MUNIHOLDINGS
CALIFORNIA
INSURED FUND, INC.
[GRAPHIC OMITTED]
STRATEGIC
Performance
Annual Report
August 31, 1998
<PAGE>
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 on 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.
As a part of its investment strategy, the Fund may invest in certain securities
whose potential income return is inversely related to changes in a floating
interest rate ("inverse floaters"). In general, interest rates on inverse
floaters will decrease when short-term interest rates increase and increase when
short-term interest rates decrease. Investments in inverse floaters may be
characterized as derivative securities and may subject the Fund to the risks of
reduced or eliminated interest payments and losses of invested principal. In
addition, inverse floaters have the effect of providing investment leverage and,
as a result, the market value of such securities will generally be more volatile
than that of fixed-rate, tax-exempt securities. To the extent the Fund invests
in inverse floaters, the market value of the Fund's portfolio and the net asset
value of the Fund's shares may also be more volatile than if the Fund did not
invest in such securities.
<PAGE>
MuniHoldings California Insured Fund, Inc., August 31, 1998
DEAR SHAREHOLDER
Since inception (September 19, 1997) through August 31, 1998, the Common Stock
of MuniHoldings California Insured Fund, Inc. earned $0.825 per share income
dividends, which included earned and unpaid dividends of $0.074. This represents
a net annualized yield of 5.47%, based on a month-end per share net asset value
of $15.88. Over the same period, the total investment return on the Fund's
Common Stock was +11.16%, based on a change in per share net asset value from
$15.00 to $15.88, and assuming reinvestment of $0.752 per share income
dividends.
For the six months ended August 31, 1998, total investment return on the Fund's
Common Stock was +4.85%, based on a change in per share net asset value from
$15.57 to $15.88, and assuming reinvestment of $0.425 per share income
dividends.
For the six months ended August 31, 1998, the Fund's Preferred Stock had an
average yield of 3.45% for Series A and 3.44% for Series B.
The Municipal Market Environment
Long-term tax-exempt bond yields declined slightly during the six months ended
August 31, 1998. Throughout most of this year, foreign economic factors have
continued to outweigh US domestic fundamentals. Thus far this year, the near
absence of inflationary pressures in the United States continued to support low
interest rates. Consistently strong domestic economic growth has caused some
investors to fear that the Federal Reserve Board would be forced eventually to
raise short-term interest rates. This action would be taken to ensure that the
US economy's present rate of growth would decelerate before any inflationary
pressures could develop. However, the weakening financial conditions in many
Asian countries, combined with the currency devaluation in Russia, calmed
investor concerns of Federal Reserve Board intervention, and fixed-income bond
prices again moved higher. As measured by the Bond Buyer Revenue Bond Index,
long-term uninsured municipal bond yields fell approximately 10 basis points
(0.10%) to end the six-month period at 5.26%. As in late 1997 and early 1998, US
Treasury bond yields benefited from a "flight to quality" as foreign investors
were drawn to the relative safe haven of US Government securities. Additionally,
the sharp US equity market correction at the end of August triggered an
additional flight into US Treasury securities. Long-term US Treasury bond yields
declined approximately 70 basis points to end the six-month period at 5.21%.
Thus far in 1998, the municipal bond market has experienced unexpectedly strong
supply pressures. To a large extent these supply pressures have prevented
tax-exempt bond yields from declining as much as US Treasury bond yields. During
the first eight months of 1998, almost $150 billion in new tax-exempt bonds were
underwritten, an increase of about 40% compared to the same period a year ago.
During the most recent three months, municipalities issued almost $75 billion in
new securities, an increase of nearly 25% compared to the same three-month
period in 1997.
However, the recent pace of new municipal bond issuance is unlikely to be
maintained. Continued increases in bond issuance will require lower and lower
municipal bond yields to generate the economic savings necessary for additional
tax-exempt bond refinancings. Preliminary estimates for 1998 total municipal
bond issuance are in the $200 billion-$225 billion range. These estimates
suggest that recent supply pressures, which have lessened recently, are likely
to abate further later in the year.
The continued impact of the Asian financial crisis on the US domestic economy's
future growth remains unclear. Current Asian economic conditions continue to
reflect ongoing weakness. Recent trade data indicated that reduced US exports to
these countries might have lowered US economic growth in the first half of 1998
by as much as 2%. Since further trade deterioration is likely in the coming
months, we do not believe the Federal Reserve Board will be willing to raise
interest rates, barring a dramatic and unexpected resurgence of domestic
inflation.
These factors suggest that over the near term, interest rates in general are
unlikely to rise by any appreciable amount. Recent supply pressures have caused
municipal bond yield ratios to rise relative to US Treasury bond yields. At
August 31, 1998, long-term tax-exempt bond yields were at attractive yield
ratios relative to US Treasury securities of comparable maturities (over 90%),
well in excess of their expected range of 85%-88%. Tax-exempt bond yield ratios
have rarely exceeded 90% in the 1980s and 1990s. Previous instances have usually
been associated with potential changes in Federal tax codes that would have
adversely affected the tax-favored status of municipal bonds. The present
situation has developed largely because of a temporary supply imbalance. These
imbalances should soon be corrected as tax-exempt bond issuance slows from its
current rapid pace later this year. Any further pressure on the municipal market
may well represent a very attractive investment opportunity.
Portfolio Strategy
Since the Fund's inception, our primary strategy has been to seek to offer a
high level of tax-exempt income to the Fund's Common Stock shareholders. We
accomplished this by maintaining a fully invested position in long-term insured
California securities, which was a good strategy given this year's trend toward
lower interest rates. During the six-month period ended August 31, 1998, a
combination of several positive technical and economic factors contributed to an
environment where the fixed-income markets, particularly the tax-exempt market,
reached historically low levels of nominal interest rates.
Our strategy over the past six months has been to remain fully invested, taking
advantage of the leveraging of the Fund's Common Stock and using any dips in
market price to maintain our aggressive portfolio structure. (For a complete
explanation of the benefits and risks of leveraging, see page 1 of this report
to shareholders.) The challenge over the past six months has been identifying
what periods constituted market retracements in an effort to concentrate the
Fund's buying power during these events, whether through the rather ample
1997-1998 new-issue calendar or the secondary marketplace.
At current interest rate levels, with long-term municipal bond yields nearing
5%, we may begin to sell some of the Fund's more aggressively structured
securities. Proceeds of these sales would be concentrated in cash reserves or
used to purchase less interest rate-sensitive, income-oriented holdings.
Although the fundamental economic backdrop for the marketplace is still quite
supportive, we would expect the municipal market to participate only marginally
in any further fixed-income price gains.
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
September 28, 1998
2 & 3
<PAGE>
MuniHoldings California Insured Fund, Inc., August 31, 1998
SCHEDULE OF INVESTMENTS (in Thousands)
<TABLE>
<CAPTION>
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
California--91.6% AAA Aaa $ 3,345 ABC California Unified School District, UT, Series A, 5.625%
due 8/01/2020 (b) $ 3,568
-----------------------------------------------------------------------------------------------------------
AAA Aaa 1,220 California Community College, Financing Authority, Lease
Revenue Bonds (West Valley--Mission Community College),
5.50% due 5/01/2017 (c) 1,295
-----------------------------------------------------------------------------------------------------------
California HFA, Home Mortgage Revenue Bonds, AMT:
AAA Aaa 4,125 Series E, 6.10% due 8/01/2029 (e) 4,399
AAA Aaa 1,000 Series I, 5.75% due 2/01/2029 (c) 1,044
AAA Aaa 4,600 Series M, 5.60% due 8/01/2029 (c) 4,741
-----------------------------------------------------------------------------------------------------------
AAA Aaa 6,355 California HFA, S/F Mortgage Revenue Bonds, AMT, Series C-2,
Class II, 5.625% due 8/01/2020 (c) 6,583
-----------------------------------------------------------------------------------------------------------
AAA Aaa 10,000 California Health Facilities Financing Authority Revenue
Bonds, RITR, Series 17, 6.87% due 8/15/2030 (c)(d) 10,723
-----------------------------------------------------------------------------------------------------------
California Health Facilities Financing Authority, Revenue
Refunding Bonds (Children's Hospital) (c):
AAA Aaa 2,500 5.375% due 7/01/2016 2,600
AAA Aaa 4,500 5.375% due 7/01/2020 4,651
-----------------------------------------------------------------------------------------------------------
California State Public Works Board, Lease Revenue Bonds (e):
AAA Aaa 2,000 (Department of Corrections--Corcoran II), Series A, 5.50%
due 1/01/2017 2,110
AAA Aaa 2,625 Refunding (California Community Collateral), Series B,
5.625% due 3/01/2019 2,782
AAA Aaa 3,000 Refunding (University of California Project), Series A,
5.40% due 12/01/2016 3,160
-----------------------------------------------------------------------------------------------------------
AAA Aaa 9,620 California State Veterans, AMT, Series BH, 5.50% due
12/01/2024 (b) 9,862
-----------------------------------------------------------------------------------------------------------
AAA Aaa 2,035 California Statewide Communities Development Authority, COP,
Refunding (San Diego State University Foundation), 5.30% due
3/01/2017 (e) 2,106
-----------------------------------------------------------------------------------------------------------
AAA Aaa 3,690 Contra Costa County, California, COP, Refunding (Merrithew
Memorial Hospital Project), 5.50% due 11/01/2022 (c) 3,888
-----------------------------------------------------------------------------------------------------------
AAA Aaa 7,000 El Dorado County, California, Public Agency Financing
Authority, Revenue Refunding Bonds, 5.50% due 2/15/2021 (f) 7,342
-----------------------------------------------------------------------------------------------------------
AAA Aaa 1,305 Glendale, California, Unified School District, Series A,
5.375% due 9/01/2022 (f) 1,357
-----------------------------------------------------------------------------------------------------------
AAA Aaa 6,200 Los Angeles, California, Department of Water and Power, RITR
(Electric Plant), Series 1B, 6.92% due 11/15/2031 (d)(f) 6,556
-----------------------------------------------------------------------------------------------------------
AAA Aaa 4,275 Los Angeles, California, M/F Mortgage Revenue Refunding
Bonds (Housing), Senior Series G, 5.65% due 1/01/2014 (b) 4,446
-----------------------------------------------------------------------------------------------------------
AAA Aaa 3,000 Los Angeles, California, Unified School District, COP
(Multiple Properties Project), Series A, 5.50% due
10/01/2016 (b) 3,178
-----------------------------------------------------------------------------------------------------------
Los Angeles County, California, Metropolitan Transportation
Authority, Sales Tax Revenue Refunding Bonds, Property A, First
Tier, Senior Series A (c):
AAA Aaa 4,000 5.25% due 7/01/2013 4,200
AAA Aaa 10,000 5.25% due 7/01/2027 10,215
-----------------------------------------------------------------------------------------------------------
AAA Aaa 1,750 Metropolitan Water District, Southern California, Waterworks
Revenue Bonds, Series A, 5.50% due 7/01/2025 (c) 1,831
-----------------------------------------------------------------------------------------------------------
AAA Aaa 2,000 Montebello, California, Community Redevelopment Agency, Tax
Allocation Housing, Series A, 5.45% due 9/01/2019 (b) 2,091
-----------------------------------------------------------------------------------------------------------
AAA Aaa 16,000 Norco, California, Redevelopment Agency, Tax Allocation,
Refunding (Norco Redevelopment Project Area No. 1), 5.75%
due 3/01/2026 (c) 17,193
-----------------------------------------------------------------------------------------------------------
AAA Aaa 3,600 Northern California, Transmission Revenue Bonds, RITR,
Series 16, 6.62% due 5/01/2020 (c)(d) 3,717
-----------------------------------------------------------------------------------------------------------
AAA Aaa 1,300 Oakland, California, GO, UT, Series C, Measure K, 5.80% due
12/15/2018 (c) 1,408
-----------------------------------------------------------------------------------------------------------
AAA Aaa 5,750 Palm Desert, California, Financing Authority, Tax Allocation
Revenue Refunding Bonds (Project Area No. 1), 5.45% due
4/01/2018 (c) 6,049
-----------------------------------------------------------------------------------------------------------
AAA Aaa 5,000 Pittsburg, California, Public Financing Authority, Water
Revenue Bonds, 5.50% due 6/01/2027 (c) 5,269
-----------------------------------------------------------------------------------------------------------
AAA Aaa 7,500 Pittsburg, California, Redevelopment Agency, Tax Allocation
(Los Medanos Project Area), Series B, 5.70% due 8/01/2032 (b) 8,239
-----------------------------------------------------------------------------------------------------------
Port Oakland, California, Port Revenue Bonds (c):
AAA Aaa 2,000 AMT, Series G, 5.375% due 11/01/2025 2,053
AAA Aaa 7,000 Series J, 5.50% due 11/01/2026 7,388
-----------------------------------------------------------------------------------------------------------
San Francisco, California, City and County Airports
Commission, International Airport Revenue Bonds, AMT,
Second Series:
AAA Aaa 2,000 Issue 10-A, 5.70% due 5/01/2026 (c) 2,116
AAA Aaa 6,000 Issue 12-A, 5.80% due 5/01/2021 (f) 6,360
-----------------------------------------------------------------------------------------------------------
AAA Aaa 8,500 San Francisco, California, City and County Redevelopment
Financing Authority, Tax Allocation Revenue Refunding
Bonds, 5.11%* due 8/01/2024 (c) 2,324
-----------------------------------------------------------------------------------------------------------
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) 10,222
-----------------------------------------------------------------------------------------------------------
AAA VMIG1+ 100 Southern California Public Power Authority, Power Project
Revenue Refunding Bonds (Sub-Palo Verde Project), VRDN,
Series C, 2.25% due 7/01/2017 (a)(e) 100
-----------------------------------------------------------------------------------------------------------
AAA Aaa 7,750 Southern California Public Power Authority, Revenue
Refunding Bonds (Transmission Project), Crossover, 5.75%
due 7/01/2021 (c) 8,187
-----------------------------------------------------------------------------------------------------------
AAA Aaa 4,000 University of California, Hospital Revenue Bonds (University
of California Davis Medical Center), 5.75% due 7/01/2024 (e) 4,281
-----------------------------------------------------------------------------------------------------------
AAA Aaa 4,500 University of California, Multi-Purpose Projects Revenue
Bonds, Series F, 5% due 9/01/2015 (f) 4,557
-----------------------------------------------------------------------------------------------------------
</TABLE>
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
RITR Residual Interest Trust Receipts
S/F Single-Family
UT Unlimited Tax
VRDN Variable Rate Demand Notes
4 & 5
<PAGE>
MuniHoldings California Insured Fund, Inc., August 31, 1998
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
<TABLE>
<CAPTION>
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Puerto Rico--7.3% A Baa1 $ 8,000 Puerto Rico Commonwealth, Highway and Transportation
Authority, Highway Revenue Bonds, Series Y, 5.50% due
7/01/2026 $ 8,313
-----------------------------------------------------------------------------------------------------------
A Baa1 7,000 Puerto Rico Commonwealth, Refunding Bonds (Public
Improvement), 5.375% due 7/01/2025 7,165
====================================================================================================================================
Total Investments (Cost--$201,940)--98.9% 209,669
Other Assets Less Liabilities--1.1% 2,313
--------
Net Assets--100.0% $211,982
========
====================================================================================================================================
</TABLE>
(a) The interest rate is subject to change periodically based upon prevailing
market rates. The interest rate shown is the rate in effect at August 31,
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 August 31, 1998.
(e) AMBAC Insured.
(f) FGIC Insured.
* Represents a zero coupon bond; the interest rate shown is the effective
yield at the time of purchase by the Fund.
+ Highest short-term ratings by Moody's Investors Service, Inc.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements.
Quality Profile
The quality ratings of securities in the Fund as of August 31, 1998 were as
follows:
- --------------------------------------------------------------------------------
Percent of
S&P Rating/Moody's Rating Net Assets
- --------------------------------------------------------------------------------
AAA/Aaa ........................................................... 91.6%
A/A ............................................................... 7.3
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<TABLE>
<CAPTION>
As of August 31, 1998
==================================================================================================================================
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$201,939,849) (Note 1a) .... $209,668,623
Cash ............................................................... 79,702
Interest receivable ................................................ 2,626,617
Prepaid expenses and other assets .................................. 4,912
------------
Total assets ....................................................... 212,379,854
------------
==================================================================================================================================
Liabilities: Payables:
Offering costs (Note 1e) ........................................ $ 98,192
Dividends to shareholders (Note 1f) ............................. 93,503
Investment adviser (Note 2) ..................................... 78,928 270,623
Accrued expenses and other liabilities ............................. ------------ 127,668
------------
Total liabilities .................................................. 398,291
------------
==================================================================================================================================
Net Assets: Net assets ......................................................... $211,981,563
============
==================================================================================================================================
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
(8,308,595 shares issued and outstanding) ....................... $ 830,860
Paid-in capital in excess of par ................................... 122,721,345
Undistributed investment income--net ............................... 621,090
Undistributed realized capital gains on
investments--net ................................................... 79,494
Unrealized appreciation on investments--net ........................ 7,728,774
------------
Total--Equivalent to $15.88 net asset value per
share of Common Stock (market price--$15.4375) ..................... 131,981,563
------------
Total capital ...................................................... $211,981,563
============
==================================================================================================================================
</TABLE>
* Auction Market Preferred Stock.
See Notes to Financial Statements.
6 & 7
<PAGE>
MuniHoldings California Insured Fund, Inc., August 31, 1998
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Period September 19, 1997+ to August 31, 1998
==================================================================================================================================
<S> <C> <C> <C>
Investment Interest and amortization of premium and discount earned ........... $ 10,136,612
Income (Note 1d):
==================================================================================================================================
Expenses: Investment advisory fees (Note 2) .................................. $ 1,062,163
Commission fees (Note 4) ........................................... 177,584
Professional fees .................................................. 46,315
Transfer agent fees ................................................ 26,103
Accounting services (Note 2) ....................................... 23,669
Directors' fees and expenses ....................................... 22,990
Listing fees ....................................................... 20,611
Custodian fees ..................................................... 15,084
Organization expenses .............................................. 15,000
Pricing fees ....................................................... 6,675
Printing and shareholder reports ................................... 5,401
Other .............................................................. 17,680
------------
Total expenses before reimbursement ................................ 1,439,275
Reimbursement of expenses (Note 2) ................................. (524,045)
Total expenses after reimbursement ................................. ------------ 915,230
------------
Investment income--net ............................................. 9,221,382
------------
==================================================================================================================================
Realized & Realized gain on investments--net .................................. 79,495
Unrealized Gain on Unrealized appreciation on investments--net ........................ 7,728,774
Investments -- Net ------------
(Notes 1b, 1d & 3): Net Increase in Net Assets Resulting from Operations ............... $ 17,029,651
============
==================================================================================================================================
</TABLE>
+ Commencement of operations.
See Notes to Financial Statements.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Period
Sept. 19, 1997+
Increase (Decrease) in Net Assets: to Aug. 31, 1998
=================================================================================================================================
<S> <C> <C>
Operations: Investment income--net .................................................................... $ 9,221,382
Realized gain on investments--net ......................................................... 79,494
Unrealized appreciation on investments--net ............................................... 7,728,774
-------------
Net increase in net assets resulting from operations ...................................... 17,029,650
-------------
=================================================================================================================================
Dividends to Investment income--net:
Shareholders Common Stock ........................................................................... (6,240,612)
(Note 1f): Preferred Stock ........................................................................ (2,359,680)
-------------
Net decrease in net assets resulting from dividends to shareholders ....................... (8,600,292)
-------------
=================================================================================================================================
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 ................................................................. 337,005
Offering 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 ........................ 203,452,200
-------------
=================================================================================================================================
Net Assets: Total increase in net assets .............................................................. 211,881,558
Beginning of period ....................................................................... 100,005
-------------
End of period* ............................................................................ $ 211,981,563
=============
=================================================================================================================================
* Undistributed investment income--net ................................................... $ 621,090
=============
=================================================================================================================================
</TABLE>
+ Commencement of operations
See Notes to Financial Statements
8 & 9
<PAGE>
MuniHoldings California Insured Fund, Inc., August 31, 1998
FINANCIAL HIGHLIGHTS
The following per share data and ratios have been derived from
information provided in the financial statements
<TABLE>
<CAPTION>
For the Period
Sept. 19, 1997+
Increase (Decrease) in Net Asset Value: to Aug. 31, 1998
=======================================================================================================
<S> <C> <C>
Per Share Net asset value, beginning of period ............................ $ 15.00
Operating -------------
Performance: Investment income--net .......................................... 1.10
Realized and unrealized gain on investments--net ................ .96
-------------
Total from investment operations ................................ 2.06
-------------
Less dividends to Common Stock shareholders:
Investment income--net ....................................... (.75)
-------------
Capital charge resulting from issuance of Common Stock .......... (.05)
-------------
Effect of Preferred Stock activity:++
Dividends to Preferred Stock shareholders:
Investment income--net ...................................... (.28)
Capital charge resulting from issuance of Preferred Stock .... (.10)
-------------
Total effect of Preferred Stock activity ........................ (.38)
-------------
Net asset value, end of period .................................. $ 15.88
=============
Market price per share, end of period ........................... $ 15.4375
=============
=======================================================================================================
Total Investment Based on market price per share ................................. 8.06%++
Return:** =============
Based on net asset value per share .............................. 11.16%++
=============
=======================================================================================================
Ratios to Average Expenses, net of reimbursement .................................. .47%*
Net Assets:*** =============
Expenses ........................................................ .75%*
=============
Investment income--net .......................................... 4.77%*
=============
=======================================================================================================
Supplemental Net assets, net of Preferred Stock, end of period (in
Data: thousands) ...................................................... $ 131,982
=============
Preferred Stock outstanding, end of period (in thousands) ....... $ 80,000
=============
Portfolio turnover .............................................. 71.37%
=============
=======================================================================================================
Leverage: Asset coverage per $1,000 ....................................... $ 2,650
=============
=======================================================================================================
Dividends Per Series A--Investment income--net ................................ $ 735
Share on Preferred =============
Stock Outstanding: Series B--Investment income--net ................................ $ 739
=============
=======================================================================================================
</TABLE>
* 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.
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. 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 a 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.
o 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.
o 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
10 & 11
<PAGE>
MuniHoldings California Insured Fund, Inc., August 31, 1998
NOTES TO FINANCIAL STATEMENTS (concluded)
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) Offering expenses--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
proceeds from the issuance of Preferred Stock. For the period September 19, 1997
to August 31, 1998, FAM earned fees of $1,062,163, of which $524,045 was
voluntarily waived.
During the period September 19, 1997 to August 31, 1998, Merrill Lynch, Pierce,
Fenner & Smith Inc. ("MLPF&S"), an affiliate of FAM, received underwriting fees
of $600,000 in connection with the issuance of the Fund's Preferred Stock.
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 August 31, 1998 were $329,429,833 and $127,838,864,
respectively.
Net realized gains (losses) for the period September 19, 1997 to August 31, 1998
and net unrealized gains as of August 31, 1998 were as follows:
- --------------------------------------------------------------------------------
Realized Unrealized
Gains (Losses) Gains
- --------------------------------------------------------------------------------
Long-term investments ................... $ 306,410 $7,728,774
Short-term investments .................. 5,810 --
Financial futures contracts ............. (232,725) --
---------- ----------
Total ................................... $ 79,495 $7,728,774
========== ==========
- --------------------------------------------------------------------------------
As of August 31, 1998, net unrealized appreciation for Federal income tax
purposes aggregated $7,706,799, all of which related to appreciated securities.
The aggregate cost of investments at August 31, 1998 for Federal income tax
purposes was $201,961,824.
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 August 31,
1998, increased by 8,280,000 from shares sold and by 21,928 as a result of
dividend reinvestment. Prior to September 19, 1997 (commencement of operations),
the Fund issued 6,667 shares to FAM for $100,005.
Preferred Stock
Auction Market Preferred Stock ("AMPS") are shares of Preferred Stock of the
Fund, with a par value of $.10 per share and a liquidation preference of $25,000
per share, 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
August 31, 1998 were as follows: Series A, 2.21% and Series B, 2.50%.
In connection with the offering of AMPS, the Board of Directors reclassified
3,200 shares of unissued capital stock as AMPS. Shares issued and outstanding
during the period September 19, 1997 to August 31, 1998 increased by 3,200 as a
result of the AMPS offering.
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 August 31, 1998, MLPF&S, an
affiliate of FAM, earned $173,556 as commissions.
5. Subsequent Event:
On September 8, 1998, the Fund's Board of Directors declared an ordinary income
dividend to Common Stock shareholders in the amount of $.073549 per share,
payable on September 29, 1998 to shareholders of record as of September 22,
1998.
12 & 13
<PAGE>
MuniHoldings California Insured Fund, Inc., August 31, 1998
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
MuniHoldings California Insured Fund, Inc.:
We have audited the accompanying statement of assets, liabilities and capital,
including the schedule of investments, of MuniHoldings California Insured Fund,
Inc. as of August 31, 1998, the related statements of operations and changes in
net assets, and the financial highlights for the period September 19, 1997
(commencement of operations) to August 31, 1998. These financial statements and
the financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and the
financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and the 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 at August 31, 1998 by
correspondence with the custodian. 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
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights present
fairly, in all material respects, the financial position of MuniHoldings
California Insured Fund, Inc. as of August 31, 1998, the results of its
operations, the changes in its net assets, and the financial highlights for the
period September 19, 1997 to August 31, 1998 in conformity with generally
accepted accounting principles.
Deloitte & Touche llp
Princeton, New Jersey
October 6, 1998
IMPORTANT TAX INFORMATION (unaudited)
All of the net investment income distributions paid by MuniHoldings California
Insured Fund, Inc. during its taxable period ended August 31, 1998 qualify as
tax-exempt interest dividends for Federal income tax purposes.
Additionally, there were no capital gains distributed by the Fund during the
year.
Please retain this information for your records.
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.
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
Robert A. DiMella, 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
14 & 15
<PAGE>
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--8/98
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