UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-07528
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Insured Municipal Income Fund Inc.
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(Exact name of registrant as specified in charter)
51 West 52nd Street, New York, New York 10019-6114
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(Address of principal executive offices) (Zip code)
Mark F. Kemper, Esq.
UBS Global Asset Management (US) Inc.
51 West 52nd Street
New York, NY 10019-6114
(Name and address of agent for service)
Copy to:
Jack W. Murphy, Esq.
Dechert LLP
1775 I Street, N.W.
Washington, DC 20006-2401
Registrant's telephone number, including area code: 212-882 5000
Date of fiscal year end: March 31
Date of reporting period: September 30, 2005
ITEM 1. REPORTS TO STOCKHOLDERS.
[UBS GLOBAL ASSET MANAGEMENT LOGO]
INSURED MUNICIPAL INCOME FUND INC.
SEMIANNUAL REPORT
SEPTEMBER 30, 2005
INSURED MUNICIPAL INCOME FUND INC.
November 15, 2005
DEAR SHAREHOLDER,
We are pleased to present you with the semi-annual report for Insured Municipal
Income Fund Inc. (the "Fund") for the six months ended September 30, 2005.
PERFORMANCE
Over the six-month period, the Fund returned 3.21% on a net asset value basis
and 6.25% on a market price basis. Over the same period, the Fund's peer group,
the Lipper Insured Municipal Debt Funds (Leveraged) median posted net asset
value and market price returns of 3.79% and 7.22%, respectively. Finally, the
Fund's benchmark, the Lehman Brothers Municipal Bond Index (the "Index"),
returned 2.80%. (For more performance information, please refer to "Performance
at a Glance" on page 5.)
The Fund continued to use leverage during the period, which was 40% of total
assets as of September 30, 2005. While short-term rates rose over the period and
increased the Fund's borrowings costs, this leverage still had a positive effect
on the Fund's income during the reporting period, as the yields on the Fund's
longer-term bonds more than offset the borrowing costs. Leverage magnifies
returns on both the upside and on the downside, creating a wider range of
returns within the Fund's peer group.
AN INTERVIEW WITH PORTFOLIO MANAGER KEVIN MCINTYRE
Q. HOW WOULD YOU DESCRIBE THE ECONOMIC ENVIRONMENT DURING THE REPORTING PERIOD?
A. The US economy faced a number of challenges during the reporting period,
including record high energy prices, natural disasters, rising interest
rates, and geopolitical events. Despite these issues, the economy proved to
be surprisingly resilient. GDP grew at 3.3% in the second quarter, and
advance estimates for third quarter growth came in at 3.8%, stronger than
expected in the wake of Hurricanes Katrina and Rita and the spike in oil and
gas prices.
[SIDENOTE]
INSURED MUNICIPAL INCOME FUND INC.
INVESTMENT GOAL:
High level of current income exempt from federal income tax, consistent with
preservation of capital
PORTFOLIO MANAGER:
Kevin McIntyre
UBS Global Asset Management (US) Inc.
COMMENCEMENT:
June 8, 1993
NYSE SYMBOL:
PIF
DIVIDEND PAYMENTS:
Monthly
1
Q. HOW DID THE FEDERAL RESERVE BOARD (THE "FED") REACT TO THESE ECONOMIC
CONDITIONS?
A. Given the strength of the economy, the Fed continued its tightening
campaign, raising the federal funds rate (or "fed funds" rate)--the rate
that banks charge one another for funds they borrow on an overnight
basis--four times over the period, bringing the fed funds rate to 3.75%.
Throughout this tightening campaign that started in June 2004, the Fed has
made it clear that it expects to continue to raise rates at a "measured"
pace to keep inflation under control and, toward the end of the period,
seemed to become increasingly concerned about inflation. Accordingly, the
Fed raised rates another 0.25%, bringing the fed funds rate to 4.0% on
November 1, after the close of the reporting period.
Q: FINALLY, HOW DID THE MUNICIPAL BOND MARKET PERFORM IN THIS ENVIRONMENT?
A: Over the past six months, municipal bonds (munis) outperformed similarly
dated Treasuries all along the yield curve. Overall, longer-dated securities
were the top performers both for munis and Treasuries.
Q: IN GENERAL TERMS, HOW DID YOU POSITION THE PORTFOLIO?
A: Given our expectation that yields would continue to rise in concert with the
Fed's tightening cycle, we maintained a defensive duration position.
(Duration is a measure of sensitivity to interest rate changes.) Toward the
end of the period, we went a little longer on duration than we had been for
previous months, while still remaining defensive relative to the index,
since we felt market conditions and the continued rising rate environment
warranted it. In terms of positioning, we maintained a barbell strategy,
holding relative over-weights to both short-term and longer-term securities,
while maintaining an underweight position to the 2- to 8-year portion of the
yield curve. Also, we were underweighted to the 20-year area versus our
peers. This barbell positioning resulted in underperformance in both the
10-15 and 20-year areas, as those bonds performed better than their
short-term counterparts.
Q: LET'S TALK ABOUT FUND SPECIFICS. YOU WERE RECENTLY GIVEN MORE FLEXIBILITY TO
INVEST IN AMT BONDS. HOW HAVE YOU PUT THIS STRATEGY TO WORK FOR THE FUND?
A: AMT bonds, those bonds subject to the alternative minimum tax for certain
taxpayers, present us with an opportunity to add yield to the portfolio, and
we now look for attractive AMT opportunities as part of our normal research.
A couple of AMT bonds that we have added to the portfolio recently include
Metropolitan Washington DC Airport Authority Bonds that mature in 2016 and
yield 5.25%, and Hillsborough County for Tampa Port Authority bonds that
mature at various times from 2016-2019 and yield 5.75%. Both of these
2
bonds were attractively priced and structured, especially when compared with
non-AMT bonds. The addition of these bonds boosted the portfolio's yield, as
AMT bonds generally yield more than non-AMT bonds to compensate for the
possibility that they may be less advantageous from a tax perspective for
some investors.
Q: EARLIER THIS YEAR, THE FUND ALSO WAS GIVEN THE ABILITY TO INVEST IN
NON-INSURED MUNICIPAL BONDS RATED AT LEAST BBB/BAA OR THE EQUIVALENT, UP TO
A MAXIMUM OF 20% OF THE PORTFOLIO. HOW DID YOU PUT THIS FLEXIBILITY TO WORK?
A: While the Fund continues to invest most of its assets in insured municipal
bonds, it now does have the latitude to invest outside of the Aaa/AAA
universe. Any of these new holdings must still be diversified and have
investment grade ratings. With that said, the past six months have been a
tough environment in which to find attractive opportunities. Because credit
spreads (the yield difference between a given bond and a Treasury, which is
considered risk-free) have been near historical lows, we couldn't justify
the additional risk these bonds present for only a minor uptick in yield.
However, if credit spreads widen in the future and we feel those bonds offer
a yield that adequately compensates for taking that additional risk, we
expect to selectively add those lower-rated bonds to the Fund's portfolio.
Q: FROM A SECTOR STANDPOINT, WHAT WERE IMPORTANT POSITIONS FOR THE FUND?
A: First, it's important to keep in mind that we attempt to maintain a
well-diversified portfolio, and the Fund holds bonds in a number of
different industry sectors and subsectors. However, our research leads us to
focus on various sectors from time to time. Over the last six months, the
power and water sectors stand out. They were attractive because they tend to
have stronger revenue and earnings stability through various economic
climates than other sectors, but are still priced comparably to other
sectors. Conversely, we maintained the Fund's underweight to tobacco and
hospital bonds, as we continued to have the same negative outlook we've had
on these two sectors for quite some time.
Q: WERE THERE ANY STATES OR REGIONS THAT WERE AN AREA OF FOCUS FOR THE FUND?
A: From a regional standpoint, we focused on states that exhibited improved
fiscal health and offered attractively valued municipal bonds. Offerings
that we believe met that definition included long-term California bonds, a
state whose fiscal situation has continued to improve since its 2003
financial crisis, as well as tax-backed New Jersey debt. Finally, it's
important to note that we had little exposure to hurricane-affected areas,
and continue to closely monitor the credit quality of those Gulf states and
municipalities.
3
We thank you for your continued support and welcome any comments or questions
you may have. For additional information on the UBS family of funds,* please
contact your financial advisor, or visit us at www.ubs.com/globalam-us.
Sincerely,
/s/ W.Douglas Beck /s/ Kevin McIntyre
W.Douglas Beck, CFA Kevin McIntyre
PRESIDENT PORTFOLIO MANAGEMENT TEAM
Insured Municipal Income Fund Inc. Insured Municipal Income Fund Inc.
EXECUTIVE DIRECTOR DIRECTOR
UBS Global Asset Management (US) Inc. UBS Global Asset Management (US) Inc.
/s/ Elbridge T. Gerry III
Elbridge T. Gerry III
PORTFOLIO MANAGEMENT TEAM
Insured Municipal Income Fund Inc.
MANAGING DIRECTOR
UBS Global Asset Management (US) Inc.
This letter is intended to assist shareholders in understanding how the Fund
performed during the six months ended September 30, 2005. The views and opinions
in the letter were current as of November 15, 2005. They are not guarantees of
performance or investment results and should not be taken as investment advice.
Investment decisions reflect a variety of factors, and we reserve the right to
change our views about individual securities, sectors and markets at any time.
As a result, the views expressed should not be relied upon as a forecast of the
Fund's future investment intent. We encourage you to consult your financial
advisor regarding your personal investment program.
* Mutual funds are sold by prospectus only. You should read it carefully and
consider a fund's investment objectives, risks, charges, expenses and other
important information contained in the prospectus before investing.
Prospectuses for most of our funds can be obtained from your financial
advisor, by calling UBS Funds at 800-647 1568 or by visiting our Web site at
www.ubs.com/globalam-us.
4
PERFORMANCE AT A GLANCE (UNAUDITED)
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED 9/30/05
6 MONTHS 1 YEAR 5 YEARS 10 YEARS
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NET ASSET VALUE RETURNS
Insured Municipal Income Fund Inc. 3.21% 3.94% 6.15% 6.30%
Lipper Insured Municipal Debt Funds
(Leveraged) median 3.79 5.25 7.94 6.50
MARKET PRICE RETURNS
Insured Municipal Income Fund Inc. 6.25 3.63 7.45 7.72
Lipper Insured Municipal Debt Funds
(Leveraged) median 7.22 5.73 8.05 7.22
Lehman Brothers Municipal Bond Index 2.80 4.05 6.34 6.06
Past performance does not predict future performance. The return and value of an
investment will fluctuate so that an investor's shares, when sold, may be worth
more or less than their original cost. NAV return assumes, for illustration
only, that dividends were reinvested at the net asset value on the payable
dates. NAV and market price returns for periods of less than one year are
cumulative. Returns do not reflect the deduction of taxes that a shareholder
could pay on Fund distributions.
Lipper peer group data calculated by Lipper Inc.; used with permission. The
Lipper median is the return of the fund that places in the middle of the peer
group.
SHARE PRICE, DIVIDEND AND YIELDS AS OF 9/30/05
Market Price $ 13.17
Net Asset Value (per share applicable to common shareholders) $ 15.08
12-Month Net Investment Income Dividend to common shareholders
(period ended 9/30/05) $ 0.70
September 2005 Dividend $ 0.055
Market Yield* 5.01%
NAV Yield* 4.38%
* Market yield is calculated by multiplying the September dividend by 12 and
dividing by the month-end market price. NAV yield is calculated by
multiplying the September dividend by 12 and dividing by the month-end net
asset value. Prices and yields will vary.
5
PORTFOLIO STATISTICS (UNAUDITED)
CHARACTERISTICS 9/30/05 3/31/05 9/30/04
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Net Assets Applicable to Common
Shareholders (mm) $ 311.0 $ 308.0 $ 314.7
Weighted Average Maturity 14.3 yrs 11.7 yrs 11.1 yrs
Weighted Average Duration 4.2 yrs 4.3 yrs 4.8 yrs
Weighted Average Coupon 5.0% 4.8% 4.7%
Leverage** 40.1% 40.1% 38.8%
Callable/Maturing Within Five Years* 11.6% 18.3% 13.8%
Callable/Maturing Beyond Five Years* 88.4% 81.7% 86.2%
PORTFOLIO COMPOSITION*** 9/30/05 3/31/05 9/30/04
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Long-Term Municipal Bonds 150.3% 144.5% 143.5%
Short-Term Municipal Notes 14.1 23.3 21.6
Futures 0.8 0.1 (0.0)+
Other Assets Less Liabilities 2.3 0.3 1.6
Liquidation Value of Auction Preferred
Shares (67.5) (68.2) (66.7)
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TOTAL 100.0% 100.0% 100.0%
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CREDIT QUALITY*** 9/30/05 3/31/05 9/30/04
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AAA 146.6% 140.8% 139.0%
A1/SP1 14.1 23.3 20.1
Nonrated 3.7 3.7 6.0
Futures 0.8 0.1 (0.0)+
Other Assets Less Liabilities 2.3 0.3 1.6
Liquidation Value of Auction Preferred
Shares (67.5) (68.2) (66.7)
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TOTAL 100.0% 100.0% 100.0%
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TOP FIVE STATES* 9/30/05 3/31/05 9/30/04
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California 38.1% California 30.5% California 24.6%
Texas 13.4 Texas 12.4 Texas 17.3
New York 7.3 New York 10.0 New York 11.2
Washington 6.4 Illinois 8.6 Illinois 8.0
Georgia 5.4 New Mexico 6.5 Washington 6.0
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TOTAL 70.6% 68.0% 67.1%
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TOP FIVE SECTORS* 9/30/05 3/31/05 9/30/04
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Water 24.9% Power 21.2% Power 20.3%
Power 19.3 Water & Sewer 21.2 Escrowed to Maturity 12.2
Hospital 5.0 Escrowed to Maturity 10.3 Water & Sewer 9.5
Lease 4.2 Hospital 6.5 Hospital 8.3
Airport 3.3 Sales Tax 4.2 Airport 5.7
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TOTAL 56.7% 63.4% 56.0%
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* Weightings represent percentages of total investments as of the dates
indicated. The Fund's portfolio is actively managed and its composition will
vary over time.
** As a percentage of total assets as of the dates indicated.
*** As a percentage of net assets applicable to common shareholders as of the
dates indicated. Credit quality ratings shown are designated by Standard &
Poor's Rating Group, an independent rating agency.
+ Represents less than (0.05)% of net assets applicable to common
shareholders.
6
INSURED MUNICIPAL INCOME FUND INC.
PORTFOLIO OF INVESTMENTS -- SEPTEMBER 30, 2005 (UNAUDITED)
PRINCIPAL
AMOUNT MOODY'S S&P MATURITY INTEREST
(000) RATING RATING DATES RATES VALUE
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LONG-TERM MUNICIPAL BONDS--150.28%
CALIFORNIA--62.59%
$ 10,000 California State Department of
Water Resources Power Supply
Revenue-Series A (AMBAC
Insured) Aaa AAA 05/01/16 5.500% $ 11,101,400
3,000 California State Department of
Water Resources Revenue-
Central Valley Project-
Series AC (MBIA Insured) Aaa AAA 12/01/27 5.000 3,152,940
4,000 California State Department of
Water Resources Revenue-
Series W (FSA Insured) Aaa AAA 12/01/14 5.500 4,556,000
3,000 California State Economic
Recovery-Series A (MBIA
Insured) Aaa AAA 07/01/15 5.000 3,265,770
30 California State General
Obligation (FGIC Insured) Aaa AAA 11/01/12 7.000 30,401
3,305 Chino Valley Unified School
District-Series A (FSA
Insured) Aaa AAA 08/01/26 5.000 3,457,327
3,125 Contra Costa Water District
Revenue-Series L (FSA Insured) Aaa AAA 10/01/19 5.000 3,339,719
5,000 Contra Costa Water District
Revenue-Series M (FSA Insured) Aaa AAA 10/01/18 5.000 5,356,150
4,400 Inglewood Unified School
District-1998 Election-
Series C (FSA Insured) Aaa AAA 10/01/28 5.000 4,594,568
3,200 Livermore-Amador Valley Water
Management Agency Sewer
Revenue-Series A (AMBAC
Insured) Aaa AAA 08/01/14 5.250 3,485,920
2,000 Long Beach Finance Authority
Lease Revenue-Aquarium of the
South Pacific (AMBAC Insured) Aaa AAA 11/01/15 5.500 2,217,500
5,000 Los Angeles Community College
District Refunding-Election
2001-Series A (FSA Insured) Aaa AAA 08/01/25 5.000 5,290,400
9,000 Los Angeles Community College
District Refunding-Election
2001-Series A (FSA Insured Aaa AAA 06/01/26 5.000 9,500,490
8,475 Los Angeles County Sanitation
Districts Financing Authority
Revenue-Capital Project-
Series A (FSA Insured) Aaa AAA 10/01/20 5.000 9,009,942
7
PRINCIPAL
AMOUNT MOODY'S S&P MATURITY INTEREST
(000) RATING RATING DATES RATES VALUE
------------------------------------------------------------------------------------------------------------------------
LONG-TERM MUNICIPAL BONDS--(CONTINUED)
CALIFORNIA--(CONTINUED)
$ 3,000 Los Angeles University School
District-Series A (FSA Insured) Aaa AAA 07/01/20 5.250% $ 3,270,630
11,625 Los Angeles Waste & Water
Systems Revenue Refunding-
Subseries A (MBIA Insured) Aaa AAA 06/01/26 5.000 12,151,147
7,000 Los Angeles Water & Power
Revenue-Power Systems-
Series A-A-1 (FSA Insured) Aaa AAA 07/01/21 5.250 7,500,990
3,000 Los Angeles Water & Power
Revenue-Power Systems-
Series A-Subseries A-2
(MBIA Insured) Aaa AAA 07/01/16 5.000 3,227,280
7,000 Los Angeles Water & Power
Revenue-Power Systems-
Series A-Subseries A-2
(MBIA Insured) Aaa AAA 07/01/18 5.000 7,490,910
5,000 Los Angeles Water & Power
Revenue-Power Systems-
Series A-Subseries A-2
(MBIA-IBC Insured) Aaa AAA 07/01/30 5.000 5,194,950
6,000 Los Angeles Water & Power
Revenue-Power Systems-
Series B (FSA Insured) Aaa AAA 07/01/25 5.000 6,300,840
1,000 Marin Municipal Water District
Revenue (AMBAC Insured) Aaa AAA 07/01/18 5.000 1,068,100
4,260 Metropolitan Water District
Waterworks Revenue-
Series B-3 (MBIA Insured) Aaa AAA 10/01/17 5.000 4,589,426
5,000 Metropolitan Water District
Waterworks Revenue-
Series B-3 (MBIA Insured) Aaa AAA 10/01/29 5.000 5,236,150
6,000 Orange County Refunding-
Recovery-Series A (MBIA
Insured) Aaa AAA 06/01/15 5.000 6,558,480
7,160 Oxnard Financing Authority
Waste & Water Revenue-
Redwood Trunk Sewer &
Headworks-Series A (FGIC
Insured) Aaa AAA 06/01/34 5.250 7,674,303
6,520 Placentia-Yorba Linda Unified
School District-Series A
(FGIC Insured) Aaa AAA 08/01/26 5.000 6,787,450
8
PRINCIPAL
AMOUNT MOODY'S S&P MATURITY INTEREST
(000) RATING RATING DATES RATES VALUE
------------------------------------------------------------------------------------------------------------------------
LONG-TERM MUNICIPAL BONDS--(CONTINUED)
CALIFORNIA--(CONCLUDED)
$ 10,000 Sacramento County Sanitation
District Financing Authority
Revenue (AMBAC Insured) Aaa AAA 12/01/27 5.000% $ 10,368,700
5,045 Sacramento County Sanitation
District Financing Authority
Revenue-County Sanitation
District 1 (MBIA Insured) Aaa AAA 08/01/19 5.000 5,426,150
7,000 Sacramento Municipal Utility
Revenue-Municipal Utility
District-Series R (MBIA
Insured) Aaa AAA 08/15/19 5.000 7,447,370
4,000 San Francisco City & County
Airport Commission
International Airport-Second
Series 27B (FGIC Insured) Aaa AAA 05/01/15 5.250 4,326,960
7,910 San Jose Libraries, Parks &
Public Safety Project (MBIA
Insured) Aaa AAA 09/01/27 5.000 8,267,216
9,000 San Jose Unified School
District Santa Clara County-
Election 2002-Series B
(FGIC Insured) Aaa AAA 08/01/29 5.000 9,456,210
3,825 Walnut Energy Center
Authority Revenue-Series A
(AMBAC Insured) Aaa AAA 01/01/34 5.000 3,963,388
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194,665,177
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DISTRICT OF COLUMBIA--2.03%
4,000 District of Columbia Hospital
Revenue-Medlantic
Healthcare-Series A
(Escrowed to Maturity)
(MBIA Insured) Aaa AAA 08/15/14 5.750 4,159,640
2,000 Metropolitan Airport Authority
Systems-AMT-Series A
(MBIA Insured) Aaa AAA 10/01/16 5.250 2,164,980
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6,324,620
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FLORIDA--4.84%
6,450 Florida State Board of
Education-Public Education-
Series A (FSA Insured) Aaa AAA 06/01/27 5.000 6,741,927
9
PRINCIPAL
AMOUNT MOODY'S S&P MATURITY INTEREST
(000) RATING RATING DATES RATES VALUE
------------------------------------------------------------------------------------------------------------------------
LONG-TERM MUNICIPAL BONDS--(CONTINUED)
FLORIDA--(CONCLUDED)
$ 1,060 Hillsborough County Port
District Revenue Tampa Port
Authority Project-AMT-Series A
(MBIA Insured) Aaa AAA 06/01/16 5.750% $ 1,171,788
1,115 Hillsborough County Port
District Revenue Tampa Port
Authority Project-AMT-Series A
(MBIA Insured) Aaa AAA 06/01/17 5.750 1,232,588
1,175 Hillsborough County Port
District Revenue Tampa Port
Authority Project-AMT-Series A
(MBIA Insured) Aaa AAA 06/01/18 5.750 1,298,915
1,240 Hillsborough County Port
District Revenue Tampa Port
Authority Project-AMT-Series A
(MBIA Insured) Aaa AAA 06/01/19 5.750 1,370,770
3,000 Miami-Dade County Expressway
Authority Toll System
Revenue-Series B (FGIC
Insured) Aaa AAA 07/01/26 5.250 3,235,380
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15,051,368
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GEORGIA--8.82%
1,015 Columbus Building Authority
Lease Revenue-Series A
(FGIC Insured) Aaa AAA 01/01/16 5.250 1,116,114
13,850 Georgia Local Government
Certificates of Participation-
Grantor Transportation-
Series A (MBIA Insured) Aaa AAA 06/01/28 4.750 14,218,549
2,000 Georgia Municipal Electric
Authority Power Revenue-
Series A (FSA Insured) Aaa AAA 01/01/18 5.000 2,126,240
15 Georgia Municipal Electric
Authority Power Revenue-
Series Y (MBIA-IBC Insured) Aaa AAA 01/01/10 10.000 18,895
4,515 Georgia Municipal Electric
Authority Power Revenue-
Unrefunded Balance-Series Y
(FSA-CR Insured) Aaa AAA 01/01/10 10.000 5,675,039
10
PRINCIPAL
AMOUNT MOODY'S S&P MATURITY INTEREST
(000) RATING RATING DATES RATES VALUE
------------------------------------------------------------------------------------------------------------------------
LONG-TERM MUNICIPAL BONDS--(CONTINUED)
GEORGIA--(CONCLUDED)
$ 3,410 Georgia Municipal Electric
Authority Power Revenue-
Unrefunded Balance-
Series Y (MBIA-IBC Insured) Aaa AAA 01/01/10 10.000% $ 4,286,131
------------------------------------------------------------------------------------------------------------------------
27,440,968
------------------------------------------------------------------------------------------------------------------------
ILLINOIS--5.16%
1,500 Chicago General Obligation-
Series A (FSA Insured) Aaa AAA 01/01/25 5.000 1,566,900
2,000 Chicago General Obligation-
Series A (FSA Insured) Aaa AAA 01/01/26 5.000 2,086,380
740 Chicago General Obligation-
Series A (Pre-refunded with
U.S. Government Securities
to 01/01/11 @ $101) (MBIA
Insured) Aaa AAA 01/01/14 5.500 821,089
260 Chicago General Obligation-
Unrefunded Balance-Series A
(MBIA Insured) Aaa AAA 01/01/14 5.500 286,380
4,500 Illinois Health Facilities Authority
Revenue-Franciscan Sisters
Health Care-Series C
(Escrowed to Maturity)
(MBIA Insured) Aaa AAA 09/01/18 5.750 5,159,070
3,000 Kane McHenry Cook & De Kalb
Counties-United School
District No. 300 (MBIA Insured) Aaa AAA 12/01/15 5.500 3,307,440
2,395 Metropolitan Pier & Exposition
Authority-Illinois Dedicated
State Tax-Series A-2002
(Pre-refunded with U.S.
Government Securities to
06/15/19 @ $100) (FGIC
Insured) Aaa AAA 12/15/23 5.500 2,808,521
------------------------------------------------------------------------------------------------------------------------
16,035,780
------------------------------------------------------------------------------------------------------------------------
INDIANA--0.35%
1,000 Indiana University Revenue-
Student Fee-Series O (FGIC
Insured) Aaa AAA 08/01/18 5.250 1,088,230
11
PRINCIPAL
AMOUNT MOODY'S S&P MATURITY INTEREST
(000) RATING RATING DATES RATES VALUE
------------------------------------------------------------------------------------------------------------------------
LONG-TERM MUNICIPAL BONDS--(CONTINUED)
MAINE--1.57%
$ 4,785 Maine Health & Higher
Educational Facilities
Authority Revenue-Series A
(Escrowed to Maturity)
(FSA Insured) NR AAA 07/01/23 5.500% $ 4,873,523
MISSOURI--1.68%
1,740 St. Louis Airport Revenue-
Capital Improvement Project-
Series A (MBIA Insured) Aaa AAA 07/01/15 5.375 1,900,689
2,035 St. Louis Airport Revenue-
Capital Improvement Project-
Series A (MBIA Insured) Aaa AAA 07/01/16 5.375 2,222,932
1,000 St. Louis Airport Revenue-
Capital Improvement Project-
Series A (MBIA Insured) Aaa AAA 07/01/18 5.375 1,089,860
------------------------------------------------------------------------------------------------------------------------
5,213,481
------------------------------------------------------------------------------------------------------------------------
NEVADA--3.71%
4,000 Washoe County Gas & Water
Facilities Revenue-Sierra
Pacific Power Co. Project-
Series B (MBIA Insured) Aaa AAA 06/01/23 5.900 4,008,800
7,500 Washoe County Water Facilities
Revenue-Sierra Pacific Power Co.
Project-Series A (MBIA Insured) Aaa AAA 06/01/23 5.900 7,516,500
------------------------------------------------------------------------------------------------------------------------
11,525,300
------------------------------------------------------------------------------------------------------------------------
NEW JERSEY--1.07%
3,150 New Jersey Economic
Development Authority
Revenue-Cigarette Tax (FGIC
Insured) Aaa AAA 06/15/09 5.000 3,327,975
NEW MEXICO--8.07%
15,000 New Mexico Finance Authority
State Transportation Revenue-
Senior Lien-Series A (MBIA
Insured)+ Aaa AAA 06/15/20 5.250 16,354,950
4,130 University of New Mexico
Revenue-Hospital Meeting
(FSA-FHA Insured) Aaa AAA 01/01/23 5.000 4,320,352
12
PRINCIPAL
AMOUNT MOODY'S S&P MATURITY INTEREST
(000) RATING RATING DATES RATES VALUE
------------------------------------------------------------------------------------------------------------------------
LONG-TERM MUNICIPAL BONDS--(CONTINUED)
NEW MEXICO--(CONCLUDED)
$ 4,230 University of New Mexico
Revenue-Hospital Meeting
(FSA-FHA Insured) Aaa AAA 07/01/23 5.000% $ 4,424,960
------------------------------------------------------------------------------------------------------------------------
25,100,262
------------------------------------------------------------------------------------------------------------------------
NEW YORK--6.55%
3,000 New York State Dormitory
Authority Revenue-Series B
(Mandatory Put 05/15/12
@ $100) (FGIC Insured) Aaa AAA 11/15/29 5.250++ 3,272,340
3,000 New York State Dormitory
Authority Revenue-Sloan
Kettering Center-Series 1
(MBIA Insured) Aaa AAA 07/01/16 5.000 3,221,880
2,000 Long Island Power Authority
Electric System Revenue-
Series A (FSA Insured) Aaa AAA 12/01/22 5.125 2,102,360
5,650 Metropolitan Transportation
Authority Dedicated Tax Fund-
Series A (FSA Insured) Aaa AAA 11/15/24 5.250 6,121,040
4,000 Metropolitan Transportation
Authority Revenue-Series A
(FGIC Insured) Aaa AAA 11/15/17 5.000 4,305,360
1,200 New York City General
Obligation-Series F (MBIA-IBC
Insured) Aaa AAA 08/01/12 5.750 1,356,984
------------------------------------------------------------------------------------------------------------------------
20,379,964
------------------------------------------------------------------------------------------------------------------------
NORTH CAROLINA--1.22%
3,505 Charlotte Certificates of
Participation Refunding-
Convention Facilities Project-
Series A (MBIA Insured) Aaa AAA 08/01/12 5.000 3,794,338
OHIO--3.75%
5,000 Cleveland Airport Systems
Revenue-Series A
(FSA Insured) Aaa AAA 01/01/14 5.250 5,371,550
6,045 Columbus City School District
School Facilities Construction &
Improvement (FGIC Insured) Aaa AAA 12/01/31 5.000 6,294,538
------------------------------------------------------------------------------------------------------------------------
11,666,088
------------------------------------------------------------------------------------------------------------------------
13
PRINCIPAL
AMOUNT MOODY'S S&P MATURITY INTEREST
(000) RATING RATING DATES RATES VALUE
------------------------------------------------------------------------------------------------------------------------
LONG-TERM MUNICIPAL BONDS--(CONTINUED)
PENNSYLVANIA--5.93%
$ 15,390 Allegheny County Sanitation
Authority Sewer Revenue
Refunding-Series A (MBIA
Insured) Aaa AAA 12/01/23 5.000% $ 16,308,014
1,000 Philadelphia General Obligation
(FSA Insured) Aaa AAA 03/15/13 5.250 1,067,890
1,000 Philadelphia General Obligation
(FSA Insured) Aaa AAA 03/15/14 5.250 1,067,890
------------------------------------------------------------------------------------------------------------------------
18,443,794
------------------------------------------------------------------------------------------------------------------------
PUERTO RICO--1.75%
5,000 Puerto Rico Public Finance
Corp. Commonwealth
Appropriation-Series A
(Mandatory Put 02/01/12 @
$100) (FGIC Insured) Aaa AAA 08/01/31 5.250++ 5,455,450
RHODE ISLAND--1.90%
5,140 Rhode Island Depositors
Economic Protection Corp.
Special Obligation-Series A
(Escrowed to Maturity)
(FSA Insured) NR AAA 08/01/14 5.750 5,906,837
SOUTH CAROLINA--1.21%
2,500 Medical University of South
Carolina Hospital Authority
Hospital Facilities Revenue
Refunding-Series A
(MBIA-FHA Insured) Aaa AAA 02/15/25 5.250 2,665,975
1,000 Myrtle Beach Water & Sewer
Revenue System (FGIC
Insured) Aaa AAA 03/01/15 5.375 1,099,610
------------------------------------------------------------------------------------------------------------------------
3,765,585
------------------------------------------------------------------------------------------------------------------------
TEXAS--17.19%
7,015 Austin Water & Wastewater
System Revenue Refunding
(MBIA Insured) Aaa AAA 05/15/29 5.000 7,349,756
2,000 Corpus Christi Utilities System
Revenue Refunding &
Improvement (FSA Insured) Aaa AAA 07/15/17 5.250 2,199,300
14
PRINCIPAL
AMOUNT MOODY'S S&P MATURITY INTEREST
(000) RATING RATING DATES RATES VALUE
------------------------------------------------------------------------------------------------------------------------
LONG-TERM MUNICIPAL BONDS--(CONTINUED)
TEXAS--(CONCLUDED)
$ 5,170 Fort Bend Independent School
District Refunding-Series A
(PSF-GTD) NR AAA 08/15/26 5.250% $ 5,532,882
2,120 Frisco Certificates Obligation-
Series A (FGIC Insured) Aaa AAA 02/15/14 5.250 2,284,215
13,500 Houston Utility Systems
Revenue Refunding-First
Lien-Series A (FGIC Insured) Aaa AAA 05/15/23 5.250 14,485,770
7,000 Houston Utility Systems
Revenue Refunding-First
Lien-Series A (MBIA Insured) Aaa AAA 05/15/25 5.250 7,479,850
2,000 Irving Independent School
District Refunding-Capital
Appreciation-Series A
(PSF-GTD) Aaa AAA 02/15/12 4.960# 1,566,420
2,000 Jefferson County General
Obligation (FGIC Insured) Aaa AAA 08/01/20 5.250 2,158,060
1,065 San Antonio Refunding-General
Improvement Forward-Series
2006 (FGIC Insured)(a) Aaa AAA 08/01/12 5.250 1,150,605
1,420 San Antonio Refunding-General
Improvement Forward-Series
2006 (FGIC Insured)(a) Aaa AAA 08/01/13 5.250 1,539,536
155 San Antonio Water Revenue
(MBIA Insured) Aaa AAA 05/15/16 6.000 162,302
720 San Antonio Water Revenue
(Pre-refunded with U.S.
Government Securities to
05/15/07 @ $100)
(MBIA Insured) Aaa AAA 05/15/16 6.000 822,377
6,110 Texas A&M University Fund Aaa NR 07/01/17 5.250 6,648,413
60 Williamson County General
Obligation-Unrefunded
Balance (FSA Insured) Aaa AAA 02/15/17 5.500 65,309
------------------------------------------------------------------------------------------------------------------------
53,444,795
------------------------------------------------------------------------------------------------------------------------
WASHINGTON--10.49%
5,210 Washington State Public Power
Supply Revenue Refunding-
Systems Nuclear Project No. 2-
Series A (Escrowed to Maturity)
(MBIA Insured) Aaa AAA 07/01/11 6.550# 4,214,525
15
PRINCIPAL
AMOUNT MOODY'S S&P MATURITY INTEREST
(000) RATING RATING DATES RATES VALUE
------------------------------------------------------------------------------------------------------------------------
LONG-TERM MUNICIPAL BONDS--(CONCLUDED)
WASHINGTON--(CONCLUDED)
$ 2,220 Cowlitz County School
District No. 458 Kelso
(FSA Insured) Aaa NR 12/01/15 5.750% $ 2,490,862
1,000 Cowlitz County School
District No. 458 Kelso
(FSA Insured) Aaa NR 12/01/18 5.750 1,118,870
2,000 Energy Northwest Electric
Revenue-Columbia Generator
Station-Series F (MBIA Insured) Aaa AAA 07/01/18 5.000 2,118,400
10,000 Energy Northwest Electric
Revenue-Project No. 1-
Series A (AMBAC Insured) Aaa AAA 07/01/14 5.000 10,862,600
5,000 Energy Northwest Electric
Revenue-Project No. 1-
Series A (AMBAC Insured) Aaa AAA 07/01/15 5.000 5,433,900
2,175 Energy Northwest Electric
Revenue-Project No. 1-
Series A (MBIA Insured) Aaa AAA 07/01/15 5.750 2,437,762
3,785 Spokane County Refunding-
Series B (MBIA Insured) Aaa AAA 12/01/10 5.000 3,950,972
------------------------------------------------------------------------------------------------------------------------
32,627,891
------------------------------------------------------------------------------------------------------------------------
WISCONSIN--0.40%
1,105 Ladysmith-Hawkins School
District Refunding (FGIC
Insured) Aaa NR 04/01/20 5.500 1,242,981
------------------------------------------------------------------------------------------------------------------------
Total Long-Term Municipal Bonds (cost--$461,360,832) 467,374,407
------------------------------------------------------------------------------------------------------------------------
SHORT-TERM MUNICIPAL NOTES--14.12%
ILLINOIS--3.58%
4,880 Illinois Health Facilities Authority
Revenue-University of Chicago
Hospitals (MBIA Insured) VMIG-1 A-1+ 10/03/05 2.810* 4,880,000
6,250 Illinois Health Facilities Authority
Revenue-University of Chicago
Hospitals Project-Series C
(MBIA Insured) VMIG-1 A-1+ 10/03/05 2.760* 6,250,000
------------------------------------------------------------------------------------------------------------------------
11,130,000
------------------------------------------------------------------------------------------------------------------------
16
PRINCIPAL
AMOUNT MOODY'S S&P MATURITY INTEREST
(000) RATING RATING DATES RATES VALUE
------------------------------------------------------------------------------------------------------------------------
SHORT-TERM MUNICIPAL NOTES--(CONCLUDED)
MASSACHUSETTS--0.19%
$ 580 Massachusetts State Health &
Educational Facilities
Authority Revenue-Capital
Asset Program-Series B
(MBIA Insured) VMIG-1 A-1+ 10/03/05 2.810%* $ 580,000
NEW YORK--5.46%
8,600 New York City General
Obligation-SubSeries A-6
(FSA Insured) VMIG-1 A-1+ 10/03/05 2.700* 8,600,000
6,000 New York City General
Obligation-Series B-
Subseries B-4 (MBIA Insured) VMIG-1 A-1+ 10/03/05 2.680* 6,000,000
2,400 New York City Municipal Water
Finance Authority Water &
Sewer Systems Revenue-
Series C (FGIC Insured) VMIG-1 A-1+ 10/03/05 2.680* 2,400,000
------------------------------------------------------------------------------------------------------------------------
17,000,000
------------------------------------------------------------------------------------------------------------------------
TEXAS--4.89%
15,000 Texas State Tax & Revenue
Anticipation Notes MIG1 SP-1+ 08/31/06 4.500 15,200,100
------------------------------------------------------------------------------------------------------------------------
Total Short-Term Municipal Notes (cost--$43,915,218) 43,910,100
------------------------------------------------------------------------------------------------------------------------
Total Investments (cost--$505,276,050)--164.40% 511,284,507
Other assets in excess of liabilities--3.12% 9,719,847
Liquidation value of auction preferred shares--(67.52)% (210,000,000)
------------------------------------------------------------------------------------------------------------------------
Net Assets applicable to common shareholders--100.00% $ 311,004,354
------------------------------------------------------------------------------------------------------------------------
* Variable rate demand notes are payable on demand. The maturity dates shown
are the next interest rate reset dates; the interest rates shown are the
current rates as of September 30, 2005.
# Interest rates shown reflect yield to maturity at purchase date for zero
coupon bonds.
++ Floating rate security. The interest rate shown is the current rate as of
September 30, 2005.
+ Entire amount pledged as collateral for futures transactions.
(a) Security purchased on a when-issued basis. When issued refers to a
transaction made conditionally because a security, although authorized, has
not yet been issued.
AMBAC -- American Municipal Bond Assurance Corporation
AMT -- Alternative Minimum Tax
CR -- Custodial Receipts
FGIC -- Financial Guaranty Insurance Company
FHA -- Federal Housing Authority
FSA -- Financial Security Assurance
GTD -- Guaranteed
IBC -- Insured Bond Certificate
MBIA -- Municipal Bond Investors Assurance
NR -- Not Rated
PSF -- Permanent School Fund
17
FUTURES CONTRACTS
NUMBER OF IN EXPIRATION UNREALIZED
CONTRACTS CONTRACTS TO DELIVER EXCHANGE FOR DATES APPRECIATION
-------------------------------------------------------------------------------
U.S. Treasury Bond
515 20 Year Futures $ 60,568,506 December 2005 $ 1,649,288
U.S. Treasury Note
360 10 Year Futures 40,374,810 December 2005 802,935
-------------------------------------------------------------------------------
$ 2,452,223
-------------------------------------------------------------------------------
See accompanying notes to financial statements
18
INSURED MUNICIPAL INCOME FUND INC.
STATEMENT OF ASSETS AND LIABILITIES -- SEPTEMBER 30, 2005 (UNAUDITED)
ASSETS:
Investments in securities, at value (cost--$505,276,050) $ 511,284,507
Cash 98,887
Receivable for investments sold 5,674,067
Receivable for interest 6,717,610
Receivable for variation margin 311,250
Other assets 13,232
Total assets 524,099,553
LIABILITIES:
Payable for investments purchased 2,646,078
Payable to investment advisor and administrator 258,555
Dividends payable to auction preferred shareholders 48,957
Accrued expenses and other liabilities 141,609
Total liabilities 3,095,199
Auction preferred shares series A, B, C, D,E and F-4, 200 non-participating
shares authorized, issued and outstanding; $0.001 par value;
$50,000 liquidation value per share 210,000,000
Net assets applicable to common shareholders $ 311,004,354
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS:
Common Stock-$0.001 par value; 199,997,000 shares authorized;
20,628,363 shares issued and outstanding 301,976,191
Undistributed net investment income 436,610
Accumulated net realized gain from investment activities and futures 130,873
Net unrealized appreciation of investments and futures 8,460,680
Net assets applicable to common shareholders $ 311,004,354
Net asset value per common share ($311,004,354 applicable to 20,628,363
common shares outstanding) $ 15.08
See accompanying notes to financial statements
19
STATEMENT OF OPERATIONS
FOR THE SIX
MONTHS ENDED
SEPTEMBER 30, 2005
(UNAUDITED)
-----------------------------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest $ 11,483,739
EXPENSES:
Investment advisory and administration fees 2,363,440
Auction preferred shares expenses 301,301
Custody and accounting fees 157,563
Professional fees 46,397
Reports and notices to shareholders 40,228
Transfer agency fees 8,586
Directors' fees 8,114
Other expenses 41,992
2,967,621
Less: Fee waivers by investment advisor and administrator (787,813)
Net expenses 2,179,808
Net investment income 9,303,931
REALIZED AND UNREALIZED GAINS (LOSSES) FROM INVESTMENT ACTIVITIES:
Net realized gain (loss) from:
Investments 3,596,157
Futures (2,171,568)
Net change in unrealized appreciation/depreciation of:
Investments (528,383)
Futures 2,109,581
Net realized and unrealized gain from investment activities 3,005,787
Dividends to auction preferred shareholders from net investment income (2,530,582)
Net increase in net assets applicable to common shareholders
resulting from operations $ 9,779,136
See accompanying notes to financial statements
20
STATEMENT OF CHANGES IN NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS
FOR THE SIX
MONTHS ENDED FOR THE
SEPTEMBER 30, 2005 YEAR ENDED
(UNAUDITED) MARCH 31, 2005
------------------------------------------------------------------------------------------------------------
FROM OPERATIONS:
Net investment income $ 9,303,931 $ 17,183,245
Net realized gains from investment activities and futures 1,424,589 2,287,506
Net change in unrealized appreciation/depreciation of
investments and futures 1,581,198 (8,902,767)
COMMON SHARE EQUIVALENT OF DIVIDENDS AND
DISTRIBUTIONS TO AUCTION PREFERRED SHAREHOLDERS
FROM:
Net investment income (2,530,582) (2,812,124)
Net realized gains from investment activities -- (194,876)
Total dividends and distributions paid to auction
preferred shareholders (2,530,582) (3,007,000)
Net increase in net assets applicable to common
shareholders resulting from operations 9,779,136 7,560,984
DIVIDENDS AND DISTRIBUTIONS TO COMMON
SHAREHOLDERS FROM:
Net investment income (6,807,360) (15,677,560)
Net realized gains from investment activities -- (1,419,231)
Total dividends and distributions to common
shareholders (6,807,360) (17,096,791)
Net increase (decrease) in net assets applicable to common
shareholders 2,971,776 (9,535,807)
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS:
Beginning of period 308,032,578 317,568,385
End of period $ 311,004,354 $ 308,032,578
Accumulated undistributed net investment income $ 436,610 $ 470,621
See accompanying notes to financial statements
21
INSURED MUNICIPAL INCOME FUND INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Insured Municipal Income Fund Inc. (the "Fund") was incorporated in Maryland on
February 18, 1993, and is registered with the Securities and Exchange Commission
under the Investment Company Act of 1940, as amended, as a closed-end
diversified management investment company. The Fund's investment objective is to
achieve a high level of current income that is exempt from federal income tax,
consistent with the preservation of capital. There can be no assurance that the
Fund's investment objective will be achieved.
In the normal course of business the Fund may enter into contracts that contain
a variety of representations or that provide indemnification for certain
liabilities. The Fund's maximum exposure under these arrangements is unknown, as
this would involve future claims that may be made against the Fund that have not
yet occurred. However, the Fund has not had prior claims or losses pursuant to
these contracts and expects the risk of loss to be remote.
The preparation of financial statements in accordance with U.S. generally
accepted accounting principles requires the Fund's management to make estimates
and assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from those estimates. The
following is a summary of significant accounting policies:
VALUATION OF INVESTMENTS--The Fund calculates its net asset value based on the
current market value, where available, for its portfolio securities. The Fund
normally obtains market values for its securities from independent pricing
sources and broker-dealers. Independent pricing sources may use last reported
sale prices, current market quotations or valuations from computerized "matrix"
systems that derive values based on comparable securities. A matrix system
incorporates parameters such as security quality, maturity and coupon, and/or
research and evaluations by its staff, including review of broker-dealer market
price quotations, if available, in determining the valuation of the portfolio
securities. If a market value is not available from an independent pricing
source for a particular security, that security is valued at fair value as
determined in good faith by or under the direction of the Fund's Board of
Directors (the "Board"). Various factors may be reviewed in order to make a good
faith determination of a security's fair value. These factors include, but are
not limited to, the type and cost of the security; contractual or legal
restrictions on resale of the security; relevant financial or business
developments of the issuer; actively traded similar or related securities;
conversion or exchange rights on the security; related corporate actions; and
changes in overall market conditions. If events occur that materially affect the
value of securities (particularly non-U.S. securities) between the close of
trading in those securities and the close of regular trading on the New York
Stock
22
Exchange, the securities are fair valued. The amortized cost method of
valuation, which approximates market value, generally is used to value
short-term debt instruments with sixty days or less remaining to maturity,
unless the Board determines that this does not represent fair value. Securities
traded in the over-the-counter ("OTC") market are valued at the last bid price
available on the valuation date prior to valuation.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME--Investment transactions are
recorded on the trade date. Realized gains and losses from investment
transactions are calculated using the identified cost method. Interest income is
recorded on an accrual basis. Discounts are accreted and premiums are amortized
as adjustments to interest income and the identified cost of investments.
FUTURES CONTRACTS--Upon entering into a financial futures contract, the Fund is
required to deposit in a segregated account with its custodian, in the name of
the futures broker through which the transaction was effected, an amount of cash
and/or municipal obligations equal to a certain percentage of the contract
amount. This amount is known as the "initial margin". Subsequent payments, known
as "variation margin" are made or received by the Fund each day, depending on
the daily fluctuations in the value of the underlying financial futures
contracts. Such variation margin is recorded for financial statement purposes on
a daily basis as unrealized gain or loss until the financial futures contract is
closed, at which time the net gain or loss is reclassified to realized gain or
loss on futures. Variation margin calls could be substantial in the event of
adverse price movements.
Using financial futures contracts involves various market risks. If the Fund was
unable to liquidate a futures position due to the absence of a liquid secondary
market or the imposition of price limits, it could incur substantial losses. The
Fund would continue to be subject to market risk with respect to the position.
In addition, the Fund would continue to be required to make variation margin
payments and might be required to maintain the position being hedged or to
maintain cash or securities in a segregated account. Furthermore, certain
characteristics of the futures market might increase the risk that movements in
the prices of the financial futures contracts might not correlate perfectly with
movements in the prices of the investments being hedged, including temporary
price distortion.
DIVIDENDS AND DISTRIBUTIONS--The Fund intends to pay monthly dividends to common
shareholders at a level rate that over time will result in the distribution of
all of the Fund's net investment income remaining after the payment of dividends
on any outstanding auction preferred shares. The dividend rate on the common
stock is adjusted as necessary to reflect the earnings rate of the Fund.
23
Dividends and distributions to common shareholders are recorded on the
ex-dividend date. Dividends to auction preferred shareholders are accrued daily.
The amount of dividends from net investment income and distributions from net
realized capital gains is determined in accordance with federal income tax
regulations, which may differ from U.S. generally accepted accounting
principles. These "book/tax" differences are either considered temporary or
permanent in nature. To the extent these differences are permanent in nature,
such amounts are reclassified within the capital accounts based on their federal
tax-basis treatment; temporary differences do not require reclassification.
CONCENTRATION OF RISK
The Fund follows an investment policy of investing primarily in municipal
obligations of various states. Economic changes affecting those states and
certain of their public bodies and municipalities may affect the ability of the
issuers within those states to pay interest on, or repay principal of, municipal
obligations held by the Fund.
INVESTMENT ADVISOR AND ADMINISTRATOR
The Board has approved an investment advisory and administration contract
("Advisory Contract") with UBS Global Asset Management (US) Inc. ("UBS Global
AM"), under which UBS Global AM serves as investment advisor and administrator
of the Fund. UBS Global AM is an indirect wholly owned asset management
subsidiary of UBS AG, an internationally diversified organization with
headquarters in Zurich, Switzerland and operations in many areas of the
financial services industry. In accordance with the Advisory Contract, the Fund
pays UBS Global AM an investment advisory and administration fee, which is
accrued weekly and paid monthly, at the annual rate of 0.90% of the Fund's
average weekly net assets applicable to holders of common and auction preferred
shares. UBS Global AM has agreed to waive 0.30% of the advisory and
administration fee, so that the Fund's effective fee is 0.60% of average weekly
net assets applicable to holders of common and auction preferred shares. This
waiver will continue indefinitely unless the Board agrees to any change. At
September 30, 2005, the Fund owed UBS Global AM $258,555, which is composed of
$387,832 of investment advisory and administration fees less fees waived of
$129,277. For the six months ended September 30, 2005, UBS Global AM waived
$787,813 of investment advisory and administration fees from the Fund.
ADDITIONAL INFORMATION REGARDING COMPENSATION TO AFFILIATE OF A BOARD MEMBER
Effective March 1, 2005, Professor Meyer Feldberg accepted the position of
senior advisor to Morgan Stanley, resulting in him becoming an interested
director of
24
the Fund. The Fund has been informed that Professor Feldberg's role at Morgan
Stanley does not involve matters directly affecting any UBS funds. Fund
transactions are executed through Morgan Stanley based on that firm's ability to
provide best execution of the transactions. During the six months ended
September 30, 2005, the Fund purchased and sold certain securities (e.g., fixed
income securities) in principal trades with Morgan Stanley having an aggregate
value of $82,449,007. Morgan Stanley received compensation in connection with
these trades, which may have been in the form of a "mark-up" or "mark-down" of
the price of the securities, a fee from the issuer for maintaining a commercial
paper program, or some other form of compensation. Although the precise amount
of this compensation is not generally known by UBS Global AM, UBS Global AM
believes that under normal circumstances it represents a small portion of the
total value of the transactions. In addition, Morgan Stanley may participate as
a broker-dealer in auctions for the Fund's Auction Preferred Shares and receive
compensation therefor. Amounts received by Morgan Stanley, if any, will vary
depending upon that firm's participation in an auction, and such amounts are
calculated and paid by the auction agent from money provided by the Fund.
AUCTION PREFERRED SHARES
The Fund has issued 800 shares of auction preferred shares Series A, 800 shares
of auction preferred shares Series B, 800 shares of auction preferred shares
Series C, 600 shares of auction preferred shares Series D, 600 shares of auction
preferred shares Series E and 600 shares of auction preferred shares Series F
which are referred to herein collectively as the "APS." All shares of each
series of APS have liquidation preference of $50,000 per share plus an amount
equal to accumulated but unpaid dividends upon liquidation.
Dividends, which are cumulative, are generally reset every 7 days for each
Series of APS. Dividend rates ranged from 1.890% to 2.875% for the six months
ended September 30, 2005.
The Fund is subject to certain restrictions relating to the APS. Failure to
comply with these restrictions could preclude the Fund from declaring any
distributions to common shareholders or repurchasing common shares and/or could
trigger the mandatory redemption of APS at liquidation value.
The APS are entitled to one vote per share and, unless otherwise required by
law, will vote with holders of common stock as a single class, except that the
APS will vote separately as a class on certain matters, as required by law. The
holders of the APS have the right to elect two directors of the Fund.
25
The redemption of the Fund's APS is outside of the control of the Fund because
it is redeemable upon the occurrence of an event that is not solely within the
control of the Fund.
PURCHASES AND SALES OF SECURITIES
For the six months ended September 30, 2005, aggregate purchases and sales of
portfolio securities, excluding short-term securities, were $161,007,263 and
$141,094,305, respectively.
FEDERAL TAX STATUS
The Fund intends to distribute substantially all of its tax-exempt income and
any taxable income and to comply with the other requirements of the Internal
Revenue Code applicable to regulated investment companies. Accordingly, no
provision for federal income taxes is required. In addition, by distributing
during each calendar year substantially all of its net investment income, net
realized capital gains and certain other amounts, if any, the Fund intends not
to be subject to a federal excise tax.
The tax character of distributions paid during the fiscal year ended March 31,
2005 was as follows:
DISTRIBUTIONS PAID FROM: 2005
--------------------------------------------------------------------------------
Tax-exempt income $ 18,116,461
Net long-term capital gains 1,987,330
--------------------------------------------------------------------------------
Total distributions paid $ 20,103,791
--------------------------------------------------------------------------------
The tax character of distributions paid and the components of accumulated
earnings (deficit) on a tax basis for the current fiscal year will be calculated
after the Fund's fiscal year ending March 31, 2006.
For federal income tax purposes, which was substantially the same for book
purposes, the tax cost of investments and the components of net unrealized
appreciation of investments at September 30, 2005 were as follows:
Tax cost of investments $ 505,276,050
Gross unrealized appreciation $ 7,682,282
Gross unrealized depreciation (1,673,825)
--------------------------------------------------------------------------------
Net unrealized appreciation $ 6,008,457
--------------------------------------------------------------------------------
26
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27
INSURED MUNICIPAL INCOME FUND INC.
FINANCIAL HIGHLIGHTS
Selected data for a share of common stock outstanding throughout each period is
presented below:
FOR THE
SIX MONTHS ENDED
SEPTEMBER 30,
2005
(UNAUDITED)
-------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.93
Net investment income 0.45
Net realized and unrealized gains (losses) from
investment activities 0.15
Common share equivalent of dividends and
distributions paid to auction preferred
shareholders from:
Net investment income (0.12)
Net realized gains from investment activities --
Total dividends and distributions paid to
auction preferred shareholders (0.12)
Net increase from operations 0.48
Dividends and distributions paid to common
shareholders from:
Net investment income (0.33)
Net realized gains from investment activities --
Total dividends and distributions paid to
common shareholders (0.33)
Auction preferred shares offering expenses
NET ASSET VALUE, END OF PERIOD $ 15.08
MARKET VALUE, END OF PERIOD $ 13.17
TOTAL INVESTMENT RETURN(1) 6.25%
RATIO TO AVERAGE NET ASSETS ATTRIBUTABLE TO
COMMON SHARES:
Total expenses, net of fee waivers by advisor 1.39%*
Total expenses, before fee waivers by advisor 1.89%*
Net investment income before auction preferred
shares dividends 5.91%*
Auction preferred shares dividends from
net investment income 1.61%*
Net investment income available to common
shareholders, net of fee waivers by advisor 4.30%*
Net investment income available to common
shareholders, before fee waivers by advisor 3.80%*
SUPPLEMENTAL DATA:
Net assets applicable to common shareholders,
end of period (000's) $ 311,004
Portfolio turnover 29%
Asset coverage per share of auction preferred
shares, end of period $ 124,049
* Annualized.
(1) Total investment return is calculated assuming a $10,000 purchase of common
stock at the current market price on the first day of each period reported
and a sale at the current market price on the last day of each period
reported, and assuming reinvestment of dividends and other distributions to
common shareholders at prices obtained under the Fund's Dividend
Reinvestment Plan. Total investment return does not reflect brokerage
commissions and has not been annualized for the period less than one year.
Returns do not reflect the deduction of taxes that a shareholder could pay
on Fund distributions.
# Amount represents less than $0.005 per common share.
28
FOR THE YEARS ENDED MARCH 31,
----------------------------------------------------------------------
2005 2004 2003 2002 2001
----------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 15.39 $ 15.76 $ 15.15 $ 15.30 $ 14.54
Net investment income 0.83 0.84 0.97 1.01 1.04
Net realized and unrealized gains (losses) from
investment activities (0.31) 0.00# 0.58 (0.26) 0.79
Common share equivalent of dividends and
distributions paid to auction preferred
shareholders from:
Net investment income (0.14) (0.07) (0.10) (0.17) (0.31)
Net realized gains from investment activities (0.01) (0.02) -- -- --
Total dividends and distributions paid to
auction preferred shareholders (0.15) (0.09) (0.10) (0.17) (0.31)
Net increase from operations 0.37 0.75 1.45 0.58 1.52
Dividends and distributions paid to common
shareholders from:
Net investment income (0.76) (0.84) (0.84) (0.73) (0.76)
Net realized gains from investment activities (0.07) (0.24) -- -- --
Total dividends and distributions paid to
common shareholders (0.83) (1.08) (0.84) (0.73) (0.76)
Auction preferred shares offering expenses -- (0.04) -- -- --
NET ASSET VALUE, END OF PERIOD $ 14.93 $ 15.39 $ 15.76 $ 15.15 $ 15.30
MARKET VALUE, END OF PERIOD $ 12.71 $ 14.48 $ 13.98 $ 13.42 $ 13.11
TOTAL INVESTMENT RETURN(1) (6.55)% 11.75% 10.61% 8.04% 16.02%
RATIO TO AVERAGE NET ASSETS ATTRIBUTABLE TO
COMMON SHARES:
Total expenses, net of fee waivers by advisor 1.51% 1.35% 1.41% 1.42% 1.44%
Total expenses, before fee waivers by advisor 1.96% 1.62% 1.60% 1.61% 1.63%
Net investment income before auction preferred
shares dividends 5.52% 5.42% 6.23% 6.57% 7.00%
Auction preferred shares dividends from
net investment income 0.90% 0.44% 0.61% 1.11% 2.10%
Net investment income available to common
shareholders, net of fee waivers by advisor 4.62% 4.98% 5.62% 5.46% 4.90%
Net investment income available to common
shareholders, before fee waivers by advisor 4.17% 4.71% 5.43% 5.27% 4.71%
SUPPLEMENTAL DATA:
Net assets applicable to common shareholders,
end of period (000's) $ 308,033 $ 317,568 $ 325,060 $ 312,552 $ 315,568
Portfolio turnover 50% 37% 24% 14% 2%
Asset coverage per share of auction preferred
shares, end of period $ 123,341 $ 125,612 $ 158,353 $ 154,184 $ 155,189
29
GENERAL INFORMATION (UNAUDITED)
THE FUND
Insured Municipal Income Fund Inc. (the "Fund") is a diversified, closed-end
management investment company whose shares trade on the New York Stock Exchange
("NYSE"). The Fund's investment objective is to achieve a high level of current
income that is exempt from federal income tax, consistent with the preservation
of capital. The Fund's investment advisor and administrator is UBS Global Asset
Management (US) Inc. ("UBS Global AM"), an indirect wholly owned asset
management subsidiary of UBS AG, which had approximately $50.2 billion in assets
under management as of September 30, 2005.
Effective October 1, 2005, Kevin McIntyre assumed primary responsibility for the
day-to-day management of the Fund. Mr. McIntyre is a director and portfolio
manager of UBS Global AM. Mr. McIntyre joined UBS Global AM in 1995 and has been
a member of its municipal securities team since that date. Mr. McIntyre has
previously served as a trader for the municipal securities group.
SHAREHOLDER INFORMATION
The Fund's NYSE trading symbol is "PIF." Comparative net asset value and market
price information about the Fund is published weekly in THE WALL STREET JOURNAL,
THE NEW YORK TIMES and BARRON'S, as well as in numerous other publications.
An annual meeting of shareholders of the Fund was held on July 21, 2005. At the
meeting Margo N. Alexander, Richard Q. Armstrong, David J. Beaubien, Richard R.
Burt, Meyer Feldberg, and William D. White were elected to serve as directors
until the next annual meeting of shareholders, or until their successors are
elected and qualified or until they resign or are otherwise removed. The shares
were voted as indicated below:
COMMON STOCK AND APS SHARES VOTING AS A SINGLE CLASS
SHARES
SHARES WITHHOLD
TO VOTE FOR OR WITHHOLD AUTHORITY IN THE ELECTION OF: VOTED FOR AUTHORITY
--------------------------------------------------------------------------------------
Richard Q. Armstrong 19,221,100.276 732,267.788
David J. Beaubien 19,227,184.276 726,183.788
Richard R. Burt 19,218,115.276 735,252.788
William D. White 19,228,404.276 724,963.788
AUCTION PREFERRED SHARES
SHARES
SHARES WITHHOLD
TO VOTE FOR OR WITHHOLD AUTHORITY IN THE ELECTION OF: VOTED FOR AUTHORITY
-------------------------------------------------------------------------------------
Margo N. Alexander 3,990 1
Meyer Feldberg 3,990 1
30
The Fund is not aware of any broker non-votes. (Broker non-votes are shares held
in street name for which the broker indicates that instructions have not been
received from the beneficial owners or other persons entitled to vote and for
which the broker does not have discretionary voting authority.)
PROXY VOTING POLICIES, PROCEDURES AND RECORD
You may obtain a description of the Fund's (1) proxy voting policies, (2) proxy
voting procedures and (3) information regarding how the Fund voted any proxies
related to portfolio securities during the 12-month period ended June 30, 2005,
without charge, upon request by contacting the Fund directly at 1-800-647 1568,
online on the Fund's Web site: www.ubs.com/ubsglobalam-proxy, or on the EDGAR
Database on the SEC's Web site (http://www.sec.gov).
QUARTERLY FORM N-Q PORTFOLIO SCHEDULE
The Fund will file 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 be reviewed and copied
at the SEC's Public Reference Room in Washington, D.C. Information on the
operation of the SEC's Public Reference Room may be obtained by calling
1-800-SEC 0330. Additionally, you may obtain copies of Forms N-Q from the Fund
upon request by calling 1-800-647 1568.
DIVIDEND REINVESTMENT PLAN
The Fund's Board has established a Dividend Reinvestment Plan (the "Plan") under
which all common shareholders whose shares are registered in their own names, or
in the name of UBS Financial Services Inc. or its nominee, will have all
dividends and other distributions on their shares of common stock automatically
reinvested in additional shares of common stock, unless such common shareholders
elect to receive cash. Common shareholders who elect to hold their shares in the
name of another broker or nominee should contact such broker or nominee to
determine whether, or how, they may participate in the Plan. The ability of such
shareholders to participate in the Plan may change if their shares are
transferred into the name of another broker or nominee.
A common shareholder may elect not to participate in the Plan or may terminate
participation in the Plan at any time without penalty, and common shareholders
who have previously terminated participation in the Plan may rejoin it at any
time. Changes in elections must be made in writing to the Fund's
31
transfer agent and should include the shareholder's name and address as they
appear on the share certificate or in the transfer agent's records. An election
to terminate participation in the Plan, until such election is changed, will be
deemed an election by a common shareholder to take all subsequent distributions
in cash. An election will be effective only for distributions declared and
having a record date at least ten days after the date on which the election is
received.
Additional shares of common stock acquired under the Plan will be purchased in
the open market, on the NYSE or otherwise, at prices that may be higher or lower
than the net asset value per share of the common stock at the time of the
purchase. The number of shares of common stock purchased with each dividend will
be equal to the result obtained by dividing the amount of the dividend payable
to a particular shareholder by the average price per share (including applicable
brokerage commissions) that the transfer agent was able to obtain in the open
market. The Fund will not issue any new shares of common stock in connection
with the Plan. There currently is no charge to participants for reinvesting
dividends or other distributions. The transfer agent's fees for handling the
reinvestment of distributions will be paid by the Fund. However, each
participant pays a pro rata share of brokerage commissions incurred with respect
to the transfer agent's open market purchases of common stock in connection with
the reinvestment of distributions. The automatic reinvestment of dividends and
other distributions in shares of common stock does not relieve participants of
any income tax that may be payable on such distributions.
Experience under the Plan may indicate that changes are desirable. Accordingly,
the Fund reserves the right to amend or terminate the Plan with respect to any
dividend or other distribution if notice of the change is sent to Plan
participants at least 30 days before the record date for such distribution. The
Plan also may be amended or terminated by the transfer agent by at least 30
days' written notice to all Plan participants. Additional information regarding
the Plan may be obtained from, and all correspondence concerning the Plan should
be directed to, the transfer agent at PFPC Inc., P.O. Box 43027, Providence,
Rhode Island 02940-3027. For further information regarding the Plan, you may
also contact the transfer agent directly at 1-800-331 1710.
32
BOARD APPROVAL OF ADVISORY AND ADMINISTRATION AGREEMENT (UNAUDITED)
BACKGROUND
At a meeting of the board of Insured Municipal Income Fund ("Fund") on July 20,
2005, the members of the board, including the directors who are not "interested
persons" of the Fund ("Independent Directors") as defined in the Investment
Company Act of 1940, as amended, considered and approved the continuance of the
Advisory and Administration Agreement for the Fund. In preparing for the
meeting, the board members had requested and received information from UBS
Global Asset Management (US) Inc. ("UBS Global AM") to assist them, including
performance and expense information for other investment companies with similar
investment objectives to the Fund. The board received and considered a variety
of information about UBS Global AM, as well as the advisory and administrative
arrangements for the Fund. The Independent Directors discussed the materials
initially provided by management prior to the scheduled board meeting in a
session with their independent legal counsel and requested, and received from
management, supplemental materials to assist them in their consideration of the
Advisory and Administration Agreement. Subsequently, the Chairman of the board
and independent legal counsel to the Independent Directors met with management
representatives to discuss generally how information would be provided at the
board meeting. The Independent Directors also met for several hours the evening
before the board meeting and met again after management's presentation was
completed to review the disclosure that had been made to them at the meeting. At
all of these sessions the Independent Directors met in session with their
independent legal counsel. The Independent Directors also received a memorandum
from their independent legal counsel discussing the duties of board members in
considering approval of advisory and administration agreements. In its
consideration of the approval of the Advisory and Administration Agreement, the
board, including the Independent Directors, considered the following factors:
NATURE, EXTENT AND QUALITY OF THE SERVICES UNDER THE ADVISORY AND ADMINISTRATION
AGREEMENT
The board received and considered information regarding the nature, extent and
quality of management services provided to the Fund by UBS Global AM under the
Advisory and Administration Agreement during the past year. The board also
received a description of the administrative and other services rendered to the
Fund and its shareholders by UBS Global AM. The board noted that information
received at regular meetings throughout the year related to the services
rendered by UBS Global AM concerning the management of the Fund's affairs and
UBS Global AM's role in coordinating providers of other
33
services to the Fund, including custody, accounting and transfer agency
services. The board's evaluation of the services provided by UBS Global AM took
into account the board's knowledge and familiarity gained as board members of
funds in the UBS New York fund complex, including the scope and quality of UBS
Global AM's investment management and other capabilities and the quality of its
administrative and other services. The board observed that the scope of services
provided by UBS Global AM had expanded over time as a result of regulatory and
other developments, including maintaining and monitoring its own and the Fund's
expanded compliance programs.
The board had available to it the qualifications, backgrounds and
responsibilities of the Fund's senior personnel and the portfolio management
team primarily responsible for the day-to-day portfolio management of the Fund
and recognized that these persons report to the board regularly, some at every
board meeting. The board also considered, based on its knowledge of UBS Global
AM and its affiliates, the financial resources available to UBS Global AM and
its parent organization, UBS AG.
The board reviewed how transactions in Fund assets are effected. In conducting
its review, the board had available UBS Global AM's brokerage policies and
practices, the standards applied in seeking best execution, UBS Global AM's soft
dollar policies and practices, the use of a broker affiliated with UBS Global AM
and the existence of quality controls applicable to brokerage allocation
procedures. In addition, management also reported to the board on, among other
things, its disaster recovery plans and portfolio manager compensation plan.
The board concluded that, overall, it was satisfied with the nature, extent and
quality of services provided, and expected to be provided, to the Fund under the
Advisory and Administration Agreement.
FUND PERFORMANCE
The board received and considered performance information of the Fund compared
to other funds (the "Performance Universe") selected by Lipper, Inc. ("Lipper"),
an independent provider of investment company data, over the one-, three-, five-
and ten-year periods, ended May 31, 2005 and since inception. The board was
provided with a description of the methodology Lipper used to determine the
similarity of the Fund with the funds included in the Performance Universe. The
board also noted that it had received information throughout the year at
periodic intervals with respect to the Fund's performance.
The comparative Lipper information showed that the Fund's performance as
compared against the Performance Universe was consistently below average
34
for the comparative periods. Specifically, the Fund's performance was in the
fourth and fifth quintile for all comparative periods. The board in its review
noted that management explained that the Fund had consistently underperformed
due in large part to its conservative duration, higher overall credit quality
and an aversion to significant exposure to securities subject to the alternative
minimum tax ("AMT"). In addition, the board noted several changes made in recent
years that should provide the portfolio management team with increased
flexibility over the long-term. The changes included the following: (1)
increased ability to invest in securities having a maturity of ten years or
less, (2) increased ability to use derivatives to hedge unwanted duration
exposure while preserving security selection opportunities, (3) increasing the
amount of leverage to take advantage of a continued steepness in the yield
curve, (4) potential increased AMT exposure, and (5) modifying investment
policies to permit investment of up to twenty percent (20%) of the Fund in
investment grade instruments that are not insured. Based on its review and facts
stated above, the board concluded that the Fund's investment performance was
satisfactory.
MANAGEMENT FEES AND EXPENSE RATIO
The board reviewed and considered the contractual advisory and administration
fee (the "Contractual Management Fee") payable by the Fund to UBS Global AM in
light of the nature, extent and quality of the advisory and administrative
services provided by UBS Global AM. The board also reviewed and considered the
actual fee rate (the "Actual Management Fee") paid by the Fund.
Additionally, the board received and considered information comparing the Fund's
Contractual Management Fee, Actual Management Fee and overall expenses with
those of funds in a group of funds selected and provided by Lipper (the "Expense
Group").
In connection with its consideration of the Fund's management fees, the board
also received information on an affiliate of UBS Global AM's standard
institutional account fees for accounts of a similar investment type to the
Fund. The board noted that these fees were lower than the Contractual Management
Fee and Actual Management Fee for the Fund, but also noted management's
explanation that comparisons with such accounts may be of limited relevance
given the different structures and regulatory requirements of mutual funds
versus such accounts, the differences in the levels of services required by
mutual funds and such accounts and the memorandum provided by the Fund's legal
counsel discussing court decisions regarding the limited usefulness of such
comparisons.
35
The comparative Lipper information showed that the Fund's Contractual Management
Fee and Actual Management Fee were in the fifth quintile in its Expense Group
(i.e., eight out of eight for the periods included in the Lipper report). The
board noted that UBS Global AM currently has a fee waiver in place whereby it
waives 30 basis points (0.30%) from its Contractual Management Fee and that the
fee waiver will continue indefinitely unless the board agrees to a change in the
waiver. In addition, the board also noted that the Fund's total expenses were
the highest out of the eight funds in its Expense Group. The board noted that
the Fund's high Actual Total Expenses was the result of the Fund's high Actual
Management Fee and its high custodian fee. Management noted that the Fund's
custodian fees appear to be higher than those of other funds in its Expense
Group because accounting costs are also included in the Fund's custodian fees,
which may not be the case for some of its peers in the Fund's Expense Group.
Management also noted that it had increased its fee waiver by one-half (from
0.20% to 0.30%) during the course of the past year but that the impact of the
increased waiver was not fully reflected in the Lipper data. The Board
considered that the fee was more acceptable once the fee waiver was taken into
account. Management noted that the Fund's Actual Management Fee was higher than
its peers, if only by less than one-quarter of one percent, primarily because of
the higher degree of leverage of the Fund. If the Actual Management Fees in the
peer group were adjusted for the relative degrees of leverage to facilitate a
more meaningful comparison, the Fund's Actual Management Fee would be more
consistent with the peer median. Management added that it would attempt to
negotiate a reduction in the Fund's custodian fees.
Taking all of the above into consideration, the board determined that the
Contractual Management Fee was reasonable in light of the nature, extent and
quality of the services provided to the Fund under the Advisory and
Administration Agreement.
ADVISOR PROFITABILITY
The board received and considered a profitability analysis of UBS Global AM and
its affiliates in providing services to the Fund. The board also received
profitability information with respect to the UBS New York fund complex as a
whole. In addition, the board received information with respect to UBS Global
AM's allocation methodologies used in preparing this profitability data. UBS
Global AM's profitability was considered not excessive in light of the nature,
extent and quality of the services provided to the Fund.
36
ECONOMIES OF SCALE
The board received and considered information from management regarding whether
it has achieved economies of scale with respect to the management of the Fund,
whether the Fund has appropriately benefited from any economies of scale, and
whether there is potential realization of further economies of scale. The board
considered whether economies of scale in the provision of services to the Fund
were being passed along to shareholders. The board also considered whether
alternative fee structures (such as breakpoints) would be more appropriate or
reasonable taking into consideration economies of scale or other efficiencies.
In conducting its review, the board noted that the Fund's Contractual Management
Fee did not contain any breakpoints. Further, the board noted that advisory
agreements of closed-end funds usually do not contain breakpoints. Management
informed the board that the Fund, as a closed-end investment company, was not
expected to materially increase in size; thus, UBS Global AM would not benefit
from economies of scale. The Board members considered whether economies of scale
could be realized because UBS Global AM advises other similar funds, and, based
on their experience, the board accepted UBS Global AM's explanation that
significant economies of scale would not be realized because of the nature of
the market in which the Fund invests did not provide significant savings.
OTHER BENEFITS TO UBS GLOBAL AM
The board considered other benefits received by UBS Global AM and its affiliates
as a result of its relationship with the Fund, including the opportunity to
offer additional products and services to Fund shareholders.
In light of the costs of providing investment management, administrative and
other services to the Fund and UBS Global AM's ongoing commitment to the Fund,
the profits and other ancillary benefits that UBS Global AM and its affiliates
received were considered reasonable.
In light of all of the foregoing, the board approved the Advisory and
Administration Agreement to continue for another year.
In making its decision, the board identified no single factor as being
determinative in approving the Advisory and Administration Agreement. The
Independent Directors were advised by separate independent legal counsel
throughout the entire process. The board discussed the proposed continuance of
the Advisory and Administration Agreement in a private session with their
independent legal counsel at which no representatives of UBS Global AM were
present.
37
DIRECTORS
Richard Q. Armstrong
CHAIRMAN
Margo N. Alexander
David J. Beaubien
Richard R. Burt
Meyer Feldberg
William D. White
PRINCIPAL OFFICERS
W. Douglas Beck
PRESIDENT
Mark F. Kemper
VICE PRESIDENT AND SECRETARY
Thomas Disbrow
VICE PRESIDENT AND TREASURER
Elbridge T. Gerry III
VICE PRESIDENT
Kevin McIntyre
VICE PRESIDENT
INVESTMENT ADVISOR AND ADMINISTRATOR
UBS Global Asset Management (US) Inc.
51 West 52nd Street
New York, New York 10019-6114
THE FINANCIAL INFORMATION INCLUDED HEREIN IS TAKEN FROM THE RECORDS OF THE FUND
WITHOUT EXAMINATION BY INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS WHO DO NOT
EXPRESS AN OPINION THEREON.
NOTICE IS HEREBY GIVEN IN ACCORDANCE WITH SECTION 23(c) OF THE INVESTMENT
COMPANY ACT OF 1940 THAT FROM TIME TO TIME THE FUND MAY PURCHASE SHARES OF ITS
COMMON STOCK IN THE OPEN MARKET AT MARKET PRICES.
THIS REPORT IS SENT TO THE SHAREHOLDERS OF THE FUND FOR THEIR INFORMATION. IT IS
NOT A PROSPECTUS, CIRCULAR OR REPRESENTATION INTENDED FOR USE IN THE PURCHASE OR
SALE OF SHARES OF THE FUND OR OF ANY SECURITIES MENTIONED IN THIS REPORT.
(C) 2005 UBS GLOBAL ASSET MANAGEMENT (US) INC. ALL RIGHTS RESERVED.
[UBS LOGO]
Presorted
UBS GLOBAL ASSET MANAGEMENT (US) INC. Standard
51 West 52nd Street US Postage
New York, NY 10019-6114 PAID
Smithtown, NY
Permit 700
ITEM 2. CODE OF ETHICS.
Form N-CSR disclosure requirement not applicable to this filing of a semi-annual
report.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Form N-CSR disclosure requirement not applicable to this filing of a semi-annual
report.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Form N-CSR disclosure requirement not applicable to this filing of a semi-annual
report.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Form N-CSR disclosure requirement not applicable to this filing of a semi-annual
report.
ITEM 6. SCHEDULE OF INVESTMENTS.
Included as part of the report to shareholders filed under Item 1 of this form.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Form N-CSR disclosure requirement not applicable to this filing of a semi-annual
report.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Form N-CSR disclosure requirement not yet effective with respect to the
registrant.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
There were no purchases made by or on behalf of the registrant or any
"affiliated purchaser," as defined in Rule 10b-18(a)(3) under the Securities
Exchange Act of 1934, as amended, of shares of the registrant's equity
securities made in the period covered by this report.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The registrant's Board has established a Nominating and Corporate Governance
Committee. The Nominating and Corporate Governance Committee will consider
nominees recommended by shareholders
if a vacancy occurs among those board members who are not "interested persons"
as defined in Section 2(a)(19) of the Investment Company Act of 1940, as
amended. In order to recommend a nominee, a shareholder should send a letter to
the chairperson of the Nominating and Corporate Governance Committee, Richard R.
Burt, care of the Secretary of the registrant at UBS Global Asset Management
(US) Inc., 51 West 52nd Street, New York, New York 10019-6114, and indicate on
the envelope "Nominating and Corporate Governance Committee." The shareholder's
letter should state the nominee's name and should include the nominee's resume
or curriculum vitae, and must be accompanied by a written consent of the
individual to stand for election if nominated for the Board and to serve if
elected by shareholders.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive officer and principal financial
officer have concluded that the registrant's disclosure controls and
procedures (as defined in Rule 30a-3(c) under the Investment Company
Act of 1940, as amended) are effective based on their evaluation of
these controls and procedures as of a date within 90 days of the
filing date of this document.
(b) The registrant's principal executive officer and principal financial
officer are aware of no changes in the registrant's internal control
over financial reporting (as defined in Rule 30a-3(d) under the
Investment Company Act of 1940, as amended) that occurred during the
registrant's last fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting.
ITEM 12. EXHIBITS.
(a) (1) Code of Ethics - Form N-CSR disclosure requirement not applicable
to this filing of a semi-annual report.
(a) (2) Certifications of principal executive officer and principal
financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 is attached hereto as Exhibit EX-99.CERT.
(a) (3) Written solicitation to purchase securities under Rule 23c-1 under
the Investment Company Act of 1940 sent or given during the period
covered by the report by or on behalf of the registrant to 10 or more
persons - The registrant has not engaged in such a solicitation during
the period covered by this report.
(b) Certifications of principal executive officer and principal financial
officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 is
attached hereto as Exhibit EX-99.906CERT.
SIGNATURES
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.
Insured Municipal Income Fund Inc.
By: /s/ W. Douglas Beck
-------------------
W. Douglas Beck
President
Date: December 8, 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/ W. Douglas Beck
-------------------
W. Douglas Beck
President
Date: December 8, 2005
----------------
By: /s/ Thomas Disbrow
------------------
Thomas Disbrow
Vice President and Treasurer
Date: December 8, 2005
----------------