MUNIHOLDINGS
INSURED
FUND II, INC.
FUND LOGO
Semi-Annual Report
March 31, 1999
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:
IBJ Whitehall Bank & Trust Company
One State Street
New York, NY 10004
NYSE Symbol
MUE
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. has the ability to leverage to
seek to enhance the yield and net asset value of its Common Stock.
However, these objectives cannot be achieved in all interest rate
environments. To leverage, the Fund issues Preferred Stock, which
pays dividends at prevailing short-term interest rates, and invests
the proceeds in long-term municipal bonds. The interest earned on
these investments is paid to Common Stock shareholders in the form
of dividends, and the value of these portfolio holdings is reflected
in the per share net asset value of the Fund's Common Stock.
However, in order to benefit Common Stock shareholders, the yield
curve must be positively sloped; that is, short-term interest rates
must be lower than long-term interest rates. At the same time, a
period of generally declining interest rates will benefit Common
Stock shareholders. If either of these conditions change, then the
risks of leveraging will begin to outweigh the benefits.
To illustrate these concepts, assume a fund's Common Stock
capitalization of $100 million and the issuance of Preferred Stock
for an additional $50 million, creating a total value of $150
million available for investment in long-term municipal bonds. If
prevailing short-term interest rates are approximately 3% and long-
term interest rates are approximately 6%, the yield curve has a
strongly positive slope. The fund pays dividends on the $50 million
of Preferred Stock based on the lower short-term interest rates. At
the same time, the fund's total portfolio of $150 million earns the
income based on long-term interest rates. Of course, increases in
short-term interest rates would reduce (and even eliminate) the
dividends on the Common Stock.
In this case, the dividends paid to Preferred Stock shareholders are
significantly lower than the income earned on the fund's long-term
investments, and therefore the Common Stock shareholders are the
beneficiaries of the incremental yield. However, if short-term
interest rates rise, narrowing the differential between short-term
and long-term interest rates, the incremental yield pickup on the
Common Stock will be reduced or eliminated completely. At the same
time, the market value of the fund's Common Stock (that is, its
price as listed on the New York Stock Exchange) may, as a result,
decline.Furthermore, if long-term interest rates rise, the Common
Stock's net asset value will reflect the full decline in the price
of the portfolio's investments, since the value of the fund's
Preferred Stock does not fluctuate. In addition to the decline in
net asset value, the market value of the fund's Common Stock may
also decline.
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, 1999
DEAR SHAREHOLDER
We are pleased to provide you with this first semi-annual report for
MuniHoldings Insured Fund II, Inc. In this and future shareholder
reports, we will highlight the Fund's performance and describe
recent investment activities. The Fund seeks to provide shareholders
with current income exempt from Federal income taxes by investing
primarily in a portfolio of long-term, investment-grade municipal
obligations.
Since inception (February 26, 1999) through March 31, 1999, the
Common Stock of MuniHoldings Insured Fund II, Inc. had earned and
unpaid dividends of $0.080 per share. This represents a net
annualized yield of 5.74%, based on a month-end per share net asset
value of $14.95. Over the same period, the total investment return
on the Fund's Common Stock was -0.33%, based on a change in per
share net asset value from $15.00 to $14.95.
For the period February 26, 1999 through March 31, 1999, the Fund's
Preferred Shares had an average yield of 3.05% for Series A and
3.00% for Series B.
The Municipal Market Environment
Since the Fund's inception (February 26, 1999) through March 31,
1999, long-term tax-exempt revenue bond yields were little changed.
However, long-term US Treasury bond yields were under significant
pressure throughout the March period. Investors became increasingly
concerned that the strong growth the US economy displayed during the
fourth quarter in 1998 would continue into the first half of 1999.
Continued strong US equity market performance also reduced investor
interest in long-term fixed-income products. Furthermore, foreign
economic growth, while clearly not expanding, appears to have
stabilized. This reduced much of the strong "flight to quality"
benefit the US Treasury market had enjoyed in recent quarters. These
factors helped push US Treasury bond yields higher throughout the
period. US Treasury bond yields rose 50 basis points (0.50%) to end
the March period at 5.625%. Long-term municipal revenue bond yields
rose less than 5 basis points to end the March period at 5.29% as
measured by the Bond Buyer Revenue Bond Index.
The relative stability of the municipal bond market in recent months
was largely the result of a return to a strong technical position
within the tax-exempt market. For much of 1998, new long-term
municipal bond issuance was significantly above recent historic
trends. Additionally, the strong demand exerted by world equity
markets also sapped much of the demand for tax-advantaged products.
However, in recent months, a much stronger supply/demand
relationship has developed.
Over the last 12 months, nearly $275 billion in new long-term
municipal bonds was issued, an increase of approximately 10%
compared to the same period a year ago. As interest rates declined
in the recent quarters, it has become increasingly difficult for
municipalities to generate the economic savings necessary for
additional tax-free financings. Consequently, the pace of new bond
issuance slowed in recent quarters. During the six months ended
March 31, 1999, more than $125 billion in new long-term municipal
securities was underwritten, a decrease of 6% compared to the same
six-month period a year ago. During the quarter ended March 31,
1999, approximately $60 billion in new long-term tax-exempt bonds
was issued, a decline of almost 20% compared to the quarter ended
March 31, 1998.
Additionally, in January and February, tax-exempt bondholders
received over $40 billion from coupon payments, bond maturities and
proceeds from early bond redemptions. Consequently, retail investor
demand has been strong in recent months, easily matching, if not at
times exceeding, available supply. We will monitor this trend
closely in the coming months to determine if the supply pressures
exerted in 1998 are abating and fostering a more balanced
supply/demand environment for 1999.
The recent relative outperformance of the municipal bond market has
resulted in a decline in its recent historic high yield ratios. As
recently as the end of 1998, long-term, A-rated municipal revenue
bond yields were in excess of 100% of comparable US Treasury bond
yields. At March 31, 1999, municipal bond yield ratios were
approximately 95% of their taxable counterparts, still well above
their recent historic average. During 1997, tax-exempt bond yield
ratios averaged 84%. Should the current positive technical
environment in municipal securities continue to improve, it is
likely that tax-exempt bond yield ratios will return to more
historic levels.
Looking ahead, the direction and intensity of the next move in
interest rates is difficult to predict. In recent years, US bond
yields tended to reach their annual peak sometime in April and move
downward for the remainder of the year. However, such trends have
been predicated on subsequent declines in US economic activity.
Currently, there appears to be little indication of significant
economic weakness going forward. On the other hand, by nearly every
measure, inflation is well contained. Future indicators of
inflation, such as the prices of gold and other commodities, are
giving little evidence of any significant inflationary increase.
Additionally, inflation-adjusted real rates of return are
historically attractive to long-term investors. These factors
suggest that fixed-income bond yields may trade in a relatively
narrow range, centered around current levels, for a protracted
period of time. Should the US economy weaken later this year, it is
likely that bond yields will decline as they have in recent years.
Portfolio Strategy
Since its inception, we have focused on committing the Fund's
initial proceeds in the long-term and intermediate-term maturity
range of the insured municipal market. Interest rates in the taxable
arena, and to a much lesser degree in the municipal market, have
risen since the Fund commenced operations. Therefore, we had to
proceed carefully in making our initial investments in order to seek
to protect the portfolio's net asset valuation. More of our initial
investments were focused in shorter maturity municipal bonds than
would otherwise be the case if the fixed-income market had been more
stable. Our goal is to have the Fund invested while tempering the
impact of rising interest rates so that Common Stock shareholders
can begin to benefit from the higher yield that leverage can
provide. (For an explanation of the benefits and risks of
leveraging, see page 1 of this report to shareholders.)
As a result of inordinately tight credit quality spreads, we
deliberately underweighted the Fund's exposure to uninsured bonds.
Our portfolio currently reflects a balance of long-term and short-
term holdings, with a high degree of credit quality. Once interest
rates have stabilized, we plan to recommit a larger portion of Fund
assets to longer-term, higher-yielding bonds.
In Conclusion
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
May 12, 1999
MuniHoldings Insured Fund II, Inc., March 31, 1999
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 and at right.
AMT Alternative Minimum Tax (subject to)
GO General Obligation Bonds
HFA Housing Finance Agency
PCR Pollution Control Revenue Bonds
RIB Residual Interest Bonds
S/F Single-Family
UT Unlimited Tax
VRDN Variable Rate Demand Notes
<TABLE>
SCHEDULE OF INVESTMENTS (in Thousands)
<CAPTION>
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <S> <S> <C> <S> <C>
Alabama--6.6% AAA Aaa $17,140 Jefferson County, Alabama, Sewer Revenue Bonds,
Capital Improvement Warrants, Series A, 5.375%
due 2/01/2036 (b) $ 17,442
Colorado--4.6% NR* Aa2 11,000 Colorado HFA (S/F Program), Revenue Refunding Bonds,
AMT, Series A-2, 6.45% due 4/01/2030 12,106
Connecticut--3.3% NR* Baa3 8,500 Mashantucket Western Pequot Tribe, Connecticut,
Special Revenue Refunding Bonds, Series B, 5.75%
due 9/01/2027 8,727
Illinois--14.5% AAA Aaa 10,000 Chicago, Illinois, Board of Education, Chicago
School Reform, GO,UT, Series A, 5.25% due
12/01/2022 (a) 10,040
AAA Aaa 7,765 Chicago, Illinois, Board of Education (School
Reform Project), GO, Series A, 5.25% due 12/01/2027 (a) 7,796
AAA NR* 12,650 Chicago, Illinois, Wastewater Transmission Revenue
Bonds, 5.125% due 1/01/2025 (b) 12,410
AAA Aaa 4,000 Illinois Development Finance Authority, PCR (Illinois
Power Company Project), Series A, 5.40% due 3/01/2028 (d) 4,048
NR* Aaa 4,000 Melrose Park, Illinois, Water Revenue Bonds, Series A,
5.20% due 7/01/2018 (d) 4,034
Massachusetts-- AAA Aaa 5,970 Massachusetts Bay Transportation Authority, General
11.5% Transportation Revenue Bonds, Series D, 5% due
3/01/2027 (d) 5,821
AA- Aa3 5,000 Massachussets State, GO, Consolidated Loan, Series C, 5%
due 8/01/2017 4,994
AAA Aaa 8,820 Massachusetts State Turnpike Authority, Metropolitan
Highway Systems Revenue Refunding Bonds, Sub-Series B,
5.125% due 1/01/2037 (d) 8,682
AAA Aaa 7,000 Massachusetts State Water Resources Authority Revenue
Bonds, Series B, 5% due 12/01/2025 (d) 6,818
AAA Aaa 4,000 Massachusetts State Water Resources Authority,
Revenue Refunding Bonds, Series D, 5% due 8/01/2024 (d) 3,915
Mississippi--2.4% Jackson County, Mississippi PCR, Revenue Refunding Bonds
(Chevron USA Inc. Project), VRDN (f):
NR* P1 5,100 2.95% due 12/01/2016 5,100
NR* VMIG1++ 1,300 2.95% due 6/01/2023 1,300
New Jersey--5.9% AAA Aaa 5,740 New Jersey Healthcare Facilities Financing Authority,
Revenue Refunding Bonds (Saint Barnabas Health),
Series B, 5.25% due 7/01/2016 (d) 5,887
AAA Aaa 9,720 New Jersey Sports and Exposition Authority, Convention
Center Revenue Refunding Bonds, 5% due 9/01/2018 (d) 9,708
New York--17.3% Long Island Power Authority, New York,
Electric System Revenue Bonds:
AAA Aaa 10,800 Series A, 5.125% due 12/01/2022 (c) 10,804
A- VMIG1++ 1,900 Sub-Series 5, VRDN, 3% due 5/01/2033 (f) 1,900
AAA Aaa 5,000 Metropolitan Transportation Authority, New York,
Dedicated Tax Fund Revenue Bonds, Series A, 5.25% due
4/01/2026 (d) 5,070
A1+ VMIG1++ 3,100 New York City, New York, Municipal Water Finance
Authority, Water and Sewer System Revenue Refunding Bonds,
VRDN, Series G, 2.95% due 6/15/2024 (b)(f) 3,100
AAA NR* 7,000 New York State Dormitory Authority Revenue Bonds (State
University Educational Facilities), Series B, 5% due
5/15/2018 (c) 6,965
AAA Aaa 7,860 New York State Local Government Assistance Corporation,
Revenue Refunding Bonds, Series B, 5% due 4/01/2018 (d) 7,822
AAA Aaa 9,600 New York State Urban Development Corporation Revenue
Bonds (Correctional Capital Facilities), Series 6, 5.375% due
1/01/2025 (a) 9,866
Ohio--1.9% BBB Baa3 5,000 Ohio State Solid Waste Disposal Revenue Bonds (USG
Corporation Project), AMT, 5.60% due 8/01/2032 4,985
Pennsylvania-- NR* Aaa 4,860 Erie, Pennsylvania, Sewer Authority, Sewer Revenue
6.8% Bonds, Series B, 5.125% due 6/01/2020 (a) 4,841
NR* Aaa 5,600 Lycoming County, Pennsylvania, College Authority Revenue
Bonds (Pennsylvania College of Technology), 5.25% due
7/01/2018 (d) 5,715
AAA Aaa 7,500 Pennsylvania State Turnpike Commission, Oil Franchise
Tax Revenue Bonds, Senior Series A, 5% due 12/01/2023 (a) 7,374
Tennessee--2.3% AAA Aaa 6,000 Metropolitan Government, Nashville and Davidson County
Tennesse, GO, Series A, 5.125% due 11/15/2027 (b) 5,986
Texas--14.1% AAA NR* 10,000 Brazos River Authority, Texas, PCR, Refunding, AMT,
Series C, 5.55% due 6/01/2030 (d) 10,290
AAA NR* 15,260 Colorado River, Texas, Municipal Water District, Revenue
Refunding Bonds, Series 119, RIB, 6.915% due 1/01/2021 (a)(e) 15,178
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 6,283
AAA Aaa 5,375 Texas State Turnpike Authority, Dallas North Thruway
Revenue Bonds (President George Bush Turnpike),
5.25% due 1/01/2023 (b) 5,416
Wyoming--3.8% NR* P1 10,000 Uinta County, Wyoming, PCR, Refunding (Chevron USA
Inc. Project), VRDN, 2.95% due 8/15/2020 (f) 10,000
Puerto Rico--3.9% AAA Aaa 10,000 Puerto Rico Commonwealth Infrastructure
Financing Authority Special, Series A, 5%
due 7/01/2012 (a) 10,327
Total Investments (Cost--$260,956)--98.9% 260,750
Other Assets Less Liabilities--1.1% 2,768
---------
Net Assets--100.0% $ 263,518
=========
<FN>
*Not Rated.
++Highest short-term rating by Moody's Investors Service, Inc.
(a)AMBAC Insured.
(b)FGIC Insured.
(c)FSA Insured.
(d)MBIA Insured.
(e)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 March 31, 1999.
(f)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, 1999.
See Notes to Financial Statements.
</TABLE>
MuniHoldings Insured Fund II, Inc., March 31, 1999
<TABLE>
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<CAPTION>
As of March 31, 1999
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$260,955,900)(Note 1a) $260,749,769
Cash 81,592
Receivables:
Interest $ 3,194,676
Investment adviser (Note 2) 26,223 3,220,899
------------
Prepaid expenses and other assets 19,500
------------
Total assets 264,071,760
------------
Liabilities: Payables:
Offering costs (Note 1e) 183,440
Dividends to shareholders (Note 1f) 74,550 257,990
------------
Accrued expenses and other liabilities 295,441
------------
Total liabilities 553,431
------------
Net Assets: Net assets $263,518,329
Capital: ============
Capital Stock (200,000,000 shares authorized)(Note 4):
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 (10,606,667 shares
issued and outstanding) $ 1,060,667
Paid-in capital in excess of par 156,800,201
Undistributed investment income--net 799,433
Undistributed realized capital gains on investments--net 64,159
Unrealized depreciation on investments--net (206,131)
------------
Total--Equivalent to $14.95 net asset value per share of
Common Stock (market price--$14.875) 158,518,329
------------
Total capital $263,518,329
============
<FN>
*Auction Market Preferred Stock.
See Notes to Financial Statements.
<CAPTION>
STATEMENT OF OPERATIONS
For the Period February 26, 1999++ to March 31, 1999
<S> <S> <C> <C>
Investment Interest and amortization of premium and discount earned $ 942,792
Income (Note 1d):
Expenses: Investment advisory fees (Note 2) $ 92,641
Commission fees (Note 4) 15,758
Accounting services (Note 2) 2,967
Directors' fees and expenses 2,550
Professional fees 2,535
Transfer agent fees 2,086
Custodian fees 1,349
Listing fees 957
Printing and shareholder reports 902
Pricing fees 439
Other 763
------------
Total expenses before reimbursement 122,947
Reimbursement of expenses (Note 2) (118,864)
------------
Total expenses after reimbursement 4,083
------------
Investment income--net 938,709
------------
Realized & Realized gain on investments--net 64,159
Unrealized Unrealized depreciation on investments--net (206,131)
Gain (Loss) on ------------
Investments--Net Net Increase in Net Assets Resulting from Operations $ 796,737
(Notes 1b, ============
1d & 3):
<FN>
++Commencement of operations.
See Notes to Financial Statements.
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
For the Period
Feb. 26, 1999++ to
Increase (Decrease) in Net Assets: March 31, 1999
<S> <S> <C>
Operations: Investment income--net $ 938,709
Realized gain on investments--net 64,159
Unrealized depreciation on investments--net (206,131)
------------
Net increase in net assets resulting from operations 796,737
------------
Dividends to Investment income--net to Preferred Stock shareholders (139,276)
Shareholders ------------
(Note 1f): Net decrease in net assets resulting from dividends to shareholders (139,276)
------------
Capital Stock Proceeds from issuance of Common Stock 159,000,000
Transactions Proceeds from issuance of Preferred Stock 105,000,000
(Notes 1e & 4): Offering costs resulting from the issuance of Common Stock (268,197)
Offering and underwriting costs resulting from the issuance of Preferred Stock (970,940)
------------
Net increase in net assets derived from capital stock transactions 262,760,863
------------
Net Assets: Total increase in net assets 263,418,324
Beginning of period 100,005
------------
End of period* $263,518,329
============
<FN>
*Undistributed investment income--net $ 799,433
============
++Commencement of operations.
See Notes to Financial Statements.
</TABLE>
MuniHoldings Insured Fund II, Inc., March 31, 1999
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements. For the Period
Feb. 26, 1999++ to
Increase (Decrease) in Net Asset Value: March 31, 1999
<S> <S> <C>
Per Share Net asset value, beginning of period $ 15.00
Operating ------------
Performance: Investment income--net .09
Realized and unrealized loss on investments--net (.01)
------------
Total from investment operations .08
------------
Capital change resulting from issuance of Common Stock (.03)
Effect of Preferred Stock activity++++:
Dividends to Preferred Stock shareholders:
Investment income--net (.01)
Capital charge resulting from issuance of Preferred Stock (.09)
------------
Total effect of Preferred Stock activity (.10)
------------
Net asset value, end of period $ 14.95
============
Market price per share, end of period $ 14.875
============
Total Investment Based on market price per share (.83%)+++
Return:** ============
Based on net asset value per share (.33%)+++
============
Ratios to Average Expenses, net of reimbursement .02%*
Net Assets:*** ============
Expenses .73%*
============
Investment income--net 5.57%*
============
Supplemental Net assets, net of Preferred Stock, end of period (in thousands) $ 158,518
Data: ============
Preferred Stock outstanding, end of period (in thousands) $ 105,000
============
Portfolio turnover 15.60%
============
Leverage: Asset coverage per $1,000 $ 2,510
============
Dividends Series A--Investment income--net $ 38
Per Share on ============
Preferred Stock Series B--Investment income--net $ 29
Outstanding: ============
<FN>
*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 March 18, 1999.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
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. Prior to commencement of
operations on February 26, 1999, the Fund had no operations other
than those relating to organizational matters and the sale of 6,667
shares of Common Stock on February 18, 1999, to Fund Asset
Management, L.P. ("FAM") for $100,005. 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 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.
* 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.
MuniHoldings Insured Fund II, Inc., March 31, 1999
NOTES TO FINANCIAL STATEMENTS (concluded)
(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 February 26, 1999 to
March 31, 1999, FAM earned fees of $92,641, all of which was
voluntarily waived. FAM also reimbursed the Fund additional expenses
of $26,223.
During the period February 26, 1999 to March 31, 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 period February 26, 1999 to March 31, 1999 were $266,888,025
and $27,279,508, respectively.
Net realized gains (losses) for the period February 26, 1999 to
March 31, 1999 and net unrealized losses as of March 31, 1999 were
as follows:
Realized Gains Unrealized
(Losses) Losses
Long-term investments $ (42,512) $ (206,131)
Financial futures contracts 106,671 --
----------- ----------
Total $ 64,159 $ (206,131)
=========== ==========
As of March 31, 1999, net unrealized depreciation for Federal income
tax purposes aggregated $206,131, of which $220,122 related to
appreciated securities and $426,253 related to depreciated
securities. The aggregate cost of investments at March 31, 1999 for
Federal income tax purposes was $260,955,900.
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 February 26, 1999 to
March 31, 1999 increased by 10,600,000 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, 1999 were as follows: Series A, 3.09% and Series B, 2.99%.
In connection with the offering of AMPS, the Board of Directors
reclassified 4,200 shares of unissued capital stock as AMPS. Shares
issued and outstanding during the period February 26, 1999 to March
31, 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 0.25% to 0.375%,
calculated on the proceeds of each auction.
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 invest-ment 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, 1999
were as follows:
Percent of
S&P Rating/Moody's Rating Net Assets
AAA/Aaa 76.7%
AA/Aa 8.9
BBB/Baa 5.2
Other++ 8.1
[FN]
++Temporary investments in short-term municipal securities.
