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: 09/30/06
Date of reporting period: 10/01/05 - 03/31/06
Item 1 - Report to Stockholders
Semi-Annual Report
March 31, 2006
MuniHoldings
Insured Fund II, Inc.
(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 1-800-637-3863; (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.
Announcement to Shareholders
On February 15, 2006, BlackRock, Inc. ("BlackRock") and Merrill Lynch & Co.,
Inc. ("Merrill Lynch") entered into an agreement to contribute Merrill Lynch's
investment management business, Merrill Lynch Investment Managers, L.P. and
certain affiliates (including Fund Asset Management, L.P. and Merrill Lynch
Investment Managers International Limited), to BlackRock to create a new
independent company that will be one of the world's largest asset management
firms with over $1 trillion in assets under management (based on combined
assets under management as of March 31, 2006). The transaction is expected to
close in the third quarter of 2006, at which time the new company will operate
under the BlackRock name. If approved by the Fund's Board of Directors and
Fund shareholders, the combined company that results from the transaction is
expected to become the investment adviser of the Fund.
Portfolio Information as of March 31, 2006
Percent of
Quality Ratings by Total
S&P/Moody's Investments
AAA/Aaa 92.4%
AA/Aa 2.8
A/A 2.1
BBB/Baa 2.0
Other* 0.7
* Includes portfolio holdings in variable rate demand notes and
short-term investments.
MUNIHOLDINGS INSURED FUND II, INC. MARCH 31, 2006
A Letter From the President
Dear Shareholder
You may be aware that changes are on the horizon at Merrill Lynch Investment
Managers ("MLIM"). On February 15, 2006, Merrill Lynch announced plans to
combine the firm's investment advisory business, including MLIM, with another
highly regarded investment manager - BlackRock, Inc. ("BlackRock").
We believe this merger of asset management strength will benefit our
investors. MLIM is a leading investment management organization with over
$576 billion in assets under management globally and 2,757 employees in 17
countries. It offers over 100 investment strategies in vehicles ranging
from mutual funds to institutional portfolios. BlackRock is one of the
largest publicly traded investment management firms in the United States with
$463.1 billion in assets under management and 1,839 employees. It manages
assets on behalf of institutional and individual investors worldwide through a
variety of equity, fixed income, liquidity and alternative investment products.
At the completion of the transaction, which is expected in the third quarter
of this year, the resultant firm will be a top-10 investment manager worldwide
with over $1 trillion in assets under management.* The combined company will
provide a wider selection of high-quality investment solutions across a
range of asset classes and investment styles. MLIM and BlackRock possess
complementary capabilities that together create a well-rounded organization
uniting some of the finest money managers in the industry. At the same time,
the firms share similar values and beliefs - they are focused on delivering
excellence on behalf of clients, and both make investment performance their
single most important mission. In short, the merger only reinforces our
commitment to shareholders.
Most of MLIM's investment products - including mutual funds, separately
managed accounts, annuities and variable insurance funds - eventually will
carry the "BlackRock" name. As a shareholder in one or more MLIM-advised
mutual funds, you will receive a proxy package in the coming weeks in
connection with this transaction. After you receive this information, should
you have any questions or concerns, do not hesitate to contact your financial
advisor.
As always, we thank you for entrusting us with your investment assets, and we
look forward to continuing to serve your investment needs with even greater
strength and scale as the new BlackRock.
Sincerely,
(Robert C. Doll, Jr.)
Robert C. Doll, Jr.
President and Chief Investment Officer
Merrill Lynch Investment Managers
* $1.039 trillion in assets under management as of March 31, 2006.
Data, including assets under management, are as of March 31, 2006.
MUNIHOLDINGS INSURED FUND II, INC. MARCH 31, 2006
A Discussion With Your Fund's Portfolio Manager
The Fund continued to provide an above-average dividend as we remained focused
on yield generation and preservation of the portfolio's net asset value.
Discuss the recent market environment relative to municipal bonds.
Long-term bond yields generally rose over the past six months as investors
appeared to disregard signs of a slowing economy and instead focused on
potential inflationary pressures and continued interest rate hikes by the
Federal Reserve Board (the Fed). The Fed raised the federal funds rate at each
of its meetings during the period, bringing the short-term target rate to
4.75%. Given little expectation that the current monetary tightening cycle
will be curtailed before, perhaps, midyear, the yield curve continued to
flatten with shorter-term interest rates increasing more than longer rates.
Over the six-month period ended March 31, 2006, 30-year U.S. Treasury bond
yields rose 43 basis points (.43%) to 4.90%, 10-year U.S. Treasury note yields
rose 52 basis points to 4.86% and two-year Treasury note yields increased 64
basis points to 4.82%.
Tax-exempt bond yields generally mirrored the movement of their taxable
counterparts. According to Municipal Market Data, yields on AAA-rated tax-
exempt bonds maturing in 30 years rose four basis points to 4.48%. AAA-rated
issues maturing in 10 years ended the period with a yield of 3.99%, an
increase of 26 basis points. The tax-exempt market's strong technical position
allowed municipal bond prices to decline less than taxable bond prices.
Issuance of new long-term tax-exempt bonds has slowed dramatically in recent
months, helping to support the recent outperformance of municipal bonds. After
setting a new annual record in 2005, new issuance declined during the six-
month period ended March 31, 2006, with $168 billion in long-term municipal
bonds issued - a decline of 11.1% compared to the same six-month period a year
ago. In 2005, the record level of new issuance was largely triggered by a 47%
increase in refunding activity as issuers took advantage of historically low
bond yields and a flattening yield curve to refinance outstanding higher-
couponed debt. So far in 2006, refunding issuance has declined more than 55%
relative to the first three months of 2005. It remains to be seen if this
decline is the beginning of a sustained trend toward a significant decline in
refunding issuance.
Investor demand for municipal product has remained strong. As reported by the
Investment Company Institute (ICI), for all of 2005, long-term municipal bond
funds received net new monies of $5.04 billion. This represented a sharp
reversal from the $3.67 billion outflow seen in 2004. ICI data for January and
February 2006 shows that tax-exempt mutual funds continued to experience
positive cash flows, receiving more than $4.9 billion in assets - more than
twice the net new monies received during the first two months of 2005.
Looking ahead, the fundamentals for the tax-exempt bond market appear
favorable, and continued positive cash flows are anticipated. Given their
attractive yields relative to comparable U.S. Treasury bonds, and the
prospects for reduced issuance in 2006, we believe municipal bonds could enjoy
solid results in the coming months.
How did the Fund perform during the period?
For the six-month period ended March 31, 2006, the Common Stock of
MuniHoldings Insured Fund II, Inc. had net annualized yields of 5.73% and
5.99%, based on a period-end per share net asset value of $13.94 and a per
share market price of $13.32, respectively, and $.398 per share income
dividends. Over the same period, the Fund's total investment return on the
Fund's Common Stock was +.92%, based on a change in per share net asset value
from $14.23 to $13.94, and assuming reinvestment of all distributions.
The Fund's total return, based on net asset value, lagged the +1.16% average
return of the Lipper Insured Municipal Debt Funds (Leveraged) category for the
six-month period. (Funds in this Lipper category invest primarily in municipal
debt issues insured as to timely payment. These funds can be leveraged via use
of debt, preferred equity and/or reverse repurchase agreements.) For the most
part, we attribute the portfolio's relative underperformance to our yield
curve positioning. While we were anticipating a flattening of the municipal
yield curve, the Fund maintained its higher exposure to bonds with
intermediate maturities - that is, those with final maturities between 5 years
and 10 years. We held these investments in recognition of their higher book
yields and embedded gains, which enabled the Fund to distribute one of the
highest dividend yields in its Lipper category.
MUNIHOLDINGS INSURED FUND II, INC. MARCH 31, 2006
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 may 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.
With credit spreads at relatively narrow levels, we increased our exposure to
bonds exempt from tax in high demand states such as New York and New Jersey.
In fact, we increased our investments in New Jersey tax-exempt issues by 4.7%
as an increase in supply caused them to trade at attractive spreads. We also
started shifting the Fund's focus from the 20-year sector of the yield curve
to the 10-year - 15-year areas. The flattening of the curve has enabled this
restructuring to be accomplished with very little yield sacrifice and, we
believe, positions the Fund for better performance should the municipal yield
curve steepen in the future.
For the six months ended March 31, 2006, the Fund's Auction Market Preferred
Stock (AMPS) had average yields of 2.94% for Series A, 2.90% for Series B and
2.97% for Series C. Continued short-term interest rate increases by the Fed
have continued to boost the Fund's borrowing costs. The Fed raised the short-
term interest rate target 100 basis points during the six-month period.
Nevertheless, we are still able to borrow at a lower rate than where we
invest, and this has continued to generate an income benefit to the holders of
Common Stock. Of course, should the spread between short-term and long-term
interest rates narrow, the benefits of leveraging 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 39.63% of total net assets,
before the deduction of Preferred Stock. (For a more complete explanation of
the benefits and risks of leveraging, see page 6 of this report to
shareholders.)
How would you characterize the Fund's position at the close of the period?
The Fund ended the period fully invested and with a neutral posture in terms
of interest rate risk. We also were in the process of shifting our yield curve
strategy to neutral at period-end, given the possibility that the yield curve
flattening trend is nearing its conclusion. Overall, we continue to emphasize
a competitive yield for our shareholders and preservation of the portfolio's
net asset value.
Robert A. DiMella, CFA
Vice President and Portfolio Manager
April 19, 2006
MUNIHOLDINGS INSURED FUND II, INC. MARCH 31, 2006
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, 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. As of March 31,
2006, the percentage of the Fund's total net assets invested in inverse
floaters was 8.16%, before the deduction of Preferred Stock.
Swap Agreements
The Fund may 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, 2006
Schedule of Investments (In Thousands)
Face
Amount Municipal Bonds Value
Alabama--2.9%
$ 3,580 Jefferson County, Alabama, Limited Obligation
School Warrants, Series A, 5.50% due 1/01/2022 $ 3,843
5,000 Mobile, Alabama, GO, Refunding, 5.25%
due 8/15/2020 5,328
Alaska--1.3%
2,000 Anchorage, Alaska, Water Revenue Refunding Bonds,
6% due 9/01/2024 (a) 2,156
1,700 Matanuska-Susitna Boro, Alaska, GO, Series A,
6% due 3/01/2010 (i)(j) 1,841
Arkansas--2.1%
6,105 Arkansas State Development Finance Authority,
M/F Mortgage Revenue Refunding Bonds, DRIVERS,
Series 964Z, 7.204% due 6/01/2010 (d)(i)(l) 6,594
California--31.0%
5,355 California Pollution Control Financing Authority, PCR,
Refunding, DRIVERS, AMT, Series 878Z, 7.193%
due 12/01/2009 (i)(l) 6,015
4,675 California State, GO, Refunding, RIB, AMT,
Series 777X, 7.26% due 12/01/2021 (i)(l) 4,926
2,100 California State, Various Purpose, GO, 5.50%
due 4/01/2028 2,293
Cerritos, California, Community College District, GO
(Election of 2004), Series A (i):
110 5% due 8/01/2025 115
85 5% due 8/01/2026 89
2,800 Compton, California, Unified School District, GO
(Election of 2002), Series B, 5.50%
due 6/01/2025 (i) 3,057
2,405 Dixon, California, Unified School District, GO
(Election of 2002), 5.20% due 8/01/2044 (f) 2,504
East Side Union High School District, California,
Santa Clara County, GO (Election of 2002),
Series D (m):
2,185 5% due 8/01/2020 2,300
8,460 5% due 8/01/2029 8,792
Los Angeles, California, Unified School District, GO:
3,400 (Election of 1997), Series F, 5%
due 1/01/2028 (c) 3,540
8,110 Series A, 5% due 1/01/2028 (i) 8,444
4,240 Modesto, California, Schools Infrastructure Financing
Agency, Special Tax Bonds, 5.50%
due 9/01/2036 (a) 4,590
5,000 Port of Oakland, California, Revenue Refunding
Bonds, AMT, Series L, 5.375% due 11/01/2027 (c) 5,300
1,500 Port of Oakland, California, Trust Receipts, Revenue
Bonds, AMT, Class R, Series K, 8.014%
due 11/01/2021 (c)(l) 1,685
Face
Amount Municipal Bonds Value
California (concluded)
$ 2,985 Roseville, California, Joint Union High School
District, GO (Election of 2004), Series A, 5%
due 8/01/2029 (c) $ 3,107
2,130 Sacramento, California, City Financing Authority,
Capital Improvement Revenue Bonds (911 Call
Center and Other Municipal Projects), 5%
due 12/01/2027 (a) 2,205
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 (f) 1,322
5,075 San Francisco, California, City and County, GO
(California Academy of Sciences Improvements),
Series E, 5% due 6/15/2022 (i) 5,315
3,800 San Jose, California, GO (Libraries, Parks and Public
Safety Projects), 5% due 9/01/2030 (i) 3,936
5,190 Sequoia, California, Unified High School District,
GO, Refunding, Series B, 5.50% due 7/01/2035 (f) 5,729
3,430 Sweetwater, California, Union High School District,
Public Financing Authority, Special Tax Revenue
Bonds, Series A, 5% due 9/01/2028 (f) 3,563
Tustin, California, Unified School District, Senior
Lien Special Tax Bonds (Community Facilities
District Number 97-1), Series A (f):
2,915 5% due 9/01/2032 2,993
4,620 5% due 9/01/2038 4,732
University of California Revenue Bonds (Multiple
Purpose Projects), Series Q (f):
3,000 5% due 9/01/2022 3,123
6,710 5% due 9/01/2031 6,939
Colorado--3.7%
6,285 Aurora, Colorado, COP, 5.75%
due 12/01/2010 (a)(j) 6,818
315 Colorado HFA, Revenue Refunding Bonds
(S/F Program), AMT, Senior Series A-2, 7.50%
due 4/01/2031 328
4,000 Colorado Health Facilities Authority, Hospital
Revenue Refunding Bonds (Poudre Valley Health
Care), Series A, 5.75% due 12/01/2009 (f)(j) 4,309
Connecticut--0.5%
1,520 Connecticut State, GO, Series D, 5%
due 12/01/2024 (i) 1,597
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
GO General Obligation Bonds
HDA Housing Development Authority
HFA Housing Finance Agency
IDA Industrial Development Authority
IDR Industrial Development Revenue Bonds
M/F Multi-Family
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, 2006
Schedule of Investments (continued) (In Thousands)
Face
Amount Municipal Bonds Value
Florida--0.2%
$ 3,670 Miami-Dade County, Florida, Subordinate Special
Obligation Revenue Bonds, Series A, 5.24%**
due 10/01/2037 (i) $ 706
Georgia--1.0%
3,000 Augusta, Georgia, Water and Sewer Revenue Bonds,
5.25% due 10/01/2034 (f) 3,188
Idaho--0.2%
810 Idaho Housing and Finance Association,
S/F Mortgage Revenue Bonds, AMT, Series E, 6%
due 1/01/2032 813
Illinois--8.6%
Chicago, Illinois, GO Series A (c)(j):
18,130 6% due 7/01/2010 19,910
2,185 (Neighborhoods Alive 21 Program), 6%
due 7/01/2010 2,400
3,650 Chicago, Illinois, O'Hare International Airport
Revenue Bonds, DRIVERS, AMT, Series 845-Z,
8.472% due 1/01/2012 (i)(l)(m) 4,438
125 Lake, Cook, Kane and McHenry Counties, Illinois,
Community Unit School District Number 220, GO,
6% due 12/01/2020 (c) 136
Indiana--4.2%
3,000 Indiana Transportation Finance Authority,
Highway Revenue Bonds, Series A, 5.25%
due 6/01/2029 (c) 3,188
9,280 Shelbyville, Indiana, Elementary School Building
Corporation Revenue Bonds, First Mortgage,
5.75% due 1/15/2009 (f)(j) 9,877
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 3,796
2,805 Sedgwick and Shawnee Counties, Kansas,
S/F Mortgage Revenue Bonds, AMT, Series A-2,
6.20% due 12/01/2033 (e)(g) 2,826
Louisiana--0.7%
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) 2,218
Massachusetts--12.1%
5,865 Massachusetts Bay Transportation Authority, Sales
Tax Revenue Refunding Bonds, Senior Series A,
5% due 7/01/2035 6,039
3,495 Massachusetts Bay Transportation Authority, Special
Assessment Revenue Refunding Bonds, Series A,
5% due 7/01/2031 3,637
5,440 Massachusetts State HFA, Rental Housing Mortgage
Revenue Bonds, AMT, Series A, 5.15%
due 7/01/2026 (f) 5,400
8,775 Massachusetts State School Building Authority,
Dedicated Sales Tax Revenue Bonds, Series A,
5% due 8/15/2030 (f) 9,175
12,345 Massachusetts State Special Obligation Dedicated
Tax Revenue Bonds, 5.25% due 1/01/2014 (c)(j) 13,313
Face
Amount Municipal Bonds Value
Michigan--2.2%
$ 1,000 Michigan State Hospital Finance Authority, Revenue
Refunding Bonds (Mercy-Mount Clemens),
Series A, 6% due 5/15/2014 (i) $ 1,069
Michigan State Strategic Fund, Limited Obligation
Revenue Refunding Bonds, DRIVERS, AMT,
Series (l)(m):
2,500 857Z, 7.773% due 3/01/2010 2,783
1,000 858Z, 7.474% due 12/01/2011 1,124
1,500 Saint Clair County, Michigan, Economic Revenue
Refunding Bonds (Detroit Edison Company), RIB,
Series 282, 9.32% due 8/01/2024 (a)(l) 1,729
Minnesota--4.4%
Prior Lake, Minnesota, Independent School District
Number 719, GO (f):
2,555 5.50% due 2/01/2016 2,709
1,830 5.50% due 2/01/2017 1,938
3,570 5.50% due 2/01/2018 3,780
2,840 5.50% due 2/01/2019 3,007
2,185 Sauk Rapids, Minnesota, Independent School
District Number 47, GO, Series A, 5.625%
due 2/01/2018 (i) 2,367
Nebraska--1.9%
Omaha Convention Hotel Corporation, Nebraska,
Convention Center Revenue Bonds, First Tier,
Series A (a):
1,410 5.50% due 4/01/2020 1,520
3,985 5.50% due 4/01/2022 4,280
Nevada--3.9%
1,750 Clark County, Nevada, IDR (Power Company Project),
AMT, Series A, 6.70% due 6/01/2022 (c) 1,820
165 Nevada Housing Division, S/F Mortgage Revenue
Bonds, AMT, Series A-2, 6.30% due 4/01/2022 (i) 166
Truckee Meadows, Nevada, Water Authority, Water
Revenue Bonds, Series A (f):
5,000 5.50% due 7/01/2018 5,359
4,445 5.50% due 7/01/2019 4,764
New Jersey--17.6%
New Jersey EDA, Cigarette Tax Revenue Bonds:
8,590 5.75% due 6/15/2029 9,036
6,200 5.75% due 6/15/2034 (b) 6,757
11,000 New Jersey EDA, Motor Vehicle Surcharge Revenue
Bonds, Series A, 5.25% due 7/01/2033 (i) 11,719
New Jersey State Transportation Trust Fund Authority,
Transportation System Revenue Bonds, Series D:
10,000 5% due 6/15/2018 (a) 10,542
12,950 5% due 6/15/2020 (f) 13,582
3,000 New Jersey State Turnpike Authority, Turnpike
Revenue Bonds, Series C, 5% due 1/01/2030 (f) 3,123
New Mexico--2.7%
5,000 Farmington, New Mexico, PCR, Refunding (Public
Service Company of San Juan), Series C, 5.70%
due 12/01/2016 (a) 5,164
3,075 New Mexico Finance Authority, Senior Lien State
Transportation Revenue Bonds, Series A, 5.25%
due 6/15/2016 (i) 3,317
MUNIHOLDINGS INSURED FUND II, INC. MARCH 31, 2006
Schedule of Investments (continued) (In Thousands)
Face
Amount Municipal Bonds Value
New York--20.9%
$ 8,010 Metropolitan Transportation Authority, New York,
Revenue Bonds, Series A, 5% due 11/15/2019 (a) $ 8,493
14,000 Nassau Health Care Corporation, New York,
Health System Revenue Bonds, 5.75%
due 8/01/2009 (f)(j) 15,167
145 New York City, New York, GO, Refunding, Series G,
5.75% due 2/01/2017 (f) 147
3,375 New York City, New York, Sales Tax Asset Receivable
Corporation Revenue Bonds, DRIVERS,
Series 1133Z, 7.015% due 10/15/2012 (a)(l) 3,854
New York City, New York, Sales Tax Asset Receivable
Corporation Revenue Bonds, Series A:
5,200 5.25% due 10/15/2018 (i) 5,605
3,000 5% due 10/15/2029 (a) 3,136
5,000 5% due 10/15/2032 (a) 5,219
4,345 New York State Dormitory Authority Revenue Bonds
(School Districts Financing Program), Series D,
5.25% due 10/01/2023 (i) 4,637
1,560 New York State Thruway Authority, General
Revenue Refunding Bonds, Series G, 5.25%
due 1/01/2027 (f) 1,676
Tobacco Settlement Financing Corporation of New
York Revenue Bonds:
2,000 Series A-1, 5.25% due 6/01/2021 (a) 2,126
7,850 Series C-1, 5.50% due 6/01/2017 8,387
5,630 Series C-1, 5.50% due 6/01/2020 (c)(m) 6,104
500 Triborough Bridge and Tunnel Authority, New York,
General Purpose Revenue Refunding Bonds, VRDN,
Series C, 3.15% due 1/01/2032 (a)(k) 500
North Carolina--0.4%
1,340 North Carolina HFA, Home Ownership Revenue
Bonds, AMT, Series 14-A, 5.35% due 1/01/2022 (a) 1,382
Ohio--1.0%
1,745 Aurora, Ohio, City School District, COP, 6.10%
due 12/01/2009 (i)(j) 1,904
1,000 Kent State University, Ohio, University Revenue
Bonds, 6% due 5/01/2024 (a) 1,088
Oklahoma--1.2%
3,385 Claremore, Oklahoma, Public Works Authority,
Capital Improvement Revenue Refunding Bonds,
Series A, 5.25% due 6/01/2027 (f) 3,632
Pennsylvania--8.3%
4,480 Lehigh County, Pennsylvania, IDA, PCR, Refunding
(Pennsylvania Power and Light Utilities Corporation
Project), 4.75% due 2/15/2027 (c) 4,509
5,600 Lycoming County, Pennsylvania, College Authority
Revenue Bonds (Pennsylvania College of
Technology), 5.25% due 7/01/2007 (i)(j) 5,768
6,435 Pennsylvania State Higher Educational Facilities
Authority, State System of Higher Education
Revenue Bonds, Series O, 5.125%
due 6/15/2024 (a) 6,531
2,800 Sayre, Pennsylvania, Health Care Facilities Authority,
Revenue Refunding Bonds (Guthrie Healthcare
System), Series A, 5.875% due 12/01/2031 2,977
Face
Amount Municipal Bonds Value
Pennsylvania (concluded)
Seneca Valley, Pennsylvania, School District, GO (c):
$ 1,390 5% due 1/01/2020 $ 1,466
2,260 5% due 1/01/2021 2,378
2,090 Washington County, Pennsylvania, Capital Funding
Authority Revenue Bonds (Capital Projects and
Equipment Program), 6.15% due 12/01/2029 (a) 2,242
Rhode Island--3.6%
5,555 Providence, Rhode Island, Redevelopment Agency
Revenue Refunding Bonds (Public Safety and
Municipal Buildings), Series A, 5.75%
due 4/01/2010 (a)(j) 6,027
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 (m) 5,077
South Carolina--0.8%
2,490 South Carolina Housing Finance and Development
Authority, Mortgage Revenue Refunding Bonds,
AMT, Series A-2, 6.35% due 7/01/2019 (f) 2,606
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)(j) 3,783
1,080 Tennessee HDA, Revenue Bonds (Homeownership
Program), AMT, Series 2C, 6% due 7/01/2011 1,092
1,515 Tennessee HDA, Revenue Refunding Bonds
(Homeownership Program), AMT, Series 1, 6.05%
due 7/01/2014 (i) 1,533
Texas--8.0%
1,750 Austin, Texas, Convention Center Revenue Bonds
(Convention Enterprises Inc.), Trust Certificates,
Second Tier, Series B, 6% due 1/01/2023 1,857
8,000 Dallas-Fort Worth, Texas, International Airport
Revenue Bonds, DRIVERS, AMT, Series 778-Z,
7.473% due 11/01/2011 (i)(l) 8,976
Dallas-Fort Worth, Texas, International Airport
Revenue Refunding and Improvement Bonds,
AMT, Series A (c):
1,835 5.875% due 11/01/2017 1,977
2,150 5.875% due 11/01/2018 2,316
2,390 5.875% due 11/01/2019 2,575
El Paso, Texas, Water and Sewer Revenue Refunding
and Improvement Bonds, Series A (f):
115 6% due 3/01/2015 127
170 6% due 3/01/2016 187
180 6% due 3/01/2017 200
4,651 Houston, Texas, Community College System,
Participation Interests, COP (Alief Center Project),
5.75% due 8/15/2022 (i) 4,901
1,850 Midland, Texas, Certificates of Obligation, GO,
6.10% due 3/01/2010 (c)(j) 2,009
Utah--0.2%
610 Weber County, Utah, Municipal Building Authority,
Lease Revenue Refunding Bonds, 5.75%
due 12/15/2007 (i)(j) 638
MUNIHOLDINGS INSURED FUND II, INC. MARCH 31, 2006
Schedule of Investments (concluded) (In Thousands)
Face
Amount Municipal Bonds Value
Washington--7.0%
$ 6,885 Bellevue, Washington, GO, Refunding, 5.50%
due 12/01/2039 (i) $ 7,503
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) 4,054
Lewis County, Washington, GO, Refunding (a):
1,805 5.75% due 12/01/2009 (j) 1,932
1,640 5.75% due 12/01/2024 1,746
2,500 Seattle, Washington, Municipal Light and Power
Revenue Bonds, 6% due 10/01/2009 (i)(j) 2,710
3,500 Seattle, Washington, Water System Revenue Bonds,
Series B, 6% due 7/01/2009 (c)(j) 3,777
West Virginia--2.1%
6,210 West Virginia State Housing Development Fund,
Housing Finance Revenue Refunding Bonds,
Series D, 5.20% due 11/01/2021 (i) 6,428
Wisconsin--0.4%
1,250 Wisconsin State Health and Educational Facilities
Authority Revenue Bonds (Blood Center of
Southeastern Wisconsin Project), 5.75%
due 6/01/2034 1,330
Face
Amount Municipal Bonds Value
Puerto Rico--3.9%
$ 6,225 Puerto Rico Commonwealth, Public Improvement,
GO, 5.125% due 7/01/2030 (f) $ 6,535
5,335 Puerto Rico Electric Power Authority, Power
Revenue Bonds, Series RR, 5%
due 7/01/2027 (m) 5,572
Total Municipal Bonds
(Cost--$493,695)--163.2% 508,539
Shares
Held Short-Term Securities
3,303 Merrill Lynch Institutional Tax-Exempt
Fund, 3.02% (h)(n) 3,303
Total Short-Term Securities
(Cost--$3,303)--1.1% 3,303
Total Investments (Cost--$496,998*)--164.3% 511,842
Other Assets Less Liabilities--1.4% 4,296
Preferred Stock, at Redemption Value--(65.7%) (204,577)
----------
Net Assets Applicable to Common Stock--100.0% $ 311,561
==========
* The cost and unrealized appreciation (depreciation) of investments
as of March 31, 2006, as computed for federal income tax purposes,
were as follows:
Aggregate cost $ 497,104
===============
Gross unrealized appreciation $ 16,656
Gross unrealized depreciation (1,918)
---------------
Net unrealized appreciation $ 14,738
===============
** Represents a zero coupon bond; the interest rate shown reflects the
effective yield at the time of purchase.
(a) AMBAC Insured.
(b) Assured Guaranty Insured.
(c) FGIC Insured.
(d) FHA Insured.
(e) FNMA Collateralized.
(f) FSA Insured.
(g) GNMA Collateralized.
(h) Investments in companies considered to be an affiliate of the Fund,
for purposes of Section 2(a)(3) of the Investment Company Act of 1940,
were as follows:
Net Dividend
Affiliate Activity Income
Merrill Lynch Institutional Tax-Exempt Fund (286) $59
(i) MBIA Insured.
(j) Prerefunded.
(k) Security may have a maturity of more than one year at time of issuance,
but has variable rate and demand features that qualify it as a short-term
security. The rate disclosed is that currently in effect. This rate
changes periodically based upon prevailing market rates.
(l) The rate disclosed is that currently in effect. This rate changes
periodically and inversely based upon prevailing market rates.
(m) XL Capital Insured.
(n) Represents the current yield as of March 31, 2006.
See Notes to Financial Statements.
MUNIHOLDINGS INSURED FUND II, INC. MARCH 31, 2006
Statement of Net Assets
As of March 31, 2006
Assets
Investments in unaffiliated securities, at value (identified cost--$493,694,870) $ 508,538,741
Investments in affiliated securities, at value (identified cost--$3,303,225) 3,303,225
Cash 41,992
Receivables:
Interest $ 7,502,359
Securities sold 176,428 7,678,787
---------------
Prepaid expenses 8,297
---------------
Total assets 519,571,042
---------------
Liabilities
Payables:
Securities purchased 3,010,965
Investment adviser 202,758
Dividends to Common Stock shareholders 132,591
Other affiliates 10,824 3,357,138
---------------
Accrued expenses and other liabilities 76,169
---------------
Total liabilities 3,433,307
---------------
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) 204,576,748
---------------
Net Assets Applicable to Common Stock
Net assets applicable to Common Stock $ 311,560,987
===============
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 $ 2,006,730
Accumulated realized capital losses--net (21,260,815)
Unrealized appreciation--net 14,843,871
---------------
Total accumulated losses--net (4,410,214)
---------------
Total--Equivalent to $13.94 net asset value per share of Common Stock
(market price--$13.32) $ 311,560,987
===============
* Auction Market Preferred Stock.
See Notes to Financial Statements.
MUNIHOLDINGS INSURED FUND II, INC. MARCH 31, 2006
Statement of Operations
For the Six Months Ended March 31, 2006
Investment Income
Interest $ 12,269,799
Dividends from affiliates 59,389
---------------
Total income 12,329,188
---------------
Expenses
Investment advisory fees $ 1,421,798
Commission fees 256,374
Accounting services 86,092
Transfer agent fees 33,191
Professional fees 30,204
Printing and shareholder reports 19,678
Custodian fees 14,129
Directors' fees and expenses 12,989
Pricing fees 10,817
Listing fees 9,534
Other 23,950
---------------
Total expenses before waiver and reimbursement 1,918,756
Waiver and reimbursement of expenses (101,379)
---------------
Total expenses after waiver and reimbursement 1,817,377
---------------
Investment income--net 10,511,811
---------------
Realized & Unrealized Gain (Loss)--Net
Realized gain on:
Investments--net 1,033,641
Futures contracts and forward interest rate swaps--net 554,225 1,587,866
---------------
Change in unrealized appreciation on:
Investments--net (6,299,689)
Futures contracts--net (161,412) (6,461,101)
--------------- ---------------
Total realized and unrealized loss--net (4,873,235)
---------------
Dividends to Preferred Stock Shareholders
Investment income--net (3,002,219)
---------------
Net Increase in Net Assets Resulting from Operations $ 2,636,357
===============
See Notes to Financial Statements.
MUNIHOLDINGS INSURED FUND II, INC. MARCH 31, 2006
Statements of Changes in Net Assets
For the Six For the
Months Ended Year Ended
March 31, September 30,
Increase (Decrease) in Net Assets: 2006 2005
Operations
Investment income--net $ 10,511,811 $ 21,749,116
Realized gain--net 1,587,866 8,290,447
Change in unrealized appreciation/depreciation--net (6,461,101) (10,385,043)
Dividends to Preferred Stock shareholders (3,002,219) (4,101,460)
--------------- ---------------
Net increase in net assets resulting from operations 2,636,357 15,553,060
--------------- ---------------
Dividends to Common Stock Shareholders
Investment income--net (9,119,790) (19,580,725)
--------------- ---------------
Net decrease in net assets resulting from dividends to Common Stock shareholders (9,119,790) (19,580,725)
--------------- ---------------
Net Assets Applicable to Common Stock
Total decrease in net assets applicable to Common Stock (6,483,433) (4,027,665)
Beginning of period 318,044,420 322,072,085
--------------- ---------------
End of period* $ 311,560,987 $ 318,044,420
=============== ===============
* Undistributed investment income--net $ 2,006,730 $ 3,616,928
=============== ===============
See Notes to Financial Statements.
MUNIHOLDINGS INSURED FUND II, INC. MARCH 31, 2006
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. 2006 2005 2004 2003 2002
Per Share Operating Performance
Net asset value, beginning of period $ 14.23 $ 14.41 $ 14.37 $ 14.48 $ 13.94
------------ ---------- ---------- ---------- ----------
Investment income--net .47++ .97++ 1.00++ 1.02++ 1.03
Realized and unrealized gain (loss)--net (.22) (.09) --++++ (.17) .47
Dividends and distributions to Preferred
Stock shareholders:
Investment income--net (.13) (.18) (.09) (.10) (.13)
Realized gain--net -- -- -- -- --++++++
------------ ---------- ---------- ---------- ----------
Total from investment operations .12 .70 .91 .75 1.37
------------ ---------- ---------- ---------- ----------
Less dividends and distributions to Common Stock
shareholders:
Investment income--net (.41) (.88) (.87) (.86) (.83)
Realized gain--net -- -- -- -- --++++++
------------ ---------- ---------- ---------- ----------
Total dividends and distributions to Common Stock
shareholders (.41) (.88) (.87) (.86) (.83)
------------ ---------- ---------- ---------- ----------
Net asset value, end of period $ 13.94 $ 14.23 $ 14.41 $ 14.37 $ 14.48
============ ========== ========== ========== ==========
Market price per share, end of period $ 13.32 $ 13.90 $ 13.25 $ 13.13 $ 13.55
============ ========== ========== ========== ==========
Total Investment Return*
Based on net asset value per share .92%+++++ 5.35% 7.12% 5.95% 10.67%
============ ========== ========== ========== ==========
Based on market price per share (1.28%)+++++ 11.92% 7.80% 3.45% 10.71%
============ ========== ========== ========== ==========
Average Net Assets of Common Stock
Total expenses, net of waiver and reimbursement** 1.16%+++ 1.15% 1.12% 1.14% 1.18%
============ ========== ========== ========== ==========
Total expenses** 1.23%+++ 1.21% 1.21% 1.23% 1.27%
============ ========== ========== ========== ==========
Total investment income--net** 6.72%+++ 6.72% 6.93% 7.19% 7.44%
============ ========== ========== ========== ==========
Amount of dividends to Preferred Stock shareholders 1.92%+++ 1.27% .63% .69% .97%
============ ========== ========== ========== ==========
Investment income--net, to Common Stock
shareholders 4.80% 5.45% 6.30% 6.50% 6.47%
============ ========== ========== ========== ==========
Ratios Based on Average Net Assets of Preferred Stock
Dividends to Preferred Stock shareholders 2.94%+++ 1.99% .99% 1.08% 1.46%
============ ========== ========== ========== ==========
MUNIHOLDINGS INSURED FUND II, INC. MARCH 31, 2006
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. 2006 2005 2004 2003 2002
Supplemental Data
Net assets applicable to Common Stock, end of period
(in thousands) $ 311,561 $ 318,044 $ 322,072 $ 321,270 $ 323,678
============ ========== ========== ========== ==========
Preferred Stock outstanding, end of period
(in thousands) $ 204,500 $ 204,500 $ 204,500 $ 204,500 $ 204,500
============ ========== ========== ========== ==========
Portfolio turnover 24.48% 58.19% 45.89% 52.00% 50.73%
============ ========== ========== ========== ==========
Leverage
Asset coverage per $1,000 $ 2,524 $ 2,555 $ 2,575 $ 2,571 $ 2,583
============ ========== ========== ========== ==========
Dividends Per Share on Preferred Stock Outstanding
Series A--Investment income--net $ 367 $ 505 $ 253 $ 268 $ 362
============ ========== ========== ========== ==========
Series B--Investment income--net $ 362 $ 494 $ 241 $ 267 $ 338
============ ========== ========== ========== ==========
Series C--Investment income--net $ 370 $ 504 $ 251 $ 271 $ 381
============ ========== ========== ========== ==========
* 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.
++++++ Amount is less than $(.01) per share.
+++ Annualized.
+++++ Aggregate total investment return.
See Notes to Financial Statements.
MUNIHOLDINGS INSURED FUND II, INC. MARCH 31, 2006
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 shares are 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 ("OTC") markets and are valued at the last available bid price in
the OTC 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 OTC 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
investment 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, 2006
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 operations of the Fund. For such services, the Fund pays a
monthly fee at an annual rate of .55% of the Fund's average weekly net assets,
including proceeds from the issuance of Preferred Stock. FAM has agreed to
waive its management fee on the proceeds of Preferred Stock that exceeds 35%
of the Fund's total net assets. For the six months ended March 31, 2006, FAM
earned fees of $1,421,798, of which $97,238 was waived. In addition, FAM has
agreed to reimburse its advisory fee by the amount of advisory fees the Fund
pays to FAM indirectly through its investment in Merrill Lynch Institutional
Tax-Exempt Fund. For the six months ended March 31, 2006, FAM reimbursed the
Fund in the amount of $4,141.
For the six months ended March 31, 2006, the Fund reimbursed FAM $5,709 for
certain accounting services.
In addition, Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"), an
affiliate of FAM, received $640 in commissions on the execution of portfolio
security transactions for the Fund for the six months ended March 31, 2006.
Certain officers and/or directors of the Fund are officers and/or directors of
FAM, PSI, and/or ML & Co.
In February 2006, ML & Co. and BlackRock, Inc. entered into an agreement to
contribute ML & Co.'s investment management business, including FAM, to the
investment management business of BlackRock, Inc. The transaction is expected
to close in the third quarter of 2006.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
six months ended March 31, 2006, were $125,036,655 and $129,176,770,
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 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, 2006 were as follows:
Series A, 3.25%; Series B, 3.25%; and Series C, 3.23%.
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, 2006, MLPF&S earned $124,142
as commissions.
5. Capital Loss Carryforward:
On September 30, 2005, the Fund had a net capital loss carryforward of
$18,683,686, of which $6,857,897 expires in 2007, $11,519,686 expires in 2008
and $306,103 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 $.063000 per share on April 27, 2006 to shareholders of record on
April 17, 2006.
MUNIHOLDINGS INSURED FUND II, INC. MARCH 31, 2006
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. The Co-
chairmen of the Board are also independent directors. 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"). 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; (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 services provided by
the Investment Adviser to be of high quality. 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 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,
investment performance, and leverage 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; (d) information on the profitability to
the Investment Adviser and its affiliates of the Investment Advisory Agreement
and other relationships with the Fund; and (e) information provided by the
Investment Adviser concerning investment advisory fees charged to other
clients, such as other retail closed-end funds under similar investment
mandates. 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, 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 in February 2006, the independent directors' and Board's review
included the following:
MUNIHOLDINGS INSURED FUND II, INC. MARCH 31, 2006
Services Provided by the Investment Adviser--The Board reviewed the nature,
extent and quality of services provided by the Investment Adviser, focusing on
the investment advisory services and the resulting performance of the Fund.
The Board uses data provided by Lipper and by the Investment Adviser in its
review of advisory services. 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 funds. In addition to data regarding
total return, the Board also considers yield a significant factor in its
analysis. While the Board reviews performance data at least quarterly,
consistent with the Investment Adviser's investment goals, the Board attaches
more importance to performance over relatively long periods of time, typically
three to five years. The Board concluded that the comparative data indicated
that performance was satisfactory. Considering all these factors, the Board
concluded that the nature and quality of the services provided supported the
continuation of the Investment Advisory Agreement with the Investment Adviser.
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
municipal investing group the strategies being used to achieve the stated
objectives. Among other things, the Board considers the size, education 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 managers. The Board also
considered the experience of the Fund's portfolio manager and noted that Mr.
DiMella has more than fifteen years of experience in portfolio management. The
Investment Adviser and its investment staff have extensive experience in
analyzing and managing the types of investments used by the Fund. The Board
concluded 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 considered comparable by Lipper. The Board also compares the
Fund's total expenses to those of other comparable funds. The Board considered
the services provided to and the fees charged by the Investment Adviser to
other types of clients with similar investment mandates, consisting of other
closed-end funds with similar investment mandates and noted that the fees
charged by the Investment Adviser in those cases typically were comparable to
those being charged to the Fund. The Board determined that the Fund's
contractual and actual management fee rates and total expenses were
competitive with those of comparable funds, as determined 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
concluded that the Investment Adviser's profits are acceptable in relation to
the nature and quality of services provided and given the level of fees and
expenses overall.
Economies of Scale--The Board considered the extent to which economies of
scale might be realized as the assets of the Fund increase and whether there
should be changes in the management fee rate or structure in order to enable
the Fund to participate in these economies of scale. The Board considered
economies of scale to the extent applicable to the Fund's closed-end structure
and determined that the Fund appropriately benefits from any economies of
scale and 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 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, 2006
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.
MUNIHOLDINGS INSURED FUND II, INC. MARCH 31, 2006
Officers and Directors
Robert C. Doll, Jr., President and Director
James H. Bodurtha, Director
Kenneth A. Froot, Director
Joe Grills, Director
Herbert I. London, Director
Roberta Cooper Ramo, Director
Robert S. Salomon, Jr., Director
Donald C. Burke, Vice President and Treasurer
Kenneth A. Jacob, Senior Vice President
John M. Loffredo, Senior Vice President
Robert A. DiMella, Vice President
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:
Computershare Trust Company, N.A.
P.O. Box 43010
Providence, RI 02940-3010
1-800-426-5523
Preferred Stock:
The Bank of New York
101 Barclay Street - 7 West
New York, NY 10286
NYSE Symbol
MUE
Effective January 1, 2006, Stephen B. Swensrud retired as Director of
MuniHoldings Insured Fund II, Inc. The Fund's Board of Directors wishes
Mr. Swensrud well in his retirement.
MUNIHOLDINGS INSURED FUND II, INC. MARCH 31, 2006
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.
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, 2006
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 22, 2006
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 22, 2006
By: /s/ Donald C. Burke
---------------------------
Donald C. Burke,
Chief Financial Officer of
MuniHoldings Insured Fund II, Inc.
Date: May 22, 2006