Annual Report December 31, 2016

Transcription

1 Annual Report December 31, 2016 PIMCO Variable Insurance Trust Share Classes Institutional Administrative Advisor PIMCO Real Return Portfolio

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3 Table of Contents Page Chairman s Letter 2 Important Information About the PIMCO Real Return Portfolio 4 Portfolio Summary 6 Expense Example 7 Financial Highlights 8 Statement of Assets and Liabilities 10 Statement of Operations 11 Statements of Changes in Net Assets 12 Statement of Cash Flows 13 Schedule of Investments 14 Notes to Financial Statements 26 Report of Independent Registered Public Accounting Firm 45 Glossary 46 Federal Income Tax Information 47 Management of the Trust 48 Privacy Policy 50 Approval of Investment Advisory Contract and Other Agreements 52 This material is authorized for use only when preceded or accompanied by the current PIMCO Variable Insurance Trust (the Trust ) prospectus for the Portfolio. (The variable product prospectus may be obtained by contacting your Investment Consultant.)

4 Chairman s Letter Dear PIMCO Variable Insurance Trust Shareholder, Please find enclosed the Annual Report for the PIMCO Variable Insurance Trust covering the twelve-month reporting period ended December 31, The following pages contain specific details about the Portfolio s investment performance and a discussion of the factors that most affected performance over the reporting period. In the first quarter of the reporting period, global growth concerns in the midst of uncertainty from China, falling commodity prices and questions about the efficacy of central bank policies sparked a sell-off in risk assets. Despite elevated volatility in financial markets, the fundamental backdrop remained mostly intact and supportive central banks helped reignite risk appetite in part with calming rhetoric and actions. The European Central Bank ( ECB ) announced additional easing measures in Europe, with a focus on credit expansion. Also, concerns about global influences and financial conditions kept the Federal Reserve ( Fed ) on hold after its December 2015 interest rate hike, suggesting a more dovish tilt with a tolerance for overshooting their inflation target. In June 2016, the unexpected outcome of the U.K. Brexit referendum dominated headlines and market movements. Volatility rose as a result and sovereign yields rallied significantly, while risk assets generally underperformed. Steadier commodity prices and fiscal stimulus in China helped bolster market sentiment, even as central banks remained on hold ahead of the Brexit referendum. Softer-than-expected employment data in the U.S. pushed market expectations for the next Fed interest rate hike further out into the future, with the Fed continuing to hold rates steady through the end of November. Leading up to the November 8 th U.S. presidential election, investors generally shook off the surprising result of the Brexit referendum, along with a host of political developments including new leadership in the U.K. and Brazil, and a coup attempt in Turkey. In this environment, volatility generally remained low and risk assets rallied. Central banks featured prominently in the headlines as monetary policy concerns (in particular, the longevity of central bank support) lingered beneath the seemingly benign market environment. The Bank of Japan s comprehensive review, inaction by the ECB, and the Fed s solidifying path towards a potential interest rate increase in December 2016 all contributed to sovereign yields generally rising during this period. Still, equities moved higher (U.S. stock indices set record highs), credit spreads tightened, and emerging market assets continued to gain. In the wake of the not expected result of the U.S. election, volatility fell, equities rallied, credit spreads continued to tighten and the U.S. dollar strengthened. In contrast, interest rates rose dramatically as most markets focused on the pro-growth and inflationary potential of fiscal expansion, tax cuts, and deregulation. Part of the rise in interest rates was also due to a sharp increase in inflation expectations. Despite the generally positive risk sentiment towards the end of the reporting period, emerging markets weakened as protectionist rhetoric from the incoming administration weighed on the asset class. Finally, the ECB at its December 8 th meeting opted to leave its main policy rate unchanged and announced an expansion of its Quantitative Easing program to exceed $2.4 trillion by the end of And on December 14 th, the Fed raised its key lending rate, the Federal Funds Rate, by 0.25% to a range of 0.50%-0.75%, representing their second rate increase in ten years. Highlights of the financial markets during the twelve-month fiscal reporting period include: U.S. Treasuries, as represented by the Bloomberg Barclays U.S. Treasury Index, returned 1.04% for the reporting period. Yields rose across the U.S. Treasury yield curve in reaction to the Fed s interest rate increases, rising concern over inflation and strong investor risk appetite. The benchmark ten-year U.S. Treasury note yielded 2.45% at the end of the reporting period, up from 2.27% on December 31, The Bloomberg Barclays U.S. Aggregate Index, a widely used index of U.S. investment-grade bonds, returned 2.65% for the reporting period. U.S. Treasury Inflation-Protected Securities ( TIPS ), as represented by the Bloomberg Barclays U.S. TIPS Index, returned 4.68% over the reporting period. U.S. TIPS outpaced nominal U.S. Treasuries over the reporting period as inflation expectations moved higher alongside oil prices and in response to the surprise U.S. presidential election result. Diversified commodities, as represented by the Bloomberg Commodity Index Total Return, returned 11.77% over the reporting period. Prices on broad commodities rebounded, led higher primarily by energy and metal prices. 2 PIMCO VARIABLE INSURANCE TRUST

5 Crude oil prices rose markedly after reaching multi-year lows in January 2016, driven higher by continued rebalancing of supply and demand as well as news of a potential OPEC production cut. Within precious metals, gold prices were the beneficiary of strong safe-haven demand over the first half of the reporting period before losing ground to end the period due to rising U.S. interest rates and a stronger U.S. dollar. Base metal prices posted strong gains, most notably toward the end of the period as the U.S. presidential election result fueled speculation of rising demand stemming from increased U.S. infrastructure spending. Agency mortgage-backed securities ( MBS ), as represented by the Bloomberg Barclays U.S. MBS Fixed Rate Index, returned 1.67% over the reporting period and underperformed like-duration U.S. Treasuries. Non-Agency MBS prices were higher and spreads tightened, as the sector benefited from favorable technicals and continued gradual improvement in U.S. housing fundamentals. Positive representation and warranty settlement developments also benefited the sector. U.S. investment grade credit, as represented by the Bloomberg Barclays U.S. Credit Index, returned 5.63% over the reporting period, as continued monetary policy support from global central banks and strong supply/demand technicals supported spread tightening. Developed market global high yield bonds, as measured by the BofA Merrill Lynch Developed Markets High Yield Constrained Index (USD Hedged), returned 13.65% over the reporting period. Performance was driven by the recovery in the commodity sectors, as well as triple-c outperformance alongside the broad risk rally. Meanwhile, high yield bond mutual funds saw strong inflows, as investors continued to seek higher yielding instruments. Emerging market ( EM ) external debt, as represented by the JPMorgan Emerging Markets Bond Index (EMBI) Global, returned 10.19% over the reporting period. EM local bonds, as represented by the JPMorgan Government Bond Index-Emerging Markets Global Diversified Index (Unhedged), returned 9.94% over the reporting period. Improving domestic economic fundamentals and strong inflows into the asset class served as broad tailwinds for EM external and local currency debt performance. Elevated uncertainty in the wake of the U.S. election, particularly surrounding global trade and monetary policy, weighed on performance at the end of the reporting period. U.S. equities, as represented by the S&P 500 Index, returned 11.96% over the reporting period. EM equities, as represented by the MSCI Emerging Markets Index (Net Dividends in USD), returned 11.19% over the same period. Developed market equities outside the U.S., as represented by the MSCI EAFE Net Dividend Index (USD Unhedged), returned 1.00% over the reporting period. Thank you once again for the trust you have placed in us. We value your commitment and will continue to work diligently to meet your broad investment and investment solution needs. Sincerely, Brent R. Harris Chairman of the Board, PIMCO Variable Insurance Trust February 17, 2017 Past performance is no guarantee of future results. Unless otherwise noted, index returns reflect the reinvestment of income dividends and capital gains, if any, but do not reflect fees, brokerage commissions or other expenses of investing. It is not possible to invest directly in an unmanaged index. ANNUAL REPORT DECEMBER 31,

6 Important Information About the PIMCO Real Return Portfolio PIMCO Variable Insurance Trust (the Trust ) is an open-end management investment company currently consisting of nineteen separate investment portfolios, including the PIMCO Real Return Portfolio (the Portfolio ). The Portfolio is only available as a funding vehicle under variable life insurance policies or variable annuity contracts issued by insurance companies ( Variable Contracts ). Individuals may not purchase shares of the Portfolio directly. Shares of the Portfolio also may be sold to qualified pension and retirement plans outside of the separate account context. We believe that bond funds have an important role to play in a well-diversified investment portfolio. It is important to note, however, that in an environment where interest rates may trend upward, rising rates would negatively impact the performance of most bond funds, and fixed-income securities and other instruments held by the Portfolio are likely to decrease in value. A wide variety of factors can cause interest rates to rise (e.g., central bank monetary policies, inflation rates, general economic conditions, etc.). In addition, changes in interest rates can be sudden and unpredictable, and there is no guarantee that Fund management will anticipate such movement accurately. The Portfolio may lose money as a result of movements in interest rates. As of the date of this report, interest rates in the U.S. and many parts of the world, including certain European countries, are near historically low levels. As such, bond funds may currently face an increased exposure to the risks associated with a rising interest rate environment. This is especially true as the Fed ended its quantitative easing program in October 2014 and has begun, and may continue, to raise interest rates. To the extent the Fed continues to raise interest rates, there is a risk that rates across the financial system may rise. Further, while bond markets have steadily grown over the past three decades, dealer inventories of corporate bonds are near historic lows in relation to market size. As a result, there has been a significant reduction in the ability of dealers to make markets. Bond funds and individual bonds with a longer duration (a measure used to determine the sensitivity of a security s price to changes in interest rates) tend to be more sensitive to changes in interest rates, usually making them more volatile than securities or funds with shorter durations. All of the factors mentioned above, individually or collectively, could lead to increased volatility and/or lower liquidity in the fixed income markets or negatively impact the Portfolio s performance or cause the Portfolio to incur losses. As a result, the Portfolio may experience increased shareholder redemptions, which, among other things, could further reduce the net assets of the Portfolio. The Portfolio may be subject to various risks as described in the Portfolio s prospectus. Some of these risks may include, but are not limited to, the following: interest rate risk, call risk, credit risk, high yield risk, market risk, issuer risk, liquidity risk, derivatives risk, equity risk, mortgage-related and other asset-backed securities risk, foreign (non-u.s.) investment risk, emerging markets risk, sovereign debt risk, currency risk, leveraging risk, management risk and short sale risk. A complete description of these and other risks is contained in the Portfolio s prospectus. The Portfolio may use derivative instruments for hedging purposes or as part of an investment strategy. Use of these instruments may involve certain costs and risks such as liquidity risk, interest rate risk, market risk, credit risk, leverage risk, management risk and the risk that the Portfolio may not be able to close out a position when it would be most advantageous to do so. Changes in regulation relating to a mutual fund s use of derivatives and related instruments could potentially limit or impact the Portfolio s ability to invest in derivatives, limit the Portfolio s ability to employ certain strategies that use derivatives and/or adversely affect the value or performance of derivatives and the Portfolio. Certain derivative transactions may have a leveraging effect on the Portfolio. For example, a small investment in a derivative instrument may have a significant impact on the Portfolio s exposure to interest rates, currency exchange rates or other investments. As a result, a relatively small price movement in an asset, instrument or component of the index underlying a derivative instrument may cause an immediate and substantial loss or gain, which translates into heightened volatility for the Portfolio. The Portfolio may engage in such transactions regardless of whether the Portfolio owns the asset, instrument or components of the index underlying the derivative instrument. The Portfolio may invest a significant portion of its assets in these types of instruments. If it does, the Portfolio s investment exposure could far exceed the value of its portfolio securities and its investment performance could be primarily dependent upon securities it does not own. Investing in foreign (non- U.S.) securities may entail risk due to foreign (non-u.s.) economic and political developments; this risk may be increased when investing in emerging markets. For example, if the Portfolio invests in emerging market debt, it may face increased exposure to interest rate, liquidity, volatility, and redemption risk due to the specific economic, political, geographical, or legal background of the foreign (non-u.s.) issuer. High yield bonds typically have a lower credit rating than other bonds. Lower-rated bonds generally involve a greater risk to principal than higher-rated bonds. Further, markets for lower-rated bonds are typically less liquid than for higher-rated bonds, and public information is usually less abundant in markets for lower-rated bonds. Thus, high yield investments increase the chance that the Portfolio will lose money. The credit quality of a particular security or group of securities does not ensure the stability or safety of the overall portfolio. Mortgage-related and asset-backed securities represent interests in pools of mortgages or other assets such as consumer loans or 4 PIMCO VARIABLE INSURANCE TRUST

7 receivables. As a general matter, mortgage-related and asset-backed securities are subject to interest rate risk, extension risk, prepayment risk, and credit risk. These risks largely stem from the fact that returns on mortgage-related and asset-backed securities depend on the ability of the underlying assets to generate cash flow. The geographical classification of foreign (non-u.s.) securities in this report are classified by the country of incorporation of a holding. In certain instances, a security s country of incorporation may be different from its country of economic exposure. On the Portfolio Summary page in this Shareholder Report, the Average Annual Total Return table and Cumulative Returns chart measure performance assuming that any dividend and capital gain distributions were reinvested. The Cumulative Returns chart reflects only Administrative Class performance. Performance for Institutional Class, Class M and Advisor Class shares, if applicable, may be higher or lower based on each class s expense ratios. The Portfolio measures its performance against a broad-based securities market index ( benchmark index ). The benchmark index does not take into account fees, expenses, or taxes. The Portfolio s past performance, before and after taxes, is not necessarily an indication of how the Portfolio will perform in the future. The following table discloses the inception dates of the Portfolio and its respective share classes along with the Portfolio s diversification status as of period end: Portfolio Institutional Administrative Advisor Diversification Portfolio Name Inception Class Class M Class Class Status PIMCO Real Return Portfolio 09/30/99 04/10/00 09/30/99 02/28/06 Diversified An investment in the Portfolio is not a bank deposit and is not guaranteed or insured by the Federal Deposit Insurance Corporation ( FDIC ) or any other government agency. It is possible to lose money on investments in the Portfolio. The Trustees are responsible generally for overseeing the management of the Trust. The Trustees authorize the Trust to enter into service agreements with the Adviser, the Distributor, the Administrator and other service providers in order to provide, and in some cases authorize service providers to procure through other parties, necessary or desirable services on behalf of the Trust and the Portfolio. Shareholders are not parties to or third-party beneficiaries of such service agreements. Neither this Portfolio s prospectus nor summary prospectus, the Trust s Statement of Additional Information ( SAI ), any contracts filed as exhibits to the Trust s registration statement, nor any other communications, disclosure documents or regulatory filings (including this report) from or on behalf of the Trust or the Portfolio creates a contract between or among any shareholder of the Portfolio, on the one hand, and the Trust, the Portfolio, a service provider to the Trust or the Portfolio, and/or the Trustees or officers of the Trust, on the other hand. The Trustees (or the Trust and its officers, service providers or other delegates acting under authority of the Trustees) may amend the most recent prospectus or use a new prospectus, summary prospectus or SAI with respect to the Portfolio or the Trust, and/or amend, file and/or issue any other communications, disclosure documents or regulatory filings, and may amend or enter into any contracts to which the Trust or the Portfolio is a party, and interpret the investment objective(s), policies, restrictions and contractual provisions applicable to the Portfolio, without shareholder input or approval, except in circumstances in which shareholder approval is specifically required by law (such as changes to fundamental investment policies) or where a shareholder approval requirement is specifically disclosed in the Trust s then-current prospectus or SAI. PIMCO has adopted written proxy voting policies and procedures ( Proxy Policy ) as required by Rule 206(4)-6 under the Investment Advisers Act of 1940, as amended. The Proxy Policy has been adopted by the Trust as the policies and procedures that PIMCO will use when voting proxies on behalf of the Portfolio. A description of the policies and procedures that PIMCO uses to vote proxies relating to portfolio securities of the Portfolio, and information about how the Portfolio voted proxies relating to portfolio securities held during the most recent twelve-month period ended June 30, are available without charge, upon request, by calling the Trust at (888) 87-PIMCO, on the Portfolio s website at pvit.pimco-funds.com, and on the Securities and Exchange Commission s ( SEC ) website at The Portfolio files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. A copy of the Trust s Form N-Q is available on the SEC s website at and may be reviewed and copied at the SEC s Public Reference Room in Washington, D.C., and is available without charge, upon request, by calling the Trust at (888) 87-PIMCO and on the Portfolio s website at pvit.pimco-funds.com. Information on the operation of the Public Reference Room may be obtained by calling SEC The Trust is distributed by PIMCO Investments LLC, 1633 Broadway, New York, New York ANNUAL REPORT DECEMBER 31,

8 PIMCO Real Return Portfolio Cumulative Returns Through December 31, 2016 (in thousands) $ /99 04/08 12/16 ADMINISTRATIVE CLASS $27,476 INDEX $26,490 $10,000 invested at the end of the month when the Portfolio s Administrative Class commenced operations. Average Annual Total Return for the period ended December 31, 2016 Allocation Breakdown as of 12/31/2016 U.S. Treasury Obligations 64.6% Short-Term Instruments 16.4% Corporate Bonds & Notes 6.6% Sovereign Issues 5.8% U.S. Government Agencies 3.2% Other 3.4% % of Investments, at value. Allocation Breakdown and % of investments exclude securities sold short and financial derivative instruments, if any. Includes Central Funds Used for Cash Management Purposes. 1 Year 5 Years 10 Years Inception PIMCO Real Return Portfolio Institutional Class 5.35% 0.97% 4.51% 6.08% PIMCO Real Return Portfolio Administrative Class 5.19% 0.82% 4.35% 6.03% PIMCO Real Return Portfolio Advisor Class 5.09% 0.72% 4.25% 3.92% Bloomberg Barclays U.S. TIPS Index ± 4.68% 0.89% 4.36% 5.80% / All Portfolio returns are net of fees and expenses. For class inception dates please refer to the Important information. / Average annual total return since 09/30/1999. ± Bloomberg Barclays U.S. TIPS Index is an unmanaged market index comprised of all U.S. Treasury Inflation-Protected Securities rated investment grade (Baa3 or better), have at least one year to final maturity, and at least $250 million par amount outstanding. It is not possible to invest directly in an unmanaged index. Performance quoted represents past performance. Past performance is not a guarantee or a reliable indicator of future results. Current performance may be lower or higher than performance shown. Investment return and the principal value of an investment will fluctuate. Shares may be worth more or less than original cost when redeemed. The Portfolio s performance does not reflect the deduction of additional charges and expenses imposed in connection with investing in Variable Contracts, which will reduce returns. Differences in the Portfolio s performance versus the index and related attribution information with respect to particular categories of securities or individual positions may be attributable, in part, to differences in the pricing methodologies used by the Portfolio and the index. For performance current to the most recent month-end, visit The Portfolio s total annual operating expense ratio as stated in the Portfolio s current prospectus, as supplemented, is 0.63% for Institutional Class shares, 0.78% for Administrative Class shares, and 0.88% for Advisor Class shares. Details regarding any Portfolio s operating expenses can be found in the Portfolio s prospectus. Investment Objective and Strategy Overview PIMCO Real Return Portfolio seeks maximum real return, consistent with preservation of real capital and prudent investment management, by investing under normal circumstances at least 80% of its net assets in inflation-indexed bonds of varying maturities issued by the U.S. and non-u.s. governments, their agencies or instrumentalities and corporations, which may be represented by forwards or derivatives such as options, futures contracts or swap agreements. Assets not invested in inflationindexed bonds may be invested in other types of Fixed Income Instruments. Fixed Income Instruments include bonds, debt securities and other similar instruments issued by various U.S. and non-u.s. public- or private-sector entities. Inflation-indexed bonds are fixed income securities that are structured to provide protection against inflation. Portfolio strategies may change from time to time. Please refer to the Portfolio s current prospectus for more information regarding the Portfolio s strategy. Portfolio Insights The following impacted performance during the reporting period:» Exposure to U.S. Treasury Inflation-Protected Securities (TIPS) benefited absolute performance, as U.S. TIPS posted positive returns over the reporting period.» An overweight to U.S. real duration contributed to relative performance, as yields fell across the curve.» Exposure to U.S. corporate credit within the financial sector benefited relative performance, as these securities posted positive returns.» An underweight to U.K. nominal duration detracted from relative performance, as yields fell across maturities.» Exposure to U.S. Treasuries detracted from relative performance, as nominal interest rates rose across all maturities.» An underweight to European nominal duration detracted from relative performance, as yields fell. 6 PIMCO VARIABLE INSURANCE TRUST

9 Expense Example PIMCO Real Return Portfolio Example As a shareholder of the Portfolio, you incur two types of costs: (1) transaction costs and (2) ongoing costs, including management fees, distribution and/or service (12b-1) fees (if applicable), and other Portfolio expenses. The Example is intended to help you understand your ongoing costs (in dollars) of investing in the Portfolio and to compare these costs with the ongoing costs of investing in other mutual funds. The Expense Example does not reflect any fees or other expenses imposed by the Variable Contracts. If it did, the expenses reflected in the Expense Example would be higher. The Example is based on an investment of $1,000 invested at the beginning of the period and held from July 1, 2016 to December 31, 2016 unless noted otherwise in the table and footnotes below. Actual Expenses The information in the table under the heading Actual provides information about actual account values and actual expenses. You may use the information in these columns, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.60), then multiply the result by the number in the appropriate row for your share class, in the column titled Expenses Paid During Period to estimate the expenses you paid on your account during this period. Hypothetical Example for Comparison Purposes The information in the table under the heading Hypothetical (5% return before expenses) provides information about hypothetical account values and hypothetical expenses based on the Portfolio s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Portfolio s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Portfolio and other portfolios. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other portfolios. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the information under the heading Hypothetical (5% return before expenses) is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different portfolios. In addition, if these transactional costs were included, your costs would have been higher. Expense ratios may vary period to period because of various factors, such as an increase in expenses that are not covered by the management fees such as fees and expenses of the independent trustees and their counsel, extraordinary expenses and interest expense. Actual Hypothetical (5% return before expenses) Beginning Account Value (07/01/16) Ending Account Value (12/31/16) Expenses Paid During Period* Beginning Account Value (07/01/16) Ending Account Value (12/31/16) Expenses Paid During Period* Net Annualized Expense Ratio** Institutional Class $ 1, $ $ 3.85 $ 1, $ 1, $ % Administrative Class 1, , , Advisor Class 1, , , * Expenses Paid During Period are equal to the net annualized expense ratio for the class, multiplied by the average account value over the period, multiplied by 186/366 (to reflect the one-half year period). Overall fees and expenses of investing in the Portfolio will be higher because the example does not reflect variable contract fees and expenses. ** Net Annualized Expense Ratio is reflective of any applicable contractual fee waivers and/or expense reimbursements or voluntary fee waivers. Details regarding fee waivers can be found in Note 8 in the Notes to Financial Statements. ANNUAL REPORT DECEMBER 31,

10 Financial Highlights PIMCO Real Return Portfolio Investment Operations Less Distributions (b) Selected Per Share Data for the Year Ended: Net Asset Value Beginning of Year Net Investment Income (a) Net Realized/ Unrealized Gain (Loss) Total From Net Investment Income From Net Realized Capital Gain Tax Basis Return of Capital Institutional Class 12/31/2016 $ $ 0.30 $ 0.34 $ 0.64 $ (0.18) $ 0.00 $ (0.12) $ (0.30) 12/31/ (0.45) (0.33) (0.55) (0.55) 12/31/ (0.20) (0.20) 12/31/ (1.40) (1.30) (0.25) (0.10) 0.00 (0.35) 12/31/ (0.18) (0.77) 0.00 (0.95) Administrative Class 12/31/ (0.16) 0.00 (0.12) (0.28) 12/31/ (0.44) (0.35) (0.53) (0.53) 12/31/ (0.18) (0.18) 12/31/ (1.40) (1.32) (0.23) (0.10) 0.00 (0.33) 12/31/ (0.16) (0.77) 0.00 (0.93) Advisor Class 12/31/ (0.15) 0.00 (0.12) (0.27) 12/31/ (0.45) (0.36) (0.52) (0.52) 12/31/ (0.17) (0.17) 12/31/ (1.41) (1.33) (0.22) (0.10) 0.00 (0.32) 12/31/ (0.14) (0.77) 0.00 (0.91) Total (a) (b) Per share amounts based on average number of shares outstanding during the year. The tax characterization of distributions is determined in accordance with federal income tax regulations. See Note 2 in the Notes to Financial Statements for more information. 8 PIMCO VARIABLE INSURANCE TRUST See Accompanying Notes

11 Ratios/Supplemental Data Ratios to Average Net Assets Net Asset Value End of Year Total Return Net Assets End of Year (000s) Expenses Expenses Excluding Interest Expense Net Investment Income Portfolio Turnover Rate $ % $ 154, % 0.50% 2.42% 132% (2.56) 168, , (9.08) 138, , ,789, (2.70) 2,037, ,393, (9.22) 2,754, ,626, , (2.80) 513, , (9.31) 461, , See Accompanying Notes ANNUAL REPORT DECEMBER 31,

12 Statement of Assets and Liabilities PIMCO Real Return Portfolio (Amounts in thousands, except per share amounts) December 31, 2016 Assets: Investments, at value Investments in securities* $ 3,044,987 Investments in Affiliates 419,285 Financial Derivative Instruments Exchange-traded or centrally cleared 1,156 Over the counter 23,625 Deposits with counterparty 4,296 Foreign currency, at value 946 Receivable for investments sold 553,858 Receivable for investments sold on a delayed-delivery basis 23,211 Receivable for TBA investments sold 263,714 Receivable for Portfolio shares sold 1,344 Interest and/or dividends receivable 11,307 Dividends receivable from Affiliates 347 Other assets 1 Total Assets 4,348,077 Liabilities: Borrowings & Other Financing Transactions Payable for sale-buyback transactions $ 1,489,483 Payable for short sales 15,168 Financial Derivative Instruments Exchange-traded or centrally cleared 2,586 Over the counter 40,557 Payable for investments in Affiliates purchased 347 Payable for TBA investments purchased 339,800 Deposits from counterparty 7,082 Payable for Portfolio shares redeemed 1,295 Overdraft due to custodian 32 Accrued investment advisory fees 549 Accrued supervisory and administrative fees 548 Accrued distribution fees 113 Accrued servicing fees 241 Other liabilities 57 Total Liabilities 1,897,858 Net Assets $ 2,450,219 Net Assets Consist of: Paid in capital $ 2,646,246 Undistributed net investment income 10,124 Accumulated undistributed net realized (loss) (148,423) Net unrealized (depreciation) (57,728) Net Assets $ 2,450,219 Net Assets: Institutional Class $ 154,072 Administrative Class 1,789,709 Advisor Class 506,438 Shares Issued and Outstanding: Institutional Class 12,554 Administrative Class 145,825 Advisor Class 41,264 Net Asset Value Per Share Outstanding: Institutional Class $ Administrative Class Advisor Class Cost of investments in securities $ 3,091,602 Cost of investments in Affiliates $ 419,289 Cost of foreign currency held $ 930 Proceeds received on short sales $ 15,158 Cost or premiums of financial derivative instruments, net $ 157 * Includes repurchase agreements of: $ 3, PIMCO VARIABLE INSURANCE TRUST See Accompanying Notes

13 Statement of Operations PIMCO Real Return Portfolio (Amounts in thousands) Year Ended December 31, 2016 Investment Income: Interest $ 84,005 Dividends from Investments in Affiliates 1,230 Total Income 85,235 Expenses: Investment advisory fees 6,469 Supervisory and administrative fees 6,469 Servicing fees - Administrative Class 2,886 Distribution and/or servicing fees - Advisor Class 1,283 Trustee fees 72 Interest expense 6,658 Miscellaneous expense 5 Total Expenses 23,842 Net Investment Income 61,393 Net Realized Gain (Loss): Investments in securities (7,689) Investments in Affiliates 77 Exchange-traded or centrally cleared financial derivative instruments (34,624) Over the counter financial derivative instruments (19,147) Foreign currency 1,193 Net Realized (Loss) (60,190) Net Change in Unrealized Appreciation (Depreciation): Investments in securities 130,593 Investments in Affiliates 139 Exchange-traded or centrally cleared financial derivative instruments 11,480 Over the counter financial derivative instruments (4,039) Foreign currency assets and liabilities (953) Net Change in Unrealized Appreciation 137,220 Net Increase in Net Assets Resulting from Operations $ 138,423 See Accompanying Notes ANNUAL REPORT DECEMBER 31,

14 Statements of Changes in Net Assets PIMCO Real Return Portfolio (Amounts in thousands) (Decrease) in Net Assets from: Year Ended December 31, 2016 Year Ended December 31, 2015 Operations: Net investment income $ 61,393 $ 20,935 Net realized (loss) (60,190) (68,269) Net change in unrealized appreciation (depreciation) 137,220 (30,133) Net Increase (Decrease) in Net Assets Resulting from Operations 138,423 (77,467) Distributions to Shareholders: From net investment income Institutional Class (1,891) (7,388) Administrative Class (23,813) (87,630) Advisor Class (5,957) (21,499) Tax basis return of capital Institutional Class (1,518) 0 Administrative Class (19,412) 0 Advisor Class (5,176) 0 Total Distributions (a) (57,767) (116,517) Portfolio Share Transactions: Net (decrease) resulting from Portfolio share transactions** (349,453) (124,061) Total (Decrease) in Net Assets (268,797) (318,045) Net Assets: Beginning of year 2,719,016 3,037,061 End of year* $ 2,450,219 $ 2,719,016 * Including undistributed (overdistributed) net investment income of: $ 10,124 $ (197) ** See Note 12 in the Notes to Financial Statements. (a) The tax characterization of distributions is determined in accordance with federal income tax regulations. See Note 2 in the Notes to Financial Statements for more information. 12 PIMCO VARIABLE INSURANCE TRUST See Accompanying Notes

15 Statement of Cash Flows PIMCO Real Return Portfolio (Amounts in thousands) Cash Flows Provided by Operating Activities: Year Ended December 31, 2016 Net increase in net assets resulting from operations $ 138,423 Adjustments to Reconcile Net Increase in Net Assets from Operations to Net Cash Provided by Operating Activities: Purchases of long-term securities (4,606,182) Proceeds from sales of long-term securities 5,403,445 Purchases of short-term portfolio investments, net (435,070) (Increase) in deposits with counterparty (1,032) Decrease in receivable for investments sold 874,420 Decrease in interest and/or dividends receivable 6,383 (Increase) in dividends receivable from Affiliates (347) Payments on exchange-traded or centrally cleared financial derivative instruments (22,412) Payments on over the counter financial derivative instruments (22,036) Increase in payable for investments purchased 328,412 (Decrease) in deposits from counterparty (3,958) (Decrease) in accrued investment advisory fees (84) (Decrease) in accrued supervisory and administrative fees (85) (Decrease) in accrued distribution fees (7) (Decrease) in accrued servicing fees (44) Proceeds from short sales transactions, net 15,158 Proceeds from foreign currency transactions 240 Increase in other liabilities 49 Net Realized (Gain) Loss Investments in securities 7,689 Investments in Affiliates (77) Exchange-traded or centrally cleared financial derivative instruments 34,624 Over the counter financial derivative instruments 19,147 Foreign currency (1,193) Net Change in Unrealized (Appreciation) Depreciation Investments in securities (130,593) Investments in Affiliates (139) Exchange-traded or centrally cleared financial derivative instruments (11,480) Over the counter financial derivative instruments 4,039 Foreign currency assets and liabilities 953 Net amortization (accretion) on investments 633 Net Cash Provided by Operating Activities 1,598,876 Cash Flows (Used for) Financing Activities: Proceeds from shares sold 371,651 Payments on shares redeemed (771,060) Increase in overdraft due to custodian 32 Cash distributions paid* (1) Proceeds from reverse repurchase agreements 1,215,493 Payments on reverse repurchase agreements (1,218,094) Proceeds from sale-buyback transactions 18,010,000 Payments on sale-buyback transactions (19,215,983) Net Cash (Used for) Financing Activities Net (Decrease) in Cash and Foreign Currency (1,607,962) (9,086) Cash and Foreign Currency: Beginning of year 10,032 End of year $ 946 * Reinvestment of distributions $ 57,766 Supplemental Disclosure of Cash Flow Information: Interest expense paid during the year $ 6,269 See Accompanying Notes ANNUAL REPORT DECEMBER 31,

16 Schedule of Investments PIMCO Real Return Portfolio PRINCIPAL AMOUNT (000S) INVESTMENTS IN SECURITIES 124.3% BANK LOAN OBLIGATIONS 0.0% MARKET VALUE (000S) Hilton Worldwide Finance LLC 3.256% due 10/25/2023 $ 91 $ % due 10/26/ Valeant Pharmaceuticals International, Inc % due 04/01/ Total Bank Loan Obligations (Cost $187) 194 CORPORATE BONDS & NOTES 9.3% BANKING & FINANCE 8.4% AerCap Aviation Solutions BV 6.375% due 05/30/ AerCap Ireland Capital Ltd % due 05/15/ % due 05/15/ % due 05/15/ % due 10/30/ Ally Financial, Inc % due 01/30/ ,500 19, % due 02/15/2017 2,500 2, % due 12/01/ ,900 13,400 Bank of America N.A % due 06/05/ ,780 24,780 BBVA Bancomer S.A % due 03/10/ Bear Stearns Cos. LLC 7.250% due 02/01/2018 5,500 5,821 CIT Group, Inc % due 02/19/ % due 08/15/ % due 05/15/ % due 03/15/ % due 02/15/ Citigroup, Inc % due 05/01/ ,900 32,927 Cooperatieve Rabobank UA 1.220% due 04/28/ ,900 32,923 Credit Suisse Group Funding Guernsey Ltd % due 09/15/2022 2,600 2,624 Deutsche Bank AG 4.250% due 10/14/ ,000 11,044 Ford Motor Credit Co. LLC 1.684% due 09/08/ Goldman Sachs Group, Inc % due 09/15/2020 9,900 9,997 ING Bank NV 2.625% due 12/05/2022 3,200 3,181 International Lease Finance Corp % due 04/15/ % due 04/01/ % due 05/15/ % due 12/15/ % due 03/15/ % due 09/01/ JPMorgan Chase & Co % due 04/25/2018 8,400 8, % due 06/23/ ,000 12,106 Lehman Brothers Holdings, Inc % due 09/27/2027 ^ Mitsubishi UFJ Financial Group, Inc % due 03/01/2021 4,900 5,073 Navient Corp % due 09/25/ % due 01/15/2019 2,500 2,600 OneMain Financial Holdings LLC 6.750% due 12/15/ Santander Holdings USA, Inc % due 11/24/ Synchrony Financial 2.287% due 11/09/ PRINCIPAL AMOUNT (000S) MARKET VALUE (000S) Toronto-Dominion Bank 2.250% due 03/15/2021 $ 4,800 $ 4,770 Unibail-Rodamco SE 1.650% due 04/16/2019 5,700 5, ,594 INDUSTRIALS 0.5% AbbVie, Inc % due 05/14/2018 2,800 2,803 Aetna, Inc % due 12/08/2017 2,000 2, % due 06/15/2021 1,400 1,394 AP Moller - Maersk A/S 2.550% due 09/22/ Hellenic Railways Organization S.A % due 03/17/2017 EUR 3,900 4,074 Japan Tobacco, Inc % due 07/23/2018 $ Kinder Morgan, Inc % due 06/01/ ,691 UTILITIES 0.4% BG Energy Capital PLC 6.500% due 11/30/2072 GBP 1,700 2,190 Petrobras Global Finance BV 4.375% due 05/20/2023 $ % due 03/17/ % due 01/27/2021 7,600 7, % due 01/16/2034 GBP % due 05/23/2021 $ ,622 Total Corporate Bonds & Notes (Cost $227,836) 226,907 MUNICIPAL BONDS & NOTES 0.0% WEST VIRGINIA 0.0% Tobacco Settlement Finance Authority, West Virginia Revenue Bonds, Series % due 06/01/ Total Municipal Bonds & Notes (Cost $640) 606 U.S. GOVERNMENT AGENCIES 4.6% Fannie Mae 0.644% due 12/25/ % due 08/25/ % due 07/25/ /25/ % due 05/25/ % due 02/25/2041 1,884 1, % due 07/01/ /01/ % due 10/01/ % due 05/25/ Fannie Mae, TBA 3.000% due 01/01/ /01/ ,000 36, % due 01/01/ /01/ ,000 51,302 Freddie Mac 0.854% due 10/15/ % due 02/15/ % due 08/25/ % due 08/15/ /15/ ,227 10, % due 10/25/ /25/2045 3,781 3, % due 01/01/ % due 12/01/ NCUA Guaranteed Notes 1.102% due 10/07/2020 2,023 2, % due 12/08/2020 3,726 3,745 PRINCIPAL AMOUNT (000S) MARKET VALUE (000S) Small Business Administration 5.902% due 02/10/2018 $ 62 $ % due 08/01/ Total U.S. Government Agencies (Cost $111,379) 111,942 U.S. TREASURY OBLIGATIONS 91.4% U.S. Treasury Inflation Protected Securities (d) 0.125% due 04/15/2019 (h)(j) 45,214 45, % due 04/15/2020 (f)(h)(j) 88,251 89, % due 01/15/2022 (f) 180, , % due 07/15/2022 (f) 247, , % due 01/15/2023 (f)(j) 151, , % due 07/15/2024 (j) 44,405 43, % due 07/15/2026 4,397 4, % due 01/15/2025 (j) 67,947 66, % due 07/15/2023 (f)(h)(j) 92,670 93, % due 07/15/2025 (j) 5,993 5, % due 07/15/ ,377 80, % due 01/15/2024 (f) 57,847 58, % due 01/15/ ,905 11, % due 02/15/2043 5,698 5, % due 02/15/2042 (j) 11,703 11, % due 02/15/ ,118 15, % due 02/15/ ,648 64, % due 07/15/2020 (h)(j) 22,877 24, % due 07/15/2018 (h) 1,166 1, % due 01/15/2020 (f) 103, , % due 02/15/2044 (f)(j) 134, , % due 01/15/2018 (h)(j) 3,000 3, % due 01/15/2028 (f) 67,913 75, % due 07/15/2019 (h)(j) 9,623 10, % due 02/15/2040 (f) 42,106 52, % due 02/15/2041 (j) 4,360 5, % due 01/15/2025 (f) 176, , % due 01/15/ ,943 29, % due 01/15/2029 (f) 97, , % due 04/15/ ,935 88, % due 04/15/2029 (f) 124, ,027 U.S. Treasury Notes 1.750% due 11/30/ ,130 20, % due 11/15/2026 3,300 3, % due 12/31/2021 (j) Total U.S. Treasury Obligations (Cost $2,280,471) 2,239,173 NON-AGENCY MORTGAGE-BACKED SECURITIES 2.1% American Home Mortgage Investment Trust 2.778% due 09/25/ Banc of America Commercial Mortgage Trust 5.492% due 02/10/ Banc of America Funding Trust 0.959% due 07/20/ % due 02/20/ % due 01/20/2047 ^ Banc of America Mortgage Trust 2.903% due 02/25/2036 ^ % due 06/25/ % due 11/25/ % due 09/25/ Banc of America Re-REMIC Trust 5.679% due 06/24/ % due 02/17/ BCRR Trust 5.858% due 07/17/ Bear Stearns Adjustable Rate Mortgage Trust 2.820% due 08/25/ % due 10/25/ % due 03/25/ % due 01/25/ Bear Stearns ALT-A Trust 3.117% due 03/25/2036 ^ % due 09/25/2035 1,785 1,538 Chase Mortgage Finance Trust 3.017% due 02/25/ ChaseFlex Trust 6.000% due 02/25/2037 ^ PIMCO VARIABLE INSURANCE TRUST See Accompanying Notes

17 December 31, 2016 PRINCIPAL AMOUNT (000S) MARKET VALUE (000S) Chevy Chase Funding LLC Mortgage- Backed Certificates 1.036% due 01/25/2035 $ 16 $ 14 Citigroup Mortgage Loan Trust, Inc % due 09/25/ % due 05/25/ % due 09/25/2037 ^ Countrywide Alternative Loan Trust 0.919% due 02/20/2047 ^ % due 05/25/ % due 09/25/2046 ^ 4,845 3, % due 12/25/ % due 12/25/ Countrywide Home Loan Mortgage Pass-Through Trust 2.876% due 05/20/2036 ^ % due 11/19/ % due 08/25/2035 ^ Deutsche ALT-B Securities, Inc % due 10/25/2036 ^ Eurosail PLC 0.675% due 06/13/2045 GBP % due 06/13/2045 3,512 4,002 First Horizon Alternative Mortgage Securities Trust 2.996% due 06/25/2034 $ First Horizon Mortgage Pass-Through Trust 2.817% due 02/25/ % due 08/25/ GreenPoint Mortgage Funding Trust 0.862% due 11/25/ % due 06/25/ GS Mortgage Securities Trust 4.592% due 08/10/2043 6,000 6,398 GSR Mortgage Loan Trust 3.010% due 09/25/ % due 12/25/ % due 07/25/ % due 01/25/ HarborView Mortgage Loan Trust 1.016% due 02/19/ % due 06/20/ % due 05/19/ IndyMac Mortgage Loan Trust 1.536% due 05/25/ % due 12/25/ % due 11/25/2035 ^ JPMorgan Chase Commercial Mortgage Securities Trust 5.794% due 02/12/ JPMorgan Mortgage Trust 2.572% due 07/27/ % due 07/25/ % due 08/25/2035 ^ % due 02/25/ % due 09/25/ % due 07/25/ % due 08/25/ JPMorgan Resecuritization Trust 6.000% due 02/27/ Marche Mutui SRL 0.108% due 02/25/2055 EUR % due 01/27/ MASTR Adjustable Rate Mortgages Trust 3.043% due 11/21/2034 $ Mellon Residential Funding Corp. Mortgage Pass- Through Certificates 1.404% due 11/15/ Mellon Residential Funding Corp. Mortgage Pass- Through Trust 1.144% due 12/15/ Merrill Lynch Mortgage Investors Trust 1.006% due 11/25/ % due 10/25/ % due 12/25/ Merrill Lynch/Countrywide Commercial Mortgage Trust 5.700% due 09/12/ PRINCIPAL AMOUNT (000S) MARKET VALUE (000S) Morgan Stanley Capital Trust 5.809% due 12/12/2049 $ 502 $ % due 06/11/ Morgan Stanley Mortgage Loan Trust 2.862% due 06/25/ Morgan Stanley Re-REMIC Trust 5.793% due 08/12/2045 1,294 1,298 Residential Accredit Loans, Inc. Trust 1.056% due 08/25/ Royal Bank of Scotland Capital Funding Trust 6.095% due 12/16/2049 1,280 1,290 Sequoia Mortgage Trust 0.939% due 07/20/2036 1, % due 10/19/ Structured Adjustable Rate Mortgage Loan Trust 1.974% due 01/25/ % due 08/25/ % due 02/25/ % due 12/25/ Structured Asset Mortgage Investments Trust 0.946% due 06/25/ % due 04/25/ % due 07/19/ % due 10/19/ Swan Trust 2.940% due 04/25/2041 AUD Thrones PLC 1.902% due 07/20/2044 GBP Vornado DP LLC Trust 4.004% due 09/13/2028 $ 6,500 6,858 WaMu Mortgage Pass-Through Certificates Trust 1.297% due 01/25/ % due 05/25/ % due 12/25/ % due 02/25/ % due 11/25/ % due 07/25/ % due 11/25/ % due 12/25/ % due 08/25/ Wells Fargo Mortgage-Backed Securities Trust 3.039% due 09/25/ Total Non-Agency Mortgage-Backed Securities (Cost $49,253) 50,359 ASSET-BACKED SECURITIES 2.6% Aquilae CLO PLC 0.050% due 01/17/2023 EUR Atlas Senior Loan Fund Ltd % due 01/30/2024 $ 2,100 2,102 Bayview Opportunity Master Fund Trust 4.350% due 01/28/ Cadogan Square CLO BV 0.042% due 07/24/2023 EUR Carlyle High Yield Partners Ltd % due 04/19/2022 $ Citigroup Mortgage Loan Trust, Inc % due 01/25/ % due 06/25/2037 7,000 6,239 College Loan Corp. Trust 1.132% due 01/25/ Credit-Based Asset Servicing and Securitization LLC 0.816% due 11/25/ Equity One Mortgage Pass-Through Trust 1.356% due 04/25/ Finn Square CLO Ltd % due 12/24/2023 1,400 1,402 Fraser Sullivan CLO Ltd % due 04/20/2023 2,811 2,812 GSAMP Trust 0.826% due 12/25/ % due 09/25/2035 ^ PRINCIPAL AMOUNT (000S) MARKET VALUE (000S) HSI Asset Securitization Corp. Trust 0.806% due 10/25/2036 $ 7 $ 4 Merrill Lynch Mortgage Investors Trust 0.836% due 09/25/ % due 02/25/ Morgan Stanley IXIS Real Estate Capital Trust 0.806% due 11/25/ Navient Student Loan Trust 1.906% due 03/25/2066 4,248 4,297 NovaStar Mortgage Funding Trust 1.226% due 01/25/2036 2,100 1,876 OneMain Financial Issuance Trust 2.470% due 09/18/2024 8,928 8,942 Palmer Square CLO Ltd % due 10/17/2025 5,100 5,091 Park Place Securities, Inc % due 09/25/2035 3,200 2,967 Park Place Securities, Inc. Asset-Backed Pass-Through Certificates 1.246% due 09/25/ % due 10/25/2034 4,000 3,554 PDM CLO BV 0.561% due 02/14/2023 EUR Penta CLO S.A % due 06/04/ RAAC Trust 1.096% due 08/25/2036 $ Renaissance Home Equity Loan Trust 1.516% due 12/25/ Securitized Asset-Backed Receivables LLC Trust 0.816% due 12/25/2036 ^ SLM Student Loan Trust 0.922% due 04/25/2019 5,455 5, % due 04/25/2023 7,078 7,094 Soundview Home Loan Trust 0.816% due 11/25/ Structured Asset Securities Corp. Mortgage Loan Trust 2.117% due 04/25/ Symphony CLO Ltd % due 05/15/ Vericrest Opportunity Loan Trust 4.250% due 03/26/ VOLT LLC 3.375% due 10/25/ % due 02/25/ % due 06/26/2045 2,217 2, % due 04/25/ Voya CLO Ltd % due 10/15/2022 4,300 4,303 Total Asset-Backed Securities (Cost $64,310) 64,689 SOVEREIGN ISSUES 8.2% Autonomous Community of Catalonia 4.950% due 02/11/2020 EUR 1,000 1,128 Brazil Letras do Tesouro Nacional 0.000% due 04/01/2017 (b) BRL 262,600 78, % due 01/01/2018 (b) 129,500 35,706 France Government International Bond 2.250% due 07/25/2020 (d) EUR 3,204 3,847 Italy Buoni Poliennali Del Tesoro 0.100% due 05/15/2022 (d) % due 09/15/2018 (d) 1,922 2, % due 09/15/2024 (d) 10,262 12, % due 09/15/2041 (d) 2,131 2, % due 09/15/2026 (d) Japan Government International Bond 0.100% due 03/10/2024 (d) JPY 204,600 1,844 Mexico Government International Bond 4.750% due 06/14/2018 MXN 65,102 3, % due 05/29/ ,051 9,022 New Zealand Government International Bond 2.000% due 09/20/2025 (d) NZD 7,276 5, % due 09/20/2030 (d) 15,248 11,747 See Accompanying Notes ANNUAL REPORT DECEMBER 31,