MORGAN STANLEY INSURED MUNICIPAL INCOME TRUST
LETTER TO THE SHAREHOLDERS o OCTOBER 31, 2002
DEAR SHAREHOLDER:
During the 12 months ended October 31, 2002, U.S. economic indicators fluctuated
between stronger and weaker growth. The economy continued to recover from
recession and the aftermath of September 11. Real gross domestic product (GDP)
accelerated to an annual rate of 5.0 percent in the first quarter of 2002. In
the spring, the economy began to send mixed signals and the recovery lost
momentum. Weakness in manufacturing and capital spending combined with
corporate-accounting scandals and geopolitical turmoil to slow GDP to a 1.3
percent annual rate in the second quarter. The strongest consumer spending of
the year and the restocking of inventories led to 4.0 percent annual growth in
the third quarter.
As the economy gained strength in the first few months of 2002, a general
consensus developed that the Federal Reserve Board would begin to tighten
monetary policy and raise short-term interest rates. The bond market reacted to
these concerns in March and yields rose. By late spring, however, the consensus
shifted to favoring bonds as labor market and capital-spending indicators
remained soft and new disclosures on corporate ethics spurred a flight to
quality. Most importantly, the Federal Reserve changed its monetary policy bias
from neutral toward one of easing. The market's expectations of eventual rate
hikes were scaled back and bonds rallied. A mid-October surge in the equity
markets created a downdraft in bond prices. However, renewed concerns about the
economy helped bond prices improve by month-end. On November 6, 2002, the
Federal Reserve lowered the federal funds rate from 1.75 to 1.25 percent. This
marked the first change by the central bank in nearly one year.
MUNICIPAL MARKET CONDITIONS
The economic environment and unsettled equity markets lowered municipal yields
to levels last seen in the 1960s. The yield on the 30-year insured municipal
bond index ranged from a high of 5.43 percent in March to a low of 4.74 percent
in September. The index yield stood at 4.96 percent at the end of October 2002.
Throughout the period the slope of the municipal yield curve remained steep. The
yield pickup for extending maturities from 1 to 30 years averaged 350 basis
points.
The ratio of municipal yields as a percentage of U.S. Treasury yields is used as
a gauge of the relative value of municipals. The ratio of 30-year insured
municipal bond yields to 30-year Treasuries fell from 98 percent in December
2001 to 94 percent in March. As municipals lagged the summer rally in
Treasuries, the ratio jumped to 102 percent in September but declined to 99
percent by the end of October. These levels imply that municipals are cheap
relative to Treasuries.
State and local governments took advantage of lower interest rates to refinance
outstanding debt in a manner similar to homeowners refinancing their mortgages.
Refinancing activity contributed to a surge in municipal bond underwriting, and
long-term volume increased 27 percent to a record $292 billion in the
MORGAN STANLEY INSURED MUNICIPAL INCOME TRUST
LETTER TO THE SHAREHOLDERS o OCTOBER 31, 2002 CONTINUED
first ten months of 2002. Refunding issues represented almost one-quarter of the
total. California, Florida, New York, and Texas, the largest states in terms of
issuance, represented 40 percent of the national volume. Issuance is on track to
raise calendar year 2002's volume to more than $325 billion.
30-Year Bond Yields 1997-2002
Date Insured Municipal Yields U.S. Treasury Yields Insured Municipal Yields/U.S. Treasury Yields (Ratio)
---- ------------------------ -------------------- -----------------------------------------------------
12/31/96 5.60 6.63 84.46%
01/31/97 5.70 6.79 83.95%
02/28/97 5.65 6.80 83.09%
03/31/97 5.90 7.10 83.10%
04/30/97 5.75 6.94 82.85%
05/30/97 5.65 6.91 81.77%
06/30/97 5.60 6.78 82.60%
07/30/97 5.30 6.30 84.13%
08/31/97 5.50 6.61 83.21%
09/30/97 5.40 6.40 84.38%
10/31/97 5.35 6.15 86.99%
11/30/97 5.30 6.05 87.60%
12/31/97 5.15 5.92 86.99%
01/31/98 5.15 5.80 88.79%
02/28/98 5.20 5.92 87.84%
03/31/98 5.25 5.93 88.53%
04/30/98 5.35 5.95 89.92%
05/29/98 5.20 5.80 89.66%
06/30/98 5.20 5.65 92.04%
07/31/98 5.18 5.71 90.72%
08/31/98 5.03 5.27 95.45%
09/30/98 4.95 5.00 99.00%
10/31/98 5.05 5.16 97.87%
11/30/98 5.00 5.06 98.81%
12/31/98 5.05 5.10 99.02%
01/31/99 5.00 5.09 98.23%
02/28/99 5.10 5.58 91.40%
03/31/99 5.15 5.63 91.47%
04/30/99 5.20 5.66 91.87%
05/31/99 5.30 5.83 90.91%
06/30/99 5.47 5.96 91.78%
07/31/99 5.55 6.10 90.98%
08/31/99 5.75 6.06 94.88%
09/30/99 5.85 6.05 96.69%
10/31/99 6.03 6.16 97.89%
11/30/99 6.00 6.29 95.39%
12/31/99 5.97 6.48 92.13%
01/31/00 6.18 6.49 95.22%
02/29/00 6.04 6.14 98.37%
03/31/00 5.82 5.83 99.83%
04/30/00 5.91 5.96 99.16%
05/31/00 5.91 6.01 98.34%
06/30/00 5.84 5.90 98.98%
07/31/00 5.73 5.78 99.13%
08/31/00 5.62 5.67 99.12%
09/30/00 5.74 5.89 97.45%
10/31/00 5.65 5.79 97.58%
11/30/00 5.55 5.61 98.93%
12/31/00 5.27 5.46 96.52%
01/31/01 5.30 5.50 96.36%
02/28/01 5.27 5.31 99.25%
03/31/01 5.26 5.44 96.69%
04/30/01 5.45 5.79 94.13%
05/31/01 5.40 5.75 93.91%
06/30/01 5.35 5.76 92.88%
07/31/01 5.16 5.52 93.48%
08/31/01 5.07 5.37 94.41%
09/30/01 5.20 5.42 95.94%
10/31/01 5.04 4.87 103.49%
11/30/01 5.17 5.29 97.73%
12/31/01 5.36 5.47 97.99%
01/31/02 5.22 5.43 96.13%
02/28/02 5.14 5.42 94.83%
03/31/02 5.43 5.80 93.62%
04/30/02 5.30 5.59 94.81%
05/31/02 5.29 5.62 94.13%
06/30/02 5.27 5.51 95.64%
07/31/02 5.12 5.30 96.60%
08/31/02 5.00 4.93 101.42%
09/30/02 4.74 4.67 101.50%
10/31/02 4.92 4.99 98.60%
Source: Municipal Market Data - A Division of Thomson Financial Municipal Group
and Bloomberg L.P.
PERFORMANCE
The net asset value (NAV) of Morgan Stanley Insured Municipal Income Trust (IIM)
increased from $15.42 to $15.67 per share for the fiscal year ended October 31,
2002. Based on this change plus the reinvestment of tax-free dividends totaling
$0.8175 per share the Trust's total NAV return was 7.66 percent. IIM's value on
the New York Stock Exchange (NYSE) decreased from $14.13 to $14.05 per share
during the same period. Based on this change plus the reinvestment of tax-free
dividends, IIM's total market return was 5.35 percent. On October 31, 2002,
IIM's NYSE market price was at a 10.34 percent discount to its NAV.
2
MORGAN STANLEY INSURED MUNICIPAL INCOME TRUST
LETTER TO THE SHAREHOLDERS o OCTOBER 31, 2002 CONTINUED
Monthly dividends for the fourth quarter of 2002 were declared in September.
Beginning with the October payment the monthly dividend was increased from
$0.0675 to $0.075 per share. The new dividend reflects the level of the Trust's
undistributed net investment income and projected earnings power. The Trust's
level of undistributed net investment income was $0.187 per share on October 31,
2002, versus $0.086 per share last year.
PORTFOLIO STRUCTURE
The Trust's total net assets of $551 million, including Auction Rate Preferred
Shares (ARPS), were diversified among 14 long-term sectors and 79 credits. At
the end of October the portfolio's average maturity was 19 years. Average
duration, a measure of sensitivity to interest-rate changes, was 4.9 years. The
accompanying charts provide current information on the portfolio's credit
enhancements, maturity distribution and sector concentrations. Optional call
provisions by year and their respective cost (book) yields are also shown.
THE IMPACT OF LEVERAGING
As discussed in previous reports, the total income available for distribution to
common shareholders includes incremental income provided by the Trust's
outstanding ARPS. ARPS dividends reflect prevailing short-term interest rates on
maturities normally ranging from one week to one year. Incremental income to
common shareholders depends on two factors. The first factor is the amount of
ARPS outstanding, while the second is the spread between the portfolio's cost
yield and ARPS expenses (ARPS auction rate and expenses). The greater the spread
and the amount of ARPS outstanding, the greater the amount of incremental income
available for distribution to common shareholders. The level of net investment
income available for distribution to common shareholders varies with the level
of short-term interest rates. ARPS leverage also increases the price volatility
of common shares and has the effect of extending portfolio duration.
During the fiscal year, ARPS leverage contributed approximately $0.16 per share
to common share earnings. The Trust's five ARPS series totaled $155 million and
represented 28 percent of total net assets. In January 2002, ARPS series 4 was
extended until January 2004 at a yield of 2.47 percent. In July 2002, series 3
was extended until July 2004 at a yield of 2.20 percent. The yield on the
Trust's three weekly series ranged between 0.90 and 2.47 percent.
LOOKING AHEAD
The Federal Reserve Board's cautious approach toward an eventual rate tightening
earlier this year helped stabilize the fixed-income markets. In fact, the Fed's
current willingness to be accommodative resulted in a major bond rally during
the second and third calendar quarters. We believe that the yields on tax-exempt
securities continue to favor municipal bonds as an attractive choice for
tax-conscious investors. For many investors, the taxable equivalent yields
available on municipal bonds offer a significant advantage.
3
MORGAN STANLEY INSURED MUNICIPAL INCOME TRUST
LETTER TO THE SHAREHOLDERS o OCTOBER 31, 2002 CONTINUED
The Trust's procedure for reinvestment of 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. The Trust may also utilize procedures to reduce
or eliminate the amount of outstanding ARPS, including their purchase in the
open market or in privately negotiated transactions. During the 12-month period
ended October 31, 2002, the Trust purchased and retired 996,500 shares of common
stock at a weighted average market discount of 8.17 percent.
We appreciate your ongoing support of Morgan Stanley Insured Municipal Income
Trust and look forward to continuing to serve your investment needs.
Very truly yours,
/s/ Charles A. Fiumefreddo /s/ Mitchell M. Merin
Charles A. Fiumefreddo Mitchell M. Merin
Chairman of the Board President and CEO
4
MORGAN STANLEY INSURED MUNICIPAL INCOME TRUST
LETTER TO THE SHAREHOLDERS o OCTOBER 31, 2002 CONTINUED
LARGEST SECTORS AS OF OCTOBER 31, 2002
(% OF LONG-TERM PORTFOLIO)
[GRAPHIC OMITTED]
TRANSPORTATION ........................... 20%
WATER & SEWER ............................ 12%
ELECTRIC ................................. 10%
GENERAL OBLIGATION ....................... 10%
HOSPITAL ................................. 10%
REFUNDED ................................. 9%
IDR/PCR* ................................. 8%
MORTGAGE ................................. 6%
PUBLIC FACILITIES ........................ 5%
* INDUSTRIAL DEVELOPMENT/POLLUTION CONTROL REVENUE.
PORTFOLIO STRUCTURE IS SUBJECT TO CHANGE.
CREDIT ENHANCEMENTS AS OF OCTOBER 31, 2002
(% OF LONG-TERM PORTFOLIO)
[GRAPHIC OMITTED]
MBIA ..................................... 38%
AMBAC .................................... 24%
FGIC ..................................... 20%
FSA ...................................... 18%
PORTFOLIO STRUCTURE IS SUBJECT TO CHANGE.
DISTRIBUTION BY MATURITY
(% OF LONG-TERM PORTFOLIO)
[GRAPHIC OMITTED]
WEIGHTED AVERAGE
MATURITY: 19 YEARS
1-5 YEARS ............................... 3.2%
5-10 YEARS .............................. 6.4%
10-20 YEARS ............................. 46.0%
20-30 YEARS ............................. 35.8%
30+ YEARS ............................... 8.6%
PORTFOLIO STRUCTURE IS SUBJECT TO CHANGE.
5
MORGAN STANLEY INSURED MUNICIPAL INCOME TRUST
LETTER TO THE SHAREHOLDERS o OCTOBER 31, 2002 CONTINUED
CALL AND COST (BOOK) YIELD STRUCTURE
(BASED ON LONG-TERM PORTFOLIO)
OCTOBER 31, 2002
[GRAPHIC OMITTED]
PERCENT CALLABLE
WEIGHTED AVERAGE
CALL PROTECTION: 6 YEARS
2002 ..................................... 5%
2003 ..................................... 37%
2004 ..................................... 2%
2005 ..................................... 2%
2006 ..................................... 1%
2007 ..................................... 1%
2008 ..................................... 2%
2009 ..................................... 6%
2010 ..................................... 10%
2011 ..................................... 9%
2012+ .................................... 25%
YEARS BONDS CALLABLE
COST (BOOK) YIELD*
WEIGHTED AVERAGE
BOOK YIELD: 5.6%
2002 .................................... 5.9%
2003 .................................... 5.9%
2004 .................................... 5.9%
2005 .................................... 5.9%
2006 .................................... 5.8%
2007 .................................... 5.6%
2008 .................................... 5.3%
2009 .................................... 5.7%
2010 .................................... 5.7%
2011 .................................... 5.2%
2012+ ................................... 5.1%
* 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 5.9% ON 5% OF THE LONG-TERM
PORTFOLIO THAT IS CALLABLE IN 2002.
PORTFOLIO STRUCTURE IS SUBJECT TO CHANGE.
6
MORGAN STANLEY INSURED MUNICIPAL INCOME TRUST
LETTER TO THE SHAREHOLDERS o OCTOBER 31, 2002 CONTINUED
Geographic Summary of Investments
Based on Market Value as a Percent of Total Investments
Arizona ................ 1.9% Indiana .......... 4.5% Nevada ........... 4.3% Tennessee ........ 0.7%
California ............. 5.2 Kentucky ......... 3.4 New Hampshire .... 0.7 Texas ............ 10.3
Colorado ............... 1.5 Louisiana ........ 1.4 New Jersey ....... 2.2 Utah ............. 0.8
Connecticut ............ 2.3 Maine ............ 0.9 New York ......... 5.6 Virginia ......... 1.2
District of Columbia.... 2.7 Massachusetts .... 2.5 North Carolina ... 3.0 Washington ....... 5.5
Florida ................ 5.2 Michigan ......... 2.4 Ohio ............. 1.1 West Virginia .... 1.5
Hawaii ................. 1.0 Minnesota ........ 0.9 Pennsylvania ..... 9.2 Wisconsin ........ 1.4
Idaho .................. 1.7 Missouri ......... 1.4 Rhode Island ..... 2.3 Wyoming .......... 0.8
Illinois ............... 7.1 Montana .......... 1.0 South Carolina ... 2.4 -----
Total ............ 100.0%
======
7
MORGAN STANLEY INSURED MUNICIPAL INCOME TRUST
RESULTS OF ANNUAL MEETING
On October 23, 2002, an annual meeting of the Trust's shareholders was held for
the purpose of voting on two separate matters, the results of which were as
follows:
(1) Election of Trustee by all shareholders:
Wayne E. Hedien
For ............................................ 20,948,039
Withheld ....................................... 727,571
(2) Election of Trustee by preferred shareholders:
Manuel H. Johnson
For ............................................ 2,597
Against ........................................ 1
The following Trustees were not standing for reelection at this meeting:
Michael Bozic, Charles A. Fiumefreddo, Edwin J. Garn, James F. Higgins, Michael
E. Nugent and Philip J. Purcell.
8
MORGAN STANLEY INSURED MUNICIPAL INCOME TRUST
PORTFOLIO OF INVESTMENTS o OCTOBER 31, 2002
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
----------- ------------ ----------- ---------------
TAX-EXEMPT-MUNICIPAL BONDS (126.8%)
GENERAL OBLIGATION (13.1%)
District of Columbia,
$ 5,000 Refg Ser 1993 B (Ambac) ............................................... 5.50 % 06/01/09 $ 5,615,150
6,000 Refg Ser 1993 B (FSA) ................................................. 5.50 06/01/10 6,742,020
Florida Board of Education, Capital Outlay
5,000 Refg 2002 Ser C (MBIA) ................................................ 5.00 06/01/19 5,199,950
5,000 Refg 2002 Ser C (MBIA) ................................................ 5.00 06/01/20 5,165,900
15,000 Chicago, Illinois, Neighborhoods Alive 21 Ser 2001 A (FGIC)** .......... 5.50 01/01/36 15,601,800
3,000 Vicksburg Community Schools, Michigan, 1993 Refg (MBIA) ................ 5.625 05/01/20 3,083,670
6,000 Clark County Sanitation District, Nevada, Refg 1993 (FGIC) ............. 5.70 07/01/12 6,203,040
4,000 Houston, Texas, Public Improvement & Refg Ser 2001 B (FSA) ............. 5.50 03/01/17 4,321,320
------- ------------
49,000 51,932,850
------- ------------
EDUCATIONAL FACILITIES REVENUE (4.4%)
3,000 District of Columbia, American Association for the Advancement of
Science Ser 1997 (Ambac) .............................................. 5.125 01/01/27 3,006,390
Aurora West School District 129, Illinois,
1,000 School Building Ser 2002 A (FGIC) ..................................... 5.75 02/01/20 1,096,030
2,000 School Building Ser 2002 A (FGIC) ..................................... 5.75 02/01/21 2,179,400
4,000 Illinois Educational Facilities Authority, DePaul University
Refg Ser 1997 (Ambac) ................................................. 5.50 10/01/19 4,310,600
4,000 New Hampshire Health & Education Facilities Authority, University of
New Hampshire Ser 2001 (Ambac) ........................................ 5.125 07/01/33 4,050,520
2,500 Rhode Island Health & Educational Building Corporation, Providence
College Ser 1993 (MBIA) ............................................... 5.60 11/01/15 2,621,725
------- ------------
16,500 17,264,665
------- ------------
ELECTRIC REVENUE (13.2%)
10,000 North Carolina Municipal Power Agency #1, Catawba
Ser 1993 (MBIA) ....................................................... 9.37[+/+] 01/01/20 10,429,000
3,000 Piedmont Municipal Power Agency, South Carolina, Refg Ser 1993
(MBIA) ................................................................ 5.375 01/01/25 3,161,910
Lower Colorado River Authority, Texas,
10,000 Refg Ser 1999 A (FSA) ................................................. 5.875 05/15/16 11,294,200
5,000 Refg Ser 2001 (FSA) ................................................... 5.00 05/15/26 4,993,000
4,000 Refg Ser 2002 (MBIA) .................................................. 5.00 05/15/31 3,981,840
10,000 Washington Public Power Supply System, Nuclear Proj #1
Refg Ser 1993 A (MBIA) ................................................ 5.70 07/01/17 10,406,600
8,000 Wisconsin Public Power, Refg Ser 1993 A (Ambac) ........................ 5.25 07/01/21 8,082,560
------- ------------
50,000 52,349,110
------- ------------
See Notes to Financial Statements
9
MORGAN STANLEY INSURED MUNICIPAL INCOME TRUST
PORTFOLIO OF INVESTMENTS o OCTOBER 31, 2002 CONTINUED
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
----------- ----------- ----------- ---------------
HOSPITAL REVENUE (12.1%)
$ 5,000 Mesa Industrial Development Authority, Arizona, Discovery Health
Ser 1999 A (MBIA) ...................................................... 5.875% 01/01/16 $ 5,543,900
5,000 Sarasota County Public Hospital Board, Florida, Sarasota Memorial
Hospital Refg Ser 1998 B (MBIA) ........................................ 5.25 07/01/24 5,218,000
3,000 Indiana Health Facilities Financing Authority, Deaconess Hospital Inc
Refg Ser 1993 (MBIA) ................................................... 5.75 03/01/15 3,091,290
5,000 Kentucky Economic Development Finance Authority, St Elizabeth
Medical Center Inc Ser 1993 A (FGIC) ................................... 6.00 12/01/22 5,273,100
3,935 Maine Health & Higher Educational Facilities Authority, Ser 1993 A
(FSA) .................................................................. 5.50 07/01/23 4,024,639
5,500 Massachusetts Health & Educational Facilities Authority, Lahey Clinic
Medical Center Ser B (MBIA) ............................................ 5.625 07/01/15 5,680,950
2,000 Missouri Health & Educational Facilities Authority, SSM Health Care
Ser 1998 A (MBIA) ...................................................... 5.00 06/01/22 1,999,920
4,000 Washington County Hospital Authority, Pennsylvania, Washington
Hospital Ser 1993 (Ambac) .............................................. 5.625 07/01/23 4,107,960
4,000 Chattanooga-Hamilton County Hospital Authority, Tennessee,
Erlanger Medical Center Refg Ser 1993 (FSA) ............................ 5.50 10/01/13 4,149,640
Amarillo Health Facilities Corporation, Texas,
3,020 Baptist St Anthony's Hospital Ser 1998 (FSA) ........................... 5.50 01/01/16 3,311,068
5,075 Baptist St Anthony's Hospital Ser 1998 (FSA) ........................... 5.50 01/01/17 5,535,201
-------- ------------
45,530 47,935,668
-------- ------------
INDUSTRIAL DEVELOPMENT/POLLUTION CONTROL REVENUE (10.0%)
7,500 Adams County, Colorado, Public Service Co of Colorado
Refg 1993 Ser A (MBIA) ................................................. 5.875 04/01/14 7,686,525
5,000 Hawaii Department of Budget and Finance, Hawaiian Electric Co
Ser 1999 C (AMT) (Ambac) ............................................... 6.20 11/01/29 5,647,200
12,000 Indiana Development Finance Authority, PSI Energy Inc Ser 1993 B
(AMT) (MBIA) ........................................................... 5.75 02/15/28 12,290,520
4,900 Monroe County, Michigan, Detroit Edison Co Ser CC (AMT) (MBIA) .......... 6.55 06/01/24 5,109,475
5,400 Forsyth, Montana, Puget Sound Power & Light Co Ser 1993 (MBIA) .......... 5.875 04/01/20 5,576,796
3,000 New York State Energy Research & Development Authority, Brooklyn
Union Gas Co 1991 Ser D (AMT) (MBIA) ................................... 9.566[+/+] 07/08/26 3,159,420
-------- ------------
37,800 39,469,936
-------- ------------
MORTGAGE REVENUE - MULTI-FAMILY (0.8%)
3,025 West Virginia Housing Development Fund, Ser A (Ambac) ................... 5.65 11/01/21 3,063,024
-------- ------------
See Notes to Financial Statements
10
MORGAN STANLEY INSURED MUNICIPAL INCOME TRUST
PORTFOLIO OF INVESTMENTS o OCTOBER 31, 2002 CONTINUED
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
----------- ------------ ----------- ---------------
MORTGAGE REVENUE - SINGLE FAMILY (6.7%)
$ 12,715 Connecticut Housing Finance Authority, 1992 Ser A-2 (AMT)
(Secondary FSA) ..................................................... 6.05 % 11/15/25 $ 12,918,694
1,195 Maine Housing Authority, Mortgage Purchase 1990 Ser A-6 (AMT)
(Secondary MBIA) .................................................... 6.35 11/15/22 1,224,636
12,500 New Jersey Housing & Mortgage Finance Agency, Home Buyer
1990 Ser F-3 (AMT) (MBIA) ........................................... 5.95 04/01/25 12,539,625
-------- ------------
26,410 26,682,955
-------- ------------
PUBLIC FACILITIES REVENUE (6.8%)
5,000 San Jose Financing Authority, California, Civic Center Ser 2002 B
(Ambac) (WI) ........................................................ 5.00 06/01/37 5,016,050
5,000 Miami-Dade County School Board, Florida, Ser 2001 A COPs (MBIA)....... 5.00 05/01/31 5,022,550
3,000 Orange County School Board, Florida, Ser 2001 A COPs (Ambac) ......... 5.25 08/01/14 3,330,780
10,000 Marion County Convention & Recreational Facilities Authority, Indiana,
Excise Tax Refg Ser 1993 A (Ambac) .................................. 5.50 06/01/21 10,043,900
Kentucky Property & Building Commission, Project #74
1,660 Refg Ser 2002 A (FSA) ............................................... 5.375 02/01/17 1,788,318
1,500 Refg Ser 2002 A (FSA) ............................................... 5.375 02/01/18 1,604,160
-------- ------------
26,160 26,805,758
-------- ------------
RECREATIONAL FACILITIES REVENUE (1.8%)
Metropolitan Pier & Exposition Authority, Illinois, McCormick Place,
3,000 Refg Ser 2002 B (MBIA) .............................................. 0.00# 06/15/18 1,899,240
5,000 Ser 2002 A (MBIA) ................................................... 5.25 06/15/42 5,105,900
-------- ------------
8,000 7,005,140
-------- ------------
STUDENT LOAN REVENUE (4.7%)
18,000 Pennsylvania State Higher Educational Assistant Agency, 1988 Ser D
(AMT) (Ambac) ....................................................... 6.05 01/01/19 18,617,400
-------- ------------
Transportation Facilities Revenue (24.9%)
5,000 Tucson, Arizona, Street & Highway Jr Lien Refg Ser 1993 (MBIA) ....... 5.50 07/01/12 5,211,800
9,000 Long Beach California, Harbor Refg Ser 1998 A (AMT) (FGIC) ........... 6.00 05/15/18 10,508,310
5,000 Chicago, Illinois, Chicago-O'Hare Int'l Airport Second Lien
Refg 1993 Ser A (AMT) (MBIA) ........................................ 5.60 01/01/18 5,110,700
4,000 Illinois Toll Highway Authority, Priority Refg 1998 Ser A (FSA) ...... 5.50 01/01/15 4,499,320
5,000 Minneapolis-St Paul Metropolitan Airports Commission, Minnesota,
Ser 2001 C (FGIC) ................................................... 5.25 01/01/32 5,106,150
3,250 St Louis, Missouri, Lambert Int'l Airport Ser 2001 A (MBIA) .......... 5.00 07/01/20 3,309,280
9,000 Nevada Department of Business & Industry, Las Vegas Monorail
1st Tier Ser 2000 (Ambac) ........................................... 5.375 01/01/40 9,211,410
See Notes to Financial Statements
11
MORGAN STANLEY INSURED MUNICIPAL INCOME TRUST
PORTFOLIO OF INVESTMENTS o OCTOBER 31, 2002 CONTINUED
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
----------- ------------ ----------- ---------------
Metropolitan Transportation Authority, New York,
$ 3,000 Dedicated Tax Fund Ser 2002 A (FSA) ...................................... 5.25 % 11/15/24 $ 3,101,640
10,000 Transportation Refg Ser 2002 A (FGIC) .................................... 5.00 11/15/25 10,070,400
10,000 Triborough Bridge & Tunnel Authority, New York, Refg 2002 E
(MBIA) (WI) .............................................................. 5.25 11/15/22 10,379,200
4,000 Cleveland, Ohio, Airport Ser 2000 A (FSA) ................................. 5.00 01/01/31 4,007,720
5,000 South Carolina Transportation Infrastructure Bank, Ser 1999 A
(Ambac) .................................................................. 5.50 10/01/16 5,503,050
5,000 Texas Turnpike Authority, Central Texas First Tier 2002-A (Ambac) ......... 5.50 08/15/39 5,232,250
4,000 Salt Lake City, Utah, Airport Refg Ser 1993 B (FGIC) ...................... 5.875 12/01/18 4,218,280
3,000 Richmond Metropolitan Authority, Virginia, Refg Ser 2002 (FGIC) ........... 5.25 07/15/22 3,202,290
Port of Seattle, Washington,
5,000 Ser 2001 B (AMT) (MBIA) .................................................. 5.625 02/01/24 5,195,050
5,000 Ser 2001 A (FGIC) ........................................................ 5.00 04/01/31 4,969,750
-------- ------------
94,250 98,836,600
-------- ------------
WATER & SEWER REVENUE (14.8%)
5,000 San Diego County Water Authority, California, Ser 2002A COPs
(MBIA) .................................................................... 5.00 05/01/27 5,027,200
1,000 Colorado Water Resources & Power Development Authority, Water
Resources 2001 Ser A (FGIC) .............................................. 4.875 11/01/23 994,150
5,000 Tampa Bay Water Authority, Florida, Ser 2001 A (FGIC) ..................... 5.00 10/01/28 5,026,600
10,000 Louisville & Jefferson County Metropolitan Sewer District, Kentucky,
Ser 1993 (MBIA) .......................................................... 5.30 05/15/19 10,291,400
2,470 Detroit, Michigan, Sewage Refg Ser 1993 A (FGIC) .......................... 5.70 07/01/13 2,576,260
3,000 Grand Rapids, Michigan, Sewer Impr & Refg Ser 1998 A (FGIC) ............... 4.75 01/01/28 2,878,560
2,000 Cleveland, Ohio, Waterworks Impr & Refg 1998 Ser I (FSA) .................. 5.00 01/01/23 2,007,040
4,000 Allegheny County Sanitary Authority, Pennsylvania, Sewer Ser 2000
(MBIA) ................................................................... 5.50 12/01/24 4,204,600
5,000 Philadelphia, Pennsylvania, Water & Wastewater Ser 1998 (Ambac) ........... 5.25 12/15/14 5,570,050
10,000 Houston, Texas, Water & Sewer Jr Lien Refg Ser 2000 B (FGIC) .............. 5.25 12/01/30 10,184,100
5,000 King County, Washington, Sewer Refg 2001 (FGIC) ........................... 5.00 01/01/31 4,947,450
5,000 West Virginia Water Development Authority, Loan Program II
Refg Ser A-11 (FSA) ...................................................... 5.50 11/01/23 5,091,150
-------- ------------
57,470 58,798,560
-------- ------------
See Notes to Financial Statements
12
MORGAN STANLEY INSURED MUNICIPAL INCOME TRUST
PORTFOLIO OF INVESTMENTS o OCTOBER 31, 2002 CONTINUED
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
----------- ------------ ------------- ---------------
OTHER REVENUE (2.0%)
New York City Transitional Finance Authority, New York
$ 2,000 2000 Ser C (Ambac) (WI) ........................................... 5.25 % 08/01/21 $ 2,085,100
2,500 2000 Ser C (Ambac) (WI) ........................................... 5.25 08/01/22 2,588,550
3,000 Alexandria Industrial Development Authority, Virginia, Institute for
Defense Analysis Ser 2000 A (Ambac) ............................... 5.90 10/01/30 3,281,310
-------- ------------
7,500 7,954,960
-------- ------------
REFUNDED (11.5%)
6,850 Louisiana Public Facilities Authority, Our Lady of the Lake Regional
Medical Center Ser 1993 D & E (FSA) ............................... 8.385[+/+] 05/28/04+ 7,967,509
3,000 Massachusetts, 2002 Ser B (FSA) .................................... 5.50 03/01/12+ 3,420,210
5,000 Massachusetts Municipal Wholesale Electric Company, 1993 Ser A
(Ambac) (ETM) ..................................................... 5.00 07/01/10 5,189,850
8,000 Washoe County, Nevada, Reno - Sparks Convention Ltd Tax
Ser 1993 A (FGIC) (ETM) ............................................ 5.75 07/01/22 8,527,600
5,000 Allegheny County Hospital Development Authority, Pennsylvania,
Pittsburgh Mercy Health Ser 1996 (Ambac) (ETM) .................... 5.625 08/15/18 5,534,700
10,000 Rhode Island Depositors Economic Protection Corporation,
Refg 1992 Ser B (MBIA) (ETM) ...................................... 6.00 08/01/17 10,435,100
4,360 Piedmont Municipal Power Agency, South Carolina, Refg Ser 1993
(MBIA) (ETM)** .................................................... 5.375 01/01/25 4,680,852
-------- ------------
42,210 45,755,821
-------- ------------
481,855 TOTAL TAX-EXEMPT MUNICIPAL BONDS (Cost $476,696,577)............................ 502,472,447
-------- ------------
SHORT-TERM TAX-EXEMPT-MUNICIPAL OBLIGATIONS (15.1%)
8,000 Redding, California, Ser 1993 A COPs (FGIC) ........................ 9.309[+/+] 06/27/03+ 8,746,240
9,800 Idaho Health Facilities Authority, St Luke's Regional Medical Center
Ser 2000 (FSA) (Demand 11/01/02) .................................. 1.99* 07/01/30 9,800,000
2,800 Missouri Health & Educational Facilities Authority, Washington
University Ser 2000 B (Demand 11/01/02) ........................... 1.95* 09/01/30 2,800,000
6,200 University of North Carolina, Hospitals at Chapel Hill Ser 2001 A
(Demand 11/01/02) ................................................. 1.99* 02/15/31 6,200,000
13,600 Philadelphia Hospital & Higher Education Facilities Authority,
Pennsylvania, Children's Hospital of Philadelphia Ser 2002 A
(Demand 11/01/02) ................................................. 1.90* 07/01/22 13,600,000
8,800 North Central Texas Health Facilities Development Corporation,
Presbyterian Medical Center Ser 1985 D (MBIA)
(Demand 11/01/02) ................................................. 2.04* 12/01/15 8,800,000
See Notes to Financial Statements
13
MORGAN STANLEY INSURED MUNICIPAL INCOME TRUST
PORTFOLIO OF INVESTMENTS o OCTOBER 31, 2002 CONTINUED
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
----------- ------------ ----------- ----------------
$ 5,560 Washington Health Care Facilities Authority, Virginia Mason Medical
Center Ser 1997 B (MBIA) (Demand 11/01/02) ........................ 2.04*% 02/15/27 $ 5,560,000
4,400 Kemmerer, Wyoming, Exxon Corp. Ser 1984 (Demand 11/01/02) .......... 1.89* 11/01/14 4,400,000
-------- --------------
59,160 TOTAL SHORT-TERM TAX-EXEMPT-MUNICIPAL OBLIGATIONS (Cost $59,160,000)...................... 59,906,240
-------- --------------
$541,015 TOTAL INVESTMENTS (Cost $535,856,577) (a) ...................................... 141.9 % 562,378,687
========
LIABILITIES IN EXCESS OF OTHER ASSETS .......................................... (2.8) (10,886,309)
PREFERRED SHARES OF BENEFICIAL INTEREST ........................................ (39.1) ( 155,132,788)
--------------
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS ................................... 100.0 % $ 396,359,590
==============
------------
Note: The categories of investments are shown as a percentage of net
assets applicable to common shareholders.
AMT Alternative Minimum Tax.
COPs Certificates of Participation.
ETM Escrowed to maturity.
WI Security purchased on a "when-issued" basis.
+ Prerefunded to call date shown.
[+/+] Current coupon rate for residual interest bond. This rate resets
periodically as the auction rate on the related short-term security
fluctuates.
# Currently a zero coupon security; will convert to 5.30% on June 15,
2012.
* Current coupon of variable rate demand obligation.
** This security is segregated in connection with the purchase of a
"when-issued" security.
(a) The aggregate cost for federal income tax purposes approximates
the aggregate cost for book purposes. The aggregate gross
unrealized appreciation is $26,994,003 and the aggregate gross
unrealized depreciation is $471,893, resulting in net unrealized
appreciation of $26,522,110.
Bond Insurance:
---------------
Ambac Ambac Assurance Corporation.
FGIC Financial Guaranty Insurance Company.
FSA Financial Security Assurance Inc.
MBIA Municipal Bond Investors Assurance Corporation.
See Notes to Financial Statements
14
MORGAN STANLEY INSURED MUNICIPAL INCOME TRUST
PORTFOLIO OF INVESTMENTS o OCTOBER 31, 2002 CONTINUED
Geographic Summary of Investments
Based on Market Value as a Percent of
Net Assets Applicable to Common Shareholders
Arizona ................ 2.7% Indiana ............ 6.4% Nevada ............ 6.0% Tennessee ........... 1.1%
California ............. 7.4 Kentucky ........... 4.8 New Hampshire ..... 1.0 Texas ............... 14.6
Colorado ............... 2.2 Louisiana .......... 2.0 New Jersey ........ 3.2 Utah ................ 1.1
Connecticut ............ 3.3 Maine .............. 1.3 New York .......... 7.9 Virginia ............ 1.6
District of Columbia.... 3.9 Massachusetts ...... 3.6 North Carolina .... 4.2 Washington .......... 7.8
Florida ................ 7.3 Michigan ........... 3.4 Ohio .............. 1.5 West Virginia ....... 2.1
Hawaii ................. 1.4 Minnesota .......... 1.3 Pennsylvania ...... 13.0 Wisconsin ........... 2.0
Idaho .................. 2.5 Missouri ........... 2.1 Rhode Island ...... 3.3 Wyoming ............. 1.1
Illinois ............... 10.0 Montana ............ 1.4 South Carolina .... 3.4 -----
Total ............... 141.9%
=====
See Notes to Financial Statements
15
MORGAN STANLEY INSURED MUNICIPAL INCOME TRUST
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
October 31, 2002
ASSETS:
Investments in securities, at value
(cost $535,856,577) ................................................................ $562,378,687
Cash ................................................................................ 188,984
Interest receivable ................................................................. 8,443,585
Prepaid expenses .................................................................... 583,530
------------
TOTAL ASSETS ...................................................................... 571,594,786
------------
LIABILITIES:
Payable for:
Investments purchased ............................................................. 19,691,268
Investment management fee ......................................................... 181,361
Common shares of beneficial interest repurchased .................................. 123,572
Accrued expenses and other payables ................................................. 106,207
------------
TOTAL LIABILITIES ................................................................. 20,102,408
------------
Preferred shares of beneficial interest, (at liquidation value)
(1,000,000 shares authorized of non-participating $.01 par
value, 3,100 shares outstanding) 155,132,788
------------
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS ...................................... $396,359,590
============
COMPOSITION OF NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS:
Common shares of beneficial interest (unlimited shares authorized of $.01 par value,
25,287,513 shares outstanding) ..................................................... $365,619,728
Net unrealized appreciation ......................................................... 26,522,110
Accumulated undistributed net investment income ..................................... 4,722,041
Accumulated net realized loss ....................................................... (504,289)
------------
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS ...................................... $396,359,590
============
NET ASSET VALUE PER COMMON SHARE,
($396,359,590 divided by 25,287,513 common shares outstanding)....................... $ 15.67
============
See Notes to Financial Statements
16
MORGAN STANLEY INSURED MUNICIPAL INCOME TRUST
FINANCIAL STATEMENTS CONTINUED
STATEMENT OF OPERATIONS
For the year ended October 31, 2002
NET INVESTMENT INCOME:
INTEREST INCOME ........................................................ $ 29,808,268
------------
EXPENSES
Investment management fee .............................................. 1,931,106
Auction commission fees ................................................ 560,074
Transfer agent fees and expenses ....................................... 118,342
Professional fees ...................................................... 66,948
Auction agent fees ..................................................... 39,235
Shareholder reports and notices ........................................ 34,821
Registration fees ...................................................... 19,596
Trustees' fees and expenses ............................................ 18,509
Custodian fees ......................................................... 10,065
Other .................................................................. 50,819
------------
TOTAL EXPENSES ....................................................... 2,849,515
Less: expense offset ................................................... (9,975)
------------
NET EXPENSES ......................................................... 2,839,540
------------
NET INVESTMENT INCOME ................................................ 26,968,728
------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain ...................................................... 5,550,941
Net change in unrealized appreciation .................................. (2,766,900)
------------
NET GAIN ............................................................. 2,784,041
------------
Dividends to preferred shareholders from net investment income ......... (3,456,880)
------------
NET INCREASE ........................................................... $ 26,295,889
============
See Notes to Financial Statements
17
MORGAN STANLEY INSURED MUNICIPAL INCOME TRUST
FINANCIAL STATEMENTS CONTINUED
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR FOR THE YEAR
ENDED ENDED
OCTOBER 31, 2002 OCTOBER 31, 2001
------------------ -----------------
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income .......................................................... $ 26,968,728 $ 27,481,798
Net realized gain .............................................................. 5,550,941 2,882,363
Net change in unrealized appreciation .......................................... (2,766,900) 21,371,132
Dividends to preferred shareholders from net investment income ................. (3,456,880) (5,748,045)
------------ ------------
NET INCREASE ................................................................. 26,295,889 45,987,248
Dividends to common shareholders from net investment income .................... (21,133,899) (20,862,320)
Decrease from transactions in common shares of beneficial interest ............. (14,028,728) (12,411,356)
------------ ------------
NET INCREASE (DECREASE) ...................................................... (8,866,738) 12,713,572
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS:
Beginning of period ............................................................ 405,226,328 392,512,756
------------ ------------
END OF PERIOD
(Including accumulated undistributed net investment income of $4,722,041 and
$2,258,468, respectively)....................................................... $396,359,590 $405,226,328
============ ============
See Notes to Financial Statements
18
MORGAN STANLEY INSURED MUNICIPAL INCOME TRUST
NOTES TO FINANCIAL STATEMENTS o OCTOBER 31, 2002
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley Insured Municipal Income Trust (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 federal income tax. The Trust was organized
as a Massachusetts business trust on March 12, 1992 and commenced operations on
February 26, 1993.
The following is a summary of significant accounting policies:
A. VALUATION OF INVESTMENTS - Portfolio securities are valued by an outside
independent pricing service approved by the Trustees. The pricing service uses
both a computerized 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 bid side of the market each day. 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. 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. 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.
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS - Dividends and distributions to
shareholders are recorded on the ex-dividend date. 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
19
MORGAN STANLEY INSURED MUNICIPAL INCOME TRUST
NOTES TO FINANCIAL STATEMENTS o OCTOBER 31, 2002 CONTINUED
income and net realized capital gains for financial reporting purposes but not
for tax purposes are reported as dividends in excess of net investment income
or distributions in excess of net realized capital gains. To the extent they
exceed net investment income and net realized capital gains for tax purposes,
they are reported as distributions of paid-in-capital.
E. 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 MANAGEMENT AGREEMENT
Pursuant to an Investment Management Agreement with Morgan Stanley Investment
Advisors Inc. (the "Investment Manager"), the Trust pays a management fee,
calculated weekly and payable monthly, by applying the annual rate of 0.35% to
the Trust's weekly net assets including preferred shares.
3. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The cost of purchases and proceeds from sales of portfolio securities,
excluding short-term investments, for the year ended October 31, 2002
aggregated $92,424,658 and $131,199,040, respectively. Included in the
aforementioned are sales of $2,937,720 with other Morgan Stanley Funds, which
are affiliates of the Investment Manager.
Morgan Stanley Trust, an affiliate of the Investment Manager, is the Trust's
transfer agent. At October 31, 2002, the Trust had transfer agent fees and
expenses payable of approximately $8,850.
The Trust has an unfunded noncontributory defined benefit pension plan covering
all independent Trustees of the Trust who will have served as independent
Trustees for at least five years at the time of retirement. Benefits under this
plan are based on years of service and compensation during the last five years
of service. Aggregate pension costs for the year ended October 31, 2002
included in Trustees' fees and expenses in the Statement of Operations amounted
to $6,309. At October 31, 2002, the Trust had an accrued pension liability of
$47,223 which is included in accrued expenses in the Statement of Assets and
Liabilities.
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 Trust has issued Series 1 through 5 Auction Rate
Preferred Shares ("Preferred Shares") which 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.
20
MORGAN STANLEY INSURED MUNICIPAL INCOME TRUST
NOTES TO FINANCIAL STATEMENTS o OCTOBER 31, 2002 CONTINUED
Dividends, which are cumulative, are reset through auction procedures.
AMOUNT IN RESET RANGE OF
SERIES SHARES* THOUSANDS* RATE* DATE DIVIDEND RATES**
-------- --------- ------------ --------- ----------- -----------------
1 400 $20,000 1.55% 11/04/02 1.10% - 2.05%
2 900 45,000 1.65 11/04/02 1.35 - 2.47
3 1,000 50,000 2.20 07/12/04 2.20 - 2.95
4 400 20,000 2.47 01/05/04 2.47 - 2.79
5 400 20,000 1.65 11/04/02 0.90 - 2.05
------------
* As of October 31, 2002.
** For the year ended October 31, 2002.
Subsequent to October 31, 2002 and up through December 6, 2002, the Trust paid
dividends to each of the Series 1 through 5 at rates ranging from 1.15% to
2.95% in the aggregate amount of $386,034.
The Trust is 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, which are 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.
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, 2000 ............................................... 27,191,713 $271,917 $ 391,787,895
Treasury shares purchased and retired (weighted average discount 8.88%)* (907,700) (9,077) (12,402,279)
---------- -------- -------------
Balance, October 31, 2001 ............................................... 26,284,013 262,840 379,385,616
Treasury shares purchased and retired (weighted average discount 8.17%)* (996,500) (9,965) (14,018,763)
---------- -------- -------------
Balance, October 31, 2002 ............................................... 25,287,513 $252,875 $ 365,366,853
========== ======== =============
------------
* The Trustees have voted to retire the shares purchased.
21
MORGAN STANLEY INSURED MUNICIPAL INCOME TRUST
NOTES TO FINANCIAL STATEMENTS o OCTOBER 31, 2002 CONTINUED
6. FEDERAL INCOME TAX STATUS
During the year ended October 31, 2002, the Trust utilized approximately
$5,576,000 of its net capital loss carryover. At October 31, 2002, the Trust
had a net capital loss carryover of approximately $504,000 which will be
available through October 31, 2004 to offset future capital gains to the extent
provided by regulations.
As of October 31, 2002, the Trust had temporary book/tax differences primarily
attributable to book amortization of discount on debt securities and dividend
payable to preferred shareholders and permanent book/tax differences
attributable to tax adjustments on debt securities sold by the Trust. To
reflect reclassifications arising from the permanent differences, accumulated
undistributed net investment income was charged and accumulated net realized
loss was credited $25,139.
7. DIVIDENDS TO COMMON SHAREHOLDERS
On September 24, 2002, the Trust declared the following dividends from net
investment income:
AMOUNT RECORD PAYABLE
PER SHARE DATE DATE
------------- ------------------ ------------------
$ 0.075 November 8, 2002 November 22, 2002
$ 0.075 December 6, 2002 December 20, 2002
8. EXPENSE OFFSET
The expense offset represents a reduction of the custodian fees for earnings on
cash balances maintained by the Trust.
9. RISKS RELATING TO CERTAIN FINANCIAL INSTRUMENTS
The Trust may invest a portion of its assets in residual interest bonds, which
are inverse floating rate municipal obligations. The prices of these securities
are subject to greater market fluctuations during periods of changing prevailing
interest rates than are comparable fixed rate obligations.
At October 31, 2002, the Trust held positions in residual interest bonds having
a total value of $30,302,169, which represents 7.7% of the Trust's net assets
applicable to common shareholders.
10. CHANGE IN ACCOUNTING POLICY
Effective November 1, 2001, the Trust has adopted the provisions of the AICPA
Audit and Accounting Guide for Investment Companies, as revised, related to
premiums and discounts on debt securities. The cumulative effect of this
accounting change had no impact on the net assets of the Trust, but resulted in
a $110,763 increase in the cost of securities and a corresponding increase to
undistributed net investment income based on securities held as of October 31,
2001.
22
MORGAN STANLEY INSURED MUNICIPAL INCOME TRUST
NOTES TO FINANCIAL STATEMENTS o OCTOBER 31, 2002 CONTINUED
The effect of this change for the year ended October 31, 2002 was to increase
net investment income by $17,252; increase unrealized appreciation by $7,887
and decrease net realized gains by $25,139. The Statement of Changes in Net
Assets and the Financial Highlights for prior periods have not been restated to
reflect this change.
11. CHANGE IN FINANCIAL STATEMENT CLASSIFICATION FOR PREFERRED SHARES
In accordance with the provisions of EITF D-98, "Classification and Measurement
of Redeemable Securities", effective for the current reporting period, the
Trust has reclassified its Preferred Shares out of the composition of net
assets section on the Statement of Assets and Liabilities. In addition,
dividends to preferred shareholders are now classified as a component of
operations on the Statement of Operations, the Statement of Changes in Net
Assets and the Financial Highlights. Additionally, the categories of
investments on the Portfolio of Investments are shown as a percentage of net
assets applicable to common shareholders. Prior year amounts have been
reclassified to conform to this period's presentation. This change has no
impact on the net assets applicable to common shareholders of the Trust.
23
MORGAN STANLEY INSURED MUNICIPAL INCOME TRUST
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a common share of beneficial interest
outstanding throughout each period:
FOR THE YEAR ENDED OCTOBER 31,
----------------------------------------------------------------------
2002 2001 2000 1999 1998
------------ ----------- ---------- ------------ ----------
SELECTED PER SHARE DATA:
Net asset value, beginning of period. ...................... $ 15.42 $ 14.44 $ 13.69 $ 15.47 $ 14.69
--------- --------- -------- ---------- --------
Income (loss) from investment operations:
Net investment income* .................................... 1.04 1.03 1.01 1.01 1.00
Net realized and unrealized gain (loss). .................. 0.11 0.90 0.79 (1.77) 0.71
Common share equivalent of dividends paid to preferred
shareholders* ............................................ (0.13) (0.22) (0.22) (0.19) (0.20)
--------- --------- -------- ---------- --------
Total income (loss) from investment operations. ............ 1.02 1.71 1.58 (0.95) 1.51
--------- --------- -------- ---------- --------
Less dividends from net investment income .................. (0.82) (0.78) (0.86) (0.84) (0.78)
--------- --------- -------- ---------- --------
Anti-dilutive effect of acquiring treasury shares* ......... 0.05 0.05 0.03 0.01 0.05
--------- --------- -------- ---------- --------
Net asset value, end of period ............................. $ 15.67 $ 15.42 $ 14.44 $ 13.69 $ 15.47
========= ========= ======== ========== ========
Market value, end of period ................................ $ 14.05 $ 14.13 $ 12.813 $ 13.25 $ 14.813
========= ========= ======== ========== ========
TOTAL RETURN+ .............................................. 5.35% 16.70% 3.29% (5.17)% 18.27%
RATIOS TO AVERAGE NET ASSETS OF COMMON SHAREHOLDERS:
Expenses (before expense offset) ........................... 0.72% 0.71% 0.73% 0.70% 0.69%
Net investment income before preferred stock dividends ..... 6.82% 6.84% 7.27% 6.71% 6.60%
Preferred stock dividends .................................. 0.87% 1.43% 1.59% 1.26% 1.30%
Net investment income available to common shareholders ..... 5.95% 5.41% 5.68% 5.45% 5.30%
SUPPLEMENTAL DATA:
Net assets applicable to common shareholders, end of
period, in thousands ...................................... $396,360 $405,226 $392,513 $384,277 $439,807
Asset coverage on preferred shares at end of period ........ 355% 361% 352% 347% 383%
Portfolio turnover rate .................................... 17% 13% 11% 5% 7%
------------
* The per share amounts were computed using an average number of common shares
outstanding during the period.
+ Total return is based upon the current market value on the last day of each
period reported. Dividends are assumed to be reinvested at the prices
obtained under the Trust's dividend reinvestment plan. Total return does not
reflect brokerage commissions.
See Notes to Financial Statements
24
MORGAN STANLEY INSURED MUNICIPAL INCOME TRUST
INDEPENDENT AUDITORS' REPORT
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF
MORGAN STANLEY INSURED MUNICIPAL INCOME TRUST:
We have audited the accompanying statement of assets and liabilities of Morgan
Stanley Insured Municipal Income Trust (the "Trust"), including the portfolio
of investments, as of October 31, 2002, and the related statements of
operations for the year then ended and changes in net assets for each of the
two years in the period then ended, and the financial highlights for each of
the five years in the period then ended. These financial statements and
financial highlights are the responsibility of the Trust's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures
included confirmation of securities owned as of October 31, 2002, by
correspondence with the custodian and brokers. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Morgan Stanley Insured Municipal Income Trust as of October 31, 2002, the
results of its operations for the year then ended, the changes in its net
assets for each of the two years in the period then ended, and the financial
highlights for each of the five years in the period then ended, in conformity
with accounting principles generally accepted in the United States of America.
Deloitte & Touche LLP
New York, New York
December 9, 2002
2002 Federal Tax Notice (unaudited)
For the year ended October 31, 2002, all of the Trust's dividends from
net investment income received by both common and preferred shareholder
classes were exempt interest dividends, excludable from gross income for
Federal income tax purposes.
25
MORGAN STANLEY INSURED MUNICIPAL INCOME TRUST
TRUSTEE AND OFFICER INFORMATION
INDEPENDENT TRUSTEES:
TERM OF
OFFICE AND
POSITION(S) LENGTH OF
NAME, AGE AND ADDRESS OF HELD WITH TIME
INDEPENDENT TRUSTEE REGISTRANT SERVED* PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS
------------------------------------- ------------- ---------------- ------------------------------------------------
Michael Bozic (61) Trustee Since Retired; Director or Trustee of the Morgan
c/o Mayer, Brown, Rowe & Maw April 1994 Stanley Funds and the TCW/DW Term Trusts;
Counsel to the Independent Trustees formerly Vice Chairman of Kmart Corporation
1675 Broadway (December 1998-October 2000), Chairman and
New York, NY Chief Executive Officer of Levitz Furniture
Corporation (November 1995-November 1998)
and President and Chief Executive Officer of
Hills Department Stores (May 1991-July 1995);
formerly variously Chairman, Chief Executive
Officer, President and Chief Operating Officer
(1987-1991) of the Sears Merchandise Group
of Sears, Roebuck & Co.
Edwin J. Garn (70) Trustee Since Director or Trustee of the Morgan Stanley
c/o Summit Ventures LLC January 1993 Funds and the TCW/DW Term Trusts; formerly
1 Utah Center United States Senator (R-Utah) (1974-1992)
201 S. Main Street and Chairman, Senate Banking Committee
Salt Lake City, UT (1980-1986); formerly Mayor of Salt Lake City,
Utah (1971-1974); formerly Astronaut, Space
Shuttle Discovery (April 12-19, 1985); Vice
Chairman, Huntsman Corporation (chemical
company); member of the Utah Regional
Advisory Board of Pacific Corp.
Wayne E. Hedien (68) Trustee Since Retired; Director or Trustee of the Morgan
c/o Mayer, Brown, Rowe & Maw September 1997 Stanley Funds and the TCW/DW Term Trusts;
Counsel to the Independent Trustees formerly associated with the Allstate
1675 Broadway Companies (1966-1994), most recently as
New York, NY Chairman of The Allstate Corporation
(March 1993-December 1994) and Chairman
and Chief Executive Officer of its wholly-owned
subsidiary, Allstate Insurance Company
(July 1989-December 1994).
NUMBER OF
PORTFOLIOS IN
FUND
COMPLEX
NAME, AGE AND ADDRESS OF OVERSEEN
INDEPENDENT TRUSTEE BY TRUSTEE** OTHER DIRECTORSHIPS HELD BY TRUSTEE
------------------------------------- -------------- ------------------------------------------------
Michael Bozic (61) 129 Director of Weirton Steel Corporation.
c/o Mayer, Brown, Rowe & Maw
Counsel to the Independent Trustees
1675 Broadway
New York, NY
Edwin J. Garn (70) 129 Director of Franklin Covey (time management
c/o Summit Ventures LLC systems), BMW Bank of North America, Inc.
1 Utah Center (industrial loan corporation), United Space
201 S. Main Street Alliance (joint venture between Lockheed Martin
Salt Lake City, UT and the Boeing Company) and Nuskin Asia
Pacific (multilevel marketing); member of the
board of various civic and charitable
organizations.
Wayne E. Hedien (68) 129 Director of The PMI Group Inc. (private
c/o Mayer, Brown, Rowe & Maw mortgage insurance); Trustee and Vice
Counsel to the Independent Trustees Chairman of The Field Museum of Natural
1675 Broadway History; director of various other business and
New York, NY charitable organizations.
26
MORGAN STANLEY INSURED MUNICIPAL INCOME TRUST
TRUSTEE AND OFFICER INFORMATION CONTINUED
TERM OF
OFFICE AND
POSITION(S) LENGTH OF
NAME, AGE AND ADDRESS OF HELD WITH TIME
INDEPENDENT TRUSTEE REGISTRANT SERVED* PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS
--------------------------------------- ------------- ------------ ------------------------------------------------
Dr. Manuel H. Johnson (53) Trustee Since Chairman of the Audit Committee and Director
c/o Johnson Smick International, Inc. July 1991 or Trustee of the Morgan Stanley Funds and the
1133 Connecticut Avenue, N.W. TCW/DW Term Trusts; Senior Partner, Johnson
Washington, D.C. Smick International, Inc., a consulting firm;
Co-Chairman and a founder of the Group of
Seven Council (G7C), an international economic
commission; formerly Vice Chairman of the
Board of Governors of the Federal Reserve
System and Assistant Secretary of the U.S.
Treasury.
Michael E. Nugent (66) Trustee Since Chairman of the Insurance Committee and
c/o Triumph Capital, L.P. July 1991 Director or Trustee of the Morgan Stanley
237 Park Avenue Funds and the TCW/DW Term Trusts; director/
New York, NY trustee of various investment companies
managed by Morgan Stanley Investment
Management Inc. and Morgan Stanley
Investments LP (since July 2001); General
Partner, Triumph Capital, L.P., a private
investment partnership; formerly Vice
President, Bankers Trust Company and BT
Capital Corporation (1984-1988).
NUMBER OF
PORTFOLIOS IN
FUND
COMPLEX
NAME, AGE AND ADDRESS OF OVERSEEN
INDEPENDENT TRUSTEE BY TRUSTEE** OTHER DIRECTORSHIPS HELD BY TRUSTEE
--------------------------------------- -------------- ----------------------------------------------
Dr. Manuel H. Johnson (53) 129 Director of NVR, Inc. (home construction);
c/o Johnson Smick International, Inc. Chairman and Trustee of the Financial
1133 Connecticut Avenue, N.W. Accounting Foundation (oversight organization
Washington, D.C. of the Financial Accounting Standards Board).
Michael E. Nugent (66) 207 Director of various business organizations.
c/o Triumph Capital, L.P.
237 Park Avenue
New York, NY
27
MORGAN STANLEY INSURED MUNICIPAL INCOME TRUST
TRUSTEE AND OFFICER INFORMATION CONTINUED
INTERESTED TRUSTEES:
TERM OF
OFFICE AND
POSITION(S) LENGTH OF
NAME, AGE AND ADDRESS OF HELD WITH TIME
INTERESTED TRUSTEE REGISTRANT SERVED* PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS
------------------------------ ---------------------- ------------ ------------------------------------------------
Charles A. Fiumefreddo (69) Chairman and Trustee Since Chairman and Director or Trustee of the
c/o Morgan Stanley Trust July 1991 Morgan Stanley Funds and the TCW/DW Term
Harborside Financial Center, Trusts; formerly Chairman, Chief Executive
Plaza Two, Officer and Director of the Investment Manager,
Jersey City, NJ the Distributor and Morgan Stanley Services,
Executive Vice President and Director of
Morgan Stanley DW, Chairman and Director of
the Transfer Agent, and Director and/or officer
of various Morgan Stanley subsidiaries (until
June 1998) and Chief Executive Officer of the
Morgan Stanley Funds and the TCW/DW Term
Trusts (until September 2002).
James F. Higgins (54) Trustee Since Senior Advisor of Morgan Stanley (since
c/o Morgan Stanley Trust June 2000 August 2000); Director of the Distributor and
Harborside Financial Center, Dean Witter Realty Inc.; Director or Trustee of
Plaza Two, the Morgan Stanley Funds and the TCW/DW
Jersey City, NJ Term Trusts (since June 2000); previously
President and Chief Operating Officer of the
Private Client Group of Morgan Stanley
(May 1999-August 2000), President and Chief
Operating Officer of Individual Securities of
Morgan Stanley (February 1997-May 1999).
Philip J. Purcell (59) Trustee Since Director or Trustee of the Morgan Stanley
1585 Broadway April 1994 Funds and the TCW/DW Term Trusts; Chairman
New York, NY of the Board of Directors and Chief Executive
Officer of Morgan Stanley and Morgan Stanley
DW; Director of the Distributor; Chairman of the
Board of Directors and Chief Executive Officer
of Novus Credit Services Inc.; Director and/or
officer of various Morgan Stanley subsidiaries.
NUMBER OF
PORTFOLIOS IN
FUND
COMPLEX
NAME, AGE AND ADDRESS OF OVERSEEN
INTERESTED TRUSTEE BY TRUSTEE** OTHER DIRECTORSHIPS HELD BY TRUSTEE
------------------------------ - -------------- --------------------------------------------
Charles A. Fiumefreddo (69) 129 None
c/o Morgan Stanley Trust
Harborside Financial Center,
Plaza Two,
Jersey City, NJ
James F. Higgins (54) 129 None
c/o Morgan Stanley Trust
Harborside Financial Center,
Plaza Two,
Jersey City, NJ
Philip J. Purcell (59) 129 Director of American Airlines, Inc. and its
1585 Broadway parent company, AMR Corporation.
New York, NY
------------
* Each Trustee serves an indefinite term, until his or her successor is
elected.
** The Fund Complex includes all open and closed-end funds (including all of
their portfolios) advised by Morgan Stanley Investment Advisors Inc. and any
funds that have an investment advisor that is an affiliated person of Morgan
Stanley Investment Advisors Inc. (including but not limited to, Morgan
Stanley Investment Management Inc., Morgan Stanley Investments LP and Van
Kampen Asset Management Inc.).
28
MORGAN STANLEY INSURED MUNICIPAL INCOME TRUST
TRUSTEE AND OFFICER INFORMATION CONTINUED
OFFICERS:
TERM OF
OFFICE AND
POSITION(S) LENGTH OF
NAME, AGE AND ADDRESS OF HELD WITH TIME
EXECUTIVE OFFICER REGISTRANT SERVED* PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS
------------------------------ ------------------- ----------------- -------------------------------------------------------------
Mitchell M. Merin (49) President and President since President and Chief Operating Officer of Morgan Stanley
1221 Avenue of the Americas Chief Executive May 1999 and Investment Management (since December 1998); President,
New York, NY Officer Chief Executive Director (since April 1997) and Chief Executive Officer
Officer since (since June 1998) of the Investment Manager and Morgan
September 2002 Stanley Services; Chairman, Chief Executive Officer and
Director of the Distributor (since June 1998); Chairman
(since June 1998) and Director (since January 1998) of the
Transfer Agent; Director of various Morgan Stanley
subsidiaries; President (since May 1999) and Chief Executive
Officer (since September 2002) of the Morgan Stanley Funds
and TCW/DW Term Trusts; Trustee of various Van Kampen
investment companies (since December 1999); previously Chief
Strategic Officer of the Investment Manager and Morgan
Stanley Services and Executive Vice President of the
Distributor (April 1997-June 1998), Vice President of the
Morgan Stanley Funds (May 1997-April 1999), and Executive
Vice President of Morgan Stanley.
Barry Fink (47) Vice President, Since General Counsel (since May 2000) and Managing Director
1221 Avenue of the Americas Secretary and February 1997 (since December 2000) of Morgan Stanley Investment
New York, NY General Counsel Management; Managing Director (since December 2000), and
Secretary and General Counsel (since February 1997) and
Director (since July 1998) of the Investment Manager and
Morgan Stanley Services; Assistant Secretary of Morgan
Stanley DW; Vice President, Secretary and General Counsel of
the Morgan Stanley Funds and TCW/DW Term Trusts (since
February 1997); Vice President and Secretary of the
Distributor; previously, Senior Vice President, Assistant
Secretary and Assistant General Counsel of the Investment
Manager and Morgan Stanley Services.
Thomas F. Caloia (56) Treasurer Since First Vice President and Assistant Treasurer of the
c/o Morgan Stanley Trust April 1989 Investment Manager, the Distributor and Morgan Stanley
Harborside Financial Center, Services; Treasurer of the Morgan Stanley Funds.
Plaza Two,
Jersey City, NJ
Ronald E. Robison (63) Vice President Since Managing Director, Chief Administrative Officer and Director
1221 Avenue of the Americas October 1998 (since February 1999) of the Investment Manager and Morgan
New York, NY Stanley Services and Chief Executive Officer and Director of
the Transfer Agent; previously Managing Director of the TCW
Group Inc.
Joseph J. McAlinden (59) Vice President Since Managing Director and Chief Investment Officer of the
1221 Avenue of the Americas July 1995 Investment Manager, Morgan Stanley Investment Management
New York, NY Inc. and Morgan Stanley Investments LP; Director of the
Transfer Agent; Chief Investment Officer of the Van Kampen
Funds.
Francis Smith (37) Vice President Since Vice President and Chief Financial Officer of the Morgan
c/o Morgan Stanley Trust and Chief September 2002 Stanley Funds and the TCW/DW Term Trusts (since September
Harborside Financial Center, Financial Officer 2002); Executive Director of the Investment Manager and
Plaza Two, Morgan Stanley Services (since December 2001). Formerly,
Jersey City, NJ Vice President of the Investment Manager and Morgan Stanley
Services (August 2000-November 2001), Senior Manager at
PricewaterhouseCoopers LLP (January 1998-August 2000) and
Associate-Fund Administration at BlackRock Financial
Management (July 1996-December 1997).
James F. Willison (58) Vice President Since Inception Managing Director and Portfolio Manager of the Investment
1221 Avenue of the Americas Manager and/or its investment management affiliates for over
New York, New York 5 years.
Joseph R. Arcieri (53) Vice President Since January Executive Director and Portfolio Manager of the Investment
1221 Avenue of the Americas 2002 Manager and/or its investment management affiliates for over
New York, New York 5 years.
Robert W. Wimmel (37) Vice President Since January Vice President and Portfolio Manager of the Investment
1 Parkview Plaza 2002 Manager and/or its investment management affiliates for over
Oakbrook Terrace, Illinois 5 years.
------------
* Each Officer serves an indefinite term, until his or her successor is
elected.
29
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[MORGAN STANLEY LOGO]
TRUSTEES
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
Wayne E. Hedien
James F. Higgins
Dr. Manuel H. Johnson
Michael E. Nugent
Philip J. Purcell
[GRAPHIC OMITTED]
OFFICERS
Charles A. Fiumefreddo
Chairman
MORGAN STANLEY
INSURED MUNICIPAL
INCOME TRUST
Mitchell M. Merin
President and Chief Executive Officer
Barry Fink
Vice President, Secretary and General Counsel
Joseph J. McAlinden
Vice President
Ronald E. Robison
Vice President
Thomas F. Caloia
Treasurer
Francis Smith
Vice President and Chief Financial Officer
TRANSFER AGENT
Morgan Stanley Trust
Harborside Financial Center - Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT AUDITORS
Deloitte & Touche LLP
Two World Financial Center
New York, New York 10281
INVESTMENT MANAGER
Morgan Stanley Investment Advisors Inc.
1221 Avenue of the Americas
New York, New York 10020
Investments and services offered through Morgan Stanley DW Inc., Member SIPC.
37958RPT-9133K02-AS-11/02
[MORGAN STANLEY LOGO] ANNUAL REPORT
October 31, 2002