MUNIHOLDINGS
INSURED
FUND II, INC.
FUND LOGO
Semi-Annual Report
March 31, 2000
This report, including the financial information herein, is
transmitted to the shareholders of MuniHoldings Insured Fund II,
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
Insured Fund II, Inc.
Box 9011
Princeton, NJ
08543-9011
Printed on post-consumer recycled paper
MUNIHOLDINGS INSURED FUND II, INC.
The Benefits and
Risks of
Leveraging
MuniHoldings Insured Fund II, Inc. utilizes leveraging 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.
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, income 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 net
asset value of the Fund's shares may also be more volatile than if
the Fund did not invest in these securities.
MuniHoldings Insured Fund II, Inc., March 31, 2000
DEAR SHAREHOLDER
For the six months ended March 31, 2000, the Common Stock of
MuniHoldings Insured Fund II, Inc. earned $0.385 per share income
dividends, which included earned and unpaid dividends of $0.064.
This represents a net annualized yield of 6.12%, based on a month-
end per share net asset value of $12.54. Over the same period, the
total investment return on the Fund's Common Stock was +2.14%, based
on a change in per share net asset value from $12.72 to $12.54, and
assuming reinvestment of $0.390 per share income dividends.
For the six months ended March 31, 2000, the Fund's Preferred Stock
had an average yield of 3.77% for Series A and 3.78% for Series B.
The Municipal Market Environment
From October 1, 1999 through mid-January 2000, fixed-income bond
yields rose steadily higher. US economic growth, in part intensified
by Year 2000 preparations, grew at a 7.3% rate in the fourth quarter
of 1999 and at a 4.2% annual rate for all of 1999. Current estimates
for first quarter 2000 economic growth are in the 4.5%--5.5% range.
However, despite these significant growth rates, no price measure
indicator has shown any considerable signs of future price pressure
at either the consumer level or from labor, despite the lowest
unemployment rates since January 1970. Given no signs of an economic
slowdown, the Federal Reserve Board continued to raise short-term
interest rates in November 1999 and again in February and March
2000. In each instance the Federal Reserve Board cited both the
continued growth of US employment and the impressive strength of the
US equity markets as reasons for attempting to moderate US economic
growth before inflationary price increases are realized. By mid-
January 2000, US Treasury bond yields had risen almost 70 basis
points (0.70%) to 6.75%. Similarly, as measured by the Bond Buyer
Revenue Bond Index, long-term tax-exempt bond yields rose nearly 40
basis points to 6.35%.
Since mid-January, fixed-income markets have largely ignored
continued strong economic fundamentals and concentrated on very
positive technical supply factors. Declining bond issuance, both
current and, more importantly, expected future issuance, helped push
bond yields lower in February and March 2000. In late January and
early February 2000, the US Treasury announced it intended to reduce
the number of issues to be auctioned in the quarterly Treasury note
and bond auctions. Furthermore, budgetary surpluses would also allow
the US Treasury to repurchase outstanding, higher-couponed Treasury
issues, primarily in the 15-year and longer-term maturity sector.
Both these actions would result in a significant reduction in the
outstanding supply of long-term US Treasury debt. Domestic and
international investors quickly began to accumulate what was
expected to become a scarce commodity, and bond prices quickly rose.
By March 31, 2000, US Treasury bond yields had declined 60 basis
points to 5.83%. The dramatic decline in long-term US Treasury bond
yields resulted in an inverted taxable yield curve as short-term and
intermediate-term interest rates have not fallen proportionately
since the Federal Reserve Board is expected to continue to raise
short-term interest rates. The current inversion has had more to do
with debt reduction and Treasury buybacks than with investor
expectations of slower economic growth. Over the last six months,
long-term US Treasury bond yields have fallen more than 20 basis
points.
Tax-exempt bond yields have also declined in recent months. The
decline has largely been in response to the rally in US Treasury
securities, as well as a continued positive technical supply
environment. States such as California and Maryland have announced
that their large current and anticipated future budget surpluses
will permit the cancellation or postponement of expected bond
issuance. Additionally, some issuers have also initiated tenders to
repurchase existing debt, reducing the supply of tax-exempt bonds in
the secondary market as well. Since their recent peak in January
2000, long-term municipal bond yields declined over 30 basis points
to finish the six-month period ended March 31, 2000 at 6.03%. During
the last six months, municipal bond yields declined overall less
than 10 basis points.
The relative underperformance of the municipal bond market in recent
months has been especially disappointing given the strong technical
position the tax-exempt bond market has enjoyed. The issuance of
long-term tax-exempt securities has dramatically declined. Over the
last year, $206 billion in new long-term municipal securities was
issued, a decline of almost 25% compared to the same period a year
earlier. For the three months ended March 31, 2000, approximately
$40 billion in new tax-exempt bonds was underwritten, a decline of
more than 30% compared to the March 31, 1999 quarter. Although
investors received over $30 billion in coupon payments, bond
maturities and the proceeds from early bond redemptions, coupled
with the highest municipal bond yields in three years, overall
investor demand has diminished. Long-term municipal bond mutual
funds have seen consistent outflows in recent months as the yields
of individual securities have risen faster than those of larger,
more diverse mutual funds. Over the last three months, tax-exempt
mutual funds have had net redemptions of approximately $6 billion.
Also, the demand from property and casualty insurance companies has
weakened as a result of the losses and anticipated losses incurred
from a series of damaging storms across much of the eastern United
States. Additionally, many institutional investors who have in
recent years been attracted to the municipal bond market by
historically attractive tax-exempt bond yield ratios of over 90%
found other asset classes even more attractive. Even with a
favorable supply position, tax-exempt municipal bond yields have
underperformed their taxable counterparts.
Any significantly lower municipal bond yields are still likely to
require weaker US employment growth and consumer spending. The
actions taken in recent months by the Federal Reserve Board, as well
as those expected in May and perhaps June 2000, should eventually
slow US economic growth. The recent decline in US home sales is
perhaps the first sign that consumer spending is being slowed by
higher interest rates. Until further signs develop, it is likely
that the municipal bond market's current favorable technical
position will dampen significant tax-exempt interest rate volatility
and provide a stable environment for an eventual improvement in
municipal bond prices.
Portfolio Strategy
MuniHoldings Insured Fund II, Inc. focuses on seeking to enhance tax-
exempt income through the use of leverage. (For an explanation of
the benefits and risks of leveraging, see page 1 of this report to
shareholders.) For the past six months, we believed that the Fund
was structured to accomplish this goal. The fixed-income marketplace
has been subject to above-average price volatility, resulting from
continuously strong economic growth and uncertainty surrounding the
magnitude of future monetary tightening by the Federal Reserve
Board. Our fully invested position subjected the Fund's net asset
valuation to the volatility that accompanies such a drastic rise and
fall in interest rates but enabled the Fund to achieve a highly
competitive yield.
The Fund began the six-month period heavily weighted in high-quality
holdings, with 83.7% of Fund assets rated AAA by at least one of the
major rating agencies. We purchased lower-quality, investment-grade
issues as yield spreads widened to augment the distribution yield.
Yield spreads have since narrowed, allowing the Fund to participate
in the relative outperformance of this sector in the municipal bond
market.
In Conclusion
On April 12, 2000, MuniHoldings Insured Fund II, Inc.'s Board of
Directors approved a plan of reorganization, subject to shareholder
approval and certain other conditions, whereby MuniHoldings Insured
Fund II, Inc. would acquire substantially all of the assets and
liabilities of MuniHoldings Insured Fund III, Inc. and MuniHoldings
Insured Fund IV, Inc. in exchange for newly issued shares of
MuniHoldings Insured Fund II, Inc. These Funds are registered, non-
diversified, closed-end management investment companies. All three
have similar investment objectives and are managed by Fund Asset
Management, L.P.
We appreciate your investment in MuniHoldings Insured Fund II, Inc.,
and we look forward to assisting you with your financial needs in
the months and years ahead.
Sincerely,
(Terry K. Glenn)
Terry K. Glenn
President and Director
(Vincent R. Giordano)
Vincent R. Giordano
Senior Vice President
(Robert A. DiMella)
Robert A. DiMella
Vice President and Portfolio Manager
April 24, 2000
MuniHoldings Insured Fund II, Inc., March 31, 2000
PROXY RESULTS
During the six-month period ended March 31, 2000, MuniHoldings
Insured Fund II, Inc.'s Common Stock shareholders voted on the
following proposals. The proposals were approved at a shareholders'
meeting on December 15, 1999. The description of each proposal and
number of shares voted are as follows:
<TABLE>
<CAPTION>
Shares Voted Shares Withheld
For From Voting
<S> <S> <C> <C>
1. To elect the Fund's Directors: Terry K. Glenn 10,371,117 512,526
Joe Grills 10,371,117 512,526
Robert S. Salomon, Jr. 10,371,117 512,526
Stephen B. Swensrud 10,371,117 512,526
Arthur Zeikel 10,371,117 512,526
<CAPTION>
Shares Voted Shares Voted Shares Voted
For Against Abstain
<S> <C> <C> <C>
2. To ratify the selection of Ernst & Young LLP as the Fund's
independent auditors for the current fiscal year. 10,622,328 139,678 121,637
During the six-month period ended March 31, 2000, MuniHoldings
Insured Fund II, Inc.'s Preferred Stock shareholders voted on the
following proposals. The proposals were approved at a shareholders'
meeting on December 15, 1999. The description of each proposal and
number of shares voted are as follows:
<CAPTION>
Shares Voted Shares Withheld
For From Voting
<S> <S> <C> <C>
1. To elect the Fund's Terry K. Glenn 3,936 0
Board of Directors: Joe Grills 3,936 0
Walter Mintz 3,936 0
Robert S. Salomon, Jr. 3,936 0
Melvin R. Seiden 3,936 0
Stephen B. Swensrud 3,936 0
Arthur Zeikel 3,936 0
<CAPTION>
Shares Voted Shares Voted Shares Voted
For Against Abstain
<S> <C> <C> <C>
2. To ratify the selection of Ernst & Young LLP as the Fund's
independent auditors for the current fiscal year. 3,925 0 11
</TABLE>
Portfolio
Abbreviations
To simplify the listings of MuniHoldings Insured Fund II, Inc.'s
portfolio holdings in the Schedule of Investments, we have
abbreviated the names of many of the securities according to the
list below.
AMT Alternative Minimum Tax
(subject to)
GO General Obligation Bonds
HDA Housing Development Authority
IDA Industrial Development
Authority
PCR Pollution Control Revenue Bonds
VRDN Variable Rate Demand Notes
<TABLE>
SCHEDULE OF INVESTMENTS (in Thousands)
<CAPTION>
S&P Moody's Face
STATE Ratings Ratings Amount Issue Value
<S> <C> <C> <C> <S> <C>
Arizona--0.9% BBB+ Baa1 $ 2,170 Arizona Health Facilities Authority Revenue Bonds (Catholic
Healthcare West), Series A, 6.625% due 7/01/2020 $ 2,132
California BBB NR* 2,500 Contra Costa County, California, Public Financing Authority,
- --0.9% Tax Allocation Revenue Refunding Bonds (Pleasant Hill Bart Etc.
Redevelopment), 5.25% due 8/01/2028 2,149
Colorado--2.0% AAA Aaa 5,000 Denver, Colorado, City and County Airport Revenue Refunding
Bonds, Series E, 5.50% due 11/15/2025 (d) 4,788
Connecticut NR* Baa3 8,000 Mashantucket Western Pequot Tribe, Connecticut, Special Revenue
- --2.9% Refunding Bonds, Sub-Series A, 5.50% due 9/01/2028 6,981
District of A1+ VMIG1++ 3,300 District of Columbia, GO, General Fund Recovery, VRDN, Series B-1,
Columbia--5.2% 3.85% due 6/01/2003 (e) 3,300
AAA Aaa 5,115 District Of Columbia, Water and Sewer Authority, Public Utility
Revenue Refunding Bonds, 5.50% due 10/01/2023 (c) 4,945
AAA Aaa 5,000 Washington, D.C., Convention Center Authority, Dedicated Tax
Revenue Bonds, Senior Lien, 5% due 10/01/2021 (a) 4,461
Georgia--2.2% Metropolitan Atlanta, Georgia, Rapid Transit Authority, Sales
Tax Revenue Bonds, Second Indenture, Series B (d):
AAA Aaa 4,390 5.10% due 7/01/2017 4,119
AAA Aaa 1,355 5.10% due 7/01/2020 1,244
Hawaii--4.2% AAA Aaa 10,000 Hawaii State, GO, Series CT, 5.875% due 9/01/2018 (c) 10,187
Illinois--12.4% AAA Aaa 5,000 Chicago, Illinois, Board of Education, GO (Chicago School
Reform), 5.75% due 12/01/2027 (a) 4,894
Chicago, Illinois, GO, Series A (b):
AAA Aaa 8,800 6% due 1/01/2021 8,943
AAA Aaa 9,330 6% due 1/01/2022 9,459
AAA Aaa 3,400 Chicago, Illinois, Skyway Toll Bridge Revenue Refunding Bonds,
5.50% due 1/01/2023 (d) 3,239
AAA Aaa 4,000 Melrose Park, Illinois, Water Revenue Bonds, Series A, 5.20%
due 7/01/2018 (d) 3,768
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
<CAPTION>
S&P Moody's Face
STATE Ratings Ratings Amount Issue Value
<S> <C> <C> <C> <S> <C>
Indiana--4.0% A1 VMIG1++ $ 500 Jasper County, Indiana, PCR, Refunding (Northern Indiana
Public Service), VRDN, Series C, 3.85% due 4/01/2019 (e) $ 500
AAA NR* 9,280 Shelbyville, Indiana, Elementary School Building Corporation
Revenue Bonds (First Mortgage), 5.75% due 1/15/2022 (c) 9,154
Kentucky--1.8% AAA Aaa 4,250 Kentucky State Property and Buildings Commission, Revenue
Refunding Bonds (Project No. 64), 5.75% due 5/01/2011 (d) 4,434
Louisiana--0.1% A1+ VMIG1++ 400 Louisiana State Offshore Terminal Authority, Deepwater Port
Revenue Refunding Bonds (1st Stage A-Loop Inc.), VRDN, 3.85%
due 9/01/2008 (e) 400
Mississippi BBB- Ba1 3,550 Mississippi Business Finance Corporation, Mississippi,
- --1.3% PCR, Refunding (System Energy Resources Inc. Project),
5.90% due 5/01/2022 3,158
Nevada--2.9% AAA Aaa 7,000 Las Vegas, Nevada, New Convention and Visitors Authority
Revenue Bonds, 5.75% due 7/01/2016 (a) 7,097
New Jersey AAA Aaa 660 New Jersey State Housing and Mortgage Finance Agency, Home Buyer
- --0.3% Revenue Refunding Bonds, AMT, Series AA, 5.90% due 10/01/2029 (d) 660
New Mexico AAA Aaa 5,000 Farmington, New Mexico, PCR, Refunding (Public Service Company
- --2.1% of San Juan), Series C, 5.70% due 12/01/2016 (a) 5,053
New York A- VMIG1++ 4,500 Long Island Power Authority, New York, Electric System Revenue
- --24.9% Bonds, VRDN, Sub-Series 5, 3.80% due 5/01/2033 (e) 4,500
Long Island Power Authority, New York, Electric System Revenue
Refunding Bonds, Series A:
AAA Aaa 5,000 5.125% due 12/01/2022 (c) 4,513
AAA Aaa 10,000 5.25% due 12/01/2026 (d) 9,181
AAA Aaa 2,000 Metropolitan Transportation Authority, New York, Commuter
Facilities Revenue Refunding Bonds, Series B, 5% due
7/01/2017 (a) 1,852
AAA Aaa 10,000 Nassau Health Care Corporation, New York, Health System
Revenue Bonds, 5.75% due 8/01/2022 (c) 9,937
New York City, New York, GO, Refunding:
AAA NR* 10,000 Series G, 5.75% due 2/01/2017 (c) 10,118
AAA Aaa 5,480 Series H, 5.375% due 8/01/2027 (d) 5,136
A1c VMIG1++ 4,400 New York City, New York, GO, VRDN, Series B, Sub-Series B-6,
3.80% due 8/15/2005 (d)(e) 4,400
AAA Aaa 3,500 New York State Urban Development Corporation, Revenue
Refunding Bonds (Correctional Facilities), 5.75% due
1/01/2013 (c) 3,564
AAA Aaa 7,500 Port Authority of New York and New Jersey, Consolidated
Revenue Refunding Bonds, AMT, 119th Series, 5.50% due
9/15/2016 (b) 7,428
North AAA Aaa 22,000 Oliver County, North Dakota, PCR, Refunding (Square Butte Electric
Dakota--8.3% Cooperative), Series A, 5.30% due 1/01/2027 (a) 20,145
Ohio--3.0% BBB+ Baa1 5,000 Ohio State Solid Waste Disposal Revenue Bonds (USG Corporation
Project), AMT, 5.65% due 3/01/2033 4,317
AA A1 3,000 Ohio State Turnpike Commission, Turnpike Revenue Bonds,
Series A, 5.55% due 2/15/2013 3,040
Pennsylvania AAA Aaa 12,930 Allegheny County, Pennsylvania, Hospital Development
- --9.5% Authority Revenue Bonds (University of Pittsburgh Medical
Center), 5.375% due 12/01/2025 (d) 11,925
NR* Aaa 5,600 Lycoming County, Pennsylvania, College Authority Revenue
Bonds (Pennsylvania College of Technology), 5.25% due
7/01/2018 (d) 5,334
AAA Aaa 5,830 Philadelphia, Pennsylvania, Gas Works Revenue Bonds,
Second Series, 5% due 7/01/2029 (c) 5,073
A1+ NR* 700 Schuylkill County, Pennsylvania, IDA, Resource Recovery
Revenue Refunding Bonds (Northeastern Power Company), VRDN,
Series A, 4% due 12/01/2022 (e) 700
Puerto Rico AAA Aaa 10,000 Puerto Rico Commonwealth, GO, Public Improvement, 6% due
- --4.2% 7/01/2029 (d) 10,284
Rhode Providence, Rhode Island, Public Building Authority, General
Island--3.8% Revenue Bonds (School and Public Facilities Projects), Series
A (a):
AAA Aaa 2,785 5.25% due 12/15/2017 2,664
AAA Aaa 1,300 5.25% due 12/15/2018 1,235
AAA Aaa 1,305 5.25% due 12/15/2019 1,228
NR* Aaa 4,055 Providence, Rhode Island, Redevelopment Agency Revenue Refunding
Bonds (Public Safety and Municipal Buildings), Series A, 5.75%
due 4/01/2019 (a) 4,062
Texas--4.5% BBB- Baa1 5,000 Dallas-Fort Worth, Texas, International Airport Facilities,
Improvement Corporation Revenue Bonds (American Airlines Inc.),
AMT, 6.375% due 5/01/2035 4,794
AA Aa3 6,000 Harris County, Texas, Health Facilities Development Corporation,
Revenue Refunding Bonds (School Health Care System), Series B,
5.75% due 7/01/2027 (f) 6,003
Virginia AA+ Aa1 2,250 Virginia State, HDA, Rental Housing Revenue Bonds, AMT, Series B,
- --0.9% 6% due 8/01/2017 2,258
Washington AAA Aaa 3,485 Grant County, Washington, Public Utility District No. 2 Revenue
- --1.4% Bonds (Priest Rapids Hydro Electric), AMT, Second Series,
Series B, 5.90% due 1/01/2021 (d) 3,462
Total Investments (Cost--$248,789)--103.7% 252,218
Liabilities in Excess of Other Assets--(3.7%) (9,054)
---------
Net Assets--100.0% $ 243,164
=========
(a)AMBAC Insured.
(b)FGIC Insured.
(c)FSA Insured.
(d)MBIA Insured.
(e)The interest rate is subject to change periodically based upon
prevailing market rates. The interest rate shown is the rate in
effect at March 31, 2000.
(f)Escrowed to maturity.
*Not Rated.
++Highest short-term rating by Moody's Investors Service, Inc.
Ratings of issues shown have not been audited by Ernst & Young llp.
See Notes to Financial Statements.
</TABLE>
MuniHoldings Insured Fund II, Inc., March 31, 2000
<TABLE>
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<CAPTION>
As of March 31, 2000
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$248,788,700) $252,218,071
Cash 40,996
Receivables:
Securities sold $ 7,462,825
Interest 3,543,058 11,005,883
------------
Prepaid expenses 16,064
------------
Total assets 263,281,014
------------
Liabilities: Payables:
Securities purchased 19,835,233
Dividends to shareholders 166,224
Investment adviser 76,035
Offering costs 10,594 20,088,086
------------
Accrued expenses and other liabilities 28,717
------------
Total liabilities 20,116,803
------------
Net Assets: Net assets $243,164,211
============
Capital: Capital Stock (200,000,000 shares authorized):
Preferred Stock, par value $.10 per share (4,200 shares of
AMPS* issued and outstanding at $25,000 per share
liquidation preference) $105,000,000
Common Stock, par value $.10 per share (11,015,719 shares
issued and outstanding) $ 1,101,572
Paid-in capital in excess of par 162,874,062
Undistributed investment income--net 919,091
Accumulated realized capital losses on investments--net (30,159,885)
Unrealized appreciation on investments--net 3,429,371
------------
Total--Equivalent to $12.54 net asset value per share of
Common Stock (market price--$10.5625) 138,164,211
------------
Total capital $243,164,211
============
*Auction Market Preferred Stock.
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Six Months Ended March 31, 2000
<S> <S> <C> <C>
Investment Interest and amortization of premium and discount earned $ 7,076,927
Income:
Expenses: Investment advisory fees $ 662,152
Commission fees 129,283
Professional fees 52,947
Accounting services 31,381
Transfer agent fees 19,554
Printing and shareholder reports 12,474
Directors' fees and expenses 12,263
Listing fees 7,771
Custodian fees 5,700
Pricing fees 3,085
Other 14,446
------------
Total expenses before reimbursement 951,056
Reimbursement of expenses (179,157)
------------
Total expenses after reimbursement 771,899
------------
Investment income--net 6,305,028
------------
Realized & Realized loss on investments--net (17,092,485)
Unrealized Change in unrealized appreciation/depreciation on investments--net 15,101,027
Gain (Loss) on ------------
Investments--Net: Net Increase in Net Assets Resulting from Operations $ 4,313,570
============
See Notes to Financial Statements.
</TABLE>
MuniHoldings Insured Fund II, Inc., March 31, 2000
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the For the Period
Six Months February 26,
Ended 1999++ to
March 31, September 30,
Increase (Decrease) in Net Assets: 2000 1999
<S> <S> <C> <C>
Operations: Investment income--net $ 6,305,028 $ 7,439,255
Realized loss on investments--net (17,092,485) (13,067,399)
Change in unrealized appreciation/depreciation on
investments--net 15,101,027 (11,671,656)
------------ ------------
Net increase (decrease) in net assets resulting from
operations 4,313,570 (17,299,800)
------------ ------------
Dividends to Investment income--net:
Shareholders: Common Stock (4,294,816) (4,682,689)
Preferred Stock (2,009,007) (1,838,680)
------------ ------------
Net decrease in net assets resulting from dividends to
shareholders (6,303,823) (6,521,369)
------------ ------------
Capital Stock Proceeds from issuance of Common Stock -- 164,850,000
Transactions: Proceeds from issuance of Preferred Stock -- 105,000,000
Offering costs resulting from the issuance of Common Stock -- (228,434)
Offering and underwriting costs resulting from the issuance
of Preferred Stock (970,940)
Value of shares issued to Common Stock shareholders in
reinvestment of dividends 225,002 --
------------ ------------
Net increase in net assets derived from capital stock
transactions 225,002 268,650,626
------------ ------------
Net Assets: Total increase (decrease) in net assets (1,765,251) 244,829,457
Beginning of period 244,929,462 100,005
------------ ------------
End of period* $243,164,211 $244,929,462
============ ============
<FN>
*Undistributed investment income--net $ 919,091 $ 917,886
============ ============
++Commencement of operations.
See Notes to Financial Statements.
</TABLE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
For the For the Period
The following per share data and ratios have been derived Six Months February 26,
from information provided in the financial statements. Ended 1999++ to
March 31, September 30,
Increase (Decrease) in Net Assets: 2000 1999
<S> <S> <C> <C>
Per Share Net asset value, beginning of period $ 12.72 $ 15.00
Operating ------------ ------------
Performance: Investment income--net .57 .68
Realized and unrealized gain (loss) on investments--net (.18) (2.24)
------------ ------------
Total from investment operations .39 (1.56)
------------ ------------
Less dividends to Common Stock shareholders:
Investment income--net (.39) (.43)
------------ ------------
Total dividends to Common Stock shareholders (.39) (.43)
------------ ------------
Capital change resulting from issuance of Common Stock -- (.03)
------------ ------------
Effect of Preferred Stock activity:++++
Dividends to Preferred Stock shareholders:
Investment income--net (.18) (.17)
------------ ------------
Capital charge resulting from issuance of Preferred Stock -- (.09)
------------ ------------
Total effect of Preferred Stock activity (.18) (.26)
------------ ------------
Net asset value, end of period $ 12.54 $ 12.72
============ ============
Market price per share, end of period $ 10.5625 $ 12.00
============ ============
Total Investment Based on market price per share (8.81%)+++ (17.36%)+++
Return:** ============ ============
Based on net asset value per share 2.14%+++ (12.40%)+++
============ ============
Ratios Based on Total expenses, net of reimbursement*** 1.15%* .62%*
Average Net ============ ============
Assets of Total expenses*** 1.42%* 1.22%*
Common Stock: ============ ============
Total investment income--net*** 9.39%* 8.27%*
============ ============
Amount of dividends to Preferred Stock shareholders 2.99%* 2.04%*
============ ============
Investment income--net, to Common Stock shareholders 6.40%* 6.23%*
============ ============
Ratios Based on Total expenses, net of reimbursement .64%* .38%*
Total Average Net ============ ============
Assets:++++++*** Total expenses .79%* .75%*
============ ============
Total investment income--net 5.24%* 5.07%*
============ ============
Ratios Based on Dividends to Preferred Stock shareholders 3.77%* 3.24%*
Average Net ============ ============
Assets of
Preferred Stock:
Supplemental Net assets, net of Preferred Stock, end of period (in thousands) $ 138,164 $ 139,929
Data: ============ ============
Preferred Stock outstanding, end of period (in thousands) $ 105,000 $ 105,000
============ ============
Portfolio turnover 103.65% 159.29%
============ ============
Leverage: Asset coverage per $1,000 $ 2.316 $ 2,333
============ ============
Dividends Series A--Investment income--net $ 477 $ 443
Per Share on ============ ============
Preferred Stock Series B--Investment income--net $ 480 $ 432
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 charges.
***Do not reflect the effect of dividends to Preferred Stock
shareholders.
++Commencement of operations.
++++The Fund's Preferred Stock was issued on March 18, 1999.
++++++Includes Common and Preferred Stock average net assets.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
MuniHoldings Insured Fund II, Inc., March 31, 2000
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
MuniHoldings Insured Fund II, Inc. (the "Fund") is registered under
the Investment Company Act of 1940 as a non-diversified, closed-end
management investment company. The Fund's financial statements are
prepared in accordance with generally accepted accounting
principals, which may require the use of management accruals and
estimates. 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. The Fund
determines and makes 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 MUE. 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 prices as of the close of
such exchanges. Options written or purchased are valued at the last
sale price in the case of exchange-traded options. In the case of
options traded in the over-the-counter market, valuation is the last
asked price (options written) or the last bid price (options
purchased). 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 increase or decrease the level of risk to
which the Fund is exposed more quickly and efficiently than
transactions in other types of instruments. Losses may arise due to
changes in the value of the contract or if the counterparty does not
perform under the contract.
* 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.
* 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) 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 .55% of
the Fund's average weekly net assets, including proceeds from the
issuance of Preferred Stock. For the six months ended March 31,
2000, FAM earned fees of $662,152 of which $179,157 was voluntarily
waived.
During the period February 26, 1999 to September 30, 1999, Merrill
Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"), an affiliate
of FAM, received underwriting fees of $787,500 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 six months ended March 31, 2000 were $241,641,471 and
$249,493,354, respectively.
Net realized losses for the six months ended March 31, 2000 and net
unrealized gains as of March 31, 2000 were as follows:
Realized Unrealized
Losses Gains
Long-term investments $(17,081,644) $ 3,429,371
Financial futures contracts (10,841) --
------------ ------------
Total $(17,092,485) $ 3,429,371
============ ============
As of March 31, 2000, net unrealized appreciation for Federal income
tax purposes aggregated $3,429,371, of which $4,726,134 related to
appreciated securities and $1,296,763 related to depreciated
securities. The aggregate cost of investments at March 31, 2000 for
Federal income tax purposes was $248,788,700.
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 six months ended March 31,
2000 increased by 19,052 as a result of dividend reinvestment and
during the period February 26, 1999 to September 30, 1999 increased
by 10,990,000 from shares sold.
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 March
31, 2000 were as follows: Series A, 4.05% and Series B, 3.95%.
Shares issued and outstanding during the six months ended March 31,
2000 remained constant and during the period February 26, 1999 to
September 30, 1999 increased by 4,200 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 .25% to .375%,
calculated on the proceeds of each auction. For the six months ended
March 31, 2000, MLPF&S earned $101,472 as commissions.
5. Capital Loss Carryforward:
At September 30, 1999, the Fund had a capital loss carryforward of
approximately $12,824,000, all of which expires in 2007. This amount
will be available to offset like amounts of any future taxable
gains.
6. Subsequent Event:
On April 7, 2000, the Fund's Board of Directors declared an ordinary
income dividend to Common Stock shareholders in the amount of
$.063794 per share, payable on April 27, 2000 to shareholders of
record as of April 17, 2000.
7. Reorganization Plan:
On April 12, 2000, the Fund's Board of Directors approved a plan of
reorganization, subject to shareholder approval and certain other
conditions, whereby the Fund would acquire substantially all of the
assets and liabilities of MuniHoldings Insured Fund III, Inc. and
MuniHoldings Insured Fund IV, Inc. in exchange for newly issued
shares of the Fund. These Funds are registered, non-diversified,
closed-end management investment companies. All three entities have
a similar investment objective and are managed by FAM.
MuniHoldings Insured Fund II, Inc., March 31, 2000
MANAGED DIVIDEND POLICY
The Fund's dividend policy is to distribute all or a portion of its
net investment income to its shareholders on a monthly basis. 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.
QUALITY PROFILE
The quality ratings of securities in the Fund as of March 31, 2000
were as follows:
Percent of
S&P Rating/Moody's Rating Net Assets
AAA/Aaa 83.7%
AA/Aa 4.6
BBB/Baa 9.7
Other++ 5.7
++Temporary investments in short-term municipal securities.
OFFICERS AND DIRECTORS
Terry K. Glenn, President and Director
Joe Grills, Director
Walter Mintz, Director
Robert S. Salomon, Jr., Director
Melvin R. Seiden, Director
Stephen B. Swensrud, Director
Arthur Zeikel, Director
Vincent R. Giordano, Senior Vice President
Robert A. DiMella, Vice President
Kenneth A. Jacob, Vice President
Donald C. Burke, Vice President and Treasurer
Bradley J. Lucido, Secretary
Custodian
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Transfer Agents
Common Stock:
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Preferred Stock:
The Bank of New York
100 Church Street
New York, NY 10286
NYSE Symbol
MUE
