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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF
REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-9537
MFS CALIFORNIA INSURED MUNICIPAL FUND
(Exact name of registrant as specified in charter)
500 Boylston Street, Boston, Massachusetts 02116
(Address of principal executive offices) (Zip code)
Susan S. Newton
Massachusetts Financial Services Company
500 Boylston Street
Boston, Massachusetts 02116
(Name and address of agents for service)
Registrant’s telephone number, including area code: (617) 954-5000
Date of fiscal year end: November 30
Date of reporting period: May 31, 2008
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| ITEM 1. | REPORTS TO STOCKHOLDERS. |
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Semiannual report
MFS® California Insured Municipal Fund
5/31/08
CCA-SEM
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MFS® California Insured Municipal Fund
American Stock Exchange Symbol: CCA
NOT FDIC INSURED Ÿ MAY LOSE VALUE Ÿ
NO BANK OR CREDIT UNION GUARANTEE Ÿ NOT A DEPOSIT Ÿ
NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR
NCUA/NCUSIF
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Dear Shareholders:
Negative headlines tend to resonate during difficult markets, and we certainly have had more than our share of tough news recently. As a result consumer, and particularly investor, sentiment are at all-time lows. That said, I do think it is helpful to remember there are always silver linings in the storm clouds if you look hard enough.
Through all of the challenges we have faced, there are some positive underlying trends. In the United States, for example, institutional traders and credit market followers are just now showing increasing signs of confidence and are beginning to take on more risk. At the corporate level, earnings continue to be relatively strong as companies have reduced labor costs, controlled inventories, and relied less on debt to finance expansion. More broadly, low interest rates and strong demand for consumer goods and industrial equipment are good signs for the global economy.
While I do not mean to minimize the risks inherent in today’s markets, periods such as these allow the talented fund managers and research analysts we have at MFS® to test their convictions, reevaluate existing positions, and identify new investment ideas. Our investment process also includes a significant risk management component, with constant attention paid to monitoring market risk, so we can do our best to minimize any surprises to your portfolio.
For investors, this is a great time to check in with your advisor and make sure you have a sound investment plan in place — one that can keep your hard-earned money working over the long term through a strategy that involves asset allocation, diversification, and periodic portfolio rebalancing and reviews. A plan tailored to your distinct needs and goals continues to be the best approach to help you take advantage of the inevitable challenges — and opportunities — that present themselves over time.
Respectfully,
Robert J. Manning
Chief Executive Officer and Chief Investment Officer
MFS Investment Management®
July 15, 2008
The opinions expressed in this letter are subject to change, may not be relied upon for investment advice, and no forecasts can be guaranteed.
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| (a) | The average credit quality of rated securities is based upon a market weighted average of portfolio holdings that are rated by public rating agencies. |
| (d) | Duration is a measure of how much a bond’s price is likely to fluctuate with general changes in interest rates, e.g., if rates rise 1.00%, a bond with a 5-year duration is likely to lose about 5.00% of its value. |
| (i) | For purposes of this presentation, the bond component includes accrued interest amounts and may be positively or negatively impacted by the equivalent exposure from any derivative holdings, if applicable. |
| (m) | The average maturity shown is calculated using the final stated maturity on the portfolio’s holdings without taking into account any holdings which have been pre-refunded or pre-paid to an earlier date or which have a mandatory put date prior to the stated maturity. The average life shown takes into account these earlier dates. |
| (r) | Each security is assigned a rating from Moody’s Investors Service. If not rated by Moody’s, the rating will be that assigned by Standard & Poor’s. Likewise, if not assigned a rating by Standard & Poor’s, it will be based on the rating assigned by Fitch, Inc. For those portfolios that hold a security which is not rated by any of the three agencies, the security is considered Not Rated. Holdings in U.S. Treasuries and government agency mortgage-backed securities, if any, are included in the “AAA”-rating category. Percentages are based on the total market value of investments as of 5/31/08. |
Percentages are based on net assets, including preferred shares, as of 5/31/08, unless otherwise stated.
The portfolio is actively managed and current holdings may be different.
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| Michael Dawson | — | Investment Officer of MFS; employed in the investment area of MFS since 1998. Portfolio manager of the fund since June 2007. | ||
| Geoffrey Schechter | — | Investment Officer of MFS; employed in the investment area of MFS since 1993. Portfolio manager of the fund since June 2007. |
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PERFORMANCE SUMMARY THROUGH 5/31/08
The following chart represents the fund’s historical performance in comparison to its benchmark(s). Investment return and principal value will fluctuate, and shares, when sold, may be worth more or less than their original cost; current performance may be lower or higher than quoted. The performance shown does not reflect the deduction of taxes, if any, that a shareholder would pay on fund distributions or the sale of fund shares.
Price Summary
| Six Months Ended 5/31/08 | |||||||||||
| Date | Price | ||||||||||
| Net Asset Value | 5/31/08 | $12.76 | |||||||||
| 11/30/07 | $13.53 | ||||||||||
| American Stock Exchange Price | 5/31/08 | $11.63 | |||||||||
| 1/07/08 | (high) (t) | $12.45 | |||||||||
| 3/17/08 | (low) (t) | $10.75 | |||||||||
| 11/30/07 | $11.65 | ||||||||||
Total Returns vs Benchmarks
Six Months Ended 5/31/08
| American Stock Exchange Price (r) | 2.33% | |||||
| Net Asset Value (r) | (3.34)% | |||||
| Lehman Brothers Municipal Bond Index (f) | 1.44% | |||||
| (f) | Source: FactSet Research Systems, Inc. |
| (r) | Includes reinvestment of dividends and capital gain distributions. |
| (t) | For the period December 1, 2007 through May 31, 2008. |
Benchmark Definition
Lehman Brothers Municipal Bond Index – a market capitalization-weighted index that measures the performance of the tax-exempt bond market.
It is not possible to invest directly in an index.
Notes to Performance Summary
The fund’s shares may trade at a discount or premium to net asset value. Shareholders do not have the right to cause the fund to repurchase their shares at net asset value. When fund shares trade at a premium, buyers pay more than the net asset value underlying fund shares, and shares purchased at a premium would receive less than the amount paid for them in the event of the fund’s
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Performance Summary – continued
liquidation. As a result, the total return that is calculated based on the net asset value and the American Stock Exchange price can be different.
From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
In accordance with Section 23(c) of the Investment Company Act of 1940, the fund hereby gives notice that it may from time to time repurchase shares of the fund in the open market at the option of the Board of Trustees and on such terms as the Trustees shall determine.
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INVESTMENT OBJECTIVE, PRINCIPAL INVESTMENT STRATEGIES AND RISKS OF THE FUND
Investment Objective
The fund’s investment objective is to seek high current income exempt from federal income tax and California state personal income tax, but may also consider capital appreciation. The fund’s objective may be changed without shareholder approval.
Principal Investment Strategies
MFS normally invests at least 80% of the fund’s net assets in municipal instruments covered by insurance guaranteeing the timely payment of principal and interest.
MFS primarily invests the fund’s assets in investment grade debt instruments, but may also invest in lower quality debt instruments.
The fund invests, under normal market conditions, at least 80% of its net assets, including assets attributable to preferred shares and borrowings for investment purposes, in debt securities the interest of which in the opinion of issuer counsel (or other reputable authority) is exempt from federal regular income tax and California personal income tax. This policy may not be changed without shareholder approval. Interest from the fund’s investments may be subject to the federal alternative minimum tax.
MFS invests a high percentage of the fund’s assets in municipal issuers of California.
The fund may invest a relatively high percentage of the fund’s assets in securities insured by a single insurer or a small number of insurers.
MFS may invest 25% or more of the fund’s assets in municipal instruments that finance similar projects, such as those relating to education, healthcare, housing, utilities, water or sewers. Municipal instruments whose interest is exempt from federal and state personal income tax include instruments issued by U.S. territories and possessions (such as Puerto Rico) and their political subdivisions and public corporations. Although MFS seeks to invest the fund’s assets in municipal instruments whose interest is exempt from federal and state personal income tax, MFS may also invest in taxable instruments.
MFS may invest a relatively high percentage of the fund’s assets in a single issuer or a small number of issuers.
MFS may use derivatives for different purposes, including to earn income and enhance returns, to increase or decrease exposure to a particular market, to manage or adjust the risk profile of the fund, or as alternatives to direct investments.
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Investment Objective, Principal Investment Strategies and Risks of the Fund – continued
MFS uses a bottom-up investment approach in buying and selling investments for the fund. Investments are selected primarily based on fundamental analysis of instruments and their issuers in light of current market, economic, political, and regulatory conditions. Factors considered may include the instrument’s credit quality, collateral characteristics, and indenture provisions, and the issuer’s management ability, capital structure, leverage, and ability to meet its current obligations. Quantitative analysis of the structure of the instrument and its features may also be considered.
The fund uses leverage through the issuance of preferred shares and/or the creation of tender option bonds, and then investing the proceeds pursuant to its investment strategies.
In response to market, economic, political, or other conditions, MFS may depart from the fund’s principal investment strategies by temporarily investing for defensive purposes.
Principal Risks
The portfolio’s yield and share prices change daily based on the credit quality of its investments and changes in interest rates. In general, the value of debt securities will decline when interest rates rise and will increase when interest rates fall. Debt securities with longer maturity dates will generally be subject to greater price fluctuations than those with shorter maturities. Municipal instruments can be volatile and significantly affected by adverse tax or court rulings, legislative or political changes and the financial condition of the issuers and/or insurers of municipal instruments. Changes in the financial condition of an individual municipal insurer can significantly affect the fund’s share price. If the Internal Revenue Service determines an issuer of a municipal security has not complied with applicable tax requirements, interest from the security could become taxable and the security could decline significantly in value. Derivatives can be highly volatile and involve risks in addition to those of the underlying indicator’s in whose value the derivative is based. Gains or losses from derivatives can be substantially greater than the derivatives’ original cost. The portfolio’s performance will be closely tied to the economic and political conditions in California and will be more volatile than the performance of a more geographically diversified portfolio. Lower quality debt securities involve substantially greater risk of default and their value can decline significantly over time. To the extent that investments are purchased with the proceeds from the issuance of preferred shares, the fund’s net asset value will increase or decrease at a greater rate than a comparable unleveraged fund. To the extent that the fund participates in the creation of tender option bonds, it will hold more concentrated positions in individual securities and so its performance may be more volatile than the performance of more diversified funds. A tender option bond issue may terminate upon the occurrence of
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Investment Objective, Principal Investment Strategies and Risks of the Fund – continued
certain enumerated events, which would result in a reduction to the fund’s leverage. In connection with the creation of tender option bonds and for other investment purposes, the fund may invest in inverse floating rate instruments, whose potential income return is inversely related to changes in a floating interest rate. Inverse floating rate instruments may provide investment leverage and be more volatile than other debt instruments. When you sell your shares, they may be worth more or less than the amount you paid for them. Please see the fund’s registration statement for further information regarding these and other risk considerations. A copy of the fund’s registration statement on Form N-2 is available on the EDGAR database on the Securities and Exchange Commission’s Internet Web site at http://sec.gov.
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Pursuant to the fund’s Dividend Reinvestment Plan (the “Plan”), all Common Shareholders whose shares are registered in their own names will have all distributions reinvested automatically in additional Common Shares of the fund by Computershare (the “Plan Agent”), as agent under the Plan, unless a Common Shareholder elects to receive cash. An election to receive cash may be revoked or reinstated at the option of the Common Shareholder. Shareholders whose shares are held in the name of a broker or nominee will have distributions reinvested automatically by the broker or nominee in additional shares under the Plan, unless the service is not provided by the broker or nominee, or unless the shareholder elects to receive distributions in cash. If the service is not available, such distributions will be paid in cash. Shareholders whose shares are held in the name of a broker or nominee should contact the broker or nominee for details. All distributions to investors who elect not to participate (or whose broker or nominee elects not to participate) in the Plan will be paid by check mailed directly to the record holder by the Plan Agent, as dividend paying agent.
The Plan Agent will furnish each person who buys shares in the offering with written information relating to the Plan. Included in such information will be procedures for electing to receive distributions in cash (or, in the case of shares held in the name of a broker or nominee who does not participate in the Plan, procedures for having such shares registered in the name of the shareholder so that such shareholder may participate in the Plan).
If the Trustees of the fund declare a dividend (including a capital gain dividend) payable either in shares or in cash, as holders of shares may have elected, then non participants in the Plan will receive cash and participants in the Plan will receive the equivalent in shares valued as set forth below. Whenever a market price is equal to or exceeds net asset value at the time shares are valued for the purpose of determining the number of shares equivalent to the distribution, participants will be issued shares at the net asset value most recently determined as provided under “Net Asset Value” in the fund’s prospectus and its Statement of Additional Information, but in no event less than 95% of the market price. If the net asset value of the shares at such time exceeds the market price of shares at such time, or if the fund should declare a dividend (including a capital gain dividend) payable only in cash, the Plan Agent will, as agent for the participants, use the cash that the shareholders would have received as a dividend to buy shares in the open market, the American Stock Exchange or elsewhere, for the participants’ accounts. If, before the Plan Agent has completed its purchases, the market price exceeds the net asset value of the shares, the average per share purchase price paid by the Plan Agent may exceed the net asset value of the shares, resulting in the acquisition of fewer shares than if the dividend (including a
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Dividend Reinvestment Plan – continued
capital gain dividend) had been paid in shares issued by the fund. The Plan Agent will apply all cash received as a dividend (including a capital gain dividend) to purchase shares on the open market as soon as practicable after the payment date of such dividend, but in no event later than 30 days after such date, except where necessary to comply with applicable provisions of the federal securities laws.
There is no charge to participants for reinvesting dividends (including capital gain dividends). The Plan Agent’s fees for handling the reinvestment of dividends (including capital gain dividends) will be paid by the fund. There will be no brokerage charges with respect to shares issued directly by the fund as a result of dividends or capital gains distributions payable either in stock or in cash. However, each participant will pay a pro rata share of brokerage commissions incurred with respect to the Plan Agent’s open market purchases in connection with the reinvestment of dividends (including capital gain dividends).
The automatic reinvestment of dividends (including capital gain dividends) will not relieve participants of any income tax which may be payable on such dividends. The amount of the dividend for tax purposes may vary depending on whether the fund issues new Common Shares or purchases them on the open market.
The Plan may be amended or terminated on 30 days’ written notice to Plan participants. Contact the Plan Agent for additional information regarding the Plan. All communication concerning the Plan should be directed to Computershare Trust Company, N.A. by mail at P.O. Box 43078, Providence, RI 02940-3078, by phone at 1-800-637-2304 or by going to the Plan Agent’s website at www.computershare.com.
The following changes in the Plan will take effect on November 1, 2008:
| Ÿ | Purchases for reinvested dividends are made at the market price unless that price exceeds the net asset value (the shares are trading at a premium). If the shares are trading at a premium, purchases will be made at a discounted price of either the net asset value or 95% of the market price, whichever is greater. |
| Ÿ | You can buy shares of the fund through the Plan Agent on a quarterly basis. Investments may be made in any amount of $100 or more. Contact the Plan Agent for further information. |
| Ÿ | If you withdraw from the Plan you will have three options with regard to shares held in the Plan: |
| Ÿ | Your full non-certificated shares will be held by the Plan Agent in your account in book-entry form and a check will be issued for the value of any fractional shares, less any applicable fees and brokerage charges. |
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| Ÿ | The Plan Agent will sell all full and fractional shares and send the proceeds via check to your address of record. A service fee and a brokerage charge will be deducted from the proceeds. |
| Ÿ | If you opt to sell your shares through an investment professional, you may request your investment professional to transfer shares electronically from your Plan account to your brokerage firm account. |
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5/31/08 (unaudited)
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
| Municipal Bonds - 164.1% | ||||||
| Issuer | Shares/Par | Value ($) | ||||
| Airport & Port Revenue - 9.3% | ||||||
| Port of Oakland, CA, “A”, MBIA, 5%, 2026 | $ | 500,000 | $ | 479,640 | ||
| Port of Oakland, CA, “K”, FGIC, 5.75%, 2029 | 1,000,000 | 1,003,520 | ||||
| San Diego County, CA, Regional Airport Authority, AMBAC, 5.25%, 2020 |
500,000 | 526,515 | ||||
| San Diego, CA, Port District Rev., “B”, MBIA, 5%, 2029 | 1,250,000 | 1,283,600 | ||||
| $ | 3,293,275 | |||||
| General Obligations - General Purpose - 6.1% | ||||||
| State of California, AMBAC, 6%, 2017 | $ | 1,000,000 | $ | 1,141,160 | ||
| State of California, AMBAC, 5%, 2034 | 1,000,000 | 1,016,530 | ||||
| $ | 2,157,690 | |||||
| General Obligations - Schools - 18.8% | ||||||
| Culver City, CA, School Facilities Financing Authority Rev. (Culver City Unified School District), FSA, 5.5%, 2025 | $ | 1,000,000 | $ | 1,155,100 | ||
| Dublin, CA, Unified School District (Election of 2004), “C”, MBIA, 0%, 2032 |
3,000,000 | 775,350 | ||||
| Pomona, CA, Unified School District, “A”, MBIA, 6.55%, 2029 | 1,000,000 | 1,124,240 | ||||
| Rescue, CA, Unified School District (Election of 1998), MBIA, 0%, 2026 | 1,125,000 | 440,235 | ||||
| Union, CA, Elementary School District, “A”, FGIC, 0%, 2018 | 1,630,000 | 1,013,893 | ||||
| Vallejo City, CA, Unified School District, “A”, MBIA, 5.9%, 2025 | 500,000 | 506,265 | ||||
| West Contra Costa, CA, Unified School District, “A”, MBIA, 5.7%, 2023 |
500,000 | 521,475 | ||||
| West Covina, CA, Unified School District, “A”, MBIA, 5.8%, 2021 | 500,000 | 529,660 | ||||
| Yuba City, CA, Unified School District, FGIC, 0%, 2018 | 1,000,000 | 622,020 | ||||
| $ | 6,688,238 | |||||
| Healthcare Revenue - Hospitals - 13.6% | ||||||
| California Municipal Finance Authority, Certificates of Participation (Community Hospitals of Central California), 5.25%, 2027 | $ | 250,000 | $ | 236,885 | ||
| California Statewide Communities Development Authority Rev. (Adventist), ASSD GTY, 5%, 2037 | 405,000 | 400,703 | ||||
| California Statewide Communities Development Authority Rev. (Catholic Healthcare West) “K”, ASSD GTY, 5.5%, 2041 |
1,000,000 | 1,041,260 | ||||
| California Statewide Communities Development Authority Rev. (Catholic West), 6.5%, 2010 (c) |
145,000 | 158,453 | ||||
| California Statewide Communities Development Authority Rev. (Daughters of Charity Health), “A”, 5.25%, 2030 | 500,000 | 479,180 | ||||
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Portfolio of Investments (unaudited) – continued
| Issuer | Shares/Par | Value ($) | ||||
| Municipal Bonds - continued | ||||||
| Healthcare Revenue - Hospitals - continued | ||||||
| California Statewide Communities Development Authority Rev. (St. Joseph Health System), FGIC, 5.75%, 2047 |
$ | 500,000 | $ | 530,190 | ||
| Jackson, CA, Abag Finance Authority For Nonprofit Corp., 5.75%, 2037 |
385,000 | 392,585 | ||||
| Oakland, CA, Rev. (Harrison Foundation), “A”, AMBAC, 6%, 2010 (c) | 1,000,000 | 1,057,690 | ||||
| Santa Clara County, CA, Financing Authority Rev., (El Camino), AMBAC, 5.125%, 2041 | 400,000 | 396,524 | ||||
| Sierra View, CA, Local Health Care District Rev., 5.25%, 2037 | 130,000 | 122,811 | ||||
| $ | 4,816,281 | |||||
| Healthcare Revenue - Long Term Care - 6.5% | ||||||
| ABAG Finance Authority for Non-Profit Corps. (Odd Fellows Home), MBIA, 6%, 2024 | $ | 2,000,000 | $ | 2,023,500 | ||
| California Statewide Communities Development Authority Rev. (Eskaton Properties, Inc.), 8.25%, 2010 (c) |
250,000 | 284,705 | ||||
| $ | 2,308,205 | |||||
| Human Services - 0.4% | ||||||
| California Statewide Communities Development Authority Rev. (Inland Regional Center), 5.375%, 2037 |
$ | 140,000 | $ | 131,828 | ||
| Industrial Revenue - Other - 1.2% | ||||||
| California Statewide Communities Development Authority Rev. (Anheuser-Busch), 4.8%, 2046 |
$ | 500,000 | $ | 426,560 | ||
| Miscellaneous Revenue - Other - 3.3% | ||||||
| California Infrastructure & Economic Development Bank Rev. (Walt Disney Family Museum), 5.25%, 2033 |
$ | 160,000 | $ | 163,886 | ||
| San Francisco, CA, City & County Redevelopment Agency, Hotel Tax Rev., FSA, 6.75%, 2025 | 1,000,000 | 1,003,120 | ||||
| $ | 1,167,006 | |||||
| Single Family Housing - Local - 2.6% | ||||||
| California Housing Finance Agency Rev., “A”, 4.95%, 2036 | $ | 1,000,000 | $ | 897,170 | ||
| California Rural Home Mortgage Finance Authority Rev., Mortgage Backed Securities Program, “A”, GNMA, 6.35%, 2029 | 20,000 | 20,314 | ||||
| California Rural Home Mortgage Finance Authority Rev., Mortgage Backed Securities Program, “B4”, GNMA, 6.35%, 2029 |
20,000 | 20,080 | ||||
| $ | 937,564 | |||||
| Single Family Housing - Other - 2.7% | ||||||
| California Department of Veterans Affairs, Home Purchase Rev., “B”, 5.25%, 2037 | $ | 1,000,000 | $ | 966,540 | ||
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Portfolio of Investments (unaudited) – continued
| Issuer | Shares/Par | Value ($) | ||||
| Municipal Bonds - continued | ||||||
| Single Family Housing - State - 2.7% | ||||||
| California Housing Finance Agency Rev., Home Mortgage, “E”, FGIC, 5.05%, 2026 | $ | 995,000 | $ | 973,329 | ||
| Solid Waste Revenue - 1.4% | ||||||
| Salinas Valley, CA, Solid Waste Authority Rev., AMBAC, 5.125%, 2022 | $ | 500,000 | $ | 500,800 | ||
| State & Local Agencies - 25.4% | ||||||
| Golden St. Tobacco Securitization Corp. Tobacco Settlement Rev., SBHAC, 5%, 2038 | $ | 1,000,000 | $ | 1,004,090 | ||
| Golden State, CA, Tobacco Securitization Corp., Tobacco Settlement Rev., Enhanced, “A”, FGIC, 5%, 2035 | 1,000,000 | 979,680 | ||||
| Golden State, CA, Tobacco Securitization Corp., Tobacco Settlement Rev., Enhanced, “A”, FGIC, 5%, 2038 | 1,000,000 | 972,740 | ||||
| Huntington Park, CA, Public Financing Authority Rev., “A”, FSA, 5.25%, 2019 |
1,000,000 | 1,085,160 | ||||
| Los Angeles County, CA, Schools Regionalized Business Service Corp., Capital Appreciation Pooled Financing, “A”, AMBAC, 0%, 2018 | 2,020,000 | 1,255,087 | ||||
| Los Angeles County, CA, Schools Regionalized Business Service Corp., Capital Appreciation Pooled Financing, “A”, AMBAC, 0%, 2023 | 2,220,000 | 1,018,025 | ||||
| Pacifica, CA, Certificates of Participation (Street Improvement Project), AMBAC, 5.875%, 2009 (c) | 1,500,000 | 1,610,115 | ||||
| Sacramento, CA, City Financing Authority (Master Lease Program Facilities), “E”, AMBAC, 5.25%, 2026 | 1,000,000 | 1,071,300 | ||||
| $ | 8,996,197 | |||||
| Tax - Other - 2.2% | ||||||
| Southern California Logistics Airport Authority (Southern California Authority Project), XLCA, 5%, 2043 | $ | 820,000 | $ | 777,073 | ||
| Tax Assessment - 15.7% | ||||||
| Compton, CA, Public Finance Authority, AMBAC, 5%, 2032 | $ | 500,000 | $ | 495,110 | ||
| Fontana, CA, Public Finance Authority, Tax Allocation Rev. (Sub Lien North Fontana Redevelopment), “A”, AMBAC, 5%, 2029 |
1,000,000 | 1,009,090 | ||||
| Huntington Beach, CA, Community Facilities District, Special Tax (Grand Coast Resort), “2000-1”, 6.45%, 2031 |
100,000 | 102,302 | ||||
| Lancaster, CA, Financing Authority, Tax Allocation Rev. (Projects No. 5 & 6 Redevelopment Projects), MBIA, 5.25%, 2020 |
1,075,000 | 1,178,146 | ||||
| Long Beach, CA, Bond Finance Authority, Tax Allocation Rev., “C”, AMBAC, 5.5%, 2031 | 750,000 | 781,628 | ||||
| Oceanside, CA, Community Development Commission, Tax Allocation (Downtown Redevelopment Project Escrow Bonds), 5.7%, 2025 |
500,000 | 514,760 | ||||
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Portfolio of Investments (unaudited) – continued
| Issuer | Shares/Par | Value ($) | ||||
| Municipal Bonds - continued | ||||||
| Tax Assessment - continued | ||||||
| Orange County, CA, Community Facilities District, Special Tax (Ladera Ranch), “A”, 6.7%, 2009 (c) |
$ | 200,000 | $ | 214,788 | ||
| San Dieguito, CA, Public Facilities Authority, “A”, AMBAC, 5%, 2032 | 500,000 | 495,120 | ||||
| San Jose, CA, Redevelopment Agency, Tax Allocation (Merged Area Redevelopment Project), “C”, MBIA, 4.25%, 2030 |
900,000 | 789,102 | ||||
| $ | 5,580,046 | |||||
| Tobacco - 5.9% | ||||||
| Golden State, CA, Tobacco Securitization Corp., Tobacco Settlement Rev., “A-1”, 5.75%, 2047 | $ | 1,500,000 | $ | 1,301,910 | ||
| Golden State, CA, Tobacco Securitization Corp., Tobacco Settlement Rev., Asset Backed, “A-1”, 5.125%, 2047 | 1,000,000 | 776,350 | ||||
| $ | 2,078,260 | |||||
| Transportation - Special Tax - 5.2% | ||||||
| Puerto Rico Highway & Transportation Authority, Highway Rev., “Y”, FSA, 5.5%, 2016 (c) | $ | 1,000,000 | $ | 1,146,410 | ||
| San Francisco, CA, Bay Area Rapid Transit District, Sales Tax Rev., “A”, MBIA, 5%, 2030 (f) | 685,000 | 701,365 | ||||
| $ | 1,847,775 | |||||
| Universities - Colleges - 14.2% | ||||||
| Allan Hancock, CA, Joint Community College (Election of 2006), “A”, FSA, 4.375%, 2031 | $ | 100,000 | $ | 93,959 | ||
| California Educational Facilities Authority Rev. (Pepperdine University), “A”, AMBAC, 5%, 2035 | 1,000,000 | 1,015,600 | ||||
| California Educational Facilities Authority Rev., “B”, 6.625%, 2010 (c) |
205,000 | 223,071 | ||||
| California Educational Facilities Authority Rev., Unrefunded, “B”, 6.625%, 2010 (c) |
45,000 | 48,967 | ||||
| California University Rev., “C”, MBIA, 5%, 2029 | 1,500,000 | 1,532,520 | ||||
| Chabot Las Positas, CA, Community College (Election of 2004), “B”, AMBAC, 0%, 2026 | 970,000 | 384,605 | ||||
| Hastings College of the Law, CA, ASSD GTY, 4.75%, 2037 | 195,000 | 187,586 | ||||
| Rancho Santiago, CA, Community College District, FSA, 5.125%, 2029 |
1,000,000 | 1,092,060 | ||||
| University Enterprises, Inc. (Auxiliary Organization), “A”, FGIC, 4.375%, 2030 |
500,000 | 449,705 | ||||
| $ | 5,028,073 | |||||
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Portfolio of Investments (unaudited) – continued
| Issuer | Shares/Par | Value ($) | ||||
| Municipal Bonds - continued | ||||||
| Utilities - Investor Owned - 8.7% | ||||||
| California Pollution Control Financing Authority, Pollution Control Rev. (Pacific Gas & Electric Co.), MBIA, 5.35%, 2016 | $ | 1,000,000 | $ | 1,029,000 | ||
| California Pollution Control Financing Authority, Pollution Control Rev. (San Diego Gas & Electric Co.), “A”, 6.8%, 2015 | 500,000 | 565,450 | ||||
| California Pollution Control Financing Authority, Pollution Control Rev. (Southern California Edison Co.), “B”, MBIA, 5.45%, 2029 | 1,500,000 | 1,504,275 | ||||
| $ | 3,098,725 | |||||
| Utilities - Other - 1.6% | ||||||
| Southern California Public Power Authority (Natural Gas Project No. 1), “A”, 5%, 2033 |
$ | 585,000 | $ | 563,788 | ||
| Water & Sewer Utility Revenue - 16.6% | ||||||
| Culver City, CA, Wastewater Facilities Rev., “A”, FGIC, 5.7%, 2029 | $ | 1,500,000 | $ | 1,568,025 | ||
| Los Angeles, CA, Department of Water & Power, Waterworks Rev., “C”, MBIA, 5%, 2022 | 1,000,000 | 1,046,290 | ||||
| Pico Rivera, CA, Water Authority Rev. (Water Systems Project), “A”, MBIA, 5.5%, 2029 | 2,000,000 | 2,267,359 | ||||
| Westlands, CA, Water District Rev., Certificates of Participation, “A”, MBIA, 5%, 2030 | 1,000,000 | 1,017,670 | ||||
| $ | 5,899,344 | |||||
| Total Municipal Bonds (Identified Cost, $57,479,803) | $ | 58,236,597 | ||||
| Floating Rate Demand Notes - 2.3% | ||||||
| Jacksonville, FL, Pollution Control Rev. (Florida Power & Light Co.), 1.3%, due 6/02/08 | $ | 600,000 | $ | 600,000 | ||
| Lincoln County, WY, Pollution Control Rev. (Exxon Mobil Corp.), 1.13%, due 6/02/08 | 200,000 | 200,000 | ||||
| Total Floating Rate Demand Notes, at Cost | $ | 800,000 | ||||
| Total Investments (Identified Cost, $58,279,803) | $ | 59,036,597 | ||||
| Other Assets, Less Liabilities - 2.5% | 901,019 | |||||
| Preferred Shares (Issued by the Fund) - (68.9)% | (24,450,000) | |||||
| Net Assets applicable to common shares - 100.0% | $ | 35,487,616 | ||||
| (c) | Refunded bond. |
| (f) | All or a portion of the security has been segregated as collateral for open futures contracts. |
16
Table of Contents
Portfolio of Investments (unaudited) – continued
Futures contracts outstanding at 5/31/08
| Description | Contracts | Value | Expiration Date |
Unrealized Appreciation/ (Depreciation) | ||||
| U.S. Treasury Note 10 yr (Short) | 54 | $6,069,938 | Sep-08 | $7,583 |
Swap Agreements at 5/31/08
Interest Rate Swaps
| Expiration | Notional Amount |
Counterparty | Cash Flows to Receive |
Cash Flows to Pay |
Value | ||||||
| 6/19/18 | USD 2,000,000 | Morgan Stanley Capital Services, Inc |
7-day BMA | 3.492% (fixed rate) | $ | (9,045) | |||||
| 11/28/23 | USD 3,000,000 | Goldman Sachs International |
7-day SIFMA | 3.75% (fixed rate) | — | ||||||
| 6/19/28 | USD 3,000,000 | Merrill Lynch Capital Services |
7-day BMA | 3.82% (fixed rate) | (5,685) | ||||||
| 8/06/28 | USD 2,000,000 | Merrill Lynch Capital Services |
7-day BMA | 3.673% (fixed rate) | 38,673 | ||||||
| 10/08/28 | USD 3,000,000 | JPMorgan Chase Bank | 7-day SIFMA | 3.7035% (fixed rate) | 56,362 | ||||||
| $80,305 | |||||||||||
At May 31, 2008, the fund had sufficient cash and/or other liquid securities to cover any commitments under these derivative contracts.
The following abbreviations are used in this report and are defined:
| BMA | Bond Market Assn. |
| SIFMA | Securities Industry and Financial Markets Association |
| Insurers | ||
| AMBAC | AMBAC Indemnity Corp. | |
| ASSD GTY | Assured Guaranty Insurance Co. | |
| FGIC | Financial Guaranty Insurance Co. | |
| FSA | Financial Security Assurance Inc. | |
| GNMA | Government National Mortgage Assn. | |
| MBIA | MBIA Insurance Corp. | |
| SBHAC | Secondary Berkshire Hathaway Assurance Corp. | |
| XLCA | XL Capital Insurance Co. |
See Notes to Financial Statements
17
Table of Contents
Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
At 5/31/08 (unaudited)
This statement represents your fund’s balance sheet, which details the assets and liabilities comprising the total value of the fund.
| Assets | |||||
| Investments, at value (identified cost, $58,279,803) | $59,036,597 | ||||
| Cash | 37,728 | ||||
| Receivable for investments sold | 3,010,000 | ||||
| Interest receivable | 838,237 | ||||
| Swaps, at value | 95,035 | ||||
| Other assets | 23,486 | ||||
| Total assets | $63,041,083 | ||||
| Liabilities | |||||
| Distributions payable on common shares | $1,932 | ||||
| Distributions payable on preferred shares | 3,325 | ||||
| Payable for daily variation margin on open futures contracts | 13,500 | ||||
| Payable for investments purchased | 3,000,000 | ||||
| Swaps, at value | 14,730 | ||||
| Payable to affiliates | |||||
| Investment adviser |
16,620 | ||||
| Management fee |
2,699 | ||||
| Transfer agent and dividend disbursing costs |
53 | ||||
| Administrative services fee |
154 | ||||
| Payable for independent trustees’ compensation | 8,769 | ||||
| Accrued expenses and other liabilities | 41,685 | ||||
| Total liabilities | $3,103,467 | ||||
| Preferred shares | |||||
| Auction preferred shares (978 shares issued and outstanding at $25,000 per share) at liquidation value |
$24,450,000 | ||||
| Net assets applicable to common shares | $35,487,616 | ||||
| Net assets consist of | |||||
| Paid-in capital – common shares | $39,376,142 | ||||
| Unrealized appreciation (depreciation) on investments | 844,682 | ||||
| Accumulated net realized gain (loss) on investments | (4,913,285 | ) | |||
| Undistributed net investment income | 180,077 | ||||
| Net assets applicable to common shares | $35,487,616 | ||||
| Preferred shares, at value (978 shares issued and outstanding at $25,000 per share) | 24,450,000 | ||||
| Net assets including preferred shares | $59,937,616 | ||||
| Common shares of beneficial interest outstanding | 2,780,771 | ||||
| Net asset value per common share (net assets of $35,487,616/2,780,771 shares of beneficial interest outstanding) |
$12.76 |
See Notes to Financial Statements
18
Table of Contents
Financial Statements
Six months ended 5/31/08 (unaudited)
This statement describes how much your fund earned in investment income and accrued in expenses. It also describes any gains and/or losses generated by fund operations.
| Net investment income | ||||||
| Interest income | $1,575,059 | |||||
| Expenses | ||||||
| Management fee |
$195,781 | |||||
| Transfer agent and dividend disbursing costs |
230 | |||||
| Administrative services fee |
9,404 | |||||
| Independent trustees’ compensation |
5,031 | |||||
| Stock exchange fee |
3,734 | |||||
| Preferred shares remarketing agent fee |
30,682 | |||||
| Custodian fee |
5,830 | |||||
| Shareholder communications |
7,499 | |||||
| Auditing fees |
32,863 | |||||
| Legal fees |
7,646 | |||||
| Miscellaneous |
9,553 | |||||
| Total expenses | $308,253 | |||||
| Fees paid indirectly |
(4,879 | ) | ||||
| Reduction of expenses by investment adviser |
(81,921 | ) | ||||
| Net expenses | $221,453 | |||||
| Net investment income | $1,353,606 | |||||
| Realized and unrealized gain (loss) on investments | ||||||
| Realized gain (loss) (identified cost basis) | ||||||
| Investment transactions |
$(358,664 | ) | ||||
| Futures contracts |
(577,385 | ) | ||||
| Swap transactions |
(46,000 | ) | ||||
| Net realized gain (loss) on investments | $(982,049 | ) | ||||
| Change in unrealized appreciation (depreciation) | ||||||
| Investments |
$(1,392,666 | ) | ||||
| Futures contracts |
18,850 | |||||
| Swap transactions |
80,305 | |||||
| Net unrealized gain (loss) on investments | $(1,293,511 | ) | ||||
| Net realized and unrealized gain (loss) on investments | $(2,275,560 | ) | ||||
| Distributions declared to preferred shareholders | $(422,741 | ) | ||||
| Change in net assets from operations | $(1,344,695 | ) |
See Notes to Financial Statements
19
Table of Contents
Financial Statements
STATEMENTS OF CHANGES IN NET ASSETS
These statements describe the increases and/or decreases in net assets resulting from operations, any distributions, and any shareholder transactions.
| Six months ended 5/31/08 (unaudited) |
Year ended 11/30/07 |
|||||
| Change in net assets | ||||||
| From operations | ||||||
| Net investment income | $1,353,606 | $2,855,384 | ||||
| Net realized gain (loss) on investments | (982,049 | ) | (2,625,987 | ) | ||
| Net unrealized gain (loss) on investments | (1,293,511 | ) | (2,932,242 | ) | ||
| Distributions declared to preferred shareholders | (422,741 | ) | (855,432 | ) | ||
| Change in net assets from operations | $(1,344,695 | ) | $(3,558,277 | ) | ||
| Distributions declared to shareholders | ||||||
| From net investment income | $(800,862 | ) | $(1,724,078 | ) | ||
| Total change in net assets | $(2,145,557 | ) | $(5,282,355 | ) | ||
| Net assets applicable to common shares | ||||||
| At beginning of period | 37,633,173 | 42,915,528 | ||||
| At end of period (including undistributed net investment income of $180,077 and $50,074, respectively) |
$35,487,616 | $37,633,173 |
See Notes to Financial Statements
20
Table of Contents
Financial Statements
(unaudited)
The financial highlights table is intended to help you understand the fund’s financial performance for the semiannual period and the past 5 fiscal years. Certain information reflects financial results for a single fund share. The total returns in the table represent the rate by which an investor would have earned (or lost) on an investment in the fund share class (assuming reinvestment of all distributions) held for the entire period.
| Six months (unaudited) |
Years ended 11/30 | |||||||||||||||||
| 2007 | 2006 | 2005 | 2004 | 2003 | ||||||||||||||
| Net asset value, beginning of period | $13.53 | $15.43 | $14.77 | $14.97 | $15.21 | $15.30 | ||||||||||||
| Income (loss) from investment operations | ||||||||||||||||||
| Net investment income (d) |
$0.49 | $1.03 | (z) | $0.98 | $1.02 | $1.03 | $1.10 | |||||||||||
| Net realized and unrealized gain (loss) |
(0.82 | ) | (2.00 | )(z) | 0.66 | (0.21 | ) | (0.26 | ) | (0.09 | ) | |||||||
| Distributions declared to |
(0.15 | ) | (0.31 | ) | (0.27 | ) | (0.17 | ) | (0.09 | ) | (0.08 | ) | ||||||
| Total from investment operations | $(0.48 | ) | $(1.28 | ) | $1.37 | $0.64 | $0.68 | $0.93 | ||||||||||
| Less distributions declared to shareholders | ||||||||||||||||||
| From net investment income, |
$(0.29 | ) | $(0.62 | ) | $(0.71 | ) | $(0.84 | ) | $(0.92 | ) | $(1.02 | ) | ||||||
| Net asset value, end of period | $12.76 | $13.53 | $15.43 | $14.77 | $14.97 | $15.21 | ||||||||||||
| Common share market value, end of period |
$11.63 | $11.65 | $14.30 | $14.20 | $13.61 | $15.60 | ||||||||||||
| Total return at common market value (%) (p) |
2.33 | (n) | (14.78 | ) | 5.93 | 10.63 | (6.99 | ) | 1.65 | |||||||||
| Total return at net asset value (%) (p)(t) | (3.34 | )(n) | (8.27 | ) | 9.89 | % | 4.62 | % | 4.93 | % | 6.23 | % | ||||||
| Ratios (%) (to average net assets applicable to common shares) and Supplemental data: |
||||||||||||||||||
| Expenses before expense reductions (f)(p)(v) |
1.72 | (a) | 1.71 | 1.46 | 1.26 | 1.08 | 1.14 | |||||||||||
| Expenses after expense reductions (f)(p) | 1.27 | (a) | 1.12 | 1.04 | 0.95 | 0.87 | 0.88 | |||||||||||
| Net investment income (p) | 7.57 | (a) | 7.03 | (z) | 6.58 | 6.72 | 6.89 | 7.17 | ||||||||||
| Portfolio turnover | 15 | 21 | 16 | 29 | 16 | 10 | ||||||||||||
| Net assets at end of period (000 Omitted) |
$35,488 | $37,633 | $42,916 | $41,077 | $41,631 | $42,260 | ||||||||||||
21
Table of Contents
Financial Highlights (unaudited) – continued
| Six months (unaudited) |
Years ended 11/30 | ||||||||||||
| 2007 | 2006 | 2005 | 2004 | 2003 | |||||||||
| Supplemental Ratios (%): | |||||||||||||
| Ratio of expenses to average net assets including preferred shares |
0.75 | 0.70 | 0.65 | 0.60 | 0.55 | 0.55 | |||||||
| Net investment income available to common shares |
5.20 | 4.92 | 4.76 | 5.57 | 6.30 | 6.63 | |||||||
| Senior Securities: | |||||||||||||
| Total preferred shares outstanding | 978 | 978 | 978 | 978 | 978 | 978 | |||||||
| Asset coverage per preferred share (k) | $61,286 | $63,480 | $68,881 | $67,001 | $67,567 | $68,211 | |||||||
| Involuntary liquidation preference per preferred share (o) |
$25,000 | $25,000 | $25,014 | $25,012 | $25,003 | $25,002 | |||||||
| Average market value per preferred share (m)(x) |
$25,000 | $25,000 | $25,000 | $25,000 | $25,000 | $25,000 | |||||||
| (a) | Annualized. |
| (d) | Per share data is based on average shares outstanding. |
| (f) | Ratios do not reflect reductions from fees paid indirectly, if applicable. |
| (k) | Calculated by subtracting the fund’s total liabilities (not including preferred shares) from the fund’s total assets and dividing this number by the number of preferred shares outstanding. |
| (m) | Amount excludes accrued unpaid distributions to Auction Preferred Shareholders. |
| (n) | Not annualized. |
| (o) | Effective November 30, 2007, amount excludes accrued unpaid distributions to Auction Preferred Shareholders. |
| (p) | Excludes dividend payment on auction preferred shares. |
| (t) | Prior to November 30, 2007, total return at net asset value is unaudited. |
| (v) | Effective with the year ended November 30, 2007, the ratio includes the management fee before taking into account any management fee reductions. This resulted in an increase to the ratio, applicable to common shares, of 0.24% for the year ended November 30, 2007. Prior periods reflect management fee after any such reductions. |
| (x) | Average market value represents the approximate fair value of the fund’s liability. |
| (z) | The fund applied a change in estimate for amortization of premium on certain debt securities in the year ended November 30, 2007 that resulted in an increase of $0.08 per share to net share to net investment income, a decrease of $0.08 per share to net realized and unrealized gain (loss) on investments, and an increase of 0.51% to net investment income ratio. The change in estimate had no impact on net assets, net asset value per share or total return. |
See Notes to Financial Statements
22
Table of Contents
(unaudited)
| (1) | Business and Organization |
MFS California Insured Municipal Fund (the fund) is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940, as amended, as a closed-end management investment company.
| (2) | Significant Accounting Policies |
General – The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Municipal securities backed by current or anticipated revenues from a specific project or specific assets can be negatively affected by the discontinuance of the taxation supporting the projects or assets or the inability to collect revenues for the project or from the assets. If the Internal Revenue Service determines an issuer of a municipal security has not complied with applicable tax requirements, the security could decline in value, interest from the security could become taxable and the fund may be required to issue Forms 1099-DIV.
Investment Valuations – Debt instruments and floating rate loans (other than short-term instruments), including restricted debt instruments, are generally valued at an evaluated or composite bid as reported by an independent pricing service. Short-term instruments with a maturity at issuance of 60 days or less may be valued at amortized cost, which approximates market value. Futures contracts are generally valued at last posted settlement price as reported by an independent pricing service on the market on which they are primarily traded. Futures contracts for which there were no trades that day for a particular position are generally valued at the closing bid quotation as reported by an independent pricing service on the market on which such futures contracts are primarily traded. Swaps are generally valued at an evaluated bid as reported by an independent pricing service. Securities and other assets generally valued on the basis of information from an independent pricing service may also be valued at a broker-dealer bid quotation. Values obtained from pricing services can utilize both dealer-supplied valuations and electronic data processing techniques, which take into account factors such as institutional-size trading in similar groups of securities, yield, quality, coupon rate, maturity, type of issue, trading characteristics, and other market data.
The Board of Trustees has delegated primary responsibility for determining or causing to be determined the value of the fund’s investments (including any fair valuation) to the adviser pursuant to valuation policies and procedures approved
23
Table of Contents
Notes to Financial Statements (unaudited) – continued
by the Board. If the adviser determines that reliable market quotations are not readily available, investments are valued at fair value as determined in good faith by the adviser in accordance with such procedures under the oversight of the Board of Trustees. Under the fund’s valuation policies and procedures, market quotations are not considered to be readily available for most types of debt instruments and floating rate loans and many types of derivatives. These investments are generally valued at fair value based on information from independent pricing services. In addition, investments may be valued at fair value if the adviser determines that an investment’s value has been materially affected by events occurring after the close of the exchange or market on which the investment is principally traded (such as foreign exchange or market) and prior to the determination of the fund’s net asset value, or after the halting of trading of a specific security where trading does not resume prior to the close of the exchange or market on which the security is principally traded. The adviser may rely on independent pricing services or other information (such as the correlation with price movements of similar securities in the same or other markets; the type, cost and investment characteristics of the security; the business and financial condition of the issuer; and trading and other market data) to assist in determining whether to fair value and at what value to fair value an investment. The value of an investment for purposes of calculating the fund’s net asset value can differ depending on the source and method used to determine value. When fair valuation is used, the value of investments used to determine the fund’s net asset value may differ from quoted or published prices for the same investments.
The fund adopted FASB Statement No. 157, Fair Value Measurements (the “Statement”) in this reporting period. This Statement provides a single definition of fair value, a hierarchy for measuring fair value and expanded disclosures about fair value measurements.
Various inputs are used in determining the value of the fund’s assets or liabilities carried at market value. These inputs are categorized into three broad levels. Level 1 includes quoted prices in active markets for identical assets or liabilities. Level 2 includes other significant observable market-based inputs (including quoted prices for similar securities, interest rates, prepayment speed, and credit risk). Level 3 includes unobservable inputs, which may include the adviser’s own assumptions in determining the fair value of investments. Other financial instruments are derivative instruments not reflected in total investments, such as futures, forwards, swap contracts and written options, which are valued at the unrealized appreciation/depreciation
24
Table of Contents
Notes to Financial Statements (unaudited) – continued
on the instrument. The following is a summary of the levels used as of May 31, 2008 in valuing the fund’s assets or liabilities carried at market value:
| Level 1 | Level 2 | Level 3 | Total | |||||
| Investments in Securities | $— | $59,036,597 | $— | $59,036,597 | ||||
| Other Financial Instruments | $7,583 | $80,305 | $— | $87,888 |
Derivative Risk – The fund may invest in derivatives for hedging or non-hedging purposes. While hedging can reduce or eliminate losses, it can also reduce or eliminate gains. When the fund uses derivatives as an investment to gain market exposure, or for hedging purposes, gains and losses from derivative instruments may be substantially greater than the derivative’s original cost. Cash that has been segregated on behalf of certain derivative contracts will be reported separately on the Statement of Assets and Liabilities as restricted cash. Derivative instruments include futures contracts and swap agreements.
Futures Contracts – The fund may enter into futures contracts for the delayed delivery of securities or currency, or contracts based on financial indices at a fixed price on a future date. In entering such contracts, the fund is required to deposit with the broker either in cash or securities an amount equal to a certain percentage of the contract amount. Subsequent payments are made or received by the fund each day, depending on the daily fluctuations in the value of the contract, and are recorded for financial statement purposes as unrealized gains or losses by the fund. Upon entering into such contracts, the fund bears the risk of interest or exchange rates or securities prices moving unexpectedly, in which case, the fund may not achieve the anticipated benefits of the futures contracts and may realize a loss.
Swap Agreements – The fund may enter into swap agreements. A swap is an exchange of cash payments between the fund and another party. Net cash payments are exchanged at specified intervals and are recorded as a realized gain or loss in the Statement of Operations. The value of the swap is adjusted daily and the change in value, including accruals of periodic amounts of interest to be paid or received, is recorded as unrealized appreciation or depreciation in the Statement of Operations. Amounts paid or received at the inception of the swap are reflected as premiums paid or received on the Statement of Assets and Liabilities and are amortized using the effective interest method over the term of the agreement. A liquidation payment received or made upon early termination is recorded as a realized gain or loss in the Statement of Operations. Collateral, in the form of cash or securities, may be required to be held in segregated accounts with the fund custodian in connection with these agreements. Risk of loss may exceed amounts recognized on the Statement of Assets and Liabilities. These risks include the
25
Table of Contents
Notes to Financial Statements (unaudited) – continued
possible lack of a liquid market, failure of the counterparty to perform under the terms of the agreements, and unfavorable market and interest rate movements of the underlying instrument. All swap agreements entered into by the fund with the same counterparty are generally governed by a single master agreement, which provides for the netting of all amounts owed by the parties under the agreement upon the occurrence of an event of default, thereby reducing the credit risk to which such party is exposed.
The fund holds interest rate swap agreements which involve the periodic exchange of cash flows, such as the exchange of fixed rate interest payments for floating rate interest payments based on a notional principal amount. The interest rates may be based on a specific financial index or the exchange of two distinct floating rate payments. The fund may enter into an interest rate swap in order to manage its exposure to interest and foreign exchange rate fluctuations.
In March 2008, FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities (the “Standard”) was issued, and is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. This Standard provides enhanced disclosures about the fund’s use of and accounting for derivative instruments and the effect of derivative instruments on the fund’s results of operations and financial position. Management is evaluating the application of the Standard to the fund, and has not at this time determined the impact, if any, resulting from the adoption of this Standard on the fund’s financial statements.
Indemnifications – Under the fund’s organizational documents, its officers and trustees may be indemnified against certain liabilities and expenses arising out of the performance of their duties to the fund. Additionally, in the normal course of business, the fund enters into agreements with service providers that may contain indemnification clauses. The fund’s maximum exposure under these agreements is unknown as this would involve future claims that may be made against the fund that have not yet occurred.
Investment Transactions and Income – Investment transactions are recorded on the trade date. Interest income is recorded on the accrual basis. All premium and discount is amortized or accreted for financial statement purposes in accordance with U.S. generally accepted accounting principles.
The fund may receive proceeds from litigation settlements. Any proceeds received from litigation involving portfolio holdings are reflected in the Statement of Operations in realized gain/loss if the security has been disposed of by the fund or in unrealized gain/loss if the security is still held by the fund. Any other proceeds from litigation not related to portfolio holdings are reflected as other income in the Statement of Operations.
26
Table of Contents
Notes to Financial Statements (unaudited) – continued
Fees Paid Indirectly – The fund’s custody fee may be reduced according to an arrangement that measures the value of cash deposited with the custodian by the fund. This amount, for the six months ended May 31, 2008, is shown as a reduction of total expenses on the Statement of Operations.
Tax Matters and Distributions – The fund intends to qualify as a regulated investment company, as defined under Subchapter M of the Internal Revenue Code, and to distribute all of its taxable income, including realized capital gains. As a result, no provision for federal income tax is required. The fund adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“the Interpretation”) on the first day of the fund’s fiscal year. The Interpretation prescribes a minimum threshold for financial statement recognition of the benefit of a tax position taken or expected to be taken in a tax return. There was no impact resulting from the adoption of this Interpretation on the fund’s financial statements. Each of the fund’s federal tax returns for the prior three fiscal years remains subject to examination by the Internal Revenue Service. It is the fund’s policy to record interest and penalty charges on underpaid taxes associated with its tax positions as interest expense and miscellaneous expense, respectively. No such charges were recorded in the current financial statements. Foreign taxes, if any, have been accrued by the fund in the accompanying financial statements.
Distributions to shareholders are recorded on the ex-dividend date. Income and capital gain distributions are determined in accordance with income tax regulations, which may differ from U.S. generally accepted accounting principles. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences which arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary overdistributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Book/tax differences primarily relate to amortization and accretion of debt securities.
The tax character of distributions made during the current period will be determined at fiscal year end. The tax character of distributions declared to shareholders is as follows:
| 11/30/07 | ||
| Tax-exempt income | $2,579,510 |
27
Table of Contents
Notes to Financial Statements (unaudited) – continued
The federal tax cost and the tax basis components of distributable earnings were as follows:
| As of 5/31/08 | |||
| Cost of investments | $58,100,269 | ||
| Gross appreciation | 2,068,037 | ||
| Gross depreciation | (1,131,709 | ) | |
| Net unrealized appreciation (depreciation) | $936,328 | ||
| As of 11/30/07 | |||
| Undistributed tax-exempt income | $51,669 | ||
| Capital loss carryforwards | (1,352,320 | ) | |
| Post-October capital loss deferral | (2,760,491 | ) | |
| Other temporary differences | (1,595 | ) | |
| Net unrealized appreciation (depreciation) | 2,319,768 | ||
The aggregate cost above includes prior fiscal year end tax adjustments.
As of November 30, 2007, the fund had capital loss carryforwards available to offset future realized gains. Such losses expire as follows:
| 11/30/11 | $(176,833 | ) | |
| 11/30/12 | (70,908 | ) | |
| 11/30/15 | (1,104,579 | ) | |
| $(1,352,320 | ) |
| (3) | Transactions with Affiliates |
Investment Adviser – The fund has an investment advisory agreement with Massachusetts Financial Services Company (MFS) to provide overall investment management and related administrative services and facilities to the fund. The management fee is computed daily and paid monthly at an annual rate of 0.65% of the fund’s average daily net assets (including the value of auction preferred shares).
MFS has agreed in writing to reduce its management fee to 0.55% and 0.60% of average daily net assets (including the value of auction preferred shares), for the years ending November 30, 2008 and 2009, respectively. These written agreements will continue through November 30, 2008 and November 30, 2009, respectively, unless changed or rescinded by the fund’s Board of Trustees. This management fee reduction amounted to $30,120, which is shown as a reduction of total expenses in the Statement of Operations. The management fee incurred for the six months ended May 31, 2008 was equivalent to an annual effective rate of 0.55% of the fund’s average daily net assets (including the value of auction preferred shares).
MFS has agreed in writing to pay a portion of the fund’s operating expenses, exclusive of certain other fees and expenses, such that total annual fund
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Notes to Financial Statements (unaudited) – continued
operating expenses do not exceed 0.75% of the fund’s average daily net assets including auction preferred shares. This written agreement will continue through November 30, 2008 unless changed or rescinded by the fund’s Board of Trustees. For the six months ended May 31, 2008, the reduction amounted to $51,715 and is reflected as a reduction of total expenses in the Statement of Operations. Furthermore, for the period December 1, 2008 through November 30, 2009, the investment adviser has voluntarily agreed to pay a portion of the fund’s operating expenses, exclusive of certain other fees and expenses, such that the total annual fund operating expenses do not exceed 0.80% of the fund’s average daily net assets including auction preferred shares.
Transfer Agent – The fund engages Computershare Trust Company, N.A. (“Computershare”) as the sole transfer agent for the fund. MFS Service Center, Inc. (MFSC) monitors and supervises the activities of Computershare for an agreed upon fee approved by the Board of Trustees. For the six months ended May 31, 2008, these fees paid to MFSC amounted to $120. MFSC also receives payment from the fund for out-of-pocket expenses paid by MFSC on behalf of the fund. For the six months ended May 31, 2008, no out-of-pocket costs were incurred by the fund.
Administrator – MFS provides certain financial, legal, shareholder communications, compliance, and other administrative services to the fund. Under an administrative services agreement, the fund partially reimburses MFS the costs incurred to provide these services. The fund is charged a fixed amount plus a fee based on average daily net assets. The fund’s annual fixed amount is $17,500.
The administrative services fee incurred for the six months ended May 31, 2008 was equivalent to an annual effective rate of 0.0312% of the fund’s average daily net assets.
Trustees’ and Officers’ Compensation – The fund pays compensation to independent trustees in the form of a retainer, attendance fees, and additional compensation to Board and Committee chairpersons. The fund does not pay compensation directly to trustees or to officers of the fund who are also officers of the investment adviser, all of whom receive remuneration for their services to the fund from MFS. Certain officers and trustees of the fund are officers or directors of MFS and MFSC.
Deferred Trustee Compensation – The fund’s former independent trustees participated in a Deferred Compensation Plan (the Plan). The fund’s current independent trustees are not allowed to defer compensation under the Plan. Deferred amounts represent an unsecured obligation of the fund until distributed in accordance with the Plan. Included in other assets and payable for independent trustees’ compensation is $8,769 of deferred trustees’ compensation.
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Notes to Financial Statements (unaudited) – continued
Other – This fund and certain other MFS funds (the funds) have entered into a services agreement (the Agreement) which provides for payment of fees by the funds to Tarantino LLC in return for the provision of services of an Independent Chief Compliance Officer (ICCO) for the funds. The ICCO is an officer of the funds and the sole member of Tarantino LLC. The funds can terminate the Agreement with Tarantino LLC at any time under the terms of the Agreement. For the six months ended May 31, 2008, the fee paid by the fund to Tarantino LLC was $156 and is included in miscellaneous expense on the Statement of Operations. MFS has agreed to reimburse the fund for a portion of the payments made by the fund to Tarantino LLC in the amount of $86, which is shown as a reduction of total expenses in the Statement of Operations. Additionally, MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ICCO.
| (4) | Portfolio Securities |
Purchases and sales of investments, other than U.S. Government securities, purchased option transactions, and short-term obligations, aggregated $8,758,771 and $9,991,738, respectively.
| (5) | Shares of Beneficial Interest |
The fund’s Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest. The Trustees have authorized the repurchase by the fund of up to 10% annually of its own shares of beneficial interest. During the six months ended May 31, 2008, the fund did not repurchase any shares.
| (6) | Line of Credit |
The fund and other funds managed by MFS participate in a $1 billion unsecured committed line of credit provided by a syndication of banks under a credit agreement. In addition, the fund and other funds managed by MFS have established uncommitted borrowing arrangements with certain banks. Borrowings may be made for temporary financing needs. Interest is charged to each fund, based on its borrowings, generally at a rate equal to the Federal Reserve funds rate plus 0.30%. In addition, a commitment fee, based on the average daily, unused portion of the committed line of credit, is allocated among the participating funds at the end of each calendar quarter. For the six months ended May 31, 2008, the fund’s commitment fee and interest expense were $39 and $0, respectively, and are included in miscellaneous expense on the Statement of Operations.
| (7) | Auction Preferred Shares |
The fund currently has outstanding 978 shares of Auction Preferred Shares (APS). Dividends are cumulative at a rate that is reset every seven days for both series through an auction process. If the APS are unable to be remarketed on a
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Notes to Financial Statements (unaudited) – continued
remarketing date as part of the auction process, the fund would be required to pay the maximum applicable rate on APS to holders of such shares for successive dividend periods until such time when the shares are successfully remarketed. The maximum rate on APS is equal to 110% of the higher of (i) the Taxable Equivalent of the Short-Term Municipal Bond Rate or (ii) the “AA” Composite Commercial Paper Rate.
Since February 2008, regularly scheduled auctions for APS issued by closed end funds, including MFS California Insured Municipal Fund, have consistently failed because of insufficient demand (bids to buy shares) to meet the supply (shares offered for sale) at each auction. In a failed auction, APS holders cannot sell their shares tendered for sale. While repeated auction failures have affected the liquidity for APS, they do not constitute a default or automatically alter the credit quality of the APS, and APS holders have continued to receive dividends at the previously defined “maximum rate”. During the six months ended May 31, 2008, the APS dividend rates ranged from 2.35% to 4.86%. These developments with respect to APS do not affect the management or investment policies of the fund. However, one implication of these auction failures for Common shareholders is that the fund’s cost of leverage will be higher than it otherwise would have been had the auctions continued to be successful. As a result, the fund’s future Common share earnings may be lower than they otherwise would have been.
The fund pays an annual fee equivalent to 0.25% of the preferred share liquidation value for remarketing efforts associated with the preferred auction. The APS are redeemable at the option of the fund in whole or in part at the redemption price equal to $25,000 per share, plus accumulated and unpaid dividends. The APS are also subject to mandatory redemption if certain requirements relating to its asset maintenance coverage are not satisfied. The fund is required to maintain certain asset coverage with respect to the APS as defined in the trust’s By-Laws and the Investment Company Act of 1940.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Trustees and Shareholders of the MFS California Insured Municipal Fund
We have reviewed the accompanying statement of assets and liabilities of the MFS California Insured Municipal Fund (the Fund), including the portfolio of investments, as of May 31, 2008, and the related statements of operations, changes in net assets, and financial highlights for the six-month period ended May 31, 2008. These interim financial statements are the responsibility of the Fund’s management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the accompanying interim financial statements for them to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the statement of changes in net assets for the year ended November 30, 2007, and its financial highlights for the year then ended, and in our report dated January 16, 2008, we expressed an unqualified opinion on such statement of changes in net assets and financial highlights. The financial highlights for each of the four years in the period then ended November 30, 2006 were audited by another independent registered public accounting firm whose report, dated January 25, 2007, expressed an unqualified opinion on those financial highlights.
Boston, Massachusetts
July 17, 2008
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BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT
A discussion regarding the Board’s most recent review and renewal of the fund’s investment advisory agreement is available by clicking on the fund’s name under “Products and Performance” and then “Closed-End Funds” on the MFS Web site (mfs.com).
PROXY VOTING POLICIES AND INFORMATION
A general description of the MFS funds’ proxy voting policies and procedures is available without charge, upon request, by calling 1-800-225-2606, by visiting the Proxy Voting section of mfs.com or by visiting the SEC’s Web site at http://www.sec.gov.
Information regarding how the fund voted proxies relating to portfolio securities during the twelve-month period ended June 30, 2007 is available without charge by visiting the Proxy Voting section of mfs.com or by visiting the SEC’s Web site at http://www.sec.gov.
QUARTERLY PORTFOLIO DISCLOSURE
The fund will file a complete schedule of portfolio holdings with the Securities and Exchange Commission (the Commission) for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q may be reviewed and copied at the:
Public Reference Room
Securities and Exchange Commission
100 F Street, NE, Room 1580
Washington, D.C. 20549
Information on the operation of the Public Reference Room may be obtained by calling the Commission at 1-800-SEC-0330. The fund’s Form N-Q is available on the EDGAR database on the Commission’s Internet Web site at http://www.sec.gov, and copies of this information may be obtained, upon payment of a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov or by writing the Public Reference Section at the above address.
A shareholder can also obtain the quarterly portfolio holdings report at mfs.com.
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CONTACT INFORMATION AND NUMBER OF SHAREHOLDERS
Investor Information
Transfer Agent, Registrar and Dividend Disbursing Agent
| Call | 1-800-637-2304 any business day from 9 a.m. to 5 p.m. Eastern time | |
| Write to: | Computershare Trust Company, N.A. P.O. Box 43078 Providence, RI 02940-3078 | |
Number of Shareholders
As of May 31, 2008, our records indicate that there are 20 registered shareholders and approximately 1,315 shareholders owning trust shares in “street” name, such as through brokers, banks, and other financial intermediaries.
If you are a “street” name shareholder and wish to directly receive our reports, which contain important information about the trust, please write or call:
Computershare Trust Company, N.A.
P.O. Box 43078
Providence, RI 02940-3078
1-800-637-2304
500 Boylston Street, Boston, MA 02116
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| ITEM 2. | CODE OF ETHICS. |
The Registrant has not amended any provision in its Code of Ethics (the “Code”) that relates to any element of the Code’s definition enumerated in paragraph (b) of Item 2 of this Form N-CSR.
| ITEM 3. | AUDIT COMMITTEE FINANCIAL EXPERT. |
Not applicable for semi-annual reports.
| ITEM 4. | PRINCIPAL ACCOUNTANT FEES AND SERVICES. |
Not applicable for semi-annual reports.
| ITEM 5. | AUDIT COMMITTEE OF LISTED REGISTRANTS. |
Not applicable for semi-annual reports.
| ITEM 6. | SCHEDULE OF INVESTMENTS |
A schedule of investments for each series of the Registrant is included as part of the report to shareholders of such series under Item 1 of this Form N-CSR.
| ITEM 7. | DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. |
Not applicable for semi-annual reports.
| ITEM 8. | PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. |
There were no changes during this period.
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| ITEM 9. | PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. |
MFS California Insured Municipal Fund
| Period |
(a) Total number of Shares Purchased |
(b) Average Price Paid per Share |
(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
(d) Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased under the Plans or Programs | ||||
| 12/1/07 – 12/31/07 |
0 | N/A | 0 | 0 | ||||
| 1/1/08 – 1/31/08 |
0 | N/A | 0 | 0 | ||||
| 2/1/08 – 2/29/08 |
0 | N/A | 0 | 0 | ||||
| 3/1/08 – 3/31/08 |
0 | N/A | 0 | 278,077 | ||||
| 4/1/08 – 4/30/08 |
0 | N/A | 0 | 278,077 | ||||
| 5/1/08 – 5/31/08 |
0 | N/A | 0 | 278,077 | ||||
| Total |
0 | N/A | 0 | |||||
Note: The Board of Trustees approves procedures to repurchase Fund shares annually. The notification to shareholders of the program is included in the semi-annual and annual reports sent to shareholders. These annual programs begin on March 1st of each year. The programs conform to the conditions of Rule 10b-18 of the Securities Exchange Act of 1934 and limit the aggregate number of Fund shares that may be repurchased in each annual period (March 1 through the following February 28) to 10% of the Registrant’s outstanding shares as of the first day of the plan year (March 1). The aggregate number of Fund shares available for repurchase for the March 1, 2008 plan year is 278,077.
| ITEM 10. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. |
There were no material changes to the procedures by which shareholders may send recommendations to the Board for nominees to the Registrant’s Board since the Registrant last provided disclosure as to such procedures in response to the requirements of Item 407 (c)(2)(iv) of Regulation S-K or this Item.
| ITEM 11. | CONTROLS AND PROCEDURES. |
| (a) | Based upon their evaluation of the effectiveness of the registrant’s disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940 (the “Act”)) as conducted within 90 days of the filing date of this report on Form N-CSR, the registrant’s principal financial officer and principal executive officer have concluded that those disclosure controls and procedures provide reasonable assurance that the material information required to be disclosed by the registrant on this report is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. |
| (b) | There were no changes in the registrant’s internal controls over financial reporting (as defined in Rule 30a-3(d) under the Act) that occurred during the second fiscal quarter of the period covered by the report that have materially affected, or are reasonably likely to materially affect, the registrant’s internal control over financial reporting. |
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| ITEM 12. | EXHIBITS. |
| (a) | File the exhibits listed below as part of this form. Letter or number the exhibits in the sequence indicated. |
| (1) | Any code of ethics, or amendment thereto, that is the subject of the disclosure required by Item 2, to the extent that the registrant intends to satisfy the Item 2 requirements through filing of an exhibit. |
| (2) | A separate certification for each principal executive officer and principal financial officer of the registrant as required by Rule 30a-2 under the Act (17 CFR 270.30a-2): Attached hereto. |
| (b) | If the report is filed under Section 13(a) or 15(d) of the Exchange Act, provide the certifications required by Rule 30a-2(b) under the Act (17 CFR 270.30a-2(b)), Rule 13a-14(b) or Rule 15d-14(b) under the Exchange Act (17 CFR 240.13a-14(b) or 240.15d-14(b)) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350) as an exhibit. A certification furnished pursuant to this paragraph will not be deemed “filed” for the purposes of Section 18 of the Exchange Act (15 U.S.C. 78r), or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference: Attached hereto. |
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Notice
A copy of the Agreement and Declaration of Trust, as amended, of the Registrant is on file with the Secretary of State of The Commonwealth of Massachusetts and notice is hereby given that this instrument is executed on behalf of the Registrant by an officer of the Registrant as an officer and not individually and the obligations of or arising out of this instrument are not binding upon any of the Trustees or shareholders individually, but are binding only upon the assets and property of the respective constituent series of the Registrant.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) MFS CALIFORNIA INSURED MUNICIPAL FUND
| By (Signature and Title)* | ROBERT J. MANNING | |
| Robert J. Manning, President | ||
Date: July 18, 2008
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| By (Signature and Title)* | ROBERT J. MANNING | |
| Robert J. Manning, President (Principal Executive Officer) | ||
Date: July 18, 2008
| By (Signature and Title)* | MARIA F. DWYER | |
| Maria F. Dwyer, Treasurer (Principal Financial Officer and Accounting Officer) | ||
Date: July 18, 2008
| * | Print name and title of each signing officer under his or her signature. |