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: 811-07111
Morgan Stanley Insured California Municipal Securities
(Exact name of registrant as specified in charter)
1221 Avenue of the Americas, New York, New York 10020
(Address of principal executive offices) (Zip code)
Ronald E. Robison
1221 Avenue of the Americas, New York, New York 10020
(Name and address of agent for service)
Registrant's telephone number, including area code: 212-762-4000
Date of fiscal year end: October 31, 2007
Date of reporting period: April 30, 2007
Item 1 - Report to Shareholders
Welcome, Shareholder:
In this report, you'll learn about how your investment in Morgan Stanley Insured
California Municipal Securities performed during the semiannual period. We will
provide an overview of the market conditions, and discuss some of the factors
that affected performance during the reporting period. In addition, this report
includes the Trust's financial statements and a list of Trust investments.
MARKET FORECASTS PROVIDED IN THIS REPORT MAY NOT NECESSARILY COME TO PASS. THERE
IS NO ASSURANCE THAT THE TRUST WILL ACHIEVE ITS INVESTMENT OBJECTIVE. THE TRUST
IS SUBJECT TO MARKET RISK, WHICH IS THE POSSIBILITY THAT MARKET VALUES OF
SECURITIES OWNED BY THE TRUST WILL DECLINE AND, THEREFORE, THE VALUE OF THE
TRUST'S SHARES MAY BE LESS THAN WHAT YOU PAID FOR THEM. ACCORDINGLY, YOU CAN
LOSE MONEY INVESTING IN THIS TRUST.
INCOME EARNED BY CERTAIN SECURITIES IN THE PORTFOLIO MAY BE SUBJECT TO THE
FEDERAL ALTERNATIVE MINIMUM TAX (AMT).
FUND REPORT
For the six months ended April 30, 2007
MARKET CONDITIONS
The economy continued to send mixed signals about its overall strength during
the six-month reporting period. Rising energy prices and ongoing geopolitical
uncertainty had a negative impact on investor sentiment, as did the contraction
in the residential real estate sector. Turmoil in the sub-prime mortgage market
intensified concerns about housing, and dominated investment headlines during
the period. In fact, these concerns were the primary contributor to the sharp
decline in the equity market in late February, which led to a "flight to
quality" that forced yields on U.S. Treasury bonds lower and prices higher. The
changing economic and financial picture led to changes in the Federal Open
Market Committee's (the "Fed") monetary policy bias as well. Although the Fed
held the target federal funds rate steady, statements released following its
March meeting signaled a more neutral bias. This apparent shift in policy led to
a stronger equity market and began to move bond yields higher.
Long-term municipal bond yields (as represented by the 30-year AAA rated
municipal bond), which stood at 4.06 percent at the end of October, ended the
period slightly higher at 4.10 percent. The slope of the municipal yield curve
remained relatively flat, with only a 50 basis point yield differential, or
"pick-up," between 30-year maturities and one-year maturities. In comparison,
the yield pick-up from one to 30 years in April 2006 was 95 basis points, and
has averaged 165 basis points over the past three years.
Declining interest rates in the fourth quarter of 2006 spurred a rebound in
municipal bond issuance that led new issue volume for the calendar year to reach
$383 billion, the second highest on record and only 6 percent below 2005's
record pace. In the first four months of 2007, new issue municipal volume
increased by 37 percent versus the same period one year earlier, reaching a
total of $135 billion. Insured municipal bonds continued to represent roughly
half of all new issue supply. Municipalities continued to take advantage of
lower interest rates to refinance their debt and refundings increased
dramatically. California was the country's largest issuer of municipal bonds
during the period, and new issue supply for the state rose by 84 percent.
Strong demand by institutional investors and non-traditional buyers, including
hedge funds and arbitrage accounts, helped long-term municipal bonds perform
relatively in line with Treasuries for the period. The 30-year
municipal-to-Treasury yield ratio, which measures the relative attractiveness of
these two sectors, declined slightly from 86 percent at the beginning of the
period to 85 percent by period end. A declining ratio indicates that municipals
outperformed Treasuries while at the same time becoming more expensive (and thus
less attractive) on a relative basis.
The State of California continued to enjoy a generally good economic footing.
Although the slowdown in the real estate sector dampened the state's economy, it
did not stall growth as expansion in the service sector helped to offset
continued weakness in real estate related employment. In terms of its budget,
the state projects that fiscal 2007 will end slightly better than estimates due
to good revenue growth. California's inability to fully eliminate its structural
deficit despite
2
prosperous economic conditions, however, remains a credit concern.
PERFORMANCE ANALYSIS
For the six-month period ended April 30, 2007, the net asset value (NAV) of
Morgan Stanley Insured California Municipal Securities (ICS) decreased from
$15.15 to $15.05 per share. Based on this change plus reinvestment of tax-free
dividends totaling $0.30 per share and a long-term capital gain distribution of
$0.040983 per share, the Trust's total NAV return was 1.70 percent. ICS's value
on the New York Stock Exchange (NYSE) moved from $14.06 to $14.89 per share
during the same period. Based on this change plus reinvestment of dividends and
distributions, the Trust's total market return was 8.42 percent. ICS's NYSE
market price was at a 1.06 percent discount to its NAV. Past performance is no
guarantee of future results.
Monthly dividends for the second quarter of 2007, declared in March, were
unchanged at $0.05 per share. The dividend reflects the current level of the
Trust's net investment income. ICS's level of undistributed net investment
income was $0.109 per share on April 30, 2007, versus $0.107 per share six
months earlier.(1)
During the reporting period, the Trust's interest-rate positioning continued to
reflect our anticipation of higher rates. This strategy helped the Trust's total
returns at the beginning of the period when interest rates rose, but tempered
returns later in the period when rates declined. As a result, at the end of
April the Trust's option-adjusted duration* was positioned at 7.3 years. To
reduce the portfolio's duration, a U.S. Treasury futures hedge and Bond Market
Association (BMA) interest rate swap contract were used.
The primary detractor from performance was the Trust's overall maturity
distribution, which was underweighted in longer-term issues relative to issues
with shorter maturities. This stance limited the Trust's participation in the
outperformance of longer-maturity bonds during the period. The Trust's
performance was enhanced, however, by several holdings that appreciated when
they were pre-refunded.**
Reflecting a commitment to diversification, the Trust's net assets of
approximately $52 million were invested among 11 long-term sectors and 36
credits. As of the close of the period the Trust's largest allocations were to
the water and sewer, general obligation and appropriation sectors.
The Trust's procedure for reinvesting all dividends and distributions on common
shares is through purchases in the open market. This method helps support the
market value of the Trust's shares. In addition, we would like to remind you
that the Trustees have approved a procedure whereby the Trust may, when
appropriate, purchase shares in the open market or in privately negotiated
transactions at a price not above market value or net asset value, whichever is
lower at the time of purchase.
3
----------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE, WHICH IS NO GUARANTEE OF
FUTURE RESULTS, AND CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE FIGURES
SHOWN. INVESTMENT RETURN, NET ASSET VALUE AND COMMON SHARE MARKET PRICE WILL
FLUCTUATE AND TRUST SHARES, WHEN SOLD, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST.
There is no guarantee that any sectors mentioned will continue to perform as
discussed herein or that securities in such sectors will be held by the Trust in
the future.
(1) Income earned by certain securities in the portfolio may be subject to the
federal alternative minimum tax (AMT).
* A measure of the sensitivity of a bond's price to changes in interest rates,
expressed in years. Each year of duration represents an expected 1 percent
change in the price of a bond for every 1 percent change in interest rates. The
longer a bond's duration, the greater the effect of interest-rate movements on
its price. Typically, trusts with shorter durations perform better in
rising-interest-rate environments, while trusts with longer durations perform
better when rates decline.
** Prerefunding, or advance refunding, is a financing structure under which new
bonds are issued to repay an outstanding bond issue on its first call date.
TOP FIVE SECTORS
Water & Sewer 23.2%
Refunded 16.2
General Obligation 13.9
Education 9.8
Appropriation 8.3
CREDIT ENHANCEMENTS
AMBAC 23.3%
FGIC 30.0
FSA 27.3
MBIA 17.3
US Gov't Backed 2.1
Data as of April 30, 2007. Subject to change daily. All percentages for top five
sectors are as a percentage of net assets. All percentages for credit
enhancements are as a percentage of total long-term investments. These data are
provided for informational purposes only and should not be deemed a
recommendation to buy or sell the securities mentioned. Morgan Stanley is a
full-service securities firm engaged in securities trading and brokerage
activities, investment banking, research and analysis, financing and financial
advisory services.
4
FOR MORE INFORMATION
ABOUT PORTFOLIO HOLDINGS
EACH MORGAN STANLEY TRUST PROVIDES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS IN
ITS SEMIANNUAL AND ANNUAL REPORTS WITHIN 60 DAYS OF THE END OF THE TRUST'S
SECOND AND FOURTH FISCAL QUARTERS. THE SEMIANNUAL REPORTS AND THE ANNUAL REPORTS
ARE FILED ELECTRONICALLY WITH THE SECURITIES AND EXCHANGE COMMISSION (SEC) ON
FORM N-CSRS AND FORM N-CSR, RESPECTIVELY. MORGAN STANLEY ALSO DELIVERS THE
SEMIANNUAL AND ANNUAL REPORTS TO TRUST SHAREHOLDERS AND MAKES THESE REPORTS
AVAILABLE ON ITS PUBLIC WEB SITE, WWW.MORGANSTANLEY.COM. EACH MORGAN STANLEY
TRUST ALSO FILES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS WITH THE SEC FOR THE
TRUST'S FIRST AND THIRD FISCAL QUARTERS ON FORM N-Q. MORGAN STANLEY DOES NOT
DELIVER THE REPORTS FOR THE FIRST AND THIRD FISCAL QUARTERS TO SHAREHOLDERS, NOR
ARE THE REPORTS POSTED TO THE MORGAN STANLEY PUBLIC WEB SITE. YOU MAY, HOWEVER,
OBTAIN THE FORM N-Q FILINGS (AS WELL AS THE FORM N-CSR AND N-CSRS FILINGS) BY
ACCESSING THE SEC'S WEB SITE, HTTP://WWW.SEC.GOV. YOU MAY ALSO REVIEW AND COPY
THEM AT THE SEC'S PUBLIC REFERENCE ROOM IN WASHINGTON, DC. INFORMATION ON THE
OPERATION OF THE SEC'S PUBLIC REFERENCE ROOM MAY BE OBTAINED BY CALLING THE SEC
AT (800) SEC-0330. YOU CAN ALSO REQUEST COPIES OF THESE MATERIALS, UPON PAYMENT
OF A DUPLICATING FEE, BY ELECTRONIC REQUEST AT THE SEC'S E-MAIL ADDRESS
(PUBLICINFO@SEC.GOV) OR BY WRITING THE PUBLIC REFERENCE SECTION OF THE SEC,
WASHINGTON, DC 20549-0102.
5
DISTRIBUTION BY MATURITY
(% of Long-Term Portfolio) As of April 30, 2007
WEIGHTED AVERAGE MATURITY: 18 YEARS(A)
0-5 6.00
6-10 5.00
11-15 24.00
16-20 24.00
21-25 29.00
26-30 10.00
31+ 2.00
(a) Where applicable maturities reflect mandatory tenders, puts and call dates.
Portfolio structure is subject to change.
6
CALL AND COST (BOOK) YIELD STRUCTURE
(Based on Long-Term Portfolio) As of April 30, 2007
YEARS BONDS CALLABLE -- WEIGHTED AVERAGE CALL PROTECTION: 7 YEARS
2007(a) 6
2008 1
2009 1
2010 4
2011 16
2012 9
2013 19
2014 13
2015 16
2016 7
2017+ 8
COST (BOOK) YIELD(B) -- WEIGHTED AVERAGE BOOK YIELD: 5.0%
2007(a) 6.20
2008 3.90
2009 5.90
2010 5.40
2011 5.20
2012 5.20
2013 4.80
2014 4.90
2015 4.60
2016 4.60
2017+ 4.80
(a) May include issues initially callable in previous years.
(b) Cost or "book" yield is the annual income earned on a portfolio investment
based on its original purchase price before the Trust's operating expenses.
For example, the Trust is earning a book yield of 6.2% on 6% of the
long-term portfolio that is callable in 2007.
Portfolio structure is subject to change.
7
INVESTMENT ADVISORY AGREEMENT APPROVAL
NATURE, EXTENT AND QUALITY OF SERVICES
The Board reviewed and considered the nature and extent of the investment
advisory services provided by the Investment Adviser under the Advisory
Agreement, including portfolio management, investment research and fixed income
securities trading. The Board also reviewed and considered the nature and extent
of the non-advisory, administrative services provided by the Trust's
Administrator under the Administration Agreement, including accounting,
clerical, bookkeeping, compliance, business management and planning, and the
provision of supplies, office space and utilities at the Investment Adviser's
expense. (The Investment Adviser and the Administrator together are referred to
as the "Adviser" and the Advisory and Administration Agreements together are
referred to as the "Management Agreement.") The Board also compared the nature
of the services provided by the Adviser with similar services provided by
non-affiliated advisers as reported to the Board by Lipper Inc. ("Lipper").
The Board reviewed and considered the qualifications of the portfolio managers,
the senior administrative managers and other key personnel of the Adviser who
provide the administrative and advisory services to the Trust. The Board
determined that the Adviser's portfolio managers and key personnel are well
qualified by education and/or training and experience to perform the services in
an efficient and professional manner. The Board concluded that the nature and
extent of the advisory and administrative services provided were necessary and
appropriate for the conduct of the business and investment activities of the
Trust. The Board also concluded that the overall quality of the advisory and
administrative services was satisfactory.
PERFORMANCE RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS
On a regular basis, the Board reviews the performance of all funds in the Morgan
Stanley Fund Complex, including the Trust, compared to their peers, paying
specific attention to the underperforming funds. In addition, the Board
specifically reviewed the Trust's performance for the one-, three- and five-year
periods ended November 30, 2006, as shown in a report provided by Lipper (the
"Lipper Report"). The Board noted that the Lipper Report did not compare the
Trust's performance with a peer group of comparable funds because the Trust is
unleveraged and Lipper has no closed-end peer group for unleveraged California
funds. However, the Board was also provided with supplemental performance
information from the Adviser comparing the Trust's performance with a closed-end
peer group of leveraged California funds selected by Lipper. The Board discussed
with the Adviser the performance goals and the actual results achieved in
managing the Trust. The Board concluded that the Trust's performance was
competitive with that of the performance peer group provided supplementally to
the Board.
8
FEES RELATIVE TO OTHER PROPRIETARY FUNDS MANAGED BY THE ADVISER WITH COMPARABLE
INVESTMENT STRATEGIES
The Board noted that the Adviser did not manage any other proprietary funds with
investment strategies comparable to the Trust.
FEES AND EXPENSES RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS
The Board reviewed the advisory and administrative fee (together, the
"management fee") rate and total expense ratio of the Trust as compared to the
average management fee rate and average total expense ratio for funds, selected
by Lipper (the "expense peer group"), managed by other advisers with investment
strategies comparable to those of the Trust, as shown in the Lipper Report. The
Board concluded that the Trust's management fee rate and total expense ratio
were competitive with those of its expense peer group.
BREAKPOINTS AND ECONOMIES OF SCALE
The Board reviewed the structure of the Trust's management fee schedule under
the Management Agreement and noted that it does not include any breakpoints. The
Board considered that the Trust is a closed-end fund and, therefore, that the
Trust's assets are not likely to grow with new sales or grow significantly as a
result of capital appreciation. The Board concluded that economies of scale for
the Trust were not a factor that needed to be considered at the present time.
PROFITABILITY OF THE ADVISER AND AFFILIATES
The Board considered information concerning the costs incurred and profits
realized by the Adviser and affiliates during the last year from their
relationship with the Trust and during the last two years from their
relationship with the Morgan Stanley Fund Complex and reviewed with the Adviser
the cost allocation methodology used to determine the profitability of the
Adviser and affiliates. Based on its review of the information it received, the
Board concluded that the profits earned by the Adviser and affiliates were not
excessive in light of the advisory, administrative and other services provided
to the Trust.
FALL-OUT BENEFITS
The Board considered so-called "fall-out benefits" derived by the Adviser and
affiliates from their relationship with the Trust and the Morgan Stanley Fund
Complex, such as commissions on the purchase and sale of Trust shares and
"float" benefits derived from handling of checks for purchases and sales of
Trust shares, through a broker-dealer affiliate of the Adviser. The Board
concluded that the float benefits were relatively small and that the commissions
were competitive with those of other broker-dealers.
9
SOFT DOLLAR BENEFITS
The Board considered whether the Adviser realizes any benefits from commissions
paid to brokers who execute securities transactions for the Trust ("soft
dollars"). The Board noted that the Trust invests only in fixed income
securities, which do not generate soft dollars.
ADVISER FINANCIALLY SOUND AND FINANCIALLY CAPABLE OF MEETING THE TRUST'S NEEDS
The Board considered whether the Adviser is financially sound and has the
resources necessary to perform its obligations under the Management Agreement.
The Board concluded that the Adviser has the financial resources necessary to
fulfill its obligations under the Management Agreement.
HISTORICAL RELATIONSHIP BETWEEN THE TRUST AND THE ADVISER
The Board also reviewed and considered the historical relationship between the
Trust and the Adviser, including the organizational structure of the Adviser,
the policies and procedures formulated and adopted by the Adviser for managing
the Trust's operations and the Board's confidence in the competence and
integrity of the senior managers and key personnel of the Adviser. The Board
concluded that it is beneficial for the Trust to continue its relationship with
the Adviser.
OTHER FACTORS AND CURRENT TRENDS
The Board considered the controls and procedures adopted and implemented by the
Adviser and monitored by the Trust's Chief Compliance Officer and concluded that
the conduct of business by the Adviser indicates a good faith effort on its part
to adhere to high ethical standards in the conduct of the Trust's business.
GENERAL CONCLUSION
After considering and weighing all of the above factors, the Board concluded
that it would be in the best interest of the Trust and its shareholders to
approve renewal of the Management Agreement for another year.
10
Morgan Stanley Insured California Municipal Securities
PORTFOLIO OF INVESTMENTS - APRIL 30, 2007 (UNAUDITED)
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
---------------------------------------------------------------------------------------------------------
California Tax-Exempt Municipal Bonds (103.7%)
General Obligation (13.9%)
California,
$ 400 Veterans Ser BH (AMT) (FSA).............................. 5.40 % 12/01/16 $ 411,728
505 Various Purposes Dtd 03/01/94 (FSA)...................... 5.50 03/01/20 508,070
1,000 Refg Dtd 04/01/07 (MBIA)................................. 4.25 08/01/33 957,940
1,280 Huntington Beach Union High School District, Ser 2004
(FSA).................................................... 5.00 08/01/26 1,363,379
1,030 Los Angeles, Ser 2004 A (MBIA)............................. 5.00 09/01/24 1,096,693
340 San Francisco City & County, Laguna Honda Hospital RITES PA
1387 (FSA)............................................... 7.74@ 06/15/30 407,619
1,000 Upland School District, Election 2000 Ser 2001 B (FSA)..... 5.125 08/01/25 1,061,630
1,375 Washington Unified School District, Election 2004 Ser A.... 5.00 08/01/22 1,447,985
-----------
-------
7,255,044
6,930
-----------
-------
Appropriation (8.3%)
1,000 Golden State Tobacco Securitization Corporation, Enhanced
Asset Backed Ser 2005 A (FGIC)........................... 5.00 06/01/38 1,049,090
1,110 Kern County Board of Education, Refg 2006 Ser A COPs
(MBIA)................................................... 5.00 06/01/31 1,173,459
1,000 Simi Valley Public Financing Authority, Ser 2004 COPs
(Ambac).................................................. 5.00 09/01/30 1,048,400
1,000 Val Verde Unified School District, School Construction COPs
Ser 2005 B (FGIC)........................................ 5.00 01/01/30 1,050,260
-----------
-------
4,321,209
4,110
-----------
-------
Dedicated Tax (4.8%)
250 Bay Area Government Association, Pool 1994 Ser A (FSA)..... 6.00 12/15/24 250,665
1,000 Capistrano Unified School District, Community Facilities
District #98-2 Ladera Special Tax Ser 2005 (FGIC)........ 5.00 09/01/29 1,057,520
1,100 La Quinta Financing Authority, Local Agency 2004 Ser A
(Ambac).................................................. 5.25 09/01/24 1,189,232
-----------
-------
2,497,417
2,350
-----------
-------
Education (9.8%)
1,000 California State University, Ser 2005 A (Ambac)............ 5.00 11/01/35 1,056,330
University of California,
1,000 Limited Projects Ser 2005 B (FSA)........................ 5.00 05/15/30 1,052,360
1,040 Ser 2007-J (FSA)++....................................... 4.50 05/15/31 1,043,468
960 Ser 2007-J (FSA)++....................................... 4.50 05/15/35 963,202
1,000 Regents Ser 2007 A (MBIA)................................ 4.50 05/15/37 1,001,090
-----------
-------
5,116,450
5,000
-----------
-------
See Notes to Financial Statements
11
Morgan Stanley Insured California Municipal Securities
PORTFOLIO OF INVESTMENTS - APRIL 30, 2007 (UNAUDITED) continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
---------------------------------------------------------------------------------------------------------
Housing (4.1%)
$ 2,000 California Department of Veterans Affairs, Home Purchase
2002 Ser A (Ambac)....................................... 5.35 % 12/01/27 $ 2,134,000
60 California Housing Financing Agency, 1995 Ser B (AMT)
(Ambac).................................................. 6.25 08/01/14 60,561
-----------
-------
2,194,561
2,060
-----------
-------
Incremental Tax (2.0%)
1,000 Rancho Mirage Redevelopment Agency, Ser 2003 A (MBIA)...... 5.00 04/01/33 1,039,120
-----------
-------
Public Power (9.9%)
Anaheim Public Financing Authority,
1,000 Generation Refg Ser 2002-B (FSA)......................... 5.25 10/01/18 1,075,200
2,000 Distribution Ser 2007-A (MBIA)........................... 4.50 10/01/37 1,988,450
1,000 Los Angeles Department of Water & Power, 2001 Ser A
(FSA).................................................... 5.25 07/01/21 1,052,220
1,000 Southern California Public Power Authority, Transmission
Refg Ser 2002 A (FSA).................................... 5.25 07/01/18 1,073,000
-----------
-------
5,188,870
5,000
-----------
-------
Transportation (8.0%)
1,000 Los Angeles County Metropolitan Transportation Authority
Sales Tax Refg Ser 2006 A (FSA).......................... 4.50 07/01/29 1,008,550
2,000 Orange County Transportation Authority, Toll Road Express
Lanes Refg Ser 2003 A (Ambac)............................ 5.00 08/15/20 2,137,120
1,000 San Jose, Airport Ser 2001 A (FGIC)........................ 5.00 03/01/25 1,038,430
-----------
-------
4,184,100
4,000
-----------
-------
Water & Sewer (23.2%)
1,500 California Department of Water Resources, Central Valley
Ser Y (FGIC)............................................. 5.25 12/01/19 1,621,800
2,000 East Bay Municipal Utility District, California, Water Ser
2001 (MBIA).............................................. 5.00 06/01/26 2,073,120
1,000 Los Angeles Wastewater Refg Ser 2003 B (FSA)............... 5.00 06/01/22 1,051,860
1,000 Metropolitan Water District of Southern California, 2003
Ser B-2 (FGIC)........................................... 5.00 10/01/27 1,048,010
1,000 Oxnard Financing Authority, Wastewater 2004 Ser A (FGIC)... 5.00 06/01/29 1,051,370
1,000 Sacramento County Sanitation District's Financing
Authority, Ser 2006 (FGIC)............................... 5.00 12/01/28 1,066,490
1,000 San Diego County Water Authority, California, Ser 2004 A
COPs (FSA)............................................... 5.00 05/01/29 1,054,940
2,000 San Francisco Public Utilities Commission, Water Refg Ser A
2001 (FSA)............................................... 5.00 11/01/31 2,069,580
1,000 Yucaipa Valley Water District, Ser 2004 A COPs (MBIA)...... 5.25 09/01/24 1,074,460
-----------
-------
12,111,630
11,500
-----------
-------
See Notes to Financial Statements
12
Morgan Stanley Insured California Municipal Securities
PORTFOLIO OF INVESTMENTS - APRIL 30, 2007 (UNAUDITED) continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
---------------------------------------------------------------------------------------------------------
Other Revenue (3.5%)
Sacramento Financing Authority,
$ 1,510 2005 Refg Solid Waste & Redevelopment (FGIC)............. 5.00 % 12/01/17 $ 1,639,000
180 1999 Solid Waste & Redevelopment (Ambac)................. 5.75 12/01/22 192,103
-----------
-------
1,831,103
1,690
-----------
-------
Refunded (16.2%)
2,000 Anaheim, Anaheim Memorial Hospital COPs (Ambac) (ETM)...... 5.125 05/15/20 2,002,440
2,000 California Infrastructure & Economic Development Bank, Bay
Area Toll Bridges Seismic Retrofit First Lien Ser 2003 A
(FGIC) (ETM)............................................. 5.00 07/01/29 2,241,700
1,000 Los Angeles County Metropolitan Transportation Authority
Sales Tax, Ser 2000 A (FGIC)#............................ 5.25 07/01/10+ 1,059,280
2,000 Sacramento Financing Authority, Water & Capital Improvement
2001 Ser A (Ambac)....................................... 5.00 12/01/11+ 2,102,960
1,000 Puerto Rico Infrastructure Financing Authority, 2000 Ser A
(ETM).................................................... 5.50 10/01/32 1,069,270
-----------
-------
8,475,650
8,000
-----------
-------
51,640 Total California Tax-Exempt Municipal Bonds (Cost $51,802,753)................ 54,215,154
-----------
-------
California Short-Term Tax-Exempt Municipal Obligation (2.4%)
1,300 Newport Beach, Hoag Memorial Presbyterian Hospital 1992 Ser
------- (Demand 05/01/07) (Cost $1,300,000)........................ 3.90* 10/01/22 1,300,000
-----------
52,940 Total Investments (Cost $53,102,753).......................................... 55,515,154
-----------
-------
Floating Rate Note Obligations Related to Securities Held (-5.7%)
(3,000) Notes with interest rates ranging from 3.93% to 3.95% at April 30, 2007
------- and contractual maturities of collateral ranging from
05/15/31 to 10/01/37 (See Note 1D)+++ (Cost $(3,000,000))..................... (3,000,000)
-----------
49,940 Total Net Investments (Cost $50,102,753) (a)(b).................... 100.4% 52,515,154
=======
Liabilities in Excess of Other Assets.............................. (0.4) (223,927)
----- -----------
Net Assets Applicable to Common Shareholders....................... 100.0% $52,291,227
===== ===========
See Notes to Financial Statements
13
Morgan Stanley Insured California Municipal Securities
PORTFOLIO OF INVESTMENTS - APRIL 30, 2007 (UNAUDITED) continued
---------------------
AMT Alternative Minimum Tax.
COPs Certificates of Participation.
ETM Escrowed to Maturity.
RITES Residual Interest Tax-Exempt Securities.
@ Current coupon rate for inverse floating rate municipal
obligation (See Note 8). This rate resets periodically as
the auction rate on the related security changes. Position
in an inverse floating rate municipal obligation has a value
of $407,619 which represents 0.8% of net assets applicable
to common shareholders.
+ Prerefunded to call date shown.
++ Underlying security related to inverse floaters entered into
by the Trust (see Note 1D).
+++ Floating rate note obligation related to securities held.
The interest rates shown reflects the rates in effect April
30,2007.
* Current coupon of variable rate demand obligation.
# A portion of this security has been physically segregated in
connection with open futures contracts in the amount of
$26,000.
(a) Securities have been designated as collateral in an amount
equal to $4,317,652 in connection with open futures
contracts and an open swap contract.
(b) The aggregate cost for federal income tax purposes is
$50,036,751. The aggregate gross unrealized appreciation is
$2,503,050 and the aggregate gross unrealized depreciation
is $24,647, resulting in net unrealized appreciation of
$2,478,403.
Bond Insurance:
---------------
Ambac Ambac Assurance Corporation.
FGIC Financial Guaranty Insurance Company.
FSA Financial Security Assurance Inc.
MBIA Municipal Bond Investors Assurance Corporation.
FUTURES CONTRACTS OPEN AT APRIL 30, 2007:
NUMBER OF DESCRIPTION, DELIVERY UNDERLYING FACE UNREALIZED
CONTRACTS LONG/SHORT MONTH AND YEAR AMOUNT AT VALUE APPRECIATION
------------------------------------------------------------------------------------------
U.S. Treasury Notes 10
40 Short Year June 2007 $(4,333,125) $5,201
======
INTEREST RATE SWAP CONTRACT OPEN AT APRIL 30, 2007:
NOTIONAL
AMOUNT PAYMENTS PAYMENTS TERMINATION UNREALIZED
COUNTERPARTY (000) MADE BY TRUST RECEIVED BY TRUST DATE DEPRECIATION
-------------------------------------------------------------------------------------------------------------------------------
Floating Rate BMA
(Bond Market
JPMorgan Chase & Co. $3,000 Fixed Rate 3.679% Association) 05/25/17 $(5,214)
=======
See Notes to Financial Statements
14
Morgan Stanley Insured California Municipal Securities
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
April 30, 2007 (unaudited)
Assets:
Investments in securities, at value
(cost $53,102,753)................. $55,515,154
Cash................................. 83,633
Interest receivable.................. 784,679
Prepaid expenses and other assets.... 16,324
-----------
Total Assets..................... 56,399,790
-----------
Liabilities:
Floating rate note obligations....... 3,000,000
Unrealized depreciation on open swap
contract........................... 5,214
Payable for:
Investments purchased............ 1,018,920
Variation margin................. 19,375
Investment advisory fee.......... 11,991
Administration fee............... 3,553
Transfer agent fee............... 589
Accrued expenses and other
payables........................... 48,921
-----------
Total Liabilities................ 4,108,563
-----------
Preferred shares of beneficial
interest (1,000,000 shares
non-participating $.01 par value,
none issued)....................... --
-----------
Net Assets Applicable to Common
Shareholders................... $52,291,227
===========
Composition of Net Assets Applicable
to Common Shareholders:
Common shares of beneficial interest
(unlimited shares authorized of
$.01 par value, 3,473,472 shares
outstanding)....................... $49,359,252
Net unrealized appreciation.......... 2,412,388
Accumulated undistributed net
investment income.................. 376,934
Accumulated undistributed net
realized gain...................... 142,653
-----------
Net Assets Applicable to Common
Shareholders................... $52,291,227
===========
Net Asset Value Per Common Share
($52,291,227 divided by 3,473,472
common shares outstanding)........... $15.05
===========
Statement of Operations
For the six months ended April 30, 2007 (unaudited)
Net Investment Income:
Interest Income....................... $1,221,599
----------
Expenses
Investment advisory fee............... 70,461
Professional fees..................... 29,613
Administration fee.................... 20,878
Interest and residual trust
expenses............................ 20,531
Shareholder reports and notices....... 12,419
Listing fees.......................... 10,215
Transfer agent fees and expenses...... 3,221
Custodian fees........................ 1,713
Trustees' fees and expenses........... 731
Other................................. 7,296
----------
Total Expenses.................... 177,078
Less: expense offset.................. (1,524)
----------
Net Expenses...................... 175,554
----------
Net Investment Income............. 1,046,045
----------
Net Realized and Unrealized Gain
(Loss):
Net Realized Gain (Loss) on:
Investments........................... 149,488
Future contracts...................... (49,073)
----------
Net Realized Gain................. 100,415
----------
Net Change in Unrealized
Appreciation/Depreciation on:
Investments........................... (348,910)
Futures contracts..................... 47,448
Swap contract......................... (5,214)
----------
Net Depreciation.................. (306,676)
----------
Net Loss.......................... (206,261)
----------
Net Increase.......................... $ 839,784
==========
See Notes to Financial Statements
15
Morgan Stanley Insured California Municipal Securities
FINANCIAL STATEMENTS continued
Statements of Changes in Net Assets
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
APRIL 30, 2007 OCTOBER 31, 2006
-------------- ----------------
(unaudited)
Increase (Decrease) in Net Assets:
Operations:
Net investment income....................................... $ 1,046,045 $ 2,151,031
Net realized gain........................................... 100,415 290,993
Net change in unrealized appreciation/depreciation.......... (306,676) 743,034
----------- -----------
Net Increase............................................ 839,784 3,185,058
----------- -----------
Dividends and Distributions to Common Shareholders from:
Net investment income....................................... (1,043,330) (2,171,173)
Net realized gain........................................... (142,683) (1,228,286)
----------- -----------
Total Dividends and Distributions....................... (1,186,013) (3,399,459)
----------- -----------
Decrease from transactions in common shares of beneficial
interest.................................................. (234,207) (1,327,215)
----------- -----------
Net Decrease............................................ (580,436) (1,541,616)
Net Assets Applicable to Common Shareholders:
Beginning of period......................................... 52,871,663 54,413,279
----------- -----------
End of Period
(Including accumulated undistributed net investment income
of $376,934 and $374,219, respectively)..................... $52,291,227 $52,871,663
=========== ===========
See Notes to Financial Statements
16
Morgan Stanley Insured California Municipal Securities
NOTES TO FINANCIAL STATEMENTS - APRIL 30, 2007 (UNAUDITED)
1. Organization and Accounting Policies
Morgan Stanley Insured California Municipal Securities (the "Trust") is
registered under the Investment Company Act of 1940, as amended, as a
diversified, closed-end management investment company. The Trust's investment
objective is to provide current income which is exempt from both federal and
California income taxes. The Trust was organized as a Massachusetts business
trust on October 14, 1993 and commenced operations on February 28, 1994.
The following is a summary of significant accounting policies:
A. Valuation of Investments -- (1) portfolio securities are valued by an outside
independent pricing service approved by the Trustees. The pricing service uses
both a computerized grid matrix of tax-exempt securities and evaluations by its
staff, in each case based on information concerning market transactions and
quotations from dealers which reflect the mean between the last reported bid and
asked price. The portfolio securities are thus valued by reference to a
combination of transactions and quotations for the same or other securities
believed to be comparable in quality, coupon, maturity, type of issue, call
provisions, trading characteristics and other features deemed to be relevant.
The Trustees believe that timely and reliable market quotations are generally
not readily available for purposes of valuing tax-exempt securities and that the
valuations supplied by the pricing service are more likely to approximate the
fair value of such securities; (2) futures are valued at the latest sale price
on the commodities exchange on which they trade unless it is determined that
such price does not reflect their market value, in which case they will be
valued at their fair value as determined in good faith under procedures
established by and under the supervision of the Trustees; (3) interest rate
swaps are marked-to-market daily based upon quotations from market makers and
the change, if any, is recorded as unrealized appreciation or depreciation in
the Statement of Operations; and (4) short-term debt securities having a
maturity date of more than sixty days at time of purchase are valued on a
mark-to-market basis until sixty days prior to maturity and thereafter at
amortized cost based on their value on the 61st day. Short-term debt securities
having a maturity date of sixty days or less at the time of purchase are valued
at amortized cost.
B. Accounting for Investments -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
Discounts are accreted and premiums are amortized over the life of the
respective securities. Interest income is accrued daily.
C. Futures Contracts -- A futures contract is an agreement between two parties
to buy and sell financial instruments or contracts based on financial indices at
a set price on a future date. Upon entering into such a contract, the Trust is
required to pledge to the broker cash, U.S. Government
17
Morgan Stanley Insured California Municipal Securities
NOTES TO FINANCIAL STATEMENTS - APRIL 30, 2007 (UNAUDITED) continued
securities or other liquid portfolio securities equal to the minimum initial
margin requirements of the applicable futures exchange. Pursuant to the
contract, the Trust agrees to receive from or pay to the broker an amount of
cash equal to the daily fluctuation in the value of the contract. Such receipts
or payments known as variation margin are recorded by the Trust as unrealized
gains and losses. Upon closing of the contract, the Trust realizes a gain or
loss equal to the difference between the value of the contract at the time it
was opened and the value at the time it was closed.
D. Floating Rate Note Obligations Related to Securities Held -- The Trust enters
into transactions in which it transfers to Dealer Trusts ("Dealer Trusts"),
fixed rate bonds in exchange for cash and residual interests in the Dealer
Trusts' assets and cash flows, which are in the form of inverse floating rate
investments. The Dealer Trusts fund the purchases of the fixed rate bonds by
issuing floating rate notes to third parties and allowing the Fund to retain
residual interest in the bonds. The Trust enters into shortfall agreements with
the Dealer Trusts which commit the Trust to pay the Dealer Trusts, in certain
circumstances, the difference between the liquidation value of the fixed rate
bonds held by the Dealer Trusts and the liquidation value of the floating rate
notes held by third parties, as well as any shortfalls in interest cash flows.
The residual interests held by the Trust (inverse floating rate investments)
include the right of the Trust (1) to cause the holders of the floating rate
notes to tender their notes at par at the next interest rate reset date, and (2)
to transfer the municipal bond from the Dealer Trusts to the Trust, thereby
collapsing the Dealer Trusts. The Trust accounts for the transfer of bonds to
the Dealer Trusts as secured borrowings, with the securities transferred
remaining in the Trust's investment assets, and the related floating rate notes
reflected as Trust liabilities under the caption "floating rate note
obligations" on the "Statement of Assets and Liabilities." The Trust records the
interest income from the fixed rate bonds under the caption "Interest Income"
and records the expenses related to floating rate note obligations and any
administrative expenses of the Dealer Trusts under the caption "Interest and
residual trust expenses" in the Trust's "Statement of Operations." The notes
issued by the Dealer Trusts have interest rates that reset weekly and the
floating rate note holders have the option to tender their notes to the Dealer
Trusts for redemption at par at each reset date. At April 30, 2007, Trust
investments with a value of $3,995,120 are held by the Dealer Trusts and serve
as collateral for the $3,000,000 in floating rate note obligations outstanding
at that date. Contractual maturities of the floating rate note obligations and
interest rates in effect at April 30, 2007, are presented in the "Portfolio of
Investments."
E. Interest Rate Swaps -- Interest rate swaps involve the exchange of
commitments to pay and receive interest based on a notional principal amount.
Net periodic interest payments to be received
18
Morgan Stanley Insured California Municipal Securities
NOTES TO FINANCIAL STATEMENTS - APRIL 30, 2007 (UNAUDITED) continued
or paid are accrued daily and are recorded as realized gains or losses in the
Statement of Operations.
F. Federal Income Tax Policy -- It is the Trust's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable and nontaxable
income to its shareholders. Accordingly, no federal income tax provision is
required.
G. Dividends and Distributions to Shareholders -- Dividends and distributions to
shareholders are recorded on the ex-dividend date.
H. Use of Estimates -- The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures.
Actual results could differ from those estimates.
2. Investment Advisory/Administration Agreements
Pursuant to an Investment Advisory Agreement, with Morgan Stanley Investment
Advisors Inc. (the "Investment Adviser"), the Trust pays an advisory fee,
calculated weekly and payable monthly, by applying the annual rate of 0.27% to
the Trust's weekly net assets.
Pursuant to an Administration Agreement with Morgan Stanley Services Company
Inc. (the "Administrator"), an affiliate of the Investment Adviser, the Trust
pays an administration fee, calculated weekly and payable monthly, by applying
the annual rate of 0.08% to the Trust's weekly net assets.
3. Security Transactions and Transactions with Affiliates
The cost of purchases and proceeds from sales of portfolio securities, excluding
short-term investments, for the six months ended April 30, 2007 aggregated
$5,891,215 and $3,501,025, respectively. Included in the aforementioned
transactions are purchases with other Morgan Stanley funds of $414,600.
Morgan Stanley Trust, an affiliate of the Investment Adviser and Administration,
is the Trust's transfer agent.
The Trust has an unfunded Deferred Compensation Plan (the "Compensation Plan")
which allows each independent Trustee to defer payment of all, or a portion, of
the fees he or she receives for serving on the Board of Trustees. Each eligible
Trustee generally may elect to have the deferred amounts credited with a return
equal to the total return on one or more of the Morgan Stanley funds that are
offered as investment options under the Compensation Plan.
Appreciation/depreciation and
19
Morgan Stanley Insured California Municipal Securities
NOTES TO FINANCIAL STATEMENTS - APRIL 30, 2007 (UNAUDITED) continued
distributions received from these investments are recorded with an offsetting
increase/decrease in the deferred compensation obligation and do not affect the
net asset value of the Trust.
4. Preferred Shares of Beneficial Interest
The Trust is authorized to issue up to 1,000,000 non-participating preferred
shares of beneficial interest having a par value of $.01 per share, in one or
more series, with rights as determined by the Trustees, without approval of the
common shareholders. The preferred shares have a liquidation value of $50,000
per share plus the redemption premium, if any, plus accumulated but unpaid
dividends, whether or not declared, thereon to the date of distribution. The
Trust may redeem such shares, in whole or in part, at the original purchase
price of $50,000 per share plus accumulated but unpaid dividends, whether or not
declared, thereon to the date of redemption.
Upon issuance, the Trust will be subject to certain restrictions relating to the
preferred shares. Failure to comply with these restrictions could preclude the
Trust from declaring any distributions to common shareholders or purchasing
common shares and/or could trigger the mandatory redemption of preferred shares
at liquidation value.
The preferred shares, entitled to one vote per share, generally vote with the
common shares but vote separately as a class to elect two Trustees and on any
matters affecting the rights of the preferred shares.
As of April 30, 2007, there were no preferred shares outstanding.
5. Common Shares of Beneficial Interest
Transactions in common shares of beneficial interest were as follows:
CAPITAL
PAID IN
EXCESS OF
SHARES PAR VALUE PAR VALUE
--------- --------- -----------
Balance, October 31, 2005................................... 3,586,372 $35,864 $50,884,810
Treasury shares purchased and retired (weighted average
discount 7.81%)*.......................................... (96,400) (964) (1,326,251)
--------- ------- -----------
Balance, October 31, 2006................................... 3,489,972 34,900 49,558,559
Treasury shares purchased and retired (weighted average
discount 6.09%)*.......................................... (16,500) (165) (234,042)
--------- ------- -----------
Balance, April 30, 2007..................................... 3,473,472 $34,735 $49,324,517
========= ======= ===========
---------------------
* The Trustees have voted to retire the shares purchased.
20
Morgan Stanley Insured California Municipal Securities
NOTES TO FINANCIAL STATEMENTS - APRIL 30, 2007 (UNAUDITED) continued
6. Dividends to Common Shareholders
On March 26, 2007, the Trust declared the following dividends from net
investment income:
AMOUNT RECORD PAYABLE
PER SHARE DATE DATE
--------- ------------ -------------
$0.05 May 4, 2007 May 18, 2007
$0.05 June 8, 2007 June 22, 2007
7. Expense Offset
The expense offset represents a reduction of the fees and expenses for interest
earned on cash balances maintained by the Trust with the transfer agent and
custodian.
8. Purposes of and Risks Relating to Certain Financial Instruments
The Trust may invest a portion of its assets in inverse floating rate
instruments, either through outright purchases of inverse floating rate
securities or through the transfer of bonds to a Dealer Trusts in exchange for
cash and residual interests in the Dealer Trusts. These investments are
typically used by the Trust in seeking to enhance the yield of the portfolio.
These instruments typically involve greater risks than a fixed rate municipal
bond. In particular, these instruments are acquired through leverage or may have
leverage embedded in them and therefore involve many of the risks associated
with leverage. Leverage is a speculative technique that may expose the Trust to
greater risk and increased costs. Leverage may cause the Trust's net asset value
to be more volatile than if it had not been leveraged because leverage tends to
magnify the effect of any increases or decreases in the value of the Trust 's
portfolio securities. The use of leverage may also cause the Trust to liquidate
portfolio positions when it may not be advantageous to do so in order to satisfy
its obligations with respect to inverse floating rate instruments.
To hedge against adverse interest rate changes, the Trust may invest in
financial futures contracts or municipal bond index futures contracts ("futures
contracts").
These futures contracts involve elements of market risk in excess of the amount
reflected in the Statement of Assets and Liabilities. The Trust bears the risk
of an unfavorable change in the value of the underlying securities. Risks may
also arise upon entering into these contracts from the potential inability of
the counterparties to meet the terms of their contracts.
The Trust may enter into interest rate swaps and may purchase or sell interest
rate caps, floors and collars. The Trust expects to enter into these
transactions primarily to manage interest rate risk, hedge portfolio positions
and preserve a return or spread on a particular investment or portion of its
portfolio. The Trust may also enter into these transactions to protect against
any increase in the
21
Morgan Stanley Insured California Municipal Securities
NOTES TO FINANCIAL STATEMENTS - APRIL 30, 2007 (UNAUDITED) continued
price of securities the Trust anticipates purchasing at a later date. Interest
rate swap transactions are subject to market risk, risk of default by the other
party to the transaction, risk of imperfect correlation and manager risk. Such
risks may exceed the related amounts shown in the Statement of Assets and
Liabilities.
9. Federal Income Tax Status
The amount of dividends and distributions from net investment income and net
realized capital gains are determined in accordance with federal income tax
regulations which may differ from generally accepted accounting principles.
These "book/tax" differences are either considered temporary or permanent in
nature. To the extent these differences are permanent in nature, such amounts
are reclassified within the capital accounts based on their federal tax-basis
treatment; temporary differences do not require reclassification. Dividends and
distributions which exceed net investment income and net realized capital gains
for tax purposes are reported as distributions of paid-in-capital.
As of October 31, 2006, Trust had temporary book/tax differences primarily
attributable to book amortization of discounts on debt securities and
mark-to-market of open futures contracts.
10. Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board (FASB) issued
Interpretation 48, Accounting for Uncertainty in Income Taxes -- an
interpretation of FASB Statement 109 (FIN 48). FIN 48 clarifies the accounting
for income taxes by prescribing the minimum recognition threshold a tax position
must meet before being recognized in the financial statements. FIN 48 is
effective for fiscal years beginning after December 15, 2006 and is to be
applied to all open tax years as of the effective date. The impact to the
Trust's financial statements, if any is currently being assessed.
In addition, in September 2006, Statement of Financial Accounting Standards No.
157, Fair Value Measurements (SFAS 157), was issued and is effective for fiscal
years beginning after November 15, 2007. SFAS 157 defines fair value,
establishes a framework for measuring fair value and expands disclosures about
fair value measurements. Management is currently evaluating the impact the
adoption of SFAS 157 will have on the Trust's financial statement disclosures.
22
Morgan Stanley Insured California Municipal Securities
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a common share of beneficial interest
outstanding throughout each period:
FOR THE SIX FOR THE YEAR ENDED OCTOBER 31,
MONTHS ENDED ----------------------------------------------------------------------------
APRIL 30, 2007 2006 2005 2004 2003 2002
-------------- -------- -------- -------- -------- --------
(unaudited)
Selected Per Share Data:
Net asset value, beginning
of period.................. $15.15 $15.17 $15.35 $15.24 $15.56 $16.00
------ ------ ------ ------ ------ ------
Income (loss) from
investment operations:
Net investment
income*................. 0.30 0.59 0.62 0.66 0.67 0.69
Net realized and
unrealized gain
(loss).................. (0.06) 0.32 (0.05) 0.25 (0.07) (0.01)
------ ------ ------ ------ ------ ------
Total income from investment
operations................. 0.24 0.91 0.57 0.91 0.60 0.68
------ ------ ------ ------ ------ ------
Less dividends and
distributions from:
Net investment income... (0.30) (0.60) (0.66) (0.63) (0.71) (0.72)
Net realized gain....... (0.04) (0.36) (0.13) (0.20) (0.25) (0.41)
------ ------ ------ ------ ------ ------
Total dividends and
distributions.............. (0.34) (0.96) (0.79) (0.83) (0.96) (1.13)
------ ------ ------ ------ ------ ------
Anti-dilutive effect of
acquiring treasury
shares*.................... 0.00 0.03 0.04 0.03 0.04 0.01
------ ------ ------ ------ ------ ------
Net asset value, end of
period..................... $15.05 $15.15 $15.17 $15.35 $15.24 $15.56
====== ====== ====== ====== ====== ======
Market value, end of
period..................... $14.89 $14.06 $13.99 $13.96 $13.83 $14.15
====== ====== ====== ====== ====== ======
Total Return+............... 8.42%(1) 7.68% 5.96% 7.19% 4.57% (0.14)%
Ratios to Average Net
Assets:
Total expenses (before
expense offset)............ 0.68%(2)(3) 0.61%(3) 0.62%(3) 0.58%(3) 0.55%(3) 0.55%(3)
Total expenses (before
expense offset,
exclusive of interest
and residual trust
expenses)............... 0.60%(2)(3) 0.61%(3) 0.62%(3) 0.58%(3) 0.55%(3) 0.55%(3)
Net investment income....... 4.01%(2) 4.07% 4.09% 4.37% 4.50% 4.68%
Supplemental Data:
Net assets, end of period,
in thousands............... $52,291 $52,872 $54,413 $56,955 $57,923 $60,862
Portfolio turnover rate..... 12%(1) 5% 26% 31% 31% 19%
---------------------
* The per share amounts were computed using an average number
of shares outstanding during the period.
+ Total return is based upon the current market value on the
last day of each period reported. Dividends and
distributions are assumed to be reinvested at the prices
obtained under the Trust's dividend reinvestment plan. Total
return does not reflect brokerage commissions.
(1) Not annualized.
(2) Annualized.
(3) Does not reflect the effect of expense offset of 0.01%.
23
See Notes to Financial Statements
TRUSTEES
Frank L. Bowman
Michael Bozic
Kathleen A. Dennis
James F. Higgins
Dr. Manuel H. Johnson
Joseph J. Kearns
Michael F. Klein
Michael E. Nugent
W. Allen Reed
Fergus Reid
OFFICERS
Michael E. Nugent
Chairperson of the Board
Ronald E. Robison
President and Principal Executive Officer
J. David Germany
Vice President
Dennis F. Shea
Vice President
Amy R. Doberman
Vice President
Carsten Otto
Chief Compliance Officer
Stefanie V. Chang Yu
Vice President
Francis J. Smith
Treasurer and Chief Financial Officer
Mary E. Mullin
Secretary
TRANSFER AGENT
Morgan Stanley Trust
Harborside Financial Center, Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
Two World Financial Center
New York, New York 10281
LEGAL COUNSEL
Clifford Chance US LLP
31 West 52nd Street
New York, New York 10019
COUNSEL TO THE INDEPENDENT TRUSTEES
Kramer Levin Naftalis & Frankel LLP
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT ADVISER
Morgan Stanley Investment Advisors Inc.
1221 Avenue of the Americas
New York, New York 10020
The financial statements included herein have been taken from the records of the
Trust without examination by the independent auditors and accordingly they do
not express an opinion thereon.
(c) 2007 Morgan Stanley
[MORGAN STANLEY LOGO]
MORGAN STANLEY FUNDS
Morgan Stanley
Insured California
Municipal Securities
Semiannual Report
April 30, 2007
[MORGAN STANLEY LOGO]
ICSSAN-IU07-01603P-Y04/07
24
Item 2. Code of Ethics.
Not applicable for semiannual reports.
Item 3. Audit Committee Financial Expert.
Not applicable for semiannual reports.
Item 4. Principal Accountant Fees and Services
Not applicable for semiannual reports.
Item 5. Audit Committee of Listed Registrants.
Not applicable for semiannual reports.
Item 6.
Refer to Item 1.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
Not applicable for semiannual reports.
Item 8. Portfolio Managers of Closed-End Management Investment Companies
Applicable only to reports covering periods ending on or after December 31,
2005.
Item 9. Closed-End Fund Repurchases
REGISTRANT PURCHASE OF EQUITY SECURITIES
(d) Maximum Number
(c) Total Number of (or Approximate Dollar
Shares (or Units) Value) of Shares (or
(a) Total Number of Purchased as Part of Units) that May Yet
Shares (or Units) (b) Average Price Paid Publicly Announced Be Purchased Under
Period Purchased per Share (or Unit) Plans or Programs the Plans or Programs
------ ------------------- ---------------------- -------------------- ----------------------
November 1, 2006--
November 30, 2006 8,400 $14.1696 N/A N/A
December 1, 2006--
December 31, 2006 6,000 $14.1604 N/A N/A
January 1, 2007--
January 31, 2007 2,100 $14.3547 N/A N/A
February 1, 2007--
February 28, 2007 -- -- N/A N/A
March 1, 2007--
March 31, 2007 -- -- N/A N/A
April 1, 2007--
April 30, 2007 -- -- N/A N/A
------ -------- --- ---
Total 16,500 $14.2282 N/A N/A
====== ======== === ===
Item 10. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 11. Controls and Procedures
(a) The Trust's principal executive officer and principal financial officer have
concluded that the Trust's disclosure controls and procedures are sufficient to
ensure that information required to be disclosed by the Trust in this Form N-CSR
was recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms, based
upon such officers' evaluation of these controls and procedures as of a date
within 90 days of the filing date of the report.
(b) There were no changes in the registrant's internal control over financial
reporting that occurred during the second fiscal quarter of the period covered
by this report that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting.
2
Item 12. Exhibits
(a) Code of Ethics - Not applicable for semiannual reports.
(b) A separate certification for each principal executive officer and principal
financial officer of the registrant are attached hereto as part of EX-99.CERT.
3
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.
Morgan Stanley Insured California Municipal Securities
/s/ Ronald E. Robison
-------------------------------------
Ronald E. Robison
Principal Executive Officer
June 21, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.
/s/ Ronald E. Robison
-------------------------------------
Ronald E. Robison
Principal Executive Officer
June 21, 2007
/s/ Francis Smith
-------------------------------------
Francis Smith
Principal Financial Officer
June 21, 2007
4