Market Sector Update

• Global equity markets rose a strong 5% in the third quarter. In a continuation of recent trends, developed markets significantly outperformed emerging markets in the period, with the U.S. being a standout driver of returns.
• China was a significant underperformer in the period, hard hit by a slowing economy and the addition of new U.S. tariffs targeting Chinese imports. With the exception of Brazil and Mexico, which saw equity markets rebound in the quarter, it was a generally tough period for emerging-market equities and currencies. In developed markets, Europe and Japan both underperformed the U.S. in the period.
• On a sector basis, health care and information technology were large outperformers, both posting double-digit returns in the quarter. Materials, financials and consumer staples underperformed.

Portfolio Strategy

• During the quarter, the Portfolio outperformed the benchmark driven primarily by sector allocation and performance in U.S. holdings. The Portfolio’s overweight allocation to information technology and underweight to materials as well as real estate benefitted performance in the period. Stock selection was a modest drag to performance, with weak stock selection in consumer staples, communication services and information technology only partially offset by positive selection in industrials, consumer discretionary and health care.
• Top Individual performers in the period were HCA Holdings, Inc., Microsoft Corp. and Amazon.com, Inc., while top detractors tended to be more emerging-market focused and included Alibaba Group Holding Ltd. ADR, HDFC Bank Ltd. and Start Today Co. Ltd. (now ZOZO, Inc.).
• During the period, we continued to reduce the Portfolio’s exposure to emerging-market equities following a significant reduction in Chinese exposure in the second quarter. Concerns around not only the U.S. and China trade war, but also emerging-market currencies and possible demand destruction on slowing emerging-market growth, drove the further reduction. We have reallocated capital to more defensive holdings with less cyclicality around earnings and cash flow streams. We also reduced exposure to our more cyclical information technology holdings.

Outlook

• U.S. economic growth remains solid with particularly strong labor markets. High employment is likely to have positive impacts on wage inflation going forward.
• However, despite the strong U.S. gross domestic product growth environment, there are a number of factors that temper our view both in the U.S. and globally. The rise in nationalism driving more protectionist trade policies could be a sign of peaking margins. Increased costs in the form of duplicative manufacturing facilities and higher capital expenditure risks, lower margins and returns on capital over time. It is still early in terms of assessing longer-term implications, but we believe it is unlikely the trade disputes are quickly resolved.
• We have been proactively reducing our exposure to firms we believe are most at risk to dislocations as a result of these trends. We are adding to positions in health care where we are now overweight, while substantially reducing the overweight in information technology that we have had in the Portfolio for the last couple of years.

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 Sept. 30, 2018, 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 a percent of net assets include: Microsoft Corp. 5.1%, Airbus SE 4.9%, Amazon.com, Inc. 4.8%, MasterCard, Inc., Class A 4.2%, Visa, Inc., Class A 4.1%, UnitedHealth Group, Inc. 3.6%, The Home Depot, Inc. 3.0%, CME Group, Inc. 2.9%, HCA Holdings, Inc. 2.9% and Adobe Systems, Inc. 2.8%.

Risk factors: The value of the Portfolio's shares 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. Prices of growth stocks may be more sensitive to changes in current or expected earnings than the prices of other stocks. Growth stocks may be more volatile or not perform as well as value stocks or the stock market in general. International investing involves additional risks including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets The Portfolio typically holds a limited number of stocks (generally 45 to 70). As a result, the appreciation or depreciation of any one security held by the Portfolio may have a greater impact on the Portfolio’s net asset value than it would if the Portfolio invested in a larger number of securities. These and other risks are more fully described in the Portfolio's prospectus. Not all portfolios may be offered at all broker/ dealers. The IVY VARIABLE INSURANCE PORTFOLIOS, are only available as investment options in variable life insurance policies and variable annuity contracts issued by participating insurance companies. They are not offered or made available directly to the general public.

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.