654,279 | ||||||||||
|
| |||||||||
Media 2.0% | ||||||||||
Clear Channel Communications Inc., Tranche B Term Loan, 3.845%, 1/29/16 | United States | 2,470,125 | 2,265,105 | |||||||
CSC Holdings LLC (Cablevision), Term B Loan, 2.695%, 4/17/20 | United States | 3,630,253 | 3,598,488 | |||||||
Cumulus Media Holdings Inc., Second Lien Term Loan, 7.50%, 9/16/19 | United States | 4,867,932 | 4,980,503 | |||||||
FoxCo Acquisition Sub LLC, Initial Term Loan, 5.50%, 7/14/17 | United States | 1,502,230 | 1,519,757 | |||||||
NEP/NCP Holdco Inc., Second Lien Term Loan, 9.50%, 7/22/20 | United States | 299,222 | 308,198 | |||||||
l Nine Entertainment Group Pty. Ltd., Term B Loan, 3.50%, 2/05/20 | Australia | 2,053,235 | 2,048,958 | |||||||
UPC Financing Partnership, | ||||||||||
Term Loan AF, 4.00%, 1/29/21 | Netherlands | 736,600 | 738,442 | |||||||
Term Loan AH, 3.25%, 6/30/21 | Netherlands | 5,315,827 | 5,297,556 | |||||||
l Virgin Media Investment Holdings Ltd., B Facility, 5.00%, 6/07/20 | United States | 2,997,301 | 2,973,886 | |||||||
l WMG Acquisition Corp., Tranche B Term Loan, 5.00%, 7/01/20 | United States | 850,000 | 844,157 | |||||||
|
| |||||||||
| 24,575,050 | ||||||||||
|
| |||||||||
Pharmaceuticals, Biotechnology & Life Sciences 1.1% | ||||||||||
Arysta Lifescience SPC LLC, | ||||||||||
Initial Term Loan, 4.50%, 5/29/20 | United States | 2,419,654 | 2,411,064 | |||||||
l Second Lien Initial Term Loan, LLC, 8.25%, 11/30/20 | United States | 2,257,150 | 2,247,952 | |||||||
Par Pharmaceutical Cos. Inc., Term B-1 Loan, 4.25%, 9/30/19 | United States | 2,069,600 | 2,060,175 | |||||||
Valeant Pharmaceuticals International Inc., | ||||||||||
Series C-1 Tranche B Term Loan, 3.50%, 12/11/19 | Canada | 2,555,359 | 2,540,188 | |||||||
Series D-1 Tranche B Term Loan, 3.50%, 2/13/19 | Canada | 1,072,810 | 1,065,994 | |||||||
FSI-24
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Franklin Strategic Income Securities Fund | Country | Principal Amount* | Value | |||||||
j,m Senior Floating Rate Interests (continued) | ||||||||||
Pharmaceuticals, Biotechnology & Life Sciences (continued) | ||||||||||
Valeant Pharmaceuticals International Inc. (continued) | ||||||||||
Series E Tranche B Term Loan, 6.00%, 6/30/20 | Canada | 280,000 | $ | 279,875 | ||||||
Warner Chilcott Corp., | ||||||||||
Additional Term B-1 Loan, 4.25%, 3/15/18 | United States | 546,928 | 548,227 | |||||||
Term B-1 Loan, 4.25%, 3/15/18 | United States | 1,256,337 | 1,259,320 | |||||||
WC Luxco S.A.R.L., Term B-3 Loan, 4.25%, 3/15/18 | Luxembourg | 990,020 | 992,371 | |||||||
|
| |||||||||
| 13,405,166 | ||||||||||
|
| |||||||||
Retailing 1.4% | ||||||||||
BJ’s Wholesale Club Inc., | ||||||||||
2013 Replacement Loans, 4.25%, 9/26/19 | United States | 6,303,222 | 6,296,327 | |||||||
Second Lien Term Loan, 9.75%, 3/26/20 | United States | 2,652,243 | 2,699,487 | |||||||
Evergreen AcqCo. 1 LP (Savers), Term Loan, 5.00%, 7/09/19 | United States | 3,521,635 | 3,562,134 | |||||||
Party City Holdings Inc., 2013 Replacement Term Loan, 4.25%, 7/27/19 | United States | 3,790,950 | 3,787,398 | |||||||
|
| |||||||||
| 16,345,346 | ||||||||||
|
| |||||||||
Software & Services 0.7% | ||||||||||
Blue Coat Systems Inc., Second Lien Term Loan, 10.75%, 6/28/20 | United States | 930,612 | 929,449 | |||||||
Genpact International Inc., Domestic Term B-1 Loan, 3.50%, 8/30/19 | United States | 588,215 | 593,362 | |||||||
l MoneyGram International Inc., Term Loan, 4.25%, 3/28/20 | United States | 4,632,545 | 4,638,335 | |||||||
Vertafore Inc., Second Lien Term Loan, 9.75%, 10/27/17 | United States | 1,872,942 | 1,911,571 | |||||||
Websense Inc., Second Lien Term Loan, 9.50%, 12/27/20 | United States | 280,000 | 278,463 | |||||||
|
| |||||||||
| 8,351,180 | ||||||||||
|
| |||||||||
Technology Hardware & Equipment 0.1% | ||||||||||
Telesat Canada/Telesat LLC, U.S. Term B-2 Loan, 3.50%, 3/28/19 | Canada | 1,477,029 | 1,479,338 | |||||||
|
| |||||||||
Telecommunication Services 0.4% | ||||||||||
Intelsat Jackson Holdings SA, Tranche B-1 Term Loan, 4.25%, 4/02/18 | Luxembourg | 4,683,046 | 4,699,146 | |||||||
|
| |||||||||
Transportation 0.4% | ||||||||||
Avis Budget Car Rental LLC, Tranche B Term Loan, 3.00%, 3/15/19 | United States | 1,278,185 | 1,275,389 | |||||||
Evergreen International Aviation Inc., First Lien Term Loan, 5.00%, 6/30/15 | United States | 267,893 | 262,535 | |||||||
Hertz Corp., | ||||||||||
Credit Linked Deposit, 3.75%, 3/11/18 | United States | 847,103 | 826,103 | |||||||
Tranche B-1 Term Loan, 3.75%, 3/11/18 | United States | 1,287,406 | 1,292,636 | |||||||
l YRC Worldwide Inc., U.S. Tranche Term Loan, 8.75%, 3/21/15 | United States | 1,000,000 | 992,500 | |||||||
|
| |||||||||
| 4,649,163 | ||||||||||
|
| |||||||||
Total Senior Floating Rate Interests (Cost $207,243,001) | 208,834,674 | |||||||||
|
| |||||||||
Foreign Government and Agency Securities 20.8% | ||||||||||
Government of Canada, | ||||||||||
2.25%, 8/01/14 | Canada | 388,000 | CAD | 373,356 | ||||||
1.00%, 11/01/14 | Canada | 591,000 | CAD | 560,802 | ||||||
2.00%, 12/01/14 | Canada | 1,420,000 | CAD | 1,366,001 | ||||||
1.00%, 2/01/15 | Canada | 3,489,000 | CAD | 3,308,568 | ||||||
1.00%, 5/01/15 | Canada | 5,080,000 | CAD | 4,813,377 | ||||||
Government of Hungary, | ||||||||||
5.50%, 2/12/14 | Hungary | 1,235,400,000 | HUF | 5,496,324 | ||||||
7.75%, 8/24/15 | Hungary | 4,600,000 | HUF | 21,573 | ||||||
5.50%, 2/12/16 | Hungary | 1,864,700,000 | HUF | 8,359,536 | ||||||
5.50%, 12/22/16 | Hungary | 23,030,000 | HUF | 103,008 | ||||||
6.50%, 6/24/19 | Hungary | 206,000,000 | HUF | 955,216 | ||||||
7.50%, 11/12/20 | Hungary | 312,600,000 | HUF | 1,517,032 | ||||||
FSI-25
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Franklin Strategic Income Securities Fund | Country | Principal Amount* | Value | |||||||
Foreign Government and Agency Securities (continued) | ||||||||||
Government of Hungary (continued) | ||||||||||
5.375%, 2/21/23 | Hungary | 1,020,000 | $ | 983,127 | ||||||
A, 8.00%, 2/12/15 | Hungary | 14,700,000 | HUF | 68,336 | ||||||
senior note, 6.25%, 1/29/20 | Hungary | 5,507,000 | 5,778,908 | |||||||
senior note, 6.375%, 3/29/21 | Hungary | 1,550,000 | 1,621,687 | |||||||
f Government of Iceland, 144A, 5.875%, 5/11/22 | Iceland | 3,010,000 | 3,204,642 | |||||||
Government of Indonesia, | ||||||||||
FR20, 14.275%, 12/15/13 | Indonesia | 23,637,000,000 | IDR | 2,476,323 | ||||||
FR26, 11.00%, 10/15/14 | Indonesia | 1,800,000,000 | IDR | 191,821 | ||||||
FR34, 12.80%, 6/15/21 | Indonesia | 34,435,000,000 | IDR | 4,668,188 | ||||||
Government of Ireland, | ||||||||||
5.90%, 10/18/19 | Ireland | 2,228,000 | EUR | 3,271,141 | ||||||
4.50%, 4/18/20 | Ireland | 2,029,000 | EUR | 2,766,828 | ||||||
5.00%, 10/18/20 | Ireland | 3,562,000 | EUR | 4,974,940 | ||||||
senior bond, 4.40%, 6/18/19 | Ireland | 1,938,000 | EUR | 2,650,001 | ||||||
senior bond, 5.40%, 3/13/25 | Ireland | 2,883,710 | EUR | 4,081,287 | ||||||
Government of Israel, 3.50%, 9/30/13 | Israel | 16,505,000 | ILS | 4,564,101 | ||||||
Government of Malaysia, | ||||||||||
3.434%, 8/15/14 | Malaysia | 5,780,000 | MYR | 1,836,084 | ||||||
3.741%, 2/27/15 | Malaysia | 2,000,000 | MYR | 638,666 | ||||||
3.835%, 8/12/15 | Malaysia | 3,205,000 | MYR | 1,025,626 | ||||||
4.72%, 9/30/15 | Malaysia | 330,000 | MYR | 107,909 | ||||||
3.197%, 10/15/15 | Malaysia | 2,215,000 | MYR | 699,578 | ||||||
senior bond, 3.461%, 7/31/13 | Malaysia | 15,030,000 | MYR | 4,758,457 | ||||||
senior bond, 8.00%, 10/30/13 | Malaysia | 50,000 | MYR | 16,088 | ||||||
senior bond, 5.094%, 4/30/14 | Malaysia | 10,820,000 | MYR | 3,482,489 | ||||||
senior bond, 3.814%, 2/15/17 | Malaysia | 2,500,000 | MYR | 800,375 | ||||||
senior bond, 4.24%, 2/07/18 | Malaysia | 600,000 | MYR | 195,878 | ||||||
Government of Mexico, | ||||||||||
8.00%, 12/19/13 | Mexico | 915,500n | MXN | 7,196,502 | ||||||
7.00%, 6/19/14 | Mexico | 192,800n | MXN | 1,529,831 | ||||||
9.50%, 12/18/14 | Mexico | 679,620n | MXN | 5,645,072 | ||||||
6.00%, 6/18/15 | Mexico | 18,020n | MXN | 143,373 | ||||||
8.00%, 12/17/15 | Mexico | 573,560n | MXN | 4,796,222 | ||||||
6.25%, 6/16/16 | Mexico | 135,660n | MXN | 1,098,036 | ||||||
Government of Poland, | ||||||||||
5.00%, 10/24/13 | Poland | 4,140,000 | PLN | 1,254,145 | ||||||
5.75%, 4/25/14 | Poland | 38,720,000 | PLN | 11,924,735 | ||||||
5.50%, 4/25/15 | Poland | 6,862,000 | PLN | 2,154,453 | ||||||
6.25%, 10/24/15 | Poland | 12,834,000 | PLN | 4,124,373 | ||||||
5.75%, 9/23/22 | Poland | 1,000,000 | PLN | 332,503 | ||||||
j FRN, 3.98%, 1/25/17 | Poland | 1,660,000 | PLN | 496,477 | ||||||
j FRN, 3.98%, 1/25/21 | Poland | 1,683,000 | PLN | 491,708 | ||||||
Strip, 7/25/13 | Poland | 345,000 | PLN | 103,630 | ||||||
Strip, 1/25/14 | Poland | 14,600,000 | PLN | 4,325,747 | ||||||
Strip, 7/25/14 | Poland | 295,000 | PLN | 86,230 | ||||||
Strip, 7/25/15 | Poland | 1,966,000 | PLN | 555,984 | ||||||
Strip, 1/25/16 | Poland | 2,381,000 | PLN | 661,232 | ||||||
f Government of Russia, senior bond, 144A, 7.50%, 3/31/30 | Russia | 2,787,045 | 3,268,437 | |||||||
f Government of Serbia, senior note, 144A, | ||||||||||
4.875%, 2/25/20 | Serbia | 2,990,000 | 2,768,695 | |||||||
7.25%, 9/28/21 | Serbia | 1,240,000 | 1,276,909 | |||||||
Government of Sri Lanka, | ||||||||||
A, 7.50%, 8/01/13 | Sri Lanka | 48,640,000 | LKR | 371,673 | ||||||
FSI-26
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Franklin Strategic Income Securities Fund | Country | Principal Amount* | Value | |||||||
Foreign Government and Agency Securities (continued) | ||||||||||
Government of Sri Lanka (continued) | ||||||||||
A, 7.00%, 3/01/14 | Sri Lanka | 7,020,000 | LKR | $ | 52,563 | |||||
A, 11.25%, 7/15/14 | Sri Lanka | 176,100,000 | LKR | 1,355,410 | ||||||
A, 11.75%, 3/15/15 | Sri Lanka | 1,160,000 | LKR | 8,994 | ||||||
A, 6.50%, 7/15/15 | Sri Lanka | 28,980,000 | LKR | 204,611 | ||||||
A, 11.00%, 8/01/15 | Sri Lanka | 200,400,000 | LKR | 1,537,034 | ||||||
A, 6.40%, 8/01/16 | Sri Lanka | 19,500,000 | LKR | 131,323 | ||||||
A, 9.00%, 5/01/21 | Sri Lanka | 73,580,000 | LKR | 490,808 | ||||||
B, 8.50%, 7/15/13 | Sri Lanka | 1,110,000 | LKR | 8,494 | ||||||
B, 11.75%, 4/01/14 | Sri Lanka | 6,990,000 | LKR | 53,923 | ||||||
B, 6.60%, 6/01/14 | Sri Lanka | 7,100,000 | LKR | 52,468 | ||||||
B, 6.40%, 10/01/16 | Sri Lanka | 16,000,000 | LKR | 107,071 | ||||||
B, 8.50%, 7/15/18 | Sri Lanka | 15,280,000 | LKR | 104,904 | ||||||
C, 8.50%, 4/01/18 | Sri Lanka | 8,070,000 | LKR | 55,569 | ||||||
D, 8.50%, 6/01/18 | Sri Lanka | 54,050,000 | LKR | 371,122 | ||||||
Government of Sweden, | ||||||||||
1.50%, 8/30/13 | Sweden | 93,520,000 | SEK | 13,957,755 | ||||||
6.75%, 5/05/14 | Sweden | 109,020,000 | SEK | 17,049,589 | ||||||
Government of the Philippines, senior note, 6.25%, 1/27/14 | Philippines | 129,180,000 | PHP | 3,057,418 | ||||||
f Government of Ukraine, | ||||||||||
144A, 7.75%, 9/23/20 | Ukraine | 6,000,000 | 5,509,620 | |||||||
senior bond, 144A, 7.80%, 11/28/22 | Ukraine | 2,790,000 | 2,497,678 | |||||||
senior note, 144A, 7.95%, 2/23/21 | Ukraine | 2,120,000 | 1,951,555 | |||||||
senior note, 144A, 7.50%, 4/17/23 | Ukraine | 1,980,000 | 1,749,825 | |||||||
o Government of Uruguay, senior note, Index Linked, 4.375%, 12/15/28 | Uruguay | 140,497,452 | UYU | 8,065,306 | ||||||
f Government of Vietnam, 144A, 6.75%, 1/29/20 | Vietnam | 1,500,000 | 1,605,000 | |||||||
Indonesia Retail Bond, senior bond, ORI7, 7.95%, 8/15/13 | Indonesia | 8,300,000,000 | IDR | 840,596 | ||||||
Korea Monetary Stabilization Bond, | South Korea | 1,325,900,000 | KRW | 1,161,909 | ||||||
senior bond, 3.59%, 10/02/13 | South Korea | 1,237,510,000 | KRW | 1,085,613 | ||||||
senior bond, 3.48%, 12/02/13 | South Korea | 2,121,430,000 | KRW | 1,863,408 | ||||||
senior bond, 3.47%, 2/02/14 | South Korea | 2,916,950,000 | KRW | 2,564,689 | ||||||
senior bond, 3.59%, 4/02/14 | South Korea | 4,287,030,000 | KRW | 3,776,323 | ||||||
senior bond, 2.47%, 4/02/15 | South Korea | 1,822,600,000 | KRW | 1,584,271 | ||||||
senior note, 3.28%, 6/02/14 | South Korea | 5,082,540,000 | KRW | 4,470,959 | ||||||
senior note, 2.57%, 6/09/14 | South Korea | 648,000,000 | KRW | 566,435 | ||||||
senior note, 2.82%, 8/02/14 | South Korea | 509,400,000 | KRW | 446,327 | ||||||
senior note, 2.78%, 10/02/14 | South Korea | 2,030,900,000 | KRW | 1,777,118 | ||||||
senior note, 2.84%, 12/02/14 | South Korea | 841,710,000 | KRW | 736,819 | ||||||
senior note, 2.74%, 2/02/15 | South Korea | 117,220,000 | KRW | 102,401 | ||||||
senior note, 2.76%, 6/02/15 | South Korea | 5,045,300,000 | KRW | 4,404,626 | ||||||
Korea Treasury Bond, | ||||||||||
senior bond, 3.00%, 12/10/13 | South Korea | 14,887,210,000 | KRW | 13,052,360 | ||||||
senior bond, 3.50%, 6/10/14 | South Korea | 2,788,920,000 | KRW | 2,459,742 | ||||||
senior note, 3.25%, 12/10/14 | South Korea | 1,261,950,000 | KRW | 1,112,229 | ||||||
senior note, 3.25%, 6/10/15 | South Korea | 210,800,000 | KRW | 185,957 | ||||||
senior note, 2.75%, 12/10/15 | South Korea | 897,900,000 | KRW | 782,094 | ||||||
Nota Do Tesouro Nacional, | ||||||||||
10.00%, 1/01/17 | Brazil | 3,500p | BRL | 1,531,550 | ||||||
q Index Linked, 6.00%, 5/15/15 | Brazil | 1,390p | BRL | 1,481,413 | ||||||
q Index Linked, 6.00%, 8/15/16 | Brazil | 1,604p | BRL | 1,710,919 | ||||||
q Index Linked, 6.00%, 8/15/18 | Brazil | 1,525p | BRL | 1,651,820 | ||||||
Uruguay Notas del Tesoro, | ||||||||||
9.00%, 1/27/14 | Uruguay | 7,570,000 | UYU | 367,081 | ||||||
10.50%, 3/21/15 | Uruguay | 1,700,000 | UYU | 83,163 | ||||||
FSI-27
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Franklin Strategic Income Securities Fund | Country | Principal Amount* | Value | |||||||
Foreign Government and Agency Securities (continued) | ||||||||||
Uruguay Notas del Tesoro (continued) | ||||||||||
10.25%, 8/22/15 | Uruguay | 59,720,000 | UYU | $ | 2,913,348 | |||||
9.50%, 1/27/16 | Uruguay | 9,220,000 | UYU | 445,164 | ||||||
o Index Linked, 2.25%, 8/23/17 | Uruguay | 23,113,408 | UYU | 1,118,554 | ||||||
|
| |||||||||
Total Foreign Government and Agency Securities | 250,598,168 | |||||||||
|
| |||||||||
U.S. Government and Agency Securities 2.3% | ||||||||||
U.S. Treasury Bond, | ||||||||||
4.50%, 2/15/16 | United States | 3,000,000 | 3,307,968 | |||||||
7.875%, 2/15/21 | United States | 900,000 | 1,275,047 | |||||||
7.125%, 2/15/23 | United States | 1,980,000 | 2,794,893 | |||||||
U.S. Treasury Note, | ||||||||||
2.375%, 3/31/16 | United States | 3,500,000 | 3,670,898 | |||||||
4.625%, 2/15/17 | United States | 600,000 | 679,219 | |||||||
4.75%, 8/15/17 | United States | 2,900,000 | 3,328,315 | |||||||
3.75%, 11/15/18 | United States | 7,000,000 | 7,823,592 | |||||||
o Index Linked, 0.125%, 4/15/16 | United States | 2,422,968 | 2,486,193 | |||||||
o Index Linked, 0.625%, 7/15/21 | United States | 2,579,278 | 2,662,803 | |||||||
|
| |||||||||
Total U.S. Government and Agency Securities (Cost $26,580,855) | 28,028,928 | |||||||||
|
| |||||||||
Asset-Backed Securities and Commercial Mortgage-Backed Securities 4.1% | ||||||||||
Banks 2.2% | ||||||||||
Banc of America Commercial Mortgage Inc., 2006-4, AJ, 5.695%, 7/10/46 | United States | 1,547,000 | 1,547,864 | |||||||
f,j Banc of America Large Loan, 2010-HLTN, 144A, FRN, 2.493%, 11/15/15 | United States | 4,021,737 | 4,034,701 | |||||||
Bear Stearns Commercial Mortgage Securities Inc., | ||||||||||
j 2006-PW11, AJ, FRN, 5.452%, 3/11/39 | United States | 500,000 | 510,518 | |||||||
j 2006-PW12, AJ, FRN, 5.932%, 9/11/38 | United States | 1,000,000 | 999,815 | |||||||
2006-PW13, AJ, 5.611%, 9/11/41 | United States | 5,100,000 | 4,980,854 | |||||||
Citigroup Commercial Mortgage Trust, | ||||||||||
2006-C5, AJ, 5.482%, 10/15/49 | United States | 1,700,000 | 1,586,462 | |||||||
j 2007-C6, AM, FRN, 5.885%, 6/10/17 | United States | 1,700,000 | 1,869,596 | |||||||
j 2008-C7, A4, FRN, 6.072%, 12/10/49 | United States | 3,200,000 | 3,669,754 | |||||||
j Citigroup/Deutsche Bank Commercial Mortgage Trust, 2006-CD3, AJ, FRN, 5.688%, 10/15/48 | United States | 2,120,000 | 1,883,661 | |||||||
Countrywide Asset-Backed Certificates, 2005-11, AF4, 5.21%, 3/25/34 | United States | 1,275,000 | 1,071,854 | |||||||
j Greenwich Capital Commercial Funding Corp., 2006-GG7, AJ, FRN, 5.867%, 7/10/38 | United States | 2,260,000 | 2,191,708 | |||||||
Wells Fargo Mortgage Backed Securities Trust, | ||||||||||
j 2004-W, A9, FRN, 2.762%, 11/25/34 | United States | 1,699,965 | 1,752,835 | |||||||
2007-3, 3A1, 5.50%, 4/25/37 | United States | 1,000,032 | 1,033,680 | |||||||
|
| |||||||||
| 27,133,302 | ||||||||||
|
| |||||||||
Diversified Financials 1.9% | ||||||||||
f,j ARES CLO Funds, 2007-12A, B, 144A, FRN, 1.273%, 11/25/20 | United States | 1,380,000 | 1,380,000 | |||||||
f,j Atrium CDO Corp., 10A, C, 144A, FRN, 2.876%, 7/16/25 | United States | 1,400,000 | 1,369,445 | |||||||
f,j Catamaran CLO Ltd., 2013-1A, C, 144A, FRN, 3.071%, 1/27/25 | Cayman Islands | 1,130,000 | 1,075,760 | |||||||
f,j Cent CDO Ltd., 2007-15A, A2B, 144A, FRN, 0.621%, 3/11/21 | United States | 1,251,000 | 1,160,403 | |||||||
f,j Cent CLO LP, 2013-17A, D, 144A, FRN, 3.288%, 1/30/25 | Cayman Islands | 784,314 | 782,604 | |||||||
f,j CIFC Funding Ltd., 2007-3A, A1J, 144A, FRN, 0.676%, 7/26/21 | United States | 960,000 | 916,421 | |||||||
f,j Columbus Nova CLO Ltd., 2007-2A, A2, 144A, FRN, 1.277%, 10/15/21 | United States | 860,000 | 836,395 | |||||||
f,j CT CDO IV Ltd., 2006-4A, A1, 144A, FRN, 0.502%, 10/20/43 | United States | 2,129,440 | 1,994,806 | |||||||
FSI-28
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Franklin Strategic Income Securities Fund | Country | Principal Amount* | Value | |||||||
Asset-Backed Securities and Commercial Mortgage-Backed Securities (continued) | ||||||||||
Diversified Financials (continued) | ||||||||||
f G-Force 2005-RR LLC, 2005-RRA, C, 144A, 5.20%, 8/22/36 | United States | 2,000,000 | $ | 1,859,620 | ||||||
j,r German Residential Asset Note Distributor PLC, 1, C, Reg S, FRN, 2.095%, 1/20/21 | Germany | 1,008,035 | EUR | 1,304,892 | ||||||
f,j Gleneagles CLO Ltd., 2005-1A, A2, 144A, FRN, 0.674%, 11/01/17 | United States | 1,000,000 | 957,579 | |||||||
f,j ING Investment Management CLO Ltd., | ||||||||||
2013-1A, B, 144A, FRN, 3.184%, 4/15/24 | Cayman Islands | 270,000 | 267,768 | |||||||
2013-1A, C, 144A, FRN, 3.784%, 4/15/24 | Cayman Islands | 440,000 | 417,769 | |||||||
2013-2A, B, 144A, FRN, 2.956%, 4/25/25 | United States | 1,080,000 | 1,058,867 | |||||||
j Morgan Stanley Capital I Trust, 2006-HQ8, AJ, FRN, 5.68%, 3/12/44 | United States | 200,000 | 204,034 | |||||||
f,j Newcastle CDO Ltd., 2004-5A, 1, 144A, FRN, 0.613%, 12/24/39 | United States | 1,464,866 | 1,396,303 | |||||||
Residential Asset Securities Corp., 2004-KS1, AI4, 4.213%, 4/25/32 | United States | 61,753 | 61,616 | |||||||
j,r Talisman 6 Finance, Reg S, FRN, 0.391%, 10/22/16 | Ireland | 2,387,080 | EUR | 2,796,429 | ||||||
f,j Westchester CLO Ltd., 2007-1A, A1A, 144A, FRN, 0.499%, 8/01/22 | United States | 2,751,697 | 2,671,609 | |||||||
|
| |||||||||
| 22,512,320 | ||||||||||
|
| |||||||||
Total Asset-Backed Securities and Commercial Mortgage-Backed Securities (Cost $46,822,343) | 49,645,622 | |||||||||
|
| |||||||||
Mortgage-Backed Securities 6.0% | ||||||||||
j Federal Home Loan Mortgage Corp. (FHLMC) Adjustable Rate 0.0%† | ||||||||||
FHLMC, 2.459%, 1/01/33 | United States | 73,054 | 77,826 | |||||||
|
| |||||||||
Federal Home Loan Mortgage Corp. (FHLMC) Fixed Rate 0.9% | ||||||||||
FHLMC Gold 15 Year, 4.50%, 10/01/18 - 6/01/19 | United States | 603,800 | 635,095 | |||||||
FHLMC Gold 15 Year, 5.00%, 12/01/17 - 9/01/19 | United States | 858,941 | 910,087 | |||||||
FHLMC Gold 15 Year, 5.50%, 7/01/17 - 7/01/19 | United States | 155,049 | 167,048 | |||||||
FHLMC Gold 15 Year, 6.00%, 5/01/17 | United States | 7,645 | 8,218 | |||||||
FHLMC Gold 15 Year, 6.50%, 5/01/16 | United States | 1,579 | 1,655 | |||||||
FHLMC Gold 30 Year, 3.00%, 11/01/42 | United States | 2,801,708 | 2,735,958 | |||||||
FHLMC Gold 30 Year, 3.50%, 4/01/42 | United States | 171,464 | 173,972 | |||||||
FHLMC Gold 30 Year, 4.00%, 9/01/40 | United States | 1,136,204 | 1,182,574 | |||||||
FHLMC Gold 30 Year, 4.50%, 10/01/40 | United States | 1,843,684 | 1,943,657 | |||||||
FHLMC Gold 30 Year, 5.00%, 4/01/34 - 8/01/35 | United States | 609,887 | 653,354 | |||||||
FHLMC Gold 30 Year, 5.50%, 3/01/33 - 6/01/36 | United States | 1,879,636 | 2,039,702 | |||||||
FHLMC Gold 30 Year, 6.00%, 4/01/33 - 2/01/36 | United States | 592,598 | 656,909 | |||||||
FHLMC Gold 30 Year, 6.50%, 12/01/23 - 6/01/36 | United States | 115,551 | 129,698 | |||||||
FHLMC Gold 30 Year, 7.00%, 9/01/21 - 4/01/30 | United States | 46,745 | 52,406 | |||||||
FHLMC Gold 30 Year, 7.50%, 3/01/30 - 7/01/31 | United States | 1,631 | 1,768 | |||||||
|
| |||||||||
| 11,292,101 | ||||||||||
|
| |||||||||
j Federal National Mortgage Association (FNMA) Adjustable Rate 0.0%† | ||||||||||
FNMA - 2.334%, 4/01/20 - 12/01/34 | United States | 282,511 | 298,763 | |||||||
|
| |||||||||
Federal National Mortgage Association (FNMA) Fixed Rate 4.6% | ||||||||||
FNMA 15 Year, 2.50%, 7/01/22 - 5/01/28 | United States | 7,874,612 | 7,946,788 | |||||||
FNMA 15 Year, 3.00%, 3/01/22 | United States | 1,797,718 | 1,877,096 | |||||||
FNMA 15 Year, 3.50%, 12/01/20 - 5/01/26 | United States | 6,942,107 | 7,251,745 | |||||||
FNMA 15 Year, 4.00%, 2/01/20 | United States | 1,428,530 | 1,506,095 | |||||||
FNMA 15 Year, 4.50%, 6/01/19 - 3/01/20 | United States | 180,585 | 191,917 | |||||||
FNMA 15 Year, 5.00%, 10/01/17 - 6/01/18 | United States | 181,620 | 194,150 | |||||||
FNMA 15 Year, 5.50%, 11/01/13 - 11/01/18 | United States | 1,179,651 | 1,247,395 | |||||||
FNMA 15 Year, 6.00%, 4/01/16 - 7/01/16 | United States | 1,799 | 1,829 | |||||||
FNMA 30 Year, 3.00%, 12/01/42 - 5/01/43 | United States | 14,844,165 | 14,528,305 | |||||||
FNMA 30 Year, 3.50%, 5/01/43 | United States | 3,954,154 | 4,023,882 | |||||||
FNMA 30 Year, 4.00%, 11/01/40 - 1/01/41 | United States | 2,004,070 | 2,089,445 | |||||||
FNMA 30 Year, 4.50%, 12/01/40 | United States | 3,532,580 | 3,743,904 | |||||||
FSI-29
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Franklin Strategic Income Securities Fund | Country | Principal Amount* | Value | |||||||
Mortgage-Backed Securities (continued) | ||||||||||
Federal National Mortgage Association (FNMA) Fixed Rate (continued) | ||||||||||
FNMA 30 Year, 5.00%, 4/01/30 - 6/01/41 | United States | 6,194,626 | $ | 6,724,212 | ||||||
FNMA 30 Year, 5.50%, 8/01/33 - 9/01/35 | United States | 1,032,690 | 1,129,465 | |||||||
FNMA 30 Year, 6.00%, 6/01/34 - 5/01/38 | United States | 1,691,122 | 1,852,994 | |||||||
FNMA 30 Year, 6.50%, 6/01/28 - 10/01/37 | United States | 727,264 | 809,210 | |||||||
|
| |||||||||
| 55,118,432 | ||||||||||
|
| |||||||||
Government National Mortgage Association (GNMA) Fixed Rate 0.5% | ||||||||||
GNMA I SF 30 Year, 5.00%, 11/15/33 - 7/15/34 | United States | 620,112 | 674,807 | |||||||
GNMA I SF 30 Year, 5.50%, 12/15/32 - 6/15/36 | United States | 814,218 | 895,274 | |||||||
GNMA I SF 30 Year, 6.50%, 11/15/31 - 2/15/32 | United States | 3,952 | 4,182 | |||||||
GNMA I SF 30 Year, 7.00%, 10/15/28 - 6/15/32 | United States | 41,227 | 44,542 | |||||||
GNMA I SF 30 Year, 7.50%, 9/15/30 | United States | 1,904 | 2,224 | |||||||
GNMA II SF 30 Year, 3.50%, 5/20/42 | United States | 3,200,003 | 3,290,751 | |||||||
GNMA II SF 30 Year, 5.00%, 9/20/33 - 11/20/33 | United States | 179,611 | 196,832 | |||||||
GNMA II SF 30 Year, 6.00%, 11/20/34 | United States | 213,532 | 248,216 | |||||||
GNMA II SF 30 Year, 6.50%, 4/20/31 - 2/20/34 | United States | 91,574 | 103,832 | |||||||
GNMA II SF 30 Year, 7.50%, 1/20/28 - 4/20/32 | United States | 21,649 | 25,387 | |||||||
|
| |||||||||
| 5,486,047 | ||||||||||
|
| |||||||||
Total Mortgage-Backed Securities (Cost $73,085,802) | 72,273,169 | |||||||||
|
| |||||||||
Municipal Bonds 1.5% | ||||||||||
California State GO, | ||||||||||
Refunding, 5.00%, 4/01/38 | United States | 3,000,000 | 3,070,950 | |||||||
Various Purpose, 6.00%, 4/01/38 | United States | 2,500,000 | 2,843,425 | |||||||
Various Purpose, 6.00%, 11/01/39 | United States | 160,000 | 183,008 | |||||||
Various Purpose, 5.25%, 11/01/40 | United States | 560,000 | 590,582 | |||||||
Various Purpose, Refunding, 5.25%, 3/01/38 | United States | 1,500,000 | 1,563,375 | |||||||
Various Purpose, Refunding, NATL Insured, 4.50%, 12/01/32 | United States | 300,000 | 310,830 | |||||||
Various Purpose, Refunding, Series 1, AGMC Insured, 4.75%, 9/01/31 | United States | 290,000 | 302,348 | |||||||
Florida Hurricane Catastrophe Fund Finance Corp. Revenue, Series A, 2.995%, 7/01/20 | United States | 4,700,000 | 4,408,788 | |||||||
Illinois State GO, | ||||||||||
5.877%, 3/01/19 | United States | 3,000,000 | 3,282,570 | |||||||
Build America Bonds, 7.35%, 7/01/35 | United States | 1,000,000 | 1,102,910 | |||||||
|
| |||||||||
Total Municipal Bonds (Cost $16,659,980) | 17,658,786 | |||||||||
|
| |||||||||
Total Investments before Short Term Investments | 1,062,305,243 | |||||||||
|
| |||||||||
Short Term Investments 9.5% | ||||||||||
Senior Floating Rate Interests (Cost $1,655) 0.0%† | ||||||||||
s Patriot Coal Corp., Reimbursement Obligation (Second Out LC DIP), | United States | 2,044 | 1,717 | |||||||
|
| |||||||||
Foreign Government and Agency Securities 4.3% | ||||||||||
t Bank of Negara Monetary Notes, 7/04/13 - 6/19/14 | Malaysia | 44,915,000 | MYR | 14,009,537 | ||||||
t Canada Treasury Bill, 8/15/13 | Canada | 317,000 | CAD | 301,064 | ||||||
Government of Australia, 6.25%, 6/15/14 | Australia | 5,781,000 | AUD | 5,477,659 | ||||||
Government of Canada, | ||||||||||
2.50%, 9/01/13 | Canada | 501,000 | CAD | 477,713 | ||||||
1.00%, 2/01/14 | Canada | 1,588,000 | CAD | 1,509,759 | ||||||
2.00%, 3/01/14 | Canada | 585,000 | CAD | 559,727 | ||||||
0.75%, 5/01/14 | Canada | 1,030,000 | CAD | 976,953 | ||||||
Government of Hungary, E, 7.50%, 10/24/13 | Hungary | 53,040,000 | HUF | 236,316 | ||||||
t Hungary Treasury Bills, 7/17/13 - 3/05/14 | Hungary | 380,010,000 | HUF | 1,635,391 | ||||||
t Korea Monetary Stabilization Bonds, 9/10/13 | South Korea | 640,800,000 | KRW | 558,083 | ||||||
FSI-30
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Franklin Strategic Income Securities Fund | Country | Principal Amount* | Value | |||||||
Short Term Investments (continued) | ||||||||||
Foreign Government and Agency Securities (continued) | ||||||||||
Korea Monetary Stabilization Bond, senior bond, 2.55%, 5/09/14 | South Korea | 1,050,200,000 | KRW | $ | 918,019 | |||||
t Mexico Treasury Bills, 9/19/13 - 4/30/14 | Mexico | 5,373,000 | u MXN | 4,043,114 | ||||||
t Monetary Authority of Singapore Treasury Bills, 7/05/13 - 7/26/13 | Singapore | 2,737,000 | SGD | 2,159,541 | ||||||
t Philippine Treasury Bills, 7/24/13 - 4/02/14 | Philippines | 288,690,000 | PHP | 6,649,079 | ||||||
t Singapore Treasury Bills, 7/11/13 - 5/02/14 | Singapore | 11,977,000 | SGD | 9,445,637 | ||||||
t Sri Lanka Treasury Bills, 8/02/13 - 10/11/13 | Sri Lanka | 3,260,000 | LKR | 24,639 | ||||||
Uruguay Treasury Bills, | ||||||||||
Strip, 9/09/13 | Uruguay | 58,400,000 | UYU | 2,792,799 | ||||||
t 8/09/13 - 5/16/14 | Uruguay | 17,140,000 | UYU | 822,502 | ||||||
|
| |||||||||
Total Foreign Government and Agency Securities | 52,597,532 | |||||||||
|
| |||||||||
Total Investments before Money Market Funds | 1,114,904,492 | |||||||||
|
| |||||||||
| Shares | ||||||||||
Money Market Funds (Cost $62,289,365) 5.2% | ||||||||||
a,v Institutional Fiduciary Trust Money Market Portfolio | United States | 62,289,365 | 62,289,365 | |||||||
|
| |||||||||
Total Investments (Cost $1,161,686,678) 97.7% | 1,177,193,857 | |||||||||
Other Assets, less Liabilities 2.3% | 27,863,767 | |||||||||
|
| |||||||||
Net Assets 100.0% | $ | 1,205,057,624 | ||||||||
|
| |||||||||
See Abbreviations on page FSI-54.
†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, 2013, the aggregate value of these securities was $190,406, representing 0.02% of net assets.
cSee Note 1(g) regarding investment in FT Holdings Corporation III.
dAt June 30, 2013, 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.
eSee Note 9 regarding restricted securities.
fSecurity 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, 2013, the aggregate value of these securities was $220,958,386, representing 18.34% of net assets.
gSee Note 8 regarding defaulted securities.
hPerpetual security with no stated maturity date.
iSee Note 1(f) regarding loan participation notes.
jThe coupon rate shown represents the rate at period end.
kIncome may be received in additional securities and/or cash.
lA portion or all of the security purchased on a when-issued or delayed delivery basis. See Note 1(c).
mSee Note 1(i) regarding senior floating rate interests.
nPrincipal amount is stated in 100 Mexican Peso Units.
oPrincipal amount of security is adjusted for inflation. See Note 1(k).
pPrincipal amount is stated in 1,000 Brazilian Real Units.
qRedemption price at maturity is adjusted for inflation. See Note 1(k).
rSecurity was purchased pursuant to Regulation S under the Securities Act of 1933, which exempts from registration securities offered and sold outside of the United States. Such a security cannot be sold in the United States without either an effective registration statement filed pursuant to the Securities Act of 1933, or pursuant to an exemption from registration. These securities have been deemed liquid under guidelines approved by the Trust’s Board of Trustees. At June 30, 2013, the aggregate value of these securities was $4,101,321, representing 0.34% of net assets.
sSee Note 10 regarding unfunded commitments.
tThe security is traded on a discount basis with no stated coupon rate.
uPrincipal amount is stated in 10 Mexican Peso Units.
vSee Note 7 regarding investments in the Institutional Fiduciary Trust Money Market Portfolio.
FSI-31
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Franklin Strategic Income Securities Fund |
At June 30, 2013, 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 | |||||||||||||||||||||
Japanese Yen | BZWS | Buy | 620,288,000 | $ | 6,348,417 | 7/02/13 | $ | — | $ | (94,788 | ) | |||||||||||||||||
Japanese Yen | BZWS | Sell | 620,288,000 | 7,871,176 | 7/02/13 | 1,617,546 | — | |||||||||||||||||||||
Indian Rupee | CITI | Buy | 4,493,000 | 79,605 | 7/03/13 | — | (4,204 | ) | ||||||||||||||||||||
British Pound | DBAB | Sell | 297,656 | 461,665 | 7/09/13 | 9,009 | — | |||||||||||||||||||||
Indian Rupee | HSBC | Buy | 94,400,000 | 1,694,140 | 7/10/13 | — | (111,973 | ) | ||||||||||||||||||||
Indian Rupee | DBAB | Buy | 20,841,000 | 376,183 | 7/12/13 | — | (27,011 | ) | ||||||||||||||||||||
Indian Rupee | DBAB | Buy | 16,691,000 | 284,083 | 7/17/13 | — | (4,698 | ) | ||||||||||||||||||||
Indian Rupee | JPHQ | Buy | 29,466,000 | 534,104 | 7/18/13 | — | (40,974 | ) | ||||||||||||||||||||
Indian Rupee | JPHQ | Buy | 14,719,000 | 268,976 | 7/22/13 | — | (22,827 | ) | ||||||||||||||||||||
Indian Rupee | DBAB | Buy | 10,360,000 | 189,250 | 7/22/13 | — | (15,998 | ) | ||||||||||||||||||||
Euro | DBAB | Sell | 478,724 | 590,553 | 7/23/13 | — | (32,641 | ) | ||||||||||||||||||||
Euro | DBAB | Buy | 478,724 | 623,590 | 7/23/13 | — | (396 | ) | ||||||||||||||||||||
Euro | DBAB | Sell | 218,913 | 267,380 | 7/25/13 | — | (17,599 | ) | ||||||||||||||||||||
Euro | DBAB | Buy | 218,913 | 286,119 | 7/25/13 | — | (1,140 | ) | ||||||||||||||||||||
Euro | DBAB | Sell | 190,862 | 231,697 | 7/26/13 | — | (16,767 | ) | ||||||||||||||||||||
Euro | BZWS | Sell | 1,993,000 | 2,589,505 | 7/26/13 | — | (4,980 | ) | ||||||||||||||||||||
Euro | CITI | Sell | 648,569 | 841,907 | 7/26/13 | — | (2,399 | ) | ||||||||||||||||||||
Indian Rupee | JPHQ | Buy | 54,590,000 | 991,293 | 7/26/13 | — | (79,042 | ) | ||||||||||||||||||||
Indian Rupee | DBAB | Buy | 20,931,000 | 380,014 | 7/26/13 | — | (30,237 | ) | ||||||||||||||||||||
Euro | DBAB | Sell | 3,280,000 | 3,997,336 | 7/29/13 | — | (272,619 | ) | ||||||||||||||||||||
Euro | DBAB | Buy | 3,304,577 | 4,323,360 | 7/29/13 | — | (21,410 | ) | ||||||||||||||||||||
Euro | BZWS | Sell | 1,007,118 | 1,348,460 | 7/29/13 | 37,378 | — | |||||||||||||||||||||
Euro | DBAB | Sell | 24,577 | 32,872 | 7/29/13 | 878 | — | |||||||||||||||||||||
Indian Rupee | JPHQ | Buy | 23,701,000 | 431,582 | 7/29/13 | — | (35,733 | ) | ||||||||||||||||||||
Euro | DBAB | Sell | 870,275 | 1,077,313 | 7/31/13 | — | (55,635 | ) | ||||||||||||||||||||
British Pound | DBAB | Sell | 169,385 | 264,765 | 8/01/13 | 7,218 | — | |||||||||||||||||||||
Euro | JPHQ | Sell | 667,276 | 815,828 | 8/06/13 | — | (52,876 | ) | ||||||||||||||||||||
Chilean Peso | JPHQ | Buy | 482,900,000 | 999,793 | 8/08/13 | — | (56,086 | ) | ||||||||||||||||||||
Chilean Peso | JPHQ | Sell | 482,900,000 | 1,008,352 | 8/08/13 | 64,645 | — | |||||||||||||||||||||
Euro | CITI | Sell | 317,220 | 395,948 | 8/08/13 | — | (17,034 | ) | ||||||||||||||||||||
Indian Rupee | HSBC | Buy | 186,760,000 | 3,421,171 | 8/08/13 | — | (307,531 | ) | ||||||||||||||||||||
Euro | CITI | Sell | 92,411 | 115,487 | 8/09/13 | — | (4,822 | ) | ||||||||||||||||||||
Chilean Peso | BZWS | Buy | 1,487,300,000 | 3,077,385 | 8/12/13 | — | (172,615 | ) | ||||||||||||||||||||
Japanese Yen | DBAB | Sell | 35,465,000 | 452,961 | 8/19/13 | 95,335 | — | |||||||||||||||||||||
Chilean Peso | JPHQ | Buy | 1,141,336,600 | 2,278,117 | 8/20/13 | — | (51,767 | ) | ||||||||||||||||||||
Euro | BZWS | Sell | 2,084,000 | 2,579,784 | 8/20/13 | — | (133,488 | ) | ||||||||||||||||||||
Japanese Yen | JPHQ | Sell | 15,928,000 | 201,793 | 8/20/13 | 41,175 | — | |||||||||||||||||||||
Japanese Yen | HSBC | Sell | 65,957,000 | 835,957 | 8/20/13 | 170,848 | — | |||||||||||||||||||||
Japanese Yen | UBSW | Sell | 32,055,000 | 407,125 | 8/20/13 | 83,883 | — | |||||||||||||||||||||
Euro | DBAB | Sell | 193,056 | 238,881 | 8/21/13 | — | (12,469 | ) | ||||||||||||||||||||
Euro | UBSW | Sell | 3,500,000 | 4,331,775 | 8/22/13 | — | (225,108 | ) | ||||||||||||||||||||
Japanese Yen | BZWS | Sell | 15,895,000 | 201,075 | 8/22/13 | 40,789 | — | |||||||||||||||||||||
Euro | BZWS | Sell | 704,462 | 882,127 | 8/23/13 | — | (35,063 | ) | ||||||||||||||||||||
Japanese Yen | DBAB | Buy | 15,708,000 | 201,147 | 8/23/13 | — | (42,746 | ) | ||||||||||||||||||||
Japanese Yen | CITI | Sell | 31,757,000 | 401,758 | 8/23/13 | 81,517 | — | |||||||||||||||||||||
Japanese Yen | DBAB | Sell | 15,708,000 | 198,848 | 8/23/13 | 40,447 | — | |||||||||||||||||||||
Japanese Yen | HSBC | Sell | 31,524,000 | 399,250 | 8/23/13 | 81,358 | — | |||||||||||||||||||||
Euro | BZWS | Sell | 3,068,753 | 3,844,657 | 8/26/13 | — | (150,834 | ) | ||||||||||||||||||||
Euro | UBSW | Sell | 2,397,698 | 3,000,000 | 8/26/13 | — | (121,783 | ) | ||||||||||||||||||||
Euro | UBSW | Buy | 2,397,698 | 3,100,464 | 8/26/13 | 21,319 | — | |||||||||||||||||||||
Japanese Yen | JPHQ | Sell | 31,689,000 | 401,992 | 8/26/13 | 82,431 | — | |||||||||||||||||||||
Japanese Yen | UBSW | Sell | 34,903,000 | 442,426 | 8/26/13 | 90,455 | — | |||||||||||||||||||||
Japanese Yen | BZWS | Sell | 44,152,000 | 560,376 | 8/26/13 | 115,135 | — | |||||||||||||||||||||
Singapore Dollar | DBAB | Buy | 1,158,000 | 931,119 | 8/26/13 | — | (17,243 | ) | ||||||||||||||||||||
FSI-32
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Franklin Strategic Income Securities Fund |
Forward Exchange Contracts (continued)
| Currency | Counterparty | Type | Quantity | Contract Amount | Settlement Date | Unrealized Appreciation | Unrealized Depreciation | |||||||||||||||||||||
Euro | DBAB | Sell | 810,000 | $ | 1,024,091 | 8/27/13 | $ | — | $ | (30,527 | ) | |||||||||||||||||
Japanese Yen | DBAB | Buy | 44,915,000 | 575,059 | 8/27/13 | — | (122,122 | ) | ||||||||||||||||||||
Japanese Yen | HSBC | Sell | 50,145,000 | 641,240 | 8/27/13 | 135,562 | — | |||||||||||||||||||||
Japanese Yen | DBAB | Sell | 72,099,000 | 921,699 | 8/27/13 | 194,630 | — | |||||||||||||||||||||
Japanese Yen | JPHQ | Sell | 15,991,000 | 204,547 | 8/27/13 | 43,289 | — | |||||||||||||||||||||
Singapore Dollar | DBAB | Buy | 722,000 | 581,742 | 8/27/13 | — | (11,950 | ) | ||||||||||||||||||||
Euro | DBAB | Sell | 1,978,657 | 2,487,970 | 8/28/13 | — | (88,249 | ) | ||||||||||||||||||||
Euro | DBAB | Buy | 1,000,000 | 1,295,050 | 8/28/13 | 6,954 | — | |||||||||||||||||||||
Euro | DBAB | Sell | 651,325 | 823,796 | 8/29/13 | — | (24,236 | ) | ||||||||||||||||||||
Euro | DBAB | Buy | 651,325 | 848,566 | 8/29/13 | — | (534 | ) | ||||||||||||||||||||
Japanese Yen | JPHQ | Sell | 15,743,000 | 201,079 | 8/30/13 | 42,319 | — | |||||||||||||||||||||
Singapore Dollar | DBAB | Buy | 361,500 | 289,269 | 8/30/13 | — | (3,977 | ) | ||||||||||||||||||||
Indian Rupee | CITI | Buy | 4,537,000 | 79,609 | 9/03/13 | — | (4,306 | ) | ||||||||||||||||||||
Euro | DBAB | Sell | 601,984 | 760,606 | 9/04/13 | — | (23,205 | ) | ||||||||||||||||||||
Indian Rupee | HSBC | Buy | 32,771,000 | 571,164 | 9/04/13 | — | (27,333 | ) | ||||||||||||||||||||
Euro | BZWS | Sell | 271,320 | 343,478 | 9/10/13 | — | (9,804 | ) | ||||||||||||||||||||
Indian Rupee | HSBC | Buy | 5,576,000 | 96,706 | 9/11/13 | — | (4,272 | ) | ||||||||||||||||||||
Euro | BZWS | Sell | 266,006 | 341,467 | 9/12/13 | — | (4,899 | ) | ||||||||||||||||||||
Indian Rupee | HSBC | Buy | 14,080,000 | 235,115 | 9/13/13 | — | (1,782 | ) | ||||||||||||||||||||
Euro | BZWS | Sell | 759,073 | 982,734 | 9/16/13 | — | (5,671 | ) | ||||||||||||||||||||
Euro | UBSW | Sell | 708,181 | 916,245 | 9/17/13 | — | (5,897 | ) | ||||||||||||||||||||
Indian Rupee | JPHQ | Buy | 222,299,000 | 3,742,785 | 9/17/13 | — | (61,104 | ) | ||||||||||||||||||||
Indian Rupee | JPHQ | Sell | 122,000,000 | 1,979,877 | 9/17/13 | — | (40,668 | ) | ||||||||||||||||||||
Indian Rupee | DBAB | Buy | 14,156,000 | 241,401 | 9/18/13 | — | (6,988 | ) | ||||||||||||||||||||
Euro | BZWS | Sell | 178,354 | 234,946 | 9/19/13 | 2,704 | — | |||||||||||||||||||||
Singapore Dollar | JPHQ | Buy | 694,000 | 567,364 | 9/19/13 | — | (19,643 | ) | ||||||||||||||||||||
Singapore Dollar | DBAB | Buy | 973,400 | 779,843 | 9/19/13 | — | (11,613 | ) | ||||||||||||||||||||
Euro | UBSW | Sell | 2,137,312 | 2,824,950 | 9/20/13 | 41,860 | — | |||||||||||||||||||||
Indian Rupee | DBAB | Buy | 12,894,000 | 217,138 | 9/20/13 | — | (3,688 | ) | ||||||||||||||||||||
Japanese Yen | DBAB | Sell | 335,180,000 | 4,000,000 | 9/20/13 | 619,449 | — | |||||||||||||||||||||
Euro | DBAB | Buy | 219,819 | 287,502 | 9/23/13 | — | (1,261 | ) | ||||||||||||||||||||
Euro | DBAB | Sell | 495,470 | 648,967 | 9/23/13 | 3,784 | — | |||||||||||||||||||||
Indian Rupee | JPHQ | Buy | 55,600,000 | 930,630 | 9/23/13 | — | (10,637 | ) | ||||||||||||||||||||
Euro | BZWS | Sell | 469,210 | 609,870 | 9/24/13 | — | (1,121 | ) | ||||||||||||||||||||
Euro | DBAB | Sell | 1,550,000 | 1,999,268 | 9/30/13 | — | (19,159 | ) | ||||||||||||||||||||
Philippine Peso | DBAB | Buy | 21,010,000 | 502,632 | 10/04/13 | — | (15,865 | ) | ||||||||||||||||||||
Philippine Peso | HSBC | Buy | 16,853,000 | 404,013 | 10/04/13 | — | (13,557 | ) | ||||||||||||||||||||
Euro | UBSW | Sell | 2,850,000 | 3,691,121 | 10/07/13 | — | (20,323 | ) | ||||||||||||||||||||
Euro | DBAB | Sell | 185,654 | 240,385 | 10/07/13 | — | (1,385 | ) | ||||||||||||||||||||
Philippine Peso | HSBC | Buy | 25,126,000 | 604,150 | 10/07/13 | — | (22,098 | ) | ||||||||||||||||||||
Euro | BZWS | Sell | 2,749,000 | 3,575,075 | 10/11/13 | — | (4,921 | ) | ||||||||||||||||||||
Philippine Peso | HSBC | Buy | 14,493,000 | 348,716 | 10/11/13 | — | (13,039 | ) | ||||||||||||||||||||
Philippine Peso | JPHQ | Buy | 8,232,000 | 198,166 | 10/11/13 | — | (7,502 | ) | ||||||||||||||||||||
Euro | DBAB | Sell | 121,043 | 157,162 | 10/15/13 | — | (474 | ) | ||||||||||||||||||||
Philippine Peso | DBAB | Buy | 4,913,000 | 118,047 | 10/16/13 | — | (4,280 | ) | ||||||||||||||||||||
Euro | DBAB | Sell | 587,951 | 769,510 | 10/18/13 | 3,798 | — | |||||||||||||||||||||
Malaysian Ringgit | JPHQ | Buy | 763,000 | 245,614 | 10/18/13 | — | (5,803 | ) | ||||||||||||||||||||
Singapore Dollar | JPHQ | Buy | 700,000 | 565,657 | 10/21/13 | — | (13,174 | ) | ||||||||||||||||||||
Malaysian Ringgit | DBAB | Buy | 10,212,000 | 3,293,662 | 10/23/13 | — | (84,934 | ) | ||||||||||||||||||||
Malaysian Ringgit | HSBC | Buy | 6,809,796 | 2,196,000 | 10/24/13 | — | (56,404 | ) | ||||||||||||||||||||
Euro | BZWS | Sell | 217,715 | 283,992 | 10/25/13 | 442 | — | |||||||||||||||||||||
Chilean Peso | CITI | Buy | 377,668,000 | 776,136 | 10/28/13 | — | (46,014 | ) | ||||||||||||||||||||
Japanese Yen | JPHQ | Sell | 270,990,000 | 3,408,572 | 10/28/13 | 674,485 | — | |||||||||||||||||||||
Euro | UBSW | Sell | 369,000 | 481,010 | 10/29/13 | 417 | — | |||||||||||||||||||||
Euro | DBAB | Sell | 1,494,524 | 1,934,250 | 10/31/13 | — | (12,269 | ) | ||||||||||||||||||||
Japanese Yen | JPHQ | Sell | 360,360,000 | 4,532,853 | 11/01/13 | 896,949 | — | |||||||||||||||||||||
FSI-33
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Franklin Strategic Income Securities Fund |
Forward Exchange Contracts (continued)
| Currency | Counterparty | Type | Quantity | Contract Amount | Settlement Date | Unrealized Appreciation | Unrealized Depreciation | |||||||||||||||||||||
Euro | DBAB | Sell | 243,767 | $ | 318,112 | 11/04/13 | $ | 615 | $ | — | ||||||||||||||||||
Euro | BZWS | Sell | 529,706 | 689,577 | 11/05/13 | — | (350 | ) | ||||||||||||||||||||
Euro | JPHQ | Sell | 473,670 | 606,523 | 11/12/13 | — | (10,443 | ) | ||||||||||||||||||||
Euro | DBAB | Sell | 800,000 | 1,050,560 | 11/14/13 | 8,531 | — | |||||||||||||||||||||
Euro | DBAB | Sell | 227,970 | 291,031 | 11/15/13 | — | (5,910 | ) | ||||||||||||||||||||
Japanese Yen | MSCO | Sell | 12,500,000 | 158,018 | 11/15/13 | 31,880 | — | |||||||||||||||||||||
Euro | DBAB | Sell | 63,419 | 81,477 | 11/19/13 | — | (1,131 | ) | ||||||||||||||||||||
Malaysian Ringgit | DBAB | Buy | 623,200 | 200,000 | 11/19/13 | — | (4,479 | ) | ||||||||||||||||||||
Euro | UBSW | Sell | 1,480,440 | 1,895,111 | 11/20/13 | — | (33,279 | ) | ||||||||||||||||||||
Euro | JPHQ | Sell | 221,993 | 283,400 | 11/20/13 | — | (5,764 | ) | ||||||||||||||||||||
Malaysian Ringgit | HSBC | Buy | 376,000 | 120,466 | 11/20/13 | — | (2,507 | ) | ||||||||||||||||||||
Euro | UBSW | Sell | 1,245,000 | 1,623,169 | 12/03/13 | 1,341 | — | |||||||||||||||||||||
Euro | UBSW | Sell | 3,400,000 | 4,463,418 | 12/09/13 | 34,181 | — | |||||||||||||||||||||
Euro | DBAB | Buy | 3,500,000 | 4,562,390 | 12/10/13 | — | (2,856 | ) | ||||||||||||||||||||
Euro | DBAB | Sell | 5,049,917 | 6,629,027 | 12/10/13 | 50,378 | — | |||||||||||||||||||||
Japanese Yen | UBSW | Sell | 187,760,000 | 2,293,448 | 12/12/13 | 398,267 | — | |||||||||||||||||||||
Euro | DBAB | Sell | 1,200,000 | 1,565,760 | 12/13/13 | 2,465 | — | |||||||||||||||||||||
Euro | CITI | Sell | 3,868,000 | 5,079,844 | 12/17/13 | 40,712 | — | |||||||||||||||||||||
Euro | DBAB | Sell | 486,875 | 643,016 | 12/18/13 | 8,724 | — | |||||||||||||||||||||
Euro | DBAB | Sell | 262,167 | 348,111 | 12/20/13 | 6,560 | — | |||||||||||||||||||||
Singapore Dollar | DBAB | Buy | 1,048,000 | 834,395 | 12/23/13 | — | (7,181 | ) | ||||||||||||||||||||
Euro | DBAB | Sell | 239,450 | 317,415 | 1/03/14 | 5,434 | — | |||||||||||||||||||||
Malaysian Ringgit | DBAB | Buy | 952,100 | 307,794 | 1/08/14 | — | (9,907 | ) | ||||||||||||||||||||
Euro | DBAB | Sell | 40,550 | 54,098 | 1/09/14 | 1,263 | — | |||||||||||||||||||||
Chilean Peso | DBAB | Buy | 1,449,000,000 | 2,942,729 | 1/10/14 | — | (164,176 | ) | ||||||||||||||||||||
Chilean Peso | DBAB | Sell | 1,449,000,000 | 2,801,895 | 1/10/14 | 23,342 | — | |||||||||||||||||||||
Japanese Yen | HSBC | Sell | 183,560,000 | 2,105,046 | 1/10/14 | 251,662 | — | |||||||||||||||||||||
Euro | UBSW | Sell | 5,631,484 | 7,374,472 | 1/13/14 | 36,700 | — | |||||||||||||||||||||
Euro | DBAB | Sell | 108,735 | 142,606 | 1/13/14 | 925 | — | |||||||||||||||||||||
Euro | DBAB | Sell | 1,865,041 | 2,470,992 | 1/14/14 | 40,846 | — | |||||||||||||||||||||
Euro | JPHQ | Sell | 1,802,953 | 2,360,516 | 1/14/14 | 11,270 | — | |||||||||||||||||||||
Euro | DBAB | Sell | 870,051 | 1,162,992 | 1/16/14 | 29,301 | — | |||||||||||||||||||||
Japanese Yen | UBSW | Sell | 460,675,000 | 5,192,459 | 1/16/14 | 540,734 | — | |||||||||||||||||||||
Malaysian Ringgit | JPHQ | Buy | 175,000 | 57,031 | 1/16/14 | — | (2,301 | ) | ||||||||||||||||||||
Euro | JPHQ | Sell | 2,912,410 | 3,880,349 | 1/22/14 | 85,288 | — | |||||||||||||||||||||
Euro | DBAB | Sell | 1,700,000 | 2,270,605 | 1/22/14 | 55,393 | — | |||||||||||||||||||||
Euro | DBAB | Sell | 4,032,721 | 5,438,326 | 1/30/14 | 183,157 | — | |||||||||||||||||||||
Euro | DBAB | Sell | 3,014,151 | 4,066,180 | 1/31/14 | 138,317 | — | |||||||||||||||||||||
Euro | DBAB | Sell | 2,316,000 | 3,120,347 | 2/06/14 | 102,157 | — | |||||||||||||||||||||
Chilean Peso | DBAB | Buy | 725,000,000 | 1,468,206 | 2/07/14 | — | (81,899 | ) | ||||||||||||||||||||
Chilean Peso | DBAB | Sell | 65,000,000 | 125,301 | 2/07/14 | 1,012 | — | |||||||||||||||||||||
Japanese Yen | HSBC | Sell | 64,350,000 | 691,846 | 2/12/14 | 41,848 | — | |||||||||||||||||||||
Japanese Yen | JPHQ | Sell | 64,319,000 | 691,877 | 2/12/14 | 42,192 | — | |||||||||||||||||||||
Euro | UBSW | Sell | 2,151,000 | 2,885,136 | 2/13/14 | 81,848 | — | |||||||||||||||||||||
Japanese Yen | CITI | Sell | 85,250,000 | 922,544 | 2/13/14 | 61,425 | — | |||||||||||||||||||||
Japanese Yen | JPHQ | Sell | 42,690,000 | 461,279 | 2/13/14 | 30,063 | — | |||||||||||||||||||||
Japanese Yen | JPHQ | Sell | 42,710,000 | 461,271 | 2/18/14 | 29,826 | — | |||||||||||||||||||||
Japanese Yen | GSCO | Sell | 42,760,000 | 461,290 | 2/19/14 | 29,335 | — | |||||||||||||||||||||
Japanese Yen | CITI | Sell | 42,570,000 | 461,221 | 2/19/14 | 31,185 | — | |||||||||||||||||||||
Japanese Yen | BZWS | Sell | 21,350,000 | 230,626 | 2/25/14 | 14,936 | — | |||||||||||||||||||||
Japanese Yen | DBAB | Sell | 14,279,000 | 155,996 | 2/27/14 | 11,737 | — | |||||||||||||||||||||
Japanese Yen | BZWS | Sell | 80,260,000 | 862,890 | 2/27/14 | 52,036 | — | |||||||||||||||||||||
Singapore Dollar | DBAB | Buy | 361,500 | 292,074 | 2/28/14 | — | (6,716 | ) | ||||||||||||||||||||
Euro | DBAB | Sell | 1,228,589 | 1,616,516 | 3/03/14 | 15,174 | — | |||||||||||||||||||||
Euro | UBSW | Sell | 2,581,000 | 3,387,175 | 3/03/14 | 23,102 | — | |||||||||||||||||||||
Japanese Yen | JPHQ | Sell | 85,800,000 | 943,521 | 3/03/14 | 76,654 | — | |||||||||||||||||||||
FSI-34
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Franklin Strategic Income Securities Fund |
Forward Exchange Contracts (continued)
| Currency | Counterparty | Type | Quantity | Contract Amount | Settlement Date | Unrealized Appreciation | Unrealized Depreciation | |||||||||||||||||||||
Japanese Yen | UBSW | Sell | 95,700,000 | $ | 1,041,009 | 3/04/14 | $ | 74,108 | $ | — | ||||||||||||||||||
Japanese Yen | HSBC | Sell | 85,800,000 | 942,339 | 3/04/14 | 75,462 | — | |||||||||||||||||||||
Japanese Yen | DBAB | Sell | 257,790,000 | 2,801,974 | 3/04/14 | 197,403 | — | |||||||||||||||||||||
Euro | DBAB | Sell | 1,400,000 | 1,828,820 | 3/05/14 | 4,038 | — | |||||||||||||||||||||
Euro | DBAB | Sell | 324,000 | 420,406 | 3/06/14 | — | (1,903 | ) | ||||||||||||||||||||
Euro | DBAB | Sell | 2,741,981 | 3,560,641 | 3/17/14 | — | (13,575 | ) | ||||||||||||||||||||
Euro | DBAB | Sell | 479,200 | 621,863 | 3/18/14 | — | (2,786 | ) | ||||||||||||||||||||
Euro | JPHQ | Sell | 143,700 | 188,283 | 3/19/14 | 965 | — | |||||||||||||||||||||
Singapore Dollar | HSBC | Buy | 1,113,000 | 892,149 | 3/19/14 | — | (13,562 | ) | ||||||||||||||||||||
Euro | DBAB | Sell | 1,997,000 | 2,597,758 | 3/20/14 | — | (5,413 | ) | ||||||||||||||||||||
Euro | JPHQ | Sell | 240,000 | 311,998 | 3/20/14 | — | (852 | ) | ||||||||||||||||||||
Euro | JPHQ | Sell | 240,000 | 310,568 | 3/21/14 | — | (2,283 | ) | ||||||||||||||||||||
Euro | JPHQ | Sell | 240,000 | 311,730 | 3/24/14 | — | (1,128 | ) | ||||||||||||||||||||
Euro | JPHQ | Sell | 192,000 | 248,564 | 3/25/14 | — | (1,724 | ) | ||||||||||||||||||||
Euro | DBAB | Sell | 333,108 | 433,807 | 3/26/14 | — | (431 | ) | ||||||||||||||||||||
Euro | DBAB | Sell | 4,372,555 | 5,619,389 | �� | 4/03/14 | — | (80,989 | ) | |||||||||||||||||||
Euro | BZWS | Sell | 132,570 | 170,624 | 4/07/14 | — | (2,209 | ) | ||||||||||||||||||||
Euro | DBAB | Sell | 800,000 | 1,050,160 | 4/10/14 | 7,166 | — | |||||||||||||||||||||
Euro | DBAB | Sell | 949,814 | 1,243,069 | 4/11/14 | 4,747 | — | |||||||||||||||||||||
Chilean Peso | MSCO | Buy | 116,230,000 | 237,616 | 4/14/14 | — | (16,833 | ) | ||||||||||||||||||||
Euro | HSBC | Sell | 142,717 | 186,807 | 4/16/14 | 732 | — | |||||||||||||||||||||
Chilean Peso | MSCO | Buy | 104,150,000 | 211,451 | 4/21/14 | — | (13,751 | ) | ||||||||||||||||||||
Euro | BZWS | Sell | 130,134 | 171,384 | 4/22/14 | 1,707 | — | |||||||||||||||||||||
Euro | DBAB | Sell | 2,272,254 | 2,983,015 | 4/22/14 | 20,310 | — | |||||||||||||||||||||
Euro | JPHQ | Sell | 36,314 | 47,536 | 4/22/14 | 188 | — | |||||||||||||||||||||
Euro | BZWS | Sell | 1,659,340 | 2,167,430 | 4/25/14 | 3,831 | — | |||||||||||||||||||||
Chilean Peso | JPHQ | Buy | 234,301,000 | 471,668 | 4/28/14 | — | (27,222 | ) | ||||||||||||||||||||
British Pound | DBAB | Sell | 223,551 | 346,750 | 4/29/14 | 7,360 | — | |||||||||||||||||||||
Euro | BZWS | Sell | 91,515 | 119,354 | 4/30/14 | 24 | — | |||||||||||||||||||||
Singapore Dollar | DBAB | Buy | 6,168,500 | 4,985,654 | 4/30/14 | — | (116,144 | ) | ||||||||||||||||||||
Euro | DBAB | Sell | 71,000 | 93,969 | 5/05/14 | 1,385 | — | |||||||||||||||||||||
Japanese Yen | DBAB | Sell | 97,107,500 | 1,000,000 | 5/07/14 | 17,901 | — | |||||||||||||||||||||
British Pound | DBAB | Sell | 1,300,000 | 2,010,190 | 5/09/14 | 36,644 | — | |||||||||||||||||||||
Chilean Peso | DBAB | Buy | 574,000,000 | 1,167,972 | 5/09/14 | — | (80,336 | ) | ||||||||||||||||||||
Euro | DBAB | Sell | 700,000 | 918,925 | 5/09/14 | 6,103 | — | |||||||||||||||||||||
Euro | DBAB | Sell | 212,145 | 280,583 | 5/12/14 | 3,933 | — | |||||||||||||||||||||
Singapore Dollar | DBAB | Buy | 3,707,640 | 3,013,410 | 5/12/14 | — | (86,511 | ) | ||||||||||||||||||||
British Pound | DBAB | Sell | 130,318 | 198,930 | 5/15/14 | 1,098 | — | |||||||||||||||||||||
Euro | JPHQ | Sell | 201,376 | 260,361 | 5/23/14 | — | (2,268 | ) | ||||||||||||||||||||
Japanese Yen | DBAB | Sell | 50,435,000 | 500,000 | 5/28/14 | — | (10,260 | ) | ||||||||||||||||||||
Euro | DBAB | Sell | 992 | 1,291 | 6/05/14 | — | (3 | ) | ||||||||||||||||||||
Singapore Dollar | JPHQ | Buy | 4,945,200 | 3,933,816 | 6/05/14 | — | (29,875 | ) | ||||||||||||||||||||
Japanese Yen | HSBC | Sell | 80,270,000 | 829,818 | 6/10/14 | 17,532 | — | |||||||||||||||||||||
Japanese Yen | JPHQ | Sell | 54,440,000 | 553,272 | 6/10/14 | 2,370 | — | |||||||||||||||||||||
Japanese Yen | BZWS | Sell | 75,370,000 | 774,486 | 6/10/14 | 11,784 | — | |||||||||||||||||||||
Japanese Yen | JPHQ | Sell | 74,370,000 | 774,497 | 6/11/14 | 21,903 | — | |||||||||||||||||||||
Japanese Yen | DBAB | Sell | 26,600,000 | 276,807 | 6/11/14 | 7,626 | — | |||||||||||||||||||||
Japanese Yen | JPHQ | Sell | 31,400,000 | 332,328 | 6/17/14 | 14,541 | — | |||||||||||||||||||||
Singapore Dollar | HSBC | Buy | 837,000 | 664,813 | 6/20/14 | — | (4,044 | ) | ||||||||||||||||||||
Euro | DBAB | Sell | 320,700 | 420,454 | 6/27/14 | 2,095 | — | |||||||||||||||||||||
Euro | UBSW | Sell | 4,274,000 | 5,581,117 | 6/30/14 | 5,472 | — | |||||||||||||||||||||
Japanese Yen | BZWS | Sell | 620,288,000 | 6,375,005 | 6/30/14 | 95,890 | — | |||||||||||||||||||||
Japanese Yen | DBAB | Sell | 97,929,000 | 1,000,000 | 7/01/14 | 8,658 | — | |||||||||||||||||||||
|
| |||||||||||||||||||||||||||
Unrealized appreciation (depreciation) |
| 8,632,800 | (4,014,225 | ) | ||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||
Net unrealized appreciation (depreciation) |
| $ | 4,618,575 | |||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||
FSI-35
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Franklin Strategic Income Securities Fund |
At June 30,2013, the Fund had the following credit default swap contracts outstanding. See Note 1(d).
Credit Default Swap Contracts
| Description | Counterparty/ Exchange | Notional Amounta | Periodic Payment Rate | Expiration Date | Upfront Premiums Paid (Received) | Unrealized Appreciation | Unrealized Depreciation | Market Value | Ratingb | |||||||||||||||||||||||||
Centrally Cleared Swaps |
| |||||||||||||||||||||||||||||||||
Contracts to Sell Protectionc |
| |||||||||||||||||||||||||||||||||
Traded Index |
| |||||||||||||||||||||||||||||||||
CDX.NA.HY.20 | ICE | $ | 10,000,000 | 5.00% | 6/20/18 | $ | 309,380 | $ | — | $ | (10,678 | ) | $ | 298,702 | Non Investment Grade | |||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||
Centrally Cleared Swaps unrealized appreciation (depreciation) |
| — | (10,678 | ) | ||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||
OTC Swaps |
| |||||||||||||||||||||||||||||||||
Contracts to Sell Protectionc |
| |||||||||||||||||||||||||||||||||
Traded Index |
| |||||||||||||||||||||||||||||||||
CMBX.NA.AJ.2 | FBCO | 6,000,000 | 1.09% | 3/15/49 | $ | (694,288 | ) | $ | — | $ | (42,464 | ) | $ | (736,752 | ) | Non Investment Grade | ||||||||||||||||||
CMBX.NA.AJ.2 | FBCO | 6,000,000 | 1.09% | 3/15/49 | (150,268 | ) | 2,918 | — | (147,350 | ) | Non Investment Grade | |||||||||||||||||||||||
MCDX.NA.20 | CITI | 23,000,000 | 1.00% | 6/20/18 | (191,525 | ) | — | (171,232 | ) | (362,757 | ) | Non Investment Grade | ||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||
OTC Swaps unrealized appreciation (depreciation) |
| 2,918 | (213,696 | ) | ||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||
Total Credit Default Swaps unrealized appreciation (depreciation) |
| 2,918 | (224,374 | ) | ||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||
Net unrealized appreciation (depreciation) |
| $ | (221,456 | ) | ||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||
aIn 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.
bBased 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.
cThe fund enters contracts to sell protection to create a long credit position. Performance triggers include failure to pay or bankruptcy of the underlying securities for traded index swaps.
See Note 11 regarding other derivative information.
See Abbreviations on page FSI-55.
The accompanying notes are an integral part of these financial statements.
FSI-36
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements
Statement of Assets and Liabilities
June 30, 2013 (unaudited)
| Franklin Strategic Income Securities Fund | ||||
Assets: | ||||
Investments in securities: | ||||
Cost - Unaffiliated issuers | $ | 1,099,397,313 | ||
Cost - Sweep Money Fund (Note 7) | 62,289,365 | |||
|
| |||
Total cost of investments | $ | 1,161,686,678 | ||
|
| |||
Value - Unaffiliated issuers | $ | 1,114,904,492 | ||
Value - Sweep Money Fund (Note 7) | 62,289,365 | |||
|
| |||
Total value of investments | 1,177,193,857 | |||
Cash | 2,143,845 | |||
Restricted cash (Note 1e) | 1,175,400 | |||
Foreign currency, at value (cost $6,529,127) | 6,531,800 | |||
Receivables: | ||||
Investment securities sold | 60,487,897 | |||
Capital shares sold | 241,184 | |||
Interest | 12,582,467 | |||
Due from brokers | 1,250,000 | |||
Swaps (premiums paid $309,380) | 309,380 | |||
Unrealized appreciation on forward exchange contracts | 8,632,800 | |||
Unrealized appreciation on OTC swap contracts | 2,918 | |||
Other assets | 383 | |||
|
| |||
Total assets | 1,270,551,931 | |||
|
| |||
Liabilities: | ||||
Payables: | ||||
Investment securities purchased | 34,325,791 | |||
Capital shares redeemed | 23,387,301 | |||
Affiliates | 750,428 | |||
Variation margin | 10,678 | |||
Due to brokers | 1,175,400 | |||
OTC Swaps (premiums received $1,049,638) | 1,036,081 | |||
Unrealized depreciation on forward exchange contracts | 4,014,225 | |||
Unrealized depreciation on OTC swap contracts | 213,696 | |||
Unrealized depreciation on unfunded commitments (Note 10) | 34,049 | |||
Deferred tax | 73,101 | |||
Accrued expenses and other liabilities | 473,557 | |||
|
| |||
Total liabilities | 65,494,307 | |||
|
| |||
Net assets, at value | $ | 1,205,057,624 | ||
|
| |||
Net assets consist of: | ||||
Paid-in capital | $ | 1,145,807,195 | ||
Undistributed net investment income | 21,496,867 | |||
Net unrealized appreciation (depreciation) | 19,711,781 | |||
Accumulated net realized gain (loss) | 18,041,781 | |||
|
| |||
Net assets, at value | $ | 1,205,057,624 | ||
|
| |||
The accompanying notes are an integral part of these financial statements.
FSI-37
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Assets and Liabilities (continued)
June 30, 2013 (unaudited)
| Franklin Strategic Income Securities Fund | ||||
Class 1: | ||||
Net assets, at value | $ | 863,210,434 | ||
|
| |||
Shares outstanding | 70,779,241 | |||
|
| |||
Net asset value and maximum offering price per share | $ | 12.20 | ||
|
| |||
Class 2: | ||||
Net assets, at value | $ | 170,025,327 | ||
|
| |||
Shares outstanding | 14,310,972 | |||
|
| |||
Net asset value and maximum offering price per share | $ | 11.88 | ||
|
| |||
Class 4: | ||||
Net assets, at value | $ | 171,821,863 | ||
|
| |||
Shares outstanding | 14,208,626 | |||
|
| |||
Net asset value and maximum offering price per share | $ | 12.09 | ||
|
| |||
The accompanying notes are an integral part of these financial statements.
FSI-38
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Operations
for the six months ended June 30, 2013 (unaudited)
| Franklin Strategic Income Securities Fund | ||||
Investment income: | ||||
Dividends | $ | 35,052 | ||
Interest | 33,361,323 | |||
|
| |||
Total investment income | 33,396,375 | |||
|
| |||
Expenses: | ||||
Management fees (Note 3a) | 2,697,498 | |||
Administrative fees (Note 3b) | 889,691 | |||
Distribution fees: (Note 3c) | ||||
Class 2 | 206,644 | |||
Class 4 | 336,818 | |||
Unaffiliated transfer agent fees | 215 | |||
Custodian fees (Note 4) | 165,553 | |||
Reports to shareholders | 84,442 | |||
Professional fees | 50,998 | |||
Trustees’ fees and expenses | 2,852 | |||
Other | 27,901 | |||
|
| |||
Total expenses | 4,462,612 | |||
Expense reductions (Note 4) | (111 | ) | ||
|
| |||
Net expenses | 4,462,501 | |||
|
| |||
Net investment income | 28,933,874 | |||
|
| |||
Realized and unrealized gains (losses): | ||||
Net realized gain (loss) from: | ||||
Investments | 15,490,653 | |||
Foreign currency transactions | 1,109,388 | |||
Swap contracts | 1,287,893 | |||
|
| |||
Net realized gain (loss) | 17,887,934 | |||
|
| |||
Net change in unrealized appreciation (depreciation) on: | ||||
Investments | (50,433,970 | ) | ||
Translation of other assets and liabilities denominated in foreign currencies | 3,544,818 | |||
Change in deferred taxes on unrealized appreciation | 136,302 | |||
|
| |||
Net change in unrealized appreciation (depreciation) | (46,752,850 | ) | ||
|
| |||
Net realized and unrealized gain (loss) | (28,864,916 | ) | ||
|
| |||
Net increase (decrease) in net assets resulting from operations | $ | 68,958 | ||
|
| |||
The accompanying notes are an integral part of these financial statements.
FSI-39
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statements of Changes in Net Assets
| Franklin Strategic Income Securities Fund | ||||||||
| Six Months Ended June 30, 2013 (unaudited) | Year Ended December 31, 2012 | |||||||
| ||||||||
Increase (decrease) in net assets: | ||||||||
Operations: | ||||||||
Net investment income | $ | 28,933,874 | $ | 68,402,114 | ||||
Net realized gain (loss) from investments, foreign currency transactions and swap contracts | 17,887,934 | 28,045,425 | ||||||
Net change in unrealized appreciation (depreciation) on investments, translation of other assets and liabilities denominated in foreign currencies and deferred taxes | (46,752,850 | ) | 71,828,011 | |||||
| ||||||||
Net increase (decrease) in net assets resulting from operations | 68,958 | 168,275,550 | ||||||
| ||||||||
Distributions to shareholders from: | ||||||||
Net investment income and net foreign currency gains: | ||||||||
Class 1 | (54,987,119 | ) | (72,486,947 | ) | ||||
Class 2 | (10,246,664 | ) | (9,567,293 | ) | ||||
Class 4 | (10,775,092 | ) | (13,446,008 | ) | ||||
Net realized gains: | ||||||||
Class 1 | (11,433,439 | ) | (1,182,191 | ) | ||||
Class 2 | (2,203,428 | ) | (160,795 | ) | ||||
Class 4 | (2,384,488 | ) | (230,338 | ) | ||||
| ||||||||
Total distributions to shareholders | (92,030,230 | ) | (97,073,572 | ) | ||||
| ||||||||
Capital share transactions: (Note 2) | ||||||||
Class 1 | (90,881,833 | ) | (78,499,832 | ) | ||||
Class 2 | 24,566,239 | 27,715,617 | ||||||
Class 4 | (11,132,191 | ) | (2,176,836 | ) | ||||
| ||||||||
Total capital share transactions | (77,447,785 | ) | (52,961,051 | ) | ||||
| ||||||||
Net increase (decrease) in net assets | (169,409,057 | ) | 18,240,927 | |||||
Net assets: | ||||||||
Beginning of period | 1,374,466,681 | 1,356,225,754 | ||||||
| ||||||||
End of period | $ | 1,205,057,624 | $ | 1,374,466,681 | ||||
| ||||||||
Undistributed net investment income included in net assets: | ||||||||
End of period | $ | 21,496,867 | $ | 68,571,868 | ||||
| ||||||||
The accompanying notes are an integral part of these financial statements.
FSI-40
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited)
Franklin Strategic Income Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Templeton Variable Insurance Products Trust (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end investment company, consisting of twenty-one 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, 2013, 86.84% of the Fund’s shares were held through one insurance company. Investment activities of these insurance company separate accounts could have a material impact on the Fund. 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 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 Board), the Fund’s administrator, investment manager and other affiliates have formed the Valuation and Liquidity Oversight Committee (VLOC). The VLOC provides administration and oversight of the Fund’s valuation policies and procedures, which are approved annually by the Board. Among other things, these procedures allow the Fund to 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 (OTC) 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 OTC 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, credit spreads, estimated default rates, anticipated market interest rate volatility, 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 OTC 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 financial instruments for which market prices are not reliable or readily available. Under these procedures, the VLOC convenes on a regular basis to review such financial instruments and considers a number of factors, including significant unobservable valuation inputs, when arriving at fair value. The VLOC primarily employs
FSI-41
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Strategic Income Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
a. Financial Instrument Valuation (continued)
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. An income-based valuation approach may also be used 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. The VLOC employs various methods for calibrating these valuation approaches including a regular review of key inputs and assumptions, transactional back-testing or disposition analysis, and reviews of any related market activity.
Trading in securities on foreign securities stock exchanges and OTC 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 VLOC 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 Depositary 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.
In addition, certain foreign markets may be open on days that the NYSE is closed, which could result in differences between the value of the Fund’s portfolio securities on the last business day and the last calendar day of the reporting period. Any significant security valuation changes due to an open foreign market are adjusted and reflected by the Fund for financial reporting purposes.
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 Board.
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.
FSI-42
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Strategic Income Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
c. Securities Purchased on a When-Issued and Delayed Delivery Basis
The Fund purchases securities on a when-issued and delayed delivery basis, with payment and delivery scheduled for a future date. These transactions are subject to market fluctuations and are subject to the risk that the value at delivery may be more or less than the trade date purchase price. Although the Fund will generally purchase these securities with the intention of holding the securities, it may sell the securities before the settlement date. Sufficient assets have been segregated for these securities.
d. Derivative Financial Instruments
The Fund 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.
Derivative counterparty credit risk is managed through a formal evaluation of the creditworthiness of all potential counterparties. The Fund attempts to reduce its exposure to counterparty credit risk on OTC derivatives, whenever possible, by entering into International Swaps and Derivatives Association (ISDA) master agreements with certain counterparties. These agreements contain various provisions, including but not limited to collateral requirements, events of default, or early termination. Termination events applicable to the counterparty include certain deteriorations in the credit quality of the counterparty. Termination events applicable to the Fund include failure of the Fund to maintain certain net asset levels and/or limit the decline in net assets over various periods of time. In the event of default or early termination, the ISDA master agreement gives the non-defaulting party the right to net and close-out all transactions traded, whether or not arising under the ISDA agreement, to one net amount payable by one counterparty to the other. Early termination by the counterparty may result in an immediate payment by the Fund of any net liability owed to that counterparty under the ISDA agreement. However, absent an event of default or early termination, OTC derivative assets and liabilities are presented gross and not offset in the Statement of Assets and Liabilities.
Collateral requirements differ by type of derivative. Collateral or initial margin requirements are set by the broker or exchange clearing house for exchange traded and centrally cleared derivatives. Initial margin deposited is held at the exchange and can be in the form of cash and/or securities. For OTC derivatives traded under an ISDA master agreement, posting of collateral is required by either the fund or the applicable counterparty if the total net exposure of all OTC derivatives with the applicable counterparty exceeds the minimum transfer amount, which typically ranges from $100,000 to $250,000, and can vary depending on the counterparty and the type of the agreement. Generally, collateral is determined at the close of fund business each day and any additional collateral required due to changes in derivative values may be delivered by the fund or the counterparty within a few business days. Collateral pledged and/or received by the fund for OTC derivatives, if any, is held in segregated accounts with the fund’s custodian/counterparty broker and can be in the form of cash and/or securities. Unrestricted cash may be invested according to the Fund’s investment objectives.
The Fund entered into OTC 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 at a specific exchange rate on a future date.
The Fund entered into credit default swap contracts primarily to manage 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. These agreements may be privately negotiated in the over-the-counter market (“OTC credit default swaps”) or may be executed in a multilateral trade facility platform, such as a
FSI-43
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Strategic Income Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
d. Derivative Financial Instruments (continued)
registered exchange (“centrally cleared credit default swaps”). The underlying referenced debt obligation may be a single issuer of corporate or sovereign debt, a credit index, or a tranche of a credit index. 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 from the seller in exchange for the referenced debt obligation, a net settlement amount equal to the notional amount of the credit default swap less the recovery value of the referenced debt obligation, or other agreed upon amount. For centrally cleared credit default swaps, 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 referenced debt obligation. 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. 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 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.
See Note 11 regarding other derivative information.
e. Restricted Cash
At June 30, 2013, the Fund received restricted cash in connection with investments in certain derivative securities. Restricted cash is held in a segregated account with the Fund’s custodian and is reflected in the Statement of Assets and Liabilities.
f. Loan Participation Notes
The Fund invests in loan participation notes (“Participations”). Participations are loans originally issued to a borrower by one or more financial institutions (the “Lender”) and subsequently sold to other investors, such as the Fund. Participations typically result in the Fund having a contractual relationship only with the Lender, and not with the borrower. The Fund has the right to receive from the Lender any payments of principal, interest and fees which the Lender received from the borrower. The Fund generally has no rights to either enforce compliance by the borrower with the terms of the loan agreement or to any collateral relating to the original loan. As a result, the Fund assumes the credit risk of both the borrower and the Lender that is selling the Participation. The Participations may also involve interest rate risk and liquidity risk, including the potential default or insolvency of the borrower and/or the Lender.
g. FT Holdings Corporation III (FT Subsidiary)
The Fund invests in certain financial instruments through its investment in FT Subsidiary. The FT Subsidiary is a Delaware Corporation, is a wholly-owned subsidiary of the Fund, and is able to invest in certain financial instruments consistent with the investment objective of the Fund. At June 30, 2013, the FT Subsidiary’s investment, Turtle Bay Resort, as well as any other assets and liabilities of the FT Subsidiary are reflected in the Fund’s Statement of Investments and Statement of Assets and Liabilities. The financial statements have been consolidated and include the accounts of the Fund and the FT Subsidiary. All intercompany transactions and balances have been eliminated.
FSI-44
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Strategic Income Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
h. Mortgage Dollar Rolls
The Fund enters into mortgage dollar rolls, typically on a to-be-announced 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.
i. 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 certain restrictions on resale.
j. 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 if applicable, excise taxes. As a result, no provision for U.S. federal income taxes is required.
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 in an amount that would be payable if the securities were disposed of on the valuation date.
The Fund recognizes the tax benefits of uncertain tax positions only when the position is “more likely than not” to be sustained upon examination by the tax authorities based on the technical merits of the tax position. As of June 30, 2013, and for all open tax years, the Fund has determined that no liability for unrecognized tax benefits is required in the Fund’s financial statements related to uncertain tax positions taken on a tax return (or expected to be taken on future tax returns). Open tax years are those that remain subject to examination and are based on each tax jurisdiction statute of limitation.
k. 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
FSI-45
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Strategic Income Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
k. Security Transactions, Investment Income, Expenses and Distributions (continued)
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.
l. 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.
m. 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-46
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Strategic Income Securities Fund
2. SHARES OF BENEFICIAL INTEREST
At June 30, 2013, 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, 2013 | Year Ended December 31, 2012 | |||||||||||||||
| Class 1 Shares: | Shares | Amount | Shares | Amount | ||||||||||||
Shares sold | 421,099 | $ | 5,610,165 | 3,209,922 | $ | 41,235,226 | ||||||||||
Shares issued in reinvestment of distributions | 5,373,832 | 66,420,558 | 6,063,304 | 73,669,138 | ||||||||||||
Shares redeemed | (12,428,184 | ) | (162,912,556 | ) | (14,997,522 | ) | (193,404,196 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | (6,633,253 | ) | $ | (90,881,833 | ) | (5,724,296 | ) | $ | (78,499,832 | ) | ||||||
| ||||||||||||||||
Class 2 Shares: | ||||||||||||||||
Shares sold | 2,558,101 | $ | 33,021,681 | 3,441,994 | $ | 43,341,865 | ||||||||||
Shares issued in reinvestment of distributions | 1,034,061 | 12,450,092 | 819,552 | 9,728,087 | ||||||||||||
Shares redeemed | (1,617,381 | ) | (20,905,534 | ) | (2,012,180 | ) | (25,354,335 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | 1,974,781 | $ | 24,566,239 | 2,249,366 | $ | 27,715,617 | ||||||||||
| ||||||||||||||||
Class 4 Shares: | ||||||||||||||||
Shares sold | 439,970 | $ | 5,821,535 | 1,353,603 | $ | 17,206,420 | ||||||||||
Shares issued on reinvestment of distributions | 1,074,251 | 13,159,580 | 1,134,025 | 13,676,347 | ||||||||||||
Shares redeemed | (2,370,951 | ) | (30,113,306 | ) | (2,599,542 | ) | (33,059,603 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | (856,730 | ) | $ | (11,132,191 | ) | (111,914 | ) | $ | (2,176,836 | ) | ||||||
| ||||||||||||||||
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 $500 million | |
| 0.525% | Over $500 million, up to and including $1 billion | |
| 0.480% | Over $1 billion, up to and including $1.5 billion | |
| 0.435% | Over $1.5 billion, up to and including $6.5 billion | |
| 0.415% | Over $6.5 billion, up to and including $11.5 billion | |
| 0.400% | Over $11.5 billion, up to and including $16.5 billion | |
| 0.390% | Over $16.5 billion, up to and including $19 billion | |
| 0.380% | Over $19 billion, up to and including $21.5 billion | |
| 0.370% | In excess of $21.5 billion |
FSI-47
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Strategic Income Securities Fund
3. TRANSACTIONS WITH AFFILIATES (continued)
a. Management Fees (continued)
Effective May 1, 2013, the Fund combined its investment management and administration agreements as approved by the Board. The fees paid under the combined agreement do not exceed the aggregate fees that were paid under the separate agreements.
Prior to May 1, 2013, the Fund paid fees to Advisers based on the average daily net assets of the Fund as follows:
| Annualized Fee Rate | Net Assets | |
| 0.425% | Up to and including $500 million | |
| 0.325% | Over $500 million, up to and including $1 billion | |
| 0.280% | Over $1 billion, up to and including $1.5 billion | |
| 0.235% | Over $1.5 billion, up to and including $6.5 billion | |
| 0.215% | Over $6.5 billion, up to and including $11.5 billion | |
| 0.200% | Over $11.5 billion, up to and including $16.5 billion | |
| 0.190% | Over $16.5 billion, up to and including $19 billion | |
| 0.180% | Over $19 billion, up to and including $21.5 billion | |
| 0.170% | In excess of $21.5 billion |
b. Administrative Fees
Effective May 1, 2013, under an agreement with Advisers, FT Services provides administrative services to the Fund. The fee is paid by Advisers based on the average daily net assets, and is not an additional expense of the Fund.
Prior to May 1, 2013, the Fund paid administrative fees to FT Services of 0.20% per year of the average daily net assets of the Fund.
c. Distribution Fees
The Board 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. Some distribution fees are not charged on shares held by affiliates.
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, 2013, the custodian fees were reduced as noted in the Statement of Operations.
FSI-48
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Strategic Income Securities Fund
5. INCOME TAXES
At June 30, 2013, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
Cost of investments | $ | 1,165,427,614 | ||
|
| |||
Unrealized appreciation | $ | 36,455,051 | ||
Unrealized depreciation | (24,688,808 | ) | ||
|
| |||
Net unrealized appreciation (depreciation) | $ | 11,766,243 | ||
|
| |||
Differences between income and/or capital gains as determined on a book basis and a tax basis are primarily due to differing treatments of paydown losses and bond discounts and premiums.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the period ended June 30, 2013, aggregated $301,147,919 and $398,006,354, 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, 2013, the Fund had 51.32% of its portfolio invested in high yield, senior secured floating rate notes, or other securities rated below investment grade. These securities may be more sensitive to economic conditions causing greater price volatility and are potentially subject to a greater risk of loss due to default than higher rated securities.
The Fund held defaulted securities and/or other securities for which the income has been deemed uncollectible. At June 30, 2013, 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. 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.
FSI-49
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Strategic Income Securities Fund
9. RESTRICTED SECURITIES (continued)
At June 30, 2013, the Fund held investments in restricted securities, excluding certain securities exempt from registration under the 1933 Act deemed to be liquid, as follows:
Principal | Issuer | Acquisition Dates | Cost | Value | ||||||||||||
| 1,600,000 | CEVA Group PLC, senior note, first lien, 144A, 4.00%, 5/01/18 | 12/09/10 - 5/02/13 | $ | 1,595,465 | $ | 1,312,000 | ||||||||||
| 224 | CEVA Holdings LLC | 3/10/10 - 5/02/13 | 334,368 | 201,852 | ||||||||||||
| 6 | CEVA Holdings LLC, cvt. pfd., A-1 | 5/02/13 | 8,040 | 7,200 | ||||||||||||
| 486 | CEVA Holdings LLC, cvt. pfd., A-2 | 3/10/10 - 5/02/13 | 723,816 | 436,959 | ||||||||||||
|
|
|
| |||||||||||||
Total Restricted Securities (Value is 0.16% of Net Assets) | $ | 2,661,689 | $ | 1,958,011 | ||||||||||||
|
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10. UNFUNDED COMMITMENTS
The Fund enters into certain credit agreements, all or a portion of which may be unfunded. The Fund is obligated to fund these commitments at the borrowers’ discretion. Funded portions of credit agreements are presented on the Statement of Investments.
At June 30, 2013, unfunded commitments were as follows:
| Borrower | Unfunded Commitment* | |||
CEVA Group PLC, 4.00%, 12/01/13 | 130,625 | EUR | ||
Entravision Communications Corp., Tranche B Term Loans, 2.50%, 5/31/20 | 1,670,000 | |||
Patriot Coal Corp., Reimbursement Obligation (Second Out LC DIP), 4.50% - 8.273%, 12/31/13 | 285,464 | |||
|
| |||
| 2,086,089 | ||||
|
| |||
*In U.S. dollars unless otherwise indicated.
Unfunded 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 the Statement of Operations.
11. OTHER DERIVATIVE INFORMATION
At June 30, 2013, the Fund’s investments in derivative contracts 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 | $ | 8,632,800 | Unrealized depreciation on forward exchange contracts | $ | 4,014,225 | ||||||
Credit contracts | Unrealized appreciation on OTC swap contracts | 2,918 | Unrealized depreciation on OTC swap contracts/variation margin | 224,374 | ||||||||
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Strategic Income Securities Fund
11. OTHER DERIVATIVE INFORMATION (continued)
For the period ended June 30, 2013, 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] | $ | 2,003,004 | $ | 3,750,080 | |||||
Credit contracts | Net realized gain (loss) from swap contracts / Net change in unrealized appreciation (depreciation) on investments | 1,287,893 | (228,679 | ) | ||||||
At June 30, 2013 the Fund’s OTC derivative assets and liabilities, are as follows:
| Gross and Net Amounts of Assets and Liabilities Presented in the Statement of Assets and Liabilities | ||||||||
| Assetsa | Liabilitiesa | |||||||
Derivatives | ||||||||
Forward Exchange Contracts | $ | 8,632,800 | $ | 4,014,225 | ||||
Swap Contracts | 2,918 | 1,249,777 | ||||||
|
| |||||||
Total | $ | 8,635,718 | $ | 5,264,002 | ||||
|
| |||||||
aAbsent an event of default or early termination, OTC derivative assets and liabilities are presented gross and not offset in the Statement of Assets and Liabilities.
At June 30, 2013 the Fund’s OTC derivative assets which may be offset against the Fund’s OTC derivative liabilities, and collateral received from the counterparty, is as follows:
| Amounts Not Offset in the Statement of Assets and Liabilities | ||||||||||||||||||||
| Gross and Net Amounts of Assets Presented in the Statement of Assets and Liabilities | Financial Instruments Available for Offset | Financial Instruments Collateral Received a | Cash Collateral Receivedb | Net Amount (Not less than zero) | ||||||||||||||||
Counterparty | ||||||||||||||||||||
BZWS | $ | 1,994,202 | $ | (620,743 | ) | $ | — | $ | (1,125,000 | ) | $ | 248,459 | ||||||||
CITI | 214,839 | (214,839 | ) | — | — | — | ||||||||||||||
DBAB | 1,993,300 | (1,717,931 | ) | — | — | 275,369 | ||||||||||||||
FBCO | 2,918 | (2,918 | ) | — | — | — | ||||||||||||||
GSCO | 29,335 | — | — | — | 29,335 | |||||||||||||||
HSBC | 775,004 | (578,102 | ) | — | — | 196,902 | ||||||||||||||
JPHQ | 2,160,553 | (581,696 | ) | (1,357,360 | ) | — | 221,497 | |||||||||||||
MSCO | 31,880 | (30,584 | ) | — | (1,296 | ) | — | |||||||||||||
UBSW | 1,433,687 | (406,390 | ) | (733,496 | ) | — | 293,801 | |||||||||||||
|
| |||||||||||||||||||
Total | $ | 8,635,718 | $ | (4,153,203 | ) | $ | (2,090,856 | ) | $ | (1,126,296 | ) | $ | 1,265,363 | |||||||
|
| |||||||||||||||||||
aAt June 30, 2013 the Fund received U.S. Treasury Bonds and Notes as collateral for derivatives.
bIn some instances, the collateral amounts disclosed in the table above were adjusted due to the requirement to limit the collateral amounts to avoid the effect of overcollateralization. Actual collateral received and/or pledged may be more than the amounts disclosed herein.
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Strategic Income Securities Fund
11. OTHER DERIVATIVE INFORMATION (continued)
At June 30, 2013 the Fund’s OTC derivative liabilities which may be offset against the Fund’s OTC derivative assets, and collateral pledged to the counterparty, is as follows:
| Amounts Not Offset in the Statement of Assets and Liabilities | ||||||||||||||||||||
| Gross and Net Amounts of Liabilities Presented in the Statement of Assets and Liabilities | Financial Instruments Available for Offset | Financial Instruments Collateral Pledged | Cash Collateral Pledgeda | Net Amount (Not less than zero) | ||||||||||||||||
Counterparty | ||||||||||||||||||||
BZWS | $ | 620,743 | $ | (620,743 | ) | $ | — | $ | — | $ | — | |||||||||
CITI | 441,536 | (214,839 | ) | — | (226,697 | ) | — | |||||||||||||
DBAB | 1,717,931 | (1,717,931 | ) | — | — | — | ||||||||||||||
FBCO | 887,020 | (2,918 | ) | — | (884,102 | ) | — | |||||||||||||
GSCO | — | — | — | — | — | |||||||||||||||
HSBC | 578,102 | (578,102 | ) | — | — | — | ||||||||||||||
JPHQ | 581,696 | (581,696 | ) | — | — | — | ||||||||||||||
MSCO | 30,584 | (30,584 | ) | — | — | — | ||||||||||||||
UBSW | 406,390 | (406,390 | ) | — | — | — | ||||||||||||||
|
| |||||||||||||||||||
Total | $ | 5,264,002 | $ | (4,153,203 | ) | $ | — | $ | (1,110,799 | ) | $ | — | ||||||||
|
| |||||||||||||||||||
aIn some instances, the collateral amounts disclosed in the table above were adjusted due to the requirement to limit the collateral amounts to avoid the effect of overcollateralization. Actual collateral received and/or pledged may be more than the amounts disclosed herein.
For the period ended June 30, 2013, the average month end market value of derivatives represented 0.91% of average month end net assets. The average month end number of open derivative contracts for the period was 228.
See Note 1(d) regarding derivative financial instruments.
12. 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 $1.5 billion (Global Credit Facility) which matures on January 17, 2014. 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 0.07% based upon the unused portion of the Global Credit Facility. These fees are reflected in other expenses on the Statement of Operations. During the period ended June 30, 2013, the Fund did not use the Global Credit Facility.
13. 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 financial instruments and are summarized in the following fair value hierarchy:
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Strategic Income Securities Fund
13. FAIR VALUE MEASUREMENTS (continued)
| • | Level 1 – quoted prices in active markets for identical financial instruments |
| • | Level 2 – other significant observable inputs (including quoted prices for similar financial instruments, interest rates, prepayment speed, credit risk, etc.) |
| • | Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of financial instruments) |
The inputs or methodology used for valuing financial instruments are not an indication of the risk associated with investing in those financial instruments.
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.
A summary of inputs used as of June 30, 2013, in valuing the Fund’s assets and liabilities carried at fair value, is as follows:
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
|
| |||||||||||||||
Assets: | ||||||||||||||||
Investments in Securities: | ||||||||||||||||
Equity Investments:a | ||||||||||||||||
Consumer Services | $ | — | $ | 1,730,318 | $ | — | $ | 1,730,318 | ||||||||
Materials | — | 875,000 | — | b | 875,000 | |||||||||||
Media | — | 1,295,897 | — | 1,295,897 | ||||||||||||
Transportation | — | — | 646,011 | 646,011 | ||||||||||||
Other Equity Investmentsc | 901,330 | — | — | b | 901,330 | |||||||||||
Corporate Bonds | — | 428,505,340 | 1,312,000 | 429,817,340 | ||||||||||||
Senior Floating Rate Interests | — | 208,644,268 | 190,406 | 208,834,674 | ||||||||||||
Foreign Government and Agency Securities | — | 250,598,168 | — | 250,598,168 | ||||||||||||
U.S. Government and Agency Securities | — | 28,028,928 | — | 28,028,928 | ||||||||||||
Asset-Backed Securities and Commercial Mortgage-Backed Securities | — | 49,645,622 | — | 49,645,622 | ||||||||||||
Mortgage-Backed Securities | — | 72,273,169 | — | 72,273,169 | ||||||||||||
Municipal Bonds | — | 17,658,786 | — | 17,658,786 | ||||||||||||
Short Term Investments | 62,289,365 | 52,599,249 | — | 114,888,614 | ||||||||||||
|
| |||||||||||||||
Total Investments in Securities | $ | 63,190,695 | $ | 1,111,854,745 | $ | 2,148,417 | $ | 1,177,193,857 | ||||||||
|
| |||||||||||||||
Forward Exchange Contracts | $ | — | $ | 8,632,800 | $ | — | $ | 8,632,800 | ||||||||
Swaps | — | 2,918 | — | 2,918 | ||||||||||||
Liabilities: | ||||||||||||||||
Forward Exchange Contracts | — | 4,014,225 | — | 4,014,225 | ||||||||||||
Swaps | — | 224,374 | — | 224,374 | ||||||||||||
Unfunded Commitments | — | 10,159 | 23,890 | 34,049 | ||||||||||||
aIncludes common, preferred, and convertible preferred stocks as well as other equity investments.
bIncludes securities determined to have no value at June 30, 2013.
cFor detailed categories, see the accompanying Statement of Investments.
A reconciliation of assets in which Level 3 inputs are used in determining fair value is presented when there are significant Level 3 investments at the end of the period.
14. NEW ACCOUNTING PRONOUNCEMENTS
In June 2013, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2013-08, Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements. The ASU modifies the criteria
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Strategic Income Securities Fund
14. NEW ACCOUNTING PRONOUNCEMENTS (continued)
used in defining an investment company under U.S. Generally Accepted Accounting Principles and also sets forth certain measurement and disclosure requirements. Under the ASU, an entity that is registered under the 1940 Act automatically qualifies as an investment company. The ASU is effective for interim and annual reporting periods beginning after December 15, 2013. The Fund is currently reviewing the requirements and believes the adoption of this ASU will not have a material impact on its financial statements.
15. 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 | ||
| BZWS - Barclays Bank PLC | AUD - Australian Dollar | AGMC - Assured Guaranty Municipal Corp. | ||
| CITI - Citigroup, Inc. | BRL - Brazilian Real | CDO - Collateralized Debt Obligation | ||
| DBAB - Deutsche Bank AG | CAD - Canadian Dollar | CLO - Collateralized Loan Obligation | ||
| FBCO - Credit Suisse Group AG | EUR - Euro | DIP - Debtor-In-Possession | ||
| GSCO - The Goldman Sachs Group, Inc. | GBP - British Pound | FRN - Floating Rate Note | ||
| HSBC - HSBC Bank USA, N.A. | HUF - Hungarian Forint | GO - General Obligation | ||
| JPHQ - JP Morgan Chase & Co. | IDR - Indonesian Rupiah | L/C - Letter of Credit | ||
| MSCO - Morgan Stanley | ILS - New Israeli Shekel | NATL - National Public Financial Guarantee Corp. | ||
| UBSW - UBS AG | KRW - South Korean Won | PIK - Payment-In-Kind | ||
| LKR - Sri Lankan Rupee | SF - Single Family | |||
| MXN - Mexican Peso | ||||
| MYR - Malaysian Ringgit | ||||
| PHP - Philippine Peso | ||||
| PLN - Polish Zloty | ||||
| SEK - Swedish Krona | ||||
| SGD - Singapore Dollar | ||||
| UYU - Uruguayan Peso |
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FRANKLIN TEMPLETON VIP FOUNDING FUNDS ALLOCATION FUND
This semiannual report for Franklin Templeton VIP Founding Funds Allocation Fund covers the period ended June 30, 2013.
Performance Summary as of 6/30/13
Franklin Templeton VIP Founding Funds Allocation Fund – Class 1 delivered a total return of +8.52%* for the six-month period ended 6/30/13.
*Management 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 4/30/14. Fund investment results reflect the expense reduction, without which the results would have been lower.
Performance reflects the Fund’s Class 1 operating expenses, but does not include any contract fees, expenses or sales charges. If they had been included, performance would be lower. These charges and deductions, particularly for variable life policies, can have a significant effect on contract values and insurance benefits. See the contract prospectus for a complete description of these expenses, including sales charges.
Franklin Templeton VIP Founding Funds Allocation Fund – Class 1
Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares.
Current performance may differ from figures shown.
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Fund Goals and Main Investments: Franklin Templeton VIP Founding Funds Allocation Fund seeks capital appreciation, with income as a secondary goal. Under normal market conditions, the Fund 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. In comparison, the Standard & Poor’s® 500 Index (S&P 500®) delivered a +13.82% total return and the MSCI World Index posted a total return of +8.79% for the same period.1
Economic and Market Overview
Modest U.S. economic growth, as measured by gross domestic product, characterized the six-month period ended June 30, 2013. Increasing job creation helped lower the unemployment rate and absorb new job seekers, and consumer spending remained strong. Accelerating new and existing home sales accompanied record-low mortgage rates, affordable housing prices, low new-home inventories and a six-year low in U.S. foreclosures. Manufacturing, a mainstay of economic productivity, expanded every month except May.
Budgetary agreement between Congress and the President on January 1 preserved lower income tax rates for most U.S. households, but concerns remained about how the expired payroll tax cut, far-reaching federal spending cuts, and future federal debt ceiling negotiations could affect the U.S. economic recovery. Washington’s lack of consensus on proposed expenditure reductions resulted in further across-the-board federal spending cuts starting in March. In May, Federal Reserve Board (Fed) Chairman Ben Bernanke said the Fed could gradually wind down its monthly purchases of mortgage-backed securities and Treasuries, assuming continued U.S. economic improvement. He clarified in June that such action could begin in the near future.
Amid these fiscal and monetary developments, a slow and steady U.S. recovery continued. U.S. stocks generated healthy returns as the S&P 500 and Dow Jones Industrial Average reached all-time highs during the period, even though Chairman Bernanke’s statements sparked volatility.1 Rising corporate profits and generally favorable economic data bolstered investor confidence, but caution remained about
1. Source: © 2013 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: All investments involve risks, including possible loss of principal. Because the Fund invests in underlying funds that may engage in a variety of investment strategies involving certain risks, the Fund may be subject to these same risks. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Bonds are affected by changes in interest rates and the creditworthiness of their issuers. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds adjust to a rise in interest rates, the Fund’s share price may decline. Higher yielding, lower rated corporate bonds entail a greater degree of credit risk compared to investment-grade securities. Foreign investing carries additional risks such as currency and market volatility and political or social instability, risks that are heightened in developing countries. Value securities may not increase in price as anticipated or may decline further in value. The Fund’s prospectus also includes a description of the main investment risks.
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the extent to which positive business and market results were dependent on continuation of the Fed’s accommodative monetary policy.
The global economic recovery was mixed during the first half of 2013. Emerging markets continued to lead the recovery, although they showed signs of slowing. Growth in the U.S. and eurozone continued to be slow by the standards of previous recoveries. As fears eased surrounding the issues of sovereign debt in Europe, the possibility of another recession in the U.S., and a potential “hard landing” in China, financial market performance was positive. Improving sentiment, relatively strong fundamentals, and continued provision of global liquidity supported risk assets as equity markets performed well and bond prices generally declined. Policymakers in the largest developed economies increased their already unprecedented efforts to supply liquidity. Actions elsewhere in the world were mixed, with some policymakers less willing to reverse previous tightening efforts in response to the external environment.
Global developed and emerging market stocks, as measured by the MSCI All Country World Index, advanced during the first six months of 2013. Although emerging markets declined, the losses were more than offset by developed market gains. Regional performance was more consistent with local economic trends, although periodic volatility reflected the global economy’s fragility. Given the rise in rates near period-end, longer duration U.S. Treasury and emerging market bond prices experienced meaningful price declines. In the second quarter, gold, traditionally a safe haven, posted its worst quarterly performance since 1974 as inflation expectations remained subdued and global commodities stayed under pressure. Investor sentiment improved in the last week of the period, and global stock prices rebounded from period lows after China’s central bank intervened to calm the country’s interbank market, positive economic reports helped stabilize Japanese government bond yields, and several Fed members reassured investors that the Fed’s accommodative monetary policy would continue.
Investment Strategy
The Fund normally 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
FFA-3
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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 six months under review, Mutual Shares Securities Fund – Class 1 and Franklin Income Securities Fund – Class 1 underperformed the S&P 500. Templeton Growth Securities Fund – Class 1 performed comparably to 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, 2013, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.
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Fund Expenses
As an investor in a variable insurance contract (Contract) that indirectly provides for investment in an underlying mutual fund, you can incur transaction and/or ongoing expenses at both the Fund level and the Contract level.
| • | Transaction expenses can include sales charges (loads) on purchases, surrender fees, transfer fees and premium taxes. |
| • | Ongoing expenses can include management fees, distribution and service (12b-1) fees, contract fees, annual maintenance fees, mortality and expense risk fees and other fees and expenses. All mutual funds and Contracts have some types of ongoing expenses. |
The expenses shown in the table are meant to highlight ongoing expenses at the Fund level only and do not include ongoing expenses at the Contract level, or transaction expenses at either the Fund or Contract levels. While the Fund does not have transaction expenses, if the transaction and ongoing expenses at the Contract level were included, the expenses shown below would be higher. You should consult your Contract prospectus or disclosure document for more information.
The table shows Fund-level ongoing expenses and can help you understand these expenses and compare them with those of other mutual funds offered through the Contract. The table assumes a $1,000 investment held for the six months indicated. Please refer to the Fund prospectus for additional information on operating expenses.
Actual Fund Expenses
The first line (Actual) of the table provides actual account values and expenses. The “Ending Account Value” is derived from the Fund’s actual return, which includes the effect of ongoing Fund expenses, but does not include the effect of ongoing Contract expenses.
You can estimate the Fund-level expenses you incurred during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:
| 1. | Divide your account value by $1,000. |
If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6.
| 2. | Multiply the result by the number under the heading “Fund-Level Expenses Incurred During Period.” |
If Fund-Level Expenses Incurred During Period were $7.50, then 8.6 x $7.50 = $64.50.
In this illustration, the estimated expenses incurred this period at the Fund level are $64.50.
Franklin Templeton VIP Founding Funds Allocation Fund – Class 1
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Hypothetical Example for Comparison with Other Mutual Funds
Information in the second line (Hypothetical) of the table can help you compare ongoing expenses of the Fund with those of other mutual funds offered through the Contract. This information may not be used to estimate the actual ending account balance or expenses you incurred during the period. The hypothetical “Ending Account Value” is based on the Fund’s actual expense ratio and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Fund-Level Expenses Incurred During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds offered through a Contract.
| Class 1 | Beginning Account Value 1/1/13 | Ending Account Value 6/30/13 | Fund-Level Expenses Incurred During Period* 1/1/13–6/30/13 | Fund-Level 1/1/13–6/30/13 | ||||||||||||
Actual | $ | 1,000 | $ | 1,085.20 | $ | 0.52 | $ | 3.88 | ||||||||
Hypothetical (5% return | $ | 1,000 | $ | 1,024.30 | $ | 0.50 | $ | 3.76 | ||||||||
*Expenses are calculated using the most recent six-month annualized expense ratio excluding expenses of the underlying funds, net of expense waivers, for the Fund’s Class 1 shares (0.10%), which does not include any ongoing expenses of the Contract for which the Fund is an investment option, multiplied by the average account value over the period, multiplied by 181/365 to reflect the one-half year period.
**Expenses are calculated using the most recent six-month annualized expense ratio including expenses of the underlying funds, net of expense waivers, for the Fund’s Class 1 shares (0.75%), which does not include any ongoing expenses of the Contract for which the Fund is an investment option, multiplied by the average account value over the period, multiplied by 181/365 to reflect the one-half year period.
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Franklin Templeton Variable Insurance Products Trust
Financial Highlights
Franklin Templeton VIP Founding Funds Allocation Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 1 | 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||||||
| ||||||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 8.55 | $ | 7.63 | $ | 7.73 | $ | 7.15 | $ | 5.61 | $ | 9.33 | ||||||||||||
|
| |||||||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb,c | 0.29 | 0.26 | 0.25 | 0.24 | 0.26 | 0.28 | ||||||||||||||||||
Net realized and unrealized gains (losses) | 0.49 | 0.90 | (0.35 | ) | 0.52 | 1.46 | (3.64 | ) | ||||||||||||||||
|
| |||||||||||||||||||||||
Total from investment operations | 0.78 | 1.16 | (0.10 | ) | 0.76 | 1.72 | (3.36 | ) | ||||||||||||||||
|
| |||||||||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income | (1.15 | ) | (0.24 | ) | — | d | (0.18 | ) | (0.18 | ) | (0.19 | ) | ||||||||||||
Net realized gains | (1.65 | ) | — | — | — | d | — | (0.17 | ) | |||||||||||||||
|
| |||||||||||||||||||||||
Total distributions | (2.80 | ) | (0.24 | ) | — | d | (0.18 | ) | (0.18 | ) | (0.36 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ | 6.53 | $ | 8.55 | $ | 7.63 | $ | 7.73 | $ | 7.15 | $ | 5.61 | ||||||||||||
|
| |||||||||||||||||||||||
Total returne | 8.52% | 15.56% | (1.28)% | 10.64% | 30.47% | (35.75)% | ||||||||||||||||||
Ratios to average net assetsf | ||||||||||||||||||||||||
Expenses before waiver and payments by affiliatesg | 0.12% | 0.11% | 0.11% | 0.11% | 0.12% | 0.13% | ||||||||||||||||||
Expenses net of waiver and payments by affiliatesg | 0.10% | 0.10% | 0.10% | 0.10% | 0.10% | 0.13% | ||||||||||||||||||
Net investment incomec | 6.30% | 4.06% | 3.44% | 3.04% | 4.16% | 3.81% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 923 | $ | 767 | $ | 470 | $ | 437 | $ | 629 | $ | 339 | ||||||||||||
Portfolio turnover rate | 2.73% | 28.46% | h | 58.42% | 17.81% | 4.23% | 22.09% | |||||||||||||||||
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.
cRecognition 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.
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.
gDoes not include expenses of the Underlying Funds in which the Fund invests. The weighted average indirect expense of the Underlying Funds was 0.65% for the period ended June 30, 2013.
hExcludes the value of portfolio securities delivered as a result of redemption in-kind. See Note 9.
The accompanying notes are an integral part of these financial statements.
FFA-7
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Franklin Templeton VIP Founding Funds Allocation Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 2 | 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||||||
| ||||||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 8.51 | $ | 7.59 | $ | 7.71 | $ | 7.14 | $ | 5.61 | $ | 9.31 | ||||||||||||
|
| |||||||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb,c | 0.26 | 0.25 | 0.23 | 0.21 | 0.26 | 0.27 | ||||||||||||||||||
Net realized and unrealized gains (losses) | 0.51 | 0.89 | (0.35 | ) | 0.52 | 1.44 | (3.63 | ) | ||||||||||||||||
|
| |||||||||||||||||||||||
Total from investment operations | 0.77 | 1.14 | (0.12 | ) | 0.73 | 1.70 | (3.36 | ) | ||||||||||||||||
|
| |||||||||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income | (1.13 | ) | (0.22 | ) | — | d | (0.16 | ) | (0.17 | ) | (0.17 | ) | ||||||||||||
Net realized gains | (1.65 | ) | — | — | — | d | — | (0.17 | ) | |||||||||||||||
|
| |||||||||||||||||||||||
Total distributions | (2.78 | ) | (0.22 | ) | — | d | (0.16 | ) | (0.17 | ) | (0.34 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ | 6.50 | $ | 8.51 | $ | 7.59 | $ | 7.71 | $ | 7.14 | $ | 5.61 | ||||||||||||
|
| |||||||||||||||||||||||
Total returne | 8.42% | 15.33% | (1.54)% | 10.25% | 30.25% | (35.87)% | ||||||||||||||||||
Ratios to average net assetsf | ||||||||||||||||||||||||
Expenses before waiver and payments by affiliatesg | 0.37% | 0.36% | 0.36% | 0.36% | 0.37% | 0.38% | ||||||||||||||||||
Expenses net of waiver and payments by affiliatesg | 0.35% | 0.35% | 0.35% | 0.35% | 0.35% | 0.38% | ||||||||||||||||||
Net investment incomec | 6.05% | 3.81% | 3.19% | 2.79% | 3.91% | 3.56% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 490,753 | $ | 472,686 | $ | 448,101 | $ | 488,057 | $ | 474,176 | $ | 338,320 | ||||||||||||
Portfolio turnover rate | 2.73% | 28.46% | h | 58.42% | 17.81% | 4.23% | 22.09% | |||||||||||||||||
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.
cRecognition 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.
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.
gDoes not include expenses of the Underlying Funds in which the Fund invests. The weighted average indirect expenses of the Underlying Funds was 0.65% for the period ended June 30, 2013.
hExcludes the value of portfolio securities delivered as a result of redemption in-kind. See Note 9.
The accompanying notes are an integral part of these financial statements.
FFA-8
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Franklin Templeton VIP Founding Funds Allocation Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 4 | 2012 | 2011 | 2010 | 2009 | 2008a | |||||||||||||||||||
| ||||||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 8.49 | $ | 7.58 | $ | 7.71 | $ | 7.14 | $ | 5.62 | $ | 8.65 | ||||||||||||
|
| |||||||||||||||||||||||
Income from investment operationsb: | ||||||||||||||||||||||||
Net investment incomec,d | 0.27 | 0.30 | 0.24 | 0.19 | 0.23 | 0.19 | ||||||||||||||||||
Net realized and unrealized gains (losses) | 0.49 | 0.83 | (0.37 | ) | 0.54 | 1.46 | (2.87 | ) | ||||||||||||||||
|
| |||||||||||||||||||||||
Total from investment operations | 0.76 | 1.13 | (0.13 | ) | 0.73 | 1.69 | (2.68 | ) | ||||||||||||||||
|
| |||||||||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income | (0.99 | ) | (0.22 | ) | — | e | (0.16 | ) | (0.17 | ) | (0.18 | ) | ||||||||||||
Net realized gains | (1.65 | ) | — | — | — | e | — | (0.17 | ) | |||||||||||||||
|
| |||||||||||||||||||||||
Total distributions | (2.64 | ) | (0.22 | ) | — | e | (0.16 | ) | (0.17 | ) | (0.35 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ | 6.61 | $ | 8.49 | $ | 7.58 | $ | 7.71 | $ | 7.14 | $ | 5.62 | ||||||||||||
|
| |||||||||||||||||||||||
Total returnf | 8.42% | 15.17% | (1.67)% | 10.24% | 30.06% | (30.81)% | ||||||||||||||||||
Ratios to average net assetsg | ||||||||||||||||||||||||
Expenses before waiver and payments by affiliatesh | 0.47% | 0.46% | 0.46% | 0.46% | 0.47% | 0.48% | ||||||||||||||||||
Expenses net of waiver and payments by affiliatesh | 0.45% | 0.45% | 0.45% | 0.45% | 0.45% | 0.48% | ||||||||||||||||||
Net investment incomed | 5.95% | 3.71% | 3.09% | 2.69% | 3.81% | 3.46% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 552,841 | $ | 493,813 | $ | 2,860,928 | $ | 3,036,272 | $ | 1,424,479 | $ | 263,001 | ||||||||||||
Portfolio turnover rate | 2.73% | 28.46% | i | 58.42% | 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 weighted average indirect expenses of the Underlying Funds was 0.65% for the period ended June 30, 2013.
iExcludes the value of portfolio securities delivered as a result of a redemption in-kind. See Note 9.
The accompanying notes are an integral part of these financial statements.
FFA-9
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited)
| Franklin Templeton VIP Founding Funds Allocation Fund | Shares | Value | ||||||||
Investments in Underlying Fundsa | ||||||||||
Domestic Equity 33.3% | ||||||||||
Mutual Shares Securities Fund, Class 1 | 17,688,123 | $ | 347,748,506 | |||||||
|
| |||||||||
Domestic Hybrid 32.8% | ||||||||||
Franklin Income Securities Fund, Class 1 | 22,684,325 | 342,533,306 | ||||||||
|
| |||||||||
Foreign Equity 32.9% | ||||||||||
Templeton Growth Securities Fund, Class 1 | 26,718,358 | 344,132,454 | ||||||||
|
| |||||||||
Total Investments in Underlying Funds (Cost $825,808,679) 99.0% | 1,034,414,266 | |||||||||
Other Assets, less Liabilities 1.0% | 10,102,562 | |||||||||
|
| |||||||||
Net Assets 100.0% | $ | 1,044,516,828 | ||||||||
|
| |||||||||
aSee Note 7 regarding investments in Underlying Funds.
FFA-10
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements
Statement of Assets and Liabilities
June 30, 2013 (unaudited)
| Franklin Templeton VIP Founding Funds Allocation Fund | ||||
Assets: | ||||
Investments in Underlying Funds: (Note 7) | ||||
Cost | $ | 825,808,679 | ||
|
| |||
Value | $ | 1,034,414,266 | ||
Cash | 11,552,513 | |||
Receivables: | ||||
Investment securities sold | 81,161 | |||
Capital shares sold | 528,719 | |||
Other assets | 271 | |||
|
| |||
Total assets | 1,046,576,930 | |||
|
| |||
Liabilities: | ||||
Payables: | ||||
Capital shares redeemed | 1,234,327 | |||
Affiliates | 615,829 | |||
Reports to shareholders | 152,046 | |||
Accrued expenses and other liabilities | 57,900 | |||
|
| |||
Total liabilities | 2,060,102 | |||
|
| |||
Net assets, at value | $ | 1,044,516,828 | ||
|
| |||
Net assets consist of: | ||||
Paid-in capital | $ | 862,600,740 | ||
Undistributed net investment income | 27,960,301 | |||
Net unrealized appreciation (depreciation) | 208,605,587 | |||
Accumulated net realized gain (loss) | (54,649,800 | ) | ||
|
| |||
Net assets, at value | $ | 1,044,516,828 | ||
|
| |||
Class 1: | ||||
Net assets, at value | $ | 922,652 | ||
|
| |||
Shares outstanding | 141,199 | |||
|
| |||
Net asset value and maximum offering price per share | $ | 6.53 | ||
|
| |||
Class 2: | ||||
Net assets, at value | $ | 490,752,863 | ||
|
| |||
Shares outstanding | 75,483,682 | |||
|
| |||
Net asset value and maximum offering price per share | $ | 6.50 | ||
|
| |||
Class 4: | ||||
Net assets, at value | $ | 552,841,313 | ||
|
| |||
Shares outstanding | 83,672,665 | |||
|
| |||
Net asset value and maximum offering price per share | $ | 6.61 | ||
|
| |||
The accompanying notes are an integral part of these financial statements.
FFA-11
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Operations
for the six months ended June 30, 2013 (unaudited)
| Franklin Templeton VIP Founding Funds Allocation Fund | ||||
Investment income: | ||||
Dividends from Underlying Funds (Note 7) | $ | 32,786,345 | ||
|
| |||
Expenses: | ||||
Administrative fees (Note 3a) | 512,404 | |||
Distribution fees: (Note 3b) | ||||
Class 2 | 617,798 | |||
Class 4 | 930,674 | |||
Unaffiliated transfer agent fees | 575 | |||
Reports to shareholders | 70,198 | |||
Professional fees | 29,734 | |||
Trustees’ fees and expenses | 6,296 | |||
Other | 13,784 | |||
|
| |||
Total expenses | 2,181,463 | |||
Expenses waived/paid by affiliates (Note 3d) | (120,586 | ) | ||
|
| |||
Net expenses | 2,060,877 | |||
|
| |||
Net investment income | 30,725,468 | |||
|
| |||
Realized and unrealized gains (losses): | ||||
Net realized gain (loss) from sale of investments in Underlying Funds | 2,377,827 | |||
Net change in unrealized appreciation (depreciation) on investments in Underlying Funds | 48,267,914 | |||
|
| |||
Net realized and unrealized gain (loss) | 50,645,741 | |||
|
| |||
Net increase (decrease) in net assets resulting from operations | $ | 81,371,209 | ||
|
| |||
The accompanying notes are an integral part of these financial statements.
FFA-12
Table of Contents
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, 2013 (unaudited) | Year Ended | |||||||
| ||||||||
Increase (decrease) in net assets: | ||||||||
Operations: | ||||||||
Net investment income | $ | 30,725,468 | $ | 117,257,889 | ||||
Net realized gain (loss) from Underlying Funds | 2,377,827 | 493,521,519 | ||||||
Net change in unrealized appreciation (depreciation) on investments in Underlying Funds | 48,267,914 | (130,850,160 | ) | |||||
| ||||||||
Net increase (decrease) in net assets resulting from operations | 81,371,209 | 479,929,248 | ||||||
| ||||||||
Distributions to shareholders from: | ||||||||
Net investment income: | ||||||||
Class 1 | (113,893 | ) | (14,007 | ) | ||||
Class 2 | (60,502,595 | ) | (12,894,473 | ) | ||||
Class 4 | (59,385,848 | ) | (102,116,912 | ) | ||||
Net realized gains: | ||||||||
Class 1 | (162,965 | ) | — | |||||
Class 2 | (88,234,067 | ) | — | |||||
Class 4 | (98,339,718 | ) | — | |||||
| ||||||||
Total distributions to shareholders | (306,739,086 | ) | (115,025,392 | ) | ||||
| ||||||||
Capital share transactions: (Note 2) | ||||||||
Class 1 | 366,440 | 221,759 | ||||||
Class 2 | 127,027,412 | (28,591,508 | ) | |||||
Class 4 | 175,224,718 | (2,678,766,884 | ) | |||||
| ||||||||
Total capital share transactions | 302,618,570 | (2,707,136,633 | ) | |||||
| ||||||||
Net increase (decrease) in net assets | 77,250,693 | (2,342,232,777 | ) | |||||
Net assets: | ||||||||
Beginning of period | 967,266,135 | 3,309,498,912 | ||||||
| ||||||||
End of period | $ | 1,044,516,828 | $ | 967,266,135 | ||||
| ||||||||
Undistributed net investment income included in net assets: | ||||||||
End of period | $ | 27,960,301 | $ | 117,237,169 | ||||
| ||||||||
The accompanying notes are an integral part of these financial statements.
FFA-13
Table of Contents
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-one 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 accounting policies of the Underlying Funds are outlined in their respective shareholder reports. A copy of the Underlying Funds’ shareholder reports is available on the U.S. Securities and Exchange Commission (SEC) website at sec.gov or at the SEC’ Public Reference Room in Washington, D.C. The Underlying Funds’ shareholder reports are not covered by this report.
The following summarizes the Fund’s significant accounting policies.
a. Financial Instrument Valuation
The Fund’s investments in 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 Board), the Fund’s administrator and other affiliates have formed the Valuation and Liquidity Oversight Committee (VLOC). The VLOC provides administration and oversight of the Fund’s valuation policies and procedures, which are approved annually by the Board. 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 if applicable, excise taxes. As a result, no provision for U.S. federal income taxes is required.
The Fund recognizes the tax benefits of uncertain tax positions only when the position is “more likely than not” to be sustained upon examination by the tax authorities based on the technical merits of the tax position. As of June 30, 2013, and for all open tax years, the Fund has determined that no liability for unrecognized tax benefits is required in the Fund’s financial statements related to uncertain tax positions taken on a tax return (or expected to be taken on future tax returns). 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.
FFA-14
Table of Contents
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)
c. Security Transactions, Investment Income, Expenses and Distributions (continued)
The Fund indirectly bear its proportionate share of expenses from the Underlying Funds. Since the Underlying Funds have varied expense levels and the Fund may own different proportions of the Underlying Funds at different times, the amount of expenses incurred indirectly by the Fund will vary.
Realized and unrealized gains and losses and net investment income, not including class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions, by class, are generally due to differences in class specific expenses.
d. Accounting Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
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, 2013, 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, 2013 | Year Ended December 31, 2012 | |||||||||||||||
| Class 1 Shares: | Shares | Amount | Shares | Amount | ||||||||||||
Shares sold | 19,272 | $ | 173,586 | 49,376 | $ | 392,149 | ||||||||||
Shares issued in reinvestment of distributions | 41,633 | 276,858 | 1,805 | 14,007 | ||||||||||||
Shares redeemed | (9,373 | ) | (84,004 | ) | (23,150 | ) | (184,397 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | 51,532 | $ | 366,440 | 28,031 | $ | 221,759 | ||||||||||
| ||||||||||||||||
Class 2 Shares: | ||||||||||||||||
Shares sold | 3,674,765 | $ | 31,916,452 | 2,983,614 | $ | 23,927,917 | ||||||||||
Shares issued in reinvestment of distributions | 22,467,774 | 148,736,662 | 1,665,953 | 12,894,473 | ||||||||||||
Shares redeemed | (6,186,883 | ) | (53,625,702 | ) | (8,143,086 | ) | (65,413,898 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | 19,955,656 | $ | 127,027,412 | (3,493,519 | ) | $ | (28,591,508 | ) | ||||||||
| ||||||||||||||||
Class 4 Shares: | ||||||||||||||||
Shares sold | 4,617,572 | $ | 39,853,988 | 204,285,414 | $ | 1,616,018,782 | ||||||||||
Shares issued on reinvestment of distributions | 23,436,191 | 157,725,566 | 13,227,579 | 102,116,912 | ||||||||||||
Shares redeemed in-kind (Note 9) | — | — | (291,650,709 | ) | (2,437,937,443 | ) | ||||||||||
Shares redeemed | (2,533,294 | ) | (22,354,836 | ) | (245,221,948 | ) | (1,958,965,135 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | 25,520,469 | $ | 175,224,718 | (319,359,664 | ) | $ | (2,678,766,884 | ) | ||||||||
| ||||||||||||||||
FFA-15
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Templeton VIP Founding Funds Allocation 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 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 |
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 Board 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. Some distribution fees are not charged on shares held by affiliates. The Board 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 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 expenses (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, 2014.
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, 2013, there were no credits earned.
FFA-16
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin Templeton VIP Founding Funds Allocation Fund
5. INCOME TAXES
At June 30, 2013, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
Cost of investments | $ | 880,680,869 | ||
|
| |||
Unrealized appreciation | $ | 153,733,397 | ||
Unrealized depreciation | — | |||
|
| |||
Net unrealized appreciation (depreciation) | $ | 153,733,397 | ||
|
| |||
6. INVESTMENT TRANSACTIONS
Purchases and sales of Underlying Funds (excluding short term securities) for the period ended June 30, 2013, aggregated $52,786,345 and $27,931,275, respectively.
7. 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, 2013, 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 I | 20,629,424 | 2,280,533 | 225,632 | 22,684,325 | $ | 342,533,306 | $ | 22,456,917 | $ | 23,632 | 4.68% | |||||||||||||||||||||
Mutual Shares Securities Fund, Class I | 18,291,713 | — | 603,590 | 17,688,123 | 347,748,506 | — | 1,231,831 | 6.95% | ||||||||||||||||||||||||
Templeton Growth Securities Fund, Class I | 26,363,969 | 1,325,211 | 970,822 | 26,718,358 | 344,132,454 | 10,329,428 | 1,122,364 | 17.66% | ||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||
Total | $ | 1,034,414,266 | $ | 32,786,345 | $ | 2,377,827 | ||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||
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 $1.5 billion (Global Credit Facility) which matures on January 17, 2014. 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 0.07% based upon the unused portion of the Global Credit Facility. These fees are reflected in other expenses on the Statement of Operations. During the period ended June 30, 2013, 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 Templeton VIP Founding Funds Allocation Fund
9. REDEMPTION IN-KIND
During the year ended December 31, 2012, the Fund realized $516,992,768 of net gains resulting from a redemption in-kind in which a shareholder redeemed fund shares for securities held by the Underlying Funds and cash.
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 financial instruments and are summarized in the following fair value hierarchy:
| • | Level 1 – quoted prices in active markets for identical financial instruments |
| • | Level 2 – other significant observable inputs (including quoted prices for similar financial instruments, interest rates, prepayment speed, credit risk, etc.) |
| • | Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of financial instruments) |
The inputs or methodology used for valuing financial instruments are not an indication of the risk associated with investing in those financial instruments.
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, 2013, all of the Fund’s investments in financial instruments carried at fair value were valued using Level 1 inputs. For detailed categories, see the accompanying Statement of Investments.
11. NEW ACCOUNTING PRONOUNCEMENTS
In June 2013, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2013-08, Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements. The ASU modifies the criteria used in defining an investment company under U.S. Generally Accepted Accounting Principles and also sets forth certain measurement and disclosure requirements. Under the ASU, an entity that is registered under the 1940 Act automatically qualifies as an investment company. The ASU is effective for interim and annual reporting periods beginning after December 15, 2013. The Fund is currently reviewing the requirements and believes the adoption of this ASU will not have a material impact on its financial statements.
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.
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Franklin Templeton Variable Insurance Products Trust
Tax Information (unaudited)
Franklin Templeton VIP Founding Funds Allocation Fund
During the fiscal year ended December 31, 2012, the Fund, a qualified fund of funds under Section 852(g)(2) of Internal Revenue Code, received an allocation of foreign taxes paid from one or more of its underlying funds. As shown in the table below, the Fund hereby reports to shareholders the foreign source income and foreign taxes paid by underlying funds, pursuant to Section 853 of the Code. This written statement will allow shareholders of record on June 13, 2013, to treat their proportionate share of foreign taxes paid by the underlying funds 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 reported 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 | $ | 0.0100 | $ | 0.1692 | ||||
Class 2 | 0.0100 | 0.1692 | ||||||
Class 4 | 0.0100 | 0.1692 | ||||||
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 underlying funds, plus any foreign taxes withheld on these dividends.
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FRANKLIN U.S. GOVERNMENT FUND
This semiannual report for Franklin U.S. Government Fund covers the period ended June 30, 2013.
Performance Summary as of 6/30/13
Franklin U.S. Government Fund – Class 1 had a -2.30% total return for the six-month period ended 6/30/13.
Performance reflects the Fund’s Class 1 operating expenses, but does not include any contract fees, expenses or sales charges. If they had been included, performance would be lower. These charges and deductions, particularly for variable life policies, can have a significant effect on contract values and insurance benefits. See the contract prospectus for a complete description of these expenses, including sales charges.
Franklin U.S. Government Fund – Class 1
Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares.
Current performance may differ from figures shown.
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Fund Goal and Main Investments: Franklin U.S. Government Fund seeks income. Under normal market conditions, the Fund invests at least 80% of its net assets in U.S. government securities.
Performance Overview
You can find the Fund’s six-month total return in the Performance Summary. The Fund’s primary benchmark, the Barclays U.S. Government Index: Intermediate Component, had a -1.23% total return.1 The Fund’s secondary benchmark, the Lipper VIP General U.S. Government Funds Classification Average, had a -3.12% total return.2 Funds in the Lipper average may allocate as much as 35% of their investments in asset types other than U.S. government and agency mortgage-backed securities.
Economic and Market Overview
The U.S. economy, as measured by gross domestic product, grew slowly during the six months ended June 30, 2013. Lackluster consumer spending and declines in exports and commercial real estate hindered first-quarter growth. Large cuts in federal and local government spending, volatile energy prices, business disruptions caused by Superstorm Sandy and the continuing effects of extreme weather conditions on farm production also hurt the economy during the period. However, generally positive labor market, manufacturing, and home sales and construction trends suggested the U.S. economic recovery remained largely intact. Consumer sentiment rose to a five-year high, although potential U.S. tax hikes and spending cuts that took effect in 2013 contributed to fluctuations in consumer and business confidence.
In December 2012, the Federal Reserve Board (Fed) announced a 6.5% unemployment target as a guide to maintaining the historically low federal funds target rate. The Fed also agreed to continue purchases of mortgage-backed securities and long-term Treasuries at a monthly pace of $85 billion until conditions improve. Although inflation rose slightly during the reporting period, the Fed noted little evidence of wage pressures. On January 1, 2013, Congress agreed to a budget bill that maintained some tax cuts for most Americans but increased rates on the wealthiest. Congress, however, was unable to resolve differences related to a series of automatic federal spending cuts known as the “sequester.” The cuts will reduce funding for domestic and defense programs by $85 billion in the current U.S. fiscal year. Near period-end, the Fed stated it
1. Source: © 2013 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: All investments involve risks, including possible loss of principal. The Fund’s share price and yield will be affected by interest rate movements and mortgage prepayments. 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. Changes in the financial strength of a bond issuer or in a bond’s credit rating may affect its value. The Fund is actively managed but there is no guarantee that the manager’s investment decisions will produce the desired results. The Fund’s prospectus also includes a description of the main investment risks.
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could begin slowing its monthly quantitative easing purchases in 2013 if economic conditions improved and terminate the program in mid-2014 if the unemployment rate fell to 7%.
Anticipating an interest rate rise, many investors abruptly sold their fixed income instruments, and the 10-year U.S. Treasury yield rose to 2.52% at period-end from 1.78% on December 31, 2012.
Investment Strategy
Using our straightforward investment approach, we seek to produce current income with a high degree of credit safety from a conservatively managed portfolio of U.S. government securities. Analyzing securities using proprietary and nonproprietary research, we seek to identify attractive investment opportunities.
Manager’s Discussion
As financial markets ended the period, uncertainty regarding domestic fiscal policy drove volatility measures higher toward period-end. Despite delivering some of the strongest returns for the first half of the period, most spread sectors generally underperformed U.S. Treasuries.
Mortgages lagged Treasuries during the period. News that the Fed could begin tapering its quantitative easing purchases in 2013 prompted a sell-off in the Treasury market, and the 10-year Treasury note yield rose significantly near period-end. This quick rise in Treasury yields and investor fears of fewer mortgage-backed securities (MBS) purchases pressured both markets, and prices moved lower. Mortgages, in our opinion, remained fairly valued on a relative basis and sector risks remained balanced. The Fed continued to support the sector, as prepayment risk remained heightened with the market priced at a premium and mortgage rates near historical lows. The Fed, with its monthly $85 billion purchases and reinvestments, remained the mortgage market’s largest source of demand. The Fed’s eventual tapering or termination of its asset purchase program posed a risk to the sector and could negatively impact MBS yields relative to Treasury yields. As mortgage rates moved off their historical lows, actual prepayment levels declined.
Within the agency mortgage pass-through sector, Freddie Mac (FHLMC) MBS performed better than their Fannie Mae (FNMA) and Ginnie Mae (GNMA) conventional MBS counterparts. On an excess return basis, higher coupon 5.5% and 5.0% GNMAs were the best performers while lower coupon 3.5% and 3.0% GNMAs lagged.
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The Fund’s investment process and strategy did not change and the investment team continued to look for strong cash-flow fundamentals and valuations to uncover opportunities across the agency mortgage and agency debenture universe. The Fund emphasized agency pass-throughs, primarily GNMA MBS, which remain the only MBS backed by the full faith and credit of the U.S. government, and invested in other agency securities for diversification.3 We remained allocated to the GNMA sector and added to GNMA IIs (pools of mortgages from multiple issuers) with coupons, or yields, in the lower range of 3.5% to 4.0%. We decreased allocation to positions with 4.0% through 5.0% coupons. Our heaviest allocation remained in 3.5% and 4.5% coupons. The Fund’s overweighted allocation to higher coupon 5.0% and 5.5% securities relative to the index benefited performance, while the Fund’s overweighted allocation to 3.5% coupons relative to the index detracted from results.
Thank you for your participation in Franklin U.S. Government Fund. We look forward to serving your future investment needs.
3. Securities owned by the Fund, but not shares of the Fund, are guaranteed by the U.S. government, its agencies or instrumentalities as to timely payment of principal and interest. The Fund’s yield and share price are not guaranteed and will vary with market conditions.
The foregoing information reflects our analysis, opinions and portfolio holdings as of June 30, 2013, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.
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Fund Expenses
As an investor in a variable insurance contract (Contract) that indirectly provides for investment in an underlying mutual fund, you can incur transaction and/or ongoing expenses at both the Fund level and the Contract level.
| • | Transaction expenses can include sales charges (loads) on purchases, surrender fees, transfer fees and premium taxes. |
| • | Ongoing expenses can include management fees, distribution and service (12b-1) fees, contract fees, annual maintenance fees, mortality and expense risk fees and other fees and expenses. All mutual funds and Contracts have some types of ongoing expenses. |
The expenses shown in the table are meant to highlight ongoing expenses at the Fund level only and do not include ongoing expenses at the Contract level, or transaction expenses at either the Fund or Contract levels. While the Fund does not have transaction expenses, if the transaction and ongoing expenses at the Contract level were included, the expenses shown below would be higher. You should consult your Contract prospectus or disclosure document for more information.
The table shows Fund-level ongoing expenses and can help you understand these expenses and compare them with those of other mutual funds offered through the Contract. The table assumes a $1,000 investment held for the six months indicated. Please refer to the Fund prospectus for additional information on operating expenses.
Actual Fund Expenses
The first line (Actual) of the table provides actual account values and expenses. The “Ending Account Value” is derived from the Fund’s actual return, which includes the effect of ongoing Fund expenses, but does not include the effect of ongoing Contract expenses.
You can estimate the Fund-level expenses you incurred during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:
| 1. | Divide your account value by $1,000. |
If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6.
| 2. | Multiply the result by the number under the heading “Fund-Level Expenses Incurred During Period.” |
If Fund-Level Expenses Incurred During Period were $7.50, then 8.6 x $7.50 = $64.50.
In this illustration, the estimated expenses incurred this period at the Fund level are $64.50.
Franklin U.S. Government Fund – Class 1
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Hypothetical Example for Comparison with Other Mutual Funds
Information in the second line (Hypothetical) of the table can help you compare ongoing expenses of the Fund with those of other mutual funds offered through the Contract. This information may not be used to estimate the actual ending account balance or expenses you incurred during the period. The hypothetical “Ending Account Value” is based on the Fund’s actual expense ratio and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Fund-Level Expenses Incurred During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds offered through a Contract.
| Class 1 | Beginning Account Value 1/1/13 | Ending Account Value 6/30/13 | Fund-Level Expenses Incurred During Period* 1/1/13–6/30/13 | |||||||||
Actual | $ | 1,000 | $ | 977.00 | $ | 2.45 | ||||||
Hypothetical (5% return | $ | 1,000 | $ | 1,022.32 | $ | 2.51 | ||||||
*Expenses are calculated using the most recent six-month annualized expense ratio for the Fund’s Class 1 shares (0.50%), 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 U.S. Government Fund
| Six Months Ended June 30, 2013 (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 1 | 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||||||
| ||||||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 13.57 | $ | 13.67 | $ | 13.34 | $ | 13.08 | $ | 13.19 | $ | 12.89 | ||||||||||||
|
| |||||||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.12 | 0.32 | 0.42 | 0.47 | 0.52 | 0.59 | ||||||||||||||||||
Net realized and unrealized gains (losses) | (0.43 | ) | (0.03 | ) | 0.36 | 0.25 | (0.09 | ) | 0.38 | |||||||||||||||
|
| |||||||||||||||||||||||
Total from investment operations | (0.31 | ) | 0.29 | 0.78 | 0.72 | 0.43 | 0.97 | |||||||||||||||||
|
| |||||||||||||||||||||||
Less distributions from net investment income | (0.39 | ) | (0.39 | ) | (0.45 | ) | (0.46 | ) | (0.54 | ) | (0.67 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ | 12.87 | $ | 13.57 | $ | 13.67 | $ | 13.34 | $ | 13.08 | $ | 13.19 | ||||||||||||
|
| |||||||||||||||||||||||
Total returnc | (2.30)% | 2.12% | 5.96% | 5.56% | 3.34% | 7.91% | ||||||||||||||||||
Ratios to average net assetsd | ||||||||||||||||||||||||
Expenses | 0.50% | 0.50% | 0.51% | 0.52% | 0.53% | 0.53% | e | |||||||||||||||||
Net investment income | 1.81% | 2.36% | 3.11% | 3.51% | 3.96% | 4.59% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 113,435 | $ | 126,536 | $ | 136,628 | $ | 157,551 | $ | 162,524 | $ | 173,018 | ||||||||||||
Portfolio turnover rate | 48.97% | 45.89% | 37.89% | 51.04% | 27.51% | 17.06% | ||||||||||||||||||
Portfolio turnover rate excluding mortgage dollar rollsf | 47.30% | 45.89% | 37.89% | 51.04% | 27.51% | 17.06% | ||||||||||||||||||
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%.
fSee Note 1(c) regarding mortgage dollar rolls.
The accompanying notes are an integral part of these financial statements.
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Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Franklin U.S. Government Fund
| Six Months Ended June 30, 2013 (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 2 | 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||||||
| ||||||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 13.31 | $ | 13.42 | $ | 13.11 | $ | 12.87 | $ | 12.99 | $ | 12.71 | ||||||||||||
|
| |||||||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.10 | 0.28 | 0.38 | 0.43 | 0.48 | 0.55 | ||||||||||||||||||
Net realized and unrealized gains (losses) | (0.42 | ) | (0.03 | ) | 0.35 | 0.24 | (0.09 | ) | 0.37 | |||||||||||||||
|
| |||||||||||||||||||||||
Total from investment operations | (0.32 | ) | 0.25 | 0.73 | 0.67 | 0.39 | 0.92 | |||||||||||||||||
|
| |||||||||||||||||||||||
Less distributions from net investment income | (0.37 | ) | (0.36 | ) | (0.42 | ) | (0.43 | ) | (0.51 | ) | (0.64 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ | 12.62 | $ | 13.31 | $ | 13.42 | $ | 13.11 | $ | 12.87 | $ | 12.99 | ||||||||||||
|
| |||||||||||||||||||||||
Total returnc | (2.47)% | 1.89% | 5.68% | 5.28% | 3.09% | 7.59% | ||||||||||||||||||
Ratios to average net assetsd | ||||||||||||||||||||||||
Expenses | 0.75% | 0.75% | 0.76% | 0.77% | 0.78% | 0.78% | e | |||||||||||||||||
Net investment income | 1.56% | 2.11% | 2.86% | 3.26% | 3.71% | 4.34% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 1,240,466 | $ | 1,206,089 | $ | 894,699 | $ | 703,997 | $ | 557,809 | $ | 450,603 | ||||||||||||
Portfolio turnover rate | 48.97% | 45.89% | 37.89% | 51.04% | 27.51% | 17.06% | ||||||||||||||||||
Portfolio turnover rate excluding mortgage dollar rollsf | 47.30% | 45.89% | 37.89% | 51.04% | 27.51% | 17.06% | ||||||||||||||||||
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%.
fSee Note 1(c) regarding mortgage dollar rolls.
The accompanying notes are an integral part of these financial statements.
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Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited)
| Franklin U.S. Government Fund | Principal Amount | Value | ||||||
Corporate Bonds 1.1% | ||||||||
Private Export Funding Corp., | ||||||||
secured bond, 2.80%, 5/15/22 | $ | 9,000,000 | $ | 8,953,641 | ||||
senior secured note, 3.05%, 10/15/14 | 6,500,000 | 6,726,961 | ||||||
|
| |||||||
Total Corporate Bonds (Cost $16,241,398) | 15,680,602 | |||||||
|
| |||||||
Foreign Government and Agency Securities 0.8% | ||||||||
Government of Tunisia, 1.686%, 7/16/19 | 7,000,000 | 6,841,499 | ||||||
International Bank for Reconstruction and Development, | ||||||||
2, zero cpn., 2/15/16 | 1,868,000 | 1,817,306 | ||||||
Principal Strip, 7/15/17 | 1,761,000 | 1,635,437 | ||||||
|
| |||||||
Total Foreign Government and Agency Securities (Cost $10,606,096) | 10,294,242 | |||||||
|
| |||||||
Mortgage-Backed Securities 77.6% | ||||||||
aFederal Home Loan Mortgage Corp. (FHLMC) Adjustable Rate 2.3% | ||||||||
FHLMC, 1.625% - 2.481%, 6/01/14 - 5/01/43 | 12,792,031 | 13,426,045 | ||||||
FHLMC, 2.486% - 3.308%, 12/01/18 - 9/01/38 | 12,632,676 | 13,419,832 | ||||||
FHLMC, 3.339% - 6.104%, 6/01/30 - 8/01/41 | 4,620,220 | 4,914,453 | ||||||
|
| |||||||
| 31,760,330 | ||||||||
|
| |||||||
Federal Home Loan Mortgage Corp. (FHLMC) Fixed Rate 10.1% | ||||||||
FHLMC Gold 15 Year, 4.50%, 3/01/25 - 4/01/25 | 5,306,633 | 5,584,272 | ||||||
FHLMC Gold 30 Year, 3.00%, 11/01/42 - 12/01/42 | 7,379,546 | 7,206,363 | ||||||
FHLMC Gold 30 Year, 3.00%, 1/01/43 | 9,818,450 | 9,588,031 | ||||||
FHLMC Gold 30 Year, 3.00%, 5/01/43 | 19,958,505 | 19,490,120 | ||||||
FHLMC Gold 30 Year, 3.50%, 3/01/32 | 9,449,056 | 9,740,020 | ||||||
FHLMC Gold 30 Year, 3.50%, 5/01/43 | 31,011,389 | 31,480,565 | ||||||
FHLMC Gold 30 Year, 4.00%, 2/01/41 | 7,167,063 | 7,459,560 | ||||||
FHLMC Gold 30 Year, 4.00%, 9/01/40 - 12/01/41 | 8,259,862 | 8,609,339 | ||||||
FHLMC Gold 30 Year, 4.50%, 5/01/40 - 7/01/41 | 10,307,013 | 10,871,479 | ||||||
FHLMC Gold 30 Year, 5.00%, 9/01/33 - 4/01/40 | 14,196,544 | 15,241,613 | ||||||
FHLMC Gold 30 Year, 5.50%, 7/01/33 - 5/01/38 | 4,944,589 | 5,339,379 | ||||||
FHLMC Gold 30 Year, 6.00%, 1/01/24 - 8/01/35 | 2,905,990 | 3,231,538 | ||||||
FHLMC Gold 30 Year, 6.50%, 12/01/23 - 5/01/35 | 1,214,985 | 1,364,322 | ||||||
FHLMC Gold 30 Year, 7.00%, 4/01/24 - 10/01/32 | 496,264 | 561,943 | ||||||
FHLMC Gold 30 Year, 7.50%, 12/01/22 - 5/01/24 | 6,545 | 7,077 | ||||||
FHLMC Gold 30 Year, 8.00%, 7/01/21 - 5/01/22 | 13,289 | 14,850 | ||||||
FHLMC Gold 30 Year, 8.50%, 10/01/21 - 7/01/31 | 804,967 | 978,743 | ||||||
FHLMC PC 30 Year, 8.00%, 1/01/17 - 5/01/17 | 4,013 | 4,035 | ||||||
FHLMC PC 30 Year, 8.50%, 9/01/20 | 798 | 892 | ||||||
|
| |||||||
| 136,774,141 | ||||||||
|
| |||||||
aFederal National Mortgage Association (FNMA) Adjustable Rate 6.1% | ||||||||
FNMA, 1.297% - 2.295%, 4/01/16 - 8/01/42 | 12,657,263 | 13,294,683 | ||||||
FNMA, 2.283%, 7/01/38 | 14,846,596 | 15,769,683 | ||||||
FNMA, 2.30% - 2.395%, 6/01/21 - 12/01/40 | 11,151,671 | 11,831,194 | ||||||
FNMA, 2.397% - 2.72%, 9/01/18 - 12/01/40 | 11,013,581 | 11,703,317 | ||||||
FNMA, 2.595%, 10/01/35 | 16,195,732 | 17,208,791 | ||||||
FNMA, 2.726% - 7.21%, 8/01/18 - 4/01/41 | 11,523,749 | 12,220,599 | ||||||
|
| |||||||
| 82,028,267 | ||||||||
|
| |||||||
Federal National Mortgage Association (FNMA) Fixed Rate 6.8% | ||||||||
FNMA 15 Year, 5.50%, 6/01/16 - 1/01/25 | 5,316,542 | 5,737,708 | ||||||
FNMA 15 Year, 6.00%, 8/01/17 - 9/01/17 | 343,110 | 362,368 | ||||||
FUS-9
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Franklin U.S. Government Fund | Principal Amount | Value | ||||||
Mortgage-Backed Securities (continued) | ||||||||
Federal National Mortgage Association (FNMA) Fixed Rate (continued) | ||||||||
FNMA 30 Year, 3.00%, 12/01/42 | $ | 383,125 | $ | 374,984 | ||||
FNMA 30 Year, 4.00%, 1/01/41 - 3/01/41 | 4,767,873 | 4,996,289 | ||||||
FNMA 30 Year, 4.00%, 6/01/41 | 8,600,994 | 8,975,464 | ||||||
FNMA 30 Year, 4.00%, 8/01/41 | 7,574,198 | 7,903,963 | ||||||
FNMA 30 Year, 4.50%, 12/01/40 | 11,625,248 | 12,320,689 | ||||||
FNMA 30 Year, 4.50%, 8/01/40 - 6/01/41 | 9,415,460 | 9,984,720 | ||||||
FNMA 30 Year, 5.00%, 3/01/34 - 7/01/41 | 17,526,192 | 18,996,441 | ||||||
FNMA 30 Year, 5.50%, 12/01/32 - 8/01/35 | 4,824,230 | 5,282,972 | ||||||
FNMA 30 Year, 6.00%, 1/01/24 - 8/01/38 | 10,605,598 | 11,552,877 | ||||||
FNMA 30 Year, 6.50%, 1/01/24 - 9/01/36 | 1,830,191 | 2,018,940 | ||||||
FNMA 30 Year, 7.50%, 4/01/23 - 8/01/25 | 41,034 | 44,738 | ||||||
FNMA 30 Year, 8.00%, 7/01/16 - 2/01/25 | 146,461 | 156,308 | ||||||
FNMA 30 Year, 8.50%, 3/01/20 - 6/01/21 | 1,493 | 1,671 | ||||||
FNMA 30 Year, 9.00%, 10/01/26 | 200,054 | 235,301 | ||||||
FNMA GL 30 Year, 8.00%, 8/01/19 | 29,217 | 29,845 | ||||||
FNMA PL 30 Year, 5.50%, 4/01/34 | 2,166,813 | 2,366,013 | ||||||
|
| |||||||
| 91,341,291 | ||||||||
|
| |||||||
Government National Mortgage Association (GNMA) Fixed Rate 52.3% | ||||||||
GNMA I SF 30 Year, 3.00%, 7/15/42 | 854,454 | 847,921 | ||||||
GNMA I SF 30 Year, 4.00%, 9/15/41 - 10/15/41 | 7,046,715 | 7,401,578 | ||||||
GNMA I SF 30 Year, 4.50%, 7/15/40 | 7,612,342 | 8,145,208 | ||||||
GNMA I SF 30 Year, 4.50%, 1/15/39 - 4/15/41 | 32,579,932 | 34,968,634 | ||||||
GNMA I SF 30 Year, 5.00%, 4/15/39 | 7,521,941 | 8,147,199 | ||||||
GNMA I SF 30 Year, 5.00%, 2/15/40 | 9,740,506 | 10,711,353 | ||||||
GNMA I SF 30 Year, 5.00%, 6/15/30 - 9/15/40 | 51,936,589 | 56,850,923 | ||||||
GNMA I SF 30 Year, 5.50%, 11/15/28 - 10/15/39 | 18,166,287 | 19,941,041 | ||||||
GNMA I SF 30 Year, 6.00%, 11/15/23 - 11/15/38 | 9,975,965 | 11,119,717 | ||||||
GNMA I SF 30 Year, 6.50%, 5/15/23 - 9/15/38 | 4,258,875 | 4,747,830 | ||||||
GNMA I SF 30 Year, 7.00%, 3/15/22 - 1/15/32 | 1,253,145 | 1,373,536 | ||||||
GNMA I SF 30 Year, 7.50%, 2/15/17 - 8/15/33 | 1,139,644 | 1,357,264 | ||||||
GNMA I SF 30 Year, 8.00%, 3/15/17 - 5/15/24 | 343,311 | 367,596 | ||||||
GNMA I SF 30 Year, 8.25%, 4/15/25 | 17,732 | 17,853 | ||||||
GNMA I SF 30 Year, 8.50%, 6/15/22 - 12/15/24 | 123,306 | 133,162 | ||||||
GNMA I SF 30 Year, 9.00%, 6/15/16 - 5/15/20 | 35,446 | 35,815 | ||||||
GNMA I SF 30 Year, 9.50%, 7/15/16 - 12/15/20 | 107,236 | 112,553 | ||||||
GNMA I SF 30 Year, 10.00%, 10/15/17 - 8/15/21 | 63,446 | 67,193 | ||||||
GNMA II SF 30 Year, 3.00%, 12/20/42 | 407,049 | 403,458 | ||||||
GNMA II SF 30 Year, 3.50%, 12/20/40 - 7/20/42 | 6,023,095 | 6,197,648 | ||||||
GNMA II SF 30 Year, 3.50%, 8/20/42 | 18,166,927 | 18,682,121 | ||||||
GNMA II SF 30 Year, 3.50%, 9/20/42 | 50,924,747 | 52,368,917 | ||||||
GNMA II SF 30 Year, 3.50%, 10/20/42 | 15,791,690 | 16,239,525 | ||||||
GNMA II SF 30 Year, 3.50%, 11/20/42 | 31,643,948 | 32,541,444 | ||||||
GNMA II SF 30 Year, 3.50%, 12/20/42 | 23,133,450 | 23,790,757 | ||||||
GNMA II SF 30 Year, 3.50%, 1/20/43 | 38,790,664 | 39,893,623 | ||||||
GNMA II SF 30 Year, 3.50%, 3/20/43 | 14,860,598 | 15,284,393 | ||||||
GNMA II SF 30 Year, 3.50%, 4/20/43 | 18,313,731 | 18,833,339 | ||||||
GNMA II SF 30 Year, 3.50%, 5/20/43 | 30,967,307 | 31,848,043 | ||||||
GNMA II SF 30 Year, 3.50%, 6/20/43 | 14,046,798 | 14,446,306 | ||||||
GNMA II SF 30 Year, 4.00%, 11/20/40 | 7,760,204 | 8,170,707 | ||||||
GNMA II SF 30 Year, 4.00%, 11/20/41 | 21,039,265 | 22,123,440 | ||||||
GNMA II SF 30 Year, 4.00%, 11/20/39 - 1/20/42 | 30,877,227 | 32,535,831 | ||||||
FUS-10
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Franklin U.S. Government Fund | Principal Amount | Value | ||||||
Mortgage-Backed Securities (continued) | ||||||||
Government National Mortgage Association (GNMA) Fixed Rate (continued) | ||||||||
GNMA II SF 30 Year, 4.00%, 1/20/41 | $ | 7,681,506 | $ | 8,109,305 | ||||
GNMA II SF 30 Year, 4.00%, 8/20/42 | 22,194,705 | 23,351,978 | ||||||
GNMA II SF 30 Year, 4.50%, 4/20/41 | 25,142,299 | 26,919,620 | ||||||
GNMA II SF 30 Year, 4.50%, 5/20/41 | 8,220,629 | 8,863,063 | ||||||
GNMA II SF 30 Year, 4.50%, 6/20/41 | 11,676,917 | 12,469,452 | ||||||
GNMA II SF 30 Year, 4.50%, 7/20/41 | 12,021,735 | 12,909,029 | ||||||
GNMA II SF 30 Year, 4.50%, 9/20/41 | 18,219,822 | 19,641,962 | ||||||
GNMA II SF 30 Year, 4.50%, 10/20/39 - 10/20/41 | 19,586,431 | 21,062,077 | ||||||
GNMA II SF 30 Year, 4.50%, 3/20/42 | 12,449,404 | 13,348,784 | ||||||
GNMA II SF 30 Year, 5.00%, 7/20/39 | 6,654,994 | 7,278,635 | ||||||
GNMA II SF 30 Year, 5.00%, 8/20/41 | 10,832,974 | 11,755,470 | ||||||
GNMA II SF 30 Year, 5.00%, 9/20/33 - 9/20/41 | 12,504,581 | 13,708,632 | ||||||
GNMA II SF 30 Year, 5.50%, 5/20/34 - 6/20/38 | 15,496,673 | 17,090,215 | ||||||
GNMA II SF 30 Year, 6.00%, 11/20/23 - 7/20/39 | 9,653,678 | 10,871,679 | ||||||
GNMA II SF 30 Year, 6.50%, 12/20/27 - 4/20/34 | 1,094,268 | 1,262,259 | ||||||
GNMA II SF 30 Year, 7.00%, 5/20/32 | 18,362 | 20,754 | ||||||
GNMA II SF 30 Year, 7.50%, 11/20/17 - 5/20/33 | 220,916 | 256,710 | ||||||
GNMA II SF 30 Year, 8.00%, 7/20/16 - 8/20/26 | 24,169 | 27,121 | ||||||
GNMA II SF 30 Year, 9.50%, 4/20/25 | 2,823 | 2,856 | ||||||
|
| |||||||
| 708,655,529 | ||||||||
|
| |||||||
Total Mortgage-Backed Securities (Cost $1,053,994,204) | 1,050,559,558 | |||||||
|
| |||||||
U.S. Government and Agency Securities 19.1% | ||||||||
AID-Israel, 7-Z, U.S. Government Guaranteed, Strip, 8/15/22 | 5,619,000 | 4,316,662 | ||||||
Federal Agricultural Mortgage Corp., | ||||||||
1.41%, 3/06/20 | 10,000,000 | 9,482,900 | ||||||
2.66%, 4/12/22 | 7,000,000 | 6,831,762 | ||||||
4.30%, 5/13/19 | 1,010,000 | 1,128,599 | ||||||
b Federal Agricultural Mortgage Corp. Guaranteed Trust 07-1, 144A, 5.125%, 4/19/17 | 5,000,000 | 5,695,140 | ||||||
FFCB, 1.50%, 11/16/15 | 10,000,000 | 10,224,290 | ||||||
FHLB, | ||||||||
3.625%, 10/18/13 | 15,000,000 | 15,155,490 | ||||||
4.75%, 12/16/16 | 17,000,000 | 19,211,938 | ||||||
5.125%, 8/14/13 | 11,000,000 | 11,066,330 | ||||||
5.25%, 6/05/17 | 9,000,000 | 10,375,668 | ||||||
FICO, | ||||||||
12, Strip, 6/06/18 | 4,627,000 | 4,249,886 | ||||||
13P, Strip, 12/27/18 | 2,500,000 | 2,266,315 | ||||||
15, Strip, 3/07/16 | 15,000,000 | 14,661,420 | ||||||
15P, Strip, 3/07/19 | 1,798,000 | 1,614,568 | ||||||
16, Strip, 4/05/17 | 12,367,000 | 11,768,227 | ||||||
1P, Strip, 5/11/18 | 10,000,000 | 9,215,180 | ||||||
A-P, Strip, 2/08/18 | 1,000,000 | 928,889 | ||||||
B-P, Strip, 4/06/18 | 1,405,000 | 1,298,717 | ||||||
E-P, Strip, 11/02/18 | 1,296,000 | 1,184,525 | ||||||
FNMA, senior note, 5.375%, 6/12/17 | 17,800,000 | 20,619,484 | ||||||
HUD, 96-A, 7.63%, 8/01/14 | 170,000 | 170,059 | ||||||
SBA, | ||||||||
a FRN, 3.125%, 3/25/18 | 375,222 | 380,387 | ||||||
PC, 1995-20L, 1, 6.45%, 12/01/15 | 124,738 | 131,063 | ||||||
PC, 1996-20L, 1, 6.70%, 12/01/16 | 186,718 | 196,849 | ||||||
PC, 1997-20G, 1, 6.85%, 7/01/17 | 215,749 | 229,086 | ||||||
PC, 1998-20I, 1, 6.00%, 9/01/18 | 702,109 | 757,965 | ||||||
FUS-11
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Franklin U.S. Government Fund | Principal Amount | Value | ||||||
U.S. Government and Agency Securities (continued) | ||||||||
TVA, | ||||||||
1.875%, 8/15/22 | $ | 6,000,000 | $ | 5,505,486 | ||||
5.88%, 4/01/36 | 5,000,000 | 6,226,860 | ||||||
Strip, 11/01/18 | 2,644,000 | 2,394,763 | ||||||
Strip, 6/15/19 | 5,973,000 | 5,267,314 | ||||||
Strip, 6/15/20 | 6,138,000 | 5,135,554 | ||||||
U.S. Treasury Note, | ||||||||
0.875%, 11/30/16 | 2,500,000 | 2,501,368 | ||||||
1.25%, 1/31/19 | 10,000,000 | 9,836,720 | ||||||
1.75%, 10/31/18 | 3,000,000 | 3,041,250 | ||||||
2.375%, 8/31/14 | 8,000,000 | 8,201,248 | ||||||
2.375%, 9/30/14 | 17,000,000 | 17,457,215 | ||||||
2.375%, 10/31/14 | 7,000,000 | 7,200,018 | ||||||
2.50%, 4/30/15 | 6,950,000 | 7,223,927 | ||||||
3.125%, 8/31/13 | 7,000,000 | 7,035,546 | ||||||
4.75%, 5/15/14 | 8,000,000 | 8,318,128 | ||||||
|
| |||||||
Total U.S. Government and Agency Securities (Cost $254,910,217) | 258,506,796 | |||||||
|
| |||||||
Total Investments before Short Term Investments (Cost $1,335,751,915) | 1,335,041,198 | |||||||
|
| |||||||
Short Term Investments (Cost $14,738,601) 1.1% | ||||||||
Repurchase Agreements (Cost $14,738,601) 1.1% | ||||||||
c,d Joint Repurchase Agreement, 0.088%, 7/01/13 (Maturity Value $14,738,708) | 14,738,601 | 14,738,601 | ||||||
Barclays Capital Inc. (Maturity Value $1,679,918) BNP Paribas Securities Corp. (Maturity Value $1,866,657) Credit Suisse Securities (USA) LLC (Maturity Value $2,333,285) Deutsche Bank Securities Inc. (Maturity Value $1,858,846) HSBC Securities (USA) Inc. (Maturity Value $3,966,629) Merrill Lynch, Pierce, Fenner & Smith Inc. (Maturity Value $1,866,657) Morgan Stanley & Co. LLC (Maturity Value $1,166,716) | ||||||||
Collateralized by U.S. Government Agency Securities, 0.13% - 4.625%, 7/09/13 - 8/07/17; | ||||||||
|
| |||||||
Total Investments (Cost $1,350,490,516) 99.7% | 1,349,779,799 | |||||||
Other Assets, less Liabilities 0.3% | 4,121,249 | |||||||
|
| |||||||
Net Assets 100.0% | $ | 1,353,901,048 | ||||||
|
| |||||||
See Abbreviations on page FUS-21.
aThe coupon rate shown represents the rate at period end.
bSecurity was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be sold in transactions exempt from registration only to qualified institutional buyers or in a public offering registered under the Securities Act of 1933. This security has been deemed liquid under guidelines approved by the Trust’s Board of Trustees. At June 30, 2013, the value of this security was $5,695,140, representing 0.42% of net assets.
cSee Note 1(b) regarding joint repurchase agreement.
dThe security is traded on a discount basis with no stated coupon rate.
The accompanying notes are an integral part of these financial statements.
FUS-12
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements
Statement of Assets and Liabilities
June 30, 2013 (unaudited)
| Franklin U.S. Government Fund | ||||
Assets: | ||||
Investments in securities: | ||||
Cost - Unaffiliated issuers | $ | 1,335,751,915 | ||
Cost - Repurchase agreements | 14,738,601 | |||
|
| |||
Total cost of investments | $ | 1,350,490,516 | ||
|
| |||
Value - Unaffiliated issuers | $ | 1,335,041,198 | ||
Value - Repurchase agreements | 14,738,601 | |||
|
| |||
Total value of investments | 1,349,779,799 | |||
Receivables: | ||||
Investment securities sold | 1,088,358 | |||
Capital shares sold | 673,053 | |||
Interest | 4,584,487 | |||
Other assets | 371 | |||
|
| |||
Total assets | 1,356,126,068 | |||
|
| |||
Liabilities: | ||||
Payables: | ||||
Capital shares redeemed | 962,630 | |||
Affiliates | 1,052,776 | |||
Reports to shareholders | 164,279 | |||
Accrued expenses and other liabilities | 45,335 | |||
|
| |||
Total liabilities | 2,225,020 | |||
|
| |||
Net assets, at value | $ | 1,353,901,048 | ||
|
| |||
Net assets consist of: | ||||
Paid-in capital | $ | 1,360,462,858 | ||
Undistributed net investment income | 7,526,467 | |||
Net unrealized appreciation (depreciation) | (710,717 | ) | ||
Accumulated net realized gain (loss) | (13,377,560 | ) | ||
|
| |||
Net assets, at value | $ | 1,353,901,048 | ||
|
| |||
Class 1: | ||||
Net assets, at value | $ | 113,434,681 | ||
|
| |||
Shares outstanding | 8,816,675 | |||
|
| |||
Net asset value and maximum offering price per share | $ | 12.87 | ||
|
| |||
Class 2: | ||||
Net assets, at value | $ | 1,240,466,367 | ||
|
| |||
Shares outstanding | 98,271,797 | |||
|
| |||
Net asset value and maximum offering price per share | $ | 12.62 | ||
|
| |||
The accompanying notes are an integral part of these financial statements.
FUS-13
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Operations
for the six months ended June 30, 2013 (unaudited)
| Franklin U.S. Government Fund | ||||
Investment income: | ||||
Interest | $ | 15,499,214 | ||
|
| |||
Expenses: | ||||
Management fees (Note 3a) | 3,154,970 | |||
Distribution fees - Class 2 (Note 3c) | 1,535,601 | |||
Unaffiliated transfer agent fees | 385 | |||
Custodian fees (Note 4) | 10,304 | |||
Reports to shareholders | 124,979 | |||
Professional fees | 24,870 | |||
Trustees’ fees and expenses | 2,405 | |||
Other | 18,006 | |||
|
| |||
Total expenses | 4,871,520 | |||
|
| |||
Net investment income | 10,627,694 | |||
|
| |||
Realized and unrealized gains (losses): | ||||
Net realized gain (loss) from investments | 364,248 | |||
Net change in unrealized appreciation (depreciation) on investments | (45,283,694 | ) | ||
|
| |||
Net realized and unrealized gain (loss) | (44,919,446 | ) | ||
|
| |||
Net increase (decrease) in net assets resulting from operations | $ | (34,291,752 | ) | |
|
| |||
The accompanying notes are an integral part of these financial statements.
FUS-14
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statements of Changes in Net Assets
| Franklin U.S. Government Fund | ||||||||
| Six Months Ended June 30, 2013 (unaudited) | Year Ended December 31, 2012 | |||||||
| ||||||||
Increase (decrease) in net assets: | ||||||||
Operations: | ||||||||
Net investment income | $ | 10,627,694 | $ | 24,990,033 | ||||
Net realized gain (loss) from investments | 364,248 | 3,245,395 | ||||||
Net change in unrealized appreciation (depreciation) on investments | (45,283,694 | ) | (6,663,913 | ) | ||||
| ||||||||
Net increase (decrease) in net assets resulting from operations | (34,291,752 | ) | 21,571,515 | |||||
| ||||||||
Distributions to shareholders from: | ||||||||
Net investment income: | ||||||||
Class 1 | (3,416,984 | ) | (3,761,370 | ) | ||||
Class 2 | (35,241,458 | ) | (27,304,487 | ) | ||||
| ||||||||
Total distributions to shareholders | (38,658,442 | ) | (31,065,857 | ) | ||||
| ||||||||
Capital share transactions: (Note 2) | ||||||||
Class 1 | (6,863,459 | ) | (9,172,267 | ) | ||||
Class 2 | 101,089,564 | 319,964,942 | ||||||
| ||||||||
Total capital share transactions | 94,226,105 | 310,792,675 | ||||||
| ||||||||
Net increase (decrease) in net assets | 21,275,911 | 301,298,333 | ||||||
Net assets: | ||||||||
Beginning of period | 1,332,625,137 | 1,031,326,804 | ||||||
| ||||||||
End of period | $ | 1,353,901,048 | $ | 1,332,625,137 | ||||
| ||||||||
Undistributed net investment income included in net assets: | ||||||||
End of period | $ | 7,526,467 | $ | 35,557,215 | ||||
| ||||||||
The accompanying notes are an integral part of these financial statements.
FUS-15
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited)
Franklin U.S. Government Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Templeton Variable Insurance Products Trust (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end investment company, consisting of twenty-one separate funds. The Franklin U.S. Government Fund (Fund) is included in this report. The financial statements of the remaining funds in the Trust are presented separately. Shares of the Fund are 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 1 and Class 2. Each class of shares differs by its distribution fees, voting rights on matters affecting a single class and its exchange privilege.
The following summarizes the Fund’s significant accounting policies.
a. Financial Instrument Valuation
The Fund’s investments in 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 Board), the Fund’s administrator, investment manager and other affiliates have formed the Valuation and Liquidity Oversight Committee (VLOC). The VLOC provides administration and oversight of the Fund’s valuation policies and procedures, which are approved annually by the Board. Among other things, these procedures allow the Fund to 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, credit spreads, estimated default rates, anticipated market interest rate volatility, 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 financial instruments for which market prices are not reliable or readily available. Under these procedures, the VLOC convenes on a regular basis to review such financial instruments and considers a number of factors, including significant unobservable valuation inputs, when arriving at fair value. The VLOC 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. An income-based valuation approach may also be used 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. The VLOC employs various methods for calibrating these valuation approaches including a regular review of key inputs and assumptions, transactional back-testing or disposition analysis, and reviews of any related market activity.
b. 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
FUS-16
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin U.S. Government Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
b. Joint Repurchase Agreement (continued)
market daily to maintain coverage of at least 100%. Repurchase agreements are subject to the terms of Master Repurchase Agreements (MRAs) with approved counterparties (sellers). The MRAs contain various provisions, including but not limited to events of default and maintenance of collateral for repurchase agreements. In the event of default by either the seller or the Fund, certain MRAs may permit the non-defaulting party to net and close-out all transactions, if any, traded under such agreements. The Fund may sell securities it holds as collateral and apply the proceeds towards the repurchase price and any other amounts owed by the seller to the Fund in the event of default by the seller. This could involve costs or delays in addition to a loss on the securities if their value falls below the repurchase price owed by the seller. The joint repurchase agreement held by the Fund at period end, as indicated in the Statement of Investments, had been entered into on June 28, 2013.
c. 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.
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 if applicable, excise taxes. As a result, no provision for U.S. federal income taxes is required.
The Fund recognizes the tax benefits of uncertain tax positions only when the position is “more likely than not” to be sustained upon examination by the tax authorities based on the technical merits of the tax position. As of June 30, 2013, and for all open tax years, the Fund has determined that no liability for unrecognized tax benefits is required in the Fund’s financial statements related to uncertain tax positions taken on a tax return (or expected to be taken on future tax returns). 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. Amortization of premium and accretion of discount on debt securities are included in interest income. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with accounting principles generally accepted in the United States of America. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods.
Common expenses incurred by the Trust are allocated among the funds based on the ratio of net assets of each fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense.
Realized and unrealized gains and losses and net investment income, not including class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions, by class, are generally due to differences in class specific expenses.
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin U.S. Government Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
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, 2013, 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, 2013 | Year Ended December 31, 2012 | |||||||||||||||
| Class 1 Shares: | Shares | Amount | Shares | Amount | ||||||||||||
Shares sold | 484,380 | $ | 6,554,727 | 1,027,364 | $ | 14,057,416 | ||||||||||
Shares issued in reinvestment of distributions | 262,643 | 3,416,984 | 279,656 | 3,761,370 | ||||||||||||
Shares redeemed | (1,253,587 | ) | (16,835,170 | ) | (1,981,396 | ) | (26,991,053 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | (506,564 | ) | $ | (6,863,459 | ) | (674,376 | ) | $ | (9,172,267 | ) | ||||||
| ||||||||||||||||
Class 2 Shares: | ||||||||||||||||
Shares sold | 12,315,358 | $ | 162,927,158 | 30,970,663 | $ | 414,540,207 | ||||||||||
Shares issued in reinvestment of distributions | 2,759,707 | 35,241,458 | 2,066,956 | 27,304,487 | ||||||||||||
Shares redeemed | (7,403,227 | ) | (97,079,052 | ) | (9,110,319 | ) | (121,879,752 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | 7,671,838 | $ | 101,089,564 | 23,927,300 | $ | 319,964,942 | ||||||||||
| ||||||||||||||||
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 |
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin U.S. Government Fund
3. TRANSACTIONS WITH AFFILIATES (continued)
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 Board has adopted a distribution plan for Class 2 shares pursuant to Rule 12b-1 under the 1940 Act. Under the Fund’s compensation distribution plan, 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. Some distribution fees are not charged on shares held by affiliates. The Board 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, 2013, there were no credits earned.
5. INCOME TAXES
For tax purposes, capital losses may be carried over to offset future capital gains. Capital loss carryforwards with no expiration, if any, must be fully utilized before those losses with expiration dates.
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Franklin U.S. Government Fund
5. INCOME TAXES (continued)
At December 31, 2012, capital loss carryforwards were as follows:
Capital loss carryforwards subject to expiration: | ||||
2013 | $ | 2,102,640 | ||
2014 | 1,618,397 | |||
2015 | 2,329,071 | |||
2016 | 841,479 | |||
2017 | 401,851 | |||
2018 | 426,637 | |||
Capital loss carryforwards not subject to expiration: | ||||
Short term | $ | 3,809,584 | ||
Long term | 1,995,270 | |||
|
| |||
Total capital loss carryforwards | $ | 13,524,929 | ||
| ||||
At June 30, 2013, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
Cost of investments | $ | 1,354,815,822 | ||
|
| |||
Unrealized appreciation | $ | 22,034,993 | ||
Unrealized depreciation | (27,071,016 | ) | ||
|
| |||
Net unrealized appreciation (depreciation) | $ | (5,036,023 | ) | |
|
| |||
Differences between income and/or capital gains as determined on a book basis and a tax basis are primarily due to differing treatments of paydown losses and bond discounts and premiums.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the period ended June 30, 2013, aggregated $735,535,173 and $646,266,414, respectively.
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 $1.5 billion (Global Credit Facility) which matures on January 17, 2014. 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 0.07% based upon the unused portion of the Global Credit Facility. These fees are reflected in other expenses on the Statement of Operations. During the period ended June 30, 2013, 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 U.S. Government Fund
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 financial instruments and are summarized in the following fair value hierarchy:
| • | Level 1 – quoted prices in active markets for identical financial instruments |
| • | Level 2 – other significant observable inputs (including quoted prices for similar financial instruments, interest rates, prepayment speed, credit risk, etc.) |
| • | Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of financial instruments) |
The inputs or methodology used for valuing financial instruments are not an indication of the risk associated with investing in those financial instruments.
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, 2013, all of the Fund’s investments in financial instruments carried at fair value were valued using Level 2 inputs. For detailed categories, see the accompanying Statement of Investments.
9. NEW ACCOUNTING PRONOUNCEMENTS
In June 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2013-08, Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements. The ASU modifies the criteria used in defining an investment company under U.S. Generally Accepted Accounting Principles and also sets forth certain measurement and disclosure requirements. Under the ASU, an entity that is registered under the 1940 Act automatically qualifies as an investment company. The ASU is effective for interim and annual reporting periods beginning after December 15, 2013. The Fund is currently reviewing the requirements and believes the adoption of this ASU will not have a material impact on its financial statements.
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.
ABBREVIATIONS |
| Selected Portfolio |
| FFCB - Federal Farm Credit Bank |
| FHLB - Federal Home Loan Bank |
| FICO - Financing Corp. |
| FRN - Floating Rate Note |
| GL - Government Loan |
| HUD - Housing and Urban Development |
| PC - Participation Certificate |
| PL - Project Loan |
| SBA - Small Business Administration |
| SF - Single Family |
| TVA - Tennessee Valley Authority |
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MUTUAL GLOBAL DISCOVERY SECURITIES FUND
This semiannual report for Mutual Global Discovery Securities Fund covers the period ended June 30, 2013.
Performance Summary as of 6/30/13
Mutual Global Discovery Securities Fund – Class 1 delivered a +12.02% total return for the six-month period ended 6/30/13.
Performance reflects the Fund’s Class 1 operating expenses, but does not include any contract fees, expenses or sales charges. If they had been included, performance would be lower. These charges and deductions, particularly for variable life policies, can have a significant effect on contract values and insurance benefits. See the contract prospectus for a complete description of these expenses, including sales charges.
Mutual Global Discovery Securities Fund – Class 1
Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares.
Current performance may differ from figures shown.
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Fund Goal and Main Investments: Mutual Global Discovery Securities Fund seeks capital appreciation. Under normal market conditions, the Fund invests primarily in U.S. and foreign equity securities that the investment manager believes are undervalued.
Performance Overview
You can find the Fund’s six-month total return in the Performance Summary. For comparison, the Fund’s benchmark, the MSCI World Index, generated a total return of +8.79% and the Standard & Poor’s® 500 Index posted a +13.82% total return for the same period.1
Economic and Market Overview
Global developed and emerging market stocks, as measured by the MSCI All Country World Index, advanced during the first six months of 2013 as many central banks continued supportive fiscal policies. The economic focus and highly correlated market movements characteristic of previous periods appeared to be supplanted by a more fundamentals-based market environment. Regional performance was also more consistent with local economic trends, although periodic volatility highlighted the recovery’s fragility. Continued U.S. gross domestic product (GDP) growth accompanied improvements in housing, labor and retail sales. Eurozone first-quarter GDP growth missed expectations, although the number of unemployed declined and manufacturing indicator levels increased in the first half of 2013. Japan demonstrated economic progress amid major reflationary initiatives as business confidence, industrial production and retail sales improved and inflation stabilized. However, investor confidence in the country’s radical policy maneuvers wavered. China’s growth rate and manufacturing levels were weaker than expected, and the International Monetary Fund downgraded the country’s growth outlook.
Despite generally accommodative global monetary policies, central banks changed their strategies during the period to reflect the increasingly varied needs of different economies. The U.S. Federal Reserve Board (Fed) vowed to keep interest rates low until the unemployment rate reached 6.5% but ignited considerable market volatility and a Treasury sell-off by suggesting it may taper monthly bond purchases should economic conditions warrant. The European Central Bank cut benchmark interest rates and pledged to maintain systemic support after successfully containing a run
1. Source: © 2013 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: All investments involve risks, including possible loss of principal. Value securities may not increase in price as anticipated, or may decline further in value. The Fund’s investments in foreign securities involve certain risks including currency fluctuations, and economic and political uncertainties. Smaller company stocks have exhibited greater price volatility than larger company stocks, particularly over the short term. The Fund’s investments in companies engaged in mergers, reorganizations or liquidations also involve special risks as pending deals may not be completed on time or on favorable terms. The Fund may invest in lower rated bonds, which entail higher credit risk. The Fund is actively managed but there is no guarantee that the manager’s investment decisions will produce the desired results. The Fund’s prospectus also includes a description of the main investment risks.
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on a Cyprus bank. Elsewhere in developed markets, the Bank of Japan’s new governor set an explicit inflation target and pledged to double bond purchases in what many believe was unprecedented policy reform.
Emerging market central banks were more aggressive, with Brazil’s central bank hiking interest rates amid rising inflation and China’s central bank taking measures to curb real estate and credit speculation. Chinese liquidity tightening weighed on credit markets at period-end, and a jump in the interbank lending rate underscored concerns about the country’s shadow banking system. Volatility surfaced in the emerging market region as political protests intensified, and asset prices fell as investors responded to rising bond rates by unwinding highly leveraged emerging market carry trades.2 Given the rise in rates near period-end, longer duration U.S. Treasury and emerging market bond prices experienced meaningful price declines. In the second quarter, gold, traditionally a safe haven, posted its worst quarterly performance since 1974 as inflation expectations remained subdued and global commodities stayed under pressure. Investor sentiment improved in the last week of the period, and stock prices rebounded from period lows after China’s central bank intervened to calm the country’s interbank market, positive economic reports helped stabilize Japanese government bond yields, and several Fed members reassured investors that the Fed’s accommodative monetary policy would continue.
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.
2. In a carry trade, an investor seeks to profit from an interest rate differential by borrowing low-yielding currencies and lending high-yielding currencies. The use of borrowed capital to facilitate the trade creates leverage for the borrower.
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We complement this more traditional investment strategy with two others. One is distressed investing, which is complex and can take many forms. The most common distressed investment the Fund undertakes is the purchase of financially troubled or bankrupt companies’ debt at a substantial discount to face value. After the financially distressed company is reorganized, often in bankruptcy court, the old debt is typically replaced with new securities issued by the financially stronger company.
The other piece of our investment strategy is participating in arbitrage situations, another highly specialized field. When companies announce proposed mergers or takeovers, commonly referred to as “deals,” the target company may trade at a discount to the bid it ultimately accepts. One form of arbitrage involves purchasing the target company’s stock when it is trading below the value we believe it would receive in a deal. In keeping with our commitment to a relatively conservative investment approach, we typically focus our arbitrage efforts on announced deals, and eschew rumored deals or other situations we consider relatively risky.
In addition, it is our practice to hedge the Fund’s currency exposure when we deem it advantageous for our shareholders.
Manager’s Discussion
In an environment of generally rising equity prices, many Fund investments increased in value during the six-month period. Top contributors included U.S.-based software company Microsoft, U.K-based wireless telecommunications operator Vodafone Group and U.S.-based insurer American International Group (AIG).
Microsoft shares benefited from improved investor sentiment. Following the launch of the Windows 8 operating system in the fall of 2012 and a deceleration in PC sales, skepticism about Microsoft’s future peaked. In April 2013, the company reported quarterly earnings that modestly beat expectations, generally reassuring the market of its prospects. Shares appreciated as the market apparently returned to viewing Microsoft as a stable business with a reasonable future.
Shares of Vodafone Group rallied after rumors arose that Verizon, Inc. was considering taking full control of Verizon Wireless, the U.S. wireless telecommunications company jointly owned by the two phone operators. In addition, shares appeared to rally further following Vodafone’s announcement of its intent to acquire Kabel Deutschland. We viewed
What is meant by “hedge”?
To hedge a position is to seek to reduce the risk of adverse price movements in an asset. Normally, a hedge is implemented as an offsetting position in a related security, such as a currency forward contract.
What is a currency forward contract?
A currency forward contract, also called a “currency forward,” is an agreement between the Fund and a counterparty to buy or sell a foreign currency at a specific exchange rate on a future date.
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the announcement positively as it appeared to offer synergy opportunities and the potential to expand Vodafone’s presence in Germany. We continued to believe that other potential drivers of Vodafone stock performance still exist, including possible improvement in economic conditions across Europe, better revenue per customer as a critical mass of customers migrate to data-oriented plans, and a larger dividend payment from Vodafone’s existing 45% stake in Verizon Wireless.
AIG announced quarterly earnings results that topped consensus estimates because of outperformance in all segments and a general improvement in expense management. In addition, independent credit rating agency Standard & Poor’s upgraded its credit rating for AIG’s property-casualty insurance business. In our view at period-end, AIG stock remained attractively priced despite recent strength.
During the period under review, some of the Fund’s investments lost value and negatively affected performance. These included German engineering and steel conglomerate ThyssenKrupp, U.K.-based mining firm Anglo American and U.S. diversified energy producer CONSOL Energy.
For ThyssenKrupp, European economic weakness, slow progress on the sale of the Steel Americas operations and speculation that the company would need to raise additional capital pressured shares. We were disappointed by the announcement that management would not rule out raising capital this year to address the company’s low book value of equity and customer concerns of corporate risk. Nonetheless, at period-end we continued to see upside potential in the stock given our assessment of ThyssenKrupp’s strong set of assets, ability to generate strong free cash flow, manageable debt maturity ladder and value-creating restructuring plan.
A new holding, Anglo American stock was negatively affected by a sell-off in commodities. In addition, shares came under pressure arising from uncertainty associated with possible restructuring actions. However, Anglo American recently appointed a new chief executive officer (CEO) tasked with a mandate to improve operations and capital discipline. The CEO was expected to roll out a plan for the company within the next several months. We initiated an investment based on the belief that recent declines led shares to trade below our assessment of their intrinsic value.
CONSOL Energy is a low-cost producer of thermal and metallurgical coal, as well as natural gas. Coal companies remained under pressure because of concerns regarding metallurgical prices and potentially
Top 10 Equity Holdings
Mutual Global Discovery Securities Fund
6/30/13
Company Sector/Industry, | % of Total Net Assets | |||
| ACE Ltd. | 2.7% | |||
| Insurance, U.S. | ||||
| Microsoft Corp. | 2.7% | |||
| Software, U.S. | ||||
| Merck & Co. Inc. | 2.4% | |||
| Pharmaceuticals, U.S. | ||||
| Vodafone Group PLC | 2.3% | |||
| Wireless Telecommunication Services, U.K. | ||||
| American International Group Inc. | 2.3% | |||
| Insurance, U.S. | ||||
| British American Tobacco PLC | 2.0% | |||
| Tobacco, U.K. | ||||
| Royal Dutch Shell PLC, A | 1.9% | |||
| Oil, Gas & Consumable Fuels, U.K. | ||||
| Jardine Strategic Holdings Ltd. | 1.8% | |||
| Industrial Conglomerates, Hong Kong | ||||
| Medtronic Inc. | 1.8% | |||
| Health Care Equipment & Supplies, U.S. | ||||
| Wells Fargo & Co. | 1.7% | |||
| Commercial Banks, 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 (SOI).
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diminished Chinese demand for the commodity. Share prices were also hurt by the Obama administration’s climate change proposals. We believe that despite some near-term headwinds, CONSOL has the ability to survive the current pricing environment.
During the period, the Fund held currency forwards and futures to somewhat hedge the currency risk of the portfolio’s non-U.S. dollar investments. The hedges had a minor positive impact on the Fund’s performance during the period.
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, 2013, 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 Sectors/Industries
Mutual Global Discovery Securities Fund
6/30/13
% of Total Net Assets | ||||
| Commercial Banks | 8.9% | |||
| Insurance | 7.9% | |||
| Oil, Gas & Consumable Fuels | 7.0% | |||
| Tobacco | 6.7% | |||
| Pharmaceuticals | 4.9% | |||
| Software | 4.5% | |||
| Food & Staples Retailing | 4.3% | |||
| Diversified Financial Services | 4.3% | |||
| Media | 3.6% | |||
| Computers & Peripherals | 3.4% | |||
What is a futures contract?
A futures contract, also called a “future,” is an agreement between the Fund and a counterparty made through a U.S. or foreign futures exchange to buy or sell a security at a specific price on a future date.
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Fund Expenses
As an investor in a variable insurance contract (Contract) that indirectly provides for investment in an underlying mutual fund, you can incur transaction and/or ongoing expenses at both the Fund level and the Contract level.
| • | Transaction expenses can include sales charges (loads) on purchases, surrender fees, transfer fees and premium taxes. |
| • | Ongoing expenses can include management fees, distribution and service (12b-1) fees, contract fees, annual maintenance fees, mortality and expense risk fees and other fees and expenses. All mutual funds and Contracts have some types of ongoing expenses. |
The expenses shown in the table are meant to highlight ongoing expenses at the Fund level only and do not include ongoing expenses at the Contract level, or transaction expenses at either the Fund or Contract levels. While the Fund does not have transaction expenses, if the transaction and ongoing expenses at the Contract level were included, the expenses shown below would be higher. You should consult your Contract prospectus or disclosure document for more information.
The table shows Fund-level ongoing expenses and can help you understand these expenses and compare them with those of other mutual funds offered through the Contract. The table assumes a $1,000 investment held for the six months indicated. Please refer to the Fund prospectus for additional information on operating expenses.
Actual Fund Expenses
The first line (Actual) of the table provides actual account values and expenses. The “Ending Account Value” is derived from the Fund’s actual return, which includes the effect of ongoing Fund expenses, but does not include the effect of ongoing Contract expenses.
You can estimate the Fund-level expenses you incurred during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:
| 1. | Divide your account value by $1,000. |
If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6.
| 2. | Multiply the result by the number under the heading “Fund-Level Expenses Incurred During Period.” |
If Fund-Level Expenses Incurred During Period were $7.50, then 8.6 x $7.50 = $64.50.
In this illustration, the estimated expenses incurred this period at the Fund level are $64.50.
Mutual Global Discovery Securities Fund – Class 1
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Hypothetical Example for Comparison with Other Mutual Funds
Information in the second line (Hypothetical) of the table can help you compare ongoing expenses of the Fund with those of other mutual funds offered through the Contract. This information may not be used to estimate the actual ending account balance or expenses you incurred during the period. The hypothetical “Ending Account Value” is based on the Fund’s actual expense ratio and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Fund-Level Expenses Incurred During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds offered through a Contract.
| Class 1 | Beginning Account Value 1/1/13 | Ending Account Value 6/30/13 | Fund-Level Expenses Incurred During Period* 1/1/13–6/30/13 | |||||||||
Actual | $ | 1,000 | $ | 1,120.20 | $ | 5.15 | ||||||
Hypothetical (5% return | $ | 1,000 | $ | 1,019.93 | $ | 4.91 | ||||||
*Expenses are calculated using the most recent six-month annualized expense ratio for the Fund’s Class 1 shares (0.98%), 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 Global Discovery Securities Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 1 | 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||||||
| ||||||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 20.55 | $ | 19.66 | $ | 21.16 | $ | 19.14 | $ | 16.12 | $ | 24.08 | ||||||||||||
|
| |||||||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.28 | 0.43 | 0.52 | 0.38 | 0.19 | c | 0.37 | |||||||||||||||||
Net realized and unrealized gains (losses) | 2.19 | 2.21 | (1.09 | ) | 1.94 | 3.57 | (6.95 | ) | ||||||||||||||||
|
| |||||||||||||||||||||||
Total from investment operations | 2.47 | 2.64 | (0.57 | ) | 2.32 | 3.76 | (6.58 | ) | ||||||||||||||||
|
| |||||||||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income | — | (0.64 | ) | (0.50 | ) | (0.30 | ) | (0.26 | ) | (0.52 | ) | |||||||||||||
Net realized gains | — | (1.11 | ) | (0.43 | ) | — | (0.48 | ) | (0.86 | ) | ||||||||||||||
|
| |||||||||||||||||||||||
Total distributions | — | (1.75 | ) | (0.93 | ) | (0.30 | ) | (0.74 | ) | (1.38 | ) | |||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ | 23.02 | $ | 20.55 | $ | 19.66 | $ | 21.16 | $ | 19.14 | $ | 16.12 | ||||||||||||
|
| |||||||||||||||||||||||
Total returnd | 12.02% | 13.63% | (2.73)% | 12.24% | 23.63% | (28.29)% | ||||||||||||||||||
Ratios to average net assetse | ||||||||||||||||||||||||
Expensesf | 0.98% | g | 0.99% | 0.97% | g | 1.00% | g | 1.06% | g | 0.98% | g | |||||||||||||
Expenses incurred in connection with securities sold short | —% | —% | h | —% | h | 0.02% | 0.09% | 0.01% | ||||||||||||||||
Net investment income | 2.53% | 2.12% | 2.34% | 1.93% | 1.07% | c | 1.82% | |||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 1,359 | $ | 1,136 | $ | 974 | $ | 84,213 | $ | 86,755 | $ | 81,320 | ||||||||||||
Portfolio turnover rate | 10.22% | 25.63% | 26.17% | i | 49.31% | 43.35% | 22.76% | |||||||||||||||||
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 as disclosed on the Statement of Operations. Excluding the effect of this adjustment, the ratio of net investment income to average net assets would have been 1.26%.
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 or interest expense on securities sold short and security borrowing fees, if any. See below for the ratios of such expenses to average net assets for the periods presented. See Note 1(e).
gBenefit of expense reduction rounds to less than 0.01%.
hRounds to less than 0.01%.
iExcludes 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.
MGD-9
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Mutual Global Discovery Securities Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 2 | 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||||||
| ||||||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 20.17 | $ | 19.30 | $ | 20.80 | $ | 18.81 | $ | 15.85 | $ | 23.69 | ||||||||||||
|
| |||||||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.25 | 0.38 | 0.43 | 0.33 | 0.14 | c | 0.32 | |||||||||||||||||
Net realized and unrealized gains (losses) | 2.16 | 2.15 | (1.04 | ) | 1.91 | 3.50 | (6.84 | ) | ||||||||||||||||
|
| |||||||||||||||||||||||
Total from investment operations | 2.41 | 2.53 | (0.61 | ) | 2.24 | 3.64 | (6.52 | ) | ||||||||||||||||
|
| |||||||||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income | — | (0.55 | ) | (0.46 | ) | (0.25 | ) | (0.20 | ) | (0.46 | ) | |||||||||||||
Net realized gains | — | (1.11 | ) | (0.43 | ) | — | (0.48 | ) | (0.86 | ) | ||||||||||||||
|
| |||||||||||||||||||||||
Total distributions | — | (1.66 | ) | (0.89 | ) | (0.25 | ) | (0.68 | ) | (1.32 | ) | |||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ | 22.58 | $ | 20.17 | $ | 19.30 | $ | 20.80 | $ | 18.81 | $ | 15.85 | ||||||||||||
|
| |||||||||||||||||||||||
Total returnd | 11.95% | 13.36% | (2.96)% | 11.96% | 23.31% | (28.45)% | ||||||||||||||||||
Ratios to average net assetse | ||||||||||||||||||||||||
Expensesf | 1.23% | g | 1.24% | 1.22% | g | 1.25% | g | 1.31% | g | 1.23% | g | |||||||||||||
Expenses incurred in connection with securities sold short | —% | —% | h | —% | h | 0.02% | 0.09% | 0.01% | ||||||||||||||||
Net investment income | 2.28% | 1.87% | 2.09% | 1.68% | 0.82% | c | 1.57% | |||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 671,647 | $ | 660,465 | $ | 712,161 | $ | 1,351,223 | $ | 1,309,852 | $ | 1,113,720 | ||||||||||||
Portfolio turnover rate | 10.22% | 25.63% | 26.17% | i | 49.31% | 43.35% | 22.76% | |||||||||||||||||
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 as disclosed on the Statement of Operations. Excluding the effect of this adjustment, the ratio of net investment income to average net assets would have been 1.01%.
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 or interest expense on securities sold short and security borrowing fees, if any. See below for the ratios of such expenses to average net assets for the periods presented. See Note 1(e).
gBenefit of expense reduction rounds to less than 0.01%.
hRounds to less than 0.01%.
iExcludes 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.
MGD-10
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Mutual Global Discovery Securities Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 4 | 2012 | 2011 | 2010 | 2009 | 2008a | |||||||||||||||||||
| ||||||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 20.38 | $ | 19.50 | $ | 21.02 | $ | 19.02 | $ | 16.07 | $ | 22.50 | ||||||||||||
|
| |||||||||||||||||||||||
Income from investment operationsb: | ||||||||||||||||||||||||
Net investment incomec | 0.24 | 0.36 | 0.40 | 0.31 | 0.11 | d | 0.09 | |||||||||||||||||
Net realized and unrealized gains (losses) | 2.17 | 2.19 | (1.05 | ) | 1.94 | 3.56 | (5.14 | ) | ||||||||||||||||
|
| |||||||||||||||||||||||
Total from investment operations | 2.41 | 2.55 | (0.65 | ) | 2.25 | 3.67 | (5.05 | ) | ||||||||||||||||
|
| |||||||||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income | — | (0.56 | ) | (0.44 | ) | (0.25 | ) | (0.24 | ) | (0.52 | ) | |||||||||||||
Net realized gains | — | (1.11 | ) | (0.43 | ) | — | (0.48 | ) | (0.86 | ) | ||||||||||||||
|
| |||||||||||||||||||||||
Total distributions | — | (1.67 | ) | (0.87 | ) | (0.25 | ) | (0.72 | ) | (1.38 | ) | |||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ | 22.79 | $ | 20.38 | $ | 19.50 | $ | 21.02 | $ | 19.02 | $ | 16.07 | ||||||||||||
|
| |||||||||||||||||||||||
Total returne | 11.83% | 13.27% | (3.08)% | 11.87% | 23.19% | (23.48)% | ||||||||||||||||||
Ratios to average net assetsf | ||||||||||||||||||||||||
Expensesg | 1.33% | h | 1.34% | 1.32% | h | 1.35% | h | 1.41% | h | 1.33% | h | |||||||||||||
Expenses incurred in connection with securities sold short | —% | —% | i | —% | i | 0.02% | 0.09% | 0.01% | ||||||||||||||||
Net investment income | 2.18% | 1.77% | 1.99% | 1.58% | 0.72% | d | 1.47% | |||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 65,609 | $ | 62,346 | $ | 66,695 | $ | 70,613 | $ | 59,178 | $ | 23,981 | ||||||||||||
Portfolio turnover rate | 10.22% | 25.63% | 26.17% | j | 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] as disclosed on the Statement of Operations. Excluding the effect of this adjustment, the ratio of net investment income to average net assets would have been 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 or interest expense on securities sold short and security borrowing fees, if any. See below for the ratios of such expenses to average net assets for the periods presented. See Note 1(e).
hBenefit of expense reduction rounds to less than 0.01%.
iRounds to less than 0.01%.
jExcludes 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.
MGD-11
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited)
| Mutual Global Discovery Securities Fund | Country | Shares | Value | |||||||
Common Stocks and Other Equity Interests 88.6% | ||||||||||
Aerospace & Defense 0.8% | ||||||||||
Safran SA | France | 107,185 | $ | 5,598,134 | ||||||
|
| |||||||||
Auto Components 1.0% | ||||||||||
Continental AG | Germany | 42,633 | 5,693,607 | |||||||
a,b International Automotive Components Group Brazil LLC | Brazil | 424,073 | 93,105 | |||||||
a,b,c International Automotive Components Group North America, LLC | United States | 4,052,916 | 1,819,151 | |||||||
|
| |||||||||
| 7,605,863 | ||||||||||
|
| |||||||||
Automobiles 0.6% | ||||||||||
a General Motors Co. | United States | 136,940 | 4,561,471 | |||||||
|
| |||||||||
Beverages 1.4% | ||||||||||
Coca-Cola Enterprises Inc. | United Kingdom | 96,500 | 3,392,940 | |||||||
Dr. Pepper Snapple Group Inc. | United States | 120,110 | 5,516,652 | |||||||
Pernod Ricard SA | France | 12,134 | 1,345,510 | |||||||
|
| |||||||||
| 10,255,102 | ||||||||||
|
| |||||||||
Capital Markets 2.1% | ||||||||||
Morgan Stanley | United States | 383,010 | 9,356,934 | |||||||
UBS AG | Switzerland | 360,289 | 6,131,605 | |||||||
|
| |||||||||
| 15,488,539 | ||||||||||
|
| |||||||||
Commercial Banks 8.9% | ||||||||||
a,b,d The Bankshares Inc. | United States | 800,000 | 3,837,768 | |||||||
Barclays PLC | United Kingdom | 792,081 | 3,354,009 | |||||||
BNP Paribas SA | France | 138,020 | 7,540,965 | |||||||
a Capital Bank Financial Corp., A | United States | 78,494 | 1,490,601 | |||||||
a,e Capital Bank Financial Corp., B, 144A, non-voting | United States | 269,922 | 5,125,819 | |||||||
a CIT Group Inc. | United States | 99,532 | 4,641,177 | |||||||
HSBC Holdings PLC | United Kingdom | 586,355 | 6,081,344 | |||||||
KB Financial Group Inc. | South Korea | 101,400 | 3,035,609 | |||||||
PNC Financial Services Group Inc. | United States | 157,001 | 11,448,513 | |||||||
Societe Generale | France | 98,010 | 3,367,972 | |||||||
SunTrust Banks Inc. | United States | 96,864 | 3,057,997 | |||||||
Wells Fargo & Co. | United States | 307,140 | 12,675,668 | |||||||
|
| |||||||||
| 65,657,442 | ||||||||||
|
| |||||||||
Communications Equipment 1.2% | ||||||||||
Cisco Systems Inc. | United States | 359,180 | 8,731,666 | |||||||
|
| |||||||||
Computers & Peripherals 3.4% | ||||||||||
Apple Inc. | United States | 29,121 | 11,534,246 | |||||||
Dell Inc. | United States | 462,100 | 6,169,035 | |||||||
Hewlett-Packard Co. | United States | 311,640 | 7,728,672 | |||||||
|
| |||||||||
| 25,431,953 | ||||||||||
|
| |||||||||
Construction & Engineering 0.7% | ||||||||||
Vinci SA | France | 99,255 | 4,981,123 | |||||||
|
| |||||||||
Consumer Finance 0.0%† | ||||||||||
a Comdisco Holding Co. Inc. | United States | 44 | 218 | |||||||
|
| |||||||||
Diversified Financial Services 3.6% | ||||||||||
Citigroup Inc. | United States | 243,290 | 11,670,621 | |||||||
a ING Groep NV, IDR | Netherlands | 1,161,320 | 10,581,425 | |||||||
JPMorgan Chase & Co. | United States | 62,020 | 3,274,036 | |||||||
MGD-12
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Mutual Global Discovery Securities Fund | Country | Shares | Value | |||||||
Common Stocks and Other Equity Interests (continued) | ||||||||||
Diversified Financial Services (continued) | ||||||||||
NYSE Euronext | United States | 20,802 | $ | 861,203 | ||||||
|
| |||||||||
| 26,387,285 | ||||||||||
|
| |||||||||
Diversified Telecommunication Services 0.7% | ||||||||||
a,f,g Global Crossing Holdings Ltd., Contingent Distribution | United States | 2,236,777 | — | |||||||
a,f,g Marconi Corp., Contingent Distribution | United Kingdom | 1,739,100 | — | |||||||
Vivendi SA | France | 252,091 | 4,774,353 | |||||||
|
| |||||||||
| 4,774,353 | ||||||||||
|
| |||||||||
Electric Utilities 1.2% | ||||||||||
Exelon Corp. | United States | 288,450 | 8,907,336 | |||||||
|
| |||||||||
Electrical Equipment 0.7% | ||||||||||
Alstom SA | France | 158,488 | 5,190,405 | |||||||
|
| |||||||||
Electronic Equipment, Instruments & Components 0.0%† | ||||||||||
Hoya Corp. | Japan | 11,270 | 232,808 | |||||||
|
| |||||||||
Energy Equipment & Services 2.5% | ||||||||||
Baker Hughes Inc. | United States | 147,071 | 6,784,385 | |||||||
Ensco PLC, A | United States | 95,904 | 5,573,941 | |||||||
Transocean Ltd. | United States | 120,473 | 5,776,680 | |||||||
|
| |||||||||
| 18,135,006 | ||||||||||
|
| |||||||||
Food & Staples Retailing 4.3% | ||||||||||
China Resources Enterprise Ltd. | China | 1,266,000 | 3,966,477 | |||||||
CVS Caremark Corp. | United States | 121,031 | 6,920,553 | |||||||
Koninklijke Ahold NV | Netherlands | 220,456 | 3,281,348 | |||||||
Metro AG | Germany | 318,004 | 10,066,775 | |||||||
Walgreen Co. | United States | 176,650 | 7,807,930 | |||||||
|
| |||||||||
| 32,043,083 | ||||||||||
|
| |||||||||
Health Care Equipment & Supplies 2.2% | ||||||||||
Medtronic Inc. | United States | 257,934 | 13,275,863 | |||||||
Stryker Corp. | United States | 46,588 | 3,013,312 | |||||||
|
| |||||||||
| 16,289,175 | ||||||||||
|
| |||||||||
Health Care Providers & Services 2.3% | ||||||||||
Cigna Corp. | United States | 161,581 | 11,713,007 | |||||||
WellPoint Inc. | United States | 62,210 | 5,091,266 | |||||||
|
| |||||||||
| 16,804,273 | ||||||||||
|
| |||||||||
Hotels, Restaurants & Leisure 1.1% | ||||||||||
Accor SA | France | 233,246 | 8,207,952 | |||||||
|
| |||||||||
Independent Power Producers & Energy Traders 1.3% | ||||||||||
NRG Energy Inc. | United States | 364,067 | 9,720,589 | |||||||
|
| |||||||||
Industrial Conglomerates 3.0% | ||||||||||
Jardine Matheson Holdings Ltd. | Hong Kong | 141,097 | 8,536,369 | |||||||
Jardine Strategic Holdings Ltd. | Hong Kong | 371,698 | 13,492,637 | |||||||
|
| |||||||||
| 22,029,006 | ||||||||||
|
| |||||||||
Insurance 7.9% | ||||||||||
ACE Ltd. | United States | 223,660 | 20,013,097 | |||||||
a Alleghany Corp. | United States | 2,730 | 1,046,436 | |||||||
a American International Group Inc. | United States | 376,943 | 16,849,352 | |||||||
E-L Financial Corp. Ltd. | Canada | 5,378 | 3,248,233 | |||||||
MGD-13
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Mutual Global Discovery Securities Fund | Country | Shares | Value | |||||||
Common Stocks and Other Equity Interests (continued) | ||||||||||
Insurance (continued) | ||||||||||
a,b Imagine Group Holdings Ltd. | Bermuda | 56,213 | $ | 489,981 | ||||||
MetLife Inc. | United States | 78,866 | 3,608,908 | |||||||
a,b Olympus Re Holdings Ltd. | United States | 2,140 | — | |||||||
PartnerRe Ltd. | Bermuda | 94,940 | 8,597,766 | |||||||
Zurich Insurance Group AG | Switzerland | 17,558 | 4,552,797 | |||||||
|
| |||||||||
| 58,406,570 | ||||||||||
|
| |||||||||
Marine 1.5% | ||||||||||
A.P. Moller-Maersk AS, B | Denmark | 1,565 | 11,208,907 | |||||||
|
| |||||||||
Media 3.6% | ||||||||||
Comcast Corp., Special A | United States | 48,623 | 1,928,875 | |||||||
Daekyo Co. Ltd. | South Korea | 3,463 | 21,947 | |||||||
Reed Elsevier PLC | United Kingdom | 792,969 | 9,011,738 | |||||||
Time Warner Cable Inc. | United States | 54,909 | 6,176,164 | |||||||
a Tribune Co., A | United States | 43,818 | 2,493,244 | |||||||
a Tribune Co., B | United States | 26,867 | 1,524,702 | |||||||
Twenty-First Century Fox Inc., B | United States | 170,160 | 5,584,651 | |||||||
|
| |||||||||
| 26,741,321 | ||||||||||
|
| |||||||||
Metals & Mining 2.1% | ||||||||||
Anglo American PLC | United Kingdom | 275,805 | 5,312,436 | |||||||
Freeport-McMoRan Copper & Gold Inc., B | United States | 135,280 | 3,735,081 | |||||||
a ThyssenKrupp AG | Germany | 344,296 | 6,764,868 | |||||||
|
| |||||||||
| 15,812,385 | ||||||||||
|
| |||||||||
Multi-Utilities 0.8% | ||||||||||
GDF Suez | France | 305,073 | 5,974,343 | |||||||
|
| |||||||||
Multiline Retail 0.7% | ||||||||||
Kohl’s Corp. | United States | 99,870 | 5,044,434 | |||||||
|
| |||||||||
Office Electronics 1.3% | ||||||||||
Xerox Corp. | United States | 1,021,107 | 9,261,440 | |||||||
|
| |||||||||
Oil, Gas & Consumable Fuels 7.0% | ||||||||||
Apache Corp. | United States | 135,117 | 11,326,858 | |||||||
BG Group PLC | United Kingdom | 235,965 | 4,014,829 | |||||||
BP PLC | United Kingdom | 1,318,154 | 9,128,969 | |||||||
CONSOL Energy Inc. | United States | 205,976 | 5,581,950 | |||||||
Marathon Oil Corp. | United States | 178,885 | 6,185,843 | |||||||
Royal Dutch Shell PLC, A | United Kingdom | 446,141 | 14,253,758 | |||||||
a WPX Energy Inc. | United States | 59,656 | 1,129,885 | |||||||
|
| |||||||||
| 51,622,092 | ||||||||||
|
| |||||||||
Paper & Forest Products 0.2% | ||||||||||
a NewPage Holdings Inc. | United States | 19,416 | 1,698,900 | |||||||
|
| |||||||||
Personal Products 0.8% | ||||||||||
Avon Products Inc. | United States | 287,177 | 6,039,332 | |||||||
|
| |||||||||
Pharmaceuticals 4.9% | ||||||||||
Eli Lilly & Co. | United States | 59,600 | 2,927,552 | |||||||
Merck & Co. Inc. | United States | 376,658 | 17,495,764 | |||||||
Novartis AG, ADR | Switzerland | 126,364 | 8,935,199 | |||||||
Teva Pharmaceutical Industries Ltd., ADR | Israel | 174,840 | 6,853,728 | |||||||
|
| |||||||||
| 36,212,243 | ||||||||||
|
| |||||||||
MGD-14
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Mutual Global Discovery Securities Fund | Country | Shares | Value | |||||||
Common Stocks and Other Equity Interests (continued) | ||||||||||
Real Estate Management & Development 0.6% | ||||||||||
g Canary Wharf Group PLC | United Kingdom | 487,324 | $ | 2,079,361 | ||||||
Great Eagle Holdings Ltd. | Hong Kong | 314,466 | 1,200,136 | |||||||
Swire Pacific Ltd., B | Hong Kong | 359,909 | 850,126 | |||||||
|
| |||||||||
| 4,129,623 | ||||||||||
|
| |||||||||
Software 4.5% | ||||||||||
a Check Point Software Technologies Ltd. | Israel | 130,472 | 6,481,849 | |||||||
Microsoft Corp. | United States | 576,608 | 19,910,274 | |||||||
Symantec Corp. | United States | 312,280 | 7,016,932 | |||||||
|
| |||||||||
| 33,409,055 | ||||||||||
|
| |||||||||
Specialty Retail 0.7% | ||||||||||
Kingfisher PLC | United Kingdom | 973,910 | 5,081,157 | |||||||
|
| |||||||||
Tobacco 6.7% | ||||||||||
Altria Group Inc. | United States | 278,254 | 9,736,108 | |||||||
British American Tobacco PLC | United Kingdom | 291,278 | 14,925,446 | |||||||
Imperial Tobacco Group PLC | United Kingdom | 213,756 | 7,413,697 | |||||||
Lorillard Inc. | United States | 248,799 | 10,867,540 | |||||||
Philip Morris International Inc. | United States | 75,124 | 6,507,241 | |||||||
|
| |||||||||
| 49,450,032 | ||||||||||
|
| |||||||||
Wireless Telecommunication Services 2.3% | ||||||||||
Vodafone Group PLC | United Kingdom | 6,057,446 | 17,310,226 | |||||||
|
| |||||||||
Total Common Stocks and Other Equity Interests (Cost $536,030,856) | 654,434,842 | |||||||||
|
| |||||||||
Preferred Stocks (Cost $5,430,000) 0.7% | ||||||||||
Diversified Financial Services 0.7% | ||||||||||
a,b Hightower Holding LLC, pfd., A, Series 2 | United States | 2,172,000 | 4,928,594 | |||||||
|
| |||||||||
| Principal Amount* | ||||||||||
Corporate Bonds, Notes and Senior Floating Rate Interests 4.4% | ||||||||||
h Cengage Learning Acquisitions Inc., FRN, 2.70%, 7/03/14 | United States | 1,512,445 | 1,134,333 | |||||||
Clear Channel Communications Inc., | ||||||||||
e senior secured note, first lien, 144A, 9.00%, 12/15/19 | United States | 5,184,000 | 5,054,400 | |||||||
h,i Tranche B Term Loan, 3.845%, 1/29/16 | United States | 1,990,020 | 1,824,849 | |||||||
h,i Tranche C Term Loan, 3.845%, 1/29/16 | United States | 345,626 | 312,792 | |||||||
h,i Tranche D Term Loan, 6.945%, 1/30/19 | United States | 6,889,154 | 6,297,121 | |||||||
Energy Future Intermediate Holding Co. LLC/EFIH Finance Inc., second lien, | United States | 864,000 | 930,960 | |||||||
h Hilton Worldwide Inc., | ||||||||||
Mezzanine F Loan, FRN, 4.443%, 11/12/15 | United States | 734,917 | 723,894 | |||||||
Mezzanine G Loan, FRN, 4.693%, 11/12/15 | United States | 1,323,578 | 1,303,724 | |||||||
h,i Texas Competitive Electric Holdings Co. LLC, Extended Term Loan, 4.693%, 10/10/17 | United States | 12,912,264 | 9,077,321 | |||||||
Texas Competitive Electric Holdings Co. LLC/Texas Competitive Electric Holdings Finance Inc., | ||||||||||
senior note, A, 10.25%, 11/01/15 | United States | 6,359,000 | 635,900 | |||||||
e senior secured note, 144A, 11.50%, 10/01/20 | United States | 5,895,000 | 4,435,987 | |||||||
e Wind Acquisition Finance SA, | ||||||||||
senior secured note, 144A, 11.75%, 7/15/17 | Italy | 135,000 | 141,075 | |||||||
third lien, 144A, 11.75%, 7/15/17 | Italy | 394,000 | EUR | 535,928 | ||||||
|
| |||||||||
Total Corporate Bonds, Notes and Senior Floating Rate Interests (Cost $35,340,921) | 32,408,284 | |||||||||
|
| |||||||||
MGD-15
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Mutual Global Discovery Securities Fund | Country | Principal Amount* | Value | |||||||
Corporate Notes in Reorganization 0.8% | ||||||||||
e,j American Airlines Inc., senior secured note, 144A, 7.50%, 3/15/16 | United States | 5,214,000 | $ | 6,087,345 | ||||||
b,j Broadband Ventures III LLC, secured promissory note, 5.00%, 2/01/12 | United States | 595 | — | |||||||
|
| |||||||||
Total Corporate Notes in Reorganization (Cost $5,391,442) | 6,087,345 | |||||||||
|
| |||||||||
| Shares | ||||||||||
Companies in Liquidation 1.0% | ||||||||||
a Adelphia Recovery Trust | United States | 5,379,562 | 7,531 | |||||||
a,f Adelphia Recovery Trust, Arahova Contingent Value Vehicle, Contingent Distribution | United States | 386,774 | 4,719 | |||||||
a,b AET&D Holdings No. 1 Pty. Ltd. | Australia | 1,361,600 | — | |||||||
a,f,g Century Communications Corp., Contingent Distribution | United States | 1,074,000 | — | |||||||
a,b FIM Coinvestor Holdings I, LLC | United States | 2,077,368 | — | |||||||
a,k Lehman Brothers Holdings Inc., Bankruptcy Claim | United States | 17,348,669 | 7,633,415 | |||||||
a,f,g NewPage Corp., Litigation Trust, Contingent Distribution | United States | 4,854,000 | — | |||||||
a,f,g Tribune Litigation Trust, Contingent Distribution | United States | 56,883 | — | |||||||
|
| |||||||||
Total Companies in Liquidation (Cost $8,239,386) | 7,645,665 | |||||||||
|
| |||||||||
| Principal Amount* | ||||||||||
Asset-Backed Securities 0.1% | ||||||||||
Airlines 0.1% | ||||||||||
American Airlines Inc., first lien, 13.00%, 8/01/16 | United States | 43,154 | 45,959 | |||||||
American Airlines Pass Through Trust, | ||||||||||
2009-1A, 10.375%, 7/02/19 | United States | 111,987 | 119,336 | |||||||
2011-2A, 8.625%, 4/15/23 | United States | 473,193 | 504,542 | |||||||
|
| |||||||||
Total Asset-Backed Securities (Cost $657,210) | 669,837 | |||||||||
|
| |||||||||
Total Investments before Short Term Investments | 706,174,567 | |||||||||
|
| |||||||||
Short Term Investments 2.7% | ||||||||||
U.S. Government and Agency Securities 2.7% | ||||||||||
l FHLB, 7/01/13 | United States | 3,600,000 | 3,600,000 | |||||||
l,m U.S. Treasury Bills, 7/05/13 - 11/29/13 | United States | 16,500,000 | 16,498,839 | |||||||
|
| |||||||||
Total U.S. Government and Agency Securities (Cost $20,097,921) | 20,098,839 | |||||||||
|
| |||||||||
Total Investments (Cost $611,187,736) 98.3% | 726,273,406 | |||||||||
Other Assets, less Liabilities 1.7% | 12,341,627 | |||||||||
|
| |||||||||
Net Assets 100.0% | $ | 738,615,033 | ||||||||
|
| |||||||||
MGD-16
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Mutual Global Discovery 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.
bSee Note 9 regarding restricted securities.
cAt June 30, 2013, 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.
dSee Note 11 regarding holdings of 5% voting 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, 2013, the aggregate value of these securities was $21,380,554, representing 2.89% of net assets.
fContingent distributions represent the right to receive additional distributions, if any, during the reorganization of the underlying company. Shares represent total underlying principal of debt securities.
gSecurity has been deemed illiquid because it may not be able to be sold within seven days. At June 30, 2013, the aggregate value of these securities was 2,079,361, representing 0.28% of net assets.
hThe coupon rate shown represents the rate at period end.
iSee Note 1(g) regarding senior floating rate interests.
jSee Note 7 regarding credit risk and defaulted securities.
kBankruptcy claims represent the right to receive distributions, if any, during the liquidation of the underlying pool of assets. Shares represent amount of allowed unsecured claims.
lThe security is traded on a discount basis with no stated coupon rate.
mSecurity or a portion of the security has been pledged as collateral for open futures contracts. At June 30, 2013, the value of this security and/or cash pledged as collateral was $817,651, representing 0.11% of net assets.
MGD-17
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Mutual Global Discovery Securities Fund |
At June 30, 2013, 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 | ||||||||||||||||||
Currency Contracts | ||||||||||||||||||||||||
EUR/USD | Short | 236 | $ | 38,417,850 | 9/16/13 | $ | 826,043 | $ | — | |||||||||||||||
GBP/USD | Short | 167 | 15,869,175 | 9/16/13 | 446,323 | — | ||||||||||||||||||
|
| |||||||||||||||||||||||
Net unrealized appreciation (depreciation) | $ | 1,272,366 | ||||||||||||||||||||||
|
| |||||||||||||||||||||||
At June 30, 2013, 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 | |||||||||||||||||||||
Euro | SCBT | Buy | 3,153,555 | $ | 4,196,200 | 7/17/13 | $ | — | $ | (91,057 | ) | |||||||||||||||||
Euro | FBCO | Buy | 2,443,642 | 3,240,691 | 7/17/13 | — | (59,677 | ) | ||||||||||||||||||||
Euro | BOFA | Buy | 668,918 | 881,371 | 7/17/13 | — | (10,606 | ) | ||||||||||||||||||||
Euro | DBAB | Buy | 1,027,491 | 1,344,485 | 7/17/13 | — | (6,947 | ) | ||||||||||||||||||||
Euro | BZWS | Buy | 530,973 | 694,570 | 7/17/13 | — | (3,375 | ) | ||||||||||||||||||||
Euro | BZWS | Sell | 6,973,353 | 9,311,832 | 7/17/13 | 234,263 | — | |||||||||||||||||||||
Euro | FBCO | Sell | 616,333 | 836,961 | 7/17/13 | 34,649 | — | |||||||||||||||||||||
Euro | BOFA | Sell | 702,972 | 948,770 | 7/17/13 | 33,676 | — | |||||||||||||||||||||
Euro | HSBC | Sell | 145,871 | 196,576 | 7/17/13 | 6,688 | — | |||||||||||||||||||||
Euro | DBAB | Sell | 6,938,191 | 9,074,789 | 7/17/13 | 42,992 | — | |||||||||||||||||||||
Euro | SCBT | Sell | 152,743 | 204,744 | 7/17/13 | 5,911 | — | |||||||||||||||||||||
Euro | HAND | Sell | 219,726 | 300,880 | 7/17/13 | 14,851 | — | |||||||||||||||||||||
British Pound | BOFA | Sell | 154,879 | 233,903 | 7/19/13 | — | (1,610 | ) | ||||||||||||||||||||
British Pound | HSBC | Sell | 6,381,268 | 9,718,671 | 7/19/13 | 15,149 | — | |||||||||||||||||||||
British Pound | DBAB | Sell | 515,187 | 793,675 | 7/19/13 | 10,268 | — | |||||||||||||||||||||
British Pound | BOFA | Sell | 353,907 | 539,357 | 7/19/13 | 1,196 | — | |||||||||||||||||||||
British Pound | FBCO | Sell | 745,861 | 1,144,258 | 7/19/13 | 10,083 | — | |||||||||||||||||||||
British Pound | SCBT | Sell | 330,147 | 512,957 | 7/19/13 | 10,927 | — | |||||||||||||||||||||
Japanese Yen | FBCO | Sell | 48,660,000 | 474,634 | 7/22/13 | — | (15,984 | ) | ||||||||||||||||||||
Japanese Yen | DBAB | Buy | 2,382,489 | 24,458 | 7/22/13 | — | (436 | ) | ||||||||||||||||||||
Japanese Yen | SCBT | Buy | 199,414,300 | 1,974,399 | 7/22/13 | 36,214 | — | |||||||||||||||||||||
Japanese Yen | FBCO | Buy | 136,219,050 | 1,340,316 | 7/22/13 | 33,125 | — | |||||||||||||||||||||
Japanese Yen | FBCO | Sell | 319,152,400 | 3,249,754 | 7/22/13 | 31,870 | — | |||||||||||||||||||||
South Korean Won | FBCO | Buy | 64,174,899 | 57,019 | 8/12/13 | — | (974 | ) | ||||||||||||||||||||
South Korean Won | FBCO | Buy | 207,870,000 | 179,698 | 8/12/13 | 1,949 | — | |||||||||||||||||||||
South Korean Won | FBCO | Sell | 1,951,531,329 | 1,745,864 | 8/12/13 | 41,544 | — | |||||||||||||||||||||
South Korean Won | DBAB | Sell | 975,473,603 | 872,612 | 8/12/13 | 20,707 | — | |||||||||||||||||||||
South Korean Won | BOFA | Sell | 812,919,967 | 725,952 | 8/12/13 | 16,009 | — | |||||||||||||||||||||
Swiss Franc | DBAB | Buy | 488,611 | 530,412 | 8/12/13 | — | (13,071 | ) | ||||||||||||||||||||
Swiss Franc | FBCO | Buy | 1,078,252 | 1,148,093 | 8/12/13 | — | (6,441 | ) | ||||||||||||||||||||
Swiss Franc | FBCO | Sell | 399,383 | 422,027 | 8/12/13 | — | (840 | ) | ||||||||||||||||||||
Swiss Franc | DBAB | Buy | 1,119,335 | 1,169,524 | 8/12/13 | 15,626 | — | |||||||||||||||||||||
Swiss Franc | BOFA | Buy | 159,870 | 166,710 | 8/12/13 | 2,560 | — | |||||||||||||||||||||
Swiss Franc | BZWS | Buy | 97,320 | 101,553 | 8/12/13 | 1,489 | — | |||||||||||||||||||||
Swiss Franc | FBCO | Sell | 4,056,456 | 4,428,755 | 8/12/13 | 133,783 | — | |||||||||||||||||||||
Swiss Franc | DBAB | Sell | 3,764,417 | 4,108,817 | 8/12/13 | 123,055 | — | |||||||||||||||||||||
Swiss Franc | BOFA | Sell | 166,682 | 180,337 | 8/12/13 | 3,854 | — | |||||||||||||||||||||
Swiss Franc | SCBT | Sell | 305,000 | 326,594 | 8/12/13 | 3,661 | — | |||||||||||||||||||||
British Pound | FBCO | Sell | 2,717,782 | 4,199,038 | 8/19/13 | 67,196 | — | |||||||||||||||||||||
MGD-18
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Mutual Global Discovery Securities Fund |
Forward Exchange Contracts (continued)
| Currency | Counterparty | Type | Quantity | Contract Amount | Settlement Date | Unrealized Appreciation | Unrealized Depreciation | |||||||||||||||||||||
British Pound | BOFA | Sell | 3,447,658 | $ | 5,343,870 | 8/19/13 | $ | 102,396 | $ | — | ||||||||||||||||||
British Pound | SCBT | Sell | 4,462,034 | 6,916,153 | 8/19/13 | 132,523 | — | |||||||||||||||||||||
British Pound | DBAB | Sell | 1,306,562 | 1,995,166 | 8/19/13 | 8,799 | — | |||||||||||||||||||||
Euro | BOFA | Sell | 6,787,759 | 8,884,624 | 8/30/13 | 46,852 | — | |||||||||||||||||||||
Euro | BZWS | Sell | 6,187,990 | 8,093,953 | 8/30/13 | 37,089 | — | |||||||||||||||||||||
Euro | FBCO | Sell | 789,389 | 1,029,654 | 8/30/13 | 1,857 | — | |||||||||||||||||||||
Euro | HSBC | Sell | 244,755 | 319,958 | 8/30/13 | 1,283 | — | |||||||||||||||||||||
Euro | DBAB | Sell | 523,592 | 686,046 | 8/30/13 | 4,321 | — | |||||||||||||||||||||
Euro | SCBT | Sell | 437,359 | 570,430 | 8/30/13 | 981 | — | |||||||||||||||||||||
Euro | HAND | Sell | 243,092 | 317,351 | 8/30/13 | 841 | — | |||||||||||||||||||||
Canadian Dollar | SCBT | Sell | 477,233 | 468,518 | 9/18/13 | 15,515 | — | |||||||||||||||||||||
Canadian Dollar | DBAB | Sell | 2,494,262 | 2,435,507 | 9/18/13 | 67,881 | — | |||||||||||||||||||||
Euro | BOFA | Sell | 2,967,702 | 3,888,684 | 10/16/13 | 23,768 | — | |||||||||||||||||||||
Euro | BZWS | Sell | 2,981,061 | 3,903,550 | 10/16/13 | 21,237 | — | |||||||||||||||||||||
Euro | FBCO | Sell | 2,261,998 | 2,971,946 | 10/16/13 | 26,087 | — | |||||||||||||||||||||
British Pound | BOFA | Sell | 6,529,535 | 9,937,952 | 10/21/13 | 14,890 | — | |||||||||||||||||||||
Euro | FBCO | Sell | 5,854,388 | 7,539,918 | 11/18/13 | — | (85,802 | ) | ||||||||||||||||||||
Euro | DBAB | Sell | 668,658 | 864,953 | 11/18/13 | — | (6,018 | ) | ||||||||||||||||||||
Euro | SCBT | Sell | 521,864 | 675,819 | 11/18/13 | — | (3,942 | ) | ||||||||||||||||||||
Euro | BOFA | Sell | 627,484 | 813,479 | 11/18/13 | — | (3,859 | ) | ||||||||||||||||||||
Euro | BOFA | Sell | 273,861 | 356,820 | 11/18/13 | 99 | — | |||||||||||||||||||||
Euro | HSBC | Sell | 273,861 | 356,987 | 11/18/13 | 265 | — | |||||||||||||||||||||
Euro | SCBT | Sell | 198,459 | 258,725 | 11/18/13 | 219 | — | |||||||||||||||||||||
British Pound | DBAB | Buy | 974,420 | 1,524,980 | 11/21/13 | — | (44,398 | ) | ||||||||||||||||||||
British Pound | FBCO | Buy | 1,958,920 | 2,999,470 | 11/21/13 | — | (22,992 | ) | ||||||||||||||||||||
British Pound | FBCO | Sell | 5,506,963 | 8,354,063 | 11/21/13 | — | (13,487 | ) | ||||||||||||||||||||
British Pound | SCBT | Buy | 410,151 | 630,148 | 11/21/13 | — | (6,944 | ) | ||||||||||||||||||||
British Pound | DBAB | Sell | 4,399,722 | 6,678,778 | 11/21/13 | — | (6,376 | ) | ||||||||||||||||||||
British Pound | BOFA | Sell | 4,818,593 | 7,317,033 | 11/21/13 | — | (4,573 | ) | ||||||||||||||||||||
British Pound | HSBC | Buy | 122,777 | 188,545 | 11/21/13 | — | (1,993 | ) | ||||||||||||||||||||
British Pound | FBCO | Buy | 1,183,032 | 1,796,876 | 11/21/13 | 1,806 | — | |||||||||||||||||||||
|
| |||||||||||||||||||||||||||
Unrealized appreciation (depreciation) |
| 1,462,004 | (411,402 | ) | ||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||
Net unrealized appreciation (depreciation) |
| $ | 1,050,602 | |||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||
See Abbreviations on page MGD-36.
The accompanying notes are an integral part of these financial statements.
MGD-19
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements
Statement of Assets and Liabilities
June 30, 2013 (unaudited)
| Mutual Global Discovery Securities Fund | ||||
Assets: | ||||
Investments in securities: | ||||
Cost - Unaffiliated issuers | $ | 603,187,736 | ||
Cost - Non-controlled affiliated issuers (Note 11) | 8,000,000 | |||
|
| |||
Total cost of investments | $ | 611,187,736 | ||
|
| |||
Value - Unaffiliated issuers | $ | 722,435,638 | ||
Value - Non-controlled affiliated issuers (Note 11) | 3,837,768 | |||
|
| |||
Total value of investments | 726,273,406 | |||
Cash | 5,218,517 | |||
Restricted cash (Note 1d) | 160,000 | |||
Foreign currency, at value (cost $1,679,772) | 1,679,038 | |||
Receivables: | ||||
Investment securities sold | 3,177,922 | |||
Capital shares sold | 327,712 | |||
Dividends and interest | 3,263,774 | |||
Variation margin | 136,694 | |||
Unrealized appreciation on forward exchange contracts | 1,462,004 | |||
Other assets | 159,385 | |||
|
| |||
Total assets | 741,858,452 | |||
|
| |||
Liabilities: | ||||
Payables: | ||||
Investment securities purchased | 231,537 | |||
Capital shares redeemed | 1,195,521 | |||
Affiliates | 913,639 | |||
Reports to shareholders | 225,548 | |||
Due to brokers | 160,000 | |||
Unrealized depreciation on forward exchange contracts | 411,402 | |||
Accrued expenses and other liabilities | 105,772 | |||
|
| |||
Total liabilities | 3,243,419 | |||
|
| |||
Net assets, at value | $ | 738,615,033 | ||
|
| |||
Net assets consist of: | ||||
Paid-in capital | $ | 501,226,325 | ||
Undistributed net investment income | 23,868,897 | |||
Net unrealized appreciation (depreciation) | 117,397,498 | |||
Accumulated net realized gain (loss) | 96,122,313 | |||
|
| |||
Net assets, at value | $ | 738,615,033 | ||
|
| |||
The accompanying notes are an integral part of these financial statements.
MGD-20
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Assets and Liabilities (continued)
June 30, 2013 (unaudited)
| Mutual Global Discovery Securities Fund | ||||
Class 1: | ||||
Net assets, at value | $ | 1,358,521 | ||
|
| |||
Shares outstanding | 59,013 | |||
|
| |||
Net asset value and maximum offering price per share | $ | 23.02 | ||
|
| |||
Class 2: | ||||
Net assets, at value | $ | 671,647,421 | ||
|
| |||
Shares outstanding | 29,751,389 | |||
|
| |||
Net asset value and maximum offering price per share | $ | 22.58 | ||
|
| |||
Class 4: | ||||
Net assets, at value | $ | 65,609,091 | ||
|
| |||
Shares outstanding | 2,879,044 | |||
|
| |||
Net asset value and maximum offering price per share | $ | 22.79 | ||
|
| |||
The accompanying notes are an integral part of these financial statements.
MGD-21
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Operations
for the six months ended June 30, 2013 (unaudited)
| Mutual Global Discovery Securities Fund | ||||
Investment income: | ||||
Dividends | $ | 10,928,425 | ||
Interest | 2,209,795 | |||
Income from securities loaned | 79,199 | |||
|
| |||
Total investment income | 13,217,419 | |||
|
| |||
Expenses: | ||||
Management fees (Note 3a) | 3,011,654 | |||
Administrative fees (Note 3b) | 512,827 | |||
Distribution fees: (Note 3c) | ||||
Class 2 | 857,969 | |||
Class 4 | 113,850 | |||
Unaffiliated transfer agent fees | 670 | |||
Custodian fees (Note 4) | 32,810 | |||
Reports to shareholders | 59,336 | |||
Professional fees | 69,886 | |||
Trustees’ fees and expenses | 1,520 | |||
Other | 15,150 | |||
|
| |||
Total expenses | 4,675,672 | |||
Expense reductions (Note 4) | (21 | ) | ||
|
| |||
Net expenses | 4,675,651 | |||
|
| |||
Net investment income | 8,541,768 | |||
|
| |||
Realized and unrealized gains (losses): | ||||
Net realized gain (loss) from: | ||||
Investments | 30,147,773 | |||
Written options | 6,664 | |||
Foreign currency transactions | 9,037 | |||
Futures contracts | (418,947 | ) | ||
|
| |||
Net realized gain (loss) | 29,744,527 | |||
|
| |||
Net change in unrealized appreciation (depreciation) on: | ||||
Investments | 39,923,424 | |||
Translation of other assets and liabilities denominated in foreign currencies | 6,468,233 | |||
|
| |||
Net change in unrealized appreciation (depreciation) | 46,391,657 | |||
|
| |||
Net realized and unrealized gain (loss) | 76,136,184 | |||
|
| |||
Net increase (decrease) in net assets resulting from operations | $ | 84,677,952 | ||
|
| |||
The accompanying notes are an integral part of these financial statements.
MGD-22
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statements of Changes in Net Assets
| Mutual Global Discovery Securities Fund | ||||||||
| Six Months Ended June 30, 2013 (unaudited) | Year Ended December 31, 2012 | |||||||
| ||||||||
Increase (decrease) in net assets: | ||||||||
Operations: | ||||||||
Net investment income | $ | 8,541,768 | $ | 14,067,363 | ||||
Net realized gain (loss) from investments, written options, foreign currency transactions, futures contracts and securities sold short | 29,744,527 | 86,155,202 | ||||||
Net change in unrealized appreciation (depreciation) on investments and translation of other assets and liabilities denominated in foreign currencies | 46,391,657 | (5,719,893 | ) | |||||
| ||||||||
Net increase (decrease) in net assets resulting from operations | 84,677,952 | 94,502,672 | ||||||
| ||||||||
Distributions to shareholders from: | ||||||||
Net investment income: | ||||||||
Class 1 | — | (32,000 | ) | |||||
Class 2 | — | (17,455,646 | ) | |||||
Class 4 | — | (1,713,076 | ) | |||||
Net realized gains: | ||||||||
Class 1 | — | (55,531 | ) | |||||
Class 2 | — | (35,238,248 | ) | |||||
Class 4 | — | (3,402,551 | ) | |||||
| ||||||||
Total distributions to shareholders | — | (57,897,052 | ) | |||||
| ||||||||
Capital share transactions: (Note 2) | ||||||||
Class 1 | 84,583 | 115,172 | ||||||
Class 2 | (66,104,228 | ) | (85,201,977 | ) | ||||
Class 4 | (3,990,750 | ) | (7,400,610 | ) | ||||
| ||||||||
Total capital share transactions | (70,010,395 | ) | (92,487,415 | ) | ||||
| ||||||||
Net increase (decrease) in net assets | 14,667,557 | (55,881,795 | ) | |||||
Net assets: | ||||||||
Beginning of period | 723,947,476 | 779,829,271 | ||||||
| ||||||||
End of period | $ | 738,615,033 | $ | 723,947,476 | ||||
| ||||||||
Undistributed net investment income included in net assets: | ||||||||
End of period | $ | 23,868,897 | $ | 15,327,129 | ||||
| ||||||||
The accompanying notes are an integral part of these financial statements.
MGD-23
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited)
Mutual Global Discovery Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Templeton Variable Insurance Products Trust (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end investment company, consisting of twenty-one 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, 2013, 77.57% of the Fund’s shares were held through one insurance company. Investment activities of these insurance company separate accounts could have a material impact on the Fund. 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 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 Board), the Fund’s administrator, investment manager and other affiliates have formed the Valuation and Liquidity Oversight Committee (VLOC). The VLOC provides administration and oversight of the Fund’s valuation policies and procedures, which are approved annually by the Board. Among other things, these procedures allow the Fund to 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 (OTC) 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 OTC 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, credit spreads, estimated default rates, anticipated market interest rate volatility, 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 OTC 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 financial instruments for which market prices are not reliable or readily available. Under these procedures, the VLOC convenes on a regular basis to review such financial instruments and considers a number of factors, including significant unobservable valuation inputs, when arriving at fair value. The VLOC primarily employs
MGD-24
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Mutual Global Discovery Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
a. Financial Instrument Valuation (continued)
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. An income-based valuation approach may also be used 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. The VLOC employs various methods for calibrating these valuation approaches including a regular review of key inputs and assumptions, transactional back-testing or disposition analysis, and reviews of any related market activity.
Trading in securities on foreign securities stock exchanges and OTC 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 VLOC 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 Depositary 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.
In addition, certain foreign markets may be open on days that the NYSE is closed, which could result in differences between the value of the Fund’s portfolio securities on the last business day and the last calendar day of the reporting period. Any significant security valuation changes due to an open foreign market are adjusted and reflected by the Fund for financial reporting purposes.
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 Board.
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.
MGD-25
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Mutual Global Discovery Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
Derivative counterparty credit risk is managed through a formal evaluation of the creditworthiness of all potential counterparties. The Fund attempts to reduce its exposure to counterparty credit risk on OTC derivatives, whenever possible, by entering into International Swaps and Derivatives Association (ISDA) master agreements with certain counterparties. These agreements contain various provisions, including but not limited to collateral requirements, events of default, or early termination. Termination events applicable to the counterparty include certain deteriorations in the credit quality of the counterparty. Termination events applicable to the Fund include failure of the Fund to maintain certain net asset levels and/or limit the decline in net assets over various periods of time. In the event of default or early termination, the ISDA master agreement gives the non-defaulting party the right to net and close-out all transactions traded, whether or not arising under the ISDA agreement, to one net amount payable by one counterparty to the other. Early termination by the counterparty may result in an immediate payment by the Fund of any net liability owed to that counterparty under the ISDA agreement. At June 30, 2013, the Fund had no OTC derivatives in a net liability position for such contracts. However, absent an event of default or early termination, OTC derivative asset and liabilities are presented gross and not offset in the Statement of Assets and Liabilities.
Collateral requirements differ by type of derivative. Collateral or initial margin requirements are set by the broker or exchange clearing house for exchange traded and centrally cleared derivatives. Initial margin deposited is held at the exchange and can be in the form of cash and/or securities. For OTC derivatives traded under an ISDA master agreement, posting of collateral is required by either the fund or the applicable counterparty if the total net exposure of all OTC derivatives with the applicable counterparty exceeds the minimum transfer amount, which typically ranges from $100,000 to $250,000, and can vary depending on the counterparty and the type of the agreement. Generally, collateral is determined at the close of fund business each day and any additional collateral required due to changes in derivative values may be delivered by the fund or the counterparty within a few business days. Collateral pledged and/or received by the fund for OTC derivatives, if any, is held in segregated accounts with the fund’s custodian/counterparty broker and can be in the form of cash and/or securities. Unrestricted cash may be invested according to the Fund’s investment objectives.
At June 30, 2013, the Fund received $300,450 in U.S. Treasury Bills as collateral for derivatives.
The Fund entered into exchange traded financial futures contracts primarily to manage exposure to certain foreign currencies. A futures contract is an agreement between the Fund and a counterparty to buy or sell an asset 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 asset underlying the futures contract. 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 OTC 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 at a specific exchange rate on a future date.
The Fund purchased or wrote exchange traded option contracts primarily to manage 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 an asset or notional amount of a swap
MGD-26
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Mutual Global Discovery Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
c. Derivative Financial Instruments (continued)
(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 underlying investment is adjusted by any premium received or paid. Upon expiration of an option, any premium received or paid is recorded as a realized gain or loss. 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 Notes 6 and 10 regarding investment transactions and other derivative information, respectively.
d. Restricted Cash
At June 30, 2013, the Fund received restricted cash in connection with investments in certain derivative securities. Restricted cash is held in a segregated account with the Fund’s custodian and is reflected in the Statement of Assets and Liabilities.
e. Securities Sold Short
The Fund is engaged in selling securities short, which obligates the Fund to replace a borrowed security with the same security at current market value. The Fund incurs a loss if the price of the security increases between the date of the short sale and the date on which the Fund replaces the borrowed security. The Fund realizes a gain if the price of the security declines between those dates. Gains are limited to the price at which the Fund sold the security short, while losses are potentially unlimited in size.
The Fund is required to establish a margin account with the broker lending the security sold short. While the short sale is outstanding, the broker retains the proceeds of the short sale and the Fund must maintain a deposit with the 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.
f. Securities Lending
The Fund participates in an agency based securities 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. The Fund receives income from the investment of cash collateral, in addition to lending fees and rebates paid by the borrower. The Fund bears the market risk with respect to the collateral investment, securities loaned, and the risk that the agent may default on its obligations to the Fund. The securities lending agent has agreed to indemnify the Fund in the event of default by a third party borrower. At June 30, 2013, the Fund had no securities on loan.
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 certain restrictions on resale.
MGD-27
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Mutual Global Discovery Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
h. 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 if applicable, excise taxes. As a result, no provision for U.S. federal income taxes is required.
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 in an amount that would be payable if the securities were disposed of on the valuation date.
The Fund recognizes the tax benefits of uncertain tax positions only when the position is “more likely than not” to be sustained upon examination by the tax authorities based on the technical merits of the tax position. As of June 30, 2013, and for all open tax years, the Fund has determined that no liability for unrecognized tax benefits is required in the Fund’s financial statements related to uncertain tax positions taken on a tax return (or expected to be taken on future tax returns). Open tax years are those that remain subject to examination and are based on each tax jurisdiction statute of limitation.
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 and dividends declared on securities sold short are recorded on the ex-dividend date except that certain dividends from foreign securities are recognized as soon as the Fund is notified of the ex-dividend date. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with accounting principles generally accepted in the United States of America. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods.
Common expenses incurred by the Trust are allocated among the funds based on the ratio of net assets of each fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense.
Realized and unrealized gains and losses and net investment income, not including class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions, by class, are generally due to differences in class specific expenses.
j. Accounting Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
k. Guarantees and Indemnifications
Under the Trust’s organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, on behalf of the
MGD-28
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Mutual Global Discovery Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
k. Guarantees and Indemnifications (continued)
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, 2013, 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, 2013 | Year Ended December 31, 2012 | |||||||||||||||
| Class 1 Shares: | Shares | Amount | Shares | Amount | ||||||||||||
Shares sold | 7,389 | $ | 166,756 | 11,112 | $ | 227,652 | ||||||||||
Shares issued in reinvestment of distributions | — | — | 4,331 | 87,532 | ||||||||||||
Shares redeemed | (3,686 | ) | (82,173 | ) | (9,680 | ) | (200,012 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | 3,703 | $ | 84,583 | 5,763 | $ | 115,172 | ||||||||||
| ||||||||||||||||
Class 2 Shares: | ||||||||||||||||
Shares sold | 1,666,347 | $ | 36,606,139 | 1,636,877 | $ | 33,107,971 | ||||||||||
Shares issued in reinvestment of distributions | — | — | 2,653,268 | 52,693,893 | ||||||||||||
Shares redeemed | (4,652,085 | ) | (102,710,367 | ) | (8,457,161 | ) | (171,003,841 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | (2,985,738 | ) | $ | (66,104,228 | ) | (4,167,016 | ) | $ | (85,201,977 | ) | ||||||
| ||||||||||||||||
Class 4 Shares: | ||||||||||||||||
Shares sold | 116,415 | $ | 2,628,388 | 79,532 | $ | 1,636,846 | ||||||||||
Shares issued on reinvestment of distributions | — | — | 255,016 | 5,115,627 | ||||||||||||
Shares redeemed | (297,237 | ) | (6,619,138 | ) | (694,727 | ) | (14,153,083 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | (180,822 | ) | $ | (3,990,750 | ) | (360,179 | ) | $ | (7,400,610 | ) | ||||||
| ||||||||||||||||
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 |
MGD-29
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Mutual Global Discovery Securities Fund
3. TRANSACTIONS WITH AFFILIATES (continued)
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 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 Board 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. Some distribution fees are not charged on shares held by affiliates. The Board 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, 2013, the custodian fees were reduced as noted in the Statement of Operations.
5. INCOME TAXES
At June 30, 2013, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
Cost of investments | $ | 612,571,773 | ||
|
| |||
Unrealized appreciation | $ | 160,064,344 | ||
Unrealized depreciation | (46,362,711 | ) | ||
|
| |||
Net unrealized appreciation (depreciation) | $ | 113,701,633 | ||
|
| |||
MGD-30
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Mutual Global Discovery Securities Fund
5. INCOME TAXES (continued)
Differences between income and/or capital gains as determined on a book basis and a tax basis are primarily due to differing treatments of passive foreign investment company shares, pass-through entity income, bond discounts and premiums and financial futures transactions.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the period ended June 30, 2013, aggregated $73,853,610 and $137,967,663, respectively.
Transactions in options written during the period ended June 30, 2013, were as follows:
| Number of Contracts | Premiums Received | |||||||
Options outstanding at December 31, 2012 | — | $ | — | |||||
Options written | 108 | 23,165 | ||||||
Options expired | — | — | ||||||
Options exercised | (99 | ) | (13,860 | ) | ||||
Options closed | (9 | ) | (9,305 | ) | ||||
| ||||||||
Options outstanding at June 30, 2013 | — | $ | — | |||||
| ||||||||
See Notes 1(c) and 10 regarding derivative financial instruments and other derivative information, 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, 2013, the aggregate value of distressed company securities for which interest recognition has been discontinued was $6,087,345, representing 0.82% of the Fund’s net assets. For information as to specific securities, see the accompanying Statement of Investments.
8. CONCENTRATION OF RISK
Investing in foreign securities may include certain risks and considerations not typically associated with investing in U.S. securities, such as fluctuating currency values and changing local and regional economic, political and social conditions, which may result in greater market volatility. In addition, certain foreign securities may not be as liquid as U.S. securities.
9. RESTRICTED SECURITIES
The Fund 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.
MGD-31
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Mutual Global Discovery Securities Fund
9. RESTRICTED SECURITIES (continued)
At June 30, 2013, 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 | ||||||||||||
| 1,361,600 | AET&D Holdings No. 1 Pty. Ltd. | 10/13/10 | $ | — | $ | — | ||||||||||
| 800,000 | The Bankshares Inc. | 3/22/07 | 8,000,000 | 3,837,768 | ||||||||||||
| 595 | Broadband Ventures III LLC, secured promissory note, 5.00%, 2/01/12 | 7/01/10 - 11/30/12 | 595 | — | ||||||||||||
| 2,077,368 | FIM Coinvestor Holdings I, LLC | 11/20/06 - 6/02/09 | — | — | ||||||||||||
| 2,172,000 | Hightower Holding LLC, pfd., A, Series 2 | 6/10/10 - 5/10/12 | 5,430,000 | 4,928,594 | ||||||||||||
| 56,213 | Imagine Group Holdings Ltd. | 8/31/04 | 575,705 | 489,981 | ||||||||||||
| 424,073 | International Automotive Components Group Brazil LLC | 4/13/06 - 12/26/08 | 281,629 | 93,105 | ||||||||||||
| 4,052,916 | International Automotive Components Group North America, LLC | 1/12/06 - 3/18/13 | 3,247,714 | 1,819,151 | ||||||||||||
| 2,140 | Olympus Re Holdings Ltd. | 12/19/01 | 200,998 | — | ||||||||||||
|
| |||||||||||||||
Total Restricted Securities (Value is 1.51% of Net Assets) | $ | 17,736,641 | $ | 11,168,599 | ||||||||||||
|
| |||||||||||||||
10. OTHER DERIVATIVE INFORMATION
At June 30, 2013, the Fund’s investments in derivative contracts 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) | $ | 2,734,370a | Unrealized depreciation on forward exchange contracts | $ | 411,402 | ||||||
aIncludes cumulative appreciation (depreciation) of futures contracts as reported in the Statement of Investments. Only current day’s variation margin is separately reported within the Statement of Assets and Liabilities.
For the period ended June 30, 2013, 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 | $ | (160,341 | ) | $ | 7,349,256 | ||||
Equity contracts | Net realized gain (loss) from written options / Net change in unrealized appreciation (depreciation) on investments | 6,664 | — | |||||||
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Mutual Global Discovery Securities Fund
10. OTHER DERIVATIVE INFORMATION (continued)
For the period ended June 30, 2013, the average month end market value of derivatives represented 0.59% of average month end net assets. The average month end number of open derivative contracts for the period was 117.
See Note 1(c) and 6 regarding derivative financial instruments and investment transactions, respectively.
11. 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, 2013, 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. (Value is 0.52% of Net Assets) | 800,000 | — | — | 800,000 | $ | 3,837,768 | $ | — | $ | — | ||||||||||||||||||
|
| |||||||||||||||||||||||||||
12. 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 $1.5 billion (Global Credit Facility) which matures on January 17, 2014. 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 0.07% based upon the unused portion of the Global Credit Facility. These fees are reflected in other expenses on the Statement of Operations. During the period ended June 30, 2013, the Fund did not use the Global Credit Facility.
13. 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 financial instruments and are summarized in the following fair value hierarchy:
| • | Level 1 – quoted prices in active markets for identical financial instruments |
| • | Level 2 – other significant observable inputs (including quoted prices for similar financial instruments, interest rates, prepayment speed, credit risk, etc.) |
| • | Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of financial instruments) |
The inputs or methodology used for valuing financial instruments are not an indication of the risk associated with investing in those financial instruments
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Mutual Global Discovery Securities Fund
13. 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.
A summary of inputs used as of June 30, 2013, in valuing the Fund’s assets and liabilities carried at fair value, is as follows:
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
|
| |||||||||||||||
Assets: | ||||||||||||||||
Investments in Securities: | ||||||||||||||||
Equity Investments:a | ||||||||||||||||
Auto Components | $ | 5,693,607 | $ | — | $ | 1,912,256 | $ | 7,605,863 | ||||||||
Commercial Banks | 61,819,674 | — | 3,837,768 | 65,657,442 | ||||||||||||
Diversified Financial Services | 26,387,285 | — | 4,928,594 | 31,315,879 | ||||||||||||
Insurance | 57,916,589 | — | 489,981 | b | 58,406,570 | |||||||||||
Media | 25,216,619 | 1,524,702 | — | 26,741,321 | ||||||||||||
Paper & Forest Products | — | 1,698,900 | — | 1,698,900 | ||||||||||||
Real Estate Management & Development | 2,050,262 | — | 2,079,361 | 4,129,623 | ||||||||||||
All Other Equity Investmentsc | 463,807,838 | — | — | b | 463,807,838 | |||||||||||
Corporate Bonds, Notes and Senior Floating Rate Interests | — | 32,408,284 | — | 32,408,284 | ||||||||||||
Corporate Notes in Reorganization | — | 6,087,345 | — | b | 6,087,345 | |||||||||||
Companies in Liquidation | — | 7,645,665 | — | b | 7,645,665 | |||||||||||
Asset-Backed Securities | — | 669,837 | — | 669,837 | ||||||||||||
Short Term Investments | 16,498,839 | 3,600,000 | — | 20,098,839 | ||||||||||||
|
| |||||||||||||||
Total Investments in Securities | $ | 659,390,713 | $ | 53,634,733 | $ | 13,247,960 | $ | 726,273,406 | ||||||||
|
| |||||||||||||||
Forward Exchange Contracts | — | 1,462,004 | — | 1,462,004 | ||||||||||||
Futures Contracts | 1,272,366 | — | — | 1,272,366 | ||||||||||||
Liabilities: | ||||||||||||||||
Forward Exchange Contracts | — | 411,402 | — | 411,402 | ||||||||||||
aIncludes common and preferred stocks as well as other equity investments.
bIncludes securities determined to have no value at June 30, 2013.
cFor detailed categories, see the accompanying Statement of Investments.
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Mutual Global Discovery Securities Fund
13. FAIR VALUE MEASUREMENTS (continued)
A reconciliation of assets in which Level 3 inputs are used in determining fair value is presented when there are significant Level 3 investments at the end of the period. At June 30, 2013, the reconciliation of assets are 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 | ||||||||||||||||||||||||||||||||||||||||
Auto Com | $ | 1,600,592 | $ | 368,443 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | (56,779 | ) | $ | 1,912,256 | $ | (56,779 | ) | ||||||||||||||||||
Commercial Banks | 8,957,064 | c | — | — | — | (5,954,429 | ) | — | — | 835,133 | 3,837,768 | 530,792 | ||||||||||||||||||||||||||||
Diversified Financial Services | 4,239,527 | — | — | — | — | — | — | 689,067 | 4,928,594 | 689,067 | ||||||||||||||||||||||||||||||
Diversified Tele | 32,587 | c | — | — | — | — | — | — | (32,587 | ) | — | c | (32,587 | ) | ||||||||||||||||||||||||||
Insurance | 648,760 | c | — | — | — | — | — | — | (158,779 | ) | 489,981 | c | (158,779 | ) | ||||||||||||||||||||||||||
Real Estate Management & Development | 3,812,118 | — | — | — | (2,276,952 | ) | — | — | 544,195 | 2,079,361 | 231,404 | |||||||||||||||||||||||||||||
Corporate Notes in Reorgani | — | c | — | (66 | ) | — | — | — | — | 66 | — | c | — | |||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||
Total | $ | 19,290,648 | $ | 368,443 | $ | (66 | ) | $ | — | $ | (8,231,381 | ) | $ | — | $ | — | $ | 1,820,316 | $ | 13,247,960 | $ | 1,203,118 | ||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||
aThe investments were transferred out of Level 3 as a result of the removal of a significant unobservable valuation input and/or the availability of a quoted market price in an active market for identical securities.
bIncludes common and preferred stocks as well as other equity investments.
cIncludes securities determined to have no value.
Significant unobservable valuation inputs developed by the VLOC for material Level 3 investments and impact to fair value as a result of changes in unobservable valuation inputs as of June 30, 2013, are as follows:
Description | Fair Value at End of Period | Valuation Technique | Unobservable Inputs | Amount/Range | Fair Value if Input Increasesa | |||||||||
Assets: | ||||||||||||||
Investments in Securities: | ||||||||||||||
Equity Investments:b | ||||||||||||||
Auto Components | $ | 1,819,151 | Market comparables | Discount for lack of marketability | 15% | Decrease | ||||||||
| EV / EBITDA multiple | 4.6x | Increasec | ||||||||||||
Commercial Banks | 3,837,768 | Market comparables | Discount for lack of marketability | 10% | Decreasec | |||||||||
| Price / tangible book multiple | 1.4x | Increased | ||||||||||||
Diversified Financial Services | 4,928,594 | Discounted cash flow model | Cost of equity | 15.2% | Decreasec | |||||||||
| Long-term revenue growth rate | 6.2% - 40.2% | Increased | ||||||||||||
| Adjusted EBITDA margin | 6% - 21% | Increased | ||||||||||||
Real Estate Management & | 2,079,361 | Market comparables | Discount for lack of marketability | 8% | Decreasec | |||||||||
All Other Investmentse | 583,086 | |||||||||||||
Total | $ | 13,247,960 | ||||||||||||
aRepresents the directional change in the fair value of the Level 3 investments that would result from a significant and reasonable increase in the corresponding input. A significant and reasonable decrease in input would have the opposite effect. Significant impacts, if any, to fair value and/or net assets have been indicated.
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Mutual Global Discovery Securities Fund
bIncludes common and preferred stocks.
cRepresents a significant impact to fair value but not net assets.
dRepresents a significant impact to fair value and net assets.
eIncludes fair value of immaterial investments developed using various valuation techniques and unobservable inputs. May also include investments with values derived using prior transaction prices or third party pricing information without adjustment for which such inputs are also unobservable.
14. NEW ACCOUNTING PRONOUNCEMENTS
In June 2013, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2013-08, Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements. The ASU modifies the criteria used in defining an investment company under U.S. Generally Accepted Accounting Principles and also sets forth certain measurement and disclosure requirements. Under the ASU, an entity that is registered under the 1940 Act automatically qualifies as an investment company. The ASU is effective for interim and annual reporting periods beginning after December 15, 2013. The Fund is currently reviewing the requirements and believes the adoption of this ASU will not have a material impact on its financial statements.
15. 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 Notes | Selected Portfolio | |||
| BOFA - Bank of America Corp. | EUR - Euro | EBITDA - Earnings before interest, taxes, depreciation and amortization | ADR - American Depositary Receipt | |||
| BZWS - Barclays Bank PLC | GBP - British Pound | FHLB - Federal Home Loan Bank | ||||
DBAB - Deutsche Bank AG | USD - United States Dollar | EV - Enterprise value | FRN - Floating Rate Note | |||
FBCO - Credit Suisse Group AG | IDR - International Depositary Receipt | |||||
| HAND - Svenska Handelsbanken | ||||||
| HSBC - HSBC Bank USA, N.A. | ||||||
| SCBT - Standard Chartered Bank |
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MUTUAL SHARES SECURITIES FUND
This semiannual report for Mutual Shares Securities Fund covers the period ended June 30, 2013.
Performance Summary as of 6/30/13
Mutual Shares Securities Fund – Class 1 delivered a +12.66% total return for the six-month period ended 6/30/13.
Performance reflects the Fund’s Class 1 operating expenses, but does not include any contract fees, expenses or sales charges. If they had been included, performance would be lower. These charges and deductions, particularly for variable life policies, can have a significant effect on contract values and insurance benefits. See the contract prospectus for a complete description of these expenses, including sales charges.
Mutual Shares Securities Fund – Class 1
Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares.
Current performance may differ from figures shown.
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Fund Goals and Main Investments: Mutual Shares Securities Fund seeks capital appreciation, with income as a secondary goal. Under normal market conditions, the Fund invests primarily in U.S. and foreign equity securities that the investment manager believes are undervalued.
Performance Overview
You can find the Fund’s six-month total return in the Performance Summary. For comparison, the Fund’s benchmark, the Standard & Poor’s® 500 Index (S&P 500®), delivered a +13.82% total return for the period under review.1
Economic and Market Overview
Modest U.S. economic growth, as measured by gross domestic product, characterized the six-month period ended June 30, 2013. Increasing job creation helped lower the unemployment rate and absorb new job seekers, and consumer spending remained strong. Accelerating new and existing home sale accompanied record-low mortgage rates, affordable housing prices, low new-home inventories and a six-year low in U.S. foreclosures. Manufacturing, a mainstay of economic productivity, expanded every month except May.
Budgetary agreement between Congress and the President on January 1 preserved lower income tax rates for most U.S. households, but concern remained about how the expired payroll tax cut, far-reaching federal spending cuts, and future federal debt ceiling negotiations could affect the U.S. economic recovery. Washington’s lack of consensus on proposed expenditure reductions resulted in further across-the-board federal spending cuts starting in March. In May, Federal Reserve Board (Fed) Chairman Ben Bernanke said the Fed could gradually wind down its monthly purchases of mortgage-backed securities and Treasuries, assuming continued U.S. economic improvement. He clarified in June that such action could begin in the near future.
Amid these fiscal and monetary developments, a slow and steady U.S. recovery continued. U.S. stocks generated healthy returns as the S&P 500 and Dow Jones Industrial Average reached all-time highs during the period, even though Chairman Bernanke’s statements sparked volatility.2 Rising corporate profits and generally favorable economic data bolstered investor confidence, but caution remained about the
1. Source: © 2013 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. Please see Index Descriptions following the Fund Summaries.
Fund Risks: All investments involve risks, including possible loss of principal. Value securities may not increase in price as anticipated or may decline further in value. The Fund’s investments in foreign securities involve special risks including currency fluctuations, and economic and political uncertainties. The Fund may also invest in companies engaged in mergers, reorganizations or liquidations, which involve special risks as pending deals may not be completed on time or on favorable terms, as well as lower rated bonds, which entail higher credit risk. The Fund is actively managed but there is no guarantee that the manager’s investment decisions will produce the desired results. The Fund’s prospectus also includes a description of the main investment risks.
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extent to which positive business and market results were dependent on continuation of the Fed’s accommodative monetary policy.
The global economic recovery was mixed during the first half of 2013. Emerging markets continued to lead the recovery, although they showed signs of slowing. Growth in the U.S. and eurozone continued to be slow by the standards of previous recoveries. As fears eased surrounding the issues of sovereign debt in Europe, the possibility of another recession in the U.S., and a potential “hard landing” in China, financial market performance was positive. Improving sentiment, relatively strong fundamentals, and continued provision of global liquidity supported risk assets as equity markets performed well and bond prices generally declined. Policymakers in the largest developed economies increased their already unprecedented efforts to supply liquidity. Actions elsewhere in the world were mixed, with some policymakers less willing to reverse previous tightening efforts in response to the external environment.
Global developed and emerging market stocks, as measured by the MSCI All Country World Index, advanced during the first six months of 2013. Although emerging markets declined, the losses were more than offset by developed market gains. Regional performance was more consistent with local economic trends, although periodic volatility reflected the global economy’s fragility. Given the rise in rates near period-end, longer duration U.S. Treasury and emerging market bond prices experienced meaningful price declines. In the second quarter, gold, traditionally a safe haven, posted its worst quarterly performance since 1974 as inflation expectations remained subdued and global commodities stayed under pressure. Investor sentiment improved in the last week of the period, and global stock prices rebounded from period lows after China’s central bank intervened to calm the country’s interbank market, positive economic reports helped stabilize Japanese government bond yields, and several Fed members reassured investors that the Fed’s accommodative monetary policy would continue.
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
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assessment of the companies’ intrinsic or business value. We also look for asset rich companies whose shares may be trading at depressed levels due to concerns over short-term earnings disappointments, litigation, management strategy or other perceived negatives. While the vast majority of our undervalued equity investments are made in publicly traded companies globally, we may invest occasionally in privately held companies as well.
We complement this more traditional investment strategy with two others. One is distressed investing, which is complex and can take many forms. The most common distressed investment the Fund undertakes is the purchase of financially troubled or bankrupt companies’ debt at a substantial discount to face value. After the financially distressed company is reorganized, often in bankruptcy court, the old debt is typically replaced with new securities issued by the financially stronger company.
The other piece of our investment strategy is participating in arbitrage situations, another highly specialized field. When companies announce proposed mergers or takeovers, commonly referred to as “deals,” the target company may trade at a discount to the bid it ultimately accepts. One form of arbitrage involves purchasing the target company’s stock when it is trading below the value we believe it would receive in a deal. In keeping with our commitment to a relatively conservative investment approach, we typically focus our arbitrage efforts on announced deals, and eschew rumored deals or other situations we consider relatively risky.
In addition, it is our practice to hedge the Fund’s currency exposure when we deem it advantageous for our shareholders.
Manager’s Discussion
In an environment of generally rising U.S. equity prices, many Fund holdings increased in value during the six-month period. Top contributors included software company Microsoft, insurer American International Group (AIG) and retailer Kroger.
Microsoft shares benefited from improved investor sentiment. Following the launch of the Windows 8 operating system in the fall of 2012 and a deceleration in PC sales, skepticism about Microsoft’s future peaked. In April 2013, the company reported quarterly earnings that modestly beat expectations, generally reassuring the market of its prospects. Shares appreciated as the market apparently returned to viewing Microsoft as a stable business with a reasonable future.
What is meant by “hedge”?
To hedge a position is to seek to reduce the risk of adverse price movements in an asset. Normally, a hedge is implemented as an offsetting position in a related security, such as a currency forward contract.
What is a currency forward contract?
A currency forward contract, also called a “currency forward,” is an agreement between the Fund and a counterparty to buy or sell a foreign currency at a specific exchange rate on a future date.
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AIG announced quarterly earnings results that topped consensus estimates because of outperformance in all segments and a general improvement in expense management. In addition, Standard & Poor’s upgraded its credit rating for AIG’s property-casualty insurance business. In our view at period-end, AIG stock remained attractively priced despite recent strength.
During the first half of 2013, Kroger’s earnings performance continued to exceed market expectations. In the second quarter, the Cincinnati-based grocery retailer also raised full-year guidance and reaffirmed expectations of solid long-term earnings growth. Nearly a decade ago, management embarked on a strategy to enhance the company’s relevance to consumers by offering more competitive pricing, cleaner stores, improved service, higher quality fresh foods and offerings tailored to local markets. In our view, this strategy resonated with customers and allowed Kroger to increase market share, which is an important metric for retailers. Kroger remains, in our view, one of the strongest food and staples retailers. We continued to favor Kroger shares because in our assessment they could appreciate further as management continues to contain costs, grow profits and cash flow, and return capital to investors through stock buybacks and rising dividends.
During the period under review, some of the Fund’s investments negatively affected performance. These included U.S. diversified energy producer CONSOL Energy, German engineering and steel conglomerate ThyssenKrupp and U.K.-based mining firm Anglo American.
CONSOL Energy is a low-cost producer of thermal and metallurgical coal, as well as natural gas. Coal companies remained under pressure because of concerns regarding metallurgical prices and potentially diminished Chinese demand for the commodity. Share prices were also hurt by the Obama administration’s climate change proposals. We believe that despite some near-term headwinds, CONSOL has the ability to survive the current pricing environment.
For ThyssenKrupp, European economic weakness, slow progress on the sale of the Steel Americas operations and speculation that the company would need to raise additional capital pressured shares. We were disappointed by the announcement that management would not rule out raising capital this year to address the company’s low book value of equity and customer concerns of corporate risk. Nonetheless, at period-end we continued to see upside potential in the stock given our assessment of ThyssenKrupp’s strong set of assets, ability to generate
Top 10 Equity Holdings
Mutual Shares Securities Fund
6/30/13
| Company Sector/Industry, Country | % of Total Net Assets | |||
| Merck & Co. Inc. | 2.9% | |||
| Pharmaceuticals, U.S. | ||||
| Microsoft Corp. | 2.7% | |||
| Software, U.S. | ||||
| American International Group Inc. | 2.1% | |||
| Insurance, U.S. | ||||
| CVS Caremark Corp. | 2.1% | |||
| Food & Staples Retailing, U.S. | ||||
| Twenty-First Century Fox Inc., B | 2.0% | |||
| Media, U.S. | ||||
| Medtronic Inc. | 1.9% | |||
| Health Care Equipment & Supplies, U.S. | ||||
| Apple Inc. | 1.8% | |||
| Computers & Peripherals, U.S. | ||||
| PNC Financial Services Group Inc. | 1.8% | |||
| Commercial Banks, U.S. | ||||
| Vodafone Group PLC | 1.8% | |||
| Wireless Telecommunication Services, U.K. | ||||
| Cigna Corp. | 1.8% | |||
| Health Care Providers & Services, U.S. | ||||
The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund’s Statement of Investments.
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strong free cash flow, manageable debt maturity ladder and value-creating restructuring plan.
A new holding, Anglo American stock was negatively affected by a sell-off in commodities. In addition, shares came under pressure arising from uncertainty associated with possible restructuring actions. However, Anglo American recently appointed a new chief executive officer (CEO) tasked with a mandate to improve operations and capital discipline. The CEO was expected to roll out a plan for the company within the next several months. We initiated an investment based on the belief that recent declines led shares to trade below our assessment of their intrinsic value.
During the period, the Fund held currency forwards and futures to somewhat hedge the currency risk of the portfolio’s non-U.S. dollar investments. The hedges had a positive impact on the Fund’s performance.
Thank you for your participation in Mutual Shares Securities Fund. We look forward to serving your future investment needs.
The foregoing information reflects our analysis, opinions and portfolio holdings as of June 30, 2013, 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 Sectors/Industries
Mutual Shares Securities Fund
Based on Equity Securities
6/30/13
| % of Total Net Assets | ||||
| Oil, Gas & Consumable Fuels | 8.4% | |||
| Insurance | 7.9% | |||
| Media | 6.2% | |||
| Tobacco | 5.8% | |||
| Pharmaceuticals | 5.6% | |||
| Food & Staples Retailing | 5.2% | |||
| Commercial Banks | 4.8% | |||
| Computers & Peripherals | 3.6% | |||
| Software | 3.6% | |||
| Diversified Financial Services | 3.3% | |||
What is a futures contract?
A futures contract, also called a “future,” is an agreement between the Fund and a counterparty made through a U.S. or foreign futures exchange to buy or sell a security at a specific price on a future date.
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Fund Expenses
As an investor in a variable insurance contract (Contract) that indirectly provides for investment in an underlying mutual fund, you can incur transaction and/or ongoing expenses at both the Fund level and the Contract level.
| • | Transaction expenses can include sales charges (loads) on purchases, surrender fees, transfer fees and premium taxes. |
| • | Ongoing expenses can include management fees, distribution and service (12b-1) fees, contract fees, annual maintenance fees, mortality and expense risk fees and other fees and expenses. All mutual funds and Contracts have some types of ongoing expenses. |
The expenses shown in the table are meant to highlight ongoing expenses at the Fund level only and do not include ongoing expenses at the Contract level, or transaction expenses at either the Fund or Contract levels. While the Fund does not have transaction expenses, if the transaction and ongoing expenses at the Contract level were included, the expenses shown below would be higher. You should consult your Contract prospectus or disclosure document for more information.
The table shows Fund-level ongoing expenses and can help you understand these expenses and compare them with those of other mutual funds offered through the Contract. The table assumes a $1,000 investment held for the six months indicated. Please refer to the Fund prospectus for additional information on operating expenses.
Actual Fund Expenses
The first line (Actual) of the table provides actual account values and expenses. The “Ending Account Value” is derived from the Fund’s actual return, which includes the effect of ongoing Fund expenses, but does not include the effect of ongoing Contract expenses.
You can estimate the Fund-level expenses you incurred during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:
| 1. | Divide your account value by $1,000. |
If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6.
| 2. | Multiply the result by the number under the heading “Fund-Level Expenses Incurred During Period.” |
If Fund-Level Expenses Incurred During Period were $7.50, then 8.6 x $7.50 = $64.50.
In this illustration, the estimated expenses incurred this period at the Fund level are $64.50.
Mutual Shares Securities Fund – Class 1
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Hypothetical Example for Comparison with Other Mutual Funds
Information in the second line (Hypothetical) of the table can help you compare ongoing expenses of the Fund with those of other mutual funds offered through the Contract. This information may not be used to estimate the actual ending account balance or expenses you incurred during the period. The hypothetical “Ending Account Value” is based on the Fund’s actual expense ratio and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Fund-Level Expenses Incurred During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds offered through a Contract.
| Class 1 | Beginning Account Value 1/1/13 | Ending Account Value 6/30/13 | Fund-Level Expenses Incurred During Period* 1/1/13–6/30/13 | |||||||||
Actual | $ | 1,000 | $ | 1,126.60 | $ | 3.74 | ||||||
Hypothetical (5% return | $ | 1,000 | $ | 1,021.27 | $ | 3.56 | ||||||
*Expenses are calculated using the most recent six-month annualized expense ratio for the Fund’s Class 1 shares (0.71%), 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 Shares Securities Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 1 | 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||||||
| ||||||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 17.45 | $ | 15.57 | $ | 16.14 | $ | 14.75 | $ | 11.92 | $ | 20.42 | ||||||||||||
|
| |||||||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.20 | 0.35 | 0.38 | c | 0.40 | d | 0.23 | e | 0.34 | |||||||||||||||
Net realized and unrealized gains (losses) | 2.01 | 1.92 | (0.53 | ) | 1.27 | 2.89 | (7.54 | ) | ||||||||||||||||
|
| |||||||||||||||||||||||
Total from investment operations | 2.21 | 2.27 | (0.15 | ) | 1.67 | 3.12 | (7.20 | ) | ||||||||||||||||
|
| |||||||||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income | — | (0.39 | ) | (0.42 | ) | (0.28 | ) | (0.29 | ) | (0.57 | ) | |||||||||||||
Net realized gains | — | — | — | — | — | (0.73 | ) | |||||||||||||||||
|
| |||||||||||||||||||||||
Total distributions | — | (0.39 | ) | (0.42 | ) | (0.28 | ) | (0.29 | ) | (1.30 | ) | |||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ | 19.66 | $ | 17.45 | $ | 15.57 | $ | 16.14 | $ | 14.75 | $ | 11.92 | ||||||||||||
|
| |||||||||||||||||||||||
Total returnf | 12.66% | 14.61% | (0.79)% | 11.47% | 26.35% | (36.93)% | ||||||||||||||||||
Ratios to average net assetsg | ||||||||||||||||||||||||
Expenses | 0.71% | h | 0.71% | i | 0.73% | h,i | 0.74% | h,i | 0.78% | h,i | 0.73% | h,i | ||||||||||||
Expenses incurred in connection with securities sold short | —% | —% | j | —% | j | 0.02% | 0.06% | —% | j | |||||||||||||||
Net investment income | 2.12% | 2.06% | 2.28% | c | 2.66% | d | 1.85% | e | 2.16% | |||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 481,068 | $ | 449,343 | $ | 1,170,781 | $ | 1,301,520 | $ | 767,553 | $ | 319,703 | ||||||||||||
Portfolio turnover rate | 14.02% | 34.07% | k | 41.02% | 32.05% | 49.33% | 44.11% | |||||||||||||||||
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 2.14%.
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 realestate 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.
hBenefit of expense reduction rounds to less than 0.01%.
iIncludes dividend expense on securities sold short and security borrowing fees, if any. See below for the ratios of such expenses to average net assets for the periods presented. See Note 1(e).
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
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Mutual Shares Securities Fund
| Six Months Ended June 30, 2013 (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 2 | 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||||||
| ||||||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 17.23 | $ | 15.38 | $ | 15.95 | $ | 14.58 | $ | 11.78 | $ | 20.19 | ||||||||||||
|
| |||||||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.17 | 0.30 | 0.32 | c | 0.36 | d | 0.20 | e | 0.32 | |||||||||||||||
Net realized and unrealized gains (losses) | 1.99 | 1.90 | (0.51 | ) | 1.25 | 2.85 | (7.49 | ) | ||||||||||||||||
|
| |||||||||||||||||||||||
Total from investment operations | 2.16 | 2.20 | (0.19 | ) | 1.61 | 3.05 | (7.17 | ) | ||||||||||||||||
|
| |||||||||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income | — | (0.35 | ) | (0.38 | ) | (0.24 | ) | (0.25 | ) | (0.51 | ) | |||||||||||||
Net realized gains | — | — | — | — | — | (0.73 | ) | |||||||||||||||||
|
| |||||||||||||||||||||||
Total distributions | — | (0.35 | ) | (0.38 | ) | (0.24 | ) | (0.25 | ) | (1.24 | ) | |||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ | 19.39 | $ | 17.23 | $ | 15.38 | $ | 15.95 | $ | 14.58 | $ | 11.78 | ||||||||||||
|
| |||||||||||||||||||||||
Total returnf | 12.54% | 14.24% | (1.04)% | 11.19% | 26.05% | (37.11)% | ||||||||||||||||||
Ratios to average net assetsg | ||||||||||||||||||||||||
Expenses | 0.96% | h | 0.96% | i | 0.98% | h,i | 0.99% | h,i | 1.03% | h,i | 0.98% | h,i | ||||||||||||
Expenses incurred in connection with securities sold short | —% | —% | j | —% | j | 0.02% | 0.06% | —% | j | |||||||||||||||
Net investment income | 1.87% | 1.81% | 2.03% | c | 2.41% | d | 1.60% | e | 1.91% | |||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 4,286,383 | $ | 4,069,803 | $ | 3,913,220 | $ | 4,188,821 | $ | 3,953,435 | $ | 3,303,761 | ||||||||||||
Portfolio turnover rate | 14.02% | 34.07% | k | 41.02% | 32.05% | 49.33% | 44.11% | |||||||||||||||||
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 1.89%.
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 1.68%.
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.
hBenefit of expense reduction rounds to less than 0.01%.
iIncludes dividend expense on securities sold short and security borrowing fees, if any. See below for the ratios of such expenses to average net assets for the periods presented. See Note 1(e).
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
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Mutual Shares Securities Fund
| Six Months Ended June 30, 2013 (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 4 | 2012 | 2011 | 2010 | 2009 | 2008a | |||||||||||||||||||
| ||||||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 17.31 | $ | 15.45 | $ | 16.03 | $ | 14.66 | $ | 11.88 | $ | 18.91 | ||||||||||||
|
| |||||||||||||||||||||||
Income from investment operationsb: | ||||||||||||||||||||||||
Net investment incomec | 0.17 | 0.28 | 0.30 | d | 0.35 | e | 0.19 | f | 0.17 | |||||||||||||||
Net realized and unrealized gains (losses) | 1.99 | 1.91 | (0.51 | ) | 1.26 | 2.87 | (5.90 | ) | ||||||||||||||||
|
| |||||||||||||||||||||||
Total from investment operations | 2.16 | 2.19 | (0.21 | ) | 1.61 | 3.06 | (5.73 | ) | ||||||||||||||||
|
| |||||||||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income | — | (0.33 | ) | (0.37 | ) | (0.24 | ) | (0.28 | ) | (0.57 | ) | |||||||||||||
Net realized gains | — | — | — | — | — | (0.73 | ) | |||||||||||||||||
|
| |||||||||||||||||||||||
Total distributions | — | (0.33 | ) | (0.37 | ) | (0.24 | ) | (0.28 | ) | (1.30 | ) | |||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ | 19.47 | $ | 17.31 | $ | 15.45 | $ | 16.03 | $ | 14.66 | $ | 11.88 | ||||||||||||
|
| |||||||||||||||||||||||
Total returng | 12.48% | 14.20% | (1.12)% | 11.06% | 25.94% | (32.12)% | ||||||||||||||||||
Ratios to average net assetsh | ||||||||||||||||||||||||
Expenses | 1.06% | i | 1.06% | j | 1.08% | i,j | 1.09% | i,j | 1.13% | i,j | 1.08% | i,j | ||||||||||||
Expenses incurred in connection with securities sold short | —% | —% | k | —% | k | 0.02% | 0.06% | —% | k | |||||||||||||||
Net investment income | 1.77% | 1.71% | 1.93% | d | 2.31% | e | 1.50% | f | 1.81% | |||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 177,894 | $ | 165,015 | $ | 162,049 | $ | 167,274 | $ | 141,446 | $ | 57,266 | ||||||||||||
Portfolio turnover rate | 14.02% | 34.07% | l | 41.02% | 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.
d Net 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 1.79%.
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 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 1.58%.
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.
iBenefit of expense reduction rounds to less than 0.01%.
jIncludes dividend expense on securities sold short and security borrowing fees, if any. See below for the ratios of such expenses to average net assets for the periods presented. See Note 1(e).
kRounds to less than 0.01%.
lExcludes 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-11
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited)
| Mutual Shares Securities Fund | Country | Shares | Value | |||||||
Common Stocks and Other Equity Interests 85.9% | ||||||||||
Aerospace & Defense 1.4% | ||||||||||
Huntington Ingalls Industries Inc. | United States | 693,088 | $ | 39,145,610 | ||||||
Raytheon Co. | United States | 430,491 | 28,464,065 | |||||||
|
| |||||||||
| 67,609,675 | ||||||||||
|
| |||||||||
Auto Components 0.1% | ||||||||||
a,b International Automotive Components Group Brazil LLC | Brazil | 1,730,515 | 379,935 | |||||||
a,b,c International Automotive Components Group North America, LLC | United States | 15,382,424 | 6,904,401 | |||||||
|
| |||||||||
| 7,284,336 | ||||||||||
|
| |||||||||
Automobiles 1.1% | ||||||||||
a General Motors Co. | United States | 1,593,240 | 53,070,824 | |||||||
|
| |||||||||
Beverages 2.0% | ||||||||||
Coca-Cola Enterprises Inc. | United Kingdom | 956,621 | 33,634,794 | |||||||
Dr. Pepper Snapple Group Inc. | United States | 767,552 | 35,253,663 | |||||||
Pernod Ricard SA | France | 259,450 | 28,769,778 | |||||||
|
| |||||||||
| 97,658,235 | ||||||||||
|
| |||||||||
Capital Markets 1.0% | ||||||||||
Morgan Stanley | United States | 1,966,328 | 48,037,393 | |||||||
|
| |||||||||
Chemicals 0.4% | ||||||||||
a,d,e Dow Corning Corp., Contingent Distribution | United States | 100,000 | — | |||||||
Linde AG | Germany | 97,564 | 18,204,615 | |||||||
|
| |||||||||
| 18,204,615 | ||||||||||
|
| |||||||||
Commercial Banks 4.8% | ||||||||||
a,f Bond Street Holdings LLC, A, 144A | United States | 493,723 | 7,158,984 | |||||||
a CIT Group Inc. | United States | 673,253 | 31,393,787 | |||||||
Columbia Banking System Inc. | United States | 163,162 | 3,884,887 | |||||||
b First Southern Bancorp Inc. | United States | 140,952 | 699,376 | |||||||
Guaranty Bancorp | United States | 209,583 | 2,378,767 | |||||||
KB Financial Group Inc. | South Korea | 841,369 | 25,188,043 | |||||||
PNC Financial Services Group Inc. | United States | 1,206,969 | 88,012,179 | |||||||
Societe Generale | France | 647,670 | 22,256,246 | |||||||
State Bank Financial Corp. | United States | 352,200 | 5,293,566 | |||||||
SunTrust Banks Inc. | United States | 640,267 | 20,213,229 | |||||||
Wells Fargo & Co. | United States | 774,140 | 31,948,758 | |||||||
|
| |||||||||
| 238,427,822 | ||||||||||
|
| |||||||||
Communications Equipment 1.4% | ||||||||||
Cisco Systems Inc. | United States | 2,819,990 | 68,553,957 | |||||||
|
| |||||||||
Computers & Peripherals 3.6% | ||||||||||
Apple Inc. | United States | 228,130 | 90,357,731 | |||||||
Dell Inc. | United States | 3,033,038 | 40,491,057 | |||||||
Hewlett-Packard Co. | United States | 1,962,600 | 48,672,480 | |||||||
|
| |||||||||
| 179,521,268 | ||||||||||
|
| |||||||||
Consumer Finance 0.0%† | ||||||||||
a Comdisco Holding Co. Inc. | United States | 180 | 891 | |||||||
|
| |||||||||
Containers & Packaging 0.7% | ||||||||||
MeadWestvaco Corp. | United States | 1,049,099 | 35,784,767 | |||||||
|
| |||||||||
Diversified Financial Services 3.3% | ||||||||||
Citigroup Inc. | United States | 1,170,799 | 56,163,228 | |||||||
a ING Groep NV, IDR | Netherlands | 3,729,845 | 33,984,668 | |||||||
MS-12
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Mutual Shares Securities Fund | Country | Shares | Value | |||||||
Common Stocks and Other Equity Interests (continued) | ||||||||||
Diversified Financial Services (continued) | ||||||||||
JPMorgan Chase & Co. | United States | 720,920 | $ | 38,057,367 | ||||||
NYSE Euronext | United States | 802,820 | 33,236,748 | |||||||
|
| |||||||||
| 161,442,011 | ||||||||||
|
| |||||||||
Diversified Telecommunication Services 0.0%† | ||||||||||
a,d,e Global Crossing Holdings Ltd., Contingent Distribution | United States | 9,005,048 | — | |||||||
a,d,e Marconi Corp., Contingent Distribution | United Kingdom | 9,945,700 | — | |||||||
|
| |||||||||
| — | ||||||||||
|
| |||||||||
Electric Utilities 1.0% | ||||||||||
Entergy Corp. | United States | 291,000 | 20,276,880 | |||||||
Exelon Corp. | United States | 1,008,329 | 31,137,200 | |||||||
|
| |||||||||
| 51,414,080 | ||||||||||
|
| |||||||||
Electronic Equipment, Instruments & Components 0.9% | ||||||||||
TE Connectivity Ltd. | United States | 972,972 | 44,309,145 | |||||||
|
| |||||||||
Energy Equipment & Services 2.5% | ||||||||||
Baker Hughes Inc. | United States | 1,146,768 | 52,900,408 | |||||||
Ensco PLC, A | United States | 364,874 | 21,206,477 | |||||||
Transocean Ltd. | United States | 1,068,057 | 51,213,333 | |||||||
|
| |||||||||
| 125,320,218 | ||||||||||
|
| |||||||||
Food & Staples Retailing 5.2% | ||||||||||
CVS Caremark Corp. | United States | 1,789,193 | 102,306,056 | |||||||
The Kroger Co. | United States | 2,331,072 | 80,515,227 | |||||||
Wal-Mart Stores Inc. | United States | 340,432 | 25,358,779 | |||||||
Walgreen Co. | United States | 1,144,345 | 50,580,049 | |||||||
|
| |||||||||
| 258,760,111 | ||||||||||
|
| |||||||||
Health Care Equipment & Supplies 2.3% | ||||||||||
Medtronic Inc. | United States | 1,849,472 | 95,192,324 | |||||||
Stryker Corp. | United States | 298,778 | 19,324,961 | |||||||
|
| |||||||||
| 114,517,285 | ||||||||||
|
| |||||||||
Health Care Providers & Services 2.7% | ||||||||||
Cigna Corp. | United States | 1,210,344 | 87,737,837 | |||||||
UnitedHealth Group Inc. | United States | 57,328 | 3,753,837 | |||||||
WellPoint Inc. | United States | 533,668 | 43,675,389 | |||||||
|
| |||||||||
| 135,167,063 | ||||||||||
|
| |||||||||
Independent Power Producers & Energy Traders 0.9% | ||||||||||
NRG Energy Inc. | United States | 1,627,250 | 43,447,575 | |||||||
|
| |||||||||
Insurance 7.9% | ||||||||||
ACE Ltd. | United States | 826,915 | 73,992,354 | |||||||
a Alleghany Corp. | United States | 131,368 | 50,354,668 | |||||||
a American International Group Inc. | United States | 2,327,076 | 104,020,297 | |||||||
CNO Financial Group Inc. | United States | 784,849 | 10,171,643 | |||||||
MetLife Inc. | United States | 1,253,183 | 57,345,654 | |||||||
a,b Olympus Re Holdings Ltd. | United States | 16,280 | — | |||||||
White Mountains Insurance Group Ltd. | United States | 114,635 | 65,908,247 | |||||||
Zurich Insurance Group AG | Switzerland | 120,520 | 31,250,888 | |||||||
|
| |||||||||
| 393,043,751 | ||||||||||
|
| |||||||||
MS-13
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Mutual Shares Securities Fund | Country | Shares | Value | |||||||
Common Stocks and Other Equity Interests (continued) | ||||||||||
Internet Software & Services 0.6% | ||||||||||
a Google Inc., A | United States | 31,090 | $ | 27,370,703 | ||||||
|
| |||||||||
Machinery 2.2% | ||||||||||
Caterpillar Inc. | United States | 332,064 | 27,391,959 | |||||||
a Federal Signal Corp. | United States | 757,221 | 6,625,684 | |||||||
Fiat Industrial SpA | Italy | 2,060,021 | 22,966,416 | |||||||
a Oshkosh Corp. | United States | 725,250 | 27,537,743 | |||||||
Stanley Black & Decker Inc. | United States | 321,044 | 24,816,701 | |||||||
|
| |||||||||
| 109,338,503 | ||||||||||
|
| |||||||||
Marine 1.0% | ||||||||||
A.P. Moller-Maersk AS, B | Denmark | 6,986 | 50,035,417 | |||||||
|
| |||||||||
Media 6.2% | ||||||||||
British Sky Broadcasting Group PLC | United Kingdom | 3,655,724 | 44,061,480 | |||||||
Comcast Corp., Special A | United States | 278,448 | 11,046,032 | |||||||
Reed Elsevier PLC | United Kingdom | 5,958,430 | 67,714,890 | |||||||
Time Warner Cable Inc. | United States | 533,836 | 60,045,873 | |||||||
a Tribune Co., A | United States | 303,318 | 17,258,794 | |||||||
a Tribune Co., B | United States | 185,976 | 10,554,138 | |||||||
Twenty-First Century Fox Inc., B | United States | 2,989,599 | 98,118,639 | |||||||
|
| |||||||||
| 308,799,846 | ||||||||||
|
| |||||||||
Metals & Mining 2.4% | ||||||||||
Anglo American PLC | United Kingdom | 1,480,250 | 28,511,934 | |||||||
Freeport-McMoRan Copper & Gold Inc., B | United States | 2,279,246 | 62,929,982 | |||||||
a ThyssenKrupp AG | Germany | 1,353,984 | 26,603,627 | |||||||
|
| |||||||||
| 118,045,543 | ||||||||||
|
| |||||||||
Multi-Utilities 0.5% | ||||||||||
GDF Suez | France | 1,153,081 | 22,581,158 | |||||||
|
| |||||||||
Multiline Retail 0.8% | ||||||||||
Kohl’s Corp. | United States | 734,130 | 37,080,906 | |||||||
|
| |||||||||
Office Electronics 1.2% | ||||||||||
Xerox Corp. | United States | 6,583,414 | 59,711,565 | |||||||
|
| |||||||||
Oil, Gas & Consumable Fuels 8.4% | ||||||||||
Apache Corp. | United States | 888,482 | 74,481,446 | |||||||
BG Group PLC | United Kingdom | 2,157,277 | 36,705,012 | |||||||
BP PLC | United Kingdom | 5,472,712 | 37,901,656 | |||||||
CONSOL Energy Inc. | United States | 1,558,530 | 42,236,163 | |||||||
Marathon Oil Corp. | United States | 2,446,808 | 84,610,621 | |||||||
Murphy Oil Corp. | United States | 543,830 | 33,113,809 | |||||||
Petroleo Brasileiro SA, ADR | Brazil | 1,541,270 | 20,683,843 | |||||||
Royal Dutch Shell PLC, A | United Kingdom | 2,388,618 | 76,313,952 | |||||||
a WPX Energy Inc. | United States | 378,074 | 7,160,722 | |||||||
|
| |||||||||
| 413,207,224 | ||||||||||
|
| |||||||||
Paper & Forest Products 1.4% | ||||||||||
Domtar Corp. | United States | 194,469 | 12,932,188 | |||||||
International Paper Co. | United States | 1,275,776 | 56,529,635 | |||||||
|
| |||||||||
| 69,461,823 | ||||||||||
|
| |||||||||
Personal Products 0.8% | ||||||||||
Avon Products Inc. | United States | 1,851,105 | 38,928,738 | |||||||
|
| |||||||||
MS-14
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Mutual Shares Securities Fund | Country | Shares | Value | |||||||
Common Stocks and Other Equity Interests (continued) | ||||||||||
Pharmaceuticals 5.6% | ||||||||||
Eli Lilly & Co. | United States | 402,228 | $ | 19,757,439 | ||||||
a Hospira Inc. | United States | 587,508 | 22,507,431 | |||||||
Merck & Co. Inc. | United States | 3,087,428 | 143,411,031 | |||||||
Pfizer Inc. | United States | 1,246,361 | 34,910,572 | |||||||
Teva Pharmaceutical Industries Ltd., ADR | Israel | 1,322,750 | 51,851,800 | |||||||
Zoetis Inc. | United States | 169,436 | 5,233,878 | |||||||
|
| |||||||||
| 277,672,151 | ||||||||||
|
| |||||||||
Real Estate Investment Trusts (REITs) 0.2% | ||||||||||
Alexander’s Inc. | United States | 40,126 | 11,785,408 | |||||||
|
| |||||||||
Real Estate Management & Development 0.2% | ||||||||||
e Canary Wharf Group PLC | United Kingdom | 1,535,898 | 6,553,519 | |||||||
a Forestar Group Inc. | United States | 261,053 | 5,236,723 | |||||||
|
| |||||||||
| 11,790,242 | ||||||||||
|
| |||||||||
Software 3.6% | ||||||||||
Microsoft Corp. | United States | 3,808,997 | 131,524,666 | |||||||
Symantec Corp. | United States | 2,023,510 | 45,468,270 | |||||||
|
| |||||||||
| 176,992,936 | ||||||||||
|
| |||||||||
Tobacco 5.8% | ||||||||||
Altria Group Inc. | United States | 1,384,398 | 48,440,086 | |||||||
British American Tobacco PLC | United Kingdom | 1,711,147 | 87,681,297 | |||||||
Imperial Tobacco Group PLC | United Kingdom | 2,019,917 | 70,056,754 | |||||||
Lorillard Inc. | United States | 1,129,533 | 49,338,001 | |||||||
Philip Morris International Inc. | United States | 344,790 | 29,865,710 | |||||||
|
| |||||||||
| 285,381,848 | ||||||||||
|
| |||||||||
Wireless Telecommunication Services 1.8% | ||||||||||
Vodafone Group PLC | United Kingdom | 30,766,277 | 87,920,092 | |||||||
|
| |||||||||
Total Common Stocks and Other Equity Interests (Cost $3,382,357,165) | 4,247,679,125 | |||||||||
|
| |||||||||
Convertible Preferred Stocks (Cost $241,000) 0.0%† | ||||||||||
Commercial Banks 0.0%† | ||||||||||
b First Southern Bancorp Inc., cvt. pfd., C | United States | 241 | 453,396 | |||||||
|
| |||||||||
| Principal Amount* | ||||||||||
Corporate Bonds, Notes and Senior Floating Rate Interests 5.2% | ||||||||||
Avaya Inc., | ||||||||||
f senior note, 144A, 10.50%, 3/01/21 | United States | 18,403,000 | 14,032,287 | |||||||
f senior secured note, 144A, 7.00%, 4/01/19 | United States | 11,665,000 | 10,585,988 | |||||||
g,h,i Tranche B-5 Term Loan, 8.00%, 3/31/18 | United States | 4,831,000 | 4,538,121 | |||||||
g,h,i Tranche B3 Term Loan, 4.773%, 10/26/17 | United States | 14,338,000 | 12,589,739 | |||||||
g,h,i Caesars Entertainment Operating Co. Inc., Senior Tranche Term Loan, | ||||||||||
B5, first lien, 4.443%, 1/28/18 | United States | 1,369,000 | 1,182,474 | |||||||
B6, first lien, 5.443%, 1/28/18 | United States | 8,670,000 | 7,680,536 | |||||||
g,h Cengage Learning Acquisitions Inc., FRN, 2.70%, 7/03/14 | United States | 19,273,704 | 14,455,278 | |||||||
Clear Channel Communications Inc., | ||||||||||
f senior secured note, first lien, 144A, 9.00%, 12/15/19 | United States | 26,449,000 | 25,787,775 | |||||||
g,i Tranche B Term Loan, 3.845%, 1/29/16 | United States | 10,456,413 | 9,588,530 | |||||||
g,i Tranche C Term Loan, 3.845%, 1/29/16 | United States | 1,323,817 | 1,198,054 | |||||||
g,i Tranche D Term Loan, 6.945%, 1/30/19 | United States | 34,746,619 | 31,760,599 | |||||||
MS-15
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Mutual Shares Securities Fund | Country | Principal Amount* | Value | |||||||
Corporate Bonds, Notes and Senior Floating Rate Interests (continued) | ||||||||||
Energy Future Intermediate Holding Co. LLC/EFIH Finance Inc., second lien, 11.00%, 10/01/21 | United States | 5,374,000 | $ | 5,790,485 | ||||||
g Hilton Worldwide Inc., FRN, | ||||||||||
Mezzanine F Loan, 4.443%, 11/12/15 | United States | 4,976,363 | 4,901,718 | |||||||
Mezzanine G Loan, 4.693%, 11/12/15 | United States | 8,957,090 | 8,822,734 | |||||||
g,i Texas Competitive Electric Holdings Co. LLC, Extended Term Loan, 4.693%, 10/10/17 | United States | 90,618,405 | 63,704,739 | |||||||
Texas Competitive Electric Holdings Co. LLC/Texas Competitive Electric Holdings Finance Inc., | ||||||||||
senior note, A, 10.25%, 11/01/15 | United States | 44,249,000 | 4,424,900 | |||||||
f senior secured note, 144A, 11.50%, 10/01/20 | United States | 39,308,000 | 29,579,270 | |||||||
f Wind Acquisition Finance SA, | ||||||||||
senior secured note, 144A, 11.75%, 7/15/17 | Italy | 1,256,000 | 1,312,520 | |||||||
third lien, 144A, 11.75%, 7/15/17 | Italy | 2,930,000 | EUR | 3,985,457 | ||||||
|
| |||||||||
Total Corporate Bonds, Notes and Senior Floating Rate Interests (Cost $277,211,994) | 255,921,204 | |||||||||
|
| |||||||||
Corporate Notes in Reorganization 0.8% | ||||||||||
f,j American Airlines Inc., senior secured note, 144A, 7.50%, 3/15/16 | United States | 35,792,000 | 41,787,160 | |||||||
b,j Broadband Ventures III LLC, secured promissory note, 5.00%, 2/01/12 | United States | 1,754 | — | |||||||
|
| |||||||||
Total Corporate Notes in Reorganization (Cost $36,853,975) | 41,787,160 | |||||||||
|
| |||||||||
| Shares | ||||||||||
Companies in Liquidation 1.3% | ||||||||||
a Adelphia Recovery Trust | United States | 29,283,354 | 40,997 | |||||||
a,d Adelphia Recovery Trust, Arahova Contingent Value Vehicle, Contingent Distribution | United States | 1,955,453 | 23,856 | |||||||
a,b AET&D Holdings No. 1 Pty. Ltd. | Australia | 4,709,226 | — | |||||||
a,b,c,k CB FIM Coinvestors LLC | United States | 6,400,507 | — | |||||||
a,d,e Century Communications Corp., Contingent Distribution | United States | 5,487,000 | — | |||||||
a,b FIM Coinvestor Holdings I, LLC | United States | 8,006,950 | — | |||||||
a,l Lehman Brothers Holdings Inc., Bankruptcy Claim | United States | 144,058,799 | 63,385,872 | |||||||
a,d,e Tribune Litigation Trust, Contingent Distribution | United States | 393,761 | — | |||||||
a,d,e Tropicana Litigation Trust, Contingent Distribution | United States | 18,305,000 | — | |||||||
| Principal Amount* | ||||||||||
e,j Peregrine Investments Holdings Ltd., 1/15/98 | Hong Kong | 5,000,000 | JPY | — | ||||||
e,j PIV Investment Finance (Cayman) Ltd., 12/01/00 | Hong Kong | 12,200,000 | — | |||||||
|
| |||||||||
Total Companies in Liquidation (Cost $66,366,158) | 63,450,725 | |||||||||
|
| |||||||||
Asset-Backed Securities 0.1% | ||||||||||
Airlines 0.1% | ||||||||||
American Airlines Inc., first lien, 13.00%, 8/01/16 | United States | 420,033 | 447,335 | |||||||
American Airlines Pass Through Trust, | ||||||||||
2009-1A, 10.375%, 7/02/19 | United States | 713,609 | 760,439 | |||||||
2011-2A, 8.625%, 4/15/23 | United States | 3,013,875 | 3,213,544 | |||||||
|
| |||||||||
Total Asset-Backed Securities (Cost $4,336,463) | 4,421,318 | |||||||||
|
| |||||||||
Total Investments before Short Term Investments (Cost $3,767,366,755) | 4,613,712,928 | |||||||||
|
| |||||||||
MS-16
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Mutual Shares Securities Fund | Country | Principal Amount* | Value | |||||||
Short Term Investments 7.2% | ||||||||||
U.S. Government and Agency Securities 7.2% | ||||||||||
m U.S. Treasury Bills, | ||||||||||
7/18/13 | United States | 49,500,000 | $ | 49,499,604 | ||||||
n 9/12/13 | United States | 60,000,000 | 59,998,200 | |||||||
7/05/13 - 11/29/13 | United States | 245,300,000 | 245,272,876 | |||||||
|
| |||||||||
Total U.S. Government and Agency Securities (Cost $354,737,724) | 354,770,680 | |||||||||
|
| |||||||||
Total Investments (Cost $4,122,104,479) 100.5% | 4,968,483,608 | |||||||||
Other Assets, less Liabilities (0.5)% | (23,139,061 | ) | ||||||||
|
| |||||||||
Net Assets 100.0% | $ | 4,945,344,547 | ||||||||
|
| |||||||||
†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 8 regarding restricted securities.
cAt June 30, 2013, 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.
dContingent distributions represent the right to receive additional distributions, if any, during the reorganization of the underlying company. Shares represent total underlying principal of debt securities.
eSecurity has been deemed illiquid because it may not be able to be sold within seven days. At June 30, 2013, the aggregate value of these securities was $6,553,519, representing 0.13% of net assets.
fSecurity 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, 2013, the aggregate value of these securities was $134,229,441, representing 2.71% of net assets.
gThe coupon rate shown represents the rate at period end.
hA portion or all of the security purchased on a delayed delivery basis. See Note 1(c).
iSee Note 1(h) regarding senior floating rate interests.
jSee Note 7 regarding credit risk and defaulted securities.
kSee Note 10 regarding holdings of 5% voting securities.
lBankruptcy claims represent the right to receive distributions, if any, during the liquidation of the underlying pool of assets. Shares repesent amount of allowed unsecured claims.
mThe security is traded on a discount basis with no stated coupon rate.
nSecurity or a portion of the security has been pledged as collateral for open futures contracts. At June 30, 2013, the value of this security and/or cash pledged as collateral was $2,176,911, representing 0.04% of net assets.
MS-17
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Mutual Shares Securities Fund |
At June 30, 2013, the Fund had the following financial futures contracts outstanding. See Note 1(d).
Futures Contracts
| Description | Type | Number of Contracts | Notional Value | Expiration Date | Unrealized Appreciation | Unrealized Depreciation | ||||||||||||||||||
Currency Contracts | ||||||||||||||||||||||||
EUR/USD | Short | 474 | $ | 77,161,275 | 9/16/13 | $ | 1,658,787 | $ | — | |||||||||||||||
GBP/USD | Short | 807 | 76,685,175 | 9/16/13 | 2,157,146 | — | ||||||||||||||||||
|
| |||||||||||||||||||||||
Net unrealized appreciation (depreciation) | $ | 3,815,933 | ||||||||||||||||||||||
|
| |||||||||||||||||||||||
At June 30, 2013, 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 | FBCO | Buy | 1,624,991 | $ | 2,158,686 | 7/17/13 | $ | — | $ | (43,353 | ) | |||||||||||||||||
Euro | BZWS | Sell | 20,167,585 | 26,930,683 | 7/17/13 | 677,511 | — | |||||||||||||||||||||
Euro | FBCO | Sell | 524,550 | 708,540 | 7/17/13 | 25,706 | — | |||||||||||||||||||||
Euro | BOFA | Sell | 273,508 | 368,450 | 7/17/13 | 12,410 | — | |||||||||||||||||||||
Euro | HSBC | Sell | 136,753 | 184,288 | 7/17/13 | 6,270 | — | |||||||||||||||||||||
Euro | DBAB | Sell | 16,809,633 | 21,965,089 | 7/17/13 | 83,133 | — | |||||||||||||||||||||
British Pound | BOFA | Sell | 1,215,773 | 1,836,098 | 7/19/13 | — | (12,638 | ) | ||||||||||||||||||||
British Pound | HSBC | Sell | 33,993,933 | 51,772,760 | 7/19/13 | 80,700 | — | |||||||||||||||||||||
British Pound | BOFA | Sell | 3,234,860 | 4,950,853 | 7/19/13 | 31,841 | — | |||||||||||||||||||||
British Pound | FBCO | Sell | 3,933,323 | 6,047,145 | 7/19/13 | 66,032 | — | |||||||||||||||||||||
British Pound | DBAB | Sell | 1,113,268 | 1,697,678 | 7/19/13 | 4,814 | — | |||||||||||||||||||||
British Pound | SCBT | Sell | 413,318 | 637,960 | 7/19/13 | 9,458 | — | |||||||||||||||||||||
British Pound | DBAB | Sell | 2,608,763 | 3,990,961 | 8/12/13 | 24,668 | — | |||||||||||||||||||||
South Korean Won | FBCO | Sell | 3,484,353,018 | 3,024,096 | 8/12/13 | — | (18,875 | ) | ||||||||||||||||||||
South Korean Won | DBAB | Sell | 2,554,925,205 | 2,218,182 | 8/12/13 | — | (13,096 | ) | ||||||||||||||||||||
South Korean Won | FBCO | Sell | 11,032,649,327 | 9,832,576 | 8/12/13 | 197,495 | — | |||||||||||||||||||||
South Korean Won | DBAB | Sell | 3,949,042,307 | 3,532,625 | 8/12/13 | 83,830 | — | |||||||||||||||||||||
South Korean Won | BOFA | Sell | 5,647,131,219 | 5,022,306 | 8/12/13 | 90,529 | — | |||||||||||||||||||||
Swiss Franc | FBCO | Buy | 100,350 | 106,915 | 8/12/13 | — | (665 | ) | ||||||||||||||||||||
Swiss Franc | FBCO | Sell | 81,691 | 86,298 | 8/12/13 | — | (196 | ) | ||||||||||||||||||||
Swiss Franc | DBAB | Buy | 312,311 | 326,371 | 8/12/13 | 4,304 | — | |||||||||||||||||||||
Swiss Franc | BOFA | Buy | 353,505 | 368,630 | 8/12/13 | 5,661 | — | |||||||||||||||||||||
Swiss Franc | FBCO | Sell | 327,488 | 358,302 | 8/12/13 | 11,558 | — | |||||||||||||||||||||
Swiss Franc | DBAB | Sell | 356,987 | 389,363 | 8/12/13 | 11,385 | — | |||||||||||||||||||||
British Pound | DBAB | Buy | 3,290,767 | 5,137,051 | 8/19/13 | — | (134,099 | ) | ||||||||||||||||||||
British Pound | BOFA | Sell | 3,345,417 | 5,066,494 | 8/19/13 | — | (19,543 | ) | ||||||||||||||||||||
British Pound | DBAB | Sell | 775,277 | 1,173,087 | 8/19/13 | — | (5,566 | ) | ||||||||||||||||||||
British Pound | FBCO | Sell | 14,262,576 | 22,065,760 | 8/19/13 | 382,368 | — | |||||||||||||||||||||
British Pound | BOFA | Sell | 26,725,102 | 41,258,694 | 8/19/13 | 628,526 | — | |||||||||||||||||||||
British Pound | SCBT | Sell | 25,188,439 | 39,042,080 | 8/19/13 | 748,101 | — | |||||||||||||||||||||
British Pound | DBAB | Sell | 10,595,817 | 16,266,989 | 8/19/13 | 158,171 | — | |||||||||||||||||||||
Euro | BOFA | Sell | 16,453,613 | 21,535,856 | 8/30/13 | 112,984 | — | |||||||||||||||||||||
Euro | BZWS | Sell | 15,435,178 | 20,189,367 | 8/30/13 | 92,515 | — | |||||||||||||||||||||
Euro | DBAB | Sell | 693,613 | 910,318 | 8/30/13 | 7,222 | — | |||||||||||||||||||||
Euro | HAND | Sell | 186,916 | 244,570 | 8/30/13 | 1,203 | — | |||||||||||||||||||||
Euro | BOFA | Sell | 1,437,288 | 1,883,328 | 10/16/13 | 11,511 | — | |||||||||||||||||||||
Euro | BZWS | Sell | 1,443,757 | 1,890,528 | 10/16/13 | 10,285 | — | |||||||||||||||||||||
Euro | FBCO | Sell | 712,801 | 935,387 | 10/16/13 | 7,088 | — | |||||||||||||||||||||
Euro | DBAB | Sell | 464,001 | 608,630 | 10/16/13 | 4,349 | — | |||||||||||||||||||||
British Pound | BOFA | Sell | 34,783,774 | 52,940,904 | 10/21/13 | 79,323 | — | |||||||||||||||||||||
MS-18
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Mutual Shares Securities Fund | ||||||||||||||
Forward Exchange Contracts (continued)
| Currency | Counterparty | Type | Quantity | Contract Amount | Settlement Date | Unrealized Appreciation | Unrealized Depreciation | |||||||||||||||||||||
Euro | FBCO | Sell | 16,621,636 | $ | 21,422,316 | 11/18/13 | $ | — | $ | (234,726 | ) | |||||||||||||||||
Euro | DBAB | Sell | 686,759 | 890,059 | 11/18/13 | — | (4,489 | ) | ||||||||||||||||||||
Euro | BOFA | Sell | 343,379 | 446,134 | 11/18/13 | — | (1,139 | ) | ||||||||||||||||||||
Euro | SCBT | Sell | 320,316 | 416,115 | 11/18/13 | — | (1,118 | ) | ||||||||||||||||||||
Euro | BOFA | Sell | 5,022,942 | 6,625,018 | 11/18/13 | 82,311 | — | |||||||||||||||||||||
Euro | HSBC | Sell | 1,189,556 | 1,564,654 | 11/18/13 | 15,181 | — | |||||||||||||||||||||
Euro | SCBT | Sell | 1,719,038 | 2,265,763 | 11/18/13 | 26,605 | — | |||||||||||||||||||||
Euro | FBCO | Sell | 1,521,675 | 1,989,277 | 11/18/13 | 7,197 | — | |||||||||||||||||||||
Euro | DBAB | Sell | 2,665,723 | 3,535,795 | 11/18/13 | 63,519 | — | |||||||||||||||||||||
British Pound | DBAB | Buy | 2,092,339 | 3,268,443 | 11/21/13 | — | (89,240 | ) | ||||||||||||||||||||
British Pound | FBCO | Sell | 27,390,135 | 41,550,835 | 11/21/13 | — | (67,082 | ) | ||||||||||||||||||||
British Pound | SCBT | Buy | 2,135,031 | 3,280,219 | 11/21/13 | — | (36,148 | ) | ||||||||||||||||||||
British Pound | DBAB | Sell | 21,883,022 | 33,218,428 | 11/21/13 | — | (31,711 | ) | ||||||||||||||||||||
British Pound | HSBC | Buy | 1,637,213 | 2,514,219 | 11/21/13 | — | (26,557 | ) | ||||||||||||||||||||
British Pound | BOFA | Sell | 23,966,368 | 36,392,930 | 11/21/13 | — | (22,747 | ) | ||||||||||||||||||||
|
| |||||||||||||||||||||||||||
Unrealized appreciation (depreciation) |
| 3,865,764 | (762,988 | ) | ||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||
Net unrealized appreciation (depreciation) |
| $ | 3,102,776 | |||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||
See Abbreviations on page MS-35.
The accompanying notes are an integral part of these financial statements.
MS-19
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements
Statement of Assets and Liabilities
June 30, 2013 (unaudited)
| Mutual Shares Securities Fund | ||||
Assets: | ||||
Investments in securities: | ||||
Cost - Unaffiliated issuers | $ | 4,122,104,479 | ||
|
| |||
Value - Unaffiliated issuers | $ | 4,968,483,608 | ||
Cash | 227,757 | |||
Restricted cash (Note 1e) | 500,000 | |||
Foreign currency, at value (cost and $2,274,497) | 2,275,592 | |||
Receivables: | ||||
Investment securities sold | 3,500,657 | |||
Capital shares sold | 633,503 | |||
Dividends and interest | 13,835,968 | |||
Variation margin | 418,969 | |||
Unrealized appreciation on forward exchange contracts | 3,865,764 | |||
Other assets | 4,432 | |||
|
| |||
Total assets | 4,993,746,250 | |||
|
| |||
Liabilities: | ||||
Payables: | ||||
Investment securities purchased | 38,065,082 | |||
Capital shares redeemed | 3,051,903 | |||
Affiliates | 4,785,283 | |||
Due to brokers | 500,000 | |||
Unrealized depreciation on forward exchange contracts | 762,988 | |||
Accrued expenses and other liabilities | 1,236,447 | |||
|
| |||
Total liabilities | 48,401,703 | |||
|
| |||
Net assets, at value | $ | 4,945,344,547 | ||
|
| |||
Net assets consist of: | ||||
Paid-in capital | $ | 4,098,926,946 | ||
Undistributed net investment income | 148,432,235 | |||
Net unrealized appreciation (depreciation) | 853,185,919 | |||
Accumulated net realized gain (loss) | (155,200,553 | ) | ||
|
| |||
Net assets, at value | $ | 4,945,344,547 | ||
|
| |||
The accompanying notes are an integral part of these financial statements.
MS-20
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Assets and Liabilities (continued)
June 30, 2013 (unaudited)
| Mutual Shares Securities Fund | ||||
Class 1: | ||||
Net assets, at value | $ | 481,067,840 | ||
|
| |||
Shares outstanding | 24,465,379 | |||
|
| |||
Net asset value and maximum offering price per share | $ | 19.66 | ||
|
| |||
Class 2: | ||||
Net assets, at value | $ | 4,286,382,536 | ||
|
| |||
Shares outstanding | 221,059,939 | |||
|
| |||
Net asset value and maximum offering price per share | $ | 19.39 | ||
|
| |||
Class 4: | ||||
Net assets, at value | $ | 177,894,171 | ||
|
| |||
Shares outstanding | 9,135,586 | |||
|
| |||
Net asset value and maximum offering price per share | $ | 19.47 | ||
|
| |||
The accompanying notes are an integral part of these financial statements.
MS-21
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Operations
for the six months ended June 30, 2013 (unaudited)
| Mutual Shares Securities Fund | ||||
Investment income: | ||||
Dividends | $ | 55,092,180 | ||
Interest | 14,701,797 | |||
Income from securities loaned | 99,423 | |||
|
| |||
Total investment income | 69,893,400 | |||
|
| |||
Expenses: | ||||
Management fees (Note 3a) | 14,814,622 | |||
Administrative fees (Note 3b) | 2,137,578 | |||
Distribution fees: (Note 3c) | ||||
Class 2 | 5,357,541 | |||
Class 4 | 305,852 | |||
Unaffiliated transfer agent fees | 503 | |||
Custodian fees (Note 4) | 101,534 | |||
Reports to shareholders | 386,872 | |||
Professional fees | 118,812 | |||
Trustees’ fees and expenses | 10,940 | |||
Other | 42,591 | |||
|
| |||
Total expenses | 23,276,845 | |||
Expense reductions (Note 4) | (140 | ) | ||
|
| |||
Net expenses | 23,276,705 | |||
|
| |||
Net investment income | 46,616,695 | |||
|
| |||
Realized and unrealized gains (losses): | ||||
Net realized gain (loss) from: | ||||
Investments | 185,635,407 | |||
Written options | 42,621 | |||
Foreign currency transactions | 3,758,411 | |||
Futures contracts | 410,216 | |||
|
| |||
Net realized gain (loss) | 189,846,655 | |||
|
| |||
Net change in unrealized appreciation (depreciation) on: | ||||
Investments | 322,133,686 | |||
Translation of other assets and liabilities denominated in foreign currencies | 22,602,242 | |||
|
| |||
Net change in unrealized appreciation (depreciation) | 344,735,928 | |||
|
| |||
Net realized and unrealized gain (loss) | 534,582,583 | |||
|
| |||
Net increase (decrease) in net assets resulting from operations | $ | 581,199,278 | ||
|
| |||
The accompanying notes are an integral part of these financial statements.
MS-22
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statements of Changes in Net Assets
| Mutual Shares Securities Fund | ||||||||
| Six Months Ended June 30, 2013 (unaudited) | Year Ended December 31, 2012 | |||||||
| ||||||||
Increase (decrease) in net assets: | ||||||||
Operations: | ||||||||
Net investment income | $ | 46,616,695 | $ | 99,008,766 | ||||
Net realized gain (loss) from investments, written options, foreign currency transactions, futures contracts and securities sold short | 189,846,655 | 398,833,480 | ||||||
Net change in unrealized appreciation (depreciation) on investments and translation of other assets and liabilities denominated in foreign currencies | 344,735,928 | 239,569,243 | ||||||
| ||||||||
Net increase (decrease) in net assets resulting from operations | 581,199,278 | 737,411,489 | ||||||
| ||||||||
Distributions to shareholders from: | ||||||||
Net investment income: | ||||||||
Class 1 | — | (33,342,789 | ) | |||||
Class 2 | — | (82,893,175 | ) | |||||
Class 4 | — | (3,198,551 | ) | |||||
| ||||||||
Total distributions to shareholders | — | (119,434,515 | ) | |||||
| ||||||||
Capital share transactions: (Note 2) | ||||||||
Class 1 | (24,757,445 | ) | (865,246,582 | ) | ||||
Class 2 | (287,693,410 | ) | (298,991,452 | ) | ||||
Class 4 | (7,564,492 | ) | (15,628,562 | ) | ||||
| ||||||||
Total capital share transactions | (320,015,347 | ) | (1,179,866,596 | ) | ||||
| ||||||||
Net increase (decrease) in net assets | 261,183,931 | (561,889,622 | ) | |||||
Net assets: | ||||||||
Beginning of period | �� | 4,684,160,616 | 5,246,050,238 | |||||
| ||||||||
End of period | $ | 4,945,344,547 | $ | 4,684,160,616 | ||||
| ||||||||
Undistributed net investment income included in net assets: | ||||||||
End of period | $ | 148,432,235 | $ | 101,815,540 | ||||
| ||||||||
The accompanying notes are an integral part of these financial statements.
MS-23
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited)
Mutual Shares Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Templeton Variable Insurance Products Trust (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end investment company, consisting of twenty-one 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 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 Board), the Fund’s administrator, investment manager and other affiliates have formed the Valuation and Liquidity Oversight Committee (VLOC). The VLOC provides administration and oversight of the Fund’s valuation policies and procedures, which are approved annually by the Board. Among other things, these procedures allow the Fund to 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 (OTC) 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 OTC 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, credit spreads, estimated default rates, anticipated market interest rate volatility, 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 OTC 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 financial instruments for which market prices are not reliable or readily available. Under these procedures, the VLOC convenes on a regular basis to review such financial instruments and considers a number of factors, including significant unobservable valuation inputs, when arriving at fair value. The VLOC 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. An income-based
MS-24
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Mutual Shares Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
a. Financial Instrument Valuation (continued)
valuation approach may also be used 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. The VLOC employs various methods for calibrating these valuation approaches including a regular review of key inputs and assumptions, transactional back-testing or disposition analysis, and reviews of any related market activity.
Trading in securities on foreign securities stock exchanges and OTC 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 VLOC 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 Depositary 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.
In addition, certain foreign markets may be open on days that the NYSE is closed, which could result in differences between the value of the Fund’s portfolio securities on the last business day and the last calendar day of the reporting period. Any significant security valuation changes due to an open foreign market are adjusted and reflected by the Fund for financial reporting purposes.
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 Board.
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
MS-25
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Mutual Shares Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
c. Securities Purchased on a Delayed Delivery Basis (continued)
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.
Derivative counterparty credit risk is managed through a formal evaluation of the creditworthiness of all potential counterparties. The Fund attempts to reduce its exposure to counterparty credit risk on OTC derivatives, whenever possible, by entering into International Swaps and Derivatives Association (ISDA) master agreements with certain counterparties. These agreements contain various provisions, including but not limited to collateral requirements, events of default, or early termination. Termination events applicable to the counterparty include certain deteriorations in the credit quality of the counterparty. Termination events applicable to the Fund include failure of the Fund to maintain certain net asset levels and/or limit the decline in net assets over various periods of time. In the event of default or early termination, the ISDA master agreement gives the non-defaulting party the right to net and close-out all transactions traded, whether or not arising under the ISDA agreement, to one net amount payable by one counterparty to the other. Early termination by the counterparty may result in an immediate payment by the Fund of any net liability owed to that counterparty under the ISDA agreement. At June 30, 2013, the Fund had no OTC derivatives in a net liability position for such contracts. However, absent an event of default or early termination, OTC derivative assets and liabilities are presented gross and not offset in the Statement of Assets and Liabilities.
Collateral requirements differ by type of derivative. Collateral or initial margin requirements are set by the broker or exchange clearing house for exchange traded and centrally cleared derivatives. Initial margin deposited is held at the exchange and can be in the form of cash and/or securities. For OTC derivatives traded under an ISDA master agreement, posting of collateral is required by either the fund or the applicable counterparty if the total net exposure of all OTC derivatives with the applicable counterparty exceeds the minimum transfer amount, which typically ranges from $100,000 to $250,000, and can vary depending on the counterparty and the type of the agreement. Generally, collateral is determined at the close of fund business each day and any additional collateral required due to changes in derivative values may be delivered by the fund or the counterparty within a few business days. Collateral pledged and/or received by the fund for OTC derivatives, if any, is held in segregated accounts with the fund’s custodian/counterparty broker and can be in the form of cash and/or securities. Unrestricted cash may be invested according to the Fund’s investment objectives.
At June 30, 2013, the Fund received $809,345 in U.S. Treasury Bonds and Notes as collateral for derivatives.
The Fund entered into exchange traded financial futures contracts primarily to manage exposure to certain foreign currencies. A futures contract is an agreement between the Fund and a counterparty to buy or sell an asset 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 asset underlying the futures contract. 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
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Mutual Shares Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
d. Derivative Financial Instruments (continued)
The Fund entered into OTC 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 at a specific exchange rate on a future date.
The Fund purchased or wrote exchange traded option contracts primarily to manage 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 an asset 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 underlying investment is adjusted by any premium received or paid. Upon expiration of an option, any premium received or paid is recorded as a realized gain or loss. 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 Notes 6 and 9 regarding investment transactions and other derivative information, respectively.
e. Restricted Cash
At June 30, 2013, the Fund received restricted cash in connection with investments in certain derivative securities. Restricted cash is held in a segregated account with the Fund’s custodian / counterparty broker and is reflected in the Statement of Assets and Liabilities.
f. Securities Sold Short
The Fund is engaged in selling securities short, which obligates the Fund to replace a borrowed security with the same security at current market value. The Fund incurs a loss if the price of the security increases between the date of the short sale and the date on which the Fund replaces the borrowed security. The Fund realizes a gain if the price of the security declines between those dates. Gains are limited to the price at which the Fund sold the security short, while losses are potentially unlimited in size.
The Fund is required to establish a margin account with the broker lending the security sold short. While the short sale is outstanding, the broker retains the proceeds of the short sale and the Fund must maintain a deposit with the 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.
g. Securities Lending
The Fund participates in an agency based securities 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. The Fund receives income from the investment of cash collateral, in addition to lending fees and rebates paid by the borrower. The Fund bears the market risk with respect to the collateral investment, securities loaned, and the risk that the agent may default on its obligations to the Fund. The securities lending agent has agreed to indemnify the Fund in the event of default by a third party borrower. At June 30, 2013, the Fund had no securities on loan.
MS-27
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Mutual Shares Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
Senior secured corporate loans in which the Fund invests are generally readily marketable, but may be subject to certain restrictions on resale.
i. 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 if applicable, excise taxes. As a result, no provision for U.S. federal income taxes is required.
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 in an amount that would be payable if the securities were disposed of on the valuation date.
The Fund recognizes the tax benefits of uncertain tax positions only when the position is “more likely than not” to be sustained upon examination by the tax authorities based on the technical merits of the tax position. As of June 30, 2013, and for all open tax years, the Fund has determined that no liability for unrecognized tax benefits is required in the Fund’s financial statements related to uncertain tax positions taken on a tax return (or expected to be taken on future tax returns). Open tax years are those that remain subject to examination and are based on each tax jurisdiction statute of limitation.
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 and dividends declared on securities sold short are recorded on the ex-dividend date except that certain dividends from foreign securities are recognized as soon as the Fund is notified of the ex-dividend date. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with accounting principles generally accepted in the United States of America. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods.
Common expenses incurred by the Trust are allocated among the funds based on the ratio of net assets of each fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense.
Realized and unrealized gains and losses and net investment income, not including class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions, by class, are generally due to differences in class specific expenses.
MS-28
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Mutual Shares Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
k. Accounting Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
l. Guarantees and Indemnifications
Under the Trust’s organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, on behalf of the Fund, enters into contracts with service providers that contain general indemnification clauses. The Trust’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote.
2. SHARES OF BENEFICIAL INTEREST
At June 30, 2013, 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, 2013 | Year Ended December 31, 2012 | |||||||||||||||
| Class 1 Shares: | Shares | Amount | Shares | Amount | ||||||||||||
Shares sold | 354,272 | $ | 6,761,997 | 30,409,042 | $ | 503,225,918 | ||||||||||
Shares issued in reinvestment of distributions | — | — | 1,941,921 | 33,342,789 | ||||||||||||
Shares redeemed in-kind (Note 12) | — | — | (52,704,789 | ) | (918,607,583 | ) | ||||||||||
Shares redeemed | (1,645,013 | ) | (31,519,442 | ) | (29,093,625 | ) | (483,207,706 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | (1,290,741 | ) | $ | (24,757,445 | ) | (49,447,451 | ) | $ | (865,246,582 | ) | ||||||
| ||||||||||||||||
Class 2 Shares: | ||||||||||||||||
Shares sold | 5,989,005 | $ | 112,856,859 | 18,569,762 | $ | 304,904,655 | ||||||||||
Shares issued in reinvestment of distributions | — | — | 4,887,569 | 82,893,175 | ||||||||||||
Shares redeemed | (21,200,718 | ) | (400,550,269 | ) | (41,692,641 | ) | (686,789,282 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | (15,211,713 | ) | $ | (287,693,410 | ) | (18,235,310 | ) | $ | (298,991,452 | ) | ||||||
| ||||||||||||||||
Class 4 Shares: | ||||||||||||||||
Shares sold | 297,114 | $ | 5,576,823 | 310,070 | $ | 5,137,019 | ||||||||||
Shares issued on reinvestment of distributions | — | — | 187,598 | 3,198,551 | ||||||||||||
Shares redeemed | (696,109 | ) | (13,141,315 | ) | (1,453,214 | ) | (23,964,132 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | (398,995 | ) | $ | (7,564,492 | ) | (955,546 | ) | $ | (15,628,562 | ) | ||||||
| ||||||||||||||||
MS-29
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Mutual Shares 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 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 |
b. Administrative Fees
The Funds 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 Board 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. Some distribution fees are not charged on shares held by affiliates. The Board 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.
f. Other Affiliated Transactions
At June 30, 2013, Franklin Templeton Variable Insurance Products Trust – Franklin Templeton VIP Founding Funds Allocation Fund owned 6.95% of the Fund’s outstanding shares.
MS-30
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Mutual Shares Securities Fund
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, 2013, the custodian fees were reduced as noted in the Statement of Operations.
5. INCOME TAXES
For tax purposes, capital losses may be carried over to offset future capital gains. Capital loss carryforwards with no expiration, if any, must be fully utilized before those losses with expiration dates.
At December 31, 2012, the Fund had capital loss carryforwards of $326,538,425 expiring in 2017.
At June 30, 2013, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
Cost of investments | $ | 4,162,490,919 | ||
|
| |||
Unrealized appreciation | $ | 1,069,459,041 | ||
Unrealized depreciation | (263,466,353 | ) | ||
|
| |||
Net unrealized appreciation (depreciation) | $ | 805,992,688 | ||
|
| |||
Differences between income and/or capital gains as determined on a book basis and a tax basis are primarily due to differing treatments of corporate actions and gains realized on in-kind shareholder redemptions.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the period ended June 30, 2013, aggregated $621,063,629 and $727,626,113, respectively.
Transactions in options written during the period ended June 30, 2013, were as follows:
| Number of Contracts | Premiums Received | |||||||
Options outstanding at December 31, 2012 | — | $ | — | |||||
Options written | 391 | 106,103 | ||||||
Options expired | — | — | ||||||
Options exercised | (334 | ) | (46,760 | ) | ||||
Options closed | (57 | ) | (59,343 | ) | ||||
|
| |||||||
Options outstanding at June 30, 2013 | — | $ | — | |||||
|
| |||||||
See Notes 1(d) and 9 regarding derivative financial instruments and other derivative information, 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.
MS-31
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Mutual Shares Securities Fund
7. CREDIT RISK AND DEFAULTED SECURITIES (continued)
At June 30, 2013, the aggregate value of distressed company securities for which interest recognition has been discontinued was $41,787,160, representing 0.84% of the Fund’s net assets. For information as to specific securities, see the accompanying Statement of Investments.
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, 2013, 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 | ||||||||||||
| 4,709,226 | AET&D Holdings No. 1 Pty. Ltd. | 10/13/10 | $ | — | $ | — | ||||||||||
| 1,754 | Broadband Ventures III LLC, secured promissory note, 5.00%, 2/01/12 | 7/01/10 | 1,754 | — | ||||||||||||
| 6,400,507 | CB FIM Coinvestors LLC | 1/15/09 - 6/02/09 | — | — | ||||||||||||
| 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 | 699,376 | ||||||||||||
| 241 | First Southern Bancorp Inc., cvt. pfd., C | 1/27/10 - 7/07/10 | 241,000 | 453,396 | ||||||||||||
| 1,730,515 | International Automotive Components Group Brazil LLC | 4/13/06 - 12/26/08 | 1,149,241 | 379,935 | ||||||||||||
| 15,382,424 | International Automotive Components Group North America, LLC | 1/12/06 - 3/18/13 | 12,591,586 | 6,904,401 | ||||||||||||
| 16,280 | Olympus Re Holdings Ltd. | 12/19/01 | 1,529,085 | — | ||||||||||||
|
| |||||||||||||||
Total Restricted Securities (Value is 0.17% of Net Assets) | $ | 18,486,753 | $ | 8,437,108 | ||||||||||||
|
| |||||||||||||||
9. OTHER DERIVATIVE INFORMATION
At June 30, 2013, the Fund’s investments in derivative contracts 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) | $ | 7,681,697a | Unrealized depreciation on forward exchange contracts | $ | 762,988 | ||||||
aIncludes cumulative appreciation (depreciation) of futures contracts as reported in the Statement of Investments. Only current day’s variation margin is separately reported within the Statement of Assets and Liabilities.
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Mutual Shares Securities Fund
9. OTHER DERIVATIVE INFORMATION (continued)
For the period ended June 30, 2013, 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 | $ | 4,749,475 | $ | 22,750,321 | |||||
Equity contracts | Net realized gain (loss) from written options/Net change in unrealized appreciation (depreciation) on investments | 42,621 | — | |||||||
For the period ended June 30, 2013, the average month end market value of derivatives represented 0.27% of average month end net assets. The average month end number of open derivative contracts for the period was 99.
See Notes 1(d) and 6 regarding derivative financial instruments and investment transactions, respectively.
10. 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, 2013, 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 (Value is 0.00% of Net Assets) | 6,400,507 | — | — | 6,400,507 | $ | — | $ | — | $ | — | ||||||||||||||||||
|
| |||||||||||||||||||||||||||
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 $1.5 billion (Global Credit Facility) which matures on January 17, 2014. 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 0.07% based upon the unused portion of the Global Credit Facility. These fees are reflected in other expenses on the Statement of Operations. During the period ended June 30, 2013, 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)
Mutual Shares Securities Fund
12. REDEMPTION IN-KIND
During the year ended December 31, 2012, the Fund realized $139,199,450 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 netted with capital gains that are distributed to remaining shareholders, they have been reclassified from accumulated net realized gains to paid-in capital.
13. 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 financial instruments and are summarized in the following fair value hierarchy:
| • | Level 1 – quoted prices in active markets for identical financial instruments |
| • | Level 2 – other significant observable inputs (including quoted prices for similar financial instruments, interest rates, prepayment speed, credit risk, etc.) |
| • | Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of financial instruments) |
The inputs or methodology used for valuing financial instruments are not an indication of the risk associated with investing in those financial instruments.
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.
A summary of inputs used as of June 30, 2013, in valuing the Fund’s assets and liabilities carried at fair value, is as follows:
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
|
| |||||||||||||||
Assets: | ||||||||||||||||
Investments in Securities | ||||||||||||||||
Equity Investments:a | ||||||||||||||||
Auto Components | $ | — | $ | — | $ | 7,284,336 | $ | 7,284,336 | ||||||||
Commercial Banks | 230,569,462 | 7,158,984 | 1,152,772 | 238,881,218 | ||||||||||||
Media | 298,245,708 | 10,554,138 | — | 308,799,846 | ||||||||||||
Real Estate Management & Development | 5,236,723 | — | 6,553,519 | 11,790,242 | ||||||||||||
Other Equity Investmentsb | 3,681,376,879 | — | — | c | 3,681,376,879 | |||||||||||
Corporate Bonds, Notes and Senior Floating Rate Interest | — | 255,921,204 | — | 255,921,204 | ||||||||||||
Corporate Notes in Reorganization | — | 41,787,160 | — | c | 41,787,160 | |||||||||||
Companies in Liquidation | — | 63,450,725 | — | c | 63,450,725 | |||||||||||
Asset-Backed Securities | — | 4,421,318 | — | 4,421,318 | ||||||||||||
Short Term Investments | 354,770,680 | — | — | 354,770,680 | ||||||||||||
|
| |||||||||||||||
Total Investments in Securities | $ | 4,570,199,452 | $ | 383,293,529 | $ | 14,990,627 | $ | 4,968,483,608 | ||||||||
|
| |||||||||||||||
Forward Exchange Contracts | $ | — | $ | 3,865,764 | $ | — | $ | 3,865,764 | ||||||||
Futures Contracts | 3,815,933 | — | — | 3,815,933 | ||||||||||||
Liabilities: | ||||||||||||||||
Forward Exchange Contracts | — | 762,988 | — | 762,988 | ||||||||||||
aIncludes common and convertible preferred stocks as well as other equity investments.
bFor detailed categories, see the accompanying Statement of Investments.
cIncludes securities determined to have no value at June 30, 2013.
A reconciliation of assets in which Level 3 inputs are used in determining fair value is presented when there are significant Level 3 investments at the end of the period.
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Mutual Shares Securities Fund
14. NEW ACCOUNTING PRONOUNCEMENTS
In June 2013, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2013-08, Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements. The ASU modifies the criteria used in defining an investment company under U.S. Generally Accepted Accounting Principles and also sets forth certain measurement and disclosure requirements. Under the ASU, an entity that is registered under the 1940 Act automatically qualifies as an investment company. The ASU is effective for interim and annual reporting periods beginning after December 15, 2013. The Fund is currently reviewing the requirements and believes the adoption of this ASU will not have a material impact on its financial statements.
15. 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. | EUR - Euro | ADR - American Depositary Receipt | ||
| BZWS - Barclays Bank PLC | GBP - British Pound | FRN - Floating Rate Note | ||
| DBAB - Deutsche Bank AG | JPY - Japanese Yen | IDR - International Depositary Receipt | ||
| FBCO - Credit Suisse Group AG | USD - United States Dollar | |||
| HAND - Svenska Handelsbanken | ||||
| HSBC - HSBC Bank USA, N.A. | ||||
| SSBT - State Street Bank and Trust Co. |
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TEMPLETON DEVELOPING MARKETS SECURITIES FUND
This semiannual report for Templeton Developing Markets Securities Fund covers the period ended June 30, 2013.
Performance Summary as of 6/30/13
Templeton Developing Markets Securities Fund – Class 1 had a -7.51% total return for the six-month period ended 6/30/13.
Performance reflects the Fund’s Class 1 operating expenses, but does not include any contract fees, expenses or sales charges. If they had been included, performance would be lower. These charges and deductions, particularly for variable life policies, can have a significant effect on contract values and insurance benefits. See the contract prospectus for a complete description of these expenses, including sales charges.
Templeton Developing Markets Securities Fund Class 1
Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares.
Current performance may differ from figures shown.
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Fund Goal and Main Investments: Templeton Developing Markets Securities Fund seeks long-term capital appreciation. Under normal market conditions, the Fund 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 (EM) Index had a -9.40% total return, and the Standard & Poor’s®/International Finance Corporation Investable Composite Index had a total return of -8.43% for the same period.1 Please note 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
The global economy grew moderately during the six months under review, with emerging market economies generally continuing to grow faster than their developed market counterparts. However, emerging market stock performance during the period was driven less by economic growth and more by the liquidity and monetary policies in major economies. Markets began on a positive note in January, but Cyprus’s financial crisis in March and its potential impact on the eurozone, as well as an inconclusive Italian election, dampened investor sentiment. A late bailout of Cyprus’s banks helped relieve investor concerns. Subsequently, the Bank of Japan’s announcement of an unprecedented stimulus plan and its commitment to open-ended asset purchases led investors to become optimistic in April.
However, investor anxiety that the U.S. Federal Reserve Board (Fed) would taper its quantitative easing program and tighten monetary policy earlier than expected, combined with a sharp correction in Japanese government bond yields, prompted profit taking in emerging market stocks, bonds and currencies. Additionally, commodity prices declined as the U.S. dollar rose. Further contributing to global financial market volatility in June was the People’s Bank of China’s (PBOC’s) indication that it would not intervene in the interbank market after a sharp spike in a key lending rate caused investors to worry about the stability of the country’s banking sector.
1. Source: © 2013 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: All investments involve risks, including possible loss of principal. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments. Investments in developing markets involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size and lesser liquidity. The Fund is designed for the aggressive portion of a well-diversified portfolio. The Fund is actively managed but there is no guarantee that the manager’s investment decisions will produce the desired results. The Fund’s prospectus also includes a description of the main investment risks.
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Investor sentiment improved in the last week of the period, and emerging market stock prices rebounded from period lows after the PBOC did intervene to calm China’s interbank market, positive economic reports helped stabilize Japanese government bond yields, and several Fed members reassured investors that the Fed’s accommodative monetary policy would continue. The U.S. dollar remained strong against most currencies, however, including those of emerging market countries. For the six-month period, emerging market stocks declined in U.S. dollar terms, resulting partly from weaker emerging market currencies. Latin America was among the worst performers, with Peru, Colombia and Brazil posting double-digit declines.
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 months under review, key contributors to the Fund’s absolute performance included Emaar Properties, a property developer and manager with operations throughout the Middle East, notably in Dubai, United Arab Emirates (UAE); Tata Consultancy Services, one of India’s largest information technology (IT) consulting and services firms; and Great Wall Motor, one of China’s leading automobile exporters and largest pickup truck and sport utility vehicle (SUV) manufacturers. Emaar’s first-quarter revenue benefited from strong income growth in its shopping malls and retail leasing business, led by the Dubai Mall, its flagship mall asset. Dubai’s rising tourism also boosted Emaar’s hospitality business income growth as the developer’s Dubai hotels recorded a high occupancy rate. Emaar has led the UAE’s recent property market recovery, with several of the developer’s new residential projects selling out upon launch. Earnings growth for Emaar, the emirate’s largest property developer, could, in our view, potentially benefit from the UAE’s continued property market recovery and Dubai’s strengthening position as the Middle East’s tourism center.
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Tata Consultancy’s share price reached a multi-year high in the first half of the period after the company reported stronger-than-expected earnings results for its fiscal third-quarter 2013 (ended December 31, 2012), during which the company closed several large deals across industries and regions. Additionally, the company reported strong growth across its business segments for fiscal year 2013, particularly in consulting, business intelligence and enterprise solutions, and provided an encouraging guidance for fiscal year 2014 that supported investor sentiment. We believe that IT outsourcing is an attractive, growing industry and that Tata Consultancy, as an industry leader, is well positioned to potentially benefit from the industry’s continued growth. The company delivered solid margin performance for its fiscal year 2013, and in our assessment, continued weakness in the Indian rupee could further drive demand and profit margin growth.
Great Wall Motor benefited from consistently delivering stronger-than-expected earnings results, with first-quarter earnings driven largely by its better product mix and China’s continued SUV demand growth. The automaker’s China H shares reached a record high during the period as investors welcomed the automaker’s new lineup of revamped SUVs, as well as new sedan and pickup models.2 We believe that the automaker, which has a leading local brand, could potentially benefit from China’s greater SUV demand growth and the likelihood of increased exports, given the competitiveness of its products in international markets, particularly in Russia, Australia and South Africa.
In contrast, key detractors from the Fund’s absolute performance included Antofagasta, a Chilean copper mining group; AmBev (Companhia de Bebidas das Americas), one of the world’s largest beer and soft drink producers; and Souza Cruz, a major Brazilian cigarette company. Investor concerns about copper demand growth caused Antofagasta’s share price to decline, along with those of many copper mining companies, despite the company’s solid first-quarter earnings. Antofagasta’s announcement that it was resuming a copper mine construction project, seen by many investors as only marginally profitable, also contributed to the share price weakness.
Brazil’s currency depreciation, tax hikes, anti-government demonstrations in June, and concerns about slower global economic growth and the potential effects of the U.S. Fed’s tapering of its asset purchase
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 6/30/13
| Company Sector/Industry, Country | % of Total Net Assets | |||
| AmBev (Companhia de Bebidas das Americas) | 10.4% | |||
| Beverages, Brazil | ||||
| Souza Cruz SA | 5.3% | |||
| Tobacco, Brazil | ||||
| Remgro Ltd. | 3.9% | |||
| Diversified Financial Services, South Africa | ||||
| Kasikornbank PCL, fgn. | 3.7% | |||
| Commercial Banks, Thailand | ||||
| Tata Consultancy Services Ltd. | 3.2% | |||
| IT Services, India | ||||
| Samsung Electronics Co. Ltd. | 3.0% | |||
| Semiconductors & Semiconductor Equipment, South Korea | ||||
| Sberbank of Russia, pfd. | 2.8% | |||
| Commercial Banks, Russia | ||||
| Emaar Properties PJSC | 2.6% | |||
| Real Estate Management & Development, UAE | ||||
| Dairy Farm International Holdings Ltd. | 2.5% | |||
| Food & Staples Retailing, Hong Kong | ||||
| SJM Holdings Ltd. | 2.5% | |||
| Hotels, Restaurants & Leisure, Hong Kong | ||||
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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program led many foreign investors to sell Brazilian stocks. This environment negatively affected AmBev’s and Souza Cruz’s share prices, which reached period lows before recovering near period-end. In our assessment, these companies’ strong operations, low debt levels, good dividend yields and popular brands make them attractive investments. In our view, AmBev and Souza Cruz could continue to increase their market share as Brazilian consumers may become wealthier and more discerning.
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, 2013, the U.S. dollar rose in value relative to most currencies. As a result, the Fund’s performance was negatively affected by the portfolio’s investment predominantly in securities with non-U.S. currency exposure.
In the past six months, our continued search for investments we considered to be attractively valued led us to increase the Fund’s holdings in Thailand and South Korea and to initiate positions in the Philippines and Taiwan. We also added to our investment in Switzerland and initiated positions in the U.K. as we identified companies listed in these developed countries that had significant emerging market operations and that we believed were well positioned, as a result, to benefit from stronger personal income and consumer demand growth in emerging market countries. We undertook some of our largest purchases in tobacco; consumer products; wireless telecommunication services; and hotels, restaurants and leisure companies. Key purchases included new positions in Unilever, a U.K.-listed global consumer products company that derives more than 50% of its sales from emerging and frontier markets; Shin, a major telecommunications group in Thailand; and Melco Crown Entertainment, one of only six casino operators in Macau, the world’s largest gaming market.
Top 10 Countries
Templeton Developing Markets Securities Fund 6/30/13
% of Total Net Assets | ||||
| Brazil | 17.5% | |||
| Hong Kong | 8.4% | |||
| China | 7.7% | |||
| Thailand | 7.2% | |||
| Russia | 6.6% | |||
| South Africa | 4.9% | |||
| Indonesia | 4.3% | |||
| India | 4.3% | |||
| U.K. | 4.3% | |||
| South Korea | 4.0% | |||
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Conversely, we closed the Fund’s position in Kazakhstan and reduced investments in Russia, Indonesia, India and China via China H and Red Chip shares as certain stocks reached their sale targets and to focus on stocks we considered to be more attractively valued within our investment universe.3 We reduced the Fund’s holdings largely in metals and mining; chemicals; automobiles; and oil, gas and consumable fuels companies. Key sales included elimination of the Fund’s position in Russian potash fertilizer producer Uralkali and reduction of the Fund’s investments in Indonesian car and motorcycle manufacturer Astra International, and Chinese oil and gas company PetroChina.
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, 2013, 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.
3. “Red Chip” denotes shares of Hong Kong Stock Exchange-listed companies with significant exposure to China.
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Fund Expenses
As an investor in a variable insurance contract (Contract) that indirectly provides for investment in an underlying mutual fund, you can incur transaction and/or ongoing expenses at both the Fund level and the Contract level.
| • | Transaction expenses can include sales charges (loads) on purchases, surrender fees, transfer fees and premium taxes. |
| • | Ongoing expenses can include management fees, distribution and service (12b-1) fees, contract fees, annual maintenance fees, mortality and expense risk fees and other fees and expenses. All mutual funds and Contracts have some types of ongoing expenses. |
The expenses shown in the table are meant to highlight ongoing expenses at the Fund level only and do not include ongoing expenses at the Contract level, or transaction expenses at either the Fund or Contract levels. While the Fund does not have transaction expenses, if the transaction and ongoing expenses at the Contract level were included, the expenses shown below would be higher. You should consult your Contract prospectus or disclosure document for more information.
The table shows Fund-level ongoing expenses and can help you understand these expenses and compare them with those of other mutual funds offered through the Contract. The table assumes a $1,000 investment held for the six months indicated. Please refer to the Fund prospectus for additional information on operating expenses.
Actual Fund Expenses
The first line (Actual) of the table provides actual account values and expenses. The “Ending Account Value” is derived from the Fund’s actual return, which includes the effect of ongoing Fund expenses, but does not include the effect of ongoing Contract expenses.
You can estimate the Fund-level expenses you incurred during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:
| 1. | Divide your account value by $1,000. |
If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6.
| 2. | Multiply the result by the number under the heading “Fund-Level Expenses Incurred During Period.” |
If Fund-Level Expenses Incurred During Period were $7.50, then 8.6 x $7.50 = $64.50.
In this illustration, the estimated expenses incurred this period at the Fund level are $64.50.
Templeton Developing Markets Securities Fund Class 1
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Hypothetical Example for Comparison with Other Mutual Funds
Information in the second line (Hypothetical) of the table can help you compare ongoing expenses of the Fund with those of other mutual funds offered through the Contract. This information may not be used to estimate the actual ending account balance or expenses you incurred during the period. The hypothetical “Ending Account Value” is based on the Fund’s actual expense ratio and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Fund-Level Expenses Incurred During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds offered through a Contract.
| Class 1 | Beginning Account Value 1/1/13 | Ending Account Value 6/30/13 | Fund-Level Expenses Incurred During Period* 1/1/13–6/30/13 | |||||||||
Actual | $ | 1,000 | $ | 924.90 | $ | 6.49 | ||||||
Hypothetical (5% return | $ | 1,000 | $ | 1,018.05 | $ | 6.80 | ||||||
*Expenses are calculated using the most recent six-month annualized expense ratio for the Fund’s Class 1 shares (1.36%), which does not include any ongoing expenses of the Contract for which the Fund is an investment option, multiplied by the average account value over the period, multiplied by 181/365 to reflect the one-half year period.
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SUPPLEMENT DATED JULY 24, 2013
TOTHE PROSPECTUSES
DATED MAY 1, 2013
OF
FRANKLIN INCOME SECURITIES FUND
TEMPLETON DEVELOPING MARKETS SECURITIES FUND
TEMPLETON FOREIGN SECURITIES FUND
(A series of Franklin Templeton Variable Insurance Products Trust)
The prospectus is amended as follows:
I. The “Fund Summaries – Portfolio Managers” section on page FI-S5 is revised to read as follows:
Portfolio Managers
EDWARD D. PERKS, CFA Senior Vice President of Advisers and portfolio manager of the Fund since 2002.
MATTHEW QUINLAN Portfolio Manager of Advisers and portfolio manager of the Fund since December 2012.
ALEX W. PETERS, CFA Vice President of Advisers and portfolio manager of the Fund since December 2012.
CHARLES B. JOHNSON Portfolio Manager of Investment Counsel and portfolio manager of the Fund since 1989.
II. The “Fund Details – Management” section disclosure concerning the portfolio management team beginning on page FI-D9 is revised to read as follows:
The Fund is managed by a team of dedicated professionals focused on investments in debt and equity securities. The portfolio managers of the team are as follows:
EDWARD D. PERKS, CFA Senior Vice President of Advisers | Mr. Perks has been the lead portfolio manager of the Fund since 2002. He has primary responsibility for the investments of the Fund. He has final authority over all aspects of the Fund’s investment portfolio, including but not limited to, purchases and sales of individual securities, portfolio risk assessment, and the management of daily cash balances in accordance with anticipated investment management requirements. The degree to which he may perform these functions, and the nature of these functions, may change from time to time. He joined Franklin Templeton Investments in 1992. |
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MATTHEW QUINLAN Portfolio Manager of Advisers | Mr. Quinlan has been a portfolio manager of the Fund since December 2012, providing research and advice on the purchases and sales of individual securities, and portfolio risk assessment. He joined Franklin Templeton Investments in 2005. | |
ALEX W. PETERS, CFA Vice President of Advisers | Mr. Peters has been a portfolio manager of the Fund since December 2012, providing research and advice on the purchases and sales of individual securities, and portfolio risk assessment. He joined Franklin Templeton Investments in 1992. | |
CHARLES B. JOHNSON Portfolio Manager of Investment Counsel | Mr. Johnson has been a portfolio manager of the Fund since 1989, providing research, advice and portfolio risk assessment on the Fund’s investment portfolio. He joined Franklin Templeton Investments in 1957. | |
CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.
III. The “Fund Details – Principal Risks” section beginning on page TD-D3 for the Templeton Developing Markets Securities Fund is amended to add the following:
Participatory Notes
Participatory notes involve risks that are in addition to the risks normally associated with a direct investment in the underlying equity securities. In addition, the Fund is subject to the risk that the issuer of the participatory note (i.e., the issuing bank or broker-dealer), which is the only responsible party under the note, is unable or refuses to perform under the terms of the participatory note. While the holder of a participatory note is entitled to receive from the issuing bank or broker-dealer any dividends or other distributions paid on the underlying securities, the holder is not entitled to the same rights as an owner of the underlying securities, such as voting rights. Participatory notes are also not traded on exchanges, are privately issued, and may be illiquid. To the extent a participatory note is determined to be illiquid, it would be subject to the Fund’s limitation on investments in illiquid securities. There can be no assurance that the trading price or value of participatory notes will equal the value of the underlying value of the equity securities they seek to replicate.
IV. The fifth paragraph of the “Fund Details – Principal Investment Policies and Practices” section on page TF-D1 for the Templeton Foreign Securities Fund is amended as follows:
The Fund may also buy and sell (write) exchange traded and over-the-counter equity call options on individual securities held in its portfolio in an amount up to 10% of its net assets, to generate additional income for the Fund. A call option gives the purchaser of the option, upon payment of a premium, the right to buy, and the seller the obligation to sell, the underlying instrument at the exercise price. For example, the Fund may write an option with a strike price that is generally equal to the price target at which the investment manager would sell (in the case of a call option) a particular stock, and in return the Fund would earn a premium from the buyer of the option. The investment manager considers various factors, such as availability and cost, in deciding whether, when and to what extent to enter into derivative transactions.
Please keep this supplement for future reference.
TD-10
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Highlights
Templeton Developing Markets Securities Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 1 | 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||||||
| ||||||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 10.58 | $ | 9.50 | $ | 11.40 | $ | 9.86 | $ | 6.11 | $ | 16.16 | ||||||||||||
|
| |||||||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.10 | 0.19 | 0.17 | 0.09 | 0.12 | 0.16 | ||||||||||||||||||
Net realized and unrealized gains (losses) | (0.90 | ) | 1.06 | (1.94 | ) | 1.63 | 4.02 | (7.40 | ) | |||||||||||||||
|
| |||||||||||||||||||||||
Total from investment operations | (0.80 | ) | 1.25 | (1.77 | ) | 1.72 | 4.14 | (7.24 | ) | |||||||||||||||
|
| |||||||||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income | (0.23 | ) | (0.17 | ) | (0.13 | ) | (0.18 | ) | (0.36 | ) | (0.37 | ) | ||||||||||||
Net realized gains | — | — | — | — | (0.03 | ) | (2.44 | ) | ||||||||||||||||
|
| |||||||||||||||||||||||
Total distributions | (0.23 | ) | (0.17 | ) | (0.13 | ) | (0.18 | ) | (0.39 | ) | (2.81 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Redemption feesc | — | — | — | — | — | — | ||||||||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ | 9.55 | $ | 10.58 | $ | 9.50 | $ | 11.40 | $ | 9.86 | $ | 6.11 | ||||||||||||
|
| |||||||||||||||||||||||
Total returnd | (7.51)% | 13.40% | (15.67)% | 17.83% | 73.32% | (52.62)% | ||||||||||||||||||
Ratios to average net assetse | ||||||||||||||||||||||||
Expenses | 1.36% | 1.35% | 1.40% | 1.49% | f | 1.45% | f | 1.52% | f | |||||||||||||||
Net investment income | 1.91% | 1.93% | 1.57% | 0.87% | 1.64% | 1.52% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 159,421 | $ | 203,568 | $ | 232,544 | $ | 347,242 | $ | 325,927 | $ | 234,213 | ||||||||||||
Portfolio turnover rate | 27.81% | 24.45% | 14.90% | 24.41% | 56.58% | g | 75.11% | 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 redemptions in-kind.
The accompanying notes are an integral part of these financial statements.
TD-11
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Templeton Developing Markets Securities Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 2 | 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||||||
| ||||||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 10.50 | $ | 9.42 | $ | 11.30 | $ | 9.78 | $ | 6.04 | $ | 15.99 | ||||||||||||
|
| |||||||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.09 | 0.17 | 0.14 | 0.06 | 0.11 | 0.15 | ||||||||||||||||||
Net realized and unrealized gains (losses) | (0.90 | ) | 1.05 | (1.92 | ) | 1.62 | 3.98 | (7.33 | ) | |||||||||||||||
|
| |||||||||||||||||||||||
Total from investment operations | (0.81 | ) | 1.22 | (1.78 | ) | 1.68 | 4.09 | (7.18 | ) | |||||||||||||||
|
| |||||||||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income | (0.20 | ) | (0.14 | ) | (0.10 | ) | (0.16 | ) | (0.32 | ) | (0.33 | ) | ||||||||||||
Net realized gains | — | — | — | — | (0.03 | ) | (2.44 | ) | ||||||||||||||||
|
| |||||||||||||||||||||||
Total distributions | (0.20 | ) | (0.14 | ) | (0.10 | ) | (0.16 | ) | (0.35 | ) | (2.77 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Redemption feesc | — | — | — | — | — | — | ||||||||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ | 9.49 | $ | 10.50 | $ | 9.42 | $ | 11.30 | $ | 9.78 | $ | 6.04 | ||||||||||||
|
| |||||||||||||||||||||||
Total returnd | (7.73)% | 13.16% | (15.86)% | 17.58% | 72.59% | (52.70)% | ||||||||||||||||||
Ratios to average net assetse | ||||||||||||||||||||||||
Expenses | 1.61% | 1.60% | 1.65% | 1.74% | f | 1.70% | f | 1.77% | f | |||||||||||||||
Net investment income | 1.66% | 1.68% | 1.32% | 0.62% | 1.39% | 1.27% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 267,008 | $ | 291,638 | $ | 295,223 | $ | 392,546 | $ | 435,947 | $ | 264,186 | ||||||||||||
Portfolio turnover rate | 27.81% | 24.45% | 14.90% | 24.41% | 56.58% | g | 75.11% | 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 redemptions in-kind.
The accompanying notes are an integral part of these financial statements.
TD-12
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Templeton Developing Markets Securities Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 3 | 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||||||
| ||||||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 10.43 | $ | 9.36 | $ | 11.23 | $ | 9.73 | $ | 6.02 | $ | 15.96 | ||||||||||||
|
| |||||||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.09 | 0.17 | 0.14 | 0.06 | 0.10 | 0.11 | ||||||||||||||||||
Net realized and unrealized gains (losses) | (0.88 | ) | 1.04 | (1.91 | ) | 1.60 | 3.97 | (7.27 | ) | |||||||||||||||
|
| |||||||||||||||||||||||
Total from investment operations | (0.79 | ) | 1.21 | (1.77 | ) | 1.66 | 4.07 | (7.16 | ) | |||||||||||||||
|
| |||||||||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income | (0.20 | ) | (0.14 | ) | (0.10 | ) | (0.16 | ) | (0.33 | ) | (0.34 | ) | ||||||||||||
Net realized gains | — | — | — | — | (0.03 | ) | (2.44 | ) | ||||||||||||||||
|
| |||||||||||||||||||||||
Total distributions | (0.20 | ) | (0.14 | ) | (0.10 | ) | (0.16 | ) | (0.36 | ) | (2.78 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Redemption feesc | — | — | — | — | — | — | ||||||||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ | 9.44 | $ | 10.43 | $ | 9.36 | $ | 11.23 | $ | 9.73 | $ | 6.02 | ||||||||||||
|
| |||||||||||||||||||||||
Total returnd | (7.63)% | 13.16% | (15.86)% | 17.51% | 72.63% | (52.67)% | ||||||||||||||||||
Ratios to average net assetse | ||||||||||||||||||||||||
Expenses | 1.61% | 1.60% | 1.65% | 1.74% | f | 1.70% | f | 1.77% | f | |||||||||||||||
Net investment income | 1.66% | 1.68% | 1.32% | 0.62% | 1.39% | 1.27% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 37,550 | $ | 48,277 | $ | 44,702 | $ | 66,484 | $ | 66,718 | $ | 32,953 | ||||||||||||
Portfolio turnover rate | 27.81% | 24.45% | 14.90% | 24.41% | 56.58% | g | 75.11% | 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 redemptions in-kind.
The accompanying notes are an integral part of these financial statements.
TD-13
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Templeton Developing Markets Securities Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 4 | 2012 | 2011 | 2010 | 2009 | 2008a | |||||||||||||||||||
| ||||||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 10.50 | $ | 9.42 | $ | 11.30 | $ | 9.80 | $ | 6.09 | $ | 14.88 | ||||||||||||
|
| |||||||||||||||||||||||
Income from investment operationsb: | ||||||||||||||||||||||||
Net investment income (loss)c | 0.08 | 0.16 | 0.13 | 0.05 | 0.09 | (0.33 | ) | |||||||||||||||||
Net realized and unrealized gains (losses) | (0.88 | ) | 1.04 | (1.91 | ) | 1.61 | 4.00 | (5.65 | ) | |||||||||||||||
|
| |||||||||||||||||||||||
Total from investment operations | (0.80 | ) | 1.20 | (1.78 | ) | 1.66 | 4.09 | (5.98 | ) | |||||||||||||||
|
| |||||||||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income | (0.19 | ) | (0.12 | ) | (0.10 | ) | (0.16 | ) | (0.35 | ) | (0.37 | ) | ||||||||||||
Net realized gains | — | — | — | — | (0.03 | ) | (2.44 | ) | ||||||||||||||||
|
| |||||||||||||||||||||||
Total distributions | (0.19 | ) | (0.12 | ) | (0.10 | ) | (0.16 | ) | (0.38 | ) | (2.81 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Redemption feesd | — | — | — | — | — | — | ||||||||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ | 9.51 | $ | 10.50 | $ | 9.42 | $ | 11.30 | $ | 9.80 | $ | 6.09 | ||||||||||||
|
| |||||||||||||||||||||||
Total returne | (7.76)% | 13.06% | (15.88)% | 17.41% | 72.45% | (48.66)% | ||||||||||||||||||
Ratios to average net assetsf | ||||||||||||||||||||||||
Expenses | 1.71% | 1.70% | 1.75% | 1.84% | g | 1.80% | g | 1.87% | g | |||||||||||||||
Net investment income | 1.56% | 1.58% | 1.22% | 0.52% | 1.29% | 1.17% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 18,618 | $ | 23,341 | $ | 24,380 | $ | 37,198 | $ | 26,362 | $ | 7,208 | ||||||||||||
Portfolio turnover rate | 27.81% | 24.45% | 14.90% | 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-14
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited)
| Templeton Developing Markets Securities Fund | Industry | Shares | Value | |||||||
Closed End Funds 0.6% | ||||||||||
Romania 0.6% | ||||||||||
a SIF Banat-Crisana | Diversified Financial Services | 1,428,700 | $ | 474,824 | ||||||
SIF Moldova | Diversified Financial Services | 1,669,845 | 603,650 | |||||||
SIF Muntenia | Diversified Financial Services | 1,191,732 | 238,336 | |||||||
SIF Oltenia | Diversified Financial Services | 1,975,791 | 824,842 | |||||||
SIF Transilvania | Diversified Financial Services | 4,970,540 | 778,877 | |||||||
|
| |||||||||
Total Closed End Funds (Cost $3,109,586) | 2,920,529 | |||||||||
|
| |||||||||
Common Stocks 87.0% | ||||||||||
Australia 1.1% | ||||||||||
BHP Billiton Ltd. | Metals & Mining | 180,668 | 5,184,680 | |||||||
|
| |||||||||
Austria 0.8% | ||||||||||
Raiffeisen Bank International AG | Commercial Banks | 125,012 | 3,644,970 | |||||||
|
| |||||||||
Brazil 16.8% | ||||||||||
Companhia de Bebidas das Americas (AmBev) | Beverages | 1,362,350 | 50,444,051 | |||||||
M Dias Branco SA | Food Products | 143,700 | 5,443,309 | |||||||
Souza Cruz SA | Tobacco | 2,053,928 | 25,387,284 | |||||||
|
| |||||||||
| 81,274,644 | ||||||||||
|
| |||||||||
Chile 0.6% | ||||||||||
Antofagasta PLC | Metals & Mining | 227,279 | 2,748,840 | |||||||
|
| |||||||||
China 7.7% | ||||||||||
China Mobile Ltd. | Wireless Telecommunication Services | 532,000 | 5,569,711 | |||||||
China Overseas Land & Investment Ltd. | Real Estate Management & Development | 2,114,900 | 5,521,790 | |||||||
CNOOC Ltd. | Oil, Gas & Consumable Fuels | 4,172,000 | 7,078,890 | |||||||
Great Wall Motor Co. Ltd., H | Automobiles | 1,318,577 | 5,661,281 | |||||||
a Melco Crown Entertainment Ltd., ADR | Hotels, Restaurants & Leisure | 448,443 | 10,027,186 | |||||||
PetroChina Co. Ltd., H | Oil, Gas & Consumable Fuels | 3,084,400 | 3,280,875 | |||||||
|
| |||||||||
| 37,139,733 | ||||||||||
|
| |||||||||
Colombia 1.0% | ||||||||||
Bancolombia SA, ADR | Commercial Banks | 48,500 | 2,740,250 | |||||||
Ecopetrol SA, ADR | Oil, Gas & Consumable Fuels | 45,349 | 1,907,379 | |||||||
|
| |||||||||
| 4,647,629 | ||||||||||
|
| |||||||||
Hong Kong 8.4% | ||||||||||
Dairy Farm International Holdings Ltd. | Food & Staples Retailing | 1,014,733 | 12,186,943 | |||||||
Giordano International Ltd. | Specialty Retail | 3,673,000 | 3,215,553 | |||||||
I.T Ltd. | Specialty Retail | 5,818,000 | 2,085,372 | |||||||
Luk Fook Holdings (International) Ltd. | Specialty Retail | 2,126,313 | 4,934,745 | |||||||
b Luk Fook Holdings (International) Ltd., 144A | Specialty Retail | 130,000 | 301,704 | |||||||
MGM China Holdings Ltd. | Hotels, Restaurants & Leisure | 2,135,300 | 5,698,942 | |||||||
SJM Holdings Ltd. | Hotels, Restaurants & Leisure | 4,946,730 | 11,914,068 | |||||||
|
| |||||||||
| 40,337,327 | ||||||||||
|
| |||||||||
Hungary 0.1% | ||||||||||
OTP Bank PLC | Commercial Banks | 26,840 | 563,176 | |||||||
|
| |||||||||
India 4.3% | ||||||||||
Tata Consultancy Services Ltd. | IT Services | 612,050 | 15,610,446 | |||||||
Tata Motors Ltd. | Automobiles | 1,063,000 | 5,025,471 | |||||||
|
| |||||||||
| 20,635,917 | ||||||||||
|
| |||||||||
TD-15
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Templeton Developing Markets Securities Fund | Industry | Shares | Value | |||||||
Common Stocks (continued) | ||||||||||
Indonesia 4.3% | ||||||||||
PT Astra International Tbk | Automobiles | 14,036,900 | $ | 9,900,080 | ||||||
PT Bank Central Asia Tbk | Commercial Banks | 4,007,532 | 4,037,816 | |||||||
PT Bank Rakyat Indonesia (Persero) Tbk | Commercial Banks | 8,664,000 | 6,765,340 | |||||||
|
| |||||||||
| 20,703,236 | ||||||||||
|
| |||||||||
Kenya 1.3% | ||||||||||
Equity Bank Ltd. | Commercial Banks | 8,986,101 | 3,272,910 | |||||||
Kenya Commercial Bank Ltd. | Commercial Banks | 5,335,900 | 2,301,029 | |||||||
Safaricom Ltd. | Wireless Telecommunication Services | 9,225,600 | 709,661 | |||||||
|
| |||||||||
| 6,283,600 | ||||||||||
|
| |||||||||
Mexico 1.3% | ||||||||||
Kimberly Clark de Mexico SAB de CV, A | Household Products | 1,952,613 | 6,403,220 | |||||||
|
| |||||||||
Nigeria 1.7% | ||||||||||
FBN Holdings PLC | Commercial Banks | 36,527,236 | 4,022,873 | |||||||
Nigerian Breweries PLC | Beverages | 4,303,824 | 4,133,556 | |||||||
|
| |||||||||
| 8,156,429 | ||||||||||
|
| |||||||||
Philippines 1.0% | ||||||||||
Ayala Corp. | Diversified Financial Services | 344,200 | 4,631,926 | |||||||
|
| |||||||||
Qatar 2.1% | ||||||||||
Industries Qatar QSC | Industrial Conglomerates | 236,682 | 10,304,514 | |||||||
|
| |||||||||
Russia 3.8% | ||||||||||
CTC Media Inc. | Media | 42,900 | 477,048 | |||||||
c LUKOIL Holdings, ADR | Oil, Gas & Consumable Fuels | 29,958 | 1,718,840 | |||||||
c LUKOIL Holdings, ADR (London Stock Exchange) | Oil, Gas & Consumable Fuels | 174,418 | 10,007,233 | |||||||
Mining and Metallurgical Co. Norilsk Nickel, ADR | Metals & Mining | 155,043 | 2,233,394 | |||||||
a TNK-BP Holding | Oil, Gas & Consumable Fuels | 2,893,673 | 4,087,415 | |||||||
|
| |||||||||
| 18,523,930 | ||||||||||
|
| |||||||||
Singapore 1.5% | ||||||||||
K-REIT Asia | Real Estate Investment Trusts (REITs) | 5,248,511 | 5,363,442 | |||||||
Keppel Corp. Ltd. | Industrial Conglomerates | 197,557 | 1,621,300 | |||||||
|
| |||||||||
| 6,984,742 | ||||||||||
|
| |||||||||
South Africa 4.9% | ||||||||||
Remgro Ltd. | Diversified Financial Services | 977,324 | 18,784,993 | |||||||
Tiger Brands Ltd. | Food Products | 167,332 | 5,010,224 | |||||||
|
| |||||||||
| 23,795,217 | ||||||||||
|
| |||||||||
South Korea 4.0% | ||||||||||
Grand Korea Leisure Co. Ltd. | Hotels, Restaurants & Leisure | 139,610 | 4,326,150 | |||||||
LG Fashion Corp. | Textiles, Apparel & Luxury Goods | 28,382 | 700,606 | |||||||
Samsung Electronics Co. Ltd. | Semiconductors & Semiconductor Equipment | 12,328 | 14,481,947 | |||||||
|
| |||||||||
| 19,508,703 | ||||||||||
|
| |||||||||
Sweden 0.5% | ||||||||||
Oriflame Cosmetics SA, SDR | Personal Products | 81,636 | 2,584,200 | |||||||
|
| |||||||||
Switzerland 2.0% | ||||||||||
Compagnie Financiere Richemont SA | Textiles, Apparel & Luxury Goods | 108,904 | 9,630,025 | |||||||
|
| |||||||||
TD-16
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Templeton Developing Markets Securities Fund | Industry | Shares | Value | |||||||
Common Stocks (continued) | ||||||||||
Taiwan 0.8% | ||||||||||
Taiwan Semiconductor Manufacturing Co. Ltd. | Semiconductors & Semiconductor Equipment | 984,500 | $ | 3,646,296 | ||||||
|
| |||||||||
Thailand 7.2% | ||||||||||
Advanced Info Service PCL, fgn. | Wireless Telecommunication Services | 105,300 | 953,584 | |||||||
Kasikornbank PCL, fgn. | Commercial Banks | 2,875,000 | 18,095,697 | |||||||
Shin Corp. PCL | Wireless Telecommunication Services | 3,635,500 | 10,156,985 | |||||||
Thai Beverage PCL | Beverages | 12,053,200 | 5,611,669 | |||||||
|
| |||||||||
| 34,817,935 | ||||||||||
|
| |||||||||
Turkmenistan 0.5% | ||||||||||
Dragon Oil PLC | Oil, Gas & Consumable Fuels | 297,559 | 2,587,413 | |||||||
|
| |||||||||
United Arab Emirates 2.6% | ||||||||||
Emaar Properties PJSC | Real Estate Management & Development | 8,942,377 | 12,660,049 | |||||||
|
| |||||||||
United Kingdom 4.3% | ||||||||||
British American Tobacco PLC | Tobacco | 190,300 | 9,751,209 | |||||||
Unilever PLC | Food Products | 265,334 | 10,740,037 | |||||||
|
| |||||||||
| 20,491,246 | ||||||||||
|
| |||||||||
United States 1.7% | ||||||||||
Avon Products Inc. | Personal Products | 391,680 | 8,237,030 | |||||||
|
| |||||||||
Vietnam 0.1% | ||||||||||
DHG Pharmaceutical JSC | Pharmaceuticals | 95,800 | 393,049 | |||||||
Dong Phu Rubber JSC | Chemicals | 104,160 | 238,234 | |||||||
|
| |||||||||
| 631,283 | ||||||||||
|
| |||||||||
Zimbabwe 0.6% | ||||||||||
Delta Corp. Ltd. | Beverages | 2,209,976 | 3,093,966 | |||||||
|
| |||||||||
Total Common Stocks (Cost $301,136,119) | 419,851,876 | |||||||||
|
| |||||||||
dParticipatory Notes 2.6% | ||||||||||
Saudi Arabia 2.6% | ||||||||||
b Deutsche Bank AG/London, Saudi Dairy & Foodstuff Co., 144A, 5/13/14 | Food Products | 55,781 | 1,275,492 | |||||||
b HSBC Bank PLC, | ||||||||||
Al Mouwasat Medical Services, 144A, 4/13/15 | Health Care Providers & Services | 19,800 | 361,670 | |||||||
Etihad Etisalat Co., 144A, 12/05/14 | Wireless Telecommunication Services | 515,329 | 10,924,683 | |||||||
|
| |||||||||
Total Participatory Notes (Cost $11,398,544) | 12,561,845 | |||||||||
|
| |||||||||
Preferred Stocks 5.8% | ||||||||||
Brazil 0.7% | ||||||||||
Itausa - Investimentos Itau SA, pfd. | Commercial Banks | 914,705 | 3,389,772 | |||||||
a Itausa - Investimentos Itau SA, DPP, pfd. | Commercial Banks | 24,675 | 90,335 | |||||||
|
| |||||||||
| 3,480,107 | ||||||||||
|
| |||||||||
Chile 2.3% | ||||||||||
Embotelladora Andina SA, pfd., A | Beverages | 2,525,717 | 11,160,781 | |||||||
|
| |||||||||
TD-17
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Templeton Developing Markets Securities Fund | Industry | Shares | Value | |||||||
Preferred Stocks (continued) | ||||||||||
Russia 2.8% | ||||||||||
Sberbank of Russia, pfd. | Commercial Banks | 6,293,975 | $ | 13,413,342 | ||||||
|
| |||||||||
Total Preferred Stocks (Cost $25,649,633) | 28,054,230 | |||||||||
|
| |||||||||
Total Investments before Short Term Investments (Cost $341,293,882) | 463,388,480 | |||||||||
|
| |||||||||
Short Term Investments (Cost $22,857,344) 4.8% | ||||||||||
Money Market Funds 4.8% | ||||||||||
United States 4.8% | ||||||||||
a,e Institutional Fiduciary Trust Money Market Portfolio | 22,857,344 | 22,857,344 | ||||||||
|
| |||||||||
Total Investments (Cost $364,151,226) 100.8% | 486,245,824 | |||||||||
Other Assets, less Liabilities (0.8)% | (3,647,820 | ) | ||||||||
|
| |||||||||
Net Assets 100.0% | $ | 482,598,004 | ||||||||
|
| |||||||||
See Abbreviations on page TD-30.
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, 2013, the aggregate value of these securities was $12,863,549, representing 2.67% of net assets.
cAt June 30, 2013, 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(c) regarding Participatory Notes.
eSee Note 7 regarding investments in the Institutional Fiduciary Trust Money Market Portfolio.
The accompanying notes are an integral part of these financial statements.
TD-18
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements
Statement of Assets and Liabilities
June 30, 2013 (unaudited)
| Templeton Developing Markets Securities Fund | ||||
Assets: | ||||
Investments in securities: | ||||
Cost - Unaffiliated issuers | $ | 341,293,882 | ||
Cost - Sweep Money Fund (Note 7) | 22,857,344 | |||
|
| |||
Total cost of investments | $ | 364,151,226 | ||
|
| |||
Value - Unaffiliated issuers | $ | 463,388,480 | ||
Value - Sweep Money Fund (Note 7) | 22,857,344 | |||
|
| |||
Total value of investments | 486,245,824 | |||
Cash | 443,125 | |||
Foreign currency, at value (cost $4,956) | 4,912 | |||
Receivables: | ||||
Investment securities sold | 654,147 | |||
Capital shares sold | 570,685 | |||
Dividends | 911,775 | |||
Foreign tax | 25,763 | |||
Other assets | 158 | |||
|
| |||
Total assets | 488,856,389 | |||
|
| |||
Liabilities: | ||||
Payables: | ||||
Investment securities purchased | 4,276,990 | |||
Capital shares redeemed | 915,194 | |||
Affiliates | 644,455 | |||
Accrued expenses and other liabilities | 421,746 | |||
|
| |||
Total liabilities | 6,258,385 | |||
|
| |||
Net assets, at value | $ | 482,598,004 | ||
|
| |||
Net assets consist of: | ||||
Paid-in capital | $ | 409,975,965 | ||
Distributions in excess of net investment income | (2,059,504 | ) | ||
Net unrealized appreciation (depreciation) | 122,056,757 | |||
Accumulated net realized gain (loss) | (47,375,214 | ) | ||
|
| |||
Net assets, at value | $ | 482,598,004 | ||
|
| |||
The accompanying notes are an integral part of these financial statements.
TD-19
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Assets and Liabilities (continued)
June 30, 2013 (unaudited)
| Templeton Developing Markets Securities Fund | ||||
Class 1: | ||||
Net assets, at value | $ | 159,421,336 | ||
|
| |||
Shares outstanding | 16,684,839 | |||
|
| |||
Net asset value and maximum offering price per share | $ | 9.55 | ||
|
| |||
Class 2: | ||||
Net assets, at value | $ | 267,008,451 | ||
|
| |||
Shares outstanding | 28,123,838 | |||
|
| |||
Net asset value and maximum offering price per share | $ | 9.49 | ||
|
| |||
Class 3: | ||||
Net assets, at value | $ | 37,549,855 | ||
|
| |||
Shares outstanding | 3,979,212 | |||
|
| |||
Net asset value and maximum offering price per sharea | $ | 9.44 | ||
|
| |||
Class 4: | ||||
Net assets, at value | $ | 18,618,362 | ||
|
| |||
Shares outstanding | 1,958,199 | |||
|
| |||
Net asset value and maximum offering price per share | $ | 9.51 | ||
|
| |||
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-20
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Operations
for the six months ended June 30, 2013 (unaudited)
| Templeton Developing Markets Securities Fund | ||||
Investment income: | ||||
Dividends (net of foreign taxes of $664,130) | $ | 8,946,281 | ||
Income from securities loaned | 14,338 | |||
|
| |||
Total investment income | 8,960,619 | |||
|
| |||
Expenses: | ||||
Management fees (Note 3a) | 3,010,917 | |||
Administrative fees (Note 3b) | 385,193 | |||
Distribution fees: (Note 3c) | ||||
Class 2 | 361,461 | |||
Class 3 | 57,133 | |||
Class 4 | 38,950 | |||
Unaffiliated transfer agent fees | 526 | |||
Custodian fees (Note 4) | 177,204 | |||
Reports to shareholders | 104,367 | |||
Professional fees | 36,954 | |||
Trustees’ fees and expenses | 1,204 | |||
Other | 9,974 | |||
|
| |||
Total expenses | 4,183,883 | |||
|
| |||
Net investment income | 4,776,736 | |||
|
| |||
Realized and unrealized gains (losses): | ||||
Net realized gain (loss) from: | ||||
Investments | 46,990,763 | |||
Foreign currency transactions | (247,634 | ) | ||
|
| |||
Net realized gain (loss) | 46,743,129 | |||
|
| |||
Net change in unrealized appreciation (depreciation) on: | ||||
Investments | (90,957,687 | ) | ||
Translation of other assets and liabilities denominated in foreign currencies | (15,598 | ) | ||
Change in deferred taxes on unrealized appreciation | 21,147 | |||
|
| |||
Net change in unrealized appreciation (depreciation) | (90,952,138 | ) | ||
|
| |||
Net realized and unrealized gain (loss) | (44,209,009 | ) | ||
|
| |||
Net increase (decrease) in net assets resulting from operations | $ | (39,432,273 | ) | |
|
| |||
The accompanying notes are an integral part of these financial statements.
TD-21
Table of Contents
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, 2013 (unaudited) | Year Ended December 31, 2012 | |||||||
| ||||||||
Increase (decrease) in net assets: | ||||||||
Operations: | ||||||||
Net investment income | $ | 4,776,736 | $ | 10,321,744 | ||||
Net realized gain (loss) from investments and foreign currency transactions | 46,743,129 | 37,187,656 | ||||||
Net change in unrealized appreciation (depreciation) on investments, translation of other assets and liabilities denominated in foreign currencies and deferred taxes | (90,952,138 | ) | 25,533,270 | |||||
| ||||||||
Net increase (decrease) in net assets resulting from operations | (39,432,273 | ) | 73,042,670 | |||||
| ||||||||
Distributions to shareholders from: | ||||||||
Net investment income: | ||||||||
Class 1 | (3,816,779 | ) | (3,523,272 | ) | ||||
Class 2 | (5,449,449 | ) | (4,111,805 | ) | ||||
Class 3 | (777,644 | ) | (716,639 | ) | ||||
Class 4 | (373,848 | ) | (295,623 | ) | ||||
| ||||||||
Total distributions to shareholders | (10,417,720 | ) | (8,647,339 | ) | ||||
| ||||||||
Capital share transactions: (Note 2) | ||||||||
Class 1 | (27,397,174 | ) | (52,933,691 | ) | ||||
Class 2 | 2,547,894 | (36,646,633 | ) | |||||
Class 3 | (6,795,146 | ) | (1,195,085 | ) | ||||
Class 4 | (2,731,593 | ) | (3,647,744 | ) | ||||
| ||||||||
Total capital share transactions | (34,376,019 | ) | (94,423,153 | ) | ||||
| ||||||||
Redemption fees | 906 | 1,457 | ||||||
| ||||||||
Net increase (decrease) in net assets | (84,225,106 | ) | (30,026,365 | ) | ||||
| ||||||||
Net assets: | ||||||||
Beginning of period | 566,823,110 | 596,849,475 | ||||||
| ||||||||
End of period | $ | 482,598,004 | $ | 566,823,110 | ||||
| ||||||||
Undistributed net investment income (distributions in excess of net investment income) included in net assets: | ||||||||
End of period | $ | (2,059,504 | ) | $ | 3,581,480 | |||
| ||||||||
The accompanying notes are an integral part of these financial statements.
TD-22
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited)
Templeton Developing Markets Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Templeton Variable Insurance Products Trust (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end investment company, consisting of twenty-one separate funds. The Templeton Developing Markets Securities Fund (Fund) is included in this report. The financial statements of the remaining funds in the Trust are presented separately. Shares of the Fund are 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 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 Board), the Fund’s administrator, investment manager and other affiliates have formed the Valuation and Liquidity Oversight Committee (VLOC). The VLOC provides administration and oversight of the Fund’s valuation policies and procedures, which are approved annually by the Board. Among other things, these procedures allow the Fund to utilize independent pricing services, quotations from securities and financial instrument dealers, and other market sources to determine fair value.
Equity securities and exchange traded funds 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 (OTC) 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 financial instruments for which market prices are not reliable or readily available. Under these procedures, the VLOC convenes on a regular basis to review such financial instruments and considers a number of factors, including significant unobservable valuation inputs, when arriving at fair value. The VLOC 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. An income-based valuation approach may also be used 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. The VLOC employs various methods for calibrating these valuation approaches including a regular review of key inputs and assumptions, transactional back-testing or disposition analysis, and reviews of any related market activity.
Trading in securities on foreign securities stock exchanges and OTC 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 VLOC 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 Depositary Receipts, futures contracts and exchange traded funds). These price movements are measured against
TD-23
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Developing Markets Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
a. Financial Instrument Valuation (continued)
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.
In addition, certain foreign markets may be open on days that the NYSE is closed, which could result in differences between the value of the Fund’s portfolio securities on the last business day and the last calendar day of the reporting period. Any significant security valuation changes due to an open foreign market are adjusted and reflected by the Fund for financial reporting purposes.
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 Board.
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. Participatory Notes
The Fund invests in Participatory Notes (P-Notes). P-notes are promissory notes that are designed to offer a return linked to the performance of a particular underlying equity security or market. P-Notes are issued by banks or broker-dealers and allow the fund to gain exposure to common stocks in markets where direct investment is not allowed. Income received from P-Notes is recorded as dividend income in the Statement of Operations. P-Notes may contain various risks including the potential inability of the counterparty to fulfill their obligations under the terms of the contract. These securities may be more volatile and less liquid than other investments held by the Fund.
d. Securities Lending
The Fund participates in an agency based securities 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. 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
TD-24
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Developing Markets Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
d. Securities Lending (continued)
investment, securities loaned, and the risk that the agent may default on its obligations to the Fund. The securities lending agent has agreed to indemnify the Fund in the event of default by a third party borrower. At June 30, 2013, the Fund had no securities on loan.
e. 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 if applicable, excise taxes. As a result, no provision for U.S. federal income taxes is required.
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 in an amount that would be payable if the securities were disposed of on the valuation date.
The Fund recognizes the tax benefits of uncertain tax positions only when the position is “more likely than not” to be sustained upon examination by the tax authorities based on the technical merits of the tax position. As of June 30, 2013, and for all open tax years, the Fund has determined that no liability for unrecognized tax benefits is required in the Fund’s financial statements related to uncertain tax positions taken on a tax return (or expected to be taken on future tax returns). Open tax years are those that remain subject to examination and are based on each tax jurisdiction statute of limitation.
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. 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.
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.
TD-25
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Developing Markets Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
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, 2013, 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, 2013 | Year Ended December 31, 2012 | |||||||||||||||
| Class 1 Shares: | Shares | Amount | Shares | Amount | ||||||||||||
Shares sold | 593,031 | $ | 6,362,205 | 1,107,285 | $ | 11,165,172 | ||||||||||
Shares issued in reinvestment of distributions | 392,673 | 3,816,779 | 385,901 | 3,523,272 | ||||||||||||
Shares redeemed | (3,537,696 | ) | (37,576,158 | ) | (6,733,412 | ) | (67,622,135 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | (2,551,992 | ) | $ | (27,397,174 | ) | (5,240,226 | ) | $ | (52,933,691 | ) | ||||||
| ||||||||||||||||
Class 2 Shares: | ||||||||||||||||
Shares sold | 2,887,511 | $ | 29,837,645 | 3,879,555 | $ | 38,012,902 | ||||||||||
Shares issued in reinvestment of distributions | 564,125 | 5,449,449 | 453,341 | 4,111,805 | ||||||||||||
Shares redeemed | (3,103,000 | ) | (32,739,200 | ) | (7,891,630 | ) | (78,771,340 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | 348,636 | $ | 2,547,894 | (3,558,734 | ) | $ | (36,646,633 | ) | ||||||||
| ||||||||||||||||
Class 3 Shares: | ||||||||||||||||
Shares sold | 337,469 | $ | 3,607,266 | 998,194 | $ | 10,036,984 | ||||||||||
Shares issued in reinvestment of distributions | 81,005 | 777,644 | 79,538 | 716,639 | ||||||||||||
Shares redeemed | (1,066,612 | ) | (11,180,056 | ) | (1,224,195 | ) | (11,948,708 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | (648,138 | ) | $ | (6,795,146 | ) | (146,463 | ) | $ | (1,195,085 | ) | ||||||
| ||||||||||||||||
Class 4 Shares: | ||||||||||||||||
Shares sold | 93,448 | $ | 993,059 | 257,374 | $ | 2,544,613 | ||||||||||
Shares issued on reinvestment of distributions | 38,661 | 373,848 | 32,558 | 295,623 | ||||||||||||
Shares redeemed | (395,789 | ) | (4,098,500 | ) | (656,835 | ) | (6,487,980 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | (263,680 | ) | $ | (2,731,593 | ) | (366,903 | ) | $ | (3,647,744 | ) | ||||||
| ||||||||||||||||
TD-26
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Developing Markets 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 | |
Templeton Asset Management Ltd. (TAML) | Investment manager | |
Franklin Templeton Services, LLC (FT Services) | Administrative manager | |
Franklin Templeton Distributors, Inc. (Distributors) | Principal underwriter | |
Franklin Templeton Investor Services, LLC (Investor Services) | Transfer agent |
a. Management Fees
The Fund pays an investment management fee to TAML based on the average daily net assets of the Fund as follows:
| Annualized Fee Rate | Net Assets | |
| 1.100% | 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 |
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 Board 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. Some distribution fees are not charged on shares held by affiliates. The Board 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, 2013, there were no credits earned.
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Developing Markets Securities Fund
5. INCOME TAXES
For tax purposes, capital losses may be carried over to offset future capital gains. Capital loss carryforwards with no expiration, if any, must be fully utilized before those losses with expiration dates.
At December 31, 2012, the Fund had capital loss carryforwards of $88,126,277 expiring in 2017.
At June 30, 2013, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
Cost of investments | $ | 376,526,690 | ||
|
| |||
Unrealized appreciation | $ | 130,443,886 | ||
Unrealized depreciation | (20,724,752 | ) | ||
|
| |||
Net unrealized appreciation (depreciation) | $ | 109,719,134 | ||
|
| |||
Differences between income and/or capital gains as determined on a book basis and a tax basis are primarily due to differing treatments of 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, 2013, aggregated $148,918,292 and $200,125,049, 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 $1.5 billion (Global Credit Facility) which matures on January 17, 2014. 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 0.07% based upon the unused portion of the Global Credit Facility. These fees are reflected in other expenses on the Statement of Operations. During the period ended June 30, 2013, 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)
Templeton Developing Markets Securities Fund
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 financial instruments and are summarized in the following fair value hierarchy:
| • | Level 1 – quoted prices in active markets for identical financial instruments |
| • | Level 2 – other significant observable inputs (including quoted prices for similar financial instruments, interest rates, prepayment speed, credit risk, etc.) |
| • | Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of financial instruments) |
The inputs or methodology used for valuing financial instruments are not an indication of the risk associated with investing in those financial instruments.
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.
A summary of inputs used as of June 30, 2013, in valuing the Fund’s assets carried at fair value, is as follows:
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
|
| |||||||||||||||
Assets: | ||||||||||||||||
Investments in Securities: | ||||||||||||||||
Closed End Funds | $ | 2,920,529 | $ | — | $ | — | $ | 2,920,529 | ||||||||
Equity Investments:a | ||||||||||||||||
Russia | 14,571,696 | 17,365,576 | — | 31,937,272 | ||||||||||||
All Other Equity Investmentsb | 415,968,834 | — | — | 415,968,834 | ||||||||||||
Participatory Notes | — | 12,561,845 | — | 12,561,845 | ||||||||||||
Short Term Investments | 22,857,344 | — | — | 22,857,344 | ||||||||||||
|
| |||||||||||||||
Total Investments in Securities | $ | 456,318,403 | $ | 29,927,421 | $ | — | $ | 486,245,824 | ||||||||
|
| |||||||||||||||
aIncludes common and preferred stocks.
bFor detailed categories, see the accompanying Statement of Investments.
11. NEW ACCOUNTING PRONOUNCEMENTS
In June 2013, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2013-08, Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements. The ASU modifies the criteria used in defining an investment company under U.S. Generally Accepted Accounting Principles and also sets forth certain measurement and disclosure requirements. Under the ASU, an entity that is registered under the 1940 Act automatically qualifies as an investment company. The ASU is effective for interim and annual reporting periods beginning after December 15, 2013. The Fund is currently reviewing the requirements and believes the adoption of this ASU will not have a material impact on its financial statements.
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.
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Developing Markets Securities Fund
ABBREVIATIONS |
| Selected Portfolio |
| ADR - American Depositary Receipt |
| DPP - Depositary Receipt Preferred |
| SDR - Swedish Depositary Receipt |
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Franklin Templeton Variable Insurance Products Trust
Tax Information (unaudited)
Templeton Developing Markets Securities Fund
At December 31, 2012, 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 hereby reports to shareholders the foreign source income and foreign taxes paid, pursuant to Section 853 of the Internal Revenue Code. This written statement will allow shareholders of record on June 13, 2013, 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 provided as detailed analysis of foreign taxes paid, and foreign source income as reported 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 | $ | 0.0339 | $ | 0.2647 | ||||
Class 2 | $ | 0.0339 | $ | 0.2386 | ||||
Class 3 | $ | 0.0339 | $ | 0.2346 | ||||
Class 4 | $ | 0.0339 | $ | 0.2246 | ||||
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.
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TEMPLETON FOREIGN SECURITIES FUND
This semiannual report for Templeton Foreign Securities Fund covers the period ended June 30, 2013.
Performance Summary as of 6/30/13
Templeton Foreign Securities Fund – Class 1 delivered a +2.42% total return for the six-month period ended 6/30/13.
Performance reflects the Fund’s Class 1 operating expenses, but does not include any contract fees, expenses or sales charges. If they had been included, performance would be lower. These charges and deductions, particularly for variable life policies, can have a significant effect on contract values and insurance benefits. See the contract prospectus for a complete description of these expenses, including sales charges.
Templeton Foreign Securities Fund – Class 1
Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares.
Current performance may differ from figures shown.
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Fund Goal and Main Investments: Templeton Foreign Securities Fund seeks long-term capital growth. Under normal market conditions, the Fund 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’s benchmark, the MSCI Europe, Australasia, Far East (EAFE) Index, produced a +4.47% 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 developed and emerging market stocks, as measured by the MSCI All Country World Index, advanced during the first six months of 2013 as many central banks continued supportive monetary policies. The economic focus and highly correlated market movements characteristic of previous periods appeared to be supplanted by a more fundamentals-based market environment. Regional performance was also more consistent with local economic trends, although periodic volatility highlighted the recovery’s fragility. Continued U.S. gross domestic product (GDP) growth accompanied improvements in housing, labor and retail sales. Eurozone first-quarter GDP growth missed expectations, although the number of unemployed declined and manufacturing indicator levels increased in the first half of 2013. Japan demonstrated economic progress amid major reflationary initiatives as business confidence, industrial production and retail sales improved and inflation stabilized. However, investor confidence in the country’s radical policy maneuvers wavered. China’s growth rate and manufacturing levels were weaker than expected, and the International Monetary Fund downgraded the country’s growth outlook.
Despite generally accommodative global monetary policies, central banks changed their strategies during the period to reflect the increasingly varied needs of different economies. The U.S. Federal Reserve Board (Fed) vowed to keep interest rates low until the unemployment rate reached 6.5% but ignited considerable market volatility and a Treasury sell-off by suggesting it may taper monthly bond purchases
1. Source: © 2013 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: All investments involve risks, including possible loss of principal. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments; investments in emerging markets involve heightened risks related to the same factors. To the extent the Fund focuses on particular countries, regions, industries, sectors or types of investment from time to time, it may be subject to greater risks of adverse developments in such areas of focus than a fund that invests in a wider variety of countries, regions, industries, sectors or investments. Current political uncertainty surrounding the European Union (EU) and its membership may increase market volatility. The financial instability of some countries in the EU, including Greece, Italy and Spain, together with the risk of that impacting other more stable countries, may increase the economic risk of investing in companies in Europe. The Fund is actively managed but there is no guarantee that the manager’s investment decisions will produce the desired results. The Fund’s prospectus also includes a description of the main investment risks.
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should economic conditions warrant. The European Central Bank cut benchmark interest rates and pledged to maintain systemic support after successfully containing a run on a Cyprus bank. Elsewhere in developed markets, the Bank of Japan’s new governor set an explicit inflation target and pledged to double bond purchases in what many believe was unprecedented policy reform.
Emerging market central banks were more aggressive, with Brazil’s central bank hiking interest rates amid rising inflation and China’s central bank taking measures to curb real estate and credit speculation. Chinese liquidity tightening weighed on credit markets at period-end, and a jump in the interbank lending rate underscored concerns about the country’s shadow banking system. Volatility surfaced in the emerging market region as political protests intensified, and asset prices fell as investors responded to rising bond rates by unwinding highly leveraged emerging market carry trades.2 Given the rise in rates near period-end, longer duration U.S. Treasury and emerging market bond prices experienced meaningful price declines. In the second quarter, gold, traditionally a safe haven, posted its worst quarterly performance since 1974 as inflation expectations remained subdued and global commodities stayed under pressure. Investor sentiment improved in the last week of the period, and stock prices rebounded from period lows after China’s central bank intervened to calm the country’s interbank market, positive economic reports helped stabilize Japanese government bond yields, and several Fed members reassured investors that the Fed’s accommodative monetary policy would continue.
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, the health care sector experienced strong growth fueled by increasing demand and industry mergers and
2. In a carry trade, an investor seeks to profit from an interest rate differential by borrowing low-yielding currencies and lending high-yielding currencies. The use of borrowed capital to facilitate the trade creates leverage for the borrower.
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acquisition activity.3 In this environment, our overweighting and stock selection in the sector were major contributors to Fund performance relative to the MSCI EAFE Index. Noteworthy holdings included pharmaceutical companies Roche Holding (Switzerland), GlaxoSmithKline (U.K.) and Sanofi (France). Our underweighting in the poorly performing materials sector also aided relative results.4 Other individual contributors included financial services provider ING U.S.5 and Japanese automobile manufacturers Toyota Motor and Mazda Motor (sold by period-end).
In contrast, our overweighting and stock selection in the volatile energy sector was a notable detractor from Fund performance.6 Our positions in energy equipment and services company Aker Solutions (Norway) and oil, gas and consumable fuels producers Petroleo Brasileiro (Brazil) and Statoil (Norway) suffered from oil price fluctuations stemming from Middle East political tensions. Our stock selection in telecommunication services companies such as diversified telecommunication providers China Telecom5 and ORANGE7 and wireless telecommunication provider China Mobile5 weighed on results.8 The Fund’s positions in three off-benchmark South Korean companies, Samsung Electronics, KB Financial Group and POSCO, also hindered Fund performance.5
From a geographic perspective, our stock selection in Europe benefited the Fund’s relative performance, as a number of our investments in Switzerland and the U.K. performed well. Our exposure to Norway, however, was detrimental. In Asia, our stock selection detracted from performance, particularly in South Korea5 and 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
3. The health care sector comprises health care equipment and supplies, life sciences tools and services, and pharmaceuticals in the SOI.
4. The materials sector comprises chemicals, construction materials, containers and packaging, and metals and mining in the SOI.
5. Not an index component.
6. The energy sector comprises energy equipment and services; and oil, gas and consumable fuels in the SOI.
7. France Telecom in the SOI.
8. The telecommunication services sector comprises diversified telecommunication services and wireless telecommunication services in the SOI.
Top 10 Holdings
Templeton Foreign Securities Fund 6/30/13
| Company Sector/Industry, Country | % of Total Net Assets | |||
| Credit Suisse Group AG | 3.3% | |||
| Capital Markets, Switzerland | ||||
| Roche Holding AG | 3.2% | |||
| Pharmaceuticals, Switzerland | ||||
| Sanofi | 2.8% | |||
| Pharmaceuticals, France | ||||
| GlaxoSmithKline PLC | 2.8% | |||
| Pharmaceuticals, U.K. | ||||
| BNP Paribas SA | 2.7% | |||
| Commercial Banks, France | ||||
| ING Groep NV, IDR | 2.5% | |||
| Diversified Financial Services, Netherlands | ||||
| AXA SA | 2.4% | |||
| Insurance, France | ||||
| Tesco PLC | 2.3% | |||
| Food & Staples Retailing, U.K. | ||||
| Samsung Electronics Co. Ltd. | 2.2% | |||
| Semiconductors & Semiconductor Equipment, South Korea | ||||
| Aviva PLC | 2.2% | |||
| Insurance, U.K. | ||||
The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund’s Statement of Investments (SOI).
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June 30, 2013, the U.S. dollar rose in value relative to most currencies. As a result, the Fund’s performance was negatively affected by the portfolio’s investment predominantly in securities with non-U.S. currency exposure.
Thank you for your participation in Templeton Foreign 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, 2013, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.
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Fund Expenses
As an investor in a variable insurance contract (Contract) that indirectly provides for investment in an underlying mutual fund, you can incur transaction and/or ongoing expenses at both the Fund level and the Contract level.
| • | Transaction expenses can include sales charges (loads) on purchases, surrender fees, transfer fees and premium taxes. |
| • | Ongoing expenses can include management fees, distribution and service (12b-1) fees, contract fees, annual maintenance fees, mortality and expense risk fees and other fees and expenses. All mutual funds and Contracts have some types of ongoing expenses. |
The expenses shown in the table are meant to highlight ongoing expenses at the Fund level only and do not include ongoing expenses at the Contract level, or transaction expenses at either the Fund or Contract levels. While the Fund does not have transaction expenses, if the transaction and ongoing expenses at the Contract level were included, the expenses shown below would be higher. You should consult your Contract prospectus or disclosure document for more information.
The table shows Fund-level ongoing expenses and can help you understand these expenses and compare them with those of other mutual funds offered through the Contract. The table assumes a $1,000 investment held for the six months indicated. Please refer to the Fund prospectus for additional information on operating expenses.
Actual Fund Expenses
The first line (Actual) of the table provides actual account values and expenses. The “Ending Account Value” is derived from the Fund’s actual return, which includes the effect of ongoing Fund expenses, but does not include the effect of ongoing Contract expenses.
You can estimate the Fund-level expenses you incurred during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:
| 1. | Divide your account value by $1,000. |
If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6.
| 2. | Multiply the result by the number under the heading “Fund-Level Expenses Incurred During Period.” |
If Fund-Level Expenses Incurred During Period were $7.50, then 8.6 x $7.50 = $64.50.
In this illustration, the estimated expenses incurred this period at the Fund level are $64.50.
Templeton Foreign Securities Fund – Class 1
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Hypothetical Example for Comparison with Other Mutual Funds
Information in the second line (Hypothetical) of the table can help you compare ongoing expenses of the Fund with those of other mutual funds offered through the Contract. This information may not be used to estimate the actual ending account balance or expenses you incurred during the period. The hypothetical “Ending Account Value” is based on the Fund’s actual expense ratio and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Fund-Level Expenses Incurred During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds offered through a Contract.
| Class 1 | Beginning Account Value 1/1/13 | Ending Account Value 6/30/13 | Fund-Level Expenses Incurred During Period* 1/1/13–6/30/13 | |||||||||
Actual | $ | 1,000 | $ | 1,024.20 | $ | 3.91 | ||||||
Hypothetical (5% return | $ | 1,000 | $ | 1,020.93 | $ | 3.91 | ||||||
*Expenses are calculated using the most recent six-month annualized expense ratio for the Fund’s Class 1 shares (0.78%), which does not include any ongoing expenses of the Contract for which the Fund is an investment option, multiplied by the average account value over the period, multiplied by 181/365 to reflect the one-half year period.
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SUPPLEMENT DATED JULY 24, 2013
TOTHE PROSPECTUSES
DATED MAY 1, 2013
OF
FRANKLIN INCOME SECURITIES FUND
TEMPLETON DEVELOPING MARKETS SECURITIES FUND
TEMPLETON FOREIGN SECURITIES FUND
(A series of Franklin Templeton Variable Insurance Products Trust)
The prospectus is amended as follows:
I. The “Fund Summaries – Portfolio Managers” section on page FI-S5 is revised to read as follows:
Portfolio Managers
EDWARD D. PERKS, CFA Senior Vice President of Advisers and portfolio manager of the Fund since 2002.
MATTHEW QUINLAN Portfolio Manager of Advisers and portfolio manager of the Fund since December 2012.
ALEX W. PETERS, CFA Vice President of Advisers and portfolio manager of the Fund since December 2012.
CHARLES B. JOHNSON Portfolio Manager of Investment Counsel and portfolio manager of the Fund since 1989.
II. The “Fund Details – Management” section disclosure concerning the portfolio management team beginning on page FI-D9 is revised to read as follows:
The Fund is managed by a team of dedicated professionals focused on investments in debt and equity securities. The portfolio managers of the team are as follows:
EDWARD D. PERKS, CFA Senior Vice President of Advisers | Mr. Perks has been the lead portfolio manager of the Fund since 2002. He has primary responsibility for the investments of the Fund. He has final authority over all aspects of the Fund’s investment portfolio, including but not limited to, purchases and sales of individual securities, portfolio risk assessment, and the management of daily cash balances in accordance with anticipated investment management requirements. The degree to which he may perform these functions, and the nature of these functions, may change from time to time. He joined Franklin Templeton Investments in 1992. |
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MATTHEW QUINLAN Portfolio Manager of Advisers | Mr. Quinlan has been a portfolio manager of the Fund since December 2012, providing research and advice on the purchases and sales of individual securities, and portfolio risk assessment. He joined Franklin Templeton Investments in 2005. | |
ALEX W. PETERS, CFA Vice President of Advisers | Mr. Peters has been a portfolio manager of the Fund since December 2012, providing research and advice on the purchases and sales of individual securities, and portfolio risk assessment. He joined Franklin Templeton Investments in 1992. | |
CHARLES B. JOHNSON Portfolio Manager of Investment Counsel | Mr. Johnson has been a portfolio manager of the Fund since 1989, providing research, advice and portfolio risk assessment on the Fund’s investment portfolio. He joined Franklin Templeton Investments in 1957. | |
CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.
III. The “Fund Details – Principal Risks” section beginning on page TD-D3 for the Templeton Developing Markets Securities Fund is amended to add the following:
Participatory Notes
Participatory notes involve risks that are in addition to the risks normally associated with a direct investment in the underlying equity securities. In addition, the Fund is subject to the risk that the issuer of the participatory note (i.e., the issuing bank or broker-dealer), which is the only responsible party under the note, is unable or refuses to perform under the terms of the participatory note. While the holder of a participatory note is entitled to receive from the issuing bank or broker-dealer any dividends or other distributions paid on the underlying securities, the holder is not entitled to the same rights as an owner of the underlying securities, such as voting rights. Participatory notes are also not traded on exchanges, are privately issued, and may be illiquid. To the extent a participatory note is determined to be illiquid, it would be subject to the Fund’s limitation on investments in illiquid securities. There can be no assurance that the trading price or value of participatory notes will equal the value of the underlying value of the equity securities they seek to replicate.
IV. The fifth paragraph of the “Fund Details – Principal Investment Policies and Practices” section on page TF-D1 for the Templeton Foreign Securities Fund is amended as follows:
The Fund may also buy and sell (write) exchange traded and over-the-counter equity call options on individual securities held in its portfolio in an amount up to 10% of its net assets, to generate additional income for the Fund. A call option gives the purchaser of the option, upon payment of a premium, the right to buy, and the seller the obligation to sell, the underlying instrument at the exercise price. For example, the Fund may write an option with a strike price that is generally equal to the price target at which the investment manager would sell (in the case of a call option) a particular stock, and in return the Fund would earn a premium from the buyer of the option. The investment manager considers various factors, such as availability and cost, in deciding whether, when and to what extent to enter into derivative transactions.
Please keep this supplement for future reference.
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Franklin Templeton Variable Insurance Products Trust
Financial Highlights
Templeton Foreign Securities Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 1 | 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||||||
| ||||||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 14.63 | $ | 12.78 | $ | 14.54 | $ | 13.68 | $ | 10.95 | $ | 20.57 | ||||||||||||
|
| |||||||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.26 | 0.38 | 0.42 | 0.28 | 0.25 | 0.45 | ||||||||||||||||||
Net realized and unrealized gains (losses) | 0.11 | 1.91 | (1.90 | ) | 0.86 | 3.39 | (8.01 | ) | ||||||||||||||||
|
| |||||||||||||||||||||||
Total from investment operations | 0.37 | 2.29 | (1.48 | ) | 1.14 | 3.64 | (7.56 | ) | ||||||||||||||||
|
| |||||||||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income | (0.41 | ) | (0.44 | ) | (0.28 | ) | (0.28 | ) | (0.43 | ) | (0.45 | ) | ||||||||||||
Net realized gains | — | — | — | — | (0.48 | ) | (1.61 | ) | ||||||||||||||||
|
| |||||||||||||||||||||||
Total distributions | (0.41 | ) | (0.44 | ) | (0.28 | ) | (0.28 | ) | (0.91 | ) | (2.06 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Redemption feesc | — | — | — | — | — | — | ||||||||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ | 14.59 | $ | 14.63 | $ | 12.78 | $ | 14.54 | $ | 13.68 | $ | 10.95 | ||||||||||||
|
| |||||||||||||||||||||||
Total returnd | 2.42% | 18.60% | (10.44)% | 8.67% | 37.34% | (40.23)% | ||||||||||||||||||
Ratios to average net assetse | ||||||||||||||||||||||||
Expenses | 0.78% | 0.79% | 0.79% | f | 0.78% | f | 0.78% | f | 0.77% | f | ||||||||||||||
Net investment income | 3.48% | 2.84% | 2.92% | 2.10% | 2.28% | 2.82% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 258,659 | $ | 265,924 | $ | 254,292 | $ | 321,282 | $ | 318,173 | $ | 262,725 | ||||||||||||
Portfolio turnover rate | 13.36% | 12.53% | 21.09% | 19.16% | 22.50% | 18.27% | ||||||||||||||||||
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.
TF-10
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Templeton Foreign Securities Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 2 | 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||||||
| ||||||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 14.37 | $ | 12.56 | $ | 14.29 | $ | 13.45 | $ | 10.76 | $ | 20.25 | ||||||||||||
|
| |||||||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.24 | 0.34 | 0.37 | 0.25 | 0.22 | 0.40 | ||||||||||||||||||
Net realized and unrealized gains (losses) | 0.11 | 1.87 | (1.86 | ) | 0.84 | 3.34 | (7.89 | ) | ||||||||||||||||
|
| |||||||||||||||||||||||
Total from investment operations | 0.35 | 2.21 | (1.49 | ) | 1.09 | 3.56 | (7.49 | ) | ||||||||||||||||
|
| |||||||||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income | (0.37 | ) | (0.40 | ) | (0.24 | ) | (0.25 | ) | (0.39 | ) | (0.39 | ) | ||||||||||||
Net realized gains | — | — | — | — | (0.48 | ) | (1.61 | ) | ||||||||||||||||
|
| |||||||||||||||||||||||
Total distributions | (0.37 | ) | (0.40 | ) | (0.24 | ) | (0.25 | ) | (0.87 | ) | (2.00 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Redemption feesc | — | — | — | — | — | — | ||||||||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ | 14.35 | $ | 14.37 | $ | 12.56 | $ | 14.29 | $ | 13.45 | $ | 10.76 | ||||||||||||
|
| |||||||||||||||||||||||
Total returnd | 2.36% | 18.23% | (10.63)% | 8.41% | 37.04% | (40.38)% | ||||||||||||||||||
Ratios to average net assetse | ||||||||||||||||||||||||
Expenses | 1.03% | 1.04% | 1.04% | f | 1.03% | f | 1.03% | f | 1.02% | f | ||||||||||||||
Net investment income | 3.23% | 2.59% | 2.67% | 1.85% | 2.03% | 2.57% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 1,675,824 | $ | 1,744,231 | $ | 1,679,412 | $ | 2,090,757 | $ | 2,010,268 | $ | 1,702,038 | ||||||||||||
Portfolio turnover rate | 13.36% | 12.53% | 21.09% | 19.16% | 22.50% | 18.27% | ||||||||||||||||||
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.
TF-11
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Templeton Foreign Securities Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 3 | 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||||||
| ||||||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 14.32 | $ | 12.51 | $ | 14.24 | $ | 13.37 | $ | 10.70 | $ | 20.18 | ||||||||||||
|
| |||||||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.24 | 0.34 | 0.37 | 0.25 | 0.25 | 0.39 | ||||||||||||||||||
Net realized and unrealized gains (losses) | 0.10 | 1.87 | (1.86 | ) | 0.84 | 3.30 | (7.84 | ) | ||||||||||||||||
|
| |||||||||||||||||||||||
Total from investment operations | 0.34 | 2.21 | (1.49 | ) | 1.09 | 3.55 | (7.45 | ) | ||||||||||||||||
|
| |||||||||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income | (0.37 | ) | (0.40 | ) | (0.24 | ) | (0.22 | ) | (0.40 | ) | (0.42 | ) | ||||||||||||
Net realized gains | — | — | — | — | (0.48 | ) | (1.61 | ) | ||||||||||||||||
|
| |||||||||||||||||||||||
Total distributions | (0.37 | ) | (0.40 | ) | (0.24 | ) | (0.22 | ) | (0.88 | ) | (2.03 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Redemption feesc | — | — | — | — | — | — | ||||||||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ | 14.29 | $ | 14.32 | $ | 12.51 | $ | 14.24 | $ | 13.37 | $ | 10.70 | ||||||||||||
|
| |||||||||||||||||||||||
Total returnd | 2.29% | 18.30% | (10.68)% | 8.41% | 37.20% | (40.39)% | ||||||||||||||||||
Ratios to average net assetse | ||||||||||||||||||||||||
Expenses | 1.03% | 1.04% | 1.04% | f | 1.03% | f | 1.03% | f | 1.02% | f | ||||||||||||||
Net investment income | 3.23% | 2.59% | 2.67% | 1.85% | 2.03% | 2.57% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 86,449 | $ | 91,642 | $ | 88,380 | $ | 108,766 | $ | 115,364 | $ | 271,061 | ||||||||||||
Portfolio turnover rate | 13.36% | 12.53% | 21.09% | 19.16% | 22.50% | 18.27% | ||||||||||||||||||
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.
TF-12
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Templeton Foreign Securities Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 4 | 2012 | 2011 | 2010 | 2009 | 2008a | |||||||||||||||||||
| ||||||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 14.48 | $ | 12.66 | $ | 14.43 | $ | 13.59 | $ | 10.91 | $ | 18.90 | ||||||||||||
|
| |||||||||||||||||||||||
Income from investment operationsb: | ||||||||||||||||||||||||
Net investment incomec | 0.24 | 0.33 | 0.36 | 0.17 | 0.21 | 0.15 | ||||||||||||||||||
Net realized and unrealized gains (losses) | 0.10 | 1.89 | (1.88 | ) | 0.92 | 3.37 | (6.08 | ) | ||||||||||||||||
|
| |||||||||||||||||||||||
Total from investment operations | 0.34 | 2.22 | (1.52 | ) | 1.09 | 3.58 | (5.93 | ) | ||||||||||||||||
|
| |||||||||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income | (0.36 | ) | (0.40 | ) | (0.25 | ) | (0.25 | ) | (0.42 | ) | (0.45 | ) | ||||||||||||
Net realized gains | — | — | — | — | (0.48 | ) | (1.61 | ) | ||||||||||||||||
|
| |||||||||||||||||||||||
Total distributions | (0.36 | ) | (0.40 | ) | (0.25 | ) | (0.25 | ) | (0.90 | ) | (2.06 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Redemption feesd | — | — | — | — | — | — | ||||||||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ | 14.46 | $ | 14.48 | $ | 12.66 | $ | 14.43 | $ | 13.59 | $ | 10.91 | ||||||||||||
|
| |||||||||||||||||||||||
Total returne | 2.28% | 18.14% | (10.74)% | 8.38% | 36.84% | (35.15)% | ||||||||||||||||||
Ratios to average net assetsf | ||||||||||||||||||||||||
Expenses | 1.13% | 1.14% | 1.14% | g | 1.13% | g | 1.13% | g | 1.12% | g | ||||||||||||||
Net investment income | 3.13% | 2.49% | 2.57% | 1.75% | 1.93% | 2.47% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 442,997 | $ | 416,277 | $ | 353,346 | $ | 305,505 | $ | 48,501 | $ | 14,287 | ||||||||||||
Portfolio turnover rate | 13.36% | 12.53% | 21.09% | 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-13
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited)
| Templeton Foreign Securities Fund | Country | Shares | Value | |||||||
Common Stocks 94.6% | ||||||||||
Aerospace & Defense 1.0% | ||||||||||
BAE Systems PLC | United Kingdom | 4,201,030 | $ | 24,486,367 | ||||||
|
| |||||||||
Airlines 0.9% | ||||||||||
a Deutsche Lufthansa AG | Germany | 1,080,990 | 21,943,266 | |||||||
|
| |||||||||
Auto Components 0.8% | ||||||||||
Cie Generale des Etablissements Michelin, B | France | 222,570 | 19,902,955 | |||||||
|
| |||||||||
Automobiles 1.6% | ||||||||||
Toyota Motor Corp., ADR | Japan | 333,742 | 40,269,310 | |||||||
|
| |||||||||
Building Products 0.5% | ||||||||||
Compagnie de Saint-Gobain | France | 296,890 | 12,018,497 | |||||||
|
| |||||||||
Capital Markets 3.3% | ||||||||||
Credit Suisse Group AG | Switzerland | 3,092,738 | 81,995,118 | |||||||
|
| |||||||||
Chemicals 1.9% | ||||||||||
Akzo Nobel NV | Netherlands | 527,560 | 29,744,343 | |||||||
Potash Corp. of Saskatchewan Inc. | Canada | 468,130 | 17,849,797 | |||||||
|
| |||||||||
| 47,594,140 | ||||||||||
|
| |||||||||
Commercial Banks 12.0% | ||||||||||
BNP Paribas SA | France | 1,218,660 | 66,583,630 | |||||||
DBS Group Holdings Ltd. | Singapore | 2,174,520 | 26,597,009 | |||||||
Hana Financial Group Inc. | South Korea | 1,128,760 | 32,853,003 | |||||||
HSBC Holdings PLC | United Kingdom | 4,015,600 | 42,066,736 | |||||||
KB Financial Group Inc., ADR | South Korea | 1,189,645 | 35,249,181 | |||||||
a Lloyds Banking Group PLC | United Kingdom | 40,229,150 | 38,627,576 | |||||||
UniCredit SpA | Italy | 8,365,386 | 39,177,918 | |||||||
United Overseas Bank Ltd. | Singapore | 985,000 | 15,436,654 | |||||||
|
| |||||||||
| 296,591,707 | ||||||||||
|
| |||||||||
Commercial Services & Supplies 0.5% | ||||||||||
G4S PLC | United Kingdom | 3,386,630 | 11,869,458 | |||||||
|
| |||||||||
Communications Equipment 0.8% | ||||||||||
Ericsson, B, ADR | Sweden | 1,675,840 | 18,903,475 | |||||||
|
| |||||||||
Computers & Peripherals 0.7% | ||||||||||
Compal Electronics Inc. | Taiwan | 28,536,431 | 16,044,006 | |||||||
|
| |||||||||
Construction & Engineering 0.6% | ||||||||||
Carillion PLC | United Kingdom | 3,750,730 | 15,755,271 | |||||||
|
| |||||||||
Construction Materials 0.5% | ||||||||||
CRH PLC | Ireland | 659,820 | 13,355,190 | |||||||
|
| |||||||||
Containers & Packaging 0.8% | ||||||||||
Rexam PLC | United Kingdom | 2,719,161 | 19,744,640 | |||||||
|
| |||||||||
Diversified Financial Services 3.7% | ||||||||||
a ING Groep NV, IDR | Netherlands | 6,729,094 | 61,312,475 | |||||||
ING U.S. Inc. | United States | 1,076,240 | 29,123,054 | |||||||
|
| |||||||||
| 90,435,529 | ||||||||||
|
| |||||||||
Diversified Telecommunication Services 5.9% | ||||||||||
China Telecom Corp. Ltd., H | China | 47,482,357 | 22,651,606 | |||||||
France Telecom SA | France | 2,164,143 | 20,473,641 | |||||||
Singapore Telecommunications Ltd. | Singapore | 9,394,000 | 27,946,641 | |||||||
a Telefonica SA, ADR | Spain | 2,270,951 | 29,090,882 | |||||||
TF-14
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Templeton Foreign Securities Fund | Country | Shares | Value | |||||||
Common Stocks (continued) | ||||||||||
Diversified Telecommunication Services (continued) | ||||||||||
Telenor ASA | Norway | 1,413,644 | $ | 28,023,831 | ||||||
Vivendi SA | France | 928,427 | 17,583,485 | |||||||
|
| |||||||||
| 145,770,086 | ||||||||||
|
| |||||||||
Electrical Equipment 0.7% | ||||||||||
Alstom SA | France | 285,410 | 9,347,039 | |||||||
Shanghai Electric Group Co. Ltd. | China | 23,792,000 | 7,960,371 | |||||||
|
| |||||||||
| 17,307,410 | ||||||||||
|
| |||||||||
Electronic Equipment, Instruments & Components 2.0% | ||||||||||
a Flextronics International Ltd. | Singapore | 4,134,370 | 32,000,024 | |||||||
Kingboard Chemical Holdings Ltd. | Hong Kong | 8,846,000 | 18,180,267 | |||||||
|
| |||||||||
| 50,180,291 | ||||||||||
|
| |||||||||
Energy Equipment & Services 3.7% | ||||||||||
Aker Solutions ASA | Norway | 1,617,940 | 22,017,410 | |||||||
Ensign Energy Services Inc. | Canada | 1,965,300 | 30,432,381 | |||||||
Fugro NV, IDR | Netherlands | 120,800 | 6,549,018 | |||||||
Trican Well Service Ltd. | Canada | 2,373,000 | 31,554,230 | |||||||
|
| |||||||||
| 90,553,039 | ||||||||||
|
| |||||||||
Food & Staples Retailing 2.8% | ||||||||||
Metro AG | Germany | 374,380 | 11,851,421 | |||||||
Tesco PLC | United Kingdom | 11,285,990 | 56,903,942 | |||||||
|
| |||||||||
| 68,755,363 | ||||||||||
|
| |||||||||
Health Care Equipment & Supplies 1.0% | ||||||||||
Getinge AB, B | Sweden | 417,870 | 12,698,129 | |||||||
Nobel Biocare Holding AG | Switzerland | 974,135 | 11,856,435 | |||||||
|
| |||||||||
| 24,554,564 | ||||||||||
|
| |||||||||
Industrial Conglomerates 3.3% | ||||||||||
Hutchison Whampoa Ltd. | Hong Kong | 2,500,239 | 26,288,784 | |||||||
Koninklijke Philips NV | Netherlands | 920,320 | 25,090,738 | |||||||
Siemens AG | Germany | 285,414 | 28,847,683 | |||||||
|
| |||||||||
| 80,227,205 | ||||||||||
|
| |||||||||
Insurance 10.1% | ||||||||||
ACE Ltd. | United States | 307,649 | 27,528,432 | |||||||
Aegon NV | Netherlands | 6,126,220 | 40,979,383 | |||||||
AIA Group Ltd. | Hong Kong | 9,767,000 | 41,367,718 | |||||||
Aviva PLC | United Kingdom | 10,435,150 | 53,919,340 | |||||||
AXA SA | France | 2,967,908 | 58,314,662 | |||||||
Muenchener Rueckversicherungs-Gesellschaft AG | Germany | 68,060 | 12,526,668 | |||||||
Swiss Re AG | Switzerland | 174,680 | 12,996,776 | |||||||
|
| |||||||||
| 247,632,979 | ||||||||||
|
| |||||||||
Leisure Equipment & Products 0.7% | ||||||||||
Namco Bandai Holdings Inc. | Japan | 977,800 | 15,871,136 | |||||||
|
| |||||||||
Life Sciences Tools & Services 0.5% | ||||||||||
Lonza Group AG | Switzerland | 175,440 | 13,211,151 | |||||||
|
| |||||||||
Metals & Mining 1.5% | ||||||||||
POSCO | South Korea | 136,907 | 35,772,706 | |||||||
|
| |||||||||
TF-15
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Templeton Foreign Securities Fund | Country | Shares | Value | |||||||
Common Stocks (continued) | ||||||||||
Multiline Retail 1.1% | ||||||||||
Marks & Spencer Group PLC | United Kingdom | 4,066,900 | $ | 26,654,883 | ||||||
|
| |||||||||
Oil, Gas & Consumable Fuels 9.3% | ||||||||||
BP PLC | United Kingdom | 4,406,715 | 30,519,018 | |||||||
China Coal Energy Co. Ltd., H | China | 11,902,000 | 6,230,329 | |||||||
Reliance Industries Ltd. | India | 998,145 | 14,449,990 | |||||||
Royal Dutch Shell PLC, A | United Kingdom | 16,803 | 536,588 | |||||||
Royal Dutch Shell PLC, B | United Kingdom | 1,094,263 | 36,209,049 | |||||||
Statoil ASA | Norway | 1,816,110 | 37,467,454 | |||||||
Suncor Energy Inc. | Canada | 901,700 | 26,587,435 | |||||||
Talisman Energy Inc. | Canada | 2,554,600 | 29,157,940 | |||||||
Total SA, B | France | 979,926 | 47,838,402 | |||||||
|
| |||||||||
| 228,996,205 | ||||||||||
|
| |||||||||
Pharmaceuticals 10.0% | ||||||||||
GlaxoSmithKline PLC | United Kingdom | 2,772,585 | 69,501,530 | |||||||
Novartis AG | Switzerland | 417,200 | 29,628,110 | |||||||
Roche Holding AG | Switzerland | 312,840 | 77,808,541 | |||||||
Sanofi | France | 670,755 | 69,515,284 | |||||||
|
| |||||||||
| 246,453,465 | ||||||||||
|
| |||||||||
Professional Services 1.1% | ||||||||||
Hays PLC | United Kingdom | 11,353,070 | 15,345,440 | |||||||
Randstad Holding NV | Netherlands | 293,180 | 12,020,958 | |||||||
|
| |||||||||
| 27,366,398 | ||||||||||
|
| |||||||||
Real Estate Management & Development 0.0%† | ||||||||||
Cheung Kong (Holdings) Ltd. | Hong Kong | 922 | 12,506 | |||||||
|
| |||||||||
Semiconductors & Semiconductor Equipment 3.6% | ||||||||||
Infineon Technologies AG | Germany | 1,103,225 | 9,233,562 | |||||||
Samsung Electronics Co. Ltd. | South Korea | 46,744 | 54,911,106 | |||||||
Taiwan Semiconductor Manufacturing Co. Ltd. | Taiwan | 6,752,526 | 25,009,356 | |||||||
|
| |||||||||
| 89,154,024 | ||||||||||
|
| |||||||||
Software 1.9% | ||||||||||
Capcom Co. Ltd. | Japan | 1,211,400 | 19,601,744 | |||||||
Trend Micro Inc. | Japan | 868,100 | 27,568,455 | |||||||
|
| |||||||||
| 47,170,199 | ||||||||||
|
| |||||||||
Specialty Retail 1.7% | ||||||||||
Kingfisher PLC | United Kingdom | 8,202,826 | 42,796,409 | |||||||
|
| |||||||||
Trading Companies & Distributors 1.5% | ||||||||||
ITOCHU Corp. | Japan | 3,210,100 | 37,055,797 | |||||||
|
| |||||||||
Wireless Telecommunication Services 2.6% | ||||||||||
China Mobile Ltd. | China | 2,340,000 | 24,498,353 | |||||||
Vodafone Group PLC, ADR | United Kingdom | 1,340,319 | 38,520,768 | |||||||
|
| |||||||||
| 63,019,121 | ||||||||||
|
| |||||||||
Total Common Stocks (Cost $2,147,274,347) | 2,329,423,866 | |||||||||
|
| |||||||||
Preferred Stocks 0.6% | ||||||||||
Metals & Mining 0.3% | ||||||||||
Vale SA, ADR, pfd., A | Brazil | 664,832 | 8,084,357 | |||||||
|
| |||||||||
TF-16
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Templeton Foreign Securities Fund | Country | Shares | Value | |||||||
Preferred Stocks (continued) | ||||||||||
Oil, Gas & Consumable Fuels 0.3% | ||||||||||
Petroleo Brasileiro SA, ADR, pfd. | Brazil | 517,880 | $ | 7,592,121 | ||||||
|
| |||||||||
Total Preferred Stocks (Cost $12,298,386) | 15,676,478 | |||||||||
|
| |||||||||
Total Investments before Short Term Investments | 2,345,100,344 | |||||||||
|
| |||||||||
Short Term Investments (Cost $141,356,648) 5.7% | ||||||||||
Money Market Funds 5.7% | ||||||||||
a,b Institutional Fiduciary Trust Money Market Portfolio | United States | 141,356,648 | 141,356,648 | |||||||
|
| |||||||||
Total Investments (Cost $2,300,929,381) 100.9% | 2,486,456,992 | |||||||||
Other Assets, less Liabilities (0.9)% | (22,528,129 | ) | ||||||||
|
| |||||||||
Net Assets 100.0% | $ | 2,463,928,863 | ||||||||
|
| |||||||||
See Abbreviations on page TF-28.
†Rounds to less than 0.1% of net assets.
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.
TF-17
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements
Statement of Assets and Liabilities
June 30, 2013 (unaudited)
| Templeton Foreign Securities Fund | ||||
Assets: | ||||
Investments in securities: | ||||
Cost - Unaffiliated issuers | $ | 2,159,572,733 | ||
Cost - Sweep Money Fund (Note 7) | 141,356,648 | |||
|
| |||
Total cost of investments | $ | 2,300,929,381 | ||
|
| |||
Value - Unaffiliated issuers | $ | 2,345,100,344 | ||
Value - Sweep Money Fund (Note 7) | 141,356,648 | |||
|
| |||
Total value of investments | 2,486,456,992 | |||
Cash | 138,779 | |||
Receivables: | ||||
Capital shares sold | 1,033,839 | |||
Dividends | 8,441,897 | |||
Other assets | 709 | |||
|
| |||
Total assets | 2,496,072,216 | |||
|
| |||
Liabilities: | ||||
Payables: | ||||
Investment securities purchased | 26,990,472 | |||
Capital shares redeemed | 1,801,998 | |||
Affiliates | 2,572,459 | |||
Accrued expenses and other liabilities | 778,424 | |||
|
| |||
Total liabilities | 32,143,353 | |||
|
| |||
Net assets, at value | $ | 2,463,928,863 | ||
|
| |||
Net assets consist of: | ||||
Paid-in capital | $ | 2,316,573,510 | ||
Undistributed net investment income | 40,124,481 | |||
Net unrealized appreciation (depreciation) | 185,515,862 | |||
Accumulated net realized gain (loss) | (78,284,990 | ) | ||
|
| |||
Net assets, at value | $ | 2,463,928,863 | ||
|
| |||
The accompanying notes are an integral part of these financial statements.
TF-18
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Assets and Liabilities (continued)
June 30, 2013 (unaudited)
| Templeton Foreign Securities Fund | ||||
Class 1: | ||||
Net assets, at value | $ | 258,659,185 | ||
|
| |||
Shares outstanding | 17,725,899 | |||
|
| |||
Net asset value and maximum offering price per share | $ | 14.59 | ||
|
| |||
Class 2: | ||||
Net assets, at value | $ | 1,675,823,841 | ||
|
| |||
Shares outstanding | 116,817,356 | |||
|
| |||
Net asset value and maximum offering price per share | $ | 14.35 | ||
|
| |||
Class 3: | ||||
Net assets, at value | $ | 86,449,312 | ||
|
| |||
Shares outstanding | 6,049,050 | |||
|
| |||
Net asset value and maximum offering price per sharea | $ | 14.29 | ||
|
| |||
Class 4: | ||||
Net assets, at value | $ | 442,996,525 | ||
|
| |||
Shares outstanding | 30,644,319 | |||
|
| |||
Net asset value and maximum offering price per share | $ | 14.46 | ||
|
| |||
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-19
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Operations
for the six months ended June 30, 2013 (unaudited)
| Templeton Foreign Securities Fund | ||||
Investment income: | ||||
Dividends (net of foreign taxes $5,158,240) | $ | 52,406,093 | ||
Income from securities loaned | 1,346,107 | |||
|
| |||
Total investment income | 53,752,200 | |||
|
| |||
Expenses: | ||||
Management fees (Note 3a) | 8,070,086 | |||
Administrative fees (Note 3b) | 1,231,001 | |||
Distribution fees: (Note 3c) | ||||
Class 2 | 2,163,546 | |||
Class 3 | 112,971 | |||
Class 4 | 761,736 | |||
Unaffiliated transfer agent fees | 1,296 | |||
Custodian fees (Note 4) | 199,093 | |||
Reports to shareholders | 268,577 | |||
Professional fees | 58,726 | |||
Trustees’ fees and expenses | 5,024 | |||
Other | 25,570 | |||
|
| |||
Total expenses | 12,897,626 | |||
|
| |||
Net investment income | 40,854,574 | |||
|
| |||
Realized and unrealized gains (losses): | ||||
Net realized gain (loss) from: | ||||
Investments | 30,704,381 | |||
Foreign currency transactions | (64,566 | ) | ||
|
| |||
Net realized gain (loss) | 30,639,815 | |||
|
| |||
Net change in unrealized appreciation (depreciation) on: | ||||
Investments | (11,417,248 | ) | ||
Translation of other assets and liabilities denominated in foreign currencies | (18,333 | ) | ||
|
| |||
Net change in unrealized appreciation (depreciation) | (11,435,581 | ) | ||
|
| |||
Net realized and unrealized gain (loss) | 19,204,234 | |||
|
| |||
Net increase (decrease) in net assets resulting from operations | $ | 60,058,808 | ||
|
| |||
The accompanying notes are an integral part of these financial statements.
TF-20
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statements of Changes in Net Assets
| Templeton Foreign Securities Fund | ||||||||
| Six Months Ended June 30, 2013 (unaudited) | Year Ended December 31, 2012 | |||||||
| ||||||||
Increase (decrease) in net assets: | ||||||||
Operations: | ||||||||
Net investment income | $ | 40,854,574 | $ | 63,456,029 | ||||
Net realized gain (loss) from investments and foreign currency transactions | 30,639,815 | 19,998,467 | ||||||
Net change in unrealized appreciation (depreciation) on investments and translation of other assets and liabilities denominated in foreign currencies | (11,435,581 | ) | 333,368,769 | |||||
| ||||||||
Net increase (decrease) in net assets resulting from operations | 60,058,808 | 416,823,265 | ||||||
| ||||||||
Distributions to shareholders from: | ||||||||
Net investment income: | ||||||||
Class 1 | (7,042,374 | ) | (8,240,958 | ) | ||||
Class 2 | (42,339,120 | ) | (51,055,731 | ) | ||||
Class 3 | (2,189,476 | ) | (2,656,996 | ) | ||||
Class 4 | (10,745,373 | ) | (11,448,483 | ) | ||||
| ||||||||
Total distributions to shareholders | (62,316,343 | ) | (73,402,168 | ) | ||||
| ||||||||
Capital share transactions: (Note 2) | ||||||||
Class 1 | (6,795,434 | ) | (24,104,168 | ) | ||||
Class 2 | (67,775,181 | ) | (174,931,568 | ) | ||||
Class 3 | (5,229,627 | ) | (9,153,115 | ) | ||||
Class 4 | 27,897,198 | 7,407,804 | ||||||
| ||||||||
Total capital share transactions | (51,903,044 | ) | (200,781,047 | ) | ||||
| ||||||||
Redemption fees | 14,930 | 4,388 | ||||||
| ||||||||
Net increase (decrease) in net assets | (54,145,649 | ) | 142,644,438 | |||||
Net assets: | ||||||||
Beginning of period | 2,518,074,512 | 2,375,430,074 | ||||||
| ||||||||
End of period | $ | 2,463,928,863 | $ | 2,518,074,512 | ||||
| ||||||||
Undistributed net investment income included in net assets: | ||||||||
End of period | $ | 40,124,481 | $ | 61,586,250 | ||||
| ||||||||
The accompanying notes are an integral part of these financial statements.
TF-21
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited)
Templeton Foreign Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Templeton Variable Insurance Products Trust (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end investment company, consisting of twenty-one 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. 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 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 Board), the Fund’s administrator, investment manager and other affiliates have formed the Valuation and Liquidity Oversight Committee (VLOC). The VLOC provides administration and oversight of the Fund’s valuation policies and procedures, which are approved annually by the Board. Among other things, these procedures allow the Fund to 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 (OTC) 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 financial instruments for which market prices are not reliable or readily available. Under these procedures, the VLOC convenes on a regular basis to review such financial instruments and considers a number of factors, including significant unobservable valuation inputs, when arriving at fair value. The VLOC 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. An income-based valuation approach may also be used 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. The VLOC employs various methods for calibrating these valuation approaches including a regular review of key inputs and assumptions, transactional back-testing or disposition analysis, and reviews of any related market activity.
Trading in securities on foreign securities stock exchanges and OTC 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 VLOC 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 Depositary 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
TF-22
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Foreign Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
a. Financial Instrument Valuation (continued)
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.
In addition, certain foreign markets may be open on days that the NYSE is closed, which could result in differences between the value of the Fund’s portfolio securities on the last business day and the last calendar day of the reporting period. Any significant security valuation changes due to an open foreign market are adjusted and reflected by the Fund for financial reporting purposes.
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 Board.
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 securities 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. The Fund receives income from the investment of cash collateral, in addition to lending fees and rebates paid by the borrower. The Fund bears the market risk with respect to the collateral investment, securities loaned, and the risk that the agent may default on its obligations to the Fund. The securities lending agent has agreed to indemnify the Fund in the event of default by a third party borrower. At June 30, 2013, the Fund had no securities on loan.
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 if applicable, excise taxes. As a result, no provision for U.S. federal income taxes is required.
TF-23
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Foreign Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
d. Income and Deferred 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 in an amount that would be payable if the securities were disposed of on the valuation date.
The Fund recognizes the tax benefits of uncertain tax positions only when the position is “more likely than not” to be sustained upon examination by the tax authorities based on the technical merits of the tax position. As of June 30, 2013, and for all open tax years, the Fund has determined that no liability for unrecognized tax benefits is required in the Fund’s financial statements related to uncertain tax positions taken on a tax return (or expected to be taken on future tax returns). 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 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.
TF-24
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Foreign Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
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, 2013, 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, 2013 | Year Ended December 31, 2012 | |||||||||||||||
| Class 1 Shares: | Shares | Amount | Shares | Amount | ||||||||||||
Shares sold | 201,469 | $ | 3,054,446 | 437,702 | $ | 5,851,468 | ||||||||||
Shares issued in reinvestment of distributions | 468,554 | 7,042,374 | 676,598 | 8,240,958 | ||||||||||||
Shares redeemed | (1,117,532 | ) | (16,892,254 | ) | (2,835,243 | ) | (38,196,594 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | (447,509 | ) | $ | (6,795,434 | ) | (1,720,943 | ) | $ | (24,104,168 | ) | ||||||
| ||||||||||||||||
Class 2 Shares: | ||||||||||||||||
Shares sold | 5,425,802 | $ | 79,782,314 | 12,784,843 | $ | 164,850,484 | ||||||||||
Shares issued in reinvestment of distributions | 2,864,622 | 42,339,120 | 4,261,747 | 51,055,731 | ||||||||||||
Shares redeemed | (12,813,330 | ) | (189,896,615 | ) | (29,457,075 | ) | (390,837,783 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | (4,522,906 | ) | $ | (67,775,181 | ) | (12,410,485 | ) | $ | (174,931,568 | ) | ||||||
| ||||||||||||||||
Class 3 Shares: | ||||||||||||||||
Shares sold | 382,643 | $ | 5,576,260 | 414,387 | $ | 5,363,853 | ||||||||||
Shares issued in reinvestment of distributions | 148,742 | 2,189,476 | 222,529 | 2,656,996 | ||||||||||||
Shares redeemed | (881,337 | ) | (12,995,363 | ) | (1,302,161 | ) | (17,173,964 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | (349,952 | ) | $ | (5,229,627 | ) | (665,245 | ) | $ | (9,153,115 | ) | ||||||
| ||||||||||||||||
Class 4 Shares: | ||||||||||||||||
Shares sold | 2,731,226 | $ | 40,358,382 | 6,234,278 | $ | 81,740,548 | ||||||||||
Shares issued on reinvestment of distributions | 721,650 | 10,745,373 | 947,722 | 11,448,483 | ||||||||||||
Shares redeemed | (1,554,275 | ) | (23,206,557 | ) | (6,356,073 | ) | (85,781,227 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | 1,898,601 | $ | 27,897,198 | 825,927 | $ | 7,407,804 | ||||||||||
| ||||||||||||||||
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 |
TF-25
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Foreign Securities Fund
3. TRANSACTIONS WITH AFFILIATES (continued)
a. Management Fees
The Fund pays an investment management fee to TIC based on the average daily net assets of the Fund as follows:
| Annualized Fee Rate | Net Assets | |
| 0.750% | Up to and including $200 million | |
| 0.675% | Over $200 million, up to and including $1.3 billion | |
| 0.600% | Over $1.3 billion, up to and including $10 billion | |
| 0.580% | Over $10 billion, up to and including $15 billion | |
| 0.560% | Over $15 billion, up to and including $20 billion | |
| 0.540% | In excess of $20 billion |
b. Administrative Fees
The Fund pays an administrative fee to FT Services based on the average daily net assets of the Fund 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 Board 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. Some distribution fees are not charged on shares held by affiliates. The Board 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, 2013, there were no credits earned.
5. INCOME TAXES
For tax purposes, capital losses may be carried over to offset future capital gains. Capital loss carryforwards with no expiration, if any, must be fully utilized before those losses with expiration dates.
At December 31, 2012, the Fund had capital loss carryforwards of $100,804,035 expiring in 2017.
TF-26
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Foreign Securities Fund
5. INCOME TAXES (continued)
At June 30, 2013, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
Cost of investments | $ | 2,305,589,938 | ||
|
| |||
Unrealized appreciation | $ | 437,073,201 | ||
Unrealized depreciation | (256,206,147 | ) | ||
|
| |||
Net unrealized appreciation (depreciation) | $ | 180,867,054 | ||
|
| |||
Differences between income and/or capital gains as determined on a book basis and a tax basis are primarily due to differing treatments of foreign currency transactions and wash sales.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the period ended June 30, 2013, aggregated $323,649,066 and $467,708,800, 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 $1.5 billion (Global Credit Facility) which matures on January 17, 2014. 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 0.07% based upon the unused portion of the Global Credit Facility. These fees are reflected in other expenses on the Statement of Operations. During the period ended June 30, 2013, the Fund did not use the Global Credit Facility.
TF-27
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Foreign Securities Fund
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 financial instruments and are summarized in the following fair value hierarchy:
| • | Level 1 – quoted prices in active markets for identical financial instruments |
| • | Level 2 – other significant observable inputs (including quoted prices for similar financial instruments, interest rates, prepayment speed, credit risk, etc.) |
| • | Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of financial instruments) |
The inputs or methodology used for valuing financial instruments are not an indication of the risk associated with investing in those financial instruments.
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, 2013, all of the Fund’s investments in financial instruments carried at fair value were valued using Level 1 inputs. For detailed categories, see the accompanying Statement of Investments.
11. NEW ACCOUNTING PRONOUNCEMENTS
In June 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2013-08, Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements. The ASU modifies the criteria used in defining an investment company under U.S. Generally Accepted Accounting Principles and also sets forth certain measurement and disclosure requirements. Under the ASU, an entity that is registered under the 1940 Act automatically qualifies as an investment company. The ASU is effective for interim and annual reporting periods beginning after December 15, 2013. The Fund is currently reviewing the requirements and believes the adoption of this ASU will not have a material impact on its financial statements.
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 Depositary Receipt |
| IDR - International Depositary Receipt |
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Franklin Templeton Variable Insurance Products Trust
Tax Information (unaudited)
Templeton Foreign Securities Fund
At December 31, 2012, 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 hereby reports to shareholders the foreign source income and foreign taxes paid, pursuant to Section 853 of the Internal Revenue Code. This written statement will allow shareholders of record on June 13, 2013, 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 reported 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 | $ | 0.0158 | $ | 0.4094 | ||||
Class 2 | $ | 0.0158 | $ | 0.3739 | ||||
Class 3 | $ | 0.0158 | $ | 0.3735 | ||||
Class 4 | $ | 0.0158 | $ | 0.3653 | ||||
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.
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TEMPLETON GLOBAL BOND SECURITIES FUND
This semiannual report for Templeton Global Bond Securities Fund covers the period ended June 30, 2013
Performance Summary as of 6/30/13
Templeton Global Bond Securities Fund – Class 1 had a -1.52% total return for the six-month period ended 6/30/13.
Performance reflects the Fund’s Class 1 operating expenses, but does not include any contract fees, expenses or sales charges. If they had been included, performance would be lower. These charges and deductions, particularly for variable life policies, can have a significant effect on contract values and insurance benefits. See the contract prospectus for a complete description of these expenses, including sales charges.
Templeton Global Bond Securities Fund – Class 1
Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares.
Current performance may differ from figures shown.
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Fund Goal and Main Investments: Templeton Global Bond Securities Fund seeks high current income, consistent with preservation of capital, with capital appreciation as a secondary consideration. Under normal market conditions, the Fund 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. For comparison, the Fund’s benchmarks, the J.P. Morgan (JPM) Global Government Bond Index (GGBI) and the Citigroup World Government Bond Index, had -5.80% and -5.66% total returns for the same period.1
Economic and Market Overview
The global economic recovery was mixed during the period under review. Emerging economies continued to lead the recovery, although they showed signs of slowing. The U.S. and the eurozone continued to experience growth that was slow by the standards of previous recoveries. As fears surrounding the issues of sovereign debt in Europe, the possibility of another recession in the U.S., and a potential “hard landing” in China eased, financial market performance was positive. Improving sentiment, relatively strong fundamentals, and continued provision of global liquidity supported risk assets as equity markets performed well and bond prices generally declined. Policymakers in the largest developed economies continued to increase their already unprecedented efforts to supply liquidity. Actions elsewhere in the world were mixed, with some policymakers less willing to reverse previous tightening efforts in response to the external environment.
The still-ongoing eurozone sovereign debt crisis led to periods of risk aversion, when yields declined, equity markets sold off and perceived safe haven assets rallied, alternating with periods of heightened risk appetite, where yields increased and investors again favored risk assets. This was particularly true during the second quarter of 2013, when volatility for global financial markets rose sharply as market participants became concerned about the U.S. Federal Reserve Board’s potentially scaling back the pace of its monetary easing. Against this backdrop, increased liquidity creation continued, in particular from the Bank of Japan’s commitment to increase inflation.
1. Source: © 2013 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: All investments involve risks, including possible loss of principal. Currency rates may fluctuate significantly over short periods of time, and can reduce returns. Derivatives, including currency management strategies, involve costs and can create economic leverage in the portfolio that may result in significant volatility and cause the Fund to participate in losses (as well as enable gains) on an amount that exceeds the Fund’s initial investment. The Fund may not achieve the anticipated benefits and may realize losses when a counterparty fails to perform as promised. Foreign securities involve special risks, including currency fluctuations and economic and political uncertainties. Investments in emerging markets involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size and lesser liquidity. Investments in lower rated bonds include higher risk of default and loss of principal. Changes in interest rates will affect the value of the Fund’s portfolio and its share price and yield. Bond prices generally move in the opposite direction of interest rates. As prices of bonds in the Fund adjust to a rise in interest rates, the Fund’s share price may decline. The Fund is also nondiversified, which involves the risk of greater price fluctuation than a more diversified portfolio. Changes in the financial strength of a bond issuer or in a bond’s credit rating may affect its value. The Fund is actively managed but there is no guarantee that the manager’s investment decisions will produce the desired results. The Fund’s prospectus also includes a description of the main investment risks.
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Investment Strategy
We allocate the Fund’s assets among issuers, geographic regions, and currencies based upon our assessment of relative interest rates among currencies, our outlook for changes in interest rates and currencies, and credit risks. In considering these factors, we may evaluate a country’s changing market, economic and political conditions, such as inflation rate, growth prospects, global trade patterns and government policies. We seek to manage the Fund’s exposure to various currencies and may utilize currency forward 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, interest rate and currency strategies contributed to relative performance, while contributions from sovereign debt were largely neutral.
Interest Rate Strategy
As part of the Fund’s interest rate strategy we use interest rate swaps to manage duration. We maintained a defensive posture with respect to interest rate risk in developed and emerging markets. Nevertheless, select duration exposures in Europe contributed to absolute and relative performance. At period-end, the Fund had a shorter duration position than the JPM GGBI, a stance arising from our assessment that there was limited scope for further global interest rate reductions. However, we maintained some duration exposure in countries where we believed long-term bond yields could benefit from declining risk premiums.
Currency Strategy
As part of the Fund’s investment strategy, we used currency forward contracts to hedge or gain exposure to various currencies, which sometimes resulted in net negative positions. Overall, our diversified currency exposure contributed to relative results, but detracted from absolute performance. Among currencies, the Fund’s underweighted and net negative exposure to the euro benefited relative results, but this effect was more than offset by its overweighted exposure to peripheral European currencies. The Japanese yen depreciated against the U.S. dollar during the period and the Fund’s net-negative and underweighted position in the yen supported absolute and relative performance. Conversely, the Fund’s currency exposures in Asia ex-Japan detracted from absolute and relative results.
What is a currency forward contract?
A currency forward contract is an agreement between the Fund and a counterparty to buy or sell a foreign currency at a specific exchange rate on a future date.
What is an interest rate swap?
An interest rate swap is an agreement between two parties to exchange interest rate obligations, generally one based on an interest rate fixed to maturity while the other is based on an interest rate that changes in accordance with changes in a designated benchmark (for example, LIBOR, prime, commercial paper, or other benchmarks).
What is duration?
Duration is a measure of a bond’s price sensitivity to interest rate changes. In general, a portfolio of securities with a lower duration can be expected to be less sensitive to interest rate changes than a portfolio with a higher duration.
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Global Sovereign Debt Strategy
The Fund purchased investment-grade and subinvestment-grade hard currency-denominated sovereign debt that typically seeks to compensate for greater credit risk by offering higher yields relative to U.S. Treasury and European benchmark bonds. Overall, the Fund’s sovereign credit exposures were largely neutral with respect to absolute and relative 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, 2013, 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.
Currency Breakdown
Templeton Global Bond Securities Fund
6/30/13
| % of Total Net Assets | ||||
Americas | 71.5% | |||
U.S. Dollar | 49.6% | |||
Mexican Peso | 11.1% | |||
Canadian Dollar | 4.2% | |||
Chilean Peso | 3.9% | |||
Brazilian Real | 2.5% | |||
Peruvian Nuevo Sol | 0.2% | |||
Asia Pacific | 27.2% | |||
South Korean Won | 15.5% | |||
Malaysian Ringgit | 13.2% | |||
Singapore Dollar | 8.7% | |||
Indonesian Rupiah | 3.5% | |||
Indian Rupee | 2.4% | |||
Philippine Peso | 2.2% | |||
Sri Lankan Rupee | 1.2% | |||
Japanese Yen* | -19.5% | |||
Australia & New Zealand | 3.7% | |||
Australian Dollar | 3.7% | |||
Middle East & Africa | 1.3% | |||
New Israeli Shekel | 1.3% | |||
Europe* | -3.7% | |||
Polish Zloty | 10.2% | |||
Swedish Krona | 9.4% | |||
Hungarian Forint | 2.2% | |||
Norwegian Krone | 1.9% | |||
Euro* | -27.4% | |||
* A negative figure reflects net “short” exposure, designed to benefit if the value of the associated currency decreases. Conversely, the Fund’s value would potentially decline if the value of the associated currency increases.
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.
Templeton Global Bond Securities Fund – Class 1
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Hypothetical Example for Comparison with Other Mutual Funds
Information in the second line (Hypothetical) of the table can help you compare ongoing expenses of the Fund with those of other mutual funds offered through the Contract. This information may not be used to estimate the actual ending account balance or expenses you incurred during the period. The hypothetical “Ending Account Value” is based on the Fund’s actual expense ratio and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Fund-Level Expenses Incurred During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds offered through a Contract.
| Class 1 | Beginning Account Value 1/1/13 | Ending Account Value 6/30/13 | Fund-Level Expenses Incurred During Period* 1/1/13–6/30/13 | |||||||||
Actual | $ | 1,000 | $ | 984.80 | $ | 2.66 | ||||||
Hypothetical (5% return | $ | 1,000 | $ | 1,022.12 | $ | 2.71 | ||||||
*Expenses are calculated using the most recent six-month annualized expense ratio for the Fund’s Class 1 shares (0.54%), which does not include any ongoing expenses of the Contract for which the Fund is an investment option, multiplied by the average account value over the period, multiplied by 181/365 to reflect the one-half year period.
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Franklin Templeton Variable Insurance Products Trust
Financial Highlights
Templeton Global Bond Securities Fund
| Six Months Ended June 30, 2013 (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 1 | 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||||||
| ||||||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 20.01 | $ | 18.61 | $ | 19.94 | $ | 17.72 | $ | 17.42 | $ | 17.00 | ||||||||||||
|
| |||||||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.33 | 0.72 | 0.87 | 1.00 | 0.99 | 0.80 | ||||||||||||||||||
Net realized and unrealized gains (losses) | (0.63 | ) | 1.99 | (0.92 | ) | 1.58 | 2.01 | 0.27 | ||||||||||||||||
|
| |||||||||||||||||||||||
Total from investment operations | (0.30 | ) | 2.71 | (0.05 | ) | 2.58 | 3.00 | 1.07 | ||||||||||||||||
|
| |||||||||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income and net foreign currency gains | (0.96 | ) | (1.28 | ) | (1.15 | ) | (0.31 | ) | (2.70 | ) | (0.65 | ) | ||||||||||||
Net realized gains | (0.24 | ) | (0.03 | ) | (0.13 | ) | (0.05 | ) | — | — | ||||||||||||||
|
| |||||||||||||||||||||||
Total distributions | (1.20 | ) | (1.31 | ) | (1.28 | ) | (0.36 | ) | (2.70 | ) | (0.65 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Redemption feesc | — | — | — | — | — | — | ||||||||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ | 18.51 | $ | 20.01 | $ | 18.61 | $ | 19.94 | $ | 17.72 | $ | 17.42 | ||||||||||||
| �� | |||||||||||||||||||||||
Total returnd | (1.52)% | 15.31% | (0.61)% | 14.71% | 18.98% | 6.46% | ||||||||||||||||||
Ratios to average net assetse | ||||||||||||||||||||||||
Expensesf | 0.54% | 0.55% | 0.56% | 0.55% | 0.54% | 0.58% | ||||||||||||||||||
Net investment income | 3.31% | 3.71% | 4.40% | 5.27% | 5.73% | 4.66% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 293,088 | $ | 307,142 | $ | 269,819 | $ | 272,232 | $ | 195,662 | $ | 220,588 | ||||||||||||
Portfolio turnover rate | 12.52% | 43.26% | 34.18% | 8.77% | 20.84% | 28.46% | ||||||||||||||||||
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)
Templeton Global Bond Securities Fund
| Six Months Ended June 30, 2013 (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 2 | 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||||||
| ||||||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 19.47 | $ | 18.15 | $ | 19.49 | $ | 17.34 | $ | 17.10 | $ | 16.72 | ||||||||||||
|
| |||||||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.30 | 0.65 | 0.79 | 0.93 | 0.93 | 0.74 | ||||||||||||||||||
Net realized and unrealized gains (losses) | (0.60 | ) | 1.94 | (0.89 | ) | 1.54 | 1.98 | 0.27 | ||||||||||||||||
|
| |||||||||||||||||||||||
Total from investment operations | (0.30 | ) | 2.59 | (0.10 | ) | 2.47 | 2.91 | 1.01 | ||||||||||||||||
|
| |||||||||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income and net foreign currency gains | (0.93 | ) | (1.24 | ) | (1.11 | ) | (0.27 | ) | (2.67 | ) | (0.63 | ) | ||||||||||||
Net realized gains | (0.24 | ) | (0.03 | ) | (0.13 | ) | (0.05 | ) | — | — | ||||||||||||||
|
| |||||||||||||||||||||||
Total distributions | (1.17 | ) | (1.27 | ) | (1.24 | ) | (0.32 | ) | (2.67 | ) | (0.63 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Redemption feesc | — | — | — | — | — | — | ||||||||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ | 18.00 | $ | 19.47 | $ | 18.15 | $ | 19.49 | $ | 17.34 | $ | 17.10 | ||||||||||||
|
| |||||||||||||||||||||||
Total returnd | (1.65)% | 15.07% | (0.87)% | 14.45% | 18.68% | 6.21% | ||||||||||||||||||
Ratios to average net assetse | ||||||||||||||||||||||||
Expensesf | 0.79% | 0.80% | 0.81% | 0.80% | 0.79% | 0.83% | ||||||||||||||||||
Net investment income | 3.06% | 3.46% | 4.15% | 5.02% | 5.48% | 4.41% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 2,664,948 | $ | 2,418,229 | $ | 1,812,814 | $ | 1,490,794 | $ | 1,262,783 | $ | 793,773 | ||||||||||||
Portfolio turnover rate | 12.52% | 43.26% | 34.18% | 8.77% | 20.84% | 28.46% | ||||||||||||||||||
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)
Templeton Global Bond Securities Fund
| Six Months Ended June 30, 2013 (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 3 | 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||||||
| ||||||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 19.48 | $ | 18.15 | $ | 19.48 | $ | 17.33 | $ | 17.08 | $ | 16.70 | ||||||||||||
|
| |||||||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.30 | 0.65 | 0.80 | 0.93 | 0.93 | 0.74 | ||||||||||||||||||
Net realized and unrealized gains (losses) | (0.61 | ) | 1.94 | (0.90 | ) | 1.54 | 1.98 | 0.27 | ||||||||||||||||
|
| |||||||||||||||||||||||
Total from investment operations | (0.31 | ) | 2.59 | (0.10 | ) | 2.47 | 2.91 | 1.01 | ||||||||||||||||
|
| |||||||||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income and net foreign currency gains | (0.92 | ) | (1.23 | ) | (1.10 | ) | (0.27 | ) | (2.66 | ) | (0.63 | ) | ||||||||||||
Net realized gains | (0.24 | ) | (0.03 | ) | (0.13 | ) | (0.05 | ) | — | — | ||||||||||||||
|
| |||||||||||||||||||||||
Total distributions | (1.16 | ) | (1.26 | ) | (1.23 | ) | (0.32 | ) | (2.66 | ) | (0.63 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Redemption feesc | — | — | — | — | — | — | ||||||||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ | 18.01 | $ | 19.48 | $ | 18.15 | $ | 19.48 | $ | 17.33 | $ | 17.08 | ||||||||||||
|
| |||||||||||||||||||||||
Total returnd | (1.69)% | 15.06% | (0.83)% | 14.38% | 18.69% | 6.21% | ||||||||||||||||||
Ratios to average net assetse | ||||||||||||||||||||||||
Expensesf | 0.79% | 0.80% | 0.81% | 0.80% | 0.79% | 0.83% | ||||||||||||||||||
Net investment income | 3.06% | 3.46% | 4.15% | 5.02% | 5.48% | 4.41% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 195,661 | $ | 198,077 | $ | 185,811 | $ | 183,380 | $ | 143,264 | $ | 128,155 | ||||||||||||
Portfolio turnover rate | 12.52% | 43.26% | 34.18% | 8.77% | 20.84% | 28.46% | ||||||||||||||||||
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)
Templeton Global Bond Securities Fund
| Six Months Ended June 30, 2013 (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 4 | 2012 | 2011 | 2010 | 2009 | 2008a | |||||||||||||||||||
| ||||||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 19.82 | $ | 18.44 | $ | 19.78 | $ | 17.61 | $ | 17.37 | $ | 18.00 | ||||||||||||
|
| |||||||||||||||||||||||
Income from investment operationsb: | ||||||||||||||||||||||||
Net investment incomec | 0.29 | 0.64 | 0.79 | 0.93 | 0.93 | 0.66 | ||||||||||||||||||
Net realized and unrealized gains (losses) | (0.62 | ) | 1.98 | (0.91 | ) | 1.56 | 2.00 | (0.64 | ) | |||||||||||||||
|
| |||||||||||||||||||||||
Total from investment operations | (0.33 | ) | 2.62 | (0.12 | ) | 2.49 | 2.93 | 0.02 | ||||||||||||||||
|
| |||||||||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income and net foreign currency gains | (0.89 | ) | (1.21 | ) | (1.09 | ) | (0.27 | ) | (2.69 | ) | (0.65 | ) | ||||||||||||
Net realized gains | (0.24 | ) | (0.03 | ) | (0.13 | ) | (0.05 | ) | — | — | ||||||||||||||
|
| |||||||||||||||||||||||
Total distributions | (1.13 | ) | (1.24 | ) | (1.22 | ) | (0.32 | ) | (2.69 | ) | (0.65 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Redemption feesd | — | — | — | — | — | — | ||||||||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ | 18.36 | $ | 19.82 | $ | 18.44 | $ | 19.78 | $ | 17.61 | $ | 17.37 | ||||||||||||
|
| |||||||||||||||||||||||
Total returne | (1.73)% | 14.97% | (0.96)% | 14.28% | 18.58% | 0.26% | ||||||||||||||||||
Ratios to average net assetsf | ||||||||||||||||||||||||
Expensesg | 0.89% | 0.90% | 0.91% | 0.90% | 0.89% | 0.93% | ||||||||||||||||||
Net investment income | 2.96% | 3.36% | 4.05% | 4.92% | 5.38% | 4.31% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 150,723 | $ | 163,241 | $ | 151,695 | $ | 150,891 | $ | 108,910 | $ | 43,069 | ||||||||||||
Portfolio turnover rate | 12.52% | 43.26% | 34.18% | 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-10
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited)
| Templeton Global Bond Securities Fund | Principal Amount* | Value | ||||||||
Foreign Government and Agency Securities 70.3% | ||||||||||
Australia 3.3% | ||||||||||
New South Wales Treasury Corp., | ||||||||||
5.50%, 8/01/13 | 35,790,000 | AUD | $ | 32,812,885 | ||||||
senior note, 5.50%, 3/01/17 | 32,225,000 | AUD | 31,799,108 | |||||||
Queensland Treasury Corp., | ||||||||||
senior bond, 6.00%, 9/14/17 | 13,160,000 | AUD | 13,275,451 | |||||||
senior note, 6.00%, 8/14/13 | 24,450,000 | AUD | 22,452,481 | |||||||
senior note, 6.00%, 8/21/13 | 8,888,000 | AUD | 8,166,054 | |||||||
|
| |||||||||
| 108,505,979 | ||||||||||
|
| |||||||||
Brazil 2.5% | ||||||||||
Nota Do Tesouro Nacional, | ||||||||||
10.00%, 1/01/14 | 7,100 | a BRL | 3,195,220 | |||||||
10.00%, 1/01/17 | 22,490 | a BRL | 9,841,300 | |||||||
b Index Linked, 6.00%, 5/15/15 | 30,226 | a BRL | 32,213,797 | |||||||
b Index Linked, 6.00%, 8/15/16 | 14,388 | a BRL | 15,347,068 | |||||||
b Index Linked, 6.00%, 5/15/17 | 202 | a BRL | 216,219 | |||||||
b Index Linked, 6.00%, 8/15/18 | 9,555 | a BRL | 10,349,601 | |||||||
b Index Linked, 6.00%, 5/15/45 | 10,825 | a BRL | 12,333,763 | |||||||
|
| |||||||||
| 83,496,968 | ||||||||||
|
| |||||||||
Canada 2.7% | ||||||||||
Government of Canada, | ||||||||||
2.25%, 8/01/14 | 6,691,000 | CAD | 6,438,469 | |||||||
1.00%, 11/01/14 | 20,887,000 | CAD | 19,819,754 | |||||||
2.00%, 12/01/14 | 17,861,000 | CAD | 17,181,794 | |||||||
1.00%, 2/01/15 | 48,972,000 | CAD | 46,439,439 | |||||||
|
| |||||||||
| 89,879,456 | ||||||||||
|
| |||||||||
Hungary 4.0% | ||||||||||
Government of Hungary, | ||||||||||
5.50%, 2/12/14 | 653,440,000 | HUF | 2,907,170 | |||||||
7.75%, 8/24/15 | 672,690,000 | HUF | 3,154,737 | |||||||
5.50%, 2/12/16 | 436,800,000 | HUF | 1,958,195 | |||||||
4.125%, 2/19/18 | 14,310,000 | 13,952,250 | ||||||||
6.50%, 6/24/19 | 389,700,000 | HUF | 1,807,028 | |||||||
7.50%, 11/12/20 | 184,240,000 | HUF | 894,108 | |||||||
5.375%, 2/21/23 | 26,430,000 | 25,474,555 | ||||||||
A, 8.00%, 2/12/15 | 280,000,000 | HUF | 1,301,648 | |||||||
A, 6.75%, 11/24/17 | 2,028,090,000 | HUF | 9,328,431 | |||||||
A, 7.00%, 6/24/22 | 386,240,000 | HUF | 1,812,276 | |||||||
B, 6.75%, 2/24/17 | 394,700,000 | HUF | 1,834,720 | |||||||
D, 6.75%, 8/22/14 | 1,856,440,000 | HUF | 8,427,237 | |||||||
E, 7.50%, 10/24/13 | 248,600,000 | HUF | 1,107,621 | |||||||
senior note, 3.50%, 7/18/16 | 1,055,000 | EUR | 1,357,963 | |||||||
senior note, 4.375%, 7/04/17 | 7,480,000 | EUR | 9,711,027 | |||||||
senior note, 6.25%, 1/29/20 | 6,420,000 | 6,736,987 | ||||||||
senior note, 3.875%, 2/24/20 | 3,120,000 | EUR | 3,783,162 | |||||||
senior note, 6.375%, 3/29/21 | 14,820,000 | 15,505,425 | ||||||||
c senior note, Reg S, 5.75%, 6/11/18 | 14,475,000 | EUR | 19,406,625 | |||||||
|
| |||||||||
| 130,461,165 | ||||||||||
|
| |||||||||
Iceland 0.3% | ||||||||||
d Government of Iceland, 144A, 5.875%, 5/11/22 | 7,660,000 | 8,155,334 | ||||||||
|
| |||||||||
TGB-11
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Templeton Global Bond Securities Fund | Principal Amount* | Value | ||||||||
Foreign Government and Agency Securities (continued) | ||||||||||
Indonesia 3.4% | ||||||||||
Government of Indonesia, | ||||||||||
FR20, 14.275%, 12/15/13 | 14,267,000,000 | IDR | $ | 1,494,678 | ||||||
FR31, 11.00%, 11/15/20 | 167,351,000,000 | IDR | 20,732,295 | |||||||
FR34, 12.80%, 6/15/21 | 207,810,000,000 | IDR | 28,171,804 | |||||||
FR35, 12.90%, 6/15/22 | 66,582,000,000 | IDR | 9,214,916 | |||||||
FR36, 11.50%, 9/15/19 | 30,075,000,000 | IDR | 3,730,996 | |||||||
FR39, 11.75%, 8/15/23 | 5,491,000,000 | IDR | 726,898 | |||||||
FR40, 11.00%, 9/15/25 | 46,856,000,000 | IDR | 6,015,837 | |||||||
FR43, 10.25%, 7/15/22 | 68,340,000,000 | IDR | 8,269,625 | |||||||
FR44, 10.00%, 9/15/24 | 4,454,000,000 | IDR | 534,756 | |||||||
FR46, 9.50%, 7/15/23 | 226,780,000,000 | IDR | 26,500,241 | |||||||
FR48, 9.00%, 9/15/18 | 16,920,000,000 | IDR | 1,873,790 | |||||||
FR49, 9.00%, 9/15/13 | 35,030,000,000 | IDR | 3,559,472 | |||||||
|
| |||||||||
| 110,825,308 | ||||||||||
|
| |||||||||
Ireland 8.3% | ||||||||||
Government of Ireland, | ||||||||||
5.90%, 10/18/19 | 20,597,000 | EUR | 30,240,434 | |||||||
4.50%, 4/18/20 | 19,512,000 | EUR | 26,607,364 | |||||||
5.00%, 10/18/20 | 58,588,000 | EUR | 81,828,126 | |||||||
c Reg S, 5.50%, 10/18/17 | 27,708,700 | EUR | 39,922,053 | |||||||
senior bond, 4.50%, 10/18/18 | 8,090,000 | EUR | 11,252,151 | |||||||
senior bond, 4.40%, 6/18/19 | 20,943,000 | EUR | 28,637,244 | |||||||
senior bond, 5.40%, 3/13/25 | 40,422,910 | EUR | 57,210,161 | |||||||
|
| |||||||||
| 275,697,533 | ||||||||||
|
| |||||||||
Israel 1.3% | ||||||||||
Government of Israel, 3.50%, 9/30/13 | 154,649,000 | ILS | 42,764,834 | |||||||
|
| |||||||||
Lithuania 1.2% | ||||||||||
d Government of Lithuania, 144A, | ||||||||||
6.75%, 1/15/15 | 19,480,000 | 20,784,478 | ||||||||
7.375%, 2/11/20 | 12,690,000 | 15,122,483 | ||||||||
6.125%, 3/09/21 | 3,240,000 | 3,625,041 | ||||||||
|
| |||||||||
| 39,532,002 | ||||||||||
|
| |||||||||
Malaysia 4.2% | ||||||||||
Government of Malaysia, | ||||||||||
3.434%, 8/15/14 | 56,480,000 | MYR | 17,941,530 | |||||||
3.741%, 2/27/15 | 54,225,000 | MYR | 17,315,821 | |||||||
3.835%, 8/12/15 | 31,650,000 | MYR | 10,128,260 | |||||||
4.72%, 9/30/15 | 230,000 | MYR | 75,209 | |||||||
3.197%, 10/15/15 | 9,330,000 | MYR | 2,946,753 | |||||||
senior bond, 3.461%, 7/31/13 | 29,150,000 | MYR | 9,228,810 | |||||||
senior bond, 8.00%, 10/30/13 | 250,000 | MYR | 80,439 | |||||||
senior bond, 5.094%, 4/30/14 | 185,235,000 | MYR | 59,619,112 | |||||||
senior bond, 3.814%, 2/15/17 | 18,885,000 | MYR | 6,046,033 | |||||||
senior bond, 4.24%, 2/07/18 | 44,360,000 | MYR | 14,481,915 | |||||||
|
| |||||||||
| 137,863,882 | ||||||||||
|
| |||||||||
Mexico 6.3% | ||||||||||
Government of Mexico, | ||||||||||
8.00%, 12/19/13 | 10,300,200 | e MXN | 80,967,128 | |||||||
7.00%, 6/19/14 | 286,280 | e MXN | 2,271,577 | |||||||
TGB-12
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Templeton Global Bond Securities Fund | Principal Amount* | Value | ||||||||
Foreign Government and Agency Securities (continued) | ||||||||||
Mexico (continued) | ||||||||||
Government of Mexico, (continued) | ||||||||||
9.50%, 12/18/14 | 1,774,400 | e MXN | $ | 14,738,553 | ||||||
6.00%, 6/18/15 | 732,200 | e MXN | 5,825,629 | |||||||
8.00%, 12/17/15 | 4,996,150 | e MXN | 41,778,794 | |||||||
6.25%, 6/16/16 | 527,590 | e MXN | 4,270,328 | |||||||
7.25%, 12/15/16 | 250,000 | e MXN | 2,082,081 | |||||||
7.75%, 12/14/17 | 4,473,000 | e MXN | 38,145,121 | |||||||
bMexican Udibonos, Index Linked, | ||||||||||
4.50%, 12/18/14 | 217,505 | f MXN | 1,779,863 | |||||||
5.00%, 6/16/16 | 557,206 | f MXN | 4,779,078 | |||||||
3.50%, 12/14/17 | 558,642 | f MXN | 4,656,994 | |||||||
4.00%, 6/13/19 | 383,433 | f MXN | 3,290,103 | |||||||
2.50%, 12/10/20 | 301,977 | f MXN | 2,378,222 | |||||||
|
| |||||||||
| 206,963,471 | ||||||||||
|
| |||||||||
Peru 0.1% | ||||||||||
Government of Peru, senior bond, 7.84%, 8/12/20 | 11,090,000 | PEN | 4,597,845 | |||||||
|
| |||||||||
Philippines 0.1% | ||||||||||
Government of the Philippines, | 53,190,000 | PHP | 1,339,688 | |||||||
senior bond, 9.125%, 9/04/16 | 31,840,000 | PHP | 850,222 | |||||||
senior note, 6.25%, 1/27/14 | 35,720,000 | PHP | 845,417 | |||||||
|
| |||||||||
| 3,035,327 | ||||||||||
|
| |||||||||
Poland 8.5% | ||||||||||
Government of Poland, | ||||||||||
5.00%, 10/24/13 | 146,830,000 | PLN | 44,479,749 | |||||||
5.75%, 4/25/14 | 336,990,000 | PLN | 103,783,997 | |||||||
5.50%, 4/25/15 | 27,650,000 | PLN | 8,681,235 | |||||||
6.25%, 10/24/15 | 75,580,000 | PLN | 24,288,617 | |||||||
5.75%, 9/23/22 | 48,750,000 | PLN | 16,209,540 | |||||||
gFRN, 3.98%, 1/25/17 | 59,279,000 | PLN | 17,729,299 | |||||||
gFRN, 3.98%, 1/25/21 | 60,135,000 | PLN | 17,569,155 | |||||||
Strip, 7/25/13 | 8,400,000 | PLN | 2,523,159 | |||||||
Strip, 1/25/14 | 49,315,000 | PLN | 14,611,247 | |||||||
Strip, 7/25/14 | 35,420,000 | PLN | 10,353,489 | |||||||
Strip, 7/25/15 | 21,675,000 | PLN | 6,129,685 | |||||||
Strip, 1/25/16 | 57,595,000 | PLN | 15,994,808 | |||||||
|
| |||||||||
| 282,353,980 | ||||||||||
|
| |||||||||
Russia 1.9% | ||||||||||
d Government of Russia, senior bond, 144A, 7.50%, 3/31/30 | 52,773,565 | 61,888,879 | ||||||||
|
| |||||||||
Serbia 0.7% | ||||||||||
d Government of Serbia, senior note, 144A, | ||||||||||
5.25%, 11/21/17 | 4,590,000 | 4,524,019 | ||||||||
4.875%, 2/25/20 | 8,800,000 | 8,148,668 | ||||||||
7.25%, 9/28/21 | 9,670,000 | 9,957,827 | ||||||||
|
| |||||||||
| 22,630,514 | ||||||||||
|
| |||||||||
Singapore 0.5% | ||||||||||
Government of Singapore, senior note, 3.625%, 7/01/14 | 21,650,000 | SGD | 17,662,317 | |||||||
|
| |||||||||
TGB-13
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Templeton Global Bond Securities Fund | Principal Amount* | Value | ||||||||
Foreign Government and Agency Securities (continued) | ||||||||||
Slovenia 0.4% | ||||||||||
d Government of Slovenia, senior note, 144A, | ||||||||||
5.50%, 10/26/22 | 8,140,000 | $ | 7,522,540 | |||||||
5.85%, 5/10/23 | 5,030,000 | 4,693,921 | ||||||||
|
| |||||||||
| 12,216,461 | ||||||||||
|
| |||||||||
South Korea 12.4% | ||||||||||
The Export-Import Bank of Korea, senior note, | ||||||||||
4.625%, 2/20/17 | 230,000 | EUR | 326,837 | |||||||
d 144A, 1.45%, 5/19/14 | 40,580,000 | SEK | 6,053,736 | |||||||
Korea Monetary Stabilization Bond, | ||||||||||
senior bond, 3.90%, 8/02/13 | 54,619,320,000 | KRW | 47,863,850 | |||||||
senior bond, 3.59%, 10/02/13 | 5,898,020,000 | KRW | 5,174,075 | |||||||
senior bond, 3.48%, 12/02/13 | 10,110,910,000 | KRW | 8,881,157 | |||||||
senior bond, 3.47%, 2/02/14 | 20,416,550,000 | KRW | 17,950,976 | |||||||
senior bond, 3.59%, 4/02/14 | 20,432,530,000 | KRW | 17,998,433 | |||||||
senior bond, 2.55%, 5/09/14 | 10,064,000,000 | KRW | 8,797,320 | |||||||
senior bond, 2.47%, 4/02/15 | 22,461,930,000 | KRW | 19,524,734 | |||||||
senior note, 3.28%, 6/02/14 | 24,224,170,000 | KRW | 21,309,281 | |||||||
senior note, 2.82%, 8/02/14 | 31,785,420,000 | KRW | 27,849,803 | |||||||
senior note, 2.78%, 10/02/14 | 13,357,000,000 | KRW | 11,687,905 | |||||||
senior note, 2.84%, 12/02/14 | 22,065,270,000 | KRW | 19,315,571 | |||||||
senior note, 2.74%, 2/02/15 | 47,745,950,000 | KRW | 41,709,898 | |||||||
senior note, 2.76%, 6/02/15 | 36,927,000,000 | KRW | 32,237,847 | |||||||
Korea Treasury Bond, | ||||||||||
senior bond, 3.00%, 12/10/13 | 87,529,850,000 | KRW | 76,741,787 | |||||||
senior bond, 5.00%, 9/10/16 | 2,806,000,000 | KRW | 2,598,914 | |||||||
senior note, 3.25%, 12/10/14 | 13,830,700,000 | KRW | 12,189,790 | |||||||
senior note, 3.25%, 6/10/15 | 4,668,800,000 | KRW | 4,118,584 | |||||||
senior note, 2.75%, 12/10/15 | 32,942,000,000 | KRW | 28,693,339 | |||||||
|
| |||||||||
| 411,023,837 | ||||||||||
|
| |||||||||
Sri Lanka 1.1% | ||||||||||
Government of Sri Lanka, | ||||||||||
A, 7.50%, 8/01/13 | 350,190,000 | LKR | 2,675,910 | |||||||
A, 7.00%, 3/01/14 | 43,380,000 | LKR | 324,810 | |||||||
A, 11.25%, 7/15/14 | 773,000,000 | LKR | 5,949,644 | |||||||
A, 11.75%, 3/15/15 | 8,520,000 | LKR | 66,056 | |||||||
A, 6.50%, 7/15/15 | 239,920,000 | LKR | 1,693,934 | |||||||
A, 11.00%, 8/01/15 | 1,349,700,000 | LKR | 10,351,972 | |||||||
A, 6.40%, 8/01/16 | 109,200,000 | LKR | 735,411 | |||||||
A, 5.80%, 1/15/17 | 112,300,000 | LKR | 728,445 | |||||||
A, 8.00%, 11/15/18 | 61,600,000 | LKR | 409,671 | |||||||
A, 9.00%, 5/01/21 | 861,720,000 | LKR | 5,748,022 | |||||||
B, 8.50%, 7/15/13 | 7,990,000 | LKR | 61,141 | |||||||
B, 11.75%, 4/01/14 | 68,370,000 | LKR | 527,428 | |||||||
B, 6.60%, 6/01/14 | 65,500,000 | LKR | 484,033 | |||||||
B, 6.40%, 10/01/16 | 119,100,000 | LKR | 797,012 | |||||||
B, 8.50%, 7/15/18 | 146,350,000 | LKR | 1,004,756 | |||||||
C, 8.50%, 4/01/18 | 241,930,000 | LKR | 1,665,908 | |||||||
D, 8.50%, 6/01/18 | 633,000,000 | LKR | 4,346,350 | |||||||
|
| |||||||||
| 37,570,503 | ||||||||||
|
| |||||||||
TGB-14
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Templeton Global Bond Securities Fund | Principal Amount* | Value | ||||||||
Foreign Government and Agency Securities (continued) | ||||||||||
hSupranational 0.5% | ||||||||||
Inter-American Development Bank, senior note, 7.50%, 12/05/24 | 200,000,000 | MXN | $ | 16,309,351 | ||||||
|
| |||||||||
Sweden 3.1% | ||||||||||
Government of Sweden, | ||||||||||
1.50%, 8/30/13 | 313,400,000 | SEK | 46,774,599 | |||||||
6.75%, 5/05/14 | 240,050,000 | SEK | 37,541,312 | |||||||
Kommuninvest I Sverige AB, 2.25%, 5/05/14 | 123,520,000 | SEK | 18,579,984 | |||||||
|
| |||||||||
| 102,895,895 | ||||||||||
|
| |||||||||
Ukraine 2.7% | ||||||||||
d Financing of Infrastructure Projects State Enterprise, 144A, | ||||||||||
8.375%, 11/03/17 | 1,100,000 | 1,023,000 | ||||||||
7.40%, 4/20/18 | 840,000 | 744,996 | ||||||||
d Government of Ukraine, | ||||||||||
144A, 9.25%, 7/24/17 | 25,000,000 | 25,125,000 | ||||||||
144A, 7.75%, 9/23/20 | 17,227,000 | 15,819,037 | ||||||||
senior bond, 144A, 6.58%, 11/21/16 | 12,541,000 | 11,726,149 | ||||||||
senior bond, 144A, 7.80%, 11/28/22 | 4,720,000 | 4,225,462 | ||||||||
senior note, 144A, 4.95%, 10/13/15 | 290,000 | EUR | 360,528 | |||||||
senior note, 144A, 6.25%, 6/17/16 | 8,760,000 | 8,212,500 | ||||||||
senior note, 144A, 7.95%, 2/23/21 | 23,898,000 | 21,999,184 | ||||||||
|
| |||||||||
| 89,235,856 | ||||||||||
|
| |||||||||
Venezuela 0.4% | ||||||||||
Government of Venezuela, 10.75%, 9/19/13 | 13,570,000 | 13,629,708 | ||||||||
|
| |||||||||
Vietnam 0.4% | ||||||||||
d Government of Vietnam, 144A, 6.75%, 1/29/20 | 13,110,000 | 14,027,700 | ||||||||
|
| |||||||||
Total Foreign Government and Agency Securities (Cost $2,277,787,263) | 2,323,224,105 | |||||||||
|
| |||||||||
Municipal Bonds (Cost $1,292,899) 0.1% | ||||||||||
United States 0.1% | ||||||||||
Bexar County Revenue, Venue Project, Refunding, Series A, BHAC Insured, 5.25%, 8/15/47 | 1,450,000 | 1,542,017 | ||||||||
|
| |||||||||
Total Investments before Short Term Investments (Cost $2,279,080,162) | 2,324,766,122 | |||||||||
|
| |||||||||
Short Term Investments 24.8% | ||||||||||
Foreign Government and Agency Securities 14.8% | ||||||||||
Australia 0.3% | ||||||||||
Government of Australia, 6.25%, 6/15/14 | 11,819,000 | AUD | 11,198,832 | |||||||
|
| |||||||||
Canada 1.5% | ||||||||||
i Canada Treasury Bill, 8/15/13 | 3,984,000 | CAD | 3,783,715 | |||||||
Government of Canada, | ||||||||||
2.50%, 9/01/13 | 6,303,000 | CAD | 6,010,029 | |||||||
1.00%, 2/01/14 | 33,882,000 | CAD | 32,212,634 | |||||||
2.00%, 3/01/14 | 7,354,000 | CAD | 7,036,296 | |||||||
|
| |||||||||
| 49,042,674 | ||||||||||
|
| |||||||||
Hungary 0.2% | ||||||||||
i Hungary Treasury Bills, 7/17/13 - 1/08/14 | 1,333,170,000 | HUF | 5,832,396 | |||||||
|
| |||||||||
Malaysia 4.7% | ||||||||||
i Bank of Negara Monetary Notes, 7/04/13 - 6/19/14 | 493,860,000 | MYR | 153,740,625 | |||||||
|
| |||||||||
TGB-15
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Templeton Global Bond Securities Fund | Principal Amount* | Value | ||||||||
Short Term Investments (continued) | ||||||||||
Foreign Government and Agency Securities (continued) | ||||||||||
Mexico 0.8% | ||||||||||
i Mexico Treasury Bills, 9/19/13 - 4/30/14 | 35,512,120 | j MXN | $ | 26,650,458 | ||||||
|
| |||||||||
Norway 1.2% | ||||||||||
i Norway Treasury Bill, 9/18/13 | 244,187,000 | NOK | 40,081,285 | |||||||
|
| |||||||||
Philippines 0.4% | ||||||||||
i Philippine Treasury Bills, 7/10/13 - 4/02/14 | 544,760,000 | PHP | 12,558,611 | |||||||
|
| |||||||||
Singapore 3.7% | ||||||||||
Government of Singapore, senior bond, 0.25%, 2/01/14 | 21,600,000 | SGD | 17,045,413 | |||||||
i Monetary Authority of Singapore Treasury Bills, 7/05/13 - 8/12/13 | 42,856,000 | SGD | 33,812,158 | |||||||
i Singapore Treasury Bills, 7/11/13 - 5/02/14 | 91,885,000 | SGD | 72,445,446 | |||||||
|
| |||||||||
| 123,303,017 | ||||||||||
|
| |||||||||
South Korea 1.4% | ||||||||||
i Korea Monetary Stabilization Bonds, 7/09/13 - 9/10/13 | 40,357,400,000 | KRW | 35,225,240 | |||||||
Korea Monetary Stabilization Bond, senior note, 2.57%, 6/09/14 | 14,607,000,000 | KRW | 12,768,392 | |||||||
|
| |||||||||
| 47,993,632 | ||||||||||
|
| |||||||||
Sri Lanka 0.0%† | ||||||||||
i Sri Lanka Treasury Bills, 8/02/13 - 10/11/13 | 26,280,000 | LKR | 198,521 | |||||||
|
| |||||||||
Sweden 0.6% | ||||||||||
i Sweden Treasury Bills, 9/18/13 - 12/18/13 | 122,975,000 | SEK | 18,288,925 | |||||||
|
| |||||||||
Total Foreign Government and Agency Securities (Cost $503,014,085) | 488,888,976 | |||||||||
|
| |||||||||
Total Investments before Repurchase Agreements (Cost $2,782,094,247) | 2,813,655,098 | |||||||||
|
| |||||||||
Repurchase Agreements (Cost $330,837,630) 10.0% | ||||||||||
United States 10.0% | ||||||||||
kJointRepurchase Agreement, 0.088%, 7/01/13 (Maturity Value $330,840,046) | 330,837,630 | 330,837,630 | ||||||||
Barclays Capital Inc. (Maturity Value $37,709,148) | ||||||||||
BNP Paribas Securities Corp. (Maturity Value $41,900,892) | ||||||||||
Credit Suisse Securities (USA) LLC (Maturity Value $52,375,288) | ||||||||||
Deutsche Bank Securities Inc. (Maturity Value $41,725,547) | ||||||||||
HSBC Securities (USA) Inc. (Maturity Value $89,038,981) | ||||||||||
Merrill Lynch, Pierce, Fenner & Smith Inc. (Maturity Value $41,900,892) | ||||||||||
Morgan Stanley & Co. LLC (Maturity Value $26,189,298) | ||||||||||
Collateralized by U.S. Government Agency Securities, 0.13% - 4.625%, 7/09/13 - 8/07/17; iU.S.Government Agency Discount Notes, 8/01/13 - 4/21/14; iU.S. Treasury Bills, | ||||||||||
|
| |||||||||
Total Investments (Cost $3,112,931,877) 95.2% | 3,144,492,728 | |||||||||
Other Assets, less Liabilities 4.8% | 159,928,271 | |||||||||
|
| |||||||||
Net Assets 100.0% | $ | 3,304,420,999 | ||||||||
|
| |||||||||
See Abbreviations on page TGB-41.
TGB-16
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Templeton Global Bond Securities Fund |
†Rounds to less than 0.1% of net assets.
*The principal amount is stated in U.S. dollars unless otherwise indicated.
aPrincipal amount is stated in 1,000 Brazilian Real Units.
bRedemption price at maturity is adjusted for inflation. See Note 1(g).
cSecurity was purchased pursuant to Regulation S under the Securities Act of 1933, which exempts from registration securities offered and sold outside of the United States. Such a security cannot be sold in the United States without either an effective registration statement filed pursuant to the Securities Act of 1933, or pursuant to an exemption from registration. These securities have been deemed liquid under guidelines approved by the Trust’s Board of Trustees. At June 30, 2013, the aggregate value of these securities was $59,328,678, representing 1.8% of net assets.
dSecurity was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be sold in transactions exempt from registration only to qualified institutional buyers or in a public offering registered under the Securities Act of 1933. These securities have been deemed liquid under guidelines approved by the Trust Board of Trustees. At June 30, 2013, the aggregate value of these securities was $253,740,482, representing 7.68% of net assets.
ePrincipal amount is stated in 100 Mexican Peso Units.
fPrincipal amount is stated in Unidad de Inversion Units.
gThe coupon rate shown represents the rate at period end.
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.
jPrincipal amount is stated in 10 Mexican Peso Units.
kSee Note 1(c) regarding joint repurchase agreement.
The accompanying notes are an integral part of these financial statements.
TGB-17
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Templeton Global Bond Securities Fund |
At June 30, 2013, 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 | CITI | Buy | 34,491,000 | 611,098 | 7/03/13 | $ | — | $ | (32,274 | ) | ||||||||||||||||||
Indian Rupee | DBAB | Buy | 217,594,000 | 3,829,141 | 7/05/13 | — | (178,847 | ) | ||||||||||||||||||||
Indian Rupee | DBAB | Buy | 80,138,000 | 1,413,025 | 7/08/13 | — | (69,397 | ) | ||||||||||||||||||||
Mexican Peso | CITI | Buy | 215,143,730 | 16,658,309 | 7/10/13 | — | (76,074 | ) | ||||||||||||||||||||
Indian Rupee | DBAB | Buy | 239,338,000 | 4,320,079 | 7/12/13 | — | (310,194 | ) | ||||||||||||||||||||
Malaysian Ringgit | DBAB | Buy | 18,006,622 | 5,569,633 | 7/12/13 | 123,891 | — | |||||||||||||||||||||
Malaysian Ringgit | DBAB | Buy | 13,610,000 | 4,212,709 | 7/15/13 | 89,726 | — | |||||||||||||||||||||
Euro | MSCO | Sell | 9,679,000 | 11,861,324 | 7/16/13 | — | (738,272 | ) | ||||||||||||||||||||
Euro | UBSW | Sell | 8,965,000 | 10,985,711 | 7/16/13 | — | (684,439 | ) | ||||||||||||||||||||
Euro | BZWS | Sell | 2,243,000 | 2,748,348 | 7/16/13 | — | (171,468 | ) | ||||||||||||||||||||
Indian Rupee | DBAB | Buy | 383,041,000 | 6,519,403 | 7/17/13 | — | (107,816 | ) | ||||||||||||||||||||
Euro | UBSW | Sell | 8,965,000 | 11,027,847 | 7/18/13 | — | (642,398 | ) | ||||||||||||||||||||
Euro | BZWS | Sell | 3,518,000 | 4,330,482 | 7/18/13 | — | (249,096 | ) | ||||||||||||||||||||
Indian Rupee | JPHQ | Buy | 226,092,000 | 4,098,171 | 7/18/13 | — | (314,395 | ) | ||||||||||||||||||||
Malaysian Ringgit | DBAB | Buy | 11,455,000 | 2,886,190 | EUR | 7/18/13 | — | (136,699 | ) | |||||||||||||||||||
Malaysian Ringgit | DBAB | Buy | 2,637,000 | 817,852 | 7/18/13 | 15,587 | — | |||||||||||||||||||||
Euro | BZWS | Sell | 2,638,000 | 3,257,930 | 7/19/13 | — | (176,117 | ) | ||||||||||||||||||||
Euro | MSCO | Sell | 12,182,000 | 15,014,010 | 7/22/13 | — | (844,243 | ) | ||||||||||||||||||||
Euro | DBAB | Sell | 1,935,000 | 2,384,800 | 7/22/13 | — | (134,139 | ) | ||||||||||||||||||||
Indian Rupee | JPHQ | Buy | 152,363,000 | 2,784,295 | 7/22/13 | — | (236,290 | ) | ||||||||||||||||||||
Indian Rupee | DBAB | Buy | 79,271,000 | 1,448,076 | 7/22/13 | — | (122,407 | ) | ||||||||||||||||||||
Malaysian Ringgit | DBAB | Buy | 12,933,000 | 3,266,734 | EUR | 7/22/13 | — | (166,176 | ) | |||||||||||||||||||
Malaysian Ringgit | DBAB | Buy | 4,160,000 | 1,299,513 | 7/22/13 | 14,905 | — | |||||||||||||||||||||
Euro | DBAB | Sell | 1,759,000 | 2,165,048 | 7/23/13 | — | (124,788 | ) | ||||||||||||||||||||
Malaysian Ringgit | DBAB | Buy | 16,628,000 | 4,242,270 | EUR | 7/25/13 | — | (269,801 | ) | |||||||||||||||||||
Malaysian Ringgit | DBAB | Buy | 5,058,000 | 1,571,686 | 7/25/13 | 26,128 | — | |||||||||||||||||||||
Euro | CITI | Sell | 1,935,410 | 2,512,356 | 7/26/13 | — | (7,159 | ) | ||||||||||||||||||||
Indian Rupee | DBAB | Buy | 160,601,000 | 2,915,804 | 7/26/13 | — | (232,008 | ) | ||||||||||||||||||||
Indian Rupee | HSBC | Buy | 531,272,000 | 9,661,154 | 7/29/13 | — | (787,950 | ) | ||||||||||||||||||||
Indian Rupee | JPHQ | Buy | 181,822,000 | 3,310,881 | 7/29/13 | — | (274,125 | ) | ||||||||||||||||||||
Indian Rupee | DBAB | Buy | 164,063,500 | 2,987,508 | 7/29/13 | — | (247,351 | ) | ||||||||||||||||||||
Japanese Yen | BZWS | Sell | 1,079,470,000 | 12,020,824 | 7/29/13 | 1,136,663 | — | |||||||||||||||||||||
Malaysian Ringgit | JPHQ | Buy | 16,628,000 | 4,239,782 | EUR | 7/29/13 | — | (268,094 | ) | |||||||||||||||||||
Malaysian Ringgit | JPHQ | Buy | 5,318,000 | 1,645,879 | 7/29/13 | 33,609 | — | |||||||||||||||||||||
Euro | JPHQ | Sell | 11,263,000 | 13,984,141 | 7/31/13 | — | (678,351 | ) | ||||||||||||||||||||
Euro | DBAB | Sell | 11,263,000 | 14,002,162 | 7/31/13 | — | (660,330 | ) | ||||||||||||||||||||
Indian Rupee | DBAB | Buy | 511,691,981 | 9,294,450 | 7/31/13 | — | (751,335 | ) | ||||||||||||||||||||
Indian Rupee | DBAB | Buy | 24,950,000 | 414,082 | 7/31/13 | 2,479 | — | |||||||||||||||||||||
Malaysian Ringgit | HSBC | Buy | 3,005,000 | 938,300 | 7/31/13 | 10,600 | — | |||||||||||||||||||||
Chilean Peso | MSCO | Buy | 1,963,430,000 | 4,072,239 | 8/01/13 | — | (231,073 | ) | ||||||||||||||||||||
Euro | UBSW | Sell | 11,263,000 | 13,862,500 | 8/01/13 | — | (800,062 | ) | ||||||||||||||||||||
Euro | BZWS | Sell | 282,898 | 348,064 | 8/01/13 | — | (20,222 | ) | ||||||||||||||||||||
Euro | HSBC | Sell | 11,263,000 | 13,936,273 | 8/02/13 | — | (726,360 | ) | ||||||||||||||||||||
Euro | BZWS | Sell | 2,762,518 | 3,415,149 | 8/05/13 | — | (181,262 | ) | ||||||||||||||||||||
Euro | BZWS | Sell | 11,267,311 | 15,299,093 | 8/05/13 | 630,635 | — | |||||||||||||||||||||
Euro | JPHQ | Sell | 5,724,900 | 6,999,406 | 8/06/13 | — | (453,647 | ) | ||||||||||||||||||||
Indian Rupee | JPHQ | Buy | 21,500,000 | 395,835 | 8/06/13 | — | (37,262 | ) | ||||||||||||||||||||
Malaysian Ringgit | JPHQ | Buy | 1,100,000 | 346,533 | 8/06/13 | 692 | — | |||||||||||||||||||||
Singapore Dollar | DBAB | Buy | 6,207,000 | 5,019,408 | 8/07/13 | — | (121,033 | ) | ||||||||||||||||||||
Euro | CITI | Sell | 1,210,637 | 1,511,093 | 8/08/13 | — | (65,009 | ) | ||||||||||||||||||||
TGB-18
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Templeton Global Bond Securities Fund |
Forward Exchange Contracts (continued)
| Currency | Counterparty | Type | Quantity | Contract Amount* | Settlement Date | Unrealized Appreciation | Unrealized Depreciation | |||||||||||||||||||||
Euro | JPHQ | Sell | 6,343,900 | 7,918,075 | 8/09/13 | $ | — | $ | (340,952 | ) | ||||||||||||||||||
Euro | DBAB | Sell | 4,845,000 | 6,054,603 | 8/09/13 | — | (253,029 | ) | ||||||||||||||||||||
Euro | CITI | Sell | 351,512 | 439,288 | 8/09/13 | — | (18,340 | ) | ||||||||||||||||||||
South Korean Won | HSBC | Buy | 21,363,430,000 | 18,697,208 | 8/09/13 | — | (37,398 | ) | ||||||||||||||||||||
Euro | GSCO | Sell | 2,166,000 | 2,689,847 | 8/12/13 | — | (130,076 | ) | ||||||||||||||||||||
Euro | GSCO | Sell | 28,210,000 | 37,811,274 | 8/12/13 | 1,084,572 | — | |||||||||||||||||||||
Malaysian Ringgit | HSBC | Buy | 6,100,000 | 1,936,692 | 8/12/13 | — | (11,871 | ) | ||||||||||||||||||||
Singapore Dollar | DBAB | Buy | 12,363,000 | 9,995,957 | 8/12/13 | — | (239,407 | ) | ||||||||||||||||||||
South Korean Won | HSBC | Buy | 11,980,000,000 | 818,171,884 | JPY | 8/12/13 | 2,212,330 | — | ||||||||||||||||||||
Singapore Dollar | BZWS | Buy | 1,717,028 | 1,386,713 | 8/13/13 | — | (31,679 | ) | ||||||||||||||||||||
Euro | GSCO | Sell | 4,115,000 | 5,093,959 | 8/14/13 | — | (263,427 | ) | ||||||||||||||||||||
Euro | MSCO | Sell | 1,962,500 | 2,500,765 | 8/15/13 | — | (54,258 | ) | ||||||||||||||||||||
Singapore Dollar | HSBC | Buy | 3,667,000 | 2,945,169 | 8/15/13 | — | (51,261 | ) | ||||||||||||||||||||
Euro | BZWS | Sell | 6,281,000 | 7,796,385 | 8/16/13 | — | (381,029 | ) | ||||||||||||||||||||
Indian Rupee | JPHQ | Buy | 127,745,000 | 2,295,714 | 8/16/13 | — | (169,014 | ) | ||||||||||||||||||||
Euro | BZWS | Sell | 7,066,000 | 8,714,321 | 8/19/13 | — | (485,241 | ) | ||||||||||||||||||||
Japanese Yen | DBAB | Sell | 838,612,000 | 10,710,797 | 8/19/13 | 2,254,299 | — | |||||||||||||||||||||
Polish Zloty | DBAB | Buy | 59,155,000 | 13,912,277 | EUR | 8/19/13 | — | (373,992 | ) | |||||||||||||||||||
Singapore Dollar | DBAB | Buy | 7,334,000 | 5,939,904 | 8/19/13 | — | (152,067 | ) | ||||||||||||||||||||
Singapore Dollar | BZWS | Buy | 4,886,000 | 3,949,559 | 8/19/13 | — | (93,632 | ) | ||||||||||||||||||||
Singapore Dollar | HSBC | Buy | 3,667,000 | 2,945,382 | 8/19/13 | — | (51,463 | ) | ||||||||||||||||||||
Euro | JPHQ | Sell | 7,851,000 | 9,758,557 | 8/20/13 | — | (463,083 | ) | ||||||||||||||||||||
Euro | BZWS | Sell | 6,280,000 | 7,774,012 | 8/20/13 | — | (402,259 | ) | ||||||||||||||||||||
Euro | DBAB | Sell | 3,964,000 | 4,908,907 | 8/20/13 | — | (252,039 | ) | ||||||||||||||||||||
Japanese Yen | HSBC | Sell | 1,621,372,000 | 20,549,708 | 8/20/13 | 4,199,840 | — | |||||||||||||||||||||
Japanese Yen | UBSW | Sell | 758,781,000 | 9,637,150 | 8/20/13 | 1,985,624 | — | |||||||||||||||||||||
Japanese Yen | JPHQ | Sell | 377,047,000 | 4,776,828 | 8/20/13 | 974,697 | — | |||||||||||||||||||||
Chilean Peso | MSCO | Buy | 981,300,000 | 2,025,596 | 8/22/13 | — | (112,009 | ) | ||||||||||||||||||||
Japanese Yen | BZWS | Sell | 376,247,000 | 4,759,608 | 8/22/13 | 965,506 | — | |||||||||||||||||||||
Euro | BZWS | Sell | 2,680,925 | 3,357,054 | 8/23/13 | — | (133,437 | ) | ||||||||||||||||||||
Japanese Yen | DBAB | Sell | 371,821,000 | 4,706,893 | 8/23/13 | 957,405 | — | |||||||||||||||||||||
Japanese Yen | CITI | Sell | 751,731,000 | 9,510,165 | 8/23/13 | 1,929,619 | — | |||||||||||||||||||||
Japanese Yen | HSBC | Sell | 746,218,000 | 9,450,822 | 8/23/13 | 1,925,870 | — | |||||||||||||||||||||
Euro | UBSW | Sell | 13,581,483 | 16,993,151 | 8/26/13 | — | (689,825 | ) | ||||||||||||||||||||
Euro | BZWS | Sell | 8,738,369 | 10,947,778 | 8/26/13 | — | (429,505 | ) | ||||||||||||||||||||
Japanese Yen | BZWS | Sell | 1,085,075,000 | 13,771,735 | 8/26/13 | 2,829,545 | — | |||||||||||||||||||||
Japanese Yen | JPHQ | Sell | 750,133,000 | 9,515,832 | 8/26/13 | 1,951,288 | — | |||||||||||||||||||||
Japanese Yen | UBSW | Sell | 937,086,000 | 11,878,388 | 8/26/13 | 2,428,559 | — | |||||||||||||||||||||
Malaysian Ringgit | HSBC | Buy | 1,223,000 | 385,951 | 8/26/13 | — | (366 | ) | ||||||||||||||||||||
Singapore Dollar | DBAB | Buy | 9,547,000 | 7,676,502 | 8/26/13 | — | (142,160 | ) | ||||||||||||||||||||
Swedish Krona | UBSW | Buy | 30,000,000 | 3,540,032 | EUR | 8/26/13 | — | (142,144 | ) | |||||||||||||||||||
Euro | HSBC | Sell | 18,537,726 | 23,382,561 | 8/27/13 | — | (753,519 | ) | ||||||||||||||||||||
Euro | JPHQ | Sell | 8,806,308 | 11,099,031 | 8/27/13 | — | (366,764 | ) | ||||||||||||||||||||
Euro | CITI | Sell | 6,136,805 | 7,760,297 | 8/27/13 | — | (229,810 | ) | ||||||||||||||||||||
Japanese Yen | JPHQ | Sell | 751,903,000 | 9,617,895 | 8/27/13 | 2,035,465 | — | |||||||||||||||||||||
Japanese Yen | DBAB | Sell | 685,950,000 | 8,769,048 | 8/27/13 | 1,851,709 | — | |||||||||||||||||||||
Japanese Yen | HSBC | Sell | 1,247,125,000 | 15,947,890 | 8/27/13 | 3,371,482 | — | |||||||||||||||||||||
Malaysian Ringgit | JPHQ | Buy | 8,340,000 | 2,649,301 | 8/27/13 | — | (20,045 | ) | ||||||||||||||||||||
Malaysian Ringgit | HSBC | Buy | 2,087,700 | 663,057 | 8/27/13 | — | (4,891 | ) | ||||||||||||||||||||
Singapore Dollar | DBAB | Buy | 5,952,000 | 4,795,746 | 8/27/13 | — | (98,517 | ) | ||||||||||||||||||||
Euro | DBAB | Sell | 1,058,312 | 1,330,145 | 8/28/13 | — | (47,782 | ) | ||||||||||||||||||||
TGB-19
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Templeton Global Bond Securities Fund |
Forward Exchange Contracts (continued)
| Currency | Counterparty | Type | Quantity | Contract Amount* | Settlement Date | Unrealized Appreciation | Unrealized Depreciation | |||||||||||||||||||||
Indian Rupee | HSBC | Buy | 75,970,000 | 1,345,376 | 8/28/13 | $ | — | $ | (83,305 | ) | ||||||||||||||||||
Indian Rupee | DBAB | Buy | 74,850,000 | 1,316,831 | 8/28/13 | — | (73,367 | ) | ||||||||||||||||||||
Euro | JPHQ | Sell | 6,190,317 | 7,798,097 | 8/29/13 | — | (261,758 | ) | ||||||||||||||||||||
Indian Rupee | HSBC | Buy | 164,063,500 | 2,900,186 | 8/30/13 | — | (175,478 | ) | ||||||||||||||||||||
Indian Rupee | DBAB | Buy | 24,950,000 | 411,860 | 8/30/13 | 2,500 | — | |||||||||||||||||||||
Japanese Yen | JPHQ | Sell | 372,662,000 | 4,759,868 | 8/30/13 | 1,001,758 | — | |||||||||||||||||||||
Singapore Dollar | DBAB | Buy | 2,980,000 | 2,384,572 | 8/30/13 | — | (32,786 | ) | ||||||||||||||||||||
Indian Rupee | CITI | Buy | 34,827,000 | 611,096 | 9/03/13 | — | (33,057 | ) | ||||||||||||||||||||
Euro | DBAB | Sell | 541,000 | 682,607 | 9/04/13 | — | (21,801 | ) | ||||||||||||||||||||
Indian Rupee | HSBC | Buy | 251,448,000 | 4,382,475 | 9/04/13 | — | (209,722 | ) | ||||||||||||||||||||
Indian Rupee | DBAB | Buy | 88,183,000 | 1,533,823 | 9/06/13 | — | (70,884 | ) | ||||||||||||||||||||
Euro | DBAB | Sell | 1,191,000 | 1,505,638 | 9/10/13 | — | (45,143 | ) | ||||||||||||||||||||
Euro | BZWS | Sell | 1,033,224 | 1,308,010 | 9/10/13 | — | (37,334 | ) | ||||||||||||||||||||
Indian Rupee | DBAB | Buy | 80,139,000 | 1,399,226 | 9/10/13 | — | (70,552 | ) | ||||||||||||||||||||
Euro | DBAB | Sell | 8,105,300 | 10,410,447 | 9/11/13 | — | (143,380 | ) | ||||||||||||||||||||
Indian Rupee | DBAB | Buy | 43,392,000 | 753,013 | 9/11/13 | — | (33,700 | ) | ||||||||||||||||||||
Indian Rupee | HSBC | Buy | 42,784,000 | 742,011 | 9/11/13 | — | (32,777 | ) | ||||||||||||||||||||
Euro | BZWS | Sell | 1,012,110 | 1,299,225 | 9/12/13 | — | (18,639 | ) | ||||||||||||||||||||
Euro | JPHQ | Sell | 541,000 | 697,890 | 9/13/13 | — | (6,547 | ) | ||||||||||||||||||||
Indian Rupee | HSBC | Buy | 108,000,000 | 1,803,442 | 9/13/13 | — | (13,666 | ) | ||||||||||||||||||||
Euro | BZWS | Sell | 2,890,070 | 3,741,629 | 9/16/13 | — | (21,590 | ) | ||||||||||||||||||||
Euro | UBSW | Sell | 2,694,506 | 3,486,152 | 9/17/13 | — | (22,436 | ) | ||||||||||||||||||||
Indian Rupee | JPHQ | Buy | 230,330,000 | 3,878,001 | 9/17/13 | — | (63,312 | ) | ||||||||||||||||||||
Indian Rupee | DBAB | Buy | 108,614,000 | 1,852,185 | 9/18/13 | — | (53,613 | ) | ||||||||||||||||||||
Japanese Yen | BZWS | Sell | 285,057,504 | 3,654,583 | 9/18/13 | 779,592 | — | |||||||||||||||||||||
Singapore Dollar | BZWS | Buy | 21,427,761 | 17,128,506 | 9/18/13 | — | (217,255 | ) | ||||||||||||||||||||
Euro | BZWS | Sell | 678,250 | 893,459 | 9/19/13 | 10,283 | — | |||||||||||||||||||||
Singapore Dollar | JPHQ | Buy | 5,686,000 | 4,648,463 | 9/19/13 | — | (160,940 | ) | ||||||||||||||||||||
Singapore Dollar | DBAB | Buy | 7,978,100 | 6,391,684 | 9/19/13 | — | (95,182 | ) | ||||||||||||||||||||
Indian Rupee | DBAB | Buy | 98,937,000 | 1,666,125 | 9/20/13 | — | (28,299 | ) | ||||||||||||||||||||
Hungary Forint | JPHQ | Buy | 1,156,013,000 | 3,718,877 | EUR | 9/23/13 | 213,949 | — | ||||||||||||||||||||
Euro | DBAB | Sell | 8,070,000 | 10,481,881 | 9/24/13 | — | (26,625 | ) | ||||||||||||||||||||
Euro | BZWS | Sell | 1,647,381 | 2,141,233 | 9/24/13 | — | (3,936 | ) | ||||||||||||||||||||
Philippine Peso | DBAB | Buy | 165,158,000 | 3,950,959 | 9/24/13 | — | (123,147 | ) | ||||||||||||||||||||
Hungary Forint | JPHQ | Buy | 925,405,000 | 2,975,100 | EUR | 9/25/13 | 172,982 | — | ||||||||||||||||||||
Indian Rupee | JPHQ | Buy | 79,054,000 | 1,301,515 | 9/25/13 | 6,163 | — | |||||||||||||||||||||
Philippine Peso | JPHQ | Buy | 531,600,000 | 12,090,061 | 9/25/13 | 230,562 | — | |||||||||||||||||||||
Euro | DBAB | Sell | 3,753,000 | 4,862,049 | 9/26/13 | — | (25,038 | ) | ||||||||||||||||||||
Malaysian Ringgit | HSBC | Buy | 11,490,000 | 3,685,646 | 9/26/13 | — | (69,880 | ) | ||||||||||||||||||||
Malaysian Ringgit | DBAB | Buy | 11,080,500 | 3,530,048 | 9/26/13 | — | (43,147 | ) | ||||||||||||||||||||
South Korean Won | HSBC | Buy | 9,530,000,000 | 8,390,562 | 9/26/13 | — | (81,931 | ) | ||||||||||||||||||||
Euro | BZWS | Sell | 12,170,000 | 15,836,213 | 9/27/13 | — | (11,424 | ) | ||||||||||||||||||||
Indian Rupee | HSBC | Buy | 148,257,000 | 2,434,282 | 9/27/13 | 17,374 | — | |||||||||||||||||||||
Japanese Yen | JPHQ | Sell | 285,510,329 | 3,393,781 | 9/27/13 | 514,056 | — | |||||||||||||||||||||
Chilean Peso | DBAB | Buy | 1,252,750,000 | 2,588,326 | 9/30/13 | — | (158,790 | ) | ||||||||||||||||||||
Euro | DBAB | Sell | 14,880,000 | 19,211,159 | 9/30/13 | — | (165,732 | ) | ||||||||||||||||||||
Euro | HSBC | Sell | 5,430,000 | 6,985,586 | 9/30/13 | — | (85,416 | ) | ||||||||||||||||||||
Euro | MSCO | Sell | 4,020,000 | 5,178,765 | 9/30/13 | — | (56,121 | ) | ||||||||||||||||||||
Indian Rupee | DBAB | Buy | 24,950,000 | 409,763 | 9/30/13 | 2,635 | — | |||||||||||||||||||||
Japanese Yen | JPHQ | Sell | 172,207,000 | 2,223,676 | 9/30/13 | 486,705 | — | |||||||||||||||||||||
Philippine Peso | HSBC | Buy | 49,600,000 | 1,182,698 | 9/30/13 | — | (33,351 | ) | ||||||||||||||||||||
TGB-20
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (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 | 39,700,000 | 951,787 | 10/03/13 | $ | — | $ | (31,965 | ) | ||||||||||||||||||
Swedish Krona | DBAB | Buy | 445,104,500 | 67,246,487 | 10/03/13 | — | (1,023,428 | ) | ||||||||||||||||||||
Philippine Peso | DBAB | Buy | 195,560,000 | 4,678,469 | 10/04/13 | — | (147,672 | ) | ||||||||||||||||||||
Philippine Peso | HSBC | Buy | 156,866,000 | 3,760,512 | 10/04/13 | — | (126,191 | ) | ||||||||||||||||||||
Euro | UBSW | Sell | 6,370,000 | 8,249,978 | 10/07/13 | — | (45,425 | ) | ||||||||||||||||||||
Philippine Peso | HSBC | Buy | 233,867,000 | 5,623,290 | 10/07/13 | — | (205,685 | ) | ||||||||||||||||||||
Euro | DBAB | Sell | 12,680,000 | 16,621,324 | 10/09/13 | 108,471 | — | |||||||||||||||||||||
Mexican Peso | DBAB | Buy | 259,112,000 | 19,491,631 | 10/11/13 | 313,915 | — | |||||||||||||||||||||
Philippine Peso | HSBC | Buy | 134,895,000 | 3,245,711 | 10/11/13 | — | (121,364 | ) | ||||||||||||||||||||
Philippine Peso | JPHQ | Buy | 76,627,000 | 1,844,611 | 10/11/13 | — | (69,828 | ) | ||||||||||||||||||||
Malaysian Ringgit | DBAB | Buy | 16,369,588 | 5,226,922 | 10/16/13 | — | (81,388 | ) | ||||||||||||||||||||
Philippine Peso | DBAB | Buy | 45,732,000 | 1,098,825 | 10/16/13 | — | (39,839 | ) | ||||||||||||||||||||
Euro | HSBC | Sell | 12,569,000 | 16,339,700 | 10/17/13 | — | (29,328 | ) | ||||||||||||||||||||
Japanese Yen | JPHQ | Sell | 1,233,160,000 | 14,010,085 | 10/18/13 | 1,569,621 | — | |||||||||||||||||||||
Malaysian Ringgit | JPHQ | Buy | 8,104,000 | 2,608,724 | 10/18/13 | — | (61,639 | ) | ||||||||||||||||||||
Chilean Peso | CITI | Buy | 921,291,798 | 1,863,454 | 10/21/13 | — | (80,970 | ) | ||||||||||||||||||||
Singapore Dollar | JPHQ | Buy | 5,740,000 | 4,638,384 | 10/21/13 | — | (108,027 | ) | ||||||||||||||||||||
Japanese Yen | BZWS | Sell | 735,200,000 | 7,501,862 | 10/22/13 | 84,672 | — | |||||||||||||||||||||
Malaysian Ringgit | HSBC | Buy | 14,613,000 | 4,744,172 | 10/22/13 | — | (152,342 | ) | ||||||||||||||||||||
Malaysian Ringgit | DBAB | Buy | 10,811,000 | 3,486,857 | 10/23/13 | — | (89,916 | ) | ||||||||||||||||||||
Malaysian Ringgit | HSBC | Buy | 7,209,825 | 2,325,000 | 10/24/13 | — | (59,717 | ) | ||||||||||||||||||||
Euro | BZWS | Sell | 649,907 | 847,752 | 10/25/13 | 1,319 | — | |||||||||||||||||||||
Chilean Peso | CITI | Buy | 2,420,966,000 | 4,975,269 | 10/28/13 | — | (294,964 | ) | ||||||||||||||||||||
Chilean Peso | DBAB | Buy | 398,486,000 | 789,550 | 10/29/13 | — | (19,268 | ) | ||||||||||||||||||||
Chilean Peso | BZWS | Buy | 199,342,000 | 395,834 | 10/29/13 | — | (10,502 | ) | ||||||||||||||||||||
Euro | DBAB | Sell | 3,319,244 | 4,295,849 | 10/31/13 | — | (27,250 | ) | ||||||||||||||||||||
Malaysian Ringgit | JPHQ | Buy | 7,468,000 | 2,411,911 | 10/31/13 | — | (66,432 | ) | ||||||||||||||||||||
Euro | DBAB | Sell | 224,556 | 293,042 | 11/04/13 | 566 | — | |||||||||||||||||||||
Euro | BZWS | Sell | 1,581,109 | 2,058,304 | 11/05/13 | — | (1,045 | ) | ||||||||||||||||||||
Japanese Yen | CITI | Sell | 341,992,119 | 4,281,752 | 11/08/13 | 830,941 | — | |||||||||||||||||||||
Norwegian Krone | UBSW | Buy | 47,173,200 | 6,327,302 | EUR | 11/08/13 | — | (510,849 | ) | |||||||||||||||||||
Euro | JPHQ | Sell | 8,969,211 | 11,484,850 | 11/12/13 | — | (197,739 | ) | ||||||||||||||||||||
Japanese Yen | HSBC | Sell | 413,563,000 | 4,430,241 | 11/12/13 | 257,095 | — | |||||||||||||||||||||
Japanese Yen | JPHQ | Sell | 335,950,000 | 4,247,021 | 11/13/13 | 857,013 | — | |||||||||||||||||||||
Euro | DBAB | Sell | 10,778,730 | 13,760,342 | 11/15/13 | — | (279,418 | ) | ||||||||||||||||||||
Euro | MSCO | Sell | 1,962,500 | 2,503,807 | 11/15/13 | — | (52,434 | ) | ||||||||||||||||||||
Japanese Yen | UBSW | Sell | 340,600,700 | 4,303,774 | 11/15/13 | 866,771 | — | |||||||||||||||||||||
Japanese Yen | CITI | Sell | 429,663,000 | 5,432,068 | 11/15/13 | 1,096,336 | — | |||||||||||||||||||||
Japanese Yen | MSCO | Sell | 300,000,000 | 3,792,428 | 11/15/13 | 765,126 | — | |||||||||||||||||||||
Euro | DBAB | Sell | 3,953,398 | 5,079,088 | 11/19/13 | — | (70,497 | ) | ||||||||||||||||||||
Japanese Yen | DBAB | Sell | 796,770,000 | 9,831,023 | 11/19/13 | 1,790,502 | — | |||||||||||||||||||||
Japanese Yen | CITI | Sell | 986,239,000 | 12,214,847 | 11/19/13 | 2,262,319 | — | |||||||||||||||||||||
Malaysian Ringgit | DBAB | Buy | 7,197,960 | 2,310,000 | 11/19/13 | — | (51,738 | ) | ||||||||||||||||||||
Euro | JPHQ | Sell | 10,515,154 | 13,423,803 | 11/20/13 | — | (273,018 | ) | ||||||||||||||||||||
Euro | UBSW | Sell | 4,794,427 | 6,137,346 | 11/20/13 | — | (107,775 | ) | ||||||||||||||||||||
Euro | DBAB | Sell | 3,887,000 | 4,976,915 | 11/20/13 | — | (86,211 | ) | ||||||||||||||||||||
Japanese Yen | HSBC | Sell | 207,909,000 | 2,574,119 | 11/20/13 | 476,007 | — | |||||||||||||||||||||
Japanese Yen | UBSW | Sell | 317,836,000 | 3,936,147 | 11/20/13 | 728,707 | — | |||||||||||||||||||||
Japanese Yen | CITI | Sell | 1,107,834,000 | 13,695,223 | 11/20/13 | 2,515,524 | — | |||||||||||||||||||||
Japanese Yen | JPHQ | Sell | 397,873,000 | 4,930,120 | 11/20/13 | 914,987 | — | |||||||||||||||||||||
Malaysian Ringgit | HSBC | Buy | 4,326,000 | 1,385,997 | 11/20/13 | — | (28,849 | ) | ||||||||||||||||||||
TGB-21
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Templeton Global Bond Securities Fund |
Forward Exchange Contracts (continued)
| Currency | Counterparty | Type | Quantity | Contract Amount* | Settlement Date | Unrealized Appreciation | Unrealized Depreciation | |||||||||||||||||||||
Euro | DBAB | Sell | 837,570 | 1,089,218 | 11/29/13 | $ | — | $ | (1,838 | ) | ||||||||||||||||||
Euro | DBAB | Sell | 5,440,000 | 7,093,515 | 12/03/13 | 6,973 | — | |||||||||||||||||||||
Euro | UBSW | Sell | 2,400,751 | 3,151,666 | 12/09/13 | 24,167 | — | |||||||||||||||||||||
Euro | HSBC | Sell | 2,155,292 | 2,834,855 | 12/09/13 | 27,121 | — | |||||||||||||||||||||
Euro | JPHQ | Sell | 5,095,000 | 6,650,580 | 12/13/13 | 13,091 | — | |||||||||||||||||||||
Mexican Peso | CITI | Buy | 95,083,400 | 7,278,666 | 12/16/13 | — | (51,562 | ) | ||||||||||||||||||||
Swedish Krona | MSCO | Buy | 21,992,000 | 2,509,528 | EUR | 12/16/13 | — | (2,437 | ) | |||||||||||||||||||
Malaysian Ringgit | JPHQ | Buy | 13,361,013 | 4,305,837 | 12/17/13 | — | (120,564 | ) | ||||||||||||||||||||
Mexican Peso | CITI | Buy | 45,585,080 | 3,403,269 | 12/23/13 | 59,508 | — | |||||||||||||||||||||
Singapore Dollar | DBAB | Buy | 8,589,700 | 6,838,933 | 12/23/13 | — | (58,858 | ) | ||||||||||||||||||||
Philippine Peso | JPHQ | Buy | 497,600,000 | 11,283,447 | 12/26/13 | 203,988 | — | |||||||||||||||||||||
Malaysian Ringgit | JPHQ | Buy | 14,772,000 | 4,581,602 | 12/31/13 | 42,122 | — | |||||||||||||||||||||
Euro | DBAB | Sell | 2,285,618 | 3,003,759 | 1/07/14 | 25,734 | — | |||||||||||||||||||||
Japanese Yen | DBAB | Sell | 770,370,000 | 8,897,885 | 1/07/14 | 1,119,834 | — | |||||||||||||||||||||
Malaysian Ringgit | DBAB | Buy | 8,862,500 | 2,865,063 | 1/08/14 | — | (92,219 | ) | ||||||||||||||||||||
Swedish Krona | DBAB | Buy | 136,332,733 | 15,821,369 | EUR | 1/09/14 | — | (373,096 | ) | |||||||||||||||||||
Euro | CITI | Sell | 5,040,000 | 6,611,220 | 1/10/14 | 44,273 | — | |||||||||||||||||||||
Japanese Yen | CITI | Sell | 138,680,000 | 1,589,474 | 1/10/14 | 189,238 | — | |||||||||||||||||||||
Chilean Peso | MSCO | Buy | 2,254,600,000 | 4,581,124 | 1/13/14 | — | (259,092 | ) | ||||||||||||||||||||
Euro | UBSW | Sell | 15,572,000 | 20,393,838 | 1/13/14 | 103,667 | — | |||||||||||||||||||||
Euro | JPHQ | Sell | 937,000 | 1,226,767 | 1/14/14 | 5,857 | — | |||||||||||||||||||||
Euro | DBAB | Sell | 9,460,000 | 12,533,554 | 1/14/14 | 207,183 | — | |||||||||||||||||||||
Japanese Yen | UBSW | Sell | 415,980,000 | 4,756,980 | 1/14/14 | 556,671 | — | |||||||||||||||||||||
Japanese Yen | HSBC | Sell | 536,380,000 | 6,109,112 | 1/15/14 | 693,012 | — | |||||||||||||||||||||
Japanese Yen | UBSW | Sell | 707,660,000 | 7,973,544 | 1/16/14 | 827,856 | — | |||||||||||||||||||||
Japanese Yen | DBAB | Sell | 139,110,000 | 1,567,896 | 1/16/14 | 163,215 | — | |||||||||||||||||||||
Malaysian Ringgit | JPHQ | Buy | 1,856,000 | 604,856 | 1/16/14 | — | (24,407 | ) | ||||||||||||||||||||
Euro | DBAB | Sell | 4,856,000 | 6,497,328 | 1/17/14 | 169,843 | — | |||||||||||||||||||||
Japanese Yen | DBAB | Sell | 719,030,000 | 8,111,032 | 1/17/14 | 850,444 | — | |||||||||||||||||||||
Japanese Yen | JPHQ | Sell | 1,305,790,000 | 14,747,457 | 1/17/14 | 1,561,912 | — | |||||||||||||||||||||
Chilean Peso | DBAB | Buy | 2,227,910,000 | 4,528,272 | 1/22/14 | — | (261,290 | ) | ||||||||||||||||||||
Euro | JPHQ | Sell | 300,000 | 403,658 | 1/22/14 | 12,738 | — | |||||||||||||||||||||
Chilean Peso | DBAB | Buy | 3,160,140,000 | 6,428,929 | 1/24/14 | — | (377,726 | ) | ||||||||||||||||||||
Japanese Yen | UBSW | Sell | 944,420,000 | 10,705,282 | 1/27/14 | 1,167,591 | — | |||||||||||||||||||||
Chilean Peso | DBAB | Buy | 1,967,720,000 | 4,001,871 | 1/28/14 | — | (235,499 | ) | ||||||||||||||||||||
Euro | CITI | Sell | 4,998,400 | 6,690,208 | 1/28/14 | 176,715 | — | |||||||||||||||||||||
Japanese Yen | DBAB | Sell | 897,860,782 | 10,026,363 | 1/28/14 | 958,761 | — | |||||||||||||||||||||
Japanese Yen | HSBC | Sell | 1,162,462,488 | 12,988,408 | 1/28/14 | 1,248,562 | — | |||||||||||||||||||||
Chilean Peso | DBAB | Buy | 635,690,000 | 1,295,608 | 1/29/14 | — | (78,970 | ) | ||||||||||||||||||||
Chilean Peso | JPHQ | Buy | 675,370,000 | 1,372,703 | 1/30/14 | — | (80,253 | ) | ||||||||||||||||||||
Malaysian Ringgit | JPHQ | Buy | 11,703,000 | 3,767,869 | 1/30/14 | — | (110,554 | ) | ||||||||||||||||||||
Chilean Peso | DBAB | Buy | 1,271,380,000 | 2,582,793 | 1/31/14 | — | (150,009 | ) | ||||||||||||||||||||
Euro | DBAB | Sell | 65,773,000 | 88,728,713 | 1/31/14 | 3,017,241 | — | |||||||||||||||||||||
Chilean Peso | DBAB | Buy | 1,186,400,000 | 2,402,106 | 2/03/14 | — | (132,618 | ) | ||||||||||||||||||||
Euro | UBSW | Sell | 5,540,000 | 7,513,071 | 2/03/14 | 293,533 | — | |||||||||||||||||||||
Malaysian Ringgit | JPHQ | Buy | 9,715,000 | 3,085,596 | 2/04/14 | — | (50,354 | ) | ||||||||||||||||||||
Malaysian Ringgit | HSBC | Buy | 19,888,085 | 6,268,900 | 2/06/14 | — | (55,951 | ) | ||||||||||||||||||||
Singapore Dollar | HSBC | Buy | 6,206,000 | 5,016,571 | 2/07/14 | — | (117,811 | ) | ||||||||||||||||||||
Euro | CITI | Sell | 6,572,000 | 8,899,605 | 2/10/14 | 334,817 | — | |||||||||||||||||||||
Euro | UBSW | Sell | 4,929,000 | 6,673,472 | 2/10/14 | 249,881 | — | |||||||||||||||||||||
Euro | HSBC | Sell | 1,800,000 | 2,434,230 | 2/10/14 | 88,427 | — | |||||||||||||||||||||
TGB-22
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (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 | 366,860,000 | 3,724,013 | 2/10/14 | $ | 18,459 | $ | — | |||||||||||||||||||
Chilean Peso | BZWS | Buy | 1,142,900,000 | 2,317,315 | 2/11/14 | — | (132,804 | ) | ||||||||||||||||||||
Euro | BZWS | Sell | 1,412,000 | 1,907,753 | 2/11/14 | 67,589 | — | |||||||||||||||||||||
Euro | DBAB | Sell | 1,738,000 | 2,332,274 | 2/11/14 | 67,257 | — | |||||||||||||||||||||
Polish Zloty | DBAB | Buy | 17,528,000 | 4,075,237 | EUR | 2/11/14 | — | (109,339 | ) | |||||||||||||||||||
Polish Zloty | BZWS | Buy | 17,528,000 | 4,066,538 | EUR | 2/11/14 | — | (98,003 | ) | |||||||||||||||||||
Chilean Peso | DBAB | Buy | 1,145,000,000 | 2,318,283 | 2/12/14 | — | (129,978 | ) | ||||||||||||||||||||
Japanese Yen | JPHQ | Sell | 1,034,700,000 | 11,130,223 | 2/12/14 | 678,740 | — | |||||||||||||||||||||
Japanese Yen | GSCO | Sell | 394,373,000 | 4,248,793 | 2/12/14 | 265,240 | — | |||||||||||||||||||||
Japanese Yen | HSBC | Sell | 1,035,240,000 | 11,130,177 | 2/12/14 | 673,240 | — | |||||||||||||||||||||
Euro | UBSW | Sell | 657,000 | 881,234 | 2/13/14 | 25,000 | — | |||||||||||||||||||||
Japanese Yen | JPHQ | Sell | 686,710,000 | 7,420,122 | 2/13/14 | 483,594 | — | |||||||||||||||||||||
Japanese Yen | CITI | Sell | 1,371,360,000 | 14,840,354 | 2/13/14 | 988,106 | — | |||||||||||||||||||||
Chilean Peso | MSCO | Buy | 2,590,220,000 | 5,239,648 | 2/14/14 | — | (290,262 | ) | ||||||||||||||||||||
Chilean Peso | DBAB | Buy | 964,250,000 | 1,956,001 | 2/14/14 | — | (113,515 | ) | ||||||||||||||||||||
Malaysian Ringgit | DBAB | Buy | 97,443,480 | 30,906,965 | 2/14/14 | — | (478,887 | ) | ||||||||||||||||||||
Polish Zloty | DBAB | Buy | 17,528,000 | 4,068,048 | EUR | 2/14/14 | — | (100,961 | ) | |||||||||||||||||||
Chilean Peso | DBAB | Buy | 2,188,820,000 | 4,439,527 | 2/18/14 | — | (258,821 | ) | ||||||||||||||||||||
Japanese Yen | JPHQ | Sell | 831,970,000 | 8,977,211 | 2/18/14 | 572,881 | — | |||||||||||||||||||||
Japanese Yen | GSCO | Sell | 123,057,280 | 1,322,059 | 2/18/14 | 78,969 | — | |||||||||||||||||||||
Euro | JPHQ | Sell | 3,942,000 | 5,268,404 | 2/19/14 | 130,799 | — | |||||||||||||||||||||
Japanese Yen | GSCO | Sell | 687,820,000 | 7,420,129 | 2/19/14 | 471,877 | — | |||||||||||||||||||||
Japanese Yen | CITI | Sell | 684,870,000 | 7,420,164 | 2/19/14 | 501,712 | — | |||||||||||||||||||||
Malaysian Ringgit | HSBC | Buy | 4,899,000 | 1,551,593 | 2/19/14 | — | (22,215 | ) | ||||||||||||||||||||
Chilean Peso | CITI | Buy | 2,285,090,000 | 4,646,381 | 2/20/14 | — | (282,677 | ) | ||||||||||||||||||||
Chilean Peso | JPHQ | Buy | 1,055,800,000 | 2,145,935 | 2/21/14 | — | (129,938 | ) | ||||||||||||||||||||
Euro | GSCO | Sell | 2,038,000 | 2,728,067 | 2/21/14 | 71,909 | — | |||||||||||||||||||||
Chilean Peso | JPHQ | Buy | 1,792,000,000 | 3,635,257 | 2/24/14 | — | (214,558 | ) | ||||||||||||||||||||
Chilean Peso | MSCO | Buy | 1,273,240,000 | 2,575,584 | 2/24/14 | — | (145,131 | ) | ||||||||||||||||||||
Japanese Yen | HSBC | Sell | 385,460,000 | 4,124,773 | 2/24/14 | 230,675 | — | |||||||||||||||||||||
Chilean Peso | DBAB | Buy | 1,455,470,000 | 2,942,721 | 2/25/14 | — | (164,695 | ) | ||||||||||||||||||||
Japanese Yen | JPHQ | Sell | 385,700,000 | 4,160,621 | 2/25/14 | 264,052 | — | |||||||||||||||||||||
Japanese Yen | BZWS | Sell | 343,460,000 | 3,710,113 | 2/25/14 | 240,277 | — | |||||||||||||||||||||
Chilean Peso | MSCO | Buy | 1,559,200,000 | 3,152,128 | 2/26/14 | — | (176,413 | ) | ||||||||||||||||||||
Chilean Peso | DBAB | Buy | 1,435,490,000 | 2,899,980 | 2/26/14 | — | (160,364 | ) | ||||||||||||||||||||
Chilean Peso | DBAB | Buy | 2,094,920,000 | 4,235,584 | 2/27/14 | — | (237,857 | ) | ||||||||||||||||||||
Euro | DBAB | Sell | 1,530,900 | 2,024,646 | 2/27/14 | 29,323 | — | |||||||||||||||||||||
Japanese Yen | BZWS | Sell | 1,576,550,000 | 16,929,882 | 2/27/14 | 1,002,250 | — | |||||||||||||||||||||
Japanese Yen | DBAB | Sell | 229,660,000 | 2,508,999 | 2/27/14 | 188,781 | — | |||||||||||||||||||||
Chilean Peso | DBAB | Buy | 790,050,000 | 1,595,158 | 2/28/14 | — | (87,661 | ) | ||||||||||||||||||||
Chilean Peso | JPHQ | Buy | 593,800,000 | 1,200,445 | 2/28/14 | — | (67,413 | ) | ||||||||||||||||||||
Singapore Dollar | DBAB | Buy | 2,980,000 | 2,407,692 | 2/28/14 | — | (55,359 | ) | ||||||||||||||||||||
Chilean Peso | DBAB | Buy | 1,253,970,000 | 2,533,529 | 3/03/14 | — | (141,547 | ) | ||||||||||||||||||||
Euro | DBAB | Sell | 2,579,651 | 3,394,176 | 3/03/14 | 31,861 | — | |||||||||||||||||||||
Japanese Yen | JPHQ | Sell | 401,100,000 | 4,410,794 | 3/03/14 | 358,346 | — | |||||||||||||||||||||
Japanese Yen | UBSW | Sell | 447,200,000 | 4,864,571 | 3/04/14 | 346,303 | — | |||||||||||||||||||||
Japanese Yen | HSBC | Sell | 400,800,000 | 4,401,977 | 3/04/14 | 352,510 | — | |||||||||||||||||||||
Chilean Peso | BZWS | Buy | 3,010,700,000 | 6,079,152 | 3/05/14 | — | (337,316 | ) | ||||||||||||||||||||
Chilean Peso | DBAB | Buy | 1,253,970,000 | 2,526,637 | 3/05/14 | — | (135,137 | ) | ||||||||||||||||||||
Euro | DBAB | Sell | 1,536,000 | 2,000,640 | 3/05/14 | — | (1,407 | ) | ||||||||||||||||||||
Chilean Peso | DBAB | Buy | 1,328,230,000 | 2,673,840 | 3/06/14 | — | (140,970 | ) | ||||||||||||||||||||
TGB-23
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (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 | DBAB | Buy | 1,320,220,000 | 2,665,765 | 3/07/14 | $ | — | $ | (148,423 | ) | ||||||||||||||||||
Euro | BZWS | Sell | 3,441,044 | 4,502,400 | 3/07/14 | 17,231 | — | |||||||||||||||||||||
Japanese Yen | BZWS | Sell | 1,712,605,900 | 17,274,115 | 3/07/14 | — | (29,769 | ) | ||||||||||||||||||||
Chilean Peso | MSCO | Buy | 662,100,000 | 1,337,576 | 3/10/14 | — | (75,491 | ) | ||||||||||||||||||||
Euro | BZWS | Sell | 3,785,232 | 4,931,173 | 3/10/14 | — | (2,716 | ) | ||||||||||||||||||||
Euro | CITI | Sell | 31,404,613 | 41,028,557 | 3/10/14 | 93,982 | — | |||||||||||||||||||||
Euro | MSCO | Sell | 5,225,000 | 6,827,769 | 3/10/14 | 17,204 | — | |||||||||||||||||||||
Euro | GSCO | Sell | 21,480,000 | 28,010,350 | 3/10/14 | 12,085 | — | |||||||||||||||||||||
Euro | HSBC | Sell | 1,844,000 | 2,406,420 | 3/10/14 | 2,845 | — | |||||||||||||||||||||
Mexican Peso | HSBC | Buy | 135,500,950 | 10,314,452 | 3/10/14 | — | (87,714 | ) | ||||||||||||||||||||
Singapore Dollar | CITI | Buy | 21,075,381 | 16,932,505 | 3/11/14 | — | (296,002 | ) | ||||||||||||||||||||
Chilean Peso | DBAB | Buy | 1,284,460,000 | 2,596,967 | 3/13/14 | — | (149,289 | ) | ||||||||||||||||||||
Mexican Peso | CITI | Buy | 25,894,900 | 1,967,204 | 3/14/14 | — | (13,478 | ) | ||||||||||||||||||||
Singapore Dollar | HSBC | Buy | 10,521,600 | 8,436,177 | 3/14/14 | — | (130,605 | ) | ||||||||||||||||||||
Euro | BZWS | Sell | 1,161,439 | 1,511,346 | 3/17/14 | — | (2,608 | ) | ||||||||||||||||||||
Japanese Yen | CITI | Sell | 286,112,008 | 2,988,583 | 3/17/14 | 97,400 | — | |||||||||||||||||||||
Chilean Peso | DBAB | Buy | 2,600,220,000 | 5,271,072 | 3/18/14 | — | (318,561 | ) | ||||||||||||||||||||
Euro | CITI | Sell | 861,168 | 1,117,955 | 3/18/14 | — | (4,598 | ) | ||||||||||||||||||||
Hungary Forint | DBAB | Buy | 2,348,675,000 | 7,437,753 | EUR | 3/19/14 | 421,633 | — | ||||||||||||||||||||
Hungary Forint | JPHQ | Buy | 703,907,450 | 2,231,326 | EUR | 3/19/14 | 123,496 | — | ||||||||||||||||||||
Japanese Yen | CITI | Sell | 1,866,452,000 | 19,634,407 | 3/19/14 | 773,307 | — | |||||||||||||||||||||
Japanese Yen | MSCO | Sell | 575,230,000 | 6,012,962 | 3/19/14 | 200,077 | — | |||||||||||||||||||||
Singapore Dollar | HSBC | Buy | 9,120,000 | 7,310,328 | 3/19/14 | — | (111,124 | ) | ||||||||||||||||||||
Hungary Forint | JPHQ | Buy | 1,177,657,000 | 3,718,878 | EUR | 3/20/14 | 224,670 | �� | — | |||||||||||||||||||
Chilean Peso | JPHQ | Buy | 1,065,000,000 | 2,153,691 | 3/21/14 | — | (125,849 | ) | ||||||||||||||||||||
Euro | BZWS | Sell | 744,197 | 966,414 | 3/21/14 | — | (3,683 | ) | ||||||||||||||||||||
Hungary Forint | JPHQ | Buy | 1,171,335,000 | 3,718,878 | EUR | 3/21/14 | 196,998 | — | ||||||||||||||||||||
Japanese Yen | DBAB | Sell | 725,287,000 | 7,682,067 | 3/24/14 | 352,357 | — | |||||||||||||||||||||
Japanese Yen | BZWS | Sell | 740,940,000 | 7,832,595 | 3/24/14 | 344,697 | — | |||||||||||||||||||||
Mexican Peso | CITI | Buy | 75,637,200 | 5,547,527 | 3/24/14 | 154,404 | — | |||||||||||||||||||||
Japanese Yen | BZWS | Sell | 242,774,840 | 2,559,566 | 3/25/14 | 106,067 | — | |||||||||||||||||||||
Euro | DBAB | Sell | 2,736,000 | 3,554,748 | 3/26/14 | — | (11,881 | ) | ||||||||||||||||||||
Euro | CITI | Sell | 1,532,964 | 1,993,926 | 3/26/14 | — | (4,434 | ) | ||||||||||||||||||||
Malaysian Ringgit | DBAB | Buy | 8,012,500 | 2,524,576 | 3/26/14 | — | (27,796 | ) | ||||||||||||||||||||
Malaysian Ringgit | HSBC | Buy | 7,634,000 | 2,404,107 | 3/26/14 | — | (25,271 | ) | ||||||||||||||||||||
Chilean Peso | DBAB | Buy | 1,330,940,000 | 2,695,302 | 4/04/14 | — | (164,623 | ) | ||||||||||||||||||||
Euro | DBAB | Sell | 6,200,000 | 7,980,330 | 4/04/14 | — | (102,499 | ) | ||||||||||||||||||||
Euro | HSBC | Sell | 8,692,000 | 11,359,314 | 4/10/14 | 27,189 | — | |||||||||||||||||||||
Euro | UBSW | Sell | 4,346,000 | 5,690,001 | 4/11/14 | 23,895 | — | |||||||||||||||||||||
Euro | DBAB | Sell | 7,243,000 | 9,479,276 | 4/11/14 | 36,201 | — | |||||||||||||||||||||
Chilean Peso | MSCO | Buy | 2,645,530,000 | 5,408,423 | 4/14/14 | — | (383,144 | ) | ||||||||||||||||||||
Euro | JPHQ | Sell | 3,907,000 | 5,120,878 | 4/14/14 | 27,002 | — | |||||||||||||||||||||
Euro | HSBC | Sell | 6,919,000 | 9,056,487 | 4/16/14 | 35,482 | — | |||||||||||||||||||||
Chilean Peso | MSCO | Buy | 2,370,410,000 | 4,812,527 | 4/21/14 | — | (312,973 | ) | ||||||||||||||||||||
Japanese Yen | JPHQ | Sell | 421,090,000 | 4,322,751 | 4/21/14 | 65,216 | — | |||||||||||||||||||||
Japanese Yen | BZWS | Sell | 700,840,000 | 7,204,618 | 4/21/14 | 118,600 | — | |||||||||||||||||||||
Malaysian Ringgit | JPHQ | Buy | 15,728,213 | 5,098,286 | 4/21/14 | — | (202,503 | ) | ||||||||||||||||||||
Japanese Yen | CITI | Sell | 261,800,000 | 2,675,387 | 4/22/14 | 28,348 | — | |||||||||||||||||||||
Japanese Yen | JPHQ | Sell | 496,560,000 | 5,072,581 | 4/22/14 | 51,901 | — | |||||||||||||||||||||
Euro | DBAB | Sell | 4,545,000 | 5,957,132 | 4/23/14 | 31,035 | — | |||||||||||||||||||||
Euro | BZWS | Sell | 4,954,399 | 6,471,436 | 4/25/14 | 11,437 | — | |||||||||||||||||||||
TGB-24
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (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 | JPHQ | Buy | 1,501,938,000 | 3,023,529 | 4/28/14 | $ | — | $ | (174,501 | ) | ||||||||||||||||||
Euro | BZWS | Sell | 6,575,679 | 8,576,001 | 4/30/14 | 1,701 | — | |||||||||||||||||||||
Swedish Krona | BZWS | Buy | 122,773,200 | 14,205,258 | EUR | 4/30/14 | — | (339,130 | ) | |||||||||||||||||||
Euro | GSCO | Sell | 2,990,000 | 3,933,644 | 5/07/14 | 34,651 | — | |||||||||||||||||||||
Euro | BZWS | Sell | 1,259,000 | 1,652,249 | 5/07/14 | 10,499 | — | |||||||||||||||||||||
Euro | GSCO | Sell | 2,045,000 | 2,678,152 | 5/08/14 | 11,429 | — | |||||||||||||||||||||
Chilean Peso | MSCO | Buy | 1,150,200,000 | 2,333,063 | 5/12/14 | — | (154,269 | ) | ||||||||||||||||||||
Euro | UBSW | Sell | 629,000 | 830,516 | 5/12/14 | 10,262 | — | |||||||||||||||||||||
Euro | GSCO | Sell | 1,259,000 | 1,663,328 | 5/12/14 | 21,515 | — | |||||||||||||||||||||
Japanese Yen | CITI | Sell | 366,861,000 | 3,718,550 | 5/12/14 | 7,974 | — | |||||||||||||||||||||
Euro | CITI | Sell | 5,658,426 | 7,468,274 | 5/13/14 | 89,285 | — | |||||||||||||||||||||
Japanese Yen | GSCO | Sell | 490,555,000 | 4,954,250 | 5/13/14 | — | (7,501 | ) | ||||||||||||||||||||
Japanese Yen | UBSW | Sell | 366,681,000 | 3,702,540 | 5/13/14 | — | (6,280 | ) | ||||||||||||||||||||
Japanese Yen | CITI | Sell | 366,680,000 | 3,644,713 | 5/14/14 | — | (64,160 | ) | ||||||||||||||||||||
Euro | BZWS | Sell | 2,270,980 | 2,955,839 | 5/16/14 | — | (5,748 | ) | ||||||||||||||||||||
Euro | GSCO | Sell | 4,454,000 | 5,771,271 | 5/20/14 | — | (37,372 | ) | ||||||||||||||||||||
Euro | BZWS | Sell | 11,375,532 | 14,643,154 | 5/21/14 | — | (192,255 | ) | ||||||||||||||||||||
Chilean Peso | MSCO | Buy | 420,740,000 | 836,794 | 5/22/14 | — | (40,585 | ) | ||||||||||||||||||||
Malaysian Ringgit | HSBC | Buy | 298,500 | 96,950 | 5/22/14 | — | (4,154 | ) | ||||||||||||||||||||
Euro | JPHQ | Sell | 4,730,771 | 6,116,461 | 5/23/14 | — | (53,272 | ) | ||||||||||||||||||||
Malaysian Ringgit | HSBC | Buy | 1,229,300 | 397,484 | 5/28/14 | — | (15,423 | ) | ||||||||||||||||||||
Euro | BZWS | Sell | 2,836,669 | 3,664,976 | 5/30/14 | — | (34,722 | ) | ||||||||||||||||||||
Euro | GSCO | Sell | 463,000 | 596,969 | 5/30/14 | — | (6,894 | ) | ||||||||||||||||||||
Euro | BZWS | Sell | 7,110,391 | 9,268,679 | 6/05/14 | — | (5,407 | ) | ||||||||||||||||||||
Euro | BZWS | Sell | 785,200 | 1,025,825 | 6/05/14 | 1,688 | — | |||||||||||||||||||||
Euro | GSCO | Sell | 2,033,100 | 2,667,793 | 6/09/14 | 15,939 | — | |||||||||||||||||||||
Japanese Yen | JPHQ | Sell | 1,375,900,000 | 13,819,113 | 6/09/14 | — | (103,970 | ) | ||||||||||||||||||||
Japanese Yen | CITI | Sell | 1,370,500,000 | 13,819,704 | 6/09/14 | — | (48,736 | ) | ||||||||||||||||||||
Japanese Yen | HSBC | Sell | 2,052,400,000 | 20,729,219 | 6/09/14 | — | (39,540 | ) | ||||||||||||||||||||
Mexican Peso | CITI | Buy | 78,317,430 | 5,917,359 | 6/09/14 | — | (50,377 | ) | ||||||||||||||||||||
Japanese Yen | HSBC | Sell | 1,798,900,000 | 18,596,742 | 6/10/14 | 392,901 | — | |||||||||||||||||||||
Japanese Yen | JPHQ | Sell | 1,219,900,000 | 12,397,806 | 6/10/14 | 53,115 | — | |||||||||||||||||||||
Japanese Yen | BZWS | Sell | 1,689,110,000 | 17,356,925 | 6/10/14 | 264,097 | — | |||||||||||||||||||||
Mexican Peso | CITI | Buy | 78,230,000 | 5,901,657 | 6/10/14 | — | (41,701 | ) | ||||||||||||||||||||
Swedish Krona | DBAB | Buy | 41,300,000 | 4,737,325 | EUR | 6/10/14 | — | (67,611 | ) | |||||||||||||||||||
Euro | GSCO | Sell | 8,105,300 | 10,738,712 | 6/11/14 | 166,481 | — | |||||||||||||||||||||
Japanese Yen | DBAB | Sell | 595,700,000 | 6,199,009 | 6/11/14 | 170,762 | — | |||||||||||||||||||||
Japanese Yen | JPHQ | Sell | 1,666,680,000 | 17,356,983 | 6/11/14 | 490,844 | — | |||||||||||||||||||||
Polish Zloty | CITI | Buy | 5,990,000 | 1,365,927 | EUR | 6/11/14 | — | (15,429 | ) | |||||||||||||||||||
Swedish Krona | MSCO | Buy | 13,064,000 | 1,488,181 | EUR | 6/11/14 | — | (7,972 | ) | |||||||||||||||||||
Mexican Peso | CITI | Buy | 159,085,880 | 12,019,635 | 6/12/14 | — | (104,966 | ) | ||||||||||||||||||||
Polish Zloty | DBAB | Buy | 30,704,000 | 7,052,392 | EUR | 6/12/14 | — | (145,912 | ) | |||||||||||||||||||
Swedish Krona | MSCO | Buy | 42,305,800 | 4,810,926 | EUR | 6/12/14 | — | (15,137 | ) | |||||||||||||||||||
Euro | DBAB | Sell | 8,383,000 | 11,130,528 | 6/13/14 | 195,909 | — | |||||||||||||||||||||
Mexican Peso | CITI | Buy | 99,058,800 | 7,396,698 | 6/13/14 | 21,665 | — | |||||||||||||||||||||
Swedish Krona | BZWS | Buy | 24,372,000 | 2,756,016 | EUR | 6/13/14 | 11,414 | — | ||||||||||||||||||||
Swedish Krona | MSCO | Buy | 6,662,000 | 754,644 | EUR | 6/13/14 | 1,428 | — | ||||||||||||||||||||
Japanese Yen | CITI | Sell | 310,702,000 | 3,270,547 | 6/16/14 | 126,096 | — | |||||||||||||||||||||
Swedish Krona | MSCO | Buy | 21,328,100 | 2,430,774 | EUR | 6/16/14 | — | (15,024 | ) | |||||||||||||||||||
Japanese Yen | JPHQ | Sell | 702,800,000 | 7,438,218 | 6/17/14 | 325,427 | — | |||||||||||||||||||||
Euro | BZWS | Sell | 1,124,367 | 1,509,688 | 6/20/14 | 43,006 | — | |||||||||||||||||||||
TGB-25
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Templeton Global Bond Securities Fund |
Forward Exchange Contracts (continued)
| Currency | Counterparty | Type | Quantity | Contract Amount* | Settlement Date | Unrealized Appreciation | Unrealized Depreciation | |||||||||||||||||||||
Mexican Peso | CITI | Buy | 61,535,000 | 4,622,938 | 6/20/14 | $ | — | $ | (17,297 | ) | ||||||||||||||||||
Singapore Dollar | HSBC | Buy | 6,864,000 | 5,451,946 | 6/20/14 | — | (33,154 | ) | ||||||||||||||||||||
Philippine Peso | JPHQ | Buy | 392,700,000 | 8,866,561 | 6/25/14 | 142,116 | — | |||||||||||||||||||||
South Korean Won | DBAB | Buy | 21,440,000,000 | 18,351,451 | 6/27/14 | 208,994 | — | |||||||||||||||||||||
Swedish Krona | UBSW | Buy | 302,991,000 | 34,200,332 | EUR | 6/30/14 | 201,090 | — | ||||||||||||||||||||
|
| |||||||||||||||||||||||||||
Unrealized appreciation (depreciation) |
| 83,119,948 | (38,649,897 | ) | ||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||
Net unrealized appreciation (depreciation) |
| $ | 44,470,051 | |||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||
*In U.S. dollars unless otherwise indicated.
At June 30, 2013, the Fund had the following interest rate swap contracts outstanding. See Note 1(d).
Interest Rate Swap Contracts
| Description | Counterparty/ Exchange | Expiration Date | Notional Amount | Unrealized Appreciation | Unrealized Depreciation | |||||||||||||||
Receive Floating rate 3-month USD BBA LIBOR Pay Fixed rate 3.558% | JPHQ | 3/4/21 | $ | 3,240,000 | $ | — | $ | (334,030 | ) | |||||||||||
Receive Floating rate 3-month USD BBA LIBOR Pay Fixed rate 3.523% | DBAB | 3/28/21 | 14,630,000 | — | (1,434,821 | ) | ||||||||||||||
Receive Floating rate 3-month USD BBA LIBOR Pay Fixed rate 4.347% | CITI | 2/25/41 | 7,460,000 | — | (1,396,918 | ) | ||||||||||||||
Receive Floating rate 3-month USD BBA LIBOR Pay Fixed rate 4.349% | JPHQ | 2/25/41 | 7,460,000 | — | (1,400,749 | ) | ||||||||||||||
Receive Floating rate 3-month USD BBA LIBOR Pay Fixed rate 4.320% | JPHQ | 2/28/41 | 5,600,000 | — | (1,025,404 | ) | ||||||||||||||
Receive Floating rate 3-month USD BBA LIBOR Pay Fixed rate 4.299% | JPHQ | 3/1/41 | 1,870,000 | — | (331,896 | ) | ||||||||||||||
|
| |||||||||||||||||||
Unrealized appreciation (depreciation) | — | (5,923,818 | ) | |||||||||||||||||
|
| |||||||||||||||||||
Net unrealized appreciation (depreciation) | $ | (5,923,818 | ) | |||||||||||||||||
|
| |||||||||||||||||||
See Abbreviations on page TGB-41.
The accompanying notes are an integral part of these financial statements.
TGB-26
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements
Statement of Assets and Liabilities
June 30, 2013 (unaudited)
| Templeton Global Bond Securities Fund | ||||
Assets: | ||||
Investments in securities: | ||||
Cost - Unaffiliated issuers | $ | 2,782,094,247 | ||
Cost - Repurchase agreements | 330,837,630 | |||
|
| |||
Total cost of investments | $ | 3,112,931,877 | ||
|
| |||
Value - Unaffiliated issuers | $ | 2,813,655,098 | ||
Value - Repurchase agreements | 330,837,630 | |||
|
| |||
Total value of investments | 3,144,492,728 | |||
Cash | 750,000 | |||
Restricted cash (Note 1e) | 4,740,000 | |||
Foreign currency, at value (cost $86,772,148) | 86,706,193 | |||
Receivables: | ||||
Capital shares sold | 2,076,652 | |||
Interest | 35,676,654 | |||
Due from brokers | 6,700,000 | |||
Unrealized appreciation on forward exchange contracts | 83,119,948 | |||
Other assets | 859 | |||
|
| |||
Total assets | 3,364,263,034 | |||
|
| |||
Liabilities: | ||||
Payables: | ||||
Capital shares redeemed | 3,627,753 | |||
Affiliates | 2,565,780 | |||
Due to brokers | 4,740,000 | |||
Unrealized depreciation on forward exchange contracts | 38,649,897 | |||
Unrealized depreciation on OTC swap contracts | 5,923,818 | |||
Deferred tax | 3,184,327 | |||
Accrued expenses and other liabilities | 1,150,460 | |||
|
| |||
Total liabilities | 59,842,035 | |||
|
| |||
Net assets, at value | $ | 3,304,420,999 | ||
|
| |||
Net assets consist of: | ||||
Paid-in capital | $ | 3,205,584,022 | ||
Undistributed net investment income | 4,916,414 | |||
Net unrealized appreciation (depreciation) | 65,862,787 | |||
Accumulated net realized gain (loss) | 28,057,776 | |||
|
| |||
Net assets, at value | $ | 3,304,420,999 | ||
|
| |||
The accompanying notes are an integral part of these financial statements.
TGB-27
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Assets and Liabilities (continued)
June 30, 2013 (unaudited)
| Templeton Global Bond Securities Fund | ||||
Class 1: | ||||
Net assets, at value | $ | 293,088,498 | ||
|
| |||
Shares outstanding | 15,833,834 | |||
|
| |||
Net asset value and maximum offering price per share | $ | 18.51 | ||
|
| |||
Class 2: | ||||
Net assets, at value | $ | 2,664,948,298 | ||
|
| |||
Shares outstanding | 148,082,744 | |||
|
| |||
Net asset value and maximum offering price per share | $ | 18.00 | ||
|
| |||
Class 3: | ||||
Net assets, at value | $ | 195,661,365 | ||
|
| |||
Shares outstanding | 10,862,798 | |||
|
| |||
Net asset value and maximum offering price per sharea | $ | 18.01 | ||
|
| |||
Class 4: | ||||
Net assets, at value | $ | 150,722,838 | ||
|
| |||
Shares outstanding | 8,209,000 | |||
|
| |||
Net asset value and maximum offering price per share | $ | 18.36 | ||
|
| |||
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-28
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Operations
for the six months ended June 30, 2013 (unaudited)
| Templeton Global Bond Securities Fund | ||||
Investment income: | ||||
Interest (net of foreign taxes of $1,628,787) | $ | 62,844,852 | ||
|
| |||
Expenses: | ||||
Management fees (Note 3a) | 7,481,365 | |||
Distribution fees: (Note 3c) | ||||
Class 2 | 3,253,013 | |||
Class 3 | 250,490 | |||
Class 4 | 284,142 | |||
Unaffiliated transfer agent fees | 1,085 | |||
Custodian fees (Note 4) | 1,000,864 | |||
Reports to shareholders | 221,070 | |||
Registration and filing fees | 404 | |||
Professional fees | 43,680 | |||
Trustees’ fees and expenses | 5,627 | |||
Other | 24,627 | |||
|
| |||
Total expenses | 12,566,367 | |||
Expense reductions (Note 4) | (870 | ) | ||
|
| |||
Net expenses | 12,565,497 | |||
|
| |||
Net investment income | 50,279,355 | |||
|
| |||
Realized and unrealized gains (losses): | ||||
Net realized gain (loss) from: | ||||
Investments | (3,715,444 | ) | ||
Foreign currency transactions | 33,775,003 | |||
Swap contracts | (243,278 | ) | ||
|
| |||
Net realized gain (loss) | 29,816,281 | |||
|
| |||
Net change in unrealized appreciation (depreciation) on: | ||||
Investments | (154,691,349 | ) | ||
Translation of other assets and liabilities denominated in foreign currencies | 11,207,211 | |||
Change in deferred taxes on unrealized appreciation | 1,787,028 | |||
|
| |||
Net change in unrealized appreciation (depreciation) | (141,697,110 | ) | ||
|
| |||
Net realized and unrealized gain (loss) | (111,880,829 | ) | ||
|
| |||
Net increase (decrease) in net assets resulting from operations | $ | (61,601,474 | ) | |
|
| |||
The accompanying notes are an integral part of these financial statements.
TGB-29
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statements of Changes in Net Assets
| Templeton Global Bond Securities Fund | ||||||||
| Six Months Ended June 30, 2013 (unaudited) | Year Ended December 31, 2012 | |||||||
| ||||||||
Increase (decrease) in net assets: | ||||||||
Operations: | ||||||||
Net investment income | $ | 50,279,355 | $ | 95,705,827 | ||||
Net realized gain (loss) from investments, foreign currency transactions and swap contracts | 29,816,281 | 113,860,368 | ||||||
Net change in unrealized appreciation (depreciation) on investments, translation of other assets and liabilities denominated in foreign currencies and deferred taxes | (141,697,110 | ) | 173,490,240 | |||||
| ||||||||
Net increase (decrease) in net assets resulting from operations | (61,601,474 | ) | 383,056,435 | |||||
| ||||||||
Distributions to shareholders from: | ||||||||
Net investment income and net foreign currency gains: | ||||||||
Class 1 | (14,463,879 | ) | (18,014,760 | ) | ||||
Class 2 | (128,696,606 | ) | (133,749,946 | ) | ||||
Class 3 | (9,351,774 | ) | (12,114,860 | ) | ||||
Class 4 | (7,129,387 | ) | (9,763,141 | ) | ||||
Net realized gains: | ||||||||
Class 1 | (3,587,066 | ) | (438,387 | ) | ||||
Class 2 | (33,227,731 | ) | (3,357,784 | ) | ||||
Class 3 | (2,438,218 | ) | (306,543 | ) | ||||
Class 4 | (1,906,223 | ) | (251,144 | ) | ||||
| ||||||||
Total distributions to shareholders | (200,800,884 | ) | (177,996,565 | ) | ||||
| ||||||||
Capital share transactions: (Note 2) | ||||||||
Class 1 | 8,452,611 | 15,415,298 | ||||||
Class 2 | 459,742,186 | 448,524,053 | ||||||
Class 3 | 12,718,352 | (2,060,465 | ) | |||||
Class 4 | (782,322 | ) | (394,730 | ) | ||||
| ||||||||
Total capital share transactions | 480,130,827 | 461,484,156 | ||||||
| ||||||||
Redemption fees | 4,859 | 6,086 | ||||||
| ||||||||
Net increase (decrease) in net assets | 217,733,328 | 666,550,112 | ||||||
Net assets: | ||||||||
Beginning of period | 3,086,687,671 | 2,420,137,559 | ||||||
| ||||||||
End of period | $ | 3,304,420,999 | $ | 3,086,687,671 | ||||
| ||||||||
Undistributed net investment income included in net assets: | ||||||||
End of period | $ | 4,916,414 | $ | 114,278,705 | ||||
| ||||||||
The accompanying notes are an integral part of these financial statements.
TGB-30
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited)
Templeton Global Bond Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Templeton Variable Insurance Products Trust (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end investment company, consisting of twenty-one 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 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 Board), the Fund’s administrator, investment manager and other affiliates have formed the Valuation and Liquidity Oversight Committee (VLOC). The VLOC provides administration and oversight of the Fund’s valuation policies and procedures, which are approved annually by the Board. Among other things, these procedures allow the Fund to 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 (OTC) 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, credit spreads, estimated default rates, anticipated market interest rate volatility, 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 OTC 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 financial instruments for which market prices are not reliable or readily available. Under these procedures, the VLOC convenes on a regular basis to review such financial instruments and considers a number of factors, including significant unobservable valuation inputs, when arriving at fair value. The VLOC 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. An income-based valuation approach may also be used 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. The VLOC employs various methods for calibrating these valuation approaches including a regular review of key inputs and assumptions, transactional back-testing or disposition analysis, and reviews of any related market activity.
TGB-31
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Global Bond Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
a. Financial Instrument Valuation (continued)
Trading in securities on foreign securities stock exchanges and OTC 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 VLOC 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 Depositary 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.
In addition, certain foreign markets may be open on days that the NYSE is closed, which could result in differences between the value of the Fund’s portfolio securities on the last business day and the last calendar day of the reporting period. Any significant security valuation changes due to an open foreign market are adjusted and reflected by the Fund for financial reporting purposes.
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 Board.
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%. Repurchase agreements are subject to the terms of Master Repurchase Agreements (MRAs) with approved counterparties (sellers). The MRAs contain various provisions, including but not limited to events of default and maintenance of collateral for repurchase agreements. In the event of default by either the seller or the Fund, certain MRAs may permit the non-defaulting party to net and close-out all transactions, if any, traded under such agreements. The Fund may sell securities it holds as collateral and apply the proceeds towards the repurchase price and any other amounts
TGB-32
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Global Bond Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
c. Joint Repurchase Agreement (continued)
owed by the seller to the Fund in the event of default by the seller. This could involve costs or delays in addition to a loss on the securities if their value falls below the repurchase price owed by the seller. The joint repurchase agreement held by the Fund at period end, as indicated in the Statement of Investments, had been entered into on June 28, 2013.
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.
Derivative counterparty credit risk is managed through a formal evaluation of the creditworthiness of all potential counterparties. The Fund attempts to reduce its exposure to counterparty credit risk on OTC derivatives, whenever possible, by entering into International Swaps and Derivatives Association (ISDA) master agreements with certain counterparties. These agreements contain various provisions, including but not limited to collateral requirements, events of default, or early termination. Termination events applicable to the counterparty include certain deteriorations in the credit quality of the counterparty. Termination events applicable to the Fund include failure of the Fund to maintain certain net asset levels and/or limit the decline in net assets over various periods of time. In the event of default or early termination, the ISDA master agreement gives the non-defaulting party the right to net and close-out all transactions traded, whether or not arising under the ISDA agreement, to one net amount payable by one counterparty to the other. Early termination by the counterparty may result in an immediate payment by the Fund of any net liability owed to that counterparty under the ISDA agreement. However, absent an event of default or early termination, OTC derivative assets and liabilities are presented gross and not offset in the Statement of Assets and Liabilities. At June 30, 2013, the Fund had OTC derivatives in a net liability position of $2,982,505 and the aggregate value of collateral pledged for such contracts was $3,450,000.
Collateral requirements differ by type of derivative. Collateral terms are contract specific for OTC derivatives. For OTC derivatives traded under an ISDA master agreement, posting of collateral is required by either the fund or the applicable counterparty if the total net exposure of all OTC derivatives with the applicable counterparty exceeds the minimum transfer amount, which typically ranges from $100,000 to $250,000, and can vary depending on the counterparty and the type of the agreement. Generally, collateral is determined at the close of fund business each day and any additional collateral required due to changes in derivative values may be delivered by the fund or the counterparty within a few business days. Collateral pledged and/or received by the fund, if any, is held in segregated accounts with the fund’s custodian/counterparty broker and can be in the form of cash and/or securities. Unrestricted cash may be invested according to the Fund’s investment objectives.
The Fund entered into OTC 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 at a specific exchange rate on a future date.
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. These agreements may be privately negotiated in the over-the-counter market (“OTC interest rate swaps”) or may be executed on a registered exchange (“centrally cleared interest rate swaps”). For centrally cleared interest rate swaps, 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 centrally cleared interest rate swaps. 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. 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.
See Note 9 regarding other derivative information.
TGB-33
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Global Bond Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
e. Restricted Cash
At June 30, 2013, the Fund received restricted cash in connection with investments in certain derivative securities. Restricted cash is held in a segregated account with the Fund’s counterparty broker and is reflected in the Statement of Assets and Liabilities.
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 if applicable, excise taxes. As a result, no provision for U.S. federal income taxes is required.
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 in an amount that would be payable if the securities were disposed of on the valuation date.
The Fund recognizes the tax benefits of uncertain tax positions only when the position is “more likely than not” to be sustained upon examination by the tax authorities based on the technical merits of the tax position. As of June 30, 2013, and for all open tax years, the Fund has determined that no liability for unrecognized tax benefits is required in the Fund’s financial statements related to uncertain tax positions taken on a tax return (or expected to be taken on future tax returns). Open tax years are those that remain subject to examination and are based on each tax jurisdiction statute of limitation.
g. Security Transactions, Investment Income, Expenses and Distributions
Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Amortization of premium and accretion of discount on debt securities are included in interest income. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with accounting principles generally accepted in the United States of America. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods.
Common expenses incurred by the Trust are allocated among the funds based on the ratio of net assets of each fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense.
Realized and unrealized gains and losses and net investment income, not including class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions, by class, are generally due to differences in class specific expenses.
Inflation-indexed bonds 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.
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
TGB-34
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Global Bond Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
h. Accounting Estimates (continued)
date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
i. 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.
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, 2013, 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, 2013 | Year Ended December 31, 2012 | |||||||||||||||
| Class 1 Shares: | Shares | Amount | Shares | Amount | ||||||||||||
Shares sold | 1,231,467 | $ | 24,864,694 | 2,650,014 | $ | 51,366,352 | ||||||||||
Shares issued in reinvestment of distributions | 962,717 | 18,050,945 | 1,028,604 | 18,453,147 | ||||||||||||
Shares redeemed | (1,711,446 | ) | (34,463,028 | ) | (2,823,320 | ) | (54,404,201 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | 482,738 | $ | 8,452,611 | 855,298 | $ | 15,415,298 | ||||||||||
| ||||||||||||||||
Class 2 Shares: | ||||||||||||||||
Shares sold | 21,395,147 | $ | 421,910,736 | 28,727,828 | $ | 540,675,595 | ||||||||||
Shares issued in reinvestment of distributions | 8,877,431 | 161,924,337 | 7,843,692 | 137,107,730 | ||||||||||||
Shares redeemed | (6,385,183 | ) | (124,092,887 | ) | (12,232,820 | ) | (229,259,272 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | 23,887,395 | $ | 459,742,186 | 24,338,700 | $ | 448,524,053 | ||||||||||
| ||||||||||||||||
Class 3 Shares: | ||||||||||||||||
Shares sold | 660,352 | $ | 12,953,743 | 835,292 | $ | 15,856,382 | ||||||||||
Shares issued in reinvestment of distributions | 646,027 | 11,789,991 | 710,200 | 12,421,403 | ||||||||||||
Shares redeemed | (612,555 | ) | (12,025,382 | ) | (1,613,494 | ) | (30,338,250 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | 693,824 | $ | 12,718,352 | (68,002 | ) | $ | (2,060,465 | ) | ||||||||
| ||||||||||||||||
Class 4 Shares: | ||||||||||||||||
Shares sold | 409,859 | $ | 8,226,329 | 871,336 | $ | 16,701,133 | ||||||||||
Shares issued on reinvestment of distributions | 485,524 | 9,035,611 | 562,284 | 10,014,286 | ||||||||||||
Shares redeemed | (922,755 | ) | (18,044,262 | ) | (1,421,448 | ) | (27,110,149 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | (27,372 | ) | $ | (782,322 | ) | 12,172 | $ | (394,730 | ) | |||||||
| ||||||||||||||||
TGB-35
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Global Bond Securities Fund
3. TRANSACTIONS WITH AFFILIATES
Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the 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.
c. Distribution Fees
The Board 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. Some distribution fees are not charged on shares held by affiliates. The Board 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, 2013, the custodian fees were reduced as noted in the Statement of Operations.
TGB-36
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Global Bond Securities Fund
5. INCOME TAXES
At June 30, 2013, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
Cost of investments | $ | 3,131,786,763 | ||
|
| |||
Unrealized appreciation | $ | 108,201,244 | ||
Unrealized depreciation | (95,495,279 | ) | ||
|
| |||
Net unrealized appreciation (depreciation) | $ | 12,705,965 | ||
|
| |||
Differences between income and/or capital gains as determined on a book basis and a tax basis are primarily due to differing treatments of foreign currency transactions, bond discounts and premiums, and tax straddles.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the period ended June 30, 2013, aggregated $673,429,846 and $300,317,686, respectively.
7. CREDIT RISK
At June 30, 2013, the Fund had 9.49% 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-37
Table of Contents
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, 2013, the Fund’s investments in derivative contracts 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 / Net assets consist of – net unrealized appreciation | $ | — | Unrealized depreciation on swap contracts – net unrealized depreciation / Net assets consist of – net unrealized depreciation | $ | 5,923,818 | ||||||
Foreign exchange contracts | Unrealized appreciation on forward exchange contracts / Net assets consist of – net unrealized appreciation | 83,119,948 | Unrealized depreciation on forward exchange contracts / Net assets consist of – net unrealized depreciation | 38,649,897 | ||||||||
For the period ended June 30, 2013, 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 swap contracts / Net change in unrealized appreciation (depreciation) on investments | $ | (243,278 | ) | $ | 4,540,581 | ||||
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 | 40,423,253 | 13,028,401 | |||||||
At June 30, 2013, the Fund’s OTC derivative assets and liabilities, are as follows:
| Gross and Net Amounts of Assets and Liabilities Presented in the Statement of Assets and Liabilities | ||||||||
| Assetsa | Liabilitiesa | |||||||
Derivatives | ||||||||
Forward Exchange Contracts | $ | 83,119,948 | $ | 38,649,897 | ||||
Swap Contracts | — | 5,923,818 | ||||||
| ||||||||
Total | $ | 83,119,948 | $ | 44,573,715 | ||||
| ||||||||
| a | Absent an event of default or early termination, OTC derivative assets and liabilities are presented gross and not offset in the Statement of Assets and Liabilities. |
TGB-38
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Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Global Bond Securities Fund
9. OTHER DERIVATIVE INFORMATION (continued)
At June 30, 2013, the Fund’s OTC derivative assets which may be offset against the Fund's OTC derivative liabilities, and collateral received from the counterparty, is as follows:
| Amounts Not Offset in the Statement of Assets and Liabilities | ||||||||||||||||||||
| Gross and Net Amounts of Assets Presented in the Statement of Assets and Liabilities | Financial Instruments Available for Offset | Financial Instruments Collateral Received a,b | Cash Collateral Receivedb | Net Amount (Not less than zero) | ||||||||||||||||
Counterparty | ||||||||||||||||||||
BZWS | $ | 8,678,768 | $ | (4,260,833 | ) | $ | — | $ | (2,750,000 | ) | $ | 1,667,935 | ||||||||
CITI | 12,340,028 | (3,229,991 | ) | (6,284,921 | ) | — | 2,825,116 | |||||||||||||
DBAB | 15,808,059 | (14,969,162 | ) | — | — | 838,897 | ||||||||||||||
GSCO | 2,234,667 | (445,270 | ) | — | (1,789,397 | ) | — | |||||||||||||
HSBC | 16,242,562 | (4,609,008 | ) | (8,473,883 | ) | — | 3,159,671 | |||||||||||||
JPHQ | 16,992,452 | (9,441,478 | ) | (3,700,871 | ) | — | 3,850,103 | |||||||||||||
MSCO | 983,835 | (983,835 | ) | — | — | — | ||||||||||||||
UBSW | 9,839,577 | (3,651,633 | ) | (6,187,944 | ) | — | — | |||||||||||||
| ||||||||||||||||||||
Total | $ | 83,119,948 | $ | (41,591,210 | ) | $ | (24,647,619 | ) | $ | (4,539,397 | ) | $ | 12,341,722 | |||||||
| ||||||||||||||||||||
| a | At June 30, 2013, the Fund received United Kingdom Treasury Bonds and United States Treasury Notes as collateral for derivatives. |
| b | In some instances, the collateral amounts disclosed in the table above were adjusted due to the requirement to limit the collateral amounts to avoid the effect of overcollateralization. Actual collateral received and/or pledged may be more than the amounts disclosed herein. |
At June 30, 2013, the Fund’s OTC derivative liabilities which may be offset against the Fund's OTC derivative assets, and collateral pledged to the counterparty, is as follows:
| Amounts Not Offset in the Statement of Assets and Liabilities | ||||||||||||||||||||
| Gross and Net Amounts of Liabilities Presented in the Statement of Assets and Liabilities | Financial Instruments Available for Offset | Financial Instruments Collateral Pledged | Cash Collateral Pledgeda | Net Amount (Not less than zero) | ||||||||||||||||
Counterparty | ||||||||||||||||||||
BZWS | $ | 4,260,833 | $ | (4,260,833 | ) | $ | — | $ | — | $ | — | |||||||||
CITI | 3,229,991 | (3,229,991 | ) | — | — | — | ||||||||||||||
DBAB | 14,969,162 | (14,969,162 | ) | — | — | — | ||||||||||||||
GSCO | 445,270 | (445,270 | ) | — | — | — | ||||||||||||||
HSBC | 4,609,008 | (4,609,008 | ) | — | — | — | ||||||||||||||
JPHQ | 9,441,478 | (9,441,478 | ) | — | — | — | ||||||||||||||
MSCO | 3,966,340 | (983,835 | ) | — | (2,982,505 | ) | — | |||||||||||||
UBSW | 3,651,633 | (3,651,633 | ) | — | — | — | ||||||||||||||
| ||||||||||||||||||||
Total | $ | 44,573,715 | $ | (41,591,210 | ) | $ | — | $ | (2,982,505 | ) | $ | — | ||||||||
| ||||||||||||||||||||
| a | In some instances, the collateral amounts disclosed in the table above were adjusted due to the requirement to limit the collateral amounts to avoid the effect of overcollateralization. Actual collateral received and/or pledged may be more than the amounts disclosed herein. |
TGB-39
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Global Bond Securities Fund
9. OTHER DERIVATIVE INFORMATION (continued)
For the period ended June 30, 2013, the average month end market value of derivatives represented 3.93% of average month end net assets. The average month end number of open derivative contracts for the period was 440.
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 $1.5 billion (Global Credit Facility) which matures on January 17, 2014. 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 0.07% based upon the unused portion of the Global Credit Facility. These fees are reflected in other expenses on the Statement of Operations. During the period ended June 30, 2013, 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 financial instruments and are summarized in the following fair value hierarchy:
| • | Level 1 – quoted prices in active markets for identical financial instruments |
| • | Level 2 – other significant observable inputs (including quoted prices for similar financial instruments, interest rates, prepayment speed, credit risk, etc.) |
| • | Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of financial instruments) |
The inputs or methodology used for valuing financial instruments are not an indication of the risk associated with investing in those financial instruments.
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.
A summary of inputs used as of June 30, 2013, in valuing the Fund’s assets and liabilities carried at fair value, is as follows:
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
|
| |||||||||||||||
Assets: | ||||||||||||||||
Investments in Securities: | ||||||||||||||||
Foreign Government and Agency Securities | $ | — | $ | 2,323,224,105 | $ | — | $ | 2,323,224,105 | ||||||||
Municipal Bonds | — | 1,542,017 | — | 1,542,017 | ||||||||||||
Short Term Investments | — | 819,726,606 | — | 819,726,606 | ||||||||||||
|
| |||||||||||||||
Total Investments in Securities | $ | — | $ | 3,144,492,728 | $ | — | $ | 3,144,492,728 | ||||||||
|
| |||||||||||||||
Forward Exchange Contracts | $ | — | $ | 83,119,948 | $ | — | $ | 83,119,948 | ||||||||
Liabilities: | ||||||||||||||||
Forward Exchange Contracts | — | 38,649,897 | — | 38,649,897 | ||||||||||||
Swaps | — | 5,923,818 | — | 5,923,818 | ||||||||||||
TGB-40
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Global Bond Securities Fund
12. NEW ACCOUNTING PRONOUNCEMENTS
In June 2013, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2013-08, Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements. The ASU modifies the criteria used in defining an investment company under U.S. Generally Accepted Accounting Principles and also sets forth certain measurement and disclosure requirements. Under the ASU, an entity that is registered under the 1940 Act automatically qualifies as an investment company. The ASU is effective for interim and annual reporting periods beginning after December 15, 2013. The Fund is currently reviewing the requirements and believes the adoption of this ASU will not have a material impact on its financial statements.
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 | ||
| BZWS - Barclays Bank PLC | AUD - Australian Dollar | BHAC - Berkshire Hathaway Assurance Corp. | ||
| CITI - Citibank N.A. | BRL - Brazilian Real | FRN - Floating Rate Note | ||
| DBAB - Deutsche Bank AG | CAD - Canadian Dollar | |||
| GSCO - Goldman Sachs Bank | EUR - Euro | |||
| HSBC - HSBC Bank USA, N.A. | HUF - Hungarian Forint | |||
| JPHQ - JPMorgan Chase & Co. | IDR - Indonesian Rupiah | |||
| MSCO - Morgan Stanley | ILS - New Israeli Shekel | |||
| UBSW - UBS AG | JPY - Japanese Yen | |||
| KRW - South Korean Won | ||||
| 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 | ||||
| SGD - Singapore Dollar |
TGB-41
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Tax Information (unaudited)
Templeton Global Bond Securities Fund
At December 31, 2012, 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 hereby reports to shareholders the foreign source income and foreign taxes paid, pursuant to Section 853 of the Internal Revenue Code (Code). This written statement will allow shareholders of record on June 13, 2013, 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 reported 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 | $ | 0.0180 | $ | 0.7023 | ||||
Class 2 | $ | 0.0180 | $ | 0.6751 | ||||
Class 3 | $ | 0.0180 | $ | 0.6689 | ||||
Class 4 | $ | 0.0180 | $ | 0.6527 | ||||
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-42
Table of Contents
TEMPLETON GROWTH SECURITIES FUND
We are pleased to bring you Templeton Growth Securities Fund’s semiannual report for the period ended June 30, 2013.
Performance Summary as of 6/30/13
Templeton Growth Securities Fund – Class 1 delivered a +9.11% total return for the six-month period ended 6/30/13.
Performance reflects the Fund’s Class 1 operating expenses, but does not include any contract fees, expenses or sales charges. If they had been included, performance would be lower. These charges and deductions, particularly for variable life policies, can have a significant effect on contract values and insurance benefits. See the contract prospectus for a complete description of these expenses, including sales charges.
Templeton Growth Securities Fund – Class 1
Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares.
Current performance may differ from figures shown.
TG-1
Table of Contents
Fund Goal and Main Investments: Templeton Growth Securities Fund seeks long-term capital growth. Under normal market conditions, the Fund invests predominantly 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. For comparison, the Fund’s benchmark, the MSCI All Country World Index (ACWI), posted a +6.38% total return for the period under review.1
Economic and Market Overview
Global developed and emerging market stocks, as measured by the MSCI ACWI, advanced during the first six months of 2013 as many central banks continued supportive monetary policies. The economic focus and highly correlated market movements characteristic of previous periods appeared to be supplanted by a more fundamentals-based market environment. Regional performance was also more consistent with local economic trends, although periodic volatility highlighted the recovery’s fragility. Continued U.S. gross domestic product (GDP) growth accompanied improvements in housing, labor and retail sales. Eurozone first-quarter GDP growth missed expectations, although the number of unemployed declined and manufacturing indicator levels increased in the first half of 2013. Japan demonstrated economic progress amid major reflationary initiatives as business confidence, industrial production and retail sales improved and inflation stabilized. However, investor confidence in the country’s radical policy maneuvers wavered. China’s growth rate and manufacturing levels were weaker than expected, and the International Monetary Fund downgraded the country’s growth outlook.
Despite generally accommodative global monetary policies, central banks changed their strategies during the period to reflect the increasingly varied needs of different economies. The U.S. Federal Reserve Board (Fed) vowed to keep interest rates low until the unemployment rate reached 6.5% but ignited considerable market volatility and a Treasury sell-off by suggesting it may taper monthly bond purchases should economic conditions warrant. The European Central Bank cut benchmark interest rates and pledged to maintain systemic support
1. Source: © 2013 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: All investments involve risks, including possible loss of principal. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments; investments in emerging markets involve heightened risks related to the same factors. To the extent that the Fund focuses on particular countries, regions, industries, sectors or types of investment from time to time, it may be subject to greater risks of adverse developments in such areas of focus than a fund that invests in a wider variety of countries, regions, industries, sectors or investments. Current political uncertainty surrounding the European Union (EU) and its membership may increase market volatility. The financial instability of some countries in the EU, including Greece, Italy and Spain, together with the risk of that impacting other more stable countries, may increase the economic risk of investing in companies in Europe. The Fund is actively managed but there is no guarantee that the manager’s investment decisions will produce the desired results. The Fund’s prospectus also includes a description of the main investment risks.
TG-2
Table of Contents
after successfully containing a run on a Cyprus bank. Elsewhere in developed markets, the Bank of Japan’s new governor set an explicit inflation target and pledged to double bond purchases in what many believe was unprecedented policy reform.
Emerging market central banks were more aggressive, with Brazil’s central bank hiking interest rates amid rising inflation and China’s central bank taking measures to curb real estate and credit speculation. Chinese liquidity tightening weighed on credit markets at period-end, and a jump in the interbank lending rate underscored concerns about the country’s shadow banking system. Volatility surfaced in the emerging market region as political protests intensified, and asset prices fell as investors responded to rising bond rates by unwinding highly leveraged emerging market carry trades.2 Given the rise in rates near period-end, longer duration U.S. Treasury and emerging market bond prices experienced meaningful price declines. In the second quarter, gold, traditionally a safe haven, posted its worst quarterly performance since 1974 as inflation expectations remained subdued and global commodities stayed under pressure. Investor sentiment improved in the last week of the period, and stock prices rebounded from period lows after China’s central bank intervened to calm the country’s interbank market, positive economic reports helped stabilize Japanese government bond yields, and several Fed members reassured investors that the Fed’s accommodative monetary policy would continue.
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
The Fund delivered gains and not only outperformed the benchmark MSCI ACWI for the year-to-date and second-quarter periods, but also on trailing one-, two-, three-, and five-year horizons, as well as since inception. As bottom-up investors, we were encouraged by the marked
2. In a carry trade, an investor seeks to profit from an interest rate differential by borrowing low-yielding currencies and lending high-yielding currencies. The use of borrowed capital to facilitate the trade creates leverage for the borrower.
TG-3
Table of Contents
decline in stock market correlations following a notable global divergence in GDP growth, inflation and monetary policy. During the notable central bank intervention of the past few years, it seemed to us that investors were overly focused on economic and political developments and largely inattentive to stock valuations and business fundamentals. It seemed intuitive to us that a market that ignores fundamentals will almost certainly misprice stocks; therefore, we viewed unusually high correlations as an opportunity for bottom-up, fundamental investors. Even amid recent falling correlations, however, economic headlines remained in focus during the first half of 2013 and contributed to market volatility. Although various developments suggested that challenges remained, we feel these economic events proved short-lived and well contained.
We remain encouraged by the notable divergence witnessed globally in the first half of 2013 in variables ranging from GDP growth to inflation to monetary policy. On the economic front, Europe remained mired in a recession, although Germany and certain northern European countries provided strength. Although emerging market growth generally decelerated, many developing economies continued to expand faster than global GDP. The U.S. economy modestly recovered with healthy private sector demand offsetting fiscal cuts. Consequently, central bank approaches diverged, with emerging markets tightening, Japan aggressively loosening, Europe maintaining its vigilance and the U.S. weighing the timing of exiting quantitative easing. We believe this increasingly nuanced global market landscape forced investors to refocus on fundamentals across different regions, supporting some of our long-held value convictions.
Across many sectors and regions, stock selection contributed materially to Fund performance. We believe recent results attest to the benefits of our fundamental value approach in a normalizing market environment. For example, relative performance for information technology (IT) holdings — one of the Fund’s top sector contributors — was attributable mainly to stock selection.3 During a period of relatively lackluster IT performance, three of the Fund’s top contributors to relative performance were based in the sector, led by U.S. computer and peripherals manufacturer Hewlett-Packard (HP). The company’s share price rose as comprehensive restructuring initiatives aimed at keeping HP competitive appeared to gain traction, with first-quarter results
3. The IT sector comprises communications equipment; computers and peripherals; electronic equipment, instruments and components; semiconductors and semiconductor equipment; and software in the SOI.
TG-4
Table of Contents
exceeding expectations and management reaffirming earnings guidance. Even after a strong recovery from lows, the stock remained cheap, in our view, by a number of financial measures. U.S.-based Microsoft, the world largest software developer, and Cisco Systems, the world’s largest networking equipment manufacturer, also strongly contributed during the period. Microsoft’s stock price rose to a five-year high after the company reported robust results in its core enterprise software business. Cisco’s shares reached a three-year high after profits rose as businesses increased spending to meet higher demand for online data delivery. We have long maintained that in an environment of continued uncertainty, corporate capital expenditures could favor productivity enhancing investments such as technology, as opposed to capacity enhancing investments. A number of formerly underperforming, but financially sound, IT companies were finally beginning to receive share price support, and we were pleased to see the confirmation of our investment thesis.
Our investment thesis for the materials sector also appeared accurate to us, as we had suggested managements displayed poor capital discipline, exacerbating industrial overcapacity and pressuring spot prices at a time when it seemed to us nearly everyone invested simultaneously.4 Our analysis found that sector multiples insufficiently discounted downside risks. Commodity prices declined during the review period as emerging market growth slowed, inflation remained subdued and the U.S. dollar strengthened. Thus, our materials sector underweighting was a large contributor to relative performance. A long-standing overweighting and stock selection in the health care sector also helped the Fund’s positions outperform the benchmark’s sector allocation.5 These investments began to significantly reward us, led by specialty drugmakers Roche Holding (Switzerland) and Elan (Ireland). Even following the sector’s recent gains, we believe health care still offered lower valuations and more secure dividend streams than other defensive sectors, and we remained favorable toward our pharmaceuticals and biotechnology holdings that we considered reasonably valued given our assessment of their long-term total return potential.
4. The materials sector comprises chemicals, construction materials, and metals and mining in the SOI.
5. The health care sector comprises biotechnology, health care equipment and supplies, life sciences tools and services, and pharmaceuticals in the SOI.
TG-5
Table of Contents
Stock selection also supported relative performance in cyclical sectors such as consumer discretionary, energy and industrials.6 Japanese carmakers Mazda Motor and Toyota Motor made gains after yen weakness helped boost sales, buoying consumer discretionary sector returns. Leading energy sector performance was U.S. oilfield services firm Halliburton, which advanced to its highest share price in nearly two years after first-quarter results exceeded analysts’ estimates following effective North American cost-cutting. More broadly in the energy sector we found selective opportunities among integrated oil companies and oilfield services firms trading at what we believed were modest valuations and offering healthy balance sheets, sustainable dividends and considerable asset value support. From the industrials sector, U.K.-based air carrier International Consolidated Airlines Group’s stock gained and U.S. truckmaker Navistar International’s7 stock rose after the firm’s new CEO forecast an expedited recovery in market share.
Underperforming Fund sectors were primarily limited to consumer staples, telecommunication services and, to a lesser extent, financials.8 The Fund’s consumer staples underweighting detracted from returns as cautious investors helped the counter-cyclical sector sustain strong performance. U.K. food and staples retailer Tesco surrendered gains as soft sales raised concerns that a sluggish recovery in demand could limit upside potential following favorable results from restructuring. We did not find many opportunities in consumer staples given the sector’s premium multiples resulting from its combination of defensive demand characteristics and international growth potential. However, we found investments with similar attributes at valuations more attractive to us in telecommunication services, where a slowdown in emerging market growth and continued competitive pressures and regulatory uncertainty kept valuations low. In our view, these challenges created opportunities in a sector offering excellent long-term global growth prospects and the market’s highest dividend yield. Our overweighted telecommunication services allocation underperformed, including Turkcell Iletisim Hizmetleri (Turkey)7 and China Telecom (China), during a period of
6. The consumer discretionary sector comprises auto components, automobiles, media, multiline retail and specialty retail in the SOI. The energy sector comprises energy equipment and services; and oil, gas and consumable fuels in the SOI. The industrials sector comprises aerospace and defense, air freight and logistics, airlines, construction and engineering, construction materials, electrical equipment, industrial conglomerates, machinery, and trading companies and distributors in the SOI.
7. This holding is not an index component.
8. The consumer staples sector comprises food and staples retailing in the SOI. The telecommunication services sector comprises diversified telecommunication services and wireless telecommunication services in the SOI. The financials sector comprises capital markets, commercial banks, diversified financial services and insurance in the SOI.
Top 10 Holdings
Templeton Growth Securities Fund
6/30/13
| Company Sector/Industry, Country | % of Total Net Assets | |||
| Microsoft Corp. | 2.0% | |||
| Software, U.S. | ||||
| Citigroup Inc. | 1.9% | |||
| Diversified Financial Services, U.S. | ||||
| Sanofi | 1.9% | |||
| Pharmaceuticals, France | ||||
| GlaxoSmithKline PLC | 1.8% | |||
| Pharmaceuticals, U.K. | ||||
| Pfizer Inc. | 1.8% | |||
| Pharmaceuticals, U.S. | ||||
| Samsung Electronics Co. Ltd. | 1.8% | |||
| Semiconductors & Semiconductor Equipment, South Korea | ||||
| Deutsche Lufthansa AG | 1.7% | |||
| Airlines, Germany | ||||
| Roche Holding AG | 1.7% | |||
| Pharmaceuticals, Switzerland | ||||
| Amgen Inc. | 1.6% | |||
| Biotechnology, U.S. | ||||
| International Consolidated Airlines Group SA | 1.6% | |||
| Airlines, 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-6
Table of Contents
broad emerging market weakness. However, we believe our sector holdings remained undervalued, and we identified growth prospects that we felt were favorable and that may result in long-term value recognition. The Fund’s financials positions were also pressured by emerging market weakness, notably South Korean banking group KB Financial Group. Overall, we remained positive toward selective holdings in the sector, among deep value European financials undergoing intensive restructuring and well-capitalized lenders operating in higher growth regions of the world.
From a regional standpoint, stock selection helped offset unfavorable allocations, most notably the Fund’s European holdings, which outperformed the benchmark’s European constituents during the period. We continued to feel there were compelling value opportunities in Europe, where hard-won fiscal progress was realized and policymakers began to shift the focus from crisis-driven austerity measures to structural growth reforms intended to promote sustainable economic recovery. In our view, such progress was still not reflected in valuations or corporate profit margins. During the period, European stocks remained at the widest discount on record to the U.S. market based on the cyclically adjusted price-to-earnings ratio, and profits (outside of Germany) remained near 2009 lows. In the U.S., stock selection overcame a detractive underweighting. In Asia, an overweighting in South Korea detracted from relative performance. In addition to KB Financial Group, consumer electronics giant Samsung Electronics weighed on returns of our South Korean holdings. The company’s share price declined because of concerns about the sustainability of margins in the firm’s handset business and the negative impact of a weaker Japanese yen on South Korean exporters. However, our analysis indicated the loss of competitiveness by Japanese consumer electronics manufacturers could limit any long-term impact from currency fluctuations, and Samsung’s share price did not reflect what we saw as the firm’s ample cash position, managerial track record and leadership in notably profitable business lines. We viewed recent share price weakness as a temporary setback.
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,
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an investment traded in that foreign currency will increase in value, which can contribute to Fund performance. For the six months ended June 30, 2013, the U.S. dollar rose in value relative to most currencies. As a result, the Fund’s performance was negatively affected by the portfolio’s substantial investment in securities with non-U.S. currency exposure.
Overall, equity valuations remained selectively attractive to us during the period, and company managements impressively restored corporate profitability and balance sheet strength in a challenging environment. Policymakers also deserved credit for stabilizing key regions, and many economies were experiencing modest recoveries after the worst global recession in recent history. However, in our view, growth still needs to be self-sustained in a more normal yield environment for investors to maintain confidence in equity earnings and valuations. If capital misallocation, moral hazard and sovereign fiscal impairment arise, that could lead to volatility and realized losses in some asset classes. In this environment, we believe diversified equity stakes in productive businesses are among the best propositions for long-term investors, and we remain confident in the capital preservation and appreciation prospects of Fund’s value-oriented portfolio.
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, 2013, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.
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Fund Expenses
As an investor in a variable insurance contract (Contract) that indirectly provides for investment in an underlying mutual fund, you can incur transaction and/or ongoing expenses at both the Fund level and the Contract level.
| • | Transaction expenses can include sales charges (loads) on purchases, surrender fees, transfer fees and premium taxes. |
| • | Ongoing expenses can include management fees, distribution and service (12b-1) fees, contract fees, annual maintenance fees, mortality and expense risk fees and other fees and expenses. All mutual funds and Contracts have some types of ongoing expenses. |
The expenses shown in the table are meant to highlight ongoing expenses at the Fund level only and do not include ongoing expenses at the Contract level, or transaction expenses at either the Fund or Contract levels. While the Fund does not have transaction expenses, if the transaction and ongoing expenses at the Contract level were included, the expenses shown below would be higher. You should consult your Contract prospectus or disclosure document for more information.
The table shows Fund-level ongoing expenses and can help you understand these expenses and compare them with those of other mutual funds offered through the Contract. The table assumes a $1,000 investment held for the six months indicated. Please refer to the Fund prospectus for additional information on operating expenses.
Actual Fund Expenses
The first line (Actual) of the table provides actual account values and expenses. The “Ending Account Value” is derived from the Fund’s actual return, which includes the effect of ongoing Fund expenses, but does not include the effect of ongoing Contract expenses.
You can estimate the Fund-level expenses you incurred during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:
| 1. | Divide your account value by $1,000. |
If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6.
| 2. | Multiply the result by the number under the heading “Fund-Level Expenses Incurred During Period.” |
If Fund-Level Expenses Incurred During Period were $7.50, then 8.6 x $7.50 = $64.50.
In this illustration, the estimated expenses incurred this period at the Fund level are $64.50.
Templeton Growth Securities Fund – Class 1
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Hypothetical Example for Comparison with Other Mutual Funds
Information in the second line (Hypothetical) of the table can help you compare ongoing expenses of the Fund with those of other mutual funds offered through the Contract. This information may not be used to estimate the actual ending account balance or expenses you incurred during the period. The hypothetical “Ending Account Value” is based on the Fund’s actual expense ratio and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Fund-Level Expenses Incurred During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds offered through a Contract.
| Class 1 | Beginning Account Value 1/1/13 | Ending Account Value 6/30/13 | Fund-Level Expenses Incurred During Period* 1/1/13–6/30/13 | |||||||||
Actual | $ | 1,000 | $ | 1,091.10 | $ | 4.10 | ||||||
Hypothetical (5% return | $ | 1,000 | $ | 1,020.88 | $ | 3.96 | ||||||
*Expenses are calculated using the most recent six-month annualized expense ratio for the Fund’s Class 1 shares (0.79%), which does not include any ongoing expenses of the Contract for which the Fund is an investment option, multiplied by the average account value over the period, multiplied by 181/365 to reflect the one-half year period.
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SUPPLEMENT DATED JUNE 28, 2013
TO THE PROSPECTUS DATED MAY 1, 2013
OF
TEMPLETON GROWTH SECURITIES FUND
(A series of Franklin Templeton Variable Insurance Products Trust)
The prospectus is amended as follows:
I. The Fund Summary “Portfolio Managers” section on page TG-S4 is revised to read as follows:
Portfolio Managers
NORMAN BOERSMA, CFA President, Chief Executive Officer and Director of Global Advisors and portfolio manager of the Fund since 2011.
LISA F. MYERS, J.D., CFA Executive Vice President of Global Advisors and portfolio manager of the Fund since 2010.
JAMES HARPER, CFA Senior Vice President of Global Advisors and portfolio manager of the Fund since 2010.
II. For the Fund Details “Management” section disclosure concerning the portfolio management team beginning on page TG-D5 is revised to read as follows:
The Fund is managed by a team of dedicated professionals focused on investments in equity securities of companies anywhere in the world. The portfolio managers of the team are as follows:
NORMAN BOERSMA, CFA President of Global Advisors
Mr. Boersma has been lead portfolio manager of the Fund since 2011. He has primary responsibility for the investments of the Fund. He has final authority over all aspects of the Fund’s investment portfolio, including but not limited to, purchases and sales of individual securities, portfolio risk assessment, and the management of daily cash balances in accordance with anticipated investment management requirements. The degree to which he may perform these functions, and the nature of these functions, may change from time to time. He joined Franklin Templeton Investments in 1991.
LISA F. MYERS, J.D., CFA Executive Vice President of Global Advisors
Ms. Myers has been a portfolio manager of the Fund since 2010 providing research and advice on the purchases and sales of individual securities, and portfolio risk assessment. She joined Franklin Templeton Investments in 1996.
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JAMES HARPER, CFA Senior Vice President of Global Advisors
Mr. Harper has been a portfolio manager of the Fund since 2010, providing research and advice on the purchases and sales of individual securities, and portfolio risk assessment. He joined Franklin Templeton Investments in 2007.
CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.
Please keep this supplement for future reference.
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Franklin Templeton Variable Insurance Products Trust
Financial Highlights
Templeton Growth Securities Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 1 | 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||||||
| ||||||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 12.16 | $ | 10.27 | $ | 11.19 | $ | 10.56 | $ | 8.34 | $ | 15.68 | ||||||||||||
|
| |||||||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.16 | 0.27 | 0.25 | 0.17 | 0.17 | 0.29 | ||||||||||||||||||
Net realized and unrealized gains (losses) | 0.96 | 1.88 | (0.99 | ) | 0.62 | 2.36 | (6.50 | ) | ||||||||||||||||
|
| |||||||||||||||||||||||
Total from investment operations | 1.12 | 2.15 | (0.74 | ) | 0.79 | 2.53 | (6.21 | ) | ||||||||||||||||
|
| |||||||||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income | (0.40 | ) | (0.26 | ) | (0.18 | ) | (0.16 | ) | (0.31 | ) | (0.26 | ) | ||||||||||||
Net realized gains | — | — | — | — | — | (0.87 | ) | |||||||||||||||||
|
| |||||||||||||||||||||||
Total distributions | (0.40 | ) | (0.26 | ) | (0.18 | ) | (0.16 | ) | (0.31 | ) | (1.13 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ | 12.88 | $ | 12.16 | $ | 10.27 | $ | 11.19 | $ | 10.56 | $ | 8.34 | ||||||||||||
|
| |||||||||||||||||||||||
Total returnc | 9.11% | 21.40% | (6.80)% | 7.74% | 31.33% | (42.13)% | ||||||||||||||||||
Ratios to average net assetsd | ||||||||||||||||||||||||
Expensese | 0.79% | 0.78% | 0.78% | 0.77% | 0.79% | 0.78% | ||||||||||||||||||
Net investment income | 2.48% | 2.31% | 2.22% | 1.71% | 2.00% | 2.64% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 505,798 | $ | 476,954 | $ | 1,200,682 | $ | 1,348,622 | $ | 824,575 | $ | 371,700 | ||||||||||||
Portfolio turnover rate | 5.96% | 18.73% | f | 42.13% | f | 9.61% | 14.95% | 18.37% | ||||||||||||||||
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 redemption in-kind.
The accompanying notes are an integral part of these financial statements.
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Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Templeton Growth Securities Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 2 | 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||||||
| ||||||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 11.97 | $ | 10.11 | $ | 11.01 | $ | 10.40 | $ | 8.20 | $ | 15.44 | ||||||||||||
|
| |||||||||||||||||||||||
Income from investment operationsa: | ||||||||||||||||||||||||
Net investment incomeb | 0.14 | 0.21 | 0.21 | 0.15 | 0.16 | 0.29 | ||||||||||||||||||
Net realized and unrealized gains (losses) | 0.95 | 1.88 | (0.96 | ) | 0.60 | 2.32 | (6.44 | ) | ||||||||||||||||
|
| |||||||||||||||||||||||
Total from investment operations | 1.09 | 2.09 | (0.75 | ) | 0.75 | 2.48 | (6.15 | ) | ||||||||||||||||
|
| |||||||||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income | (0.37 | ) | (0.23 | ) | (0.15 | ) | (0.14 | ) | (0.28 | ) | (0.22 | ) | ||||||||||||
Net realized gains | — | — | — | — | — | (0.87 | ) | |||||||||||||||||
|
| |||||||||||||||||||||||
Total distributions | (0.37 | ) | (0.23 | ) | (0.15 | ) | (0.14 | ) | (0.28 | ) | (1.09 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ | 12.69 | $ | 11.97 | $ | 10.11 | $ | 11.01 | $ | 10.40 | $ | 8.20 | ||||||||||||
|
| |||||||||||||||||||||||
Total returnc | 9.00% | 21.07% | (6.97)% | 7.39% | 31.10% | (42.32)% | ||||||||||||||||||
Ratios to average net assetsd | ||||||||||||||||||||||||
Expensese | 1.04% | 1.03% | 1.03% | 1.02% | 1.04% | 1.03% | ||||||||||||||||||
Net investment income | 2.23% | 2.06% | 1.97% | 1.46% | 1.75% | 2.39% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 1,349,861 | $ | 1,352,554 | $ | 1,254,193 | $ | 1,626,885 | $ | 1,718,894 | $ | 1,513,557 | ||||||||||||
Portfolio turnover rate | 5.96% | 18.73% | f | 42.13% | f | 9.61% | 14.95% | 18.37% | ||||||||||||||||
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 redemption in-kind.
The accompanying notes are an integral part of these financial statements.
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Franklin Templeton Variable Insurance Products Trust
Financial Highlights (continued)
Templeton Growth Securities Fund
Six Months (unaudited) | Year Ended December 31, | |||||||||||||||||||||||
| Class 4 | 2012 | 2011 | 2010 | 2009 | 2008a | |||||||||||||||||||
| ||||||||||||||||||||||||
Per share operating performance | ||||||||||||||||||||||||
(for a share outstanding throughout the period) | ||||||||||||||||||||||||
Net asset value, beginning of period | $ | 12.07 | $ | 10.19 | $ | 11.11 | $ | 10.50 | $ | 8.31 | $ | 14.08 | ||||||||||||
|
| |||||||||||||||||||||||
Income from investment operationsb: | ||||||||||||||||||||||||
Net investment incomec | 0.14 | 0.20 | 0.20 | 0.14 | 0.14 | 0.09 | ||||||||||||||||||
Net realized and unrealized gains (losses) | 0.95 | 1.90 | (0.98 | ) | 0.61 | 2.36 | (4.73 | ) | ||||||||||||||||
|
| |||||||||||||||||||||||
Total from investment operations | 1.09 | 2.10 | (0.78 | ) | 0.75 | 2.50 | (4.64 | ) | ||||||||||||||||
|
| |||||||||||||||||||||||
Less distributions from: | ||||||||||||||||||||||||
Net investment income | (0.36 | ) | (0.22 | ) | (0.14 | ) | (0.14 | ) | (0.31 | ) | (0.26 | ) | ||||||||||||
Net realized gains | — | — | — | — | — | (0.87 | ) | |||||||||||||||||
|
| |||||||||||||||||||||||
Total distributions | (0.36 | ) | (0.22 | ) | (0.14 | ) | (0.14 | ) | (0.31 | ) | (1.13 | ) | ||||||||||||
|
| |||||||||||||||||||||||
Net asset value, end of period | $ | 12.80 | $ | 12.07 | $ | 10.19 | $ | 11.11 | $ | 10.50 | $ | 8.31 | ||||||||||||
|
| |||||||||||||||||||||||
Total returnd | 8.93% | 21.02% | (7.14)% | 7.31% | 30.98% | (35.79)% | ||||||||||||||||||
Ratios to average net assetse | ||||||||||||||||||||||||
Expensesf | 1.14% | 1.13% | 1.13% | 1.12% | 1.14% | 1.13% | ||||||||||||||||||
Net investment income | 2.13% | 1.96% | 1.87% | 1.36% | 1.65% | 2.29% | ||||||||||||||||||
Supplemental data | ||||||||||||||||||||||||
Net assets, end of period (000’s) | $ | 71,558 | $ | 67,158 | $ | 56,170 | $ | 60,569 | $ | 56,218 | $ | 24,877 | ||||||||||||
Portfolio turnover rate | 5.96% | 18.73% | g | 42.13% | 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 redemption in-kind.
The accompanying notes are an integral part of these financial statements.
TG-15
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited)
| Templeton Growth Securities Fund | Country | Shares | Value | |||||||
Common Stocks 95.7% | ||||||||||
Aerospace & Defense 0.5% | ||||||||||
BAE Systems PLC | United Kingdom | 1,730,147 | $ | 10,084,435 | ||||||
|
| |||||||||
Air Freight & Logistics 1.9% | ||||||||||
FedEx Corp. | United States | 137,650 | 13,569,537 | |||||||
TNT Express NV | Netherlands | 555,759 | 4,168,252 | |||||||
United Parcel Service Inc., B | United States | 213,890 | 18,497,207 | |||||||
|
| |||||||||
| 36,234,996 | ||||||||||
|
| |||||||||
Airlines 3.3% | ||||||||||
a Deutsche Lufthansa AG | Germany | 1,609,064 | 32,662,762 | |||||||
a International Consolidated Airlines Group SA | United Kingdom | 7,807,357 | 31,323,136 | |||||||
|
| |||||||||
| 63,985,898 | ||||||||||
|
| |||||||||
Auto Components 1.4% | ||||||||||
Cie Generale des Etablissements Michelin, B | France | 304,259 | 27,207,860 | |||||||
|
| |||||||||
Automobiles 3.2% | ||||||||||
a Mazda Motor Corp. | Japan | 4,871,160 | 19,201,770 | |||||||
Nissan Motor Co. Ltd. | Japan | 1,197,020 | 12,128,290 | |||||||
Toyota Motor Corp. | Japan | 511,400 | 30,883,013 | |||||||
|
| |||||||||
| 62,213,073 | ||||||||||
|
| |||||||||
Biotechnology 2.6% | ||||||||||
Amgen Inc. | United States | 319,880 | 31,559,361 | |||||||
a Elan Corp. PLC, ADR | Ireland | 1,360,480 | 19,237,187 | |||||||
|
| |||||||||
| 50,796,548 | ||||||||||
|
| |||||||||
Capital Markets 2.9% | ||||||||||
Credit Suisse Group AG | Switzerland | 1,026,980 | 27,227,442 | |||||||
Morgan Stanley | United States | 985,150 | 24,067,215 | |||||||
UBS AG | Switzerland | 259,546 | 4,417,103 | |||||||
|
| |||||||||
| 55,711,760 | ||||||||||
|
| |||||||||
Chemicals 1.2% | ||||||||||
Akzo Nobel NV | Netherlands | 397,282 | 22,399,144 | |||||||
|
| |||||||||
Commercial Banks 8.6% | ||||||||||
BNP Paribas SA | France | 501,247 | 27,386,510 | |||||||
a Credit Agricole SA | France | 2,476,096 | 21,281,537 | |||||||
DBS Group Holdings Ltd. | Singapore | 932,690 | 11,407,927 | |||||||
HSBC Holdings PLC | United Kingdom | 1,913,864 | 20,049,311 | |||||||
ICICI Bank Ltd., ADR | India | 261,909 | 10,018,019 | |||||||
Intesa Sanpaolo SpA | Italy | 12,521,254 | 20,063,195 | |||||||
KB Financial Group Inc. | South Korea | 657,984 | 19,698,050 | |||||||
SunTrust Banks Inc. | United States | 478,520 | 15,106,876 | |||||||
UniCredit SpA | Italy | 4,430,841 | 20,751,120 | |||||||
|
| |||||||||
| 165,762,545 | ||||||||||
|
| |||||||||
Communications Equipment 3.7% | ||||||||||
a Brocade Communications Systems Inc. | United States | 2,872,620 | 16,546,291 | |||||||
Cisco Systems Inc. | United States | 1,266,680 | 30,792,991 | |||||||
Ericsson, B | Sweden | 2,161,202 | 24,474,707 | |||||||
|
| |||||||||
| 71,813,989 | ||||||||||
|
| |||||||||
Computers & Peripherals 1.3% | ||||||||||
Hewlett-Packard Co. | United States | 1,036,700 | 25,710,160 | |||||||
|
| |||||||||
TG-16
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Templeton Growth Securities Fund | Country | Shares | Value | |||||||
Common Stocks (continued) | ||||||||||
Construction & Engineering 0.4% | ||||||||||
Carillion PLC | United Kingdom | 506,846 | $ | 2,129,051 | ||||||
FLSmidth & Co. AS | Denmark | 103,190 | 4,698,436 | |||||||
|
| |||||||||
| 6,827,487 | ||||||||||
|
| |||||||||
Construction Materials 1.3% | ||||||||||
CRH PLC | Ireland | 1,277,393 | 25,855,273 | |||||||
|
| |||||||||
Diversified Financial Services 4.7% | ||||||||||
Citigroup Inc. | United States | 770,990 | 36,984,390 | |||||||
a ING Groep NV, IDR | Netherlands | 3,399,906 | 30,978,413 | |||||||
JPMorgan Chase & Co. | United States | 440,760 | 23,267,720 | |||||||
|
| |||||||||
| 91,230,523 | ||||||||||
|
| |||||||||
Diversified Telecommunication Services 3.8% | ||||||||||
China Telecom Corp. Ltd., ADR | China | 179,195 | 8,511,763 | |||||||
France Telecom SA | France | 1,226,401 | 11,602,234 | |||||||
Singapore Telecommunications Ltd. | Singapore | 7,063,710 | 21,014,154 | |||||||
a Telefonica SA | Spain | 1,371,960 | 17,581,316 | |||||||
Vivendi SA | France | 739,654 | 14,008,312 | |||||||
|
| |||||||||
| 72,717,779 | ||||||||||
|
| |||||||||
Electrical Equipment 1.1% | ||||||||||
Alstom SA | France | 590,117 | 19,326,045 | |||||||
Dongfang Electric Corp. Ltd., H | China | 2,016,600 | 2,714,471 | |||||||
|
| |||||||||
| 22,040,516 | ||||||||||
|
| |||||||||
Electronic Equipment, Instruments & Components 1.0% | ||||||||||
a Flextronics International Ltd. | Singapore | 1,241,008 | 9,605,402 | |||||||
TE Connectivity Ltd. | United States | 210,968 | 9,607,483 | |||||||
|
| |||||||||
| 19,212,885 | ||||||||||
|
| |||||||||
Energy Equipment & Services 4.8% | ||||||||||
Baker Hughes Inc. | United States | 657,950 | 30,351,233 | |||||||
Fugro NV, IDR | Netherlands | 192,793 | 10,452,026 | |||||||
Halliburton Co. | United States | 731,720 | 30,527,358 | |||||||
Noble Corp. | United States | 470,410 | 17,678,008 | |||||||
a SBM Offshore NV | Netherlands | 150,000 | 2,523,574 | |||||||
|
| |||||||||
| 91,532,199 | ||||||||||
|
| |||||||||
Food & Staples Retailing 2.1% | ||||||||||
CVS Caremark Corp. | United States | 330,420 | 18,893,416 | |||||||
Metro AG | Germany | 27,000 | 854,715 | |||||||
Tesco PLC | United Kingdom | 3,999,235 | 20,164,136 | |||||||
|
| |||||||||
| 39,912,267 | ||||||||||
|
| |||||||||
Health Care Equipment & Supplies 1.5% | ||||||||||
Getinge AB, B | Sweden | 124,600 | 3,786,313 | |||||||
Medtronic Inc. | United States | 497,540 | 25,608,384 | |||||||
|
| |||||||||
| 29,394,697 | ||||||||||
|
| |||||||||
Industrial Conglomerates 1.7% | ||||||||||
Koninklijke Philips NV | Netherlands | 459,718 | 12,533,319 | |||||||
Siemens AG | Germany | 201,712 | 20,387,661 | |||||||
|
| |||||||||
| 32,920,980 | ||||||||||
|
| |||||||||
TG-17
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Templeton Growth Securities Fund | Country | Shares | Value | |||||||
Common Stocks (continued) | ||||||||||
Insurance 4.7% | ||||||||||
a American International Group Inc. | United States | 221,040 | $ | 9,880,488 | ||||||
Aviva PLC | United Kingdom | 3,976,260 | 20,545,686 | |||||||
AXA SA | France | 1,091,068 | 21,437,747 | |||||||
Muenchener Rueckversicherungs-Gesellschaft AG | Germany | 78,511 | 14,450,209 | |||||||
Swiss Re AG | Switzerland | 328,836 | 24,466,498 | |||||||
|
| |||||||||
| 90,780,628 | ||||||||||
|
| |||||||||
Life Sciences Tools & Services 0.5% | ||||||||||
Lonza Group AG | Switzerland | 120,746 | 9,092,531 | |||||||
|
| |||||||||
Machinery 1.0% | ||||||||||
a Navistar International Corp. | United States | 725,430 | 20,137,937 | |||||||
|
| |||||||||
Media 4.8% | ||||||||||
Comcast Corp., Special A | United States | 504,202 | 20,001,693 | |||||||
News Corp., A | United States | 152,726 | 2,336,700 | |||||||
Time Warner Cable Inc. | United States | 165,560 | 18,622,189 | |||||||
Twenty-First Century Fox Inc. | United States | 610,902 | 17,480,961 | |||||||
Viacom Inc., B | United States | 164,298 | 11,180,479 | |||||||
The Walt Disney Co. | United States | 367,850 | 23,229,727 | |||||||
|
| |||||||||
| 92,851,749 | ||||||||||
|
| |||||||||
Metals & Mining 1.0% | ||||||||||
POSCO | South Korea | 63,730 | 16,652,140 | |||||||
POSCO, ADR | South Korea | 27,740 | 1,805,319 | |||||||
|
| |||||||||
| 18,457,459 | ||||||||||
|
| |||||||||
Multiline Retail 0.7% | ||||||||||
Target Corp. | United States | 191,680 | 13,199,085 | |||||||
|
| |||||||||
Oil, Gas & Consumable Fuels 8.1% | ||||||||||
BP PLC | United Kingdom | 2,807,128 | 19,440,965 | |||||||
Chesapeake Energy Corp. | United States | 97,180 | 1,980,528 | |||||||
Chevron Corp. | United States | 179,110 | 21,195,877 | |||||||
Eni SpA | Italy | 776,759 | 15,954,658 | |||||||
Galp Energia SGPS SA, B | Portugal | 1,575,520 | 23,327,572 | |||||||
Royal Dutch Shell PLC, B | United Kingdom | 423,823 | 14,024,259 | |||||||
Talisman Energy Inc. | Canada | 2,690,800 | 30,712,513 | |||||||
Total SA, B | France | 618,659 | 30,201,931 | |||||||
|
| |||||||||
| 156,838,303 | ||||||||||
|
| |||||||||
Pharmaceuticals 10.3% | ||||||||||
a Forest Laboratories Inc. | United States | 276,650 | 11,342,650 | |||||||
GlaxoSmithKline PLC | United Kingdom | 1,418,813 | 35,565,970 | |||||||
Merck & Co. Inc. | United States | 666,781 | 30,971,977 | |||||||
Merck KGaA | Germany | 114,777 | 17,487,209 | |||||||
Pfizer Inc. | United States | 1,242,263 | 34,795,787 | |||||||
Roche Holding AG | Switzerland | 128,303 | 31,911,102 | |||||||
Sanofi | France | 346,687 | 35,929,729 | |||||||
|
| |||||||||
| 198,004,424 | ||||||||||
|
| |||||||||
Professional Services 1.1% | ||||||||||
Hays PLC | United Kingdom | 2,280 | 3,082 | |||||||
Randstad Holding NV | Netherlands | 512,440 | 21,011,051 | |||||||
|
| |||||||||
| 21,014,133 | ||||||||||
|
| |||||||||
TG-18
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Statement of Investments, June 30, 2013 (unaudited) (continued)
| Templeton Growth Securities Fund | Country | Shares | Value | |||||||
Common Stocks (continued) | ||||||||||
Semiconductors & Semiconductor Equipment 1.8% | ||||||||||
Samsung Electronics Co. Ltd. | South Korea | 28,840 | $ | 33,878,922 | ||||||
|
| |||||||||
Software 3.1% | ||||||||||
Microsoft Corp. | United States | 1,099,279 | 37,958,104 | |||||||
Nintendo Co. Ltd. | Japan | 99,240 | 11,705,898 | |||||||
Oracle Corp. | United States | 122,950 | 3,777,024 | |||||||
SAP AG | Germany | 80,912 | 5,925,252 | |||||||
|
| |||||||||
| 59,366,278 | ||||||||||
|
| |||||||||
Specialty Retail 1.1% | ||||||||||
Kingfisher PLC | United Kingdom | 4,083,541 | 21,304,961 | |||||||
|
| |||||||||
Trading Companies & Distributors 0.5% | ||||||||||
ITOCHU Corp. | Japan | 770,990 | 8,899,925 | |||||||
|
| |||||||||
Wireless Telecommunication Services 4.0% | ||||||||||
a Sprint Nextel Corp. | United States | 3,887,230 | 27,288,355 | |||||||
a Turkcell Iletisim Hizmetleri AS, ADR | Turkey | 1,477,723 | 21,234,879 | |||||||
Vodafone Group PLC | United Kingdom | 9,879,109 | 28,231,306 | |||||||
|
| |||||||||
| 76,754,540 | ||||||||||
|
| |||||||||
Total Common Stocks (Cost $1,619,301,075) | 1,844,145,889 | |||||||||
|
| |||||||||
Preferred Stocks 1.0% | ||||||||||
Metals & Mining 0.2% | ||||||||||
Vale SA, ADR, pfd., A | Brazil | 372,875 | 4,534,160 | |||||||
|
| |||||||||
Oil, Gas & Consumable Fuels 0.8% | ||||||||||
Petroleo Brasileiro SA, ADR, pfd. | Brazil | 976,922 | 14,321,677 | |||||||
|
| |||||||||
Total Preferred Stocks (Cost $26,533,331) | 18,855,837 | |||||||||
|
| |||||||||
Non-Registered Mutual Funds (Cost $11,935,000) 0.6% | ||||||||||
Diversified Financial Services 0.6% | ||||||||||
a,b,c,d Templeton China Opportunities Fund Ltd., Reg D | Cayman Islands | 1,194,518 | 12,196,026 | |||||||
|
| |||||||||
Total Investments before Short Term Investments | 1,875,197,752 | |||||||||
|
| |||||||||
| Principal Amount | ||||||||||
Short Term Investments (Cost $28,000,000) 1.5% | ||||||||||
Time Deposits 1.5% | ||||||||||
Royal Bank of Canada, 0.03%, 7/01/13 | United States | $ | 28,000,000 | 28,000,000 | ||||||
|
| |||||||||
Total Investments (Cost $1,685,769,406) 98.8% | 1,903,197,752 | |||||||||
Other Assets, less Liabilities 1.2% | 24,019,200 | |||||||||
|
| |||||||||
Net Assets 100.0% | $ | 1,927,216,952 | ||||||||
|
| |||||||||
See Abbreviations on page TG-32.
aNon-income producing.
bSee Note 1(d) regarding investment in Templeton China Opportunities Fund, Ltd.
cSee Note 8 regarding restricted securities.
dSee Note 9 regarding holdings of 5% voting securities.
The accompanying notes are an integral part of these financial statements.
TG-19
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements
Statement of Assets and Liabilities
June 30, 2013 (unaudited)
| Templeton Growth Securities Fund | ||||
Assets: | ||||
Investments in securities: | ||||
Cost - Unaffiliated issuers | $ | 1,673,834,406 | ||
Cost - Non-controlled affiliated issuers (Note 9) | 11,935,000 | |||
|
| |||
Total cost of investments | $ | 1,685,769,406 | ||
|
| |||
Value - Unaffiliated issuers | $ | 1,891,001,726 | ||
Value - Non-controlled affiliated issuers (Note 9) | 12,196,026 | |||
|
| |||
Total value of investments | 1,903,197,752 | |||
Cash | 561,646 | |||
Receivables: | ||||
Investment securities sold | 26,409,184 | |||
Capital shares sold | 1,008,046 | |||
Dividends and interest | 3,409,254 | |||
Foreign tax | 781,933 | |||
Other assets | 8,833 | |||
|
| |||
Total assets | 1,935,376,648 | |||
|
| |||
Liabilities: | ||||
Payables: | ||||
Investment securities purchased | 4,753,140 | |||
Capital shares redeemed | 994,783 | |||
Affiliates | 1,869,318 | |||
Reports to shareholders | 418,556 | |||
Accrued expenses and other liabilities | 123,899 | |||
|
| |||
Total liabilities | 8,159,696 | |||
|
| |||
Net assets, at value | $ | 1,927,216,952 | ||
|
| |||
Net assets consist of: | ||||
Paid-in capital | $ | 1,916,120,893 | ||
Undistributed net investment income | 20,803,806 | |||
Net unrealized appreciation (depreciation) | 217,330,104 | |||
Accumulated net realized gain (loss) | (227,037,851 | ) | ||
|
| |||
Net assets, at value | $ | 1,927,216,952 | ||
|
| |||
The accompanying notes are an integral part of these financial statements.
TG-20
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Assets and Liabilities (continued)
June 30, 2013 (unaudited)
| Templeton Growth Securities Fund | ||||
Class 1: | ||||
Net assets, at value | $ | 505,798,057 | ||
|
| |||
Shares outstanding | 39,282,068 | |||
|
| |||
Net asset value and maximum offering price per share | $ | 12.88 | ||
|
| |||
Class 2: | ||||
Net assets, at value | $ | 1,349,861,389 | ||
|
| |||
Shares outstanding | 106,388,492 | |||
|
| |||
Net asset value and maximum offering price per share | $ | 12.69 | ||
|
| |||
Class 4: | ||||
Net assets, at value | $ | 71,557,506 | ||
|
| |||
Shares outstanding | 5,591,623 | |||
|
| |||
Net asset value and maximum offering price per share | $ | 12.80 | ||
|
| |||
The accompanying notes are an integral part of these financial statements.
TG-21
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statement of Operations
for the six months ended June 30, 2013 (unaudited)
| Templeton Growth Securities Fund | ||||
Investment income: | ||||
Dividends (net of foreign taxes 2,446,801) | $ | 31,680,906 | ||
Interest | 16,547 | |||
Income from securities loaned | 559,781 | |||
|
| |||
Total investment income | 32,257,234 | |||
|
| |||
Expenses: | ||||
Management fees (Note 3a) | 7,440,827 | |||
Distribution fees: (Note 3c) | ||||
Class 2 | 1,745,795 | |||
Class 4 | 122,721 | |||
Unaffiliated transfer agent fees | 481 | |||
Custodian fees (Note 4) | 105,338 | |||
Reports to shareholders | 180,262 | |||
Professional fees | 60,821 | |||
Trustees’ fees and expenses | 5,173 | |||
Other | 27,086 | |||
|
| |||
Total expenses | 9,688,504 | |||
Expense reductions (Note 4) | (32 | ) | ||
|
| |||
Net expenses | 9,688,472 | |||
|
| |||
Net investment income | 22,568,762 | |||
|
| |||
Realized and unrealized gains (losses): | ||||
Net realized gain (loss) from: | ||||
Investments | 66,497,501 | |||
Foreign currency transactions | (196,482 | ) | ||
|
| |||
Net realized gain (loss) | 66,301,019 | |||
|
| |||
Net change in unrealized appreciation (depreciation) on: | ||||
Investments | 80,608,555 | |||
Translation of other assets and liabilities denominated in foreign currencies | (134,341 | ) | ||
|
| |||
Net change in unrealized appreciation (depreciation) | 80,474,214 | |||
|
| |||
Net realized and unrealized gain (loss) | 146,775,233 | |||
|
| |||
Net increase (decrease) in net assets resulting from operations | $ | 169,343,995 | ||
|
| |||
The accompanying notes are an integral part of these financial statements.
TG-22
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Financial Statements (continued)
Statements of Changes in Net Assets
| Templeton Growth Securities Fund | ||||||||
| Six Months Ended June 30, 2013 (unaudited) | Year Ended December 31, 2012 | |||||||
| ||||||||
Increase (decrease) in net assets: | ||||||||
Operations: | ||||||||
Net investment income | $ | 22,568,762 | $ | 54,813,475 | ||||
Net realized gain (loss) from investments and foreign currency transactions | 66,301,019 | 52,034,520 | ||||||
Net change in unrealized appreciation (depreciation) on investments and translation of other assets and liabilities denominated in foreign currencies | 80,474,214 | 384,863,694 | ||||||
| ||||||||
Net increase (decrease) in net assets resulting from operations | 169,343,995 | 491,711,689 | ||||||
| ||||||||
Distributions to shareholders from: | ||||||||
Net investment income: | ||||||||
Class 1 | (15,214,157 | ) | (30,925,492 | ) | ||||
Class 2 | (38,639,867 | ) | (26,587,764 | ) | ||||
Class 4 | (1,946,523 | ) | (1,228,892 | ) | ||||
| ||||||||
Total distributions to shareholders | (55,800,547 | ) | (58,742,148 | ) | ||||
| ||||||||
Capital share transactions: (Note 2) | ||||||||
Class 1 | 723,960 | (922,021,789 | ) | |||||
Class 2 | (84,129,567 | ) | (125,611,247 | ) | ||||
Class 4 | 412,795 | 284,692 | ||||||
| ||||||||
Total capital share transactions | (82,992,812 | ) | (1,047,348,344 | ) | ||||
| ||||||||
Net increase (decrease) in net assets | 30,550,636 | (614,378,803 | ) | |||||
Net assets: | ||||||||
Beginning of period | 1,896,666,316 | 2,511,045,119 | ||||||
| ||||||||
End of period | $ | 1,927,216,952 | $ | 1,896,666,316 | ||||
| ||||||||
Undistributed net investment income included in net assets: | ||||||||
End of period | $ | 20,803,806 | $ | 54,035,591 | ||||
| ||||||||
The accompanying notes are an integral part of these financial statements.
TG-23
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited)
Templeton Growth Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Templeton Variable Insurance Products Trust (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end investment company, consisting of twenty-one 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 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 Board), the Fund’s administrator, investment manager and other affiliates have formed the Valuation and Liquidity Oversight Committee (VLOC). The VLOC provides administration and oversight of the Fund’s valuation policies and procedures, which are approved annually by the Board. Among other things, these procedures allow the Fund to 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 (OTC) 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 OTC 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, credit spreads, estimated default rates, anticipated market interest rate volatility, 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. Time deposits are valued at cost, which approximates market value.
The Fund has procedures to determine the fair value of financial instruments for which market prices are not reliable or readily available. Under these procedures, the VLOC convenes on a regular basis to review such financial instruments and considers a number of factors, including significant unobservable valuation inputs, when arriving at fair value. The VLOC 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. An income-based valuation approach may also be used 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. The VLOC employs various methods for calibrating these valuation approaches including a regular review of key inputs and assumptions, transactional back-testing or disposition analysis, and reviews of any related market activity.
TG-24
Table of Contents
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)
Trading in securities on foreign securities stock exchanges and OTC 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 VLOC 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 Depositary 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.
In addition, certain foreign markets may be open on days that the NYSE is closed, which could result in differences between the value of the Fund’s portfolio securities on the last business day and the last calendar day of the reporting period. Any significant security valuation changes due to an open foreign market are adjusted and reflected by the Funds for financial reporting purposes.
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 Board.
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 securities 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. The Fund receives income from the investment of cash collateral, in addition to lending fees and rebates paid by the borrower. The Fund bears the market risk with respect to the collateral investment, securities loaned, and the risk that the agent may default on its obligations to the Fund. The securities lending agent has agreed to indemnify the Fund in the event of default by a third party borrower. At June 30, 2013, the Fund had no securities on loan.
TG-25
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Growth Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
d. 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 Funds 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.
e. 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 if applicable, excise taxes. As a result, no provision for U.S. federal income taxes is required.
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 in an amount that would be payable if the securities were disposed of on the valuation date.
The Fund recognizes the tax benefits of uncertain tax positions only when the position is “more likely than not” to be sustained upon examination by the tax authorities based on the technical merits of the tax position. As of June 30, 2013, and for all open tax years, the Fund has determined that no liability for unrecognized tax benefits is required in the Fund’s financial statements related to uncertain tax positions taken on a tax return (or expected to be taken on future tax returns). Open tax years are those that remain subject to examination and are based on each tax jurisdiction statute of limitation.
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. 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.
TG-26
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Growth Securities Fund
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
g. Accounting Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
h. Guarantees and Indemnifications
Under the Trust’s organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, on behalf of the Fund, enters into contracts with service providers that contain general indemnification clauses. The Trust’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote.
2. SHARES OF BENEFICIAL INTEREST
At June 30, 2013, 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, 2013 | Year Ended December 31, 2012 | |||||||||||||||
| Class 1 Shares: | Shares | Amount | Shares | Amount | ||||||||||||
Shares sold | 643,493 | $ | 8,277,146 | 39,146,115 | $ | 423,930,779 | ||||||||||
Shares issued in reinvestment of distributions | 1,149,106 | 15,214,157 | 3,052,862 | 30,925,492 | ||||||||||||
Shares redeemed in-kind (Note 11) | — | — | (90,515,836 | ) | (1,060,908,757 | ) | ||||||||||
Shares redeemed | (1,741,825 | ) | (22,767,343 | ) | (29,409,088 | ) | (315,969,303 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | 50,774 | $ | 723,960 | (77,725,947 | ) | $ | (922,021,789 | ) | ||||||||
| ||||||||||||||||
Class 2 Shares: | ||||||||||||||||
Shares sold | 4,179,250 | $ | 53,813,705 | 9,278,139 | $ | 99,327,364 | ||||||||||
Shares issued in reinvestment of distributions | 2,963,180 | 38,639,867 | 2,661,438 | 26,587,764 | ||||||||||||
Shares redeemed | (13,724,168 | ) | (176,583,139 | ) | (23,060,322 | ) | (251,526,375 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | (6,581,738 | ) | $ | (84,129,567 | ) | (11,120,745 | ) | $ | (125,611,247 | ) | ||||||
| ||||||||||||||||
Class 4 Shares: | ||||||||||||||||
Shares sold | 467,522 | $ | 6,050,424 | 712,668 | $ | 7,687,691 | ||||||||||
Shares issued on reinvestment of distributions | 147,912 | 1,946,523 | 121,914 | 1,228,892 | ||||||||||||
Shares redeemed | (587,588 | ) | (7,584,152 | ) | (782,111 | ) | (8,631,891 | ) | ||||||||
| ||||||||||||||||
Net increase (decrease) | 27,846 | $ | 412,795 | 52,471 | $ | 284,692 | ||||||||||
| ||||||||||||||||
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Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Growth Securities Fund
3. TRANSACTIONS WITH AFFILIATES
Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the 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 |
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
FT Services, under terms of an agreement, provides administrative services to the Fund and is not paid by the Fund for the services.
c. Distribution Fees
The Board 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. Some distribution fees are not charged on shares held by affiliates. The Board 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, 2013, Franklin Templeton Variable Insurance Products Trust – Franklin Templeton VIP Founding Funds Allocation Fund owned 17.66% of the Fund’s outstanding shares. Investment activities of this investment company could have a material impact on the Fund.
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Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Growth Securities Fund
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, 2013, the custodian fees were reduced as noted in the Statement of Operations.
5. INCOME TAXES
For tax purposes, capital losses may be carried over to offset future capital gains. Capital loss carryforwards with no expiration, if any, must be fully utilized before those losses with expiration dates.
At December 31, 2012, capital loss carryforwards were as follows:
Capital loss carryforwards expiring in: | ||||
2017 | $ | 215,277,225 | ||
2018 | 55,299,629 | |||
|
| |||
| $270,576,854 | ||||
|
|
At June 30, 2013, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
Cost of investments | $ | 1,708,863,147 | ||
|
| |||
Unrealized appreciation | $ | 406,655,292 | ||
Unrealized depreciation | (212,320,687 | ) | ||
|
| |||
Net unrealized appreciation (depreciation) | $ | 194,334,605 | ||
|
| |||
Differences between income and/or capital gains as determined on a book basis and a tax basis are primarily due to differing treatments of foreign currency transactions, wash sales and gains realized on in-kind shareholder redemptions.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the period ended June 30, 2013, aggregated $115,226,429 and $260,964,966, 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.
TG-29
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Growth Securities Fund
8. RESTRICTED SECURITIES (continued)
At June 30, 2013, 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 Dates | Cost | Value | ||||||||||||
| 1,194,518 | Templeton China Opportunities Fund Ltd., Reg D (Value is 0.63% of Net Assets) | 3/17/10 - 12/1/11 | $ | 11,935,000 | $ | 12,196,026 | ||||||||||
|
| |||||||||||||||
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, 2013, were as shown below.
| Name of Issuer | Number of Shares Held at Beginning of Year | Gross Additions | Gross Reductions | Number of Shares Held at End of Year | Value at End of Year | Investment Income | Realized Capital Gain (Loss) | |||||||||||||||||||||
Non-Controlled Affiliates | ||||||||||||||||||||||||||||
Templeton China Opportunities Fund Ltd., Reg D | 1,194,518 | — | — | 1,194,518 | $ | 12,196,026 | $ | — | $ | — | ||||||||||||||||||
|
| |||||||||||||||||||||||||||
Total Affiliated Securities (Value is 0.63% 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 $1.5 billion (Global Credit Facility) which matures on January 17, 2014. 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 0.07% based upon the unused portion of the Global Credit Facility. These fees are reflected in other expenses on the Statement of Operations. During the period ended June 30, 2013, the Fund did not use the Global Credit Facility.
11. REDEMPTION IN-KIND
During the year ended December 31, 2012 the Fund realized $18,346,694 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 have been reclassified from accumulated net realized gains to paid-in capital.
TG-30
Table of Contents
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 financial instruments and are summarized in the following fair value hierarchy:
| • | Level 1 – quoted prices in active markets for identical financial instruments |
| • | Level 2 – other significant observable inputs (including quoted prices for similar financial instruments, interest rates, prepayment speed, credit risk, etc.) |
| • | Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of financial instruments) |
The inputs or methodology used for valuing financial instruments are not an indication of the risk associated with investing in those financial instruments.
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.
A summary of inputs used as of June 30, 2013, in valuing the Fund’s assets carried at fair value, is as follows:
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
|
| |||||||||||||||
Assets: | ||||||||||||||||
Investments in Securities: | ||||||||||||||||
Equity Investments:a | ||||||||||||||||
Diversified Financial Services | $ | 91,230,523 | $ | — | $ | 12,196,026 | $ | 103,426,549 | ||||||||
All Other Equity Investmentsb | 1,771,771,203 | — | — | 1,771,771,203 | ||||||||||||
Short Term Investments | — | 28,000,000 | — | 28,000,000 | ||||||||||||
|
| |||||||||||||||
Total Investments in Securities | $ | 1,863,001,726 | $ | 28,000,000 | $ | 12,196,026 | $ | 1,903,197,752 | ||||||||
|
| |||||||||||||||
aIncludes common and preferred stocks as well as other equity investments.
bFor detailed categories, see the accompanying Statement of Investments.
13. NEW ACCOUNTING PRONOUNCEMENTS
In June 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2013-08, Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements. The ASU modifies the criteria used in defining an investment company under U.S. Generally Accepted Accounting Principles and also sets forth certain measurement and disclosure requirements. Under the ASU, an entity that is registered under the 1940 Act automatically qualifies as an investment company. The ASU is effective for interim and annual reporting periods beginning after December 15, 2013. The Fund is currently reviewing the requirements and believes the adoption of this ASU will not have a material impact on its financial statements.
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.
TG-31
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Notes to Financial Statements (unaudited) (continued)
Templeton Growth Securities Fund
ABBREVIATIONS | ||||
| Selected Portfolio | ||||
| ADR - American Depositary Receipt | ||||
| IDR - International Depositary Receipt |
TG-32
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Tax Information (unaudited)
Templeton Growth Securities Fund
At December 31, 2012, 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 hereby reports to shareholders the foreign source income and foreign taxes paid, pursuant to Section 853 of the Internal Revenue Code (Code). This written statement will allow shareholders of record on June 13, 2013, 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 reported 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 | $ | 0.0370 | $ | 0.3275 | ||||
Class 2 | $ | 0.0370 | $ | 0.3044 | ||||
Class 4 | $ | 0.0370 | $ | 0.2974 | ||||
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-33
Table of Contents
INDEX DESCRIPTIONS
The indexes are unmanaged and include reinvested distributions.
For indexes sourced by Morningstar: © 2013 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 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.
Barclays U.S. Government Index: Intermediate Component is the intermediate component of the Barclays 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.
Consumer Price Index (CPI), calculated by the Bureau of Labor Statistics, is a commonly used measure of the inflation rate.
Credit Suisse (CS) High Yield Index is designed to mirror the investable universe of the U.S. dollar-denominated high yield debt market.
Dow Jones Industrial Average is a price-weighted average of blue-chip stocks that are generally the leaders in their industry.
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.
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 6/30/13, there were 274 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 6/30/13, there were 67 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 6/30/13, there were 50 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 Yield Funds Classification Average is an equally weighted average calculation of performance figures for all funds within the Lipper High Yield Funds Classification in the Lipper VIP underlying funds universe. Lipper High Yield Funds aim at high (relative) current yield from fixed income securities, have no quality or maturity restrictions, and tend to invest in lower grade debt issues. For the six-month period ended 6/30/13, there were 112 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.
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Table of Contents
MSCI All Country World Index (ACWI) is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in global developed and emerging markets.
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®, S&P® and S&P 500® are registered trademarks of Standard & Poor’s Financial Services LLC.
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
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Board Review of Investment Management Agreement
At a meeting held April 16, 2013, 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, along with periodic reports on expenses, shareholder services, legal and compliance matters, 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 well during the Florida hurricanes and blackouts experienced in previous years, and that those operations in the New York/New Jersey area ran smoothly during the more recent Hurricane Sandy. 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, which also covered FOREX transactions. 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, including expanded collateralization requirements. 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.
SI-1
Table of Contents
Franklin Templeton Variable Insurance Products Trust
Shareholder Information (continued)
Board Review of Investment Management Agreement (continued)
INVESTMENT PERFORMANCE. The Board placed significant emphasis on the investment performance of each of the Funds in view of its importance to shareholders. While consideration was given to performance reports and discussions with portfolio managers at Board meetings throughout the year, particular attention in assessing performance was given to the Lipper reports furnished for the agreement renewals of all Funds. 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, 2013, 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 less than 10 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 lowest performing quintile of its performance universe, and on an annualized basis to be in the lowest performing quintile of such universe for the previous three-year period and the second-lowest performing quintile of such universe for the previous five-year period. The Board was not satisfied with the Fund’s performance and discussed with management the reasons for such performance and steps being taken to improve it, including the restructuring of certain internal processes and the addition of an experienced analyst to assist the portfolio management team. While intending to monitor future developments, the Board believed that management was taking appropriate action to improve performance and that no immediate change in portfolio managers was necessary.
Franklin Global Real Estate Securities Fund – The performance universe for this Fund consisted of the Fund and all global real estate 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 on an annualized basis to be in the highest performing quintile of such universe for the previous three-year period, but in the next to lowest performing quintile of such universe for each of the previous five- and 10-year periods. The Board noted steps that had been taken by management in recent years to improve the Fund’s performance, including the appointment of an additional portfolio manager in 2010. While the Board intends to continue monitoring the Fund’s results, it was satisfied with the Fund’s recent performance as shown in the Lipper report.
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 be in the lowest performing quintile of its performance universe, and on an annualized basis to be in the second-highest performing quintile of such universe for each of the previous three- and five-year periods, and the second-lowest performing quintile of such universe for the previous 10-year period. The Board discussed with management the reasons for the Fund’s total return underperformance for the one-year period and steps being taken to improve it, but found the Fund’s overall comparative performance as shown in the Lipper report to be satisfactory noting the Fund’s total return for the one-year period exceeded 14%.
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-highest performing quintile of such universe, and on an annualized basis to be in the middle performing quintile of such universe for the previous three-year period, and to be in the second-lowest quintile of such universe for each of the previous five- and 10-year periods. The Lipper report showed the Fund’s total return to be in the second-highest performing quintile of its performance universe for the one-year period, and, on an annualized basis, to be in either the highest performing quintile or second-highest performing quintile of such universe for each of the previous three-, five- and 10-year periods. The Board found the Fund’s overall performance as shown in the Lipper report to be satisfactory, noting that its annualized income return for each of the previous five- and 10-year periods as shown in such report exceeded 7%.
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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 performing 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 also be in the highest performing quintile of its performance 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 comparative 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 total return to be in the lowest performing quintile of such universe for the one-year period, and on an annualized basis to be in the second-lowest performing quintile of such universe for the previous three-year period, the middle performing quintile of such universe for the previous five-year period, and the lowest performing quintile of such universe for the previous 10-year period. The Board discussed with management the reasons for the Fund’s one-year comparative underperformance, which had dragged down its overall annualized performance, and the steps being taken to improve it. While intending to monitor ongoing performance, the Board did not believe any immediate change in portfolio management was warranted, noting as shown in the Lipper report, that the Fund’s total return for the one-year period exceeded 12%, its five-year annualized total return was above the median for the performance universe, and its 10-year annualized return was within 76 basis points of the median for the performance universe.
Franklin Large Cap Value Securities Fund – The performance universe for this Fund, which has been in operation for less than 10 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 second-lowest performing quintile of such universe for the one-year period and on an annualized basis to also be in the second-lowest performing quintile of such universe for each of the previous three- and five-year periods. The Board was not satisfied with the Fund’s comparative performance, but believed management was taking appropriate steps to improve it, including the hiring of an experienced analyst during the past year. The Board also noted that the Lipper report showed the Fund’s one-year total return to be in excess of 16% and its annualized three- and five-year returns to be within less than 1 1⁄2% and 1%, respectively, of the performance universe medians for such periods.
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 second-highest performing quintile of the performance universe for the one-year period, and on an annualized basis to be in the highest performing quintile of such universe for each of the previous three- and five-year periods, and the middle performing quintile of such universe for the previous 10-year period. 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 second-highest performing quintile of such performance universe, and on an annualized basis to be in either the highest performing quintile or second-highest performing quintile of such universe for each of the previous three-, five- and 10-year periods. The Board was satisfied with the Fund’s comparative performance as set forth in the Lipper report.
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 second-lowest performing quintile of such universe, and on an annualized basis to also be in the second-lowest performing quintile of such universe for the previous three-year period, the second-highest performing quintile of such universe for the previous five-year period, and the second-lowest performing quintile of such universe for the previous 10-year period. The Board discussed the reasons for the Fund’s comparative underperformance for the one-year period and steps being taken to improve such performance, including the addition of an analyst to the health care sector’s research team and increased discipline in analyzing downside risk scenarios and their potential impact on stock prices. While intending to monitor ongoing performance, the Board believed management was taking appropriate steps to improve it, and noted as shown
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Franklin Templeton Variable Insurance Products Trust
Shareholder Information (continued)
Board Review of Investment Management Agreement (continued)
in the Lipper report that the Fund’s total return for the one-year period exceeded 10% and its annualized total return for the previous three- and 10-year periods were each less than 1% below the median of the Lipper performance universe.
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 highest or best performing quintile of such performance universe for the one-year period, and on an annualized basis to also be in the highest performing quintile of such universe during each of the previous three- and five-year periods, and in the middle performing quintile of such universe for the previous 10-year period. The Lipper report showed the Fund’s total return to be in the highest performing quintile of such universe during the one-year period, and on an annualized basis to be in either the highest performing or second-highest performing 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 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 five full years and the Lipper report showed its income return to be in the highest performing quintile of such performance universe for the one-year period, and on an annualized basis to be in the middle performing quintile of such universe for each of the previous three- and five-year periods. The Lipper report showed the Fund’s total return for the one-year period to be in the highest performing quintile of such performance universe and on an annualized basis to be in the middle performing quintile of such universe for the previous three-year period and the second-lowest performing quintile of such universe for the previous five-year period. In assessing the relevance of such comparative performance, the Board noted the Fund is not actively managed and that its performance reflects those of the three underlying funds in which it invests in equal portions. The Board reviewed and discussed the performance of such underlying funds with management and believes that each is being managed in accordance with its underlying investment mandate. The Board found the Fund’s comparative performance as set forth in the Lipper report to be satisfactory and that no change was needed to the investment strategy followed or manner in which the Fund operates.
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 performing quintile of such universe and on an annualized basis to be in either the highest performing or second-highest 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 to be in the middle performing quintile of such universe for the one-year period, and on an annualized basis to be in the second-lowest performing quintile of such universe for each of the previous three- and five-year periods and the middle performing quintile of such universe for the previous 10-year period. The Board found the Fund’s comparative performance as shown in the Lipper report to be acceptable, noting the Fund’s income objective, the nature of the Fund’s investments, which were primarily in U.S. mortgage-backed securities, and the fact that its total return for the one-year and annualized three- and five-year periods was in each case within half a percent of the median for the Lipper performance universe, and its annualized total return for the 10-year period was above the median of such universe.
Mutual Global Discovery 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 to be in the lowest performing quintile of such universe for the one-year period, and on an annualized basis to be in the middle quintile of such universe for the three-year period, and the highest or best performing quintile of such universe for each of the previous five- and 10-year periods. The Board found the Fund’s overall comparative performance as set forth in the Lipper report to be acceptable, noting its one-year total return exceeded 16.5%.
Mutual International Securities Fund – The performance universe for this Fund consisted of the Fund and all other international value funds underlying variable insurance products as selected by Lipper. The Fund has been in existence for only three full years at the date of the Lipper report, which showed its total return for the one-year period to be in the upper half of its Lipper performance universe and its annualized three-year total return to be in the highest performing quintile of such universe. The Board was pleased with such comparative performance as shown in the Lipper report, but noted its significance was limited in view of the Fund’s short period of operation.
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Franklin Templeton Variable Insurance Products Trust
Shareholder Information (continued)
Board Review of Investment Management Agreement (continued)
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 total return for the one-year period to be in the middle performing quintile of the performance universe, and on an annualized basis to be in the second-lowest performing quintile of such universe for the previous three-year period, and the middle performing quintile of such universe for each of the previous five- and 10-year periods. The Board found the Fund’s overall performance as shown in the Lipper report to be acceptable, noting its annualized three-year total return as shown in such report was 10.77%.
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 middle performing quintile of such performance universe and on an annualized basis to be in the second-highest performing quintile of such universe for the previous three-year period, the highest or best performing quintile of such universe during the previous five-year period, and the middle performing quintile of such universe during the previous 10-year period. The Board found the comparative performance of the Fund as set forth in the Lipper report to be satisfactory.
Templeton Foreign Securities Fund – The performance universe for this Fund consisted of the Fund and all international value funds underlying variable insurance products as selected by Lipper. The Lipper report showed the Fund’s comparative total return for the one-year period to be in the second-highest performing quintile of such performance universe and on an annualized basis to be in either the highest performing quintile or second-highest performing quintile of such universe in each of the previous three-, five- and 10-year periods. The Board was satisfied with the Fund’s comparative 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 highest or best performing quintile of such performance universe, and on an annualized basis to be in either the highest or second-highest 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 second-highest performing quintile of its performance universe, and on an annualized basis to be in either the highest or second-highest performing quintile of such universe for each of the previous three-, five- and 10-year periods. The Board was satisfied with the Fund’s comparative performance as set forth in the Lipper report.
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 highest or best performing quintile of such performance universe and on an annualized basis to be in the middle performing quintile of such universe for each of the previous three- and five-year periods, and the second-lowest performing quintile of such universe for the previous 10-year period. The Board found the Fund’s comparative performance as set forth in the Lipper report to be satisfactory.
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 the 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.
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Franklin Templeton Variable Insurance Products Trust
Shareholder Information (continued)
Board Review of Investment Management Agreement (continued)
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 quintiles of their respective Lipper expense groups: 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 and Templeton Global Bond Securities Fund. 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 of each of Franklin Rising Dividends Securities Fund, Franklin Small-Mid Cap Growth Securities Fund, Franklin U.S. Government Fund, Templeton Foreign Securities Fund and Franklin Templeton VIP Founding Funds Allocation Fund were at or below the medians of their Lipper expense groups, and their actual total expense ratios in each case were below the medians of their Lipper expense groups. 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, Franklin Flex Cap Growth Securities Fund and Franklin Large Cap Value Securities Fund were above the medians of their Lipper expense groups, but in each case their actual total expense ratios were 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 the expenses of each of these Funds 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, seven basis points of the median of its Lipper expense group. The contractual investment fee rate of Mutual Shares Securities Fund was less than six basis points higher than the median of its Lipper expense group while its actual expense ratio was at the median of such expense group. The contractual management fee rate and actual expense ratio of Templeton Growth Securities Fund in both cases were above, but within, 12 basis points of the medians of its Lipper expense group. The Board found the comparative expenses of these Funds as shown in their Lipper reports to be acceptable. The contractual investment management fee rate of Templeton Developing Markets Securities Fund was less than 18 basis points above the median of its Lipper expense group, and its actual total expense ratio was less than 10 basis points above the median of its Lipper expense group. The Board found the comparative expenses of this Fund to be acceptable, noting 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 contractual investment management fee rate and actual total expense ratio of Mutual Global Discovery Securities Fund were the most expensive in its Lipper expense group, but within 26 basis points and 18 basis points, respectively, of the expense group medians. The Board found such expenses to be acceptable in view of the Fund’s overall favorable investment performance and the quality and experience of its portfolio managers. The contractual management fee rate and actual total expense ratio of Franklin Global Real Estate Securities Fund were the most expensive in its Lipper expense group, but in each case were within 17 basis points of the expense group medians. The Board found such expenses to be acceptable, noting the favorable recent performance of such Fund and that such expenses reflected a phased-in management fee increase approved by shareholders that became fully effective May 1, 2012.
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, 2012, 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 periodically 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 services provided the Funds, as well as the need to implement systems to meet additional regulatory and
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Franklin Templeton Variable Insurance Products Trust
Shareholder Information (continued)
Board Review of Investment Management Agreement (continued)
compliance requirements resulting from statutes such as the Sarbanes-Oxley and Dodd-Frank Acts 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 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, other than Franklin Rising Dividends Securities Fund, 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 investment management structure of Franklin Rising Dividends Securities Fund provides for a fee of 0.75% on the first $500 million of assets; 0.625% on the next $500 million of assets; and 0.50% on assets in excess of $1 billion. This Fund had assets of $1.7 billion at December 31, 2012, and in reviewing its fee structure, management stated its belief that this fee structure reaches a relatively low rate quickly reflecting anticipated economies of scale. In support of such position, management pointed out the favorable management fee and total expense comparisons of this Fund within its Lipper expense group as previously discussed under “Comparative Expenses.” In light of such position and taking into account the fact that the reduced rate on assets in excess of the last breakpoint lowers the Fund’s overall investment management fee rate, the Board believed that the schedule of investment management fees provides a sharing of benefits for the Fund and its shareholders, but intends to monitor future growth and the appropriateness of adding additional breakpoints.
In addition to the investment advisory services provided to Franklin Strategic Income Securities Fund under its investment management agreement, administrative services have been historically provided such Fund under a separate agreement at a fixed charge of 20 basis points. In addition to the investment advisory services provided to Franklin Flex Cap Growth Securities Fund, Franklin Global Real Estate Securities Fund, Franklin Large Cap Value Securities Fund, Franklin Small-Mid Cap Growth Securities Fund and Mutual International Securities Fund under their respective investment management agreements, administrative services have been historically provided such Funds under a separate agreement at a fixed charge of 25 basis points. At the April 16, 2013, Board meeting, the Board eliminated the separate agreements and approved a new form of investment management agreement for each such Fund combining such services. In approving the new form of investment management agreements, the Board took into account the fact that the types of services and aggregate fees, including breakpoints, would be the same as provided under the previous separate agreements for each Fund and that combining such services was consistent with Lipper’s methodology of considering contractual investment management fees to include any separately charged administrative fee. The Board also noted that combining services in a single agreement would have no impact on management’s subsidization of expenses for Franklin Flex Cap Growth Securities Fund, Franklin Large Cap Value Securities Fund and Mutual International Securities Fund.
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Franklin Templeton Variable Insurance Products Trust
Shareholder Information (continued)
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 |
 | < GAIN FROM OUR PERSPECTIVE® > |
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.
| ©2013 Franklin Templeton Investments. All rights reserved. | VIP1 S 08/13 |
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| Item 2. | Code of Ethics. |
| (a) | The Registrant has adopted a code of ethics that applies to its principal executive officers and principal financial and accounting officer. |
| (c) | N/A |
| (d) | N/A |
| (f) | Pursuant to Item 12(a)(1), the Registrant is attaching as an exhibit a copy of its code of ethics that applies to its principal executive officers and principal financial and accounting officer. |
| Item 3. | Audit Committee Financial Expert. |
| (a) | (1) The Registrant has an audit committee financial expert serving on its audit committee. |
| (2) | The audit committee financial expert is John B. Wilson and he is “independent” as defined under the relevant Securities and Exchange Commission Rules and Releases. |
| 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.
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| 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 changes in the Registrant’s internal controls or in other factors that could materially affect the internal controls over financial reporting subsequent to the date of their evaluation in connection with the preparation of this Shareholder Report on Form N-CSR.
| Item 12. | Exhibits. |
(a) (1) Code of Ethics
(a) (2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Laura F. Fergerson, Chief Executive Officer—Finance and Administration, and Gaston Gardey, Chief Financial Officer and Chief Accounting Officer
(b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Laura F. Fergerson, Chief Executive Officer—Finance and Administration, and Gaston Gardey, Chief Financial Officer and Chief Accounting Officer
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
| By | /s/ LAURA F. FERGERSON | |
| Laura F. Fergerson | ||
Chief Executive Officer – Finance and Administration |
Date August 27, 2013
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 27, 2013
| By | /s/ GASTON GARDEY | |
| Gaston Gardey | ||
Chief Financial Officer and Chief Accounting Officer |
Date August 27, 2013