Fidelity VIP High Income Portfolio

[Pages:11]PORTFOLIO MANAGER Q&A | AS OF JUNE 30, 2021

Fidelity? VIP High Income Portfolio

Key Takeaways

? For the semiannual reporting period ending June 30, 2021, the fund's share classes gained about 3%, roughly in line with the 3.70% advance of the benchmark, the ICE BofA? US High Yield Constrained Index.

? Co-Manager Michael Weaver says that, despite a changing interest

rate dynamic, the high-yield market produced a solid gain in the first half of 2021, thanks to an improved fundamental credit backdrop.

? The past six months, Mike and Co-Manager Alexandre Karam

continued to take a consistent, conservative approach to investing in high-yield bonds.

? This period, the fund's core high-yield bond portfolio finished a bit

behind the benchmark. Here, industry positioning helped to a small degree, while security selection had a negligible impact overall.

? By industry, positioning in energy contributed most versus the

benchmark by a wide margin, with both an overweighting in the outperforming group and picks within it adding value.

? Avoiding the entertainment/film segment and overweighting

telecommunications each detracted.

? The fund's non-benchmark allocation to floating-rate bank loans very

slightly trailed high-yield and therefore modestly detracted from relative performance, as did the fund's stake in cash.

? The top individual relative contributors were Mesquite Energy and

Jonah Energy, while the biggest detractor was AMC Entertainment.

? As of June 30, Michael and Alexandre believe high-yield credit

fundamentals remain relatively stable, despite continued macroeconomic and political uncertainty. They note that high-yield spreads as of June 30, while tight relative to history, do not seem unreasonable. That said, they expect to see increased volatility if and when fundamentals worsen.

Not FDIC Insured ? May Lose Value ? No Bank Guarantee

MARKET RECAP

The ICE BofA? US High Yield Constrained Index gained 3.70% for the six months ending June 30, 2021, with high-yield bonds rising on the prospect of a surge in economic growth amid widespread COVID-19 vaccinations, fiscal stimulus and fresh spending programs. As 2021 began, investors saw reasons to be hopeful. The rollout of three COVID-19 vaccines was underway, the U.S. Federal Reserve pledged to hold interest rates near zero until the economy recovered, and the federal government would deploy trillions of dollars in aid to boost consumers and the economy. Many economists raised their expectations for a powerful recovery, as opposed to a sluggish rebound. Choppy trading in a flattish May reflected concerns about inflation and jobs, but the uptrend resumed to close the first half of the year. For the full six months, lower-rated bonds (+9%) fared best, while the B and BB credit tiers each gained about 3%. By industry, entertainment/film (+30%) led the way by a wide margin. Energy (+11%) also stood out, boosted by a sharp rally in the price of oil. Energy represented about 13% of the index the past six months. Air transportation and publishing/printing each rose 8%. In contrast, notable laggards included the defensive utilities industry (0%), followed by a trio of segments that each gained roughly 1%: restaurants, food & drug retail, and cable/satellite TV. Telecommunications, a sizable index component, also advanced roughly 1% this period.

PORTFOLIO MANAGER Q&A | AS OF JUNE 30, 2021

Q&A

Michael Weaver Co-Manager

Fund Facts

Start Date: Size (in millions):

Alexandre Karam Co-Manager

September 19, 1985 $1,006.06

Investment Approach

? Fidelity? VIP High Income Portfolio is a diversified highyield bond strategy focused on investing primarily in the bonds of non-investment-grade companies.

? We apply a core investment approach, with the majority of the fund concentrated in securities rated B and BB, and typically below-benchmark exposure to the more opportunistic, lower-rated (CCC or below) credit tiers.

? We take a consistent, conservative approach, focusing on higher-quality, less-cyclical industries and businesses. In particular, we seek companies with strong balance sheets, high free cash flow, improving business/industry fundamentals and solid management teams. In doing so, we take a longer-term investment outlook, with a focus on the best risk-adjusted opportunities that we can find in the market.

? We strive to uncover these companies through in-depth fundamental "bottom-up" credit analysis, working closely with Fidelity's high-income and global research teams.

An interview with Co-Managers Michael Weaver and Alexandre Karam

Q: Mike, how did the fund perform for the six months ending June 30, 2021

M.W. The fund's share classes gained about 3%, roughly in line with the 3.70% advance of the benchmark, the ICE BofA? US High Yield Constrained Index, as well as the Morningstar peer group average.

Looking a bit longer term, the fund rose roughly 13% for the trailing 12 months, lagging the 15.60% gain of the high-yield benchmark and also behind the peer group average.

Q: What factors notably influenced high-yield bonds the past six months

M.W. Despite a changing interest rate dynamic and an uneven economic recovery, the high-yield market produced a solid gain, outpacing investment-grade corporate bonds and government securities. Early on in 2021, bonds of all stripes came under pressure amid concern that economic growth could boost inflation and eventually result in an earlier-than-expected shift in policy from the U.S. Federal Reserve. Yields on fixed-income assets generally rose and their prices generally declined.

By the spring, however, investors viewed weak-to-mixed economic data as an indication that the economic recovery might have stalled, and inflation worries waned. Bond yields moved lower and their prices rose. The Fed remained steady, keeping short-term interest rates near zero. Meanwhile, the fundamental credit backdrop was mostly positive. Corporate earnings were strong as the economy gradually reopened. We saw a fair amount of balance-sheet restructuring, as companies reduced or refinanced debt at low interest rates. The high-yield market was supported by the Fed's purchases of both investment-grade and belowinvestment-grade bonds, which the central bank undertook in March 2020 to keep financial markets operating.

Q: How did your investment strategy play out

M.W. Our focus on higher-quality companies within the high-yield universe presented somewhat of a headwind for performance versus the benchmark. These more-defensive holdings sometimes lagged lower-quality securities. Consistent with Fidelity's approach to managing high-yield bond funds, we worked with our research group to evaluate companies, analyze industries and generate investment

2 | For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

PORTFOLIO MANAGER Q&A | AS OF JUNE 30, 2021

ideas. We believe in taking a consistent, conservative approach to investing in high-yield bonds.

Our investment philosophy is grounded in our belief that higher-quality businesses in the high-yield market offer the best balance of risk and reward over time. Our investment process emphasizes a bottom-up approach, with a heavy focus on primary insights generated from our research team. We aim to have individual security selection drive fund performance over time.

The fund's core allocation to high-yield bonds gained 2.82%, trailing the benchmark and hurting our relative result.

Q: Within the high-yield allocation, what influenced performance versus the benchmark

M.W. Positioning in energy aided our relative result most by far, including an overweighting in the outperforming group and, to a lesser extent, our picks. Energy, boosted largely by investors' increased appetite for cyclical companies that stood to benefit most from the economic recovery, was the largest allocation in the fund and in the benchmark, representing about 17% and 13%, respectively, on average. The energy sector also produced our two top individual relative contributors for the period. Non-benchmark stakes in energy exploration and production company Mesquite Energy (+204%) and oil and gas producer Jonah Energy (+212%) rallied strongly as oil prices increased.

Elsewhere, the combination of an overweighting in aerospace and our picks in the segment added some value versus the benchmark. The outperformance of this category was largely driven by the gains of Canadian plane maker Bombardier (+13%), in which the fund had a sizable overweighting. We liked the company based on our view that it could continue to outperform its peers as it reduced debt and improved its balance sheet. The market eventually agreed with us after the company raised its full-year earnings forecasts and it became more likely that the bond-rating agencies would upgrade the company's credit rating.

We also made a good call with our overweighting in Dish Networks (+7%), a notable relative contributor the past six months and the type of higher-quality company that exemplifies our investment approach. As we expected, the company's earnings came in strong, despite the loss of some pay-TV subscribers. The market viewed positively the company's expected launch of 5G services to limited markets later this year.

Q: What detracted from performance

A.K. The fund's small non-benchmark position in floatingrate loans gained 3.53%, very slightly trailing high yield and therefore modestly detracting from relative performance. I'll also note that the fund's stake in cash hurt in a rising market the past six months.

In the high-yield portion of the fund, our lack of exposure to the entertainment/film category (+30%) was the biggest relative detractor from an industry perspective. Much of the segment's advance can be attributed to the strong gains of benchmark component AMC Entertainment (+209%). In our view, the debt of the movie theater chain was bolstered far more by a broader resurgence of interest in so-called meme companies, rather than an improved fundamental outlook for its core business. We avoided AMC because it simply did not fit our criteria as a high-quality company, making it the fund's largest detractor versus the benchmark.

Other notable detractors included Transocean. While we held a roughly benchmark-neutral weighting, on average, in Transocean, our holdings in securities of various maturities and structures failed to keep pace with the benchmark.

Elsewhere, it hurt to have an above-benchmark stake in Altice (+1%), a provider of broadband communications and video services. These securities lagged largely due to investors' preference for cyclical sectors. We maintained our holdings in Altice, as explained in the callout.

Q: Mike and Alexandre, what's your outlook

M.W. At midyear, we believe fundamentals for companies in the high-yield market are favorable. Leverage trends among high-yield companies are manageable and interest coverage ? meaning how easily companies can pay interest on outstanding debt ? remain robust. The number of companies in distress is minimal, and our outlook calls for a continuation of a below-average default rate in the near term.

A.K. That said, high-yield valuations at period end already reflect this favorable fundamental backdrop. With yields on most high-yield bonds hovering around 4% and the yield spread between them and U.S. Treasuries shrinking to roughly 300 basis points, we highly doubt that in the next 12 months the category can produce anywhere near its gain for the trailing year.

Even though we don't see tremendous value across the board, we think we will still find appealing opportunities. In choosing investments for the fund, we favor durable, higherquality businesses with improving fundamentals. At the same time, we remain generally cautious about industries that are highly cyclical and face strong secular headwinds, as we believe it will be difficult for firms that operate in these areas to improve their credit profile in the next few years.

Our goal remains finding attractively priced bonds for the portfolio while maintaining a disciplined approach to risk management. We focus on the long term, following a process that is analytical, logical and grounded in empirical data. It is important to reiterate that the fund is constructed with a careful and intentional emphasis on security selection, especially with consideration to financial resiliency.

3 | For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

PORTFOLIO MANAGER Q&A | AS OF JUNE 30, 2021

Co-Managers Michael Weaver and Alexandre Karam on opportunities in the telecommunications industry:

M.W. "We've recently identified some telecommunications and cable companies that we believe offer what we consider a superior risk/reward balance in the next 12 to 18 months.

"These groups suffered a pullback in the spring amid concerns about growing competition in broadband, increased regulation and 'cord cutting.' While these developments bear monitoring, we have a favorable view of a number of telecom and cable companies, based on their healthy balance sheets and, in some cases, accelerating free cash flow.

"Our view hinges on several trends. We expect subscriber unit growth will return to a healthy preCOVID rate of three to five percent. Companies' revenue mix will continue to shift from low-margin video to high-margin broadband services. The need for companies to reinvest remains manageable."

A.K. "Furthermore, recent COVID-relief bills and initiatives to help rural, underserved communities improve broadband access should be a near-term tailwind for both price and volume, especially for fund holdings Charter Communications, Frontier Communications and Altice USA. We believe other core fund holdings, including Uniti and its rural/suburban fiber network, should benefit from both increased regulatory focus and rising postpandemic enterprise/wireless investment in network bandwidth.

"We believe the 2021-22 earnings cycle for telecom and cable companies should reflect expanding profit margins, increased free cash flow and the ability to de-leverage their capital structures."

LARGEST HOLDINGS BY ISSUER

Issuer

ALTICE FRANCE SA

TRANSDIGM INC

C&W SENIOR FINANCING DAC

OCCIDENTAL PETROLEUM CORP

BOMBARDIER INC

Five Largest Issuers as a % of Net Assets

10.18%

Total Number of Holdings

412

The five largest issuers are as of the end of the reporting period, and may not be representative of the fund's current or future investments. Holdings do not include money market investments.

10 LARGEST HOLDINGS

Holding

Market Segment

C&W Senior Financing Designated Activity Co. 6.875% 9/15/27

Telecommunications

Rackspace Hosting, Inc. 5.375% 12/1/28 Technology

Uniti 6.5%

Group LP 2/15/29

/

Uniti

Group

Finance,

Inc.

Homebuilders/Real

Estate

TransDigm, Inc. 5.5% 11/15/27

Aerospace

Alliant Holdings Intermediate LLC 6.75% 10/15/27

Insurance

Uniti Group, Inc. 7.875% 2/15/25

Telecommunications

Sprint Capital Corp. 6.875% 11/15/28 Telecommunications

CCO Holdings LLC/CCO Holdings Capital Corp. 5% 2/1/28

Cable/Satellite TV

New Fortress Energy, Inc. 6.75% 9/15/25 Energy

The Chemours Co. LLC 5.75% 11/15/28 Chemicals

10 Largest Holdings as a % of Net Assets

10.07%

Total Number of Holdings

412

The 10 largest holdings are as of the end of the reporting period, and may not be representative of the fund's current or future investments. Holdings do not include money market investments.

4 | For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

PORTFOLIO MANAGER Q&A | AS OF JUNE 30, 2021

ASSET ALLOCATION

Asset Class

Portfolio Weight Index Weight

Relative Weight

Relative Change From Six Months

Ago

Bank Debt

4.31%

0.00%

4.31%

2.16%

Corporate Bond: Cash Pay

89.59%

99.65%

-10.06%

-4.16%

Corporate Bond: Deferred Pay

0.00%

0.07%

-0.07%

0.00%

Other Debt

0.00%

0.28%

-0.28%

0.04%

Convertible Bonds

1.24%

0.00%

1.24%

0.25%

Convertible Preferred Stock

0.00%

0.00%

0.00%

0.00%

Non-Convertible Preferred Stock

0.00%

0.00%

0.00%

0.00%

Equities

0.60%

0.00%

0.60%

0.20%

Cash & Net Other Assets

4.26%

0.00%

4.26%

1.51%

Net Other Assets can include fund receivables, fund payables, and offsets to other derivative positions, as well as certain assets that do not fall into any of the portfolio composition categories. Depending on the extent to which the fund invests in derivatives and the number of positions that are held for future settlement, Net Other Assets can be a negative number.

MARKET-SEGMENT DIVERSIFICATION

Market Segment Energy Telecommunications Health Care Services Aero/Elec/Computer Gaming Cable TV Chemicals Technology Electric Utilities Food/Beverage/Tobacco Homebuilding/Real Estate Diversified Financial Services Insurance Leisure Broadcasting Super Retail Containers Diversified Media Environmental

Portfolio Weight 16.95% 12.28% 7.07% 6.42% 5.55% 5.50% 5.03% 4.78% 4.29% 3.52% 3.24% 2.30% 2.27% 2.12% 1.97% 1.94% 1.74% 1.24% 1.22% 1.06%

Index Weight 13.21% 7.30% 8.21% 5.12% 2.57% 3.30% 4.30% 2.60% 5.06% 3.09% 3.64% 3.56% 3.42% 1.10% 2.29% 3.24% 2.37% 2.34% 0.95% 0.51%

Relative Weight 3.74% 4.98% -1.14% 1.30% 2.98% 2.20% 0.73% 2.18% -0.77% 0.43% -0.40% -1.26% -1.15% 1.02% -0.32% -1.30% -0.63% -1.10% 0.27% 0.55%

Relative Change From Six Months

Ago 1.77% 1.01% 0.16% -0.91% 0.06% -1.38% -1.16% -0.36% 0.71% -1.60% -0.27% 1.22% 0.71% -0.47% -0.32% -0.77% 0.24% -0.37% 0.27% 0.55%

5 | For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

PORTFOLIO MANAGER Q&A | AS OF JUNE 30, 2021

CREDIT-QUALITY DIVERSIFICATION

Credit Quality

Portfolio Weight

Index Weight

Relative Weight

Relative Change From Six Months

Ago

BBB & Above

0.72%

4.48%

-3.76%

-0.62%

BB

25.23%

45.13%

-19.90%

-8.88%

B

52.72%

37.30%

15.42%

6.17%

CCC & Below

14.89%

12.42%

2.47%

1.07%

Not Rated/Not Available

2.20%

0.39%

1.81%

0.71%

Cash & Net Other Assets

4.24%

0.28%

3.96%

1.55%

Net Other Assets can include fund receivables, fund payables, and offsets to other derivative positions, as well as certain assets that do not fall into any of the portfolio composition categories. Depending on the extent to which the fund invests in derivatives and the number of positions that are held for future settlement, Net Other Assets can be a negative number.

Credit ratings for a rated issuer or security are categorized using Moody's Investors Service (Moody's). If Moody's does not publish a rating for a security or issuer, then the Standard & Poor's Ratings Services (S&P) rating is used. When S&P and Moody's provide different ratings for the same issuer or security, the Moody's rating is used. Securities that are not rated by these NRSROs (e.g. equity securities) are categorized as Not Rated. All U.S. government securities are included in the U.S. Government category. The table information is based on the combined investments of the fund and its pro-rata share of any investments in other Fidelity funds.

6 | For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

PORTFOLIO MANAGER Q&A | AS OF JUNE 30, 2021

PERFORMANCE SUMMARY

Variable annuity contracts are issued by insurance companies through separate accounts that are part of the insurer. The value of a variable annuity contract depends on the values of units of subaccounts of the separate account. Each subaccount purchases shares of a corresponding mutual fund. Subaccount investment performance is based on the performance of the mutual fund in which it invests, less insurance company charges made against the assets of the separate account. A subaccount is not a mutual fund.

The information provided in this Performance Summary contains performance information for the fund, or class, and each variable subaccount, with comparisons over different time periods to the fund's relevant benchmarks ? including an appropriate index as well as a group of similar funds whose average returns are compiled and monitored by an independent mutual fund research company. Figures for more than one year assume a steady compounded rate of return and are not a class' year-by-year results, which fluctuated over the periods shown. Fund performance numbers are net of all underlying fund operating expenses, but do not include any insurance charges imposed by your insurance company's separate account. If fund performance information included the effect of these additional charges, the total returns would have been lower. The performance table also contains performance information for certain insurance company subaccounts that invest in the fund. Each variable subaccount's performance, as shown, is net of all fees and expenses, including those charges imposed by your insurance company. Seeing the returns over different time periods can help you assess the performance against relevant measurements and across multiple market environments. The performance information includes average annual total returns and cumulative total returns and is further explained in this section.*

Investing in a variable annuity involves risk of loss ? investment returns, contract value, and, for variable income annuities, payment amounts are not guaranteed and will fluctuate. Withdrawals of taxable amounts from an annuity are subject to ordinary income tax, and, if taken before age 59 1/2, may be subject to a 10% IRS penalty.

Current performance may be higher or lower than the performance data quoted below. An investor's shares, when redeemed, may be worth more or less than their original cost. For month-end performance figures, please visit annuityperformance or call Fidelity. The performance data featured represents past performance, which is no guarantee of future results.

Fiscal periods ending June 30, 2021

Cumulative

Annualized

Total Returns for the Fund

6

Month

YTD

1 Year

3 Year

5 Year

10 Year/ LOF1

VIP High Income Portfolio - Initial Class Gross Expense Ratio: 0.67%2

3.11%

3.11%

12.83%

5.79%

6.27%

5.43%

VIP High Income Portfolio - Investor Class Gross Expense Ratio: 0.71%2

ICE BofA US High Yield/US High Yield Constrained Blend

3.33% 3.70%

3.33% 3.70%

12.89% 15.60%

5.79% 7.12%

6.23% 7.28%

5.40% 6.49%

Morningstar Insurance High Yield Bond

3.59%

3.59%

14.84%

6.82%

6.76%

6.02%

1 Life of Fund (LOF) if performance is less than 10 years. Fund inception date: 09/19/1985.

2 This expense ratio is from the prospectus in effect as of the date shown above and generally is based on amounts incurred during that fiscal year. It does not include any fee waivers or reimbursements, which would be reflected in the fund's net expense ratio.

Performance and disclosure information continued on next page.

7 | For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

PORTFOLIO MANAGER Q&A | AS OF JUNE 30, 2021

PERFORMANCE SUMMARY (continued):

Fiscal periods ending June 30, 2021

Total Returns for the Variable Subaccount**

Annualized

New York Only: 10 Year/Life

of Subaccount

Cumulative

6

Month

YTD

1 Year

Annualized

3 Year

5 Year

10 Year/Life of

Subaccount

Fidelity Retirement Reserves A

4.58%

2.70%

2.70%

11.93%

4.94%

5.41%

4.58%

Fidelity Income Advantage B

4.37%

2.60%

2.60%

11.70%

4.73%

5.20%

4.37%

Fidelity Personal Retirement Annuity C (for contracts purchased prior to 1/1/09 and on or after 9/7/10)

5.14%

3.20%

3.20%

12.61%

5.53%

5.97%

5.14%

Fidelity Personal Retirement Annuity C (for contracts purchased between 1/1/09 and 9/6/10)

5.14%

3.20%

3.20%

12.61%

5.53%

5.97%

5.14%

Fidelity Personal Retirement Annuity C (for contracts purchased on or after 9/7/10 with an initial purchase payment of $1M+)

5.30%

3.27%

3.27%

12.78%

5.69%

6.13%

5.30%

Fidelity Retirement Reserves - Subaccount Inception: February 29, 1988; New York Only Inception: June 03, 1992. Fidelity Income Advantage Subaccount Inception: February 29, 1988; New York Only Inception: June 03, 1992. Fidelity Personal Retirement Annuity - Subaccount Inception: August 15, 2005; New York Only Inception: October 28, 2005.

Fidelity Retirement Reserves' underlying fund options are Initial Class fund offerings. Fidelity Income Advantage's underlying fund options are Initial Class fund offerings. Fidelity Personal Retirement Annuity's underlying fund options are Investor Class fund offerings.

A In NY, Retirement Reserves B In NY, Income Advantage C In NY, Personal Retirement Annuity

* Total returns are historical and include changes in share price (for the fund) and unit price (for the variable subaccount) and reinvestment of dividends and capital gains, if any.

** Returns for Fidelity Retirement Reserves include the 0.80% annual annuity charge. For Fidelity Retirement Reserves contracts, returns do not reflect the annual $30 maintenance fee which applies to contracts where purchase payments less any withdrawals are less than $25,000. Returns for Fidelity Income Advantage include the 1.00% annual annuity charge. Returns for Fidelity Personal Retirement Annuity ("FPRA") include the 0.25% annual annuity charge for contracts purchased prior to 1/1/2009, and on or after 9/7/2010. For FPRA contracts purchased between 1/1/2009 and 9/6/2010, returns include a 0.35% annual annuity charge prior to 9/7/2010 and 0.25% thereafter. For FPRA contracts purchased on or after 9/7/2010 with an initial purchase payment of $1,000,000 or more, returns include a 0.10% annual annuity charge. Life of subaccount returns are from the subaccount inception, the date the portfolio was first available in the insurance company's variable product. Please see the last page(s) of this Q&A document for most-recent calendar-quarter performance.

8 | For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

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