December 31, Annual Report. Deutsche Variable Series II. Deutsche Government & Agency Securities VIP

December 31, 2017 Annual Report Deutsche Variable Series II Deutsche Government & Agency Securities VIP

Contents 3 Performance Summary 4 Management Summary 6 Portfolio Summary 7 Investment Portfolio 12 Statement of Assets and Liabilities 12 Statement of Operations 13 Statements of Changes in Net Assets 14 Financial Highlights 15 Notes to Financial Statements 23 Report of Independent Registered Public Accounting Firm 24 Information About Your Fund s Expenses 25 Tax Information 25 Proxy Voting 26 Advisory Agreement Board Considerations and Fee Evaluation 29 Board Members and Officers This report must be preceded or accompanied by a prospectus. To obtain an additional prospectus or summary prospectus, if available, call (800) 728-3337 or your financial representative. We advise you to consider the Fund s objectives, risks, charges and expenses carefully before investing. The summary prospectus and prospectus contain this and other important information about the Fund. Please read the prospectus carefully before you invest. Investing in derivatives entails special risks relating to liquidity, leverage and credit that may reduce returns and/or increase volatility. Bond investments are subject to interest-rate, credit, liquidity and market risks to varying degrees. When interest rates rise, bond prices generally fall. Credit risk refers to the ability of an issuer to make timely payments of principal and interest. The full faith and credit guarantee of the US government applies to the timely repayment of interest, and does not eliminate market risk. Because of the rising US government debt burden, it is possible that the US government may not be able to meet its financial obligations or that securities issued by the US government may experience credit downgrades. The Fund may lend securities to approved institutions. See the prospectus for details. Deutsche Asset Management represents the asset management activities conducted by Deutsche Bank AG or any of its subsidiaries. Deutsche AM Distributors, Inc., 222 South Riverside Plaza, Chicago, IL 60606, (800) 621-1148 NOT FDIC/NCUA INSURED NO BANK GUARANTEE MAY LOSE VALUE NOT A DEPOSIT NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY 2 Deutsche Variable Series II Deutsche Government & Agency Securities VIP

Performance Summary December 31, 2017 (Unaudited) Fund performance shown is historical, assumes reinvestment of all dividend and capital gain distributions and does not guarantee future results. Investment return and principal value fluctuate with changing market conditions so that, when redeemed, shares may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Please contact your participating insurance company for the Fund s most recent month-end performance. Performance doesn t reflect charges and fees ( contract charges ) associated with the separate account that invests in the Fund or any variable life insurance policy or variable annuity contract for which the Fund is an investment option. These charges and fees will reduce returns. While all share classes have the same underlying portfolio, their performance will differ. The gross expense ratios of the Fund, as stated in the fee table of the prospectus dated May 1, 2017 are 0.86% and 1.21% for Class A and Class B shares, respectively, and may differ from the expense ratios disclosed in the Financial Highlights tables in this report. Generally accepted accounting principles require adjustments to be made to the net assets of the Fund at period end for financial reporting purposes only, and as such, the total return based on the unadjusted net asset value per share may differ from the total return reported in the financial highlights. Growth of an Assumed $10,000 Investment in Deutsche Government & Agency Securities VIP Deutsche Government & Agency Securities VIP Class A Bloomberg Barclays GNMA Index $15,000 $10,000 $5,000 $14,579 $14,038 The Bloomberg Barclays GNMA Index is an unmanaged, market-value-weighted measure of all fixed-rate securities backed by mortgage pools of the Government National Mortgage Association. Index returns do not reflect any fees or expenses and it is not possible to invest directly into an index. $0 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 Yearly periods ended December 31 '17 Comparative Results Deutsche Government & Agency Securities VIP 1-Year 3-Year 5-Year 10-Year Class A Growth of $10,000 $10,167 $10,282 $10,497 $14,038 Average annual total return 1.67% 0.93% 0.97% 3.45% Bloomberg Barclays GNMA Index Growth of $10,000 $10,186 $10,489 $10,879 $14,579 Average annual total return 1.86% 1.60% 1.70% 3.84% Deutsche Government & Agency Securities VIP 1-Year 3-Year 5-Year 10-Year Class B Growth of $10,000 $10,131 $10,173 $10,330 $13,576 Average annual total return 1.31% 0.57% 0.65% 3.10% Bloomberg Barclays GNMA Index Growth of $10,000 $10,186 $10,489 $10,879 $14,579 Average annual total return 1.86% 1.60% 1.70% 3.84% The growth of $10,000 is cumulative. Deutsche Variable Series II Deutsche Government & Agency Securities VIP 3

Management Summary December 31, 2017 (Unaudited) During the 12-month period ended December 31, 2017, the Fund provided a total return of 1.67% (Class A shares, unadjusted for contract charges) compared with the 1.86% return of its benchmark, the Bloomberg Barclays GNMA Index. Entering 2017, investor sentiment was supported by optimism over the prospects for higher growth with Republicans holding the White House and both houses of Congress. Economically sensitive, credit-oriented segments of the bond market outperformed more interest rate-sensitive, higher-quality issues for much of the year. In October 2017, the U.S. Federal Reserve (the Fed) begin the gradual tapering of its mortgagebacked security and Treasury holdings. The plan to reduce the Fed s balance sheet had been extensively foreshadowed, so the actual launch of tapering had a muted impact on longer-term bond yields. As 2017 drew to a close, against a backdrop of strengthened employment conditions and robust corporate profits, the passage of a tax reform bill that included a significant reduction in corporate tax rates led to stepped up expectations for Fed rate hikes. In December, the Fed implemented its third quarter-point rate hike of the year by increasing the upper band of its benchmark short-term lending rate from 1.25% to 1.50%. For the 12 months ended December 31, 2017, the U.S. Treasury yield curve flattened as short term yields rose and longer-term rates declined. To illustrate, the two-year Treasury yield went from 1.20% to 1.91%, the five-year from 1.93% to 2.23%, the 10-year from 2.45% to 2.43%, the 20-year from 2.79% to 2.60% and the 30-year from 3.05% to 2.75%. 2017 was a difficult year for the GNMA sector, as faster prepayment and heavy supply undermined sentiment. We reduced GNMA exposure throughout the year in exchange for conventional mortgage-backed securities and other high-quality, out-of-benchmark sectors such as U.S. Treasuries, which proved beneficial to performance. The Fund also maintained a position in collateralized mortgage obligations with favorable prepayment characteristics, which helped drive incremental yield for the Fund. The Fund tactically shifted its positioning along the yield curve throughout the period, while maintaining a strategic bias toward a flattening yield curve that favored longer maturities. High-coupon GNMAs lagged over the 12 months, and we reduced the Fund s overweight to the sector while maintaining exposure to bonds that we believe could have upside potential if interest rate levels rise. Derivatives, which were used for tactical positioning with respect to non-u.s. dollar exposures, had a positive effect on performance when coupled with corresponding currency hedges. Derivatives were also used for hedging U.S. interest rate exposure with minimal impact on performance. We expect a continued flattening of the yield curve given that the Fed is hinting at three or four hikes in the coming year. The positive sentiment is expected to carry forward into the new year, possibly suppressing demand for GNMA securities as investors seek higher yields in a steadily improving economy. However, with spreads having narrowed across asset classes, the relative value equation is pointing back in favor of the high-quality segments of the U.S. fixed income market. The backdrop is further complicated by the Fed s tapering and ultimately vanishing reinvestment into the mortgage-backed securities market. We therefore believe maintaining off-index exposures to liquid instruments such as sovereign bonds, agency CMOs and ABS securities could help mitigate volatility in the coming year. Gregory M. Staples, CFA, Managing Director Scott Agi, CFA, Director Portfolio Managers The views expressed reflect those of the portfolio management team only through the end of the period of the report as stated on the cover. The management team s views are subject to change at any time based on market and other conditions and should not be construed as a recommendation. Past performance is no guarantee of future results. Current and future portfolio holdings are subject to risk. 4 Deutsche Variable Series II Deutsche Government & Agency Securities VIP

Terms to Know The yield curve is a graphical representation of how yields on bonds of different maturities compare. Normally, yield curves slant up, as bonds with longer maturities typically offer higher yields than short-term bonds. The Bloomberg Barclays GNMA Index is an unmanaged, market-value-weighted measure of all fixed rate securities backed by mortgage pools of the Government National Mortgage Association. Index returns do not reflect any fees or expenses and it is not possible to invest directly into an index. Mortgage-backed securities (MBS) are bonds that are secured by mortgage debt. Collateralized mortgage obligations (CMOs) are mortgage-backed securities with separate pools for different classes of bondholders. Asset-backed securities (ABS) are bonds backed by receivables from consumer debt such as credit cards, home equity loans and auto loans. Coupon is the interest rate, expressed as an annual percentage of face value, which a bond issuer promises to pay until maturity. Overweight means the fund holds a higher weighting in a given sector or security than the benchmark. Underweight means the fund holds a lower weighting. Derivatives are contracts whose values can be based on a variety of instruments including indices, currencies or securities. They can be utilized for a variety of reasons including for hedging purposes; for risk management; for non-hedging purposes to seek to enhance potential gains; or as a substitute for direct investment in a particular asset class or to keep cash on hand to meet shareholder redemptions. Investing in derivatives entails special risks relating to liquidity, leverage and credit that may reduce returns and/or increase volatility. Deutsche Variable Series II Deutsche Government & Agency Securities VIP 5

Portfolio Summary (Unaudited) Asset Allocation (As a % of Net Assets) 12/31/17 12/31/16 Mortgage-Backed Securities Pass-Throughs 80% 94% Collateralized Mortgage Obligations 22% 16% Government & Agency Obligations 16% 7% Asset-Backed 5% Commercial Mortgage-Backed Securities 3% 1% Corporate Bonds 1% 2% Cash Equivalents and Other Assets and Liabilities, net 27% 20% 100% 100% Coupons* 12/31/17 12/31/16 Less than 3.5% 35% 27% 3.5% 4.49% 42% 35% 4.5% 5.49% 15% 20% 5.5% 6.49% 5% 17% 6.5% 7.49% 3% 1% 7.5% and Greater 0% 0% 100% 100% Interest Rate Sensitivity 12/31/17 12/31/16 Effective Maturity 9.9 years 9.9 years Effective Duration 4.0 years 4.2 years * Excludes Cash Equivalents and U.S. Treasury Bills. Effective maturity is the weighted average of the maturity date of bonds held by the Fund taking into consideration any available maturity shortening features. Effective duration is an approximate measure of the Fund s sensitivity to interest rate changes taking into consideration any maturity shortening features. Portfolio holdings and characteristics are subject to change. For more complete details about the Fund s investment portfolio, see page 6. Following the Fund s fiscal first and third quarter-end, a complete portfolio holdings listing is filed with the SEC on Form N-Q. The form will be available on the SEC s Web site at sec.gov, and it also may be reviewed and copied at the SEC s Public Reference Room in Washington, D.C. Information on the operation of the SEC s Public Reference Room may be obtained by calling (800) SEC-0330. The Fund s portfolio holdings are also posted on deutschefunds.com from time to time. Please see the Fund s current prospectus for more information. 6 Deutsche Variable Series II Deutsche Government & Agency Securities VIP

Investment Portfolio December 31, 2017 Principal Amount ($)(a) Value ($) Mortgage-Backed Securities Pass-Throughs 79.9% Federal Home Loan Mortgage Corp.: 3.0%, with various maturities from 9/1/2047 until 1/1/2048 (b) 3,175,532 3,176,080 3.5%, 1/1/2048 (b) 1,500,000 1,540,391 Federal National Mortgage Association: 3.0%, 10/1/2047 989,643 990,147 3.5%, with various maturities from 3/1/2045 until 1/1/2048 (b) 4,883,906 5,023,618 Government National Mortgage Association: 3.0%, 1/1/2048 (b) 2,900,000 2,926,281 3.5%, with various maturities from 4/15/2042 until 1/1/2048 (b) 8,952,364 9,285,020 4.0%, with various maturities from 9/20/2040 until 8/15/2047 (b) 3,317,415 3,500,974 4.5%, with various maturities from 6/20/2033 until 6/20/2047 3,345,367 3,562,313 4.55%, 1/15/2041 154,256 163,348 4.625%, 5/15/2041 99,772 105,623 5.0%, with various maturities from 12/15/2032 until 8/15/2040 885,521 961,290 5.5%, with various maturities from 1/15/2034 until 6/15/2042 1,421,926 1,580,577 6.0%, with various maturities from 5/20/2034 until 12/20/2038 401,050 451,867 6.5%, with various maturities from 9/15/2036 until 2/15/2039 326,796 369,347 7.0%, with various maturities from 2/20/2027 until 11/15/2038 97,847 100,187 7.5%, 10/20/2031 3,416 3,859 Total Mortgage-Backed Securities Pass-Throughs (Cost $34,006,374) 33,740,922 Asset-Backed 4.9% Automobile Receivables 0.4% AmeriCredit Automobile Receivables Trust, A3, Series 2017-1, 1.87%, 8/18/2021 170,000 169,455 Credit Card Receivables 0.7% Chase Issuance Trust, A, Series 2017-A2, 1-month USD-LIBOR + 0.400%, 1.877%*, 3/15/2024 300,000 301,729 Principal Amount ($)(a) Value ($) Miscellaneous 3.8% Atrium XIII, A1, Series 13A, 144A, 3-month USD-LIBOR + 1.180%, 2.621%*, 11/21/2030 310,000 310,181 Carbone CLO Ltd., A1, Series 2017-1A, 144A, 3-month USD-LIBOR + 1.140%, 2.809%*, 1/20/2031 380,000 380,148 Domino s Pizza Master Issuer LLC, A23, Series 2017-1A, 144A, 4.118%, 7/25/2047 448,875 458,606 Goldentree Loan Management U.S. CLO Ltd., A, Series 2017-2A, 144A, 3-month USD-LIBOR + 1.150%, 2.724%*, 11/28/2030 450,000 451,356 1,600,291 Total Asset-Backed (Cost $2,058,869) 2,071,475 Collateralized Mortgage Obligations 22.1% Federal Home Loan Mortgage Corp.: OA, Series 3179, Principal Only, Zero Coupon, 7/15/2036 80,585 71,416 22, Series 243, Interest Only, 2.589%*, 6/15/2021 16,070 198 YI, Series 3936, Interest Only, 3.0%, 6/15/2025 18,087 340 AI, Series 4016, Interest Only, 3.0%, 9/15/2025 413,351 17,262 WI, Series 3939, Interest Only, 3.0%, 10/15/2025 124,962 4,373 EI, Series 3953, Interest Only, 3.0%, 11/15/2025 194,824 6,575 IO, Series 3974, Interest Only, 3.0%, 12/15/2025 78,663 4,445 DI, Series 4010, Interest Only, 3.0%, 2/15/2027 68,655 5,211 IK, Series 4048, Interest Only, 3.0%, 5/15/2027 766,414 70,701 CZ, Series 4113, 3.0%, 9/15/2042 314,642 294,297 PL, Series 4627, 3.0%, 10/15/2046 500,000 486,898 IK, Series 3754, Interest Only, 3.5%, 6/15/2025 321,530 16,727 PI, Series 3940, Interest Only, 4.0%, 2/15/2041 289,976 42,897 C1, Series 329, Interest Only, 4.0%, 12/15/2041 855,852 161,532 UA, Series 4298, 4.0%, 2/15/2054 76,882 76,246 C32, Series 303, Interest Only, 4.5%, 12/15/2042 876,617 172,100 C28, Series 303, Interest Only, 4.5%, 1/15/2043 1,044,120 226,636 MI, Series 3871, Interest Only, 6.0%, 4/15/2040 42,658 3,356 IJ, Series 4472, Interest Only, 6.0%, 11/15/2043 356,720 81,864 A, Series 172, Interest Only, 6.5%, 1/1/2024 7,619 1,043 The accompanying notes are an integral part of the financial statements. Deutsche Variable Series II Deutsche Government & Agency Securities VIP 7

Principal Amount ($)(a) Value ($) C22, Series 324, Interest Only, 6.5%, 4/15/2039 492,382 125,211 Federal National Mortgage Association: DI, Series 2011-136, Interest Only, 3.0%, 1/25/2026 67,676 3,588 IB, Series 2013-35, Interest Only, 3.0%, 4/25/2033 526,350 74,144 Z, Series 2013-44, 3.0%, 5/25/2043 96,441 90,444 HI, Series 2010-123, Interest Only, 3.5%, 3/25/2024 23,966 188 KI, Series 2011-72, Interest Only, 3.5%, 3/25/2025 55,450 230 IO, Series 2012-146, Interest Only, 3.5%, 1/25/2043 1,116,661 212,914 4, Series 406, Interest Only, 4.0%, 9/25/2040 215,791 42,558 25, Series 351, Interest Only, 4.5%, 5/25/2019 15,922 282 21, Series 334, Interest Only, 5.0%, 3/25/2018 10 0 20, Series 334, Interest Only, 5.0%, 3/25/2018 28 0 23, Series 339, Interest Only, 5.0%, 6/25/2018 1,027 3 26, Series 381, Interest Only, 5.0%, 12/25/2020 9,550 394 IO, Series 2016-26, Interest Only, 5.0%, 5/25/2046 951,380 186,591 30, Series 381, Interest Only, 5.5%, 11/25/2019 41,359 1,470 PI, Series 2009-14, Interest Only, 5.5%, 3/25/2024 1,291,661 77,282 UI, Series 2010-126, Interest Only, 5.5%, 10/25/2040 379,043 75,407 IO, Series 2014-70, Interest Only, 5.5%, 10/25/2044 502,789 109,674 BI, Series 2015-97, Interest Only, 5.5%, 1/25/2046 422,543 92,878 WI, Series 2011-59, Interest Only, 6.0%, 5/25/2040 67,171 3,246 101, Series 383, Interest Only, 6.5%, 9/25/2022 314,297 29,701 YT, Series 2013-35, 6.5%, 9/25/2032 543,786 622,616 Government National Mortgage Association: WF, Series 2015-80, 1-month USD-LIBOR + 0.250%, 1.741%*, 1/16/2044 1,711,468 1,713,585 PB, Series 2012-90, 2.5%, 7/20/2042 515,988 460,443 ZB, Series 2016-161, 3.0%, 11/20/2046 842,107 800,582 JI, Series 2013-10, Interest Only, 3.5%, 1/20/2043 512,861 102,935 ID, Series 2013-70, Interest Only, 3.5%, 5/20/2043 244,486 44,922 BI, Series 2014-22, Interest Only, 4.0%, 2/20/2029 430,319 40,847 IP, Series 2015-50, Interest Only, 4.0%, 9/20/2040 916,440 72,343 PI, Series 2015-40, Interest Only, 4.0%, 4/20/2044 267,923 30,957 LI, Series 2009-104, Interest Only, 4.5%, 12/16/2018 13,339 121 Principal Amount ($)(a) Value ($) NI, Series 2010-44, Interest Only, 4.5%, 10/20/2037 10,295 9 CI, Series 2010-87, Interest Only, 4.5%, 11/20/2038 1,251,588 65,659 PI, Series 2014-108, Interest Only, 4.5%, 12/20/2039 217,067 37,619 MI, Series 2010-169, Interest Only, 4.5%, 8/20/2040 266,082 31,356 IP, Series 2014-115, Interest Only, 4.5%, 2/20/2044 148,002 27,302 GZ, Series 2005-24, 5.0%, 3/20/2035 632,896 727,207 MZ, Series 2009-98, 5.0%, 10/16/2039 1,277,578 1,518,363 AI, Series 2008-46, Interest Only, 5.5%, 5/16/2023 15,389 331 GI, Series 2003-19, Interest Only, 5.5%, 3/16/2033 337,891 65,412 IB, Series 2010-130, Interest Only, 5.5%, 2/20/2038 82,459 14,722 IA, Series 2012-64, Interest Only, 5.5%, 5/16/2042 202,447 49,085 DI, Series 2009-10, Interest Only, 6.0%, 4/16/2038 127,495 19,509 IP, Series 2009-118, Interest Only, 6.5%, 12/16/2039 34,557 8,903 IC, Series 1997-4, Interest Only, 7.5%, 3/16/2027 281,457 2,085 Total Collateralized Mortgage Obligations (Cost $8,875,907) 9,327,235 Commercial Mortgage-Backed Securities 2.7% CHT Mortgage Trust, A, Series 2017-CSMO,144A, 1-month USD-LIBOR + 0.880%, 2.31%*, 11/15/2036 400,000 400,623 Fannie Mae Grantor Trust, A, Series 2017-T1, 2.898%, 6/25/2027 499,893 496,577 FHLMC Multifamily Structured Pass-Through Securities, X1, Series K055, Interest Only, 1.368%*, 3/25/2026 2,483,267 229,097 Total Commercial Mortgage-Backed Securities (Cost $1,128,914) 1,126,297 Corporate Bond 1.2% Financials Bank of Montreal, 144A, 2.5%, 1/11/2022 (Cost $498,554) 500,000 499,305 Government & Agency Obligations 11.6% Sovereign Bonds 2.2% French Republic Government Bond OAT, 144A, REG S, 1.75%, 5/25/2066 EUR 370,262 420,571 Kingdom of Sweden, Series 1053, 3.5%, 3/30/2039 SEK 3,090,000 516,874 937,445 8 Deutsche Variable Series II Deutsche Government & Agency Securities VIP The accompanying notes are an integral part of the financial statements.

Principal Amount ($)(a) Value ($) U.S. Government Sponsored Agency 5.9% Federal Home Loan Bank, 1.875%, 11/29/2021 2,500,000 2,479,115 U.S. Treasury Obligations 3.5% U.S. Treasury Inflation-Indexed Bond, 0.875%, 2/15/2047 370,012 384,497 U.S. Treasury Note, 2.25%, 11/15/2027 1,100,000 1,084,488 1,468,985 Total Government & Agency Obligations (Cost $4,823,676) 4,885,545 Cash Equivalents 0.0% Shares Value ($) Deutsche Central Cash Management Government Fund, 1.30% (e) (Cost $10,252) 10,252 10,252 % of Net Assets Value ($) Total Investment Portfolio (Cost $53,265,170) 126.8 53,519,260 Other Assets and Liabilities, Net (26.8) (11,297,006) Net Assets 100.0 42,222,254 Short-Term U.S. Treasury Obligations 4.4% U.S. Treasury Bills: 1.18% **, 8/16/2018 (c) 880,000 871,271 1.378% **, 10/11/2018 (c) (d) 1,000,000 986,958 Total Short-Term U.S. Treasury Obligations (Cost $1,862,624) 1,858,229 * Variable or floating rate security. These securities are shown at their current rate as of December 31, 2017. For securities based on a published reference rate and spread, the reference rate and spread are indicated within the description above. Certain variable rate securities are not based on a published reference rate and spread but adjust periodically based on current market conditions, prepayment of underlying positions and/or other variables. ** Annualized yield at time of purchase; not a coupon rate. (a) Principal amount stated in U.S. dollars unless otherwise noted. (b) When-issued, delayed delivery or forward commitment securities included. (c) At December 31, 2017, this security has been pledged, in whole or in part, to cover initial margin requirements for open futures contracts. (d) At December 31, 2017, this security has been pledged, in whole or in part, to cover initial margin requirements for open centrally cleared swap contracts. (e) Affiliated fund managed by Deutsche Investment Management Americas Inc. The rate shown is the annualized seven-day yield at period end. 144A: Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. CLO: Collateralized Loan Obligation Interest Only: Interest Only (IO) bonds represent the interest only portion of payments on a pool of underlying mortgages or mortgage-backed securities. IO securities are subject to prepayment risk of the pool of underlying mortgages. LIBOR: London Interbank Offered Rate Principal Only: Principal Only (PO) bonds represent the principal only portion of payments on a pool of underlying mortgages or mortgage-backed securities. REG S: Securities sold under Regulation S may not be offered, sold or delivered within the United States or to, or for the account or benefit of, U.S. persons, except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act of 1933. Included in the portfolio are investments in mortgage or asset-backed securities which are interests in separate pools of mortgages or assets. Effective maturities of these investments may be shorter than stated maturities due to prepayments. Some separate investments in the Federal Home Loan Mortgage Corp., Federal National Mortgage Association and Government National Mortgage Association issues which have similar coupon rates have been aggregated for presentation purposes in this investment portfolio. At December 31, 2017, open futures contracts purchased were as follows: Futures Currency Expiration Date Contracts Notional Amount ($) Notional Value ($) Unrealized Appreciation (Depreciation) ($) 10 Year U.S. Treasury Note USD 3/20/2018 3 374,507 372,141 (2,366) Ultra 10 Year U.S. Treasury Note USD 3/20/2018 16 2,133,472 2,137,000 3,528 Total net unrealized appreciation 1,162 The accompanying notes are an integral part of the financial statements. Deutsche Variable Series II Deutsche Government & Agency Securities VIP 9

At December 31, 2017, open futures contracts sold were as follows: Futures Currency Expiration Date Contracts Notional Amount ($) Notional Value ($) Unrealized Appreciation ($) Euro-OAT French Government Bond EUR 3/8/2018 9 1,695,265 1,675,734 19,531 Federal Republic of Germany Euro-Bund EUR 3/8/2018 8 1,563,919 1,551,933 11,986 U.S. Treasury Long Bond USD 3/20/2018 5 766,357 765,000 1,357 Total unrealized appreciation 32,874 At December 31, 2017, open interest rate swap contracts were as follows: Centrally Cleared Swaps Cash Flows Paid by the Fund/Frequency Fixed 0.228% Annually Fixed 2.239% Semi-Annually Fixed 2.589% Semi-Annually Fixed 1.698% Semi-Annually Fixed 2.34% Semi-Annually Fixed 2.45% Semi-Annually Fixed 2.522% Semi-Annually Cash Flows Received by the Fund/Frequency Floating 3-Month STIBOR Quarterly Floating 3-Month LIBOR Quarterly Floating 3-Month LIBOR Quarterly Floating 3-Month LIBOR Quarterly Floating 3-Month LIBOR Quarterly Floating 3-Month LIBOR Quarterly Floating 3-Month LIBOR Quarterly Effective/ Expiration Date Notional Amount Currency Upfront Payments Paid ($) Value ($) Unrealized Appreciation/ (Depreciation) ($) 7/18/2017 7/18/2021 16,600,000 SEK (7,002) (7,002) 3/21/2018 3/21/2023 1,700,000 USD 3,065 3,065 3/21/2018 3/21/2038 400,000 USD (3,142) (3,142) 12/20/2017 12/20/2019 5,700,000 USD 40,066 40,066 12/20/2017 12/20/2027 1,300,000 USD 1,682 5,920 4,238 12/20/2017 12/20/2032 1,100,000 USD 4,658 4,658 12/20/2017 12/20/2037 700,000 USD 420 420 Total net unrealized appreciation 42,303 LIBOR: London Interbank Offered Rate; 3-Month LIBOR rate at December 31, 2017 is 1.694%. STIBOR: Stockholm Interbank Offered Rate 3-Month; STIBOR rate at December 31, 2017 is -0.47%. At December 31, 2017, open total return swap contracts were as follows: Bilateral Swaps Pay/Receive Return of the Reference Index Long Positions Markit IOS INDEX FN30.400.10 Fixed Cash Flows Received/ Frequency 4.0%/Monthly Counterparty/ Expiration Date Notional Amount Currency Upfront Payments Paid ($) Value ($) Unrealized Appreciation ($) Goldman Sachs & Co. 1/12/2041 401,623 USD 480 480 10 Deutsche Variable Series II Deutsche Government & Agency Securities VIP The accompanying notes are an integral part of the financial statements.

As of December 31, 2017, the Fund had the following open forward foreign currency contracts: Contracts to Deliver In Exchange For Settlement Date Unrealized Appreciation ($) Counterparty USD 1,036,536 EUR 879,000 1/4/2018 18,383 Citigroup, Inc. SEK 4,185,000 USD 518,452 1/18/2018 7,696 Danske Bank AS USD 929,103 EUR 796,031 1/24/2018 27,459 JPMorgan Chase Securities, Inc. CAD 526,422 NZD 600,000 1/30/2018 6,057 Canadian Imperial Bank of Commerce Total unrealized appreciation 59,595 Contracts to Deliver In Exchange For Settlement Date Unrealized Depreciation ($) Counterparty EUR 879,000 USD 1,038,007 1/4/2018 (16,912) Citigroup, Inc. EUR 348,000 USD 412,509 1/24/2018 (5,670) HSBC Holdings PLC EUR 789,719 USD 935,688 1/24/2018 (13,290) JPMorgan Chase Securities, Inc. Total unrealized depreciation (35,872) Currency Abbreviations CAD Canadian Dollar SEK Swedish Krona EUR Euro USD United States Dollar NZD New Zealand Dollar For information on the Fund s policy and additional disclosures regarding futures contracts, interest rate swap contracts, total return swap contracts and forward foreign currency contracts, please refer to the Derivatives section of Note A in the accompanying Notes to Financial Statements. Fair Value Measurements Various inputs are used in determining the value of the Fund s investments. These inputs are summarized in three broad levels. Level 1 includes quoted prices in active markets for identical securities. Level 2 includes other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds and credit risk). Level 3 includes significant unobservable inputs (including the Fund s own assumptions in determining the fair value of investments). The level assigned to the securities valuations may not be an indication of the risk or liquidity associated with investing in those securities. The following is a summary of the inputs used as of December 31, 2017 in valuing the Fund s investments. For information on the Fund s policy regarding the valuation of investments, please refer to the Security Valuation section of Note A in the accompanying Notes to Financial Statements. Assets Level 1 Level 2 Level 3 Total Fixed Income Investments (f) Mortgage-Backed Securities Pass-Throughs $ $ 33,740,922 $ $ 33,740,922 Asset-Backed 2,071,475 2,071,475 Collateralized Mortgage Obligations 9,327,235 9,327,235 Commercial Mortgage-Backed Securities 1,126,297 1,126,297 Corporate Bond 499,305 499,305 Government & Agency Obligations 4,885,545 4,885,545 Short-Term U.S. Treasury Obligations 1,858,229 1,858,229 Short-Term Investments 10,252 10,252 Derivatives (g) Futures Contracts 36,402 36,402 Interest Rate Swap Contracts 52,447 52,447 Total Return Swap Contracts 480 480 Forward Foreign Currency Contracts 59,595 59,595 Total $ 46,654 $ 53,621,530 $ $ 53,668,184 Liabilities Level 1 Level 2 Level 3 Total Derivatives (g) Futures Contracts $ (2,366) $ $ $ (2,366) Interest Rate Swap Contracts (10,144) (10,144) Forward Foreign Currency Contracts (35,872) (35,872) Total $ (2,366) $ (46,016) $ $ (48,382) There have been no transfers between fair value measurement levels during the year ended December 31, 2017. (f) See Investment Portfolio for additional detailed categorizations. (g) Derivatives include unrealized appreciation (depreciation) on open futures contracts, interest rate swap contracts, total return swap contracts and forward foreign currency contracts. The accompanying notes are an integral part of the financial statements. Deutsche Variable Series II Deutsche Government & Agency Securities VIP 11

Statement of Assets and Liabilities as of December 31, 2017 Assets Investments in non-affiliated securities, at value (cost $53,254,918) $53,509,008 Investment in Deutsche Central Cash Management Government Fund (cost $10,252) 10,252 Cash 1,887,920 Foreign currency, at value (cost $23,582) 23,641 Receivable for investments sold forward commitments 5,204,018 Receivable for Fund shares sold 9,251 Interest receivable 253,428 Receivable for variation margin on futures contracts 20,008 Unrealized appreciation on bilateral swap contracts 480 Unrealized appreciation on forward foreign currency exchange contracts 59,595 Other assets 1,106 Total assets 60,978,707 Liabilities Payable for investments purchased forward commitments 17,516,123 Line of credit loan payable 1,050,000 Payable for Fund shares redeemed 6,478 Payable for variation margin on centrally cleared swaps 24,267 Unrealized depreciation on forward foreign currency exchange contracts 35,872 Accrued management fee 7,196 Accrued Trustees fees 1,569 Other accrued expenses and payables 114,948 Total liabilities 18,756,453 Net assets, at value $42,222,254 Net Assets Consist of Undistributed net investment income 1,051,322 Unrealized appreciation (depreciation) on: Investments 254,090 Swap contracts 42,783 Futures 34,036 Foreign currency 231 Forward foreign currency contracts 23,723 Accumulated net realized gain (loss) (65,240) Paid-in capital 40,881,309 Net assets, at value $42,222,254 Class A Net Asset Value, offering and redemption price per share ($40,373,381 3,619,812 outstanding shares of beneficial interest, no par value, unlimited number of shares authorized) $ 11.15 Class B Net Asset Value, offering and redemption price per share ($1,848,873 165,975 outstanding shares of beneficial interest, no par value, unlimited number of shares authorized) $ 11.14 Statement of Operations for the year ended December 31, 2017 Investment Income Income: Interest $ 1,256,209 Income distributions Deutsche Central Cash Management Government Fund 36,267 Securities lending income, net of borrower rebates 78 Total income 1,292,554 Expenses: Management fee 220,390 Administration fee 48,976 Services to shareholders 801 Record keeping fees (Class B) 2,047 Distribution service fees (Class B) 5,337 Custodian fee 24,284 Professional fees 83,328 Reports to shareholders 20,469 Trustees fees and expenses 4,712 Interest expense 510 Other 20,335 Total expenses before expense reductions 431,189 Expense reductions (126,723) Total expenses after expense reductions 304,466 Net investment income 988,088 Realized and Unrealized Gain (Loss) Net realized gain (loss) from: Investments 1,268,050 Swap contracts (116,392) Futures (316,318) Forward foreign currency contracts 17,199 Foreign currency (1,221) Payments by affiliates (see Note G) 480 851,798 Change in net unrealized appreciation (depreciation) on: Investments (1,172,326) Swap contracts 148,395 Futures 25,841 Forward foreign currency contracts 18,968 Foreign currency 101 (979,021) Net gain (loss) (127,223) Net increase (decrease) in net assets resulting from operations $ 860,865 12 Deutsche Variable Series II Deutsche Government & Agency Securities VIP The accompanying notes are an integral part of the financial statements.

Statements of Changes in Net Assets Years Ended December 31, Increase (Decrease) in Net Assets 2017 2016 Operations: Net investment income $ 988,088 $ 1,359,001 Net realized gain (loss) 851,798 (370,572) Change in net unrealized appreciation (depreciation) (979,021) (170,481) Net increase (decrease) in net assets resulting from operations 860,865 817,948 Distributions to shareholders from: Net investment income: Class A (1,241,081) (1,846,498) Class B (46,826) (72,152) Total distributions (1,287,907) (1,918,650) Fund share transactions: Class A Proceeds from shares sold 3,259,096 2,898,041 Reinvestment of distributions 1,241,081 1,846,498 Payments for shares redeemed (15,457,312) (18,364,955) Net increase (decrease) in net assets from Class A share transactions (10,957,135) (13,620,416) Class B Proceeds from shares sold 67,053 226,087 Reinvestment of distributions 46,826 72,152 Payments for shares redeemed (642,815) (503,123) Net increase (decrease) in net assets from Class B share transactions (528,936) (204,884) Increase (decrease) in net assets (11,913,113) (14,926,002) Net assets at beginning of period 54,135,367 69,061,369 Net assets at end of period (including undistributed net investment income of $1,051,322 and $1,284,868, respectively) $ 42,222,254 $ 54,135,367 Other Information Class A Shares outstanding at beginning of period 4,598,638 5,786,470 Shares sold 291,446 253,037 Shares issued to shareholders in reinvestment of distributions 112,315 163,697 Shares redeemed (1,382,587) (1,604,566) Net increase (decrease) in Class A shares (978,826) (1,187,832) Shares outstanding at end of period 3,619,812 4,598,638 Class B Shares outstanding at beginning of period 213,112 231,100 Shares sold 6,013 19,740 Shares issued to shareholders in reinvestment of distributions 4,234 6,391 Shares redeemed (57,384) (44,119) Net increase (decrease) in Class B shares (47,137) (17,988) Shares outstanding at end of period 165,975 213,112 The accompanying notes are an integral part of the financial statements. Deutsche Variable Series II Deutsche Government & Agency Securities VIP 13

Financial Highlights Years Ended December 31, Class A 2017 2016 2015 2014 2013 Selected Per Share Data Net asset value, beginning of period $11.25 $11.48 $11.80 $11.47 $12.69 Income (loss) from investment operations: Net investment income a.23.25.27.29.24 Net realized and unrealized gain (loss) (.04) (.13) (.26).31 (.59) Total from investment operations.19.12.01.60 (.35) Less distributions from: Net investment income (.29) (.35) (.33) (.27) (.37) Net realized gains (.50) Total distributions (.29) (.35) (.33) (.27) (.87) Net asset value, end of period $11.15 $11.25 $11.48 $11.80 $11.47 Total Return (%) b 1.67 1.06.06 5.29 (3.04) Ratios to Average Net Assets and Supplemental Data Net assets, end of period ($ millions) 40 52 66 87 96 Ratio of expenses before expense reductions (%) c.87.86.74.72.71 Ratio of expenses after expense reductions (%) c.61.58.68.70.67 Ratio of net investment income (%) 2.03 2.22 2.33 2.49 2.05 Portfolio turnover rate (%) 588 521 376 393 794 a b c Based on average shares outstanding during the period. Total return would have been lower had certain expenses not been reduced. Expense ratio does not reflect charges and fees associated with the separate account that invests in the Fund or any variable life insurance policy or variable annuity contract for which the Fund is an investment option. Years Ended December 31, Class B 2017 2016 2015 2014 2013 Selected Per Share Data Net asset value, beginning of period $11.24 $11.46 $11.79 $11.46 $12.67 Income (loss) from investment operations: Net investment income a.19.21.23.25.20 Net realized and unrealized gain (loss) (.04) (.12) (.27).31 (.59) Total from investment operations.15.09 (.04).56 (.39) Less distributions from: Net investment income (.25) (.31) (.29) (.23) (.32) Net realized gains (.50) Total distributions (.25) (.31) (.29) (.23) (.82) Net asset value, end of period $11.14 $11.24 $11.46 $11.79 $11.46 Total Return (%) b 1.31.79 (.36) 4.95 (3.25) Ratios to Average Net Assets and Supplemental Data Net assets, end of period ($ millions) 2 2 3 3 4 Ratio of expenses before expense reductions (%) c 1.21 1.21 1.09 1.06 1.06 Ratio of expenses after expense reductions (%) c.95.93 1.03 1.03.99 Ratio of net investment income (%) 1.69 1.88 1.99 2.16 1.71 Portfolio turnover rate (%) 588 521 376 393 794 a b c Based on average shares outstanding during the period. Total return would have been lower had certain expenses not been reduced. Expense ratio does not reflect charges and fees associated with the separate account that invests in the Fund or any variable life insurance policy or variable annuity contract for which the Fund is an investment option. 14 Deutsche Variable Series II Deutsche Government & Agency Securities VIP The accompanying notes are an integral part of the financial statements.

Notes to Financial Statements A. Organization and Significant Accounting Policies Deutsche Government & Agency Securities VIP (the Fund ) is a diversified series of Deutsche Variable Series II (the Trust ), which is registered under the Investment Company Act of 1940, as amended (the 1940 Act ), as an open-end management investment company organized as a Massachusetts business trust. Multiple Classes of Shares of Beneficial Interest. The Fund offers two classes of shares (Class A shares and Class B shares). Sales of Class B shares are subject to recordkeeping fees up to 0.15% and Rule 12b-1 fees under the 1940 Act equal to an annual rate of 0.25% of the average daily net assets of the Class B shares of the Fund. Class A shares are not subject to such fees. Investment income, realized and unrealized gains and losses, and certain fund-level expenses and expense reductions, if any, are borne pro rata on the basis of relative net assets by the holders of all classes of shares except that each class bears certain expenses unique to that class (including the applicable Rule 12b-1 fee and recordkeeping fees). Differences in class-level expenses may result in payment of different per share dividends by class. All shares have equal rights with respect to voting subject to class-specific arrangements. The Fund s financial statements are prepared in accordance with accounting principles generally accepted in the United States of America ( U.S. GAAP ) which require the use of management estimates. Actual results could differ from those estimates. The Fund qualifies as an investment company under Topic 946 of Accounting Standards Codification of U.S. GAAP. The policies described below are followed consistently by the Fund in the preparation of its financial statements. Security Valuation. Investments are stated at value determined as of the close of regular trading on the New York Stock Exchange on each day the exchange is open for trading. Various inputs are used in determining the value of the Fund s investments. These inputs are summarized in three broad levels. Level 1 includes quoted prices in active markets for identical securities. Level 2 includes other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds and credit risk). Level 3 includes significant unobservable inputs (including the Fund s own assumptions in determining the fair value of investments). The level assigned to the securities valuations may not be an indication of the risk or liquidity associated with investing in those securities. Debt securities are valued at prices supplied by independent pricing services approved by the Fund s Board. Such services may use various pricing techniques which take into account appropriate factors such as yield, quality, coupon rate, maturity, type of issue, trading characteristics, prepayment speeds and other data, as well as broker quotes. If the pricing services are unable to provide valuations, debt securities are valued at the average of the most recent reliable bid quotations or evaluated prices, as applicable, obtained from broker-dealers. These securities are generally categorized as Level 2. Investments in open-end investment companies are valued at their net asset value each business day and are categorized as Level 1. Futures contracts are generally valued at the settlement prices established each day on the exchange on which they are traded and are categorized as Level 1. Forward currency contracts are valued at the prevailing forward exchange rate of the underlying currencies and are categorized as Level 2. Swap contracts are valued daily based upon prices supplied by a Board approved pricing vendor, if available, and otherwise are valued at the price provided by the broker-dealer. Swap contracts are generally categorized as Level 2. Securities and other assets for which market quotations are not readily available or for which the above valuation procedures are deemed not to reflect fair value are valued in a manner that is intended to reflect their fair value as determined in accordance with procedures approved by the Board and are generally categorized as Level 3. In accordance with the Fund s valuation procedures, factors considered in determining value may include, but are not limited to, the type of the security; the size of the holding; the initial cost of the security; the existence of any contractual restrictions on the security s disposition; the price and extent of public trading in similar securities of the issuer or of comparable companies; quotations or evaluated prices from broker-dealers and/or pricing services; information obtained from the issuer, analysts, and/or the appropriate stock exchange (for exchange-traded securities); an analysis of the company s or issuer s financial statements; an evaluation of the forces that influence the issuer and the market(s) in which Deutsche Variable Series II Deutsche Government & Agency Securities VIP 15

the security is purchased and sold; and with respect to debt securities, the maturity, coupon, creditworthiness, currency denomination and the movement of the market in which the security is normally traded. The value determined under these procedures may differ from published values for the same securities. Disclosure about the classification of fair value measurements is included in a table following the Fund s Investment Portfolio. Foreign Currency Translations. The books and records of the Fund are maintained in U.S. dollars. Investment securities and other assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the prevailing exchange rates at period end. Purchases and sales of investment securities, income and expenses are translated into U.S. dollars at the prevailing exchange rates on the respective dates of the transactions. Net realized and unrealized gains and losses on foreign currency transactions represent net gains and losses between trade and settlement dates on securities transactions, the acquisition and disposition of foreign currencies, and the difference between the amount of net investment income accrued and the U.S. dollar amount actually received. The portion of both realized and unrealized gains and losses on investments that results from fluctuations in foreign currency exchange rates is not separately disclosed but is included with net realized and unrealized gain/appreciation and loss/depreciation on investments. Securities Lending. Deutsche Bank AG, as lending agent, lends securities of the Fund to certain financial institutions under the terms of its securities lending agreement. During the term of the loans, the Fund continues to receive interest and dividends generated by the securities and to participate in any changes in their market value. The Fund requires the borrowers of the securities to maintain collateral with the Fund consisting of either cash or liquid, unencumbered assets having a value at least equal to the value of the securities loaned. When the collateral falls below specified amounts, the lending agent will use its best effort to obtain additional collateral on the next business day to meet required amounts under the securities lending agreement. During the year ended December 31, 2017, the Fund invested the cash collateral into a joint trading account in affiliated money market funds, including Deutsche Government & Agency Securities Portfolio, managed by Deutsche Investment Management Americas Inc. Deutsche Investment Management Americas Inc. receives a management/administration fee (0.13% annualized effective rate as of December 31, 2017) on the cash collateral invested in Deutsche Government & Agency Securities Portfolio. The Fund receives compensation for lending its securities either in the form of fees or by earning interest on invested cash collateral net of borrower rebates and fees paid to a lending agent. Either the Fund or the borrower may terminate the loan at any time, and the borrower, after notice, is required to return borrowed securities within a standard time period. There may be risks of delay and costs in recovery of securities or even loss of rights in the collateral should the borrower of the securities fail financially. If the Fund is not able to recover securities lent, the Fund may sell the collateral and purchase a replacement investment in the market, incurring the risk that the value of the replacement security is greater than the value of the collateral. The Fund is also subject to all investment risks associated with the reinvestment of any cash collateral received, including, but not limited to, interest rate, credit and liquidity risk associated with such investments. As of December 31, 2017, the Fund had no securities on loan. Forward Commitments. The Fund may purchase or sell securities on a when-issued, delayed delivery or forward commitment basis with delivery or payment to occur at a later date beyond the normal settlement period. At the time the Fund enters into a commitment to purchase or sell a security, the transaction is recorded and the value of the transaction is reflected in the net asset value. The price of such security and the date when the security will be delivered and paid for are fixed at the time the transaction is negotiated. The Fund may sell the forward commitment security before the settlement date or enter into a new commitment to extend the delivery date into the future. The value of the security may vary with market fluctuations. At the time the Fund enters into a purchase transaction it is required to segregate cash or other liquid assets at least equal to the amount of the commitment. Additionally, the Fund or the counterparty may be required to post securities and/or cash collateral in accordance with the terms of the commitment. Certain risks may arise upon entering into when-issued, delayed delivery or forward commitment transactions from the potential inability of counterparties to meet the terms of their contracts or if the issuer does not issue the securities due to political, economic or other factors. Such transactions may also have the effect of leverage on the Fund and may cause the Fund to be more volatile. Additionally, losses may arise due to changes in the value of the underlying securities. Federal Income Taxes. The Fund s policy is to comply with the requirements of the Internal Revenue Code, as amended, which are applicable to regulated investment companies and to distribute all of its taxable income to its shareholders. 16 Deutsche Variable Series II Deutsche Government & Agency Securities VIP

At December 31, 2017, the Fund had net tax basis capital loss carryforwards of approximately $29,000 of short-term losses, which may be applied against realized net taxable capital gains indefinitely. The Fund has reviewed the tax positions for the open tax years as of December 31, 2017 and has determined that no provision for income tax and/or uncertain tax positions is required in the Fund s financial statements. The Fund s federal tax returns for the prior three fiscal years remain open subject to examination by the Internal Revenue Service. Distribution of Income and Gains. Distributions from net investment income of the Fund, if any, are declared and distributed to shareholders annually. Net realized gains from investment transactions, in excess of available capital loss carryforwards, would be taxable to the Fund if not distributed and, therefore, will be distributed to shareholders at least annually. The Fund may also make additional distributions for tax purposes if necessary. The timing and characterization of certain income and capital gain distributions are determined annually in accordance with federal tax regulations which may differ from accounting principles generally accepted in the United States of America. These differences primarily relate to investments in futures contracts, investments in swap contracts, forward currency contracts and certain securities sold at a loss. As a result, net investment income (loss) and net realized gain (loss) on investment transactions for a reporting period may differ significantly from distributions during such period. Accordingly, the Fund may periodically make reclassifications among certain of its capital accounts without impacting the net asset value of the Fund. At December 31, 2017, the Fund s components of distributable earnings on a tax basis were as follows: Undistributed ordinary income* $ 1,070,799 Capital loss carryforward $ (29,000) Unrealized appreciation (depreciation) on investments $ 299,145 At December 31, 2017, the aggregate cost of investments for federal income tax purposes was $53,267,143. The net unrealized appreciation for all investments based on tax cost was $299,145. This consisted of aggregate gross unrealized appreciation for all investments in which there was an excess of value over tax cost of $973,045 and aggregate gross unrealized depreciation for all investments in which there was an excess of tax cost over value of $673,900. In addition, the tax character of distributions paid by the Fund is summarized as follows: Years Ended December 31, 2017 2016 Distributions from ordinary income* $ 1,287,907 $ 1,918,650 * For tax purposes, short-term capital gain distributions are considered ordinary income distributions. Expenses. Expenses of the Trust arising in connection with a specific fund are allocated to that fund. Other Trust expenses which cannot be directly attributed to a fund are apportioned among the funds in the Trust based upon the relative net assets or other appropriate measures. Contingencies. In the normal course of business, the Fund may enter into contracts with service providers that contain general indemnification clauses. The Fund s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet been made. However, based on experience, the Fund expects the risk of loss to be remote. Other. Investment transactions are accounted for on a trade date plus one basis for daily net asset value calculations. However, for financial reporting purposes, investment transactions are reported on trade date. Interest income is recorded on the accrual basis. Realized gains and losses from investment transactions are recorded on an identified cost basis. All discounts and premiums are accreted/amortized for both tax and financial reporting purposes for the Fund. B. Derivative Instruments Swaps. A swap is a contract between two parties to exchange future cash flows at periodic intervals based on the notional amount of the swap. A bilateral swap is a transaction between the Fund and a counterparty where cash flows are exchanged between the two parties. A centrally cleared swap is a transaction executed between the Fund and a counterparty, then cleared by a clearing member through a central clearinghouse. The central clearinghouse serves as the counterparty, with whom the Fund exchanges cash flows. The value of a swap is adjusted daily, and the change in value, if any, is recorded as unrealized appreciation or depreciation in the Statement of Assets and Liabilities. Gains or losses are realized when the swap expires or is closed. Certain risks may arise when entering into swap transactions including counterparty default; liquidity; or unfavorable changes in interest rates or the value of the underlying reference security, commodity or index. In Deutsche Variable Series II Deutsche Government & Agency Securities VIP 17