MUNIHOLDINGS
MICHIGAN INSURED
FUND, INC.
FUND LOGO
Semi-Annual Report
March 31, 1999
Officers and Directors
Terry K. Glenn, President and Director
James H. Bodurtha, Director
Herbert I. London, Director
Robert R. Martin, Director
Joseph L. May, Director
Andre F. Perold, Director
Arthur Zeikel, Director
Vincent R. Giordano, Senior Vice President
Robert A. DiMella, Vice President
Kenneth A. Jacob, Vice President
Fred K. Stuebe, Vice President
Donald C. Burke, Vice President and
Treasurer
Alice A. Pellegrino, 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
MCG
This report, including the financial information herein, is
transmitted to the shareholders of MuniHoldings Michigan Insured
Fund, Inc. for their information. It is not a prospectus, circular
or representation intended for use in the purchase of shares of the
Fund or any securities mentioned in the report. Past performance
results shown in this report should not be considered a
representation of future performance. The Fund has the ability to
leverage its Common Stock by issuing Preferred Stock to provide the
Common Stock shareholders with a potentially higher rate of return.
Leverage creates risks for Common Stock shareholders, including the
likelihood of greater volatility of net asset value and market price
of shares of the Common Stock, and the risk that fluctuations in the
short-term dividend rates of the Preferred Stock may affect the
yield to Common Stock shareholders. Statements and other information
herein are as dated and are subject to change.
MuniHoldings Michigan
Insured Fund, Inc.
Box 9011
Princeton, NJ
08543-9011
Printed on post-consumer recycled paper
MUNIHOLDINGS MICHIGAN INSURED FUND, INC.
The Benefits and
Risks of
Leveraging
MuniHoldings Michigan Insured Fund, Inc. has the ability to leverage
to seek to enhance the yield and net asset value of its Common
Stock. However, these objectives cannot be achieved in all interest
rate environments. To leverage, the Fund issues Preferred Stock,
which pays dividends at prevailing short-term interest rates, and
invests the proceeds in long-term municipal bonds. The interest
earned on these investments is paid to Common Stock shareholders in
the form of dividends, and the value of these portfolio holdings is
reflected in the per share net asset value of the Fund's Common
Stock. However, in order to benefit Common Stock shareholders, the
yield curve must be positively sloped; that is, short-term interest
rates must be lower than long-term interest rates. At the same time,
a period of generally declining interest rates will benefit Common
Stock shareholders. If either of these conditions change, then the
risks of leveraging will begin to outweigh the benefits.
To illustrate these concepts, assume a fund's Common Stock
capitalization of $100 million and the issue 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 Michigan Insured Fund, Inc., March 31, 1999
DEAR SHAREHOLDER
We are pleased to provide you with this first semi-annual report for
MuniHoldings Michigan Insured Fund, 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 and Michigan
income taxes by investing primarily in a portfolio of long-term,
investment-grade Michigan municipal obligations.
Since inception (January 29, 1999) through March 31, 1999, the
Common Stock of MuniHoldings Michigan Insured Fund, Inc. had earned
and unpaid dividends of $0.128 per share. This represents a net
annualized yield of 5.09%, based on a month-end per share net asset
value of $14.80. Over the same period, the total investment return
on the Fund's Common Stock was -1.33%, based on a change in per
share net asset value from $15.00 to $14.80.
For the period January 29, 1999 through March 31, 1999, the Fund's
Preferred Stock had an average yield of 3.07%.
The Municipal Market
Environment
Since the Fund's inception (January 29, 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 their 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 the Fund's inception, we have focused on seeking to enhance
shareholder income. Consequently, we committed the Fund's initial
proceeds in long-term insured Michigan municipal bonds that we
believed would generate significant income that is exempt from
Michigan state and Federal income taxes. We have had a moderately
defensive portfolio strategy in place since the Fund's inception,
selecting holdings more for their income-generating characteristics
than their appreciation potential should tax-exempt interest rates
decline. We invested most of the proceeds resulting from the
leveraging of the Fund's Common Stock in mid-February in the
intermediate-term sector of the Michigan municipal bond market.
These issues produced 90%-95% of the total yield available in the
tax-exempt yield curve while reducing the Fund's overall interest
rate volatility. (For a complete explanation of the benefits and
risks of leveraging, see page 1 of this report to shareholders.)
Looking ahead, we expect to maintain our current strategy and the
overall structure of the Fund. However, in recent months the supply
of new-issue Michigan municipal bonds has decreased significantly,
down more than 30% as compared to the first quarter of 1998. This
reduction provided a limited availability of Michigan tax-exempt
issues in particular sectors, such as water and sewer and other
revenue-based issues. As new-issue supply returns to more normal
levels, we expect to substitute some of the Fund's current holdings
for these revenue-based issues to create greater portfolio
diversification.
In Conclusion
We appreciate your investment in MuniHoldings Michigan Insured Fund,
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
(Fred K. Stuebe)
Fred K. Stuebe
Vice President and Portfolio Manager
May 11, 1999
MuniHoldings Michigan Insured Fund, Inc., March 31, 1999
Portfolio
Abbreviations
To simplify the listings of MuniHoldings Michigan Insured Fund,
Inc.'s portfolio holdings in the Schedule of Investments, we have
abbreviated the names of many of the securities according to the
list below and at right.
AMT Alternative Minimum Tax (subject to)
DATES Daily Adjustable Tax-Exempt Securities
GO General Obligation Bonds
HDA Housing Development Authority
PCR Pollution Control Revenue Bonds
RIB Residual Interest Bonds
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>
Michigan--97.0% AAA Aaa $ 1,210 Big Rapids, Michigan, Public Schools District, GO,
Refunding, 5% due 5/01/2019 (d) $ 1,196
AAA Aaa 4,680 Brighton, Michigan, Area School District, GO,
Refunding, 5% due 5/01/2006 (d) 4,910
AAA Aaa 2,500 Central Michigan University, Revenue Refunding Bonds,
5% due 10/01/2027 (c) 2,441
AAA Aaa 4,795 Clarkston, Michigan, Community Schools, GO, 5.25% due
5/01/2023 (b) 4,832
Delta County, Michigan, Economic Development Corporation,
Environmental Improvement Revenue Refunding Bonds
(Mead-Escanaba Paper), DATES (e):
NR* P1 2,000 Series D, 2.90% due 12/01/2023 2,000
NR* P1 1,000 Series F, 2.90% due 12/01/2013 1,000
Detroit, Michigan, Sewage Disposal Revenue Bonds, Series A (b):
AAA Aaa 4,000 5% due 7/01/2022 3,930
AAA Aaa 1,000 5% due 7/01/2027 976
AAA Aaa 2,500 Dexter, Michigan, Community Schools, GO, 5% due 5/01/2013 (c) 2,536
AAA Aaa 2,000 East China School District, Michigan, GO, Refunding,
5% due 5/01/2007 (c) 2,096
Fenton, Michigan, Area Public Schools, GO (c):
AAA Aaa 2,000 5% due 5/01/2021 1,966
AAA Aaa 2,500 5% due 5/01/2024 2,454
Ferris State University, Michigan, Revenue Refunding Bonds (a):
AAA Aaa 2,000 5% due 10/01/2023 1,964
AAA Aaa 2,000 5% due 10/01/2028 1,952
Grand Traverse County, Michigan, Hospital Revenue Refunding Bonds
(Munson Healthcare), Series A (a):
AAA Aaa 2,105 5.25% due 7/01/2013 2,168
AAA Aaa 2,500 5.50% due 7/01/2018 2,591
NR* Aaa 3,000 Holt, Michigan, Public Schools, GO, Refunding, 5.125%
due 5/01/2021 (b) 2,988
NR* Aaa 2,000 Kalamazoo, Michigan, Hospital Finance Authority, Hospital
Facility Revenue Refunding Bonds (Bronson Methodist Hospital),
5.50% due 5/15/2028 (b) 2,077
AAA Aaa 1,000 Kent County, Michigan, Airport Facility Revenue Bonds
(Kent County International Airport), AMT, 5% due
1/01/2028 (b) 960
Lanse Creuse, Michigan, Public Schools, GO (a):
AAA Aaa 1,000 5.50% due 5/01/2005 1,079
AAA Aaa 2,500 5.50% due 5/01/2006 2,708
NR* Aaa 2,235 Madison Heights, Michigan, Lamphere Schools, GO, 5%
due 5/01/2013 (c) 2,265
AA Aa2 4,000 Michigan State Building Authority, Revenue Refunding
Bonds (Facilities Program), Series 1, 5% due 10/15/2006 4,208
AAA Aaa 5,000 Michigan State, HDA, Rental Housing Revenue Bonds, Series B,
5.10% due 10/01/2019 (b) 4,969
Michigan State Hospital Finance Authority
Revenue Bonds, Series A:
AAA Aaa 1,000 (Charity Obligation), 5.125% due 11/01/2029 (b) 983
AAA Aaa 2,500 (Oakwood Obligation Group), 5% due 8/15/2026 (d) 2,413
AAA Aaa 5,000 Michigan State Hospital Finance Authority, Revenue
Refunding Bonds (Detroit Medical Hospital), Series A,
5.25% due 8/15/2027 (a) 4,970
NR* P1 3,300 Michigan State Strategic Fund, PCR, Refunding
(Consumers Power Project), VRDN, 2.90% due 4/15/2018 (e) 3,300
AAA Aaa 2,435 Michigan State University Revenue Bonds, Series A, 5%
due 2/15/2026 (a) 2,379
Northern Michigan University, Revenue Refunding Bonds (b):
AAA NR* 1,275 5.125% due 12/01/2020 1,270
AAA Aaa 1,000 5% due 12/01/2025 977
AAA Aaa 4,000 Richmond, Michigan, Community School District, GO, 5.60%
due 5/01/2006 (a)(g)(h) 4,363
AAA Aaa 4,000 Rockford, Michigan, Public Schools, GO, 5.25% due 5/01/2022 (c) 4,031
AA VMIG1++ 200 Royal Oak, Michigan, Hospital Finance Authority,
Hospital Revenue Bonds (William Beaumont Hospital), VRDN,
Series L, 2.85% due 1/01/2027 (b)(e) 200
AAA Aaa 1,160 Royal Oak, Michigan, Hospital Finance Authority, Hospital
Revenue Refunding Bonds (William Beaumont Hospital),
Series I, 5.50% due 1/01/2018 (b) 1,199
AAA Aaa 2,975 Tecumseh, Michigan, Public Schools, GO, 5% due 5/01/2021 (c) 2,924
AAA Aaa 2,700 Three Rivers, Michigan, Community Schools, GO,
6% due 5/01/2006 (b)(g) 3,031
A1+ VMIG1++ 3,600 University of Michigan, University Hospital Revenue
Bonds, VRDN, Series A, 3% due 12/01/2027 (e) 3,600
NR* Aaa 6,565 Wayne Charter County, Michigan, Airport Revenue Bonds,
AMT, RIB, Series 68, 7.265% due 12/01/2017 (b)(f) 6,851
Puerto Rico--1.5% AAA Aaa 1,550 Puerto Rico Commonwealth, GO, Refunding, 5.25% due 7/01/2018 (b) 1,578
Total Investments (Cost--$105,220)--98.5% 104,335
Variation Margin on Financial Futures Contracts**--0.1% 69
Other Assets Less Liabilities--1.4% 1,494
---------
Net Assets--100.0% $ 105,898
=========
<FN>
(a)AMBAC Insured.
(b)MBIA Insured.
(c)FGIC Insured.
(d)FSA 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, 1999.
(f)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.
(g)Prerefunded.
(h)All or a portion of security held as collateral in connection
with open financial futures contracts.
*Not Rated.
**Financial futures contracts sold as of March 31, 1999 were as
follows:
(in Thousands)
Number of Expiration Value
Contracts Issue Date (Notes 1a & 1b)
130 US Treasury Bonds June 1999 $ 15,673
-----------
Total Financial Futures Contracts Sold
(Total Contract Price--$15,736) $ 15,673
===========
++Highest short-term rating by Moody's Investors Service, Inc.
See Notes to Financial Statements.
</TABLE>
MuniHoldings Michigan Insured Fund, Inc., March 31, 1999
<TABLE>
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
As of March 31, 1999
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$105,219,835)(Note 1a) $104,334,685
Cash 78,680
Receivables:
Interest $ 1,708,239
Variation margin (Note 1b) 69,062
Investment adviser (Note 2) 15,096 1,792,397
------------ ------------
Total assets 106,205,762
------------
Liabilities: Payables:
Offering costs (Note 1e) 131,000
Dividends to shareholders (Note 1f) 25,088 156,088
------------
Accrued expenses and other liabilities 151,607
------------
Total liabilities 307,695
------------
Net Assets: Net assets $105,898,067
============
Capital: Capital Stock (200,000,000 shares authorized)(Note 4):
Preferred Stock, par value $.10 per share (1,600 shares
of AMPS* issued and outstanding at $25,000
per share liquidation preference) $ 40,000,000
Common Stock, par value $.10 per share (4,453,667
shares issued and outstanding) $ 445,367
Paid-in capital in excess of par 65,702,592
Undistributed investment income--net 569,448
Undistributed realized capital gains on investments--net 3,310
Unrealized depreciation on investments--net (822,650)
------------
Total--Equivalent to $14.80 net asset value per share of
Common Stock (market price--$15.4375) 65,898,067
------------
Total capital $105,898,067
============
<FN>
*Auction Market Preferred Stock.
See Notes to Financial Statements.
<CAPTION>
STATEMENT OF OPERATIONS
For the Period January 29, 1999++ to March 31, 1999
<S> <S> <C> <C>
Investment Interest and amortization of premium and discount earned $ 722,008
Income (Note 1d):
Expenses: Investment advisory fees (Note 2) $ 74,952
Commission fees (Note 4) 12,403
Accounting services (Note 2) 6,877
Professional fees 5,382
Directors' fees and expenses 4,365
Transfer agent fees 3,730
Listing fees 2,254
Printing and shareholder reports 1,335
Custodian fees 1,263
Pricing fees 818
Other 1,208
------------
Total expenses before reimbursement 114,587
Reimbursement of expenses (Note 2) (90,048)
------------
Total expenses after reimbursement 24,539
------------
Investment income--net 697,469
------------
Realized & Realized gain on investments--net 3,310
Unrealized Unrealized depreciation on investments--net (822,650)
Gain (Loss) on ------------
Investments--Net Net Decrease in Net Assets Resulting from Operations $ (121,871)
(Notes 1b, 1d & 3): ============
<FN>
++Commencement of operations.
See Notes to Financial Statements.
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
For the Period
Jan. 29, 1999++ to
Increase (Decrease) in Net Assets: March 31, 1999
<S> <S> <C>
Operations: Investment income--net $ 697,469
Realized gain on investments--net 3,310
Unrealized depreciation on investments--net (822,650)
------------
Net decrease in net assets resulting from operations (121,871)
------------
Dividends to Investment income--net to Preferred Stock shareholders (128,021)
Shareholders ------------
(Note 1f):
Capital Stock Proceeds from issuance of Common Stock 66,705,000
Transactions Proceeds from issuance of Preferred Stock 40,000,000
(Notes 1e & 4): Offering costs resulting from the issuance of Common Stock (216,046)
Offering and underwriting costs resulting from the issuance of Preferred Stock (441,000)
------------
Net increase in net assets derived from capital stock transactions 106,047,954
------------
Net Assets: Total increase in net assets 105,798,062
Beginning of period 100,005
------------
End of period* $105,898,067
============
<FN>
*Undistributed investment income--net $ 569,448
============
++Commencement of operations.
See Notes to Financial Statements.
</TABLE>
MuniHoldings Michigan Insured Fund, Inc., March 31, 1999
<TABLE>
FINANCIAL HIGHLIGHTS
The following per share data and ratios have been derived
from information provided in the financial statements. For the Period
Jan. 29, 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 .16
Realized and unrealized loss on investments--net (.18)
------------
Total from investment operations (.02)
------------
Capital charge resulting from issuance of Common Stock (.05)
------------
Effect of Preferred Stock activity++++:
Dividends to Preferred Stock shareholders:
Investment income--net (.03)
Capital charge resulting from issuance of Preferred Stock (.10)
------------
Total effect of Preferred Stock activity (.13)
------------
Net asset value, end of period $ 14.80
============
Market price per share, end of period $ 15.4375
============
Total Investment Based on market price per share 2.92%+++
Return:** ============
Based on net asset value per share (1.33%)+++
============
Ratios to Average Expenses, net of reimbursement .18%*
Net Assets:*** ============
Expenses .84%*
============
Investment income--net 5.12%*
============
Supplemental Net assets, net of Preferred Stock, end of period (in thousands) $ 65,898
Data: ============
Preferred Stock outstanding, end of period (in thousands) $ 40,000
============
Portfolio turnover 20.53%
============
Leverage: Asset coverage per $1,000 $ 2,647
============
Dividends Investment income--net $ 80
Per Share on ============
Preferred Stock
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 February 22, 1999.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
MuniHoldings Michigan Insured Fund, 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 principles 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 January 29, 1999, the Fund had no
operations other than those relating to organizational matters and
the sale of 6,667 shares of Common Stock on January 13, 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 MCG. 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 call and 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.
MuniHoldings Michigan Insured Fund, Inc., March 31, 1999
NOTES TO FINANCIAL STATEMENTS (concluded)
(c) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required.
(d) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Interest income is recognized on the accrual
basis. Discounts and market premiums are amortized into interest
income. Realized gains and losses on security transactions are
determined on the identified cost basis.
(e) Offering expenses--Direct expenses relating to the public
offering of the Fund's Common and Preferred Stock were charged to
capital at the time of issuance of the shares.
(f) Dividends and distributions--Dividends from net investment
income are declared and paid monthly. Distributions of capital gains
are recorded on the ex-dividend dates.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with FAM.
The general partner of FAM is Princeton Services, Inc. ("PSI"), an
indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML &
Co."), which is the limited partner.
FAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee at an annual rate of 0.55% of
the Fund's average weekly net assets, including proceeds from the
sale of Preferred Stock. For the period January 29, 1999 to March
31, 1999, FAM earned fees of $74,952, all of which was voluntarily
waived. In addition, FAM also reimbursed the Fund $15,096 in
additional expenses.
During the period January 29, 1999 to March 31, 1999, Merrill,
Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"), an affiliate
of FAM, received underwriting fees of $300,000 in connection with
the issuance of the Fund's Preferred Stock.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of FAM, PSI, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the period January 29, 1999 to March 31, 1999 were $110,537,975
and $15,219,083, respectively.
Net realized gains (losses) for the period January 29, 1999 to March
31, 1999 and net unrealized gains (losses) as of March 31, 1999 were
as follows:
Realized Unrealized
Gains Gains
(Losses) (Losses)
Long-term investments $ (167,265) $ (885,150)
Financial futures contracts 170,575 62,500
------------ ------------
Total $ 3,310 $ (822,650)
============ ============
As of March 31, 1999, net unrealized depreciation for Federal income
tax purposes aggregated $885,150, of which $4,263 related to
appreciated securities and $889,413 related to depreciated
securities. The aggregate cost of investments at March 31, 1999 for
Federal income tax purposes was $105,219,835.
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 January 29, 1999 to
March 31, 1999 increased by 4,447,000 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 yield in effect at March
31, 1999 was 3.27%.
In connection with the offering of AMPS, the Board of Directors
reclassified 1,600 shares of unissued capital stock as AMPS. Shares
issued and outstanding during the period January 29, 1999 to March
31, 1999 increased by 1,600 as a result of the AMPS offering.
The Fund pays commissions to certain broker-dealers at the end of
each auction at an annual rate ranging from 0.25% to 0.375%,
calculated on the proceeds of each auction. For the period January
29, 1999 to March 31, 1999, MLPF&S, an affiliate of FAM, earned
$6,615 as commissions.
5. Subsequent Event:
On April 8, 1999, the Fund's Board of Directors declared an ordinary
income dividend to Common Stock shareholders in the amount of
$.127860 per share, payable on April 29, 1999 to shareholders of
record as of April 22, 1999.
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
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 85.0%
AA/Aa 4.0
Other++ 9.5
[FN]
++Temporary investments in short-term municipal securities.
