UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSRS
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-09191
Name of Fund: MuniHoldings Insured Fund II, Inc.
Fund Address: P.O. Box 9011
Princeton, NJ 08543-9011
Name and address of agent for service: Robert C. Doll, Jr., Chief
Executive Officer, MuniHoldings Insured Fund II, Inc., 800
Scudders Mill Road, Plainsboro, NJ, 08536. Mailing address:
P.O. Box 9011, Princeton, NJ, 08543-9011
Registrant's telephone number, including area code: (609) 282-2800
Date of fiscal year end: 09/30/05
Date of reporting period: 10/01/04 - 03/31/05
Item 1 - Report to Stockholders
MuniHoldings
Insured Fund II, Inc.
Semi-Annual Report
March 31, 2005
(BULL LOGO) Merrill Lynch Investment Managers
www.mlim.ml.com
Mercury Advisors
A Division of Merrill Lynch Investment Managers
www.mercury.ml.com
MuniHoldings Insured Fund II, Inc. seeks to provide shareholders
with current income exempt from federal income taxes by investing
primarily in a portfolio of long-term, investment grade municipal
obligations the interest on which, in the opinion of bond counsel
to the issuer, is exempt from federal income taxes.
This report, including the financial information herein, is
transmitted to shareholders of MuniHoldings Fund II, Inc. for their
information. It is not a prospectus. Past performance results shown
in this report should not be considered a representation of future
performance. The Fund has leveraged its Common Stock and intends to
remain leveraged 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.
A description of the policies and procedures that the Fund uses
to determine how to vote proxies relating to portfolio securities
is available (1) without charge, upon request, by calling toll-free
1-800-MER-FUND (1-800-637-3863); (2) at www.mutualfunds.ml.com;
and (3) on the Securities and Exchange Commission's Web site at
http://www.sec.gov. Information about how the Fund voted proxies
relating to securities held in the Fund's portfolio during the
most recent 12-month period ended June 30 is available (1) at
www.mutualfunds.ml.com; and (2) on the Securities and Exchange
Commission's Web site at http://www.sec.gov.
MuniHoldings Insured Fund II, Inc.
Box 9011
Princeton, NJ
08543-9011
(GO PAPERLESS LOGO)
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MuniHoldings Insured Fund II, Inc.
The Benefits and Risks of Leveraging
MuniHoldings Insured Fund II, Inc. utilizes leveraging to seek
to enhance the yield and net asset value of its Common Stock.
However, these objectives cannot be achieved in all interest rate
environments. To leverage, the Fund issues Preferred Stock, which
pays dividends at prevailing short-term interest rates, and invests
the proceeds in long-term municipal bonds. The interest earned on
these investments, net of dividends to Preferred Stock, 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 create 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. As of March 31, 2005,
the percentage of the Fund's total net assets invested in inverse
floaters was 3.77%, before the deduction of Preferred Stock.
Swap Agreements
The Fund may also invest in swap agreements, which are over-the-
counter contracts in which one party agrees to make periodic
payments based on the change in market value of a specified bond,
basket of bonds, or index in return for periodic payments based on a
fixed or variable interest rate or the change in market value of a
different bond, basket of bonds or index. Swap agreements may be
used to obtain exposure to a bond or market without owning or taking
physical custody of securities. Swap agreements involve the risk
that the party with whom the Fund has entered into the swap will
default on its obligation to pay the Fund and the risk that the Fund
will not be able to meet its obligations to pay the other party to
the agreement.
MUNIHOLDINGS INSURED FUND II, INC., MARCH 31, 2005
A Letter From the President
Dear Shareholder
Financial markets broadly posted positive returns over the most
recent reporting period, with international equities providing some
of the most impressive results.
Total Returns as of March 31, 2005 6-month 12-month
U.S. equities (Standard & Poor's 500 Index) + 6.88% + 6.69%
Small-cap U.S. equities (Russell 2000 Index) + 8.00 + 5.41
International equities (MSCI Europe Australasia Far East Index) +15.13 +15.06
Fixed income (Lehman Brothers Aggregate Bond Index) + 0.47 + 1.15
Tax-exempt fixed income (Lehman Brothers Municipal Bond Index) + 1.21 + 2.67
High yield bonds (Credit Suisse First Boston High Yield Index) + 3.39 + 7.84
The U.S. economy continued to show resilience in the face of the
Federal Reserve Board's (the Fed's) continued interest rate hikes
and, more recently, higher oil prices. The Fed's measured tightening
program brought the federal funds rate to 2.75% by period-end as the
central bank continued its campaign to combat emergent inflation.
In fact, business costs have been rising, which is beginning to put
pressure on corporate profit margins. Consumer prices have been
moving up as well, particularly in the areas of gasoline prices,
healthcare costs, housing and education.
U.S. equities ended 2004 in a strong rally, but stumbled into
negative territory in the first quarter of 2005. On the positive
side, corporations have been accelerating their hiring plans,
capital spending remains reasonably robust and merger-and-
acquisition activity has increased. Offsetting the positives are
slowing corporate earnings growth, renewed energy price concerns
and the potential for an economic slowdown later this year.
International equities, especially in Asia, have benefited from
higher economic growth rates. China, in particular, recorded growth
of more than 9% in 2004.
In the bond market, long-term interest rates finally began to inch
higher while significant increases have been recorded on the short
end. This resulted in a flattening of the yield curve throughout
much of the current reporting period. At March 31, 2005, the two-
year Treasury note yielded 3.80% and the 10-year note yielded 4.50%,
a difference of 70 basis points (.70%). This compared to a spread of
151 basis points six months earlier and 226 basis points 12 months
ago.
Looking ahead, the environment is likely to be a challenging one
for investors, with diversification and selectivity becoming
increasingly important themes. With this in mind, we encourage you
to meet with your financial advisor to review your goals and asset
allocation and to rebalance your portfolio, as necessary, to ensure
it remains aligned with your objectives and risk tolerance. As
always, we thank you for trusting Merrill Lynch Investment Managers
with your investment assets, and we look forward to serving you in
the months and years ahead.
Sincerely,
(Robert C. Doll, Jr.)
Robert C. Doll, Jr.
President and Director
MUNIHOLDINGS INSURED FUND II, INC., MARCH 31, 2005
A Discussion With Your Fund's Portfolio Manager
The Fund provided competitive results relative to its Lipper peers,
as we continued to focus on generating yield and preserving the
Fund's underlying value in a rising interest rate environment.
Describe the recent market environment relative to municipal bonds.
Long-term bond yields, although volatile, were little changed over
the past six months. Gross domestic product (GDP) growth was
recently revised to 3.8% for the fourth quarter of 2004, similar to
the 4% rate recorded in the third quarter. For 2004 as a whole, real
GDP grew at a 4.4% annual rate, well ahead of 2003's annual rate of
3%. First quarter 2005 GDP growth is expected to remain in the 4%
range.
Continued economic improvements have been broadly disregarded, as
financial markets have focused on inflationary trends, currency-
related demand for long-term securities, and Federal Reserve Board
(the Fed) interest rate actions. The Fed continued to raise short-
term interest rates at each of its meetings during the period,
bringing the federal funds rate to 2.75% at period-end. As the short
end of the yield curve responded to the Fed actions with rising
yields, the longer end was little affected. The result has been a
flattening of the yield curve. Over the past six months, 30-year
U.S. Treasury bond yields declined 14 basis points to 4.75% while
10-year yields increased 36 basis points to 4.50%.
Trends in the tax-exempt market were similar. Yields on long-term,
A-rated revenue bonds, as measured by the Bond Buyer Revenue Bond
Index, were essentially unchanged at 5.03%. As reported by Municipal
Market Data, yields on AAA-rated issues maturing in 30 years
declined 10 basis points to 4.58% while yields on AAA-rated,
10-year bonds rose 37 basis points to 3.84%.
Over the past six months, $190 billion in tax-exempt bonds was
underwritten, an increase of approximately 5% versus the same period
a year ago. More than $96 billion in new long-term municipal
securities was issued in the first three months of 2005, an increase
of 13% compared to the first quarter of 2004. New issuance in the
first quarter of 2005 went on record as the largest in any first
quarter. Recent quarterly issuance was boosted by a 25% increase in
refunding issues as municipalities sought to refinance existing
higher-coupon debt. These refundings have been heavily weighted in
the 10-year - 20-year maturity range to lower the overall interest
cost of the refunding issue. This concentration has put pressure on
intermediate tax-exempt bond yields while supporting longer-term
bond prices.
Recent demand for municipal product has been positive. According to
the Investment Company Institute, in the first two months of 2005,
monthly net new cash flows into long-term municipal bond funds have
been in the $725 million to $800 million range. This represents a
significant improvement from $275 million during the same period in
2004. Recent weekly figures from AMG Data Services have continued to
show generally positive flows during March 2005. As in earlier
quarters, much of these flows have been directed to high yield
municipal bond funds, resulting in a continued narrowing of credit
spreads.
How did the Fund perform during the period in light of the existing
market conditions?
For the six-month period ended March 31, 2005, the Common Stock of
MuniHoldings Insured Fund II, Inc. had net annualized yields of
6.18% and 6.93%, based on a period-end per share net asset value of
$14.21 and a per share market price of $12.68, respectively, and
$.438 per share income dividends. Over the same period, the total
investment return on the Fund's Common Stock was +1.90%, based on a
change in per share net asset value from $14.41 to $14.21, and
assuming reinvestment of all distributions.
The Fund's return, based on net asset value, outpaced that of
its comparable Lipper category of Insured Municipal Debt Funds
(Leveraged), which had an average return of +1.63% for the six-month
period. The portfolio's slightly defensive positioning in a very
volatile interest rate environment benefited performance during the
period. Our strategy was to avoid those areas of the yield curve
that were demonstrating the most volatility, particularly the
10-year and shorter areas of the curve, and to move out on the curve
to the 20-year range and longer. This not only shielded the Fund
from much of the volatility, but also helped to augment yield.
MUNIHOLDINGS INSURED FUND II, INC., MARCH 31, 2005
For a description of the Fund's total investment return based on a
change in the per share market value of the Fund's Common Stock (as
measured by the trading price of the Fund's shares on the New York
Stock Exchange), and assuming reinvestment of dividends, please
refer to the Financial Highlights section of this report. As a
closed-end fund, the Fund's shares may trade in the secondary market
at a premium or discount to the Fund's net asset value. As a result,
total investment returns based on changes in the market value of the
Fund's Common Stock can vary significantly from total investment
returns based on changes in the Fund's net asset value.
What changes were made to the portfolio during the period?
Throughout the period, we continued to focus on securities that we
felt represented the best relative value in the insured municipal
marketplace. We continued shifting the portfolio's focus further
out on the yield curve by reducing exposure to securities with
15-year - 20-year maturities and increasing exposure further out
on the curve.
The Fund purchased bonds recently issued by Puerto Rico Electric
Power. These bonds were insured by XL Capital Assurance Inc. (XLCA)
and CIFG Services, Inc., relatively new AAA-rated insurers in the
municipal marketplace. In anticipation that they would outperform
over time, these bonds came with yields at a generous spread above
those offered by bonds backed by traditional insurers, such as
Financial Guaranty Insurance Company (FGIC), Financial Security
Assurance (FSA) and Ambac Financial Group, Inc. In fact, with recent
negative news regarding potential accounting irregularities at MBIA
Insurance Corp., the spread for bonds insured by XLCA and CIFG
narrowed by five basis points as investors sought more insurance
company diversification.
For the six-month period ended March 31, 2005, the Fund's Auction
Market Preferred Stock (AMPS) had average yields of 1.70% for Series
A, 1.64% for Series B and 1.66% for Series C. Continued short-term
interest rate hikes by the Fed have modestly increased the Fund's
borrowing costs throughout the past six months. Although the Fed
remains committed to tightening short-term interest rates, the
Fund's borrowing costs remain quite low on a historical basis and
the leveraging of the Preferred Stock has continued to generate a
material income benefit to the Fund's Common Stock shareholders.
However, should the spread between short-term and long-term tax-
exempt interest rates narrow, the benefits of leverage will decline
and, as a result, reduce the yield on the Fund's Common Stock. At
the end of the period, the Fund's leverage amount, due to AMPS, was
39.18% of total net assets. (For a more complete explanation of the
benefits and risks of leveraging, see page 2 of this report to
shareholders.)
How would you characterize the Fund's position at the close of the
period?
At period-end, the portfolio was fully invested and, in anticipation
of higher interest rates, defensively positioned. We continue to
emphasize competitive yield and preservation of the Fund's net asset
value. While we have begun to restructure the portfolio with bonds
offering slightly longer maturity dates, those securities added in
recent months have tended to be premium-coupon bonds with defensive
characteristics. Such a defensive posture has enabled the Fund to
increase its yield generation potential while helping to insulate it
from the volatility expected to accompany a rising interest rate
environment.
Robert A. DiMella, CFA
Vice President and Portfolio Manager
April 25, 2005
MUNIHOLDINGS INSURED FUND II, INC., MARCH 31, 2005
Schedule of Investments (In Thousands)
Face
State Amount Municipal Bonds Value
Alaska--1.3% $ 2,000 Anchorage, Alaska, Water Revenue Refunding Bonds, 6% due 9/01/2024 (a) $ 2,222
1,700 Matanuska-Susitna Boro, Alaska, GO, Series A, 6% due 3/01/2010 (d)(e) 1,903
California--32.0% 7,490 California Pollution Control Financing Authority, PCR, Refunding (Pacific Gas &
Electric), AMT, Series A, 5.35% due 12/01/2016 (d) 7,956
California State, Department of Water Resources, Power Supply Revenue Bonds,
Series A:
6,865 5.375% due 5/01/2017 (j) 7,447
5,400 5.25% due 5/01/2020 5,736
5,790 5.375% due 5/01/2022 6,194
4,675 California State, GO, Refunding, RIB, AMT, Series 777X, 8.13% due 12/01/2021 (d)(k) 4,831
3,000 California State Public Works Board, Lease Revenue Bonds (Department of General
Services--Capitol East End Complex), Series A, 5% due 12/01/2027 (a) 3,080
2,100 California State, Various Purpose, GO, 5.50% due 4/01/2028 2,264
Cerritos, California, Community College District, GO (Election of 2004),
Series A (d):
1,550 5% due 8/01/2025 1,611
1,215 5% due 8/01/2026 1,260
2,800 Compton, California, Unified School District, GO (Election of 2002), Series B,
5.50% due 6/01/2025 (d) 3,057
Golden State Tobacco Securitization Corporation of California, Tobacco
Settlement Revenue Bonds, Series B:
2,000 5.75% due 6/01/2021 2,129
5,980 5.75% due 6/01/2022 6,347
2,700 5.375% due 6/01/2028 (b) 2,830
1,010 5.60% due 6/01/2028 1,068
Los Angeles, California, Unified School District, GO:
3,400 (Election of 1997), Series F, 5% due 1/01/2028 (b) 3,525
11,750 Series A, 5% due 1/01/2028 (d) 12,183
4,240 Modesto, California, Schools Infrastructure Financing Agency, Special Tax
Bonds, 5.50% due 9/01/2036 (a) 4,596
5,000 Port Oakland, California, Revenue Refunding Bonds, AMT, Series L, 5.375% due
11/01/2027 (b) 5,239
1,500 Port Oakland, California, Trust Receipts, Revenue Bonds, AMT, Class R,
Series K, 9.046% due 11/01/2021 (b)(k) 1,738
2,250 Sacramento County, California, Sanitation District Financing Authority, Revenue
Refunding Bonds, RIB, Series 366, 9.172% due 12/01/2027 (k) 2,390
1,250 San Francisco, California, City and County Airport Commission, International
Airport, Special Facilities Lease Revenue Bonds (SFO Fuel Company LLC), AMT,
Series A, 6.10% due 1/01/2020 (c) 1,352
4,620 Tustin, California, Unified School District, Senior Lien Special Tax Bonds
(Community Facilities District No. 97-1), Series A, 5% due 9/01/2038 (c) 4,703
University of California Revenue Bonds (Multiple Purpose Projects), Series Q (c):
3,000 5% due 9/01/2022 3,129
6,710 5% due 9/01/2031 6,919
Colorado--3.7% Aurora, Colorado, COP (a):
3,055 5.75% due 12/01/2019 3,366
3,230 5.75% due 12/01/2020 3,552
395 Colorado HFA, Revenue Refunding Bonds (S/F Program), AMT, Senior Series A-2,
7.50% due 4/01/2031 418
4,000 Colorado Health Facilities Authority, Hospital Revenue Refunding Bonds (Poudre
Valley Health Care), Series A, 5.75% due 12/01/2009 (c)(e) 4,368
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
DRIVERS Derivative Inverse Tax-Exempt Receipts
EDA Economic Development Authority
FHA Federal Housing Authority
GO General Obligation Bonds
HDA Housing Development Authority
HFA Housing Finance Agency
IDR Industrial Development Revenue Bonds
PCR Pollution Control Revenue Bonds
RIB Residual Interest Bonds
S/F Single-Family
VRDN Variable Rate Demand Notes
MUNIHOLDINGS INSURED FUND II, INC., MARCH 31, 2005
Schedule of Investments (continued) (In Thousands)
Face
State Amount Municipal Bonds Value
Connecticut--2.7% $ 8,500 Connecticut State, HFA, Revenue Bonds (Housing Mortgage Finance Program),
AMT, Series D-2, 5.15% due 11/15/2022 (d) $ 8,718
Florida--1.8% 5,500 Dade County, Florida, Water and Sewer System Revenue Bonds, 5.25% due
10/01/2021 (b) 5,778
Georgia--1.0% 3,000 Augusta, Georgia, Water and Sewer Revenue Bonds, 5.25% due 10/01/2034 (c) 3,182
Idaho--0.3% 990 Idaho Housing and Finance Association, S/F Mortgage Revenue Bonds, AMT,
Series E, 6% due 1/01/2032 995
Illinois--13.3% Chicago, Illinois, GO, Series A (b)(e):
18,130 6% due 7/01/2010 20,539
2,185 (Neighborhoods Alive 21 Program), 6% due 7/01/2010 2,448
7,300 Chicago, Illinois, O'Hare International Airport Revenue Bonds, 3rd Lien, AMT,
Series B-2, 6% due 1/01/2029 (j) 8,101
1,600 Kane, Cook and Du Page Counties, Illinois, School District No. 46 (Elgin), GO,
6.50% due 1/01/2011 (c)(e) 1,847
Lake, Cook, Kane and McHenry Counties, Illinois, Community Unit School District
No. 220, GO (b):
8,035 6% due 12/01/2010 (e) 9,091
125 6% due 12/01/2020 139
Indiana--3.2% 9,280 Shelbyville, Indiana, Elementary School Building Corporation Revenue Bonds,
First Mortgage, 5.75% due 1/15/2009 (c)(e) 10,209
Kansas--2.1% 3,510 Kansas State Development Finance Authority, Health Facilities Revenue Bonds
(Sisters of Charity Leavenworth), Series J, 6.125% due 12/01/2020 3,875
2,805 Sedgwick and Shawnee Counties, Kansas, S/F Mortgage Revenue Bonds, AMT,
Series A-2, 6.20% due 12/01/2033 (g)(i) 2,885
Louisiana--2.3% 2,000 Louisiana Local Government, Environmental Facilities, Community Development
Authority Revenue Bonds (Capital Projects and Equipment Acquisition), Series A,
6.30% due 7/01/2030 (a) 2,190
5,000 Louisiana Public Facilities Authority, FHA Insured Mortgage Revenue Refunding
Bonds (Baton Rouge General Medical Center Project), 5.25% due 7/01/2033 (d)(f) 5,242
Massachusetts--8.3% 5,865 Massachusetts Bay Transportation Authority, Sales Tax Revenue Refunding Bonds,
Senior Series A, 5% due 7/01/2035 5,984
110 Massachusetts State, GO, Refunding, Series D, 5.375% due 8/01/2012 (d)(e) 121
1,105 Massachusetts State Industrial Finance Agency, Higher Education Revenue Refunding
Bonds (Hampshire College Project), 5.80% due 10/01/2007 (e) 1,195
Massachusetts State Special Obligation Dedicated Tax Revenue Bonds (b):
2,655 5.25% due 1/01/2025 2,817
12,345 5.25% due 1/01/2026 13,099
2,770 Massachusetts State Water Resource Authority, Revenue Refunding Bonds,
Series A, 6% due 8/01/2010 (b)(e) 3,134
Michigan--3.9% 2,000 Detroit, Michigan, City School District, GO, Series A, 5.50% due 5/01/2021 (c) 2,180
1,000 Michigan State Hospital Finance Authority, Revenue Refunding Bonds (Mercy Mount
Clemens), Series A, 6% due 5/15/2014 (d) 1,100
Michigan State Strategic Fund, Limited Obligation Revenue Refunding Bonds
(Detroit Edison Company Project), AMT (j):
2,000 Series A, 5.50% due 6/01/2030 2,117
5,000 Series C, 5.65% due 9/01/2029 5,294
1,500 Saint Clair County, Michigan, Economic Revenue Refunding Bonds (Detroit Edison
Company), RIB, Series 282, 10.20% due 8/01/2024 (a)(k) 1,846
Minnesota--4.4% Prior Lake, Minnesota, Independent School District Number 719, GO (c):
2,555 5.50% due 2/01/2016 2,761
1,830 5.50% due 2/01/2017 1,976
3,570 5.50% due 2/01/2018 3,852
2,840 5.50% due 2/01/2019 3,064
2,185 Sauk Rapids, Minnesota, Independent School District Number 47, GO, Series A,
5.625% due 2/01/2018 (d) 2,389
MUNIHOLDINGS INSURED FUND II, INC., MARCH 31, 2005
Schedule of Investments (continued) (In Thousands)
Face
State Amount Municipal Bonds Value
Mississippi--1.5% $ 3,725 Mississippi Business Finance Corporation, Mississippi, PCR, Refunding (System
Energy Resources Inc. Project), 5.875% due 4/01/2022 $ 3,770
1,000 Walnut Grove, Mississippi, Correctional Authority, COP, 6% due 11/01/2009 (a)(e) 1,133
Nebraska--1.8% 1,410 Omaha Convention Hotel Corporation, Nebraska, Convention Center Revenue Bonds,
First Tier, Series A, 5.50% due 4/01/2020 (a) 1,532
3,985 Omaha, Nebraska, Convention Hotel Corporation, Convention Center Revenue Bonds,
First Tier, Series A, 5.50% due 4/01/2022 (a) 4,329
Nevada--6.3% 1,750 Clark County, Nevada, IDR (Power Company Project), AMT, Series A, 6.70% due
6/01/2022 (b) 1,774
7,000 Las Vegas, Nevada, New Convention and Visitors Authority Revenue Bonds, 5.75%
due 7/01/2009 (a)(e) 7,756
240 Nevada Housing Division, S/F Mortgage Revenue Bonds, AMT, Series A-2, 6.30%
due 4/01/2022 (d) 243
Truckee Meadows, Nevada, Water Authority, Water Revenue Bonds, Series A (c):
5,000 5.50% due 7/01/2018 5,463
4,445 5.50% due 7/01/2019 4,856
New Jersey--9.5% New Jersey EDA, Cigarette Tax Revenue Bonds:
8,590 5.75% due 6/15/2029 9,021
6,200 5.75% due 6/15/2034 6,788
11,000 New Jersey EDA, Motor Vehicle Surcharge Revenue Bonds, Series A, 5.25% due
7/01/2033 (d) 11,695
2,135 New Jersey EDA, School Facility Construction, Revenue Refunding Bonds, Series K,
5.25% due 12/15/2017 2,338
200 New Jersey State Turnpike Authority, Turnpike Revenue Bonds, VRDN, Series C-3,
2.22% due 1/01/2024 (c)(h) 200
New Mexico--1.7% 5,000 Farmington, New Mexico, PCR, Refunding (Public Service Company of San Juan),
Series C, 5.70% due 12/01/2016 (a) 5,312
New York--16.1% 14,000 Nassau Health Care Corporation, New York, Health System Revenue Bonds, 5.75%
due 8/01/2009 (c)(e) 15,695
5,000 New York City, New York, GO, Refunding, Series G, 5.75% due 2/01/2006 (c) 5,194
5,570 New York City, New York, Sales Tax Asset Receivable Corporation Revenue Bonds,
Series A, 5.25% due 10/15/2027 (a) 6,003
4,345 New York State Dormitory Authority Revenue Bonds (School Districts Financing
Program), Series D, 5.25% due 10/01/2023 (d) 4,638
1,280 New York State Dormitory Authority, Revenue Refunding Bonds (School Districts
Bond Financing Program), Series A, 5% due 4/01/2016 (d) 1,373
3,200 New York State Local Government Assistance Corporation, Revenue Refunding
Bonds, Sub-Lien, VRDN, Series A-5V, 2.20% due 4/01/2020 (c)(h) 3,200
Tobacco Settlement Financing Corporation of New York Revenue Bonds, Series C-1:
7,850 5.50% due 6/01/2017 8,510
3,000 5.50% due 6/01/2021 3,250
3,000 West Islip, New York, Union Free School District, GO, Refunding, 5% due
10/01/2018 (c) 3,213
North Carolina--0.5% 1,445 North Carolina HFA, Home Ownership Revenue Bonds, AMT, Series 14-A, 5.35%
due 1/01/2022 (a) 1,497
Ohio--1.0% 1,745 Aurora, Ohio, City School District, COP, 6.10% due 12/01/2019 (d) 1,952
1,000 Kent State University, Ohio, University Revenue Bonds, 6% due 5/01/2024 (a) 1,115
Oklahoma--1.1% 3,385 Claremore, Oklahoma, Public Works Authority, Capital Improvement Revenue
Refunding Bonds, Series A, 5.25% due 6/01/2027 (c) 3,619
Pennsylvania--4.7% 5,600 Lycoming County, Pennsylvania, College Authority Revenue Bonds (Pennsylvania
College of Technology), 5.25% due 7/01/2007 (d)(e) 5,907
6,435 Pennsylvania State Higher Educational Facilities Authority, State System of
Higher Education Revenue Bonds, Series O, 5.125% due 6/15/2024 (a) 6,664
2,090 Washington County, Pennsylvania, Capital Funding Authority Revenue Bonds
(Capital Projects and Equipment Program), 6.15% due 12/01/2029 (a) 2,223
MUNIHOLDINGS INSURED FUND II, INC., MARCH 31, 2005
Schedule of Investments (continued) (In Thousands)
Face
State Amount Municipal Bonds Value
Rhode Island--3.5% $ 5,555 Providence, Rhode Island, Redevelopment Agency Revenue Refunding Bonds
(Public Safety and Municipal Buildings), Series A, 5.75% due 4/01/2010 (a)(e) $ 6,117
4,685 Rhode Island State Health and Educational Building Corporation Revenue Bonds
(Rhode Island School of Design), Series D, 5.50% due 8/15/2031 (j) 5,047
South Carolina--0.9% 2,695 South Carolina Housing Finance and Development Authority, Mortgage Revenue
Refunding Bonds, AMT, Series A-2, 6.35% due 7/01/2019 (c) 2,764
Tennessee--2.1% 3,500 Metropolitan Government of Nashville and Davidson County, Tennessee, Health
and Education Facilities Board, Revenue Refunding Bonds (Ascension Health Credit),
Series A, 5.875% due 11/15/2009 (a)(e) 3,909
1,080 Tennessee HDA, Revenue Bonds (Homeownership Program), AMT, Series 2B, 6% due
7/01/2011 1,110
1,515 Tennessee HDA, Revenue Refunding Bonds (Homeownership Program), AMT, Series 1,
6.05% due 7/01/2014 (d) 1,545
Texas--13.2% 3,750 Austin, Texas, Convention Center Revenue Bonds (Convention Enterprises Inc.),
Trust Certificates, Second Tier, Series B, 6% due 1/01/2023 4,020
8,000 Dallas-Fort Worth, Texas, International Airport Revenue Bonds, DRIVERS, AMT,
Series 778-Z, 8.532% due 11/01/2011 (d)(k) 8,872
Dallas-Fort Worth, Texas, International Airport Revenue Refunding and Improvement
Bonds, AMT, Series A (b):
1,835 5.875% due 11/01/2017 2,020
2,150 5.875% due 11/01/2018 2,367
2,390 5.875% due 11/01/2019 2,631
El Paso, Texas, Water and Sewer Revenue Refunding and Improvement Bonds,
Series A (c):
2,650 6% due 3/01/2015 2,974
3,875 6% due 3/01/2016 4,349
4,115 6% due 3/01/2017 4,618
4,873 Houston, Texas, Community College System, Participation Interests, COP
(Alief Center Project), 5.75% due 8/15/2022 (d) 5,276
1,850 Midland, Texas, Certificates of Obligation, GO, 6.10% due 3/01/2027 (b) 2,041
2,650 Waskom, Texas, Independent School District, GO (School Building), 5.25% due
2/15/2035 (c) 2,804
Utah--2.5% 2,400 Salt Lake City, Utah, Municipal Building Authority, Lease Revenue Refunding
Bonds (Municipal Improvements and Refunding Project), Series A, 5.40% due
10/15/2019 (a) 2,602
5,000 Weber County, Utah, Municipal Building Authority, Lease Revenue Refunding Bonds,
5.75% due 12/15/2019 (d) 5,377
Virginia--1.4% 4,385 Virginia State, HDA, Commonwealth Mortgage Revenue Bonds, Series J, Sub-Series
J-1, 5.20% due 7/01/2019 (d) 4,441
Washington--6.9% 6,885 Bellevue, Washington, GO, Refunding, 5.50% due 12/01/2039 (d) 7,356
3,840 Chelan County, Washington, Public Utility District Number 001, Consolidated
Revenue Bonds (Chelan Hydro System), AMT, Series A, 5.45% due 7/01/2037 (a) 4,011
3,445 Lewis County, Washington, GO, Refunding, 5.75% due 12/01/2024 (a) 3,768
2,500 Seattle, Washington, Municipal Light and Power Revenue Bonds, 6% due
10/01/2009 (d)(e) 2,805
3,500 Seattle, Washington, Water System Revenue Bonds, Series B, 6% due 7/01/2029 (b) 3,851
West Virginia--2.0% 6,210 West Virginia State Housing Development Fund, Housing Finance Revenue Refunding
Bonds, Series D, 5.20% due 11/01/2021 (d) 6,468
Wisconsin--0.3% 750 Wisconsin State Health and Educational Facilities Authority Revenue Bonds (Blood
Center of Southeastern Wisconsin Project), 5.75% due 6/01/2034 778
Puerto Rico--4.4% 6,225 Puerto Rico Commonwealth, Public Improvement, GO, 5.125% due 7/01/2030 (c) 6,482
Puerto Rico Electric Power Authority, Power Revenue Bonds, Series RR:
5,110 5% due 7/01/2026 (d) 5,382
1,900 5% due 7/01/2035 (b) 1,982
Total Municipal Bonds (Cost--$488,700)--161.7% 513,611
MUNIHOLDINGS INSURED FUND II, INC., MARCH 31, 2005
Schedule of Investments (concluded) (In Thousands)
Shares
Held Short-Term Securities Value
8,689 Merrill Lynch Institutional Tax-Exempt Fund (l) $ 8,689
Total Short-Term Securities (Cost--$8,689)--2.8% 8,689
Total Investments (Cost--$497,389*)--164.5% 522,300
Liabilities in Excess of Other Assets--(0.1%) (172)
Preferred Stock, at Redemption Value--(64.4%) (204,512)
-----------
Net Assets Applicable to Common Stock--100.0% $ 317,616
===========
* The cost and unrealized appreciation (depreciation) of investments as
of March 31, 2005, as computed for federal income tax purposes,
were as follows:
(in Thousands)
Aggregate cost $ 497,495
==============
Gross unrealized appreciation $ 25,670
Gross unrealized depreciation (865)
--------------
Net unrealized appreciation $ 24,805
==============
(a) AMBAC Insured.
(b) FGIC Insured.
(c) FSA Insured.
(d) MBIA Insured.
(e) Prerefunded.
(f) FHA Insured.
(g) FNMA Collateralized.
(h) Security has a maturity of more than one year, but has variable rate
and demand features which qualify it as a short-term security. The rate
disclosed is that currently in effect. This rate changes periodically based
upon prevailing market rates.
(i) GNMA Collateralized.
(j) XL Capital Insured.
(k) The rate disclosed is that currently in effect. This rate changes
periodically and inversely based upon prevailing market rates.
(l) Investments in companies considered to be an affiliate of the Fund
(such companies are defined as "Affiliated Companies" in Section
2(a)(3) of the Investment Company Act of 1940) were as follows:
(in Thousands)
Net Dividend
Affiliate Activity Income
Merrill Lynch Institutional
Tax-Exempt Fund (7,500) $50
Forward interest rate swaps outstanding as of March 31, 2005
were as follows:
(in Thousands)
Notional Unrealized
Amount Depreciation
Receive a variable rate equal to
a 7-Day Bond Market Association
Municipal Swap Index Rate and
pay a fixed rate of 3.853%
Broker, Morgan Stanley
Capital Services, Inc.
Expires June 2015 $25,000 $(38)
See Notes to Financial Statements.
MUNIHOLDINGS INSURED FUND II, INC., MARCH 31, 2005
Statement of Net Assets
As of March 31, 2005
Assets
Investments in unaffiliated securities, at value (identified cost--$488,699,443) $ 513,611,003
Investments in affiliated securities, at value (identified cost--$8,689,380) 8,689,380
Cash 12,787
Receivables:
Securities sold $ 10,389,808
Interest 7,421,349
Dividends from affiliates 471 17,811,628
---------------
Prepaid expenses 8,416
---------------
Total assets 540,133,214
---------------
Liabilities
Unrealized depreciation on forward interest rate swaps 37,750
Payables:
Securities purchased 17,566,108
Investment adviser 184,248
Dividends to Common Stock shareholders 153,306
Other affiliates 5,546 17,909,208
---------------
Accrued expenses 57,721
---------------
Total liabilities 18,004,679
---------------
Preferred Stock
Preferred Stock, at redemption value, par value $.10 per share (2,100 Series
A Shares, 2,100 Series B Shares and 3,980 Series C Shares of AMPS* authorized,
issued and outstanding at $25,000 per share liquidation preference) 204,512,369
---------------
Net Assets Applicable to Common Stock
Net assets applicable to Common Stock $ 317,616,166
===============
Analysis of Net Assets Applicable to Common Stock
Common Stock, par value $.10 per share (22,352,426 shares issued and
outstanding) $ 2,235,243
Paid-in capital in excess of par 313,735,958
Undistributed investment income--net $ 5,034,278
Accumulated realized capital losses--net (28,263,123)
Unrealized appreciation--net 24,873,810
---------------
Total accumulated earnings--net 1,644,965
---------------
Total--Equivalent to $14.21 net asset value per share of Common Stock
(market price--$12.68) $ 317,616,166
===============
* Auction Market Preferred Stock.
See Notes to Financial Statements.
MUNIHOLDINGS INSURED FUND II, INC., MARCH 31, 2005
Statement of Operations
For the Six Months Ended March 31, 2005
Investment Income
Interest $ 12,763,522
Dividends from affiliates 49,659
---------------
Total income 12,813,181
---------------
Expenses
Investment advisory fees $ 1,444,969
Commission fees 260,328
Accounting services 87,906
Transfer agent fees 30,210
Professional fees 28,275
Printing and shareholder reports 23,480
Custodian fees 14,675
Directors' fees and expenses 11,719
Pricing fees 10,570
Listing fees 10,384
Other 28,047
---------------
Total expenses before waiver and reimbursement 1,950,563
Waiver and reimbursement of expenses (109,089)
---------------
Total expenses after waiver and reimbursement 1,841,474
---------------
Investment income--net 10,971,707
---------------
Realized & Unrealized Gain (Loss)--Net
Realized gain (loss) on:
Investments--net 4,375,540
Futures contracts and forward interest rate swaps--net (1,499,535) 2,876,005
---------------
Change in unrealized appreciation/depreciation on:
Investments--net (8,964,580)
Forward interest rate swaps--net 2,148,375 (6,816,205)
--------------- ---------------
Total realized and unrealized loss--net (3,940,200)
---------------
Dividends to Preferred Stock Shareholders
Investment income--net (1,697,063)
---------------
Net Increase in Net Assets Resulting from Operations $ 5,334,444
===============
See Notes to Financial Statements.
MUNIHOLDINGS INSURED FUND II, INC., MARCH 31, 2005
Statements of Changes in Net Assets
For the Six For the
Months Ended Year Ended
March 31, September 30,
Increase (Decrease) in Net Assets: 2005 2004
Operations
Investment income--net $ 10,971,707 $ 22,252,027
Realized gain (loss)--net 2,876,005 (53,052)
Change in unrealized appreciation--net (6,816,205) 84,198
Dividends to Preferred Stock shareholders (1,697,063) (2,034,890)
--------------- ---------------
Net increase in net assets resulting from operations 5,334,444 20,248,283
--------------- ---------------
Dividends to Common Stock Shareholders
Investment income--net (9,790,363) (19,446,611)
--------------- ---------------
Net decrease in net assets resulting from dividends to Common Stock
shareholders (9,790,363) (19,446,611)
--------------- ---------------
Net Assets Applicable to Common Stock
Total increase (decrease) in net assets applicable to Common Stock (4,455,919) 801,672
Beginning of period 322,072,085 321,270,413
--------------- ---------------
End of period* $ 317,616,166 $ 322,072,085
=============== ===============
* Undistributed investment income--net $ 5,034,278 $ 5,549,997
=============== ===============
See Notes to Financial Statements.
MUNIHOLDINGS INSURED FUND II, INC., MARCH 31, 2005
Financial Highlights
For the Six
Months Ended
The following per share data and ratios have been derived March 31, For the Year Ended September 30,
from information provided in the financial statements. 2005 2004 2003 2002 2001
Per Share Operating Performance
Net asset value, beginning of period $ 14.41 $ 14.37 $ 14.48 $ 13.94 $ 12.72
---------- ---------- ---------- ---------- ----------
Investment income--net .49++ 1.00++ 1.02++ 1.03 1.06
Realized and unrealized gain (loss)--net (.17) -- (.17) .47 1.21
Dividends and distributions to Preferred
Stock shareholders:
Investment income--net (.08) (.09) (.10) (.13) (.31)
Realized gain--net -- -- -- --++++ --
---------- ---------- ---------- ---------- ----------
Total from investment operations .24 .91 .75 1.37 1.96
---------- ---------- ---------- ---------- ----------
Less dividends and distributions to Common
Stock shareholders:
Investment income--net (.44) (.87) (.86) (.83) (.74)
Realized gain--net -- -- -- --++++ --
---------- ---------- ---------- ---------- ----------
Total dividends and distributions to Common
Stock shareholders (.44) (.87) (.86) (.83) (.74)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 14.21 $ 14.41 $ 14.37 $ 14.48 $ 13.94
========== ========== ========== ========== ==========
Market price per share, end of period $ 12.68 $ 13.25 $ 13.13 $ 13.55 $ 13.04
========== ========== ========== ========== ==========
Total Investment Return**
Based on net asset value per share 1.90%+++ 7.12% 5.95% 10.67% 16.43%
========== ========== ========== ========== ==========
Based on market price per share (1.11%)+++ 7.80% 3.45% 10.71% 28.87%
========== ========== ========== ========== ==========
Ratios Based on Average Net Assets of Common Stock
Total expenses, net of waiver and
reimbursement*** 1.15%* 1.12% 1.14% 1.18% 1.09%
========== ========== ========== ========== ==========
Total expenses*** 1.21%* 1.21% 1.23% 1.27% 1.26%
========== ========== ========== ========== ==========
Total investment income--net*** 6.83%* 6.93% 7.19% 7.44% 7.83%
========== ========== ========== ========== ==========
Amount of dividends to Preferred Stock
shareholders 1.06%* .63% .69% .97% 2.28%
========== ========== ========== ========== ==========
Investment income--net, to Common Stock
shareholders 5.77%* 6.30% 6.50% 6.47% 5.55%
========== ========== ========== ========== ==========
Ratios Based on Average Net Assets of Common & Preferred Stock***
Total expenses, net of waiver and reimbursement .70%* .69% .69% .71% .65%
========== ========== ========== ========== ==========
Total expenses .74%* .74% .75% .76% .75%
========== ========== ========== ========== ==========
Total investment income--net 4.18%* 4.23% 4.37% 4.48% 4.67%
========== ========== ========== ========== ==========
MUNIHOLDINGS INSURED FUND II, INC., MARCH 31, 2005
Financial Highlights (concluded)
For the Six
Months Ended
The following per share data and ratios have been derived March 31, For the Year Ended September 30,
from information provided in the financial statements. 2005 2004 2003 2002 2001
Ratios Based on Average Net Assets of Preferred Stock
Dividends to Preferred Stock shareholders 1.66%* .99% 1.08% 1.46% 3.36%
========== ========== ========== ========== ==========
Supplemental Data
Net assets applicable to Common Stock,
end of period (in thousands) $ 317,616 $ 322,072 $ 321,270 $ 323,678 $ 311,505
========== ========== ========== ========== ==========
Preferred Stock outstanding, end of period
(in thousands) $ 204,500 $ 204,500 $ 204,500 $ 204,500 $ 204,500
========== ========== ========== ========== ==========
Portfolio turnover 20.59% 45.89% 52.00% 50.73% 61.09%
========== ========== ========== ========== ==========
Leverage
Asset coverage per $1,000 $ 2,553 $ 2,575 $ 2,571 $ 2,583 $ 2,523
========== ========== ========== ========== ==========
Dividends Per Share on Preferred Stock Outstanding
Series A--Investment income--net $ 212 $ 253 $ 268 $ 362 $ 820
========== ========== ========== ========== ==========
Series B--Investment income--net $ 205 $ 241 $ 267 $ 338 $ 830
========== ========== ========== ========== ==========
Series C--Investment income--net $ 207 $ 251 $ 271 $ 381 $ 850
========== ========== ========== ========== ==========
* 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.
++ Based on average shares outstanding.
++++ Amount is less than $(.01) per share.
+++ Aggregate total investment return.
See Notes to Financial Statements.
MUNIHOLDINGS INSURED FUND II, INC., MARCH 31, 2005
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 amended, as a non-
diversified, closed-end management investment company. The Fund's
financial statements are prepared in conformity with U.S. generally
accepted accounting principles, which may require the use of
management accruals and estimates. Actual results may differ from
these estimates. These unaudited financial statements reflect all
adjustments, which are, in the opinion of management, necessary
to present a fair statement of the results for the interim period.
All such adjustments are of a normal, recurring nature. The Fund
determines and makes available for publication the net asset value
of its Common Stock on a daily 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 last available
bid price in the over-the-counter market or on the basis of values
as obtained by a pricing service. Pricing services use valuation
matrixes that incorporate both dealer-supplied valuations and
valuation models. The procedures of the pricing service and its
valuations are reviewed by the officers of the Fund under the
general direction of the Board of Directors. Such valuations and
procedures are reviewed periodically by the Board of Directors of
the Fund. 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). Swap agreements are valued by quoted fair
values received daily by the Fund's pricing service. Short-term
investments with a remaining maturity of 60 days or less are valued
at amortized cost, which approximates market value, under which
method the investment is valued at cost and any premium or discount
is amortized on a straight line basis to maturity. Investments in
open-end investment companies are valued at their net asset value
each business day. Securities and other 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.
(b) Derivative financial instruments--The Fund may engage in various
portfolio strategies both to increase the return of the Fund and to
hedge, or protect, its exposure to interest rate movements and
movements in the securities 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.
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 may purchase and write 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 the 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.
* Forward interest rate swaps--The Fund may enter into forward
interest rate swaps. In a forward interest rate swap, the Fund and
the counterparty agree to make periodic net payments on a specified
notional contract amount, commencing on a specified future effective
date, unless terminated earlier. When the agreement is closed, the
Fund records a realized gain or loss in an amount equal to the value
of the agreement.
MUNIHOLDINGS INSURED FUND II, INC., MARCH 31, 2005
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). Realized gains and losses on security
transactions are determined on the identified cost basis. Dividend
income is recorded on the ex-dividend dates. Interest income is
recognized on the accrual basis. The Fund amortizes all premiums and
discounts on debt securities.
(e) 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 Fund
Asset Management, L.P. ("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 operation of the Fund. For such
services, the Fund pays a monthly fee at an annual rate of .55% of
the Fund's average weekly net assets, including proceeds from the
issuance of Preferred Stock. For the six months ended March 31,
2005, FAM earned fees of $1,444,969, of which $102,541 was waived.
In addition, for the six months ended March 31, 2005, FAM reimbursed
the Fund in the amount of $6,548.
For the six months ended March 31, 2005, the Fund reimbursed FAM
$5,794 for certain accounting services.
Certain officers and/or directors of the Fund are officers and/or
directors of FAM, PSI, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the six months ended March 31, 2005 were $114,592,683 and
$105,111,913, respectively.
4. Stock Transactions:
The Fund is authorized to issue 200,000,000 shares of 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 stock
without approval of holders of Common Stock.
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, plus accrued and unpaid
dividends, that entitle their holders to receive cash dividends at
an annual rate that may vary for the successive dividend periods.
The yields in effect at March 31, 2005 were as follows: Series A,
2.15%; Series B, 2%; and Series C, 2.45%.
The Fund pays commissions to certain broker-dealers at the end of
each auction at an annual rate ranging from .25% to .375%,
calculated on the proceeds of each auction. For the six months ended
March 31, 2005, Merrill Lynch, Pierce, Fenner & Smith Incorporated,
an affiliate of FAM, earned $137,289 as commissions.
5. Capital Loss Carryforward:
On September 30, 2004, the Fund had a net capital loss carryforward
of $25,279,349, of which $13,453,559 expires in 2007, $11,519,686
expires in 2008 and $306,104 expires in 2012. This amount will be
available to offset like amounts of any future taxable gains.
6. Subsequent Event:
The Fund paid a tax-exempt income dividend to holders of Common
Stock in the amount of $.073000 per share on April 28, 2005 to
shareholders of record on April 15, 2005.
MUNIHOLDINGS INSURED FUND II, INC., MARCH 31, 2005
Disclosure of Investment Advisory Agreement
Activities of and Composition of the Board of Directors
All but one member of the Board of Directors is an independent
director whose only affiliation with Fund Asset Management, L.P.
(the "Investment Adviser") or other Merrill Lynch affiliates is
as a director of the Fund and certain other funds advised by the
Investment Adviser or its affiliates. Each of the Co-Chairman of
the Board is also an independent director. New director nominees
are chosen as nominees by a Nominating Committee comprised of
independent directors. All independent directors also are members
of the Board's Audit Committee and the independent directors meet in
executive session at each in person Board meeting. The Board and the
Audit Committee meet in person for at least two days each quarter
and conduct other in person and telephone meetings throughout the
year, some of which are formal board meetings, and some of which are
informational meetings. The independent counsel to the independent
directors attends all in-person Board and Audit Committee meetings
and other meetings at the independent directors' request.
Investment Advisory Agreement--Matters Considered by the Board
Every year, the Board considers approval of the Fund's investment
advisory agreement (the "Investment Advisory Agreement") and
throughout each year, reviews and evaluates the performance of and
services provided by the Investment Adviser. The Board assesses the
nature, scope and quality of the services provided to the Fund by
the personnel of the Investment Adviser and its affiliates,
including administrative services, shareholder services, oversight
of fund accounting, marketing services and assistance in meeting
legal and regulatory requirements. The Board also receives and
assesses information regarding the services provided to the Fund by
certain unaffiliated service providers.
At various times throughout the year, the Board also considers a
range of information in connection with its oversight of the
services provided by the Investment Adviser and its affiliates.
Among the matters considered are: (a) fees (in addition to
management fees) paid to the Investment Adviser and its affiliates
by the Fund, including fees associated with the Fund's auction
market preferred stock; (b) Fund operating expenses paid to third
parties; (c) the resources devoted to and compliance reports
relating to the Fund's investment objective, policies and
restrictions, and its compliance with its Code of Ethics and the
Investment Adviser's compliance policies and procedures; and (d) the
nature, cost and character of non-investment management services
provided by the Investment Adviser and its affiliates.
The Board believes that the Investment Adviser is one of the most
experienced global asset management firms and considers the overall
quality of services provided by the Investment Adviser to be
excellent. The Board also believes that the Investment Adviser is
financially sound and well managed, and notes that the Investment
Adviser is affiliated with one of America's largest financial firms.
The Board believes that, for many of the Fund's shareholders, the
investment involved the selection of the Investment Adviser as the
investment adviser to the Fund. The Board works closely with the
Investment Adviser in overseeing the Investment Adviser's efforts to
achieve good performance. As part of this effort, the Board
discusses portfolio manager effectiveness and, when performance is
not satisfactory, discusses with the Investment Adviser taking steps
such as changing investment personnel.
Annual Consideration of Approval by the Board of Directors
In the period prior to the Board meeting to consider renewal of the
Investment Advisory Agreement, the Board requests and receives
materials specifically relating to the Fund's Investment Advisory
Agreement. These materials include (a) information compiled by
Lipper Inc. ("Lipper") on the fees and expenses and the investment
performance of the Fund as compared to a comparable group of funds
as classified by Lipper; (b) information comparing the Fund's market
price with its net asset value per share; (c) a discussion by the
Fund's portfolio management team of investment strategies used by
the Fund during its most recent fiscal year; and (d) information on
the profitability to the Investment Adviser and its affiliates of
the Investment Advisory Agreement and other relationships with the
Fund. The Board also considers other matters it deems important to
the approval process such as services related to the valuation and
pricing of Fund portfolio holdings, information relating to the
status of the Fund's managed dividend program, the Fund's portfolio
turnover statistics, and direct and indirect benefits to the
Investment Adviser and its affiliates from their relationship with
the Fund.
Certain Specific Renewal Data
In connection with the most recent renewal of the Fund's Investment
Advisory Agreement, the independent directors' and Board's review
included the following:
MUNIHOLDINGS INSURED FUND II, INC., MARCH 31, 2005
The Investment Adviser's Services and Fund Performance--The Board
reviewed the nature, extent and quality of services provided by the
Investment Adviser, including the investment advisory services and
the resulting performance of the Fund. The Board focused primarily
on the Investment Adviser's investment advisory services and the
Fund's investment performance, having concluded that the other
services provided to the Fund by the Investment Adviser were
satisfactory. The Board compared Fund performance - both including
and excluding the effects of the Fund's fees and expenses - to the
performance of a comparable group of mutual funds, and the
performance of a relevant index or combination of indexes. While
the Board reviews performance data at least quarterly, consistent
with the Investment Adviser's investment goals, the Board attaches
primary importance to performance over relatively long periods of
time, typically three to five years. The Board noted that the Fund's
performance within the group compared for the one, three and five
year periods generally ranked in the top half of the group for all
periods measured. The Board concluded that the Fund's performance
supported the continuation of the management fee rate at the present
level and the renewal of the Investment Advisory Agreement.
The Investment Adviser's Personnel and Investment Process--The Board
reviews at least annually the Fund's investment objectives and
strategies. The Board discusses with senior management of the
Investment Adviser responsible for investment operations and the
senior management of the Investment Adviser's tax-exempt fixed
income investing group the strategies being used to achieve the
stated objectives. Among other things, the Board considers the size,
background and experience of the Investment Adviser's investment
staff, its use of technology, and the Investment Adviser's approach
to training and retaining portfolio managers and other research,
advisory and management personnel. The Board also reviews the
Investment Adviser's compensation policies and practices with
respect to the Fund's portfolio manager. The Board also considered
the experience of the Fund's portfolio manager and noted that
Mr. DiMella, the Fund's portfolio manager, has more than ten years'
experience investing in municipal bonds. The Board concluded that
the Investment Adviser and its investment staff and the Fund's
portfolio manager have extensive experience in analyzing and
managing the types of investments used by the Fund and that the
Fund benefits from that expertise.
Management Fees and Other Expenses--The Board reviews the Fund's
contractual management fee rate and actual management fee rate as a
percentage of total assets at common asset levels - the actual rate
includes advisory and administrative service fees and the effects of
any fee waivers - compared to the other funds in its Lipper
category. It also compares the Fund's total expenses to those of
other, comparable funds. The Board did not consider the services
provided to and the fees charged by the Investment Adviser to other
types of clients with similar investment mandates, because the
Investment Adviser advised the Board that it had no comparable
investment mandates from its institutional clients. The Board noted
that the Fund's contractual and actual management fee rates and its
overall operating expenses were lower than the median of its
comparable funds classified by Lipper. The Board has concluded that
the Fund's management fee and fee rate and overall expense ratio are
reasonable compared to those of other, comparable funds.
Profitability--The Board considers the cost of the services provided
to the Fund by the Investment Adviser and the Investment Adviser's
and its affiliates' profits relating to the management of the Fund
and the MLIM/FAM-advised funds. As part of its analysis, the Board
reviewed the Investment Adviser's methodology in allocating its
costs to the management of the Fund and concluded that there was a
reasonable basis for the allocation. The Board believes the
Investment Adviser's profits are reasonable in relation to the
nature and quality of services provided.
Economies of Scale--The Board considers whether there have
been economies of scale in respect of the management of the
MLIM/FAM-advised funds, whether the MLIM/FAM-advised funds
(including the Fund) have appropriately benefited from any economies
of scale, and whether there is potential for realization of any
further economies of scale. The Board considered economies of scale
to the extent applicable to the Fund's closed end structure and
determined that the current management fee structure was reasonable
and that no changes were currently necessary.
Conclusion
After the independent directors deliberated in executive session,
the entire Board including all of the independent directors,
approved the renewal of the existing Investment Advisory Agreement,
concluding that the advisory fee rate was reasonable in relation to
the services provided and that a contract renewal was in the best
interests of the shareholders.
MUNIHOLDINGS INSURED FUND II, INC., MARCH 31, 2005
Dividend Policy
The Fund's dividend policy is to distribute all or a portion of its
net investment income to its shareholders on a monthly basis. In
order to provide shareholders with a more stable level of dividend
distributions, 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 Net Assets, which comprises part of
the financial information included in this report.
Portfolio Information as of March 31, 2005
Quality Ratings by Percent of
S&P/Moody's Total Investments
AAA/Aaa 86.4%
AA/Aa 3.8
A/A 5.3
BBB/Baa 2.8
Other* 1.7
* Includes portfolio holdings in short-term investments.
MUNIHOLDINGS INSURED FUND II, INC., MARCH 31, 2005
Officers and Directors
Robert C. Doll, Jr., President and Director
James H. Bodurtha, Director
Joe Grills, Director
Herbert I. London, Director
Roberta Cooper Ramo, Director
Robert S. Salomon, Jr., Director
Stephen B. Swensrud, Director
Kenneth A. Jacob, Senior Vice President
John M. Loffredo, Senior Vice President
Robert A. DiMella, Vice President
Donald C. Burke, Vice President and Treasurer
Jeffrey Hiller, Chief Compliance Officer
Alice A. Pellegrino, Secretary
Custodian
State Street Bank and Trust Company
P.O. Box 351
Boston, MA 02101
Transfer Agent
Common Stock:
EquiServe
P.O. Box 43010
Providence, RI 02940-3010
Preferred Stock:
The Bank of New York
101 Barclay Street - 7 West
New York, NY 10286
NYSE Symbol
MUE
Effective January 1, 2005, Terry K. Glenn retired as President and
Director of MuniHoldings Insured Fund II, Inc. The Fund's Board of
Directors wishes Mr. Glenn well in his retirement.
Effective January 1, 2005, Robert C. Doll, Jr. became President and
Director of the Fund.
MUNIHOLDINGS INSURED FUND II, INC., MARCH 31, 2005
Availability of Quarterly Schedule of Investments
The Fund files its complete schedule of portfolio holdings with the
Securities and Exchange Commission ("SEC") for the first and third
quarters of each fiscal year on Form N-Q. The Fund's Forms N-Q are
available on the SEC's Web site at http://www.sec.gov. The Fund's
Forms N-Q may also be reviewed and copied at the SEC's Public
Reference Room in Washington, DC. Information on the operation of
the Public Reference Room may be obtained by calling 1-800-SEC-0330.
MUNIHOLDINGS INSURED FUND II, INC., MARCH 31, 2005
Electronic Delivery
The Fund offers electronic delivery of communications to its
shareholders. In order to receive this service, you must
register your account and provide us with e-mail information.
To sign up for this service, simply access this Web site at
http://www.icsdelivery.com/live and follow the instructions.
When you visit this site, you will obtain a personal identification
number (PIN). You will need this PIN should you wish to update your
e-mail address, choose to discontinue this service and/or make any
other changes to the service. This service is not available for
certain retirement accounts at this time.
MUNIHOLDINGS INSURED FUND II, INC., MARCH 31, 2005
Item 2 - Code of Ethics - Not Applicable to this semi-annual
report
Item 3 - Audit Committee Financial Expert - Not Applicable to this
semi-annual report
Item 4 - Principal Accountant Fees and Services - Not Applicable
to this semi-annual report
Item 5 - Audit Committee of Listed Registrants - Not Applicable to
this semi-annual report
Item 6 - Schedule of Investments - Not Applicable
Item 7 - Disclosure of Proxy Voting Policies and Procedures for
Closed-End Management Investment Companies - Not
Applicable to this semi-annual report
Item 8 - Portfolio Managers of Closed-End Management Investment
Companies - Not Applicable to this semi-annual report
Item 9 - Purchases of Equity Securities by Closed-End Management
Investment Company and Affiliated Purchasers - Not
Applicable
Item 10 - Submission of Matters to a Vote of Security Holders - Not
Applicable
Item 11 - Controls and Procedures
11(a) - The registrant's certifying officers have reasonably
designed such disclosure controls and procedures to
ensure material information relating to the registrant is
made known to us by others particularly during the period
in which this report is being prepared. The registrant's
certifying officers have determined that the registrant's
disclosure controls and procedures are effective based on
our evaluation of these controls and procedures as of a
date within 90 days prior to the filing date of this
report.
11(b) - There were no changes in the registrant's internal
control over financial reporting (as defined in Rule
30a-3(d) under the Act (17 CFR 270.30a-3(d)) that
occurred during the last fiscal half-year of the period
covered by this report that has materially affected,
or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
Item 12 - Exhibits attached hereto
12(a)(1) - Code of Ethics - Not Applicable to this semi-annual
report
12(a)(2) - Certifications - Attached hereto
12(a)(3) - Not Applicable
12(b) - Certifications - Attached hereto
Pursuant to the requirements of the Securities Exchange Act of 1934
and the Investment Company Act of 1940, the registrant has duly
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
MuniHoldings Insured Fund II, Inc.
By: /s/ Robert C. Doll, Jr.
-------------------------------
Robert C. Doll, Jr.,
Chief Executive Officer of
MuniHoldings Insured Fund II, Inc.
Date: May 23, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934
and the Investment Company Act of 1940, this report has been signed
below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
By: /s/ Robert C. Doll, Jr.
-------------------------------
Robert C. Doll, Jr.,
Chief Executive Officer of
MuniHoldings Insured Fund II, Inc.
Date: May 23, 2005
By: /s/ Donald C. Burke
----------------------------
Donald C. Burke,
Chief Financial Officer of
MuniHoldings Insured Fund II, Inc.
Date: May 23, 2005