Market Sector Update

• The most recent quarter marked another positive period for equities, with the Russell 1000 Index, the Portfolio’s benchmark, showing a 3% positive return. Equity performance was bolstered by a continued steady strengthening of the global economic outlook, with economic data and trends improving in each region around the world.
• The short-term general improvement in metrics for the major global economic zones has helped increase confidence in the sustainability of a modestly improved outlook – even without policy stimulus.
• In our view, this trend was reinforced by the strength of year-over-year comparisons in corporate earnings. Underlying improvements in key sector earnings like industrials and technology also balanced an increasingly dismal U.S. political and legislative outlook.
• Despite concerns about pricing pressure and policy uncertainty, the healthcare sector performed well relative to the overall market during the period. While it appears investors are optimistic the sector is less likely to experience a substantial reset in earnings due to healthcare reform, the overall sector uncertainty remains a concern for the short term. Energy continues to be a poor performing sector. The price of crude oil saw a substantial decline during second quarter as the process of reducing inventory has been far slower than expected. We remain confident the inventory overhang in oil and petroleum products will be worked off and prices will rise, but achieving this balance will require patience.

Portfolio Strategy

• For the quarter, the Portfolio underperformed its benchmark. From a sector allocation perspective, the Porfolio benefitted from being underweight telecommunications. Relative performance also was adversely impacted by being overweight energy and underweight in healthcare.
• Stock selection in energy, materials and consumer staples benefited relative performance, while stock selection in healthcare and technology were the greatest drags on relative performance.
• From an individual stock perspective positions in International Paper, Nokia, Prologis, Inc., Lockheed Martin and MetLife added the most to relative performance. The Portfolio’s leading detractors to relative performance in terms of stock selection were Life Storage, Analog Devices, Inc., Suncor Energy and International Game Technology.
• The greatest drag on performance relative to the benchmark came from not owning the FAANG stocks (Facebook, Apple, Amazon, Netflix and Google-parent Alphabet). These companies provide below market dividend yields, so we do not view these stocks as part of the Portfolio’s investable universe.

Outlook

• We are optimistic that the market earnings outlook continues to improve and believe economic activity remains broadly favorable. The rate of growth is likely to ebb somewhat as comparisons normalize, but we believe that lagging sectors and regions will continue a trend of modest improvement and stabilization.
• Six months into his presidency, Donald Trump finds his pro-growth agenda stalled, his administration shrouded in controversy and his approval ratings at record lows. Yet, the U.S. economy continues to improve. From a growth perspective the lack of a policy tailwind does not appear to be a danger to current progress. So far investors have shrugged off the lack of action on key priorities.
• We believe equities could experience a pause or modest retrenchment as proposed reforms languish due to gridlock. The need of the administration and leaders in Congress to show constituents they can fulfill election promises will only intensify as next year’s mid-term elections draw closer, and a prolonged failure of Washington to deliver on reforms could lead to a reset in expectations from a market perspective.

The opinions expressed are those of the Portfolio’s manager and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through June 30, 2017, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon. Past performance is not a guarantee of future results.

Top 10 holdings (%) as of 06/30/2017: Microsoft Corp. 5.1, Pfizer, Inc. 4.9, Well Fargo & Co. 4.5, JPMorgan Chase & Co. 4.5, Chevron Corp. 4.5, Philip Morris International 3.9, Lockheed Martin Corp. 3.8, Exelon Corp.&br;3.5, MetLife, Inc. 3.5 and Dow Chemical Co. 3.1.

The Russell 1000 Value Index is an unmanaged index comprised of securities that represent the large cap sector of the stock market. It is not possible to invest directly in an index.

IVY INVESTMENTS® refers to the investment management and investment advisory services offered by Ivy Investment Management Company, the financial services offered by Ivy Distributors, Inc., a FINRA member broker dealer and the distributor of IVY FUNDS® mutual funds and IVY VARIABLE INSURANCE PORTFOLIOS℠, and the financial services offered by their affiliates.

Risk factors: The value of the Portfolio will change, and you could lose money on your investment. An investment in the Portfolio is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The Portfolio’s emphasis on dividend-paying stocks involves the risk that such stocks may fall out of favor with investors and underperform non-dividend paying stocks and the market as a whole over any period of time. In addition, there is no guarantee that the companies in which the Portfolio invests will declare dividends in the future or that dividends, if declared, will remain at current levels or increase over time. The amount of any dividend the company may pay may fluctuate significantly. In addition, the value of dividend-paying common stocks can decline when interest rates rise as fixed-income investments become more attractive to investors. This risk may be greater due to the current period of historically low interest rates. The Portfolio typically holds a limited number of stocks (generally 40 to 60). As a result, the appreciation or depreciation of any one security held by the Portfolio will have a greater impact on the Portfolio’s net asset value than it would if the Portfolio invested in a large number of securities. These and other risks are more fully described in the Portfolio’s prospectus. Not all funds or fund classes may be offered at all broker/dealers.

Annuities are long-term financial products designed for retirement purposes. Annuity and life insurance guarantees are based on the financial strength and claims-paying ability of the issuing insurance company. The guarantees have no bearing on the performance of a variable investment option. Variable investment options are subject to market risk, including loss of principal. There are charges and expenses associated with annuities and variable life insurance products, including mortality and expense risk charges, management fees, administrative fees, expenses for optional riders and deferred sales charges for early withdrawals. Withdrawals before age 59 1/2 may be subject to a 10% IRS tax penalty and surrender charges may apply.