United States
Securities and Exchange Commission
Washington, D.C. 20549
Form N-CSR
Certified Shareholder Report of Registered Management Investment Companies
811-8042
(Investment Company Act File Number)
Federated Insurance Series
_______________________________________________________________
(Exact Name of Registrant as Specified in Charter)
Federated Investors Funds
4000 Ericsson Drive
Warrendale, Pennsylvania 15086-7561
(Address of Principal Executive Offices)
(412) 288-1900
(Registrant's Telephone Number)
John W. McGonigle, Esquire
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, Pennsylvania 15222-3779
(Name and Address of Agent for Service)
(Notices should be sent to the Agent for Service)
Date of Fiscal Year End: 12/31/2011
Date of Reporting Period: 12/31/2011
Item 1. Reports to Stockholders
Annual Shareholder Report | ||
December 31, 2011 | ||
Share Class |
Primary |
Service |
Federated Capital Appreciation Fund II
A Portfolio of Federated Insurance Series
Dear Valued Shareholder,
I am pleased to present the Annual Shareholder Report for your fund covering the period from January 1, 2011 through December 31, 2011. This report includes Management's Discussion of Fund Performance, a complete listing of your fund's holdings, performance information and financial statements along with other important fund information.
In addition, our website, FederatedInvestors.com, offers easy access to Federated resources that include timely fund updates, economic and market insights from our investment strategists, and financial planning tools. We invite you to register to take full advantage of its capabilities.
Thank you for investing with Federated. I hope you find this information useful and look forward to keeping you informed.
Sincerely,
John B. Fisher, President
Management's Discussion of Fund Performance (unaudited)
The Fund's total return, based on net asset value, for the 12-month reporting period ended December 31, 2011, was -5.29% for the Fund's Primary Shares and -5.51% for the Fund's Service Shares. The total return of the Standard & Poor's 500 Index (S&P 500),1 a broad-based securities market index and the Fund's benchmark, rose 2.11% during the same period. The Fund's total return for the fiscal year reflected actual cash flows, transaction costs and other expenses which were not reflected in the total return of the S&P 500.
The following discussion will focus on the performance of the Fund's Primary Shares.
Stocks, as measured by the S&P 500, had a modestly positive 12-month period, with all of the return coming from dividends. While volatile, equity market performance during the fiscal year was dominated by the market's preference for a combination of stable growth and high dividend paying stocks. Utilities and Consumer Staples were the strongest performing sectors within the S&P 500, rising 20.0% and 14.0%, respectively. Health Care (up 12.7%) and Telecommunication Services (up 6.3%) were also strong performers within the S&P 500. The Financials and Materials sectors had poor performance within the S&P 500.
The biggest investment issues during the period centered on the U.S credit downgrade, the European sovereign debt crisis and the euro destabilization. This economic uncertainty, combined with continued domestic economic malaise, drove the market's preferences for yield and stability.
The Fund underperformed the S&P 500 market during the 12-month reporting period primarily due to a conservative portfolio posturing within most sectors relative to the S&P 500. The Fund's positioning was driven by the anticipation of a slow economic recovery in the United States. Two key measures for monitoring the strength of the economic recovery – employment growth and housing – continued to disappoint throughout the year. Approximately 60% of the relative underperformance was driven by stock selection. The rest of the Fund's underperformance verses its benchmark index was attributable to defensive sector positioning and modest cash balances. This was particularly true during the very strong rally seen during October 2011, as the market was able to look past the European debt crisis and projections for much slower global growth.
The weakest relative returns were in the Information Technology, Energy and Materials sectors. Favorable stock selection within the Health Care sector provided some positive performance during the period.
The top five positive contributors to returns were Humana, Pharmasset Inc., Exxon Mobil, Apple Inc. and Pfizer. The largest negative contributors were Arch Coal, JPMorgan Chase, MetLife Inc., BMC Software and Lear Corp.
1 | The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The index is unmanaged, and it is not possible to invest directly in an index. |
FUND PERFORMANCE AND GROWTH OF A $10,000 INVESTMENT
The Average Annual Total Return table below shows returns for each class averaged over the stated periods. The graphs below illustrate the hypothetical investment of $10,0001 in the Federated Capital Appreciation Fund II (the “Fund”) from December 31, 2001 to December 31, 2011, for Primary Shares and from April 30, 2002 (start of performance) to December 31, 2011, for Sevice Shares, compared to the Standard & Poor's 500 Index (S&P 500)2 and the Lipper Variable Underlying Funds Large Cap Core Average (LLCCA).2
Average Annual Total Returns for the Period Ended 12/31/2011
Share Class | 1 Year | 5 Years | 10 Years | Start of Performance* |
Primary Shares | -5.29% | -1.16% | 1.37% | N/A |
Service Shares | -5.51% | -1.38% | N/A | 2.06% |
* | The Fund's Service Shares start of performance date was April 30, 2002. |
Performance data quoted represents past performance which is no guarantee of future results. Investment return and principal value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Performance of a variable investment option changes over time and current performance may be lower or higher than what is stated. For current to the most recent month end performance, contact your insurance company. The performance information presented does not include the charges and expenses imposed by the insurance company under the variable insurance product contract. The inclusion of such charges would lower performance. Please refer to the variable insurance product prospectus for a complete listing of these expenses. Fund shares are available exclusively as a funding vehicle for life insurance companies writing variable life insurance policies and variable annuity contracts. Variable investment options are not obligations of or guaranteed by any bank and are not federally insured.
Annual Shareholder Report
Growth of a $10,000 Investment – PRIMARY SHARESFederated Capital Appreciation Fund II - Primary Shares | C000026771 | S&P 500 | LLCCA |
12/31/2001 | 10,000 | 10,000 | 10,000 |
12/31/2002 | 7,704 | 7,790 | 7,726 |
12/31/2003 | 9,547 | 10,025 | 9,781 |
12/31/2004 | 10,253 | 11,115 | 10,664 |
12/31/2005 | 10,449 | 11,662 | 11,274 |
12/31/2006 | 12,143 | 13,504 | 12,775 |
12/31/2007 | 13,343 | 14,246 | 14,037 |
12/31/2008 | 9,425 | 8,975 | 8,815 |
12/31/2009 | 10,695 | 11,350 | 11,282 |
12/31/2010 | 12,093 | 13,060 | 12,799 |
12/31/2011 | 11,453 | 13,336 | 12,670 |
Growth of a $10,000 Investment – SERVICE SHARES
Federated Capital Appreciation Fund II - Service Shares | C000026772 | S&P 500 | LLCCA |
4/30/2002 | 10,000 | 10,000 | 10,000 |
12/31/2002 | 8,358 | 8,271 | 8,210 |
12/31/2003 | 10,354 | 10,644 | 10,394 |
12/31/2004 | 11,090 | 11,802 | 11,332 |
12/31/2005 | 11,279 | 12,383 | 11,981 |
12/31/2006 | 13,058 | 14,336 | 13,575 |
12/31/2007 | 14,317 | 15,123 | 14,884 |
12/31/2008 | 10,070 | 9,528 | 9,347 |
12/31/2009 | 11,406 | 12,049 | 11,962 |
12/31/2010 | 12,889 | 13,864 | 13,571 |
12/31/2011 | 12,179 | 14,157 | 13,434 |
1 | The Fund's performance assumes the reinvestment of all dividends and distributions. The S&P 500 and the LLCCA have been adjusted to reflect reinvestment of dividends on securities in the index or average. |
2 | The S&P 500 is not adjusted to reflect sales charges, expenses or other fees that the SEC requires to be reflected in the Fund's performance. The LLCCA represents the average of the total returns reported by all of the funds serving as underlying investment options for variable insurance contracts designated by Lipper, Inc. as falling into the category, and is not adjusted to reflect sales charges. However, these total returns are reported net of expenses and other fees the SEC requires to be reflected in a fund's performance. The index is unmanaged and, unlike the Fund, is not affected by cash flows. It is not possible to invest directly in an index or an average. |
Portfolio of Investments Summary Table (unaudited)
At December 31, 2011, the Fund's sector composition1 was as follows:
Sector Composition | Percentage of Total Net Assets |
Information Technology | 18.2% |
Energy | 13.1% |
Financials | 12.9% |
Consumer Staples | 12.0% |
Health Care | 12.0% |
Industrials | 11.0% |
Consumer Discretionary | 10.4% |
Materials | 3.7% |
Utilities | 3.2% |
Telecommunication Services | 2.2% |
Cash Equivalents2 | 1.3% |
Other Assets and Liabilities — Net3,4 | 0.0% |
TOTAL | 100.0% |
1 | Except for Cash Equivalents and Other Assets and Liabilities, sector classifications are based upon, and individual portfolio securities are assigned to, the classifications of the Global Industry Classification Standard (GICS) except that the Adviser assigns a classification to securities not classified by the GICS and to securities for which the Adviser does not have access to the classification made by the GICS. |
2 | Cash Equivalents include any investments in money market mutual funds and/or overnight repurchase agreements. |
3 | Represents less than 0.1%. |
4 | Assets, other than investments in securities, less liabilities. See Statement of Assets and Liabilities. |
Shares or Principal Amount | Value |
COMMON STOCKS – 98.7% |
Consumer Discretionary – 10.4% |
33,700 | 1 | DIRECTV Group, Inc., Class A | 1,441,012 |
70,757 | 1 | Discovery Communications, Inc. | 2,898,914 |
32,150 | Expedia, Inc. | 932,993 |
48,300 | Foot Locker, Inc. | 1,151,472 |
48,700 | 1 | Las Vegas Sands Corp. | 2,080,951 |
78,900 | Macy's, Inc. | 2,539,002 |
94,700 | Mattel, Inc. | 2,628,872 |
29,667 | McDonald's Corp. | 2,976,490 |
15,200 | Nike, Inc., Class B | 1,464,824 |
32,150 | 1 | TripAdvisor, Inc. | 810,502 |
TOTAL | 18,925,032 |
Consumer Staples – 12.0% |
83,300 | Altria Group, Inc. | 2,469,845 |
51,500 | CVS Caremark Corp. | 2,100,170 |
25,500 | Church and Dwight, Inc. | 1,166,880 |
84,700 | ConAgra Foods, Inc. | 2,236,080 |
24,900 | Kimberly-Clark Corp. | 1,831,644 |
41,485 | Nestle S.A. | 2,384,957 |
33,100 | Procter & Gamble Co. | 2,208,101 |
77,000 | Reynolds American, Inc. | 3,189,340 |
30,404 | The Coca-Cola Co. | 2,127,368 |
32,400 | Wal-Mart Stores, Inc. | 1,936,224 |
TOTAL | 21,650,609 |
Energy – 13.1% |
43,800 | 1 | Alpha Natural Resources, Inc. | 894,834 |
30,100 | 1 | Cameron International Corp. | 1,480,619 |
31,780 | Chevron Corp. | 3,381,392 |
48,357 | ConocoPhillips | 3,523,775 |
50,900 | Exxon Mobil Corp. | 4,314,284 |
120,900 | Marathon Oil Corp. | 3,538,743 |
38,000 | National-Oilwell, Inc. | 2,583,620 |
11,300 | Paramount Resources Ltd. | 471,411 |
31,000 | Schlumberger Ltd. | 2,117,610 |
37,800 | Transocean Ltd. | 1,451,142 |
TOTAL | 23,757,430 |
Financials – 12.9% |
81,000 | Citigroup, Inc. | 2,131,110 |
100,600 | Discover Financial Services | 2,414,400 |
98,200 | Fifth Third Bancorp | 1,249,104 |
76,685 | JPMorgan Chase & Co. | 2,549,776 |
78,200 | Marsh & McLennan Cos., Inc. | 2,472,684 |
87,105 | MetLife, Inc. | 2,715,934 |
46,600 | PNC Financial Services Group | 2,687,422 |
26,600 | Simon Property Group, Inc. | 3,429,804 |
132,155 | Wells Fargo & Co. | 3,642,192 |
TOTAL | 23,292,426 |
Shares or Principal Amount | Value |
Health Care – 12.0% |
26,100 | Allergan, Inc. | 2,290,014 |
45,800 | Cardinal Health, Inc. | 1,859,938 |
25,550 | 1 | Celgene Corp. | 1,727,180 |
141,600 | 1 | Elan Corp. PLC, ADR | 1,945,584 |
20,400 | 1 | Express Scripts, Inc., Class A | 911,676 |
46,600 | 1 | Gilead Sciences, Inc. | 1,907,338 |
42,700 | Humana, Inc. | 3,740,947 |
61,100 | Merck & Co., Inc. | 2,303,470 |
145,300 | Pfizer, Inc. | 3,144,292 |
38,600 | UnitedHealth Group, Inc. | 1,956,248 |
TOTAL | 21,786,687 |
Industrials – 11.0% |
253,836 | General Electric Co. | 4,546,203 |
41,289 | Honeywell International, Inc. | 2,244,057 |
27,100 | Parker-Hannifin Corp. | 2,066,375 |
44,300 | Raytheon Co. | 2,143,234 |
47,300 | Trinity Industries, Inc. | 1,421,838 |
27,540 | Union Pacific Corp. | 2,917,587 |
25,600 | United Parcel Service, Inc. | 1,873,664 |
37,607 | United Technologies Corp. | 2,748,696 |
TOTAL | 19,961,654 |
Information Technology – 18.2% |
34,095 | Accenture PLC | 1,814,877 |
9,010 | 1 | Apple, Inc. | 3,649,050 |
45,700 | 1 | BMC Software, Inc. | 1,498,046 |
37,400 | 1 | Broadcom Corp., Class A | 1,098,064 |
120,200 | Cisco Systems, Inc. | 2,173,216 |
63,333 | 1 | EMC Corp. | 1,364,193 |
81,000 | Hewlett-Packard Co. | 2,086,560 |
27,400 | KLA-Tencor Corp. | 1,322,050 |
206,138 | Microsoft Corp. | 5,351,342 |
35,768 | Motorola, Inc. | 1,655,701 |
130,400 | 1 | ON Semiconductor Corp. | 1,006,688 |
92,619 | Oracle Corp. | 2,375,677 |
32,400 | Qualcomm, Inc. | 1,772,280 |
159,702 | 1 | Symantec Corp. | 2,499,336 |
100,200 | 1 | Teradyne, Inc. | 1,365,726 |
22,400 | 1 | VMware, Inc., Class A | 1,863,456 |
TOTAL | 32,896,262 |
Materials – 3.7% |
18,555 | Cliffs Natural Resources, Inc. | 1,156,904 |
27,100 | Du Pont (E.I.) de Nemours & Co. | 1,240,638 |
32,900 | Eastman Chemical Co. | 1,285,074 |
40,200 | Newmont Mining Corp. | 2,412,402 |
49,600 | 1 | Stillwater Mining Co. | 518,816 |
TOTAL | 6,613,834 |
Telecommunication Services – 2.2% |
100,327 | Verizon Communications, Inc. | 4,025,119 |
Shares or Principal Amount | Value |
Utilities – 3.2% |
135,100 | CMS Energy Corp. | 2,983,008 |
65,000 | FirstEnergy Corp. | 2,879,500 |
TOTAL | 5,862,508 |
TOTAL COMMON STOCKS (IDENTIFIED COST $165,779,517) | 178,771,561 |
Repurchase Agreement – 1.3% |
$2,268,000 | Interest in $4,100,000,000 joint repurchase agreement 0.06%, dated 12/30/2011 under which Bank of America, N.A. will repurchase securities provided as collateral for $4,100,027,333 on 1/3/2012. The securities provided as collateral at the end of the period were U.S. Government Agency securities with various maturities to 4/15/2040 and the market value of those underlying securities was $4,218,795,473. (AT COST) | 2,268,000 |
TOTAL INVESTMENTS — 100.0% (IDENTIFIED COST $168,047,517)2 | 181,039,561 |
OTHER ASSETS AND LIABILITIES - NET — 0.0%3 | 56,678 |
TOTAL NET ASSETS — 100% | $181,096,239 |
At December 31, 2011, the Fund had the following outstanding foreign exchange contracts:
Settlement Date | Foreign Currency Units to Deliver | In Exchange For | Unrealized Depreciation |
Contracts Sold: | |||
1/4/2012 | 161,925 Canadian Dollar | $159,206 | $(261) |
Unrealized Depreciation on Foreign Exchange Contracts is included in “Other Assets and Liabilities — Net.”
1 | Non-income producing security. |
2 | The cost of investments for federal tax purposes amounts to $171,388,406. |
3 | Assets, other than investments in securities, less liabilities. See Statement of Assets and Liabilities. |
Note: The categories of investments are shown as a percentage of total net assets at December 31, 2011.
Annual Shareholder Report
Various inputs are used in determining the value of the Fund's investments. These inputs are summarized in the three broad levels listed below:Level 1 — quoted prices in active markets for identical securities, including investment companies with daily net asset values, if applicable. Level 2 — other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.). Also includes securities valued at amortized cost. Level 3 — significant unobservable inputs (including the Fund's own assumptions in determining the fair value of investments).The inputs or methodology used for valuing securities are not an indication of the risk associated with investing in those securities.
The following is a summary of the inputs used, as of December 31, 2011, in valuing the Fund's assets carried at fair value:
Valuation Inputs |
Level 1 — Quoted Prices and Investments in Mutual Funds | Level 2 — Other Significant Observable Inputs | Level 3 — Significant Unobservable Inputs | Total |
Equity Securities: |
Common Stock |
Domestic | $170,400,857 | $ — | $ — | $170,400,857 |
International | 8,370,7041 | — | — | 8,370,704 |
Repurchase Agreement | — | 2,268,000 | — | 2,268,000 |
TOTAL SECURITIES | $178,771,561 | $2,268,000 | $ — | $181,039,561 |
OTHER FINANCIAL INSTRUMENTS* | $(261) | $ — | $ — | $(261) |
1 | Includes $1,801,317 of securities transferred from Level 2 to Level 1 because quoted prices on equity securities traded principally in foreign markets were utilized to value securities for which fair value factors were previously applied to account for significant post market close activity. Transfers shown represent the value of the securities at the beginning of the period. |
* | Other financial instruments include foreign exchange contracts. |
The following acronym is used throughout this portfolio:
ADR | — American Depositary Receipt |
See Notes which are an integral part of the Financial Statements
Annual Shareholder ReportFinancial Highlights – Primary Shares
(For a Share Outstanding Throughout Each Period)
Year Ended December 31 | 2011 | 2010 | 2009 | 2008 | 2007 |
Net Asset Value, Beginning of Period | $6.40 | $5.72 | $5.10 | $7.39 | $6.78 |
Income From Investment Operations: |
Net investment income | 0.04 | 0.04 | 0.051 | 0.071 | 0.061 |
Net realized and unrealized gain (loss) on investments and foreign currency transactions | (0.38) | 0.70 | 0.63 | (2.20) | 0.61 |
TOTAL FROM INVESTMENT OPERATIONS | (0.34) | 0.74 | 0.68 | (2.13) | 0.67 |
Less Distributions: |
Distributions from net investment income | (0.04) | (0.06) | (0.06) | (0.02) | (0.06) |
Distributions from net realized gain on investments and foreign currency transactions | — | — | — | (0.14) | — |
TOTAL DISTRIBUTIONS | (0.04) | (0.06) | (0.06) | (0.16) | (0.06) |
Net Asset Value, End of Period | $6.02 | $6.40 | $5.72 | $5.10 | $7.39 |
Total Return2 | (5.29)% | 13.07% | 13.48% | (29.37)% | 9.88% |
Ratios to Average Net Assets: |
Net expenses | 1.13%3 | 1.18%3 | 1.18%3 | 1.18%3 | 1.18%3 |
Net investment income | 0.86% | 0.67% | 0.97% | 1.03% | 0.85% |
Expense waiver/reimbursement4 | 0.03% | 0.17% | 0.23% | 0.14% | 0.78% |
Supplemental Data: |
Net assets, end of period (000 omitted) | $176,315 | $72,320 | $60,961 | $79,706 | $81,727 |
Portfolio turnover | 229% | 260% | 274% | 307% | 198% |
1 | Per share numbers have been calculated using the average shares method. |
2 | Based on net asset value. Total returns do not reflect any additional fees or expenses that may be imposed by separate accounts of insurance companies or in connection with any variable annuity or variable life insurance contract. |
3 | The net expense ratio is calculated without reduction for fees paid indirectly for expense offset arrangements. The net expense ratios are 1.13%, 1.18%, 1.12%, 1.17% and 1.18% for the years ended December 31, 2011, 2010, 2009, 2008 and 2007, respectively, after taking into account these expense reductions. |
4 | This expense decrease is reflected in both the net expense and the net investment income ratios shown above. |
See Notes which are an integral part of the Financial Statements
Annual Shareholder ReportFinancial Highlights – Service Shares
(For a Share Outstanding Throughout Each Period)
Year Ended December 31 | 2011 | 2010 | 2009 | 2008 | 2007 |
Net Asset Value, Beginning of Period | $6.40 | $5.71 | $5.08 | $7.37 | $6.76 |
Income From Investment Operations: |
Net investment income | 0.04 | 0.02 | 0.031 | 0.041 | 0.041 |
Net realized and unrealized gain (loss) on investments and foreign currency transactions | (0.39) | 0.72 | 0.64 | (2.19) | 0.61 |
TOTAL FROM INVESTMENT OPERATIONS | (0.35) | 0.74 | 0.67 | (2.15) | 0.65 |
Less Distributions: |
Distributions from net investment income | (0.03) | (0.05) | (0.04) | (0.00)2 | (0.04) |
Distributions from net realized gain on investments and foreign currency transactions | — | — | — | (0.14) | — |
TOTAL DISTRIBUTIONS | (0.03) | (0.05) | (0.04) | (0.14) | (0.04) |
Net Asset Value, End of Period | $6.02 | $6.40 | $5.71 | $5.08 | $7.37 |
Total Return3 | (5.51)% | 13.01% | 13.27% | (29.67)% | 9.64% |
Ratios to Average Net Assets: |
Net expenses | 1.40%4 | 1.43%4 | 1.43%4 | 1.43%4 | 1.43%4 |
Net investment income | 0.42% | 0.45% | 0.68% | 0.67% | 0.60% |
Expense waiver/reimbursement5 | 0.03% | 0.18% | 0.23% | 0.14% | 0.78% |
Supplemental Data: |
Net assets, end of period (000 omitted) | $4,781 | $7,296 | $4,756 | $4,826 | $9,368 |
Portfolio turnover | 229% | 260% | 274% | 307% | 198% |
1 | Per share numbers have been calculated using the average shares method. |
2 | Represents less than $0.01. |
3 | Based on net asset value. Total returns do not reflect any additional fees or expenses that may be imposed by separate accounts of insurance companies or in connection with any variable annuity or variable life insurance contract. |
4 | The net expense ratio is calculated without reduction for fees paid indirectly for expense offset arrangements. The net expense ratios are 1.40%, 1.43%, 1.37%, 1.42% and 1.42% for the years ended December 31, 2011, 2010, 2009, 2008 and 2007, respectively, after taking into account these expense reductions. |
5 | This expense decrease is reflected in both the net expense and the net investment income ratios shown above. |
See Notes which are an integral part of the Financial Statements
Annual Shareholder ReportStatement of Assets and Liabilities
Assets: |
Total investments in securities, at value (identified cost $168,047,517) | $181,039,561 |
Cash | 267 |
Cash denominated in foreign currencies (identified cost $59) | 55 |
Income receivable | 317,597 |
Receivable for investments sold | 247,726 |
Receivable for shares sold | 6,936 |
TOTAL ASSETS | 181,612,142 |
Liabilities: |
Payable for investments purchased | $278,474 |
Payable for shares redeemed | 189,077 |
Unrealized depreciation on foreign exchange contracts | 261 |
Payable for Directors'/Trustees' fees | 173 |
Payable for auditing fees | 25,000 |
Payable for distribution services fee (Note 5) | 1,012 |
Accrued expenses | 21,906 |
TOTAL LIABILITIES | 515,903 |
Net assets for 30,074,948 shares outstanding | $181,096,239 |
Net Assets Consist of: |
Paid-in capital | $177,758,720 |
Net unrealized appreciation of investments and translation of assets and liabilities in foreign currency | 12,992,045 |
Accumulated net realized loss on investments and foreign currency transactions | (10,659,612) |
Undistributed net investment income | 1,005,086 |
TOTAL NET ASSETS | $181,096,239 |
Net Asset Value, Offering Price and Redemption Proceeds Per Share |
Primary Shares: |
$176,315,028 ÷ 29,281,117 shares outstanding, no par value, unlimited shares authorized | $6.02 |
Service Shares: |
$4,781,211 ÷ 793,831 shares outstanding, no par value, unlimited shares authorized | $6.02 |
See Notes which are an integral part of the Financial Statements
Annual Shareholder ReportInvestment Income: |
Dividends (including net of foreign taxes withheld of $11,080) | $2,471,058 |
Interest | 4,451 |
TOTAL INCOME | 2,475,509 |
Expenses: |
Investment adviser fee (Note 5) | $1,061,233 |
Administrative fee (Note 5) | 190,000 |
Custodian fees | 20,673 |
Transfer and dividend disbursing agent fees and expenses | 31,898 |
Directors'/Trustees' fees | 2,660 |
Auditing fees | 25,000 |
Legal fees | 7,009 |
Portfolio accounting fees | 68,110 |
Distribution services fee (Note 5) | 15,274 |
Printing and postage | 33,540 |
Insurance premiums | 4,124 |
Miscellaneous | 4,044 |
TOTAL EXPENSES | 1,463,565 |
Waiver and Reduction: |
Waiver of administrative fee (Note 5) | $(33,751) |
Fees paid indirectly from directed brokerage arrangements (Note 6) | (4,421) |
TOTAL WAIVER AND REDUCTION | (38,172) |
Net expenses | 1,425,393 |
Net investment income | 1,050,116 |
Realized and Unrealized Gain (Loss) on Investments and Foreign Currency Transactions: |
Net realized gain/loss on investments and foreign currency transactions | 17,865,350 |
Net change in unrealized appreciation of investments and translation of assets and liabilities in foreign currency | (31,063,483) |
Net realized and unrealized loss on investments and foreign currency transactions | (13,198,133) |
Change in net assets resulting from operations | $(12,148,017) |
See Notes which are an integral part of the Financial Statements
Annual Shareholder ReportStatement of Changes in Net Assets
Year Ended December 31 | 2011 | 2010 |
Increase (Decrease) in Net Assets |
Operations: |
Net investment income | $1,050,116 | $509,420 |
Net realized gain on investments and foreign currency transactions | 17,865,350 | 7,317,586 |
Net change in unrealized appreciation/depreciation of investments and translation of assets and liabilities in foreign currency | (31,063,483) | 1,324,437 |
CHANGE IN NET ASSETS RESULTING FROM OPERATIONS | (12,148,017) | 9,151,443 |
Distributions to Shareholders: |
Distributions from net investment income |
Primary Shares | (476,434) | (645,353) |
Service Shares | (31,715) | (38,009) |
CHANGE IN NET ASSETS RESULTING FROM DISTRIBUTIONS TO SHAREHOLDERS | (508,149) | (683,362) |
Share Transactions: |
Proceeds from sale of shares | 2,722,697 | 4,540,270 |
Proceeds from shares issued in connection with the tax-free transfer of assets from EquiTrust Variable Insurance Series Fund, Blue Chip Portfolio | 77,833,019 | — |
Proceeds from shares issued in connection with the tax-free transfer of assets from EquiTrust Variable Insurance Series Fund, Value Growth Portfolio | 57,130,618 | — |
Proceeds from shares issued in connection with the tax-free transfer of assets from Federated Clover Value Fund II | — | 67,693,209 |
Net asset value of shares issued to shareholders in payment of distributions declared | 508,149 | 683,362 |
Cost of shares redeemed | (24,058,632) | (67,485,369) |
CHANGE IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS | 114,135,851 | 5,431,472 |
Change in net assets | 101,479,685 | 13,899,553 |
Net Assets: |
Beginning of period | 79,616,554 | 65,717,001 |
End of period (including undistributed net investment income of $1,005,086 and $507,687, respectively) | $181,096,239 | $79,616,554 |
See Notes which are an integral part of the Financial Statements
Annual Shareholder ReportFederated Insurance Series (the “Trust”) is registered under the Investment Company Act of 1940, as amended (the “Act”), as an open-end management investment company. The Trust consists of seven portfolios. The financial statements included herein are only those of Federated Capital Appreciation Fund II (the “Fund”), a diversified portfolio. The financial statements of the other portfolios are presented separately. The assets of each portfolio are segregated and a shareholder's interest is limited to the portfolio in which shares are held. Each portfolio pays its own expenses. The Fund offers two classes of shares: Primary Shares and Service Shares. All shares of the Fund have equal rights with respect to voting, except on class-specific matters. Fund shares are available exclusively as a funding vehicle for life insurance companies writing variable life insurance policies and variable annuity contracts. The investment objective of the Fund is capital appreciation.
On March 12, 2010, the Fund acquired all of the net assets of Federated Clover Value Fund II (the “Acquired Fund”), an open-end investment company in a tax-free reorganization in exchange for shares of the Fund, pursuant to a plan of reorganization approved by the Acquired Fund's shareholders on February 19, 2010. The purpose of the transaction was to combine two portfolios with comparable investment objectives and strategies. For financial reporting purposes, assets received and shares issued by the Fund were recorded at fair value; however, the cost basis of the investments received from the Acquired Fund was carried forward to align ongoing reporting of the Fund's realized and unrealized gains and losses with amounts distributable to shareholders for tax purposes.
Assuming the acquisition had been completed on January 1, 2010, the beginning of the annual reporting period of the Fund, the Fund's pro forma results of operations of for the year ended December 31, 2010, are as follows:
Net investment income1 | $589,809 |
Net realized and unrealized gain on investments | $11,034,391 |
Net increase in net assets resulting from operations | $11,624,200 |
1 | Net investment income includes $24,070 of pro forma additional expenses. |
Because the combined investment portfolios have been managed as a single integrated portfolio since the acquisition was completed, it is not practicable to separate the amounts of revenue and earnings of the Acquired Fund that has been included in the Fund's Statement of Operations since March 12, 2010. The Fund received net assets from the Acquired Fund as the result of the tax-free reorganization as follows:
Shares of the Fund Issued | Acquired Fund Net Assets Received | Unrealized Appreciation1 | Net Assets of the Fund Immediately Prior to Combination | Net Assets of the Fund Immediately After Combination |
11,511,806 | $67,693,209 | $4,031,199 | $66,741,830 | $134,435,039 |
1 | Unrealized Appreciation is included in the Acquired Fund Net Assets Received amount shown above. |
On July 15, 2011, the Fund acquired all of the net assets of EquiTrust Variable Insurance Series Fund, Blue Chip Portfolio and EquiTrust Variable Insurance Series Fund, Value Growth Portfolio (the “Acquired Funds”), open-end investment companies in a tax-free reorganization in exchange for shares of the Fund, pursuant to a plan of reorganization approved by the Acquired Funds' shareholders on July 15, 2011. The purpose of the transaction was to combine three portfolios with comparable investment objectives and strategies. For financial reporting purposes, assets received and shares issued by the Fund were recorded at fair value; however, the cost basis of the investments received from the Acquired Funds was carried forward to align ongoing reporting of the Fund's realized and unrealized gains and losses with amounts distributable to shareholders for tax purposes.
Assuming the acquisition had been completed on January 1, 2011, the beginning of the annual reporting period of the Fund, the Fund's pro forma results of operations for the year ended December 31, 2011, are as follows:
Net investment income* | $1,784,692 |
Net realized and unrealized loss on investments | $(6,184,781) |
Net decrease in net assets resulting from operations | $(4,400,089) |
* | Net investment income includes $493,933 of pro forma additional expenses. |
Because the combined investment portfolios have been managed as a single integrated portfolio since the acquisition was completed, it is not practicable to separate the amounts of revenue and earnings of the Acquired Fund that has been included in the Fund's Statement of Operations as of December 31, 2011.
For every one share of EquiTrust Variable Insurance Series Fund, Blue Chip Portfolio Initial Class and Service Class shares exchanged, a shareholder received 5.744 and 5.983 shares, respectively, of Federated Capital Appreciation Fund II Primary Shares. For every one share of EquiTrust Variable Insurance Series Fund, Value Growth Portfolio Initial Class and Service Class shares exchanged, a shareholder received 2.215 and 2.268 shares, respectively, of Federated Capital Appreciation Fund II Primary Shares.
Annual Shareholder Report
On July 15, 2011, the Fund received assets from EquiTrust Variable Series Fund, Blue Chip Portfolio as a result of a tax-free reorganization, as follows:Shares of the Fund Issued | EquiTrust Variable Insurance Series Fund, Blue Chip Portfolio Net Assets Received | Unrealized Appreciation1 | Net Assets of the Fund Immediately Prior to Combination | Net Assets of the Fund Immediately After Combination2 |
12,142,196 | $77,833,019 | $19,687,835 | $71,968,489 | $206,932,126 |
1 | Unrealized Appreciation is included in the EquiTrust Variable Insurance Series Fund, Blue Chip Portfolio Net Assets Received amount shown above. |
2 | Net Assets of the Fund Immediately After Combination includes the net assets received from EquiTrust Variable Insurance Series Fund, Value Growth Portfolio which was also reorganized into the Fund on July 15, 2011. |
On July 15, 2011, the Fund received assets from EquiTrust Variable Series Fund, Value Growth Portfolio as a result of a tax-free reorganization, as follows:
Shares of the Fund Issued | EquiTrust Variable Insurance Series Fund, Value Growth Portfolio Net Assets Received | Unrealized Appreciation1 | Net Assets of the Fund Immediately Prior to Combination | Net Assets of the Fund Immediately After Combination2 |
8,911,520 | $57,130,618 | $10,292,448 | $71,968,489 | $206,932,126 |
1 | Unrealized Appreciation is included in the EquiTrust Variable Insurance Series Fund, Value Growth Portolio Net Assets Received amount shown above. |
2 | Net Assets of the Fund Immediately After Combination includes the net assets received from EquiTrust Variable Insurance Series Fund, Blue Chip Portfolio which was also reorganized into the Fund on July 15, 2011. |
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. These policies are in conformity with U.S. generally accepted accounting principles (GAAP).
Investment Valuation
In calculating its net asset value (NAV), the Fund generally values investments as follows:
- Equity securities listed on an exchange or traded through a regulated market system are valued at their last reported sale price or official closing price in their principal exchange or market.
- Fixed-income securities acquired with remaining maturities greater than 60 days are fair valued using price evaluations provided by a pricing service approved by the Board of Trustees (the “Trustees”).
- Fixed-income securities acquired with remaining maturities of 60 days or less are valued at their cost (adjusted for the accretion of any discount or amortization of any premium), which approximates market value.
- Derivative contracts listed on exchanges are valued at their reported settlement or closing price.
- Over-the-counter (OTC) derivative contracts are fair valued using price evaluations provided by a pricing service approved by the Trustees.
- Shares of other mutual funds are valued based upon their reported NAVs.
- For securities that are fair valued in accordance with procedures established by and under the general supervision of the Trustees, certain factors may be considered such as: the purchase price of the security, information obtained by contacting the issuer, analysis of the issuer's financial statements or other available documents, fundamental analytical data, the nature and duration of restrictions on disposition, the movement of the market in which the security is normally traded and public trading in similar securities of the issuer or comparable issuers.
If the Fund cannot obtain a price or price evaluation from a pricing service for an investment, the Fund may attempt to value the investment based upon the mean of bid and asked quotations or fair value the investment based on price evaluations, from one or more dealers. If any price, quotation, price evaluation or other pricing source is not readily available when the NAV is calculated, the Fund uses the fair value of the investment determined in accordance with the procedures described below. There can be no assurance that the Fund could purchase or sell an investment at the price used to calculate the Fund's NAV.
Fair Valuation and Significant Events Procedures
The Trustees have authorized the use of pricing services to provide evaluations of the current fair value of certain investments for purposes of calculating the NAV. Factors considered by pricing services in evaluating an investment include the yields or prices of investments of comparable quality, coupon, maturity, call rights and other potential prepayments, terms and type, reported transactions, indications as to values from dealers and general market conditions. Some pricing services provide a single price evaluation reflecting the bid-side of the market for an investment (a “bid” evaluation). Other pricing services offer both bid evaluations and price evaluations indicative of a price between the prices bid and asked for Annual Shareholder Report
the investment (a “mid” evaluation). The Fund normally uses bid evaluations for U.S. Treasury and Agency securities, mortgage-backed securities and municipal securities. The Fund normally uses mid evaluations for other types of fixed-income securities and OTC derivative contracts. In the event that market quotations and price evaluations are not available for an investment, the fair value of the investment is determined in accordance with procedures adopted by the Trustees.The Trustees also have adopted procedures requiring an investment to be priced at its fair value whenever the Adviser determines that a significant event affecting the value of the investment has occurred between the time as of which the price of the investment would otherwise be determined and the time as of which the NAV is computed. An event is considered significant if there is both an affirmative expectation that the investment's value will change in response to the event and a reasonable basis for quantifying the resulting change in value. Examples of significant events that may occur after the close of the principal market on which a security is traded, or after the time of a price evaluation provided by a pricing service or a dealer, include:
- With respect to securities traded in foreign markets, significant trends in U.S. equity markets or in the trading of foreign securities index futures or options contracts;
- With respect to price evaluations of fixed-income securities determined before the close of regular trading on the NYSE, actions by the Federal Reserve Open Market Committee and other significant trends in U.S. fixed-income markets;
- Political or other developments affecting the economy or markets in which an issuer conducts its operations or its securities are traded; and
- Announcements concerning matters such as acquisitions, recapitalizations, litigation developments, a natural disaster affecting the issuer's operations or regulatory changes or market developments affecting the issuer's industry.
The Trustees have approved the use of a pricing service to determine the fair value of equity securities traded principally in foreign markets when the Adviser determines that there has been a significant trend in the U.S. equity markets or in index futures trading. For other significant events, the Fund may seek to obtain more current quotations or price evaluations from alternative pricing sources. If a reliable alternative pricing source is not available, the Fund will determine the fair value of the investment using another method approved by the Trustees.
Repurchase Agreements
The Fund may invest in repurchase agreements for short-term liquidity purposes. It is the policy of the Fund to require the other party to a repurchase agreement to transfer to the Fund's custodian or sub-custodian eligible securities or cash with a market value (after transaction costs) at least equal to the repurchase price to be paid under the repurchase agreement. The eligible securities are transferred to accounts with the custodian or sub-custodian in which the Fund holds a “securities entitlement” and exercises “control” as those terms are defined in the Uniform Commercial Code. The Fund has established procedures for monitoring the market value of the transferred securities and requiring the transfer of additional eligible securities if necessary to equal at least the repurchase price. These procedures also allow the other party to require securities to be transferred from the account to the extent that their market value exceeds the repurchase price or in exchange for other eligible securities of equivalent market value.
The insolvency of the other party or other failure to repurchase the securities may delay the disposition of the underlying securities or cause the Fund to receive less than the full repurchase price. Under the terms of the repurchase agreement, any amounts received by the Fund in excess of the repurchase price and related transaction costs must be remitted to the other party.
The Fund may enter into repurchase agreements in which eligible securities are transferred into joint trading accounts maintained by the custodian or sub-custodian for investment companies and other clients advised by the Fund's Adviser and its affiliates. The Fund will participate on a pro rata basis with the other investment companies and clients in its share of the securities transferred under such repurchase agreements and in its share of proceeds from any repurchase or other disposition of such securities.
Investment Income, Gains and Losses, Expenses and Distributions
Investment transactions are accounted for on a trade-date basis. Realized gains and losses from investment transactions are recorded on an identified-cost basis. Interest income and expenses are accrued daily. Dividend income and distributions to shareholders are recorded on the ex-dividend date. Foreign dividends are recorded on the ex-dividend date or when the Fund is informed of the ex-dividend date. Distributions of net investment income are declared and paid annually. Non-cash dividends included in dividend income, if any, are recorded at fair value. Investment income, realized and unrealized gains and losses, and certain fund-level expenses are allocated to each class based on relative average daily net assets, except that Primary Shares and Service Shares may bear distribution services fees unique to those classes.
Dividends are declared separately for each class. No class has preferential dividend rights; differences in per share dividend rates are generally due to differences in separate class expenses.
Premium and Discount Amortization
All premiums and discounts on fixed-income securities are amortized/accreted using the effective interest rate method.
Federal Taxes
It is the Fund's policy to comply with the Subchapter M provision of the Internal Revenue Code (the “Code”) and to distribute to shareholders each year substantially all of its income. Accordingly, no provision for federal income tax is necessary. As of and during the year ended December 31, 2011, the Fund did not have a liability for any uncertain tax positions. The Fund recognizes interest and penalties, if any, related to tax liabilities as income tax expense in the Statement of Operations. As of December 31, 2011, tax years 2008 through 2011 remain subject to examination by the Fund's major tax jurisdictions, which include the United States of America and the Commonwealth of Massachusetts.
The Fund may be subject to taxes imposed by governments of countries in which it invests. Such taxes are generally based on either income or gains earned or repatriated. The Fund accrues and applies such taxes to net investment income, net realized gains and net unrealized gains as income and/or gains are earned.
Annual Shareholder Report
When-Issued and Delayed Delivery TransactionsThe Fund may engage in when-issued or delayed delivery transactions. The Fund records when-issued securities on the trade date and maintains security positions such that sufficient liquid assets will be available to make payment for the securities purchased. Securities purchased on a when-issued or delayed delivery basis are marked to market daily and begin earning interest on the settlement date. Losses may occur on these transactions due to changes in market conditions or the failure of counterparties to perform under the contract.
Foreign Exchange Contracts
The Fund enters into foreign exchange contracts for the delayed delivery of securities or foreign currency exchange transactions. The Fund enters into foreign exchange contracts to protect assets against adverse changes in foreign currency exchange rates or exchange control regulations. Purchased contracts are used to acquire exposure to foreign currencies, whereas, contracts to sell are used to hedge the Fund's securities against currency fluctuations. Risks may arise upon entering into these transactions from the potential inability of counterparties to meet the terms of their commitments and from unanticipated movements in security prices or foreign exchange rates. The foreign exchange contracts are adjusted by the daily exchange rate of the underlying currency and any gains or losses are recorded for financial statement purposes as unrealized until the settlement date.
Foreign exchange contracts outstanding at period end are listed after the Fund's Portfolio of Investments.
The average value at settlement date payable and receivable of foreign exchange contracts purchased and sold by the Fund throughout the period was $30 and $0, respectively. This is based on the contracts held as of each month-end throughout the fiscal period.
Foreign Currency Translation
The accounting records of the Fund are maintained in U.S. dollars. All assets and liabilities denominated in foreign currencies (FCs) are translated into U.S. dollars based on the rates of exchange of such currencies against U.S. dollars on the date of valuation. Purchases and sales of securities, income and expenses are translated at the rate of exchange quoted on the respective date that such transactions are recorded. The Fund does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in market prices of securities held. Such fluctuations are included with the net realized and unrealized gain or loss from investments.
Reported net realized foreign exchange gains or losses arise from sales of portfolio securities, sales and maturities of short-term securities, sales of FCs, currency gains or losses realized between the trade and settlement dates on securities transactions, the difference between the amounts of dividends, interest and foreign withholding taxes recorded on the Fund's books, and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in the value of assets and liabilities other than investments in securities at fiscal year end, resulting from changes in the exchange rate.
Additional Disclosure Related to Derivative Instruments
Fair Value of Derivative Instruments | ||||
Liability | ||||
Statement of Assets and Liabilities Location | Fair Value | |||
Derivatives not accounted for as hedging instruments under ASC Topic 815 | ||||
Foreign exchange contracts | Unrealized depreciation on foreign exchange contracts | $261 |
The Effect of Derivative Instruments on the Statement of Operations for the Year Ended December 31, 2011
Amount of Realized Gain or (Loss) on Derivatives Recognized in Income | |
Forward Currency Contracts | |
Foreign exchange contracts | $(10,584) |
Change in Unrealized Appreciation or (Depreciation) on Derivatives Recognized in Income | |
Forward Currency Contracts | |
Foreign exchange contracts | $(261) |
Other
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts of assets, liabilities, expenses and revenues reported in the financial statements. Actual results could differ from those estimated.
Annual Shareholder Report
3. SHARES OF BENEFICIAL INTERESTThe following tables summarize share activity:
Year Ended December 31 | 2011 | 2010 | |
Primary Shares: | Shares | Amount | Shares | Amount |
Shares sold | 380,601 | $2,372,424 | 610,915 | $3,548,340 |
Proceeds from shares issued in connection with the tax-free transfer of assets from Equitrust Variable Insurance Series Fund, Blue Chip Portfolio | 12,142,196 | 77,833,019 | — | — |
Proceeds from shares issued in connection with the tax-free transfer of assets from Equitrust Variable Insurance Series Fund, Value Growth Portfolio | 8,911,520 | 57,130,618 | — | — |
Proceeds from shares issued in connection with the tax-free transfer of assets from Federated Clover Value Fund II | — | — | 10,976,714 | 64,541,563 |
Shares issued to shareholders in payment of distributions declared | 73,980 | 476,434 | 110,505 | 645,353 |
Shares redeemed | (3,524,623) | (21,593,620) | (11,065,928) | (65,162,127) |
NET CHANGE RESULTING FROM PRIMARY SHARE TRANSACTIONS | 17,983,674 | $116,218,875 | 632,206 | $3,573,129 |
Year Ended December 31 | 2011 | 2010 | |
Service Shares: | Shares | Amount | Shares | Amount |
Shares sold | 55,443 | $350,273 | 168,616 | $991,930 |
Proceeds from shares issued in connection with the tax-free transfer of assets from Federated Clover Value Fund II | — | — | 535,092 | 3,151,646 |
Shares issued to shareholders in payment of distributions declared | 4,917 | 31,715 | 6,508 | 38,009 |
Shares redeemed | (405,827) | (2,465,012) | (403,391) | (2,323,242) |
NET CHANGE RESULTING FROM SERVICE SHARE TRANSACTIONS | (345,467) | $(2,083,024) | 306,825 | $1,858,343 |
NET CHANGE RESULTING FROM TOTAL FUND SHARE TRANSACTIONS | 17,638,207 | $114,135,851 | 939,031 | $5,431,472 |
The timing and character of income and capital gain distributions are determined in accordance with income tax regulations, which may differ from GAAP. These differences are due in part to differing treatments for foreign currency transactions, acquired capital loss carryforwards and regulatory settlement proceeds.
For the year ended December 31, 2011, permanent differences identified and reclassified among the components of net assets were as follows:
Increase (Decrease) | ||
Paid-In Capital | Undistributed Net Investment Income (Loss) | Accumulated Net Realized Gain (Loss) |
$(36,908,630) | $(44,568) | $36,953,198 |
Net investment income (loss), net realized gains (losses) and net assets were not affected by this reclassification.
The tax character of distributions as reported on the Statement of Changes in Net Assets for the years ended December 31, 2011 and 2010, was as follows:
2011 | 2010 |
Ordinary income | $508,149 | $683,362 |
As of December 31, 2011, the components of distributable earnings on a tax basis were as follows:
Undistributed ordinary income | $1,005,086 |
Undistributed long-term capital gain | $10,414,168 |
Net unrealized appreciation | $9,651,155 |
Capital loss carryforwards | $(17,732,890) |
The difference between book-basis and tax-basis net unrealized appreciation/depreciation is attributable to differing treatments for the deferral of losses on wash sales.
At December 31, 2011, the cost of investments for federal tax purposes was $171,388,406. The net unrealized appreciation of investments for federal tax purposes excluding any unrealized appreciation/depreciation resulting from changes in foreign currency exchange rates and outstanding foreign currency commitments was $9,651,155. This consists of net unrealized appreciation from investments for those securities having an excess of value over cost of $15,880,745 and net unrealized depreciation from investments for those securities having an excess of cost over value of $6,229,590.
Annual Shareholder Report
At December 31, 2011, the Fund had a capital loss carryforward of $17,732,890 which will reduce the Fund's taxable income arising from future net realized gains on investments, if any, to the extent permitted by the Code, thereby reducing the amount of distributions to shareholders which would otherwise be necessary to relieve the Fund of any liability for federal income tax. Pursuant to the Code, a net capital loss incurred in taxable years beginning on or before December 22, 2010 is characterized as short-term and may be carried forward for a maximum of eight tax years (“Carryforward Limit”), whereas a net capital loss incurred in taxable years beginning after December 22, 2010 retains its character as either short-term or long-term, does not expire and is required to be utilized prior to the losses which have a Carryforward Limit.The following schedule summarizes the Fund's short-term and long-term capital loss carryforwards and expiration year:
Expiration Year | Short-term | Long-term | Total |
2016 | $15,473,225 | NA | $15,473,225 |
2017 | $2,259,665 | NA | $2,259,665 |
As a result of the tax-free transfer of assets from Federated Clover Value Fund II, Equitrust Variable Insurance Series, Blue Chip Portfolio and Equitrust Variable Insurance Series, Value Growth Portfolio, certain capital loss carryforwards listed above may be limited.
The Fund used capital loss carryforwards of $9,922,360 to offset taxable capital gains realized during the year ended December 31, 2011.
5. INVESTMENT ADVISER FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Investment Adviser Fee
Federated Equity Management Company of Pennsylvania is the Fund's investment adviser (the “Adviser”). The advisory agreement between the Fund and the Adviser provides for an annual fee equal to 0.85% of the Fund's average daily net assets. Subject to the terms described in the Expense Limitation note, the Adviser may voluntarily choose to waive any portion of its fee.
Administrative Fee
Federated Administrative Services (FAS), under the Administrative Services Agreement, provides the Fund with administrative personnel and services. The fee paid to FAS is based on the average aggregate daily net assets of certain Federated funds as specified below:
Administrative Fee | Average Aggregate Daily Net Assets of the Federated Funds |
0.150% | on the first $5 billion |
0.125% | on the next $5 billion |
0.100% | on the next $10 billion |
0.075% | on assets in excess of $20 billion |
The administrative fee received during any fiscal year shall be at least $150,000 per portfolio and $40,000 per each additional class of Shares. Subject to the terms described in the Expense Limitation note, FAS may voluntarily choose to waive any portion of its fee. For the year ended December 31, 2011, FAS waived $33,751 of its fee. The net fee paid to FAS was 0.125% of average daily net assets of the Fund.
Distribution Services Fee
The Fund has adopted a Distribution Plan (the “Plan”) pursuant to Rule 12b-1 under the Act. Under the terms of the Plan, the Fund will compensate Federated Securities Corp. (FSC), the principal distributor, from the daily net assets of the Fund's Primary Shares and Service Shares to finance activities intended to result in the sale of these shares. The Plan provides that the Fund may incur distribution expenses at the following percentages of average daily net assets annually, to compensate FSC:
Share Class Name | Percentage of Average Daily Net Assets of Class |
Primary Shares | 0.25% |
Service Shares | 0.25% |
Subject to the terms described in the Expense Limitation note, FSC may voluntarily choose to waive any portion of its fee. For the year ended December 31, 2011, distribution services fees for the Fund were as follows:
Distribution Services Fees Incurred |
Service Shares | $15,274 |
When FSC receives fees, it may pay some or all of them to financial intermediaries whose customers purchase shares. For the year ended December 31, 2011, FSC did not retain any fees paid by the Fund. For the year ended December 31, 2011, the Fund's Primary Shares did not incur a distribution services fee; however it may begin to incur this fee upon approval of the Trustees.
Annual Shareholder Report
Expense LimitationThe Adviser and its affiliates (which may include FSC and FAS) have voluntarily agreed to waive their fees and/or reimburse expenses so that the total annual fund operating expenses (as shown in the financial highlights) paid by the Fund's Primary Shares and Service Shares (after the voluntary waivers and/or reimbursements) will not exceed 1.18% and 1.43% (the “Fee Limit”), respectively, up to but not including the later of (the “Termination Date”): (a) June 1, 2012, with respect to Primary Shares and May 1, 2012 with respect to Service Shares; or (b) the date of the Fund's next effective Prospectus. While the Adviser and its affiliates currently do not anticipate terminating or increasing these arrangements prior to the Termination Date, these arrangements may only be terminated or the Fee Limit increased prior to the Termination Date with the agreement of the Trustees.
Interfund Transactions
During the year ended December 31, 2011, the Fund engaged in purchase and sale transactions with funds that have a common investment adviser (or affiliated investment advisers), common Directors/Trustees, and/or common Officers. These purchase and sale transactions complied with Rule 17a-7 under the Act and amounted to $519,936 and $3,947,100, respectively.
General
Certain Officers and Trustees of the Fund are Officers and Directors or Trustees of the above companies.
The Fund directs portfolio trades to a broker that in turn pays a portion of the Fund's operating expenses. For the year ended December 31, 2011, the Fund's expenses were reduced by $4,421 under these arrangements.
Purchases and sales of investments, excluding long-term U.S. government securities and short-term obligations, for the year ended December 31, 2011, were as follows:
Purchases | $279,472,270 |
Sales | $291,595,161 |
The Fund participates in a $100,000,000 unsecured, uncommitted revolving line of credit (LOC) agreement with PNC Bank. The LOC was made available for extraordinary or emergency purposes, primarily for financing redemption payments. Borrowings are charged interest at a rate offered to the Fund by PNC Bank at the time of the borrowing. As of December 31, 2011, there were no outstanding loans. During the year ended December 31, 2011, the Fund did not utilize the LOC.
Pursuant to an Exemptive Order issued by the Securities and Exchange Commission, the Fund, along with other funds advised by subsidiaries of Federated Investors, Inc., may participate in an interfund lending program. This program provides an alternative credit facility allowing the Fund to borrow from other participating affiliated funds. As of December 31, 2011, there were no outstanding loans. During the year ended December 31, 2011, the program was not utilized.
10. RECENT ACCOUNTING PRONOUNCEMENTS
In April 2011, the Financial Accounting Standards Board (FASB) released Accounting Standards Update (ASU) No. 2011-03, “Reconsideration of Effective Control for Repurchase Agreements.” This ASU amends FASB Accounting Standards Codification (ASC) Topic 860, “Transfers and Servicing” ; specifically the criteria required to determine whether a repurchase agreement and similar agreements should be accounted for as sales of financial assets or secured borrowings with commitments. This ASU is effective for fiscal years and interim periods beginning after December 15, 2011. Management has concluded that the adoption of ASU No. 2011-03 is not expected to have a material impact on the Fund's financial statements and the accompanying notes, net assets or results of operations.
In addition, in May 2011, FASB released ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” This ASU amends FASB ASC Topic 820, “Fair Value Measurement,” to establish common requirements for measuring fair value and for disclosing information about fair value measurements in accordance with GAAP. This ASU is effective for fiscal years and interim periods beginning after December 15, 2011. Management has concluded that the adoption of ASU No. 2011-04 is not expected to have a material impact on the Fund's financial statements and the accompanying notes.
11. FEDERAL TAX INFORMATION (UNAUDITED)
Of the ordinary income distributions made by the Fund during the year ended December 31, 2011, 100% qualify for the dividend received deduction available to corporate shareholders.
Annual Shareholder ReportReport of Independent Registered Public Accounting Firm
TO THE BOARD OF TRUSTEES OF FEDERATED INSURANCE SERIES AND SHAREHOLDERS OF FEDERATED CAPITAL APPRECIATION FUND ii:
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of the Federated Capital Appreciation Fund II (the “Fund”), a portfolio of Federated Insurance Series, as of December 31, 2011, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2011, by correspondence with the custodian, transfer agent, and brokers or by other appropriate auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Federated Capital Appreciation Fund II as of December 31, 2011, and the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended, in conformity with U.S. generally accepted accounting principles.
Boston, Massachusetts
February 13, 2012
Shareholder Expense Example (unaudited)
As a shareholder of the Fund, you incur ongoing costs, including management fees and to the extent applicable, distribution (12b-1) fees and/or shareholder services fees and other Fund expenses. This Example is intended to help you to understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other funds used as variable investment options. It is based on an investment of $1,000 invested at the beginning of the period and held for the entire period from July 1, 2011 to December 31, 2011.
The first section of the table below provides information about actual account values and actual expenses. You may use the information in this section, together with the amount you invested, to estimate the expenses that you incurred over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first section under the heading entitled “Expenses Paid During Period” to estimate the expenses attributable to your investment during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second section of the table below provides information 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. Thus, you should not use the hypothetical account values and expenses to estimate the actual ending account balance or your expenses for the period. Rather, these figures are required to be provided to enable you to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only. Therefore, the second section of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds.
Beginning Account Value 7/1/2011 | Ending Account Value 12/31/2011 | Expenses Paid During Period1 |
Actual: |
Primary Shares | $1,000 | $936.20 | $5.42 |
Service Shares | $1,000 | $934.80 | $6.63 |
Hypothetical (assuming a 5% return before expenses): |
Primary Shares | $1,000 | $1,019.61 | $5.65 |
Service Shares | $1,000 | $1,018.35 | $6.92 |
1 | Expenses are equal to the Fund's annualized net expense ratios, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half-year period). The expenses shown in the table do not include the charges and expenses imposed by the insurance company under the variable insurance product contract. Please refer to the variable insurance product prospectus for a complete listing of these expenses. The annualized net expense ratios are as follows: |
Primary Shares | 1.11% |
Service Shares | 1.36% |
Board of Trustees and Trust Officers
The Board of Trustees is responsible for managing the Trust's business affairs and for exercising all the Trust's powers except those reserved for the shareholders. The following tables give information about each Trustee and the senior officers of the Fund. Where required, the tables separately list Trustees who are “interested persons” of the Fund (i.e., “Interested” Trustees) and those who are not (i.e., “Independent” Trustees). Unless otherwise noted, the address of each person listed is Federated Investors Tower, 1001 Liberty Avenue, Pittsburgh, PA 15222. The address of all Independent Trustees listed is 4000 Ericsson Drive, Warrendale, PA 15086-7561; Attention: Mutual Fund Board. As of December 31, 2011, the Trust comprised seven portfolio(s), and the Federated Fund Family consisted of 43 investment companies (comprising 134 portfolios). Unless otherwise noted, each Officer is elected annually. Unless otherwise noted, each Trustee oversees all portfolios in the Federated Fund Family and serves for an indefinite term. The Fund's Statement of Additional Information includes additional information about Trust Trustees and is available, without charge and upon request, by calling 1-800-341-7400.
Interested Trustees Background
Name Birth Date Positions Held with Trust Date Service Began | Principal Occupation(s) for Past Five Years, Other Directorships Held and Previous Position(s) |
John F. Donahue* Birth Date: July 28, 1924 Trustee Began serving: October 1993 | Principal Occupations: Director or Trustee of the Federated Fund Family; Chairman and Director, Federated Investors, Inc.; Chairman of the Federated Fund Family's Executive Committee. Previous Positions: Chairman of the Federated Fund Family; Trustee, Federated Investment Management Company; Chairman and Director, Federated Investment Counseling. |
J. Christopher Donahue* Birth Date: April 11, 1949 Trustee Began serving: October 1993 | Principal Occupations: Principal Executive Officer and President of the Federated Fund Family; Director or Trustee of some of the Funds in the Federated Fund Family; President, Chief Executive Officer and Director, Federated Investors, Inc.; Chairman and Trustee, Federated Investment Management Company; Trustee, Federated Investment Counseling; Chairman and Director, Federated Global Investment Management Corp.; Chairman, Federated Equity Management Company of Pennsylvania and Passport Research, Ltd. (investment advisory subsidiary of Federated); Trustee, Federated Shareholder Services Company; Director, Federated Services Company. Previous Positions: President, Federated Investment Counseling; President and Chief Executive Officer, Federated Investment Management Company, Federated Global Investment Management Corp. and Passport Research, Ltd. |
* | Family relationships and reasons for “interested” status: John F. Donahue is the father of J. Christopher Donahue; both are “interested” due to their beneficial ownership of shares of Federated Investors, Inc. and the positions they hold with Federated and its subsidiaries. |
INDEPENDENT Trustees Background
Name Birth Date Positions Held with Trust Date Service Began | Principal Occupation(s) for Past Five Years, Other Directorships Held, Previous Position(s) and Qualifications |
Nicholas P. Constantakis, CPA Birth Date: September 3, 1939 Trustee Began serving: February 1998 | Principal Occupation: Director or Trustee of the Federated Fund Family. Other Directorship Held: Director, Chairman of the Audit Committee, and member of the Compensation Committee, Michael Baker Corporation (architecture, engineering and construction services). Previous Position: Partner, Andersen Worldwide SC. Qualifications: Public accounting and director experience. |
John F. Cunningham Birth Date: March 5, 1943 Trustee Began serving: November 1999 | Principal Occupation: Director or Trustee of the Federated Fund Family. Other Directorships Held: Chairman, President and Chief Executive Officer, Cunningham & Co., Inc. (strategic business consulting); Trustee Associate, Boston College. Previous Positions: Director, Redgate Communications and EMC Corporation (computer storage systems); Chairman of the Board and Chief Executive Officer, Computer Consoles, Inc.; President and Chief Operating Officer, Wang Laboratories; Director, First National Bank of Boston; Director, Apollo Computer, Inc. Qualifications: Business management and director experience. |
Name Birth Date Positions Held with Trust Date Service Began | Principal Occupation(s) for Past Five Years, Other Directorships Held, Previous Position(s) and Qualifications |
Maureen Lally-Green Birth Date: July 5, 1949 Trustee Began serving: August 2009 | Principal Occupations: Director or Trustee of the Federated Fund Family; Director, Office of Church Relations, Diocese of Pittsburgh; Adjunct Professor of Law, Duquesne University School of Law. Other Directorships Held: Director, Auberle; Trustee, St. Francis University; Director, Ireland Institute of Pittsburgh; Director, UPMC Mercy Hospital; Regent, St. Vincent Seminary; Director, Epilepsy Foundation of Western and Central Pennsylvania; Director, Saint Thomas More Society, Allegheny County. Previous Position: Pennsylvania Superior Court Judge. Qualifications: Legal and director experience. |
Peter E. Madden Birth Date: March 16, 1942 Trustee Began serving: October 1993 | Principal Occupation: Director or Trustee, and Chairman of the Board of Directors or Trustees, of the Federated Fund Family. Previous Positions: Representative, Commonwealth of Massachusetts General Court; President, Chief Operating Officer and Director, State Street Bank and Trust Company and State Street Corporation (retired); Director, VISA USA and VISA International; Chairman and Director, Massachusetts Bankers Association; Director, Depository Trust Corporation; Director, The Boston Stock Exchange. Qualifications: Business management, mutual fund services and director experience. |
Charles F. Mansfield, Jr. Birth Date: April 10, 1945 Trustee Began serving: November 1999 | Principal Occupations: Director or Trustee of the Federated Fund Family; Management Consultant. Previous Positions: Chief Executive Officer, PBTC International Bank; Partner, Arthur Young & Company (now Ernst & Young LLP); Chief Financial Officer of Retail Banking Sector, Chase Manhattan Bank; Senior Vice President, HSBC Bank USA (formerly Marine Midland Bank); Vice President, Citibank; Assistant Professor of Banking and Finance, Frank G. Zarb School of Business, Hofstra University; Executive Vice President, DVC Group, Inc. (marketing, communications and technology). Qualifications: Banking, business management, education and director experience. |
Thomas M. O'Neill Birth Date: June 14, 1951 Trustee Began serving: October 2006 | Principal Occupations: Director or Trustee, Vice Chairman of the Audit Committee of the Federated Fund Family; Sole Proprietor, Navigator Management Company (investment and strategic consulting). Other Directorships Held: Board of Overseers, Children's Hospital of Boston; Visiting Committee on Athletics, Harvard College; Board of Directors, Medicines for Humanity; Board of Directors, The Golisano Children's Museum of Naples, Florida. Previous Positions: Chief Executive Officer and President, Managing Director and Chief Investment Officer, Fleet Investment Advisors; President and Chief Executive Officer, Aeltus Investment Management, Inc.; General Partner, Hellman, Jordan Management Co., Boston, MA; Chief Investment Officer, The Putnam Companies, Boston, MA; Credit Analyst and Lending Officer, Fleet Bank; Director and Consultant, EZE Castle Software (investment order management software); Director, Midway Pacific (lumber). Qualifications: Business management, mutual fund, director and investment experience. |
John S. Walsh Birth Date: November 28, 1957 Trustee Began serving: January 1999 | Principal Occupations: Director or Trustee, Chairman of the Audit Committee of the Federated Fund Family; President and Director, Heat Wagon, Inc. (manufacturer of construction temporary heaters); President and Director, Manufacturers Products, Inc. (distributor of portable construction heaters); President, Portable Heater Parts, a division of Manufacturers Products, Inc. Previous Position: Vice President, Walsh & Kelly, Inc. Qualifications: Business management and director experience. |
Name Birth Date Address Positions Held with Trust Date Service Began | Principal Occupation(s) for Past Five Years and Previous Position(s) |
John W. McGonigle Birth Date: October 26, 1938 EXECUTIVE VICE PRESIDENT AND SECRETARY Began serving: September 1993 | Principal Occupations: Executive Vice President and Secretary of the Federated Fund Family; Vice Chairman, Executive Vice President, Secretary and Director, Federated Investors, Inc. Previous Positions: Trustee, Federated Investment Management Company and Federated Investment Counseling; Director, Federated Global Investment Management Corp., Federated Services Company and Federated Securities Corp. |
Richard A. Novak Birth Date: December 25, 1963 Treasurer Began serving: January 2006 | Principal Occupations: Principal Financial Officer and Treasurer of the Federated Fund Family; Senior Vice President, Federated Administrative Services; Financial and Operations Principal for Federated Securities Corp., Edgewood Services, Inc. and Southpointe Distribution Services, Inc. Previous Positions: Controller of Federated Investors, Inc.; Vice President, Finance of Federated Services Company; held various financial management positions within The Mercy Hospital of Pittsburgh; Auditor, Arthur Andersen & Co. |
Name Birth Date Address Positions Held with Trust Date Service Began | Principal Occupation(s) for Past Five Years and Previous Position(s) |
Richard B. Fisher Birth Date: May 17, 1923 Vice President Began serving: September 1993 | Principal Occupations: Vice Chairman or Vice President of some of the Funds in the Federated Fund Family; Vice Chairman, Federated Investors, Inc.; Chairman, Federated Securities Corp. Previous Positions: President and Director or Trustee of some of the Funds in the Federated Fund Family; Executive Vice President, Federated Investors, Inc.; Director and Chief Executive Officer, Federated Securities Corp. |
John B. Fisher Birth Date: May 16, 1956 President Began serving: November 2004 | Principal Occupations: President, Director/Trustee and CEO, Federated Advisory Services Company, Federated Equity Management Company of Pennsylvania, Federated Global Investment Management Corp., Federated Investment Counseling, Federated Investment Management Company; President and CEO of Passport Research, Ltd.; President of some of the Funds in the Federated Fund Family; Director, Federated Investors Trust Company. Previous Positions: President and Director of the Institutional Sales Division of Federated Securities Corp.; President and Director of Federated Investment Counseling; Director, Edgewood Securities Corp.; Director, Federated Services Company; Director, Federated Investors, Inc.; Chairman and Director, Southpointe Distribution Services, Inc.; President, Technology, Federated Services Company. |
Brian P. Bouda Birth Date: February 28, 1947 CHIEF COMPLIANCE OFFICER AND SENIOR VICE PRESIDENT Began serving: August 2004 | Principal Occupations: Senior Vice President and Chief Compliance Officer of the Federated Fund Family; Vice President and Chief Compliance Officer of Federated Investors, Inc. and Chief Compliance Officer of its subsidiaries. Mr. Bouda joined Federated in 1999 and is a member of the American Bar Association and the State Bar Association of Wisconsin. |
Stephen F. Auth Birth Date: September 3, 1956 450 Lexington Avenue Suite 3700 New York, NY 10017-3943 CHIEF INVESTMENT OFFICER Began serving: November 2002 | Principal Occupations: Mr. Auth is Chief Investment Officer of this Fund and various other Funds in the Federated Fund Family; Executive Vice President, Federated Investment Counseling, Federated Global Investment Management Corp. and Federated Equity Management Company of Pennsylvania. Previous Positions: Executive Vice President, Federated Investment Management Company, and Passport Research, Ltd. (investment advisory subsidiary of Federated); Senior Vice President, Global Portfolio Management Services Division; Senior Vice President, Federated Investment Management Company and Passport Research, Ltd.; Senior Managing Director and Portfolio Manager, Prudential Investments. |
Robert J. Ostrowski Birth Date: April 26, 1963 Chief Investment Officer Began serving: May 2004 | Principal Occupations: Robert J. Ostrowski joined Federated in 1987 as an Investment Analyst and became a Portfolio Manager in 1990. He was named Chief Investment Officer of taxable fixed-income products in 2004 and also serves as a Senior Portfolio Manager. He has been a Senior Vice President of the Fund's Adviser since 1997. Mr. Ostrowski has received the Chartered Financial Analyst designation. He received his M.S. in Industrial Administration from Carnegie Mellon University. |
Evaluation and Approval of Advisory Contract – May 2011
federated capital appreciation fund ii (the “Fund”)
The Fund's Board reviewed the Fund's investment advisory contract at meetings held in May 2011. The Board's decision regarding the contract reflects the exercise of its business judgment on whether to continue the existing arrangements.
In this connection, the Federated Funds' Board had previously appointed a Senior Officer, whose duties include specified responsibilities relating to the process by which advisory fees are to be charged to a Federated fund. The Senior Officer has the authority to retain consultants, experts, or staff as may be reasonably necessary to assist in the performance of his duties, reports directly to the Board, and may be terminated only with the approval of a majority of the independent members of the Board. The Senior Officer prepared and furnished to the Board an independent, written evaluation that covered topics discussed below (the “Evaluation”). The Board considered that Evaluation, along with other information, in deciding to approve the advisory contract.
During its review of the contract, the Board considered compensation and benefits received by the Adviser. This included the fees received for services provided to the Fund by other entities in the Federated organization and research services (if any) received by the Adviser from brokers that execute Federated fund trades, as well as advisory fees. The Board is also familiar with and considered judicial decisions concerning allegedly excessive investment advisory fees, which have indicated that the following factors may be relevant to an Adviser's fiduciary duty with respect to its receipt of compensation from a fund: the nature and quality of the services provided by the Adviser, including the performance of the fund; the Adviser's cost of providing the services; the extent to which the Adviser may realize “economies of scale” as a fund grows larger; any indirect benefits that may accrue to the Adviser and its affiliates as a result of the Adviser's relationship with a fund; performance and expenses of comparable funds; and the extent to which the independent Board members are fully informed about all facts the Board deems relevant bearing on the Adviser's services and fees. The Board further considered management fees (including any components thereof) charged to institutional and other clients of the Adviser for what might be viewed as like services, and the cost to the Adviser and its affiliates of supplying services pursuant to the management fee agreements, excluding any intra-corporate profit and profit margins of the Adviser and its affiliates for supplying such services. The Board was aware of these factors and was guided by them in its review of the Fund's advisory contract to the extent it considered them to be appropriate and relevant, as discussed further below.
The Board considered and weighed these circumstances in light of its substantial accumulated experience in governing the Fund and working with Federated on matters relating to the Federated funds, and was assisted in its deliberations by independent legal counsel. Throughout the year, the Board has requested and received substantial and detailed information about the Fund and the Federated organization that was in addition to the extensive materials that comprise and accompany the Senior Officer's Evaluation. Federated provided much of this information at each regular meeting of the Board, and furnished additional information in connection with the particular meeting at which the Board's formal review of the advisory contract occurred. Between regularly scheduled meetings, the Board also received information on particular matters as the need arose. Thus, the Board's consideration of the advisory contract included review of the Senior Officer's Evaluation, accompanying data and additional information covering such matters as: the Adviser's investment philosophy, revenue, profitability, personnel and processes; investment and operating strategies; the Fund's short- and long-term performance (in absolute terms, both on a gross basis and net of expenses, as well as in relationship to its particular investment program and certain competitor or “peer group” funds and/or other benchmarks, as appropriate), and comments on the reasons for performance; the Fund's investment objectives; the Fund's expenses (including the advisory fee itself and the overall expense structure of the Fund, both in absolute terms and relative to similar and/or competing funds, with due regard for contractual or voluntary expense limitations); the use and allocation of brokerage commissions derived from trading the Fund's portfolio securities (if any); and the nature, quality and extent of the advisory and other services provided to the Fund by the Adviser and its affiliates. The Board also considered the preferences and expectations of Fund shareholders and their relative sophistication; the continuing state of competition in the mutual fund industry and market practices; the range of comparable fees for similar funds in the mutual fund industry; the Fund's relationship to the Federated family of funds which include a comprehensive array of funds with different investment objectives, policies and strategies which are available for exchange without the incurrence of additional sales charges; compliance and audit reports concerning the Federated funds and the Federated companies that service them (including communications from regulatory agencies), as well as Federated's responses to any issues raised therein; and relevant developments in the mutual fund industry and how the Federated funds and/or Federated are responding to them. The Board's evaluation process is evolutionary. The criteria considered and the emphasis placed on relevant criteria change in recognition of changing circumstances in the mutual fund marketplace.
With respect to the Fund's performance and expenses in particular, the Board has found the use of comparisons to other mutual funds with comparable investment programs to be relevant, given the high degree of competition in the mutual fund business. The Board focused on comparisons with other similar mutual funds more heavily than non-mutual fund products or services because it is believed that they are more relevant. For example, other mutual funds are the products most like the Annual Shareholder Report
Fund, they are readily available to Fund shareholders as alternative investment vehicles, and they are the type of investment vehicle in fact chosen and maintained by the Fund's investors. The range of their fees and expenses therefore appears to be a generally reliable indication of what consumers have found to be reasonable in the precise marketplace in which the Fund competes. The Fund's ability to deliver competitive performance when compared to its peer group was a useful indicator of how the Adviser is executing the Fund's investment program, which in turn assisted the Board in reaching a conclusion that the nature, extent, and quality of the Adviser's investment management services were such as to warrant continuation of the advisory contract. In this regard, the Senior Officer has reviewed Federated's fees for providing advisory services to products outside the Federated family of funds (e.g., institutional and separate accounts). He concluded that mutual funds and institutional accounts are inherently different products. Those differences include, but are not limited to, different types of targeted investors; being subject to different laws and regulations; different legal structures; different average account sizes; different associated costs; different portfolio management techniques made necessary by different cash flows; and portfolio manager time spent in review of securities pricing. The Senior Officer did not consider these fee schedules to be determinative in judging the appropriateness of mutual fund advisory contracts.The Senior Officer reviewed information compiled by Federated, using data supplied by independent fund ranking organizations, regarding the performance of, and fees charged by, other mutual funds, noting his view that comparisons to fund peer groups are relevant in judging the reasonableness of proposed fees.
For the periods covered by the Evaluation, the Fund's performance for the five-year period was above the median of the relevant peer group, and the Fund's performance fell below the median of the relevant peer group for the one and three-year period. The Board discussed the Fund's performance with the Adviser and recognized the efforts being undertaken by the Adviser. The Board will continue to monitor these efforts and the performance of the Fund.
The Board also received financial information about Federated, including information regarding the compensation and benefits Federated derived from its relationships with the Federated funds. This information covered not only the fees under the advisory contracts, but also fees received by Federated's subsidiaries for providing other services to the Federated funds under separate contracts (e.g., for serving as the Federated funds' administrator). The information also detailed any indirect benefit Federated may derive from its receipt of research services from brokers who execute Federated fund trades. In addition, the Board considered the fact that, in order for a fund to be competitive in the marketplace, Federated and its affiliates frequently waived fees and/or reimbursed expenses and have disclosed to fund investors and/or indicated to the Board their intention to do so in the future, where appropriate. Moreover, the Board receives regular reporting as to the institution or elimination of these voluntary waivers.
Federated furnished information, requested by the Senior Officer, that reported revenues on a fund-by-fund basis and made estimates of the allocation of expenses on a fund-by-fund basis, using allocation methodologies specified by the Senior Officer. The Senior Officer noted that, although they may apply consistent allocation processes, the inherent difficulties in allocating costs (and the unavoidable arbitrary aspects of that exercise) and the lack of consensus on how to allocate those costs may render such allocation information unreliable. The allocation information was considered in the analysis by the Board but was determined to be of limited use.
The Board and the Senior Officer also reviewed information compiled by Federated comparing profitability information for Federated to other publicly held fund management companies. In this regard, the Senior Officer noted the limited availability of such information, but nonetheless concluded that Federated's profit margins did not appear to be excessive and the Board agreed.
The Senior Officer's Evaluation also discussed the notion of possible realization of “economies of scale” as a fund grows larger. The Board considered in this regard that the Adviser has made significant and long-term investments in areas that support all of the Federated funds, such as personnel and processes for the portfolio management, compliance, internal audit, and risk management functions; and systems technology; and that the benefits of these efforts (as well as any economies, should they exist) were likely to be enjoyed by the fund complex as a whole. Finally, the Board also noted the absence of any applicable regulatory or industry guidelines on this subject, which (as discussed in the Senior Officer's Evaluation) is compounded by the lack of any common industry practice or general pattern with respect to structuring fund advisory fees with “breakpoints” that serve to reduce the fee as the fund attains a certain size. The Senior Officer did not recommend institution of breakpoints in pricing Federated's fund advisory services at this time.
It was noted in the materials for the Board meeting that for the period covered by the Evaluation, the Fund's investment advisory fee, after waivers and expense reimbursements, if any, was above the median of the relevant peer group. The Board reviewed the fees and other expenses of the Fund with the Adviser and was satisfied that the overall expense structure of the Fund remained competitive. The Board will continue to monitor advisory fees and other expenses borne by the Fund.
Annual Shareholder Report
The Senior Officer noted that, considering the totality of the circumstances, and all of the factors referenced within his Evaluation, he had concluded that, subject to comments and recommendations made within his Evaluation, his observations and the information accompanying the Evaluation supported a finding by the Board that the management fees for each of the funds are reasonable and that Federated appeared to provide appropriate administrative services to the Fund for the fees paid. Under these circumstances, no changes were recommended to, and no objection was raised to, the continuation of the Fund's advisory contract. The Board concluded that the nature, quality and scope of services provided the Fund by the Adviser and its affiliates were satisfactory.In its decision to continue an existing investment advisory contract, the Board was mindful of the potential disruptions of the Fund's operations and various risks, uncertainties and other effects that could occur as a result of a decision to terminate or not renew an advisory contract. In particular, the Board recognized that many shareholders have invested in the Fund on the strength of the Adviser's industry standing and reputation and with the expectation that the Adviser will have a continuing role in providing advisory services to the Fund. Thus, the Board's approval of the advisory contract reflected the fact that it is the shareholders who have effectively selected the Adviser by virtue of having invested in the Fund.
The Board based its decision to approve the advisory contract on the totality of the circumstances and relevant factors and with a view to past and future long-term considerations. Not all of the factors and considerations identified above were necessarily relevant to the Fund, nor did the Board consider any one of them to be determinative. With respect to the factors that were relevant, the Board's decision to approve the contract reflects its determination that Federated's performance and actions provided a satisfactory basis to support the decision to continue the existing arrangements.
Annual Shareholder ReportVoting Proxies on Fund Portfolio Securities
A description of the policies and procedures that the Fund uses to determine how to vote proxies, if any, relating to securities held in the Fund's portfolio is available, without charge and upon request, by calling 1-800-341-7400. A report on “Form N-PX” of how the Fund voted any such proxies during the most recent 12-month period ended June 30 is available from Federated's website at FederatedInvestors.com. To access this information from the home page, select “All” under “Asset Classes.” Select a fund name and share class, if applicable, to go to the Fund Overview page. On the Fund Overview page, select the “Documents” tab. At the bottom of that page, select “Proxy Voting Record Report (Form N-PX).” Form N-PX filings are also available at the SEC's website at www.sec.gov.
The Fund files with the SEC a complete schedule of its portfolio holdings, as of the close of the first and third quarters of its fiscal year, on “Form N-Q.” These filings are available on the SEC's website at www.sec.gov and may be reviewed and copied at the SEC's Public Reference Room in Washington, DC. (Call 1-800-SEC-0330 for information on the operation of the Public Reference Room.) You may also access this information from the “Products” section of Federated's website at FederatedInvestors.com. From the home page, select “All” under “Asset Classes.” Select a fund name and share class, if applicable, to go to the Fund Overview page. On the Fund Overview page, select the “Documents” tab. At the bottom of that page, select “Form N-Q.”
Annual Shareholder ReportVariable investment options are not bank deposits or obligations, are not guaranteed by any bank and are not insured or guaranteed by the U.S. government, the Federal Deposit Insurance Corporation, the Federal Reserve Board or any other government agency. Investment in variable investment options involves investment risk, including the possible loss of principal.
This Report is authorized for distribution to prospective investors only when preceded or accompanied by the Fund's Prospectus, which contains facts concerning its objective and policies, management fees, expenses and other information.
Federated Capital Appreciation Fund II
Federated Investors Funds
4000 Ericsson Drive
Warrendale, PA 15086-7561
Contact us at FederatedInvestors.com
or call 1-800-341-7400.
Federated Securities Corp., Distributor
CUSIP 313916835
CUSIP 313916819
G00433-19 (2/12)
Federated is a registered trademark of Federated Investors, Inc.
2012 © Federated Investors, Inc.
Annual Shareholder Report | ||
December 31, 2011 | ||
Federated Managed Volatility Fund II
(formerly, Federated Capital Income Fund II)
A Portfolio of Federated Insurance Series
Dear Valued Shareholder,
I am pleased to present the Annual Shareholder Report for your fund covering the period from January 1, 2011 through December 31, 2011. This report includes Management's Discussion of Fund Performance, a complete listing of your fund's holdings, performance information and financial statements along with other important fund information.
As of December 2, 2011, the fund changed its name to Federated Managed Volatility Fund II to reflect a refinement in its objective. The fund now uses an equity index futures overlay to target an annualized volatility forecast within an 8-12% range. However, the actual or realized volatility for any particular period may be higher or lower depending on market conditions.
Our website, FederatedInvestors.com, offers easy access to Federated resources that include timely fund updates, economic and market insights from our investment strategists, and financial planning tools. We invite you to register to take full advantage of its capabilities.
Thank you for investing with Federated. I hope you find this information useful and look forward to keeping you informed.
Sincerely,
John B. Fisher, President
Management's Discussion of Fund Performance (unaudited)
The Fund's total return, based on net asset value, for the 12-month reporting period ended December 31, 2011, was 4.77%. For the same period, the Russell 1000® Value Index (RU1000V) posted a total return of 0.39%, the Barclays Capital High Yield 2% Issuer Capped Index (BCHY2%ICI) returned 4.96%, the Barclays Capital Mortgage-Backed Securities Index (BCMB) returned 6.23% and the Barclays Capital Emerging Market Bond Index (BCEMB) returned 6.97%. Weighting these benchmarks (40% RU1000V, 20% BCHY2%ICI, 20% BCMB and 20% BCEMB), the blended benchmark1 (“Benchmark”) return for the period was 4.00%. The Fund's total return reflected actual cashflows, transaction costs and other expenses, which are not reflected in the total return of the Benchmark.
The Fund's investment strategy focused on income-earning investments, specifically high-quality, dividend-paying stocks and high current yield, fixed-income securities to achieve the Fund's primary income objective and secondary capital appreciation objective.2
The 4.77% total return of the Fund for the reporting period consisted of 0.77% in price appreciation and 4.00% in reinvested dividends.
During the 12-month reporting period, global equity markets experienced extreme volatility. The first quarter of the reporting period was characterized in general by improved equity markets, which were driven by stronger than expected economic data, additional quantitative easing, an extension of the Bush era tax rates, better than expected corporate earnings and a pickup in merger and acquisition activity. However, by the end of first half of 2011, the escalating unrest in the Middle East, the catastrophic events in Japan, the United States debt ceiling political debate and subsequent downgrade by Standard & Poor's of the long term credit rating of the United States and the continued debt issues of certain European countries caused significant headwind for the markets. The last quarter of 2011 saw a relief rally which pushed the market back into positive territory for the reporting period; however, most of the above concerns did not dissipate and continued to cause market volatility.
The Standard & Poor's 500 Index3 (S&P 500) returned 2.11%, and the Nasdaq Composite Index4 returned -0.79% for the reporting period. In general, for the full fiscal year, growth outperformed value and defensive stocks generally outperformed cyclical stocks. The S&P 500 performance in the Consumer Staples and Health Care sectors dominated weak performance in the Financials and Materials sectors.
On the fixed-income side, 2011 turned out to be a difficult year for “risk” assets and an excellent year for “safe” assets such as U.S. Treasuries. Long-term Treasury securities were the best performers in the bond market on an absolute basis. Risk assets, such as corporate and emerging market bonds performed poorly (produced less absolute total return relative to Treasury securities) as the financial crisis in Europe concerned investors, due to the deteriorating credit quality of U.S. financial institutions with significant exposure to Euro-related corporations and governments. Investors also were worried over the summer that the U.S. economy could be slipping back into recession. The Federal Reserve's new monetary program announced in September, dubbed “Operation Twist,” helped to push long-term Treasury interest rates lower. Treasury interest rates finished the year down 10-145 basis points, more in the 10-30 year part of the yield curve.
During the reporting period, the Fund's portfolio was allocated between stocks and fixed-income securities in a manner reflecting the Fund's primary investment objective of income and its secondary objective of capital appreciation. Factors used in making this allocation were: (1) the Fund's ability to pay and maintain an attractive level of dividends; and (2) the expected relative total return of fixed-income securities and stocks. The allocation at the end of the reporting period on December 31, 2011, was 53.1% fixed-income securities, 40.2% stocks and 6.7% cash equivalents and other assets/liabilities. The Fund's allocation had a slightly negative effect on performance, relative to the Benchmark, because fixed-income securities produced positive returns and outperformed stocks.
Annual Shareholder Report
SECTOR AND SECURITY SELECTION – EQUITYThe equity component of the portfolio outperformed the RU1000V during the 12-month reporting period. The Fund's portfolio managers focused on realization of the Fund's total return and income objectives by purchasing and holding income-producing equity securities with favorable valuation levels. Growth stocks generally outperformed value stocks, which had a negative influence on the Fund's performance. On the other hand, securities with large capitalizations outperformed small capitalizations, which positively impacted the Fund's performance. Overall, both sector allocation and stock selection contributed positively to the Fund's equity performance. An overweight position (as compared with the RU1000V) in the Utilities and Consumer Staples sectors and underweight position in the Financials sector enhanced the Fund's performance. Also enhancing Fund performance was solid stock selection in the Materials and Health Care sectors. Detracting from performance was poor stock selection in the Industrials sector.
During the fiscal year, the Fund invested in S&P 500 futures contracts for volatility risk management purposes.5 The trading of these futures contracts had a negligible impact on the Fund's performance during the period.
SECTOR AND SECURITY SELECTION – BONDS6
Sector allocation was mixed in terms of its effect on the absolute return of the Fund. The emerging market allocation added to the Fund's absolute return. The high-yield and mortgage allocations were positive but below the returns from emerging market bonds,7 thus detracting from absolute returns. Thus, sector allocation detracted from absolute returns. Overall, security selection was a large positive contributor to Fund performance, although the performance varied widely by bond sector. Emerging market security selection outperformed the BCEMB, and selection within the U.S. high-yield portions also outperformed the BCHY2%ICI. The mortgage component underperformed relative to its respective index, the BCMB. Recent small additions in the portfolio to long-term investment-grade corporates and TIPS (Treasury Inflation-Protected Securities) added slightly to performance. The use of Treasury Note & Bond futures contracts negatively affected the Fund's strategies in interest rate sensitivity and yield curve exposure management during the reporting period.
1 | The total return for the 12-month reporting period for each of the Fund's component benchmark indexes, the Russell 1000 Value Index (RU1000V), the Barclays Capital High Yield 2% Issuer Capped Index (BCHY2%ICI), Barclays Capital Mortgage-Backed Securities Index (BCMB) and Barclays Capital Emerging Market Bond Index (BCEMB) was 0.39%, 4.96%, 6.23% and 6.97%, respectively. The RU1000V Index is an unmanaged index that measures the performance of the 1,000 largest U.S. domiciled companies (based on total market capitalization) with lower price-to-book ratios and lower forecasted growth values. The BCHY2%ICI is the 2% Issuer Cap component of the Barclays Capital U.S. Corporate High Yield Index (BCHYI). The BCHYI is an index that covers all fixed-income securities having a maximum quality rating of “Ba1,” a minimum outstanding of $150 million and at least one year to maturity. The BCMB is an unmanaged index comprised of all fixed-income securities mortgage pools owned by GNMA, FNMA and FHLMC, including GNMA Graduated Payment Mortgages. The BCEMB tracks total returns for external-currency-denominated debt instruments of the emerging markets: Brady bonds, loans, Eurobonds and U.S. dollar-denominated local market instruments. Countries covered are Argentina, Brazil, Bulgaria, Ecuador, Mexico, Morocco, Nigeria, Panama, Peru, the Philippines, Poland, Russia and Venezuela. The indexes are unmanaged, and it is not possible to invest directly in an index. |
2 | There are no guarantees that dividend-paying stocks will continue to pay dividends. In addition, dividend-paying stocks may not experience the same capital appreciation potential as non dividend-paying stocks. High-yield, lower-rated securities generally entail greater market, credit and liquidity risks than investment-grade securities and may include higher volatility and higher risk of default. |
3 | The S&P 500 Index is an unmanaged, capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The index is unmanaged, and it is not possible to invest directly in an index. |
4 | The Nasdaq Composite Index is an index that measures all Nasdaq domestic and non-U.S.-based common stocks listed on the Nasdaq stock market. The index is unmanaged, and it is not possible to invest directly in an index. |
5 | The Fund's use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities or other traditional instruments. |
6 | Bond prices are sensitive to changes in interest rates and a rise in interest rates can cause a decline in their prices. |
7 | International investing involves special risks including currency risk, increased volatility, political risks and differences in auditing and other financial standards. Prices of emerging markets securities can be significantly more volatile than the prices of securities in developed countries and currency risk and political risks are accentuated in emerging markets. |
FUND PERFORMANCE AND GROWTH OF A $10,000 INVESTMENT
The Average Annual Total Return table below shows returns averaged over the stated periods. The graph below illustrates the hypothetical investment of $10,0001 in the Federated Managed Volatility Fund II (the “Fund”) from December 31, 2001 to December 31, 2011, compared to the Standard & Poor's 500 Index (S&P 500),2,3 the Russell 1000 Value Index (RU1000V),2,3 both broad-based market indexes, a blend of indexes comprised of 40% RU1000V/20% Barclays Capital Emerging Market Bond Index (BCEMB)3 /20% Barclays Capital High Yield 2% Issuer Capped Index (BCHY2%ICI)3 /20% Barclays Capital Mortgage-Backed Securities Index (BCMB)3 (Blended Index)2,4 and the Lipper Variable Underlying Funds Mixed-Asset Target Allocation Conservative Funds (MTAC).2
Average Annual Total Returns for the Period Ended 12/31/2011 |
1 Year | 4.77% |
5 Years | 4.53% |
10 Years | 4.46% |
Performance data quoted represents past performance which is no guarantee of future results. Investment return and principal value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Performance of a variable investment option changes over time and current performance may be lower or higher than what is stated. For current to the most recent month end performance, contact your insurance company. The performance information presented does not include the charges and expenses imposed by the insurance company under the variable insurance product contract. The inclusion of such charges would lower performance. Please refer to the variable insurance product prospectus for a complete listing of these expenses. Fund shares are available exclusively as a funding vehicle for life insurance companies writing variable life insurance policies and variable annuity contracts. Variable investment options are not obligations of or guaranteed by any bank and are not federally insured.
GROWTH of a $10,000 Investment
Federated Managed Volatility Fund II | C000026773 | S&P 500 | RU1000V | The Blended Index | MTAC |
12/31/2001 | 10,000 | 10,000 | 10,000 | 10,000 | 10,000 |
12/31/2002 | 7,605 | 7,790 | 8,448 | 9,806 | 8,522 |
12/31/2003 | 9,177 | 10,025 | 10,985 | 11,519 | 9,989 |
12/31/2004 | 10,088 | 11,115 | 12,796 | 12,719 | 10,750 |
12/31/2005 | 10,722 | 11,662 | 13,699 | 13,526 | 11,153 |
12/31/2006 | 12,399 | 13,504 | 16,746 | 15,475 | 12,209 |
12/31/2007 | 12,899 | 14,246 | 16,717 | 15,910 | 12,752 |
12/31/2008 | 10,270 | 8,975 | 10,557 | 12,543 | 10,300 |
12/31/2009 | 13,175 | 11,350 | 12,636 | 15,154 | 12,424 |
12/31/2010 | 14,767 | 13,060 | 14,595 | 17,103 | 13,618 |
12/31/2011 | 15,471 | 13,336 | 14,652 | 17,751 | 13,881 |
1 | The Fund's performance assumes the reinvestment of all dividends and distributions. The S&P 500, RU1000V, Blended Index and the MTAC have been adjusted to reflect reinvestment of dividends on securities in the indexes and average. |
2 | The S&P 500 and Blended Index are not adjusted to reflect sales charges, expenses or other fees that the Securities and Exchange Commission (SEC) requires to be reflected in the Fund's performance. Lipper figures represent the average total returns reported by all of the funds serving as underlying investment options for variable insurance contracts designated by Lipper, Inc. as falling into the category indicated. They do not reflect sales charges. However, these total returns are reported net of expenses or other fees that the SEC requires to be reflected in a mutual fund's performance. The indexes are unmanaged and, unlike the Fund, are not affected by cash flows. It is not possible to invest directly in an index or an average. |
3 | The S&P 500 is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The RU1000V measures the performance of the 1,000 largest U.S.-domiciled companies (based on total market capitalization) with lower price-to-book ratios and lower forecasted growth values. The indexes are not adjusted to reflect sales charges, expenses and other fees that the SEC requires to be reflected in the fund's performance. The BCHY2%ICI is the 2% Issuer Cap component of the Barclays Capital U.S. Corporate High Yield Index (BCHYI). The BCHYI is an index that covers all fixed-income securities having a maximum quality rating of Ba1, a minimum outstanding of $150 million and at least one year to maturity. The BCMB is comprised of all fixed-income securities mortgage pools by GNMA, FNMA and FHLMC, including GNMA Graduated Payment Mortgages. The BCEMB is comprised of external-currency-denominated debt instruments of the emerging markets: Brady bonds, loans, Eurobonds and U.S. dollar-denominated local market instruments. Countries covered are Argentina, Brazil, Bulgaria, Ecuador, Mexico, Morocco, Nigeria, Panama, Peru, the Philippines, Poland, Russia and Venezuela. Indexes are unmanaged, and investments cannot be made directly in an index. |
4 | The Blended Index is the Fund's benchmark. |
Portfolio of Investments Summary Tables (unaudited)
At December 31, 2011, the Fund's portfolio composition1 was as follows:
Portfolio Composition | Percentage of Total Net Assets |
Domestic Equity Securities | 31.6% |
Domestic Fixed-Income Securities | 31.2% |
International Fixed-Income Securities | 21.2% |
International Equity Securities | 8.8% |
U.S. Treasury Securities | 1.2% |
Derivative Contracts2 | (0.1)% |
Cash Equivalents3 | 4.8% |
Other Assets and Liabilities — Net4 | 1.3% |
TOTAL | 100.0% |
At December 31, 2011, the Fund's sector composition5 for its equity securities was as follows:
Sector Composition of Equity Holdings | Percentage of Equity Securities |
Utilities | 17.8% |
Health Care | 13.3% |
Financials | 12.7% |
Consumer Staples | 12.4% |
Energy | 12.2% |
Telecommunication Services | 11.3% |
Industrials | 9.7% |
Materials | 6.3% |
Consumer Discretionary | 2.6% |
Information Technology | 1.7% |
TOTAL | 100.0% |
1 | See the Fund's Prospectus and Statement of Additional Information for a description of the types of securities in which the Fund invests. As of the date specified above, the Fund owned shares of one or more affiliated investment companies. For purposes of this table, the affiliated investment company (other than an affiliated money market mutual fund) is not treated as a single portfolio security, but rather the Fund is treated as owning a pro rata portion of each security and each other asset and liability owned by the affiliated investment company. Accordingly, the percentages of total net assets shown in the table will differ from those presented on the Portfolio of Investments. |
2 | Based upon net unrealized appreciation (depreciation) or value of the derivative contracts as applicable. Derivative contracts may consist of futures, forwards, options and swaps. The impact of a derivative contract on the Fund's performance may be larger than its unrealized appreciation (depreciation) or value may indicate. In many cases, the notional value or amount of a derivative contract may provide a better indication of the contract's significance to the portfolio. More complete information regarding the Fund's direct investments in derivative contracts, including unrealized appreciation (depreciation), value and notional values or amounts of such contracts, can be found in the table at the end of the Portfolio of Investments included in this Report. |
3 | Cash Equivalents include any investments in money market mutual funds and/or overnight repurchase agreements. |
4 | Assets, other than investments in securities and derivative contracts, less liabilities. See Statement of Assets and Liabilities. |
5 | Sector classifications are based upon, and individual portfolio securities are assigned to, the classifications of the Global Industry Classification Standard (GICS) except that the Adviser assigns a classification to securities not classified by the GICS and to securities for which the Adviser does not have access to the classification made by the GICS. |
Shares or Principal Amount | Value |
COMMON STOCKS – 28.9% |
Consumer Discretionary – 0.2% |
9,295 | Regal Entertainment Group | 110,982 |
2,935 | Target Corp. | 150,331 |
TOTAL | 261,313 |
Consumer Staples – 4.4% |
50,090 | Altria Group, Inc. | 1,485,169 |
8,580 | Heinz (H.J.) Co. | 463,663 |
9,920 | Kimberly-Clark Corp. | 729,715 |
3,700 | Lorillard, Inc. | 421,800 |
15,790 | Philip Morris International, Inc. | 1,239,199 |
25,825 | Reynolds American, Inc. | 1,069,672 |
TOTAL | 5,409,218 |
Energy – 4.6% |
21,089 | ARC Resources Ltd. | 519,592 |
9,494 | Baytex Energy Corp. | 530,918 |
20,440 | Bonavista Energy Corp. | 523,063 |
21,490 | ConocoPhillips | 1,565,976 |
12,140 | Crescent Point Energy Corp. | 535,054 |
9,190 | Royal Dutch Shell PLC | 671,697 |
18,683 | Seadrill Ltd. | 619,902 |
2,275 | Total SA, ADR | 116,275 |
11,295 | Vermilion Energy, Inc. | 503,023 |
TOTAL | 5,585,500 |
Financials – 1.6% |
14,320 | Cincinnati Financial Corp. | 436,187 |
39,390 | Hospitality Properties Trust | 905,183 |
14,305 | Mercury General Corp. | 652,594 |
TOTAL | 1,993,964 |
Health Care – 5.4% |
28,011 | Bristol-Myers Squibb Co. | 987,108 |
29,135 | GlaxoSmithKline PLC, ADR | 1,329,430 |
31,415 | Lilly (Eli) & Co. | 1,305,607 |
36,909 | Merck & Co., Inc. | 1,391,469 |
72,179 | Pfizer, Inc. | 1,561,954 |
TOTAL | 6,575,568 |
Industrials – 3.0% |
20,845 | Deluxe Corp. | 474,432 |
28,900 | Donnelley (R.R.) & Sons Co. | 417,027 |
113,415 | General Electric Co. | 2,031,263 |
24,020 | Pitney Bowes, Inc. | 445,331 |
4,250 | United Parcel Service, Inc. | 311,057 |
TOTAL | 3,679,110 |
Information Technology – 0.7% |
17,325 | Intel Corp. | 420,131 |
4,935 | Maxim Integrated Products, Inc. | 128,508 |
3,660 | Microchip Technology, Inc. | 134,066 |
Shares or Principal Amount | Value |
8,195 | Seagate Technology | 134,398 |
TOTAL | 817,103 |
Materials – 1.2% |
5,790 | Dow Chemical Co. | 166,520 |
10,905 | International Paper Co. | 322,788 |
16,900 | Newmont Mining Corp. | 1,014,169 |
TOTAL | 1,503,477 |
Telecommunication Services – 4.5% |
48,034 | AT&T, Inc. | 1,452,548 |
19,550 | BCE, Inc. | 814,649 |
23,010 | CenturyLink, Inc. | 855,972 |
28,295 | Verizon Communications | 1,135,195 |
46,245 | Vodafone Group PLC, ADR | 1,296,247 |
TOTAL | 5,554,611 |
Utilities – 3.3% |
10,995 | American Electric Power Co., Inc. | 454,204 |
10,060 | DTE Energy Co. | 547,767 |
10,184 | Integrys Energy Group, Inc. | 551,769 |
14,590 | National Grid PLC, ADR | 707,323 |
19,140 | NiSource, Inc. | 455,723 |
30,180 | Pepco Holdings, Inc. | 612,654 |
2,930 | SCANA Corp. | 132,026 |
19,745 | Scottish & Southern Energy PLC, ADR | 396,677 |
3,460 | Southern Co. | 160,163 |
TOTAL | 4,018,306 |
TOTAL COMMON STOCKS (IDENTIFIED COST $32,031,084) | 35,398,170 |
PREFERRED STOCKS – 11.4% |
Consumer Discretionary – 0.9% |
21,470 | Goodyear Tire & Rubber Co., Conv. Pfd., 5.875%, 4/1/2014, Annual Dividend $2.95 | 1,044,515 |
Consumer Staples – 0.6% |
5,000 | Bunge Ltd., Conv. Pfd., 4.875%, 12/31/2049, Annual Dividend $4.88 | 470,000 |
30,705 | 1,2 | Dole Food Automatic Exchange, Conv. Pfd., Series 144A, 7.00%, 11/01/2012, Annual Dividend $0.88 | 267,681 |
TOTAL | 737,681 |
Energy – 0.3% |
7,900 | Apache Corp., Conv. Pfd., 6.00%, 8/1/2013, Annual Dividend $3.00 | 428,812 |
Financials – 3.5% |
400 | 3 | Bank of America, Series L, Pfd., 7.25%, 12/31/2049, Annual Dividend $72.50 | 315,208 |
24,270 | Citigroup, Inc., Conv. Pfd., 7.50%, 12/15/2012, Annual Dividend $7.50 | 1,971,937 |
44,400 | Hartford Financial, Conv. Bond, Series F, Pfd., 7.250%, 4/1/2013, Annual Dividend $1.81 | 833,832 |
9,700 | New York Community Bancorp, Inc., Conv. Pfd., 6.00%, 11/01/2051, Annual Dividend $3.00 | 407,158 |
550 | Wells Fargo Co, Series L, Pfd., 7.50%, 12/31/2049, Annual Dividend $75.00 | 585,475 |
3,500 | Wintrust Financial Corp., Conv. Pfd., 7.50% 12/15/2013, Annual Dividend $3.80 | 156,774 |
TOTAL | 4,270,384 |
Industrials – 0.9% |
37,000 | 1,2,3 | 2010 Swift Mandatory Common Exchange, Conv. Pfd., Series 144A, 6.00%, 12/31/2013, Annual Dividend $0.68 | 327,043 |
27,300 | Continental Finance Trust II, Conv. Pfd., 6.00%, 11/15/2030, Annual Dividend $3.00 | 761,670 |
TOTAL | 1,088,713 |
Shares or Principal Amount | Value |
Materials – 1.3% |
34,205 | Anglogold Ashanti Holding, Conv. Pfd., 6.00%, 9/15/2013, Annual Dividend $3.00 | 1,632,605 |
Utilities – 3.9% |
22,165 | AES Trust III, Conv. Pfd., 6.75%, 10/15/2029, Annual Dividend $3.38 | 1,088,080 |
16,830 | Great Plains Energy, Inc., Conv. Pfd., 12.00%, 06/15/2012, Annual Dividend $6.00 | 1,118,858 |
21,000 | Nextera Energy, Inc., Conv. Pfd., 8.375%, 6/1/2012, Annual Dividend $4.19 | 1,062,810 |
26,780 | PPL Corp., Conv. Pfd., 9.50%, 7/1/2013, Annual Dividend $4.75 | 1,495,128 |
TOTAL | 4,764,876 |
TOTAL PREFERRED STOCKS (IDENTIFIED COST $14,967,259) | 13,967,586 |
Adjustable Rate Mortgage – 0.1% |
$66,224 | Federal National Mortgage Association, 5.790%, 9/1/2037 (IDENTIFIED COST $66,700) | 70,851 |
Collateralized Mortgage Obligation – 2.4% |
2,500,000 | Government National Mortgage Association REMIC 2003-11 QC, 5.500%, 2/20/2033 (IDENTIFIED COST $2,409,217) | 2,881,235 |
Corporate Bonds – 12.1% |
Banking – 0.7% |
100,000 | 1,2 | Banco Credito del Peru, Sr. Note, Series 144A, 5.375%, 09/16/2020 | 98,580 |
100,000 | Banco de Credito del Peru, Jr. Sub. Note, Series REGS, 9.75%, 11/06/2069 | 114,000 |
250,000 | RSHB Capital S.A., Series REGS, 7.750%, 05/29/2018 | 267,500 |
400,000 | Vnesheconombank, Bank Guarantee, Series REGS, 6.800%, 11/22/2025 | 389,250 |
TOTAL | 869,330 |
Broadcast Radio & TV – 0.2% |
200,000 | Grupo Televisa S.A., Sr. Unsecd. Note, 6.625%, 01/15/2040 | 228,094 |
Building & Development – 0.4% |
250,000 | Odebrecht Finance Ltd., Company Guarantee, Series REGS, 6.000%, 04/05/2023 | 251,875 |
200,000 | 1,2 | Odebrecht SA, Company Guarantee, Series 144A, 7.500%, 09/29/2049 | 196,500 |
TOTAL | 448,375 |
Building Materials – 0.4% |
250,000 | 1,2 | Rearden G Holdings EINS GmbH, Company Guarantee, Series 144A, 7.875%, 03/30/2020 | 251,875 |
300,000 | Votorantim Cimentos SA, Company Guarantee, Series REGS, 7.250%, 04/05/2041 | 290,405 |
TOTAL | 542,280 |
Cable & Wireless Television – 0.1% |
150,000 | Net Servicos de Comunicacao SA, Company Guarantee, 7.500%, 01/27/2020 | 172,500 |
Communications Equipment – 0.8% |
1,796,000 | Liberty Media Group, Conv. Bond, 3.500%, 01/15/2031 | 1,028,892 |
Conglomerates – 0.2% |
200,000 | Voto-Votorantim O/S Trad, Series REGS, 6.625%, 09/25/2019 | 213,000 |
Consumer Non-Cyclical — Tobacco – 0.2% |
180,000 | Lorillard Tobacco Co., Sr. Unsecd. Note, 7.000%, 08/04/2041 | 189,491 |
Energy — Independent – 0.1% |
150,000 | 1,2 | Petroleos Mexicanos, Company Guarantee, Series 144A, 6.500%, 06/02/2041 | 170,320 |
Finance – 0.2% |
300,000 | Gruposura Finance, Company Guarantee, Series REGS, 5.700%, 05/18/2021 | 301,500 |
Financial Institution — Banking – 0.7% |
150,000 | Bank of America Corp., Sub. Note, 6.500%, 09/15/2037 | 122,548 |
500,000 | JPMorgan Chase Capital XVIII, Company Guarantee, Series AA, 7.000%, 11/01/2039 | 504,030 |
150,000 | Merrill Lynch & Co., Inc., Sub. Note, 7.750%, 05/14/2038 | 143,271 |
150,000 | Morgan Stanley, Sr. Unsecd. Note, Series MTN, 6.250%, 08/09/2026 | 141,492 |
TOTAL | 911,341 |
Shares or Principal Amount | Value |
Financial Institution — Brokerage – 0.3% |
$400,000 | Jefferies Group, Inc., Sr. Unsecd. Note, 6.250%, 01/15/2036 | 326,000 |
Financial Institution — Finance Noncaptive – 0.1% |
100,000 | HSBC Finance Capital Trust IX, Note, 5.911%, 11/30/2035 | 82,750 |
Government Agency – 0.4% |
500,000 | Banco Nacional de Desenvolvimento Economico e Social, Sr. Unsecd. Note, Series REGS, 5.500%, 07/12/2020 | 540,625 |
Insurance – 0.6% |
714,000 | Old Republic International Corp., Conv. Bond, 8.000%, 05/15/2012 | 718,106 |
Marine – 0.1% |
125,000 | Dryships, Inc., Conv. Bond, 5.000%, 12/01/2014 | 85,979 |
Metals & Mining – 0.6% |
200,000 | Alrosa Finance SA, Company Guarantee, Series REGS, 7.750%, 11/03/2020 | 200,000 |
150,000 | Bumi Investment PTE Ltd., Series REGS, 10.750%, 10/06/2017 | 151,500 |
100,000 | 1,2 | Bumi Investment, Series 1, Company Guarantee, Series 144A, 10.750%, 10/06/2017 | 101,000 |
300,000 | Vale Overseas Ltd., 6.875%, 11/21/2036 | 343,202 |
TOTAL | 795,702 |
Mortgage Banks – 0.3% |
200,000 | Credito Real SA, Sr. Unsecd. Note, Series REGS, 10.250%, 04/14/2015 | 205,000 |
150,000 | 1,2 | Credito Real, S.A. de C.V., Sr. Note, Series 144A, 10.250%, 04/14/2015 | 153,750 |
TOTAL | 358,750 |
Oil & Gas – 3.3% |
200,000 | Ecopetrol SA, Note, 7.625%, 07/23/2019 | 243,000 |
300,000 | Empresa Nacional del Petroleo, Note, Series REGS, 5.250%, 08/10/2020 | 317,977 |
72,711 | Gazprom International SA, Series REGS, 7.201%, 02/01/2020 | 77,119 |
250,000 | 1,2 | Gazprom, Note, Series 144A, 8.625%, 04/28/2034 | 293,750 |
250,000 | 1,2 | IPIC GMTN, Ltd., Company Guarantee, Series 144A, 6.875%, 11/01/2041 | 255,625 |
500,000 | KazMunaiGaz Finance Sub B.V., Series REGS, 6.375%, 04/09/2021 | 508,750 |
250,000 | Lukoil International Finance BV, Company Guarantee, Series REGS, 6.125%, 11/09/2020 | 246,250 |
500,000 | Pemex Project Funding Master, Company Guarantee, 6.625%, 06/15/2035 | 570,253 |
250,000 | Petrobras International Finance Co., Company Guarantee, 7.875%, 03/15/2019 | 300,300 |
1,300,000 | Petroleos de Venezuela, S.A., Company Guarantee, Series REGS, 8.500%, 11/02/2017 | 983,450 |
150,000 | Petroleos Mexicanos, Company Guarantee, Series WI, 8.000%, 05/03/2019 | 187,631 |
TOTAL | 3,984,105 |
Paper Products – 0.2% |
200,000 | Fibria Overseas Finance, Company Guarantee, Series REGS, 6.750%, 03/03/2021 | 184,500 |
Steel – 0.2% |
200,000 | 1,2 | CSN Islands XI Corp., Company Guarantee, Series 144A, 6.875%, 09/21/2019 | 212,300 |
Telecommunications & Cellular – 0.7% |
100,000 | 1,2 | Digicel Ltd., Sr. Note, Series 144A, 8.250%, 09/01/2017 | 101,500 |
200,000 | 1,2 | Qtel International Finance Ltd., Bank Guarantee, Series 144A, 5.000%, 10/19/2025 | 196,420 |
100,000 | 1,2 | Telemovil Finance Co., Ltd., Company Guarantee, Series 144A, 8.000%, 10/01/2017 | 103,500 |
100,000 | Telemovil Finance Co., Ltd., Company Guarantee, Series REGS, 8.000%, 10/01/2017 | 103,500 |
400,000 | 1,2 | Vimpelcom, Company Guarantee, Series 144A, 7.504%, 03/01/2022 | 338,000 |
TOTAL | 842,920 |
Utilities – 1.3% |
200,000 | 1,2 | Abu Dhabi National Energy Co. PJSC, Sr. Unsecd. Note, Series 144A, 5.875%, 12/13/2021 | 209,000 |
500,000 | 1,2 | Comision Fed De Electric, Sr. Note, Series 144A, 4.875%, 05/26/2021 | 515,394 |
150,000 | 1,2 | Dubai Electricity & Water, Sr. Unsecd. Note, Series 144A, 7.375%, 10/21/2020 | 154,500 |
460,000 | Majapahit Holding BV, Company Guarantee, Series REGS, 7.750%, 01/20/2020 | 536,475 |
Shares or Principal Amount | Value |
$150,000 | Power Sector Assets & Liabilities Management Corp., Company Guarantee, Series REGS, 7.390%, 12/02/2024 | 184,125 |
TOTAL | 1,599,494 |
TOTAL CORPORATE BONDS (IDENTIFIED COST $14,757,327) | 14,806,354 |
FOREIGN Governments/Agencies – 10.5% |
Sovereign – 10.5% |
266,760 | Argentina, Government of, Note, 8.280%, 12/31/2033 | 194,735 |
3,132,000 | Argentina, Government of, Note, 1.000%, 12/15/2035 | 234,900 |
400,000 | Argentina, Government of, Sr. Unsecd. Note, 7.000%, 10/03/2015 | 373,000 |
300,000 | Argentina, Government of, Sr. Unsecd. Note, Series 1, 8.750%, 06/02/2017 | 282,000 |
70,000 | Brazil, Government of, Bond, 8.250%, 01/20/2034 | 105,525 |
171,166 | Brazil, Government of, Note, 8.000%, 01/15/2018 | 200,265 |
200,000 | Brazil, Government of, Unsub., 11.000%, 08/17/2040 | 264,500 |
300,000 | Colombia, Government of, Note, 7.375%, 01/27/2017 | 364,500 |
350,000 | 1,2 | Indonesia, Government of, Series 144A, 8.500%, 10/12/2035 | 504,000 |
800,000 | Indonesia, Government of, Series REGS, 6.625%, 02/17/2037 | 968,000 |
1,000,000 | Mexico, Government of, Sr. Note, 5.750%, 10/12/2110 | 1,065,000 |
400,000 | Panama, Government of, 6.700%, 01/26/2036 | 522,000 |
636,000 | Peru, Government of, 6.550%, 03/14/2037 | 807,720 |
250,000 | Peru, Government of, Sr. Unsecd. Note, Series REGS, 7.840%, 08/12/2020 | 105,711 |
600,000 | Philippines, Government of, 6.375%, 1/15/2032 | 710,250 |
200,000 | 1,2 | Republic of Serbia, Series 144A, 7.250%, 9/28/2021 | 194,500 |
1,644,950 | Russia, Government of, Unsub., Series REGS, 7.500%, 03/31/2030 | 1,910,198 |
100,000 | South Africa, Government of, Sr. Unsecd. Note, 6.875%, 05/27/2019 | 120,500 |
100,000 | 1,2 | Sri Lanka, Government of, Sr. Unsecd. Note, Series 144A, 6.250%, 10/04/2020 | 100,000 |
350,000 | Turkey, Government of, 7.000%, 9/26/2016 | 383,687 |
500,000 | Turkey, Government of, Bond, 5.625%, 03/30/2021 | 505,625 |
150,000 | Turkey, Government of, Note, 7.375%, 2/05/2025 | 169,688 |
500,000 | United Mexican States, Note, 5.125%, 01/15/2020 | 571,250 |
500,000 | United Mexican States, Series MTNA, 6.750%, 09/27/2034 | 651,250 |
350,000 | Uruguay, Government of, 7.625%, 3/21/2036 | 483,875 |
100,000 | Uruguay, Government of, Note, 8.000%, 11/18/2022 | 137,000 |
900,000 | Venezuela, Government of, 9.375%, 01/13/2034 | 621,000 |
480,000 | Venezuela, Government of, Note, 7.65%, 4/21/2025 | 297,600 |
TOTAL FOREIGN GOVERNMENTS/AGENCIES (IDENTIFIED COST $11,686,573) | 12,848,279 |
Mortgage-Backed Securities – 4.4% |
Federal Home Loan Mortgage Corporation – 4.3% |
1,156,247 | Federal Home Loan Mortgage Corp. Pool A93951, 4.000%, 30 Year, 9/1/2040 | 1,212,545 |
1,170,412 | Federal Home Loan Mortgage Corp. Pool A95704, 3.500%, 30 Year, 12/1/2040 | 1,203,061 |
381,214 | Federal Home Loan Mortgage Corp. Pool A96406, 4.000%, 30 Year, 1/1/2041 | 399,776 |
1,993,081 | Federal Home Loan Mortgage Corp. Pool G08462, 3.500%, 30 Year, 10/1/2041 | 2,048,990 |
145,118 | Federal Home Loan Mortgage Corp. Pool J07260, 4.500%, 15 Year, 3/1/2023 | 153,769 |
223,561 | Federal Home Loan Mortgage Corp. Pool J14732, 4.000%, 15 Year, 3/1/2026 | 234,857 |
TOTAL | 5,252,998 |
Government National Mortgage Association – 0.1% |
27,439 | Government National Mortgage Association Pool 002796, 7.000%, 30 Year, 8/20/2029 | 31,506 |
15,012 | Government National Mortgage Association Pool 003040, 7.000%, 30 Year, 2/20/2031 | 17,206 |
36,053 | Government National Mortgage Association Pool 003188, 6.500%, 30 Year, 1/20/2032 | 41,122 |
Shares or Principal Amount | Value |
$56,341 | Government National Mortgage Association Pool 003239, 6.500%, 30 Year, 5/20/2032 | 64,306 |
TOTAL | 154,140 |
TOTAL MORTGAGE-BACKED SECURITIES (IDENTIFIED COST $5,273,907) | 5,407,138 |
U.S. Treasury – 1.2% |
392,920 | 4 | U.S. Treasury Inflation-Protected Bond, 2.125%, 2/15/2041 | 531,685 |
1,000,000 | 5 | United States Treasury Bill, 0.015%, 4/5/2012 | 999,965 |
TOTAL U.S. TREASURY (IDENTIFIED COST $1,502,821) | 1,531,650 |
MUTUAL FUND – 23.6% |
4,275,573 | 6 | Federated High Income Bond Fund II, Primary Shares (IDENTIFIED COST $27,244,664) | 28,902,871 |
Repurchase Agreement – 4.6% |
5,677,000 | Interest in $4,100,000,000 joint repurchase agreement 0.06%, dated 12/30/2011 under which Bank of America, N.A. will repurchase securities provided as collateral for $4,100,027,333 on 1/03/2012. The securities provided as collateral at the end of the period were U.S. Government Agency securities with various maturities to 4/15/2040 and the market value of those underlying securities was $4,218,795,473. (AT COST) | 5,677,000 |
TOTAL INVESTMENTS — 99.2% (IDENTIFIED COST $115,616,552)7 | 121,491,134 |
OTHER ASSETS AND LIABILITIES - NET — 0.8%8 | 1,003,053 |
TOTAL NET ASSETS — 100% | $122,494,187 |
At December 31, 2011, the Fund had the following outstanding futures contracts:
Description | Number of Contracts | Notional Value | Expiration Date | Unrealized Appreciation/ (Depreciation) |
3 S&P 500 Index Long Futures | 18 | $5,636,700 | March 2012 | $11,628 |
3 United States Treasury Bond 30-Year Short Futures | 38 | $5,502,875 | March 2012 | $(94,520) |
NET UNREALIZED DEPRECIATION ON FUTURES CONTRACTS | $(82,892) |
Net Unrealized Depreciation on Futures Contracts is included in “Other Assets and Liabilities — Net.”
1 | Denotes a restricted security that either: (a) cannot be offered for public sale without first being registered, or being able to take advantage of an exemption from registration, under the Securities Act of 1933; or (b) is subject to a contractual restriction on public sales. At December 31, 2011, these restricted securities amounted to $4,745,238, which represented 3.9% of total net assets. |
2 | Denotes a restricted security that may be resold without restriction to “qualified institutional buyers” as defined in Rule 144A under the Securities Act of 1933 and that the Fund has determined to be liquid under criteria established by the Fund's Board of Trustees (the “Trustees”). At December 31, 2011, these liquid restricted securities amounted to $4,745,238, which represented 3.9% of total net assets. |
3 | Non-income producing security. |
4 | Pledged as collateral to ensure the Fund is able to satisfy the obligations of its outstanding futures contracts. |
5 | Discount rate at time of purchase. |
6 | Affiliated holding. |
7 | The cost of investments for federal tax purposes amounts to $116,362,591. |
8 | Assets, other than investments in securities, less liabilities. See Statement of Assets and Liabilities. |
Note: The categories of investments are shown as a percentage of total net assets at December 31, 2011.
Various inputs are used in determining the value of the Fund's investments. These inputs are summarized in the three broad levels listed below:
Level 1 — quoted prices in active markets for identical securities, including investment companies with daily net asset values, if applicable. Level 2 — other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.). Also includes securities valued at amortized cost. Level 3 — significant unobservable inputs (including the Fund's own assumptions in determining the fair value of investments).The inputs or methodology used for valuing securities are not an indication of the risk associated with investing in those securities.
Annual Shareholder Report
The following is a summary of the inputs used, as of December 31, 2011, in valuing the Fund's assets carried at fair value:Valuation Inputs | ||||
Level 1 — Quoted Prices and Investments in Mutual Funds | Level 2 — Other Significant Observable Inputs | Level 3 — Significant Unobservable Inputs | Total | |
Equity Securities: | ||||
Common Stocks | ||||
Domestic | $26,699,922 | $ — | $ — | $26,699,922 |
International | 8,698,248 | — | — | 8,698,248 |
Preferred Stocks | ||||
Domestic | 11,597,300 | 267,681 | — | 11,864,981 |
International | 2,102,605 | — | — | 2,102,605 |
Debt Securities: | ||||
Adjustable Rate Mortgage | — | 70,851 | — | 70,851 |
Collateralized Mortgage Obligation | — | 2,881,235 | — | 2,881,235 |
Corporate Bonds | — | 14,806,354 | — | 14,806,354 |
Foreign Governments/Agencies | — | 12,848,279 | — | 12,848,279 |
Mortgage-Backed Securities | — | 5,407,138 | — | 5,407,138 |
U.S. Treasury | — | 1,531,650 | — | 1,531,650 |
Mutual Fund | 28,902,871 | — | — | 28,902,871 |
Repurchase Agreement | — | 5,677,000 | — | 5,677,000 |
TOTAL SECURITIES | $78,000,946 | $43,490,188 | $ — | $121,491,134 |
OTHER FINANCIAL INSTRUMENTS* | $(82,892) | $ — | $ — | $(82,892) |
* | Other financial instruments include futures contracts. |
The following acronyms are used throughout this portfolio:
ADR | — American Depositary Receipt |
REMIC | — Real Estate Mortgage Investment Conduit |
See Notes which are an integral part of the Financial Statements
Annual Shareholder Report(For a Share Outstanding Throughout Each Period)
Year Ended December 31 | 2011 | 2010 | 2009 | 2008 | 2007 |
Net Asset Value, Beginning of Period | $9.15 | $8.67 | $7.25 | $9.62 | $9.74 |
Income From Investment Operations: |
Net investment income1 | 0.43 | 0.39 | 0.46 | 0.45 | 0.42 |
Net realized and unrealized gain (loss) on investments, written options, futures contracts, swap contracts and foreign currency transactions | 0.002 | 0.61 | 1.45 | (2.32) | (0.05) |
TOTAL FROM INVESTMENT OPERATIONS | 0.43 | 1.00 | 1.91 | (1.87) | 0.37 |
Less Distributions: |
Distributions from net investment income | (0.36) | (0.52) | (0.49) | (0.50) | (0.49) |
Net Asset Value, End of Period | $9.22 | $9.15 | $8.67 | $7.25 | $9.62 |
Total Return3 | 4.77% | 12.08% | 28.28% | (20.38)% | 3.93% |
Ratios to Average Net Assets: |
Net expenses | 1.02%4 | 1.13%4 | 1.13%4 | 1.13%4 | 1.13%4 |
Net investment income | 4.74% | 4.50% | 6.03% | 5.23% | 4.38% |
Expense waiver/reimbursement5 | 0.16% | 0.33% | 0.68% | 0.38% | 0.19% |
Supplemental Data: |
Net assets, end of period (000 omitted) | $122,494 | $54,450 | $36,913 | $32,549 | $49,498 |
Portfolio turnover | 114% | 96% | 69% | 95% | 76% |
Portfolio turnover (excluding purchases and sales from dollar-roll transactions) | 113% | 96% | 69% | 94% | 68% |
1 | Per share numbers have been calculated using the average shares method. |
2 | Represents less than $0.01. |
3 | Based on net asset value. Total returns do not reflect any additional fees or expenses that may be imposed by separate accounts of insurance companies or in connection with any variable annuity or variable life insurance contract. |
4 | The net expense ratio is calculated without reduction for fees paid indirectly for expense offset arrangements. The net expense ratios are 1.02%, 1.11%, 1.12%, 1.13% and 1.13% for the years ended December 31, 2011, 2010, 2009, 2008 and 2007, respectively, after taking into account these expense reductions. |
5 | This expense decrease is reflected in both the net expense and the net investment income ratios shown above. |
See Notes which are an integral part of the Financial Statements
Annual Shareholder ReportStatement of Assets and Liabilities
Assets: |
Total investments in securities, at value including $28,902,871 of investments in an affiliated holding (Note 5) (identified cost $115,616,552) | $121,491,134 |
Cash denominated in foreign currencies (identified cost $157,215) | 152,723 |
Income receivable | 995,807 |
Receivable for shares sold | 60 |
Prepaid expenses | 949 |
TOTAL ASSETS | 122,640,673 |
Liabilities: |
Payable for investments purchased | $2,839 |
Payable for shares redeemed | 60,036 |
Payable for daily variation margin | 33,475 |
Payable for investment adviser fee (Note 5) | 3,122 |
Payable for Directors'/Trustees' fees | 169 |
Payable for auditing fees | 27,750 |
Payable for portfolio accounting fees | 19,095 |
TOTAL LIABILITIES | 146,486 |
Net assets for 13,285,476 shares outstanding | $122,494,187 |
Net Assets Consist of: |
Paid-in capital | $115,654,620 |
Net unrealized appreciation of investments, futures contracts and translation of assets and liabilities in foreign currency | 5,787,349 |
Accumulated net realized loss on investments, written options, futures contracts, swap contracts and foreign currency transactions | (3,110,922) |
Undistributed net investment income | 4,163,140 |
TOTAL NET ASSETS | $122,494,187 |
Net Asset Value, Offering Price and Redemption Proceeds Per Share: |
$122,494,187 ÷ 13,285,476 shares outstanding, no par value, unlimited shares authorized | $9.22 |
See Notes which are an integral part of the Financial Statements
Annual Shareholder ReportInvestment Income: |
Dividends (including $1,072,004 received from an affiliated holding (Note 5) and net of foreign taxes withheld of $42,925) | $3,324,274 |
Interest | 1,607,305 |
TOTAL INCOME | 4,931,579 |
Expenses: |
Investment adviser fee (Note 5) | $642,216 |
Administrative fee (Note 5) | 150,000 |
Custodian fees | 18,369 |
Transfer and dividend disbursing agent fees and expenses | 16,551 |
Directors'/Trustees' fees | 2,432 |
Auditing fees | 27,750 |
Legal fees | 7,792 |
Portfolio accounting fees | 92,245 |
Printing and postage | 39,348 |
Insurance premiums | 4,110 |
Miscellaneous | 3,776 |
TOTAL EXPENSES | 1,004,589 |
Waivers, Reimbursement and Reduction: |
Waiver/reimbursement of investment adviser fee (Note 5) | $(109,876) |
Waiver of administrative fee (Note 5) | (24,143) |
Fees paid indirectly from directed brokerage arrangements (Note 6) | (479) |
TOTAL WAIVERS, REIMBURSEMENT AND REDUCTION | (134,498) |
Net expenses | 870,091 |
Net investment income | 4,061,488 |
Realized and Unrealized Gain (Loss) on Investments, Futures Contracts, Swap Contracts and Foreign Currency Transactions: |
Net realized gain on investments and foreign currency transactions (including realized loss of $101,407 on investments in an affiliated holding (Note 5)) | 11,951,040 |
Net realized loss on futures contracts | (260,502) |
Net realized loss on swap contracts | (9,708) |
Net change in unrealized appreciation of investments and translation of assets and liabilities in foreign currency | (13,441,106) |
Net change in unrealized depreciation of futures contracts | (82,892) |
Net change in unrealized depreciation of swap contracts | 10,018 |
Net realized and unrealized loss on investments, futures contracts, swap contracts and foreign currency transactions | (1,833,150) |
Change in net assets resulting from operations | $2,228,338 |
See Notes which are an integral part of the Financial Statements
Annual Shareholder ReportStatement of Changes in Net Assets
Year Ended December 31 | 2011 | 2010 |
Increase (Decrease) in Net Assets |
Operations: |
Net investment income | $4,061,488 | $2,270,870 |
Net realized gain on investments, futures contracts, swap contracts and foreign currency transactions | 11,680,830 | 3,460,069 |
Net change in unrealized appreciation/depreciation of investments, futures contracts, swap contracts and translation of assets and liabilities in foreign currency | (13,513,980) | (28,500) |
CHANGE IN NET ASSETS RESULTING FROM OPERATIONS | 2,228,338 | 5,702,439 |
Distributions to Shareholders: |
Distributions from net investment income | (2,077,694) | (2,161,759) |
Share Transactions: |
Proceeds from sale of shares | 4,005,815 | 5,935,057 |
Proceeds from shares issued in connection with the tax-free transfer of assets from EquiTrust Variable Insurance Series Fund Managed Portfolio | 79,932,309 | — |
Proceeds from shares issued in connection with the tax-free transfer of assets from Federated Equity Income Fund II | — | 19,979,519 |
Net asset value of shares issued to shareholders in payment of distributions declared | 2,077,694 | 2,161,759 |
Cost of shares redeemed | (18,122,161) | (14,079,899) |
CHANGE IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS | 67,893,657 | 13,996,436 |
Change in net assets | 68,044,301 | 17,537,116 |
Net Assets: |
Beginning of period | 54,449,886 | 36,912,770 |
End of period (including undistributed net investment income of $4,163,140 and $2,087,688, respectively) | $122,494,187 | $54,449,886 |
See Notes which are an integral part of the Financial Statements
Annual Shareholder ReportFederated Insurance Series (the “Trust”) is registered under the Investment Company Act of 1940, as amended (the “Act”), as an open-end management investment company. The Trust consists of seven portfolios. The financial statements included herein are only those of Federated Managed Volatility Fund II (formerly, Federated Capital Income Fund II) (the “Fund”), a diversified portfolio. The financial statements of the other portfolios are presented separately. The assets of each portfolio are segregated and a shareholder's interest is limited to the portfolio in which shares are held. Each portfolio pays its own expenses. Fund shares are available exclusively as a funding vehicle for life insurance companies writing variable life insurance policies and variable annuity contracts. The investment objective of the Fund is to achieve high current income and moderate capital appreciation.
On July 15, 2011, the Fund acquired all of the net assets of EquiTrust Variable Insurance Series Fund Managed Portfolio (the “Acquired Fund”), an open-end investment company, in a tax-free reorganization in exchange for shares of the Fund, pursuant to a plan of reorganization approved by the Acquired Fund's shareholders on July 15, 2011. The purpose of the transaction was to combine two portfolios with comparable investment objectives and strategies. For financial reporting purposes, assets received and shares issued by the Fund were recorded at fair value; however, the cost basis of the investments received from the Acquired Fund was carried forward to align ongoing reporting of the Fund's realized and unrealized gains and losses with amounts distributable to shareholders for tax purposes.
Assuming the acquisition had been completed on January 1, 2011, the beginning of the annual reporting period of the Fund, the Fund's pro forma results of operations for the year ended December 31, 2011, are as follows:
Net investment income* | $4,777,841 |
Net realized and unrealized gain on investments | $69,376 |
Net increase in net assets resulting from operations | $4,847,217 |
* | Net investment income includes $245,073 of pro forma additional expenses. |
Because the combined investment portfolios have been managed as a single integrated portfolio since the acquisition was completed, it is not practicable to separate the amounts of revenue and earnings of the Acquired Fund that has been included in the Fund's Statement of Operations as of December 31, 2011.
For every one share of EquiTrust Variable Insurance Series Fund Managed Portfolio Initial Class shares exchanged, a shareholder received 1.655 shares of Federated Managed Volatility Fund II.
For every one share of EquiTrust Variable Insurance Series Fund Managed Portfolio Service Class shares exchanged, a shareholder received 1.720 shares of Federated Managed Volatility Fund II.
On July 15, 2011, the Fund received assets from the EquiTrust Variable Insurance Series Fund Managed Portfolio as the result of the tax-free reorganization as follows:
Shares of the Fund Issued | EquiTrust Variable Insurance Series Fund Managed Portfolio Net Assets Received | Unrealized Appreciation1 | Net Assets of the Fund Immediately Prior to Combination | Net Assets of the Fund Immediately After Combination |
8,669,448 | $79,932,309 | $13,634,965 | $53,474,645 | $133,406,954 |
1 | Unrealized Appreciation is included in the EquiTrust Variable Insurance Series Fund Managed Portfolio Net Assets Received amount shown above. |
On March 12, 2010, the Fund acquired all of the net assets of Federated Equity Income Fund II, an open-end investment company in a tax-free reorganization in exchange for shares of the Fund, pursuant to a plan of reorganization approved by Federated Equity Income Fund II's shareholders on February 19, 2010. The purpose of the transaction was to combine two portfolios managed by Federated Equity Management Company of Pennsylvania with comparable investment objectives and strategies. For financial reporting purposes, assets received and shares issued by the Fund were recorded at fair value; however, the cost basis of the investments received from Federated Equity Income Fund II was carried forward to align ongoing reporting of the Fund's realized and unrealized gains and losses with amounts distributable to shareholders for tax purposes.
Assuming the acquisition had been completed on January 1, 2010, the beginning of the annual reporting period of the Fund, the Fund's pro forma results of operations for the year ended December 31, 2010, are as follows:
Net investment income* | $2,468,243 |
Net realized and unrealized gain on investments, written options and swap contracts | $3,614,861 |
Net increase in net assets resulting from operations | $6,083,104 |
* | Net investment income includes $1,562 of pro forma eliminated expenses. |
Because the combined investment portfolios have been managed as a single integrated portfolio since the acquisition was completed, it is not practicable to separate the amounts of revenue and earnings of Federated Equity Income Fund II that has been included in the Fund's Statement of Operations since March 12, 2010. The Fund received net assets from Federated Equity Income Fund II as the result of the tax-free reorganization as follows:
Shares of the Fund Issued | Federated Equity Income Fund II Net Assets Received | Unrealized Appreciation1 | Net Assets of the Fund Immediately Prior to Combination | Net Assets of the Fund Immediately After Combination |
2,375,696 | $19,979,519 | $2,070,856 | $36,300,833 | $56,280,352 |
1 | Unrealized Appreciation is included in the Federated Equity Income Fund II Net Assets Received amount shown above. |
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. These policies are in conformity with U.S. generally accepted accounting principles (GAAP).
Investment Valuation
In calculating its net asset value (NAV), the Fund generally values investments as follows:
- Equity securities listed on an exchange or traded through a regulated market system are valued at their last reported sale price or official closing price in their principal exchange or market.
- Fixed-income securities acquired with remaining maturities greater than 60 days are fair valued using price evaluations provided by a pricing service approved by the Trustees.
- Fixed-income securities acquired with remaining maturities of 60 days or less are valued at their cost (adjusted for the accretion of any discount or amortization of any premium), which approximates market value.
- Shares of other mutual funds are valued based upon their reported NAVs.
- Derivative contracts listed on exchanges are valued at their reported settlement or closing price.
- Over-the-counter (OTC) derivative contracts are fair valued using price evaluations provided by a pricing service approved by the Trustees.
- For securities that are fair valued in accordance with procedures established by and under the general supervision of the Trustees, certain factors may be considered such as: the purchase price of the security, information obtained by contacting the issuer, analysis of the issuer's financial statements or other available documents, fundamental analytical data, the nature and duration of restrictions on disposition, the movement of the market in which the security is normally traded and public trading in similar securities of the issuer or comparable issuers.
If the Fund cannot obtain a price or price evaluation from a pricing service for an investment, the Fund may attempt to value the investment based upon the mean of bid and asked quotations or fair value the investment based on price evaluations, from one or more dealers. If any price, quotation, price evaluation or other pricing source is not readily available when the NAV is calculated, the Fund uses the fair value of the investment determined in accordance with the procedures described below. There can be no assurance that the Fund could purchase or sell an investment at the price used to calculate the Fund's NAV.
Fair Valuation and Significant Events Procedures
The Trustees have authorized the use of pricing services to provide evaluations of the current fair value of certain investments for purposes of calculating the NAV. Factors considered by pricing services in evaluating an investment include the yields or prices of investments of comparable quality, coupon, maturity, call rights and other potential prepayments, terms and type, reported transactions, indications as to values from dealers and general market conditions. Some pricing services provide a single price evaluation reflecting the bid-side of the market for an investment (a “bid” evaluation). Other pricing services offer both bid evaluations and price evaluations indicative of a price between the prices bid and asked for the investment (a “mid” evaluation). The Fund normally uses bid evaluations for U.S. Treasury and Agency securities, mortgage-backed securities and municipal securities. The Fund normally uses mid evaluations for other types of fixed-income securities and OTC derivative contracts. In the event that market quotations and price evaluations are not available for an investment, the fair value of the investment is determined in accordance with procedures adopted by the Trustees.
The Trustees also have adopted procedures requiring an investment to be priced at its fair value whenever the Adviser determines that a significant event affecting the value of the investment has occurred between the time as of which the price of the investment would otherwise be determined and the time as of which the NAV is computed. An event is considered significant if there is both an affirmative expectation that the investment's value will change in response to the event and a reasonable basis for quantifying the resulting change in value. Examples of significant events that may occur after the close of the principal market on which a security is traded, or after the time of a price evaluation provided by a pricing service or a dealer, include:
- With respect to securities traded in foreign markets, significant trends in U.S. equity markets or in the trading of foreign securities index futures or options contracts;
- With respect to price evaluations of fixed-income securities determined before the close of regular trading on the NYSE, actions by the Federal Reserve Open Market Committee and other significant trends in U.S. fixed-income markets;
- Political or other developments affecting the economy or markets in which an issuer conducts its operations or its securities are traded; and
- Announcements concerning matters such as acquisitions, recapitalizations, litigation developments, a natural disaster affecting the issuer's operations or regulatory changes or market developments affecting the issuer's industry.
Annual Shareholder Report
The Trustees have approved the use of a pricing service to determine the fair value of equity securities traded principally in foreign markets when the Adviser determines that there has been a significant trend in the U.S. equity markets or in index futures trading. For other significant events, the Fund may seek to obtain more current quotations or price evaluations from alternative pricing sources. If a reliable alternative pricing source is not available, the Fund will determine the fair value of the investment using another method approved by the Trustees.Repurchase Agreements
The Fund may invest in repurchase agreements for short-term liquidity purposes. It is the policy of the Fund to require the other party to a repurchase agreement to transfer to the Fund's custodian or sub-custodian eligible securities or cash with a market value (after transaction costs) at least equal to the repurchase price to be paid under the repurchase agreement. The eligible securities are transferred to accounts with the custodian or sub-custodian in which the Fund holds a “securities entitlement” and exercises “control” as those terms are defined in the Uniform Commercial Code. The Fund has established procedures for monitoring the market value of the transferred securities and requiring the transfer of additional eligible securities if necessary to equal at least the repurchase price. These procedures also allow the other party to require securities to be transferred from the account to the extent that their market value exceeds the repurchase price or in exchange for other eligible securities of equivalent market value.
The insolvency of the other party or other failure to repurchase the securities may delay the disposition of the underlying securities or cause the Fund to receive less than the full repurchase price. Under the terms of the repurchase agreement, any amounts received by the Fund in excess of the repurchase price and related transaction costs must be remitted to the other party.
The Fund may enter into repurchase agreements in which eligible securities are transferred into joint trading accounts maintained by the custodian or sub-custodian for investment companies and other clients advised by the Fund's Adviser and its affiliates. The Fund will participate on a pro rata basis with the other investment companies and clients in its share of the securities transferred under such repurchase agreements and in its share of proceeds from any repurchase or other disposition of such securities.
Investment Income, Gains and Losses, Expenses and Distributions
Investment transactions are accounted for on a trade-date basis. Realized gains and losses from investment transactions are recorded on an identified-cost basis. Interest income and expenses are accrued daily. Dividend income and distributions to shareholders are recorded on the ex-dividend date. Foreign dividends are recorded on the ex-dividend date or when the Fund is informed of the ex-dividend date. Positive or negative inflation adjustments on Treasury Inflation-Protected Securities (TIPS) are included in interest income. Distributions of net investment income are declared and paid annually. Non-cash dividends included in dividend income, if any, are recorded at fair value.
Premium and Discount Amortization/Paydown Gains and Losses
All premiums and discounts on fixed-income securities, other than mortgage-backed securities, are amortized/accreted using the effective interest rate method. Gains and losses realized on principal payment of mortgage-backed securities (paydown gains and losses) are classified as part of investment income.
Federal Taxes
It is the Fund's policy to comply with the Subchapter M provision of the Internal Revenue Code (the “Code”) and to distribute to shareholders each year substantially all of its income. Accordingly, no provision for federal income tax is necessary. As of and during the year ended December 31, 2011, the Fund did not have a liability for any uncertain tax positions. The Fund recognizes interest and penalties, if any, related to tax liabilities as income tax expense in the Statement of Operations. As of December 31, 2011, tax years 2008 through 2011 remain subject to examination by the Fund's major tax jurisdictions, which include the United States of America and the Commonwealth of Massachusetts.
The Fund may be subject to taxes imposed by governments of countries in which it invests. Such taxes are generally based on either income or gains earned or repatriated. The Fund accrues and applies such taxes to net investment income, net realized gains and net unrealized gains as income and/or gains are earned.
When-Issued and Delayed Delivery Transactions
The Fund may engage in when-issued or delayed delivery transactions. The Fund records when-issued securities on the trade date and maintains security positions such that sufficient liquid assets will be available to make payment for the securities purchased. Securities purchased on a when-issued or delayed delivery basis are marked to market daily and begin earning interest on the settlement date. Losses may occur on these transactions due to changes in market conditions or the failure of counterparties to perform under the contract.
The Fund may transact in To Be Announced Securities (TBAs). As with other delayed delivery transactions, a seller agrees to issue TBAs at a future date. However, the seller does not specify the particular securities to be delivered. Instead, the Fund agrees to accept any security that meets specified terms such as issuer, interest rate and terms of underlying mortgages. The Fund records TBAs on the trade date utilizing information associated with the specified terms of the transaction as opposed to the specific mortgages. TBAs are marked to market daily and begin earning interest on the settlement date. Losses may occur due to the fact that the actual underlying mortgages received may be less favorable than those anticipated by the Fund.
Dollar-Roll Transactions
The Fund engages in dollar-roll transactions in which the Fund sells mortgage-backed securities with a commitment to buy similar (same type, coupon and maturity), but not identical mortgage-backed securities on a future date at a lower price. Normally, one or both securities involved are TBA mortgage-backed securities. The Fund treats dollar-roll transactions as purchases and sales. Dollar-rolls are subject to interest rate risks and credit risks.
Annual Shareholder Report
Futures ContractsThe Fund purchases and sells financial futures contracts to manage cash flows, enhance yield and to potentially reduce transaction costs. Upon entering into a financial futures contract with a broker, the Fund is required to deposit in a segregated account a specified amount of cash or U.S. government securities. Futures contracts are valued daily and unrealized gains or losses are recorded in a “variation margin” account. Daily, the Fund receives from or pays to the broker a specified amount of cash based upon changes in the variation margin account. When a contract is closed, the Fund recognizes a realized gain or loss. Futures contracts have market risks, including the risk that the change in the value of the contract may not correlate with the changes in the value of the underlying securities. There is minimal counterparty risk to the Fund since futures are exchange traded and the exchange's clearinghouse, as counterparty to all exchange traded futures, guarantees the futures against default.
Futures contracts outstanding at period end are listed after the Fund's Portfolio of Investments.
The average notional value of long and short futures contracts held by the Fund throughout the period was $433,592 and $1,752,308, respectively. This is based on amounts held as of each month-end throughout the fiscal period.
Swap Contracts
Swap contracts involve two parties that agree to exchange the returns (or the differential in rates of return) earned or realized on particular predetermined investments, instruments, indices or other measures. The gross returns to be exchanged or “swapped” between parties are generally calculated with respect to a “notional amount” for a predetermined period of time. The Fund enters into interest rate, total return, credit default, currency and other swap agreements. Risks may arise upon entering into swap agreements from the potential inability of the counterparties to meet the terms of their contract from unanticipated changes in the value of the swap agreement.
The Fund uses credit default swaps to manage exposure to a given issuer or sector by either selling protection to increase exposure, or buying protection to reduce exposure. The “buyer” in a credit default swap is obligated to pay the “seller” a periodic stream of payments over the term of the contract provided that no event of default on an underlying reference obligation has occurred. If an event of default occurs, the seller must pay the buyer the full notional value, or the “par value,” of the reference obligation in exchange for the reference obligation. In connection with these agreements, securities may be identified as collateral in accordance with the terms of the respective swap agreements to provide assets of value and recourse in the event of default or bankruptcy/insolvency. Recovery values are assumed by market makers considering either industry standard recovery rates or entity specific factors and considerations until a credit event occurs. If a credit event has occurred, the recovery value is typically determined by a facilitated auction whereby a minimum number of allowable broker bids, together with a specific valuation method, are used to calculate the settlement value.
Upfront payments received or paid by the Fund will be reflected as an asset or liability on the Statement of Assets and Liabilities. Changes in the value of swap contracts are included in Swaps, at value on the Statement of Assets and Liabilities, and periodic payments are reported as Net realized gain (loss) on swap contracts in the Statement of Operations.
At December 31, 2011, the Fund had no outstanding swap contracts.
The average notional value of credit default swap contracts held by the Fund throughout the period was $100,000. This is based on amounts held as of each month-end throughout the fiscal period.
Foreign Exchange Contracts
The Fund enters into foreign exchange contracts for the delayed delivery of securities or foreign currency exchange transactions. The Fund enters into foreign exchange contracts to protect assets against adverse changes in foreign currency exchange rates or exchange control regulations. Purchased contracts are used to acquire exposure to foreign currencies, whereas, contracts to sell are used to hedge the Fund's securities against currency fluctuations. Risks may arise upon entering into these transactions from the potential inability of counterparties to meet the terms of their commitments and from unanticipated movements in security prices or foreign exchange rates. The foreign exchange contracts are adjusted by the daily exchange rate of the underlying currency and any gains or losses are recorded for financial statement purposes as unrealized until the settlement date.
At December 31, 2011, the Fund had no outstanding foreign exchange contracts.
Foreign Currency Translation
The accounting records of the Fund are maintained in U.S. dollars. All assets and liabilities denominated in foreign currencies (FCs) are translated into U.S. dollars based on the rates of exchange of such currencies against U.S. dollars on the date of valuation. Purchases and sales of securities, income and expenses are translated at the rate of exchange quoted on the respective date that such transactions are recorded. The Fund does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in market prices of securities held. Such fluctuations are included with the net realized and unrealized gain or loss from investments.
Reported net realized foreign exchange gains or losses arise from sales of portfolio securities, sales and maturities of short-term securities, sales of FCs, currency gains or losses realized between the trade and settlement dates on securities transactions, the difference between the amounts of dividends, interest and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in the value of assets and liabilities other than investments in securities at fiscal year end, resulting from changes in the exchange rate.
Option Contracts
The Fund buys or sells put and call options to provide income and protection from extreme reductions in the market value of certain securities. The seller (“writer”) of an option receives a payment or premium, from the buyer, which the writer keeps regardless of whether the buyer exercises the option. When the Fund writes a put or call option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. The Fund, as a writer of an option, bears the market risk of an unfavorable change in the price of the underlying reference instrument. When the Fund purchases a put or call option, an amount equal to the premium paid is recorded as an increase to the cost of the investment and subsequently marked to market to reflect the current value of the option purchased. Premiums paid for purchasing options which expire are treated as realized losses. Premiums received/paid for writing/purchasing options which are exercised or closed are added to the proceeds or offset against amounts Annual Shareholder Report
paid on the underlying reference instrument to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. Options can trade on securities or commodities exchanges. In this case, the exchange sets all the terms of the contract except for the price. Most exchanges require investors to maintain margin accounts through their brokers to cover their potential obligations to the exchange. This protects investors against potential defaults by the counterparty.At December 31, 2011, the Fund had no outstanding written option contracts.
The average market value of purchased put option contracts held by the Fund throughout the period was $7,643. This is based on amounts held as of each month-end throughout the fiscal period.
Restricted Securities
The Fund may purchase securities which are considered restricted. Restricted securities are securities that either: (a) cannot be offered for public sale without first being registered, or being able to take advantage of an exemption from registration, under the Securities Act of 1933; or (b) are subject to contractual restrictions on public sales. In some cases, when a security cannot be offered for public sale without first being registered, the issuer of the restricted security has agreed to register such securities for resale, at the issuer's expense, either upon demand by the Fund or in connection with another registered offering of the securities. Many such restricted securities may be resold in the secondary market in transactions exempt from registration. Restricted securities may be determined to be liquid under criteria established by the Trustees. The Fund will not incur any registration costs upon such resales. The Fund's restricted securities are valued at the price provided by dealers in the secondary market or, if no market prices are available, at the fair value as determined in accordance with procedures established by and under the general supervision of the Trustees.
Additional Disclosure Related to Derivative Instruments
Fair Value of Derivative Instruments | ||||
Liability | ||||
Statement of Assets and Liabilities Location | Fair Value | |||
Derivatives not accounted for as hedging instruments under ASC Topic 815 | ||||
Interest rate contracts | Payable for daily variation margin | $82,892* |
* | Includes cumulative appreciation/depreciation of futures contracts as reported in the footnotes to the Portfolio of Investments. Only the current day's variation margin is reported within the Statement of Assets and Liabilities. |
The Effect of Derivative Instruments on the Statement of Operations for the Year Ended December 31, 2011
Amount of Realized Gain or (Loss) on Derivatives Recognized in Income | |||||
Credit Default Swaps | Futures | Forward Currency Contracts | Options Purchased | Total | |
Interest rate contracts | $ — | $(260,502) | $ — | $ — | $(260,502) |
Foreign exchange contracts | $ — | $ — | $12,883 | $(41,688) | $(28,805) |
Credit contracts | $(9,708) | $ — | $ — | $ — | $(9,708) |
TOTAL | $(9,708) | $(260,502) | $12,883 | $(41,688) | $(299,015) |
Change in Unrealized Appreciation or (Depreciation) on Derivatives Recognized in Income | |||
Credit Default Swaps | Futures | Total | |
Interest rate contracts | $ — | $(82,892) | $(82,892) |
Credit contracts | $10,018 | $ — | $10,018 |
TOTAL | $10,018 | $(82,892) | $(72,874) |
Other
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts of assets, liabilities, expenses and revenues reported in the financial statements. Actual results could differ from those estimated.
Annual Shareholder Report
3. SHARES OF BENEFICIAL INTERESTThe following table summarizes share activity:
Year Ended December 31 | 2011 | 2010 |
Shares sold | 438,555 | 700,644 |
Shares issued in connection with the tax-free transfer of assets from EquiTrust Variable Insurance Series Fund Managed Portfolio | 8,669,448 | — |
Shares issued in connection with the tax-free transfer of assets from Federated Equity Income Fund II | — | 2,375,696 |
Shares issued to shareholders in payment of distributions declared | 230,343 | 257,693 |
Shares redeemed | (2,003,738) | (1,641,687) |
NET CHANGE RESULTING FROM FUND SHARE TRANSACTIONS | 7,334,608 | 1,692,346 |
The timing and character of income and capital gain distributions are determined in accordance with income tax regulations, which may differ from GAAP. These differences are due primarily to differing treatments for foreign currency transactions, discount accretion/premium amortization on debt securities, capital loss carryforwards acquired in mergers and swap income reclassifications.
For the year ended December 31, 2011, permanent differences identified and reclassified among the components of net assets were as follows:
Increase (Decrease) | ||
Paid-In Capital | Undistributed Net Investment Income (Loss) | Accumulated Net Realized Gain (Loss) |
$2,719,892 | $91,658 | $(2,811,550) |
Net investment income (loss), net realized gains (losses) and net assets were not affected by this reclassification.
The tax character of distributions as reported on the Statement of Changes in Net Assets for the years ended December 31, 2011 and 2010, was as follows:
2011 | 2010 |
Ordinary income | $2,077,694 | $2,161,759 |
As of December 31, 2011, the components of distributable earnings on a tax basis were as follows:
Undistributed ordinary income | $4,109,778 |
Undistributed long-term gains | $8,254,819 |
Net unrealized appreciation | $5,117,358 |
Capital loss carryforwards | $(10,642,388) |
The difference between book-basis and tax-basis net unrealized appreciation/depreciation is attributable to differing treatments for the deferral of losses on wash sales, discount accretion/premium amortization on debt securities and dollar-roll transactions.
At December 31, 2011, the cost of investments for federal tax purposes was $116,362,591. The net unrealized appreciation of investments for federal tax purposes excluding any unrealized appreciation/depreciation resulting from changes in foreign currency exchange rates and futures contracts was $5,128,543. This consists of net unrealized appreciation from investments for those securities having an excess of value over cost of $8,342,067 and net unrealized depreciation from investments for those securities having an excess of cost over value of $3,213,524.
At December 31, 2011, the Fund had a capital loss carryforward of $10,642,388 which will reduce the Fund's taxable income arising from future net realized gains on investments, if any, to the extent permitted by the Code, thereby reducing the amount of distributions to shareholders which would otherwise be necessary to relieve the Fund of any liability for federal income tax. Pursuant to the Code, a net capital loss incurred in taxable years beginning on or before December 22, 2010 is characterized as short-term and may be carried forward for a maximum of eight tax years (“Carryforward Limit”), whereas a net capital loss incurred in taxable years beginning after December 22, 2010 retains its character as either short-term or long-term, does not expire and is required to be utilized prior to the losses which have a Carryforward Limit.
The following schedule summarizes the Fund's short-term and long-term capital loss carryforwards and expiration year:
Expiration Year | Short-Term | Long-Term | Total |
2015 | $2,000,344 | N/A | $2,000,344 |
2016 | $5,924,422 | N/A | $5,924,422 |
2017 | $2,717,622 | N/A | $2,717,622 |
As a result of the tax-free transfer of assets from Federated Equity Income Fund II and EquiTrust Variable Insurance Series Fund Managed Portfolio, the use of certain capital loss carryforwards listed above may be limited.
The Fund used capital loss carryforwards of $3,221,193 to offset taxable capital gains realized during the year ended December 31, 2011.
Capital loss carryforwards of $389,069 expired during the year ended December 31, 2011.
Annual Shareholder Report
5. INVESTMENT ADVISER FEE AND OTHER TRANSACTIONS WITH AFFILIATESInvestment Adviser Fee
Federated Equity Management Company of Pennsylvania is the Fund's investment adviser (the “Adviser”). The advisory agreement between the Fund and the Adviser provides for an annual fee equal to 0.75% of the Fund's average daily net assets. Subject to the terms described in the Expense Limitation note, the Adviser may voluntarily choose to waive any portion of its fee. For the year ended December 31, 2011, the Adviser voluntarily waived $765 of its fee.
Certain of the Fund's assets are managed by Federated Investment Management Company (the “Sub-Adviser”). Under the terms of a sub-advisory agreement between the Adviser and the Sub-Adviser, the Sub-Adviser receives an allocable portion of the Fund's adviser fee. The fee is paid by the Adviser out of its own resources and is not an incremental Fund expense. For the year ended December 31, 2011, the Sub-Adviser earned a fee of $111,953.
Administrative Fee
Federated Administrative Services (FAS), under the Administrative Services Agreement, provides the Fund with administrative personnel and services. The fee paid to FAS is based on the average aggregate daily net assets of certain Federated funds as specified below:
Administrative Fee | Average Aggregate Daily Net Assets of the Federated Funds |
0.150% | on the first $5 billion |
0.125% | on the next $5 billion |
0.100% | on the next $10 billion |
0.075% | on assets in excess of $20 billion |
The administrative fee received during any fiscal year shall be at least $150,000 per portfolio and $40,000 per each additional class of Shares. Subject to the terms described in the Expense Limitation note, FAS may voluntarily choose to waive any portion of its fee. For the year ended December 31, 2011, the net fee paid to FAS was 0.147% of average daily net assets of the Fund. FAS waived $24,143 of its fee.
Expense Limitation
Effective December 2, 2011, the Adviser and its affiliates (which may include FAS) have voluntarily agreed to waive their fees and/or reimburse expenses so that the total annual fund operating expenses (as shown in the financial highlights) paid by the Fund (after the voluntary waivers and/or reimbursements) will not exceed 0.86% (the “Fee Limit”), up to but not including the later of (the “Termination Date”): (a) December 2, 2012; or (b) the date of the Fund's next effective Prospectus. While the Adviser and its affiliates currently do not anticipate terminating or increasing these arrangements prior to the Termination Date, these arrangements may only be terminated or the Fee Limit increased prior to the Termination Date with the agreement of the Trustees.
Interfund Transactions
During the year ended December 31, 2011, the Fund engaged in purchase and sale transactions with funds that have a common investment adviser (or affiliated investment advisers), common Directors/Trustees and/or common Officers. These purchase and sale transactions complied with Rule 17a-7 under the Act and amounted to $0 and $745,567, respectively.
General
Certain Officers and Trustees of the Fund are Officers and Directors or Trustees of the above companies.
Transactions Involving Affiliated Holdings
Affiliated holdings are mutual funds which are managed by the Adviser or an affiliate of the Adviser. The Adviser has agreed to reimburse the Fund for certain investment adviser fees as a result of transactions in other affiliated mutual funds. For the year ended December 31, 2011, the Adviser reimbursed $109,111. Transactions involving the affiliated holding during the year ended December 31, 2011, were as follows:
Federated High Income Bond Fund II, Primary Shares |
Balance of Shares Held 12/31/2010 | 2,016,405 |
Purchases/Additions | 3,871,773 |
Sales/Reductions | 1,612,605 |
Balance of Shares Held 12/31/2011 | 4,275,573 |
Value | $28,902,871 |
Dividend Income | $1,072,004 |
The Fund directs portfolio trades to a broker that in turn pays a portion of the Fund's operating expenses. For the year ended December 31, 2011, the Fund's expenses were reduced by $479 under these arrangements.
Purchases and sales of investments, excluding long-term U.S. government securities and short-term obligations, for the year ended December 31, 2011, were as follows:
Purchases | $79,609,121 |
Sales | $96,996,535 |
The Fund invests in securities of non-U.S. issuers. Political or economic developments may have an effect on the liquidity and volatility of portfolio securities and currency holdings.
At December 31, 2011, the diversification of countries was as follows:
Country | Percentage of Net Assets |
United States | 44.0% |
Great Britain | 3.6% |
Mexico | 3.1% |
Canada | 2.8% |
Russia | 1.8% |
Brazil | 1.7% |
Indonesia | 1.6% |
Venezuela | 1.6% |
Cayman Islands | 1.1% |
Bermuda | 1.0% |
Argentina | 0.9% |
Peru | 0.9% |
Turkey | 0.9% |
Columbia | 0.7% |
Luxembourg | 0.7% |
Philippines | 0.7% |
Uruguay | 0.5% |
Ireland | 0.4% |
Kazakhstan | 0.4% |
Panama | 0.4% |
Chile | 0.3% |
United Arab Emirates | 0.3% |
El Salvador | 0.2% |
Germany | 0.2% |
Netherlands | 0.2% |
Qatar | 0.2% |
Serbia | 0.2% |
Singapore | 0.2% |
France | 0.1% |
Marshall Islands | 0.1% |
South Africa | 0.1% |
Sri Lanka | 0.1% |
The Fund participates in a $100,000,000 unsecured, uncommitted revolving line of credit (LOC) agreement with PNC Bank. The LOC was made available for extraordinary or emergency purposes, primarily for financing redemption payments. Borrowings are charged interest at a rate offered to the Fund by PNC Bank at the time of the borrowing. As of December 31, 2011, there were no outstanding loans. During the year ended December 31, 2011, the Fund did not utilize the LOC.
Pursuant to an Exemptive Order issued by the Securities and Exchange Commission, the Fund, along with other funds advised by subsidiaries of Federated Investors, Inc., may participate in an interfund lending program. This program provides an alternative credit facility allowing the Fund to borrow from other participating affiliated funds. As of December 31, 2011, there were no outstanding loans. During the year ended December 31, 2011, the program was not utilized.
11. RECENT ACCOUNTING PRONOUNCEMENTS
In April 2011, the Financial Accounting Standards Board (FASB) released Accounting Standards Update (ASU) No. 2011-03, “Reconsideration of Effective Control for Repurchase Agreements.” This ASU amends FASB Accounting Standards Codification (ASC) Topic 860, “Transfers and Servicing”; specifically the criteria required to determine whether a repurchase agreement and similar agreements should be accounted for as sales of financial assets or secured borrowings with commitments. This ASU is effective for fiscal years and interim periods beginning after December 15, 2011. Management has concluded that the adoption of ASU No. 2011-03 is not expected to have a material impact on the Fund's financial statements and the accompanying notes, net assets or results of operations.
In addition, in May 2011, FASB released ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” This ASU amends FASB ASC Topic 820, “Fair Value Measurement,” to establish common requirements for measuring fair value and for disclosing information about fair value measurements in accordance with GAAP. This ASU is effective for fiscal years and interim periods beginning after December 15, 2011. Management has concluded that the adoption of ASU No. 2011-04 is not expected to have a material impact on the Fund's financial statements and the accompanying notes.
12. FEDERAL TAX INFORMATION (UNAUDITED)
Of the ordinary income distributions made by the Fund during the year ended December 31, 2011, 25.96% qualify for the dividend received deduction available to corporate shareholders.
Annual Shareholder ReportReport of Independent Registered Public Accounting Firm
TO THE BOARD OF TRUSTEES OF Federated insurance series AND SHAREHOLDERS OF federated Managed volatility fund II:
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of the Federated Managed Volatility Fund II (the “Fund”) (formerly, Federated Capital Income Fund II), a portfolio of Federated Insurance Series, as of December 31, 2011, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended and the financial highlights for each of the years in the five-year period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2011, by correspondence with the custodian, transfer agent and brokers or by other appropriate auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Federated Managed Volatility Fund II as of December 31, 2011, and the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended and the financial highlights for each of the years in the five-year period then ended, in conformity with U.S. generally accepted accounting principles.
Boston, Massachusetts
February 13, 2012
Shareholder Expense Example (unaudited)
As a shareholder of the Fund, you incur ongoing costs, including management fees and to the extent applicable, distribution (12b-1) fees and/or shareholder services fees and other Fund expenses. This Example is intended to help you to understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other variable investment options. It is based on an investment of $1,000 invested at the beginning of the period and held for the entire period from July 1, 2011 to December 31, 2011.
The first section of the table below provides information about actual account values and actual expenses. You may use the information in this section, together with the amount you invested, to estimate the expenses that you incurred over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first section under the heading entitled “Expenses Paid During Period” to estimate the expenses attributable to your investment during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second section of the table below provides information 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. Thus, you should not use the hypothetical account values and expenses to estimate the actual ending account balance or your expenses for the period. Rather, these figures are required to be provided to enable you to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only. Therefore, the second section of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds.
Beginning Account Value 7/1/2011 | Ending Account Value 12/31/2011 | Expenses Paid During Period1 ,2 |
Actual | $1,000 | $998.90 | $4.84 |
Hypothetical (assuming a 5% return before expenses) | $1,000 | $1,020.37 | $4.89 |
1 | Expenses are equal to the Fund's annualized net expense ratio of 0.96%, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half-year period). The expenses shown in the table do not include the charges and expenses imposed by the insurance company under the variable insurance product contract. Please refer to the variable insurance product prospectus for a complete listing of these expenses. |
2 | Actual and Hypothetical expenses paid during the period utilizing the Fund's current annualized net expense ratio of 0.86% (as reflected in the Notes to Financial Statements, Note 5 under Expense Limitation), multiplied by the average account value over the period, multiplied by 184/365 (to reflect current expenses as if they had been in effect throughout the most recent one-half-year period) would be $4.33 and $4.38, respectively. |
Board of Trustees and Trust Officers
The Board of Trustees is responsible for managing the Trust's business affairs and for exercising all the Trust's powers except those reserved for the shareholders. The following tables give information about each Trustee and the senior officers of the Fund. Where required, the tables separately list Trustees who are “interested persons” of the Fund (i.e., “Interested” Trustees) and those who are not (i.e., “Independent” Trustees). Unless otherwise noted, the address of each person listed is Federated Investors Tower, 1001 Liberty Avenue, Pittsburgh, PA 15222. The address of all Independent Trustees listed is 4000 Ericsson Drive, Warrendale, PA 15086-7561; Attention: Mutual Fund Board. As of December 31, 2011, the Trust comprised seven portfolio(s), and the Federated Fund Family consisted of 43 investment companies (comprising 134 portfolios). Unless otherwise noted, each Officer is elected annually. Unless otherwise noted, each Trustee oversees all portfolios in the Federated Fund Family and serves for an indefinite term. The Fund's Statement of Additional Information includes additional information about Trust Trustees and is available, without charge and upon request, by calling 1-800-341-7400.
Interested Trustees Background
Name Birth Date Positions Held with Trust Date Service Began | Principal Occupation(s) for Past Five Years, Other Directorships Held and Previous Position(s) |
John F. Donahue* Birth Date: July 28, 1924 Trustee Began serving: October 1993 | Principal Occupations: Director or Trustee of the Federated Fund Family; Chairman and Director, Federated Investors, Inc.; Chairman of the Federated Fund Family's Executive Committee. Previous Positions: Chairman of the Federated Fund Family; Trustee, Federated Investment Management Company; Chairman and Director, Federated Investment Counseling. |
J. Christopher Donahue* Birth Date: April 11, 1949 Trustee Began serving: October 1993 | Principal Occupations: Principal Executive Officer and President of the Federated Fund Family; Director or Trustee of some of the Funds in the Federated Fund Family; President, Chief Executive Officer and Director, Federated Investors, Inc.; Chairman and Trustee, Federated Investment Management Company; Trustee, Federated Investment Counseling; Chairman and Director, Federated Global Investment Management Corp.; Chairman, Federated Equity Management Company of Pennsylvania and Passport Research, Ltd. (investment advisory subsidiary of Federated); Trustee, Federated Shareholder Services Company; Director, Federated Services Company. Previous Positions: President, Federated Investment Counseling; President and Chief Executive Officer, Federated Investment Management Company, Federated Global Investment Management Corp. and Passport Research, Ltd. |
* | Family relationships and reasons for “interested” status: John F. Donahue is the father of J. Christopher Donahue; both are “interested” due to their beneficial ownership of shares of Federated Investors, Inc. and the positions they hold with Federated and its subsidiaries. |
INDEPENDENT Trustees Background
Name Birth Date Positions Held with Trust Date Service Began | Principal Occupation(s) for Past Five Years, Other Directorships Held, Previous Position(s) and Qualifications |
Nicholas P. Constantakis, CPA Birth Date: September 3, 1939 Trustee Began serving: February 1998 | Principal Occupation: Director or Trustee of the Federated Fund Family. Other Directorship Held: Director, Chairman of the Audit Committee, and member of the Compensation Committee, Michael Baker Corporation (architecture, engineering and construction services). Previous Position: Partner, Andersen Worldwide SC. Qualifications: Public accounting and director experience. |
John F. Cunningham Birth Date: March 5, 1943 Trustee Began serving: November 1999 | Principal Occupation: Director or Trustee of the Federated Fund Family. Other Directorships Held: Chairman, President and Chief Executive Officer, Cunningham & Co., Inc. (strategic business consulting); Trustee Associate, Boston College. Previous Positions: Director, Redgate Communications and EMC Corporation (computer storage systems); Chairman of the Board and Chief Executive Officer, Computer Consoles, Inc.; President and Chief Operating Officer, Wang Laboratories; Director, First National Bank of Boston; Director, Apollo Computer, Inc. Qualifications: Business management and director experience. |
Name Birth Date Positions Held with Trust Date Service Began | Principal Occupation(s) for Past Five Years, Other Directorships Held, Previous Position(s) and Qualifications |
Maureen Lally-Green Birth Date: July 5, 1949 Trustee Began serving: August 2009 | Principal Occupations: Director or Trustee of the Federated Fund Family; Director, Office of Church Relations, Diocese of Pittsburgh; Adjunct Professor of Law, Duquesne University School of Law. Other Directorships Held: Director, Auberle; Trustee, St. Francis University; Director, Ireland Institute of Pittsburgh; Director, UPMC Mercy Hospital; Regent, St. Vincent Seminary; Director, Epilepsy Foundation of Western and Central Pennsylvania; Director, Saint Thomas More Society, Allegheny County. Previous Position: Pennsylvania Superior Court Judge. Qualifications: Legal and director experience. |
Peter E. Madden Birth Date: March 16, 1942 Trustee Began serving: October 1993 | Principal Occupation: Director or Trustee, and Chairman of the Board of Directors or Trustees, of the Federated Fund Family. Previous Positions: Representative, Commonwealth of Massachusetts General Court; President, Chief Operating Officer and Director, State Street Bank and Trust Company and State Street Corporation (retired); Director, VISA USA and VISA International; Chairman and Director, Massachusetts Bankers Association; Director, Depository Trust Corporation; Director, The Boston Stock Exchange. Qualifications: Business management, mutual fund services and director experience. |
Charles F. Mansfield, Jr. Birth Date: April 10, 1945 Trustee Began serving: November 1999 | Principal Occupations: Director or Trustee of the Federated Fund Family; Management Consultant. Previous Positions: Chief Executive Officer, PBTC International Bank; Partner, Arthur Young & Company (now Ernst & Young LLP); Chief Financial Officer of Retail Banking Sector, Chase Manhattan Bank; Senior Vice President, HSBC Bank USA (formerly Marine Midland Bank); Vice President, Citibank; Assistant Professor of Banking and Finance, Frank G. Zarb School of Business, Hofstra University; Executive Vice President, DVC Group, Inc. (marketing, communications and technology). Qualifications: Banking, business management, education and director experience. |
Thomas M. O'Neill Birth Date: June 14, 1951 Trustee Began serving: October 2006 | Principal Occupations: Director or Trustee, Vice Chairman of the Audit Committee of the Federated Fund Family; Sole Proprietor, Navigator Management Company (investment and strategic consulting). Other Directorships Held: Board of Overseers, Children's Hospital of Boston; Visiting Committee on Athletics, Harvard College; Board of Directors, Medicines for Humanity; Board of Directors, The Golisano Children's Museum of Naples, Florida. Previous Positions: Chief Executive Officer and President, Managing Director and Chief Investment Officer, Fleet Investment Advisors; President and Chief Executive Officer, Aeltus Investment Management, Inc.; General Partner, Hellman, Jordan Management Co., Boston, MA; Chief Investment Officer, The Putnam Companies, Boston, MA; Credit Analyst and Lending Officer, Fleet Bank; Director and Consultant, EZE Castle Software (investment order management software); Director, Midway Pacific (lumber). Qualifications: Business management, mutual fund, director and investment experience. |
John S. Walsh Birth Date: November 28, 1957 Trustee Began serving: January 1999 | Principal Occupations: Director or Trustee, Chairman of the Audit Committee of the Federated Fund Family; President and Director, Heat Wagon, Inc. (manufacturer of construction temporary heaters); President and Director, Manufacturers Products, Inc. (distributor of portable construction heaters); President, Portable Heater Parts, a division of Manufacturers Products, Inc. Previous Position: Vice President, Walsh & Kelly, Inc. Qualifications: Business management and director experience. |
Name Birth Date Address Positions Held with Trust Date Service Began | Principal Occupation(s) for Past Five Years and Previous Position(s) |
John W. McGonigle Birth Date: October 26, 1938 EXECUTIVE VICE PRESIDENT AND SECRETARY Began serving: September 1993 | Principal Occupations: Executive Vice President and Secretary of the Federated Fund Family; Vice Chairman, Executive Vice President, Secretary and Director, Federated Investors, Inc. Previous Positions: Trustee, Federated Investment Management Company and Federated Investment Counseling; Director, Federated Global Investment Management Corp., Federated Services Company and Federated Securities Corp. |
Richard A. Novak Birth Date: December 25, 1963 Treasurer Began serving: January 2006 | Principal Occupations: Principal Financial Officer and Treasurer of the Federated Fund Family; Senior Vice President, Federated Administrative Services; Financial and Operations Principal for Federated Securities Corp., Edgewood Services, Inc. and Southpointe Distribution Services, Inc. Previous Positions: Controller of Federated Investors, Inc.; Vice President, Finance of Federated Services Company; held various financial management positions within The Mercy Hospital of Pittsburgh; Auditor, Arthur Andersen & Co. |
Name Birth Date Address Positions Held with Trust Date Service Began | Principal Occupation(s) for Past Five Years and Previous Position(s) |
Richard B. Fisher Birth Date: May 17, 1923 Vice President Began serving: September 1993 | Principal Occupations: Vice Chairman or Vice President of some of the Funds in the Federated Fund Family; Vice Chairman, Federated Investors, Inc.; Chairman, Federated Securities Corp. Previous Positions: President and Director or Trustee of some of the Funds in the Federated Fund Family; Executive Vice President, Federated Investors, Inc.; Director and Chief Executive Officer, Federated Securities Corp. |
John B. Fisher Birth Date: May 16, 1956 President Began serving: November 2004 | Principal Occupations: President, Director/Trustee and CEO, Federated Advisory Services Company, Federated Equity Management Company of Pennsylvania, Federated Global Investment Management Corp., Federated Investment Counseling, Federated Investment Management Company; President and CEO of Passport Research, Ltd.; President of some of the Funds in the Federated Fund Family; Director, Federated Investors Trust Company. Previous Positions: President and Director of the Institutional Sales Division of Federated Securities Corp.; President and Director of Federated Investment Counseling; Director, Edgewood Securities Corp.; Director, Federated Services Company; Director, Federated Investors, Inc.; Chairman and Director, Southpointe Distribution Services, Inc.; President, Technology, Federated Services Company. |
Brian P. Bouda Birth Date: February 28, 1947 CHIEF COMPLIANCE OFFICER AND SENIOR VICE PRESIDENT Began serving: August 2004 | Principal Occupations: Senior Vice President and Chief Compliance Officer of the Federated Fund Family; Vice President and Chief Compliance Officer of Federated Investors, Inc. and Chief Compliance Officer of its subsidiaries. Mr. Bouda joined Federated in 1999 and is a member of the American Bar Association and the State Bar Association of Wisconsin. |
Stephen F. Auth Birth Date: September 3, 1956 450 Lexington Avenue Suite 3700 New York, NY 10017-3943 CHIEF INVESTMENT OFFICER Began serving: November 2002 | Principal Occupations: Mr. Auth is Chief Investment Officer of this Fund and various other Funds in the Federated Fund Family; Executive Vice President, Federated Investment Counseling, Federated Global Investment Management Corp. and Federated Equity Management Company of Pennsylvania. Previous Positions: Executive Vice President, Federated Investment Management Company, and Passport Research, Ltd. (investment advisory subsidiary of Federated); Senior Vice President, Global Portfolio Management Services Division; Senior Vice President, Federated Investment Management Company and Passport Research, Ltd.; Senior Managing Director and Portfolio Manager, Prudential Investments. |
Robert J. Ostrowski Birth Date: April 26, 1963 Chief Investment Officer Began serving: May 2004 | Principal Occupations: Robert J. Ostrowski joined Federated in 1987 as an Investment Analyst and became a Portfolio Manager in 1990. He was named Chief Investment Officer of taxable fixed-income products in 2004 and also serves as a Senior Portfolio Manager. He has been a Senior Vice President of the Fund's Adviser since 1997. Mr. Ostrowski has received the Chartered Financial Analyst designation. He received his M.S. in Industrial Administration from Carnegie Mellon University. |
Evaluation and Approval of Advisory Contract – May 2011
FEDERATED CAPITAL INCOME FUND II (the “Fund”)
The Fund's Board reviewed the Fund's investment advisory and subadvisory contracts at meetings held in May 2011. The Board's decision regarding these contracts reflects the exercise of its business judgment on whether to continue the existing arrangements.
In this connection, the Federated Funds' Board had previously appointed a Senior Officer, whose duties include specified responsibilities relating to the process by which advisory fees are to be charged to a Federated fund. The Senior Officer has the authority to retain consultants, experts, or staff as may be reasonably necessary to assist in the performance of his duties, reports directly to the Board, and may be terminated only with the approval of a majority of the independent members of the Board. The Senior Officer prepared and furnished to the Board an independent, written evaluation that covered topics discussed below (the “Evaluation”). The Board considered that Evaluation, along with other information, in deciding to approve the advisory and subadvisory contracts.
During its review of these contracts, the Board considered compensation and benefits received by the Adviser and subadviser. This included the fees received for services provided to the Fund by other entities in the Federated organization and research services (if any) received by the Adviser from brokers that execute Federated fund trades, as well as advisory fees. The Board is also familiar with and considered judicial decisions concerning allegedly excessive investment advisory fees, which have indicated that the following factors may be relevant to an Adviser's fiduciary duty with respect to its receipt of compensation from a fund: the nature and quality of the services provided by the Adviser, including the performance of the fund; the Adviser's cost of providing the services; the extent to which the Adviser may realize “economies of scale” as a fund grows larger; any indirect benefits that may accrue to the Adviser and its affiliates as a result of the Adviser's relationship with a fund; performance and expenses of comparable funds; and the extent to which the independent Board members are fully informed about all facts the Board deems relevant bearing on the Adviser's services and fees. The Board further considered management fees (including any components thereof) charged to institutional and other clients of the Adviser and subadviser for what might be viewed as like services, and the cost to the Adviser and its affiliates of supplying services pursuant to the management fee agreements, excluding any intra-corporate profit and profit margins of the Adviser and its affiliates for supplying such services. The Board was aware of these factors and was guided by them in its review of the Fund's advisory and subadvisory contracts to the extent it considered them to be appropriate and relevant, as discussed further below.
The Board considered and weighed these circumstances in light of its substantial accumulated experience in governing the Fund and working with Federated on matters relating to the Federated funds, and was assisted in its deliberations by independent legal counsel. Throughout the year, the Board has requested and received substantial and detailed information about the Fund and the Federated organization that was in addition to the extensive materials that comprise and accompany the Senior Officer's Evaluation. Federated provided much of this information at each regular meeting of the Board, and furnished additional information in connection with the particular meeting at which the Board's formal review of the advisory and subadvisory contracts occurred. Between regularly scheduled meetings, the Board also received information on particular matters as the need arose. Thus, the Board's consideration of the advisory and subadvisory contracts included review of the Senior Officer's Evaluation, accompanying data and additional information covering such matters as: the Adviser's and subadviser's investment philosophy, revenue, profitability, personnel and processes; investment and operating strategies; the Fund's short- and long-term performance (in absolute terms, both on a gross basis and net of expenses, as well as in relationship to its particular investment program and certain competitor or “peer group” funds and/or other benchmarks, as appropriate), and comments on the reasons for performance; the Fund's investment objectives; the Fund's expenses (including the advisory fee itself and the overall expense structure of the Fund, both in absolute terms and relative to similar and/or competing funds, with due regard for contractual or voluntary expense limitations); the use and allocation of brokerage commissions derived from trading the Fund's portfolio securities (if any); and the nature, quality and extent of the advisory and other services provided to the Fund by the Adviser and its affiliates. The Board also considered the preferences and expectations of Fund shareholders and their relative sophistication; the continuing state of competition in the mutual fund industry and market practices; the range of comparable fees for similar funds in the mutual fund industry; the Fund's relationship to the Federated family of funds which include a comprehensive array of funds with different investment objectives, policies and strategies which are available for exchange without the incurrence of additional sales charges; compliance and audit reports concerning the Federated funds and the Federated companies that service them (including communications from regulatory agencies), as well as Federated's responses to any issues raised therein; and relevant developments in the mutual fund industry and how the Federated funds and/or Federated are responding to them. The Board's evaluation process is evolutionary. The criteria considered and the emphasis placed on relevant criteria change in recognition of changing circumstances in the mutual fund marketplace.
Annual Shareholder Report
With respect to the Fund's performance and expenses in particular, the Board has found the use of comparisons to other mutual funds with comparable investment programs to be relevant, given the high degree of competition in the mutual fund business. The Board focused on comparisons with other similar mutual funds more heavily than non-mutual fund products or services because it is believed that they are more relevant. For example, other mutual funds are the products most like the Fund, they are readily available to Fund shareholders as alternative investment vehicles, and they are the type of investment vehicle in fact chosen and maintained by the Fund's investors. The range of their fees and expenses therefore appears to be a generally reliable indication of what consumers have found to be reasonable in the precise marketplace in which the Fund competes. The Fund's ability to deliver competitive performance when compared to its peer group was a useful indicator of how the Adviser is executing the Fund's investment program, which in turn assisted the Board in reaching a conclusion that the nature, extent, and quality of the Adviser's investment management services were such as to warrant continuation of the advisory contract. In this regard, the Senior Officer has reviewed Federated's fees for providing advisory services to products outside the Federated family of funds (e.g., institutional and separate accounts). He concluded that mutual funds and institutional accounts are inherently different products. Those differences include, but are not limited to, different types of targeted investors; being subject to different laws and regulations; different legal structures; different average account sizes; different associated costs; different portfolio management techniques made necessary by different cash flows; and portfolio manager time spent in review of securities pricing. The Senior Officer did not consider these fee schedules to be determinative in judging the appropriateness of mutual fund advisory contracts.The Senior Officer reviewed information compiled by Federated, using data supplied by independent fund ranking organizations, regarding the performance of, and fees charged by, other mutual funds, noting his view that comparisons to fund peer groups are relevant in judging the reasonableness of proposed fees.
For the one-year, three-year and five-year periods covered by the Evaluation, the Fund's performance was above the median of the relevant peer group.
The Board also received financial information about Federated, including information regarding the compensation and benefits Federated derived from its relationships with the Federated funds. This information covered not only the fees under the advisory contracts, but also fees received by Federated's subsidiaries for providing other services to the Federated funds under separate contracts (e.g., for serving as the Federated funds' administrator). The information also detailed any indirect benefit Federated may derive from its receipt of research services from brokers who execute Federated fund trades. In addition, the Board considered the fact that, in order for a fund to be competitive in the marketplace, Federated and its affiliates frequently waived fees and/or reimbursed expenses and have disclosed to fund investors and/or indicated to the Board their intention to do so in the future, where appropriate. Moreover, the Board receives regular reporting as to the institution or elimination of these voluntary waivers.
Federated furnished information, requested by the Senior Officer, that reported revenues on a fund-by-fund basis and made estimates of the allocation of expenses on a fund-by-fund basis, using allocation methodologies specified by the Senior Officer. The Senior Officer noted that, although they may apply consistent allocation processes, the inherent difficulties in allocating costs (and the unavoidable arbitrary aspects of that exercise) and the lack of consensus on how to allocate those costs may render such allocation information unreliable. The allocation information was considered in the analysis by the Board but was determined to be of limited use.
The Board and the Senior Officer also reviewed information compiled by Federated comparing profitability information for Federated to other publicly held fund management companies. In this regard, the Senior Officer noted the limited availability of such information, but nonetheless concluded that Federated's profit margins did not appear to be excessive and the Board agreed.
The Senior Officer's Evaluation also discussed the notion of possible realization of “economies of scale” as a fund grows larger. The Board considered in this regard that the Adviser has made significant and long-term investments in areas that support all of the Federated funds, such as personnel and processes for the portfolio management, compliance, internal audit, and risk management functions; and systems technology; and that the benefits of these efforts (as well as any economies, should they exist) were likely to be enjoyed by the fund complex as a whole. Finally, the Board also noted the absence of any applicable regulatory or industry guidelines on this subject, which (as discussed in the Senior Officer's Evaluation) is compounded by the lack of any common industry practice or general pattern with respect to structuring fund advisory fees with “breakpoints” that serve to reduce the fee as the fund attains a certain size. The Senior Officer did not recommend institution of breakpoints in pricing Federated's fund advisory services at this time.
It was noted in the materials for the Board meeting that for the period covered by the Evaluation, the Fund's investment advisory fee, after waivers and expense reimbursements, if any, was below the median of the relevant peer group. The Board reviewed the fees and other expenses of the Fund with the Adviser and was satisfied that the overall expense structure of the Fund remained competitive.
Annual Shareholder Report
The Senior Officer noted that, considering the totality of the circumstances, and all of the factors referenced within his Evaluation, he had concluded that, subject to comments and recommendations made within his Evaluation, his observations and the information accompanying the Evaluation supported a finding by the Board that the management fees for each of the funds are reasonable and that Federated appeared to provide appropriate administrative services to the Fund for the fees paid. Under these circumstances, no changes were recommended to, and no objection was raised to, the continuation of the Fund's advisory and subadvisory contracts. The Board concluded that the nature, quality and scope of services provided the Fund by the Adviser and its affiliates were satisfactory.In its decision to continue an existing investment advisory contract, the Board was mindful of the potential disruptions of the Fund's operations and various risks, uncertainties and other effects that could occur as a result of a decision to terminate or not renew an advisory contract. In particular, the Board recognized that many shareholders have invested in the Fund on the strength of the Adviser's industry standing and reputation and with the expectation that the Adviser will have a continuing role in providing advisory services to the Fund. Thus, the Board's approval of the advisory contract reflected the fact that it is the shareholders who have effectively selected the Adviser by virtue of having invested in the Fund.
The Board based its decision to approve the advisory and subadvisory contracts on the totality of the circumstances and relevant factors and with a view to past and future long-term considerations. Not all of the factors and considerations identified above were necessarily relevant to the Fund, nor did the Board consider any one of them to be determinative. With respect to the factors that were relevant, the Board's decision to approve the contract reflects its determination that Federated's performance and actions provided a satisfactory basis to support the decision to continue the existing arrangements.
Annual Shareholder ReportVoting Proxies on Fund Portfolio Securities
A description of the policies and procedures that the Fund uses to determine how to vote proxies, if any, relating to securities held in the Fund's portfolio is available, without charge and upon request, by calling 1-800-341-7400. A report on “Form N-PX” of how the Fund voted any such proxies during the most recent 12-month period ended June 30 is available from Federated's website at FederatedInvestors.com. To access this information from the home page, select “All” under “Asset Classes.” Select a fund name and share class, if applicable, to go to the Fund Overview page. On the Fund Overview page, select the “Documents” tab. At the bottom of that page, select “Proxy Voting Record Report (Form N-PX).” Form N-PX filings are also available at the SEC's website at www.sec.gov.
The Fund files with the SEC a complete schedule of its portfolio holdings, as of the close of the first and third quarters of its fiscal year, on “Form N-Q.” These filings are available on the SEC's website at www.sec.gov and may be reviewed and copied at the SEC's Public Reference Room in Washington, DC. (Call 1-800-SEC-0330 for information on the operation of the Public Reference Room.) You may also access this information from the “Products” section of Federated's website at FederatedInvestors.com. From the home page, select “All” under “Asset Classes.” Select a fund name and share class, if applicable, to go to the Fund Overview page. On the Fund Overview page, select the “Documents” tab. At the bottom of that page, select “Form N-Q.”
Annual Shareholder ReportVariable investment options are not bank deposits or obligations, are not guaranteed by any bank and are not insured or guaranteed by the U.S. government, the Federal Deposit Insurance Corporation, the Federal Reserve Board or any other government agency. Investment in variable investment options involves investment risk, including the possible loss of principal.
This Report is authorized for distribution to prospective investors only when preceded or accompanied by the Fund's Prospectus, which contains facts concerning its objective and policies, management fees, expenses and other information.
Federated Managed Volatility Fund II
Federated Investors Funds
4000 Ericsson Drive
Warrendale, PA 15086-7561
Contact us at FederatedInvestors.com
or call 1-800-341-7400.
Federated Securities Corp., Distributor
CUSIP 313916108
G00845-01 (2/12)
Federated is a registered trademark of Federated Investors, Inc.
2012 © Federated Investors, Inc.
Annual Shareholder Report | ||
December 31, 2011 | ||
Share Class |
Primary |
Service |
Federated High Income Bond Fund II
A Portfolio of Federated Insurance Series
Dear Valued Shareholder,
I am pleased to present the Annual Shareholder Report for your fund covering the period from January 1, 2011 through December 31, 2011. This report includes Management's Discussion of Fund Performance, a complete listing of your fund's holdings, performance information and financial statements along with other important fund information.
In addition, our website, FederatedInvestors.com, offers easy access to Federated resources that include timely fund updates, economic and market insights from our investment strategists, and financial planning tools. We invite you to register to take full advantage of its capabilities.
Thank you for investing with Federated. I hope you find this information useful and look forward to keeping you informed.
Sincerely,
John B. Fisher, President
Management's Discussion of Fund Performance (unaudited)
The Fund's total return, based on net asset value, for the 12-month reporting period ended December 31, 2011, was 5.17% for the Primary Shares and 4.92% for the Service Shares. The total return of the Barclays Capital U.S. Corporate High Yield 2% Issuer Capped Index (BCHY2%ICI),1 a broad-based securities market index, was 4.96% during the same period. The Fund's total return for the most recently completed fiscal year reflected actual cash flows, transaction costs and other expenses which were not reflected in the total return of the BCHY2%ICI.
The following discussion will focus on the performance of the Primary Shares.
The high-yield market endured significant month-to-month volatility over the reporting period. Two major uncertainty factors drove the volatility. First, there was substantial uncertainty regarding the strength of the U.S. economy. While the reporting period started and ended with some optimism that a path of slow but sustainable economic growth was the most likely outcome, the middle part of the period was characterized by concerns of faltering growth and a potential “double-dip” recession. Second, considerable uncertainty was generated by government debt concerns in the euro zone. At the beginning of the period, these concerns were focused mainly on Greece and Portugal. However, by the end of the period, concerns had spread to Italy, Spain and France, along with concerns about slow economic growth for the euro zone as a whole due to fiscal austerity plans in many countries. Despite these macroeconomic uncertainties, the one constant from a high-yield perspective was the overall strength in corporate credit conditions. Strong earnings, large cash balances, solid balance sheets and a desire to reduce overall financial risk characterized corporate credit markets. For example, the default rate as calculated by the Altman & Kuehne High-Yield Bond Default and Return Report and New York University was 0.66% for the first nine months of 2011 after totaling just 1.13% for all of 2010. Both of these rates are well below the 3.56% average annual default rate between 1978 and 2010. However, the overall macroeconomic concerns tended to offset the positive of corporate credit conditions, as shown by a widening in the yield spread between high-yield bonds and U.S. Treasury securities — according to the Credit Suisse High Yield Bond Index,2 the spread increased from 571 basis points on December 31, 2010 to 728 basis points on December 31, 2011.
Within the high-yield market,3 major industry sectors that substantially outperformed the overall BCHY2%ICI included: Media – Cable, Natural Gas Utilities, Food & Beverage, Energy and Lodging. Major industry sectors that substantially underperformed the overall BCHY2%ICI included: Home Construction, Transportation Wireless Communications, Consumer Products and Industrial – Other. From a ratings quality perspective, the higher-quality, more interest rate sensitive “BB” rated sector led the way with a total return of 6.81%, followed by the “B” rated sector at 5.41% and the lower-quality “CCC” rated sector well behind at 1.18%.
The Fund outperformed the BCHY2%ICI for the reporting period. The main reason for the Fund's outperformance was outstanding security selection which more than offset an overweight position, relative to the BCHY2%ICI, in the poor performing “CCC” rated quality sector and an underweight position in the strong performing “BB” rated quality sector. Security selection was particularly strong in the Gaming, Paper, Services, Technology, Transportation and Wireless Telecommunication sectors. Strong security selection in the Consumer Products and Media – Non Cable sectors more than offset overweight positions in these weak performing industry sectors, while strong security selection in the Energy sector more than offset an underweight position in this strong performing industry sector. The Fund had an underweight position, relative to the BCHY2%ICI, in the weak performing Home Construction sector which also aided performance. Specific holdings that substantially outperformed the BCHY2%ICI included: Petrohawk, Universal City Development, Diversey Inc., Nalco, Sealed Air, Brigham Exploration and Macy's.
The Fund was negatively affected by poor security selection in the Automotive and Electric Utility sectors. Also, an overweight position, relative to the BCHY2%ICI, in the poor performing Industrial – Other sector and an underweight position in the strong performing Wireline and Electric Utility sectors hindered performance. Specific holdings that substantially underperformed the BCHY2%ICI included: Aquilex Holdings, Texas Competitive Electric, American Standard, ATP Oil and Gas, Momentive Performance Materials, Exide Technologies and Houghton Mifflin.
1 | The BCHY2%ICI is the 2% Issuer Cap component of the Barclays Capital U.S. Corporate High Yield Index (BCHYI). The BCHYI is an index that covers the universe of fixed-rate, noninvestment-grade debt. Pay-in-kind (PIK) bonds, Eurobonds and debt issues from countries designated as emerging markets (e.g., Argentina, Brazil, Venezuela, etc.) are excluded, but Canadian and global bonds (SEC registered) of issuers in non-EMG countries are included. Original issue zeroes, step-up coupon structures and 144-As are also included. The index is unmanaged, and it is not possible to invest directly in an index. |
2 | Credit Suisse High Yield Bond Index serves as a benchmark to evaluate the performance of low quality bonds. Low quality is defined as those bonds in the range from “BB” to “CCC” and defaults. The index is unmanaged, and it is not possible to invest directly in an index. |
3 | High-yield, lower-rated securities generally entail greater market, credit and liquidity risks than investment-grade securities and may include higher volatility and higher risk of default. |
FUND PERFORMANCE AND GROWTH OF A $10,000 INVESTMENT
The Average Annual Total Return table below shows returns for each class averaged over the stated periods. The graphs below illustrate the hypothetical investment of $10,0001 in the Federated High Income Bond Fund II (the “Fund”) from December 31, 2001 to December 31, 2011, compared to the Lipper Variable Underlying Funds High Current Yield Funds Average (LFHCYFA)2 and the Barclays Capital U.S. Corporate High Yield 2% Issuer Capped Index (BCHY2%ICI).
Average Annual Total Returns for the Period Ended 12/31/2011
Share Class | 1 Year | 5 Years | 10 Years |
Primary | 5.17% | 7.14% | 8.19% |
Service | 4.92% | 6.89% | 7.93% |
Performance data quoted represents past performance which is no guarantee of future results. Investment return and principal value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Performance of a variable investment option changes over time and current performance may be lower or higher than what is stated. For current to the most recent month end performance, contact your insurance company. The performance information presented does not include the charges and expenses imposed by the insurance company under the variable insurance product contract. The inclusion of such charges would lower performance. Please refer to the variable insurance product prospectus for a complete listing of these expenses. Fund shares are available exclusively as a funding vehicle for life insurance companies writing variable life insurance policies and variable annuity contracts. Variable investment options are not obligations of or guaranteed by any bank and are not federally insured.
Growth of a $10,000 Investment – PRIMARY SHARES
Federated High Income Bond II - Primary Shares | C000026776 | BCHY2%ICI | LFHCYFA |
12/31/2001 | 10,000 | 10,000 | 10,000 |
12/31/2002 | 10,139 | 10,347 | 9,941 |
12/31/2003 | 12,391 | 12,368 | 12,341 |
12/31/2004 | 13,687 | 13,529 | 13,558 |
12/31/2005 | 14,051 | 13,903 | 13,906 |
12/31/2006 | 15,569 | 15,397 | 15,285 |
12/31/2007 | 16,103 | 15,747 | 15,675 |
12/31/2008 | 11,917 | 11,671 | 11,234 |
12/31/2009 | 18,215 | 18,528 | 16,074 |
12/31/2010 | 20,898 | 21,297 | 18,172 |
12/31/2011 | 21,978 | 22,353 | 18,781 |
Growth of a $10,000 Investment – SERVICE SHARES
Federated High Income Bond II - Service Shares | C000026777 | BCHY2%ICI | LFHCYFA |
12/31/2001 | 10,000 | 10,000 | 10,000 |
12/31/2002 | 10,136 | 10,347 | 9,941 |
12/31/2003 | 12,345 | 12,368 | 12,341 |
12/31/2004 | 13,600 | 13,529 | 13,558 |
12/31/2005 | 13,908 | 13,903 | 13,906 |
12/31/2006 | 15,378 | 15,397 | 15,285 |
12/31/2007 | 15,868 | 15,747 | 15,675 |
12/31/2008 | 11,727 | 11,671 | 11,234 |
12/31/2009 | 17,881 | 18,528 | 16,074 |
12/31/2010 | 20,453 | 21,297 | 18,172 |
12/31/2011 | 21,460 | 22,353 | 18,781 |
1 | The Fund's performance assumes the reinvestment of all dividends and distributions. The BCHY2%ICI and the LFHCYFA have been adjusted to reflect reinvestment of dividends on securities in the index and avergage. |
2 | The LFHCYFA represents the avergage of the total returns reported by all of the funds serving as underlying investment options for variable insurance contracts designated by Lipper, Inc. as falling into the respective categories indicated, and is not adjusted to reflect any sales charges. However, these total returns are reported net of expenses or other fees that the Securities and Exchange Commission requires to be reflected in a fund's performance. |
Portfolio of Investments Summary Table (unaudited)
At December 31, 2011, the Fund's index classification1 was as follows:
Index Classification | Percentage of Total Net Assets |
Technology | 12.4% |
Health Care | 10.4% |
Media — Non-Cable | 7.9% |
Energy | 6.8% |
Automotive | 6.7% |
Financial Institutions | 5.8% |
Gaming | 4.6% |
Food & Beverage | 4.3% |
Industrial — Other | 4.3% |
Retailers | 4.3% |
Consumer Products | 4.0% |
Packaging & Containers | 3.6% |
Other2 | 22.4% |
Cash Equivalents3 | 0.7% |
Other Assets and Liabilities — Net4 | 1.8% |
TOTAL | 100.0% |
1 | Index classifications are based upon, and individual portfolio securities are assigned to, the classifications and sub-classifications of the Barclays Capital U.S. Corporate High Yield 2% Issuer Capped Index (BCHY2%ICI). Individual portfolio securities that are not included in the BCHY2%ICI are assigned to an index classification by the Fund's Adviser. |
2 | For purposes of this table, index classifications which constitute less than 3.5% of the Fund's total net assets have been aggregated under the designation “Other.” |
3 | Cash Equivalents includes any investments in money market mutual funds and/or overnight repurchase agreements. |
4 | Assets, other than investments in securities, less liabilities. See Statement of Assets and Liabilities. |
Principal Amount or Shares | Value |
Corporate Bonds – 97.1% |
Aerospace/Defense – 1.3% |
$225,000 | 1,2 | Altegrity, Inc., Company Guarantee, Series 144A, 10.50%, 11/1/2015 | 203,625 |
525,000 | 1 | Altegrity, Inc., Company Guarantee, Series 144A, 11.75%, 5/1/2016 | 462,000 |
275,000 | ManTech International Corp., Company Guarantee, 7.25%, 4/15/2018 | 281,531 |
518,656 | 1,2 | Sequa Corp., Bond, Series 144A, 13.50%, 12/1/2015 | 557,555 |
225,000 | 1,2 | Sequa Corp., Sr. Note, Series 144A, 11.75%, 12/1/2015 | 240,750 |
1,150,000 | TransDigm, Inc., Company Guarantee, 7.75%, 12/15/2018 | 1,242,000 |
TOTAL | 2,987,461 |
Automotive – 6.5% |
625,000 | Affinia Group, Inc., Company Guarantee, 9.00%, 11/30/2014 | 621,875 |
325,000 | 1,2 | Affinia Group, Inc., Sr. Secd. Note, Series 144A, 10.75%, 8/15/2016 | 354,250 |
500,000 | 1,2 | Allison Transmission, Inc., Sr. Unsecd. Note, Series 144A, 7.125%, 5/15/2019 | 492,500 |
225,000 | American Axle & Manufacturing Holdings, Inc., Sr. Note, 7.75%, 11/15/2019 | 221,625 |
315,000 | 1,2 | American Axle & Manufacturing Holdings, Inc., Sr. Sub. Note, Series 144A, 9.25%, 1/15/2017 | 343,350 |
475,000 | ArvinMeritor, Inc., Company Guarantee, 10.625%, 3/15/2018 | 448,875 |
450,000 | 1,2 | Chrysler Group LLC, Sr. Secd. Note, Series 144A, 8.00%, 6/15/2019 | 414,000 |
925,000 | 1,2 | Chrysler Group LLC, Sr. Secd. Note, Series 144A, 8.25%, 6/15/2021 | 846,375 |
425,000 | Cooper-Standard Automotive, Inc., Company Guarantee, 8.50%, 5/1/2018 | 446,781 |
100,000 | Dana Holding Corp., Sr. Note, 6.50%, 2/15/2019 | 101,500 |
100,000 | Dana Holding Corp., Sr. Note, 6.75%, 2/15/2021 | 103,000 |
1,225,000 | Exide Technologies, Sr. Secd. Note, 8.625%, 2/1/2018 | 949,375 |
250,000 | Ford Motor Credit Co., Sr. Note, 7.00%, 4/15/2015 | 269,375 |
400,000 | Ford Motor Credit Co., Sr. Note, 8.00%, 6/1/2014 | 435,675 |
250,000 | Ford Motor Credit Co., Sr. Unsecd. Note, 6.625%, 8/15/2017 | 272,525 |
1,950,000 | Ford Motor Credit Co., Sr. Unsecd. Note, 8.00%, 12/15/2016 | 2,217,821 |
250,000 | Ford Motor Credit Co., Sr. Unsecd. Note, 8.125%, 1/15/2020 | 295,115 |
1,075,000 | 1,2 | International Automotive Components, Sr. Secd. Note, Series 144A, 9.125%, 6/1/2018 | 967,500 |
100,000 | 1,2 | Jaguar Land Rover PLC, Series 144A, 7.75%, 5/15/2018 | 95,750 |
450,000 | 1,2 | Jaguar Land Rover PLC, Sr. Unsecd. Note, Series 144A, 8.125%, 5/15/2021 | 425,250 |
100,000 | Lear Corp., Company Guarantee, 8.125%, 3/15/2020 | 110,500 |
125,000 | Navistar International Corp., Sr. Note, 8.25%, 11/1/2021 | 133,594 |
1,075,000 | 1,2 | Pittsburgh Glass Works, LLC, Sr. Secd. Note, Series 144A, 8.50%, 4/15/2016 | 1,040,062 |
625,000 | 1,2 | Stoneridge, Inc., Sr. Secd. Note, Series 144A, 9.50%, 10/15/2017 | 643,750 |
450,000 | Tenneco Automotive, Inc., Company Guarantee, 6.875%, 12/15/2020 | 463,500 |
150,000 | Tenneco Automotive, Inc., Company Guarantee, 7.75%, 8/15/2018 | 159,750 |
540,000 | Tomkins LLC/Tomkins, Inc., Term Loan — 2nd Lien, 9.00%, 10/1/2018 | 601,425 |
350,000 | 1,2 | Tower Automotive, Inc., Sr. Secd. Note, Series 144A, 10.625%, 9/1/2017 | 353,500 |
1,100,000 | United Components, Inc., Company Guarantee, Series WI, 8.625%, 2/15/2019 | 1,072,500 |
TOTAL | 14,901,098 |
Building Materials – 2.0% |
100,000 | 1 | American Standard Cos., Sr. Secd. Note, Series 144A, 10.75%, 1/15/2016 | 60,000 |
675,000 | Associated Materials, Inc., Sr. Secd. Note, 9.125%, 11/1/2017 | 592,313 |
100,000 | 1,2 | Building Materials Corp. of America, Bond, Series 144A, 6.75%, 5/1/2021 | 105,250 |
300,000 | 1,2 | Building Materials Corp. of America, Sr. Note, Series 144A, 7.50%, 3/15/2020 | 325,500 |
350,000 | Interline Brands, Inc., Company Guarantee, 7.00%, 11/15/2018 | 364,000 |
475,000 | 1,2 | Masonite International Corp., Sr. Note, Series 144A, 8.25%, 4/15/2021 | 467,875 |
1,150,000 | Norcraft Cos. L.P., Sr. Secd. Note, Series WI, 10.50%, 12/15/2015 | 1,078,125 |
Principal Amount or Shares | Value |
$400,000 | 1,2 | Nortek Holdings, Inc., Sr. Note, Series 144A, 10.00%, 12/1/2018 | 381,000 |
750,000 | 1,2 | Nortek Holdings, Inc., Sr. Note, Series 144A, 8.50%, 4/15/2021 | 637,500 |
750,000 | Ply Gem Industries, Inc., Sr. Secd. Note, Series WI, 8.25%, 2/15/2018 | 657,187 |
TOTAL | 4,668,750 |
Chemicals – 3.2% |
325,000 | Compass Minerals International, Inc., Company Guarantee, 8.00%, 6/1/2019 | 351,813 |
875,000 | Ferro Corp., Sr. Note, 7.875%, 8/15/2018 | 883,750 |
775,000 | Hexion U.S. Finance Corp., Sr. Secd. Note, 8.875%, 2/1/2018 | 730,437 |
525,000 | Hexion U.S. Finance Corp., Sr. Secd. Note, Series WI, 9.00%, 11/15/2020 | 435,750 |
700,000 | Huntsman International LLC, Company Guarantee, 5.50%, 6/30/2016 | 689,500 |
500,000 | Huntsman International LLC, Company Guarantee, 8.625%, 3/15/2021 | 532,500 |
400,000 | Koppers Holdings, Inc., Company Guarantee, Series WI, 7.875%, 12/1/2019 | 426,000 |
500,000 | Momentive Performance Materials, Inc., Sr. Note, Series WI, 9.00%, 1/15/2021 | 382,500 |
300,000 | Nalco Co., Sr. Note, 8.25%, 5/15/2017 | 342,000 |
675,000 | Omnova Solutions, Inc., Company Guarantee, 7.875%, 11/1/2018 | 587,250 |
625,000 | 1,2 | Oxea Finance, Sr. Secd. Note, Series 144A, 9.50%, 7/15/2017 | 628,125 |
625,000 | Solutia, Inc., Company Guarantee, 8.75%, 11/1/2017 | 685,938 |
450,000 | Solutia, Inc., Sr. Note, 7.875%, 3/15/2020 | 491,625 |
225,000 | Union Carbide Corp., Sr. Deb., 7.875%, 4/1/2023 | 266,484 |
TOTAL | 7,433,672 |
Construction Machinery – 1.1% |
200,000 | RSC Equipment Rental, Inc., Company Guarantee, Series WI, 8.25%, 2/1/2021 | 203,500 |
304,000 | RSC Equipment Rental, Inc., Sr. Note, 9.50%, 12/1/2014 | 313,880 |
525,000 | RSC Equipment Rental, Inc., Sr. Note, Series WI, 10.25%, 11/15/2019 | 574,875 |
250,000 | 1,2 | RSC Equipment Rental, Inc., Sr. Secd. Note, Series 144A, 10.00%, 7/15/2017 | 292,500 |
1,150,000 | United Rentals, Inc., Sr. Sub. Note, 8.375%, 9/15/2020 | 1,127,000 |
TOTAL | 2,511,755 |
Consumer Products – 4.0% |
675,000 | Easton Bell Sports, Inc., Sr. Secd. Note, 9.75%, 12/1/2016 | 739,125 |
625,000 | Jarden Corp., Sr. Sub. Note, 7.50%, 5/1/2017 | 665,625 |
590,000 | Libbey Glass, Inc., Sr. Secd. Note, 10.00%, 2/15/2015 | 634,250 |
550,000 | Prestige Brands Holdings, Inc., Company Guarantee, 8.25%, 4/1/2018 | 566,500 |
500,000 | 1,2 | Scotts Miracle-Gro Co., Sr. Note, Series 144A, 6.625%, 12/15/2020 | 510,000 |
1,775,000 | Sealy Mattress Co., Sr. Sub. Note, 8.25%, 6/15/2014 | 1,766,125 |
1,050,000 | 1,2 | Simmons Co., Company Guarantee, Series 144A, 11.25%, 7/15/2015 | 1,089,375 |
100,000 | 1,2 | Spectrum Brands Holdings, Inc., 9.50%, 6/15/2018 | 109,875 |
250,000 | Spectrum Brands Holdings, Inc., Sr. Secd. Note, 9.50%, 6/15/2018 | 274,688 |
1,151,690 | Spectrum Brands, Inc., Bond, 12.00%, 8/28/2019 | 1,258,221 |
1,750,000 | Visant Corp., Company Guarantee, Series WI, 10.00%, 10/1/2017 | 1,610,000 |
TOTAL | 9,223,784 |
Energy – 6.8% |
1,025,000 | ATP Oil & Gas Corp., Sr. Secd. 2nd Priority Note, Series WI, 11.875%, 5/1/2015 | 679,062 |
1,075,000 | Basic Energy Services, Inc., Company Guarantee, 7.125%, 4/15/2016 | 1,083,062 |
125,000 | Berry Petroleum Co., Sr. Unsecd. Note, 6.75%, 11/1/2020 | 126,875 |
775,000 | 1,2 | CHC Helicopter Corp., Sr. Secd. Note, Series 144A, 9.25%, 10/15/2020 | 701,375 |
825,000 | 1,2 | CVR Energy, Inc., 2nd Priority Sr. Secd. Note, Series 144A, 10.875%, 4/1/2017 | 928,125 |
250,000 | 1,2 | Carrizo Oil & Gas, Inc., Company Guarantee, 8.625%, 10/15/2018 | 252,500 |
950,000 | Chaparral Energy, Inc., Company Guarantee, 9.875%, 10/1/2020 | 1,030,750 |
925,000 | Chesapeake Energy Corp., Sr. Note, 6.875%, 11/15/2020 | 994,375 |
Principal Amount or Shares | Value |
$500,000 | 1,2 | Chesapeake Oilfield Services Co., Sr. Note, Series 144A, 6.625%, 11/15/2019 | 522,500 |
400,000 | Compagnie Generale de Geophysique Veritas, Company Guarantee, 9.50%, 5/15/2016 | 434,000 |
400,000 | Compagnie Generale de Geophysique Veritas, Sr. Unsecd. Note, 6.50%, 6/1/2021 | 390,000 |
450,000 | Compagnie Generale de Geophysique Veritas, Sr. Unsecd. Note, 7.75%, 5/15/2017 | 457,875 |
300,000 | Comstock Resources, Inc., Company Guarantee, 7.75%, 4/1/2019 | 286,500 |
450,000 | Concho Resources, Inc., Sr. Note, 7.00%, 1/15/2021 | 485,437 |
275,000 | Copano Energy LLC, Company Guarantee, 7.125%, 4/1/2021 | 279,125 |
350,000 | Denbury Resources, Inc., Sr. Sub. Note, 6.375%, 8/15/2021 | 367,500 |
249,000 | Denbury Resources, Inc., Sr. Sub., 8.25%, 2/15/2020 | 279,503 |
500,000 | EXCO Resources, Inc., Sr. Note, 7.50%, 9/15/2018 | 475,000 |
175,000 | Energy XXI Gulf Coast, Inc., 7.75%, 6/15/2019 | 179,375 |
275,000 | Energy XXI Gulf Coast, Inc., 9.25%, 12/15/2017 | 299,750 |
700,000 | Forbes Energy Services Ltd., Company Guarantee, Series WI, 9.00%, 6/15/2019 | 658,000 |
450,000 | Linn Energy LLC, Company Guarantee, 7.75%, 2/1/2021 | 470,250 |
225,000 | 1,2 | Linn Energy LLC, Company Guarantee, Series 144A, 6.50%, 5/15/2019 | 224,438 |
400,000 | Linn Energy LLC, Sr. Unsecd. Note, 8.625%, 4/15/2020 | 436,000 |
550,000 | Oasis Petroleum, Inc., Company Guarantee, 6.50%, 11/1/2021 | 548,625 |
700,000 | PHI, Inc., Company Guarantee, Series WI, 8.625%, 10/15/2018 | 705,250 |
575,000 | Plains Exploration & Production Co., 6.75%, 2/1/2022 | 605,187 |
225,000 | 1,2 | SM Energy Co., Sr. Unsecd. Note, Series 144A, 6.50%, 11/15/2021 | 232,875 |
425,000 | Sesi LLC, Sr. Note, Series WI, 6.375%, 5/1/2019 | 434,563 |
325,000 | 1,2 | Sesi LLC, Sr. Unsecd. Note, Series 144A, 7.125%, 12/15/2021 | 342,063 |
675,000 | 1,2 | W&T Offshore, Inc., Sr. Note, Series 144A, 8.50%, 6/15/2019 | 702,000 |
TOTAL | 15,611,940 |
Entertainment – 1.2% |
900,000 | Cedar Fair LP, Company Guarantee, 9.125%, 8/1/2018 | 983,250 |
925,000 | Cinemark USA, Inc., Company Guarantee, 8.625%, 6/15/2019 | 1,010,562 |
325,000 | Cinemark USA, Inc., Company Guarantee, Series WI, 7.375%, 6/15/2021 | 333,938 |
775,000 | 1,3,4,5 | Hard Rock Park Operations LLC, Sr. Secd. Note, Series 144A, 0.00%, 4/1/2012 | 0 |
450,000 | Regal Cinemas, Inc., Company Guarantee, 8.625%, 7/15/2019 | 488,250 |
TOTAL | 2,816,000 |
Financial Institutions – 5.6% |
250,000 | Ally Financial, Inc., Company Guarantee, 7.50%, 9/15/2020 | 253,438 |
525,000 | Ally Financial, Inc., Company Guarantee, 8.00%, 11/1/2031 | 509,250 |
1,375,000 | Ally Financial, Inc., Company Guarantee, 8.00%, 3/15/2020 | 1,412,813 |
1,500,000 | Ally Financial, Inc., Company Guarantee, Series WI, 6.25%, 12/1/2017 | 1,452,874 |
4,175,000 | 1,2 | CIT Group, Inc., Sr. Secd. Note, Series 144A, 7.00%, 5/2/2017 | 4,175,000 |
150,000 | International Lease Finance Corp., Sr. Unsecd. Note, 5.75%, 5/15/2016 | 139,288 |
150,000 | International Lease Finance Corp., Sr. Unsecd. Note, 6.25%, 5/15/2019 | 138,728 |
250,000 | International Lease Finance Corp., Sr. Unsecd. Note, 8.25%, 12/15/2020 | 253,125 |
600,000 | International Lease Finance Corp., Sr. Unsecd. Note, 8.625%, 9/15/2015 | 617,250 |
1,975,000 | International Lease Finance Corp., Sr. Unsecd. Note, 8.75%, 3/15/2017 | 2,039,187 |
1,800,000 | Nuveen Investments, Company Guarantee, 10.50%, 11/15/2015 | 1,795,500 |
TOTAL | 12,786,453 |
Food & Beverage – 4.3% |
900,000 | 1,2 | Aramark Corp., Series 144A, 8.625%, 5/1/2016 | 931,500 |
850,000 | Aramark Corp., Sr. Note, 8.50%, 2/1/2015 | 875,500 |
575,000 | B&G Foods, Inc., Sr. Note, 7.625%, 1/15/2018 | 613,813 |
125,000 | Darling International, Inc., Company Guarantee, 8.50%, 12/15/2018 | 139,375 |
Principal Amount or Shares | Value |
$1,000,000 | Dean Foods Co., Company Guarantee, 7.00%, 6/1/2016 | 992,500 |
850,000 | Dean Foods Co., Sr. Note, Series WI, 9.75%, 12/15/2018 | 909,500 |
825,000 | Del Monte Foods Co., Sr. Unsecd. Note, 7.625%, 2/15/2019 | 796,125 |
1,650,000 | Michael Foods, Inc., Company Guarantee, Series WI, 9.75%, 7/15/2018 | 1,744,875 |
1,050,000 | Pinnacle Foods Finance LLC/Pinnacle Foods Finance Corp., Company Guarantee, 9.25%, 4/1/2015 | 1,082,812 |
600,000 | Pinnacle Foods Finance LLC/Pinnacle Foods Finance Corp., Sr. Sub. Note, Series WI, 10.625%, 4/1/2017 | 633,000 |
1,125,000 | 1,2 | U.S. Foodservice, Inc., Sr. Unsecd. Note, Series 144A, 8.50%, 6/30/2019 | 1,094,062 |
TOTAL | 9,813,062 |
Gaming – 4.6% |
700,000 | American Casino & Entertainment, Sr. Secd. Note, 11.00%, 6/15/2014 | 715,750 |
450,000 | Ameristar Casinos, Inc., Sr. Unsecd. Note, Series WI, 7.50%, 4/15/2021 | 465,750 |
1,100,000 | 1,2 | Great Canadian Gaming Corp., Company Guarantee, Series 144A, 7.25%, 2/15/2015 | 1,116,500 |
1,375,000 | Harrah's Operating Co., Inc., Sr. Secd. Note, 11.25%, 6/1/2017 | 1,466,094 |
1,125,000 | Jacobs Entertainment, Inc., Sr. Note, 9.75%, 6/15/2014 | 1,046,250 |
1,925,000 | MGM Mirage, Inc., Sr. Note, 7.50%, 6/1/2016 | 1,852,812 |
225,000 | MGM Mirage, Inc., Sr. Secd. Note, 9.00%, 3/15/2020 | 250,313 |
875,000 | Peninsula Gaming, LLC, Company Guarantee, 10.75%, 8/15/2017 | 920,938 |
200,000 | Peninsula Gaming, LLC, Sr. Secd. Note, 8.375%, 8/15/2015 | 213,000 |
600,000 | 1,2 | San Pasqual Casino Development Group, Inc., Sr. Note, Series 144A, 8.00%, 9/15/2013 | 594,000 |
765,000 | 1,2 | Seminole Tribe of Florida, Bond, Series 144A, 7.804%, 10/1/2020 | 746,479 |
450,000 | 1,2 | Seminole Tribe of Florida, Note, Series 144A, 7.75%, 10/1/2017 | 470,250 |
750,000 | 1,2 | Sugarhouse HSP Gaming Finance Corp., Sr. Secd. Note, Series 144A, 8.625%, 4/15/2016 | 772,500 |
TOTAL | 10,630,636 |
Health Care – 10.4% |
900,000 | Alere, Inc., Company Guarantee, 9.00%, 5/15/2016 | 913,500 |
400,000 | Alere, Inc., Sr. Note, 7.875%, 2/1/2016 | 403,000 |
975,000 | Bausch & Lomb, Inc., Sr. Unsecd. Note, 9.875%, 11/1/2015 | 1,028,625 |
2,250,000 | Biomet, Inc., Sr. Sub. Note, Series WI, 11.625%, 10/15/2017 | 2,452,500 |
1,075,000 | CRC Health Corp., Sr. Sub. Note, 10.75%, 2/1/2016 | 1,026,625 |
500,000 | DJO Finance LLC, Company Guarantee, Series WI, 7.75%, 4/15/2018 | 386,250 |
225,000 | DJO Finance LLC, Company Guarantee, Series WI, 9.75%, 10/15/2017 | 176,063 |
1,300,000 | Emergency Medical Services Corp., Company Guarantee, Series WI, 8.125%, 6/1/2019 | 1,303,250 |
575,000 | 1,2 | ExamWorks Group, Inc., Sr. Unsecd. Note, Series 144A, 9.00%, 7/15/2019 | 523,250 |
600,000 | Grifols, Inc., Sr. Note, Series WI, 8.25%, 2/1/2018 | 633,000 |
950,000 | HCA Holdings, Inc, Sr. Unsecd. Note, Series WI, 7.75%, 5/15/2021 | 971,375 |
725,000 | HCA, Inc., Sr. Note, 7.50%, 11/6/2033 | 630,750 |
225,000 | HCA, Inc., Sr. Secd. Note, 6.50%, 2/15/2020 | 234,000 |
2,350,000 | HCA, Inc., Sr. Unsecd. Note, 7.50%, 2/15/2022 | 2,408,750 |
825,000 | Iasis Healthcare, Sr. Unsecd. Note, 8.375%, 5/15/2019 | 723,937 |
675,000 | 1,2 | Inventiv Health Inc., Sr. Note, Series 144A, 10.00%, 8/15/2018 | 621,000 |
925,000 | 1,2 | Jaguar Holding Co., Sr. Note, 9.50%, 12/1/2019 | 975,875 |
700,000 | 1,2 | Kinetic Concepts, Inc., Series 144A, 10.50%, 11/1/2018 | 687,750 |
1,300,000 | 1,2 | Multiplan, Inc., Company Guarantee, Series 144A, 9.875%, 9/1/2018 | 1,358,500 |
700,000 | Omnicare, Inc., Sr. Sub., 7.75%, 6/1/2020 | 755,125 |
1,075,000 | United Surgical Partners International, Inc., Company Guarantee, 9.25%, 5/1/2017 | 1,085,750 |
250,000 | Universal Hospital Services, Inc., Floating Rate Note — Sr. Secured Note, 4.121%, 6/1/2015 | 226,875 |
1,075,000 | Universal Hospital Services, Inc., Sr. Secd. Note, 8.50%, 6/1/2015 | 1,091,125 |
1,795,625 | VWR Funding, Inc., Company Guarantee, Series B, 10.25%, 7/15/2015 | 1,862,961 |
Principal Amount or Shares | Value |
$1,375,000 | Vanguard Health Holdings II, Company Guarantee, 8.00%, 2/1/2018 | 1,371,562 |
TOTAL | 23,851,398 |
Industrial - Other – 4.3% |
550,000 | American Tire Distributors, Inc., Sr. Secd. Note, Series 144A, 9.75%, 6/1/2017 | 569,250 |
275,000 | 1,2 | Amsted Industries, Inc., Sr. Note, Series 144A, 8.125%, 3/15/2018 | 292,875 |
250,000 | Atkore International, Inc., Sr. Secd. Note, Series WI, 9.875%, 1/1/2018 | 240,625 |
500,000 | Belden CDT, Inc., Company Guarantee, 9.25%, 6/15/2019 | 536,250 |
525,000 | Belden CDT, Inc., Sr. Sub. Note, 7.00%, 3/15/2017 | 526,969 |
700,000 | 1,2 | Cleaver-Brooks, Inc., Sr. Secd. Note, Series 144A, 12.25%, 5/1/2016 | 707,000 |
675,000 | 1,2 | Dynacast International LLC, Series 144A, 9.25%, 7/15/2019 | 637,875 |
875,000 | General Cable Corp., Sr. Note, 7.125%, 4/1/2017 | 877,187 |
650,000 | 1,2 | International Wire Group Holdings, Inc., Sr. Secd. Note, Series 144A, 9.75%, 4/15/2015 | 659,750 |
1,150,000 | 1,2 | Knowledge Learning Corp., Sr. Sub. Note, Series 144A, 7.75%, 2/1/2015 | 1,078,125 |
625,000 | 1,2 | Maxim Finance Corp., Sr. Secd. Note, Series 144A, 12.25%, 4/15/2015 | 565,625 |
375,000 | Mueller Water Products, Inc., Company Guarantee, 8.75%, 9/1/2020 | 409,219 |
650,000 | Mueller Water Products, Inc., Sr. Sub. Note, Series WI, 7.375%, 6/1/2017 | 594,750 |
825,000 | Rexnord, Inc., Company Guarantee, 8.50%, 5/1/2018 | 878,625 |
800,000 | The Hillman Group, Inc., Sr. Unsecd. Note, 10.875%, 6/1/2018 | 796,000 |
450,000 | Thermon Industries, Inc., Sr. Secd. Note, Series WI, 9.50%, 5/1/2017 | 487,125 |
TOTAL | 9,857,250 |
Lodging – 0.4% |
900,000 | Host Marriott LP, Note, Series Q, 6.75%, 6/1/2016 | 929,250 |
Media - Cable – 1.0% |
175,000 | 1,2 | Cequel Communications Holdings, Sr. Note, Series 144A, 8.625%, 11/15/2017 | 186,375 |
550,000 | Charter Communications Holdings II, 7.375%, 6/1/2020 | 583,000 |
100,000 | Charter Communications Holdings II, Company Guarantee, 7.25%, 10/30/2017 | 105,875 |
100,000 | Charter Communications Holdings II, Company Guarantee, Series WI, 8.125%, 4/30/2020 | 110,000 |
575,000 | Charter Communications Holdings II, Sr. Note, 7.00%, 1/15/2019 | 602,313 |
625,000 | Virgin Media, Inc., Company Guarantee, Series 1, 9.50%, 8/15/2016 | 704,687 |
TOTAL | 2,292,250 |
Media - Non-Cable – 7.9% |
475,000 | 1,2 | AMC Networks, Inc., Sr. Note, Series 144A, 7.75%, 7/15/2021 | 518,937 |
1,125,000 | Clear Channel Communications, Inc., Company Guarantee, 9.00%, 3/1/2021 | 953,437 |
850,000 | Clear Channel Outdoor Holdings, Inc., Company Guarantee, Series B, 9.25%, 12/15/2017 | 922,250 |
125,000 | Clear Channel Worldwide, Company Guarantee, 9.25%, 12/15/2017 | 135,000 |
900,000 | Crown Media Holdings, Inc., Company Guarantee, 10.50%, 7/15/2019 | 951,750 |
850,000 | 1,2 | Cumulus Media, Inc., Sr. Note, Series 144A, 7.75%, 5/1/2019 | 758,625 |
825,000 | 1,2 | Entercom Radio LLC, Sr. Unsecd. Note, Series 144A, 10.50%, 12/1/2019 | 829,125 |
750,000 | Entravision Communications Corp., Sr. Secd. Note, 8.75%, 8/1/2017 | 738,750 |
975,000 | 1,2 | FoxCo Acquisitions, LLC, Sr. Note, Series 144A, 13.375%, 7/15/2016 | 1,068,844 |
350,000 | 1,2 | Houghton Mifflin Co., Sr. Secd. Note, Series 144A, 10.50%, 6/1/2019 | 215,250 |
1,575,000 | Idearc, Inc., Company Guarantee, 8.00%, 11/15/2016 | 17,719 |
400,000 | Intelsat Bermuda, Ltd., Company Guarantee, 11.50%, 2/4/2017 | 387,000 |
450,000 | Intelsat Jackson Holdings S.A., Company Guarantee, 8.50%, 11/1/2019 | 478,125 |
600,000 | 1,2 | Intelsat Jackson Holdings S.A., Company Guarantee, Series 144A, 7.25%, 4/1/2019 | 610,500 |
525,000 | 1,2 | Intelsat Jackson Holdings S.A., Company Guarantee, Series 144A, 7.50%, 4/1/2021 | 532,219 |
1,325,000 | Intelsat Jackson Holdings S.A., Sr. Note, 11.25%, 6/15/2016 | 1,395,391 |
275,000 | Lamar Media Corp., Company Guarantee, 7.875%, 4/15/2018 | 292,875 |
925,000 | Lamar Media Corp., Sr. Sub. Note, Series B, 6.625%, 8/15/2015 | 945,812 |
Principal Amount or Shares | Value |
$1,075,000 | MDC Partners, Inc., Company Guarantee, 11.00%, 11/1/2016 | 1,155,625 |
50,000 | 1,2 | MDC Partners, Inc., Company Guarantee, Series 144A, 11.00%, 11/1/2016 | 53,250 |
350,000 | Nexstar Broadcasting Group, Inc., Company Guarantee, 7.00%, 1/15/2014 | 343,438 |
981,391 | Nexstar Broadcasting Group, Inc., Company Guarantee, Series 1, 7.00%, 1/15/2014 | 962,990 |
250,000 | Nielsen Finance LLC/Nielsen Finance Co., Company Guarantee, 7.75%, 10/15/2018 | 271,250 |
650,000 | 1,2 | ProQuest Co., Company Guarantee, Series 144A, 9.00%, 10/15/2018 | 529,750 |
1,050,000 | SSI Investments II Ltd., Company Guarantee, 11.125%, 6/1/2018 | 1,115,625 |
850,000 | Southern Graphics Systems, Inc., Sr. Sub. Note, Series WI, 12.00%, 12/15/2013 | 858,500 |
975,000 | 1,2 | XM Satellite Radio, Inc., Sr. Unsecd. Note, Series 144A, 7.625%, 11/1/2018 | 1,028,625 |
TOTAL | 18,070,662 |
Metals & Mining – 0.0% |
750,000 | 3,4,5 | Aleris International, Inc., Company Guarantee, 9.00%, 12/15/2014 | 75 |
625,000 | 3,4,5 | Aleris International, Inc., Sr. Sub. Note, 10.00%, 12/15/2016 | 0 |
TOTAL | 75 |
Packaging & Containers – 3.6% |
775,000 | 1,2 | Ardagh Packaging Finance PLC, Company Guarantee, Series 144A, 9.125%, 10/15/2020 | 771,125 |
325,000 | Berry Plastics Corp., Sr. Secd. Note, 9.50%, 5/15/2018 | 328,250 |
350,000 | Bway Holding Co., Company Guarantee, Series WI, 10.00%, 6/15/2018 | 374,500 |
946,303 | Bway Holding Co., Sr. Unsecd. Note, 10.125%, 11/1/2015 | 922,645 |
200,000 | Crown Americas, LLC, Company Guarantee, 6.25%, 2/1/2021 | 210,000 |
125,000 | Greif, Inc., Sr. Unsecd. Note, 7.75%, 8/1/2019 | 135,625 |
775,000 | 1,2 | Packaging Dynamics Corp., Sr. Secd. Note, Series 144A, 8.75%, 2/1/2016 | 778,875 |
300,000 | 1,2 | Reynolds Group, Sr. Note, Series 144A, 9.00%, 4/15/2019 | 286,500 |
775,000 | 1,2 | Reynolds Group, Sr. Note, Series 144A, 9.25%, 5/15/2018 | 745,938 |
950,000 | 1,2 | Reynolds Group, Sr. Note, Series 144A, 9.875%, 8/15/2019 | 926,250 |
200,000 | 1,2 | Reynolds Group, Sr. Secd. Note, Series 144A, 7.125%, 4/15/2019 | 204,500 |
450,000 | 1,2 | Reynolds Group, Sr. Secd. Note, Series 144A, 8.75%, 10/15/2016 | 475,875 |
1,075,000 | 1,2 | Reynolds Group, Sr. Unsecd. Note, Series 144A, 8.25%, 2/15/2021 | 956,750 |
1,100,000 | 1,2 | Sealed Air Corp., Sr. Unsecd. Note, Series 144A, 8.375%, 9/15/2021 | 1,221,000 |
TOTAL | 8,337,833 |
Paper – 0.7% |
300,000 | Cascades, Inc., Company Guarantee, Series WI, 7.875%, 1/15/2020 | 292,500 |
100,000 | Clearwater Paper Corp., Company Guarantee, 7.125%, 11/1/2018 | 104,500 |
175,000 | Clearwater Paper Corp., Sr. Unsecd. Note, 10.625%, 6/15/2016 | 196,000 |
225,000 | Graphic Packaging International Corp., Company Guarantee, 9.50%, 6/15/2017 | 247,500 |
200,000 | Graphic Packaging International Corp., Sr. Note, 7.875%, 10/1/2018 | 214,000 |
475,000 | 1,2 | Longview Fibre Co., Sr. Secd. Note, Series 144A, 8.00%, 6/1/2016 | 477,375 |
TOTAL | 1,531,875 |
Restaurants – 1.4% |
1,250,000 | DineEquity, Inc., Company Guarantee, Series WI, 9.50%, 10/30/2018 | 1,348,438 |
1,125,000 | 1,2 | NPC International, Inc., 10.50%, 1/15/2020 | 1,136,250 |
850,000 | 1,2 | Seminole Hard Rock Entertainment, Inc./Seminole Hard Rock International LLC, Sr. Secd. Note, Series 144A, 3.046%, 3/15/2014 | 799,000 |
TOTAL | 3,283,688 |
Retailers – 4.3% |
800,000 | 1,2 | Academy Finance Corp., Series 144A, 9.25%, 8/1/2019 | 794,000 |
750,000 | Express, LLC, Company Guarantee, 8.75%, 3/1/2018 | 815,625 |
1,150,000 | Gymboree Corp., Sr. Unsecd. Note, 9.125%, 12/1/2018 | 1,012,000 |
250,000 | JC Penney Corp., Inc., Sr. Unsecd. Note, 7.40%, 4/1/2037 | 233,750 |
1,400,000 | 1,2 | Jo-Ann Stores, Inc., Sr. Unsecd. Note, Series 144A, 8.125%, 3/15/2019 | 1,340,500 |
Principal Amount or Shares | Value |
$675,000 | Michaels Stores, Inc., Company Guarantee, 7.75%, 11/1/2018 | 685,125 |
1,150,000 | 1,2 | PETCO Animal Supplies, Inc., Sr. Note, Series 144A, 9.25%, 12/1/2018 | 1,239,125 |
475,000 | 1,2 | Sally Beauty Holdings, Inc., Sr. Note, Series 144A, 6.875%, 11/15/2019 | 498,750 |
1,750,000 | The Yankee Candle Co., Inc., Sr. Sub. Note, Series B, 9.75%, 2/15/2017 | 1,715,000 |
925,000 | United Auto Group, Inc., Sr. Sub. Note, 7.75%, 12/15/2016 | 952,750 |
600,000 | YCC Holdings LLC, Sr. Unsecd. Note, 10.25%, 2/15/2016 | 528,000 |
TOTAL | 9,814,625 |
Services – 1.5% |
925,000 | 1,2 | Garda World Security Corp., Sr. Unsecd. Note, Series 144A, 9.75%, 3/15/2017 | 943,500 |
750,000 | Trans Union LLC, Company Guarantee, Series 144A, 11.375%, 6/15/2018 | 860,625 |
950,000 | West Corp., Company Guarantee, 11.00%, 10/15/2016 | 1,004,625 |
725,000 | West Corp., Company Guarantee, 7.875%, 1/15/2019 | 723,187 |
TOTAL | 3,531,937 |
Technology – 12.4% |
1,050,000 | Advanced Micro Devices, Inc., Sr. Unsecd. Note, 7.75%, 8/1/2020 | 1,084,125 |
1,000,000 | 1,2 | Allen Systems Group, Inc., Sr. Secd. 2nd Priority Note, Series 144A, 10.50%, 11/15/2016 | 875,000 |
875,000 | Aspect Software, Inc., Sr. Note, Series WI, 10.625%, 5/15/2017 | 912,187 |
575,000 | 1,2 | Beagle Acquisition Corp., Sr. Unsecd. Note, Series 144A, 11.00%, 12/31/2019 | 604,469 |
350,000 | CDW LLC/ CDW Finance, Company Guarantee, 12.535%, 10/12/2017 | 353,500 |
1,725,000 | CDW LLC/ CDW Finance, Sr. Unsecd. Note, Series WI, 8.50%, 4/1/2019 | 1,746,562 |
100,000 | Ceridian Corp., Sr. Unsecd. Note, 11.25%, 11/15/2015 | 78,500 |
1,100,000 | 1,2 | CommScope, Inc., Sr. Note, Series 144A, 8.25%, 1/15/2019 | 1,105,500 |
1,300,000 | 1,2 | Compucom System, Inc., Sr. Sub. Note, Series 144A, 12.50%, 10/1/2015 | 1,332,500 |
950,000 | 1,2 | CoreLogic, Inc., Sr. Unsecd. Note, Series 144A, 7.25%, 6/1/2021 | 914,375 |
975,000 | 1,2 | Eagle Parent, Inc., Sr. Note, Series 144A, 8.625%, 5/1/2019 | 936,000 |
125,000 | Fidelity National Information Services, Inc., Company Guarantee, Series WI, 7.625%, 7/15/2017 | 135,938 |
250,000 | Fidelity National Information Services, Inc., Company Guarantee, Series WI, 7.875%, 7/15/2020 | 271,250 |
275,000 | 1,2 | Fidelity National Information Services, Inc., Series 144A, 7.625%, 7/15/2017 | 297,688 |
325,000 | 1,2 | First Data Corp., Sr. Secd. 2nd Priority Note, Series 144A, 8.25%, 1/15/2021 | 292,500 |
850,000 | 1,2 | First Data Corp., Sr. Secd. 2nd Priority Note, Series 144A, 8.75%, 1/15/2022 | 735,250 |
575,000 | Freescale Semiconductor, Inc., Company Guarantee, 10.75%, 8/1/2020 | 602,313 |
1,075,000 | 1,2 | Freescale Semiconductor, Inc., Sr. Secd. Note, Series 144A, 9.25%, 4/15/2018 | 1,154,281 |
1,125,000 | GXS WORLDWIDE, INC., Sr. Secd. Note, 9.75%, 6/15/2015 | 1,046,250 |
925,000 | 1,2 | IGATE Capital Corp., Sr. Note, Series 144A, 9.00%, 5/1/2016 | 959,687 |
875,000 | Interactive Data Corp., Company Guarantee, 10.25%, 8/1/2018 | 962,500 |
450,000 | Iron Mountain, Inc., Sr. Sub. Note, 7.75%, 10/1/2019 | 477,563 |
725,000 | Kemet Corp., Sr. Note, 10.50%, 5/1/2018 | 770,313 |
1,125,000 | Lender Processing Services, Sr. Note, 8.125%, 7/1/2016 | 1,110,937 |
825,000 | MagnaChip Semiconductor S.A., Sr. Note, Series WI, 10.50%, 4/15/2018 | 862,125 |
900,000 | SERENA Software, Inc., Sr. Sub. Note, 10.375%, 3/15/2016 | 927,000 |
1,000,000 | SITEL Corp., Sr. Unsecd. Note, 11.50%, 4/1/2018 | 742,500 |
200,000 | 1,2 | Seagate Technology HDD Holdings, Company Guarantee, Series 144A, 7.75%, 12/15/2018 | 213,750 |
975,000 | Seagate Technology HDD Holdings, Sr. Note, 6.80%, 10/1/2016 | 1,048,125 |
250,000 | 1,2 | Seagate Technology HDD Holdings, Sr. Unsecd. Note, Series 144A, 7.00%, 11/1/2021 | 257,500 |
775,000 | 1,2 | SoftBrands, Inc., Sr. Note, Series 144A, 11.50%, 7/15/2018 | 755,625 |
675,000 | 1,2 | Solera Holdings, Inc., Company Guarantee, Series 144A, 6.75%, 6/15/2018 | 685,125 |
750,000 | Spansion, Inc., Sr. Unsecd. Note, Series WI, 7.875%, 11/15/2017 | 686,250 |
750,000 | Stream Global Services, Inc., Sr. Secd. Note, 11.25%, 10/1/2014 | 765,000 |
200,000 | SunGard Data Systems, Inc., Company Guarantee, 10.625%, 5/15/2015 | 214,000 |
Principal Amount or Shares | Value |
$1,150,000 | SunGard Data Systems, Inc., Sr. Sub. Note, Series WI, 10.25%, 8/15/2015 | 1,197,437 |
250,000 | SunGard Data Systems, Inc., Sr. Unsecd. Note, 7.625%, 11/15/2020 | 258,125 |
1,075,000 | Syniverse Holdings, Inc., Company Guarantee, 9.125%, 1/15/2019 | 1,139,500 |
TOTAL | 28,511,250 |
Transportation – 0.8% |
825,000 | Avis Budget Group, Inc., Company Guarantee, 8.25%, 1/15/2019 | 822,937 |
425,000 | Hertz Corp., Company Guarantee, 6.75%, 4/15/2019 | 428,188 |
500,000 | Hertz Corp., Company Guarantee, 7.50%, 10/15/2018 | 525,000 |
70,000 | Hertz Corp., Sr. Note, 8.875%, 1/1/2014 | 70,700 |
TOTAL | 1,846,825 |
Utility - Electric – 1.1% |
425,000 | Edison Mission Energy, Sr. Note, 7.75%, 6/15/2016 | 312,375 |
219,015 | 1 | FPL Energy National Wind, Note, Series 144A, 6.125%, 3/25/2019 | 215,621 |
675,000 | NRG Energy, Inc., Company Guarantee, 8.25%, 9/1/2020 | 681,750 |
275,000 | 1,2 | NRG Energy, Inc., Company Guarantee, Series 144A, 7.625%, 5/15/2019 | 270,875 |
450,000 | 1,2 | NRG Energy, Inc., Company Guarantee, Series 144A, 7.875%, 5/15/2021 | 441,000 |
125,000 | NRG Energy, Inc., Company Guarantee, Series WI, 7.625%, 1/15/2018 | 125,625 |
500,000 | Texas Competitive Electric Holdings Co. LLC, Company Guarantee, Series A, 10.25%, 11/1/2015 | 180,000 |
350,000 | 1,2 | Texas Competitive Electric Holdings Co. LLC, Sr. Secd. Note, Series 144A, 11.50%, 10/1/2020 | 298,813 |
TOTAL | 2,526,059 |
Utility - Natural Gas – 3.1% |
1,175,000 | Crosstex Energy, Inc., Company Guarantee, 8.875%, 2/15/2018 | 1,289,562 |
1,250,000 | Energy Transfer Equity LP, Sr. Unsecd. Note, 7.50%, 10/15/2020 | 1,371,875 |
250,000 | Ferrellgas, L.P., Sr. Unsecd. Note, 6.50%, 5/1/2021 | 221,250 |
625,000 | Holly Energy Partners LP, Sr. Note, 6.25%, 3/1/2015 | 632,813 |
1,125,000 | Inergy LP, Company Guarantee, 6.875%, 8/1/2021 | 1,136,250 |
350,000 | MarkWest Energy Partners LP, Company Guarantee, 6.75%, 11/1/2020 | 368,375 |
525,000 | MarkWest Energy Partners LP, Sr. Unsecd. Note, 6.25%, 6/15/2022 | 551,250 |
375,000 | Regency Energy Partners LP, Company Guarantee, 9.375%, 6/1/2016 | 414,375 |
300,000 | Regency Energy Partners LP, Sr. Note, 6.875%, 12/1/2018 | 320,250 |
750,000 | Southern Star Central Corp., Sr. Note, 6.75%, 3/1/2016 | 766,875 |
TOTAL | 7,072,875 |
Wireless Communications – 3.3% |
100,000 | 1,2 | Digicel Ltd., Sr. Note, Series 144A, 10.50%, 4/15/2018 | 101,500 |
450,000 | 1,2 | Digicel Ltd., Sr. Note, Series 144A, 12.00%, 4/1/2014 | 506,250 |
425,000 | 1,2 | Digicel Ltd., Sr. Note, Series 144A, 8.25%, 9/1/2017 | 431,375 |
375,000 | 1,2 | Digicel Ltd., Sr. Note, Series 144A, 8.875%, 1/15/2015 | 371,250 |
725,000 | 1,2 | Digicel Ltd., Sr. Note, Series 144A, 9.125%, 1/15/2015 | 714,125 |
1,100,000 | MetroPCS Wireless, Inc., Sr. Note, 6.625%, 11/15/2020 | 1,028,500 |
400,000 | MetroPCS Wireless, Inc., Sr. Note, 7.875%, 9/1/2018 | 407,500 |
700,000 | Nextel Communications, Inc., Sr. Note, Series D, 7.375%, 8/1/2015 | 644,000 |
175,000 | Sprint Capital Corp., Company Guarantee, 6.875%, 11/15/2028 | 125,781 |
1,950,000 | Sprint Capital Corp., Company Guarantee, 6.90%, 5/1/2019 | 1,613,625 |
925,000 | 1,2 | Sprint Capital Corp., GTD Note, Series 144A, 9.00%, 11/15/2018 | 973,562 |
225,000 | 1,2 | Sprint Capital Corp., Note, 11.50%, 11/15/2021 | 223,313 |
500,000 | Sprint Nextel Corp., Unsecd. Note, 6.00%, 12/1/2016 | 417,500 |
TOTAL | 7,558,281 |
Principal Amount or Shares | Value |
Wireline Communications – 0.3% |
$450,000 | 1,2 | Level 3 Communications, Inc., Sr. Unsecd. Note, Series 144A, 8.125%, 7/1/2019 | 444,375 |
125,000 | TW Telecom, Inc., Company Guarantee, Series WI, 8.00%, 3/1/2018 | 133,750 |
TOTAL | 578,125 |
TOTAL CORPORATE BONDS (IDENTIFIED COST $222,695,912) | 222,978,869 |
COMMON STOCKS – 0.1% |
Automotive – 0.1% |
9,693 | 3 | General Motors Co. | 196,477 |
2,400,000 | 1,3 | General Motors Co. Escrow Shares | 36,000 |
TOTAL | 232,477 |
Metals & Mining – 0.0% |
23,013 | 1,3,5 | Royal Oak Mines, Inc. | 0 |
Other – 0.0% |
71 | 1,3,5 | CVC Claims Litigation LLC | 0 |
TOTAL COMMON STOCKS (IDENTIFIED COST $1,548,494) | 232,477 |
WARRANTS – 0.1% |
Automotive – 0.1% |
8,811 | 3 | General Motors Co., Warrants | 103,353 |
8,811 | 3 | General Motors Co., Warrants | 68,902 |
TOTAL WARRANTS (IDENTIFIED COST $1,026,733) | 172,255 |
PREFERRED STOCK – 0.2% |
Financial Institutions – 0.2% |
700 | 1,2 | Ally Financial, Inc., Pfd., Series 144A, Annual Dividend 7.00% (IDENTIFIED COST $220,345) | 501,834 |
Repurchase Agreement – 0.7% |
1,668,000 | Interest in $4,100,000,000 joint repurchase agreement 0.06%, dated 12/30/2011 under which Bank of America, N.A. will repurchase securities provided as collateral for $4,100,027,333 on 1/3/2012. The securities provided as collateral at the end of the period were U.S. Government Agency securities with various maturities to 4/15/2040 and the market value of those underlying securities was $4,218,795,473. (AT COST) | 1,668,000 |
TOTAL INVESTMENTS — 98.2% (IDENTIFIED COST $227,159,484)6 | 225,553,435 |
OTHER ASSETS AND LIABILITIES - NET — 1.8%7 | 4,155,365 |
TOTAL NET ASSETS — 100% | $229,708,800 |
1 | Denotes a restricted security that either: (a) cannot be offered for public sale without first being registered, or being able to take advantage of an exemption from registration, under the Securities Act of 1933; or (b) is subject to a contractual restriction on public sales. At December 31, 2011, these restricted securities amounted to $70,536,965, which represented 30.7% of total net assets. |
2 | Denotes a restricted security that may be resold without restriction to “qualified institutional buyers” as defined in Rule 144A under the Securities Act of 1933 and that the Fund has determined to be liquid under criteria established by the Fund's Board of Trustees (the “Trustees”). At December 31, 2011, these liquid restricted securities amounted to $69,763,344, which represented 30.4% of total net assets. |
3 | Non-income producing security. |
4 | Issuer in default. |
5 | Market quotations and price evaluations are not available. Fair value determined in accordance with procedures established by and under the general supervision of the Trustees. |
6 | The cost of investments for federal tax purposes amounts to $ 227,508,356. |
7 | Assets, other than investments in securities, less liabilities. See Statement of Assets and Liabilities. |
Note: The categories of investments are shown as a percentage of total net assets at December 31, 2011.
Annual Shareholder Report
Various inputs are used in determining the value of the Fund's investments. These inputs are summarized in the three broad levels listed below:Level 1 — quoted prices in active markets for identical securities, including investment companies with daily net asset values, if applicable. Level 2 — other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.). Also includes securities valued at amortized cost. Level 3 — significant unobservable inputs (including the Fund's own assumptions in determining the fair value of investments).The inputs or methodology used for valuing securities are not an indication of the risk associated with investing in those securities.
The following is a summary of the inputs used, as of December 31, 2011, in valuing the Fund's assets carried at fair value:
Valuation Inputs |
Level 1 — Quoted Prices and Investments in Mutual Funds | Level 2 — Other Significant Observable Inputs | Level 3 — Significant Unobservable Inputs | Total |
Debt Securities: |
Corporate Bonds | $ — | $222,978,794 | $75 | $222,978,869 |
Equity Securities: |
Common Stock |
Domestic | 196,477 | 36,000 | 0 | 232,477 |
International | — | — | 0 | 0 |
Warrants | 172,255 | — | — | 172,255 |
Preferred Stock |
Domestic | — | 501,834 | — | 501,834 |
Repurchase Agreement | — | 1,668,000 | — | 1,668,000 |
TOTAL SECURITIES | $368,732 | $225,184,628 | $75 | $225,553,435 |
Following is a reconciliation of assets in which significant unobservable inputs (Level 3) were used in determining fair value:
Investments in Corporate Bonds Securities | Investments in Common Stock — Domestic Securities | Investments in Common Stock — International Securities |
Balance as of January 1, 2011 | $0 | $0 | $544 |
Change in unrealized appreciation/depreciation | (4,013) | — | (544) |
(Sales) | (856) | — | — |
Transfers in and/or out of Level 3 | 4,9441 | — | — |
Balance as of December 31, 2011 | $75 | $0 | $0 |
The total change in unrealized appreciation (depreciation) included in the Statement of Operations attributable to investments still held at December 31, 2011. | $(4,013) | $ — | $(544) |
1 | Transferred from Level 2 to Level 3 because fair values were determined using valuation techniques utilizing unobservable market data due to observable market data being unavailable. Transfers shown represent the value of the securities at the beginning of the period. |
The following acronym is used throughout this portfolio:
GTD — Guaranteed
See Notes which are an integral part of the Financial Statements
Annual Shareholder ReportFinancial Highlights – Primary Shares
(For a Share Outstanding Throughout Each Period)
Year Ended December 31 | 2011 | 2010 | 2009 | 2008 | 2007 |
Net Asset Value, Beginning of Period | $7.03 | $6.67 | $5.03 | $7.49 | $7.85 |
Income From Investment Operations: |
Net investment income | 0.531 | 0.561 | 0.551 | 0.581 | 0.551 |
Net realized and unrealized gain (loss) on investments | (0.18) | 0.36 | 1.78 | (2.37) | (0.29) |
TOTAL FROM INVESTMENT OPERATIONS | 0.35 | 0.92 | 2.33 | (1.79) | 0.26 |
Less Distributions: |
Distributions from net investment income | (0.62) | (0.56) | (0.69) | (0.67) | (0.62) |
Net Asset Value, End of Period | $6.76 | $7.03 | $6.67 | $5.03 | $7.49 |
Total Return2 | 5.17% | 14.73% | 52.85% | (25.99)% | 3.43% |
Ratios to Average Net Assets: |
Net expenses | 0.79% | 0.78% | 0.78% | 0.79% | 0.77% |
Net investment income | 7.77% | 8.41% | 9.64% | 8.96% | 7.29% |
Expense waiver/reimbursement3 | 0.00%4 | 0.00%4 | 0.02% | 0.00%4 | 0.00%4 |
Supplemental Data: |
Net assets, end of period (000 omitted) | $157,842 | $164,640 | $168,092 | $117,303 | $196,470 |
Portfolio turnover | 38% | 45% | 33% | 15% | 31% |
1 | Per share numbers have been calculated using the average shares method. |
2 | Based on net asset value. Total returns do not reflect any additional fees or expenses that may be imposed by separate accounts of insurance companies or in connection with any variable annuity or variable life insurance contract. |
3 | This expense decrease is reflected in both the net expense and the net investment income ratios shown above. |
4 | Represents less than 0.01%. |
See Notes which are an integral part of the Financial Statements
Annual Shareholder ReportFinancial Highlights – Service Shares
(For a Share Outstanding Throughout Each Period)
Year Ended December 31 | 2011 | 2010 | 2009 | 2008 | 2007 |
Net Asset Value, Beginning of Period | $7.00 | $6.65 | $5.01 | $7.45 | $7.81 |
Income From Investment Operations: |
Net investment income | 0.511 | 0.541 | 0.531 | 0.561 | 0.531 |
Net realized and unrealized gain (loss) on investments | (0.18) | 0.36 | 1.78 | (2.35) | (0.28) |
TOTAL FROM INVESTMENT OPERATIONS | 0.33 | 0.90 | 2.31 | (1.79) | 0.25 |
Less Distributions: |
Distributions from net investment income | (0.60) | (0.55) | (0.67) | (0.65) | (0.61) |
Net Asset Value, End of Period | $6.73 | $7.00 | $6.65 | $5.01 | $7.45 |
Total Return2 | 4.92% | 14.38% | 52.47% | (26.09)% | 3.19% |
Ratios to Average Net Assets: |
Net expenses | 1.04% | 1.03% | 1.03% | 1.04% | 1.02% |
Net investment income | 7.50% | 8.16% | 9.39% | 8.68% | 7.04% |
Expense waiver/reimbursement3 | 0.00%4 | 0.00%4 | 0.02% | 0.00%4 | 0.00%4 |
Supplemental Data: |
Net assets, end of period (000 omitted) | $71,867 | $84,800 | $81,866 | $55,262 | $89,486 |
Portfolio turnover | 38% | 45% | 33% | 15% | 31% |
1 | Per share numbers have been calculated using the average shares method. |
2 | Based on net asset value. Total returns do not reflect any additional fees or expenses that may be imposed by separate accounts of insurance companies or in connection with any variable annuity or variable life insurance contract. |
3 | This expense decrease is reflected in both the net expense and the net investment income ratios shown above. |
4 | Represents less than 0.01%. |
See Notes which are an integral part of the Financial Statements
Annual Shareholder ReportStatement of Assets and Liabilities
Assets: |
Total investments in securities, at value including (identified cost $227,159,484) | $225,553,435 |
Cash | 367 |
Income receivable | 4,567,510 |
Receivable for shares sold | 48,842 |
TOTAL ASSETS | 230,170,154 |
Liabilities: |
Payable for shares redeemed | $415,014 |
Payable for Directors'/Trustees' fees | 273 |
Payable for portfolio accounting fees | 19,199 |
Payable for distribution services fee (Note 5) | 15,702 |
Accrued expenses | 11,166 |
TOTAL LIABILITIES | 461,354 |
Net assets for 34,010,717 shares outstanding | $229,708,800 |
Net Assets Consist of: |
Paid-in capital | $240,313,792 |
Net unrealized depreciation of investments | (1,606,049) |
Accumulated net realized loss on investments | (27,827,719) |
Undistributed net investment income | 18,828,776 |
TOTAL NET ASSETS | $229,708,800 |
Net Asset Value, Offering Price and Redemption Proceeds Per Share |
Primary Shares: |
Net asset value per share ($157,842,026 ÷ 23,334,309 shares outstanding), no par value, unlimited shares authorized | $6.76 |
Service Shares: |
Net asset value per share ($71,866,774 ÷ 10,676,408 shares outstanding), no par value, unlimited shares authorized | $6.73 |
See Notes which are an integral part of the Financial Statements
Annual Shareholder ReportInvestment Income: |
Interest | $20,411,397 |
Dividends | 51,940 |
TOTAL INCOME | 20,463,337 |
Expenses: |
Investment adviser fee (Note 5) | $1,435,110 |
Administrative fee (Note 5) | 190,000 |
Custodian fees | 14,371 |
Transfer and dividend disbursing agent fees and expenses | 31,876 |
Directors'/Trustees' fees | 4,219 |
Auditing fees | 26,250 |
Legal fees | 5,346 |
Portfolio accounting fees | 112,606 |
Distribution services fee (Note 5) | 199,707 |
Printing and postage | 65,044 |
Insurance premiums | 4,524 |
Miscellaneous | 4,441 |
TOTAL EXPENSES | 2,093,494 |
Waiver of administrative fee (Note 5) | (7,981) |
Net expenses | 2,085,513 |
Net investment income | 18,377,824 |
Realized and Unrealized Gain (Loss) on Investments: |
Net realized gain on investments | 5,949,818 |
Net change in unrealized appreciation of investments | (13,011,424) |
Net realized and unrealized loss on investments | (7,061,606) |
Change in net assets resulting from operations | $11,316,218 |
See Notes which are an integral part of the Financial Statements
Annual Shareholder ReportStatement of Changes in Net Assets
Year Ended December 31 | 2011 | 2010 |
Increase (Decrease) in Net Assets |
Operations: |
Net investment income | $18,377,824 | $20,562,347 |
Net realized gain (loss) on investments | 5,949,818 | (8,148,805) |
Net change in unrealized appreciation/depreciation of investments | (13,011,424) | 20,767,491 |
CHANGE IN NET ASSETS RESULTING FROM OPERATIONS | 11,316,218 | 33,181,033 |
Distributions to Shareholders: |
Distributions from net investment income |
Primary Shares | (13,785,722) | (13,679,804) |
Service Shares | (7,019,210) | (6,749,782) |
CHANGE IN NET ASSETS RESULTING FROM DISTRIBUTIONS TO SHAREHOLDERS | (20,804,932) | (20,429,586) |
Share Transactions: |
Proceeds from sale of shares | 88,628,005 | 82,456,481 |
Net asset value of shares issued to shareholders in payment of distributions declared | 19,732,929 | 19,640,199 |
Cost of shares redeemed | (118,603,135) | (115,366,719) |
CHANGE IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS | (10,242,201) | (13,270,039) |
Change in net assets | (19,730,915) | (518,592) |
Net Assets: |
Beginning of period | 249,439,715 | 249,958,307 |
End of period (including undistributed net investment income of $18,828,776 and $20,777,247, respectively) | $229,708,800 | $249,439,715 |
See Notes which are an integral part of the Financial Statements
Annual Shareholder ReportFederated Insurance Series (the “Trust”) is registered under the Investment Company Act of 1940, as amended (the “Act”), as an open-end management investment company. The Trust consists of seven portfolios. The financial statements included herein are only those of Federated High Income Bond Fund II (the “Fund”), a diversified portfolio. The financial statements of the other portfolios are presented separately. The assets of each portfolio are segregated and a shareholder's interest is limited to the portfolio in which shares are held. Each portfolio pays its own expenses. The Fund offers two classes of shares: Primary Shares and Service Shares. All shares of the Fund have equal rights with respect to voting, except on class-specific matters. Fund shares are available exclusively as a funding vehicle for life insurance companies writing variable life insurance policies and variable annuity contracts. The investment objective of the Fund is to seek high current income.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. These policies are in conformity with U.S. generally accepted accounting principles (GAAP).
Investment Valuation
In calculating its net asset value (NAV), the Fund generally values investments as follows:
- Fixed-income securities acquired with remaining maturities greater than 60 days are fair valued using price evaluations provided by a pricing service approved by the Trustees.
- Fixed-income securities acquired with remaining maturities of 60 days or less are valued at their cost (adjusted for the accretion of any discount or amortization of any premium), which approximates market value.
- Equity securities listed on an exchange or traded through a regulated market system are valued at their last reported sale price or official closing price in their principal exchange or market.
- Shares of other mutual funds are valued based upon their reported NAVs.
- Derivative contracts listed on exchanges are valued at their reported settlement or closing price.
- Over-the-counter (OTC) derivative contracts are fair valued using price evaluations provided by a pricing service approved by the Trustees.
- For securities that are fair valued in accordance with procedures established by and under the general supervision of the Trustees, certain factors may be considered such as: the purchase price of the security, information obtained by contacting the issuer, analysis of the issuer's financial statements or other available documents, fundamental analytical data, the nature and duration of restrictions on disposition, the movement of the market in which the security is normally traded and public trading in similar securities of the issuer or comparable issuers.
If the Fund cannot obtain a price or price evaluation from a pricing service for an investment, the Fund may attempt to value the investment based upon the mean of bid and asked quotations or fair value the investment based on price evaluations, from one or more dealers. If any price, quotation, price evaluation or other pricing source is not readily available when the NAV is calculated, the Fund uses the fair value of the investment determined in accordance with the procedures described below. There can be no assurance that the Fund could purchase or sell an investment at the price used to calculate the Fund's NAV.
Fair Valuation and Significant Events Procedures
The Trustees have authorized the use of pricing services to provide evaluations of the current fair value of certain investments for purposes of calculating the NAV. Factors considered by pricing services in evaluating an investment include the yields or prices of investments of comparable quality, coupon, maturity, call rights and other potential prepayments, terms and type, reported transactions, indications as to values from dealers and general market conditions. Some pricing services provide a single price evaluation reflecting the bid-side of the market for an investment (a “bid” evaluation). Other pricing services offer both bid evaluations and price evaluations indicative of a price between the prices bid and asked for the investment (a “mid” evaluation). The Fund normally uses bid evaluations for U.S. Treasury and Agency securities, mortgage-backed securities and municipal securities. The Fund normally uses mid evaluations for other types of fixed-income securities and OTC derivative contracts. In the event that market quotations and price evaluations are not available for an investment, the fair value of the investment is determined in accordance with procedures adopted by the Trustees.
The Trustees also have adopted procedures requiring an investment to be priced at its fair value whenever the Adviser determines that a significant event affecting the value of the investment has occurred between the time as of which the price of the investment would otherwise be determined and the time as of which the NAV is computed. An event is considered significant if there is both an affirmative expectation that the investment's value will change in response to the event and a reasonable basis for quantifying the resulting change in value. Examples of significant events that may occur after the close of the principal market on which a security is traded, or after the time of a price evaluation provided by a pricing service or a dealer, include:
- With respect to securities traded in foreign markets, significant trends in U.S. equity markets or in the trading of foreign securities index futures or options contracts;
- With respect to price evaluations of fixed-income securities determined before the close of regular trading on the NYSE, actions by the Federal Reserve Open Market Committee and other significant trends in U.S. fixed-income markets;
- Political or other developments affecting the economy or markets in which an issuer conducts its operations or its securities are traded; and
- Announcements concerning matters such as acquisitions, recapitalizations, litigation developments, a natural disaster affecting the issuer's operations or regulatory changes or market developments affecting the issuer's industry.
Annual Shareholder Report
The Trustees have approved the use of a pricing service to determine the fair value of equity securities traded principally in foreign markets when the Adviser determines that there has been a significant trend in the U.S. equity markets or in index futures trading. For other significant events, the Fund may seek to obtain more current quotations or price evaluations from alternative pricing sources. If a reliable alternative pricing source is not available, the Fund will determine the fair value of the investment using another method approved by the Trustees.Repurchase Agreements
The Fund may invest in repurchase agreements for short-term liquidity purposes. It is the policy of the Fund to require the other party to a repurchase agreement to transfer to the Fund's custodian or sub-custodian eligible securities or cash with a market value (after transaction costs) at least equal to the repurchase price to be paid under the repurchase agreement. The eligible securities are transferred to accounts with the custodian or sub-custodian in which the Fund holds a “securities entitlement” and exercises “control” as those terms are defined in the Uniform Commercial Code. The Fund has established procedures for monitoring the market value of the transferred securities and requiring the transfer of additional eligible securities if necessary to equal at least the repurchase price. These procedures also allow the other party to require securities to be transferred from the account to the extent that their market value exceeds the repurchase price or in exchange for other eligible securities of equivalent market value.
The insolvency of the other party or other failure to repurchase the securities may delay the disposition of the underlying securities or cause the Fund to receive less than the full repurchase price. Under the terms of the repurchase agreement, any amounts received by the Fund in excess of the repurchase price and related transaction costs must be remitted to the other party.
The Fund may enter into repurchase agreements in which eligible securities are transferred into joint trading accounts maintained by the custodian or sub-custodian for investment companies and other clients advised by the Fund's Adviser and its affiliates. The Fund will participate on a pro rata basis with the other investment companies and clients in its share of the securities transferred under such repurchase agreements and in its share of proceeds from any repurchase or other disposition of such securities.
Investment Income, Gains and Losses, Expenses and Distributions
Investment transactions are accounted for on a trade-date basis. Realized gains and losses from investment transactions are recorded on an identified-cost basis. Interest income and expenses are accrued daily. Dividend income and distributions to shareholders are recorded on the ex-dividend date. Foreign dividends are recorded on the ex-dividend date or when the Fund is informed of the ex-dividend date. Distributions of net investment income are declared and paid annually. Non-cash dividends included in dividend income, if any, are recorded at fair value. Investment income, realized and unrealized gains and losses, and certain fund-level expenses are allocated to each class based on relative average daily net assets, except that Primary Shares and Service Shares may bear distribution services fees unique to those classes.
Dividends are declared separately for each class. No class has preferential dividend rights; differences in per share dividend rates are generally due to differences in separate class expenses.
Premium and Discount Amortization
All premiums and discounts on fixed-income securities are amortized/accreted using the effective interest rate method.
Federal Taxes
It is the Fund's policy to comply with the Subchapter M provision of the Internal Revenue Code (the “Code”) and to distribute to shareholders each year substantially all of its income. Accordingly, no provision for federal income tax is necessary. As of and during the year ended December 31, 2011, the Fund did not have a liability for any uncertain tax positions. The Fund recognizes interest and penalties, if any, related to tax liabilities as income tax expense in the Statement of Operations. As of December 31, 2011, tax years 2008 through 2011 remain subject to examination by the Fund's major tax jurisdictions, which include the United States of America and the Commonwealth of Massachusetts.
When-Issued and Delayed Delivery Transactions
The Fund may engage in when-issued or delayed delivery transactions. The Fund records when-issued securities on the trade date and maintains security positions such that sufficient liquid assets will be available to make payment for the securities purchased. Securities purchased on a when-issued or delayed delivery basis are marked to market daily and begin earning interest on the settlement date. Losses may occur on these transactions due to changes in market conditions or the failure of counterparties to perform under the contract.
Restricted Securities
The Fund may purchase securities which are considered restricted. Restricted securities are securities that either: (a) cannot be offered for public sale without first being registered, or being able to take advantage of an exemption from registration, under the Securities Act of 1933; or (b) are subject to contractual restrictions on public sales. In some cases, when a security cannot be offered for public sale without first being registered, the issuer of the restricted security has agreed to register such securities for resale, at the issuer's expense, either upon demand by the Fund or in connection with another registered offering of the securities. Many such restricted securities may be resold in the secondary market in transactions exempt from registration. Restricted securities may be determined to be liquid under criteria established by the Trustees. The Fund will not incur any registration costs upon such resales. The Fund's restricted securities are valued at the price provided by dealers in the secondary market or, if no market prices are available, at the fair value as determined in accordance with procedures established by and under the general supervision of the Trustees.
Annual Shareholder Report
Additional information on restricted securities, excluding securities purchased under Rule 144A that have been deemed liquid by the Trustees, if applicable, held at December 31, 2011, is as follows:Security | Acquisition Date | Cost | Market Value |
Altegrity, Inc., Company Guarantee, Series 144A, 11.75%, 5/1/2016 | 10/19/2007 – 3/25/2008 | $484,746 | $462,000 |
American Standard Cos., Sr. Secd. Note, Series 144A, 10.75%, 1/15/2016 | 1/13/2011 | $100,000 | $60,000 |
CVC Claims Litigation LLC | 3/26/1997 – 6/18/1997 | $590,616 | $0 |
FPL Energy National Wind, Note, Series 144A, 6.125%, 3/25/2019 | 2/16/2005 | $219,015 | $215,621 |
General Motors Co. Escrow shares | 4/21/2011 | $50,060 | $36,000 |
Hard Rock Park Operations LLC, Sr. Secd. Note, Series 144A, 0.00%, 4/1/2012 | 3/23/2006 | $737,477 | $0 |
Royal Oak Mines, Inc. | 2/24/1999 | $2,557 | $0 |
Other
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts of assets, liabilities, expenses and revenues reported in the financial statements. Actual results could differ from those estimated.
3. SHARES OF BENEFICIAL INTEREST
The following tables summarize share activity:
Year Ended December 31 | 2011 | 2010 | |
Primary Shares: | Shares | Amount | Shares | Amount |
Shares sold | 8,172,025 | $55,173,550 | 6,413,989 | $42,633,192 |
Shares issued to shareholders in payment of distributions declared | 1,914,716 | 12,713,719 | 2,039,623 | 12,890,417 |
Shares redeemed | (10,171,437) | (68,262,412) | (10,221,630) | (67,643,284) |
NET CHANGE RESULTING FROM PRIMARY SHARE TRANSACTIONS | (84,696) | $(375,143) | (1,768,018) | $(12,119,675) |
Year Ended December 31 | 2011 | 2010 | |
Service Shares: | Shares | Amount | Shares | Amount |
Shares sold | 5,040,245 | $33,454,455 | 6,007,107 | $39,823,289 |
Shares issued to shareholders in payment of distributions declared | 1,060,304 | 7,019,210 | 1,071,394 | 6,749,782 |
Shares redeemed | (7,540,535) | (50,340,723) | (7,274,545) | (47,723,435) |
NET CHANGE RESULTING FROM SERVICE SHARE TRANSACTIONS | (1,439,986) | $(9,867,058) | (196,044) | $(1,150,364) |
NET CHANGE RESULTING FROM TOTAL FUND SHARE TRANSACTIONS | (1,524,682) | $(10,242,201) | (1,964,062) | $(13,270,039) |
The timing and character of income and capital gain distributions are determined in accordance with income tax regulations, which may differ from GAAP. These differences are due in part to differing treatments for defaulted bonds, expiring capital loss carryforwards and discount accretion/premium amortization on debt securities.
For the year ended December 31, 2011, permanent differences identified and reclassified among the components of net assets were as follows:
Increase (Decrease) | ||
Paid-In Capital | Undistributed Net Investment Income (Loss) | Accumulated Net Realized Gain (Loss) |
$(2,058,880) | $478,637 | $1,580,243 |
Net investment income (loss), net realized gains (losses), and net assets were not affected by this reclassification.
The tax character of distributions as reported on the Statement of Changes in Net Assets for the years ended December 31, 2011 and 2010, was as follows:
2011 | 2010 |
Ordinary income | $20,804,932 | $20,429,586 |
As of December 31, 2011, the components of distributable earnings on a tax basis were as follows:
Undistributed ordinary income | $18,864,367 |
Net unrealized depreciation | $(1,954,920) |
Capital loss carryforwards | $(27,514,439) |
The difference between book-basis and tax-basis net unrealized appreciation/depreciation is attributable in part to differing treatments for the deferral of losses on wash sales, defaulted bonds and discount accretion/premium amortization on debt securities.
At December 31, 2011, the cost of investments for federal tax purposes was $227,508,356. The net unrealized depreciation of investments for federal tax purposes was $1,954,921. This consists of net unrealized appreciation from investments for those securities having an excess of value over cost of $8,896,193 and net unrealized depreciation from investments for those securities having an excess of cost over value of $10,851,114.
At December 31, 2011, the Fund had a capital loss carryforward of $27,514,439 which will reduce the Fund's taxable income arising from future net realized gains on investments, if any, to the extent permitted by the Code, thereby reducing the amount of distributions to shareholders which would otherwise be necessary to relieve the Fund of any liability for federal income tax. Pursuant to the Code, a net capital loss incurred in taxable years beginning on or before December 22, 2010, is characterized as short-term and may be carried forward for a maximum of eight tax years (“Carryforward Limit”), whereas a net capital loss incurred in taxable years beginning after December 22, 2010, retains its character as either short-term or long-term, does not expire and is required to be utilized prior to the losses which have a Carryforward Limit.
The following schedule summarizes the Fund's short-term and long-term capital loss carryforwards and expiration year:
Expiration Year | Short-Term | Long-Term | Total |
2013 | $50,909 | NA | $50,909 |
2014 | $948,345 | NA | $948,345 |
2016 | $4,402,143 | NA | $4,402,143 |
2017 | $13,179,638 | NA | $13,179,638 |
2018 | $8,933,404 | NA | $8,933,404 |
The Fund used capital loss carryforwards of $3,886,950 to offset taxable capital gains realized during the year ended December 31, 2011. Additionally, capital loss carryforwards of $2,057,985 expired during the year ended December 31, 2011.
5. INVESTMENT ADVISER FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Investment Adviser Fee
Federated Investment Management Company is the Fund's investment adviser (the “Adviser”). The advisory agreement between the Fund and the Adviser provides for an annual fee equal to 0.60% of the Fund's average daily net assets. Subject to the terms described in the Expense Limitation note, the Adviser may voluntarily choose to waive any portion of its fee.
Administrative Fee
Federated Administrative Services (FAS), under the Administrative Services Agreement, provides the Fund with administrative personnel and services. The fee paid to FAS is based on the average aggregate daily net assets of certain Federated funds as specified below:
Administrative Fee | Average Aggregate Daily Net Assets of the Federated Funds |
0.150% | on the first $5 billion |
0.125% | on the next $5 billion |
0.100% | on the next $10 billion |
0.075% | on assets in excess of $20 billion |
The administrative fee received during any fiscal year shall be at least $150,000 per portfolio and $40,000 per each additional class of Shares. Subject to the terms described in the Expense Limitation note, FAS may voluntarily choose to waive any portion of its fee. For the year ended December 31, 2011, the net fee paid to FAS was 0.076% of average daily net assets of the Fund. FAS waived $7,981 of its fee.
Distribution Services Fee
The Fund has adopted a Distribution Plan (the “Plan”) pursuant to Rule 12b-1 under the Act. Under the terms of the Plan, the Fund will compensate Federated Securities Corp. (FSC), the principal distributor, from the daily net assets of the Fund's Service Shares to finance activities intended to result in the sale of these shares. The Plan provides that the Fund may incur distribution expenses at 0.25% of average daily net assets, annually, to compensate FSC. Subject to the terms described in the Expense Limitation note, FSC may voluntarily choose to waive any portion of its fee. For the year ended December 31, 2011, distribution services fees for the Fund were as follows:
Distribution Services Fees Incurred |
Service Shares | $199,707 |
When FSC receives fees, it may pay some or all of them to financial intermediaries whose customers purchase shares. For the year ended December 31, 2011, FSC retained $344 of fees paid by the Fund.
Annual Shareholder Report
Expense LimitationThe Adviser and its affiliates (which may include FSC and FAS) have voluntarily agreed to waive their fees and/or reimburse expenses so that the total annual fund operating expenses (as shown in the financial highlights) paid by the Fund's Primary Shares and Service Shares (after the voluntary waivers and reimbursements) will not exceed 0.85% and 1.10% (the “Fee Limit”), respectively, up to but not including the later of (the “Termination Date”): (a) May 1, 2012; or (b) the date of the Fund's next effective Prospectus. While the Adviser and its affiliates currently do not anticipate terminating or increasing these arrangements prior to the Termination Date, these arrangements may only be terminated or the Fee Limit increased prior to the Termination Date with the agreement of the Trustees.
Interfund Transactions
During the year ended December 31, 2011, the Fund engaged in purchase and sale transactions with funds that have a common investment adviser (or affiliated investment advisers), common Directors/Trustees, and/or common Officers. The purchase and sale transactions complied with Rule 17a-7 under the Act and amounted to $0 and $1,112,375.
General
Certain Officers and Trustees of the Fund are Officers and Directors or Trustees of the above companies.
Purchases and sales of investments, excluding long-term U.S. government securities and short-term obligations for the year ended December 31, 2011, were as follows:
Purchases | $90,014,135 |
Sales | $89,061,224 |
The Fund participates in a $100,000,000 unsecured, uncommitted revolving line of credit (LOC) agreement with PNC Bank. The LOC was made available for extraordinary or emergency purposes, primarily for financing redemption payments. Borrowings are charged interest at a rate offered to the Fund by PNC Bank at the time of the borrowing. As of December 31, 2011, there were no outstanding loans. During the year ended December 31, 2011, the Fund did not utilize the LOC.
Pursuant to an Exemptive Order issued by the Securities and Exchange Commission, the Fund, along with other funds advised by subsidiaries of Federated Investors, Inc., may participate in an interfund lending program. This program provides an alternative credit facility allowing the Fund to borrow from other participating affiliated funds. As of December 31, 2011, there were no outstanding loans. During the year ended December 31, 2011, the program was not utilized.
9. recent accounting pronouncements
In April 2011, the Financial Accounting Standards Board (FASB) released Accounting Standards Update (ASU) No. 2011-03, “Reconsideration of Effective Control for Repurchase Agreements.” This ASU amends FASB Accounting Standards Codification (ASC) Topic 860, “Transfers and Servicing”; specifically the criteria required to determine whether a repurchase agreement and similar agreements should be accounted for as sales of financial assets or secured borrowings with commitments. This ASU is effective for fiscal years and interim periods beginning after December 15, 2011. Management has concluded that the adoption of ASU No. 2011-03 is not expected to have a material impact on the Fund's financial statements and the accompanying notes, net assets and results of operations.
In addition, in May 2011, FASB released ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” This ASU amends FASB ASC Topic 820, “Fair Value Measurement,” to establish common requirements for measuring fair value and for disclosing information about fair value measurements in accordance with GAAP. This ASU is effective for fiscal years and interim periods beginning after December 15, 2011. Management has concluded that the adoption of ASU No. 2011-04 is not expected to have a material impact on the Fund's financial statements and the accompanying notes.
Annual Shareholder ReportReport of Independent Registered Public Accounting Firm
TO THE BOARD OF TRUSTEES OF FEDERATED insurance series AND SHAREHOLDERS OF FEDERATED high income bond fund ii:
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of the Federated High Income Bond Fund II (the “Fund”), a portfolio of Federated Insurance Series, as of December 31, 2011, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended. These financial statements and financial highlights are the responsibility of the Fund's management.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2011, by correspondence with the custodian and transfer agent, or by other appropriate auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Federated High Income Bond Fund II as of December 31, 2011, and the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended, in conformity with U.S. generally accepted accounting principles.
Boston, Massachusetts
February 13, 2012
Shareholder Expense Example (unaudited)
As a shareholder of the Fund, you incur ongoing costs, including management fees and to the extent applicable, distribution (12b-1) fees and/or shareholder services fees and other Fund expenses. This Example is intended to help you to understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other variable investment options. It is based on an investment of $1,000 invested at the beginning of the period and held for the entire period from July 1, 2011 to December 31, 2011.
The first section of the table below provides information about actual account values and actual expenses. You may use the information in this section, together with the amount you invested, to estimate the expenses that you incurred over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first section under the heading entitled “Expenses Paid During Period” to estimate the expenses attributable to your investment during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second section of the table below provides information 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. Thus, you should not use the hypothetical account values and expenses to estimate the actual ending account balance or your expenses for the period. Rather, these figures are required to be provided to enable you to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only. Therefore, the second section of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds.
Beginning Account Value 7/1/2011 | Ending Account Value 12/31/2011 | Expenses Paid During Period1 |
Actual: |
Primary Shares | $1,000 | $1,009.00 | $4.00 |
Service Shares | $1,000 | $1,007.50 | $5.26 |
Hypothetical (assuming a 5% return before expenses): |
Primary Shares | $1,000 | $1,021.22 | $4.02 |
Service Shares | $1,000 | $1,019.96 | $5.30 |
1 | Expenses are equal to the Fund's annualized net expense ratios, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half-year period). The expenses shown in the table do not include the charges and expenses imposed by the insurance company under the variable insurance product contract. Please refer to the variable insurance product prospectus for a complete listing of these expenses. The annualized net expense ratios are as follows: |
Primary Shares | 0.79% |
Service Shares | 1.04% |
Board of Trustees and Trust Officers
The Board of Trustees is responsible for managing the Trust's business affairs and for exercising all the Trust's powers except those reserved for the shareholders. The following tables give information about each Trustee and the senior officers of the Fund. Where required, the tables separately list Trustees who are “interested persons” of the Fund (i.e., “Interested” Trustees) and those who are not (i.e., “Independent” Trustees). Unless otherwise noted, the address of each person listed is Federated Investors Tower, 1001 Liberty Avenue, Pittsburgh, PA 15222. The address of all Independent Trustees listed is 4000 Ericsson Drive, Warrendale, PA 15086-7561; Attention: Mutual Fund Board. As of December 31, 2011, the Trust comprised seven portfolio(s), and the Federated Fund Family consisted of 43 investment companies (comprising 134 portfolios). Unless otherwise noted, each Officer is elected annually. Unless otherwise noted, each Trustee oversees all portfolios in the Federated Fund Family and serves for an indefinite term. The Fund's Statement of Additional Information includes additional information about Trust Trustees and is available, without charge and upon request, by calling 1-800-341-7400.
Interested Trustees Background
Name Birth Date Positions Held with Trust Date Service Began | Principal Occupation(s) for Past Five Years, Other Directorships Held and Previous Position(s) |
John F. Donahue* Birth Date: July 28, 1924 Trustee Began serving: October 1993 | Principal Occupations: Director or Trustee of the Federated Fund Family; Chairman and Director, Federated Investors, Inc.; Chairman of the Federated Fund Family's Executive Committee. Previous Positions: Chairman of the Federated Fund Family; Trustee, Federated Investment Management Company; Chairman and Director, Federated Investment Counseling. |
J. Christopher Donahue* Birth Date: April 11, 1949 Trustee Began serving: October 1993 | Principal Occupations: Principal Executive Officer and President of the Federated Fund Family; Director or Trustee of some of the Funds in the Federated Fund Family; President, Chief Executive Officer and Director, Federated Investors, Inc.; Chairman and Trustee, Federated Investment Management Company; Trustee, Federated Investment Counseling; Chairman and Director, Federated Global Investment Management Corp.; Chairman, Federated Equity Management Company of Pennsylvania and Passport Research, Ltd. (investment advisory subsidiary of Federated); Trustee, Federated Shareholder Services Company; Director, Federated Services Company. Previous Positions: President, Federated Investment Counseling; President and Chief Executive Officer, Federated Investment Management Company, Federated Global Investment Management Corp. and Passport Research, Ltd. |
* | Family relationships and reasons for “interested” status: John F. Donahue is the father of J. Christopher Donahue; both are “interested” due to their beneficial ownership of shares of Federated Investors, Inc. and the positions they hold with Federated and its subsidiaries. |
INDEPENDENT Trustees Background
Name Birth Date Positions Held with Trust Date Service Began | Principal Occupation(s) for Past Five Years, Other Directorships Held, Previous Position(s) and Qualifications |
Nicholas P. Constantakis, CPA Birth Date: September 3, 1939 Trustee Began serving: February 1998 | Principal Occupation: Director or Trustee of the Federated Fund Family. Other Directorship Held: Director, Chairman of the Audit Committee, and member of the Compensation Committee, Michael Baker Corporation (architecture, engineering and construction services). Previous Position: Partner, Andersen Worldwide SC. Qualifications: Public accounting and director experience. |
John F. Cunningham Birth Date: March 5, 1943 Trustee Began serving: November 1999 | Principal Occupation: Director or Trustee of the Federated Fund Family. Other Directorships Held: Chairman, President and Chief Executive Officer, Cunningham & Co., Inc. (strategic business consulting); Trustee Associate, Boston College. Previous Positions: Director, Redgate Communications and EMC Corporation (computer storage systems); Chairman of the Board and Chief Executive Officer, Computer Consoles, Inc.; President and Chief Operating Officer, Wang Laboratories; Director, First National Bank of Boston; Director, Apollo Computer, Inc. Qualifications: Business management and director experience. |
Name Birth Date Positions Held with Trust Date Service Began | Principal Occupation(s) for Past Five Years, Other Directorships Held, Previous Position(s) and Qualifications |
Maureen Lally-Green Birth Date: July 5, 1949 Trustee Began serving: August 2009 | Principal Occupations: Director or Trustee of the Federated Fund Family; Director, Office of Church Relations, Diocese of Pittsburgh; Adjunct Professor of Law, Duquesne University School of Law. Other Directorships Held: Director, Auberle; Trustee, St. Francis University; Director, Ireland Institute of Pittsburgh; Director, UPMC Mercy Hospital; Regent, St. Vincent Seminary; Director, Epilepsy Foundation of Western and Central Pennsylvania; Director, Saint Thomas More Society, Allegheny County. Previous Position: Pennsylvania Superior Court Judge. Qualifications: Legal and director experience. |
Peter E. Madden Birth Date: March 16, 1942 Trustee Began serving: October 1993 | Principal Occupation: Director or Trustee, and Chairman of the Board of Directors or Trustees, of the Federated Fund Family. Previous Positions: Representative, Commonwealth of Massachusetts General Court; President, Chief Operating Officer and Director, State Street Bank and Trust Company and State Street Corporation (retired); Director, VISA USA and VISA International; Chairman and Director, Massachusetts Bankers Association; Director, Depository Trust Corporation; Director, The Boston Stock Exchange. Qualifications: Business management, mutual fund services and director experience. |
Charles F. Mansfield, Jr. Birth Date: April 10, 1945 Trustee Began serving: November 1999 | Principal Occupations: Director or Trustee of the Federated Fund Family; Management Consultant. Previous Positions: Chief Executive Officer, PBTC International Bank; Partner, Arthur Young & Company (now Ernst & Young LLP); Chief Financial Officer of Retail Banking Sector, Chase Manhattan Bank; Senior Vice President, HSBC Bank USA (formerly Marine Midland Bank); Vice President, Citibank; Assistant Professor of Banking and Finance, Frank G. Zarb School of Business, Hofstra University; Executive Vice President, DVC Group, Inc. (marketing, communications and technology). Qualifications: Banking, business management, education and director experience. |
Thomas M. O'Neill Birth Date: June 14, 1951 Trustee Began serving: October 2006 | Principal Occupations: Director or Trustee, Vice Chairman of the Audit Committee of the Federated Fund Family; Sole Proprietor, Navigator Management Company (investment and strategic consulting). Other Directorships Held: Board of Overseers, Children's Hospital of Boston; Visiting Committee on Athletics, Harvard College; Board of Directors, Medicines for Humanity; Board of Directors, The Golisano Children's Museum of Naples, Florida. Previous Positions: Chief Executive Officer and President, Managing Director and Chief Investment Officer, Fleet Investment Advisors; President and Chief Executive Officer, Aeltus Investment Management, Inc.; General Partner, Hellman, Jordan Management Co., Boston, MA; Chief Investment Officer, The Putnam Companies, Boston, MA; Credit Analyst and Lending Officer, Fleet Bank; Director and Consultant, EZE Castle Software (investment order management software); Director, Midway Pacific (lumber). Qualifications: Business management, mutual fund, director and investment experience. |
John S. Walsh Birth Date: November 28, 1957 Trustee Began serving: January 1999 | Principal Occupations: Director or Trustee, Chairman of the Audit Committee of the Federated Fund Family; President and Director, Heat Wagon, Inc. (manufacturer of construction temporary heaters); President and Director, Manufacturers Products, Inc. (distributor of portable construction heaters); President, Portable Heater Parts, a division of Manufacturers Products, Inc. Previous Position: Vice President, Walsh & Kelly, Inc. Qualifications: Business management and director experience. |
Name Birth Date Address Positions Held with Trust Date Service Began | Principal Occupation(s) for Past Five Years and Previous Position(s) |
John W. McGonigle Birth Date: October 26, 1938 EXECUTIVE VICE PRESIDENT AND SECRETARY Began serving: September 1993 | Principal Occupations: Executive Vice President and Secretary of the Federated Fund Family; Vice Chairman, Executive Vice President, Secretary and Director, Federated Investors, Inc. Previous Positions: Trustee, Federated Investment Management Company and Federated Investment Counseling; Director, Federated Global Investment Management Corp., Federated Services Company and Federated Securities Corp. |
Richard A. Novak Birth Date: December 25, 1963 TREASURER Began serving: January 2006 | Principal Occupations: Principal Financial Officer and Treasurer of the Federated Fund Family; Senior Vice President, Federated Administrative Services; Financial and Operations Principal for Federated Securities Corp., Edgewood Services, Inc. and Southpointe Distribution Services, Inc. Previous Positions: Controller of Federated Investors, Inc.; Vice President, Finance of Federated Services Company; held various financial management positions within The Mercy Hospital of Pittsburgh; Auditor, Arthur Andersen & Co. |
Name Birth Date Address Positions Held with Trust Date Service Began | Principal Occupation(s) for Past Five Years and Previous Position(s) |
Richard B. Fisher Birth Date: May 17, 1923 VICE PRESIDENT Began serving: September 1993 | Principal Occupations: Vice Chairman or Vice President of some of the Funds in the Federated Fund Family; Vice Chairman, Federated Investors, Inc.; Chairman, Federated Securities Corp. Previous Positions: President and Director or Trustee of some of the Funds in the Federated Fund Family; Executive Vice President, Federated Investors, Inc.; Director and Chief Executive Officer, Federated Securities Corp. |
John B. Fisher Birth Date: May 16, 1956 PRESIDENT Began serving: November 2004 | Principal Occupations: President, Director/Trustee and CEO, Federated Advisory Services Company, Federated Equity Management Company of Pennsylvania, Federated Global Investment Management Corp., Federated Investment Counseling, Federated Investment Management Company; President and CEO of Passport Research, Ltd.; President of some of the Funds in the Federated Fund Family; Director, Federated Investors Trust Company. Previous Positions: President and Director of the Institutional Sales Division of Federated Securities Corp.; President and Director of Federated Investment Counseling; Director, Edgewood Securities Corp.; Director, Federated Services Company; Director, Federated Investors, Inc.; Chairman and Director, Southpointe Distribution Services, Inc.; President, Technology, Federated Services Company. |
Brian P. Bouda Birth Date: February 28, 1947 CHIEF COMPLIANCE OFFICER AND SENIOR VICE PRESIDENT Began serving: August 2004 | Principal Occupations: Senior Vice President and Chief Compliance Officer of the Federated Fund Family; Vice President and Chief Compliance Officer of Federated Investors, Inc. and Chief Compliance Officer of its subsidiaries. Mr. Bouda joined Federated in 1999 and is a member of the American Bar Association and the State Bar Association of Wisconsin. |
Stephen F. Auth Birth Date: September 3, 1956 450 Lexington Avenue Suite 3700 New York, NY 10017-3943 CHIEF INVESTMENT OFFICER Began serving: November 2002 | Principal Occupations: Mr. Auth is Chief Investment Officer of this Fund and various other Funds in the Federated Fund Family; Executive Vice President, Federated Investment Counseling, Federated Global Investment Management Corp. and Federated Equity Management Company of Pennsylvania. Previous Positions: Executive Vice President, Federated Investment Management Company, and Passport Research, Ltd. (investment advisory subsidiary of Federated); Senior Vice President, Global Portfolio Management Services Division; Senior Vice President, Federated Investment Management Company and Passport Research, Ltd.; Senior Managing Director and Portfolio Manager, Prudential Investments. |
Robert J. Ostrowski Birth Date: April 26, 1963 CHIEF INVESTMENT OFFICER Began serving: May 2004 | Principal Occupations: Robert J. Ostrowski joined Federated in 1987 as an Investment Analyst and became a Portfolio Manager in 1990. He was named Chief Investment Officer of taxable fixed-income products in 2004 and also serves as a Senior Portfolio Manager. He has been a Senior Vice President of the Fund's Adviser since 1997. Mr. Ostrowski has received the Chartered Financial Analyst designation. He received his M.S. in Industrial Administration from Carnegie Mellon University. |
Evaluation and Approval of Advisory Contract – May 2011
FEDERATed HIGH INCOME BOND fund ii (the “Fund”)
The Fund's Board reviewed the Fund's investment advisory contract at meetings held in May 2011. The Board's decision regarding the contract reflects the exercise of its business judgment on whether to continue the existing arrangements.
In this connection, the Federated Funds' Board had previously appointed a Senior Officer, whose duties include specified responsibilities relating to the process by which advisory fees are to be charged to a Federated fund. The Senior Officer has the authority to retain consultants, experts, or staff as may be reasonably necessary to assist in the performance of his duties, reports directly to the Board, and may be terminated only with the approval of a majority of the independent members of the Board. The Senior Officer prepared and furnished to the Board an independent, written evaluation that covered topics discussed below (the “Evaluation”). The Board considered that Evaluation, along with other information, in deciding to approve the advisory contract.
During its review of the contract, the Board considered compensation and benefits received by the Adviser. This included the fees received for services provided to the Fund by other entities in the Federated organization and research services (if any) received by the Adviser from brokers that execute Federated fund trades, as well as advisory fees. The Board is also familiar with and considered judicial decisions concerning allegedly excessive investment advisory fees, which have indicated that the following factors may be relevant to an Adviser's fiduciary duty with respect to its receipt of compensation from a fund: the nature and quality of the services provided by the Adviser, including the performance of the fund; the Adviser's cost of providing the services; the extent to which the Adviser may realize “economies of scale” as a fund grows larger; any indirect benefits that may accrue to the Adviser and its affiliates as a result of the Adviser's relationship with a fund; performance and expenses of comparable funds; and the extent to which the independent Board members are fully informed about all facts the Board deems relevant bearing on the Adviser's services and fees. The Board further considered management fees (including any components thereof) charged to institutional and other clients of the Adviser for what might be viewed as like services, and the cost to the Adviser and its affiliates of supplying services pursuant to the management fee agreements, excluding any intra-corporate profit and profit margins of the Adviser and its affiliates for supplying such services. The Board was aware of these factors and was guided by them in its review of the Fund's advisory contract to the extent it considered them to be appropriate and relevant, as discussed further below.
The Board considered and weighed these circumstances in light of its substantial accumulated experience in governing the Fund and working with Federated on matters relating to the Federated funds, and was assisted in its deliberations by independent legal counsel. Throughout the year, the Board has requested and received substantial and detailed information about the Fund and the Federated organization that was in addition to the extensive materials that comprise and accompany the Senior Officer's Evaluation. Federated provided much of this information at each regular meeting of the Board, and furnished additional information in connection with the particular meeting at which the Board's formal review of the advisory contract occurred. Between regularly scheduled meetings, the Board also received information on particular matters as the need arose. Thus, the Board's consideration of the advisory contract included review of the Senior Officer's Evaluation, accompanying data and additional information covering such matters as: the Adviser's investment philosophy, revenue, profitability, personnel and processes; investment and operating strategies; the Fund's short- and long-term performance (in absolute terms, both on a gross basis and net of expenses, as well as in relationship to its particular investment program and certain competitor or “peer group” funds and/or other benchmarks, as appropriate), and comments on the reasons for performance; the Fund's investment objectives; the Fund's expenses (including the advisory fee itself and the overall expense structure of the Fund, both in absolute terms and relative to similar and/or competing funds, with due regard for contractual or voluntary expense limitations); the use and allocation of brokerage commissions derived from trading the Fund's portfolio securities (if any); and the nature, quality and extent of the advisory and other services provided to the Fund by the Adviser and its affiliates. The Board also considered the preferences and expectations of Fund shareholders and their relative sophistication; the continuing state of competition in the mutual fund industry and market practices; the range of comparable fees for similar funds in the mutual fund industry; the Fund's relationship to the Federated family of funds which include a comprehensive array of funds with different investment objectives, policies and strategies which are available for exchange without the incurrence of additional sales charges; compliance and audit reports concerning the Federated funds and the Federated companies that service them (including communications from regulatory agencies), as well as Federated's responses to any issues raised therein; and relevant developments in the mutual fund industry and how the Federated funds and/or Federated are responding to them. The Board's evaluation process is evolutionary. The criteria considered and the emphasis placed on relevant criteria change in recognition of changing circumstances in the mutual fund marketplace.
With respect to the Fund's performance and expenses in particular, the Board has found the use of comparisons to other mutual funds with comparable investment programs to be relevant, given the high degree of competition in the mutual fund business. The Board focused on comparisons with other similar mutual funds more heavily than non-mutual fund products or services because it is believed that they are more relevant. For example, other mutual funds are the products most like the Annual Shareholder Report
Fund, they are readily available to Fund shareholders as alternative investment vehicles, and they are the type of investment vehicle in fact chosen and maintained by the Fund's investors. The range of their fees and expenses therefore appears to be a generally reliable indication of what consumers have found to be reasonable in the precise marketplace in which the Fund competes. The Fund's ability to deliver competitive performance when compared to its peer group was a useful indicator of how the Adviser is executing the Fund's investment program, which in turn assisted the Board in reaching a conclusion that the nature, extent, and quality of the Adviser's investment management services were such as to warrant continuation of the advisory contract. In this regard, the Senior Officer has reviewed Federated's fees for providing advisory services to products outside the Federated family of funds (e.g., institutional and separate accounts). He concluded that mutual funds and institutional accounts are inherently different products. Those differences include, but are not limited to, different types of targeted investors; being subject to different laws and regulations; different legal structures; different average account sizes; different associated costs; different portfolio management techniques made necessary by different cash flows; and portfolio manager time spent in review of securities pricing. The Senior Officer did not consider these fee schedules to be determinative in judging the appropriateness of mutual fund advisory contracts.The Senior Officer reviewed information compiled by Federated, using data supplied by independent fund ranking organizations, regarding the performance of, and fees charged by, other mutual funds, noting his view that comparisons to fund peer groups are relevant in judging the reasonableness of proposed fees.
For the one-year, three-year and five-year periods covered by the Evaluation, the Fund's performance was above the median of the relevant peer group.
The Board also received financial information about Federated, including information regarding the compensation and benefits Federated derived from its relationships with the Federated funds. This information covered not only the fees under the advisory contracts, but also fees received by Federated's subsidiaries for providing other services to the Federated funds under separate contracts (e.g., for serving as the Federated funds' administrator). The information also detailed any indirect benefit Federated may derive from its receipt of research services from brokers who execute Federated fund trades. In addition, the Board considered the fact that, in order for a fund to be competitive in the marketplace, Federated and its affiliates frequently waived fees and/or reimbursed expenses and have disclosed to fund investors and/or indicated to the Board their intention to do so in the future, where appropriate. Moreover, the Board receives regular reporting as to the institution or elimination of these voluntary waivers.
Federated furnished information, requested by the Senior Officer, that reported revenues on a fund-by-fund basis and made estimates of the allocation of expenses on a fund-by-fund basis, using allocation methodologies specified by the Senior Officer. The Senior Officer noted that, although they may apply consistent allocation processes, the inherent difficulties in allocating costs (and the unavoidable arbitrary aspects of that exercise) and the lack of consensus on how to allocate those costs may render such allocation information unreliable. The allocation information was considered in the analysis by the Board but was determined to be of limited use.
The Board and the Senior Officer also reviewed information compiled by Federated comparing profitability information for Federated to other publicly held fund management companies. In this regard, the Senior Officer noted the limited availability of such information, but nonetheless concluded that Federated's profit margins did not appear to be excessive and the Board agreed.
The Senior Officer's Evaluation also discussed the notion of possible realization of “economies of scale” as a fund grows larger. The Board considered in this regard that the Adviser has made significant and long-term investments in areas that support all of the Federated funds, such as personnel and processes for the portfolio management, compliance, internal audit, and risk management functions; and systems technology; and that the benefits of these efforts (as well as any economies, should they exist) were likely to be enjoyed by the fund complex as a whole. Finally, the Board also noted the absence of any applicable regulatory or industry guidelines on this subject, which (as discussed in the Senior Officer's Evaluation) is compounded by the lack of any common industry practice or general pattern with respect to structuring fund advisory fees with “breakpoints” that serve to reduce the fee as the fund attains a certain size. The Senior Officer did not recommend institution of breakpoints in pricing Federated's fund advisory services at this time.
It was noted in the materials for the Board meeting that for the period covered by the Evaluation, the Fund's investment advisory fee, after waivers and expense reimbursements, if any, was above the median of the relevant peer group. The Board reviewed the fees and other expenses of the Fund with the Adviser and was satisfied that the overall expense structure of the Fund remained competitive. The Board will continue to monitor advisory fees and other expenses borne by the Fund.
The Senior Officer noted that, considering the totality of the circumstances, and all of the factors referenced within his Evaluation, he had concluded that, subject to comments and recommendations made within his Evaluation, his observations and the information accompanying the Evaluation supported a finding by the Board that the management fees for each of the funds are reasonable and that Federated appeared to provide appropriate administrative services to the Fund for the fees paid. Under these circumstances, no changes were recommended to, and no objection was raised to, the continuation of the Fund's advisory contract. The Board concluded that the nature, quality and scope of services provided the Fund by the Adviser and its affiliates were satisfactory.
Annual Shareholder Report
In its decision to continue an existing investment advisory contract, the Board was mindful of the potential disruptions of the Fund's operations and various risks, uncertainties and other effects that could occur as a result of a decision to terminate or not renew an advisory contract. In particular, the Board recognized that many shareholders have invested in the Fund on the strength of the Adviser's industry standing and reputation and with the expectation that the Adviser will have a continuing role in providing advisory services to the Fund. Thus, the Board's approval of the advisory contract reflected the fact that it is the shareholders who have effectively selected the Adviser by virtue of having invested in the Fund.The Board based its decision to approve the advisory contract on the totality of the circumstances and relevant factors and with a view to past and future long-term considerations. Not all of the factors and considerations identified above were necessarily relevant to the Fund, nor did the Board consider any one of them to be determinative. With respect to the factors that were relevant, the Board's decision to approve the contract reflects its determination that Federated's performance and actions provided a satisfactory basis to support the decision to continue the existing arrangements.
Annual Shareholder ReportVoting Proxies on Fund Portfolio Securities
A description of the policies and procedures that the Fund uses to determine how to vote proxies, if any, relating to securities held in the Fund's portfolio is available, without charge and upon request, by calling 1-800-341-7400. A report on “Form N-PX” of how the Fund voted any such proxies during the most recent 12-month period ended June 30 is available from Federated's website at FederatedInvestors.com. To access this information from the home page, select “All” under “Asset Classes.” Select a fund name and share class, if applicable, to go to the Fund Overview page. On the Fund Overview page, select the “Documents” tab. At the bottom of that page, select “Proxy Voting Record Report (Form N-PX).” Form N-PX filings are also available at the SEC's website at www.sec.gov.
The Fund files with the SEC a complete schedule of its portfolio holdings, as of the close of the first and third quarters of its fiscal year, on “Form N-Q.” These filings are available on the SEC's website at www.sec.gov and may be reviewed and copied at the SEC's Public Reference Room in Washington, DC. (Call 1-800-SEC-0330 for information on the operation of the Public Reference Room.) You may also access this information from the “Products” section of Federated's website at FederatedInvestors.com. From the home page, select “All” under “Asset Classes.” Select a fund name and share class, if applicable, to go to the Fund Overview page. On the Fund Overview page, select the “Documents” tab. At the bottom of that page, select “Form N-Q.”
Annual Shareholder ReportVariable investment options are not bank deposits or obligations, are not guaranteed by any bank and are not insured or guaranteed by the U.S. government, the Federal Deposit Insurance Corporation, the Federal Reserve Board or any other government agency. Investment in variable investment options involves investment risk, including the possible loss of principal.
This Report is authorized for distribution to prospective investors only when preceded or accompanied by the Fund's Prospectus, which contains facts concerning its objective and policies, management fees, expenses and other information.
Federated High Income Bond Fund II
Federated Investors Funds
4000 Ericsson Drive
Warrendale, PA 15086-7561
Contact us at FederatedInvestors.com
or call 1-800-341-7400.
Federated Securities Corp., Distributor
CUSIP 313916306
CUSIP 313916843
G00844-01 (2/12)
Federated is a registered trademark of Federated Investors, Inc.
2012 © Federated Investors, Inc.
Annual Shareholder Report | ||
December 31, 2011 | ||
Share Class |
Primary |
Service |
Federated Kaufmann Fund II
A Portfolio of Federated Insurance Series
Management's Discussion of Fund Performance
Portfolio of Investments Summary Table
Portfolio of Investments
Financial Highlights
Statement of Assets and Liabilities
Statement of Operations
Statement of Changes in Net Assets
Notes to Financial Statements
Report of Independent Registered Public Accounting Firm
Shareholder Expense Example
Board of Trustees and Trust Officers
Evaluation and Approval of Advisory Contract
Voting Proxies on Fund Portfolio Securities
Quarterly Portfolio Schedule
Management's Discussion of Fund Performance (unaudited)
The Fund's total return, based on net asset value, for the 12-month reporting period ended December 31, 2011, was -13.28% for the Primary Shares and -13.49% for the Service Shares. The Fund's benchmark, the Russell Midcap Growth Index (the RMGI),1 a broad-based securities market index, had a total return of -1.65% and the Lipper Variable Underlying Mid-Cap Growth Funds Average2 had a total return of -5.38% for the same period. The Fund's and the Lipper Average's total return for the most recently completed fiscal year reflected actual cash flows, transaction costs and other expenses, which were not reflected in the total return of the RMGI.
For purposes of the following, the discussion will focus on the Fund's Primary Shares.
The stock market as a whole posted very strong returns during the first half of the fiscal year but then retreated into negative return territory during the July through August period. The equity markets, as measured by the Standard and Poor's 500 Index (S&P 500),3 bottomed in September before finishing the year up 2.11% after a powerful rally during the month of October. Overall, large-cap stocks performed best, followed by mid-cap stocks and then small-cap stocks. In terms of style, growth stocks outperformed value stocks across large- and small-cap stock groupings; within mid-cap stocks, value stocks slightly outperformed growth stocks.
Economic growth in Europe began to slow, especially in the highly indebted countries of Greece, Italy, Portugal, Ireland and Spain, among others. Credit spreads widened substantially on speculation that these governments would not be able to support their level of indebtedness in a slowing economic environment without significant support from the European Central Bank. The political scene dominated much of the European debate on how to resolve the debt crisis. However, even after numerous meetings between bankers and politicians and the resignation of several prime ministers, credible plans for a bailout remained elusive.
Unfortunately, political uncertainty was not limited to Europe. The United States Congress and the president generated a highly-contentious standoff regarding the debt ceiling debate. This uncertainty prompted Standard and Poor's to downgrade the long-term credit rating of the U.S. government debt securities from “AAA” to “AA+” with a negative outlook. Additionally, during June 2011, the Federal Reserve's second quantitative easing program (known as QE2) ended.
The European debt crisis, global economic uncertainty from numerous weakening economic indicators and global political uncertainty during the reporting period increased volatility and negatively affected the global equity markets.
The Fund underperformed its respective peers and the RMGI over the reporting period. Key factors affecting the Fund performance included country allocation, stock selection, sector allocation and macroeconomic events.
The Fund's relative underperformance was driven by its country allocation. The Fund maintained exposure to growth companies outside of the United States, particularly in Brazil, China and India, among others.4 Both developed and emerging international markets significantly underperformed the U.S. markets and accounted for nearly one-half of the underperformance relative to the RMGI.
Stock selection contributed both positively and negatively to Fund performance. Companies that were strong performers included: Cubist Pharmaceuticals (+85%), Alkermes (+41%), Cia Hering (+9%), Google (+9%), Restoque (+42%), Salix Pharmaceuticals (+62%), Apple (+18%) and Progenics Pharmaceuticals (+56%). Holdings that negatively affected performance included: Camelot Information Systems (-85%), Hypermarcas (-56%), Warner Chilcott (-33%), Lee & Man Paper Manufacturing (-57%), Huabao International (-68%), Examworks (-49%), Housing Development Finance (-24%) and Expeditors International (-24%).
Sector weightings negatively contributed to Fund performance. The Fund had substantially less exposure to Consumer Discretionary, Consumer Staples and Energy sectors and an overweight in the Financial sector, relative to the RMGI, which hurt performance.
Macroeconomic events, previously mentioned, pushed stock correlations substantially higher, meaning many stocks moved in the same direction, up or down, simultaneously. This made stock selection more difficult because stocks reacted similarly to both positive and negative news, and investors focused on headlines rather than company fundamentals.
1 | The Russell Midcap® Growth Index is an unmanaged index that measures the performance of those Russell Midcap® companies with higher price-to-book ratios and higher forecasted growth values. The stocks are also members of the Russell 1000® Growth Index. The index is unmanaged, and it is not possible to invest directly in an index. |
2 | Lipper figures represent the average of the total returns reported by all funds serving as underlying investment options for variable insurance contracts designated by Lipper, Inc. as falling into the respective categories indicated. They do not reflect sales charges. The average is unmanaged, and it is not possible to invest directly in an average. |
3 | The S&P 500 Index is an unmanaged, capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The index is unmanaged, and it is not possible to invest directly in an index. |
4 | International investing involves special risks including currency risk, increased volatility, political risks and differences in auditing and other financial standards. |
FUND PERFORMANCE AND GROWTH OF A $10,000 INVESTMENT
The Average Annual Total Return table below shows returns for each class averaged over the stated periods. The graphs below illustrate the hypothetical investment of $10,0001 in the Federated Kaufmann Fund II (the “Fund”) from April 30, 2002 (start of performance) to December 31, 2011, for Primary Shares and from May 1, 2003 (start of performance) to December 31, 2011, for Service Shares, compared to the Russell Midcap Growth Index (RMGI)2 and the Lipper Variable Underlying Mid-Cap Growth Funds Average (LMCGA).3
Average Annual Total Returns for the Period Ended 12/31/2011
Share Class | 1 Year | 5 Years | Start of Performance* |
Primary Shares | -13.28% | -1.37% | 4.70% |
Service Shares | -13.49% | -1.62% | 7.06% |
* | The Fund's Primary Shares start of performance date was April 30, 2002. The Fund's Service Shares start of performance date was May 1, 2003. |
Performance data quoted represents past performance which is no guarantee of future results. Investment return and principal value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Performance of a variable investment option changes over time and current performance may be lower or higher than what is stated. For current to the most recent month-end performance, contact your insurance company. The performance information presented does not include the charges and expenses imposed by the insurance company under the variable insurance product contract. The inclusion of such charges would lower performance. Please refer to the variable insurance product prospectus for a complete listing of these expenses. Fund shares are available exclusively as a funding vehicle for life insurance companies writing variable life insurance policies and variable annuity contracts. Variable investment options are not obligations of or guaranteed by any bank and are not federally insured.
Annual Shareholder Report
Federated Kaufmann Fund II - Primary Shares | C000026779 | RMGI | LMCGA |
4/30/2002 | 10,000 | 10,000 | 10,000 |
12/31/2002 | 8,160 | 7,803 | 7,661 |
12/31/2003 | 11,400 | 11,136 | 10,511 |
12/31/2004 | 13,071 | 12,860 | 12,056 |
12/31/2005 | 14,540 | 14,416 | 13,329 |
12/31/2006 | 16,703 | 15,952 | 14,479 |
12/31/2007 | 20,217 | 17,775 | 16,863 |
12/31/2008 | 11,768 | 9,896 | 9,234 |
12/31/2009 | 15,239 | 14,477 | 13,252 |
12/31/2010 | 17,981 | 18,297 | 16,811 |
12/31/2011 | 15,592 | 17,995 | 15,897 |
Growth of a $10,000 investment – SERVICE SHARES
Federated Kaufmann Fund II - Service Shares | C000026780 | RMGI | LMCGA |
5/1/2003 | 10,000 | 10,000 | 10,000 |
12/31/2003 | 13,475 | 13,363 | 12,968 |
12/31/2004 | 15,426 | 15,432 | 14,874 |
12/31/2005 | 17,104 | 17,299 | 16,445 |
12/31/2006 | 19,601 | 19,143 | 17,864 |
12/31/2007 | 23,644 | 21,331 | 20,805 |
12/31/2008 | 13,736 | 11,877 | 11,393 |
12/31/2009 | 17,733 | 17,375 | 16,350 |
12/31/2010 | 20,880 | 21,959 | 20,741 |
12/31/2011 | 18,064 | 21,597 | 19,613 |
1 | The Fund's performance assumes the reinvestment of all dividends and distributions. The RMGI and LMCGA have been adjusted to reflect reinvestment of dividends on securities in the index and average. |
2 | The RMGI is not adjusted to reflect sales charges, expenses or other fees that the Securities and Exchange Commission (SEC) requires to be reflected in the Fund's performance. The index is unmanaged and, unlike the Fund, is not affected by cash flows. It is not possible to invest directly in an index. |
3 | The LMCGA represents the average of the total returns reported by all of the funds serving as underlying investment options for variable insurance contracts designated by Lipper, Inc. as falling into the respective category indicated, and is not adjusted to reflect any sales charges. However, these total returns are reported net of expenses or other fees that the SEC requires to be reflected in a Fund's performance. |
Portfolio of Investments Summary Table (unaudited)
At December 31, 2011, the Fund's sector composition1 was as follows:
Sector Composition | Percentage of Total Net Assets |
Information Technology | 22.5% |
Health Care | 20.2% |
Industrials | 17.8% |
Financials | 15.7% |
Consumer Discretionary | 11.8% |
Materials | 4.2% |
Consumer Staples | 1.3% |
Energy | 1.2% |
Telecommunication Services | 0.9% |
Utilities | 0.8% |
Securities Lending Collateral2 | 3.3% |
Cash Equivalents3 | 4.0% |
Other Assets and Liabilities — Net4 | (3.7)% |
TOTAL | 100.0% |
1 | Except for Securities Lending Collateral, Cash Equivalents and Other Assets and Liabilities, sector classifications are based upon, and individual portfolio securities are assigned to, the classifications of the Global Industry Classification Standard (GICS), except that the Adviser assigns a classification to securities not classified by the GICS and to securities for which the Adviser does not have access to the classification made by the GICS. |
2 | Cash collateral received from lending portfolio securities which is invested in short-term investments such as repurchase agreements or money market mutual funds. |
3 | Cash Equivalents include any investments in money market mutual funds and/or overnight repurchase agreements other than those representing securities lending collateral. |
4 | Assets, other than investments in securities, less liabilities. See Statement of Assets and Liabilities. |
Principal Amount or Shares | Value |
COMMON STOCKS – 95.7% |
Consumer Discretionary – 11.8% |
25,334 | Abercrombie & Fitch Co., Class A | 1,237,313 |
17,200 | Bharat Forge Ltd. | 80,421 |
30,800 | 1 | Cia Hering | 535,997 |
454,370 | 1 | Genting Singapore PLC | 528,969 |
270,000 | 1 | L'Occitane International SA | 542,322 |
23,400 | 1 | Las Vegas Sands Corp. | 999,882 |
47,699 | 1 | Melco PBL Entertainment (Macau) Ltd., ADR | 458,864 |
33,800 | 1 | Michael Kors Holdings Ltd. | 921,050 |
46,505 | National CineMedia, Inc. | 576,662 |
25,316 | 1 | Penn National Gaming, Inc. | 963,780 |
580,659 | 1 | Prada Holding SpA | 2,627,940 |
783 | 1 | Priceline.com, Inc. | 366,217 |
9,000 | Ralph Lauren Corp. | 1,242,720 |
72,444 | Restoque Comercio e Confeccoes de Roupas SA | 1,060,298 |
1,633,439 | 1 | Samsonite International SA | 2,561,646 |
24,600 | 1 | Shutterfly, Inc. | 559,896 |
5,900 | 1,2 | SodaStream International Ltd. | 192,871 |
6,264 | Starbucks Corp. | 288,207 |
11,383 | 1 | Vera Bradley, Inc. | 367,102 |
49,057 | 1 | Yoox SpA | 529,524 |
TOTAL | 16,641,681 |
Consumer Staples – 1.3% |
66,129 | Almacenes Exito SA | 868,530 |
5,200 | 1 | Ralcorp Holdings, Inc. | 444,600 |
7,600 | 1 | TreeHouse Foods, Inc. | 496,888 |
10,107 | United Breweries Co., Inc. | 72,845 |
TOTAL | 1,882,863 |
Energy – 1.2% |
12,700 | 1 | Bonanza Creek Energy, Inc. | 158,750 |
7,450 | 1 | Concho Resources, Inc. | 698,438 |
15,853 | 1 | Dresser-Rand Group, Inc. | 791,223 |
TOTAL | 1,648,411 |
Financials – 15.7% |
8,260 | BlackRock, Inc. | 1,472,262 |
596,476 | CETIP SA | 8,618,163 |
347,600 | Chimera Investment Corp. | 872,476 |
187,912 | Fibra Uno Administracion SA | 320,487 |
198,500 | Housing Development Finance Corp. Ltd. | 2,425,136 |
67,100 | JPMorgan Chase & Co. | 2,231,075 |
67,780 | LPS Brasil Cons De Imoveis | 944,796 |
40,678 | Multiplan Empreendimentos Imobiliarios SA | 834,605 |
573,256 | PT Bank Central Asia | 505,767 |
80,700 | Wells Fargo & Co. | 2,224,092 |
41,200 | Willis Group Holdings PLC | 1,598,560 |
TOTAL | 22,047,419 |
Principal Amount or Shares | Value |
Health Care – 19.5% |
144,406 | 1 | Alkermes, Inc. | 2,506,888 |
12,600 | Allergan, Inc. | 1,105,524 |
36,450 | 1 | Allscripts Healthcare Solutions, Inc. | 690,363 |
25,300 | 1 | Amarin Corporation PLC., ADR | 189,497 |
5,775 | Amil Participacoes SA | 50,869 |
29,600 | 1 | Biocon Ltd. | 153,281 |
10,300 | 1 | Biogen Idec, Inc. | 1,133,515 |
780,300 | 1 | CFR Pharmaceuticals SA | 183,396 |
5,278 | 1,3,4 | CFR Pharmaceuticals SA, ADR | 123,769 |
34,736 | 1 | Conceptus, Inc. | 439,063 |
31,122 | 1 | Corcept Therapeutics, Inc. | 106,437 |
49,676 | 1 | Corcept Therapeutics, Inc. | 169,892 |
107,100 | 1 | Cubist Pharmaceuticals, Inc. | 4,243,302 |
94,180 | 1 | Dexcom, Inc. | 876,816 |
386,264 | 1 | Dyax Corp. | 525,319 |
11,100 | 1 | Edwards Lifesciences Corp. | 784,770 |
111,461 | 1 | ExamWorks Group, Inc. | 1,056,650 |
71,700 | 1 | Express Scripts, Inc., Class A | 3,204,273 |
46,000 | 1,2 | Insulet Corp. | 866,180 |
65,900 | 1 | Nektar Therapeutics | 368,711 |
137,000 | 1 | Progenics Pharmaceuticals, Inc. | 1,169,980 |
137,210 | 1 | Protalix Biotherapeutics, Inc. | 676,445 |
5,434 | 1 | Regeneron Pharmaceuticals, Inc. | 301,207 |
76,100 | 1 | Repligen Corp. | 264,067 |
36,600 | 1 | Salix Pharmaceuticals Ltd. | 1,751,310 |
78,200 | 1,2 | Seattle Genetics, Inc. | 1,307,113 |
6,294 | 1 | Threshold Pharmaceuticals, Inc. | 7,679 |
4,128 | 1 | Varian Medical Systems, Inc. | 277,113 |
114,952 | 1 | Vical, Inc. | 506,938 |
34,650 | 1 | Vivus, Inc. | 337,838 |
62,412 | 1 | Warner Chilcott PLC | 944,294 |
18,300 | 1 | Watson Pharmaceuticals, Inc. | 1,104,222 |
TOTAL | 27,426,721 |
Industrials – 17.8% |
32,100 | CLARCOR, Inc. | 1,604,679 |
16,642 | Caterpillar, Inc. | 1,507,765 |
17,343 | 1 | CoStar Group, Inc. | 1,157,298 |
18,203 | Cummins, Inc. | 1,602,228 |
33,293 | Danaher Corp. | 1,566,103 |
58,442 | Expeditors International Washington, Inc. | 2,393,784 |
27,653 | FedEx Corp. | 2,309,302 |
8,088 | 1 | IHS, Inc., Class A | 696,862 |
26,805 | 1 | Kansas City Southern Industries, Inc. | 1,823,008 |
15,500 | Localiza Rent A Car SA | 212,733 |
12,817 | MSC Industrial Direct Co. | 917,057 |
95,746 | Max India Ltd. | 266,838 |
71,300 | 1 | Owens Corning, Inc. | 2,047,736 |
13,500 | Precision Castparts Corp. | 2,224,665 |
14,388 | 1 | RPX Corp. | 182,008 |
Principal Amount or Shares | Value |
14,991 | 1 | Teledyne Technologies, Inc. | 822,256 |
10,033 | Trinity Industries, Inc. | 301,592 |
22,200 | United Technologies Corp. | 1,622,598 |
44,560 | 1 | Verisk Analytics, Inc. | 1,788,193 |
TOTAL | 25,046,705 |
Information Technology – 22.5% |
179,200 | Amadeus IT Holding SA | 2,907,238 |
9,800 | 1 | Apple, Inc. | 3,969,000 |
107,600 | 1 | Atmel Corp. | 871,560 |
40,200 | Avago Technologies Ltd. | 1,160,172 |
15,200 | 1 | Check Point Software Technologies Ltd. | 798,608 |
12,822 | 1 | Citrix Systems, Inc. | 778,552 |
72,288 | 1 | Comverse Technology, Inc. | 495,896 |
16,000 | 1 | Cypress Semiconductor Corp. | 270,240 |
6,108 | 1 | Demand Media, Inc. | 40,618 |
37,279 | 1 | EMC Corp. | 802,990 |
19,216 | 1 | eBay, Inc. | 582,821 |
20,198 | 1,2 | First Solar, Inc. | 681,884 |
6,750 | 1 | Google, Inc. | 4,359,825 |
26,100 | 1 | LivePerson, Inc. | 327,555 |
13,639 | 1,3,4 | Mail.RU Group Ltd., Series 144A, GDR | 354,614 |
93,450 | 1 | Microsemi Corp. | 1,565,287 |
37,774 | 1 | Moneygram International, Inc. | 670,489 |
49,000 | 1 | NCR Corp. | 806,540 |
53,146 | 1 | NIC, Inc. | 707,373 |
81,824 | 1,2 | NXP Semiconductors NV | 1,257,635 |
53,211 | Qualcomm, Inc. | 2,910,642 |
16,000 | 1 | RADWARE Ltd. | 468,000 |
21,753 | 1 | RDA Microelectronics, Inc., ADR | 237,760 |
3,500 | 1 | RealPage, Inc. | 88,445 |
36,317 | 1 | Riverbed Technology, Inc. | 853,450 |
44,700 | 1 | STR Holdings, Inc. | 367,881 |
74,750 | 1 | TNS, Inc. | 1,324,570 |
7,890 | 1 | VMware, Inc., Class A | 656,369 |
14,663 | 1,2 | VistaPrint Ltd. | 448,688 |
78,600 | 1,2 | Zynga, Inc. | 739,626 |
TOTAL | 31,504,328 |
Materials – 4.2% |
13,206 | Allegheny Technologies, Inc. | 631,247 |
18,200 | BASF SE | 1,269,398 |
40,000 | Eastman Chemical Co. | 1,562,400 |
144,637 | Huabao International Holdings Ltd. | 74,119 |
430,000 | Lee & Man Paper Manufacturing Ltd. | 138,413 |
1,148,187 | 1 | Mongolian Mining Corp. | 867,800 |
25,520 | 2 | Sociedad Quimica Y Minera de Chile, ADR | 1,374,252 |
TOTAL | 5,917,629 |
Telecommunication Services – 0.9% |
66,389 | 1 | TW Telecom, Inc. | 1,286,619 |
Principal Amount or Shares | Value |
Utilities – 0.8% |
14,400 | ITC Holdings Corp. | 1,092,672 |
TOTAL COMMON STOCKS (IDENTIFIED COST $113,838,937) | 134,495,048 |
WARRANTS – 0.2% |
Health Care – 0.2% |
5,034 | 1 | Alexza Pharmaceuticals, Inc., Warrants | 4,041 |
1,900 | 1 | Clinical Data, Inc., Warrants | 0 |
17,387 | 1 | Corcept Therapeutics, Inc., Warrants | 34,788 |
7,909 | 1 | Cyclacel Pharmaceuticals, Inc., Warrants | 36 |
71,998 | 1 | Dynavax Technologies Corp., Warrants | 182,306 |
12,443 | 1 | Favrille, Inc., Warrants | 0 |
32,007 | 1 | Threshold Pharmaceuticals, Inc., Warrants | 15,514 |
TOTAL WARRANTS (IDENTIFIED COST $17,096) | 236,685 |
Corporate Bonds – 0.5% |
Health Care – 0.5% |
$370,000 | Insulet Corp., Conv. Bond, 3.75%, 6/15/2016 | 376,527 |
330,000 | Insulet Corp., Conv. Bond, 5.375%, 6/15/2013 | 380,391 |
TOTAL CORPORATE BONDS (IDENTIFIED COST $700,000) | 756,918 |
Repurchase AgreementS – 7.3% |
5,594,000 | Interest in $4,100,000,000 joint repurchase agreement 0.06%, dated 12/30/2011 under which Bank of America, N.A. will repurchase securities provided as collateral for $4,100,027,333 on 1/3/2012. The securities provided as collateral at the end of the period were U.S. Government Agency securities with various maturities to 4/15/2040 and the market value of those underlying securities was $4,218,795,473. | 5,594,000 |
4,726,000 | Interest in $4,100,000,000 joint repurchase agreement 0.06%, dated 12/30/2011 under which Bank of America, N.A. will repurchase securities provided as collateral for $4,100,027,333 on 1/3/2012. The securities provided as collateral at the end of the period were U.S. Government Agency securities with various maturities to 4/15/2040 and the market value of those underlying securities was $4,218,795,473 (purchased with proceeds from securities lending collateral). | 4,726,000 |
TOTAL REPURCHASE AGREEMENTS (AT COST) | 10,320,000 |
TOTAL INVESTMENTS — 103.7% (IDENTIFIED COST $124,876,033)5 | 145,808,651 |
OTHER ASSETS AND LIABILITIES - NET — (3.7)%6 | (5,230,977) |
TOTAL NET ASSETS — 100% | $140,577,674 |
At December 31, 2011, the Fund had outstanding foreign exchange contracts as follows:
Settlement Date | Foreign Currency Units to Deliver/Receive | In Exchange For | Unrealized Appreciation/ (Depreciation) |
Contracts Purchased: | |||
1/4/2012 | 46,095 Hong Kong Dollar | $5,935 | $0 |
Contracts Sold: | |||
1/3/2012 | 41,638 Brazilian Real | $22,180 | $(143) |
1/3/2012 | 18,536 Brazilian Real | $9,907 | $(31) |
NET UNREALIZED DEPRECIATION ON FOREIGN EXCHANGE CONTRACTS | $(174) |
Annual Shareholder Report
1 | Non-income producing security. |
2 | All or a portion of these securities are temporarily on loan to unaffiliated broker/dealers. |
3 | Denotes a restricted security that may be resold without restriction to “qualified institutional buyers” as defined in Rule 144A under the Securities Act of 1933 and that the Fund has determined to be liquid under criteria established by the Fund's Board of Trustees (the “Trustees”). At December 31, 2011, these liquid restricted securities amounted to $478,383, which represented 0.3% of total net assets. |
4 | Denotes a restricted security that either: (a) cannot be offered for public sale without first being registered, or being able to take advantage of an exemption from registration, under the Securities Act of 1933; or (b) is subject to a contractual restriction on public sales. At December 31, 2011, these restricted securities amounted to $478,383, which represented 0.3% of total net assets. |
5 | The cost of investments for federal tax purposes amounts to $125,907,101. |
6 | Assets, other than investments in securities, less liabilities. See Statement of Assets and Liabilities. |
Note: The categories of investments are shown as a percentage of total net assets at December 31, 2011.
Various inputs are used in determining the value of the Fund's investments. These inputs are summarized in the three broad levels listed below:
Level 1 — quoted prices in active markets for identical securities, including investment companies with daily net asset values, if applicable. Level 2 — other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.). Also includes securities valued at amortized cost. Level 3 — significant unobservable inputs (including the Fund's own assumptions in determining the fair value of investments).The inputs or methodology used for valuing securities are not an indication of the risk associated with investing in those securities.
The following is a summary of the inputs used, as of December 31, 2011, in valuing the Fund's assets carried at fair value:
Valuation Inputs |
Level 1 — Quoted Prices and Investments in Mutual Funds | Level 2 — Other Significant Observable Inputs | Level 3 — Significant Unobservable Inputs | Total |
Equity Securities: |
Common Stock |
Domestic | $92,277,996 | $ — | $ — | $92,277,996 |
International | 42,217,0521 | — | — | 42,217,052 |
Debt Securities: |
Corporate Bonds | — | 756,918 | — | 756,918 |
Warrants | — | 236,685 | — | 236,685 |
Repurchase Agreements | — | 10,320,000 | — | 10,320,000 |
TOTAL SECURITIES | $134,495,048 | $11,313,603 | $ — | $145,808,651 |
OTHER FINANCIAL INSTRUMENTS2 | $(174) | $ — | $ — | $(174) |
1 | Includes $34,340,057 of securities transferred from Level 2 to Level 1 because quoted prices on equity securities traded principally in foreign markets were utilized to value securities for which fair value factors were previously applied to account for significant post market close activity. Transfers shown represent the value of the securities at the beginning of the period. |
2 | Other financial instruments include foreign exchange contracts. |
Annual Shareholder Report
Investments in International Equity Securities |
Balance as of January 1, 2011 | $6,550 |
Realized gain (loss) | 6,027 |
Change in unrealized appreciation/depreciation | (6,550) |
(Sales) | (6,027) |
Balance as of December 31, 2011 | $ — |
The total change in unrealized appreciation (depreciation) included in the Statement of Operations attributable to investments still held at December 31, 2011. | $ — |
The following acronyms are used throughout this portfolio:
ADR | — American Depositary Receipt |
GDR | — Global Depository Receipt |
See Notes which are an integral part of the Financial Statements
Annual Shareholder ReportFinancial Highlights – Primary Shares
(For a Share Outstanding Throughout Each Period)
Year Ended December 31 | 2011 | 2010 | 2009 | 2008 | 2007 |
Net Asset Value, Beginning of Period | $14.96 | $12.69 | $9.80 | $18.82 | $16.46 |
Income From Investment Operations: |
Net investment income (loss) | (0.09)1 | 0.091 | (0.00)1,2 | (0.02)1 | (0.03)1 |
Net realized and unrealized gain (loss) on investments, futures contracts, written options and foreign currency transactions | (1.88) | 2.19 | 2.89 | (7.27) | 3.34 |
TOTAL FROM INVESTMENT OPERATIONS | (1.97) | 2.28 | 2.89 | (7.29) | 3.31 |
Less Distributions: |
Distributions from net investment income | (0.15) | (0.01) | — | (0.05) | — |
Distributions from net realized gain on investments, written options and foreign currency transactions | — | — | — | (1.68) | (0.95) |
TOTAL DISTRIBUTIONS | (0.15) | (0.01) | — | (1.73) | (0.95) |
Net Asset Value, End of Period | $12.84 | $14.96 | $12.69 | $9.80 | $18.82 |
Total Return3 | (13.28)% | 17.99% | 29.49% | (41.79)% | 21.04% |
Ratios to Average Net Assets: |
Net expenses | 1.53%4 | 1.53%4 | 1.53%4 | 1.53%4 | 1.53%4 |
Net investment income (loss) | (0.65)% | 0.67% | (0.00)%5 | (0.14)% | (0.15)% |
Expense waiver/reimbursement6 | 0.29% | 0.24% | 0.31% | 0.39% | 0.32% |
Supplemental Data: |
Net assets, end of period (000 omitted) | $43,025 | $62,352 | $65,698 | $37,588 | $61,696 |
Portfolio turnover | 63% | 58% | 100% | 71% | 67% |
1 | Per share numbers have been calculated using the average shares method. |
2 | Represents less than $0.01. |
3 | Based on net asset value. Total returns do not reflect any additional fees or expenses that may be imposed by separate accounts of insurance companies or in connection with any variable annuity or variable life insurance contract. |
4 | The net expense ratio is calculated without reduction for expense offset arrangements. The net expense ratios are 1.53%, 1.53%, 1.53%, 1.53% and 1.53% for the years ended December 31, 2011, 2010, 2009, 2008 and 2007, respectively, after taking into account these expense reductions. |
5 | Represents less than 0.01%. |
6 | This expense decrease is reflected in both the net expense and the net investment income (loss) ratios shown above. |
See Notes which are an integral part of the Financial Statements
Annual Shareholder ReportFinancial Highlights – Service Shares
(For a Share Outstanding Throughout Each Period)
Year Ended December 31 | 2011 | 2010 | 2009 | 2008 | 2007 |
Net Asset Value, Beginning of Period | $14.73 | $12.51 | $9.69 | $18.61 | $16.34 |
Income From Investment Operations: |
Net investment income (loss) | (0.13)1 | 0.061 | (0.03)1 | (0.05)1 | (0.07)1 |
Net realized and unrealized gain (loss) on investments, futures contracts, written options and foreign currency transactions | (1.84) | 2.16 | 2.85 | (7.19) | 3.29 |
TOTAL FROM INVESTMENT OPERATIONS | (1.97) | 2.22 | 2.82 | (7.24) | 3.22 |
Less Distributions: |
Distributions from net investment income | (0.12) | — | — | — | — |
Distributions from net realized gain on investments, written options and foreign currency transactions | — | — | — | (1.68) | (0.95) |
TOTAL DISTRIBUTIONS | (0.12) | — | — | (1.68) | (0.95) |
Net Asset Value, End of Period | $12.64 | $14.73 | $12.51 | $9.69 | $18.61 |
Total Return2 | (13.49)% | 17.75% | 29.10% | (41.91)% | 20.63% |
Ratios to Average Net Assets: |
Net expenses | 1.78%3 | 1.78%3 | 1.78%3 | 1.78%3 | 1.78%3 |
Net investment income (loss) | (0.90)% | 0.47% | (0.27)% | (0.37)% | (0.40)% |
Expense waiver/reimbursement4 | 0.29% | 0.24% | 0.31% | 0.39% | 0.32% |
Supplemental Data: |
Net assets, end of period (000 omitted) | $97,552 | $120,887 | $94,374 | $62,180 | $77,516 |
Portfolio turnover | 63% | 58% | 100% | 71% | 67% |
1 | Per share numbers have been calculated using the average shares method. |
2 | Based on net asset value. Total returns do not reflect any additional fees or expenses that may be imposed by separate accounts of insurance companies or in connection with any variable annuity or variable life insurance contract. |
3 | The net expense ratio is calculated without reduction for expense offset arrangements. The net expense ratios are 1.78%, 1.78%, 1.78%, 1.78% and 1.78% for the years ended December 31, 2011, 2010, 2009, 2008 and 2007, respectively, after taking into account these expense reductions. |
4 | This expense decrease is reflected in both the net expense and the net investment income (loss) ratios shown above. |
See Notes which are an integral part of the Financial Statements
Annual Shareholder ReportStatement of Assets and Liabilities
Assets: |
Total investments in securities, at value including $4,599,856 of securities loaned (identified cost $124,876,033) | $145,808,651 |
Cash | 927 |
Cash denominated in foreign currencies (identified cost $98,004) | 97,485 |
Income receivable | 127,106 |
Receivable for investments sold | 227,309 |
Receivable for shares sold | 30,896 |
Other assets | 743 |
TOTAL ASSETS | 146,293,117 |
Liabilities: |
Payable for investments purchased | $761,759 |
Payable for shares redeemed | 119,759 |
Unrealized depreciation on foreign exchange contracts | 174 |
Payable for collateral due to broker for securities lending | 4,726,000 |
Payable for Directors'/Trustees' fees | 173 |
Payable for distribution services fee (Note 5) | 20,711 |
Accrued expenses | 86,867 |
TOTAL LIABILITIES | 5,715,443 |
Net assets for 11,066,605 shares outstanding | $140,577,674 |
Net Assets Consist of: |
Paid-in capital | $126,881,891 |
Net unrealized appreciation of investments and translation of assets and liabilities in foreign currency | 20,930,743 |
Accumulated net realized loss on investments, futures contracts, written options and foreign currency transactions | (7,113,042) |
Distributions in excess of net investment income | (121,918) |
TOTAL NET ASSETS | $140,577,674 |
Net Asset Value, Offering Price and Redemption Proceeds Per Share |
Primary Shares: |
$43,025,200 ÷ 3,349,838 shares outstanding, no par value, unlimited shares authorized | $12.84 |
Service Shares: |
$97,552,474 ÷ 7,716,767 shares outstanding, no par value, unlimited shares authorized | $12.64 |
See Notes which are an integral part of the Financial Statements
Annual Shareholder ReportInvestment Income: |
Dividends (net of foreign taxes withheld of $2,861) | $1,328,872 |
Interest (including income on securities loaned of $100,834) | 130,724 |
TOTAL INCOME | 1,459,596 |
Expenses: |
Investment adviser fee (Note 5) | $2,365,945 |
Administrative fee (Note 5) | 190,000 |
Custodian fees | 206,316 |
Transfer and dividend disbursing agent fees and expenses | 31,025 |
Directors'/Trustees' fees | 2,895 |
Auditing fees | 27,750 |
Legal fees | 7,560 |
Portfolio accounting fees | 70,891 |
Distribution services fee (Note 5) | 278,047 |
Printing and postage | 99,069 |
Insurance premiums | 4,438 |
Miscellaneous | 16,760 |
TOTAL EXPENSES | 3,300,696 |
Waivers and Reduction: |
Waiver of investment adviser fee (Note 5) | $(440,896) |
Waiver of administrative fee (Note 5) | (33,340) |
Waiver of distribution services fee (Note 5) | (900) |
Fees paid indirectly from directed brokerage arrangements (Note 6) | (1,898) |
TOTAL WAIVERS AND REDUCTION | (477,034) |
Net expenses | 2,823,662 |
Net investment income (loss) | (1,364,066) |
Realized and Unrealized Gain (Loss) on Investments and Foreign Currency Transactions: |
Net realized gain on investments and foreign currency transactions | 14,869,904 |
Net change in unrealized appreciation of investments and translation of assets and liabilities in foreign currency | (35,953,370) |
Net realized and unrealized loss on investments and foreign currency transactions | (21,083,466) |
Change in net assets resulting from operations | $(22,447,532) |
See Notes which are an integral part of the Financial Statements
Annual Shareholder ReportStatement of Changes in Net Assets
Year Ended December 31 | 2011 | 2010 |
Increase (Decrease) in Net Assets |
Operations: |
Net investment income (loss) | $(1,364,066) | $965,066 |
Net realized gain on investments and foreign currency transactions | 14,869,904 | 3,076,668 |
Net change in unrealized appreciation/depreciation of investments and translation of assets and liabilities in foreign currency | (35,953,370) | 25,556,379 |
CHANGE IN NET ASSETS RESULTING FROM OPERATIONS | (22,447,532) | 29,598,113 |
Distributions to Shareholders: |
Distributions from net investment income |
Primary Shares | (621,683) | (60,494) |
Service Shares | (965,481) | — |
CHANGE IN NET ASSETS RESULTING FROM DISTRIBUTIONS TO SHAREHOLDERS | (1,587,164) | (60,494) |
Share Transactions: |
Proceeds from sale of shares | 18,408,587 | 41,219,061 |
Proceeds from shares issued in connection with the tax-free transfer of assets from Federated Mid Cap Growth Strategies Fund II | — | 17,390,831 |
Net asset value of shares issued to shareholders in payment of distributions declared | 1,587,164 | 60,494 |
Cost of shares redeemed | (38,622,052) | (65,040,768) |
CHANGE IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS | (18,626,301) | (6,370,382) |
Change in net assets | (42,660,997) | 23,167,237 |
Net Assets: |
Beginning of period | 183,238,671 | 160,071,434 |
End of period (including undistributed (distributions in excess of) net investment income of $(121,918) and $600,707, respectively) | $140,577,674 | $183,238,671 |
See Notes which are an integral part of the Financial Statements
Annual Shareholder ReportFederated Insurance Series (the “Trust”) is registered under the Investment Company Act of 1940, as amended (the “Act”), as an open-end management investment company. The Trust consists of seven portfolios. The financial statements included herein are only those of Federated Kaufmann Fund II (the “Fund”), a diversified portfolio. The financial statements of the other portfolios are presented separately. The assets of each portfolio are segregated and a shareholder's interest is limited to the portfolio in which shares are held. Each portfolio pays its own expenses. The Fund offers two classes of shares: Primary Shares and Service Shares. All shares of the Fund have equal rights with respect to voting, except on class-specific matters. Fund shares are available exclusively as a funding vehicle for life insurance companies writing variable life insurance policies and variable annuity contracts. The investment objective of the Fund is capital appreciation.
On March 12, 2010, the Fund acquired all of the net assets of Federated Mid Cap Growth Strategies Fund II (the “Acquired Fund”), an open-end investment company in a tax-free reorganization in exchange for shares of the Fund, pursuant to a plan of reorganization approved by the Acquired Fund's shareholders on February 19, 2010. The purpose of the transaction was to combine two portfolios managed by Federated Equity Management Company of Pennsylvania with comparable investment objectives and strategies. For financial reporting purposes, assets received and shares issued by the Fund were recorded at fair value; however, the cost basis of the investments received from the Acquired Fund was carried forward to align ongoing reporting of the Fund's realized and unrealized gains and losses with amounts distributable to shareholders for tax purposes.
Assuming the acquisition had been completed on January 1, 2010, the beginning of the annual reporting period of the Fund, the Fund's pro forma results of operations for the year ended December 31, 2010, were as follows:
Net investment income* | $ 950,143 |
Net realized and unrealized gain on investments | $29,274,855 |
Net increase in net assets resulting from operations | $30,224,998 |
* | Net investment income includes $8,590 of pro forma additional expenses. |
Because the combined investment portfolios have been managed as a single integrated portfolio since the acquisition was completed, it is not practicable to separate the amounts of revenue and earnings of the Acquired Fund that has been included in the Fund's Statement of Operations as of December 31, 2010. The Fund received net assets from the Acquired Fund as the result of the tax-free reorganization as follows:
Shares of the Fund Issued | Acquired Fund Net Assets Received | Unrealized Appreciation1 | Net Assets of the Fund Immediately Prior to Combination | Net Assets of the Fund Immediately After Combination |
1,330,624 | $17,390,831 | $658,483 | $181,843,185 | $199,234,016 |
1 | Unrealized Appreciation is included in the Acquired Fund Net Assets Received amount shown above. |
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. These policies are in conformity with U.S. generally accepted accounting principles (GAAP).
Investment Valuation
In calculating its net asset value (NAV), the Fund generally values investments as follows:
- Equity securities listed on an exchange or traded through a regulated market system are valued at their last reported sale price or official closing price in their principal exchange or market.
- Fixed-income securities acquired with remaining maturities greater than 60 days are fair valued using price evaluations provided by a pricing service approved by the Trustees.
- Fixed-income securities acquired with remaining maturities of 60 days or less are valued at their cost (adjusted for the accretion of any discount or amortization of any premium), which approximates market value.
- Shares of other mutual funds are valued based upon their reported NAVs.
- Derivative contracts listed on exchanges are valued at their reported settlement or closing price.
- Over-the-counter (OTC) derivative contracts are fair valued using price evaluations provided by a pricing service approved by the Trustees.
- For securities that are fair valued in accordance with procedures established by and under the general supervision of the Trustees, certain factors may be considered such as: the purchase price of the security, information obtained by contacting the issuer, analysis of the issuer's financial statements or other available documents, fundamental analytical data, the nature and duration of restrictions on disposition, the movement of the market in which the security is normally traded and public trading in similar securities of the issuer or comparable issuers.
If the Fund cannot obtain a price or price evaluation from a pricing service for an investment, the Fund may attempt to value the investment based upon the mean of bid and asked quotations or fair value the investment based on price evaluations, from one or more dealers. If any price, quotation, price evaluation or other pricing source is not readily available when the NAV is calculated, the Fund uses the fair value of the investment determined in accordance with the procedures described below. There can be no assurance that the Fund could purchase or sell an investment at the price used to calculate the Fund's NAV.
Annual Shareholder Report
The Trustees have authorized the use of pricing services to provide evaluations of the current fair value of certain investments for purposes of calculating the NAV. Factors considered by pricing services in evaluating an investment include the yields or prices of investments of comparable quality, coupon, maturity, call rights and other potential prepayments, terms and type, reported transactions, indications as to values from dealers and general market conditions. Some pricing services provide a single price evaluation reflecting the bid-side of the market for an investment (a “bid” evaluation). Other pricing services offer both bid evaluations and price evaluations indicative of a price between the prices bid and asked for the investment (a “mid” evaluation). The Fund normally uses bid evaluations for U.S. Treasury and Agency securities and mortgage-backed securities. The Fund normally uses mid evaluations for other types of fixed-income securities and OTC derivative contracts. In the event that market quotations and price evaluations are not available for an investment, the fair value of the investment is determined in accordance with procedures adopted by the Trustees.
The Trustees also have adopted procedures requiring an investment to be priced at its fair value whenever the Adviser determines that a significant event affecting the value of the investment has occurred between the time as of which the price of the investment would otherwise be determined and the time as of which the NAV is computed. An event is considered significant if there is both an affirmative expectation that the investment's value will change in response to the event and a reasonable basis for quantifying the resulting change in value. Examples of significant events that may occur after the close of the principal market on which a security is traded, or after the time of a price evaluation provided by a pricing service or a dealer, include:
- With respect to securities traded in foreign markets, significant trends in U.S. equity markets or in the trading of foreign securities index futures or options contracts;
- With respect to price evaluations of fixed-income securities determined before the close of regular trading on the NYSE, actions by the Federal Reserve Open Market Committee and other significant trends in U.S. fixed-income markets;
- Political or other developments affecting the economy or markets in which an issuer conducts its operations or its securities are traded; and
- Announcements concerning matters such as acquisitions, recapitalizations, litigation developments, a natural disaster affecting the issuer's operations or regulatory changes or market developments affecting the issuer's industry.
The Trustees have approved the use of a pricing service to determine the fair value of equity securities traded principally in foreign markets when the Adviser determines that there has been a significant trend in the U.S. equity markets or in index futures trading. For other significant events, the Fund may seek to obtain more current quotations or price evaluations from alternative pricing sources. If a reliable alternative pricing source is not available, the Fund will determine the fair value of the investment using another method approved by the Trustees.
Repurchase Agreements
The Fund may invest in repurchase agreements for short-term liquidity purposes. It is the policy of the Fund to require the other party to a repurchase agreement to transfer to the Fund's custodian or sub-custodian eligible securities or cash with a market value (after transaction costs) at least equal to the repurchase price to be paid under the repurchase agreement. The eligible securities are transferred to accounts with the custodian or sub-custodian in which the Fund holds a “securities entitlement” and exercises “control” as those terms are defined in the Uniform Commercial Code. The Fund has established procedures for monitoring the market value of the transferred securities and requiring the transfer of additional eligible securities if necessary to equal at least the repurchase price. These procedures also allow the other party to require securities to be transferred from the account to the extent that their market value exceeds the repurchase price or in exchange for other eligible securities of equivalent market value.
The insolvency of the other party or other failure to repurchase the securities may delay the disposition of the underlying securities or cause the Fund to receive less than the full repurchase price. Under the terms of the repurchase agreement, any amounts received by the Fund in excess of the repurchase price and related transaction costs must be remitted to the other party.
The Fund may enter into repurchase agreements in which eligible securities are transferred into joint trading accounts maintained by the custodian or sub-custodian for investment companies and other clients advised by the Fund's Adviser and its affiliates. The Fund will participate on a pro rata basis with the other investment companies and clients in its share of the securities transferred under such repurchase agreements and in its share of proceeds from any repurchase or other disposition of such securities.
Investment Income, Gains and Losses, Expenses and Distributions
Investment transactions are accounted for on a trade-date basis. Realized gains and losses from investment transactions are recorded on an identified-cost basis. Interest income and expenses are accrued daily. Dividend income and distributions to shareholders are recorded on the ex-dividend date. Foreign dividends are recorded on the ex-dividend date or when the Fund is informed of the ex-dividend date. Distributions of net investment income, if any, are declared and paid annually. Non-cash dividends included in dividend income, if any, are recorded at fair value. Investment income, realized and unrealized gains and losses, and certain fund-level expenses are allocated to each class based on relative average daily net assets, except that Primary Shares and Service Shares may bear distribution services fees unique to those classes.
Dividends are declared separately for each class. No class has preferential dividend rights; differences in per share dividend rates are generally due to differences in separate class expenses.
Premium and Discount Amortization
All premiums and discounts on fixed-income securities are amortized/accreted using the effective interest rate method.
Federal Taxes
It is the Fund's policy to comply with the Subchapter M provision of the Internal Revenue Code (the “Code”) and to distribute to shareholders each year substantially all of its income. Accordingly, no provision for federal income tax is necessary. As of and during the year ended December 31, 2011, the Fund did not have a liability for any uncertain tax positions. The Fund recognizes interest and penalties, if any, related to tax liabilities as income tax expense in the Statement of Operations. As of December 31, 2011, tax years 2008 through 2011 remain subject to examination by the Fund's major tax jurisdictions, which include the United States of America and the Commonwealth of Massachusetts.
Annual Shareholder Report
When-Issued and Delayed Delivery Transactions
The Fund may engage in when-issued or delayed delivery transactions. The Fund records when-issued securities on the trade date and maintains security positions such that sufficient liquid assets will be available to make payment for the securities purchased. Securities purchased on a when-issued or delayed delivery basis are marked to market daily and begin earning interest on the settlement date. Losses may occur on these transactions due to changes in market conditions or the failure of counterparties to perform under the contract.
Foreign Exchange Contracts
The Fund enters into foreign exchange contracts for the delayed delivery of securities or foreign currency exchange transactions. The Fund enters into foreign exchange contracts to protect assets against adverse changes in foreign currency exchange rates or exchange control regulations. Purchased contracts are used to acquire exposure to foreign currencies, whereas, contracts to sell are used to hedge the Fund's securities against currency fluctuations. Risks may arise upon entering into these transactions from the potential inability of counterparties to meet the terms of their commitments and from unanticipated movements in security prices or foreign exchange rates. The foreign exchange contracts are adjusted by the daily exchange rate of the underlying currency and any gains or losses are recorded for financial statement purposes as unrealized until the settlement date.
Foreign exchange contracts outstanding at period end are listed after the Fund's Portfolio of Investments.
The average value at settlement date payable and receivable of foreign exchange contracts purchased and sold by the Fund throughout the period was $401 and $133, respectively. This is based on the contracts held as of each month-end throughout the fiscal period.
Foreign Currency Translation
The accounting records of the Fund are maintained in U.S. dollars. All assets and liabilities denominated in foreign currencies (FCs) are translated into U.S. dollars based on the rates of exchange of such currencies against U.S. dollars on the date of valuation. Purchases and sales of securities, income and expenses are translated at the rate of exchange quoted on the respective date that such transactions are recorded. The Fund does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in market prices of securities held. Such fluctuations are included with the net realized and unrealized gain or loss from investments.
Reported net realized foreign exchange gains or losses arise from sales of portfolio securities, sales and maturities of short-term securities, sales of FCs, currency gains or losses realized between the trade and settlement dates on securities transactions, the difference between the amounts of dividends, interest and foreign withholding taxes recorded on the Fund's books, and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in the value of assets and liabilities other than investments in securities at fiscal year end, resulting from changes in the exchange rate.
Securities Lending
The Fund participates in a securities lending program providing for the lending of equity securities to qualified brokers. The Fund normally receives cash collateral for securities loaned that is invested in short-term securities including repurchase agreements. Collateral is maintained at a minimum level of 100% of the market value of investments loaned, plus interest, if applicable. Earnings on collateral are allocated between the securities lending agent, as a fee for its services under the program, and the Fund, according to agreed-upon rates.
As of December 31, 2011, securities subject to this type of arrangement and related collateral were as follows:
Market Value of Securities Loaned | Market Value of Collateral |
$4,599,856 | $4,726,000 |
Restricted Securities
The Fund may purchase securities which are considered restricted. Restricted securities are securities that either: (a) cannot be offered for public sale without first being registered, or being able to take advantage of an exemption from registration, under the Securities Act of 1933; or (b) are subject to contractual restrictions on public sales. In some cases, when a security cannot be offered for public sale without first being registered, the issuer of the restricted security has agreed to register such securities for resale, at the issuer's expense, either upon demand by the Fund or in connection with another registered offering of the securities. Many such restricted securities may be resold in the secondary market in transactions exempt from registration. Restricted securities may be determined to be liquid under criteria established by the Trustees. The Fund will not incur any registration costs upon such resales. The Fund's restricted securities are valued at the price provided by dealers in the secondary market or, if no market prices are available, at the fair value as determined in accordance with procedures established by and under the general supervision of the Trustees.
Annual Shareholder Report
Fair Value of Derivative Instruments | ||||
Liability | ||||
Statement of Assets and Liabilities Location | Fair Value | |||
Derivatives not accounted for as hedging instruments under ASC Topic 815 | ||||
Foreign exchange contracts | Unrealized depreciation on foreign exchange contracts | $174 |
The Effect of Derivative Instruments on the Statement of Operations for the Year Ended December 31, 2011
Amount of Realized Gain or (Loss) on Derivatives Recognized in Income | |
Forward Currency Contracts | |
Foreign exchange contracts | $(47,385) |
Change in Unrealized Appreciation or (Depreciation) on Derivatives Recognized in Income | |
Forward Currency Contracts | |
Foreign exchange contracts | $(175) |
Other
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts of assets, liabilities, expenses and revenues reported in the financial statements. Actual results could differ from those estimated.
3. SHARES OF BENEFICIAL INTEREST
The following tables summarize share activity:
Year Ended December 31 | 2011 | 2010 | |
Primary Shares | Shares | Amount | Shares | Amount |
Shares sold | 290,591 | $4,215,828 | 553,516 | $7,219,247 |
Proceeds from shares issued in connection with the tax-free transfer of assets from Federated Mid Cap Growth Strategies Fund II | — | — | 1,330,624 | 17,390,831 |
Shares issued to shareholders in payment of distributions declared | 42,610 | 621,683 | 4,646 | 60,494 |
Shares redeemed | (1,150,254) | (16,096,509) | (2,900,532) | (38,427,179) |
NET CHANGE RESULTING FROM PRIMARY SHARE TRANSACTIONS | (817,053) | $(11,258,998) | (1,011,746) | $(13,756,607) |
Year Ended December 31 | 2011 | 2010 | |
Service Shares | Shares | Amount | Shares | Amount |
Shares sold | 1,054,469 | $14,192,759 | 2,697,293 | $33,999,814 |
Shares issued to shareholders in payment of distributions declared | 67,094 | 965,481 | — | — |
Shares redeemed | (1,609,988) | (22,525,543) | (2,034,406) | (26,613,589) |
NET CHANGE RESULTING FROM SERVICE SHARE TRANSACTIONS | (488,425) | $(7,367,303) | 662,887 | $7,386,225 |
NET CHANGE RESULTING FROM TOTAL FUND SHARE TRANSACTIONS | (1,305,478) | $(18,626,301) | (348,859) | $(6,370,382) |
The timing and character of income and capital gain distributions are determined in accordance with income tax regulations, which may differ from GAAP. These differences are due in part to differing treatments for foreign currency transactions, passive foreign investment company gains and losses, regulatory settlement proceeds and net operating losses.
Annual Shareholder Report
Increase (Decrease) | ||
Paid-In Capital | Undistributed Net Investment Income (Loss) | Accumulated Net Realized Gain (Loss) |
$(1,478,800) | $2,228,605 | $(749,805) |
Net investment income (loss), net realized gains (losses), and net assets were not affected by this reclassification.
The tax character of distributions as reported on the Statement of Changes in Net Assets for the years ended December 31, 2011 and 2010, was as follows:
2011 | 2010 |
Ordinary income | $1,587,164 | $60,494 |
As of December 31, 2011, the components of distributable earnings on a tax basis were as follows:
Net unrealized appreciation | $19,899,822 |
Capital loss carryforwards | $(6,204,039) |
The difference between book-basis and tax-basis net unrealized appreciation/depreciation is attributable to differing treatments for the deferral of losses on wash sales, adjustment to capital loss carryforwards and the realization for tax purposes of unrealized gains on investments in passive foreign investment companies.
At December 31, 2011, the cost of investments for federal tax purposes was $125,907,101. The net unrealized appreciation of investments for federal tax purposes excluding any unrealized appreciation/depreciation resulting from changes in foreign currency exchange rates and outstanding foreign currency commitments was $19,901,550. This consists of net unrealized appreciation from investments for those securities having an excess of value over cost of $26,624,694 and net unrealized depreciation from investments for those securities having an excess of cost over value of $6,723,144,.
At December 31, 2011, the Fund had a capital loss carryforward of $6,204,039 which will reduce the Fund's taxable income arising from future net realized gains on investments, if any, to the extent permitted by the Code, thereby reducing the amount of distributions to shareholders which would otherwise be necessary to relieve the Fund of any liability for federal income tax. Pursuant to the Code, a net capital loss incurred in taxable years beginning on or before December 22, 2010, is characterized as short-term and may be carried forward for a maximum of eight tax years (“Carryforward Limit”), whereas a net capital loss incurred in taxable years beginning after December 22, 2010, retains its character as either short-term or long-term, does not expire and is required to be utilized prior to the losses which have a Carryforward Limit.
The following schedule summarizes the Fund's short-term and long-term capital loss carryforwards and expiration year:
Expiration Year | Short-Term | Long-Term | Total |
2016 | $2,321,531 | NA | $2,321,531 |
2017 | $3,882,508 | NA | $3,882,508 |
As a result of the tax-free transfer of assets from the Acquired Fund, the use of certain capital loss carryforwards listed above may be limited.
The Fund used capital loss carryforwards of $14,344,851 to offset taxable capital gains realized during the year ended December 31, 2011.
5. INVESTMENT ADVISER FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Investment Adviser Fee
Federated Equity Management Company of Pennsylvania is the Fund's investment adviser (the “Adviser”). The advisory agreement between the Fund and the Adviser provides for an annual fee equal to 1.425% of the Fund's average daily net assets. Subject to the terms described in the Expense Limitation note, the Adviser may voluntarily choose to waive any portion of its fee. For the year ended December 31, 2011, the Adviser voluntarily waived $440,896 of its fee.
Certain of the Fund's assets are managed by Federated Global Investment Management Corp. (the “Sub-Adviser”). Under the terms of a sub-advisory agreement between the Adviser and the Sub-Adviser, the Sub-Adviser receives an allocable portion of the Fund's adviser fee. The fee is paid by the Adviser out of its resources and is not an incremental Fund expense. For the year ended December 31, 2011, the Sub-Adviser earned the entire net investment adviser fee.
Annual Shareholder Report
Federated Administrative Services (FAS), under the Administrative Services Agreement, provides the Fund with administrative personnel and services. The fee paid to FAS is based on the average aggregate daily net assets of certain Federated funds as specified below:
Administrative Fee | Average Aggregate Daily Net Assets of the Federated Funds |
0.150% | on the first $5 billion |
0.125% | on the next $5 billion |
0.100% | on the next $10 billion |
0.075% | on assets in excess of $20 billion |
The administrative fee received during any fiscal year shall be at least $150,000 per portfolio and $40,000 per each additional class of Shares. Subject to the terms described in the Expense Limitation note, FAS may voluntarily choose to waive any portion of its fee. For the year ended December 31, 2011, the net fee paid to FAS was 0.094% of average daily net assets of the Fund. FAS waived $33,340 of its fee.
Distribution Services Fee
The Fund has adopted a Distribution Plan (the “Plan”) pursuant to Rule 12b-1 under the Act. Under the terms of the Plan, the Fund will compensate Federated Securities Corp. (FSC), the principal distributor, from the daily net assets of the Fund's Primary Shares and Service Shares to finance activities intended to result in the sale of these shares. The Plan provides that the Fund may incur distribution expenses at the following percentages of average daily net assets annually, to compensate FSC:
Share Class Name | Percentage of Average Daily Net Assets of Class |
Primary Shares | 0.25% |
Service Shares | 0.25% |
Subject to the terms described in the Expense Limitation note, FSC may voluntarily choose to waive any portion of its fee. For the year ended December 31, 2011, distribution services fees for the Fund were as follows:
Distribution Services Fees Incurred | Distribution Services Fees Waived |
Service Shares | $278,047 | $(900) |
When FSC receives fees, it may pay some or all of them to financial intermediaries whose customers purchase shares. For the year ended December 31, 2011, FSC did not retain any fees paid by the Fund. For the year ended December 31, 2011, the Fund's Primary Shares did not incur a distribution services fee; however, it may begin to incur this fee upon approval of the Trustees.
Expense Limitation
The Adviser and its affiliates (which may include FSC and FAS) have voluntarily agreed to waive their fees and/or reimburse expenses so that the total annual fund operating expenses (as shown in the financial highlights) paid by the Fund's Primary Shares and Service Shares (after the voluntary waivers and reimbursements) will not exceed 1.53% and 1.78% (the “Fee Limit”), respectively, up to but not including the later of (the “Termination Date”): (a) May 1, 2012; or (b) the date of the Fund's next effective Prospectus. While the Adviser and its affiliates currently do not anticipate terminating or increasing these arrangements prior to the Termination Date, these arrangements may only be terminated or the Fee Limit increased prior to the Termination Date with the agreement of the Trustees.
Interfund Transactions
During the year ended December 31, 2011, the Fund engaged in purchase and sale transactions with funds that have a common investment adviser (or affiliated investment advisers), common Directors/Trustees and/or common Officers. These purchase and sale transactions complied with Rule 17a-7 under the Act and amounted to $232,461 and $495,637, respectively.
General
Certain Officers and Trustees of the Fund are Officers and Directors or Trustees of the above companies.
The Fund directs portfolio trades to a broker that in turn pays a portion of the Fund's operating expenses. For the year ended December 31, 2011, the Fund's expenses were reduced by $1,898 under these arrangements.
Purchases and sales of investments, excluding long-term U.S. government securities and short-term obligations, for the year ended December 31, 2011, were as follows:
Purchases | $102,329,830 |
Sales | $135,474,553 |
The Fund invests in securities of non-U.S. issuers. Political or economic developments may have an effect on the liquidity and volatility of portfolio securities and currency holdings.
At December 31, 2011, the diversification of countries was as follows:
Country | Percentage of Net Assets |
United States | 66.4% |
Brazil | 8.7% |
Ireland | 3.6% |
Italy | 2.3% |
Luxembourg | 2.2% |
India | 2.1% |
Spain | 2.1% |
Netherlands Antilles | 1.2% |
Chile | 1.2% |
Cayman Islands | 1.1% |
Israel | 1.0% |
Virgin Islands | 0.9% |
Germany | 0.9% |
Singapore | 0.8% |
Colombia | 0.6% |
United Kingdom | 0.5% |
Indonesia | 0.4% |
Mexico | 0.2% |
Bermuda | 0.1% |
Hong Kong | 0.1% |
The Fund participates in a $100,000,000 unsecured, uncommitted revolving line of credit (LOC) agreement with PNC Bank. The LOC was made available for extraordinary or emergency purposes, primarily for financing redemption payments. Borrowings are charged interest at a rate offered to the Fund by PNC Bank at the time of the borrowing. As of December 31, 2011, there were no outstanding loans. During the year ended December 31, 2011, the Fund did not utilize the LOC.
Pursuant to an Exemptive Order issued by the Securities and Exchange Commission, the Fund, along with other funds advised by subsidiaries of Federated Investors, Inc., may participate in an interfund lending program. This program provides an alternative credit facility allowing the Fund to borrow other participating affiliated funds. As of December 31, 2011, there were no outstanding loans. During the year ended December 31, 2011, the program was not utilized.
11. RECENT ACCOUNTING PRONOUNCEMENTS
In April 2011, the Financial Accounting Standards Board (FASB) released Accounting Standards Update (ASU) No. 2011-03, “Reconsideration of Effective Control for Repurchase Agreements.” This ASU amends FASB Accounting Standards Codification (ASC) Topic 860, “Transfers and Servicing”; specifically the criteria required to determine whether a repurchase agreement and similar agreements should be accounted for as sales of financial assets or secured borrowings with commitments. This ASU is effective for fiscal years and interim periods beginning after December 15, 2011. Management has concluded that the adoption of ASU No. 2011-03 is not expected to have a material impact on the Fund's financial statements and the accompanying notes, net assets and results of operations.
In addition, in May 2011, FASB released ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” This ASU amends FASB ASC Topic 820, “Fair Value Measurement,” to establish common requirements for measuring fair value and for disclosing information about fair value measurements in accordance with GAAP. This ASU is effective for fiscal years and interim periods beginning after December 15, 2011. Management has concluded that the adoption of ASU No. 2011-04 is not expected to have a material impact on the Fund's financial statements or the accompanying notes.
12. FEDERAL TAX INFORMATION (UNAUDITED)
Of the ordinary income distributions made by the Fund during the year ended December 31, 2011, 99.67% qualify for the dividend received deduction available to corporate shareholders.
Annual Shareholder ReportReport of Independent Registered Public Accounting Firm
TO THE BOARD OF TRUSTEES OF Federated insurance series AND SHAREHOLDERS OF federated kaufmann fund ii:
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of the Federated Kaufmann Fund II (the “Fund”), a portfolio of Federated Insurance Series, as of December 31, 2011, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2011, by correspondence with the custodian, transfer agent, and brokers or by other appropriate auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Federated Kaufmann Fund II as of December 31, 2011, and the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended, in conformity with U.S. generally accepted accounting principles.
Boston, Massachusetts
February 13, 2012
Shareholder Expense Example (unaudited)
As a shareholder of the Fund, you incur ongoing costs, including management fees and to the extent applicable, distribution (12b-1) fees and/or shareholder services fees and other Fund expenses. This Example is intended to help you to understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other funds used as variable investment options. It is based on an investment of $1,000 invested at the beginning of the period and held for the entire period from July 1, 2011 to December 31, 2011.
The first section of the table below provides information about actual account values and actual expenses. You may use the information in this section, together with the amount you invested, to estimate the expenses that you incurred over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first section under the heading entitled “Expenses Paid During Period” to estimate the expenses attributable to your investment during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second section of the table below provides information 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. Thus, you should not use the hypothetical account values and expenses to estimate the actual ending account balance or your expenses for the period. Rather, these figures are required to be provided to enable you to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only. Therefore, the second section of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds.
Beginning Account Value 7/1/2011 | Ending Account Value 12/31/2011 | Expenses Paid During Period1 |
Actual: |
Primary Shares | $1,000 | $839.80 | $7.10 |
Service Shares | $1,000 | $838.80 | $8.25 |
Hypothetical (assuming a 5% return before expenses): |
Primary Shares | $1,000 | $1,017.49 | $7.78 |
Service Shares | $1,000 | $1,016.23 | $9.05 |
1 | Expenses are equal to the Fund's annualized net expense ratios, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half-year period). The expenses shown in the table do not include the charges and expenses imposed by the insurance company under the variable insurance product contract. Please refer to the variable insurance product prospectus for a complete listing of these expenses. The annualized net expense ratios are as follows: |
Primary Shares | 1.53% |
Service Shares | 1.78% |
Board of Trustees and Trust Officers
The Board of Trustees is responsible for managing the Trust's business affairs and for exercising all the Trust's powers except those reserved for the shareholders. The following tables give information about each Trustee and the senior officers of the Fund. Where required, the tables separately list Trustees who are “interested persons” of the Fund (i.e., “Interested” Trustees) and those who are not (i.e., “Independent” Trustees). Unless otherwise noted, the address of each person listed is Federated Investors Tower, 1001 Liberty Avenue, Pittsburgh, PA 15222. The address of all Independent Trustees listed is 4000 Ericsson Drive, Warrendale, PA 15086-7561; Attention: Mutual Fund Board. As of December 31, 2011, the Trust comprised seven portfolio(s), and the Federated Fund Family consisted of 43 investment companies (comprising 134 portfolios). Unless otherwise noted, each Officer is elected annually. Unless otherwise noted, each Trustee oversees all portfolios in the Federated Fund Family and serves for an indefinite term. The Fund's Statement of Additional Information includes additional information about Trust Trustees and is available, without charge and upon request, by calling 1-800-341-7400.
Interested Trustees Background
Name Birth Date Positions Held with Trust Date Service Began | Principal Occupation(s) for Past Five Years, Other Directorships Held and Previous Position(s) |
John F. Donahue* Birth Date: July 28, 1924 Trustee Began serving: October 1993 | Principal Occupations: Director or Trustee of the Federated Fund Family; Chairman and Director, Federated Investors, Inc.; Chairman of the Federated Fund Family's Executive Committee. Previous Positions: Chairman of the Federated Fund Family; Trustee, Federated Investment Management Company; Chairman and Director, Federated Investment Counseling. |
J. Christopher Donahue* Birth Date: April 11, 1949 Trustee Began serving: October 1993 | Principal Occupations: Principal Executive Officer and President of the Federated Fund Family; Director or Trustee of some of the Funds in the Federated Fund Family; President, Chief Executive Officer and Director, Federated Investors, Inc.; Chairman and Trustee, Federated Investment Management Company; Trustee, Federated Investment Counseling; Chairman and Director, Federated Global Investment Management Corp.; Chairman, Federated Equity Management Company of Pennsylvania and Passport Research, Ltd. (investment advisory subsidiary of Federated); Trustee, Federated Shareholder Services Company; Director, Federated Services Company. Previous Positions: President, Federated Investment Counseling; President and Chief Executive Officer, Federated Investment Management Company, Federated Global Investment Management Corp. and Passport Research, Ltd. |
* | Family relationships and reasons for “interested” status: John F. Donahue is the father of J. Christopher Donahue; both are “interested” due to their beneficial ownership of shares of Federated Investors, Inc. and the positions they hold with Federated and its subsidiaries. |
INDEPENDENT Trustees Background
Name Birth Date Positions Held with Trust Date Service Began | Principal Occupation(s) for Past Five Years, Other Directorships Held, Previous Position(s) and Qualifications |
Nicholas P. Constantakis, CPA Birth Date: September 3, 1939 Trustee Began serving: February 1998 | Principal Occupation: Director or Trustee of the Federated Fund Family. Other Directorship Held: Director, Chairman of the Audit Committee, and member of the Compensation Committee, Michael Baker Corporation (architecture, engineering and construction services). Previous Position: Partner, Andersen Worldwide SC. Qualifications: Public accounting and director experience. |
John F. Cunningham Birth Date: March 5, 1943 Trustee Began serving: November 1999 | Principal Occupation: Director or Trustee of the Federated Fund Family. Other Directorships Held: Chairman, President and Chief Executive Officer, Cunningham & Co., Inc. (strategic business consulting); Trustee Associate, Boston College. Previous Positions: Director, Redgate Communications and EMC Corporation (computer storage systems); Chairman of the Board and Chief Executive Officer, Computer Consoles, Inc.; President and Chief Operating Officer, Wang Laboratories; Director, First National Bank of Boston; Director, Apollo Computer, Inc. Qualifications: Business management and director experience. |
Name Birth Date Positions Held with Trust Date Service Began | Principal Occupation(s) for Past Five Years, Other Directorships Held, Previous Position(s) and Qualifications |
Maureen Lally-Green Birth Date: July 5, 1949 Trustee Began serving: August 2009 | Principal Occupations: Director or Trustee of the Federated Fund Family; Director, Office of Church Relations, Diocese of Pittsburgh; Adjunct Professor of Law, Duquesne University School of Law. Other Directorships Held: Director, Auberle; Trustee, St. Francis University; Director, Ireland Institute of Pittsburgh; Director, UPMC Mercy Hospital; Regent, St. Vincent Seminary; Director, Epilepsy Foundation of Western and Central Pennsylvania; Director, Saint Thomas More Society, Allegheny County. Previous Position: Pennsylvania Superior Court Judge. Qualifications: Legal and director experience. |
Peter E. Madden Birth Date: March 16, 1942 Trustee Began serving: October 1993 | Principal Occupation: Director or Trustee, and Chairman of the Board of Directors or Trustees, of the Federated Fund Family. Previous Positions: Representative, Commonwealth of Massachusetts General Court; President, Chief Operating Officer and Director, State Street Bank and Trust Company and State Street Corporation (retired); Director, VISA USA and VISA International; Chairman and Director, Massachusetts Bankers Association; Director, Depository Trust Corporation; Director, The Boston Stock Exchange. Qualifications: Business management, mutual fund services and director experience. |
Charles F. Mansfield, Jr. Birth Date: April 10, 1945 Trustee Began serving: November 1999 | Principal Occupations: Director or Trustee of the Federated Fund Family; Management Consultant. Previous Positions: Chief Executive Officer, PBTC International Bank; Partner, Arthur Young & Company (now Ernst & Young LLP); Chief Financial Officer of Retail Banking Sector, Chase Manhattan Bank; Senior Vice President, HSBC Bank USA (formerly Marine Midland Bank); Vice President, Citibank; Assistant Professor of Banking and Finance, Frank G. Zarb School of Business, Hofstra University; Executive Vice President, DVC Group, Inc. (marketing, communications and technology). Qualifications: Banking, business management, education and director experience. |
Thomas M. O'Neill Birth Date: June 14, 1951 Trustee Began serving: October 2006 | Principal Occupations: Director or Trustee, Vice Chairman of the Audit Committee of the Federated Fund Family; Sole Proprietor, Navigator Management Company (investment and strategic consulting). Other Directorships Held: Board of Overseers, Children's Hospital of Boston; Visiting Committee on Athletics, Harvard College; Board of Directors, Medicines for Humanity; Board of Directors, The Golisano Children's Museum of Naples, Florida. Previous Positions: Chief Executive Officer and President, Managing Director and Chief Investment Officer, Fleet Investment Advisors; President and Chief Executive Officer, Aeltus Investment Management, Inc.; General Partner, Hellman, Jordan Management Co., Boston, MA; Chief Investment Officer, The Putnam Companies, Boston, MA; Credit Analyst and Lending Officer, Fleet Bank; Director and Consultant, EZE Castle Software (investment order management software); Director, Midway Pacific (lumber). Qualifications: Business management, mutual fund, director and investment experience. |
John S. Walsh Birth Date: November 28, 1957 Trustee Began serving: January 1999 | Principal Occupations: Director or Trustee, Chairman of the Audit Committee of the Federated Fund Family; President and Director, Heat Wagon, Inc. (manufacturer of construction temporary heaters); President and Director, Manufacturers Products, Inc. (distributor of portable construction heaters); President, Portable Heater Parts, a division of Manufacturers Products, Inc. Previous Position: Vice President, Walsh & Kelly, Inc. Qualifications: Business management and director experience. |
Name Birth Date Address Positions Held with Trust Date Service Began | Principal Occupation(s) for Past Five Years and Previous Position(s) |
John W. McGonigle Birth Date: October 26, 1938 EXECUTIVE VICE PRESIDENT AND SECRETARY Began serving: September 1993 | Principal Occupations: Executive Vice President and Secretary of the Federated Fund Family; Vice Chairman, Executive Vice President, Secretary and Director, Federated Investors, Inc. Previous Positions: Trustee, Federated Investment Management Company and Federated Investment Counseling; Director, Federated Global Investment Management Corp., Federated Services Company and Federated Securities Corp. |
Richard A. Novak Birth Date: December 25, 1963 TREASURER Began serving: January 2006 | Principal Occupations: Principal Financial Officer and Treasurer of the Federated Fund Family; Senior Vice President, Federated Administrative Services; Financial and Operations Principal for Federated Securities Corp., Edgewood Services, Inc. and Southpointe Distribution Services, Inc. Previous Positions: Controller of Federated Investors, Inc.; Vice President, Finance of Federated Services Company; held various financial management positions within The Mercy Hospital of Pittsburgh; Auditor, Arthur Andersen & Co. |
Name Birth Date Address Positions Held with Trust Date Service Began | Principal Occupation(s) for Past Five Years and Previous Position(s) |
Richard B. Fisher Birth Date: May 17, 1923 VICE PRESIDENT Began serving: September 1993 | Principal Occupations: Vice Chairman or Vice President of some of the Funds in the Federated Fund Family; Vice Chairman, Federated Investors, Inc.; Chairman, Federated Securities Corp. Previous Positions: President and Director or Trustee of some of the Funds in the Federated Fund Family; Executive Vice President, Federated Investors, Inc.; Director and Chief Executive Officer, Federated Securities Corp. |
John B. Fisher Birth Date: May 16, 1956 PRESIDENT Began serving: November 2004 | Principal Occupations: President, Director/Trustee and CEO, Federated Advisory Services Company, Federated Equity Management Company of Pennsylvania, Federated Global Investment Management Corp., Federated Investment Counseling, Federated Investment Management Company; President and CEO of Passport Research, Ltd.; President of some of the Funds in the Federated Fund Family; Director, Federated Investors Trust Company. Previous Positions: President and Director of the Institutional Sales Division of Federated Securities Corp.; President and Director of Federated Investment Counseling; Director, Edgewood Securities Corp.; Director, Federated Services Company; Director, Federated Investors, Inc.; Chairman and Director, Southpointe Distribution Services, Inc.; President, Technology, Federated Services Company. |
Brian P. Bouda Birth Date: February 28, 1947 CHIEF COMPLIANCE OFFICER AND SENIOR VICE PRESIDENT Began serving: August 2004 | Principal Occupations: Senior Vice President and Chief Compliance Officer of the Federated Fund Family; Vice President and Chief Compliance Officer of Federated Investors, Inc. and Chief Compliance Officer of its subsidiaries. Mr. Bouda joined Federated in 1999 and is a member of the American Bar Association and the State Bar Association of Wisconsin. |
Stephen F. Auth Birth Date: September 3, 1956 450 Lexington Avenue Suite 3700 New York, NY 10017-3943 CHIEF INVESTMENT OFFICER Began serving: November 2002 | Principal Occupations: Mr. Auth is Chief Investment Officer of this Fund and various other Funds in the Federated Fund Family; Executive Vice President, Federated Investment Counseling, Federated Global Investment Management Corp. and Federated Equity Management Company of Pennsylvania. Previous Positions: Executive Vice President, Federated Investment Management Company, and Passport Research, Ltd. (investment advisory subsidiary of Federated); Senior Vice President, Global Portfolio Management Services Division; Senior Vice President, Federated Investment Management Company and Passport Research, Ltd.; Senior Managing Director and Portfolio Manager, Prudential Investments. |
Robert J. Ostrowski Birth Date: April 26, 1963 CHIEF INVESTMENT OFFICER Began serving: May 2004 | Principal Occupations: Robert J. Ostrowski joined Federated in 1987 as an Investment Analyst and became a Portfolio Manager in 1990. He was named Chief Investment Officer of taxable fixed-income products in 2004 and also serves as a Senior Portfolio Manager. He has been a Senior Vice President of the Fund's Adviser since 1997. Mr. Ostrowski has received the Chartered Financial Analyst designation. He received his M.S. in Industrial Administration from Carnegie Mellon University. |
Evaluation and Approval of Advisory Contract – May 2011
Federated kaufmann fund II (the “Fund”)
The Fund's Board reviewed the Fund's investment advisory and subadvisory contracts at meetings held in May 2011. The Board's decision regarding these contracts reflects the exercise of its business judgment on whether to continue the existing arrangements.
In this connection, the Federated Funds' Board had previously appointed a Senior Officer, whose duties include specified responsibilities relating to the process by which advisory fees are to be charged to a Federated fund. The Senior Officer has the authority to retain consultants, experts, or staff as may be reasonably necessary to assist in the performance of his duties, reports directly to the Board, and may be terminated only with the approval of a majority of the independent members of the Board. The Senior Officer prepared and furnished to the Board an independent, written evaluation that covered topics discussed below (the “Evaluation”). The Board considered that Evaluation, along with other information, in deciding to approve the advisory and subadvisory contracts.
During its review of these contracts, the Board considered compensation and benefits received by the Adviser and subadviser. This included the fees received for services provided to the Fund by other entities in the Federated organization and research services (if any) received by the Adviser from brokers that execute Federated fund trades, as well as advisory fees. The Board is also familiar with and considered judicial decisions concerning allegedly excessive investment advisory fees, which have indicated that the following factors may be relevant to an Adviser's fiduciary duty with respect to its receipt of compensation from a fund: the nature and quality of the services provided by the Adviser, including the performance of the fund; the Adviser's cost of providing the services; the extent to which the Adviser may realize “economies of scale” as a fund grows larger; any indirect benefits that may accrue to the Adviser and its affiliates as a result of the Adviser's relationship with a fund; performance and expenses of comparable funds; and the extent to which the independent Board members are fully informed about all facts the Board deems relevant bearing on the Adviser's services and fees. The Board further considered management fees (including any components thereof) charged to institutional and other clients of the Adviser and subadviser for what might be viewed as like services, and the cost to the Adviser and its affiliates of supplying services pursuant to the management fee agreements, excluding any intra-corporate profit and profit margins of the Adviser and its affiliates for supplying such services. The Board was aware of these factors and was guided by them in its review of the Fund's advisory and subadvisory contracts to the extent it considered them to be appropriate and relevant, as discussed further below.
The Board considered and weighed these circumstances in light of its substantial accumulated experience in governing the Fund and working with Federated on matters relating to the Federated funds, and was assisted in its deliberations by independent legal counsel. Throughout the year, the Board has requested and received substantial and detailed information about the Fund and the Federated organization that was in addition to the extensive materials that comprise and accompany the Senior Officer's Evaluation. Federated provided much of this information at each regular meeting of the Board, and furnished additional information in connection with the particular meeting at which the Board's formal review of the advisory and subadvisory contracts occurred. Between regularly scheduled meetings, the Board also received information on particular matters as the need arose. Thus, the Board's consideration of the advisory and subadvisory contracts included review of the Senior Officer's Evaluation, accompanying data and additional information covering such matters as: the Adviser's and subadviser's investment philosophy, revenue, profitability, personnel and processes; investment and operating strategies; the Fund's short- and long-term performance (in absolute terms, both on a gross basis and net of expenses, as well as in relationship to its particular investment program and certain competitor or “peer group” funds and/or other benchmarks, as appropriate), and comments on the reasons for performance; the Fund's investment objectives; the Fund's expenses (including the advisory fee itself and the overall expense structure of the Fund, both in absolute terms and relative to similar and/or competing funds, with due regard for contractual or voluntary expense limitations); the use and allocation of brokerage commissions derived from trading the Fund's portfolio securities (if any); and the nature, quality and extent of the advisory and other services provided to the Fund by the Adviser and its affiliates. The Board also considered the preferences and expectations of Fund shareholders and their relative sophistication; the continuing state of competition in the mutual fund industry and market practices; the range of comparable fees for similar funds in the mutual fund industry; the Fund's relationship to the Federated family of funds which include a comprehensive array of funds with different investment objectives, policies and strategies which are available for exchange without the incurrence of additional sales charges; compliance and audit reports concerning the Federated funds and the Federated companies that service them (including communications from regulatory agencies), as well as Federated's responses to any issues raised therein; and relevant developments in the mutual fund industry and how the Federated funds and/or Federated are responding to them. The Board also considered that the longevity and experience of the Fund's portfolio management team and their unique approach to investing may limit the utility of comparisons to other equity mutual funds. The Board's evaluation process is evolutionary. The criteria considered and the emphasis placed on relevant criteria change in recognition of changing circumstances in the mutual fund marketplace.
Annual Shareholder Report
The Senior Officer reviewed information compiled by Federated, using data supplied by independent fund ranking organizations, regarding the performance of, and fees charged by, other mutual funds, noting his view that comparisons to fund peer groups are relevant in judging the reasonableness of proposed fees.
The Fund's performance fell below the median of the relevant peer group for the one-year, three-year and five-year periods covered by the Evaluation. The Board discussed the Fund's performance with the Adviser and recognized the efforts being undertaken by the Adviser. The Board will continue to monitor these efforts and the performance of the Fund.
The Board also received financial information about Federated, including information regarding the compensation and benefits Federated derived from its relationships with the Federated funds. This information covered not only the fees under the advisory contracts, but also fees received by Federated's subsidiaries for providing other services to the Federated funds under separate contracts (e.g., for serving as the Federated funds' administrator). The information also detailed any indirect benefit Federated may derive from its receipt of research services from brokers who execute Federated fund trades. In addition, the Board considered the fact that, in order for a fund to be competitive in the marketplace, Federated and its affiliates frequently waived fees and/or reimbursed expenses and have disclosed to fund investors and/or indicated to the Board their intention to do so in the future, where appropriate. Moreover, the Board receives regular reporting as to the institution or elimination of these voluntary waivers.
Federated furnished information, requested by the Senior Officer, that reported revenues on a fund-by-fund basis and made estimates of the allocation of expenses on a fund-by-fund basis, using allocation methodologies specified by the Senior Officer. The Senior Officer noted that, although they may apply consistent allocation processes, the inherent difficulties in allocating costs (and the unavoidable arbitrary aspects of that exercise) and the lack of consensus on how to allocate those costs may render such allocation information unreliable. The allocation information was considered in the analysis by the Board but was determined to be of limited use.
The Board and the Senior Officer also reviewed information compiled by Federated comparing profitability information for Federated to other publicly held fund management companies. In this regard, the Senior Officer noted the limited availability of such information, but nonetheless concluded that Federated's profit margins did not appear to be excessive and the Board agreed.
The Senior Officer's Evaluation also discussed the notion of possible realization of “economies of scale” as a fund grows larger. The Board considered in this regard that the Adviser has made significant and long-term investments in areas that support all of the Federated funds, such as personnel and processes for the portfolio management, compliance, internal audit, and risk management functions; and systems technology; and that the benefits of these efforts (as well as any economies, should they exist) were likely to be enjoyed by the fund complex as a whole. Finally, the Board also noted the absence of any applicable regulatory or industry guidelines on this subject, which (as discussed in the Senior Officer's Evaluation) is compounded by the lack of any common industry practice or general pattern with respect to structuring fund advisory fees with “breakpoints” that serve to reduce the fee as the fund attains a certain size. The Senior Officer did not recommend institution of breakpoints in pricing Federated's fund advisory services at this time.
It was noted in the materials for the Board meeting that for the period covered by the Evaluation, the Fund's investment advisory fee, after waivers and expense reimbursements, if any, was above the median of the relevant peer group. The Board reviewed the fees and other expenses of the Fund with the Adviser and was satisfied that the overall expense structure of the Fund remained competitive. The Board will continue to monitor advisory fees and other expenses borne by the Fund.
Annual Shareholder Report
In its decision to continue an existing investment advisory contract, the Board was mindful of the potential disruptions of the Fund's operations and various risks, uncertainties and other effects that could occur as a result of a decision to terminate or not renew an advisory contract. In particular, the Board recognized that many shareholders have invested in the Fund on the strength of the Adviser's industry standing and reputation and with the expectation that the Adviser will have a continuing role in providing advisory services to the Fund. Thus, the Board's approval of the advisory contract reflected the fact that it is the shareholders who have effectively selected the Adviser by virtue of having invested in the Fund.
The Board based its decision to approve the advisory and subadvisory contracts on the totality of the circumstances and relevant factors and with a view to past and future long-term considerations. Not all of the factors and considerations identified above were necessarily relevant to the Fund, nor did the Board consider any one of them to be determinative. With respect to the factors that were relevant, the Board's decision to approve the contract reflects its determination that Federated's performance and actions provided a satisfactory basis to support the decision to continue the existing arrangements.
Annual Shareholder ReportVoting Proxies on Fund Portfolio Securities
A description of the policies and procedures that the Fund uses to determine how to vote proxies, if any, relating to securities held in the Fund's portfolio is available, without charge and upon request, by calling 1-800-341-7400. A report on “Form N-PX” of how the Fund voted any such proxies during the most recent 12-month period ended June 30 is available from Federated's website at FederatedInvestors.com. To access this information from the home page, select “All” under “Asset Classes.” Select a fund name and share class, if applicable, to go to the Fund Overview page. On the Fund Overview page, select the “Documents” tab. At the bottom of that page, select “Proxy Voting Record Report (Form N-PX).” Form N-PX filings are also available at the SEC's website at www.sec.gov.
The Fund files with the SEC a complete schedule of its portfolio holdings, as of the close of the first and third quarters of its fiscal year, on “Form N-Q.” These filings are available on the SEC's website at www.sec.gov and may be reviewed and copied at the SEC's Public Reference Room in Washington, DC. (Call 1-800-SEC-0330 for information on the operation of the Public Reference Room.) You may also access this information from the “Products” section of Federated's website at FederatedInvestors.com. From the home page, select “All” under “Asset Classes.” Select a fund name and share class, if applicable, to go to the Fund Overview page. On the Fund Overview page, select the “Documents” tab. At the bottom of that page, select “Form N-Q.”
Annual Shareholder ReportVariable investment options are not bank deposits or obligations, are not guaranteed by any bank and are not insured or guaranteed by the U.S. government, the Federal Deposit Insurance Corporation, the Federal Reserve Board or any other government agency. Investment in variable investment options involves investment risk, including the possible loss of principal.
This Report is authorized for distribution to prospective investors only when preceded or accompanied by the Fund's Prospectus, which contains facts concerning its objective and policies, management fees, expenses and other information.
Federated Kaufmann Fund II
Federated Investors Funds
4000 Ericsson Drive
Warrendale, PA 15086-7561
Contact us at FederatedInvestors.com
or call 1-800-341-7400.
Federated Securities Corp., Distributor
CUSIP 313916827
CUSIP 313916777
28136 (2/12)
Federated is a registered trademark of Federated Investors, Inc.
2012 © Federated Investors, Inc.
Annual Shareholder Report | ||
December 31, 2011 | ||
Federated Prime Money Fund II
A Portfolio of Federated Insurance Series
Dear Valued Shareholder,
I am pleased to present the Annual Shareholder Report for your fund covering the period from January 1, 2011 through December 31, 2011. This report includes a complete listing of your fund's holdings, performance information and financial statements along with other important fund information.
In addition, our website, FederatedInvestors.com, offers easy access to Federated resources that include timely fund updates, economic and market insights from our investment strategists, and financial planning tools. We invite you to register to take full advantage of its capabilities.
Thank you for investing with Federated. I hope you find this information useful and look forward to keeping you informed.
Sincerely,
John B. Fisher, President
Portfolio of Investments Summary Tables (unaudited)
At December 31, 2011, the Fund's portfolio composition1 was as follows:
Security Type | Percentage of Total Net Assets |
Commercial Paper and Notes | 50.8% |
Bank Instruments | 32.7% |
Variable Rate Demand Instruments | 8.2% |
Repurchase Agreements | 8.2% |
Other Assets and Liabilities — Net2 | 0.1% |
TOTAL | 100.0% |
At December 31, 2011, the Fund's effective maturity3 schedule was as follows:
Securities With an Effective Maturity of: | Percentage of Total Net Assets |
1-7 Days | 37.3%4 |
8-30 Days | 30.0% |
31-90 Days | 20.8% |
91-180 Days | 9.7% |
181 Days or more | 2.1% |
Other Assets and Liabilities — Net2 | 0.1% |
TOTAL | 100.0% |
1 | Commercial Paper and Notes include any fixed-rate security that is not a bank instrument. A variable rate demand instrument is any security which has an interest rate that resets periodically. See the Fund's Prospectus for descriptions of commercial paper, repurchase agreements and bank instruments. |
2 | Assets, other than investments in securities, less liabilities. See Statement of Assets and Liabilities. |
3 | Effective maturity is determined in accordance with the requirements of Rule 2a-7 under the Investment Company Act of 1940, which regulates money market mutual funds. |
4 | Overnight securities comprised 25.8 % of the Fund's portfolio. |
Principal Amount | Value |
Asset-Backed Securities – 2.8% |
Finance - Automotive – 1.8% |
$754,134 | Honda Auto Receivables Trust 2011-3, Class A1, 0.398%, 10/22/2012 | 754,134 |
660,052 | 1,2 | SMART Series 2011-2US Trust, Class A1, 0.365%, 7/14/2012 | 660,052 |
519,312 | Santander Drive Auto Receivables Trust 2011-2, Class A1, 0.286%, 6/15/2012 | 519,312 |
1,689,282 | Santander Drive Auto Receivables Trust 2011-3, Class A1, 0.372%, 9/17/2012 | 1,689,282 |
TOTAL | 3,622,780 |
Finance - Equipment – 0.0% |
36,833 | 1,2 | Macquarie Equipment Funding Trust 2011-A, Class A1, 0.432%, 3/20/2012 | 36,833 |
Finance - Retail – 1.0% |
2,000,000 | 1,2,3 | Gracechurch Mortgage Finance PLC 2011-1, Class 1A, 0.485%, 1/20/2012 | 2,000,000 |
TOTAL ASSET-BACKED SECURITIES | 5,659,613 |
Bank Note – 4.4% |
Finance - Banking – 4.4% |
9,000,000 | Bank of America N.A., 0.460%, 2/10/2012 | 9,000,000 |
Certificates of Deposit – 32.7% |
Finance - Banking – 32.7% |
2,000,000 | 3 | Bank of Montreal, 0.428%, 1/17/2012 | 2,000,000 |
2,000,000 | 3 | Bank of Montreal, 0.486%, 1/31/2012 | 2,000,000 |
3,000,000 | 3 | Bank of Nova Scotia, Toronto, 0.425%, 1/9/2012 | 3,000,000 |
2,000,000 | Bank of Tokyo-Mitsubishi UFJ Ltd., 0.470%, 3/7/2012 | 2,000,000 |
3,000,000 | Barclays Bank PLC, 0.500%, 3/2/2012 | 3,000,000 |
750,000 | Barclays Bank PLC, 0.810%, 1/25/2012 | 750,000 |
1,000,000 | Caisse des Depots et Consignations (CDC), 0.670%, 1/10/2012 | 1,000,002 |
5,000,000 | Credit Suisse, Zurich, 0.420%, 1/25/2012 | 5,000,000 |
8,000,000 | Deutsche Bank AG, 0.450%, 1/23/2012 | 8,000,000 |
10,000,000 | Mizuho Corporate Bank Ltd., 0.400% - 0.420%, 1/20/2012 - 2/2/2012 | 10,000,000 |
3,000,000 | 3 | National Australia Bank Ltd., Melbourne, 0.366%, 1/12/2012 | 3,000,000 |
5,000,000 | Rabobank Nederland NV, Utrecht, 0.580%, 4/27/2012 | 5,000,000 |
4,000,000 | Sumitomo Mitsui Banking Corp., 0.300%, 1/17/2012 | 4,000,000 |
10,000,000 | Svenska Handelsbanken, Stockholm, 0.400% - 0.580%, 2/6/2012 - 4/20/2012 | 10,000,025 |
2,000,000 | 3 | Toronto Dominion Bank, 0.476%, 1/10/2012 | 2,000,000 |
1,000,000 | 3 | Westpac Banking Corp. Ltd., Sydney, 0.385%, 1/17/2012 | 1,000,000 |
5,000,000 | Westpac Banking Corp. Ltd., Sydney, 0.470%, 4/16/2012 | 5,000,000 |
TOTAL CERTIFICATES OF DEPOSIT | 66,750,027 |
Collateralized Loan Agreements – 9.8% |
Finance - Banking – 9.8% |
3,000,000 | Barclays Capital, Inc., 0.507%, 1/4/2012 | 3,000,000 |
2,000,000 | Citigroup Global Markets, Inc., 0.497%, 1/3/2012 | 2,000,000 |
5,000,000 | Credit Suisse Securities (USA) LLC, 0.375% - 0.913%, 1/9/2012 - 3/13/2012 | 5,000,000 |
1,000,000 | Deutsche Bank Securities, Inc., 0.446%, 1/3/2012 | 1,000,000 |
3,000,000 | JPMorgan Securities LLC, 0.760%, 3/20/2012 | 3,000,000 |
4,000,000 | 3 | RBS Securities, Inc., 0.440%, 1/3/2012 | 4,000,000 |
2,000,000 | Wells Fargo Securities, LLC, 0.243%, 1/3/2012 | 2,000,000 |
TOTAL COLLATERALIZED LOAN AGREEMENTS | 20,000,000 |
Commercial Paper – 28.9%4 |
Aerospace/Auto – 0.5% |
1,000,000 | 1,2 | VW Credit, Inc., (GTD by Volkswagen AG), 0.450%, 2/2/2012 | 999,600 |
Principal Amount | Value |
Diversified – 0.5% |
$1,000,000 | 1,2 | BAE Systems Holdings, Inc., (GTD by BAE Systems PLC), 0.430%, 1/3/2012 | 999,976 |
Finance - Automotive – 2.0% |
3,000,000 | FCAR Owner Trust, (A1+/P1 Series), 0.351%, 1/3/2012 | 2,999,942 |
1,000,000 | 1,2 | Harley-Davidson Funding Corp., (Harley-Davidson, Inc. Support Agreement), 0.450%, 1/27/2012 | 999,675 |
TOTAL | 3,999,617 |
Finance - Banking – 14.2% |
5,000,000 | 1,2 | Caisse des Depots et Consignations (CDC), 0.501%, 1/4/2012 | 4,999,792 |
8,000,000 | Citigroup Funding, Inc., 0.450% - 0.601%, 1/9/2012 - 2/3/2012 | 7,997,850 |
7,000,000 | 1,2 | Grampian Funding LLC, 0.310%, 1/3/2012 - 1/9/2012 | 6,999,776 |
9,000,000 | ING (U.S.) Funding LLC, 0.380% - 0.400%, 1/3/2012 - 1/10/2012 | 8,999,494 |
TOTAL | 28,996,912 |
Finance - Commercial – 3.9% |
8,000,000 | 1,2 | Atlantic Asset Securitization LLC, 1.000%, 1/3/2012 | 7,999,556 |
Finance - Retail – 7.3% |
8,000,000 | 1,2 | Barton Capital LLC, 1.000%, 1/3/2012 | 7,999,556 |
4,000,000 | 1,2 | Salisbury Receivables Company LLC, 0.380%, 1/19/2012 | 3,999,240 |
3,000,000 | 1,2 | Sheffield Receivables Corp., 0.420%, 3/2/2012 | 2,997,865 |
TOTAL | 14,996,661 |
Oil & Oil Finance – 0.5% |
1,000,000 | 1,2 | Devon Energy Corp., 0.410%, 1/5/2012 | 999,954 |
TOTAL COMMERCIAL PAPER | 58,992,276 |
Corporate Bonds – 4.9% |
Finance - Commercial – 4.9% |
2,000,000 | General Electric Capital Corp., 0.511%, 4/10/2012 | 2,000,523 |
500,000 | 3 | General Electric Capital Corp., 0.559%, 2/1/2012 | 498,073 |
800,000 | General Electric Capital Corp., 4.250%, 6/15/2012 | 813,629 |
545,000 | General Electric Capital Corp., 5.250%, 10/19/2012 | 563,744 |
617,000 | General Electric Capital Corp., 5.450%, 1/15/2013 | 644,471 |
2,000,000 | General Electric Capital Corp., 5.875%, 2/15/2012 | 2,012,960 |
3,322,000 | General Electric Capital Corp., 6.000%, 6/15/2012 | 3,403,823 |
TOTAL CORPORATE BONDS | 9,937,223 |
Notes — Variable – 8.2%3 |
Finance - Banking – 8.2% |
3,710,000 | Abraham Joshua Heschel School, (Series 2010), (TD Bank, N.A. LOC), 0.230%, 1/5/2012 | 3,710,000 |
3,450,000 | Connecticut Health and Educational Facilities Authority, (Series D) Griffin Hospital, (Wells Fargo Bank, N.A. LOC), 0.220%, 1/5/2012 | 3,450,000 |
5,450,000 | JPMorgan Chase Bank, N.A., 0.334%, 1/30/2012 | 5,450,000 |
255,000 | Lancaster, PA IDA, Snavely's Mill, Inc. (Series 2003 — B), (Fulton Bank LOC), 1.700%, 1/5/2012 | 255,000 |
1,440,000 | Lee County, FL IDA, Bonita Community Health Center, (Series 1999B), (Fifth Third Bank, Cincinnati LOC), 0.470%, 1/6/2012 | 1,440,000 |
775,000 | New York City Housing Development Corp., (Series 2009-A1), (RBS Citizens Bank N.A. LOC), 0.220%, 1/4/2012 | 775,000 |
775,000 | New York City Housing Development Corp., (Series 2010-A2), (RBS Citizens Bank N.A. LOC), 0.220%, 1/4/2012 | 775,000 |
960,000 | Pinellas County, FL Health Facility Authority, (Series 2006A), (SunTrust Bank LOC), 0.260%, 1/3/2012 | 960,000 |
TOTAL NOTES — VARIABLE | 16,815,000 |
Repurchase Agreements – 8.2% |
12,788,000 | Interest in $4,100,000,000 joint repurchase agreement 0.06%, dated 12/30/2011 under which Bank of America, N.A. will repurchase securities provided as collateral for $4,100,027,333 on 1/3/2012. The securities provided as collateral at the end of the period were U.S. Government Agency securities with various maturities to 4/15/2040 and the market value of those underlying securities was $4,218,795,473. | 12,788,000 |
Principal Amount | Value |
$4,000,000 | Interest in $1,125,000,000 joint repurchase agreement 0.02%, dated 12/30/2011 under which RBS Securities, Inc. will repurchase securities provided as collateral for $1,125,002,500 on 1/3/2012. The securities provided as collateral at the end of the period were U.S. Treasury securities with various maturities to 11/15/2017 and the market value of those underlying securities was $1,147,505,344. | 4,000,000 |
TOTAL REPURCHASE AGREEMENTS | 16,788,000 |
TOTAL INVESTMENTS — 99.9% (AT AMORTIZED COST)5 | 203,942,139 |
OTHER ASSETS AND LIABILITIES - NET — 0.1%6 | 181,550 |
TOTAL NET ASSETS — 100% | $204,123,689 |
1 | Denotes a restricted security that either: (a) cannot be offered for public sale without first being registered, or being able to take advantage of an exemption from registration, under the Securities Act of 1933; or (b) is subject to a contractual restriction on public sales. At December 31, 2011, these restricted securities amounted to $41,691,875, which represented 20.4% of total net assets. |
2 | Denotes a restricted security that may be resold without restriction to “qualified institutional buyers” as defined in Rule 144A under the Securities Act of 1933 and that the Fund has determined to be liquid under criteria established by the Fund's Board of Trustees (the “Trustees”). At December 31, 2011, these liquid restricted securities amounted to $41,691,875, which represented 20.4% of total net assets. |
3 | Denotes a variable rate security with current rate and next reset date shown. |
4 | Discount rate at time of purchase. |
5 | Also represents cost for federal tax purposes. |
6 | Assets, other than investments in securities, less liabilities. See Statement of Assets and Liabilities. |
Note: The categories of investments are shown as a percentage of total net assets at December 31, 2011.
Various inputs are used in determining the value of the Fund's investments. These inputs are summarized in the three broad levels listed below:
Level 1 — quoted prices in active markets for identical securities, including investment companies with daily net asset values, if applicable. Level 2 — other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.). Also includes securities valued at amortized cost. Level 3 — significant unobservable inputs (including the Fund's own assumptions in determining the fair value of investments).The inputs or methodology used for valuing securities are not an indication of the risk associated with investing in those securities.
As of December 31, 2011, all investments of the Fund are valued at amortized cost, which is considered a Level 2 input, in valuing the Fund's assets.
The following acronyms are used throughout this portfolio:
GTD | — Guaranteed |
IDA | — Industrial Development Authority |
LOC | — Letter of Credit |
See Notes which are an integral part of the Financial Statements
Annual Shareholder Report(For a Share Outstanding Throughout Each Period)
Year Ended December 31 | 2011 | 2010 | 2009 | 2008 | 2007 |
Net Asset Value, Beginning of Period | $1.00 | $1.00 | $1.00 | $1.00 | $1.00 |
Income From Investment Operations: |
Net investment income | — | 0.0001 | 0.005 | 0.025 | 0.047 |
Net realized gain (loss) on investments | (0.000)1 | (0.000)1 | 0.0001 | 0.0001 | 0.0001 |
TOTAL FROM INVESTMENT OPERATIONS | (0.000)1 | (0.000)1 | 0.005 | 0.025 | 0.047 |
Less Distributions: |
Distributions from net investment income | — | (0.000)1 | (0.005) | (0.025) | (0.047) |
Distributions from net realized gain on investments | — | (0.000)1 | (0.000)1 | — | — |
TOTAL DISTRIBUTIONS | — | (0.000)1 | (0.005) | (0.025) | (0.047) |
Net Asset Value, End of Period | $1.00 | $1.00 | $1.00 | $1.00 | $1.00 |
Total Return2 | 0.00% | 0.00%3 | 0.45% | 2.54% | 4.78% |
Ratios to Average Net Assets: |
Net expenses | 0.36% | 0.41% | 0.65% | 0.67% | 0.65% |
Net investment income | 0.00% | 0.00%3 | 0.48% | 2.51% | 4.68% |
Expense waiver/reimbursement4 | 0.32% | 0.24% | 0.17% | 0.11% | 0.17% |
Supplemental Data: |
Net assets, end of period (000 omitted) | $204,124 | $213,825 | $80,265 | $106,829 | $95,699 |
1 | Represents less than $0.001. |
2 | Based on net asset value. Total returns do not reflect any additional fees or expenses that may be imposed by separate accounts of insurance companies or in connection with any variable annuity or variable life insurance contract. |
3 | Represents less than 0.01%. |
4 | This expense decrease is reflected in both the net expense and the net investment income ratios shown above. |
See Notes which are an integral part of the Financial Statements
Annual Shareholder ReportStatement of Assets and Liabilities
Assets: |
Total investments in securities, at amortized cost and fair value | $203,942,139 |
Income receivable | 155,324 |
Receivable for shares sold | 106,453 |
TOTAL ASSETS | 204,203,916 |
Liabilities: |
Payable for shares redeemed | $27,287 |
Bank overdraft | 24,783 |
Payable for investment adviser fee (Note 5) | 3,844 |
Payable for custodian fees | 4,727 |
Payable for transfer and dividend disbursing agent fees and expenses | 2,857 |
Payable for Directors'/Trustees' fees | 648 |
Payable for portfolio accounting fees | 9,482 |
Payable for printing and postage | 5,064 |
Accrued expenses | 1,535 |
TOTAL LIABILITIES | 80,227 |
Net assets for 204,125,091 shares outstanding | $204,123,689 |
Net Assets Consist of: |
Paid-in capital | $204,124,639 |
Accumulated net realized loss on investments | (950) |
TOTAL NET ASSETS | $204,123,689 |
Net Asset Value, Offering Price and Redemption Proceeds Per Share: |
$204,123,689 ÷ 204,125,091 shares outstanding, no par value, unlimited shares authorized | $1.00 |
See Notes which are an integral part of the Financial Statements
Annual Shareholder ReportInvestment Income: |
Interest | $727,887 |
Expenses: |
Investment adviser fee (Note 5) | $1,016,270 |
Administrative fee (Note 5) | 158,724 |
Custodian fees | 20,986 |
Transfer and dividend disbursing agent fees and expenses | 16,442 |
Directors'/Trustees' fees | 4,505 |
Auditing fees | 20,000 |
Legal fees | 6,881 |
Portfolio accounting fees | 54,716 |
Printing and postage | 72,305 |
Insurance premiums | 4,748 |
Miscellaneous | 1,911 |
TOTAL EXPENSES | 1,377,488 |
Waivers (Note 5): |
Waiver of investment adviser fee | $(645,553) |
Waiver of administrative fee | (4,048) |
TOTAL WAIVERS | (649,601) |
Net expenses | 727,887 |
Net investment income | — |
Net realized loss on investments | (332) |
Change in net assets resulting from operations | $(332) |
See Notes which are an integral part of the Financial Statements
Annual Shareholder ReportStatement of Changes in Net Assets
Year Ended December 31 | 2011 | 2010 |
Increase (Decrease) in Net Assets |
Operations: |
Net investment income | $ — | $20 |
Net realized loss on investments | (332) | (619) |
CHANGE IN NET ASSETS RESULTING FROM OPERATIONS | (332) | (599) |
Distributions to Shareholders: |
Distributions from net investment income | — | (2,321) |
Distributions from net realized gain on investments | — | (6) |
CHANGE IN NET ASSETS RESULTING FROM DISTRIBUTIONS TO SHAREHOLDERS | — | (2,327) |
Share Transactions: |
Proceeds from sale of shares | 107,055,148 | 266,637,033 |
Proceeds from shares issued in connection with the tax-free transfer of assets from EquiTrust Variable Insurance Series Fund - Money Market Portfolio | 9,834,179 | — |
Net asset value of shares issued to shareholders in payment of distributions declared | — | 2,327 |
Cost of shares redeemed | (126,590,081) | (133,076,213) |
CHANGE IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS | (9,700,754) | 133,563,147 |
Change in net assets | (9,701,086) | 133,560,221 |
Net Assets: |
Beginning of period | 213,824,775 | 80,264,554 |
End of period | $204,123,689 | $213,824,775 |
See Notes which are an integral part of the Financial Statements
Annual Shareholder ReportFederated Insurance Series (the “Trust”) is registered under the Investment Company Act of 1940, as amended (the “Act”), as an open-end management investment company. The Trust consists of seven portfolios. The financial statements included herein are only those of Federated Prime Money Market Fund II (the “Fund”), a diversified portfolio. The financial statements of the other portfolios are presented separately. The assets of each portfolio are segregated and a shareholder's interest is limited to the portfolio in which shares are held. Each portfolio pays its own expenses. Fund shares are available exclusively as a funding vehicle for life insurance companies writing variable life insurance policies and variable annuity contracts. The investment objective of the Fund is to provide current income consistent with stability of principal and liquidity.
On July 15, 2011, the Fund acquired all of the net assets of EquiTrust Variable Insurance Series Fund - Money Market Portfolio (the “Acquired Fund”), an open-end investment company in a tax-free reorganization in exchange for shares of the Fund, pursuant to a plan of reorganization approved by the Acquired Fund's shareholders on July 15, 2011. The purpose of the transaction was to combine two portfolios with comparable investment objectives and strategies. For financial reporting purposes, assets received and shares issued by the Fund were recorded at fair value; however, the cost basis of the investments received from the Acquired Fund was carried forward to align ongoing reporting of the Fund's realized and unrealized gains and losses with amounts distributable to shareholders for tax purposes.
Assuming the acquisition had been completed on January 1, 2011, the beginning of the annual reporting period of the Fund, the Fund's pro forma results of operations for the year ended December 31, 2011, are as follows:
Net investment income* | $ — |
Net realized and unrealized loss on investments | $(332) |
Net decrease in net assets resulting from operations | $(332) |
* | Net investment income includes $4,982 of pro forma additional expenses. |
Because the combined investment portfolios have been managed as a single integrated portfolio since the acquisition was completed, it is not practicable to separate the amounts of revenue and earnings of the Acquired Fund that has been included in the Fund's Statement of Operations as of December 31, 2011. For every one share of EquiTrust Variable Insurance Series Fund - Money Market Portfolio Initial Class Shares exchanged, a shareholder received one share of the Fund. On July 15, 2011, the Fund received net assets from EquiTrust Variable Insurance Series Fund - Money Market Portfolio as follows:
Shares of the Fund Issued | EquiTrust Variable Insurance Series Fund - Money Market Portfolio Net Assets Received | Net Assets of the Fund Immediately Prior to Combination | Net Assets of the Fund Immediately After Combination |
9,834,179 | $9,834,179 | $190,095,066 | $199,929,245 |
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. These policies are in conformity with U.S. generally accepted accounting principles (GAAP).
Investment Valuation
Securities are valued at amortized cost. Under the amortized cost valuation method, an investment is valued initially at its cost as determined in accordance with GAAP. The Fund then adjusts the amount of interest income accrued each day over the term of the investment to account for any difference between the initial cost of the investment and the amount payable at its maturity. If amortized cost is determined not to approximate market value, the fair value of the portfolio securities will be determined under procedures established by and under the general supervision of the Trustees.
Repurchase Agreements
The Fund may invest in repurchase agreements for short-term liquidity purposes. It is the policy of the Fund to require the other party to a repurchase agreement to transfer to the Fund's custodian or sub-custodian eligible securities or cash with a market value (after transaction costs) at least equal to the repurchase price to be paid under the repurchase agreement. The eligible securities are transferred to accounts with the custodian or sub-custodian in which the Fund holds a “securities entitlement” and exercises “control” as those terms are defined in the Uniform Commercial Code. The Fund has established procedures for monitoring the market value of the transferred securities and requiring the transfer of additional eligible securities if necessary to equal at least the repurchase price. These procedures also allow the other party to require securities to be transferred from the account to the extent that their market value exceeds the repurchase price or in exchange for other eligible securities of equivalent market value.
The insolvency of the other party or other failure to repurchase the securities may delay the disposition of the underlying securities or cause the Fund to receive less than the full repurchase price. Under the terms of the repurchase agreement, any amounts received by the Fund in excess of the repurchase price and related transaction costs must be remitted to the other party.
Annual Shareholder Report
The Fund may enter into repurchase agreements in which eligible securities are transferred into joint trading accounts maintained by the custodian or sub-custodian for investment companies and other clients advised by the Fund's Adviser and its affiliates. The Fund will participate on a pro rata basis with the other investment companies and clients in its share of the securities transferred under such repurchase agreements and in its share of proceeds from any repurchase or other disposition of such securities.Investment Income, Gains or Losses, Expenses and Distributions
Investment transactions are accounted for on a trade-date basis. Realized gains and losses from investment transactions are recorded on an identified-cost basis. Interest income and expenses are accrued daily. Distributions to shareholders, if any, are recorded on the ex-dividend date. Distributions of net investment income are declared daily and paid monthly.
Premium and Discount Amortization
All premiums and discounts are amortized/accreted using the effective interest rate method.
Federal Taxes
It is the Fund's policy to comply with the Subchapter M provision of the Internal Revenue Code (the “Code”) and to distribute to shareholders each year substantially all of its income. Accordingly, no provision for federal income tax is necessary. As of and during the year ended December 31, 2011, the Fund did not have a liability for any uncertain tax positions. The Fund recognizes interest and penalties, if any, related to tax liabilities as income tax expense in the Statement of Operations. As of December 31, 2011, tax years 2008 through 2011 remain subject to examination by the Fund's major tax jurisdictions, which include the United States of America and the Commonwealth of Massachusetts.
When-Issued and Delayed Delivery Transactions
The Fund may engage in when-issued or delayed delivery transactions. The Fund records when-issued securities on the trade date and maintains security positions such that sufficient liquid assets will be available to make payment for the securities purchased. Securities purchased on a when-issued or delayed delivery basis are marked to market daily and begin earning interest on the settlement date. Losses may occur on these transactions due to changes in market conditions or the failure of counterparties to perform under the contract.
Restricted Securities
The Fund may purchase securities which are considered restricted. Restricted securities are securities that either: (a) cannot be offered for public sale without first being registered, or being able to take advantage of an exemption from registration, under the Securities Act of 1933; or (b) are subject to contractual restrictions on public sales. In some cases, when a security cannot be offered for public sale without first being registered, the issuer of the restricted security has agreed to register such securities for resale, at the issuer's expense, either upon demand by the Fund or in connection with another registered offering of the securities. Many such restricted securities may be resold in the secondary market in transactions exempt from registration. Restricted securities may be determined to be liquid under criteria established by the Trustees. The Fund will not incur any registration costs upon such resales. Restricted securities are valued at amortized cost in accordance with Rule 2a-7 under the Act.
Other
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts of assets, liabilities, expenses and revenues reported in the financial statements. Actual results could differ from those estimated.
3. SHARES OF BENEFICIAL INTEREST
The following table summarizes share activity:
Year Ended December 31 | 2011 | 2010 |
Shares sold | 107,055,148 | 266,637,033 |
Proceeds from shares issued in connection with the tax-free transfer of assets from EquiTrust Variable Insurance Series Fund - Money Market Portfolio | 9,834,179 | — |
Shares issued to shareholders in payment of distributions declared | — | 2,327 |
Shares redeemed | (126,590,081) | (133,076,213) |
NET CHANGE RESULTING FROM FUND SHARE TRANSACTIONS | (9,700,754) | 133,563,147 |
The tax character of distributions as reported on the Statement of Changes in Net Assets for the years ended December 31, 2011 and 2010, was as follows:
2011 | 2010 |
Ordinary income1 | $ — | $2,327 |
1 | For tax purposes, short-term capital gain distributions are considered ordinary income distributions. |
Annual Shareholder Report
As of December 31, 2011, the components of distributable earnings on a tax basis were as follows:Capital loss carryforwards | ($950) |
At December 31, 2011, the Fund had a capital loss carryforward of $950 which will reduce the Fund's taxable income arising from future net realized gains on investments, if any, to the extent permitted by the Code, thereby reducing the amount of distributions to shareholders which would otherwise be necessary to relieve the Fund of any liability for federal income tax. Pursuant to the Code, a net capital loss incurred in taxable years beginning on or before December 22, 2010 is characterized as short-term and may be carried forward for a maximum of eight tax years (“Carryforward Limit”), whereas a net capital loss incurred in taxable years beginning after December 22, 2010 retains its character as either short-term or long-term, does not expire and is required to be utilized prior to the losses which have a Carryforward Limit.
The following schedule summarizes the Fund's short-term and long-term capital loss carryforwards and expiration year:
Expiration Year | Short-Term | Long-Term | Total |
No expiration | $332 | NA | $332 |
2018 | 618 | NA | 618 |
5. INVESTMENT ADVISER FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Investment Adviser Fee
Federated Investment Management Company is the Fund's investment adviser (the “Adviser”). The advisory agreement between the Fund and the Adviser provides for an annual fee equal to 0.50% of the Fund's average daily net assets. Subject to the terms described in the Expense Limitation note, the Adviser may also voluntarily choose to waive any portion of its fee. For the year ended December 31, 2011, the Adviser voluntarily waived $645,553 of its fee.
Administrative Fee
Federated Administrative Services (FAS), under the Administrative Services Agreement, provides the Fund with administrative personnel and services. The fee paid to FAS is based on the average aggregate daily net assets of certain Federated funds as specified below:
Administrative Fee | Average Aggregate Daily Net Assets of the Federated Funds |
0.150% | on the first $5 billion |
0.125% | on the next $5 billion |
0.100% | on the next $10 billion |
0.075% | on assets in excess of $20 billion |
The administrative fee received during any fiscal year shall be at least $150,000 per portfolio and $40,000 per each additional class of Shares. Subject to the terms described in the Expense Limitation note, FAS may voluntarily choose to waive any portion of its fee. For the year ended December 31, 2011, the net fee paid to FAS was 0.076% of average daily net assets of the Fund. FAS waived $4,048 of its fee.
Expense Limitation
Due to the possibility of changes in market conditions and other factors, there can be no assurance that the level of waivers/reimbursement/reduction of Fund expenses reflected in the financial highlights will be maintained in the future. However, the Adviser and its affiliates (which may include FAS) have voluntarily agreed to waive their fees and/or reimburse expenses so that the total annual fund operating expenses (as shown in the financial highlights) paid by the Fund (after the voluntary waivers and reimbursements) will not exceed 0.67% (the “Fee Limit”) up to but not including the later of (the “Termination Date”): (a) June 1, 2012; or (b) the date of the Fund's next effective Prospectus. While the Adviser and its affiliates currently do not anticipate terminating or increasing this arrangement prior to the Termination Date, this arrangement may only be terminated or the Fee Limit increased prior to the Termination Date with the agreement of the Trustees.
General
Certain Officers and Trustees of the Fund are Officers and Directors or Trustees of the above companies.
The Fund may invest a portion of its assets in securities of companies that are deemed by the Fund's management to be classified in similar business sectors. Economic developments may have an effect on the liquidity and volatility of the portfolio securities.
The Fund participates in a $100,000,000 unsecured, uncommitted revolving line of credit (LOC) agreement with PNC Bank. The LOC was made available for extraordinary or emergency purposes, primarily for financing redemption payments. Borrowings are charged interest at a rate offered to the Fund by PNC Bank at the time of the borrowing. As of December 31, 2011, there were no outstanding loans. During the year ended December 31, 2011, the Fund did not utilize the LOC.
Annual Shareholder Report
8. INTERFUND LENDINGPursuant to an Exemptive Order issued by the Securities and Exchange Commission, the Fund, along with other funds advised by subsidiaries of Federated Investors, Inc., may participate in an interfund lending program. This program provides an alternative credit facility allowing the Fund to borrow from other participating affiliated funds. As of December 31, 2011, there were no outstanding loans. During the year ended December 31, 2011, the program was not utilized.
9. RECENT ACCOUNTING PRONOUNCEMENTS
In April 2011, the Financial Accounting Standards Board (FASB) released Accounting Standards Update (ASU) No. 2011-03, “Reconsideration of Effective Control for Repurchase Agreements.” This ASU amends FASB Accounting Standards Codification (ASC) Topic 860, “Transfers and Servicing”; specifically the criteria required to determine whether a repurchase agreement and similar agreements should be accounted for as sales of financial assets or secured borrowings with commitments. This ASU is effective for fiscal years and interim periods beginning after December 15, 2011. Management has concluded that the adoption of ASU No. 2011-03 is not expected to have a material impact on the Fund's financial statements and the accompanying notes, net assets or results of operations.
In addition, in May 2011, FASB released ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” This ASU amends FASB ASC Topic 820, “Fair Value Measurement,” to establish common requirements for measuring fair value and for disclosing information about fair value measurements in accordance with GAAP. This ASU is effective for fiscal years and interim periods beginning after December 15, 2011. Management has concluded that the adoption of ASU No. 2011-04 is not expected to have a material impact on the Fund's financial statements and the accompanying notes.
Annual Shareholder ReportReport of Independent Registered Public Accounting Firm
TO THE BOARD OF TRUSTEES OF FEDERATED INSURANCE SERIES AND SHAREHOLDERS OF FEDERATED PRIME MONEY FUND II:
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of the Federated Prime Money Fund II (the “Fund”), a portfolio of Federated Insurance Series, as of December 31, 2011, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2011, by correspondence with the custodian and transfer agent, or by other appropriate auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Federated Prime Money Fund II as of December 31, 2011, and the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended, in conformity with U.S. generally accepted accounting principles.
Boston, Massachusetts
February 13, 2012
Shareholder Expense Example (unaudited)
As a shareholder of the Fund, you incur ongoing costs, including management fees and to the extent applicable, distribution (12b-1) fees and/or shareholder services fees and other Fund expenses. This Example is intended to help you to understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other variable investment options. It is based on an investment of $1,000 invested at the beginning of the period and held for the entire period from July 1, 2011 to December 31, 2011.
The first section of the table below provides information about actual account values and actual expenses. You may use the information in this section, together with the amount you invested, to estimate the expenses that you incurred over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first section under the heading entitled “Expenses Paid During Period” to estimate the expenses attributable to your investment during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second section of the table below provides information 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. Thus, you should not use the hypothetical account values and expenses to estimate the actual ending account balance or your expenses for the period. Rather, these figures are required to be provided to enable you to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only. Therefore, the second section of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds.
Beginning Account Value 7/1/2011 | Ending Account Value 12/31/2011 | Expenses Paid During Period1, 2 |
Actual | $1,000 | $1,000.00 | $1.81 |
Hypothetical (assuming a 5% return before expenses) | $1,000 | $1,023.39 | $1.84 |
1 | Expenses are equal to the Fund's annualized net expense ratio of 0.36%, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half-year period). The expenses shown in the table do not include the charges and expenses imposed by the insurance company under the variable insurance product contract. Please refer to the variable insurance product prospectus for a complete listing of these expenses. |
2 | Actual and Hypothetical expenses paid during the period, utilizing the Fund's current annualized net expense ratio of 0.67% (as reflected in the Notes to Financial Statements, Note 5 under Expense Limitation), multiplied by the average account value over the period, multiplied by 184/365 (to reflect current expenses as if they had been in effect throughout the most recent one-half-year period) would be $3.38 and $3.41, respectively. |
Board of Trustees and Trust Officers
The Board of Trustees is responsible for managing the Trust's business affairs and for exercising all the Trust's powers except those reserved for the shareholders. The following tables give information about each Trustee and the senior officers of the Fund. Where required, the tables separately list Trustees who are “interested persons” of the Fund (i.e., “Interested” Trustees) and those who are not (i.e., “Independent” Trustees). Unless otherwise noted, the address of each person listed is Federated Investors Tower, 1001 Liberty Avenue, Pittsburgh, PA 15222. The address of all Independent Trustees listed is 4000 Ericsson Drive, Warrendale, PA 15086-7561; Attention: Mutual Fund Board. As of December 31, 2011, the Trust comprised seven portfolio(s), and the Federated Fund Family consisted of 43 investment companies (comprising 134 portfolios). Unless otherwise noted, each Officer is elected annually. Unless otherwise noted, each Trustee oversees all portfolios in the Federated Fund Family and serves for an indefinite term. The Fund's Statement of Additional Information includes additional information about Trust Trustees and is available, without charge and upon request, by calling 1-800-341-7400.
Interested Trustees Background
Name Birth Date Positions Held with Trust Date Service Began | Principal Occupation(s) for Past Five Years, Other Directorships Held and Previous Position(s) |
John F. Donahue* Birth Date: July 28, 1924 Trustee Began serving: October 1993 | Principal Occupations: Director or Trustee of the Federated Fund Family; Chairman and Director, Federated Investors, Inc.; Chairman of the Federated Fund Family's Executive Committee. Previous Positions: Chairman of the Federated Fund Family; Trustee, Federated Investment Management Company; Chairman and Director, Federated Investment Counseling. |
J. Christopher Donahue* Birth Date: April 11, 1949 Trustee Began serving: October 1993 | Principal Occupations: Principal Executive Officer and President of the Federated Fund Family; Director or Trustee of some of the Funds in the Federated Fund Family; President, Chief Executive Officer and Director, Federated Investors, Inc.; Chairman and Trustee, Federated Investment Management Company; Trustee, Federated Investment Counseling; Chairman and Director, Federated Global Investment Management Corp.; Chairman, Federated Equity Management Company of Pennsylvania and Passport Research, Ltd. (investment advisory subsidiary of Federated); Trustee, Federated Shareholder Services Company; Director, Federated Services Company. Previous Positions: President, Federated Investment Counseling; President and Chief Executive Officer, Federated Investment Management Company, Federated Global Investment Management Corp. and Passport Research, Ltd. |
* | Family relationships and reasons for “interested” status: John F. Donahue is the father of J. Christopher Donahue; both are “interested” due to their beneficial ownership of shares of Federated Investors, Inc. and the positions they hold with Federated and its subsidiaries. |
INDEPENDENT Trustees Background
Name Birth Date Positions Held with Trust Date Service Began | Principal Occupation(s) for Past Five Years, Other Directorships Held, Previous Position(s) and Qualifications |
Nicholas P. Constantakis, CPA Birth Date: September 3, 1939 Trustee Began serving: February 1998 | Principal Occupation: Director or Trustee of the Federated Fund Family. Other Directorship Held: Director, Chairman of the Audit Committee, and member of the Compensation Committee, Michael Baker Corporation (architecture, engineering and construction services). Previous Position: Partner, Andersen Worldwide SC. Qualifications: Public accounting and director experience. |
John F. Cunningham Birth Date: March 5, 1943 Trustee Began serving: November 1999 | Principal Occupation: Director or Trustee of the Federated Fund Family. Other Directorships Held: Chairman, President and Chief Executive Officer, Cunningham & Co., Inc. (strategic business consulting); Trustee Associate, Boston College. Previous Positions: Director, Redgate Communications and EMC Corporation (computer storage systems); Chairman of the Board and Chief Executive Officer, Computer Consoles, Inc.; President and Chief Operating Officer, Wang Laboratories; Director, First National Bank of Boston; Director, Apollo Computer, Inc. Qualifications: Business management and director experience. |
Name Birth Date Positions Held with Trust Date Service Began | Principal Occupation(s) for Past Five Years, Other Directorships Held, Previous Position(s) and Qualifications |
Maureen Lally-Green Birth Date: July 5, 1949 Trustee Began serving: August 2009 | Principal Occupations: Director or Trustee of the Federated Fund Family; Director, Office of Church Relations, Diocese of Pittsburgh; Adjunct Professor of Law, Duquesne University School of Law. Other Directorships Held: Director, Auberle; Trustee, St. Francis University; Director, Ireland Institute of Pittsburgh; Director, UPMC Mercy Hospital; Regent, St. Vincent Seminary; Director, Epilepsy Foundation of Western and Central Pennsylvania; Director, Saint Thomas More Society, Allegheny County. Previous Position: Pennsylvania Superior Court Judge. Qualifications: Legal and director experience. |
Peter E. Madden Birth Date: March 16, 1942 Trustee Began serving: October 1993 | Principal Occupation: Director or Trustee, and Chairman of the Board of Directors or Trustees, of the Federated Fund Family. Previous Positions: Representative, Commonwealth of Massachusetts General Court; President, Chief Operating Officer and Director, State Street Bank and Trust Company and State Street Corporation (retired); Director, VISA USA and VISA International; Chairman and Director, Massachusetts Bankers Association; Director, Depository Trust Corporation; Director, The Boston Stock Exchange. Qualifications: Business management, mutual fund services and director experience. |
Charles F. Mansfield, Jr. Birth Date: April 10, 1945 Trustee Began serving: November 1999 | Principal Occupations: Director or Trustee of the Federated Fund Family; Management Consultant. Previous Positions: Chief Executive Officer, PBTC International Bank; Partner, Arthur Young & Company (now Ernst & Young LLP); Chief Financial Officer of Retail Banking Sector, Chase Manhattan Bank; Senior Vice President, HSBC Bank USA (formerly Marine Midland Bank); Vice President, Citibank; Assistant Professor of Banking and Finance, Frank G. Zarb School of Business, Hofstra University; Executive Vice President, DVC Group, Inc. (marketing, communications and technology). Qualifications: Banking, business management, education and director experience. |
Thomas M. O'Neill Birth Date: June 14, 1951 Trustee Began serving: October 2006 | Principal Occupations: Director or Trustee, Vice Chairman of the Audit Committee of the Federated Fund Family; Sole Proprietor, Navigator Management Company (investment and strategic consulting). Other Directorships Held: Board of Overseers, Children's Hospital of Boston; Visiting Committee on Athletics, Harvard College; Board of Directors, Medicines for Humanity; Board of Directors, The Golisano Children's Museum of Naples, Florida. Previous Positions: Chief Executive Officer and President, Managing Director and Chief Investment Officer, Fleet Investment Advisors; President and Chief Executive Officer, Aeltus Investment Management, Inc.; General Partner, Hellman, Jordan Management Co., Boston, MA; Chief Investment Officer, The Putnam Companies, Boston, MA; Credit Analyst and Lending Officer, Fleet Bank; Director and Consultant, EZE Castle Software (investment order management software); Director, Midway Pacific (lumber). Qualifications: Business management, mutual fund, director and investment experience. |
John S. Walsh Birth Date: November 28, 1957 Trustee Began serving: January 1999 | Principal Occupations: Director or Trustee, Chairman of the Audit Committee of the Federated Fund Family; President and Director, Heat Wagon, Inc. (manufacturer of construction temporary heaters); President and Director, Manufacturers Products, Inc. (distributor of portable construction heaters); President, Portable Heater Parts, a division of Manufacturers Products, Inc. Previous Position: Vice President, Walsh & Kelly, Inc. Qualifications: Business management and director experience. |
Name Birth Date Address Positions Held with Trust Date Service Began | Principal Occupation(s) for Past Five Years and Previous Position(s) |
John W. McGonigle Birth Date: October 26, 1938 EXECUTIVE VICE PRESIDENT AND SECRETARY Began serving: September 1993 | Principal Occupations: Executive Vice President and Secretary of the Federated Fund Family; Vice Chairman, Executive Vice President, Secretary and Director, Federated Investors, Inc. Previous Positions: Trustee, Federated Investment Management Company and Federated Investment Counseling; Director, Federated Global Investment Management Corp., Federated Services Company and Federated Securities Corp. |
Richard A. Novak Birth Date: December 25, 1963 TREASURER Began serving: January 2006 | Principal Occupations: Principal Financial Officer and Treasurer of the Federated Fund Family; Senior Vice President, Federated Administrative Services; Financial and Operations Principal for Federated Securities Corp., Edgewood Services, Inc. and Southpointe Distribution Services, Inc. Previous Positions: Controller of Federated Investors, Inc.; Vice President, Finance of Federated Services Company; held various financial management positions within The Mercy Hospital of Pittsburgh; Auditor, Arthur Andersen & Co. |
Name Birth Date Address Positions Held with Trust Date Service Began | Principal Occupation(s) for Past Five Years and Previous Position(s) |
Richard B. Fisher Birth Date: May 17, 1923 VICE PRESIDENT Began serving: September 1993 | Principal Occupations: Vice Chairman or Vice President of some of the Funds in the Federated Fund Family; Vice Chairman, Federated Investors, Inc.; Chairman, Federated Securities Corp. Previous Positions: President and Director or Trustee of some of the Funds in the Federated Fund Family; Executive Vice President, Federated Investors, Inc.; Director and Chief Executive Officer, Federated Securities Corp. |
John B. Fisher Birth Date: May 16, 1956 PRESIDENT Began serving: November 2004 | Principal Occupations: President, Director/Trustee and CEO, Federated Advisory Services Company, Federated Equity Management Company of Pennsylvania, Federated Global Investment Management Corp., Federated Investment Counseling, Federated Investment Management Company; President and CEO of Passport Research, Ltd.; President of some of the Funds in the Federated Fund Family; Director, Federated Investors Trust Company. Previous Positions: President and Director of the Institutional Sales Division of Federated Securities Corp.; President and Director of Federated Investment Counseling; Director, Edgewood Securities Corp.; Director, Federated Services Company; Director, Federated Investors, Inc.; Chairman and Director, Southpointe Distribution Services, Inc.; President, Technology, Federated Services Company. |
Brian P. Bouda Birth Date: February 28, 1947 CHIEF COMPLIANCE OFFICER AND SENIOR VICE PRESIDENT Began serving: August 2004 | Principal Occupations: Senior Vice President and Chief Compliance Officer of the Federated Fund Family; Vice President and Chief Compliance Officer of Federated Investors, Inc. and Chief Compliance Officer of its subsidiaries. Mr. Bouda joined Federated in 1999 and is a member of the American Bar Association and the State Bar Association of Wisconsin. |
Stephen F. Auth Birth Date: September 3, 1956 450 Lexington Avenue Suite 3700 New York, NY 10017-3943 CHIEF INVESTMENT OFFICER Began serving: November 2002 | Principal Occupations: Mr. Auth is Chief Investment Officer of this Fund and various other Funds in the Federated Fund Family; Executive Vice President, Federated Investment Counseling, Federated Global Investment Management Corp. and Federated Equity Management Company of Pennsylvania. Previous Positions: Executive Vice President, Federated Investment Management Company, and Passport Research, Ltd. (investment advisory subsidiary of Federated); Senior Vice President, Global Portfolio Management Services Division; Senior Vice President, Federated Investment Management Company and Passport Research, Ltd.; Senior Managing Director and Portfolio Manager, Prudential Investments. |
Robert J. Ostrowski Birth Date: April 26, 1963 CHIEF INVESTMENT OFFICER Began serving: May 2004 | Principal Occupations: Robert J. Ostrowski joined Federated in 1987 as an Investment Analyst and became a Portfolio Manager in 1990. He was named Chief Investment Officer of taxable fixed-income products in 2004 and also serves as a Senior Portfolio Manager. He has been a Senior Vice President of the Fund's Adviser since 1997. Mr. Ostrowski has received the Chartered Financial Analyst designation. He received his M.S. in Industrial Administration from Carnegie Mellon University. |
Evaluation and Approval of Advisory Contract – May 2011
federated prime money fund ii (the “Fund”)
The Fund's Board reviewed the Fund's investment advisory contract at meetings held in May 2011. The Board's decision regarding the contract reflects the exercise of its business judgment on whether to continue the existing arrangements.
In this connection, the Federated Funds' Board had previously appointed a Senior Officer, whose duties include specified responsibilities relating to the process by which advisory fees are to be charged to a Federated fund. The Senior Officer has the authority to retain consultants, experts, or staff as may be reasonably necessary to assist in the performance of his duties, reports directly to the Board, and may be terminated only with the approval of a majority of the independent members of the Board. The Senior Officer prepared and furnished to the Board an independent, written evaluation that covered topics discussed below (the “Evaluation”). The Board considered that Evaluation, along with other information, in deciding to approve the advisory contract.
During its review of the contract, the Board considered compensation and benefits received by the Adviser. This included the fees received for services provided to the Fund by other entities in the Federated organization and research services (if any) received by the Adviser from brokers that execute Federated fund trades, as well as advisory fees. The Board is also familiar with and considered judicial decisions concerning allegedly excessive investment advisory fees, which have indicated that the following factors may be relevant to an Adviser's fiduciary duty with respect to its receipt of compensation from a fund: the nature and quality of the services provided by the Adviser, including the performance of the fund; the Adviser's cost of providing the services; the extent to which the Adviser may realize “economies of scale” as a fund grows larger; any indirect benefits that may accrue to the Adviser and its affiliates as a result of the Adviser's relationship with a fund; performance and expenses of comparable funds; and the extent to which the independent Board members are fully informed about all facts the Board deems relevant bearing on the Adviser's services and fees. The Board further considered management fees (including any components thereof) charged to institutional and other clients of the Adviser for what might be viewed as like services, and the cost to the Adviser and its affiliates of supplying services pursuant to the management fee agreements, excluding any intra-corporate profit and profit margins of the Adviser and its affiliates for supplying such services. The Board was aware of these factors and was guided by them in its review of the Fund's advisory contract to the extent it considered them to be appropriate and relevant, as discussed further below.
The Board considered and weighed these circumstances in light of its substantial accumulated experience in governing the Fund and working with Federated on matters relating to the Federated funds, and was assisted in its deliberations by independent legal counsel. Throughout the year, the Board has requested and received substantial and detailed information about the Fund and the Federated organization that was in addition to the extensive materials that comprise and accompany the Senior Officer's Evaluation. Federated provided much of this information at each regular meeting of the Board, and furnished additional information in connection with the particular meeting at which the Board's formal review of the advisory contract occurred. Between regularly scheduled meetings, the Board also received information on particular matters as the need arose. Thus, the Board's consideration of the advisory contract included review of the Senior Officer's Evaluation, accompanying data and additional information covering such matters as: the Adviser's investment philosophy, revenue, profitability, personnel and processes; investment and operating strategies; the Fund's short- and long-term performance (in absolute terms, both on a gross basis and net of expenses, as well as in relationship to its particular investment program and certain competitor or “peer group” funds and/or other benchmarks, as appropriate), and comments on the reasons for performance; the Fund's investment objectives; the Fund's expenses (including the advisory fee itself and the overall expense structure of the Fund, both in absolute terms and relative to similar and/or competing funds, with due regard for contractual or voluntary expense limitations); the use and allocation of brokerage commissions derived from trading the Fund's portfolio securities (if any); and the nature, quality and extent of the advisory and other services provided to the Fund by the Adviser and its affiliates. The Board also considered the preferences and expectations of Fund shareholders and their relative sophistication; the continuing state of competition in the mutual fund industry and market practices; the range of comparable fees for similar funds in the mutual fund industry; the Fund's relationship to the Federated family of funds which include a comprehensive array of funds with different investment objectives, policies and strategies which are available for exchange without the incurrence of additional sales charges; compliance and audit reports concerning the Federated funds and the Federated companies that service them (including communications from regulatory agencies), as well as Federated's responses to any issues raised therein; and relevant developments in the mutual fund industry and how the Federated funds and/or Federated are responding to them. The Board's evaluation process is evolutionary. The criteria considered and the emphasis placed on relevant criteria change in recognition of changing circumstances in the mutual fund marketplace.
With respect to the Fund's performance and expenses in particular, the Board has found the use of comparisons to other mutual funds with comparable investment programs to be relevant, given the high degree of competition in the mutual fund business. The Board focused on comparisons with other similar mutual funds more heavily than non-mutual fund products or services because it is believed that they are more relevant. For example, other mutual funds are the products most like the Annual Shareholder Report
Fund, they are readily available to Fund shareholders as alternative investment vehicles, and they are the type of investment vehicle in fact chosen and maintained by the Fund's investors. The range of their fees and expenses therefore appears to be a generally reliable indication of what consumers have found to be reasonable in the precise marketplace in which the Fund competes. The Fund's ability to deliver competitive performance when compared to its peer group was a useful indicator of how the Adviser is executing the Fund's investment program, which in turn assisted the Board in reaching a conclusion that the nature, extent, and quality of the Adviser's investment management services were such as to warrant continuation of the advisory contract. In this regard, the Senior Officer has reviewed Federated's fees for providing advisory services to products outside the Federated family of funds (e.g., institutional and separate accounts). He concluded that mutual funds and institutional accounts are inherently different products. Those differences include, but are not limited to, different types of targeted investors; being subject to different laws and regulations; different legal structures; different average account sizes; different associated costs; different portfolio management techniques made necessary by different cash flows; and portfolio manager time spent in review of securities pricing. The Senior Officer did not consider these fee schedules to be determinative in judging the appropriateness of mutual fund advisory contracts.The Senior Officer reviewed information compiled by Federated, using data supplied by independent fund ranking organizations, regarding the performance of, and fees charged by, other mutual funds, noting his view that comparisons to fund peer groups are relevant in judging the reasonableness of proposed fees.
The Fund's performance fell below the median of the relevant peer group for the one-year period covered by the Evaluation. The Board discussed the Fund's performance with the Adviser and recognized the efforts being undertaken by the Adviser. The Board will continue to monitor these efforts and the performance of the Fund.
The Board also received financial information about Federated, including information regarding the compensation and benefits Federated derived from its relationships with the Federated funds. This information covered not only the fees under the advisory contracts, but also fees received by Federated's subsidiaries for providing other services to the Federated funds under separate contracts (e.g., for serving as the Federated funds' administrator). The information also detailed any indirect benefit Federated may derive from its receipt of research services from brokers who execute Federated fund trades. In addition, the Board considered the fact that, in order for a fund to be competitive in the marketplace, Federated and its affiliates frequently waived fees and/or reimbursed expenses and have disclosed to fund investors and/or indicated to the Board their intention to do so in the future, where appropriate. Moreover, the Board receives regular reporting as to the institution or elimination of these voluntary waivers.
Federated furnished information, requested by the Senior Officer, that reported revenues on a fund-by-fund basis and made estimates of the allocation of expenses on a fund-by-fund basis, using allocation methodologies specified by the Senior Officer. The Senior Officer noted that, although they may apply consistent allocation processes, the inherent difficulties in allocating costs (and the unavoidable arbitrary aspects of that exercise) and the lack of consensus on how to allocate those costs may render such allocation information unreliable. The allocation information was considered in the analysis by the Board but was determined to be of limited use.
The Board and the Senior Officer also reviewed information compiled by Federated comparing profitability information for Federated to other publicly held fund management companies. In this regard, the Senior Officer noted the limited availability of such information, but nonetheless concluded that Federated's profit margins did not appear to be excessive and the Board agreed.
The Senior Officer's Evaluation also discussed the notion of possible realization of “economies of scale” as a fund grows larger. The Board considered in this regard that the Adviser has made significant and long-term investments in areas that support all of the Federated funds, such as personnel and processes for the portfolio management, compliance, internal audit, and risk management functions; and systems technology; and that the benefits of these efforts (as well as any economies, should they exist) were likely to be enjoyed by the fund complex as a whole. Finally, the Board also noted the absence of any applicable regulatory or industry guidelines on this subject, which (as discussed in the Senior Officer's Evaluation) is compounded by the lack of any common industry practice or general pattern with respect to structuring fund advisory fees with “breakpoints” that serve to reduce the fee as the fund attains a certain size. The Senior Officer did not recommend institution of breakpoints in pricing Federated's fund advisory services at this time.
It was noted in the materials for the Board meeting that for the period covered by the Evaluation, the Fund's investment advisory fee, after waivers and expense reimbursements, if any, was below the median of the relevant peer group. The Board reviewed the fees and other expenses of the Fund with the Adviser and was satisfied that the overall expense structure of the Fund remained competitive.
Annual Shareholder Report
The Senior Officer noted that, considering the totality of the circumstances, and all of the factors referenced within his Evaluation, he had concluded that, subject to comments and recommendations made within his Evaluation, his observations and the information accompanying the Evaluation supported a finding by the Board that the management fees for each of the funds are reasonable and that Federated appeared to provide appropriate administrative services to the Fund for the fees paid. Under these circumstances, no changes were recommended to, and no objection was raised to, the continuation of the Fund's advisory contract. The Board concluded that the nature, quality and scope of services provided the Fund by the Adviser and its affiliates were satisfactory.In its decision to continue an existing investment advisory contract, the Board was mindful of the potential disruptions of the Fund's operations and various risks, uncertainties and other effects that could occur as a result of a decision to terminate or not renew an advisory contract. In particular, the Board recognized that many shareholders have invested in the Fund on the strength of the Adviser's industry standing and reputation and with the expectation that the Adviser will have a continuing role in providing advisory services to the Fund. Thus, the Board's approval of the advisory contract reflected the fact that it is the shareholders who have effectively selected the Adviser by virtue of having invested in the Fund.
The Board based its decision to approve the advisory contract on the totality of the circumstances and relevant factors and with a view to past and future long-term considerations. Not all of the factors and considerations identified above were necessarily relevant to the Fund, nor did the Board consider any one of them to be determinative. With respect to the factors that were relevant, the Board's decision to approve the contract reflects its determination that Federated's performance and actions provided a satisfactory basis to support the decision to continue the existing arrangements.
Annual Shareholder ReportVoting Proxies on Fund Portfolio Securities
A description of the policies and procedures that the Fund uses to determine how to vote proxies, if any, relating to securities held in the Fund's portfolio is available, without charge and upon request, by calling 1-800-341-7400. A report on “Form N-PX” of how the Fund voted any such proxies during the most recent 12-month period ended June 30 is available from Federated's website at FederatedInvestors.com. To access this information from the home page, select “All” under “Asset Classes.” Select a fund name and share class, if applicable, to go to the Fund Overview page. On the Fund Overview page, select the “Documents” tab. At the bottom of that page, select “Proxy Voting Record Report (Form N-PX).” Form N-PX filings are also available at the SEC's website at www.sec.gov.
The Fund files with the SEC a complete schedule of its portfolio holdings, as of the close of the first and third quarters of its fiscal year, on “Form N-Q.” These filings are available on the SEC's website at www.sec.gov and may be reviewed and copied at the SEC's Public Reference Room in Washington, DC. (Call 1-800-SEC-0330 for information on the operation of the Public Reference Room.) You may also access this information from the “Products” section of Federated's website at FederatedInvestors.com. From the home page, select “All” under “Asset Classes.” Select a fund name and share class, if applicable, to go to the Fund Overview page. On the Fund Overview page, select the “Documents” tab. At the bottom of that page, select “Form N-Q.”
Annual Shareholder ReportVariable investment options are not bank deposits or obligations, are not guaranteed by any bank and are not insured or guaranteed by the U.S. government, the Federal Deposit Insurance Corporation, the Federal Reserve Board or any other government agency. Investment in variable investment options involves investment risk, including the possible loss of principal. Although money market funds seek to maintain a stable net asset value of $1.00 per share, there is no assurance that they will be able to do so.
This Report is authorized for distribution to prospective investors only when preceded or accompanied by the Fund's Prospectus, which contains facts concerning its objective and policies, management fees, expenses and other information.
Federated Prime Money Fund II
Federated Investors Funds
4000 Ericsson Drive
Warrendale, PA 15086-7561
Contact us at FederatedInvestors.com
or call 1-800-341-7400.
Federated Securities Corp., Distributor
CUSIP 313916504
G00842-01 (2/12)
Federated is a registered trademark of Federated Investors, Inc.
2012 © Federated Investors, Inc.
Annual Shareholder Report | ||
December 31, 2011 | ||
Share Class |
Primary |
Service |
Federated Quality Bond Fund II
A Portfolio of Federated Insurance Series
Dear Valued Shareholder,
I am pleased to present the Annual Shareholder Report for your fund covering the period from January 1, 2011 through December 31, 2011. This report includes Management's Discussion of Fund Performance, a complete listing of your fund's holdings, performance information and financial statements along with other important fund information.
In addition, our website, FederatedInvestors.com, offers easy access to Federated resources that include timely fund updates, economic and market insights from our investment strategists, and financial planning tools. We invite you to register to take full advantage of its capabilities.
Thank you for investing with Federated. I hope you find this information useful and look forward to keeping you informed.
Sincerely,
John B. Fisher, President
Management's Discussion of Fund Performance (unaudited)
The Fund's total return, based on net asset value, for the 12-month reporting period ended December 31, 2011, was 2.27% for the Primary Shares and 1.99% for the Service Shares. The total return of the Barclays Capital U.S. Intermediate Credit Bond Index (BCICI),1 a broad-based securities market index, was 5.37%. The Fund's total return for the most recently completed fiscal year reflected actual cash flows, transaction costs and other expenses, which were not reflected in the total return of the BCICI.
During the reporting period, the most significant factors affecting the Fund's performance relative to the BCICI were: (a) the credit ratings of portfolio securities (which indicates the risk that securities will default); (b) the selection of individual securities; (c) the selection of securities with different maturities (expressed by a yield curve showing the relative yield of similar securities with different maturities); (d) overall interest rate sensitivity of the portfolio, as measured by the effective duration of the portfolio; and (e) the use of derivatives to execute the duration and yield curve strategies employed throughout the year.
For purposes of the following, the discussion will focus on the Fund's Primary Shares. The total return of the Fund's Shares consisted of 5.21% current income and -2.94% depreciation in the value of the Fund's Shares.
2011 proved to be a difficult year for risk assets, including investment-grade corporate bonds. The fundamental reason behind the poor performance of investment-grade corporates was the financial crisis in Europe. Investors became concerned about the deteriorating credit quality of U.S. financial institutions with significant exposure to euro-related corporations and governments. Investors also worried over the summer that the U.S. economy could be slipping back into recession. The Federal Reserve's new monetary program announced in September, dubbed “Operation Twist,” also helped push long-term interest rates lower.
Treasury interest rates finished the year down 10-145 basis points, more in the 10- to 30-year part of the yield curve. The five-year Treasury yield stood at 0.83% at year-end 2011, compared to 2.01% at the prior year-end. The BCICI underperformed similar duration Treasuries for the year by 1.97%, after outperforming them by 2.12% in 2010.
At the end of the reporting period, corporate bonds totaled 96% of the portfolio. The Fund's overweight to lower quality corporate credits such as “BBB” rated credits relative to the BCICI, and consequently an underweight to “AAA” rated and ”AA” rated corporates, detracted from Fund performance. Furthermore, investment-grade corporate bonds performed worse than many other sectors of the investment-grade bond market. This factor had the greatest negative impact on performance for the year.
Overall security selection had a modest positive effect on performance during the reporting period relative to the BCICI. The Banking and Insurance sectors added significantly to performance. On the other hand, our exposure to basic industry (Metals & Mining, Paper and Chemicals) and Capital Goods detracted from performance, but not enough to offset the positives from banking and insurance.
Some of the Banking sector names that added significantly to performance included: Barclays, JPMorgan, PNC, Wilmington Trust, Citigroup, M&T Bank, Wells Fargo, SunTrust and Capital One. Insurance sector names that performed well included: Ace Insurance, MassMutual, MetLife and Northwestern Mutual Life. Names that did particularly poorly were: Bank of America, Morgan Stanley, Jefferies Group, Entergy, Zurich Financial Group and AIG.
Annual Shareholder Report
Interest Rate, Yield Curve and Derivative ExposureActive management of the portfolio's overall interest rate sensitivity (portfolio effective duration)2 was a very slight detractor from performance. Over the reporting period, relative to the BCICI, the Fund had, on average, a lesser interest rate sensitivity than the benchmark, during a period of falling interest rates.3
Active management of the portfolio's yield curve exposures appreciably benefited Fund performance over the 12-month reporting period. Relative to the BCICI, the Fund held mostly short maturity and very long maturity securities and avoided holding relatively intermediate maturities. As a result, the Fund was well positioned in the parts of the yield curve where bond prices increased by a relatively larger amount compared to the benchmark, which added to performance.
The use of Treasury note and bond futures contracts played a negative role over the 12-month reporting period in executing the Fund's strategies in interest rate sensitivity and yield curve exposure management.
1 | The Barclays Capital U.S. Intermediate Credit Bond Index is an unmanaged index that consists of dollar-denominated, investment-grade, publicly issued securities with a maturity of between one and ten years, a minimum amount outstanding of $250 million and that are issued by both corporate issuers and non-corporate issuers (supranationals, sovereigns, foreign agencies and foreign local governments). The index is unmanaged, and it is not possible to invest directly in an index. |
2 | Duration measures the price sensitivity of a fixed-income security to changes in interest rates. Securities with longer durations are more sensitive to changes in interest rates than securities of shorter durations. |
3 | Bond prices are sensitive to changes in interest rates and a rise in interest rates can cause a decline in their prices. |
FUND PERFORMANCE AND GROWTH OF A $10,000 INVESTMENT
The Average Annual Total Return table below shows returns for each class averaged over the stated periods. The graphs below illustrate the hypothetical investment of $10,0001 in the Federated Quality Bond Fund II (the “Fund”) from December 31, 2001 to December 31, 2011, for Primary Shares and from April 30, 2002 (start of performance) to December 31, 2011, for Service Shares, compared to the Barclays Capital U.S. Intermediate Credit Bond Index (BCICI)2 and the Lipper Intermediate Investment Grade Debt Variable Underlying Funds Classification Average (LIIGDVU).2
Average Annual Total Returns for the Period Ended 12/31/2011
Share Class | 1 Year | 5 Years | 10 Years | Start of Performance* |
Primary Shares | 2.27% | 5.48% | 5.03% | N/A |
Service Shares | 1.99% | 5.22% | N/A | 4.82% |
* | The Fund's Service Shares start of performance date was April 30, 2002. |
Performance data quoted represents past performance which is no guarantee of future results. Investment return and principal value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Performance of a variable investment option performance changes over time and current performance may be lower or higher than what is stated. For current to the most recent month-end performance, contact your insurance company. The performance information presented does not include the charges and expenses imposed by the insurance company under the variable insurance product contract. The inclusion of such charges would lower performance. Please refer to the variable insurance product prospectus for a complete listing of these expenses. Fund shares are available exclusively as a funding vehicle for life insurance companies writing variable life insurance policies and variable annuity contracts. Variable investment options are not obligations of or guaranteed by any bank and are not federally insured.
Growth of a $10,000 Investment – PRIMARY SHARES
Federated Quality Bond Fund II - Primary Shares | C000026769 | BCICI | LIIGDVU |
12/31/2001 | 10,000 | 10,000 | 10,000 |
12/31/2002 | 10,931 | 11,014 | 10,730 |
12/31/2003 | 11,438 | 11,775 | 11,312 |
12/31/2004 | 11,853 | 12,255 | 11,747 |
12/31/2005 | 12,006 | 12,430 | 11,928 |
12/31/2006 | 12,505 | 12,988 | 12,367 |
12/31/2007 | 13,178 | 13,716 | 12,968 |
12/31/2008 | 12,218 | 13,337 | 12,342 |
12/31/2009 | 14,715 | 15,461 | 13,744 |
12/31/2010 | 15,966 | 16,660 | 14,645 |
12/31/2011 | 16,329 | 17,555 | 15,484 |
Annual Shareholder Report
Growth of a $10,000 Investment – SERVICE SHARES
Federated Quality Bond Fund II - Service Shares | C000026770 | BCICI | LIIGDVU |
4/30/2002 | 10,000 | 10,000 | 10,000 |
12/31/2002 | 10,793 | 10,881 | 10,898 |
12/31/2003 | 11,272 | 11,633 | 11,489 |
12/31/2004 | 11,646 | 12,108 | 11,931 |
12/31/2005 | 11,761 | 12,280 | 12,115 |
12/31/2006 | 12,222 | 12,832 | 12,561 |
12/31/2007 | 12,850 | 13,551 | 13,171 |
12/31/2008 | 11,880 | 13,177 | 12,535 |
12/31/2009 | 14,274 | 15,275 | 13,959 |
12/31/2010 | 15,456 | 16,460 | 14,874 |
12/31/2011 | 15,764 | 17,343 | 15,727 |
1 | The Fund's performance assumes the reinvestment of all dividends and distributions. The BCICI has been adjusted to reflect reinvestment of dividends on securities in the index. |
2 | The BCICI and LIIGDVU are not adjusted to reflect sales charges, expense or other fees that the Securities and Exchange Commission (SEC) requires to be reflected in the Fund's performance. The BCICI consists of dollar-denominated, investment-grade, publicly issued securities with a maturity between one and ten years, a minimum amount outstanding of $250 million and that are issued by both corporate issuers and non-corporate issuers (supranationals, sovereigns, foreign agencies and foreign local governments). The LIIGDVU represents the average of the total returns reported by all of the funds serving as underlying investment options for variable insurance contracts designated by Lipper, Inc. as falling in the respective categories indicated, and is not adjusted to reflect any sales charges. However, these total returns are reported net of expenses or other fees that the SEC requires to be reflected in the Fund's performance. The index is unmanaged and, unlike the Fund, is not affected by cash flows. It is not possible to invest directly in an index. |
Portfolio of Investments Summary Table (unaudited)
At December 31, 2011, the Fund's portfolio composition1 was as follows:
Security Type | Percentage of Total Net Assets |
Corporate Debt Securities | 95.7% |
Mortgage-Backed Securities2 | 0.7% |
U.S. Treasury and Agency Securities3 | 0.6% |
Foreign Government Debt Securities | 0.5% |
Collateralized Mortgage Obligations | 0.5% |
Derivative Contracts4 | (0.4)% |
Cash Equivalents5 | 0.9% |
Other Assets and Liabilities — Net6 | 1.5% |
TOTAL | 100.0% |
1 | See the Fund's Prospectus and Statement of Additional Information for a description of these security types. |
2 | For purposes of this table, Mortgage-Backed Securities include mortgage-backed securities guaranteed by Government Sponsored Entities (GSEs) and adjustable rate mortgage-backed securities. |
3 | For purposes of this table, U.S. Treasury and Agency Securities do not include mortgage-backed securities guaranteed by GSEs. |
4 | Based upon net unrealized appreciation (depreciation) or value of the derivative contracts as applicable. Derivative contracts may consist of futures, forwards, options and swaps. The impact of a derivative contract on the Fund's performance may be larger than its unrealized appreciation (depreciation) or value may indicate. In many cases, the notional value or amount of a derivative contract may provide a better indication of the contract's significance to the portfolio. More complete information regarding the Fund's direct investments in derivative contracts, including unrealized appreciation (depreciation), value and notional values or amounts of such contracts, can be found in the table at the end of the Portfolio of Investments included in this Report. |
5 | Cash Equivalents include any investments in money market mutual funds and/or overnight repurchase agreements. |
6 | Assets, other than investments in securities and derivative contracts, less liabilities. See Statement of Assets and Liabilities. |
Principal Amount | Value |
Corporate Bonds – 95.7% |
Basic Industry - Chemicals – 2.1% |
$500,000 | Du Pont (E.I.) de Nemours & Co., 4.625%, 1/15/2020 | 574,963 |
320,000 | Du Pont (E.I.) de Nemours & Co., 6.00%, 7/15/2018 | 392,564 |
300,000 | Eastman Chemical Co., Sr. Unsecd. Note, 5.50%, 11/15/2019 | 341,706 |
420,000 | Ecolab, Inc., Sr. Unsecd. Note, 2.375%, 12/8/2014 | 424,298 |
640,000 | FMC Corp., Sr. Unsecd. Note, 3.95%, 2/1/2022 | 650,935 |
410,000 | 1,2 | Incitec Pivot Finance LLC, Company Guarantee, Series 144A, 4.00%, 12/7/2015 | 421,973 |
800,000 | 1,2 | Incitec Pivot Finance LLC, Company Guarantee, Series 144A, 6.00%, 12/10/2019 | 878,589 |
1,290,000 | RPM International, Inc., 6.50%, 2/15/2018 | 1,459,358 |
900,000 | RPM International, Inc., Sr. Unsecd. Note, 6.125%, 10/15/2019 | 979,454 |
395,000 | Rohm & Haas Co., 6.00%, 9/15/2017 | 450,527 |
TOTAL | 6,574,367 |
Basic Industry - Metals & Mining – 3.4% |
1,000,000 | Alcoa, Inc., Sr. Unsecd. Note, 5.40%, 4/15/2021 | 1,003,315 |
750,000 | Allegheny Technologies, Inc., Sr. Note, 9.375%, 6/1/2019 | 958,885 |
100,000 | 1,2 | Anglo American Capital PLC, Company Guarantee, Series 144A, 4.45%, 9/27/2020 | 100,825 |
300,000 | Anglogold Ashanti Holdings PLC, Sr. Note, 6.50%, 4/15/2040 | 292,320 |
2,300,000 | ArcelorMittal, Sr. Unsecd. Note, 5.25%, 8/5/2020 | 2,091,346 |
80,000 | ArcelorMittal, Sr. Unsecd. Note, 6.75%, 3/1/2041 | 72,041 |
770,000 | Barrick Gold Corp., Sr. Unsecd. Note, 6.95%, 4/1/2019 | 944,426 |
850,000 | Carpenter Technology Corp., Sr. Unsecd. Note, 5.20%, 7/15/2021 | 832,123 |
1,020,000 | 1,2 | Gerdau S.A., Company Guarantee, Series 144A, 5.75%, 1/30/2021 | 1,017,450 |
700,000 | 1,2 | Gold Fields Orogen Holding BVI Ltd., Company Guarantee, Series 144A, 4.875%, 10/7/2020 | 618,911 |
730,000 | 1,2 | Hyundai Steel Co., Sr. Unsecd. Note, Series 144A, 4.625%, 4/21/2016 | 728,482 |
435,000 | Rio Tinto Finance USA Ltd., Company Guarantee, 6.50%, 7/15/2018 | 524,799 |
1,430,000 | Worthington Industries, Inc., Sr. Unsecd. Note, 6.50%, 4/15/2020 | 1,643,168 |
TOTAL | 10,828,091 |
Basic Industry - Paper – 1.4% |
640,000 | International Paper Co., Bond, 7.30%, 11/15/2039 | 774,610 |
1,000,000 | International Paper Co., Sr. Unsecd. Note, 7.95%, 6/15/2018 | 1,216,494 |
460,000 | Plum Creek Timberlands LP, Sr. Unsecd. Note, 4.70%, 3/15/2021 | 464,155 |
350,000 | Westvaco Corp., 7.65%, 3/15/2027 | 391,375 |
1,300,000 | Westvaco Corp., Sr. Deb., 7.50%, 6/15/2027 | 1,446,385 |
TOTAL | 4,293,019 |
Capital Goods - Aerospace & Defense – 0.6% |
500,000 | Embraer Overseas Ltd., Sr. Unsecd. Note, 6.375%, 1/24/2017 | 543,750 |
690,000 | Goodrich Corp., 4.875%, 3/1/2020 | 788,973 |
430,000 | 1,2 | Meccanica Holdings USA, Inc., Company Guarantee, Series 144A, 6.25%, 1/15/2040 | 308,008 |
320,000 | Rockwell Collins, Inc., Sr. Unsecd. Note, 3.10%, 11/15/2021 | 325,822 |
TOTAL | 1,966,553 |
Capital Goods - Building Materials – 1.2% |
620,000 | Masco Corp., Sr. Unsecd. Note, 7.125%, 3/15/2020 | 626,488 |
2,620,000 | Valmont Industries, Inc., Sr. Unsecd. Note, 6.625%, 4/20/2020 | 3,036,439 |
TOTAL | 3,662,927 |
Capital Goods - Construction Machinery – 0.3% |
1,010,000 | 1,2 | AGCO Corp., Sr. Unsecd. Note, Series 144A, 5.875%, 12/1/2021 | 1,022,802 |
Capital Goods - Diversified Manufacturing – 1.5% |
360,000 | Avery Dennison Corp., Sr. Unsecd. Note, 5.375%, 4/15/2020 | 370,697 |
Principal Amount | Value |
$1,045,000 | Harsco Corp., 5.75%, 5/15/2018 | 1,207,442 |
500,000 | Ingersoll-Rand Global Holding Co. Ltd., 6.875%, 8/15/2018 | 608,853 |
1,190,000 | Pentair, Inc., Company Guarantee, 5.00%, 5/15/2021 | 1,258,012 |
1,910,000 | 1,2 | Textron Financial Corp., Jr. Sub. Note, Series 144A, 6.00%, 2/15/2067 | 1,403,850 |
TOTAL | 4,848,854 |
Capital Goods - Environmental – 0.3% |
770,000 | Republic Services, Inc., Company Guarantee, Series WI, 5.50%, 9/15/2019 | 880,668 |
Capital Goods - Packaging – 0.2% |
650,000 | Sonoco Products Co., Sr. Unsecd. Note, 5.75%, 11/1/2040 | 696,783 |
Communications - Media & Cable – 0.7% |
1,090,000 | DIRECTV Holdings LLC, Company Guarantee, 5.00%, 3/1/2021 | 1,168,465 |
100,000 | Time Warner Cable, Inc., Company Guarantee, 5.50%, 9/1/2041 | 105,412 |
775,000 | Time Warner Cable, Inc., Sr. Unsecd. Note, 5.85%, 5/1/2017 | 884,049 |
TOTAL | 2,157,926 |
Communications - Media Noncable – 1.1% |
1,250,000 | Discovery Communications LLC, Company Guarantee, 5.05%, 6/1/2020 | 1,386,428 |
290,000 | Interpublic Group of Cos., Inc., Sr. Unsecd. Note, 10.00%, 7/15/2017 | 332,775 |
530,000 | Moody's Corp., Sr. Unsecd. Note, 5.50%, 9/1/2020 | 556,577 |
1,100,000 | 1,2 | Pearson Funding Two PLC, Sr. Unsecd. Note, Series 144A, 4.00%, 5/17/2016 | 1,168,645 |
TOTAL | 3,444,425 |
Communications - Telecom Wireless – 1.9% |
500,000 | American Tower Corp., Sr. Unsecd. Note, 4.50%, 1/15/2018 | 509,166 |
4,300,000 | 1,2 | Crown Castle Towers LLC, Sr. Secd. Note, Series 144A, 5.495%, 1/15/2017 | 4,700,979 |
720,000 | 1,2 | SBA Tower Trust, Series 144A, 5.101%, 4/15/2017 | 749,700 |
TOTAL | 5,959,845 |
Communications - Telecom Wirelines – 1.9% |
2,000,000 | CenturyLink, Inc., Sr. Note, Series Q, 6.15%, 9/15/2019 | 2,011,578 |
1,000,000 | Rogers Communications, Inc., Company Guarantee, 6.80%, 8/15/2018 | 1,219,921 |
240,000 | Telefonica Emisiones Sau, Company Guarantee, 5.462%, 2/16/2021 | 229,848 |
250,000 | Telefonica SA, Company Guarantee, 7.045%, 6/20/2036 | 246,703 |
905,000 | Verizon Communications, Inc., Sr. Unsecd. Note, 6.10%, 4/15/2018 | 1,084,801 |
1,000,000 | Verizon Communications, Inc., Sr. Unsecd. Note, 6.35%, 4/1/2019 | 1,235,227 |
TOTAL | 6,028,078 |
Consumer Cyclical - Automotive – 1.7% |
300,000 | 1,2 | Daimler Finance NA LLC, Company Guarantee, Series 144A, 1.95%, 3/28/2014 | 300,981 |
575,000 | 1,2 | Daimler Finance NA LLC, Sr. Unsecd. Note, Series 144A, 2.625%, 9/15/2016 | 575,268 |
420,000 | 1,2 | Harley-Davidson Financial Services, Inc., Company Guarantee, Series 144A, 3.875%, 3/15/2016 | 435,045 |
990,000 | 1,2 | Hyundai Capital Services, Inc., Note, Series 144A, 6.00%, 5/5/2015 | 1,055,608 |
505,000 | Johnson Controls, Inc., Sr. Unsecd. Note, 5.00%, 3/30/2020 | 566,946 |
1,860,000 | 1,2 | Nissan Motor Acceptance Corp., Note, Series 144A, 4.50%, 1/30/2015 | 1,935,303 |
420,000 | 1,2 | RCI Banque SA, Sr. Unsecd. Note, Series 144A, 4.60%, 4/12/2016 | 401,525 |
TOTAL | 5,270,676 |
Consumer Cyclical - Entertainment – 1.9% |
1,000,000 | 1 | Football Trust V, Pass Thru Cert., Series 144A, 5.35%, 10/5/2020 | 1,117,207 |
1,890,000 | NBC Universal, Inc., Sr. Unsecd. Note, 5.15%, 4/30/2020 | 2,118,067 |
450,000 | NBC Universal, Inc., Sr. Unsecd. Note, 5.95%, 4/1/2041 | 537,580 |
500,000 | Time Warner, Inc., Company Guarantee, 6.20%, 3/15/2040 | 599,165 |
800,000 | Time Warner, Inc., Deb., 8.375%, 3/15/2023 | 1,044,166 |
475,000 | Viacom, Inc., Sr. Unsecd. Note, 2.50%, 12/15/2016 | 477,942 |
Principal Amount | Value |
$205,000 | Viacom, Inc., Sr. Unsecd. Note, 3.50%, 4/1/2017 | 213,273 |
TOTAL | 6,107,400 |
Consumer Cyclical - Lodging – 0.6% |
950,000 | Choice Hotels International, Inc., Company Guarantee, 5.70%, 8/28/2020 | 990,475 |
930,000 | Wyndham Worldwide Corp., Sr. Unsecd. Note, 6.00%, 12/1/2016 | 1,004,195 |
TOTAL | 1,994,670 |
Consumer Cyclical - Retailers – 1.1% |
1,472,859 | 1,2 | CVS Caremark Corp., Pass Thru Cert., Series 144A, 5.298%, 1/11/2027 | 1,511,519 |
480,000 | Home Depot, Inc., Sr. Unsecd. Note, 5.95%, 4/1/2041 | 625,585 |
530,000 | JC Penney Corp., Inc., Sr. Unsecd. Note, 5.75%, 2/15/2018 | 535,300 |
370,000 | O'Reilly Automotive, Inc., Company Guarantee, 4.875%, 1/14/2021 | 394,258 |
350,000 | Wal-Mart Stores, Inc., Sr. Unsecd. Note, 5.625%, 4/15/2041 | 451,202 |
TOTAL | 3,517,864 |
Consumer Cyclical - Services – 0.5% |
250,000 | Boston University, Series MTNA, 7.625%, 7/15/2097 | 321,250 |
330,000 | eBay, Inc., Sr. Unsecd. Note, 3.25%, 10/15/2020 | 331,573 |
350,000 | Expedia, Inc., Company Guarantee, 5.95%, 8/15/2020 | 353,423 |
370,000 | University of Southern California, Sr. Unsecd. Note, 5.25%, 10/1/2111 | 463,523 |
TOTAL | 1,469,769 |
Consumer Non-Cyclical - Food/Beverage – 1.2% |
900,000 | Archer-Daniels-Midland Co., 5.935%, 10/1/2032 | 1,122,962 |
900,000 | Coca-Cola Femsa S.A.B de C.V., Sr. Unsecd. Note, 4.625%, 2/15/2020 | 997,294 |
1,140,000 | General Mills, Inc., Note, 5.70%, 2/15/2017 | 1,345,673 |
450,000 | Ralcorp Holdings, Inc., Sr. Secd. Note, 6.625%, 8/15/2039 | 464,070 |
TOTAL | 3,929,999 |
Consumer Non-Cyclical - Health Care – 0.4% |
910,000 | Life Technologies Corp., Sr. Note, 3.375%, 3/1/2013 | 922,961 |
370,000 | Quest Diagnostics, Inc., Sr. Unsecd. Note, 4.75%, 1/30/2020 | 395,963 |
TOTAL | 1,318,924 |
Consumer Non-Cyclical - Pharmaceuticals – 0.7% |
900,000 | Bio-Rad Laboratories, Inc., Sr. Unsecd. Note, 4.875%, 12/15/2020 | 944,437 |
300,000 | Dentsply International, Inc., Sr. Unsecd. Note, 2.75%, 8/15/2016 | 303,067 |
910,000 | Gilead Sciences, Inc., Sr. Unsecd. Note, 4.50%, 4/1/2021 | 962,031 |
TOTAL | 2,209,535 |
Consumer Non-Cyclical - Products – 0.8% |
330,000 | Clorox Co., Sr. Unsecd. Note, 3.55%, 11/1/2015 | 347,395 |
510,000 | Hasbro, Inc., Sr. Unsecd. Note, 6.35%, 3/15/2040 | 556,925 |
870,000 | Whirlpool Corp., Note, 8.00%, 5/1/2012 | 889,510 |
610,000 | Whirlpool Corp., Series MTN, 5.50%, 3/1/2013 | 634,179 |
TOTAL | 2,428,009 |
Consumer Non-Cyclical - Supermarkets – 0.7% |
610,000 | Kroger Co., Bond, 6.90%, 4/15/2038 | 778,948 |
1,200,000 | Safeway Inc., Sr. Unsecd. Note, 7.45%, 9/15/2027 | 1,463,461 |
TOTAL | 2,242,409 |
Consumer Non-Cyclical - Tobacco – 0.1% |
360,000 | Lorillard Tobacco Co., Sr. Unsecd. Note, 7.00%, 8/4/2041 | 378,982 |
Energy - Independent – 1.7% |
400,000 | Apache Corp., Sr. Unsecd. Note, 5.10%, 9/1/2040 | 474,800 |
1,000,000 | 1,2 | Petroleos Mexicanos, Company Guarantee, Series 144A, 6.50%, 6/2/2041 | 1,135,465 |
20,000 | Petroleos Mexicanos, Company Guarantee, Series WI, 4.875%, 3/15/2015 | 21,237 |
Principal Amount | Value |
$800,000 | Petroleos Mexicanos, Company Guarantee, Series WI, 5.50%, 1/21/2021 | 868,885 |
1,520,000 | Petroleos Mexicanos, Company Guarantee, Series WI, 6.00%, 3/5/2020 | 1,707,235 |
190,000 | Talisman Energy, Inc., Sr. Unsecd. Note, 3.75%, 2/1/2021 | 187,437 |
420,509 | 1,2 | Tengizchevroil LLP, Series 144A, 6.124%, 11/15/2014 | 432,599 |
405,000 | XTO Energy, Inc., 6.75%, 8/1/2037 | 622,371 |
TOTAL | 5,450,029 |
Energy - Integrated – 1.5% |
1,420,000 | BP Capital Markets PLC, Company Guarantee, 4.742%, 3/11/2021 | 1,619,132 |
530,000 | 1,2 | CNPC Hong Kong Overseas Capital Ltd., Company Guarantee, Series 144A, 5.95%, 4/28/2041 | 585,782 |
1,250,000 | Husky Oil Ltd., Deb., 7.55%, 11/15/2016 | 1,521,860 |
870,000 | Petrobras International Finance Co., Company Guarantee, 6.75%, 1/27/2041 | 995,842 |
TOTAL | 4,722,616 |
Energy - Oil Field Services – 1.3% |
280,000 | Nabors Industries, Inc., Company Guarantee, 5.00%, 9/15/2020 | 287,238 |
1,100,000 | Nabors Industries, Inc., Company Guarantee, 9.25%, 1/15/2019 | 1,385,976 |
450,000 | Noble Holding International Ltd., Company Guarantee, 4.90%, 8/1/2020 | 477,595 |
365,000 | 1,2 | Schlumberger Investment SA, Company Guarantee, Series 144A, 1.95%, 9/14/2016 | 369,010 |
1,480,000 | Weatherford International Ltd., 6.00%, 3/15/2018 | 1,646,873 |
TOTAL | 4,166,692 |
Energy - Refining – 0.2% |
295,000 | Marathon Petroleum Corp., Sr. Unsecd. Note, 6.50%, 3/1/2041 | 333,285 |
240,000 | Valero Energy Corp., 9.375%, 3/15/2019 | 307,920 |
TOTAL | 641,205 |
Financial Institution - Banking – 23.5% |
850,000 | American Express Co., Note, Series MTN, 2.75%, 9/15/2015 | 854,481 |
2,500,000 | American Express Credit Corp., Sr. Unsecd. Note, Series MTN, 2.80%, 9/19/2016 | 2,533,117 |
1,180,000 | Associated Banc-Corp., Sr. Unsecd. Note, 5.125%, 3/28/2016 | 1,214,066 |
1,600,000 | Astoria Financial Corp., Note, 5.75%, 10/15/2012 | 1,631,739 |
1,000,000 | Bank of America Corp., Note, 4.50%, 4/1/2015 | 967,624 |
2,000,000 | Bank of America Corp., Sr. Note, 5.375%, 6/15/2014 | 1,997,233 |
6,000,000 | Bank of America Corp., Sr. Unsecd. Note, 3.70%, 9/1/2015 | 5,605,600 |
55,000 | Bank of America Corp., Sr. Unsecd. Note, 5.00%, 5/13/2021 | 50,500 |
6,500,000 | Bank of America Corp., Sr. Unsecd. Note, 5.75%, 12/1/2017 | 6,226,802 |
55,000 | Bank of America Corp., Sr. Unsecd. Note, 5.875%, 1/5/2021 | 52,217 |
3,000,000 | 1,2 | Barclays Bank PLC, Series 144A, 5.926%, 9/29/2049 | 2,531,924 |
2,470,000 | Capital One Capital IV, 6.745%, 2/17/2037 | 2,451,475 |
725,000 | Capital One Capital V, 10.25%, 8/15/2039 | 756,719 |
1,340,000 | Capital One Capital VI, 8.875%, 5/15/2040 | 1,395,564 |
4,500,000 | Citigroup, Inc., Sr. Note, 5.375%, 8/9/2020 | 4,637,547 |
500,000 | Citigroup, Inc., Sr. Unsecd. Note, 6.00%, 12/13/2013 | 518,272 |
2,290,000 | Citigroup, Inc., Sr. Unsecd. Note, 6.875%, 3/5/2038 | 2,572,000 |
480,000 | City National Corp., Note, 5.25%, 9/15/2020 | 477,897 |
1,000,000 | Comerica Bank, Sub. Note, 5.20%, 8/22/2017 | 1,090,874 |
1,210,000 | Deutsche Bank AG London, Sr. Unsecd. Note, Series 1, 3.25%, 1/11/2016 | 1,225,615 |
610,000 | Fifth Third Bancorp, Sr. Unsecd. Note, 3.625%, 1/25/2016 | 624,968 |
1,000,000 | Fifth Third Bancorp, Sub., 5.45%, 1/15/2017 | 1,055,768 |
1,070,000 | Goldman Sachs Group, Inc., Sr. Unsecd. Note, 3.625%, 2/7/2016 | 1,034,392 |
900,000 | Goldman Sachs Group, Inc., Sr. Unsecd. Note, 5.125%, 1/15/2015 | 919,988 |
2,900,000 | Goldman Sachs Group, Inc., Sr. Unsecd. Note, 6.25%, 2/1/2041 | 2,855,114 |
250,000 | Huntington Bancshares, Inc., Sub. Note, 7.00%, 12/15/2020 | 283,717 |
Principal Amount | Value |
$3,500,000 | JPMorgan Chase Capital XVIII, Company Guarantee, Series AA, 7.00%, 11/1/2039 | 3,528,211 |
2,440,000 | Manufacturers & Traders Trust Co., Sub. Note, Series BKNT, 5.629%, 12/1/2021 | 2,295,698 |
1,100,000 | Morgan Stanley, Sr. Unsecd. Note, 3.45%, 11/2/2015 | 1,012,033 |
3,900,000 | Morgan Stanley, Sr. Unsecd. Note, 3.80%, 4/29/2016 | 3,602,197 |
500,000 | Morgan Stanley, Sr. Unsecd. Note, 5.50%, 7/24/2020 | 457,246 |
4,970,000 | Morgan Stanley, Sr. Unsecd. Note, 5.75%, 1/25/2021 | 4,627,800 |
825,000 | Morgan Stanley, Sr. Unsecd. Note, Series MTN, 5.95%, 12/28/2017 | 790,334 |
2,010,000 | Morgan Stanley, Sr. Unsecd. Note, Series MTN, 6.625%, 4/1/2018 | 1,987,677 |
800,000 | PNC Funding Corp., Sr. Unsecd. Note, 4.25%, 9/21/2015 | 856,169 |
1,000,000 | PNC Funding Corp., Sr. Unsecd. Note, 5.125%, 2/8/2020 | 1,132,685 |
410,000 | PNC Funding Corp., Sub. Note, 5.625%, 2/1/2017 | 443,085 |
1,500,000 | 1,2 | PNC Preferred Funding LLC, Jr. Sub. Note, Series 144A, 6.517%, 3/29/2049 | 1,083,750 |
1,400,000 | 1,2 | Santander US Debt SA Unipersonal, Bank Guarantee, Series 144A, 3.781%, 10/7/2015 | 1,281,511 |
550,000 | SunTrust Banks, Inc., Sr. Unsecd. Note, 3.60%, 4/15/2016 | 560,748 |
565,000 | Suntrust Capital VIII, Jr. Sub. Note, 6.10%, 12/15/2036 | 559,706 |
1,320,000 | Wachovia Corp., 5.75%, 2/1/2018 | 1,500,426 |
1,175,000 | Westpac Banking Corp., Sr. Unsecd. Note, 4.875%, 11/19/2019 | 1,256,714 |
1,900,000 | Wilmington Trust Corp., Sub. Note, 8.50%, 4/2/2018 | 2,267,034 |
TOTAL | 74,808,237 |
Financial Institution - Brokerage – 5.7% |
2,230,000 | BlackRock, Inc., 6.25%, 9/15/2017 | 2,601,766 |
500,000 | 1,2 | CME Group Index Services LLC, Company Guarantee, Series 144A, 4.40%, 3/15/2018 | 538,249 |
900,000 | 1,2 | Cantor Fitzgerald LP, Bond, Series 144A, 7.875%, 10/15/2019 | 902,963 |
835,000 | Eaton Vance Corp., 6.50%, 10/2/2017 | 913,259 |
3,000,000 | 1,2 | FMR LLC, Bond, Series 144A, 7.57%, 6/15/2029 | 3,565,591 |
850,000 | 1,2 | FMR LLC, Series 144A, 4.75%, 3/1/2013 | 877,165 |
350,000 | Franklin Resources, Inc., Sr. Unsecd. Note, 4.625%, 5/20/2020 | 380,034 |
750,000 | Invesco Ltd., Sr. Unsecd. Note, 5.625%, 4/17/2012 | 760,217 |
800,000 | Janus Capital Group, Inc., Sr. Note, 6.70%, 6/15/2017 | 850,111 |
1,835,000 | Jefferies Group, Inc., Sr. Unsecd. Note, 6.875%, 4/15/2021 | 1,665,263 |
1,040,000 | Jefferies Group, Inc., Sr. Unsecd. Note, 8.50%, 7/15/2019 | 1,053,000 |
740,000 | NASDAQ OMX Group, Inc., Sr. Unsecd. Note, 5.55%, 1/15/2020 | 757,762 |
690,000 | Nuveen Investments, 5.50%, 9/15/2015 | 583,050 |
1,210,000 | Raymond James Financial, Inc., 8.60%, 8/15/2019 | 1,392,685 |
90,000 | Raymond James Financial, Inc., Sr. Unsecd. Note, 4.25%, 4/15/2016 | 92,226 |
1,225,000 | TD Ameritrade Holding Corp., Company Guarantee, 4.15%, 12/1/2014 | 1,292,799 |
TOTAL | 18,226,140 |
Financial Institution - Finance Noncaptive – 4.9% |
1,950,000 | Discover Bank, Sub., Series BKNT, 8.70%, 11/18/2019 | 2,225,950 |
75,000 | General Electric Capital Corp., 5.625%, 5/1/2018 | 84,003 |
1,500,000 | General Electric Capital Corp., Sr. Unsecd. Note, 4.625%, 1/7/2021 | 1,572,714 |
3,000,000 | General Electric Capital Corp., Sr. Unsecd. Note, 4.65%, 10/17/2021 | 3,136,096 |
1,000,000 | General Electric Capital Corp., Sr. Unsecd. Note, Series GMTN, 6.875%, 1/10/2039 | 1,196,650 |
4,400,000 | HSBC Finance Capital Trust IX, Note, 5.911%, 11/30/2035 | 3,641,000 |
1,300,000 | HSBC Finance Corp., Sr. Sub. Note, 6.676%, 1/15/2021 | 1,344,605 |
1,100,000 | 1,2 | ILFC E-Capital Trust I, Floating Rate Note — Sr. Sub Note, Series 144A, 4.60%, 12/21/2065 | 654,478 |
1,000,000 | 1,2 | Lukoil International Finance BV, Series 144A, 6.356%, 6/7/2017 | 1,020,000 |
960,000 | 1,2 | Macquarie Group Ltd., Sr. Unsecd. Note, Series 144A, 6.00%, 1/14/2020 | 906,026 |
TOTAL | 15,781,522 |
Principal Amount | Value |
Financial Institution - Insurance - Health – 0.2% |
$505,000 | UnitedHealth Group, Inc., Sr. Unsecd. Note, 6.00%, 2/15/2018 | 600,083 |
Financial Institution - Insurance - Life – 6.1% |
910,000 | 1,2 | AXA Equitable Life Insurance Co., Sub., Series 144A, 7.70%, 12/1/2015 | 1,034,001 |
580,000 | Aflac, Inc., Sr. Unsecd. Note, 6.90%, 12/17/2039 | 651,177 |
1,790,000 | Aflac, Inc., Sr. Unsecd. Note, 8.50%, 5/15/2019 | 2,203,701 |
230,000 | American International Group, Inc., Sr. Unsecd. Note, 4.25%, 9/15/2014 | 223,734 |
1,900,000 | American International Group, Inc., Sr. Unsecd. Note, 6.40%, 12/15/2020 | 1,920,245 |
350,000 | Lincoln National Corp., Sr. Note, 7.00%, 6/15/2040 | 395,372 |
2,500,000 | 1,2 | Massachusetts Mutual Life Insurance Co., Sub. Note, Series 144A, 8.875%, 6/1/2039 | 3,664,739 |
2,300,000 | MetLife, Inc., Sr. Unsecd. Note, 4.75%, 2/8/2021 | 2,488,418 |
500,000 | 1,2 | New York Life Insurance Co., Sub. Note, Series 144A, 6.75%, 11/15/2039 | 640,079 |
1,300,000 | 1,2 | Northwestern Mutual Life Insurance Co., Sub. Note, Series 144A, 6.063%, 3/30/2040 | 1,553,408 |
350,000 | 1,2 | Penn Mutual Life Insurance Co., Sr. Note, Series 144A, 7.625%, 6/15/2040 | 422,078 |
850,000 | Prudential Financial, Inc., Series MTN, 6.625%, 12/1/2037 | 926,676 |
500,000 | Prudential Financial, Inc., Sr. Unsecd. Note, Series MTN, 4.75%, 9/17/2015 | 529,510 |
1,500,000 | Prudential Financial, Inc., Sr. Unsecd. Note, Series MTN, 6.10%, 6/15/2017 | 1,663,895 |
700,000 | SunAmerica, Inc., Deb., 8.125%, 4/28/2023 | 752,062 |
250,000 | 1 | Union Central Life Insurance Co., Note, Series 144A, 8.20%, 11/1/2026 | 289,346 |
TOTAL | 19,358,441 |
Financial Institution - Insurance - P&C – 2.5% |
1,380,000 | ACE INA Holdings, Inc., Sr. Note, 5.70%, 2/15/2017 | 1,588,795 |
330,000 | CNA Financial Corp., 6.50%, 8/15/2016 | 357,374 |
660,000 | CNA Financial Corp., Sr. Unsecd. Note, 5.75%, 8/15/2021 | 674,471 |
680,000 | CNA Financial Corp., Sr. Unsecd. Note, 5.875%, 8/15/2020 | 699,470 |
1,180,000 | Horace Mann Educators Corp., Sr. Note, 6.85%, 4/15/2016 | 1,275,043 |
2,200,000 | 1,2 | Liberty Mutual Group, Inc., Unsecd. Note, Series 144A, 5.75%, 3/15/2014 | 2,295,713 |
250,000 | MBIA Insurance Corp., Sr. Deb., 6.625%, 10/1/2028 | 176,563 |
1,050,000 | 1,2 | ZFS Finance USA Trust II, Jr. Sub. Note, Series 144A, 6.45%, 12/15/2065 | 960,750 |
TOTAL | 8,028,179 |
Financial Institution - REITs – 4.5% |
1,200,000 | Boston Properties LP, Sr. Unsecd. Note, 5.875%, 10/15/2019 | 1,355,636 |
890,000 | Equity One, Inc., Bond, 6.00%, 9/15/2017 | 928,736 |
200,000 | Equity One, Inc., Sr. Unsecd. Note, 6.25%, 12/15/2014 | 210,501 |
1,700,000 | HRPT Properties Trust, Sr. Unsecd. Note, 6.25%, 6/15/2017 | 1,805,154 |
1,075,000 | HRPT Properties Trust, Sr. Unsecd. Note, 6.25%, 8/15/2016 | 1,145,463 |
960,000 | Health Care REIT, Inc., Sr. Unsecd. Note, 6.125%, 4/15/2020 | 995,959 |
1,300,000 | Hospitality Properties Trust, Sr. Unsecd. Note, 6.75%, 2/15/2013 | 1,321,248 |
850,000 | Liberty Property LP, 6.625%, 10/1/2017 | 968,765 |
450,000 | ProLogis Inc., Sr. Unsecd. Note, 6.875%, 3/15/2020 | 500,281 |
1,260,000 | ProLogis Inc., Sr. Unsecd. Note, Series WI, 7.625%, 8/15/2014 | 1,381,010 |
630,000 | Prologis, Conv. Bond, 2.25%, 4/1/2037 | 629,414 |
250,000 | Prologis, Sr. Unsecd. Note, 5.50%, 4/1/2012 | 251,161 |
1,500,000 | Realty Income Corp., Sr. Unsecd. Note, 6.75%, 8/15/2019 | 1,711,060 |
470,000 | Regency Centers LP, Company Guarantee, 4.80%, 4/15/2021 | 477,775 |
700,000 | Tanger Properties LP, Sr. Unsecd. Note, 6.125%, 6/1/2020 | 779,589 |
TOTAL | 14,461,752 |
Municipal Services – 0.9% |
895,000 | 1,2 | Army Hawaii Family Housing, Series 144A, 5.524%, 6/15/2050 | 875,928 |
1,850,000 | 1,2 | Camp Pendleton & Quantico Housing LLC, Series 144A, 5.572%, 10/1/2050 | 1,845,430 |
TOTAL | 2,721,358 |
Principal Amount | Value |
Sovereign – 0.6% |
$1,120,000 | Corp Andina De Fomento, Sr. Unsecd. Note, 3.75%, 1/15/2016 | 1,133,847 |
510,000 | Inter-American Development Bank, Series MTN, 6.75%, 7/15/2027 | 734,460 |
TOTAL | 1,868,307 |
Technology – 3.0% |
700,000 | BMC Software, Inc., 7.25%, 6/1/2018 | 810,624 |
770,000 | Cisco Systems, Inc., Sr. Unsecd. Note, 3.15%, 3/14/2017 | 837,207 |
670,000 | Fiserv, Inc., Sr. Note, 6.80%, 11/20/2017 | 780,397 |
1,315,000 | Harris Corp., 5.95%, 12/1/2017 | 1,538,597 |
2,000,000 | Hewlett-Packard Co., Sr. Unsecd. Note, 3.30%, 12/9/2016 | 2,046,061 |
180,000 | Juniper Networks, Inc., Sr. Unsecd. Note, 5.95%, 3/15/2041 | 196,923 |
1,230,000 | KLA-Tencor Corp., 6.90%, 5/1/2018 | 1,423,590 |
515,000 | Maxim Integrated Products, Inc., Note, 3.45%, 6/14/2013 | 529,338 |
285,000 | SAIC, Inc., Company Guarantee, 5.95%, 12/1/2040 | 310,368 |
670,000 | Verisk Analytics, Inc., Sr. Unsecd. Note, 4.875%, 1/15/2019 | 676,762 |
325,000 | Xerox Corp., Sr. Unsecd. Note, 4.50%, 5/15/2021 | 329,877 |
TOTAL | 9,479,744 |
Transportation - Airlines – 0.8% |
227,174 | Continental Airlines, Inc., Equip. Trust, Series 991A, 6.545%, 2/2/2019 | 237,539 |
4,000 | Southwest Airlines Co., 6.50%, 3/1/2012 | 4,033 |
2,310,000 | Southwest Airlines Co., Sr. Unsecd. Note, 5.125%, 3/1/2017 | 2,437,856 |
TOTAL | 2,679,428 |
Transportation - Railroads – 0.2% |
465,000 | Burlington Northern Santa Fe Corp., Deb., 5.75%, 5/1/2040 | 557,826 |
143,128 | Burlington Northern Santa Fe Corp., Pass Thru Cert., Series 99-2, 7.57%, 1/2/2021 | 173,011 |
TOTAL | 730,837 |
Transportation - Services – 0.9% |
1,695,000 | 1,2 | Enterprise Rent-A-Car USA Finance Co., Series 144A, 6.375%, 10/15/2017 | 1,951,792 |
161,968 | FedEx Corp., Pass Thru Cert., Series 97-A, 7.50%, 1/15/2018 | 163,993 |
370,000 | Ryder System, Inc., Sr. Unsecd. Note, Series MTN, 3.15%, 3/2/2015 | 380,227 |
405,000 | Ryder System, Inc., Sr. Unsecd. Note, Series MTN, 3.50%, 6/1/2017 | 416,059 |
TOTAL | 2,912,071 |
Utility - Electric – 8.2% |
1,400,000 | Avista Corp., 1st Mtg. Bond, 5.95%, 6/1/2018 | 1,688,385 |
1,454,550 | Bruce Mansfield Unit 1 2, Pass Thru Cert., 6.85%, 6/1/2034 | 1,578,186 |
930,000 | Cleveland Electric Illuminating Co., Sr. Unsecd. Note, 5.95%, 12/15/2036 | 992,713 |
235,000 | Commonwealth Edison Co., 1st Mtg. Bond, 5.80%, 3/15/2018 | 277,861 |
910,000 | Consolidated Edison Co., Sr. Unsecd. Note, Series 06-C, 5.50%, 9/15/2016 | 1,069,020 |
1,700,000 | Entergy Gulf States, Inc., 1st Mtg. Bond, 6.18%, 3/1/2035 | 1,703,229 |
1,975,000 | Entergy Louisiana LLC, 1st Mtg. Bond, 5.40%, 11/1/2024 | 2,257,086 |
500,000 | Exelon Generation Co. LLC, Sr. Unsecd. Note, 5.75%, 10/1/2041 | 575,196 |
570,000 | FirstEnergy Solutions Corp., Company Guarantee, 4.80%, 2/15/2015 | 608,884 |
800,000 | FirstEnergy Solutions Corp., Company Guarantee, 6.05%, 8/15/2021 | 889,069 |
235,000 | Great Plains Energy, Inc., Note, 4.85%, 6/1/2021 | 246,706 |
1,374,705 | 1,2 | Great River Energy, 1st Mtg. Note, Series 144A, 5.829%, 7/1/2017 | 1,512,324 |
420,000 | KCP&L Greater Missouri Operations Co., Sr. Unsecd. Note, 11.875%, 7/1/2012 | 440,886 |
2,650,000 | MidAmerican Energy Holdings Co., Sr. Unsecd. Note, 5.95%, 5/15/2037 | 3,189,173 |
635,000 | Northern States Power Co., MN, 1st Mtg. Bond, 5.25%, 3/1/2018 | 759,483 |
1,110,000 | PPL Energy Supply LLC, Sr. Unsecd. Note, 6.00%, 12/15/2036 | 1,178,840 |
425,000 | PSEG Power LLC, Sr. Unsecd. Note, 4.15%, 9/15/2021 | 443,165 |
1,500,000 | Public Service Co., CO, 1st Mtg. Bond, Series 20, 5.125%, 6/1/2019 | 1,763,098 |
Principal Amount | Value |
$500,000 | Southwestern Electric Power Co., Sr. Unsecd. Note, 6.20%, 3/15/2040 | 628,699 |
230,000 | TECO Finance, Inc., Company Guarantee, 5.15%, 3/15/2020 | 253,619 |
800,000 | UIL Holdings Corp., Sr. Unsecd. Note, 4.625%, 10/1/2020 | 830,370 |
1,570,000 | Union Electric Co., 6.00%, 4/1/2018 | 1,865,248 |
124,542 | Waterford 3 Funding Corp., 8.09%, 1/2/2017 | 124,622 |
1,000,000 | Westar Energy, Inc., 1st Mtg. Bond, 5.15%, 1/1/2017 | 1,112,716 |
TOTAL | 25,988,578 |
Utility - Natural Gas Distributor – 0.4% |
280,000 | 1,2 | Florida Gas Transmission Co. LLC, Sr. Unsecd. Note, Series 144A, 5.45%, 7/15/2020 | 308,521 |
810,000 | National Fuel Gas Co., Sr. Unsecd. Note, 4.90%, 12/1/2021 | 830,356 |
TOTAL | 1,138,877 |
Utility - Natural Gas Pipelines – 2.3% |
15,000 | Duke Capital Corp., Sr. Note, 6.25%, 2/15/2013 | 15,726 |
1,850,000 | Enbridge, Inc., Sr. Note, 5.60%, 4/1/2017 | 2,093,897 |
1,600,000 | Kinder Morgan Energy Partners LP, Sr. Unsecd. Note, 5.30%, 9/15/2020 | 1,744,388 |
1,850,000 | Kinder Morgan Energy Partners LP, Sr. Unsecd. Note, 5.80%, 3/15/2035 | 1,888,977 |
1,110,000 | Williams Partners LP, 5.25%, 3/15/2020 | 1,230,389 |
380,000 | Williams Partners LP, Sr. Unsecd. Note, 4.125%, 11/15/2020 | 390,561 |
TOTAL | 7,363,938 |
TOTAL CORPORATE BONDS (IDENTIFIED COST $291,931,062) | 304,360,609 |
FOREIGN Governments/Agencies – 0.5% |
Sovereign – 0.5% |
225,000 | Colombia, Government of, Sr. Unsecd. Note, 4.375%, 7/12/2021 | 241,875 |
900,000 | 1,2 | State of Qatar, Series 144A, 5.25%, 1/20/2020 | 987,750 |
500,000 | Sweden, Government of, 10.25%, 11/1/2015 | 502,588 |
TOTAL FOREIGN GOVERNMENTS/AGENCIES (IDENTIFIED COST $1,622,316) | 1,732,213 |
Mortgage-Backed Securities – 0.7% |
Federal Home Loan Mortgage Corporation – 0.0% |
2,997 | Federal Home Loan Mortgage Corp., Pool C01051, 8.00%, 9/1/2030 | 3,573 |
2,582 | Federal Home Loan Mortgage Corp., Pool E80411, 6.50%, 4/1/2015 | 2,738 |
TOTAL | 6,311 |
Federal National Mortgage Association – 0.0% |
410 | Federal National Mortgage Association, Pool 50276, 9.50%, 2/1/2020 | 479 |
Government National Mortgage Association – 0.7% |
6,751 | Government National Mortgage Association, Pool 1512, 7.50%, 12/20/2023 | 7,744 |
9,877 | Government National Mortgage Association, Pool 2630, 6.50%, 8/20/2028 | 11,202 |
11,766 | Government National Mortgage Association, Pool 2631, 7.00%, 8/20/2028 | 13,485 |
18,238 | Government National Mortgage Association, Pool 2658, 6.50%, 10/20/2028 | 20,688 |
24,408 | Government National Mortgage Association, Pool 2701, 6.50%, 1/20/2029 | 27,692 |
2,245 | Government National Mortgage Association, Pool 276337, 10.00%, 8/15/2019 | 2,622 |
18,292 | Government National Mortgage Association, Pool 2796, 7.00%, 8/20/2029 | 21,004 |
6,086 | Government National Mortgage Association, Pool 3039, 6.50%, 2/20/2031 | 6,932 |
12,009 | Government National Mortgage Association, Pool 3040, 7.00%, 2/20/2031 | 13,765 |
36,053 | Government National Mortgage Association, Pool 3188, 6.50%, 1/20/2032 | 41,122 |
33,641 | Government National Mortgage Association, Pool 3239, 6.50%, 5/20/2032 | 38,397 |
70,134 | Government National Mortgage Association, Pool 3261, 6.50%, 7/20/2032 | 80,074 |
2,066 | Government National Mortgage Association, Pool 493514, 8.00%, 9/15/2030 | 2,415 |
6,428 | Government National Mortgage Association, Pool 516688, 8.00%, 8/15/2029 | 7,594 |
622,379 | Government National Mortgage Association, Pool 643816, 6.00%, 7/15/2025 | 704,918 |
Principal Amount | Value |
$418,439 | Government National Mortgage Association, Pool 704189, 5.50%, 1/15/2039 | 469,211 |
781,163 | Government National Mortgage Association, Pool 782604, 5.50%, 3/15/2039 | 876,312 |
TOTAL | 2,345,177 |
TOTAL MORTGAGE-BACKED SECURITIES (IDENTIFIED COST $2,149,577) | 2,351,967 |
Collateralized Mortgage Obligations – 0.5% |
Commercial Mortgage – 0.5% |
1,500,000 | TIAA Seasoned Commercial Mortgage Trust 2007-C4, Class AJ, 5.983%, 8/15/2039 (IDENTIFIED COST $1,488,320) | 1,481,377 |
U.S. Treasury – 0.6% |
U.S. Treasury Bill – 0.4%3 |
1,200,000 | 4 | United States Treasury Bill, 0.02%, 4/26/2012 | 1,199,943 |
U.S. Treasury Note – 0.2% |
600,000 | 4 | United States Treasury Note, 1.50%, 8/31/2018 | 608,836 |
TOTAL U.S. TREASURY (IDENTIFIED COST $1,802,170) | 1,808,779 |
Repurchase Agreement – 0.9% |
2,768,000 | Interest in $4,100,000,000 joint repurchase agreement 0.06%, dated 12/30/2011 under which Bank of America, N.A. will repurchase securities provided as collateral for $4,100,027,333 on 1/3/2012. The securities provided as collateral at the end of the period were U.S. Government Agency securities with various maturities to 4/15/2040 and the market value of those underlying securities was $4,218,795,473. (AT COST) | 2,768,000 |
TOTAL INVESTMENTS — 98.9% (IDENTIFIED COST $301,761,445)5 | 314,502,945 |
OTHER ASSETS AND LIABILITIES - NET — 1.1%6 | 3,640,303 |
TOTAL NET ASSETS — 100% | $318,143,248 |
At December 31, 2011, the Fund had the following outstanding futures contracts:
Description | Number of Contracts | Notional Value | Expiration Date | Unrealized Appreciation/ (Depreciation) |
7 U.S. Treasury Bond 30-Year Short Futures | 500 | $72,406,250 | March 2012 | $(1,237,608) |
7 U.S. Treasury Note 2-Year Short Futures | 100 | $22,054,688 | March 2012 | $(26,162) |
7 U.S. Treasury Note 5-Year Long Futures | 60 | $7,395,469 | March 2012 | $39,245 |
NET UNREALIZED DEPRECIATION ON FUTURES CONTRACTS | $(1,224,525) |
Net Unrealized Depreciation on Futures Contracts is included in “Other Assets and Liabilities — Net.”
1 | Denotes a restricted security that either: (a) cannot be offered for public sale without first being registered, or being able to take advantage of an exemption from registration, under the Securities Act of 1933; or (b) is subject to a contractual restriction on public sales. At December 31, 2011, these restricted securities amounted to $54,679,042, which represented 17.2% of total net assets. |
2 | Denotes a restricted security that may be resold without restriction to “qualified institutional buyers” as defined in Rule 144A under the Securities Act of 1933 and that the Fund has determined to be liquid under criteria established by the Fund's Board of Trustees (the “Trustees”). At December 31, 2011, these liquid restricted securities amounted to $53,272,489, which represented 16.7% of total net assets. |
3 | Discount rate at time of purchase. |
4 | All or a portion of this security is pledged as collateral to ensure the Fund is able to satisfy the obligations of its outstanding futures contracts. |
5 | Also represents cost for federal tax purposes. |
6 | Assets, other than investments in securities, less liabilities. See Statement of Assets and Liabilities. |
7 | Non-income producing security. |
Note: The categories of investments are shown as a percentage of total net assets at December 31, 2011.
Annual Shareholder Report
Various inputs are used in determining the value of the Fund's investments. These inputs are summarized in the three broad levels listed below:Level 1 — quoted prices in active markets for identical securities, including investment companies with daily net asset values, if applicable. Level 2 — other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.). Also includes securities valued at amortized cost. Level 3 — significant unobservable inputs (including the Fund's own assumptions in determining the fair value of investments).The inputs or methodology used for valuing securities are not an indication of the risk associated with investing in those securities.
The following is a summary of the inputs used, as of December 31, 2011, in valuing the Fund's assets carried at fair value:
Valuation Inputs | ||||
Level 1 — Quoted Prices and Investments in Mutual Funds | Level 2 — Other Significant Observable Inputs | Level 3 — Significant Unobservable Inputs | Total | |
Debt Securities: | ||||
Corporate Bonds | $ — | $304,360,609 | $ — | $304,360,609 |
Foreign Governments/Agencies | — | 1,732,213 | — | 1,732,213 |
Mortgage-Backed Securities | — | 2,351,967 | — | 2,351,967 |
Collateralized Mortgage Obligations | — | 1,481,377 | — | 1,481,377 |
U.S. Treasury | — | 1,808,779 | — | 1,808,779 |
Repurchase Agreement | — | 2,768,000 | — | 2,768,000 |
TOTAL SECURITIES | $ — | $314,502,945 | $ — | $314,502,945 |
OTHER FINANCIAL INSTRUMENTS* | $(1,224,525) | $ — | $ — | $(1,224,525) |
* | Other financial instruments include futures contracts. |
The following acronyms are used throughout this portfolio:
MTN | — Medium Term Note |
REIT | — Real Estate Investment Trust |
See Notes which are an integral part of the Financial Statements
Annual Shareholder ReportFinancial Highlights – Primary Shares
(For a Share Outstanding Throughout Each Period)
Year Ended December 31 | 2011 | 2010 | 2009 | 2008 | 2007 |
Net Asset Value, Beginning of Period | $11.55 | $11.20 | $10.00 | $11.34 | $11.29 |
Income From Investment Operations: |
Net investment income1 | 0.50 | 0.52 | 0.53 | 0.54 | 0.52 |
Net realized and unrealized gain (loss) on investments and futures contracts | (0.24) | 0.40 | 1.37 | (1.32) | 0.07 |
TOTAL FROM INVESTMENT OPERATIONS | 0.26 | 0.92 | 1.90 | (0.78) | 0.59 |
Less Distributions: |
Distributions from net investment income | (0.60) | (0.57) | (0.70) | (0.56) | (0.54) |
Net Asset Value, End of Period | $11.21 | $11.55 | $11.20 | $10.00 | $11.34 |
Total Return2 | 2.27% | 8.50% | 20.43% | (7.29)% | 5.38% |
Ratios to Average Net Assets: |
Net expenses | 0.70% | 0.70% | 0.70% | 0.70% | 0.70% |
Net investment income | 4.44% | 4.61% | 5.12% | 4.99% | 4.68% |
Expense waiver/reimbursement3 | 0.06% | 0.05% | 0.08% | 0.04% | 0.06% |
Supplemental Data: |
Net assets, end of period (000 omitted) | $265,952 | $214,644 | $230,850 | $224,203 | $365,332 |
Portfolio turnover | 35% | 26% | 32% | 35% | 23% |
1 | Per share numbers have been calculated using the average shares method. |
2 | Based on net asset value. Total returns do not reflect any additional fees or expenses that may be imposed by separate accounts of insurance companies or in connection with any variable annuity or variable life insurance contract. |
3 | This expense decrease is reflected in both the net expense and the net investment income ratios shown above. |
See Notes which are an integral part of the Financial Statements
Annual Shareholder ReportFinancial Highlights – Service Shares
(For a Share Outstanding Throughout Each Period)
Year Ended December 31 | 2011 | 2010 | 2009 | 2008 | 2007 |
Net Asset Value, Beginning of Period | $11.50 | $11.15 | $9.95 | $11.29 | $11.24 |
Income From Investment Operations: |
Net investment income1 | 0.48 | 0.49 | 0.50 | 0.51 | 0.49 |
Net realized and unrealized gain (loss) on investments and futures contracts | (0.25) | 0.40 | 1.37 | (1.32) | 0.07 |
TOTAL FROM INVESTMENT OPERATIONS | 0.23 | 0.89 | 1.87 | (0.81) | 0.56 |
Less Distributions: |
Distributions from net investment income | (0.57) | (0.54) | (0.67) | (0.53) | (0.51) |
Net Asset Value, End of Period | $11.16 | $11.50 | $11.15 | $9.95 | $11.29 |
Total Return2 | 1.99% | 8.28% | 20.15% | (7.55)% | 5.14% |
Ratios to Average Net Assets: |
Net expenses | 0.95% | 0.95% | 0.95% | 0.95% | 0.95% |
Net investment income | 4.21% | 4.36% | 4.86% | 4.78% | 4.43% |
Expense waiver/reimbursement3 | 0.06% | 0.05% | 0.08% | 0.04% | 0.06% |
Supplemental Data: |
Net assets, end of period (000 omitted) | $52,191 | $63,962 | $69,338 | $63,177 | $77,282 |
Portfolio turnover | 35% | 26% | 32% | 35% | 23% |
1 | Per share numbers have been calculated using the average shares method. |
2 | Based on net asset value. Total returns do not reflect any additional fees or expenses that may be imposed by separate accounts of insurance companies or in connection with any variable annuity or variable life insurance contract. |
3 | This expense decrease is reflected in both the net expense and the net investment income ratios shown above. |
See Notes which are an integral part of the Financial Statements
Annual Shareholder ReportStatement of Assets and Liabilities
Assets: |
Total investments in securities, at value (identified cost $301,761,445) | $314,502,945 |
Cash | 194 |
Income receivable | 3,983,509 |
Receivable for shares sold | 166,773 |
TOTAL ASSETS | 318,653,421 |
Liabilities: |
Payable for shares redeemed | $283,203 |
Payable for daily variation margin | 153,750 |
Payable for Directors'/Trustees' fees | 552 |
Payable for auditing fees | 21,000 |
Payable for portfolio accounting fees | 19,605 |
Payable for distribution services fee (Note 5) | 11,212 |
Accrued expenses | 20,851 |
TOTAL LIABILITIES | 510,173 |
Net assets for 28,405,654 shares outstanding | $318,143,248 |
Net Assets Consist of: |
Paid-in capital | $308,079,345 |
Net unrealized appreciation of investments and futures contracts | 11,516,975 |
Accumulated net realized loss on investments and futures contracts | (14,433,321) |
Undistributed net investment income | 12,980,249 |
TOTAL NET ASSETS | $318,143,248 |
Net Asset Value, Offering Price and Redemption Proceeds Per Share |
Primary Shares: |
$265,952,256 ÷ 23,728,364 shares outstanding, no par value, unlimited shares authorized | $11.21 |
Service Shares: |
$52,190,992 ÷ 4,677,290 shares outstanding, no par value, unlimited shares authorized | $11.16 |
See Notes which are an integral part of the Financial Statements
Annual Shareholder ReportInvestment Income: |
Interest | $15,209,804 |
Expenses: |
Investment adviser fee (Note 5) | $1,772,805 |
Administrative fee (Note 5) | 230,733 |
Custodian fees | 17,666 |
Transfer and dividend disbursing agent fees and expenses | 32,122 |
Directors'/Trustees' fees | 4,627 |
Auditing fees | 21,048 |
Legal fees | 6,845 |
Portfolio accounting fees | 116,413 |
Distribution services fee (Note 5) | 146,644 |
Printing and postage | 55,115 |
Insurance premiums | 4,616 |
Miscellaneous | 6,768 |
TOTAL EXPENSES | 2,415,402 |
Waivers (Note 5): |
Waiver of investment adviser fee | $(180,125) |
Waiver of administrative fee | (5,882) |
TOTAL WAIVERS | (186,007) |
Net expenses | 2,229,395 |
Net investment income | 12,980,409 |
Realized and Unrealized Gain (Loss) on Investments and Futures Contracts: |
Net realized gain on investments | 9,588,357 |
Net realized loss on futures contracts | (9,832,315) |
Net change in unrealized appreciation of investments | (5,647,864) |
Net change in unrealized appreciation of futures contracts | (2,318,320) |
Net realized and unrealized loss on investments and futures contracts | (8,210,142) |
Change in net assets resulting from operations | $4,770,267 |
See Notes which are an integral part of the Financial Statements
Annual Shareholder ReportStatement of Changes in Net Assets
Year Ended December 31 | 2011 | 2010 |
Increase (Decrease) in Net Assets |
Operations: |
Net investment income | $12,980,409 | $13,513,362 |
Net realized gain (loss) on investments and futures contracts | (243,958) | 1,733,756 |
Net change in unrealized appreciation/depreciation of investments and futures contracts | (7,966,184) | 9,118,283 |
CHANGE IN NET ASSETS RESULTING FROM OPERATIONS | 4,770,267 | 24,365,401 |
Distributions to Shareholders: |
Distributions from net investment income |
Primary Shares | (10,493,641) | (11,479,886) |
Service Shares | (3,019,020) | (3,359,543) |
CHANGE IN NET ASSETS RESULTING FROM DISTRIBUTIONS TO SHAREHOLDERS | (13,512,661) | (14,839,429) |
Share Transactions: |
Proceeds from sale of shares | 16,992,413 | 26,079,433 |
Proceeds from shares issued in connection with the tax-free transfer of assets from EquiTrust Variable Insurance Series Fund – High Grade Bond Portfolio | 60,088,922 | — |
Proceeds from shares issued in connection with the tax-free transfer of assets from EquiTrust Variable Insurance Series Fund – Strategic Yield Portfolio | 41,471,137 | — |
Net asset value of shares issued to shareholders in payment of distributions declared | 13,512,661 | 14,839,429 |
Cost of shares redeemed | (83,786,245) | (72,026,192) |
CHANGE IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS | 48,278,888 | (31,107,330) |
Change in net assets | 39,536,494 | (21,581,358) |
Net Assets: |
Beginning of period | 278,606,754 | 300,188,112 |
End of period (including undistributed net investment income of $12,980,249 and $13,512,501, respectively) | $318,143,248 | $278,606,754 |
See Notes which are an integral part of the Financial Statements
Annual Shareholder ReportFederated Insurance Series (the “Trust”) is registered under the Investment Company Act of 1940, as amended (the “Act”), as an open-end management investment company. The Trust consists of seven portfolios. The financial statements included herein are only those of Federated Quality Bond Fund II (the “Fund”), a diversified portfolio. The financial statements of the other portfolios are presented separately. The assets of each portfolio are segregated and a shareholder's interest is limited to the portfolio in which shares are held. Each portfolio pays its own expenses. The Fund offers two classes of shares: Primary Shares and Service Shares. All shares of the Fund have equal rights with respect to voting, except on class-specific matters. Fund shares are available exclusively as a funding vehicle for life insurance companies writing variable life insurance policies and variable annuity contracts. The investment objective of the Fund is to provide current income.
On July 15, 2011, the Fund acquired all of the net assets of EquiTrust Variable Insurance Series Fund - High Grade Bond Portfolio and EquiTrust Variable Insurance Series Fund - Strategic Yield Portfolio (the “Acquired Funds”), each an open-end investment company in a tax-free reorganization in exchange for shares of the Fund, pursuant to a plan of reorganization approved by the Acquired Funds' shareholders on July 15, 2011. The purpose of the transaction was to combine three portfolios with comparable investment objectives and strategies. For financial reporting purposes, assets received and shares issued by the Fund were recorded at fair value; however, the cost basis of the investments received from the Acquired Funds was carried forward to align ongoing reporting of the Funds' realized and unrealized gains and losses with amounts distributable to shareholders for tax purposes.
Assuming the acquisitions had been completed on January 1, 2011, the beginning of the annual reporting period of the Fund, the Fund's pro forma results of operations for the year ended December 31, 2011, are as follows:
Net investment income* | $15,285,503 |
Net realized and unrealized loss on investments | $(6,091,896) |
Net increase in net assets resulting from operations | $9,193,607 |
* | Net investment income includes $76,663 of pro forma additional expenses. |
Because the combined investment portfolios have been managed as a single integrated portfolio since the acquisitions were completed, it is not practicable to separate the amounts of revenue and earnings of the Acquired Funds that have been included in the Fund's Statement of Operations as of December 31, 2011.
For every one share of EquiTrust Variable Insurance Series Fund - High Grade Bond Portfolio Initial Class and Service Class shares exchanged, a shareholder received 0.935 shares of Federated Quality Bond Fund II Primary Shares.
For every one share of EquiTrust Variable Insurance Series Fund - Strategic Yield Portfolio Initial Class and Service Class shares exchanged, a shareholder received 0.828 shares of Federated Quality Bond Fund II Primary Shares.
The Fund received assets from EquiTrust Variable Insurance Series Fund - High Grade Bond Portfolio, as follows:
Shares of the Fund Issued | EquiTrust Variable Insurance Series Fund - High Grade Bond Portfolio Net Assets Received | Unrealized Appreciation1 | Net Assets of the Fund Immediately Prior to Combination | Net Assets of the Fund Immediately After Combination2 |
5,282,536 | $60,088,922 | $3,617,122 | $252,447,610 | $354,007,669 |
1 | Unrealized Appreciation is included in the EquiTrust Variable Insurance Series Fund – High Grade Bond Portfolio Net Assets Received amount shown above. |
2 | Net Assets of the Fund Immediately After Combination includes the net assets received from EquiTrust Variable Insurance Series Fund - Strategic Yield Portfolio which was also reorganized into the Fund on July 15, 2011. |
Annual Shareholder Report
The Fund received assets from EquiTrust Variable Insurance Series Fund - Strategic Yield Portfolio as follows:Shares of the Fund Issued | EquiTrust Variable Insurance Series Fund - Strategic Yield Portfolio Net Assets Received | Unrealized Appreciation1 | Net Assets of the Fund Immediately Prior to Combination | Net Assets of the Fund Immediately After Combination2 |
3,646,384 | $41,471,137 | $2,937,265 | $252,447,610 | $354,007,669 |
1 | Unrealized Appreciation is included in the EquiTrust Variable Insurance Series Fund – Strategic Yield Portfolio Net Assets Received amount shown above. |
2 | Net Assets of the Fund Immediately After Combination includes the net assets received from EquiTrust Variable Insurance Series Fund - High Grade Bond Portfolio which was also reorganized into the Fund on July 15, 2011. |
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. These policies are in conformity with U.S. generally accepted accounting principles (GAAP).
Investment Valuation
In calculating its net asset value (NAV), the Fund generally values investments as follows:
- Fixed-income securities acquired with remaining maturities greater than 60 days are fair valued using price evaluations provided by a pricing service approved by the Trustees.
- Fixed-income securities acquired with remaining maturities of 60 days or less are valued at their cost (adjusted for the accretion of any discount or amortization of any premium), which approximates market value.
- Derivative contracts listed on exchanges are valued at their reported settlement or closing price.
- Over-the-counter (OTC) derivative contracts are fair valued using price evaluations provided by a pricing service approved by the Trustees.
- Shares of other mutual funds are valued based upon their reported NAVs.
- For securities that are fair valued in accordance with procedures established by and under the general supervision of the Trustees, certain factors may be considered such as: the purchase price of the security, information obtained by contacting the issuer, analysis of the issuer's financial statements or other available documents, fundamental analytical data, the nature and duration of restrictions on disposition, the movement of the market in which the security is normally traded and public trading in similar securities of the issuer or comparable issuers.
If the Fund cannot obtain a price or price evaluation from a pricing service for an investment, the Fund may attempt to value the investment based upon the mean of bid and asked quotations or fair value the investment based on price evaluations, from one or more dealers. If any price, quotation, price evaluation or other pricing source is not readily available when the NAV is calculated, the Fund uses the fair value of the investment determined in accordance with the procedures described below. There can be no assurance that the Fund could purchase or sell an investment at the price used to calculate the Fund's NAV.
Fair Valuation and Significant Events Procedures
The Trustees have authorized the use of pricing services to provide evaluations of the current fair value of certain investments for purposes of calculating the NAV. Factors considered by pricing services in evaluating an investment include the yields or prices of investments of comparable quality, coupon, maturity, call rights and other potential prepayments, terms and type, reported transactions, indications as to values from dealers and general market conditions. Some pricing services provide a single price evaluation reflecting the bid-side of the market for an investment (a “bid” evaluation). Other pricing services offer both bid evaluations and price evaluations indicative of a price between the prices bid and asked for the investment (a “mid” evaluation). The Fund normally uses bid evaluations for U.S. Treasury and Agency securities, mortgage-backed securities and municipal securities. The Fund normally uses mid evaluations for other types of fixed-income securities and OTC derivative contracts. In the event that market quotations and price evaluations are not available for an investment, the fair value of the investment is determined in accordance with procedures adopted by the Trustees.
The Trustees also have adopted procedures requiring an investment to be priced at its fair value whenever the Adviser determines that a significant event affecting the value of the investment has occurred between the time as of which the price of the investment would otherwise be determined and the time as of which the NAV is computed. An event is considered significant if there is both an affirmative expectation that the investment's value will change in response to the event and a reasonable basis for quantifying the resulting change in value. Examples of significant events that may occur after the close of the principal market on which a security is traded, or after the time of a price evaluation provided by a pricing service or a dealer, include:
- With respect to securities traded in foreign markets, significant trends in U.S. equity markets or in the trading of foreign securities index futures or options contracts;
- With respect to price evaluations of fixed-income securities determined before the close of regular trading on the NYSE, actions by the Federal Reserve Open Market Committee and other significant trends in U.S. fixed-income markets;
- Political or other developments affecting the economy or markets in which an issuer conducts its operations or its securities are traded; and
- Announcements concerning matters such as acquisitions, recapitalizations, litigation developments, a natural disaster affecting the issuer's operations or regulatory changes or market developments affecting the issuer's industry.
Annual Shareholder Report
The Trustees have approved the use of a pricing service to determine the fair value of equity securities traded principally in foreign markets when the Adviser determines that there has been a significant trend in the U.S. equity markets or in index futures trading. For other significant events, the Fund may seek to obtain more current quotations or price evaluations from alternative pricing sources. If a reliable alternative pricing source is not available, the Fund will determine the fair value of the investment using another method approved by the Trustees.Repurchase Agreements
The Fund may invest in repurchase agreements for short-term liquidity purposes. It is the policy of the Fund to require the other party to a repurchase agreement to transfer to the Fund's custodian or sub-custodian eligible securities or cash with a market value (after transaction costs) at least equal to the repurchase price to be paid under the repurchase agreement. The eligible securities are transferred to accounts with the custodian or sub-custodian in which the Fund holds a “securities entitlement” and exercises “control” as those terms are defined in the Uniform Commercial Code. The Fund has established procedures for monitoring the market value of the transferred securities and requiring the transfer of additional eligible securities if necessary to equal at least the repurchase price. These procedures also allow the other party to require securities to be transferred from the account to the extent that their market value exceeds the repurchase price or in exchange for other eligible securities of equivalent market value.
The insolvency of the other party or other failure to repurchase the securities may delay the disposition of the underlying securities or cause the Fund to receive less than the full repurchase price. Under the terms of the repurchase agreement, any amounts received by the Fund in excess of the repurchase price and related transaction costs must be remitted to the other party.
The Fund may enter into repurchase agreements in which eligible securities are transferred into joint trading accounts maintained by the custodian or sub-custodian for investment companies and other clients advised by the Fund's Adviser and its affiliates. The Fund will participate on a pro rata basis with the other investment companies and clients in its share of the securities transferred under such repurchase agreements and in its share of proceeds from any repurchase or other disposition of such securities.
Investment Income, Gains and Losses, Expenses and Distributions
Investment transactions are accounted for on a trade-date basis. Realized gains and losses from investment transactions are recorded on an identified-cost basis. Interest income and expenses are accrued daily. Dividend income and distributions to shareholders are recorded on the ex-dividend date. Foreign dividends are recorded on the ex-dividend date or when the Fund is informed of the ex-dividend date. Distributions of net investment income are declared and paid annually. Non-cash dividends included in dividend income, if any, are recorded at fair value. Investment income, realized and unrealized gains and losses, and certain fund-level expenses are allocated to each class based on relative average daily net assets, except that Primary Shares and Service Shares may bear distribution services fees unique to those classes. Dividends are declared separately for each class. No class has preferential dividend rights; differences in per share dividend rates are generally due to differences in separate class expenses.
Premium and Discount Amortization/Paydown Gains and Losses
All premiums and discounts on fixed-income securities, other than mortgage-backed securities, are amortized/accreted using the effective interest rate method. Gains and losses realized on principal payment of mortgage-backed securities (paydown gains and losses) are classified as investment income.
Federal Taxes
It is the Fund's policy to comply with the Subchapter M provision of the Internal Revenue Code and to distribute to shareholders each year substantially all of its income. Accordingly, no provision for federal income tax is necessary. As of and during the year ended December 31, 2011, the Fund did not have a liability for any uncertain tax positions. The Fund recognizes interest and penalties, if any, related to tax liabilities as income tax expense in the Statement of Operations. As of December 31, 2011, tax years 2008 through 2011 remain subject to examination by the Fund's major tax jurisdictions, which include the United States of America and the Commonwealth of Massachusetts.
When-Issued and Delayed Delivery Transactions
The Fund may engage in when-issued or delayed delivery transactions. The Fund records when-issued securities on the trade date and maintains security positions such that sufficient liquid assets will be available to make payment for the securities purchased. Securities purchased on a when-issued or delayed delivery basis are marked to market daily and begin earning interest on the settlement date. Losses may occur on these transactions due to changes in market conditions or the failure of counterparties to perform under the contract.
Futures Contracts
The Fund purchases and sells financial futures contracts to manage cash flows, enhance yield and to potentially reduce transaction costs. Upon entering into a financial futures contract with a broker, the Fund is required to deposit in a segregated account a specified amount of cash or U.S. government securities. Futures contracts are valued daily and unrealized gains or losses are recorded in a “variation margin” account. Daily, the Fund receives from or pays to the broker a specified amount of cash based upon changes in the variation margin account. When a contract is closed, the Fund recognizes a realized gain or loss. Futures contracts have market risks, including the risk that the change in the value of the contract may not correlate with the changes in the value of the underlying securities. There is minimal counterparty risk to the Fund since futures are exchange traded and the exchange's clearing house, as counterparty to all exchange-traded futures, guarantees the futures against default.
Futures contracts outstanding at period end are listed after the Fund's Portfolio of Investments.
The average notional value of long and short futures contracts held by the Fund throughout the period was $1,134,916 and $85,064,063, respectively. This is based on amounts held as of each month-end throughout the fiscal period.
Annual Shareholder Report
Restricted SecuritiesThe Fund may purchase securities which are considered restricted. Restricted securities are securities that either: (a) cannot be offered for public sale without first being registered, or being able to take advantage of an exemption from registration, under the Securities Act of 1933; or (b) are subject to contractual restrictions on public sales. In some cases, when a security cannot be offered for public sale without first being registered, the issuer of the restricted security has agreed to register such securities for resale, at the issuer's expense, either upon demand by the Fund or in connection with another registered offering of the securities. Many such restricted securities may be resold in the secondary market in transactions exempt from registration. Restricted securities may be determined to be liquid under criteria established by the Trustees. The Fund will not incur any registration costs upon such resales. The Fund's restricted securities are valued at the price provided by dealers in the secondary market or, if no market prices are available, at the fair value as determined in accordance with procedures established by and under the general supervision of the Trustees.
Additional information on restricted securities, excluding securities purchased under Rule 144A, if applicable, that have been deemed liquid by the Trustees, held at December 31, 2011, is as follows:
Security | Acquisition Date | Cost | Market Value |
Football Trust V, Pass Thru Cert., 5.35%, 10/5/2020 | 3/24/2010 | $1,000,000 | $1,117,207 |
Union Central Life Insurance Co., Note, 8.20%, 11/1/2026 | 5/14/1999 - 9/29/1999 | $248,739 | $289,346 |
Additional Disclosure Related to Derivative Instruments
Fair Value of Derivative Instruments | ||
Liability | ||
Statement of Assets and Liabilities Location | Fair Value | |
Derivatives not accounted for as hedging instruments under ASC Topic 815 | ||
Interest rate contracts | Payable for daily variation margin | $1,224,525* |
* | Includes cumulative appreciation/depreciation of futures contracts as reported in the footnotes to the Portfolio of Investments. Only the current day's variation margin is reported within the Statement of Assets and Liabilities. |
The Effect of Derivative Instruments on the Statement of Operations for the Year Ended December 31, 2011
Amount of Realized Gain or (Loss) on Derivatives Recognized in Income | |
Futures | |
Interest rate contracts | $(9,832,315) |
Change in Unrealized Appreciation or (Depreciation) on Derivatives Recognized in Income | |
Futures | |
Interest rate contracts | $(2,318,320) |
Other
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts of assets, liabilities, expenses and revenues reported in the financial statements. Actual results could differ from those estimated.
3. SHARES OF BENEFICIAL INTEREST
The following tables summarize share activity:
Year Ended December 31 | 2011 | 2010 | |
Primary Shares: | Shares | Amount | Shares | Amount |
Shares sold | 1,279,001 | $14,426,705 | 1,894,790 | $21,439,655 |
Proceeds from shares issued in connection with the tax-free transfer of assets from EquiTrust Variable Insurance Series Fund - High Grade Bond Portfolio | 5,282,536 | 60,088,922 | — | — |
Proceeds from shares issued in connection with the tax-free transfer of assets from EquiTrust Variable Insurance Series Fund - Strategic Yield Portfolio | 3,646,384 | 41,471,137 | — | — |
Shares issued to shareholders in payment of distributions declared | 941,134 | 10,493,641 | 1,051,272 | 11,479,886 |
Shares redeemed | (6,007,573) | (68,196,503) | (4,979,753) | (56,467,940) |
NET CHANGE RESULTING FROM PRIMARY SHARE TRANSACTIONS | 5,141,482 | $58,283,902 | (2,033,691) | $(23,548,399) |
Year Ended December 31 | 2011 | 2010 | |
Service Shares: | Shares | Amount | Shares | Amount |
Shares sold | 224,908 | $2,565,708 | 410,908 | $4,639,778 |
Shares issued to shareholders in payment of distributions declared | 271,495 | 3,019,020 | 308,498 | 3,359,543 |
Shares redeemed | (1,382,768) | (15,589,742) | (1,375,339) | (15,558,252) |
NET CHANGE RESULTING FROM SERVICE SHARE TRANSACTIONS | (886,365) | $(10,005,014) | (655,933) | $(7,558,931) |
NET CHANGE RESULTING FROM TOTAL FUND SHARE TRANSACTIONS | 4,255,117 | $48,278,888 | (2,689,624) | $(31,107,330) |
The timing and character of income and capital gain distributions are determined in accordance with income tax regulations, which may differ from GAAP. These differences are due to differing treatments for capital loss carryforwards acquired in mergers.
For the year ended December 31, 2011, permanent differences identified and reclassified among the components of net assets were as follows:
Paid-In Capital | Accumulated Net Realized Gain (Loss) |
$2,958,173 | $(2,958,173) |
Net investment income (loss), net realized gains (losses), and net assets were not affected by this reclassification.
The tax character of distributions as reported on the Statement of Changes in Net Assets for the years ended December 31, 2011 and 2010, was as follows:
2011 | 2010 |
Ordinary income | $13,512,661 | $14,839,429 |
As of December 31, 2011, the components of distributable earnings on a tax basis were as follows:
Undistributed ordinary income | $12,980,249 |
Net unrealized appreciation | $12,741,500 |
Capital loss carryforwards | $(15,657,846) |
At December 31, 2011, the cost of investments for federal tax purposes was $301,761,445. The net unrealized appreciation of investments for federal tax purposes excluding any unrealized depreciation resulting from futures contracts was $12,741,500. This consists of net unrealized appreciation from investments for those securities having an excess of value over cost of $19,449,087 and net unrealized depreciation from investments for those securities having an excess of cost over value of $6,707,587.
At December 31, 2011, the Fund had a capital loss carryforward of $15,657,846 which will reduce the Fund's taxable income arising from future net realized gains on investments, if any, to the extent permitted by the Code, thereby reducing the amount of distributions to shareholders which would otherwise be necessary to relieve the Fund of any liability for federal income tax. Pursuant to the Code, a net capital loss incurred in taxable years beginning on or before December 22, 2010 is characterized as short-term and may be carried forward for a maximum of eight tax years (“Carryforward Limit”), whereas a net capital loss incurred in taxable years beginning after December 22, 2010, retains its character as either short-term or long-term, does not expire and is required to be utilized prior to the losses which have a Carryforward Limit.
The following schedule summarizes the Fund's short-term and long-term capital loss carryforwards and expiration year:
Expiration Year | Short-Term | Long-Term | Total |
No expiration | $2,586,921 | $986,193 | $3,573,114 |
2014 | $1,395,784 | NA | $1,395,784 |
2015 | $1,328 | NA | $1,328 |
2016 | $6,487,655 | NA | $6,487,655 |
2017 | $4,199,965 | NA | $4,199,965 |
As a result of the tax-free transfer of assets from the EquiTrust Variable Insurance Series Funds mergers, the use of certain capital loss carryforwards listed above may be limited.
5. INVESTMENT ADVISER FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Investment Adviser Fee
Federated Investment Management Company is the Fund's investment adviser (the “Adviser”). The advisory agreement between the Fund and the Adviser provides for an annual fee equal to 0.60% of the Fund's average daily net assets. Subject to the terms described in the Expense Limitation note, the Adviser may voluntarily choose to waive any portion of its fee. For the year ended December 31, 2011, the Adviser voluntarily waived $180,125 of its fee.
Annual Shareholder Report
Administrative FeeFederated Administrative Services (FAS), under the Administrative Services Agreement, provides the Fund with administrative personnel and services. The fee paid to FAS is based on the average aggregate daily net assets of certain Federated funds as specified below:
Administrative Fee | Average Aggregate Daily Net Assets of the Federated Funds |
0.150% | on the first $5 billion |
0.125% | on the next $5 billion |
0.100% | on the next $10 billion |
0.075% | on assets in excess of $20 billion |
The administrative fee received during any fiscal year shall be at least $150,000 per portfolio and $40,000 per each additional class of Shares. Subject to the terms described in the Expense Limitation note, FAS may voluntarily choose to waive any portion of its fee. For the year ended December 31, 2011, the net fee paid to FAS was 0.076% of average daily net assets of the Fund. FAS waived $5,882 of its fee.
Distribution Services Fee
The Fund has adopted a Distribution Plan (the “Plan”) pursuant to Rule 12b-1 under the Act. Under the terms of the Plan, the Fund will compensate Federated Securities Corp. (FSC), the principal distributor, from the daily net assets of the Fund's Primary Shares and Service Shares to finance activities intended to result in the sale of these shares. The Plan provides that the Fund may incur distribution expenses at the following percentages of average daily net assets annually, to compensate FSC:
Share Class Name | Percentage of Average Daily Net Assets of Class |
Primary Shares | 0.25% |
Service Shares | 0.25% |
Subject to the terms described in the Expense Limitation note, FSC may voluntarily choose to waive any portion of its fee. For the year ended December 31, 2011, distribution services fees for the Fund were as follows:
Distribution Services Fees Incurred |
Service Shares | $146,644 |
When FSC receives fees, it may pay some or all of them to financial intermediaries whose customers purchase shares. For the year ended December 31, 2011, FSC retained $197 of fees paid by the Fund. For the year ended December 31, 2011, the Fund's Primary Shares did not incur a distribution services fee; however, it may begin to incur the fee upon approval of the Trustees.
Expense Limitation
The Adviser and its affiliates (which may include FSC and FAS) have voluntarily agreed to waive their fees and/or reimburse expenses so that the total annual fund operating expenses (as shown in the financial highlights) paid by the Fund's Primary Shares and Service Shares (after the voluntary waivers and/or reimbursements) will not exceed 0.75% and 1.00% (the “Fee Limit”), respectively, up to but not including the later of (the “Termination Date”): (a) June 1, 2012, with respect to Primary Shares and May 1, 2012, with respect to Service Shares; or (b) the date of the Fund's next effective Prospectus. While the Adviser and its affiliates currently do not anticipate terminating or increasing these arrangements prior to the Termination Date, these arrangements may only be terminated or the Fee Limit increased prior to the Termination Date with the agreement of the Trustees.
General
Certain Officers and Trustees of the Fund are Officers and Directors or Trustees of the above companies.
Purchases and sales of investments, excluding long-term U.S. government securities and short-term obligations, for the year ended December 31, 2011, were as follows:
Purchases | $98,065,438 |
Sales | $110,238,105 |
Annual Shareholder Report
7. LINE OF CREDITThe Fund participates in a $100,000,000 unsecured, uncommitted revolving line of credit (LOC) agreement with PNC Bank. The LOC was made available for extraordinary or emergency purposes, primarily for financing redemption payments. Borrowings are charged interest at a rate offered to the Fund by PNC Bank at the time of the borrowing. As of December 31, 2011, there were no outstanding loans. During the year ended December 31, 2011, the Fund did not utilize the LOC.
Pursuant to an Exemptive Order issued by the Securities and Exchange Commission, the Fund, along with other funds advised by subsidiaries of Federated Investors, Inc., may participate in an interfund lending program. This program provides an alternative credit facility allowing the Fund to borrow from other participating affiliated funds. As of December 31, 2011, there were no outstanding loans. During the year ended December 31, 2011, the program was not utilized.
9. recent accounting pronouncements
In April 2011, the Financial Accounting Standards Board (FASB) released Accounting Standards Update (ASU) No. 2011-03, “Reconsideration of Effective Control for Repurchase Agreements.” This ASU amends FASB Accounting Standards Codification (ASC) Topic 860, “Transfers and Servicing”; specifically the criteria required to determine whether a repurchase agreement and similar agreements should be accounted for as sales of financial assets or secured borrowings with commitments. This ASU is effective for fiscal years and interim periods beginning after December 15, 2011. Management has concluded that the adoption of ASU No. 2011-03 is not expected to have a material impact on the Fund's financial statements and the accompanying notes, net assets or results of operations.
In addition, in May 2011, FASB released ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” This ASU amends FASB ASC Topic 820, “Fair Value Measurement,” to establish common requirements for measuring fair value and for disclosing information about fair value measurements in accordance with GAAP. This ASU is effective for fiscal years and interim periods beginning after December 15, 2011. Management has concluded that the adoption of ASU No. 2011-04 is not expected to have a material impact on the Fund's financial statements and the accompanying notes.
Annual Shareholder ReportReport of Independent Registered Public Accounting Firm
TO THE BOARD OF TRUSTEES OF Federated insurance series AND SHAREHOLDERS OF Federated quality bond fund ii:
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of the Federated Quality Bond Fund II (the “Fund”), a portfolio of Federated Insurance Series, as of December 31, 2011, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2011, by correspondence with the custodian and transfer agent, or by other appropriate auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Federated Quality Bond Fund II as of December 31, 2011, and the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended, in conformity with U.S. generally accepted accounting principles.
Boston, Massachusetts
February 13, 2012
Shareholder Expense Example (unaudited)
As a shareholder of the Fund, you incur ongoing costs, including management fees and to the extent applicable, distribution (12b-1) fees and/or shareholder services fees and other Fund expenses. This Example is intended to help you to understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other variable investment options. It is based on an investment of $1,000 invested at the beginning of the period and held for the entire period from July 1, 2011 to December 31, 2011.
The first section of the table below provides information about actual account values and actual expenses. You may use the information in this section, together with the amount you invested, to estimate the expenses that you incurred over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first section under the heading entitled “Expenses Paid During Period” to estimate the expenses attributable to your investment during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second section of the table below provides information 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. Thus, you should not use the hypothetical account values and expenses to estimate the actual ending account balance or your expenses for the period. Rather, these figures are required to be provided to enable you to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only. Therefore, the second section of each table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds.
Beginning Account Value 7/1/2011 | Ending Account Value 12/31/2011 | Expenses Paid During Period1 |
Actual: |
Primary Shares | $1,000 | $995.60 | $3.52 |
Service Shares | $1,000 | $993.80 | $4.77 |
Hypothetical (assuming a 5% return before expenses): |
Primary Shares | $1,000 | $1,021.68 | $3.57 |
Service Shares | $1,000 | $1,020.42 | $4.84 |
1 | Expenses are equal to the Fund's annualized net expense ratios, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half-year period). The expenses shown in the table do not include the charges and expenses imposed by the insurance company under the variable insurance product contract. Please refer to the variable insurance product prospectus for a complete listing of these expenses. The annualized net expense ratios are as follows: |
Primary Shares | 0.70% |
Service Shares | 0.95% |
Board of Trustees and Trust Officers
The Board of Trustees is responsible for managing the Trust's business affairs and for exercising all the Trust's powers except those reserved for the shareholders. The following tables give information about each Trustee and the senior officers of the Fund. Where required, the tables separately list Trustees who are “interested persons” of the Fund (i.e., “Interested” Trustees) and those who are not (i.e., “Independent” Trustees). Unless otherwise noted, the address of each person listed is Federated Investors Tower, 1001 Liberty Avenue, Pittsburgh, PA 15222. The address of all Independent Trustees listed is 4000 Ericsson Drive, Warrendale, PA 15086-7561; Attention: Mutual Fund Board. As of December 31, 2011, the Trust comprised seven portfolio(s), and the Federated Fund Family consisted of 43 investment companies (comprising 134 portfolios). Unless otherwise noted, each Officer is elected annually. Unless otherwise noted, each Trustee oversees all portfolios in the Federated Fund Family and serves for an indefinite term. The Fund's Statement of Additional Information includes additional information about Trust Trustees and is available, without charge and upon request, by calling 1-800-341-7400.
Interested Trustees Background
Name Birth Date Positions Held with Trust Date Service Began | Principal Occupation(s) for Past Five Years, Other Directorships Held and Previous Position(s) |
John F. Donahue* Birth Date: July 28, 1924 Trustee Began serving: October 1993 | Principal Occupations: Director or Trustee of the Federated Fund Family; Chairman and Director, Federated Investors, Inc.; Chairman of the Federated Fund Family's Executive Committee. Previous Positions: Chairman of the Federated Fund Family; Trustee, Federated Investment Management Company; Chairman and Director, Federated Investment Counseling. |
J. Christopher Donahue* Birth Date: April 11, 1949 Trustee Began serving: October 1993 | Principal Occupations: Principal Executive Officer and President of the Federated Fund Family; Director or Trustee of some of the Funds in the Federated Fund Family; President, Chief Executive Officer and Director, Federated Investors, Inc.; Chairman and Trustee, Federated Investment Management Company; Trustee, Federated Investment Counseling; Chairman and Director, Federated Global Investment Management Corp.; Chairman, Federated Equity Management Company of Pennsylvania and Passport Research, Ltd. (investment advisory subsidiary of Federated); Trustee, Federated Shareholder Services Company; Director, Federated Services Company. Previous Positions: President, Federated Investment Counseling; President and Chief Executive Officer, Federated Investment Management Company, Federated Global Investment Management Corp. and Passport Research, Ltd. |
* | Family relationships and reasons for “interested” status: John F. Donahue is the father of J. Christopher Donahue; both are “interested” due to their beneficial ownership of shares of Federated Investors, Inc. and the positions they hold with Federated and its subsidiaries. |
INDEPENDENT Trustees Background
Name Birth Date Positions Held with Trust Date Service Began | Principal Occupation(s) for Past Five Years, Other Directorships Held, Previous Position(s) and Qualifications |
Nicholas P. Constantakis, CPA Birth Date: September 3, 1939 Trustee Began serving: February 1998 | Principal Occupation: Director or Trustee of the Federated Fund Family. Other Directorship Held: Director, Chairman of the Audit Committee, and member of the Compensation Committee, Michael Baker Corporation (architecture, engineering and construction services). Previous Position: Partner, Andersen Worldwide SC. Qualifications: Public accounting and director experience. |
John F. Cunningham Birth Date: March 5, 1943 Trustee Began serving: November 1999 | Principal Occupation: Director or Trustee of the Federated Fund Family. Other Directorships Held: Chairman, President and Chief Executive Officer, Cunningham & Co., Inc. (strategic business consulting); Trustee Associate, Boston College. Previous Positions: Director, Redgate Communications and EMC Corporation (computer storage systems); Chairman of the Board and Chief Executive Officer, Computer Consoles, Inc.; President and Chief Operating Officer, Wang Laboratories; Director, First National Bank of Boston; Director, Apollo Computer, Inc. Qualifications: Business management and director experience. |
Name Birth Date Positions Held with Trust Date Service Began | Principal Occupation(s) for Past Five Years, Other Directorships Held, Previous Position(s) and Qualifications |
Maureen Lally-Green Birth Date: July 5, 1949 Trustee Began serving: August 2009 | Principal Occupations: Director or Trustee of the Federated Fund Family; Director, Office of Church Relations, Diocese of Pittsburgh; Adjunct Professor of Law, Duquesne University School of Law. Other Directorships Held: Director, Auberle; Trustee, St. Francis University; Director, Ireland Institute of Pittsburgh; Director, UPMC Mercy Hospital; Regent, St. Vincent Seminary; Director, Epilepsy Foundation of Western and Central Pennsylvania; Director, Saint Thomas More Society, Allegheny County. Previous Position: Pennsylvania Superior Court Judge. Qualifications: Legal and director experience. |
Peter E. Madden Birth Date: March 16, 1942 Trustee Began serving: October 1993 | Principal Occupation: Director or Trustee, and Chairman of the Board of Directors or Trustees, of the Federated Fund Family. Previous Positions: Representative, Commonwealth of Massachusetts General Court; President, Chief Operating Officer and Director, State Street Bank and Trust Company and State Street Corporation (retired); Director, VISA USA and VISA International; Chairman and Director, Massachusetts Bankers Association; Director, Depository Trust Corporation; Director, The Boston Stock Exchange. Qualifications: Business management, mutual fund services and director experience. |
Charles F. Mansfield, Jr. Birth Date: April 10, 1945 Trustee Began serving: November 1999 | Principal Occupations: Director or Trustee of the Federated Fund Family; Management Consultant. Previous Positions: Chief Executive Officer, PBTC International Bank; Partner, Arthur Young & Company (now Ernst & Young LLP); Chief Financial Officer of Retail Banking Sector, Chase Manhattan Bank; Senior Vice President, HSBC Bank USA (formerly Marine Midland Bank); Vice President, Citibank; Assistant Professor of Banking and Finance, Frank G. Zarb School of Business, Hofstra University; Executive Vice President, DVC Group, Inc. (marketing, communications and technology). Qualifications: Banking, business management, education and director experience. |
Thomas M. O'Neill Birth Date: June 14, 1951 Trustee Began serving: October 2006 | Principal Occupations: Director or Trustee, Vice Chairman of the Audit Committee of the Federated Fund Family; Sole Proprietor, Navigator Management Company (investment and strategic consulting). Other Directorships Held: Board of Overseers, Children's Hospital of Boston; Visiting Committee on Athletics, Harvard College; Board of Directors, Medicines for Humanity; Board of Directors, The Golisano Children's Museum of Naples, Florida. Previous Positions: Chief Executive Officer and President, Managing Director and Chief Investment Officer, Fleet Investment Advisors; President and Chief Executive Officer, Aeltus Investment Management, Inc.; General Partner, Hellman, Jordan Management Co., Boston, MA; Chief Investment Officer, The Putnam Companies, Boston, MA; Credit Analyst and Lending Officer, Fleet Bank; Director and Consultant, EZE Castle Software (investment order management software); Director, Midway Pacific (lumber). Qualifications: Business management, mutual fund, director and investment experience. |
John S. Walsh Birth Date: November 28, 1957 Trustee Began serving: January 1999 | Principal Occupations: Director or Trustee, Chairman of the Audit Committee of the Federated Fund Family; President and Director, Heat Wagon, Inc. (manufacturer of construction temporary heaters); President and Director, Manufacturers Products, Inc. (distributor of portable construction heaters); President, Portable Heater Parts, a division of Manufacturers Products, Inc. Previous Position: Vice President, Walsh & Kelly, Inc. Qualifications: Business management and director experience. |
Name Birth Date Address Positions Held with Trust Date Service Began | Principal Occupation(s) for Past Five Years and Previous Position(s) |
John W. McGonigle Birth Date: October 26, 1938 EXECUTIVE VICE PRESIDENT AND SECRETARY Began serving: September 1993 | Principal Occupations: Executive Vice President and Secretary of the Federated Fund Family; Vice Chairman, Executive Vice President, Secretary and Director, Federated Investors, Inc. Previous Positions: Trustee, Federated Investment Management Company and Federated Investment Counseling; Director, Federated Global Investment Management Corp., Federated Services Company and Federated Securities Corp. |
Richard A. Novak Birth Date: December 25, 1963 TREASURER Began serving: January 2006 | Principal Occupations: Principal Financial Officer and Treasurer of the Federated Fund Family; Senior Vice President, Federated Administrative Services; Financial and Operations Principal for Federated Securities Corp., Edgewood Services, Inc. and Southpointe Distribution Services, Inc. Previous Positions: Controller of Federated Investors, Inc.; Vice President, Finance of Federated Services Company; held various financial management positions within The Mercy Hospital of Pittsburgh; Auditor, Arthur Andersen & Co. |
Name Birth Date Address Positions Held with Trust Date Service Began | Principal Occupation(s) for Past Five Years and Previous Position(s) |
Richard B. Fisher Birth Date: May 17, 1923 VICE PRESIDENT Began serving: September 1993 | Principal Occupations: Vice Chairman or Vice President of some of the Funds in the Federated Fund Family; Vice Chairman, Federated Investors, Inc.; Chairman, Federated Securities Corp. Previous Positions: President and Director or Trustee of some of the Funds in the Federated Fund Family; Executive Vice President, Federated Investors, Inc.; Director and Chief Executive Officer, Federated Securities Corp. |
John B. Fisher Birth Date: May 16, 1956 PRESIDENT Began serving: November 2004 | Principal Occupations: President, Director/Trustee and CEO, Federated Advisory Services Company, Federated Equity Management Company of Pennsylvania, Federated Global Investment Management Corp., Federated Investment Counseling, Federated Investment Management Company; President and CEO of Passport Research, Ltd.; President of some of the Funds in the Federated Fund Family; Director, Federated Investors Trust Company. Previous Positions: President and Director of the Institutional Sales Division of Federated Securities Corp.; President and Director of Federated Investment Counseling; Director, Edgewood Securities Corp.; Director, Federated Services Company; Director, Federated Investors, Inc.; Chairman and Director, Southpointe Distribution Services, Inc.; President, Technology, Federated Services Company. |
Brian P. Bouda Birth Date: February 28, 1947 CHIEF COMPLIANCE OFFICER AND SENIOR VICE PRESIDENT Began serving: August 2004 | Principal Occupations: Senior Vice President and Chief Compliance Officer of the Federated Fund Family; Vice President and Chief Compliance Officer of Federated Investors, Inc. and Chief Compliance Officer of its subsidiaries. Mr. Bouda joined Federated in 1999 and is a member of the American Bar Association and the State Bar Association of Wisconsin. |
Stephen F. Auth Birth Date: September 3, 1956 450 Lexington Avenue Suite 3700 New York, NY 10017-3943 CHIEF INVESTMENT OFFICER Began serving: November 2002 | Principal Occupations: Mr. Auth is Chief Investment Officer of this Fund and various other Funds in the Federated Fund Family; Executive Vice President, Federated Investment Counseling, Federated Global Investment Management Corp. and Federated Equity Management Company of Pennsylvania. Previous Positions: Executive Vice President, Federated Investment Management Company, and Passport Research, Ltd. (investment advisory subsidiary of Federated); Senior Vice President, Global Portfolio Management Services Division; Senior Vice President, Federated Investment Management Company and Passport Research, Ltd.; Senior Managing Director and Portfolio Manager, Prudential Investments. |
Robert J. Ostrowski Birth Date: April 26, 1963 CHIEF INVESTMENT OFFICER Began serving: May 2004 | Principal Occupations: Robert J. Ostrowski joined Federated in 1987 as an Investment Analyst and became a Portfolio Manager in 1990. He was named Chief Investment Officer of taxable fixed-income products in 2004 and also serves as a Senior Portfolio Manager. He has been a Senior Vice President of the Fund's Adviser since 1997. Mr. Ostrowski has received the Chartered Financial Analyst designation. He received his M.S. in Industrial Administration from Carnegie Mellon University. |
Evaluation and Approval of Advisory Contract – May 2011
FEDERATed quality bond fund ii (the “Fund”)
The Fund's Board reviewed the Fund's investment advisory contract at meetings held in May 2011. The Board's decision regarding the contract reflects the exercise of its business judgment on whether to continue the existing arrangements.
In this connection, the Federated Funds' Board had previously appointed a Senior Officer, whose duties include specified responsibilities relating to the process by which advisory fees are to be charged to a Federated fund. The Senior Officer has the authority to retain consultants, experts, or staff as may be reasonably necessary to assist in the performance of his duties, reports directly to the Board, and may be terminated only with the approval of a majority of the independent members of the Board. The Senior Officer prepared and furnished to the Board an independent, written evaluation that covered topics discussed below (the “Evaluation”). The Board considered that Evaluation, along with other information, in deciding to approve the advisory contract.
During its review of the contract, the Board considered compensation and benefits received by the Adviser. This included the fees received for services provided to the Fund by other entities in the Federated organization and research services (if any) received by the Adviser from brokers that execute Federated fund trades, as well as advisory fees. The Board is also familiar with and considered judicial decisions concerning allegedly excessive investment advisory fees, which have indicated that the following factors may be relevant to an Adviser's fiduciary duty with respect to its receipt of compensation from a fund: the nature and quality of the services provided by the Adviser, including the performance of the fund; the Adviser's cost of providing the services; the extent to which the Adviser may realize “economies of scale” as a fund grows larger; any indirect benefits that may accrue to the Adviser and its affiliates as a result of the Adviser's relationship with a fund; performance and expenses of comparable funds; and the extent to which the independent Board members are fully informed about all facts the Board deems relevant bearing on the Adviser's services and fees. The Board further considered management fees (including any components thereof) charged to institutional and other clients of the Adviser for what might be viewed as like services, and the cost to the Adviser and its affiliates of supplying services pursuant to the management fee agreements, excluding any intra-corporate profit and profit margins of the Adviser and its affiliates for supplying such services. The Board was aware of these factors and was guided by them in its review of the Fund's advisory contract to the extent it considered them to be appropriate and relevant, as discussed further below.
The Board considered and weighed these circumstances in light of its substantial accumulated experience in governing the Fund and working with Federated on matters relating to the Federated funds, and was assisted in its deliberations by independent legal counsel. Throughout the year, the Board has requested and received substantial and detailed information about the Fund and the Federated organization that was in addition to the extensive materials that comprise and accompany the Senior Officer's Evaluation. Federated provided much of this information at each regular meeting of the Board, and furnished additional information in connection with the particular meeting at which the Board's formal review of the advisory contract occurred. Between regularly scheduled meetings, the Board also received information on particular matters as the need arose. Thus, the Board's consideration of the advisory contract included review of the Senior Officer's Evaluation, accompanying data and additional information covering such matters as: the Adviser's investment philosophy, revenue, profitability, personnel and processes; investment and operating strategies; the Fund's short- and long-term performance (in absolute terms, both on a gross basis and net of expenses, as well as in relationship to its particular investment program and certain competitor or “peer group” funds and/or other benchmarks, as appropriate), and comments on the reasons for performance; the Fund's investment objectives; the Fund's expenses (including the advisory fee itself and the overall expense structure of the Fund, both in absolute terms and relative to similar and/or competing funds, with due regard for contractual or voluntary expense limitations); the use and allocation of brokerage commissions derived from trading the Fund's portfolio securities (if any); and the nature, quality and extent of the advisory and other services provided to the Fund by the Adviser and its affiliates. The Board also considered the preferences and expectations of Fund shareholders and their relative sophistication; the continuing state of competition in the mutual fund industry and market practices; the range of comparable fees for similar funds in the mutual fund industry; the Fund's relationship to the Federated family of funds which include a comprehensive array of funds with different investment objectives, policies and strategies which are available for exchange without the incurrence of additional sales charges; compliance and audit reports concerning the Federated funds and the Federated companies that service them (including communications from regulatory agencies), as well as Federated's responses to any issues raised therein; and relevant developments in the mutual fund industry and how the Federated funds and/or Federated are responding to them. The Board's evaluation process is evolutionary. The criteria considered and the emphasis placed on relevant criteria change in recognition of changing circumstances in the mutual fund marketplace.
With respect to the Fund's performance and expenses in particular, the Board has found the use of comparisons to other mutual funds with comparable investment programs to be relevant, given the high degree of competition in the mutual fund business. The Board focused on comparisons with other similar mutual funds more heavily than non-mutual fund products or services because it is believed that they are more relevant. For example, other mutual funds are the products most like the Annual Shareholder Report
Fund, they are readily available to Fund shareholders as alternative investment vehicles, and they are the type of investment vehicle in fact chosen and maintained by the Fund's investors. The range of their fees and expenses therefore appears to be a generally reliable indication of what consumers have found to be reasonable in the precise marketplace in which the Fund competes. The Fund's ability to deliver competitive performance when compared to its peer group was a useful indicator of how the Adviser is executing the Fund's investment program, which in turn assisted the Board in reaching a conclusion that the nature, extent, and quality of the Adviser's investment management services were such as to warrant continuation of the advisory contract. In this regard, the Senior Officer has reviewed Federated's fees for providing advisory services to products outside the Federated family of funds (e.g., institutional and separate accounts). He concluded that mutual funds and institutional accounts are inherently different products. Those differences include, but are not limited to, different types of targeted investors; being subject to different laws and regulations; different legal structures; different average account sizes; different associated costs; different portfolio management techniques made necessary by different cash flows; and portfolio manager time spent in review of securities pricing. The Senior Officer did not consider these fee schedules to be determinative in judging the appropriateness of mutual fund advisory contracts.The Senior Officer reviewed information compiled by Federated, using data supplied by independent fund ranking organizations, regarding the performance of, and fees charged by, other mutual funds, noting his view that comparisons to fund peer groups are relevant in judging the reasonableness of proposed fees.
For the one-year, three-year and five-year periods covered by the Evaluation, the Fund's performance was above the median of the relevant peer group.
The Board also received financial information about Federated, including information regarding the compensation and benefits Federated derived from its relationships with the Federated funds. This information covered not only the fees under the advisory contracts, but also fees received by Federated's subsidiaries for providing other services to the Federated funds under separate contracts (e.g., for serving as the Federated funds' administrator). The information also detailed any indirect benefit Federated may derive from its receipt of research services from brokers who execute Federated fund trades. In addition, the Board considered the fact that, in order for a fund to be competitive in the marketplace, Federated and its affiliates frequently waived fees and/or reimbursed expenses and have disclosed to fund investors and/or indicated to the Board their intention to do so in the future, where appropriate. Moreover, the Board receives regular reporting as to the institution or elimination of these voluntary waivers.
Federated furnished information, requested by the Senior Officer, that reported revenues on a fund-by-fund basis and made estimates of the allocation of expenses on a fund-by-fund basis, using allocation methodologies specified by the Senior Officer. The Senior Officer noted that, although they may apply consistent allocation processes, the inherent difficulties in allocating costs (and the unavoidable arbitrary aspects of that exercise) and the lack of consensus on how to allocate those costs may render such allocation information unreliable. The allocation information was considered in the analysis by the Board but was determined to be of limited use.
The Board and the Senior Officer also reviewed information compiled by Federated comparing profitability information for Federated to other publicly held fund management companies. In this regard, the Senior Officer noted the limited availability of such information, but nonetheless concluded that Federated's profit margins did not appear to be excessive and the Board agreed.
The Senior Officer's Evaluation also discussed the notion of possible realization of “economies of scale” as a fund grows larger. The Board considered in this regard that the Adviser has made significant and long-term investments in areas that support all of the Federated funds, such as personnel and processes for the portfolio management, compliance, internal audit, and risk management functions; and systems technology; and that the benefits of these efforts (as well as any economies, should they exist) were likely to be enjoyed by the fund complex as a whole. Finally, the Board also noted the absence of any applicable regulatory or industry guidelines on this subject, which (as discussed in the Senior Officer's Evaluation) is compounded by the lack of any common industry practice or general pattern with respect to structuring fund advisory fees with “breakpoints” that serve to reduce the fee as the fund attains a certain size. The Senior Officer did not recommend institution of breakpoints in pricing Federated's fund advisory services at this time.
It was noted in the materials for the Board meeting that for the period covered by the Evaluation, the Fund's investment advisory fee, after waivers and expense reimbursements, if any, was above the median of the relevant peer group. The Board reviewed the fees and other expenses of the Fund with the Adviser and was satisfied that the overall expense structure of the Fund remained competitive. The Board will continue to monitor advisory fees and other expenses borne by the Fund.
The Senior Officer noted that, considering the totality of the circumstances, and all of the factors referenced within his Evaluation, he had concluded that, subject to comments and recommendations made within his Evaluation, his observations and the information accompanying the Evaluation supported a finding by the Board that the management fees for each of the funds are reasonable and that Federated appeared to provide appropriate administrative services to the Fund for the fees paid. Under these circumstances, no changes were recommended to, and no objection was raised to, the continuation of the Fund's advisory contract. The Board concluded that the nature, quality and scope of services provided the Fund by the Adviser and its affiliates were satisfactory.
Annual Shareholder Report
In its decision to continue an existing investment advisory contract, the Board was mindful of the potential disruptions of the Fund's operations and various risks, uncertainties and other effects that could occur as a result of a decision to terminate or not renew an advisory contract. In particular, the Board recognized that many shareholders have invested in the Fund on the strength of the Adviser's industry standing and reputation and with the expectation that the Adviser will have a continuing role in providing advisory services to the Fund. Thus, the Board's approval of the advisory contract reflected the fact that it is the shareholders who have effectively selected the Adviser by virtue of having invested in the Fund.The Board based its decision to approve the advisory contract on the totality of the circumstances and relevant factors and with a view to past and future long-term considerations. Not all of the factors and considerations identified above were necessarily relevant to the Fund, nor did the Board consider any one of them to be determinative. With respect to the factors that were relevant, the Board's decision to approve the contract reflects its determination that Federated's performance and actions provided a satisfactory basis to support the decision to continue the existing arrangements.
Annual Shareholder ReportVoting Proxies on Fund Portfolio Securities
A description of the policies and procedures that the Fund uses to determine how to vote proxies, if any, relating to securities held in the Fund's portfolio is available, without charge and upon request, by calling 1-800-341-7400. A report on “Form N-PX” of how the Fund voted any such proxies during the most recent 12-month period ended June 30 is available from Federated's website at FederatedInvestors.com. To access this information from the home page, select “All” under “Asset Classes.” Select a fund name and share class, if applicable, to go to the Fund Overview page. On the Fund Overview page, select the “Documents” tab. At the bottom of that page, select “Proxy Voting Record Report (Form N-PX).” Form N-PX filings are also available at the SEC's website at www.sec.gov.
The Fund files with the SEC a complete schedule of its portfolio holdings, as of the close of the first and third quarters of its fiscal year, on “Form N-Q.” These filings are available on the SEC's website at www.sec.gov and may be reviewed and copied at the SEC's Public Reference Room in Washington, DC. (Call 1-800-SEC-0330 for information on the operation of the Public Reference Room.) You may also access this information from the “Products” section of Federated's website at FederatedInvestors.com. From the home page, select “All” under “Asset Classes.” Select a fund name and share class, if applicable, to go to the Fund Overview page. On the Fund Overview page, select the “Documents” tab. At the bottom of that page, select “Form N-Q.”
Annual Shareholder ReportVariable investment options are not bank deposits or obligations, are not guaranteed by any bank and are not insured or guaranteed by the U.S. government, the Federal Deposit Insurance Corporation, the Federal Reserve Board or any other government agency. Investment in variable investment options involves investment risk, including the possible loss of principal.
This Report is authorized for distribution to prospective investors only when preceded or accompanied by the Fund's Prospectus, which contains facts concerning its objective and policies, management fees, expenses and other information.
Federated Quality Bond Fund II
Federated Investors Funds
4000 Ericsson Drive
Warrendale, PA 15086-7561
Contact us at FederatedInvestors.com
or call 1-800-341-7400.
Federated Securities Corp., Distributor
CUSIP 313916884
CUSIP 313916785
G00433-14 (2/12)
Federated is a registered trademark of Federated Investors, Inc.
2012 © Federated Investors, Inc.
Annual Shareholder Report | ||
December 31, 2011 | ||
Federated Fund for U.S. Government Securities II
A Portfolio of Federated Insurance Series
Dear Valued Shareholder,
I am pleased to present the Annual Shareholder Report for your fund covering the period from January 1, 2011 through December 31, 2011. This report includes Management's Discussion of Fund Performance, a complete listing of your fund's holdings, performance information and financial statements along with other important fund information.
In addition, our website, FederatedInvestors.com, offers easy access to Federated resources that include timely fund updates, economic and market insights from our investment strategists, and financial planning tools. We invite you to register to take full advantage of its capabilities.
Thank you for investing with Federated. I hope you find this information useful and look forward to keeping you informed.
Sincerely,
John B. Fisher, President
Management's Discussion of Fund Performance (unaudited)
The Fund's total return for the 12-month reporting period ended December 31, 2011, was 5.78%. The Fund's custom benchmark (“Blended Index”), which consists of a 67%/33% blend of the Barclays Capital Mortgage-Backed Securities Index and Barclays Capital Government Index,1 respectively, returned 7.16%.
The most significant impacts on performance resulted from: (a) duration; (b) sector allocation; and (c) yield curve.
Political upheaval, government debt and European financial system concerns dominated headlines during the year. Waves of unrest swept the Middle East in the “Arab Spring,” leading to the fall of numerous political leaders and their governments. European leaders came under pressure as well due to unsustainable levels of debt and the strains on government finances and the European financial system.
As the risk of selected European defaults rose along with debt levels, implications for European banks, large holders of sovereign debt, became worrisome. The need to maintain proper bank capitalization along with a stable financial system became the focus for numerous government leader summits and meetings in an attempt to forge a restructuring plan. As a resolution remained elusive, yields rose as investors demanded greater compensation for potential default risk, raising costs for select eurozone governments. For investors, the demand for risk declined, instead favoring government bonds, most notably U.S. Treasuries. Consequently, Treasury demand remained robust despite Standard & Poor's downgrade of U.S. government debt in August.
Central banks were quite active, led by the European Central Bank (ECB) and the Federal Reserve (the “Fed”) which acted to increase liquidity and support growth. The ECB purchased sovereign debt in an attempt to reduce finance costs; however, market pressure on severely indebted nations was significant, most notably for Greece, Spain, Italy and Portugal. Additionally, the ECB initiated a three-year financing program for European financial institutions, offering low-cost loans intended to increase liquidity.
The Fed commenced “Operation Twist” which entails the sale of shorter maturity Treasuries in favor of buying longer maturity issues. Combined with the purchase of agency mortgage-backed securities (MBS) with paydowns from the Fed's MBS portfolio, these programs were devised to support housing and reduce interest rates. In this environment, investors preferred the safety of government debt over fixed-income securities offering greater yield despite signs of improving U.S. economic growth in the latter portion of the reporting period. The two-year and ten-year Treasury yields decreased 35 and 141 basis points to 0.24% and 1.88%, respectively.2
Risk averse investors preferred U.S Treasuries which outperformed similar duration residential and commercial MBS.
Duration was below the Blended Index for a significant portion of the reporting period in expectation of higher interest rates. As Treasury market yields declined, as highlighted above, the Fund's capital gains lagged, thus negatively contributing to Fund performance.
U.S. Treasury securities posted the strongest returns in the fixed-income universe as falling market interest rates resulted in strong capital gains and total returns. Spread sectors, including agency and non-agency residential and commercial mortgage securities, lagged similar duration Treasuries as investors shunned risk in favor of U.S. Treasury debt. Due to this environment, allocations to commercial and non-agency residential MBS were not beneficial. Sector allocation, therefore, acted as a drag on performance.
Annual Shareholder Report
YIELD CURVEYield curve strategy incorporated expectations of a flatter yield curve. Specifically, the portfolio was opportunistically designed to benefit under a scenario where the yield differential between two-year and ten-year Treasury yields compressed. In fact, the yield differential did decrease, as the two- to ten-year Treasury yield spread contracted from 270 to 164 basis points. As a result, yield curve strategy made a positive contribution to Fund performance.
1 | Barclays Capital Mortgage-Backed Securities Index is composed of all fixed securities mortgage pools by GNMA, FNMA and the FHLMC, including GNMA Graduated Payment Mortgages. The Barclays Capital Government Index includes the Treasury and Agency indexes. The Treasury component includes public obligations of the U.S. Treasury that have remaining maturities of more than one year. The Agency component includes both callable and non-callable agency securities that are publicly issued by U.S. government agencies, quasi-federal corporations and corporate or foreign debt guaranteed by the U.S. government. The indexes are unmanaged, and it is not possible to invest directly in an index. |
2 | Bond prices are sensitive to changes in interest rates and a rise in interest rates can cause a decline in their prices. The value of some mortgage-backed securities may be particularly sensitive to changes in prevailing interest rates, and although the securities are generally supported by some form of government or private insurance, there is no assurance that private guarantors or insurers will meet their obligations. |
3 | Duration is a measure of a security's price sensitivity to changes in interest rates. Securities with longer durations are more sensitive to changes in interest rates than securities of shorter durations. |
FUND PERFORMANCE AND GROWTH OF A $10,000 INVESTMENT
The Average Annual Total Return table below shows returns averaged over the stated periods. The graph below illustrates the hypothetical investment of $10,0001 in the Federated Fund for U.S. Government Securities II (the “Fund”) from December 31, 2001 to December 31, 2011, compared to the Barclays Capital Mortgage-Backed Securities Index (BCMBS),2 and the Barclays Capital Government Index (BCGI),2 both broad-based market indexes, and a blended index comprised of 67% Barclays Capital Mortgage-Backed Securities Index and 33% Barclays Capital Government Index (Blended Index).2
Average Annual Total Returns for the Period Ended 12/31/2011 |
1 Year | 5.78% |
5 Year | 5.34% |
10 Years | 4.77% |
Performance data quoted represents past performance which is no guarantee of future results. Investment return and principal value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Performance of a variable investment option changes over time and current performance may be lower or higher than what is stated. For current to the most recent month end performance, contact your insurance company. The performance information presented does not include the charges and expenses imposed by the insurance company under the variable insurance product contract. The inclusion of such charges would lower performance. Please refer to the variable insurance product prospectus for a complete listing of these expenses. Fund shares are available exclusively as a funding vehicle for life insurance companies writing variable life insurance policies and variable annuity contracts. Variable investment options are not obligations of or guaranteed by any bank and are not federally insured.
GROWTH OF A $10,000 INVESTMENT
Federated Fund for U.S. Government Securities II | C000026775 | BCMBS | BCGI | Blended Index |
12/31/2001 | 10,000 | 10,000 | 10,000 | 10,000 |
12/31/2002 | 10,905 | 10,875 | 11,150 | 10,966 |
12/31/2003 | 11,163 | 11,208 | 11,412 | 11,276 |
12/31/2004 | 11,566 | 11,736 | 11,809 | 11,761 |
12/31/2005 | 11,800 | 12,042 | 12,122 | 12,070 |
12/31/2006 | 12,289 | 12,671 | 12,543 | 12,630 |
12/31/2007 | 13,061 | 13,553 | 13,630 | 13,580 |
12/31/2008 | 13,620 | 14,684 | 15,318 | 14,893 |
12/31/2009 | 14,329 | 15,528 | 14,981 | 15,359 |
12/31/2010 | 15,070 | 16,382 | 15,808 | 16,205 |
12/31/2011 | 15,940 | 17,418 | 17,234 | 17,374 |
1 | The Fund's performance assumes the reinvestment of all dividends and distributions. The BCMBS, BCGI and Blended Index have been adjusted to reflect reinvestment of dividends on securities in the indexes. |
2 | The BCMBS, BCGI and Blended Index are not adjusted to reflect sales charges, expenses or other fees that the Securities and Exchange Commission requires to be reflected in the Fund's performance. The indexes are unmanaged and, unlike the Fund, are not affected by cash flows. It is not possible to invest directly in an index. |
Portfolio of Investments Summary Table (unaudited)
At December 31, 2011, the Fund's portfolio composition1 was as follows:
Type of Investments | Percentage of Total Net Assets |
U.S. Government Agency Mortgage-Backed Securities | 71.7% |
Non-Agency Mortgage-Backed Securities | 14.5% |
U.S. Treasury Securities | 9.8% |
U.S. Government Agency Securities | 6.6% |
Repurchase Agreements — Collateral2 | 3.5% |
Repurchase Agreements — Cash | 2.6% |
Other Assets and Liabilities — Net3 | (8.7)% |
TOTAL | 100.0% |
1 | See the Fund's Prospectus and Statement of Additional Information for a description of the types of securities in which the Fund invests. |
2 | Includes repurchase agreements purchased with cash collateral or proceeds received in securities lending and/or dollar-roll transactions, as well as cash held to cover payments on when-issued and delayed delivery transactions. |
3 | Assets, other than investments in securities, less liabilities. See Statement of Assets and Liabilities. |
Principal Amount | Value |
U.S. Treasury obligations – 9.8% |
$2,000,000 | United States Treasury Bonds, 3.750%, 8/15/2041 | 2,347,500 |
1,250,000 | United States Treasury Bonds, 4.375%, 5/15/2040 | 1,620,996 |
370,000 | United States Treasury Bonds, 7.500%, 11/15/2024 | 590,324 |
5,000,000 | United States Treasury Notes, 1.500%, 8/31/2018 | 5,073,633 |
3,000,000 | United States Treasury Notes, 1.875%, 6/15/2012 | 3,024,492 |
4,000,000 | United States Treasury Notes, 2.625%, 6/30/2014 | 4,228,907 |
9,500,000 | United States Treasury Notes, 3.125%, 5/15/2021 | 10,603,153 |
TOTAL U.S. TREASURY OBLIGATIONS (IDENTIFIED COST $25,757,948) | 27,489,005 |
GOVERNMENT AGENCIES – 6.6% |
1,000,000 | Federal Farm Credit System, 5.750%, 12/7/2028 | 1,316,461 |
1,100,000 | Federal Home Loan Bank System, 7.125%, 2/15/2030 | 1,622,419 |
1,500,000 | Federal Home Loan Mortgage Corp., 5.625%, 11/23/2035 | 1,679,788 |
72,000 | Federal Home Loan Mortgage Corp., 6.750%, 9/15/2029 | 106,778 |
2,000,000 | Tennessee Valley Authority, 4.650%, 6/15/2035 | 2,300,942 |
10,700,000 | Tennessee Valley Authority, 6.000%, 3/15/2013 | 11,434,234 |
TOTAL GOVERNMENT AGENCIES (IDENTIFIED COST $16,454,567) | 18,460,622 |
Mortgage-Backed Securities – 58.0% |
Federal Home Loan Mortgage Corporation – 28.1% |
10,439,009 | 1 | Federal Home Loan Mortgage Corp., 3.500%, 10/1/2025 - 1/1/2042 | 10,830,373 |
26,513,916 | Federal Home Loan Mortgage Corp., 4.500%, 6/1/2019 - 4/1/2041 | 28,112,194 |
13,517,144 | Federal Home Loan Mortgage Corp., 5.000%, 7/1/2019 - 6/1/2040 | 14,543,928 |
16,735,310 | Federal Home Loan Mortgage Corp., 5.500%, 12/1/2020 - 3/1/2040 | 18,156,683 |
4,826,389 | Federal Home Loan Mortgage Corp., 6.000%, 1/1/2014 - 7/1/2037 | 5,298,244 |
646,019 | Federal Home Loan Mortgage Corp., 6.500%, 12/1/2021 - 5/1/2031 | 722,562 |
1,173,442 | Federal Home Loan Mortgage Corp., 7.000%, 12/1/2029 - 4/1/2032 | 1,341,498 |
108,209 | Federal Home Loan Mortgage Corp., 7.500%, 9/1/2030 - 1/1/2031 | 126,485 |
15,633 | Federal Home Loan Mortgage Corp., 8.500%, 5/1/2030 | 18,843 |
8,318 | Federal Home Loan Mortgage Corp., 9.000%, 2/1/2025 - 5/1/2025 | 9,925 |
TOTAL | 79,160,735 |
Federal National Mortgage Association – 15.8% |
7,966,494 | 1 | Federal National Mortgage Association, 3.500%, 1/1/2021 - 1/1/2042 | 8,308,020 |
6,000,000 | Federal National Mortgage Association, 4.000%, 1/1/2042 | 6,302,687 |
6,323,020 | Federal National Mortgage Association, 4.500%, 12/1/2019 - 10/1/2041 | 6,729,975 |
5,585,492 | Federal National Mortgage Association, 5.000%, 7/1/2034 - 7/1/2040 | 6,031,764 |
5,278,545 | Federal National Mortgage Association, 5.500%, 11/1/2021 - 4/1/2036 | 5,749,554 |
9,079,545 | Federal National Mortgage Association, 6.000%, 5/1/2014 - 3/1/2038 | 9,956,427 |
542,434 | Federal National Mortgage Association, 6.500%, 6/1/2029 - 11/1/2035 | 607,442 |
534,959 | Federal National Mortgage Association, 7.000%, 3/1/2015 - 4/1/2032 | 610,692 |
28,803 | Federal National Mortgage Association, 7.500%, 5/1/2015 - 2/1/2030 | 33,740 |
29,084 | Federal National Mortgage Association, 8.000%, 7/1/2030 | 34,737 |
TOTAL | 44,365,038 |
Government National Mortgage Association – 14.1% |
24,080,951 | 1 | Government National Mortgage Association, 4.500%, 6/20/2039 - 1/15/2042 | 26,261,537 |
1,899,150 | Government National Mortgage Association, 5.000%, 7/15/2034 | 2,108,246 |
1,594,235 | Government National Mortgage Association, 5.500%, 5/20/2035 | 1,780,948 |
7,373,176 | Government National Mortgage Association, 6.000%, 4/15/2032 - 7/20/2038 | 8,321,278 |
1,081,457 | Government National Mortgage Association, 6.500%, 12/15/2023 - 5/15/2032 | 1,236,158 |
Principal Amount | Value |
$41,766 | Government National Mortgage Association, 7.500%, 10/15/2026 - 3/20/2030 | 48,766 |
3,237 | Government National Mortgage Association, 8.000%, 4/15/2030 | 3,831 |
16,190 | Government National Mortgage Association, 9.500%, 11/15/2016 | 18,193 |
TOTAL | 39,778,957 |
TOTAL MORTGAGE-BACKED SECURITIES (IDENTIFIED COST $153,835,458) | 163,304,730 |
Collateralized Mortgage Obligations – 19.7% |
1,813,565 | Countrywide Alternative Loan Trust 2003-J3, Class 1A3, 5.250%, 11/25/2033 | 1,816,699 |
2,061,477 | Countrywide Home Loans 2007-14, Class A18, 6.000%, 9/25/2037 | 1,829,338 |
864,817 | Credit Suisse Mortgage Capital Certificate 2007-4, Class 4A2, 5.500%, 6/25/2037 | 701,465 |
328,874 | Federal Home Loan Mortgage Corp. REMIC 3076 NM, 7.500%, 4/15/2033 | 335,402 |
4,000,196 | 2 | Federal Home Loan Mortgage Corp. REMIC 3144 FB, 0.628%, 4/15/2036 | 3,993,430 |
1,198,984 | 2 | Federal Home Loan Mortgage Corp. REMIC 3175 FE, 0.588%, 6/15/2036 | 1,195,375 |
557,538 | 2 | Federal Home Loan Mortgage Corp. REMIC 3206 FE, 0.678%, 8/15/2036 | 557,776 |
3,663,651 | Federal Home Loan Mortgage Corp. REMIC K010 A1, 3.320%, 7/25/2020 | 3,908,277 |
4,000,000 | Federal Home Loan Mortgage Corp. REMIC K703 A2, 2.699%, 5/25/2018 | 4,135,742 |
3,450,000 | Federal Home Loan Mortgage Corp. REMIC K704 A2, 2.412%, 8/25/2018 | 3,499,864 |
899,345 | 2 | Federal National Mortgage Association REMIC 2006-43 FL, 0.694%, 6/25/2036 | 899,893 |
1,832,605 | 2 | Federal National Mortgage Association REMIC 2006-58 FP, 0.594%, 7/25/2036 | 1,827,805 |
2,638,260 | 2 | Federal National Mortgage Association REMIC 2006-81 FB, 0.644%, 9/25/2036 | 2,635,434 |
2,948,315 | 2 | Federal National Mortgage Association REMIC 2006-85 PF, 0.674%, 9/25/2036 | 2,944,289 |
744,363 | 2 | Federal National Mortgage Association REMIC 2006-93 FM, 0.674%, 10/25/2036 | 743,637 |
3,226,041 | Federal National Mortgage Association REMIC 2011-M7 A1, 2.049%, 9/25/2018 | 3,277,456 |
6,000,000 | Federal National Mortgage Association REMIC 2011-M7 A2, 2.578%, 9/25/2018 | 6,131,582 |
2,300,000 | Federal National Mortgage Association REMIC 2011-M8 A2, 2.922%, 8/25/2021 | 2,343,395 |
761,708 | First Horizon Alternative Mortgage Securities 2005-FA7, Class 2A1, 5.000%, 9/25/2020 | 710,056 |
1,600,289 | Harborview Mortgage Loan Trust 2006-4, Class 2A1A, 0.485%, 5/19/2047 | 773,430 |
566,890 | Sequoia Mortgage Trust 2010-H1, Class A1, 3.750%, 2/25/2040 | 565,552 |
1,657,404 | Sequoia Mortgage Trust 2011-1, Class A1, 4.125%, 2/25/2041 | 1,656,331 |
2,610,855 | Sequoia Mortgage Trust 2011-2, Class A1, 3.900%, 9/25/2041 | 2,644,797 |
2,353,279 | Structured Asset Securities Corp. 2005-17, Class 5A1, 5.500%, 10/25/2035 | 1,995,412 |
3,500,000 | UBS-Citigroup Commercial Mortgage Trust 2011-C1, Class A2, 2.804%, 1/10/2045 | 3,552,902 |
1,259,822 | 2 | Washington Mutual 2006-AR1, Class 2A1B, 1.278%, 1/25/2046 | 726,144 |
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS (IDENTIFIED COST $57,002,729) | 55,401,483 |
Commercial Mortgage-Backed Securities – 8.5% |
2,754,834 | 3,4 | Commercial Mortgage Pass-Through Certificates 2010-C1, Class A1, 3.156%, 7/10/2046 | 2,834,780 |
2,650,000 | 3,4 | DBUBS Mortgage Trust 2011-LC2A, Class A2, 3.386%, 7/10/2044 | 2,741,423 |
2,439,152 | 3,4 | GS Mortgage Securities Corp. 2010-C2, Class A1, 3.849%, 12/10/2043 | 2,531,080 |
2,421,948 | 3,4 | JPMorgan Chase Commercial Mortgage Securities 2010-C1, Class A1, 3.853%, 6/15/2043 | 2,532,324 |
2,804,097 | 3,4 | JPMorgan Chase Commercial Mortgage Securities 2010-C2, Class A1, 2.749%, 11/15/2043 | 2,838,753 |
2,100,000 | 3,4 | JPMorgan Chase Commercial Mortgage Securities, 2011-C4, Class A2, 3.341%, 7/15/2046 | 2,167,942 |
4,738,068 | NCUA Guaranteed Notes 2010-C1, Class A1, 1.600%, 10/29/2020 | 4,798,034 |
1,500,000 | 3,4 | WFRBS Commercial Mortgage Trust 2011-C3, Class A2, 3.292%, 3/15/2044 | 1,563,816 |
1,834,081 | 3,4 | Wells Fargo Commercial Mortgage Trust 2010-C1, Class A1, 3.349%, 11/15/2043 | 1,904,355 |
TOTAL COMMERCIAL MORTGAGE-BACKED SECURITIES (IDENTIFIED COST $23,500,510) | 23,912,507 |
Repurchase Agreements – 6.1% |
14,582,000 | 2 | Interest in $4,100,000,000 joint repurchase agreement 0.06%, dated 12/30/2011 under which Bank of America, N.A. will repurchase securities provided as collateral for $4,100,027,333 on 1/3/2012. The securities provided as collateral at the end of the period were U.S. Government Agency securities with various maturities to 4/15/2040 and the market value of those underlying securities was $4,218,795,473. | 14,582,000 |
Principal Amount | Value |
$2,498,000 | 5 | Interest in $82,383,000 joint repurchase agreement 0.05%, dated 12/19/2011 under which Barclays Capital, Inc. will repurchase securities provided as collateral for $82,387,005 on 1/23/2012. The securities provided as collateral at the end of the period were U.S. Government Agency securities with various maturities to 3/25/2049 and the market value of those underlying securities was $84,740,414. | 2,498,000 |
TOTAL REPURCHASE AGREEMENTS (AT COST) | 17,080,000 |
TOTAL INVESTMENTS — 108.7% (IDENTIFIED COST $293,631,212)6 | $ 305,648,347 |
OTHER ASSETS AND LIABILITIES - NET — (8.7)%7 | (24,342,816) |
TOTAL NET ASSETS — 100% | $281,305,531 |
1 | All or a portion of these To Be Announced Securities (TBAs) are subject to dollar-roll transactions. |
2 | All or a portion of these securities are segregated pending settlement of dollar-roll transactions. |
3 | Denotes a restricted security that either: (a) cannot be offered for public sale without first being registered, or being able to take advantage of an exemption from registration, under the Securities Act of 1933; or (b) is subject to a contractual restriction on public sales. At December 31, 2011, these restricted securities amounted to $19,114,473, which represented 6.8% of total net assets. |
4 | Denotes a restricted security that may be resold without restriction to “qualified institutional buyers” as defined in Rule 144A under the Securities Act of 1933 and that the Fund has determined to be liquid under criteria established by the Fund's Board of Trustees (the “Trustees”). At December 31, 2011, these liquid restricted securities amounted to $19,114,473, which represented 6.8% of total net assets. |
5 | Although the repurchase date is more than seven days after the date of purchase, the Fund has the right to terminate the repurchase agreement at any time with seven-days' notice. |
6 | The cost of investments for federal tax purposes amounts to $292,191,433. |
7 | Assets, other than investment in securities, less liabilities. See Statement of Assets and Liabilities. |
Note: The categories of investments are shown as a percentage of total net assets at December 31, 2011.
Various inputs are used in determining the value of the Fund's investments. These inputs are summarized in the three broad levels listed below:
Level 1 — quoted prices in active markets for identical securities, including investment companies with daily net asset values, if applicable. Level 2 — other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.). Also includes securities valued at amortized cost. Level 3 — significant unobservable inputs (including the Fund's own assumptions in determining the fair value of investments).The inputs or methodology used for valuing securities are not an indication of the risk associated with investing in those securities.
As of December 31, 2011, all investments of the Fund utilized Level 2 inputs in valuing the Fund's assets carried at fair value.
The following acronym is used throughout this portfolio:
REMIC — Real Estate Mortgage Investment Conduit
See Notes which are an integral part of the Financial Statements
Annual Shareholder Report(For a Share Outstanding Throughout Each Period)
Year Ended December 31 | 2011 | 2010 | 2009 | 2008 | 2007 |
Net Asset Value, Beginning of Period | $11.50 | $11.45 | $11.45 | $11.53 | $11.34 |
Income From Investment Operations: |
Net investment income | 0.351 | 0.371 | 0.54 | 0.56 | 0.54 |
Net realized and unrealized gain (loss) on investments | 0.29 | 0.20 | 0.03 | (0.08) | 0.15 |
TOTAL FROM INVESTMENT OPERATIONS | 0.64 | 0.57 | 0.57 | 0.48 | 0.69 |
Less Distributions: |
Distributions from net investment income | (0.48) | (0.52) | (0.57) | (0.56) | (0.50) |
Net Asset Value, End of Period | $11.66 | $11.50 | $11.45 | $11.45 | $11.53 |
Total Return2 | 5.78% | 5.17% | 5.21% | 4.28% | 6.29% |
Ratios to Average Net Assets: |
Net expenses | 0.74% | 0.74% | 0.74% | 0.73% | 0.74% |
Net investment income | 3.10% | 3.25% | 3.64% | 4.30% | 4.74% |
Expense waiver/reimbursement3 | 0.02% | 0.01% | 0.01% | 0.00%4 | 0.00%4 |
Supplemental Data: |
Net assets, end of period (000 omitted) | $281,306 | $306,894 | $342,705 | $393,122 | $422,254 |
Portfolio turnover | 157% | 138% | 165% | 163% | 226% |
Portfolio turnover (excluding purchases and sales from dollar-roll transactions) | 51% | 41% | 39% | 25% | 53% |
1 | Per share numbers have been calculated using the average shares method. |
2 | Based on net asset value. Total returns do not reflect any additional fees or expenses that may be imposed by separate accounts of insurance companies or in connection with any variable annuity or variable life insurance contract. |
3 | This expense decrease is reflected in both the net expense and the net investment income ratios shown above. |
4 | Represents less than 0.01%. |
See Notes which are an integral part of the Financial Statements
Annual Shareholder ReportStatement of Assets and Liabilities
Assets: |
Total investments in securities, at value (identified cost $293,631,212) | $305,648,347 |
Cash | 273 |
Income receivable | 1,141,300 |
Receivable for shares sold | 40,868 |
TOTAL ASSETS | 306,830,788 |
Liabilities: |
Payable for investments purchased | $25,228,396 |
Payable for shares redeemed | 258,560 |
Payable for Directors'/Trustees' fees | 697 |
Accrued expenses | 37,604 |
TOTAL LIABILITIES | 25,525,257 |
Net assets for 24,126,180 shares outstanding | $281,305,531 |
Net Assets Consist of: |
Paid-in capital | $258,307,266 |
Net unrealized appreciation of investments | 12,017,135 |
Accumulated net realized gain on investments and futures contracts | 732,511 |
Undistributed net investment income | 10,248,619 |
TOTAL NET ASSETS | $281,305,531 |
Net Asset Value, Offering Price and Redemption Proceeds Per Share: |
$281,305,531 ÷ 24,126,180 shares outstanding, no par value, unlimited shares authorized | $11.66 |
See Notes which are an integral part of the Financial Statements
Annual Shareholder ReportInvestment Income: |
Interest (including income on securities loaned of $104) | $11,159,576 |
Expenses: |
Investment adviser fee (Note 5) | $1,741,883 |
Administrative fee (Note 5) | 226,711 |
Custodian fees | 23,385 |
Transfer and dividend disbursing agent fees and expenses | 16,870 |
Directors'/Trustees' fees | 4,850 |
Auditing fees | 20,501 |
Legal fees | 5,390 |
Portfolio accounting fees | 118,984 |
Printing and postage | 56,982 |
Insurance premiums | 4,647 |
Miscellaneous | 2,859 |
TOTAL EXPENSES | 2,223,062 |
Waivers (Note 5): |
Waiver of investment adviser fee | $(54,732) |
Waiver of administrative fee | (5,782) |
TOTAL WAIVERS | (60,514) |
Net expenses | 2,162,548 |
Net investment income | 8,997,028 |
Realized and Unrealized Gain on Investments: |
Net realized gain on investments | 6,909,859 |
Net change in unrealized appreciation of investments | 322,272 |
Net realized and unrealized gain on investments | 7,232,131 |
Change in net assets resulting from operations | $16,229,159 |
See Notes which are an integral part of the Financial Statements
Annual Shareholder ReportStatement of Changes in Net Assets
Year Ended December 31 | 2011 | 2010 |
Increase (Decrease) in Net Assets |
Operations: |
Net investment income | $8,997,028 | $10,785,642 |
Net realized gain on investments | 6,909,859 | 3,921,565 |
Net change in unrealized appreciation/depreciation of investments | 322,272 | 2,428,601 |
CHANGE IN NET ASSETS RESULTING FROM OPERATIONS | 16,229,159 | 17,135,808 |
Distributions to Shareholders: |
Distributions from net investment income | (12,275,774) | (15,265,110) |
Share Transactions: |
Proceeds from sale of shares | 30,216,404 | 31,901,638 |
Net asset value of shares issued to shareholders in payment of distributions declared | 12,275,774 | 15,265,110 |
Cost of shares redeemed | (72,034,271) | (84,848,058) |
CHANGE IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS | (29,542,093) | (37,681,310) |
Change in net assets | (25,588,708) | (35,810,612) |
Net Assets: |
Beginning of period | 306,894,239 | 342,704,851 |
End of period (including undistributed net investment income of $10,248,619 and $12,277,973, respectively) | $281,305,531 | $306,894,239 |
See Notes which are an integral part of the Financial Statements
Annual Shareholder ReportFederated Insurance Series (the “Trust”) is registered under the Investment Company Act of 1940, as amended (the “Act”), as an open-end management investment company. The Trust consists of seven portfolios. The financial statements included herein are only those of Federated Fund for U.S. Government Securities II (the “Fund”), a diversified portfolio. The financial statements of the other portfolios are presented separately. The assets of each portfolio are segregated and a shareholder's interest is limited to the portfolio in which shares are held. Each portfolio pays its own expenses. Fund shares are available exclusively as a funding vehicle for life insurance companies writing variable life insurance policies and variable annuity contracts. The investment objective of the Fund is to provide current income.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. These policies are in conformity with U.S. generally accepted accounting principles (GAAP).
Investment Valuation
In calculating its net asset value (NAV), the Fund generally values investments as follows:
- Fixed-income securities acquired with remaining maturities greater than 60 days are fair valued using price evaluations provided by a pricing service approved by the Trustees.
- Fixed-income securities acquired with remaining maturities of 60 days or less are valued at their cost (adjusted for the accretion of any discount or amortization of any premium), which approximates market value.
- Derivative contracts listed on exchanges are valued at their reported settlement or closing price.
- Over-the-counter (OTC) derivative contracts are fair valued using price evaluations provided by a pricing service approved by the Trustees.
- Shares of other mutual funds are valued based upon their reported NAVs.
- For securities that are fair valued in accordance with procedures established by and under the general supervision of the Trustees, certain factors may be considered such as: the purchase price of the security, information obtained by contacting the issuer, analysis of the issuer's financial statements or other available documents, fundamental analytical data, the nature and duration of restrictions on disposition, the movement of the market in which the security is normally traded and public trading in similar securities of the issuer or comparable issuers.
If the Fund cannot obtain a price or price evaluation from a pricing service for an investment, the Fund may attempt to value the investment based upon the mean of bid and asked quotations or fair value the investment based on price evaluations, from one or more dealers. If any price, quotation, price evaluation or other pricing source is not readily available when the NAV is calculated, the Fund uses the fair value of the investment determined in accordance with the procedures described below. There can be no assurance that the Fund could purchase or sell an investment at the price used to calculate the Fund's NAV.
Fair Valuation and Significant Events Procedures
The Trustees have authorized the use of pricing services to provide evaluations of the current fair value of certain investments for purposes of calculating the NAV. Factors considered by pricing services in evaluating an investment include the yields or prices of investments of comparable quality, coupon, maturity, call rights and other potential prepayments, terms and type, reported transactions, indications as to values from dealers and general market conditions. Some pricing services provide a single price evaluation reflecting the bid-side of the market for an investment (a “bid” evaluation). Other pricing services offer both bid evaluations and price evaluations indicative of a price between the prices bid and asked for the investment (a “mid” evaluation). The Fund normally uses bid evaluations for U.S. Treasury and Agency securities and mortgage-backed securities. The Fund normally uses mid evaluations for other types of fixed-income securities and OTC derivative contracts. In the event that market quotations and price evaluations are not available for an investment, the fair value of the investment is determined in accordance with procedures adopted by the Trustees.
The Trustees also have adopted procedures requiring an investment to be priced at its fair value whenever the Adviser determines that a significant event affecting the value of the investment has occurred between the time as of which the price of the investment would otherwise be determined and the time as of which the NAV is computed. An event is considered significant if there is both an affirmative expectation that the investment's value will change in response to the event and a reasonable basis for quantifying the resulting change in value. Examples of significant events that may occur after the close of the principal market on which a security is traded, or after the time of a price evaluation provided by a pricing service or a dealer, include:
- With respect to price evaluations of fixed-income securities determined before the close of regular trading on the NYSE, actions by the Federal Reserve Open Market Committee and other significant trends in U.S. fixed-income markets;
- Political or other developments affecting the economy or markets in which an issuer conducts its operations or its securities are traded; and
- Announcements concerning matters such as acquisitions, recapitalizations, litigation developments, a natural disaster affecting the issuer's operations or regulatory changes or market developments affecting the issuer's industry.
The Fund may seek to obtain more current quotations or price evaluations from alternative pricing sources. If a reliable alternative pricing source is not available, the Fund will determine the fair value of the investment using another method approved by the Trustees.
Repurchase Agreements
The Fund may invest in repurchase agreements for short-term liquidity purposes. It is the policy of the Fund to require the other party to a repurchase agreement to transfer to the Fund's custodian or sub-custodian eligible securities or cash with a market value (after transaction costs) at least equal to the repurchase price to be paid under the repurchase agreement. The eligible securities are transferred to accounts with the custodian or sub-custodian in which the Fund holds a “securities entitlement” and exercises “control” as those terms are defined in the Uniform Annual Shareholder Report
Commercial Code. The Fund has established procedures for monitoring the market value of the transferred securities and requiring the transfer of additional eligible securities if necessary to equal at least the repurchase price. These procedures also allow the other party to require securities to be transferred from the account to the extent that their market value exceeds the repurchase price or in exchange for other eligible securities of equivalent market value.The insolvency of the other party or other failure to repurchase the securities may delay the disposition of the underlying securities or cause the Fund to receive less than the full repurchase price. Under the terms of the repurchase agreement, any amounts received by the Fund in excess of the repurchase price and related transaction costs must be remitted to the other party.
The Fund may enter into repurchase agreements in which eligible securities are transferred into joint trading accounts maintained by the custodian or sub-custodian for investment companies and other clients advised by the Fund's Adviser and its affiliates. The Fund will participate on a pro rata basis with the other investment companies and clients in its share of the securities transferred under such repurchase agreements and in its share of proceeds from any repurchase or other disposition of such securities.
Investment Income, Gains and Losses, Expenses and Distributions
Investment transactions are accounted for on a trade-date basis. Realized gains and losses from investment transactions are recorded on an identified-cost basis. Interest income and expenses are accrued daily. Dividend income and distributions to shareholders are recorded on the ex-dividend date. Positive or negative inflation adjustments on Treasury Inflation-Protected Securities (TIPS) are included in interest income. Distributions of net investment income are declared and paid annually. Non-cash dividends included in dividend income, if any, are recorded at fair value.
Premium and Discount Amortization/Paydown Gains and Losses
All premiums and discounts on fixed-income securities, other than mortgage-backed securities, are amortized/accreted using the effective interest rate method. Gains and losses realized on principal payment of mortgage-backed securities (paydown gains and losses) are classified as part of investment income.
Federal Taxes
It is the Fund's policy to comply with the Subchapter M provision of the Internal Revenue Code (the “Code”) and to distribute to shareholders each year substantially all of its income. Accordingly, no provision for federal income tax is necessary. As of and during the year ended December 31, 2011, the Fund did not have a liability for any uncertain tax positions. The Fund recognizes interest and penalties, if any, related to tax liabilities as income tax expense in the Statement of Operations. As of December 31, 2011, tax years 2008 through 2011 remain subject to examination by the Fund's major tax jurisdictions, which include the United States of America and the Commonwealth of Massachusetts.
When-Issued and Delayed Delivery Transactions
The Fund may engage in when-issued or delayed delivery transactions. The Fund records when-issued securities on the trade date and maintains security positions such that sufficient liquid assets will be available to make payment for the securities purchased. Securities purchased on a when-issued or delayed delivery basis are marked to market daily and begin earning interest on the settlement date. Losses may occur on these transactions due to changes in market conditions or the failure of counterparties to perform under the contract.
The Fund may transact in To Be Announced Securities (TBAs). As with other delayed delivery transactions, a seller agrees to issue TBAs at a future date. However, the seller does not specify the particular securities to be delivered. Instead, the Fund agrees to accept any security that meets specified terms such as issuer, interest rate and terms of underlying mortgages. The Fund records TBAs on the trade date utilizing information associated with the specified terms of the transaction as opposed to the specific mortgages. TBAs are marked to market daily and begin earning interest on the settlement date. Losses may occur due to the fact that the actual underlying mortgages received may be less favorable than those anticipated by the Fund.
Restricted Securities
The Fund may purchase securities which are considered restricted. Restricted securities are securities that either: (a) cannot be offered for public sale without first being registered, or being able to take advantage of an exemption from registration, under the Securities Act of 1933; or (b) are subject to contractual restrictions on public sales. In some cases, when a security cannot be offered for public sale without first being registered, the issuer of the restricted security has agreed to register such securities for resale, at the issuer's expense, either upon demand by the Fund or in connection with another registered offering of the securities. Many such restricted securities may be resold in the secondary market in transactions exempt from registration. Restricted securities may be determined to be liquid under criteria established by the Trustees. The Fund will not incur any registration costs upon such resales. The Fund's restricted securities are valued at the price provided by dealers in the secondary market or, if no market prices are available, at the fair value as determined in accordance with procedures established by and under the general supervision of the Trustees.
Dollar-Roll Transactions
The Fund engages in dollar-roll transactions in which the Fund sells mortgage-backed securities with a commitment to buy similar (same type, coupon and maturity), but not identical mortgage-backed securities on a future date at a lower price. Normally, one or both securities involved are TBA mortgage-backed securities. The Fund treats dollar-roll transactions as purchases and sales. Dollar-rolls are subject to interest rate risks and credit risks.
Other
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts of assets, liabilities, expenses and revenues reported in the financial statements. Actual results could differ from those estimated.
Annual Shareholder Report
3. SHARES OF BENEFICIAL INTERESTThe following table summarizes share activity:
Year Ended December 31 | 2011 | 2010 |
Shares sold | 2,632,438 | 2,794,218 |
Shares issued to shareholders in payment of distributions declared | 1,107,922 | 1,371,528 |
Shares redeemed | (6,306,493) | (7,408,907) |
NET CHANGE RESULTING FROM FUND SHARE TRANSACTIONS | (2,566,133) | (3,243,161) |
The timing and character of income and capital gain distributions are determined in accordance with income tax regulations, which may differ from GAAP. These differences are due to differing treatments for dollar-roll transactions.
For the year ended December 31, 2011, permanent differences identified and reclassified among the components of net assets were as follows:
Increase (Decrease) | |
Undistributed Net Investment Income (Loss) | Accumulated Net Realized Gain (Loss) |
$1,249,392 | $(1,249,392) |
Net investment income (loss), net realized gains (losses) and net assets were not affected by this reclassification.
The tax character of distributions as reported on the Statement of Changes in Net Assets for the years ended December 31, 2011 and 2010, was as follows:
2011 | 2010 |
Ordinary income | $12,275,774 | $15,265,110 |
As of December 31, 2011, the components of distributable earnings on a tax basis were as follows:
Undistributed ordinary income | $10,248,619 |
Net unrealized appreciation | $13,456,914 |
Capital loss carryforwards | $(707,268) |
The difference between book-basis and tax-basis net unrealized appreciation/depreciation is attributable to differing treatments for dollar-roll transactions.
At December 31, 2011, the cost of investments for federal tax purposes was $292,191,433. The net unrealized appreciation of investments for federal tax purposes was $13,456,914. This consists of net unrealized appreciation from investments for those securities having an excess of value over cost of $16,984,868 and net unrealized depreciation from investments for those securities having an excess of cost over value of $3,527,954.
At December 31, 2011, the Fund had a capital loss carryforward of $707,268 which will reduce the Fund's taxable income arising from future net realized gains on investments, if any, to the extent permitted by the Code, thereby reducing the amount of distributions to shareholders which would otherwise be necessary to relieve the Fund of any liability for federal income tax. Pursuant to the Code, a net capital loss incurred in taxable years beginning on or before December 22, 2010, is characterized as short-term and may be carried forward for a maximum of eight tax years (“Carryforward Limit”), whereas a net capital loss incurred in taxable years beginning after December 22, 2010, retains its character as either short-term or long-term, does not expire and is required to be utilized prior to the losses which have a Carryforward Limit.
The following schedule summarizes the Fund's short-term and long-term capital loss carryforwards and expiration year:
Expiration Year | Short-Term | Long-Term | Total |
2017 | $707,268 | NA | $707,268 |
The Fund used capital loss carryforwards of $5,378,369 to offset taxable capital gains realized during the year ended December 31, 2011.
5. INVESTMENT ADVISER FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Investment Adviser Fee
Federated Investment Management Company is the Fund's investment adviser (the “Adviser”). The advisory agreement between the Fund and the Adviser provides for an annual fee equal to 0.60% of the Fund's average daily net assets. Subject to the terms described in the Expense Limitation note, the Adviser may voluntarily choose to waive any portion of its fee. For the year ended December 31, 2011, the Adviser voluntarily waived $54,732 of its fee.
Annual Shareholder Report
Administrative FeeFederated Administrative Services (FAS), under the Administrative Services Agreement, provides the Fund with administrative personnel and services. The fee paid to FAS is based on the average aggregate daily net assets of certain Federated funds as specified below:
Administrative Fee | Average Aggregate Daily Net Assets of the Federated Funds |
0.150% | on the first $5 billion |
0.125% | on the next $5 billion |
0.100% | on the next $10 billion |
0.075% | on assets in excess of $20 billion |
The administrative fee received during any fiscal year shall be at least $150,000 per portfolio and $40,000 per each additional class of Shares. Subject to the terms described in the Expense Limitation note, FAS may voluntarily choose to waive any portion of its fee. For the year ended December 31, 2011, the net fee paid to FAS was 0.076% of average daily net assets of the Fund. FAS waived $5,782 of its fee.
Expense Limitation
The Adviser and its affiliates (which may include FAS) have voluntarily agreed to waive their fees and/or reimburse expenses so that the total annual fund operating expenses (as shown in the financial highlights) paid by the Fund (after the voluntary waivers and/or reimbursements) will not exceed 0.80% (the “Fee Limit”), up to but not including the later of (the “Termination Date”): (a) May 1, 2012; or (b) the date of the Fund's next effective Prospectus. While the Adviser and its affiliates currently do not anticipate terminating or increasing these arrangements prior to the Termination Date, these arrangements may only be terminated or the Fee Limit increased prior to the Termination Date with the agreement of the Trustees.
General
Certain Officers and Trustees of the Fund are Officers and Directors or Trustees of the above companies.
Purchases and sales of investments, excluding long-term U.S. government securities and short-term obligations, for the year ended December 31, 2011, were as follows:
Purchases | $46,255,321 |
Sales | $29,799,340 |
The Fund participates in a $100,000,000 unsecured, uncommitted revolving line of credit (LOC) agreement with PNC Bank. The LOC was made available for extraordinary or emergency purposes, primarily for financing redemption payments. Borrowings are charged interest at a rate offered to the Fund by PNC Bank at the time of the borrowing. As of December 31, 2011, there were no outstanding loans. During the year ended December 31, 2011, the Fund did not utilize the LOC.
Pursuant to an Exemptive Order issued by the Securities and Exchange Commission, the Fund, along with other funds advised by subsidiaries of Federated Investors, Inc., may participate in an interfund lending program. This program provides an alternative credit facility allowing the Fund to borrow from other participating affiliated funds. As of December 31, 2011, there were no outstanding loans. During the year ended December 31, 2011, the program was not utilized.
9. RECENT ACCOUNTING PRONOUNCEMENTS
In April 2011, the Financial Accounting Standards Board (FASB) released Accounting Standards Update (ASU) No. 2011-03, “Reconsideration of Effective Control for Repurchase Agreements.” This ASU amends FASB Accounting Standards Codification (ASC) Topic 860, “Transfers and Servicing”; specifically the criteria required to determine whether a repurchase agreement and similar agreements should be accounted for as sales of financial assets or secured borrowings with commitments. This ASU is effective for fiscal years and interim periods beginning after December 15, 2011. Management has concluded that the adoption of ASU No. 2011-03 is not expected to have a material impact on the Fund's financial statements and the accompanying notes, net assets or results of operations.
In addition, in May 2011, FASB released ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” This ASU amends FASB ASC Topic 820, “Fair Value Measurement,” to establish common requirements for measuring fair value and for disclosing information about fair value measurements in accordance with GAAP. This ASU is effective for fiscal years and interim periods beginning after December 15, 2011. Management has concluded that the adoption of ASU No. 2011-04 is not expected to have a material impact on the Fund's financial statements and the accompanying notes.
Annual Shareholder ReportReport of Independent Registered Public Accounting Firm
TO THE BOARD OF TRUSTEES OF Federated insurance series AND SHAREHOLDERS OF federated fund for u.s. government securities ii:
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of the Federated Fund for U.S. Government Securities II (the “Fund”), a portfolio of Federated Insurance Series, as of December 31, 2011, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended and the financial highlights for each of the years in the five-year period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2011, by correspondence with the custodian, transfer agent and brokers or by other appropriate auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Federated Fund for U.S. Government Securities II as of December 31, 2011, and the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended and the financial highlights for each of the years in the five-year period then ended, in conformity with U.S. generally accepted accounting principles.
Boston, Massachusetts
February 13, 2012
Shareholder Expense Example (unaudited)
As a shareholder of the Fund, you incur ongoing costs, including management fees and to the extent applicable, distribution (12b-1) fees and/or shareholder services fees and other Fund expenses. This Example is intended to help you to understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other variable investment options. It is based on an investment of $1,000 invested at the beginning of the period and held for the entire period from July 1, 2011 to December 31, 2011.
The first section of the table below provides information about actual account values and actual expenses. You may use the information in this section, together with the amount you invested, to estimate the expenses that you incurred over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first section under the heading entitled “Expenses Paid During Period” to estimate the expenses attributable to your investment during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second section of the table below provides information 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. Thus, you should not use the hypothetical account values and expenses to estimate the actual ending account balance or your expenses for the period. Rather, these figures are required to be provided to enable you to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only. Therefore, the second section of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds.
Beginning Account Value 7/1/2011 | Ending Account Value 12/31/2011 | Expenses Paid During Period1 |
Actual | $1,000 | $1,035.50 | $3.80 |
Hypothetical (assuming a 5% return before expenses) | $1,000 | $1,021.48 | $3.77 |
1 | Expenses are equal to the Fund's annualized net expense ratio of 0.74%, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half-year period). The expenses shown in the table do not include the charges and expenses imposed by the insurance company under the variable insurance product contract. Please refer to the variable insurance product prospectus for a complete listing of these expenses. |
Board of Trustees and Trust Officers
The Board of Trustees is responsible for managing the Trust's business affairs and for exercising all the Trust's powers except those reserved for the shareholders. The following tables give information about each Trustee and the senior officers of the Fund. Where required, the tables separately list Trustees who are “interested persons” of the Fund (i.e., “Interested” Trustees) and those who are not (i.e., “Independent” Trustees). Unless otherwise noted, the address of each person listed is Federated Investors Tower, 1001 Liberty Avenue, Pittsburgh, PA 15222. The address of all Independent Trustees listed is 4000 Ericsson Drive, Warrendale, PA 15086-7561; Attention: Mutual Fund Board. As of December 31, 2011, the Trust comprised seven portfolio(s), and the Federated Fund Family consisted of 43 investment companies (comprising 134 portfolios). Unless otherwise noted, each Officer is elected annually. Unless otherwise noted, each Trustee oversees all portfolios in the Federated Fund Family and serves for an indefinite term. The Fund's Statement of Additional Information includes additional information about Trust Trustees and is available, without charge and upon request, by calling 1-800-341-7400.
Interested Trustees Background
Name Birth Date Positions Held with Trust Date Service Began | Principal Occupation(s) for Past Five Years, Other Directorships Held and Previous Position(s) |
John F. Donahue* Birth Date: July 28, 1924 Trustee Began serving: October 1993 | Principal Occupations: Director or Trustee of the Federated Fund Family; Chairman and Director, Federated Investors, Inc.; Chairman of the Federated Fund Family's Executive Committee. Previous Positions: Chairman of the Federated Fund Family; Trustee, Federated Investment Management Company; Chairman and Director, Federated Investment Counseling. |
J. Christopher Donahue* Birth Date: April 11, 1949 Trustee Began serving: October 1993 | Principal Occupations: Principal Executive Officer and President of the Federated Fund Family; Director or Trustee of some of the Funds in the Federated Fund Family; President, Chief Executive Officer and Director, Federated Investors, Inc.; Chairman and Trustee, Federated Investment Management Company; Trustee, Federated Investment Counseling; Chairman and Director, Federated Global Investment Management Corp.; Chairman, Federated Equity Management Company of Pennsylvania and Passport Research, Ltd. (investment advisory subsidiary of Federated); Trustee, Federated Shareholder Services Company; Director, Federated Services Company. Previous Positions: President, Federated Investment Counseling; President and Chief Executive Officer, Federated Investment Management Company, Federated Global Investment Management Corp. and Passport Research, Ltd. |
* | Family relationships and reasons for “interested” status: John F. Donahue is the father of J. Christopher Donahue; both are “interested” due to their beneficial ownership of shares of Federated Investors, Inc. and the positions they hold with Federated and its subsidiaries. |
INDEPENDENT Trustees Background
Name Birth Date Positions Held with Trust Date Service Began | Principal Occupation(s) for Past Five Years, Other Directorships Held, Previous Position(s) and Qualifications |
Nicholas P. Constantakis, CPA Birth Date: September 3, 1939 Trustee Began serving: February 1998 | Principal Occupation: Director or Trustee of the Federated Fund Family. Other Directorship Held: Director, Chairman of the Audit Committee, and member of the Compensation Committee, Michael Baker Corporation (architecture, engineering and construction services). Previous Position: Partner, Andersen Worldwide SC. Qualifications: Public accounting and director experience. |
John F. Cunningham Birth Date: March 5, 1943 Trustee Began serving: November 1999 | Principal Occupation: Director or Trustee of the Federated Fund Family. Other Directorships Held: Chairman, President and Chief Executive Officer, Cunningham & Co., Inc. (strategic business consulting); Trustee Associate, Boston College. Previous Positions: Director, Redgate Communications and EMC Corporation (computer storage systems); Chairman of the Board and Chief Executive Officer, Computer Consoles, Inc.; President and Chief Operating Officer, Wang Laboratories; Director, First National Bank of Boston; Director, Apollo Computer, Inc. Qualifications: Business management and director experience. |
Name Birth Date Positions Held with Trust Date Service Began | Principal Occupation(s) for Past Five Years, Other Directorships Held, Previous Position(s) and Qualifications |
Maureen Lally-Green Birth Date: July 5, 1949 Trustee Began serving: August 2009 | Principal Occupations: Director or Trustee of the Federated Fund Family; Director, Office of Church Relations, Diocese of Pittsburgh; Adjunct Professor of Law, Duquesne University School of Law. Other Directorships Held: Director, Auberle; Trustee, St. Francis University; Director, Ireland Institute of Pittsburgh; Director, UPMC Mercy Hospital; Regent, St. Vincent Seminary; Director, Epilepsy Foundation of Western and Central Pennsylvania; Director, Saint Thomas More Society, Allegheny County. Previous Position: Pennsylvania Superior Court Judge. Qualifications: Legal and director experience. |
Peter E. Madden Birth Date: March 16, 1942 Trustee Began serving: October 1993 | Principal Occupation: Director or Trustee, and Chairman of the Board of Directors or Trustees, of the Federated Fund Family. Previous Positions: Representative, Commonwealth of Massachusetts General Court; President, Chief Operating Officer and Director, State Street Bank and Trust Company and State Street Corporation (retired); Director, VISA USA and VISA International; Chairman and Director, Massachusetts Bankers Association; Director, Depository Trust Corporation; Director, The Boston Stock Exchange. Qualifications: Business management, mutual fund services and director experience. |
Charles F. Mansfield, Jr. Birth Date: April 10, 1945 Trustee Began serving: November 1999 | Principal Occupations: Director or Trustee of the Federated Fund Family; Management Consultant. Previous Positions: Chief Executive Officer, PBTC International Bank; Partner, Arthur Young & Company (now Ernst & Young LLP); Chief Financial Officer of Retail Banking Sector, Chase Manhattan Bank; Senior Vice President, HSBC Bank USA (formerly Marine Midland Bank); Vice President, Citibank; Assistant Professor of Banking and Finance, Frank G. Zarb School of Business, Hofstra University; Executive Vice President, DVC Group, Inc. (marketing, communications and technology). Qualifications: Banking, business management, education and director experience. |
Thomas M. O'Neill Birth Date: June 14, 1951 Trustee Began serving: October 2006 | Principal Occupations: Director or Trustee, Vice Chairman of the Audit Committee of the Federated Fund Family; Sole Proprietor, Navigator Management Company (investment and strategic consulting). Other Directorships Held: Board of Overseers, Children's Hospital of Boston; Visiting Committee on Athletics, Harvard College; Board of Directors, Medicines for Humanity; Board of Directors, The Golisano Children's Museum of Naples, Florida. Previous Positions: Chief Executive Officer and President, Managing Director and Chief Investment Officer, Fleet Investment Advisors; President and Chief Executive Officer, Aeltus Investment Management, Inc.; General Partner, Hellman, Jordan Management Co., Boston, MA; Chief Investment Officer, The Putnam Companies, Boston, MA; Credit Analyst and Lending Officer, Fleet Bank; Director and Consultant, EZE Castle Software (investment order management software); Director, Midway Pacific (lumber). Qualifications: Business management, mutual fund, director and investment experience. |
John S. Walsh Birth Date: November 28, 1957 Trustee Began serving: January 1999 | Principal Occupations: Director or Trustee, Chairman of the Audit Committee of the Federated Fund Family; President and Director, Heat Wagon, Inc. (manufacturer of construction temporary heaters); President and Director, Manufacturers Products, Inc. (distributor of portable construction heaters); President, Portable Heater Parts, a division of Manufacturers Products, Inc. Previous Position: Vice President, Walsh & Kelly, Inc. Qualifications: Business management and director experience. |
Name Birth Date Address Positions Held with Trust Date Service Began | Principal Occupation(s) for Past Five Years and Previous Position(s) |
John W. McGonigle Birth Date: October 26, 1938 EXECUTIVE VICE PRESIDENT AND SECRETARY Began serving: September 1993 | Principal Occupations: Executive Vice President and Secretary of the Federated Fund Family; Vice Chairman, Executive Vice President, Secretary and Director, Federated Investors, Inc. Previous Positions: Trustee, Federated Investment Management Company and Federated Investment Counseling; Director, Federated Global Investment Management Corp., Federated Services Company and Federated Securities Corp. |
Richard A. Novak Birth Date: December 25, 1963 TREASURER Began serving: January 2006 | Principal Occupations: Principal Financial Officer and Treasurer of the Federated Fund Family; Senior Vice President, Federated Administrative Services; Financial and Operations Principal for Federated Securities Corp., Edgewood Services, Inc. and Southpointe Distribution Services, Inc. Previous Positions: Controller of Federated Investors, Inc.; Vice President, Finance of Federated Services Company; held various financial management positions within The Mercy Hospital of Pittsburgh; Auditor, Arthur Andersen & Co. |
Name Birth Date Address Positions Held with Trust Date Service Began | Principal Occupation(s) for Past Five Years and Previous Position(s) |
Richard B. Fisher Birth Date: May 17, 1923 VICE PRESIDENT Began serving: September 1993 | Principal Occupations: Vice Chairman or Vice President of some of the Funds in the Federated Fund Family; Vice Chairman, Federated Investors, Inc.; Chairman, Federated Securities Corp. Previous Positions: President and Director or Trustee of some of the Funds in the Federated Fund Family; Executive Vice President, Federated Investors, Inc.; Director and Chief Executive Officer, Federated Securities Corp. |
John B. Fisher Birth Date: May 16, 1956 PRESIDENT Began serving: November 2004 | Principal Occupations: President, Director/Trustee and CEO, Federated Advisory Services Company, Federated Equity Management Company of Pennsylvania, Federated Global Investment Management Corp., Federated Investment Counseling, Federated Investment Management Company; President and CEO of Passport Research, Ltd.; President of some of the Funds in the Federated Fund Family; Director, Federated Investors Trust Company. Previous Positions: President and Director of the Institutional Sales Division of Federated Securities Corp.; President and Director of Federated Investment Counseling; Director, Edgewood Securities Corp.; Director, Federated Services Company; Director, Federated Investors, Inc.; Chairman and Director, Southpointe Distribution Services, Inc.; President, Technology, Federated Services Company. |
Brian P. Bouda Birth Date: February 28, 1947 CHIEF COMPLIANCE OFFICER AND SENIOR VICE PRESIDENT Began serving: August 2004 | Principal Occupations: Senior Vice President and Chief Compliance Officer of the Federated Fund Family; Vice President and Chief Compliance Officer of Federated Investors, Inc. and Chief Compliance Officer of its subsidiaries. Mr. Bouda joined Federated in 1999 and is a member of the American Bar Association and the State Bar Association of Wisconsin. |
Stephen F. Auth Birth Date: September 3, 1956 450 Lexington Avenue Suite 3700 New York, NY 10017-3943 CHIEF INVESTMENT OFFICER Began serving: November 2002 | Principal Occupations: Mr. Auth is Chief Investment Officer of this Fund and various other Funds in the Federated Fund Family; Executive Vice President, Federated Investment Counseling, Federated Global Investment Management Corp. and Federated Equity Management Company of Pennsylvania. Previous Positions: Executive Vice President, Federated Investment Management Company, and Passport Research, Ltd. (investment advisory subsidiary of Federated); Senior Vice President, Global Portfolio Management Services Division; Senior Vice President, Federated Investment Management Company and Passport Research, Ltd.; Senior Managing Director and Portfolio Manager, Prudential Investments. |
Robert J. Ostrowski Birth Date: April 26, 1963 CHIEF INVESTMENT OFFICER Began serving: May 2004 | Principal Occupations: Robert J. Ostrowski joined Federated in 1987 as an Investment Analyst and became a Portfolio Manager in 1990. He was named Chief Investment Officer of taxable fixed-income products in 2004 and also serves as a Senior Portfolio Manager. He has been a Senior Vice President of the Fund's Adviser since 1997. Mr. Ostrowski has received the Chartered Financial Analyst designation. He received his M.S. in Industrial Administration from Carnegie Mellon University. |
Evaluation and Approval of Advisory Contract – May 2011
FEDERATed fund FOR U.S. GOVERNMENT SECURITIES ii (the “Fund”)
The Fund's Board reviewed the Fund's investment advisory contract at meetings held in May 2011. The Board's decision regarding the contract reflects the exercise of its business judgment on whether to continue the existing arrangements.
In this connection, the Federated Funds' Board had previously appointed a Senior Officer, whose duties include specified responsibilities relating to the process by which advisory fees are to be charged to a Federated fund. The Senior Officer has the authority to retain consultants, experts, or staff as may be reasonably necessary to assist in the performance of his duties, reports directly to the Board, and may be terminated only with the approval of a majority of the independent members of the Board. The Senior Officer prepared and furnished to the Board an independent, written evaluation that covered topics discussed below (the “Evaluation”). The Board considered that Evaluation, along with other information, in deciding to approve the advisory contract.
During its review of the contract, the Board considered compensation and benefits received by the Adviser. This included the fees received for services provided to the Fund by other entities in the Federated organization and research services (if any) received by the Adviser from brokers that execute Federated fund trades, as well as advisory fees. The Board is also familiar with and considered judicial decisions concerning allegedly excessive investment advisory fees, which have indicated that the following factors may be relevant to an Adviser's fiduciary duty with respect to its receipt of compensation from a fund: the nature and quality of the services provided by the Adviser, including the performance of the fund; the Adviser's cost of providing the services; the extent to which the Adviser may realize “economies of scale” as a fund grows larger; any indirect benefits that may accrue to the Adviser and its affiliates as a result of the Adviser's relationship with a fund; performance and expenses of comparable funds; and the extent to which the independent Board members are fully informed about all facts the Board deems relevant bearing on the Adviser's services and fees. The Board further considered management fees (including any components thereof) charged to institutional and other clients of the Adviser for what might be viewed as like services, and the cost to the Adviser and its affiliates of supplying services pursuant to the management fee agreements, excluding any intra-corporate profit and profit margins of the Adviser and its affiliates for supplying such services. The Board was aware of these factors and was guided by them in its review of the Fund's advisory contract to the extent it considered them to be appropriate and relevant, as discussed further below.
The Board considered and weighed these circumstances in light of its substantial accumulated experience in governing the Fund and working with Federated on matters relating to the Federated funds, and was assisted in its deliberations by independent legal counsel. Throughout the year, the Board has requested and received substantial and detailed information about the Fund and the Federated organization that was in addition to the extensive materials that comprise and accompany the Senior Officer's Evaluation. Federated provided much of this information at each regular meeting of the Board, and furnished additional information in connection with the particular meeting at which the Board's formal review of the advisory contract occurred. Between regularly scheduled meetings, the Board also received information on particular matters as the need arose. Thus, the Board's consideration of the advisory contract included review of the Senior Officer's Evaluation, accompanying data and additional information covering such matters as: the Adviser's investment philosophy, revenue, profitability, personnel and processes; investment and operating strategies; the Fund's short- and long-term performance (in absolute terms, both on a gross basis and net of expenses, as well as in relationship to its particular investment program and certain competitor or “peer group” funds and/or other benchmarks, as appropriate), and comments on the reasons for performance; the Fund's investment objectives; the Fund's expenses (including the advisory fee itself and the overall expense structure of the Fund, both in absolute terms and relative to similar and/or competing funds, with due regard for contractual or voluntary expense limitations); the use and allocation of brokerage commissions derived from trading the Fund's portfolio securities (if any); and the nature, quality and extent of the advisory and other services provided to the Fund by the Adviser and its affiliates. The Board also considered the preferences and expectations of Fund shareholders and their relative sophistication; the continuing state of competition in the mutual fund industry and market practices; the range of comparable fees for similar funds in the mutual fund industry; the Fund's relationship to the Federated family of funds which include a comprehensive array of funds with different investment objectives, policies and strategies which are available for exchange without the incurrence of additional sales charges; compliance and audit reports concerning the Federated funds and the Federated companies that service them (including communications from regulatory agencies), as well as Federated's responses to any issues raised therein; and relevant developments in the mutual fund industry and how the Federated funds and/or Federated are responding to them. The Board's evaluation process is evolutionary. The criteria considered and the emphasis placed on relevant criteria change in recognition of changing circumstances in the mutual fund marketplace.
With respect to the Fund's performance and expenses in particular, the Board has found the use of comparisons to other mutual funds with comparable investment programs to be relevant, given the high degree of competition in the mutual fund business. The Board focused on comparisons with other similar mutual funds more heavily than non-mutual fund products or services because it is believed that they are more relevant. For example, other mutual funds are the products most like the Annual Shareholder Report
Fund, they are readily available to Fund shareholders as alternative investment vehicles, and they are the type of investment vehicle in fact chosen and maintained by the Fund's investors. The range of their fees and expenses therefore appears to be a generally reliable indication of what consumers have found to be reasonable in the precise marketplace in which the Fund competes. The Fund's ability to deliver competitive performance when compared to its peer group was a useful indicator of how the Adviser is executing the Fund's investment program, which in turn assisted the Board in reaching a conclusion that the nature, extent, and quality of the Adviser's investment management services were such as to warrant continuation of the advisory contract. In this regard, the Senior Officer has reviewed Federated's fees for providing advisory services to products outside the Federated family of funds (e.g., institutional and separate accounts). He concluded that mutual funds and institutional accounts are inherently different products. Those differences include, but are not limited to, different types of targeted investors; being subject to different laws and regulations; different legal structures; different average account sizes; different associated costs; different portfolio management techniques made necessary by different cash flows; and portfolio manager time spent in review of securities pricing. The Senior Officer did not consider these fee schedules to be determinative in judging the appropriateness of mutual fund advisory contracts.The Senior Officer reviewed information compiled by Federated, using data supplied by independent fund ranking organizations, regarding the performance of, and fees charged by, other mutual funds, noting his view that comparisons to fund peer groups are relevant in judging the reasonableness of proposed fees.
The Fund's performance fell below the median of the relevant peer group for the one-year, three-year and five-year periods covered by the Evaluation. The Board discussed the Fund's performance with the Adviser and recognized the efforts being undertaken by the Adviser. The Board will continue to monitor these efforts and the performance of the Fund.
The Board also received financial information about Federated, including information regarding the compensation and benefits Federated derived from its relationships with the Federated funds. This information covered not only the fees under the advisory contracts, but also fees received by Federated's subsidiaries for providing other services to the Federated funds under separate contracts (e.g., for serving as the Federated funds' administrator). The information also detailed any indirect benefit Federated may derive from its receipt of research services from brokers who execute Federated fund trades. In addition, the Board considered the fact that, in order for a fund to be competitive in the marketplace, Federated and its affiliates frequently waived fees and/or reimbursed expenses and have disclosed to fund investors and/or indicated to the Board their intention to do so in the future, where appropriate. Moreover, the Board receives regular reporting as to the institution or elimination of these voluntary waivers.
Federated furnished information, requested by the Senior Officer, that reported revenues on a fund-by-fund basis and made estimates of the allocation of expenses on a fund-by-fund basis, using allocation methodologies specified by the Senior Officer. The Senior Officer noted that, although they may apply consistent allocation processes, the inherent difficulties in allocating costs (and the unavoidable arbitrary aspects of that exercise) and the lack of consensus on how to allocate those costs may render such allocation information unreliable. The allocation information was considered in the analysis by the Board but was determined to be of limited use.
The Board and the Senior Officer also reviewed information compiled by Federated comparing profitability information for Federated to other publicly held fund management companies. In this regard, the Senior Officer noted the limited availability of such information, but nonetheless concluded that Federated's profit margins did not appear to be excessive and the Board agreed.
The Senior Officer's Evaluation also discussed the notion of possible realization of “economies of scale” as a fund grows larger. The Board considered in this regard that the Adviser has made significant and long-term investments in areas that support all of the Federated funds, such as personnel and processes for the portfolio management, compliance, internal audit, and risk management functions; and systems technology; and that the benefits of these efforts (as well as any economies, should they exist) were likely to be enjoyed by the fund complex as a whole. Finally, the Board also noted the absence of any applicable regulatory or industry guidelines on this subject, which (as discussed in the Senior Officer's Evaluation) is compounded by the lack of any common industry practice or general pattern with respect to structuring fund advisory fees with “breakpoints” that serve to reduce the fee as the fund attains a certain size. The Senior Officer did not recommend institution of breakpoints in pricing Federated's fund advisory services at this time.
It was noted in the materials for the Board meeting that for the period covered by the Evaluation, the Fund's investment advisory fee, after waivers and expense reimbursements, if any, was above the median of the relevant peer group. The Board reviewed the fees and other expenses of the Fund with the Adviser and was satisfied that the overall expense structure of the Fund remained competitive. The Board will continue to monitor advisory fees and other expenses borne by the Fund.
Annual Shareholder Report
The Senior Officer noted that, considering the totality of the circumstances, and all of the factors referenced within his Evaluation, he had concluded that, subject to comments and recommendations made within his Evaluation, his observations and the information accompanying the Evaluation supported a finding by the Board that the management fees for each of the funds are reasonable and that Federated appeared to provide appropriate administrative services to the Fund for the fees paid. Under these circumstances, no changes were recommended to, and no objection was raised to, the continuation of the Fund's advisory contract. The Board concluded that the nature, quality and scope of services provided the Fund by the Adviser and its affiliates were satisfactory.In its decision to continue an existing investment advisory contract, the Board was mindful of the potential disruptions of the Fund's operations and various risks, uncertainties and other effects that could occur as a result of a decision to terminate or not renew an advisory contract. In particular, the Board recognized that many shareholders have invested in the Fund on the strength of the Adviser's industry standing and reputation and with the expectation that the Adviser will have a continuing role in providing advisory services to the Fund. Thus, the Board's approval of the advisory contract reflected the fact that it is the shareholders who have effectively selected the Adviser by virtue of having invested in the Fund.
The Board based its decision to approve the advisory contract on the totality of the circumstances and relevant factors and with a view to past and future long-term considerations. Not all of the factors and considerations identified above were necessarily relevant to the Fund, nor did the Board consider any one of them to be determinative. With respect to the factors that were relevant, the Board's decision to approve the contract reflects its determination that Federated's performance and actions provided a satisfactory basis to support the decision to continue the existing arrangements.
Annual Shareholder ReportVoting Proxies on Fund Portfolio Securities
A description of the policies and procedures that the Fund uses to determine how to vote proxies, if any, relating to securities held in the Fund's portfolio is available, without charge and upon request, by calling 1-800-341-7400. A report on “Form N-PX” of how the Fund voted any such proxies during the most recent 12-month period ended June 30 is available from Federated's website at FederatedInvestors.com. To access this information from the home page, select “All” under “Asset Classes.” Select a fund name and share class, if applicable, to go to the Fund Overview page. On the Fund Overview page, select the “Documents” tab. At the bottom of that page, select “Proxy Voting Record Report (Form N-PX).” Form N-PX filings are also available at the SEC's website at www.sec.gov.
The Fund files with the SEC a complete schedule of its portfolio holdings, as of the close of the first and third quarters of its fiscal year, on “Form N-Q.” These filings are available on the SEC's website at www.sec.gov and may be reviewed and copied at the SEC's Public Reference Room in Washington, DC. (Call 1-800-SEC-0330 for information on the operation of the Public Reference Room.) You may also access this information from the “Products” section of Federated's website at FederatedInvestors.com. From the home page, select “All” under “Asset Classes.” Select a fund name and share class, if applicable, to go to the Fund Overview page. On the Fund Overview page, select the “Documents” tab. At the bottom of that page, select “Form N-Q.”
Annual Shareholder ReportVariable investment options are not bank deposits or obligations, are not guaranteed by any bank and are not insured or guaranteed by the U.S. government, the Federal Deposit Insurance Corporation, the Federal Reserve Board or any other government agency. Investment in variable investment options involves investment risk, including the possible loss of principal.
This Report is authorized for distribution to prospective investors only when preceded or accompanied by the Fund's Prospectus, which contains facts concerning its objective and policies, management fees, expenses and other information.
Federated Fund for U.S. Government Securities II
Federated Investors Funds
4000 Ericsson Drive
Warrendale, PA 15086-7561
Contact us at FederatedInvestors.com
or call 1-800-341-7400.
Federated Securities Corp., Distributor
CUSIP 313916207
G00846-01 (2/12)
Federated is a registered trademark of Federated Investors, Inc.
2012 © Federated Investors, Inc.
Item 2. Code of Ethics
(a) As of the end of the period covered by this report, the registrant has adopted a code of ethics (the "Section 406 Standards for Investment Companies - Ethical Standards for Principal Executive and Financial Officers") that applies to the registrant's Principal Executive Officer and Principal Financial Officer; the registrant's Principal Financial Officer also serves as the Principal Accounting Officer.
(c) Not Applicable
(d) Not Applicable
(e) Not Applicable
(f)(3) The registrant hereby undertakes to provide any person, without charge, upon request, a copy of the code of ethics. To request a copy of the code of ethics, contact the registrant at 1-800-341-7400, and ask for a copy of the Section 406 Standards for Investment Companies - Ethical Standards for Principal Executive and Financial Officers.
Item 3. Audit Committee Financial Expert
The registrant's Board has determined that each of the following members of the Board's Audit Committee is an “audit committee financial expert,” and is "independent," for purposes of this Item: Nicholas P. Constantakis, Charles F. Mansfield, Jr., Thomas M. O'Neill and John S. Walsh.
Item 4. Principal Accountant Fees and Services
(a) Audit Fees billed to the registrant for the two most recent fiscal years:
Fiscal year ended 2011 - $171,500
Fiscal year ended 2010 - $166,250
(b) Audit-Related Fees billed to the registrant for the two most recent fiscal years:
Fiscal year ended 2011 - $0
Fiscal year ended 2010 - $337
Travel to Audit Committee meeting.
Amount requiring approval of the registrant’s audit committee pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X, $6,984 and $0 respectively. Fiscal year ended 2011- Audit consent fee for N-14 merger document.
(c) Tax Fees billed to the registrant for the two most recent fiscal years:
Fiscal year ended 2011 - $0
Fiscal year ended 2010 - $0
Amount requiring approval of the registrant’s audit committee pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X, $0 and $0 respectively.
(d) All Other Fees billed to the registrant for the two most recent fiscal years:
Fiscal year ended 2011 - $0
Fiscal year ended 2010 - $0
Amount requiring approval of the registrant’s audit committee pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X, $0 and $0 respectively.
(e)(1) Audit Committee Policies regarding Pre-approval of Services.
The Audit Committee is required to pre-approve audit and non-audit services performed by the independent auditor in order to assure that the provision of such services do not impair the auditor’s independence. Unless a type of service to be provided by the independent auditor has received general pre-approval, it will require specific pre-approval by the Audit Committee. Any proposed services exceeding pre-approved cost levels will require specific pre-approval by the Audit Committee.
Certain services have the general pre-approval of the Audit Committee. The term of the general pre-approval is 12 months from the date of pre-approval, unless the Audit Committee specifically provides for a different period. The Audit Committee will annually review the services that may be provided by the independent auditor without obtaining specific pre-approval from the Audit Committee and may grant general pre-approval for such services. The Audit Committee will revise the list of general pre-approved services from time to time, based on subsequent determinations. The Audit Committee will not delegate its responsibilities to pre-approve services performed by the independent auditor to management.
The Audit Committee has delegated pre-approval authority to its Chairman. The Chairman will report any pre-approval decisions to the Audit Committee at its next scheduled meeting. The Committee will designate another member with such pre-approval authority when the Chairman is unavailable.
AUDIT SERVICES
The annual Audit services engagement terms and fees will be subject to the specific pre-approval of the Audit Committee. The Audit Committee must approve any changes in terms, conditions and fees resulting from changes in audit scope, registered investment company (RIC) structure or other matters.
In addition to the annual Audit services engagement specifically approved by the Audit Committee, the Audit Committee may grant general pre-approval for other Audit Services, which are those services that only the independent auditor reasonably can provide. The Audit Committee has pre-approved certain Audit services, all other Audit services must be specifically pre-approved by the Audit Committee.
AUDIT-RELATED SERVICES
Audit-related services are assurance and related services that are reasonably related to the performance of the audit or review of the Company’s financial statements or that are traditionally performed by the independent auditor. The Audit Committee believes that the provision of Audit-related services does not impair the independence of the auditor, and has pre-approved certain Audit-related services, all other Audit-related services must be specifically pre-approved by the Audit Committee.
TAX SERVICES
The Audit Committee believes that the independent auditor can provide Tax services to the Company such as tax compliance, tax planning and tax advice without impairing the auditor’s independence. However, the Audit Committee will not permit the retention of the independent auditor in connection with a transaction initially recommended by the independent auditor, the purpose of which may be tax avoidance and the tax treatment of which may not be supported in the Internal Revenue Code and related regulations. The Audit Committee has pre-approved certain Tax services, all Tax services involving large and complex transactions must be specifically pre-approved by the Audit Committee.
ALL OTHER SERVICES
With respect to the provision of services other than audit, review or attest services the pre-approval requirement is waived if:
(1) The aggregate amount of all such services provided constitutes no more than five percent of the total amount of revenues paid by the registrant, the registrant’s 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 to its accountant during the fiscal year in which the services are provided;
(2) Such services were not recognized by the registrant, the registrant’s 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 at the time of the engagement to be non-audit services; and
(3) Such services are promptly brought to the attention of the Audit Committee of the issuer and approved prior to the completion of the audit by the Audit Committee or by one or more members of the Audit Committee who are members of the board of directors to whom authority to grant such approvals has been delegated by the Audit Committee.
The Audit Committee may grant general pre-approval to those permissible non-audit services classified as All Other services that it believes are routine and recurring services, and would not impair the independence of the auditor.
The SEC’s rules and relevant guidance should be consulted to determine the precise definitions of prohibited non-audit services and the applicability of exceptions to certain of the prohibitions.
PRE-APPROVAL FEE LEVELS
Pre-approval fee levels for all services to be provided by the independent auditor will be established annually by the Audit Committee. Any proposed services exceeding these levels will require specific pre-approval by the Audit Committee.
PROCEDURES
Requests or applications to provide services that require specific approval by the Audit Committee will be submitted to the Audit Committee by both the independent auditor and the Principal Accounting Officer and/or Internal Auditor, and must include a joint statement as to whether, in their view, the request or application is consistent with the SEC’s rules on auditor independence.
(e)(2) Percentage of services identified in items 4(b) through 4(d) that were approved by the registrants audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X:
4(b)
Fiscal year ended 2011 – 0%
Fiscal year ended 2010 - 0%
Percentage of services provided to the registrants 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 approved by the registrants audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X, 0% and 0% respectively.
4(c)
Fiscal year ended 2011 – 0%
Fiscal year ended 2010 – 0%
Percentage of services provided to the registrants 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 approved by the registrants audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X, 0% and 0% respectively.
4(d)
Fiscal year ended 2011 – 0%
Fiscal year ended 2010 – 0%
Percentage of services provided to the registrants 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 approved by the registrants audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X, 0% and 0% respectively.
(f) NA
(g) Non-Audit Fees billed to the registrant, the registrant’s investment adviser, and certain entities controlling, controlled by or under common control with the investment adviser:
Fiscal year ended 2011 - $18,623
Fiscal year ended 2010 - $13,373
(h) The registrant’s Audit Committee has considered that the provision of non-audit services that were rendered to the registrant’s 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.
Item 5. Audit Committee of Listed Registrants
Not Applicable
Item 6. Schedule of Investments
(a) The registrant’s Schedule of Investments is included as part of the Report to Stockholders filed under Item 1 of this form.
(b) Not Applicable; Fund had no divestments during the reporting period covered since the previous Form N-CSR filing.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies
Not Applicable
Item 8. Portfolio Managers of Closed-End Management Investment Companies
Not Applicable
Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers
Not Applicable
Item 10. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 11. Controls and Procedures
(a) The registrant’s President and Treasurer have concluded that the
registrant’s disclosure controls and procedures (as defined in rule 30a-3(c) under the Act) are effective in design and operation and are sufficient to form the basis of the certifications required by Rule 30a-(2) under the Act, based on their evaluation of these disclosure controls and procedures within 90 days of the filing date of this report on Form N-CSR.
(b) There were no changes in the registrant’s internal control over financial reporting (as defined in rule 30a-3(d) under the Act) during the second fiscal quarter of the period covered by this report that have materially affected, or are reasonably likely to materially affect, the registrant’s internal control over financial reporting.
Item 12. Exhibits
(a)(1) Code of Ethics- Not Applicable to this Annual Report.
(a)(2) Certifications of Principal Executive Officer and Principal Financial Officer.
(a)(3) Not Applicable.
(b) Certifications pursuant to 18 U.S.C. Section 1350.
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.
Registrant Federated Insurance Series
By /S/ Richard A. Novak
Richard A. Novak, Principal Financial Officer
Date February 10, 2012
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/ John B. Fisher
John B. Fisher, Principal Executive Officer
Date February 10, 2012
By /S/ Richard A. Novak
Richard A. Novak, Principal Financial Officer
Date February 10, 2012