MFS BLENDED RESEARCH CORE EQUITY PORTFOLIO

Transcription

1 SEMIANNUAL REPORT June 30, 2014 MFS BLENDED RESEARCH CORE EQUITY PORTFOLIO MFS Variable Insurance Trust II CGS-SEM

2 MFS BLENDED RESEARCH CORE EQUITY PORTFOLIO CONTENTS Letter from the Chairman and CEO... 1 Portfolio composition... 2 Expense table... 3 Portfolio of investments... 4 Statement of assets and liabilities... 6 Statement of operations... 7 Statements of changes in net assets... 8 Financial highlights... 9 Notes to financial statements Proxy voting policies and information Quarterly portfolio disclosure Further information The report is prepared for the general information of contract owners. It is authorized for distribution to prospective investors only when preceded or accompanied by a current prospectus. NOT FDIC INSURED MAY LOSE VALUE NO BANK OR CREDIT UNION GUARANTEE NOT A DEPOSIT NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF

3 LETTER FROM THE CHAIRMAN AND CEO MFS Blended Research Core Equity Portfolio Dear Contract Owners: After the U.S. economy contracted sharply early this year with activity curtailed by severe winter weather, a decline in exports and an inventory stockpile indicators have consistently shown that the U.S. economy likely regained momentum in the second quarter. The labor market is more robust, manufacturing is strong and retail sales have improved along with consumer confidence. Although Europe emerged from recession last year, the pace of growth in the region has been slow, with persistently high unemployment and very low inflation that points to the risk of deflation. Asia remains vulnerable but also shows signs of recovery. China s economic growth has slowed somewhat, and Japan s economic turnaround remains a work in progress. Emerging markets have been more turbulent over the past 12 months. Despite this economic uncertainty, and the growing likelihood of interest rate increases that has heightened bond risks, global financial markets have been relatively stable thus far in As always at MFS, active risk management is integral to how we manage your investments. We use a collaborative process, sharing insights across asset classes, regions and economic sectors. Our global team of investment professionals takes a multidisciplined, long-term, diversified investment approach. We understand that these are challenging economic times. We believe that we can serve you best by applying proven principles, such as asset allocation and diversification, over the long term. We are confident that this approach can serve you well as you work with your financial advisors to reach your goals in the years ahead. Respectfully, Robert J. Manning Chairman and Chief Executive Officer MFS Investment Management August 15, 2014 The opinions expressed in this letter are subject to change and may not be relied upon for investment advice. No forecasts can be guaranteed. 1

4 PORTFOLIO COMPOSITION Portfolio structure Equities 99.1% Cash & Other 0.9% Top ten holdings Exxon Mobil Corp. 3.7% JPMorgan Chase & Co. 2.3% Apple, Inc. 2.3% Chevron Corp. 2.2% Verizon Communications, Inc. 2.1% Wells Fargo & Co. 2.0% Oracle Corp. 1.9% CVS Caremark Corp. 1.9% Pfizer, Inc. 1.8% Facebook, Inc., A 1.8% Equity sectors Technology 17.7% Financial Services 15.4% Health Care 12.8% Energy 10.0% Consumer Staples 7.2% Utilities & Communications 7.0% Retailing 6.8% Leisure 5.9% Industrial Goods & Services 5.7% Basic Materials 3.2% Special Products & Services 2.7% Autos & Housing 2.5% Transportation 2.2% Cash & Other can include cash, other assets less liabilities, offsets to derivative positions, and short-term securities. Percentages are based on net assets as of 6/30/14. The portfolio is actively managed and current holdings may be different. 2

5 EXPENSE TABLE Fund Expenses Borne by the Contract Holders During the Period, January 1, 2014 through June 30, 2014 As a contract holder of the fund, you incur ongoing costs, including management fees; distribution and/or service (12b-1) fees; and other fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the fund and to compare these costs with the ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period January 1, 2014 through June 30, Actual Expenses The first line for each share class in the following table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled Expenses Paid During Period to estimate the expenses you paid on your account during this period. Hypothetical Example for Comparison Purposes The second line for each share class in the following table provides information about hypothetical account values and hypothetical expenses based on the fund s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the fund s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight the fund s ongoing costs only and do not take into account the fees and expenses imposed under the variable contracts through which your investment in the fund is made. Therefore, the second line for each share class in the table is useful in comparing ongoing costs associated with an investment in vehicles (such as the fund) which fund benefits under variable annuity and variable life insurance contracts and to qualified pension and retirement plans only, and will not help you determine the relative total costs of investing in the fund through variable annuity and variable life insurance contracts. If the fees and expenses imposed under the variable contracts were included, your costs would have been higher. Share Class Initial Class Service Class Annualized Expense Ratio Beginning Account Value 1/01/14 Ending Account Value 6/30/14 Expenses Paid During Period (p) 1/01/14-6/30/14 Actual 0.45% $1, $1, $2.30 Hypothetical (h) 0.45% $1, $1, $2.26 Actual 0.70% $1, $1, $3.57 Hypothetical (h) 0.70% $1, $1, $3.51 (h) 5% class return per year before expenses. (p) Expenses Paid During Period are equal to each class s annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by 181/365 (to reflect the one-half year period). 3

6 PORTFOLIO OF INVESTMENTS 6/30/14 (unaudited) The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes. Issuer Shares/Par Value ($) COMMON STOCKS 99.1% Aerospace 3.5% Alliant Techsystems, Inc. 13,081 $ 1,751,804 Lockheed Martin Corp. 49,015 7,878,181 United Technologies Corp. 64,227 7,415,007 $ 17,044,992 Automotive 2.5% General Motors Co. 147,688 $ 5,361,074 Goodyear Tire & Rubber Co. 45,332 1,259,323 Johnson Controls, Inc. 109,802 5,482,414 $ 12,102,811 Biotechnology 1.9% Biogen Idec, Inc. (a) 22,837 $ 7,200,734 Gilead Sciences, Inc. (a) 24,657 2,044,312 $ 9,245,046 Broadcasting 0.9% Time Warner, Inc. 28,410 $ 1,995,803 Walt Disney Co. 25,645 2,198,802 $ 4,194,605 Business Services 2.7% Accenture PLC, A 67,884 $ 5,487,743 Cognizant Technology Solutions Corp., A (a) 50,537 2,471,765 FleetCor Technologies, Inc. (a) 40,762 5,372,432 $ 13,331,940 Cable TV 2.2% Comcast Corp., A 113,216 $ 6,077,435 Time Warner Cable, Inc. 32,475 4,783,568 $ 10,861,003 Chemicals 2.4% CF Industries Holdings, Inc. 20,361 $ 4,897,431 LyondellBasell Industries N.V., A 70,302 6,864,990 $ 11,762,421 Computer Software 3.4% CA, Inc. 85,703 $ 2,463,104 Microsoft Corp. 91,808 3,828,394 Oracle Corp. 227,207 9,208,700 PTC, Inc. (a) 29,971 1,162,875 $ 16,663,073 Computer Software Systems 5.2% Apple, Inc. 119,767 $ 11,129,947 Hewlett-Packard Co. 242,147 8,155,511 International Business Machines Corp. 2, ,601 Western Digital Corp. 63,698 5,879,325 $ 25,567,384 Consumer Products 1.5% Procter & Gamble Co. 95,751 $ 7,525,071 Issuer Shares/Par Value ($) COMMON STOCKS continued Containers 0.8% Packaging Corp. of America 51,437 $ 3,677,231 Electrical Equipment 0.6% General Electric Co. 116,250 $ 3,055,050 Electronics 2.5% Avago Technologies Ltd. 65,038 $ 4,687,289 Intel Corp. 251,365 7,767,179 $ 12,454,468 Energy Independent 2.7% EOG Resources, Inc. 71,394 $ 8,343,103 Marathon Petroleum Corp. 64,978 5,072,832 $ 13,415,935 Energy Integrated 5.9% Chevron Corp. 83,970 $ 10,962,284 Exxon Mobil Corp. 179,358 18,057,763 $ 29,020,047 Food & Beverages 3.5% Archer Daniels Midland Co. 72,914 $ 3,216,237 Coca-Cola Enterprises, Inc. 45,723 2,184,645 General Mills, Inc. 87,768 4,611,331 Mondelez International, Inc. 49,265 1,852,857 Tyson Foods, Inc., A 142,854 5,362,739 $ 17,227,809 Food & Drug Stores 3.1% CVS Caremark Corp. 121,143 $ 9,130,548 Kroger Co. 120,027 5,932,935 $ 15,063,483 Gaming & Lodging 1.7% Royal Caribbean Cruises Ltd. 67,191 $ 3,735,820 Wynn Resorts Ltd. 21,360 4,433,482 $ 8,169,302 General Merchandise 1.7% Kohl s Corp. 45,282 $ 2,385,456 Macy s, Inc. 99,508 5,773,454 $ 8,158,910 Health Maintenance Organizations 1.2% WellPoint, Inc. 54,676 $ 5,883,684 Insurance 4.7% Berkshire Hathaway, Inc., B (a) 11,879 $ 1,503,406 Everest Re Group Ltd. 31,103 4,991,720 MetLife, Inc. 127,355 7,075,844 Prudential Financial, Inc. 58,874 5,226,245 Validus Holdings Ltd. 110,115 4,210,798 $ 23,008,013 4

7 Portfolio of Investments (unaudited) continued Issuer Shares/Par Value ($) COMMON STOCKS continued Internet 5.0% Facebook, Inc., A (a) 130,075 $ 8,752,747 Google, Inc., A (a) 9,742 5,695,855 Google, Inc., C (a) 7,066 4,064,928 Yahoo!, Inc. (a) 164,478 5,778,112 $ 24,291,642 Machinery & Tools 1.6% Cummins, Inc. 36,807 $ 5,678,952 Kennametal, Inc. 42,142 1,950,332 $ 7,629,284 Major Banks 6.7% Bank of America Corp. 337,370 $ 5,185,377 Goldman Sachs Group, Inc. 40,625 6,802,250 JPMorgan Chase & Co. 195,250 11,250,305 Wells Fargo & Co. 182,294 9,581,373 $ 32,819,305 Medical & Health Technology & Services 1.4% Cardinal Health, Inc. 78,168 $ 5,359,198 HCA Holdings, Inc. (a) 24,843 1,400,648 $ 6,759,846 Medical Equipment 2.8% Abbott Laboratories 104,959 $ 4,292,823 Medtronic, Inc. 31,380 2,000,789 Thermo Fisher Scientific, Inc. 63,971 7,548,578 $ 13,842,190 Network & Telecom 1.6% Qualcomm, Inc. 100,389 $ 7,950,809 Oil Services 1.4% Ensco PLC, A 69,802 $ 3,878,897 Halliburton Co. 38,699 2,748,016 $ 6,626,913 Other Banks & Diversified Financials 3.5% Citigroup, Inc. 173,599 $ 8,176,513 Discover Financial Services 122,218 7,575,072 Navient Corp. 87,630 1,551,927 $ 17,303,512 Pharmaceuticals 5.5% Bristol-Myers Squibb Co. 130,369 $ 6,324,200 Endo International PLC (a) 75,634 5,295,893 Johnson & Johnson 63,352 6,627,886 Pfizer, Inc. 295,796 8,779,225 $ 27,027,204 Railroad & Shipping 1.0% Union Pacific Corp. 51,496 $ 5,136,726 Issuer Shares/Par Value ($) COMMON STOCKS continued Specialty Stores 2.1% Advance Auto Parts, Inc. 36,324 $ 4,900,834 AutoZone, Inc. (a) 9,795 5,252,471 $ 10,153,305 Telecommunications Wireless 1.0% American Tower Corp., REIT 53,541 $ 4,817,619 Telephone Services 2.7% AT&T, Inc. 16,291 $ 576,050 Frontier Communications Corp. 353,456 2,064,183 Verizon Communications, Inc. 214,280 10,484,720 $ 13,124,953 Tobacco 2.1% Lorillard, Inc. 105,869 $ 6,454,833 Philip Morris International, Inc. 46,623 3,930,785 $ 10,385,618 Trucking 1.1% United Parcel Service, Inc., B 53,022 $ 5,443,239 Utilities Electric Power 3.3% AES Corp. 347,624 $ 5,405,553 American Electric Power Co., Inc. 103,569 5,776,043 Edison International 66,916 3,888,489 Great Plains Energy, Inc. 39,891 1,071,871 $ 16,141,956 Total Common Stocks (Identified Cost, $364,772,081) $485,276,452 MONEY MARKET FUNDS 0.2% MFS Institutional Money Market Portfolio, 0.08%, at Cost and Net Asset Value (v) 1,251,825 $ 1,251,825 Total Investments (Identified Cost, $366,023,906) $486,528,277 OTHER ASSETS, LESS LIABILITIES 0.7% 3,290,128 Net Assets 100.0% $489,818,405 (a) Non-income producing security. (v) Underlying affiliated fund that is available only to investment companies managed by MFS. The rate quoted for the MFS Institutional Money Market Portfolio is the annualized seven-day yield of the fund at period end. The following abbreviations are used in this report and are defined: PLC Public Limited Company REIT Real Estate Investment Trust See Notes to Financial Statements Real Estate 0.5% Public Storage, Inc., REIT 14,373 $ 2,462,814 Restaurants 1.2% McDonald s Corp. 58,837 $ 5,927,239 5

8 FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES (unaudited) This statement represents your fund s balance sheet, which details the assets and liabilities comprising the total value of the fund. At 6/30/14 Assets Investments Non-affiliated issuers, at value (identified cost, $364,772,081) $485,276,452 Underlying affiliated funds, at cost and value 1,251,825 Total investments, at value (identified cost, $366,023,906) $486,528,277 Receivables for Investments sold 3,772,869 Dividends 352,669 Other assets 3,346 Total assets $490,657,161 Liabilities Payable for fund shares reacquired $739,711 Payable to affiliates Investment adviser 20,151 Shareholder servicing costs 161 Distribution and/or service fees 3,472 Payable for independent Trustees compensation 86 Accrued expenses and other liabilities 75,175 Total liabilities $838,756 Net assets $489,818,405 Net assets consist of Paid-in capital $358,831,821 Unrealized appreciation (depreciation) on investments 120,504,371 Accumulated net realized gain (loss) on investments (882,908) Undistributed net investment income 11,365,121 Net assets $489,818,405 Shares of beneficial interest outstanding 9,608,693 Net assets Shares outstanding Net asset value per share Initial Class $363,198,438 7,111,259 $51.07 Service Class 126,619,967 2,497, See Notes to Financial Statements 6

9 FINANCIAL STATEMENTS STATEMENT OF OPERATIONS (unaudited) This statement describes how much your fund earned in investment income and accrued in expenses. It also describes any gains and/or losses generated by fund operations. Six months ended 6/30/14 Net investment income Income Dividends $4,925,533 Dividends from underlying affiliated funds 918 Total investment income $4,926,451 Expenses Management fee $1,330,982 Distribution and/or service fees 159,032 Shareholder servicing costs 6,569 Administrative services fee 33,873 Independent Trustees compensation 7,498 Custodian fee 25,218 Shareholder communications 15,999 Audit and tax fees 25,838 Legal fees 2,618 Miscellaneous 8,446 Total expenses $1,616,073 Reduction of expenses by investment adviser (372,364) Net expenses $1,243,709 Net investment income $3,682,742 Realized and unrealized gain (loss) on investments Realized gain (loss) on investments (identified cost basis) $33,164,051 Change in unrealized appreciation (depreciation) on investments $(10,108,765) Net realized and unrealized gain (loss) on investments $23,055,286 Change in net assets from operations $26,738,028 See Notes to Financial Statements 7

10 FINANCIAL STATEMENTS STATEMENTS OF CHANGES IN NET ASSETS These statements describe the increases and/or decreases in net assets resulting from operations, any distributions, and any shareholder transactions. Six months ended 6/30/14 (unaudited) Year ended 12/31/13 Change in net assets From operations Net investment income $3,682,742 $7,685,814 Net realized gain (loss) on investments 33,164,051 57,531,662 Net unrealized gain (loss) on investments (10,108,765) 82,114,230 Change in net assets from operations $26,738,028 $147,331,706 Distributions declared to shareholders From net investment income $ $(9,239,051) Change in net assets from fund share transactions $(38,700,470) $(81,956,261) Total change in net assets $(11,962,442) $56,136,394 Net assets At beginning of period 501,780, ,644,453 At end of period (including undistributed net investment income of $11,365,121 and $7,682,379, respectively) $489,818,405 $501,780,847 See Notes to Financial Statements 8

11 FINANCIAL STATEMENTS FINANCIAL HIGHLIGHTS MFS Blended Research Core Equity Portfolio The financial highlights table is intended to help you understand the fund s financial performance for the semiannual period and the past 5 fiscal years. Certain information reflects financial results for a single fund share. The total returns in the table represent the rate by which an investor would have earned (or lost) on an investment in the fund share class (assuming reinvestment of all distributions) held for the entire period. Initial Class Six months ended Years ended 12/31 6/30/ (unaudited) Net asset value, beginning of period $48.31 $36.15 $31.86 $31.89 $27.84 $22.80 Income (loss) from investment operations Net investment income (d) $0.38 $0.71 $0.72 $0.49 $0.51 $0.43 Net realized and unrealized gain (loss) on investments and foreign currency Total from investment operations $2.76 $13.03 $4.89 $0.59 $4.56 $5.59 Less distributions declared to shareholders From net investment income $ $(0.87) $(0.60) $(0.62) $(0.51) $(0.55) Net asset value, end of period (x) $51.07 $48.31 $36.15 $31.86 $31.89 $27.84 Total return (%) (k)(r)(s)(x) 5.71(n) Ratios (%) (to average net assets) and Supplemental data: Expenses before expense reductions (f) 0.60(a) Expenses after expense reductions (f) 0.45(a) Net investment income 1.59(a) Portfolio turnover 16(n) Net assets at end of period (000 omitted) $363,198 $367,674 $311,265 $315,115 $360,667 $361,105 Service Class Six months ended Years ended 12/31 6/30/ (unaudited) Net asset value, beginning of period $48.02 $35.93 $31.65 $31.66 $27.66 $22.62 Income (loss) from investment operations Net investment income (d) $0.32 $0.60 $0.62 $0.41 $0.44 $0.37 Net realized and unrealized gain (loss) on investments and foreign currency Total from investment operations $2.68 $12.84 $4.77 $0.52 $4.44 $5.51 Less distributions declared to shareholders From net investment income $ $(0.75) $(0.49) $(0.53) $(0.44) $(0.47) Net asset value, end of period (x) $50.70 $48.02 $35.93 $31.65 $31.66 $27.66 Total return (%) (k)(r)(s)(x) 5.58(n) Ratios (%) (to average net assets) and Supplemental data: Expenses before expense reductions (f) 0.85(a) Expenses after expense reductions (f) 0.70(a) Net investment income 1.34(a) Portfolio turnover 16(n) Net assets at end of period (000 omitted) $126,620 $134,107 $134,379 $147,882 $184,799 $199,348 See Notes to Financial Statements 9

12 Financial Highlights continued (a) Annualized. (d) Per share data is based on average shares outstanding. (f) Ratios do not reflect reductions from fees paid indirectly, if applicable. (k) The total return does not reflect expenses that apply to separate accounts. Inclusion of these charges would reduce the total return figures for all periods shown. (n) Not annualized (r) Certain expenses have been reduced without which performance would have been lower. (s) From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower. (x) The net asset values per share and total returns have been calculated on net assets which include adjustments made in accordance with U.S. generally accepted accounting principles required at period end for financial reporting purposes. See Notes to Financial Statements 10

13 NOTES TO FINANCIAL STATEMENTS (unaudited) MFS Blended Research Core Equity Portfolio (1) Business and Organization MFS Blended Research Core Equity Portfolio (the fund) is a diversified series of MFS Variable Insurance Trust II (the trust). The trust is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. The shareholders of each series of the trust are separate accounts of insurance companies, which offer variable annuity and/or life insurance products, and qualified retirement and pension plans. The fund is an investment company and accordingly follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board (FASB) Accounting Standard Codification Topic 946 Financial Services Investment Companies. (2) Significant Accounting Policies General The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates. In the preparation of these financial statements, management has evaluated subsequent events occurring after the date of the fund s Statement of Assets and Liabilities through the date that the financial statements were issued. In June 2014, FASB issued Accounting Standards Update , Transfers and Servicing (Topic 860) Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures ( ASU ). ASU changes the accounting for repurchase-to-maturity transactions and enhances the required disclosures for repurchase agreements and other similar transactions. Although still evaluating the potential impacts of ASU to the fund, management expects that the impact of the fund s adoption will be limited to additional financial statement disclosures which would first be effective for interim reporting periods beginning after March 15, Balance Sheet Offsetting The fund s accounting policy with respect to balance sheet offsetting is that, absent an event of default by the counterparty or a termination of the agreement, the International Swaps and Derivatives Association (ISDA) Master Agreement does not result in an offset of reported amounts of financial assets and financial liabilities in the Statement of Assets and Liabilities across transactions between the fund and the applicable counterparty. The fund s right to setoff may be restricted or prohibited by the bankruptcy or insolvency laws of the particular jurisdiction to which a specific master netting agreement counterparty is subject. Balance sheet offsetting disclosures, to the extent applicable to the fund, have been included in the fund s Significant Accounting Policies note under the captions for each of the fund s in-scope financial instruments and transactions. Investment Valuations Equity securities, including restricted equity securities, are generally valued at the last sale or official closing price as provided by a third-party pricing service on the market or exchange on which they are primarily traded. Equity securities, for which there were no sales reported that day, are generally valued at the last quoted daily bid quotation as provided by a third-party pricing service on the market or exchange on which such securities are primarily traded. Short-term instruments with a maturity at issuance of 60 days or less generally are valued at amortized cost, which approximates market value. Open-end investment companies are generally valued at net asset value per share. Securities and other assets generally valued on the basis of information from a third-party pricing service may also be valued at a broker/dealer bid quotation. Values obtained from third-party pricing services can utilize both transaction data and market information such as yield, quality, coupon rate, maturity, type of issue, trading characteristics, and other market data. The Board of Trustees has delegated primary responsibility for determining or causing to be determined the value of the fund s investments (including any fair valuation) to the adviser pursuant to valuation policies and procedures approved by the Board. If the adviser determines that reliable market quotations are not readily available, investments are valued at fair value as determined in good faith by the adviser in accordance with such procedures under the oversight of the Board of Trustees. Under the fund s valuation policies and procedures, market quotations are not considered to be readily available for most types of debt instruments and floating rate loans and many types of derivatives. These investments are generally valued at fair value based on information from third-party pricing services. In addition, investments may be valued at fair value if the adviser determines that an investment s value has been materially affected by events occurring after the close of the exchange or market on which the investment is principally traded (such as foreign exchange or market) and prior to the determination of the fund s net asset value, or after the halting of trading of a specific security where trading does not resume prior to the close of the exchange or market on which the security is principally traded. Events that occur on a frequent basis after foreign markets close (such as developments in foreign markets and significant movements in the U.S. markets) and prior to the determination of the fund s net asset value may be deemed to have a material effect on the value of securities traded in foreign markets. Accordingly, the fund s foreign equity securities may often be valued at fair value. The adviser generally relies on third-party pricing services or other information (such as the correlation with price movements of similar securities in the same or other markets; the type, cost and investment characteristics of the security; the business and financial condition of the issuer; and trading and other market data) to assist in determining whether to fair value and at what value to fair value an investment. The value of an investment for purposes of calculating the fund s net asset value can differ 11

14 Notes to Financial Statements (unaudited) continued depending on the source and method used to determine value. When fair valuation is used, the value of an investment used to determine the fund s net asset value may differ from quoted or published prices for the same investment. There can be no assurance that the fund could obtain the fair value assigned to an investment if it were to sell the investment at the same time at which the fund determines its net asset value per share. Various inputs are used in determining the value of the fund s assets or liabilities. These inputs are categorized into three broad levels. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fund s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment. Level 1 includes unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 includes other significant observable market-based inputs (including quoted prices for similar securities, interest rates, prepayment speed, and credit risk). Level 3 includes unobservable inputs, which may include the adviser s own assumptions in determining the fair value of investments. The following is a summary of the levels used as of June 30, 2014 in valuing the fund s assets or liabilities: Investments at Value Level 1 Level 2 Level 3 Total Equity Securities $485,276,452 $ $ $485,276,452 Mutual Funds 1,251,825 1,251,825 Total Investments $486,528,277 $ $ $486,528,277 For further information regarding security characteristics, see the Portfolio of Investments. Indemnifications Under the fund s organizational documents, its officers and Trustees may be indemnified against certain liabilities and expenses arising out of the performance of their duties to the fund. Additionally, in the normal course of business, the fund enters into agreements with service providers that may contain indemnification clauses. The fund s maximum exposure under these agreements is unknown as this would involve future claims that may be made against the fund that have not yet occurred. Investment Transactions and Income Investment transactions are recorded on the trade date. Dividends received in cash are recorded on the ex-dividend date. Certain dividends from foreign securities will be recorded when the fund is informed of the dividend if such information is obtained subsequent to the ex-dividend date. Dividend payments received in additional securities are recorded on the ex-dividend date in an amount equal to the value of the security on such date. The fund may receive proceeds from litigation settlements. Any proceeds received from litigation involving portfolio holdings are reflected in the Statement of Operations in realized gain/loss if the security has been disposed of by the fund or in unrealized gain/loss if the security is still held by the fund. Any other proceeds from litigation not related to portfolio holdings are reflected as other income in the Statement of Operations. Fees Paid Indirectly The fund s custody fee may be reduced according to an arrangement that measures the value of cash deposited with the custodian by the fund. For the six months ended June 30, 2014, custody fees were not reduced. Tax Matters and Distributions The fund intends to qualify as a regulated investment company, as defined under Subchapter M of the Internal Revenue Code, and to distribute all of its taxable income, including realized capital gains. As a result, no provision for federal income tax is required. The fund s federal tax returns, when filed, will remain subject to examination by the Internal Revenue Service for a three year period. Management has analyzed the Fund s tax positions taken on federal and state tax returns for all open tax years and does not believe that there are any uncertain tax positions that require recognition of a tax liability. Distributions to shareholders are recorded on the ex-dividend date. Income and capital gain distributions are determined in accordance with income tax regulations, which may differ from U.S. generally accepted accounting principles. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences which arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary overdistributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes. Book/tax differences primarily relate to wash sale loss deferrals. The tax character of distributions declared to shareholders for the last fiscal year is as follows: 12/31/13 Ordinary income (including any short-term capital gains) $9,239,051 12

15 Notes to Financial Statements (unaudited) continued The federal tax cost and the tax basis components of distributable earnings were as follows: As of 6/30/14 Cost of investments $366,091,158 Gross appreciation 123,429,351 Gross depreciation (2,992,232) Net unrealized appreciation (depreciation) $120,437,119 As of 12/31/13 Undistributed ordinary income 7,682,379 Capital loss carryforwards (33,979,707) Net unrealized appreciation (depreciation) 130,545,884 The aggregate cost above includes prior fiscal year end tax adjustments, if applicable. Under the Regulated Investment Company Modernization Act of 2010 (the Act ), net capital losses recognized for fund fiscal years beginning after December 31, 2010 may be carried forward indefinitely, and their character is retained as short-term and/or long-term losses ( post-enactment losses ). Previously, net capital losses were carried forward for eight years and treated as short-term losses ( pre-enactment losses ). As a transition rule, the Act requires that all post-enactment net capital losses be used before pre-enactment net capital losses. As of December 31, 2013, the fund had capital loss carryforwards available to offset future realized gains. Such pre-enactment losses expire as follows: 12/31/17 $(33,979,707) The availability of $33,979,707 of the capital loss carryforwards of the fund may be limited in a given year due to a change in ownership of the fund on July 31, Multiple Classes of Shares of Beneficial Interest The fund offers multiple classes of shares, which differ in their respective distribution and/or service fees. The fund s income, realized and unrealized gain (loss), and common expenses are allocated to shareholders based on the daily net assets of each class. Dividends are declared separately for each class. Differences in per share dividend rates are generally due to differences in separate class expenses. The fund s distributions declared to shareholders as reported in the Statements of Changes in Net Assets are presented by class as follows: From net investment income Six months ended 6/30/14 Year ended 12/31/13 Initial Class $ $6,891,828 Service Class 2,347,223 Total $ $9,239,051 (3) Transactions with Affiliates Investment Adviser The fund has an investment advisory agreement with MFS to provide overall investment management and related administrative services and facilities to the fund. The management fee is computed daily and paid monthly at an annual rate of 0.55% of the fund s average daily net assets. The investment adviser has agreed in writing to reduce its management fee to 0.40% of average daily net assets. This written agreement will continue until modified by the fund s Board of Trustees, but such agreement will continue at least until April 30, For the six months ended June 30, 2014, this management fee reduction amounted to $362,995, which is included in the reduction of total expenses in the Statement of Operations. MFS has also agreed in writing to reduce its management fee by a specified amount if certain MFS mutual fund assets exceed thresholds agreed to by MFS and the fund s Board of Trustees. For the six months ended June 30, 2014, this management fee reduction amounted to $8,849, which is included in the reduction of total expenses in the Statement of Operations. The management fee incurred for the six months ended June 30, 2014 was equivalent to an annual effective rate of 0.40% of the fund s average daily net assets. Distributor MFS Fund Distributors, Inc. (MFD), a wholly-owned subsidiary of MFS, is the distributor of shares of the fund. The Trustees have adopted a distribution plan for the Service Class shares pursuant to Rule 12b-1 under the Investment Company Act of The fund s distribution plan provides that the fund will pay MFD distribution and/or service fees equal to 0.25% per annum of its average daily net assets attributable to Service Class shares as partial consideration for services performed and expenses incurred by MFD and financial intermediaries (including participating insurance companies that invest in the fund to fund variable annuity and variable life insurance contracts, sponsors of qualified retirement and pension plans that invest in the fund, and affiliates of these 13

16 Notes to Financial Statements (unaudited) continued participating insurance companies and plan sponsors) in connection with the sale and distribution of the Service Class shares. MFD may subsequently pay all, or a portion, of the distribution and/or service fees to financial intermediaries. Shareholder Servicing Agent MFS Service Center, Inc. (MFSC), a wholly-owned subsidiary of MFS, receives a fee from the fund for its services as shareholder servicing agent. For the six months ended June 30, 2014, the fee was $6,536, which equated to % annually of the fund s average daily net assets. MFSC also receives payment from the fund for out-of-pocket expenses paid by MFSC on behalf of the fund. For the six months ended June 30, 2014, these costs amounted to $33. Administrator MFS provides certain financial, legal, shareholder communications, compliance, and other administrative services to the fund. Under an administrative services agreement, the fund partially reimburses MFS the costs incurred to provide these services. The fund is charged an annual fixed amount of $17,500 plus a fee based on average daily net assets. The administrative services fee incurred for the six months ended June 30, 2014 was equivalent to an annual effective rate of % of the fund s average daily net assets. Trustees and Officers Compensation The fund pays compensation to independent Trustees in the form of a retainer, attendance fees, and additional compensation to Board and Committee chairpersons. The fund does not pay compensation directly to Trustees or officers of the fund who are also officers of the investment adviser, all of whom receive remuneration for their services to the fund from MFS. Certain officers and Trustees of the fund are officers or directors of MFS, MFD, and MFSC. Other This fund and certain other funds managed by MFS (the funds) have entered into services agreements (the Agreements) which provide for payment of fees by the funds to Tarantino LLC and Griffin Compliance LLC in return for the provision of services of an Independent Chief Compliance Officer (ICCO) and Assistant ICCO, respectively, for the funds. The funds can terminate the Agreements with Tarantino LLC and Griffin Compliance LLC at any time under the terms of the Agreements. The ICCO is an officer of the funds and the sole member of Tarantino LLC. Prior to June 1, 2014, Robyn L. Griffin served as the Assistant ICCO and was an officer of the funds. Ms. Griffin is the sole member of Griffin Compliance LLC. Effective May 31, 2014, Ms. Griffin resigned as Assistant ICCO and the service agreement between the funds and Griffin Compliance LLC was terminated. For the six months ended June 30, 2014, the aggregate fees paid by the fund to Tarantino LLC and Griffin Compliance LLC were $1,059 and are included in Miscellaneous expense in the Statement of Operations. MFS has agreed to reimburse the fund for a portion of the payments made by the fund in the amount of $520, which is included in the reduction of total expenses in the Statement of Operations. Additionally, MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ICCO and Assistant ICCO. The fund invests in the MFS Institutional Money Market Portfolio which is managed by MFS and seeks current income consistent with preservation of capital and liquidity. Income earned on this investment is included in Dividends from underlying affiliated funds in the Statement of Operations. This money market fund does not pay a management fee to MFS. (4) Portfolio Securities For the six months ended June 30, 2014, purchases and sales of investments, other than short-term obligations, aggregated $75,435,700 and $111,572,054, respectively. (5) Shares of Beneficial Interest The fund s Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest. Transactions in fund shares were as follows: Six months ended 6/30/14 Year ended 12/31/13 Shares Amount Shares Amount Shares sold Initial Class 36,873 $1,784,390 54,971 $2,333,113 Service Class 19, ,514 5, ,518 56,109 $2,709,904 60,191 $2,544,631 Shares issued to shareholders in reinvestment of distributions Initial Class $ 163,468 $6,891,828 Service Class 55,966 2,347,223 $ 219,434 $9,239,051 Shares reacquired Initial Class (535,565) $(26,179,146) (1,218,111) $(51,430,547) Service Class (314,477) (15,231,228) (1,008,597) (42,309,396) (850,042) $(41,410,374) (2,226,708) $(93,739,943) Net change Initial Class (498,692) $(24,394,756) (999,672) $(42,205,606) Service Class (295,241) (14,305,714) (947,411) (39,750,655) (793,933) $(38,700,470) (1,947,083) $(81,956,261) 14

17 Notes to Financial Statements (unaudited) continued (6) Line of Credit The fund and certain other funds managed by MFS participate in a $1.1 billion unsecured committed line of credit, subject to a $1 billion sublimit, provided by a syndication of banks under a credit agreement. Borrowings may be made for temporary financing needs. Interest is charged to each fund, based on its borrowings, generally at a rate equal to the higher of the Federal Reserve funds rate or one month LIBOR plus an agreed upon spread. A commitment fee, based on the average daily, unused portion of the committed line of credit, is allocated among the participating funds at the end of each calendar quarter. In addition, the fund and other funds managed by MFS have established unsecured uncommitted borrowing arrangements with certain banks for temporary financing needs. Interest is charged to each fund, based on its borrowings, at a rate equal to the Federal Reserve funds rate plus an agreed upon spread. For the six months ended June 30, 2014, the fund s commitment fee and interest expense were $1,016 and $0, respectively, and are included in Miscellaneous expense in the Statement of Operations. (7) Transactions in Underlying Affiliated Funds Affiliated Issuers An affiliated issuer may be considered one in which the fund owns 5% or more of the outstanding voting securities, or a company which is under common control. For the purposes of this report, the fund assumes the following to be an affiliated issuer: Underlying Affiliated Fund Beginning Shares/Par Amount Acquisitions Shares/Par Amount Dispositions Shares/Par Amount Ending Shares/Par Amount MFS Institutional Money Market Portoflio 385,807 33,700,254 (32,834,236) 1,251,825 Underlying Affiliated Fund Realized Gain (Loss) Capital Gain Distributions Dividend Income Ending Value MFS Institutional Money Market Portoflio $ $ $918 $1,251,825 15

18 PROXY VOTING POLICIES AND INFORMATION MFS votes proxies on behalf of the fund pursuant to proxy voting policies and procedures that are available without charge, upon request, by calling , by visiting the Proxy Voting section of mfs.com or by visiting the SEC s Web site at Information regarding how the fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 is available without charge by visiting the Proxy Voting section of mfs.com or by visiting the SEC s Web site at QUARTERLY PORTFOLIO DISCLOSURE The fund will file a complete schedule of portfolio holdings with the Securities and Exchange Commission (the Commission) for the first and third quarters of each fiscal year on Form N-Q. The fund s Form N-Q is available on the EDGAR database on the Commission s Internet Web site at and may be reviewed and copied at the: Public Reference Room Securities and Exchange Commission 100 F Street, NE, Room 1580 Washington, D.C Information on the operation of the Public Reference Room may be obtained by calling the Commission at SEC Copies of the fund s Form N-Q also may be obtained, upon payment of a duplicating fee, by electronic request at the following address: publicinfo@sec.gov or by writing the Public Reference Section at the above address. FURTHER INFORMATION From time to time, MFS may post important information about the fund or the MFS funds on the MFS web site (mfs.com). This information is available by visiting Commentary & Announcements and Market Outlooks sections of mfs.com or by clicking on the fund s name under Variable Insurance Portfolios VIT II in the Products section of mfs.com. 16

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