MUNIHOLDINGS
MICHIGAN INSURED
FUND, INC.
FUND LOGO
Annual Report
September 30, 1999
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., September 30, 1999
DEAR SHAREHOLDER
Since inception (January 29, 1999) through September 30, 1999, the
Common Stock of MuniHoldings Michigan Insured Fund, Inc. earned
$0.514 per share income dividends, which included earned and unpaid
dividends of $0.065. This represents a net annualized yield of
5.97%, based on a month-end net asset value of $12.83 per share.
During the same period, the total investment return on the Fund's
Common Stock was -11.53%, based on a change in per share net asset
value from $15.00 to $12.83, and assuming reinvestment of $0.449 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%.
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.
In Conclusion
On September 23, 1999, MuniHoldings Michigan Insured Fund, Inc.'s
Board of Directors approved a plan of reorganization, subject to
shareholder approval and certain other conditions, whereby MuniYield
Michigan Insured Fund, Inc. would acquire substantially all of the
assets and liabilities of the Fund and MuniVest Michigan Insured
Fund, Inc. in exchange for newly issued shares of MuniYield Michigan
Insured Fund, Inc. These Funds are registered, non-diversified,
closed-end management investment companies. All three entities have
similar investment objectives and are managed by Fund Asset
Management, L.P.
We appreciate your investment in MuniHoldings Michigan Insured Fund,
Inc.
Sincerely,
(Terry K. Glenn)
Terry K. Glenn
President and Director
(Vincent R. Giordano)
Vincent R. Giordano
Senior Vice President
(Fred K. Stuebe)
Fred K. Stuebe
Vice President and
Portfolio Manager
October 26, 1999
MuniHoldings Michigan Insured Fund, Inc., September 30, 1999
<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--101.3% AAA Aaa $1,210 Big Rapids, Michigan, Public Schools District, GO,
Refunding, 5% due 5/01/2019 (d) $ 1,094
AAA Aaa 4,680 Brighton, Michigan, Area School District, GO, Refunding,
5% due 5/01/2006 (d) 4,735
AAA Aaa 1,000 Cedar Springs, Michigan, Public School District, GO,
Refunding, 5% due 5/01/2017 (d) 916
Central Michigan University, Revenue Refunding Bonds (c):
AAA Aaa 3,000 5% due 10/01/2023 2,659
AAA Aaa 2,500 5% due 10/01/2027 2,187
AAA Aaa 4,795 Clarkston, Michigan, Community Schools, GO, 5.25%
due 5/01/2023 (b) 4,447
AAA Aaa 1,765 Decatur, Michigan, Public Schools, Van Burn--Cass Counties,
GO, 5% due 5/01/2024 (d) 1,560
AAA Aaa 3,500 Detroit, Michigan, City School District, GO, Series B, 5%
due 5/01/2021 (c) 3,130
AAA Aaa 4,000 Detroit, Michigan, Sewage Disposal Revenue Bonds, Series A,
5% due 7/01/2022 (b) 3,570
Fenton, Michigan, Area Public Schools, GO (c):
AAA Aaa 2,000 5% due 5/01/2021 1,789
AAA Aaa 2,500 5% due 5/01/2024 2,210
Ferris State University, Michigan, Revenue Refunding Bonds (a):
AAA Aaa 2,000 5% due 10/01/2023 1,773
AAA Aaa 2,000 5% due 10/01/2028 1,746
AAA Aaa 2,500 Grand Traverse County, Michigan, Hospital Revenue Refunding
Bonds (Munson Healthcare), Series A, 5.50% due 7/01/2018 (a) 2,409
NR* Aaa 3,000 Holt, Michigan, Public Schools, GO, Refunding, 5.125%
due 5/01/2021 (b) 2,739
AAA Aaa 1,080 Kalamazoo, Michigan, Building Authority Revenue Bonds,
5.375% due 10/01/2019 (b) 1,032
Kalamazoo, Michigan, Hospital Finance Authority, Hospital
Facility Revenue Refunding Bonds (Bronson Methodist Hospital) (b):
NR* Aaa 1,000 5.50% due 5/15/2013 1,000
NR* Aaa 2,000 RIB, Series 138, 6.86% due 5/15/2028 (f) 1,785
AAA Aaa 1,000 Kent County, Michigan, Airport Facility Revenue Bonds
(Kent County International Airport), AMT, 5% due 1/01/2028 (b) 861
AAA NR* 2,500 Michigan Higher Education Student Loan Authority Revenue
Bonds, Student Loan, AMT, Series XVII-B, 5.40% due 6/01/2018 (a) 2,351
AAA Aaa 3,500 Michigan State, HDA, Rental Housing Revenue Bonds, Series B,
5.10% due 10/01/2019 (b) 3,220
AAA Aaa 1,000 Michigan State Hospital Finance Authority Revenue Bonds
(Charity Obligation), Series A, 5.125% due 11/01/2029 (b) 881
Michigan State Hospital Finance Authority, Revenue Refunding Bonds:
AAA Aaa 5,000 (Detroit Medical Group), Series A, 5.25% due 8/15/2027 (a) 4,526
NR* VMIG1++ 3,000 (Mount Clemens Hospital), VRDN, 3.70% due 8/15/2015 (e) 3,000
AAA Aaa 2,500 (Oakwood Obligation Group), Series A, 5% due 8/15/2026 (d) 2,174
AAA Aaa 2,000 Michigan State Housing Representatives, COP, 5.50%
due 8/15/2015 (a) 1,977
AAA Aaa 5,000 Michigan State Strategic Fund, Limited Obligation, Revenue
Refunding Bonds (Detroit Edison Company), AMT, Series A,
5.55% due 9/01/2029 (b) 4,715
AAA Aaa 2,800 Michigan State Trunk Line, Revenue Refunding Bonds, Series A,
5% due 11/01/2026 (b) 2,454
AAA Aaa 2,435 Michigan State University Revenue Bonds, Series A, 5% due
2/15/2026 (a) 2,144
AAA Aaa 1,000 Muskegon Heights, Michigan, Public Schools, GO, 5% due
5/01/2029 (b) 872
AAA Aaa 1,000 Northern Michigan University, Revenue Refunding Bonds,
5% due 12/01/2025 (b) 880
AAA Aaa 4,000 Rockford, Michigan, Public Schools, GO, 5.25% due
5/01/2022 (c) 3,720
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) 1,129
AAA Aaa 2,500 Saginaw, Michigan, Hospital Finance Authority, Revenue
Refunding Bonds (Covenant Medical Center), Series E,
5.625% due 7/01/2013 (b) 2,517
AAA Aaa 2,975 Tecumseh, Michigan, Public Schools, GO, 5% due 5/01/2021 (c) 2,660
A1+ VMIG1++ 100 University of Michigan, University Revenue Bonds
(Medical Service Plan), VRDN, Series A, 4% due 12/01/2027 (e) 100
NR* Aaa 6,565 Wayne Charter County, Michigan, Airport Revenue Bonds,
RIB, AMT, Series 68, 6.535% due 12/01/2017 (b)(f) 5,847
AAA Aaa 5,900 Wayne State University, Michigan, University Revenue
Refunding Bonds, 5.125% due 11/15/2029 (c) 5,268
West Branch--Rose City, Michigan, GO (c):
AAA Aaa 1,000 5.50% due 5/01/2017 991
AAA Aaa 1,405 5.50% due 5/01/2024 1,364
AAA Aaa 1,185 West Ottawa, Michigan, Public School District, GO,
5.60% due 5/01/2021 (c) 1,159
AAA Aaa 3,000 Zeeland, Michigan, Public Schools, GO, 5.375%
due 5/01/2025 (c) 2,827
Total Investments (Cost--$106,387)--101.3% 98,418
Liabilities in Excess of Other Assets--(1.3%) (1,262)
---------
Net Assets--100.0% $ 97,156
=========
<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 September 30, 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 September 30, 1999.
*Not Rated.
++Highest short-term rating by Moody's Investors Service, Inc.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements.
</TABLE>
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 at right.
AMT Alternative Minimum Tax (subject to)
COP Certificates of Participation
GO General Obligation Bonds
HDA Housing Development Authority
RIB Residual Interest Bonds
VRDN Variable Rate Demand Notes
MuniHoldings Michigan Insured Fund, 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--$106,386,509)(Note 1a) $ 98,418,153
Cash 1,249,400
Interest receivable 1,861,514
Prepaid expenses 6,972
------------
Total assets 101,536,039
------------
Liabilities: Payables:
Securities purchased $ 4,048,271
Dividends to shareholders (Note 1f) 112,644
Offering costs (Note 1e) 99,336
Investment adviser (Note 2) 2,944 4,263,195
------------
Accrued expenses and other liabilities 116,730
------------
Total liabilities 4,379,925
------------
Net Assets: Net assets $ 97,156,114
============
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 65,710,786
Undistributed investment income--net 307,391
Accumulated realized capital losses on investments--net (Note 5) (1,339,074)
Unrealized depreciation on investments--net (7,968,356)
------------
Total--Equivalent to $12.83 net asset value per share of
Common Stock (market price--$11.8125) 57,156,114
------------
Total capital $ 97,156,114
============
<FN>
*Auction Market Preferred Stock.
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Period January 29, 1999++ to September 30, 1999
<S> <S> <C> <C>
Investment Interest and amortization of premium and discount earned $ 3,334,870
Income (Note 1d):
Expenses: Investment advisory fees (Note 2) $ 356,546
Commission fees (Note 4) 60,507
Professional fees 28,256
Accounting services (Note 2) 26,828
Directors' fees and expenses 20,931
Transfer agent fees 19,041
Listing fees 10,477
Printing and shareholder reports 8,171
Custodian fees 6,013
Pricing fees 4,403
Other 6,501
Total expenses before reimbursement 547,674
------------
Reimbursement of expenses (Note 2) (296,407)
------------
Total expenses after reimbursement 251,267
------------
Investment income--net 3,083,603
------------
Realized & Realized loss on investments--net (1,339,074)
Unrealized Unrealized depreciation on investments--net (7,968,356)
Loss on ------------
Investments--Net Net Decrease in Net Assets Resulting from Operations $ (6,223,827)
(Notes 1b, 1d & 3): ============
<FN>
++Commencement of operations.
See Notes to Financial Statements.
</TABLE>
MuniHoldings Michigan Insured Fund, Inc., September 30, 1999
<TABLE>
STATEMENT OF CHANGES IN NET ASSETS
<CAPTION>
For the Period
January 29, 1999++ to
Increase (Decrease) in Net Assets: September 30, 1999
<S> <S> <C>
Operations: Investment income--net $ 3,083,603
Realized loss on investments--net (1,339,074)
Unrealized depreciation on investments--net (7,968,356)
------------
Net decrease in net assets resulting from operations (6,223,827)
------------
Dividends to Investment income--net:
Shareholders Common Stock (1,999,407)
(Note 1f): Preferred Stock (776,805)
------------
Net decrease in net assets resulting from dividends to shareholders (2,776,212)
------------
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 (208,732)
Offering and underwriting costs resulting from the issuance of Preferred Stock (440,120)
------------
Net increase in net assets derived from capital stock transactions 106,056,148
------------
Net Assets: Total increase in net assets 97,056,109
Beginning of period 100,005
------------
End of period* $ 97,156,114
============
<FN>
*Undistributed investment income--net $ 307,391
============
++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
January 29, 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 .69
Realized and unrealized loss on investments--net (2.09)
------------
Total from investment operations (1.40)
------------
Less dividends to Common Stock shareholders:
Investment income--net (.45)
------------
Capital charge resulting from issuance of Common Stock (.05)
------------
Effect of Preferred Stock activity:++++
Dividends to Preferred Stock shareholders:
Investment income--net (.17)
Capital charge resulting from issuance of Preferred Stock (.10)
------------
Total effect of Preferred Stock activity (.27)
------------
Net asset value, end of period $ 12.83
============
Market price per share, end of period $ 11.8125
============
Total Investment Based on market price per share (18.55%)+++
Return:** ============
Based on net asset value per share (11.53%)+++
============
Ratios Based on Total expenses, net of reimbursement*** .62%*
Average ============
Net Assets of Total expenses*** 1.35%*
Common Stock: ============
Total investment income--net*** 7.59%*
============
Amount of dividends to Preferred Stock shareholders 1.91%*
============
Investment income--net, to Common Stock shareholders 5.68%*
============
Ratios Based on Total expenses, net of reimbursement .39%*
Total Average ============
Net Total expenses .84%*
Assets:++++++*** ============
Total investment income--net 4.76%*
============
Ratios Based on Dividends to Preferred Stock shareholders 3.21%*
Average Net ============
Assets of
Preferred Stocks:
Supplemental Net assets, net of Preferred Stock, end of period (in thousands) $ 57,156
Data: ============
Preferred Stock outstanding, end of period (in thousands) $ 40,000
============
Portfolio turnover 63.05%
============
Leverage: Asset coverage per $1,000 $ 2,429
============
Dividends Investment income--net $ 486
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 charges.
***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.
++++++Includes Common and Preferred Stock average net assets.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
MuniHoldings Michigan Insured Fund, Inc., September 30, 1999
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. 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.
(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
sale of Preferred Stock. For the period January 29, 1999 to
September 30, 1999, FAM earned fees of $356,546, of which $281,311
was voluntarily waived. FAM also reimbursed the Fund additional
expenses of $15,096.
During the period January 29, 1999 to September 30, 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 September 30, 1999 were
$160,652,973 and $55,650,562, respectively.
Net realized gains (losses) for the period January 29, 1999 to
September 30, 1999 and net unrealized losses as of September 30,
1999 were as follows:
Realized
Gains Unrealized
(Losses) Losses
Long-term investments $ (1,586,272) $(7,968,356)
Financial futures contracts 247,198 --
------------ -----------
Total $ (1,339,074) $(7,968,356)
============ ===========
As of September 30, 1999, net unrealized depreciation for Federal
income tax purposes aggregated $7,968,356, of which $9,070 related
to appreciated securities and $7,977,426 related to depreciated
securities. The aggregate cost of investments at September 30, 1999
for Federal income tax purposes was $106,386,509.
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
September 30, 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
September 30, 1999 was 3.50%.
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
September 30, 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 .25% to .375%,
calculated on the proceeds of each auction. For the period January
29, 1999 to September 30, 1999, MLPF&S, an affiliate of FAM, earned
$49,109 as commissions.
5. Capital Loss Carryforward:
At September 30, 1999, the Fund had a net capital loss carryforward
of approximately $1,339,000, all of which expires in 2007. This
amount will be available to offset like amounts of any future
taxable gains.
6. Reorganization Plan:
On September 23, 1999, the Fund's Board of Directors approved a plan
of reorganization, subject to shareholder approval and certain other
conditions, where MuniYield Michigan Insured Fund, Inc. would
acquire substantially all of the assets and liabilities of the Fund
and MuniVest Michigan Insured Fund, Inc. in exchange for newly
issued shares of MuniYield Michigan Insured Fund, Inc. These Funds
are registered, non-diversified, closed-end management investment
companies. All three entities have similar investment objectives and
are managed by FAM.
7. 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 $.065000 per share, payable on October 28, 1999 to shareholders
of record as of October 22, 1999.
MuniHoldings Michigan Insured Fund, Inc., September 30, 1999
<AUDIT-REPORT>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
MuniHoldings Michigan Insured Fund, Inc.:
We have audited the accompanying statement of assets, liabilities
and capital, including the schedule of investments, of MuniHoldings
Michigan Insured Fund, Inc., as of September 30, 1999, the related
statements of operations and changes in net assets, and the
financial highlights for the period January 29, 1999 (commencement
of operations) to September 30, 1999. These financial statements and
the financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these
financial statements and the financial highlights based on our
audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements.
Our procedures included confirmation of securities owned at
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, such financial statements and the financial high-
lights present fairly, in all material respects, the financial
position of MuniHoldings Michigan Insured Fund, Inc. as of September
30, 1999, the results of its operations, the changes in its net
assets, and the financial highlights for the period January 29, 1999
(commencement of operations) to September 30, 1999 in conformity
with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
November 12, 1999
</AUDIT-REPORT>
IMPORTANT TAX INFORMATION (unaudited)
All of the net investment income distributions paid by
MuniHoldings Michigan Insured Fund, 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 98.1%
Other++ 3.2
[FN]
++Temporary investments in short-term municipal securities.
MuniHoldings Michigan Insured Fund, Inc., September 30, 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
The Bank of New York
90 Washington Street
New York, NY 10286
Transfer Agents
Common Stock:
The Bank of New York
101 Barclay Street
New York, NY 10286
Preferred Stock:
The Bank of New York
100 Church Street
New York, NY 10286
NYSE Symbol
MCG
