UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM N-CSR
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: 12/31/17
| Item 1. | Reports to Stockholders. |
| | |
 | | Annual Report December 31, 2017 |
Franklin Templeton
Variable Insurance Products Trust
Franklin Templeton Variable Insurance
Products Trust Annual Report
| | | | | | | | |
| Not FDIC Insured | | | | | May Lose Value | | | | | No Bank Guarantee |
MASTER CLASS – 5
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
Important Notes to
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.
Franklin VolSmart Allocation VIP Fund
This annual report for Franklin VolSmart Allocation VIP Fund covers the fiscal year ended December 31, 2017.
Class 5 Performance Summary as of December 31, 2017
Average annual total return of Class 5 shares* represents the average annual change in value, assuming reinvestment of dividends and capital gains. Average returns smooth out variations in returns, which can be significant; they are not the same as year-by-year results.
| | | | | | | | | | | | |
| Periods ended 12/31/17 | | 1-Year | | | 3-Year | | | Since Inception (4/1/13) | |
Average Annual Total Return | | | +15.69% | | | | +5.45% | | | | +4.79% | |
*Prior to 5/1/15, the Fund followed different investment strategies, had different subadvisory arrangements, allocated its core portfolio differently, had a different current target volatility goal and made different use of derivative instruments. As a result, the Fund generally held different investments and had a different investment profile. The Fund has an expense reduction and a fee waiver associated with any investments it makes in a Franklin Templeton money fund and/or other Franklin Templeton fund, contractually guaranteed through 4/30/18. Fund investment results reflect the expense reduction and fee waiver; without these reductions, the results would have been lower.
Performance reflects the Fund’s Class 5 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.
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.
Total Return Index Comparison for a Hypothetical $10,000 Investment (4/1/13–12/31/17)
The graph below shows the change in value of a hypothetical $10,000 investment in the Fund over the indicated period and includes reinvestment of any income or distributions. The Fund’s performance* is compared to the performance of the Standard & Poor’s® 500 Index (S&P 500®) and the Bloomberg Barclays US Aggregate Bond Index. One cannot invest directly in an index, and an index is not representative of the Fund’s portfolio. Please see Important Notes to Performance Information preceding the Fund Summaries.
**Source: Morningstar. Please see Index Descriptions following the Fund Summaries.
FRANKLIN VOLSMART ALLOCATION VIP FUND
Fund Goal and Main Investments
The Fund seeks total return (including income and capital gains) while seeking to manage volatility.
Fund Risks
All investments involve risks, including possible loss of principal. There can be no guarantee that the Fund will stay within its target volatility. Also, the managed volatility and tail risk protection strategies could negatively impact the Fund’s return and expose the Fund to additional costs. Generally, investors should be comfortable with fluctuation in the value of their investments, especially over the short term. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Bond prices generally move in the opposite direction of interest rates. Changes in the financial strength of a bond issuer or in a bond’s credit rating may affect its value. Derivatives involve costs and can create economic leverage in the portfolio, which may result in significant volatility and cause the Fund to participate in losses 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. Because the Fund allocates assets to a variety of investment strategies, ETFs and other mutual funds, which involve certain risks, it may be subject to those same risks. 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.
Performance Overview
You can find the Fund’s one-year total return in the Performance Summary. For comparison, the Fund’s benchmarks, the S&P 500 and the Bloomberg Barclays US Aggregate Bond Index, returned +21.83% and +3.54%, respectively, for the period under review.1 The Fund’s blended benchmark, a combination of leading stock and bond indexes that better reflects the asset allocation of the Fund’s portfolio, returned +13.94% for the same period.2
Economic and Market Overview
The US economy grew during the 12 months under review. After strengthening in 2017’s second and third quarters, the economy moderated in the fourth quarter. The economy grew faster in 2017 than in 2016, however, largely due to growth in consumer spending, business investment and exports. The manufacturing and services sectors expanded during the period. The unemployment rate declined from 4.7% in December 2016 to 4.1% at period-end.3 Monthly retail sales were volatile but positive on average during the period. Annual inflation, as measured by the Consumer Price Index, was 2.1% in December 2016, and while it varied over the 12-month period, remained unchanged at period-end.3
The US Federal Reserve (Fed) raised its target range for the federal funds rate 0.25% at its March and June 2017 meetings, amid signs of a growing US economy, strengthening labor market and improving business spending. At its December meeting, the Fed raised its target range for the federal funds rate 0.25% to 1.25%–1.50%, as widely anticipated by the market. The Fed also confirmed that the monthly balance sheet reduction would increase from $10 billion to $20 billion beginning in January 2018.
US equity markets rose during the 12-month period, benefiting from mostly upbeat economic data, better US corporate earnings and improving global economic growth. Concerns about the terms of the UK’s exit from the European Union (EU), political uncertainty in the US, tensions between the US and North Korea, and the progress of US health care and tax reform plans curbed market sentiment at times. However, the markets were also supported by investor optimism arising from pro-growth and pro-business policy plans in the US, the prospect for reforms in the EU with Emmanuel Macron’s election as France’s president, and the US Fed chair’s comments indicating optimism about the US economy and the likelihood of gradual rate hikes. Furthermore, the Senate’s approval of a budget plan in October and subsequent passage of a tax reform bill near period-end drove many US equity indexes to end 2017 near record highs. In this environment, the broad US stock market, as measured by the S&P 500, generated a +21.83% total return for the period.1
1. Source: Morningstar.
2. The Fund’s blended benchmark was calculated internally and rebalanced monthly and was composed of 60% S&P 500, 30% Bloomberg Barclays US Aggregate Bond Index and 10% Bloomberg Barclays 1-3 Month US Treasury Bill Index.
One cannot invest directly in an index, and an index is not representative of the Fund’s portfolio. Please see Index Descriptions following the Fund Summaries.
3. Source: Bureau of Labor Statistics.
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).
FRANKLIN VOLSMART ALLOCATION VIP FUND
The 10-year Treasury yield, which moves inversely to its price, shifted throughout the period. The yield rose in June amid renewed optimism for improvement in economic growth and was supported in July by hawkish comments from key central bankers around the world. Easing concerns about Hurricane Irma’s economic impact, the Fed’s balance sheet normalization beginning in October and strong economic data also pushed the yield higher. However, several factors weighed on the Treasury yield at certain points during the period, including tensions between the US and North Korea; uncertainty on whether the Fed would raise rates in December 2017; and the appointment of Jerome Powell, viewed as more dovish than other contenders, as the next Fed chair. Near period-end, the Senate’s approval of a budget plan and the subsequent passage of the tax bill drove the yield higher. Overall, the 10-year Treasury yield declined from 2.45% at the beginning of the period to 2.40% at period-end.
Investment Strategy
Under normal market conditions, the Fund seeks to achieve its investment goal by allocating its assets across certain asset classes, sectors and strategies in an attempt to produce a diversified portfolio that will generate returns while minimizing the expected volatility of the Fund’s returns so that volatility does not exceed a target of 10% per year. (Volatility within the 10% target is referred to as “Target Volatility.”) The Fund’s assets are primarily invested in its “core portfolio,” which is principally composed of various US equity and fixed income investments and strategies, including other mutual funds that provide exposure to such investments and strategies.
In addition, the Fund employs a volatility management strategy, which is designed to manage the expected volatility of the Fund’s returns so that volatility remains within the Fund’s Target Volatility. Thus, the Fund may utilize certain derivative instruments (primarily futures contracts on indexes) in an effort to adjust the Fund’s expected volatility to within the Target Volatility. There is no guarantee that the Fund will stay within its Target Volatility. The Fund also employs a “tail risk protection strategy,” designed to protect the Fund from risks related to extreme short-term market downturns (tail risk). Thus, the Fund may utilize certain derivatives (primarily total return swap agreements) in an effort to hedge the tail risk of the Fund. There is no guarantee that the Fund’s volatility management or tail risk protection strategies will be successful.
| | | | |
| Portfolio Composition* | | | |
| 12/31/17 | | | |
| | | % of Total
Net Assets | |
| Stocks | | | 50.6% | |
| Capital Goods | | | 10.5% | |
| Health Care Equipment & Services | | | 6.6% | |
| Materials | | | 6.2% | |
| Software & Services | | | 4.7% | |
| Energy | | | 3.1% | |
| Semiconductors & Semiconductor Equipment | | | 3.0% | |
| Food, Beverage & Tobacco | | | 2.7% | |
| Pharmaceuticals, Biotechnology & Life Sciences | | | 2.4% | |
| Retailing | | | 2.2% | |
| Food & Staples Retailing | | | 1.7% | |
| Household & Personal Products | | | 1.5% | |
| Consumer Services | | | 1.2% | |
| Consumer Durables & Apparel | | | 1.1% | |
| Media | | | 1.0% | |
| Commercial & Professional Services | | | 1.0% | |
| Insurance | | | 0.9% | |
| Transportation | | | 0.6% | |
| Diversified Financials | | | 0.2% | |
| Underlying Funds – Equity | | | 20.0% | |
| Franklin DynaTech Fund – Class R6 | | | 9.8% | |
| Franklin Income Fund – Class R6 | | | 5.8% | |
| iShares Core MSCI EAFE ETF | | | 4.4% | |
| Underlying Funds – Fixed Income | | | 25.8% | |
| Franklin Low Duration Total Return Fund – Class R6 | | | 12.1% | |
| Franklin Strategic Income Fund – Class R6 | | | 10.0% | |
| Franklin Income Fund – Class R6 | | | 3.7% | |
| Hedge Strategy | | | 1.8% | |
| Short-Term Investments & Other Net Assets | | | 1.8% | |
*Figures are stated as a percentage of total and may not equal 100% or may be negative due to rounding, use of any derivatives, unsettled trades or other factors. The breakdown may not match the SOI.
What is a futures contract?
A futures contract is an agreement between the Fund and a counterparty made through a US or foreign futures exchange to buy or sell an underlying instrument or asset at a specific price on a future date.
FRANKLIN VOLSMART ALLOCATION VIP FUND
What is a total return swap agreement?
A swap agreement, such as an equity total return swap, is a contract between the Fund and a counterparty to exchange on a future date the returns, or differentials in rates of return, that would have been earned or realized if a notional amount were invested in specific instruments.
Manager’s Discussion
At the end of the 12-month period, at the asset allocation level, the Fund held roughly 70% in equities, 26% in fixed income and 4% in cash. In comparison, the Fund’s blended benchmark was composed of 60% equities, 30% fixed income and 10% cash.2
Equities
During the calendar year, the Fund’s underlying equity allocation outpaced its underlying index, the S&P 500. The Fund’s largest allocation was to US equities. Our favorable view and overweighting to the asset class was rewarded as US equity indexes posted a banner year in 2017. Our positive assessment reflected synchronized global economic growth, modest inflation and supportive liquidity conditions. Corporate indicators were also positive, with rising earnings-per-share growth and strong profit margins. Fund selection in the equity component benefited relative results, largely due to robust returns for technology-focused Franklin DynaTech Fund. The information technology (IT) sector enjoyed a prolonged rally for most of 2017 as strong earnings reports generally exceeded expectations.
From an equity sector perspective, materials and health care holdings strengthened relative returns. In contrast, positioning in consumer staples, including select food products holdings, and a structural sector underweighting in IT (outside of the technology-focused strategy) dampened relative results.
FIXED INCOME
Fixed income helped overall relative fund performance, largely due to an underweighted allocation relative to the Fund’s blended benchmark. However, the fixed income component’s returns matched its benchmark index, the Bloomberg Barclays US Aggregate Bond Index, during the review period. We held a cautious view of US and developed-market sovereign debt as we found valuations expensive, particularly in the eurozone, where term premiums were the lowest among government bonds. Improving global growth with inflation trending higher also warranted lower exposure to government bonds, from our perspective.
| | | | |
| Portfolio Strategy Holdings* | | | |
| 12/31/17 | | | |
| | | % of Total
Net Assets | |
| Franklin Rising Dividends Strategy | | | 50.6% | |
| Franklin Low Duration Total Return Fund | | | 12.1% | |
| Franklin Strategic Income Fund | | | 10.0% | |
| Franklin DynaTech Fund | | | 9.8% | |
| Franklin Income Fund | | | 9.5% | |
| iShares Core MSCI EAFE ETF | | | 4.4% | |
| Hedge Strategy | | | 1.8% | |
| Short-Term Investments & Other Net Assets | | | 1.8% | |
*The breakdown may not match the SOI.
Relative returns were mixed for the three underlying bond strategies. High-yield bonds delivered healthy results for the review period, and Franklin Strategic Income Fund and Franklin Income Fund both held a significant weighting in the sector. Attractive yields relative to fixed income sectors and 12-month trailing default rates that have declined since 2016 supported our rationale for holding high-yield bonds in 2017. Both strategies performed well during the review period as their holdings in spread sectors enabled them to outperform the fixed income benchmark. Conversely, Franklin Low Duration Total Return Fund weighed on relative performance, as its short-term maturity profile led to underperformance relative to the longer dated fixed income benchmark.
Hedging
During 2017, global equities reached meaningfully high price-to-earnings ratios and exhibited unusually low volatility, which suggests to us a level of investor complacency. Unusually low and protracted stock market volatility has persisted for some time, but we view this as a trend that we believe will eventually—and significantly—revert. Neither of the Fund’s volatility hedging strategies were meaningfully active during the review period.
Thank you for your participation in Franklin VolSmart Allocation VIP Fund. We look forward to serving your future investment needs.
FRANKLIN VOLSMART ALLOCATION VIP FUND
The foregoing information reflects our analysis, opinions and portfolio holdings as of December 31, 2017, 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.
FRANKLIN VOLSMART ALLOCATION VIP FUND
Class 5 Fund Expenses
As an investor in a variable insurance contract (Contract) that indirectly provides for investment in an underlying mutual fund, you can incur transaction and/or ongoing expenses at both the Fund level and the Contract Level: (1) transaction expenses can include sales charges (loads) on purchases, surrender fees, transfer fees and premium taxes; and (2) 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 table below shows Fund-level ongoing expenses and can help you understand these costs 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 table below provides information about the actual account values and actual expenses in the columns under the heading “Actual.” In these columns the Fund’s actual return, which includes the effect of ongoing Fund expenses but does not include the effect of ongoing Contract expenses, is used to calculate the “Ending Account Value.” You can estimate the Fund-level expenses you paid during the period by following these steps (of course, your account value and expenses will differ from those in this illustration): Divide your account value by $1,000 (if your account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6). Then multiply the result by the number under the headings “Actual” and “Fund-Level Expenses Paid During Period” (if Fund-Level Expenses Paid During Period were $ 7.50, then 8.6 x $7.50 = $64.50). In this illustration, the estimated expenses paid this period at the Fund level are $64.50.
Hypothetical Example for Comparison with Other Mutual Funds
Under the heading “Hypothetical” in the table, information is provided about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. This information may not be used to estimate the actual ending account balance or expenses you paid for the period, but it can help you compare ongoing costs of investing in the Fund with those of other mutual funds offered through the Contract. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds offered through the Contract.
Please note that expenses shown in the table are meant to highlight ongoing costs at the Fund level only and do not reflect any ongoing expenses at the Contract level, or transaction expenses at either the Fund or Contract levels. In addition, 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.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Actual | | | Hypothetical | | | | |
| | | | | | (actual return after expenses) | | | (5% annual return before expenses) | | | | |
| Share Class | | Beginning Account
Value 7/1/17 | | | Ending Account
Value 12/31/17 | | | Fund-Level Expenses Paid During Period
7/1/17–12/31/171,2 | | | Ending Account
Value 12/31/17 | | | Fund-Level Expenses
Paid During Period
7/1/17–12/31/171,2 | | | Net Annualized
Expense
Ratio2 | |
Class 5 | | $ | 1,000 | | | $ | 1,081.70 | | | $ | 3.36 | | | $ | 1,021.98 | | | $ | 3.26 | | | | 0.64 | % |
1. Expenses are equal to the annualized expense ratio for the six-month period as indicated above—in the far right column—multiplied by the simple average account value over the period indicated, and then multiplied by 184/365 to reflect the one-half year period.
2. Reflects expenses after fee waivers and expense reimbursements. Does not include any ongoing expenses of the Contract for which the Fund is an investment option or acquired fund fees and expenses.
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
Financial Highlights
Franklin VolSmart Allocation VIP Fund
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2017 | | | 2016 | | | 2015 | | | 2014 | | | 2013a | |
| Class 2 | | | | | | | | | | | | | | | | | | | | |
Per share operating performance
(for a share outstanding throughout the year) | | | | | | | | | | | | | | | | | | | | |
| | | | | |
Net asset value, beginning of year | | | $10.10 | | | | $9.68 | | | | $10.20 | | | | $10.07 | | | | $10.00 | |
| | | | |
| | | | | |
| Income from investment operationsb: | | | | | | | | | | | | | | | | | | | | |
| | | | | |
Net investment incomec,d | | | 0.16 | | | | 0.16 | | | | 0.10 | | | | 0.11 | | | | 0.09 | |
| | | | | |
Net realized and unrealized gains (losses) | | | 1.41 | | | | 0.28 | | | | (0.42 | ) | | | 0.25 | | | | 0.17 | |
| | | | |
Total from investment operations | | | 1.57 | | | | 0.44 | | | | (0.32 | ) | | | 0.36 | | | | 0.26 | |
| | | | |
| | | | | |
Less distributions from: | | | | | | | | | | | | | | | | | | | | |
| | | | | |
Net investment income and net foreign currency gains | | | — | | | | (— | )e | | | (0.05 | ) | | | (0.23 | ) | | | (0.19 | ) |
| | | | | |
Net realized gains | | | — | | | | (0.02 | ) | | | (0.15 | ) | | | (— | )e | | | — | |
| | | | |
Total distributions | | | — | | | | (0.02 | ) | | | (0.20 | ) | | | (0.23 | ) | | | (0.19 | ) |
| | | | |
Net asset value, end of year | | | $11.67 | | | | $10.10 | | | | $9.68 | | | | $10.20 | | | | $10.07 | |
| | | | |
| | | | | |
Total returnf | | | 15.54% | | | | 4.39% | | | | (3.12)% | | | | 3.60% | | | | 2.56% | |
| | | | | |
| Ratios to average net assetsg | | | | | | | | | | | | | | | | | | | | |
| | | | | |
Expenses before waiver and payments by affiliatesh | | | 1.14% | | | | 1.25% | | | | 1.77% | | | | 1.97% | | | | 2.97% | |
| | | | | |
Expenses net of waiver and payments by affiliatesh | | | 0.73%i | | |
| 0.73%i
|
| | | 0.93% | | | | 1.08%i | | | | 1.08%i | |
| | | | | |
Net investment incomed | | | 1.44% | | | | 1.50% | | | | 1.30% | | | | 1.07% | | | | 1.21% | |
| | | | | |
| Supplemental data | | | | | | | | | | | | | | | | | | | | |
| | | | | |
Net assets, end of year (000’s) | | | $36 | | | | $31 | | | | $8,703 | | | | $10,201 | | | | $10,065 | |
| | | | | |
Portfolio turnover rate | | | 5.69% | | | | 1.00% | | | | 95.15% | | | | 22.04% | | | | 8.12% | |
aFor the period April 1, 2013 (commencement of operations) to December 31, 2013.
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’s shares in relation to income earned and/or fluctuating fair 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 and exchange traded 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 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 and exchange traded funds in which the Fund invests. The weighted average indirect expenses of the Underlying Funds and exchange traded funds was 0.20% for the year ended December 31, 2017.
iBenefit of expense reduction rounds to less than 0.01%.
| | | | | | |
| | | The accompanying notes are an integral part of these financial statements. | Annual Report | | | FVA-7 | |
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
FINANCIAL HIGHLIGHTS
Franklin VolSmart Allocation VIP Fund (continued)
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2017 | | | 2016 | | | 2015 | | | 2014 | | | 2013a | |
| Class 5 | | | | | | | | | | | | | | | | | | | | |
Per share operating performance (for a share outstanding throughout the year) | | | | | | | | | | | | | | | | | | | | |
| | | | | |
Net asset value, beginning of year | | | $10.07 | | | | $9.67 | | | | $10.20 | | | | $10.07 | | | | $10.00 | |
| | | | |
| | | | | |
| Income from investment operationsb: | | | | | | | | | | | | | | | | | | | | |
| | | | | |
Net investment incomec,d | | | 0.17 | | | | 0.16 | | | | 0.16 | | | | 0.13 | | | | 0.10 | |
| | | | | |
Net realized and unrealized gains (losses) | | | 1.41 | | | | 0.29 | | | | (0.47 | ) | | | 0.25 | | | | 0.17 | |
| | | | |
Total from investment operations | | | 1.58 | | | | 0.45 | | | | (0.31 | ) | | | 0.38 | | | | 0.27 | |
| | | | |
| | | | | |
| Less distributions from: | | | | | | | | | | | | | | | | | | | | |
| | | | | |
Net investment income and net foreign currency gains | | | — | | | | (0.03 | ) | | | (0.07 | ) | | | (0.25 | ) | | | (0.20 | ) |
| | | | | |
Net realized gains | | | — | | | | (0.02 | ) | | | (0.15 | ) | | | (— | )e | | | — | |
| | | | |
Total distributions | | | — | | | | (0.05 | ) | | | (0.22 | ) | | | (0.25 | ) | | | (0.20 | ) |
| | | | |
Net asset value, end of year | | | $11.65 | | | | $10.07 | | | | $9.67 | | | | $10.20 | | | | $10.07 | |
| | | | |
| | | | | |
Total returnf | | | 15.69% | | | | 4.59% | | | | (3.10 | )% | | | 3.75% | | | | 2.68% | |
| | | | | |
| Ratios to average net assetsg | | | | | | | | | | | | | | | | | | | | |
| | | | | |
Expenses before waiver and payments by affiliatesh | | | 1.04% | | | | 1.15% | | | | 1.66% | | | | 1.82% | | | | 2.82% | |
| | | | | |
Expenses net of waiver and payments by affiliatesh | | | 0.63%i | | | | 0.63%i | | | | 0.82% | | | | 0.93%i | | | | 0.93%i | |
| | | | | |
Net investment incomed | | | 1.54% | | | | 1.60% | | | | 1.41% | | | | 1.22% | | | | 1.36% | |
| | | | | |
| Supplemental data | | | | | | | | | | | | | | | | | | | | |
| | | | | |
Net assets, end of year (000’s) | | | $188,240 | | | | $124,581 | | | | $54,816 | | | | $10,201 | | | | $10,065 | |
| | | | | |
Portfolio turnover rate | | | 5.69% | | | | 1.00% | | | | 95.15% | | | | 22.04% | | | | 8.12% | |
aFor the period April 1, 2013 (commencement of operations) to December 31, 2013.
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’s shares in relation to income earned and/or fluctuating fair 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 and exchange traded 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 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 and exchange traded funds in which the Fund invests. The weighted average indirect expenses of the Underlying Funds and exchange traded funds was 0.20% for the year ended December 31, 2017.
iBenefit of expense reduction rounds to less than 0.01%.
| | | | |
| FVA-8 | | Annual Report | The accompanying notes are an integral part of these financial statements. | | |
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
Statement of Investments, December 31, 2017
| | | | | | | | | | |
Franklin VolSmart Allocation VIP Fund | |
| | | | | Shares | | | Value | |
| | | | | | | | | | |
| | | Common Stocks 50.6% | | | | | | |
| | | Capital Goods 10.5% | | | | | | |
| | Carlisle Cos. Inc. | | | 7,460 | | | $ | 847,829 | |
| | Donaldson Co. Inc. | | | 13,830 | | | | 676,978 | |
| | Dover Corp. | | | 23,600 | | | | 2,383,364 | |
| | General Dynamics Corp. | | | 11,000 | | | | 2,237,950 | |
| | Honeywell International Inc. | | | 20,900 | | | | 3,205,224 | |
| | Johnson Controls International PLC | | | 40,092 | | | | 1,527,906 | |
| | Pentair PLC (United Kingdom) | | | 27,100 | | | | 1,913,802 | |
| | Roper Technologies Inc. | | | 16,900 | | | | 4,377,100 | |
| | United Technologies Corp. | | | 15,500 | | | | 1,977,335 | |
| | W.W. Grainger Inc. | | | 2,750 | | | | 649,688 | |
| | | | | | | | | | |
| | | | | | | | | 19,797,176 | |
| | | | | | | | | | |
| | | Commercial & Professional Services 1.0% | | | | | | |
| | Cintas Corp. | | | 7,700 | | | | 1,199,891 | |
| | Matthews International Corp., A | | | 11,870 | | | | 626,736 | |
| | | | | | | | | | |
| | | | | | | | | 1,826,627 | |
| | | | | | | | | | |
| | | Consumer Durables & Apparel 1.1% | | | | | | |
| | Leggett & Platt Inc. | | | 9,590 | | | | 457,731 | |
| | NIKE Inc., B | | | 24,400 | | | | 1,526,220 | |
| | | | | | | | | | |
| | | | | | | | | 1,983,951 | |
| | | | | | | | | | |
| | | Consumer Services 1.2% | | | | | | |
| | McDonald’s Corp. | | | 9,380 | | | | 1,614,486 | |
| | Yum! Brands Inc. | | | 7,700 | | | | 628,397 | |
| | | | | | | | | | |
| | | | | | | | | 2,242,883 | |
| | | | | | | | | | |
| | | Diversified Financials 0.2% | | | | | | |
| | State Street Corp. | | | 3,750 | | | | 366,038 | |
| | | | | | | | | | |
| | | Energy 3.1% | | | | | | |
| | Chevron Corp. | | | 10,590 | | | | 1,325,762 | |
| | EOG Resources Inc. | | | 5,730 | | | | 618,324 | |
| | Exxon Mobil Corp. | | | 14,800 | | | | 1,237,872 | |
| | Occidental Petroleum Corp. | | | 16,600 | | | | 1,222,756 | |
| | Schlumberger Ltd. | | | 21,300 | | | | 1,435,407 | |
| | | | | | | | | | |
| | | | | | | | | 5,840,121 | |
| | | | | | | | | | |
| | | Food & Staples Retailing 1.7% | | | | | | |
| | CVS Health Corp. | | | 12,550 | | | | 909,875 | |
| | Walgreens Boots Alliance Inc. | | | 14,300 | | | | 1,038,466 | |
| | Wal-Mart Stores Inc. | | | 13,390 | | | | 1,322,263 | |
| | | | | | | | | | |
| | | | | | | | | 3,270,604 | |
| | | | | | | | | | |
| | | Food, Beverage & Tobacco 2.7% | | | | | | |
| | Archer-Daniels-Midland Co. | | | 24,200 | | | | 969,936 | |
| | Bunge Ltd | | | 19,100 | | | | 1,281,228 | |
| | McCormick & Co. Inc. | | | 10,750 | | | | 1,095,532 | |
| | PepsiCo Inc. | | | 14,300 | | | | 1,714,856 | |
| | | | | | | | | | |
| | | | | | | | | 5,061,552 | |
| | | | | | | | | | |
| | | Health Care Equipment & Services 6.6% | | | | | | |
| | Abbott Laboratories | | | 27,960 | | | | 1,595,677 | |
| | Becton, Dickinson and Co. | | | 13,900 | | | | 2,975,434 | |
| | DENTSPLY SIRONA Inc. | | | 13,000 | | | | 855,790 | |
| | Medtronic PLC | | | 29,600 | | | | 2,390,200 | |
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
STATEMENT OF INVESTMENTS (UNAUDITED)
Franklin VolSmart Allocation VIP Fund (continued)
| | | | | | | | | | |
| | | | | Shares | | | Value | |
| | | | | | | | | | |
| | | Common Stocks (continued) | | | | | | |
| | | Health Care Equipment & Services (continued) | | | | | | |
| | Stryker Corp. | | | 19,600 | | | $ | 3,034,864 | |
| | West Pharmaceutical Services Inc. | | | 14,900 | | | | 1,470,183 | |
| | | | | | | | | | |
| | | | | | | | | 12,322,148 | |
| | | | | | | | | | |
| | | Household & Personal Products 1.5% | | | | | | |
| | Colgate-Palmolive Co. | | | 18,300 | | | | 1,380,735 | |
| | The Procter & Gamble Co. | | | 16,280 | | | | 1,495,806 | |
| | | | | | | | | | |
| | | | | | | | | 2,876,541 | |
| | | | | | | | | | |
| | | Insurance 0.9% | | | | | | |
| | Aflac Inc. | | | 9,120 | | | | 800,554 | |
| | Chubb Ltd. | | | 3,981 | | | | 581,743 | |
| | Erie Indemnity Co., A | | | 2,720 | | | | 331,405 | |
| | | | | | | | | | |
| | | | | | | | | 1,713,702 | |
| | | | | | | | | | |
| | | Materials 6.2% | | | | | | |
| | Air Products and Chemicals Inc. | | | 16,100 | | | | 2,641,688 | |
| | Albemarle Corp. | | | 33,300 | | | | 4,258,737 | |
| | Ecolab Inc. | | | 7,660 | | | | 1,027,819 | |
| | Nucor Corp. | | | 12,200 | | | | 775,676 | |
| | Praxair Inc. | | | 18,800 | | | | 2,907,984 | |
| | | | | | | | | | |
| | | | | | | | | 11,611,904 | |
| | | | | | | | | | |
| | | Media 1.0% | | | | | | |
| | Comcast Corp., A | | | 24,400 | | | | 977,220 | |
| | John Wiley & Sons Inc., A | | | 14,600 | | | | 959,950 | |
| | | | | | | | | | |
| | | | | | | | | 1,937,170 | |
| | | | | | | | | | |
| | | Pharmaceuticals, Biotechnology & Life Sciences 2.4% | | | | | | |
| | AbbVie Inc. | | | 9,040 | | | | 874,259 | |
| | Johnson & Johnson | | | 17,000 | | | | 2,375,240 | |
| | Perrigo Co. PLC | | | 6,040 | | | | 526,446 | |
| | Pfizer Inc. | | | 13,410 | | | | 485,710 | |
| | Roche Holding AG, ADR (Switzerland) | | | 7,500 | | | | 236,850 | |
| | | | | | | | | | |
| | | | | | | | | 4,498,505 | |
| | | | | | | | | | |
| | | Retailing 2.2% | | | | | | |
| | The Gap Inc. | | | 15,720 | | | | 535,423 | |
| | Ross Stores Inc. | | | 22,600 | | | | 1,813,650 | |
| | Target Corp. | | | 13,240 | | | | 863,910 | |
| | Tiffany & Co. | | | 8,800 | | | | 914,760 | |
| | | | | | | | | | |
| | | | | | | | | 4,127,743 | |
| | | | | | | | | | |
| | | Semiconductors & Semiconductor Equipment 3.0% | | | | | | |
| | Analog Devices Inc. | | | 28,214 | | | | 2,511,892 | |
| | Texas Instruments Inc. | | | 28,700 | | | | 2,997,428 | |
| | Versum Materials Inc. | | | 5,495 | | | | 207,986 | |
| | | | | | | | | | |
| | | | | | | | | 5,717,306 | |
| | | | | | | | | | |
| | | Software & Services 4.7% | | | | | | |
| | Accenture PLC, A | | | 20,400 | | | | 3,123,036 | |
| | Microsoft Corp. | | | 52,300 | | | | 4,473,742 | |
| | Visa Inc., A | | | 11,200 | | | | 1,277,024 | |
| | | | | | | | | | |
| | | | | | | | | 8,873,802 | |
| | | | | | | | | | |
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
STATEMENT OF INVESTMENTS (UNAUDITED)
Franklin VolSmart Allocation VIP Fund (continued)
| | | | | | | | | | |
| | | | | Shares | | | Value | |
| | | | | | | | | | |
| | | Common Stocks (continued) | | | | | | |
| | | Transportation 0.6% | | | | | | |
| | United Parcel Service Inc., B | | | 10,000 | | | $ | 1,191,500 | |
| | | | | | | | | | |
| | | |
| | Total Common Stocks (Cost $76,185,477) | | | | | | | 95,259,273 | |
| | | | | | | | | | |
| | | |
| | Investments in Underlying Funds and Exchange Traded Funds 45.8% | | | | | | | | |
| | | Domestic Equity 9.8% | | | | | | |
| a,b | | Franklin DynaTech Fund, Class R6 | | | 272,141 | | | | 18,437,573 | |
| | | | | | | | | | |
| | | Domestic Fixed Income 22.1% | | | | | | |
| b | | Franklin Low Duration Total Return Fund, Class R6 | | | 2,325,396 | | | | 22,835,389 | |
| b | | Franklin Strategic Income Fund, Class R6 | | | 1,907,939 | | | | 18,793,197 | |
| | | | | | | | | | |
| | | | | | | | | 41,628,586 | |
| | | | | | | | | | |
| | | Domestic Hybrid 9.5% | | | | | | |
| b | | Franklin Income Fund, Class R6 | | | 7,571,482 | | | | 17,868,696 | |
| | | | | | | | | | |
| | | Foreign Equity 4.4% | | | | | | |
| | iShares Core MSCI EAFE ETF | | | 125,600 | | | | 8,300,904 | |
| | | | | | | | | | |
| | | |
| | Total Investments in Underlying Funds and Exchange Traded Funds (Cost $79,714,479) | | | | | | | 86,235,759 | |
| | | | | | | | | | |
| | | |
| | Total Investments before Short Term Investments (Cost $155,899,956) | | | | | | | 181,495,032 | |
| | | | | | | | | | |
| | Short Term Investments (Cost $6,861,620) 3.6% | | | | | | | | |
| | | Money Market Funds 3.6% | | | | | | |
| b,c | | Institutional Fiduciary Trust Money Market Portfolio, 0.89% | | | 6,861,620 | | | | 6,861,620 | |
| | | | | | | | | | |
| | Total Investments (Cost $162,761,576) 100.0% | | | | | | | 188,356,652 | |
| | Other Assets, less Liabilities (0.0)%† | | | | | | | (80,852 | ) |
| | | | | | | | | | |
| | Net Assets 100.0% | | | | | | $ | 188,275,800 | |
| | | | | | | | | | |
†Rounds to less than 0.1% of net assets.
aNon-income producing.
bSee Note 3(e) regarding investments in Underlying Funds.
cThe rate shown is the annualized seven-day yield at period end.
At December 31, 2017, the Fund had the following total return swap contracts outstanding. See Note 1(c).
Total Return Swap Contracts
| | | | | | | | | | | | | | | | | | | | | | | | |
| Underlying Instruments | | Financing
Rate | | | Payment
Frequency | | | Counterparty | | | Maturity
Date | | | Notional Value | | | Value/
Unrealized
Appreciation
(Depreciation) | |
| OTC Swap Contracts | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| Longa | | | | | | | | | | | | | | | | | | | | | | | | |
Dynamic VIX Backwardation (BEFSDVB1) | | | 0.25 | % | | | Monthly | | | | BZWS | | | | 5/25/18 | | | $ | 34,100,000 | | | $ | (3,164 | ) |
aThe Fund receives the total return on the underlying instrument and pays a financing rate.
See Abbreviations on page FVA-23.
The accompanying notes are an integral part of these financial statements.
| | | | | | |
| | | The accompanying notes are an integral part of these financial statements. | Annual Report | | | FVA-11 | |
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
FINANCIAL STATEMENTS
Financial Statements
Statement of Assets and Liabilities
December 31, 2017
| | | | |
| | | Franklin VolSmart
Allocation VIP
Fund | |
Assets: | | | | |
Investments in securities: | | | | |
Cost - Unaffiliated issuers | | $ | 83,867,508 | |
Cost - Non-controlled affiliates (Note 3e) | | | 78,894,068 | |
| | | | |
Value - Unaffiliated issuers | | $ | 103,560,177 | |
Value - Non-controlled affiliates (Note 3e) | | | 84,796,475 | |
Receivables: | | | | |
Capital shares sold | | | 14,671 | |
Dividends | | | 136,862 | |
Other assets | | | 14 | |
| | | | |
Total assets | | | 188,508,199 | |
| | | | |
Liabilities: | | | | |
Payables: | | | | |
Capital shares redeemed | | | 14,671 | |
Management fees | | | 69,008 | |
Distribution fees | | | 46,466 | |
Professional fees | | | 82,858 | |
Unrealized depreciation on OTC swap contracts | | | 3,164 | |
Accrued expenses and other liabilities | | | 16,232 | |
| | | | |
Total liabilities | | | 232,399 | |
| | | | |
Net assets, at value | | $ | 188,275,800 | |
| | | | |
Net assets consist of: | | | | |
Paid-in capital | | $ | 162,847,987 | |
Undistributed net investment income | | | 778,163 | |
Net unrealized appreciation (depreciation) | | | 25,591,912 | |
Accumulated net realized gain (loss) | | | (942,262 | ) |
| | | | |
Net assets, at value | | $ | 188,275,800 | |
| | | | |
| |
| Class 2: | | | | |
Net assets, at value | | $ | 35,721 | |
| | | | |
Shares outstanding | | | 3,061 | |
| | | | |
Net asset value and maximum offering price per share | | $ | 11.67 | |
| | | | |
| |
| Class 5: | | | | |
Net assets, at value | | $ | 188,240,079 | |
| | | | |
Shares outstanding | | | 16,162,667 | |
| | | | |
Net asset value and maximum offering price per share | | $ | 11.65 | |
| | | | |
| | | | |
| FVA-12 | | Annual Report | The accompanying notes are an integral part of these financial statements. | | |
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
FINANCIAL STATEMENTS
Statement of Operations
for the year ended December 31, 2017
| | | | |
| | | Franklin VolSmart
Allocation VIP
Fund | |
Investment income: | | | | |
Dividends: (net of foreign taxes)* | | | | |
Unaffiliated issuers | | $ | 1,790,946 | |
Non-controlled affiliates (Note 3e) | | | 1,789,694 | |
| | | | |
Total investment income | | | 3,580,640 | |
| | | | |
Expenses: | | | | |
Management fees (Note 3a) | | | 1,318,737 | |
Distribution fees: (Note 3c) | | | | |
Class 2 | | | 83 | |
Class 5 | | | 247,434 | |
Custodian fees (Note 4) | | | 1,860 | |
Reports to shareholders | | | 18,933 | |
Registration and filing fees | | | 472 | |
Professional fees | | | 97,577 | |
Trustees’ fees and expenses | | | 627 | |
Other | | | 25,429 | |
| | | | |
Total expenses | | | 1,711,152 | |
Expense reductions (Note 4) | | | (51 | ) |
Expenses waived/paid by affiliates (Note 3e and 3f) | | | (669,258 | ) |
| | | | |
Net expenses | | | 1,041,843 | |
| | | | |
Net investment income | | | 2,538,797 | |
| | | | |
Realized and unrealized gains (losses): | | | | |
Net realized gain (loss) from: | | | | |
Investments: | | | | |
Unaffiliated issuers | | | 326,312 | |
Non-controlled affiliates (Note 3e) | | | 532,731 | |
Foreign currency transactions | | | (26 | ) |
Swap contracts | | | (376,240 | ) |
Capital gain distributions from Underlying Funds: | | | | |
Non-controlled affiliates (Note 3e) | | | 309,152 | |
| | | | |
Net realized gain (loss) | | | 791,929 | |
| | | | |
Net change in unrealized appreciation (depreciation) on: | | | | |
Investments: | | | | |
Unaffiliated issuers | | | 15,056,303 | |
Non-controlled affiliates (Note 3e) | | | 5,216,763 | |
Swap contracts | | | 1,874 | |
| | | | |
Net change in unrealized appreciation (depreciation) | | | 20,274,940 | |
| | | | |
Net realized and unrealized gain (loss) | | | 21,066,869 | |
| | | | |
Net increase (decrease) in net assets resulting from operations | | $ | 23,605,666 | |
| | | | |
| |
* Foreign taxes withheld on dividends | | $ | 1,721 | |
| | | | | | |
| | | The accompanying notes are an integral part of these financial statements. | Annual Report | | | FVA-13 | |
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
FINANCIAL STATEMENTS
Statements of Changes in Net Assets
| | | | | | | | |
| | | Franklin VolSmart Allocation VIP Fund | |
| | | Year Ended December 31, | |
| | | 2017 | | | 2016 | |
Increase (decrease) in net assets: | | | | | | | | |
Operations: | | | | | | | | |
Net investment income | | $ | 2,538,797 | | | $ | 1,419,032 | |
Net realized gain (loss) | | | 791,929 | | | | (4,311,221 | ) |
Net change in unrealized appreciation (depreciation) | | | 20,274,940 | | | | 6,451,189 | |
| | | | |
Net increase (decrease) in net assets resulting from operations | | | 23,605,666 | | | | 3,559,000 | |
| | | | |
Distributions to shareholders from: | | | | | | | | |
Net investment income: | | | | | | | | |
Class 2 | | | — | | | | (294 | ) |
Class 5 | | | — | | | | (354,685 | ) |
Net realized gains: | | | | | | | | |
Class 2 | | | — | | | | (7,355 | ) |
Class 5 | | | — | | | | (116,711 | ) |
| | | | |
Total distributions to shareholders | | | — | | | | (479,045 | ) |
| | | | |
Capital share transactions: (Note 2) | | | | | | | | |
Class 2 | | | — | | | | (8,888,134 | ) |
Class 5 | | | 40,058,190 | | | | 66,900,840 | |
| | | | |
Total capital share transactions | | | 40,058,190 | | | | 58,012,706 | |
| | | | |
Net increase (decrease) in net assets | | | 63,663,856 | | | | 61,092,661 | |
Net assets: | | | | | | | | |
Beginning of year | | | 124,611,944 | | | | 63,519,283 | |
| | | | |
End of year | | $ | 188,275,800 | | | $ | 124,611,944 | |
| | | | |
Undistributed net investment income included in net assets: End of year | | $ | 778,163 | | | $ | — | |
| | | | |
Distributions in excess of net investment income included in net assets: End of year | | $ | — | | | $ | (1,374,219 | ) |
| | | | |
| | | | |
| FVA-14 | | Annual Report | The accompanying notes are an integral part of these financial statements. | | |
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
Notes to Financial Statements
Franklin VolSmart Allocation VIP Fund
1. Organization and Significant Accounting Policies
Franklin Templeton Variable Insurance Products Trust (Trust) is registered under the Investment Company Act of 1940 (1940 Act) as an open-end management investment company, consisting of eighteen separate funds and applies the specialized accounting and reporting guidance in U.S. Generally Accepted Accounting Principles (U.S. GAAP). Franklin VolSmart Allocation VIP Fund (Fund) is included in this report. The Fund invests in affiliated funds managed by Franklin Templeton (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. At December 31, 2017, 98.2% 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 2 and Class 5. Each class of shares may differ 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’s 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. The Fund calculates the net asset value (NAV) per share as of 4 p.m. Eastern time each day the New York Stock Exchange (NYSE) is open for trading. Under compliance policies and procedures approved by the Trust’s Board of Trustees (the Board), the Fund’s administrator has responsibility for oversight of valuation, including leading the cross-functional Valuation Committee (VC). The VC 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.
Investments in the Underlying Funds are valued at their closing NAV each trading day.
Equity securities and exchange traded funds (ETFs) 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 as of 4 p.m. Eastern time. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at 4 p.m. Eastern time 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.
Certain derivative financial instruments 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 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 VC 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 VC 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
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
NOTES TO FINANCIAL STATEMENTS
Franklin VolSmart Allocation VIP Fund (continued)
1. Organization and Significant Accounting Policies (continued)
a. Financial Instrument Valuation (continued)
existed. The VC 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 4 p.m. Eastern time. In addition, trading in certain foreign markets may not take place on every Fund’s business day. Occasionally, events occur between the time at which trading in a foreign security is completed and 4 p.m. Eastern time 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 4 p.m. Eastern time. In order to minimize the potential for these differences, the VC 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.
When the last day of the reporting period is a non-business day, certain foreign markets may be open on those days that the Fund’s NAV is not calculated, 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 in the Statement of Operations.
Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period.
c. Derivative Financial Instruments
The Fund invested in derivative financial instruments 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 in 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.
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
NOTES TO FINANCIAL STATEMENTS
Franklin VolSmart Allocation VIP Fund (continued)
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. 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. 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 December 31, 2017, the Fund had OTC derivatives in a net liability position for such contracts of $3,164.
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 the next business day, or 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. To the extent that the amounts due to the Fund from its counterparties are not subject to collateralization or are not fully collateralized, the Fund bears the risk of loss from counterparty non-performance.
The Fund entered into OTC total return swap contracts primarily to manage and/or gain exposure to equity price risk of an underlying instrument such as a stock, bond, index or basket of securities or indices. A total return swap is an agreement between the Fund and a counterparty to exchange a return linked to an underlying instrument for a floating or fixed rate payment, both based upon a notional amount. Over the term of the contract, contractually required payments to be paid or received are accrued daily and recorded as unrealized appreciation or depreciation until the payments are made, at which time they are recognized as realized gain or loss.
See Note 7 regarding other derivative information.
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 may recognize an income tax liability related to its uncertain tax positions under U.S. GAAP when the uncertain tax position has a less than 50% probability that it will be sustained upon examination by the tax authorities based on its technical merits. As of December 31, 2017, the Fund has determined that no tax liability is required in its financial statements related to uncertain tax positions for any open tax years (or expected to be taken in future tax years). Open tax years are those that remain subject to examination and are based on the statute of limitations in each jurisdiction in which the Fund invests.
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
NOTES TO FINANCIAL STATEMENTS
Franklin VolSmart Allocation VIP Fund (continued)
1. Organization and Significant Accounting
Policies (continued)
e. Security Transactions, Investment Income, Expenses and Distributions
Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Estimated expenses are accrued daily. Dividend income and realized gain distributions are recorded on the ex-dividend date except for certain dividends from securities where the dividend rate is not available. In such cases, the dividend is recorded as soon as the information is received by the Fund. Distributions to shareholders are recorded on the ex-dividend date. Distributable earnings are determined according to income tax regulations (tax basis) and may differ from earnings recorded in accordance with U.S. GAAP. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods.
Common expenses incurred by the Trust are allocated among the Funds based on the ratio of net assets of each Fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the Fund that incurred the expense.
The Fund indirectly bears its proportionate share of expenses from the Underlying Funds and ETFs. Since the Underlying Funds and ETFs have varied expense levels and the Fund may own different proportions of the Underlying Funds and ETFs at different times, the amount of expenses incurred indirectly by the Fund will vary.
Realized and unrealized gains and losses and net investment income, excluding 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 U.S. GAAP 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 December 31, 2017, there were an unlimited number of shares authorized (without par value). Transactions in the Fund’s shares were as follows:
| | | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2017 | | | | 2016 | |
| | | Shares | | Amount | | | | Shares | | | Amount | |
| | | | | |
| Class 2 Shares: | | | | | | | | | | | | | | |
Shares redeemed | | — | | $ — | | | | | (895,626 | ) | | $ | (8,888,134 | ) |
| | | |
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
NOTES TO FINANCIAL STATEMENTS
Franklin VolSmart Allocation VIP Fund (continued)
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2017 | | | | | | 2016 | |
| | | Shares | | | Amount | | | | | | Shares | | | Amount | |
| | | | | |
| Class 5 Shares: | | | | | | | | | | | | | | | | | | | | |
Shares sold | | | 6,311,063 | | | $ | 67,303,086 | | | | | | | | 8,177,643 | | | $ | 81,628,729 | |
Shares issued in reinvestment of distributions | | | — | | | | — | | | | | | | | 46,757 | | | | 471,396 | |
Shares redeemed | | | (2,514,276 | ) | | | (27,244,896 | ) | | | | | | | (1,525,885 | ) | | | (15,199,285 | ) |
| | | | |
Net increase (decrease) | | | 3,796,787 | | | $ | 40,058,190 | | | | | | | | 6,698,515 | | | $ | 66,900,840 | |
| | | | |
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, directors and/or trustees of certain of the Underlying Funds and of the following subsidiaries:
| | |
| Subsidiary | | Affiliation |
Franklin Advisers, Inc. (Advisers) | | Investment manager |
Franklin Advisory Services, LLC (Advisory Services) | | Investment manager |
K2/D&S Management Co., LLC (K2 Advisors) | | 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 of 0.80% per year of the average daily net assets of the Fund.
Under a subadvisory agreement, Advisory Services and K2 Advisors, affiliates of Advisers, provide subadvisory services to the Fund. The subadvisory fee is paid by Advisers based on the Fund’s average daily net assets, and is not an additional expense of the Fund.
b. Administrative Fees
Under an agreement with Advisers, FT Services provides administrative services to the Fund. The fee is paid by Advisers based on the Fund’s 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 and Class 5 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% and 0.15% per year of its average daily net assets of Class 2 and Class 5, respectively. The Board has agreed to limit the current rate to 0.25% per year for Class 2. The plan year, for purposes of monitoring compliance with the maximum annual plan rates, is February 1 through January 31.
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.
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
NOTES TO FINANCIAL STATEMENTS
Franklin VolSmart Allocation VIP Fund (continued)
3. Transactions with Affiliates (continued)
e. Investments in Underlying Funds
The Fund invests in Underlying Funds which are managed by Advisers or affiliates of Advisers. The Fund does not invest in Underlying Funds for the purpose of exercising a controlling influence over the management or policies. Management fees paid by the Fund are waived on assets invested in the Underlying Funds, as noted in the Statement of Operations, in an amount not to exceed the management and administrative fees paid directly or indirectly by the Underlying Funds.
Investments in Underlying Funds for the year ended December 31, 2017, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Underlying Funds | | 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 | | | Dividend
Income | | | Realized
Gain
(Loss) | | | Net Change in
Unrealized
Appreciation
(Depreciation) | |
| | | | | | | | |
| Non-Controlled Affiliates | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Franklin DynaTech Fund, Class R6 | | | 251,990 | | | | 104,165 | | | | (84,014 | ) | | | 272,141 | | | $ | 18,437,573 | | | $ | — | | | $ | 841,883 | a | | $ | 4,600,980 | |
Franklin Income Fund, Class R6 | | | 5,053,596 | | | | 2,517,886 | | | | — | | | | 7,571,482 | | | | 17,868,696 | | | | 826,177 | | | | — | | | | 437,774 | |
Franklin Low Duration Total Return Fund, Class R6 | | | 1,612,689 | | | | 712,707 | | | | — | | | | 2,325,396 | | | | 22,835,389 | | | | 450,136 | | | | — | | | | (152,027 | ) |
Franklin Strategic Income Fund, Class R6 | | | 1,380,378 | | | | 527,561 | | | | — | | | | 1,907,939 | | | | 18,793,197 | | | | 477,159 | | | | — | | | | 330,036 | |
Institutional Fiduciary Trust Money Market Portfolio, 0.89% | | | 9,750,824 | | | | 49,184,107 | | | | (52,073,311 | ) | | | 6,861,620 | | | | 6,861,620 | | | | 36,222 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Total Affiliated Securities | | | | | | | | | | | | | | | | | | $ | 84,796,475 | | | $ | 1,789,694 | | | $ | 841,883 | | | $ | 5,216,763 | |
| | | | | | | | | | | | | | | | | | | | |
aIncludes realized gain distributions received.
f. Waiver and Expense Reimbursements
Advisers has contractually agreed in advance to waive or limit its fees and to assume as its own expense certain expenses otherwise payable by the Fund so that the expenses (excluding distribution fees and acquired fund fees and expenses) for each class of the Fund do not exceed 0.65%, based on the average net assets of each class (other than certain non-routine expenses or costs, including those relating to litigation, indemnification, reorganizations, and liquidations) until April 30, 2018. Total expenses waived or paid are not subject to recapture subsequent to the Fund’s fiscal year end.
4. Expense Offset Arrangement
The Fund has entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Fund’s custodian expenses. During the year ended December 31, 2017, the custodian fees were reduced as noted in the Statement of Operations.
5. Income Taxes
For tax purposes, capital losses may be carried over to offset future capital gains, if any.
At December 31, 2017, the capital loss carryforwards were as follows:
| | | | |
Capital loss carryforwards: | | | | |
Short term | | $ | 164,571 | |
Long term | | | 455,583 | |
| | | | |
Total capital loss carryforwards | | $ | 620,154 | |
| | | | |
During the year ended December 31, 2017, the Fund utilized $1,198,579 of capital loss carryforwards.
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
NOTES TO FINANCIAL STATEMENTS
Franklin VolSmart Allocation VIP Fund (continued)
The tax character of distributions paid during the years ended December 31, 2017 and 2016, was as follows:
| | | | | | | | |
| | | 2017 | | | 2016 | |
Distributions paid from: | | | | | | | | |
Ordinary income | | $ | — | | | $ | 355,325 | |
Long term capital gain | | | — | | | | 123,720 | |
| | | | |
| | $ | — | | | $ | 479,045 | |
| | | | |
At December 31, 2017, the cost of investments, net unrealized appreciation (depreciation) and undistributed ordinary income for income tax purposes were as follows:
| | | | |
Cost of investments | | $ | 163,230,402 | |
| | | | |
Unrealized appreciation | | $ | 27,122,155 | |
Unrealized depreciation | | | (1,999,069 | ) |
| | | | |
Net unrealized appreciation (depreciation) | | $ | 25,123,086 | |
| | | | |
Distributable earnings - undistributed ordinary income . | | $ | 924,882 | |
| | | | |
Differences between income and/or capital gains as determined on a book basis and a tax basis are primarily due to differing treatment of swaps.
6. Investment Transactions
Purchases and sales of investments (excluding short term securities) for the year ended December 31, 2017, aggregated $52,765,395 and $8,975,485, respectively.
7. Other Derivative Information
At December 31, 2017, the Fund’s investments in derivative contracts are reflected in 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 | | | Statement of Assets and
Liabilities Location | | Fair Value | |
Equity contracts | | Unrealized appreciation on OTC swap contracts | | $ | — | | | Unrealized depreciation on OTC swap contracts | | $ | 3,164 | |
| | | | | | | | | | | | |
For the year ended December 31, 2017, the effect of derivative contracts in the Fund’s Statement of Operations was as follows:
| | | | | | | | | | | | |
Derivative Contracts
Not Accounted for
as Hedging Instruments | | Statement of Operations
Location | | Net Realized
Gain (Loss)
for the Year | | | Statement of Operations Location | | Net Change in
Unrealized Appreciation
(Depreciation)
for the Year | |
| | Net realized gain (loss) from: | | | | | | Net change in unrealized appreciation (depreciation) on: | | | | |
Equity contracts | | Swap contracts | | $ | (376,240 | ) | | Swap contracts | | $ | 1,874 | |
| | | | | | | | | | | | |
For the year ended December 31, 2017, the average month end notional amount of swap contracts represented $31,023,077.
See Note 1(c) regarding derivative financial instruments.
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
STATEMENT OF INVESTMENTS (UNAUDITED)
Franklin VolSmart Allocation VIP Fund (continued)
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 $2 billion (Global Credit Facility) which matured on February 9, 2018. 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. Effective February 9, 2018, the Borrowers renewed the Global Credit Facility for a one year term, maturing February 8, 2019, for a total of $2 billion.
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 0.15% based upon the unused portion of the Global Credit Facility. These fees are reflected in other expenses in the Consolidated Statement of Operations. During the year ended December 31, 2017, 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 input levels are not necessarily an indication of the risk or liquidity associated with financial instruments at that level.
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 December 31, 2017, in valuing the Fund’s assets and liabilites carried at fair value, is as follows:
| | | | | | | | | | | | | | | | |
| | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| | | | |
| Assets: | | | | | | | | | | | | | | | | |
Investments in Securities:a | | | | | | | | | | | | | | | | |
Equity Investments | | $ | 95,259,273 | | | $ | — | | | $ | — | | | $ | 95,259,273 | |
Investments in Underlying Funds and Exchange Traded Funds | | | 86,235,759 | | | | — | | | | — | | | | 86,235,759 | |
Short Term Investments | | | 6,861,620 | | | | — | | | | — | | | | 6,861,620 | |
| | | | |
Total Investments in Securities | | $ | 188,356,652 | | | $ | — | | | $ | — | | | $ | 188,356,652 | |
| | | | |
| | | | |
| Liabilities: | | | | | | | | | | | | | | | | |
Other Financial Instruments: | | | | | | | | | | | | | | | | |
Swap Contracts. | | $ | — | | | $ | 3,164 | | | $ | — | | | $ | 3,164 | |
| | | | |
aFor detailed categories, see the accompanying Statement of Investments.
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
NOTES TO FINANCIAL STATEMENTS
Franklin VolSmart Allocation VIP Fund (continued)
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 other than those already disclosed in the financial statements.
Abbreviations
| | | | | | |
| Counterparty | | | | Selected Portfolio |
| | | |
| BZWS | | Barclays Bank PLC | | ADR | | American Depositary Receipt |
| | | |
| | | | EAFE | | Europe, Australia & Far East |
| | | |
| | | | VIX | | Market Volatility Index |
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
Report of Independent Registered Public Accounting Firm
To the Board of Trustees of Franklin Templeton Variable Insurance Products Trust and Shareholders of Franklin VolSmart Allocation VIP Fund
Opinion on the Financial Statements
We have audited the accompanying statement of assets and liabilities, including the statement of investments, of Franklin VolSmart Allocation VIP Fund (the “Fund”) as of December 31, 2017, the related statement of operations for the year ended December 31, 2017, the statement of changes in net assets for each of the two years in the period ended December 31, 2017, including the related notes, and the financial highlights for each of the periods indicated therein (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund as of December 31, 2017, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period ended December 31, 2017 and the financial highlights for each of the periods indicated therein in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Fund’s management. Our responsibility is to express an opinion on the Fund’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our procedures included confirmation of securities owned as of December 31, 2017 by correspondence with the custodian, transfer agent, and brokers; when replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
February 15, 2018
We have served as the auditor of one or more investment companies in the Franklin Templeton Group of Funds since 1948.
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
Index Descriptions
The indexes are unmanaged and include reinvestment of any income or distributions. They do not reflect any fees, expenses or sales charges.
For Russell Indexes: Frank Russell Company is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of Frank Russell Company.
See www.franklintempletondatasources.com for additional data provider information.
Bloomberg Barclays US Aggregate Bond Index is a market capitalization-weighted index representing the US 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.
Bloomberg Barclays US Government Index: Intermediate Component is the intermediate component of the Barclays US Government Index, which includes public obligations of the US Treasury with at least one year to final maturity and publicly issued debt of US government agencies, quasi-federal corporations, and corporate or foreign debt guaranteed by the US government.
Citigroup World Government Bond Index is a market capitalization-weighted index consisting of investment-grade world government bond markets.
Consumer Price Index (CPI) is a commonly used measure of the inflation rate.
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.
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 allocation of assets among different fixed income securities sectors (not primarily in one sector except for defensive purposes), including US and foreign governments, with a significant portion rated below investment grade. For the 12-month period ended 12/31/17, there were 316 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 12-month period ended 12/31/17, there were 75 funds in this category. Lipper calculations do not include contract fees, expenses or sales charges, and may have been different if such charges had been considered.
Lipper VIP General US Government Funds Classification Average is an equally weighted average calculation of performance figures for all funds within the Lipper General US Government Funds classification in the Lipper VIP underlying funds universe. Lipper General US Government Funds invest primarily in US government and agency issues. For the 12-month period ended 12/31/17, there were 56 funds in this category. Lipper calculations do not include contract fees, expenses or sales charges, and may have been different if such charges had been considered.
MSCI 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 All Country World Index (ACWI) ex USA Index captures large- and mid-capitalization representation across 22 of 23 developed markets countries (excluding the US) and 23 emerging markets countries. The index covers approximately 85% of the global equity opportunity set outside the US.
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
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 Frontier Markets Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in frontier markets.
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 2000® Index is market capitalization weighted and measures performance of the 2,000 smallest companies in the Russell 3000® Index, which represent a small amount of the total market capitalization of the Russell 3000® Index.
Russell 2000® Value Index is market capitalization weighted and measures performance of those Russell 2000® Index companies with lower price-to-book ratios and lower forecasted growth values.
Russell 2500TM 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 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 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 represents 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 US equity market performance.
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.
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
Special Meeting of Shareholders
MEETING OF SHAREHOLDERS: OCTOBER 30, 2017
(UNAUDITED)
A Special Meeting of Shareholders of Franklin Templeton Variable Insurance Products Trust was held at the offices of Franklin Templeton Investments, One Franklin Parkway, San Mateo, California on October 30, 2017. The purpose of the meeting was to elect Trustees of Franklin Templeton Variable Insurance Products Trust and to vote to approve an amended fundamental investment restriction regarding investments in commodities for the Fund. At the meeting, (i) the following persons were elected by the shareholders to serve as Trustees of Franklin Templeton Variable Insurance Products Trust: Harris J. Ashton, Terrence J. Checki, Mary C. Choksi, Edith E. Holiday, Gregory E. Johnson, Rupert H. Johnson, Jr., J. Michael Luttig, Larry D. Thompson, and John B. Wilson; and (ii) the proposal to approve an amended fundamental investment restriction regarding investments in commodities was approved by shareholders. No other business was transacted at the meeting.
The results of the voting at the meeting are as follows:
Proposal 1. To elect a Board of Trustees:
| | | | | | | | |
| Name | | For | | | Withheld | |
Harris J. Ashton | | | 1,483,931,005 | | | | 63,700,507 | |
Terrence J. Checki | | | 1,487,851,289 | | | | 59,780,222 | |
Mary C. Choksi | | | 1,487,649,087 | | | | 59,982,424 | |
Edith E. Holiday | | | 1,487,786,345 | | | | 59,845,166 | |
Gregory E. Johnson | | | 1,490,898,162 | | | | 56,733,349 | |
Rupert H. Johnson, Jr | | | 1,485,176,267 | | | | 62,455,244 | |
J. Michael Luttig | | | 1,488,062,993 | | | | 59,568,519 | |
Larry D. Thompson | | | 1,486,098,183 | | | | 61,533,328 | |
John B. Wilson | | | 1,489,011,786 | | | | 58,619,724 | |
Total Trust Shares Outstanding*: 1,598,054,299
Proposal 2. To approve an amended fundamental investment restriction regarding investments in commodities:
Franklin VolSmart Allocation VIP Fund
| | | | |
| | | Shares | |
For | | | 13,979,495 | |
Against | | | 469,722 | |
Abstain | | | 1,491,733 | |
Total Fund Shares Voted | | | 15,940,951 | |
Total Fund Outstanding Shares* | | | 15,940,951 | |
*As of the record date.
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Board Members and Officers
The name, year of birth and address of the officers and board members, as well as their affiliations, positions held with the Trust, principal occupations during at least the past five years and number of US registered portfolios overseen in the Franklin Templeton Investments fund complex, are shown below. Generally, each board member serves until that person’s successor is elected and qualified.
Independent Board Members
| | | | | | | | |
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 |
| | | | |
Harris J. Ashton (1932)
One Franklin Parkway
San Mateo, CA 94403-1906 | | Trustee | | Since 1988 | | 139 | | Bar-S Foods (meat packing company) (1981-2010). |
| | |
| Principal Occupation During at Least the Past 5 Years: | | | | |
| Director of various companies; and formerly, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and President, Chief Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until 1998). |
| | | | |
Terrence J. Checki (1945)
One Franklin Parkway
San Mateo, CA 94403-1906 | | Trustee | | Since October 2017 | | 113 | | Hess Corporation (exploration of oil and gas) (2014-present). |
| | |
| Principal Occupation During at Least the Past 5 Years: | | | | |
| Member of the Council on Foreign Relations (1996-present); Member of the National Committee on U.S.-China Relations (1999-present); member of the Board of Trustees of the Economic Club of New York (2013-present); member of the Board of Trustees of the Foreign Policy Association (2005-present) and member of various other boards of trustees and advisory boards; and formerly, Executive Vice President of the Federal Reserve Bank of New York and Head of its Emerging Markets and Internal Affairs Group and Member of Management Committee (1995-2014); and Visiting Fellow at the Council on Foreign Relations (2014). |
| | | | |
Mary C. Choksi (1950)
One Franklin Parkway
San Mateo, CA 94403-1906 | | Trustee | | Since 2014 | | 139 | | Avis Budget Group Inc. (car rental) (2007-present), Omnicom Group Inc. (advertising and marketing communications services) (2011-present) and White Mountains Insurance Group, Ltd. (holding company) (2017-present) |
| | |
| Principal Occupation During at Least the Past 5 Years: | | | | |
| Director of various companies; and formerly, Founder and Senior Advisor, Strategic Investment Group (investment management group) (2015-2017); Founding Partner and Senior Managing Director, Strategic Investment Group (1987-2015); Founding Partner and Managing Director, Emerging Markets Management LLC (investment management firm) (1987-2011); and Loan Officer/Senior Loan Officer/Senior Pension Investment Officer, World Bank Group (international financial institution) (1977-1987). |
| | | | |
Edith E. Holiday (1952)
One Franklin Parkway
San Mateo, CA 94403-1906 | | Trustee | | Since 2005 | | 139 | | Hess Corporation (exploration of oil and gas) (1993-present), Canadian National Railway (railroad) (2001-present), White Mountains Insurance Group, Ltd. (holding company) (2004-present), Santander Consumer USA Holdings, Inc. (consumer finance) (November 2016), RTI International Metals, Inc. (manufacture and distribution of titanium) (1999-2015) and H.J. Heinz Company (processed foods and allied products) (1994-2013). |
| | |
| Principal Occupation During at Least the Past 5 Years: | | | | |
| Director or Trustee of various companies and trusts; and formerly, Assistant to the President of the United States and Secretary of the Cabinet (1990-1993); General Counsel to the United States Treasury Department (1989-1990); and Counselor to the Secretary and Assistant Secretary for Public Affairs and Public Liaison – United States Treasury Department (1988-1989). |
| | | | |
J. Michael Luttig (1954)
One Franklin Parkway
San Mateo, CA 94403-1906 | | Trustee | | Since 2009 | | 139 | | Boeing Capital Corporation (aircraft financing) (2006-2013). |
| | |
| Principal Occupation During at Least the Past 5 Years: | | | | |
| Executive Vice President, General Counsel and member of the Executive Council, The Boeing Company (aerospace company) (2006-present); and formerly, Federal Appeals Court Judge, U.S. Court of Appeals for the Fourth Circuit (1991-2006). |
| | | | | | | | |
Independent Board Members (continued) | | | | |
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 |
| | | | |
Larry D. Thompson (1945)
One Franklin Parkway
San Mateo, CA 94403-1906 | | Trustee | | Since 2007 | | 139 | | The Southern Company (energy company) (2014-present; previously 2010-2012), Graham Holdings Company (education and media organization) (2011-present) and Cbeyond, Inc. (business communications provider) (2010-2012). |
| | |
| Principal Occupation During at Least the Past 5 Years: | | | | |
| Director of various companies; Counsel, Finch McCranie, LLP (law firm) (2015-present); Independent Compliance Monitor and Auditor, Volkswagen AG (manufacturer of automobiles and commercial vehicles) (2017-present); John A. Sibley Professor of Corporate and Business Law, University of Georgia School of Law (2015; previously 2011-2012); and formerly, Executive Vice President – Government Affairs, General Counsel and Corporate Secretary, PepsiCo, Inc. (consumer products) (2012-2014); Senior Vice President – Government Affairs, General Counsel and Secretary, PepsiCo, Inc. (2004-2011); Senior Fellow of The Brookings Institution (2003-2004); Visiting Professor, (2003-2004); Visiting Professor, University of Georgia School of Law (2004); and Deputy Attorney General, U.S. Department of Justice (2001-2003). |
| | | | |
John B. Wilson (1959)
One Franklin Parkway
San Mateo, CA 94403-1906 | | Lead Independent Trustee | | Trustee since 2007 and Lead Independent Trustee since 2008 | | 113 | | None |
| | |
| Principal Occupation During at Least the Past 5 Years: | | | | |
| President and Founder, Hyannis Port Capital, Inc. (real estate and private equity investing) (2002-present); serves on private and non-profit boards; and formerly, President, Staples International and Head of Global Transformation (office supplies) (2012-2016); Chief Operating Officer and Executive Vice President, Gap, Inc. (retail) (1996-2000); Chief Financial Officer and Executive Vice President – Finance and Strategy, Staples, Inc. (1992-1996); Senior Vice President – Corporate Planning, Northwest Airlines, Inc. (airlines) (1990-1992); and Vice President and Partner, Bain & Company (consulting firm) (1986-1990). |
Interested Board Members and Officers
| | | | | | | | |
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)
One Franklin Parkway
San Mateo, CA 94403-1906 | | Trustee | | Since 2013 | | 153 | | None |
| | |
| Principal Occupation During at Least the Past 5 Years: | | | | |
| Chairman of the Board, Member – Office of the Chairman, Director 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 43 of the investment companies in Franklin Templeton Investments; Vice Chairman, Investment Company Institute; and formerly, President, Franklin Resources, Inc. (1994-2015). |
| | | | |
**Rupert H. Johnson, Jr. (1940)
One Franklin Parkway
San Mateo, CA 94403-1906 | | Chairman of the Board, and Trustee | | Chairman of the Board since 2013, and Trustee since 1988 | | 139 | | 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 41 of the investment companies in Franklin Templeton Investments. |
| | | | |
Alison E. Baur (1964)
One Franklin Parkway
San Mateo, CA 94403-1906 | | Vice President | | Since 2012 | | Not Applicable | | Not Applicable |
| | |
| Principal Occupation During at Least the Past 5 Years: | | | | |
| Deputy General Counsel, Franklin Templeton Investments; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 45 of the investment companies in Franklin Templeton Investments. |
Interested Board Members and Officers (continued)
| | | | | | | | |
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 |
| | | | |
Gaston Gardey (1967) One Franklin Parkway San Mateo, CA 94403-1906 | | Chief Financial Officer, Chief Accounting Officer and Treasurer | | Since 2009 | | Not Applicable | | Not Applicable |
| | | | |
| | | | |
| | | | |
| | | | |
| | |
| Principal Occupation During at Least the Past 5 Years: | | | | |
| Treasurer, U.S. Fund Administration & Reporting, Franklin Templeton Investments; and officer of 28 of the investment companies in Franklin Templeton Investments. |
| | | | |
Aliya S. Gordon (1973) One Franklin Parkway San Mateo, CA 94403-1906 | | Vice President | | Since 2009 | | Not Applicable | | Not Applicable |
| | |
| Principal Occupation During at Least the Past 5 Years: | | | | |
Senior Associate General Counsel, Franklin Templeton Investments; and officer of 45 of the investment companies in Franklin Templeton Investments. |
| | | | |
Steven J. Gray (1955) One Franklin Parkway San Mateo, CA 94403-1906 | | Vice President | | Since 2009 | | Not Applicable | | Not Applicable |
| | |
| Principal Occupation During at Least the Past 5 Years: | | | | |
| Senior Associate General Counsel, Franklin Templeton Investments; Vice President, Franklin Templeton Distributors, Inc. and FASA, LLC; and officer of 45 of the investment companies in Franklin Templeton Investments. |
| | | | |
Matthew T. Hinkle (1971) One Franklin Parkway San Mateo, CA 94403-1906 | | Chief Executive Officer – Finance and Administration | | Since June 2017 | | Not Applicable | | Not Applicable |
| | |
| Principal Occupation During at Least the Past 5 Years: | | | | |
| Senior Vice President, Franklin Templeton Services, LLC; officer of 45 of the investment companies in Franklin Templeton Investments; and formerly, Vice President, Global Tax (2012-April 2017) and Treasurer/Assistant Treasurer, Franklin Templeton Investments (2009-2017). |
| | | | |
Edward B. Jamieson (1948) One Franklin Parkway San Mateo, CA 94403-1906 | | President and Chief Executive Officer – Investment Management | | Since 2010 | | Not Applicable | | Not Applicable |
| | |
| Principal Occupation During at Least the Past 5 Years: | | | | |
President and Director, Franklin Advisers, Inc.; Executive Vice President, Franklin Templeton Institutional, LLC; and officer and/or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 10 of the investment companies in Franklin Templeton Investments. |
| | | | |
Robert Lim (1948) One Franklin Parkway San Mateo, CA 94403-1906 | | Vice President – AML Compliance | | Since 2016 | | Not Applicable | | Not Applicable |
| | |
| Principal Occupation During at Least the Past 5 Years: | | | | |
| Vice President, Franklin Templeton Companies, LLC; Chief Compliance Officer, Franklin Templeton Distributors, Inc. and Franklin Templeton Investor Services, LLC; and officer of 45 of the investment companies in Franklin Templeton Investments. |
|
| | | | |
Kimberly H. Novotny (1972) 300 S.E. 2nd Street Fort Lauderdale, FL 33301-1923 | | Vice President | | Since 2013 | | Not Applicable | | Not Applicable |
| | |
| Principal Occupation During at Least the Past 5 Years: | | | | |
Associate General Counsel, Franklin Templeton Investments; Vice President and Corporate Secretary, Fiduciary Trust International of the South; Vice President, Templeton Investment Counsel, LLC; Assistant Secretary, Franklin Resources, Inc.; and officer of 45 of the investment companies in Franklin Templeton Investments. |
Interested Board Members and Officers (continued)
| | | | | | | | |
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 |
| | | | |
Robert C. Rosselot (1960) 300 S.E. 2nd Street Fort Lauderdale, FL 33301-1923 | | Chief Compliance Officer | | Since 2013 | | Not Applicable | | Not Applicable |
| | | | |
| | | | |
| | |
| Principal Occupation During at Least the Past 5 Years: | | | | |
| Director, Global Compliance, Franklin Templeton Investments; Vice President, Franklin Templeton Companies, LLC; officer of 45 of the investment companies in Franklin Templeton Investments; and formerly, Senior Associate General Counsel, Franklin Templeton Investments (2007-2013); and Secretary and Vice President, Templeton Group of Funds (2004-2013). |
| | | | |
Karen L. Skidmore (1952) One Franklin Parkway San Mateo, CA 94403-1906 | | Vice President and Secretary | | Since 2006 | | Not Applicable | | Not Applicable |
| | | | | | | |
| | | | | | | | |
| | |
| Principal Occupation During at Least the Past 5 Years: | | | | |
| Senior Associate General Counsel, Franklin Templeton Investments; and officer of 45 of the investment companies in Franklin Templeton Investments. |
| | | | |
Navid J. Tofigh (1972) One Franklin Parkway San Mateo, CA 94403-1906 | | Vice President | | Since 2015 | | Not Applicable | | Not Applicable |
| | | | | | | | |
| | | | | | | | |
| | |
| Principal Occupation During at Least the Past 5 Years: | | | | |
| Associate General Counsel, Franklin Templeton Investments; and officer of 45 of the investment companies in Franklin Templeton Investments. |
| | | | |
Craig S. Tyle (1960) One Franklin Parkway San Mateo, CA 94403-1906 | | Vice President | | Since 2005 | | Not Applicable | | Not Applicable |
| | | | | | | | |
| | | | | | | | |
| | |
| Principal Occupation During at Least the Past 5 Years: | | | | |
| General Counsel and Executive Vice President, Franklin Resources, Inc.; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 45 of the investment companies in Franklin Templeton Investments. |
| | | | |
Lori A. Weber (1964) 300 S.E. 2nd Street Fort Lauderdale, FL 33301-1923 | | Vice President | | Since 2011 | | Not Applicable | | Not Applicable |
| | | | | | | | |
| | | | | | | | |
| | |
| Principal Occupation During at Least the Past 5 Years: | | | | |
| Senior Associate General Counsel, Franklin Templeton Investments; Assistant Secretary, Franklin Resources, Inc.; Vice President and Secretary, Templeton Investment Counsel, LLC; and officer of 45 of the investment companies in Franklin Templeton Investments. |
*We base the number of portfolios on each separate series of the US registered investment companies within the Franklin Templeton Investments fund complex. These portfolios have a common investment manager or affiliated investment managers.
**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. (Resources), which is the parent company of the Fund’s investment manager and distributor. Rupert H. Johnson, Jr. is considered to be an interested person of the Fund under the federal securities laws due to his position as officer and director and major shareholder of Resources.
Note 1: Rupert H. Johnson, Jr. is the uncle of Gregory E. Johnson.
Note 2: Officer information is current as of the date of this report. It is possible that after this date, information about officers may change.
The Sarbanes-Oxley Act of 2002 and Rules adopted by the Securities and Exchange Commission require the Fund to disclose whether the Fund’s Audit Committee includes at least one member who is an audit committee financial expert within the meaning of such Act and Rules. The Fund’s Board has determined that there is at least one such financial expert on the Audit Committee and has designated John B. Wilson as its audit committee financial expert. The Board believes that Mr. Wilson qualifies as such an expert in view of his extensive business background and experience, including service as chief financial officer of Staples, Inc. from 1992 to 1996. Mr. Wilson has been a Member and Chairman of the Fund’s Audit Committee since 2007. As a result of such background and experience, the Board believes that Mr. Wilson has acquired an understanding of generally accepted accounting principles and financial statements, the general application of such principles in connection with the accounting estimates, accruals and reserves, and analyzing and evaluating financial statements that present a breadth and level of complexity of accounting issues generally comparable to those of the Fund, as well as an understanding of internal controls and procedures for financial reporting and an understanding of audit committee functions. Mr. Wilson is an independent Board member as that term is defined under the relevant Securities and Exchange Commission Rules and Releases.
The Statement of Additional Information (SAI) includes additional information about the board members and is available, without charge, upon request. Shareholders may call (800) DIAL BEN/342-5236 to request the SAI.
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
Shareholder Information
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 US 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 US 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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|
| Annual Report |
Franklin Templeton Variable Insurance Products Trust |
| Investment Manager |
Franklin Advisers, Inc. |
| Subadvisors |
| K2/D&S Management Co., L.C.C. |
Franklin Advisory Services, 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 help ensure we provide you with quality service, all calls to and from our service areas are monitored and/or recorded.
| | |
| © 2018 Franklin Templeton Investments. All rights reserved. | | VIP5 A 02/18 |
| (a) | The Registrant has adopted a code of ethics that applies to its principal executive officers and principal financial and accounting officer. |
| (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. |
(a) Audit Fees
The aggregate fees paid to the principal accountant for professional services rendered by the principal accountant for the audit of the registrant’s annual financial statements or for services that are normally provided by the principal accountant in connection with statutory and regulatory filings or engagements were $818,062 for the fiscal year ended December 31, 2017 and $937,061 for the fiscal year ended December 31, 2016.
(b) Audit-Related Fees
The aggregate fees paid to the principal accountant for assurance and related services rendered by the principal accountant to the registrant that are reasonably related to the performance of the audit of the registrant’s financial statements and are not reported under paragraph (a) of Item 4 were $0 for the fiscal year ended December 31, 2017 and $4,682 for the fiscal year ended December 31, 2016. The services for which these fees were paid included attestation services.
There were no fees paid to the principal accountant for assurance and related services rendered by the principal accountant to the registrant’s investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant that are reasonably related to the performance of the audit of their financial statements.
(c) Tax Fees
There were no fees paid to the principal accountant for professional services rendered by the principal accountant to the registrant for tax compliance, tax advice and tax planning.
There were no fees paid to the principal accountant for professional services rendered by the principal accountant to the registrant’s investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant for tax compliance, tax advice and tax planning.
(d) All Other Fees
There were no fees paid to the principal accountant for products and services rendered by the principal accountant to the registrant not reported in paragraphs (a)-(c) of Item 4.
The aggregate fees paid to the principal accountant for products and services rendered by the principal accountant to the registrant’s investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant other than services reported in paragraphs (a)-(c) of Item 4 were $14,000 for the fiscal year ended December 31, 2017 and $349,307 for the fiscal year ended December 31, 2016. The services for which these fees were paid included review of materials provided to the fund Board in connection with the investment management contract renewal process and derivatives assessments, review of system processes related to fixed income securities, compliance examination for Investment Advisor Act rule 204-2 and 206-4(2), and benchmarking services in connection with the 2015 ICI TA Survey.
(e) (1) The registrant’s audit committee is directly responsible for approving the services to be provided by the auditors, including:
(i) pre-approval of all audit and audit related services;
(ii) pre-approval of all non-audit related services to be provided to the Fund by the auditors;
(iii) pre-approval of all non-audit related services to be provided to the registrant by the auditors to the registrant’s investment adviser or to any entity that controls, is controlled by or is under common control with the registrant’s investment adviser and that provides ongoing services to the registrant where the non-audit services relate directly to the operations or financial reporting of the registrant; and
(iv) establishment by the audit committee, if deemed necessary or appropriate, as an alternative to committee pre-approval of services to be provided by the auditors, as required by paragraphs (ii) and (iii) above, of policies and procedures to permit such services to be pre-approved by other means, such as through establishment of guidelines or by action of a designated member or members of the committee; provided the policies and procedures are detailed as to the particular service and the committee is informed of each service and such policies and procedures do not include delegation of audit committee responsibilities, as contemplated under the Securities Exchange Act of 1934, to management; subject, in the case of (ii) through (iv), to any waivers, exceptions or exemptions that may be available under applicable law or rules.
(e) (2) None of the services provided to the registrant described in paragraphs (b)-(d) of Item 4 were approved by the audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of regulation S-X.
(f) No disclosures are required by this Item 4(f).
(g) The aggregate non-audit fees paid to the principal accountant for services rendered by the principal accountant to the registrant and the registrant’s investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant were $14,000 for the fiscal year ended December 31, 2017 and $353,989 for the fiscal year ended December 31, 2016.
(h) The registrant’s audit committee of the board has considered whether the provision of non-audit services that were rendered to the registrant’s investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with maintaining the principal accountant’s independence.
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Item 5. | | Audit Committee of Listed Registrants. | | N/A |
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| Item 6. | | Schedule of Investments. | | N/A |
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Item 7. | | Disclosure of Proxy Voting Policies and Procedures for Closed- End Management Investment Companies. | | N/A |
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Item 8. | | Portfolio Managers of Closed-End Management Investment Companies. | | N/A |
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Item 9. | | Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers. | | N/A |
Item 10. Submission of Matters to a Vote of Security Holders.
There have been no changes to the procedures by which shareholders may recommend nominees to the Registrant’s Board of Trustees that would require disclosure herein.
Item 11. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures. The Registrant maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Registrant’s filings under the Securities Exchange Act of 1934 and the Investment Company Act of 1940 is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities
and Exchange Commission. Such information is accumulated and communicated to the Registrant’s management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. The Registrant’s management, including the principal executive officer and the principal financial officer, recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
Within 90 days prior to the filing date of this Shareholder Report on Form N-CSR, the Registrant had carried out an evaluation, under the supervision and with the participation of the Registrant’s management, including the Registrant’s principal executive officer and the Registrant’s principal financial officer, of the effectiveness of the design and operation of the Registrant’s disclosure controls and procedures. Based on such evaluation, the Registrant’s principal executive officer and principal financial officer concluded that the Registrant’s disclosure controls and procedures are effective.
(b) Changes in Internal Controls. There have been no 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.
(a) (1) Code of Ethics
(a) (2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Matthew T. Hinkle, 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 Matthew T. Hinkle, Chief Executive Officer - Finance and Administration, and Gaston Gardey, Chief Financial Officer and Chief Accounting Officer
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Franklin Templeton Variable Insurance Products Trust
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| |
| By | | /s/ MATTHEW T. HINKLE |
| | Matthew T. Hinkle |
| | Chief Executive Officer – |
| | Finance and Administration |
Date February 26, 2018 |
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/ MATTHEW T. HINKLE |
| | Matthew T. Hinkle |
| | Chief Executive Officer – |
| | Finance and Administration |
| Date February 26, 2018 |
| | |
| By | | /s/ GASTON GARDEY |
| | Gaston Gardey |
| | Chief Financial Officer and |
| | Chief Accounting Officer |
Date February 26, 2018 |
