N-CSR 1 d850227dncsr.htm FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS - MASTER CLASS 4 FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS - MASTER CLASS 4

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

FORM N-CSR

 

 

CERTIFIED SHAREHOLDER REPORT OF REGISTERED

MANAGEMENT INVESTMENT COMPANIES

Investment Company Act file number 811-05583

 

 

Franklin Templeton Variable Insurance Products Trust

(Exact name of registrant as specified in charter)

 

 

One Franklin Parkway, San Mateo, CA 94403-1906

(Address of principal executive offices) (Zip code)

 

 

Craig S. Tyle, One Franklin Parkway, San Mateo, CA 94403-1906

(Name and address of agent for service)

 

 

Registrant’s telephone number, including area code: (650) 312-2000

Date of fiscal year end:     12/31    

Date of reporting period: 12/31/14

 

 

 

 

 

Item 1. Reports to Stockholders.

LOGO  

Annual Report

December 31, 2014

 

Franklin Templeton

Variable Insurance Products Trust

 

 

 

 

LOGO

Franklin Templeton Variable Insurance

Products Trust Annual Report

 

Table of Contents     
Important Notes to Performance Information   i   
*Franklin Templeton Variable Insurance Products Trust Statement of Additional Information Supplement   SAI-1   
Fund Summaries

Franklin Flex Cap Growth VIP Fund (formerly, Franklin Flex Cap Growth Securities Fund)

   FFC-1   

*Prospectus Supplement

   FFC-6   

Franklin Founding Funds Allocation VIP Fund (formerly, Franklin Templeton VIP Founding Funds Allocation Fund)

   FFA-1   

Franklin High Income VIP Fund (formerly, Franklin High Income Securities Fund)

   FH-1   

Franklin Income VIP Fund (formerly, Franklin Income Securities Fund)

   FI-1   

Franklin Mutual Global Discovery VIP Fund (formerly, Mutual Global Discovery Securities Fund)

   MGD-1   

Franklin Mutual Shares VIP Fund (formerly, Mutual Shares Securities Fund)

   MS-1   

Franklin Rising Dividends VIP Fund (formerly, Franklin Rising Dividends Securities Fund)

   FRD-1   

*Prospectus Supplement

   FRD-6   

Franklin Small Cap Value VIP Fund (formerly, Franklin Small Cap Value Securities Fund)

   FSV-1   

*Prospectus Supplement

   FSV-6   

Franklin Small-Mid Cap Growth VIP Fund (formerly, Franklin Small-Mid Cap Growth Securities Fund)

   FSC-1   

Franklin Strategic Income VIP Fund (formerly, Franklin Strategic Income Securities Fund)

   FSI-1   

*Prospectus and Statement of Additional Information Supplements

   FSI-6   

Templeton Developing Markets VIP Fund (formerly, Templeton Developing Markets Securities Fund)

   TD-1   

Templeton Foreign VIP Fund (formerly, Templeton Foreign Securities Fund)

   TF-1   

Templeton Global Bond VIP Fund (formerly, Templeton Global Bond Securities Fund)

   TGB-1   

Templeton Growth VIP Fund (formerly, Templeton Growth Securities Fund)

   TG-1   
Index Descriptions   I-1   
Board Members and Officers   BOD-1   
Shareholder Information   SI-1   

*Not part of the annual report. Retain for your records.

 

Not FDIC Insured | May Lose Value | No Bank Guarantee

 

MASTER CLASS – 4

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

Important Notes to Performance Information

Performance data is historical and cannot predict or guarantee future results. Principal value and investment return will fluctuate with market conditions, and you may have a gain or loss when you withdraw your money. Inception dates of the funds may have preceded the effective dates of the subaccounts, contracts or their availability in all states.

When reviewing the index comparisons, please keep in mind that indexes have a number of inherent performance differentials over the funds. First, unlike the funds, which must hold a minimum amount of cash to maintain liquidity, indexes do not have a cash component. Second, the funds are actively managed and, thus, are subject to management fees to cover salaries of securities analysts or portfolio managers in addition to other expenses. Indexes are unmanaged and do not include any commissions or other expenses typically associated with investing in securities. Third, indexes often contain a different mix of securities than the fund to which they are compared. Additionally, please remember that indexes are simply a measure of performance and cannot be invested in directly.

 

           i   

SUPPLEMENT DATED SEPTEMBER 24, 2014

TO THE STATEMENT OF ADDITIONAL INFORMATION

DATED MAY 1, 2014 OF

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST (the “Trust”)

The following section is added to the Trust’s Statement of Additional Information before the section “Performance” on page 100:

 

Calculation of Net Asset Value                                                                                          

The Fund’s net asset value per share is generally calculated to two decimal places, but it will generally be calculated to four decimal places in connection with redemptions of two-thirds or more of the Fund’s assets.

 

 

 

 

Please keep this supplement with your statement of additional information for future reference.

 

SAI-1

Franklin Flex Cap Growth VIP Fund

(Formerly, Franklin Flex Cap Growth Securities Fund)

This annual report for Franklin Flex Cap Growth VIP Fund covers the fiscal year ended December 31, 2014.

Class 4 Performance Summary as of December 31, 2014

Average annual total return of Class 4 shares* represents the average annual change in value, assuming reinvestment of dividends and capital gains. Average returns smooth out variations in returns, which can be significant; they are not the same as year-by-year results.

 

Periods ended 12/31/14    1-Year        5-Year        Since Inception (3/1/05)  

Average Annual Total Return

      +5.98%           +11.90%           +6.85%   

*For the period beginning 2/29/08, Class 4 performance reflects a 12b-1 fee expense of 0.35% per year, which affects future performance. Class 4 performance prior to 2/29/08 reflects historical Class 1 performance, which does not have a 12b-1 fee expense. Since 2/29/08 (effective date), the average annual total return of Class 4 shares was +8.13%. The Fund has an expense reduction contractually guaranteed through at least 4/30/15 and a fee waiver associated with its investments in a Franklin Templeton money fund, contractually guaranteed through at least its current fiscal year-end. Fund investment results reflect the expense reduction and fee waiver, to the extent applicable; without these reductions, the results would have been lower.

Performance reflects the Fund’s Class 4 operating expenses, but does not include any contract fees, expenses or sales charges. If they had been included, performance would be lower. These charges and deductions, particularly for variable life policies, can have a significant effect on contract values and insurance benefits. See the contract prospectus for a complete description of these expenses, including sales charges.

Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares. Current performance may differ from figures shown.

Total Return Index Comparison for a Hypothetical $10,000 Investment (3/1/05–12/31/14)

The graph below shows the change in value of a hypothetical $10,000 investment in the Fund over the indicated period and includes reinvestment of any income or distributions. The Fund’s performance* is compared to the performance of the Russell 1000® Growth Index, the Russell 3000® Growth Index and the Standard & Poors® 500 Index (S&P 500®). One cannot invest directly in an index, and an index is not representative of the Fund’s portfolio. Please see Important Notes to Performance Information preceding the Fund Summaries.

 

LOGO

**Source: Morningstar. Please see Index Descriptions following the Fund Summaries.

 

    Annual Report     FFC-1   

FRANKLIN FLEX CAP GROWTH VIP FUND

Fund Goal and Main Investments

Franklin Flex Cap Growth VIP Fund seeks capital appreciation. Under normal market conditions, the Fund invests predominantly in equity securities of companies that the investment manager believes have the potential for capital appreciation.

Fund Risks

All investments involve risks, including possible loss of principal. Growth stock prices reflect projections of future earnings or revenues, and can, therefore, fall dramatically if the company fails to meet those projections. Smaller, midsized and relatively new or unseasoned companies can be particularly sensitive to changing economic conditions, and their prospects for growth are less certain than those of larger, more established companies. Historically, these securities have experienced more price volatility than larger company stocks, especially over the short term. To the extent the Fund focuses on particular countries, regions, industries, sectors or types of investment from time to time, it may be subject to greater risk of adverse developments in such areas of focus than a fund that invests in a wider variety of countries, regions, industries, sectors or investments. Foreign securities involve special risks, including currency fluctuations and economic and political uncertainties. The Fund is actively managed but there is no guarantee that the manager’s investment decisions will produce the desired results. The Fund’s prospectus also includes a description of the main investment risks.

Performance Overview

You can find the Fund’s one-year total return in the Performance Summary. In comparison, the Russell 1000® Growth Index generated a +13.05% total return, the Russell 3000® Growth Index delivered a +12.44% total return, and the S&P 500 produced a +13.69% total return for the same period.1

Economic and Market Overview

The U.S. economy continued to grow during the year ended December 31, 2014, underpinned in some quarters by manufacturing activity, consumer and business spending, and federal defense spending. Home sales experienced some weakness resulting from reduced inventory, higher mortgage rates and tight credit requirements but began to recover in May as mortgage rates declined. Home prices stayed higher than a year earlier. Retail sales generally improved, supported by job growth and lower

gasoline prices in the latter part of 2014. The unemployment rate declined to 5.6% in December 2014 from 6.7% in December 2013.2 Inflation, as measured by the Consumer Price Index, remained low.

In January 2014, the U.S. Federal Reserve Board (Fed) began reducing its large-scale bond purchases $10 billion a month and ended the buying program in October. But it continued its practice of maintaining holdings of longer term securities at sizable levels. The Fed believed underlying economic strength could support ongoing progress in labor market conditions. The Fed also noted that although inflation might remain low in the near term, the likelihood of inflation running persistently below 2% had diminished. Toward period-end, the Fed stated that it could be patient with regard to raising interest rates and that the interest rate might not rise for at least a couple of meetings, possibly implying at least the first two meetings of 2015.

Investor confidence grew during the period as corporate profits rose and the economy generally strengthened. The market endured sell-offs when many investors reacted to political instability in certain emerging markets, crises in Ukraine and the Middle East, weakness in Europe and Japan, and moderating economic data in China. U.S. stocks rose overall for the 12 months under review as the S&P 500 and Dow Jones Industrial Average reached all-time highs.3

Investment Strategy

We use fundamental, bottom-up research to seek companies meeting our criteria of growth potential, quality and valuation. In seeking sustainable growth characteristics, we look for companies we believe can produce sustainable earnings and cash flow growth, evaluating the long-term market opportunity and competitive structure of an industry to target leaders and emerging leaders. We define quality companies as those with strong and improving competitive positions in attractive markets. We also believe important attributes of quality are experienced and talented management teams as well as financial strength reflected in the capital structure, gross and operating margins, free cash flow generation and returns on capital employed. Our valuation analysis includes a range of potential outcomes based on an assessment of multiple scenarios. In assessing value, we consider whether security prices fully reflect the balance of the sustainable growth opportunities relative to business and financial risks.

 

 

1. Source: Morningstar.

One cannot invest directly in an index, and an index is not representative of the Fund’s portfolio. Please see Index Descriptions following the Fund Summaries.

2. Source: Bureau of Labor Statistics.

3. Please see Index Descriptions following the Fund Summaries.

 

FFC-2    Annual Report    

FRANKLIN FLEX CAP GROWTH VIP FUND

 

Manager’s Discussion

During the 12 months under review, most sectors represented in the Fund’s portfolio delivered gains and contributed to absolute performance. Relative to the Russell 3000® Growth Index, key contributors included an overweighting in health care, as well as stock selection and an underweighting in telecommunication services.4 Also helping relative results was an underweighting in the energy sector, which suffered from weak crude oil prices resulting from slower global demand growth and strong world supply.

In the health care sector, generic pharmaceutical company Actavis and life sciences tools and services firm Illumina were among the top performers. Actavis’s shares rallied after the company announced in February that it would acquire Forest Laboratories to strengthen its specialty pharmaceuticals portfolio and reported that its acquisition of specialty drug maker Warner Chilcott had helped earnings results. Actavis agreed to acquire several other companies in 2014, including multi-specialty global health care firm Allergan, which would make the combined company one of the largest pharmaceutical companies worldwide. Accretive acquisitions boosted Actavis’s revenues and earnings in recent quarters. Illumina announced strong quarterly earnings, supported by healthy global demand for its sequencing products and services. The company also raised its revenue and earnings guidance for full year 2014.

Other notable contributors included our off-benchmark investment in Netherlands-based integrated circuit manufacturer NXP Semiconductors, as well as our positions in equipment rental company United Rentals5 and athletic apparel and footwear manufacturer Under Armour. NXP Semiconductors generated better-than-expected earnings, driven by product revenue growth and cost control. Additionally, NXP benefited from company-specific product cycles and strong demand trends from certain customers and expected to experience seasonality in certain business segments. United Rentals delivered stronger-than-expected quarterly earnings, driven by growth in equipment rentals and sales. Under Armour reported solid quarterly revenues and raised guidance for full year 2014 as footwear demand and international sales gained momentum.

In contrast, major detractors from relative performance included stock selection in the consumer discretionary and industrials sectors.6

 

 

LOGO

 

 

4. The health care sector comprises health care equipment and services; and pharmaceuticals, biotechnology and life sciences in the SOI.

5. No longer held by period-end.

6. The consumer discretionary sector comprises automobiles and components, consumer durables and apparel, consumer services, media and retailing in the SOI. The industrials sector comprises capital goods, commercial and professional services, and transportation in the SOI.

 

    Annual Report     FFC-3   

FRANKLIN FLEX CAP GROWTH VIP FUND

Top 10 Holdings       
12/31/14       

Company

Sector/Industry

    % of Total
Net Assets		  

Apple Inc.

Technology Hardware & Equipment

      6.2%   

Facebook Inc., A

Software & Services

      3.1%   

MasterCard Inc., A

Software & Services

      2.8%   

Celgene Corp.

Pharmaceuticals, Biotechnology & Life Sciences

      2.7%   

Actavis PLC

Pharmaceuticals, Biotechnology & Life Sciences

      2.7%   

Visa Inc., A

Software & Services

      2.1%   

Precision Castparts Corp.

Capital Goods

      2.0%   

LinkedIn Corp., A

Software & Services

      1.8%   

Amazon.com Inc.

Retailing

      1.6%   

Ecolab Inc.

Materials

      1.6%   

The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund’s Statement of Investments (SOI).

Within consumer discretionary, full-service restaurant company Chuy’s Holdings and casino resort operator Wynn Resorts5 detracted from relative returns. Chuy’s Holdings’ share price declined after the company reported lower-than-expected third-quarter earnings and lowered its fiscal-year 2014 guidance. Shares of Wynn Resorts, which generates most of its revenue from Las Vegas and Macau, were hurt by a decline in Macau gambling revenues.

In the industrials sector, key detractors included our position in hydrocarbon and gas production and storage equipment manufacturer Chart Industries5 and our off-benchmark investment in satellite imagery service provider DigitalGlobe.5 Chart Industries reported weaker-than-expected quarterly earnings and lowered its full-year 2014 guidance, citing headwinds in its biomedical segment, uncertainty about China’s liquefied natural gas demand and weak crude oil prices. DigitalGlobe’s shares fell after the company reported fourth-quarter 2013 revenues and a fiscal-year 2014 revenue outlook that missed expectations. News that Google5 would acquire a competitor also weighed on the stock.

Other key detractors included our position in 3D printer manufacturer Stratasys, which delivered stronger-than-expected earnings for 2014’s first three quarters, driven partly by contributions from recent acquisitions and higher margin products. However, the company lowered its full-year 2014 guidance because of costs associated with its acquisition of cloud-based collaboration tools provider GrabCAD, which Stratasys expected would improve accessibility to its 3D printing solutions.

Thank you for your participation in Franklin Flex Cap Growth VIP Fund. We look forward to serving your future investment needs.

The foregoing information reflects our analysis, opinions and portfolio holdings as of December 31, 2014, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.

 

FFC-4    Annual Report    

FRANKLIN FLEX CAP GROWTH VIP FUND

Class 4 Fund Expenses

As an investor in a variable insurance contract (Contract) that indirectly provides for investment in an underlying mutual fund, you can incur transaction and/or ongoing expenses at both the Fund level and the Contract level.

 

•   Transaction expenses can include sales charges (loads) on purchases, redemption fees, surrender fees, transfer fees and premium taxes.

 

•   Ongoing expenses can include management fees, distribution and service (12b-1) fees, contract fees, annual maintenance fees, mortality and expense risk fees and other fees and expenses. All mutual funds and Contracts have some types of ongoing expenses.

The expenses shown in the table are meant to highlight ongoing expenses at the Fund level only and do not include ongoing expenses at the Contract level, or transaction expenses at either the Fund or Contract level. While the Fund does not have transaction expenses, if the transaction and ongoing expenses at the Contract level were included, the expenses shown below would be higher. You should consult your Contract prospectus or disclosure document for more information.

The table shows Fund-level ongoing expenses and can help you understand these expenses and compare them with those of other mutual funds offered through the Contract. The table assumes a $1,000 investment held for the six months indicated. Please refer to the Fund prospectus for additional information on operating expenses.

Actual Fund Expenses

The first line (Actual) of the table provides actual account values and expenses. The “Ending Account Value” is derived from the Fund’s actual return, which includes the effect of ongoing Fund expenses, but does not include the effect of ongoing Contract expenses.

You can estimate the Fund-level expenses you incurred during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:

 

1. Divide your account value by $1,000.

If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6.

 

2. Multiply the result by the number under the heading “Fund-Level Expenses Incurred During Period.”

If Fund-Level Expenses Incurred During Period were $7.50, then 8.6 × $7.50 = $64.50.

In this illustration, the estimated expenses incurred this period at the Fund level are $64.50.

Hypothetical Example for Comparison

with Other Mutual Funds

Information in the second line (Hypothetical) of the table can help you compare ongoing expenses of the Fund with those of other mutual funds offered through the Contract. This information may not be used to estimate the actual ending account balance or expenses you incurred during the period. The hypothetical “Ending Account Value” is based on the Fund’s actual expense ratio and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Fund-Level Expenses Incurred During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds offered through a Contract.

 
Class 4  

Beginning Account

Value 7/1/14

     

Ending Account

Value 12/31/14

     

Fund-Level Expenses
Incurred During Period*

7/1/14–12/31/14

  

Actual

     $1,000         $1,013.60         $5.38   

Hypothetical (5% return before expenses)

     $1,000         $1,019.86         $5.40   

*Expenses are calculated using the most recent six-month annualized expense ratio, net of expense waivers, for the Fund’s Class 4 shares (1.06%), which does not include any ongoing expenses of the Contract for which the Fund is an investment option, multiplied by the average account value over the period, multiplied by 184/365 reflect the one-half year period.

 

    Annual Report     FFC-5   

SUPPLEMENT DATED SEPTEMBER 30, 2014

TO THE PROSPECTUS DATED MAY 1, 2014

OF

FRANKLIN FLEX CAP GROWTH VIP FUND

(a series of Franklin Templeton Variable Insurance Products Trust)

The prospectus is amended as follows:

I.  The “Fund Summary – Annual Fund Operating Expenses” table beginning on page FFC-S1 in the Fund’s Class 2 prospectus is replaced with the following:

Annual Fund Operating Expenses

(expenses that you pay each year as a percentage of the value of your investment)

 

     Class 2  
Management fees1, 2      1.00%  
Distribution and service (12b-1) fees      0.25%  
Other expenses1, 2      0.16%  
Total annual Fund operating expenses1      1.41%  
Fee waiver and/or expense reimbursement3      -0.45%  
Total annual Fund operating expenses after fee waiver and/or expense reimbursement1, 3      0.96%  

 

1. Management fees and other expenses have been restated to reflect increased fees due to a decline in the assets of the Fund as a result of shareholder redemptions.

 

2. Management fees and other expenses have been restated to reflect current fiscal year fees and expenses as a result of the bundling of the Fund’s investment management agreement with its fund administration agreement effective May 1, 2013. Such combined investment management fees are described further under “Management” in the Fund’s prospectus. Total annual fund operating expenses are not affected by such bundling.

 

3. The investment manager has contractually agreed to waive or assume certain expenses so that common expenses (excluding Rule 12b-1 fees, acquired fund fees and expenses and certain non-routine expenses) do not exceed 0.71% until at least April 30, 2015. Contractual fee waiver and/or expense reimbursement agreements may not be terminated during the terms set forth above. Expenses included in the table above were restated to reflect the increased cap on operating expenses from 0.68% to 0.71% effective May 1, 2014.

II.  The “Fund Summary – Example” table beginning on page FFC-S1 in the Fund’s Class 2 prospectus is replaced with the following:

 

    1 Year   3 Years   5 Years   10 Years
Class 2        $ 98       $ 402       $ 728      $ 1,652

III.  The “Fund Summary – Annual Fund Operating Expenses” table beginning on page FFC-S1 in the Fund’s Class 4 prospectus is replaced with the following:

Annual Fund Operating Expenses

(expenses that you pay each year as a percentage of the value of your investment)

 

     Class 4  
Management fees1, 2      1.00%  
Distribution and service (12b-1) fees      0.35%  
Other expenses1, 2      0.16%  
Total annual Fund operating expenses1      1.51%  
Fee waiver and/or expense reimbursement3      -0.45%  
Total annual Fund operating expenses after fee waiver and/or expense reimbursement1, 3      1.06%  

 

FFC-6         

1. Management fees and other expenses have been restated to reflect increased fees due to a decline in the assets of the Fund as a result of shareholder redemptions.

 

2. Management fees and other expenses have been restated to reflect current fiscal year fees and expenses as a result of the bundling of the Fund’s investment management agreement with its fund administration agreement effective May 1, 2013. Such combined investment management fees are described further under “Management” in the Fund’s prospectus. Total annual fund operating expenses are not affected by such bundling.

 

3. The investment manager has contractually agreed to waive or assume certain expenses so that common expenses (excluding Rule 12b-1 fees, acquired fund fees and expenses and certain non-routine expenses) do not exceed 0.71% until at least April 30, 2015. Contractual fee waiver and/or expense reimbursement agreements may not be terminated during the terms set forth above. Expenses included in the table above were restated to reflect the increased cap on operating expenses from 0.68% to 0.71% effective May 1, 2014.

IV.  The “Fund Summary – Example” table beginning on page FFC-S1 in the Fund’s Class 4 prospectus is replaced with the following:

 

    1 Year   3 Years   5 Years   10 Years
Class 4      $ 108       $ 433       $ 781      $ 1,763

Please keep this supplement with your prospectus for future reference.

 

          FFC-7   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

 

Financial Highlights

Franklin Flex Cap Growth VIP Fund

     Year Ended December 31,  
      2014      2013     2012      2011      2010  
Class 2              
Per share operating performance
(for a share outstanding throughout the year)		              

Net asset value, beginning of year

      $18.11         $13.21        $12.09         $12.70         $10.93   
  

 

 

  
Income from investment operationsa:              

Net investment income (loss)b

      (0.08 )       (0.01 )      0.01         (0.02 )       (0.02 ) 

Net realized and unrealized gains (losses)

      1.09         4.95        1.11         (0.59 )       1.79   
  

 

 

  

Total from investment operations

      1.01         4.94        1.12         (0.61 )       1.77   
  

 

 

  
Less distributions from:              

Net investment income

      —         (— )c      —         —         —   

Net realized gains

      (2.51 )       (0.04 )      —         —         —   
  

 

 

  

Total distributions

      (2.51 )       (0.04 )      —         —         —   
  

 

 

  

Net asset value, end of year

      $16.61         $18.11        $13.21         $12.09         $12.70   
  

 

 

  

Total returnd

      6.11%         37.48%        9.26%         (4.80)%         16.19%   
Ratios to average net assets              

Expenses before waiver and payments by affiliates

      1.20%         1.18%        1.18%         1.16%         1.18%   

Expenses net of waiver and payments by affiliates

      0.95%         0.93%        0.93%         0.93%         0.93%   

Net investment income (loss)

      (0.46)%         (0.09)%        0.09%         (0.14)%         (0.17)%   
Supplemental data              

Net assets, end of year (000’s)

      $93,354         $169,123        $159,122         $188,527         $227,774   

Portfolio turnover rate

      52.83%         52.15%        43.50%         63.99%         60.00%   

aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.

bBased on average daily shares outstanding.

cAmount rounds to less than $0.01 per share.

dTotal return does not include fees, charges or expenses imposed by the variable annuity and life insurance contracts for which the Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle.

 

FFC-8    Annual Report   |    The accompanying notes are an integral part of these financial statements.    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FINANCIAL HIGHLIGHTS

 

Franklin Flex Cap Growth VIP Fund (continued)

     Year Ended December 31,  
      2014      2013      2012     2011      2010  
Class 4              
Per share operating performance
(for a share outstanding throughout the year)		              

Net asset value, beginning of year

      $17.96         $13.12         $12.01        $12.63         $10.88   
  

 

 

  
Income from investment operationsa:              

Net investment income (loss)b

      (0.10 )       (0.03 )       (— )c      (0.03 )       (0.03 ) 

Net realized and unrealized gains (losses)

      1.09         4.91         1.11        (0.59 )       1.78   
  

 

 

  

Total from investment operations

      0.99         4.88         1.11        (0.62 )       1.75   
  

 

 

  

Less distributions from net realized gains

      (2.51 )       (0.04 )       —        —         —   
  

 

 

  

Net asset value, end of year

      $16.44         $17.96         $13.12        $12.01         $12.63   
  

 

 

  

Total returnd

      5.98%         37.28%         9.24%        (4.91)%         16.08%   
Ratios to average net assets              

Expenses before waiver and payments by affiliates

      1.30%         1.28%         1.28%        1.26%         1.28%   

Expenses net of waiver and payments by affiliates

      1.05%         1.03%         1.03%        1.03%         1.03%   

Net investment income (loss)

      (0.56)%         (0.19)%         (0.01)%        (0.24)%         (0.27)%   
Supplemental data              

Net assets, end of year (000’s)

      $31,355         $251,339         $216,607        $270,598         $263,746   

Portfolio turnover rate

      52.83%         52.15%         43.50%        63.99%         60.00%   

aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.

bBased on average daily shares outstanding.

cAmount rounds to less than $0.01 per share.

dTotal return does not include fees, charges or expenses imposed by the variable annuity and life insurance contracts for which Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle.

 

    The accompanying notes are an integral part of these financial statements.    |   Annual Report     FFC-9   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

 

Statement of Investments, December 31, 2014

 

Franklin Flex Cap Growth VIP Fund  
           Shares        Value  
 

Common Stocks 99.3%

        
 

Automobiles & Components 1.3%

        
 

BorgWarner Inc.

      20,000         $ 1,099,000   
a  

Tesla Motors Inc.

      2,250           500,422   
         

 

 

  
            1,599,422   
         

 

 

  
 

Banks 2.3%

        
a  

Signature Bank

      9,500           1,196,620   
a  

SVB Financial Group

      10,250           1,189,717   
 

Talmer Bancorp Inc., A

      35,000           491,400   
         

 

 

  
            2,877,737   
         

 

 

  
 

Capital Goods 7.1%

        
 

AMETEK Inc.

      12,200           642,086   
 

Cummins Inc.

      1,500           216,255   
a  

HD Supply Holdings Inc.

      40,000           1,179,600   
 

Honeywell International Inc.

      9,500           949,240   
a  

The KEYW Holding Corp.

      21,323           221,333   
 

Pall Corp.

      9,000           910,890   
 

Precision Castparts Corp.

      10,500           2,529,240   
a  

Proto Labs Inc.

      9,000           604,440   
 

Rockwell Automation Inc.

      5,750           639,400   
 

Roper Industries Inc.

      6,250           977,187   
         

 

 

  
            8,869,671   
         

 

 

  
 

Commercial & Professional Services 1.8%

        
a  

IHS Inc., A

      13,500           1,537,380   
a  

Stericycle Inc.

      5,500           720,940   
         

 

 

  
            2,258,320   
         

 

 

  
 

Consumer Durables & Apparel 4.2%

        
 

Harman International Industries Inc.

      5,590           596,509   
a  

Michael Kors Holdings Ltd.

      12,000           901,200   
 

NIKE Inc., B

      16,500           1,586,475   
a  

TRI Pointe Homes Inc.

      67,500           1,029,375   
a  

Under Armour Inc., A

      17,000           1,154,300   
         

 

 

  
            5,267,859   
         

 

 

  
 

Consumer Services 1.8%

        
a  

Buffalo Wild Wings Inc.

      4,530           817,122   
a  

Chipotle Mexican Grill Inc.

      1,300           889,863   
a  

Chuy’s Holdings Inc.

      1,772           34,855   
a  

Noodles & Co.

      18,000           474,300   
         

 

 

  
            2,216,140   
         

 

 

  
 

Diversified Financials 2.4%

        
a  

Affiliated Managers Group Inc.

      4,250           902,020   
 

Financial Engines Inc.

      11,000           402,050   
 

Intercontinental Exchange Inc.

      2,800           614,012   
 

T. Rowe Price Group Inc.

      12,100           1,038,906   
         

 

 

  
            2,956,988   
         

 

 

  
 

Energy 1.8%

        
a  

Diamondback Energy Inc.

      13,500           807,030   
a  

FMC Technologies Inc.

      9,000           421,560   
 

Oceaneering International Inc.

      7,500           441,075   

 

FFC-10    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

 

Franklin Flex Cap Growth VIP Fund (continued)

 

           Shares        Value  
 

Common Stocks (continued)

        
 

Energy (continued)

        
a  

Rice Energy Inc.

      30,000         $ 629,100   
         

 

 

  
            2,298,765   
         

 

 

  
 

Food & Staples Retailing 0.9%

        
a  

Sprouts Farmers Markets LLC

      7,620           258,928   
 

Whole Foods Market Inc.

      16,500           831,930   
         

 

 

  
            1,090,858   
         

 

 

  
 

Food, Beverage & Tobacco 1.8%

        
a  

Boston Beer Inc., A

      2,410           697,791   
 

Mead Johnson Nutrition Co., A

      7,000           703,780   
a  

Monster Beverage Corp.

      7,750           839,713   
         

 

 

  
            2,241,284   
         

 

 

  
 

Health Care Equipment & Services 4.3%

        
a  

Cerner Corp.

      15,120           977,659   
a  

DexCom Inc.

      15,000           825,750   
a  

Envision Healthcare Holdings Inc.

      40,000           1,387,600   
a  

Insulet Corp.

      16,000           736,960   
 

McKesson Corp.

      6,810           1,413,620   
         

 

 

  
            5,341,589   
         

 

 

  
 

Materials 3.2%

        
 

Cytec Industries Inc.

      20,000           923,400   
 

Ecolab Inc.

      19,500           2,038,140   
 

Praxair Inc.

      7,500           971,700   
         

 

 

  
            3,933,240   
         

 

 

  
 

Media 4.1%

        
a  

Charter Communications Inc., A

      7,500           1,249,650   
a  

IMAX Corp. (Canada)

      20,000           618,000   
 

Twenty-First Century Fox Inc., B

      37,500           1,383,375   
 

The Walt Disney Co.

      20,000           1,883,800   
         

 

 

  
            5,134,825   
         

 

 

  
 

Pharmaceuticals, Biotechnology & Life Sciences 13.9%

        
a  

Actavis PLC

      13,000           3,346,330   
a  

Alnylam Pharmaceuticals Inc.

      9,000           873,000   
a  

Biogen Idec Inc.

      5,500           1,866,975   
 

Bristol-Myers Squibb Co.

      21,100           1,245,533   
a  

Celgene Corp.

      30,000           3,355,800   
a  

Celldex Therapeutics Inc.

      37,820           690,215   
a  

Illumina Inc.

      7,000           1,292,060   
a  

Jazz Pharmaceuticals PLC

      4,500           736,785   
a  

Karyopharm Therapeutics Inc.

      13,500           505,305   
 

Perrigo Co. PLC

      8,590           1,435,904   
a  

Quintiles Transnational Holdings Inc.

      13,000           765,310   
a  

Regeneron Pharmaceuticals Inc.

      2,400           984,600   
a  

Revance Therapeutics Inc.

      15,000           254,100   
         

 

 

  
            17,351,917   
         

 

 

  
 

Real Estate 1.3%

        
 

American Tower Corp.

      16,000           1,581,600   
         

 

 

  

 

    Annual Report     FFC-11   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

 

Franklin Flex Cap Growth VIP Fund (continued)

 

           Shares        Value  
 

Common Stocks (continued)

        
 

Retailing 6.3%

        
 

Advance Auto Parts Inc.

      4,500         $ 716,760   
a  

Amazon.com Inc.

      6,600           2,048,310   
 

Dick’s Sporting Goods Inc.

      9,250           459,263   
a  

LKQ Corp.

      45,000           1,265,400   
a  

Netflix Inc.

      1,550           529,495   
a  

The Priceline Group Inc.

      1,500           1,710,315   
 

Tractor Supply Co.

      15,000           1,182,300   
         

 

 

  
            7,911,843   
         

 

 

  
 

Semiconductors & Semiconductor Equipment 5.5%

        
 

Applied Materials Inc.

      47,000           1,171,240   
a  

Cavium Inc.

      23,360           1,444,115   
 

Microchip Technology Inc.

      25,000           1,127,750   
a  

Nanometrics Inc.

      21,507           361,748   
a  

NXP Semiconductors NV (Netherlands)

      24,200           1,848,880   
 

Xilinx Inc.

      20,420           883,982   
         

 

 

  
            6,837,715   
         

 

 

  
 

Software & Services 21.4%

        
a  

Alliance Data Systems Corp.

      2,750           786,638   
a  

ANSYS Inc.

      6,500           533,000   
a  

Bottomline Technologies Inc.

      9,800           247,744   
a  

BroadSoft Inc.

      18,000           522,360   
a  

Cognizant Technology Solutions Corp., A

      11,200           589,792   
a  

CoStar Group Inc.

      6,650           1,221,139   
a  

Demandware Inc.

      9,500           546,630   
a  

Electronic Arts Inc.

      37,000           1,739,555   
a  

Facebook Inc., A

      50,000           3,901,000   
a  

FleetCor Technologies Inc.

      12,000           1,784,520   
a  

Fortinet Inc.

      10,500           321,930   
a  

Guidewire Software Inc.

      7,500           379,725   
a  

HomeAway Inc.

      22,500           670,050   
a  

LinkedIn Corp., A

      10,000           2,297,100   
 

MasterCard Inc., A

      40,000           3,446,400   
a  

Mobileye NV

      8,400           340,704   
a  

NetSuite Inc.

      9,300           1,015,281   
a  

Salesforce.com Inc.

      21,000           1,245,510   
a  

ServiceNow Inc.

      5,500           373,175   
a  

Splunk Inc.

      8,000           471,600   
a  

Twitter Inc.

      18,160           651,399   
 

Visa Inc., A

      10,000           2,622,000   
a  

Workday Inc.

      4,530           369,693   
a  

Yelp Inc.

      12,000           656,760   
         

 

 

  
            26,733,705   
         

 

 

  
 

Technology Hardware & Equipment 9.2%

        
 

Apple Inc.

      70,000           7,726,600   
a  

Palo Alto Networks Inc.

      9,500           1,164,415   
 

QUALCOMM Inc.

      18,000           1,337,940   
 

SanDisk Corp.

      6,500           636,870   
a  

Stratasys Ltd.

      7,000           581,770   
         

 

 

  
            11,447,595   
         

 

 

  

 

FFC-12    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

Franklin Flex Cap Growth VIP Fund (continued)

           Shares        Value  
 

Common Stocks (continued)

        
 

Telecommunication Services 0.6%

        
a  

SBA Communications Corp.

      6,510         $ 721,048   
         

 

 

  
 

Transportation 4.1%

        
a  

Genesee & Wyoming Inc.

      11,000           989,120   
a  

Hub Group Inc., A

      25,000           952,000   
 

Kansas City Southern

      5,500           671,165   
a  

Spirit Airlines Inc.

      18,500           1,398,230   
 

Union Pacific Corp.

      9,500           1,131,735   
         

 

 

  
            5,142,250   
         

 

 

  
 

Total Common Stocks (Cost $75,463,742)

           123,814,371   
         

 

 

  
 

Short Term Investments (Cost $3,647,947) 2.9%

        
 

Money Market Funds 2.9%

        
a,b  

Institutional Fiduciary Trust Money Market Portfolio

      3,647,947           3,647,947   
         

 

 

  
 

Total Investments (Cost $79,111,689) 102.2%

           127,462,318   
 

Other Assets, less Liabilities (2.2)%

           (2,753,018 ) 
         

 

 

  
 

Net Assets 100.0%

         $ 124,709,300   
         

 

 

  

aNon-income producing.

bSee Note 3(e) regarding investments in Institutional Fiduciary Trust Money Market Portfolio.

 

    The accompanying notes are an integral part of these financial statements.    |   Annual Report     FFC-13   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

Financial Statements

Statement of Assets and Liabilities

December 31, 2014

 

      Franklin Flex
Cap Growth
VIP Fund		  

Assets:

   

Investments in securities:

   

Cost - Unaffiliated issuers

    $ 75,463,742   

Cost - Sweep Money Fund (Note 3e)

      3,647,947   
  

 

 

  

Total cost of investments

    $ 79,111,689   
  

 

 

  

Value - Unaffiliated issuers

    $ 123,814,371   

Value - Sweep Money Fund (Note 3e)

      3,647,947   
  

 

 

  

Total value of investments

      127,462,318   

Receivables:

   

Investment securities sold

      80,529   

Capital shares sold

      8,344   

Dividends

      63,481   

Other assets

      37   
  

 

 

  

Total assets

      127,614,709   
  

 

 

  

Liabilities:

   

Payables:

   

Investment securities purchased

      2,584,039   

Capital shares redeemed

      133,608   

Management fees

      73,173   

Distribution fees

      58,295   

Accrued expenses and other liabilities

      56,294   
  

 

 

  

Total liabilities

      2,905,409   
  

 

 

  

Net assets, at value

    $ 124,709,300   
  

 

 

  

Net assets consist of:

   

Paid-in capital

    $ 1,524,744   

Net unrealized appreciation (depreciation)

      48,350,629   

Accumulated net realized gain (loss)

      74,833,927   
  

 

 

  

Net assets, at value

    $ 124,709,300   
  

 

 

  
Class 2:   

Net assets, at value

    $ 93,353,938   
  

 

 

  

Shares outstanding

      5,620,893   
  

 

 

  

Net asset value and maximum offering price per share

    $ 16.61   
  

 

 

  
Class 4:   

Net assets, at value

    $ 31,355,362   
  

 

 

  

Shares outstanding

      1,907,838   
  

 

 

  

Net asset value and maximum offering price per share

    $ 16.44   
  

 

 

  

 

FFC-14    Annual Report   |    The accompanying notes are an integral part of these financial statements.    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FINANCIAL STATEMENTS

 

Statement of Operations

for the year ended December 31, 2014

 

      Franklin Flex
Cap Growth
VIP Fund		  

Investment income:

   

Dividends

    $ 1,500,901   

Income from securities loaned

      202,181   
  

 

 

  

Total investment income

      1,703,082   
  

 

 

  

Expenses:

   

Management fees (Note 3a)

      3,172,516   

Distribution fees: (Note 3c)

   

Class 2

      376,264   

Class 4

      689,689   

Custodian fees (Note 4)

      2,946   

Reports to shareholders

      62,803   

Professional fees

      51,487   

Trustees’ fees and expenses

      1,672   

Other

      9,579   
  

 

 

  

Total expenses

      4,366,956   

Expenses waived/paid by affiliates (Note 3e and 3f)

      (867,831 ) 
  

 

 

  

Net expenses

      3,499,125   
  

 

 

  

Net investment income (loss)

      (1,796,043 ) 
  

 

 

  

Realized and unrealized gains (losses):

   

Net realized gain (loss) from investments

      136,983,635   

Net change in unrealized appreciation (depreciation) on investments

      (121,113,931 ) 
  

 

 

  

Net realized and unrealized gain (loss)

      15,869,704   
  

 

 

  

Net increase (decrease) in net assets resulting from operations

    $ 14,073,661   
  

 

 

  

 

    The accompanying notes are an integral part of these financial statements.    |   Annual Report     FFC-15   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FINANCIAL STATEMENTS

Statements of Changes in Net Assets

 

    Franklin Flex Cap Growth VIP Fund  
    Year Ended December 31,  
     2014        2013  

Increase (decrease) in net assets:

       

Operations:

       

Net investment income (loss)

   $ (1,796,043 )       $ (590,415 ) 

Net realized gain (loss) from investments

     136,983,635           60,105,842   

Net change in unrealized appreciation (depreciation) on investments

     (121,113,931 )         67,788,666   
 

 

 

  

Net increase (decrease) in net assets resulting from operations

     14,073,661           127,304,093   
 

 

 

  

Distributions to shareholders from:

       

Net investment income:

       

Class 2

     —           (6,555 ) 

Net realized gains:

       

Class 2

     (23,244,460 )         (449,397 ) 

Class 4

     (34,835,360 )         (654,813 ) 
 

 

 

  

Total distributions to shareholders

     (58,079,820 )         (1,110,765 ) 
 

 

 

  

Capital share transactions: (Note 2)

       

Class 2

     (59,517,033 )         (41,676,643 ) 

Class 4

     (192,229,021 )         (39,784,837 ) 
 

 

 

  

Total capital share transactions

     (251,746,054 )         (81,461,480 ) 
 

 

 

  

Net increase (decrease) in net assets

     (295,752,213 )         44,731,848   

Net assets (there is no undistributed net investment income at beginning or end of year):

       

Beginning of year

     420,461,513           375,729,665   
 

 

 

  

End of year

   $ 124,709,300         $ 420,461,513   
 

 

 

  

 

FFC-16    Annual Report   |    The accompanying notes are an integral part of these financial statements.    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

Notes to Financial Statements

Franklin Flex Cap Growth VIP Fund

1. Organization and Significant Accounting Policies

Franklin Templeton Variable Insurance Products Trust (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end management investment company, consisting of nineteen separate funds and applies the specialized accounting and reporting guidance in U.S. Generally Accepted Accounting Principles (U.S. GAAP). Franklin Flex Cap Growth VIP Fund (Fund) is included in this report. The financial statements of the remaining funds in the Trust are presented separately. Shares of the Fund are generally sold only to insurance company separate accounts to fund the benefits of variable life insurance policies or variable annuity contracts. At December 31, 2014, 40.33% of the Fund’s shares were held through one insurance company. Investment activities of these insurance company separate accounts could have a material impact on the Fund. The Fund offers two classes of shares: Class 2 and Class 4. Each class of shares differs by its distribution fees, voting rights on matters affecting a single class and its exchange privilege.

Effective May 1, 2014, Franklin Flex Cap Growth Securities Fund was renamed Franklin Flex Cap Growth VIP Fund.

The following summarizes the Fund’s significant accounting policies.

a. Financial Instrument Valuation

The Fund’s investments in financial instruments are carried at fair value daily. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. The Fund calculates the net asset value (NAV) per share at the close of the New York Stock Exchange (NYSE), generally at 4 p.m. Eastern time (NYSE close) on each day the NYSE is open for trading. Under compliance policies and procedures approved by the Trust’s Board of Trustees (the Board), the Fund’s administrator has responsibility for oversight of valuation, including leading the cross-functional Valuation and Liquidity Oversight Committee (VLOC). The VLOC provides administration and oversight of the Fund’s valuation policies and procedures, which are approved annually by the Board. Among other things, these procedures allow the Fund to utilize independent pricing services, quotations from securities and financial instrument dealers, and other market sources to determine fair value.

Equity securities listed on an exchange or on the NASDAQ National Market System are valued at the last quoted sale price

or the official closing price of the day, respectively. Foreign equity securities are valued as of the close of trading on the foreign stock exchange on which the security is primarily traded or as of the NYSE close, whichever is earlier. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at the NYSE close on the day that the value of the security is determined. Over-the-counter securities are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. Certain equity securities are valued based upon fundamental characteristics or relationships to similar securities. Investments in open-end mutual funds and non-registered money market funds are valued at the closing NAV.

The Fund has procedures to determine the fair value of financial instruments for which market prices are not reliable or readily available. Under these procedures, the VLOC convenes on a regular basis to review such financial instruments and considers a number of factors, including significant unobservable valuation inputs, when arriving at fair value. The VLOC primarily employs a market-based approach which may use related or comparable assets or liabilities, recent transactions, market multiples, book values, and other relevant information for the investment to determine the fair value of the investment. An income-based valuation approach may also be used in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the investments. Due to the inherent uncertainty of valuations of such investments, the fair values may differ significantly from the values that would have been used had an active market existed. The VLOC employs various methods for calibrating these valuation approaches including a regular review of key inputs and assumptions, transactional back-testing or disposition analysis, and reviews of any related market activity.

b. Securities Lending

The Fund participates in an agency based securities lending program. The Fund receives cash collateral against the loaned securities in an amount equal to at least 102% of the fair value of the loaned securities. Collateral is maintained over the life of the loan in an amount not less than 100% of the fair value of loaned securities, as determined at the close of fund business each day; any additional collateral required due to changes in security values is delivered to the Fund on the next business

 

 

    Annual Report     FFC-17   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

 

Franklin Flex Cap Growth VIP Fund (continued)

 

1. Organization and Significant Accounting Policies (continued)

b. Securities Lending (continued)

 

day. The collateral is invested in a non-registered money fund. The Fund receives income from the investment of cash collateral, in addition to lending fees and rebates paid by the borrower. The Fund bears the market risk with respect to the collateral investment, securities loaned, and the risk that the agent may default on its obligations to the Fund. The securities lending agent has agreed to indemnify the Fund in the event of default by a third party borrower. At December 31, 2014, the Fund had no securities on loan.

c. Income and Deferred Taxes

It is the Fund’s policy to qualify as a regulated investment company under the Internal Revenue Code. The Fund intends to distribute to shareholders substantially all of its taxable income and net realized gains to relieve it from federal income and if applicable, excise taxes. As a result, no provision for U.S. federal income taxes is required.

The Fund may be subject to foreign taxation related to income received, capital gains on the sale of securities and certain foreign currency transactions in the foreign jurisdictions in which it invests. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist in the foreign markets in which the Fund invests. When a capital gain tax is determined to apply the Fund records an estimated deferred tax liability in an amount that would be payable if the securities were disposed of on the valuation date.

The Fund recognizes the tax benefits of uncertain tax positions only when the position is “more likely than not” to be sustained upon examination by the tax authorities based on the technical merits of the tax position. As of December 31, 2014, and for all open tax years, the Fund has determined that no liability for unrecognized tax benefits is required in the Fund’s financial statements related to uncertain tax positions taken on a tax return (or expected to be taken on future tax returns). Open tax years are those that remain subject to examination and are based on each tax jurisdiction statute of limitation.

d. Security Transactions, Investment Income, Expenses and Distributions

Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a

specific identification basis. Estimated expenses are accrued daily. Dividend income is recorded on the ex-dividend date. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with U.S. GAAP. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods.

Common expenses incurred by the Trust are allocated among the funds based on the ratio of net assets of each fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense.

Realized and unrealized gains and losses and net investment income, not including class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions, by class, are generally due to differences in class specific expenses.

Distributions received by the Fund from certain securities may be a return of capital (ROC). Such distributions reduce the cost basis of the securities, and any distributions in excess of the cost basis are recognized as capital gains.

e. Accounting Estimates

The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates.

f. Guarantees and Indemnifications

Under the Trust’s organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, on behalf of the Fund, enters into contracts with service providers that contain general indemnification clauses. The Trust’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote.

 

FFC-18    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

 

Franklin Flex Cap Growth VIP Fund (continued)

 

2. Shares of Beneficial Interest

At December 31, 2014, there were an unlimited number of shares authorized (without par value). Transactions in the Fund’s shares were as follows:

 

     Year Ended December 31,  
     2014          2013  
      Shares      Amount           Shares      Amount  
Class 2 Shares:              

Shares sold

      1,271,685       $ 22,546,625           1,113,999       $ 16,865,422   

Shares issued in reinvestment of distributions

      1,454,597         23,244,460           30,996         455,952   

Shares redeemed

      (6,444,966 )       (105,308,118 )         (3,846,981 )       (58,998,017 ) 
  

 

 

  

Net increase (decrease)

      (3,718,684 )     $ (59,517,033 )         (2,701,986 )     $ (41,676,643 ) 
  

 

 

  
Class 4 Shares:              

Shares sold

      1,157,788       $ 20,021,648           1,584,158       $ 24,181,871   

Shares issued on reinvestment of distributions

      2,201,982         34,835,359           44,850         654,813   

Shares redeemed

      (15,445,351 )       (247,086,028 )         (4,145,079 )       (64,621,521 ) 
  

 

 

  

Net increase (decrease)

      (12,085,581 )     $ (192,229,021 )         (2,516,071 )     $ (39,784,837 ) 
  

 

 

  

3. Transactions With Affiliates

Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Fund are also officers and/or directors of the following subsidiaries:

 

Subsidiary    Affiliation

Franklin Advisers, Inc. (Advisers)

   

Investment manager

Franklin Templeton Services, LLC (FT Services)

   

Administrative manager

Franklin Templeton Distributors, Inc. (Distributors)

   

Principal underwriter

Franklin Templeton Investor Services, LLC (Investor Services)

   

Transfer agent

a. Management Fees

The Fund pays an investment management fee to Advisers based on the average daily net assets of the Fund as follows:

 

Annualized Fee Rate    Net Assets

1.000%

   

Up to and including $100 million

0.900%

   

Over $100 million, up to and including $250 million

0.850%

   

Over $250 million, up to and including $10 billion

0.800%

   

Over $10 billion, up to and including $12.5 billion

0.775%

   

Over $12.5 billion, up to and including $15 billion

0.750%

   

In excess of $15 billion

b. Administrative Fees

Under an agreement with Advisers, FT Services provides administrative services to the Fund. The fee is paid by Advisers based on the Fund’s average daily net assets, and is not an additional expense of the Fund.

 

    Annual Report     FFC-19   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Franklin Flex Cap Growth VIP Fund (continued)

3. Transactions With Affiliates (continued)

c. Distribution Fees

The Board has adopted distribution plans for Class 2 and Class 4 shares pursuant to Rule 12b-1 under the 1940 Act. Under the Fund’s compensation distribution plans, the Fund pays Distributors for costs incurred in connection with the servicing, sale and distribution of the Fund’s shares up to 0.35% per year of its average daily net assets of each class. Some distribution fees are not charged on shares held by affiliates. The Board has agreed to limit the current rate to 0.25% per year for Class 2. The plan year, for purposes of monitoring compliance with the maximum annual plan rates, is February 1 through January 31.

d. Transfer Agent Fees

Investor Services, under terms of an agreement, performs shareholder servicing for the Fund and is not paid by the Fund for the services.

e. Investments in Institutional Fiduciary Trust Money Market Portfolio

The Fund invests in Institutional Fiduciary Trust Money Market Portfolio (Sweep Money Fund), an affiliated open-end management investment company. Management fees paid by the Fund are waived on assets invested in the Sweep Money Fund, as noted on the Statement of Operations, in an amount not to exceed the management and administrative fees paid directly or indirectly by the Sweep Money Fund. Prior to January 1, 2014, the waiver was accounted for as a reduction to management fees.

f. Waiver and Expense Reimbursements

Advisers has contractually agreed in advance to waive or limit its fees and to assume as its own expense certain expenses otherwise payable by the Fund so that the expenses (excluding distribution fees, and acquired fund fees and expenses, for Class 2 and Class 4 of the Fund do not exceed 0.71% based on the average net assets of each class (other than certain non-routine expenses or costs, including those relating to litigation, indemnification, reorganizations, and liquidations) until April 30, 2015. Prior to May 1, 2014, expenses were limited to 0.68%.

4. Expense Offset Arrangement

The Fund has entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Fund’s custodian expenses. During the year ended December 31, 2014, there were no credits earned.

5. Income Taxes

The tax character of distributions paid during the years ended December 31, 2014 and 2013, was as follows:

 

     2014     2013  

Distributions paid from:

     

Ordinary income

    $ 5,771,146      $ 6,555  

Long term capital gain

      52,308,674        1,104,210  
  

 

 

  
   $ 58,079,820      $ 1,110,765  
  

 

 

  

 

FFC-20    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Franklin Flex Cap Growth VIP Fund (continued)

At December 31, 2014, the cost of investments, net unrealized appreciation (depreciation), undistributed ordinary income and undistributed long term capital gains for income tax purposes were as follows:

 

Cost of investments

    $ 79,791,127   
  

 

 

  

Unrealized appreciation

    $ 48,152,786  

Unrealized depreciation

      (481,595 )
  

 

 

  

Net unrealized appreciation (depreciation)

    $ 47,671,191  
  

 

 

  

Undistributed ordinary income

    $ 1,430,846   

Undistributed long term capital gains

      74,082,521   
  

 

 

  

Distributable earnings

    $ 75,513,367   
  

 

 

  

Differences between income and/or capital gains as determined on a book basis and a tax basis are primarily due to differing treatments of wash sales.

The Fund utilized a tax accounting practice to treat a portion of the proceeds from capital shares redeemed as a distribution from realized capital gains.

6. Investment Transactions

Purchases and sales of investments (excluding short term securities) for the year ended December 31, 2014, aggregated $173,311,920 and $487,707,849, respectively.

7. Credit Facility

The Fund, together with other U.S. registered and foreign investment funds (collectively, Borrowers), managed by Franklin Templeton Investments, are borrowers in a joint syndicated senior unsecured credit facility totaling $1.5 billion (Global Credit Facility) which matured on February 13, 2015. This Global Credit Facility provides a source of funds to the Borrowers for temporary and emergency purposes, including the ability to meet future unanticipated or unusually large redemption requests. The Borrowers expect to renew the Global Credit Facility for a total of $2 billion effective February 13, 2015, which matures on February 12, 2016.

Under the terms of the Global Credit Facility, the Fund shall, in addition to interest charged on any borrowings made by the Fund and other costs incurred by the Fund, pay its share of fees and expenses incurred in connection with the implementation and maintenance of the Global Credit Facility, based upon its relative share of the aggregate net assets of all of the Borrowers, including an annual commitment fee of 0.07% based upon the unused portion of the Global Credit Facility. These fees are reflected in other expenses on the Statement of Operations. During the year ended December 31, 2014, the Fund did not use the Global Credit Facility.

8. Fair Value Measurements

The Fund follows a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Fund’s own market assumptions (unobservable inputs). These inputs are used in determining the value of the Fund’s financial instruments and are summarized in the following fair value hierarchy:

 

  •   Level 1 – quoted prices in active markets for identical financial instruments
  •   Level 2 – other significant observable inputs (including quoted prices for similar financial instruments, interest rates, prepayment speed, credit risk, etc.)
  •   Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of financial instruments)

 

    Annual Report   FFC-21

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Franklin Flex Cap Growth VIP Fund (continued)

8. Fair Value Measurements (continued)

The input levels are not necessarily an indication of the risk or liquidity associated with financial instruments at that level.

For movements between the levels within the fair value hierarchy, the Fund has adopted a policy of recognizing the transfers as of the date of the underlying event which caused the movement.

At December 31, 2014, all of the Fund’s investments in financial instruments carried at fair value were valued using Level 1 inputs. For detailed categories, see the accompanying Statement of Investments.

9. New Accounting Pronouncements

In June 2014, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2014-11, Transfers and Servicing (Topic 860), Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. The ASU changes the accounting for certain repurchase agreements and expands disclosure requirements related to repurchase agreements, securities lending, repurchase-to-maturity and similar transactions. The ASU is effective for interim and annual reporting periods beginning after December 15, 2014. Management has reviewed the requirements and believes the adoption of this ASU will not have a material impact on the financial statements.

10. Subsequent Events

The Fund has evaluated subsequent events through the issuance of the financial statements and determined that no events have occurred that require disclosure other than those already disclosed in the financial statements.

 

FFC-22    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

Report of Independent Registered Public Accounting Firm

Franklin Flex Cap Growth VIP Fund

To the Board of Trustees and Shareholders of Franklin Templeton Variable Insurance Products Trust

In our opinion, the accompanying statement of assets and liabilities, including the statement of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Franklin Flex Cap Growth VIP Fund (the “Fund”) at December 31, 2014, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements 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 are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2014 by correspondence with the custodian and brokers, provides a reasonable basis for our opinion.

PricewaterhouseCoopers LLP

San Francisco, California

February 13, 2015

 

    Annual Report     FFC-23   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

Tax Information (unaudited)

Franklin Flex Cap Growth VIP Fund

Under Section 852(b)(3)(C) of the Internal Revenue Code (Code), the Fund hereby reports the maximum amount allowable but no less than $111,791,004 as a long term capital gain dividend for the fiscal year ended December 31, 2014.

Under Section 854(b)(1)(A) of the Code, the Fund hereby reports 22.76% of the ordinary income dividends as income qualifying for the dividends received deduction for the fiscal year ended December 31, 2014.

 

  FFC-24       Annual Report    

Franklin Founding Funds Allocation VIP Fund

(Formerly, Franklin Templeton VIP Founding Funds Allocation Fund)

This annual report for Franklin Founding Funds Allocation VIP Fund covers the fiscal year ended December 31, 2014.

Class 4 Performance Summary as of December 31, 2014

Average annual total return of Class 4 shares* represents the average annual change in value, assuming reinvestment of dividends and capital gains. Average returns smooth out variations in returns, which can be significant; they are not the same as year-by-year results.

 

Periods ended 12/31/14    1-Year        5-Year        Inception (7/2/07)  

Average Annual Total Return

      +2.75%           +9.67%           +2.86%   

*For the period beginning 2/29/08, Class 4 performance reflects a 12b-1 fee expense of 0.35% per year, which affects future performance. Class 4 performance prior to 2/29/08 reflects historical Class 1 performance, which does not have a 12b-1 fee expense. Since 2/29/08 (effective date), the average annual total return of Class 4 shares was +5.35%. The Fund has an expense reduction contractually guaranteed through at least 4/30/15. Fund investment results reflect the expense reduction, to the extent applicable; without this reduction, the results would have been lower.

Performance reflects the Fund’s Class 4 operating expenses, but does not include any contract fees, expenses or sales charges. If they had been included, performance would be lower. These charges and deductions, particularly for variable life policies, can have a significant effect on contract values and insurance benefits. See the contract prospectus for a complete description of these expenses, including sales charges.

Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares. Current performance may differ from figures shown.

Total Return Index Comparison for a Hypothetical $10,000 Investment (7/2/07–12/31/14)

The graph below shows the change in value of a hypothetical $10,000 investment in the Fund over the indicated period and includes reinvestment of any income or distributions. The Fund’s performance* is compared to the performance of the Standard & Poor’s® 500 Index (S&P 500®) and the MSCI World Index. One cannot invest directly in an index, and an index is not representative of the Fund’s portfolio. Please see Important Notes to Performance Information preceding the Fund Summaries.

 

LOGO

**Source: Morningstar. Please see Index Descriptions following the Fund Summaries.

 

    Annual Report     FFA-1   

FRANKLIN FOUNDING FUNDS ALLOCATION VIP FUND

Fund Goals and Main Investments

Franklin Founding Funds Allocation VIP Fund seeks capital appreciation, with income as a secondary goal. Under normal market conditions, the Fund invests equal portions in Class 1 shares of Franklin Income VIP Fund, Franklin Mutual Shares VIP Fund and Templeton Growth VIP Fund.

Fund Risks

All investments involve risks, including possible loss of principal. Because the Fund invests in underlying funds that may engage in a variety of investment strategies involving certain risks, the Fund may be subject to these same risks. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Bonds are affected by changes in interest rates and the creditworthiness of their issuers. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds adjust to a rise in interest rates, the Fund’s share price may decline. Higher yielding, lower rated corporate bonds entail a greater degree of credit risk compared to investment-grade securities. Foreign investing carries additional risks such as currency and market volatility and political or social instability, risks that are heightened in developing countries. Value securities may not increase in price as anticipated or may decline further in value. The Fund’s prospectus also includes a description of the main investment risks.

Performance Overview

You can find the Fund’s one-year total return in the Performance Summary. In comparison, the S&P 500 generated a +13.69% total return and the MSCI World Index produced a +5.50% total return for the same period.1

Economic and Market Overview

The global economy grew moderately during 2014 as U.S. economic growth expanded while growth rates in much of the rest of the world declined. U.S. economic activity was supported in some quarters by increased consumer spending, business investment and federal defense spending. The housing market strengthened, and lower gasoline prices and improved job growth contributed to rising retail sales. The U.S. Federal Reserve Board (Fed) began reducing its large-scale bond purchases $10 billion a month in January and ended the buying program in October. But it continued its practice of maintaining

 

 

LOGO

*The asset allocation is based on the Statement of Investments (SOI), which classifies each underlying fund into a broad asset class.

The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund’s SOI.

 

holdings of longer term securities at sizable levels. Toward period-end, the Fed stated that it could be patient with regard to raising interest rates and that the interest rate might not rise for at least a couple of meetings, possibly implying at least the first two meetings of 2015.

Outside the U.S., the U.K. economy grew relatively well, supported by the services and manufacturing sectors. In the eurozone, economic growth remained subdued, as concerns persisted about the potential negative impacts to growth from the crisis in Ukraine and China’s moderating growth rate. In June, the European Central Bank (ECB) reduced its main interest rate and, for the first time, set a negative deposit rate; the ECB reduced both rates again in September. The ECB broadened its monetary easing stance by implementing an asset purchase program to prevent deflation and stimulate the economy. Japan’s second- and third-quarter economic contractions indicated the economy was in a recession, although private consumption and exports improved in the third quarter. In October, the Bank of Japan expanded its stimulus measures amid weak domestic demand and as substantially lower crude oil prices exerted further downward pressure on inflation. Near period-end, Japan’s ruling coalition was reelected in early parliamentary elections and subsequently announced a fresh stimulus package aimed at reviving economic growth.

Global developed market stocks, as measured by the MSCI World Index, advanced overall during the 12-month period amid a generally accommodative monetary policy environment

 

1. Source: Morningstar.

One cannot invest directly in an index, and an index is not representative of the Fund’s portfolio. Please see Index Descriptions following the Fund Summaries.

 

FFA-2    Annual Report    

FRANKLIN FOUNDING FUNDS ALLOCATION VIP FUND

and continued strength in corporate earnings. In several emerging markets, economic growth generally moderated. Emerging market stocks overall, as measured by the MSCI Emerging Markets Index, fell for the year, amid headwinds such as soft domestic demand, weak exports, plummeting crude oil prices, regional geopolitical tensions and concerns about possible U.S. interest rate increases. Many emerging market currencies depreciated against the U.S. dollar, leading several central banks to raise interest rates seeking to support their currencies. Several other central banks lowered interest rates to promote economic growth. Gold prices ended the year lower amid benign global inflation and a strong U.S. dollar.

Investment Strategy

The Fund normally invests its assets in an equally weighted combination of Class 1 shares of Franklin Income VIP Fund, Franklin Mutual Shares VIP Fund and Templeton Growth VIP Fund. These underlying funds, in turn, invest in a variety of U.S. and foreign equity securities and, to a lesser extent, fixed income and money market securities. As market conditions affect the underlying funds, we rebalance the Fund’s allocations seeking to maintain equal weightings of approximately 33 1⁄3% of total net assets in each underlying fund whenever the actual allocations exceed plus or minus 3% of the fixed allocation percentages.

Manager’s Discussion

The Fund’s performance can be attributed largely to its allocation among the underlying funds and their investments in domestic and foreign equities, fixed income securities, and short-term investments and other net assets.

During the year under review, Franklin Mutual Shares VIP Fund – Class 1 and Franklin Income VIP Fund – Class 1 underperformed the S&P 500. Templeton Growth VIP Fund – Class 1 underperformed the MSCI World Index.

Thank you for your participation in Franklin Founding Funds Allocation VIP Fund. We look forward to serving your future investment needs.

The foregoing information reflects our analysis, opinions and portfolio holdings as of December 31, 2014, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.

 

 

    Annual Report     FFA-3   

FRANKLIN FOUNDING FUNDS ALLOCATION VIP FUND

Class 4 Fund Expenses

As an investor in a variable insurance contract (Contract) that indirectly provides for investment in an underlying mutual fund, you can incur transaction and/or ongoing expenses at both the Fund level and the Contract level.

 

•   Transaction expenses can include sales charges (loads) on purchases, redemption fees, surrender fees, transfer fees and premium taxes.

 

•   Ongoing expenses can include management fees, distribution and service (12b-1) fees, contract fees, annual maintenance fees, mortality and expense risk fees and other fees and expenses. All mutual funds and Contracts have some types of ongoing expenses.

The expenses shown in the table are meant to highlight ongoing expenses at the Fund level only and do not include ongoing expenses at the Contract level, or transaction expenses at either the Fund or Contract levels. While the Fund does not have transaction expenses, if the transaction and ongoing expenses at the Contract level were included, the expenses shown below would be higher. You should consult your Contract prospectus or disclosure document for more information.

The table shows Fund-level ongoing expenses and can help you understand these expenses and compare them with those of other mutual funds offered through the Contract. The table assumes a $1,000 investment held for the six months indicated. Please refer to the Fund prospectus for additional information on operating expenses.

Actual Fund Expenses

The first line (Actual) of the table provides actual account values and expenses. The “Ending Account Value” is derived from the Fund’s actual return, which includes the effect of ongoing Fund expenses, but does not include the effect of ongoing Contract expenses.

You can estimate the Fund-level expenses you incurred during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:

 

1. Divide your account value by $1,000.

If an account had an $8,600 value,

then $8,600 ÷ $1,000 = 8.6.

 

2. Multiply the result by the number under the heading “Fund-Level Expenses Incurred During Period.”

If Fund-Level Expenses Incurred During Period were $7.50, then 8.6 × $7.50 = $64.50.

In this illustration, the estimated expenses incurred this period at the Fund level are $64.50.

Hypothetical Example for Comparison with Other Mutual Funds

Information in the second line (Hypothetical) of the table can help you compare ongoing expenses of the Fund with those of other mutual funds offered through the Contract. This information may not be used to estimate the actual ending account balance or expenses you incurred during the period. The hypothetical “Ending Account Value” is based on the Fund’s actual expense ratio and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Fund-Level Expenses Incurred During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds offered through a Contract.

 
Class 4   Beginning Account
Value 7/1/14		      Ending Account
Value 12/31/14		     

Expenses Paid
During Period*

7/1/14–12/31/14

     

Expenses Paid
During Period**

7/1/14–12/31/14

  

Actual

     $1,000         $   956.90         $2.22         $5.48   

Hypothetical (5% return before expenses)

     $1,000         $1,022.94         $2.29         $5.65   

*Expenses are calculated using the most recent six-month annualized expense ratio excluding expenses of the underlying funds, net of expense waivers, for the Fund’s Class 4 shares (0.45%), which does not include any ongoing expenses of the Contract for which the Fund is an investment option, multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period.

**Expenses are calculated using the most recent six-month annualized expense ratio including expenses of the underlying funds, net of expense waivers, for the Fund’s Class 4 shares (1.11%), which does not include any ongoing expenses of the Contract for which the Fund is an investment option, multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period.

 

FFA-4    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

Financial Highlights

Franklin Founding Funds Allocation VIP Fund

     Year Ended December 31,  
      2014      2013      2012      2011      2010  
Class 1               

Per share operating performance

(for a share outstanding throughout the year)

               

Net asset value, beginning of year

      $7.47         $8.55         $7.63         $7.73         $7.15   
  

 

 

  
Income from investment operationsa:               

Net investment incomeb,c

      0.22         0.30         0.26         0.25         0.24   

Net realized and unrealized gains (losses)

      0.02         1.42         0.90         (0.35 )       0.52   
  

 

 

  

Total from investment operations

      0.24         1.72         1.16         (0.10 )       0.76   
  

 

 

  
Less distributions from:               

Net investment income

      (0.23 )       (1.15 )       (0.24 )       (— )d       (0.18 ) 

Net realized gains

      (0.01 )       (1.65 )       —         —         (— )d 
  

 

 

  

Total distributions

      (0.24 )       (2.80 )       (0.24 )       (— )d       (0.18 ) 
  

 

 

  

Net asset value, end of year

      $7.47         $7.47         $8.55         $7.63         $7.73   
  

 

 

  

Total returne

      3.05%         24.14%         15.56%         (1.28)%         10.64%   
Ratios to average net assets               

Expenses before waiver and payments by affiliatesf

      0.11%         0.11%         0.11%         0.11%         0.11%   

Expenses net of waiver and payments by affiliatesf

      0.10%         0.10%         0.10%         0.10%         0.10%   

Net investment incomec

      2.88%         3.67%         4.06%         3.44%         3.04%   
Supplemental data               

Net assets, end of year (000’s)

      $1,114         $952         $767         $470         $437   

Portfolio turnover rate

      4.80%         3.91%         28.46% g       58.42%         17.81%   

aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.

bBased on average daily shares outstanding.

cRecognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests.

dAmount rounds to less than $0.01 per share.

eTotal return does not include fees, charges or expenses imposed by the variable annuity and life insurance contracts for which the Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle.

fDoes not include expenses of the Underlying Funds in which the Fund invests. The weighted average indirect expenses of the Underlying Funds was 0.66% for the year ended December 31, 2014.

gExcludes the value of portfolio securities delivered as a result of a redemption in-kind.

 

    The accompanying notes are an integral part of these financial statements.    |   Annual Report     FFA-5   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FINANCIAL HIGHLIGHTS

Franklin Founding Funds Allocation VIP Fund (continued)

     Year Ended December 31,  
      2014      2013      2012      2011      2010  
Class 2               

Per share operating performance

(for a share outstanding throughout the year)

               

Net asset value, beginning of year

      $7.42         $8.51         $7.59         $7.71         $7.14   
  

 

 

  
Income from investment operationsa:               

Net investment incomeb,c

      0.20         0.27         0.25         0.23         0.21   

Net realized and unrealized gains (losses)

      0.02         1.42         0.89         (0.35 )       0.52   
  

 

 

  

Total from investment operations

      0.22         1.69         1.14         (0.12 )       0.73   
  

 

 

  
Less distributions from:               

Net investment income

      (0.21 )       (1.13 )       (0.22 )       (— )d       (0.16 ) 

Net realized gains

      (0.01 )       (1.65 )       —         —         (— )d 
  

 

 

  

Total distributions

      (0.22 )       (2.78 )       (0.22 )       (— )d       (0.16 ) 
  

 

 

  

Net asset value, end of year

      $7.42         $7.42         $8.51         $7.59         $7.71   
  

 

 

  

Total returne

      2.85%         23.77%         15.33%         (1.54)%         10.25%   
Ratios to average net assets               

Expenses before waiver and payments by affiliatesf

      0.36%         0.36%         0.36%         0.36%         0.36%   

Expenses net of waiver and payments by affiliatesf

      0.35%         0.35%         0.35%         0.35%         0.35%   

Net investment incomec

      2.63%         3.42%         3.81%         3.19%         2.79%   
Supplemental data               

Net assets, end of year (000’s)

      $557,704         $547,506         $472,686         $448,101         $488,057   

Portfolio turnover rate

      4.80%         3.91%         28.46% g       58.42%         17.81%   

aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.

bBased on average daily shares outstanding.

cRecognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests.

dAmount rounds to less than $0.01 per share.

eTotal return does not include fees, charges or expenses imposed by the variable annuity and life insurance contracts for which the Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle.

fDoes not include expenses of the Underlying Funds in which the Fund invests. The weighted average indirect expenses of the Underlying Funds was 0.66% for the year ended December 31, 2014.

gExcludes the value of portfolio securities delivered as a result of a redemption in-kind.

 

FFA-6    Annual Report   |    The accompanying notes are an integral part of these financial statements.    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FINANCIAL HIGHLIGHTS

Franklin Founding Funds Allocation VIP Fund (continued)

     Year Ended December 31,  
      2014      2013      2012      2011      2010  
Class 4               

Per share operating performance

(for a share outstanding throughout the year)

               

Net asset value, beginning of year

      $7.54         $8.49         $7.58         $7.71         $7.14   
  

 

 

  
Income from investment operationsa:               

Net investment incomeb,c

      0.20         0.26         0.30         0.24         0.19   

Net realized and unrealized gains (losses)

      0.02         1.43         0.83         (0.37 )       0.54   
  

 

 

  

Total from investment operations

      0.22         1.69         1.13         (0.13 )       0.73   
  

 

 

  
Less distributions from:               

Net investment income

      (0.21 )       (0.99 )       (0.22 )       (— )d       (0.16 ) 

Net realized gains

      (0.01 )       (1.65 )       —         —         (— )d 
  

 

 

  

Total distributions

      (0.22 )       (2.64 )       (0.22 )       (— )d       (0.16 ) 
  

 

 

  

Net asset value, end of year

      $7.54         $7.54         $8.49         $7.58         $7.71   
  

 

 

  

Total returne

      2.75%         23.68%         15.17%         (1.67)%         10.24%   
Ratios to average net assets               

Expenses before waiver and payments by affiliatesf

      0.46%         0.46%         0.46%         0.46%         0.46%   

Expenses net of waiver and payments by affiliatesf

      0.45%         0.45%         0.45%         0.45%         0.45%   

Net investment incomec

      2.53%         3.32%         3.71%         3.09%         2.69%   
Supplemental data               

Net assets, end of year (000’s)

      $702,324         $676,781         $493,813         $2,860,928         $3,036,272   

Portfolio turnover rate

      4.80%         3.91%         28.46% g       58.42%         17.81%   

aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.

bBased on average daily shares outstanding.

cRecognition of net investment income by the Fund is affected by the timing of declaration of dividends by the Underlying Funds in which the Fund invests.

dAmount rounds to less than $0.01 per share.

eTotal return does not include fees, charges or expenses imposed by the variable annuity and life insurance contracts for which Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle.

fDoes not include expenses of the Underlying Funds in which the Fund invests. The weighted average indirect expenses of the Underlying Funds was 0.66% for the year ended December 31, 2014.

gExcludes the value of portfolio securities delivered as a result of a redemption in-kind.

 

    The accompanying notes are an integral part of these financial statements.    |   Annual Report     FFA-7   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

 

Statement of Investments, December 31, 2014

Franklin Founding Funds Allocation VIP Fund

           Shares        Value  
 

Investments in Underlying Fundsa

        
 

Domestic Equity 33.1%

        
 

Franklin Mutual Shares VIP Fund, Class 1

      18,222,604         $ 417,479,858   
         

 

 

  
 

Domestic Hybrid 33.2%

        
 

Franklin Income VIP Fund, Class 1

      25,395,586           418,519,258   
         

 

 

  
 

Foreign Equity 33.1%

        
 

Templeton Growth VIP Fund, Class 1

      28,094,843           417,208,413   
         

 

 

  
 

Total Investments in Underlying Funds (Cost $904,036,051) 99.4%

           1,253,207,529   
 

Other Assets, less Liabilities 0.6%

           7,933,684   
         

 

 

  
 

Net Assets 100.0%

         $ 1,261,141,213   
         

 

 

  

 

 

 

 

aSee Note 3(d) regarding investments in Underlying Funds.

 

FFA-8    Annual Report   |    The accompanying notes are an integral part of these financial statements.    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

Financial Statements

Statement of Assets and Liabilities

December 31, 2014

 

      Franklin Founding
Funds Allocation
VIP Fund		  

Assets:

   

Investments in Underlying Funds: (Note 3d)

   

Cost

    $ 904,036,051   
  

 

 

  

Value

    $ 1,253,207,529   

Cash

      10,732,335   

Receivables from capital shares sold

      1,194,849   

Other assets

      105   
  

 

 

  

Total assets

      1,265,134,818   
  

 

 

  

Liabilities:

   

Payables:

   

Capital shares redeemed

      3,175,535   

Administrative fees

      78,302   

Distribution fees

      655,956   

Accrued expenses and other liabilities

      83,812   
  

 

 

  

Total liabilities

      3,993,605   
  

 

 

  

Net assets, at value

    $ 1,261,141,213   
  

 

 

  

Net assets consist of:

   

Paid-in capital

    $ 933,717,015   

Undistributed net investment income

      31,617,896   

Net unrealized appreciation (depreciation)

      349,171,478   

Accumulated net realized gain (loss)

      (53,365,176 ) 
  

 

 

  

Net assets, at value

    $ 1,261,141,213   
  

 

 

  
Class 1:   

Net assets, at value

    $ 1,113,673   
  

 

 

  

Shares outstanding

      149,087   
  

 

 

  

Net asset value and maximum offering price per share

    $ 7.47   
  

 

 

  
Class 2:   

Net assets, at value

    $ 557,703,613   
  

 

 

  

Shares outstanding

      75,174,882   
  

 

 

  

Net asset value and maximum offering price per share

    $ 7.42   
  

 

 

  
Class 4:   

Net assets, at value

    $ 702,323,927   
  

 

 

  

Shares outstanding

      93,205,355   
  

 

 

  

Net asset value and maximum offering price per share

    $ 7.54   
  

 

 

  

 

    The accompanying notes are an integral part of these financial statements.    |   Annual Report     FFA-9   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FINANCIAL STATEMENTS

Statement of Operations

for the year ended December 31, 2014

 

      Franklin Founding
Funds Allocation
VIP Fund		  

Investment income:

   

Dividends from Underlying Funds (Note 3d)

    $ 38,513,333   
  

 

 

  

Expenses:

   

Administrative fees (Note 3a)

      1,293,974   

Distribution fees: (Note 3b)

   

Class 2

      1,406,298   

Class 4

      2,557,243   

Reports to shareholders

      110,315   

Professional fees

      32,208   

Trustees’ fees and expenses

      5,013   

Other

      7,667   
  

 

 

  

Total expenses

      5,412,718   

Expenses waived/paid by affiliates (Note 3e)

      (155,153 ) 
  

 

 

  

Net expenses

      5,257,565   
  

 

 

  

Net investment income

      33,255,768   
  

 

 

  

Realized and unrealized gains (losses):

   

Net realized gain (loss) from:

   

Sale of investments in Underlying Funds (Note 3d)

      (677,936 ) 

Realized gain distributions by Underlying Funds (Note 3d)

      2,262,901   
  

 

 

  

Net realized gain (loss)

      1,584,965   
  

 

 

  

Net change in unrealized appreciation (depreciation) on investments in Underlying Funds

      (1,653,471 ) 
  

 

 

  

Net realized and unrealized gain (loss)

      (68,506 ) 
  

 

 

  

Net increase (decrease) in net assets resulting from operations

    $ 33,187,262   
  

 

 

  

 

FFA-10    Annual Report   |    The accompanying notes are an integral part of these financial statements.    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FINANCIAL STATEMENTS

Statements of Changes in Net Assets

 

     Franklin Founding Funds Allocation VIP Fund  
     Year Ended December 31,  
      2014        2013  

Increase (decrease) in net assets:

        

Operations:

        

Net investment income

    $ 33,255,768         $ 36,642,567   

Net realized gain (loss) from Underlying Funds

      1,584,965           3,163,496   

Net change in unrealized appreciation (depreciation) on investments in Underlying Funds

      (1,653,471 )         190,487,276   
  

 

 

  

Net increase (decrease) in net assets resulting from operations

      33,187,262           230,293,339   
  

 

 

  

Distributions to shareholders from:

        

Net investment income:

        

Class 1

      (32,764 )         (113,893 ) 

Class 2

      (15,578,364 )         (60,502,595 ) 

Class 4

      (19,895,877 )         (59,385,848 ) 

Net realized gains:

        

Class 1

      (924 )         (162,965 ) 

Class 2

      (475,173 )         (88,234,067 ) 

Class 4

      (618,180 )         (98,339,718 ) 
  

 

 

  

Total distributions to shareholders

      (36,601,282 )         (306,739,086 ) 
  

 

 

  

Capital share transactions: (Note 2)

        

Class 1

      164,958           268,891   

Class 2

      11,105,994           115,298,186   

Class 4

      28,046,285           218,850,531   
  

 

 

  

Total capital share transactions

      39,317,237           334,417,608   
  

 

 

  

Net increase (decrease) in net assets

      35,903,217           257,971,861   

Net assets:

        

Beginning of year

      1,225,237,996           967,266,135   
  

 

 

  

End of year

    $ 1,261,141,213         $ 1,225,237,996   
  

 

 

  

Undistributed net investment income included in net assets:

        

End of year

    $ 31,617,896         $ 33,877,400   
  

 

 

  

 

    The accompanying notes are an integral part of these financial statements.    |   Annual Report     FFA-11   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

Notes to Financial Statements

Franklin Founding Funds Allocation VIP Fund

1. Organization and Significant Accounting Policies

Franklin Templeton Variable Insurance Products Trust (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end management investment company, consisting of nineteen separate funds and applies the specialized accounting and reporting guidance in U.S. Generally Accepted Accounting Principles (U.S. GAAP). Franklin Founding Funds Allocation VIP Fund (Fund) is included in this report. The financial statements of the remaining funds in the Trust are presented separately. The Fund invests primarily in other funds of the Trust (Underlying Funds). Shares of the Fund are generally sold only to insurance company separate accounts to fund the benefits of variable life insurance policies or variable annuity contracts. The Fund offers three classes of shares: Class 1, Class 2, and Class 4. Each class of shares differs by its distribution fees, voting rights on matters affecting a single class and its exchange privilege.

The accounting policies of the Underlying Funds are outlined in their respective shareholder reports. A copy of the Underlying Funds’ shareholder reports is available on the U.S. Securities and Exchange Commission (SEC) website at sec.gov or at the SEC’s Public Reference Room in Washington, D.C. The Underlying Funds’ shareholder reports are not covered by this report.

Effective May 31, 2014, Franklin Templeton VIP Founding Funds Allocation Fund was renamed Franklin Founding Funds Allocation VIP Fund.

The following summarizes the Fund’s significant accounting policies.

a. Financial Instrument Valuation

The Fund’s investments in financial instruments are carried at fair value daily. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. The Fund calculates the net asset value (NAV) per share at the close of the New York Stock Exchange (NYSE), generally at 4 p.m. Eastern time (NYSE close) on each day the NYSE is open for trading. Under compliance policies and procedures approved by the Trust’s Board of Trustees (the Board), the Fund’s administrator has responsibility for oversight of valuation, including leading the cross-functional Valuation and Liquidity Oversight Committee (VLOC). The VLOC provides administration and oversight of the Fund’s valuation policies

and procedures, which are approved annually by the Board. Among other things, these procedures allow the Fund to utilize independent pricing services, quotations from securities and financial instrument dealers, and other market sources to determine fair value. Investments in the Underlying Funds are valued at their closing NAV each trading day.

b. Income Taxes

It is the Fund’s policy to qualify as a regulated investment company under the Internal Revenue Code. The Fund intends to distribute to shareholders substantially all of its taxable income and net realized gains to relieve it from federal income and if applicable, excise taxes. As a result, no provision for U.S. federal income taxes is required.

The Fund recognizes the tax benefits of uncertain tax positions only when the position is “more likely than not” to be sustained upon examination by the tax authorities based on the technical merits of the tax position. As of December 31, 2014, and for all open tax years, the Fund has determined that no liability for unrecognized tax benefits is required in the Fund’s financial statements related to uncertain tax positions taken on a tax return (or expected to be taken on future tax returns). Open tax years are those that remain subject to examination and are based on each tax jurisdiction statute of limitation.

c. Security Transactions, Investment Income, Expenses and Distributions

Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Estimated expenses are accrued daily. Dividend income and realized gain distributions by Underlying Funds are recorded on the ex-dividend date. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with U.S. GAAP. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods.

Common expenses incurred by the Trust are allocated among the funds based on the ratio of net assets of each fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense.

 

 

FFA-12    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Franklin Founding Funds Allocation VIP Fund (continued)

The Fund indirectly bears its proportionate share of expenses from the Underlying Funds. Since the Underlying Funds have varied expense levels and the Fund may own different proportions of the Underlying Funds at different times, the amount of expenses incurred indirectly by the Fund will vary.

Realized and unrealized gains and losses and net investment income, not including class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions, by class, are generally due to differences in class specific expenses.

d. Accounting Estimates

The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the

date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates.

e. Guarantees and Indemnifications

Under the Trust’s organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, on behalf of the Fund, enters into contracts with service providers that contain general indemnification clauses. The Trust’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote.

 

2. Shares of Beneficial Interest

At December 31, 2014, there were an unlimited number of shares authorized (without par value). Transactions in the Fund’s shares were as follows:

 

     Year Ended December 31,  
     2014          2013  
      Shares      Amount           Shares      Amount  
Class 1 Shares:              

Shares sold

      37,779       $ 289,740           24,967       $ 213,393   

Shares issued in reinvestment of distributions

      4,341         33,688           41,633         276,858   

Shares redeemed

      (20,435 )       (158,470 )         (28,865 )       (221,360 ) 
  

 

 

  

Net increase (decrease)

      21,685       $ 164,958           37,735       $ 268,891   
  

 

 

  
Class 2 Shares:              

Shares sold

      11,044,608       $ 83,657,513           9,475,437       $ 72,686,096   

Shares issued in reinvestment of distributions

      2,082,171         16,053,537           22,467,774         148,736,662   

Shares redeemed

      (11,722,596 )       (88,605,056 )         (13,700,538 )       (106,124,572 ) 
  

 

 

  

Net increase (decrease)

      1,404,183       $ 11,105,994           18,242,673       $ 115,298,186   
  

 

 

  
Class 4 Shares:              

Shares sold

      13,809,688       $ 106,773,129           14,101,836       $ 107,566,000   

Shares issued on reinvestment of distributions

      2,616,589         20,514,057           23,436,191         157,725,566   

Shares redeemed

      (12,995,650 )       (99,240,901 )         (5,915,495 )       (46,441,035 ) 
  

 

 

  

Net increase (decrease)

      3,430,627       $ 28,046,285           31,622,532       $ 218,850,531   
  

 

 

  

 

    Annual Report     FFA-13   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Franklin Founding Funds Allocation VIP Fund (continued)

3. Transactions With Affiliates

Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Fund are also officers and/or directors/trustees of certain of the Underlying Funds and of the following subsidiaries:

 

Subsidiary    Affiliation

Franklin Templeton Services, LLC (FT Services)

   

Administrative manager

Franklin Templeton Distributors, Inc. (Distributors)

   

Principal underwriter

Franklin Templeton Investor Services, LLC (Investor Services)

   

Transfer agent

a. Administrative Fees

The Fund pays an administrative fee to FT Services of 0.10% per year of the average daily net assets of the Fund for administrative services including monitoring and rebalancing the percentage of the Fund’s investments in the Underlying Funds.

b. Distribution Fees

The Board has adopted distribution plans for Class 2 and Class 4 shares pursuant to Rule 12b-1 under the 1940 Act. Under the Fund’s compensation distribution plans, the Fund pays Distributors for costs incurred in connection with the servicing, sale and distribution of the Fund’s shares up to 0.35% per year of its average daily net assets of each class. Some distribution fees are not charged on shares held by affiliates. The Board has agreed to limit the current rate to 0.25% per year for Class 2. The plan year, for purposes of monitoring compliance with the maximum annual plan rates, is February 1 through January 31.

c. Transfer Agent Fees

Investor Services, under terms of an agreement, performs shareholder servicing for the Fund and is not paid by the Fund for the services.

d. Investments in Underlying Funds

The Fund invests primarily in the Underlying Funds which are managed by affiliates of the Fund’s administrative manager, FT Services. The Fund does not invest in the Underlying Funds for the purpose of exercising a controlling influence over the management or policies. Investments in Underlying Funds for the year ended December 31, 2014, were as follows:

 

Underlying Funds   Number
of Shares
Held at
Beginning
of Year		     Gross
Additions		     Gross
Reductions		     Number
of Shares
Held at
End of
Year		     Value at
End of
Year		     Investment
Income		     Realized
Gain
(Loss)		     % of
Underlying
Fund Shares
Outstanding
Held at End
of Year		  

Franklin Income VIP Fund, Class 1a

     24,462,601        2,153,488        (1,220,503 )      25,395,586      $ 418,519,258      $ 21,984,390      $ (846,306 )      5.73%   

Franklin Mutual Shares VIP Fund, Class 1b

     18,485,942        1,194,264        (1,457,602 )      18,222,604        417,479,858        9,790,126        2,856,091        8.20%   

Templeton Growth VIP Fund, Class 1c

     26,312,175        2,326,382        (543,714 )      28,094,843        417,208,413        6,738,817        (424,820 )      22.87%   
         

 

 

    

Total

           $ 1,253,207,529      $ 38,513,333      $ 1,584,965     
         

 

 

    

aEffective May 1, 2014, Franklin Income Securities Fund was renamed Franklin Income VIP Fund.

bEffective May 1, 2014, Mutual Shares Securities Fund was renamed Franklin Mutual Shares VIP Fund.

cEffective May 1, 2014, Templeton Growth Securities Fund was renamed Templeton Growth VIP Fund.

e. Waiver and Expense Reimbursements

FT Services contractually agreed in advance to waive or limit its fees and to assume as its own expense certain expenses otherwise payable by the Fund so that the expenses (excluding distribution fees, and acquired fund fees and expenses) for each class of the Fund do not exceed 0.10% based on the average net assets of each class (other than certain non-routine expenses or costs, including those relating to litigation, indemnification, reorganizations, and liquidations) until April 30, 2015.

 

FFA-14    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Franklin Founding Funds Allocation VIP Fund (continued)

4. Expense Offset Arrangement

The Fund has entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Fund’s custodian expenses. During the year ended December 31, 2014, there were no credits earned.

5. Income Taxes

The tax character of distributions paid during the years ended December 31, 2014 and 2013, was as follows:

 

     2014     2013  

Distributions paid from:

     

Ordinary income

    $ 36,432,932      $ 120,002,336   

Long term capital gain

      168,350        186,736,750   
  

 

 

  
   $ 36,601,282      $ 306,739,086   
  

 

 

  

At December 31, 2014, the cost of investments, net unrealized appreciation (depreciation), undistributed ordinary income and undistributed long term capital gains for income tax purposes were as follows:

 

Cost of investments

    $ 959,173,368   
  

 

 

  

Unrealized appreciation

    $ 294,034,161   

Unrealized depreciation

      —   
  

 

 

  

Net unrealized appreciation (depreciation)

    $ 294,034,161   
  

 

 

  

Undistributed ordinary income

    $ 31,617,896   

Undistributed long term capital gains

      1,772,132   
  

 

 

  

Distributable earnings

    $ 33,390,028   
  

 

 

  

Differences between income and/or capital gains as determined on a book basis and a tax basis are primarily due to differing treatment of wash sales.

6. Investment Transactions

Purchases and sales of Underlying Funds (excluding short term securities) for the year ended December 31, 2014, aggregated $100,776,235 and $61,620,662, respectively.

7. Credit Facility

The Fund, together with other U.S. registered and foreign investment funds (collectively, Borrowers), managed by Franklin Templeton Investments, are borrowers in a joint syndicated senior unsecured credit facility totaling $1.5 billion (Global Credit Facility) which matured on February 13, 2015. This Global Credit Facility provides a source of funds to the Borrowers for temporary and emergency purposes, including the ability to meet future unanticipated or unusually large redemption requests. The Borrowers expect to renew the Global Credit Facility for a total of $2 billion effective February 13, 2015, which matures on February 12, 2016.

Under the terms of the Global Credit Facility, the Fund shall, in addition to interest charged on any borrowings made by the Fund and other costs incurred by the Fund, pay its share of fees and expenses incurred in connection with the implementation and maintenance of the Global Credit Facility, based upon its relative share of the aggregate net assets of all of the Borrowers, including an annual commitment fee of 0.07% based upon the unused portion of the Global Credit Facility. These fees are reflected in other expenses on the Statement of Operations. During the year ended December 31, 2014, the Fund did not use the Global Credit Facility.

 

    Annual Report     FFA-15   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Franklin Founding Funds Allocation VIP Fund (continued)

8. Fair Value Measurements

The Fund follows a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Fund’s own market assumptions (unobservable inputs). These inputs are used in determining the value of the Fund’s financial instruments and are summarized in the following fair value hierarchy:

 

  •   Level 1 – quoted prices in active markets for identical financial instruments
  •   Level 2 – other significant observable inputs (including quoted prices for similar financial instruments, interest rates, prepayment speed, credit risk, etc.)
  •   Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of financial instruments)

The input levels are not necessarily an indication of the risk or liquidity associated with financial instruments at that level.

For movements between the levels within the fair value hierarchy, the Fund has adopted a policy of recognizing the transfers as of the date of the underlying event which caused the movement.

At December 31, 2014, all of the Fund’s investments in financial instruments carried at fair value were valued using Level 1 inputs. For detailed categories, see the accompanying Statement of Investments.

9. Subsequent Events

The Fund has evaluated subsequent events through the issuance of the financial statements and determined that no events have occurred that require disclosure other than those already disclosed in the financial statements.

 

FFA-16    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

Report of Independent Registered Public Accounting Firm

Franklin Founding Funds Allocation VIP Fund

To the Board of Trustees and Shareholders of Franklin Templeton Variable Insurance Products Trust

In our opinion, the accompanying statement of assets and liabilities, including the statement of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Franklin Founding Funds Allocation VIP Fund (the “Fund”) at December 31, 2014, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements 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 are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2014 by correspondence with the custodian and brokers, provides a reasonable basis for our opinion.

PricewaterhouseCoopers LLP

San Francisco, California

February 13, 2015

 

    Annual Report     FFA-17   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

Tax Information (unaudited)

Franklin Founding Funds Allocation VIP Fund

Under Section 852(b)(3)(C) of the Internal Revenue Code (Code), the Fund hereby reports the maximum amount allowable but no less than $168,350 as a long term capital gain dividend for the fiscal year ended December 31, 2014.

Under Section 854(b)(1)(A) of the Code, the Fund hereby reports 39.80% of the ordinary income dividends as income qualifying for the dividends received deduction for the fiscal year ended December 31, 2014.

At December 31, 2014, the Fund, a qualified fund of funds under Section 852(g)(2) of the Code, received an allocation of foreign taxes paid from one or more of its underlying funds. The Fund elects to treat foreign taxes paid as allowed under Section 853 of the Code. This election will allow shareholders of record as of the 2015 distribution date, to treat their proportionate share of foreign taxes paid by the underlying funds as having been paid directly by them. The shareholder shall consider these amounts as foreign taxes paid in the tax year in which they receive the Fund distribution.

 

  FFA-18       Annual Report    

Franklin High Income VIP Fund

(Formerly, Franklin High Income Securities Fund)

This annual report for Franklin High Income VIP Fund covers the fiscal year ended December 31, 2014.

Class 4 Performance Summary as of December 31, 2014

Average annual total return of Class 4 shares* represents the average annual change in value, assuming reinvestment of dividends and capital gains. Average returns smooth out variations in returns, which can be significant; they are not the same as year-by-year results.

 

Periods ended 12/31/14    1-Year        5-Year        10-Year  

Average Annual Total Return

      -0.15%           +8.00%           +6.49%   

*For the period beginning 2/29/08, Class 4 performance reflects a 12b-1 fee expense of 0.35% per year, which affects future performance. Class 4 performance prior to 2/29/08 reflects historical Class 1 performance, which does not have a 12b-1 fee expense. Since 2/29/08 (effective date), the average annual total return of Class 4 shares was +7.55%.

Performance reflects the Fund’s Class 4 operating expenses, but does not include any contract fees, expenses or sales charges. If they had been included, performance would be lower. These charges and deductions, particularly for variable life policies, can have a significant effect on contract values and insurance benefits. See the contract prospectus for a complete description of these expenses, including sales charges.

Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares. Current performance may differ from figures shown.

Total Return Index Comparison for a Hypothetical $10,000 Investment (1/1/05–12/31/14)

The graph below shows the change in value of a hypothetical $10,000 investment in the Fund over the indicated period and includes reinvestment of any income or distributions. The Fund’s performance* is compared to the performance of the Credit Suisse (CS) High Yield Index and the Lipper VIP High Yield Funds Classification Average. One cannot invest directly in an index, and an index is not representative of the Fund’s portfolio. Please see Important Notes to Performance Information preceding the Fund Summaries.

 

LOGO

**Source: Credit Suisse Group. Please see Index Descriptions following the Fund Summaries.

***Source: Lipper, a Thomson Reuters Company. Please see Index Descriptions following the Fund Summaries.

 

    Annual Report     FH-1   

FRANKLIN HIGH INCOME VIP FUND

Fund Goals and Main Investments

Franklin High Income VIP Fund seeks a high level of current income with capital appreciation as a secondary goal. Under normal market conditions, the Fund invests predominantly in high yield, lower rated debt securities and preferred stocks.

Fund Risks

All investments involve risks, including possible loss of principal. The risks associated with higher yielding, lower rated securities include higher risk of default and loss of principal. Changes in the financial strength of a bond issuer or in a bond’s credit rating may affect its value. In addition, interest rate movements will affect the Fund’s share price and yield. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in the Fund adjust to a rise in interest rates, the Fund’s share price may decline. Investment in foreign securities also involves special risks, including currency fluctuations, and political and economic uncertainty. The Fund is actively managed but there is no guarantee that the manager’s investment decisions will produce the desired results. The Fund’s prospectus also includes a description of the main investment risks.

Performance Overview

You can find the Fund’s one-year total return in the Performance Summary. In comparison, the Fund’s benchmark, the CS High Yield Index, posted a +1.86% total return for the period under review.1 The Fund’s peers, as measured by the Lipper VIP High Yield Funds Classification Average, delivered a +1.59% total return.2

Economic and Market Overview

The U.S. economy continued to grow during the year ended December 31, 2014, underpinned in some quarters by manufacturing activity, consumer and business spending, and federal defense spending. Home sales experienced weakness resulting from reduced inventory, higher mortgage rates and tight credit requirements but began to recover in May as mortgage rates declined. Home prices stayed higher than a year earlier. Retail sales generally improved, supported by job growth and lower gasoline prices in the latter part of 2014. The unemployment rate declined to 5.6% in December 2014 from 6.7% in December 2013.3 Inflation, as measured by the Consumer Price Index, remained low.

In January 2014, the U.S. Federal Reserve Board (Fed) began reducing its large-scale bond purchases $10 billion a month and ended the buying program in October. But it continued its practice of maintaining holdings of longer term securities at sizable levels. The Fed believed underlying economic strength could support ongoing progress in labor market conditions. The Fed also noted that although inflation might remain low in the near term, the likelihood of inflation running persistently below 2% had diminished. Toward period-end, the Fed stated that it could be patient with regard to raising interest rates and that the interest rate might not rise for at least a couple of meetings, possibly implying at least the first two meetings of 2015.

The 10-year Treasury yield declined from 3.04% at the beginning of the period to 2.17% at period-end, as investors shifted to less risky assets given the crises in Ukraine and the Middle East, weak economic data in Europe and Japan, record-low bond yields and lower Treasury issuance.

Investment Strategy

We are research-driven, fundamental investors who rely on a team of analysts to provide in-depth industry expertise and use qualitative and quantitative analyses to evaluate companies. As bottom-up investors, we focus primarily on individual securities. We also consider sectors when choosing investments. In selecting securities for the Fund’s investment portfolio, we do not rely principally on ratings assigned by rating agencies, but perform our own independent analysis to evaluate an issuer’s creditworthiness. We consider a variety of factors, including an issuer’s experience and managerial strength, its sensitivity to economic conditions and its current financial condition.

Manager’s Discussion

In the first half of 2014, investor demand for high yield bonds was strong, driven by a mostly benign interest rate environment and a continued mild corporate bond default rate. Additionally, the low absolute level of interest rates seemed to support a healthy risk appetite among investors searching for greater income from their investments. However, financial market conditions became more volatile during the second half of 2014. Considering energy is one of the largest sectors in the high yield market, the dramatic fall in oil prices severely affected the sector’s bond prices. This negative momentum spread throughout the high yield market, and investor concerns led to cash

 

 

1. Source: Credit Suisse Group.

2. Source: Lipper, a Thomson Reuters Company.

One cannot invest directly in an index, and an index is not representative of the Fund’s portfolio. Please see Index Descriptions following the Fund Summaries.

3. Source: Bureau of Labor Statistics.

 

FH-2    Annual Report    

FRANKLIN HIGH INCOME VIP FUND

 

LOGO

*Includes common and convertible preferred shares.

Top 10 Sectors/Industries       
12/31/14       
      % of Total
Net Assets		  
Energy      18.6%   
Materials      11.1%   
Media      10.8%   
Telecommunication Services      10.2%   
Banks      5.3%   
Health Care Equipment & Services      5.0%   
Consumer Services      3.8%   
Software & Services      3.6%   
Diversified Financials      3.6%   
Food, Beverage & Tobacco      3.4%   

The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund’s Statement of Investments (SOI).

 

outflows from high yield retail mutual funds, further exacerbating downward pricing pressure. The market reached some stability by year-end, however, and the CS High Yield Index posted a small positive return for the year as a decline in prices was more than offset by coupon income. As investors seemed more risk averse toward year-end, bonds with lower credit ratings underperformed their higher quality counterparts for the year. The Fund was positioned with a fairly neutral ratings exposure compared to the CS High Yield Index. Consequently, the Fund’s relative performance in 2014 was pressured by its overweighted exposure to the energy sector, as well as certain individual security selections.

We drew on our fundamental research process to make individual investments and overweight or underweight certain industries relative to the CS High Yield Index in an effort to outperform. Although certain of the Fund’s positionings enhanced relative performance versus its benchmark, our overall industry exposure negatively impacted relative returns. For example, what we deemed as strong asset protection in the energy sector guided us to an overweighted position. However, bond prices of energy producers and energy service providers fell in conjunction with weaker commodity prices. Following a fairly steady decline in oil prices over the summer and fall, the decline in oil and energy bond prices accelerated following the November decision by the Organization of the Petroleum Exporting Countries not to cut production. In addition, a warmer-than-expected start to winter pushed natural gas prices lower. These factors placed tremendous downward pressure on bond prices in the energy sector. Correspondingly, the energy

sector underperformed the benchmark, weighing on the Fund’s overweighted allocation and security selection in the sector.

Slowing demand from China, coupled with global oversupply in many commodities, put pricing pressure on the metals and mining industry.4 This trend led to weaker operating results, which in turn weighed on bond prices and led our overweighting to hinder relative performance. However, our security selection contributed as we avoided several of the worst performing securities within the industry. In contrast, the Fund’s underweighted positioning in the information technology sector detracted from relative returns.5 Issuers in the sector benefited from improved demand as well as access to public equity markets. The corresponding deleveraging of some companies’ balance sheets drove the sector’s relative outperformance versus the benchmark.

Certain industry exposures positively impacted relative returns, such as our overweighting in cable.6 A higher quality bias within the industry coupled with generally credit-positive merger and acquisition activity helped the industry outperform the market. Another industry we overweighted, health care, also aided relative performance.7 The Affordable Care Act helped stimulate demand as well as facilitate payments to health care providers. This situation resulted in higher volumes and lower bad debt for most of the industry, particularly hospitals, which are large sector components. Similarly, our overweighting in the

 

4. Metals and mining is part of materials in the SOI.

5. Information technology comprises technology hardware and equipment in the SOI.

6. Cable is part of media in the SOI.

7. Health care comprises health care equipment and services in the SOI.

 

    Annual Report     FH-3   

FRANKLIN HIGH INCOME VIP FUND

packaging industry benefited relative performance.8 After experiencing consolidation over the past three years, pricing power has strengthened, leading to higher margins and steady credit improvements for industry participants. Correspondingly, bond prices improved and drove industry outperformance versus the benchmark.

Thank you for your participation in Franklin High Income VIP Fund. We look forward to serving your future investment needs.

The foregoing information reflects our analysis, opinions and portfolio holdings as of December 31, 2014, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.

 

 

8. Packaging is part of materials in the SOI.

 

FH-4    Annual Report    

FRANKLIN HIGH INCOME VIP FUND

Class 4 Fund Expenses

As an investor in a variable insurance contract (Contract) that indirectly provides for investment in an underlying mutual fund, you can incur transaction and/or ongoing expenses at both the Fund level and the Contract level.

 

•   Transaction expenses can include sales charges (loads) on purchases, redemption fees, surrender fees, transfer fees and premium taxes.

 

•   Ongoing expenses can include management fees, distribution and service (12b-1) fees, contract fees, annual maintenance fees, mortality and expense risk fees and other fees and expenses. All mutual funds and Contracts have some types of ongoing expenses.

The expenses shown in the table are meant to highlight ongoing expenses at the Fund level only and do not include ongoing expenses at the Contract level, or transaction expenses at either the Fund or Contract level. While the Fund does not have transaction expenses, if the transaction and ongoing expenses at the Contract level were included, the expenses shown below would be higher. You should consult your Contract prospectus or disclosure document for more information.

The table shows Fund-level ongoing expenses and can help you understand these expenses and compare them with those of other mutual funds offered through the Contract. The table assumes a $1,000 investment held for the six months indicated. Please refer to the Fund prospectus for additional information on operating expenses.

Actual Fund Expenses

The first line (Actual) of the table provides actual account values and expenses. The “Ending Account Value” is derived from the Fund’s actual return, which includes the effect of ongoing Fund expenses, but does not include the effect of ongoing Contract expenses.

You can estimate the Fund-level expenses you incurred during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:

 

1. Divide your account value by $1,000.

If an account had an $8,600 value,

then $8,600 ÷ $1,000 = 8.6.

 

2. Multiply the result by the number under the heading “Fund-Level Expenses Incurred During Period.”

If Fund-Level Expenses Incurred During Period were $7.50, then 8.6 × $7.50 = $64.50.

In this illustration, the estimated expenses incurred this period at the Fund level are $64.50.

Hypothetical Example for Comparison with Other Mutual Funds

Information in the second line (Hypothetical) of the table can help you compare ongoing expenses of the Fund with those of other mutual funds offered through the Contract. This information may not be used to estimate the actual ending account balance or expenses you incurred during the period. The hypothetical “Ending Account Value” is based on the Fund’s actual expense ratio and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Fund-Level Expenses Incurred During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds offered through a Contract.

 
Class 4  

Beginning Account

Value 7/1/14

      Ending Account
Value 12/31/14		     

Fund-Level Expenses
Incurred During Period*

7/1/14–12/31/14

  

Actual

     $1,000         $   946.50         $4.51   

Hypothetical (5% return before expenses)

     $1,000         $1,020.57         $4.69   

*Expenses are calculated using the most recent six-month annualized expense ratio for the Fund’s Class 4 shares (0.92%), which does not include any ongoing expenses of the Contract for which the Fund is an investment option, multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period.

 

    Annual Report     FH-5   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

 

Financial Highlights

Franklin High Income VIP Fund

     Year Ended December 31,  
      2014      2013      2012      2011      2010  
Class 1               
Per share operating performance
(for a share outstanding throughout the year)		               

Net asset value, beginning of year

      $7.02         $7.01         $6.52         $6.63         $6.26   
  

 

 

  
Income from investment operationsa:               

Net investment incomeb

      0.42         0.46         0.48         0.50         0.49   

Net realized and unrealized gains (losses)

      (0.38 )       0.09         0.51         (0.19 )       0.32   
  

 

 

  

Total from investment operations

      0.04         0.55         0.99         0.31         0.81   
  

 

 

  

Less distributions from net investment income

      (0.44 )       (0.54 )       (0.50 )       (0.42 )       (0.44 ) 
  

 

 

  

Net asset value, end of year

      $6.62         $7.02         $7.01         $6.52         $6.63   
  

 

 

  

Total returnc

      0.21%         8.17%         15.94%         4.63%         13.71%   
Ratios to average net assets               

Expenses

      0.57% d       0.58% d       0.58%         0.58%         0.61%   

Net investment income

      6.00%         6.63%         7.15%         7.52%         7.71%   
Supplemental data               

Net assets, end of year (000’s)

      $34,552         $39,300         $42,166         $41,971         $48,051   

Portfolio turnover rate

      39.46%         30.78%         37.03%         45.11%         60.80%   

aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.

bBased on average daily shares outstanding.

cTotal return does not include fees, charges or expenses imposed by the variable annuity and life insurance contracts for which Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle.

dBenefit of expense reduction rounds to less than 0.01%.

 

FH-6    Annual Report   |    The accompanying notes are an integral part of these financial statements.    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FINANCIAL HIGHLIGHTS

 

Franklin High Income VIP Fund (continued)

     Year Ended December 31,  
      2014      2013      2012      2011      2010  
Class 2               

Per share operating performance

(for a share outstanding throughout the year)

               

Net asset value, beginning of year

      $6.81         $6.82         $6.36         $6.47         $6.13   
  

 

 

  
Income from investment operationsa:               

Net investment incomeb

      0.39         0.43         0.46         0.47         0.47   

Net realized and unrealized gains (losses)

      (0.37 )       0.08         0.48         (0.18 )       0.30   
  

 

 

  

Total from investment operations

      0.02         0.51         0.94         0.29         0.77   
  

 

 

  

Less distributions from net investment income

      (0.42 )       (0.52 )       (0.48 )       (0.40 )       (0.43 ) 
  

 

 

  

Net asset value, end of year

      $6.41         $6.81         $6.82         $6.36         $6.47   
  

 

 

  

Total returnc

      (0.02)%         7.83%         15.56%         4.56%         13.26%   
Ratios to average net assets               

Expenses

      0.82% d       0.83% d       0.83%         0.83%         0.86%   

Net investment income

      5.75%         6.38%         6.90%         7.27%         7.46%   
Supplemental data               

Net assets, end of year (000’s)

      $261,944         $291,826         $281,851         $249,452         $239,824   

Portfolio turnover rate

      39.46%         30.78%         37.03%         45.11%         60.80%   

 

aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.

bBased on average daily shares outstanding.

cTotal return does not include fees, charges or expenses imposed by the variable annuity and life insurance contracts for which Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle.

dBenefit of expense reduction rounds to less than 0.01%.

 

 

    The accompanying notes are an integral part of these financial statements.    |   Annual Report     FH-7   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FINANCIAL HIGHLIGHTS

 

Franklin High Income VIP Fund (continued)

     Year Ended December 31,  
      2014      2013      2012      2011      2010  
Class 4               
Per share operating performance
(for a share outstanding throughout the year)		               

Net asset value, beginning of year

      $6.94         $6.94         $6.46         $6.57         $6.22   
  

 

 

  
Income from investment operationsa:               

Net investment incomeb

      0.39         0.43         0.46         0.47         0.47   

Net realized and unrealized gains (losses)

      (0.38 )       0.08         0.49         (0.18 )       0.31   
  

 

 

  

Total from investment operations

      0.01         0.51         0.95         0.29         0.78   
  

 

 

  

Less distributions from net investment income

      (0.41 )       (0.51 )       (0.47 )       (0.40 )       (0.43 ) 
  

 

 

  

Net asset value, end of year

      $6.54         $6.94         $6.94         $6.46         $6.57   
  

 

 

  

Total returnc

      (0.15)%         7.72%         15.50%         4.39%         13.31%   
Ratios to average net assets               

Expenses

      0.92% d       0.93% d       0.93%         0.93%         0.96%   

Net investment income

      5.65%         6.28%         6.80%         7.17%         7.36%   
Supplemental data               

Net assets, end of year (000’s)

      $25,740         $27,789         $27,664         $27,055         $25,934   

Portfolio turnover rate

      39.46%         30.78%         37.03%         45.11%         60.80%   

aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.

bBased on average daily shares outstanding.

cTotal return does not include fees, charges or expenses imposed by the variable annuity and life insurance contracts for which Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle.

dBenefit of expense reduction rounds to less than 0.01%.

 

FH-8    Annual Report   |    The accompanying notes are an integral part of these financial statements.    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

 

Statement of Investments, December 31, 2014

 

Franklin High Income VIP Fund           
           Country     Shares        Value  
           
 

Common Stocks 0.2%

          
 

Materials 0.1%

          
 

NewPage Holdings Inc.

      United States        5,000         $ 453,750   
           

 

 

  
 

Transportation 0.1%

          
a  

CEVA Holdings LLC

      United Kingdom        224           173,817   
           

 

 

  
 

Total Common Stocks (Cost $1,274,328)

             627,567   
           

 

 

  
 

Convertible Preferred Stocks 0.1%

          
 

Transportation 0.1%

          
a  

CEVA Holdings LLC, cvt. pfd., A-1

      United Kingdom        6           6,000   
a  

CEVA Holdings LLC, cvt. pfd., A-2

      United Kingdom        486           376,270   
           

 

 

  
 

Total Convertible Preferred Stocks
(Cost $731,856)

             382,270   
           

 

 

  
               Principal Amount*           
 

Corporate Bonds 92.8%

          
 

Automobiles & Components 0.7%

          
 

The Goodyear Tire & Rubber Co., senior note, 6.50%, 3/01/21

      United States        2,200,000           2,343,000   
           

 

 

  
 

Banks 5.3%

          
b  

Bank of America Corp., junior sub. bond, M, 8.125% to 5/15/18, FRN thereafter, Perpetual

      United States        2,500,000           2,709,375   
 

CIT Group Inc., senior note,

          
 

5.375%, 5/15/20

      United States        1,700,000           1,803,106   
 

5.00%, 8/15/22

      United States        2,700,000           2,784,375   
b  

Citigroup Inc., junior sub. bond, M, 6.30% to 5/15/24, FRN thereafter, Perpetual

      United States        2,800,000           2,765,000   
b  

JPMorgan Chase & Co., junior sub. bond,

          
 

R, 6.00% to 8/01/23, FRN thereafter, Perpetual

      United States        2,500,000           2,481,250   
 

V, 5.00% to 7/30/19, FRN thereafter, Perpetual

      United States        1,400,000           1,376,812   
 

Royal Bank of Scotland Group PLC, sub. note,

          
 

6.125%, 12/15/22

      United Kingdom        2,000,000           2,176,250   
 

5.125%, 5/28/24

      United Kingdom        900,000           916,875   
           

 

 

  
              17,013,043   
           

 

 

  
 

Capital Goods 2.1%

          
c  

Abengoa Finance SAU, senior note, 144A,

          
 

8.875%, 11/01/17

      Spain        2,500,000           2,421,875   
 

7.75%, 2/01/20

      Spain        400,000           357,000   
c  

AECOM Technology Corp.,

          
 

senior bond, 144A, 5.875%, 10/15/24

      United States        200,000           205,000   
 

senior note, 144A, 5.75%, 10/15/22

      United States        300,000           307,500   
 

Navistar International Corp., senior note, 8.25%, 11/01/21

      United States        1,500,000           1,485,000   
 

TransDigm Inc.,

          
 

senior sub. bond, 6.50%, 7/15/24

      United States        500,000           505,000   
 

senior sub. note, 6.00%, 7/15/22

      United States        500,000           501,250   
c  

Zachry Holdings Inc., senior note, 144A, 7.50%, 2/01/20

      United States        1,100,000           1,111,000   
           

 

 

  
              6,893,625   
           

 

 

  
 

Commercial & Professional Services 1.0%

          
c  

Algeco Scotsman Global Finance PLC, senior secured note, first lien, 144A, 8.50%, 10/15/18

      United Kingdom        1,300,000           1,263,438   
d,e  

Goss Graphic Systems Inc., senior sub. note, 12.25%, 11/19/05

      United States        1,912,374           191   
c  

IHS Inc., senior note, 144A, 5.00%, 11/01/22

      United States        600,000           597,000   
 

United Rentals North America Inc., senior bond, 5.75%, 11/15/24

      United States        1,400,000           1,445,500   
           

 

 

  
              3,306,129   
           

 

 

  

 

    Annual Report     FH-9   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

 

Franklin High Income VIP Fund (continued)

 

           Country     Principal Amount*        Value  
           
 

Corporate Bonds (continued)

          
 

Consumer Durables & Apparel 3.2%

          
 

KB Home,

          
 

senior bond, 7.50%, 9/15/22

      United States        2,100,000         $ 2,236,500   
 

senior note, 4.75%, 5/15/19

      United States        600,000           592,500   
 

senior note, 7.00%, 12/15/21

      United States        700,000           738,063   
 

Standard Pacific Corp., senior note, 6.25%, 12/15/21

      United States        1,500,000           1,545,000   
c  

Taylor Morrison Communities Inc./Monarch Communities Inc.,
senior note, 144A,

          
 

7.75%, 4/15/20

      United States        1,140,000           1,214,100   
 

5.25%, 4/15/21

      United States        900,000           891,000   
 

5.625%, 3/01/24

      United States        1,500,000           1,455,000   
 

Visant Corp., senior note, 10.00%, 10/01/17

      United States        1,900,000           1,672,000   
           

 

 

  
              10,344,163   
           

 

 

  
 

Consumer Services 3.8%

          
c  

1011778 BC ULC/New Red Finance Inc., secured note, second lien, 144A, 6.00%, 4/01/22

      Canada        2,000,000           2,060,000   
c  

24 Hour Holdings III LLC, senior note, 144A, 8.00%, 6/01/22

      United States        2,000,000           1,610,000   
 

Caesars Entertainment Operating Co. Inc., senior secured note, first lien, 11.25%, 6/01/17

      United States        2,600,000           1,918,800   
c,d  

Fontainebleau Las Vegas, senior secured note, first lien, 144A,
11.00%, 6/15/15

      United States        1,700,000           21,250   
 

MGM Resorts International, senior note,

          
 

5.25%, 3/31/20

      United States        2,900,000           2,885,500   
 

6.625%, 12/15/21

      United States        300,000           316,500   
 

Pinnacle Entertainment Inc.,

          
 

senior note, 6.375%, 8/01/21

      United States        600,000           621,000   
 

senior sub. note, 7.75%, 4/01/22

      United States        1,100,000           1,149,500   
c  

Scientific Games International Inc.,

          
 

senior note, 144A, 10.00%, 12/01/22

      United States        1,100,000           1,013,375   
 

senior secured note, first lien, 144A, 7.00%, 1/01/22

      United States        800,000           814,000   
           

 

 

  
              12,409,925   
           

 

 

  
 

Diversified Financials 3.6%

          
c  

AerCap Ireland Capital Ltd./AerCap Global Aviation Trust, senior note, 144A, 5.00%, 10/01/21

      Netherlands        1,100,000           1,146,063   
 

Ally Financial Inc., senior bond, 5.125%, 9/30/24

      United States        800,000           814,000   
 

E*TRADE Financial Corp., senior note, 5.375%, 11/15/22

      United States        1,300,000           1,332,500   
 

Navient Corp., senior note,

          
 

8.45%, 6/15/18

      United States        800,000           894,000   
 

5.50%, 1/15/19

      United States        3,500,000           3,587,500   
c  

NOVA Chemicals Corp., senior bond, 144A, 5.00%, 5/01/25

      Canada        2,000,000           1,990,000   
c  

OneMain Financial Holdings Inc., senior note, 144A, 7.25%, 12/15/21

      United States        1,700,000           1,751,000   
           

 

 

  
              11,515,063   
           

 

 

  
 

Energy 18.6%

          
c  

California Resources Corp.,

          
 

senior bond, 144A, 6.00%, 11/15/24

      United States        1,000,000           850,000   
 

senior note, 144A, 5.50%, 9/15/21

      United States        800,000           688,000   
 

CGG SA, senior note, 6.875%, 1/15/22

      France        2,300,000           1,752,312   
 

CHC Helicopter SA,

          
 

senior note, 9.375%, 6/01/21

      Canada        260,000           245,700   
 

senior secured note, first lien, 9.25%, 10/15/20

      Canada        2,700,000           2,632,500   
 

Chesapeake Energy Corp., senior note, 6.625%, 8/15/20

      United States        3,000,000           3,202,500   
c  

Compressco Partners LP/Finance Corp., senior note, 144A, 7.25%, 8/15/22

      United States        700,000           609,000   

 

FH-10    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

 

Franklin High Income VIP Fund (continued)

 

           Country     Principal Amount*        Value  
           
 

Corporate Bonds (continued)

          
 

Energy (continued)

          
 

CONSOL Energy Inc., senior note,

          
 

8.25%, 4/01/20

      United States        1,000,000         $ 1,041,250   
 

6.375%, 3/01/21

      United States        300,000           301,500   
 

c144A, 5.875%, 4/15/22

      United States        1,100,000           1,028,500   
c  

Drill Rigs Holdings Inc., secured note, 144A, 6.50%, 10/01/17

      United States        2,000,000           1,670,000   
 

Energy Transfer Equity LP,

          
 

senior bond, 5.875%, 1/15/24

      United States        400,000           408,000   
 

senior note, 7.50%, 10/15/20

      United States        2,600,000           2,899,000   
 

Energy XXI Gulf Coast Inc., senior note,

          
 

7.50%, 12/15/21

      United States        1,000,000           545,000   
 

c144A, 6.875%, 3/15/24

      United States        1,200,000           651,000   
c  

EnQuest PLC, senior note, 144A, 7.00%, 4/15/22

      United Kingdom        1,200,000           737,250   
 

EPL Oil & Gas Inc., senior note, 8.25%, 2/15/18

      United States        1,400,000           1,071,000   
 

Goodrich Petroleum Corp., senior note, 8.875%, 3/15/19

      United States        2,500,000           1,237,500   
 

Halcon Resources Corp., senior note,

          
 

8.875%, 5/15/21

      United States        2,500,000           1,893,750   
 

9.25%, 2/15/22

      United States        1,100,000           816,750   
c  

Kinder Morgan Inc., senior secured bond, first lien, 144A, 5.625%, 11/15/23

      United States        1,500,000           1,608,390   
 

Linn Energy LLC/Finance Corp., senior note,

          
 

8.625%, 4/15/20

      United States        2,000,000           1,750,000   
 

7.75%, 2/01/21

      United States        700,000           593,250   
 

6.50%, 9/15/21

      United States        300,000           244,500   
 

Martin Midstream Partners LP/Martin Midstream Finance Corp., senior note, 7.25%, 2/15/21

      United States        1,100,000           1,039,500   
c  

Memorial Resource Development Corp., senior note, 144A, 5.875%, 7/01/22

      United States        1,100,000           998,250   
 

Midstates Petroleum Co. Inc./LLC, senior note, 9.25%, 6/01/21

      United States        2,000,000           1,020,000   
c  

Murray Energy Corp., senior secured note, 144A, 8.625%, 6/15/21

      United States        1,300,000           1,248,000   
c  

Ocean Rig UDW Inc., senior note, 144A, 7.25%, 4/01/19

      United States        2,700,000           1,908,562   
 

Offshore Group Investment Ltd.,

          
 

senior bond, first lien, 7.125%, 4/01/23

      United States        1,000,000           720,000   
 

senior secured note, first lien, 7.50%, 11/01/19

      United States        2,000,000           1,502,500   
 

PBF Holding Co. LLC, first lien, 8.25%, 2/15/20

      United States        2,500,000           2,525,000   
 

Peabody Energy Corp., senior note,

          
 

6.50%, 9/15/20

      United States        1,700,000           1,483,250   
 

6.25%, 11/15/21

      United States        1,700,000           1,459,875   
 

Penn Virginia Corp., senior note, 8.50%, 5/01/20

      United States        1,200,000           966,000   
 

Penn Virginia Resource Partners LP/Penn Virginia Resource Finance Corp., senior note,

          
 

8.375%, 6/01/20

      United States        902,000           967,395   
 

6.50%, 5/15/21

      United States        600,000           609,000   
 

QEP Resources Inc., senior note,

          
 

5.375%, 10/01/22

      United States        1,500,000           1,425,000   
 

5.25%, 5/01/23

      United States        1,500,000           1,410,000   
 

Quicksilver Resources Inc.,

          
 

c,fsecured note, second lien, 144A, FRN, 7.00%, 6/21/19

      United States        1,000,000           747,500   
 

senior note, 9.125%, 8/15/19

      United States        500,000           127,500   
c  

Regency Energy Partners LP/Regency Energy Finance Corp., senior note, 144A, 8.375%, 6/01/19

      United States        2,500,000           2,631,250   
 

Sabine Pass Liquefaction LLC,

          
 

first lien, 5.625%, 2/01/21

      United States        2,400,000           2,370,000   
 

first lien, 5.625%, 4/15/23

      United States        900,000           884,250   
 

senior secured, first lien, 5.75%, 5/15/24

      United States        200,000           197,250   
 

Samson Investment Co., senior note, 9.75%, 2/15/20

      United States        2,700,000           1,132,313   

 

    Annual Report   FH-11

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

 

Franklin High Income VIP Fund (continued)

 

           Country     Principal Amount*        Value  
           
 

Corporate Bonds (continued)

          
 

Energy (continued)

          
 

Sanchez Energy Corp., senior note,

          
 

7.75%, 6/15/21

      United States        1,800,000         $ 1,683,000   
 

c 144A, 6.125%, 1/15/23

      United States        700,000           589,750   
c  

Ultra Petroleum Corp., senior bond, 144A, 6.125%, 10/01/24

      United States        2,100,000           1,816,500   
           

 

 

  
              59,938,297   
           

 

 

  
 

Food, Beverage & Tobacco 3.4%

          
 

Constellation Brands Inc., senior bond, 4.75%, 11/15/24

      United States        900,000           913,500   
c  

Cott Beverages Inc., senior note, 144A, 6.75%, 1/01/20

      United States        1,100,000           1,102,750   
c  

Dole Food Co. Inc., senior secured note, 144A, 7.25%, 5/01/19

      United States        1,500,000           1,498,125   
c  

JBS USA LLC/Finance Inc.,

          
 

senior bond, 144A, 5.875%, 7/15/24

      United States        600,000           595,500   
 

senior note, 144A, 8.25%, 2/01/20

      United States        2,600,000           2,749,500   
 

Post Holdings Inc., senior note,

          
 

7.375%, 2/15/22

      United States        1,600,000           1,604,000   
 

c 144A, 6.75%, 12/01/21

      United States        1,100,000           1,069,750   
 

c 144A, 6.00%, 12/15/22

      United States        300,000           282,375   
 

WhiteWave Foods Co., senior note, 5.375%, 10/01/22

      United States        1,100,000           1,135,750   
           

 

 

  
              10,951,250   
           

 

 

  
 

Health Care Equipment & Services 5.0%

          
 

Alere Inc.,

          
 

senior note, 7.25%, 7/01/18

      United States        2,200,000           2,299,000   
 

senior sub. note, 6.50%, 6/15/20

      United States        300,000           303,750   
 

CHS/Community Health Systems Inc., senior note,

          
 

8.00%, 11/15/19

      United States        1,200,000           1,284,000   
 

7.125%, 7/15/20

      United States        700,000           747,250   
 

6.875%, 2/01/22

      United States        1,300,000           1,383,687   
 

DaVita HealthCare Partners Inc., senior bond, 5.125%, 7/15/24

      United States        1,400,000           1,430,625   
 

HCA Inc.,

          
 

senior note, 5.875%, 5/01/23

      United States        2,500,000           2,640,625   
 

senior secured note, first lien, 5.00%, 3/15/24

      United States        2,300,000           2,369,000   
 

Tenet Healthcare Corp., senior note,

          
 

8.125%, 4/01/22

      United States        3,000,000           3,360,000   
 

c 144A, 5.00%, 3/01/19

      United States        200,000           200,750   
           

 

 

  
              16,018,687   
           

 

 

  
 

Materials 11.0%

          
 

ArcelorMittal, senior note, 6.00%, 3/01/21

      Luxembourg        1,900,000           1,969,093   
c  

Ardagh Packaging Finance PLC, senior note, 144A, 9.125%, 10/15/20

      Luxembourg        600,000           640,500   
c  

Ardagh Packaging Finance PLC/Ardagh MP Holdings USA Inc., senior note, 144A,

          
 

6.25%, 1/31/19

      Luxembourg        300,000           294,000   
 

7.00%, 11/15/20

      Luxembourg        176,471           179,118   
 

6.75%, 1/31/21

      Luxembourg        300,000           296,813   
 

6.00%, 6/30/21

      Luxembourg        1,900,000           1,819,250   
c  

Barminco Finance Pty. Ltd., senior note, 144A, 9.00%, 6/01/18

      Australia        2,000,000           1,801,250   
c  

BlueScope Steel Ltd./BlueScope Steel Finance, senior note, 144A, 7.125%, 5/01/18

      Australia        2,000,000           2,080,000   
c  

Cemex Finance LLC, senior secured note, 144A, 6.00%, 4/01/24

      Mexico        1,700,000           1,645,812   
c  

Constellium NV, senior note, 144A, 5.75%, 5/15/24

      Netherlands        1,100,000           962,500   
c  

Eldorado Gold Corp., senior note, 144A, 6.125%, 12/15/20

      Canada        3,100,000           3,022,500   

 

FH-12    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

 

Franklin High Income VIP Fund (continued)

 

           Country     Principal Amount*        Value  
           
 

Corporate Bonds (continued)

          
 

Materials (continued)

          
c  

First Quantum Minerals Ltd., senior note, 144A,

          
 

6.75%, 2/15/20

      Canada        2,000,000         $ 1,820,000   
 

7.00%, 2/15/21

      Canada        1,836,000           1,661,580   
c  

FMG Resources (August 2006) Pty. Ltd., senior note, 144A,

          
 

6.875%, 2/01/18

      Australia        888,889           811,667   
 

8.25%, 11/01/19

      Australia        500,000           456,875   
c  

Ineos Finance PLC, senior secured note, 144A, 7.50%, 5/01/20

      Switzerland        500,000           525,937   
c  

Ineos Group Holdings SA, senior note, 144A,

          
 

6.125%, 8/15/18

      Switzerland        1,300,000           1,254,500   
 

5.875%, 2/15/19

      Switzerland        700,000           665,000   
 

Olin Corp., senior bond, 5.50%, 8/15/22

      United States        1,700,000           1,729,750   
c  

Owens-Brockway Glass Container Inc., senior note, 144A, 5.00%, 1/15/22

      United States        1,300,000           1,327,625   
c  

Polymer Group Inc., senior note, 144A, 6.875%, 6/01/19

      United States        1,500,000           1,445,625   
c  

Rain CII Carbon LLC/CII Carbon Corp., second lien, 144A, 8.25%, 1/15/21

      United States        1,200,000           1,233,000   
 

Reynolds Group Issuer Inc./LLC/SA,

          
 

first lien, 5.75%, 10/15/20

      United States        1,400,000           1,442,000   
 

senior note, 8.50%, 5/15/18

      United States        2,800,000           2,870,000   
 

senior note, 9.00%, 4/15/19

      United States        1,200,000           1,248,000   
 

senior note, 9.875%, 8/15/19

      United States        200,000           213,000   
 

senior note, 8.25%, 2/15/21

      United States        400,000           412,000   
c  

Sealed Air Corp., senior note, 144A, 8.375%, 9/15/21

      United States        100,000           112,250   
c  

Steel Dynamics Inc.,

          
 

senior bond, 144A, 5.50%, 10/01/24

      United States        800,000           822,000   
 

senior note, 144A, 5.125%, 10/01/21

      United States        800,000           815,000   
           

 

 

  
              35,576,645   
           

 

 

  
 

Media 10.8%

          
c  

Anna Merger Sub Inc., senior note, 144A, 7.75%, 10/01/22

      United States        1,100,000           1,116,500   
 

CCO Holdings LLC/CCO Holdings Capital Corp.,

          
 

senior bond, 5.25%, 9/30/22

      United States        900,000           901,125   
 

senior note, 6.50%, 4/30/21

      United States        1,500,000           1,580,625   
 

CCOH Safari LLC, senior bond, 5.75%, 12/01/24

      United States        600,000           608,250   
 

Clear Channel Worldwide Holdings Inc.,

          
 

senior note, 6.50%, 11/15/22

      United States        1,000,000           1,035,000   
 

senior sub. note, 7.625%, 3/15/20

      United States        1,100,000           1,163,250   
 

CSC Holdings LLC, senior note,

          
 

6.75%, 11/15/21

      United States        1,500,000           1,663,125   
 

c 144A, 5.25%, 6/01/24

      United States        1,000,000           1,007,500   
c  

DISH DBS Corp., senior note, 144A, 5.875%, 11/15/24

      United States        3,100,000           3,123,250   
 

Gannett Co. Inc.,

          
 

senior bond, 6.375%, 10/15/23

      United States        2,000,000           2,130,000   
 

senior note, 5.125%, 7/15/20

      United States        1,400,000           1,435,000   
 

iHeartCommunications Inc.,

          
 

senior secured bond, first lien, 9.00%, 3/01/21

      United States        2,500,000           2,459,375   
 

c senior secured note, first lien, 144A, 9.00%, 9/15/22

      United States        700,000           687,750   
c  

Nielsen Finance LLC/Co., senior note, 144A, 5.00%, 4/15/22

      United States        1,000,000           1,006,250   
c,g  

Radio One Inc., senior sub. note, 144A, 9.25%, 2/15/20

      United States        800,000           700,000   
c  

Sirius XM Radio Inc., senior bond, 144A, 6.00%, 7/15/24

      United States        2,500,000           2,568,750   
c  

Unitymedia KabelBW GmbH, senior bond, 144A, 6.125%, 1/15/25

      Germany        1,200,000           1,243,500   

 

    Annual Report     FH-13   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

 

Franklin High Income VIP Fund (continued)

 

           Country     Principal Amount*        Value  
           
 

Corporate Bonds (continued)

          
 

Media (continued)

          
c  

Univision Communications Inc., senior secured note, 144A,

          
 

6.875%, 5/15/19

      United States        2,500,000         $ 2,609,375   
 

7.875%, 11/01/20

      United States        700,000           749,000   
c  

UPCB Finance III Ltd., senior secured note, 144A, 6.625%, 7/01/20

      Netherlands        1,000,000           1,052,500   
c  

UPCB Finance VI Ltd., senior secured note, 144A, 6.875%, 1/15/22

      Netherlands        500,000           544,688   
c  

Virgin Media Finance PLC, senior bond, 144A, 6.375%, 4/15/23

      United Kingdom        1,700,000           1,789,250   
c  

Virgin Media Secured Finance PLC, senior secured bond, first lien, 144A, 5.50%, 1/15/25

      United Kingdom        1,100,000           1,139,187   
c  

WMG Acquisition Corp., senior note, 144A, 5.625%, 4/15/22

      United States        2,500,000           2,431,250   
           

 

 

  
              34,744,500   
           

 

 

  
 

Pharmaceuticals, Biotechnology & Life Sciences 3.3%

          
c  

inVentiv Health Inc., senior secured note, 144A, 9.00%, 1/15/18

      United States        300,000           307,500   
c,h  

Jaguar Holding Co. I, senior note, 144A, PIK, 9.375%, 10/15/17

      United States        2,400,000           2,458,800   
c  

Jaguar Holding Co. II/Merger Sub Inc., senior note, 144A, 9.50%, 12/01/19

      United States        700,000           753,375   
 

Par Pharmaceutical Cos. Inc., senior note, 7.375%, 10/15/20

      United States        3,300,000           3,465,000   
c  

Valeant Pharmaceuticals International Inc., senior note, 144A,

          
 

7.50%, 7/15/21

      United States        200,000           216,750   
 

5.625%, 12/01/21

      United States        300,000           303,000   
c  

VPI Escrow Corp., senior note, 144A, 6.375%, 10/15/20

      United States        3,000,000           3,146,250   
           

 

 

  
              10,650,675   
           

 

 

  
 

Retailing 1.0%

          
c  

American Builders & Contractors Supply Co. Inc., senior note, 144A, 5.625%, 4/15/21

      United States        2,100,000           2,115,750   
c  

New Look Bondco I PLC, secured note, 144A, 8.375%, 5/14/18

      United Kingdom        1,000,000           1,054,375   
           

 

 

  
              3,170,125   
           

 

 

  
 

Semiconductors & Semiconductor Equipment 0.1%

          
 

Freescale Semiconductor Inc., senior note, 8.05%, 2/01/20

      United States        472,000           499,140   
           

 

 

  
 

Software & Services 3.6%

          
c  

BMC Software Finance Inc., senior note, 144A, 8.125%, 7/15/21

      United States        2,500,000           2,362,500   
 

Equinix Inc., senior bond, 5.375%, 4/01/23

      United States        3,300,000           3,316,500   
 

First Data Corp.,

          
 

senior bond, 12.625%, 1/15/21

      United States        1,000,000           1,190,000   
 

senior note, 11.25%, 1/15/21

      United States        646,000           734,825   
 

csenior secured bond, 144A, 8.25%, 1/15/21

      United States        2,500,000           2,687,500   
 

Sterling International Inc., senior note, 11.00%, 10/01/19

      United States        1,200,000           1,281,000   
           

 

 

  
              11,572,325   
           

 

 

  
 

Technology Hardware & Equipment 1.6%

          
c  

Alcatel-Lucent USA Inc., senior note, 144A, 6.75%, 11/15/20

      France        3,400,000           3,605,700   
c  

Blackboard Inc., senior note, 144A, 7.75%, 11/15/19

      United States        1,500,000           1,511,250   
           

 

 

  
              5,116,950   
           

 

 

  
 

Telecommunication Services 10.2%

          
 

CenturyLink Inc.,

          
 

senior bond, 6.75%, 12/01/23

      United States        100,000           109,875   
 

senior note, 6.45%, 6/15/21

      United States        400,000           431,000   
 

senior note, 5.80%, 3/15/22

      United States        2,500,000           2,606,250   
c  

Digicel Group Ltd., senior note, 144A, 8.25%, 9/30/20

      Bermuda        2,000,000           1,957,500   

 

FH-14    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

 

Franklin High Income VIP Fund (continued)

 

           Country     Principal Amount*        Value  
           
 

Corporate Bonds (continued)

          
 

Telecommunication Services (continued)

          
c  

Digicel Ltd., senior note, 144A, 6.00%, 4/15/21

      Bermuda        2,200,000         $ 2,091,375   
 

Frontier Communications Corp.,

          
 

senior bond, 7.625%, 4/15/24

      United States        200,000           207,000   
 

senior note, 8.50%, 4/15/20

      United States        2,000,000           2,240,000   
 

senior note, 8.75%, 4/15/22

      United States        900,000           1,010,250   
 

senior note, 7.875%, 1/15/27

      United States        200,000           200,500   
 

Intelsat Jackson Holdings SA,

          
 

senior bond, 5.50%, 8/01/23

      Luxembourg        1,500,000           1,495,312   
 

senior note, 7.50%, 4/01/21

      Luxembourg        3,800,000           4,080,250   
c  

Millicom International Cellular SA, senior note, 144A, 6.625%, 10/15/21

      Luxembourg        200,000           205,625   
 

Sprint Corp., senior bond,

          
 

7.875%, 9/15/23

      United States        500,000           496,100   
 

7.125%, 6/15/24

      United States        500,000           467,500   
 

Sprint Nextel Corp., senior note,

          
 

8.375%, 8/15/17

      United States        3,000,000           3,247,500   
 

c144A, 9.00%, 11/15/18

      United States        3,000,000           3,419,700   
 

T-Mobile USA Inc.,

          
 

senior bond, 6.50%, 1/15/24

      United States        400,000           411,000   
 

senior bond, 6.375%, 3/01/25

      United States        1,100,000           1,120,350   
 

senior note, 6.542%, 4/28/20

      United States        1,600,000           1,658,000   
 

senior note, 6.125%, 1/15/22

      United States        200,000           203,750   
c  

Wind Acquisition Finance SA,

          
 

senior note, 144A, 7.375%, 4/23/21

      Italy        3,500,000           3,307,500   
 

senior secured note, first lien, 144A, 4.75%, 7/15/20

      Italy        2,000,000           1,900,000   
           

 

 

  
              32,866,337   
           

 

 

  
 

Transportation 1.2%

          
c  

Florida East Coast Holdings Corp.,

          
 

secured note, first lien, 144A, 6.75%, 5/01/19

      United States        900,000           893,250   
 

senior note, 144A, 9.75%, 5/01/20

      United States        500,000           500,000   
c  

Stena AB, senior bond, 144A, 7.00%, 2/01/24

      Sweden        1,000,000           917,500   
c  

Stena International SA, secured bond, 144A, 5.75%, 3/01/24

      Sweden        1,500,000           1,417,500   
           

 

 

  
              3,728,250   
           

 

 

  
 

Utilities 3.3%

          
 

Calpine Corp.,

          
 

senior bond, 5.75%, 1/15/25

      United States        1,200,000           1,216,500   
 

senior note, 5.375%, 1/15/23

      United States        1,300,000           1,314,625   
 

csenior secured bond, first lien, 144A, 7.875%, 1/15/23

      United States        698,000           773,035   
 

csenior secured bond, first lien, 144A, 5.875%, 1/15/24

      United States        400,000           428,000   
 

csenior secured note, first lien, 144A, 6.00%, 1/15/22

      United States        100,000           107,000   
c  

InterGen NV, secured bond, 144A, 7.00%, 6/30/23

      Netherlands        2,500,000           2,387,500   
c  

NGL Energy Partners LP/NGL Energy Finance Corp., senior note, 144A, 5.125%, 7/15/19

      United States        500,000           480,625   
c  

NRG Yield Operating LLC, senior bond, 144A, 5.375%, 8/15/24

      United States        2,000,000           2,040,000   
c,d  

Texas Competitive Electric Holdings Co. LLC/Texas Competitive Electric Holdings Finance Inc., senior secured note, 144A, 11.50%, 10/01/20

      United States        2,500,000           1,781,250   
           

 

 

  
              10,528,535   
           

 

 

  
 

Total Corporate Bonds (Cost $310,742,789)

             299,186,664   
           

 

 

  

 

    Annual Report     FH-15   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

Franklin High Income VIP Fund (continued)

           Country     Principal Amount*        Value  
           
f,i  

Senior Floating Rate Interests (Cost $2,327,917) 0.7%

          
 

Household & Personal Products 0.7%

          
 

Sun Products Corp., Tranche B Term Loan, 5.50%, 3/23/20

      United States        2,346,427         $ 2,193,909   
           

 

 

  
               Shares           
 

Escrows and Litigation Trusts (Cost $—) 0.0%

          
a,e  

NewPage Corp., Litigation Trust

      United States        2,500,000           —   
           

 

 

  
 

Total Investments before Short Term Investments
(Cost $315,076,890)

             302,390,410   
           

 

 

  
               Principal Amount*           
 

Short Term Investments (Cost $16,927,549) 5.3%

          
 

Repurchase Agreements 5.3%

          
j  

Joint Repurchase Agreement, 0.057%, 1/02/15
(Maturity Value $16,927,602)

      United States        16,927,549           16,927,549   
 

BNP Paribas Securities Corp. (Maturity Value $1,426,489)
HSBC Securities (USA) Inc. (Maturity Value $11,792,275)
Merrill Lynch, Pierce, Fenner & Smith Inc. (Maturity Value $3,708,838)

          
 

Collateralized by U.S. Government Agency Securities, 0.00% - 1.50%, 1/20/15 - 10/09/19; U.S. Government Agency Securities, Strips, 6/01/17; and U.S. Treasury Notes, 1.625% - 4.50%, 11/15/15 - 11/30/20 (valued at $17,268,235)

          
           

 

 

  
 

Total Investments (Cost $332,004,439) 99.1%

             319,317,959   
 

Other Assets, less Liabilities 0.9%

             2,918,447   
           

 

 

  
 

Net Assets 100.0%

           $ 322,236,406   
           

 

 

  

See Abbreviations on page FH-27.

*The principal amount is stated in U.S. dollars unless otherwise indicated.

aNon-income producing.

bPerpetual security with no stated maturity date.

cSecurity was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be sold in transactions exempt from registration only to qualified institutional buyers or in a public offering registered under the Securities Act of 1933. These securities have been deemed liquid under guidelines approved by the Trust’s Board of Trustees. At December 31, 2014, the aggregate value of these securities was $138,100,965, representing 42.86% of net assets.

dSee Note 7 regarding defaulted securities.

eSecurity has been deemed illiquid because it may not be able to be sold within seven days. At December 31, 2014, the aggregate value of these securities was $191, representing less than 0.01% of net assets.

fThe coupon rate shown represents the rate at period end.

gAt December 31, 2014, pursuant to the Fund’s policies and the requirements of applicable securities law, the Fund may be restricted from trading this security for a limited or extended period of time.

hIncome may be received in additional securities and/or cash.

iSee Note 1(e) regarding senior floating rate interests.

jSee Note 1(c) regarding joint repurchase agreement.

 

FH-16    Annual Report   |    The accompanying notes are an integral part of these financial statements.    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

 

Financial Statements

Statement of Assets and Liabilities

December 31, 2014

 

      Franklin High
Income VIP
Fund		  

Assets:

   

Investments in securities:

   

Cost - Unaffiliated issuers

    $ 315,076,890   

Cost - Repurchase agreements

      16,927,549   
  

 

 

  

Total cost of investments

    $ 332,004,439   
  

 

 

  

Value - Unaffiliated issuers

    $ 302,390,410   

Value - Repurchase agreements

      16,927,549   
  

 

 

  

Total value of investments

      319,317,959   

Receivables:

   

Capital shares sold

      585,762   

Dividends and interest

      5,267,737   

Other assets

      112   
  

 

 

  

Total assets

      325,171,570   
  

 

 

  

Liabilities:

   

Payables:

   

Capital shares redeemed

      70,296   

Management fees

      142,599   

Distribution fees

      124,506   

Funds advanced by custodian

      2,500,000   

Accrued expenses and other liabilities

      97,763   
  

 

 

  

Total liabilities

      2,935,164   
  

 

 

  

Net assets, at value

    $ 322,236,406   
  

 

 

  

Net assets consist of:

   

Paid-in capital

    $ 331,587,521   

Undistributed net investment income

      19,094,317   

Net unrealized appreciation (depreciation)

      (12,686,480 ) 

Accumulated net realized gain (loss)

      (15,758,952 ) 
  

 

 

  

Net assets, at value

    $ 322,236,406   
  

 

 

  
Class 1:   

Net assets, at value

    $ 34,552,260   
  

 

 

  

Shares outstanding

      5,219,193   
  

 

 

  

Net asset value and maximum offering price per share

    $ 6.62   
  

 

 

  
Class 2:   

Net assets, at value

    $ 261,944,147   
  

 

 

  

Shares outstanding

      40,845,987   
  

 

 

  

Net asset value and maximum offering price per share

    $ 6.41   
  

 

 

  
Class 4:   

Net assets, at value

    $ 25,739,999   
  

 

 

  

Shares outstanding

      3,933,338   
  

 

 

  

Net asset value and maximum offering price per share

    $ 6.54   
  

 

 

  

 

    The accompanying notes are an integral part of these financial statements.    |   Annual Report     FH-17   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FINANCIAL STATEMENTS

Statement of Operations

for the year ended December 31, 2014

 

      Franklin High
Income VIP
Fund		  

Investment income:

   

Dividends

    $ 39,488   

Interest

      23,449,400   
  

 

 

  

Total investment income

      23,488,888   
  

 

 

  

Expenses:

   

Management fees (Note 3a)

      1,860,239   

Distribution fees: (Note 3c)

   

Class 2

      729,711   

Class 4

      97,921   

Custodian fees (Note 4)

      3,226   

Reports to shareholders

      93,095   

Professional fees

      49,561   

Trustees’ fees and expenses

      1,437   

Other

      28,279   
  

 

 

  

Total expenses

      2,863,469   

Expense reductions (Note 4)

      (34 ) 
  

 

 

  

Net expenses

      2,863,435   
  

 

 

  

Net investment income

      20,625,453   
  

 

 

  

Realized and unrealized gains (losses):

   

Net realized gain (loss) from:

   

Investments

      7,935,628   

Foreign currency transactions

      (5,812 ) 
  

 

 

  

Net realized gain (loss)

      7,929,816   
  

 

 

  

Net change in unrealized appreciation (depreciation) on:

   

Investments

      (26,634,518 ) 

Translation of other assets and liabilities denominated in foreign currencies

      2,562   
  

 

 

  

Net change in unrealized appreciation (depreciation)

      (26,631,956 ) 
  

 

 

  

Net realized and unrealized gain (loss)

      (18,702,140 ) 
  

 

 

  

Net increase (decrease) in net assets resulting from operations

    $ 1,923,313   
  

 

 

  

 

FH-18    Annual Report   |    The accompanying notes are an integral part of these financial statements.    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FINANCIAL STATEMENTS

 

Statements of Changes in Net Assets

 

    Franklin High Income VIP Fund  
    Year Ended December 31,  
     2014        2013  

Increase (decrease) in net assets:

       

Operations:

       

Net investment income

   $ 20,625,453         $ 22,562,058   

Net realized gain (loss) from investments and foreign currency transactions

     7,929,816           5,546,800   

Net change in unrealized appreciation (depreciation) on investments and translation of other assets and liabilities denominated in foreign currencies

     (26,631,956 )         (1,216,918 ) 
 

 

 

  

Net increase (decrease) in net assets resulting from operations

     1,923,313           26,891,940   
 

 

 

  

Distributions to shareholders from:

       

Net investment income:

       

Class 1

     (2,292,485 )         (2,998,716 ) 

Class 2

     (18,595,621 )         (20,021,935 ) 

Class 4

     (1,613,962 )         (1,982,283 ) 
 

 

 

  

Total distributions to shareholders

     (22,502,068 )         (25,002,934 ) 
 

 

 

  

Capital share transactions: (Note 2)

       

Class 1

     (2,696,242 )         (3,089,037 ) 

Class 2

     (12,927,786 )         8,408,156   

Class 4

     (475,860 )         25,255   
 

 

 

  

Total capital share transactions

     (16,099,888 )         5,344,374   
 

 

 

  

Net increase (decrease) in net assets

     (36,678,643 )         7,233,380   

Net assets:

       

Beginning of year

     358,915,049           351,681,669   
 

 

 

  

End of year

   $ 322,236,406         $ 358,915,049   
 

 

 

  

Undistributed net investment income included in net assets:

       

End of year

   $ 19,094,317         $ 20,624,091   
 

 

 

  

 

    The accompanying notes are an integral part of these financial statements.    |   Annual Report     FH-19   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

Notes to Financial Statements

Franklin High Income VIP Fund

1. Organization and Significant Accounting Policies

Franklin Templeton Variable Insurance Products Trust (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end management investment company, consisting of nineteen separate funds and applies the specialized accounting and reporting guidance in U.S. Generally Accepted Accounting Principles (U.S. GAAP). Franklin High Income VIP Fund (Fund) is included in this report. The financial statements of the remaining funds in the Trust are presented separately. Shares of the Fund are generally sold only to insurance company separate accounts to fund the benefits of variable life insurance policies or variable annuity contracts. At December 31, 2014, 84.97% of the Fund’s shares were held through one insurance company. Investment activities of these insurance company separate accounts could have a material impact on the Fund. The Fund offers three classes of shares: Class 1, Class 2, and Class 4. Each class of shares differs by its distribution fees, voting rights on matters affecting a single class and its exchange privilege.

Effective May 1, 2014, Franklin High Income Securities Fund was renamed Franklin High Income VIP Fund.

The following summarizes the Fund’s significant accounting policies.

a. Financial Instrument Valuation

The Fund’s investments in financial instruments are carried at fair value daily. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. The Fund calculates the net asset value per share at the close of the New York Stock Exchange (NYSE), generally at 4 p.m. Eastern time (NYSE close) on each day the NYSE is open for trading. Under compliance policies and procedures approved by the Trust’s Board of Trustees (the Board), the Fund’s administrator has responsibility for oversight of valuation, including leading the cross-functional Valuation and Liquidity Oversight Committee (VLOC). The VLOC provides administration and oversight of the Fund’s valuation policies and procedures, which are approved annually by the Board. Among other things, these procedures allow the Fund to utilize independent pricing services, quotations from securities and financial instrument dealers, and other market sources to determine fair value.

Equity securities listed on an exchange or on the NASDAQ National Market System are valued at the last quoted sale price

or the official closing price of the day, respectively. Foreign equity securities are valued as of the close of trading on the foreign stock exchange on which the security is primarily traded or as of the NYSE close, whichever is earlier. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at the NYSE close on the day that the value of the security is determined. Over-the-counter (OTC) securities are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. Certain equity securities are valued based upon fundamental characteristics or relationships to similar securities.

Debt securities generally trade in the OTC market rather than on a securities exchange. The Fund’s pricing services use multiple valuation techniques to determine fair value. In instances where sufficient market activity exists, the pricing services may utilize a market-based approach through which quotes from market makers are used to determine fair value. In instances where sufficient market activity may not exist or is limited, the pricing services also utilize proprietary valuation models which may consider market characteristics such as benchmark yield curves, credit spreads, estimated default rates, anticipated market interest rate volatility, coupon rates, anticipated timing of principal repayments, underlying collateral, and other unique security features in order to estimate the relevant cash flows, which are then discounted to calculate the fair value. Securities denominated in a foreign currency are converted into their U.S. dollar equivalent at the foreign exchange rate in effect at the NYSE close on the date that the values of the foreign debt securities are determined. Repurchase agreements are valued at cost, which approximates fair value.

The Fund has procedures to determine the fair value of financial instruments for which market prices are not reliable or readily available. Under these procedures, the VLOC convenes on a regular basis to review such financial instruments and considers a number of factors, including significant unobservable valuation inputs, when arriving at fair value. The VLOC primarily employs a market-based approach which may use related or comparable assets or liabilities, recent transactions, market multiples, book values, and other relevant information for the investment to determine the fair value of the investment. An income-based valuation approach may also be used in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the

 

 

FH-20    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

 

Franklin High Income VIP Fund (continued)

 

investments. Due to the inherent uncertainty of valuations of such investments, the fair values may differ significantly from the values that would have been used had an active market existed. The VLOC employs various methods for calibrating these valuation approaches including a regular review of key inputs and assumptions, transactional back-testing or disposition analysis, and reviews of any related market activity.

Trading in securities on foreign securities stock exchanges and OTC markets may be completed before the daily NYSE close. In addition, trading in certain foreign markets may not take place on every NYSE business day. Occasionally, events occur between the time at which trading in a foreign security is completed and the close of the NYSE that might call into question the reliability of the value of a portfolio security held by the Fund. As a result, differences may arise between the value of the Fund’s portfolio securities as determined at the foreign market close and the latest indications of value at the close of the NYSE. In order to minimize the potential for these differences, the VLOC monitors price movements following the close of trading in foreign stock markets through a series of country specific market proxies (such as baskets of American Depositary Receipts, futures contracts and exchange traded funds). These price movements are measured against established trigger thresholds for each specific market proxy to assist in determining if an event has occurred that may call into question the reliability of the values of the foreign securities held by the Fund. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services.

Also, when the last day of the reporting period is a non-business day, certain foreign markets may be open on those days that the NYSE is closed, which could result in differences between the value of the Fund’s portfolio securities on the last business day and the last calendar day of the reporting period. Any significant security valuation changes due to an open foreign market are adjusted and reflected by the Fund for financial reporting purposes.

b. Foreign Currency Translation

Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. The Fund may enter into foreign currency exchange contracts to facilitate transactions denominated in a foreign currency. Purchases and sales of securities, income and

expense items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. Portfolio securities and assets and liabilities denominated in foreign currencies contain risks that those currencies will decline in value relative to the U.S. dollar. Occasionally, events may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the Board.

The Fund does not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments on the Statement of Operations.

Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period.

c. Joint Repurchase Agreement

The Fund enters into a joint repurchase agreement whereby its uninvested cash balance is deposited into a joint cash account with other funds managed by the investment manager or an affiliate of the investment manager and is used to invest in one or more repurchase agreements. The value and face amount of the joint repurchase agreement are allocated to the funds based on their pro-rata interest. A repurchase agreement is accounted for as a loan by the Fund to the seller, collateralized by securities which are delivered to the Fund’s custodian. The fair value, including accrued interest, of the initial collateralization is required to be at least 102% of the dollar amount invested by the funds, with the value of the underlying securities marked to market daily to maintain coverage of at least 100%. Repurchase agreements are subject to the terms of Master Repurchase Agreements (MRAs) with approved counterparties (sellers). The MRAs contain various provisions, including but not limited to events of default and maintenance of collateral for repurchase agreements. In the event of default by either the seller or the Fund, certain MRAs may permit the non-defaulting party to net

 

 

    Annual Report     FH-21   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Franklin High Income VIP Fund (continued)

1. Organization and Significant Accounting Policies (continued)

c. Joint Repurchase Agreement (continued)

and close-out all transactions, if any, traded under such agreements. The Fund may sell securities it holds as collateral and apply the proceeds towards the repurchase price and any other amounts owed by the seller to the Fund in the event of default by the seller. This could involve costs or delays in addition to a loss on the securities if their value falls below the repurchase price owed by the seller. The joint repurchase agreement held by the Fund at year end, as indicated in the Statement of Investments, had been entered into on December 31, 2014.

d. Derivative Financial Instruments

The Fund invested in derivatives in order to manage risk or gain exposure to various other investments or markets. Derivatives are financial contracts based on an underlying or notional amount, require no initial investment or an initial net investment that is smaller than would normally be required to have a similar response to changes in market factors, and require or permit net settlement. Derivatives contain various risks including the potential inability of the counterparty to fulfill their obligations under the terms of the contract, the potential for an illiquid secondary market, and/or the potential for market movements which expose the fund to gains or losses in excess of the amounts shown in the Statement of Assets and Liabilities. Realized gain and loss and unrealized appreciation and depreciation on these contracts for the period are included in the Statement of Operations.

The Fund entered into forward exchange contracts primarily to manage and/or gain exposure to certain foreign currencies. A forward exchange contract is an agreement between the fund and a counterparty to buy or sell a foreign currency at a specific exchange rate on a future date.

See Note 8 regarding other derivative information.

e. Senior Floating Rate Interests

The Fund invests in senior secured corporate loans that pay interest at rates which are periodically reset by reference to a base lending rate plus a spread. These base lending rates are generally the prime rate offered by a designated U.S. bank or the London InterBank Offered Rate (LIBOR). Senior secured corporate loans often require prepayment of principal from

excess cash flows or at the discretion of the borrower. As a result, actual maturity may be substantially less than the stated maturity. Senior secured corporate loans in which the Fund invests are generally readily marketable, but may be subject to certain restrictions on resale.

f. Income and Deferred Taxes

It is the Fund’s policy to qualify as a regulated investment company under the Internal Revenue Code. The Fund intends to distribute to shareholders substantially all of its taxable income and net realized gains to relieve it from federal income and if applicable, excise taxes. As a result, no provision for U.S. federal income taxes is required.

The Fund may be subject to foreign taxation related to income received, capital gains on the sale of securities and certain foreign currency transactions in the foreign jurisdictions in which it invests. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist in the foreign markets in which the Fund invests. When a capital gain tax is determined to apply the Fund records an estimated deferred tax liability in an amount that would be payable if the securities were disposed of on the valuation date.

The Fund recognizes the tax benefits of uncertain tax positions only when the position is “more likely than not” to be sustained upon examination by the tax authorities based on the technical merits of the tax position. As of December 31, 2014, and for all open tax years, the Fund has determined that no liability for unrecognized tax benefits is required in the Fund’s financial statements related to uncertain tax positions taken on a tax return (or expected to be taken on future tax returns). Open tax years are those that remain subject to examination and are based on each tax jurisdiction statute of limitation.

g. Security Transactions, Investment Income, Expenses and Distributions

Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Amortization of premium and accretion of discount on debt securities are included in interest income. Facility fees are recognized as income over the expected term of the loan. Dividend income is recorded on the ex-dividend date except for certain foreign securities where the dividend rate is not available. In such cases, the dividend is recorded as soon as the information is received by the Fund. Distributions to

 

FH-22    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Franklin High Income VIP Fund (continued)

shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with U.S. GAAP. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods.

Common expenses incurred by the Trust are allocated among the funds based on the ratio of net assets of each fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense.

Realized and unrealized gains and losses and net investment income, not including class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions, by class, are generally due to differences in class specific expenses.

h. Accounting Estimates

The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates.

i. Guarantees and Indemnifications

Under the Trust’s organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust.

Additionally, in the normal course of business, the Trust, on behalf of the Fund, enters into contracts with service providers that contain general indemnification clauses. The Trust’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote.

 

2. Shares of Beneficial Interest

At December 31, 2014, there were an unlimited number of shares authorized (without par value). Transactions in the Fund’s shares were as follows:

 

     Year Ended December 31,  
     2014          2013  
      Shares      Amount           Shares      Amount  
Class 1 Shares:              

Shares sold

      120,684       $ 836,723           296,126       $ 2,094,060   

Shares issued in reinvestment of distributions

      329,854         2,292,485           448,910         2,998,716   

Shares redeemed

      (832,231 )       (5,825,450 )         (1,160,278 )       (8,181,813 ) 
  

 

 

  

Net increase (decrease)

      (381,693 )     $ (2,696,242 )         (415,242 )     $ (3,089,037 ) 
  

 

 

  
Class 2 Shares:              

Shares sold

      13,791,290       $ 93,795,388           8,384,624       $ 56,291,181   

Shares issued in reinvestment of distributions

      2,754,907         18,595,621           3,085,044         20,021,935   

Shares redeemed

      (18,545,301 )       (125,318,795 )         (9,961,173 )       (67,904,960 ) 
  

 

 

  

Net increase (decrease)

      (1,999,104 )     $ (12,927,786 )         1,508,495       $ 8,408,156   
  

 

 

  
Class 4 Shares:              

Shares sold

      276,687       $ 1,933,896           232,056       $ 1,586,635   

Shares issued on reinvestment of distributions

      234,247         1,613,962           299,438         1,982,283   

Shares redeemed

      (581,606 )       (4,023,718 )         (515,161 )       (3,543,663 ) 
  

 

 

  

Net increase (decrease)

      (70,672 )     $ (475,860 )         16,333       $ 25,255   
  

 

 

  

 

    Annual Report     FH-23   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Franklin High Income VIP Fund (continued)

3. Transactions With Affiliates

Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Fund are also officers and/or directors of the following subsidiaries:

 

Subsidiary    Affiliation

Franklin Advisers, Inc. (Advisers)

   

Investment manager

Franklin Templeton Services, LLC (FT Services)

   

Administrative manager

Franklin Templeton Distributors, Inc. (Distributors)

   

Principal underwriter

Franklin Templeton Investor Services, LLC (Investor Services)

   

Transfer agent

a. Management Fees

The Fund pays an investment management fee to Advisers based on the average daily net assets of the Fund as follows:

 

Annualized Fee Rate    Net Assets

0.625%

   

Up to and including $100 million

0.500%

   

Over $100 million, up to and including $250 million

0.450%

   

Over $250 million, up to and including $7.5 billion

0.440%

   

Over $7.5 billion, up to and including $10 billion

0.430%

   

Over $10 billion, up to and including $12.5 billion

0.420%

   

Over $12.5 billion, up to and including $15 billion

0.400%

   

In excess of $15 billion

b. Administrative Fees

Under an agreement with Advisers, FT Services provides administrative services to the Fund. The fee is paid by Advisers based on the Fund’s average daily net assets, and is not an additional expense of the Fund.

c. Distribution Fees

The Board has adopted distribution plans for Class 2 and Class 4 shares pursuant to Rule 12b-1 under the 1940 Act. Under the Fund’s compensation distribution plans, the Fund pays Distributors for costs incurred in connection with the servicing, sale and distribution of the Fund’s shares up to 0.35% per year of its average daily net assets. Some distribution fees are not charged on shares held by affiliates. The Board has agreed to limit the current rate to 0.25% per year for Class 2. The plan year, for purposes of monitoring compliance with the maximum annual plan rate, is February 1 through January 31.

d. Transfer Agent Fees

Investor Services, under terms of an agreement, performs shareholder servicing for the Fund and is not paid by the Fund for the services.

4. Expense Offset Arrangement

The Fund has entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Fund’s custodian expenses. During the year ended December 31, 2014, the custodian fees were reduced as noted in the Statement of Operations.

 

FH-24    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Franklin High Income VIP Fund (continued)

5. Income Taxes

For tax purposes, capital losses may be carried over to offset future capital gains. Capital loss carryforwards with no expiration, if any, must be fully utilized before those losses with expiration dates.

At December 31, 2014, capital loss carryforwards were as follows:

 

Capital loss carryforwards subject to expiration:

   

2016

    $ 5,101,475   

2017

      10,621,353   
  

 

 

  

Total capital loss carryforwards

    $ 15,722,828   
  

 

 

  

During the year ended December 31, 2014, the Fund utilized $7,582,975 of capital loss carrryforwards.

The tax character of distributions paid during the years ended December 31, 2014 and 2013, was as follows:

 

     2014     2013  

Distributions paid from ordinary income

    $ 22,502,068      $ 25,002,934   
  

 

 

  

At December 31, 2014, the cost of investments, net unrealized appreciation (depreciation) and undistributed ordinary income for income tax purposes were as follows:

 

Cost of investments

    $ 332,967,756   
  

 

 

  

Unrealized appreciation

    $ 7,157,236   

Unrealized depreciation

      (20,807,034 ) 
  

 

 

  

Net unrealized appreciation (depreciation)

    $ (13,649,798 ) 
  

 

 

  

Distributable earnings – undistributed ordinary income

    $ 20,062,102   
  

 

 

  

Differences between income and/or capital gains as determined on a book basis and a tax basis are primarily due to differing treatments of defaulted securities and bond discounts and premiums.

6. Investment Transactions

Purchases and sales of investments (excluding short term securities) for the year ended December 31, 2014, aggregated $134,544,880 and $149,753,264 respectively.

7. Credit Risk and Defaulted Securities

At December 31, 2014, the Fund had 92.93% of its portfolio invested in high yield , senior secured floating rate notes, or other securities rated below investment grade. These securities may be more sensitive to economic conditions causing greater price volatility and are potentially subject to a greater risk of loss due to default than higher rated securities.

The Fund held defaulted securities and/or other securities for which the income has been deemed uncollectible. At December 31, 2014, the aggregate value of these securities was $1,802,691 representing 0.56% of the Fund’s net assets. The Fund discontinues accruing income on securities for which income has been deemed uncollectible and provides an estimate for losses on interest receivable. The securities have been identified on the accompanying Statement of Investments.

 

    Annual Report     FH-25   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Franklin High Income VIP Fund (continued)

8. Other Derivative Information

For the year ended December 31, 2014, the effect of the derivative contracts for the Fund’s Statement of Operations was as follows:

 

Derivatives Contracts
Not Accounted for
as Hedging Instruments		   Statement of Operations Locations   Realized
Gain (Loss)
for the Year		     Change In
Unrealized
Appreciation
(Depreciation)
for the Year		  

Foreign exchange contracts

   Net realized gain (loss) from foreign currency transactions / Net change in unrealized appreciation (depreciation) on translation of other assets and liabilities denominated in foreign currencies   $ 1,380      $ 2,567   

For the year ended December 31, 2014, the average month end fair value of derivatives represented 0.01% of average month end net assets. The average month end number of open derivatives contracts for the year was 2.

See note 1(d) regarding derivative financial instruments.

9. Credit Facility

The Fund, together with other U.S. registered and foreign investment funds (collectively, Borrowers), managed by Franklin Templeton Investments, are borrowers in a joint syndicated senior unsecured credit facility totaling $1.5 billion (Global Credit Facility) which matured on February 13, 2015. This Global Credit Facility provides a source of funds to the Borrowers for temporary and emergency purposes, including the ability to meet future unanticipated or unusually large redemption requests. The Borrowers expect to renew the Global Credit Facility for a total of $2 billion effective February 13, 2015, which matures on February 12, 2016.

Under the terms of the Global Credit Facility, the Fund shall, in addition to interest charged on any borrowings made by the Fund and other costs incurred by the Fund, pay its share of fees and expenses incurred in connection with the implementation and maintenance of the Global Credit Facility, based upon its relative share of the aggregate net assets of all of the Borrowers, including an annual commitment fee of 0.07% based upon the unused portion of the Global Credit Facility. These fees are reflected in other expenses on the Statement of Operations. During the year ended December 31, 2014, the Fund did not use the Global Credit Facility.

10. Fair Value Measurements

The Fund follows a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Fund’s own market assumptions (unobservable inputs). These inputs are used in determining the value of the Fund’s financial instruments and are summarized in the following fair value hierarchy:

 

  •   Level 1 – quoted prices in active markets for identical financial instruments
  •   Level 2 – other significant observable inputs (including quoted prices for similar financial instruments, interest rates, prepayment speed, credit risk, etc.)
  •   Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of financial instruments)

The input levels are not necessarily an indication of the risk or liquidity associated with financial instruments at that level.

For movements between the levels within the fair value hierarchy, the Fund has adopted a policy of recognizing the transfers as of the date of the underlying event which caused the movement.

 

FH-26    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Franklin High Income VIP Fund (continued)

A summary of inputs used as of December 31, 2014, in valuing the Fund’s assets carried at fair value, is as follows:

 

      Level 1     Level 2     Level 3     Total  
Assets:         

Investments in Securities:

         

Equity Investments:a

         

Materials

    $ —      $ 453,750      $ —      $ 453,750   

Transportation

      —        —        556,087        556,087   

Corporate Bonds

      —        299,165,223        21,441        299,186,664   

Senior Floating Rate Interests

      —        2,193,909        —        2,193,909   

Escrows and Litigation Trusts

      —        —        — b      —   

Short Term Investments

      —        16,927,549        —        16,927,549   
  

 

 

  

Total Investments in Securities

    $  —      $ 318,740,431     $ 577,528     $ 319,317,959   
  

 

 

  

aIncludes common and convertible preferred stocks.

bIncludes securities determined to have no value at December 31, 2014.

A reconciliation of assets in which Level 3 inputs are used in determining fair value is presented when there are significant Level 3 financial instruments at the end of the year.

11. Subsequent Events

The Fund has evaluated subsequent events through the issuance of the financial statements and determined that no events have occurred that require disclosure other than those already disclosed in the financial statements.

Abbreviations

 

Selected Portfolio
FRN   Floating Rate Note
PIK   Payment-In-Kind

 

    Annual Report     FH-27   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

Report of Independent Registered Public Accounting Firm

Franklin High Income VIP Fund

To the Board of Trustees and Shareholders of Franklin Templeton Variable Insurance Products Trust

In our opinion, the accompanying statement of assets and liabilities, including the statement of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Franklin High Income VIP Fund (the “Fund”) at December 31, 2014, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements 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 are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2014 by correspondence with the custodian and brokers, provides a reasonable basis for our opinion.

PricewaterhouseCoopers LLP

San Francisco, California

February 13, 2015

 

  FH-28       Annual Report    

Franklin Income VIP Fund

(Formerly, Franklin Income Securities Fund)

This annual report for Franklin Income VIP Fund covers the fiscal year ended December 31, 2014.

Class 4 Performance Summary as of December 31, 2014

Average annual total return of Class 4 shares* represents the average annual change in value, assuming reinvestment of dividends and capital gains. Average returns smooth out variations in returns, which can be significant; they are not the same as year-by-year results.

 

Periods ended 12/31/14    1-Year        5-Year        10-Year  

Average Annual Total Return

      +4.52%           +9.05%           +6.30%   

*For the period beginning 2/29/08, Class 4 performance reflects a 12b-1 fee expense of 0.35% per year, which affects future performance. Class 4 performance prior to 2/29/08 reflects historical Class 1 performance, which does not have a 12b-1 fee expense. Since 2/29/08 (effective date), the average annual total return of Class 4 shares was +6.44%.

Performance reflects the Fund’s Class 4 operating expenses, but does not include any contract fees, expenses or sales charges. If they had been included, performance would be lower. These charges and deductions, particularly for variable life policies, can have a significant effect on contract values and insurance benefits. See the contract prospectus for a complete description of these expenses, including sales charges.

Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares. Current performance may differ from figures shown.

Total Return Index Comparison for a Hypothetical $10,000 Investment (1/1/05–12/31/14)

The graph below shows the change in value of a hypothetical $10,000 investment in the Fund over the indicated period and includes reinvestment of any income or distributions. The Fund’s performance* is compared to the performance of the Standard & Poor’s® 500 Index (S&P 500®) and the Barclays U.S. Aggregate Index. One cannot invest directly in an index, and an index is not representative of the Fund’s portfolio. Please see Important Notes to Performance Information preceding the Fund Summaries.

 

LOGO

**Source: Morningstar. Please see Index Descriptions following the Fund Summaries.

 

    Annual Report     FI-1   

FRANKLIN INCOME VIP FUND

Fund Goal and Main Investments

Franklin Income VIP Fund seeks to maximize income while maintaining prospects for capital appreciation. Under normal market conditions, the Fund invests in both equity and debt securities.

Fund Risks

All investments involve risks, including possible loss of principal. The Fund’s share price and yield will be affected by interest rate movements. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in the Fund adjust to a rise in interest rates, the Fund’s share price may decline. Changes in the financial strength of a bond issuer or in a bond’s credit rating may affect its value. The Fund’s portfolio includes a substantial portion of higher yielding, lower rated corporate bonds because of the relatively higher yields they offer. Floating rate loans are lower rated, higher yielding instruments, which are subject to increased risk of default and can potentially result in loss of principal. These securities carry a greater degree of credit risk relative to investment-grade securities. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. The Fund is actively managed but there is no guarantee that the manager’s investment decisions will produce the desired results. The Fund’s prospectus also includes a description of the main investment risks.

Performance Overview

You can find the Fund’s one-year total return in the Performance Summary. For comparison, the Fund’s equity benchmark, the S&P 500, posted a +13.69% total return, and its fixed income benchmark, the Barclays U.S. Aggregate Index, produced a +5.97% total return for the same period.1

Economic and Market Overview

The U.S. economy continued to grow during the year ended December 31, 2014, underpinned in some quarters by manufacturing activity, consumer and business spending, and federal defense spending. Home sales experienced some weakness resulting from reduced inventory, higher mortgage rates and tight credit requirements but began to recover in May as mortgage rates declined. Home prices stayed higher than a year earlier. Retail sales generally improved, supported by job growth

and lower gasoline prices in the latter part of 2014. The unemployment rate declined to 5.6% in December 2014 from 6.7% in December 2013.2 Inflation, as measured by the Consumer Price Index, remained low.

In January 2014, the U.S. Federal Reserve Board (Fed) began reducing its large-scale bond purchases $10 billion a month and ended the buying program in October. But it continued its practice of maintaining holdings of longer term securities at sizable levels. The Fed believed underlying economic strength could support ongoing progress in labor market conditions. The Fed also noted that although inflation might remain low in the near term, the likelihood of inflation running persistently below 2% had diminished. Toward period-end, the Fed stated that it could be patient with regard to raising interest rates and that the interest rate might not rise for at least a couple of meetings, possibly implying at least the first two meetings of 2015.

Investor confidence grew during the period as corporate profits rose and the economy generally strengthened. The market endured sell-offs when many investors reacted to political instability in certain emerging markets, crises in Ukraine and the Middle East, weakness in Europe and Japan, and moderating economic data in China. U.S. stocks rose overall for the 12 months under review as the S&P 500 and Dow Jones Industrial Average reached all-time highs.3

The 10-year Treasury yield declined from 3.04% at the beginning of the period to 2.17% at period-end, as investors shifted to less risky assets given the crises in Ukraine and the Middle East, weak economic data in Europe and Japan, record-low bond yields and lower Treasury issuance.

Investment Strategy

We search for undervalued or out-of-favor securities we believe offer opportunities for income today and growth tomorrow. We generally perform independent analysis of the debt securities being considered for the Fund’s portfolio, rather than relying principally on ratings assigned by rating agencies. In analyzing debt and equity securities, we consider a variety of factors, including: a security’s relative value based on such factors as anticipated cash flow, interest or dividend coverage, asset coverage, and earnings prospects; the experience and strength of a company’s management; a company’s sensitivity to changes in interest rates and business conditions; a company’s debt maturity

 

 

1. Source: Morningstar.

One cannot invest directly in an index, and an index is not representative of the Fund’s portfolio. Please see Index Descriptions following the Fund Summaries.

2. Source: Bureau of Labor Statistics.

3. Please see Index Descriptions following the Fund Summaries.

 

FI-2    Annual Report    

FRANKLIN INCOME VIP FUND

schedules and borrowing requirements; and a company’s changing financial condition and market recognition of the change.

Manager’s Discussion

During the 12 months under review, we maintained a heavier position in equities relative to fixed income securities, which contributed positively to Fund performance. Although the Fund remained well diversified, we incrementally reduced the Fund’s overall equity weighting from 60.0% to 57.4% of total net assets by taking profits in select strong-performing equity holdings. The Fund’s fixed income exposure declined slightly from 35.7% to 34.5% of total net assets for the year under review. The Fund’s cash position increased from 4.3% to 8.1% of total net assets.

Equity securities generally performed well across many sectors, driven by continued, albeit modest, earnings growth, together with improving U.S. economic and employment outlooks. The Fund generated strong performance from a wide range of sectors including utilities, information technology and health care. In contrast, disappointing global economic activity and a worsening outlook weighed heavily on commodity prices and led to significant declines in security prices in the energy and materials sectors, which detracted from Fund performance.

The utilities sector represented one of the Fund’s largest weightings and was a key positive contributor. The sector delivered strong returns buoyed by the decline in long-term interest rates and the stable returns and growth generated by many electric and multi-utilities that attracted investors seeking yield. Individual utilities contributors included PG&E, an electric and natural gas utility that benefited from an improved regulatory environment and what we considered were attractive opportunities for rate base growth. Integrated utility Duke Energy performed well as investors gained increased understanding of the company’s future growth opportunities in generation and distribution. Other strong equity contributors included Intel, one of the world’s leaders in the design, manufacture and sale of semiconductor technology for a broad range of computing devices, which benefited from improved demand for personal computers, growth in mobile computing and “connected” devices, and a greater need for network security and advanced computing capability. Among equity financials holdings, Wells Fargo & Co. and Bank of America positively impacted results largely because of improved loan growth and an improving regulatory environment that contributed to strengthened financial profiles and higher dividends for shareholders.

Equity performance detractors were concentrated in the energy and materials sectors, as slowing global economic growth

 

Portfolio Breakdown       
12/31/14       
      % of Total
Net Assets		  
Equity*      57.4%   

Utilities

      13.4%   

Energy

      9.2%   

Materials

      8.2%   

Financials

      5.8%   

Health Care

      4.8%   

Industrials

      4.7%   

Information Technology

      4.2%   

Other

      7.1%   
Fixed Income      34.5%   

Energy

      7.7%   

Consumer Discretionary

      6.5%   

Information Technology

      4.7%   

Telecommunication Services

      3.5%   

Financials

      3.3%   

Materials

      2.5%   

Health Care

      2.0%   

Other

      4.3%   
Short-Term Investments & Other Net Assets      8.1%   

*Includes convertible bonds.

 

reduced demand for many commodities and as advances in extraction technologies led to supply growth, especially from oil and gas shale fields. The collapse of crude oil prices in the fourth quarter of 2014 weighed on share prices for many multi-national integrated oil companies, particularly Fund holdings in BP, Chevron and Royal Dutch Shell. Similarly, the more focused upstream producers and independent exploration and production companies such as Canadian Oil Sands, SandRidge Energy and Cobalt International Energy, a new holding, detracted with the pullback in global oil prices. Within the materials sector, our holdings in diversified mining companies such as Rio Tinto, BHP Billiton and Freeport-McMoRan hindered performance.

Fixed income markets generally performed well during the period despite lagging considerably behind equity markets as modest income and price returns helped the Barclays U.S. Aggregate Index deliver a moderate total return. The primary positive contributor to fixed income returns was the continued favorable environment for long-term interest rates, which led the 10-year U.S. Treasury to rally over the course of the year and its yield to correspondingly fall. In sharp contrast to their investment grade counterparts, noninvestment-grade fixed

 

    Annual Report     FI-3   

FRANKLIN INCOME VIP FUND

Top Five Equity Holdings       
12/31/14       
Company
Sector/Industry		    % of Total
Net Assets		  

Bank of America Corp.*

Financials

      1.9%   

Royal Dutch Shell PLC, A, ADR (U.K.)

Energy

      1.8%   

Wells Fargo & Co.

Financials

      1.7%   

General Electric Co.

Industrials

      1.7%   

The Dow Chemical Co.

Materials

      1.6%   

*Includes equity-linked notes.

income markets struggled as investors became wary of sector valuations and as credit spreads widened.

The decline in long-term interest rates during the period provided fixed income markets with favorable conditions that enabled many of the Fund’s high yield corporate bonds to generate positive returns; however, the Fund’s corporate bonds overall had a small negative return. Communications4 sector holdings including Charter Communications5 and Cablevision Systems benefited from demand for video and data services, and iHeart Communications continued to improve its liquidity and financial positioning amid stable demand from advertisers. Technology6 sector positions were led by First Data, a leader in financial transaction systems and processing, and Freescale Semiconductor, a leader in embedded semiconductor processing solutions for the automotive, consumer, industrial and networking markets.

As was the case among the Fund’s equity holdings, major fixed income detractors were concentrated in the commodity-related energy and basic industry7 sectors. The high yield bonds and term loans of exploration and production and oilfield services and equipment companies were severely hurt by lower commodity prices that reduced cash flow and impacted the upstream industry’s spending plans. Investor concerns regarding the long-term viability of many of the more highly leveraged producers weighed on the securities prices of Samson Investment, W&T Offshore, Energy XXI Gulf Coast and

 

Top Five Fixed Income and

Senior Floating Rate Interests Holdings*

       
12/31/14       
Issuer
Sector/Industry		    % of Total
Net Assets		  

First Data Corp.

Information Technology

      2.8%   

iHeartCommunications Inc.

Consumer Discretionary

      1.8%   

JPMorgan Chase & Co.

Financials

      1.5%   

Sprint Nextel Corp.

Telecommunication Services

      1.1%   

HCA Inc.

Health Care

      1.0%   

*Does not include convertible bonds.

The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund’s Statement of Investments (SOI).

SandRidge Energy. Basic industry holdings, particularly those engaged in coal mining, slumped further as reduced demand kept pressure on pricing. Among these, Peabody Energy, Alpha Natural Resources, Arch Coal and Walter Energy detracted from results during the period.

Thank you for your participation in Franklin Income VIP Fund. We look forward to serving your future investment needs.

The foregoing information reflects our analysis, opinions and portfolio holdings as of December 31, 2014, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.

 

4. Communications companies are in consumer discretionary and telecommunication services in the fixed income section of the SOI.

5. Charter Communications comprises CCO Holdings in the SOI.

6. Technology holdings are in information technology in the fixed income section of the SOI.

7. Basic industry holdings are in energy and materials in the fixed income section of the SOI.

 

FI-4    Annual Report    

FRANKLIN INCOME VIP FUND

Class 4 Fund Expenses

As an investor in a variable insurance contract (Contract) that indirectly provides for investment in an underlying mutual fund, you can incur transaction and/or ongoing expenses at both the Fund level and the Contract level.

 

•   Transaction expenses can include sales charges (loads) on purchases, redemption fees, surrender fees, transfer fees and premium taxes.

 

•   Ongoing expenses can include management fees, distribution and service (12b-1) fees, contract fees, annual maintenance fees, mortality and expense risk fees and other fees and expenses. All mutual funds and Contracts have some types of ongoing expenses.

The expenses shown in the table are meant to highlight ongoing expenses at the Fund level only and do not include ongoing expenses at the Contract level, or transaction expenses at either the Fund or Contract level. While the Fund does not have transaction expenses, if the transaction and ongoing expenses at the Contract level were included, the expenses shown below would be higher. You should consult your Contract prospectus or disclosure document for more information.

The table shows Fund-level ongoing expenses and can help you understand these expenses and compare them with those of other mutual funds offered through the Contract. The table assumes a $1,000 investment held for the six months indicated. Please refer to the Fund prospectus for additional information on operating expenses.

Actual Fund Expenses

The first line (Actual) of the table provides actual account values and expenses. The “Ending Account Value” is derived from the Fund’s actual return, which includes the effect of ongoing Fund expenses, but does not include the effect of ongoing Contract expenses.

You can estimate the Fund-level expenses you incurred during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:

 

1. Divide your account value by $1,000.

If an account had an $8,600 value,

then $8,600 ÷ $1,000 = 8.6.

 

2. Multiply the result by the number under the heading “Fund-Level Expenses Incurred During Period.”

If Fund-Level Expenses Incurred During Period were $7.50, then 8.6 × $7.50 = $64.50.

In this illustration, the estimated expenses incurred this period at the Fund level are $64.50.

Hypothetical Example for Comparison with Other Mutual Funds

Information in the second line (Hypothetical) of the table can help you compare ongoing expenses of the Fund with those of other mutual funds offered through the Contract. This information may not be used to estimate the actual ending account balance or expenses you incurred during the period. The hypothetical “Ending Account Value” is based on the Fund’s actual expense ratio and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Fund-Level Expenses Incurred During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds offered through a Contract.

 
Class 4  

Beginning Account

Value 7/1/14

      Ending Account
Value 12/31/14		     

Fund-Level Expenses
Incurred During Period*

7/1/14–12/31/14

  

Actual

     $1,000         $   953.20         $4.04   

Hypothetical (5% return before expenses)

     $1,000         $1,021.07         $4.18   

*Expenses are calculated using the most recent six-month annualized expense ratio for the Fund’s Class 4 shares (0.82%), which does not include any ongoing expenses of the Contract for which the Fund is an investment option, multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period.

 

    Annual Report     FI-5   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

Financial Highlights

Franklin Income VIP Fund

     Year Ended December 31,  
      2014      2013      2012      2011      2010  
Class 1               
Per share operating performance
(for a share outstanding throughout the year)		               

Net asset value, beginning of year

      $16.53         $15.47         $14.68         $15.16         $14.43   
  

 

 

  
Income from investment operationsa:               

Net investment incomeb

      0.72         0.81         0.91         0.96         0.89   

Net realized and unrealized gains (losses)

      0.11         1.31         0.90         (0.54 )       0.85   
  

 

 

  

Total from investment operations

      0.83         2.12         1.81         0.42         1.74   
  

 

 

  

Less distributions from net investment income

      (0.88 )       (1.06 )       (1.02 )       (0.90 )       (1.01 ) 
  

 

 

  

Net asset value, end of year

      $16.48         $16.53         $15.47         $14.68         $15.16   
  

 

 

  

Total returnc

      4.92%         14.18%         12.91%         2.71%         12.87%   
Ratios to average net assets               

Expenses

      0.47% d       0.47% d       0.47%         0.47% d       0.47% d 

Net investment income

      4.26%         5.07%         6.03%         6.35%         6.28%   
Supplemental data               

Net assets, end of year (000’s)

      $714,664         $695,004         $584,391         $1,300,935         $1,449,028   

Portfolio turnover rate

      24.77%         21.71%         26.66% e       28.65%         41.65%   

aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.

bBased on average daily shares outstanding.

cTotal return does not include fees, charges or expenses imposed by the variable annuity and life insurance contracts for which Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle.

dBenefit of expense reduction rounds to less than 0.01%.

eExcludes the value of portfolio securities delivered as a result of a redemption in-kind.

 

FI-6    Annual Report   |    The accompanying notes are an integral part of these financial statements.    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FINANCIAL HIGHLIGHTS

Franklin Income VIP Fund (continued)

     Year Ended December 31,  
      2014      2013      2012      2011      2010  
Class 2               
Per share operating performance
(for a share outstanding throughout the year)		               

Net asset value, beginning of year

      $16.07         $15.07         $14.32         $14.82         $14.12   
  

 

 

  
Income from investment operationsa:               

Net investment incomeb

      0.66         0.75         0.85         0.90         0.86   

Net realized and unrealized gains (losses)

      0.11         1.27         0.88         (0.53 )       0.82   
  

 

 

  

Total from investment operations

      0.77         2.02         1.73         0.37         1.68   
  

 

 

  

Less distributions from net investment income

      (0.84 )       (1.02 )       (0.98 )       (0.87 )       (0.98 ) 
  

 

 

  

Net asset value, end of year

      $16.00         $16.07         $15.07         $14.32         $14.82   
  

 

 

  

Total returnc

      4.62%         13.94%         12.65%         2.38%         12.67%   
Ratios to average net assets               

Expenses

      0.72% d       0.72% d       0.72%         0.72% d       0.72% d 

Net investment income

      4.01%         4.82%         5.78%         6.10%         6.03%   
Supplemental data               

Net assets, end of year (000’s)

      $6,022,804         $6,188,045         $6,182,997         $5,915,637         $6,309,207   

Portfolio turnover rate

      24.77%         21.71%         26.66% e       28.65%         41.65%   

aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.

bBased on average daily shares outstanding.

cTotal return does not include fees, charges or expenses imposed by the variable annuity and life insurance contracts for which Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle.

dBenefit of expense reduction rounds to less than 0.01%.

eExcludes the value of portfolio securities delivered as a result of a redemption in-kind.

 

    The accompanying notes are an integral part of these financial statements.    |   Annual Report     FI-7   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FINANCIAL HIGHLIGHTS

Franklin Income VIP Fund (continued)

     Year Ended December 31,  
      2014      2013      2012      2011      2010  
Class 4               
Per share operating performance
(for a share outstanding throughout the year)		               

Net asset value, beginning of year

      $16.36         $15.32         $14.54         $15.04         $14.33   
  

 

 

  
Income from investment operationsa:               

Net investment incomeb

      0.66         0.75         0.85         0.90         0.85   

Net realized and unrealized gains (losses)

      0.11         1.30         0.90         (0.54 )       0.84   
  

 

 

  

Total from investment operations

      0.77         2.05         1.75         0.36         1.69   
  

 

 

  

Less distributions from net investment income

      (0.82 )       (1.01 )       (0.97 )       (0.86 )       (0.98 ) 
  

 

 

  

Net asset value, end of year

      $16.31         $16.36         $15.32         $14.54         $15.04   
  

 

 

  

Total returnc

      4.52%         13.85%         12.56%         2.29%         12.54%   
Ratios to average net assets               

Expenses

      0.82% d       0.82% d       0.82%         0.82% d       0.82% d 

Net investment income

      3.91%         4.72%         5.68%         6.00%         5.93%   
Supplemental data               

Net assets, end of year (000’s)

      $378,545         $397,652         $436,405         $431,435         $415,541   

Portfolio turnover rate

      24.77%         21.71%         26.66% e       28.65%         41.65%   

aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.

bBased on average daily shares outstanding.

cTotal return does not include fees, charges or expenses imposed by the variable annuity and life insurance contracts for which Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle.

dBenefit of expense reduction rounds to less than 0.01%.

eExcludes the value of portfolio securities delivered as a result of a redemption in-kind.

 

FI-8    Annual Report   |    The accompanying notes are an integral part of these financial statements.    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

 

Statement of Investments, December 31, 2014

 

Franklin Income VIP Fund           
           Country     Shares/Warrants        Value  
 

Common Stocks and Other Equity Interests 49.9%

          
 

Consumer Discretionary 3.2%

          
a  

Dex Media Inc.

      United States        458,876         $ 4,116,118   
 

Ford Motor Co.

      United States        3,750,000           58,125,000   
 

General Motors Co.

      United States        1,839,100           64,202,981   
 

Las Vegas Sands Corp.

      United States        200,000           11,632,000   
 

Target Corp.

      United States        1,181,100           89,657,301   
           

 

 

  
              227,733,400   
           

 

 

  
 

Consumer Staples 0.8%

          
 

PepsiCo Inc.

      United States        584,000           55,223,040   
           

 

 

  
 

Energy 7.7%

          
 

BP PLC, ADR

      United Kingdom        2,942,400           112,164,288   
 

Canadian Oil Sands Ltd.

      Canada        2,000,000           17,946,179   
 

Chevron Corp.

      United States        700,000           78,526,000   
 

Devon Energy Corp.

      United States        650,000           39,786,500   
 

Eni SpA

      Italy        776,500           13,633,088   
 

Exxon Mobil Corp.

      United States        484,850           44,824,382   
 

Halliburton Co.

      United States        250,000           9,832,500   
 

Occidental Petroleum Corp.

      United States        150,000           12,091,500   
 

Royal Dutch Shell PLC, A, ADR

      United Kingdom        1,951,748           130,669,529   
 

Schlumberger Ltd.

      United States        250,000           21,352,500   
 

Spectra Energy Corp.

      United States        600,000           21,780,000   
 

Total SA, B, ADR

      France        932,900           47,764,480   
           

 

 

  
              550,370,946   
           

 

 

  
 

Financials 2.7%

          
 

Bank of America Corp.

      United States        473,900           8,478,071   
 

Commonwealth Bank of Australia

      Australia        374,700           26,203,980   
 

HSBC Holdings PLC

      United Kingdom        1,841,457           17,468,518   
 

JPMorgan Chase & Co.

      United States        735,100           46,002,558   
 

MetLife Inc.

      United States        761,108           41,168,332   
 

Wells Fargo & Co.

      United States        1,000,000           54,820,000   
           

 

 

  
              194,141,459   
           

 

 

  
 

Health Care 4.8%

          
 

Eli Lilly & Co.

      United States        434,800           29,996,852   
 

Johnson & Johnson

      United States        417,800           43,689,346   
 

Merck & Co. Inc.

      United States        1,523,200           86,502,528   
 

Pfizer Inc.

      United States        3,638,975           113,354,071   
 

Roche Holding AG

      Switzerland        92,619           25,143,702   
 

Sanofi, ADR

      France        868,292           39,602,798   
           

 

 

  
              338,289,297   
           

 

 

  
 

Industrials 4.5%

          
 

The Boeing Co.

      United States        231,800           30,129,364   
a  

CEVA Holdings LLC

      United Kingdom        13,012           10,084,502   
 

Deere & Co.

      United States        224,200           19,834,974   
 

General Electric Co.

      United States        4,656,200           117,662,174   
 

Lockheed Martin Corp.

      United States        253,200           48,758,724   
 

Raytheon Co.

      United States        150,000           16,225,500   
 

Republic Services Inc.

      United States        527,300           21,223,825   
 

United Technologies Corp.

      United States        75,000           8,625,000   
 

Waste Management Inc.

      United States        928,200           47,635,224   
           

 

 

  
              320,179,287   
           

 

 

  

 

    Annual Report     FI-9   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

 

Franklin Income VIP Fund (continued)

 

           Country     Shares/Warrants        Value  
 

Common Stocks and Other Equity Interests (continued)

          
 

Information Technology 3.4%

          
 

Apple Inc.

      United States        350,000         $ 38,633,000   
 

Cisco Systems Inc.

      United States        1,400,000           38,941,000   
a,b  

First Data Holdings Inc., B

      United States        4,929,600           20,984,469   
 

Intel Corp.

      United States        1,500,000           54,435,000   
 

Microsoft Corp.

      United States        687,500           31,934,375   
 

Texas Instruments Inc.

      United States        924,800           49,444,432   
 

Xilinx Inc.

      United States        183,400           7,939,386   
           

 

 

  
              242,311,662   
           

 

 

  
 

Materials 7.7%

          
 

Agrium Inc.

      Canada        650,000           61,568,000   
 

Barrick Gold Corp.

      Canada        1,000,000           10,750,000   
 

BASF SE

      Germany        250,000           21,138,699   
 

BHP Billiton PLC

      Australia        2,784,192           60,257,011   
 

The Dow Chemical Co.

      United States        2,525,700           115,197,177   
 

E. I. du Pont de Nemours and Co.

      United States        1,047,500           77,452,150   
 

Freeport-McMoRan Inc., B

      United States        1,500,000           35,040,000   
 

Goldcorp Inc.

      Canada        1,508,600           27,939,272   
 

LyondellBasell Industries NV, A

      United States        500,000           39,695,000   
 

The Mosaic Co.

      United States        300,000           13,695,000   
 

Rio Tinto PLC, ADR

      United Kingdom        1,845,100           84,985,306   
           

 

 

  
              547,717,615   
           

 

 

  
 

Telecommunication Services 2.1%

          
 

AT&T Inc.

      United States        1,621,000           54,449,390   
 

CenturyLink Inc.

      United States        500,000           19,790,000   
 

Telstra Corp. Ltd.

      Australia        3,446,331           16,799,158   
 

Verizon Communications Inc.

      United States        1,123,892           52,575,668   
 

Vodafone Group PLC

      United Kingdom        2,115,279           7,340,960   
           

 

 

  
              150,955,176   
           

 

 

  
 

Utilities 13.0%

          
 

AGL Resources Inc.

      United States        290,732           15,847,801   
 

American Electric Power Co. Inc.

      United States        400,000           24,288,000   
 

Dominion Resources Inc.

      United States        700,000           53,830,000   
 

Duke Energy Corp.

      United States        1,302,500           108,810,850   
a,c  

Dynegy Inc.

      United States        1,250,000           37,937,500   
a,c  

Dynegy Inc., wts., 10/02/17

      United States        242,666           977,944   
 

Entergy Corp.

      United States        538,100           47,072,988   
 

Exelon Corp.

      United States        2,877,200           106,686,576   
 

FirstEnergy Corp.

      United States        845,900           32,981,641   
d  

HK Electric Investments & HK Electric Investments Ltd., 144A

      Hong Kong        3,117,900           2,058,776   
 

NextEra Energy Inc.

      United States        651,300           69,226,677   
 

PG&E Corp.

      United States        1,935,300           103,035,372   
 

Pinnacle West Capital Corp.

      United States        260,500           17,794,755   
 

PPL Corp.

      United States        1,365,400           49,604,982   
 

Public Service Enterprise Group Inc.

      United States        923,500           38,242,135   
 

Sempra Energy

      United States        368,300           41,013,888   
 

The Southern Co.

      United States        1,888,200           92,729,502   
 

TECO Energy Inc.

      United States        1,253,700           25,688,313   

 

FI-10    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

Franklin Income VIP Fund (continued)

           Country     Shares/Warrants        Value  
 

Common Stocks and Other Equity Interests (continued)

          
 

Utilities (continued)

          
 

Xcel Energy Inc.

      United States        1,510,964         $ 54,273,827   
           

 

 

  
              922,101,527   
           

 

 

  
 

Total Common Stocks and Other Equity Interests (Cost $2,892,681,102)

             3,549,023,409   
           

 

 

  
e  

Equity-Linked Securities 2.7%

          
 

Consumer Staples 0.3%

          
d  

Citigroup Inc. into Whole Foods Market Inc., 7.00%, 144A

      United States        485,000           21,611,309   
           

 

 

  
 

Energy 1.0%

          
d  

Citigroup Inc. into Cabot Oil & Gas Corp., 6.00%, 144A

      United States        696,000           20,889,883   
d  

Credit Suisse New York into Baker Hughes Inc., 6.00%, 144A

      United States        200,000           10,862,620   
d  

JPMorgan Chase & Co. into Anadarko Petroleum Corp., 7.00%, 144A

      United States        470,000           38,933,296   
           

 

 

  
              70,685,799   
           

 

 

  
 

Financials 0.6%

          
d  

The Goldman Sachs Group into Bank of America Corp., 6.00%, 144A

      United States        2,150,000           38,714,190   
           

 

 

  
 

Information Technology 0.8%

          
d  

Bank of America Corp. into Intel Corp., 6.50%, 144A

      United States        1,045,000           38,106,970   
d  

Bank of America Corp. into Freescale Semiconductor Ltd., 7.00%, 144A

      United States        950,000           21,726,690   
           

 

 

  
              59,833,660   
           

 

 

  
 

Total Equity-Linked Securities (Cost $186,768,257)

             190,844,958   
           

 

 

  
 

Convertible Preferred Stocks 3.7%

          
 

Consumer Discretionary 0.2%

          
 

Fiat Chrysler Automobiles NV, 7.875%, cvt. pfd.

      United Kingdom        100,000           10,750,000   
           

 

 

  
 

Energy 0.2%

          
 

Halcon Resources Corp., 5.75%, cvt. pfd., A

      United States        10,000           3,258,750   
 

Sanchez Energy Corp., 6.50%, cvt. pfd., B

      United States        200,000           6,836,000   
 

SandRidge Energy Inc., 7.00%, cvt. pfd.

      United States        121,600           6,791,360   
           

 

 

  
              16,886,110   
           

 

 

  
 

Financials 2.3%

          
 

Bank of America Corp., 7.25%, cvt. pfd., L

      United States        78,200           90,944,254   
 

FelCor Lodging Trust Inc., 7.80%, cvt. pfd., A

      United States        167,325           4,273,480   
a  

FNMA, 5.375%, cvt. pfd.

      United States        475           5,818,750   
 

Wells Fargo & Co., 7.50%, cvt. pfd., A

      United States        53,000           64,262,235   
           

 

 

  
              165,298,719   
           

 

 

  
 

Industrials 0.2%

          
a  

CEVA Holdings LLC, cvt. pfd., A-1

      United Kingdom        397           397,000   
a  

CEVA Holdings LLC, cvt. pfd., A-2

      United Kingdom        14,711           11,400,948   
           

 

 

  
              11,797,948   
           

 

 

  
 

Materials 0.4%

          
 

Alcoa Inc., 5.375%, cvt. pfd.

      United States        500,000           25,225,000   
 

ArcelorMittal, 6.00%, cvt. pfd.

      Luxembourg        160,000           2,768,000   
           

 

 

  
              27,993,000   
           

 

 

  

 

    Annual Report     FI-11   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

Franklin Income VIP Fund (continued)

           Country     Shares/Warrants     Value  
 

Convertible Preferred Stocks (continued)

       
 

Utilities 0.4%

       
 

Dominion Resources Inc., 6.00%, cvt. pfd., B

      United States        145,000      $ 8,717,400   
 

Dominion Resources Inc., 6.125%, cvt. pfd., A

      United States        145,000        8,701,450   
 

Dominion Resources Inc., 6.375%, cvt. pfd., A

      United States        162,000        8,425,620   
 

NextEra Energy Inc., 5.889%, cvt. pfd.

      United States        83,100        5,562,714   
        

 

 

  
           31,407,184   
        

 

 

  
 

Total Convertible Preferred Stocks
(Cost $275,974,258)

          264,132,961   
        

 

 

  
 

Preferred Stocks 0.2%

       
 

Financials 0.2%

       
a  

FHLMC, 8.375%, pfd., Z

      United States        745,175        2,943,441   
a  

FNMA, 6.75%, pfd.

      United States        406,950        1,216,781   
a  

FNMA, 7.625%, pfd., R

      United States        694,650        2,354,864   
a  

FNMA, 8.25%, pfd.

      United States        739,375        2,861,381   
 

Morgan Stanley, 6.375%, pfd., I

      United States        350,000        8,858,500   
        

 

 

  
 

Total Preferred Stocks (Cost $73,403,750)

          18,234,967   
        

 

 

  
               Principal Amount*        
 

Convertible Bonds 0.9%

       
 

Consumer Discretionary 0.5%

       
d  

Volkswagen International Finance, cvt., sub. note, 144A, 5.50%, 11/09/15

      Germany        25,000,000  EUR      33,647,225   
        

 

 

  
 

Energy 0.3%

       
d,f  

American Energy-Permian Basin LLC, cvt., 144A, PIK, 8.00%, 5/01/22

      United States        5,000,000        4,339,320   
 

Cobalt International Energy Inc., cvt., senior bond, 3.125%,
5/15/24

      United States        25,000,000        16,890,625   
        

 

 

  
           21,229,945   
        

 

 

  
 

Materials 0.1%

       
 

Cemex SAB de CV, cvt., sub. note, 3.75%, 3/15/18

      Mexico        5,690,000        6,932,241   
        

 

 

  
 

Total Convertible Bonds (Cost $67,008,977)

          61,809,411   
        

 

 

  
 

Corporate Bonds 32.1%

       
 

Consumer Discretionary 5.6%

       
d  

1011778 BC ULC/New Red Finance Inc., secured note, second lien, 144A, 6.00%, 4/01/22

      Canada        10,000,000        10,300,000   
d  

Academy Ltd./Finance Corp., senior note, 144A, 9.25%, 8/01/19

      United States        5,300,000        5,591,500   
d  

Altice SA, senior secured note, 144A, 7.75%, 5/15/22

      Luxembourg        3,000,000        3,011,250   
 

Cablevision Systems Corp., senior note, 7.75%, 4/15/18

      United States        10,000,000        11,037,500   
d  

CBS Outdoor Americas Capital LLC/CBS Outdoor Americas Capital Corp.,

       
 

senior bond, 144A, 5.625%, 2/15/24

      United States        1,600,000        1,612,000   
 

senior note, 144A, 5.25%, 2/15/22

      United States        1,600,000        1,616,000   
 

CCO Holdings LLC/CCO Holdings Capital Corp.,

       
 

senior bond, 5.25%, 9/30/22

      United States        2,700,000        2,703,375   
 

senior note, 6.50%, 4/30/21

      United States        15,000,000        15,806,250   
 

Chrysler Group LLC/CG Co-Issuer Inc., senior secured note,

       
 

8.00%, 6/15/19

      United States        25,000,000        26,406,250   
 

8.25%, 6/15/21

      United States        15,400,000        17,132,500   

 

FI-12    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

Franklin Income VIP Fund (continued)

           Country     Principal Amount*        Value  
 

Corporate Bonds (continued)

          
 

Consumer Discretionary (continued)

          
 

Clear Channel Worldwide Holdings Inc., senior sub. note, 7.625%, 3/15/20

      United States        8,750,000         $ 9,253,125   
 

CSC Holdings LLC, senior note, 6.75%, 11/15/21

      United States        15,400,000           17,074,750   
g  

Cumulus Media Holdings Inc., senior note, 7.75%, 5/01/19

      United States        10,000,000           10,137,500   
f  

Dex Media Inc., senior sub. note, PIK, 14.00%, 1/29/17

      United States        16,544,628           7,235,727   
 

DISH DBS Corp.,

          
 

senior bond, 5.00%, 3/15/23

      United States        15,000,000           14,550,000   
 

d senior note, 144A, 5.875%, 11/15/24

      United States        8,300,000           8,362,250   
 

Dollar General Corp., senior bond, 3.25%, 4/15/23

      United States        5,000,000           4,559,320   
 

The Goodyear Tire & Rubber Co., senior note,

          
 

8.25%, 8/15/20

      United States        4,900,000           5,218,500   
 

6.50%, 3/01/21

      United States        12,600,000           13,419,000   
 

HD Supply Inc.,

          
 

d first lien, 144A, 5.25%, 12/15/21

      United States        6,000,000           6,120,000   
 

senior note, 7.50%, 7/15/20

      United States        10,000,000           10,525,000   
 

iHeartCommunications Inc.,

          
 

f senior note, PIK, 14.00%, 2/01/21

      United States        13,465,320           10,933,611   
 

senior secured bond, first lien, 9.00%, 3/01/21

      United States        24,100,000           23,708,375   
 

senior secured note, first lien, 9.00%, 12/15/19

      United States        18,000,000           17,797,500   
 

d senior secured note, first lien, 144A, 9.00%, 9/15/22

      United States        14,600,000           14,344,500   
 

KB Home,

          
 

senior bond, 7.50%, 9/15/22

      United States        6,500,000           6,922,500   
 

senior note, 7.25%, 6/15/18

      United States        10,600,000           11,342,000   
d  

Laureate Education Inc., 144A, 9.25%, 9/01/19

      United States        5,000,000           5,175,000   
 

MGM Resorts International, senior note,

          
 

10.00%, 11/01/16

      United States        10,000,000           11,175,000   
 

8.625%, 2/01/19

      United States        3,700,000           4,213,375   
 

5.25%, 3/31/20

      United States        5,000,000           4,975,000   
 

6.75%, 10/01/20

      United States        5,500,000           5,788,750   
d  

Numericable Group SA, senior note, first lien, 144A, 6.00%, 5/15/22

      France        10,000,000           10,056,500   
 

Shea Homes LP/Funding Corp., senior secured note, 8.625%, 5/15/19

      United States        6,700,000           7,068,500   
d  

Sirius XM Radio Inc.,

          
 

senior bond, 144A, 6.00%, 7/15/24

      United States        14,600,000           15,001,500   
 

senior note, 144A, 5.75%, 8/01/21

      United States        5,000,000           5,137,500   
d  

Univision Communications Inc., senior secured note, 144A,

          
 

6.875%, 5/15/19

      United States        15,000,000           15,656,250   
 

5.125%, 5/15/23

      United States        10,000,000           10,150,000   
d  

Virgin Media Secured Finance PLC, senior secured bond, first lien, 144A, 5.50%, 1/15/25

      United Kingdom        7,000,000           7,249,375   
 

Visant Corp., senior note, 10.00%, 10/01/17

      United States        12,800,000           11,264,000   
           

 

 

  
              399,631,033   
           

 

 

  
 

Consumer Staples 0.8%

          
d  

Albertsons Holdings/Saturn Acquisition, senior note, 144A, 7.75%, 10/15/22

      United States        5,000,000           5,150,000   
 

Alliance One International Inc., secured note, second lien, 9.875%, 7/15/21

      United States        10,000,000           8,975,000   
d  

JBS USA LLC/Finance Inc., senior note, 144A,

          
 

8.25%, 2/01/20

      United States        10,000,000           10,575,000   
 

7.25%, 6/01/21

      United States        17,400,000           18,009,000   
 

U.S. Foods Inc., 8.50%, 6/30/19

      United States        10,000,000           10,610,000   
           

 

 

  
              53,319,000   
           

 

 

  

 

    Annual Report     FI-13   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

Franklin Income VIP Fund (continued)

           Country     Principal Amount*        Value  
 

Corporate Bonds (continued)

          
 

Energy 7.2%

          
 

Alpha Natural Resources Inc., senior note, 6.25%, 6/01/21

      United States        2,500,000         $ 712,500   
d  

American Energy-Woodford LLC/Finance Corp., senior note, 144A, 9.00%, 9/15/22

      United States        5,000,000           3,250,000   
d  

Antero Resources Corp., senior note, 144A, 5.125%, 12/01/22

      United States        6,000,000           5,685,000   
 

Antero Resources Finance Corp., senior note, 5.375%, 11/01/21

      United States        2,200,000           2,136,750   
 

Arch Coal Inc., senior note,

          
 

g 7.00%, 6/15/19

      United States        5,500,000           1,677,500   
 

7.25%, 6/15/21

      United States        12,500,000           3,703,125   
 

Bill Barrett Corp., senior note,

          
 

7.625%, 10/01/19

      United States        4,000,000           3,660,000   
 

7.00%, 10/15/22

      United States        10,000,000           8,100,000   
 

BreitBurn Energy Partners LP/BreitBurn Finance Corp., senior bond, 7.875%, 4/15/22

      United States        10,000,000           7,775,000   
d  

California Resources Corp.,

          
 

senior bond, 144A, 6.00%, 11/15/24

      United States        5,500,000           4,675,000   
 

senior note, 144A, 5.50%, 9/15/21

      United States        12,500,000           10,750,000   
d  

Calumet Specialty Products Partners LP/Calumet Finance Corp., senior note, 144A, 6.50%, 4/15/21

      United States        5,000,000           4,487,500   
 

CGG SA, senior note, 6.50%, 6/01/21

      France        11,100,000           8,491,500   
 

CHC Helicopter SA, senior secured note, first lien, 9.25%, 10/15/20

      Canada        22,500,000           21,937,500   
 

Chesapeake Energy Corp., senior note, 5.375%, 6/15/21

      United States        15,000,000           15,065,625   
 

Clayton Williams Energy Inc., senior note, 7.75%, 4/01/19

      United States        1,500,000           1,282,500   
 

CONSOL Energy Inc., senior note,

          
 

8.25%, 4/01/20

      United States        1,800,000           1,874,250   
 

 d144A, 5.875%, 4/15/22

      United States        21,500,000           20,102,500   
 

Denbury Resources Inc.,

          
 

senior note, 5.50%, 5/01/22

      United States        17,000,000           15,640,000   
 

senior sub. note, 4.625%, 7/15/23

      United States        5,000,000           4,362,500   
 

Energy XXI Gulf Coast Inc., senior note,

          
 

9.25%, 12/15/17

      United States        20,764,000           13,808,060   
 

d 144A, 6.875%, 3/15/24

      United States        11,810,000           6,406,925   
d  

EnQuest PLC, senior note, 144A, 7.00%, 4/15/22

      United Kingdom        15,000,000           9,215,625   
 

EP Energy LLC/Everest Acquisition Finance Inc., senior note, 9.375%, 5/01/20

      United States        10,000,000           10,150,000   
 

EXCO Resources Inc., senior note, 7.50%, 9/15/18

      United States        12,500,000           9,617,187   
d  

Gibson Energy Inc., senior note, 144A, 6.75%, 7/15/21

      Canada        7,000,000           7,017,500   
 

Halcon Resources Corp., senior note,

          
 

9.75%, 7/15/20

      United States        12,500,000           9,437,500   
 

8.875%, 5/15/21

      United States        3,500,000           2,651,250   
 

9.25%, 2/15/22

      United States        5,800,000           4,306,500   
d  

Hercules Offshore Inc., senior note, 144A,

          
 

10.25%, 4/01/19

      United States        3,000,000           1,605,000   
 

8.75%, 7/15/21

      United States        5,000,000           2,350,000   
 

6.75%, 4/01/22

      United States        1,500,000           652,500   
 

Kinder Morgan Inc.,

          
 

senior note, MTN, 7.75%, 1/15/32

      United States        22,000,000           27,170,000   
 

 dsenior secured bond, first lien, 144A, 5.625%, 11/15/23

      United States        9,800,000           10,508,148   
 

 dsenior secured note, 144A, 5.00%, 2/15/21

      United States        2,400,000           2,500,087   
 

Linn Energy LLC/Finance Corp., senior note,

          
 

6.25%, 11/01/19

      United States        2,500,000           2,137,500   
 

8.625%, 4/15/20

      United States        20,000,000           17,500,000   

 

FI-14    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

Franklin Income VIP Fund (continued)

           Country     Principal Amount*        Value  
 

Corporate Bonds (continued)

          
 

Energy (continued)

          
 

Magnum Hunter Resources Corp., senior note, 9.75%, 5/15/20

      United States        5,000,000         $ 3,975,000   
 

Midstates Petroleum Co. Inc./LLC, senior note,

          
 

10.75%, 10/01/20

      United States        5,000,000           2,700,000   
 

9.25%, 6/01/21

      United States        7,500,000           3,825,000   
d  

NGPL PipeCo LLC, secured note, 144A, 7.119%, 12/15/17

      United States        10,250,000           10,121,875   
d  

Niska Gas Storage Canada ULC/Finance Corp., senior note, 144A, 6.50%, 4/01/19

      United States        11,500,000           8,711,250   
d  

Ocean Rig UDW Inc., senior note, 144A, 7.25%, 4/01/19

      United States        7,500,000           5,301,563   
 

Offshore Group Investment Ltd., senior secured note, first lien, 7.50%, 11/01/19

      United States        6,500,000           4,883,125   
 

Peabody Energy Corp., senior note, 6.25%, 11/15/21

      United States        15,000,000           12,881,250   
 

Penn Virginia Corp., senior note, 8.50%, 5/01/20

      United States        9,300,000           7,486,500   
 

Quicksilver Resources Inc., senior note, 9.125%, 8/15/19

      United States        20,000,000           5,100,000   
 

Regency Energy Partners LP/Regency Energy Finance Corp., senior note, 5.875%, 3/01/22

      United States        3,900,000           3,909,750   
 

Rex Energy Corp., senior note, 8.875%, 12/01/20

      United States        5,000,000           4,500,000   
d  

Rice Energy Inc., senior note, 144A, 6.25%, 5/01/22

      United States        7,831,000           7,321,985   
 

Sabine Pass Liquefaction LLC,

          
 

first lien, 5.625%, 2/01/21

      United States        15,100,000           14,911,250   
 

senior secured, first lien, 5.75%, 5/15/24

      United States        9,900,000           9,763,875   
 

Sabine Pass LNG LP,

          
 

first lien, 6.50%, 11/01/20

      United States        10,000,000           10,150,000   
 

senior secured note, 7.50%, 11/30/16

      United States        10,000,000           10,450,000   
 

Samson Investment Co., senior note, 9.75%, 2/15/20

      United States        12,500,000           5,242,188   
 

Sanchez Energy Corp., senior note,

          
 

7.75%, 6/15/21

      United States        10,000,000           9,350,000   
 

 d144A, 6.125%, 1/15/23

      United States        13,000,000           10,952,500   
 

SandRidge Energy Inc., senior note,

          
 

8.75%, 1/15/20

      United States        20,000,000           13,800,000   
 

7.50%, 3/15/21

      United States        15,000,000           9,675,000   
 

8.125%, 10/15/22

      United States        10,000,000           6,350,000   
 

7.50%, 2/15/23

      United States        6,600,000           4,257,000   
 

Stone Energy Corp., senior bond, 7.50%, 11/15/22

      United States        15,000,000           12,975,000   
 

Transocean Inc., senior bond, 6.50%, 11/15/20

      United States        5,000,000           4,747,460   
 

W&T Offshore Inc., senior note, 8.50%, 6/15/19

      United States        40,500,000           26,932,500   
           

 

 

  
              512,676,603   
           

 

 

  
 

Financials 3.3%

          
h  

Bank of America Corp., junior sub. bond, M, 8.125% to 5/15/18, FRN thereafter, Perpetual

      United States        5,000,000           5,418,750   
h  

Citigroup Inc.,

          
 

junior sub. bond, 5.35% to 5/15/23, FRN thereafter, Perpetual

      United States        10,000,000           9,275,000   
 

junior sub. bond, 5.95% to 1/30/23, FRN thereafter, Perpetual

      United States        4,500,000           4,438,125   
 

junior sub. bond, M, 6.30% to 5/15/24, FRN thereafter, Perpetual

      United States        16,800,000           16,590,000   
 

junior sub. note, 5.90% to 2/15/23, FRN thereafter, Perpetual

      United States        12,500,000           12,250,000   
 

International Lease Finance Corp., senior note, 8.75%, 3/15/17

      United States        15,000,000           16,650,000   
d  

Jefferies Finance LLC/JFIN Co-Issuer Corp., senior note, 144A, 7.50%, 4/15/21

      United States        5,000,000           4,668,750   
h  

JPMorgan Chase & Co.,

          
 

junior sub. bond, R, 6.00% to 8/01/23, FRN thereafter, Perpetual

      United States        3,200,000           3,176,000   
 

junior sub. bond, V, 5.00% to 7/30/19, FRN thereafter, Perpetual

      United States        10,000,000           9,834,370   
 

junior sub. note, I, 7.90% to 4/30/19, FRN thereafter, Perpetual

      United States        85,000,000           91,910,500   

 

    Annual Report     FI-15   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

Franklin Income VIP Fund (continued)

           Country     Principal Amount*        Value  
 

Corporate Bonds (continued)

          
 

Financials (continued)

          
 

Morgan Stanley, senior note, 5.50%, 1/26/20

      United States        15,000,000         $ 16,895,760   
 

Nationstar Mortgage LLC/Nationstar Capital Corp., senior note, 9.625%, 5/01/19

      United States        4,400,000           4,675,000   
 

Navient Corp., senior note, 6.125%, 3/25/24

      United States        5,000,000           4,925,000   
d  

OneMain Financial Holdings Inc., senior note, 144A,

          
 

6.75%, 12/15/19

      United States        10,000,000           10,225,000   
 

7.25%, 12/15/21

      United States        5,000,000           5,150,000   
h  

PNC Financial Services Group Inc., junior sub. note, 4.85% to 6/01/23, FRN thereafter, Perpetual

      United States        8,000,000           7,570,664   
h  

Wells Fargo & Co., junior sub. bond, S, 5.90% to 6/15/24, FRN thereafter, Perpetual

      United States        7,900,000           7,979,000   
           

 

 

  
              231,631,919   
           

 

 

  
 

Health Care 2.0%

          
 

CHS/Community Health Systems Inc.,

          
 

senior note, 6.875%, 2/01/22

      United States        6,400,000           6,812,000   
 

senior secured note, 5.125%, 8/01/21

      United States        2,600,000           2,710,500   
 

DaVita HealthCare Partners Inc., senior bond, 5.125%, 7/15/24

      United States        5,000,000           5,109,375   
 

HCA Inc.,

          
 

senior note, 7.50%, 2/15/22

      United States        25,000,000           28,625,000   
 

senior note, 5.875%, 5/01/23

      United States        7,500,000           7,921,875   
 

senior secured bond, first lien, 5.25%, 4/15/25

      United States        5,000,000           5,231,250   
 

senior secured note, 6.50%, 2/15/20

      United States        16,500,000           18,529,500   
 

senior secured note, first lien, 5.00%, 3/15/24

      United States        10,400,000           10,712,000   
d,f  

Jaguar Holding Co. I, senior note, 144A, PIK, 9.375%, 10/15/17

      United States        10,200,000           10,449,900   
 

Tenet Healthcare Corp., senior note,

          
 

8.00%, 8/01/20

      United States        10,426,000           11,025,495   
 

8.125%, 4/01/22

      United States        22,500,000           25,200,000   
 

d 144A, 5.00%, 3/01/19

      United States        3,400,000           3,412,750   
d  

Valeant Pharmaceuticals International Inc., senior note, 144A, 7.50%, 7/15/21

      United States        7,700,000           8,344,875   
           

 

 

  
              144,084,520   
           

 

 

  
 

Industrials 1.3%

          
d  

Abengoa Finance SAU, senior note, 144A, 8.875%, 11/01/17

      Spain        12,900,000           12,496,875   
d  

Abengoa Greenfield SA, senior note, 144A, 6.50%, 10/01/19

      Spain        5,000,000           4,371,875   
d  

Algeco Scotsman Global Finance PLC,

          
 

senior note, 144A, 10.75%, 10/15/19

      United Kingdom        5,000,000           4,337,500   
 

senior secured note, first lien, 144A, 8.50%, 10/15/18

      United Kingdom        9,900,000           9,621,563   
d  

Bombardier Inc., senior bond, 144A, 6.125%, 1/15/23

      Canada        7,500,000           7,668,750   
d  

CEVA Group PLC, senior note, first lien, 144A, 4.00%, 5/01/18

      United Kingdom        12,691,882           11,264,045   
 

Hertz Corp., senior note, 6.75%, 4/15/19

      United States        9,500,000           9,832,500   
 

Navistar International Corp., senior note, 8.25%, 11/01/21

      United States        16,300,000           16,137,000   
d  

Stena AB, senior bond, 144A, 7.00%, 2/01/24

      Sweden        5,800,000           5,321,500   
 

TransDigm Inc.,

          
 

senior sub. bond, 6.50%, 7/15/24

      United States        2,700,000           2,727,000   
 

senior sub. note, 6.00%, 7/15/22

      United States        2,700,000           2,706,750   
 

United Rentals North America Inc., senior sub. note, 8.375%, 9/15/20

      United States        8,800,000           9,482,000   
           

 

 

  
              95,967,358   
           

 

 

  
 

Information Technology 4.3%

          
d  

BMC Software Finance Inc., senior note, 144A, 8.125%, 7/15/21

      United States        16,500,000           15,592,500   

 

FI-16    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

Franklin Income VIP Fund (continued)

           Country     Principal Amount*     Value  
 

Corporate Bonds (continued)

       
 

Information Technology (continued)

       
d,f  

Boxer Parent Co. Inc., senior note, 144A, PIK, 9.00%, 10/15/19

      United States        10,000,000      $ 8,550,000   
 

CDW LLC/Finance Corp., senior note, 8.50%, 4/01/19

      United States        4,495,000        4,759,081   
d,f  

CommScope Holdings Co. Inc., senior note, 144A, PIK, 6.625%, 6/01/20

      United States        11,200,000        11,592,000   
 

First Data Corp.,

       
 

senior bond, 12.625%, 1/15/21

      United States        80,000,000        95,200,000   
 

d senior secured bond, 144A, 8.25%, 1/15/21

      United States        45,000,000        48,375,000   
 

d,f senior secured note, 144A, PIK, 8.75%, 1/15/22

      United States        33,188,000        35,843,040   
 

Freescale Semiconductor Inc., senior note,

       
 

8.05%, 2/01/20

      United States        7,454,000        7,882,605   
 

10.75%, 8/01/20

      United States        54,846,000        60,056,370   
 

Infor U.S. Inc., senior note, 9.375%, 4/01/19

      United States        4,100,000        4,402,375   
 

NCR Corp., senior note, 5.00%, 7/15/22

      United States        5,000,000        4,900,000   
 

Sterling International Inc., senior note, 11.00%, 10/01/19

      United States        7,500,000        8,006,250   
        

 

 

  
           305,159,221   
        

 

 

  
 

Materials 2.5%

       
 

AngloGold Ashanti Holdings PLC, senior note, 8.50%, 7/30/20

      South Africa        6,000,000        6,386,250   
d  

Ardagh Packaging Finance PLC/Ardagh MP Holdings USA Inc., senior note, 144A,

       
 

6.25%, 1/31/19

      Luxembourg        2,800,000        2,744,000   
 

6.75%, 1/31/21

      Luxembourg        3,000,000        2,968,125   
d  

Cemex Finance LLC, senior secured note, 144A,

       
 

9.375%, 10/12/22

      Mexico        7,100,000        7,952,000   
 

6.00%, 4/01/24

      Mexico        14,700,000        14,231,438   
d  

Cemex SAB de CV, senior secured note, 144A,

       
 

9.00%, 1/11/18

      Mexico        5,581,000        5,839,121   
 

9.50%, 6/15/18

      Mexico        12,000,000        13,200,000   
d  

Consolidated Minerals Ltd., senior secured note, 144A, 8.00%, 5/15/20

      Jersey Islands        5,000,000        3,781,250   
 

Dynacast International LLC/Finance Inc., 9.25%, 7/15/19

      United States        5,000,000        5,387,500   
d  

First Quantum Minerals Ltd., senior note, 144A,

       
 

6.75%, 2/15/20

      Canada        2,300,000        2,093,000   
 

7.00%, 2/15/21

      Canada        2,300,000        2,081,500   
d  

FMG Resources (August 2006) Pty. Ltd., senior note, 144A,

       
 

g 6.875%, 2/01/18

      Australia        5,288,889        4,829,417   
 

8.25%, 11/01/19

      Australia        15,000,000        13,706,250   
 

HudBay Minerals Inc., senior note, 9.50%, 10/01/20

      Canada        10,000,000        9,750,000   
d  

Ineos Finance PLC, senior secured note, 144A, 8.375%, 2/15/19

      Switzerland        5,100,000        5,431,500   
d  

Ineos Group Holdings SA, senior note, 144A, 5.75%, 2/15/19

      Switzerland        5,700,000  EUR      6,672,847   
d  

Kerling PLC, senior secured note, 144A, 10.625%, 2/01/17

      United Kingdom        9,400,000  EUR      11,563,547   
 

Reynolds Group Issuer Inc./LLC/SA,

       
 

first lien, 5.75%, 10/15/20

      United States        14,200,000        14,626,000   
 

senior note, 9.00%, 4/15/19

      United States        5,000,000        5,200,000   
 

senior note, 9.875%, 8/15/19

      United States        16,800,000        17,892,000   
 

senior note, 8.25%, 2/15/21

      United States        5,200,000        5,356,000   
 

senior secured note, 6.875%, 2/15/21

      United States        10,000,000        10,487,500   
d  

Walter Energy Inc., first lien, 144A, 9.50%, 10/15/19

      United States        10,000,000        7,650,000   
        

 

 

  
           179,829,245   
        

 

 

  
 

Telecommunication Services 3.5%

       
 

CenturyLink Inc., senior bond, 6.75%, 12/01/23

      United States        1,700,000        1,867,875   

 

    Annual Report     FI-17   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

Franklin Income VIP Fund (continued)

           Country     Principal Amount*        Value  
 

Corporate Bonds (continued)

          
 

Telecommunication Services (continued)

          
 

Frontier Communications Corp., senior note,

          
 

8.50%, 4/15/20

      United States        12,900,000         $ 14,448,000   
 

9.25%, 7/01/21

      United States        7,400,000           8,574,750   
 

7.125%, 1/15/23

      United States        8,800,000           8,998,000   
 

Intelsat Jackson Holdings SA, senior bond, 5.50%, 8/01/23

      Luxembourg        13,400,000           13,358,125   
 

Sprint Corp., senior bond,

          
 

7.875%, 9/15/23

      United States        37,500,000           37,207,500   
 

7.125%, 6/15/24

      United States        8,200,000           7,667,000   
 

Sprint Nextel Corp.,

          
 

11.50%, 11/15/21

      United States        30,000,000           36,225,000   
 

senior note, 9.125%, 3/01/17

      United States        13,300,000           14,662,585   
 

senior note, 7.00%, 8/15/20

      United States        7,500,000           7,537,500   
 

d senior note, 144A, 9.00%, 11/15/18

      United States        20,000,000           22,798,000   
 

T-Mobile USA Inc.,

          
 

senior bond, 6.625%, 4/01/23

      United States        15,000,000           15,435,000   
 

senior note, 6.542%, 4/28/20

      United States        11,200,000           11,606,000   
 

senior note, 6.633%, 4/28/21

      United States        5,000,000           5,150,000   
 

senior note, 6.731%, 4/28/22

      United States        5,000,000           5,168,750   
d  

Telecom Italia SpA, senior note, 144A, 5.303%, 5/30/24

      Italy        7,500,000           7,617,187   
 

Verizon Communications Inc.,

          
 

senior bond, 6.55%, 9/15/43

      United States        7,300,000           9,366,082   
 

senior note, 5.15%, 9/15/23

      United States        6,900,000           7,624,597   
d  

Wind Acquisition Finance SA, senior note, 144A, 7.375%, 4/23/21

      Italy        15,000,000           14,175,000   
           

 

 

  
              249,486,951   
           

 

 

  
 

Utilities 1.6%

          
 

Calpine Corp.,

          
 

senior bond, 5.75%, 1/15/25

      United States        10,000,000           10,137,500   
 

senior note, 5.375%, 1/15/23

      United States        14,500,000           14,663,125   
 

d senior secured bond, first lien, 144A, 7.875%, 1/15/23

      United States        3,936,000           4,359,120   
d  

Dynegy Finance I Inc./Dynegy Finance II Inc., senior note, 144A,

          
 

6.75%, 11/01/19

      United States        25,000,000           25,468,750   
 

7.375%, 11/01/22

      United States        18,300,000           18,643,125   
d  

InterGen NV, secured bond, 144A, 7.00%, 6/30/23

      Netherlands        25,000,000           23,875,000   
d  

NGL Energy Partners LP/NGL Energy Finance Corp., senior note, 144A, 6.875%, 10/15/21

      United States        10,000,000           9,900,000   
d  

NRG Yield Operating LLC, senior bond, 144A, 5.375%, 8/15/24

      United States        6,600,000           6,732,000   
           

 

 

  
              113,778,620   
           

 

 

  
 

Total Corporate Bonds (Cost $2,300,715,254)

             2,285,564,470   
           

 

 

  
i,j  

Senior Floating Rate Interests 2.4%

          
 

Consumer Discretionary 0.9%

          
 

iHeartCommunications Inc.,

          
 

Tranche D Term Loan, 6.919%, 1/30/19

      United States        50,864,664           48,051,237   
 

Tranche E Term Loan, 7.669%, 7/30/19

      United States        13,142,769           12,633,486   
 

SuperMedia Inc., Exit Term Loan, 11.60%, 12/31/16

      United States        753,341           605,969   
           

 

 

  
              61,290,692   
           

 

 

  
 

Consumer Staples 0.2%

          
 

U.S. Foods Inc., Term Loan, 4.50%, 3/31/19

      United States        14,775,000           14,710,359   
           

 

 

  

 

FI-18    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

Franklin Income VIP Fund (continued)

           Country     Principal Amount*        Value  
i,j  

Senior Floating Rate Interests (continued)

          
 

Energy 0.5%

          
 

Drillships Financing Holding Inc., Tranche B-1 Term Loan,
6.00%, 3/31/21

      Marshall Islands        14,886,935         $ 11,872,331   
 

Fieldwood Energy LLC, Second Lien Loans, 8.375%, 9/30/20

      United States        10,000,000           7,365,000   
 

Quicksilver Resources Inc., Second Lien Loans, 7.00%, 6/21/19

      United States        25,000,000           19,000,000   
           

 

 

  
              38,237,331   
           

 

 

  
 

Industrials 0.4%

          
 

CEVA Group PLC, Pre-Funded L/C, 6.50%, 3/19/21

      United States        5,418,719           5,091,905   
 

CEVA Intercompany BV, Dutch BV Term Loan, 6.50%, 3/19/21

      Netherlands        5,671,429           5,329,373   
 

CEVA Logistics Canada ULC, Canadian Term Loan, 6.50%, 3/19/21

      Canada        977,833           918,858   
 

CEVA Logistics U.S. Holdings Inc., U.S. Term Loan, 6.50%, 3/19/21

      United States        7,822,660           7,350,860   
 

Navistar Inc., Tranche B Term Loan, 5.75%, 8/17/17

      United States        6,081,022           6,065,819   
           

 

 

  
              24,756,815   
           

 

 

  
 

Information Technology 0.4%

          
 

First Data Corp., 2018 New Dollar Term Loan, 3.667%, 3/24/18

      United States        22,436,455           22,015,771   
 

SRA International Inc., Term Loan, 6.50%, 7/20/18

      United States        7,469,520           7,478,857   
           

 

 

  
              29,494,628   
           

 

 

  
 

Total Senior Floating Rate Interests (Cost $179,332,889)

             168,489,825   
           

 

 

  
               Shares           
 

Escrows and Litigation Trusts 0.0%†

          
a  

Motors Liquidation Co., Escrow Account, cvt. pfd., C

      United States        1,400,000           14,000   
a,k  

SuperMedia Inc., Litigation Trust

      United States        3,472,135           —   
           

 

 

  
 

Total Escrows and Litigation Trusts (Cost $101,664)

             14,000   
           

 

 

  
 

Total Investments before Short Term Investments (Cost $5,975,986,151)

            6,538,114,001   
           

 

 

  
               Principal Amount*           
 

Short Term Investments 5.4%

          
 

U.S. Government and Agency Securities 4.3%

          
l  

FHLB,

          
 

1/02/15

      United States        25,000,000           25,000,000   
 

1/14/15

      United States        100,000,000           99,999,700   
 

1/21/15

      United States        85,000,000           84,999,575   
l  

FNMA, 1/05/15

      United States        49,186,000           49,185,951   
l  

U.S. Treasury Bill, 1/02/15

      United States        50,000,000           50,000,000   
           

 

 

  
 

Total U.S. Government and Agency Securities (Cost $309,181,683)

             309,185,226   
           

 

 

  
 

Total Investments before Money Market Funds and Repurchase Agreements (Cost $6,285,167,834)

             6,847,299,227   
           

 

 

  

 

    Annual Report     FI-19   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

Franklin Income VIP Fund (continued)

           Country     Principal Amount*      Value  
 

Repurchase Agreements (Cost $71,647,836) 1.0%

        
m  

Joint Repurchase Agreement, 0.057%, 1/02/15 (Maturity Value $71,648,063)

      United States        71,647,836       $ 71,647,836   
         

 

 

  
 

BNP Paribas Securities Corp. (Maturity Value $6,037,782)

        
 

HSBC Securities (USA) Inc. (Maturity Value $49,912,190)

Merrill Lynch, Pierce, Fenner & Smith Inc. (Maturity Value $15,698,091)

        
 

Collateralized by U.S. Government Agency Securities, 0.000% - 1.50%, 1/20/15 - 10/09/19; U.S. Government Agency Securities, Strips, 6/01/17; and U.S. Treasury Notes, 1.625% - 4.50%, 11/15/15 - 11/30/20 (valued at $73,089,829)

        
               Shares         
n  

Investments from Cash Collateral Received for Loaned Securities (Cost $5,160,980) 0.1%

        
 

Money Market Funds 0.1%

        
o  

BNY Mellon Overnight Government Fund, 0.072%

      United States        5,160,980         5,160,980   
         

 

 

  
 

Total Investments (Cost $6,361,976,650) 97.3%

           6,924,108,043   
 

Other Assets, less Liabilities 2.7%

           191,905,223   
         

 

 

  
 

Net Assets 100.0%

         $ 7,116,013,266   
         

 

 

  

See Abbreviations on page FI-32.

*The principal amount is stated in U.S. dollars unless otherwise indicated.

†Rounds to less than 0.1% of net assets.

aNon-income producing.

bSee Note 8 regarding restricted securities.

cAt December 31, 2014, pursuant to the Fund’s policies and the requirements of applicable securities law, the Fund may be restricted from trading these securities for a limited or extended period of time.

dSecurity was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be sold in transactions exempt from registration only to qualified institutional buyers or in a public offering registered under the Securities Act of 1933. These securities have been deemed liquid under guidelines approved by the Trust’s Board of Trustees. At December 31, 2014, the aggregate value of these securities was $971,256,642, representing 13.65% of net assets.

eSee Note 1(d) regarding equity-linked securities.

fIncome may be received in additional securities and/or cash.

gA portion or all of the security is on loan at December 31, 2014. See Note 1(e).

hPerpetual security with no stated maturity date.

iSee Note 1(f) regarding senior floating rate interests.

jThe coupon rate shown represents the rate at period end.

kSecurity has been deemed illiquid because it may not be able to be sold within seven days.

lThe security is traded on a discount basis with no stated coupon rate.

mSee Note 1(c) regarding joint repurchase agreement.

nSee Note 1(e) regarding securities on loan.

oThe rate shown is the annualized seven-day yield at period end.

 

FI-20    Annual Report   |    The accompanying notes are an integral part of these financial statements.    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

Financial Statements

Statement of Assets and Liabilities

December 31, 2014

 

      Franklin Income
VIP Fund		  

Assets:

   

Investments in securities:

   

Cost - Unaffiliated issuers

    $ 6,290,328,814   

Cost - Repurchase agreements

      71,647,836   
  

 

 

  

Total cost of investments

    $ 6,361,976,650   
  

 

 

  

Value - Unaffiliated issuers

    $ 6,852,460,207   

Value - Repurchase agreements

      71,647,836   
  

 

 

  

Total value of investments (includes securities loaned in the amount of $4,938,811)

      6,924,108,043   

Cash

      92,022,072   

Receivables:

   

Investment securities sold

      45,270,528   

Capital shares sold

      6,948,498   

Dividends and interest

      62,018,505   

Other assets

      631   
  

 

 

  

Total assets

      7,130,368,277   
  

 

 

  

Liabilities:

   

Payables:

   

Investment securities purchased

      255,575   

Capital shares redeemed

      2,544,886   

Management fees

      2,755,852   

Distribution fees

      2,791,938   

Payable upon return of securities loaned

      5,160,980   

Accrued expenses and other liabilities

      845,780   
  

 

 

  

Total liabilities

      14,355,011   
  

 

 

  

Net assets, at value

    $ 7,116,013,266   
  

 

 

  

Net assets consist of:

   

Paid-in capital

    $ 6,997,238,896   

Undistributed net investment income

      285,827,668   

Net unrealized appreciation (depreciation)

      561,891,661   

Accumulated net realized gain (loss)

      (728,944,959 ) 
  

 

 

  

Net assets, at value

    $ 7,116,013,266   
  

 

 

  
Class 1:   

Net assets, at value

    $ 714,663,840   
  

 

 

  

Shares outstanding

      43,363,008   
  

 

 

  

Net asset value and maximum offering price per share

    $ 16.48   
  

 

 

  
Class 2:   

Net assets, at value

    $ 6,022,804,327   
  

 

 

  

Shares outstanding

      376,432,254   
  

 

 

  

Net asset value and maximum offering price per share

    $ 16.00   
  

 

 

  
Class 4:   

Net assets, at value

    $ 378,545,099   
  

 

 

  

Shares outstanding

      23,213,333   
  

 

 

  

Net asset value and maximum offering price per share

    $ 16.31   
  

 

 

  

 

    The accompanying notes are an integral part of these financial statements.    |   Annual Report     FI-21   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FINANCIAL STATEMENTS

Statement of Operations

for the year ended December 31, 2014

 

      Franklin Income
VIP Fund		  

Investment income:

   

Dividends

    $ 153,911,805   

Interest

      197,524,636   

Income from securities loaned

      787,813   
  

 

 

  

Total investment income

      352,224,254   
  

 

 

  

Expenses:

   

Management fees (Note 3a)

      33,738,136   

Distribution fees: (Note 3c)

   

Class 2

      15,789,181   

Class 4

      1,392,360   

Custodian fees (Note 4)

      105,982   

Reports to shareholders

      832,683   

Professional fees

      159,687   

Trustees’ fees and expenses

      29,192   

Other

      129,449   
  

 

 

  

Total expenses

      52,176,670   

Expense reductions (Note 4)

      (1,565 ) 
  

 

 

  

Net expenses

      52,175,105   
  

 

 

  

Net investment income

      300,049,149   
  

 

 

  

Realized and unrealized gains (losses):

   

Net realized gain (loss) from:

   

Investments

      328,621,693   

Foreign currency transactions

      (745,927 ) 
  

 

 

  

Net realized gain (loss)

      327,875,766   
  

 

 

  

Net change in unrealized appreciation (depreciation) on:

   

Investments

      (288,316,303 ) 

Translation of other assets and liabilities denominated in foreign currencies

      (353,707 ) 
  

 

 

  

Net change in unrealized appreciation (depreciation)

      (288,670,010 ) 
  

 

 

  

Net realized and unrealized gain (loss)

      39,205,756   
  

 

 

  

Net increase (decrease) in net assets resulting from operations

    $ 339,254,905   
  

 

 

  

 

FI-22    Annual Report   |    The accompanying notes are an integral part of these financial statements.    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FINANCIAL STATEMENTS

Statements of Changes in Net Assets

 

    Franklin Income VIP Fund  
    Year Ended December 31,  
     2014        2013  

Increase (decrease) in net assets:

       

Operations:

       

Net investment income

   $ 300,049,149         $ 352,220,004   

Net realized gain (loss) from investments and foreign currency transactions

     327,875,766           58,814,586   

Net change in unrealized appreciation (depreciation) on investments and translation of other assets and liabilities denominated in foreign currencies

     (288,670,010 )         532,304,482   
 

 

 

  

Net increase (decrease) in net assets resulting from operations

     339,254,905           943,339,072   
 

 

 

  

Distributions to shareholders from:

       

Net investment income:

       

Class 1

     (37,211,436 )         (40,171,484 ) 

Class 2

     (314,580,044 )         (401,855,498 ) 

Class 4

     (19,237,312 )         (27,978,841 ) 
 

 

 

  

Total distributions to shareholders

     (371,028,792 )         (470,005,823 ) 
 

 

 

  

Capital share transactions: (Note 2)

       

Class 1

     23,158,016           66,533,168   

Class 2

     (137,432,835 )         (397,831,491 ) 

Class 4

     (18,639,257 )         (65,127,276 ) 
 

 

 

  

Total capital share transactions

     (132,914,076 )         (396,425,599 ) 
 

 

 

  

Net increase (decrease) in net assets

     (164,687,963 )         76,907,650   

Net assets:

       

Beginning of year

     7,280,701,229           7,203,793,579   
 

 

 

  

End of year

   $ 7,116,013,266         $ 7,280,701,229   
 

 

 

  

Undistributed net investment income included in net assets:

       

End of year

   $ 285,827,668         $ 344,943,832   
 

 

 

  

 

    The accompanying notes are an integral part of these financial statements.    |   Annual Report     FI-23   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

Notes to Financial Statements

Franklin Income VIP Fund

1. Organization and Significant Accounting Policies

Franklin Templeton Variable Insurance Products Trust (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end management investment company, consisting of nineteen separate funds and applies the specialized accounting and reporting guidance in U.S. Generally Accepted Accounting Principles (U.S. GAAP). Franklin Income VIP Fund (Fund) is included in this report. The financial statements of the remaining funds in the Trust are presented separately. Shares of the Fund are generally sold only to insurance company separate accounts to fund the benefits of variable life insurance policies or variable annuity contracts. The Fund offers three classes of shares: Class 1, Class 2, and Class 4. Each class of shares differs by its distribution fees, voting rights on matters affecting a single class and its exchange privilege.

Effective May 1, 2014, Franklin Income Securities Fund was renamed Franklin Income VIP Fund.

The following summarizes the Fund’s significant accounting policies.

a. Financial Instrument Valuation

The Fund’s investments in financial instruments are carried at fair value daily. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. The Fund calculates the net asset value (NAV) per share at the close of the New York Stock Exchange (NYSE), generally at 4 p.m. Eastern time (NYSE close) on each day the NYSE is open for trading. Under compliance policies and procedures approved by the Trust’s Board of Trustees (the Board), the Fund’s administrator has responsibility for oversight of valuation, including leading the cross-functional Valuation and Liquidity Oversight Committee (VLOC). The VLOC provides administration and oversight of the Fund’s valuation policies and procedures, which are approved annually by the Board. Among other things, these procedures allow the Fund to utilize independent pricing services, quotations from securities and financial instrument dealers, and other market sources to determine fair value.

Equity securities listed on an exchange or on the NASDAQ National Market System are valued at the last quoted sale price or the official closing price of the day, respectively. Foreign equity securities are valued as of the close of trading on the foreign stock exchange on which the security is primarily traded

or as of the NYSE close, whichever is earlier. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at the NYSE close on the day that the value of the security is determined. Over-the-counter (OTC) securities are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. Certain equity securities are valued based upon fundamental characteristics or relationships to similar securities. Investments in non-registered money market funds are valued at the closing NAV.

Debt securities generally trade in the OTC market rather than on a securities exchange. The Fund’s pricing services use multiple valuation techniques to determine fair value. In instances where sufficient market activity exists, the pricing services may utilize a market-based approach through which quotes from market makers are used to determine fair value. In instances where sufficient market activity may not exist or is limited, the pricing services also utilize proprietary valuation models which may consider market characteristics such as benchmark yield curves, credit spreads, estimated default rates, anticipated market interest rate volatility, coupon rates, anticipated timing of principal repayments, underlying collateral, and other unique security features in order to estimate the relevant cash flows, which are then discounted to calculate the fair value. Securities denominated in a foreign currency are converted into their U.S. dollar equivalent at the foreign exchange rate in effect at the NYSE close on the date that the values of the foreign debt securities are determined. Repurchase agreements are valued at cost, which approximates fair value.

The Fund has procedures to determine the fair value of financial instruments for which market prices are not reliable or readily available. Under these procedures, the VLOC convenes on a regular basis to review such financial instruments and considers a number of factors, including significant unobservable valuation inputs, when arriving at fair value. The VLOC primarily employs a market-based approach which may use related or comparable assets or liabilities, recent transactions, market multiples, book values, and other relevant information for the investment to determine the fair value of the investment. An income-based valuation approach may also be used in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the investments. Due to the inherent uncertainty of valuations of

 

 

FI-24    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Franklin Income VIP Fund (continued)

such investments, the fair values may differ significantly from the values that would have been used had an active market existed. The VLOC employs various methods for calibrating these valuation approaches including a regular review of key inputs and assumptions, transactional back-testing or disposition analysis, and reviews of any related market activity.

Trading in securities on foreign securities stock exchanges and OTC markets may be completed before the daily NYSE close. In addition, trading in certain foreign markets may not take place on every NYSE business day. Occasionally, events occur between the time at which trading in a foreign security is completed and the close of the NYSE that might call into question the reliability of the value of a portfolio security held by the Fund. As a result, differences may arise between the value of the Fund’s portfolio securities as determined at the foreign market close and the latest indications of value at the close of the NYSE. In order to minimize the potential for these differences, the VLOC monitors price movements following the close of trading in foreign stock markets through a series of country specific market proxies (such as baskets of American Depositary Receipts, futures contracts and exchange traded funds). These price movements are measured against established trigger thresholds for each specific market proxy to assist in determining if an event has occurred that may call into question the reliability of the values of the foreign securities held by the Fund. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services.

Also, when the last day of the reporting period is a non-business day, certain foreign markets may be open on those days that the NYSE is closed, which could result in differences between the value of the Fund’s portfolio securities on the last business day and the last calendar day of the reporting period. Any significant security valuation changes due to an open foreign market are adjusted and reflected by the Fund for financial reporting purposes.

b. Foreign Currency Translation

Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. The Fund may enter into foreign currency exchange contracts to facilitate transactions denominated in a foreign currency. Purchases and sales of securities, income and expense items denominated in foreign currencies are translated

into U.S. dollars at the exchange rate in effect on the transaction date. Portfolio securities and assets and liabilities denominated in foreign currencies contain risks that those currencies will decline in value relative to the U.S. dollar. Occasionally, events may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the Board.

The Fund does not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments on the Statement of Operations.

Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period.

c. Joint Repurchase Agreement

The Fund enters into a joint repurchase agreement whereby its uninvested cash balance is deposited into a joint cash account with other funds managed by the investment manager or an affiliate of the investment manager and is used to invest in one or more repurchase agreements. The value and face amount of the joint repurchase agreement are allocated to the funds based on their pro-rata interest. A repurchase agreement is accounted for as a loan by the Fund to the seller, collateralized by securities which are delivered to the Fund’s custodian. The fair value, including accrued interest, of the initial collateralization is required to be at least 102% of the dollar amount invested by the funds, with the value of the underlying securities marked to market daily to maintain coverage of at least 100%. Repurchase agreements are subject to the terms of Master Repurchase Agreements (MRAs) with approved counterparties (sellers). The MRAs contain various provisions, including but not limited to events of default and maintenance of collateral for repurchase agreements. In the event of default by either the seller or the Fund, certain MRAs may permit the non-defaulting party to net and close-out all transactions, if any, traded under such

 

 

    Annual Report     FI-25   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Franklin Income VIP Fund (continued)

1. Organization and Significant Accounting

Policies (continued)

c. Joint Repurchase Agreement (continued)

agreements. The Fund may sell securities it holds as collateral and apply the proceeds towards the repurchase price and any other amounts owed by the seller to the Fund in the event of default by the seller. This could involve costs or delays in addition to a loss on the securities if their value falls below the repurchase price owed by the seller. The joint repurchase agreement held by the Fund at year end, as indicated in the Statement of Investments, had been entered into on December 31, 2014.

d. Equity-Linked Securities

The Fund invests in equity-linked securities. Equity-linked securities are hybrid financial instruments that generally combine both debt and equity characteristics into a single note form. Income received from equity-linked securities is recorded as realized gains in the Statement of Operations and may be based on the performance of an underlying equity security, an equity index, or an option position. The risks of investing in equity-linked securities include unfavorable price movements in the underlying security and the credit risk of the issuing financial institution. There may be no guarantee of a return of principal with equity-linked securities and the appreciation potential may be limited. Equity-linked securities may be more volatile and less liquid than other investments held by the Fund.

e. Securities Lending

The Fund participates in an agency based securities lending program. The Fund receives cash collateral against the loaned securities in an amount equal to at least 102% of the fair value of the loaned securities. Collateral is maintained over the life of the loan in an amount not less than 100% of the fair value of loaned securities, as determined at the close of fund business each day; any additional collateral required due to changes in security values is delivered to the Fund on the next business day. The collateral is invested in a non-registered money fund as indicated on the Statement of Investments. The Fund receives income from the investment of cash collateral, in addition to lending fees and rebates paid by the borrower. The Fund bears the market risk with respect to the collateral investment, securities loaned, and the risk that the agent may default on its obligations to the Fund. The securities lending agent has agreed to indemnify the Fund in the event of default by a third party borrower.

f. Senior Floating Rate Interests

The Fund invests in senior secured corporate loans that pay interest at rates which are periodically reset by reference to a base lending rate plus a spread. These base lending rates are generally the prime rate offered by a designated U.S. bank or the London InterBank Offered Rate (LIBOR). Senior secured corporate loans often require prepayment of principal from excess cash flows or at the discretion of the borrower. As a result, actual maturity may be substantially less than the stated maturity. Senior secured corporate loans in which the Fund invests are generally readily marketable, but may be subject to certain restrictions on resale.

g. Income and Deferred Taxes

It is the Fund’s policy to qualify as a regulated investment company under the Internal Revenue Code. The Fund intends to distribute to shareholders substantially all of its taxable income and net realized gains to relieve it from federal income and if applicable, excise taxes. As a result, no provision for U.S. federal income taxes is required.

The Fund may be subject to foreign taxation related to income received, capital gains on the sale of securities and certain foreign currency transactions in the foreign jurisdictions in which it invests. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist in the foreign markets in which the Fund invests. When a capital gain tax is determined to apply the Fund records an estimated deferred tax liability in an amount that would be payable if the securities were disposed of on the valuation date. As a result of several court cases, in certain countries across the European Union, the Fund has filed additional tax reclaims for previously withheld taxes on dividends earned in those countries. These additional filings are subject to various administrative proceedings by the local jurisdictions’ tax authorities within the European Union, as well as a number of related judicial proceedings. At this time, uncertainty exists as to the ultimate resolution of these proceedings, the likelihood of receipt of these reclaims, and the potential timing of payment, and accordingly, no amounts are reflected in the financial statements.

The Fund recognizes the tax benefits of uncertain tax positions only when the position is “more likely than not” to be sustained upon examination by the tax authorities based on the technical merits of the tax position. As of December 31, 2014, and for all open tax years, the Fund has determined that no liability for unrecognized tax benefits is required in the Fund’s financial

 

FI-26    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Franklin Income VIP Fund (continued)

statements related to uncertain tax positions taken on a tax return (or expected to be taken on future tax returns). Open tax years are those that remain subject to examination and are based on each tax jurisdiction statute of limitation.

h. Security Transactions, Investment Income, Expenses and Distributions

Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Amortization of premium and accretion of discount on debt securities are included in interest income. Facility fees are recognized as income over the expected term of the loan. Dividend income is recorded on the ex-dividend date except for certain foreign securities where the dividend rate is not available. In such cases, the dividend is recorded as soon as the information is received by the Fund. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with U.S. GAAP. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods.

Common expenses incurred by the Trust are allocated among the funds based on the ratio of net assets of each fund to the

combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense.

Realized and unrealized gains and losses and net investment income, not including class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions, by class, are generally due to differences in class specific expenses.

i. Accounting Estimates

The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates.

j. Guarantees and Indemnifications

Under the Trust’s organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, on behalf of the Fund, enters into contracts with service providers that contain general indemnification clauses. The Trust’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote.

 

2. Shares of Beneficial Interest

At December 31, 2014, there were an unlimited number of shares authorized (without par value). Transactions in the Fund’s shares were as follows:

 

     Year Ended December 31,  
     2014          2013  
      Shares      Amount           Shares      Amount  
Class 1 Shares:              

Shares sold

      2,465,196       $ 42,146,383           4,144,696       $ 65,962,113   

Shares issued in reinvestment of distributions

      2,182,489         37,211,436           2,620,449         40,171,484   

Shares redeemed

      (3,341,982 )       (56,199,803 )         (2,480,546 )       (39,600,429 ) 
  

 

 

  

Net increase (decrease)

      1,305,703       $ 23,158,016           4,284,599       $ 66,533,168   
  

 

 

  

 

    Annual Report     FI-27   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Franklin Income VIP Fund (continued)

2. Shares of Beneficial Interest (continued)

     Year Ended December 31,  
     2014          2013  
      Shares      Amount           Shares      Amount  
Class 2 Shares:              

Shares sold

      37,540,981       $ 619,277,066           35,402,352       $ 551,266,014   

Shares issued in reinvestment of distributions

      18,973,465         314,580,044           26,915,974         401,855,498   

Shares redeemed

      (65,224,564 )       (1,071,289,945 )         (87,475,715 )       (1,350,953,003 ) 
  

 

 

  

Net increase (decrease)

      (8,710,118 )     $ (137,432,835 )         (25,157,389 )     $ (397,831,491 ) 
  

 

 

  
Class 4 Shares:              

Shares sold

      3,949,673       $ 66,366,931           3,337,474       $ 52,791,548   

Shares issued on reinvestment of distributions

      1,137,629         19,237,312           1,839,503         27,978,841   

Shares redeemed

      (6,186,364 )       (104,243,500 )         (9,346,237 )       (145,897,665 ) 
  

 

 

  

Net increase (decrease)

      (1,099,062 )     $ (18,639,257 )         (4,169,260 )     $ (65,127,276 ) 
  

 

 

  

3. Transactions With Affiliates

Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Invest-ments. Certain officers and trustees of the Fund are also officers and/or directors of the following subsidiaries:

 

Subsidiary    Affiliation

Franklin Advisers, Inc. (Advisers)

   

Investment manager

Templeton Investment Counsel, LLC (TIC)

   

Investment manager

Franklin Templeton Services, LLC (FT Services)

   

Administrative manager

Franklin Templeton Distributors, Inc. (Distributors)

   

Principal underwriter

Franklin Templeton Investor Services, LLC (Investor Services)

   

Transfer agent

a. Management Fees

The Fund pays an investment management fee to Advisers based on the average daily net assets of the Fund as follows:

 

Annualized Fee Rate    Net Assets

0.625%

   

Up to and including $100 million

0.500%

   

Over $100 million, up to and including $250 million

0.450%

   

Over $250 million, up to and including $7.5 billion

0.440%

   

Over $7.5 billion, up to and including $10 billion

0.430%

   

Over $10 billion, up to and including $12.5 billion

0.420%

   

Over $12.5 billion, up to and including $15 billion

0.400%

   

In excess of $15 billion

Under a subadvisory agreement, TIC, an affiliate of Advisers, provides subadvisory services to the Fund. The subadvisory fee is paid by Advisers based on the Fund’s average daily net assets, and is not an additional expense of the Fund. Effective February 1, 2014, the subadvisory agreement was terminated.

b. Administrative Fees

Under an agreement with Advisers, FT Services provides administrative services to the Fund. The fee is paid by Advisers based on the Fund’s average daily net assets, and is not an additional expense of the Fund.

 

FI-28    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Franklin Income VIP Fund (continued)

c. Distribution Fees

The Board has adopted distribution plans for Class 2 and Class 4 shares pursuant to Rule 12b-1 under the 1940 Act. Under the Fund’s compensation distribution plans, the Fund pays Distributors for costs incurred in connection with the servicing, sale and distribution of the Fund’s shares up to 0.35% per year of its average daily net assets of each class. Some distribution fees are not charged on shares held by affiliates. The Board has agreed to limit the current rate to 0.25% per year for Class 2. The plan year, for purposes of monitoring compliance with the maximum annual plan rates, is February 1 through January 31.

d. Transfer Agent Fees

Investor Services, under terms of an agreement, performs shareholder servicing for the Fund and is not paid by the Fund for the services.

4. Expense Offset Arrangement

The Fund has entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Fund’s custodian expenses. During the year ended December 31, 2014, the custodian fees were reduced as noted in the Statement of Operations.

5. Income Taxes

For tax purposes, capital losses may be carried over to offset future capital gains. Capital loss carryforwards with no expiration, if any, must be fully utilized before those losses with expiration dates.

At December 31, 2014, capital loss carryforwards were as follows:

 

Capital loss carryforwards subject to expiration:

   

2016

    $ 50,251,090   

2017

      521,405,875   

2018

      157,561,044   
  

 

 

  

Total capital loss carryforwards

    $ 729,218,009   
  

 

 

  

During the year ended December 31, 2014, the Fund utilized $314,699,036 of capital loss carryforwards.

The tax character of distributions paid during the years ended December 31, 2014 and 2013, was as follows:

 

     2014     2013  

Distributions paid from ordinary income

    $ 371,028,792      $ 470,005,823   
  

 

 

  

At December 31, 2014, the cost of investments, net unrealized appreciation (depreciation) and undistributed ordinary income for income tax purposes were as follows:

 

Cost of investments

    $ 6,369,540,133   
  

 

 

  

Unrealized appreciation

    $ 1,072,574,189   

Unrealized depreciation

      (518,006,279 ) 
  

 

 

  

Net unrealized appreciation (depreciation)

    $ 554,567,910   
  

 

 

  

Distributable earnings - undistributed ordinary income

    $ 293,094,579   
  

 

 

  

Differences between income and/or capital gains as determined on a book basis and a tax basis are primarily due to differing treatments of bond discounts and premiums and equity-linked securities.

 

    Annual Report     FI-29   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Franklin Income VIP Fund (continued)

6. Investment Transactions

Purchases and sales of investments (excluding short term securities) for the year ended December 31, 2014, aggregated $1,735,401,572 and $2,203,659,865, respectively.

7. Credit Risk

At December 31, 2014, the Fund had 32.50% of its portfolio invested in high yield, senior secured floating rate notes, or other securities rated below investment grade. These securities may be more sensitive to economic conditions causing greater price volatility and are potentially subject to a greater risk of loss due to default than higher rated securities.

8. Restricted Securities

The Fund invests in securities that are restricted under the Securities Act of 1933 (1933 Act) or which are subject to legal, contractual, or other agreed upon restrictions on resale. Restricted securities are often purchased in private placement transactions, and cannot be sold without prior registration unless the sale is pursuant to an exemption under the 1933 Act. Disposal of these securities may require greater effort and expense, and prompt sale at an acceptable price may be difficult. The Fund may have registration rights for restricted securities. The issuer generally incurs all registration costs.

At December 31, 2014, the Fund held investments in restricted securities, excluding certain securities exempt from registration under the 1933 Act deemed to be liquid, as follows:

 

Shares    Issuer    Acquisition
Date		      Cost      Value  
4,929,600   

First Data Holdings Inc., B (Value is 0.29% of Net Assets)

      6/26/14       $ 19,718,400       $ 20,984,469   
        

 

 

  

9. Credit Facility

The Fund, together with other U.S. registered and foreign investment funds (collectively, Borrowers), managed by Franklin Templeton Investments, are borrowers in a joint syndicated senior unsecured credit facility totaling $1.5 billion (Global Credit Facility) which matured on February 13, 2015. This Global Credit Facility provides a source of funds to the Borrowers for temporary and emergency purposes, including the ability to meet future unanticipated or unusually large redemption requests. The Borrowers expect to renew the Global Credit Facility for a total of $2 billion effective February 13, 2015, which matures on February 12, 2016.

Under the terms of the Global Credit Facility, the Fund shall, in addition to interest charged on any borrowings made by the Fund and other costs incurred by the Fund, pay its share of fees and expenses incurred in connection with the implementation and maintenance of the Global Credit Facility, based upon its relative share of the aggregate net assets of all of the Borrowers, including an annual commitment fee of 0.07% based upon the unused portion of the Global Credit Facility. These fees are reflected in other expenses on the Statement of Operations. During the year ended December 31, 2014, the Fund did not use the Global Credit Facility.

10. Fair Value Measurements

The Fund follows a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Fund’s own market assumptions (unobservable inputs). These inputs are used in determining the value of the Fund’s financial instruments and are summarized in the following fair value hierarchy:

 

  •   Level 1 – quoted prices in active markets for identical financial instruments
  •   Level 2 – other significant observable inputs (including quoted prices for similar financial instruments, interest rates, prepayment speed, credit risk, etc.)
  •   Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of financial instruments)

 

FI-30    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Franklin Income VIP Fund (continued)

The input levels are not necessarily an indication of the risk or liquidity associated with financial instruments at that level.

For movements between the levels within the fair value hierarchy, the Fund has adopted a policy of recognizing the transfers as of the date of the underlying event which caused the movement.

A summary of inputs used as of December 31, 2014, in valuing the Fund’s assets carried at fair value, is as follows:

 

      Level 1     Level 2     Level 3     Total  
Assets:         

Investments in Securities:

         

Equity Investments:a

         

Energy

    $ 550,370,946      $ 13,627,360      $ 3,258,750      $ 567,257,056   

Financials

      371,856,395        5,818,750        —        377,675,145   

Industrials

      310,094,785        —        21,882,450        331,977,235   

Information Technology

      221,327,193        —        20,984,469        242,311,662   

All Other Equity Investmentsb

      2,312,170,239        —        —        2,312,170,239   

Equity-Linked Securities

      —        190,844,958        —        190,844,958   

Convertible Bonds

      —        61,809,411        —        61,809,411   

Corporate Bonds

      —        2,285,564,470        —        2,285,564,470   

Senior Floating Rate Interests

      —        168,489,825        —        168,489,825   

Escrows and Litigation Trusts

      —        —        14,000 c      14,000   

Short Term Investments

      50,000,000        335,994,042        —        385,994,042   
  

 

 

  

Total Investments in Securities

    $ 3,815,819,558     $ 3,062,148,816      $ 46,139,669     $ 6,924,108,043   
  

 

 

  

aIncludes common, preferred, and convertible preferred stocks as well as other equity investments.

bFor detailed categories, see the accompanying Statement of Investments.

cIncludes securities determined to have no value at December 31, 2014.

A reconciliation of assets in which Level 3 inputs are used in determining fair value is presented when there are significant Level 3 financial instruments at the end of the year.

11. New Accounting Pronouncements

In June 2014, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2014-11, Transfers and Servicing (Topic 860), Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. The ASU changes the accounting for certain repurchase agreements and expands disclosure requirements related to repurchase agreements, securities lending, repurchase-to-maturity and similar transactions. The ASU is effective for interim and annual reporting periods beginning after December 15, 2014. Management has reviewed the requirements and believes the adoption of this ASU will not have a material impact on the financial statements.

12. Subsequent Events

The Fund has evaluated subsequent events through the issuance of the financial statements and determined that no events have occurred that require disclosure other than those already disclosed in the financial statements.

 

    Annual Report     FI-31   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Franklin Income VIP Fund (continued)

Abbreviations

 

Currency   Selected Portfolio
EUR   Euro   ADR   American Depositary Receipt
    FHLB   Federal Home Loan Bank
    FHLMC   Federal Home Loan Mortgage Corp.
    FNMA   Federal National Mortgage Association
    FRN   Floating Rate Note
    L/C   Letter of Credit
    MTN   Medium Term Note
    PIK   Payment-In-Kind

 

FI-32    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

Report of Independent Registered Public Accounting Firm

Franklin Income VIP Fund

To the Board of Trustees and Shareholders of Franklin Templeton Variable Insurance Products Trust

In our opinion, the accompanying statement of assets and liabilities, including the statement of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Franklin Income VIP Fund (the “Fund”) at December 31, 2014, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements 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 are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2014 by correspondence with the custodian and brokers, provides a reasonable basis for our opinion.

PricewaterhouseCoopers LLP

San Francisco, California

February 13, 2015

 

    Annual Report     FI-33   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

Tax Information (unaudited)

Franklin Income VIP Fund

Under Section 854(b)(1)(A) of the Internal Revenue Code, the Fund hereby reports 28.06% of the ordinary income dividends as income qualifying for the dividends received deduction for the fiscal year ended December 31, 2014.

 

  FI-34       Annual Report    

Franklin Mutual Global Discovery VIP Fund

(Formerly, Mutual Global Discovery Securities Fund)

This annual report for Franklin Mutual Global Discovery VIP Fund covers the fiscal year ended December 31, 2014.

Class 4 Performance Summary as of December 31, 2014

Average annual total return of Class 4 shares* represents the average annual change in value, assuming reinvestment of dividends and capital gains. Average returns smooth out variations in returns, which can be significant; they are not the same as year-by-year results.

 

Periods ended 12/31/14    1-Year        5-Year        10-Year  

Average Annual Total Return

      +5.60%           +10.59%           +8.89%   

*For the period beginning 2/29/08, Class 4 performance reflects a 12b-1 fee expense of 0.35% per year, which affects future performance. Class 4 performance prior to 2/29/08 reflects historical Class 1 performance, which does not have a 12b-1 fee expense. Since 2/29/08 (effective date), the average annual total return of Class 4 shares was +6.71%.

Performance reflects the Fund’s Class 4 operating expenses, but does not include any contract fees, expenses or sales charges. If they had been included, performance would be lower. These charges and deductions, particularly for variable life policies, can have a significant effect on contract values and insurance benefits. See the contract prospectus for a complete description of these expenses, including sales charges.

Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares. Current performance may differ from figures shown.

Total Return Index Comparison for a Hypothetical $10,000 Investment (1/1/05–12/31/14)

The graph below shows the change in value of a hypothetical $10,000 investment in the Fund over the indicated period and includes reinvestment of any income or distributions. The Fund’s performance is compared to the performance of the MSCI World Index and the Standard & Poor’s® 500 Index (S&P 500®). One cannot invest directly in an index, and an index is not representative of the Fund’s portfolio. Please see Important Notes to Performance Information preceding the Fund Summaries.

 

LOGO

**Source: Morningstar. Please see Index Descriptions following the Fund Summaries.

 

    Annual Report     MGD-1   

FRANKLIN MUTUAL GLOBAL DISCOVERY VIP FUND

Fund Goal and Main Investments

Franklin Mutual Global Discovery VIP Fund seeks capital appreciation. Under normal market conditions, the Fund invests primarily in U.S. and foreign equity securities that the investment manager believes are undervalued.

Fund Risks

All investments involve risks, including possible loss of principal. Value securities may not increase in price as anticipated, or may decline further in value. The Fund’s investments in foreign securities involve certain risks including currency fluctuations, and economic and political uncertainties. Smaller company stocks have exhibited greater price volatility than larger company stocks, particularly over the short term. The Fund’s investments in companies engaged in mergers, reorganizations or liquidations also involve special risks as pending deals may not be completed on time or on favorable terms. The Fund may invest in lower rated bonds, which entail higher credit risk. The Fund is actively managed but there is no guarantee that the manager’s investment decisions will produce the desired results. The Fund’s prospectus also includes a description of the main investment risks.

Performance Overview

You can find the Fund’s one-year total return in the Performance Summary. In comparison, the Fund’s benchmark, the MSCI World Index, generated a +5.50% total return and the S&P 500 posted a +13.69% total return for the same period.1

Economic and Market Overview

The global economy grew moderately during the 12 months under review as U.S. economic growth expanded while growth rates in much of the rest of the world declined. As measured by the MSCI World Index, stocks in global developed markets advanced overall during the 12-month period amid a generally accommodative monetary policy environment and continued strength in corporate earnings.2 Oil prices declined sharply during the 12-month period, resulting from weak global demand growth and strong world supply, and gold prices ended lower amid benign global inflation and a strong U.S. dollar.

U.S. economic growth trends were generally encouraging during the period. Economic activity expanded for most of 2014, supported in some quarters by increased consumer spending, business

investment and federal defense spending. The U.S. Federal Reserve Board (Fed) began reducing its large-scale bond purchases $10 billion a month in January and ended the buying program in October. But it continued its practice of maintaining holdings of longer term securities at sizable levels. The Fed believed underlying economic strength could support ongoing progress in labor market conditions. Toward period-end, the Fed stated that it could be patient with regard to raising interest rates and that the interest rate might not rise for at least a couple of meetings, possibly implying at least the first two meetings of 2015.

Outside the U.S., the U.K. economy grew relatively well, supported by the services and manufacturing sectors. In the eurozone, economic growth remained subdued, as concerns persisted about the potential negative impacts to growth from the crisis in Ukraine and China’s moderating growth rate. However, third-quarter economic growth, though meager, exceeded expectations, especially in the region’s major economies of Germany and France. In June, the European Central Bank (ECB) reduced its main interest rate and, for the first time, set a negative deposit rate; the ECB reduced both rates again in September. The ECB broadened its monetary easing stance by implementing an asset purchase program to prevent deflation and stimulate the economy. Toward period-end, the ECB cut its 2014 growth forecast for the eurozone and attributed the reduction to geopolitical risks dampening confidence and private investment.

Japan’s second- and third-quarter economic contractions indicated the economy was in a recession. However, private consumption and exports improved in the third quarter. In October, the Bank of Japan expanded its stimulus measures amid weak domestic demand and as substantially lower crude oil prices exerted further downward pressure on inflation. Toward period-end, Japan’s ruling coalition was reelected in early parliamentary elections and subsequently announced a fresh stimulus package aimed at reviving economic growth.

In several emerging markets, economic growth generally moderated. However, Brazil exited recession as government spending prior to a presidential election drove third-quarter economic growth. Emerging market equities, as measured by the MSCI Emerging Markets Index, fell for the 12-month period, amid headwinds such as soft domestic demand and weak exports in several countries.2 Falling crude oil prices and geopolitical tensions in certain regions, as well as concerns about the timing of

 

 

1. Source: Morningstar.

One cannot invest directly in an index, and an index is not representative of the Fund’s portfolio. Please see Index Descriptions following the Fund Summaries.

2. Please see Index Descriptions following the Fund Summaries.

 

MGD-2    Annual Report    

FRANKLIN MUTUAL GLOBAL DISCOVERY VIP FUND

U.S. interest rate increases, also pressured emerging market equities. Many emerging market currencies depreciated against the U.S. dollar, leading central banks in several countries to raise interest rates in an effort to curb inflation and support their currencies. Several other central banks lowered interest rates to promote economic growth. After implementing monetary stimulus measures to support specific sectors, China’s central bank increased its efforts to bolster the economy by cutting its benchmark interest rates for the first time since July 2012. In contrast, Russia’s central bank raised its key interest rate sharply toward period-end to limit further devaluation of the Russian ruble and contain rising inflation.

Investment Strategy

At Mutual Series, we are committed to our distinctive value approach to investing. Our major investment strategy is investing in undervalued stocks. When selecting undervalued equities, we are attracted to fundamentally strong companies with healthy balance sheets, high-quality assets, substantial free cash flow and shareholder-oriented management teams and whose stocks are trading at discounts to our assessment of the companies’ intrinsic or business value. We also look for asset rich companies whose shares may be trading at depressed levels due to concerns over short-term earnings disappointments, litigation, management strategy or other perceived negatives. While the vast majority of our undervalued equity investments are made in publicly traded companies globally, we may invest occasionally in privately held companies as well.

We complement this more traditional investment strategy with two others. One is distressed investing, which is complex and can take many forms. The most common distressed investment the Fund undertakes is the purchase of financially troubled or bankrupt companies’ debt at a substantial discount to face value. After the financially distressed company is reorganized, often in bankruptcy court, the old debt is typically replaced with new securities issued by the financially stronger company.

The other piece of our investment strategy is participating in arbitrage situations, another highly specialized field. When companies announce proposed mergers or takeovers, commonly referred to as “deals,” the target company may trade at a discount to the bid it ultimately accepts. One form of arbitrage involves purchasing the target company’s stock when it is trading below the value we believe it would receive in a deal. In keeping with our commitment to a relatively conservative investment approach, we typically focus our arbitrage efforts on

 

 

LOGO

*Weightings may be negative or may not total 100% due to rounding, use of any derivatives, unsettled trades or other factors.

 

announced deals, and eschew rumored deals or other situations we consider relatively risky.

In addition, it is our practice to hedge the Fund’s currency exposure when we deem it advantageous for our shareholders.

 

    Annual Report     MGD-3   

FRANKLIN MUTUAL GLOBAL DISCOVERY VIP FUND

 

What is meant by “hedge”?

To hedge an investment is to take a position intended to offset potential losses/gains that may be incurred by a companion financial instrument.

 

Top 10 Sectors/Industries       
Based on Equity Securities       
12/31/14       
      % of Total
Net Assets		  
Banks      17.1%   
Insurance      7.9%   
Oil, Gas & Consumable Fuels      7.7%   
Pharmaceuticals      6.8%   
Media      6.3%   
Tobacco      5.2%   
Software      4.9%   
Food & Staples Retailing      3.7%   
Health Care Equipment & Supplies      3.5%   
Technology Hardware, Storage & Peripherals      2.8%   

Manager’s Discussion

Many Fund holdings increased in value during the 12-month period. Top contributors included technology leader Apple, Teva Pharmaceutical Industries and software company Microsoft.

During the year Apple reported consistently good quarterly results, driven by its strong iPhone business. In addition, the company announced a trio of shareholder friendly actions. These included an enhanced share repurchase program of $90 billion, up from $60 billion, with the same end date of December 2015, an 8% increase in the dividend, and a seven-for-one stock split that went into effect in early June. In September, the company released its highly anticipated iPhone 6, which sold 10 million units in its first two days. The iPhone sales drove a strong fiscal fourth quarter via healthy sales volumes and a strong product mix that led to a higher average selling price for the period. In October, the company refreshed its product line-up ahead of the holiday season, including launches of the new iPad Air 2, iPad Mini 3, iMac with Retina Display and an updated Mac Mini. Apple also announced the commencement of support for Apple Pay, its mobile payment and digital wallet application.

The performance of Israel-based Teva Pharmaceutical Industries was largely driven by positive events related to the company’s most profitable drug, Copaxone, used to prevent the relapse of multiple sclerosis. In March, the U.S. Supreme Court agreed to hear Teva’s appeal (with oral arguments occurring in

October) to maintain a patent, which further delayed the entrance of generic competition. The delay provided Teva the opportunity to convert more U.S. patients to its new formulation and allowed it to potentially retain a higher portion of the franchise once generic alternatives entered the market. In December, Teva received more good news regarding Copaxone with the new formulation gaining European Union approval. Investors also reacted favorably to the January 2014 announcement of a new chief executive officer (CEO) as the market believed he could successfully carry on Teva’s cost-cutting restructuring program.

Microsoft shares rose as the company named a new CEO in February. We viewed the hiring of Microsoft insider Satya Nadella as positive given his technical background and track record of reaching beyond Microsoft and embracing other technologies. A good example of Nadella’s openness was the March announcement that the company’s Office productivity suite would be made available for the Apple iPad. Nadella also announced a restructuring plan in July. The restructuring was intended to simplify the company’s operations and align the recently acquired Nokia Devices and Services business with the overall strategy.

During the period under review, some of the Fund’s investments negatively affected performance. These included retailer Metro, offshore drilling company Transocean and energy exploration and production firm Apache.

Upheaval in Ukraine and Russia’s involvement disrupted Germany-based retailer Metro’s planned partial initial public offering (IPO) of its Russia cash-and-carry business. The IPO was important as it would have provided a benchmark valuation for this important Metro operation and allowed Metro to fund growth and further reduce debt with the capital raised. Instead, the company sought to raise cash by selling other non-core assets, such as the September sale of its stake in U.K.-based Booker and its operations in Vietnam. As of year-end, we believed the market assigned little value to Metro’s Russian operations, despite the fact that the business continued to perform well amid deteriorating economic conditions within Russia. In our view, Metro stock has material upside potential should the situation in Ukraine be resolved and conditions in Russia improve in a reasonable time frame.

Transocean is a Switzerland-headquartered company providing offshore contract drilling services. The offshore drilling market continued to be mired in a downturn with little clarity regarding the length and depth of the current cycle as oil prices plunged during the second half of 2014. Oil companies pushed back projects, leaving a number of new rigs without contracts and increasing

 

 

MGD-4    Annual Report    

FRANKLIN MUTUAL GLOBAL DISCOVERY VIP FUND

potential downtime between jobs for existing rigs. The growing fleet of uncontracted rigs at period-end portended, in our view, weak second-half results and a challenging start to 2015. On a positive note, the company started a Master Limited Partnership (MLP), Transocean Partners, which went public in September. The MLP may provide Transocean with a way to generate cash by selling (dropping down) assets into Transocean Partners while still controlling the operations of those assets.

Share prices of energy sector companies almost universally plunged during the second half of 2014, driven by a collapse in oil prices. The spot price of crude oil declined nearly 50% from its 2014 peak price in June. Apache was hit especially hard due to its current restructuring efforts. In early May, Apache took a significant step in its program of monetizing capital-intensive, long-lead-time assets, selling non-producing deepwater oil and gas projects in the Gulf of Mexico that were a drain on cash flow. However, during the second half of 2014, investors became concerned that Apache’s attempts to sell additional assets would be unsuccessful and failed asset sales would result in a weak balance sheet at a time of depressed commodity prices. In December, Apache sold its liquefied natural gas assets and some upstream Australian assets for $2.75 billion. In our view, the sales materially strengthened the company’s balance sheet and could result in reduced future capital requirements.

During the period, the Fund held currency forwards and futures to somewhat hedge the currency risk of the portfolio’s non-U.S. dollar investments. The hedges had a positive impact on the Fund’s performance during the period.

 

What is a currency forward contract?

A currency forward contract, or a currency forward, is an agreement between the Fund and a counterparty to buy or sell a foreign currency at a specific exchange rate on a future date.

 

What is a futures contract?

A futures contract, or a future, is an agreement between the Fund and a counterparty made through a U.S. or foreign futures exchange to buy or sell an asset at a specific price on a future date.

 

Top 10 Equity Holdings       
12/31/14       
Company
Sector/Industry, Country		    % of Total
Net Assets		  

Merck & Co. Inc.

Pharmaceuticals, U.S.

      2.6%   

Microsoft Corp.

Software, U.S.

      2.5%   

Medtronic Inc.

Health Care Equipment & Supplies, U.S.

      2.5%   

Wells Fargo & Co.

Banks, U.S.

      2.3%   

Royal Dutch Shell PLC, A

Oil, Gas & Consumable Fuels, U.K.

      2.1%   

Apple Inc.

Technology Hardware, Storage & Peripherals, U.S.

      2.0%   

Teva Pharmaceutical Industries Ltd., ADR

Pharmaceuticals, Israel

      2.0%   

American International Group Inc.

Insurance, U.S.

      1.8%   

A.P. Moeller-Maersk AS, B

Marine, Denmark

      1.8%   

ACE Ltd.

Insurance, U.S.

      1.7%   

The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund’s Statement of Investments.

 

Thank you for your participation in Franklin Mutual Global Discovery VIP Fund. We look forward to serving your future investment needs.

The foregoing information reflects our analysis, opinions and portfolio holdings as of December 31, 2014, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.

 

    Annual Report     MGD-5   

FRANKLIN MUTUAL GLOBAL DISCOVERY VIP FUND

Class 4 Fund Expenses

As an investor in a variable insurance contract (Contract) that indirectly provides for investment in an underlying mutual fund, you can incur transaction and/or ongoing expenses at both the Fund level and the Contract level.

 

•   Transaction expenses can include sales charges (loads) on purchases, redemption fees, surrender fees, transfer fees and premium taxes.

 

•   Ongoing expenses can include management fees, distribution and service (12b-1) fees, contract fees, annual maintenance fees, mortality and expense risk fees and other fees and expenses. All mutual funds and Contracts have some types of ongoing expenses.

The expenses shown in the table are meant to highlight ongoing expenses at the Fund level only and do not include ongoing expenses at the Contract level, or transaction expenses at either the Fund or Contract level. While the Fund does not have transaction expenses, if the transaction and ongoing expenses at the Contract level were included, the expenses shown below would be higher. You should consult your Contract prospectus or disclosure document for more information.

The table shows Fund-level ongoing expenses and can help you understand these expenses and compare them with those of other mutual funds offered through the Contract. The table assumes a $1,000 investment held for the six months indicated. Please refer to the Fund prospectus for additional information on operating expenses.

Actual Fund Expenses

The first line (Actual) of the table provides actual account values and expenses. The “Ending Account Value” is derived from the Fund’s actual return, which includes the effect of ongoing Fund expenses, but does not include the effect of ongoing Contract expenses.

You can estimate the Fund-level expenses you incurred during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:

 

1. Divide your account value by $1,000.

If an account had an $8,600 value,

then $8,600 ÷ $1,000 = 8.6.

 

2. Multiply the result by the number under the heading “Fund-Level Expenses Incurred During Period.”

If Fund-Level Expenses Incurred During Period were $7.50, then 8.6 × $7.50 = $64.50.

In this illustration, the estimated expenses incurred this period at the Fund level are $64.50.

Hypothetical Example for Comparison with Other Mutual Funds

Information in the second line (Hypothetical) of the table can help you compare ongoing expenses of the Fund with those of other mutual funds offered through the Contract. This information may not be used to estimate the actual ending account balance or expenses you incurred during the period. The hypothetical “Ending Account Value” is based on the Fund’s actual expense ratio and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Fund-Level Expenses Incurred During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds offered through a Contract.

 
Class 4  

Beginning Account

Value 7/1/14

     

Ending Account

Value 12/31/14

     

Fund-Level Expenses
Incurred During Period*

7/1/14–12/31/14

  

Actual

     $1,000         $   985.60         $6.81   

Hypothetical (5% return before expenses)

     $1,000         $1,018.35         $6.92   

*Expenses are calculated using the most recent six-month annualized expense ratio for the Fund’s Class 4 shares (1.36%), which does not include any ongoing expenses of the Contract for which the Fund is an investment option, multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period.

 

MGD-6    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

Financial Highlights

Franklin Mutual Global Discovery VIP Fund

     Year Ended December 31,  
      2014      2013      2012      2011      2010  
Class 1               
Per share operating performance
(for a share outstanding throughout the year)		               

Net asset value, beginning of year

      $23.31         $20.55         $19.66         $21.16         $19.14   
  

 

 

  
Income from investment operationsa:               

Net investment incomeb

      0.68 c       0.46         0.43         0.52         0.38   

Net realized and unrealized gains (losses)

      0.76         5.03         2.21         (1.09 )       1.94   
  

 

 

  

Total from investment operations

      1.44         5.49         2.64         (0.57 )       2.32   
  

 

 

  
Less distributions from:               

Net investment income

      (0.57 )       (0.58 )       (0.64 )       (0.50 )       (0.30 ) 

Net realized gains

      (1.57 )       (2.15 )       (1.11 )       (0.43 )       —   
  

 

 

  

Total distributions

      (2.14 )       (2.73 )       (1.75 )       (0.93 )       (0.30 ) 
  

 

 

  

Net asset value, end of year

      $22.61         $23.31         $20.55         $19.66         $21.16   
  

 

 

  

Total returnd

      5.98%         27.95%         13.63%         (2.73)%         12.24%   
Ratios to average net assets               

Expensese

      1.00% f       0.97% f       0.99%         0.97% f       1.00% f 

Expenses incurred in connection with securities sold short

      0.03%         —% g       —% g       —% g       0.02%   

Net investment income

      2.85% c       2.13%         2.12%         2.34%         1.93%   
Supplemental data               

Net assets, end of year (000’s)

      $2,313         $2,465         $1,136         $974         $84,213   

Portfolio turnover rate

      22.18%         15.58%         25.63%         26.17% h       49.31%   

aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.

bBased on average daily shares outstanding.

cNet investment income per share includes approximately $0.34 per share received in the form of special dividends paid in connection with certain Fund’s holdings. Excluding these amounts, the ratio of net investment income to average net assets would have been 1.40%.

dTotal return does not include fees, charges or expenses imposed by the variable annuity and life insurance contracts for which the Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle.

eIncludes dividend or interest expense on securities sold short and security borrowing fees, if any. See below for the ratios of such expenses to average net assets for the periods presented. See Note 1(e).

fBenefit of expense reduction rounds to less than 0.01%.

gRounds to less than 0.01%.

hExcludes the value of portfolio securities delivered as a result of a redemption in-kind.

 

    The accompanying notes are an integral part of these financial statements.    |   Annual Report     MGD-7   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FINANCIAL HIGHLIGHTS

Franklin Mutual Global Discovery VIP Fund (continued)

     Year Ended December 31,  
      2014      2013      2012      2011      2010  
Class 2               
Per share operating performance
(for a share outstanding throughout the year)		               

Net asset value, beginning of year

      $22.84         $20.17         $19.30         $20.80         $18.81   
  

 

 

  
Income from investment operationsa:               

Net investment incomeb

      0.60 c       0.42         0.38         0.43         0.33   

Net realized and unrealized gains (losses)

      0.75         4.92         2.15         (1.04 )       1.91   
  

 

 

  

Total from investment operations

      1.35         5.34         2.53         (0.61 )       2.24   
  

 

 

  
Less distributions from:               

Net investment income

      (0.51 )       (0.52 )       (0.55 )       (0.46 )       (0.25 ) 

Net realized gains

      (1.57 )       (2.15 )       (1.11 )       (0.43 )       —   
  

 

 

  

Total distributions

      (2.08 )       (2.67 )       (1.66 )       (0.89 )       (0.25 ) 
  

 

 

  

Net asset value, end of year

      $22.11         $22.84         $20.17         $19.30         $20.80   
  

 

 

  

Total returnd

      5.71%         27.61%         13.36%         (2.96)%         11.96%   
Ratios to average net assets               

Expensese

      1.25% f       1.22% f       1.24%         1.22% f       1.25% f 

Expenses incurred in connection with securities sold short

      0.03%         —% g       —% g       —% g       0.02%   

Net investment income

      2.60% c       1.88%         1.87%         2.09%         1.68%   
Supplemental data               

Net assets, end of year (000’s)

      $685,711         $684,780         $660,465         $712,161         $1,351,223   

Portfolio turnover rate

      22.18%         15.58%         25.63%         26.17% h       49.31%   

aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.

bBased on average daily shares outstanding.

cNet investment income per share includes approximately $0.34 per share received in the form of special dividends paid in connection with certain Fund’s holdings. Excluding these amounts, the ratio of net investment income to average net assets would have been 1.15%.

dTotal return does not include fees, charges or expenses imposed by the variable annuity and life insurance contracts for which the Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle.

eIncludes dividend or interest expense on securities sold short and security borrowing fees, if any. See below for the ratios of such expenses to average net assets for the periods presented. See Note 1(e).

fBenefit of expense reduction rounds to less than 0.01%.

gRounds to less than 0.01%.

hExcludes the value of portfolio securities delivered as a result of a redemption in-kind.

 

MGD-8    Annual Report   |    The accompanying notes are an integral part of these financial statements.    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FINANCIAL HIGHLIGHTS

Franklin Mutual Global Discovery VIP Fund (continued)

     Year Ended December 31,  
      2014      2013      2012      2011      2010  
Class 4               
Per share operating performance
(for a share outstanding throughout the year)		               

Net asset value, beginning of year

      $23.10         $20.38         $19.50         $21.02         $19.02   
  

 

 

  
Income from investment operationsa:               

Net investment incomeb

      0.61 c       0.40         0.36         0.40         0.31   

Net realized and unrealized gains (losses)

      0.73         4.97         2.19         (1.05 )       1.94   
  

 

 

  

Total from investment operations

      1.34         5.37         2.55         (0.65 )       2.25   
  

 

 

  
Less distributions from:               

Net investment income

      (0.48 )       (0.50 )       (0.56 )       (0.44 )       (0.25 ) 

Net realized gains

      (1.57 )       (2.15 )       (1.11 )       (0.43 )       —   
  

 

 

  

Total distributions

      (2.05 )       (2.65 )       (1.67 )       (0.87 )       (0.25 ) 
  

 

 

  

Net asset value, end of year

      $22.39         $23.10         $20.38         $19.50         $21.02   
  

 

 

  

Total returnd

      5.60%         27.52%         13.27%         (3.08)%         11.87%   
Ratios to average net assets               

Expensese

      1.35% f       1.32% f       1.34%         1.32% f       1.35% f 

Expenses incurred in connection with securities sold short

      0.03%         —% g       —% g       —% g       0.02%   

Net investment income

      2.50% c       1.78%         1.77%         1.99%         1.58%   
Supplemental data               

Net assets, end of year (000’s)

      $59,961         $70,354         $62,346         $66,695         $70,613   

Portfolio turnover rate

      22.18%         15.58%         25.63%         26.17% h       49.31%   

aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.

bBased on average daily shares outstanding.

cNet investment income per share includes approximately $0.34 per share received in the form of special dividends paid in connection with certain Fund’s holdings. Excluding these amounts, the ratio of net investment income to average net assets would have been 1.05%.

dTotal return does not include fees, charges or expenses imposed by the variable annuity and life insurance contracts for which the Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle.

eIncludes dividend or interest expense on securities sold short and security borrowing fees, if any. See below for the ratios of such expenses to average net assets for the periods presented. See Note 1(e).

fBenefit of expense reduction rounds to less than 0.01%.

gRounds to less than 0.01%.

hExcludes the value of portfolio securities delivered as a result of a redemption in-kind.

 

    The accompanying notes are an integral part of these financial statements.    |   Annual Report     MGD-9   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

Statement of Investments, December 31, 2014

 

Franklin Mutual Global Discovery VIP Fund                 
           Country     Shares/
Rights/Units		        Value  
 

Common Stocks and Other Equity Interests 90.2%

          
 

Aerospace & Defense 1.2%

          
a  

B/E Aerospace Inc.

      United States        65,840         $ 3,820,037   
a  

KLX Inc.

      United States        32,920           1,357,950   
 

Safran SA

      France        59,465           3,687,574   
           

 

 

  
              8,865,561   
           

 

 

  
 

Auto Components 0.8%

          
 

Cie Generale des Etablissements Michelin, B

      France        30,800           2,805,162   
a,b  

International Automotive Components Group Brazil LLC

      Brazil        424,073           40,109   
a,b,c  

International Automotive Components Group North America LLC

      United States        4,052,916           3,068,787   
           

 

 

  
              5,914,058   
           

 

 

  
 

Automobiles 1.4%

          
 

General Motors Co.

      United States        214,110           7,474,580   
 

Hyundai Motor Co.

      South Korea        20,953           3,237,508   
           

 

 

  
              10,712,088   
           

 

 

  
 

Banks 17.1%

          
 

Barclays PLC

      United Kingdom        2,052,511           7,790,171   
 

BNP Paribas SA

      France        117,870           7,025,594   
a  

Capital Bank Financial Corp., A

      United States        78,494           2,103,639   
a,d  

Capital Bank Financial Corp., B, 144A, non-voting

      United States        269,922           7,233,910   
 

CIT Group Inc.

      United States        108,462           5,187,737   
 

Citigroup Inc.

      United States        229,050           12,393,895   
 

Citizens Financial Group Inc.

      United States        90,486           2,249,482   
a  

Commerzbank AG

      Germany        598,393           7,950,130   
 

HSBC Holdings PLC

      United Kingdom        586,355           5,562,309   
 

Industrial and Commercial Bank of China Ltd., H

      China        9,380,679           6,847,432   
a  

ING Groep NV, IDR

      Netherlands        756,040           9,907,375   
 

JPMorgan Chase & Co.

      United States        131,280           8,215,502   
 

KB Financial Group Inc.

      South Korea        85,560           2,827,854   
 

PNC Financial Services Group Inc.

      United States        112,821           10,292,660   
a  

Seacoast Banking Corp. of Florida

      United States        398,000           5,472,500   
 

Societe Generale SA

      France        118,614           5,021,868   
 

SunTrust Banks Inc.

      United States        111,578           4,675,118   
 

Wells Fargo & Co.

      United States        307,140           16,837,415   
           

 

 

  
              127,594,591   
           

 

 

  
 

Beverages 1.3%

          
 

Coca-Cola Enterprises Inc.

      United States        19,931           881,349   
 

PepsiCo Inc.

      United States        90,367           8,545,103   
           

 

 

  
              9,426,452   
           

 

 

  
 

Capital Markets 0.6%

          
 

Credit Suisse Group AG

      Switzerland        171,112           4,316,525   
           

 

 

  
 

Communications Equipment 1.3%

          
 

Cisco Systems Inc.

      United States        359,180           9,990,592   
           

 

 

  
 

Consumer Finance 0.5%

          
a  

Ally Financial Inc.

      United States        151,600           3,580,792   
           

 

 

  
 

Diversified Consumer Services 0.1%

          
 

Cengage Learning Holdings II LP

      United States        22,762           512,145   
           

 

 

  

 

MGD-10    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

Franklin Mutual Global Discovery VIP Fund (continued)

           Country     Shares/
Rights/Units		        Value  
 

Common Stocks and Other Equity Interests (continued)

  

       
 

Diversified Telecommunication Services 0.0%

          
a,e,f  

Global Crossing Holdings Ltd., Contingent Distribution

      United States        2,236,777         $ —   
           

 

 

  
 

Energy Equipment & Services 1.5%

          
 

Baker Hughes Inc.

      United States        141,757           7,948,315   
 

Ensco PLC, A

      United States        42,249           1,265,358   
g  

Transocean Ltd.

      United States        120,473           2,208,270   
           

 

 

  
              11,421,943   
           

 

 

  
 

Food & Staples Retailing 3.7%

          
 

CVS Health Corp.

      United States        46,236           4,452,989   
 

Empire Co. Ltd., A

      Canada        72,193           5,447,191   
 

Metro AG

      Germany        318,004           9,738,904   
 

Walgreens Boots Alliance Inc.

      United States        102,904           7,841,285   
           

 

 

  
              27,480,369   
           

 

 

  
 

Health Care Equipment & Supplies 3.5%

          
 

Medtronic Inc.

      United States        257,980           18,626,156   
 

Stryker Corp.

      United States        83,662           7,891,836   
           

 

 

  
              26,517,992   
           

 

 

  
 

Health Care Providers & Services 0.9%

          
 

Cigna Corp.

      United States        63,106           6,494,238   
           

 

 

  
 

Hotels, Restaurants & Leisure 1.4%

          
 

Accor SA

      France        233,913           10,568,517   
           

 

 

  
 

Independent Power & Renewable Electricity Producers 1.1%

          
 

NRG Energy Inc.

      United States        299,277           8,065,515   
           

 

 

  
 

Industrial Conglomerates 2.0%

          
 

Jardine Strategic Holdings Ltd.

      Hong Kong        371,698           12,712,072   
 

Koninklijke Philips NV

      Netherlands        51,504           1,505,024   
 

Siemens AG

      Germany        3,785           429,361   
           

 

 

  
              14,646,457   
           

 

 

  
 

Insurance 7.9%

          
 

ACE Ltd.

      United States        112,290           12,899,875   
a  

Alleghany Corp.

      United States        2,730           1,265,355   
 

The Allstate Corp.

      United States        104,847           7,365,502   
 

American International Group Inc.

      United States        243,553           13,641,404   
 

China Pacific Insurance (Group) Co. Ltd., H

      China        998,479           5,041,360   
 

E-L Financial Corp. Ltd.

      Canada        5,378           3,189,171   
 

MetLife Inc.

      United States        63,096           3,412,863   
a,b  

Olympus Re Holdings Ltd.

      United States        2,140           —   
 

PartnerRe Ltd.

      United States        58,470           6,673,181   
 

PICC Property and Casualty Co. Ltd., H

      China        180,838           351,696   
 

Zurich Insurance Group AG

      Switzerland        17,558           5,504,756   
           

 

 

  
              59,345,163   
           

 

 

  
 

IT Services 1.1%

          
 

Xerox Corp.

      United States        612,817           8,493,644   
           

 

 

  
 

Marine 1.8%

          
 

A.P. Moeller-Maersk AS, B

      Denmark        6,595           13,254,505   
           

 

 

  

 

    Annual Report     MGD-11   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

Franklin Mutual Global Discovery VIP Fund (continued)

           Country     Shares/
Rights/Units		        Value  
 

Common Stocks and Other Equity Interests (continued)

  

       
 

Media 6.3%

          
 

CBS Corp., B

      United States        91,632         $ 5,070,915   
 

Comcast Corp., Special A

      United States        48,623           2,798,983   
a  

DIRECTV

      United States        111,180           9,639,306   
 

Reed Elsevier PLC

      United Kingdom        229,978           3,943,134   
 

Time Warner Cable Inc.

      United States        62,129           9,447,336   
 

Time Warner Inc.

      United States        66,132           5,648,995   
a  

Tribune Media Co., A

      United States        37,010           2,212,088   
a  

Tribune Media Co., B

      United States        26,867           1,605,840   
 

Tribune Publishing Co.

      United States        17,670           404,643   
 

Twenty-First Century Fox Inc., B

      United States        170,160           6,277,202   
           

 

 

  
              47,048,442   
           

 

 

  
 

Metals & Mining 2.0%

          
 

Anglo American PLC

      United Kingdom        151,808           2,840,660   
 

Freeport-McMoRan Inc., B

      United States        135,280           3,160,141   
a  

ThyssenKrupp AG

      Germany        344,296           8,856,877   
           

 

 

  
              14,857,678   
           

 

 

  
 

Multiline Retail 0.4%

          
 

Kohl’s Corp.

      United States        55,561           3,391,443   
           

 

 

  
 

Oil, Gas & Consumable Fuels 7.7%

          
 

Anadarko Petroleum Corp.

      United States        41,180           3,397,350   
 

Apache Corp.

      United States        149,500           9,369,165   
 

BG Group PLC

      United Kingdom        224,778           3,030,626   
 

BP PLC

      United Kingdom        1,028,014           6,585,722   
 

China Shenhua Energy Co. Ltd., H

      China        2,009,534           5,934,824   
 

CONSOL Energy Inc.

      United States        114,311           3,864,855   
 

Marathon Oil Corp.

      United States        178,885           5,060,657   
 

Repsol SA

      Spain        65,116           1,224,796   
 

Repsol SA (interim line)

      Spain        1,915           36,020   
a  

Repsol SA, rts., 1/08/15

      Spain        6           3   
 

Royal Dutch Shell PLC, A

      United Kingdom        469,862           15,725,623   
 

Talisman Energy Inc.

      Canada        428,960           3,358,757   
           

 

 

  
              57,588,398   
           

 

 

  
 

Paper & Forest Products 0.2%

          
 

NewPage Holdings Inc.

      United States        19,416           1,762,002   
           

 

 

  
 

Personal Products 0.4%

          
 

Avon Products Inc.

      United States        311,441           2,924,431   
           

 

 

  
 

Pharmaceuticals 6.8%

          
 

Eli Lilly & Co.

      United States        122,317           8,438,650   
a  

Hospira Inc.

      United States        44,053           2,698,246   
 

Merck & Co. Inc.

      United States        346,558           19,681,029   
 

Novartis AG, ADR

      Switzerland        60,628           5,617,791   
 

Teva Pharmaceutical Industries Ltd., ADR

      Israel        257,877           14,830,506   
           

 

 

  
              51,266,222   
           

 

 

  
 

Real Estate Management & Development 1.0%

          
f  

Canary Wharf Group PLC

      United Kingdom        487,324           4,108,670   
 

Dalian Wanda Commercial Properties Co. Ltd., H

      China        482,100           3,068,325   
           

 

 

  
              7,176,995   
           

 

 

  

 

MGD-12    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

Franklin Mutual Global Discovery VIP Fund (continued)

           Country     Shares/
Rights/Units		        Value  
 

Common Stocks and Other Equity Interests (continued)

  

       
 

Road & Rail 0.3%

          
a  

CAR Inc.

      China        1,626,783         $ 2,190,318   
           

 

 

  
 

Semiconductors & Semiconductor Equipment 0.3%

          
a  

SK Hynix Semiconductor Inc.

      South Korea        53,632           2,341,398   
           

 

 

  
 

Software 4.9%

          
a  

Check Point Software Technologies Ltd.

      Israel        106,122           8,338,005   
 

Microsoft Corp.

      United States        406,422           18,878,302   
 

Symantec Corp.

      United States        364,800           9,358,944   
           

 

 

  
              36,575,251   
           

 

 

  
 

Specialty Retail 1.0%

          
 

Kingfisher PLC

      United Kingdom        1,354,320           7,187,882   
           

 

 

  
 

Technology Hardware, Storage & Peripherals 2.8%

          
 

Apple Inc.

      United States        138,547           15,292,818   
 

Hewlett-Packard Co.

      United States        146,350           5,873,025   
           

 

 

  
              21,165,843   
           

 

 

  
 

Tobacco 5.2%

          
 

Altria Group Inc.

      United States        176,234           8,683,049   
 

British American Tobacco PLC

      United Kingdom        220,778           12,044,433   
 

Lorillard Inc.

      United States        197,019           12,400,376   
 

Philip Morris International Inc.

      United States        75,124           6,118,850   
           

 

 

  
              39,246,708   
           

 

 

  
 

Wireless Telecommunication Services 1.7%

          
 

Vodafone Group PLC

      United Kingdom        3,618,505           12,557,824   
           

 

 

  
 

Total Common Stocks and Other Equity Interests
(Cost $499,445,334)

             674,481,982   
           

 

 

  
 

Preferred Stocks 1.4%

          
 

Automobiles 0.8%

          
 

Volkswagen AG, pfd.

      Germany        26,396           5,897,566   
           

 

 

  
 

Diversified Financial Services 0.6%

          
a,b  

Hightower Holding LLC, pfd., A, Series 2

      United States        2,172,000           5,052,941   
           

 

 

  
 

Total Preferred Stocks (Cost $10,942,486)

             10,950,507   
           

 

 

  
               Principal Amount*           
 

Corporate Bonds, Notes and Senior Floating Rate Interests 2.9%

          
d  

Avaya Inc., senior note, 144A, 10.50%, 3/01/21

      United States        609,000           523,740   
h,i  

Caesars Entertainment Operating Co. Inc., Senior Tranche, first lien, B7, 9.75%, 3/01/17

      United States        1,176,090           1,043,192   
h,i  

Cengage Learning Acquisitions Inc., First Lien Exit Term Loan, 7.00%, 3/31/20

      United States        146,890           145,605   
 

iHeartCommunications Inc.,

          
 

senior secured note, first lien, 9.00%, 12/15/19

      United States        5,184,000           5,125,680   
 

h,iTranche B Term Loan, 3.819%, 1/29/16

      United States        49,521           49,010   
 

h,iTranche C Term Loan, 3.819%, 1/29/16

      United States        7,331           7,249   
 

h,iTranche D Term Loan, 6.919%, 1/30/19

      United States        6,889,154           6,508,101   
 

h,iTranche E Term Loan, 7.669%, 7/30/19

      United States        2,213,881           2,128,093   

 

    Annual Report     MGD-13   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

Franklin Mutual Global Discovery VIP Fund (continued)

           Country     Principal Amount*        Value  
 

Corporate Bonds, Notes and Senior Floating Rate Interests (continued)

          
h,i  

JC Penney Corp. Inc., Term Loan, 6.00%, 5/22/18

      United States        722,990         $ 712,597   
d  

NGPL PipeCo LLC,

          
 

secured note, 144A, 7.119%, 12/15/17

      United States        1,086,000           1,072,425   
 

gsenior secured note, 144A, 9.625%, 6/01/19

      United States        2,369,000           2,386,767   
 

Walter Energy Inc.,

          
 

h,iB, Term Loan, 7.25%, 4/01/18

      United States        1,651,867           1,285,359   
 

dfirst lien, 144A, 9.50%, 10/15/19

      United States        966,000           738,990   
 

d,g,jsecond lien, 144A, PIK, 11.50%, 4/01/20

      United States        778,000           256,778   
           

 

 

  
 

Total Corporate Bonds, Notes and Senior Floating Rate Interests (Cost $22,071,131)

             21,983,586   
           

 

 

  
 

Corporate Notes and Senior Floating Rate Interests in Reorganization 1.1%

          
b,k  

Broadband Ventures III LLC, secured promissory note, 5.00%, 2/01/12

      United States        595           —   
h,i,k  

Texas Competitive Electric Holdings Co. LLC, Extended Term Loan, 4.648%, 10/10/17

      United States        5,912,264           3,828,191   
d,k  

Texas Competitive Electric Holdings Co. LLC/Texas Competitive Electric Holdings Finance Inc., senior secured note, 144A, 11.50%, 10/01/20

      United States        5,895,000           4,200,187   
           

 

 

  
 

Total Corporate Notes and Senior Floating Rate Interests in Reorganization (Cost $10,546,425)

             8,028,378   
           

 

 

  
               Shares           
 

Companies in Liquidation 0.6%

          
a  

Adelphia Recovery Trust

      United States        5,379,562           12,911   
a,e  

Adelphia Recovery Trust, Arahova Contingent Value Vehicle, Contingent Distribution

      United States        386,774           3,868   
a,e,f  

Century Communications Corp., Contingent Distribution

      United States        1,074,000           —   
a,b  

FIM Coinvestor Holdings I, LLC

      United States        2,077,368           —   
a,l  

Lehman Brothers Holdings Inc., Bankruptcy Claim

      United States        17,348,669           4,337,167   
a,e,f  

NewPage Corp., Litigation Trust, Contingent Distribution

      United States        4,854,000           —   
a,e,f  

Tribune Media Litigation Trust, Contingent Distribution

      United States        56,883           —   
           

 

 

  
 

Total Companies in Liquidation (Cost $5,290,112)

             4,353,946   
           

 

 

  
               Principal Amount*           
 

Municipal Bonds (Cost $2,111,088) 0.3%

          
 

Puerto Rico Commonwealth GO, Refunding, Series A, 8.00%, 7/01/35

      United States        2,261,000           1,975,549   
           

 

 

  
 

Total Investments before Short Term Investments
(Cost $550,406,576)

             721,773,948   
           

 

 

  

 

MGD-14    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

Franklin Mutual Global Discovery VIP Fund (continued)

           Country     Principal Amount*        Value  
 

Short Term Investments 2.8%

          
 

U.S. Government and Agency Securities 2.5%

          
m  

FHLB, 1/02/15

      United States        1,400,000         $ 1,400,000   
m,n  

U.S. Treasury Bills, 1/02/15 - 5/14/15

      United States        17,350,000           17,349,370   
           

 

 

  
 

Total U.S. Government and Agency Securities (Cost $18,748,604)

             18,749,370   
           

 

 

  
 

Total Investments before Money Market Funds (Cost $569,155,180)

             740,523,318   
           

 

 

  
               Shares           
o  

Investments from Cash Collateral Received for Loaned Securities (Cost $1,964,154) 0.3%

          
 

Money Market Funds 0.3%

          
p  

BNY Mellon Overnight Government Fund, 0.072%

      United States        1,964,154           1,964,154   
           

 

 

  
 

Total Investments (Cost $571,119,334) 99.3%

             742,487,472   
 

Securities Sold Short (0.6)%

             (4,854,863 ) 
 

Other Assets, less Liabilities 1.3%

             10,353,046   
           

 

 

  
 

Net Assets 100.0%

           $ 747,985,655   
           

 

 

  
q  

Securities Sold Short (Proceeds $5,054,971) (0.6)%

  

       
 

Common Stocks (0.6)%

          
 

Diversified Telecommunication Services (0.6)%

          
 

AT&T Inc.

      United States        144,533         $ (4,854,863 ) 
           

 

 

  

*The principal amount is stated in U.S. dollars unless otherwise indicated.

aNon-income producing.

bSee Note 8 regarding restricted securities.

cAt December 31, 2014, pursuant to the Fund’s policies and the requirements of applicable securities law, the Fund may be restricted from trading this security for a limited or extended period of time.

dSecurity was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be sold in transactions exempt from registration only to qualified institutional buyers or in a public offering registered under the Securities Act of 1933. These securities have been deemed liquid under guidelines approved by the Trust’s Board of Trustees. At December 31, 2014, the aggregate value of these securities was $16,412,797, representing 2.19% of net assets.

eContingent distributions represent the right to receive additional distributions, if any, during the reorganization of the underlying company. Shares represent total underlying principal of debt securities.

fSecurity has been deemed illiquid because it may not be able to be sold within seven days. At December 31, 2014, the aggregate value of these securities was $4,108,670, representing 0.55% of net assets.

gA portion or all of the security is on loan at December 31, 2014. See Note 1(f).

hSee Note 1(g) regarding senior floating rate interests.

iThe coupon rate shown represents the rate at period end.

jIncome may be received in additional securities and/or cash.

kSee Note 7 regarding credit risk and defaulted securities.

lBankruptcy claims represent the right to receive distributions, if any, during the liquidation of the underlying pool of assets. Shares represent amount of allowed unsecured claims.

mThe security is traded on a discount basis with no stated coupon rate.

nSecurity or a portion of the security has been pledged as collateral for securities sold short and open futures contracts. At December 31, 2014, the aggregate value of these securities and/or cash pledged as collateral was $8,548,878, representing 1.14% of net assets.

oSee Note 1(f) regarding securities on loan.

pThe rate shown is the annualized seven-day yield at period end.

qSee Note 1(e) regarding securities sold short.

 

    Annual Report     MGD-15   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

Franklin Mutual Global Discovery VIP Fund (continued)

At December 31, 2014, the Fund had the following futures contracts outstanding. See Note 1(c).

 

Futures Contracts                                          
Description    Type      Number of
Contracts		      Notional
Value		      Expiration
Date		      Unrealized
Appreciation		      Unrealized
Depreciation		  
Currency Contracts                  

CHF/USD

      Short         2       $ 251,850         3/16/15       $ 5,869       $  —     

EUR/USD

      Short         244         36,926,350         3/16/15         889,557         —     

GBP/USD

      Short         212         20,630,250         3/16/15         119,799         —     
              

 

 

  

Net unrealized appreciation (depreciation)

  

    $ 1,015,225      
              

 

 

     

At December 31, 2014, the Fund had the following forward exchange contracts outstanding. See Note 1(c).

 

Forward Exchange Contracts  
Currency    Counterpartya      Type      Quantity      Contract
Amount		      Settlement
Date		      Unrealized
Appreciation		      Unrealized
Depreciation		  

Euro

      BOFA         Buy         62,119       $ 77,835         1/20/15       $ —       $ (2,654 )

Euro

      BOFA         Sell         234,863         310,282         1/20/15         26,035         —   

Euro

      BONY         Buy         224,335         279,180         1/20/15         —         (7,675 )

Euro

      DBAB         Buy         366,036         455,962         1/20/15         —         (12,961 )

Euro

      DBAB         Sell         420,141         557,159         1/20/15         48,675         —   

Euro

      FBCO         Buy         280,569         349,638         1/20/15         —         (10,075 )

Euro

      FBCO         Sell         131,344         174,977         1/20/15         16,015         —   

Euro

      HSBC         Buy         352,533         438,561         1/20/15         —         (11,902 )

Euro

      HSBC         Sell         611,754         816,909         1/20/15         76,522         —   

Euro

      SCBT         Sell         239,523         316,561         1/20/15         26,674         —   

Euro

      SSBT         Buy         374,550         466,580         1/20/15         —         (13,274 )

Euro

      SSBT         Sell         134,992         178,390         1/20/15         15,013         —   

British Pound

      BOFA         Buy         1,520,270         2,480,687         1/21/15         —         (111,442 )

British Pound

      BZWS         Buy         1,586,023         2,557,212         1/21/15         —         (85,494 )

British Pound

      DBAB         Sell         3,447,464         5,879,317         1/21/15         506,661         —   

British Pound

      FBCO         Buy         568,431         928,038         1/21/15         —         (42,174 )

British Pound

      FBCO         Sell         72,578         117,656         1/21/15         4,548         —   

British Pound

      HSBC         Buy         96,469         162,092         1/21/15         —         (11,751 )

British Pound

      HSBC         Sell         2,424,144         4,135,590         1/21/15         357,714         —   

British Pound

      SCBT         Sell         124,777         202,231         1/21/15         7,774         —   

British Pound

      SSBT         Buy         295,457         495,080         1/21/15         —         (34,630 )

British Pound

      SSBT         Sell         3,197,314         5,457,176         1/21/15         474,363         —   

South Korean Won

      BOFA         Sell         2,704,847,671         2,578,029         2/12/15         115,027         (4,647 )

South Korean Won

      BONY         Sell         140,593,045         136,229         2/12/15         7,965         —   

South Korean Won

      FBCO         Buy         68,366,719         62,550         2/12/15         —         (178 )

South Korean Won

      FBCO         Sell         2,399,126,376         2,307,949         2/12/15         120,929         (1,718 )

South Korean Won

      HSBC         Buy         1,244,472,266         1,131,505         2/12/15         7,588         (3,753 )

South Korean Won

      HSBC         Sell         5,263,250,893         5,024,736         2/12/15         225,181         (2,141 )

Swiss Franc

      BOFA         Buy         148,821         153,643         2/12/15         —         (3,842 )

Swiss Franc

      BOFA         Sell         1,765,381         1,952,448         2/12/15         175,439         —   

Swiss Franc

      DBAB         Buy         223,217         231,427         2/12/15         —         (6,739 )

Swiss Franc

      DBAB         Sell         80,450         87,164         2/12/15         6,184         —   

Swiss Franc

      FBCO         Buy         253,437         263,769         2/12/15         —         (8,663 )

Swiss Franc

      FBCO         Sell         70,617         74,996         2/12/15         3,913         —   

Swiss Franc

      HSBC         Buy         8,608         8,899         2/12/15         —         (234 )

Swiss Franc

      HSBC         Sell         21,773         22,134         2/12/15         218         —   

Swiss Franc

      SSBT         Buy         299,201         309,853         2/12/15         —         (8,682 )

Swiss Franc

      SSBT         Sell         10,234         10,646         2/12/15         344         —   

British Pound

      BOFA         Buy         2,242,999         3,611,418         2/19/15         —         (116,628 )

British Pound

      BOFA         Sell         2,747,190         4,536,866         2/19/15         256,503         —   

British Pound

      BONY         Buy         200,600         320,694         2/19/15         —         (8,142 )

British Pound

      BZWS         Buy         53,437         84,876         2/19/15         —         (1,616 )

 

MGD-16    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

Franklin Mutual Global Discovery VIP Fund (continued)

Forward Exchange Contracts (continued)  
Currency    Counterpartya      Type      Quantity      Contract
Amount		      Settlement
Date		      Unrealized
Appreciation		      Unrealized
Depreciation		  

British Pound

      DBAB         Buy         403,461       $ 642,442         2/19/15       $ —       $ (13,814 )

British Pound

      DBAB         Sell         49,695         77,854         2/19/15         425         —   

British Pound

      FBCO         Buy         687,340         1,100,241         2/19/15         —         (29,305 )

British Pound

      FBCO         Sell         2,543,161         4,200,763         2/19/15         238,295         —   

British Pound

      HSBC         Buy         535,887         858,134         2/19/15         —         (23,176 )

British Pound

      HSBC         Sell         808,794         1,289,975         2/19/15         29,804         —   

British Pound

      SCBT         Buy         35,672         57,750         2/19/15         —         (2,170 )

British Pound

      SCBT         Sell         154,166         249,172         2/19/15         8,967         —   

British Pound

      SSBT         Buy         644,899         1,028,030         2/19/15         —         (23,220 )

British Pound

      SSBT         Sell         2,411,323         3,985,602         2/19/15         228,549         —   

Euro

      BOFA         Sell         1,448,155         1,886,745         2/27/15         133,539         —   

Euro

      BONY         Sell         246,309         323,114         2/27/15         24,921         —   

Euro

      DBAB         Sell         1,344,910         1,761,553         2/27/15         133,342         —   

Euro

      FBCO         Sell         1,082,837         1,403,679         2/27/15         92,745         —   

Euro

      HSBC         Sell         476,710         625,431         2/27/15         48,303         —   

Euro

      SCBT         Sell         423,935         554,215         2/27/15         40,980         —   

Euro

      SSBT         Sell         251,052         327,397         2/27/15         23,462         —   

Canadian Dollar

      BONY         Buy         87,566         78,286         3/18/15         —         (3,008 )

Canadian Dollar

      BONY         Sell         238,611         212,290         3/18/15         7,163         —   

Canadian Dollar

      DBAB         Sell         564,421         490,510         3/18/15         5,291         —   

Canadian Dollar

      SCBT         Buy         84,071         74,859         3/18/15         —         (2,586 )

Canadian Dollar

      SCBT         Sell         9,326,591         8,474,105         3/18/15         456,275         —   

Canadian Dollar

      SSBT         Buy         68,388         60,531         3/18/15         —         (1,740 )

Euro

      BOFA         Sell         1,853,806         2,334,324         4/16/15         88,993         —   

Euro

      BONY         Sell         260,030         325,987         4/16/15         11,039         —   

Euro

      BZWS         Sell         224,315         282,695         4/16/15         11,004         —   

Euro

      DBAB         Sell         3,217,304         4,057,911         4/16/15         161,111         —   

Euro

      FBCO         Sell         2,317,230         2,914,338         4/16/15         107,708         —   

Euro

      HSBC         Sell         817,942         1,031,235         4/16/15         40,543         —   

Euro

      SCBT         Sell         130,014         162,953         4/16/15         5,480         —   

Euro

      SSBT         Sell         721,586         911,350         4/16/15         37,365         —   

British Pound

      BOFA         Sell         121,809         190,277         4/22/15         590         —   

British Pound

      HSBC         Sell         2,791,917         4,488,901         4/22/15         141,170         —   

British Pound

      SCBT         Sell         2,974,595         4,792,073         4/22/15         159,866         —   

Euro

      BOFA         Sell         3,706,940         4,626,789         5/18/15         135,397         —   

Euro

      BONY         Sell         52,730         64,278         5/18/15         389         —   

Euro

      DBAB         Sell         4,342,380         5,408,048         5/18/15         146,745         —   

Euro

      FBCO         Sell         3,823,872         4,773,759         5/18/15         140,689         —   

Euro

      HSBC         Sell         830,837         1,028,865         5/18/15         22,209         —   

Euro

      SSBT         Sell         429,704         537,163         5/18/15         16,525         —   

British Pound

      BOFA         Buy         132,595         206,881         5/21/15         —         (444 )

British Pound

      BOFA         Sell         2,235,735         3,498,925         5/21/15         18,121         —   

British Pound

      FBCO         Buy         52,495         81,720         5/21/15         9         —   

British Pound

      FBCO         Sell         1,610,500         2,518,499         5/21/15         11,121         —   

British Pound

      HSBC         Buy         221,130         345,726         5/21/15         —         (1,449 )

British Pound

      SSBT         Sell         2,951,169         4,615,628         5/21/15         20,966         —   
                 

 

 

  

Unrealized appreciation (depreciation)

  

      5,228,386         (611,927 )
                 

 

 

  

Net unrealized appreciation (depreciation)

  

    $ 4,616,459      
                 

 

 

     

aMay be comprised of multiple contracts with the same counterparty, currency and settlement date.

See Abbreviations on page MGD-34.

 

    The accompanying notes are an integral part of these financial statements.    |   Annual Report     MGD-17   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

Financial Statements

Statement of Assets and Liabilities

December 31, 2014

 

      Franklin Mutual
Global Discovery
VIP Fund		  

Assets:

   

Investments in securities:

   

Cost

    $ 571,119,334   
  

 

 

  

Value (includes securities loaned in the amount of $1,883,779)

    $ 742,487,472   

Restricted cash (Note 1d)

      1,470,000   

Foreign currency, at value (cost $1,693,476)

      1,696,266   

Receivables:

   

Investment securities sold

      1,279,306   

Capital shares sold

      186,830   

Dividends and interest

      1,277,848   

Due from brokers

      5,039,024   

Variation margin

      139,773   

Unrealized appreciation on forward exchange contracts

      5,228,386   

Other assets

      157,539   
  

 

 

  

Total assets

      758,962,444   
  

 

 

  

Liabilities:

   

Payables:

   

Capital shares redeemed

      790,652   

Management fees

      596,370   

Distribution fees

      322,383   

Funds advanced by custodian

      179,484   

Securities sold short, at value (proceeds $5,054,971)

      4,854,863   

Payable upon return of securities loaned

      1,964,154   

Due to brokers

      1,470,000   

Unrealized depreciation on forward exchange contracts

      611,927   

Accrued expenses and other liabilities

      186,956   
  

 

 

  

Total liabilities

      10,976,789   
  

 

 

  

Net assets, at value

    $ 747,985,655   
  

 

 

  

Net assets consist of:

   

Paid-in capital

    $ 518,684,359   

Undistributed net investment income

      20,534,780   

Net unrealized appreciation (depreciation)

      177,193,054   

Accumulated net realized gain (loss)

      31,573,462   
  

 

 

  

Net assets, at value

    $ 747,985,655   
  

 

 

  

 

MGD-18    Annual Report   |    The accompanying notes are an integral part of these financial statements.    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FINANCIAL STATEMENTS

Statement of Assets and Liabilities (continued)

December 31, 2014

      Franklin Mutual
Global Discovery
VIP Fund		  
Class 1:   

Net assets, at value

    $ 2,313,327   
  

 

 

  

Shares outstanding

      102,295   
  

 

 

  

Net asset value and maximum offering price per share

    $ 22.61   
  

 

 

  
Class 2:   

Net assets, at value

    $ 685,711,407   
  

 

 

  

Shares outstanding

      31,008,286   
  

 

 

  

Net asset value and maximum offering price per share

    $ 22.11   
  

 

 

  
Class 4:   

Net assets, at value

    $ 59,960,921   
  

 

 

  

Shares outstanding

      2,678,081   
  

 

 

  

Net asset value and maximum offering price per share

    $ 22.39   
  

 

 

  

 

    The accompanying notes are an integral part of these financial statements.    |   Annual Report     MGD-19   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FINANCIAL STATEMENTS

Statement of Operations

for the year ended December 31, 2014

 

      Franklin Mutual
Global Discovery
VIP Fund		  

Investment income:

   

Dividends

    $ 26,521,952   

Interest

      2,813,187   

Income from securities loaned

      11,936   
  

 

 

  

Total investment income

      29,347,075   
  

 

 

  

Expenses:

   

Management fees (Note 3a)

      6,791,117   

Administrative fees (Note 3b)

      337,573   

Distribution fees: (Note 3c)

   

Class 2

      1,732,870   

Class 4

      231,562   

Custodian fees (Note 4)

      40,192   

Reports to shareholders

      146,506   

Professional fees

      69,104   

Trustees’ fees and expenses

      3,002   

Dividends on securities sold short

      212,421   

Other

      27,793   
  

 

 

  

Total expenses

      9,592,140   

Expense reductions (Note 4)

      (76 ) 
  

 

 

  

Net expenses

      9,592,064   
  

 

 

  

Net investment income

      19,755,011   
  

 

 

  

Realized and unrealized gains (losses):

   

Net realized gain (loss) from:

   

Investments

      30,316,298   

Foreign currency transactions

      (1,786,136 ) 

Futures contracts

      4,996,648   

Securities sold short

      (392,405 ) 
  

 

 

  

Net realized gain (loss)

      33,134,405   
  

 

 

  

Net change in unrealized appreciation (depreciation) on:

   

Investments

      (20,882,091 ) 

Translation of other assets and liabilities denominated in foreign currencies

      10,228,317   
  

 

 

  

Net change in unrealized appreciation (depreciation)

      (10,653,774 ) 
  

 

 

  

Net realized and unrealized gain (loss)

      22,480,631   
  

 

 

  

Net increase (decrease) in net assets resulting from operations

    $ 42,235,642   
  

 

 

  

 

MGD-20    Annual Report   |    The accompanying notes are an integral part of these financial statements.    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FINANCIAL STATEMENTS

Statements of Changes in Net Assets

 

    Franklin
Mutual Global Discovery VIP Fund		  
    Year Ended December 31,  
     2014      2013  

Increase (decrease) in net assets:

     

Operations:

     

Net investment income

   $ 19,755,011       $ 14,042,917   

Net realized gain (loss) from investments, written options, foreign currency transactions, futures contracts and securities sold short

     33,134,405         51,438,971   

Net change in unrealized appreciation (depreciation) on investments and translation of other assets and liabilities denominated in foreign currencies

     (10,653,774 )       116,840,987   
 

 

 

  

Net increase (decrease) in net assets resulting from operations

     42,235,642         182,322,875   
 

 

 

  

Distributions to shareholders from:

     

Net investment income:

     

Class 1

     (43,196 )       (52,604 ) 

Class 2

     (14,775,740 )       (14,417,027 ) 

Class 4

     (1,243,714 )       (1,382,402 ) 

Net realized gains:

     

Class 1

     (119,891 )       (195,304 ) 

Class 2

     (45,727,518 )       (59,917,989 ) 

Class 4

     (4,102,276 )       (5,990,316 ) 
 

 

 

  

Total distributions to shareholders

     (66,012,335 )       (81,955,642 ) 
 

 

 

  

Capital share transactions: (Note 2)

     

Class 1

     (105,551 )       1,149,200   

Class 2

     23,195,730         (67,039,527 ) 

Class 4

     (8,926,689 )       (825,524 ) 
 

 

 

  

Total capital share transactions

     14,163,490         (66,715,851 ) 
 

 

 

  

Net increase (decrease) in net assets

     (9,613,203 )       33,651,382   

Net assets:

     

Beginning of year

     757,598,858         723,947,476   
 

 

 

  

End of year

   $ 747,985,655       $ 757,598,858   
 

 

 

  

Undistributed net investment income included in net assets:

     

End of year

   $ 20,534,780       $ 15,025,568   
 

 

 

  

 

    The accompanying notes are an integral part of these financial statements.    |   Annual Report     MGD-21   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

Notes to Financial Statements

Franklin Mutual Global Discovery VIP Fund

1. Organization and Significant Accounting Policies

Franklin Templeton Variable Insurance Products Trust (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end management investment company, consisting of nineteen separate funds and applies the specialized accounting and reporting guidance in U.S. Generally Accepted Accounting Principles (U.S. GAAP). Franklin Mutual Global Discovery VIP Fund (Fund) is included in this report. The financial statements of the remaining funds in the Trust are presented separately. Shares of the Fund are generally sold only to insurance company separate accounts to fund the benefits of variable life insurance policies or variable annuity contracts. At December 31, 2014, 60.55% of the Fund’s shares were held through one insurance company. Investment activities of these insurance company separate accounts could have a material impact on the Fund. The Fund offers three classes of shares: Class 1, Class 2, and Class 4. Each class of shares differs by its distribution fees, voting rights on matters affecting a single class and its exchange privilege.

Effective May 1, 2014, Mutual Global Discovery Securities Fund was renamed Franklin Mutual Global Discovery VIP Fund.

The following summarizes the Fund’s significant accounting policies.

a. Financial Instrument Valuation

The Fund’s investments in financial instruments are carried at fair value daily. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. The Fund calculates the net asset value (NAV) per share at the close of the New York Stock Exchange (NYSE), generally at 4 p.m. Eastern time (NYSE close) on each day the NYSE is open for trading. Under compliance policies and procedures approved by the Trust’s Board of Trustees (the Board), the Fund’s administrator has responsibility for oversight of valuation, including leading the cross-functional Valuation and Liquidity Oversight Committee (VLOC). The VLOC provides administration and oversight of the Fund’s valuation policies and procedures, which are approved annually by the Board. Among other things, these procedures allow the Fund to utilize independent pricing services, quotations from securities and financial instrument dealers, and other market sources to determine fair value.

Equity securities and derivative financial instruments (derivatives) listed on an exchange or on the NASDAQ National Market System are valued at the last quoted sale price or the

official closing price of the day, respectively. Foreign equity securities are valued as of the close of trading on the foreign stock exchange on which the security is primarily traded or as of the NYSE close, whichever is earlier. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at the NYSE close on the day that the value of the security is determined. Over-the-counter (OTC) securities are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. Certain equity securities are valued based upon fundamental characteristics or relationships to similar securities. Investments in non-registered money market funds are valued at the closing NAV.

Debt securities generally trade in the OTC market rather than on a securities exchange. The Fund’s pricing services use multiple valuation techniques to determine fair value. In instances where sufficient market activity exists, the pricing services may utilize a market-based approach through which quotes from market

makers are used to determine fair value. In instances where sufficient market activity may not exist or is limited, the pricing services also utilize proprietary valuation models which may consider market characteristics such as benchmark yield curves, credit spreads, estimated default rates, anticipated market interest rate volatility, coupon rates, anticipated timing of principal repayments, underlying collateral, and other unique security features in order to estimate the relevant cash flows, which are then discounted to calculate the fair value. Securities denominated in a foreign currency are converted into their U.S. dollar equivalent at the foreign exchange rate in effect at the NYSE close on the date that the values of the foreign debt securities are determined.

Certain derivatives trade in the OTC market. The Fund’s pricing services use various techniques including industry standard option pricing models and proprietary discounted cash flow models to determine the fair value of those instruments. The Fund’s net benefit or obligation under the derivative contract, as measured by the fair value of the contract, is included in net assets.

The Fund has procedures to determine the fair value of financial instruments for which market prices are not reliable or readily available. Under these procedures, the VLOC convenes on a regular basis to review such financial instruments and considers a number of factors, including significant unobservable valuation inputs, when arriving at fair value. The VLOC primarily

 

 

  MGD-22       Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Franklin Mutual Global Discovery VIP Fund (continued)

employs a market-based approach which may use related or comparable assets or liabilities, recent transactions, market multiples, book values, and other relevant information for the investment to determine the fair value of the investment. An income-based valuation approach may also be used in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the investments. Due to the inherent uncertainty of valuations of such investments, the fair values may differ significantly from the values that would have been used had an active market existed. The VLOC employs various methods for calibrating these valuation approaches including a regular review of key inputs and assumptions, transactional back-testing or disposition analysis, and reviews of any related market activity.

Trading in securities on foreign securities stock exchanges and OTC markets may be completed before the daily NYSE close. In addition, trading in certain foreign markets may not take place on every NYSE business day. Occasionally, events occur between the time at which trading in a foreign security is completed and the close of the NYSE that might call into question the reliability of the value of a portfolio security held by the Fund. As a result, differences may arise between the value of the Fund’s portfolio securities as determined at the foreign market close and the latest indications of value at the close of the NYSE. In order to minimize the potential for these differences, the VLOC monitors price movements following the close of trading in foreign stock markets through a series of country specific market proxies (such as baskets of American Depositary Receipts, futures contracts and exchange traded funds). These price movements are measured against established trigger thresholds for each specific market proxy to assist in determining if an event has occurred that may call into question the reliability of the values of the foreign securities held by the Fund. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services.

Also, when the last day of the reporting period is a non-business day, certain foreign markets may be open on those days that the NYSE is closed, which could result in differences between the value of the Fund’s portfolio securities on the last business day and the last calendar day of the reporting period. Any significant security valuation changes due to an open foreign market are adjusted and reflected by the Fund for financial reporting purposes.

b. Foreign Currency Translation

Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. The Fund may enter into foreign currency exchange contracts to facilitate transactions denominated in a foreign currency. Purchases and sales of securities, income and expense items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. Portfolio securities and assets and liabilities denominated in foreign currencies contain risks that those currencies will decline in value relative to the U.S. dollar. Occasionally, events may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the Board.

The Fund does not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments on the Statement of Operations.

Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period.

c. Derivative Financial Instruments

The Fund invested in derivatives in order to manage risk or gain exposure to various other investments or markets. Derivatives are financial contracts based on an underlying or notional amount, require no initial investment or an initial net investment that is smaller than would normally be required to have a similar response to changes in market factors, and require or permit net settlement. Derivatives contain various risks including the potential inability of the counterparty to fulfill their obligations under the terms of the contract, the potential for an illiquid secondary market, and/or the potential for market movements which expose the Fund to gains or losses in excess of the

 

 

    Annual Report     MGD-23   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Franklin Mutual Global Discovery VIP Fund (continued)

1. Organization and Significant Accounting Policies (continued)

c. Derivative Financial Instruments (continued)

amounts shown on the Statement of Assets and Liabilities. Realized gain and loss and unrealized appreciation and depreciation on these contracts for the period are included in the Statement of Operations.

Derivative counterparty credit risk is managed through a formal evaluation of the creditworthiness of all potential counterparties. The Fund attempts to reduce its exposure to counterparty credit risk on OTC derivatives, whenever possible, by entering into International Swaps and Derivatives Association (ISDA) master agreements with certain counterparties. These agreements contain various provisions, including but not limited to collateral requirements, events of default, or early termination. Termination events applicable to the counterparty include certain deteriorations in the credit quality of the counterparty. Termination events applicable to the Fund include failure of the Fund to maintain certain net asset levels and/or limit the decline in net assets over various periods of time. In the event of default or early termination, the ISDA master agreement gives the non-defaulting party the right to net and close-out all transactions traded, whether or not arising under the ISDA agreement, to one net amount payable by one counterparty to the other. However, absent an event of default or early termination, OTC derivative assets and liabilities are presented gross and not offset in the Statement of Assets and Liabilities. Early termination by the counterparty may result in an immediate payment by the Fund of any net liability owed to that counterparty under the ISDA agreement. At December 31, 2014, the Fund had OTC derivatives in a net liability position of $76,106.

Collateral requirements differ by type of derivative. Collateral or initial margin requirements are set by the broker or exchange clearing house for exchange traded and centrally cleared derivatives. Initial margin deposited is held at the exchange and can be in the form of cash and/or securities. For OTC derivatives traded under an ISDA master agreement, posting of collateral is required by either the fund or the applicable counterparty if the total net exposure of all OTC derivatives with the applicable counterparty exceeds the minimum transfer amount, which typically ranges from $100,000 to $250,000, and can vary depending on the counterparty and the type of the agreement. Generally, collateral is determined at the close of fund business each day and any additional collateral required

due to changes in derivative values may be delivered by the fund or the counterparty within a few business days. Collateral pledged and/or received by the fund for OTC derivatives, if any, is held in segregated accounts with the fund’s custodian/counterparty broker and can be in the form of cash and/or securities. Unrestricted cash may be invested according to the Fund’s investment objectives.

At December 31, 2014, the Fund received $2,137,141 in a Federal Republic of Germany Note and U.S. Treasury Notes.

The Fund entered into exchange traded futures contracts primarily to manage exposure to certain foreign currencies. A futures contract is an agreement between the Fund and a counterparty to buy or sell an asset for a specified price on a future date. Required initial margins are pledged by the Fund, and the daily change in fair value is accounted for as a variation margin payable or receivable on the Statement of Assets and Liabilities.

The Fund entered into OTC forward exchange contracts primarily to manage exposure to certain foreign currencies. A forward exchange contract is an agreement between the Fund and a counterparty to buy or sell a foreign currency at a specific exchange rate on a future date.

The Fund purchased or wrote exchange traded option contracts primarily to manage exposure to equity price risk. An option is a contract entitling the holder to purchase or sell a specific amount of shares or units of an asset or notional amount of a swap (swaption), at a specified price. Options purchased are recorded as an asset while options written are recorded as a liability. Upon exercise of an option, the acquisition cost or sales proceeds of the underlying investment is adjusted by any premium received or paid. Upon expiration of an option, any premium received or paid is recorded as a realized gain or loss. Upon closing an option other than through expiration or exercise, the difference between the premium and the cost to close the position is recorded as a realized gain or loss.

See Notes 6 and 9 regarding investment transactions and other derivative information, respectively.

d. Restricted Cash

At December 31, 2014, the Fund held restricted cash in connection with investments in certain derivative securities. Restricted cash is held in a segregated account with the Fund’s custodian and is reflected in the Statement of Assets and Liabilities.

 

  MGD-24       Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Franklin Mutual Global Discovery VIP Fund (continued)

e. Securities Sold Short

The Fund is engaged in selling securities short, which obligates the Fund to replace a borrowed security with the same security at current fair value. The Fund incurs a loss if the price of the security increases between the date of the short sale and the date on which the Fund replaces the borrowed security. The Fund realizes a gain if the price of the security declines between those dates. Gains are limited to the price at which the Fund sold the security short, while losses are potentially unlimited in size.

The Fund is required to establish a margin account with the broker lending the security sold short. While the short sale is outstanding, the broker retains the proceeds of the short sale to the extent necessary to meet margin requirements until the short position is closed out. A deposit must also be maintained with the Fund’s custodian/counterparty broker consisting of cash and/or securities having a value equal to a specified percentage of the value of the securities sold short. The Fund is obligated to pay fees for borrowing the securities sold short and is required to pay the counterparty any dividends and/or interest due on securities sold short. Such dividends and/or interest and any security borrowing fees are recorded as an expense to the Fund.

f. Securities Lending

The Fund participates in an agency based securities lending program. The Fund receives cash collateral against the loaned securities in an amount equal to at least 102% of the fair value of the loaned securities. Collateral is maintained over the life of the loan in an amount not less than 100% of the fair value of loaned securities, as determined at the close of fund business each day; any additional collateral required due to changes in security values is delivered to the Fund on the next business day. The collateral is invested in a non-registered money fund as indicated in the Statement of Investments. The Fund receives income from the investment of cash collateral, in addition to lending fees and rebates paid by the borrower. The Fund bears the market risk with respect to the collateral investment, securities loaned, and the risk that the agent may default on its obligations to the Fund. The securities lending agent has agreed to indemnify the Fund in the event of default by a third party borrower.

g. Senior Floating Rate Interests

The Fund invests in senior secured corporate loans that pay interest at rates which are periodically reset by reference to a base lending rate plus a spread. These base lending rates are generally the prime rate offered by a designated U.S. bank or the

London InterBank Offered Rate (LIBOR). Senior secured corporate loans often require prepayment of principal from excess cash flows or at the discretion of the borrower. As a result, actual maturity may be substantially less than the stated maturity. Senior secured corporate loans in which the Fund invests are generally readily marketable, but may be subject to certain restrictions on resale.

h. Income and Deferred Taxes

It is the Fund’s policy to qualify as a regulated investment company under the Internal Revenue Code. The Fund intends to distribute to shareholders substantially all of its taxable income and net realized gains to relieve it from federal income and if applicable, excise taxes. As a result, no provision for U.S. federal income taxes is required.

The Fund may be subject to foreign taxation related to income received, capital gains on the sale of securities and certain foreign currency transactions in the foreign jurisdictions in which it invests. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist in the foreign markets in which the Fund invests. When a capital gain tax is determined to apply the Fund records an estimated deferred tax liability in an amount that would be payable if the securities were disposed of on the valuation date. As a result of several court cases, in certain countries across the European Union, the Fund has filed additional tax reclaims for previously withheld taxes on dividends earned in those countries. These additional filings are subject to various administrative proceedings by the local jurisdictions’ tax authorities within the European Union, as well as a number of related judicial proceedings. At this time, uncertainty exists as to the ultimate resolution of these proceedings, the likelihood of receipt of these reclaims, and the potential timing of any payment and accordingly, no amounts are reflected in the financial statements.

The Fund recognizes the tax benefits of uncertain tax positions only when the position is “more likely than not” to be sustained upon examination by the tax authorities based on the technical merits of the tax position. As of December 31, 2014, and for all open tax years, the Fund has determined that no liability for unrecognized tax benefits is required in the Fund’s financial statements related to uncertain tax positions taken on a tax return (or expected to be taken on future tax returns). Open tax years are those that remain subject to examination and are based on each tax jurisdiction statute of limitation.

 

 

    Annual Report     MGD-25   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Franklin Mutual Global Discovery VIP Fund (continued)

1. Organization and Significant Accounting Policies (continued)

i. Security Transactions, Investment Income, Expenses and Distributions

 

Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Amortization of premium and accretion of discount on debt securities are included in interest income. Dividend income and dividends declared on securities sold short are recorded on the ex-dividend date except for certain foreign securities where the dividend rate is not available. In such cases, the dividend is recorded as soon as the information is received by the Fund. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with U.S. GAAP. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods.

Common expenses incurred by the Trust are allocated among the funds based on the ratio of net assets of each fund to the

combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense.

Realized and unrealized gains and losses and net investment income, not including class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions, by class, are generally due to differences in class specific expenses.

j. Accounting Estimates

The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates.

k. Guarantees and Indemnifications

Under the Trust’s organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, on behalf of the Fund, enters into contracts with service providers that contain general indemnification clauses. The Trust’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote.

2. Shares of Beneficial Interest

At December 31, 2014, there were an unlimited number of shares authorized (without par value). Transactions in the Fund’s shares were as follows:

 

     Year Ended December 31,  
     2014          2013  
      Shares      Amount           Shares      Amount  
Class 1 Shares:              

Shares sold

      31,917       $ 725,026           44,760       $ 1,035,207   

Shares issued in reinvestment of distributions

      7,051         163,086           11,601         247,908   

Shares redeemed

      (42,408 )       (993,663 )         (5,936 )       (133,915 ) 
  

 

 

  

Net increase (decrease)

      (3,440 )     $ (105,551 )         50,425       $ 1,149,200   
  

 

 

  

 

  MGD-26       Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Franklin Mutual Global Discovery VIP Fund (continued)

     Year Ended December 31,  
     2014          2013  
      Shares      Amount           Shares      Amount  
Class 2 Shares:              

Shares sold

      4,023,757       $ 92,853,300           4,182,129       $ 92,856,510   

Shares issued in reinvestment of distributions

      2,672,405         60,503,258           3,546,518         74,335,016   

Shares redeemed

      (5,665,511 )       (130,160,828 )         (10,488,139 )       (234,231,053 ) 
  

 

 

  

Net increase (decrease)

      1,030,651       $ 23,195,730           (2,759,492 )     $ (67,039,527 ) 
  

 

 

  
Class 4 Shares:              

Shares sold

      84,657       $ 1,961,531           372,331       $ 8,412,949   

Shares issued on reinvestment of distributions

      233,144         5,345,990           347,770         7,372,718   

Shares redeemed

      (685,719 )       (16,234,210 )         (733,968 )       (16,611,191 ) 
  

 

 

  

Net increase (decrease)

      (367,918 )     $ (8,926,689 )         (13,867 )     $ (825,524 ) 
  

 

 

  

3. Transactions With Affiliates

Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Fund are also officers and/or directors of the following subsidiaries:

 

Subsidiary    Affiliation

Franklin Mutual Advisers, LLC (Franklin Mutual)

   

Investment manager

Franklin Templeton Services, LLC (FT Services)

   

Administrative manager

Franklin Templeton Distributors, Inc. (Distributors)

   

Principal underwriter

Franklin Templeton Investor Services, LLC (Investor Services)

   

Transfer agent

a. Management Fees

The Fund pays an investment management fee to Franklin Mutual based on the average daily net assets of the Fund as follows:

 

Annualized Fee Rate    Net Assets

0.950%

   

Up to and including $200 million

0.935%

   

Over $200 million, up to and including $700 million

0.900%

   

Over $700 million, up to and including $1.2 billion

0.875%

   

Over $1.2 billion, up to and including $4 billion

0.845%

   

Over $4 billion, up to and including $7 billion

0.825%

   

Over $7 billion, up to and including $10 billion

0.805%

   

In excess of $10 billion

Effective May 1, 2014, the Fund combined its investment management and administration agreements as approved by the Board. The fees paid under the combined agreement do not exceed the aggregate fees that were paid under the separate agreements.

Prior to May 1, 2014, the Fund paid fees to Franklin Mutual based on the average daily net assets of the Fund as follows:

 

Annualized Fee Rate    Net Assets

0.800%

   

Up to and including $4 billion

0.770%

   

Over $4 billion, up to and including $7 billion

0.750%

   

Over $7 billion, up to and including $10 billion

0.730%

   

In excess of $10 billion

 

    Annual Report     MGD-27   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Franklin Mutual Global Discovery VIP Fund (continued)

3. Transactions With Affiliates (continued)

b. Administrative Fees

Effective May 1, 2014, under an agreement with Franklin Mutual, FT Services provides administrative services to the Fund. The fee is paid by Franklin Mutual based on the Fund’s average daily net assets, and is not an additional expense of the Fund.

Prior to May 1, 2014, the Fund paid fees to FT Services based on the average daily net assets of the Fund as follows:

 

Annualized Fee Rate    Net Assets

0.150%

   

Up to and including $200 million

0.135%

   

Over $200 million, up to and including $700 million

0.100%

   

Over $700 million, up to and including $1.2 billion

0.075%

   

In excess of $1.2 billion

c. Distribution Fees

The Board has adopted distribution plans for Class 2 and Class 4 shares pursuant to Rule 12b-1 under the 1940 Act. Under the Fund’s compensation distribution plans, the Fund pays Distributors for costs incurred in connection with the servicing, sale and distribution of the Fund’s shares up to 0.35% per year of its average daily net assets of each class. Some distribution fees are not charged on shares held by affiliates. The Board has agreed to limit the current rate to 0.25% per year for Class 2. The plan year, for purposes of monitoring compliance with the maximum annual plan rates, is February 1 through January 31.

d. Transfer Agent Fees

Investor Services, under terms of an agreement, performs shareholder servicing for the Fund and is not paid by the Fund for the services.

4. Expense Offset Arrangement

The Fund has entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Fund’s custodian expenses. During the year ended December 31, 2014, the custodian fees were reduced as noted in the Statement of Operations.

5. Income Taxes

The tax character of distributions paid during the years ended December 31, 2014 and 2013, was as follows:

 

     2014     2013  

Distributions paid from:

     

Ordinary income

    $ 23,269,495      $ 18,220,656   

Long term capital gain

      42,742,840        63,734,986   
  

 

 

  
   $ 66,012,335      $ 81,955,642   
  

 

 

  

 

  MGD-28       Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Franklin Mutual Global Discovery VIP Fund (continued)

At December 31, 2014, the cost of investments, net unrealized appreciation (depreciation), undistributed ordinary income and undistributed long term capital gains for income tax purposes were as follows:

 

Cost of investments

    $ 570,998,758   
  

 

 

  

Unrealized appreciation

    $ 208,450,604  

Unrealized depreciation

      (36,961,890 ) 
  

 

 

  

Net unrealized appreciation (depreciation)

    $ 171,488,714   
  

 

 

  

Undistributed ordinary income

    $ 20,300,159   

Undistributed long term capital gains

      41,340,807   
  

 

 

  

Distributable earnings

    $ 61,640,966   
  

 

 

  

Differences between income and/or capital gains as determined on a book basis and a tax basis are primarily due to differing treatments of foreign currency transactions, tax straddles and bond discounts and premiums.

6. Investment Transactions

Purchases and sales of investments (excluding short term securities and securities sold short) for the year ended December 31, 2014, aggregated $162,450,101 and $184,449,486, respectively.

Transactions in options written during the year ended December 31, 2014, were as follows:

 

     Number of
Contracts		     Premiums
Received		  

Options outstanding at December 31, 2013

      —      $ —   

Options written

      40        19,962   

Options expired

      —        —   

Options exercised

      (40 )      (19,962 ) 

Options closed

      —        —   
  

 

 

  

Options outstanding at December 31, 2014

      —      $ —   
  

 

 

  

See Notes 1(c) and 9 regarding derivative financial instruments and other derivative information, respectively.

7. Credit Risk and Defaulted Securities

The Fund may purchase the pre-default or defaulted debt of distressed companies. Distressed companies are financially troubled and are about to be or are already involved in financial restructuring or bankruptcy. Risks associated with purchasing these securities include the possibility that the bankruptcy or other restructuring process takes longer than expected, or that distributions in restructuring are less than anticipated, either or both of which may result in unfavorable consequences to the Fund. If it becomes probable that the income on debt securities, including those of distressed companies, will not be collected, the Fund discontinues accruing income and recognizes an adjustment for uncollectible interest.

At December 31, 2014, the aggregate long value of distressed company securities for which interest recognition has been discontinued was $8,028,378, representing 1.07% of the Fund’s net assets. For information as to specific securities, see the accompanying Statement of Investments.

8. Restricted Securities

The Fund invests in securities that are restricted under the Securities Act of 1933 (1933 Act) or which are subject to legal, contractual, or other agreed upon restrictions on resale. Restricted securities are often purchased in private placement transactions, and cannot be sold without prior registration unless the sale is pursuant to an exemption under the 1933 Act. Disposal of these securities

 

    Annual Report     MGD-29   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Franklin Mutual Global Discovery VIP Fund (continued)

8. Restricted Securities (continued)

may require greater effort and expense, and prompt sale at an acceptable price may be difficult. The Fund may have registration rights for restricted securities. The issuer generally incurs all registration costs.

At December 31, 2014, the Fund held investments in restricted securities, excluding certain securities exempt from registration under the 1933 Act deemed to be liquid, as follows:

 

Principal
Amount/
Shares/Units		    Issuer    Acquisition
Dates		      Cost      Value  
595   

Broadband Ventures III LLC, secured promissory note, 5.00%, 2/01/12

      7/01/10 - 11/30/12       $ 595       $ —   
2,077,368   

FIM Coinvestor Holdings I, LLC

      11/20/06 - 6/02/09         —         —   
2,172,000   

Hightower Holding LLC, pfd., A, Series 2

      6/10/10 - 5/10/12         5,430,000         5,052,941   
424,073   

International Automotive Components Group Brazil LLC

      4/13/06 - 12/26/08         281,629         40,109   
4,052,916   

International Automotive Components Group North America LLC

      1/12/06 - 3/18/13         3,247,714         3,068,787   
2,140   

Olympus Re Holdings Ltd.

      12/19/01         199,920         —   
        

 

 

  
  

Total Restricted Securities (Value is 1.09% of Net Assets)

       $ 9,159,858       $ 8,161,837   
        

 

 

  

9. Other Derivative Information

At December 31, 2014, the Fund’s investments in derivative contracts are reflected on the Statement of Assets and Liabilities as follows:

 

    

Asset Derivatives

    

Liability Derivatives

  
Derivative Contracts
Not Accounted for
as Hedging Instruments		    Statement of Assets and
Liabilities Location		   Fair Value     Statement of Assets and
Liabilities Location		   Fair Value  

Foreign exchange contracts

   

Unrealized appreciation on forward exchange contracts / Net assets consist of - net unrealized appreciation

(depreciation)

   $ 6,243,611 a    Unrealized depreciation on forward exchange contracts   $ 611,927   

aIncludes cumulative appreciation (depreciation) of futures contracts as reported in the Statement of Investments. Only current day’s variation margin is separately reported within the Statement of Assets and Liabilities.

For the year ended December 31, 2014, the effect of derivative contracts on the Fund’s Statement of Operations was as follows:

 

Derivative Contracts
Not Accounted for
as Hedging Instruments		    Statement of Operations Locations   Realized
Gain (Loss)
for the Year		     Change in
Unrealized
Appreciation
(Depreciation)
for the Year 		 

Foreign exchange contracts

    Net realized gain (loss) from foreign currency transactions and futures contracts / Net change in unrealized appreciation (depreciation) on translation of other assets and liabilities denominated in foreign currencies   $ 3,281,768      $ 10,271,228    

For the year ended December 31, 2014, the average month end fair value of derivatives represented 0.58% of average month end net assets. The average month end number of open derivative contracts for the year was 219.

See Notes 1(c) and 6 regarding derivative financial instruments and investment transactions, respectively.

 

MGD-30    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Franklin Mutual Global Discovery VIP Fund (continued)

10. Holdings of 5% Voting Securities of Portfolio Companies

The 1940 Act defines “affiliated companies” to include investments in portfolio companies in which a fund owns 5% or more of the outstanding voting securities. Investments in “affiliated companies” for the Fund for the year ended December 31, 2014, were as shown below.

 

Name of Issuer  

Number of Shares

Held at Beginning

of Year

    

Gross

Additions

    

Gross

Reductions

    

Number of Shares

Held at End

of Year

    

Value at

End of

Year

    

Investment

Income

    

Realized Capital

Gain (Loss)

  
Non-Controlled Affiliates              

The Bankshares Inc. (Value is 0.00% of Net Assets)

     800,000        —        (800,000 )a      —      $  —      $  —      $  —   
         

 

 

    

 

 

    

 

 

  

a Gross reduction was the result of a corporate action.

11. Credit Facility

The Fund, together with other U.S. registered and foreign investment funds (collectively, Borrowers), managed by Franklin Templeton Investments, are borrowers in a joint syndicated senior unsecured credit facility totaling $1.5 billion (Global Credit Facility) which matured on February 13, 2015. This Global Credit Facility provides a source of funds to the Borrowers for temporary and emergency purposes, including the ability to meet future unanticipated or unusually large redemption requests. The Borrowers expect to renew the Global Credit Facility for a total of $2 billion effective February 13, 2015, which matures on February 12, 2016.

Under the terms of the Global Credit Facility, the Fund shall, in addition to interest charged on any borrowings made by the Fund and other costs incurred by the Fund, pay its share of fees and expenses incurred in connection with the implementation and maintenance of the Global Credit Facility, based upon its relative share of the aggregate net assets of all of the Borrowers, including an annual commitment fee of 0.07% based upon the unused portion of the Global Credit Facility. These fees are reflected in other expenses on the Statement of Operations. During the year ended December 31, 2014, the Fund did not use the Global Credit Facility.

12. Fair Value Measurements

The Fund follows a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Fund’s own market assumptions (unobservable inputs). These inputs are used in determining the value of the Fund’s financial instruments and are summarized in the following fair value hierarchy:

 

  •   Level 1 – quoted prices in active markets for identical financial instruments
  •   Level 2 – other significant observable inputs (including quoted prices for similar financial instruments, interest rates, prepayment speed, credit risk, etc.)
  •   Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of financial instruments)

The input levels are not necessarily an indication of the risk or liquidity associated with financial instruments at that level.

For movements between the levels within the fair value hierarchy, the Fund has adopted a policy of recognizing the transfers as of the date of the underlying event which caused the movement.

 

    Annual Report     MGD-31   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Franklin Mutual Global Discovery VIP Fund (continued)

12. Fair Value Measurements (continued)

A summary of inputs used as of December 31, 2014, in valuing the Fund’s assets and liabilities carried at fair value, is as follows:

 

      Level 1     Level 2     Level 3     Total  
Assets:         

Investments in Securities:

         

Equity Investments:a

         

Auto Components

    $ 2,805,162      $ —      $ 3,108,896      $ 5,914,058   

Banks

      120,360,681        7,233,910        —        127,594,591   

Diversified Financial Services

      —        —        5,052,941        5,052,941   

Oil, Gas & Consumable Fuels

      57,552,378        36,020        —        57,588,398   

Paper & Forest Products

      —        1,762,002        —        1,762,002   

Real Estate Management & Development

      3,068,325        —        4,108,670        7,176,995   

All Other Equity Investmentsb

      480,343,504        —        — c      480,343,504   

Corporate Bonds, Notes and Senior Floating Rate Interests

      —        21,983,586        —        21,983,586   

Corporate Notes and Senior Floating Rate Interests in Reorganization

      —        8,028,378        — c      8,028,378   

Companies in Liquidation

      12,911        4,341,035        — c      4,353,946   

Municipal Bonds

      —        1,975,549        —        1,975,549   

Short Term Investments

      17,349,370        3,364,154        —        20,713,524   
  

 

 

  

Total Investments in Securities

    $ 681,492,331      $ 48,724,634      $ 12,270,507      $ 742,487,472   
  

 

 

  

Other Financial Instruments

         

Futures Contracts

    $ 1,015,225      $ —      $ —      $ 1,015,225   

Forward Exchange Contracts

      —        5,228,386        —        5,228,386   
  

 

 

  

Total Other Financial Instruments

    $ 1,015,225      $ 5,228,386      $ —      $ 6,243,611   
  

 

 

  
Liabilities:         

Other Financial Instruments

         

Securities Sold Short

    $ 4,854,863      $ —      $ —      $ 4,854,863   

Forward Exchange Contracts

      —        611,927        —        611,927   
  

 

 

  

Total Other Financial Instruments

    $ 4,854,863      $ 611,927      $ —      $ 5,466,790   
  

 

 

  

aIncludes common and preferred stocks as well as other equity investments.

bFor detailed categories, see the accompanying Statement of Investments.

cIncludes securities determined to have no value at December 31, 2014.

 

MGD-32    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Franklin Mutual Global Discovery VIP Fund (continued)

A reconciliation of assets in which Level 3 inputs are used in determining fair value is presented when there are significant Level 3 financial instruments at the end of the year. At December 31, 2014, the reconciliation of assets is as follows:

 

     Balance
at
Beginning
of
Year		     Purchases     Sales     Transfers
Into
Level 3		     Transfer
Out of
Level 3a		     Cost
Basis
Adjust
mentsb		     Net
Realized
Gain
(Loss)		     Net
Unrealized
Appr
eciation
(Depre
ciation)		     Balance
at
End of
Year		     Net
Change
in
Unrealized
Appre
ciation
(Deprec
iation)
on Assets
Held at
Year End		  
Assets:                    

Investments in Securities:

                    

Equity Investments:c

                    

Auto Components

   $ 2,375,839      $  —      $ —      $  —      $ —      $ —      $ —      $ 733,057      $ 3,108,896      $ 733,057   

Banks

     3,815,192        —        —        —        (4,132,633 )      —        —        317,441        —        —   

Diversified Financial Services

     4,131,361        —        —        —        —        —        —        921,580        5,052,941        921,580   

Insurance

     410,692 d      —        (391,596 )      —        —        (557 )      (184,109 )      165,570        — d      557   

Real Estate Management & Development

     2,518,473        —        —        —        —        —        —        1,590,197        4,108,670        1,590,197   
 

 

 

  

Total

   $ 13,251,557      $ —      $ (391,596 )    $ —      $ (4,132,633 )    $ (557 )    $ (184,109 )    $ 3,727,845      $ 12,270,507      $ 3,245,391   
 

 

 

  

aThe investment was transferred out of Level 3 as a result of a corporation action.

bMay include accretion, amortization, partnership adjustments, and/or other cost basis adjustments.

cIncludes common and preferred stocks as well as other equity investments.

dIncludes securities determined to have no value.

Significant unobservable valuation inputs developed by the VLOC for material Level 3 financial instruments and impact to fair value as a result of changes in unobservable valuation inputs as of December 31, 2014, are as follows:

 

Description   Fair Value at
End of Year		     Valuation
Technique		   Unobservable Inputs   Amount/
Range		     Impact to Fair
Value if Input
Increasesa		  
Assets:          

Investments in Securities:

          

Equity Investments:b

          

Auto Components

   $ 3,068,787     

Market comparables

   Discount for lack of marketability EV / EBITDA multiple    

 

 10%

3.6x

   

  

    

 

 Decrease

Increased

 c 

  

Diversified Financial Services

     5,052,941     

Discounted cash flow model

   Cost of equity Long-term revenue growth rate Adjusted EBITDA margin    

 
 

 16%

6.2% - 29.0%
5.0% - 26.9%

   

  
  

    

 

 

 Decrease

Increased

Increase 

   

  

  

Real Estate Management & Development

     4,108,670     

Market comparables

  

Discount for lack of marketability

     8%       Decrease c 

All Other Investmentse

     40,109                           

Total

   $ 12,270,507                           

aRepresents the directional change in the fair value of the Level 3 investments that would result from a significant and reasonable increase in the corresponding input. A significant and reasonable decrease in the input would have the opposite effect. Significant impacts, if any, to fair value and/or net assets have been indicated.

bIncludes common and preferred stocks.

cRepresents a significant impact to fair value but not net assets.

dRepresents a significant impact to fair value and net assets.

eIncludes fair value of immaterial investments developed using various valuation techniques and unobservable inputs. May also include investments with values derived using prior transaction prices or third party pricing information without adjustment for which such inputs are also unobservable.

 

    Annual Report     MGD-33   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Franklin Mutual Global Discovery VIP Fund (continued)

12. Fair Value Measurements (continued)

Abbreviations List

 

EBITDA   Earnings before interest, taxes, depreciation and amortization
EV   Enterprise value

13. New Accounting Pronouncements

In June 2014, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2014-11, Transfers and Servicing (Topic 860), Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. The ASU changes the accounting for certain repurchase agreements and expands disclosure requirements related to repurchase agreements, securities lending, repurchase-to-maturity and similar transactions. The ASU is effective for interim and annual reporting periods beginning after December 15, 2014. Management has reviewed the requirements and believes the adoption of this ASU will not have a material impact on the financial statements.

14. Subsequent Events

The Fund has evaluated subsequent events through the issuance of the financial statements and determined that no events have occurred that require disclosure other than those already disclosed in the financial statements.

Abbreviations

 

Counterparty        Currency   Selected Portfolio
BOFA   Bank of America N.A.   CHF   Swiss Franc   ADR   American Depositary Receipt
BONY   Bank of New York Mellon   EUR   Euro   FHLB   Federal Home Loan Bank
BZWS   Barclays Bank PLC   GBP   British Pound   GO   General Obligation
DBAB   Deutsche Bank AG   USD   United States Dollar   IDR   International Depositary Receipt
FBCO   Credit Suisse Group AG       PIK   Payment-In-Kind
HSBC   HSBC Bank USA, N.A.        
SCBT   Standard Chartered Bank        
SSBT   State Street Bank and Trust Co.        

 

MGD-34    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

Report of Independent Registered Public Accounting Firm

Franklin Mutual Global Discovery VIP Fund

To the Board of Trustees and Shareholders of Franklin Templeton Variable Insurance Products Trust

In our opinion, the accompanying statement of assets and liabilities, including the statement of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Franklin Mutual Global Discovery VIP Fund (the “Fund”) at December 31, 2014, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements 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 are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2014 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP

San Francisco, California

February 13, 2015

 

    Annual Report     MGD-35   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

Tax Information (unaudited)

Franklin Mutual Global Discovery VIP Fund

Under Section 852(b)(3)(C) of the Internal Revenue Code (Code), the Fund hereby reports the maximum amount allowable but no less than $42,742,840 as a long term capital gain dividend for the fiscal year ended December 31, 2014.

Under Section 854(b)(1)(A) of the Code, the Fund hereby reports 31.13% of the ordinary income dividends as income qualifying for the dividends received deduction for the fiscal year ended December 31, 2014.

 

  MGD-36       Annual Report    

Franklin Mutual Shares VIP Fund

(Formerly, Mutual Shares Securities Fund)

This annual report for Franklin Mutual Shares VIP Fund covers the fiscal year ended December 31, 2014.

Class 4 Performance Summary as of December 31, 2014

Average annual total return of Class 4 shares* represents the average annual change in value, assuming reinvestment of dividends and capital gains. Average returns smooth out variations in returns, which can be significant; they are not the same as year-by-year results.

 

Periods ended 12/31/14    1-Year        5-Year        10-Year  

Average Annual Total Return

      +7.04%           +11.44%           +6.38%   

*For the period beginning 2/29/08, Class 4 performance reflects a 12b-1 fee expense of 0.35% per year, which affects future performance. Class 4 performance prior to 2/29/08 reflects historical Class 1 performance, which does not have a 12b-1 fee expense. Since 2/29/08 (effective date), the average annual total return of Class 4 shares was +5.79%.

Performance reflects the Fund’s Class 4 operating expenses, but does not include any contract fees, expenses or sales charges. If they had been included, performance would be lower. These charges and deductions, particularly for variable life policies, can have a significant effect on contract values and insurance benefits. See the contract prospectus for a complete description of these expenses, including sales charges.

Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares. Current performance may differ from figures shown.

Total Return Index Comparison for a Hypothetical $10,000 Investment (1/1/05–12/31/14)

The graph below shows the change in value of a hypothetical $10,000 investment in the Fund over the indicated period and includes reinvestment of any income and distributions. The Fund’s performance* is compared to the performance of the Standard & Poor’s® 500 Index (S&P 500®). One cannot invest directly in an index, and an index is not representative of the Fund’s portfolio. Please see Important Notes to Performance Information preceding the Fund Summaries.

 

LOGO

**Source: Morningstar. Please see Index Descriptions following the Fund Summaries.

 

    Annual Report     MS-1   

FRANKLIN MUTUAL SHARES VIP FUND

Fund Goals and Main Investments

Franklin Mutual Shares VIP Fund seeks capital appreciation, with income as a secondary goal. Under normal market conditions, the Fund invests primarily in U.S. and foreign equity securities that the investment manager believes are undervalued.

Fund Risks

All investments involve risks, including possible loss of principal. Value securities may not increase in price as anticipated or may decline further in value. The Fund’s investments in foreign securities involve special risks including currency fluctuations, and economic and political uncertainties. The Fund may also invest in companies engaged in mergers, reorganizations or liquidations, which involve special risks as pending deals may not be completed on time or on favorable terms, as well as lower rated bonds, which entail higher credit risk. The Fund is actively managed but there is no guarantee that the manager’s investment decisions will produce the desired results. The Fund’s prospectus also includes a description of the main investment risks.

Performance Overview

You can find the Fund’s one-year total return in the Performance Summary. In comparison, the Fund’s benchmark, the S&P 500, delivered a +13.69% total return for the period under review.1

Economic and Market Overview

The global economy grew moderately during 2014 as U.S. economic growth expanded while growth rates in much of the rest of the world declined. U.S. economic activity was supported in some quarters by increased consumer spending, business investment and federal defense spending. The housing market strengthened, and lower gasoline prices and improved job growth contributed to rising retail sales. The U.S. Federal Reserve Board (Fed) began reducing its large-scale bond purchases $10 billion a month in January and ended the buying program in October. But it continued its practice of maintaining holdings of longer term securities at sizable levels. Toward period-end, the Fed stated that it could be patient with regard to raising interest rates and that the interest rate might not rise for at least a couple of meetings, possibly implying at least the first two meetings of 2015.

Outside the U.S., the U.K. economy grew relatively well, supported by the services and manufacturing sectors. In the eurozone, economic growth remained subdued, as concerns persisted about the potential negative impacts to growth from the crisis in Ukraine and China’s moderating growth rate. In June, the European Central Bank (ECB) reduced its main interest rate and, for the first time, set a negative deposit rate; the ECB reduced both rates again in September. The ECB broadened its monetary easing stance by implementing an asset purchase program to prevent deflation and stimulate the economy. Japan’s second- and third-quarter economic contractions indicated the economy was in a recession, although private consumption and exports improved in the third quarter. In October, the Bank of Japan expanded its stimulus measures amid weak domestic demand and as substantially lower crude oil prices exerted further downward pressure on inflation. Near period-end, Japan’s ruling coalition was reelected in early parliamentary elections and subsequently announced a fresh stimulus package aimed at reviving economic growth.

Global developed market stocks, as measured by the MSCI World Index, advanced overall during the 12-month period amid a generally accommodative monetary policy environment and continued strength in corporate earnings.2 In several emerging markets, economic growth generally moderated. Emerging market stocks overall, as measured by the MSCI Emerging Markets Index, fell for the year, amid headwinds such as soft domestic demand, weak exports, plummeting crude oil prices, regional geopolitical tensions and concerns about possible U.S. interest rate increases.2 Many emerging market currencies depreciated against the U.S. dollar, leading several central banks to raise interest rates seeking to support their currencies. Several other central banks lowered interest rates to promote economic growth. Gold prices ended the year lower amid benign global inflation and a strong U.S. dollar.

Investment Strategy

At Mutual Series, we are committed to our distinctive value approach to investing. Our major investment strategy is investing in undervalued stocks. When selecting undervalued equities, we are attracted to fundamentally strong companies with healthy balance sheets, high-quality assets, substantial free cash flow and shareholder-oriented management teams and whose stocks are trading at discounts to our assessment of the

 

 

1. Source: Morningstar.

One cannot invest directly in an index, and an index is not representative of the Fund’s portfolio. Please see Index Descriptions following the Fund Summaries.

2. Please see Index Descriptions following the Fund Summaries.

 

MS-2    Annual Report    

FRANKLIN MUTUAL SHARES VIP FUND

 

companies’ intrinsic or business value. We also look for asset rich companies whose shares may be trading at depressed levels due to concerns over short-term earnings disappointments, litigation, management strategy or other perceived negatives. While the vast majority of our undervalued equity investments are made in publicly traded companies globally, we may invest occasionally in privately held companies as well.

We complement this more traditional investment strategy with two others. One is distressed investing, which is complex and can take many forms. The most common distressed investment the Fund undertakes is the purchase of financially troubled or bankrupt companies’ debt at a substantial discount to face value. After the financially distressed company is reorganized, often in bankruptcy court, the old debt is typically replaced with new securities issued by the financially stronger company.

The other piece of our investment strategy is participating in arbitrage situations, another highly specialized field. When companies announce proposed mergers or takeovers, commonly referred to as “deals,” the target company may trade at a discount to the bid it ultimately accepts. One form of arbitrage involves purchasing the target company’s stock when it is trading below the value we believe it would receive in a deal. In keeping with our commitment to a relatively conservative investment approach, we typically focus our arbitrage efforts on announced deals, and eschew rumored deals or other situations we consider relatively risky.

In addition, it is our practice to hedge the Fund’s currency exposure when we deem it advantageous for our shareholders.

 

What is meant by “hedge”?

To hedge an investment is to take a position intended to offset potential losses/gains that may be incurred by a companion financial instrument.

Manager’s Discussion

Many Fund holdings increased in value during the 12-month period. Top contributors to performance included technology leader Apple, Teva Pharmaceutical Industries and retailer Kroger.

During the year Apple reported consistently good quarterly results, driven by its strong iPhone business. In addition, the company announced a trio of shareholder friendly actions. These included an enhanced share repurchase program of $90 billion, up from $60 billion, with the same end date of December 2015, an 8% increase in the dividend, and a seven-for-one stock split

 

Top 10 Sectors/Industries       
Based on Equity Securities       
12/31/14       
      % of Total
Net Assets		  
Banks      9.0%   
Media      9.0%   
Insurance      8.3%   
Pharmaceuticals      6.9%   
Oil, Gas & Consumable Fuels      6.7%   
Tobacco      5.9%   
Software      5.1%   
Health Care Equipment & Supplies      4.2%   
Technology Hardware, Storage & Peripherals      3.8%   
Food & Staples Retailing      3.6%   
 

 

that went into effect in early June. In September, the company released its highly anticipated iPhone 6, which sold 10 million units in its first two days. The iPhone sales drove a strong fiscal fourth quarter via healthy sales volumes and a strong product mix that led to a higher average selling price for the period. In October, the company refreshed its product line-up ahead of the holiday season, including launches of the new iPad Air 2, iPad Mini 3, iMac with Retina Display and an updated Mac Mini. Apple also announced the commencement of support for Apple Pay, its mobile payment and digital wallet application.

The performance of Israel-based Teva Pharmaceutical Industries was largely driven by positive events related to the company’s most profitable drug, Copaxone, used to prevent the relapse of multiple sclerosis. In March, the U.S. Supreme Court agreed to hear Teva’s appeal (with oral arguments occurring in October) to maintain a patent, which further delayed the entrance of generic competition. The delay provided Teva the opportunity to convert more U.S. patients to its new formulation and allowed it to potentially retain a higher portion of the franchise once generic alternatives entered the market. In December, Teva received more good news regarding Copaxone with the new formulation gaining European Union approval. Investors also reacted favorably to the January 2014 announcement of a new chief executive officer (CEO) as the market believed he could successfully carry on Teva’s cost-cutting restructuring program.

Kroger is a Cincinnati-based grocery retailer that operates over 2,400 grocery and multi-department stores in 31 states. During 2014, the company reported strong quarterly operating profits while also raising its fiscal year 2014 earnings outlook for three

 

    Annual Report     MS-3   

FRANKLIN MUTUAL SHARES VIP FUND

consecutive quarters. The increase in the full-year outlook was driven in part by the acquisition of Harris Teeter, a stronger outlook for 2014 full-year sales and a decline in gasoline prices, which has helped the U.S. consumer. Kroger’s management team has been executing on a program called “Consumer First” for several years. This program has resonated with Kroger customers, enabling the company to gain market share, leverage fixed costs, drive operating profit growth and increase shareholder value.

During the period under review, some of the Fund’s investments negatively affected performance. These included offshore drilling company Transocean, natural resources firm Freeport-McMoRan and retailer Tesco.

Transocean is a Switzerland-headquartered company providing offshore contract drilling services. The offshore drilling market continued to be mired in a downturn with little clarity regarding the length and depth of the current cycle as oil prices plunged during the second half of 2014. Oil companies pushed back projects, leaving a number of new rigs without contracts and increasing potential downtime between jobs for existing rigs. The growing fleet of uncontracted rigs at period-end portended, in our view, weak second-half results and a challenging start to 2015. On a positive note, the company started a Master Limited Partnership (MLP), Transocean Partners, which went public in September. The MLP may provide Transocean with a way to generate cash by selling (dropping down) assets into Transocean Partners while still controlling the operations of those assets.

Shares of Freeport-McMoRan came under pressure during 2014 due in large part to falling crude oil prices during the second half of the year, as well as lower prices for copper and gold. The company’s stock also came under pressure from events related to its operations in Indonesia. In early 2014, Indonesia’s government issued new mining-related tax and regulatory policies with the apparent intent to force miners to build smelters within the country. In September, production at the company’s Grasberg mine in Indonesia declined following a fatal accident. The workers’ union subsequently threatened to strike, a development that ultimately did not occur. We took a favorable view of agreements announced in May for Freeport to sell shale assets in Texas and to purchase deepwater oil and gas projects in the Gulf of Mexico. We believe the deepwater assets are more attractive than the shale assets, and proceeds from the shale asset sale allowed Freeport to pay off some of its debt. In addition, we had a favorable view on copper over the longer term as we believed supply shortages were likely in the next few years.

 

 

LOGO

*Weightings may be negative or may not total 100% due to rounding, use of any derivatives, unsettled trades or other factors.

 

Shares of U.K.-based Tesco fell throughout 2014. In March, the stock declined as investors became more concerned about price competition from major discounters and competitor supermarkets. Then in August, Tesco issued an unexpected trading statement ahead of its scheduled first-half results. The company lowered its profit guidance primarily for its flagship U.K. operations and cut its dividend. The stock price took a further hit in September with the announcement of material accounting irregularities in Tesco’s core U.K. operations and a contemporaneous change of both the company’s CEO and chief financial officer. At year-end, the Fund no longer held Tesco shares.

During the period, the Fund held currency forwards and futures to somewhat hedge the currency risk of the portfolio’s non-U.S. dollar investments. The hedges had a positive impact on the Fund’s performance.

 

MS-4    Annual Report    

FRANKLIN MUTUAL SHARES VIP FUND

 

What is a currency forward contract?

A currency forward contract, or currency forward, is an agreement between the Fund and a counterparty to buy or sell a foreign currency at a specific exchange rate on a future date.

 

What is a futures contract?

A futures contract, or a future, is an agreement between the Fund and a counterparty made through a U.S. or foreign futures exchange to buy or sell an asset at a specific price on a future date.

Thank you for your participation in Franklin Mutual Shares VIP Fund. We look forward to serving your future investment needs.

The foregoing information reflects our analysis, opinions and portfolio holdings as of December 31, 2014, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.

 

Top 10 Equity Holdings       
12/31/14       
Company
Sector/Industry, Country		    % of Total
Net Assets		  

Medtronic Inc.

Health Care Equipment & Supplies, U.S.

      3.1%   

Microsoft Corp.

Software, U.S.

      2.9%   

Merck & Co. Inc.

Pharmaceuticals, U.S.

      2.6%   

Teva Pharmaceutical Industries Ltd., ADR

Pharmaceuticals, Israel

      2.2%   

Apple Inc.

Technology Hardware, Storage & Peripherals, U.S.

      2.2%   

Twenty-First Century Fox Inc., B

Media, U.S.

      2.0%   

PNC Financial Services Group Inc.

Banks, U.S.

      1.9%   

American International Group Inc.

Insurance, U.S.

      1.8%   

British American Tobacco PLC

Tobacco, U.K.

      1.7%   

Time Warner Cable Inc.

Media, U.S.

      1.7%   

The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund’s Statement of Investments.

 

 

    Annual Report     MS-5   

FRANKLIN MUTUAL SHARES VIP FUND

Class 4 Fund Expenses

As an investor in a variable insurance contract (Contract) that indirectly provides for investment in an underlying mutual fund, you can incur transaction and/or ongoing expenses at both the Fund level and the Contract level.

 

•   Transaction expenses can include sales charges (loads) on purchases, redemption fees, surrender fees, transfer fees and premium taxes.

 

•   Ongoing expenses can include management fees, distribution and service (12b-1) fees, contract fees, annual maintenance fees, mortality and expense risk fees and other fees and expenses. All mutual funds and Contracts have some types of ongoing expenses.

The expenses shown in the table are meant to highlight ongoing expenses at the Fund level only and do not include ongoing expenses at the Contract level, or transaction expenses at either the Fund or Contract level. While the Fund does not have transaction expenses, if the transaction and ongoing expenses at the Contract level were included, the expenses shown below would be higher. You should consult your Contract prospectus or disclosure document for more information.

The table shows Fund-level ongoing expenses and can help you understand these expenses and compare them with those of other mutual funds offered through the Contract. The table assumes a $1,000 investment held for the six months indicated. Please refer to the Fund prospectus for additional information on operating expenses.

Actual Fund Expenses

The first line (Actual) of the table provides actual account values and expenses. The “Ending Account Value” is derived from the Fund’s actual return, which includes the effect of ongoing Fund expenses, but does not include the effect of ongoing Contract expenses.

You can estimate the Fund-level expenses you incurred during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:

 

1. Divide your account value by $1,000.

If an account had an $8,600 value,

then $8,600 ÷ $1,000 = 8.6.

 

2. Multiply the result by the number under the heading “Fund-Level Expenses Incurred During Period.”

If Fund-Level Expenses Incurred During Period were $7.50, then 8.6 × $7.50 = $64.50.

In this illustration, the estimated expenses incurred this period at the Fund level are $64.50.

Hypothetical Example for Comparison with Other Mutual Funds

Information in the second line (Hypothetical) of the table can help you compare ongoing expenses of the Fund with those of other mutual funds offered through the Contract. This information may not be used to estimate the actual ending account balance or expenses you incurred during the period. The hypothetical “Ending Account Value” is based on the Fund’s actual expense ratio and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Fund-Level Expenses Incurred During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds offered through a Contract.

 
Class 4  

Beginning Account

Value 7/1/14

     

Ending Account

Value 12/31/14

     

Fund-Level Expenses
Incurred During Period*

7/1/14–12/31/14

  

Actual

     $1,000         $   991.10         $5.52   

Hypothetical (5% return before expenses)

     $1,000         $1,019.66         $5.60   

*Expenses are calculated using the most recent six-month annualized expense ratio for the Fund’s Class 4 shares (1.10%), which does not include any ongoing expenses of the Contract for which the Fund is an investment option, multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period.

 

MS-6    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

Financial Highlights

Franklin Mutual Shares VIP Fund

     Year Ended December 31,  
      2014      2013      2012      2011      2010  
Class 1               
Per share operating performance
(for a share outstanding throughout the year)		               

Net asset value, beginning of year

      $21.92         $17.45         $15.57         $16.14         $14.75   
  

 

 

  
Income from investment operationsa:               

Net investment incomeb

      0.62 c       0.42         0.35         0.38 d       0.40 e 

Net realized and unrealized gains (losses)

      1.01         4.52         1.92         (0.53 )       1.27   
  

 

 

  

Total from investment operations

      1.63         4.94         2.27         (0.15 )       1.67   
  

 

 

  
Less distributions from:               

Net investment income

      (0.52 )       (0.47 )       (0.39 )       (0.42 )       (0.28 ) 

Net realized gains

      (0.12 )       —         —         —         —   
  

 

 

  

Total distributions

      (0.64 )       (0.47 )       (0.39 )       (0.42 )       (0.28 ) 
  

 

 

  

Net asset value, end of year

      $22.91         $21.92         $17.45         $15.57         $16.14   
  

 

 

  

Total returnf

      7.38%         28.53%         14.61%         (0.79)%         11.47%   
Ratios to average net assets               

Expensesg

      0.73% h       0.71% h       0.71%         0.73% h       0.74% h 

Expenses incurred in connection with securities sold short

      0.03%         —% i       —% i       —% i       0.02%   

Net investment income

      2.83% c       2.08%         2.06%         2.28% d       2.66% e 
Supplemental data               

Net assets, end of year (000’s)

      $656,463         $552,163         $449,343         $1,170,781         $1,301,520   

Portfolio turnover rate

      21.33%         24.05%         34.07% j       41.02%         32.05%   

aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.

bBased on average daily shares outstanding.

cNet investment income per share includes approximately $0.23 per share received in the form of special dividends paid in connection with certain Fund’s holdings. Excluding these amounts, the ratio of net investment income to average net assets would have been 1.79%.

dNet investment income per share includes approximately $0.02 per share related to interest income received that had previously been deemed uncollectible. Excluding this amount, the ratio of net investment income to average net assets would have been 2.14%.

eNet investment income per share includes approximately $0.11 per share received in the form of a special dividend paid in connection with a corporate real estate investment trust (REIT) conversion. Excluding this non-recurring amount, the ratio of the net investment income to average net assets would have been 1.93%.

fTotal return does not include fees, charges or expenses imposed by the variable annuity and life insurance contracts for which Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle.

gIncludes dividend or interest expense on securities sold short and security borrowing fees, if any. See below for the ratios of such expenses to average net assets for the periods presented. See Note 1(f).

hBenefit of expense reduction rounds to less than 0.01%.

iRounds to less than 0.01%.

jExcludes the value of portfolio securities delivered as a result of a redemption in-kind.

 

    The accompanying notes are an integral part of these financial statements.    |   Annual Report     MS-7   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FINANCIAL HIGHLIGHTS

Franklin Mutual Shares VIP Fund (continued)

     Year Ended December 31,  
      2014      2013      2012      2011      2010  
Class 2               
Per share operating performance
(for a share outstanding throughout the year)		               

Net asset value, beginning of year

      $21.63         $17.23         $15.38         $15.95         $14.58   
  

 

 

  
Income from investment operationsa:               

Net investment incomeb

      0.58 c       0.36         0.30         0.32 d       0.36 e 

Net realized and unrealized gains (losses)

      0.97         4.46         1.90         (0.51 )       1.25   
  

 

 

  

Total from investment operations

      1.55         4.82         2.20         (0.19 )       1.61   
  

 

 

  
Less distributions from:               

Net investment income

      (0.46 )       (0.42 )       (0.35 )       (0.38 )       (0.24 ) 

Net realized gains

      (0.12 )       —         —         —         —   
  

 

 

  

Total distributions

      (0.58 )       (0.42 )       (0.35 )       (0.38 )       (0.24 ) 
  

 

 

  

Net asset value, end of year

      $22.60         $21.63         $17.23         $15.38         $15.95   
  

 

 

  

Total returnf

      7.12%         28.26%         14.24%         (1.04)%         11.19%   
Ratios to average net assets               

Expensesg

      0.98% h       0.96% h       0.96%         0.98% h       0.99% h 

Expenses incurred in connection with securities sold short

      0.03%         —% i       —% i       —% i       0.02%   

Net investment income

      2.58% c       1.83%         1.81%         2.03% d       2.41% e 
Supplemental data               

Net assets, end of year (000’s)

      $4,218,342         $4,558,547         $4,069,803         $3,913,220         $4,188,821   

Portfolio turnover rate

      21.33%         24.05%         34.07% j       41.02%         32.05%   

aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.

bBased on average daily shares outstanding.

cNet investment income per share includes approximately $0.23 per share received in the form of special dividends paid in connection with certain Fund’s holdings. Excluding these amounts, the ratio of net investment income to average net assets would have been 1.54%.

dNet investment income per share includes approximately $0.02 per share related to interest income received that had previously been deemed uncollectible. Excluding this amount, the ratio of net investment income to average net assets would have been 1.89%.

eNet investment income per share includes approximately $0.11 per share received in the form of a special dividend paid in connection with a corporate real estate investment trust (REIT) conversion. Excluding this non-recurring amount, the ratio of the net investment income to average net assets would have been 1.68%.

fTotal return does not include fees, charges or expenses imposed by the variable annuity and life insurance contracts for which Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle.

gIncludes dividend or interest expense on securities sold short and security borrowing fees, if any. See below for the ratios of such expenses to average net assets for the periods presented. See Note 1(f).

hBenefit of expense reduction rounds to less than 0.01%.

iRounds to less than 0.01%.

jExcludes the value of portfolio securities delivered as a result of a redemption in-kind.

 

MS-8    Annual Report   |    The accompanying notes are an integral part of these financial statements.    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FINANCIAL HIGHLIGHTS

Franklin Mutual Shares VIP Fund (continued)

     Year Ended December 31,  
      2014      2013      2012      2011      2010  
Class 4               
Per share operating performance
(for a share outstanding throughout the year)		               

Net asset value, beginning of year

      $21.74         $17.31         $15.45         $16.03         $14.66   
  

 

 

  
Income from investment operationsa:               

Net investment incomeb

      0.57 c       0.34         0.28         0.30 d       0.35 e 

Net realized and unrealized gains (losses)

      0.96         4.49         1.91         (0.51 )       1.26   
  

 

 

  

Total from investment operations

      1.53         4.83         2.19         (0.21 )       1.61   
  

 

 

  
Less distributions from:               

Net investment income

      (0.43 )       (0.40 )       (0.33 )       (0.37 )       (0.24 ) 

Net realized gains

      (0.12 )       —         —         —         —   
  

 

 

  

Total distributions

      (0.55 )       (0.40 )       (0.33 )       (0.37 )       (0.24 ) 
  

 

 

  

Net asset value, end of year

      $22.72         $21.74         $17.31         $15.45         $16.03   
  

 

 

  

Total returnf

      7.04%         28.05%         14.20%         (1.12)%         11.06%   
Ratios to average net assets               

Expensesg

      1.08% h       1.06% h       1.06%         1.08% h       1.09% h 

Expenses incurred in connection with securities sold short

      0.03%         —% i       —% i       —% i       0.02%   

Net investment income

      2.48% c       1.73%         1.71%         1.93% d       2.31% e 
Supplemental data               

Net assets, end of year (000’s)

      $158,020         $188,153         $165,015         $162,049         $167,274   

Portfolio turnover rate

      21.33%         24.05%         34.07% j       41.02%         32.05%   

aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.

bBased on average daily shares outstanding.

cNet investment income per share includes approximately $0.23 per share received in the form of special dividends paid in connection with certain Fund’s holdings. Excluding these amounts, the ratio of net investment income to average net assets would have been 1.44%.

dNet investment income per share includes approximately $0.02 per share related to interest income received that had previously been deemed uncollectible. Excluding this amount, the ratio of net investment income to average net assets would have been 1.79%.

eNet investment income per share includes approximately $0.11 per share received in the form of a special dividend paid in connection with a corporate real estate investment trust (REIT) conversion. Excluding this non-recurring amount, the ratio of the net investment income to average net assets would have been 1.58%.

fTotal return does not include fees, charges or expenses imposed by the variable annuity and life insurance contracts for which Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle.

gIncludes dividend or interest expense on securities sold short and security borrowing fees, if any. See below for the ratios of such expenses to average net assets for the periods presented. See Note 1(f).

hBenefit of expense reduction rounds to less than 0.01%.

iRounds to less than 0.01%.

jExcludes the value of portfolio securities delivered as a result of a redemption in-kind.

 

    The accompanying notes are an integral part of these financial statements.    |   Annual Report     MS-9   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

Statement of Investments, December 31, 2014

 

Franklin Mutual Shares VIP Fund           
           Country        Shares        Value  
 

Common Stocks and Other Equity Interests 84.3%

             
 

Aerospace & Defense 1.7%

             
a  

B/E Aerospace Inc.

      United States           449,172         $ 26,060,959   
 

Huntington Ingalls Industries Inc.

      United States           462,038           51,960,793   
a  

KLX Inc.

      United States           224,586           9,264,173   
              

 

 

  
                 87,285,925   
              

 

 

  
 

Auto Components 0.2%

             
a,b  

International Automotive Components Group Brazil LLC

      Brazil           1,730,515           163,672   
a,b,c  

International Automotive Components Group North America LLC

      United States           15,382,424           11,647,264   
              

 

 

  
                 11,810,936   
              

 

 

  
 

Automobiles 1.4%

             
 

General Motors Co.

      United States           1,960,940           68,456,415   
              

 

 

  
 

Banks 9.0%

             
 

Barclays PLC

      United Kingdom           6,895,000           26,169,520   
 

CIT Group Inc.

      United States           643,453           30,776,357   
 

Citigroup Inc.

      United States           1,073,159           58,068,633   
 

Citizens Financial Group Inc.

      United States           612,022           15,214,867   
 

Columbia Banking System Inc.

      United States           163,162           4,504,903   
a  

FCB Financial Holdings Inc., A

      United States           493,723           12,165,335   
 

Guaranty Bancorp

      United States           209,583           3,026,378   
a  

ING Groep NV, IDR

      Netherlands           2,238,146           29,329,336   
 

JPMorgan Chase & Co.

      United States           1,079,000           67,523,820   
 

KB Financial Group Inc.

      South Korea           683,068           22,576,167   
 

PNC Financial Services Group Inc.

      United States           1,022,679           93,299,005   
 

Societe Generale SA

      France           214,711           9,090,413   
 

State Bank Financial Corp.

      United States           352,200           7,036,956   
 

SunTrust Banks Inc.

      United States           929,422           38,942,782   
 

Wells Fargo & Co.

      United States           655,860           35,954,245   
              

 

 

  
                 453,678,717   
              

 

 

  
 

Beverages 1.3%

             
 

Coca-Cola Enterprises Inc.

      United States           187,519           8,292,090   
 

PepsiCo Inc.

      United States           621,282           58,748,426   
              

 

 

  
                 67,040,516   
              

 

 

  
 

Capital Markets 0.4%

             
 

Credit Suisse Group AG

      Switzerland           829,525           20,925,857   
              

 

 

  
 

Chemicals 0.0%

             
a,d,e  

Dow Corning Corp., Contingent Distribution

      United States           100,000           —   
              

 

 

  
 

Communications Equipment 1.4%

             
 

Cisco Systems Inc.

      United States           2,495,550           69,413,723   
              

 

 

  
 

Consumer Finance 0.5%

             
a  

Ally Financial Inc.

      United States           1,050,600           24,815,172   
              

 

 

  
 

Containers & Packaging 0.9%

             
 

MeadWestvaco Corp.

      United States           1,008,696           44,776,016   
              

 

 

  
 

Diversified Consumer Services 0.1%

             
 

Cengage Learning Holdings II LP

      United States           289,744           6,519,240   
              

 

 

  
 

Diversified Telecommunication Services 0.6%

             
a,d,e  

Global Crossing Holdings Ltd., Contingent Distribution

      United States           9,005,048           —   
 

Koninklijke KPN NV

      Netherlands           9,848,740           31,317,811   
              

 

 

  
                 31,317,811   
              

 

 

  

 

MS-10    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

Franklin Mutual Shares VIP Fund (continued)

           Country     Shares        Value  
 

Common Stocks and Other Equity Interests (continued)

          
 

Energy Equipment & Services 1.4%

          
 

Baker Hughes Inc.

      United States        896,262         $ 50,253,411   
 

Ensco PLC, A

      United States        184,920           5,538,354   
f  

Transocean Ltd.

      United States        931,007           17,065,358   
           

 

 

  
              72,857,123   
           

 

 

  
 

Food & Staples Retailing 3.6%

          
 

CVS Health Corp.

      United States        504,363           48,575,200   
 

The Kroger Co.

      United States        1,216,930           78,139,075   
 

Walgreens Boots Alliance Inc.

      United States        729,528           55,590,034   
           

 

 

  
              182,304,309   
           

 

 

  
 

Health Care Equipment & Supplies 4.2%

          
 

Medtronic Inc.

      United States        2,132,922           153,996,968   
 

Stryker Corp.

      United States        594,612           56,089,750   
           

 

 

  
              210,086,718   
           

 

 

  
 

Health Care Providers & Services 1.2%

          
 

Cigna Corp.

      United States        572,674           58,933,881   
           

 

 

  
 

Household Products 0.2%

          
 

Energizer Holdings Inc.

      United States        60,713           7,805,263   
           

 

 

  
 

Independent Power & Renewable Electricity Producers 0.8%

          
 

NRG Energy Inc.

      United States        1,407,314           37,927,112   
           

 

 

  
 

Insurance 8.3%

          
 

ACE Ltd.

      United States        607,735           69,816,597   
a  

Alleghany Corp.

      United States        111,968           51,897,168   
 

The Allstate Corp.

      United States        685,830           48,179,557   
 

American International Group Inc.

      United States        1,588,406           88,966,620   
 

MetLife Inc.

      United States        922,473           49,896,565   
a,b  

Olympus Re Holdings Ltd.

      United States        16,280           —   
 

White Mountains Insurance Group Ltd.

      United States        114,635           72,232,660   
 

Zurich Insurance Group AG

      Switzerland        111,270           34,885,193   
           

 

 

  
              415,874,360   
           

 

 

  
 

IT Services 1.3%

          
 

Xerox Corp.

      United States        4,708,324           65,257,371   
           

 

 

  
 

Machinery 1.2%

          
 

Caterpillar Inc.

      United States        279,216           25,556,641   
 

CNH Industrial NV (EUR Traded)

      United Kingdom        1,150,471           9,326,868   
 

CNH Industrial NV, special voting (EUR Traded)

      United Kingdom        1,844,814           14,955,907   
 

Federal Signal Corp.

      United States        757,221           11,691,492   
           

 

 

  
              61,530,908   
           

 

 

  
 

Marine 1.3%

          
 

A.P. Moeller-Maersk AS, B

      Denmark        32,270           64,855,627   
           

 

 

  
 

Media 9.0%

          
 

CBS Corp., B

      United States        1,025,107           56,729,421   
 

Comcast Corp., Special A

      United States        278,448           16,028,859   
a  

DIRECTV

      United States        756,479           65,586,729   
 

Reed Elsevier PLC

      United Kingdom        3,957,770           67,858,735   
 

Time Warner Cable Inc.

      United States        554,196           84,271,044   
 

Time Warner Inc.

      United States        455,598           38,917,181   

 

    Annual Report     MS-11   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

Franklin Mutual Shares VIP Fund (continued)

           Country     Shares        Value  
 

Common Stocks and Other Equity Interests (continued)

          
 

Media (continued)

          
a  

Tribune Media Co., A

      United States        173,164         $ 10,350,012   
a  

Tribune Media Co., B

      United States        185,976           11,115,786   
 

Tribune Publishing Co.

      United States        97,748           2,238,429   
 

Twenty-First Century Fox Inc., B

      United States        2,670,559           98,516,922   
           

 

 

  
              451,613,118   
           

 

 

  
 

Metals & Mining 1.9%

          
 

Anglo American PLC

      United Kingdom        723,643           13,540,947   
 

Freeport-McMoRan Inc., B

      United States        1,867,696           43,629,379   
a  

ThyssenKrupp AG

      Germany        1,430,635           36,802,512   
           

 

 

  
              93,972,838   
           

 

 

  
 

Multiline Retail 0.4%

          
 

Kohl’s Corp.

      United States        328,513           20,052,434   
           

 

 

  
 

Oil, Gas & Consumable Fuels 6.7%

          
 

Anadarko Petroleum Corp.

      United States        279,670           23,072,775   
 

Apache Corp.

      United States        907,650           56,882,426   
 

BG Group PLC

      United Kingdom        1,788,200           24,109,862   
 

BP PLC

      United Kingdom        5,137,552           32,912,477   
 

CONSOL Energy Inc.

      United States        755,295           25,536,524   
 

Marathon Oil Corp.

      United States        1,788,098           50,585,292   
 

Murphy Oil Corp.

      United States        502,750           25,398,930   
 

Royal Dutch Shell PLC, A

      United Kingdom        2,322,671           77,736,545   
 

Talisman Energy Inc. (CAD Traded)

      Canada        202,643           1,587,988   
 

Talisman Energy Inc. (USD Traded)

      Canada        2,775,188           21,729,722   
           

 

 

  
              339,552,541   
           

 

 

  
 

Paper & Forest Products 1.2%

          
 

International Paper Co.

      United States        1,175,666           62,992,184   
           

 

 

  
 

Personal Products 0.5%

          
 

Avon Products Inc.

      United States        2,475,318           23,243,236   
           

 

 

  
 

Pharmaceuticals 6.9%

          
 

Eli Lilly & Co.

      United States        763,276           52,658,411   
a  

Hospira Inc.

      United States        787,789           48,252,077   
 

Merck & Co. Inc.

      United States        2,335,928           132,657,351   
 

Teva Pharmaceutical Industries Ltd., ADR

      Israel        1,969,012           113,237,880   
           

 

 

  
              346,805,719   
           

 

 

  
 

Real Estate Investment Trusts (REITs) 0.3%

          
 

Alexander’s Inc.

      United States        40,126           17,542,285   
           

 

 

  
 

Real Estate Management & Development 0.3%

          
e  

Canary Wharf Group PLC

      United Kingdom        1,535,898           12,949,288   
a  

Forestar Group Inc.

      United States        161,671           2,489,733   
           

 

 

  
              15,439,021   
           

 

 

  
 

Software 5.1%

          
 

CA Inc.

      United States        965,033           29,385,255   
 

Microsoft Corp.

      United States        3,126,947           145,246,688   
 

Symantec Corp.

      United States        3,184,665           81,702,581   
           

 

 

  
              256,334,524   
           

 

 

  

 

MS-12    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

Franklin Mutual Shares VIP Fund (continued)

           Country     Shares        Value  
 

Common Stocks and Other Equity Interests (continued)

  

       
 

Technology Hardware, Storage & Peripherals 3.8%

          
 

Apple Inc.

      United States        1,010,540         $ 111,543,405   
 

Hewlett-Packard Co.

      United States        1,109,027           44,505,254   
 

Samsung Electronics Co. Ltd.

      South Korea        28,252           34,276,627   
           

 

 

  
              190,325,286   
           

 

 

  
 

Tobacco 5.9%

          
 

Altria Group Inc.

      United States        1,248,308           61,504,135   
 

British American Tobacco PLC

      United Kingdom        1,550,387           84,580,584   
 

Imperial Tobacco Group PLC

      United Kingdom        1,209,297           53,456,648   
 

Lorillard Inc.

      United States        1,157,753           72,868,974   
 

Philip Morris International Inc.

      United States        282,010           22,969,714   
           

 

 

  
              295,380,055   
           

 

 

  
 

Wireless Telecommunication Services 1.3%

          
 

Vodafone Group PLC

      United Kingdom        18,909,354           65,623,881   
           

 

 

  
 

Total Common Stocks and Other Equity Interests
(Cost $2,990,557,699)

             4,242,350,122   
           

 

 

  
 

Preferred Stocks (Cost $35,233,301) 0.6%

          
 

Automobiles 0.6%

          
 

Volkswagen AG, pfd.

      Germany        135,289           30,227,147   
           

 

 

  
               Principal Amount*           
 

Corporate Bonds, Notes and Senior Floating Rate Interests 4.9%

          
 

Avaya Inc.,

          
 

g senior note, 144A, 10.50%, 3/01/21

      United States        18,224,000           15,672,640   
 

g senior secured note, 144A, 7.00%, 4/01/19

      United States        12,923,000           12,664,540   
 

h,i Tranche B-3 Term Loan, 4.67%, 10/26/17

      United States        19,407,661           18,663,707   
 

h,i Tranche B-6 Term Loan, 6.50%, 3/31/18

      United States        4,733,178           4,679,930   
h,i  

Caesars Entertainment Operating Co. Inc., Senior Tranche, first lien,

          
 

B5B, 5.949%, 3/01/17

      United States        3,251,752           2,854,768   
 

B6B, 6.949%, 3/01/17

      United States        15,503,483           13,701,203   
 

B7, 9.75%, 3/01/17

      United States        9,850,500           8,737,394   
h,i  

Cengage Learning Acquisitions Inc., First Lien Exit Term Loan, 7.00%, 3/31/20

      United States        1,825,208           1,809,237   
 

First Data Corp., senior note, 11.75%, 8/15/21

      United States        9,426,000           10,863,465   
 

iHeartCommunications Inc.,

          
 

senior secured note, first lien, 9.00%, 12/15/19

      United States        26,449,000           26,151,449   
 

h,i Tranche B Term Loan, 3.819%, 1/29/16

      United States        260,204           257,521   
 

h,i Tranche C Term Loan, 3.819%, 1/29/16

      United States        28,080           27,764   
 

h,i Tranche D Term Loan, 6.919%, 1/30/19

      United States        34,746,619           32,824,714   
 

h,i Tranche E Term Loan, 7.669%, 7/30/19

      United States        11,168,253           10,735,483   
h,i  

JC Penney Corp. Inc., Term Loan, 6.00%, 5/22/18

      United States        26,191,507           25,815,004   
 

NGPL PipeCo LLC,

          
 

g secured note, 144A, 7.119%, 12/15/17

      United States        9,756,000           9,634,050   
 

f,g senior secured note, 144A, 9.625%, 6/01/19

      United States        14,481,000           14,589,608   
 

h,i Term Loan B, 6.75%, 9/15/17

      United States        792,371           766,619   
h,i  

Toys R US-Delaware Inc.,

          
 

Filo Term Loan, 8.75%, 10/24/19

      United States        2,560,000           2,520,243   
 

j Term Loan B4, 9.75%, 4/24/20

      United States        21,675,344           19,843,778   

 

    Annual Report     MS-13   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

Franklin Mutual Shares VIP Fund (continued)

           Country     Principal Amount*        Value  
 

Corporate Bonds, Notes and Senior Floating Rate Interests (continued)

          
 

Walter Energy Inc.,

          
 

h,i B, Term Loan, 7.25%, 4/01/18

      United States        11,218,193         $ 8,729,156   
 

g first lien, 144A, 9.50%, 10/15/19

      United States        6,301,000           4,820,265   
 

f,g,k second lien, 144A, PIK, 11.50%, 4/01/20

      United States        5,262,000           1,736,718   
           

 

 

  
 

Total Corporate Bonds, Notes and Senior Floating Rate Interests (Cost $247,498,693)

             248,099,256   
           

 

 

  
 

Corporate Notes and Senior Floating Rate Interests in Reorganization 1.7%

          
b,l  

Broadband Ventures III LLC, secured promissory note, 5.00%, 2/01/12

      United States        1,754           —   
h,i,l  

Texas Competitive Electric Holdings Co. LLC, Extended Term Loan, 4.648%, 10/10/17

      United States        90,618,405           58,675,417   
g,l  

Texas Competitive Electric Holdings Co. LLC/Texas Competitive Electric Holdings Finance Inc., senior secured note, 144A, 11.50%, 10/01/20

      United States        39,308,000           28,006,950   
           

 

 

  
 

Total Corporate Notes and Senior Floating Rate Interests in Reorganization (Cost $115,883,307)

             86,682,367   
           

 

 

  
               Shares           
 

Companies in Liquidation 0.7%

          
a  

Adelphia Recovery Trust

      United States        29,283,354           70,280   
a,d  

Adelphia Recovery Trust, Arahova Contingent Value Vehicle, Contingent Distribution

      United States        1,955,453           19,554   
a,b,c,m  

CB FIM Coinvestors LLC

      United States        6,400,507           —   
a,d,e  

Century Communications Corp., Contingent Distribution

      United States        5,487,000           —   
a,b  

FIM Coinvestor Holdings I, LLC

      United States        8,006,950           —   
a,n  

Lehman Brothers Holdings Inc., Bankruptcy Claim

      United States        144,058,799           36,014,700   
a,d,e  

Tribune Media Litigation Trust, Contingent Distribution

      United States        393,761           —   
a,d,e  

Tropicana Litigation Trust, Contingent Distribution

      United States        18,305,000           —   
           

 

 

  
 

Total Companies in Liquidation (Cost $41,876,162)

             36,104,534   
           

 

 

  
               Principal Amount*           
 

Municipal Bonds (Cost $14,662,575) 0.3%

          
 

Puerto Rico Commonwealth GO, Refunding, Series A, 8.00%, 7/01/35

      United States        15,709,000           13,725,739   
           

 

 

  
 

Total Investments before Short Term Investments
(Cost $3,445,711,737)

             4,657,189,165   
           

 

 

  

 

MS-14    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

Franklin Mutual Shares VIP Fund (continued)

           Country     Principal Amount*        Value  
 

Short Term Investments 7.3%

          
 

U.S. Government and Agency Securities 7.0%

          
o  

U.S. Treasury Bills,

          
 

1/02/15

      United States        63,700,000         $ 63,700,000   
 

p 1/29/15 - 7/02/15

      United States        287,680,000           287,651,209   
           

 

 

  
 

Total U.S. Government and Agency Securities
(Cost $351,335,064)

             351,351,209   
           

 

 

  
 

Total Investments before Money Market Funds
(Cost $3,797,046,801)

             5,008,540,374   
           

 

 

  
               Shares           
q  

Investments from Cash Collateral Received for Loaned Securities (Cost $14,448,795) 0.3%

          
 

Money Market Funds 0.3%

          
r  

BNY Mellon Overnight Government Fund, 0.072%

      United States        14,448,795           14,448,795   
           

 

 

  
 

Total Investments (Cost $3,811,495,596) 99.8%

             5,022,989,169   
 

Securities Sold Short (0.7)%

             (33,033,145 ) 
 

Other Assets, less Liabilities 0.9%

             42,868,703   
           

 

 

  
 

Net Assets 100.0%

           $ 5,032,824,727   
           

 

 

  
s  

Securities Sold Short (Proceeds $34,400,399) (0.7)%

          
 

Common Stocks (0.7)%

          
 

Diversified Telecommunication Services (0.7)%

          
 

AT&T Inc.

      United States        983,422         $ (33,033,145 ) 
           

 

 

  

 

*The principal amount is stated in U.S. dollars unless otherwise indicated.

aNon-income producing.

bSee Note 8 regarding restricted securities.

cAt December 31, 2014, pursuant to the Fund’s policies and the requirements of applicable securities law, the Fund may be restricted from trading these securities for a limited or extended period of time.

dContingent distributions represent the right to receive additional distributions, if any, during the reorganization of the underlying company. Shares represent total underlying principal of debt securities.

eSecurity has been deemed illiquid because it may not be able to be sold within seven days. At December 31, 2014, the aggregate value of these securities was $12,949,288, representing 0.26% of net assets.

fA portion or all of the security is on loan at December 31, 2014. See Note 1(g).

gSecurity was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be sold in transactions exempt from registration only to qualified institutional buyers or in a public offering registered under the Securities Act of 1933. These securities have been deemed liquid under guidelines approved by the Trust’s Board of Trustees. At December 31, 2014, the aggregate value of these securities was $87,124,771, representing 1.73% of net assets.

hSee Note 1(h) regarding senior floating rate interests.

iThe coupon rate shown represents the rate at period end.

jA portion or all of the security purchased on a delayed delivery basis. See Note 1(c).

kIncome may be received in additional securities and/or cash.

lSee Note 7 regarding credit risk and defaulted securities.

mSee Note 10 regarding holdings of 5% voting securities.

nBankruptcy claims represent the right to receive distributions, if any, during the liquidation of the underlying pool of assets. Shares represent amount of allowed unsecured claims.

oThe security is traded on a discount basis with no stated coupon rate.

pSecurity or a portion of the security has been pledged as collateral for securities sold short, open futures and forward contracts. At December 31, 2014, the value of this security and/or cash pledged as collateral was $54,237,697, representing 1.08% of net assets.

qSee Note 1(g) regarding securities on loan.

rThe rate shown is the annualized seven-day yield at period end.

sSee Note 1(f) regarding securities sold short.

 

    Annual Report     MS-15   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

Franklin Mutual Shares VIP Fund (continued)

At December 31, 2014, the Fund had the following futures contracts outstanding. See Note 1(d).

 

Futures Contracts  
Description    Type      Number of
Contracts		      Notional
Value		      Expiration
Date		      Unrealized
Appreciation		      Unrealized
Depreciation		  
Currency Contracts                  

CHF/USD

      Short         22       $ 2,770,350         3/16/15       $ 64,556       $  —   

EUR/USD

      Short         491         74,306,713         3/16/15         1,790,180         —   

GBP/USD

      Short         1,150         111,909,375         3/16/15         649,288         —   
              

 

 

  

Net unrealized appreciation (depreciation)

  

    $ 2,504,024      
              

 

 

     

At December 31, 2014, the Fund had the following forward exchange contracts outstanding. See Note 1(d).

 

Forward Exchange Contracts  
Currency    Counterpartya      Type      Quantity      Contract
Amount		      Settlement
Date		      Unrealized
Appreciation		      Unrealized
Depreciation		  

Euro

      BOFA         Buy         195,842       $ 243,911         1/20/15       $ —       $ (6,890 ) 

Euro

      BOFA         Sell         103,066         136,162         1/20/15         11,425         —   

Euro

      BONY         Buy         30,450         38,139         1/20/15         —         (1,287 ) 

Euro

      DBAB         Buy         391,686         488,087         1/20/15         —         (14,042 ) 

Euro

      DBAB         Sell         408,296         539,495         1/20/15         45,347         —   

Euro

      FBCO         Sell         71,702         94,989         1/20/15         8,210         —   

Euro

      HSBC         Buy         391,686         487,884         1/20/15         —         (13,839 ) 

Euro

      HSBC         Sell         356,763         471,498         1/20/15         39,719         —   

Euro

      SCBT         Sell         105,111         138,918         1/20/15         11,705         —   

Euro

      SSBT         Buy         392,037         488,380         1/20/15         —         (13,910 ) 

Euro

      SSBT         Sell         356,763         471,456         1/20/15         39,677         —   

British Pound

      BOFA         Buy         13,960,725         22,756,672         1/21/15         —         (999,760 ) 

British Pound

      BZWS         Buy         11,674,596         18,836,564         1/21/15         —         (642,441 ) 

British Pound

      DBAB         Sell         22,492,043         38,357,647         1/21/15         3,305,214         —   

British Pound

      FBCO         Buy         4,450,184         7,263,280         1/21/15         —         (327,948 ) 

British Pound

      FBCO         Sell         479,516         777,341         1/21/15         30,046         —   

British Pound

      HSBC         Buy         537,697         903,465         1/21/15         —         (65,498 ) 

British Pound

      HSBC         Sell         15,812,672         26,976,418         1/21/15         2,333,364         —   

British Pound

      SCBT         Sell         824,100         1,335,653         1/21/15         51,344         —   

British Pound

      SSBT         Buy         1,776,769         2,976,016         1/21/15         —         (207,033 ) 

British Pound

      SSBT         Sell         20,856,066         35,597,133         1/21/15         3,094,267         —   

South Korean Won

      BOFA         Buy         1,453,683,558         1,356,875         2/12/15         —         (30,670 ) 

South Korean Won

      BOFA         Sell         18,373,971,870         17,561,175         2/12/15         817,060         (18,571 ) 

South Korean Won

      BONY         Sell         1,460,646,033         1,415,308         2/12/15         82,752         —   

South Korean Won

      FBCO         Buy         466,294,044         426,619         2/12/15         —         (1,216 ) 

South Korean Won

      FBCO         Sell         24,709,570,673         23,807,530         2/12/15         1,264,838         —   

South Korean Won

      HSBC         Buy         4,560,218,860         4,165,599         2/12/15         17,436         (22,719 ) 

South Korean Won

      HSBC         Sell         24,119,320,086         23,217,452         2/12/15         1,236,780         (23,531 ) 

Swiss Franc

      BOFA         Buy         1,207,808         1,247,421         2/12/15         —         (31,658 ) 

Swiss Franc

      BOFA         Sell         9,790,739         10,826,139         2/12/15         970,911         —   

Swiss Franc

      DBAB         Buy         2,489,139         2,594,372         2/12/15         —         (88,838 ) 

Swiss Franc

      DBAB         Sell         511,795         553,792         2/12/15         38,626         —   

Swiss Franc

      FBCO         Buy         1,652,528         1,715,589         2/12/15         —         (52,176 ) 

Swiss Franc

      FBCO         Sell         455,271         483,015         2/12/15         24,745         —   

Swiss Franc

      HSBC         Buy         41,715         43,126         2/12/15         —         (1,136 ) 

Swiss Franc

      HSBC         Sell         105,631         107,382         2/12/15         1,056         —   

Swiss Franc

      SSBT         Buy         2,161,559         2,238,018         2/12/15         —         (62,221 ) 

Swiss Franc

      SSBT         Sell         72,792         75,720         2/12/15         2,449         —   

British Pound

      BOFA         Buy         14,672,698         23,617,002         2/19/15         —         (755,650 ) 

British Pound

      BOFA         Sell         20,585,699         33,879,884         2/19/15         1,805,559         —   

British Pound

      BZWS         Buy         328,780         522,213         2/19/15         —         (9,945 ) 

British Pound

      DBAB         Buy         2,155,538         3,458,176         2/19/15         —         (99,658 ) 

British Pound

      DBAB         Sell         290,717         455,448         2/19/15         2,485         —   

 

MS-16    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

Franklin Mutual Shares VIP Fund (continued)

Forward Exchange Contracts (continued)  
Currency    Counterpartya      Type      Quantity      Contract
Amount		      Settlement
Date		      Unrealized
Appreciation		      Unrealized
Depreciation		  

British Pound

      FBCO         Buy         3,990,864       $ 6,388,538         2/19/15       $ —       $ (170,422 ) 

British Pound

      FBCO         Sell         16,875,253         27,893,010         2/19/15         1,599,885         —   

British Pound

      HSBC         Buy         3,194,436         5,117,285         2/19/15         —         (140,074 ) 

British Pound

      HSBC         Sell         5,161,615         8,203,414         2/19/15         161,165         —   

British Pound

      SCBT         Buy         466,309         754,917         2/19/15         —         (28,367 ) 

British Pound

      SCBT         Sell         408,270         656,327         2/19/15         20,206         —   

British Pound

      SSBT         Buy         13,632,537         22,093,027         2/19/15         —         (852,338 ) 

British Pound

      SSBT         Sell         22,351,155         36,439,973         2/19/15         1,614,912         —   

Euro

      BOFA         Buy         59,058         74,018         2/27/15         —         (2,519 ) 

Euro

      BOFA         Sell         340,793         445,272         2/27/15         32,692         —   

Euro

      BONY         Buy         368,679         458,434         2/27/15         —         (12,094 ) 

Euro

      BONY         Sell         626,812         822,129         2/27/15         63,281         —   

Euro

      DBAB         Buy         611,694         761,414         2/27/15         —         (20,868 ) 

Euro

      DBAB         Sell         972,518         1,269,884         2/27/15         92,508         —   

Euro

      FBCO         Buy         397,232         492,856         2/27/15         —         (11,948 ) 

Euro

      FBCO         Sell         470,068         612,245         2/27/15         43,159         —   

Euro

      HSBC         Buy         702,645         873,604         2/27/15         —         (22,949 ) 

Euro

      HSBC         Sell         813,358         1,060,012         2/27/15         75,322         —   

Euro

      SCBT         Sell         500,368         649,753         2/27/15         43,984         —   

Euro

      SSBT         Buy         634,479         789,888         2/27/15         —         (21,757 ) 

Euro

      SSBT         Sell         651,414         849,370         2/27/15         60,737         —   

Euro

      BOFA         Sell         1,818,249         2,311,477         4/16/15         109,213         —   

Euro

      BONY         Sell         567,695         711,692         4/16/15         24,100         —   

Euro

      BZWS         Sell         294,348         369,392         4/16/15         12,878         —   

Euro

      DBAB         Sell         942,694         1,192,820         4/16/15         51,029         —   

Euro

      FBCO         Sell         1,162,263         1,463,631         4/16/15         55,897         —   

Euro

      HSBC         Sell         1,551,770         1,960,871         4/16/15         81,366         —   

Euro

      SCBT         Sell         283,848         355,761         4/16/15         11,964         —   

Euro

      SSBT         Sell         1,470,188         1,852,108         4/16/15         71,415         —   

British Pound

      BOFA         Sell         1,805,602         2,820,531         4/22/15         8,746         —   

British Pound

      HSBC         Sell         18,037,659         28,950,419         4/22/15         861,161         —   

British Pound

      SCBT         Sell         18,073,951         29,117,135         4/22/15         971,361         —   

Euro

      BOFA         Sell         17,483,246         21,831,329         5/18/15         648,326         —   

Euro

      BONY         Sell         119,151         145,245         5/18/15         880         —   

Euro

      DBAB         Sell         20,536,211         25,642,666         5/18/15         760,637         —   

Euro

      FBCO         Sell         18,916,557         23,620,331         5/18/15         700,704         —   

Euro

      HSBC         Sell         1,477,677         1,830,517         5/18/15         40,138         —   

Euro

      SSBT         Sell         1,033,901         1,293,309         5/18/15         40,617         —   

British Pound

      BOFA         Buy         651,914         1,017,146         5/21/15         —         (2,184 ) 

British Pound

      BOFA         Sell         11,512,119         18,016,466         5/21/15         93,305         —   

British Pound

      FBCO         Buy         231,285         360,045         5/21/15         41         —   

British Pound

      FBCO         Sell         8,292,701         12,968,126         5/21/15         57,261         —   

British Pound

      HSBC         Buy         1,150,785         1,799,525         5/21/15         —         (7,874 ) 

British Pound

      SSBT         Sell         15,195,997         23,766,539         5/21/15         107,967         —   
                 

 

 

  

Unrealized appreciation (depreciation)

  

      23,751,872         (4,784,031 ) 
                 

 

 

  

Net unrealized appreciation (depreciation)

  

    $ 18,967,841      
                 

 

 

     

aMay be comprised of multiple contracts with the same counterparty, currency and settlement date.

See Abbreviations on page MS-33.

 

    The accompanying notes are an integral part of these financial statements.    |   Annual Report     MS-17   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

Financial Statements

Statement of Assets and Liabilities

December 31, 2014

 

      Franklin Mutual
Shares VIP
Fund		  

Assets:

   

Investments in securities:

   

Cost

    $ 3,811,495,596   
  

 

 

  

Value (includes securities loaned in the amount of $13,844,330)

    $ 5,022,989,169   

Cash

      413,992   

Restricted cash (Note 1e)

      5,150,000   

Foreign currency, at value (cost $7,590,010)

      7,603,838   

Receivables:

   

Investment securities sold

      3,731,159   

Capital shares sold

      462,641   

Dividends and interest

      9,804,952   

Due from brokers

      34,318,854   

Variation margin

      192,363   

Unrealized appreciation on forward exchange contracts

      23,751,872   

Other assets

      847,031   
  

 

 

  

Total assets

      5,109,265,871   
  

 

 

  

Liabilities:

   

Payables:

   

Investment securities purchased

      10,686,037   

Capital shares redeemed

      2,751,849   

Management fees

      2,954,899   

Distribution fees

      1,862,959   

Securities sold short, at value (proceeds $34,400,399)

      33,033,145   

Payable upon return of securities loaned

      14,448,795   

Due to brokers

      5,150,000   

Unrealized depreciation on forward exchange contracts

      4,784,031   

Accrued expenses and other liabilities

      769,429   
  

 

 

  

Total liabilities

      76,441,144   
  

 

 

  

Net assets, at value

    $ 5,032,824,727   
  

 

 

  

Net assets consist of:

   

Paid-in capital

    $ 3,400,072,674   

Undistributed net investment income

      135,335,888   

Net unrealized appreciation (depreciation)

      1,234,339,868   

Accumulated net realized gain (loss)

      263,076,297   
  

 

 

  

Net assets, at value

    $ 5,032,824,727   
  

 

 

  

 

MS-18    Annual Report   |    The accompanying notes are an integral part of these financial statements.    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FINANCIAL STATEMENTS

Statement of Assets and Liabilities (continued)

December 31, 2014

      Franklin Mutual
Shares VIP
Fund		  
Class 1:   

Net assets, at value

    $ 656,462,845   
  

 

 

  

Shares outstanding

      28,649,881   
  

 

 

  

Net asset value and maximum offering price per share

    $ 22.91   
  

 

 

  
Class 2:   

Net assets, at value

    $ 4,218,341,780   
  

 

 

  

Shares outstanding

      186,624,434   
  

 

 

  

Net asset value and maximum offering price per share

    $ 22.60   
  

 

 

  
Class 4:   

Net assets, at value

    $ 158,020,102   
  

 

 

  

Shares outstanding

      6,954,769   
  

 

 

  

Net asset value and maximum offering price per share

    $ 22.72   
  

 

 

  

 

    The accompanying notes are an integral part of these financial statements.    |   Annual Report     MS-19   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FINANCIAL STATEMENTS

Statement of Operations

for the year ended December 31, 2014

 

      Franklin Mutual
Shares VIP
Fund		  

Investment income:

   

Dividends

    $ 155,438,111   

Interest

      30,503,752   

Income from securities loaned

      64,238   
  

 

 

  

Total investment income

      186,006,101   
  

 

 

  

Expenses:

   

Management fees (Note 3a)

      34,241,883   

Administrative fees (Note 3b)

      1,475,520   

Distribution fees: (Note 3c)

   

Class 2

      11,046,947   

Class 4

      612,845   

Custodian fees (Note 4)

      155,385   

Reports to shareholders

      780,605   

Professional fees

      195,923   

Trustees’ fees and expenses

      20,732   

Dividends on securities sold short

      1,363,635   

Other

      83,862   
  

 

 

  

Total expenses

      49,977,337   

Expense reductions (Note 4)

      (369 ) 
  

 

 

  

Net expenses

      49,976,968   
  

 

 

  

Net investment income

      136,029,133   
  

 

 

  

Realized and unrealized gains (losses):

   

Net realized gain (loss) from:

   

Investments

      288,234,079   

Foreign currency transactions

      (18,300,963 ) 

Futures contracts

      13,224,439   

Securities sold short

      (2,788,137 ) 
  

 

 

  

Net realized gain (loss)

      280,369,418   
  

 

 

  

Net change in unrealized appreciation (depreciation) on:

   

Investments

      (110,525,830 ) 

Translation of other assets and liabilities denominated in foreign currencies

      49,590,550   
  

 

 

  

Net change in unrealized appreciation (depreciation)

      (60,935,280 ) 
  

 

 

  

Net realized and unrealized gain (loss)

      219,434,138   
  

 

 

  

Net increase (decrease) in net assets resulting from operations

    $ 355,463,271   
  

 

 

  

 

MS-20    Annual Report   |    The accompanying notes are an integral part of these financial statements.    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FINANCIAL STATEMENTS

Statements of Changes in Net Assets

 

    Franklin Mutual Shares VIP Fund  
    Year Ended December 31,  
     2014        2013  

Increase (decrease) in net assets:

       

Operations:

       

Net investment income

   $ 136,029,133         $ 93,933,333   

Net realized gain (loss) from investments, written options, foreign currency transactions, futures contracts and securities sold short

     280,369,418           369,009,836   

Net change in unrealized appreciation (depreciation) on investments and translation of other assets and liabilities denominated in foreign currencies

     (60,935,280 )         786,825,157   
 

 

 

  

Net increase (decrease) in net assets resulting from operations

     355,463,271           1,249,768,326   
 

 

 

  

Distributions to shareholders from:

       

Net investment income:

       

Class 1

     (14,458,134 )         (11,380,461 ) 

Class 2

     (87,785,708 )         (90,294,700 ) 

Class 4

     (3,061,827 )         (3,535,676 ) 

Net realized gains:

       

Class 1

     (3,341,870 )         —   

Class 2

     (22,825,048 )         —   

Class 4

     (853,086 )         —   
 

 

 

  

Total distributions to shareholders

     (132,325,673 )         (105,210,837 ) 
 

 

 

  

Capital share transactions: (Note 2)

       

Class 1

     79,247,758           (9,960,888 ) 

Class 2

     (529,398,101 )         (502,396,967 ) 

Class 4

     (39,025,210 )         (17,497,568 ) 
 

 

 

  

Total capital share transactions

     (489,175,553 )         (529,855,423 ) 
 

 

 

  

Net increase (decrease) in net assets

     (266,037,955 )         614,702,066   

Net assets:

       

Beginning of year

     5,298,862,682           4,684,160,616   
 

 

 

  

End of year

   $ 5,032,824,727         $ 5,298,862,682   
 

 

 

  

Undistributed net investment income included in net assets:

       

End of year

   $ 135,335,888         $ 91,100,656   
 

 

 

  

 

    The accompanying notes are an integral part of these financial statements.    |   Annual Report     MS-21   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

Notes to Financial Statements

Franklin Mutual Shares VIP Fund

1. Organization and Significant Accounting Policies

Franklin Templeton Variable Insurance Products Trust (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end management investment company, consisting of nineteen separate funds and applies the specialized accounting and reporting guidance in U.S. Generally Accepted Accounting Principles (U.S. GAAP). Franklin Mutual Shares VIP Fund (Fund) is included in this report. The financial statements of the remaining funds in the Trust are presented separately. Shares of the Fund are generally sold only to insurance company separate accounts to fund the benefits of variable life insurance policies or variable annuity contracts. The Fund offers three classes of shares: Class 1, Class 2, and Class 4. Each class of shares differs by its distribution fees, voting rights on matters affecting a single class and its exchange privilege.

Effective May 1, 2014, Mutual Shares Securities Fund was renamed Franklin Mutual Shares VIP Fund.

The following summarizes the Fund’s significant accounting policies.

a. Financial Instrument Valuation

The Fund’s investments in financial instruments are carried at fair value daily. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. The Fund calculates the net asset value (NAV) per share at the close of the New York Stock Exchange (NYSE), generally at 4 p.m. Eastern time (NYSE close) on each day the NYSE is open for trading. Under compliance policies and procedures approved by the Trust’s Board of Trustees (the Board), the Fund’s administrator has responsibility for oversight of valuation, including leading the cross-functional Valuation and Liquidity Oversight Committee (VLOC). The VLOC provides administration and oversight of the Fund’s valuation policies and procedures, which are approved annually by the Board. Among other things, these procedures allow the Fund to utilize independent pricing services, quotations from securities and financial instrument dealers, and other market sources to determine fair value.

Equity securities and derivative financial instruments (derivatives) listed on an exchange or on the NASDAQ National Market System are valued at the last quoted sale price or the official closing price of the day, respectively. Foreign equity

securities are valued as of the close of trading on the foreign stock exchange on which the security is primarily traded or as of the NYSE close, whichever is earlier. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at the NYSE close on the day that the value of the security is determined. Over-the-counter (OTC) securities are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. Certain equity securities are valued based upon fundamental characteristics or relationships to similar securities. Investments in non-registered money market funds are valued at the closing NAV.

Debt securities generally trade in the OTC market rather than on a securities exchange. The Fund’s pricing services use multiple valuation techniques to determine fair value. In instances where sufficient market activity exists, the pricing services may utilize a market-based approach through which quotes from market makers are used to determine fair value. In instances where sufficient market activity may not exist or is limited, the pricing services also utilize proprietary valuation models which may consider market characteristics such as benchmark yield curves, credit spreads, estimated default rates, anticipated market interest rate volatility, coupon rates, anticipated timing of principal repayments, underlying collateral, and other unique security features in order to estimate the relevant cash flows, which are then discounted to calculate the fair value. Securities denominated in a foreign currency are converted into their U.S. dollar equivalent at the foreign exchange rate in effect at the NYSE close on the date that the values of the foreign debt securities are determined.

Certain derivatives trade in the OTC market. The Fund’s pricing services use various techniques including industry standard option pricing models and proprietary discounted cash flow models to determine the fair value of those instruments. The Fund’s net benefit or obligation under the derivative contract, as measured by the fair value of the contract, is included in net assets.

The Fund has procedures to determine the fair value of financial instruments for which market prices are not reliable or readily available. Under these procedures, the VLOC convenes on a regular basis to review such financial instruments and considers a number of factors, including significant unobservable valuation inputs, when arriving at fair value. The VLOC primarily

 

 

MS-22    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Franklin Mutual Shares VIP Fund (continued)

employs a market-based approach which may use related or comparable assets or liabilities, recent transactions, market multiples, book values, and other relevant information for the investment to determine the fair value of the investment. An income-based valuation approach may also be used in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the investments. Due to the inherent uncertainty of valuations of such investments, the fair values may differ significantly from the values that would have been used had an active market existed. The VLOC employs various methods for calibrating these valuation approaches including a regular review of key inputs and assumptions, transactional back-testing or disposition analysis, and reviews of any related market activity.

Trading in securities on foreign securities stock exchanges and OTC markets may be completed before the daily NYSE close. In addition, trading in certain foreign markets may not take place on every NYSE business day. Occasionally, events occur between the time at which trading in a foreign security is completed and the close of the NYSE that might call into question the reliability of the value of a portfolio security held by the Fund. As a result, differences may arise between the value of the Fund’s portfolio securities as determined at the foreign market close and the latest indications of value at the close of the NYSE. In order to minimize the potential for these differences, the VLOC monitors price movements following the close of trading in foreign stock markets through a series of country specific market proxies (such as baskets of American Depositary Receipts, futures contracts and exchange traded funds). These price movements are measured against established trigger thresholds for each specific market proxy to assist in determining if an event has occurred that may call into question the reliability of the values of the foreign securities held by the Fund. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services.

Also, when the last day of the reporting period is a non-business day, certain foreign markets may be open on those days that the NYSE is closed, which could result in differences between the value of the Fund’s portfolio securities on the last business day and the last calendar day of the reporting period. Any significant security valuation changes due to an open foreign market are adjusted and reflected by the Fund for financial reporting purposes.

b. Foreign Currency Translation

Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. The Fund may enter into foreign currency exchange contracts to facilitate transactions denominated in a foreign currency. Purchases and sales of securities, income and expense items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. Portfolio securities and assets and liabilities denominated in foreign currencies contain risks that those currencies will decline in value relative to the U.S. dollar. Occasionally, events may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the Board.

The Fund does not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments on the Statement of Operations.

Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period.

c. Securities Purchased on a Delayed Delivery Basis

The Fund purchases securities on a delayed delivery basis, with payment and delivery scheduled for a future date. These transactions are subject to market fluctuations and are subject to the risk that the value at delivery may be more or less than the trade date purchase price. Although the Fund will generally purchase these securities with the intention of holding the securities, it may sell the securities before the settlement date. Sufficient assets have been segregated for these securities.

 

 

    Annual Report     MS-23   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Franklin Mutual Shares VIP Fund (continued)

1. Organization and Significant Accounting

Policies (continued)

 

d. Derivative Financial Instruments

The Fund invested in derivatives in order to manage risk or gain exposure to various other investments or markets. Derivatives are financial contracts based on an underlying or notional amount, require no initial investment or an initial net investment that is smaller than would normally be required to have a similar response to changes in market factors, and require or permit net settlement. Derivatives contain various risks including the potential inability of the counterparty to fulfill their obligations under the terms of the contract, the potential for an illiquid secondary market, and/or the potential for market movements which expose the Fund to gains or losses in excess of the amounts shown on the Statement of Assets and Liabilities. Realized gain and loss and unrealized appreciation and depreciation on these contracts for the period are included in the Statement of Operations.

Derivative counterparty credit risk is managed through a formal evaluation of the creditworthiness of all potential counterparties. The Fund attempts to reduce its exposure to counterparty credit risk on OTC derivatives, whenever possible, by entering into International Swaps and Derivatives Association (ISDA) master agreements with certain counterparties. These agreements contain various provisions, including but not limited to collateral requirements, events of default, or early termination. Termination events applicable to the counterparty include certain deteriorations in the credit quality of the counterparty. Termination events applicable to the Fund include failure of the Fund to maintain certain net asset levels and/or limit the decline in net assets over various periods of time. In the event of default or early termination, the ISDA master agreement gives the non-defaulting party the right to net and close-out all transactions traded, whether or not arising under the ISDA agreement, to one net amount payable by one counterparty to the other. However, absent an event of default or early termination, OTC derivative assets and liabilities are presented gross and not offset in the Statement of Assets and Liabilities. Early termination by the counterparty may result in an immediate payment by the Fund of any net liability owed to that counterparty under the ISDA agreement. At December 31, 2014, the Fund had OTC derivatives in a net liability position of $639,508 and the aggregate value of collateral pledged for such contracts was $579,884.

Collateral requirements differ by type of derivative. Collateral or initial margin requirements are set by the broker or exchange clearing house for exchange traded and centrally cleared derivatives. Initial margin deposited is held at the exchange and can be in the form of cash and/or securities. For OTC derivatives traded under an ISDA master agreement, posting of collateral is required by either the fund or the applicable counterparty if the total net exposure of all OTC derivatives with the applicable counterparty exceeds the minimum transfer amount, which typically ranges from $100,000 to $250,000, and can vary depending on the counterparty and the type of the agreement. Generally, collateral is determined at the close of fund business each day and any additional collateral required due to changes in derivative values may be delivered by the fund or the counterparty within a few business days. Collateral pledged and/or received by the fund for OTC derivatives, if any, is held in segregated accounts with the fund’s custodian/counterparty broker and can be in the form of cash and/or securities. Unrestricted cash may be invested according to the Fund’s investment objectives.

At December 31, 2014, the Fund received $11,628,180 in United Kingdom Treasury Notes, Federal Republic of Germany Bond, and U.S. Treasury Notes as collateral for derivatives.

The Fund entered into exchange traded futures contracts primarily to manage exposure to certain foreign currencies. A futures contract is an agreement between the Fund and a counterparty to buy or sell an asset for a specified price on a future date. Required initial margins are pledged by the Fund, and the daily change in fair value is accounted for as a variation margin payable or receivable on the Statement of Assets and Liabilities.

The Fund entered into OTC forward exchange contracts primarily to manage exposure to certain foreign currencies. A forward exchange contract is an agreement between the Fund and a counterparty to buy or sell a foreign currency at a specific exchange rate on a future date.

The Fund purchased or wrote exchange traded option contracts primarily to manage exposure to equity price risk. An option is a contract entitling the holder to purchase or sell a specific amount of shares or units of an asset or notional amount of a swap (swaption), at a specified price. Options purchased are recorded as an asset while options written are recorded as a liability. Upon exercise of an option, the acquisition cost or sales proceeds of the underlying investment is adjusted by any premium received or paid. Upon expiration of an option, any premium received or paid is recorded as

 

MS-24    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Franklin Mutual Shares VIP Fund (continued)

a realized gain or loss. Upon closing an option other than through expiration or exercise, the difference between the premium and the cost to close the position is recorded as a realized gain or loss.

See Note 9 regarding other derivative information.

e. Restricted Cash

At December 31, 2014, the Fund held restricted cash in connection with investments in certain derivative securities. Restricted cash is held in a segregated account with the Fund’s custodian and is reflected in the Statement of Assets and Liabilities.

f. Securities Sold Short

The Fund is engaged in selling securities short, which obligates the Fund to replace a borrowed security with the same security at current fair value. The Fund incurs a loss if the price of the security increases between the date of the short sale and the date on which the Fund replaces the borrowed security. The Fund realizes a gain if the price of the security declines between those dates. Gains are limited to the price at which the Fund sold the security short, while losses are potentially unlimited in size.

The Fund is required to establish a margin account with the broker lending the security sold short. While the short sale is outstanding, the broker retains the proceeds of the short sale to the extent necessary to meet margin requirements until the short position is closed out. A deposit must also be maintained with the Fund’s custodian/counterparty broker consisting of cash and/or securities having a value equal to a specified percentage of the value of the securities sold short. The Fund is obligated to pay fees for borrowing the securities sold short and is required to pay the counterparty any dividends and/or interest due on securities sold short. Such dividends and/or interest and any security borrowing fees are recorded as an expense to the Fund.

g. Securities Lending

The Fund participates in an agency based securities lending program. The Fund receives cash collateral against the loaned securities in an amount equal to at least 102% of the fair value of the loaned securities. Collateral is maintained over the life of the loan in an amount not less than 100% of the fair value of loaned securities, as determined at the close of fund business each day; any additional collateral required due to changes in security values is delivered to the Fund on the next business day. The collateral is invested in a non-registered money fund as indicated in the Statement of Investments. The Fund receives income from

the investment of cash collateral, in addition to lending fees and rebates paid by the borrower. The Fund bears the market risk with respect to the collateral investment, securities loaned, and the risk that the agent may default on its obligations to the Fund. The securities lending agent has agreed to indemnify the Fund in the event of default by a third party borrower.

h. Senior Floating Rate Interests

The Fund invests in senior secured corporate loans that pay interest at rates which are periodically reset by reference to a base lending rate plus a spread. These base lending rates are generally the prime rate offered by a designated U.S. bank or the London InterBank Offered Rate (LIBOR). Senior secured corporate loans often require prepayment of principal from excess cash flows or at the discretion of the borrower. As a result, actual maturity may be substantially less than the stated maturity. Senior secured corporate loans in which the Fund invests are generally readily marketable, but may be subject to certain restrictions on resale.

i. Income and Deferred Taxes

It is the Fund’s policy to qualify as a regulated investment company under the Internal Revenue Code. The Fund intends to distribute to shareholders substantially all of its taxable income and net realized gains to relieve it from federal income and if applicable, excise taxes. As a result, no provision for U.S. federal income taxes is required.

The Fund may be subject to foreign taxation related to income received, capital gains on the sale of securities and certain foreign currency transactions in the foreign jurisdictions in which it invests. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist in the foreign markets in which the Fund invests. When a capital gain tax is determined to apply the Fund records an estimated deferred tax liability in an amount that would be payable if the securities were disposed of on the valuation date. As a result of several court cases, in certain countries across the European Union, the Fund has filed additional tax reclaims for previously withheld taxes on dividends earned in those countries. These additional filings are subject to various administrative proceedings by the local jurisdictions’ tax authorities within the European Union, as well as a number of related judicial proceedings. At this time, uncertainty exists as to the ultimate resolution of these proceedings, the likelihood of receipt of these reclaims, and the potential timing of payment, and accordingly, no amounts are reflected in the financial statements.

 

 

    Annual Report     MS-25   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Franklin Mutual Shares VIP Fund (continued)

1. Organization and Significant Accounting

Policies (continued)

i. Income and Deferred Taxes (continued)

The Fund recognizes the tax benefits of uncertain tax positions only when the position is “more likely than not” to be sustained upon examination by the tax authorities based on the technical merits of the tax position. As of December 31, 2014, and for all open tax years, the Fund has determined that no liability for unrecognized tax benefits is required in the Fund’s financial statements related to uncertain tax positions taken on a tax return (or expected to be taken on future tax returns). Open tax years are those that remain subject to examination and are based on each tax jurisdiction statute of limitation.

j. Security Transactions, Investment Income, Expenses and Distributions

Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Amortization of premium and accretion of discount on debt securities are included in interest income. Dividend income and dividends declared on securities sold short are recorded on the ex-dividend date except for certain foreign securities where the dividend rate is not available. In such cases, the dividend rate is recorded as soon as the information is received by the Fund. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with U.S. GAAP. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net

assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods.

Common expenses incurred by the Trust are allocated among the funds based on the ratio of net assets of each fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense.

Realized and unrealized gains and losses and net investment income, not including class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions, by class, are generally due to differences in class specific expenses.

k. Accounting Estimates

The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates.

l. Guarantees and Indemnifications

Under the Trust’s organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, on behalf of the Fund, enters into contracts with service providers that contain general indemnification clauses. The Trust’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote.

 

MS-26    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Franklin Mutual Shares VIP Fund (continued)

2. Shares of Beneficial Interest

At December 31, 2014, there were an unlimited number of shares authorized (without par value). Transactions in the Fund’s shares were as follows:

 

     Year Ended December 31,  
     2014          2013  
      Shares      Amount           Shares      Amount  
Class 1 Shares:              

Shares sold

      5,610,891       $ 127,714,907           1,271,063       $ 25,943,160   

Shares issued in reinvestment of distributions

      766,251         17,800,004           565,348         11,380,461   

Shares redeemed

      (2,917,184 )       (66,267,153 )         (2,402,608 )       (47,284,509 ) 
  

 

 

  

Net increase (decrease)

      3,459,958       $ 79,247,758           (566,197 )     $ (9,960,888 ) 
  

 

 

  
Class 2 Shares:              

Shares sold

      9,492,120       $ 213,958,738           9,115,759       $ 176,951,746   

Shares issued in reinvestment of distributions

      4,821,742         110,610,757           4,541,987         90,294,700   

Shares redeemed

      (38,420,623 )       (853,967,596 )         (39,198,203 )       (769,643,413 ) 
  

 

 

  

Net increase (decrease)

      (24,106,761 )     $ (529,398,101 )         (25,540,457 )     $ (502,396,967 ) 
  

 

 

  
Class 4 Shares:              

Shares sold

      237,284       $ 5,313,846           622,201       $ 12,228,440   

Shares issued on reinvestment of distributions

      169,771         3,914,913           176,961         3,535,676   

Shares redeemed

      (2,108,780 )       (48,253,969 )         (1,677,249 )       (33,261,684 ) 
  

 

 

  

Net increase (decrease)

      (1,701,725 )     $ (39,025,210 )         (878,087 )     $ (17,497,568 ) 
  

 

 

  

3. Transactions With Affiliates

Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Fund are also officers and/or directors of the following subsidiaries:

 

Subsidiary    Affiliation

Franklin Mutual Advisers, LLC (Franklin Mutual)

   

Investment manager

Franklin Templeton Services, LLC (FT Services)

   

Administrative manager

Franklin Templeton Distributors, Inc. (Distributors)

   

Principal underwriter

Franklin Templeton Investor Services, LLC (Investor Services)

   

Transfer agent

a. Management Fees

The Fund pays an investment management fee to Franklin Mutual based on the average daily net assets of the Fund as follows:

 

Annualized Fee Rate    Net Assets

0.750%

   

Up to and including $200 million

0.735%

   

Over $200 million, up to and including $700 million

0.700%

   

Over $700 million, up to and including $1.2 billion

0.675%

   

Over $1.2 billion, up to and including $5 billion

0.645%

   

Over $5 billion, up to and including $10 billion

0.625%

   

Over $10 billion, up to and including $15 billion

0.605%

   

Over $15 billion, up to and including $20 billion

0.585%

   

In excess of $20 billion

 

    Annual Report     MS-27   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Franklin Mutual Shares VIP Fund (continued)

3. Transactions With Affiliates (continued)

a. Management Fees (continued)

Effective May 1, 2014, the Fund combined its investment management and administration agreements as approved by the Board. The fees paid under the combined agreement do not exceed the aggregate fees that were paid under the separate agreements.

Prior to May 1, 2014, the Fund paid fees to Franklin Mutual based on the average daily net assets of the Fund as follows:

 

Annualized Fee Rate    Net Assets

0.600%

   

Up to and including $5 billion

0.570%

   

Over $5 billion, up to and including $10 billion

0.550%

   

Over $10 billion, up to and including $15 billion

0.530%

   

Over $15 billion, up to and including $20 billion

0.510%

   

In excess of $20 billion

b. Administrative Fees

Effective May 1, 2014, under an agreement with Franklin Mutual, FT Services provides administrative services to the Fund. The fee is paid by Franklin Mutual based on the Fund’s average daily net assets, and is not an additional expense of the Fund.

Prior to May 1, 2014, the Fund paid administrative fees to FT Services based on the average daily net assets of the Fund as follows:

 

Annualized Fee Rate    Net Assets

0.150%

   

Up to and including $200 million

0.135%

   

Over $200 million, up to and including $700 million

0.100%

   

Over $700 million, up to and including $1.2 billion

0.075%

   

In excess of $1.2 billion

c. Distribution Fees

The Board has adopted distribution plans for Class 2 and Class 4 shares pursuant to Rule 12b-1 under the 1940 Act. Under the Fund’s compensation distribution plans, the Fund pays Distributors for costs incurred in connection with the servicing, sale and distribution of the Fund’s shares up to 0.35% per year of its average daily net assets. Some distribution fees are not charged on shares held by affiliates. The Board has agreed to limit the current rate to 0.25% per year for Class 2. The plan year, for purposes of monitoring compliance with the maximum annual plan rates, is February 1 through January 31.

d. Transfer Agent Fees

Investor Services, under terms of an agreement, performs shareholder servicing for the Fund and is not paid by the Fund for the services.

e. Other Affiliated Transactions

At December 31, 2014, Franklin Templeton Variable Insurance Products Trust – Franklin Founding Funds Allocation VIP Fund owned 8.20% of the Fund’s outstanding shares.

4. Expense Offset Arrangement

The Fund has entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Fund’s custodian expenses. During the year ended December 31, 2014, the custodian fees were reduced as noted in the Statement of Operations.

 

MS-28    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Franklin Mutual Shares VIP Fund (continued)

5. Income Taxes

The tax character of distributions paid during the years ended December 31, 2014 and 2013, was as follows:

 

     2014     2013  

Distributions paid from:

     

Ordinary income

    $ 105,305,669      $ 105,210,837   

Long term capital gain

      27,020,004        —   
  

 

 

  
   $ 132,325,673      $ 105,210,837   
  

 

 

  

At December 31, 2014, the cost of investments, net unrealized appreciation (depreciation), undistributed ordinary income and undistributed long term capital gains for income tax purposes were as follows:

 

Cost of investments

    $ 3,839,936,519   
  

 

 

  

Unrealized appreciation

    $ 1,439,316,969  

Unrealized depreciation

      (256,264,319 )
  

 

 

  

Net unrealized appreciation (depreciation)

    $ 1,183,052,650  
  

 

 

  

Undistributed ordinary income

    $ 141,938,607   

Undistributed long term capital gains

      309,874,621   
  

 

 

  

Distributable earnings

    $ 451,813,228   
  

 

 

  

Differences between income and/or capital gains as determined on a book basis and a tax basis are primarily due to differing treatments of foreign currency transactions, and bond discounts and premiums.

6. Investment Transactions

Purchases and sales of investments (excluding short term securities and securities sold short) for the year ended December 31, 2014, aggregated $1,037,069,828 and $1,605,445,498, respectively.

7. Credit Risk and Defaulted Securities

The Fund may purchase the pre-default or defaulted debt of distressed companies. Distressed companies are financially troubled and are about to be or are already involved in financial restructuring or bankruptcy. Risks associated with purchasing these securities include the possibility that the bankruptcy or other restructuring process takes longer than expected, or that distributions in restructuring are less than anticipated, either or both of which may result in unfavorable consequences to the Fund. If it becomes probable that the income on debt securities, including those of distressed companies, will not be collected, the Fund discontinues accruing income and recognizes an adjustment for uncollectible interest.

At December 31, 2014, the aggregate long value of distressed company securities for which interest recognition has been discontinued was $86,682,367, representing 1.72% of the Fund’s net assets. For information as to specific securities, see the accompanying Statement of Investments.

8. Restricted Securities

The Fund invests in securities that are restricted under the Securities Act of 1933 (1933 Act) or which are subject to legal, contractual, or other agreed upon restrictions on resale. Restricted securities are often purchased in private placement transactions, and cannot be sold without prior registration unless the sale is pursuant to an exemption under the 1933 Act. Disposal of these securities may require greater effort and expense, and prompt sale at an acceptable price may be difficult. The Fund may have registration rights for restricted securities. The issuer generally incurs all registration costs.

 

    Annual Report     MS-29   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Franklin Mutual Shares VIP Fund (continued)

8. Restricted Securities (continued)

At December 31, 2014, the Fund held investments in restricted securities, excluding certain securities exempt from registration under the 1933 Act deemed to be liquid, as follows:

 

Principal
Amount/
Shares		    Issuer    Acquisition
Dates		      Cost      Value  
1,754   

Broadband Ventures III LLC, secured promissory note, 5.00%, 2/01/12

      7/01/10 - 11/30/12       $ 1,754       $ —   
6,400,507   

CB FIM Coinvestors LLC

      1/15/09 - 6/02/09         —         —   
8,006,950   

FIM Coinvestor Holdings I, LLC

      11/20/06 - 6/02/09         —         —   
1,730,515   

International Automotive Components Group Brazil LLC

      4/13/06 - 12/26/08         1,149,241         163,672   
15,382,424   

International Automotive Components Group North America LLC

      1/12/06 - 3/18/13         12,591,586         11,647,264   
16,280   

Olympus Re Holdings Ltd.

      12/19/01         1,520,888         —   
        

 

 

  
  

Total Restricted Securities (Value is 0.23% of Net Assets)

       $ 15,263,469       $ 11,810,936   
        

 

 

  

9. Other Derivative Information

At December 31, 2014, the Fund’s investments in derivative contracts are reflected on the Statement of Assets and Liabilities as follows:

 

    

Asset Derivatives

    

Liability Derivatives

  
Derivative Contracts
Not Accounted for
as Hedging Instruments		    Statement of Assets and
Liabilities Location		   Fair Value     Statement of Assets and
Liabilities Location		   Fair Value  

Foreign exchange contracts

    Unrealized appreciation on forward exchange contracts / Net assets consist of - net unrealized appreciation (depreciation)   $ 26,255,896a      Unrealized depreciation on forward exchange contracts   $
 		 4,784,031
 		   
  

aIncludes cumulative appreciation (depreciation) of futures contracts as reported in the Statement of Investments. Only current day’s variation margin is separately reported within the Statement of Assets and Liabilities.

For the year ended December 31, 2014, the effect of derivative contracts on the Fund’s Statement of Operations was as follows:

 

Derivative Contracts
Not Accounted for
as Hedging Instruments		    Statement of Operations Locations   Realized
Gain (Loss)
for the Year		     Change in
Unrealized
Appreciation
(Depreciation)
for the Year		  

Foreign exchange contracts

    Net realized gain (loss) from foreign currency transactions and futures contracts / Net change in unrealized appreciation (depreciation) on translation of other assets and liabilities denominated in foreign currencies   $ (4,431,674 )    $ 49,678,899  

For the year ended December 31, 2014, the average month end fair value of derivatives represented 0.40% of average month end net assets. The average month end number of open derivative contracts for the year was 213.

See Note 1(d) regarding derivative financial instruments.

 

MS-30    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Franklin Mutual Shares VIP Fund (continued)

10. Holdings of 5% Voting Securities of Portfolio Companies

The 1940 Act defines “affiliated companies” to include investments in portfolio companies in which a fund owns 5% or more of the outstanding voting securities. Investments in “affiliated companies” for the Fund for the year ended December 31, 2014, were as shown below.

 

Name of Issuer   Number of Shares
Held at Beginning
of Year		     Gross
Additions		     Gross
Reductions		     Number of Shares
Held at End
of Year		     Value at
End of
Year		     Investment
Income		     Realized Capital
Gain (Loss)		  
Non-Controlled Affiliates              

CB FIM Coinvestors LLC (Value is 0.00% of Net Assets)

     6,400,507        —        —        6,400,507      $  —      $  —      $  —   
         

 

 

  

11. Credit Facility

The Fund, together with other U.S. registered and foreign investment funds (collectively, Borrowers), managed by Franklin Templeton Investments, are borrowers in a joint syndicated senior unsecured credit facility totaling $1.5 billion (Global Credit Facility) which matured on February 13, 2015. This Global Credit Facility provides a source of funds to the Borrowers for temporary and emergency purposes, including the ability to meet future unanticipated or unusually large redemption requests. The Borrowers expect to renew the Global Credit Facility for a total of $2 billion effective February 13, 2015, which matures on February 12, 2016.

Under the terms of the Global Credit Facility, the Fund shall, in addition to interest charged on any borrowings made by the Fund and other costs incurred by the Fund, pay its share of fees and expenses incurred in connection with the implementation and maintenance of the Global Credit Facility, based upon its relative share of the aggregate net assets of all of the Borrowers, including an annual commitment fee of 0.07% based upon the unused portion of the Global Credit Facility. These fees are reflected in other expenses on the Statement of Operations. During the year ended December 31, 2014, the Fund did not use the Global Credit Facility.

12. Fair Value Measurements

The Fund follows a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Fund’s own market assumptions (unobservable inputs). These inputs are used in determining the value of the Fund’s financial instruments and are summarized in the following fair value hierarchy:

 

  •   Level 1 – quoted prices in active markets for identical financial instruments
  •   Level 2 – other significant observable inputs (including quoted prices for similar financial instruments, interest rates, prepayment speed, credit risk, etc.)
  •   Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of financial instruments)

The input levels are not necessarily an indication of the risk or liquidity associated with financial instruments at that level.

For movements between the levels within the fair value hierarchy, the Fund has adopted a policy of recognizing the transfers as of the date of the underlying event which caused the movement.

 

    Annual Report     MS-31   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Franklin Mutual Shares VIP Fund (continued)

12. Fair Value Measurements (continued)

A summary of inputs used as of December 31, 2014, in valuing the Fund’s assets and liabilities carried at fair value, is as follows:

 

      Level 1     Level 2     Level 3     Total  
Assets:         

Investments in Securities:

         

Equity Investments:a

         

Auto Components

    $ —      $ —      $ 11,810,936      $ 11,810,936   

Machinery

      46,575,001        14,955,907        —        61,530,908   

Real Estate Management & Development

      2,489,733        —        12,949,288        15,439,021   

All Other Equity Investmentsb

      4,183,796,404        —        — c      4,183,796,404   

Corporate Bonds, Notes and Senior Floating Rate Interests

      —        248,099,256        —        248,099,256   

Corporate Notes and Senior Floating Rate Interests in Reorganization

      —        86,682,367        — c      86,682,367   

Companies in Liquidation

      70,280        36,034,254        — c      36,104,534   

Municipal Bonds

      —        13,725,739        —        13,725,739   

Short Term Investments

      351,351,209        14,448,795        —        365,800,004   
  

 

 

  

Total Investments in Securities

    $ 4,584,282,627      $ 413,946,318     $ 24,760,224     $ 5,022,989,169   
  

 

 

  

Other Financial Instruments

         

Futures Contracts

    $ 2,504,024      $ —      $ —      $ 2,504,024   

Forward Exchange Contracts

      —        23,751,872        —        23,751,872   
  

 

 

  

Total Other Financial Instruments

    $ 2,504,024      $ 23,751,872     $ —      $ 26,255,896   
  

 

 

  
Liabilities:         

Other Financial Instruments

         

Securities Sold Short

    $ 33,033,145      $ —      $ —      $ 33,033,145   

Forward Exchange Contracts

      —        4,784,031       —        4,784,031   
  

 

 

  

Total Other Financial Instruments

    $ 33,033,145      $ 4,784,031     $ —      $ 37,817,176   
  

 

 

  

aIncludes common and preferred stocks as well as other equity investments.

bFor detailed categories, see the accompanying Statement of Investments.

cIncludes securities determined to have no value at December 31, 2014.

A reconciliation of assets in which Level 3 inputs are used in determining fair value is presented when there are significant Level 3 financial instruments at the end of the year.

13. New Accounting Pronouncements

In June 2014, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2014-11, Transfers and Servicing (Topic 860), Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. The ASU changes the accounting for certain repurchase agreements and expands disclosure requirements related to repurchase agreements, securities lending, repurchase-to-maturity and similar transactions. The ASU is effective for interim and annual reporting periods beginning after December 15, 2014. Management has reviewed the requirements and believes the adoption of this ASU will not have a material impact on the financial statements.

14. Subsequent Events

The Fund has evaluated subsequent events through the issuance of the financial statements and determined that no events have occurred that require disclosure other than those already disclosed in the financial statements.

 

MS-32    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Franklin Mutual Shares VIP Fund (continued)

Abbreviations

 

Counterparty   Currency   Selected Portfolio
BOFA   Bank of America Corp.   CAD   Canadian Dollar   ADR   American Depositary Receipt
BONY   Bank of New York Mellon   CHF   Swiss Franc   GO   General Obligation
BZWS   Barclays Bank PLC   EUR   Euro   IDR   International Depositary Receipt
DBAB   Deutsche Bank AG   GBP   British Pound   PIK   Payment-In-Kind
FBCO   Credit Suisse Group AG   USD   United States Dollar    
HSBC   HSBC Bank USA, N.A.        
SCBT   Standard Chartered Bank        
SSBT   State Street Bank and Trust Co.        

 

    Annual Report     MS-33   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

Report of Independent Registered Public Accounting Firm

Franklin Mutual Shares VIP Fund

To the Board of Trustees and Shareholders of Franklin Templeton Variable Insurance Products Trust

In our opinion, the accompanying statement of assets and liabilities, including the statement of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Franklin Mutual Shares VIP Fund (the “Fund”) at December 31, 2014, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements 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 are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2014 by correspondence with the custodian and brokers, provides a reasonable basis for our opinion.

PricewaterhouseCoopers LLP

San Francisco, California

February 13, 2015

 

  MS-34       Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

Tax Information (unaudited)

Franklin Mutual Shares VIP Fund

Under Section 852(b)(3)(C) of the Internal Revenue Code (Code), the Fund hereby reports the maximum amount allowable but no less than $27,020,004 as a long term capital gain distribution for the fiscal year ended December 31, 2014.

Under Section 854(b)(1)(A) of the Code, the Fund hereby reports 58.87% of the ordinary income dividends as income qualifying for the dividends received deduction for the fiscal year ended December 31, 2014.

 

    Annual Report     MS-35   

Franklin Rising Dividends VIP Fund

(Formerly, Franklin Rising Dividends Securities Fund)

This annual report for Franklin Rising Dividends VIP Fund covers the fiscal year ended December 31, 2014.

Class 4 Performance Summary as of December 31, 2014

Average annual total return of Class 4 shares* represents the average annual change in value, assuming reinvestment of dividends and capital gains. Average returns smooth out variations in returns, which can be significant; they are not the same as year-by-year results.

 

Periods ended 12/31/14    1-Year        5-Year        10-Year  

Average Annual Total Return

      +8.62%           +14.98%           +7.38%   

*For the period beginning 2/29/08, Class 4 performance reflects a 12b-1 fee expense of 0.35% per year, which affects future performance. Class 4 performance prior to 2/29/08 reflects historical Class 1 performance, which does not have a 12b-1 fee expense. Since 2/29/08 (effective date), the average annual total return of Class 4 shares was +9.13%. The Fund has a fee waiver associated with its investments in a Franklin Templeton money fund, contractually guaranteed through at least its current fiscal year-end. Fund investment results reflect the fee waiver, to the extent applicable; without this reduction, the results would have been lower.

Performance reflects the Fund’s Class 4 operating expenses, but does not include any contract fees, expenses or sales charges. If they had been included, performance would be lower. These charges and deductions, particularly for variable life policies, can have a significant effect on contract values and insurance benefits. See the contract prospectus for a complete description of these expenses, including sales charges.

Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares. Current performance may differ from figures shown.

Total Return Index Comparison for a Hypothetical $10,000 Investment (1/1/05–12/31/14)

The graph below shows the change in value of a hypothetical $10,000 investment in the Fund over the indicated period and includes reinvestment of any income or distributions. The Fund’s performance* is compared to the performance of the Standard & Poor’s® 500 Index (S&P 500®). One cannot invest directly in an index, and an index is not representative of the Fund’s portfolio. Please see Important Notes to Performance Information preceding the Fund Summaries.

 

LOGO

**Source: Morningstar. Please see Index Descriptions following the Fund Summaries.

 

    Annual Report     FRD-1   

FRANKLIN RISING DIVIDENDS VIP FUND

Fund Goal and Main Investments

Franklin Rising Dividends VIP Fund seeks long-term capital appreciation, with preservation of capital as an important consideration. Under normal market conditions, the Fund invests at least 80% of its net assets in equity securities of companies that have paid rising dividends.

Fund Risks

All investments involve risks, including possible loss of principal. Value securities may not increase in price as anticipated or may decline further in value. While smaller and midsized companies may offer substantial opportunities for capital growth, they also involve heightened risks and should be considered speculative. Historically, smaller- and midsized-company securities have been more volatile in price than larger company securities, especially over the short term. The Fund is actively managed but there is no guarantee that the manager’s investment decisions will produce the desired results. The Fund’s prospectus also includes a description of the main investment risks.

Performance Overview

You can find the Fund’s one-year total return in the Performance Summary. In comparison, the S&P 500 rose 13.69% for the same period.1 Please note the Fund employs a bottom-up stock selection process, and the managers invest in securities without regard to benchmark comparisons.

Economic and Market Overview

The U.S. economy continued to grow during the year ended December 31, 2014, underpinned in some quarters by manufacturing activity, consumer and business spending, and federal defense spending. Home sales experienced some weakness resulting from reduced inventory, higher mortgage rates and tight credit requirements but began to recover in May as mortgage rates declined. Home prices stayed higher than a year earlier. Retail sales generally improved, supported by job growth and lower gasoline prices in the latter part of 2014. The unemployment rate declined to 5.6% in December 2014 from 6.7% in December 2013.2 Inflation, as measured by the Consumer Price Index, remained low.

In January 2014, the U.S. Federal Reserve Board (Fed) began reducing its large-scale bond purchases $10 billion a month and ended the buying program in October. But it continued its practice of maintaining holdings of longer term securities at sizable levels. The Fed believed underlying economic strength could support ongoing progress in labor market conditions. The Fed also noted that although inflation might remain low in the near term, the likelihood of inflation running persistently below 2% had diminished. Toward period-end, the Fed stated that it could be patient with regard to raising interest rates and that the interest rate might not rise for at least a couple of meetings, possibly implying at least the first two meetings of 2015.

Investor confidence grew during the period as corporate profits rose and the economy generally strengthened. The market endured sell-offs when many investors reacted to political instability in certain emerging markets, crises in Ukraine and the Middle East, weakness in Europe and Japan, and moderating economic data in China. U.S. stocks rose overall for the 12 months under review as the S&P 500 and Dow Jones Industrial Average reached all-time highs.3

Investment Strategy

We are a research-driven, fundamental investment adviser, pursuing a disciplined value-oriented strategy. As bottom-up investors concentrating primarily on individual securities, we seek fundamentally sound companies that we believe meet our screening criteria, which include consistent, substantial dividend increases; reinvested earnings; and strong balance sheets. We attempt to acquire such stocks at attractive prices, often when they are out of favor with other investors. In following these criteria, we do not necessarily focus on companies whose securities pay a high dividend but rather on companies that consistently raise their dividends.

Manager’s Discussion

During the 12 months under review, three holdings that helped absolute Fund performance were Air Products and Chemicals, Becton, Dickinson & Co., and Stryker. Shares of Air Products and Chemicals, an industrial gas producer, benefited from solid earnings performance over the year and positive sentiment surrounding the ongoing involvement of an activist shareholder. The share price rose sharply in June after the appointment

 

 

1. Source: Morningstar.

One cannot invest directly in an index, and an index is not representative of the Fund’s portfolio. Please see Index Descriptions following the Fund Summaries.

2. Source: Bureau of Labor Statistics.

3. Please see Index Descriptions following the Fund Summaries.

 

  FRD-2       Annual Report    

FRANKLIN RISING DIVIDENDS VIP FUND

of new chief executive officer Seifi Ghasemi and again in September when he announced his reorganization plan. The company has a 32-year history of increasing dividends. Becton, Dickinson & Co., a manufacturer of medical devices, reported solid results through most of 2014, with the largest gain occurring in the second half of the year after the company announced it intended to buy CareFusion. The stock rose again in November after the company announced it intended to finance a portion of the acquisition through the repatriation of overseas cash, thereby taking on less debt and enabling greater cash accretion in the first year following the deal. Becton has raised its dividend for the past 43 years. Shares of Stryker, a medical technology company, rose sharply in the second half of 2014 partly resulting, in our view, from a strong earnings report in October, suggesting a pickup in hip and knee surgery end markets. Stryker’s management has been enthusiastic about the commercial prospects of the company’s robotic assisted surgery platform, obtained from its acquisition of MAKO Surgical Corp. in late 2013. Speculation continued throughout 2014 about whether Stryker would buy Smith & Nephew, a British-based medical equipment manufacturer. The deal would hold the possibility of a tax inversion for Stryker. The company has a 22-year history of dividend increases.

Detractors from absolute Fund performance included Pentair, Dover and Chevron. Shares of Pentair, a manufacturer of water pumps and filtration systems, continued to struggle during the period, as ongoing weakness in its water transport business and concerns regarding the company’s exposure to oil and gas end markets were compounded by a reduction in previous 2014 and 2015 full-year earnings-per-share guidance. The lower guidance was largely driven by management’s decision to sell the troubled water transport business; however, the weaker-than-anticipated global economic environment also contributed to the revision, as management struggled to fully offset economic headwinds with cost structure improvements. Pentair has 38 years of dividend increases. After a solid first-half performance, shares of Dover, an industrial products and equipment manufacturer, declined sharply over the second half of 2014, ending the year down. Concerns regarding Dover’s exposure to energy end markets were the primary cause of its share price weakness, as investors worried the oil price decline would lead to a drop in U.S. shale production and hence, less demand for the company’s oil production equipment. Dover’s management expected its energy end markets to be a headwind in 2015. The company has raised dividends for the past 59 years. Shares of Chevron, a global, integrated energy company, declined in line

 

 

LOGO

 

 

    Annual Report     FRD-3   

FRANKLIN RISING DIVIDENDS VIP FUND

with the broader energy sector, as the unexpected and severe oil price decline over the second half of the year resulted in indiscriminate selling across the sector. However, we continued to hold Chevron and believe that over time, the company’s scale, geographic diversity and integrated downstream activities should provide operational resilience in an uncertain energy price environment. Chevron has 27 years of dividend increases.

During the period, we initiated new positions including Schlumberger, an oilfield services company with a substantial history of dividend increases; Microsoft, a global software and services provider (11 years of consecutive dividend increases); Accenture, a management consulting, technology and outsourcing services firm (10 years); CVS Health, an integrated pharmacy health care provider (12 years); and EOG Resources, an oil and gas exploration and production company with a substantial history of dividend increases. We added to our positions in Honeywell International, a diversified industrial company, with a history of dividend increases; Bunge, a global agribusiness and food company (13 years); and QUALCOMM, a digital communications products and services manufacturer (11 years), among others. Positions that we liquidated included Family Dollar Stores, Superior Uniform Group, Hill-Rom Holdings, Mercury General and Cohu. We reduced our holdings in International Business Machines, Air Products and Chemicals, and Teleflex, among others.

Our 10 largest positions on December 31, 2014, represented 33.9% of the Fund’s total net assets. It is interesting to note how these 10 companies would respond, in aggregate, to the Fund’s screening criteria based on a simple average of statistical measures. On average, these 10 companies have raised their dividends 33 years in a row and by 344% in the past 10 years. Their most recent year-over-year dividend increases averaged 8.8% with a yield of 2.0% on December 31, 2014, and a dividend payout ratio of 34.7%, based on estimates of calendar year 2015 operating earnings. The average price/earnings ratio was 19.5 times calendar year 2014 estimates versus 18.2 for that of the unmanaged S&P 500.

Thank you for your participation in Franklin Rising Dividends VIP Fund. We look forward to continuing to serve your investment needs.

 

 

Top 10 Holdings       
12/31/14       
Company
Sector/Industry		    % of Total
Net Assets		  
Roper Industries Inc.
Industrial Conglomerates		      4.0%   
Praxair Inc.
Materials		      3.7%   
United Technologies Corp.
Aerospace & Defense		      3.7%   
Johnson & Johnson
Pharmaceuticals, Biotechnology & Life Sciences		      3.5%   
Becton, Dickinson & Co.
Health Care Equipment & Services		      3.4%   
Dover Corp.
Machinery		      3.3%   
Chevron Corp.
Energy		      3.1%   
West Pharmaceutical Services Inc.
Health Care Equipment & Services		      3.1%   
Stryker Corp.
Health Care Equipment & Services		      3.1%   
Wal-Mart Stores Inc.
Food & Staples Retailing		      3.0%   

The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund’s Statement of Investments (SOI).

 

The foregoing information reflects our analysis, opinions and portfolio holdings as of December 31, 2014, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.

 

FRD-4    Annual Report    

FRANKLIN RISING DIVIDENDS VIP FUND

Class 4 Fund Expenses

As an investor in a variable insurance contract (Contract) that indirectly provides for investment in an underlying mutual fund, you can incur transaction and/or ongoing expenses at both the Fund level and the Contract level.

 

•   Transaction expenses can include sales charges (loads) on purchases, redemption fees, surrender fees, transfer fees and premium taxes.

 

•   Ongoing expenses can include management fees, distribution and service (12b-1) fees, contract fees, annual maintenance fees, mortality and expense risk fees and other fees and expenses. All mutual funds and Contracts have some types of ongoing expenses.

The expenses shown in the table are meant to highlight ongoing expenses at the Fund level only and do not include ongoing expenses at the Contract level, or transaction expenses at either the Fund or Contract level. While the Fund does not have transaction expenses, if the transaction and ongoing expenses at the Contract level were included, the expenses shown below would be higher. You should consult your Contract prospectus or disclosure document for more information.

The table shows Fund-level ongoing expenses and can help you understand these expenses and compare them with those of other mutual funds offered through the Contract. The table assumes a $1,000 investment held for the six months indicated. Please refer to the Fund prospectus for additional information on operating expenses.

Actual Fund Expenses

The first line (Actual) of the table provides actual account values and expenses. The “Ending Account Value” is derived from the Fund’s actual return, which includes the effect of ongoing Fund expenses, but does not include the effect of ongoing Contract expenses.

You can estimate the Fund-level expenses you incurred during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:

 

1. Divide your account value by $1,000.

If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6.

 

2. Multiply the result by the number under the heading “Fund-Level Expenses Incurred During Period.”

If Fund-Level Expenses Incurred During Period were $7.50, then 8.6 × $7.50 = $64.50.

In this illustration, the estimated expenses incurred this period at the Fund level are $64.50.

Hypothetical Example for Comparison with Other Mutual Funds

Information in the second line (Hypothetical) of the table can help you compare ongoing expenses of the Fund with those of other mutual funds offered through the Contract. This information may not be used to estimate the actual ending account balance or expenses you incurred during the period. The hypothetical “Ending Account Value” is based on the Fund’s actual expense ratio and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Fund-Level Expenses Incurred During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds offered through a Contract.

 
Class 4  

Beginning Account

Value 7/1/14

     

Ending Account

Value 12/31/14

     

Fund-Level Expenses
Incurred During Period*

7/1/14–12/31/14

  

Actual

     $1,000         $1,042.90         $4.99   

Hypothetical (5% return before expenses)

     $1,000         $1,020.32         $4.94   

*Expenses are calculated using the most recent six-month annualized expense ratio, net of expense waivers, for the Fund’s Class 4 shares (0.97%), which does not include any ongoing expenses of the Contract for which the Fund is an investment option, multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period.

 

    Annual Report     FRD-5   

SUPPLEMENT DATED OCTOBER 1, 2014

TO THE PROSPECTUSES DATED MAY 1, 2014

OF

FRANKLIN RISING DIVIDENDS VIP FUND

(A series of Franklin Templeton Variable Insurance Products Trust)

The prospectus is amended as follows:

I.  The Fund Summary “Portfolio Managers” section beginning on page FRD-S4 is revised to remove reference to William J. Lippman and revise Donald G. Taylor’s biography to the following:

Portfolio Managers

DONALD G. TAYLOR, CPA President and Chief Investment Officer of Advisory Services and portfolio manager of the Fund since 1996.

NICHOLAS P. B. GETAZ, CFA Research Analyst of Advisory Services and portfolio manager of the Fund since February 2014.

BRUCE C. BAUGHMAN, CPA Senior Vice President of Advisory Services and portfolio manager of the Fund since inception (1992).

II.  The portfolio management team in the “Fund Details – Management” section beginning on page FRD-D6 is revised to remove reference to William J. Lippman and revise Donald G. Taylor’s title to the following:

The Fund is managed by a team of dedicated professionals focused on investments that have paid rising dividends. The portfolio managers of the team are as follows:

 

DONALD G. TAYLOR, CPA President and Chief Investment Officer of Advisory Services    Mr. Taylor has been the lead portfolio manager of the Fund since 1996. He has primary responsibility for the investments of the Fund. He has final authority over all aspects of the Fund’s investment portfolio, including but not limited to, purchases and sales of individual securities, portfolio risk assessment, and the management of daily cash balances in accordance with anticipated investment management requirements. The degree to which he may perform these functions, and the nature of these functions, may change from time to time. He joined Franklin Templeton Investments in 1996.

NICHOLAS P. B. GETAZ, CFA

Research Analyst of Advisory Services

    Mr. Getaz has been portfolio manager of the Fund since February 2014, providing support to the lead portfolio manager(s) as needed. He joined Franklin Templeton Investments in 2011.

 

FRD-6         

BRUCE C. BAUGHMAN, CPA Senior Vice President of Advisory Services    Mr. Baughman has been a portfolio manager of the Fund since its inception (1992), providing support to the lead portfolio manager(s) as needed. He joined Franklin Templeton Investments in 1988.

CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.

 

Please keep this supplement with your prospectus for future reference.

 

          FRD-7   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

Financial Highlights

Franklin Rising Dividends VIP Fund

     Year Ended December 31,  
      2014      2013      2012      2011      2010  
Class 1               
Per share operating performance
(for a share outstanding throughout the year)		               

Net asset value, beginning of year

      $28.14         $22.03         $20.01         $19.15         $16.13   
  

 

 

  
Income from investment operationsa:               

Net investment incomeb

      0.45         0.40         0.41         0.36         0.32   

Net realized and unrealized gains (losses)

      2.03         6.16         2.00         0.83         3.01   
  

 

 

  

Total from investment operations

      2.48         6.56         2.41         1.19         3.33   
  

 

 

  
Less distributions from:               

Net investment income

      (0.44 )       (0.45 )       (0.39 )       (0.33 )       (0.31 ) 

Net realized gains

      (0.55 )       —         —         —         —   
  

 

 

  

Total distributions

      (0.99 )       (0.45 )       (0.39 )       (0.33 )       (0.31 ) 
  

 

 

  

Net asset value, end of year

      $29.63         $28.14         $22.03         $20.01         $19.15   
  

 

 

  

Total returnc

      9.01%         30.05%         12.18%         6.29%         20.94%   
Ratios to average net assets               

Expenses

      0.62% d       0.61%         0.63%         0.63%         0.64%   

Net investment income

      1.58%         1.59%         1.96%         1.87%         1.88%   
Supplemental data               

Net assets, end of year (000’s)

      $160,480         $168,380         $141,455         $140,297         $148,544   

Portfolio turnover rate

      8.61%         0.07%         11.19%         12.76%         8.97%   

aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.

bBased on average daily shares outstanding.

cTotal return does not include fees, charges or expenses imposed by the variable annuity and life insurance contracts for which Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle.

dBenefit of waiver and payments by affiliates rounds to less than 0.01%.

 

FRD-8    Annual Report   |    The accompanying notes are an integral part of these financial statements.    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FINANCIAL HIGHLIGHTS

Franklin Rising Dividends VIP Fund (continued)

     Year Ended December 31,  
      2014      2013      2012      2011      2010  
Class 2               

Per share operating performance

(for a share outstanding throughout the year)

               

Net asset value, beginning of year

      $27.62         $21.64         $19.65         $18.82         $15.86   
  

 

 

  
Income from investment operationsa:               

Net investment incomeb

      0.37         0.33         0.35         0.31         0.28   

Net realized and unrealized gains (losses)

      1.99         6.04         1.98         0.81         2.95   
  

 

 

  

Total from investment operations

      2.36         6.37         2.33         1.12         3.23   
  

 

 

  
Less distributions from:               

Net investment income

      (0.37 )       (0.39 )       (0.34 )       (0.29 )       (0.27 ) 

Net realized gains

      (0.55 )       —         —         —         —   
  

 

 

  

Total distributions

      (0.92 )       (0.39 )       (0.34 )       (0.29 )       (0.27 ) 
  

 

 

  

Net asset value, end of year

      $29.06         $27.62         $21.64         $19.65         $18.82   
  

 

 

  

Total returnc

      8.72%         29.69%         11.96%         6.00%         20.64%   
Ratios to average net assets               

Expenses

      0.87% d       0.86%         0.88%         0.88%         0.89%   

Net investment income

      1.33%         1.34%         1.71%         1.62%         1.63%   
Supplemental data               

Net assets, end of year (000’s)

      $1,667,816         $1,752,012         $1,550,084         $1,523,396         $1,572,732   

Portfolio turnover rate

      8.61%         0.07%         11.19%         12.76%         8.97%   

 

aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.

bBased on average daily shares outstanding.

cTotal return does not include fees, charges or expenses imposed by the variable annuity and life insurance contracts for which Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle.

dBenefit of waiver and payments by affiliates rounds to less than 0.01%.

 

    The accompanying notes are an integral part of these financial statements.    |   Annual Report     FRD-9   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FINANCIAL HIGHLIGHTS

Franklin Rising Dividends VIP Fund (continued)

     Year Ended December 31,  
      2014      2013      2012      2011      2010  
Class 4               
Per share operating performance
(for a share outstanding throughout the year)		               

Net asset value, beginning of year

      $27.76         $21.78         $19.83         $19.04         $16.09   
  

 

 

  
Income from investment operationsa:               

Net investment incomeb

      0.35         0.32         0.35         0.31         0.32   

Net realized and unrealized gains (losses)

      2.00         6.07         1.96         0.80         2.94   
  

 

 

  

Total from investment operations

      2.35         6.39         2.31         1.11         3.26   
  

 

 

  
Less distributions from:               

Net investment income

      (0.37 )       (0.41 )       (0.36 )       (0.32 )       (0.31 ) 

Net realized gains

      (0.55 )       —         —         —         —   
  

 

 

  

Total distributions

      (0.92 )       (0.41 )       (0.36 )       (0.32 )       (0.31 ) 
  

 

 

  

Net asset value, end of year

      $29.19         $27.76         $21.78         $19.83         $19.04   
  

 

 

  

Total returnc

      8.62%         29.57%         11.78%         5.89%         20.62%   
Ratios to average net assets               

Expenses

      0.97% d       0.96%         0.98%         0.98%         0.99%   

Net investment income

      1.23%         1.24%         1.61%         1.52%         1.53%   
Supplemental data               

Net assets, end of year (000’s)

      $15,503         $12,028         $6,432         $3,020         $1,007   

Portfolio turnover rate

      8.61%         0.07%         11.19%         12.76%         8.97%   

aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.

bBased on average daily shares outstanding.

cTotal return does not include fees, charges or expenses imposed by the variable annuity and life insurance contracts for which Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle.

dBenefit of waiver and payments by affiliates rounds to less than 0.01%.

 

FRD-10    Annual Report   |    The accompanying notes are an integral part of these financial statements.    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

Statement of Investments, December 31, 2014

 

Franklin Rising Dividends VIP Fund  
           Shares        Value  
         
 

Common Stocks 98.4%

        
 

Aerospace & Defense 5.0%

        
 

General Dynamics Corp.

      53,000         $ 7,293,860   
 

Honeywell International Inc.

      171,100           17,096,312   
 

United Technologies Corp.

      590,900           67,953,500   
         

 

 

  
            92,343,672   
         

 

 

  
 

Automobiles & Components 2.7%

        
 

Johnson Controls Inc.

      1,040,500           50,297,770   
         

 

 

  
 

Commercial & Professional Services 3.6%

        
 

ABM Industries Inc.

      814,288           23,329,351   
 

Brady Corp., A

      653,579           17,868,850   
 

Cintas Corp.

      225,700           17,703,908   
 

Matthews International Corp., A

      138,000           6,716,460   
         

 

 

  
            65,618,569   
         

 

 

  
 

Consumer Durables & Apparel 3.5%

        
 

Leggett & Platt Inc.

      332,800           14,180,608   
 

NIKE Inc., B

      528,500           50,815,275   
         

 

 

  
            64,995,883   
         

 

 

  
 

Consumer Services 1.4%

        
 

McDonald’s Corp.

      254,345           23,832,127   
 

Yum! Brands Inc.

      25,400           1,850,390   
         

 

 

  
            25,682,517   
         

 

 

  
 

Diversified Financials 0.5%

        
 

State Street Corp.

      110,500           8,674,250   
         

 

 

  
 

Energy 8.6%

        
a  

California Resources Corp.

      148,316           817,221   
 

Chevron Corp.

      517,700           58,075,586   
 

EOG Resources Inc.

      31,500           2,900,205   
 

Exxon Mobil Corp.

      365,500           33,790,475   
 

Occidental Petroleum Corp.

      370,790           29,889,382   
 

Schlumberger Ltd.

      384,000           32,797,440   
         

 

 

  
            158,270,309   
         

 

 

  
 

Food & Staples Retailing 5.6%

        
 

CVS Health Corp.

      71,600           6,895,796   
 

Wal-Mart Stores Inc.

      652,964           56,076,548   
 

Walgreens Boots Alliance Inc.

      531,300           40,485,060   
         

 

 

  
            103,457,404   
         

 

 

  
 

Food, Beverage & Tobacco 6.2%

        
 

Archer-Daniels-Midland Co.

      713,000           37,076,000   
 

Bunge Ltd.

      166,400           15,127,424   
 

McCormick & Co. Inc.

      383,000           28,456,900   
 

PepsiCo Inc.

      363,900           34,410,384   
         

 

 

  
            115,070,708   
         

 

 

  
 

Health Care Equipment & Services 15.9%

        
 

Abbott Laboratories

      641,800           28,893,836   
 

Becton, Dickinson and Co.

      453,143           63,059,380   
 

DENTSPLY International Inc.

      4,000           213,080   
 

Medtronic Inc.

      730,000           52,706,000   

 

    Annual Report     FRD-11   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

Franklin Rising Dividends VIP Fund (continued)

          Shares        Value  
 

Common Stocks (continued)

       
 

Health Care Equipment & Services (continued)

       
 

Stryker Corp.

     608,400         $ 57,390,372   
 

Teleflex Inc.

     285,253           32,752,750   
 

West Pharmaceutical Services Inc.

     1,086,534           57,847,070   
        

 

 

  
           292,862,488   
        

 

 

  
 

Household & Personal Products 3.4%

       
 

Colgate-Palmolive Co.

     191,000           13,215,290   
 

The Procter & Gamble Co.

     538,600           49,061,074   
        

 

 

  
           62,276,364   
        

 

 

  
 

Industrial Conglomerates 4.4%

       
 

Carlisle Cos. Inc.

     96,261           8,686,593   
 

Roper Industries Inc.

     469,350           73,382,872   
        

 

 

  
           82,069,465   
        

 

 

  
 

Insurance 6.3%

       
 

Aflac Inc.

     276,200           16,873,058   
 

Arthur J. Gallagher & Co.

     704,000           33,144,320   
 

The Chubb Corp.

     45,000           4,656,150   
 

Erie Indemnity Co., A

     508,302           46,138,572   
 

Old Republic International Corp.

     678,708           9,929,498   
 

RLI Corp.

     124,142           6,132,615   
        

 

 

  
           116,874,213   
        

 

 

  
 

Machinery 9.0%

       
 

Donaldson Co. Inc.

     350,068           13,523,127   
 

Dover Corp.

     839,376           60,200,047   
 

Hillenbrand Inc.

     1,027,300           35,441,850   
 

Pentair PLC (United Kingdom)

     844,000           56,058,480   
        

 

 

  
           165,223,504   
        

 

 

  
 

Materials 11.2%

       
 

Air Products and Chemicals Inc.

     378,900           54,648,747   
 

Albemarle Corp.

     694,700           41,772,311   
 

Bemis Co. Inc.

     172,199           7,785,117   
 

Ecolab Inc.

     107,000           11,183,640   
 

Nucor Corp.

     447,055           21,928,048   
 

Praxair Inc.

     530,460           68,726,397   
        

 

 

  
           206,044,260   
        

 

 

  
 

Media 0.8%

       
 

John Wiley & Sons Inc., A

     237,600           14,075,424   
        

 

 

  
 

Pharmaceuticals, Biotechnology & Life Sciences 6.7%

       
 

AbbVie Inc.

     300,800           19,684,352   
 

Johnson & Johnson

     617,700           64,592,889   
 

Perrigo Co. PLC

     1,500           250,740   
 

Pfizer Inc.

     1,242,100           38,691,415   
 

Roche Holding AG, ADR (Switzerland)

     25,000           849,750   
        

 

 

  
           124,069,146   
        

 

 

  

 

FRD-12    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

Franklin Rising Dividends VIP Fund (continued)

           Shares        Value  
 

Common Stocks (continued)

        
 

Retailing 0.5%

        
 

Ross Stores Inc.

      29,000         $ 2,733,540   
 

Target Corp.

      85,800           6,513,078   
         

 

 

  
            9,246,618   
         

 

 

  
 

Semiconductors & Semiconductor Equipment 0.2%

        
 

Texas Instruments Inc.

      59,000           3,154,435   
         

 

 

  
 

Software & Services 2.0%

        
 

Accenture PLC, A

      142,500           12,726,675   
 

International Business Machines Corp.

      24,700           3,962,868   
 

Microsoft Corp.

      456,500           21,204,425   
         

 

 

  
            37,893,968   
         

 

 

  
 

Technology Hardware & Equipment 0.8%

        
a  

Knowles Corp.

      285,500           6,723,525   
 

QUALCOMM Inc.

      114,500           8,510,785   
         

 

 

  
            15,234,310   
         

 

 

  
 

Trading Companies & Distributors 0.0%†

        
 

W.W. Grainger Inc.

      1,000           254,890   
         

 

 

  
 

Transportation 0.1%

        
 

United Parcel Service Inc., B

      9,500           1,056,115   
         

 

 

  
 

Total Common Stocks (Cost $966,214,535)

           1,814,746,282   
         

 

 

  
 

Short Term Investments (Cost $20,601,446) 1.1%

        
 

Money Market Funds 1.1%

        
a,b  

Institutional Fiduciary Trust Money Market Portfolio

      20,601,446           20,601,446   
         

 

 

  
 

Total Investments (Cost $986,815,981) 99.5%

           1,835,347,728   
 

Other Assets, less Liabilities 0.5%

           8,451,401   
         

 

 

  
 

Net Assets 100.0%

         $ 1,843,799,129   
         

 

 

  

See Abbreviations on page FRD-22.

†Rounds to less than 0.1% of net assets.

aNon-income producing.

bSee Note 3(e) regarding investments in Institutional Fiduciary Trust Money Market Portfolio.

 

    The accompanying notes are an integral part of these financial statements.    |   Annual Report     FRD-13   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

Financial Statements

Statement of Assets and Liabilities

December 31, 2014

 

      Franklin Rising
Dividends VIP
Fund		  

Assets:

   

Investments in securities:

   

Cost - Unaffiliated issuers

    $ 966,214,535   

Cost - Sweep Money Fund (Note 3e)

      20,601,446   
  

 

 

  

Total cost of investments

    $ 986,815,981   
  

 

 

  

Value - Unaffiliated issuers

    $ 1,814,746,282   

Value - Sweep Money Fund (Note 3e)

      20,601,446   
  

 

 

  

Total value of investments

      1,835,347,728   

Cash

      47,915   

Receivables:

   

Investment securities sold

      8,128,376   

Capital shares sold

      269,259   

Dividends

      3,030,967   

Other assets

      295   
  

 

 

  

Total assets

      1,846,824,540   
  

 

 

  

Liabilities:

   

Payables:

   

Capital shares redeemed

      1,153,406   

Management fees

      942,502   

Distribution fees

      703,610   

Reports to shareholders

      165,487   

Accrued expenses and other liabilities

      60,406   
  

 

 

  

Total liabilities

      3,025,411   
  

 

 

  

Net assets, at value

    $ 1,843,799,129   
  

 

 

  

Net assets consist of:

   

Paid-in capital

    $ 788,596,919   

Undistributed net investment income

      24,965,968   

Net unrealized appreciation (depreciation)

      848,531,747   

Accumulated net realized gain (loss)

      181,704,495   
  

 

 

  

Net assets, at value

    $ 1,843,799,129   
  

 

 

  
Class 1:   

Net assets, at value

    $ 160,480,304   
  

 

 

  

Shares outstanding

      5,416,806   
  

 

 

  

Net asset value and maximum offering price per share

    $ 29.63   
  

 

 

  
Class 2:   

Net assets, at value

    $ 1,667,816,325   
  

 

 

  

Shares outstanding

      57,389,011   
  

 

 

  

Net asset value and maximum offering price per share

    $ 29.06   
  

 

 

  
Class 4:   

Net assets, at value

    $ 15,502,500   
  

 

 

  

Shares outstanding

      531,076   
  

 

 

  

Net asset value and maximum offering price per share

    $ 29.19   
  

 

 

  

 

FRD-14    Annual Report   |    The accompanying notes are an integral part of these financial statements.    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FINANCIAL STATEMENTS

Statement of Operations

for the year ended December 31, 2014

 

      Franklin Rising
Dividends VIP
Fund		  

Investment income:

   

Dividends

    $ 40,706,027   
  

 

 

  

Expenses:

   

Management fees (Note 3a)

      11,147,149   

Distribution fees: (Note 3c)

   

Class 2

      4,198,143   

Class 4

      46,154   

Custodian fees (Note 4)

      16,494   

Reports to shareholders

      245,233   

Professional fees

      65,413   

Trustees’ fees and expenses

      7,397   

Other

      29,822   
  

 

 

  

Total expenses

      15,755,805   

Expenses waived/paid by affiliates (Note 3e)

      (21,312 ) 
  

 

 

  

Net expenses

      15,734,493   
  

 

 

  

Net investment income

      24,971,534   
  

 

 

  

Realized and unrealized gains (losses):

   

Net realized gain (loss) from investments

      183,292,710   

Net change in unrealized appreciation (depreciation) on investments

      (59,038,904 ) 
  

 

 

  

Net realized and unrealized gain (loss)

      124,253,806   
  

 

 

  

Net increase (decrease) in net assets resulting from operations

    $ 149,225,340   
  

 

 

  

 

    The accompanying notes are an integral part of these financial statements.    |   Annual Report     FRD-15   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FINANCIAL STATEMENTS

Statements of Changes in Net Assets

 

    Franklin Rising Dividends VIP Fund  
    Year Ended December 31,  
     2014        2013  

Increase (decrease) in net assets:

       

Operations:

       

Net investment income

   $ 24,971,534         $ 25,051,212   

Net realized gain (loss) from investments

     183,292,710           109,495,187   

Net change in unrealized appreciation (depreciation) on investments

     (59,038,904 )         341,536,473   
 

 

 

  

Net increase (decrease) in net assets resulting from operations

     149,225,340           476,082,872   
 

 

 

  

Distributions to shareholders from:

       

Net investment income:

       

Class 1

     (2,478,710 )         (2,772,388 ) 

Class 2

     (22,406,447 )         (26,490,890 ) 

Class 4

     (165,391 )         (163,605 ) 

Net realized gains:

       

Class 1

     (3,072,165 )         —   

Class 2

     (32,971,551 )         —   

Class 4

     (247,432 )         —   
 

 

 

  

Total distributions to shareholders

     (61,341,696 )         (29,426,883 ) 
 

 

 

  

Capital share transactions: (Note 2)

       

Class 1

     (16,079,195 )         (11,198,645 ) 

Class 2

     (163,125,563 )         (204,341,308 ) 

Class 4

     2,701,123           3,331,799   
 

 

 

  

Total capital share transactions

     (176,503,635 )         (212,208,154 ) 
 

 

 

  

Net increase (decrease) in net assets

     (88,619,991 )         234,447,835   

Net assets:

       

Beginning of year

     1,932,419,120           1,697,971,285   
 

 

 

  

End of year

   $ 1,843,799,129         $ 1,932,419,120   
 

 

 

  

Undistributed net investment income included in net assets:

       

End of year

   $ 24,965,968         $ 25,044,982   
 

 

 

  

 

FRD-16    Annual Report   |    The accompanying notes are an integral part of these financial statements.    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

Notes to Financial Statements

Franklin Rising Dividends VIP Fund

1. Organization and Significant Accounting Policies

Franklin Templeton Variable Insurance Products Trust (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end management investment company, consisting of nineteen separate funds and applies the specialized accounting and reporting guidance in U.S. Generally Accepted Accounting Principles (U.S. GAAP). Franklin Rising Dividends VIP Fund (Fund) is included in this report. The financial statements of the remaining funds in the Trust are presented separately. Shares of the Fund are generally sold only to insurance company separate accounts to fund the benefits of variable life insurance policies or variable annuity contracts. At December 31, 2014, 40.53% of the Fund’s shares were held through one insurance company. Investment activities of these insurance company separate accounts could have a material impact on the Fund. The Fund offers three classes of shares: Class 1, Class 2, and Class 4. Each class of shares differs by its distribution fees, voting rights on matters affecting a single class and its exchange privilege.

Effective May 1, 2014, Franklin Rising Dividends Securities Fund was renamed Franklin Rising Dividends VIP Fund.

The following summarizes the Fund’s significant accounting policies.

a. Financial Instrument Valuation

The Fund’s investments in financial instruments are carried at fair value daily. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. The Fund calculates the net asset value (NAV) per share at the close of the New York Stock Exchange (NYSE), generally at 4 p.m. Eastern time (NYSE close) on each day the NYSE is open for trading. Under compliance policies and procedures approved by the Trust’s Board of Trustees (the Board), the Fund’s administrator has responsibility for oversight of valuation, including leading the cross-functional Valuation and Liquidity Oversight Committee (VLOC). The VLOC provides administration and oversight of the Fund’s valuation policies and procedures, which are approved annually by the Board. Among other things, these procedures allow the Fund to utilize independent pricing services, quotations from securities and financial instrument dealers, and other market sources to determine fair value.

Equity securities listed on an exchange or on the NASDAQ National Market System are valued at the last quoted sale price

or the official closing price of the day, respectively. Foreign equity securities are valued as of the close of trading on the foreign stock exchange on which the security is primarily traded or as of the NYSE close, whichever is earlier. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at the NYSE close on the day that the value of the security is determined. Over-the-counter (OTC) securities are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. Certain equity securities are valued based upon fundamental characteristics or relationships to similar securities. Investments in open-end mutual funds are valued at the closing NAV.

The Fund has procedures to determine the fair value of financial instruments for which market prices are not reliable or readily available. Under these procedures, the VLOC convenes on a regular basis to review such financial instruments and considers a number of factors, including significant unobservable valuation inputs, when arriving at fair value. The VLOC primarily employs a market-based approach which may use related or comparable assets or liabilities, recent transactions, market multiples, book values, and other relevant information for the investment to determine the fair value of the investment. An income-based valuation approach may also be used in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the investments. Due to the inherent uncertainty of valuations of such investments, the fair values may differ significantly from the values that would have been used had an active market existed. The VLOC employs various methods for calibrating these valuation approaches including a regular review of key inputs and assumptions, transactional back-testing or disposition analysis, and reviews of any related market activity.

Trading in securities on foreign securities stock exchanges and OTC markets may be completed before the daily NYSE close. In addition, trading in certain foreign markets may not take place on every NYSE business day. Occasionally, events occur between the time at which trading in a foreign security is completed and the close of the NYSE that might call into question the reliability of the value of a portfolio security held by the Fund. As a result, differences may arise between the value of the Fund’s portfolio securities as determined at the foreign market close and the latest indications of value at the close of

 

 

    Annual Report     FRD-17   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Franklin Rising Dividends VIP Fund (continued)

1. Organization and Significant Accounting Policies (continued)

a. Financial Instrument Valuation (continued)

the NYSE. In order to minimize the potential for these differences, the VLOC monitors price movements following the close of trading in foreign stock markets through a series of country specific market proxies (such as baskets of American Depositary Receipts, futures contracts and exchange traded funds). These price movements are measured against established trigger thresholds for each specific market proxy to assist in determining if an event has occurred that may call into question the reliability of the values of the foreign securities held by the Fund. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services.

Also, when the last day of the reporting period is a non-business day, certain foreign markets may be open on those days that the NYSE is closed, which could result in differences between the value of the Fund’s portfolio securities on the last business day and the last calendar day of the reporting period. Any significant security valuation changes due to an open foreign market are adjusted and reflected by the Fund for financial reporting purposes.

b. Income and Deferred Taxes

It is the Fund’s policy to qualify as a regulated investment company under the Internal Revenue Code. The Fund intends to distribute to shareholders substantially all of its taxable income and net realized gains to relieve it from federal income and if applicable, excise taxes. As a result, no provision for U.S. federal income taxes is required.

The Fund may be subject to foreign taxation related to income received, capital gains on the sale of securities and certain foreign currency transactions in the foreign jurisdictions in which it invests. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist in the foreign markets in which the Fund invests. When a capital gain tax is determined to apply the Fund records an estimated deferred tax liability in an amount that would be payable if the securities were disposed of on the valuation date.

The Fund recognizes the tax benefits of uncertain tax positions only when the position is “more likely than not” to be sustained

upon examination by the tax authorities based on the technical merits of the tax position. As of December 31, 2014, and for all open tax years, the Fund has determined that no liability for unrecognized tax benefits is required in the Fund’s financial statements related to uncertain tax positions taken on a tax return (or expected to be taken on future tax returns). Open tax years are those that remain subject to examination and are based on each tax jurisdiction statute of limitation.

c. Security Transactions, Investment Income, Expenses and Distributions

Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Estimated expenses are accrued daily. Dividend income is recorded on the ex-dividend date except for certain foreign securities where the dividend rate is not available. In such cases, the dividend is recorded as soon as the information is received by the Fund. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with U.S. GAAP. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods.

Common expenses incurred by the Trust are allocated among the funds based on the ratio of net assets of each fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense.

Realized and unrealized gains and losses and net investment income, not including class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions, by class, are generally due to differences in class specific expenses.

d. Accounting Estimates

The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates.

 

FRD-18    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Franklin Rising Dividends VIP Fund (continued)

e. Guarantees and Indemnifications

Under the Trust’s organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, on behalf of the Fund, enters into contracts with service providers that contain general indemnification clauses. The Trust’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote.

2. Shares of Beneficial Interest

At December 31, 2014, there were an unlimited number of shares authorized (without par value). Transactions in the Fund’s shares were as follows:

 

     Year Ended December 31,  
     2014          2013  
      Shares      Amount           Shares      Amount  
Class 1 Shares:              

Shares sold

      159,314       $ 4,468,085           425,367       $ 10,754,937   

Shares issued in reinvestment of distributions

      197,681         5,550,875           111,610         2,772,388   

Shares redeemed

      (923,627 )       (26,098,155 )         (973,756 )       (24,725,970 ) 
  

 

 

  

Net increase (decrease)

      (566,632 )     $ (16,079,195 )         (436,779 )     $ (11,198,645 ) 
  

 

 

  
Class 2 Shares:              

Shares sold

      5,801,510       $ 162,781,330           6,187,499       $ 153,726,999   

Shares issued in reinvestment of distributions

      2,007,904         55,377,998           1,085,247         26,490,890   

Shares redeemed

      (13,846,241 )       (381,284,891 )         (15,483,753 )       (384,559,197 ) 
  

 

 

  

Net increase (decrease)

      (6,036,827 )     $ (163,125,563 )         (8,211,007 )     $ (204,341,308 ) 
  

 

 

  
Class 4 Shares:              

Shares sold

      178,786       $ 4,991,418           216,130       $ 5,332,125   

Shares issued on reinvestment of distributions

      14,893         412,823           6,664         163,605   

Shares redeemed

      (95,832 )       (2,703,118 )         (84,878 )       (2,163,931 ) 
  

 

 

  

Net increase (decrease)

      97,847       $ 2,701,123           137,916       $ 3,331,799   
  

 

 

  

3. Transactions With Affiliates

Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton

Investments. Certain officers and trustees of the Fund are also officers and/or directors of the following subsidiaries:

 

Subsidiary    Affiliation

Franklin Advisory Services, LLC (Advisory Services)

   

Investment manager

Franklin Templeton Services, LLC (FT Services)

   

Administrative manager

Franklin Templeton Distributors, Inc. (Distributors)

   

Principal underwriter

Franklin Templeton Investor Services, LLC (Investor Services)

   

Transfer agent

 

    Annual Report     FRD-19   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Franklin Rising Dividends VIP Fund (continued)

3. Transactions With Affiliates (continued)

a. Management Fees

The Fund pays an investment management fee to Advisory Services based on the average daily net assets of the Fund as follows:

 

Annualized Fee Rate    Net Assets

0.750%

   

Up to and including $500 million

0.625%

   

Over $500 million, up to and including $1 billion

0.500%

   

In excess of $1 billion

b. Administrative Fees

Under an agreement with Advisory Services, FT Services provides administrative services to the Fund. The fee is paid by Advisory Services based on the Fund’s average daily net assets, and is not an additional expense of the Fund.

c. Distribution Fees

The Board has adopted distribution plans for Class 2 and Class 4 shares pursuant to Rule 12b-1 under the 1940 Act. Under the Fund’s compensation distribution plans, the Fund pays Distributors for costs incurred in connection with the servicing, sale and distribution of the Fund’s shares up to 0.35% per year of its average daily net assets. Some distribution fees are not charged on shares held by affiliates. The Board has agreed to limit the current rate to 0.25% per year for Class 2. The plan year, for purposes of monitoring compliance with the maximum annual plan rates, is February 1 through January 31.

d. Transfer Agent Fees

Investor Services, under terms of an agreement, performs shareholder servicing for the Fund and is not paid by the Fund for the services.

e. Investments in Institutional Fiduciary Trust Money Market Portfolio

The Fund invests in Institutional Fiduciary Trust Money Market Portfolio (Sweep Money Fund), an affiliated open-end management investment company. Management fees paid by the Fund are waived on assets invested in the Sweep Money Fund, as noted on the Statement of Operations, in an amount not to exceed the management and administrative fees paid directly or indirectly by the Sweep Money Fund. Prior to January 1, 2014, the waiver was accounted for as a reduction to management fees.

4. Expense Offset Arrangement

The Fund has entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Fund’s custodian expenses. During the year ended December 31, 2014, there were no credits earned.

5. Income Taxes

The tax character of distributions paid during the years ended December 31, 2014 and 2013, was as follows:

 

     2014     2013  

Distributions paid from:

     

Ordinary income

    $ 25,050,548      $ 29,426,883   

Long term capital gain

      36,291,148        —   
  

 

 

  
   $ 61,341,696      $ 29,426,883   
  

 

 

  

 

FRD-20    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Franklin Rising Dividends VIP Fund (continued)

At December 31, 2014, the cost of investments, net unrealized appreciation (depreciation), undistributed ordinary income and undistributed long term capital gains for income tax purposes were as follows:

 

Cost of investments

    $ 986,938,224   
  

 

 

  

Unrealized appreciation

    $ 854,533,014   

Unrealized depreciation

      (6,123,510 ) 
  

 

 

  

Net unrealized appreciation (depreciation)

    $ 848,409,504   
  

 

 

  

Undistributed ordinary income

    $ 25,119,933   

Undistributed long term capital gains

      181,672,772   
  

 

 

  

Distributable earnings

    $ 206,792,705   
  

 

 

  

Differences between income and/or capital gains as determined on a book basis and a tax basis are primarily due to differing treatment of wash sales.

6. Investment Transactions

Purchases and sales of investments (excluding short term securities) for the year ended December 31, 2014, aggregated $157,265,687 and $367,114,593, respectively.

7. Credit Facility

The Fund, together with other U.S. registered and foreign investment funds (collectively, Borrowers), managed by Franklin Templeton Investments, are borrowers in a joint syndicated senior unsecured credit facility totaling $1.5 billion (Global Credit Facility) which matured on February 13, 2015. This Global Credit Facility provides a source of funds to the Borrowers for temporary and emergency purposes, including the ability to meet future unanticipated or unusually large redemption requests. The Borrowers expect to renew the Global Credit Facility for a total of $2 billion effective February 13, 2015, which matures on February 12, 2016.

Under the terms of the Global Credit Facility, the Fund shall, in addition to interest charged on any borrowings made by the Fund and other costs incurred by the Fund, pay its share of fees and expenses incurred in connection with the implementation and maintenance of the Global Credit Facility, based upon its relative share of the aggregate net assets of all of the Borrowers, including an annual commitment fee of 0.07% based upon the unused portion of the Global Credit Facility. These fees are reflected in other expenses on the Statement of Operations. During the year ended December 31, 2014, the Fund did not use the Global Credit Facility.

8. Fair Value Measurements

The Fund follows a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Fund’s own market assumptions (unobservable inputs). These inputs are used in determining the value of the Fund’s financial instruments and are summarized in the following fair value hierarchy:

 

  •   Level 1 – quoted prices in active markets for identical financial instruments
  •   Level 2 – other significant observable inputs (including quoted prices for similar financial instruments, interest rates, prepayment speed, credit risk, etc.)
  •   Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of financial instruments)

The input levels are not necessarily an indication of the risk or liquidity associated with financial instruments at that level.

 

    Annual Report     FRD-21   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Franklin Rising Dividends VIP Fund (continued)

8. Fair Value Measurements (continued)

For movements between the levels within the fair value hierarchy, the Fund has adopted a policy of recognizing the transfers as of the date of the underlying event which caused the movement.

At December 31, 2014, all of the Fund’s investments in financial instruments carried at fair value were valued using Level 1 inputs. For detailed categories, see the accompanying Statement of Investments.

9. New Accounting Pronouncements

In June 2014, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2014-11, Transfers and Servicing (Topic 860), Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. The ASU changes the accounting for certain repurchase agreements and expands disclosure requirements related to repurchase agreements, securities lending, repurchase-to-maturity and similar transactions. The ASU is effective for interim and annual reporting periods beginning after December 15, 2014. Management has reviewed the requirements and believes the adoption of this ASU will not have a material impact on the financial statements.

10. Subsequent Events

The Fund has evaluated subsequent events through the issuance of the financial statements and determined that no events have occurred that require disclosure other than those already disclosed in the financial statements.

Abbreviations

 

Selected Portfolio
ADR   American Depositary Receipt

 

FRD-22    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

Report of Independent Registered Public Accounting Firm

Franklin Rising Dividends VIP Fund

To the Board of Trustees and Shareholders of Franklin Templeton Variable Insurance Products Trust

In our opinion, the accompanying statement of assets and liabilities, including the statement of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Franklin Rising Dividends VIP Fund (the “Fund”) at December 31, 2014, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements 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 are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2014 by correspondence with the custodian, transfer agent and brokers, provides a reasonable basis for our opinion.

PricewaterhouseCoopers LLP

San Francisco, California

February 13, 2015

 

    Annual Report     FRD-23   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

Tax Information (unaudited)

Franklin Rising Dividends VIP Fund

Under Section 852(b)(3)(C) of the Internal Revenue Code (Code), the Fund hereby reports the maximum amount allowable but no less than $36,291,148 as a long term capital gain dividend for the fiscal year ended December 31, 2014.

Under Section 854(b)(1)(A) of the Code, the Fund hereby reports 100% of the ordinary income dividends as income qualifying for the dividends received deduction for the fiscal year ended December 31, 2014.

 

  FRD-24       Annual Report    

Franklin Small Cap Value VIP Fund

(Formerly, Franklin Small Cap Value Securities Fund)

This annual report for Franklin Small Cap Value VIP Fund covers the fiscal year ended December 31, 2014.

Class 4 Performance Summary as of December 31, 2014

Average annual total return of Class 4 shares* represents the average annual change in value, assuming reinvestment of dividends and capital gains. Average returns smooth out variations in returns, which can be significant; they are not the same as year-by-year results.

 

Periods ended 12/31/14    1-Year        5-Year        10-Year  

Average Annual Total Return

      +0.48%           +14.78%           +7.97%   

*For the period beginning 2/29/08, Class 4 performance reflects a 12b-1 fee expense of 0.35% per year, which affects future performance. Class 4 performance prior to 2/29/08 reflects historical Class 1 performance, which does not have a 12b-1 fee expense. Since 2/29/08 (effective date), the average annual total return of Class 4 shares was +9.17%. The Fund has a fee waiver associated with its investments in a Franklin Templeton money fund, contractually guaranteed through at least its current fiscal year-end. Fund investment results reflect the fee waiver, to the extent applicable; without this reduction, the results would have been lower.

Performance reflects the Fund’s Class 4 operating expenses, but does not include any contract fees, expenses or sales charges. If they had been included, performance would be lower. These charges and deductions, particularly for variable life policies, can have a significant effect on contract values and insurance benefits. See the contract prospectus for a complete description of these expenses, including sales charges.

Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares. Current performance may differ from figures shown.

Total Return Index Comparison for a Hypothetical $10,000 Investment (1/1/05–12/31/14)

The graph below shows the change in value of a hypothetical $10,000 investment in the Fund over the indicated period and includes reinvestment of any income or distributions. The Fund’s performance* is compared to the performance of the Russell 2500™ Value Index. One cannot invest directly in an index, and an index is not representative of the Fund’s portfolio. Please see Important Notes to Performance Information preceding the Fund Summaries.

 

LOGO

**Source: Morningstar. Please see Index Descriptions following the Fund Summaries.

 

    Annual Report     FSV-1   

FRANKLIN SMALL CAP VALUE VIP FUND

Fund Goal and Main Investments

Franklin Small Cap Value VIP Fund seeks long-term total return. Under normal market conditions, the Fund invests at least 80% of its net assets in investments of small capitalization companies. For this Fund, small capitalization companies are those with market capitalizations under $3.5 billion at the time of purchase. The Fund generally invests in equity securities of companies that the manager believes are undervalued and have the potential for capital appreciation.

Fund Risks

All investments involve risks, including possible loss of principal. The Fund’s investments in smaller company stocks carry special risks as such stocks have historically exhibited greater price volatility than large-company stocks, particularly over the short term. Additionally, smaller companies often have relatively small revenues, limited product lines and a small market share. In addition, the Fund may invest up to 25% of its total assets in foreign securities, which involve special risks, including currency fluctuations and economic and political uncertainty. The Fund is actively managed but there is no guarantee that the manager’s investment decisions will produce the desired results. The Fund’s prospectus also includes a description of the main investment risks.

Performance Overview

You can find the Fund’s one-year total return in the Performance Summary. For comparison, the Fund’s benchmark, the Russell 2500TM Value Index, rose 7.11% for the same period.1 Please note the Fund employs a bottom-up stock selection process, and the managers invest in securities without regard to benchmark comparisons.

Economic and Market Overview

The U.S. economy continued to grow during the year ended December 31, 2014, underpinned in some quarters by manufacturing activity, consumer and business spending, and federal defense spending. Home sales experienced some weakness resulting from reduced inventory, higher mortgage rates and tight credit requirements but began to recover in May as mortgage rates declined. Home prices stayed higher than a year

earlier. Retail sales generally improved, supported by job growth and lower gasoline prices in the latter part of 2014. The unemployment rate declined to 5.6% in December 2014 from 6.7% in December 2013.2 Inflation, as measured by the Consumer Price Index, remained low.

In January 2014, the U.S. Federal Reserve Board (Fed) began reducing its large-scale bond purchases $10 billion a month and ended the buying program in October. But it continued its practice of maintaining holdings of longer term securities at sizable levels. The Fed believed underlying economic strength could support ongoing progress in labor market conditions. The Fed also noted that although inflation might remain low in the near term, the likelihood of inflation running persistently below 2% had diminished. Toward period-end, the Fed stated that it could be patient with regard to raising interest rates and that the interest rate might not rise for at least a couple of meetings, possibly implying at least the first two meetings of 2015.

Investor confidence grew during the period as corporate profits rose and the economy generally strengthened. The market endured sell-offs when many investors reacted to political instability in certain emerging markets, crises in Ukraine and the Middle East, weakness in Europe and Japan, and moderating economic data in China. U.S. stocks rose overall for the 12 months under review as the Standard & Poor’s® 500 Index and Dow Jones Industrial Average reached all-time highs.3

Investment Strategy

We generally invest in stocks that we believe are undervalued and have the potential for capital appreciation. We consider a stock price a “value” when it trades at less than the price at which we believe it would trade if the market reflected all factors relating to the company’s worth. Accordingly, we invest in companies that we believe have, for example, stock prices that are low relative to current or historical or future earnings, book value, cash flow or sales; recent sharp price declines but the potential for good long-term earnings prospects; and valuable intangibles not reflected in the stock price. Companies in which we may invest include those that may be considered out of favor, such as companies attempting to recover from bankruptcy, business setbacks, adverse events or cyclical downturns, or that may be considered potential takeover targets.

 

 

1. Source: Morningstar.

One cannot invest directly in an index, and an index is not representative of the Fund’s portfolio. Please see Index Descriptions following the Fund Summaries.

2. Source: Bureau of Labor Statistics.

3. Please see Index Descriptions following the Fund Summaries.

 

FSV-2    Annual Report    

FRANKLIN SMALL CAP VALUE VIP FUND

Manager’s Discussion

Contributors to absolute Fund performance included Trinity Industries, Protective Life and STERIS. Trinity Industries, a railcar manufacturer, experienced increased demand for railcars to transport oil, commodities and autos resulting from rising energy and auto production, and a positive response to asset sales and acquisitions. Protective Life, a life insurance company, was the subject of an all cash takeover by Dai-ichi Life Insurance at a 34% premium to Protective’s then share price. STERIS, a manufacturer and supplier of sterilization products and services primarily for the health care industry, reported earnings growth driven by increased organic demand and the benefit from prior acquisitions. In addition, the company was also expected to benefit from a sizable strategic acquisition anticipated to be completed in 2015.

Detractors from absolute Fund performance included Civeo, Unit Corp. and Tidewater. Civeo, a spin-off of Fund holding Oil States International, is a leading provider of lodging and related services tied mostly to oil exploration and production and mining companies in Canada and Australia. The stock was negatively impacted by substantially lower-than-expected earnings guidance because of an uncertain contracting environment as oil and other commodity prices came under pressure. Unit Corp., an onshore oil and gas exploration, production and drilling services provider, was negatively impacted by the precipitous drop in energy prices that began in mid-2014. Tidewater suffered from a sharp decline in oil prices, weaker-than-expected deepwater day rates and higher maintenance expenses.

During the period, we initiated new positions including Axiall, a chemicals and building products manufacturer; Maple Leaf Foods, a packaged consumer foods manufacturer; Minerals Technologies, a global producer of value-added specialty minerals; GrainCorp, a grain products and services provider; and Gerresheimer, a glass and plastics maker for the pharmaceuticals industry. We also added to our holdings in Sensient Technologies, a color, flavor and fragrance manufacturer; H.B. Fuller, an industrial adhesive producer; and Enersys, an industrial battery manufacturer; among others.

We eliminated positions including the aforementioned Trinity Industries and Protective Life, Harman International Industries, Autoliv and Atwood Oceanics, among others. Some holdings

 

 

LOGO

 

 

    Annual Report     FSV-3   

FRANKLIN SMALL CAP VALUE VIP FUND

we reduced included Reliance Steel & Aluminum, Steel Dynamics and EnPro Industries, among others. The acquisition of Schawk by Matthews International was announced at a 36% premium to Schawk’s then share price, and we sold our position before the deal was completed.

Thank you for your participation in Franklin Small Cap Value VIP Fund. We look forward to serving your future investment needs.

The foregoing information reflects our analysis, opinions and portfolio holdings as of December 31, 2014, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.

 

Top 10 Holdings       
12/31/14       
Company
Sector/Industry		    % of Total
Net Assets		  
Sensient Technologies Corp.
Materials		      2.7%   
Thor Industries Inc.
Automobiles & Components		      2.5%   
La-Z-Boy Inc.
Consumer Durables & Apparel		      2.2%   
STERIS Corp.
Health Care Equipment & Services		      2.2%   
Group 1 Automotive Inc.
Retailing		      2.2%   
StanCorp Financial Group Inc.
Insurance		      2.1%   
Axiall Corp.
Materials		      2.1%   
RPM International Inc.
Materials		      2.1%   
H.B. Fuller Co.
Materials		      2.0%   
Regal-Beloit Corp.
Electrical Equipment		      1.9%   

The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund’s Statement of Investments (SOI).

 

 

FSV-4    Annual Report    

FRANKLIN SMALL CAP VALUE VIP FUND

Class 4 Fund Expenses

As an investor in a variable insurance contract (Contract) that indirectly provides for investment in an underlying mutual fund, you can incur transaction and/or ongoing expenses at both the Fund level and the Contract level.

 

•   Transaction expenses can include sales charges (loads) on purchases, redemption fees, surrender fees, transfer fees and premium taxes.

 

•   Ongoing expenses can include management fees, distribution and service (12b-1) fees, contract fees, annual maintenance fees, mortality and expense risk fees and other fees and expenses. All mutual funds and Contracts have some types of ongoing expenses.

The expenses shown in the table are meant to highlight ongoing expenses at the Fund level only and do not include ongoing expenses at the Contract level, or transaction expenses at either the Fund or Contract level. While the Fund does not have transaction expenses, if the transaction and ongoing expenses at the Contract level were included, the expenses shown below would be higher. You should consult your Contract prospectus or disclosure document for more information.

The table shows Fund-level ongoing expenses and can help you understand these expenses and compare them with those of other mutual funds offered through the Contract. The table assumes a $1,000 investment held for the six months indicated. Please refer to the Fund prospectus for additional information on operating expenses.

Actual Fund Expenses

The first line (Actual) of the table provides actual account values and expenses. The “Ending Account Value” is derived from the Fund’s actual return, which includes the effect of ongoing Fund expenses, but does not include the effect of ongoing Contract expenses.

You can estimate the Fund-level expenses you incurred during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:

 

1. Divide your account value by $1,000.

If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6.

 

2. Multiply the result by the number under the heading “Fund-Level Expenses Incurred During Period.”

If Fund-Level Expenses Incurred During Period were $7.50, then 8.6 × $7.50 = $64.50.

In this illustration, the estimated expenses incurred this period at the Fund level are $64.50.

Hypothetical Example for Comparison with Other Mutual Funds

Information in the second line (Hypothetical) of the table can help you compare ongoing expenses of the Fund with those of other mutual funds offered through the Contract. This information may not be used to estimate the actual ending account balance or expenses you incurred during the period. The hypothetical “Ending Account Value” is based on the Fund’s actual expense ratio and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Fund-Level Expenses Incurred During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds offered through a Contract.

 
Class 4  

Beginning Account

Value 7/1/14

      Ending Account
Value 12/31/14		     

Fund-Level Expenses
Incurred During Period*

7/1/14–12/31/14

  

Actual

     $1,000         $961.30         $4.89   

Hypothetical (5% return before expenses)

     $1,000         $1,020.21         $5.04   

*Expenses are calculated using the most recent six-month annualized expense ratio, net of expense waivers, for the Fund’s Class 4 shares (0.99%), which does not include any ongoing expenses of the Contract for which the Fund is an investment option, multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period.

 

    Annual Report     FSV-5   

SUPPLEMENT DATED OCTOBER 1, 2014

TO THE PROSPECTUSES DATED MAY 1, 2014

OF

FRANKLIN SMALL CAP VALUE VIP FUND

(A series of Franklin Templeton Variable Insurance Products Trust)

The prospectus is amended as follows:

I.  The Fund Summary “Portfolio Managers” section beginning on page FSV-S4 is revised to remove reference to William J. Lippman and revise Donald G. Taylor’s biography to the following:

Portfolio Managers

STEVEN B. RAINERI Portfolio Manager of Advisory Services and portfolio manager of the Fund since 2012.

DONALD G. TAYLOR, CPA President and Chief Investment Officer of Advisory Services and portfolio manager of the Fund since inception (1998).

BRUCE C. BAUGHMAN, CPA Senior Vice President of Advisory Services and portfolio manager of the Fund since inception (1998).

II.  The portfolio management team in the “Fund Details – Management” section beginning on page FSV-D4 is revised to remove reference to William J. Lippman and revise Donald G. Taylor’s title to the following:

The Fund is managed by a team of dedicated professionals focused on investments of small cap value companies. The portfolio managers of the team are as follows:

 

STEVEN B. RAINERI

Portfolio Manager of Advisory Services

    Mr. Raineri has been a co-lead portfolio manager of the Fund since 2012. He joined Franklin Templeton Investments in 2005. Mr. Raineri, as co-lead portfolio manager of the Fund, has primary responsibility for the investments of the Fund. He has final authority over all aspects of the Fund’s investment portfolio, including but not limited to, purchases and sales of individual securities, portfolio risk assessment, and the management of daily cash balances in accordance with anticipated investment management requirements. The degree to which he may perform these functions, and the nature of these functions, may change from time to time. Mr. Baughman and Mr. Taylor provide support to the lead portfolio manager(s) of the Fund as needed.
DONALD G. TAYLOR, CPA President and Chief Investment Officer of Advisory Services    Mr. Taylor has been a portfolio manager of the Fund since its inception (1998). He joined Franklin Templeton Investments in 1996.
BRUCE C. BAUGHMAN, CPA Senior Vice President of Advisory Services    Mr. Baughman has been a portfolio manager of the Fund since its inception (1998). He joined Franklin Templeton Investments in 1988.

Please keep this supplement with your prospectus for future reference.

 

FSV-6         

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

Financial Highlights

Franklin Small Cap Value VIP Fund

     Year Ended December 31,  
      2014      2013      2012      2011      2010  
Class 1               
Per share operating performance
(for a share outstanding throughout the year)		               

Net asset value, beginning of year

      $24.54         $18.58         $15.82         $16.55         $13.00   
  

 

 

  
Income from investment operationsa:               

Net investment incomeb

      0.19         0.19         0.29 c       0.16         0.14   

Net realized and unrealized gains (losses)

      0.06         6.45         2.64         (0.74 )       3.54   
  

 

 

  

Total from investment operations

      0.25         6.64         2.93         (0.58 )       3.68   
  

 

 

  
Less distributions from:               

Net investment income

      (0.20 )       (0.32 )       (0.17 )       (0.15 )       (0.13 ) 

Net realized gains

      (1.78 )       (0.36 )       —         —         —   
  

 

 

  

Total distributions

      (1.98 )       (0.68 )       (0.17 )       (0.15 )       (0.13 ) 
  

 

 

  

Net asset value, end of year

      $22.81         $24.54         $18.58         $15.82         $16.55   
  

 

 

  

Total returnd

      0.88%         36.50%         18.75%         (3.53)%         28.49%   
Ratios to average net assets               

Expenses

      0.63% e       0.63%         0.67%         0.66%         0.67%   

Net investment income

      0.82%         0.90%         1.70% c       1.02%         0.98%   
Supplemental data               

Net assets, end of year (000’s)

      $57,843         $62,408         $40,133         $39,374         $47,300   

Portfolio turnover rate

      19.45%         10.44%         5.84%         14.39%         15.92%   

aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.

bBased on average daily shares outstanding.

cNet investment income per share includes approximately $0.10 per share received in the form of special dividends. Excluding these amounts, the ratio of net investment income to average net assets would have been 1.10%.

dTotal return does not include fees, charges or expenses imposed by the variable annuity and life insurance contracts for which Franklin Templeton Variable Insurance

Products Trust serves as an underlying investment vehicle.

eBenefit of waiver and payments by affiliates and expense reduction rounds to less than 0.01%.

 

    The accompanying notes are an integral part of these financial statements.    |   Annual Report     FSV-7   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FINANCIAL HIGHLIGHTS

Franklin Small Cap Value VIP Fund (continued)

     Year Ended December 31,  
      2014      2013      2012      2011      2010  
Class 2               
Per share operating performance
(for a share outstanding throughout the year)		               

Net asset value, beginning of year

      $24.07         $18.23         $15.53         $16.25         $12.77   
  

 

 

  
Income from investment operationsa:               

Net investment incomeb

      0.13         0.14         0.24 c       0.12         0.10   

Net realized and unrealized gains (losses)

      0.05         6.34         2.59         (0.73 )       3.48   
  

 

 

  

Total from investment operations

      0.18         6.48         2.83         (0.61 )       3.58   
  

 

 

  
Less distributions from:               

Net investment income

      (0.15 )       (0.28 )       (0.13 )       (0.11 )       (0.10 ) 

Net realized gains

      (1.78 )       (0.36 )       —         —         —   
  

 

 

  

Total distributions

      (1.93 )       (0.64 )       (0.13 )       (0.11 )       (0.10 ) 
  

 

 

  

Net asset value, end of year

      $22.32         $24.07         $18.23         $15.53         $16.25   
  

 

 

  

Total returnd

      0.57%         36.24%         18.39%         (3.76)%         28.22%   
Ratios to average net assets               

Expenses

      0.88% e       0.88%         0.92%         0.91%         0.92%   

Net investment income

      0.57%         0.65%         1.45% c       0.77%         0.73%   
Supplemental data               

Net assets, end of year (000’s)

      $1,445,325         $1,606,802         $1,286,573         $1,211,168         $1,362,292   

Portfolio turnover rate

      19.45%         10.44%         5.84%         14.39%         15.92%   

aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.

bBased on average daily shares outstanding.

cNet investment income per share includes approximately $0.10 per share received in the form of special dividends. Excluding these amounts, the ratio of net investment income to average net assets would have been 0.85%.

dTotal return does not include fees, charges or expenses imposed by the variable annuity and life insurance contracts for which Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle.

eBenefit of waiver and payments by affiliates and expense reduction rounds to less than 0.01%.

 

  FSV-8       Annual Report   |    The accompanying notes are an integral part of these financial statements.    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FINANCIAL HIGHLIGHTS

Franklin Small Cap Value VIP Fund (continued)

     Year Ended December 31,  
      2014      2013      2012      2011      2010  
Class 4               
Per share operating performance
(for a share outstanding throughout the year)		               

Net asset value, beginning of year

      $24.37         $18.44         $15.71         $16.44         $12.92   
  

 

 

  
Income from investment operationsa:               

Net investment incomeb

      0.11         0.12         0.22 c       0.11         0.09   

Net realized and unrealized gains (losses)

      0.05         6.42         2.63         (0.75 )       3.53   
  

 

 

  

Total from investment operations

      0.16         6.54         2.85         (0.64 )       3.62   
  

 

 

  
Less distributions from:               

Net investment income

      (0.12 )       (0.25 )       (0.12 )       (0.09 )       (0.10 ) 

Net realized gains

      (1.78 )       (0.36 )       —         —         —   
  

 

 

  

Total distributions

      (1.90 )       (0.61 )       (0.12 )       (0.09 )       (0.10 ) 
  

 

 

  

Net asset value, end of year

      $22.63         $24.37         $18.44         $15.71         $16.44   
  

 

 

  

Total returnd

      0.48%         36.12%         18.27%         (3.87)%         28.14%   
Ratios to average net assets               

Expenses

      0.98% e       0.98%         1.02%         1.01%         1.02%   

Net investment income

      0.47%         0.55%         1.35% c       0.67%         0.63%   
Supplemental data               

Net assets, end of year (000’s)

      $30,452         $35,936         $32,424         $34,284         $39,075   

Portfolio turnover rate

      19.45%         10.44%         5.84%         14.39%         15.92%   

aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.

bBased on average daily shares outstanding.

cNet investment income per share includes approximately $0.10 per share received in the form of special dividends. Excluding these amounts, the ratio of net investment income to average net assets would have been 0.75%.

dTotal return does not include fees, charges or expenses imposed by the variable annuity and life insurance contracts for which Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle.

eBenefit of waiver and payments by affiliates and expense reduction rounds to less than 0.01%.

 

    The accompanying notes are an integral part of these financial statements.    |   Annual Report     FSV-9   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

Statement of Investments, December 31, 2014

 

Franklin Small Cap Value VIP Fund  
           Shares        Value  
 

Common Stocks 96.7%

        
 

Aerospace & Defense 1.8%

        
 

AAR Corp.

      984,700         $ 27,354,966   
         

 

 

  
 

Automobiles & Components 5.1%

       
a  

Drew Industries Inc.

      223,800           11,429,466   
 

Gentex Corp.

      587,300           21,219,149   
 

Thor Industries Inc.

      680,900           38,041,883   
 

Winnebago Industries Inc.

      331,200           7,206,912   
         

 

 

  
            77,897,410   
         

 

 

  
 

Banks 2.8%

        
 

Chemical Financial Corp.

      398,954           12,223,951   
 

EverBank Financial Corp.

      367,152           6,997,917   
 

OFG Bancorp. (Puerto Rico)

      602,000           10,023,300   
 

Peoples Bancorp Inc.

      158,000           4,096,940   
 

TrustCo Bank Corp. NY

      1,388,700           10,081,962   
         

 

 

  
            43,424,070   
         

 

 

  
 

Building Products 4.8%

        
 

Apogee Enterprises Inc.

      424,700           17,994,539   
a  

Gibraltar Industries Inc.

      842,300           13,695,798   
 

Simpson Manufacturing Co. Inc.

      433,400           14,995,640   
 

Universal Forest Products Inc.

      504,700           26,850,040   
         

 

 

  
            73,536,017   
         

 

 

  
 

Commercial & Professional Services 2.3%

        
 

Civeo Corp.

      562,400           2,311,464   
 

McGrath RentCorp

      399,318           14,319,543   
 

MSA Safety Inc.

      357,113           18,959,129   
         

 

 

  
            35,590,136   
         

 

 

  
 

Construction & Engineering 3.0%

        
 

EMCOR Group Inc.

      367,400           16,345,626   
 

Granite Construction Inc.

      775,000           29,465,500   
         

 

 

  
            45,811,126   
         

 

 

  
 

Consumer Durables & Apparel 5.0%

        
 

Brunswick Corp.

      445,000           22,810,700   
a  

Helen of Troy Ltd.

      17,700           1,151,562   
 

Hooker Furniture Corp.

      445,000           7,640,650   
 

La-Z-Boy Inc.

      1,281,100           34,384,724   
a  

M/I Homes Inc.

      435,900           10,008,264   
         

 

 

  
            75,995,900   
         

 

 

  
 

Electrical Equipment 4.5%

        
 

EnerSys

      254,210           15,689,841   
 

Franklin Electric Co. Inc.

      389,264           14,609,078   
 

Powell Industries Inc.

      195,000           9,568,650   
 

Regal-Beloit Corp.

      397,000           29,854,400   
         

 

 

  
            69,721,969   
         

 

 

  
 

Energy 7.6%

        
 

Bristow Group Inc.

      442,300           29,098,917   
 

Energen Corp.

      220,000           14,027,200   
a  

Helix Energy Solutions Group Inc.

      631,200           13,697,040   
 

Hunting PLC (United Kingdom)

      706,900           5,856,306   

 

  FSV-10       Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

Franklin Small Cap Value VIP Fund (continued)

           Shares        Value  
 

Common Stocks (continued)

        
 

Energy (continued)

        
a  

Oil States International Inc.

      299,900         $ 14,665,110   
 

Rowan Cos. PLC

      529,000           12,336,280   
 

Tidewater Inc.

      202,800           6,572,748   
a  

Unit Corp.

      577,900           19,706,390   
         

 

 

  
            115,959,991   
         

 

 

  
 

Food, Beverage & Tobacco 2.6%

        
 

GrainCorp Ltd. (Australia)

      1,725,000           11,619,816   
 

Maple Leaf Foods Inc. (Canada)

      1,699,600           28,496,200   
         

 

 

  
            40,116,016   
         

 

 

  
 

Health Care Equipment & Services 4.9%

        
 

Hill-Rom Holdings Inc.

      344,000           15,693,280   
 

STERIS Corp.

      530,000           34,370,500   
 

Teleflex Inc.

      211,800           24,318,876   
         

 

 

  
            74,382,656   
         

 

 

  
 

Industrial Conglomerates 1.8%

        
 

Carlisle Cos. Inc.

      308,900           27,875,136   
         

 

 

  
 

Insurance 9.5%

        
 

Arthur J. Gallagher & Co.

      168,200           7,918,856   
 

Aspen Insurance Holdings Ltd.

      538,700           23,578,899   
 

Assurant Inc.

      51,800           3,544,674   
 

The Hanover Insurance Group Inc.

      345,000           24,605,400   
 

HCC Insurance Holdings Inc.

      188,200           10,072,464   
 

Montpelier Re Holdings Ltd.

      413,800           14,822,316   
 

Old Republic International Corp.

      1,075,900           15,740,417   
 

StanCorp Financial Group Inc.

      467,400           32,652,564   
 

Validus Holdings Ltd.

      317,800           13,207,768   
         

 

 

  
            146,143,358   
         

 

 

  
 

Machinery 10.0%

        
 

Astec Industries Inc.

      523,800           20,590,578   
 

Briggs & Stratton Corp.

      410,200           8,376,284   
a  

EnPro Industries Inc.

      245,000           15,376,200   
 

Hillenbrand Inc.

      545,200           18,809,400   
 

Kennametal Inc.

      228,500           8,178,015   
 

Lincoln Electric Holdings Inc.

      272,700           18,840,843   
b  

Lindsay Corp.

      166,000           14,232,840   
 

Mueller Industries Inc.

      712,200           24,314,508   
a  

Wabash National Corp.

      1,726,900           21,344,484   
 

Watts Water Technologies Inc., A

      55,000           3,489,200   
         

 

 

  
            153,552,352   
         

 

 

  
 

Materials 16.8%

        
 

A. Schulman Inc.

      601,466           24,377,417   
 

Allegheny Technologies Inc.

      120,000           4,172,400   
 

AptarGroup Inc.

      65,000           4,344,600   
 

Axiall Corp.

      752,900           31,975,663   
 

Cabot Corp.

      506,800           22,228,248   
 

Carpenter Technology Corp.

      493,500           24,304,875   
 

H.B. Fuller Co.

      677,700           30,177,981   
 

Minerals Technologies Inc.

      262,900           18,258,405   

 

    Annual Report     FSV-11   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

Franklin Small Cap Value VIP Fund (continued)

           Shares        Value  
 

Common Stocks (continued)

        
 

Materials (continued)

        
 

Reliance Steel & Aluminum Co.

      119,900         $ 7,346,273   
 

RPM International Inc.

      620,000           31,440,200   
 

Sensient Technologies Corp.

      681,500           41,121,710   
 

Steel Dynamics Inc.

      551,500           10,886,610   
 

Stepan Co.

      181,400           7,270,512   
         

 

 

  
            257,904,894   
         

 

 

  
 

Pharmaceuticals, Biotechnology & Life Sciences 0.6%

        
 

Gerresheimer AG (Germany)

      167,421           9,105,944   
         

 

 

  
 

Real Estate 0.0%†

        
 

Excel Trust Inc.

      12,000           160,680   
         

 

 

  
 

Retailing 8.9%

        
 

Brown Shoe Co. Inc.

      800,000           25,720,000   
 

The Cato Corp., A

      438,600           18,500,148   
a  

Genesco Inc.

      261,908           20,067,391   
 

Group 1 Automotive Inc.

      373,600           33,482,032   
 

The Men’s Wearhouse Inc.

      517,000           22,825,550   
a  

The Pep Boys - Manny, Moe & Jack

      837,100           8,220,322   
a  

West Marine Inc.

      610,700           7,890,244   
         

 

 

  
            136,705,687   
         

 

 

  
 

Semiconductors & Semiconductor Equipment 0.6%

        
 

Cohu Inc.

      736,000           8,758,400   
         

 

 

  
 

Technology Hardware & Equipment 2.0%

        
a  

Ingram Micro Inc., A

      507,100           14,016,244   
a  

Multi-Fineline Electronix Inc.

      140,400           1,576,692   
a  

Rofin-Sinar Technologies Inc.

      508,700           14,635,299   
         

 

 

  
            30,228,235   
         

 

 

  
 

Trading Companies & Distributors 0.7%

        
 

Applied Industrial Technologies Inc.

      251,200           11,452,208   
         

 

 

  
 

Transportation 1.4%

        
a  

Genesee & Wyoming Inc.

      126,377           11,363,820   
 

SkyWest Inc.

      714,800           9,492,544   
         

 

 

  
            20,856,364   
         

 

 

  
 

Total Common Stocks (Cost $974,309,478)

           1,482,533,515   
         

 

 

  
         Principal Amount           
 

Corporate Bonds (Cost $7,669,460) 0.4%

        
 

Energy 0.4%

        
 

Unit Corp., senior sub. note, 6.625%, 5/15/21

    $ 7,944,000           7,149,600   
         

 

 

  
 

Total Investments before Short Term Investments (Cost $981,978,938)

           1,489,683,115   
         

 

 

  
         Shares           
 

Short Term Investments 3.9%

        
 

Money Market Funds (Cost $43,920,522) 2.9%

        
a,c  

Institutional Fiduciary Trust Money Market Portfolio

      43,920,522           43,920,522   
         

 

 

  

 

  FSV-12       Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

Franklin Small Cap Value VIP Fund (continued)

           Principal Amount        Value  
d  

Investments from Cash Collateral Received for Loaned Securities 1.0%

  

     
e  

Joint Repurchase Agreements 1.0%

        
 

Barclays Capital Inc., 0.05%, 1/02/15 (Maturity Value $3,477,439)

    $ 3,477,429         $ 3,477,429   
 

Collateralized by U.S. Treasury Notes, 1.50% - 2.125%, 8/31/18 - 6/30/21 (valued at $3,546,978)

        
 

BNP Paribas Securities Corp., 0.05%, 1/02/15 (Maturity Value $3,477,439)

      3,477,429           3,477,429   
 

Collateralized by U.S. Treasury Notes, 1.00% - 2.00%, 11/30/19 - 11/15/21 (valued at $3,546,978)

        
 

Citigroup Global Markets Inc., 0.06%, 1/02/15 (Maturity Value $732,062)

      732,060           732,060   
 

Collateralized by fU.S. Treasury Bill, 5/07/15; U.S. Treasury Bonds, 2.75% - 9.25%, 2/15/16 - 8/15/43; U.S. Treasury Bonds, Index Linked, 0.625% - 3.625%, 1/15/26 - 2/15/43; U.S. Treasury Notes, 0.25% - 3.375%, 1/31/15 - 11/30/19; U.S. Treasury Notes, Index Linked, 0.50% - 2.625%, 4/15/15 - 7/15/20; and U.S. Treasury Strips, 11/15/15 - 5/15/44 (valued at $746,701)

        
 

HSBC Securities (USA) Inc., 0.06%, 1/02/15 (Maturity Value $3,477,441)

      3,477,429           3,477,429   
 

Collateralized by U.S. Government Agency Securities, 0.25% - 7.25%, 10/15/15 - 7/15/32; U.S. Government Agency Securities, zero cpn., 12/01/15 - 3/17/31; and U.S. Government Agency Strips, 1/15/15 - 4/15/30 (valued at $3,546,986)

        
 

RBC Capital Markets LLC, 0.06%, 1/02/15 (Maturity Value $3,477,441)

      3,477,429           3,477,429   
 

Collateralized by fU.S. Treasury Bill, 10/15/15; U.S. Treasury Bonds, 3.00% - 6.25%, 8/15/23 - 11/15/44; U.S. Treasury Bonds, Index Linked, 0.125% - 2.125%, 4/15/17 - 2/15/41; U.S. Treasury Notes, 0.25% - 2.125%, 7/31/15 - 11/30/21; U.S. Treasury Notes, Index Linked, 0.625% - 1.875%, 7/15/15 - 7/15/21; and U.S. Treasury Strips, 2/15/15 - 5/15/44 (valued at $3,546,979)

        
         

 

 

  
 

Total Joint Repurchase Agreements (Cost $14,641,776)

           14,641,776   
         

 

 

  
 

Total Investments (Cost $1,040,541,236) 101.0%

          1,548,245,413   
 

Other Assets, less Liabilities (1.0)%

          (14,625,401 ) 
         

 

 

  
 

Net Assets 100.0%

         $ 1,533,620,012   
         

 

 

  

 

 

†Rounds to less than 0.1% of net assets.

aNon-income producing.

bA portion or all of the security is on loan at December 31, 2014. See Note 1(d).

cSee Note 3(e) regarding investments in Institutional Fiduciary Trust Money Market Portfolio.

dSee Note 1(d) regarding securities on loan.

eSee Note 1(c) regarding joint repurchase agreements.

fThe security is traded on a discount basis with no stated coupon rate.

 

    The accompanying notes are an integral part of these financial statements.    |   Annual Report     FSV-13   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

Financial Statements

Statement of Assets and Liabilities

December 31, 2014

 

      Franklin Small
Cap Value
VIP Fund		  

Assets:

   

Investments in securities:

   

Cost - Unaffiliated issuers

    $ 981,978,938   

Cost - Sweep Money Fund (Note 3e)

      43,920,522   

Cost - Repurchase agreements

      14,641,776   
  

 

 

  

Total cost of investments

    $ 1,040,541,236   
  

 

 

  

Value - Unaffiliated issuers

    $ 1,489,683,115   

Value - Sweep Money Fund (Note 3e)

      43,920,522   

Value - Repurchase agreements

      14,641,776   
  

 

 

  

Total value of investments (includes securities loaned in the amount of $14,224,266)

      1,548,245,413   

Receivables:

   

Investment securities sold

      1,476,033   

Capital shares sold

      179,797   

Dividends and interest

      1,494,602   

Other assets

      141   
  

 

 

  

Total assets

      1,551,395,986   
  

 

 

  

Liabilities:

   

Payables:

   

Investment securities purchased

      161,379   

Capital shares redeemed

      1,231,588   

Management fees

      784,556   

Distribution fees

      621,178   

Payable upon return of securities loaned

      14,641,776   

Accrued expenses and other liabilities

      335,497   
  

 

 

  

Total liabilities

      17,775,974   
  

 

 

  

Net assets, at value

    $ 1,533,620,012   
  

 

 

  

Net assets consist of:

   

Paid-in capital

    $ 812,435,237   

Undistributed net investment income

      8,474,380   

Net unrealized appreciation (depreciation)

      507,704,177   

Accumulated net realized gain (loss)

      205,006,218   
  

 

 

  

Net assets, at value

    $ 1,533,620,012   
  

 

 

  

 

  FSV-14       Annual Report   |    The accompanying notes are an integral part of these financial statements.    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FINANCIAL STATEMENTS

Statement of Assets and Liabilities (continued)

December 31, 2014

      Franklin Small
Cap Value
VIP Fund		  
Class 1:   

Net assets, at value

    $ 57,843,144   
  

 

 

  

Shares outstanding

      2,536,210   
  

 

 

  

Net asset value and maximum offering price per share

    $ 22.81   
  

 

 

  
Class 2:   

Net assets, at value

    $ 1,445,325,278   
  

 

 

  

Shares outstanding

      64,742,832   
  

 

 

  

Net asset value and maximum offering price per share

    $ 22.32   
  

 

 

  
Class 4:   

Net assets, at value

    $ 30,451,590   
  

 

 

  

Shares outstanding

      1,345,369   
  

 

 

  

Net asset value and maximum offering price per share

    $ 22.63   
  

 

 

  

 

    The accompanying notes are an integral part of these financial statements.    |   Annual Report     FSV-15   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FINANCIAL STATEMENTS

Statement of Operations

for the year ended December 31, 2014

 

      Franklin Small
Cap Value
VIP Fund		  

Investment income:

   

Dividends

    $ 22,275,512   

Interest

      56,037   

Income from securities loaned

      854,179   
  

 

 

  

Total investment income

      23,185,728   
  

 

 

  

Expenses:

   

Management fees (Note 3a)

      9,088,117   

Administrative fees (Note 3b)

      596,175   

Distribution fees: (Note 3c)

   

Class 2

      3,773,855   

Class 4

      112,514   

Custodian fees (Note 4)

      17,703   

Reports to shareholders

      383,800   

Professional fees

      55,193   

Trustees’ fees and expenses

      6,472   

Other

      25,168   
  

 

 

  

Total expenses

      14,058,997   

Expense reductions (Note 4)

      (178 ) 

Expenses waived/paid by affiliates (Note 3e)

      (40,012 ) 
  

 

 

  

Net expenses

      14,018,807   
  

 

 

  

Net investment income

      9,166,921   
  

 

 

  

Realized and unrealized gains (losses):

   

Net realized gain (loss) from:

   

Investments

      205,096,961   

Foreign currency transactions

      (126,767 ) 
  

 

 

  

Net realized gain (loss)

      204,970,194   
  

 

 

  

Net change in unrealized appreciation (depreciation) on investments

      (206,772,254 ) 
  

 

 

  

Net realized and unrealized gain (loss)

      (1,802,060 ) 
  

 

 

  

Net increase (decrease) in net assets resulting from operations

    $ 7,364,861   
  

 

 

  

 

  FSV-16       Annual Report   |    The accompanying notes are an integral part of these financial statements.    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FINANCIAL STATEMENTS

Statements of Changes in Net Assets

 

    Franklin Small Cap Value VIP Fund  
    Year Ended December 31,  
     2014        2013  

Increase (decrease) in net assets:

       

Operations:

       

Net investment income

   $ 9,166,921         $ 10,009,153   

Net realized gain (loss) from investments and foreign currency transactions

     204,970,194           119,472,862   

Net change in unrealized appreciation (depreciation) on investments

     (206,772,254 )         344,133,096   
 

 

 

  

Net increase (decrease) in net assets resulting from operations

     7,364,861           473,615,111   
 

 

 

  

Distributions to shareholders from:

       

Net investment income:

       

Class 1

     (493,372 )         (615,112 ) 

Class 2

     (9,349,846 )         (18,772,536 ) 

Class 4

     (160,210 )         (406,547 ) 

Net realized gains:

       

Class 1

     (4,292,308 )         (681,161 ) 

Class 2

     (112,743,662 )         (24,226,581 ) 

Class 4

     (2,435,910 )         (585,151 ) 
 

 

 

  

Total distributions to shareholders

     (129,475,308 )         (45,287,088 ) 
 

 

 

  

Capital share transactions: (Note 2)

       

Class 1

     (206,770 )         7,328,882   

Class 2

     (46,032,420 )         (83,608,654 ) 

Class 4

     (3,176,134 )         (6,031,999 ) 
 

 

 

  

Total capital share transactions

     (49,415,324 )         (82,311,771 ) 
 

 

 

  

Net increase (decrease) in net assets

     (171,525,771 )         346,016,252   

Net assets:

       

Beginning of year

     1,705,145,783           1,359,129,531   
 

 

 

  

End of year

   $ 1,533,620,012         $ 1,705,145,783   
 

 

 

  

Undistributed net investment income included in net assets:

       

End of year

   $ 8,474,380         $ 9,437,652   
 

 

 

  

 

    The accompanying notes are an integral part of these financial statements.    |   Annual Report     FSV-17   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

Notes to Financial Statements

Franklin Small Cap Value VIP Fund

1. Organization and Significant Accounting Policies

Franklin Templeton Variable Insurance Products Trust (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end management investment company, consisting of nineteen separate funds and applies the specialized accounting and reporting guidance in U.S. Generally Accepted Accounting Principles (U.S. GAAP). Franklin Small Cap Value VIP Fund (Fund) is included in this report. The financial statements of the remaining funds in the Trust are presented separately. Shares of the Fund are generally sold only to insurance company separate accounts to fund the benefits of variable life insurance policies or variable annuity contracts. The Fund offers three classes of shares: Class 1, Class 2 and Class 4. Each class of shares differs by its distribution fees, voting rights on matters affecting a single class and its exchange privilege.

Effective May 1, 2014, Franklin Small Cap Value Securities Fund was renamed Franklin Small Cap Value VIP Fund.

The following summarizes the Fund’s significant accounting policies.

a. Financial Instrument Valuation

The Fund’s investments in financial instruments are carried at fair value daily. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. The Fund calculates the net asset value (NAV) per share at the close of the New York Stock Exchange (NYSE), generally at 4 p.m. Eastern time (NYSE close) on each day the NYSE is open for trading. Under compliance policies and procedures approved by the Trust’s Board of Trustees (the Board), the Fund’s administrator has responsibility for oversight of valuation, including leading the cross-functional Valuation and Liquidity Oversight Committee (VLOC). The VLOC provides administration and oversight of the Fund’s valuation policies and procedures, which are approved annually by the Board. Among other things, these procedures allow the Fund to utilize independent pricing services, quotations from securities and financial instrument dealers, and other market sources to determine fair value.

Equity securities listed on an exchange or on the NASDAQ National Market System are valued at the last quoted sale price or the official closing price of the day, respectively. Foreign equity securities are valued as of the close of trading on the

foreign stock exchange on which the security is primarily traded or as of the NYSE close, whichever is earlier. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at the NYSE close on the day that the value of the security is determined. Over-the-counter (OTC) securities are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. Certain equity securities are valued based upon fundamental characteristics or relationships to similar securities. Investments in open-end mutual funds are valued at the closing NAV.

Debt securities generally trade in the OTC market rather than on a securities exchange. The Fund’s pricing services use multiple valuation techniques to determine fair value. In instances where sufficient market activity exists, the pricing services may utilize a market-based approach through which quotes from market makers are used to determine fair value. In instances where sufficient market activity may not exist or is limited, the pricing services also utilize proprietary valuation models which may consider market characteristics such as benchmark yield curves, credit spreads, estimated default rates, anticipated market interest rate volatility, coupon rates, anticipated timing of principal repayments, underlying collateral, and other unique security features in order to estimate the relevant cash flows, which are then discounted to calculate the fair value. Repurchase agreements are valued at cost, which approximates fair value.

The Fund has procedures to determine the fair value of financial instruments for which market prices are not reliable or readily available. Under these procedures, the VLOC convenes on a regular basis to review such financial instruments and considers a number of factors, including significant unobservable valuation inputs, when arriving at fair value. The VLOC primarily employs a market-based approach which may use related or comparable assets or liabilities, recent transactions, market multiples, book values, and other relevant information for the investment to determine the fair value of the investment. An income-based valuation approach may also be used in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the investments. Due to the inherent uncertainty of valuations of such investments, the fair values may differ significantly from the values that would have been used had an active market existed. The VLOC employs various methods for calibrating

 

 

  FSV-18       Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Franklin Small Cap Value VIP Fund (continued)

these valuation approaches including a regular review of key inputs and assumptions, transactional back-testing or disposition analysis, and reviews of any related market activity.

Trading in securities on foreign securities stock exchanges and OTC markets may be completed before the daily NYSE close. In addition, trading in certain foreign markets may not take place on every NYSE business day. Occasionally, events occur between the time at which trading in a foreign security is completed and the close of the NYSE that might call into question the reliability of the value of a portfolio security held by the Fund. As a result, differences may arise between the value of the Fund’s portfolio securities as determined at the foreign market close and the latest indications of value at the close of the NYSE. In order to minimize the potential for these differences, the VLOC monitors price movements following the close of trading in foreign stock markets through a series of country specific market proxies (such as baskets of American Depositary Receipts, futures contracts and exchange traded funds). These price movements are measured against established trigger thresholds for each specific market proxy to assist in determining if an event has occurred that may call into question the reliability of the values of the foreign securities held by the Fund. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services.

Also, when the last day of the reporting period is a non-business day, certain foreign markets may be open on those days that the NYSE is closed, which could result in differences between the value of the Fund’s portfolio securities on the last business day and the last calendar day of the reporting period. Any significant security valuation changes due to an open foreign market are adjusted and reflected by the Fund for financial reporting purposes.

b. Foreign Currency Translation

Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. The Fund may enter into foreign currency exchange contracts to facilitate transactions denominated in a foreign currency. Purchases and sales of securities, income and expense items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. Portfolio securities and assets and liabilities denominated

in foreign currencies contain risks that those currencies will decline in value relative to the U.S. dollar. Occasionally, events may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the Board.

The Fund does not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments on the Statement of Operations.

Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period.

c. Joint Repurchase Agreement

The Fund enters into a joint repurchase agreement whereby its uninvested cash balance is deposited into a joint cash account with other funds managed by the investment manager or an affiliate of the investment manager and is used to invest in one or more repurchase agreements. The value and face amount of the joint repurchase agreement are allocated to the funds based on their pro-rata interest. A repurchase agreement is accounted for as a loan by the Fund to the seller, collateralized by securities which are delivered to the Fund’s custodian. The fair value, including accrued interest, of the initial collateralization is required to be at least 102% of the dollar amount invested by the funds, with the value of the underlying securities marked to market daily to maintain coverage of at least 100%. Repurchase agreements are subject to the terms of Master Repurchase Agreements (MRAs) with approved counterparties (sellers). The MRAs contain various provisions, including but not limited to events of default and maintenance of collateral for repurchase agreements. In the event of default by either the seller or the Fund, certain MRAs may permit the non-defaulting party to net and close-out all transactions, if any, traded under such agreements. The Fund may sell securities it holds as collateral and apply the proceeds towards the repurchase price and any other amounts owed by the seller to the Fund in the event of default

 

 

    Annual Report     FSV-19   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Franklin Small Cap Value VIP Fund (continued)

1. Organization and Significant Accounting Policies (continued)

c. Joint Repurchase Agreement (continued)

by the seller. This could involve costs or delays in addition to a loss on the securities if their value falls below the repurchase price owed by the seller. The joint repurchase agreement held by the Fund at year end, as indicated in the Statement of Investments, had been entered into on December 31, 2014.

d. Securities Lending

The Fund participates in an agency based securities lending program. The Fund receives cash collateral against the loaned securities in an amount equal to at least 102% of the fair value of the loaned securities. Collateral is maintained over the life of the loan in an amount not less than 100% of the fair value of loaned securities, as determined at the close of fund business each day; any additional collateral required due to changes in security values is delivered to the Fund on the next business day. The collateral is invested in joint repurchase agreements as indicated on the Statement of Investments. The Fund receives income from the investment of cash collateral, in addition to lending fees and rebates paid by the borrower. The Fund bears the market risk with respect to the collateral investment, securities loaned, and the risk that the agent may default on its obligations to the Fund. The securities lending agent has agreed to indemnify the Fund in the event of default by a third party borrower.

e. Income and Deferred Taxes

It is the Fund’s policy to qualify as a regulated investment company under the Internal Revenue Code. The Fund intends to distribute to shareholders substantially all of its taxable income and net realized gains to relieve it from federal income and if applicable, excise taxes. As a result, no provision for U.S. federal income taxes is required.

The Fund may be subject to foreign taxation related to income received, capital gains on the sale of securities and certain foreign currency transactions in the foreign jurisdictions in which it invests. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist in the foreign markets in which the Fund invests. When a capital gain tax is determined to apply the Fund records an estimated deferred tax liability in an amount that would be payable if the securities were disposed of on the valuation date.

The Fund recognizes the tax benefits of uncertain tax positions only when the position is “more likely than not” to be sustained

upon examination by the tax authorities based on the technical merits of the tax position. As of December 31, 2014, and for all open tax years, the Fund has determined that no liability for unrecognized tax benefits is required in the Fund’s financial statements related to uncertain tax positions taken on a tax return (or expected to be taken on future tax returns). Open tax years are those that remain subject to examination and are based on each tax jurisdiction statute of limitation.

f. Security Transactions, Investment Income, Expenses and Distributions

Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Amortization of premium and accretion of discount on debt securities are included in interest income. Dividend income recorded on the ex-dividend date except for certain foreign securities where the dividend rate is not available. In such cases, the dividend is recorded as soon as the information is received by the Fund. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with U.S. GAAP. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods.

Common expenses incurred by the Trust are allocated among the funds based on the ratio of net assets of each fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense.

Realized and unrealized gains and losses and net investment income, not including class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions, by class, are generally due to differences in class specific expenses.

g. Accounting Estimates

The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates.

 

  FSV-20       Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Franklin Small Cap Value VIP Fund (continued)

h. Guarantees and Indemnifications

Under the Trust’s organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, on behalf of the Fund, enters into contracts with service providers that contain general indemnification clauses. The Trust’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote.

2. Shares of Beneficial Interest

At December 31, 2014, there were an unlimited number of shares authorized (without par value). Transactions in the Fund’s shares were as follows:

 

     Year Ended December 31,  
     2014          2013  
      Shares      Amount           Shares      Amount  
Class 1 Shares:              

Shares sold

      175,851       $ 4,068,553           854,519       $ 17,437,814   

Shares issued in reinvestment of distributions

      206,102         4,785,680           64,172         1,296,273   

Shares redeemed

      (388,575 )       (9,061,003 )         (536,406 )       (11,405,205 ) 
  

 

 

  

Net increase (decrease)

      (6,622 )     $ (206,770 )         382,285       $ 7,328,882   
  

 

 

  
Class 2 Shares:              

Shares sold

      5,020,152       $ 113,569,546           6,730,565       $ 138,529,743   

Shares issued in reinvestment of distributions

      5,364,390         122,093,507           2,167,294         42,999,117   

Shares redeemed

      (12,408,353 )       (281,695,473 )         (12,704,970 )       (265,137,514 ) 
  

 

 

  

Net increase (decrease)

      (2,023,811 )     $ (46,032,420 )         (3,807,111 )     $ (83,608,654 ) 
  

 

 

  
Class 4 Shares:              

Shares sold

      176,245       $ 3,946,345           205,689       $ 4,293,023   

Shares issued on reinvestment of distributions

      112,435         2,596,120           49,338         991,698   

Shares redeemed

      (418,040 )       (9,718,599 )         (538,222 )       (11,316,720 ) 
  

 

 

  

Net increase (decrease)

      (129,360 )     $ (3,176,134 )         (283,195 )     $ (6,031,999 ) 
  

 

 

  

3. Transactions With Affiliates

Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Fund are also officers and/or directors of the following subsidiaries:

 

Subsidiary    Affiliation

Franklin Advisory Services, LLC (Advisory Services)

   

Investment manager

Franklin Templeton Services, LLC (FT Services)

   

Administrative manager

Franklin Templeton Distributors, Inc. (Distributors)

   

Principal underwriter

Franklin Templeton Investor Services, LLC (Investor Services)

   

Transfer agent

 

    Annual Report     FSV-21   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Franklin Small Cap Value VIP Fund (continued)

3. Transactions With Affiliates (continued)

a. Management Fees

The Fund pays an investment management fee to Advisory Services based on the average daily net assets of the Fund as follows:

 

Annualized Fee Rate    Net Assets

0.750%

   

Up to and including $200 million

0.635%

   

Over $200 million, up to and including $700 million

0.600%

   

Over $700 million, up to and including $1.2 billion

0.575%

   

Over $1.2 billion, up to and including $1.3 billion

0.475%

   

In excess of $1.3 billion

Effective May 1, 2014, the Fund combined its investment management and administration agreements as approved by the Board. The fees paid under the combined agreement do not exceed the aggregate fees that were paid under the separate agreements.

Prior to May 1, 2014, the Fund paid fees to Advisory Services based on the average daily net assets of the Fund as follows:

 

Annualized Fee Rate    Net Assets

0.600%

   

Up to and including $200 million

0.500%

   

Over $200 million, up to and including $1.3 billion

0.400%

   

In excess of $1.3 billion

b. Administrative Fees

Effective May 1, 2014, under an agreement with Advisory Services, FT Services provides administrative services to the Fund. The fee is paid by Advisory Services based on the Fund’s average daily net assets, and is not an additional expense of the Fund.

Prior to May 1, 2014, the Fund paid administrative fees to FT Services of based on the average daily net assets of the Fund as follows:

 

Annualized Fee Rate    Net Assets

0.150%

   

Up to and including $200 million

0.135%

   

Over $200 million, up to and including $700 million

0.100%

   

Over $700 million, up to and including $1.2 billion

0.075%

   

In excess of $1.2 billion

c. Distribution Fees

The Board has adopted distribution plans for Class 2 and Class 4 shares pursuant to Rule 12b-1 under the 1940 Act. Under the Fund’s compensation distribution plans, the Fund pays Distributors for costs incurred in connection with the servicing, sale and distribution of the Fund’s shares up to 0.35% per year of its average daily net assets of each class. Some distribution fees are not charged on shares held by affiliates. The Board has agreed to limit the current rate to 0.25% per year for Class 2. The plan year, for purposes of monitoring compliance with the maximum annual plan rates, is February 1 through January 31.

d. Transfer Agent Fees

Investor Services, under terms of an agreement, performs shareholder servicing for the Fund and is not paid by the Fund for the services.

 

  FSV-22       Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Franklin Small Cap Value VIP Fund (continued)

e. Investments in Institutional Fiduciary Trust Money Market Portfolio

The Fund invests in Institutional Fiduciary Trust Money Market Portfolio (Sweep Money Fund), an affiliated open-end management investment company. Management fees paid by the Fund are waived on assets invested in the Sweep Money Fund, as noted on the Statement of Operations, in an amount not to exceed the management and administrative fees paid directly or indirectly by the Sweep Money Fund. Prior to January 1, 2014, the waiver was accounted for as a reduction to management fees.

4. Expense Offset Arrangement

The Fund has entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Fund’s custodian expenses. During the year ended December 31, 2014, the custodian fees were reduced as noted in the Statement of Operations.

5. Income Taxes

The tax character of distributions paid during the years ended December 31, 2014 and 2013, was as follows:

 

     2014     2013  

Distributions paid from:

     

Ordinary income

    $ 16,187,412      $ 19,794,195   

Long term capital gain

      113,287,896        25,492,893   
  

 

 

  
   $ 129,475,308      $ 45,287,088   
  

 

 

  

At December 31, 2014, the cost of investments, net unrealized appreciation (depreciation), undistributed ordinary income and undistributed long term capital gains for income tax purposes were as follows:

 

Cost of investments

    $ 1,041,186,367   
  

 

 

  

Unrealized appreciation

    $ 543,172,981   

Unrealized depreciation

      (36,113,935 ) 
  

 

 

  

Net unrealized appreciation (depreciation)

    $ 507,059,046   
  

 

 

  

Undistributed ordinary income

    $ 11,864,222   

Undistributed long term capital gains

      202,261,508   
  

 

 

  

Distributable earnings

    $ 214,125,730   
  

 

 

  

Differences between income and/or capital gains as determined on a book basis and a tax basis are primarily due to differing treatment of passive foreign investment company shares.

6. Investment Transactions

Purchases and sales of investments (excluding short term securities) for the year ended December 31, 2014, aggregated $302,369,904 and $449,603,046 respectively.

7. Credit Facility

The Fund, together with other U.S. registered and foreign investment funds (collectively, Borrowers), managed by Franklin Templeton Investments, are borrowers in a joint syndicated senior unsecured credit facility totaling $1.5 billion (Global Credit Facility) which matured on February 13, 2015. This Global Credit Facility provides a source of funds to the Borrowers for temporary and emergency purposes, including the ability to meet future unanticipated or unusually large redemption requests. The Borrowers expect to renew the Global Credit Facility for a total of $2 billion effective February 13, 2015, which matures on February 12, 2016.

 

    Annual Report     FSV-23   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Franklin Small Cap Value VIP Fund (continued)

7. Credit Facility (continued)

Under the terms of the Global Credit Facility, the Fund shall, in addition to interest charged on any borrowings made by the Fund and other costs incurred by the Fund, pay its share of fees and expenses incurred in connection with the implementation and maintenance of the Global Credit Facility, based upon its relative share of the aggregate net assets of all of the Borrowers, including an annual commitment fee of 0.07% based upon the unused portion of the Global Credit Facility. These fees are reflected in other expenses on the Statement of Operations. During the year ended December 31, 2014, the Fund did not use the Global Credit Facility.

8. Fair Value Measurements

The Fund follows a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Fund’s own market assumptions (unobservable inputs). These inputs are used in determining the value of the Fund’s financial instruments and are summarized in the following fair value hierarchy:

 

  •   Level 1 – quoted prices in active markets for identical financial instruments
  •   Level 2 – other significant observable inputs (including quoted prices for similar financial instruments, interest rates, prepayment speed, credit risk, etc.)
  •   Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of financial instruments)

The input levels are not necessarily an indication of the risk or liquidity associated with financial instruments at that level.

For movements between the levels within the fair value hierarchy, the Fund has adopted a policy of recognizing the transfers as of the date of the underlying event which caused the movement.

A summary of inputs used as of December 31, 2014, in valuing the Fund’s assets carried at fair value, is as follows:

 

      Level 1     Level 2     Level 3     Total  
Assets:         

Investments in Securities:

         

Equity Investmentsa

    $ 1,482,533,515      $ —      $  —      $ 1,482,533,515   

Corporate Bonds

      —        7,149,600        —        7,149,600   

Short Term Investments

      43,920,522        14,641,776        —        58,562,298   
  

 

 

  

Total Investments in Securities

    $ 1,526,454,037     $ 21,791,376     $ —      $ 1,548,245,413   
  

 

 

  

aFor detailed categories, see the accompanying Statement of Investments.

9. New Accounting Pronouncements

In June 2014, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2014-11, Transfers and Servicing (Topic 860), Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. The ASU changes the accounting for certain repurchase agreements and expands disclosure requirements related to repurchase agreements, securities lending, repurchase-to-maturity and similar transactions. The ASU is effective for interim and annual reporting periods beginning after December 15, 2014. Management has reviewed the requirements and believes the adoption of this ASU will not have a material impact on the financial statements.

10. Subsequent Events

The Fund has evaluated subsequent events through the issuance of the financial statements and determined that no events have occurred that require disclosure other than those already disclosed in the financial statements.

 

  FSV-24       Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

Report of Independent Registered Public Accounting Firm

Franklin Small Cap Value VIP Fund

To the Board of Trustees and Shareholders of Franklin Templeton Variable Insurance Products Trust

In our opinion, the accompanying statement of assets and liabilities, including the statement of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Franklin Small Cap Value VIP Fund (the “Fund”) at December 31, 2014, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements 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 are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2014 by correspondence with the custodian, transfer agent and brokers, provides a reasonable basis for our opinion.

PricewaterhouseCoopers LLP

San Francisco, California

February 13, 2015

 

    Annual Report     FSV-25   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

Tax Information (unaudited)

Franklin Small Cap Value VIP Fund

Under Section 852(b)(3)(C) of the Internal Revenue Code (Code), the Fund hereby reports the maximum amount allowable but no less than $113,287,896 as a long term capital gain dividend for the fiscal year ended December 31, 2014.

Under Section 854(b)(1)(A) of the Code, the Fund hereby reports 100% of the ordinary income dividends as income qualifying for the dividends received deduction for the fiscal year ended December 31, 2014.

 

  FSV-26       Annual Report    

Franklin Small-Mid Cap Growth VIP Fund

(Formerly, Franklin Small-Mid Cap Growth Securities Fund)

This annual report for Franklin Small-Mid Cap Growth VIP Fund covers the fiscal year ended December 31, 2014.

Class 4 Performance Summary as of December 31, 2014

Average annual total return of Class 4 shares* represents the average annual change in value, assuming reinvestment of dividends and capital gains. Average returns smooth out variations in returns, which can be significant; they are not the same as year-by-year results.

 

Periods ended 12/31/14    1-Year        5-Year        10-Year  

Average Annual Total Return

      +7.39%           +14.75%           +7.67%   

*For the period beginning 2/29/08, Class 4 performance reflects a 12b-1 fee expense of 0.35% per year, which affects future performance. Class 4 performance prior to 2/29/08 reflects historical Class 1 performance, which does not have a 12b-1 fee expense. Since 2/29/08 (effective date), the average annual total return of Class 4 shares was +9.52%. The Fund has a fee waiver associated with its investments in a Franklin Templeton money fund, contractually guaranteed through at least its current fiscal year-end. Fund investment results reflect the fee waiver, to the extent applicable; without this reduction, the results would have been lower.

Performance reflects the Fund’s Class 4 operating expenses, but does not include any contract fees, expenses or sales charges. If they had been included, performance would be lower. These charges and deductions, particularly for variable life policies, can have a significant effect on contract values and insurance benefits. See the contract prospectus for a complete description of these expenses, including sales charges.

Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares. Current performance may differ from figures shown.

Total Return Index Comparison for a Hypothetical $10,000 Investment (1/1/05–12/31/14)

The graph below shows the change in value of a hypothetical $10,000 investment in the Fund over the indicated period and includes reinvestment of any income or distributions. The Fund’s performance* is compared to the performance of the Russell Midcap® Growth Index and the Standard & Poor’s® 500 Index (S&P 500®). One cannot invest directly in an index, and an index is not representative of the Fund’s portfolio. Please see Important Notes to Performance Information preceding the Fund Summaries.

 

LOGO

**Source: Morningstar. Please see Index Descriptions following the Fund Summaries.

 

    Annual Report     FSC-1   

FRANKLIN SMALL-MID CAP GROWTH VIP FUND

Fund Goal and Main Investments

Franklin Small-Mid Cap Growth VIP Fund seeks long-term capital growth. Under normal market conditions, the Fund invests at least 80% of its net assets in equity securities of small capitalization and mid-capitalization companies. For this Fund, small cap companies are those within the market capitalization range of companies in the Russell 2500TM Index at the time of purchase, and midcap companies are those within the market capitalization range of companies in the Russell Midcap® Index at the time of purchase.1

Fund Risks

All investments involve risks, including possible loss of principal. Growth stock prices reflect projections of future earnings or revenues, and can, therefore, fall dramatically if the company fails to meet those projections. Smaller, midsized or relatively new or unseasoned companies can be particularly sensitive to changing economic conditions, and their prospects for growth are less certain than those of larger, more established companies. Historically, these securities have experienced more price volatility than larger company stocks, especially over the short term. To the extent the Fund focuses on particular countries, regions, industries, sectors or types of investment from time to time, it may be subject to greater risk of adverse developments in such areas of focus than a fund that invests in a wider variety of countries, regions, industries, sectors or investments. From time to time, the trading market for a particular security or type of security in which the Fund invests may become less liquid or even illiquid. The Fund is actively managed but there is no guarantee that the manager’s investment decisions will produce the desired results. The Fund’s prospectus also includes a description of the main investment risks.

Performance Overview

You can find the Fund’s one-year total return in the Performance Summary. In comparison, the Fund’s narrow benchmark, the Russell Midcap® Growth Index, generated a total return of +11.90%, and its broad benchmark, the S&P 500, produced a +13.69% total return for the same period.2

Economic and Market Overview

The U.S. economy continued to grow during the year ended December 31, 2014, underpinned in some quarters by manufacturing activity, consumer and business spending, and

federal defense spending. Home sales experienced some weakness resulting from reduced inventory, higher mortgage rates and tight credit requirements but began to recover in May as mortgage rates declined. Home prices stayed higher than a year earlier. Retail sales generally improved, supported by job growth and lower gasoline prices in the latter part of 2014. The unemployment rate declined to 5.6% in December 2014 from 6.7% in December 2013.3 Inflation, as measured by the Consumer Price Index, remained low.

In January 2014, the U.S. Federal Reserve Board (Fed) began reducing its large-scale bond purchases $10 billion a month and ended the buying program in October. But it continued its practice of maintaining holdings of longer term securities at sizable levels. The Fed believed underlying economic strength could support ongoing progress in labor market conditions. The Fed also noted that although inflation might remain low in the near term, the likelihood of inflation running persistently below 2% had diminished. Toward period-end, the Fed stated that it could be patient with regard to raising interest rates and that the interest rate might not rise for at least a couple of meetings, possibly implying at least the first two meetings of 2015.

Investor confidence grew during the period as corporate profits rose and the economy generally strengthened. The market endured sell-offs when many investors reacted to political instability in certain emerging markets, crises in Ukraine and the Middle East, weakness in Europe and Japan, and moderating economic data in China. U.S. stocks rose overall for the 12 months under review as the S&P 500 and Dow Jones Industrial Average reached all-time highs.1

Investment Strategy

We use fundamental, bottom-up research to seek companies meeting our criteria of growth potential, quality and valuation. In seeking sustainable growth characteristics, we look for companies we believe can produce sustainable earnings and cash flow growth, evaluating the long-term market opportunity and competitive structure of an industry to target leaders and emerging leaders. We define quality companies as those with strong and improving competitive positions in attractive markets. We also believe important attributes of quality are experienced and talented management teams as well as financial strength reflected in the capital structure, gross and operating margins, free cash flow generation and returns on capital employed. Our valuation analysis includes a range of potential

 

 

1. Please see Index Descriptions following the Fund Summaries.

2. Source: Morningstar.

One cannot invest directly in an index, and an index is not representative of the Fund’s portfolio. Please see Index Descriptions following the Fund Summaries.

3. Source: Bureau of Labor Statistics.

 

FSC-2    Annual Report    

FRANKLIN SMALL-MID CAP GROWTH VIP FUND

outcomes based on an assessment of multiple scenarios. In assessing value, we consider whether security prices fully reflect the balance of the sustainable growth opportunities relative to business and financial risks.

Manager’s Discussion

Most sectors represented in the Fund’s portfolio delivered positive returns and contributed to absolute performance during the 12 months under review. Relative to the Russell Midcap® Growth Index, key contributors included stock selection in information technology (IT) and an overweighting in health care.

In the IT sector, top contributors included our off-benchmark investment in Netherlands-based, integrated circuit manufacturer NXP Semiconductors and position in Singapore-based, analog semiconductor devices manufacturer Avago Technologies. NXP Semiconductors generated better-than-expected earnings, driven by product revenue growth and cost control. Additionally, NXP benefited from company-specific product cycles and strong demand trends from certain customers and expected to experience seasonality in certain business segments. Avago Technologies acquired storage and networking semiconductor developer LSI in May 2014 to position itself as a diversified semiconductor market leader. The combined businesses helped Avago significantly increase its revenues, driven by the wireless communications and enterprise storage segments, and deliver stronger-than-expected fiscal-year 2014 revenues and earnings.

Among the Fund’s health care holdings, our position in hospitals and health care facilities operator HCA Holdings and off-benchmark investment in medical technology company CareFusion aided relative results. HCA benefited from health care reform and an increase in hospital admissions, which helped it deliver better-than-expected results. The company’s higher full-year 2014 earnings guidance and share repurchase program also supported its stock performance. CareFusion’s share price surged after medical equipment supplier Becton, Dickinson & Co. announced an agreement to acquire the company to improve its role in providing drug management and patient safety services to hospitals. We closed our position after the acquisition announcement.

Other notable individual contributors included positions in athletic apparel and footwear manufacturer Under Armour and discount airline operator Spirit Airlines. Under Armour reported solid quarterly revenues and raised guidance for full year 2014

 

 

LOGO

 

as footwear demand and international sales gained momentum. Spirit Airlines continued to report stronger-than-expected earnings results, supported by flight volume growth and improved operational performance. Also supporting its stock price were a share repurchase program, falling crude oil prices and an award for fuel efficiency.

In contrast, key detractors from the Fund’s relative performance included stock selection in the consumer discretionary and industrials sectors.

Among the Fund’s consumer discretionary holdings, notable detractors included our off-benchmark investment in Wolverine World Wide, a designer and manufacturer of branded footwear, apparel and accessories, as well as positions in GNC Holdings, a specialty retailer of health and wellness products, and Dick’s Sporting Goods, a sports and fitness retailer. Wolverine World Wide’s share price fell in January 2014 after the company said it expected international efforts for newly acquired brands to

 

    Annual Report     FSC-3   

FRANKLIN SMALL-MID CAP GROWTH VIP FUND

Top 10 Holdings       
12/31/14       
Company
Sector/Industry		    % of Total
Net Assets		  

NXP Semiconductors NV (Netherlands)

Information Technology

      1.5%   

AMETEK Inc.

Industrials

      1.4%   

Affiliated Managers Group Inc.

Financials

      1.4%   

HCA Holdings Inc.

Health Care

      1.4%   

Perrigo Co. PLC

Health Care

      1.3%   

Intercontinental Exchange Inc.

Financials

      1.3%   

Jarden Corp.

Consumer Discretionary

      1.3%   

Robert Half International Inc.

Industrials

      1.2%   

Signature Bank

Financials

      1.2%   

Chipotle Mexican Grill Inc.

Consumer Discretionary

      1.2%   

The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund’s Statement of Investments.

begin showing results only in the latter half of the year. Shares began to recover in 2014’s second half after the company improved its earnings and unveiled a plan to close approximately 140 stores in 2014 and 2015 to optimize its operations. GNC’s shares suffered in the first half of 2014, and we closed our position in the company. Dick’s Sporting Goods’ share price declined after the company reported weakness in its golf and hunting businesses. However, the company reported better results later in the year aided by its golf business restructuring and strong results from other categories, particularly women’s and youth apparel.

In the industrials sector, key detractors included our position in Flowserve, a provider of flow control products and services for the global infrastructure markets. Although Flowserve delivered healthy earnings in the first half of the year, its revenues declined in the third quarter, resulting largely from project delays by some customers, unfavorable foreign currency exchange rates and costs related to its divestment of a Russia-focused business.

Key individual detractors included our new, off-benchmark investment in Rex Energy and new position in Concho Resources. These independent oil and gas companies, along with other energy companies, were negatively affected by a sharp decline in crude oil prices in 2014, resulting from excess supply and weak global demand growth.

Thank you for your participation in Franklin Small-Mid Cap Growth VIP Fund. We look forward to serving your future investment needs.

The foregoing information reflects our analysis, opinions and portfolio holdings as of December 31, 2014, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.

 

FSC-4    Annual Report    

FRANKLIN SMALL-MID CAP GROWTH VIP FUND

Class 4 Fund Expenses

As an investor in a variable insurance contract (Contract) that indirectly provides for investment in an underlying mutual fund, you can incur transaction and/or ongoing expenses at both the Fund level and the Contract level.

 

•   Transaction expenses can include sales charges (loads) on purchases, redemption fees, surrender fees, transfer fees and premium taxes.

 

•   Ongoing expenses can include management fees, distribution and service (12b-1) fees, contract fees, annual maintenance fees, mortality and expense risk fees and other fees and expenses. All mutual funds and Contracts have some types of ongoing expenses.

The expenses shown in the table are meant to highlight ongoing expenses at the Fund level only and do not include ongoing expenses at the Contract level, or transaction expenses at either the Fund or Contract level. While the Fund does not have transaction expenses, if the transaction and ongoing expenses at the Contract level were included, the expenses shown below would be higher. You should consult your Contract prospectus or disclosure document for more information.

The table shows Fund-level ongoing expenses and can help you understand these expenses and compare them with those of other mutual funds offered through the Contract. The table assumes a $1,000 investment held for the six months indicated. Please refer to the Fund prospectus for additional information on operating expenses.

Actual Fund Expenses

The first line (Actual) of the table provides actual account values and expenses. The “Ending Account Value” is derived from the Fund’s actual return, which includes the effect of ongoing Fund expenses, but does not include the effect of ongoing Contract expenses.

You can estimate the Fund-level expenses you incurred during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:

 

1. Divide your account value by $1,000.

If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6.

 

2. Multiply the result by the number under the heading “Fund-Level Expenses Incurred During Period.”

If Fund-Level Expenses Incurred During Period were $7.50, then 8.6 × $7.50 = $64.50.

In this illustration, the estimated expenses incurred this period at the Fund level are $64.50.

Hypothetical Example for Comparison with Other Mutual Funds

Information in the second line (Hypothetical) of the table can help you compare ongoing expenses of the Fund with those of other mutual funds offered through the Contract. This information may not be used to estimate the actual ending account balance or expenses you incurred during the period. The hypothetical “Ending Account Value” is based on the Fund’s actual expense ratio and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Fund-Level Expenses Incurred During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds offered through a Contract.

 
Class 4  

Beginning Account

Value 7/1/14

     

Ending Account

Value 12/31/14

     

Fund-Level Expenses
Incurred During Period*

7/1/14–12/31/14

  

Actual

     $1,000         $1,019.90         $5.85   

Hypothetical (5% return before expenses)

     $1,000         $1,019.41         $5.85   

*Expenses are calculated using the most recent six-month annualized expense ratio, net of expense waivers, for the Funds Class 4 shares (1.15%), which does not include any ongoing expenses of the Contract for which the Fund is an investment option, multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period.

 

    Annual Report     FSC-5   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

 

Financial Highlights

Franklin Small-Mid Cap Growth VIP Fund

     Year Ended December 31,  
      2014      2013      2012     2011      2010  
Class 1              
Per share operating performance
(for a share outstanding throughout the year)		              

Net asset value, beginning of year

      $28.38         $21.87         $21.19        $22.21         $17.36   
  

 

 

  
Income from investment operationsa:              

Net investment income (loss)b

      (0.07 )       (0.09 )       (0.01 )c      (0.05 )       (0.01 ) 

Net realized and unrealized gains (losses)

      2.04         8.19         2.27        (0.97 )       4.86   
  

 

 

  

Total from investment operations

      1.97         8.10         2.26        (1.02 )       4.85   
  

 

 

  
Less distributions from net realized gains      (5.40 )       (1.59 )       (1.58 )      —         —   
  

 

 

  

Net asset value, end of year

      $24.95         $28.38         $21.87        $21.19         $22.21   
  

 

 

  

Total returnd

      7.78%         38.50%         11.12%        (4.59)%         27.94%   
Ratios to average net assets              

Expenses

      0.80% e       0.80% f       0.80%        0.79%         0.79%   

Net investment income (loss)

      (0.29)%         (0.35)%         (0.03)% c      (0.21)%         (0.07)%   
Supplemental data              

Net assets, end of year (000’s)

      $99,803         $98,020         $75,977        $76,384         $89,826   

Portfolio turnover rate

      48.73%         42.77%         41.44%        45.00%         46.69%   

aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.

bBased on average daily shares outstanding.

cNet investment income per share includes approximately $0.03 per share received in the form of special dividends. Excluding these amounts, the ratio of net investment income to average net assets would have been (0.16)%.

dTotal return does not include fees, charges or expenses imposed by the variable annuity and life insurance contracts for which Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle.

eBenefit of waiver and payments by affiliates rounds to less than 0.01%.

fBenefit of expense reduction rounds to less than 0.01%.

 

FSC-6    Annual Report   |    The accompanying notes are an integral part of these financial statements.    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FINANCIAL HIGHLIGHTS

Franklin Small-Mid Cap Growth VIP Fund (continued)

     Year Ended December 31,  
      2014      2013      2012      2011      2010  
Class 2               
Per share operating performance
(for a share outstanding throughout the year)		               

Net asset value, beginning of year

      $27.16         $21.04         $20.49         $21.54         $16.87   
  

 

 

  
Income from investment operationsa:               

Net investment income (loss)b

      (0.13 )       (0.14 )       (0.06 )c       (0.10 )       (0.06 ) 

Net realized and unrealized gains (losses)

      1.93         7.85         2.19         (0.95 )       4.73   
  

 

 

  

Total from investment operations

      1.80         7.71         2.13         (1.05 )       4.67   
  

 

 

  

Less distributions from net realized gains

      (5.40 )       (1.59 )       (1.58 )       —         —   
  

 

 

  

Net asset value, end of year

      $23.56         $27.16         $21.04         $20.49         $21.54   
  

 

 

  

Total returnd

      7.47%         38.15%         10.85%         (4.87)%         27.68%   
Ratios to average net assets               

Expenses

      1.05% e       1.05% f       1.05%         1.04%         1.04%   

Net investment income (loss)

      (0.54)%         (0.60)%         (0.28)% c       (0.46)%         (0.32)%   
Supplemental data               

Net assets, end of year (000’s)

      $582,772         $660,806         $670,193         $717,086         $939,481   

Portfolio turnover rate

      48.73%         42.77%         41.44%         45.00%         46.69%   

aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.

bBased on average daily shares outstanding.

cNet investment income per share includes approximately $0.03 per share received in the form of special dividends. Excluding these amounts, the ratio of net investment income to average net assets would have been (0.41)%.

dTotal return does not include fees, charges or expenses imposed by the variable annuity and life insurance contracts for which Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle.

eBenefit of waiver and payments by affiliates rounds to less than 0.01%.

fBenefit of expense reduction rounds to less than 0.01%.

 

    The accompanying notes are an integral part of these financial statements.    |   Annual Report     FSC-7   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FINANCIAL HIGHLIGHTS

 

Franklin Small-Mid Cap Growth VIP Fund (continued)

     Year Ended December 31,  
      2014      2013      2012     2011      2010  
Class 4              
Per share operating performance
(for a share outstanding throughout the year)		              

Net asset value, beginning of year

      $27.72         $21.47         $20.90        $21.98         $17.24   
  

 

 

  
Income from investment operationsa:              

Net investment income (loss)b

      (0.16 )       (0.17 )       (0.09 )c      (0.12 )       (0.07 ) 

Net realized and unrealized gains (losses)

      1.98         8.01         2.24        (0.96 )       4.81   
  

 

 

  

Total from investment operations

      1.82         7.84         2.15        (1.08 )       4.74   
  

 

 

  

Less distributions from net realized gains

      (5.40 )       (1.59 )       (1.58 )      —         —   
  

 

 

  

Net asset value, end of year

      $24.14         $27.72         $21.47        $20.90         $21.98   
  

 

 

  

Total returnd

      7.39%         37.99%         10.79%        (4.91)%         27.49%   
Ratios to average net assets              

Expenses

      1.15% e       1.15% f       1.15%        1.14%         1.14%   

Net investment income (loss)

      (0.64)%         (0.70)%         (0.38)% c      (0.56)%         (0.42)%   
Supplemental data              

Net assets, end of year (000’s)

      $16,384         $19,132         $12,000        $12,664         $15,413   

Portfolio turnover rate

      48.73%         42.77%         41.44%        45.00%         46.69%   

aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.

bBased on average daily shares outstanding.

cNet investment income per share includes approximately $0.03 per share received in the form of special dividends. Excluding these amounts, the ratio of net investment income to average net assets would have been (0.51)%.

dTotal return does not include fees, charges or expenses imposed by the variable annuity and life insurance contracts for which Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle.

eBenefit of waiver and payments by affiliates rounds to less than 0.01%.

fBenefit of expense reduction rounds to less than 0.01%.

 

FSC-8    Annual Report   |    The accompanying notes are an integral part of these financial statements.    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

Statement of Investments, December 31, 2014

 

Franklin Small-Mid Cap Growth VIP Fund  
           Shares        Value  
         
         
 

Common Stocks 98.6%

        
 

Consumer Discretionary 21.2%

        
 

Advance Auto Parts Inc.

      33,400         $ 5,319,952   
 

BorgWarner Inc.

      105,100           5,775,245   
a  

Buffalo Wild Wings Inc.

      36,400           6,565,832   
a  

Charter Communications Inc., A

      28,200           4,698,684   
a  

Chipotle Mexican Grill Inc.

      12,200           8,351,022   
 

Dick’s Sporting Goods Inc.

      115,200           5,719,680   
a  

Dollar Tree Inc.

      67,300           4,736,574   
a  

Global Eagle Entertainment Inc.

      263,000           3,579,430   
a  

Grand Canyon Education Inc.

      100,400           4,684,664   
 

Harman International Industries Inc.

      62,500           6,669,375   
a  

IMAX Corp. (Canada)

      172,300           5,324,070   
a  

Jarden Corp.

      186,950           8,951,166   
b  

KB Home

      405,300           6,707,715   
 

L Brands Inc.

      61,700           5,340,135   
a  

Liberty Broadband Corp., C

      40,500           2,017,710   
 

Marriott International Inc., A

      104,300           8,138,529   
a  

MGM Resorts International

      262,491           5,612,058   
a  

Netflix Inc.

      18,200           6,217,302   
 

Nordstrom Inc.

      45,200           3,588,428   
a  

Norwegian Cruise Line Holdings Ltd.

      82,800           3,871,728   
 

Polaris Industries Inc.

      13,800           2,087,112   
a  

Shutterfly Inc.

      71,700           2,989,531   
a  

Tenneco Inc.

      126,500           7,161,165   
 

Tractor Supply Co.

      67,500           5,320,350   
a  

Under Armour Inc., A

      69,176           4,697,050   
a,b  

Wayfair Inc., A

      64,700           1,284,295   
 

Wolverine World Wide Inc.

      129,800           3,825,206   
 

Wynn Resorts Ltd.

      25,050           3,726,438   
a,b  

Zoe’s Kitchen Inc.

      111,100           3,323,001   
a,b  

Zulily Inc.

      86,000           2,012,400   
         

 

 

  
            148,295,847   
         

 

 

  
 

Consumer Staples 3.4%

        
a  

Boston Beer Inc., A

      22,100           6,398,834   
a,b  

Freshpet Inc.

      139,900           2,386,694   
a  

Monster Beverage Corp.

      49,900           5,406,665   
a  

TreeHouse Foods Inc.

      69,100           5,910,123   
 

Whole Foods Market Inc.

      79,200           3,993,264   
         

 

 

  
            24,095,580   
         

 

 

  
 

Energy 4.2%

        
 

Cabot Oil & Gas Corp., A

      209,800           6,212,178   
a  

Cheniere Energy Inc.

      24,000           1,689,600   
a  

Concho Resources Inc.

      65,600           6,543,600   
a  

Diamondback Energy Inc.

      79,100           4,728,598   
 

EQT Corp.

      73,500           5,563,950   
 

Oceaneering International Inc.

      50,600           2,975,786   
a,b  

Rex Energy Corp.

      257,900           1,315,290   
         

 

 

  
            29,029,002   
         

 

 

  
 

Financials 7.4%

        
a  

Affiliated Managers Group Inc.

      47,000           9,975,280   
 

Brown & Brown Inc.

      126,300           4,156,533   

 

    Annual Report     FSC-9   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

Franklin Small-Mid Cap Growth VIP Fund (continued)

           Shares        Value  
         
 

Common Stocks (continued)

        
 

Financials (continued)

        
 

Intercontinental Exchange Inc.

      42,608         $ 9,343,508   
 

Jones Lang LaSalle Inc.

      19,100           2,863,663   
 

Lazard Ltd., A

      104,500           5,228,135   
 

LPL Financial Holdings Inc.

      99,200           4,419,360   
a  

Signature Bank

      66,700           8,401,532   
 

T. Rowe Price Group Inc.

      82,800           7,109,208   
         

 

 

  
            51,497,219   
         

 

 

  
 

Health Care 20.3%

        
 

Agilent Technologies Inc.

      92,500           3,786,950   
a  

Alnylam Pharmaceuticals Inc.

      44,100           4,277,700   
a  

BioMarin Pharmaceutical Inc.

      27,300           2,467,920   
a  

Catamaran Corp.

      118,000           6,106,500   
a  

Celldex Therapeutics Inc.

      178,400           3,255,800   
a  

Cerner Corp.

      100,000           6,466,000   
 

The Cooper Cos. Inc.

      44,900           7,277,841   
a  

DaVita HealthCare Partners Inc.

      83,700           6,339,438   
 

DENTSPLY International Inc.

      109,500           5,833,065   
a  

DexCom Inc.

      52,900           2,912,145   
a  

Edwards Lifesciences Corp.

      34,300           4,369,134   
a  

Envision Healthcare Holdings Inc.

      171,400           5,945,866   
a  

HCA Holdings Inc.

      134,700           9,885,633   
a  

HeartWare International Inc.

      22,106           1,623,243   
a  

HMS Holdings Corp.

      126,000           2,663,640   
a  

Hologic Inc.

      96,800           2,588,432   
a  

Illumina Inc.

      29,300           5,408,194   
a  

Impax Laboratories Inc.

      227,700           7,213,536   
a  

Incyte Corp.

      24,400           1,783,884   
a  

Insulet Corp.

      49,600           2,284,576   
a,b  

Intercept Pharmaceuticals Inc.

      6,100           951,600   
a  

Karyopharm Therapeutics Inc.

      56,913           2,130,254   
a,b  

Keryx Biopharmaceuticals Inc.

      125,100           1,770,165   
a  

Medivation Inc.

      36,846           3,670,230   
a  

Mettler-Toledo International Inc.

      19,500           5,897,970   
a  

Nevro Corp.

      16,300           630,321   
 

Perrigo Co. PLC

      56,385           9,425,317   
a  

Portola Pharmaceuticals Inc.

      27,700           784,464   
a  

Puma Biotechnology Inc.

      6,300           1,192,401   
a  

Quintiles Transnational Holdings Inc.

      136,500           8,035,755   
a  

Revance Therapeutics Inc.

      115,000           1,948,100   
a  

Sagent Pharmaceuticals Inc.

      70,800           1,777,788   
 

St. Jude Medical Inc.

      106,500           6,925,695   
a  

Tandem Diabetes Care Inc.

      113,800           1,445,260   
a  

Vertex Pharmaceuticals Inc.

      25,400           3,017,520   
         

 

 

  
            142,092,337   
         

 

 

  
 

Industrials 15.8%

        
a  

The Advisory Board Co.

      79,100           3,874,318   
 

Allegiant Travel Co.

      25,292           3,802,146   
 

AMETEK Inc.

      190,000           9,999,700   
a  

B/E Aerospace Inc.

      60,000           3,481,200   
a  

DigitalGlobe Inc.

      193,300           5,986,501   

 

  FSC-10       Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

Franklin Small-Mid Cap Growth VIP Fund (continued)

           Shares        Value  
         
 

Common Stocks (continued)

        
 

Industrials (continued)

        
 

Flowserve Corp.

      88,100         $ 5,271,023   
a  

Genesee & Wyoming Inc.

      55,200           4,963,584   
a  

HD Supply Holdings Inc.

      245,500           7,239,795   
a  

Hexcel Corp.

      140,200           5,816,898   
a  

IHS Inc., A

      66,400           7,561,632   
 

J.B. Hunt Transport Services Inc.

      48,500           4,086,125   
 

Kansas City Southern

      28,400           3,465,652   
 

L-3 Communications Holdings Inc.

      41,600           5,250,336   
a  

Proto Labs Inc.

      72,900           4,895,964   
 

Robert Half International Inc.

      145,300           8,482,614   
 

Rockwell Automation Inc.

      30,900           3,436,080   
 

Roper Industries Inc.

      48,870           7,640,825   
a  

Spirit Airlines Inc.

      93,400           7,059,172   
 

Towers Watson & Co.

      22,500           2,546,325   
a  

WABCO Holdings Inc.

      55,600           5,825,768   
         

 

 

  
            110,685,658   
         

 

 

  
 

Information Technology 22.4%

        
a  

Alliance Data Systems Corp.

      10,400           2,974,920   
a  

ANSYS Inc.

      43,500           3,567,000   
 

Applied Materials Inc.

      300,600           7,490,952   
 

Avago Technologies Ltd. (Singapore)

      73,400           7,383,306   
a  

Bottomline Technologies Inc.

      109,500           2,768,160   
a  

Cognex Corp.

      158,600           6,554,938   
a  

CoStar Group Inc.

      24,600           4,517,298   
a  

Demandware Inc.

      51,100           2,940,294   
a  

Electronic Arts Inc.

      138,500           6,511,578   
 

Equinix Inc.

      24,883           5,641,723   
 

Fidelity National Information Services Inc.

      50,772           3,158,018   
a  

FleetCor Technologies Inc.

      45,800           6,810,918   
a,b  

Freescale Semiconductor Ltd.

      134,600           3,395,958   
a  

HomeAway Inc.

      113,300           3,374,074   
 

Intersil Corp., A

      404,900           5,858,903   
a  

JDS Uniphase Corp.

      307,600           4,220,272   
 

Lam Research Corp.

      43,500           3,451,290   
a  

LinkedIn Corp., A

      22,700           5,214,417   
a,b  

Mobileye NV

      21,425           868,998   
a  

NetSuite Inc.

      32,500           3,548,025   
a  

NXP Semiconductors NV (Netherlands)

      135,700           10,367,480   
a  

Pandora Media Inc.

      172,600           3,077,458   
a  

Red Hat Inc.

      82,900           5,731,706   
a  

Semtech Corp.

      92,200           2,541,954   
a  

ServiceNow Inc.

      33,800           2,293,330   
a,b  

Stratasys Ltd.

      65,700           5,460,327   
a  

Trimble Navigation Ltd.

      104,300           2,768,122   
a  

Twitter Inc.

      161,500           5,793,005   
a  

Vantiv Inc., A

      104,800           3,554,816   
a  

VeriFone Systems Inc.

      109,100           4,058,520   
a  

ViaSat Inc.

      132,000           8,319,960   
a  

Workday Inc.

      27,900           2,276,919   
 

Xilinx Inc.

      104,800           4,536,792   

 

    Annual Report     FSC-11   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

Franklin Small-Mid Cap Growth VIP Fund (continued)

           Shares        Value  
         
 

Common Stocks (continued)

        
 

Information Technology (continued)

        
a  

Yelp Inc.

      102,100         $ 5,587,933   
         

 

 

  
            156,619,364   
         

 

 

  
 

Materials 3.3%

        
a  

Axalta Coating Systems Ltd.

      291,700           7,590,034   
 

Cytec Industries Inc.

      118,600           5,475,762   
 

H.B. Fuller Co.

      93,213           4,150,775   
 

Martin Marietta Materials Inc.

      50,300           5,549,096   
         

 

 

  
            22,765,667   
         

 

 

  
 

Utilities 0.6%

        
a  

Calpine Corp.

      185,800           4,111,754   
         

 

 

  
 

Total Common Stocks (Cost $478,113,747)

           689,192,428   
         

 

 

  
 

Short Term Investments 5.7%

        
 

Money Market Funds (Cost $12,577,150) 1.8%

        
a,c  

Institutional Fiduciary Trust Money Market Portfolio

      12,577,150           12,577,150   
         

 

 

  
d  

Investments from Cash Collateral Received for Loaned Securities
(Cost $27,805,125) 3.9%

        
 

Money Market Funds 3.9%

        
e  

BNY Mellon Overnight Government Fund, 0.072%

      27,805,125           27,805,125   
         

 

 

  
 

Total Investments (Cost $518,496,022) 104.3%

           729,574,703   
 

Other Assets, less Liabilities (4.3)%

           (30,615,790 ) 
         

 

 

  
 

Net Assets 100.0%

         $ 698,958,913   
         

 

 

  

aNon-income producing.

bA portion or all of the security is on loan at December 31, 2014. See Note 1(c).

cSee Note 3(e) regarding investments in Institutional Fiduciary Trust Money Market Portfolio.

dSee Note 1(c) regarding securities on loan.

eThe rate shown is the annualized seven-day yield at period end.

 

FSC-12    Annual Report   |    The accompanying notes are an integral part of these financial statements.    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

Financial Statements

Statement of Assets and Liabilities

December 31, 2014

 

      Franklin Small-Mid
Cap Growth
VIP Fund		  

Assets:

   

Investments in securities:

   

Cost - Unaffiliated issuers

    $ 505,918,872   

Cost - Sweep Money Fund (Note 3e)

      12,577,150   
  

 

 

  

Total cost of investments

    $ 518,496,022   
  

 

 

  

Value - Unaffiliated issuers

    $ 716,997,553   

Value - Sweep Money Fund (Note 3e)

      12,577,150   
  

 

 

  

Total value of investments (includes securities loaned in the amount of $27,364,211)

      729,574,703   

Receivables:

   

Investment securities sold

      1,355,508   

Capital shares sold

      120,400   

Dividends and interest

      186,182   

Due from brokers

      1,362,150   

Other assets

      352   
  

 

 

  

Total assets

      732,599,295   
  

 

 

  

Liabilities:

   

Payables:

   

Investment securities purchased

      2,829,872   

Capital shares redeemed

      455,764   

Management fees

      457,653   

Distribution fees

      255,175   

Funds advanced by custodian

      1,634,580   

Payable upon return of securities loaned

      27,805,125   

Accrued expenses and other liabilities

      202,213   
  

 

 

  

Total liabilities

      33,640,382   
  

 

 

  

Net assets, at value

    $ 698,958,913   
  

 

 

  

Net assets consist of:

   

Paid-in capital

    $ 326,534,889   

Undistributed net investment income

     3,992   

Net unrealized appreciation (depreciation)

      211,078,681   

Accumulated net realized gain (loss)

      161,341,351   
  

 

 

  

Net assets, at value

    $ 698,958,913   
  

 

 

  
Class 1:   

Net assets, at value

    $ 99,802,515   
  

 

 

  

Shares outstanding

      4,000,192   
  

 

 

  

Net asset value and maximum offering price per share

    $ 24.95   
  

 

 

  
Class 2:   

Net assets, at value

    $ 582,772,151   
  

 

 

  

Shares outstanding

      24,733,327   
  

 

 

  

Net asset value and maximum offering price per share

    $ 23.56   
  

 

 

  
Class 4:   

Net assets, at value

    $ 16,384,247   
  

 

 

  

Shares outstanding

      678,798   
  

 

 

  

Net asset value and maximum offering price per share

    $ 24.14   
  

 

 

  

 

    The accompanying notes are an integral part of these financial statements.    |   Annual Report     FSC-13   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FINANCIAL STATEMENTS

 

Statement of Operations

for the year ended December 31, 2014

 

      Franklin Small-Mid
Cap Growth
VIP Fund		  

Investment income:

   

Dividends

    $ 3,595,313   

Income from securities loaned

      138,644   
  

 

 

  

Total investment income

      3,733,957   
  

 

 

  

Expenses:

   

Management fees (Note 3a)

      5,613,906   

Distribution fees: (Note 3c)

   

Class 2

      1,535,545   

Class 4

      61,714   

Custodian fees (Note 4)

      6,985   

Reports to shareholders

      181,592   

Professional fees

      49,497   

Trustees’ fees and expenses

      2,956   

Other

      14,850   
  

 

 

  

Total expenses

      7,467,045   

Expenses waived/paid by affiliates (Note 3e)

      (8,562 ) 
  

 

 

  

Net expenses

      7,458,483   
  

 

 

  

Net investment income (loss)

      (3,724,526 ) 
  

 

 

  

Realized and unrealized gains (losses):

   

Net realized gain (loss) from:

   

Investments

      165,567,639   

Foreign currency transactions

      883   
  

 

 

  

Net realized gain (loss)

      165,568,522   
  

 

 

  

Net change in unrealized appreciation (depreciation) on investments

      (110,422,791 ) 
  

 

 

  

Net realized and unrealized gain (loss)

      55,145,731   
  

 

 

  

Net increase (decrease) in net assets resulting from operations

    $ 51,421,205   
  

 

 

  

 

FSC-14    Annual Report   |    The accompanying notes are an integral part of these financial statements.    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FINANCIAL STATEMENTS

Statements of Changes in Net Assets

 

     Franklin Small-Mid Cap Growth VIP Fund  
     Year Ended December 31,  
      2014        2013  

Increase (decrease) in net assets:

        

Operations:

        

Net investment income (loss)

    $ (3,724,526 )       $ (4,372,919 ) 

Net realized gain (loss) from investments and foreign currency transactions

      165,568,522           148,360,735   

Net change in unrealized appreciation (depreciation) on investments

      (110,422,791 )         103,931,403   
  

 

 

  

Net increase (decrease) in net assets resulting from operations

      51,421,205           247,919,219   
  

 

 

  

Distributions to shareholders from:

        

Net realized gains:

        

Class 1

      (18,164,400 )         (5,305,025 ) 

Class 2

      (120,447,127 )         (39,304,696 ) 

Class 4

      (3,536,394 )         (836,392 ) 
  

 

 

  

Total distributions to shareholders

      (142,147,921 )         (45,446,113 ) 
  

 

 

  

Capital share transactions: (Note 2)

        

Class 1

      12,658,981           (739,844 ) 

Class 2

      (469,072 )         (185,107,692 ) 

Class 4

      (462,764 )         3,163,185   
  

 

 

  

Total capital share transactions

      11,727,145           (182,684,351 ) 
  

 

 

  

Net increase (decrease) in net assets

      (78,999,571 )         19,788,755   

Net assets:

        

Beginning of year

      777,958,484           758,169,729   
  

 

 

  

End of year

    $ 698,958,913         $ 777,958,484   
  

 

 

  

Undistributed net investment income included in net assets:

        

End of year

    $ 3,992         $ 2,662   
  

 

 

  

 

    The accompanying notes are an integral part of these financial statements.    |   Annual Report     FSC-15   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

 

Notes to Financial Statements

 

Franklin Small-Mid Cap Growth VIP Fund

 

1. Organization and Significant Accounting Policies

Franklin Templeton Variable Insurance Products Trust (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end management investment company, consisting of nineteen separate funds and applies the specialized accounting and reporting guidance in U.S. Generally Accepted Accounting Principles (U.S. GAAP). Franklin Small-Mid Cap Growth VIP Fund (Fund) is included in this report. The financial statements of the remaining funds in the Trust are presented separately. Shares of the Fund are generally sold only to insurance company separate accounts to fund the benefits of variable life insurance policies or variable annuity contracts. At December 31, 2014, 41.86% of the Fund’s shares were held through one insurance company. Investment activities of these insurance company separate accounts could have a material impact on the Fund. The Fund offers three classes of shares: Class 1, Class 2, and Class 4. Each class of shares differs by its distribution fees, voting rights on matters affecting a single class and its exchange privilege.

Effective May 1, 2014, Franklin Small-Mid Cap Growth Securities Fund was renamed Franklin Small-Mid Cap Growth VIP Fund.

The following summarizes the Fund’s significant accounting policies.

a. Financial Instrument Valuation

The Fund’s investments in financial instruments are carried at fair value daily. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. The Fund calculates the net asset value (NAV) per share at the close of the New York Stock Exchange (NYSE), generally at 4 p.m. Eastern time (NYSE close) on each day the NYSE is open for trading. Under compliance policies and procedures approved by the Trust’s Board of Trustees (the Board), the Fund’s administrator has responsibility for oversight of valuation, including leading the cross-functional Valuation and Liquidity Oversight Committee (VLOC). The VLOC provides administration and oversight of the Fund’s valuation policies and procedures, which are approved annually by the Board. Among other things, these procedures allow the Fund to utilize independent pricing services, quotations from securities and financial instrument dealers, and other market sources to determine fair value.

Equity securities listed on an exchange or on the NASDAQ National Market System are valued at the last quoted sale price or the official closing price of the day, respectively. Foreign equity securities are valued as of the close of trading on the foreign stock exchange on which the security is primarily traded or as of the NYSE close, whichever is earlier. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at the NYSE close on the day that the value of the security is determined. Over-the-counter (OTC) securities are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. Certain equity securities are valued based upon fundamental characteristics or relationships to similar securities. Investments in open-end mutual funds and non-registered money market funds are valued at the closing NAV.

The Fund has procedures to determine the fair value of financial instruments for which market prices are not reliable or readily available. Under these procedures, the VLOC convenes on a regular basis to review such financial instruments and considers a number of factors, including significant unobservable valuation inputs, when arriving at fair value. The VLOC primarily employs a market-based approach which may use related or comparable assets or liabilities, recent transactions, market multiples, book values, and other relevant information for the investment to determine the fair value of the investment. An income-based valuation approach may also be used in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the investments. Due to the inherent uncertainty of valuations of such investments, the fair values may differ significantly from the values that would have been used had an active market existed. The VLOC employs various methods for calibrating these valuation approaches including a regular review of key inputs and assumptions, transactional back-testing or disposition analysis, and reviews of any related market activity.

Trading in securities on foreign securities stock exchanges and OTC markets may be completed before the daily NYSE close. In addition, trading in certain foreign markets may not take place on every NYSE business day. Occasionally, events occur between the time at which trading in a foreign security is completed and the close of the NYSE that might call into question the reliability of the value of a portfolio security held by the Fund. As a result, differences may arise between the value of

 

 

FSC-16    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

 

Franklin Small-Mid Cap Growth VIP Fund (continued)

 

the Fund’s portfolio securities as determined at the foreign market close and the latest indications of value at the close of the NYSE. In order to minimize the potential for these differences, the VLOC monitors price movements following the close of trading in foreign stock markets through a series of country specific market proxies (such as baskets of American Depositary Receipts, futures contracts and exchange traded funds). These price movements are measured against established trigger thresholds for each specific market proxy to assist in determining if an event has occurred that may call into question the reliability of the values of the foreign securities held by the Fund. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services.

Also, when the last day of the reporting period is a non-business day, certain foreign markets may be open on those days that the NYSE is closed, which could result in differences between the value of the Fund’s portfolio securities on the last business day and the last calendar day of the reporting period. Any significant security valuation changes due to an open foreign market are adjusted and reflected by the Fund for financial reporting purposes.

b. Foreign Currency Translation

Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. The Fund may enter into foreign currency exchange contracts to facilitate transactions denominated in a foreign currency. Purchases and sales of securities, income and expense items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. Portfolio securities and assets and liabilities denominated in foreign currencies contain risks that those currencies will decline in value relative to the U.S. dollar. Occasionally, events may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the Board.

The Fund does not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments on the Statement of Operations.

Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period.

c. Securities Lending

The Fund participates in an agency based securities lending program. The Fund receives cash collateral against the loaned securities in an amount equal to at least 102% of the fair value of the loaned securities. Collateral is maintained over the life of the loan in an amount not less than 100% of the fair value of loaned securities, as determined at the close of fund business each day; any additional collateral required due to changes in security values is delivered to the Fund on the next business day. The collateral is invested in a non-registered money fund as indicated on the Statement of Investments. The Fund receives income from the investment of cash collateral, in addition to lending fees and rebates paid by the borrower. The Fund bears the market risk with respect to the collateral investment, securities loaned, and the risk that the agent may default on its obligations to the Fund. The securities lending agent has agreed to indemnify the Fund in the event of default by a third party borrower.

d. Income and Deferred Taxes

It is the Fund’s policy to qualify as a regulated investment company under the Internal Revenue Code. The Fund intends to distribute to shareholders substantially all of its taxable income and net realized gains to relieve it from federal income and if applicable, excise taxes. As a result, no provision for U.S. federal income taxes is required.

The Fund may be subject to foreign taxation related to income received, capital gains on the sale of securities and certain foreign currency transactions in the foreign jurisdictions in which it invests. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist in the foreign markets in which the Fund invests. When a capital gain tax is determined to apply the Fund records an estimated deferred tax liability in an amount that would be payable if the securities were disposed of on the valuation date.

 

 

    Annual Report     FSC-17   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Franklin Small-Mid Cap Growth VIP Fund (continued)

1. Organization and Significant Accounting Policies (continued)

d. Income and Deferred Taxes (continued)

The Fund recognizes the tax benefits of uncertain tax positions only when the position is “more likely than not” to be sustained upon examination by the tax authorities based on the technical merits of the tax position. As of December 31, 2014, and for all open tax years, the Fund has determined that no liability for unrecognized tax benefits is required in the Fund’s financial statements related to uncertain tax positions taken on a tax return (or expected to be taken on future tax returns). Open tax years are those that remain subject to examination and are based on each tax jurisdiction statute of limitation.

e. Security Transactions, Investment Income, Expenses and Distributions

Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Estimated expenses are accrued daily. Dividend income is recorded on the ex-dividend date except for certain foreign securities where the dividend rate is not available. In such cases, the dividend is recorded as soon as the information is received by the Fund. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with U.S. GAAP. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods.

Common expenses incurred by the Trust are allocated among the funds based on the ratio of net assets of each fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense.

Realized and unrealized gains and losses and net investment income, not including class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions, by class, are generally due to differences in class specific expenses.

f. Accounting Estimates

The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates.

g. Guarantees and Indemnifications

Under the Trust’s organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, on behalf of the Fund, enters into contracts with service providers that contain general indemnification clauses. The Trust’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote.

 

FSC-18    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

 

Franklin Small-Mid Cap Growth VIP Fund (continued)

 

2. Shares of Beneficial Interest

At December 31, 2014, there were an unlimited number of shares authorized (without par value). Transactions in the Fund’s shares were as follows:

 

     Year Ended December 31,  
     2014          2013  
      Shares      Amount           Shares      Amount  
Class 1 Shares:              

Shares sold

      274,487       $ 7,229,775           208,707       $ 5,257,737   

Shares issued in reinvestment of distributions

      759,699         18,164,400           224,030         5,305,025   

Shares redeemed

      (487,310 )       (12,735,194 )         (452,875 )       (11,302,606 ) 
  

 

 

  

Net increase (decrease)

      546,876       $ 12,658,981           (20,138 )     $ (739,844 ) 
  

 

 

  
Class 2 Shares:              

Shares sold

      897,666       $ 22,309,519           1,537,143       $ 36,852,173   

Shares issued in reinvestment of distributions

      5,327,162         120,447,127           1,732,248         39,304,696   

Shares redeemed

      (5,821,755 )       (143,225,718 )         (10,791,872 )       (261,264,561 ) 
  

 

 

  

Net increase (decrease)

      403,073       $ (469,072 )         (7,522,481 )     $ (185,107,692 ) 
  

 

 

  
Class 4 Shares:              

Shares sold

      67,020       $ 1,726,663           272,840       $ 6,706,822   

Shares issued on reinvestment of distributions

      152,628         3,536,394           36,098         836,392   

Shares redeemed

      (231,062 )       (5,725,821 )         (177,757 )       (4,380,029 ) 
  

 

 

  

Net increase (decrease)

      (11,414 )     $ (462,764 )         131,181       $ 3,163,185   
  

 

 

  

3. Transactions With Affiliates

Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Fund are also officers and/or directors of the following subsidiaries:

 

Subsidiary    Affiliation

Franklin Advisers, Inc. (Advisers)

   

Investment manager

Franklin Templeton Services, LLC (FT Services)

   

Administrative manager

Franklin Templeton Distributors, Inc. (Distributors)

   

Principal underwriter

Franklin Templeton Investor Services, LLC (Investor Services)

   

Transfer agent

a. Management Fees

The Fund pays an investment management fee to Advisers based on the average daily net assets of the Fund as follows:

 

Annualized Fee Rate    Net Assets

0.800%

   

Up to and including $500 million

0.700%

   

Over $500 million, up to and including $1 billion

0.650%

   

Over $1 billion, up to and including $1.5 billion

0.600%

   

Over $1.5 billion, up to and including $6.5 billion

0.575%

   

Over $6.5 billion, up to and including $11.5 billion

0.550%

   

Over $11.5 billion, up to and including $16.5 billion

0.540%

   

Over $16.5 billion, up to and including $19 billion

0.530%

   

Over $19 billion, up to and including $21.5 billion

0.520%

   

In excess of $21.5 billion

 

    Annual Report     FSC-19   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Franklin Small-Mid Cap Growth VIP Fund (continued)

3. Transactions With Affiliates (continued)

b. Administrative Fees

Under an agreement with Advisers, FT Services provides administrative services to the Fund. The fee is paid by Advisers based on the Fund’s average daily net assets, and is not an additional expense of the Fund.

c. Distribution Fees

The Board has adopted distribution plans for Class 2 and Class 4 shares pursuant to Rule 12b-1 under the 1940 Act. Under the Fund’s compensation distribution plans, the Fund pays Distributors for costs incurred in connection with the servicing, sale and distribution of the Fund’s shares up to 0.35% per year of its average daily net assets of each class. Some distribution fees are not charged on shares held by affiliates. The Board has agreed to limit the current rate to 0.25% per year for Class 2. The plan year, for purposes of monitoring compliance with the maximum annual plan rates, is February 1 through January 31.

d. Transfer Agent Fees

Investor Services, under terms of an agreement, performs shareholder servicing for the Fund and is not paid by the Fund for the services.

e. Investments in Institutional Fiduciary Trust Money Market Portfolio

The Fund invests in Institutional Fiduciary Trust Money Market Portfolio (Sweep Money Fund), an affiliated open-end management investment company. Management fees paid by the Fund are waived on assets invested in the Sweep Money Fund, as noted on the Statement of Operations, in an amount not to exceed the management and administrative fees paid directly or indirectly by the Sweep Money Fund. Prior to January 1, 2014, the waiver was accounted for as a reduction to management fees.

4. Expense Offset Arrangement

The Fund has entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Fund’s custodian expenses. During the year ended December 31, 2014, there were no credits earned.

5. Income Taxes

The tax character of distributions paid during the years ended December 31, 2014 and 2013, was as follows:

 

     2014     2013  

Distributions paid from:

     

Ordinary income

    $ 16,670,971      $ —   

Long term capital gain

      125,476,950        45,446,113   
  

 

 

  
   $ 142,147,921      $ 45,446,113   
  

 

 

  

At December 31, 2014, the cost of investments, net unrealized appreciation (depreciation), undistributed ordinary income and undistributed long term capital gains for income tax purposes were as follows:

 

Cost of investments

    $ 519,477,618   
  

 

 

  

Unrealized appreciation

    $ 225,507,700   

Unrealized depreciation

      (15,410,615 ) 
  

 

 

  

Net unrealized appreciation (depreciation)

    $ 210,097,085   
  

 

 

  

Undistributed ordinary income

    $ 11,956,994   

Undistributed long term capital gains

      150,369,944   
  

 

 

  

Distributable earnings

    $ 162,326,938   
  

 

 

  

 

FSC-20    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Franklin Small-Mid Cap Growth VIP Fund (continued)

Differences between income and/or capital gains as determined on a book basis and a tax basis are primarily due to differing treatments of wash sales.

6. Investment Transactions

Purchases and sales of investments (excluding short term securities) for the year ended December 31, 2014, aggregated $353,539,689 and $488,663,803, respectively.

7. Credit Facility

The Fund, together with other U.S. registered and foreign investment funds (collectively, Borrowers), managed by Franklin Templeton Investments, are borrowers in a joint syndicated senior unsecured credit facility totaling $1.5 billion (Global Credit Facility) which matured on February 13, 2015. This Global Credit Facility provides a source of funds to the Borrowers for temporary and emergency purposes, including the ability to meet future unanticipated or unusually large redemption requests. The Borrowers expect to renew the Global Credit Facility for a total of $2 billion effective February 13, 2015, which matures on February 12, 2016.

Under the terms of the Global Credit Facility, the Fund shall, in addition to interest charged on any borrowings made by the Fund and other costs incurred by the Fund, pay its share of fees and expenses incurred in connection with the implementation and maintenance of the Global Credit Facility, based upon its relative share of the aggregate net assets of all of the Borrowers, including an annual commitment fee of 0.07% based upon the unused portion of the Global Credit Facility. These fees are reflected in other expenses on the Statement of Operations. During the year ended December 31, 2014, the Fund did not use the Global Credit Facility.

8. Fair Value Measurements

The Fund follows a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Fund’s own market assumptions (unobservable inputs). These inputs are used in determining the value of the Fund’s financial instruments and are summarized in the following fair value hierarchy:

 

  •   Level 1 – quoted prices in active markets for identical financial instruments
  •   Level 2 – other significant observable inputs (including quoted prices for similar financial instruments, interest rates, prepayment speed, credit risk, etc.)
  •   Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of financial instruments)

The input levels are not necessarily an indication of the risk or liquidity associated with financial instruments at that level.

For movements between the levels within the fair value hierarchy, the Fund has adopted a policy of recognizing the transfers as of the date of the underlying event which caused the movement.

A summary of inputs used as of December 31, 2014, in valuing the Fund’s assets carried at fair value, is as follows:

 

      Level 1     Level 2     Level 3     Total  
Assets:         

Investments in Securities:

         

Equity Investmentsa

    $ 689,192,428      $ —      $  —      $ 689,192,428   

Short Term Investments

      12,577,150        27,805,125        —        40,382,275   
  

 

 

  

Total Investments in Securities

    $ 701,769,578     $ 27,805,125     $ —      $ 729,574,703   
  

 

 

  

aFor detailed categories, see the accompanying Statement of Investments.

 

    Annual Report     FSC-21   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

 

Franklin Small-Mid Cap Growth VIP Fund (continued)

 

9. New Accounting Pronouncements

In June 2014, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2014-11, Transfers and Servicing (Topic 860), Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. The ASU changes the accounting for certain repurchase agreements and expands disclosure requirements related to repurchase agreements, securities lending, repurchase-to-maturity and similar transactions. The ASU is effective for interim and annual reporting periods beginning after December 15, 2014. Management has reviewed the requirements and believes the adoption of this ASU will not have a material impact on the financial statements.

10. Subsequent Events

The Fund has evaluated subsequent events through the issuance of the financial statements and determined that no events have occurred that require disclosure other than those already disclosed in the financial statements.

 

FSC-22    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

Report of Independent Registered Public Accounting Firm

Franklin Small-Mid Cap Growth VIP Fund

To the Board of Trustees and Shareholders of Franklin Templeton Variable Insurance Products Trust

In our opinion, the accompanying statement of assets and liabilities, including the statement of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Franklin Small-Mid Cap Growth VIP Fund (the “Fund”) at December 31, 2014, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements 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 are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2014 by correspondence with the custodian, transfer agent and brokers, provides a reasonable basis for our opinion.

PricewaterhouseCoopers LLP

San Francisco, California

February 13, 2015

 

    Annual Report     FSC-23   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

Tax Information (unaudited)

Franklin Small-Mid Cap Growth VIP Fund

Under Section 852(b)(3)(C) of the Internal Revenue Code (Code), the Fund hereby reports the maximum amount allowable but no less than $125,476,950 as a long term capital gain dividend for the fiscal year ended December 31, 2014.

Under Section 854(b)(1)(A) of the Code, the Fund hereby reports 19.56% of the ordinary income dividends as income qualifying for the dividends received deduction for the fiscal year ended December 31, 2014.

 

  FSC-24       Annual Report    

Franklin Strategic Income VIP Fund

(Formerly, Franklin Strategic Income Securities Fund)

This annual report for Franklin Strategic Income VIP Fund covers the fiscal year ended December 31, 2014.

Class 4 Performance Summary as of December 31, 2014

Average annual total return of Class 4 shares* represents the average annual change in value, assuming reinvestment of dividends and capital gains. Average returns smooth out variations in returns, which can be significant; they are not the same as year-by-year results.

 

Periods ended 12/31/14    1-Year        5-Year        10-Year  

Average Annual Total Return

      +1.75%           +6.09%           +5.78%   

*For the period beginning 2/29/08, Class 4 performance reflects a 12b-1 fee expense of 0.35% per year, which affects future performance. Class 4 performance prior to 2/29/08 reflects historical Class 1 performance, which does not have a 12b-1 fee expense. Since 2/29/08 (effective date), the average annual total return of Class 4 shares was +6.00%. The Fund has a fee waiver associated with its investments in a Franklin Templeton money fund, contractually guaranteed through at least its current fiscal year-end. Fund investment results reflect the fee waiver, to the extent applicable; without this reduction, the results would have been lower.

Performance reflects the Fund’s Class 4 operating expenses, but does not include any contract fees, expenses or sales charges. If they had been included, performance would be lower. These charges and deductions, particularly for variable life policies, can have a significant effect on contract values and insurance benefits. See the contract prospectus for a complete description of these expenses, including sales charges.

Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares. Current performance may differ from figures shown.

Total Return Index Comparison for a Hypothetical $10,000 Investment (1/1/05–12/31/14)

The graph below shows the change in value of a hypothetical $10,000 investment in the Fund over the indicated period and includes reinvestment of any income or distributions. The Fund’s performance* is compared to the performance of the Barclays U.S. Aggregate Index and the Lipper Multi-Sector Income Funds Classification Average. One cannot invest directly in an index, and an index is not representative of the Fund’s portfolio. Please see Important Notes to Performance Information preceding the Fund Summaries.

 

LOGO

**Source: Morningstar. Please see Index Descriptions following the Fund Summaries.

***Source: Lipper, a Thomson Reuters Company. Please see Index Descriptions following the Fund Summaries.

 

    Annual Report     FSI-1   

FRANKLIN STRATEGIC INCOME VIP FUND

Fund Goals and Main Investments

Franklin Strategic Income VIP Fund seeks a high level of current income, with capital appreciation over the long term as a secondary goal. Under normal market conditions, the Fund invests primarily to predominantly in U.S. and foreign debt securities, including those in emerging markets.

Fund Risks

All investments involve risks, including possible loss of principal. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in the Fund adjust to a rise in interest rates, the Fund’s share price may decline. Changes in the financial strength of a bond issuer or in a bond’s credit rating may affect its value. High yields reflect the higher credit risks associated with certain lower rated securities held in the portfolio. Floating rate loans and high yield corporate bonds are rated below investment grade and are subject to greater risk of default, which could result in loss of principal — a risk that may be heightened in a slowing economy. The risks of foreign securities include currency fluctuations and political uncertainty. Investments in developing markets involve heightened risks related to the same factors, in addition to those associated with their relatively small size and lesser liquidity. Investing in derivative securities and the use of foreign currency techniques involve special risks as such may not achieve the anticipated benefits and/or may result in losses to the Fund. The Fund is actively managed but there is no guarantee that the manager’s investment decisions will produce the desired results. The Fund’s prospectus also includes a description of the main investment risks.

Performance Overview

You can find the Fund’s one-year total return in the Performance Summary. For comparison, the Fund’s benchmark, the Barclays U.S. Aggregate Index, delivered a +5.97% total return for the period under review.1 The Fund’s peers, as measured by the Lipper Multi-Sector Income Funds Classification Average, produced a +3.03% return.2

Economic and Market Overview

The U.S. economy continued to grow during the year ended December 31, 2014, underpinned in some quarters by manufacturing activity, consumer and business spending, and federal

defense spending. Home sales experienced weakness resulting from reduced inventory, higher mortgage rates and tight credit requirements but began to recover in May as mortgage rates declined. Home prices stayed higher than a year earlier. Retail sales generally improved, supported by job growth and lower gasoline prices in the latter part of 2014. The unemployment rate declined to 5.6% in December 2014 from 6.7% in December 2013.3 Inflation, as measured by the Consumer Price Index, remained low.

In January 2014, the U.S. Federal Reserve Board (Fed) began reducing its large-scale bond purchases $10 billion a month and ended the buying program in October. But it continued its practice of maintaining holdings of longer term securities at sizable levels. The Fed believed underlying economic strength could support ongoing progress in labor market conditions. The Fed also noted that although inflation might remain low in the near term, the likelihood of inflation running persistently below 2% had diminished. Toward period-end, the Fed stated that it could be patient with regard to raising interest rates and that the interest rate might not rise for at least a couple of meetings, possibly implying at least the first two meetings of 2015.

The 10-year Treasury yield declined from 3.04% at the beginning of the period to 2.17% at period-end, as investors shifted to less risky assets given the crises in Ukraine and the Middle East, weak economic data in Europe and Japan, record-low bond yields and lower Treasury issuance.

The U.S. dollar broadly strengthened over the course of the year while oil prices weakened significantly, particularly in the final months. Global liquidity from the Bank of Japan (BOJ) and the European Central Bank (ECB) helped dampen volatility in emerging markets, and it helped compensate for the withdrawal of liquidity from the ending of the Fed’s bond buying program in October. Some emerging market economies had healthy current account and fiscal balances with strong export-driven economies, while others struggled with deficits and economic imbalances.

Investment Strategy

We allocate our investments among the various types of debt available based on our assessment of changing economic, global market, industry and issuer conditions. We use a top-down analysis of macroeconomic trends, combined with a bottom-up fundamental analysis of market sectors, industries

 

 

1. Source: Morningstar.

2. Source: Lipper, a Thomson Reuters Company.

One cannot invest directly in an index, and an index is not representative of the Fund’s portfolio. Please see Index Descriptions following the Fund Summaries.

3. Source: Bureau of Labor Statistics.

 

FSI-2    Annual Report    

FRANKLIN STRATEGIC INCOME VIP FUND

and issuers, seeking to take advantage of varying sector reactions to economic events. For example, we may evaluate business cycles, yield curves, country risk, and the relative interest rates among currencies, and values between and within markets. In selecting debt securities, we generally conduct our own analysis of the security’s intrinsic value rather than simply relying on the coupon rate or rating. We may also enter into various transactions involving certain currency-, interest rate- or credit-related derivative instruments.

Manager’s Discussion

Contrary to year-end 2013 consensus forecasts, longer term U.S. interest rates moved markedly lower over the course of 2014. Initially, weaker first-quarter economic growth following a cold winter led rates lower. However, even as the U.S. economy recovered during the remainder of the year, fairly subdued levels of inflation, helped by declining energy prices, as well as some risk aversion due to geopolitical conflicts from Russia to the Middle East, caused rates to remain low by period-end. The Fed announced the end of new asset purchases as part of its quantitative easing (QE) program, but an expected ramp-up in QE by the ECB and the BOJ also maintained global demand for G3 (U.S., eurozone and Japan) government bonds. Although periods of risk aversion did cause financial market volatility during the period, for the past year domestic equity markets rose, and the Standard & Poor’s® 500 Index gained 13.69%, supported by corporate earnings and an outlook for improving U.S. economic growth heading into 2015.1

The Fund posted a positive total return for the review period but lagged the Barclays U.S. Aggregate Index and the Lipper Multi-Sector Income Funds Classification Average. Given the decline in longer term rates during the period, longer duration U.S. fixed income securities performed well. Additionally, high yield corporates underperformed as did certain non-U.S. dollar government bond sectors due to a stronger U.S. dollar. Consequently, relative to the Fund’s benchmarks, the Fund’s heavier weightings to high yield and global bonds detracted from performance, as did the Fund’s lesser exposure to U.S. interest rate duration than the benchmark. In contrast, the Fund’s short position in the Japanese yen aided returns given weakness in the yen relative to the U.S. dollar. The Fund’s longer duration municipal bonds, investment-grade corporate holdings and commercial mortgage-backed securities also added to returns, as did exposure to the leveraged bank loan sector.

 

 

LOGO

*Figures reflect certain derivatives held in the portfolio (or their underlying reference assets) and may not total 100% or may be negative due to rounding, use of derivatives, unsettled trades or other factors. The breakdown may not match the Statement of Investments (SOI).

The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund’s SOI.

 

What is duration?

Duration is a measure of a bond’s price sensitivity to interest rate changes. In general, a portfolio of securities with a lower duration can be expected to be less sensitive to interest rate changes than a portfolio with a higher duration.

In the corporate sectors, credit fundamentals remained largely supportive, with growing corporate earnings and relatively subdued default rates. However, several years into the economic recovery, management teams have been getting more comfortable taking on incremental leverage for certain capital projects, mergers and acquisitions activity, and shareholder remuneration. Moreover, weakness in certain commodity prices, including coal, iron ore and oil, negatively impacted sentiment in the

 

 

    Annual Report     FSI-3   

FRANKLIN STRATEGIC INCOME VIP FUND

 

mining and energy sectors during the period. A significant drop in crude oil prices caused meaningful downward pressure on high yield energy bonds during 2014’s fourth quarter. Finally, relatively robust new-issue supply combined with retail fund outflows in the high yield and leveraged loans sectors also added some downward pressure on security prices. Overall, with what we believed was still a supportive intermediate-term fundamental backdrop, the Fund increased its exposure to leveraged loans during the period while raising its weighting in high yield corporate bonds during the latter half of 2014. However, as investment-grade corporate bonds tended to have longer interest rate duration and appreciated during the period, the Fund reduced its exposure to this asset class.

Internationally, given the stronger outlook for the U.S. economy compared to other foreign developed markets, the broad trade-weighted U.S. dollar rallied during the period. As a result, the Fund’s position in certain non-U.S. dollar global bonds and currencies detracted from performance, with particular weakness in the Brazilian real, Chilean peso, Mexican peso and Uruguayan peso. Conversely, the Fund’s short position in the Japanese yen, through the use of currency forwards, added to returns, as that currency declined relative to the U.S. dollar. Overall, the Fund reduced its non-U.S. dollar weighting during the year, given an outlook for stronger relative U.S. economic growth. The Fund maintained fairly modest exposure to hard currency emerging market bonds, although a position in Ukraine debt securities detracted from performance given the nation’s conflict with Russia.

 

What is a currency forward contract?

A currency forward contract, or a currency forward, is an agreement between the Fund and a counterparty to buy or sell a foreign currency at a specific exchange rate on a future date.

With the decline in longer term U.S. rates, the more rate-sensitive fixed income sectors (Treasuries, agencies and mortgage-backed

securities) generally posted positive returns during the period. The Fund maintained a lower exposure to these sectors, preferring higher income opportunities in the corporate credit markets.

The combination of lower U.S. rates and some inflows into dedicated municipal bond funds helped to support performance in this sector. However, concerns regarding Puerto Rico’s debt burden as well as the commonwealth’s prospective treatment of certain municipal obligations in a restructuring scenario put pressure on select issues over the past year. Given overall strong performance from municipal securities, the Fund reduced its exposure to municipal debt during the period.

The portfolio utilized derivatives, including currency forwards and credit derivatives.

 

What is a credit derivative?

A credit derivative is a contract agreement between the Fund and a counterparty that is principally used by the Fund to gain or increase exposure to certain high yield securities or segments of the high yield bond market and/or to hedge against credit risk.

Thank you for your participation in Franklin Strategic Income VIP Fund. We look forward to serving your future investment needs.

The foregoing information reflects our analysis, opinions and portfolio holdings as of December 31, 2014, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.

 

 

FSI-4    Annual Report    

FRANKLIN STRATEGIC INCOME VIP FUND

Class 4 Fund Expenses

As an investor in a variable insurance contract (Contract) that indirectly provides for investment in an underlying mutual fund, you can incur transaction and/or ongoing expenses at both the Fund level and the Contract level.

 

•   Transaction expenses can include sales charges (loads) on purchases, redemption fees, surrender fees, transfer fees and premium taxes.

 

•   Ongoing expenses can include management fees, distribution and service (12b-1) fees, contract fees, annual maintenance fees, mortality and expense risk fees and other fees and expenses. All mutual funds and Contracts have some types of ongoing expenses.

The expenses shown in the table are meant to highlight ongoing expenses at the Fund level only and do not include ongoing expenses at the Contract level, or transaction expenses at either the Fund or Contract level. While the Fund does not have transaction expenses, if the transaction and ongoing expenses at the Contract level were included, the expenses shown below would be higher. You should consult your Contract prospectus or disclosure document for more information.

The table shows Fund-level ongoing expenses and can help you understand these expenses and compare them with those of other mutual funds offered through the Contract. The table assumes a $1,000 investment held for the six months indicated. Please refer to the Fund prospectus for additional information on operating expenses.

Actual Fund Expenses

The first line (Actual) of the table provides actual account values and expenses. The “Ending Account Value” is derived from the Fund’s actual return, which includes the effect of ongoing Fund expenses, but does not include the effect of ongoing Contract expenses.

You can estimate the Fund-level expenses you incurred during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:

 

1. Divide your account value by $1,000.

If an account had an $8,600 value,

then $8,600 ÷ $1,000 = 8.6.

 

2. Multiply the result by the number under the heading “Fund-Level Expenses Incurred During Period.”

If Fund-Level Expenses Incurred During Period were $7.50, then 8.6 × $7.50 = $64.50.

In this illustration, the estimated expenses incurred this period at the Fund level are $64.50.

Hypothetical Example for Comparison with Other Mutual Funds

Information in the second line (Hypothetical) of the table can help you compare ongoing expenses of the Fund with those of other mutual funds offered through the Contract. This information may not be used to estimate the actual ending account balance or expenses you incurred during the period. The hypothetical “Ending Account Value” is based on the Fund’s actual expense ratio and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Fund-Level Expenses Incurred During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds offered through a Contract.

 
Class 4  

Beginning Account

Value 7/1/14

      Ending Account
Value 12/31/14		     

Fund-Level Expenses
Incurred During Period*

7/1/14–12/31/14

  

Actual

     $1,000         $   977.60         $4.84   

Hypothetical (5% return before expenses)

     $1,000         $1,020.32         $4.94   

*Expenses are calculated using the most recent six-month annualized expense ratio, net of expense waivers, for the Fund’s Class 4 shares (0.97%), which does not include any ongoing expenses of the Contract for which the Fund is an investment option, multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period.

 

    Annual Report     FSI-5   

SUPPLEMENT DATED DECEMBER 15, 2014

TO THE PROSPECTUSES DATED MAY 1, 2014

OF

FRANKLIN STRATEGIC INCOME VIP FUND

(A series of Franklin Templeton Variable Insurance Products Trust)

The prospectus is amended as follows:

I.  The fourth paragraph of the Fund Summary “Principal Investment Strategies” section beginning on page FSI-S1 is replaced with the following:

For purposes of pursuing its investment goals, the Fund regularly enters into various currency-related transactions involving derivative instruments, including currency and cross currency forwards, currency swaps, and currency and currency index futures contracts. The Fund may also enter into interest rate and credit-related transactions involving derivative instruments, including interest rate, fixed income total return and credit default swaps and bond/interest rate futures contracts. The use of these derivative transactions may allow the Fund to obtain net long or net short exposures to selected currencies, interest rates, durations or credit risks. These derivative instruments may be used for hedging purposes, to enhance Fund returns or to obtain exposure to various market sectors.

II.  The Fund Summary “Principal Risks – Derivative Instruments” section on page FSI-S3 is replaced with the following:

Derivative Instruments  The performance of derivative instruments depends largely on the performance of an underlying instrument, such as a currency, security, interest rate or index, and such instruments often have risks similar to the underlying instrument, in addition to other risks. Derivatives involve costs and can create economic leverage in the Fund’s portfolio which may result in significant volatility and cause the Fund to participate in losses (as well as gains) in an amount that exceeds the Fund’s initial investment. Other risks include illiquidity, mispricing or improper valuation of the derivative instrument, and imperfect correlation between the value of the derivative and the underlying instrument so that the Fund may not realize the intended benefits. When used for hedging, the change in value of the derivative may also not correlate specifically with the currency, security or other risk being hedged. With over-the-counter derivatives, there is the risk that the other party to the transaction will fail to perform.

III.  The ninth paragraph of the Fund Details “Principal Investment Policies and Practices” section beginning on page FSI-D1 is replaced with the following:

For purposes of pursuing its investment goals, the Fund regularly enters into currency-related transactions involving derivative instruments, including currency and cross currency forwards, currency swaps, currency and currency index futures contracts, and currency options. The Fund may also enter into interest rate and credit-related transactions involving certain derivative instruments, including interest rate and credit default swaps and interest rate and/or bond futures contracts (including U.S. Treasury futures contracts) and options thereon, and fixed income total return and inflation index swaps. The use of such derivative transactions may allow the Fund to obtain net long or net short exposures to selected currencies, interest rates, countries, durations or credit risks. The Fund may use currency, interest rate or credit-related derivative strategies for the purposes of enhancing Fund returns, increasing liquidity,

 

  FSI-6            

gaining exposure to particular instruments in more efficient or less expensive ways and/or hedging risks relating to changes in currency exchange rates, credit risks, interest rates and other market factors.

IV.  The fourteenth paragraph of the Fund Details “Principal Investment Policies and Practices” section beginning on page FSI-D1 is replaced with the following:

Swap agreements, such as interest rate, fixed income total return, currency, inflation index and credit default swaps, are contracts between the Fund and another party (the swap counterparty) involving the exchange of payments on specified terms over periods ranging from a few days to multiple years. A swap agreement may be negotiated bilaterally and traded over-the-counter (OTC) between the two parties (for an uncleared swap) or, in some instances, must be transacted through a futures commission merchant (FCM) and cleared through a clearinghouse that serves as a central counterparty (for a cleared swap). In a basic swap transaction, the Fund agrees with the swap counterparty to exchange the returns (or differentials in rates of return) earned or realized on a particular “notional amount” of underlying instruments. The notional amount is the set amount selected by the parties as the basis on which to calculate the obligations that they have agreed to exchange. The parties typically do not actually exchange the notional amount. Instead, they agree to exchange the returns that would be earned or realized if the notional amount were invested in given instruments or at given interest rates.

V.  The Fund Details “Principal Investment Policies and Practices” section beginning on page FSI-D1 is revised to add the following paragraph immediately following the paragraph that begins with “An interest rate swap…”:

A total return swap is an agreement between two parties, pursuant to which one pays (and the other receives) an amount equal to the total return (including, typically, income and capital gains distributions, principal prepayment or credit losses) of an underlying reference asset (e.g., a note, bond or securities index) in exchange for a regular payment, at a floating rate based on LIBOR, or alternatively at a fixed rate or the total rate of return on another financial instrument. A Fund may take either position in a total return swap (i.e., the Fund may receive or pay the total return on the underlying reference asset).

 

Please keep this supplement with your prospectus for future reference.

 

          FSI-7   

SUPPLEMENT DATED DECEMBER 15, 2014

TO THE STATEMENT OF ADDITIONAL INFORMATION

DATED MAY 1, 2014

OF

FRANKLIN STRATEGIC INCOME VIP FUND

(A series of Franklin Templeton Variable Insurance Products Trust)

The statement of additional information is amended as follows:

I.  The following is added to the “Glossary of Investments, Techniques, Strategies and Their Risks – Derivative instruments – Swaps” section:

Fixed income total return swaps. Generally, a total return swap is an agreement between two parties, pursuant to which one pays (and the other receives) an amount equal to the total return (including, typically, income and capital gains distributions, principal prepayment or credit losses) of an underlying reference asset (e.g., a note, bond or securities index) in exchange for a regular payment, at a floating rate based on LIBOR, or alternatively at a fixed rate or the total rate of return on another financial instrument. A Fund may take either position in a total return swap (i.e., the Fund may receive or pay the total return on the underlying reference asset). A fixed income total return swap may be written on many different kinds of underlying reference assets, and may include different indices for various kinds of debt securities (e.g., U.S. investment grade bonds, high yield bonds or emerging market bonds). A fixed income total return swap is similar to other swaps, such as interest rate swaps where payment streams are exchanged between a fund and the counterparty.

 

 

Please keep this supplement with your statement of additional information for future reference.

 

FSI-8         

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

Financial Highlights

Franklin Strategic Income VIP Fund

     Year Ended December 31,  
      2014      2013      2012      2011      2010  
Class 1               
Per share operating performance
(for a share outstanding throughout the year)		               

Net asset value, beginning of year

      $12.64         $13.17         $12.55         $12.99         $12.28   
  

 

 

  
Income from investment operationsa:               

Net investment incomeb

      0.54         0.59         0.65         0.69         0.72   

Net realized and unrealized gains (losses)

      (0.25 )       (0.15 )       0.92         (0.32 )       0.61   
  

 

 

  

Total from investment operations

      0.29         0.44         1.57         0.37         1.33   
  

 

 

  
Less distributions from:               

Net investment income and net foreign currency gains

      (0.78 )       (0.80 )       (0.93 )       (0.81 )       (0.62 ) 

Net realized gains

      (0.25 )       (0.17 )       (0.02 )       —         —   
  

 

 

  

Total distributions

      (1.03 )       (0.97 )       (0.95 )       (0.81 )       (0.62 ) 
  

 

 

  

Net asset value, end of year

      $11.90         $12.64         $13.17         $12.55         $12.99   
  

 

 

  

Total returnc

      2.12%         3.52%         13.12%         2.78%         11.21%   
Ratios to average net assets               

Expenses before waiver and payments by affiliates

      0.63%         0.60%         0.58%         0.60%         0.59%   

Expenses net of waiver and payments by affiliates

      0.62% d       0.60% d       0.58%         0.60% d       0.59% d 

Net investment income

      4.34%         4.58%         5.04%         5.36%         5.71%   
Supplemental data               

Net assets, end of year (000’s)

      $574,850         $705,493         $1,019,537         $1,043,690         $1,195,149   

Portfolio turnover rate

      55.64%         48.06%         49.98%         55.65%         56.46%   

Portfolio turnover rate excluding mortgage dollar rollse

      48.86%         47.01%         48.75%         55.65%         56.46%   

aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.

bBased on average daily shares outstanding.

cTotal return does not include fees, charges or expenses imposed by the variable annuity and life insurance contracts for which Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle.

dBenefit of expense reduction rounds to less than 0.01%.

eSee Note 1(h) regarding mortgage dollar rolls.

 

    The accompanying notes are an integral part of these financial statements.    |   Annual Report     FSI-9   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FINANCIAL HIGHLIGHTS

Franklin Strategic Income VIP Fund (continued)

     Year Ended December 31,  
      2014      2013      2012      2011      2010  
Class 2               
Per share operating performance
(for a share outstanding throughout the year)		               

Net asset value, beginning of year

      $12.30         $12.84         $12.27         $12.72         $12.05   
  

 

 

  
Income from investment operationsa:               

Net investment incomeb

      0.49         0.54         0.60         0.64         0.68   

Net realized and unrealized gains (losses)

      (0.24 )       (0.13 )       0.89         (0.30 )       0.59   
  

 

 

  

Total from investment operations

      0.25         0.41         1.49         0.34         1.27   
  

 

 

  
Less distributions from:               

Net investment income and net foreign currency gains

      (0.75 )       (0.78 )       (0.90 )       (0.79 )       (0.60 ) 

Net realized gains

      (0.25 )       (0.17 )       (0.02 )       —         —   
  

 

 

  

Total distributions

      (1.00 )       (0.95 )       (0.92 )       (0.79 )       (0.60 ) 
  

 

 

  

Net asset value, end of year

      $11.55         $12.30         $12.84         $12.27         $12.72   
  

 

 

  

Total returnc

      1.86%         3.32%         12.75%         2.57%         10.91%   
Ratios to average net assets               

Expenses before waiver and payments by affiliates

      0.88%         0.85%         0.83%         0.85%         0.84%   

Expenses net of waiver and payments by affiliates

      0.87% d       0.85% d       0.83%         0.85% d       0.84% d 

Net investment income

      4.09%         4.33%         4.79%         5.11%         5.46%   
Supplemental data               

Net assets, end of year (000’s)

      $206,571         $175,307         $158,451         $123,749         $101,347   

Portfolio turnover rate

      55.64%         48.06%         49.98%         55.65%         56.46%   

Portfolio turnover rate excluding mortgage dollar rollse

      48.86%         47.01%         48.75%         55.65%         56.46%   

aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.

bBased on average daily shares outstanding.

cTotal return does not include fees, charges or expenses imposed by the variable annuity and life insurance contracts for which Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle.

dBenefit of expense reduction rounds to less than 0.01%.

eSee Note 1(h) regarding mortgage dollar rolls.

 

FSI-10    Annual Report   |    The accompanying notes are an integral part of these financial statements.    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FINANCIAL HIGHLIGHTS

Franklin Strategic Income VIP Fund (continued)

     Year Ended December 31,  
      2014      2013      2012      2011      2010  
Class 4               
Per share operating performance
(for a share outstanding throughout the year)		               

Net asset value, beginning of year

      $12.51         $13.04         $12.44         $12.88         $12.20   
  

 

 

  
Income from investment operationsa:               

Net investment incomeb

      0.49         0.54         0.60         0.64         0.67   

Net realized and unrealized gains (losses)

      (0.25 )       (0.14 )       0.91         (0.31 )       0.60   
  

 

 

  

Total from investment operations

      0.24         0.40         1.51         0.33         1.27   
  

 

 

  
Less distributions from:               

Net investment income and net foreign currency gains

      (0.72 )       (0.76 )       (0.89 )       (0.77 )       (0.59 ) 

Net realized gains

      (0.25 )       (0.17 )       (0.02 )       —         —   
  

 

 

  

Total distributions

      (0.97 )       (0.93 )       (0.91 )       (0.77 )       (0.59 ) 
  

 

 

  

Net asset value, end of year

      $11.78         $12.51         $13.04         $12.44         $12.88   
  

 

 

  

Total returnc

      1.75%         3.17%         12.67%         2.46%         10.88%   
Ratios to average net assets               

Expenses before waiver and payments by affiliates

      0.98%         0.95%         0.93%         0.95%         0.94%   

Expenses net of waiver and payments by affiliates

      0.97% d       0.95% d       0.93%         0.95% d       0.94% d 

Net investment income

      3.99%         4.23%         4.69%         5.01%         5.36%   
Supplemental data               

Net assets, end of year (000’s)

      $113,986         $134,970         $196,479         $188,786         $188,178   

Portfolio turnover rate

      55.64%         48.06%         49.98%         55.65%         56.46%   

Portfolio turnover rate excluding mortgage dollar rollse

      48.86%         47.01%         48.75%         55.65%         56.46%   

aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.

bBased on average daily shares outstanding.

cTotal return does not include fees, charges or expenses imposed by the variable annuity and life insurance contracts for which Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle.

dBenefit of expense reduction rounds to less than 0.01%.

eSee Note 1(h) regarding mortgage dollar rolls.

 

    The accompanying notes are an integral part of these financial statements.    |   Annual Report     FSI-11   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

Statement of Investments, December 31, 2014

 

Franklin Strategic Income VIP Fund                   
           Country     Shares/Units     Value  
 

Common Stocks and Other Equity Interests 1.5%

       
 

Consumer Services 0.3%

       
a,b,c  

Turtle Bay Resort

      United States        1,901,449      $ 2,566,956   
        

 

 

  
 

Diversified Financials 1.1%

       
 

iShares iBoxx High Yield Corporate Bond ETF

      United States        110,000        9,856,000   
        

 

 

  
 

Materials 0.1%

       
 

NewPage Holdings Inc.

      United States        5,000        453,750   
        

 

 

  
 

Transportation 0.0%†

       
a  

CEVA Holdings LLC

      United Kingdom        224        173,817   
        

 

 

  
 

Total Common Stocks and Other Equity Interests (Cost $13,344,286)

          13,050,523   
        

 

 

  
 

Convertible Preferred Stocks 0.0%†

       
 

Transportation 0.0%†

       
a  

CEVA Holdings LLC, cvt. pfd., A-1

      United Kingdom        6        6,000   
a  

CEVA Holdings LLC, cvt. pfd., A-2

      United Kingdom        486        376,270   
        

 

 

  
 

Total Convertible Preferred Stocks (Cost $731,856)

          382,270   
        

 

 

  
 

Preferred Stocks (Cost $625,000) 0.1%

       
 

Diversified Financials 0.1%

       
 

GMAC Capital Trust I, 8.125%, pfd.

      United States        25,000        659,500   
        

 

 

  
               Principal Amount*        
 

Corporate Bonds 35.8%

       
 

Automobiles & Components 0.4%

       
d  

Avis Budget Finance PLC, senior note, 144A, 6.00%, 3/01/21

      United States        1,000,000  EUR      1,275,037   
 

The Goodyear Tire & Rubber Co., senior note, 6.50%, 3/01/21

      United States        2,000,000        2,130,000   
        

 

 

  
           3,405,037   
        

 

 

  
 

Banks 2.6%

       
 

Bank of America Corp.,

       
 

e junior sub. bond, M, 8.125% to 5/15/18, FRN thereafter, Perpetual

      United States        2,500,000        2,709,375   
 

senior note, 5.65%, 5/01/18

      United States        1,500,000        1,667,733   
 

CIT Group Inc., senior note,

       
 

5.375%, 5/15/20

      United States        1,000,000        1,060,650   
 

5.00%, 8/15/22

      United States        2,500,000        2,578,125   
 

Citigroup Inc.,

       
 

e junior sub. bond, M, 6.30% to 5/15/24, FRN thereafter, Perpetual

      United States        700,000        691,250   
 

senior note, 3.875%, 10/25/23

      United States        3,000,000        3,124,020   
 

sub. bond, 5.50%, 9/13/25

      United States        500,000        554,386   
 

sub. note, 4.05%, 7/30/22

      United States        300,000        310,903   
 

JPMorgan Chase & Co.,

       
 

e junior sub. bond, R, 6.00% to 8/01/23, FRN thereafter, Perpetual

      United States        1,500,000        1,488,750   
 

e junior sub. bond, V, 5.00% to 7/30/19, FRN thereafter, Perpetual

      United States        200,000        196,687   
 

e junior sub. note, X, 6.10% to 10/01/24, FRN thereafter, Perpetual

      United States        500,000        500,000   
 

senior note, 4.25%, 10/15/20

      United States        1,000,000        1,075,929   
 

sub. note, 3.375%, 5/01/23

      United States        1,000,000        990,381   
 

sub. note, 3.875%, 9/10/24

      United States        1,000,000        1,002,054   
 

Royal Bank of Scotland Group PLC, sub. note, 6.125%, 12/15/22

      United Kingdom       1,000,000        1,088,125   
 

The Royal Bank of Scotland PLC, sub. note, 6.934%, 4/09/18

      United Kingdom        1,500,000  EUR      2,095,191   

 

FSI-12    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

Franklin Strategic Income VIP Fund (continued)

           Country        Principal Amount*     Value  
 

Corporate Bonds (continued)

          
 

Banks (continued)

          
e  

Wells Fargo & Co., junior sub. bond, S, 5.90% to 6/15/24, FRN thereafter, Perpetual

      United States           2,500,000      $ 2,525,000   
           

 

 

  
              23,658,559   
           

 

 

  
 

Capital Goods 0.8%

          
d  

Abengoa Finance SAU, senior note, 144A,

          
 

8.875%, 11/01/17

      Spain           2,000,000        1,937,500   
 

7.75%, 2/01/20

      Spain           200,000        178,500   
d  

AECOM Technology Corp.,

          
 

senior bond, 144A, 5.875%, 10/15/24

      United States           200,000        205,000   
 

senior note, 144A, 5.75%, 10/15/22

      United States           300,000        307,500   
d  

KM Germany Holdings GmbH, senior secured note, first lien, 144A, 8.75%, 12/15/20

      Germany           900,000  EUR      1,184,287   
 

Navistar International Corp., senior note, 8.25%, 11/01/21

      United States           1,500,000        1,485,000   
 

Terex Corp., senior note, 6.00%, 5/15/21

      United States           1,000,000        1,025,000   
 

TransDigm Inc.,

          
 

senior sub. bond, 6.50%, 7/15/24

      United States           500,000        505,000   
 

senior sub. note, 6.00%, 7/15/22

      United States           400,000        401,000   
           

 

 

  
              7,228,787   
           

 

 

  
 

Consumer Durables & Apparel 1.0%

          
d  

Financiere Gaillon 8 SAS, senior note, 144A, 7.00%, 9/30/19

      France           1,200,000  EUR      1,415,700   
d  

INVISTA Finance LLC, senior secured note, 144A, 4.25%, 10/15/19

      United States           2,500,000        2,512,500   
 

KB Home, senior note,

          
 

4.75%, 5/15/19

      United States           1,000,000        987,500   
 

7.00%, 12/15/21

      United States           1,600,000        1,687,000   
 

M/I Homes Inc., senior note, 8.625%, 11/15/18

      United States           300,000        312,750   
 

Toll Brothers Finance Corp., senior bond, 5.625%, 1/15/24

      United States           1,100,000        1,166,000   
 

Visant Corp., senior note, 10.00%, 10/01/17

      United States           1,400,000        1,232,000   
           

 

 

  
              9,313,450   
           

 

 

  
 

Consumer Services 1.3%

          
d  

1011778 BC ULC/New Red Finance Inc., secured note, second lien, 144A, 6.00%, 4/01/22

      Canada           2,000,000        2,060,000   
 

Caesars Entertainment Operating Co. Inc., senior secured note, first lien, 11.25%, 6/01/17

      United States           2,600,000        1,918,800   
d,f  

Financiere Quick SAS, 144A, FRN, 7.582%, 10/15/19

      France           1,600,000  EUR      1,488,242   
d,g  

Fontainebleau Las Vegas, senior secured note, first lien, 144A, 11.00%, 6/15/15

      United States           2,500,000        31,250   
 

MGM Resorts International, senior note,

          
 

6.625%, 7/15/15

      United States           2,500,000        2,550,000   
 

6.75%, 10/01/20

      United States           200,000        210,500   
 

6.625%, 12/15/21

      United States           500,000        527,500   
 

Pinnacle Entertainment Inc., senior note, 6.375%, 8/01/21

      United States           700,000        724,500   
d  

Scientific Games International Inc.,

          
 

senior note, 144A, 10.00%, 12/01/22

      United States           1,100,000        1,013,375   
 

senior secured note, first lien, 144A, 7.00%, 1/01/22

      United States           800,000        814,000   
           

 

 

  
              11,338,167   
           

 

 

  
 

Diversified Financials 2.0%

          
d  

AerCap Ireland Capital Ltd./AerCap Global Aviation Trust,
senior note, 144A, 5.00%, 10/01/21

      Netherlands           1,100,000        1,146,063   

 

    Annual Report   FSI-13

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

Franklin Strategic Income VIP Fund (continued)

           Country     Principal Amount*     Value  
 

Corporate Bonds (continued)

       
 

Diversified Financials (continued)

       
 

Ally Financial Inc., senior note, 7.50%, 9/15/20

      United States        3,000,000      $ 3,525,000   
 

Deutsche Bank AG, sub. bond, 4.296% to 5/24/23, FRN thereafter, 5/24/28

      Germany        3,500,000        3,405,482   
 

E*TRADE Financial Corp., senior note,

       
 

6.375%, 11/15/19

      United States        1,100,000        1,171,500   
 

5.375%, 11/15/22

      United States        700,000        717,500   
 

General Electric Capital Corp., senior note, A, 8.50%, 4/06/18

      United States        29,000,000  MXN      2,179,277   
 

GMAC Inc., sub. note, 8.00%, 12/31/18

      United States        500,000        568,750   
 

Navient Corp., senior note,

       
 

8.45%, 6/15/18

      United States        1,800,000        2,011,500   
 

5.50%, 1/15/19

      United States        1,500,000        1,537,500   
 

6.125%, 3/25/24

      United States        500,000        492,500   
d  

Neuberger Berman Group LLC/Finance Corp., senior note, 144A, 5.875%, 3/15/22

      United States        1,400,000        1,480,500   
        

 

 

  
           18,235,572   
        

 

 

  
 

Energy 7.0%

       
 

Access Midstream Partner LP/ACMP Finance Corp., senior note,

       
 

5.875%, 4/15/21

      United States        1,500,000        1,571,250   
 

6.125%, 7/15/22

      United States        600,000        640,500   
 

BreitBurn Energy Partners LP/BreitBurn Finance Corp., senior bond, 7.875%, 4/15/22

      United States        2,700,000        2,099,250   
d  

California Resources Corp.,

       
 

senior bond, 144A, 6.00%, 11/15/24

      United States        1,500,000        1,275,000   
 

senior note, 144A, 5.50%, 9/15/21

      United States        800,000        688,000   
 

CGG SA, senior note,

       
 

7.75%, 5/15/17

      France        159,000        137,138   
 

6.50%, 6/01/21

      France        1,800,000        1,377,000   
 

6.875%, 1/15/22

      France        200,000        152,375   
 

CHC Helicopter SA,

       
 

senior note, 9.375%, 6/01/21

      Canada        260,000        245,700   
 

senior secured note, first lien, 9.25%, 10/15/20

      Canada        1,800,000        1,755,000   
 

Chesapeake Energy Corp., senior note,

       
 

6.625%, 8/15/20

      United States        1,000,000        1,067,500   
 

6.125%, 2/15/21

      United States        1,500,000        1,582,500   
 

5.75%, 3/15/23

      United States        1,000,000        1,035,000   
 

Clayton Williams Energy Inc., senior note, 7.75%, 4/01/19

      United States        2,000,000        1,710,000   
d  

CONSOL Energy Inc., senior note, 144A, 5.875%, 4/15/22

      United States        2,000,000        1,870,000   
 

Energy Transfer Equity LP, senior note, 7.50%, 10/15/20

      United States        3,000,000        3,345,000   
 

Energy Transfer Partners LP, senior note, 5.20%, 2/01/22

      United States        1,000,000        1,071,095   
 

Energy XXI Gulf Coast Inc., senior note,

       
 

9.25%, 12/15/17

      United States        2,000,000        1,330,000   
 

d 144A, 6.875%, 3/15/24

      United States        1,000,000        542,500   
d  

EnQuest PLC, senior note, 144A, 7.00%, 4/15/22

      United Kingdom        1,500,000        921,563   
 

Freeport-McMoran Oil & Gas LLC/FCX Oil & Gas Inc., senior note, 6.875%, 2/15/23

      United States        672,000        749,280   
d,h  

Gaz Capital SA, (OJSC Gazprom), loan participation,

       
 

senior bond, 144A, 6.51%, 3/07/22

      Russia        500,000        450,125   
 

senior note, 144A, 5.092%, 11/29/15

      Russia        1,500,000        1,473,337   
 

senior note, 144A, 3.85%, 2/06/20

      Russia        1,500,000        1,241,407   
 

Halcon Resources Corp., senior note,

       
 

8.875%, 5/15/21

      United States        2,000,000        1,515,000   
 

9.25%, 2/15/22

      United States        800,000        594,000   

 

FSI-14    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

Franklin Strategic Income VIP Fund (continued)

           Country     Principal Amount*        Value  
 

Corporate Bonds (continued)

          
 

Energy (continued)

          
d  

Kinder Morgan Finance Co. LLC, senior secured note, 144A, 6.00%, 1/15/18

      United States        2,000,000         $ 2,177,600   
 

Kinder Morgan Inc., senior note, 6.50%, 9/15/20

      United States        1,500,000           1,699,278   
 

Linn Energy LLC/Finance Corp., senior note,

          
 

8.625%, 4/15/20

      United States        2,000,000           1,750,000   
 

7.75%, 2/01/21

      United States        1,200,000           1,017,000   
 

6.50%, 9/15/21

      United States        200,000           163,000   
d  

LUKOIL International Finance BV, senior note, 144A, 4.563%, 4/24/23

      Russia        3,500,000           2,800,455   
 

Martin Midstream Partners LP/Martin Midstream Finance Corp., senior note, 7.25%, 2/15/21

      United States        1,900,000           1,795,500   
 

Midstates Petroleum Co. Inc./LLC, senior note, 9.25%, 6/01/21

      United States        1,700,000           867,000   
 

Oasis Petroleum Inc., senior note, 6.875%, 3/15/22

      United States        1,300,000           1,189,500   
 

Offshore Group Investment Ltd.,

          
 

senior bond, first lien, 7.125%, 4/01/23

      United States        700,000           504,000   
 

senior secured note, first lien, 7.50%, 11/01/19

      United States        2,000,000           1,502,500   
 

PBF Holding Co. LLC, first lien, 8.25%, 2/15/20

      United States        1,000,000           1,010,000   
 

Peabody Energy Corp., senior note,

          
 

6.50%, 9/15/20

      United States        2,500,000           2,181,250   
 

6.25%, 11/15/21

      United States        1,500,000           1,288,125   
 

Penn Virginia Corp., senior note, 8.50%, 5/01/20

      United States        1,500,000           1,207,500   
 

Penn Virginia Resource Partners LP/Penn Virginia Resource Finance Corp., senior note,

          
 

8.375%, 6/01/20

      United States        1,172,000           1,256,970   
 

6.50%, 5/15/21

      United States        400,000           406,000   
d,f  

Quicksilver Resources Inc., secured note, second lien, 144A, FRN, 7.00%, 6/21/19

      United States        1,500,000           1,121,250   
 

Regency Energy Partners LP/Regency Energy Finance Corp., senior note,

          
 

5.875%, 3/01/22

      United States        200,000           200,500   
 

5.00%, 10/01/22

      United States        400,000           380,000   
 

Sabine Pass Liquefaction LLC,

          
 

first lien, 5.625%, 2/01/21

      United States        2,500,000           2,468,750   
 

first lien, 5.625%, 4/15/23

      United States        900,000           884,250   
 

senior secured, first lien, 5.75%, 5/15/24

      United States        300,000           295,875   
 

Samson Investment Co., senior note, 9.75%, 2/15/20

      United States        2,500,000           1,048,438   
 

Sanchez Energy Corp., senior note,

          
 

7.75%, 6/15/21

      United States        1,700,000           1,589,500   
 

d 144A, 6.125%, 1/15/23

      United States        600,000           505,500   
 

W&T Offshore Inc., senior note, 8.50%, 6/15/19

      United States        2,000,000           1,330,000   
           

 

 

  
              63,079,261   
           

 

 

  
 

Food & Staples Retailing 0.2%

          
d  

Cencosud SA, senior note, 144A, 4.875%, 1/20/23

      Chile        1,500,000           1,479,248   
           

 

 

  
 

Food, Beverage & Tobacco 0.9%

          
 

Constellation Brands Inc., senior note, 4.25%, 5/01/23

      United States        1,000,000           995,000   
 

Del Monte Corp., senior note, 7.625%, 2/15/19

      United States        1,736,000           1,709,960   
d  

JBS USA LLC/Finance Inc., senior note, 144A,

          
 

8.25%, 2/01/20

      United States        2,400,000           2,538,000   
 

7.25%, 6/01/21

      United States        300,000           310,500   

 

    Annual Report     FSI-15   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

Franklin Strategic Income VIP Fund (continued)

           Country     Principal Amount*     Value  
 

Corporate Bonds (continued)

       
 

Food, Beverage & Tobacco (continued)

       
d  

Post Holdings Inc., senior note, 144A,

       
 

6.75%, 12/01/21

      United States        1,700,000      $ 1,653,250   
 

6.00%, 12/15/22

      United States        400,000        376,500   
d  

Smithfield Foods Inc., senior note, 144A, 5.875%, 8/01/21

      United States        600,000        612,375   
        

 

 

  
           8,195,585   
        

 

 

  
 

Health Care Equipment & Services 1.7%

       
 

Alere Inc., senior sub. note, 6.50%, 6/15/20

      United States        800,000        810,000   
d  

AmSurg Corp., senior note, 144A, 5.625%, 7/15/22

      United States        400,000        412,000   
 

CHS/Community Health Systems Inc.,

       
 

senior note, 8.00%, 11/15/19

      United States        1,500,000        1,605,000   
 

senior note, 6.875%, 2/01/22

      United States        400,000        425,750   
 

senior secured note, first lien, 5.125%, 8/15/18

      United States        600,000        622,500   
 

DaVita HealthCare Partners Inc.,

       
 

senior bond, 5.125%, 7/15/24

      United States        500,000        510,938   
 

senior note, 5.75%, 8/15/22

      United States        1,500,000        1,595,625   
 

HCA Inc.,

       
 

senior note, 7.50%, 2/15/22

      United States        1,500,000        1,717,500   
 

senior note, 5.875%, 5/01/23

      United States        1,500,000        1,584,375   
 

senior secured bond, first lien, 5.25%, 4/15/25

      United States        600,000        627,750   
 

senior secured note, 5.875%, 3/15/22

      United States        1,000,000        1,097,500   
 

Omnicare Inc., senior note, 4.75%, 12/01/22

      United States        700,000        712,250   
 

Tenet Healthcare Corp., senior note,

       
 

8.125%, 4/01/22

      United States        1,700,000        1,904,000   
 

d 144A, 5.00%, 3/01/19

      United States        500,000        501,875   
 

d 144A, 5.50%, 3/01/19

      United States        1,200,000        1,233,000   
        

 

 

  
           15,360,063   
        

 

 

  
 

Insurance 0.9%

       
 

MetLife Inc., junior sub. note, 6.40% to 12/15/36, FRN thereafter, 12/15/66

      United States        1,500,000        1,680,000   
d  

Mitsui Sumitomo Insurance Co. Ltd., junior sub. note, 144A, 7.00% to 3/15/22, FRN thereafter, 3/15/72

      Japan        2,500,000        2,881,113   
d  

Nippon Life Insurance Co., sub. bond, 144A, 5.10% to 10/16/24, FRN thereafter, 10/16/44

      Japan        3,500,000        3,660,142   
        

 

 

  
           8,221,255   
        

 

 

  
 

Materials 4.7%

       
 

ArcelorMittal, senior note,

       
 

6.00%, 3/01/21

      Luxembourg        3,000,000        3,109,095   
 

6.75%, 2/25/22

      Luxembourg        500,000        533,750   
d  

Ardagh Packaging Finance PLC, senior note, 144A, 9.125%, 10/15/20

      Luxembourg        500,000        533,750   
d  

Ardagh Packaging Finance PLC/Ardagh MP Holdings USA Inc., senior note, 144A,

       
 

6.25%, 1/31/19

      Luxembourg        200,000        196,000   
 

7.00%, 11/15/20

      Luxembourg        105,882        107,471   
 

6.75%, 1/31/21

      Luxembourg        200,000        197,875   
 

6.00%, 6/30/21

      Luxembourg        1,300,000        1,244,750   
d  

Barminco Finance Pty. Ltd., senior note, 144A, 9.00%, 6/01/18

      Australia        1,500,000        1,350,938   
 

Celanese US Holdings LLC, senior note, 3.25%, 10/15/19

      United States        700,000  EUR      878,762   
d  

Cemex Finance LLC, senior secured note, 144A, 6.00%, 4/01/24

      Mexico        1,000,000        968,125   

 

FSI-16    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

Franklin Strategic Income VIP Fund (continued)

           Country     Principal Amount*     Value  
 

Corporate Bonds (continued)

       
 

Materials (continued)

       
d  

Cemex SAB de CV,

       
 

first lien, 144A, 5.70%, 1/11/25

      Mexico        1,500,000      $ 1,449,375   
 

secured note, 144A, 5.875%, 3/25/19

      Mexico        1,000,000        1,014,375   
 

senior secured note, 144A, 9.00%, 1/11/18

      Mexico        500,000        523,125   
d  

Ceramtec Group GmbH, senior note, 144A, 8.25%, 8/15/21

      Germany        1,400,000  EUR      1,832,696   
d  

First Quantum Minerals Ltd., senior note, 144A,

       
 

6.75%, 2/15/20

      Canada        1,400,000        1,274,000   
 

7.00%, 2/15/21

      Canada        1,725,000        1,561,125   
d  

FMG Resources (August 2006) Pty. Ltd., senior note, 144A,

       
 

6.875%, 2/01/18

      Australia        1,111,111        1,014,583   
 

8.25%, 11/01/19

      Australia        2,500,000        2,284,375   
 

Freeport-McMoRan Inc., senior note, 4.55%, 11/14/24

      United States        2,500,000        2,432,325   
d  

Glencore Funding LLC, senior note, 144A,

       
 

4.125%, 5/30/23

      Switzerland        1,000,000        977,471   
 

4.625%, 4/29/24

      Switzerland        500,000        504,450   
d  

Ineos Finance PLC, senior secured note, 144A,

       
 

8.375%, 2/15/19

      Switzerland        200,000        213,000   
 

7.50%, 5/01/20

      Switzerland        300,000        315,563   
d  

Ineos Group Holdings SA, senior note, 144A,

       
 

6.125%, 8/15/18

      Switzerland        700,000        675,500   
 

6.50%, 8/15/18

      Switzerland        700,000  EUR      838,001   
 

5.75%, 2/15/19

      Switzerland        300,000  EUR      351,202   
d  

Kerling PLC, senior secured note, 144A, 10.625%, 2/01/17

      United Kingdom        650,000  EUR      799,607   
 

Novelis Inc., senior note, 8.75%, 12/15/20

      Canada        1,600,000        1,704,000   
d  

Owens-Brockway Glass Container Inc., senior note, 144A, 5.00%, 1/15/22

      United States        1,300,000        1,327,625   
 

Reynolds Group Issuer Inc./LLC/SA,

       
 

first lien, 5.75%, 10/15/20

      United States        900,000        927,000   
 

senior note, 8.50%, 5/15/18

      United States        1,000,000        1,025,000   
 

senior note, 8.25%, 2/15/21

      United States        1,000,000        1,030,000   
 

senior secured note, first lien, 7.125%, 4/15/19

      United States        1,000,000        1,036,250   
d  

Sealed Air Corp.,

       
 

senior bond, 144A, 5.125%, 12/01/24

      United States        1,000,000        1,012,500   
 

senior note, 144A, 8.375%, 9/15/21

      United States        800,000        898,000   
 

senior note, 144A, 4.875%, 12/01/22

      United States        1,000,000        995,000   
d  

Steel Dynamics Inc.,

       
 

senior bond, 144A, 5.50%, 10/01/24

      United States        1,000,000        1,027,500   
 

senior note, 144A, 5.125%, 10/01/21

      United States        1,000,000        1,018,750   
d  

U.S. Coatings Acquisition Inc./Flash Dutch 2 BV, 144A, 5.75%, 2/01/21

      United States        1,000,000  EUR      1,278,819   
d  

Xstrata Finance Canada Ltd., senior note, 144A, 4.95%, 11/15/21

      Switzerland        1,500,000        1,584,769   
        

 

 

  
           42,046,502   
        

 

 

  
 

Media 3.8%

       
 

CCO Holdings LLC/CCO Holdings Capital Corp., senior bond, 5.25%, 9/30/22

      United States        2,000,000        2,002,500   
 

CCOH Safari LLC, senior bond, 5.75%, 12/01/24

      United States        1,100,000        1,115,125   
 

Clear Channel Worldwide Holdings Inc.,

       
 

senior note, 6.50%, 11/15/22

      United States        1,000,000        1,035,000   
 

senior sub. note, 7.625%, 3/15/20

      United States        200,000        208,500   
 

senior sub. note, 7.625%, 3/15/20

      United States        500,000        528,750   

 

    Annual Report     FSI-17   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

Franklin Strategic Income VIP Fund (continued)

           Country     Principal Amount*     Value  
 

Corporate Bonds (continued)

       
 

Media (continued)

       
 

CSC Holdings LLC, senior note, 6.75%, 11/15/21

      United States        3,000,000      $ 3,326,250   
 

DISH DBS Corp., senior note,

       
 

7.125%, 2/01/16

      United States        2,000,000        2,107,500   
 

6.75%, 6/01/21

      United States        500,000        538,750   
 

5.875%, 7/15/22

      United States        500,000        513,750   
 

d 144A, 5.875%, 11/15/24

      United States        400,000        403,000   
 

Gannett Co. Inc.,

       
 

senior bond, 6.375%, 10/15/23

      United States        1,900,000        2,023,500   
 

 d senior bond, 144A, 5.50%, 9/15/24

      United States        300,000        301,500   
 

senior note, 5.125%, 7/15/20

      United States        1,000,000        1,025,000   
 

iHeartCommunications Inc.,

       
 

senior secured bond, first lien, 9.00%, 3/01/21

      United States        2,400,000        2,361,000   
 

 d senior secured note, first lien, 144A, 9.00%, 9/15/22

      United States        700,000        687,750   
d  

Nielsen Finance LLC/Co., senior note, 144A, 5.00%, 4/15/22

      United States        1,500,000        1,509,375   
d  

Sirius XM Radio Inc., senior bond, 144A, 6.00%, 7/15/24

      United States        1,700,000        1,746,750   
d  

Unitymedia Hessen GmbH & Co. KG/Unitymedia NRW GmbH, senior secured note, 144A, 5.625%, 4/15/23

      Germany        800,000  EUR      1,053,334   
d  

Unitymedia KabelBW GmbH, senior bond, 144A, 6.125%, 1/15/25

      Germany        1,700,000        1,761,625   
d  

Univision Communications Inc.,

       
 

senior secured bond, 144A, 6.75%, 9/15/22

      United States        436,000        468,700   
 

senior secured note, 144A, 7.875%, 11/01/20

      United States        1,500,000        1,605,000   
d  

UPCB Finance II Ltd., senior secured note, 144A, 6.375%, 7/01/20

      Netherlands        2,000,000  EUR      2,547,292   
d  

Videotron Ltd., senior bond, 144A, 5.375%, 6/15/24

      Canada        800,000        818,000   
d  

Virgin Media Finance PLC, senior bond, 144A, 6.375%, 10/15/24

      United Kingdom        900,000  GBP      1,515,056   
d  

Virgin Media Secured Finance PLC, senior secured bond, first lien, 144A, 5.50%, 1/15/25

      United Kingdom        1,900,000        1,967,688   
d  

VTR Finance BV, senior secured note, 144A, 6.875%, 1/15/24

      Chile        900,000        920,250   
        

 

 

  
           34,090,945   
        

 

 

  
 

Pharmaceuticals, Biotechnology & Life Sciences 1.1%

       
d  

Grifols Worldwide Operations Ltd., senior note, 144A, 5.25%, 4/01/22

      United States        700,000        717,640   
d,i  

Jaguar Holding Co. I, senior note, 144A, PIK, 9.375%, 10/15/17

      United States        2,500,000        2,561,250   
d  

Valeant Pharmaceuticals International Inc., senior note, 144A, 7.50%, 7/15/21

      United States        1,200,000        1,300,500   
d  

VPI Escrow Corp., senior note, 144A, 6.375%, 10/15/20

      United States        2,400,000        2,517,000   
 

Zoetis Inc., senior bond, 3.25%, 2/01/23

      United States        2,500,000        2,470,410   
        

 

 

  
           9,566,800   
        

 

 

  
 

Real Estate 0.1%

       
 

Crown Castle International Corp., senior bond, 5.25%, 1/15/23

      United States        500,000        512,500   
        

 

 

  
 

Retailing 0.4%

       
d  

Edcon Pty. Ltd., secured note, 144A, 9.50%, 3/01/18

      South Africa        1,800,000  EUR      1,756,013   
d  

New Look Bondco I PLC, 144A, 8.75%, 5/14/18

      United Kingdom        1,300,000  GBP      2,134,302   
        

 

 

  
           3,890,315   
        

 

 

  
 

Software & Services 1.1%

       
d  

BMC Software Finance Inc., senior note, 144A, 8.125%, 7/15/21

      United States        2,500,000        2,362,500   
 

Equinix Inc., senior bond, 5.375%, 4/01/23

      United States        2,000,000        2,010,000   
 

First Data Corp.,

       
 

senior bond, 12.625%, 1/15/21

      United States        300,000        357,000   
 

d senior secured bond, 144A, 8.25%, 1/15/21

      United States        3,500,000        3,762,500   

 

FSI-18    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

Franklin Strategic Income VIP Fund (continued)

           Country     Principal Amount*     Value  
 

Corporate Bonds (continued)

       
 

Software & Services (continued)

       
 

Sterling International Inc., senior note, 11.00%, 10/01/19

      United States        1,100,000      $ 1,174,250   
        

 

 

  
           9,666,250   
        

 

 

  
 

Technology Hardware & Equipment 0.3%

       
d  

Alcatel-Lucent USA Inc., senior note, 144A, 6.75%, 11/15/20

      France        2,000,000        2,121,000   
d,i  

CommScope Holdings Co. Inc., senior note, 144A, PIK, 6.625%, 6/01/20

      United States        200,000        207,000   
        

 

 

  
           2,328,000   
        

 

 

  
 

Telecommunication Services 3.4%

       
 

CenturyLink Inc.,

       
 

senior bond, 6.75%, 12/01/23

      United States        200,000        219,750   
 

senior note, 6.00%, 4/01/17

      United States        1,000,000        1,066,250   
 

senior note, 6.45%, 6/15/21

      United States        1,000,000        1,077,500   
d  

Digicel Group Ltd., senior note, 144A, 8.25%, 9/30/20

      Bermuda        1,500,000        1,468,125   
d  

Digicel Ltd., senior note, 144A, 6.00%, 4/15/21

      Bermuda        1,000,000        950,625   
d  

eAccess Ltd., senior note, 144A, 8.25%, 4/01/18

      Japan        1,000,000        1,051,875   
 

Frontier Communications Corp.,

       
 

senior bond, 7.625%, 4/15/24

      United States        600,000        621,000   
 

senior note, 8.50%, 4/15/20

      United States        2,000,000        2,240,000   
 

senior note, 8.75%, 4/15/22

      United States        500,000        561,250   
 

senior note, 7.875%, 1/15/27

      United States        400,000        401,000   
 

Intelsat Jackson Holdings SA,

       
 

senior bond, 6.625%, 12/15/22

      Luxembourg        1,600,000        1,652,000   
 

senior note, 7.25%, 10/15/20

      Luxembourg        1,000,000        1,058,750   
 

senior note, 7.50%, 4/01/21

      Luxembourg        1,000,000        1,073,750   
d  

Millicom International Cellular SA, senior note, 144A, 6.625%, 10/15/21

      Luxembourg        1,500,000        1,542,187   
d,i  

Mobile Challenger Intermediate Group SA, secured note, 144A, PIK, 8.75%, 3/15/19

      Switzerland        600,000  EUR      738,705   
d  

Play Finance 1 SA, senior note, 144A, 6.50%, 8/01/19

      Poland        500,000  EUR      642,812   
d  

Play Finance 2 SA, senior secured note, 144A, 5.25%, 2/01/19

      Poland        800,000  EUR      1,005,268   
 

Sprint Corp., senior bond, 7.875%, 9/15/23

      United States        500,000        496,100   
 

Sprint Nextel Corp., senior note,

       
 

8.375%, 8/15/17

      United States        1,200,000        1,299,000   
 

6.00%, 11/15/22

      United States        500,000        461,875   
 

d 144A, 9.00%, 11/15/18

      United States        1,500,000        1,709,850   
 

d 144A, 7.00%, 3/01/20

      United States        800,000        868,000   
 

T-Mobile USA Inc.,

       
 

senior bond, 6.50%, 1/15/24

      United States        300,000        308,250   
 

senior bond, 6.375%, 3/01/25

      United States        1,300,000        1,324,050   
 

senior note, 6.542%, 4/28/20

      United States        1,400,000        1,450,750   
 

senior note, 6.125%, 1/15/22

      United States        200,000        203,750   
 

Verizon Communications Inc., senior note, 5.15%, 9/15/23

      United States        2,000,000        2,210,028   
d  

Wind Acquisition Finance SA, senior secured note, 144A,

       
 

4.00%, 7/15/20

      Italy        600,000  EUR      715,110   
 

7.00%, 4/23/21

      Italy        2,000,000  EUR      2,377,481   
        

 

 

  
           30,795,091   
        

 

 

  
 

Transportation 0.7%

       
d  

Florida East Coast Holdings Corp.,

       
 

secured note, first lien, 144A, 6.75%, 5/01/19

      United States        900,000        893,250   
 

senior note, 144A, 9.75%, 5/01/20

      United States        400,000        400,000   

 

    Annual Report     FSI-19   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

Franklin Strategic Income VIP Fund (continued)

           Country     Principal Amount*        Value  
 

Corporate Bonds (continued)

          
 

Transportation (continued)

          
 

Hertz Corp., senior note,

          
 

6.75%, 4/15/19

      United States        1,500,000         $ 1,552,500   
 

6.25%, 10/15/22

      United States        1,500,000           1,522,500   
d  

Stena AB, senior bond, 144A, 7.00%, 2/01/24

      Sweden        900,000           825,750   
d  

Stena International SA, secured bond, 144A, 5.75%, 3/01/24

      Sweden        1,100,000           1,039,500   
           

 

 

  
              6,233,500   
           

 

 

  
 

Utilities 1.4%

          
 

Calpine Corp.,

          
 

senior bond, 5.75%, 1/15/25

      United States        1,200,000           1,216,500   
 

senior note, 5.375%, 1/15/23

      United States        1,300,000           1,314,625   
 

d senior secured bond, first lien, 144A, 5.875%, 1/15/24

      United States        600,000           642,000   
 

d senior secured note, first lien, 144A, 6.00%, 1/15/22

      United States        100,000           107,000   
d  

Dynegy Finance I Inc./Dynegy Finance II Inc., senior secured bond, first lien, 144A, 7.625%, 11/01/24

      United States        1,300,000           1,327,625   
d,e  

EDF SA, sub. note, 144A, 5.25% to 1/29/23, FRN thereafter, Perpetual

      France        3,000,000           3,077,100   
d  

InterGen NV, secured bond, 144A, 7.00%, 6/30/23

      Netherlands        2,500,000           2,387,500   
d,g  

Texas Competitive Electric Holdings Co. LLC/Texas Competitive Electric Holdings Finance Inc., senior secured note, first lien, 144A, 11.50%, 10/01/15

      United States        3,000,000           2,137,500   
           

 

 

  
              12,209,850   
           

 

 

  
 

Total Corporate Bonds (Cost $328,498,730)

             320,854,737   
           

 

 

  
f,j  

Senior Floating Rate Interests 18.6%

          
 

Automobiles & Components 0.8%

          
 

Crowne Group LLC, Term Loan, 6.00%, 9/30/20

      United States        1,646,573           1,621,875   
 

FRAM Group Holdings Inc. (Autoparts Holdings),

          
 

Second Lien Term Loan, 10.50%, 1/29/18

      United States        1,458,729           1,455,082   
 

Term Loan, 6.50%, 7/29/17

      United States        2,290,008           2,283,138   
 

Henniges Automotive Holdings Inc., Term Loans, 5.50%, 6/12/21

      United States        810,662           810,662   
 

UCI International Inc., Term Loan, 5.50%, 7/26/17

      United States        579,767           577,835   
           

 

 

  
              6,748,592   
           

 

 

  
 

Capital Goods 1.1%

          
 

Alfred Fueling Systems Inc. (Wayne Fueling),

          
 

First Lien Initial Term Loan, 4.75%, 6/20/21

      United States        491,885           483,277   
 

Second Lien Initial Term Loan, 8.50%, 6/20/22

      United States        845,106           823,978   
 

Doncasters U.S. Finance LLC,

          
 

Second Lien Term Loan, 9.50%, 10/09/20

      United States        125,226           124,130   
 

Term B Loans, 4.50%, 4/09/20

      United States        297,841           296,538   
k  

Erickson Inc., Purchase Price Notes, 6.00%, 11/02/20

      United States        190,406           154,522   
 

Onsite Rental Group Operations Pty. Ltd., Term B Loan, 5.50%, 7/30/21

      United States        2,167,856           2,146,177   
 

Sensus USA Inc.,

          
 

First Lien Term Loan, 4.50% - 5.50%, 5/09/17

      United States        1,318,102           1,291,740   
 

Second Lien Term Loan, 8.50%, 5/09/18

      United States        3,032,186           2,903,318   
 

Signode Industrial Group U.S. Inc., Initial Term B Loan, 3.75%, 5/01/21

      United States        839,167           807,698   
 

TransDigm Inc.,

          
 

Tranche C Term Loan, 3.75%, 2/28/20

      United States        406,538           400,270   
 

Tranche D Term Loan, 3.75%, 6/04/21

      United States        292,729           287,899   

 

FSI-20    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

Franklin Strategic Income VIP Fund (continued)

           Country        Principal Amount*        Value  
f,j  

Senior Floating Rate Interests (continued)

             
 

Capital Goods (continued)

             
l  

WireCo Worldgroup Inc., Term Loan, 7.00%, 2/15/17

      United States           48,726         $ 48,818   
              

 

 

  
                 9,768,365   
              

 

 

  
 

Commercial & Professional Services 0.8%

             
 

AlixPartners LLP, Second Lien 2013 Recapitalization Term Loan,
9.00%, 7/10/21

      United States           2,678,927           2,710,183   
 

Interactive Data Corp., Term Loan, 4.75%, 5/02/21

      United States           4,218,422           4,198,384   
              

 

 

  
                 6,908,567   
              

 

 

  
 

Consumer Durables & Apparel 0.0%†

             
l  

Varsity Brands Inc., First Lien Term Loan, 7.25%, 12/16/21

      United States           328,408           327,997   
              

 

 

  
 

Consumer Services 2.5%

             
 

24 Hour Fitness Worldwide Inc., Term Loan, 4.75%, 5/30/21

      United States           1,277,820           1,233,895   
 

Caesars Entertainment Resort Properties LLC, Term B Loans, 7.00%, 10/11/20

      United States           4,070,809           3,863,878   
 

Cannery Casino Resorts LLC,

             
 

Second Lien Term Loan, 10.00%, 10/02/19

      United States           780,000           612,300   
 

Term Loan, 6.00%, 10/02/18

      United States           2,604,913           2,441,020   
 

ClubCorp Club Operations Inc., Term B Loans, 4.50%, 7/24/20

      United States           138,479           136,662   
 

Diamond Resorts Corp., Term Loans, 5.50%, 5/09/21

      United States           572,424           569,562   
 

Fitness International LLC, Term B Loan, 5.50%, 7/01/20

      United States           3,134,569           3,024,859   
 

ROC Finance LLC, Funded Term B Loans, 5.00%, 4/08/19

      United States           314,906           295,618   
 

TGI Friday’s Inc.,

             
 

First Lien Initial Term Loan, 5.25% - 6.50%, 7/15/20

      United States           479,779           478,579   
 

l Second Lien Initial Term Loan, 9.25%, 7/15/21

      United States           500,000           492,500   
 

Town Sports International LLC, Initial Term Loan,
4.50% - 5.75%, 11/15/20

      United States           1,017,795           735,357   
 

Travelport Finance Luxembourg S.A.R.L., Initial Term Loan, 6.00%, 9/02/21

      Luxembourg           2,359,471           2,360,061   
c,i  

Turtle Bay Holdings LLC, Term Loan B, PIK, 3.00%, 6/30/16

      United States           6,401,230           6,145,181   
              

 

 

  
                 22,389,472   
              

 

 

  
 

Diversified Financials 0.6%

             
 

Guggenheim Partners Investment Management Holdings LLC, Initial Term Loan, 5.50%, 7/22/20

      United States           932,033           925,625   
l  

Realogy Group LLC, Initial Term B Loans, 5.25%, 3/05/20

      United States           92,166           90,860   
 

Trans Union LLC, 2014 Replacement Term Loan, 4.00%, 4/09/21

      United States           4,159,657           4,110,261   
              

 

 

  
                 5,126,746   
              

 

 

  
 

Energy 1.2%

             
 

Bowie Resource Holdings LLC, Second Lien Initial Term Loan,
11.75%, 2/16/21

      United States           480,257           473,053   
 

Citgo Petroleum Corp., Term B Loan, 4.50%, 7/29/21

      United States           224,013           223,453   
 

Drillships Ocean Ventures Inc. and Drillships Vent, Term Loan, 5.50%, 7/25/21

      United States           717,677           582,216   
 

Fieldwood Energy LLC, Second Lien Loans, 8.375%, 9/30/20

      United States           468,000           344,682   
 

Foresight Energy LLC, Term Loans, 5.50%, 8/23/20

      United States           720,000           711,000   
 

McJunkin Red Man Corp., 2013 Term Loan, 5.00%, 11/11/19

      United States           723,792           676,746   
 

OSG Bulk Ships Inc., Initial Term Loan, 5.25%, 8/05/19

      United States           1,245,444           1,217,421   
 

OSG International Inc., Initial Term Loan, (OIN), 5.75%, 8/05/19

      United States           2,022,339           1,971,780   
l  

Peabody Energy Corp., Term Loan, 4.25%, 9/24/20

      United States           1,240,345           1,126,646   
l  

UTEX Industries Inc., First Lien Initial Term Loan, 5.00%, 5/22/21

      United States           3,160,867           2,939,607   

 

    Annual Report     FSI-21   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

Franklin Strategic Income VIP Fund (continued)

           Country     Principal Amount*        Value  
f,j  

Senior Floating Rate Interests (continued)

          
 

Energy (continued)

          
 

Westmoreland Coal Co., Term Loan, 7.50%, 12/16/20

      United States        664,630         $ 652,999   
           

 

 

  
              10,919,603   
           

 

 

  
 

Food & Staples Retailing 0.2%

          
 

AdvancePierre Foods Inc., Second Lien Term Loan, 9.50%, 10/10/17

      United States        1,805,558           1,787,502   
           

 

 

  
 

Food, Beverage & Tobacco 0.2%

          
 

Big Heart Pet Brands (Del Monte Pet), Initial Term Loans, 3.50%, 2/24/20

      United States        1,690,987           1,627,575   
 

CSM Bakery Supplies LLC (U.S. Acquisition), Second Lien Term Loan, 8.75%, 7/03/21

      United States        128,913           125,368   
           

 

 

  
              1,752,943   
           

 

 

  
 

Health Care Equipment & Services 1.5%

          
 

Carestream Health Inc., Second Lien Loan, 9.50%, 12/07/19

      United States        685,642           680,786   
 

Community Health Systems Inc., 2021 Term D Loan, 4.25%, 1/27/21

      United States        2,778,862           2,776,933   
 

Connolly LLC,

          
 

Initial Term Loan, 5.00%, 5/14/21

      United States        1,766,986           1,760,360   
 

Second Lien Initial Term Loan, 8.00%, 5/14/22

      United States        423,200           421,084   
 

Dialysis Newco Inc., Second Lien Term Loan B, 7.75%, 10/22/21

      United States        267,300           266,632   
 

Millennium Health LLC, Tranche B Term Loan, 5.25%, 4/16/21

      United States        2,713,769           2,704,442   
 

Surgery Centers Holdings Inc.,

          
 

Second Lien Term Loan, 8.50%, 11/03/21

      United States        404,200           392,074   
 

Term Loan, 5.25%, 11/03/20

      United States        70,600           68,923   
 

Truven Health Analytics Inc., New Tranche B Term Loan, 4.50%, 6/06/19

      United States        1,740,077           1,694,400   
 

U.S. Renal Care Inc., Tranche B-2 Term Loan, 4.25%, 7/03/19

      United States        3,042,441           3,000,607   
           

 

 

  
              13,766,241   
           

 

 

  
 

Household & Personal Products 0.8%

          
 

FGI Operating Co. LLC (Freedom Group), Term B Loans, 5.50%, 4/19/19

      United States        3,882,930           3,805,271   
 

Sun Products Corp., Tranche B Term Loan, 5.50%, 3/23/20

      United States        3,895,804           3,642,577   
           

 

 

  
              7,447,848   
           

 

 

  
 

Materials 3.6%

          
 

Appvion Inc., Term Loan, 5.75% - 6.75%, 6/28/19

      United States        1,025,189           1,014,297   
 

Arysta Lifescience SPC LLC,

          
 

Initial Term Loan, 4.50%, 5/29/20

      United States        3,453,831           3,439,439   
 

Second Lien Initial Term Loan, 8.25%, 11/30/20

      United States        551,458           551,114   
 

Atkore International Inc., Second Lien Initial Term Loan, 7.75%, 10/09/21

      United States        219,800           215,404   
 

AZ Chem US Inc., First Lien Initial Term Loan, 5.75%, 6/12/21

      United States        1,478,894           1,461,332   
 

Caraustar Industries Inc.,

          
 

Initial Term Loan, 7.50%, 5/01/19

      United States        1,683,063           1,673,596   
 

l Term Loan C, 9.00%,5/01/19

      United States        2,740,000           2,698,900   
 

CD&R Millennium U.S. Acquico LLC, Second Lien Initial Term Loan, 8.25%, 7/31/22

      United States        585,000           570,375   
 

Cyanco Intermediate Corp., Initial Term Loan, 5.50%, 5/01/20

      United States        3,385,395           3,283,833   
l  

Exopack Holdings SA, USD Term Loan, 5.25%, 5/08/19

      Luxembourg        3,692,818           3,685,126   

 

FSI-22    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

Franklin Strategic Income VIP Fund (continued)

           Country     Principal Amount*        Value  
f,j  

Senior Floating Rate Interests (continued)

          
 

Materials (continued)

          
l  

FMG America Finance Inc. (Fortescue Metals Group), Loans, 3.75%, 6/30/19

      United States        827,208         $ 755,690   
 

HII Holding Corp. (Houghton International), Second Lien Term Loan, 9.50%, 12/20/20

      United States        575,175           575,175   
l  

Ineos U.S. Finance LLC, Dollar Term Loan, 5.25%, 5/04/18

      United States        301,326           293,308   
 

MacDermid Holdings LLC, First Lien Tranche B Term Loan, 4.00%, 6/07/20

      United States        2,285,464           2,246,184   
 

OCI Beaumont LLC, Term B-3 Loan, 5.00%, 8/20/19

      United States        1,064,011           1,055,366   
 

Oxbow Carbon LLC,

          
 

First Lien Tranche B Term Loan, 4.25%, 7/19/19

      United States        337,855           311,671   
 

Second Lien Initial Term Loan, 8.00%, 1/19/20

      United States        311,538           274,154   
 

OXEA GmbH, Second Lien Term Loan, 8.25%, 7/15/20

      Luxembourg        838,599           802,958   
 

Prescrix Inc., Second Lien Term Loan, 8.00%, 5/02/22

      United States        663,243           658,269   
 

Reynolds Group Holdings Inc., U.S. Term Loan, 4.00%, 12/01/18

      United States        2,752,731           2,709,227   
 

Solenis International LP and Solenis Holdings, Second Lien Term Loan, 7.75%, 7/31/22

      United States        174,800           170,867   
 

Tronox Pigments (Netherlands) BV, Term Loan, 4.00%, 3/19/20

      Netherlands        265,759           262,104   
 

Univar Inc., Term B Loan, 5.00%, 6/30/17

      United States        442,956           429,747   
l  

Walter Energy Inc., B Term Loan, 7.25%, 4/01/18

      United States        3,746,209           2,915,019   
           

 

 

  
              32,053,155   
           

 

 

  
 

Media 1.6%

          
 

AP NMT Acquisition BV, Second Lien Dollar Term B Loan, 10.00%, 8/13/22

      Netherlands        1,290,000           1,244,850   
 

Cengage Learning Acquisitions Inc., First Lien Exit Term Loan, 7.00%, 3/31/20

      United States        3,087,626           3,060,610   
 

Cumulus Media Holdings Inc., Term Loans, 4.25%, 12/23/20

      United States        459,266           445,201   
 

NEP/NCP Holdco Inc., Second Lien Term Loan, 9.50%, 7/22/20

      United States        678,796           668,614   
c  

Radio One Inc., Term Loan, 7.50%, 3/31/16

      United States        2,066,387           2,050,889   
 

William Morris Endeavor Entertainment LLC,

          
 

Term Loans First Lien, 5.25%, 5/06/21

      United States        2,765,480           2,675,602   
 

Term Loans Second Lien, 8.25%, 5/06/22

      United States        4,543,017           4,372,654   
           

 

 

  
              14,518,420   
           

 

 

  
 

Real Estate 0.0%†

          
 

Capital Automotive LP, Second Lien Term Loan, 6.00%, 4/30/20

      United States        182,500           182,500   
           

 

 

  
 

Retailing 1.8%

          
 

BJ’s Wholesale Club Inc.,

          
 

2013 (Nov) Replacement Loans, 4.50%, 9/26/19

      United States        3,530,563           3,476,132   
 

Second Lien 2013 (Nov) Replacement Loans, 8.50%, 3/26/20

      United States        1,915,908           1,890,363   
 

Evergreen AcqCo. 1 LP (Savers), Term Loan, 5.00%, 7/09/19

      United States        4,157,730           4,100,561   
 

Harbor Freight Tools USA Inc., Loans, 4.75%, 7/26/19

      United States        1,095,527           1,094,431   
 

JC Penney Corp. Inc., Term Loan, 5.00%, 6/20/19

      United States        478           461   
 

The Men’s Wearhouse Inc., Tranche B Term Loan, 4.50%, 6/18/21

      United States        1,183,276           1,178,839   
 

Party City Holdings Inc., 2014 Replacement Term Loan, 4.00% - 5.25%, 7/27/19

      United States        1,402,113           1,374,071   
 

Sungard Availability Services Capital Inc., Tranche B Term Loan, 6.00%, 3/31/19

      United States        3,246,752           2,830,087   
           

 

 

  
              15,944,945   
           

 

 

  

 

    Annual Report     FSI-23   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

Franklin Strategic Income VIP Fund (continued)

           Country     Principal Amount*     Value  
f,j  

Senior Floating Rate Interests (continued)

       
 

Semiconductors & Semiconductor Equipment 0.1%

       
 

M/A-COM Technology Solutions Holdings Inc., Initial Term Loan, 4.50%, 5/07/21

      United States        520,982      $ 520,982   
        

 

 

  
 

Software & Services 1.3%

       
 

BMC Software Finance Inc., Initial U.S. Term Loans, 5.00%, 9/10/20

      United States        4,856,465        4,721,397   
l  

MoneyGram International Inc., Term Loan, 4.25%, 3/28/20

      United States        5,166,286        4,791,730   
 

Vertafore Inc., Second Lien Term Loan, 9.75%, 10/27/17

      United States        2,015,657        2,027,414   
l  

Worldpay U.S. Inc.,

       
 

Facility B2A-II Loan, 6.25%, 11/30/19

      United States        297,300        297,857   
 

Facility C2 Loan, 5.75%, 11/30/19

      United States        106,549        106,316   
        

 

 

  
           11,944,714   
        

 

 

  
 

Technology Hardware & Equipment 0.2%

       
 

Dell International LLC, Term B Loan, 4.50%, 4/29/20

      United States        1,306,268        1,304,518   
 

Presidio Inc., Term Loan, 5.00%, 3/31/17

      United States        702,189        702,628   
        

 

 

  
           2,007,146   
        

 

 

  
 

Transportation 0.3%

       
 

Global Tip Finance BV/Finance America LLC, Facility C Commitment, 7.00%, 10/16/20

      United States        2,424,189        2,412,068   
        

 

 

  
 

Total Senior Floating Rate Interests (Cost $170,403,405)

          166,527,806   
        

 

 

  
 

Foreign Government and Agency Securities 18.2%

       
 

Government of Canada, 1.00%, 5/01/15

      Canada        5,755,000  CAD      4,956,759   
 

Government of Hungary,

       
 

5.50%, 2/12/16

      Hungary        1,864,700,000  HUF      7,437,507   
 

5.50%, 12/22/16

      Hungary        46,690,000  HUF      190,838   
 

6.50%, 6/24/19

      Hungary        206,000,000  HUF      896,291   
 

7.50%, 11/12/20

      Hungary        313,570,000  HUF      1,460,322   
 

A, 6.75%, 11/24/17

      Hungary        104,470,000  HUF      446,879   
 

A, 5.50%, 12/20/18

      Hungary        34,100,000  HUF      142,988   
 

A, 7.00%, 6/24/22

      Hungary        930,000  HUF      4,372   
 

A, 6.00%, 11/24/23

      Hungary        1,270,000  HUF      5,775   
 

senior note, 6.25%, 1/29/20

      Hungary        4,597,000        5,175,670   
 

senior note, 6.375%, 3/29/21

      Hungary        1,000,000        1,144,430   
 

Government of Indonesia, FR34, 12.80%, 6/15/21

      Indonesia        17,235,000,000  IDR      1,733,381   
 

Government of Ireland, 5.00%, 10/18/20

      Ireland        3,000,000  EUR      4,545,577   
 

Government of Malaysia,

       
 

3.741%, 2/27/15

      Malaysia        12,310,000  MYR      3,522,917   
 

3.835%, 8/12/15

      Malaysia        7,475,000  MYR      2,144,052   
 

4.72%, 9/30/15

      Malaysia        10,268,000  MYR      2,965,254   
 

3.197%, 10/15/15

      Malaysia        4,730,000  MYR      1,350,739   
 

senior bond, 3.814%, 2/15/17

      Malaysia        2,500,000  MYR      717,746   
 

senior bond, 4.24%, 2/07/18

      Malaysia        600,000  MYR      174,303   
 

senior note, 3.172%, 7/15/16

      Malaysia        28,100,000  MYR      7,992,407   
 

Government of Mexico,

       
 

6.00%, 6/18/15

      Mexico        18,020 m MXN      123,816   
 

8.00%, 12/17/15

      Mexico        753,560 m MXN      5,338,389   
 

6.25%, 6/16/16

      Mexico        699,310 m MXN      4,924,668   
 

7.25%, 12/15/16

      Mexico        790,330 m MXN      5,724,533   

 

FSI-24    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

Franklin Strategic Income VIP Fund (continued)

           Country     Principal Amount*     Value  
 

Foreign Government and Agency Securities (continued)

  

    
 

Government of Poland,

       
 

5.50%, 4/25/15

      Poland        5,300,000  PLN    $ 1,515,622   
 

6.25%, 10/24/15

      Poland        9,134,000  PLN      2,672,432   
 

4.75%, 10/25/16

      Poland        31,000,000  PLN      9,216,504   
 

Strip, 7/25/15

      Poland        2,052,000  PLN      574,410   
 

Strip, 1/25/16

      Poland        1,066,000  PLN      295,572   
d  

Government of Portugal, 144A, 5.125%, 10/15/24

      Portugal        7,000,000        7,380,800   
d  

Government of Serbia, senior note, 144A,

       
 

4.875%, 2/25/20

      Serbia        4,410,000        4,426,339   
 

7.25%, 9/28/21

      Serbia        1,000,000        1,124,125   
 

Government of Singapore, senior note, 1.125%, 4/01/16

      Singapore        7,350,000  SGD      5,585,068   
 

Government of Sri Lanka,

       
 

A, 11.75%, 3/15/15

      Sri Lanka        1,160,000  LKR      8,944   
 

A, 6.50%, 7/15/15

      Sri Lanka        28,980,000  LKR      221,640   
 

A, 6.40%, 8/01/16

      Sri Lanka        19,500,000  LKR      148,514   
 

B, 6.40%, 10/01/16

      Sri Lanka        16,000,000  LKR      121,534   
 

B, 8.50%, 7/15/18

      Sri Lanka        15,280,000  LKR      121,470   
 

C, 8.50%, 4/01/18

      Sri Lanka        8,070,000  LKR      64,034   
 

D, 8.50%, 6/01/18

      Sri Lanka        54,050,000  LKR      429,782   
 

Government of Sweden, 4.50%, 8/12/15

      Sweden        26,000,000  SEK      3,422,112   
 

Government of the Philippines,

       
 

senior bond, 7.00%, 1/27/16

      Philippines        80,000,000  PHP      1,853,835   
 

senior note, 1.625%, 4/25/16

      Philippines        155,000,000  PHP      3,427,783   
d  

Government of Ukraine,

       
 

144A, 7.75%, 9/23/20

      Ukraine        3,850,000        2,345,728   
 

senior bond, 144A, 7.80%, 11/28/22

      Ukraine        2,790,000        1,667,346   
 

senior note, 144A, 7.95%, 2/23/21

      Ukraine        2,120,000        1,289,893   
 

senior note, 144A, 7.50%, 4/17/23

      Ukraine        1,000,000        589,530   
n  

Government of Uruguay, senior bond, Index Linked, 4.375%, 12/15/28

      Uruguay        192,368,980  UYU      7,971,782   
 

Korea Monetary Stabilization Bond,

       
 

senior bond, 2.47%, 4/02/15

      South Korea        4,622,600,000  KRW      4,230,645   
 

senior bond, 2.80%, 8/02/15

      South Korea        1,324,510,000  KRW      1,216,039   
 

senior bond, 2.81%, 10/02/15

      South Korea        6,000,000,000  KRW      5,515,967   
 

senior note, 2.74%, 2/02/15

      South Korea        1,617,220,000  KRW      1,479,345   
 

senior note, 2.76%, 6/02/15

      South Korea        5,045,300,000  KRW      4,625,867   
 

Korea Treasury Bond, senior note,

       
 

3.25%, 6/10/15

      South Korea        210,800,000  KRW      193,703   
 

2.75%, 12/10/15

      South Korea        5,847,900,000  KRW      5,380,383   
 

3.00%, 12/10/16

      South Korea        5,500,000,000  KRW      5,114,921   
 

Nota Do Tesouro Nacional,

       
 

10.00%, 1/01/17

      Brazil        6,200 o BRL      2,222,517   
 

p Index Linked, 6.00%, 5/15/15

      Brazil        1,390 o BRL      1,326,942   
 

p Index Linked, 6.00%, 8/15/16

      Brazil        1,604 o BRL      1,517,596   
 

p Index Linked, 6.00%, 8/15/18

      Brazil        5,525 o BRL      5,186,197   
 

Uruguay Notas del Tesoro,

       
 

10.50%, 3/21/15

      Uruguay        1,700,000  UYU     69,193   
 

10.25%, 8/22/15

      Uruguay        59,720,000  UYU      2,431,639   
 

9.50%, 1/27/16

      Uruguay        9,220,000  UYU      379,015   
 

n 18, Index Linked, 2.25%, 8/23/17

      Uruguay        26,165,056  UYU      1,017,617   

 

    Annual Report     FSI-25   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

Franklin Strategic Income VIP Fund (continued)

           Country     Principal Amount*     Value  
 

Foreign Government and Agency Securities (continued)

  

    
 

Uruguay Treasury Bill, Strip,

       
 

7/02/15

      Uruguay        510,000  UYU    $ 19,585   
 

8/20/15

      Uruguay        35,364,000  UYU      1,335,945   
        

 

 

  
 

Total Foreign Government and Agency Securities
(Cost $178,618,520)

          162,857,528   
        

 

 

  
 

U.S. Government and Agency Securities 1.8%

       
 

U.S. Treasury Bond,

       
 

4.50%, 2/15/16

      United States        1,000,000        1,046,211   
 

7.875%, 2/15/21

      United States        900,000        1,216,055   
 

U.S. Treasury Note,

       
 

4.625%, 2/15/17

      United States        600,000        649,102   
 

4.75%, 8/15/17

      United States        2,900,000        3,184,449   
 

3.75%, 11/15/18

      United States        7,000,000        7,627,536   
 

n Index Linked, 0.125%, 4/15/16

      United States        2,474,248        2,467,290   
        

 

 

  
 

Total U.S. Government and Agency Securities
(Cost $15,720,021)

          16,190,643   
        

 

 

  
 

Asset-Backed Securities and Commercial Mortgage-Backed Securities 5.7%

       
 

Banks 3.3%

       
 

Banc of America Commercial Mortgage Trust, 2006-4, AJ, 5.695%, 7/10/46

      United States        1,807,000        1,877,446   
f  

Bear Stearns Adjustable Rate Mortgage Trust, 2004-4, A6, FRN, 3.517%, 6/25/34

      United States        2,238,662        2,308,574   
 

Bear Stearns Commercial Mortgage Securities Inc.,

       
 

f 2006-PW11, AJ, FRN, 5.605%, 3/11/39

      United States        1,000,000        1,032,955   
 

f 2006-PW12, AJ, FRN, 5.751%, 9/11/38

      United States        1,440,000        1,483,436   
 

2006-PW13, AJ, 5.611%, 9/11/41

      United States        5,100,000        5,240,293   
 

Citigroup Commercial Mortgage Trust,

       
 

2006-C5, AJ, 5.482%, 10/15/49

      United States        2,520,000        2,472,801   
 

f 2007-C6, AM, FRN, 5.706%, 6/10/17

      United States        2,500,000        2,673,498   
f  

Citigroup/Deutsche Bank Commercial Mortgage Trust, 2006-CD3, AJ, FRN, 5.688%, 10/15/48

      United States        2,700,000        2,633,594   
 

Countrywide Asset-Backed Certificates, 2005-11, AF4, 5.21%, 3/25/34

      United States        1,275,000        1,158,229   
 

Greenwich Capital Commercial Funding Corp.,

       
 

f 2006-GG7, AJ, FRN, 5.82%, 7/10/38

      United States        2,560,000        2,630,450   
 

2007-GG9, AM, 5.475%, 3/10/39

      United States        1,030,000        1,081,150   
 

JP Morgan Chase Commercial Mortgage Securities Trust,

       
 

2006-CB17, AM, 5.464%, 12/12/43

      United States        760,000        788,340   
 

f 2006-LDP7, AJ, FRN, 5.873%, 4/15/45

      United States        1,680,000        1,690,214   
f  

Merrill Lynch Mortgage Investors Trust, 2005-A6, 2A3, FRN, 0.55%, 8/25/35

      United States        350,000        324,945   
f  

Morgan Stanley Capital I Trust, 2006-HQ8, AJ, FRN, 5.497%, 3/12/44

      United States        200,000        205,503   
 

Wells Fargo Mortgage Backed Securities Trust,

       
 

f 2004-W, A9, FRN, 2.616%, 11/25/34

      United States        1,184,527        1,218,511   
 

2007-3, 3A1, 5.50%, 4/25/37

      United States        407,108        420,990   
        

 

 

  
           29,240,929   
        

 

 

  

 

FSI-26    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

Franklin Strategic Income VIP Fund (continued)

           Country     Principal Amount*     Value  
 

Asset-Backed Securities and Commercial Mortgage-Backed Securities (continued)

       
 

Diversified Financials 2.4%

       
d,f  

ARES CLO Funds, 2007-12A, B, 144A, FRN, 1.233%, 11/25/20

      United States        1,380,000      $ 1,360,211   
d,f  

Atrium CDO Corp., 10A, C, 144A, FRN, 2.829%, 7/16/25

      United States        1,400,000        1,339,940   
d,f  

Atrium XI, 11A, C, 144A, FRN, 3.435%, 10/23/25

      Cayman Islands        1,820,000        1,795,521   
d,f  

BCAP LLC Trust, 2009-RR1, 2A2, 144A, FRN, 2.615%, 5/26/35

      United States        440,000        436,854   
d,f  

Catamaran CLO Ltd., 2013-1A, C, 144A, FRN, 2.834%, 1/27/25

      Cayman Islands        1,130,000        1,069,048   
d,f  

Cent CDO Ltd., 2007-15A, A2B, 144A, FRN, 0.579%, 3/11/21

      United States        1,251,000        1,173,726   
d,f  

Cent CLO LP, 2013-17A, D, 144A, FRN, 3.233%, 1/30/25

      Cayman Islands        784,314        760,761   
d,f  

CIFC Funding Ltd., 2007-3A, A1J, 144A, FRN, 0.634%, 7/26/21

      United States        960,000        923,462   
d,f  

ColumbusNova CLO Ltd., 2007-2A, A2, 144A, FRN, 1.231%, 10/15/21

      United States        860,000        841,149   
d,f  

CT CDO IV Ltd., 2006-4A, A1, 144A, FRN, 0.476%, 10/20/43

      United States        1,461,964        1,449,479   
d,f  

Eaton Vance CDO Ltd., 2014-1A,

       
 

A, 144A, FRN, 1.685%, 7/15/26

      Cayman Islands        2,000,000        1,985,600   
 

B, 144A, FRN, 2.285%, 7/15/26

      United States        426,000        414,681   
 

C, 144A, FRN, 3.235%, 7/15/26

      United States        167,100        162,602   
d  

G-Force LLC, 2005-RRA, C, 144A, 5.20%, 8/22/36

      United States        2,000,000        1,932,710   
f  

Impac Secured Assets Trust, 2007-2, FRN, 0.42%, 4/25/37

      United States        342,107        316,693   
d,f  

ING Investment Management CLO Ltd.,

       
 

2013-1A, B, 144A, FRN, 3.131%, 4/15/24

      Cayman Islands        270,000        260,782   
 

2013-1A, C, 144A, FRN, 3.731%, 4/15/24

      Cayman Islands        440,000        418,242   
 

2013-2A, B, 144A, FRN, 2.914%, 4/25/25

      United States        1,080,000        1,038,528   
 

MortgageIT Trust, 2004-1, A2, 1.07%, 11/25/34

      United States        428,268        416,130   
d,f  

Newcastle CDO Ltd., 2004-5A, 1, 144A, FRN, 0.595%, 12/24/39

      United States        499,337        490,743   
f  

Opteum Mortgage Acceptance Corp. Trust, 2005-4, 1APT, FRN, 0.48%, 11/25/35

      United States        703,519        667,683   
 

Residential Asset Securities Corp., 2004-KS1, AI4, 4.213%, 4/25/32

      United States        39,021        38,999   
 

Structured Asset Securities Corp., 2005-2XS, 2A2, 1.656%, 2/25/35

      United States        374,569        363,017   
f,q  

Talisman 6 Finance, Reg S, FRN, 0.262%, 10/22/16

      Germany        1,666,863  EUR      1,992,620   
f  

Thornburg Mortgage Securities Trust, 2005-1, A3, FRN, 2.234%, 4/25/45

      United States        389,232        391,914   
        

 

 

  
           22,041,095   
        

 

 

  
 

Total Asset-Backed Securities and Commercial Mortgage-Backed Securities (Cost $48,972,136)

          51,282,024   
        

 

 

  
 

Mortgage-Backed Securities 3.1%

       
f  

Federal Home Loan Mortgage Corp. (FHLMC) Adjustable Rate 0.0%†

  

    
 

FHLMC, 2.348%, 1/01/33

      United States        59,855        62,458   
        

 

 

  
 

Federal Home Loan Mortgage Corp. (FHLMC) Fixed Rate 0.2%

       
 

FHLMC Gold 15 Year, 5.50%, 7/01/17 - 7/01/19

      United States        90,706        96,389   
 

FHLMC Gold 15 Year, 6.00%, 5/01/17

      United States        3,998        4,168   
 

FHLMC Gold 15 Year, 6.50%, 5/01/16

      United States        379        388   
l  

FHLMC Gold 30 Year, 3.50%, 1/01/42

      United States        148,000        153,897   
 

FHLMC Gold 30 Year, 5.00%, 4/01/34 - 8/01/35

      United States        388,336        429,657   
 

FHLMC Gold 30 Year, 5.50%, 3/01/33 - 1/01/35

      United States        365,995        411,229   
 

FHLMC Gold 30 Year, 6.00%, 4/01/33 - 2/01/36

      United States        319,783        364,767   
 

FHLMC Gold 30 Year, 6.50%, 12/01/23 - 6/01/36

      United States        76,567        87,736   
 

FHLMC Gold 30 Year, 7.00%, 9/01/21 - 4/01/30

      United States        32,452        36,857   

 

    Annual Report     FSI-27   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

Franklin Strategic Income VIP Fund (continued)

           Country     Principal Amount*        Value  
 

Mortgage-Backed Securities (continued)

          
 

Federal Home Loan Mortgage Corp. (FHLMC) Fixed Rate (continued)

  

       
 

FHLMC Gold 30 Year, 7.50%, 8/01/30 - 7/01/31

      United States        1,245         $ 1,364   
           

 

 

  
              1,586,452   
           

 

 

  
f  

Federal National Mortgage Association (FNMA) Adjustable Rate 0.0%†

  

       
 

FNMA, 2.31% - 2.33%, 4/01/20 - 12/01/34

      United States        214,239           227,099   
           

 

 

  
 

Federal National Mortgage Association (FNMA) Fixed Rate 2.7%

          
 

FNMA 15 Year, 2.50%, 7/01/22 - 6/01/27

      United States        607,676           620,941   
 

FNMA 15 Year, 3.00%, 10/01/27

      United States        5,241,524           5,463,969   
 

FNMA 15 Year, 4.50%, 6/01/19 - 3/01/20

      United States        128,656           135,518   
 

FNMA 15 Year, 5.00%, 10/01/17 - 6/01/18

      United States        94,512           99,648   
 

FNMA 15 Year, 5.50%, 3/01/16 - 11/01/18

      United States        552,873           584,218   
 

FNMA 15 Year, 6.00%, 4/01/16 - 7/01/16

      United States        854           859   
l  

FNMA 30 Year, 3.00%, 1/01/43

      United States        7,143,000           7,226,149   
l  

FNMA 30 Year, 3.50%, 1/01/42

      United States        1,087,000           1,133,198   
l  

FNMA 30 Year, 4.00%, 1/01/41

      United States        7,409,000           7,907,863   
 

FNMA 30 Year, 5.00%, 4/01/30

      United States        130,124           144,265   
 

FNMA 30 Year, 6.50%, 6/01/28 - 10/01/37

      United States        368,129           420,170   
           

 

 

  
              23,736,798   
           

 

 

  
 

Government National Mortgage Association (GNMA) Fixed Rate 0.2%

  

       
 

GNMA I SF 30 Year, 5.00%, 11/15/33 - 7/15/34

      United States        441,687           489,201   
 

GNMA I SF 30 Year, 6.50%, 2/15/32

      United States        2,164           2,471   
 

GNMA I SF 30 Year, 7.00%, 10/15/28 - 6/15/32

      United States        32,104           33,858   
 

GNMA I SF 30 Year, 7.50%, 9/15/30

      United States        1,636           1,969   
l  

GNMA II SF 30 Year, 3.50%, 1/01/43

      United States        820,000           860,808   
 

GNMA II SF 30 Year, 5.00%, 9/20/33 - 11/20/33

      United States        130,124           144,661   
 

GNMA II SF 30 Year, 6.00%, 11/20/34

      United States        149,979           172,286   
 

GNMA II SF 30 Year, 6.50%, 4/20/31 - 2/20/34

      United States        70,608           82,467   
 

GNMA II SF 30 Year, 7.50%, 1/20/28 - 4/20/32

      United States        17,319           20,249   
           

 

 

  
              1,807,970   
           

 

 

  
 

Total Mortgage-Backed Securities (Cost $26,939,088)

             27,420,777   
           

 

 

  
 

Municipal Bonds 3.9%

          
 

Arkansas State GO, Four-Lane Highway Construction and Improvement Bonds, 3.25%, 6/15/22

      United States        400,000           433,352   
 

California State GO, Various Purpose,

          
 

5.25%, 11/01/40

      United States        560,000           645,854   
 

Refunding, 5.25%, 3/01/38

      United States        1,500,000           1,632,060   
 

Refunding, 5.00%, 4/01/38

      United States        2,000,000           2,180,720   
 

Refunding, NATL Insured, 4.50%, 12/01/32

      United States        300,000           313,008   
 

Refunding, Series 1, AGMC Insured, 4.75%, 9/01/31

      United States        290,000           299,982   
 

Colorado State ISD, GO, Mitchell and Scurry Counties, School Building, PSF Guarantee, 5.00%, 8/15/43

      United States        300,000           343,011   
 

Evansville Local Public Improvement Bond Bank Revenue, Sewage Works Project, Series A, 5.00%, 7/01/36

      United States        675,000           765,848   
 

Florida Hurricane Catastrophe Fund Finance Corp. Revenue,
Series A, 2.995%, 7/01/20

      United States        3,000,000           3,038,400   
 

Illinois State GO,

          
 

5.877%, 3/01/19

      United States        2,000,000           2,210,240   
 

Build America Bonds, 7.35%, 7/01/35

      United States        1,000,000           1,177,250   

 

FSI-28    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

Franklin Strategic Income VIP Fund (continued)

           Country     Principal Amount*     Value  
 

Municipal Bonds (continued)

       
 

Massachusetts State GO, Consolidated Loan of 2014,
Series A, 4.50%, 12/01/43

      United States        2,300,000      $ 2,482,344   
 

Minnesota State GO, Various Purpose, Refunding,
Series F, 4.00%, 10/01/24

      United States        2,650,000        3,009,128   
 

Nassau County GO, General Improvement Bonds, Series B, 5.00%,

       
 

4/01/39

      United States        1,500,000        1,674,495   
 

4/01/43

      United States        1,600,000        1,764,336   
 

New Jersey EDA Revenue, School Facilities Construction, Refunding,
Series NN, 5.00%, 3/01/30

      United States        700,000        767,641   
 

New York City HDC Revenue, Series B1, 5.00%, 7/01/33

      United States        500,000        572,010   
 

New York City Municipal Water Finance Authority Water and Sewer
System Revenue, Second General Resolution, Fiscal 2014,

       
 

Refunding, Series BB, 5.00%, 6/15/46

      United States        2,430,000        2,745,535   
 

New York State Urban Development Corp. Revenue, State Personal
Income Tax, General Purpose, Series C, 5.00%, 3/15/29

      United States        1,500,000        1,766,445   
 

Puerto Rico Electric Power Authority Power Revenue,

       
 

Series A, 6.75%, 7/01/36

      United States        3,465,000        1,754,364   
 

Series XX, 5.25%, 7/01/40

      United States        165,000        83,541   
 

Puerto Rico Sales Tax FICO Revenue, Capital Appreciation, Refunding, Series A, zero cpn., 8/01/26

      United States        275,000        101,585   
 

Puerto Rico Sales Tax FICO Sales Tax Revenue,

       
 

Capital Appreciation, Series A, zero cpn., 8/01/25

      United States        320,000        128,835   
 

first subordinate, Series A, 5.75%, 8/01/37

      United States        500,000        372,480   
 

first subordinate, Series A, 6.50%, 8/01/44

      United States        2,500,000        2,006,575   
 

Refunding, Series A, NATL RE, FGIC Insured, zero cpn., 8/01/45

      United States        3,700,000        531,394   
 

Refunding, Series B, 6.05%, 8/01/37

      United States        915,000        669,140   
 

Refunding, Series B, 6.05%, 8/01/38

      United States        1,120,000        817,656   
 

South Carolina State Public Service Authority Revenue, Refunding,
Series B, 5.00%, 12/01/38

      United States        1,000,000        1,123,620   
        

 

 

  
 

Total Municipal Bonds (Cost $34,692,948)

          35,410,849   
        

 

 

  
               Shares        
 

Escrows and Litigation Trusts 0.0%

       
a,k  

Comfort Co. Inc., Escrow Account

      United States        13,427        —   
a,k  

NewPage Corp., Litigation Trust

      United States        2,500,000        —   
        

 

 

  
 

Total Escrows and Litigation Trusts (Cost $ —)

          —   
        

 

 

  
 

Total Investments before Short Term Investments
(Cost $818,545,990)

          794,636,657   
        

 

 

  
               Principal Amount*        
 

Short Term Investments 10.8%

       
 

Foreign Government and Agency Securities (Cost $475,130) 0.1%

       
 

Government of Canada, 1.50%, 8/01/15

      Canada        550,000  CAD      475,015   
        

 

 

  
 

Total Investments before Money Market Funds
(Cost $819,021,120)

          795,111,672   
        

 

 

  

 

    Annual Report     FSI-29   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

Franklin Strategic Income VIP Fund (continued)

           Country     Shares        Value  
 

Money Market Funds (Cost $96,065,603) 10.7%

          
a,r  

Institutional Fiduciary Trust Money Market Portfolio

      United States        96,065,603         $ 96,065,603   
           

 

 

  
 

Total Investments (Cost $915,086,723) 99.5%

             891,177,275   
 

Other Assets, less Liabilities 0.5%

             4,230,066   
           

 

 

  
 

Net Assets 100.0%

           $ 895,407,341   
           

 

 

  

 

†Rounds to less than 0.1% of net assets.

*The principal amount is stated in U.S. dollars unless otherwise indicated.

aNon-income producing.

bThe security is owned by FT Holdings Corporation III, a wholly-owned subsidiary of the Fund. See Note 1(g).

cAt December 31, 2014, pursuant to the Fund’s policies and the requirements of applicable securities law, the Fund may be restricted from trading these securities for a limited or extended period of time.

dSecurity was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be sold in transactions exempt from registration only to qualified institutional buyers or in a public offering registered under the Securities Act of 1933. These securities have been deemed liquid under guidelines approved by the Trust’s Board of Trustees. At December 31, 2014, the aggregate value of these securities was $176,474,602, representing 19.71% of net assets.

ePerpetual security with no stated maturity date.

fThe coupon rate shown represents the rate at period end.

gSee Note 7 regarding defaulted securities.

hSee Note 1(f) regarding loan participation notes.

iIncome may be received in additional securities and/or cash.

jSee Note 1(i) regarding senior floating rate interests.

kSecurity has been deemed illiquid because it may not be able to be sold within seven days. At December 31, 2014, the aggregate value of these securities was $154,522, representing 0.02% of net assets.

lA portion or all of the security purchased on a delayed delivery or to-be-announced (TBA) basis. See Note 1(c).

mPrincipal amount is stated in 100 Mexican Peso Units

nPrincipal amount of security is adjusted for inflation. See Note 1(k).

oPrincipal amount is stated in 1,000 Brazilian Real Units.

pRedemption price at maturity is adjusted for inflation. See Note 1(k).

qSecurity was purchased pursuant to Regulation S under the Securities Act of 1933, which exempts from registration securities offered and sold outside of the United States. Such a security cannot be sold in the United States without either an effective registration statement filed pursuant to the Securities Act of 1933, or pursuant to an exemption from registration. This security has been deemed liquid under guidelines approved by the Trust’s Board of Trustees. At December 31, 2014, the value of this security was $1,992,620, representing 0.22% of net assets.

rSee Note 3(e) regarding investments in Institutional Fiduciary Trust Money Market Portfolio.

 

 

FSI-30    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

Franklin Strategic Income VIP Fund (continued)

At December 31, 2014, the Fund had the following forward exchange contracts outstanding. See Note 1(d).

 

Forward Exchange Contracts  
Currency    Counterpartya      Type      Quantity      Contract
Amount		      Settlement
Date		      Unrealized
Appreciation		      Unrealized
Depreciation		  

Chilean Peso

      BZWS         Buy         477,650,000       $ 823,534         1/09/15       $ —       $ (37,357 ) 

Chilean Peso

      DBAB         Buy         140,000,000         241,421         1/09/15         —         (10,991 ) 

Euro

      BZWS         Buy         3,948,823         4,995,538         1/09/15         —         (216,986 ) 

Euro

      BZWS         Sell         4,116,197         5,626,760         1/09/15         645,666         —   

Euro

      DBAB         Buy         5,924,086         8,066,131         1/09/15         —         (897,273 ) 

Euro

      DBAB         Sell         7,328,957         9,971,255         1/09/15         1,102,333         —   

Euro

      JPHQ         Buy         2,590,000         3,302,657         1/09/15         —         (168,445 ) 

Euro

      JPHQ         Sell         7,574,544         10,313,425         1/09/15         1,147,313         —   

Indian Rupee

      DBAB         Buy         307,316,000         4,589,980         1/09/15         276,658         —   

Indian Rupee

      HSBC         Buy         144,338,000         2,139,801         1/09/15         145,927         —   

Indian Rupee

      JPHQ         Buy         23,701,000         356,835         1/09/15         18,492         —   

Japanese Yen

      BZWS         Sell         136,513,000         1,336,671         1/09/15         197,312         —   

Japanese Yen

      CITI         Sell         127,820,000         1,250,365         1/09/15         183,559         —   

Japanese Yen

      DBAB         Buy         379,925,000         3,508,727         1/09/15         —         (337,814 ) 

Japanese Yen

      DBAB         Sell         987,554,000         9,622,124         1/09/15         1,379,843         —   

Japanese Yen

      GSCO         Sell         42,760,000         417,639         1/09/15         60,758         —   

Japanese Yen

      HSBC         Sell         247,910,000         2,397,324         1/09/15         328,228         —   

Japanese Yen

      JPHQ         Sell         149,719,000         1,472,570         1/09/15         222,991         —   

Singapore Dollar

      DBAB         Buy         1,663,000         1,319,773         1/09/15         —         (64,773 ) 

Euro

      DBAB         Buy         2,150,000         2,876,399         2/09/15         —         (273,846 ) 

Euro

      DBAB         Sell         3,561,422         4,905,641         2/09/15         594,576         —   

Euro

      JPHQ         Sell         1,889,700         2,614,801         2/09/15         327,339         —   

Indian Rupee

      CITI         Buy         4,537,000         68,123         2/09/15         3,311         —   

Japanese Yen

      DBAB         Sell         257,790,000         2,516,252         2/09/15         364,132         —   

Japanese Yen

      HSBC         Sell         85,800,000         837,049         2/09/15         120,761         —   

Japanese Yen

      JPHQ         Sell         181,500,000         1,771,692         2/09/15         256,468         —   

Singapore Dollar

      DBAB         Buy         973,400         768,575         2/09/15         —         (34,377 ) 

Singapore Dollar

      JPHQ         Buy         694,000         548,088         2/09/15         —         (24,630 ) 

Swedish Krona

      DBAB         Buy         91,336,000         14,011,490         2/09/15         —         (2,298,768 ) 

Swedish Krona

      DBAB         Sell         52,750,000         7,001,670         2/09/15         237,129         —   

British Pound

      DBAB         Sell         380,363         643,957         3/09/15         51,408         —   

Chilean Peso

      DBAB         Buy         314,000,000         543,629         3/09/15         —         (29,644 ) 

Chilean Peso

      JPHQ         Buy         234,301,000         408,546         3/09/15         —         (25,020 ) 

Chilean Peso

      MSCO         Buy         220,380,000         389,861         3/09/15         —         (29,122 ) 

Euro

      BZWS         Sell         132,570         182,984         3/09/15         22,474         —   

Euro

      DBAB         Buy         3,154,283         3,961,374         3/09/15         —         (142,319 ) 

Euro

      DBAB         Sell         14,178,711         19,458,828         3/09/15         2,291,922         —   

Euro

      HSBC         Sell         142,717         196,450         3/09/15         23,655         —   

Euro

      JPHQ         Sell         2,118,679         2,926,091         3/09/15         360,895         —   

Japanese Yen

      DBAB         Sell         780,622,000         7,656,519         3/09/15         1,137,991         —   

Japanese Yen

      HSBC         Sell         80,270,000         785,267         3/09/15         114,978         —   

Japanese Yen

      JPHQ         Sell         235,580,000         2,304,140         3/09/15         336,945         —   

Singapore Dollar

      DBAB         Buy         7,316,140         5,840,520         3/09/15         —         (323,568 ) 

Singapore Dollar

      DBAB         Sell         2,651,000         1,999,095         3/09/15         30         —   

Singapore Dollar

      HSBC         Buy         837,000         669,900         3/09/15         —         (38,736 ) 

Singapore Dollar

      JPHQ         Buy         4,945,200         3,938,045         3/09/15         —         (208,971 ) 

British Pound

      DBAB         Sell         1,674,528         2,746,518         5/07/15         139,162         —   

Chilean Peso

      CITI         Buy         377,668,000         634,203         5/07/15         —         (19,050 ) 

Chilean Peso

      JPHQ         Buy         1,598,650,000         2,727,027         5/07/15         —         (123,112 ) 

Euro

      BZWS         Sell         4,318,741         5,524,305         5/07/15         292,263         —   

Euro

      CITI         Sell         1,058,200         1,427,103         5/07/15         145,121         —   

Euro

      DBAB         Sell         10,374,678         13,742,245         5/07/15         1,173,593         —   

Euro

      GSCO         Sell         369,000         468,398         5/07/15         21,364         —   

Euro

      JPHQ         Sell         6,561,135         8,572,596         5/07/15         623,951         —   

Indian Rupee

      DBAB         Sell         31,625,000         500,000         5/07/15         9,526         —   

 

    Annual Report     FSI-31   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

Forward Exchange Contracts (continued)  
Currency    Counterpartya      Type      Quantity      Contract
Amount		      Settlement
Date		      Unrealized
Appreciation		      Unrealized
Depreciation		  

Japanese Yen

      BZWS         Sell         60,047,000       $ 587,731         5/07/15       $ 85,961       $ —   

Japanese Yen

      CITI         Sell         31,757,000         310,679         5/07/15         45,309         —   

Japanese Yen

      DBAB         Sell         27,184,000         265,287         5/07/15         38,130         —   

Japanese Yen

      HSBC         Sell         147,626,000         1,444,594         5/07/15         210,991         —   

Japanese Yen

      JPHQ         Sell         366,653,000         3,477,968         5/07/15         414,115         —   

Malaysian Ringgit

      DBAB         Buy         6,892,000         2,087,852         5/07/15         —         (139,500 ) 

Singapore Dollar

      DBAB         Sell         1,249,000         999,240         5/07/15         58,209         —   

Euro

      BZWS         Sell         529,706         668,870         6/18/15         26,855         —   

Euro

      CITI         Sell         3,868,000         4,772,277         6/18/15         84,177         —   

Euro

      DBAB         Sell         6,574,489         8,210,401         6/18/15         241,980         —   

Euro

      JPHQ         Sell         2,176,103         2,718,786         6/18/15         81,302         —   

Indian Rupee

      DBAB         Buy         128,000,000         2,008,473         6/18/15         —         (36,800 ) 

Japanese Yen

      DBAB         Sell         1,175,702,500         10,237,325         6/18/15         407,799         —   

Japanese Yen

      JPHQ         Sell         548,120,000         4,864,378         6/18/15         294,015         (12,224 ) 

Japanese Yen

      MSCO         Sell         12,500,000         110,358         6/18/15         5,851         —   

Malaysian Ringgit

      DBAB         Buy         623,200         184,734         6/18/15         —         (9,157 ) 

Malaysian Ringgit

      HSBC         Buy         376,000         110,530         6/18/15         —         (4,597 ) 
                 

 

 

  

Unrealized appreciation (depreciation)

  

      16,352,768         (5,507,080 ) 
                 

 

 

  

Net unrealized appreciation (depreciation)

  

    $ 10,845,688      
                 

 

 

     

aMay be comprised of multiple contracts with the same counterparty, currency and settlement date.

At December 31, 2014, the Fund had the following credit default swap contracts outstanding. See Note 1(d).

Credit Default Swap Contracts

Description    Counterparty /
Exchange		      Notional
Amounta		      Periodic
Payment
Rate		     Expiration
Date		      Upfront
Premiums
Paid
(Received)		     Unrealized
Appreciation		      Unrealized
Depreciation		      Market
Value		      Ratingb
OTC Swaps                         
Contracts to Sell Protectionc                      
Traded Index                         

MCDX.NA.21

      CITI         7,000,000         1.00 %      12/20/18       $ (104,821 )    $ 173,015       $  —       $ 68,194       Non Investment
Grade

MCDX.NA.23

      CITI         3,000,000         1.00 %      12/20/19         19,683        2,602         —         22,285       Non Investment
Grade
               

 

 

           

Net unrealized appreciation (depreciation)

  

   $ 175,617            
               

 

 

           

aIn U.S. dollars unless otherwise indicated. For contracts to sell protection, the notional amount is equal to the maximum potential amount of the future payments and no recourse provisions have been entered into in association with the contracts.

bBased on Standard and Poor’s (S&P) Rating for single name swaps and internal ratings for index swaps. Internal ratings based on mapping into equivalent ratings from external vendors.

cThe fund enters contracts to sell protection to create a long credit position. Performance triggers include default, bankruptcy or restructuring for single name swaps and failure to pay or bankruptcy of the underlying securities for traded index swaps.

See Note 9 regarding other derivative information.

See Abbreviations on page FSI-49.

 

FSI-32    Annual Report   |    The accompanying notes are an integral part of these financial statements.    

Franklin Strategic Income VIP Fund (continued)

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

Financial Statements

Statement of Assets and Liabilities

December 31, 2014

 

      Franklin Strategic
Income VIP Fund		  

Assets:

   

Investments in securities:

   

Cost - Unaffiliated issuers

    $ 819,021,120   

Cost - Sweep Money Fund (Note 3e)

      96,065,603   
  

 

 

  

Total cost of investments

    $ 915,086,723   
  

 

 

  

Value - Unaffiliated issuers

    $ 795,111,672   

Value - Sweep Money Fund (Note 3e)

      96,065,603   
  

 

 

  

Total value of investments

      891,177,275   

Cash

      182,186   

Restricted cash (Note 1e)

      5,579,400   

Foreign currency, at value (cost $895,888)

      895,812   

Receivables:

   

Investment securities sold

      8,259,331   

Capital shares sold

      219,339   

Dividends and interest

      9,346,168   

OTC swaps (premiums paid $20,637)

      19,683   

Unrealized appreciation on forward exchange contracts

      16,352,768   

Unrealized appreciation on OTC swap contracts

      175,617   

Other assets

      89   
  

 

 

  

Total assets

      932,207,668   
  

 

 

  

Liabilities:

   

Payables:

   

Investment securities purchased

      24,528,561   

Capital shares redeemed

      251,919   

Management fees

      436,276   

Distribution fees

      153,261   

Due to brokers

      5,579,400   

OTC Swaps (premiums received $137,569)

      104,821   

Unrealized depreciation on forward exchange contracts

      5,507,080   

Unrealized depreciation on unfunded loan commitments (Note 8)

      19,110   

Deferred tax

      11,099   

Accrued expenses and other liabilities

      208,800   
  

 

 

  

Total liabilities

      36,800,327   
  

 

 

  

Net assets, at value

    $ 895,407,341   
  

 

 

  

Net assets consist of:

   

Paid-in capital

    $ 853,292,288   

Undistributed net investment income

      39,238,788   

Net unrealized appreciation (depreciation)

      (13,091,622 ) 

Accumulated net realized gain (loss)

      15,967,887   
  

 

 

  

Net assets, at value

    $ 895,407,341   
  

 

 

  

 

    The accompanying notes are an integral part of these financial statements.    |   Annual Report     FSI-33   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FINANCIAL STATEMENTS

Statement of Assets and Liabilities (continued)

December 31, 2014

 

      Franklin Strategic
Income VIP Fund		  
Class 1:   

Net assets, at value

    $ 574,850,182   
  

 

 

  

Shares outstanding

      48,308,043   
  

 

 

  

Net asset value and maximum offering price per share

    $ 11.90   
  

 

 

  
Class 2:   

Net assets, at value

    $ 206,570,686   
  

 

 

  

Shares outstanding

      17,887,815   
  

 

 

  

Net asset value and maximum offering price per share

    $ 11.55   
  

 

 

  
Class 4:   

Net assets, at value

    $ 113,986,473   
  

 

 

  

Shares outstanding

      9,674,546   
  

 

 

  

Net asset value and maximum offering price per share

    $ 11.78   
  

 

 

  

 

FSI-34    Annual Report   |    The accompanying notes are an integral part of these financial statements.    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FINANCIAL STATEMENTS

Statement of Operations

for the year ended December 31, 2014

 

      Franklin Strategic
Income VIP Fund		  

Investment income:

   

Dividends

    $ 137,853   

Interest

      48,006,997   
  

 

 

  

Total investment income

      48,144,850   
  

 

 

  

Expenses:

   

Management fees (Note 3a)

      5,595,205   

Distribution fees: (Note 3c)

   

Class 2

      480,827   

Class 4

      451,080   

Custodian fees (Note 4)

      126,357   

Reports to shareholders

      206,080   

Professional fees

      101,661   

Trustees’ fees and expenses

      3,913   

Other

      82,245   
  

 

 

  

Total expenses

      7,047,368   

Expense reductions (Note 4)

      (1,130 ) 

Expenses waived/paid by affiliates (Note 3e)

      (75,838 ) 
  

 

 

  

Net expenses

      6,970,400   
  

 

 

  

Net investment income

      41,174,450   
  

 

 

  

Realized and unrealized gains (losses):

   

Net realized gain (loss) from:

   

Investments

      18,635,732   

Foreign currency transactions

      2,286,891   

Swap contracts

      973,216   
  

 

 

  

Net realized gain (loss)

      21,895,839   
  

 

 

  

Net change in unrealized appreciation (depreciation) on:

   

Investments

      (52,758,469 ) 

Translation of other assets and liabilities denominated in foreign currencies

      11,194,003   

Change in deferred taxes on unrealized appreciation

      30   
  

 

 

  

Net change in unrealized appreciation (depreciation)

      (41,564,436 ) 
  

 

 

  

Net realized and unrealized gain (loss)

      (19,668,597 ) 
  

 

 

  

Net increase (decrease) in net assets resulting from operations

    $ 21,505,853   
  

 

 

  

 

    The accompanying notes are an integral part of these financial statements.    |   Annual Report     FSI-35   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FINANCIAL STATEMENTS

Statements of Changes in Net Assets

 

    Franklin Strategic Income VIP Fund  
    Year Ended December 31,  
     2014        2013  

Increase (decrease) in net assets:

       

Operations:

       

Net investment income

   $ 41,174,450         $ 54,238,182   

Net realized gain (loss) from investments, foreign currency transactions and swap contracts

     21,895,839           22,020,933   

Net change in unrealized appreciation (depreciation) on investments, translation of other assets and liabilities denominated in foreign currencies and deferred taxes

     (41,564,436 )         (37,991,817 ) 
 

 

 

  

Net increase (decrease) in net assets resulting from operations

     21,505,853           38,267,298   
 

 

 

  

Distributions to shareholders from:

       

Net investment income and net foreign currency gains:

       

Class 1

     (39,220,893 )         (54,987,119 ) 

Class 2

     (11,269,863 )         (10,246,664 ) 

Class 4

     (7,512,342 )         (10,775,092 ) 

Net realized gains:

       

Class 1

     (12,517,628 )         (11,433,439 ) 

Class 2

     (3,732,579 )         (2,203,428 ) 

Class 4

     (2,588,163 )         (2,384,488 ) 
 

 

 

  

Total distributions to shareholders

     (76,841,468 )         (92,030,230 ) 
 

 

 

  

Capital share transactions: (Note 2)

       

Class 1

     (94,647,397 )         (275,817,937 ) 

Class 2

     43,236,033           23,867,593   

Class 4

     (13,615,799 )         (52,983,286 ) 
 

 

 

  

Total capital share transactions

     (65,027,163 )         (304,933,630 ) 
 

 

 

  

Net increase (decrease) in net assets

     (120,362,778 )         (358,696,562 ) 

Net assets:

       

Beginning of year

     1,015,770,119           1,374,466,681   
 

 

 

  

End of year

   $ 895,407,341         $ 1,015,770,119   
 

 

 

  

Undistributed net investment income included in net assets:

       

End of year

   $ 39,238,788         $ 50,393,655   
 

 

 

  

 

FSI-36    Annual Report   |    The accompanying notes are an integral part of these financial statements.    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

Notes to Financial Statements

Franklin Strategic Income VIP Fund

1. Organization and Significant Accounting Policies

Franklin Templeton Variable Insurance Products Trust (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end management investment company, consisting of nineteen separate funds and applies the specialized accounting and reporting guidance in U.S. Generally Accepted Accounting Principles (U.S. GAAP). Franklin Strategic Income VIP Fund (Fund) is included in this report. The financial statements of the remaining funds in the Trust are presented separately. Shares of the Fund are generally sold only to insurance company separate accounts to fund the benefits of variable life insurance policies or variable annuity contracts. At December 31, 2014, 77.75% of the Fund’s shares were held through one insurance company. Investment activities of these insurance company separate accounts could have a material impact on the Fund. The Fund offers three classes of shares: Class 1, Class 2, and Class 4. Each class of shares differs by its distribution fees, voting rights on matters affecting a single class and its exchange privilege.

Effective May 1, 2014, Franklin Strategic Income Securities Fund was renamed Franklin Strategic Income VIP Fund.

The following summarizes the Fund’s significant accounting policies.

a. Financial Instrument Valuation

The Fund’s investments in financial instruments are carried at fair value daily. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. The Fund calculates the net asset value (NAV) per share at the close of the New York Stock Exchange (NYSE), generally at 4 p.m. Eastern time (NYSE close) on each day the NYSE is open for trading. Under compliance policies and procedures approved by the Trust’s Board of Trustees (the Board), the Fund’s administrator has responsibility for oversight of valuation, including leading the cross-functional Valuation and Liquidity Oversight Committee (VLOC). The VLOC provides administration and oversight of the Fund’s valuation policies and procedures, which are approved annually by the Board. Among other things, these procedures allow the Fund to utilize independent pricing services, quotations from securities and financial instrument dealers, and other market sources to determine fair value.

Equity securities listed on an exchange or on the NASDAQ National Market System are valued at the last quoted sale price or the official closing price of the day, respectively. Foreign equity securities are valued as of the close of trading on the foreign stock exchange on which the security is primarily traded or as of the NYSE close, whichever is earlier. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at the NYSE close on the day that the value of the security is determined. Over-the-counter (OTC) securities are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. Certain equity securities are valued based upon fundamental characteristics or relationships to similar securities. Investments in open-end mutual funds are valued at the closing NAV.

Debt securities generally trade in the OTC market rather than on a securities exchange. The Fund’s pricing services use multiple valuation techniques to determine fair value. In instances where sufficient market activity exists, the pricing services may utilize a market-based approach through which quotes from market makers are used to determine fair value. In instances where sufficient market activity may not exist or is limited, the pricing services also utilize proprietary valuation models which may consider market characteristics such as benchmark yield curves, credit spreads, estimated default rates, anticipated market interest rate volatility, coupon rates, anticipated timing of principal repayments, underlying collateral, and other unique security features in order to estimate the relevant cash flows, which are then discounted to calculate the fair value. Securities denominated in a foreign currency are converted into their U.S. dollar equivalent at the foreign exchange rate in effect at the NYSE close on the date that the values of the foreign debt securities are determined.

Certain derivative financial instruments (derivatives) trade in the OTC market. The Fund’s pricing services use various techniques including industry standard option pricing models and proprietary discounted cash flow models to determine the fair value of those instruments. The Fund’s net benefit or obligation under the derivative contract, as measured by the fair value of the contract, is included in net assets.

The Fund has procedures to determine the fair value of financial instruments for which market prices are not reliable or readily available. Under these procedures, the VLOC convenes on a

 

 

    Annual Report     FSI-37   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Franklin Strategic Income VIP Fund (continued)

1. Organization and Significant Accounting Policies (continued)

a. Financial Instrument Valuation (continued)

regular basis to review such financial instruments and considers a number of factors, including significant unobservable valuation inputs, when arriving at fair value. The VLOC primarily employs a market-based approach which may use related or comparable assets or liabilities, recent transactions, market multiples, book values, and other relevant information for the investment to determine the fair value of the investment. An income-based valuation approach may also be used in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the investments. Due to the inherent uncertainty of valuations of such investments, the fair values may differ significantly from the values that would have been used had an active market existed. The VLOC employs various methods for calibrating these valuation approaches including a regular review of key inputs and assumptions, transactional back-testing or disposition analysis, and reviews of any related market activity.

Trading in securities on foreign securities stock exchanges and OTC markets may be completed before the daily NYSE close. In addition, trading in certain foreign markets may not take place on every NYSE business day. Occasionally, events occur between the time at which trading in a foreign security is completed and the close of the NYSE that might call into question the reliability of the value of a portfolio security held by the Fund. As a result, differences may arise between the value of the Fund’s portfolio securities as determined at the foreign market close and the latest indications of value at the close of the NYSE. In order to minimize the potential for these differences, the VLOC monitors price movements following the close of trading in foreign stock markets through a series of country specific market proxies (such as baskets of American Depositary Receipts, futures contracts and exchange traded funds). These price movements are measured against established trigger thresholds for each specific market proxy to assist in determining if an event has occurred that may call into question the reliability of the values of the foreign securities held by the Fund. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services.

Also, when the last day of the reporting period is a non-business day, certain foreign markets may be open on those days that the NYSE is closed, which could result in differences between the value of the Fund’s portfolio securities on the last business day and the last calendar day of the reporting period. Any significant security valuation changes due to an open foreign market are adjusted and reflected by the Fund for financial reporting purposes.

b. Foreign Currency Translation

Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. The Fund may enter into foreign currency exchange contracts to facilitate transactions denominated in a foreign currency. Purchases and sales of securities, income and expense items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. Portfolio securities and assets and liabilities denominated in foreign currencies contain risks that those currencies will decline in value relative to the U.S. dollar. Occasionally, events may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the Board.

The Fund does not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments on the Statement of Operations.

Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period.

c. Securities Purchased on a Delayed Delivery and TBA Basis

The Fund purchases securities on a delayed delivery and to-be-announced (TBA) basis, with payment and delivery scheduled for a future date. These transactions are subject to market

 

FSI-38    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Franklin Strategic Income VIP Fund (continued)

fluctuations and are subject to the risk that the value at delivery may be more or less than the trade date purchase price. Although the Fund will generally purchase these securities with the intention of holding the securities, it may sell the securities before the settlement date. Sufficient assets have been segregated for these securities.

d. Derivative Financial Instruments

The Fund invested in derivatives in order to manage risk or gain exposure to various other investments or markets. Derivatives are financial contracts based on an underlying or notional amount, require no initial investment or an initial net investment that is smaller than would normally be required to have a similar response to changes in market factors, and require or permit net settlement. Derivatives contain various risks including the potential inability of the counterparty to fulfill their obligations under the terms of the contract, the potential for an illiquid secondary market, and/or the potential for market movements which expose the Fund to gains or losses in excess of the amounts shown on the Statement of Assets and Liabilities. Realized gain and loss and unrealized appreciation and depreciation on these contracts for the period are included in the Statement of Operations.

Derivative counterparty credit risk is managed through a formal evaluation of the creditworthiness of all potential counterparties. The Fund attempts to reduce its exposure to counterparty credit risk on OTC derivatives, whenever possible, by entering into International Swaps and Derivatives Association (ISDA) master agreements with certain counterparties. These agreements contain various provisions, including but not limited to collateral requirements, events of default, or early termination. Termination events applicable to the counterparty include certain deteriorations in the credit quality of the counterparty. Termination events applicable to the Fund include failure of the Fund to maintain certain net asset levels and/or limit the decline in net assets over various periods of time. In the event of default or early termination, the ISDA master agreement gives the non-defaulting party the right to net and close-out all transactions traded, whether or not arising under the ISDA agreement, to one net amount payable by one counterparty to the other. However, absent an event of default or early termination, OTC derivative assets and liabilities are presented gross and not offset in the Statement of Assets and Liabilities. Early termination by the counterparty may result in an immediate payment by the Fund of any net liability owed to that counterparty under the ISDA agreement.

Collateral requirements differ by type of derivative. Collateral terms are contract specific for OTC derivatives. For OTC derivatives traded under an ISDA master agreement, posting of collateral is required by either the fund or the applicable counterparty if the total net exposure of all OTC derivatives with the applicable counterparty exceeds the minimum transfer amount, which typically ranges from $100,000 to $250,000, and can vary depending on the counterparty and the type of the agreement. Generally, collateral is determined at the close of fund business each day and any additional collateral required due to changes in derivative values may be delivered by the fund or the counterparty within a few business days. Collateral pledged and/or received by the fund, if any, is held in segregated accounts with the fund’s custodian/counterparty broker and can be in the form of cash and/or securities. Unrestricted cash may be invested according to the Fund’s investment objectives.

The Fund entered into OTC forward exchange contracts primarily to manage and/or gain exposure to certain foreign currencies. A forward exchange contract is an agreement between the Fund and a counterparty to buy or sell a foreign currency at a specific exchange rate on a future date.

The Fund entered into credit default swap contracts primarily to manage exposure to credit risk. A credit default swap is an agreement between the Fund and a counterparty whereby the buyer of the contract receives credit protection and the seller of the contract guarantees the credit worthiness of a referenced debt obligation. These agreements may be privately negotiated in the over-the-counter market (“OTC credit default swaps”) or may be executed in a multilateral trade facility platform, such as a registered exchange (“centrally cleared credit default swaps”). The underlying referenced debt obligation may be a single issuer of corporate or sovereign debt, a credit index, or a tranche of a credit index. In the event of a default of the underlying referenced debt obligation, the buyer is entitled to receive the notional amount of the credit default swap contract from the seller in exchange for the referenced debt obligation, a net settlement amount equal to the notional amount of the credit default swap less the recovery value of the referenced debt obligation, or other agreed upon amount. For centrally cleared credit default swaps, required initial margins are pledged by the Fund, and the daily change in fair value is accounted for as a variation margin payable or receivable on the Statement of Assets and Liabilities. Over the term of the contract, the buyer pays the seller a periodic stream of payments, provided that no

 

 

    Annual Report     FSI-39   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Franklin Strategic Income VIP Fund (continued)

1. Organization and Significant Accounting Policies (continued)

d. Derivative Financial Instruments (continued)

event of default has occurred. Such periodic payments are accrued daily as an unrealized appreciation or depreciation until the payments are made, at which time they are realized. Payments received or paid to initiate a credit default swap contract are reflected on the Statement of Assets and Liabilities and represent compensating factors between stated terms of the credit default swap agreement and prevailing market conditions (credit spreads and other relevant factors). These upfront payments are amortized over the term of the contract as a realized gain or loss on the Statement of Operations.

See Note 9 regarding other derivative information.

e. Restricted Cash

At December 31, 2014, the Fund held restricted cash in connection with investments in certain derivative securities. Restricted cash is held in a segregated account with the Fund’s custodian and is reflected in the Statement of Assets and Liabilities.

f. Loan Participation Notes

The Fund invests in loan participation notes (“Participations”). Participations are loans originally issued to a borrower by one or more financial institutions (the “Lender”) and subsequently sold to other investors, such as the Fund. Participations typically result in the Fund having a contractual relationship only with the Lender and not with the borrower. The Fund has the right to receive from the Lender any payments of principal, interest and fees which the Lender received from the borrower. The Fund generally has no rights to either enforce compliance by the borrower with the terms of the loan agreement or to any collateral relating to the original loan. As a result, the Fund assumes the credit risk of both the borrower and the Lender that is selling the Participation. The Participations may also involve interest rate risk and liquidity risk, including the potential default or insolvency of the borrower and/or the Lender.

g. FT Holdings Corporation III (FT Subsidiary)

The Fund invests in certain financial instruments through its investment in the FT Subsidiary. FT Subsidiary is a Delaware Corporation, is a wholly-owned subsidiary of the Fund, and is able to invest in certain financial instruments consistent with the

investment objective of the Fund. At December 31, 2014, FT Subsidiary’s investment, Turtle Bay Resort, as well as any other assets and liabilities of FT Subsidiary are reflected in the Fund’s Statement of Investments and Statement of Assets and Liabilities. The financial statements have been consolidated and include the accounts of the Fund and FT Subsidiary. All intercompany transactions and balances have been eliminated.

h. Mortgage Dollar Rolls

The Fund enters into mortgage dollar rolls, typically on a TBA basis. Mortgage dollar rolls are agreements between the Fund and a financial institution to simultaneously sell and repurchase mortgage-backed securities at a future date. Gains or losses are realized on the initial sale, and the difference between the repurchase price and the sale price is recorded as an unrealized gain or loss to the Fund upon entering into the mortgage dollar roll. In addition, the Fund may invest the cash proceeds that are received from the initial sale. During the period between the sale and repurchase, the Fund is not entitled to principal and interest paid on the mortgage backed securities. The risks of mortgage dollar roll transactions include the potential inability of the counterparty to fulfill its obligations.

i. Senior Floating Rate Interests

The Fund invests in senior secured corporate loans that pay interest at rates which are periodically reset by reference to a base lending rate plus a spread. These base lending rates are generally the prime rate offered by a designated U.S. bank or the London InterBank Offered Rate (LIBOR). Senior secured corporate loans often require prepayment of principal from excess cash flows or at the discretion of the borrower. As a result, actual maturity may be substantially less than the stated maturity. Senior secured corporate loans in which the Fund invests are generally readily marketable, but may be subject to certain restrictions on resale.

j. Income and Deferred Taxes

It is the Fund’s policy to qualify as a regulated investment company under the Internal Revenue Code. The Fund intends to distribute to shareholders substantially all of its taxable income and net realized gains to relieve it from federal income and if applicable, excise taxes. As a result, no provision for U.S. federal income taxes is required.

The Fund may be subject to foreign taxation related to income received, capital gains on the sale of securities and certain

 

FSI-40    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Franklin Strategic Income VIP Fund (continued)

foreign currency transactions in the foreign jurisdictions in which it invests. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist in the foreign markets in which the Fund invests. When a capital gain tax is determined to apply the Fund records an estimated deferred tax liability in an amount that would be payable if the securities were disposed of on the valuation date.

The Fund recognizes the tax benefits of uncertain tax positions only when the position is “more likely than not” to be sustained upon examination by the tax authorities based on the technical merits of the tax position. As of December 31, 2014, and for all open tax years, the Fund has determined that no liability for unrecognized tax benefits is required in the Fund’s financial statements related to uncertain tax positions taken on a tax return (or expected to be taken on future tax returns). Open tax years are those that remain subject to examination and are based on each tax jurisdiction statute of limitation.

k. Security Transactions, Investment Income, Expenses and Distributions

Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Amortization of premium and accretion of discount on debt securities are included in interest income. Facility fees are recognized as income over the expected term of the loan. Dividend income is recorded on the ex-dividend date. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with U.S. GAAP. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods.

Common expenses incurred by the Trust are allocated among the funds based on the ratio of net assets of each fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense.

Realized and unrealized gains and losses and net investment income, not including class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions, by class, are generally due to differences in class specific expenses.

Inflation-indexed bonds are adjusted for inflation through periodic increases or decreases in the security’s interest accruals, face amount, or principal redemption value, by amounts corresponding to the rate of inflation as measured by an index. Any increase or decrease in the face amount or principal redemption value will be included as interest income on the Statement of Operations.

l. Accounting Estimates

The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates.

m. Guarantees and Indemnifications

Under the Trust’s organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, on behalf of the Fund, enters into contracts with service providers that contain general indemnification clauses. The Trust’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote.

 

 

    Annual Report     FSI-41   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Franklin Strategic Income VIP Fund (continued)

2. Shares of Beneficial Interest

At December 31, 2014, there were an unlimited number of shares authorized (without par value). Transactions in the Fund’s shares were as follows:

 

     Year Ended December 31,  
     2014          2013  
      Shares      Amount           Shares      Amount  
Class 1 Shares:              

Shares sold

      702,662       $ 8,745,867           782,903       $ 10,091,023   

Shares issued in reinvestment of distributions

      4,268,855         51,738,520           5,373,832         66,420,558   

Shares redeemed

      (12,467,167 )       (155,131,784 )         (27,765,536 )       (352,329,518 ) 
  

 

 

  

Net increase (decrease)

      (7,495,650 )     $ (94,647,397 )         (21,608,801 )     $ (275,817,937 ) 
  

 

 

  
Class 2 Shares:              

Shares sold

      6,058,039       $ 72,800,016           4,461,765       $ 56,022,684   

Shares issued in reinvestment of distributions

      1,273,552         15,002,442           1,034,061         12,450,092   

Shares redeemed

      (3,696,063 )       (44,566,425 )         (3,579,730 )       (44,605,183 ) 
  

 

 

  

Net increase (decrease)

      3,635,528       $ 43,236,033           1,916,096       $ 23,867,593   
  

 

 

  
Class 4 Shares:              

Shares sold

      732,854       $ 9,004,820           930,235       $ 11,782,444   

Shares issued on reinvestment of distributions

      839,610         10,100,506           1,074,251         13,159,580   

Shares redeemed

      (2,683,922 )       (32,721,125 )         (6,283,838 )       (77,925,310 ) 
  

 

 

  

Net increase (decrease)

      (1,111,458 )     $ (13,615,799 )         (4,279,352 )     $ (52,983,286 ) 
  

 

 

  

3. Transactions With Affiliates

Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Fund are also officers and/or directors of the following subsidiaries:

 

Subsidiary    Affiliation

Franklin Advisers, Inc. (Advisers)

   

Investment manager

Franklin Templeton Services, LLC (FT Services)

   

Administrative manager

Franklin Templeton Distributors, Inc. (Distributors)

   

Principal underwriter

Franklin Templeton Investor Services, LLC (Investor Services)

   

Transfer agent

 

FSI-42    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Franklin Strategic Income VIP Fund (continued)

a. Management Fees

The Fund pays an investment management fee to Advisers based on the average daily net assets of the Fund as follows:

 

Annualized Fee Rate    Net Assets

0.625%

   

Up to and including $500 million

0.525%

   

Over $500 million, up to and including $1 billion

0.480%

   

Over $1 billion, up to and including $1.5 billion

0.435%

   

Over $1.5 billion, up to and including $6.5 billion

0.415%

   

Over $6.5 billion, up to and including $11.5 billion

0.400%

   

Over $11.5 billion, up to and including $16.5 billion

0.390%

   

Over $16.5 billion, up to and including $19 billion

0.380%

   

Over $19 billion, up to and including $21.5 billion

0.370%

   

In excess of $21.5 billion

b. Administrative Fees

Under an agreement with Advisers, FT Services provides administrative services to the Fund. The fee is paid by Advisers based on the Fund’s average daily net assets, and is not an additional expense of the Fund.

c. Distribution Fees

The Board has adopted distribution plans for Class 2 and Class 4 shares pursuant to Rule 12b-1 under the 1940 Act. Under the Fund’s compensation distribution plans, the Fund pays Distributors for costs incurred in connection with the servicing, sale and distribution of the Fund’s shares up to 0.25%, and 0.35% per year of its average daily net assets of Class 2 and Class 4, respectively. Some distribution fees are not charged on shares held by affiliates. The plan year, for purposes of monitoring compliance with the maximum annual plan rates, is February 1 through January 31.

d. Transfer Agent Fees

Investor Services, under terms of an agreement, performs shareholder servicing for the Fund and is not paid by the Fund for the services.

e. Investments in Institutional Fiduciary Trust Money Market Portfolio

The Fund invests in Institutional Fiduciary Trust Money Market Portfolio (Sweep Money Fund), an affiliated open-end management investment company. Management fees paid by the Fund are waived on assets invested in the Sweep Money Fund, as noted on the Statement of Operations, in an amount not to exceed the management and administrative fees paid directly or indirectly by the Sweep Money Fund. Prior to January 1, 2014, the waiver was accounted for as a reduction to management fees.

4. Expense Offset Arrangement

The Fund has entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Fund’s custodian expenses. During the year ended December 31, 2014, the custodian fees were reduced as noted in the Statement of Operations.

 

    Annual Report     FSI-43   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Franklin Strategic Income VIP Fund (continued)

5. Income Taxes

The tax character of distributions paid during the years ended December 31, 2014 and 2013, was as follows:

 

     2014     2013  

Distributions paid from:

     

Ordinary income

    $ 59,337,862      $ 79,686,221   

Long term capital gain

      17,503,606        12,344,009   
  

 

 

  
   $ 76,841,468      $ 92,030,230   
  

 

 

  

At December 31, 2014, the cost of investments, net unrealized appreciation (depreciation), undistributed ordinary income and undistributed long term capital gains for income tax purposes were as follows:

 

Cost of investments

    $ 917,305,934   
  

 

 

  

Unrealized appreciation

    $ 20,839,065   

Unrealized depreciation

      (46,967,724 ) 
  

 

 

  

Net unrealized appreciation (depreciation)

    $ (26,128,659 ) 
  

 

 

  

Undistributed ordinary income

    $ 55,480,213   

Undistributed long term capital gains

      14,270,924   
  

 

 

  

Distributable earnings

    $ 69,751,137   
  

 

 

  

Differences between income and/or capital gains as determined on a book basis and a tax basis are primarily due to differing treatments of foreign currency transactions and bond discounts and premiums.

6. Investment Transactions

Purchases and sales of investments (excluding short term securities) for the year ended December 31, 2014, aggregated $478,174,188 and $532,087,943, respectively.

7. Credit Risk and Defaulted Securities

At December 31, 2014, the Fund had 57.01% of its portfolio invested in high yield, senior secured floating rate notes, or other securities rated below investment grade. These securities may be more sensitive to economic conditions causing greater price volatility and are potentially subject to a greater risk of loss due to default than higher rated securities.

The Fund held defaulted securities and/or other securities for which the income has been deemed uncollectible. At December 31, 2014, the aggregate value of these securities was $2,168,750, representing 0.24% of the Fund’s net assets. The Fund discontinues accruing income on securities for which income has been deemed uncollectible and provides an estimate for losses on interest receivable. The securities have been identified on the accompanying Statement of Investments.

8. Unfunded Loan Commitments

The Fund enters into certain credit agreements, all or a portion of which may be unfunded. The Fund is obligated to fund these loan commitments at the borrowers’ discretion. Funded portions of credit agreements are presented on the Statement of Investments.

At December 31, 2014, unfunded commitments were as follows:

 

Borrower    Unfunded
Commitment		  

Patriot Coal Corp., L/C Facility, 6.50%, 12/18/18

    $ 173,376   
  

 

 

  

 

FSI-44    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Franklin Strategic Income VIP Fund (continued)

Unfunded loan commitments and funded portions of credit agreements are marked to market daily and any unrealized appreciation or depreciation is included in the Statement of Assets and Liabilities and the Statement of Operations.

9. Other Derivative Information

At December 31, 2014, the Fund’s investments in derivative contracts are reflected on the Statement of Assets and Liabilities as follows:

 

    

Asset Derivatives

    

Liability Derivatives

  

Derivative Contracts

Not Accounted for

as Hedging Instruments

    Statement of Assets and
Liabilities Location		   Fair Value     Statement of Assets and
Liabilities Location		   Fair Value  

Foreign exchange contracts

    Unrealized appreciation on forward exchange contracts   $ 16,352,768      Unrealized depreciation on forward exchange contracts   $ 5,507,080   

Credit contracts

    Unrealized appreciation on OTC swap contracts     175,617      Unrealized depreciation on OTC swap contracts     —     

For the year ended December 31, 2014, the effect of derivative contracts on the Fund’s Statement of Operations was as follows:

 

Derivative Contracts

Not Accounted for

as Hedging Instruments

    Statement of Operations Locations   Realized
Gain (Loss)
for the Year		     Change in
Unrealized
Appreciation
(Depreciation)
for the Year		  

Foreign exchange contracts

    Net realized gain (loss) from foreign currency transactions / Net change in unrealized appreciation (depreciation) on translation of other assets and liabilities denominated in foreign currencies   $ 2,520,387      $ 11,455,572   

Credit contracts

    Net realized gain (loss) from swap contracts / Net change in unrealized appreciation (depreciation) on investments     973,216        (71,683 ) 

At December 31, 2014, the Fund’s OTC derivative assets and liabilities, are as follows:

 

     Gross and Net Amounts
of Assets and Liabilities
Presented in the
Statement of Assets  and
Liabilities		  
      Assetsa     Liabilitiesa  
Derivatives     

Forward exchange contracts

    $ 16,352,768      $ 5,507,080   

Swap Contracts

      195,300        104,821   
  

 

 

  

Total

    $ 16,548,068      $ 5,611,901   
  

 

 

  

aAbsent an event of default or early termination, OTC derivative assets and liabilities are presented gross and not offset in the Statement of Assets and Liabilities.

 

    Annual Report     FSI-45   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Franklin Strategic Income VIP Fund (continued)

9. Other Derivative Information (continued)

At December 31, 2014, the Fund’s OTC derivative assets which may be offset against the Fund’s OTC derivative liabilities and collateral received from the counterparty, is as follows:

 

           Amounts Not Offset in the Statement of
Assets and Liabilities		        
      Gross and Net
Amounts of Assets
Presented in the
Statement of
Assets and Liabilities		     Financial
Instruments
Available for Offset		     Financial
Instruments
Collateral
Receiveda,b		     Cash Collateral
Receivedb		     Net Amount (Not
less than zero)		  
Counterparty           

BZWS

    $ 1,270,531      $ (254,343 )    $ —      $ (839,000 )    $ 177,188   

CITI

      656,777        (123,871 )      (338,840 )      —        194,066   

DBAB

      9,504,421        (4,598,830 )      —        (4,690,000 )      215,591   

GSCO

      82,122        —        —        —        82,122   

HSBC

      944,540        (43,333 )      (901,207 )      —        —   

JPHQ

      4,083,826        (562,402 )      (3,521,424 )      —        —   

MSCO

      5,851        (5,851 )      —        —        —   
  

 

 

  

Total

    $ 16,548,068      $ (5,588,630 )    $ (4,761,471 )    $ (5,529,000 )    $ 668,967   
  

 

 

  

aAt December 31, 2014, the Fund received United Kingdom Treasury Bonds and Notes, U.S. Government Agency Securities and U.S. Treasury Bonds and Notes as collateral for derivatives.

bIn some instances, the collateral amounts disclosed in the table above were adjusted due to the requirement to limit the collateral amounts to avoid the effect of overcollateralization. Actual collateral received and/or pledged may be more than the amounts disclosed herein.

At December 31, 2014, the Fund’s OTC derivative liabilities which may be offset against the Fund’s OTC derivative assets and collateral pledged to the counterparty, is as follows:

 

           Amounts Not Offset in the Statement of
Assets and Liabilities		        
      Gross and Net
Amounts of Liabilities
Presented in the
Statement of
Assets and Liabilities		     Financial
Instruments
Available for Offset		     Financial
Instruments
Collateral
Pledged		     Cash Collateral
Pledged		     Net Amount (Not
less than zero)		  
Counterparty           

BZWS

    $ 254,343      $ (254,343 )    $  —      $  —      $ —   

CITI

      123,871        (123,871 )      —        —        —   

DBAB

      4,598,830        (4,598,830 )      —        —        —   

GSCO

      —        —        —        —        —   

HSBC

      43,333        (43,333 )      —        —        —   

JPHQ

      562,402        (562,402 )      —        —        —   

MSCO

      29,122        (5,851 )      —        —        23,271   
  

 

 

  

Total

    $ 5,611,901      $ (5,588,630 )    $ —      $ —      $ 23,271   
  

 

 

  

For the year ended December 31, 2014, the average month end fair value of derivatives represented 1.08% of average month end net assets. The average month end number of open derivative contracts for the year was 203.

See Note 1(d) regarding derivative financial instruments.

 

FSI-46    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Franklin Strategic Income VIP Fund (continued)

10. Credit Facility

The Fund, together with other U.S. registered and foreign investment funds (collectively, Borrowers), managed by Franklin Templeton Investments, are borrowers in a joint syndicated senior unsecured credit facility totaling $1.5 billion (Global Credit Facility) which matured on February 13, 2015. This Global Credit Facility provides a source of funds to the Borrowers for temporary and emergency purposes, including the ability to meet future unanticipated or unusually large redemption requests. The Borrowers expect to renew the Global Credit Facility for a total of $2 billion effective February 13, 2015, which matures on February 12, 2016.

Under the terms of the Global Credit Facility, the Fund shall, in addition to interest charged on any borrowings made by the Fund and other costs incurred by the Fund, pay its share of fees and expenses incurred in connection with the implementation and maintenance of the Global Credit Facility, based upon its relative share of the aggregate net assets of all of the Borrowers, including an annual commitment fee of 0.07% based upon the unused portion of the Global Credit Facility. These fees are reflected in other expenses on the Statement of Operations. During the year ended December 31, 2014, the Fund did not use the Global Credit Facility.

11. Fair Value Measurements

The Fund follows a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Fund’s own market assumptions (unobservable inputs). These inputs are used in determining the value of the Fund’s financial instruments and are summarized in the following fair value hierarchy:

 

  •   Level 1 – quoted prices in active markets for identical financial instruments
  •   Level 2 – other significant observable inputs (including quoted prices for similar financial instruments, interest rates, prepayment speed, credit risk, etc.)
  •   Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of financial instruments)

The input levels are not necessarily an indication of the risk or liquidity associated with financial instruments at that level.

For movements between the levels within the fair value hierarchy, the Fund has adopted a policy of recognizing the transfers as of the date of the underlying event which caused the movement.

A summary of inputs used as of December 31, 2014, in valuing the Fund’s assets and liabilities carried at fair value, is as follows:

 

      Level 1     Level 2     Level 3     Total  
Assets:         

Investments in Securities:

         

Equity Investments:a

         

Consumer Services

    $ —      $ —      $ 2,566,956      $ 2,566,956   

Materials

      —        453,750        —        453,750   

Transportation

      —        —        556,087        556,087   

All Other Equity Investmentsb

      10,515,500        —        —        10,515,500   

Corporate Bonds

      —        320,823,487        31,250        320,854,737   

Senior Floating Rate Interests

      —        166,373,284        154,522        166,527,806   

Foreign Government and Agency Securities

      —        162,857,528        —        162,857,528   

U.S. Government and Agency Securities

      —        16,190,643        —        16,190,643   

Asset-Backed Securities and Commercial Mortgage-Backed Securities

      —        51,282,024        —        51,282,024   

Mortgage-Backed Securities

      —        27,420,777        —        27,420,777   

Municipal Bonds

      —        35,410,849        —        35,410,849   

Escrows and Litigation Trusts

      —        —        — c      —   

Short Term Investments

      96,065,603        475,015        —        96,540,618   
  

 

 

  

Total Investments in Securities

    $ 106,581,103      $ 781,287,357      $ 3,308,815      $ 891,177,275   
  

 

 

  

 

    Annual Report     FSI-47   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Franklin Strategic Income VIP Fund (continued)

11. Fair Value Measurements (continued)

 

      Level 1     Level 2     Level 3     Total  

Other Financial Instruments

         

Forward Exchange Contracts

    $  —      $ 16,352,768      $  —      $ 16,352,768   

Swap Contracts

      —        175,617        —        175,617   
  

 

 

  

Total Other Financial Instruments

    $ —      $ 16,528,385      $ —      $ 16,528,385   
  

 

 

  
Liabilities:         

Other Financial Instruments

         

Forward Exchange Contracts

    $ —      $ 5,507,080      $ —      $ 5,507,080   

Unfunded Loan Commitments

      —        19,110        —        19,110   
  

 

 

  

Total Other Financial Instruments

    $ —      $ 5,526,190      $ —      $ 5,526,190   
  

 

 

  

aIncludes common, preferred and convertible preferred stocks.

bFor detailed categories, see the accompanying Statement of Investments.

cIncludes securities determined to have no value at December 31, 2014.

A reconciliation of assets in which Level 3 inputs are used in determining fair value is presented when there are significant Level 3 financial instruments at the end of the year.

12. Subsequent Events

The Fund has evaluated subsequent events through the issuance of the financial statements and determined that no events have occurred that require disclosure other than those already disclosed in the financial statements.

 

FSI-48    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Franklin Strategic Income VIP Fund (continued)

Abbreviations

 

Counterparty        Currency   Selected Portfolio
BZWS   Barclays Bank PLC   BRL   Brazilian Real   AGMC   Assured Guaranty Municipal Corp.
CITI   Citigroup, Inc.   CAD   Canadian Dollar   CDO   Collateralized Debt Obligation
DBAB   Deutsche Bank AG   EUR   Euro   CLO   Collateralized Loan Obligation
GSCO   The Goldman Sachs Group,   GBP   British Pound   EDA   Economic Development Authority
HSBC   HSBC Bank USA, N.A.   HUF   Hungarian Forint   ETF   Exchange Traded Fund
JPHQ   JP Morgan Chase & Co.   IDR   Indonesian Rupiah   FGIC   Financial Guaranty Insurance Co.
MSCO   Morgan Stanley   KRW   South Korean Won   FICO   Financing Corp.
    LKR   Sri Lankan Rupee   FRN   Floating Rate Note
    MXN   Mexican Peso   GO   General Obligation
    MYR   Malaysian Ringgit   HDC   Housing Development Corp.
    PHP   Philippine Peso   ISD   Independent School District
    PLN   Polish Zloty   NATL   National Public Financial Guarantee Corp.
    SEK   Swedish Krona   NATL RE   National Public Financial Guarantee Corp. Reinsured
    SGD   Singapore Dollar   PIK   Payment-In-Kind
    UYU   Uruguayan Peso   PSF   Permanent School Fund

 

    Annual Report     FSI-49   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

Report of Independent Registered Public Accounting Firm

Franklin Strategic Income VIP Fund

To the Board of Trustees and Shareholders of Franklin Templeton Variable Insurance Products Trust

In our opinion, the accompanying statement of assets and liabilities, including the statement of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Franklin Strategic Income VIP Fund (the “Fund”) at December 31, 2014, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements 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 are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2014 by correspondence with the custodian, transfer agent and brokers, provides a reasonable basis for our opinion.

PricewaterhouseCoopers LLP

San Francisco, California

February 13, 2015

 

  FSI-50       Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

Tax Information (unaudited)

Franklin Strategic Income VIP Fund

Under Section 852(b)(3)(C) of the Internal Revenue Code, the Fund hereby reports the maximum amount allowable but no less than $17,503,606 as a long term capital gain dividend for the fiscal year ended December 31, 2014.

 

    Annual Report     FSI-51   

Templeton Developing Markets VIP Fund

(Formerly, Templeton Developing Markets Securities Fund)

This annual report for Templeton Developing Markets VIP Fund covers the fiscal year ended December 31, 2014.

Class 4 Performance Summary as of December 31, 2014

Average annual total return of Class 4 shares* represents the average annual change in value, assuming reinvestment of dividends and capital gains. Average returns smooth out variations in returns, which can be significant; they are not the same as year-by-year results.

 

Periods ended 12/31/14    1-Year        5-Year        10-Year  

Average Annual Total Return

      -8.48%           +0.22%           +5.72%   

*For the period beginning 2/29/08, Class 4 performance reflects a 12b-1 fee expense of 0.35% per year, which affects future performance. Class 4 performance prior to 2/29/08 reflects historical Class 1 performance, which does not have a 12b-1 fee expense. Since 2/29/08 (effective date), the average annual total return of Class 4 shares was -1.61%. The Fund has a fee waiver associated with its investments in a Franklin Templeton money fund, contractually guaranteed through at least its current fiscal year-end. Fund investment results reflect the fee waiver, to the extent applicable; without this reduction, the results would have been lower.

Performance reflects the Fund’s Class 4 operating expenses, but does not include any contract fees, expenses or sales charges. If they had been included, performance would be lower. These charges and deductions, particularly for variable life policies, can have a significant effect on contract values and insurance benefits. See the contract prospectus for a complete description of these expenses, including sales charges.

Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares. Current performance may differ from figures shown.

Total Return Index Comparison for a Hypothetical $10,000 Investment (1/1/05–12/31/14)

The graph below shows the change in value of a hypothetical $10,000 investment in the Fund over the indicated period and includes reinvestment of any income or distributions. The Fund’s performance* is compared to the performance of the MSCI Emerging Markets (EM) Index and the Standard & Poor’s®/International Finance Corporation Investable (S&P®/IFCI) Composite Index. One cannot invest directly in an index, and an index is not representative of the Fund’s portfolio. Please see Important Notes to Performance Information preceding the Fund Summaries.

 

LOGO

**Source: Morningstar. Please see Index Descriptions following the Fund Summaries.

 

    Annual Report     TD-1   

TEMPLETON DEVELOPING MARKETS VIP FUND

Fund Goal and Main Investments

Templeton Developing Markets VIP Fund seeks long-term capital appreciation. Under normal market conditions, the Fund invests at least 80% of its net assets in emerging market investments.

Fund Risks

All investments involve risks, including possible loss of principal. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments. Investments in developing markets, of which frontier markets are a subset, involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size, lesser liquidity and lack of established legal, political, business and social frameworks to support securities markets. Because these frameworks are typically even less developed in frontier markets, as well as various factors including the increased potential for extreme price volatility, illiquidity, trade barriers and exchange controls, the risks associated with developing markets are magnified in frontier markets. The Fund is designed for the aggressive portion of a well-diversified portfolio. The Fund is actively managed but there is no guarantee that the manager’s investment decisions will produce the desired results. The Fund’s prospectus also includes a description of the main investment risks.

Performance Overview

You can find the Fund’s one-year total return in the Performance Summary. In comparison, the MSCI EM Index had a -1.82% total return, and the S&P/IFCI Composite Index had a -1.12% total return for the same period.1 Please note index performance numbers are for reference and we do not attempt to track an index but rather undertake investments on the basis of fundamental research.

Economic and Market Overview

The global economy grew moderately during the 12 months under review as many developed markets continued to recover and many emerging markets continued to expand. Although several emerging market countries faced headwinds such as soft domestic demand, weak exports and geopolitical crises, emerging market economies overall continued to grow faster than developed market economies. China’s economy stabilized in 2014 as fiscal and monetary stimulus measures implemented in

 

 

LOGO

 

the year’s second half gained traction. Strength in production and consumer spending offset weakness in fixed-asset investment. Domestic demand continued to account for a greater portion of China’s gross domestic product, as the government’s market friendly policies supported new economic drivers. Emerging market countries showing signs of economic improvement included India, Poland and Mexico, while others, including Russia, South Africa and South Korea, showed signs of moderation. Although Brazil exited recession as government spending drove third-quarter economic growth, it continued to face headwinds such as lower commodity prices.

Central bank actions varied across emerging markets. Several central banks, including those of Russia, Brazil and South Africa, raised interest rates in response to rising inflation and weakening currencies. In contrast, the central banks of Chile, Mexico and South Korea lowered interest rates to promote economic growth. After raising interest rates early in the year to support the Turkish lira, Turkey’s central bank began easing monetary policy to boost economic growth. The People’s Bank of China cut its benchmark interest rate for the first time since July 2012.

Emerging markets experienced volatility in 2014 amid concerns about the U.S. Federal Reserve Board’s (Fed’s) timing of interest rate increases, moderating global economic growth and geopolitical tensions in several regions. Also weighing on investor sentiment was a sharp decline in crude oil prices,

 

1. Source: Morningstar.

One cannot invest directly in an index, and an index is not representative of the Fund’s portfolio. Please see Index Descriptions following the Fund Summaries.

 

  TD-2       Annual Report    

TEMPLETON DEVELOPING MARKETS VIP FUND

which pressured several oil-producing countries’ financial positions and currencies. However, India’s and Indonesia’s announced economic reforms following their national elections, China’s fiscal and monetary stimulus measures, the European Central Bank’s monetary easing and the Fed’s accommodative policy provided investors with some optimism.

For the 12 months ended December 31, 2014, emerging market stocks, as measured by the MSCI EM Index, rose 5.57% in local currency terms, as many investors seemed to focus on the relatively attractive valuations of many emerging market stocks.1 However, weak local currencies led to a 1.82% decline in U.S. dollar terms.1 European emerging markets overall underperformed, as did Latin America. Asia generally performed well, as many countries in the region delivered double-digit gains. In addition, the Middle East and Africa region produced solid returns.

Investment Strategy

We employ a fundamental research, value-oriented, long-term investment approach. We focus on the market price of a company’s securities relative to our evaluation of its long-term earnings, asset value and cash flow potential. We also consider a company’s profit and loss outlook, balance sheet strength, cash flow trends and asset value in relation to the current price. Our analysis considers the company’s corporate governance behavior as well as its position in its sector, the economic framework and political environment. We invest in securities without regard to benchmark comparisons.

Manager’s Discussion

During the year under review, key contributors to the Fund’s absolute performance included Emaar Properties, Remgro and TSMC (Taiwan Semiconductor Manufacturing Co.).

Emaar Properties is a major property developer and manager with operations throughout the Middle East, notably in Dubai, United Arab Emirates (UAE). Dubai’s rising tourism boosted Emaar’s hotel and retail operations, and a property sector recovery in the earlier part of the year also supported the company’s operations. The UAE’s inclusion in the MSCI EM Index in June further boosted Emaar’s share price. However, signs of a property price decline in the emirate during the final months of 2014 led to a share price correction.

Remgro is a South African conglomerate with a diversified portfolio of financial and industrial assets that we believe provides an attractive means to address growth in the South African and broader African economies. The share price appreciation during the year, in our view, reflected investors’

 

 

Top 10 Countries

       
12/31/14       
      % of Total
Net Assets		  
China      20.4%   
South Africa      11.5%   
Thailand      10.9%   
India      10.9%   
Brazil      8.0%   
Belgium      3.6%   
U.K.      3.5%   
Indonesia      3.4%   
Taiwan      3.1%   
South Korea      2.9%   
 

confidence in Africa’s financials and industrials sectors, while sentiment in the commodity sector remained relatively weaker.

TSMC, the world’s largest independent integrated circuit foundry, showed strong growth in the past few years, resulting from increased demand for chips used in mobile devices such as smartphones and tablets. Strong corporate results, management updates suggesting rising market share and progress in the commercialization of the most advanced technology supported the company’s share price performance.

In contrast, key detractors from the Fund’s absolute performance included Petrobras (Petroleo Brasileiro), Avon Products and SJM Holdings.

Petrobras, a new holding this period, is Brazil’s main oil and gas producer, refiner and distributor. The company’s links with government and political figures were scrutinized in the final quarter of 2014 amid accusations of bribery and corrupt practices. Delays in the release of third-quarter results and the sharp decline in oil and gas prices also weighed on sentiment. The decision of the Organization of the Petroleum Exporting Countries to maintain oil production levels despite a global oversupply led prices to fall more than 40% in 2014’s fourth quarter.

Avon Products is a U.S.-listed global cosmetics company with substantial operations in various emerging market countries, most notably Brazil. Its third-quarter corporate results, impacted by Brazil’s sluggish economy, disappointed investors. Concerns about the company’s ability to service its substantial debts in a weak market environment led two major rating agencies to downgrade the company’s debt rating to below investment grade, further weighing on investor sentiment. Also pressuring shares were the economic and currency crises in Russia, another substantial market for the company.

 

    Annual Report     TD-3   

TEMPLETON DEVELOPING MARKETS VIP FUND

SJM Holdings, a Hong Kong-listed, Macau-based gaming and entertainment company, lost ground in 2014 after strong stock performance in 2013, as the Chinese government’s anti-corruption and anti-extravagance policies negatively affected casino revenues. Macau’s annual gambling revenues declined in 2014 for the first time since China liberalized the administrative region’s casinos in 2001.

It is important to recognize the effect of currency movements on the Fund’s performance. In general, if the value of the U.S. dollar goes up compared with a foreign currency, an investment traded in that foreign currency will go down in value because it will be worth fewer U.S. dollars. This can have a negative effect on Fund performance. Conversely, when the U.S. dollar weakens in relation to a foreign currency, an investment traded in that foreign currency will increase in value, which can contribute to Fund performance. For the 12 months ended December 31, 2014, the U.S. dollar rose in value relative to most currencies. As a result, the Fund’s performance was negatively affected by the portfolio’s investment predominantly in securities with non-U.S. currency exposure.

In the past 12 months, we increased the Fund’s holdings largely in Thailand, South Africa, India, Indonesia and China via China H, Red Chip and P Chip shares as we continued to search for investment opportunities we considered to be attractive.2 We initiated investments in several markets, including Greece and Peru, and made some purchases in other emerging markets, including Turkey and Taiwan. Additionally, we made some purchases in developed market countries, such as the U.S. and Belgium, where we identified select companies with significant

emerging market operations. In sector terms, we increased the Fund’s holdings mainly in materials, energy, financials and health care.3 Key purchases included new positions in Itau Unibanco Holding, a leading Brazilian commercial bank; Brilliance China Automotive Holdings, a major Chinese automobile manufacturer with a joint venture with BMW; and Naspers, a South Africa-based multinational media group.

Conversely, we reduced the Fund’s investments in Hong Kong, the UAE, Macau and Brazil to focus on stocks we considered to be more attractively valued within our investment universe. We

 

 

Top 10 Holdings

      
12/31/14      
Company
Sector/Industry, Country		   % of Total
Net Assets		  
Remgro Ltd.
Diversified Financial Services, South Africa		     5.0%   
Tata Consultancy Services Ltd.
IT Services, India		     4.7%   
Siam Commercial Bank PCL, fgn.
Banks, Thailand		     4.2%   
Naspers Ltd., N
Media, South Africa		     4.2%   
Brilliance China Automotive Holdings Ltd.
Automobiles, China		     4.2%   
Itau Unibanco Holding SA, ADR
Banks, Brazil		     3.8%   
Anheuser-Busch InBev NV
Beverages, Belgium		     3.6%   
Unilever PLC
Food Products, U.K.		     3.5%   
TSMC (Taiwan Semiconductor Manufacturing Co.) Ltd.
Semiconductors & Semiconductor Equipment, Taiwan		     3.1%   
China Construction Bank Corp., H
Banks, China		     3.0%   

The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund’s Statement of Investments (SOI).

 

also eliminated exposures to several countries, including Nigeria and Singapore. In sector terms, some of the largest sales were in consumer staples and consumer discretionary.4 Key sales included a reduction of the Fund’s holding in Emaar Properties. We closed the Fund’s positions in Ambev, a Brazil-based global beer and soft drink producer, and British American Tobacco, a U.K.-listed global tobacco company. Additionally, we closed the Fund’s positions in a number of Macau casino resort operators, including Sands China, Melco Crown Entertainment and SJM Holdings, mentioned earlier.

Thank you for your participation in Templeton Developing Markets VIP Fund. We look forward to serving your future investment needs.

 

2. “China H” denotes shares of China-incorporated, Hong Kong Stock Exchange-listed companies with most businesses in China. “Red Chip” denotes shares of Hong Kong Stock Exchange-listed companies substantially owned by Chinese mainland state entities, with significant exposure to China. “P Chip” denotes shares of Hong Kong Stock Exchange-listed companies controlled by Chinese mainland individuals and incorporated outside of China, with a majority of their business in China.

3. The materials sector comprises chemicals, construction materials, and metals and mining in the SOI. The energy sector comprises oil, gas and consumable fuels in the SOI. The financials sector comprises banks, diversified financial services, insurance, and real estate management and development in the SOI. The health care sector comprises biotechnology and pharmaceuticals in the SOI.

4. The consumer staples sector comprises beverages, food products, food and staples retailing, personal products and tobacco in the SOI. The consumer discretionary sector comprises automobiles; hotels, restaurants and leisure; media; specialty retail; and textiles, apparel and luxury goods in the SOI.

 

  TD-4       Annual Report    

TEMPLETON DEVELOPING MARKETS VIP FUND

The foregoing information reflects our analysis, opinions and portfolio holdings as of December 31, 2014, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.

 

 

    Annual Report     TD-5   

TEMPLETON DEVELOPING MARKETS VIP FUND

Class 4 Fund Expenses

As an investor in a variable insurance contract (Contract) that indirectly provides for investment in an underlying mutual fund, you can incur transaction and/or ongoing expenses at both the Fund level and the Contract level.

 

•   Transaction expenses can include sales charges (loads) on purchases, redemption fees, surrender fees, transfer fees and premium taxes.

 

•   Ongoing expenses can include management fees, distribution and service (12b-1) fees, contract fees, annual maintenance fees, mortality and expense risk fees and other fees and expenses. All mutual funds and Contracts have some types of ongoing expenses.

The expenses shown in the table are meant to highlight ongoing expenses at the Fund level only and do not include ongoing expenses at the Contract level, or transaction expenses at either the Fund or Contract level. While the Fund does not have transaction expenses, if the transaction and ongoing expenses at the Contract level were included, the expenses shown below would be higher. You should consult your Contract prospectus or disclosure document for more information.

The table shows Fund-level ongoing expenses and can help you understand these expenses and compare them with those of other mutual funds offered through the Contract. The table assumes a $1,000 investment held for the six months indicated. Please refer to the Fund prospectus for additional information on operating expenses.

Actual Fund Expenses

The first line (Actual) of the table provides actual account values and expenses. The “Ending Account Value” is derived from the Fund’s actual return, which includes the effect of ongoing Fund expenses, but does not include the effect of ongoing Contract expenses.

You can estimate the Fund-level expenses you incurred during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:

 

1. Divide your account value by $1,000.

If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6.

 

2. Multiply the result by the number under the heading “Fund-Level Expenses Incurred During Period.”

If Fund-Level Expenses Incurred During Period were $7.50, then 8.6 × $7.50 = $64.50.

In this illustration, the estimated expenses incurred this period at the Fund level are $64.50.

Hypothetical Example for Comparison with Other Mutual Funds

Information in the second line (Hypothetical) of the table can help you compare ongoing expenses of the Fund with those of other mutual funds offered through the Contract. This information may not be used to estimate the actual ending account balance or expenses you incurred during the period. The hypothetical “Ending Account Value” is based on the Fund’s actual expense ratio and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Fund-Level Expenses Incurred During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds offered through a Contract.

 
Class 4  

Beginning Account

Value 7/1/14

     

Ending Account

Value 12/31/14

     

Fund-Level Expenses
Incurred During Period*

7/1/14–12/31/14

  

Actual

     $1,000         $   909.30         $8.18   

Hypothetical (5% return before expenses)

     $1,000         $1,016.64         $8.64   

*Expenses are calculated using the most recent six-month annualized expense ratio, net of expense waivers, for the Fund’s Class 4 shares (1.70%), which does not include any ongoing expenses of the Contract for which the Fund is an investment option, multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period.

 

TD-6    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

Financial Highlights

Templeton Developing Markets VIP Fund

     Year Ended December 31,  
      2014      2013      2012      2011      2010  
Class 1               
Per share operating performance
(for a share outstanding throughout the year)		               

Net asset value, beginning of year

      $10.26         $10.58         $9.50         $11.40         $9.86   
  

 

 

  
Income from investment operationsa:               

Net investment incomeb

      0.15 c       0.13         0.19         0.17         0.09   

Net realized and unrealized gains (losses)

      (0.97 )       (0.22 )       1.06         (1.94 )       1.63   
  

 

 

  

Total from investment operations

      (0.82 )       (0.09 )       1.25         (1.77 )       1.72   
  

 

 

  

Less distributions from net investment income

      (0.17 )       (0.23 )       (0.17 )       (0.13 )       (0.18 ) 
  

 

 

  

Redemption feesd

      —         —         —         —         —   
  

 

 

  

Net asset value, end of year

      $9.27         $10.26         $10.58         $9.50         $11.40   
  

 

 

  

Total returne

      (8.09)%         (0.73)%         13.40%         (15.67)%         17.83%   
Ratios to average net assets               

Expenses

      1.36% f       1.35%         1.35%         1.40%         1.49% g 

Net investment income

      1.51% c       1.25%         1.93%         1.57%         0.87%   
Supplemental data               

Net assets, end of year (000’s)

      $114,487         $145,707         $203,568         $232,544         $347,242   

Portfolio turnover rate

      82.87%         44.59%         24.45%         14.90%         24.41%   

 

aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.

bBased on average daily shares outstanding.

cNet investment income per share includes approximately $0.04 per share received in the form of special dividends. Excluding these amounts, the ratio of net investment income to average net assets would have been 1.11%.

dAmount rounds to less than $0.01 per share.

eTotal return does not include fees, charges or expenses imposed by the variable annuity and life insurance contracts for which the Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle.

fBenefit of waiver and payments by affiliates rounds to less than 0.01%.

gBenefit of expense reduction rounds to less than 0.01%.

 

    The accompanying notes are an integral part of these financial statements.    |   Annual Report     TD-7   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FINANCIAL HIGHLIGHTS

Templeton Developing Markets VIP Fund (continued)

     Year Ended December 31,  
      2014      2013      2012      2011      2010  
Class 2               
Per share operating performance
(for a share outstanding throughout the year)		               

Net asset value, beginning of year

      $10.19         $10.50         $9.42         $11.30         $9.78   
  

 

 

  
Income from investment operationsa:               

Net investment incomeb

      0.12 c       0.10         0.17         0.14         0.06   

Net realized and unrealized gains (losses)

      (0.96 )       (0.21 )       1.05         (1.92 )       1.62   
  

 

 

  

Total from investment operations

      (0.84 )       (0.11 )       1.22         (1.78 )       1.68   
  

 

 

  

Less distributions from net investment income

      (0.15 )       (0.20 )       (0.14 )       (0.10 )       (0.16 ) 
  

 

 

  

Redemption feesd

      —         —         —         —         —   
  

 

 

  

Net asset value, end of year

      $9.20         $10.19         $10.50         $9.42         $11.30   
  

 

 

  

Total returne

      (8.39)%         (0.92)%         13.16%         (15.86)%         17.58%   
Ratios to average net assets               

Expenses

      1.61% f       1.60%         1.60%         1.65%         1.74% g 

Net investment income

      1.26% c       1.00%         1.68%         1.32%         0.62%   
Supplemental data               

Net assets, end of year (000’s)

      $250,813         $274,683         $291,638         $295,223         $392,546   

Portfolio turnover rate

      82.87%         44.59%         24.45%         14.90%         24.41%   

aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.

bBased on average daily shares outstanding.

cNet investment income per share includes approximately $0.04 per share received in the form of special dividends. Excluding these amounts, the ratio of net investment income to average net assets would have been 0.86%.

dAmount rounds to less than $0.01 per share.

eTotal return does not include fees, charges or expenses imposed by the variable annuity and life insurance contracts for which the Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle.

fBenefit of waiver and payments by affiliates rounds to less than 0.01%.

gBenefit of expense reduction rounds to less than 0.01%.

 

  TD-8       Annual Report   |    The accompanying notes are an integral part of these financial statements.    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FINANCIAL HIGHLIGHTS

Templeton Developing Markets VIP Fund (continued)

     Year Ended December 31,  
      2014      2013      2012      2011      2010  
Class 4               
Per share operating performance
(for a share outstanding throughout the year)		               

Net asset value, beginning of year

      $10.20         $10.50         $9.42         $11.30         $9.80   
  

 

 

  
Income from investment operationsa:               

Net investment incomeb

      0.12 c       0.10         0.16         0.13         0.05   

Net realized and unrealized gains (losses)

      (0.97 )       (0.21 )       1.04         (1.91 )       1.61   
  

 

 

  

Total from investment operations

      (0.85 )       (0.11 )       1.20         (1.78 )       1.66   
  

 

 

  

Less distributions from net investment income

      (0.13 )       (0.19 )       (0.12 )       (0.10 )       (0.16 ) 
  

 

 

  

Redemption feesd

      —         —         —         —         —   
  

 

 

  

Net asset value, end of year

      $9.22         $10.20         $10.50         $9.42         $11.30   
  

 

 

  

Total returne

      (8.48)%         (1.07)%         13.06%         (15.88)%         17.41%   
Ratios to average net assets               

Expenses

      1.71% f       1.70%         1.70%         1.75%         1.84% g 

Net investment income

      1.16% c       0.90%         1.58%         1.22%         0.52%   
Supplemental data               

Net assets, end of year (000’s)

      $11,106         $15,225         $23,341         $24,380         $37,198   

Portfolio turnover rate

      82.87%         44.59%         24.45%         14.90%         24.41%   

aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.

bBased on average daily shares outstanding.

cNet investment income per share includes approximately $0.04 per share received in the form of special dividends. Excluding these amounts, the ratio of net investment income to average net assets would have been 0.76%.

dAmount rounds to less than $0.01 per share.

eTotal return does not include fees, charges or expenses imposed by the variable annuity and life insurance contracts for which Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle.

fBenefit of waiver and payments by affiliates rounds to less than 0.01%.

gBenefit of expense reduction rounds to less than 0.01%.

 

    The accompanying notes are an integral part of these financial statements.    |   Annual Report     TD-9   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

Statement of Investments, December 31, 2014

 

Templeton Developing Markets VIP Fund           
           Industry     Shares        Value  
 

Common Stocks 88.1%

          
 

Argentina 0.2%

          
a  

Grupo Clarin SA, B, GDR, Reg S

      Media        70,355         $ 668,373   
           

 

 

  
 

Austria 0.2%

          
 

OMV AG

      Oil, Gas & Consumable Fuels        21,610           575,520   
           

 

 

  
 

Belgium 3.6%

          
 

Anheuser-Busch InBev NV

      Beverages        120,577           13,694,002   
           

 

 

  
 

Brazil 5.5%

          
 

Itau Unibanco Holding SA, ADR

      Banks        1,090,710           14,190,137   
 

M Dias Branco SA

      Food Products        115,900           3,968,730   
 

Souza Cruz SA

      Tobacco        369,828           2,688,646   
           

 

 

  
              20,847,513   
           

 

 

  
 

Chile 0.6%

          
 

Sociedad Quimica Y Minera de Chile SA Soquimich, ADR

      Chemicals        94,287           2,251,574   
           

 

 

  
 

China 20.4%

          
b  

Aluminum Corp. of China Ltd., H

      Metals & Mining        3,864,400           1,779,210   
b,c  

BAIC Motor Corp. Ltd., 144A

      Automobiles        1,325,500           1,529,959   
 

Brilliance China Automotive Holdings Ltd.

      Automobiles        9,805,700           15,681,128   
 

China Construction Bank Corp., H

      Banks        13,887,300           11,372,830   
 

China Life Insurance Co. Ltd., H

      Insurance        1,543,000           6,029,559   
 

China Mobile Ltd.

      Wireless Telecommunication Services        440,000           5,146,796   
 

China Petroleum and Chemical Corp., H

      Oil, Gas & Consumable Fuels        7,360,000           5,932,460   
b  

China Shipping Development Co. Ltd., H

      Marine        7,704,500           5,276,136   
 

Industrial and Commercial Bank of China Ltd., H

      Banks        7,018,300           5,123,012   
 

NetEase Inc., ADR

      Internet Software & Services        31,003           3,073,637   
 

PetroChina Co. Ltd., H

      Oil, Gas & Consumable Fuels        6,970,600           7,713,197   
 

Tencent Holdings Ltd.

      Internet Software & Services        250,000           3,627,184   
 

Yanzhou Coal Mining Co. Ltd., H

      Oil, Gas & Consumable Fuels        5,152,200           4,372,156   
           

 

 

  
              76,657,264   
           

 

 

  
 

Greece 0.3%

          
b  

National Bank of Greece SA

      Banks        647,599           1,151,884   
           

 

 

  
 

Hong Kong 0.7%

          
 

Dairy Farm International Holdings Ltd.

      Food & Staples Retailing        187,433           1,686,897   
 

Giordano International Ltd.

      Specialty Retail        315,900           140,555   
 

MGM China Holdings Ltd.

      Hotels, Restaurants & Leisure        326,400           830,107   
           

 

 

  
              2,657,559   
           

 

 

  
 

India 10.9%

          
 

Biocon Ltd.

      Biotechnology        545,046           3,679,612   
 

Dr. Reddy’s Laboratories Ltd.

      Pharmaceuticals        68,010           3,502,404   
 

Infosys Ltd.

      IT Services        130,000           4,068,081   
 

Reliance Industries Ltd.

      Oil, Gas & Consumable Fuels        138,200           1,953,786   
 

Tata Consultancy Services Ltd.

      IT Services        438,340           17,789,852   
 

Tata Motors Ltd.

      Automobiles        1,285,800           10,108,324   
           

 

 

  
              41,102,059   
           

 

 

  
 

Indonesia 3.4%

          
 

Astra International Tbk PT

      Automobiles        12,653,700           7,586,090   
 

Bank Danamon Indonesia Tbk PT

      Banks        4,004,800           1,463,199   
 

Semen Indonesia (Persero) Tbk PT

      Construction Materials        3,016,000           3,945,030   
           

 

 

  
              12,994,319   
           

 

 

  

 

  TD-10       Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

Templeton Developing Markets VIP Fund (continued)

           Industry     Shares        Value  
 

Common Stocks (continued)

          
 

Kenya 0.7%

          
 

Equity Bank Ltd.

      Banks        937,377         $ 517,602   
 

Kenya Commercial Bank Ltd.

      Banks        3,217,000           2,007,294   
           

 

 

  
              2,524,896   
           

 

 

  
 

Pakistan 0.7%

          
 

United Bank Ltd.

      Banks        1,465,400           2,540,317   
           

 

 

  
 

Peru 0.4%

          
 

Compania de Minas Buenaventura SA, ADR

      Metals & Mining        153,850           1,470,806   
           

 

 

  
 

Philippines 2.3%

          
 

Ayala Corp.

      Diversified Financial Services        252,530           3,913,270   
b  

Bloomberry Resorts Corp.

      Hotels, Restaurants & Leisure        13,485,300           3,733,789   
b  

Melco Crown Philippines Resorts Corp.

      Hotels, Restaurants & Leisure        3,445,200           1,044,676   
           

 

 

  
              8,691,735   
           

 

 

  
 

Qatar 2.1%

          
 

Industries Qatar QSC

      Industrial Conglomerates        170,907           7,884,333   
           

 

 

  
 

South Africa 11.5%

          
 

Kumba Iron Ore Ltd.

      Metals & Mining        30,769           638,288   
 

MTN Group Ltd.

      Wireless Telecommunication Services        373,611           7,153,030   
 

Naspers Ltd., N

      Media        121,196           15,878,463   
 

Remgro Ltd.

      Diversified Financial Services        857,524           18,833,717   
 

Truworths International Ltd.

      Specialty Retail        139,837           934,463   
           

 

 

  
              43,437,961   
           

 

 

  
 

South Korea 2.9%

          
 

Hyundai Development Co.

      Construction & Engineering        86,880           3,074,035   
 

Samsung Electronics Co. Ltd.

      Technology Hardware, Storage & Peripherals        3,498           4,243,935   
 

SK Innovation Co. Ltd.

      Oil, Gas & Consumable Fuels        46,511           3,618,788   
           

 

 

  
              10,936,758   
           

 

 

  
 

Switzerland 0.5%

          
 

Compagnie Financiere Richemont SA

      Textiles, Apparel & Luxury Goods        21,519           1,922,035   
           

 

 

  
 

Taiwan 3.1%

          
 

Taiwan Semiconductor Manufacturing Co. Ltd.

      Semiconductors & Semiconductor Equipment        2,654,000           11,823,134   
           

 

 

  
 

Thailand 10.9%

          
 

Kasikornbank PCL, fgn.

      Banks        619,000           4,311,162   
 

Land and Houses PCL, fgn.

      Real Estate Management & Development        16,698,900           4,596,260   
 

PTT Exploration and Production PCL, fgn.

      Oil, Gas & Consumable Fuels        642,000           2,186,861   
 

PTT PCL, fgn.

      Oil, Gas & Consumable Fuels        593,300           5,846,387   
 

Quality Houses PCL, fgn.

      Real Estate Management & Development        5,037,800           560,777   
 

Siam Commercial Bank PCL, fgn.

      Banks        2,869,800           15,885,146   
 

Thai Beverage PCL, fgn.

      Beverages        14,863,200           7,741,250   
           

 

 

  
              41,127,843   
           

 

 

  
 

Turkey 1.7%

          
 

Akbank TAS

      Banks        1,089,000           4,041,111   
 

Tupras-Turkiye Petrol Rafinerileri AS

      Oil, Gas & Consumable Fuels        91,900           2,177,688   
           

 

 

  
              6,218,799   
           

 

 

  
 

United Arab Emirates 0.5%

          
 

Emaar Properties PJSC

      Real Estate Management & Development        943,742           1,865,362   
           

 

 

  

 

    Annual Report     TD-11   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

Templeton Developing Markets VIP Fund (continued)

           Industry     Shares        Value  
 

Common Stocks (continued)

          
 

United Kingdom 3.5%

          
 

Unilever PLC

      Food Products        318,597         $ 13,050,572   
           

 

 

  
 

United States 1.5%

          
 

Avon Products Inc.

      Personal Products        582,973           5,474,116   
           

 

 

  
 

Total Common Stocks
(Cost $295,275,017)

             331,568,734   
           

 

 

  
d  

Participatory Notes 1.1%

          
 

Saudi Arabia 1.1%

          
c  

Deutsche Bank AG/London,

          
 

Etihad Etisalat Co., 144A, 9/27/16

      Wireless Telecommunication Services        66,819           787,059   
 

Saudi Basic Industries Corp., 144A, 9/27/16

      Chemicals        103,105           2,308,044   
c  

HSBC Bank PLC, Etihad Etisalat Co., 144A, 11/20/17

      Wireless Telecommunication Services        102,495           1,207,286   
           

 

 

  
 

Total Participatory Notes
(Cost $4,985,543)

             4,302,389   
           

 

 

  
 

Preferred Stocks 3.0%

          
 

Brazil 2.5%

          
 

Petroleo Brasileiro SA, ADR, pfd.

      Oil, Gas & Consumable Fuels        572,800           4,341,824   
 

Vale SA, ADR, pfd., A

      Metals & Mining        675,050           4,900,863   
           

 

 

  
              9,242,687   
           

 

 

  
 

Chile 0.5%

          
 

Embotelladora Andina SA, pfd., A

      Beverages        818,017           1,984,052   
           

 

 

  
 

Total Preferred Stocks
(Cost $19,598,511)

             11,226,739   
           

 

 

  
 

Total Investments before Short Term Investments (Cost $319,859,071)

             347,097,862   
           

 

 

  
 

Short Term Investments
(Cost $29,018,398) 7.7%

          
 

Money Market Funds 7.7%

          
 

United States 7.7%

          
b,e  

Institutional Fiduciary Trust Money Market Portfolio

        29,018,398           29,018,398   
           

 

 

  
 

Total Investments
(Cost $348,877,469) 99.9%

             376,116,260   
 

Other Assets, less Liabilities 0.1%

             289,349   
           

 

 

  
 

Net Assets 100.0%

           $ 376,405,609   
           

 

 

  

See Abbreviations on page TD-24.

aSecurity was purchased pursuant to Regulation S under the Securities Act of 1933, which exempts from registration securities offered and sold outside of the United States. Such a security cannot be sold in the United States without either an effective registration statement filed pursuant to the Securities Act of 1933, or pursuant to an exemption from registration. This security has been deemed liquid under guidelines approved by the Trust’s Board of Trustees.

bNon-income producing.

cSecurity was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be sold in transactions exempt from registration only to qualified institutional buyers or in a public offering registered under the Securities Act of 1933. These securities have been deemed liquid under guidelines approved by the Trust’s Board of Trustees. At December 31, 2014, the aggregate value of these securities was $5,832,348, representing 1.55% of net assets.

dSee Note 1(c) regarding Participatory Notes.

eSee Note 3(e) regarding investments in Institutional Fiduciary Trust Money Market Portfolio.

 

  TD-12       Annual Report   |    The accompanying notes are an integral part of these financial statements.    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

Financial Statements

Statement of Assets and Liabilities

December 31, 2014

 

      Templeton
Developing Markets
VIP Fund		  

Assets:

   

Investments in securities:

   

Cost - Unaffiliated issuers

    $ 319,859,071   

Cost - Sweep Money Fund (Note 3e)

      29,018,398   
  

 

 

  

Total cost of investments

    $ 348,877,469   
  

 

 

  

Value - Unaffiliated issuers

    $ 347,097,862   

Value - Sweep Money Fund (Note 3e)

      29,018,398   
  

 

 

  

Total value of investments

      376,116,260   

Receivables:

   

Investment securities sold

      1,217,085   

Capital shares sold

      223,222   

Dividends

      222,166   

Foreign tax

      24,667   

Other assets

      39   
  

 

 

  

Total assets

      377,803,439   
  

 

 

  

Liabilities:

   

Payables:

   

Investment securities purchased

      441,229   

Capital shares redeemed

      115,178   

Management fees

      394,346   

Distribution fees

      113,662   

Custodian fees

      72,176   

Reports to shareholders

      175,890   

Deferred tax

      29,402   

Accrued expenses and other liabilities

      55,947   
  

 

 

  

Total liabilities

      1,397,830   
  

 

 

  

Net assets, at value

    $ 376,405,609   
  

 

 

  

Net assets consist of:

   

Paid-in capital

    $ 311,018,669   

Distributions in excess of net investment income

      (531,967 ) 

Net unrealized appreciation (depreciation)

      27,174,090   

Accumulated net realized gain (loss)

      38,744,817   
  

 

 

  

Net assets, at value

    $ 376,405,609   
  

 

 

  

 

    The accompanying notes are an integral part of these financial statements.    |   Annual Report     TD-13   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FINANCIAL STATEMENTS

Statement of Assets and Liabilities (continued)

December 31, 2014

      Templeton
Developing Markets
VIP Fund		  
Class 1:   

Net assets, at value

    $ 114,486,612   
  

 

 

  

Shares outstanding

      12,348,636   
  

 

 

  

Net asset value and maximum offering price per share

    $ 9.27   
  

 

 

  
Class 2:   

Net assets, at value

    $ 250,812,576   
  

 

 

  

Shares outstanding

      27,259,704   
  

 

 

  

Net asset value and maximum offering price per share

    $ 9.20   
  

 

 

  
Class 4:   

Net assets, at value

    $ 11,106,421   
  

 

 

  

Shares outstanding

      1,204,443   
  

 

 

  

Net asset value and maximum offering price per share

    $ 9.22   
  

 

 

  

 

  TD-14       Annual Report   |    The accompanying notes are an integral part of these financial statements.    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FINANCIAL STATEMENTS

Statement of Operations

for the year ended December 31, 2014

 

      Templeton
Developing Markets
VIP Fund		  

Investment income:

   

Dividends (net of foreign taxes of $971,948)

    $ 12,394,221   

Income from securities loaned

      41,171   
  

 

 

  

Total investment income

      12,435,392   
  

 

 

  

Expenses:

   

Management fees (Note 3a)

      5,180,805   

Administrative fees (Note 3b)

      207,590   

Distribution fees: (Note 3c)

   

Class 2

      692,996   

Class 3

      27,045   

Class 4

      46,875   

Custodian fees (Note 4)

      202,906   

Reports to shareholders

      219,662   

Professional fees

      74,491   

Trustees’ fees and expenses

      1,792   

Other

      28,261   
  

 

 

  

Total expenses

      6,682,423   

Expenses waived/paid by affiliates (Note 3e)

      (15,026 ) 
  

 

 

  

Net expenses

      6,667,397   
  

 

 

  

Net investment income

      5,767,995   
  

 

 

  

Realized and unrealized gains (losses):

   

Net realized gain (loss) from:

   

Investments

      66,730,564   

Foreign currency transactions

      2,076   
  

 

 

  

Net realized gain (loss)

      66,732,640   
  

 

 

  

Net change in unrealized appreciation (depreciation) on:

   

Investments

      (106,603,657 ) 

Translation of other assets and liabilities denominated in foreign currencies

      (12,588 ) 

Change in deferred taxes on unrealized appreciation

      (29,402 ) 
  

 

 

  

Net change in unrealized appreciation (depreciation)

      (106,645,647 ) 
  

 

 

  

Net realized and unrealized gain (loss)

      (39,913,007 ) 
  

 

 

  

Net increase (decrease) in net assets resulting from operations

    $ (34,145,012 ) 
  

 

 

  

 

    The accompanying notes are an integral part of these financial statements.    |   Annual Report     TD-15   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FINANCIAL STATEMENTS

Statements of Changes in Net Assets

 

    Templeton
Developing Markets VIP Fund		  
    Year Ended December 31,  
     2014        2013  

Increase (decrease) in net assets:

       

Operations:

       

Net investment income

   $ 5,767,995         $ 5,556,147   

Net realized gain (loss) from investments and foreign currency transactions

     66,732,640           67,962,625   

Net change in unrealized appreciation (depreciation) on investments, translation of other assets and liabilities denominated in foreign currencies and deferred taxes

     (106,645,647 )         (79,189,158 ) 
 

 

 

  

Net increase (decrease) in net assets resulting from operations

     (34,145,012 )         (5,670,386 ) 
 

 

 

  

Distributions to shareholders from:

       

Net investment income:

       

Class 1

     (2,319,775 )         (3,816,779 ) 

Class 2

     (4,358,800 )         (5,449,449 ) 

Class 3

     —           (777,644 ) 

Class 4

     (173,399 )         (373,848 ) 
 

 

 

  

Total distributions to shareholders

     (6,851,974 )         (10,417,720 ) 
 

 

 

  

Capital share transactions: (Note 2)

       

Class 1

     (18,560,195 )         (52,075,044 ) 

Class 2

     2,280,393           (8,867,643 ) 

Class 3

     (33,674,042 )         (12,240,084 ) 

Class 4

     (2,909,339 )         (7,287,727 ) 
 

 

 

  

Total capital share transactions

     (52,863,183 )         (80,470,498 ) 
 

 

 

  

Redemption fees

     68           1,204   
 

 

 

  

Net increase (decrease) in net assets

     (93,860,101 )         (96,557,400 ) 

Net assets:

       

Beginning of year

     470,265,710           566,823,110   
 

 

 

  

End of year

   $ 376,405,609         $ 470,265,710   
 

 

 

  

Distributions in excess of net investment income, end of year

   $ (531,967 )       $ (481,395 ) 
 

 

 

  

 

TD-16    Annual Report   |    The accompanying notes are an integral part of these financial statements.    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

Notes to Financial Statements

Templeton Developing Markets VIP Fund

1. Organization and Significant Accounting Policies

Franklin Templeton Variable Insurance Products Trust (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end management investment company, consisting of nineteen separate funds and applies the specialized accounting and reporting guidance in U.S. Generally Accepted Accounting Principles (U.S. GAAP). Templeton Developing Markets VIP Fund (Fund) is included in this report. The financial statements of the remaining funds in the Trust are presented separately. Shares of the Fund are generally sold only to insurance company separate accounts to fund the benefits of variable life insurance policies or variable annuity contracts. The Fund offers three classes of shares: Class 1, Class 2, and Class 4. Effective May 1, 2014, all Class 3 shares were converted to Class 2. Each class of shares differs by its distribution fees, voting rights on matters affecting a single class and its exchange privilege.

Effective May 1, 2014, Templeton Developing Markets Securities Fund was renamed Templeton Developing Markets VIP Fund.

The following summarizes the Fund’s significant accounting policies.

a. Financial Instrument Valuation

The Fund’s investments in financial instruments are carried at fair value daily. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. The Fund calculates the net asset value (NAV) per share at the close of the New York Stock Exchange (NYSE), generally at 4 p.m. Eastern time (NYSE close) on each day the NYSE is open for trading. Under compliance policies and procedures approved by the Trust’s Board of Trustees (the Board), the Fund’s administrator has responsibility for oversight of valuation, including leading the cross-functional Valuation and Liquidity Oversight Committee (VLOC). The VLOC provides administration and oversight of the Fund’s valuation policies and procedures, which are approved annually by the Board. Among other things, these procedures allow the Fund to utilize independent pricing services, quotations from securities and financial instrument dealers, and other market sources to determine fair value.

Equity securities listed on an exchange or on the NASDAQ National Market System are valued at the last quoted sale price or the official closing price of the day, respectively. Foreign

equity securities are valued as of the close of trading on the foreign stock exchange on which the security is primarily traded or as of the NYSE close, whichever is earlier. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at the NYSE close on the day that the value of the security is determined. Over-the-counter (OTC) securities are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. Certain equity securities are valued based upon fundamental characteristics or relationships to similar securities. Investments in open-end mutual funds are valued at the closing NAV.

The Fund has procedures to determine the fair value of financial instruments for which market prices are not reliable or readily available. Under these procedures, the VLOC convenes on a regular basis to review such financial instruments and considers a number of factors, including significant unobservable valuation inputs, when arriving at fair value. The VLOC primarily employs a market-based approach which may use related or comparable assets or liabilities, recent transactions, market multiples, book values, and other relevant information for the investment to determine the fair value of the investment. An income-based valuation approach may also be used in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the investments. Due to the inherent uncertainty of valuations of such investments, the fair values may differ significantly from the values that would have been used had an active market existed. The VLOC employs various methods for calibrating these valuation approaches including a regular review of key inputs and assumptions, transactional back-testing or disposition analysis, and reviews of any related market activity.

Trading in securities on foreign securities stock exchanges and OTC markets may be completed before the daily NYSE close. In addition, trading in certain foreign markets may not take place on every NYSE business day. Occasionally, events occur between the time at which trading in a foreign security is completed and the close of the NYSE that might call into question the reliability of the value of a portfolio security held by the Fund. As a result, differences may arise between the value of the Fund’s portfolio securities as determined at the foreign market close and the latest indications of value at the close of the NYSE. In order to minimize the potential for these

 

 

    Annual Report     TD-17   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Templeton Developing Markets VIP Fund (continued)

1. Organization and Significant Accounting Policies (continued)

a. Financial Instrument Valuation (continued)

differences, the VLOC monitors price movements following the close of trading in foreign stock markets through a series of country specific market proxies (such as baskets of American Depositary Receipts, futures contracts and exchange traded funds). These price movements are measured against established trigger thresholds for each specific market proxy to assist in determining if an event has occurred that may call into question the reliability of the values of the foreign securities held by the Fund. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services.

Also, when the last day of the reporting period is a non-business day, certain foreign markets may be open on those days that the NYSE is closed, which could result in differences between the value of the Fund’s portfolio securities on the last business day and the last calendar day of the reporting period. Any significant security valuation changes due to an open foreign market are adjusted and reflected by the Fund for financial reporting purposes.

b. Foreign Currency Translation

Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. The Fund may enter into foreign currency exchange contracts to facilitate transactions denominated in a foreign currency. Purchases and sales of securities, income and expense items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. Portfolio securities and assets and liabilities denominated in foreign currencies contain risks that those currencies will decline in value relative to the U.S. dollar. Occasionally, events may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the Board.

The Fund does not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments on the Statement of Operations.

Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period.

c. Participatory Notes

The Fund invests in Participatory Notes (P-Notes). P-notes are promissory notes that are designed to offer a return linked to the performance of a particular underlying equity security or market. P-Notes are issued by banks or broker-dealers and allow the fund to gain exposure to common stocks in markets where direct investment is not allowed. Income received from P-Notes is recorded as dividend income in the Statement of Operations. P-Notes may contain various risks including the potential inability of the counterparty to fulfill their obligations under the terms of the contract. These securities may be more volatile and less liquid than other investments held by the Fund.

d. Securities Lending

The Fund participates in an agency based securities lending program. The Fund receives cash collateral against the loaned securities in an amount equal to at least 102% of the fair value of the loaned securities. Collateral is maintained over the life of the loan in an amount not less than 100% of the fair value of loaned securities, as determined at the close of fund business each day; any additional collateral required due to changes in security values is delivered to the Fund on the next business day. The collateral is invested in a non-registered money fund. The Fund receives income from the investment of cash collateral, in addition to lending fees and rebates paid by the borrower. The Fund bears the market risk with respect to the collateral investment, securities loaned, and the risk that the agent may default on its obligations to the Fund. The securities lending agent has agreed to indemnify the Fund in the event of default by a third party borrower. At December 31, 2014, the Fund had no securities on loan.

e. Income and Deferred Taxes

It is the Fund’s policy to qualify as a regulated investment company under the Internal Revenue Code. The Fund intends to distribute to shareholders substantially all of its taxable income

 

  TD-18       Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Templeton Developing Markets VIP Fund (continued)

and net realized gains to relieve it from federal income and if applicable, excise taxes. As a result, no provision for U.S. federal income taxes is required.

The Fund may be subject to foreign taxation related to income received, capital gains on the sale of securities and certain foreign currency transactions in the foreign jurisdictions in which it invests. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist in the foreign markets in which the Fund invests. When a capital gain tax is determined to apply the Fund records an estimated deferred tax liability in an amount that would be payable if the securities were disposed of on the valuation date.

The Fund recognizes the tax benefits of uncertain tax positions only when the position is “more likely than not” to be sustained upon examination by the tax authorities based on the technical merits of the tax position. As of December 31, 2014, and for all open tax years, the Fund has determined that no liability for unrecognized tax benefits is required in the Fund’s financial statements related to uncertain tax positions taken on a tax return (or expected to be taken on future tax returns). Open tax years are those that remain subject to examination and are based on each tax jurisdiction statute of limitation.

f. Security Transactions, Investment Income, Expenses and Distributions

Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Estimated expenses are accrued daily. Dividend income is recorded on the ex-dividend date except for certain foreign securities where the dividend rate is not available. In such cases, the dividend is recorded as soon as the information is received by the Fund. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with U.S. GAAP. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods.

Common expenses incurred by the Trust are allocated among the funds based on the ratio of net assets of each fund to the combined net assets of the Trust. Fund specific expenses are

charged directly to the fund that incurred the expense.

Realized and unrealized gains and losses and net investment income, not including class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions, by class, are generally due to differences in class specific expenses.

g. Accounting Estimates

The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates.

h. Redemption Fees

Redemptions and exchanges of interests in an insurance company subaccount that invests in Class 3 shares of the Fund were subject to a 1.0% short term trading fee if the interest in the subaccount had been held for less than 60 days. Such fees were retained by the Fund and accounted for as an addition to paid-in capital, allocated to each class of shares based upon the relative proportion of net assets of each class.

i. Guarantees and Indemnifications

Under the Trust’s organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, on behalf of the Fund, enters into contracts with service providers that contain general indemnification clauses. The Trust’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote.

 

 

    Annual Report     TD-19   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Templeton Developing Markets VIP Fund (continued)

2. Shares of Beneficial Interest

At December 31, 2014, there were an unlimited number of shares authorized (without par value). Transactions in the Fund’s shares were as follows:

 

     Year Ended December 31,  
     2014          2013  
      Shares      Amount           Shares      Amount  
Class 1 Shares:              

Shares sold

      1,624,952       $ 16,226,245           1,118,729       $ 11,636,774   

Shares issued in reinvestment of distributions

      229,681         2,319,775           392,673         3,816,779   

Shares redeemed

      (3,701,849 )       (37,106,215 )         (6,552,381 )       (67,528,597 ) 
  

 

 

  

Net increase (decrease)

      (1,847,216 )     $ (18,560,195 )         (5,040,979 )     $ (52,075,044 ) 
  

 

 

  
Class 2 Shares:              

Shares sold

      7,755,421       $ 76,467,757           5,110,513       $ 51,867,557   

Shares issued in reinvestment of distributions

      434,143         4,358,800           564,125         5,449,449   

Shares redeemed

      (7,896,683 )       (78,546,164 )         (6,483,017 )       (66,184,649 ) 
  

 

 

  

Net increase (decrease)

      292,881       $ 2,280,393           (808,379 )     $ (8,867,643 ) 
  

 

 

  
Class 3 Sharesa:              

Shares sold

      171,371       $ 1,697,483           410,783       $ 4,328,836   

Shares issued in reinvestment of distributions

      —         —           81,005         777,644   

Shares redeemed

      (3,593,907 )       (35,371,525 )         (1,696,602 )       (17,346,564 ) 
  

 

 

  

Net increase (decrease)

      (3,422,536 )     $ (33,674,042 )         (1,204,814 )     $ (12,240,084 ) 
  

 

 

  
Class 4 Shares:              

Shares sold

      89,395       $ 875,146           206,201       $ 2,099,934   

Shares issued on reinvestment of distributions

      17,219         173,399           38,661         373,848   

Shares redeemed

      (395,412 )       (3,957,884 )         (973,500 )       (9,761,509 ) 
  

 

 

  

Net increase (decrease)

      (288,798 )     $ (2,909,339 )         (728,638 )     $ (7,287,727 ) 
  

 

 

  

aEffective May 1, 2014, all Class 3 shares were converted to Class 2.

3. Transactions With Affiliates

Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Fund are also officers and/or trustees of the following subsidiaries:

 

Subsidiary    Affiliation

Templeton Asset Management Ltd. (TAML)

   

Investment manager

Franklin Templeton Services, LLC (FT Services)

   

Administrative manager

Franklin Templeton Distributors, Inc. (Distributors)

   

Principal underwriter

Franklin Templeton Investor Services, LLC (Investor Services)

   

Transfer agent

 

  TD-20       Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Templeton Developing Markets VIP Fund (continued)

a. Management Fees

The Fund pays an investment management fee to TAML based on the average daily net assets of the Fund as follows:

 

Annualized Fee Rate    Net Assets

1.250%

   

Up to and including $200 million

1.235%

   

Over $200 million, up to and including $700 million

1.200%

   

Over $700 million, up to and including $1 billion

1.150%

   

Over $1 billion, up to and including $1.2 billion

1.125%

   

Over $1.2 billion, up to and including $5 billion

1.075%

   

Over $5 billion, up to and including $10 billion

1.025%

   

Over $10 billion, up to and including $15 billion

0.975%

   

Over $15 billion, up to and including $20 billion

0.925%

   

In excess of $20 billion

Effective May 1, 2014, the Fund combined its investment management and administration agreements as approved by the Board. The fees paid under the combined agreement do not exceed the aggregate fees that were paid under the separate agreements.

Prior to May 1, 2014, the Fund paid fees to TAML based on the average daily net assets of the Fund as follows:

 

Annualized Fee Rate    Net Assets

1.100%

   

Up to and including $1 billion

1.050%

   

Over $1 billion, up to and including $5 billion

1.000%

   

Over $5 billion, up to and including $10 billion

0.950%

   

Over $10 billion, up to and including $15 billion

0.900%

   

Over $15 billion, up to and including $20 billion

0.850%

   

In excess of $20 billion

b. Administrative Fees

Effective May 1, 2014, under an agreement with TAML, FT Services provides administrative services to the Fund. The fee is paid by TAML based on the Fund’s average daily net assets, and is not an additional expense of the Fund.

Prior to May 1, 2014, the Fund paid administrative fees to FT Services based on the average daily net assets of the Fund as follows:

 

Annualized Fee Rate    Net Assets

0.150%

   

Up to and including $200 million

0.135%

   

Over $200 million, up to and including $700 million

0.100%

   

Over $700 million, up to and including $1.2 billion

0.075%

   

In excess of $1.2 billion

c. Distribution Fees

The Board has adopted distribution plans for Class 2, Class 3, and Class 4 shares pursuant to Rule 12b-1 under the 1940 Act. Under the Fund’s compensation distribution plans, the Fund pays Distributors for costs incurred in connection with the servicing, sale and distribution of the Fund’s shares up to 0.25%, 0.35%, and 0.35% per year of its average daily net assets of Class 2, Class 3, and Class 4, respectively. Some distribution fees are not charged on shares held by affiliates. The Board has agreed to limit the current rate to 0.25% per year for Class 3. The plan year, for purposes of monitoring compliance with the maximum annual plan rates, is February 1 through January 31.

 

    Annual Report     TD-21   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Templeton Developing Markets VIP Fund (continued)

3. Transactions With Affiliates (continued)

 

d. Transfer Agent Fees

Investor Services, under terms of an agreement, performs shareholder servicing for the Fund and is not paid by the Fund for the services.

e. Investments in Institutional Fiduciary Trust Money Market Portfolio

The Fund invests in Institutional Fiduciary Trust Money Market Portfolio (Sweep Money Fund), an affiliated open-end management investment company. Management fees paid by the Fund are waived on assets invested in the Sweep Money Fund, as noted on the Statement of Operations, in an amount not to exceed the management and administrative fees paid directly or indirectly by the Sweep Money Fund. Prior to January 1, 2014, the waiver was accounted for as a reduction to management fees.

4. Expense Offset Arrangement

The Fund has entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Fund’s custodian expenses. During the year ended December 31, 2014, there were no credits earned.

5. Income Taxes

For tax purposes, capital losses may be carried over to offset future capital gains. Capital loss carryforwards with no expiration, if any, must be fully utilized before those losses with expiration dates.

During the year ended December 31, 2014, the Fund utilized $21,512,788 of capital loss carryforwards.

The tax character of distributions paid during the years ended December 31, 2014 and 2013, was as follows:

 

     2014     2013  

Distributions paid from ordinary income

    $ 6,851,974     $ 10,417,720  
  

 

 

  

At December 31, 2014, the cost of investments, net unrealized appreciation (depreciation), undistributed ordinary income and undistributed long term capital gains for income tax purposes were as follows:

 

Cost of investments

    $ 360,855,731   
  

 

 

  

Unrealized appreciation

    $ 43,958,141   

Unrealized depreciation

      (28,697,612 ) 
  

 

 

  

Net unrealized appreciation (depreciation)

    $ 15,260,529   
  

 

 

  

Undistributed ordinary income

    $ 7,063,937   

Undistributed long term capital gains

      43,127,174   
  

 

 

  

Distributable earnings

    $ 50,191,111   
  

 

 

  

Differences between income and/or capital gains as determined on a book basis and a tax basis are primarily due to differing treatments of foreign currency transactions, passive foreign investment company shares, corporate actions and wash sales.

6. Investment Transactions

Purchases and sales of investments (excluding short term securities) for the year ended December 31, 2014, aggregated $342,813,364 and $413,007,437, respectively.

 

  TD-22       Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Templeton Developing Markets VIP Fund (continued)

7. Concentration of Risk

Investing in foreign securities may include certain risks and considerations not typically associated with investing in U.S. securities, such as fluctuating currency values and changing local and regional economic, political and social conditions, which may result in greater market volatility. In addition, certain foreign securities may not be as liquid as U.S. securities.

8. Credit Facility

The Fund, together with other U.S. registered and foreign investment funds (collectively, Borrowers), managed by Franklin Templeton Investments, are borrowers in a joint syndicated senior unsecured credit facility totaling $1.5 billion (Global Credit Facility) which matured on February 13, 2015. This Global Credit Facility provides a source of funds to the Borrowers for temporary and emergency purposes, including the ability to meet future unanticipated or unusually large redemption requests. The Borrowers expect to renew the Global Credit Facility for a total of $2 billion effective February 13, 2015, which matures on February 12, 2016.

Under the terms of the Global Credit Facility, the Fund shall, in addition to interest charged on any borrowings made by the Fund and other costs incurred by the Fund, pay its share of fees and expenses incurred in connection with the implementation and maintenance of the Global Credit Facility, based upon its relative share of the aggregate net assets of all of the Borrowers, including an annual commitment fee of 0.07% based upon the unused portion of the Global Credit Facility. These fees are reflected in other expenses on the Statement of Operations. During the year ended December 31, 2014, the Fund did not use the Global Credit Facility.

9. Fair Value Measurements

The Fund follows a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Fund’s own market assumptions (unobservable inputs). These inputs are used in determining the value of the Fund’s financial instruments and are summarized in the following fair value hierarchy:

 

  •   Level 1 – quoted prices in active markets for identical financial instruments
  •   Level 2 – other significant observable inputs (including quoted prices for similar financial instruments, interest rates, prepayment speed, credit risk, etc.)
  •   Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of financial instruments)

The input levels are not necessarily an indication of the risk or liquidity associated with financial instruments at that level.

For movements between the levels within the fair value hierarchy, the Fund has adopted a policy of recognizing the transfers as of the date of the underlying event which caused the movement.

A summary of inputs used as of December 31, 2014, in valuing the Fund’s assets carried at fair value, is as follows:

 

      Level 1     Level 2     Level 3     Total  
Assets:         

Investments in Securities:

         

Equity Investmentsa,b

    $ 342,795,473      $ —      $  —      $ 342,795,473   

Participatory Notes

      —        4,302,389        —        4,302,389   

Short Term Investments

      29,018,398        —        —        29,018,398   
  

 

 

  

Total Investments in Securities

    $ 371,813,871      $ 4,302,389     $ —      $ 376,116,260   
  

 

 

  

aIncludes common and preferred stocks.

bFor detailed categories, see the accompanying Statement of Investments.

 

    Annual Report     TD-23   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Templeton Developing Markets VIP Fund (continued)

10. New Accounting Pronouncements

In June 2014, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2014-11, Transfers and Servicing (Topic 860), Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. The ASU changes the accounting for certain repurchase agreements and expands disclosure requirements related to repurchase agreements, securities lending, repurchase-to-maturity and similar transactions. The ASU is effective for interim and annual reporting periods beginning after December 15, 2014. Management has reviewed the requirements and believes the adoption of this ASU will not have a material impact on the financial statements.

11. Subsequent Events

The Fund has evaluated subsequent events through the issuance of the financial statements and determined that no events have occurred that require disclosure other than those already disclosed in the financial statements.

Abbreviations

 

Selected Portfolio
ADR   American Depositary Receipt
GDR   Global Depositary Receipt

 

  TD-24       Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

Report of Independent Registered Public Accounting Firm

Templeton Developing Markets VIP Fund

To the Board of Trustees and Shareholders of Franklin Templeton Variable Insurance Products Trust

In our opinion, the accompanying statement of assets and liabilities, including the statement of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Templeton Developing Markets VIP Fund (the “Fund”) at December 31, 2014, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements 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 are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2014 by correspondence with the custodian, transfer agent and brokers, provides a reasonable basis for our opinion.

PricewaterhouseCoopers LLP

San Francisco, California

February 13, 2015

 

    Annual Report     TD-25   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

Tax Information (unaudited)

Templeton Developing Markets VIP Fund

Under Section 854(b)(1)(A) of the Internal Revenue Code (Code), the Fund hereby reports 1.71% of the ordinary income dividends as income qualifying for the dividends received deduction for the fiscal year ended December 31, 2014.

At December 31, 2014, more than 50% of the Fund’s total assets were invested in securities of foreign issuers. In most instances, foreign taxes were withheld from income paid to the Fund on these investments. The Fund elects to treat foreign taxes paid as allowed under Section 853 of the Code. This election will allow shareholders of record as of the 2015 distribution date, to treat their proportionate share of foreign taxes paid by the Fund as having been paid directly by them. The shareholder shall consider these amounts as foreign taxes paid in the tax year in which they receive the Fund distribution.

 

  TD-26       Annual Report    

Templeton Foreign VIP Fund

(Formerly, Templeton Foreign Securities Fund)

This annual report for Templeton Foreign VIP Fund covers the fiscal year ended December 31, 2014.

Class 4 Performance Summary as of December 31, 2014

Average annual total return of Class 4 shares* represents the average annual change in value, assuming reinvestment of dividends and capital gains. Average returns smooth out variations in returns, which can be significant; they are not the same as year-by-year results.

 

Periods ended 12/31/14    1-Year        5-Year        10-Year  

Average Annual Total Return

      -11.22%           +4.51%           +4.69%   

*For the period beginning 2/29/08, Class 4 performance reflects a 12b-1 fee expense of 0.35% per year, which affects future performance. Class 4 performance prior to 2/29/08 reflects historical Class 1 performance, which does not have a 12b-1 fee expense. Since 2/29/08 (effective date), the average annual total return of Class 4 shares was +1.49%. The Fund has a fee waiver associated with its investments in a Franklin Templeton money fund, contractually guaranteed through at least its current fiscal year-end. Fund investment results reflect the fee waiver, to the extent applicable; without this reduction, the results would have been lower.

Performance reflects the Fund’s Class 4 operating expenses, but does not include any contract fees, expenses or sales charges. If they had been included, performance would be lower. These charges and deductions, particularly for variable life policies, can have a significant effect on contract values and insurance benefits. See the contract prospectus for a complete description of these expenses, including sales charges.

Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares. Current performance may differ from figures shown.

Total Return Index Comparison for a Hypothetical $10,000 Investment (1/1/05–12/31/14)

The graph below shows the change in value of a hypothetical $10,000 investment in the Fund over the indicated period and includes reinvestment of any income or distributions. The Fund’s performance* is compared to the performance of the MSCI Europe, Australasia, Far East (EAFE) Index. One cannot invest directly in an index, and an index is not representative of the Fund’s portfolio. Please see Important Notes to Performance Information preceding the Fund Summaries.

 

LOGO

**Source: Morningstar. Please see Index Descriptions following the Fund Summaries.

 

    Annual Report     TF-1   

TEMPLETON FOREIGN VIP FUND

Fund Goal and Main Investments

Templeton Foreign VIP Fund seeks long-term capital growth. Under normal market conditions, the Fund invests at least 80% of its net assets in investments of issuers located outside the U.S., including those in emerging markets.

Fund Risks

All investments involve risks, including possible loss of principal. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments; investments in emerging markets involve heightened risks related to the same factors. In addition, smaller company stocks have historically experienced more price volatility than larger company stocks, especially over the short term. To the extent the Fund focuses on particular countries, regions, industries, sectors or types of investment from time to time, it may be subject to greater risks of adverse developments in such areas of focus than a fund that invests in a wider variety of countries, regions, industries, sectors or investments. The Fund is actively managed but there is no guarantee that the manager’s investment decisions will produce the desired results. The Fund’s prospectus also includes a description of the main investment risks.

Performance Overview

You can find the Fund’s one-year total return in the Performance Summary. In comparison, the Fund’s benchmark, the MSCI Europe, Australasia, Far East (EAFE) Index, had a -4.48% total return for the same period.1 Please note, index performance information is provided for reference and we do not attempt to track the index but rather undertake investments on the basis of fundamental research.

Economic and Market Overview

The global economy grew moderately during the 12 months under review as U.S. economic growth expanded while growth rates in much of the rest of the world declined. As measured by the MSCI World Index, stocks in global developed markets advanced overall during the 12-month period amid a generally accommodative monetary policy environment and continued strength in corporate earnings.2 Oil prices declined sharply during the 12-month period, resulting from weak global demand growth and strong world supply, and gold prices ended lower amid benign global inflation and a strong U.S. dollar.

 

 

LOGO

 

U.S. economic growth trends were generally encouraging during the period. Economic activity expanded for most of 2014, supported in some quarters by increased consumer spending, business investment and federal defense spending. The U.S. Federal Reserve Board (Fed) began reducing its large-scale bond purchases $10 billion a month in January and ended the buying program in October. But it continued its practice of maintaining holdings of longer term securities at sizable levels. The Fed believed underlying economic strength could support ongoing progress in labor market conditions. Toward period-end, the Fed stated that it could be patient with regard to raising interest rates and that the interest rate might not rise for at least a couple of meetings, possibly implying at least the first two meetings of 2015.

Outside the U.S., the U.K. economy grew relatively well, supported by the services and manufacturing sectors. In the eurozone, economic growth remained subdued, as concerns persisted about the potential negative impacts to growth from the crisis in Ukraine and China’s moderating growth rate. However, third-quarter economic growth, though meager, exceeded expectations, especially in the region’s major economies of Germany and France. In June, the European Central Bank (ECB) reduced its main interest rate and, for the first time, set a negative deposit rate; the ECB reduced both rates again in September. The ECB broadened its monetary easing stance by implementing an asset purchase program to prevent deflation and stimulate the economy. Toward period-end, the ECB cut its 2014 growth forecast for the eurozone and attributed the reduction to geopolitical risks dampening confidence and private investment.

 

1. Source: Morningstar.

One cannot invest directly in an index, and an index is not representative of the Fund’s portfolio. Please see Index Descriptions following the Fund Summaries.

2. Please see Index Descriptions following the Fund Summaries.

 

TF-2    Annual Report    

TEMPLETON FOREIGN VIP FUND

Japan’s second- and third-quarter economic contractions indicated the economy was in a recession. However, private consumption and exports improved in the third quarter. In October, the Bank of Japan expanded its stimulus measures amid weak domestic demand and as substantially lower crude oil prices exerted further downward pressure on inflation. Toward period-end, Japan’s ruling coalition was reelected in early parliamentary elections and subsequently announced a fresh stimulus package aimed at reviving economic growth.

In several emerging markets, economic growth generally moderated. However, Brazil exited recession as government spending prior to a presidential election drove third-quarter economic growth. Emerging market equities, as measured by the MSCI Emerging Markets Index, fell for the 12-month period, amid headwinds such as soft domestic demand and weak exports in several countries.2 Falling crude oil prices and geopolitical tensions in certain regions, as well as concerns about the timing of U.S. interest rate increases, also pressured emerging market equities. Many emerging market currencies depreciated against the U.S. dollar, leading central banks in several countries to raise interest rates in an effort to curb inflation and support their currencies. Several other central banks lowered interest rates to promote economic growth. After implementing monetary stimulus measures to support specific sectors, China’s central bank increased its efforts to bolster the economy by cutting its benchmark interest rates for the first time since July 2012. In contrast, Russia’s central bank raised its key interest rate sharply toward period-end to limit further devaluation of the Russian ruble and contain rising inflation.

Investment Strategy

Our investment philosophy is bottom up, value oriented and long term. In choosing investments, we generally focus on the market price of a company’s securities relative to our evaluation of the company’s potential long-term earnings, asset value and cash flow. Among factors we consider are a company’s historical value measures, including price/earnings ratio, profit margins and liquidation value. We do in-depth research to construct a bargain list from which we buy.

Manager’s Discussion

The Fund underperformed its benchmark, the MSCI EAFE Index, for the 12-month period, as several sectors detracted from relative returns. An overweighting and stock selection in

 

Top 10 Holdings  
12/31/14  

Company

Sector/Industry, Country

   % of Total
Net Assets		  

Samsung Electronics Co. Ltd.

Technology Hardware, Storage & Peripherals, South Korea

     3.4%   

GlaxoSmithKline PLC

Pharmaceuticals, U.K.

     2.5%   

BNP Paribas SA

Banks, France

     2.1%   

Roche Holding AG

Pharmaceuticals, Switzerland

     2.0%   

Hana Financial Group Inc.

Banks, South Korea

     2.0%   

Credit Suisse Group AG

Capital Markets, Switzerland

     2.0%   

Sanofi

Pharmaceuticals, France

     2.0%   

Tesco PLC

Food & Staples Retailing, U.K.

     1.8%   

AXA SA

Insurance, France

     1.6%   

KB Financial Group Inc., ADR

Banks, South Korea

     1.6%   

The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund’s Statement of Investments (SOI).

 

energy hindered Fund performance, notably energy equipment and services companies Trican Well Service3 and Ensign Energy Services,3 both based in Canada,3 as well as Saipem (Italy), Petrofac (U.K.) and Technip (France).4 Energy stocks generally retreated as crude oil prices fell sharply in 2014 resulting from excess global supply and weak demand growth. Stock selection in consumer staples, mainly in food and staples retailing, also hurt performance.5 U.K. retailer Tesco’s shares fell as the company cut its 2014 profit forecast amid declining sales and loss of market share to discount rivals. Stock selection in financials, especially banks such as Hana Financial Group (South Korea)3 and BNP Paribas (France), hindered relative Fund performance.6 Hana Financial’s earnings suffered from lower interest margins, loan losses and an increase in loan loss provisioning. Stock selection in information technology further hampered relative performance, including solar photovoltaic company GCL-Poly Energy Holdings3 and laminate manufacturer Kingboard Chemical Holdings,3 both headquartered in Hong Kong.7

 

3. Not part of the index.

4. The energy sector comprises energy equipment and services; and oil, gas and consumable fuels in the SOI.

5. The consumer staples sector comprises beverages and food and staples retailing in the SOI.

6. The financials sector comprises banks, capital markets, diversified financial services, insurance, and real estate management and development in the SOI.

7. The information technology sector comprises electronic equipment, instruments and components; semiconductors and semiconductor equipment; software; and technology hardware, storage and peripherals in the SOI.

 

    Annual Report     TF-3   

TEMPLETON FOREIGN VIP FUND

It is important to recognize the effect of currency movements on the Fund’s performance. In general, if the value of the U.S. dollar goes up compared with a foreign currency, an investment traded in that foreign currency will go down in value because it will be worth fewer U.S. dollars. This can have a negative effect on Fund performance. Conversely, when the U.S. dollar weakens in relation to a foreign currency, an investment traded in that foreign currency will increase in value, which can contribute to Fund performance. For the 12 months ended December 31, 2014, the U.S. dollar appreciated in value relative to many currencies in which the Fund’s investments were traded. As a result, the Fund’s performance was negatively affected by the portfolio’s investment predominantly in securities with non-U.S. currency exposure.

In contrast, stock selection in materials, particularly mining company Hudbay Minerals (Canada),3 contributed to relative performance.8 Stock selection in telecommunication services providers such as China Telecom (China)3 and China Mobile (China)3 also aided relative results.9 Both companies benefited after they partnered with China Unicom to establish a telecommunications tower company as a joint venture to reduce capital expenditures. China Mobile’s shares rose after the company cancelled a smartphone consumer subsidy. Additionally, an increased 4G mobile broadband subscriber base and a business deal with Deutsche Telekom helped the company’s stock. Select financials positions, especially insurers such as China Life Insurance (China),3 ACE (U.S.)3 and Aviva (U.K.) also supported relative returns. Aviva’s strong operating profits in the first half of 2014 resulted from stringent cost controls. Toward period-end, Aviva announced plans to acquire rival

insurer Friends Life, aimed at expansion within the U.K., and planned to control costs via mergers and job cuts. Other individual contributors included Teva Pharmaceuticals (Israel)3 and Flextronics International (Singapore).3

From a geographic perspective, stock selection in Europe detracted from Fund performance primarily from investments in the U.K., France and Italy. Stock selection in Asia, particularly Hong Kong, as well as off-benchmark holdings in South Korea, further hampered the Fund’s performance. An off-benchmark allocation in North America, especially in Canadian energy companies, also hurt relative performance. However, an overweighted exposure to Israel, and positioning in China,3 Singapore and Germany contributed to relative returns, as did the Fund’s off-benchmark U.S. investments.

Thank you for your participation in Templeton Foreign VIP Fund. We look forward to serving your future investment needs.

The foregoing information reflects our analysis, opinions and portfolio holdings as of December 31, 2014, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.

 

 

 

8. The materials sector comprises chemicals, construction materials, and metals and mining in the SOI.

9. The telecommunication services sector comprises diversified telecommunication services and wireless telecommunication services in the SOI.

 

TF-4    Annual Report    

TEMPLETON FOREIGN VIP FUND

Class 4 Fund Expenses

As an investor in a variable insurance contract (Contract) that indirectly provides for investment in an underlying mutual fund, you can incur transaction and/or ongoing expenses at both the Fund level and the Contract level.

 

•   Transaction expenses can include sales charges (loads) on purchases, redemption fees, surrender fees, transfer fees and premium taxes.

 

•   Ongoing expenses can include management fees, distribution and service (12b-1) fees, contract fees, annual maintenance fees, mortality and expense risk fees and other fees and expenses. All mutual funds and Contracts have some types of ongoing expenses.

The expenses shown in the table are meant to highlight ongoing expenses at the Fund level only and do not include ongoing expenses at the Contract level, or transaction expenses at either the Fund or Contract level. While the Fund does not have transaction expenses, if the transaction and ongoing expenses at the Contract level were included, the expenses shown below would be higher. You should consult your Contract prospectus or disclosure document for more information.

The table shows Fund-level ongoing expenses and can help you understand these expenses and compare them with those of other mutual funds offered through the Contract. The table assumes a $1,000 investment held for the six months indicated. Please refer to the Fund prospectus for additional information on operating expenses.

Actual Fund Expenses

The first line (Actual) of the table provides actual account values and expenses. The “Ending Account Value” is derived from the Fund’s actual return, which includes the effect of ongoing Fund expenses, but does not include the effect of ongoing Contract expenses.

You can estimate the Fund-level expenses you incurred during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:

 

1. Divide your account value by $1,000.

If an account had an $8,600 value,

then $8,600 ÷ $1,000 = 8.6.

 

2. Multiply the result by the number under the heading “Fund-Level Expenses Incurred During Period.”

If Fund-Level Expenses Incurred During Period were $7.50, then 8.6 × $7.50 = $64.50.

In this illustration, the estimated expenses incurred this period at the Fund level are $64.50.

Hypothetical Example for Comparison with Other Mutual Funds

Information in the second line (Hypothetical) of the table can help you compare ongoing expenses of the Fund with those of other mutual funds offered through the Contract. This information may not be used to estimate the actual ending account balance or expenses you incurred during the period. The hypothetical “Ending Account Value” is based on the Fund’s actual expense ratio and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Fund-Level Expenses Incurred During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds offered through a Contract.

 
Class 4  

Beginning Account

Value 7/1/14

     

Ending Account

Value 12/31/14

     

Fund-Level Expenses
Incurred During Period*

7/1/14–12/31/14

  

Actual

     $1,000         $   860.90         $5.25   

Hypothetical (5% return before expenses)

     $1,000         $1,019.56         $5.70   

*Expenses are calculated using the most recent six-month annualized expense ratio, net of expense waivers, for the Fund’s Class 4 shares (1.12%), which does not include any ongoing expenses of the Contract for which the Fund is an investment option, multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period.

 

    Annual Report     TF-5   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

Financial Highlights

Templeton Foreign VIP Fund

     Year Ended December 31,  
      2014      2013      2012      2011      2010  
Class 1               

Per share operating performance

(for a share outstanding throughout the year)

               

Net asset value, beginning of year

      $17.56         $14.63         $12.78         $14.54         $13.68   
  

 

 

  
Income from investment operationsa:               

Net investment incomeb

      0.53 c       0.34         0.38         0.42         0.28   

Net realized and unrealized gains (losses)

      (2.39 )       3.00         1.91         (1.90 )       0.86   
  

 

 

  

Total from investment operations

      (1.86 )       3.34         2.29         (1.48 )       1.14   
  

 

 

  

Less distributions from net investment income

      (0.36 )       (0.41 )       (0.44 )       (0.28 )       (0.28 ) 
  

 

 

  

Redemption feesd

      —         —         —         —         —   
  

 

 

  

Net asset value, end of year

      $15.34         $17.56         $14.63         $12.78         $14.54   
  

 

 

  

Total returne

      (10.89)%         23.27%         18.60%         (10.44)%         8.67%   
Ratios to average net assets               

Expenses

      0.77% f       0.78%         0.79%         0.79% g       0.78% g 

Net investment income

      3.11% c       2.16%         2.84%         2.92%         2.10%   
Supplemental data               

Net assets, end of year (000’s)

      $248,355         $298,468         $265,924         $254,292         $321,282   

Portfolio turnover rate

      25.71%         23.61%         12.53%         21.09%         19.16%   

aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.

bBased on average daily shares outstanding.

cNet investment income per share includes approximately $0.16 per share received in the form of a special dividend paid in connection with certain Fund holdings. Excluding this amount, the ratio of net investment income to average net assets would have been 2.13%.

dAmount rounds to less than $0.01 per share.

eTotal return does not include fees, charges or expenses imposed by the variable annuity and life insurance contracts for which Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle.

fBenefit of waiver and payments by affiliates rounds to less than 0.01%.

gBenefit of expense reduction rounds to less than 0.01%.

 

TF-6    Annual Report   |    The accompanying notes are an integral part of these financial statements.    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FINANCIAL HIGHLIGHTS

Templeton Foreign VIP Fund (continued)

     Year Ended December 31,  
      2014      2013      2012      2011      2010  
Class 2               
Per share operating performance
(for a share outstanding throughout the year)		               

Net asset value, beginning of year

      $17.24         $14.37         $12.56         $14.29         $13.45   
  

 

 

  
Income from investment operationsa:               

Net investment incomeb

      0.48 c       0.30         0.34         0.37         0.25   

Net realized and unrealized gains (losses)

      (2.35 )       2.94         1.87         (1.86 )       0.84   
  

 

 

  

Total from investment operations

      (1.87 )       3.24         2.21         (1.49 )       1.09   
  

 

 

  

Less distributions from net investment income

      (0.32 )       (0.37 )       (0.40 )       (0.24 )       (0.25 ) 
  

 

 

  

Redemption feesd

      —         —         —         —         —   
  

 

 

  

Net asset value, end of year

      $15.05         $17.24         $14.37         $12.56         $14.29   
  

 

 

  

Total returne

      (11.13)%         22.97%         18.23%         (10.63)%         8.41%   
Ratios to average net assets               

Expenses

      1.02% f       1.03%         1.04%         1.04% g       1.03% g 

Net investment income

      2.86% c       1.91%         2.59%         2.67%         1.85%   
Supplemental data               

Net assets, end of year (000’s)

      $1,645,571         $1,873,586         $1,744,231         $1,679,412         $2,090,757   

Portfolio turnover rate

      25.71%         23.61%         12.53%         21.09%         19.16%   

aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.

bBased on average daily shares outstanding.

cNet investment income per share includes approximately $0.16 per share received in the form of a special dividend paid in connection with certain Fund holdings. Excluding this amount, the ratio of net investment income to average net assets would have been 1.88%.

dAmount rounds to less than $0.01 per share.

eTotal return does not include fees, charges or expenses imposed by the variable annuity and life insurance contracts for which Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle.

fBenefit of waiver and payments by affiliates rounds to less than 0.01%.

gBenefit of expense reduction rounds to less than 0.01%.

 

    The accompanying notes are an integral part of these financial statements.    |   Annual Report     TF-7   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FINANCIAL HIGHLIGHTS

Templeton Foreign VIP Fund (continued)

     Year Ended December 31,  
      2014      2013      2012      2011      2010  
Class 4               

Per share operating performance

(for a share outstanding throughout the year)

               

Net asset value, beginning of year

      $17.37         $14.48         $12.66         $14.43         $13.59   
  

 

 

  
Income from investment operationsa:               

Net investment incomeb

      0.46 c       0.28         0.33         0.36         0.17   

Net realized and unrealized gains (losses)

      (2.36 )       2.97         1.89         (1.88 )       0.92   
  

 

 

  

Total from investment operations

      (1.90 )       3.25         2.22         (1.52 )       1.09   
  

 

 

  

Less distributions from net investment income

      (0.31 )       (0.36 )       (0.40 )       (0.25 )       (0.25 ) 
  

 

 

  

Redemption feesd

      —         —         —         —         —   
  

 

 

  

Net asset value, end of year

      $15.16         $17.37         $14.48         $12.66         $14.43   
  

 

 

  

Total returne

      (11.22)%         22.86%         18.14%         (10.74)%         8.38%   
Ratios to average net assets               

Expenses

      1.12% f       1.13%         1.14%         1.14% g       1.13% g 

Net investment income

      2.76% c       1.81%         2.49%         2.57%         1.75%   
Supplemental data               

Net assets, end of year (000’s)

      $503,143         $513,098         $416,277         $353,346         $305,505   

Portfolio turnover rate

      25.71%         23.61%         12.53%         21.09%         19.16%   

aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.

bBased on average daily shares outstanding.

cNet investment income per share includes approximately $0.16 per share received in the form of a special dividend paid in connection with certain Fund holdings. Excluding this amount, the ratio of net investment income to average net assets would have been 1.78%.

dAmount rounds to less than $0.01 per share.

eTotal return does not include fees, charges or expenses imposed by the variable annuity and life insurance contracts for which Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle.

fBenefit of waiver and payments by affiliates rounds to less than 0.01%.

gBenefit of expense reduction rounds to less than 0.01%.

 

TF-8    Annual Report   |    The accompanying notes are an integral part of these financial statements.    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

 

Statement of Investments, December 31, 2014

 

Templeton Foreign VIP Fund           
           Country     Shares        Value  
           
 

Common Stocks 92.8%

          
 

Aerospace & Defense 1.1%

          
 

BAE Systems PLC

      United Kingdom        3,443,320         $ 25,332,725   
           

 

 

  
 

Airlines 0.6%

          
 

Deutsche Lufthansa AG

      Germany        859,340           14,380,453   
           

 

 

  
 

Auto Components 2.1%

          
 

Cie Generale des Etablissements Michelin, B

      France        274,970           25,043,360   
 

Hyundai Mobis Co. Ltd.

      South Korea        118,532           25,575,585   
           

 

 

  
              50,618,945   
           

 

 

  
 

Automobiles 3.4%

          
 

Hyundai Motor Co.

      South Korea        85,778           13,253,805   
 

Nissan Motor Co. Ltd.

      Japan        4,058,500           35,800,830   
a  

Toyota Motor Corp., ADR

      Japan        262,491           32,937,371   
           

 

 

  
              81,992,006   
           

 

 

  
 

Banks 13.9%

          
 

Bangkok Bank PCL, fgn.

      Thailand        1,247,500           7,436,436   
 

Barclays PLC

      United Kingdom        4,800,520           18,220,059   
 

BNP Paribas SA

      France        854,430           50,927,957   
 

DBS Group Holdings Ltd.

      Singapore        929,520           14,453,587   
 

Hana Financial Group Inc.

      South Korea        1,636,205           47,870,246   
 

HSBC Holdings PLC

      United Kingdom        4,015,600           38,297,077   
b  

ING Groep NV, IDR

      Netherlands        2,116,284           27,732,420   
 

KB Financial Group Inc., ADR

      South Korea        1,189,645           38,806,220   
 

Societe Generale SA

      France        391,870           16,590,952   
 

Standard Chartered PLC

      United Kingdom        1,388,570           20,842,825   
 

UniCredit SpA

      Italy        5,333,111           34,427,097   
 

United Overseas Bank Ltd.

      Singapore        985,000           18,238,262   
           

 

 

  
              333,843,138   
           

 

 

  
 

Beverages 0.5%

          
 

Suntory Beverage & Food Ltd.

      Japan        377,600           13,140,764   
           

 

 

  
 

Building Products 0.8%

          
 

Compagnie de Saint-Gobain

      France        470,940           20,075,371   
           

 

 

  
 

Capital Markets 2.4%

          
 

Credit Suisse Group AG

      Switzerland        1,874,638           47,290,204   
 

GAM Holding Ltd.

      Switzerland        505,110           9,145,021   
           

 

 

  
              56,435,225   
           

 

 

  
 

Chemicals 1.2%

          
 

Akzo Nobel NV

      Netherlands        407,380           28,417,402   
           

 

 

  
 

Construction & Engineering 1.1%

          
 

Carillion PLC

      United Kingdom        3,750,730           19,631,750   
 

Sinopec Engineering Group Co. Ltd.

      China        11,830,500           8,010,127   
           

 

 

  
              27,641,877   
           

 

 

  
 

Construction Materials 0.7%

          
 

CRH PLC

      Ireland        659,820           15,887,805   
           

 

 

  
 

Diversified Financial Services 1.5%

          
 

BM&F BOVESPA SA

      Brazil        2,189,700           8,116,104   
 

Deutsche Boerse AG

      Germany        387,190           27,744,563   
           

 

 

  
              35,860,667   
           

 

 

  

 

    Annual Report     TF-9   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

Templeton Foreign VIP Fund (continued)

           Country     Shares        Value  
           
 

Common Stocks (continued)

          
 

Diversified Telecommunication Services 4.0%

          
 

China Telecom Corp. Ltd., H

      China        52,438,357         $ 30,432,568   
 

Singapore Telecommunications Ltd.

      Singapore        4,671,000           13,750,679   
a  

Telefonica SA, ADR

      Spain        2,270,951           32,270,214   
 

Telenor ASA

      Norway        928,054           18,819,459   
           

 

 

  
              95,272,920   
           

 

 

  
 

Electrical Equipment 0.7%

          
 

ABB Ltd.

      Switzerland        838,920           17,838,231   
           

 

 

  
 

Electronic Equipment, Instruments & Components 1.7%

          
b  

Flextronics International Ltd.

      Singapore        1,849,070           20,672,602   
 

Kingboard Chemical Holdings Ltd.

      Hong Kong        11,646,000           19,675,469   
           

 

 

  
              40,348,071   
           

 

 

  
 

Energy Equipment & Services 3.8%

          
 

Ensign Energy Services Inc.

      Canada        1,965,300           17,262,485   
 

Petrofac Ltd.

      United Kingdom        1,484,944           16,271,512   
b  

Saipem SpA

      Italy        1,138,333           12,072,761   
 

Technip SA

      France        561,210           33,555,952   
 

Trican Well Service Ltd.

      Canada        2,373,000           11,382,226   
           

 

 

  
              90,544,936   
           

 

 

  
 

Food & Staples Retailing 2.4%

          
 

Metro AG

      Germany        489,650           14,995,580   
 

Tesco PLC

      United Kingdom        14,669,830           43,216,481   
           

 

 

  
              58,212,061   
           

 

 

  
 

Health Care Equipment & Supplies 0.7%

          
 

Getinge AB, B

      Sweden        737,270           16,807,915   
           

 

 

  
 

Health Care Providers & Services 1.4%

          
 

Shanghai Pharmaceuticals Holding Co. Ltd., H

      China        6,434,800           14,522,792   
 

Sinopharm Group Co.

      China        5,059,200           17,942,855   
           

 

 

  
              32,465,647   
           

 

 

  
 

Industrial Conglomerates 1.6%

          
 

Hutchison Whampoa Ltd.

      Hong Kong        988,239           11,387,635   
 

Siemens AG

      Germany        233,124           26,445,003   
           

 

 

  
              37,832,638   
           

 

 

  
 

Insurance 8.1%

          
 

ACE Ltd.

      United States        307,649           35,342,717   
 

Aegon NV

      Netherlands        4,446,700           33,676,593   
 

Aviva PLC

      United Kingdom        3,200,110           24,166,915   
 

AXA SA

      France        1,685,708           39,172,566   
 

China Life Insurance Co. Ltd., H

      China        6,096,000           23,821,252   
 

Muenchener Rueckversicherungs-Gesellschaft AG

      Germany        68,060           13,649,943   
b,c  

NN Group NV, 144A

      Netherlands        453,400           13,630,315   
 

Swiss Re AG

      Switzerland        130,190           10,953,926   
           

 

 

  
              194,414,227   
           

 

 

  

 

TF-10    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

 

Templeton Foreign VIP Fund (continued)

 

           Country     Shares        Value  
           
 

Common Stocks (continued)

          
 

Life Sciences Tools & Services 1.8%

          
 

Lonza Group AG

      Switzerland        121,930         $ 13,760,356   
b  

MorphoSys AG

      Germany        116,110           10,765,986   
b  

QIAGEN NV

      Netherlands        807,901           18,925,565   
           

 

 

  
              43,451,907   
           

 

 

  
 

Metals & Mining 2.5%

          
 

HudBay Minerals Inc.

      Canada        2,891,000           25,194,334   
 

POSCO

      South Korea        136,907           34,484,602   
           

 

 

  
              59,678,936   
           

 

 

  
 

Multiline Retail 1.4%

          
 

Marks & Spencer Group PLC

      United Kingdom        4,429,680           33,058,947   
           

 

 

  
 

Oil, Gas & Consumable Fuels 9.3%

          
 

BP PLC

      United Kingdom        5,463,315           34,999,399   
 

Dragon Oil PLC

      Turkmenistan        1,142,970           9,575,816   
 

Eni SpA

      Italy        1,319,747           23,170,929   
 

Kunlun Energy Co. Ltd.

      China        9,072,000           8,611,085   
 

LUKOIL Holdings, ADR

      Russia        160,535           6,389,293   
 

Royal Dutch Shell PLC, A

      United Kingdom        16,803           564,020   
 

Royal Dutch Shell PLC, B

      United Kingdom        1,094,263           38,086,666   
 

Statoil ASA

      Norway        697,230           12,244,221   
 

Suncor Energy Inc.

      Canada        901,700           28,652,512   
 

Talisman Energy Inc.

      Canada        2,957,400           23,175,320   
 

Total SA, B

      France        715,516           36,812,725   
           

 

 

  
              222,281,986   
           

 

 

  
 

Pharmaceuticals 11.9%

          
 

Bayer AG

      Germany        194,750           26,628,167   
 

GlaxoSmithKline PLC

      United Kingdom        2,772,585           59,465,602   
 

Merck KGaA

      Germany        233,460           22,152,599   
 

Novartis AG

      Switzerland        328,730           30,535,320   
 

Roche Holding AG

      Switzerland        179,480           48,724,252   
 

Sanofi

      France        513,135           46,976,790   
 

Teva Pharmaceutical Industries Ltd., ADR

      Israel        670,527           38,562,008   
 

UCB SA

      Belgium        160,740           12,292,109   
           

 

 

  
              285,336,847   
           

 

 

  
 

Real Estate Management & Development 0.0%†

          
 

Cheung Kong (Holdings) Ltd.

      Hong Kong        922           15,517   
           

 

 

  
 

Semiconductors & Semiconductor Equipment 1.8%

          
b  

GCL-Poly Energy Holdings Ltd.

      Hong Kong        138,306,000           32,284,688   
 

Infineon Technologies AG

      Germany        1,103,225           11,807,210   
           

 

 

  
              44,091,898   
           

 

 

  
 

Software 0.8%

          
 

Capcom Co. Ltd.

      Japan        1,211,400           18,359,294   
           

 

 

  
 

Specialty Retail 1.1%

          
 

Kingfisher PLC

      United Kingdom        5,160,616           27,389,316   
           

 

 

  

 

    Annual Report     TF-11   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

 

Templeton Foreign VIP Fund (continued)

 

           Country     Shares        Value  
           
 

Common Stocks (continued)

          
 

Technology Hardware, Storage & Peripherals 4.5%

          
 

CANON Inc.

      Japan        521,800         $ 16,724,164   
 

Konica Minolta Inc.

      Japan        864,300           9,557,250   
 

Samsung Electronics Co. Ltd.

      South Korea        66,679           80,898,033   
           

 

 

  
              107,179,447   
           

 

 

  
 

Trading Companies & Distributors 2.0%

          
 

Daewoo International Corp.

      South Korea        366,608           10,541,455   
 

ITOCHU Corp.

      Japan        3,441,000           37,102,207   
           

 

 

  
              47,643,662   
           

 

 

  
 

Wireless Telecommunication Services 2.0%

          
 

China Mobile Ltd.

      China        1,903,500           22,265,742   
 

Mobile TeleSystems, ADR

      Russia        369,312           2,651,660   
 

Vodafone Group PLC, ADR

      United Kingdom        671,535           22,946,351   
           

 

 

  
              47,863,753   
           

 

 

  
 

Total Common Stocks (Cost $2,063,303,883)

             2,223,714,534   
           

 

 

  
 

Preferred Stocks (Cost $11,136,802) 0.1%

          
 

Oil, Gas & Consumable Fuels 0.1%

          
 

Petroleo Brasileiro SA, ADR, pfd.

      Brazil        517,880           3,925,530   
           

 

 

  
 

Total Investments before Short Term Investments
(Cost $2,074,440,685)

             2,227,640,064   
           

 

 

  
 

Short Term Investments 6.6%

          
 

Money Market Funds (Cost $135,800,137) 5.7%

          
b,d  

Institutional Fiduciary Trust Money Market Portfolio

      United States        135,800,137           135,800,137   
           

 

 

  
e  

Investments from Cash Collateral Received for Loaned Securities
(Cost $22,777,025) 0.9%

   

       
 

Money Market Funds 0.9%

          
f  

BNY Mellon Overnight Government Fund, 0.072%

      United States        22,777,025           22,777,025   
           

 

 

  
 

Total Investments (Cost $2,233,017,847) 99.5%

             2,386,217,226   
 

Other Assets, less Liabilities 0.5%

             10,851,391   
           

 

 

  
 

Net Assets 100.0%

           $ 2,397,068,617   
           

 

 

  

 

See Abbreviations on page TF-23.

†Rounds to less than 0.1% of net assets.

aA portion or all of the security is on loan at December 31, 2014. See Note 1(c).

bNon-income producing.

cSecurity was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be sold in transactions exempt from registration only to qualified institutional buyers or in a public offering registered under the Securities Act of 1933. This security has been deemed liquid under guidelines approved by the Trust’s Board of Trustees. At December 31, 2014, the value of this security was $13,630,315, representing 0.57% of net assets.

dSee Note 3(e) regarding investments in Institutional Fiduciary Trust Money Market Portfolio.

eSee Note 1(c) regarding securities on loan.

fThe rate shown is the annualized seven-day yield at period end.

 

TF-12    Annual Report   |    The accompanying notes are an integral part of these financial statements.    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

Financial Statements

Statement of Assets and Liabilities

December 31, 2014

 

      Templeton
Foreign
VIP Fund		  

Assets:

   

Investments in securities:

   

Cost - Unaffiliated issuers

    $ 2,097,217,710   

Cost - Sweep Money Fund (Note 3e)

      135,800,137   
  

 

 

  

Total cost of investments

    $ 2,233,017,847   
  

 

 

  

Value - Unaffiliated issuers

    $ 2,250,417,089   

Value - Sweep Money Fund (Note 3e)

      135,800,137   
  

 

 

  

Total value of investments (includes securities loaned in the amount $22,207,943)

      2,386,217,226   

Receivables:

   

Capital shares sold

      47,937,396   

Dividends

      3,812,274   

Other assets

      233   
  

 

 

  

Total assets

      2,437,967,129   
  

 

 

  

Liabilities:

   

Payables:

   

Investment securities purchased

      14,064,634   

Capital shares redeemed

      1,041,637   

Management fees

      1,485,858   

Distribution fees

      973,078   

Payable upon return of securities loaned

      22,777,025   

Accrued expenses and other liabilities

      556,280   
  

 

 

  

Total liabilities

      40,898,512   
  

 

 

  

Net assets, at value

    $ 2,397,068,617   
  

 

 

  

Net assets consist of:

   

Paid-in capital

    $ 2,096,424,724   

Undistributed net investment income

      75,444,548   

Net unrealized appreciation (depreciation)

      153,106,440   

Accumulated net realized gain (loss)

      72,092,905   
  

 

 

  

Net assets, at value

    $ 2,397,068,617   
  

 

 

  
Class 1:   

Net assets, at value

    $ 248,354,655   
  

 

 

  

Shares outstanding

      16,191,969   
  

 

 

  

Net asset value and maximum offering price per share

    $ 15.34   
  

 

 

  
Class 2:   

Net assets, at value

    $ 1,645,570,685   
  

 

 

  

Shares outstanding

      109,316,577   
  

 

 

  

Net asset value and maximum offering price per share

    $ 15.05   
  

 

 

  
Class 4:   

Net assets, at value

    $ 503,143,277   
  

 

 

  

Shares outstanding

      33,192,724   
  

 

 

  

Net asset value and maximum offering price per share

    $ 15.16   
  

 

 

  

 

    The accompanying notes are an integral part of these financial statements.    |   Annual Report     TF-13   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FINANCIAL STATEMENTS

Statement of Operations

for the year ended December 31, 2014

 

      Templeton
Foreign
VIP Fund		  

Investment income:

   

Dividends (net of foreign taxes of $7,313,287)

    $ 100,346,608   

Income from securities loaned

      2,098,406   
  

 

 

  

Total investment income

      102,445,014   
  

 

 

  

Expenses:

   

Management fees (Note 3a)

      18,665,399   

Administrative fees (Note 3b)

      859,943   

Distribution fees: (Note 3c)

   

Class 2

      4,543,745   

Class 3

      75,571   

Class 4

      1,780,731   

Custodian fees (Note 4)

      277,642   

Reports to shareholders

      447,762   

Registration and filing fees

      1,428   

Professional fees

      109,904   

Trustees’ fees and expenses

      10,731   

Other

      61,734   
  

 

 

  

Total expenses

      26,834,590   

Expenses waived/paid by affiliates (Note 3e)

      (83,720 ) 
  

 

 

  

Net expenses

      26,750,870   
  

 

 

  

Net investment income

      75,694,144   
  

 

 

  

Realized and unrealized gains (losses):

   

Net realized gain (loss) from:

   

Investments

      132,213,003   

Foreign currency transactions

      (210,650 ) 
  

 

 

  

Net realized gain (loss)

      132,002,353   
  

 

 

  

Net change in unrealized appreciation (depreciation) on:

   

Investments

      (498,653,455 ) 

Translation of other assets and liabilities denominated in foreign currencies

      (176,911 ) 
  

 

 

  

Net change in unrealized appreciation (depreciation)

      (498,830,366 ) 
  

 

 

  

Net realized and unrealized gain (loss)

      (366,828,013 ) 
  

 

 

  

Net increase (decrease) in net assets resulting from operations

    $ (291,133,869 ) 
  

 

 

  

 

TF-14    Annual Report   |    The accompanying notes are an integral part of these financial statements.    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FINANCIAL STATEMENTS

Statements of Changes in Net Assets

 

    Templeton Foreign VIP Fund  
    Year Ended December 31,  
     2014        2013  

Increase (decrease) in net assets:

       

Operations:

       

Net investment income

   $ 75,694,144         $ 50,200,298   

Net realized gain (loss) from investments and foreign currency transactions

     132,002,353           40,523,982   

Net change in unrealized appreciation (depreciation) on investments and translation of other assets and liabilities denominated in foreign currencies

     (498,830,366 )         454,985,363   
 

 

 

  

Net increase (decrease) in net assets resulting from operations

     (291,133,869 )         545,709,643   
 

 

 

  

Distributions to shareholders from:

       

Net investment income:

       

Class 1

     (5,893,509 )         (7,042,374 ) 

Class 2

     (34,594,703 )         (42,339,120 ) 

Class 3

     —           (2,189,476 ) 

Class 4

     (9,091,879 )         (10,745,373 ) 
 

 

 

  

Total distributions to shareholders

     (49,580,091 )         (62,316,343 ) 
 

 

 

  

Capital share transactions: (Note 2)

       

Class 1

     (13,666,266 )         (18,682,478 ) 

Class 2

     10,314,563           (199,579,456 ) 

Class 3

     (96,991,462 )         (13,135,502 ) 

Class 4

     57,564,581           10,467,967   
 

 

 

  

Total capital share transactions

     (42,778,584 )         (220,929,469 ) 
 

 

 

  

Redemption fees

     3,115           19,703   
 

 

 

  

Net increase (decrease) in net assets

     (383,489,429 )         262,483,534   

Net assets:

       

Beginning of year

     2,780,558,046           2,518,074,512   
 

 

 

  

End of year

   $ 2,397,068,617         $ 2,780,558,046   
 

 

 

  

Undistributed net investment income included in net assets:

       

End of year

   $ 75,444,548         $ 49,005,172   
 

 

 

  

 

    The accompanying notes are an integral part of these financial statements.    |   Annual Report     TF-15   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

Notes to Financial Statements

Templeton Foreign VIP Fund

1. Organization and Significant Accounting Policies

Franklin Templeton Variable Insurance Products Trust (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end management investment company, consisting of nineteen separate funds and applies the specialized accounting and reporting guidance in U.S. Generally Accepted Accounting Principles (U.S. GAAP). Templeton Foreign VIP Fund (Fund) is included in this report. The financial statements of the remaining funds in the Trust are presented separately. Shares of the Fund are generally sold only to insurance company separate accounts to fund the benefits of variable life insurance policies or variable annuity contracts. The Fund offers three classes of shares: Class 1, Class 2, and Class 4. Effective May 1, 2014, all Class 3 shares were converted to Class 2. Each class of shares differs by its distribution fees, voting rights on matters affecting a single class and its exchange privilege.

Effective May 1, 2014, Templeton Foreign Securities Fund was renamed Templeton Foreign VIP Fund.

The following summarizes the Fund’s significant accounting policies.

a. Financial Instrument Valuation

The Fund’s investments in financial instruments are carried at fair value daily. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. The Fund calculates the net asset value (NAV) per share at the close of the New York Stock Exchange (NYSE), generally at 4 p.m. Eastern time (NYSE close) on each day the NYSE is open for trading. Under compliance policies and procedures approved by the Trust’s Board of Trustees (the Board), the Fund’s administrator has responsibility for oversight of valuation, including leading the cross-functional Valuation and Liquidity Oversight Committee (VLOC). The VLOC provides administration and oversight of the Fund’s valuation policies and procedures, which are approved annually by the Board. Among other things, these procedures allow the Fund to utilize independent pricing services, quotations from securities and financial instrument dealers, and other market sources to determine fair value.

Equity securities listed on an exchange or on the NASDAQ National Market System are valued at the last quoted sale price

or the official closing price of the day, respectively. Foreign equity securities are valued as of the close of trading on the foreign stock exchange on which the security is primarily traded or as of the NYSE close, whichever is earlier. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at the NYSE close on the day that the value of the security is determined. Over-the-counter (OTC) securities are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. Certain equity securities are valued based upon fundamental characteristics or relationships to similar securities. Investments in open-end mutual funds and non-registered money market funds are valued at the closing NAV.

The Fund has procedures to determine the fair value of financial instruments for which market prices are not reliable or readily available. Under these procedures, the VLOC convenes on a regular basis to review such financial instruments and considers a number of factors, including significant unobservable valuation inputs, when arriving at fair value. The VLOC primarily employs a market-based approach which may use related or comparable assets or liabilities, recent transactions, market multiples, book values, and other relevant information for the investment to determine the fair value of the investment. An income-based valuation approach may also be used in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the investments. Due to the inherent uncertainty of valuations of such investments, the fair values may differ significantly from the values that would have been used had an active market existed. The VLOC employs various methods for calibrating these valuation approaches including a regular review of key inputs and assumptions, transactional back-testing or disposition analysis, and reviews of any related market activity.

Trading in securities on foreign securities stock exchanges and OTC markets may be completed before the daily NYSE close. In addition, trading in certain foreign markets may not take place on every NYSE business day. Occasionally, events occur between the time at which trading in a foreign security is completed and the close of the NYSE that might call into question the reliability of the value of a portfolio security held by the Fund. As a result, differences may arise between the value of the Fund’s portfolio securities as determined at the foreign

 

 

TF-16    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Templeton Foreign VIP Fund (continued)

market close and the latest indications of value at the close of the NYSE. In order to minimize the potential for these differences, the VLOC monitors price movements following the close of trading in foreign stock markets through a series of country specific market proxies (such as baskets of American Depositary Receipts, futures contracts and exchange traded funds). These price movements are measured against established trigger thresholds for each specific market proxy to assist in determining if an event has occurred that may call into question the reliability of the values of the foreign securities held by the Fund. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services.

Also, when the last day of the reporting period is a non-business day, certain foreign markets may be open on those days that the NYSE is closed, which could result in differences between the value of the Fund’s portfolio securities on the last business day and the last calendar day of the reporting period. Any significant security valuation changes due to an open foreign market are adjusted and reflected by the Fund for financial reporting purposes.

b. Foreign Currency Translation

Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. The Fund may enter into foreign currency exchange contracts to facilitate transactions denominated in a foreign currency. Purchases and sales of securities, income and expense items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. Portfolio securities and assets and liabilities denominated in foreign currencies contain risks that those currencies will decline in value relative to the U.S. dollar. Occasionally, events may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the Board.

The Fund does not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments on the Statement of Operations.

Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period.

c. Securities Lending

The Fund participates in an agency based securities lending program. The Fund receives cash collateral against the loaned securities in an amount equal to at least 102% of the fair value of the loaned securities. Collateral is maintained over the life of the loan in an amount not less than 100% of the fair value of loaned securities, as determined at the close of fund business each day; any additional collateral required due to changes in security values is delivered to the Fund on the next business day. The collateral is invested in a non-registered money fund as indicated on the Statement of Investments. The Fund receives income from the investment of cash collateral, in addition to lending fees and rebates paid by the borrower. The Fund bears the market risk with respect to the collateral investment, securities loaned, and the risk that the agent may default on its obligations to the Fund. The securities lending agent has agreed to indemnify the Fund in the event of default by a third party borrower.

d. Income and Deferred Taxes

It is the Fund’s policy to qualify as a regulated investment company under the Internal Revenue Code. The Fund intends to distribute to shareholders substantially all of its taxable income and net realized gains to relieve it from federal income and if applicable, excise taxes. As a result, no provision for U.S. federal income taxes is required.

The Fund may be subject to foreign taxation related to income received, capital gains on the sale of securities and certain foreign currency transactions in the foreign jurisdictions in which it invests. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist in the foreign markets in which the Fund invests. When a capital gain tax is determined to apply the Fund records an estimated deferred tax liability in an amount that would be payable if the securities were disposed of on the valuation date. As a result of several court cases, in certain

 

 

    Annual Report     TF-17   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Templeton Foreign VIP Fund (continued)

1. Organization and Significant Accounting Policies (continued)

d. Income and Deferred Taxes (continued)

countries across the European Union, the Fund has filed additional tax reclaims for previously withheld taxes on dividends earned in those countries. These additional filings are subject to various administrative proceedings by the local jurisdictions’ tax authorities within the European Union, as well as a number of related judicial proceedings. At this time, uncertainty exists as to the ultimate resolution of these proceedings, the likelihood of receipt of these reclaims, and the potential timing of payment, and accordingly, no amounts are reflected in the financial statements.

The Fund recognizes the tax benefits of uncertain tax positions only when the position is “more likely than not” to be sustained upon examination by the tax authorities based on the technical merits of the tax position. As of December 31, 2014, and for all open tax years, the Fund has determined that no liability for unrecognized tax benefits is required in the Fund’s financial statements related to uncertain tax positions taken on a tax return (or expected to be taken on future tax returns). Open tax years are those that remain subject to examination and are based on each tax jurisdiction statute of limitation.

e. Security Transactions, Investment Income, Expenses and Distributions

Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Estimated expenses are accrued daily. Dividend income is recorded on the ex-dividend date except for certain foreign securities where the dividend rate is not available. In such cases, the dividend is recorded as soon as the information is received by the Fund. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with U.S. GAAP. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the

results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods.

Common expenses incurred by the Trust are allocated among the funds based on the ratio of net assets of each fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense.

Realized and unrealized gains and losses and net investment income, not including class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions, by class, are generally due to differences in class specific expenses.

f. Accounting Estimates

The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates.

g. Redemption Fees

Redemptions and exchanges of interests in an insurance company subaccount that invested in Class 3 shares of the Fund were subject to a 1.0% short term trading fee if the interest in the subaccount had been held for less than 60 days. Such fees were retained by the Fund and accounted for as an addition to paid-in capital, allocated to each class of shares based upon the relative proportion of net assets of each class.

h. Guarantees and Indemnifications

Under the Trust’s organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, on behalf of the Fund, enters into contracts with service providers that contain general indemnification clauses. The Trust’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote.

 

TF-18    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

 

Templeton Foreign VIP Fund (continued)

 

2. Shares of Beneficial Interest

At December 31, 2014, there were an unlimited number of shares authorized (without par value). Transactions in the Fund’s shares were as follows:

 

     Year Ended December 31,  
     2014          2013  
      Shares      Amount           Shares      Amount  
Class 1 Shares:              

Shares sold

      620,933       $ 10,378,692           496,052       $ 7,884,222   

Shares issued in reinvestment of distributions

      329,615         5,893,509           468,554         7,042,374   

Shares redeemed

      (1,754,194 )       (29,938,467 )         (2,142,399 )       (33,609,074 ) 
  

 

 

  

Net increase (decrease)

      (803,646 )     $ (13,666,266 )         (1,177,793 )     $ (18,682,478 ) 
  

 

 

  
Class 2 Shares:              

Shares sold

      18,861,260       $ 315,063,591           9,932,214       $ 152,564,880   

Shares issued in reinvestment of distributions

      1,967,844         34,594,703           2,864,622         42,339,120   

Shares redeemed

      (20,169,191 )       (339,343,731 )         (25,480,434 )       (394,483,456 ) 
  

 

 

  

Net increase (decrease)

      659,913       $ 10,314,563           (12,683,598 )     $ (199,579,456 ) 
  

 

 

  
Class 3 Sharesa:              

Shares sold

      149,791       $ 2,553,688           558,566       $ 8,455,794   

Shares issued in reinvestment of distributions

      —         —           148,742         2,189,476   

Shares redeemed

      (5,703,761 )       (99,545,150 )         (1,552,340 )       (23,780,772 ) 
  

 

 

  

Net increase (decrease)

      (5,553,970 )     $ (96,991,462 )         (845,032 )     $ (13,135,502 ) 
  

 

 

  
Class 4 Shares:              

Shares sold

      6,994,024       $ 113,655,992           5,690,758       $ 88,119,947   

Shares issued on reinvestment of distributions

      513,375         9,091,879           721,650         10,745,373   

Shares redeemed

      (3,859,063 )       (65,183,290 )         (5,613,738 )       (88,397,353 ) 
  

 

 

  

Net increase (decrease)

      3,648,336       $ 57,564,581           798,670       $ 10,467,967   
  

 

 

  

aEffective May 1, 2014, all Class 3 Shares were converted to Class 2.

3. Transactions With Affiliates

Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Fund are also officers and/or directors of the following subsidiaries:

 

Subsidiary    Affiliation

Templeton Investment Counsel, LLC (TIC)

   

Investment manager

Franklin Templeton Services, LLC (FT Services)

   

Administrative manager

Franklin Templeton Distributors, Inc. (Distributors)

   

Principal underwriter

Franklin Templeton Investor Services, LLC (Investor Services)

   

Transfer agent

 

    Annual Report     TF-19   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Templeton Foreign VIP Fund (continued)

3. Transactions With Affiliates (continued)

a. Management Fees

The Fund pays an investment management fee to TIC based on the average daily net assets of the Fund as follows:

 

Annualized Fee Rate    Net Assets

0.900%

   

Up to and including $200 million

0.810%

   

Over $200 million, up to and including $700 million

0.775%

   

Over $700 million, up to and including $1.2 billion

0.750%

   

Over $1.2 billion, up to and including $1.3 billion

0.675%

   

Over $1.3 billion, up to and including $10 billion

0.655%

   

Over $10 billion, up to and including $15 billion

0.635%

   

Over $15 billion, up to and including $20 billion

0.615%

   

In excess of $20 billion

Effective May 1, 2014 the Fund combined its investment management and administration agreements as approved by the Board. The fees paid under the combined agreement do not exceed the aggregate fees that were paid under the separate agreements.

Prior to May 1, 2014, the Fund paid fees to TIC based on the average daily net assets of the Fund as follows:

 

Annualized Fee Rate    Net Assets

0.750%

   

Up to and including $200 million

0.675%

   

Over $200 million, up to and including $1.3 billion

0.600%

   

Over $1.3 billion, up to and including $10 billion

0.580%

   

Over $10 billion, up to and including $15 billion

0.560%

   

Over $15 billion, up to and including $20 billion

0.540%

   

In excess of $20 billion

b. Administrative Fees

Effective May 1, 2014, under an agreement with TIC, FT Services provides administrative services to the Fund. The fee is paid by TIC based on the Fund’s average daily net assets, and is not an additional expense of the Fund.

Prior to May 1, 2014, the Fund paid fees to FT Services based on the average daily net assets of the Fund as follows:

 

Annualized Fee Rate    Net Assets

0.150%

   

Up to and including $200 million

0.135%

   

Over $200 million, up to and including $700 million

0.100%

   

Over $700 million, up to and including $1.2 billion

0.075%

   

In excess of $1.2 billion

c. Distribution Fees

The Board has adopted distribution plans for Class 2, Class 3, and Class 4 shares pursuant to Rule 12b-1 under the 1940 Act. Under the Fund’s compensation distribution plans, the Fund pays Distributors for costs incurred in connection with the servicing, sale and distribution of the Fund’s shares up to 0.25%, 0.35%, and 0.35% per year of its average daily net assets of Class 2, Class 3, and Class 4, respectively. Some distribution fees are not charged on shares held by affiliates. The Board has agreed to limit the current rate to 0.25% per year for Class 3. The plan year, for purposes of monitoring compliance with the maximum annual plan rates, is February 1 through January 31.

 

TF-20    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Templeton Foreign VIP Fund (continued)

d. Transfer Agent Fees

Investor Services, under terms of an agreement, performs shareholder servicing for the Fund and is not paid by the Fund for the services.

e. Investments in Institutional Fiduciary Trust Money Market Portfolio

The Fund invests in Institutional Fiduciary Trust Money Market Portfolio (Sweep Money Fund), an affiliated open-end management investment company. Management fees paid by the Fund are waived on assets invested in the Sweep Money Fund, as noted on the Statement of Operations, in an amount not to exceed the management and administrative fees paid directly or indirectly by the Sweep Money Fund. Prior to January 1, 2014, the waiver was accounted for as a reduction to management fees.

4. Expense Offset Arrangement

The Fund has entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Fund’s custodian expenses. During the year ended December 31, 2014, there were no credits earned.

5. Income Taxes

For tax purposes, capital losses may be carried over to offset future capital gains. Capital loss carryforwards with no expiration, if any, must be fully utilized before those losses with expiration dates. During the year ended December 31, 2014, the Fund utilized $55,459,546 of capital loss carryforwards.

The tax character of distributions paid during the years ended December 31, 2014 and 2013, was as follows:

 

     2014     2013  

Distributions paid from ordinary income

    $  49,580,091      $ 62,316,343   
  

 

 

  

At December 31, 2014, the cost of investments, net unrealized appreciation (depreciation), undistributed ordinary income and undistributed long term capital gains for income tax purposes were as follows:

 

Cost of investments

    $  2,237,678,404   
  

 

 

  

Unrealized appreciation

    $ 405,796,683   

Unrealized depreciation

      (257,257,861 ) 
  

 

 

  

Net unrealized appreciation (depreciation)

    $ 148,538,822   
  

 

 

  

Undistributed ordinary income

    $ 75,444,548   

Undistributed long term capital gains

      76,753,457   
  

 

 

  

Distributable earnings

    $ 152,198,005   
  

 

 

  

Differences between income and/or capital gains as determined on a book basis and a tax basis are primarily due to differing treatment of foreign currency transactions.

6. Investment Transactions

Purchases and sales of investments (excluding short term securities) for the year ended December 31, 2014, aggregated $651,409,315 and $791,730,248, respectively.

7. Concentration of Risk

Investing in foreign securities may include certain risks and considerations not typically associated with investing in U.S. securities, such as fluctuating currency values and changing local and regional economic, political and social conditions, which may result in greater market volatility. In addition, certain foreign securities may not be as liquid as U.S. securities.

 

    Annual Report     TF-21   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Templeton Foreign VIP Fund (continued)

8. Credit Facility

The Fund, together with other U.S. registered and foreign investment funds (collectively, Borrowers), managed by Franklin Templeton Investments, are borrowers in a joint syndicated senior unsecured credit facility totaling $1.5 billion (Global Credit Facility) which matured on February 13, 2015. This Global Credit Facility provides a source of funds to the Borrowers for temporary and emergency purposes, including the ability to meet future unanticipated or unusually large redemption requests. The Borrowers expect to renew the Global Credit Facility for a total of $2 billion effective February 13, 2015, which matures on February 12, 2016.

Under the terms of the Global Credit Facility, the Fund shall, in addition to interest charged on any borrowings made by the Fund and other costs incurred by the Fund, pay its share of fees and expenses incurred in connection with the implementation and maintenance of the Global Credit Facility, based upon its relative share of the aggregate net assets of all of the Borrowers, including an annual commitment fee of 0.07% based upon the unused portion of the Global Credit Facility. These fees are reflected in other expenses on the Statement of Operations. During the year ended December 31, 2014, the Fund did not use the Global Credit Facility.

9. Fair Value Measurements

The Fund follows a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Fund’s own market assumptions (unobservable inputs). These inputs are used in determining the value of the Fund’s financial instruments and are summarized in the following fair value hierarchy:

 

  •   Level 1 – quoted prices in active markets for identical financial instruments
  •   Level 2 – other significant observable inputs (including quoted prices for similar financial instruments, interest rates, prepayment speed, credit risk, etc.)
  •   Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of financial instruments)

The input levels are not necessarily an indication of the risk or liquidity associated with financial instruments at that level.

For movements between the levels within the fair value hierarchy, the Fund has adopted a policy of recognizing the transfers as of the date of the underlying event which caused the movement.

A summary of inputs used as of December 31, 2014, in valuing the Fund’s assets carried at fair value, is as follows:

 

      Level 1     Level 2     Level 3     Total  
Assets:         

Investments in Securities:

         

Equity Investmentsa,b

    $ 2,227,640,064      $ —      $  —      $ 2,227,640,064   

Short Term Investments

      135,800,137        22,777,025          158,577,162   
  

 

 

  

Total Investments in Securities

    $ 2,363,440,201     $ 22,777,025     $  —      $ 2,386,217,226   
  

 

 

  

aIncludes common and preferred stocks.

bFor detailed categories, see the accompanying Statement of Investments.

10. New Accounting Pronouncements

In June 2014, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2014-11, Transfers and Servicing (Topic 860), Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. The ASU changes the accounting for certain repurchase agreements and expands disclosure requirements related to repurchase agreements, securities lending, repurchase-to-maturity and similar transactions. The ASU is effective for interim and annual reporting periods beginning after December 15, 2014. Management has reviewed the requirements and believes the adoption of this ASU will not have a material impact on the financial statements.

 

TF-22    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Templeton Foreign VIP Fund (continued)

11. Subsequent Events

The Fund has evaluated subsequent events through the issuance of the financial statements and determined that no events have occurred that require disclosure other than those already disclosed in the financial statements.

Abbreviations

 

Selected Portfolio
ADR   American Depositary Receipt
IDR   International Depositary Receipt

 

    Annual Report     TF-23   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

Report of Independent Registered Public Accounting Firm

Templeton Foreign VIP Fund

To the Board of Trustees and Shareholders of Franklin Templeton Variable Insurance Products Trust

In our opinion, the accompanying statement of assets and liabilities, including the statement of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Templeton Foreign VIP Fund (the “Fund”) at December 31, 2014, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements 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 are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2014 by correspondence with the custodian, transfer agent and brokers, provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP

San Francisco, California

February 13, 2015

 

  TF-24       Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

Tax Information (unaudited)

Templeton Foreign VIP Fund

At December 31, 2014, more than 50% of the Fund’s total assets were invested in securities of foreign issuers. In most instances, foreign taxes were withheld from income paid to the Fund on these investments. The Fund elects to treat foreign taxes paid as allowed under Section 853 of the Internal Revenue Code. This election will allow shareholders of record as of the 2015 distribution date, to treat their proportionate share of foreign taxes paid by the Fund as having been paid directly by them. The shareholder shall consider these amounts as foreign taxes paid in the tax year in which they receive the Fund distribution.

 

    Annual Report     TF-25   

Templeton Global Bond VIP Fund

(Formerly, Templeton Global Bond Securities Fund)

We are pleased to bring you Templeton Global Bond VIP Fund’s annual report for the fiscal year ended December 31, 2014.

Class 4 Performance Summary as of December 31, 2014

Average annual total return of Class 4 shares* represents the average annual change in value, assuming reinvestment of dividends and capital gains. Average returns smooth out variations in returns, which can be significant; they are not the same as year-by-year results.

 

Periods ended 12/31/14    1-Year        5-Year        10-Year  

Average Annual Total Return

      +1.69%           +6.09%           +7.53%   

*For the period beginning 2/29/08, Class 4 performance reflects a 12b-1 fee expense of 0.35% per year, which affects future performance. Class 4 performance prior to 2/29/08 reflects historical Class 1 performance, which does not have a 12b-1 fee expense. Since 2/29/08 (effective date), the average annual total return of Class 4 shares was +7.09%.

Performance reflects the Fund’s Class 4 operating expenses, but does not include any contract fees, expenses or sales charges. If they had been included, performance would be lower. These charges and deductions, particularly for variable life policies, can have a significant effect on contract values and insurance benefits. See the contract prospectus for a complete description of these expenses, including sales charges.

Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares. Current performance may differ from figures shown.

Total Return Index Comparison for a Hypothetical $10,000 Investment (1/1/05–12/31/14)

The graph below shows the change in value of a hypothetical $10,000 investment in the Fund over the indicated period and includes reinvestment of any income or distributions. The Fund’s performance* is compared to the performance of the J.P. Morgan (JPM) Global Government Bond Index (GGBI), the Citigroup World Government Bond Index (WGBI) and the Consumer Price Index (CPI). One cannot invest directly in an index, and an index is not representative of the Fund’s portfolio. Please see Important Notes to Performance Information preceding the Fund Summaries.

 

LOGO

**Source: Morningstar. Please see Index Descriptions following the Fund Summaries.

 

    Annual Report     TGB-1   

TEMPLETON GLOBAL BOND VIP FUND

Fund Goal and Main Investments

Templeton Global Bond VIP Fund seeks high current income, consistent with preservation of capital, with capital appreciation as a secondary consideration. Under normal market conditions, the Fund invests at least 80% of its net assets in bonds, which include debt securities of any maturity, such as bonds, notes, bills and debentures.

Fund Risks

All investments involve risks, including possible loss of principal. Currency rates may fluctuate significantly over short periods of time, and can reduce returns. Derivatives, including currency management strategies, involve costs and can create economic leverage in the portfolio that may result in significant volatility and cause the Fund to participate in losses (as well as enable gains) on an amount that exceeds the Fund’s initial investment. The Fund may not achieve the anticipated benefits and may realize losses when a counterparty fails to perform as promised. Foreign securities involve special risks, including currency fluctuations and economic and political uncertainties. Investments in emerging markets involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size and lesser liquidity. Investments in lower rated bonds include higher risk of default and loss of principal. Changes in interest rates will affect the value of the Fund’s portfolio and its share price and yield. Bond prices generally move in the opposite direction of interest rates. As prices of bonds in the Fund adjust to a rise in interest rates, the Fund’s share price may decline. The Fund is also nondiversified, which involves the risk of greater price fluctuation than a more diversified portfolio. Changes in the financial strength of a bond issuer or in a bond’s credit rating may affect its value. The Fund is actively managed but there is no guarantee that the manager’s investment decisions will produce the desired results. The Fund’s prospectus also includes a description of the main investment risks.

Performance Overview

You can find the Fund’s one-year total return in the Performance Summary. For comparison, the JPM GGBI produced a +0.67% total return, and the Citigroup WGBI had a -0.48% total return for the same period.1

 

LOGO

*Percentages reflect certain derivatives held in the portfolio (or their underlying reference assets) and may not total 100% or may be negative due to rounding, use of derivatives, unsettled trades or other factors.

**The Fund’s euro area investments were in Ireland, Slovenia and Portugal.

***The Fund’s supranational investment was denominated in the Mexican peso.

 

Economic and Market Overview

During the period, global financial markets were broadly influenced by the pickup in U.S. growth, China’s economic stabilization, and the abundance of global liquidity from the Bank of Japan (BOJ) and the European Central Bank (ECB). We continued to see differentiation among specific emerging market economies; some had healthy current account and fiscal balances with strong export-driven economies, while others struggled with deficits and economic imbalances.

The U.S. dollar broadly strengthened over the course of the year while oil prices weakened significantly, particularly in the final months. Global liquidity from the BOJ and the ECB helped dampen volatility in emerging markets, and it helped compensate for the withdrawal of liquidity from the ending of the U.S. Federal Reserve’s (Fed’s) bond-buying program in October. However, several emerging market currencies depreciated during the period.

 

1. Source: Morningstar.

One cannot invest directly in an index, and an index is not representative of the Fund’s portfolio. Please see Index Descriptions following the

Fund Summaries.

 

TGB-2    Annual Report    

TEMPLETON GLOBAL BOND VIP FUND

In late October, the BOJ introduced a new round of quantitative easing (QE) with an indefinite time horizon. The annual level of asset purchasing was raised to 80 trillion yen, a level approximately equal to the U.S. Fed’s former QE program. This massive amount of liquidity had significant implications for global markets. Although Japan’s QE was positive for global risk assets, it contributed to further yen depreciation.

In Europe, economic data were mixed with a persistent lack of inflation. Eurozone bond yields remained around historical lows at the end of the period. The ECB’s renewed commitment to increase the size of its balance sheet will likely maintain weakening pressure on the euro, in our view. China’s growth moderated during the period, but the country’s economy did not face a “hard landing” and did not have a major impact on global aggregate demand.

Investment Strategy

We invest selectively in bonds around the world based upon our assessment of changing market, political and economic conditions. While seeking opportunities, we monitor various factors including changes in interest rates, currency exchange rates and credit risks. We seek to manage the Fund’s exposure to various currencies and may utilize currency forward contracts.

 

What is a currency forward contract?

A currency forward contract is an agreement between the Fund and a counterparty to buy or sell a foreign currency at a specific exchange rate on a future date.

Manager’s Discussion

The core of our strategy remained seeking to position ourselves to navigate a rising rate environment. Thus, we continued to maintain short portfolio duration while aiming at a negative correlation with U.S. Treasury rates. We also actively sought opportunities that could potentially offer positive real yields without taking undue interest rate risk. We favor countries that have solid underlying fundamentals and policymakers who have stayed ahead of the curve regarding fiscal, monetary and financial policy. We seek to augment this positioning with select opportunities in emerging markets and with a number of currency strategies.

We believe it is essential for investors to understand and differentiate between declines that are related to market noise and those that are caused by fundamental developments. Our approach also emphasizes having the right time frame. We

 

 

Currency Breakdown*

       
12/31/14       
      % of Total
Net Assets		  
Americas      90.7%   
U.S. Dollar      66.0%   
Mexican Peso      13.4%   
Brazilian Real      4.7%   
Canadian Dollar      3.5%   
Chilean Peso      3.0%   
Peruvian Nuevo Sol      0.1%   
Asia Pacific      23.2%   
South Korean Won      15.1%   
Malaysian Ringgit      14.0%   
Singapore Dollar      8.0%   
Indonesian Rupiah      4.2%   
Indian Rupee      2.4%   
Sri Lankan Rupee      1.3%   
Philippine Peso      1.1%   
Japanese Yen      -22.9%   
Europe      -13.9%   
Polish Zloty      8.7%   
Hungarian Forint      4.3%   
Swedish Krona      1.7%   
Euro      -28.6%   

*Percentages reflect certain derivatives held in the portfolio (or their underlying reference assets) and may not total 100% or may be negative due to rounding, use of derivatives, unsettled trades or other factors.

The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund’s Statement of Investments.

 

recognize that when investing globally, many opportunities take time to materialize, and we are willing to ride through short-term volatility.

During the period, the Fund’s absolute performance benefited from interest rate strategies, while sovereign credit exposures and currency positions had a largely neutral effect. The Fund maintained a defensive approach regarding interest rates in developed and emerging markets. Select duration exposures in Europe contributed to absolute return. Among currencies, the Fund’s net-negative positions in the Japanese yen and the euro contributed to absolute performance. Currency positions in the Americas and Asia ex-Japan detracted from absolute return, as did positions in peripheral European currencies against the euro.

 

    Annual Report     TGB-3   

TEMPLETON GLOBAL BOND VIP FUND

 

What is duration?

Duration is a measure of a bond’s price sensitivity to interest rate changes. In general, a portfolio of securities with a lower duration can be expected to be less sensitive to interest rate changes than a portfolio with a higher duration.

Relative to the JPM GGBI, currency positions contributed to performance, while interest rate strategies detracted, and sovereign credit exposures had a largely neutral effect. Underweighted positioning in the euro and the Japanese yen contributed to relative performance during the period. However, overweighted currency positions in the Americas and Asia ex-Japan detracted from relative return, as did overweighted positions in peripheral European currencies against the euro. The Fund maintained a shorter duration position relative to the JPM

GGBI. Select underweighted duration exposures in Europe and underweighted duration exposure in the U.S. detracted from relative performance.

Thank you for your participation in Templeton Global Bond VIP Fund. We look forward to serving your future investment needs.

The foregoing information reflects our analysis, opinions and portfolio holdings as of December 31, 2014, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.

 

 

TGB-4    Annual Report    

TEMPLETON GLOBAL BOND VIP FUND

Class 4 Fund Expenses

As an investor in a variable insurance contract (Contract) that indirectly provides for investment in an underlying mutual fund, you can incur transaction and/or ongoing expenses at both the Fund level and the Contract level.

 

•   Transaction expenses can include sales charges (loads) on purchases, redemption fees, surrender fees, transfer fees and premium taxes.

 

•   Ongoing expenses can include management fees, distribution and service (12b-1) fees, contract fees, annual maintenance fees, mortality and expense risk fees and other fees and expenses. All mutual funds and Contracts have some types of ongoing expenses.

The expenses shown in the table are meant to highlight ongoing expenses at the Fund level only and do not include ongoing expenses at the Contract level, or transaction expenses at either the Fund or Contract level. While the Fund does not have transaction expenses, if the transaction and ongoing expenses at the Contract level were included, the expenses shown below would be higher. You should consult your Contract prospectus or disclosure document for more information.

The table shows Fund-level ongoing expenses and can help you understand these expenses and compare them with those of other mutual funds offered through the Contract. The table assumes a $1,000 investment held for the six months indicated. Please refer to the Fund prospectus for additional information on operating expenses.

Actual Fund Expenses

The first line (Actual) of the table provides actual account values and expenses. The “Ending Account Value” is derived from the Fund’s actual return, which includes the effect of ongoing Fund expenses, but does not include the effect of ongoing Contract expenses.

You can estimate the Fund-level expenses you incurred during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:

 

1. Divide your account value by $1,000.

If an account had an $8,600 value, then $8,600 ÷ $1,000 = 8.6.

 

2. Multiply the result by the number under the heading “Fund-Level Expenses Incurred During Period.”

If Fund-Level Expenses Incurred During Period were $7.50, then 8.6 × $7.50 = $64.50.

In this illustration, the estimated expenses incurred this period at the Fund level are $64.50.

Hypothetical Example for Comparison with Other Mutual Funds

Information in the second line (Hypothetical) of the table can help you compare ongoing expenses of the Fund with those of other mutual funds offered through the Contract. This information may not be used to estimate the actual ending account balance or expenses you incurred during the period. The hypothetical “Ending Account Value” is based on the Fund’s actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Fund-Level Expenses Incurred During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds offered through a Contract.

 
Class 4  

Beginning Account

Value 7/1/14

     

Ending Account

Value 12/31/14

     

Fund-Level Expenses
Incurred During Period*

7/1/14–12/31/14

  

Actual

     $1,000         $   986.60         $4.36   

Hypothetical (5% return before expenses)

     $1,000         $1,020.82         $4.43   

*Expenses are calculated using the most recent six-month annualized expense ratio for the Fund’s Class 4 shares (0.87%), which does not include any ongoing expenses of the Contract for which the Fund is an investment option, multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period.

 

    Annual Report     TGB-5   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

 

Financial Highlights

Templeton Global Bond VIP Fund

     Year Ended December 31,  
      2014      2013      2012      2011      2010  
Class 1               
Per share operating performance
(for a share outstanding throughout the year)		               

Net asset value, beginning of year

      $19.15         $20.01         $18.61         $19.94         $17.72   
  

 

 

  
Income from investment operationsa:               

Net investment incomeb

      0.58         0.64         0.72         0.87         1.00   

Net realized and unrealized gains (losses)

      (0.16 )       (0.30 )       1.99         (0.92 )       1.58   
  

 

 

  

Total from investment operations

      0.42         0.34         2.71         (0.05 )       2.58   
  

 

 

  
Less distributions from:               

Net investment income and net foreign currency gains

      (1.01 )       (0.96 )       (1.28 )       (1.15 )       (0.31 ) 

Net realized gains

      —         (0.24 )       (0.03 )       (0.13 )       (0.05 ) 
  

 

 

  

Total distributions

      (1.01 )       (1.20 )       (1.31 )       (1.28 )       (0.36 ) 
  

 

 

  

Redemption feesc

      —         —         —         —         —   
  

 

 

  

Net asset value, end of year

      $18.56         $19.15         $20.01         $18.61         $19.94   
  

 

 

  

Total returnd

      2.12%         1.89%         15.31%         (0.61)%         14.71%   
Ratios to average net assets               

Expensese

      0.51%         0.51%         0.55%         0.56%         0.55%   

Net investment income

      3.08%         3.26%         3.71%         4.40%         5.27%   
Supplemental data               

Net assets, end of year (000’s)

      $323,491         $280,963         $307,142         $269,819         $272,232   

Portfolio turnover rate

      39.14%         34.39%         43.26%         34.18%         8.77%   

aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.

bBased on average daily shares outstanding.

cAmount rounds to less than $0.01 per share.

dTotal return does not include fees, charges or expenses imposed by the variable annuity and life insurance contracts for which the Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle.

eBenefit of expense reduction rounds to less than 0.01%.

 

TGB-6    Annual Report   |    The accompanying notes are an integral part of these financial statements.    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FINANCIAL HIGHLIGHTS

 

Templeton Global Bond VIP Fund (continued)

     Year Ended December 31,  
      2014      2013      2012      2011      2010  
Class 2               
Per share operating performance
(for a share outstanding throughout the year)		               

Net asset value, beginning of year

      $18.60         $19.47         $18.15         $19.49         $17.34   
  

 

 

  
Income from investment operationsa:               

Net investment incomeb

      0.52         0.57         0.65         0.79         0.93   

Net realized and unrealized gains (losses)

      (0.17 )       (0.27 )       1.94         (0.89 )       1.54   
  

 

 

  

Total from investment operations

      0.35         0.30         2.59         (0.10 )       2.47   
  

 

 

  
Less distributions from:               

Net investment income and net foreign currency gains

      (0.96 )       (0.93 )       (1.24 )       (1.11 )       (0.27 ) 

Net realized gains

      —         (0.24 )       (0.03 )       (0.13 )       (0.05 ) 
  

 

 

  

Total distributions

      (0.96 )       (1.17 )       (1.27 )       (1.24 )       (0.32 ) 
  

 

 

  

Redemption feesc

      —         —         —         —         —   
  

 

 

  

Net asset value, end of year

      $17.99         $18.60         $19.47         $18.15         $19.49   
  

 

 

  

Total returnd

      1.83%         1.63%         15.07%         (0.87)%         14.45%   
Ratios to average net assets               

Expensese

      0.76%         0.76%         0.80%         0.81%         0.80%   

Net investment income

      2.83%         3.01%         3.46%         4.15%         5.02%   
Supplemental data               

Net assets, end of year (000’s)

      $3,177,638         $2,826,039         $2,418,229         $1,812,814         $1,490,794   

Portfolio turnover rate

      39.14%         34.39%         43.26%         34.18%         8.77%   

aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.

bBased on average daily shares outstanding.

cAmount rounds to less than $0.01 per share.

dTotal return does not include fees, charges or expenses imposed by the variable annuity and life insurance contracts for which the Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle.

eBenefit of expense reduction rounds to less than 0.01%.

 

    The accompanying notes are an integral part of these financial statements.    |   Annual Report     TGB-7   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FINANCIAL HIGHLIGHTS

 

Templeton Global Bond VIP Fund (continued)

     Year Ended December 31,  
      2014      2013      2012      2011      2010  
Class 4               
Per share operating performance
(for a share outstanding throughout the year)		               

Net asset value, beginning of year

      $18.97         $19.82         $18.44         $19.78         $17.61   
  

 

 

  
Income from investment operationsa:               

Net investment incomeb

      0.51         0.56         0.64         0.79         0.93   

Net realized and unrealized gains (losses)

      (0.18 )       (0.28 )       1.98         (0.91 )       1.56   
  

 

 

  

Total from investment operations

      0.33         0.28         2.62         (0.12 )       2.49   
  

 

 

  
Less distributions from:               

Net investment income and net foreign currency gains

      (0.92 )       (0.89 )       (1.21 )       (1.09 )       (0.27 ) 

Net realized gains

      —         (0.24 )       (0.03 )       (0.13 )       (0.05 ) 
  

 

 

  

Total distributions

      (0.92 )       (1.13 )       (1.24 )       (1.22 )       (0.32 ) 
  

 

 

  

Redemption feesc

      —         —         —         —         —   
  

 

 

  

Net asset value, end of year

      $18.38         $18.97         $19.82         $18.44         $19.78   
  

 

 

  

Total returnd

      1.69%         1.54%         14.97%         (0.96)%         14.28%   
Ratios to average net assets               

Expensese

      0.86%         0.86%         0.90%         0.91%         0.90%   

Net investment income

      2.73%         2.91%         3.36%         4.05%         4.92%   
Supplemental data               

Net assets, end of year (000’s)

      $111,199         $118,145         $163,241         $151,695         $150,891   

Portfolio turnover rate

      39.14%         34.39%         43.26%         34.18%         8.77%   

aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.

bBased on average daily shares outstanding.

cAmount rounds to less than $0.01 per share.

dTotal return does not include fees, charges or expenses imposed by the variable annuity and life insurance contracts for which the Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle.

eBenefit of expense reduction rounds to less than 0.01%.

 

TGB-8    Annual Report   |    The accompanying notes are an integral part of these financial statements.    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

Statement of Investments, December 31, 2014

 

Templeton Global Bond VIP Fund        
           Principal Amount*     Value  
 

Corporate Bonds (Cost $1,940,489) 0.1%

     
 

Ukraine 0.1%

     
a,b  

State Export-Import Bank of Ukraine, (Biz Finance PLC), loan participation, Reg S, 8.75%, 1/22/18

      2,480,000      $ 1,447,700   
      

 

 

  
 

Foreign Government and Agency Securities 59.7%

     
 

Brazil 4.6%

     
 

Letra Tesouro Nacional, Strip,

     
 

1/01/15

      3,971 c BRL      1,493,606   
 

10/01/15

      4,950 c BRL      1,702,255   
 

1/01/16

      38,490 c BRL      12,828,301   
 

7/01/16

      1,490 c BRL      467,136   
 

10/01/16

      4,700 c BRL      1,427,690   
 

1/01/17

      46,660 c BRL      13,777,675   
 

1/01/18

      28,770 c BRL      7,558,759   
 

Nota Do Tesouro Nacional,

     
 

10.00%, 1/01/17

      22,490 c BRL      8,062,003   
 

10.00%, 1/01/21

      9,240 c BRL      3,137,713   
 

10.00%, 1/01/23

      26,700 c BRL      8,908,200   
 

d Index Linked, 6.00%, 5/15/15

      30,226 c BRL      28,854,782   
 

d Index Linked, 6.00%, 8/15/16

      14,388 c BRL      13,612,951   
 

d Index Linked, 6.00%, 5/15/17

      202 c BRL      191,584   
 

d Index Linked, 6.00%, 8/15/18

      15,665 c BRL      14,704,395   
 

d,e Index Linked, 6.00%, 5/15/19

      6,790 c BRL      6,373,761   
 

d Index Linked, 6.00%, 8/15/20

      1,090 c BRL      1,022,399   
 

d Index Linked, 6.00%, 8/15/22

      18,770 c BRL      17,631,907   
 

d,e Index Linked, 6.00%, 5/15/23

      3,330 c BRL      3,123,248   
 

d,e Index Linked, 6.00%, 8/15/24

      3,110 c BRL      2,912,768   
 

d Index Linked, 6.00%, 5/15/45

      10,825 c BRL      10,026,081   
 

senior note, 10.00%, 1/01/19

      21,390 c BRL      7,412,643   
      

 

 

  
         165,229,857   
      

 

 

  
 

Canada 1.2%

     
 

Government of Canada, 1.00%, 2/01/15

      48,972,000  CAD      42,171,798   
      

 

 

  
 

Hungary 4.4%

     
 

Government of Hungary,

     
 

7.75%, 8/24/15

      672,690,000  HUF      2,671,696   
 

5.50%, 2/12/16

      436,800,000  HUF      1,742,212   
 

5.50%, 12/22/16

      258,730,000  HUF      1,057,521   
 

4.125%, 2/19/18

      14,310,000        14,864,155   
 

4.00%, 4/25/18

      629,920,000  HUF      2,503,100   
 

6.50%, 6/24/19

      1,445,130,000  HUF      6,287,652   
 

7.50%, 11/12/20

      317,540,000  HUF      1,478,810   
 

5.375%, 2/21/23

      26,430,000        28,690,426   
 

A, 8.00%, 2/12/15

      280,000,000  HUF      1,077,483   
 

A, 6.75%, 11/24/17

      2,394,300,000  HUF      10,241,816   
 

A, 5.50%, 12/20/18

      446,060,000  HUF      1,870,423   
 

A, 7.00%, 6/24/22

      1,459,910,000  HUF      6,863,441   
 

A, 6.00%, 11/24/23

      1,118,980,000  HUF      5,088,369   
 

B, 6.75%, 2/24/17

      597,480,000  HUF      2,503,292   
 

B, 5.50%, 6/24/25

      2,661,360,000  HUF      11,823,914   
 

senior note, 6.25%, 1/29/20

      6,420,000        7,228,150   
 

senior note, 6.375%, 3/29/21

      14,820,000        16,960,453   
 

a senior note, Reg S, 3.50%, 7/18/16

      1,055,000  EUR      1,328,582   
 

a senior note, Reg S, 4.375%, 7/04/17

      7,480,000  EUR      9,722,143   

 

    Annual Report     TGB-9   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

 

Templeton Global Bond VIP Fund (continued)

 

           Principal Amount*     Value  
 

Foreign Government and Agency Securities (continued)

     
 

Hungary (continued)

     
 

a senior note, Reg S, 5.75%, 6/11/18

      14,475,000  EUR    $ 20,002,545   
 

a senior note, Reg S, 3.875%, 2/24/20

      3,120,000  EUR      4,106,285   
      

 

 

  
         158,112,468   
      

 

 

  
 

Iceland 0.2%

     
f  

Government of Iceland, 144A, 5.875%, 5/11/22

      7,660,000        8,605,359   
      

 

 

  
 

India 2.0%

     
 

Government of India,

     
 

senior bond, 7.80%, 5/03/20

      720,800,000  INR      11,327,715   
 

senior bond, 8.28%, 9/21/27

      217,800,000  INR      3,532,499   
 

senior bond, 8.60%, 6/02/28

      747,500,000  INR      12,523,219   
 

senior note, 7.28%, 6/03/19

      28,000,000  INR      432,964   
 

senior note, 8.12%, 12/10/20

      541,300,000  INR      8,630,143   
 

senior note, 8.35%, 5/14/22

      212,700,000  INR      3,439,643   
 

senior note, 7.16%, 5/20/23

      133,700,000  INR      2,011,821   
 

senior note, 8.83%, 11/25/23

      1,805,900,000  INR      30,156,539   
      

 

 

  
         72,054,543   
      

 

 

  
 

Indonesia 2.4%

     
 

Government of Indonesia,

     
 

7.875%, 4/15/19

      50,477,000,000  IDR      4,126,601   
 

FR31, 11.00%, 11/15/20

      170,808,000,000  IDR      15,831,425   
 

FR34, 12.80%, 6/15/21

      208,649,000,000  IDR      20,984,518   
 

FR35, 12.90%, 6/15/22

      67,421,000,000  IDR      7,004,759   
 

FR36, 11.50%, 9/15/19

      31,754,000,000  IDR      2,942,624   
 

FR39, 11.75%, 8/15/23

      5,491,000,000  IDR      551,317   
 

FR40, 11.00%, 9/15/25

      46,856,000,000  IDR      4,573,994   
 

FR43, 10.25%, 7/15/22

      69,179,000,000  IDR      6,363,520   
 

FR44, 10.00%, 9/15/24

      4,454,000,000  IDR      407,639   
 

FR46, 9.50%, 7/15/23

      226,780,000,000  IDR      20,201,449   
 

FR48, 9.00%, 9/15/18

      16,920,000,000  IDR      1,424,512   
 

senior bond, FR53, 8.25%, 7/15/21

      11,270,000,000  IDR      933,326   
 

senior note, 8.50%, 10/15/16

      3,358,000,000  IDR      275,601   
      

 

 

  
         85,621,285   
      

 

 

  
 

Ireland 4.3%

     
 

Government of Ireland,

     
 

5.90%, 10/18/19

      9,455,000  EUR      14,390,781   
 

4.50%, 4/18/20

      9,654,000  EUR      14,081,563   
 

5.00%, 10/18/20

      40,264,000  EUR      61,007,699   
 

senior bond, 5.40%, 3/13/25

      40,422,910  EUR      67,443,882   
      

 

 

  
         156,923,925   
      

 

 

  
 

Lithuania 1.1%

     
f  

Government of Lithuania, 144A,

     
 

6.75%, 1/15/15

      19,480,000        19,553,732   
 

7.375%, 2/11/20

      12,690,000        15,329,647   
 

6.125%, 3/09/21

      3,240,000        3,778,391   
      

 

 

  
         38,661,770   
      

 

 

  
 

Malaysia 2.7%

     
 

Government of Malaysia,

     
 

3.741%, 2/27/15

      80,530,000  MYR      23,046,343   
 

3.835%, 8/12/15

      91,575,000  MYR      26,266,429   

 

TGB-10    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

 

Templeton Global Bond VIP Fund (continued)

 

           Principal Amount*     Value  
 

Foreign Government and Agency Securities (continued)

     
 

Malaysia (continued)

     
 

4.72%, 9/30/15

      42,200,000  MYR    $ 12,186,766   
 

3.197%, 10/15/15

      64,330,000  MYR      18,370,617   
 

senior bond, 3.814%, 2/15/17

      18,885,000  MYR      5,421,856   
 

senior bond, 4.24%, 2/07/18

      44,360,000  MYR      12,886,792   
      

 

 

  
         98,178,803   
      

 

 

  
 

Mexico 5.7%

     
 

Government of Mexico,

     
 

6.00%, 6/18/15

      10,022,500 g MXN      68,865,096   
 

8.00%, 12/17/15

      7,233,450 g MXN      51,243,396   
 

6.25%, 6/16/16

      5,020,310 g MXN      35,353,931   
 

7.25%, 12/15/16

      250,000 g MXN      1,810,805   
 

7.75%, 12/14/17

      4,473,000 g MXN      33,182,738   
h  

Mexican Udibonos, Index Linked,

     
 

5.00%, 6/16/16

      593,022 i MXN      4,274,615   
 

3.50%, 12/14/17

      594,550 i MXN      4,306,800   
 

4.00%, 6/13/19

      408,085 i MXN      3,023,745   
 

2.50%, 12/10/20

      321,387 i MXN      2,234,845   
      

 

 

  
         204,295,971   
      

 

 

  
 

Peru 0.1%

     
 

Government of Peru, senior bond, 7.84%, 8/12/20

      11,090,000  PEN      4,253,461   
      

 

 

  
 

Philippines 0.4%

     
 

Government of the Philippines,

     
 

senior bond, 7.00%, 1/27/16

      53,190,000  PHP      1,232,568   
 

senior bond, 9.125%, 9/04/16

      31,840,000  PHP      770,514   
 

senior note, 1.625%, 4/25/16

      548,000,000  PHP      12,118,872   
      

 

 

  
         14,121,954   
      

 

 

  
 

Poland 6.3%

     
 

Government of Poland,

     
 

6.25%, 10/24/15

      34,630,000  PLN      10,132,070   
 

5.00%, 4/25/16

      61,000,000  PLN      17,939,869   
 

4.75%, 10/25/16

      340,685,000  PLN      101,287,890   
 

5.75%, 9/23/22

      48,750,000  PLN      17,050,657   
 

j FRN, 2.69%, 1/25/17

      59,279,000  PLN      16,754,301   
 

j FRN, 2.69%, 1/25/21

      60,135,000  PLN      16,732,431   
 

Strip, 1/25/16

      177,077,000  PLN      49,098,463   
      

 

 

  
         228,995,681   
      

 

 

  
 

Portugal 2.5%

     
 

Government of Portugal,

     
 

f 144A, 5.125%, 10/15/24

      34,000,000        35,849,600   
 

a Reg S, 3.875%, 2/15/30

      41,530,000  EUR      52,811,853   
 

a senior bond, Reg S, 4.95%, 10/25/23

      284,900  EUR      408,966   
 

a senior note, Reg S, 5.65%, 2/15/24

      712,400  EUR      1,067,618   
      

 

 

  
         90,138,037   
      

 

 

  
 

Russia 1.3%

     
f  

Government of Russia, senior bond, 144A, 7.50%, 3/31/30

      46,398,235        48,493,115   
      

 

 

  

 

    Annual Report     TGB-11   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

 

Templeton Global Bond VIP Fund (continued)

 

           Principal Amount*     Value  
 

Foreign Government and Agency Securities (continued)

     
 

Serbia 1.4%

     
f  

Government of Serbia, senior note, 144A,

     
 

5.25%, 11/21/17

      4,590,000      $ 4,717,924   
 

4.875%, 2/25/20

      8,800,000        8,832,604   
 

7.25%, 9/28/21

      32,130,000        36,118,136   
      

 

 

  
         49,668,664   
      

 

 

  
 

Singapore 0.2%

     
 

Government of Singapore, senior note, 1.125%, 4/01/16

      11,000,000  SGD      8,358,605   
      

 

 

  
 

Slovenia 0.4%

     
f  

Government of Slovenia, senior note, 144A,

     
 

5.50%, 10/26/22

      8,140,000        9,046,837   
 

5.85%, 5/10/23

      5,030,000        5,748,586   
      

 

 

  
         14,795,423   
      

 

 

  
 

South Korea 13.1%

     
 

The Export-Import Bank of Korea, senior note, 4.625%, 2/20/17

      230,000  EUR      302,274   
 

Korea Monetary Stabilization Bond,

     
 

senior bond, 2.47%, 4/02/15

      22,461,930,000  KRW      20,557,360   
 

senior bond, 2.80%, 8/02/15

      68,737,030,000  KRW      63,107,777   
 

senior bond, 2.81%, 10/02/15

      2,932,000,000  KRW      2,695,469   
 

senior note, 2.74%, 2/02/15

      47,745,950,000  KRW      43,675,393   
 

senior note, 2.76%, 6/02/15

      51,516,200,000  KRW      47,233,483   
 

senior note, 2.66%, 6/09/15

      24,216,850,000  KRW      22,196,336   
 

senior note, 2.90%, 12/02/15

      54,164,800,000  KRW      49,889,892   
 

senior note, 2.78%, 2/02/16

      20,416,550,000  KRW      18,804,876   
 

senior note, 2.80%, 4/02/16

      34,476,970,000  KRW      31,801,457   
 

senior note, 2.79%, 6/02/16

      10,523,000,000  KRW      9,715,735   
 

senior note, 2.46%, 8/02/16

      48,720,700,000  KRW      44,799,249   
 

senior note, 2.22%, 10/02/16

      8,481,500,000  KRW      7,772,620   
 

senior note, 2.07%, 12/02/16

      22,054,000,000  KRW      20,157,566   
 

Korea Treasury Bond,

     
 

senior bond, 4.00%, 3/10/16

      1,283,100,000  KRW      1,199,374   
 

senior bond, 5.00%, 9/10/16

      2,806,000,000  KRW      2,689,010   
 

senior note, 4.50%, 3/10/15

      641,500,000  KRW      589,003   
 

senior note, 3.25%, 6/10/15

      4,668,800,000  KRW      4,290,143   
 

senior note, 4.00%, 9/10/15

      3,390,100,000  KRW      3,139,686   
 

senior note, 2.75%, 12/10/15

      32,942,000,000  KRW      30,308,412   
 

senior note, 2.75%, 6/10/16

      19,419,900,000  KRW      17,919,872   
 

senior note, 3.00%, 12/10/16

      33,345,900,000  KRW      31,011,207   
      

 

 

  
         473,856,194   
      

 

 

  
 

Sri Lanka 1.3%

     
 

Government of Sri Lanka,

     
 

8.25%, 3/01/17

      41,710,000  LKR      326,908   
 

10.60%, 7/01/19

      413,650,000  LKR      3,554,694   
 

10.60%, 9/15/19

      615,240,000  LKR      5,310,501   
 

11.20%, 7/01/22

      69,990,000  LKR      634,023   
 

A, 11.75%, 3/15/15

      8,520,000  LKR      65,693   
 

A, 6.50%, 7/15/15

      239,920,000  LKR      1,834,913   
 

A, 11.00%, 8/01/15

      1,349,700,000  LKR      10,583,006   
 

A, 8.50%, 11/01/15

      144,870,000  LKR      1,124,509   
 

A, 6.40%, 8/01/16

      109,200,000  LKR      831,680   

 

TGB-12    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

 

Templeton Global Bond VIP Fund (continued)

 

           Principal Amount*     Value  
 

Foreign Government and Agency Securities (continued)

     
 

Sri Lanka (continued)

     
 

A, 5.80%, 1/15/17

      112,300,000  LKR    $ 841,647   
 

A, 7.50%, 8/15/18

      63,830,000  LKR      491,705   
 

A, 8.00%, 11/15/18

      512,300,000  LKR      4,015,288   
 

A, 9.00%, 5/01/21

      861,720,000  LKR      7,010,210   
 

B, 6.40%, 10/01/16

      119,100,000  LKR      904,670   
 

B, 8.50%, 7/15/18

      146,350,000  LKR      1,163,427   
 

C, 8.50%, 4/01/18

      444,930,000  LKR      3,530,445   
 

D, 8.50%, 6/01/18

      633,000,000  LKR      5,033,339   
      

 

 

  
         47,256,658   
      

 

 

  
k  

Supranational 0.4%

     
 

Inter-American Development Bank, senior note, 7.50%, 12/05/24

      200,000,000  MXN      15,827,682   
      

 

 

  
 

Sweden 1.3%

     
 

Government of Sweden, 4.50%, 8/12/15

      342,110,000  SEK      45,028,407   
      

 

 

  
 

Ukraine 2.4%

     
f  

Financing of Infrastructure Projects State Enterprise, 144A,

     
 

8.375%, 11/03/17

      1,100,000        663,861   
 

7.40%, 4/20/18

      840,000        508,452   
f  

Government of Ukraine,

     
 

144A, 9.25%, 7/24/17

      57,230,000        35,246,526   
 

144A, 7.75%, 9/23/20

      17,227,000        10,496,066   
 

senior bond, 144A, 6.58%, 11/21/16

      12,541,000        8,115,532   
 

senior bond, 144A, 7.80%, 11/28/22

      10,110,000        6,041,888   
 

senior note, 144A, 4.95%, 10/13/15

      290,000  EUR      238,514   
 

senior note, 144A, 6.25%, 6/17/16

      8,760,000        5,645,864   
 

senior note, 144A, 7.95%, 2/23/21

      24,098,000        14,662,187   
 

senior note, 144A, 7.50%, 4/17/23

      8,160,000        4,810,565   
      

 

 

  
         86,429,455   
      

 

 

  
 

Vietnam 0.0%†

     
f  

Government of Vietnam, 144A, 6.75%, 1/29/20

      215,000        242,449   
      

 

 

  
 

Total Foreign Government and Agency Securities (Cost $2,261,143,533)

        2,157,321,564   
      

 

 

  
 

Total Investments before Short Term Investments (Cost $2,263,084,022)

        2,158,769,264   
      

 

 

  
 

Short Term Investments 29.4%

     
 

Foreign Government and Agency Securities 18.1%

     
 

Canada 2.3%

     
l  

Canada Treasury Bills,

     
 

2/12/15

      57,919,000  CAD      49,825,552   
 

3/12/15 - 4/23/15

      31,818,000  CAD      27,348,092   
 

Government of Canada, 1.50%, 8/01/15

      7,840,000  CAD      6,771,127   
      

 

 

  
         83,944,771   
      

 

 

  
 

Malaysia 7.3%

     
l  

Bank of Negara Monetary Notes, 1/08/15 - 11/03/15

      930,045,000  MYR      263,024,124   
      

 

 

  

 

    Annual Report     TGB-13   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

Templeton Global Bond VIP Fund (continued)

           Principal Amount*     Value  
 

Short Term Investments (continued)

     
 

Foreign Government and Agency Securities (continued)

     
 

Mexico 4.1%

     
l  

Mexico Treasury Bills,

     
 

4/01/15

      117,990,590 m MXN    $ 79,435,209   
 

3/19/15 - 12/10/15

      101,387,010 m MXN      67,668,693   
      

 

 

  
         147,103,902   
      

 

 

  
 

Philippines 0.3%

     
l  

Philippine Treasury Bills, 4/08/15 - 12/02/15

      528,310,000  PHP      11,639,670   
      

 

 

  
 

Singapore 3.9%

     
l  

Monetary Authority of Singapore Treasury Bills,

     
 

1/30/15

      56,381,000  SGD      42,537,056   
 

1/02/15 - 3/27/15

      130,580,000  SGD      98,500,258   
      

 

 

  
         141,037,314   
      

 

 

  
 

South Korea 0.2%

     
 

Korea Monetary Stabilization Bond,

     
 

l 1/13/15

      4,703,800,000  KRW      4,298,642   
 

senior note, 2.13%, 10/08/15

      3,266,500,000  KRW      2,987,885   
      

 

 

  
         7,286,527   
      

 

 

  
 

Total Foreign Government and Agency Securities
(Cost $687,296,183)

        654,036,308   
      

 

 

  
 

U.S. Government and Agency Securities 7.1%

     
 

United States 7.1%

     
l  

FHLB,

     
 

1/02/15

      64,000,000        64,000,000   
 

1/07/15

      192,255,000        192,254,808   
      

 

 

  
 

Total U.S. Government and Agency Securities
(Cost $256,253,762)

        256,254,808   
      

 

 

  
 

Total Investments before Repurchase Agreements
(Cost $3,206,633,967)

        3,069,060,380   
      

 

 

  
 

Repurchase Agreements (Cost $153,266,107) 4.2%

     
 

United States 4.2%

     
n  

Joint Repurchase Agreement, 0.057%, 1/02/15 (Maturity Value $153,266,592)
BNP Paribas Securities Corp. (Maturity Value $12,915,776)
HSBC Securities (USA) Inc. (Maturity Value $106,770,106)
Merrill Lynch, Pierce, Fenner & Smith Inc. (Maturity Value $33,580,710)

Collateralized by U.S. Government Agency Securities, 0.00% - 1.50%,

1/20/15 - 10/09/19; U.S. Government Agency Securities, Strips, 6/01/17; and

U.S. Treasury Notes, 1.625% - 4.50%, 11/15/15 - 11/30/20 (valued at $156,350,759)

      153,266,107        153,266,107   
      

 

 

  
 

Total Investments (Cost $3,359,900,074) 89.2%

        3,222,326,487   
 

Other Assets, less Liabilities 10.8%

        390,002,096   
      

 

 

  
 

Net Assets 100.0%

      $ 3,612,328,583   
      

 

 

  

See Abbreviations on page TGB-39.

 

TGB-14    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

 

Templeton Global Bond VIP Fund (continued)

 

†Rounds to less than 0.1% of net assets.

*The principal amount is stated in U.S. dollars unless otherwise indicated.

aSecurity was purchased pursuant to Regulation S under the Securities Act of 1933, which exempts from registration securities offered and sold outside of the United States. Such a security cannot be sold in the United States without either an effective registration statement filed pursuant to the Securities Act of 1933, or pursuant to an exemption from registration. These securities have been deemed liquid under guidelines approved by the Trust’s Board of Trustees. At December 31, 2014, the aggregate value of these securities was $90,895,692, representing 2.52% of net assets.

bSee Note 1(g) regarding loan participation notes.

cPrincipal amount is stated in 1,000 Brazilian Real Units.

dRedemption price at maturity is adjusted for inflation. See Note 1(i).

eA portion or all of the security purchased on a delayed delivery basis. See Note 1(d).

fSecurity was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be sold in transactions exempt from registration only to qualified institutional buyers or in a public offering registered under the Securities Act of 1933. These securities have been deemed liquid under guidelines approved by the Trust’s Board of Trustees. At December 31, 2014, the aggregate value of these securities was $282,745,834, representing 7.83% of net assets.

gPrincipal amount is stated in 100 Mexican Peso Units.

hPrincipal amount of security is adjusted for inflation. See Note 1(i).

iPrincipal amount is stated in Unidad de Inversion Units.

jThe coupon rate shown represents the rate at period end.

kA supranational organization is an entity formed by two or more central governments through international treaties.

lThe security is traded on a discount basis with no stated coupon rate.

mPrincipal amount is stated in 10 Mexican Peso Units.

nSee Note 1(c) regarding joint repurchase agreement.

 

    The accompanying notes are an integral part of these financial statements.    |   Annual Report     TGB-15   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

 

Templeton Global Bond VIP Fund (continued)

 

At December 31, 2014, the Fund had the following forward exchange contracts outstanding. See Note 1(e).

 

Forward Exchange Contracts  
Currency    Counterpartya      Type      Quantity      Contract
Amount*		             Settlement
Date		      Unrealized
Appreciation		      Unrealized
Depreciation		  

Euro

      DBAB         Sell         2,285,618         3,117,423           1/07/15       $ 351,611       $ —   

Japanese Yen

      DBAB         Sell         770,370,000         7,397,446           1/07/15         967,929         —   

Japanese Yen

      GSCO         Sell         329,010,000         3,172,373           1/08/15         426,428         —   

Malaysian Ringgit

      DBAB         Buy         8,862,500         2,641,344           1/08/15         —         (108,829 )

Malaysian Ringgit

      JPHQ         Buy         5,661,200         1,689,507           1/08/15         —         (71,784 )

Chilean Peso

      MSCO         Buy         2,645,530,000         4,305,525           1/09/15         48,827         —   

Malaysian Ringgit

      JPHQ         Buy         3,044,000         909,091           1/09/15         —         (39,342 )

Chilean Peso

      MSCO         Buy         2,254,600,000         4,087,753           1/12/15         —         (378,187 )

Euro

      CITI         Sell         5,040,000         6,851,628           1/12/15         752,418         —   

Malaysian Ringgit

      JPHQ         Buy         912,000         272,646           1/12/15         —         (12,147 )

Mexican Peso

      CITI         Buy         109,357,558         8,148,849           1/12/15         —         (738,405 )

Euro

      SCNY         Sell         15,572,000         21,162,504           1/13/15         2,317,672         —   

Japanese Yen

      CITI         Sell         138,680,000         1,325,939           1/13/15         168,454         —   

Chilean Peso

      DBAB         Buy         1,330,940,000         2,159,916           1/14/15         29,395         —   

Euro

      DBAB         Sell         9,460,000         12,915,265           1/14/15         1,466,891         —   

Euro

      JPHQ         Sell         937,000         1,280,879           1/14/15         146,933         —   

Indian Rupee

      JPHQ         Buy         60,607,000         977,556           1/14/15         —         (18,736 )

Japanese Yen

      SCNY         Sell         415,980,000         3,981,432           1/14/15         509,447         —   

Chilean Peso

      DBAB         Buy         1,248,687,000         2,019,875           1/15/15         33,886         —   

Indian Rupee

      DBAB         Buy         239,338,000         3,855,937           1/15/15         —         (70,291 )

Japanese Yen

      BZWS         Sell         1,089,820,000         10,508,959           1/15/15         1,412,676         —   

Japanese Yen

      HSBC         Sell         536,380,000         5,157,500           1/15/15         680,555         —   

Japanese Yen

      JPHQ         Sell         708,450,000         6,830,771           1/15/15         917,628         —   

Malaysian Ringgit

      JPHQ         Buy         1,700,000         509,975           1/15/15         —         (24,551 )

Chilean Peso

      DBAB         Buy         1,351,533,000         2,193,691           1/16/15         28,957         —   

Euro

      DBAB         Sell         4,856,000         6,643,979           1/16/15         767,178         —   

Japanese Yen

      DBAB         Sell         858,140,000         8,301,876           1/16/15         1,139,269         —   

Japanese Yen

      SCNY         Sell         707,660,000         6,849,041           1/16/15         942,440         —   

Malaysian Ringgit

      JPHQ         Buy         1,856,000         559,221           1/16/15         —         (29,310 )

Chilean Peso

      CITI         Buy         2,420,966,000         3,886,293           1/20/15         93,159         —   

Indian Rupee

      DBAB         Buy         491,655,000         7,917,727           1/20/15         —         (148,825 )

Indian Rupee

      JPHQ         Buy         60,607,000         974,820           1/20/15         —         (17,137 )

Japanese Yen

      JPHQ         Sell         652,895,000         6,288,781           1/20/15         839,096         —   

Euro

      BZWS         Sell         2,638,000         3,595,594           1/21/15         402,872         —   

Indian Rupee

      JPHQ         Buy         226,092,000         3,613,916           1/21/15         —         (42,021 )

Euro

      JPHQ         Sell         300,000         407,663           1/22/15         44,574         —   

Indian Rupee

      DBAB         Buy         79,271,000         1,274,919           1/22/15         —         (22,810 )

Indian Rupee

      JPHQ         Buy         152,363,000         2,434,886           1/22/15         —         (28,268 )

Chilean Peso

      DBAB         Buy         2,227,910,000         4,025,131           1/23/15         —         (364,338 )

Chilean Peso

      DBAB         Buy         3,160,140,000         5,597,626           1/26/15         —         (406,915 )

Singapore Dollar

      JPHQ         Buy         5,740,000         4,627,166           1/26/15         —         (297,270 )

Indian Rupee

      DBAB         Buy         130,201,000         2,078,228           1/27/15         —         (23,694 )

Japanese Yen

      GSCO         Sell         944,420,000         9,135,865           1/27/15         1,252,353         —   

Japanese Yen

      DBAB         Sell         897,860,782         8,793,935           1/28/15         1,299,010         —   

Japanese Yen

      HSBC         Sell         1,162,462,488         11,359,272           1/28/15         1,655,575         —   

Euro

      CITI         Sell         4,998,400         6,833,688           1/29/15         783,681         —   

Swedish Krona

      BZWS         Buy         122,773,200         13,272,161        EUR         1/29/15         —         (320,941 )

Swedish Krona

      BZWS         Sell         64,676,000         6,861,153        EUR         1/29/15         11,087         —   

Chilean Peso

      DBAB         Buy         1,346,508,000         2,235,091           1/30/15         —         (24,439 )

Euro

      DBAB         Sell         71,313,000         97,501,346           1/30/15         11,183,948         —   

Indian Rupee

      DBAB         Buy         609,812,988         9,803,728           1/30/15         —         (186,743 )

Indian Rupee

      HSBC         Buy         679,529,000         10,926,588           1/30/15         —         (210,155 )

Chilean Peso

      DBAB         Buy         2,084,769,000         3,473,918           2/02/15         —         (52,001 )

Indian Rupee

      DBAB         Buy         246,043,494         3,953,617           2/02/15         —         (75,313 )

Chilean Peso

      DBAB         Buy         1,104,929,000         1,844,007           2/03/15         —         (30,527 )

 

TGB-16    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

 

Templeton Global Bond VIP Fund (continued)

 

Forward Exchange Contracts (continued)  
Currency    Counterpartya      Type      Quantity      Contract
Amount*		             Settlement
Date		      Unrealized
Appreciation		      Unrealized
Depreciation		  

Indian Rupee

      DBAB         Buy         211,714,000         3,397,421           2/03/15       $ —       $ (60,785 )

Indian Rupee

      HSBC         Buy         120,016,750         1,925,703           2/03/15         —         (34,226 )

Chilean Peso

      DBAB         Buy         1,186,400,000         2,093,155           2/04/15         —         (146,109 )

Indian Rupee

      JPHQ         Buy         358,075,000         5,747,408           2/04/15         —         (105,025 )

Malaysian Ringgit

      JPHQ         Buy         9,715,000         2,870,948           2/04/15         —         (102,576 )

Japanese Yen

      JPHQ         Sell         1,719,500,000         17,030,047           2/06/15         2,675,410         —   

Japanese Yen

      SCNY         Sell         1,720,000,000         17,030,125           2/06/15         2,671,313         —   

Euro

      DBAB         Sell         1,738,000         2,350,993           2/09/15        247,162         —   

Euro

      GSCO         Sell         2,045,000         2,850,198           2/09/15         374,747         —   

Indian Rupee

      CITI         Buy         69,318,000         1,108,332           2/09/15         —         (16,939 )

Indian Rupee

      DBAB         Buy         217,594,000         3,496,508           2/09/15         —         (70,550 )

Indian Rupee

      HSBC         Buy         251,448,000         4,039,533           2/09/15         —         (80,553 )

Indian Rupee

      JPHQ         Buy         21,500,000         345,538           2/09/15         —         (7,026 )

Japanese Yen

      BZWS         Sell         1,720,220,000         17,030,111           2/09/15         2,669,120         —   

Japanese Yen

      JPHQ         Sell         1,723,960,000         17,030,113           2/09/15         2,637,899         —   

Malaysian Ringgit

      HSBC         Buy         1,320,000         409,061           2/09/15         —         (33,086 )

Singapore Dollar

      HSBC         Buy         6,206,000         4,980,738           2/09/15         —         (299,791 )

Chilean Peso

      BZWS         Buy         1,142,900,000         1,966,110           2/10/15         —         (91,315 )

Euro

      BZWS         Sell         4,929,000         6,705,658           2/10/15         739,111         —   

Euro

      CITI         Sell         6,572,000         8,937,066           2/10/15         981,670         —   

Euro

      HSBC         Sell         1,800,000         2,448,198           2/10/15         269,301         —   

Japanese Yen

      CITI         Sell         366,860,000         3,613,387           2/10/15         550,689         —   

Polish Zloty

      DBAB         Buy         17,528,000         4,100,597        EUR         2/10/15         —         (21,777 )

South Korean Won

      HSBC         Buy         21,363,430,000         19,556,417           2/10/15         —         (64,888 )

Euro

      BZWS         Sell         1,412,000         1,919,896           2/11/15         210,660         —   

Polish Zloty

      BZWS         Buy         17,528,000         4,098,200        EUR         2/11/15         —         (19,112 )

Chilean Peso

      MSCO         Buy         2,590,220,000         4,500,035           2/12/15         —         (251,730 )

Indian Rupee

      DBAB         Buy         39,609,000         636,276           2/12/15         —         (12,947 )

Indian Rupee

      HSBC         Buy         42,784,000         687,196           2/12/15         —         (13,902 )

Japanese Yen

      GSCO         Sell         394,373,000         3,862,539           2/12/15         570,099         —   

Japanese Yen

      HSBC         Sell         1,035,240,000         10,157,129           2/12/15         1,514,382         —   

Japanese Yen

      JPHQ         Sell         1,034,700,000         10,163,748           2/12/15         1,525,509         —   

Singapore Dollar

      BZWS         Buy         1,717,028         1,370,990           2/12/15         —         (75,902 )

Singapore Dollar

      DBAB         Buy         12,363,000         9,858,852           2/12/15         —         (533,916 )

Euro

      SCNY         Sell         657,000         898,921           2/13/15         103,606         —   

Indian Rupee

      HSBC         Buy         108,000,000         1,731,602           2/13/15         —         (32,277 )

Japanese Yen

      CITI         Sell         1,371,360,000         13,455,259           2/13/15         2,006,308         —   

Japanese Yen

      JPHQ         Sell         686,710,000         6,722,960           2/13/15         989,885         —   

Malaysian Ringgit

      DBAB         Buy         97,443,480         28,620,284           2/13/15         —         (875,471 )

Chilean Peso

      CITI         Buy         2,285,090,000         3,997,009           2/17/15         —         (250,591 )

Chilean Peso

      DBAB         Buy         964,250,000         1,678,124           2/17/15         —         (97,231 )

Japanese Yen

      CITI         Sell         684,870,000         6,711,780           2/17/15         993,884         —   

Polish Zloty

      DBAB         Buy         17,528,000         4,116,487        EUR         2/17/15         —         (42,665 )

Singapore Dollar

      BZWS         Buy         4,886,000         3,915,221           2/17/15         —         (229,899 )

Singapore Dollar

      HSBC         Buy         3,667,000         2,935,291           2/17/15         —         (169,414 )

Chilean Peso

      DBAB         Buy         2,188,820,000         3,745,735           2/18/15         —         (157,427 )

Japanese Yen

      GSCO         Sell         810,877,280         7,987,562           2/18/15         1,217,594         —   

Japanese Yen

      JPHQ         Sell         831,970,000         8,193,278           2/18/15         1,247,207         —   

Singapore Dollar

      HSBC         Buy         3,667,000         2,901,108           2/18/15         —         (135,230 )

Euro

      JPHQ         Sell         3,942,000         5,406,118           2/19/15         634,022         —   

Malaysian Ringgit

      HSBC         Buy         4,899,000         1,458,904           2/19/15         —         (64,780 )

Chilean Peso

      JPHQ         Buy         527,750,000         904,456           2/20/15         —         (39,405 )

Euro

      BZWS         Sell         6,280,000         8,629,160           2/20/15         1,026,679         —   

Chilean Peso

      MSCO         Buy         1,273,240,000         2,229,062           2/23/15         —         (142,535 )

Euro

      DBAB         Sell         11,070,000         15,216,822           2/23/15         1,815,342         —   

Euro

      GSCO         Sell         2,038,000         2,804,594           2/23/15         337,366         —   

 

    Annual Report   TGB-17

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

 

Templeton Global Bond VIP Fund (continued)

 

Forward Exchange Contracts (continued)  
Currency    Counterpartya      Type      Quantity      Contract
Amount*		             Settlement
Date		      Unrealized
Appreciation		      Unrealized
Depreciation		  

Hungarian Forint

      DBAB         Buy         18,260,690,000         57,055,741        EUR         2/23/15       $ 626,231       $ —   

Indian Rupee

      DBAB         Buy         98,937,000         1,579,000           2/23/15         —         (24,804 )

Singapore Dollar

      DBAB         Buy         3,667,000         2,936,360           2/23/15         —         (170,483 )

Chilean Peso

      JPHQ         Buy         1,792,000,000         3,139,453           2/24/15         —         (203,032 )

Japanese Yen

      HSBC         Sell         385,460,000         3,778,205           2/24/15         559,867         —   

Chilean Peso

      BZWS         Buy         199,342,000         332,292           2/25/15         —         (5,670 )

Chilean Peso

      MSCO         Buy         1,559,200,000         2,719,456           2/25/15         —         (164,703 )

Euro

      DBAB         Sell         1,530,900         2,104,222           2/25/15         250,869         —   

Japanese Yen

      BZWS         Sell         343,460,000         3,353,283           2/25/15         485,595         —   

Japanese Yen

      JPHQ         Sell         385,700,000         3,764,359           2/25/15         543,992         —   

Chilean Peso

      DBAB         Buy         1,455,470,000         2,533,896           2/26/15         —         (149,287 )

Euro

      BZWS         Sell         13,673,773         18,783,180           2/26/15         2,229,181         —   

Euro

      SCNY         Sell         13,581,483         18,651,450           2/26/15         2,209,181         —   

Japanese Yen

      BZWS         Sell         1,576,550,000         15,416,019           2/26/15         2,252,654         —   

Japanese Yen

      SCNY         Sell         937,086,000         9,171,113           2/26/15         1,346,937         —   

Malaysian Ringgit

      HSBC         Buy         1,223,000         382,774           2/26/15         —         (34,960 )

Euro

      BOFA         Sell         2,694,506         3,684,198           2/27/15         422,101         —   

Euro

      DBAB         Sell         2,579,651         3,535,928           2/27/15         412,880         —   

Japanese Yen

      DBAB         Sell         229,660,000         2,253,115           2/27/15         335,559         —   

Malaysian Ringgit

      HSBC         Buy         2,087,700         625,397           2/27/15        —         (31,721 )

Singapore Dollar

      DBAB         Buy         15,499,000         12,383,349           2/27/15         —         (693,049 )

Chilean Peso

      DBAB         Buy         1,253,970,000         2,164,256           3/03/15         —         (110,599 )

Indian Rupee

      HSBC         Buy         120,016,750         1,906,762           3/03/15         —         (23,989 )

Japanese Yen

      JPHQ         Sell         848,300,000         8,330,768           3/03/15         1,247,579         —   

Japanese Yen

      HSBC         Sell         400,800,000         3,927,487           3/04/15         580,824         —   

Euro

      DBAB         Sell         1,536,000         2,117,606           3/05/15         257,958         —   

Euro

      BZWS         Sell         7,226,276         9,927,286           3/09/15         1,178,056         —   

Euro

      GSCO         Sell         21,480,000         29,508,580           3/09/15         3,501,622         —   

Euro

      HSBC         Sell         1,844,000         2,535,057           3/09/15         302,430         —   

Indian Rupee

      DBAB         Buy         40,529,000         647,185           3/09/15         —         (12,120 )

Japanese Yen

      BZWS         Sell         1,712,605,900         16,747,810           3/09/15         2,446,815         —   

Euro

      CITI         Sell         31,404,613         43,464,770           3/10/15         5,441,223         —   

Euro

      MSCO         Sell         5,225,000         7,236,494           3/10/15         910,257         —   

Mexican Peso

      HSBC         Buy         135,500,950         10,232,665           3/10/15         —         (1,083,238 )

Singapore Dollar

      CITI         Buy         21,075,381         16,688,084           3/11/15         —         (796,528 )

Chilean Peso

      DBAB         Buy         1,284,460,000         2,183,008           3/13/15         —         (81,195 )

Indian Rupee

      JPHQ         Buy         139,661,000         2,223,547           3/13/15         —         (36,834 )

Mexican Peso

      CITI         Buy         30,688,400         2,312,964           3/13/15         —         (241,187 )

Euro

      JPHQ         Sell         541,000         749,734           3/16/15         94,676         —   

Singapore Dollar

      HSBC         Buy         10,521,600         8,328,531           3/16/15         —         (396,082 )

Euro

      BZWS         Sell         1,161,439         1,619,627           3/17/15         213,311         —   

Euro

      CITI         Sell         861,168         1,201,588           3/17/15         158,852         —   

Japanese Yen

      CITI         Sell         286,112,008         2,796,192           3/17/15         406,818         —   

Mexican Peso

      CITI         Buy         25,894,900         1,896,854           3/17/15         —         (149,131 )

Hungarian Forint

      DBAB         Buy         2,348,675,000         7,360,310        EUR         3/19/15         46,927         —   

Hungarian Forint

      JPHQ         Buy         703,907,450         2,206,2614        EUR         3/19/15         13,646         —   

Japanese Yen

      CITI         Sell         1,866,452,000         18,386,154           3/19/15         2,798,717         —   

Japanese Yen

      MSCO         Sell         575,230,000         5,697,039           3/19/15         893,078         —   

Chilean Peso

      JPHQ         Buy         1,065,000,000         1,806,616           3/20/15         —         (64,945 )

Hungarian Forint

      JPHQ         Buy         2,348,992,000         7,387,464        EUR         3/20/15         14,956         —   

Euro

      BZWS         Sell         744,197         1,036,294           3/23/15         135,143         —   

Japanese Yen

      DBAB         Sell         725,287,000         7,102,579           3/24/15         1,045,095         —   

Mexican Peso

      CITI         Buy         75,637,200         5,533,080           3/24/15         —         (430,374 )

Japanese Yen

      BZWS         Sell         983,714,840         9,632,663           3/25/15         1,416,737         —   

Euro

      DBAB         Sell         2,736,000         3,767,882           3/26/15         454,757         —   

Malaysian Ringgit

      DBAB         Buy         8,012,500         2,379,008           3/26/15         —         (106,034 )

 

TGB-18    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

 

Templeton Global Bond VIP Fund (continued)

 

Forward Exchange Contracts (continued)  
Currency    Counterpartya      Type      Quantity      Contract
Amount*		            Settlement
Date		      Unrealized
Appreciation		      Unrealized
Depreciation		  

Malaysian Ringgit

      HSBC         Buy         7,634,000         2,265,685            3/26/15       $ —       $ (100,083 )

Euro

      BZWS         Sell         6,085,000         8,403,385            3/27/15         1,034,764         —   

Euro

      GSCO         Sell         4,020,000         5,124,093            3/31/15         255,905         —   

Malaysian Ringgit

      HSBC         Buy         7,790,000         2,319,971            3/31/15         —         (111,108 )

Euro

      DBAB         Sell         6,200,000         8,552,466            4/07/15         1,043,751         —   

Euro

      HSBC         Sell         8,692,000         11,983,443            4/10/15         1,456,369         —   

Malaysian Ringgit

      HSBC         Buy         4,010,000         1,204,023            4/10/15         —         (67,910 )

Euro

      DBAB         Sell         7,243,000         9,997,296            4/13/15         1,224,854         —   

Euro

      SCNY         Sell         4,346,000         6,007,172            4/13/15         743,465         —   

Euro

      JPHQ         Sell         3,907,000         5,415,297            4/14/15         683,239         —   

Japanese Yen

      CITI         Sell         261,800,000         2,586,279            4/15/15         399,193         —   

Chilean Peso

      MSCO         Buy         2,370,410,000         4,180,617            4/16/15         —         (312,883 )

Euro

      HSBC         Sell         6,919,000         9,607,793            4/16/15         1,227,497         —   

Malaysian Ringgit

      DBAB         Buy         16,369,588         4,942,508            4/16/15         —         (306,944 )

Japanese Yen

      BZWS         Sell         700,840,000         6,897,488            4/17/15         1,042,505         —   

Japanese Yen

      JPHQ         Sell         421,090,000         4,129,831            4/21/15         611,774         —   

Malaysian Ringgit

      JPHQ         Buy         15,728,213         4,756,756            4/21/15         —         (304,631 )

Japanese Yen

      JPHQ         Sell         496,560,000         4,870,981            4/22/15         722,348         —   

Chilean Peso

      JPHQ         Buy         1,501,938,000         2,597,385            4/28/15         —         (149,163 )

Euro

      BZWS         Sell         6,575,679         9,116,916            4/30/15         1,151,252         —   

Euro

      SCNY         Sell         11,263,000         15,586,415            4/30/15         1,942,611         —   

Euro

      BZWS         Sell         7,026,829         9,738,201            5/05/15         1,225,564         —   

Euro

      BZWS         Sell         1,259,000         1,747,228            5/07/15         221,982         —   

Euro

      GSCO         Sell         2,990,000         4,150,539            5/07/15         528,232         —   

Chilean Peso

      MSCO         Buy         1,150,200,000         1,963,134            5/11/15         —         (90,288 )

Japanese Yen

      CITI         Sell         366,861,000         3,622,531            5/12/15         556,753         —   

Euro

      CITI         Sell         5,658,426         7,795,614            5/13/15         940,135         —   

Euro

      GSCO         Sell         2,279,000         3,140,210            5/13/15         379,083         —   

Euro

      SCNY         Sell         629,000         865,237            5/13/15         103,170         —   

Japanese Yen

      GSCO         Sell         490,555,000         4,832,578            5/13/15         733,066         —   

Japanese Yen

      SCNY         Sell         366,681,000         3,615,470            5/13/15         551,159         —   

Euro

      GSCO         Sell         3,095,000         4,263,177            5/14/15        513,383         —   

Japanese Yen

      CITI         Sell         366,680,000         3,607,315            5/14/15         542,975         —   

Euro

      BZWS         Sell         8,551,980         11,739,474            5/18/15         1,377,747         —   

Japanese Yen

      BOFA         Sell         1,105,661,700         10,890,000            5/18/15         1,649,547         —   

Japanese Yen

      BOFA         Sell         1,102,846,375         10,895,000            5/19/15         1,677,964         —   

Japanese Yen

      BZWS         Sell         1,105,842,500         10,895,000            5/19/15         1,652,924         —   

Japanese Yen

      CITI         Sell         1,104,534,000         10,895,000            5/19/15         1,663,859         —   

Japanese Yen

      HSBC         Sell         1,106,730,400         10,895,000            5/19/15         1,645,503         —   

Singapore Dollar

      DBAB         Buy         11,645,100         9,320,927            5/19/15         —         (547,758 )

Euro

      JPHQ         Sell         15,309,581         19,214,979            5/20/15         665,226         —   

Japanese Yen

      JPHQ         Sell         715,709,000         6,099,706            5/20/15         118,097         —   

Euro

      DBAB         Sell         3,887,000         4,881,295            5/21/15         171,586         —   

Euro

      GSCO         Sell         4,454,000         6,114,496            5/21/15         717,778         —   

Chilean Peso

      MSCO         Buy         420,740,000         740,218            5/22/15         —         (55,763 )

Euro

      BZWS         Sell         11,375,532         15,597,276            5/22/15         1,813,892         —   

Malaysian Ringgit

      HSBC         Buy         298,500         90,870            5/22/15         —         (6,588 )

Euro

      JPHQ         Sell         4,730,771         6,467,059            5/26/15         734,681         —   

Malaysian Ringgit

      HSBC         Buy         1,229,300         374,615            5/28/15         —         (27,688 )

Singapore Dollar

      DBAB         Buy         2,980,000         2,296,459            5/28/15         —         (51,501 )

Euro

      BZWS         Sell         2,836,669         3,862,153            5/29/15         424,789         —   

Singapore Dollar

      BZWS         Buy         21,427,761         17,077,995            5/29/15         —         (935,657 )

Singapore Dollar

      DBAB         Buy         2,980,000         2,374,029            5/29/15         —         (129,083 )

Euro

      GSCO         Sell         463,000         629,997            6/01/15         68,934         —   

Chilean Peso

      BZWS         Buy         3,010,700,000         5,297,730            6/04/15         —         (405,244 )

Chilean Peso

      MSCO         Buy         662,100,000         1,160,053            6/05/15         —         (84,208 )

 

    Annual Report   TGB-19

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

 

Templeton Global Bond VIP Fund (continued)

 

Forward Exchange Contracts (continued)  
Currency    Counterpartya      Type      Quantity      Contract
Amount*		             Settlement
Date		      Unrealized
Appreciation		      Unrealized
Depreciation		  

Euro

      BZWS         Sell         7,895,591         10,753,400           6/05/15       $ 1,185,113       $ —   

Euro

      HSBC         Sell         20,544,891         26,756,433           6/08/15         1,858,263         —   

Mexican Peso

      CITI         Buy         78,317,430         5,880,658           6/08/15         —         (622,645 )

Euro

      GSCO         Sell         2,033,100         2,772,843           6/09/15         308,921         —   

Japanese Yen

      CITI         Sell         1,370,500,000         13,418,909           6/09/15         1,962,023         —   

Japanese Yen

      HSBC         Sell         2,052,400,000         20,093,398           6/09/15         2,936,075         —   

Mexican Peso

      CITI         Buy         78,230,000         5,898,586           6/09/15         —         (646,776 )

Japanese Yen

      BZWS         Sell         1,689,110,000         16,542,468           6/10/15         2,421,945         —   

Japanese Yen

      CITI         Sell         2,595,800,000         25,383,818           6/10/15         3,683,602         —   

Japanese Yen

      HSBC         Sell         1,798,900,000         17,624,266           6/10/15         2,585,928         —   

Japanese Yen

      DBAB         Sell         595,700,000         5,832,191           6/11/15         852,233         —   

Japanese Yen

      JPHQ         Sell         1,666,680,000         16,314,089           6/11/15         2,380,906         —   

Polish Zloty

      CITI         Buy         5,990,000         1,431,781        EUR         6/11/15         —         (53,932 )

Euro

      GSCO         Sell         8,105,300         10,996,461           6/12/15         1,173,297         —   

Mexican Peso

      CITI         Buy         159,085,880         11,896,940           6/12/15         —         (1,219,072 )

Polish Zloty

      DBAB         Buy         30,704,000         7,330,373        EUR         6/12/15         —         (266,203 )

Euro

      DBAB         Sell         8,383,000         11,362,067           6/15/15         1,202,018         —   

Mexican Peso

      CITI         Buy         68,370,400         5,118,694           6/15/15         —         (530,538 )

Singapore Dollar

      JPHQ         Buy         5,686,000         4,333,841           6/15/15         —         (50,760 )

Malaysian Ringgit

      JPHQ         Buy         13,361,013         3,765,787           6/16/15         —         (911 )

Japanese Yen

      CITI         Sell         310,702,000         3,054,123           6/17/15         456,512         —   

Japanese Yen

      JPHQ         Sell         702,800,000         6,909,128           6/17/15         1,033,401         —   

Malaysian Ringgit

      JPHQ         Buy         14,772,000         4,165,821           6/19/15         —         (4,368 )

Euro

      BZWS         Sell         1,124,367         1,529,617           6/22/15         166,801         —   

Japanese Yen

      DBAB         Sell         1,455,820,000         14,296,573           6/22/15         2,124,512         —   

Malaysian Ringgit

      HSBC         Buy         36,880,000         11,168,312           6/22/15         —         (781,293 )

Mexican Peso

      CITI         Buy         61,535,000         4,596,280           6/22/15         —         (468,665 )

Singapore Dollar

      HSBC         Buy         6,864,000         5,224,142           6/22/15         —         (53,908 )

Singapore Dollar

      DBAB         Buy         8,589,700         6,553,021           6/23/15         —         (82,957 )

Philippine Peso

      JPHQ         Buy         251,010,000         5,697,263           6/25/15         —         (128,166 )

Philippine Peso

      JPHQ         Buy         17,950,000         398,978           6/29/15         —         (774 )

South Korean Won

      DBAB         Buy         21,440,000,000         20,706,973           6/29/15         —         (1,238,806 )

Polish Zloty

      CITI         Buy         135,806,000         43,573,652           6/30/15         —         (5,478,167 )

Mexican Peso

      CITI         Buy         105,786,172         7,946,081           7/10/15         —         (858,662 )

Malaysian Ringgit

      DBAB         Buy         18,006,622         5,557,599           7/14/15         —         (494,202 )

Malaysian Ringgit

      DBAB         Buy         13,610,000         4,200,617           7/15/15         —         (373,795 )

Euro

      BZWS         Sell         2,243,000         3,063,624           7/16/15         343,984         —   

Euro

      MSCO         Sell         9,679,000         13,215,319           7/16/15         1,479,523         —   

Euro

      DBAB         Sell         17,930,000         24,380,318           7/17/15         2,639,822         —   

Euro

      BZWS         Sell         3,518,000         4,769,458           7/20/15         503,602         —   

Malaysian Ringgit

      DBAB         Buy         2,637,000         807,781           7/20/15         —         (66,569 )

Malaysian Ringgit

      DBAB         Buy         11,455,000         2,581,641        EUR         7/20/15         89,342         —   

Euro

      DBAB         Sell         1,935,000         2,623,667           7/22/15         277,248         —   

Euro

      MSCO         Sell         12,182,000         16,491,261           7/22/15        1,719,130        —   

Malaysian Ringgit

      DBAB         Buy         4,160,000         1,279,016           7/22/15         —         (109,876 )

Malaysian Ringgit

      DBAB         Buy         12,933,000         2,932,587        EUR         7/22/15         78,621         —   

Euro

      DBAB         Sell         1,759,000         2,382,882           7/23/15         249,850         —   

Japanese Yen

      CITI         Sell         913,412,000         9,038,135           7/24/15         1,397,006         —   

Japanese Yen

      JPHQ         Sell         1,407,000,000         13,914,849           7/24/15         2,144,620         —   

Euro

      DBAB         Sell         4,715,000         6,358,460           7/27/15         640,493         —   

Euro

      GSCO         Sell         4,711,000         6,355,846           7/27/15         642,729         —   

Japanese Yen

      JPHQ         Sell         490,100,000         4,849,594           7/27/15         749,449         —   

Malaysian Ringgit

      DBAB         Buy         5,058,000         1,563,959           7/27/15         —         (142,926 )

Malaysian Ringgit

      DBAB         Buy         16,628,000         3,811,838        EUR         7/27/15         48,911         —   

Chilean Peso

      DBAB         Buy         1,967,720,000         3,386,490           7/28/15         —         (203,075 )

Chilean Peso

      MSCO         Buy         1,963,430,000         3,378,293           7/28/15         —         (201,818 )

 

TGB-20    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

 

Templeton Global Bond VIP Fund (continued)

 

Forward Exchange Contracts (continued)  
Currency    Counterpartya      Type      Quantity      Contract
Amount*		             Settlement
Date		      Unrealized
Appreciation		      Unrealized
Depreciation		  

Euro

      CITI         Sell         1,935,410         2,610,733           7/28/15       $ 263,587       $ —   

Euro

      GSCO         Sell         11,263,000         15,199,644           7/28/15         1,540,574         —   

Japanese Yen

      BZWS         Sell         1,079,470,000         10,640,152           7/29/15         1,609,047         —   

Chilean Peso

      JPHQ         Buy         675,370,000         1,160,629           7/30/15         —         (68,181 )

Malaysian Ringgit

      JPHQ         Buy         5,318,000         1,644,403           7/30/15         —         (150,629 )

Malaysian Ringgit

      JPHQ         Buy         16,628,000         3,812,712        EUR         7/30/15         46,671         —   

Chilean Peso

      DBAB         Buy         635,690,000         1,093,096           7/31/15         —         (64,917 )

Euro

      JPHQ         Sell         11,263,000         15,142,653           7/31/15         1,482,915         —   

Malaysian Ringgit

      HSBC         Buy         3,005,000         925,128           7/31/15         —         (81,110 )

Malaysian Ringgit

      JPHQ         Buy         11,703,000         3,604,028           7/31/15         —         (316,993 )

Chilean Peso

      DBAB         Buy         1,271,380,000         2,156,343           8/04/15         —         (100,657 )

Euro

      BZWS         Sell         282,898         379,461           8/04/15         36,341         —   

Euro

      HSBC         Sell         11,263,000         15,115,228           8/04/15         1,454,599         —   

Euro

      BZWS         Sell         7,003,000         9,413,958           8/05/15         920,045         —   

Euro

      JPHQ         Sell         5,724,900         7,696,327           8/05/15         752,616         —   

Malaysian Ringgit

      HSBC         Buy         21,208,085         6,488,828           8/06/15         —         (534,519 )

Malaysian Ringgit

      JPHQ         Buy         1,100,000         338,826           8/06/15         —         (29,994 )

Singapore Dollar

      DBAB         Buy         6,207,000         4,986,343           8/07/15         —         (310,860 )

Euro

      CITI         Sell         7,698,954         10,300,172           8/10/15         961,377         —   

Euro

      DBAB         Sell         4,845,000         6,492,082           8/11/15         615,024         —   

Euro

      JPHQ         Sell         6,343,900         8,496,861           8/11/15         801,615         —   

Japanese Yen

      CITI         Sell         751,731,000         7,378,955           8/11/15         1,088,307         —   

Malaysian Ringgit

      HSBC         Buy         2,230,000         680,895           8/11/15         —         (55,021 )

Chilean Peso

      DBAB         Buy         1,145,000,000         1,934,775           8/12/15         —         (84,642 )

Euro

      GSCO         Sell         30,376,000         40,787,070           8/12/15         3,939,925         —   

Malaysian Ringgit

      HSBC         Buy         6,100,000         1,857,321           8/12/15         —         (145,405 )

South Korean Won

      HSBC         Buy         11,980,000,000         1,157,868,285        JPY         8/12/15         1,179,541         —   

Euro

      MSCO         Sell         1,962,500         2,451,084           8/14/15         70,426         —   

Euro

      MSCO         Sell         1,962,500         2,634,705           8/17/15         253,930         —   

Chilean Peso

      MSCO         Buy         981,300,000         1,653,551           8/18/15         —         (68,708 )

Euro

      BZWS         Sell         7,066,000         9,482,678           8/18/15         910,535         —   

Japanese Yen

      DBAB         Sell         838,612,000         8,222,613           8/18/15         1,204,033         —   

Polish Zloty

      DBAB         Buy         59,155,000         13,879,634        EUR         8/19/15         —         (264,226 )

Chilean Peso

      JPHQ         Buy         528,050,000         890,097           8/20/15         —         (37,412 )

Euro

      DBAB         Sell         3,964,000         5,317,012           8/20/15         507,915         —   

Euro

      JPHQ         Sell         7,851,000         10,535,061           8/20/15         1,010,282         —   

Japanese Yen

      HSBC         Sell         1,621,372,000         15,864,697           8/20/15         2,294,483         —   

Japanese Yen

      JPHQ         Sell         1,135,828,000         11,119,108           8/20/15         1,612,697         —   

Japanese Yen

      BZWS         Sell         376,247,000         3,656,824           8/24/15         507,563         —   

Japanese Yen

      DBAB         Sell         371,821,000         3,595,670           8/25/15         483,399         —   

Japanese Yen

      HSBC         Sell         746,218,000         7,220,300           8/25/15         974,196         —   

Euro

      BZWS         Sell         2,680,925         3,567,306           8/26/15         314,508         —   

Japanese Yen

      BZWS         Sell         1,085,075,000         10,507,573           8/26/15         1,424,953         —   

Japanese Yen

      JPHQ         Sell         750,133,000         7,258,954           8/26/15         979,965         —   

Chilean Peso

      DBAB         Buy         1,435,490,000         2,395,278           8/27/15         —         (78,599 )

Euro

      HSBC         Sell         18,537,726         24,543,023           8/27/15         2,050,613         —   

Euro

      JPHQ         Sell         14,996,625         19,862,655           8/27/15         1,666,775         —   

Japanese Yen

      DBAB         Sell         685,950,000         6,621,746           8/27/15         879,897         —   

Japanese Yen

      HSBC         Sell         1,247,125,000         12,039,978           8/27/15         1,600,729         —   

Japanese Yen

      JPHQ         Sell         751,903,000         7,268,029           8/27/15         974,110         —   

Malaysian Ringgit

      JPHQ         Buy         8,340,000         2,577,734           8/27/15         —         (239,563 )

Chilean Peso

      JPHQ         Buy         593,800,000         990,988           8/28/15         —         (32,757 )

Euro

      DBAB         Sell         1,058,312         1,399,745           8/31/15         115,577         —   

Japanese Yen

      JPHQ         Sell         372,662,000         3,602,775           8/31/15         483,124         —   

Euro

      DBAB         Sell         1,732,000         2,288,803           9/02/15         187,107         —   

Chilean Peso

      DBAB         Buy         2,582,200,000         4,263,871           9/08/15        —         (100,640 )

 

    Annual Report   TGB-21

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

 

Templeton Global Bond VIP Fund (continued)

 

Forward Exchange Contracts (continued)  
Currency    Counterpartya      Type      Quantity      Contract
Amount*		             Settlement
Date		      Unrealized
Appreciation		      Unrealized
Depreciation		  

Euro

      DBAB         Sell         8,105,300         10,692,674           9/08/15       $ 856,332       $ —   

Euro

      JPHQ         Sell         20,765,000         27,017,342           9/08/15         1,817,577         —   

Chilean Peso

      DBAB         Buy         1,320,220,000         2,165,360           9/09/15         —         (36,968 )

Japanese Yen

      BZWS         Sell         285,057,504         2,673,734           9/18/15         286,662         —   

Euro

      BZWS         Sell         678,250         882,658           9/21/15         59,380         —   

Singapore Dollar

      HSBC         Buy         9,120,000         7,226,624           9/21/15         —         (356,378 )

Euro

      DBAB         Sell         8,070,000         10,422,002           9/23/15         626,101         —   

Hungarian Forint

      JPHQ         Buy         1,156,013,000         3,674,198        EUR         9/23/15         —         (72,107 )

Euro

      BZWS         Sell         1,647,381         2,124,100           9/24/15         124,367         —   

Hungarian Forint

      JPHQ         Buy         925,405,000         2,938,073        EUR         9/25/15         —         (54,145 )

Philippine Peso

      JPHQ         Buy         123,740,000         2,754,062           9/25/15         —         (11,837 )

Euro

      CITI         Sell         1,532,964         1,977,064           9/28/15         116,085         —   

Euro

      DBAB         Sell         3,753,000         4,833,226           9/28/15         277,181         —   

Malaysian Ringgit

      DBAB         Buy         11,080,500         3,343,341           9/28/15         —         (243,587 )

Malaysian Ringgit

      HSBC         Buy         11,490,000         3,467,005           9/28/15         —         (252,694 )

Euro

      BZWS         Sell         6,085,000         7,769,358           9/29/15         382,152         —   

Japanese Yen

      JPHQ         Sell         285,510,329         2,628,065           9/29/15         236,679         —   

Euro

      HSBC         Sell         5,430,000         6,919,096           9/30/15         326,906         —   

Japanese Yen

      JPHQ         Sell         172,207,000         1,586,540           9/30/15         144,124         —   

South Korean Won

      HSBC         Buy         9,530,000,000         9,062,381           9/30/15         —         (424,182 )

Euro

      DBAB         Sell         14,880,000         18,981,226           10/01/15         916,015         —   

Euro

      JPHQ         Sell         6,370,000         8,073,147           10/07/15         338,493         —   

Japanese Yen

      JPHQ         Sell         5,663,900,000         52,286,176           10/07/15         4,835,985         —   

Mexican Peso

      HSBC         Buy         377,048,070         27,308,472           10/07/15         —         (2,199,628 )

Euro

      DBAB         Sell         12,680,000         16,085,214           10/09/15         688,035         —   

Japanese Yen

      HSBC         Sell         2,816,800,000         26,142,602           10/09/15         2,543,143         —   

Japanese Yen

      BZWS         Sell         1,426,300,000         13,246,191           10/13/15         1,295,192         —   

Japanese Yen

      DBAB         Sell         1,406,600,000         13,071,276           10/13/15         1,285,344         —   

Mexican Peso

      DBAB         Buy         259,112,000         18,946,476           10/14/15         —         (1,699,811 )

Japanese Yen

      JPHQ         Sell         652,895,000         6,177,044           10/19/15         705,529         —   

Euro

      HSBC         Sell         12,569,000         16,093,348           10/20/15         827,001         —   

Japanese Yen

      JPHQ         Sell         1,233,160,000         11,663,845           10/20/15         1,329,202         —   

Malaysian Ringgit

      JPHQ         Buy         8,104,000         2,421,490           10/20/15         —         (157,736 )

Japanese Yen

      BZWS         Sell         735,200,000         6,909,125           10/22/15         747,359         —   

Malaysian Ringgit

      HSBC         Buy         14,613,000         4,370,308           10/23/15         —         (289,161 )

Euro

      DBAB         Sell         4,545,000         5,769,196           10/26/15         248,044         —   

Malaysian Ringgit

      DBAB         Buy         10,811,000         3,244,306           10/26/15         —         (225,593 )

Malaysian Ringgit

      HSBC         Buy         7,209,825         2,163,813           10/26/15         —         (150,642 )

Euro

      BZWS         Sell         5,604,306         7,117,300           10/27/15         309,170         —   

Euro

      DBAB         Sell         3,319,244         4,238,509           10/30/15         205,995         —   

Malaysian Ringgit

      JPHQ         Buy         7,468,000         2,236,263           10/30/15         —         (151,559 )

Euro

      DBAB         Sell         224,556         284,400           11/03/15         11,564         —   

Euro

      UBSW         Sell         32,701,000         41,113,332           11/04/15         1,380,557         —   

Euro

      BZWS         Sell         1,581,109         1,986,252           11/06/15         65,063         —   

Euro

      DBAB         Sell         15,875,000         19,827,081           11/10/15         535,714         —   

Japanese Yen

      CITI         Sell         341,992,119         2,999,865           11/10/15         132,120         —   

Euro

      JPHQ         Sell         8,969,211         11,238,870           11/12/15         338,933         —   

Euro

      MSCO         Sell         4,572,000         5,715,937           11/12/15         159,762         —   

Japanese Yen

      CITI         Sell         429,663,000         3,781,047           11/12/15         177,949         —   

Japanese Yen

      HSBC         Sell         413,563,000         3,625,281           11/12/15         157,196         —   

Japanese Yen

      JPHQ         Sell         335,950,000         2,951,798           11/12/15         134,565         —   

Euro

      BZWS         Sell         2,643,000         3,298,966           11/13/15         86,954         —   

Euro

      DBAB         Sell         10,778,730         13,489,042           11/16/15         388,831         —   

Euro

      MSCO         Sell         5,391,000         6,746,028           11/16/15         193,935         —   

Japanese Yen

      MSCO         Sell         300,000,000         2,616,089           11/16/15         100,054         —   

Japanese Yen

      SCNY         Sell         340,600,700         2,975,146           11/16/15         118,602         —   

 

TGB-22    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

Templeton Global Bond VIP Fund (continued)

Forward Exchange Contracts (continued)  
Currency    Counterpartya      Type      Quantity      Contract
Amount*		            Settlement
Date		      Unrealized
Appreciation		      Unrealized
Depreciation		  

Euro

      DBAB         Sell         2,240,000         2,791,376            11/18/15       $ 68,805       $ —   

Euro

      UBSW         Sell         3,245,000         4,046,191            11/18/15         102,109         —   

Japanese Yen

      DBAB         Sell         796,770,000         6,869,891            11/18/15         187,190         —   

Euro

      DBAB         Sell         5,073,398         6,346,537            11/19/15         180,015         —   

Japanese Yen

      CITI         Sell         986,239,000         8,516,377            11/19/15         244,328         —   

Malaysian Ringgit

      DBAB         Buy         7,197,960         2,106,145            11/19/15         —         (99,499 )

Japanese Yen

      CITI         Sell         1,107,834,000         9,558,533            11/20/15         266,358         —   

Malaysian Ringgit

      HSBC         Buy         4,326,000         1,262,365            11/20/15         —         (56,445 )

Japanese Yen

      HSBC         Sell         207,909,000         1,778,520            11/24/15         34,452         —   

Euro

      DBAB         Sell         837,570         1,044,140            11/30/15         25,841         —   

Euro

      DBAB         Sell         5,440,000         6,787,488            12/04/15         173,036         —   

Euro

      HSBC         Sell         2,155,292         2,655,061            12/09/15        34,150        —   

Euro

      SCNY         Sell         2,400,751         2,965,696            12/09/15         46,298         —   

Euro

      MSCO         Sell         1,412,000         1,769,808            12/11/15         52,685         —   

Mexican Peso

      CITI         Buy         95,083,400         6,461,665            12/11/15         —         (158,389 )

Euro

      BOFA         Sell         17,769,000         22,094,863            12/15/15         484,075         —   

Euro

      JPHQ         Sell         5,095,000         6,360,241            12/15/15         163,665         —   

Mexican Peso

      CITI         Buy         45,585,080         3,001,981            12/18/15         18,478         —   

Japanese Yen

      DBAB         Sell         1,453,310,000         12,440,592            12/21/15         240,365         —   

Japanese Yen

      HSBC         Sell         1,455,540,000         12,445,832            12/21/15         226,884         —   

Japanese Yen

      BZWS         Sell         696,650,000         5,891,731            12/22/15         43,343         —   

Japanese Yen

      CITI         Sell         1,086,780,000         9,203,760            12/22/15         80,225         —   

Euro

      BZWS         Sell         6,863,000         8,364,804            1/05/16         13,836         —   
                    

 

 

  

Unrealized appreciation (depreciation)

  

      232,865,865         (40,202,582 )
                    

 

 

  

Net unrealized appreciation (depreciation)

  

    $ 192,663,283      
                    

 

 

     

aMay be comprised of multiple contracts with the same counterparty, currency and settlement date.

*In U.S. dollars unless otherwise indicated.

At December 31, 2014, the Fund had the following interest rate swap contracts outstanding. See Note 3.

 

Interest Rate Swap Contracts                                   
Description    Counterparty /
Exchange		      Expiration
Date		      Notional
Amount		      Unrealized
Appreciation		      Unrealized
Depreciation		  
Centrally Cleared Swaps               

Receive Floating rate 3-month USD BBA LIBOR
Pay Fixed rate 0.926%

      LCH         10/17/17       $ 183,490,000       $ 1,214,733       $ —   

Receive Floating rate 3-month USD BBA LIBOR
Pay Fixed rate 2.775%

      CME         10/4/23         13,090,000         —         (678,272 ) 

Receive Floating rate 3-month USD BBA LIBOR
Pay Fixed rate 2.795%

      CME         10/4/23         13,090,000         —         (700,199 ) 

Receive Floating rate 3-month USD BBA LIBOR
Pay Fixed rate 2.765%

      CME         10/7/23         13,090,000         —         (666,043 ) 

Receive Floating rate 3-month USD BBA LIBOR
Pay Fixed rate 2.731%

      LCH         7/7/24         34,000,000         —         (1,814,644 ) 

Receive Floating rate 3-month USD BBA LIBOR
Pay Fixed rate 3.668%

      CME         10/4/43         6,370,000         —         (1,324,454 ) 

Receive Floating rate 3-month USD BBA LIBOR
Pay Fixed rate 3.687%

      CME         10/4/43         6,370,000         —         (1,349,459 ) 

Receive Floating rate 3-month USD BBA LIBOR
Pay Fixed rate 3.675%

      CME         10/7/43         6,370,000         —         (1,333,403 ) 
           

 

 

  

Centrally Cleared Swaps unrealized appreciation (depreciation)

  

      1,214,733         (7,866,474 ) 
           

 

 

  

 

    Annual Report   TGB-23

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

Templeton Global Bond VIP Fund (continued)

Interest Rate Swap Contracts (continued)                                   
Description    Counterparty /
Exchange		      Expiration
Date		      Notional
Amount		      Unrealized
Appreciation		      Unrealized
Depreciation		  
OTC Swaps               

Receive Floating rate 3-month USD BBA LIBOR
Pay Fixed rate 3.558%

      JPHQ         3/4/21       $ 3,240,000       $ —       $ (343,604 ) 

Receive Floating rate 3-month USD BBA LIBOR
Pay Fixed rate 3.523%

      DBAB         3/28/21         14,630,000         —         (1,493,633 ) 

Receive Floating rate 3-month USD BBA LIBOR
Pay Fixed rate 4.347%

      CITI         2/25/41         7,460,000         —         (2,523,788 ) 

Receive Floating rate 3-month USD BBA LIBOR
Pay Fixed rate 4.349%

      JPHQ         2/25/41         7,460,000         —         (2,527,738 ) 

Receive Floating rate 3-month USD BBA LIBOR
Pay Fixed rate 4.320%

      JPHQ         2/28/41         5,600,000         —         (1,873,170 ) 

Receive Floating rate 3-month USD BBA LIBOR
Pay Fixed rate 4.299%

      JPHQ         3/1/41         1,870,000         —         (613,749 ) 
           

 

 

  

OTC Swaps unrealized appreciation (depreciation)

  

      —         (9,375,682 ) 
           

 

 

  

Total Interest Rate Swaps unrealized appreciation (depreciation)

  

      1,214,733         (17,242,156 ) 
           

 

 

  

Net unrealized appreciation (depreciation)

  

    $ (16,027,423 ) 
              

 

 

  

 

TGB-24    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

Financial Statements

Statement of Assets and Liabilities

December 31, 2014

 

      Templeton Global
Bond VIP Fund		  

Assets:

   

Investments in securities:

   

Cost - Unaffiliated issuers

    $ 3,206,633,967   

Cost - Repurchase agreements

      153,266,107   
  

 

 

  

Total cost of investments

    $ 3,359,900,074   
  

 

 

  

Value - Unaffiliated issuers

    $ 3,069,060,380   

Value - Repurchase agreements

      153,266,107   
  

 

 

  

Total value of investments

      3,222,326,487   

Cash

      131,086,267   

Restricted cash (Note 1f)

      102,776,600   

Foreign currency, at value (cost $54,881,187)

      54,797,576   

Receivables:

   

Investment securities sold

      13,965,819   

Capital shares sold

      1,705,141   

Interest

      28,671,491   

Due from brokers

      6,920,502   

Unrealized appreciation on forward exchange contracts

      232,865,865   

Other assets

      292   
  

 

 

  

Total assets

      3,795,116,040   
  

 

 

  

Liabilities:

   

Payables:

   

Investment securities purchased

      21,427,668   

Capital shares redeemed

      2,520,710   

Management fees

      1,404,786   

Distribution fees

      1,406,445   

Variation margin

      131,913   

Due to Brokers

      102,776,600   

Unrealized depreciation on forward exchange contracts

      40,202,582   

Unrealized depreciation on OTC swap contracts

      9,375,682   

Deferred tax

      2,624,665   

Accrued expenses and other liabilities

      916,406   
  

 

 

  

Total liabilities

      182,787,457   
  

 

 

  

Net assets, at value

    $ 3,612,328,583   
  

 

 

  

Net assets consist of:

   

Paid-in capital

    $ 3,519,976,589   

Undistributed net investment income

      39,205,955   

Net unrealized appreciation (depreciation)

      35,165,493   

Accumulated net realized gain (loss)

      17,980,546   
  

 

 

  

Net assets, at value

    $ 3,612,328,583   
  

 

 

  

 

    The accompanying notes are an integral part of these financial statements.    |   Annual Report   TGB-25

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FINANCIAL STATEMENTS

Statement of Assets and Liabilities (continued)

December 31, 2014

 

      Templeton Global
Bond VIP Fund		  
Class 1:   

Net assets, at value

    $ 323,491,431   
  

 

 

  

Shares outstanding

      17,432,471   
  

 

 

  

Net asset value and maximum offering price per share

    $ 18.56   
  

 

 

  
Class 2:   

Net assets, at value

    $ 3,177,638,316   
  

 

 

  

Shares outstanding

      176,652,246   
  

 

 

  

Net asset value and maximum offering price per share

    $ 17.99   
  

 

 

  
Class 4:   

Net assets, at value

    $ 111,198,836   
  

 

 

  

Shares outstanding

      6,049,384   
  

 

 

  

Net asset value and maximum offering price per share

    $ 18.38   
  

 

 

  

 

TGB-26    Annual Report   |    The accompanying notes are an integral part of these financial statements.    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FINANCIAL STATEMENTS

 

Statement of Operations

for the year ended December 31, 2014

 

      Templeton Global
Bond VIP Fund		  

Investment income:

   

Interest (net of foreign taxes $2,852,069)

    $ 127,015,935   
  

 

 

  

Expenses:

   

Management fees (Note 3a)

      16,154,459   

Distribution fees: (Note 3c)

   

Class 2

      7,627,990   

Class 3

      156,081   

Class 4

      405,742   

Custodian fees (Note 4)

      1,316,806   

Reports to shareholders

      509,873   

Professional fees

      101,942   

Trustees’ fees and expenses

      13,603   

Other

      75,486   
  

 

 

  

Total expenses

      26,361,982   

Expense reductions (Note 4)

      (7,009 ) 
  

 

 

  

Net expenses

      26,354,973   
  

 

 

  

Net investment income

      100,660,962   
  

 

 

  

Realized and unrealized gains (losses):

   

Net realized gain (loss) from:

   

Investments

      11,756,370   

Foreign currency transactions

      25,573,926   

Swap contracts

      (3,632,367 ) 
  

 

 

  

Net realized gain (loss)

      33,697,929   
  

 

 

  

Net change in unrealized appreciation (depreciation) on:

   

Investments

      (242,033,071 ) 

Translation of other assets and liabilities denominated in foreign currencies

      169,111,124   

Change in deferred taxes on unrealized appreciation

      (964,346 ) 
  

 

 

  

Net change in unrealized appreciation (depreciation)

      (73,886,293 ) 
  

 

 

  

Net realized and unrealized gain (loss)

      (40,188,364 ) 
  

 

 

  

Net increase (decrease) in net assets resulting from operations

    $ 60,472,598   
  

 

 

  

 

    The accompanying notes are an integral part of these financial statements.    |   Annual Report   TGB-27

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FINANCIAL STATEMENTS

 

Statements of Changes in Net Assets

 

    Templeton Global Bond VIP Fund  
    Year Ended December 31,  
     2014        2013  

Increase (decrease) in net assets:

       

Operations:

       

Net investment income

   $ 100,660,962         $ 100,648,197   

Net realized gain (loss) from investments, foreign currency transactions and swap contracts

     33,697,929           47,113,794   

Net change in unrealized appreciation (depreciation) on investments, translation of other assets and liabilities denominated in foreign currencies and deferred taxes

     (73,886,293 )         (98,508,111 ) 
 

 

 

  

Net increase (decrease) in net assets resulting from operations

     60,472,598           49,253,880   
 

 

 

  

Distributions to shareholders from:

       

Net investment income and net foreign currency gains:

       

Class 1

     (15,858,865 )         (14,463,879 ) 

Class 2

     (156,385,457 )         (128,696,606 ) 

Class 3

     —           (9,351,774 ) 

Class 4

     (5,645,270 )         (7,129,387 ) 

Net realized gains:

       

Class 1

     —           (3,587,066 ) 

Class 2

     —           (33,227,731 ) 

Class 3

     —           (2,438,218 ) 

Class 4

     —           (1,906,223 ) 
 

 

 

  

Total distributions to shareholders

     (177,889,592 )         (200,800,884 ) 
 

 

 

  

Capital share transactions: (Note 2)

       

Class 1

     52,744,146           (13,273,114 ) 

Class 2

     457,068,596           529,969,403   

Class 3

     (195,888,546 )         4,794,164   

Class 4

     (3,448,828 )         (37,369,362 ) 
 

 

 

  

Total capital share transactions

     310,475,368           484,121,091   
 

 

 

  

Redemption fees

     1,163           7,288   
 

 

 

  

Net increase (decrease) in net assets

     193,059,537           332,581,375   

Net assets:

       

Beginning of year

     3,419,269,046           3,086,687,671   
 

 

 

  

End of year

   $ 3,612,328,583         $ 3,419,269,046   
 

 

 

  

Undistributed net investment income included in net assets:

       

End of year

   $ 39,205,955         $ 104,975,944   
 

 

 

  

 

TGB-28    Annual Report   |    The accompanying notes are an integral part of these financial statements.    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

Notes to Financial Statements

Templeton Global Bond VIP Fund

1. Organization and Significant Accounting Policies

Franklin Templeton Variable Insurance Products Trust (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end management investment company, consisting of nineteen separate funds and applies the specialized accounting and reporting guidance in U.S. Generally Accepted Accounting Principles (U.S. GAAP). Templeton Global Bond VIP Fund (Fund) is included in this report. The financial statements of the remaining funds in the Trust are presented separately. Shares of the Fund are generally sold only to insurance company separate accounts to fund the benefits of variable life insurance policies or variable annuity contracts. The Fund offers three classes of shares: Class 1, Class 2, and Class 4. Effective May 1, 2014, all Class 3 shares were converted to Class 2. Each class of shares differs by its distribution fees, voting rights on matters affecting a single class and its exchange privilege.

Effective May 1, 2014, Templeton Global Bond Securities Fund was renamed Templeton Global Bond VIP Fund.

The following summarizes the Fund’s significant accounting policies.

a. Financial Instrument Valuation

The Fund’s investments in financial instruments are carried at fair value daily. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. The Fund calculates the net asset value per share at the close of the New York Stock Exchange (NYSE), generally at 4 p.m. Eastern time (NYSE close) on each day the NYSE is open for trading. Under compliance policies and procedures approved by the Trust’s Board of Trustees (the Board), the Fund’s administrator has responsibility for oversight of valuation, including leading the cross-functional Valuation and Liquidity Oversight Committee (VLOC). The VLOC provides administration and oversight of the Fund’s valuation policies and procedures, which are approved annually by the Board. Among other things, these procedures allow the Fund to utilize independent pricing services, quotations from securities and financial instrument dealers, and other market sources to determine fair value.

Debt securities generally trade in the over-the-counter (OTC) market rather than on a securities exchange. The Fund’s pricing services use multiple valuation techniques to determine fair

value. In instances where sufficient market activity exists, the pricing services may utilize a market-based approach through which quotes from market makers are used to determine fair value. In instances where sufficient market activity may not exist or is limited, the pricing services also utilize proprietary valuation models which may consider market characteristics such as benchmark yield curves, credit spreads, estimated default rates, anticipated market interest rate volatility, coupon rates, anticipated timing of principal repayments, underlying collateral, and other unique security features in order to estimate the relevant cash flows, which are then discounted to calculate the fair value. Securities denominated in a foreign currency are converted into their U.S. dollar equivalent at the foreign exchange rate in effect at the NYSE close on the date that the values of the foreign debt securities are determined. Repurchase agreements are valued at cost, which approximates fair value.

Derivative financial instruments (derivatives) listed on an exchange are valued at the official closing price of the day. Certain derivatives trade in the OTC market. The Fund’s pricing services use various techniques including industry standard option pricing models and proprietary discounted cash flow models to determine the fair value of those instruments. The Fund’s net benefit or obligation under the derivative contract, as measured by the fair value of the contract, is included in net assets.

The Fund has procedures to determine the fair value of financial instruments for which market prices are not reliable or readily available. Under these procedures, the VLOC convenes on a regular basis to review such financial instruments and considers a number of factors, including significant unobservable valuation inputs, when arriving at fair value. The VLOC primarily employs a market-based approach which may use related or comparable assets or liabilities, recent transactions, market multiples, book values, and other relevant information for the investment to determine the fair value of the investment. An income-based valuation approach may also be used in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the investments. Due to the inherent uncertainty of valuations of such investments, the fair values may differ significantly from the values that would have been used had an active market existed. The VLOC employs various methods for calibrating these valuation approaches including a regular review of key inputs and assumptions, transactional back-testing or disposition analysis, and reviews of any related market activity.

 

 

    Annual Report   TGB-29

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

 

Templeton Global Bond VIP Fund (continued)

 

1. Organization and Significant Accounting

Policies (continued)

 

b. Foreign Currency Translation

Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. The Fund may enter into foreign currency exchange contracts to facilitate transactions denominated in a foreign currency. Purchases and sales of securities, income and expense items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. Portfolio securities and assets and liabilities denominated in foreign currencies contain risks that those currencies will decline in value relative to the U.S. dollar. Occasionally, events may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the Board.

The Fund does not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments on the Statement of Operations.

Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period.

c. Joint Repurchase Agreement

The Fund enters into a joint repurchase agreement whereby its uninvested cash balance is deposited into a joint cash account with other funds managed by the investment manager or an affiliate of the investment manager and is used to invest in one or more repurchase agreements. The value and face amount of the joint repurchase agreement are allocated to the funds based on their pro-rata interest. A repurchase agreement is accounted for as a loan by the Fund to the seller, collateralized by securities which are delivered to the Fund’s custodian. The fair

value, including accrued interest, of the initial collateralization is required to be at least 102% of the dollar amount invested by the funds, with the value of the underlying securities marked to market daily to maintain coverage of at least 100%. Repurchase agreements are subject to the terms of Master Repurchase Agreements (MRAs) with approved counterparties (sellers). The MRAs contain various provisions, including but not limited to events of default and maintenance of collateral for repurchase agreements. In the event of default by either the seller or the Fund, certain MRAs may permit the non-defaulting party to net and close-out all transactions, if any, traded under such agreements. The Fund may sell securities it holds as collateral and apply the proceeds towards the repurchase price and any other amounts owed by the seller to the Fund in the event of default by the seller. This could involve costs or delays in addition to a loss on the securities if their value falls below the repurchase price owed by the seller. The joint repurchase agreement held by the Fund at year end, as indicated in the Statement of Investments, had been entered into on December 31, 2014.

d. Securities Purchased on a Delayed Delivery Basis

The Fund purchases securities on a delayed delivery basis, with payment and delivery scheduled for a future date. These transactions are subject to market fluctuations and are subject to the risk that the value at delivery may be more or less than the trade date purchase price. Although the Fund will generally purchase these securities with the intention of holding the securities, it may sell the securities before the settlement date. Sufficient assets have been segregated for these securities.

e. Derivative Financial Instruments

The Fund invested in derivatives in order to manage risk or gain exposure to various other investments or markets. Derivatives are financial contracts based on an underlying or notional amount, require no initial investment or an initial net investment that is smaller than would normally be required to have a similar response to changes in market factors, and require or permit net settlement. Derivatives contain various risks including the potential inability of the counterparty to fulfill their obligations under the terms of the contract, the potential for an illiquid secondary market, and/or the potential for market movements which expose the Fund to gains or losses in excess of the amounts shown on the Statement of Assets and Liabilities. Realized gain and loss and unrealized appreciation and depreciation on these contracts for the period are included in the Statement of Operations.

 

TGB-30    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

 

Templeton Global Bond VIP Fund (continued)

 

Derivative counterparty credit risk is managed through a formal evaluation of the creditworthiness of all potential counterparties. The Fund attempts to reduce its exposure to counterparty credit risk on OTC derivatives, whenever possible, by entering into International Swaps and Derivatives Association (ISDA) master agreements with certain counterparties. These agreements contain various provisions, including but not limited to collateral requirements, events of default, or early termination. Termination events applicable to the counterparty include certain deteriorations in the credit quality of the counterparty. Termination events applicable to the Fund include failure of the Fund to maintain certain net asset levels and/or limit the decline in net assets over various periods of time. In the event of default or early termination, the ISDA master agreement gives the non-defaulting party the right to net and close-out all transactions traded, whether or not arising under the ISDA agreement, to one net amount payable by one counterparty to the other. However, absent an event of default or early termination, OTC derivative assets and liabilities are presented gross and not offset in the Statement of Assets and Liabilities. Early termination by the counterparty may result in an immediate payment by the Fund of any net liability owed to that counterparty under the ISDA agreement.

Collateral requirements differ by type of derivative. Collateral or initial margin requirements are set by the broker or exchange clearing house for exchange traded and centrally cleared derivatives. Initial margin deposited is held at the exchange and can be in the form of cash and/or securities. For OTC derivatives traded under an ISDA master agreement, posting of collateral is required by either the fund or the applicable counterparty if the total net exposure of all OTC derivatives with the applicable counterparty exceeds the minimum transfer amount, which typically ranges from $100,000 to $250,000, and can vary depending on the counterparty and the type of the agreement. Generally, collateral is determined at the close of fund business each day and any additional collateral required due to changes in derivative values may be delivered by the fund or the counterparty within a few business days. Collateral pledged and/or received by the fund for OTC derivatives, if any, is held in segregated accounts with the fund’s custodian/counterparty broker and can be in the form of cash and/or securities. Unrestricted cash may be invested according to the Fund’s investment objectives.

The Fund entered into OTC forward exchange contracts primarily to manage and/or gain exposure to certain foreign currencies.

A forward exchange contract is an agreement between the Fund and a counterparty to buy or sell a foreign currency at a specific exchange rate on a future date.

The Fund entered into interest rate swap contracts primarily to manage interest rate risk. An interest rate swap is an agreement between the Fund and a counterparty to exchange cash flows based on the difference between two interest rates, applied to a notional amount. These agreements may be privately negotiated in the over-the-counter market (“OTC interest rate swaps”) or may be executed on a registered exchange (“centrally cleared interest rate swaps”). For centrally cleared interest rate swaps, required initial margins are pledged by the Fund, and the daily change in fair value is accounted for as a variation margin payable or receivable on the Statement of Assets and Liabilities. Over the term of the contract, contractually required payments to be paid and to be received are accrued daily and recorded as unrealized depreciation and appreciation until the payments are made, at which time they are realized.

See Note 9 regarding other derivative information.

f. Restricted Cash

At December 31, 2014, the Fund held restricted cash in connection with investments in certain derivative securities. Restricted cash is held in a segregated account with the Fund’s counterparty broker and is reflected in the Statement of Assets and Liabilities.

g. Loan Participation Notes

The Fund invests in loan participation notes (“Participations”). Participations are loans originally issued to a borrower by one or more financial institutions (the “Lender”) and subsequently sold to other investors, such as the Fund. Participations typically result in the Fund having a contractual relationship only with the Lender and not with the borrower. The Fund has the right to receive from the Lender any payments of principal, interest and fees which the Lender received from the borrower. The Fund generally has no rights to either enforce compliance by the borrower with the terms of the loan agreement or to any collateral relating to the original loan. As a result, the Fund assumes the credit risk of both the borrower and the Lender that is selling the Participation. The Participations may also involve interest rate risk and liquidity risk, including the potential default or insolvency of the borrower and/or the Lender.

 

 

    Annual Report   TGB-31

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

 

Templeton Global Bond VIP Fund (continued)

 

1. Organization and Significant Accounting

Policies (continued)

 

h. Income and Deferred Taxes

It is the Fund’s policy to qualify as a regulated investment company under the Internal Revenue Code. The Fund intends to distribute to shareholders substantially all of its taxable income and net realized gains to relieve it from federal income and if applicable, excise taxes. As a result, no provision for U.S. federal income taxes is required.

The Fund may be subject to foreign taxation related to income received, capital gains on the sale of securities and certain foreign currency transactions in the foreign jurisdictions in which it invests. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist in the foreign markets in which the Fund invests. When a capital gain tax is determined to apply the Fund records an estimated deferred tax liability in an amount that would be payable if the securities were disposed of on the valuation date.

The Fund recognizes the tax benefits of uncertain tax positions only when the position is “more likely than not” to be sustained upon examination by the tax authorities based on the technical merits of the tax position. As of December 31, 2014, and for all open tax years, the Fund has determined that no liability for unrecognized tax benefits is required in the Fund’s financial statements related to uncertain tax positions taken on a tax return (or expected to be taken on future tax returns). Open tax years are those that remain subject to examination and are based on each tax jurisdiction statute of limitation.

i. Security Transactions, Investment Income, Expenses and Distributions

Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Amortization of premium and accretion of discount on debt securities are included in interest income. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with U.S. GAAP. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary

differences are not reclassified, as they may reverse in subsequent periods.

Common expenses incurred by the Trust are allocated among the funds based on the ratio of net assets of each fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense.

Realized and unrealized gains and losses and net investment income, not including class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions, by class, are generally due to differences in class specific expenses.

Inflation-indexed bonds are adjusted for inflation through periodic increases or decreases in the security’s interest accruals, face amount, or principal redemption value, by amounts corresponding to the rate of inflation as measured by an index. Any increase or decrease in the face amount or principal redemption value will be included as interest income on the Statement of Operations.

j. Accounting Estimates

The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates.

k. Redemption Fees

Redemptions and exchanges of interests in an insurance company subaccount that invested in Class 3 shares of the Fund were subject to a 1.0% short term trading fee if the interest in the subaccount had been held for less than 60 days. Such fees were retained by the Fund and accounted for as an addition to paid-in capital, allocated to each class of shares based upon the relative proportion of net assets of each class.

l. Guarantees and Indemnifications

Under the Trust’s organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, on behalf of the Fund, enters into contracts with service providers that contain general indemnification clauses. The Trust’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote.

 

TGB-32    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

 

Templeton Global Bond VIP Fund (continued)

 

2. Shares of Beneficial Interest

At December 31, 2014, there were an unlimited number of shares authorized (without par value). Transactions in the Fund’s shares were as follows:

 

     Year Ended December 31,  
     2014          2013  
      Shares      Amount           Shares      Amount  
Class 1 Shares:              

Shares sold

      4,252,687       $ 81,034,541           1,918,229       $ 37,822,305   

Shares issued in reinvestment of distributions

      844,006         15,858,865           962,717         18,050,945   

Shares redeemed

      (2,332,299 )       (44,149,260 )         (3,563,965 )       (69,146,364 ) 
  

 

 

  

Net increase (decrease)

      2,764,394       $ 52,744,146           (683,019 )     $ (13,273,114 ) 
  

 

 

  
Class 2 Shares:              

Shares sold

      34,833,702       $ 645,437,884           34,876,621       $ 667,964,958   

Shares issued in reinvestment of distributions

      8,573,764         156,385,457           8,877,431         161,924,337   

Shares redeemed

      (18,696,173 )       (344,754,745 )         (16,008,448 )       (299,919,892 ) 
  

 

 

  

Net increase (decrease)

      24,711,293       $ 457,068,596           27,745,604       $ 529,969,403   
  

 

 

  
Class 3 Sharesa:              

Shares sold

      167,296       $ 3,090,319           1,022,231       $ 19,570,327   

Shares issued in reinvestment of distributions

      —         —           646,027         11,789,991   

Shares redeemed

      (10,595,103 )       (198,978,865 )         (1,409,425 )       (26,566,154 ) 
  

 

 

  

Net increase (decrease)

      (10,427,807 )     $ (195,888,546 )         258,833       $ 4,794,164   
  

 

 

  
Class 4 Shares:              

Shares sold

      721,184       $ 13,510,739           892,452       $ 17,199,730   

Shares issued on reinvestment of distributions

      302,695         5,645,270           485,524         9,035,611   

Shares redeemed

      (1,203,628 )       (22,604,837 )         (3,385,215 )       (63,604,703 ) 
  

 

 

  

Net increase (decrease)

      (179,749 )     $ (3,448,828 )         (2,007,239 )     $ (37,369,362 ) 
  

 

 

  

aEffective May 1, 2014, all Class 3 shares were converted to Class 2.

3. Transactions With Affiliates

Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Fund are also officers and/or directors of the following subsidiaries:

 

Subsidiary    Affiliation

Franklin Advisers, Inc. (Advisers)

   

Investment manager

Franklin Templeton Services, LLC (FT Services)

   

Administrative manager

Franklin Templeton Distributors, Inc. (Distributors)

   

Principal underwriter

Franklin Templeton Investor Services, LLC (Investor Services)

   

Transfer agent

 

    Annual Report   TGB-33

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

 

Templeton Global Bond VIP Fund (continued)

 

3. Transactions With Affiliates (continued)

 

a. Management Fees

The Fund pays an investment management fee to Advisers based on the average daily net assets of the Fund as follows:

 

Annualized Fee Rate    Net Assets

0.625%

   

Up to and including $100 million

0.500%

   

Over $100 million, up to and including $250 million

0.450%

   

Over $250 million, up to and including $7.5 billion

0.440%

   

Over $7.5 billion, up to and including $10 billion

0.430%

   

Over $10 billion, up to and including $12.5 billion

0.420%

   

Over $12.5 billion, up to and including $15 billion

0.400%

   

In excess of $15 billion

b. Administrative Fees

Under an agreement with Advisers, FT Services provides administrative services to the Fund. The fee is paid by Advisers based on the Fund’s average daily net assets, and is not an additional expense of the Fund.

c. Distribution Fees

The Board has adopted distribution plans for Class 2, Class 3, and Class 4 shares pursuant to Rule 12b-1 under the 1940 Act. Under the Fund’s compensation distribution plans, the Fund pays Distributors for costs incurred in connection with the servicing, sale and distribution of the Fund’s shares up to 0.25%, 0.35%, and 0.35% per year of its average daily net assets of Class 2, Class 3, and Class 4, respectively. Some distribution fees are not charged on shares held by affiliates. The Board has agreed to limit the current rate to 0.25% per year for Class 3. The plan year, for purposes of monitoring compliance with the maximum annual plan rates, is February 1 through January 31.

d. Transfer Agent Fees

Investor Services, under terms of an agreement, performs shareholder servicing for the Fund and is not paid by the Fund for the services.

4. Expense Offset Arrangement

The Fund has entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Fund’s custodian expenses. During the year ended December 31, 2014, the custodian fees were reduced as noted in the Statement of Operations.

5. Income Taxes

For tax purposes, capital losses may be carried over to offset future capital gains. Capital loss carryforwards with no expiration, if any, must be fully utilized before those losses with expiration dates.

During the year ended December 31, 2014, the Fund utilized $4,268,308 of capital loss carryforwards.

The tax character of distributions paid during the years ended December 31, 2014 and 2013, was as follows:

 

    

2014

   

2013

Distributions paid from:

      

Ordinary income

    $177,889,592    $159,641,646

Long term capital gain

    —    41,159,238
  

 

   $177,889,592    $200,800,884
  

 

 

TGB-34    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Templeton Global Bond VIP Fund (continued)

At December 31, 2014, the cost of investments, net unrealized appreciation (depreciation) and undistributed ordinary income for income tax purposes were as follows:

 

Cost of investments

    $ 3,377,737,207   
  

 

 

  

Unrealized appreciation

    $ 69,774,655   

Unrealized depreciation

      (225,185,375 ) 
  

 

 

  

Net unrealized appreciation (depreciation)

    $ (155,410,720 ) 
  

 

 

  

Distributable earnings - undistributed ordinary income

    $ 296,662,724   
  

 

 

  

Differences between income and/or capital gains as determined on a book basis and a tax basis are primarily due to differing treatments of foreign currency transactions, bond discounts and premiums, and tax straddles.

6. Investment Transactions

Purchases and sales of investments (excluding short term securities) for the year ended December 31, 2014, aggregated $903,909,874 and $912,085,215, respectively.

7. Credit Risk

At December 31, 2014, the Fund had 12.49% of its portfolio invested in high yield or other securities rated below investment grade. These securities may be more sensitive to economic conditions causing greater price volatility and are potentially subject to a greater risk of loss due to default than higher rated securities.

8. Concentration of Risk

Investing in foreign securities may include certain risks and considerations not typically associated with investing in U.S. securities, such as fluctuating currency values and changing local and regional economic, political and social conditions, which may result in greater market volatility. In addition, certain foreign securities may not be as liquid as U.S. securities.

9. Other Derivative Information

At December 31, 2014, the Fund’s investments in derivative contracts are reflected on the Statement of Assets and Liabilities as follows:

 

    

Asset Derivatives

   

Liability Derivatives

 
Derivative Contracts
Not Accounted for
as Hedging Instruments		    Statement of Assets and
Liabilities Location		   Fair Value     Statement of Assets and
Liabilities Location		   Fair Value  

Interest rate contracts

    Net assets consist of: net unrealized appreciation (depreciation)   $ 1,214,733a      Unrealized depreciation on OTC swap contracts / Variation margin / Net assets consist of: net unrealized appreciation (depreciation)   $ 17,242,156a  

Foreign exchange contracts

    Unrealized appreciation on forward exchange contracts     232,865,865      Unrealized depreciation on forward exchange contracts     40,202,582   

aIncludes cumulative appreciation (depreciation) of centrally cleared swaps as reported in the Statement of Investments. Only current day’s variation margin is separately reported within the Statement of Assets and Liabilities.

 

    Annual Report   TGB-35

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Templeton Global Bond VIP Fund (continued)

9. Other Derivative Information (continued)

For the year ended December 31, 2014, the effect of derivative contracts on the Fund’s Statement of Operations was as follows:

 

Derivative Contracts
Not Accounted for
as Hedging Instruments		    Statement of Operations Locations   Realized
Gain (Loss)
for the Year		     Change in
Unrealized
Appreciation
(Depreciation)
for the Year		  

Interest rate contracts

    Net realized gain (loss) from swap contracts / Net change in unrealized appreciation (depreciation) on investments   $ (3,632,367 )    $ (13,899,952 ) 

Foreign exchange contracts

    Net realized gain (loss) from foreign currency transactions / Net change in unrealized appreciation (depreciation) on translation of other assets and liabilities denominated in foreign currencies     30,955,447        170,892,729   

At December 31, 2014, the Fund’s OTC derivative assets and liabilities, are as follows:

 

     Gross and Net Amounts
of Assets and Liabilities
Presented in the
Statement of Assets and
Liabilities		  
      Assetsa     Liabilitiesa  
Derivatives     

Forward exchange contracts

    $ 232,865,865      $ 40,202,582   

Swap Contracts

      —        9,375,682   
  

 

 

  

Total

    $ 232,865,865      $ 49,578,264   
  

 

 

  

aAbsent an event of default or early termination, OTC derivative assets and liabilities are presented gross and not offset in the Statement of Assets and Liabilities.

At December 31, 2014, the Fund’s OTC derivative assets which may be offset against the Fund’s OTC derivative liabilities and collateral received from the counterparty, is as follows:

 

           Amounts Not Offset in the Statement of
Assets and Liabilities		        
      Gross and Net
Amounts of Assets
Presented in the
Statement of
Assets and Liabilities		     Financial
Instruments
Available for Offset		     Financial
Instruments
Collateral
Receiveda,b		     Cash Collateral
Receivedb		     Net Amount (Not
less than zero)		  
Counterparty           

BOFA

    $ 4,233,687      $ —      $ (4,233,687 )    $ —      $ —   

BZWS

      40,533,031        (2,083,740 )      —        (38,449,291 )      —   

CITI

      30,086,745        (15,183,789 )      (14,902,956 )      —        —   

DBAB

      44,311,455        (13,698,501 )      —        (28,870,000 )      1,742,954   

GSCO

      18,482,036        —        —        (18,100,000 )      382,036   

HSBC

      30,976,462        (8,402,055 )      (22,574,407 )      —        —   

JPHQ

      43,272,275        (8,459,356 )      (34,812,919 )      —        —   

MSCO

      5,881,607        (1,750,823 )      —        (3,729,600 )      401,184   

 

TGB-36    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Templeton Global Bond VIP Fund (continued)

           Amounts Not Offset in the Statement of
Assets and Liabilities		        
      Gross and Net
Amounts of Assets
Presented in the
Statement of
Assets and Liabilities		     Financial
Instruments
Available for Offset		     Financial
Instruments
Collateral
Receiveda,b		     Cash Collateral
Receivedb		     Net Amount (Not
less than zero)		  
Counterparty           

SCNY

    $ 13,605,901      $ —      $ —      $ (13,500,000 )    $ 105,901   

UBSW

      1,482,666        —        (1,333,708 )      —        148,958   
  

 

 

  

Total

    $ 232,865,865      $ (49,578,264 )    $ (77,857,677 )    $ (102,648,891 )    $ 2,781,033   
  

 

 

  

aAt December 31, 2014, the Fund received United Kingdom Treasury Bonds and Notes, U.S. Government Agency Securities and U.S. Treasury Bonds, Notes and Bills as collateral for derivatives.

bIn some instances, the collateral amounts disclosed in the table above were adjusted due to the requirement to limit the collateral amounts to avoid the effect of overcollateralization. Actual collateral received and/or pledged may be more than the amounts disclosed herein.

At December 31, 2014, the Fund’s OTC derivative liabilities which may be offset against the Fund’s OTC derivative assets and collateral pledged to the counterparty, is as follows:

 

           Amounts Not Offset in the Statement of
Assets and Liabilities		        
      Gross and Net
Amounts of Liabilities
Presented in the
Statement of
Assets and Liabilities		     Financial
Instruments
Available for Offset		     Financial
Instruments
Collateral
Pledged		     Cash Collateral
Pledged		     Net Amount (Not
less than zero)		  
Counterparty           

BOFA

    $ —      $ —      $  —      $  —      $  —   

BZWS

      2,083,740        (2,083,740 )      —        —        —   

CITI

      15,183,789        (15,183,789 )      —        —        —   

DBAB

      13,698,501        (13,698,501 )      —        —        —   

GSCO

      —        —        —        —        —   

HSBC

      8,402,055        (8,402,055 )      —        —        —   

JPHQ

      8,459,356        (8,459,356 )      —        —        —   

MSCO

      1,750,823        (1,750,823 )      —        —        —   

SCNY

      —        —        —        —        —   

UBSW

      —        —        —        —        —   
  

 

 

  

Total

    $ 49,578,264      $ (49,578,264 )    $  —      $  —      $  —   
  

 

 

  

For the year ended December 31, 2014, the average month end fair value of derivatives represented 3.82% of average month end net assets. The average month end number of open derivative contracts for the year was 478.

See Note 1(e) regarding derivative financial instruments.

See Abbreviations on page TGB - 39

10. Credit Facility

The Fund, together with other U.S. registered and foreign investment funds (collectively, Borrowers), managed by Franklin Templeton Investments, are borrowers in a joint syndicated senior unsecured credit facility totaling $1.5 billion (Global Credit Facility) which matured on February 13, 2015. This Global Credit Facility provides a source of funds to the Borrowers for temporary and emergency purposes, including the ability to meet future unanticipated or unusually large redemption requests. The Borrowers expect to renew the Global Credit Facility for a total of $2 billion effective February 13, 2015, which matures on February 12, 2016.

 

    Annual Report   TGB-37

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Templeton Global Bond VIP Fund (continued)

10. Credit Facility (continued)

Under the terms of the Global Credit Facility, the Fund shall, in addition to interest charged on any borrowings made by the Fund and other costs incurred by the Fund, pay its share of fees and expenses incurred in connection with the implementation and maintenance of the Global Credit Facility, based upon its relative share of the aggregate net assets of all of the Borrowers, including an annual commitment fee of 0.07% based upon the unused portion of the Global Credit Facility. These fees are reflected in other expenses on the Statement of Operations. During the year ended December 31, 2014, the Fund did not use the Global Credit Facility.

11. Fair Value Measurements

The Fund follows a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Fund’s own market assumptions (unobservable inputs). These inputs are used in determining the value of the Fund’s financial instruments and are summarized in the following fair value hierarchy:

 

  •   Level 1 – quoted prices in active markets for identical financial instruments
  •   Level 2 – other significant observable inputs (including quoted prices for similar financial instruments, interest rates, prepayment speed, credit risk, etc.)
  •   Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of financial instruments)

The input levels are not necessarily an indication of the risk or liquidity associated with financial instruments at that level.

For movements between the levels within the fair value hierarchy, the Fund has adopted a policy of recognizing the transfers as of the date of the underlying event which caused the movement.

At December 31, 2014, all of the Fund’s investments in financial instruments carried at fair value were valued using Level 2 inputs.

12. Subsequent Events

The Fund has evaluated subsequent events through the issuance of the financial statements and determined that no events have occurred that require disclosure other than those already disclosed in the financial statements.

 

TGB-38    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Templeton Global Bond VIP Fund (continued)

Abbreviations

 

Counterparty/Exchange   Currency   Selected Portfolio
BOFA   Bank of America N.A.   BRL   Brazilian Real   FHLB   Federal Home Loan Bank
BZWS   Barclays Bank PLC   CAD   Canadian Dollar   FRN   Floating Rate Note
CITI   Citigroup, Inc.   EUR   Euro    
CME   Chicago Mercantile Exchange   HUF   Hungarian Forint    
DBAB   Deutsche Bank AG   IDR   Indonesian Rupiah    
GSCO   Goldman Sachs Bank   INR   Indian Rupee    
HSBC   HSBC Bank USA N.A.   JPY   Japanese Yen    
JPHQ   JP Morgan Chase & Co.   KRW   South Korean Won    
LCH   London Clearing House   LKR   Sri Lankan Rupee    
MSCO   Morgan Stanley   MXN   Mexican Peso    
SCNY   Standard Chartered Bank   MYR   Malaysian Ringgit    
UBSW   UBS AG   PEN   Peruvian Nuevo Sol    
    PHP   Philippine Peso    
    PLN   Polish Zloty    
    SEK   Swedish Krona    
    SGD   Singapore Dollar    

 

    Annual Report   TGB-39

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

Report of Independent Registered Public Accounting Firm

Templeton Global Bond VIP Fund

To the Board of Trustees and Shareholders of Franklin Templeton Variable Insurance Products Trust

In our opinion, the accompanying statement of assets and liabilities, including the statement of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Templeton Global Bond VIP Fund (the “Fund”) at December 31, 2014, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements 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 are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2014 by correspondence with the custodian and brokers, provides a reasonable basis for our opinion.

PricewaterhouseCoopers LLP

San Francisco, California

February 13, 2015

 

TGB-40    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

 

Tax Information (unaudited)

 

Templeton Global Bond VIP Fund

 

At December 31, 2014, more than 50% of the Fund’s total assets were invested in securities of foreign issuers. In most instances, foreign taxes were withheld from income paid to the Fund on these investments. The Fund elects to treat foreign taxes paid as allowed under Section 853 of the Internal Revenue Code. This election will allow shareholders of record as of the 2015 distribution date, to treat their proportionate share of foreign taxes paid by the Fund as having been paid directly by them. The shareholder shall consider these amounts as foreign taxes paid in the tax year in which they receive the Fund distribution.

 

    Annual Report   TGB-41

Templeton Growth VIP Fund

(Formerly, Templeton Growth Securities Fund)

This annual report for Templeton Growth VIP Fund covers the fiscal year ended December 31, 2014.

Class 4 Performance Summary as of December 31, 2014

Average annual total return of Class 4 shares* represents the average annual change in value, assuming reinvestment of dividends and capital gains. Average returns smooth out variations in returns, which can be significant; they are not the same as year-by-year results.

 

Periods ended 12/31/14    1-Year        5-Year        10-Year  

Average Annual Total Return

      -2.88%           +8.88%           +4.68%   

*For the period beginning 2/29/08, Class 4 performance reflects a 12b-1 fee expense of 0.35% per year, which affects future performance. Class 4 performance prior to 2/29/08 reflects historical Class 1 performance, which does not have a 12b-1 fee expense. Since 2/29/08 (effective date), the average annual total return of Class 4 shares was +3.76%.

Performance reflects the Fund’s Class 4 operating expenses, but does not include any contract fees, expenses or sales charges. If they had been included, performance would be lower. These charges and deductions, particularly for variable life policies, can have a significant effect on contract values and insurance benefits. See the contract prospectus for a complete description of these expenses, including sales charges.

Performance data represent past performance, which does not guarantee future results. Investment return and principal value will fluctuate, and you may have a gain or loss when you sell your shares. Current performance may differ from figures shown.

Total Return Index Comparison for a Hypothetical $10,000 Investment (1/1/05–12/31/14)

The graph below shows the change in value of a hypothetical $10,000 investment in the Fund over the indicated period and includes reinvestment of any income or distributions. The Fund’s performance* is compared to the performance of the MSCI World Index and the MSCI All Country World Index (ACWI). One cannot invest directly in an index, and an index is not representative of the Fund’s portfolio. Please see Important Notes to Performance Information preceding the Fund Summaries.

 

LOGO

**Source: Morningstar. Please see Index Descriptions following the Fund Summaries.

 

    Annual Report     TG-1   

TEMPLETON GROWTH VIP FUND

Fund Goal and Main Investments

Templeton Growth VIP Fund seeks long-term capital growth. Under normal market conditions, the Fund invests predominantly in equity securities of companies located anywhere in the world, including emerging markets.

Fund Risks

All investments involve risks, including possible loss of principal. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments; investments in emerging markets involve heightened risks related to the same factors. To the extent the Fund focuses on particular countries, regions, industries, sectors or types of investments from time to time, it may be subject to greater risks of adverse developments in such areas of focus than a fund that invests in a wider variety of countries, regions, industries, sectors or investments. The Fund is actively managed but there is no guarantee that the manager’s investment decisions will produce the desired results. The Fund’s prospectus also includes a description of the main investment risks.

Performance Overview

You can find the Fund’s one-year total return in the Performance Summary. For comparison, the Fund’s benchmarks, the MSCI All Country World Index (ACWI) returned +4.71%, and the MSCI World Index returned +5.50% for the period under review.1

Economic and Market Overview

The global economy grew moderately during the 12 months under review as U.S. economic growth expanded while growth rates in much of the rest of the world declined. As measured by the MSCI World Index, stocks in global developed markets advanced overall during the 12-month period amid a generally accommodative monetary policy environment and continued strength in corporate earnings. Oil prices declined sharply during the 12-month period, resulting from weak global demand growth and strong world supply, and gold prices ended lower amid benign global inflation and a strong U.S. dollar.

U.S. economic growth trends were generally encouraging during the period. Economic activity expanded for most of 2014, supported in some quarters by increased consumer spending, business investment and federal defense spending. The U.S. Federal Reserve Board (Fed) began reducing its large-scale bond purchases $10 billion a month in January and ended the buying

 

 

LOGO

 

program in October. But it continued its practice of maintaining holdings of longer term securities at sizable levels. The Fed believed underlying economic strength could support ongoing progress in labor market conditions. Toward period-end, the Fed stated that it could be patient with regard to raising interest rates and that the interest rate might not rise for at least a couple of meetings, possibly implying at least the first two meetings of 2015.

Outside the U.S., the U.K. economy grew relatively well, supported by the services and manufacturing sectors. In the eurozone, economic growth remained subdued, as concerns persisted about the potential negative impacts to growth from the crisis in Ukraine and China’s moderating growth rate. However, third-quarter economic growth, though meager, exceeded expectations, especially in the region’s major economies of Germany and France. In June, the European Central Bank (ECB) reduced its main interest rate and, for the first time, set a negative deposit rate; the ECB reduced both rates again in September. The ECB broadened its monetary easing stance by implementing an asset purchase program to prevent deflation and stimulate the economy. Toward period-end, the ECB cut its 2014 growth forecast for the eurozone and attributed the reduction to geopolitical risks dampening confidence and private investment.

Japan’s second- and third-quarter economic contractions indicated the economy was in a recession. However, private consumption and exports improved in the third quarter. In October, the Bank of Japan expanded its stimulus measures amid weak domestic demand and as substantially lower crude oil prices exerted further

 

1. Source: Morningstar.

One cannot invest directly in an index, and an index is not representative of the Fund’s portfolio. Please see Index Descriptions following the Fund Summaries.

 

TG-2    Annual Report    

TEMPLETON GROWTH VIP FUND

downward pressure on inflation. Toward period-end, Japan’s ruling coalition was reelected in early parliamentary elections and subsequently announced a fresh stimulus package aimed at reviving economic growth.

In several emerging markets, economic growth generally moderated. However, Brazil exited recession as government spending prior to a presidential election drove third-quarter economic growth. Emerging market equities, as measured by the MSCI Emerging Markets Index, fell for the 12-month period, amid headwinds such as soft domestic demand and weak exports in several countries.2 Falling crude oil prices and geopolitical tensions in certain regions, as well as concerns about the timing of U.S. interest rate increases, also pressured emerging market equities. Many emerging market currencies depreciated against the U.S. dollar, leading central banks in several countries to raise interest rates in an effort to curb inflation and support their currencies. Several other central banks lowered interest rates to promote economic growth. After implementing monetary stimulus measures to support specific sectors, China’s central bank increased its efforts to bolster the economy by cutting its benchmark interest rates for the first time since July 2012. In contrast, Russia’s central bank raised its key interest rate sharply toward period-end to limit further devaluation of the Russian ruble and contain rising inflation.

Investment Strategy

Our investment philosophy is bottom up, value oriented and long term. In choosing investments, we will focus on the market price of a company’s securities relative to our evaluation of the company’s potential long-term earnings, asset value and cash flow. Among factors we may consider are a company’s historical value measures, including price/earnings ratio, profit margins and liquidation value. We do in-depth research to construct a bargain list from which we buy.

Manager’s Discussion

The year 2014 was a challenging one for global equity markets. Following a period of tentative optimism that corporate fundamentals would resume driving share prices, investor focus shifted back to broad-based economic and political factors in 2014. In our opinion, the most significant story in 2014 was the deepening divergence between the U.S., where growth rates accelerated for much of 2014, and the rest of the world, where growth rates generally moderated. Numerous factors contributed to the change in market conditions. In Europe, disinflationary pressures intensified and political discord resurfaced; in Japan, extraordinary monetary

policy failed to prevent a triple-dip recession; and in diverse emerging markets, economic growth generally cooled as commodities and currencies came under pressure. Two major events further deepened the divide between U.S. and international markets. The price of oil nearly halved, favoring the consumer-driven U.S. economy at the expense of oil-exporting nations abroad; and Russia invaded Ukraine, marring European business confidence and reminding investors of the risks sometimes associated with emerging market investing. In this environment of increasing economic and geopolitical uncertainty, the U.S. seemed to us to solidify its status as a destination for capital in troubled times.

However, in our opinion, the U.S.’s attractive mix of defensive and pro-cyclical characteristics came at a cost. The price-to-book multiple of U.S. stocks relative to global peers neared all-time highs at year-end, and measures of price-to-normalized earnings were also elevated. Yet, despite our detractive underweighting in the U.S., we continued to find selective bottom-up opportunities in this deep and diverse market, and stock selection in the U.S. contributed to relative performance.

We also found select opportunities we regarded as attractive in Asia. Although we found value relatively scarce in Japan, where we had yet to see the structural reforms required to deal with challenges caused by debt, demographics and corporate governance, we selectively discovered what we deemed as attractive opportunities elsewhere, including in Singapore and emerging Asia. Although our stock selection and underweighting in Japan contributed to relative returns in 2014, stock selection in China and an overweighted allocation in South Korea resulted in the Fund’s Asian stocks detracting from performance relative to the MSCI ACWI. In China, our focus was on finding companies with, in our opinion, balance sheet strength, capital discipline and the ability to sustainably generate strong free cash flow. We found what we considered attractive bottom-up opportunities in South Korea despite concerns about currency strength and cyclical exposure. Valuations looked reasonable to us for a competitive, commodity-importing emerging market with accommodative monetary policy, a comfortable current account surplus and good exposure to U.S. and Asian growth.

Stock selection and an overweighted allocation in Europe detracted from relative performance as the delicate progress made stabilizing the banking system, enacting necessary budget reforms, and preparing for further monetary stimulus failed to meaningfully restore corporate confidence or revive lending activity. Concerns about Europe, along with worries about a slowing China and destabilized Russia, made European equities cheap on nearly all normalized valuation metrics. In our analysis, European equities

 

 

2. Please see Index Descriptions following the Fund Summaries.

 

    Annual Report     TG-3   

TEMPLETON GROWTH VIP FUND

also looked attractive relative to bonds. Cyclical stocks, in particular, looked attractively priced to us at the end of 2014, with the relative price, price-to-earnings ratio and price-to-book ratio of European cyclical sectors compared with defensive sectors all close to post-financial crisis lows. Overall, we consider such valuation levels depressed for a diverse corporate sector composed of many high-quality, globally relevant companies.

From a sector perspective, an overweighted energy position comprised several of the Fund’s biggest detractors, pressured primarily by European oil services stocks.3 Shares of Dutch oilfield surveyor Fugro was a major laggard as weaker oil and gas markets led to project delays and cancellations that could result in the company forgoing its dividend. Oil market weakness and reduced capital expenditure plans by energy producers, Fugro’s main clients, coincided with company-specific issues, resulting in our loss of confidence in Fugro’s management and the impairment of our original investment thesis. Thus, we liquidated the position toward the end of the reporting period seeking to limit losses and redirect the proceeds to what we considered more attractive opportunities. Despite challenging conditions in the energy sector more broadly, we remained favorable toward our sector holdings. Although we do not know when equilibrium will be restored to oil markets, we do expect that supply could incrementally decline and oil may eventually return to a level that promotes continued investment. In the meantime, we have focused on the long-term fundamental prospects of individual energy companies. Energy stocks were historically cheap following a period of sustained pressure on sector fundamentals and, most recently, a major oil price correction. As energy companies improved capital allocation and refocused on shareholder returns, we continued to find what we considered compelling long-term bargains in the sector, with a focus on companies with the balance sheet strength to weather a period of lower oil prices, in our opinion.

Consistent with the broad-based underperformance of cyclical sectors in 2014, stock selection in industrials also hurt relative performance, pressured by U.K. services firm Serco Group, whose share price declined as an investigation into alleged malpractice at a domestic business unit resulted in profit warnings and a need to raise capital.4 We remained encouraged by the company’s earnest efforts to address its issues and restore the faith of its clients and regulator, and felt that the stock’s

depressed valuation failed to reflect what we saw as new management’s sensible turnaround plan and Serco’s attractive position as a long-term beneficiary of public sector outsourcing growth. Underweighted consumer staples and overweighted telecommunications holdings also detracted from relative performance, pressured by stock-specific weakness.5

Conversely, stock selection in the consumer discretionary sector contributed to relative performance, led by our media holdings.6 We believe our long-term investment theses in U.S. media began to be validated as television and movie studios (such as Twenty-First Century Fox and Walt Disney) benefited from rising demand for quality content, and as content distributors (such as Comcast and Time Warner Cable, which was sold by period-end) gained from their control of the increasingly valuable broadband pipeline. Health care and information technology holdings delivered double-digit absolute gains and among them

 

Top 10 Holdings       
12/31/14       
Company
Sector/Industry, Country		    % of Total
Net Assets		  

Microsoft Corp.

Software, U.S.

      3.0%   

Samsung Electronics Co. Ltd.

Technology Hardware, Storage & Peripherals, South Korea

      3.0%   

Citigroup Inc.

Banks, U.S.

      2.3%   

Hewlett-Packard Co.

Technology Hardware, Storage & Peripherals, U.S.

      2.3%   

Comcast Corp., Special A

Media, U.S.

      2.3%   

Teva Pharmaceutical Industries Ltd., ADR

Pharmaceuticals, Israel

      2.2%   

Talisman Energy Inc.

Oil, Gas & Consumable Fuels, Canada

      2.1%   

Medtronic Inc.

Health Care Equipment & Supplies, U.S.

      2.0%   

Amgen Inc.

Biotechnology, U.S.

      1.9%   

Pfizer Inc.

Pharmaceuticals, U.S.

      1.9%   

The dollar value, number of shares or principal amount, and names of all portfolio holdings are listed in the Fund’s Statement of Investments (SOI).

3. The energy sector comprises energy equipment and services; and oil, gas and consumable fuels in the SOI.

4. The industrials sector comprises aerospace and defense, air freight and logistics, airlines, commercial services and supplies, construction and engineering, electrical equipment, industrial conglomerates, machinery and professional services in the SOI.

5. The consumer staples sector comprises food and staples retailing in the SOI. The telecommunication services sector comprises diversified telecommunication services and wireless telecommunication services in the SOI.

6. The consumer discretionary sector comprises auto components, automobiles, media, multiline retail and specialty retail in the SOI.

 

TG-4    Annual Report    

TEMPLETON GROWTH VIP FUND

were several of the Fund’s top contributors.7 From health care, shares of U.S. biotechnology giant Amgen rallied to a record after the firm beat earnings estimates and announced a dividend hike and share buyback. We were pleased to see Amgen use its prodigious cash flow to directly enhance shareholder value and were encouraged by the continued resilience of the firm’s base business and positive evolution of its new drug pipeline. We believe the market remained overly concerned about pressures to Amgen’s more mature business lines and failed to appreciate the company’s sustainable long-term earnings potential. More generally, in our analysis, our health care position offered a mix of longer term holdings among major pharmaceuticals firms that have restructured and rebased earnings in the aftermath of many expiring patents industry-wide, and newer bargains among medical technology, specialty pharmaceuticals and biotechnology stocks with what we considered undervalued cash-flow and profit growth potential. From the information technology sector, U.S. computer manufacturer Hewlett-Packard and U.S. software firm Microsoft, both long-term holdings, also finished the year among the Fund’s top contributors.

It is also important to recognize the effect of currency movements on the Fund’s performance. In general, if the value of the U.S. dollar goes up compared with a foreign currency, an investment traded in that foreign currency will go down in value because it will be worth fewer U.S. dollars. This can have a negative effect on Fund performance. Conversely, when the U.S. dollar weakens in relation to a foreign currency, an investment traded in that foreign currency will increase in value, which can contribute to Fund performance. For the 12 months ended December 31, 2014, the U.S. dollar rose in value relative to most currencies. As a result, the Fund’s performance was negatively affected by the portfolio’s substantial investment in securities with non-U.S. currency exposure.

In recent years, we felt stocks traded more on broad-based economic and policy expectations than on business fundamentals. This trend, in our view, resulted in an increasingly bifurcated market in which the leaders (U.S. stocks, consumer cyclicals and health care) kept surging farther ahead and the laggards (international stocks and industrial cyclicals) kept falling farther behind. Throughout this challenging period, we tried to use the market’s distraction to our advantage by focusing on what we determined to be overlooked value. In doing so, we sought to build a differentiated portfolio based on our long-term assumptions about company-level business fundamentals. We believe outperformance comes from value recognition, and our experience has been that price and value eventually do intersect over time. Going into 2015, we remained confident that our portfolio contained far more value than its prices seemed to reflect.

Thank you for your participation in Templeton Growth VIP Fund. We look forward to serving your future investment needs.

The foregoing information reflects our analysis, opinions and portfolio holdings as of December 31, 2014, the end of the reporting period. The way we implement our main investment strategies and the resulting portfolio holdings may change depending on factors such as market and economic conditions. These opinions may not be relied upon as investment advice or an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but the investment manager makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.

 

 

7. The health care sector comprises biotechnology, life sciences tools and services, and pharmaceuticals in the SOI. The information technology sector comprises communications equipment; electronic equipment, instruments and components; semiconductors and semiconductor equipment; and software in the SOI.

 

    Annual Report     TG-5   

TEMPLETON GROWTH VIP FUND

Class 4 Fund Expenses

As an investor in a variable insurance contract (Contract) that indirectly provides for investment in an underlying mutual fund, you can incur transaction and/or ongoing expenses at both the Fund level and the Contract level.

 

•   Transaction expenses can include sales charges (loads) on purchases, redemption fees, surrender fees, transfer fees and premium taxes.

 

•   Ongoing expenses can include management fees, distribution and service (12b-1) fees, contract fees, annual maintenance fees, mortality and expense risk fees and other fees and expenses. All mutual funds and Contracts have some types of ongoing expenses.

The expenses shown in the table are meant to highlight ongoing expenses at the Fund level only and do not include ongoing expenses at the Contract level, or transaction expenses at either the Fund or Contract level. While the Fund does not have transaction expenses, if the transaction and ongoing expenses at the Contract level were included, the expenses shown below would be higher. You should consult your Contract prospectus or disclosure document for more information.

The table shows Fund-level ongoing expenses and can help you understand these expenses and compare them with those of other mutual funds offered through the Contract. The table assumes a $1,000 investment held for the six months indicated. Please refer to the Fund prospectus for additional information on operating expenses.

Actual Fund Expenses

The first line (Actual) of the table provides actual account values and expenses. The “Ending Account Value” is derived from the Fund’s actual return, which includes the effect of ongoing Fund expenses, but does not include the effect of ongoing Contract expenses.

You can estimate the Fund-level expenses you incurred during the period by following these steps. Of course, your account value and expenses will differ from those in this illustration:

 

1. Divide your account value by $1,000.

If an account had an $8,600 value,

then $8,600 ÷ $1,000 = 8.6.

 

2. Multiply the result by the number under the heading “Fund-Level Expenses Incurred During Period.”

If Fund-Level Expenses Incurred During Period were $7.50, then 8.6 × $7.50 = $64.50.

In this illustration, the estimated expenses incurred this period at the Fund level are $64.50.

Hypothetical Example for Comparison with Other Mutual Funds

Information in the second line (Hypothetical) of the table can help you compare ongoing expenses of the Fund with those of other mutual funds offered through the Contract. This information may not be used to estimate the actual ending account balance or expenses you incurred during the period. The hypothetical “Ending Account Value” is based on the Fund’s actual expense ratio and an assumed 5% annual rate of return before expenses, which does not represent the Fund’s actual return. The figure under the heading “Fund-Level Expenses Incurred During Period” shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds offered through a Contract.

 
Class 4  

Beginning Account

Value 7/1/14

     

Ending Account

Value 12/31/14

     

Fund-Level Expenses
Incurred During Period*

7/1/14–12/31/14

  

Actual

     $1,000         $   925.30         $5.48   

Hypothetical (5% return before expenses)

     $1,000         $1,019.51         $5.75   

*Expenses are calculated using the most recent six-month annualized expense ratio for the Fund’s Class 4 shares (1.13%), which does not include any ongoing expenses of the Contract for which the Fund is an investment option, multiplied by the average account value over the period, multiplied by 184/365 to reflect the one-half year period.

 

TG-6    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

Financial Highlights

Templeton Growth VIP Fund

     Year Ended December 31,  
      2014      2013      2012      2011      2010  
Class 1               

Per share operating performance

(for a share outstanding throughout the year)

               

Net asset value, beginning of year

      $15.47         $12.16         $10.27         $11.19         $10.56   
  

 

 

  
Income from investment operationsa:               

Net investment incomeb

      0.38 c       0.22         0.27         0.25         0.17   

Net realized and unrealized gains (losses)

      (0.75 )       3.49         1.88         (0.99 )       0.62   
  

 

 

  

Total from investment operations

      (0.37 )       3.71         2.15         (0.74 )       0.79   
  

 

 

  

Less distributions from net investment income

      (0.25 )       (0.40 )       (0.26 )       (0.18 )       (0.16 ) 
  

 

 

  

Net asset value, end of year

      $14.85         $15.47         $12.16         $10.27         $11.19   
  

 

 

  

Total returnd

      (2.53)%         31.05%         21.40%         (6.80)%         7.74%   
Ratios to average net assets               

Expenses

      0.78%         0.78% e       0.78% e       0.78% e       0.77% e 

Net investment income

      2.46% c       1.62%         2.31%         2.22%         1.71%   
Supplemental data               

Net assets, end of year (000’s)

      $572,860         $588,409         $476,954         $1,200,682         $1,348,622   

Portfolio turnover rate

      17.46%         11.60%         18.73% f       42.13% f       9.61%   

aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.

bBased on average daily shares outstanding.

cNet investment income per share includes approximately $0.09 per share received in the form of special dividends. Excluding these amounts, the ratio of net investment income to average net assets would have been 1.88%.

dTotal return does not include fees, charges or expenses imposed by the variable annuity and life insurance contracts for which Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle.

eBenefit of expense reduction rounds to less than 0.01%.

fExcludes the value of portfolio securities delivered as a result of redemption in-kind.

 

    The accompanying notes are an integral part of these financial statements.    |   Annual Report     TG-7   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FINANCIAL HIGHLIGHTS

 

Templeton Growth VIP Fund (continued)

     Year Ended December 31,  
      2014      2013      2012      2011      2010  
Class 2               

Per share operating performance

(for a share outstanding throughout the year)

               

Net asset value, beginning of year

      $15.23         $11.97         $10.11         $11.01         $10.40   
  

 

 

  
Income from investment operationsa:               

Net investment incomeb

      0.34 c       0.19         0.21         0.21         0.15   

Net realized and unrealized gains (losses)

      (0.75 )       3.44         1.88         (0.96 )       0.60   
  

 

 

  

Total from investment operations

      (0.41 )       3.63         2.09         (0.75 )       0.75   
  

 

 

  

Less distributions from net investment income

      (0.21 )       (0.37 )       (0.23 )       0.15         (0.14 ) 
  

 

 

  

Net asset value, end of year

      $14.61         $15.23         $11.97         $10.11         $11.01   
  

 

 

  

Total returnd

      (2.81)%         30.82%         21.07%         (6.97)%         7.39%   
Ratios to average net assets               

Expenses

      1.03%         1.03% e       1.03% e       1.03% e       1.02% e 

Net investment income

      2.21% c       1.37%         2.06%         1.97%         1.46%   
Supplemental data               

Net assets, end of year (000’s)

      $1,171,896         $1,450,304         $1,352,554         $1,254,193         $1,626,885   

Portfolio turnover rate

      17.46%         11.60%         18.73% f       42.13% f       9.61%   

aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.

bBased on average daily shares outstanding.

cNet investment income per share includes approximately $0.09 per share received in the form of special dividends. Excluding these amounts, the ratio of net investment income to average net assets would have been 1.63%.

dTotal return does not include fees, charges or expenses imposed by the variable annuity and life insurance contracts for which Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle.

eBenefit of expense reduction rounds to less than 0.01%.

fExcludes the value of portfolio securities delivered as a result of redemption in-kind.

 

TG-8    Annual Report   |    The accompanying notes are an integral part of these financial statements.    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FINANCIAL HIGHLIGHTS

 

Templeton Growth VIP Fund (continued)

     Year Ended December 31,  
      2014      2013      2012      2011      2010  
Class 4               
Per share operating performance
(for a share outstanding throughout the year)		               

Net asset value, beginning of year

      $15.35         $12.07         $10.19         $11.11         $10.50   
  

 

 

  
Income from investment operationsa:               

Net investment incomeb

      0.33 c       0.17         0.20         0.20         0.14   

Net realized and unrealized gains (losses)

      (0.76 )       3.47         1.90         (0.98 )       0.61   
  

 

 

  

Total from investment operations

      (0.43 )       3.64         2.10         (0.78 )       0.75   
  

 

 

  

Less distributions from net investment income

      (0.19 )       (0.36 )       (0.22 )       (0.14 )       (0.14 ) 
  

 

 

  

Net asset value, end of year

      $14.73         $15.35         $12.07         $10.19         $11.11   
  

 

 

  

Total returnd

      (2.88)%         30.64%         21.02%         (7.14)%         7.31%   
Ratios to average net assets               

Expenses

      1.13%         1.13% e       1.13% e       1.13% e       1.12% e 

Net investment income

      2.11% c       1.27%         1.96%         1.87%         1.36%   
Supplemental data               

Net assets, end of year (000’s)

      $59,989         $72,683         $67,158         $56,170         $60,569   

Portfolio turnover rate

      17.46%         11.60%         18.73% f       42.13% f       9.61%   

aThe amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating fair value of the investments of the Fund.

bBased on average daily shares outstanding.

cNet investment income per share includes approximately $0.09 per share received in the form of special dividends. Excluding these amounts, the ratio of net investment income to average net assets would have been 1.53%.

dTotal return does not include fees, charges or expenses imposed by the variable annuity and life insurance contracts for which Franklin Templeton Variable Insurance Products Trust serves as an underlying investment vehicle.

eBenefit of expense reduction rounds to less than 0.01%.

fExcludes the value of portfolio securities delivered as a result of redemption in-kind.

 

    The accompanying notes are an integral part of these financial statements.    |   Annual Report     TG-9   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

Statement of Investments, December 31, 2014

 

Templeton Growth VIP Fund  
           Country     Shares        Value  
 

Common Stocks 97.1%

          
 

Aerospace & Defense 0.7%

          
 

BAE Systems PLC

      United Kingdom        1,730,147         $ 12,728,802   
           

 

 

  
 

Air Freight & Logistics 1.4%

          
 

TNT Express NV

      Netherlands        646,272           4,333,002   
a  

TNT Express NV, 144A

      Netherlands        441,000           2,956,733   
 

United Parcel Service Inc., B

      United States        160,030           17,790,535   
           

 

 

  
              25,080,270   
           

 

 

  
 

Airlines 2.7%

          
 

Deutsche Lufthansa AG

      Germany        1,735,414           29,040,938   
b  

International Consolidated Airlines Group SA

      United Kingdom        2,633,247           19,951,692   
           

 

 

  
              48,992,630   
           

 

 

  
 

Auto Components 1.3%

          
 

Cie Generale des Etablissements Michelin, B

      France        259,469           23,631,580   
           

 

 

  
 

Automobiles 2.2%

          
 

Nissan Motor Co. Ltd.

      Japan        2,342,720           20,665,596   
 

Toyota Motor Corp.

      Japan        312,490           19,710,406   
           

 

 

  
              40,376,002   
           

 

 

  
 

Banks 13.7%

          
 

Bangkok Bank PCL, fgn.

      Thailand        913,600           5,390,462   
 

BNP Paribas SA

      France        401,637           23,939,412   
 

Citigroup Inc.

      United States        770,990           41,718,269   
b  

Commerzbank AG

      Germany        547,840           7,278,493   
 

Credit Agricole SA

      France        1,640,346           21,356,648   
 

DBS Group Holdings Ltd.

      Singapore        932,690           14,502,879   
 

HSBC Holdings PLC

      United Kingdom        2,567,864           24,489,911   
b  

ING Groep NV, IDR

      Netherlands        1,482,966           19,433,231   
 

JPMorgan Chase & Co.

      United States        440,760           27,582,761   
 

KB Financial Group Inc.

      South Korea        657,984           21,747,112   
 

SunTrust Banks Inc.

      United States        478,520           20,049,988   
 

UniCredit SpA

      Italy        3,118,881           20,133,468   
           

 

 

  
              247,622,634   
           

 

 

  
 

Biotechnology 2.2%

          
 

Amgen Inc.

      United States        219,000           34,884,510   
b  

Gilead Sciences Inc.

      United States        49,050           4,623,453   
           

 

 

  
              39,507,963   
           

 

 

  
 

Capital Markets 3.2%

          
 

Credit Suisse Group AG

      Switzerland        1,026,980           25,906,919   
 

Morgan Stanley

      United States        832,180           32,288,584   
           

 

 

  
              58,195,503   
           

 

 

  
 

Chemicals 1.5%

          
 

Akzo Nobel NV

      Netherlands        397,282           27,713,001   
           

 

 

  
 

Commercial Services & Supplies 0.3%

          
 

Serco Group PLC

      United Kingdom        2,443,089           6,119,525   
           

 

 

  
 

Communications Equipment 2.2%

          
 

Cisco Systems Inc.

      United States        836,770           23,274,757   
 

Ericsson, B

      Sweden        1,291,812           15,627,760   
           

 

 

  
              38,902,517   
           

 

 

  

 

TG-10    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

 

Templeton Growth VIP Fund (continued)

 

           Country     Shares        Value  
 

Common Stocks (continued)

          
 

Construction & Engineering 0.6%

          
c  

FLSmidth & Co. AS

      Denmark        250,000         $ 11,060,293   
           

 

 

  
 

Construction Materials 1.7%

          
 

CRH PLC

      Ireland        1,290,661           31,077,825   
           

 

 

  
 

Consumer Finance 0.3%

          
 

Capital One Financial Corp.

      United States        55,980           4,621,149   
           

 

 

  
 

Diversified Telecommunication Services 3.7%

          
 

China Telecom Corp. Ltd., ADR

      China        179,195           10,520,539   
 

Singapore Telecommunications Ltd.

      Singapore        5,861,470           17,255,233   
 

Telefonica SA

      Spain        1,682,480           24,266,745   
 

Verizon Communications Inc.

      United States        158,750           7,426,325   
 

Vivendi SA

      France        286,004           7,160,081   
           

 

 

  
              66,628,923   
           

 

 

  
 

Electrical Equipment 0.2%

          
 

Dongfang Electric Corp. Ltd., H

      China        2,016,600           3,708,654   
           

 

 

  
 

Electronic Equipment, Instruments & Components 0.4%

          
b  

Flextronics International Ltd.

      Singapore        691,118           7,726,699   
           

 

 

  
 

Energy Equipment & Services 1.6%

          
 

Baker Hughes Inc.

      United States        146,590           8,219,302   
 

Noble Corp. PLC

      United States        902,230           14,949,951   
 

Paragon Offshore PLC

      United States        232,730           644,662   
b  

Saipem SpA

      Italy        158,570           1,681,738   
 

Technip SA

      France        60,350           3,608,456   
           

 

 

  
              29,104,109   
           

 

 

  
 

Food & Staples Retailing 2.8%

          
 

CVS Health Corp.

      United States        182,840           17,609,320   
b  

Metro AG

      Germany        587,740           17,999,596   
 

Tesco PLC

      United Kingdom        4,757,618           14,015,671   
           

 

 

  
              49,624,587   
           

 

 

  
 

Health Care Equipment & Supplies 3.2%

          
 

Getinge AB, B

      Sweden        925,050           21,088,829   
 

Medtronic Inc.

      United States        497,540           35,922,388   
           

 

 

  
              57,011,217   
           

 

 

  
 

Industrial Conglomerates 2.0%

          
 

Koninklijke Philips NV

      Netherlands        459,718           13,433,649   
 

Siemens AG

      Germany        201,712           22,881,705   
           

 

 

  
              36,315,354   
           

 

 

  
 

Insurance 6.2%

          
 

American International Group Inc.

      United States        569,370           31,890,414   
 

Aviva PLC

      United Kingdom        2,366,920           17,874,746   
 

AXA SA

      France        1,091,068           25,354,292   
 

Muenchener Rueckversicherungs-Gesellschaft AG

      Germany        28,871           5,790,295   
a,b  

NN Group NV, 144A

      Netherlands        276,400           8,309,261   
 

Swiss Re AG

      Switzerland        270,006           22,717,765   
           

 

 

  
              111,936,773   
           

 

 

  

 

    Annual Report     TG-11   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

 

Templeton Growth VIP Fund (continued)

 

           Country     Shares        Value  
 

Common Stocks (continued)

          
 

Life Sciences Tools & Services 0.5%

          
b  

QIAGEN NV

      Netherlands        385,000         $ 9,018,856   
           

 

 

  
 

Machinery 1.1%

          
b  

Navistar International Corp.

      United States        598,440           20,035,771   
           

 

 

  
 

Media 4.8%

          
 

Comcast Corp., Special A

      United States        710,142           40,879,324   
b  

News Corp., A

      United States        319,435           5,011,935   
 

Sky PLC

      United Kingdom        721,063           10,104,049   
 

Twenty-First Century Fox Inc., A

      United States        641,182           24,624,595   
 

The Walt Disney Co.

      United States        64,060           6,033,811   
           

 

 

  
              86,653,714   
           

 

 

  
 

Metals & Mining 1.8%

          
 

Mining and Metallurgical Co. Norilsk Nickel OJSC, ADR

      Russia        1,040,760           14,799,607   
 

POSCO

      South Korea        63,730           16,052,530   
 

POSCO, ADR

      South Korea        27,740           1,770,089   
           

 

 

  
              32,622,226   
           

 

 

  
 

Multiline Retail 0.8%

          
 

Target Corp.

      United States        191,680           14,550,429   
           

 

 

  
 

Oil, Gas & Consumable Fuels 9.6%

          
 

BP PLC

      United Kingdom        2,807,128           17,983,183   
 

Chevron Corp.

      United States        137,470           15,421,384   
 

China Shenhua Energy Co. Ltd., H

      China        5,271,520           15,568,556   
 

Eni SpA

      Italy        776,759           13,637,635   
 

Galp Energia SGPS SA, B

      Portugal        1,575,520           16,072,683   
 

Kunlun Energy Co. Ltd.

      China        15,089,830           14,323,171   
 

Royal Dutch Shell PLC, B

      United Kingdom        299,573           10,426,869   
 

Talisman Energy Inc.

      Canada        4,745,780           37,189,751   
 

Total SA, B

      France        618,659           31,829,510   
           

 

 

  
              172,452,742   
           

 

 

  
 

Pharmaceuticals 11.6%

          
b  

Actavis PLC

      United States        56,124           14,446,879   
 

GlaxoSmithKline PLC

      United Kingdom        1,103,090           23,658,756   
 

Merck & Co. Inc.

      United States        304,971           17,319,303   
 

Merck KGaA

      Germany        229,554           21,781,965   
 

Pfizer Inc.

      United States        1,111,443           34,621,450   
 

Roche Holding AG

      Switzerland        115,383           31,323,548   
 

Sanofi

      France        290,857           26,627,551   
 

Teva Pharmaceutical Industries Ltd., ADR

      Israel        688,930           39,620,364   
           

 

 

  
              209,399,816   
           

 

 

  
 

Professional Services 0.0%†

          
 

Hays PLC

      United Kingdom        2,280           5,174   
           

 

 

  
 

Software 3.4%

          
 

Microsoft Corp.

      United States        1,177,169           54,679,500   
 

SAP SE

      Germany        80,912           5,703,859   
           

 

 

  
              60,383,359   
           

 

 

  
 

Specialty Retail 2.0%

          
 

Best Buy Co. Inc.

      United States        277,560           10,819,289   
 

Kingfisher PLC

      United Kingdom        4,891,448           25,960,740   
           

 

 

  
              36,780,029   
           

 

 

  

 

TG-12    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

STATEMENT OF INVESTMENTS

Templeton Growth VIP Fund (continued)

           Country     Shares        Value  
 

Common Stocks (continued)

          
 

Technology Hardware, Storage & Peripherals 5.3%

          
 

Hewlett-Packard Co.

      United States        1,036,700         $ 41,602,771   
 

Samsung Electronics Co. Ltd.

      South Korea        45,020           54,620,337   
           

 

 

  
              96,223,108   
           

 

 

  
 

Wireless Telecommunication Services 2.1%

          
 

Mobile TeleSystems, ADR

      Russia        70,713           507,719   
b  

Turkcell Iletisim Hizmetleri AS, ADR

      Turkey        1,647,543           24,910,850   
 

Vodafone Group PLC

      United Kingdom        3,292,417           11,426,154   
           

 

 

  
              36,844,723   
           

 

 

  
 

Total Common Stocks (Cost $1,395,816,925)

             1,752,655,957   
           

 

 

  
 

Preferred Stocks (Cost $18,040,759) 0.6%

          
 

Oil, Gas & Consumable Fuels 0.6%

          
 

Petroleo Brasileiro SA, ADR, pfd.

      Brazil        1,317,392           9,985,831   
           

 

 

  
 

Total Investments before Short Term Investments
(Cost $1,413,857,684)

            1,762,641,788   
           

 

 

  
               Principal Amount*           
 

Short Term Investments 2.8%

          
 

Time Deposits 2.2%

          
 

Bank of Montreal, 0.03%, 1/02/15

      Canada        12,000,000           12,000,000   
 

Bank of Nova Scotia, 0.04%, 1/02/15

      United States        14,000,000           14,000,000   
 

Royal Bank of Canada, 0.03%, 1/02/15

      Canada        14,000,000           14,000,000   
           

 

 

  
 

Total Time Deposits (Cost $40,000,000)

            40,000,000   
           

 

 

  
 

Total Investments before Money Market Funds
(Cost $1,453,857,684)

             1,802,641,788   
           

 

 

  
               Shares           
d  

Investments from Cash Collateral Received for Loaned Securities (Cost $11,687,500) 0.6%

          
 

Money Market Funds 0.6%

          
e  

BNY Mellon Overnight Government Fund, 0.072%

      United States        11,687,500           11,687,500   
           

 

 

  
 

Total Investments (Cost $1,465,545,184) 100.5%

             1,814,329,288   
 

Other Assets, less Liabilities (0.5)%

             (9,584,712 ) 
           

 

 

  
 

Net Assets 100.0%

           $ 1,804,744,576   
           

 

 

  

See Abbreviations on page TG-24.

†Rounds to less than 0.1% of net assets.

*The principal amount is stated in U.S. dollars unless otherwise indicated.

aSecurity was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be sold in transactions exempt from registration only to qualified institutional buyers or in a public offering registered under the Securities Act of 1933. These securities have been deemed liquid under guidelines approved by the Trust’s Board of Trustees. At December 31, 2014, the aggregate value of these securities was $11,265,994, representing 0.62% of net assets.

bNon-income producing.

cA portion or all of the security is on loan at December 31, 2014. See Note 1(c).

dSee Note 1(c) regarding securities on loan.

eThe rate shown is the annualized seven-day yield at period end.

 

    The accompanying notes are an integral part of these financial statements.    |   Annual Report     TG-13   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

Financial Statements

Statement of Assets and Liabilities

December 31, 2014

 

      Templeton Growth
VIP Fund		  

Assets:

   

Investments in securities:

   

Cost

    $ 1,465,545,184   
  

 

 

  

Value (Includes securities loaned in the amount of $11,060,293)

    $ 1,814,329,288   

Cash

      637,065   

Receivables:

   

Investment securities sold

      893,948   

Capital shares sold

      56,949   

Dividends and interest

      3,527,056   

Other assets

      178   
  

 

 

  

Total assets

      1,819,444,484   
  

 

 

  

Liabilities:

   

Payables:

   

Investment securities purchased

      351,460   

Capital shares redeemed

      542,498   

Management fees

      1,174,814   

Distribution fees

      533,118   

Payable upon return of securities loaned

      11,687,500   

Accrued expenses and other liabilities

      410,518   
  

 

 

  

Total liabilities

      14,699,908   
  

 

 

  

Net assets, at value

    $ 1,804,744,576   
  

 

 

  

Net assets consist of:

   

Paid-in capital

    $ 1,500,964,915   

Undistributed net investment income

      44,589,038   

Net unrealized appreciation (depreciation)

      348,736,638   

Accumulated net realized gain (loss)

      (89,546,015 ) 
  

 

 

  

Net assets, at value

    $ 1,804,744,576   
  

 

 

  
Class 1:   

Net assets, at value

    $ 572,859,920   
  

 

 

  

Shares outstanding

      38,575,054   
  

 

 

  

Net asset value and maximum offering price per share

    $ 14.85   
  

 

 

  
Class 2:   

Net assets, at value

    $ 1,171,895,526   
  

 

 

  

Shares outstanding

      80,202,282   
  

 

 

  

Net asset value and maximum offering price per share

    $ 14.61   
  

 

 

  
Class 4:   

Net assets, at value

    $ 59,989,130   
  

 

 

  

Shares outstanding

      4,072,480   
  

 

 

  

Net asset value and maximum offering price per share

    $ 14.73   
  

 

 

  

 

TG-14    Annual Report   |    The accompanying notes are an integral part of these financial statements.    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FINANCIAL STATEMENTS

Statement of Operations

for the year ended December 31, 2014

 

      Templeton Growth
VIP Fund		  

Investment income:

   

Dividends (net of foreign taxes of $4,294,947)

    $ 63,974,034   

Interest

      11,444   

Income from securities loaned

      1,115,554   
  

 

 

  

Total investment income

      65,101,032   
  

 

 

  

Expenses:

   

Management fees (Note 3a)

      15,167,256   

Distribution fees: (Note 3c)

   

Class 2

      3,356,502   

Class 4

      237,543   

Custodian fees (Note 4)

      143,548   

Reports to shareholders

      316,235   

Professional fees

      74,729   

Trustees’ fees and expenses

      8,173   

Other

      53,303   
  

 

 

  

Total expenses

      19,357,289   
  

 

 

  

Net investment income

      45,743,743   
  

 

 

  

Realized and unrealized gains (losses):

   

Net realized gain (loss) from:

   

Investments:

   

Unaffiliated issuers

      104,727,236   

Non-controlled affiliated issuers (Note 8)

      773,990   

Foreign currency transactions

      (6,005 ) 
  

 

 

  

Net realized gain (loss)

      105,495,221   
  

 

 

  

Net change in unrealized appreciation (depreciation) on:

   

Investments

      (200,399,842 ) 

Translation of other assets and liabilities denominated in foreign currencies

      (94,980 ) 
  

 

 

  

Net change in unrealized appreciation (depreciation)

      (200,494,822 ) 
  

 

 

  

Net realized and unrealized gain (loss)

      (94,999,601 ) 
  

 

 

  

Net increase (decrease) in net assets resulting from operations

    $ (49,255,858 ) 
  

 

 

  

 

    The accompanying notes are an integral part of these financial statements.    |   Annual Report     TG-15   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

FINANCIAL STATEMENTS

Statements of Changes in Net Assets

 

    Templeton Growth VIP Fund  
    Year Ended December 31,  
     2014        2013  

Increase (decrease) in net assets:

       

Operations:

       

Net investment income

   $ 45,743,743         $ 28,850,993   

Net realized gain (loss) from investments and foreign currency transactions

     105,495,221           98,725,339   

Net change in unrealized appreciation (depreciation) on investments and translation of other assets and liabilities denominated in foreign currencies

     (200,494,822 )         412,375,570   
 

 

 

  

Net increase (decrease) in net assets resulting from operations

     (49,255,858 )         539,951,902   
 

 

 

  

Distributions to shareholders from:

       

Net investment income:

       

Class 1

     (9,482,577 )         (15,214,157 ) 

Class 2

     (18,300,865 )         (38,639,867 ) 

Class 4

     (885,005 )         (1,946,523 ) 
 

 

 

  

Total distributions to shareholders

     (28,668,447 )         (55,800,547 ) 
 

 

 

  

Capital share transactions: (Note 2)

       

Class 1

     9,471,206           (17,266,459 ) 

Class 2

     (227,816,318 )         (240,507,877 ) 

Class 4

     (10,381,665 )         (11,647,677 ) 
 

 

 

  

Total capital share transactions

     (228,726,777 )         (269,422,013 ) 
 

 

 

  

Net increase (decrease) in net assets

     (306,651,082 )         214,729,342   

Net assets:

       

Beginning of year

     2,111,395,658           1,896,666,316   
 

 

 

  

End of year

   $ 1,804,744,576         $ 2,111,395,658   
 

 

 

  

Undistributed net investment income included in net assets:

       

End of year

   $ 44,589,038         $ 26,566,772   
 

 

 

  

 

TG-16    Annual Report   |    The accompanying notes are an integral part of these financial statements.    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

Notes to Financial Statements

Templeton Growth VIP Fund

1. Organization and Significant Accounting Policies

Franklin Templeton Variable Insurance Products Trust (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end management investment company, consisting of nineteen separate funds and applies the specialized accounting and reporting guidance in U.S. Generally Accepted Accounting Principles (U.S. GAAP). Templeton Growth VIP Fund (Fund) is included in this report. The financial statements of the remaining funds in the Trust are presented separately. Shares of the Fund are generally sold only to insurance company separate accounts to fund the benefits of variable life insurance policies or variable annuity contracts. The Fund offers three classes of shares: Class 1, Class 2, and Class 4. Each class of shares differs by its distribution fees, voting rights on matters affecting a single class and its exchange privilege.

Effective May 1, 2014, Templeton Growth Securities Fund was renamed Templeton Growth VIP Fund.

The following summarizes the Fund’s significant accounting policies.

a. Financial Instrument Valuation

The Fund’s investments in financial instruments are carried at fair value daily. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. The Fund calculates the net asset value (NAV) per share at the close of the New York Stock Exchange (NYSE), generally at 4 p.m. Eastern time (NYSE close) on each day the NYSE is open for trading. Under compliance policies and procedures approved by the Trust’s Board of Trustees (the Board), the Fund’s administrator has responsibility for oversight of valuation, including leading the cross-functional Valuation and Liquidity Oversight Committee (VLOC). The VLOC provides administration and oversight of the Fund’s valuation policies and procedures, which are approved annually by the Board. Among other things, these procedures allow the Fund to utilize independent pricing services, quotations from securities and financial instrument dealers, and other market sources to determine fair value.

Equity securities listed on an exchange or on the NASDAQ National Market System are valued at the last quoted sale price or the official closing price of the day, respectively. Foreign equity securities are valued as of the close of trading on the foreign stock exchange on which the security is primarily traded or as of the NYSE close, whichever is earlier. The value is then

converted into its U.S. dollar equivalent at the foreign exchange rate in effect at the NYSE close on the day that the value of the security is determined. Over-the-counter (OTC) securities are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. Certain equity securities are valued based upon fundamental characteristics or relationships to similar securities. Investments in non-registered money market funds are valued at the closing NAV. Time deposits are valued at cost, which approximates fair value.

The Fund has procedures to determine the fair value of financial instruments for which market prices are not reliable or readily available. Under these procedures, the VLOC convenes on a regular basis to review such financial instruments and considers a number of factors, including significant unobservable valuation inputs, when arriving at fair value. The VLOC primarily employs a market-based approach which may use related or comparable assets or liabilities, recent transactions, market multiples, book values, and other relevant information for the investment to determine the fair value of the investment. An income-based valuation approach may also be used in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the investments. Due to the inherent uncertainty of valuations of such investments, the fair values may differ significantly from the values that would have been used had an active market existed. The VLOC employs various methods for calibrating these valuation approaches including a regular review of key inputs and assumptions, transactional back-testing or disposition analysis, and reviews of any related market activity.

Trading in securities on foreign securities stock exchanges and OTC markets may be completed before the daily NYSE close. In addition, trading in certain foreign markets may not take place on every NYSE business day. Occasionally, events occur between the time at which trading in a foreign security is completed and the close of the NYSE that might call into question the reliability of the value of a portfolio security held by the Fund. As a result, differences may arise between the value of the Fund’s portfolio securities as determined at the foreign market close and the latest indications of value at the close of the NYSE. In order to minimize the potential for these differences, the VLOC monitors price movements following the close of trading in foreign stock markets through a series of country specific market proxies (such

 

 

    Annual Report     TG-17   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Templeton Growth VIP Fund (continued)

1. Organization and Significant Accounting

Policies (continued)

a. Financial Instrument Valuation (continued)

as baskets of American Depositary Receipts, futures contracts and exchange traded funds). These price movements are measured against established trigger thresholds for each specific market proxy to assist in determining if an event has occurred that may call into question the reliability of the values of the foreign securities held by the Fund. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services.

Also, when the last day of the reporting period is a non-business day, certain foreign markets may be open on those days that the NYSE is closed, which could result in differences between the value of the Fund’s portfolio securities on the last business day and the last calendar day of the reporting period. Any significant security valuation changes due to an open foreign market are adjusted and reflected by the Fund for financial reporting purposes.

b. Foreign Currency Translation

Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. The Fund may enter into foreign currency exchange contracts to facilitate transactions denominated in a foreign currency. Purchases and sales of securities, income and expense items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. Portfolio securities and assets and liabilities denominated in foreign currencies contain risks that those currencies will decline in value relative to the U.S. dollar. Occasionally, events may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the Board.

The Fund does not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments on the Statement of Operations.

Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the

difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period.

c. Securities Lending

The Fund participates in an agency based securities lending program. The Fund receives cash collateral against the loaned securities in an amount equal to at least 102% of the fair value of the loaned securities. Collateral is maintained over the life of the loan in an amount not less than 100% of the fair value of loaned securities, as determined at the close of fund business each day; any additional collateral required due to changes in security values is delivered to the Fund on the next business day. The collateral is invested in a non-registered money fund as indicated on the Statement of Investments. The Fund receives income from the investment of cash collateral, in addition to lending fees and rebates paid by the borrower. The Fund bears the market risk with respect to the collateral investment, securities loaned, and the risk that the agent may default on its obligations to the Fund. The securities lending agent has agreed to indemnify the Fund in the event of default by a third party borrower.

d. Income and Deferred Taxes

It is the Fund’s policy to qualify as a regulated investment company under the Internal Revenue Code. The Fund intends to distribute to shareholders substantially all of its taxable income and net realized gains to relieve it from federal income and if applicable, excise taxes. As a result, no provision for U.S. federal income taxes is required.

The Fund may be subject to foreign taxation related to income received, capital gains on the sale of securities and certain foreign currency transactions in the foreign jurisdictions in which it invests. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist in the foreign markets in which the Fund invests. When a capital gain tax is determined to apply the Fund records an estimated deferred tax liability in an amount that would be payable if the securities were disposed of on the valuation date. As a result of several court cases, in certain countries across the European Union, the Fund has filed additional tax reclaims for previously withheld taxes on dividends earned in those countries. These additional filings are subject to various administrative proceedings by the local jurisdictions’ tax authorities within the

 

TG-18    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Templeton Growth VIP Fund (continued)

European Union, as well as a number of related judicial proceedings. At this time, uncertainty exists as to the ultimate resolution of these proceedings, the likelihood of receipt of these reclaims, and the potential timing of payment and accordingly, no amounts are reflected in the financial statements.

The Fund recognizes the tax benefits of uncertain tax positions only when the position is “more likely than not” to be sustained upon examination by the tax authorities based on the technical merits of the tax position. As of December 31, 2014, and for all open tax years, the Fund has determined that no liability for unrecognized tax benefits is required in the Fund’s financial statements related to uncertain tax positions taken on a tax return (or expected to be taken on future tax returns). Open tax years are those that remain subject to examination and are based on each tax jurisdiction statute of limitation.

e. Security Transactions, Investment Income, Expenses and Distributions

Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a

specific identification basis. Interest income and estimated expenses are accrued daily. Dividend income is recorded on the ex-dividend date except for certain foreign securities where the dividend rate is not available. In such cases the dividend is recorded as soon as the information is received by the fund. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with U.S. GAAP. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net

assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods.

Common expenses incurred by the Trust are allocated among the funds based on the ratio of net assets of each fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense.

Realized and unrealized gains and losses and net investment income, not including class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions, by class, are generally due to differences in class specific expenses.

f. Accounting Estimates

The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates.

g. Guarantees and Indemnifications

Under the Trust’s organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, on behalf of the Fund, enters into contracts with service providers that contain general indemnification clauses. The Trust’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote.

 

2. Shares of Beneficial Interest

At December 31, 2014, there were an unlimited number of shares authorized (without par value). Transactions in the Fund’s shares were as follows:

 

     Year Ended December 31,  
     2014          2013  
      Shares      Amount           Shares      Amount  
Class 1 Shares:              

Shares sold

      2,100,767       $ 33,047,439           896,927       $ 12,053,666   

Shares issued in reinvestment of distributions

      589,713         9,482,577           1,149,106         15,214,157   

Shares redeemed

      (2,142,457 )       (33,058,810 )         (3,250,296 )       (44,534,282 ) 
  

 

 

  

Net increase (decrease)

      548,023       $ 9,471,206           (1,204,263 )     $ (17,266,459 ) 
  

 

 

  

 

    Annual Report     TG-19   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

 

Templeton Growth VIP Fund (continued)

 

2. Shares of Beneficial Interest (continued)

 

     Year Ended December 31,  
     2014          2013  
      Shares      Amount           Shares      Amount  
Class 2 Shares:              

Shares sold

      2,721,083       $ 41,308,837           7,540,783       $ 101,234,976   

Shares issued in reinvestment of distributions

      1,155,358         18,300,865           2,963,180         38,639,867   

Shares redeemed

      (18,911,727 )       (287,426,020 )         (28,236,625 )       (380,382,720 ) 
  

 

 

  

Net increase (decrease)

      (15,035,286 )     $ (227,816,318 )         (17,732,662 )     $ (240,507,877 ) 
  

 

 

  
Class 4 Shares:              

Shares sold

      416,620       $ 6,355,215           683,745       $ 9,107,528   

Shares issued on reinvestment of distributions

      55,382         885,005           147,912         1,946,523   

Shares redeemed

      (1,134,025 )       (17,621,885 )         (1,660,931 )       (22,701,728 ) 
  

 

 

  

Net increase (decrease)

      (662,023 )     $ (10,381,665 )         (829,274 )     $ (11,647,677 ) 
  

 

 

  

3. Transactions With Affiliates

Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Fund are also officers and/or directors of the following subsidiaries:

 

Subsidiary    Affiliation

Templeton Global Advisors Limited (TGAL)

   

Investment manager

Franklin Templeton Services, LLC (FT Services)

   

Administrative manager

Franklin Templeton Distributors, Inc. (Distributors)

   

Principal underwriter

Franklin Templeton Investor Services, LLC (Investor Services)

   

Transfer agent

a. Management Fees

The Fund pays an investment management fee to TGAL based on the average daily net assets of the Fund as follows:

 

Annualized Fee Rate    Net Assets

1.000%

   

Up to and including $100 million

0.900%

   

Over $100 million, up to and including $250 million

0.800%

   

Over $250 million, up to and including $500 million

0.750%

   

Over $500 million, up to and including $1 billion

0.700%

   

Over $1 billion, up to and including $5 billion

0.675%

   

Over $5 billion, up to and including $10 billion

0.655%

   

Over $10 billion, up to and including $15 billion

0.635%

   

Over $15 billion, up to and including $20 billion

0.615%

   

In excess of $20 billion

b. Administrative Fees

Under an agreement with TGAL, FT Services provides administrative services to the Fund. The fee is paid by TGAL based on the Fund’s average daily net assets, and is not an additional expense of the Fund.

 

TG-20    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Templeton Growth VIP Fund (continued)

c. Distribution Fees

The Board has adopted distribution plans for Class 2 and Class 4 shares pursuant to Rule 12b-1 under the 1940 Act. Under the Fund’s compensation distribution plans, the Fund pays Distributors for costs incurred in connection with the servicing, sale and distribution of the Fund’s shares up to 0.35% per year of its average daily net assets of each class. Some distribution fees are not charged on shares held by affiliates. The Board has agreed to limit the current rate to 0.25% per year for Class 2. The plan year, for purposes of monitoring compliance with the maximum annual plan rates, is February 1 through January 31.

d. Transfer Agent Fees

Investor Services, under terms of an agreement, performs shareholder servicing for the Fund and is not paid by the Fund for the services.

e. Other Affiliated Transactions

At December 31, 2014, Franklin Templeton Variable Insurance Products Trust – Franklin Founding Funds Allocation VIP Fund owned 22.87% of the Fund’s outstanding shares.

4. Expense Offset Arrangement

The Fund has entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Fund’s custodian expenses. During the year ended December 31, 2014, there were no credits earned.

5. Income Taxes

For tax purposes, capital losses may be carried over to offset future capital gains. Capital loss carryforwards with no expiration, if any, must be fully utilized before those losses with expiration dates.

At December 31, 2014, capital loss carryforwards were as follows:

 

Capital loss carryforwards subject to expiration:

   

2017

    $ 16,985,638   

2018

      55,299,629   
  

 

 

  

Total capital loss carryforwards

    $ 72,285,267   
  

 

 

  

During the year ended December 31, 2014, the Fund utilized $100,617,302 of capital loss carryforwards.

The tax character of distributions paid during the years ended December 31, 2014 and 2013, was as follows:

 

     2014     2013  

Distributions paid from ordinary income

    $ 28,668,447      $ 55,800,547   
  

 

 

  

 

    Annual Report     TG-21   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Templeton Growth VIP Fund (continued)

5. Income Taxes (continued)

At December 31, 2014, the cost of investments net unrealized appreciation (depreciation), and undistributed ordinary income for income tax purposes were as follows:

 

Cost of investments

    $ 1,482,805,931   
  

 

 

  

Unrealized appreciation

    $ 461,615,214   

Unrealized depreciation

      (130,091,857 ) 
  

 

 

  

Net unrealized appreciation (depreciation)

    $ 331,523,357   
  

 

 

  

Distributable earnings – undistributed ordinary income

    $ 44,589,039   
  

 

 

  

Differences between income and/or capital gains as determined on a book basis and a tax basis are primarily due to differing treatments of foreign currency transactions, passive foreign investment company shares and wash sales.

6. Investment Transactions

Purchases and sales of investments (excluding short term securities) for the year ended December 31, 2014, aggregated $345,290,172 and $558,996,224, respectively.

7. Concentration of Risk

Investing in foreign securities may include certain risks and considerations not typically associated with investing in U.S. securities, such as fluctuating currency values and changing local and regional economic, political and social conditions, which may result in greater market volatility. In addition, certain foreign securities may not be as liquid as U.S. securities.

8. Holdings of 5% Voting Securities of Portfolio Companies

The 1940 Act defines “affiliated companies” to include investments in portfolio companies in which a fund owns 5% or more of the outstanding voting securities. Investments in “affiliated companies” for the Fund for the year ended December 31, 2014, were as shown below.

 

Name of Issuer    Number of Shares
Held at Beginning
of Year		      Gross
Additions		      Gross
Reductions		    

Number of Shares
Held at End

of Year

      Value at
End of
Year		      Investment
Income		      Realized Capital
Gain (Loss)		  
Non-Controlled Affiliates                    

Templeton China Opportunities Fund Ltd., Reg D (Value is —% of Net Assets)

      1,195,196         —         (1,195,196 )      —       $  —       $  —       $ 773,990   
             

 

 

  

9. Credit Facility

The Fund, together with other U.S. registered and foreign investment funds (collectively, Borrowers), managed by Franklin Templeton Investments, are borrowers in a joint syndicated senior unsecured credit facility totaling $1.5 billion (Global Credit Facility) which matured on February 13, 2015. This Global Credit Facility provides a source of funds to the Borrowers for temporary and emergency purposes, including the ability to meet future unanticipated or unusually large redemption requests. The Borrowers expect to renew the Global Credit Facility for a total of $2 billion effective February 13, 2015, which matures on February 12, 2016.

Under the terms of the Global Credit Facility, the Fund shall, in addition to interest charged on any borrowings made by the Fund and other costs incurred by the Fund, pay its share of fees and expenses incurred in connection with the implementation and maintenance of the Global Credit Facility, based upon its relative share of the aggregate net assets of all of the Borrowers, including an

 

TG-22    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

Templeton Growth VIP Fund (continued)

annual commitment fee of 0.07% based upon the unused portion of the Global Credit Facility. These fees are reflected in other expenses on the Statement of Operations. During the year ended December 31, 2014, the Fund did not use the Global Credit Facility.

10. Fair Value Measurements

The Fund follows a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Fund’s own market assumptions (unobservable inputs). These inputs are used in determining the value of the Fund’s financial instruments and are summarized in the following fair value hierarchy:

 

  •   Level 1 – quoted prices in active markets for identical financial instruments
  •   Level 2 – other significant observable inputs (including quoted prices for similar financial instruments, interest rates, prepayment speed, credit risk, etc.)
  •   Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of financial instruments)

The input levels are not necessarily an indication of the risk or liquidity associated with financial instruments at that level.

For movements between the levels within the fair value hierarchy, the Fund has adopted a policy of recognizing the transfers as of the date of the underlying event which caused the movement.

A summary of inputs used as of December 31, 2014, in valuing the Fund’s assets carried at fair value, is as follows:

 

      Level 1     Level 2     Level 3     Total  
Assets:         

Investments in Securities:

         

Equity Investmentsa,b

    $ 1,762,641,788      $ —      $  —      $ 1,762,641,788   

Short Term Investments

      —        51,687,500        —        51,687,500   
  

 

 

  

Total Investments in Securities

    $ 1,762,641,788     $ 51,687,500     $ —      $ 1,814,329,288   
  

 

 

  

aIncludes common and preferred stocks.

bFor detailed categories, see the accompanying Statement of Investments.

11. New Accounting Pronouncements

In June 2014, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2014-11, Transfers and Servicing (Topic 860), Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. The ASU changes the accounting for certain repurchase agreements and expands disclosure requirements related to repurchase agreements, securities lending, repurchase-to-maturity and similar transactions. The ASU is effective for interim and annual reporting periods beginning after December 15, 2014. Management has reviewed the requirements and believes the adoption of this ASU will not have a material impact on the financial statements.

12. Subsequent Events

The Fund has evaluated subsequent events through the issuance of the financial statements and determined that no events have occurred that require disclosure other than those already disclosed in the financial statements.

 

    Annual Report     TG-23   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

NOTES TO FINANCIAL STATEMENTS

 

Templeton Growth VIP Fund (continued)

 

Abbreviations

 

Selected Portfolio
ADR   American Depositary Receipt
IDR   International Depositary Receipt

 

TG-24    Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

Report of Independent Registered Public Accounting Firm

Templeton Growth VIP Fund

To the Board of Trustees and Shareholders of Franklin Templeton Variable Insurance Products Trust

In our opinion, the accompanying statement of assets and liabilities, including the statement of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Templeton Growth VIP Fund (the “Fund”) at December 31, 2014, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements 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 are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2014 by correspondence with the custodian, transfer agent and brokers, provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP

San Francisco, California

February 13, 2015

 

    Annual Report     TG-25   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

Tax Information (unaudited)

Templeton Growth VIP Fund

Under Section 854(b)(1)(A) of the Internal Revenue Code (Code), the Fund hereby reports 38.13% of the ordinary income dividends as income qualifying for the dividends received deduction for the fiscal year ended December 31, 2014.

At December 31, 2014, more than 50% of the Fund’s total assets were invested in securities of foreign issuers. In most instances, foreign taxes were withheld from income paid to the Fund on these investments. The Fund elects to treat foreign taxes paid as allowed under Section 853 of the Code. This election will allow shareholders of record as of the 2015 distribution date, to treat their proportionate share of foreign taxes paid by the Fund as having been paid directly by them. The shareholder shall consider these amounts as foreign taxes paid in the tax year in which they receive the Fund distribution.

 

  TG-26       Annual Report    

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

Index Descriptions

The indexes are unmanaged and include reinvested distributions.

For Russell Indexes: Russell Investment Group is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of Russell Investment Group.

See www.franklintempletondatasources.com for additional data provider information.

Barclays U.S. Aggregate Index is a market capitalization-weighted index representing the U.S. investment-grade, fixed-rate, taxable bond market with index components for government and corporate, mortgage pass-through and asset-backed securities. All issues included are SEC registered, taxable, dollar denominated and nonconvertible, must have at least one year to final maturity and must be rated investment grade (Baa3/BBB-/BBB- or higher) using the middle rating of Moody’s, Standard & Poor’s and Fitch, respectively.

Barclays U.S. Government Index: Intermediate Component is the intermediate component of the Barclays U.S. Government Index, which includes public obligations of the U.S. Treasury with at least one year to final maturity and publicly issued debt of U.S. government agencies, quasi-federal corporations, and corporate or foreign debt guaranteed by the U.S. government.

Bloomberg Commodity Index consists of exchanged-traded futures on physical commodities weighted to account for economic significance and market liquidity. Prior to 7/1/14, the index was known as the Dow Jones-UBS Commodity Index.

Citigroup World Government Bond Index is a market capitalization-weighted index consisting of investment-grade world government bond markets.

Consumer Price Index (CPI) is a commonly used measure of the inflation rate.

Credit Suisse (CS) High Yield Index is designed to mirror the investable universe of the U.S. dollar-denominated high yield debt market.

Dow Jones Industrial Average is a price-weighted average of blue-chip stocks that are generally the leaders in their industry.

FTSE® EPRA®/NAREIT® Developed Index is a free float-adjusted index designed to measure the performance of publicly traded real estate securities in the North American, European and Asian real estate markets.

J.P. Morgan (JPM) Global Government Bond Index (GGBI) tracks total returns for liquid, fixed-rate, domestic government bonds with maturities greater than one year issued by developed countries globally.

Lipper Multi-Sector Income Funds Classification Average is calculated by averaging the total returns of all funds within the Lipper Multi-Sector Income Funds classification in the Lipper Open-End underlying funds universe. Lipper Multi-Sector Income Funds are defined as funds that seek current income by allocating assets among different fixed income securities sectors (not primarily in one sector except for defensive purposes), including U.S. and foreign governments, with a significant portion rated below investment grade. For the 12-month period ended 12/31/14, there were 246 funds in this category. Lipper calculations do not include contract fees, expenses or sales charges, and may have been different if such charges had been considered.

Lipper VIP Equity Income Funds Classification Average is an equally weighted average calculation of performance figures for all funds within the Lipper Equity Income Funds classification in the Lipper VIP underlying funds universe. Lipper Equity Income Funds seek relatively high current income and growth of income through investing 60% or more of their portfolios in equities. For the 12-month period ended 12/31/14, there were 64 funds in this category. Lipper calculations do not include contract fees, expenses or sales charges, and may have been different if such charges had been considered.

Lipper VIP General U.S. Government Funds Classification Average is an equally weighted average calculation of performance figures for all funds within the Lipper General U.S. Government Funds classification in the Lipper VIP underlying funds universe. Lipper General U.S. Government Funds invest primarily in U.S. government and agency issues. For the 12-month period ended 12/31/14, there were 50 funds in this category. Lipper calculations do not include contract fees, expenses or sales charges, and may have been different if such charges had been considered.

Lipper VIP High Yield Funds Classification Average is an equally weighted average calculation of performance figures for all funds within the Lipper High Yield Funds Classification in the Lipper VIP underlying funds universe. Lipper High Yield Funds aim at high (relative) current yield from fixed income securities, have no quality or maturity restrictions, and tend to invest in lower grade debt issues. For the 12-month period

 

 

    Annual Report     I-1   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

INDEX DESCRIPTIONS

ended 12/31/14, there were 112 funds in this category. Lipper calculations do not include contract fees, expenses or sales charges, and may have been different if such charges had been considered.

MSCI All Country World Index (ACWI) is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in global developed and emerging markets.

MSCI Emerging Markets (EM) Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in global emerging markets.

MSCI Europe, Australasia, Far East (EAFE) Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in global developed markets excluding the U.S. and Canada.

MSCI World Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in global developed markets.

Russell 1000® Growth Index is market capitalization weighted and measures performance of those Russell 1000® Index companies with higher price-to-book ratios and higher forecasted growth values.

Russell 1000® Index is market capitalization weighted and measures performance of the largest companies in the Russell 3000® Index, which represents the majority of the U.S. market’s total capitalization.

Russell 2500™ Index is market capitalization weighted and measures performance of the smallest companies in the Russell 3000® Index, which represent a modest amount of the Russell 3000® Index’s total market capitalization.

Russell 2500™ Value Index is market capitalization weighted and measures performance of those Russell 2500 TM Index companies with lower price-to-book ratios and lower forecasted growth values.

Russell 3000® Growth Index is market capitalization weighted and measures performance of those Russell 3000® Index companies with higher price-to-book ratios and higher forecasted growth values.

Russell 3000® Index is market capitalization weighted and measures performance of the largest U.S. companies based on total market capitalization and represents the majority of the investable U.S. equity market.

Russell Midcap® Growth Index is market capitalization weighted and measures performance of those Russell Midcap® Index companies with higher price-to-book ratios and higher forecasted growth values.

Russell Midcap® Index is market capitalization weighted and measures performance of the smallest companies in the Russell 1000® Index, which represent a modest amount of the Russell 1000® Index’s total market capitalization.

Standard & Poor’s® 500 Index (S&P 500®) is a market capitalization-weighted index of 500 stocks designed to measure total U.S. equity market performance.

Standard & Poor’s®/International Finance Corporation Investable (S&P/IFCI) Composite Index is a free float-adjusted, market capitalization-weighted index designed to measure equity performance in global emerging markets.

 

 

I-2    Annual Report    

Board Members and Officers

The name, year of birth and address of the officers and board members, as well as their affiliations, positions held with the Trust, principal occupation during at least the past five years and number of portfolios overseen in the Franklin Templeton Investments fund complex are shown below. Generally, each board member serves until that person’s successor is elected and qualified.

Independent Board Members

 

 

Name, Year of Birth
and Address		   Position    Length of
Time Served		    Number of Portfolios in
Fund Complex Overseen
by Board Member*		    Other Directorships Held During
at Least the Past 5 Years

Harris J. Ashton (1932)

One Franklin Parkway

San Mateo, CA 94403-1906

   Trustee    Since 1988    137    Bar-S Foods (meat packing company) (1981-2010).
Principal Occupation During at Least the Past 5 Years:
Director of various companies; and formerly, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and President, Chief Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until 1998).

Mary C. Choksi (1950)

One Franklin Parkway

San Mateo, CA 94403-1906

   Trustee    Since October 2014    111    Avis Budget Group Inc. (car rental), Omnicom Group Inc. (advertising and marketing communications services) and H.J. Heinz Company (processed foods and allied products) (1998-2006).
Principal Occupation During at Least the Past 5 Years:
Founding Partner and Senior Managing Director, Strategic Investment Group (investment management group) (1987-present); director of various companies; and formerly, Founding Partner and Managing Director, Emerging Markets Management LLC (investment management firm) (1987-2011); Loan Officer/Senior Loan Officer/Senior Pension Investment Officer, World Bank Group (international financial institution) (1977-1987).

Sam Ginn (1937)

One Franklin Parkway

San Mateo, CA 94403-1906

   Trustee    Since 2007    111    ICO Global Communications (Holdings) Limited (satellite company) (2006-2010), Chevron Corporation (global energy company) (1989-2009), Hewlett-Packard Company (technology company) (1996-2002), Safeway, Inc. (grocery retailer) (1991-1998) and TransAmerica Corporation (insurance company) (1989-1999).
Principal Occupation During at Least the Past 5 Years:

Private investor; and formerly, Chairman, First Responder Network Authority (FirstNet) (interoperable wireless broadband network) (2012-2014); Chairman of the Board, Vodafone AirTouch, PLC (wireless company) (1999-2000); Chairman of the Board and Chief Executive Officer, AirTouch Communications (cellular communications) (1993-1998) and Pacific Telesis Group (telephone holding company) (1988-1994).

Edith E. Holiday (1952)

One Franklin Parkway

San Mateo, CA 94403-1906

   Trustee    Since 2005    137    Hess Corporation (exploration and refining of oil and gas), H.J. Heinz Company (processed foods and allied products) (1994-2013), RTI International Metals, Inc. (manufacture and distribution of titanium), Canadian National Railway (railroad) and White Mountains Insurance Group, Ltd. (holding company).
Principal Occupation During at Least the Past 5 Years:

Director or Trustee of various companies and trusts; and formerly, Assistant to the President of the United States and Secretary of the Cabinet (1990-1993); General Counsel to the United States Treasury Department (1989-1990); and Counselor to the Secretary and Assistant Secretary for Public Affairs and Public Liaison-United States Treasury Department (1988-1989).

 

    Annual Report     BOD-1   

Independent Board Members (continued)

 

 

Name, Year of Birth
and Address		   Position    Length of
Time Served		    Number of Portfolios in
Fund Complex Overseen
by Board Member*		    Other Directorships Held During
at Least the Past 5 Years

J. Michael Luttig (1954)

One Franklin Parkway

San Mateo, CA 94403-1906

   Trustee    Since 2009    137    Boeing Capital Corporation (aircraft financing) (2006-2013).
Principal Occupation During at Least the Past 5 Years:
Executive Vice President, General Counsel and member of the Executive Council, The Boeing Company (aerospace company); and formerly, Federal Appeals Court Judge, U.S. Court of Appeals for the Fourth Circuit (1991-2006).

Frank A. Olson (1932)

One Franklin Parkway

San Mateo, CA 94403-1906

   Trustee    Since 2005    137    Hess Corporation (exploration and refining of oil and gas) (1998-2013).
Principal Occupation During at Least the Past 5 Years:
Director of various companies; and formerly, Chairman of the Board, The Hertz Corporation (car rental) (1980-2000) and Chief Executive Officer (1977-1999); and Chairman of the Board, President and Chief Executive Officer, UAL Corporation (airlines) (June-December 1987).

Larry D. Thompson (1945)

One Franklin Parkway

San Mateo, CA 94403-1906

   Trustee    Since 2007    137    Cbeyond, Inc. (business communications provider) (2010-2012), The Southern Company (energy company) (December 2014; previously 2010-2012) and Graham Holdings Company (education and media organization) (2011-present).
Principal Occupation During at Least the Past 5 Years:
Executive Vice President – Government Affairs, General Counsel and Corporate Secretary, PepsiCo, Inc. (consumer products) (2012-present); and formerly, John A. Sibley Professor of Corporate and Business Law, University of Georgia School of Law (2011-2012); Senior Vice President – Government Affairs, General Counsel and Secretary, PepsiCo, Inc. (2004-2011); Senior Fellow of The Brookings Institution (2003-2004); Visiting Professor, University of Georgia School of Law (2004); and Deputy Attorney General, U.S. Department of Justice (2001-2003).

John B. Wilson (1959)

One Franklin Parkway

San Mateo, CA 94403-1906

   Lead Independent Trustee    Trustee since 2007 and Lead Independent Trustee since 2008    111    None
Principal Occupation During at Least the Past 5 Years:
President, Staples Europe (office supplies) (2012-present); President and Founder, Hyannis Port Capital, Inc. (real estate and private equity investing); serves on private and non-profit boards; and formerly, Chief Operating Officer and Executive Vice President, Gap, Inc. (retail) (1996-2000); Chief Financial Officer and Executive Vice President – Finance and Strategy, Staples, Inc. (1992-1996); Senior Vice President – Corporate Planning, Northwest Airlines, Inc. (airlines) (1990-1992); and Vice President and Partner, Bain & Company (consulting firm) (1986-1990).

 

BOD-2    Annual Report    

Interested Board Members and Officers

 

Name, Year of Birth
and Address		   Position    Length of
Time Served		    Number of Portfolios in
Fund Complex Overseen
by Board Member*		    Other Directorships Held During
at Least the Past 5 Years

**Gregory E. Johnson (1961)

One Franklin Parkway

San Mateo, CA 94403-1906

   Trustee    Since 2013    147    None
Principal Occupation During at Least the Past 5 Years:

Chairman of the Board, Member – Office of the Chairman, Director, President and Chief Executive Officer, Franklin Resources, Inc.; officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 44 of the investment companies in Franklin Templeton Investments; and Vice Chairman, Investment Company Institute.

**Rupert H. Johnson, Jr. (1940)

One Franklin Parkway

San Mateo, CA 94403-1906

   Chairman of the Board and Trustee    Chairman of the Board since 2013 and Trustee since 1988    137    None
Principal Occupation During at Least the Past 5 Years:
Vice Chairman, Member – Office of the Chairman and Director, Franklin Resources, Inc.; Director, Franklin Advisers, Inc.; Senior Vice President, Franklin Advisory Services, LLC; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 41 of the investment companies in Franklin Templeton Investments.

Alison E. Baur (1964)

One Franklin Parkway

San Mateo, CA 94403-1906

   Vice President    Since 2012    Not Applicable    Not Applicable
Principal Occupation During at Least the Past 5 Years:
Deputy General Counsel, Franklin Templeton Investments; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments.

Laura F. Fergerson (1962)

One Franklin Parkway

San Mateo, CA 94403-1906

   Chief Executive Officer – Finance and Administration    Since 2009    Not Applicable    Not Applicable
Principal Occupation During at Least the Past 5 Years:
Senior Vice President, Franklin Templeton Services, LLC; and officer of 46 of the investment companies in Franklin Templeton Investments.

Gaston Gardey (1967)

One Franklin Parkway

San Mateo, CA 94403-1906

   Treasurer, Chief Financial Officer and Chief Accounting Officer    Since 2009    Not Applicable    Not Applicable
Principal Occupation During at Least the Past 5 Years:
Director, Fund Accounting, Franklin Templeton Investments; and officer of 27 of the investment companies in Franklin Templeton Investments.

Aliya S. Gordon (1973)

One Franklin Parkway

San Mateo, CA 94403-1906

   Vice President    Since 2009    Not Applicable    Not Applicable
Principal Occupation During at Least the Past 5 Years:
Senior Associate General Counsel, Franklin Templeton Investments; officer of 46 of the investment companies in Franklin Templeton Investments; and formerly, Litigation Associate, Steefel, Levitt & Weiss, LLP (2000-2004).

 

    Annual Report     BOD-3   

Interested Board Members and Officers (continued)

 

 

Name, Year of Birth
and Address		   Position    Length of
Time Served		    Number of Portfolios in
Fund Complex Overseen
by Board Member*		    Other Directorships Held During
at Least the Past 5 Years

Steven J. Gray (1955)

One Franklin Parkway

San Mateo, CA 94403-1906

   Vice President    Since 2009    Not Applicable    Not Applicable
Principal Occupation During at Least the Past 5 Years:
Senior Associate General Counsel, Franklin Templeton Investments; Vice President, Franklin Templeton Distributors, Inc. and Franklin Alternative Strategies Advisers, LLC; and officer of 46 of the investment companies in Franklin Templeton Investments.

Selena L. Holmes (1965)

100 Fountain Parkway

St. Petersburg, FL 33716-1205

   Vice President – AML Compliance    Since 2012    Not Applicable    Not Applicable
Principal Occupation During at Least the Past 5 Years:
Director, Global Compliance Monitoring; Chief Compliance Officer, Franklin Alternative Strategies Advisers, LLC; Vice President, Franklin Templeton Companies, LLC; and officer of 46 of the investment companies in Franklin Templeton Investments.

Edward B. Jamieson (1948)

One Franklin Parkway

San Mateo, CA 94403-1906

   President and Chief Executive Officer – Investment Management    Since 2010    Not Applicable    Not Applicable
Principal Occupation During at Least the Past 5 Years:
President, Chief Investment Officer and Director, Franklin Advisers, Inc.; Executive Vice President, Franklin Templeton Institutional, LLC; and officer and/or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 10 of the investment companies in Franklin Templeton Investments.

Kimberly H. Novotny (1972)

300 S.E. 2nd Street

Fort Lauderdale, FL 33301-1923

   Vice President    Since 2013    Not Applicable    Not Applicable
Principal Occupation During at Least the Past 5 Years:
Associate General Counsel, Franklin Templeton Investments; Vice President and Secretary, Fiduciary Trust International of the South; Vice President, Templeton Investment Counsel, LLC; Assistant Secretary, Franklin Resources, Inc.; and officer of 46 of the investment companies in Franklin Templeton Investments.

Robert C. Rosselot (1960)

300 S.E. 2nd Street

Fort Lauderdale, FL 33301-1923

   Chief Compliance Officer    Since 2013    Not Applicable    Not Applicable
Principal Occupation During at Least the Past 5 Years:
Director, Global Compliance, Franklin Templeton Investments; Vice President, Franklin Templeton Companies, LLC; officer of 46 of the investment companies in Franklin Templeton Investments; and formerly, Senior Associate General Counsel, Franklin Templeton Investments (2007-2013); and Secretary and Vice President, Templeton Group of Funds (2004-2013).

Karen L. Skidmore (1952)

One Franklin Parkway

San Mateo, CA 94403-1906

   Vice President and Secretary    Since 2006    Not Applicable    Not Applicable
Principal Occupation During at Least the Past 5 Years:
Senior Associate General Counsel, Franklin Templeton Investments; and officer of 46 of the investment companies in Franklin Templeton Investments.

 

BOD-4    Annual Report    

Interested Board Members and Officers (continued)

 

 

Name, Year of Birth
and Address		   Position    Length of
Time Served		    Number of Portfolios in
Fund Complex Overseen
by Board Member*		    Other Directorships Held During
at Least the Past 5 Years

Craig S. Tyle (1960)

One Franklin Parkway

San Mateo, CA 94403-1906

   Vice President    Since 2005    Not Applicable    Not Applicable
Principal Occupation During at Least the Past 5 Years:
General Counsel and Executive Vice President, Franklin Resources, Inc.; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments.

Lori A. Weber (1964)

300 S.E. 2nd Street

Fort Lauderdale, FL 33301-1923

   Vice President    Since 2011    Not Applicable    Not Applicable
Principal Occupation During at Least the Past 5 Years:
Senior Associate General Counsel, Franklin Templeton Investments; Assistant Secretary, Franklin Resources, Inc.; Vice President and Secretary, Templeton Investment Counsel, LLC; Vice President, Fiduciary Trust International of the South; and officer of 46 of the investment companies in Franklin Templeton Investments.

*We base the number of portfolios on each separate series of the U.S. registered investment companies within the Franklin Templeton Investments fund complex. These portfolios have a common investment manager or affiliated investment managers.

**Gregory E. Johnson is considered to be an interested person of the Fund under the federal securities laws due to his position as an officer and director of Franklin Resources, Inc. (Resources), which is the parent company of the Fund’s investment manager and distributor. Rupert H. Johnson, Jr. is considered to be an interested person of the Fund under the federal securities laws due to his position as officer and director and major shareholder of Resources.

Note 1: Rupert H. Johnson, Jr. is the uncle of Gregory E. Johnson.

Note 2: Officer information is current as of the date of this report. It is possible that after this date, information about officers may change.

The Sarbanes-Oxley Act of 2002 and Rules adopted by the Securities and Exchange Commission require the Fund to disclose whether the Fund’s Audit Committee includes at least one member who is an audit committee financial expert within the meaning of such Act and Rules. The Fund’s Board has determined that there is at least one such financial expert on the Audit Committee and has designated John B. Wilson as its audit committee financial expert. The Board believes that Mr. Wilson qualifies as such an expert in view of his extensive business background and experience, including service as chief financial officer of Staples, Inc. from 1992 to 1996. Mr. Wilson has been a Member and Chairman of the Fund’s Audit Committee since 2007. As a result of such background and experience, the Board believes that Mr. Wilson has acquired an understanding of generally accepted accounting principles and financial statements, the general application of such principles in connection with the accounting estimates, accruals and reserves, and analyzing and evaluating financial statements that present a breadth and level of complexity of accounting issues generally comparable to those of the Fund, as well as an understanding of internal controls and procedures for financial reporting and an understanding of audit committee functions. Mr. Wilson is an independent Board member as that term is defined under the relevant Securities and Exchange Commission Rules and Releases.

The Statement of Additional Information (SAI) includes additional information about the board members and is available, without charge, upon request. Shareholders may call (800) 321-8563 or their insurance companies to request the SAI.

 

    Annual Report     BOD-5   

FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST

Shareholder Information

Proxy Voting Policies and Procedures

The Trust’s investment manager has established Proxy Voting Policies and Procedures (Policies) that the Trust uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Trust’s complete Policies online at franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at (954) 527-7678 or by sending a written request to: Franklin Templeton Companies, LLC, 300 S.E. 2nd Street, Fort Lauderdale, FL 33301, Attention: Proxy Group. Copies of the Trust’s proxy voting records are also made available online at franklintempleton.com and posted on the U.S. Securities and Exchange Commission’s website at sec.gov and reflect the most recent 12-month period ended June 30.

Quarterly Statement of Investments

The Trust files a complete statement of investments with the U.S. Securities and Exchange Commission for the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission’s website at sec.gov. The filed form may also be viewed and copied at the Commission’s Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling (800) SEC-0330.

 

 

    Annual Report     SI-1   

 

 

 

 

LOGO

 

Annual Report

Franklin Templeton

Variable Insurance Products Trust

Investment Managers

Franklin Advisers, Inc.

Franklin Advisory Services, LLC

Franklin Mutual Advisers, LLC

Templeton Asset Management Ltd.

Templeton Global Advisors Limited

Templeton Investment Counsel, LLC

Fund Administrator

Franklin Templeton Services, LLC

Distributor

Franklin Templeton Distributors, Inc.

 

Franklin Templeton Variable Insurance Products Trust (FTVIP) shares are not offered to the public; they are offered and sold only to:

(1) insurance company separate accounts (Separate Account) to serve as the underlying investment vehicle for variable contracts;

(2) certain qualified plans; and (3) other mutual funds (funds of funds).

Authorized for distribution to investors in Separate Accounts only when accompanied or preceded by the current prospectus for the applicable contract, which includes the Separate Account and the FTVIP prospectuses. Investors should carefully consider a fund’s investment goals, risks, charges and expenses before investing. The prospectus contains this and other information; please read it carefully before investing.

To help ensure we provide you with quality service, all calls to and from our service areas are monitored and/or recorded.

 

©2015 Franklin Templeton Investments. All rights reserved. VIP4 A 02/15

Item 2. Code of Ethics.

 

(a) The Registrant has adopted a code of ethics that applies to its principal executive officers and principal financial and accounting officer.

 

(c) N/A

 

(d) N/A

 

(f) Pursuant to Item 12(a)(1), the Registrant is attaching as an exhibit a copy of its code of ethics that applies to its principal executive officers and principal financial and accounting officer.

 

Item 3. Audit Committee Financial Expert.

 

(a) (1) The Registrant has an audit committee financial expert serving on its audit committee.

 

      (2) The audit committee financial expert is John B. Wilson and he is “independent” as defined under the relevant Securities and Exchange Commission Rules and Releases.

 

Item 4. Principal Accountant Fees and Services.

(a) Audit Fees

The aggregate fees paid to the principal accountant for professional services rendered by the principal accountant for the audit of the registrant’s annual financial statements or for services that are normally provided by the principal accountant in connection with statutory and regulatory filings or engagements were $879,564 for the fiscal year ended December 31, 2014 and $914,590 for the fiscal year ended December 31, 2013.

(b) Audit-Related Fees

There were no fees paid to the principal accountant for assurance and related services rendered by the principal accountant to the registrant that are reasonably related to the performance of the audit of the registrant’s financial statements and are not reported under paragraph (a) of Item 4.

There were no fees paid to the principal accountant for assurance and related services rendered by the principal accountant to the registrant’s investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant that are reasonably related to the performance of the audit of their financial statements.

 

(c) Tax Fees

There were no fees paid to the principal accountant for professional services rendered by the principal accountant to the registrant for tax compliance, tax advice and tax planning.

The aggregate fees paid to the principal accountant for professional services rendered by the principal accountant to the registrant’s

investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant for tax compliance, tax advice and tax planning were $0 for the fiscal year ended December 31, 2014 and $6,930 for the fiscal year ended December 31, 2013. The services for which these fees were paid included technical tax consultation for capital gain tax and withholding tax reporting for foreign governments and requirements on local country’s self-certification forms.

 

(d) All Other Fees

The aggregate fees paid to the principal accountant for products and services rendered by the principal accountant to the registrant not reported in paragraphs (a)-(c) of Item 4 were $9,566 for the fiscal year ended December 31, 2014 and $0 for the fiscal year ended December 31, 2013. The services for which these fees were paid include review of materials provided to the fund Board in connection with the investment management contract renewal process.

The aggregate fees paid to the principal accountant for products and services rendered by the principal accountant to the registrant’s investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant other than services reported in paragraphs (a)-(c) of Item 4 were $195,213 for the fiscal year ended December 31, 2014 and $59,809 for the fiscal year ended December 31, 2013. The services for which these fees were paid included preparation and review of materials provided to the fund Board in connection with the investment management contract renewal process, certifying asset under management, and XBRL tagging on financial statements. Other services include compliance examination for Investment Advisor Act rule 204-2 and 206-4(2).

(e) (1) The registrant’s audit committee is directly responsible for approving the services to be provided by the auditors, including:

(i) pre-approval of all audit and audit related services;

(ii) pre-approval of all non-audit related services to be provided to the Fund by the auditors;

(iii) pre-approval of all non-audit related services to be provided to the registrant by the auditors to the registrant’s investment adviser or to any entity that controls, is controlled by or is under common control with the registrant’s investment adviser and that provides ongoing services to the registrant where the non-audit services relate directly to the operations or financial reporting of the registrant; and

(iv) establishment by the audit committee, if deemed necessary or appropriate, as an alternative to committee pre-approval of services to be provided by the auditors, as required by paragraphs (ii) and (iii) above, of policies and procedures to permit such services to be pre-approved by other means, such as through establishment of guidelines or by action of a designated member or members of the committee; provided the policies and procedures are detailed as to the particular service and the committee is informed of each service and such policies and procedures do not include delegation of audit

committee responsibilities, as contemplated under the Securities Exchange Act of 1934, to management; subject, in the case of (ii) through (iv), to any waivers, exceptions or exemptions that may be available under applicable law or rules.

(e) (2) None of the services provided to the registrant described in paragraphs (b)-(d) of Item 4 were approved by the audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of regulation S-X.

 

(f) No disclosures are required by this Item 4(f).

(g) The aggregate non-audit fees paid to the principal accountant for services rendered by the principal accountant to the registrant and the registrant’s investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant were $204,779 for the fiscal year ended December 31, 2014 and $66,739 for the fiscal year ended December 31, 2013.

(h) The registrant’s audit committee of the board has considered whether the provision of non-audit services that were rendered to the registrant’s investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with maintaining the principal accountant’s independence.

 

Item 5. Audit Committee of Listed Registrants.            N/A

 

Item 6. Schedule of Investments.            N/A

 

Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.            N/A

 

Item 8. Portfolio Managers of Closed-End Management Investment Companies.            N/A

 

Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers.            N/A

 

Item 10. Submission of Matters to a Vote of Security Holders.

There have been no changes to the procedures by which shareholders may recommend nominees to the Registrant’s Board of Trustees that would require disclosure herein.

Item 11. Controls and Procedures.

(a) Evaluation of Disclosure Controls and Procedures. The Registrant maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Registrant’s filings under the Securities Exchange Act of 1934 and the Investment Company Act of 1940 is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission. Such information is accumulated and communicated to the Registrant’s management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. The Registrant’s management, including the principal executive officer and the principal financial officer, recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

Within 90 days prior to the filing date of this Shareholder Report on Form N-CSR, the Registrant had carried out an evaluation, under the supervision and with the participation of the Registrant’s management, including the Registrant’s principal executive officer and the Registrant’s principal financial officer, of the effectiveness of the design and operation of the Registrant’s disclosure controls and procedures. Based on such evaluation, the Registrant’s principal executive officer and principal financial officer concluded that the Registrant’s disclosure controls and procedures are effective.

(b) Changes in Internal Controls. There have been no changes in the Registrant’s internal controls or in other factors that could materially affect the internal controls over financial reporting subsequent to the date of their evaluation in connection with the preparation of this Shareholder Report on Form N-CSR.

 

Item 12. Exhibits.

(a)(1) Code of Ethics

(a)(2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Laura F. Fergerson, Chief Executive Officer - Finance and Administration, and Gaston Gardey, Chief Financial Officer and Chief Accounting Officer

(b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Laura F. Fergerson, Chief Executive Officer - Finance and Administration, and Gaston Gardey, Chief Financial Officer and Chief Accounting Officer

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Franklin Templeton Variable Insurance Products Trust

 

By

/s/ LAURA F. FERGERSON

Laura F. Fergerson
Chief Executive Officer –
Finance and Administration
Date February 26, 2015

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

By

/s/ LAURA F. FERGERSON

Laura F. Fergerson
Chief Executive Officer –
Finance and Administration
Date February 26, 2015
By

/s/ GASTON GARDEY

Gaston Gardey
Chief Financial Officer and
Chief Accounting Officer
Date February 26, 2015