MUNIHOLDINGS
INSURED
FUND II, INC.
FUND LOGO
Annual Report
September 30, 1999
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., September 30, 1999
DEAR SHAREHOLDER
Since inception (February 26, 1999) through September 30, 1999, the
Common Stock of MuniHoldings Insured Fund II, Inc. earned $0.495 per
share income dividends, which included earned and unpaid dividends
of $0.069. This represents a net annualized yield of 6.54%, based on
a month-end net asset value of $12.72 per share. During the same
period, the total investment return on the Fund's Common Stock was
- -12.40%, based on a change in per share net asset value from $15.00
to $12.72, and assuming reinvestment of $0.426 per share income
dividends.
For the six-month period ended September 30, 1999, the Fund's
Auction Market Preferred Stock had an average yield of 3.24% for
Series A and 3.22% for Series B.
The Municipal Market Environment
The combination of steady strong domestic economic growth,
improvement in foreign economies (most notably in Japan) and
increasing investor concerns regarding potential increases in US
inflation put upward pressure on bond yields throughout the six-
month period ended September 30, 1999. Continued strong US
employment growth, particularly the decline in the US unemployment
rate to 4.2% in early June, was among the reasons the Federal
Reserve Board cited for raising short-term interest rates in late
June and again in late August. US Treasury bond yields reacted by
climbing above 6.25% by mid-August before improving somewhat to
6.05% by September 30, 1999. During the period, yields on 30-year US
Treasury bonds increased over 40 basis points (0.40%).
Long-term tax-exempt bond yields also rose during the six months
ended September 30, 1999. Until early May, the municipal bond market
was able to withstand much of the upward pressure on bond yields.
However, investor concerns of additional moves by the Federal
Reserve Board to moderate US economic growth and, more importantly,
the loss of the strong technical support that the tax-exempt market
enjoyed in early 1999 helped push municipal bond yields
significantly higher for the remainder of the period. The yields on
long-term tax-exempt revenue bonds rose over 65 basis points to
5.96% by September 30, 1999, as measured by the Bond Buyer Revenue
Bond Index.
In recent months, the significant decline in new tax-exempt bond
issuance has remained a positive factor within the municipal bond
market, as it had been for much of the past year. During the last
six months, more than $113 billion in long-term municipal bonds was
issued, a decline of over 20% compared to the same period a year
ago. During the past three months, $55 billion in municipal bonds
was underwritten, representing a decline of nearly 15% compared to
the corresponding period in 1998. Additionally, in June and July,
investors received more than $40 billion in coupon income and
proceeds from bond maturities and early bond redemptions. These
proceeds have generated considerable retail investor interest, which
has helped absorb the recent diminished supply.
Although tax-exempt bond yields are at their highest level in over
two years and have attracted significant retail investor interest,
institutional demand has declined sharply. Long-term municipal
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. In addition, the demand from
property/casualty insurance companies has weakened as a result of
the losses, and anticipated losses, incurred as a result of the
series of damaging storms across much of the eastern United States.
Additionally, many institutional investors who were attracted to the
municipal bond market in recent years by historically attractive tax-
exempt bond yield ratios of over 90% have found other asset classes
even more attractive. Even with a reduced supply position, tax-
exempt issuers have been forced to repeatedly raise municipal bond
yields in the attempt to attract adequate demand.
The recent relative underperformance of the municipal bond market
has resulted in an opportunity for long-term investors to purchase
tax-exempt issues whose yields are nearly identical to taxable US
Treasury securities. At September 30, 1999, long-term uninsured
municipal revenue bond yields were almost 99% of comparable US
Treasury securities. In recent months, many taxable asset classes,
such as corporate bonds, mortgage-backed securities and US agency
debt, have all accelerated debt issuance. This acceleration was
initiated largely to avoid issuing securities at year-end and to
minimize any associated Year 2000 (Y2K) problems that may develop.
However, this increased issuance has also resulted in higher yield
levels in the various asset classes as lower bond prices became
necessary to attract sufficient investor demand. Going forward, it
is believed that the pace of non-US Government debt issuance is
likely to slow significantly. As the supply of this debt declines,
we would expect many institutional investors to return to the
municipal bond market and the attractive yield ratios available.
Looking ahead, it appears to us that long-term municipal bond yields
will remain under pressure, trading in a broad range centered near
current levels. Investors are likely to remain concerned about
future action by the Federal Reserve Board. Y2K considerations may
prohibit a series of Federal Reserve Board moves at the end of the
year and the beginning of 2000. Any improvement in bond prices will
probably be contingent upon weakening in both US employment growth
and consumer spending. The 100 basis point rise in US Treasury bond
yields seen thus far this year may negatively affect US economic
growth. The US housing market will be among the first sectors likely
to be affected, as some declines have already been evidenced in
response to higher mortgage rates. We believe that it is also
unrealistic to expect double-digit returns in US equity markets to
continue indefinitely. Much of the US consumer's wealth is tied to
recent stock market appreciation. Any slowing in these incredible
growth rates is likely to reduce consumer spending. We believe that
these factors suggest that the worst of the recent increase in bond
yields has passed and stable, if not slightly improving, bond prices
may be expected.
Portfolio Strategy
Our goal is to deliver the highest possible level of tax-exempt
income through the use of leverage while simultaneously delivering a
competitive total return. (For an explanation of the benefits and
risks of leveraging, see page 1 of this report to shareholders.) For
the past six months, we believe that we have structured the Fund to
accomplish half of this equation. The Fund succeeded in enhancing
the yield to the shareholder but underperformed on the total return
side. The fixed-income marketplace has been subject to above-average
price volatility, resulting from steady economic releases and
uncertainty surrounding the Year 2000. Consequently, our relatively
fully invested position for the Fund has subjected its net asset
valuation to the volatility that accompanies such a drastic rise in
interest rates. The positive news is that municipal bonds have
reached both relative and absolute levels where retail demand
becomes very active, which we expect to provide support for the
fixed-income market going into next year, when a lesser degree of
supply could be forecast.
At September 30, 1999, the Fund was heavily weighted in high-quality
holdings, with 91.6% of Fund assets rated AAA by at least one of the
major rating agencies. We deliberately underweighted the Fund's
exposure to uninsured bonds because of the market's tight credit
quality spreads. The emphasis on credit quality has helped
performance as credit spreads have widened in this period's rising
interest rate environment. With value having been restored to the
taxable and especially to tax-exempt fixed-income markets, we intend
to stay the course and monitor market data for signs indicating a
more supportive market for fixed-income securities.
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
(Roberto A. DiMella)
Roberto A. DiMella
Vice President and Portfolio Manager
October 28, 1999
MuniHoldings Insured Fund II, Inc., September 30, 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 at right.
AMT Alternative Minimum Tax
(subject to)
COP Certificates of Participation
EDA Economic Development Authority
GO General Obligation Bonds
PCR Pollution Control Revenue
Bonds
RIB Residual Interest Bonds
<TABLE>
SCHEDULE OF INVESTMENTS (in Thousands)
<CAPTION>
S&P Moody's Face Value
STATE Ratings Ratings Amount Issue (Note 1a)
<S> <C> <C> <C> <S> <C>
Alabama--3.0% AAA NR* $ 8,570 Jefferson County, Alabama, Sewer Revenue Bonds, RIB, Series 124,
6.62% due 2/01/2036 (b)(e) $ 7,225
California AAA Aaa 8,000 California State, GO, 5% due 10/01/2023 (d) 7,215
- --17.3% BBB NR* 2,500 Contra Costa County, California, Public Financing Authority,
Tax Allocation Revenue Refunding Bonds (Pleasant Hill Bart Etc.
Redevelopment), 5.25% due 8/01/2028 2,201
AAA Aaa 15,000 Los Angeles, California, Unified School District, GO, Series A,
5% due 7/01/2021 (b) 13,630
AAA Aaa 10,000 San Francisco, California, City and County Airport Commission,
International Airport Revenue Bonds, Second Series, Issue 15-B,
4.50% due 5/01/2028 (d) 8,124
AAA NR* 2,000 Santa Clara, California, Unified School District, GO, 5% due
8/01/2022 (b) 1,810
AAA Aaa 10,000 University of California, Revenue Refunding Bonds (Multiple
Purpose Projects), Series E, 5.125% due 9/01/2020 (d) 9,291
Connecticut NR* Baa3 8,500 Mashantucket Western Pequot Tribe, Connecticut, Special Revenue
- --3.2% Refunding Bonds, Sub-Series B, 5.75% due 9/01/2027 7,899
Florida--2.7% AAA Aaa 5,000 Lake County, Florida, School Board, COP, 5% due 7/01/2023 (d) 4,470
NR* Aaa 2,500 Orange County, Florida, School Board, COP, RIB, Series 130,
6.36% due 8/01/2023 (d)(e) 2,147
Georgia--1.7% AAA Aaa 4,500 Metropolitan Atlanta, Georgia, Rapid Transit Authority, Sales
Tax Revenue Bonds, Second Indenture, Series B, 5.10% due
7/01/2020 (d) 4,127
Hawaii--4.1% AAA Aaa 10,000 Hawaii State, GO, Series CT, 5.875% due 9/01/2018 (c) 10,106
Illinois--8.5% AAA Aaa 10,000 Chicago, Illinois, Board of Education, GO (Chicago School
Reform), Series A, 5.25% due 12/01/2022 (a) 9,148
AAA Aaa 3,400 Chicago, Illinois, Skyway Toll Bridge Revenue Refunding Bonds,
5.50% due 1/01/2023 (d) 3,237
AAA Aaa 5,000 Illinois Development Finance Authority, PCR, Refunding (Illinois
Power Company Project), Series A, 5.40% due 3/01/2028 (d) 4,612
AAA Aaa 4,000 Melrose Park, Illinois, Water Revenue Bonds, Series A, 5.20%
due 7/01/2018 (d) 3,697
Indiana--3.7% AAA NR* 9,280 Shelbyville, Indiana, Elementary School Building Corporation
Revenue Bonds (First Mortgage), 5.75% due 1/15/2022 (c) 9,142
Massachusetts AAA Aaa 8,635 Massachusetts Bay Transportation Authority, Massachusetts,
- --3.1% Revenue Refunding Bonds (General Transportation System),
Series B, 5% due 3/01/2028 (d) 7,548
Mississippi BBB- Ba1 3,550 Mississippi Business Finance Corporation, Mississippi, PCR,
- --1.3% Refunding (System Energy Resources Inc. Project), 5.90%
due 5/01/2022 3,286
New Jersey AAA Aaa 3,595 New Jersey EDA, Revenue Bonds (Transportation Project Sub-Lease),
- --3.0% Series A, 5% due 5/01/2008 (c) 3,617
AAA Aaa 3,800 New Jersey State Housing and Mortgage Finance Agency, Revenue
Refunding Bonds (Home Buyer), AMT, Series AA, 5.90% due
10/01/2029 (d) 3,758
New York Long Island Power Authority, New York, Electric System Revenue
- --18.5% Refunding Bonds, Series A:
AAA Aaa 15,000 5.125% due 12/01/2022 (c) 13,650
AAA Aaa 10,000 5.50% due 12/01/2029 (d) 9,574
AAA Aaa 5,500 Metropolitan Transportation Authority, New York, Dedicated Tax
Fund Revenue Bonds, Series A, 5% due 4/01/2023 (b) 4,901
AAA Aaa 10,000 Nassau Health Care Corporation, New York, Health System Revenue
Bonds, 5.75% due 8/01/2022 (c) 9,899
AAA Aaa 7,500 Port Authority of New York and New Jersey, Consolidated Revenue
Bonds, AMT, 119th Series, 5.50% due 9/15/2016 (b) 7,378
Ohio--3.9% BBB+ Baa2 5,000 Ohio State Solid Waste Disposal Revenue Bonds (USG Corporation
Project), AMT, 5.60% due 8/01/2032 4,504
AAA Aaa 5,260 Ohio State Water Development Authority Revenue Bonds (Water
Development-Community Assistance), 5.375% due 12/01/2024 (a) 5,012
Pennsylvania NR* Aaa 4,015 Beaver County, Pennsylvania, GO, Refunding, 5.15% due
- --8.2% 10/01/2017 (d) 3,746
NR* Aaa 5,600 Lycoming County, Pennsylvania, College Authority Revenue
Bonds (Pennsylvania College of Technology), 5.25% due
7/01/2018 (d) 5,281
AAA Aaa 5,450 Pennsylvania State Turnpike Commission, Oil Franchise Tax
Revenue Refunding Bonds, Senior Series A, 4.75% due 12/01/2027 (a) 4,535
AAA Aaa 7,500 Philadelphia, Pennsylvania, GO, 5% due 5/15/2025 (d) 6,622
Rhode Providence, Rhode Island, Public Building Authority, General
Island--2.3% Revenue Bonds (School and Public Facilities Projects),
Series A (a):
AAA Aaa 2,785 5.25% due 12/15/2017 2,632
AAA Aaa 1,435 5.25% due 12/15/2018 1,350
AAA Aaa 1,855 5.25% due 12/15/2019 1,736
Tennessee AAA Aaa 7,000 Harpeth Valley, Tennessee, Davidson and Williamson Counties
- --2.5% Utilities District, Utilities Improvement Revenue Bonds, 5%
due 9/01/2028 (d) 6,157
Texas--14.3% AAA NR* 15,260 Colorado River, Texas, Municipal Water District, Revenue
Refunding Bonds, RIB, Series 119, 6.165% due 1/01/2021 (a)(e) 12,571
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) 6,004
AAA Aaa 17,775 Texas State Turnpike Authority, Dallas North Thruway Revenue
Bonds (President George Bush Turnpike), 5.25% due 1/01/2023 (b) 16,385
Total Investments (Cost--$259,898)--101.3% 248,227
Liabilities in Excess of Other Assets--(1.3%) (3,298)
---------
Net Assets--100.0% $ 244,929
=========
<FN>
(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 September 30, 1999.
(f)Escrowed to maturity.
*Not Rated.
Ratings of issues shown have not been audited by Ernst & Young LLP.
See Notes to Financial Statements.
</TABLE>
MuniHoldings Insured Fund II, Inc., September 30, 1999
<TABLE>
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<CAPTION>
As of September 30, 1999
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$259,898,232)(Note 1a) $248,226,576
Cash 10,072
Receivables:
Interest $ 3,463,188
Securities sold 1,496,833 4,960,021
------------
Prepaid expenses 15,528
------------
Total assets 253,212,197
------------
Liabilities: Payables:
Securities purchased 7,793,982
Dividends to shareholders (Note 1f) 269,552
Offering costs (Note 1e) 54,000
Investment adviser (Note 2) 9,916 8,127,450
------------
Accrued expenses and other liabilities 155,285
------------
Total liabilities 8,282,735
------------
Net Assets: Net assets $244,929,462
============
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 (10,996,667 shares
issued and outstanding) $ 1,099,667
Paid-in capital in excess of par 162,650,964
Undistributed investment income--net 917,886
Accumulated realized capital losses on investments--net (13,067,399)
Unrealized depreciation on investments--net (11,671,656)
------------
Total--Equivalent to $12.72 net asset value per share of Common
Stock (market price--$12.00) 139,929,462
------------
Total capital $244,929,462
============
<FN>
*Auction Market Preferred Stock.
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Period February 26, 1999++ to September 30, 1999
<S> <S> <C> <C>
Investment Interest and amortization of premium and discount earned $ 7,993,134
Income
(Note 1d):
Expenses: Investment advisory fees (Note 2) $ 806,576
Commission fees (Note 4) 140,885
Professional fees 37,901
Accounting services (Note 2) 31,252
Transfer agent fees 23,354
Directors' fees and expenses 20,214
Printing and shareholder reports 11,487
Custodian fees 9,209
Listing fees 9,149
Pricing fees 3,530
Other 7,980
------------
Total expenses before reimbursement 1,101,537
Reimbursement of expenses (Note 2) (547,658)
------------
Total expenses after reimbursement 553,879
------------
Investment income--net 7,439,255
------------
Realized & Realized loss on investments--net (13,067,399)
Unrealized Unrealized depreciation on investments--net (11,671,656)
Loss on ------------
Investments--Net Net Decrease in Net Assets Resulting from Operations $(17,299,800)
(Notes 1b, ============
1d & 3):
<FN>
++Commencement of operations.
See Notes to Financial Statements.
</TABLE>
MuniHoldings Insured Fund II, Inc., September 30, 1999
<TABLE>
STATEMENT OF CHANGES IN NET ASSETS
<CAPTION>
For the Period
February 26, 1999++ to
Increase (Decrease) in Net Assets: September 30, 1999
<S> <S> <C>
Operations: Investment income--net $ 7,439,255
Realized loss on investments--net (13,067,399)
Unrealized depreciation on investments--net (11,671,656)
------------
Net decrease in net assets resulting from operations (17,299,800)
------------
Dividends to Investment income--net:
Shareholders Common Stock (4,682,689)
(Note 1f): Preferred Stock (1,838,680)
------------
Net decrease in net assets resulting from dividends to shareholders (6,521,369)
------------
Capital Stock Proceeds from issuance of Common Stock 164,850,000
Transactions Proceeds from issuance of Preferred Stock 105,000,000
(Notes 1e & 4): Offering costs resulting from the issuance of Common Stock (228,434)
Offering and underwriting costs resulting from the issuance of Preferred Stock (970,940)
------------
Net increase in net assets derived from capital stock transactions 268,650,626
------------
Net Assets: Total increase in net assets 244,829,457
Beginning of period 100,005
------------
End of period* $244,929,462
============
<FN>
*Undistributed investment income--net $ 917,886
============
++Commencement of operations.
See Notes to Financial Statements.
</TABLE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements. For the Period
February 26, 1999++ to
Increase (Decrease) in Net Asset Value: September 30, 1999
<S> <S> <C>
Per Share Net asset value, beginning of period $ 15.00
Operating ------------
Performance: Investment income--net .68
Realized and unrealized loss on investments--net (2.24)
------------
Total from investment operations (1.56)
------------
Less dividends to Common Stock shareholders:
Investment income--net (.43)
------------
Total dividends and distributions to Common Stock shareholders (.43)
------------
Capital change resulting from issuance of Common Stock (.03)
------------
Effect of Preferred Stock activity:++++
Dividends to Preferred Stock shareholders:
Investment income--net (.17)
Capital charge resulting from issuance of Preferred Stock (.09)
------------
Total effect of Preferred Stock activity (.26)
------------
Net asset value, end of period $ 12.72
============
Market price per share, end of period $ 12.00
============
Total Investment Based on market price per share (17.36%)+++
Return:** ============
Based on net asset value per share (12.40%)+++
============
Ratios Based on Total expenses, net of reimbursement*** .62%*
Average Net ============
Assets of Total expenses*** 1.22%*
Common Stock: ============
Total investment income--net*** 8.27%*
============
Amount of dividends to Preferred Stock shareholders 2.04%*
============
Investment income--net, to Common Stock shareholders 6.23%*
============
Ratios Based on Total expenses, net of reimbursement .38%*
Total Average Net ============
Assets:++++++*** Total expenses .75%*
============
Total investment income--net 5.07%*
============
Ratios Based on Dividends to Preferred Stock shareholders 3.24%*
Average Net ============
Assets of
Preferred Stock:
Supplemental Net assets, net of Preferred Stock, end of period (in thousands) $ 139,929
Data: ============
Preferred Stock outstanding, end of period (in thousands) $ 105,000
============
Portfolio turnover 159.29%
============
Leverage: Asset coverage per $1,000 $ 2,333
============
Dividends Series A--Investment income--net $ 443
Per Share on ============
Preferred Stock Series B--Investment income--net $ 432
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 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., September 30, 1999
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. 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.
(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 period February 26, 1999 to
September 30, 1999, FAM earned fees of $806,576 of which $521,435
was voluntarily waived. FAM also reimbursed the Fund additional
expenses of $26,223.
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 period February 26, 1999 to September 30, 1999 were
$635,165,760 and $361,597,955, respectively.
Net realized gains (losses) for the period February 26, 1999 to
September 30, 1999 and net unrealized losses as of September 30,
1999 were as follows:
Realized Unrealized
Gains (Losses) Losses
Long-term investments $(13,638,573) $(11,671,656)
Financial futures contracts 571,174 --
------------ ------------
Total $(13,067,399) $(11,671,656)
============ ============
As of September 30, 1999, net unrealized depreciation for Federal
income tax purposes aggregated $11,915,481, of which $275,923
related to appreciated securities and $12,191,404 related to
depreciated securities. The aggregate cost of investments at
September 30, 1999 for Federal income tax purposes was $260,142,057.
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
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
September 30, 1999 were as follows: Series A, 3.90% and Series B,
3.80%.
In connection with the offering 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
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 period February
26, 1999 to September 30, 1999, MLPF&S earned $127,038 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 October 6, 1999, the Fund's Board of Directors declared an
ordinary income dividend to Common Stock shareholders in the amount
of $.069000 per share, payable on October 28, 1999 to shareholders
of record as of October 22, 1999.
MuniHoldings Insured Fund II, Inc., September 30, 1999
<AUDIT-REPORT>
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors,
MuniHoldings Insured Fund II, Inc.:
We have audited the accompanying statement of assets, liabilities
and capital of MuniHoldings Insured Fund II, Inc., including the
schedule of investments, as of September 30, 1999, and the related
statements of operations and changes in net assets, and financial
highlights for the period from February 26, 1999 (commencement of
operations) to September 30, 1999. These financial statements and
financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these
financial statements and 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 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
and financial highlights. Our procedures included confirmation of
securities owned as of September 30, 1999, by correspondence with
the custodian and brokers. 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
referred to above present fairly, in all material respects, the
financial position of MuniHoldings Insured Fund II, Inc. at
September 30, 1999, the results of its operations, the changes in
its net assets, and the financial highlights for the period from
February 26, 1999 to September 30, 1999 in conformity with generally
accepted accounting principles.
Ernst & Young LLP
MetroPark, New Jersey
October 22, 1999
</AUDIT-REPORT>
IMPORTANT TAX INFORMATION (unaudited)
All of the net investment income distributions paid by MuniHoldings
Insured Fund II, Inc. during its taxable year ended September 30,
1999 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.
QUALITY PROFILE (unaudited)
The quality ratings of securities in the Fund as of September 30,
1999 were as follows:
Percent of
S&P Rating/Moody's Rating Net Assets
AAA/Aaa 91.6%
AA/Aa 2.4
BBB/Baa 7.3
MuniHoldings Insured Fund II, Inc., September 30, 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:
The Bank of New York
100 Church Street
New York, NY 10286
NYSE Symbol
MUE
