MUNIHOLDINGS
CALIFORNIA
INSURED FUND, INC.
[FUND LOGO]
STRATEGIC
Performance
Semi-Annual Report
February 28, 1998
This report, including the financial information herein, is
transmitted to the shareholders of MuniHoldings California Insured
Fund, Inc. for their information. It is not a prospectus, circular
or representation intended for use in the purchase of shares of the
Fund or any securities mentioned in the report. Past performance
results shown in this report should not be considered a representation
of future performance. The Fund has the ability to leverage its Common
Stock by issuing Preferred Stock to provide the Common Stock
shareholders with a potentially higher rate of return. Leverage creates
risks for Common Stock shareholders, including the likelihood of
greater volatility of net asset value and market price of shares of the
Common Stock, and the risk that fluctuations in the short-term dividend
rates of the Preferred Stock may affect the yield to Common Stock
shareholders. Statements and other information herein are as dated and
are subject to change.
MuniHoldings California
Insured Fund, Inc.
Box 9011
Princeton, NJ
08543-9011 #HOLDCA -- 2/98
[RECYCLE LOGO]
Printed on post-consumer recycled paper
MUNIHOLDINGS CALIFORNIA INSURED FUND, INC.
The Benefits and
Risks of
Leveraging
MuniHoldings California Insured Fund, Inc. has the ability to
leverage to seek to enhance the yield and net asset value of its
Common Stock. However, these objectives cannot be achieved in all
interest rate environments. To leverage, the Fund issues Preferred
Stock, which pays dividends at prevailing short-term interest rates,
and invests the proceeds in long-term municipal bonds. The interest
earned on these investments is paid to Common Stock shareholders in
the form of dividends, and the value of these portfolio holdings
is reflected in the per share net asset value of the Fund's Common
Stock. However, in order to benefit Common Stock shareholders, the
yield curve must be positively sloped; that is, short-term interest
rates must be lower than long-term interest rates. At the same time,
a period of generally declining interest rates will benefit Common
Stock shareholders. If either of these conditions change, then the
risks of leveraging will begin to outweigh the benefits.
To illustrate these concepts, assume a fund's Common Stock
capitalization of $100 million and the issuance of Preferred Stock
for an additional $50 million, creating a total value of $150
million available for investment in long-term municipal bonds. If
prevailing short-term interest rates are approximately 3% and long-
term interest rates are approximately 6%, the yield curve has a
strongly positive slope. The fund pays dividends on the $50 million
of Preferred Stock based on the lower short-term interest rates. At
the same time, the fund's total portfolio of $150 million earns the
income based on long-term interest rates. Of course, increases in
short-term interest rates would reduce (and even eliminate) the
dividends on the Common Stock.
In this case, the dividends paid to Preferred Stock shareholders
are significantly lower than the income earned on the fund's long-
term investments, and therefore the Common Stock shareholders are
the beneficiaries of the incremental yield. However, if short-term
interest rates rise, narrowing the differential between short-term
and long-term interest rates, the incremental yield pickup on the
Common Stock will be reduced or eliminated completely. At the same
time, the market value of the fund's Common Stock (that is, its
price as listed on the New York Stock Exchange) may, as a result,
decline. Furthermore, if long-term interest rates rise, the Common
Stock's net asset value will reflect the full decline in the price
of the portfolio's investments, since the value of the fund's
Preferred Stock does not fluctuate. In addition to the decline in
net asset value, the market value of the fund's Common Stock may
also decline.
Managed Dividend
Policy
The Fund's dividend policy is to distribute substantially all of its
net investment income to its shareholders on a monthly basis.
However, in order to provide shareholders with a more consistent
yield to the current trading price of shares of Common Stock of the
Fund, the Fund may at times pay out less than the entire amount of
net investment income earned in any particular month and may at
times in any particular month pay out such accumulated but
undistributed income in addition to net investment income earned in
that month. As a result, the dividends paid by the Fund for any
particular month may be more or less than the amount of net
investment income earned by the Fund during such month. The Fund's
current accumulated but undistributed net investment income, if any,
is disclosed in the Statement of Assets, Liabilities and Capital,
which comprises part of the financial information included in this
report.
MuniHoldings California Insured Fund, Inc., February 28, 1998
DEAR SHAREHOLDER
We are pleased to provide you with this first semi-annual report for
MuniHoldings California Insured Fund, Inc. In this and future
reports to shareholders, we will highlight the Fund's performance,
describe the recent investment environment and outline investment
activities. The Fund seeks to provide shareholders with current
income exempt from Federal and California income taxes by investing
in a portfolio of long-term, investment grade municipal obligations.
Since inception (September 19, 1997) through February 28, 1998, the
Common Stock of MuniHoldings California Insured Fund, Inc. earned
$0.398 per share income dividends, which included earned and unpaid
dividends of $0.071. This represents a net annualized yield of
5.73%, based on a month-end per share net asset value of $15.57.
Over the same period, the total investment return on the Fund's
Common Stock was +6.01%, based on a change in per share net asset
value from $15.00 to $15.57, and assuming reinvestment of $0.327 per
share income dividends.
Since inception (September 19, 1997) through February 28, 1998, the
Fund's Preferred Stock had an average yield of 2.70% for Series A
and 2.74% for Series B.
The Municipal Market Environment
During the six months ended February 28, 1998, bond yields declined
to recent historic lows. Prior to late October, the ongoing positive
combination of moderate economic growth and low inflation had
allowed interest rates to gradually move lower. More recently,
however, the decline in interest rates was driven more by the
continued turmoil in Asian equity markets than by fundamental
concerns. A significant "flight to quality" has benefited the US
Treasury bond market, particularly longer-maturity US Treasury
bonds, as foreign investors have sought safe haven in the relative
stability of US financial markets. Over the six months ended
February 28, 1998, US Treasury bond yields declined approximately 70
basis points (0.70%) to 5.92%. Long-term municipal revenue bonds, as
measured by the Bond Buyer Revenue Bond Index, declined over 30
basis points to end the February period at 5.36%. Tax-exempt bond
yields have not been at these levels since the mid-1970s.
Without the ability to benefit from the tax advantage inherent in
municipal bonds, foreign investors have not participated to any
significant extent in the tax-exempt market. Consequently, municipal
bond yields have not declined as dramatically as have taxable US
Treasury securities. The increase in new municipal bond issuance
over the past six months has also prevented the tax-exempt bond
market from more closely mirroring the yield declines exhibited by
its taxable counterpart. Over the last six months, over $125 billion
in new long-term municipal bonds were underwritten, an increase of
over 35% compared to the same six-month period one year ago. As
interest rates have continued to decline in recent months, new tax-
exempt bond issuance has remained strong. Over $60 billion in new
long-term municipal securities were issued during the last three
months, an increase of over 40% compared to the same three-month
period ended February 28, 1997. During the past month, over $20
billion in new long-term municipal securities were underwritten,
representing an increase of over 50% compared to the February 1997
level and the largest February issuance ever.
In our opinion, the recent correction in world equity markets has
enhanced the near-term prospects for continued low, if not
declining, interest rates in the United States. It is likely that
the recent correction will result in slower US domestic growth in
the coming months. This decline should be generated in part by
reduced US export growth. Going forward, Asian consumer demand for
US products is likely to decline in response to diminished Asian
economic growth. Perhaps more important, it is likely that, barring
a dramatic and unexpected resurgence in domestic growth and
inflation, the Federal Reserve Board will be unwilling to raise
interest rates until the full impact of the recent Asian market
turmoil can be established.
All of these factors suggest that over the near term, interest
rates, including tax-exempt bond yields, are unlikely to rise by any
appreciable amount. It is probable that municipal bond yields will
remain under some relative pressure because of continued strong new-
issue supply. However, the recent pace of municipal bond issuance is
likely to be unsustainable. Continued increases in bond issuance
will require lower and lower tax-exempt bond yields to generate the
economic savings necessary for additional municipal bond
refinancings. Preliminary estimates of 1998 total municipal bond
issuance are presently in the $200 billion--$225 billion range.
These estimates suggest that recent supply pressures are likely to
abate somewhat next year, or at least exert only minimal technical
pressure during 1998. Additionally, municipal bond investors
received approximately $30 billion in January and February coupon
payments, bond maturities and proceeds from early redemptions, which
should serve to intensify investor demand in the near future. With
tax-exempt bond yields at already attractive yield ratios relative
to US Treasury bonds (approximately 90% at the end of February
1998), any further pressure on the municipal market may well
represent an attractive investment opportunity.
Portfolio Strategy
Since the Fund's inception, our primary strategy has been to
maintain a fully invested position. This aggressive stance enabled
the Fund to perform extremely well in the declining interest rate
environment recently witnessed in the tax-exempt municipal bond
market. Although the market is bound to experience volatility when
setbacks occur, it is our opinion that these instances should be
short lived. A slow growth, low inflation economic environment
should continue to supply a positive backdrop for debt securities,
and the relatively tight technical supply/demand outlook for
municipal bonds will cushion any temporary down moves in tax-exempt
bond prices. Since the Fund is aggressively structured, our strategy
going forward will be concentrated more toward improving the call
features of the underlying securities in the portfolio and adjusting
the sector diversity of the holdings. As a result of the
historically tight credit quality spreads, we favored overweighting
the position of Fund assets in AAA-enhanced securities. At February
28, 1998, 86% of the Fund's assets was invested in securities rated
AAA by at least one of the major rating agencies.
In Conclusion
We appreciate your ongoing interest in MuniHoldings California
Insured Fund, Inc., and we look forward to assisting you with your
financial needs in the months and years ahead.
Sincerely,
/S/ARTHUR ZEIKEL
Arthur Zeikel
President
/S/VINCENT R. GIORDANO
Vincent R. Giordano
Senior Vice President
/S/WALTER C. O'CONNOR
Walter C. O'Connor
Vice President and Portfolio Manager
April 1, 1998
Portfolio Insurance
MuniHoldings California Insured Fund, Inc. seeks to provide its
shareholders with the benefits of an insured municipal bond
portfolio. Previously, the Fund generally achieved this objective by
limiting at least 80% of portfolio investments to municipal bonds
insured under policies obtained by the issuer or another party,
including the Fund itself, and issued by insurance carriers with
claims paying ability ratings of AAA or its equivalent from at least
two nationally recognized rating agencies, such as Standard & Poor's
Ratings Services, Moody's Investors Service, Inc., or Fitch IBCA,
Inc. In order to increase the Fund's flexibility to obtain
appropriate investments, the Fund has modified its practice with
respect to the ratings criteria it applies to the carriers that
provide insurance for the municipal bonds in its portfolio.
Currently, the Fund may also invest in municipal bonds insured by,
or may itself purchase an insurance policy for all or a portion of
its municipal bond portfolio from, an insurance carrier with a
claims paying ability rating of AAA or its equivalent from at least
one of such nationally recognized rating agencies. There can be no
assurance that insurance of the kind described above will continue
to be available to the Fund, and the Fund has reserved its right to
modify its criteria for portfolio insurance, or discontinue its
policy of maintaining an insured portfolio if such insurance is no
longer available or if the cost of such insurance outweighs its
benefits to the Fund. Although we periodically review the financial
condition of each insurer, there can be no assurance that the
insurers will be able to honor their obligations under the
circumstances of any claim thereunder.
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (in Thousands)
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <C> <C>
California -- 98.9% AAA Aaa $3,345 ABC California Unified School District, UT,
Series A, 5.625% due 8/01/2020 (b) $3,513
AAA Aaa 1,220 California Community College, Financing Authority,
Lease Revenue Bonds (West Valley -- Mission Community
College), 5.50% due 5/01/2017 (c) 1,279
California HFA, Home Mortgage Revenue Bonds, AMT:
AAA Aaa 5,000 Series B, 5.15% due 2/01/2018 (e) 4,957
AAA Aaa 4,125 Series E, 6.10% due 8/01/2029 (e) 4,358
AAA Aaa 1,000 Series I, 5.75% due 2/01/2029 (c) 1,036
AAA Aaa 4,600 Series M, 5.60% due 8/01/2029 (c) 4,708
AAA Aaa 6,355 California HFA, S/F Mortgage, AMT, Series C-2, Class
II, Revenue Bonds, 5.625% due 8/01/2020 (c) 6,547
California Health Facilities Financing Authority
Revenue Bonds:
AAA Aaa 10,000 RITR, Series 17, 7.42% due 8/15/2030 (c)(d) 10,513
A1+ VMIG1+ 4,000 VRDN (Pooled Loan Program), Series 85-B, 3.35% due
10/01/2010 (a)(f) 4,000
California Health Facilities Financing Authority, Revenue
Refunding Bonds (Children's Hospital) (c):
AAA Aaa 2,500 5.375% due 7/01/2016 2,565
AAA Aaa 4,500 5.375% due 7/01/2020 4,558
California Health Facilities Financing Authority, Revenue
Refunding Bonds (Sutter Health Hospital):
AAA Aaa 5,000 Series C, 5.125% due 8/15/2022 (b) 4,921
A1+ VMIG1+ 700 VRDN, Series B, 3.65% due 7/01/2012 (a)(e) 700
A1+ VMIG1+ 400 VRDN, Series C, 3.65% due 7/01/2022 (a)(b) 400
California Pollution Control Financing Authority, PCR,
Refunding (Pacific Gas and Electric Co.), VRDN (a):
A1+ NR* 1,600 Series C, 3.55% due 11/01/2026 1,600
A1+ NR* 700 Series F, 3.60% due 11/01/2026 700
California State Public Works Board, Lease Revenue Bonds
(e):
AAA Aaa 2,000 (Department of Corrections), Series A, 5.50% due 1/01/2017 2,088
AAA Aaa 2,625 Refunding (California Community Collateral), Series B,
5.625% due 3/01/2019 2,738
AAA Aaa 3,000 Refunding (University of California Project), Series A,
5.40% due 12/01/2016 3,118
AAA Aaa 9,620 California State Veterans, AMT, Series BH, 5.50% due
12/01/2024 (b) 9,738
California Statewide Communities Development Authority,
COP:
AAA Aaa 2,500 (John Muir/Mount Diablo Health Systems), 5.25% due
8/15/2027 (c) 2,496
AA Aa3 5,000 Refunding (Saint Joseph Health Systems), 5.125% due
7/01/2017 4,924
AAA Aaa 3,690 Contra Costa County, California, COP, Refunding (Merrithew
Memorial Hospital Project), 5.50% due 11/01/2022 (c) 3,815
AAA Aaa 7,000 El Dorado County, California, Public Agency Financing
Authority, Revenue Refunding Bonds, 5.50% due 2/15/2021 (f) 7,228
AAA Aaa 1,305 Glendale, California, Unified School District, Series A,
5.375% due 9/01/2022 (f) 1,331
AAA Aaa 6,200 Los Angeles, California, Department of Water and Power,
RITR (Electric Plant), Series 1B, 5.40% due 11/15/2031
(d)(f) 6,371
AAA Aaa 4,275 Los Angeles, California, M/F Mortgage Revenue Refunding
Bonds, Senior Series G, 5.65% due 1/01/2014 (b) 4,386
AAA Aaa 3,000 Los Angeles, California, Unified School District, COP
(Multiple Properties Project), Series A, 5.50% due
10/01/2016 (b) 3,145
AAA Aaa 10,000 Los Angeles County, California, Metropolitan
Transportation Authority, Sales Tax Revenue Refunding
Bonds, Property A, First Tier, Senior Series A, 5.25% due
7/01/2027 (c) 10,031
AAA Aaa 1,750 Metropolitan Water District, Southern California,
Waterworks Revenue Bonds, Series A, 5.50% due 7/01/2025
(c) 1,804
AAA Aaa 2,000 Montebello, California, Community Redevelopment Agency,
Tax Allocation Housing, Series A, 5.45% due 9/01/2019 (b) 2,046
AAA Aaa 16,000 Norco, California, Redevelopment Agency, Tax Allocation,
Refunding (Norco Redevelopment Project Area No. 1), 5.75%
due 3/01/2026 (c) 17,032
AAA Aaa 3,600 Northern California, Transmission Revenue Bonds, RITR,
Series 16, 7.12% due 5/01/2020 (c)(d) 3,614
AAA Aaa 1,300 Oakland, California, GO, UT, Series C, Measure K, 5.80%
due 12/15/2018 (c) 1,390
Palm Desert, California, Financing Authority, Tax
Allocation Revenue Bonds (c):
AAA Aaa 2,500 5.10% due 10/01/2027 2,448
AAA Aaa 5,750 Refunding (Project Area No. 1), 5.45% due 4/01/2018 5,967
AAA Aaa 5,000 Pittsburg, California, Public Financing Authority, Water
Revenue Bonds, 5.50% due 6/01/2027 (c) 5,178
AAA Aaa 7,500 Pittsburg, California, Redevelopment Agency, Tax
Allocation (Los Medanos Project Area), Series B, 5.70% due
8/01/2032 (b) 8,115
Port Oakland, California, Port Revenue Bonds (c):
AAA Aaa 2,000 AMT, Series G, 5.375% due 11/01/2025 2,015
AAA Aaa 7,000 Series J, 5.50% due 11/01/2026 7,256
San Francisco, California, City and County Airport
Commission, International Airport Revenue Bonds, AMT,
Second Series:
AAA Aaa 2,000 Issue 10-A, 5.70% due 5/01/2026 (c) 2,099
AAA Aaa 6,000 Issue 12-A, 5.80% due 5/01/2021 (f) 6,327
AAA Aaa 10,000 San Francisco, California, State Building Authority, Lease
Revenue Bonds (San Francisco Civic Center Complex),
Series A, 5.25% due 12/01/2021 (e) 10,015
AAA Aaa 1,500 Saratoga, California, Unified School District, UT,
Series A, 5.375% due 9/01/2017 (f) 1,547
AAA Aaa 7,750 Southern California Public Power Authority, Revenue
Refunding Bonds (Transmission Project), Crossover, 5.75%
due 7/01/2021 (c) 8,101
AAA Aaa 4,000 University of California, Hospital Revenue Bonds
(University California Davis Medical Center), 5.75% due
7/01/2024 (e) 4,237
Puerto Rico -- 8.1% A Baa1 8,000 Puerto Rico Commonwealth, Highway and Transportation
Authority, Highway Revenue Bonds, Series Y, 5.50% due
7/01/2026 8,215
A Baa1 8,715 Puerto Rico Commonwealth, Refunding Bonds (Public
Improvement), 5.375% due 7/01/2025 8,820
------------
Total Investments (Cost -- $219,073) -- 107.0% 223,990
Liabilities in Excess of Other Assets -- (7.0%) (14,747)
------------
Net Assets -- 100.0% $209,243
============
(a) The interest rate is subject to change periodically based upon prevailing
market rates. The interest rate shown is the rate in effect at
February 28, 1998.
(b) FSA Insured.
(c) MBIA Insured.
(d) The interest rate is subject to change periodically and inversely based
upon prevailing market rates. The interest rate shown is the rate in
effect at February 28, 1998.
(e) AMBAC Insured.
(f) FGIC Insured.
* Not Rated.
+ Highest short-term ratings by Moody's Investors Service, Inc.
Quality Profile
The quality ratings of securities in the Fund as of February 28, 1998
were as follows:
Percent of
S&P Rating/Moody's Rating Net Assets*
AAA/Aaa 93.0%
AA/Aa 2.4
A/A 8.1
Other+ 3.5
+ Temporary investments in short-term municipal securities.
* Total may not equal 100%.
Portfolio
Abbreviations
To simplify the listings of MuniHoldings California Insured Fund, Inc.'s
portfolio holdings in the Schedule of Investments, we have abbreviated
the names of many of the securities according to the list below and at
right.
AMT Alternative Minimum Tax (subject to)
COP Certificates of Participation
GO General Obligation Bonds
HFA Housing Finance Agency
M/F Multi-Family
PCR Pollution Control Revenue Bonds
RITR Residual Interest Trust Receipts
S/F Single-Family
UT Unlimited Tax
VRDN Variable Rate Demand Notes
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
As of February 28, 1998
<S> <C> <C> <C>
Assets: Investments, at value (identified cost -- $219,073,485) (Note 1a) $223,989,849
Cash 154,847
Receivables:
Securities sold $20,638,170
Interest 2,486,542 23,124,712
------------
Deferred organization expenses (Note 1e) 13,493
------------
Total assets 247,282,901
------------
Liabilities: Payables:
Securities purchased 37,700,502
Dividends to shareholders (Note 1f) 86,345
Investment adviser (Note 2) 20,496 37,807,343
------------
Accrued expenses and other liabilities 232,103
------------
Total liabilities 38,039,446
------------
Net Assets: Net assets $209,243,455
============
Capital: Capital Stock (200,000,000 shares authorized) (Note 4):
Preferred Stock, par value $.10 per share (3,200 shares of AMPS*
issued and outstanding at $25,000 per share liquidation preference) $80,000,000
Common Stock, par value $.10 per share (8,298,983 shares issued and
outstanding) $829,898
Paid-in capital in excess of par 122,576,432
Undistributed investment income -- net 620,478
Undistributed realized capital gains on investments -- net 300,283
Unrealized appreciation on investments -- net 4,916,364
------------
Total -- Equivalent to $15.57 net asset value per share of Common Stock
(market price -- $15.3125) 129,243,455
------------
Total capital $209,243,455
============
* Auction Market Preferred Stock.
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
For the Period September 19, 1997+ to February 28, 1998
<S> <C> <C> <C>
Investment Interest and amortization of premium and discount earned $4,558,873
Income (Note 1d):
Expenses: Investment advisory fees (Note 2) $487,253
Commission fees (Note 4) 74,325
Professional fees 20,413
Accounting services (Note 2) 17,943
Directors' fees and expenses 10,598
Transfer agent fees 9,002
Custodian fees 7,896
Listing fees 7,175
Printing and shareholder reports 3,515
Pricing fees 2,593
Amortization of organization expenses (Note 1e) 669
Other 6,595
------------
Total expenses before reimbursement 647,977
Reimbursement of expenses (Note 2) (398,264)
------------
Total expenses after reimbursement 249,713
------------
Investment income -- net 4,309,160
------------
Realized & Realized gain on investments -- net 300,283
Unrealized Gain on Unrealized appreciation on investments -- net 4,916,364
Investments -- ------------
Net (Notes 1b, 1d & 3): Net Increase in Net Assets Resulting from Operations $9,525,807
============
+ Commencement of operations.
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
For the Period
Sept. 19, 1997+
Increase (Decrease) in Net Assets: to Feb. 28, 1998
<S> <C> <C>
Operations: Investment income -- net $4,309,160
Realized gain on investments -- net 300,283
Unrealized appreciation on investments -- net 4,916,364
------------
Net increase in net assets resulting from operations 9,525,807
------------
Dividends to Investment income -- net:
Shareholders Common Stock (2,712,170)
(Note 1f): Preferred Stock (976,512)
------------
Net decrease in net assets resulting from dividends to shareholders (3,688,682)
------------
Capital Stock Proceeds from issuance of Common Stock 124,200,000
Transactions Proceeds from issuance of Preferred Stock 80,000,000
(Notes 1e & 4): Value of shares issued to Common Stock shareholders in reinvestment of dividends 191,130
Offering and underwriting costs resulting from the issuance of Common Stock (304,402)
Offering and underwriting costs resulting from the issuance of Preferred Stock (780,403)
------------
Net increase in net assets derived from capital stock transactions 203,306,325
------------
Net Assets: Total increase in net assets 209,143,450
Beginning of period 100,005
------------
End of period* $209,243,455
============
* Undistributed investment income -- net $620,478
============
+ Commencement of operations.
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
The following per share data and ratios have been derived
from information provided in the financial statements. For the Period
Sept. 19, 1997+
to Feb. 28, 1998
Increase (Decrease) in Net Asset Value:
<S> <C> <C>
Per Share Net asset value, beginning of period $15.00
Operating ------------
Performance: Investment income -- net .52
Realized and unrealized gain on investments -- net .64
------------
Total from investment operations 1.16
------------
Less dividends to Common Stock shareholders:
Investment income -- net (.33)
------------
Capital charge resulting from issuance of Common Stock (.04)
------------
Effect of Preferred Stock activity:++
Dividends to Preferred Stock shareholders:
Investment income -- net (.12)
Capital charge resulting from issuance of Preferred Stock (.10)
------------
Total effect of Preferred Stock activity (.22)
------------
Net asset value, end of period $15.57
============
Market price per share, end of period $15.3125
============
Total Investment Based on market price per share 4.26%++++
Return:** ============
Based on net asset value per share 6.01%++++
============
Ratios to Average Expenses, net of reimbursement .28%*
Net Assets:*** ============
Expenses .73%*
============
Investment income -- net 4.86%*
============
Supplemental Net assets, net of Preferred Stock, end of period (in thousands) $129,243
Data: ============
Preferred Stock outstanding, end of period (in thousands) $80,000
============
Portfolio turnover 57.45%
============
Leverage: Asset coverage per $1,000 $2,616
============
Dividends Series A -- Investment income -- net $303
Per Share on ============
Preferred Stock Series B -- Investment income -- net $308
Outstanding: ============
* Annualized.
** Total investment returns based on market value, which can be significantly
greater or lesser than the net asset value, may result in substantially different
returns. Total investment returns exclude the effects of sales loads.
*** Do not reflect the effect of dividends to Preferred Stock shareholders.
+ Commencement of operations.
++ The Fund's Preferred Stock was issued on October 7, 1997.
++++ Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
MuniHoldings California Insured Fund, Inc. (the "Fund") is
registered under the Investment Company Act of 1940 as a non-
diversified, closed-end management investment company. These
unaudited financial statements reflect all adjustments which are, in
the opinion of management, necessary to a fair statement of the
results for the interim period presented. All such adjustments are
of a normal recurring nature. Prior to commencement of operations on
September 19, 1997, the Fund had no operations other than those
relating to organizational matters and the sale of 6,667 shares of
Common Stock on September 16, 1997 to Fund Asset Management, L.P.
("FAM") for $100,005. The Fund will determine and make available for
publication the net asset value of its Common Stock on weekly basis.
The Fund's Common Stock is listed on the New York Stock Exchange
under the symbol CLH. The following is a summary of significant
accounting policies followed by the Fund.
(a) Valuation of investments -- Municipal bonds are traded primarily
in the over-the-counter markets and are valued at the most recent
bid price or yield equivalent as obtained by the Fund's pricing
service from dealers that make markets in such securities. Financial
futures contracts and options thereon, which are traded on
exchanges, are valued at their closing price as of the close of such
exchanges. Options, which are traded on exchanges, are valued at
their last sale price as of the close of such exchanges or, lacking
any sales, at the last available bid price. Securities with
remaining maturities of sixty days or less are valued at amortized
cost, which approximates market value. Securities and assets for
which market quotations are not readily available are valued at fair
value as determined in good faith by or under the direction of the
Board of Directors of the Fund, including valuations furnished by a
pricing service retained by the Fund, which may utilize a matrix
system for valuations. The procedures of the pricing service and its
valuations are reviewed by the officers of the Fund under the
general supervision of the Board of Directors.
(b) Derivative financial instruments -- The Fund may engage in
various portfolio strategies to seek to increase its return by
hedging its portfolio against adverse movements in the debt markets.
Losses may arise due to changes in the value of the contract or if
the counterparty does not perform under the contract.
[bullet] Financial futures contracts -- The Fund may purchase or
sell financial futures contracts and options on such futures
contracts for the purpose of hedging the market risk on existing
securities or the intended purchase of securities. Futures contracts
are contracts for delayed delivery of securities at a specific
future date and at a specific price or yield. Upon entering into a
contract, the Fund deposits and maintains as collateral such initial
margin as required by the exchange on which the transaction is
effected. Pursuant to the contract, the Fund agrees to receive from
or pay to the broker an amount of cash equal to the daily
fluctuation in value of the contract. Such receipts or payments are
known as variation margin and are recorded by the Fund as unrealized
gains or losses. When the contract is closed, the Fund records a
realized gain or loss equal to the difference between the value of
the contract at the time it was opened and the value at the time it
was closed.
[bullet] Options -- The Fund is authorized to write covered call
options and purchase put options. When the Fund writes an option, an
amount equal to the premium received by the Fund is reflected as an
asset and an equivalent liability. The amount of the liability is
subsequently marked to market to reflect the current market value of
the option written.
When a security is purchased or sold through an exercise of an
option, the related premium paid (or received) is added to (or
deducted from) the basis of the security acquired or deducted from
(or added to) the proceeds of the security sold. When an option
expires (or the Fund enters into a closing transaction), the Fund
realizes a gain or loss on the option to the extent of the premiums
received or paid (or gain or loss to the extent the cost of the
closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
(c) Income taxes -- It is the Fund'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 income to its shareholders. Therefore, no Federal income tax
provision is required.
(d) Security transactions and investment income -- Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Interest income is recognized on the accrual
basis. Discounts and market premiums are amortized into interest
income. Realized gains and losses on security transactions are
determined on the identified cost basis.
(e) Deferred organization and offering expenses -- Deferred
organization expenses are amortized on a straight-line basis over a
five-year period. Direct expenses relating to the public offering of
the Fund's Common and Preferred Stock were charged to capital at the
time of issuance of the shares.
(f) Dividends and distributions -- Dividends from net investment
income are declared and paid monthly. Distributions of capital gains
are recorded on the ex-dividend dates.
2. Investment Advisory Agreement and Transactions
with Affiliates:
The Fund has entered into an Investment Advisory Agreement with FAM.
The general partner of FAM is Princeton Services, Inc. ("PSI"), an
indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML &
Co."), which is the limited partner.
FAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee at an annual rate of 0.55% of
the Fund's average weekly net assets, including any proceeds from
the sale of Preferred Stock. For the period September 19, 1997 to
February 28, 1998, FAM earned fees of $487,253, of which $398,264
was voluntarily waived.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of FAM, PSI, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the period September 19, 1997 to February 28, 1998 were
$303,784,424 and $92,307,966, respectively.
Net realized gains for the period September 19, 1997 to February 28,
1998 and net unrealized gains as of February 28, 1998 were as
follows:
Realized Unrealized
Gains Gains
Long-term investments $214,523 $4,916,364
Short-term investments 5,810 --
Financial futures contracts 79,950 --
------------ ------------
Total $300,283 $4,916,364
============ ============
As of February 28, 1998, net unrealized appreciation for Federal
income tax purposes aggregated $4,916,364, of which $5,200,108
related to appreciated securities and $283,744 related to
depreciated securities. The aggregate cost of investments at
February 28, 1998 for Federal income tax purposes was $219,073,485.
4. Capital Stock Transactions:
The Fund is authorized to issue 200,000,000 shares of capital stock,
including Preferred Stock, par value $.10 per share, all of which
were initially classified as Common Stock. The Board of Directors is
authorized, however, to reclassify any unissued shares of capital
stock without approval of holders of Common Stock.
Common Stock
Shares issued and outstanding during the period September 19, 1997
to February 28, 1998, increased by 8,280,000 from shares sold and by
12,316 as a result of dividend reinvestment.
Preferred Stock
Auction Market Preferred Stock ("AMPS") are shares of Preferred
Stock of the Fund that entitle their holders to receive cash
dividends at an annual rate that may vary for the successive
dividend periods. The yields in effect at February 28, 1998 were as
follows: Series A, 2.206% and Series B, 3.20%.
As of February 28, 1998, there were 3,200 AMPS shares authorized,
issued and outstanding with a liquidation preference of $25,000 per
share.
The Fund pays commissions to certain broker-dealers at the end of
each auction at an annual rate ranging from 0.25% to 0.375%,
calculated on the proceeds of each auction. For the period September
19, 1997 to February 28, 1998, Merrill Lynch, Pierce Fenner & Smith
Inc., an affiliate of FAM, earned $75,757 as commissions.
5. Subsequent Event:
On March 9, 1998, the Fund's Board of Directors declared an ordinary
income dividend to Common Stock shareholders in the amount of
$.071272 per share, payable on March 30, 1998 to shareholders of
record as of March 23, 1998.
OFFICERS AND DIRECTORS
Arthur Zeikel, President and Director
Ronald W. Forbes, Director
Cynthia A. Montgomery, Director
Charles C. Reilly, Director
Kevin A. Ryan, Director
Richard R. West, Director
Terry K. Glenn, Executive Vice President
Vincent R. Giordano, Senior Vice President
Donald C. Burke, Vice President
Kenneth A. Jacob, Vice President
Walter C. O'Connor, Vice President
Gerald M. Richard, Treasurer
Patrick D. Sweeney, Secretary
Custodian
The Bank of New York
90 Washington Street
New York, NY 10286
Transfer Agents
Common Stock:
The Bank of New York
101 Barclay Street
New York, NY 10286
Preferred Stock:
IBJ Schroder Bank & Trust Company
One State Street
New York, NY 10004
NYSE Symbol
CLH
