SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

|X|   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT OF 1934

                   For the fiscal year ended December 31, 1999

                                       OR

|_|   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934

                         Commission File Number 1-12644

                   Financial Security Assurance Holdings Ltd.
             (Exact name of registrant as specified in its charter)

          New York                                              13-3261323
(State or other jurisdiction of                             (I.R.S. Employer
incorporation or organization)                             Identification No.)

                    350 Park Avenue, New York, New York 10022
          (Address of principal executive offices, including zip code)

                                 (212) 826-0100
              (Registrant's telephone number, including area code)

           Securities registered pursuant to Section 12(b) of the Act:

<TABLE>
               Title of each class                          Name of each exchange on which registered
               -------------------                          -----------------------------------------
<S>                                                                <C>
     Common Stock, par value $.01 per share                        New York Stock Exchange, Inc.
7.375% Senior Quarterly Income Debt Securities Due 2097            New York Stock Exchange, Inc.
6.950% Senior Quarterly Income Debt Securities Due 2098            New York Stock Exchange, Inc.
</TABLE>

           Securities registered pursuant to Section 12(g) of the Act:
                                      None

      Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|

      Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|

      The aggregate market value of voting stock, excluding treasury shares,
held by non-affiliates of the registrant at March 16, 2000 was $1,911,715,971
(based upon the closing price of the registrant's shares on the New York Stock
Exchange on March 16, 2000, which was $71-15/16). For purposes of the foregoing,
White Mountains Insurance Group, Ltd., was deemed to be an affiliate of the
registrant.

      At March 16, 2000, there were outstanding 33,517,995 shares of Common
Stock, par value $0.01 per share, of the registrant (includes 511,031 shares of
Common Stock owned by a trust on behalf of the Company and excludes 158,306
shares of Common Stock actually held in treasury).

      Documents Incorporated By Reference

      Portions of the registrant's Annual Report to Shareholders for the year
ended December 31, 1999 are incorporated by reference into Part II hereof.
<PAGE>

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                     Page
                                                                                     ----
<S>                                                                                   <C>
Item 1.  Business..................................................................    2

Item 2.  Properties................................................................   23

Item 3.  Legal Proceedings.........................................................   23

Item 4.  Submission of Matters to a Vote of Security Holders.......................   23

Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters.....   24

Item 6.  Selected Financial Data...................................................   24

Item 7.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations.............................................................   24

Item 7A. Quantitative and Qualitative Disclosures About Market Risk................   24

Item 8.  Financial Statements and Supplementary Data...............................   25

Item 9.  Changes in and Disagreements with Accountants on Accounting and
         Financial Disclosure......................................................   25

Item 10. Directors and Executive Officers of the Registrant........................   26

Item 11. Executive Compensation....................................................   29

Item 12. Security Ownership of Certain Beneficial Owners and Management............   35

Item 13. Certain Relationships and Related Transactions............................   38

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..........   41
</TABLE>


                                       1
<PAGE>

Item 1. Business.

General

      Financial Security Assurance Holdings Ltd. (the "Company"), through its
wholly owned subsidiary, Financial Security Assurance Inc. ("FSA"), is primarily
engaged in the business of providing financial guaranty insurance on
asset-backed and municipal obligations. The claims-paying ability of FSA is
rated "triple-A" by the major securities ratings agencies and obligations
insured by FSA are generally awarded "triple-A" ratings by reason of such
insurance. FSA was the first insurance company organized to insure asset-backed
obligations and has been a leading insurer of asset-backed obligations (based on
number of transactions insured) since its inception in 1985. FSA expanded the
focus of its business in 1990 to include financial guaranty insurance of
municipal obligations. For the year ended December 31, 1999, FSA had gross
premiums written of $362.7 million, of which 51% related to insurance of
municipal obligations and 49% related to insurance of asset-backed obligations.
At December 31, 1999, FSA had net insurance in force of $195.6 billion, of which
67% represented insurance of municipal obligations and 33% represented insurance
of asset-backed obligations. FSA is licensed to engage in the financial guaranty
insurance business in all 50 states, the District of Columbia, Puerto Rico and
the U.S. Virgin Islands.

      FSA owns FSA Insurance Company ("FSAIC"), which in turn owns Financial
Security Assurance International Ltd. ("FSA International"), Financial Security
Assurance (U.K.) Limited ("FSA-UK") and Financial Security Assurance of
Oklahoma, Inc. ("FSA Oklahoma"). FSA International is a Bermuda domiciled
insurance company that primarily provides financial guaranty insurance for
transactions outside United States and European markets as well as reinsurance
to FSA. FSA-UK is a United Kingdom domiciled insurance company that primarily
provides financial guaranty insurance for transactions in the United Kingdom and
other European markets. FSAIC is an Oklahoma domiciled insurance company that
primarily provides reinsurance to FSA. FSA Oklahoma ceased to be an operating
company in 1998. All such insurance company subsidiaries are wholly owned,
except that XL Capital Ltd owns a minority interest in FSA International as
described below.

      FSA Portfolio Management Inc. ("FSA Portfolio Management"), a wholly owned
subsidiary of the Company, is engaged in the business of managing the investment
portfolios of the Company and its affiliates.

      Transaction Services Corporation ("TSC"), a wholly owned subsidiary of the
Company, is engaged in the business of managing workout transactions within the
insured portfolios of the Company and its subsidiaries and of certain third
parties.

      When it commenced operations in 1985, the Company was owned by a number of
large insurance companies and other institutional investors. In 1989, the
Company was acquired by U S WEST Capital Corporation ("U S WEST"), which has
since changed its name to MediaOne Capital Corporation ("MediaOne"). MediaOne is
a subsidiary of MediaOne Group, Inc., with operations and investments in
domestic cable and broadband communications and international broadband and
wireless communication. In 1990, the Company established a strategic
relationship with The Tokio Marine and Fire Insurance Co. Ltd. ("Tokio Marine"),
which acquired a minority interest in the Company. Tokio Marine is a major
Japanese property and casualty insurance company.

      In 1994, the Company completed an initial public offering (the "IPO") of
common shares, at which time White Mountains Insurance Group, Ltd. ("White
Mountains") (formerly known as Fund American Enterprises Holdings, Inc.) made an
investment in the Company and entered into certain agreements providing, among
other things, White Mountains options to acquire additional shares of the
Company from MediaOne. In 1994, pursuant to these agreements, the Company issued
to White Mountains 2,000,000 shares of Series A non-dividend paying voting
convertible preferred stock having a liquidation preference of $700,000. In
1999, White Mountains exercised its stock options and acquired 2,560,607 shares
of common stock from MediaOne. White Mountains is an insurance holding company.

      In 1998, the Company and XL Capital Ltd ("XL") entered into a joint
venture, establishing two Bermuda domiciled financial guaranty insurance
companies--FSA International and XL Financial Assurance Ltd ("XLFA"). XL owns a
minority interest in FSA International and the Company owns a minority interest
in XLFA. In connection with such joint venture, XL acquired an interest in the
Company and the Company acquired an interest in XL. XL is a major Bermuda
insurance company.


                                       2
<PAGE>

      In December 1999, the Company sold additional shares of common stock to
White Mountains, Tokio Marine and XL. See Item 5, "Market for Registrant's
Common Equity and Related Stockholders Matters." During 1999, MediaOne
distributed 7,825,104 shares to the holders of Debt Exchangeable for Common
Stock ("DECS") previously issued by U S WEST, Inc.

      At December 31, 1999, voting control of the Company was held 25.2% by
White Mountains, 7.4% by Tokio Marine, 7.2% by XL, 4.8% by MediaOne and 55.4% by
the public and employees.

      On March 14, 2000, the Company announced that it had entered into a merger
agreement pursuant to which the Company would become a wholly owned subsidiary
of Dexia S.A., a publicly held Belgian corporation, subject to receipt of
shareholder and regulatory approvals and satisfaction of other closing
conditions. Dexia S.A., through its bank subsidiaries, is primarily engaged in
the business of public finance in France, Belgium and other European countries.

      The principal executive offices of the Company are located at 350 Park
Avenue, New York, New York 10022. Subsidiaries of the Company also maintain
offices domestically in San Francisco and Dallas and abroad in London,
Singapore, Bermuda, Tokyo, Sydney and Madrid.

Industry Overview

      Financial guaranty insurance written by FSA typically guarantees scheduled
payments on an issuer's obligations. Upon a payment default on an insured
obligation, FSA is generally required to pay the principal, interest or other
amounts due in accordance with the obligation's original payment schedule or, at
its option, to pay such amounts on an accelerated basis. FSA's underwriting
policy is to insure asset-backed and municipal obligations that would otherwise
be investment grade without the benefit of FSA's insurance. Asset-backed
obligations insured by FSA are generally issued in structured transactions
backed by pools of assets such as residential mortgage loans, consumer or trade
receivables, securities or other assets having an ascertainable cash flow or
market value. Municipal obligations insured by FSA consist primarily of general
obligation bonds supported by the issuers' taxing power and special revenue
bonds and other special obligations of state and local governments supported by
the issuers' ability to impose and collect fees and charges for public services
or specific projects.

      The Company's business objective is to remain a leading insurer of
asset-backed and municipal obligations employing our transactional and financial
skills to generate strong premium volume at attractive returns. The Company
believes that the demand for our financial guaranty insurance will remain strong
over the long term as a result of the anticipated continuation of three trends:
(i) expansion of asset securitization outside the residential mortgage sector;
(ii) substantial volume of new domestic municipal bonds that are insured, due,
in part, to the continued use of municipal bonds to finance repairs and
improvements to the nation's infrastructure and municipal bond purchases by
individuals who generally purchase insured obligations; and (iii) growing use of
asset securitization and financial guaranty insurance in non-U.S. markets, due
to, in part, a trend towards private financing initiatives for projects that
have essential public purposes and regulatory changes encouraging or
facilitating off-balance sheet financings.

      The Company expects to continue to emphasize a diversified insured
portfolio characterized by insurance of both asset-backed and municipal
obligations, with a broad geographic distribution and a variety of revenue
sources and transaction structures. In addition to its domestic business, the
Company selectively pursues international opportunities and currently operates
in the European and Asia Pacific markets.

Business of FSA

General

      The business of FSA is managed by its Management Committee, comprised of
its Chairman, President, Chief Operating Officer, Chief Underwriting Officer,
General Counsel and Chief Financial Officer. FSA is primarily engaged in the
business of writing financial guaranty insurance on asset-backed and municipal
obligations as described below.

Asset-Backed Obligations

      Asset-backed obligations are typically issued in connection with
structured financings or securitizations, in which the securities being issued
are secured by or payable from a specific pool of assets having an ascertainable
cash flow or market value and held by a special purpose issuing entity. While
most asset-backed obligations are secured by or represent interests in diverse
pools of assets, such as residential mortgage loans, auto loans, debt securities
and bank loans, monoline financial guarantors also insure asset-backed
obligations secured by less diverse payment sources, such as multifamily real
estate.


                                       3
<PAGE>

      Asset-backed obligations are typically payable from cash flow generated by
a pool of assets and take the form of either "pass-through" obligations, which
represent interests in the related assets, or "pay-through" obligations, which
generally are debt obligations collateralized by the related assets. Both types
of asset-backed obligations generally have the benefit of overcollateralization,
excess cash flow or one or more other forms of credit enhancement to cover
credit risks associated with the related assets.

The following table sets forth certain industry information relating to selected
asset-backed obligations for the periods indicated:

                          New Asset-Backed Obligations

<TABLE>
<CAPTION>
               Volume of                                Combined          Asset-Backed
             Private-Label       Volume of Other         Volume              Volume
              Residential            Public                of          Insured by Monoline
                Mortgage          Asset-Backed         Asset-Backed        Insurance
             Obligations(1)      Obligations(2)        Obligations(3)     Companies(4)
             --------------      --------------        --------------     ------------
                                     (dollars in billions)
<S>             <C>                 <C>                 <C>                 <C>
1991 .........  $ 49.3              $ 50.6              $ 99.9              $  9.8
1992 .........    89.5                51.1               140.6                10.3
1993 .........    98.5                61.0               159.5                21.4
1994 .........    63.2                75.5               138.7                24.7
1995 .........    37.0               108.0               145.0                44.7
1996 .........    38.4               151.1               189.5                74.5
1997 .........    63.3               176.0               239.5                92.6
1998 .........   132.7               178.8               311.5               120.1
1999 .........    99.2               185.3               284.5              N/A(5)
</TABLE>

(1)   Information is from Inside Mortgage Securities, January 8, 1993, January
      14, 1994, January 20, 1995, February 2, 1996, and Inside MBS & ABS,
      February 14, 1997, January 16, 1998, January 8, 1999, and January 7, 2000
      and includes all U.S. public and rated private residential first
      mortgage-backed transactions, except obligations issued or guaranteed by
      government related entities.

(2)   Information is from Asset Sales Report, January 18, 1993, January 25,
      1993, January 10, 1994, January 9, 1995, January 22, 1996, January 27,
      1997, January 5, 1998, March 1 , 1999 and January 3, 2000 and includes all
      U.S. public asset-backed obligations (other than commercial paper
      transactions) backed by consumer receivables (including home equity
      loans), pooled corporate obligations and commercial mortgages.

(3)   Combined volume excludes: (i) private placement non-residential
      asset-backed obligations, (ii) asset-backed commercial paper and (iii)
      non-U.S. obligations.

(4)   Information is based on data provided by the Association of Financial
      Guaranty Insurors (AFGI). Includes all public and private transactions and
      all domestic and non-domestic transactions.

(5)   Not available.

      The market data set forth in the table above excludes privately placed
non-residential mortgage transactions as well as non-domestic issues. As a
result, the market data omits information regarding most "collateralized debt
obligation" securitizations, which represented a significant sector in the
insured asset-backed market in 1998 and 1999. The insured volume data in the
table includes such transactions.

      The issuance of asset-backed obligations of the type included in the table
experienced substantial growth in each year listed, with the exceptions of 1994
and 1999. The combined volume of such asset-backed obligations grew from $99.9
billion in 1991 to a high of $311.5 billion in 1998. In 1999, the public
asset-backed market increased while the private-label mortgage-backed sector
decreased, resulting in an overall decline to $284.5 billion.

      The largest single component of public, non-residential asset-backed
obligations was credit card securitizations in 1991, automobile loan
securitizations in 1992 and 1993, credit card securitizations in 1994, 1995 and
1996, home equity loan securitizations in 1997 and 1998, and automobile loan
securitizations in 1999.

      The par value of new asset-backed obligations insured by monoline
financial guaranty insurance companies rose in every year from 1991 through
1998.


                                       4
<PAGE>

      The growth in the issuance of asset-backed obligations since 1991 has been
due in part to increased capital requirements of commercial banks and insurance
companies and the contraction of credit extended to corporations. Banks have
responded to increased capital requirements by selling certain of their assets,
such as credit card receivables and automobile loans, in securitized structures
to the financial markets. Moreover, many corporations have found securitization
of their assets to be a less costly funding alternative to traditional forms of
borrowing. The period has also seen the development of finance companies that
fund consumer finance and home equity lending through the capital markets.

      Residential mortgage-backed issuance declined in 1994 because interest
rates rose, causing a reduction in mortgage loan refinancings and therefore in
the amount of new loan originations available for securitization. The decline
continued in 1995, as interest rates stabilized, and ended in 1996. Issuance
increased in 1997 and 1998 due to falling interest rates and declined as rates
rose in 1999.

      The demand for asset securitizations continues to deepen and broaden as
issuers securitize new classes of assets through increasingly complex
structures. Properly structured credit enhancements are often attractive in
providing market acceptability, liquidity and security.

Municipal Obligations

      Municipal obligations include bonds, notes and other evidences of
indebtedness issued by states and their political subdivisions (such as
counties, cities or towns), utility districts, public universities and
hospitals, public housing and transportation authorities and other public and
quasi-public entities. Municipal obligations are supported by the issuer's
taxing power in the case of general obligation bonds, or by the issuer's ability
to impose and collect fees and charges for public services or specific projects
in the case of most special revenue bonds.

      Insurance of municipal obligations represents the largest portion of the
financial guaranty insurance business. Since the early 1980s, insured municipal
obligation volume has grown substantially in terms of insurance in force, the
number of municipalities issuing insured obligations and the types of municipal
obligations that are insured. The percentage of municipal obligations insured
has also increased substantially. From 1990 to 1993, municipal issuance
increased each year. The low market interest rates which prevailed during 1993
resulted in record levels of new issuances and refundings of municipal bonds. As
expected, these record levels of issuances and refundings were not sustained
when interest rates increased. Consequently, the volume of issuances and
refundings of municipal bonds, and opportunities to write insurance for such
bonds, fell significantly in 1994 and modestly in 1995. Both total issuance and
refundings increased in 1996, 1997 and 1998, primarily because of lower interest
rates. In 1999, rising interest rates caused a steep decline in refundings,
which was responsible for much of the decline in total issuance that year.

      The following table sets forth certain information regarding long-term
municipal obligations, issued during the periods indicated:

                        Insured Municipal Obligations(1)

<TABLE>
<CAPTION>
                                                                      New Insured
                                                                        Volume
                                   New                New             as Percent
 Year                             Total             Insured           of New Total
                                  Volume             Volume              Volume
                                  ------             ------              ------
                                             (dollars in billions)
<S>                               <C>                <C>                  <C>
1990 .................            $127.8             $ 33.5               26.2%
1991 .................             172.4               51.9               30.1
1992 .................             234.7               80.8               34.4
1993 .................             292.2              107.9               36.9
1994 .................             165.0               61.5               37.3
1995 .................             160.0               68.5               42.8
1996 .................             185.0               85.7               46.3
1997 .................             220.6              107.5               48.7
1998 .................             286.2              145.1               50.7
1999 .................             225.9              103.9               46.0
</TABLE>

----------
(1)   Information is based on data provided in The Bond Buyer, January 7, 2000.
      Volume is expressed in terms of principal insured.


                                       5
<PAGE>

Types of Products

      FSA's insurance is employed in both the new issue and secondary markets.
Insurance premium rates take into account the projected return to and risk
assumed by FSA. Critical factors in assessing risk include the credit quality of
the issuer, type of issue, sources of repayment, transaction structure and term
to maturity. Each obligation is evaluated on the basis of such factors and
subject to FSA's underwriting guidelines. The final premium rate is generally a
function of market factors, including the interest rate savings to the issuer
from the use of insurance.

      In the case of new issues, the insured obligations are sold with FSA
insurance at the time the obligations are issued. For both municipal and
asset-backed obligations, FSA participates in negotiated offerings, where the
investment banker and often the insurer have been selected by the sponsor or
issuer. In addition, FSA participates in competitive offerings, where
underwriting syndicates bid for securities and submit bids that may include
insurance.

      In the secondary market, FSA's Triple-A Guaranteed Secondary Securities
(TAGSS(R)) Program provides insurance for uninsured asset-backed obligations
trading in the secondary market. Likewise, FSA's Custody Receipt Program
provides insurance for uninsured municipal obligations trading in the secondary
market. The insurance of obligations outstanding in the secondary market
generally affords a wider secondary market and therefore greater marketability
to a given issue of previously issued obligations. FSA's underwriting guidelines
require the same underwriting standards on secondary market issues as on new
security issues, although the evaluation procedures are typically abbreviated.

      FSA insures guaranteed investment contracts ("GIC's"), GIC equivalents and
obligations under interest rate, currency and credit default swaps, both alone
and in connection with asset-backed and municipal transactions employing FSA
insurance. FSA writes portfolio insurance for securities held by unit investment
trusts and mutual funds. Such insurance covers securities either while they are
held by the fund or to their maturity, whether or not held by the fund. FSA also
issues surety bonds under its Sure-Bid(R) program, which provides an alternative
to issuers and financial advisors to traditional types of good faith deposits on
competitive municipal bond transactions.

      The following table indicates the percentages of par amount (net of
reinsurance) outstanding at December 31, 1999 and 1998 with respect to each type
of asset-backed and municipal program:

            Net Par Amount and Percentage Outstanding by Program Type

<TABLE>
<CAPTION>
                                                           December 31, 1999
                             -------------------------------------------------------------------------
                                  Asset-Backed Programs                    Municipal Programs
                             ----------------------------------     ----------------------------------
                                                  Percent of                               Percent of
                                Net            Total Net Amount        Net               Total Net Par
                             Par Amount             Amount          Par Amount               Amount
                             Outstanding          Oustanding        Outstanding           Outstanding
                             -----------          ----------        -----------           -----------
                                                       (dollars in millions)
<S>                            <C>                   <C>               <C>                   <C>
New Issue .........            $47,450                93.9%            $72,148                92.2%
Secondary Market ..              3,039                 6.0               6,149                 7.8
Portfolio Insurance                 19                 0.1                  --                 0.0
                               -------               -----             -------               -----
    Total .........            $50,508(1)            100.0%            $78,297(2)            100.0%
                               =======               =====             =======               =====
</TABLE>

<TABLE>
<CAPTION>
                                                           December 31, 1998
                             -------------------------------------------------------------------------
                                  Asset-Backed Programs                    Municipal Programs
                             ----------------------------------     ----------------------------------
                                                  Percent of                               Percent of
                                Net            Total Net Amount        Net               Total Net Par
                             Par Amount             Amount          Par Amount               Amount
                             Outstanding          Oustanding        Outstanding           Outstanding
                             -----------          ----------        -----------           -----------
                                                       (dollars in millions)
<S>                            <C>                   <C>               <C>                   <C>
New Issue .........            $34,972                93.4%            $59,986                90.9%
Secondary Market ..              2,432                 6.5               6,020                 9.1
Portfolio Insurance                 19                 0.1                  --                 0.0
                               -------               -----             -------               -----
    Total .........            $37,423(1)            100.0%            $66,006(2)            100.0%
                               =======               =====             =======               =====
</TABLE>
----------

(1)   Excludes $207 million and $200 million par amount outstanding assumed by
      FSA under reinsurance agreements at December 31, 1999 and 1998,
      respectively.

(2)   Excludes $926 million and $1,044 million par amount outstanding assumed by
      FSA under reinsurance agreements at December 31, 1999 and 1998,
      respectively.


                                       6
<PAGE>

Insurance in Force

      FSA insures a variety of asset-backed obligations, including obligations
backed by residential mortgage loans, auto loans, other consumer receivables,
corporate bonds, bank loans, government debt and multifamily mortgage loans.
Asset-backed obligations insured by FSA include synthetic obligations such as
credit default swaps structured to have risks similar to more traditional forms
of asset-backed structures. FSA has insured a broad array of municipal
obligations. FSA has also insured investor-owned utility first mortgage bonds
and sale/leaseback obligation bonds. In 1990, FSA ceased writing insurance
backed by commercial mortgage loans, and today retains only minor net insurance
in force in that sector. FSA has also insured obligations of financial
institutions and, on a short-term basis, obligations of highly rated corporate
obligors.

      FSA has selectively expanded its insured portfolio in a manner intended to
achieve diversification. At December 31, 1999, FSA and its subsidiaries had in
force 740 issues insuring approximately $64.4 billion in gross direct par amount
outstanding of asset-backed obligations and 5,419 issues insuring approximately
$109.6 billion in gross direct par amount outstanding of municipal obligations.
In addition, at December 31, 1999, FSA had assumed pursuant to certain
reinsurance contracts approximately $0.2 billion and $1.0 billion in par amount
outstanding on asset-backed and municipal obligations, respectively, resulting
in a total gross par amount outstanding of approximately $175.2 billion. At such
date, the total net par amount outstanding, determined by reducing the gross par
amount outstanding to reflect reinsurance ceded of approximately $45.3 billion,
was approximately $129.9 billion. Net par data does not distinguish between
quota share and first loss reinsurance. In light of FSA's substantial use of
first loss reinsurance in the asset-backed sector, net par data tends to
overstate FSA's net risk exposure. At December 31, 1999, the weighted average
life of the direct principal insured on these policies was approximately five
and thirteen years, respectively, for asset-backed and municipal obligations.

Asset-Backed Obligations

      FSA's insured portfolio of asset-backed obligations is divided into six
major categories:

      Residential Mortgage Loans. Obligations primarily backed by residential
mortgage loans generally take the form of conventional pass-through certificates
or pay-through debt securities, but also include other structured products.
Residential mortgage loans backing these insured obligations include closed-end
first mortgage loans and closed- and open-end second mortgage loans or home
equity loans on one-to-four family residential properties, including
condominiums and cooperative apartments.

      Consumer Receivables. Obligations primarily backed by consumer receivables
include conventional pass-through and pay-through securities as well as more
highly structured transactions. Consumer receivables backing these insured
obligations include automobile loans and leases, manufactured housing loans and
credit card receivables.

      Government Securities. Obligations primarily backed by government
securities include insured investment funds that invest in government securities
and insured bonds backed by letters of credit or repurchase agreements
collateralized by government securities. Government securities include full
faith and credit obligations of the United States and obligations of public
agencies and government sponsored enterprises of the United States, such as the
Federal National Mortgage Association ("FNMA") and the Federal Home Loan
Mortgage Corporation ("Freddie Mac"), as well as obligations of non-U.S.
sovereigns.

      Pooled Corporate Obligations. Obligations primarily backed by pooled
corporate obligations include obligations collateralized by corporate debt
securities or corporate loans and obligations backed by cash flow or market
value of non-consumer indebtedness, and include "collateralized bond
obligations" and "collateralized loan obligations". Corporate obligations
include corporate bonds, bank loan participations, trade receivables, franchise
loans and equity securities.

      Investor-Owned Utility Obligations. Obligations backed by investor-owned
utilities include, most commonly, first mortgage bond obligations of for-profit
electric or water utilities providing retail, industrial and commercial service,
and also include sale-leaseback obligation bonds supported by such entities. In
each case, these bonds are secured by a mortgage on property owned by or leased
to an investor-owned utility.

      Other Asset-Backed Obligations. Other asset-backed obligations insured by
FSA include bonds or other securities backed by a combination of assets that
include elements of more than one of the categories set forth above.


                                       7
<PAGE>

Municipal Obligations

      FSA's insured portfolio of municipal obligations is divided into seven
major categories:

      General Obligation Bonds. General obligation bonds are issued by states,
their political subdivisions and other municipal issuers, and are supported by
the general obligation of the issuer to pay from available funds and by a pledge
of the issuer to levy taxes sufficient in an amount to provide for the full
payment of the bonds to the extent other available funds are insufficient.

      Housing Revenue Bonds. Housing revenue bonds include both multifamily and
single family housing bonds, with multi-tiered security structures based on the
underlying mortgages, reserve funds, and various other features such as Federal
Housing Administration or private mortgage insurance, bank letters of credit,
first loss guaranties, and, in some cases, the general obligation of the issuing
housing agency or a state's "moral obligation" (that is, not a legally binding
commitment) to make up deficiencies.

      Municipal Utility Revenue Bonds. Municipal utility revenue bonds include
obligations of all forms of municipal utilities, including electric, water and
sewer utilities. Insurable utilities may be organized as municipal enterprise
systems, authorities or joint-action agencies.

      Health Care Revenue Bonds. Health care revenue bonds include both
long-term maturities for capital construction or improvements of health care
facilities and medium-term maturities for equipment purchase, and include both
secured and unsecured obligations of individual hospitals and health care
systems.

      Tax-Supported (Non-General Obligation) Bonds. Tax-supported (non-general
obligation) bonds include a variety of bonds that, though not general
obligations, are supported by the taxing ability of the issuer, such as
tax-backed revenue bonds and lease revenue bonds. Tax-backed revenue bonds may
be secured by a first lien on pledged tax revenues, such as those from special
taxes, including those on retail sales and gasoline, or from tax increments (or
tax allocations) generated by growth in property values within a district. FSA
also insures bonds secured by special assessments, levied against property
owners, which benefit from covenants by the district to levy, collect and
enforce collections and to foreclose on delinquent properties. Lease revenue
bonds or certificates of participation (COPs) may be secured by long-term
obligations or by lease obligations subject to annual appropriation. The
financed project is generally real property or equipment that, in the case of
annual appropriation leases, FSA deems to serve an essential public purpose
(e.g., schools, prisons, courts) or, in the case of long-term leases, is
insulated from the risk of abatement resulting from nontenantability.

      Transportation Revenue Bonds. Transportation revenue bonds include a wide
variety of revenue-supported bonds, such as bonds for airports, ports, tunnels,
parking facilities, toll roads and toll bridges.

      Other Municipal Bonds. Other municipal bonds insured by FSA include
college and university revenue bonds, moral obligation bonds, resource recovery
bonds and debt issued, guarantied or otherwise supported by non-domestic
national or local governmental entities.

      A summary of FSA's insured portfolio at December 31, 1999 is shown below.
Please note that exposure amounts are expressed net of reinsurance but do not
distinguish between quota share reinsurance and first loss reinsurance. In
recent years, FSA has tended to employ quota share reinsurance in the municipal
sector and first loss reinsurance in the asset-backed sector.


                                       8
<PAGE>

                Summary of Insured Portfolio at December 31, 1999

<TABLE>
<CAPTION>
                                         Number                                      Percent
                                           of          Net Par           Net          of Net
                                        Issues in       Amount         Par and       Par and
                                          Force       Outstanding      Interest      Interest
                                          -----       -----------      --------      --------
                                                        (dollars in millions)
<S>                                        <C>         <C>             <C>              <C>
Asset-backed obligations
  Residential mortgages ..........          356        $ 16,663        $ 21,977         11.3%
  Consumer receivables ...........          148          14,954          16,447          8.4
  Government securities ..........           32             642             975          0.5
  Pooled corporate obligations ...           81          10,991          15,012          7.7
  Investor-owned utility
    obligations ..................           32             548           1,240          0.6
  Other asset-backed obligations .            9             155             192          0.1
  International obligations ......           82           6,762           9,043          4.6
                                          -----        --------        --------        -----
    Total asset-backed obligations          740          50,715          64,886         33.2
                                          -----        --------        --------        -----
Municipal obligations
  General obligation bonds .......        3,259          30,742          47,361         24.2
  Housing revenue bonds ..........          178           2,620           5,021          2.6
  Municipal utility revenue bonds           599          11,293          18,831          9.6
  Health care revenue bonds ......          143           5,950          10,593          5.4
  Tax-supported (non-general
    obligation) bonds ............          684          17,646          29,540         15.1
  Transportation revenue bonds ...           64           3,367           6,205          3.2
  Other municipal bonds ..........          461           6,199          10,038          5.1
  International obligations ......           31           1,406           3,096          1.6
                                          -----        --------        --------        -----
    Total municipal obligations ..        5,419          79,223         130,685         66.8
                                          -----        --------        --------        -----
        Total ....................        6,159        $129,938        $195,571        100.0%
                                          =====        ========        ========        =====
</TABLE>

Obligation Type

      The table below sets forth the relative percentages of net par amount
written of obligations insured by FSA by obligation type during each of the last
five years:

                 Annual New Business Insured by Obligation Type

<TABLE>
<CAPTION>
                                                    Year Ended December 31,
                                            ------------------------------------
                                            1999    1998    1997    1996    1995
                                            ----    ----    ----    ----    ----
<S>                                          <C>     <C>     <C>     <C>     <C>
Asset-backed obligations
  Residential mortgages ................     14%     16%     19%     28%     26%
  Consumer receivables .................     20      16      23      24      29
  Government securities ................      0       0       2       1       0
  Pooled corporate obligations .........     14       9       3       1      10
  Investor-owned utility
    obligations ........................      0       0       0       0       0
  Other asset-backed obligations .......      0       1       0       1       1
  International obligations ............     11       2       8       3       0
                                            ---     ---     ---     ---     ---
    Total asset-backed
    obligations ........................     59      44      55      58      66
                                            ---     ---     ---     ---     ---
Municipal obligations
  General obligations bonds ............     19      22      18      20      11
  Housing revenue bonds ................      2       2       1       1       2
  Municipal utility revenue bonds ......      5       9       2       4       4
  Health care revenue bonds ............      2       6       4       2       3
  Tax-supported (non-general
    obligation) bonds ..................      8      10      10       9       6
  Transportation revenue bonds .........      2       2       2       1       6
  Other municipal bonds ................      3       5       6       4       2
  International bonds ..................      0       0       2       1       0
                                            ---     ---     ---     ---     ---
    Total municipal obligations ........     41      56      45      42      34
                                            ---     ---     ---     ---     ---
        Total ..........................    100%    100%    100%    100%    100%
                                            ===     ===     ===     ===     ===
</TABLE>


                                       9
<PAGE>

Terms to Maturity

      The table below sets forth the estimated terms to maturity of FSA's
policies at December 31, 1999 and 1998:

        Estimated Terms to Maturity of Net Par of Insured Obligations(1)

<TABLE>
<CAPTION>
                                  December 31, 1999            December 31, 1998
                                ---------------------       ----------------------
                                                (in millions)
      Estimated                 Asset-                      Asset-
   Term to Maturity             Backed      Municipal       Backed       Municipal
   ----------------             ------      ---------       ------       ---------
<S>                            <C>           <C>           <C>           <C>
0 to 5 Years ...........       $10,272       $ 3,351       $ 8,468       $ 2,756
5 to 10 Years ..........        13,911         8,742         7,516         7,495
10 to 15 Years .........         8,956        15,441         5,661        12,427
15 to 20 Years .........           814        24,711           670        20,265
20 Years and Above .....        16,762        26,978        15,308        24,107
                               -------       -------       -------       -------
  Total ................       $50,715       $79,223       $37,623       $67,050
                               =======       =======       =======       =======
</TABLE>

(1)   Based on estimates made by the issuers of the insured obligations as of
      the original issuance dates of such obligations. Actual maturities could
      differ from contractual maturities because borrowers have the right to
      call or prepay certain obligations with or without call or prepayment
      penalties.

Issue Size

The tables below set forth information with respect to the original net par
amount of insurance written per issue insured by FSA at December 31, 1999:

              Asset-Backed -- Original Net Par Amount Per Issue(1)

<TABLE>
<CAPTION>
                                                                                Percent of
                                                 Percent of                       Total
                                                   Total         Net Par         Net Par
     Original                      Number         Number         Amount          Amount
   Net Par Amount               of Policies      of Issues     Outstanding     Outstanding
   --------------               -----------      ---------     -----------     -----------
                                                 (dollars in millions)
<S>                               <C>              <C>          <C>              <C>
Less than $10 million........       502             34.2%       $   822            1.6%
$10 to $25 million...........       182             12.4          1,481            2.9
$25 to $50 million...........       166             11.3          1,650            3.3
$50 million or greater.......       619             42.1         46,555           92.2
                                  -----            -----        -------          -----
  Total......................     1,469            100.0%       $50,508          100.0%
                                  =====            =====        =======          =====
</TABLE>

----------
(1)   Does not include $207 million net par amount outstanding assumed by FSA
      and its subsidiaries under reinsurance agreements.

                Municipal -- Original Net Par Amount Per Issue(1)

<TABLE>
<CAPTION>
                                                                          Percent of
                                                Percent of                   Total
                                                  Total        Net Par      Net Par
     Original                        Number      Number        Amount       Amount
   Net Par Amount                 of Policies   of Issues    Outstanding  Outstanding
   --------------                 -----------   ---------    -----------  -----------
                                                (dollars in millions)
<S>                                  <C>         <C>         <C>          <C>
Less than $10 million .........       7,773       75.4%      $20,996       26.8%
$10 to $25 million ............       1,478       14.3        15,013       19.2
$25 to $50 million ............         540        5.2        12,038       15.4
$50 million or greater ........         524        5.1        30,250       38.6
                                     ------      -----       -------      -----
  Total .......................      10,315      100.0%      $78,297      100.0%
                                     ======      =====       =======      =====
</TABLE>

----------
(1)   Does not include $926 million net par amount outstanding assumed by FSA
      and its subsidiaries under reinsurance agreements.


                                       10
<PAGE>

Geographic Concentration

      In its asset-backed business, FSA considers geographic concentration as a
factor in underwriting insurance covering securitizations of asset pools such as
residential mortgage loans or consumer receivables. However, after the initial
issuance of an insurance policy relating to such securitizations, the geographic
concentration of the underlying assets may change over the life of the policy.
In addition, in writing insurance for other types of asset-backed obligations,
such as securities primarily backed by government or corporate debt, geographic
concentration is not considered to be a significant credit factor given other
more relevant measures of diversification such as issuer or industry
diversification.

      FSA seeks to maintain a diversified portfolio of insured municipal
obligations designed to spread its risk across a number of geographic areas. The
table below sets forth those jurisdictions in which municipalities issued an
aggregate of 2% or more of FSA's net par amount outstanding of insured municipal
securities:

                                    Municipal
                        Insured Portfolio by Jurisdiction
                              at December 31, 1999

<TABLE>
<CAPTION>
                                                                        Percent of
                                                                           Total
                                                        Net Par        Municipal Net
                                        Number          Amount          Par Amount
Jurisdiction                          of Issues       Outstanding       Outstanding
------------                          ---------       -----------       -----------
                                                 (dollars in millions)
<S>                                     <C>             <C>               <C>
California ..................             575           $11,543            14.6%
New York ....................             428             7,006             8.8
Pennsylvania ................             403             5,509             7.0
Texas .......................             469             5,095             6.4
Florida .....................             147             4,696             5.9
New Jersey ..................             317             4,444             5.6
Illinois ....................             420             4,103             5.2
Massachusetts ...............             132             2,568             3.2
Michigan ....................             274             2,543             3.2
Wisconsin ...................             298             2,184             2.8
Washington ..................             167             1,736             2.2
All other states ............           1,758            26,390            33.3
Non-U.S .....................              31             1,406             1.8
                                        -----           -------           -----
    Total ...................           5,419           $79,223           100.0%
                                        =====           =======           =====
</TABLE>

Issuer Concentration

      FSA has adopted underwriting and exposure management policies designed to
limit the net par insured or net retained credit gap for any one credit. Credit
gap is a concept employed by Standard & Poor's Ratings Services to measure the
at-risk amount (worst case risk) on an insured exposure. FSA has also
established procedures to ensure compliance with any applicable regulatory
single-risk limit with respect to bonds insured by it. In many cases, FSA uses
reinsurance to limit net exposure to any one credit. At December 31, 1999,
insurance of asset-backed obligations constituted 39.0% of FSA's net par
outstanding and insurance of municipal obligations constituted 61.0% of FSA's
net par outstanding. At such date, FSA's ten largest net insured asset-backed
transactions represented $7.5 billion, or 5.8%, of its total net par amount
outstanding, and FSA's ten largest net insured municipal credits represented
$4.1 billion, or 3.2%, of its total net par amount outstanding. In light of
FSA's substantial use of first loss reinsurance in the asset-backed sector, net
par data tends to overstate FSA's net risk exposure. For purposes of the
foregoing, different issues of asset-backed securities by the same sponsor have
not been aggregated. FSA has, however, adopted underwriting policies
establishing single risk guidelines applicable to asset-backed securities of the
same sponsor. FSA is also subject to certain regulatory limits and rating agency
guidelines on exposures to single credits.

Credit Underwriting Guidelines, Standards and Procedures

      Financial guaranty insurance written by FSA relies on an assessment of the
adequacy of various payment sources to meet debt service or other obligations in
a specific transaction without regard to premiums paid or income from investment
of premiums. FSA's underwriting policy is to insure asset-backed and municipal
obligations that it


                                       11
<PAGE>

determines are investment grade without the benefit of FSA's insurance. To this
end, each policy written or reinsured by FSA is designed to meet the general
underwriting guidelines and specific standards for particular types of
obligations approved by its Board of Directors. In addition, the Company's Board
of Directors has established an Underwriting Committee which periodically
reviews completed transactions to ensure conformity with underwriting guidelines
and standards.

      FSA's underwriting guidelines for asset-backed obligations are premised on
the concept of multiple layers of protection, and vary by obligation type in
order to reflect different structures and credit support. In this regard,
asset-backed obligations insured by FSA are generally issued in structured
transactions and backed by pools of assets such as consumer or trade
receivables, residential mortgage loans, securities or other assets having an
ascertainable cash flow or market value. In addition, FSA seeks to insure
asset-backed obligations that generally provide for one or more forms of
overcollateralization (such as excess collateral value, excess cash flow or
"spread," or reserves) or third-party protection (such as bank letters of
credit, guarantees, net worth maintenance agreements, indemnity agreements or
reinsurance agreements). This overcollateralization or third-party protection
need not indemnify FSA against all loss, but is generally intended to assume the
primary risk of financial loss. Asset-backed obligations insured by FSA also
often benefit from self-adjusting mechanisms, such as cash traps that take
effect upon failure to satisfy performance based triggers. Overcollateralization
or third-party protection may not be required in transactions in which FSA is
insuring the obligations of certain highly rated issuers that typically are
regulated, have implied or explicit government support, or are short term, or in
transactions in which FSA is insuring bonds issued to refinance other bonds
insured by FSA as to which the issuer is or may be in default. FSA's general
policy has been to insure 100% of the principal, interest and other amounts due
in respect of asset-backed insured obligations rather than providing partial or
first loss coverage sufficient to convey a triple-A rating on the insured
obligations.

      FSA's underwriting guidelines for municipal obligations require that the
municipal obligor be rated investment grade by Moody's Investors Service, Inc.
("Moody's") or Standard & Poor's Ratings Services ("S&P") or, in the
alternative, such obligor is considered by FSA to be the equivalent of
investment grade. Where the municipal obligor is a governmental entity with
taxing power or providing an essential public service paid by taxes, assessments
or other charges, supplemental protections may be required if such taxes,
assessments or other charges are not projected to provide sufficient debt
service coverage. Where appropriate, the municipal obligor is required to
provide a rate or charge covenant and a pledge of additional security (e.g.,
mortgages on real property, liens on equipment or revenue pledges) to secure the
obligation.

      The rating agencies participate to varying degrees in the underwriting
process. Each asset-backed obligation insured by FSA is reviewed prior to
issuance by both S&P and Moody's to evaluate the risk proposed to be insured. In
the case of municipal obligations, prior rating agency review is a function of
the type of the insured obligation and the risk elements involved. In addition,
substantially all transactions insured by FSA are reviewed by at least one of
the major rating agencies after issuance to confirm continuing compliance with
rating agency standards. The independent review of FSA's underwriting practices
performed by the rating agencies further strengthens the underwriting process.

      The underwriting process that implements these underwriting guidelines and
standards is supported by FSA's professional staff of analysts, underwriting
officers, credit officers and attorneys. Moreover, the approval of senior
management is required for all transactions.

      Each underwriting group in the Financial Guaranty Department has a senior
underwriting officer responsible for confirming that each transaction proposed
by the Financial Guaranty Department conforms to the underwriting guidelines and
standards. The evaluation by the senior underwriting officer is reviewed by the
chief underwriting officer for the particular sector. This review may take place
while the transaction is in its formative stages, thus facilitating the
introduction of further enhancements at a stage when the transaction is more
receptive to change.

      Final transaction approval is obtained from FSA's Management Review
Committee for asset-backed transactions and from FSA's Municipal Underwriting
Committee for municipal transactions. Approval is usually based upon both a
written and an oral presentation by the underwriting group to the respective
committee. The Management Review Committee is comprised of FSA's Chief Executive
Officer, President, Chief Operating Officer, Chief Underwriting Officer, Chief
International Underwriting Officer and General Counsel. The Municipal
Underwriting Committee is comprised of FSA's Chief Executive Officer, President,
Chief Operating Officer, Chief Municipal Underwriting Officer, an Associate
General Counsel for Municipal Transactions and the Managing Director for
Municipal Surveillance. Following approval, minor transaction modifications may
be approved by the


                                       12
<PAGE>

Chairs of the underwriting groups. Major changes require the concurrence of the
appropriate underwriting committee. Subject to applicable limits, secondary
market and partial maturity asset-backed transactions that meet certain credit
and return criteria may be approved by the Chief Underwriting Officer and the
head of the department involved, with a third signature from a member of the
Management Review Committee for larger transactions. Subject to applicable
limits, municipal transactions that meet certain credit and return criteria may
be approved by a committee composed of the Chief Municipal Underwriting Officer
or the Head of Municipal Surveillance, an Associate General Counsel for
Municipal Transactions and any one of certain designated managing directors of
the Municipal Department.

Corporate Research

      FSA's Corporate Research Department is comprised of a professional staff
under the direction of the Chief Underwriting Officer. The Corporate Research
Department is responsible for evaluating the credit of entities participating or
providing recourse in obligations insured by FSA. The Corporate Research
Department also provides analysis of relevant industry segments. Members of the
Corporate Research Department generally report their findings directly to the
appropriate underwriting committee in the context of transaction review and
approval.

Transaction Oversight and Transaction Services

      FSA's Transaction Oversight Departments and Transaction Services
Corporation ("TSC") are independent of the analysts and credit officers involved
in the underwriting process. The Asset-Backed and Municipal Transaction
Oversight Departments are responsible for monitoring the performance of
outstanding transactions. TSC, together with the Transaction Oversight
Departments, is responsible for taking remedial actions as appropriate. The
managing directors responsible for the transaction oversight and transaction
services functions report to an Oversight Committee comprised of the Chairman,
the General Counsel, the Chief Underwriting Officer, the Chief Municipal
Underwriting Officer and the Chief Financial Officer. The Transaction Oversight
Departments review each insured transaction to confirm compliance with
transaction covenants, monitor credit and other developments affecting
transaction participants and collateral, and determine the steps, if any,
required to protect the interests of FSA and the holders of FSA-insured
obligations. Reviews for asset-backed transactions typically include an
examination of reports provided by, and (as circumstances warrant) discussions
with, issuers, servicers, trustees and other transaction participants. Reviews
of asset-backed transactions often include servicer audits, site visits or
evaluations by third-party appraisers, engineers or other experts retained by
FSA. The Transaction Oversight Departments review each transaction to determine
the level of ongoing attention it will require. These judgments relate to
current credit quality and other factors, including compliance with reporting or
other requirements, legal or regulatory actions involving transaction
participants and liquidity or other concerns that may not have a direct bearing
on credit quality. Transactions with the highest risk profile are generally
subject to more intensive review and, if appropriate, remedial action. The
Transaction Oversight Departments and TSC work together with the Legal
Department and the Corporate Research Department in monitoring these
transactions, negotiating restructurings and pursuing appropriate legal
remedies.

Legal

      FSA's Legal Department is comprised of a professional staff of attorneys
and legal assistants under the direction of the General Counsel. The Legal
Department plays a major role in establishing and implementing legal
requirements and procedures applicable to obligations insured by FSA. Members of
the Legal Department serve on the Management Review Committee and the Municipal
Underwriting Committee, which provide final underwriting approval for
transactions. An attorney in the Legal Department works together with a
counterpart in the Financial Guaranty Department in determining the legal and
credit elements of each obligation proposed for insurance and in overseeing the
execution of approved transactions. Asset-backed obligations insured by FSA are
ordinarily executed with the assistance of outside counsel working closely with
the Legal Department. Municipal obligations insured by FSA are ordinarily
executed without employment of outside counsel. The Legal Department works
closely with the transaction oversight and transaction services functions in
addressing legal issues, rights and remedies, as well as proposed amendments,
waivers and consents, in connection with obligations insured by FSA. The Legal
Department is also responsible for domestic and international regulatory
compliance, reinsurance, secondary market transactions, litigation and other
matters.


                                       13
<PAGE>

Loss Reserves

      FSA establishes a case basis reserve for the present value of an estimated
loss when, in management's opinion, the likelihood of a future loss is probable
and determinable at the balance sheet date. A case basis reserve for a
particular insured obligation represents FSA's estimate of the present value of
the anticipated shortfall, net of reinsurance, between (i) scheduled payments on
the insured obligations plus anticipated loss adjustment expenses and (ii)
anticipated cash flow from and proceeds to be received on sales of any
collateral supporting the obligation and other anticipated recoveries. FSA
maintains reserves in an amount believed by its management to be sufficient to
pay the present value of its estimated ultimate liability for losses and loss
adjustment expenses with respect to obligations it has insured.

      In addition to its case basis reserves, FSA maintains a non-specific
general reserve in order to account for unidentified risks inherent in its
overall portfolio. FSA does not consider traditional actuarial approaches used
in the property/casualty insurance industry to be applicable to the
determination of its loss reserves because of the absence of a sufficient number
of losses in its financial guaranty insurance activities and in the financial
guaranty industry generally to establish a meaningful statistical base. The
general reserve amount was calculated by applying a loss factor to the total net
par amount of FSA's insured obligations outstanding over the term of such
insured obligations and discounting the result at a risk-free rate. The loss
factor used for this purpose has been determined based upon an independent
rating agency study of bond defaults and FSA's portfolio characteristics and
history. FSA will, on an ongoing basis, monitor the general reserve and may
periodically adjust such reserve based on FSA's actual loss experience, its
future mix of business and future economic conditions. The general reserve is
available to be applied against future additions or accretions to existing case
basis reserves or to new case basis reserves to be established in the future. To
the extent that any such future additions to case basis reserves are applied
from the available general reserve, there will be no impact on the Company's
earnings for that period. To the extent that additions to case basis reserves
for any period exceed the remaining available general reserve or are not applied
from the general reserve, the excess will be charged against the Company's
earnings for that period. Any addition to the general reserve which results from
applying the loss factor to new par written or from replenishing amounts applied
against new case basis reserves will result in a charge to earnings at that
time. Amounts released from the general reserve as a result of the runoff of
existing net insurance in force may be applied against additions to the general
reserve required for new business written.

      The Company's liability for losses and loss adjustment expenses consists
of the case basis and general reserves. Activity in the liability for losses and
loss adjustment expenses is summarized as follows (in thousands):

<TABLE>
<CAPTION>
                                                                   Year Ended December 31,
                                                                   -----------------------
                                                            1999           1998           1997
                                                            ----           ----           ----
<S>                                                        <C>          <C>            <C>
Balance at January 1                                       $72,007      $ 75,417       $ 72,079

Less reinsurance recoverable                                 6,421        30,618         29,875
                                                           -------      --------       --------
Net balance at January 1                                    65,586        44,799         42,204

Incurred losses and loss adjustment expenses:
       Current year                                          8,575         8,049          5,400
       Prior years                                             254        (4,100)         3,756
Recovered (paid) losses and loss adjustment expenses:
       Current year                                             --            --             --
       Prior years                                           3,402        16,838         (6,561)
                                                           -------      --------       --------
Net balance December 31                                     77,817        65,586         44,799

Plus reinsurance recoverable                                 9,492         6,421         30,618
                                                           -------      --------       --------
     Balance at December 31                                $87,309      $ 72,007       $ 75,417
                                                           =======      ========       ========
</TABLE>

      During 1997, the Company increased its general reserve by $9.2 million, of
which $5.4 million was for originations of new business and $3.8 million was to
reestablish a portion of the general reserve that has been previously
transferred to case basis reserves. During 1997, the Company transferred $4.5
million to case basis reserves. Giving effect to these transfers, the general
reserve totaled $34.3 million at December 31, 1997.


                                       14
<PAGE>

      During 1998, the Company increased its general reserve by $3.9 million, of
which $8.1 million was for originations of new business offset by a $4.1 million
decrease in the amount needed to fund the general loss reserve primarily because
of recoveries on certain commercial mortgage transactions. During 1998, the
Company transferred $18.4 million to its general reserve from case basis
reserves due to those recoveries on commercial mortgage transactions. Also
during 1998, the Company transferred $9.4 million from its general reserve to
case basis reserves associated predominantly with certain consumer receivable
transactions. Giving effect to these transfers, the general reserve totaled
$47.3 million at December 31, 1998.

      During 1999, the Company increased its general reserve by $8.8 million for
originations, of which $8.6 million was for originations of new business and
$0.2 million was for the reestablishment of the general reserve. Also during
1999, the Company transferred to the general reserve $3.5 million representing
recoveries received on prior year transactions on prior-year transactions and
transferred from the general reserve to the case basis reserves $4.6 million.
Giving effect to these transfers, the general reserve totaled $55.0 million at
December 31, 1999.

      Reserves for losses and loss adjustment expenses are discounted at
risk-free rates for the general reserve and for the case basis reserves at rates
between 5.5% and 6.1%. The amount of discount taken was approximately $31.1
million, $28.6 million and $19.8 million at December 31, 1999, 1998 and 1997,
respectively.

      Since reserves are necessarily based on estimates and because of the
absence of a sufficient number of losses in its financial guaranty insurance
activities and in the financial guaranty insurance industry generally to
establish a meaningful statistical base, there can be no assurance that the case
basis reserves or the general reserve will be adequate to cover losses in FSA's
insured portfolio.

Competition and Industry Concentration

      FSA faces competition from both other providers of third party credit
enhancement and alternatives to third party credit enhancement. The majority of
asset-backed obligations and almost half of all municipal obligations are sold
without third party credit enhancement. Accordingly, each transaction proposed
to be insured by FSA must generally compete against an alternative execution
which does not employ third party credit enhancement. FSA also faces competition
from other monoline primary financial guaranty insurers, primarily Ambac
Assurance Corp. ("Ambac"), Financial Guaranty Insurance Company ("FGIC") and
MBIA Insurance Corp. ("MBIA"). FSA is the smallest of the major primary
financial guaranty insurers in terms of statutory capital. Traditional credit
enhancers such as bank letter of credit providers and mortgage pool insurers
also provide significant competition to FSA as providers of credit enhancement
for asset-backed obligations. While actions by securities rating agencies in
recent years have significantly reduced the number of triple-A rated banks that
can offer a product directly competitive with FSA's triple-A guaranty, and
risk-based capital guidelines applicable to banks have generally increased costs
associated with letters of credit that compete directly with financial guaranty
insurance, bank sponsored commercial paper conduits, bank letter of credit
providers and other credit enhancement, such as cash collateral accounts,
provided by banks, continue to provide significant competition to FSA. Recent
legislation may facilitate the direct participation by bank affiliates in the
U.S. insurance business, including the financial guaranty insurance business. In
addition, government sponsored entities, including FNMA and Freddie Mac, have
begun to compete with the monoline financial guaranty insurers in the
mortgage-backed and multifamily sectors.

      Insurance law generally restricts multiline insurance companies, such as
large property/casualty insurers and life insurers, from engaging in the
financial guaranty insurance business other than through separately capitalized
affiliates. Entry requirements include (i) assembling the group of experts
required to operate a financial guaranty insurance business, (ii) establishing
the triple-A claims-paying ability ratings with the credit rating agencies,
(iii) complying with substantial capital requirements, (iv) developing name
recognition and market acceptance with issuers, investment bankers and investors
and (v) organizing a monoline insurance company and obtaining insurance licenses
to do business in the applicable jurisdictions.

      FSA's net insurance in force is the outstanding principal, interest and
other amounts to be paid over the remaining life of all obligations insured by
FSA, net of ceded reinsurance and refunded bonds secured by United States
government securities held in escrow or other qualified collateral. Qualified
statutory capital, determined in accordance with statutory accounting
principles, is the aggregate of policyholders' surplus and contingency reserves
calculated in accordance with statutory accounting principles. Set forth below
are FSA's aggregate gross insurance in force, net insurance


                                       15
<PAGE>

in force, qualified statutory capital and leverage ratio (represented by the
ratio of its net insurance in force to qualified statutory capital) and the
average industry leverage ratio at the dates indicated. Net insurance data does
not distinguish between quota share reinsurance and first loss reinsurance. In
light of FSA's substantial use of first loss reinsurance in the asset-backed
sector, the data below may tend to overstate FSA's risk leverage in comparison
to its industry counterparts.

<TABLE>
<CAPTION>
                                                                         December 31,
                                                            ------------------------------------
                                                             1999           1998           1997
                                                                     (dollars in millions)
<S>                                                         <C>           <C>           <C>
Financial guaranty primary insurers, excluding FSA (1)
  Leverage ratio .....................................        N/A(2)         151:1         149:1

FSA
  Gross insurance in force ...........................      $271,964      $216,564      $158,020
  Net insurance in force .............................      $195,571      $159,995      $117,429
  Qualified statutory capital ........................      $  1,320      $  1,038      $    782
  Leverage ratio .....................................         148:1         154:1         150:1
</TABLE>

----------
(1)   Financial guaranty primary insurers for which data is included in this
      table are Ambac, Capital Markets Assurance Corporation (1997 only), FGIC
      and MBIA. Information relating to the financial guaranty primary insurers
      is derived from data from statutory accounting financial information
      publicly available from each insurer at December 31, 1998 and 1997.

(2)   Not available.

Reinsurance

      Reinsurance is the commitment by one insurance company, the "reinsurer,"
to reimburse another insurance company, the "ceding company," for a specified
portion of the insurance risks underwritten by the ceding company in
consideration for a portion of the premiums received. The ceding company
typically but not always receives ceding commissions to cover costs of business
generation. Because the insured party contracts for coverage solely with the
ceding company, the failure of the reinsurer to perform does not relieve the
ceding company of its obligation to the insured party under the terms of the
insurance contract.

Reinsurance Ceded

      FSA obtains reinsurance to increase its policy writing capacity, both on
an aggregate risk and a single risk basis, to meet state insurance regulatory,
rating agency and internal limits, diversify risks, reduce the need for
additional capital and strengthen financial ratios. At December 31, 1999, FSA
had reinsured approximately 26.0% of its direct principal amount outstanding.
Most of FSA's reinsurance is on a quota share or first-loss basis, with a small
portion being provided on an excess of loss basis. Reinsurance arrangements
typically require FSA to retain a minimum portion of the risks reinsured.

      FSA arranges reinsurance on both a facultative
(transaction-by-transaction) and treaty basis. Treaty reinsurance provides
coverage for a portion of the exposure from all qualifying policies issued
during the term of the treaty. In addition, FSA employs "automatic facultative"
reinsurance which permits FSA to apply reinsurance to transactions selected by
it subject to certain limitations. The reinsurer's participation in a treaty is
either cancelable annually upon 90 days' prior notice by either FSA or the
reinsurer or has a one-year term. In addition, the treaties are cancelable by
FSA upon specified financial deterioration of the reinsurer. As required by
applicable state law, reinsurance agreements may be subject to certain other
termination conditions.

      Treaties generally provide coverage for the full term of the policies
reinsured during the annual treaty period, except that, upon a financial
deterioration of the reinsurer and the occurrence of certain other conditions,
FSA generally has the right to reassume all of the business reinsured.

      FSA reinsures portions of its risks with affiliated and unaffiliated
reinsurers under quota share and first-loss treaties and on a facultative basis.
FSA's principal ceded reinsurance program consisted in 1999 of two quota share
treaties, a combination quota share and aggregate excess-of-loss treaty, four
first-loss treaties and seven automatic facultative facilities. One quota share
treaty covered all of FSA's approved regular lines of business, except U.S.
municipal obligation insurance. Under this treaty in 1999, FSA ceded 7.25% of
each covered policy, up to a


                                       16
<PAGE>

maximum of $14.5 million insured principal per policy. At its option, FSA could
have increased, and in certain instances did increase, the ceding percentage to
14.5%, up to $29.0 million of each covered policy. A second quota share treaty
covered FSA's U.S. municipal obligation insurance business. Under this treaty in
1999, FSA ceded 6.5% of each covered policy that is classified by FSA as
providing U.S. municipal bond insurance as defined by Article 69 of the New York
Insurance Law up to a limit of $17.3 million per single risk, which is defined
by revenue source. At its option, FSA could have increased, and in certain
instances did increase, the ceding percentage to 35%, up to $93.3 million per
single risk. These cession percentages under both treaties were reduced on
smaller-sized transactions. The combination quota share and aggregate
excess-of-loss treaty covers qualifying emerging market collateralized debt
obligations. This treaty reinsures (i) on a quota share basis 50% of such
transactions insured in 1999 and 2000 and (ii) on an aggregate excess-of-loss
basis 90% of FSA's net losses on qualifying transactions in excess of $50.0
million, up to a limit of liability of $200.0 million. The four first-loss
treaties applied to qualifying U.S. mortgage-backed, U.S. auto loan-backed, U.S.
multifamily housing and collateralized debt obligations. Under the seven
automatic facultative facilities in 1999, FSA at their option could allocate up
to a specified amount for each reinsurer (ranging from $4.0 million to $100.0
million depending on the reinsurer) for each transaction, subject to limits and
exclusions, in exchange for which FSA agreed to cede in the aggregate a
specified percentage of gross par insured by FSA. Each of the quota share
treaties and automatic facultative facilities allowed FSA to withhold a ceding
commission to defray its expenses. FSA also employed non-treaty quota share and
first-loss facultative reinsurance on various transactions in 1999.

      Primary insurers, such as FSA, are required to fulfill their obligations
to policyholders if reinsurers fail to meet their obligations. The financial
condition of reinsurers is important to FSA, and FSA endeavors to place its
reinsurance with financially strong reinsurers. FSA's treaty reinsurers at
December 31, 1999 were American Reinsurance Company, AXA Re Finance S.A.,
Capital Reinsurance Company, Employers Reinsurance Company, Enhance Reinsurance
Company, Tokio Marine, XL Insurance Ltd, XL Financial Assurance Ltd, and RAM
Reinsurance Co. Ltd. In 1999, five reinsurers participated in the asset-backed
quota share treaty, four reinsurers participated in the municipal quota share
treaty and seven reinsurers participated in the first-loss treaty.

      FSA, FSAIC, FSA Oklahoma and FSA International have entered into a quota
share reinsurance pooling agreement pursuant to which, after reinsurance
cessions to other reinsurers, the FSA companies share in the net retained risk
insured by each of these companies. Prior to November 1, 1998, FSA, FSAIC and
FSA Oklahoma shared the net retained risk in proportion to their policyholders'
surplus and contingency reserve ("Statutory Capital") as of December 31 of the
prior year (with the percentages adjusted commencing April 1 of each year)
through September 30, 1996 and each calendar quarter thereafter. Commencing
November 1, 1998, FSA Oklahoma ceased to be a party and FSA International became
a party to the agreement, with FSA International assuming 20% of the business
covered by the agreement during a "ramp-up" period subject to applicable single
risk limits. For transactions in the fourth quarter 1999 where FSA International
retained 20%, FSA's and FSAIC's shares were 59.16% and 20.84%, respectively. For
transactions in the fourth quarter of 1999 where FSA, FSAIC and FSA
International shared the risk in proportion to their Statutory Capital, the
respective shares were 69.15% for FSA, 24.37% for FSAIC and 6.48% for FSA
International. Following the ramp-up period, FSA, FSAIC and FSA International
will share in business covered by the agreement approximately in proportion to
their Statutory Capital at the end of the prior calendar quarter. FSA-UK and FSA
have entered into a quota share and stop loss reinsurance agreement pursuant to
which (i) FSA-UK reinsures with FSA its retention under its policies after third
party reinsurance based on an agreed-upon percentage that is substantially in
proportion to the policyholders' surplus and contingency reserve of FSA-UK to
the total policyholders' surplus and contingency reserves of FSA and its
subsidiary insurers (including FSA-UK) and (ii) subject to certain limits, FSA
is required to make payments to FSA-UK when FSA-UK's loss ratio and expense
ratio exceeds 100%. Under this agreement, FSA-UK ceded to FSA approximately 99%
of its retention after other reinsurance of its policies issued in 1999.

Rating Agencies

      The value of the insurance product sold by FSA is generally a function of
the "rating" applied to obligations insured by FSA. The insurance financial
strength, insurer financial strength and claims-paying ability, as the case may
be, of FSA and its operating insurance company subsidiaries is rated "Aaa" by
Moody's Investors Service, Inc. and "AAA" by Standard and Poor's Ratings
Services, Standard & Poor's (Australia) Pty. Ltd., Fitch IBCA, Inc. and Japan
Rating and Investment Information, Inc. Such ratings reflect only the views of
the respective rating agencies, are not recommendations to buy, sell or hold
securities and are subject to revision or withdrawal at any time by such rating
agencies. These rating agencies periodically review the business and financial
condition of FSA, focusing on the


                                       17
<PAGE>

insurer's underwriting policies and procedures and the quality of the
obligations insured. Each rating agency performs periodic assessments of the
credits insured by FSA, and the reinsurers and other providers of capital
support to FSA, to confirm that FSA continues to satisfy such rating agency's
capital adequacy criteria necessary to maintain FSA's "triple-A" rating. See
"Credit Underwriting Guidelines, Standards and Procedures" above. FSA's ability
to compete with other triple-A rated financial guarantors, and its results of
operations and financial condition, would be materially adversely affected by
any reduction in its ratings.

Insurance Regulatory Matters

General

      FSA is licensed to engage in insurance business in all 50 states, the
District of Columbia, Puerto Rico and the U.S. Virgin Islands. FSA is subject to
the insurance laws of the State of New York ("New York Insurance Law"), and is
also subject to the insurance laws of the other states in which it is licensed
to transact an insurance business. FSAIC and FSA Oklahoma are Oklahoma domiciled
insurance companies also licensed in New York and subject to the New York
Insurance Law. FSA and its domestic insurance company subsidiaries are required
to file quarterly and annual statutory financial statements in each jurisdiction
in which they are licensed, and are subject to statutory restrictions concerning
the types and quality of investments and the filing and use of policy forms and
premium rates. FSA's accounts and operations are subject to periodic examination
by the New York Superintendent of Insurance (the "New York Superintendent") (the
last such examination having been conducted in 1995 for the period ended
December 31, 1994) and other state insurance regulatory authorities.

      FSA International is a Bermuda domiciled insurance company subject to
applicable requirements of Bermuda law. FSA International maintains its
principal executive offices in Hamilton, Bermuda. FSA International does not
intend to transact business or establish a permanent place of business in the
United States or Europe. FSA-UK is a United Kingdom domiciled insurance company
subject to applicable requirements of English law. FSA-UK maintains its
principal executive offices in London, England. Pursuant to European Union
Directives, FSA-UK is generally authorized to write business out of its London
office in other member countries of the European Union subject to the
satisfaction of perfunctory registration requirements.

Domestic Insurance Holding Company Laws

      The Company and its domestic insurance company subsidiaries (FSA, FSAIC
and FSA Oklahoma) are subject to regulation under insurance holding company
statutes of New York and Oklahoma, where these respective insurers are
domiciled, as well as other jurisdictions where these companies are licensed to
do insurance business. The requirements of holding company statutes vary from
jurisdiction to jurisdiction but generally require insurance holding companies
and their insurance company subsidiaries to register and file certain reports
describing, among other information, their capital structure, ownership and
financial condition. The holding company statutes also require prior approval of
changes in control, of certain dividends and other intercorporate transfers of
assets and of transactions between insurance companies and their affiliates. The
holding company statutes generally require that all transactions with affiliates
be fair and reasonable and that those exceeding specified limits require prior
notice to or approval by insurance regulators.

      Under the insurance holding company laws in effect in New York and
Oklahoma, any acquisition of control of the Company, and thereby indirect
control of FSA, FSAIC and FSA Oklahoma, requires the prior approval of the New
York Superintendent and the Oklahoma Insurance Commissioner. "Control" is
defined as the direct or indirect power to direct or cause the direction of the
management and policies of a person, whether through the ownership of voting
securities, by contract or otherwise. Any purchaser of 10% or more of the
outstanding voting securities of a corporation is presumed to have acquired
control of that corporation and its subsidiaries, although the insurance
regulator may find that "control" in fact does or does not exist when a person
owns or controls either a lesser or greater amount of voting securities.

New York Financial Guaranty Insurance Law

      Article 69 ("Article 69") of the New York Insurance Law, a comprehensive
financial guaranty insurance statute, governs all financial guaranty insurers
licensed to do business in New York, including FSA. This statute limits the
business of financial guaranty insurers to financial guaranty insurance and
related lines (such as surety).


                                       18
<PAGE>

      Article 69 requires that financial guaranty insurers maintain a special
statutory accounting reserve called the "contingency reserve" to protect
policyholders against the impact of excessive losses occurring during adverse
economic cycles. Article 69 requires a financial guaranty insurer to provide a
contingency reserve (i) with respect to policies written prior to July 1, 1989
in an amount equal to 50% of earned premiums and (ii) with respect to policies
written on and after July 1, 1989, quarterly on a pro rata basis over a period
of 20 years for municipal bonds and 15 years for all other obligations, in an
amount equal to the greater of 50% of premiums written for the relevant category
of insurance or a percentage of the principal guarantied, varying from 0.55% to
2.50%, depending upon the type of obligation guarantied, until the contingency
reserve amount for the category equals the applicable percentage of net unpaid
principal. This reserve must be maintained for the periods specified above,
except that reductions by the insurer may be permitted under specified
circumstances in the event that actual loss experience exceeds certain
thresholds or if the reserve accumulated is deemed excessive in relation to the
insurer's outstanding insured obligations. Financial guaranty insurers are also
required to maintain reserves for losses and loss adjustment expenses on a
case-by-case basis and reserves against unearned premiums.

      Article 69 establishes single risk limits for financial guaranty insurers
applicable to all obligations issued by a single entity and backed by a single
revenue source. For example, under the limit applicable to qualifying
asset-backed securities, the lesser of (i) the insured average annual debt
service for a single risk or (ii) the insured unpaid principal (reduced by the
extent to which the unpaid principal of the supporting assets exceeds the
insured unpaid principal) divided by nine, net of qualifying reinsurance and
collateral, may not exceed 10% of the sum of the insurer's policyholders'
surplus and contingency reserve, subject to certain conditions. Under the limit
applicable to municipal obligations, the insured average annual debt service for
a single risk, net of qualifying reinsurance and collateral, may not exceed 10%
of the sum of the insurer's policyholders' surplus and contingency reserve. In
addition, insured principal of municipal obligations attributable to any single
risk, net of qualifying reinsurance and collateral, is limited to 75% of the
insurer's policyholders' surplus and contingency reserve. Single risk limits are
also specified for other categories of insured obligations, and generally are
more restrictive than those listed for asset-backed or municipal obligations.

      Article 69 also establishes aggregate risk limits on the basis of
aggregate net liability insured as compared to statutory capital. "Aggregate net
liability" is defined as outstanding principal and interest of guarantied
obligations insured, net of qualifying reinsurance and collateral. Under these
limits, policyholders' surplus and contingency reserves must not be less than a
percentage of aggregate net liability equal to the sum of various percentages of
aggregate net liability for various categories of specified obligations. The
percentage varies from 0.33% for certain municipal obligations to 4% for certain
non-investment grade obligations.

Dividend Restrictions

      FSA's ability to pay dividends is dependent upon FSA's financial
condition, results of operations, cash requirements, rating agency approval and
other related factors and is also subject to restrictions contained in the
insurance laws and related regulations of New York and other states. Under New
York insurance law, FSA may pay dividends out of earned surplus, provided that,
together with all dividends declared or distributed by FSA during the preceding
12 months, the dividends do not exceed the lesser of (i) 10% of policyholders'
surplus as of its last statement filed with the New York Superintendent of
Insurance or (ii) adjusted net investment income during this period. FSA paid no
dividends during 1999. Based upon FSA's statutory statements for the quarter
ended December 31, 1999, the maximum amount available for payment of dividends
by FSA without regulatory approval over the following 12 months is approximately
$82.0 million.

Financial Guaranty Insurance Regulation in Other Jurisdictions

      FSA is subject to laws and regulations of jurisdictions other than the
State of New York concerning the transaction of financial guaranty insurance.
The laws and regulations of these other jurisdictions are generally not more
stringent in any material respect than the New York Insurance Law.

      The Bermuda Ministry of Finance regulates FSA International. The United
Kingdom Financial Services Authority regulates FSA-UK. Pursuant to European
Union Directives, FSA-UK has been authorized to provide financial guaranty
insurance for transactions in France and Ireland from its home office in the
United Kingdom. FSA has received a determination from the Australian Insurance
and Superannuation Commissioner that the financial guaranties issued by it with
respect to Australian transactions do not constitute insurance for which a
license is


                                       19
<PAGE>

required. The Monetary Authority of Singapore regulates activities of FSA's
Singapore office, which is in the process of obtaining a license to operate as a
branch office in Singapore.

Investment Portfolio

      FSA's primary objective in managing its investment portfolio is generation
of an optimal level of after-tax investment income while preserving capital and
maintaining adequate liquidity. FSA's investment portfolio is managed primarily
by unaffiliated professional investment managers, with a portion of its
municipal portfolio managed by its affiliate, FSA Portfolio Management. To
accomplish its objectives, the Company has established guidelines for eligible
fixed income investments by FSA, requiring that at least 95% of such investments
must be rated at least "single A" at acquisition and the overall portfolio must
be rated "double A" on average. Fixed income investments falling below the
minimum quality level are disposed of at such time as management shall deem
appropriate. For liquidity purposes, the Company's policy is to invest FSA
assets in investments which are readily marketable with no legal or contractual
restrictions on resale. Eligible fixed income investments include U.S. Treasury
and agency obligations, corporate bonds, tax-exempt bonds and mortgage
pass-through instruments. Formerly, the Company and FSA also invested a small
portion of their portfolios in equity securities and/or convertible debt
securities. In late 1999, the Company disposed of a majority of such investments
due in part to adverse credit for such investments under rating agency capital
models. The Company has investments in various strategic partners, including XL,
XLFA and Fairbanks Capital Holding Corp., which owns a residential mortgage loan
servicer. In addition, the Company has from time to time invested in sponsors
of, or interests in, transactions insured or proposed to be insured by FSA, none
of which investments is material to the Company.

      The weighted average maturity of the Company's investment portfolio at
December 31, 1999 was approximately 13.8 years. The Company's current investment
strategy is to invest in quality readily marketable instruments of intermediate
average duration so as to generate stable investment earnings with minimal
market value or credit risk.

      The following tables set forth certain information concerning the
investment portfolio of the Company:

                         Investment Portfolio by Rating
                             at December 31, 1999(1)

                                               Percent of
                                               Investment
            Rating                             Portfolio
            -------------------            -------------------
            AAA(2)............                    72.3%
            AA ...............                    18.5
            A  ...............                     8.8
            BBB...............                     0.1
            Other.............                     0.3
                                                 -----
                                                 100.0%
                                                 =====
----------
(1)   Ratings are for the long-term fixed income portfolio (98.9% of the entire
      investment portfolio as of December 31, 1999) and are based on the higher
      of Moody's or S&P ratings available at December 31, 1999.

(2)   Includes U.S. Treasury and agency obligations, which comprised 19.0% of
      the total portfolio at December 31, 1999.


                                       20
<PAGE>

                             Summary of Investments

<TABLE>
<CAPTION>
                                                                 December 31,
                                 -----------------------------------------------------------------------------
                                           1999                      1998                         1997
                                 ----------------------      ---------------------       ---------------------
                                               Weighted                   Weighted                    Weighted
                                 Amortized      Average       Amortized    Average        Amortized    Average
    Investment Category             Cost        Yield(1)        Cost        Yield(1)        Cost        Yield(1)
    -------------------          ----------     -------       ---------     ------       ----------     -----
                                                             (dollars in thousands)
<S>                              <C>             <C>         <C>             <C>         <C>             <C>
Long-term investments:
Taxable bonds .............      $  730,562      6.49%       $  613,324      5.96%       $  453,437      6.52%
Tax-exempt bonds ..........       1,189,115      5.54         1,041,718      5.26           777,042      5.58
                                 ----------                  ----------                  ----------
     Total long-term
     investments ..........       1,919,677      5.90         1,655,042      5.51         1,230,479      5.92
Short-term investments(2) .         205,093      5.43            74,675      4.96           110,308      6.22
                                 ----------                  ----------                  ----------
     Total investments(3) .      $2,124,770      5.88%       $1,729,717      5.49%       $1,340,787      5.95%
                                 ==========                  ==========                  ==========
</TABLE>

----------
(1)   Yields are stated on a pre-tax basis.

(2)   Includes taxable and tax-exempt investments and excludes cash equivalents
      of $58.7 million, $23.9 million and $22.6 million, respectively.

(3)   Excludes stocks at cost of $30.1 million, $64.3 million and $29.4 million,
      respectively.

                      Investment Portfolio by Security Type

<TABLE>
<CAPTION>
                                                                December 31,
                               ----------------------------------------------------------------------------
                                        1999                        1998                      1997
                               ---------------------      ----------------------     ----------------------
                                             Weighted                   Weighted                  Weighted
                               Amortized     Average       Amortized     Average      Amortized    Average
   Investment Category            Cost        Yield(1)       Cost        Yield(1)       Cost       Yield(1)
   -------------------         ----------    -------      ----------     -------     ----------    -------
                                                          (dollars in thousands)
<S>                            <C>             <C>        <C>             <C>        <C>             <C>
U.S. government
    securities ..........      $   80,446      5.71%      $  148,669      5.14%      $  122,817      6.20%
Mortgage-backed
    securities ..........         384,349      6.86          266,770      6.54          195,567      6.62
Municipal bonds .........       1,189,115      5.54        1,041,718      5.26          777,042      5.58
Asset-backed securities .          40,787      7.33           33,188      7.07           20,961      6.69
Corporate securities ....         222,703      6.04          164,697      5.34           66,014      5.72
Foreign securities ......           2,277      5.61               --        --           48,078      7.62
                               ----------                 ----------                 ----------
    Total fixed
    maturities ..........       1,919,677      5.90        1,655,042      5.51        1,230,479      5.92
Short-term investments(2)         205,093      5.43           74,675      4.96          110,308      6.22
                               ----------                 ----------                 ----------
    Total investments(3)       $2,124,770      5.88%      $1,729,717      5.49%      $1,340,787      5.95%
                               ==========                 ==========                 ==========
</TABLE>

----------
(1)   Yields are stated on a pre-tax basis.

(2)   Includes taxable and tax-exempt investments and excludes cash equivalents
      of $58.7 million, $23.9 million and $22.6 million, respectively.

(3)   Excludes stocks at cost of $30.1 million, $64.3 million and $29.4 million,
      respectively.

                     Distribution of Investments by Maturity

<TABLE>
<CAPTION>
                                                                                  December 31,
                                           ---------------------------------------------------------------------------------------
                                                     1999                             1998                           1997
                                           --------------------------    ----------------------------     ------------------------
                                                           Estimated                        Estimated                    Estimated
                                           Amortized        Market          Amortized        Market         Amortized      Market
   Investment Category                        Cost           Value            Cost            Value           Cost         Value
   -------------------                     ----------      ----------      ----------      ----------      ----------     --------
                                                                                 (in thousands)
<S>                                         <C>            <C>             <C>             <C>             <C>            <C>
Due in one year or less(1)...........       $ 211,175      $  211,115      $   75,677      $   75,681      $  114,317     $  114,315
Due after one year through
    five years ......................         189,461         188,584         137,094         139,642          70,283         70,007
Due after five years
    through ten years ...............         154,121         153,523         225,259         233,080         208,986        208,170
Due after ten years .................       1,144,877       1,089,465         991,729       1,030,156         730,673        766,912
Mortgage-backed securities ..........         384,349         375,460         266,770         270,500         195,567        197,753
Asset-backed securities .............          40,787          39,559          33,188          33,656          20,961         21,309
                                           ----------      ----------      ----------      ----------      ----------     ----------
    Total investments(2) ............      $2,124,770      $2,057,706      $1,729,717      $1,782,715      $1,340,787     $1,378,466
                                           ==========      ==========      ==========      ==========      ==========     ==========
</TABLE>

----------
(1)   Includes short-term investments in the amount of $205.1 million, $74.7
      million and $110.3 million at December 31, 1999, 1998 and 1997,
      respectively, but excludes cash equivalents of $58.7 million, $23.9
      million, and $22.6 million, respectively.

(2)   Excludes stocks at cost of $30.1 million, $64.3 million and $29.4 million,
      respectively.


                                       21
<PAGE>

                           Mortgage-Backed Securities
                  Cost and Market Value by Investment Category

<TABLE>
<CAPTION>
                                                        December 31, 1999
                                              --------------------------------------
                                                            Amortized     Estimated
          Investment Category                 Par Value       Cost      Market Value
          -------------------                 ---------       ----      ------------
                                                        (in thousands)
<S>                                           <C>           <C>           <C>
Pass-through securities--U.S. Government
    agency .............................      $284,671      $281,486      $275,247
CMO's--U.S. Government agency ..........        42,165        42,096        40,450
CMO's--non-agency ......................        60,865        60,767        59,763
                                              --------      --------      --------
    Total mortgage-backed securities ...      $387,701      $384,349      $375,460
                                              ========      ========      ========
</TABLE>

      The Company's investments in mortgage-backed securities consisted of
pass-through certificates and collateralized mortgage obligations ("CMO's")
which are secured by mortgage loans guarantied or insured by agencies of the
federal government. These securities are highly liquid with readily determinable
market prices. The Company also held triple-A rated CMO's which are not
guarantied by government agencies. Secondary market quotations are available for
these securities, although they are not as liquid as the government
agency-backed securities.

      At December 31, 1998, the Company held sequential pay CMO tranches and
Planned Amortization Classes of CMO's. The CMO's held at December 31, 1999 have
stated maturities ranging from 3 to 32 years, and expected average lives ranging
from 1 to 28 years based on anticipated prepayments of principal. None of the
Company's holdings of CMO's is subject to extraordinary interest rate
sensitivity. At December 31, 1999, the Company did not own any interest-only
stripped mortgage securities or inverse floating rate CMO tranches.

      Mortgage-backed securities differ from traditional fixed income bonds
because they are subject to prepayments at par value without penalty at the
borrower's option. Prepayment rates on mortgage-backed securities are influenced
primarily by the general level of prevailing interest rates, with prepayments
increasing when prevailing interest rates are lower than the rates on the
underlying mortgages. When prepayments occur, the proceeds must be re-invested
at then current market rates, which are generally below the yield on the prepaid
securities. Prepayments on mortgage-backed securities purchased at a premium to
par will result in a loss to the Company to the extent of the unamortized
premium.

Employees

      At December 31, 1999, the Company and its subsidiaries had 237 employees.
None of its employees are covered by collective bargaining agreements. The
Company considers its employee relations to be satisfactory.

Forward-Looking Statements

      The Company relies upon the safe harbor for forward looking statements
provided by the Private Securities Litigation Reform Act of 1995. This safe
harbor requires that the Company specify important factors that could cause
actual results to differ materially from those contained in forward-looking
statements made by or on behalf of the Company. Accordingly, forward-looking
statements by the Company and its affiliates are qualified by reference to the
following cautionary statements.

      In its filings with the SEC, reports to shareholders, press releases and
other written and oral communications, the Company from time to time makes
forward-looking statements. Such forward-looking statements include, but are not
limited to, (i) projections of revenues, income (or loss), earnings (or loss)
per share, dividends, market share or other financial forecasts, (ii) statements
of plans, objectives or goals of the Company or its management, including those
related to growth in adjusted book value per share or return on equity and (iii)
expected losses on, and adequacy of loss reserves for, insured transactions.
Words such as "believes", "anticipates", "expects", "intends" and "plans" and
similar expressions are intended to identify forward-looking statements but are
not the exclusive means of identifying such statements.

      The Company cautions that a number of important factors could cause actual
results to differ materially from the plans, objectives, expectations, estimates
and intentions expressed in forward-looking statements made by the Company.
These factors include: (i) changes in capital requirements or other criteria of
securities rating


                                       22
<PAGE>

agencies applicable to financial guaranty insurers in general or to FSA
specifically; (ii) competitive forces, including the conduct of other financial
guaranty insurers in general; (iii) changes in domestic or foreign laws or
regulations applicable to the Company, its competitors or its clients; (iv) an
economic downturn or other economic conditions (such as a rising interest rate
environment) adversely affecting transactions insured by FSA or its investment
portfolio; (v) inadequacy of loss reserves established by the Company; (vi)
temporary or permanent disruptions in cash flow on structured transactions
attributable to legal challenges to such structures; and (vii) downgrade or
default of one or more of FSA's reinsurers. The Company cautions that the
foregoing list of important factors is not exhaustive. In any event, such
forward-looking statements made by the Company speak only as of the date on
which they are made, and the Company does not undertake any obligation to update
or revise such statements as a result of new information, future events or
otherwise.

Item 2. Properties.

      The principal executive offices of the Company and FSA are located at 350
Park Avenue, New York, New York 10022. The principal executive offices, which
consist of approximately 63,000 square feet of office space, are under lease
agreements which expire in 2005. The Company's telephone number at its principal
executive offices is (212) 826-0100. FSA or its subsidiaries also maintain
leased office space in San Francisco, Dallas, Hamilton (Bermuda), London
(England), Madrid (Spain), Singapore, Sydney (Australia) and Tokyo (Japan). The
Company and its subsidiaries do not own any real property.

Item 3. Legal Proceedings.

      In the ordinary course of business, the Company and certain subsidiaries
have become party to certain litigation. The Company believes that none of these
matters, if decided against the Company, would have a material impact on the
Company's consolidated financial position, results of operations or cash flows.

Item 4. Submission of Matters to a Vote of Security Holders.

      No matters were submitted to a vote of the Company's shareholders during
the fourth quarter of 1999.


                                       23
<PAGE>

                                     Part II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.

      Information relating to the principal market on which the Company's common
stock is tradable, the high and low sales prices per share for each quarterly
period for the past two years and the frequency and amount of any cash dividends
declared in the past two years is set forth on page 48 of the Company's 1999
Annual Report to Shareholders and such information is incorporated herein by
reference. Information concerning restrictions on the payment of dividends is
set forth in Item 1 above under the caption "Insurance Regulatory Matters --
Dividend Restrictions." At February 18, 2000, there were approximately 4,600
holders of the Company's Common Stock, which is listed on the New York Stock
Exchange.

      During the fourth quarter of 1999, the Company sold 872,509 unregistered
shares of Common Stock in reliance upon an exemption from registration under the
Securities Act of 1933 (the "Act") pursuant to Section 4(2) of the Act. Those
unregistered shares were included in the December 1, 1999 sale of shares of the
Company's Common Stock to three of the Company's major shareholders, White
Mountains, Tokio Marine and XL, as shown in the table below.

<TABLE>
<CAPTION>
                   Number of     Number of
                 Unregistered    Registered    Total Number of
                    Shares         Shares          Shares
                 Purchased in   Purchased in    Purchased in    Aggregate Purchase
 Shareholder     December 1999  December 1999   December 1999         Price
 -----------     -------------  -------------   -------------         -----
<S>                  <C>          <C>             <C>            <C>
White Mountains      172,509        750,000         922,509      $ 50,000,000
Tokio Marine         700,000              0         700,000        37,940,000
XL                         0        461,255         461,255        25,000,000
                     -------      ---------       ---------      ------------
  Total              872,509      1,211,255       2,083,764      $112,940,000
</TABLE>

      The purchase price of $54.20 per share represented 97.5% of the average of
the high and low sale price of our common stock on the New York Stock Exchange
on October 29, 1999, the date on which a Special Committee of the Company's
Board of Directors approved the sale as part of a plan to raise approximately
$140 million through sales of the Company's Common Stock.

Item 6. Selected Financial Data.

      Selected financial data for the Company and its subsidiaries for each of
the last five years is set forth under the caption "Five-Year Financial Summary"
on page 16 of the Company's 1999 Annual Report to Shareholders. Such information
is incorporated herein by reference and should be read in conjunction with the
Consolidated Financial Statements and the Notes thereto contained on pages 26
through 44 of such Annual Report.

Item 7. Management's Discussion and Analysis of Financial Condition and Results
        of Operations.

      Management's Discussion and Analysis of Financial Condition and Results of
Operations is set forth under the caption "Management's Discussion and Analysis
of Financial Condition and Results of Operations" on pages 18 through 24 of the
Company's 1999 Annual Report to Shareholders. Such information is incorporated
herein by reference and should be read in conjunction with the Consolidated
Financial Statements and the Notes thereto contained on pages 26 through 44 of
such Annual Report.

Item 7A. Quantitative and Qualitative Disclosures About Market Risks.

      Quantitative and qualitative disclosures about market risks is set forth
under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Results of Operations - Market Risk" on pages 20 and
21 of the Company's 1999 Annual Report to Shareholders. Such information is
incorporated herein by


                                       24
<PAGE>

reference and should be read in conjunction with the Consolidated Financial
Statements and the Notes thereto contained on pages 25 through 44 of such Annual
Report.

Item 8. Financial Statements and Supplementary Data.

      The 1999 Consolidated Financial Statements, together with the Notes
thereto and the Report of Independent Accountants thereon, are set forth on
pages 25 through 44 of the Company's 1999 Annual Report to Shareholders. Such
information is incorporated herein by reference.

Item 9. Changes in and Disagreements with Accountants on Accounting and
        Financial Disclosure.

      None.


                                       25
<PAGE>

                                    Part III

Item 10. Directors and Executive Officers of the Registrant.

Directors

      The Company currently has 13 directors, each of whom is standing for
reelection at the 2000 Annual Meeting of Shareholders of the Company. The name,
age, positions and offices with the Company, if any, period of service as a
director of the Company, five-year employment history and other directorships,
if any, of publicly held corporations currently held by such person, for each
director are set forth below. There are no arrangements or understandings
between any such director and any other person pursuant to which he was or is to
be selected as a director or a nominee for director.

Terry L. Baxter
  Age 54  ............   Director of the Company since August 1999. Mr. Baxter
                         served as Executive Vice President of White Mountains
                         Insurance Group, Ltd. ("White Mountains") from 1999
                         until February 2000 and as President of White Mountains
                         Holdings, Inc., a subsidiary of White Mountains
                         ("WMH"), from 1997 to 1999. Mr. Baxter was Chairman of
                         the Board of Source One Services Corporation, a
                         subsidiary of White Mountains presently known as White
                         Mountains Services Corporation ("Source One"), from
                         1996 until 1997. He was the Managing Director of the
                         National Transportation Safety Board from 1990 to 1993,
                         and before that served as Assistant Director of the
                         United States Office of Management and Budget (OMB) and
                         Vice President of GEICO. He is a director of
                         Folksamerica Reinsurance Holdings, Inc., and Main
                         Street America Holdings, Inc.

Robert P. Cochran
  Age 50  ............   Chairman of the Board of Directors of the Company since
                         November 1997, and Chief Executive Officer and a
                         Director of the Company since August 1990. Mr. Cochran
                         served as President of the Company and FSA from August
                         1990 until November 1997. He has been Chief Executive
                         Officer of FSA since August 1990, Chairman of FSA since
                         July 1994, and a director of FSA since July 1988. Prior
                         to joining the Company in 1985, Mr. Cochran was
                         managing partner of the Washington, D.C. office of the
                         Kutak Rock law firm. Mr. Cochran is Chairman of the
                         Association of Financial Guaranty Insurors, as well as
                         a director of XL Financial Assurance Ltd, White
                         Mountains and WMH.

Robert N. Downey
  Age 64  ............   Director of the Company since August 1994. Mr. Downey
                         has been a senior director of Goldman Sachs & Co. since
                         1999. He was a limited partner since 1990, and a
                         general partner from 1976 until 1990, of Goldman, Sachs
                         & Co. At Goldman, Sachs & Co., Mr. Downey served as
                         head of the Municipal Bond Department and Vice Chairman
                         of the Fixed Income Division. Mr. Downey was a Director
                         of the Securities Industry Association from 1987
                         through 1991 and served as its Chairman in 1990 and
                         Vice Chairman in 1988 and 1989. He was also formerly
                         Chairman of the Municipal Securities Division of the
                         Public Securities Association (known today as the Bond
                         Market Association) and Vice Chairman of the Municipal
                         Securities Rulemaking Board.


 Anthony M. Frank
 Age 68...............   Director of the Company since February 1996. Mr. Frank
                         was a director of Capital Guaranty Corporation, which
                         the Company acquired in December 1995 ("CGC"), from
                         February 1994 until December 1995. He has been Chairman
                         and Founding Chairman of Belvedere Capital Partners,
                         General Partner of the California Community Financial
                         Institutions Fund, since 1994. He was Postmaster
                         General of the United States from 1988 to 1992 and
                         served as Chairman and Chief Executive Officer of First
                         Nationwide Bank from 1971 to 1988. Mr. Frank is a
                         director of Charles Schwab Inc.; Bedford Properties
                         Inc.; Irvine Apartment Communities, Inc.;


                                       26
<PAGE>

                         General American Investors, Inc.; Temple-Inland, Inc.;
                         Crescent Real Estate Equities; Cotelligent Group, Inc.;
                         and MDC Communications, Inc.

Fudeji Hama
  Age 51  ............   Director of the Company since August 1998. Mr. Hama has
                         been General Manager of the Financial Services
                         Department of Tokio Marine and Director of First
                         Chicago Tokio Marine Financial Products Ltd. since
                         1998. He previously served Tokio Marine as Deputy
                         General Manager of its Financial Planning Department
                         and Deputy General Manager of its Production
                         Department. Mr. Hama was Executive Vice President and
                         Chief Operating Officer of Tokio Marine MC Asset
                         Management Co., Ltd. from 1995 to 1998.

K. Thomas Kemp
  Age 59  ............   Director of the Company since August 1994. Mr. Kemp has
                         served as Deputy Chairman of White Mountains since
                         February 2000. He served as President and Chief
                         Executive Officer of White Mountains from October 1997
                         until February 2000, and has served in other executive
                         capacities with White Mountains and WMH since 1991. Mr.
                         Kemp was Vice President of Fireman's Fund Insurance
                         Company from 1990 to January 1991. Prior to joining
                         Fireman's Fund, Mr. Kemp was President of Resolute
                         Reinsurance Company. Mr. Kemp is a director of White
                         Mountains; Folksamerica Reinsurance Holdings, Inc.;
                         Eldorado Bancshares, Inc.; and Amlin plc.

David O. Maxwell
  Age 69  ............   Director of the Company since August 1994. Mr. Maxwell
                         was Chairman and Chief Executive Officer of Fannie Mae
                         from 1981 until his retirement in 1991. Mr. Maxwell is
                         a director of Potomac Electric Power Company (PEPCO),
                         and a member of the advisory boards of Corporate
                         Partners, L.P., Centre Partners II, L.P. and Centre
                         Partners III, L.P.

Sean W. McCarthy
  Age 41  ............   Director of the Company since February 1999. Mr.
                         McCarthy has been Executive Vice President of the
                         Company and Chief Operating Officer of FSA since
                         November 1997. He has been a Managing Director of FSA
                         since March 1989, head of its Financial Guaranty
                         Department since April 1993, Executive Vice President
                         of FSA since October 1999 and a director of FSA since
                         September 1993. Prior to joining FSA in 1988, Mr.
                         McCarthy was a Vice President of PaineWebber
                         Incorporated.

James M. Osterhoff
  Age 63  ............   Director of the Company since April 1992. Mr. Osterhoff
                         was Executive Vice President and Chief Financial
                         Officer of U S WEST, Inc. (now known as MediaOne Group,
                         Inc.) from December 1991 until his retirement in
                         September 1995. Prior to joining U S WEST, Inc., he was
                         Vice President--Finance and Chief Financial Officer of
                         Digital Equipment Corp., a computer manufacturer. Mr.
                         Osterhoff is a director of GenCorp.

James H. Ozanne
  Age 56..............   Vice Chairman of the Board of Directors since February
                         1998 and a Director of the Company since January 1990.
                         Mr. Ozanne is Chairman of Greenrange Partners. He was
                         Chairman of Source One from March 1997 to May 1999,
                         Vice Chairman of Source One from August 1996 until
                         March 1997, and a director of Source One from August
                         1996 to May 1999. He was President of Fund American
                         Enterprises, Inc. from March 1997 until December 1999.
                         He was Chairman and Director of Nations Financial
                         Holdings Corporation from January 1994 to January 1996.
                         He was President and Chief Executive Officer of U S
                         WEST Capital Corporation ("USWCC"; now known as
                         MediaOne Capital Corporation) from September 1989 until
                         December 1993. Prior to joining USWCC, Mr. Ozanne was
                         Executive Vice President of General Electric Capital
                         Corporation. He is a director of Basis 100 Inc.


                                       27
<PAGE>

Richard A. Post
  Age 41  ............   Director of the Company since April 1994. Mr. Post has
                         been Executive Vice President of MediaOne Group, Inc.
                         ("MediaOne") since June 1998, Chief Financial Officer
                         of MediaOne since January 1997 and President of MOCC
                         since August 1993. Mr. Post had previously served U S
                         WEST in a number of other positions, and has been a
                         director of a number of MediaOne-affiliated companies.

Roger K. Taylor
  Age 48  ............   Director of the Company since February 1995. Mr. Taylor
                         has been President of the Company since November 1997,
                         and Chief Operating Officer of the Company since May
                         1993. Mr. Taylor joined FSA in January 1990, and has
                         served FSA as its President since November 1997, a
                         director since January 1992 and a Managing Director
                         since January 1991. Prior to joining FSA, Mr. Taylor
                         was Executive Vice President of Financial Guaranty
                         Insurance Company, a financial guaranty insurer. Mr.
                         Taylor is a director of Fairbanks Capital Holding Corp.
                         and Preferred Mortgages Limited.

Howard M. Zelikow
  Age 65 .............   Director of the Company since February 1996. Mr.
                         Zelikow was a director of CGC from February 1994 until
                         December 1995. Mr. Zelikow has been a member of Kayne
                         Anderson Investment Management, Inc., an investment
                         management company, since 1988. Mr. Zelikow was Chief
                         Financial Officer and Executive Vice President of The
                         Progressive Corporation from 1976 to 1987. Mr. Zelikow
                         is a director of The Right Start, Inc.; The Navigators
                         Group, Inc.; and Queensway Financial Holdings Limited.

Executive Officers

      In addition to Messrs. Cochran, McCarthy and Taylor (who are described in
this Item 10 above under the caption "Directors"), the Company's other executive
officers are described below. The Company's executive officers include the
permanent members of the Company's Management Committee and Mr. Joseph, who is
the Company's principal accounting officer.

      Name               Age                    Position
--------------------------------------------------------------------------------
Russell B. Brewer II     43   Managing Director, Chief Underwriting Officer and
                              Director of FSA
John A. Harrison         56   Managing Director and Chief Financial Officer of
                              the Company and FSA; Director of FSA
Jeffrey S. Joseph        41   Managing Director and Controller of the Company
                              and FSA
Bruce E. Stern           46   Managing Director, General Counsel and Secretary
                              of the Company and FSA; Director of FSA

      The present principal occupation and five-year employment history of each
of the above-named executive officers of the Company, as well as other
directorships of publicly held corporations currently held by each such person,
are set forth below:

      Mr. Brewer has been a Managing Director of FSA since March 1989 and the
Chief Underwriting Officer of FSA since September 1990. He has been a director
of FSA since September 1993. From March 1989 to August 1990, Mr. Brewer was
Managing Director, Asset Finance Group, of FSA. Prior to joining FSA in 1986,
Mr. Brewer was an Associate Director of Moody's Investors Service, Inc.

      Mr. Harrison has been a Managing Director and the Chief Financial Officer
of FSA since August 1991 and the Chief Financial Officer of the Company since
February 1993. He has been a director of FSA since September 1993. From April
1987 through August 1991, Mr. Harrison was Chief Financial Officer of Citibank,
N.A. -- U.S. Consumer Banking Group, and prior thereto was Managing Director,
Real Estate Finance Group, of Merrill Lynch & Co. Inc. Mr. Harrison has been a
director of Fairbanks Capital Holding Corp. and affiliated entities since
December 1998.


                                       28
<PAGE>

      Mr. Joseph has been a Managing Director of the Company and FSA since
December 1993 and the Controller of FSA since February 1992 and of the Company
since April 1993. Prior to joining FSA in 1992, he was Vice President and
Controller of Capital Markets Assurance Corporation, a financial guaranty
insurer.

      Mr. Stern has been a Managing Director, the Secretary and the General
Counsel of the Company since April 1993. Since April 1993, he has been the
Secretary of FSA, and since March 1989, he has been a Managing Director of FSA.
He has been a director of FSA since August 1990. Prior to joining FSA as General
Counsel in 1987, Mr. Stern was an attorney with Cravath, Swaine & Moore.

Section 16(a) Beneficial Ownership Reporting Compliance

      Each director and executive officer of the Company, and each beneficial
owner of more than 10% of the Common Stock and Preferred Stock of the Company,
is required under Section 16 of the Securities Exchange Act of 1934 to report to
the Securities and Exchange Commission, the New York Stock Exchange (the "NYSE")
and the Company, by a specified date, all transactions in the Company's equity
securities. Based solely upon a review of the reports furnished to it pursuant
to Section 16, the Company believes that all of its directors, executive
officers and greater than 10% equity security holders complied with the filing
requirements applicable to them with respect to transactions occurring during
1999.

Item 11. Executive Compensation.

Summary Compensation Table

      The table below sets forth a summary of all compensation paid to the chief
executive officer of the Company and the other four most highly compensated
executive officers of the Company and its subsidiaries, in each case for
services rendered in all capacities to the Company and its subsidiaries for the
years ended December 31, 1999, 1998 and 1997.

<TABLE>
<CAPTION>
                                                                                       Long-Term
                                                 Annual Compensation                Compensation(1)
                                        --------------------------------------      ---------------
Name and Principal                                              Other Annual      LTIP        All Other
Position                      Year      Salary       Bonus     Compensation(2)  Payouts(3)  Compensation(4)
--------                      ----      ------       -----     ---------------  ----------  ---------------
<S>                           <C>      <C>          <C>          <C>            <C>            <C>
Robert P. Cochran             1999     $470,000     $ 69,402     $2,153,645     $5,897,323     $133,823
Chairman of the Board and     1998      440,000      560,000      1,164,706      4,737,911      113,834
  Chief Executive Officer     1997      440,000      560,000        870,610      2,958,727      107,827

Roger Taylor                  1999      310,000      413,617      1,395,745      4,106,640      116,609
  President and               1998      290,000      710,000        694,118      2,979,302      103,326
  Chief Operating Officer     1997      290,000      710,000        341,185      1,729,575       97,900

Sean W. McCarthy              1999      250,000      618,828      1,154,320      3,570,905      119,309
  Executive Vice              1998      235,000      875,000        264,706      2,475,950      102,715
  President                   1997      235,000      700,000        235,300      1,201,983       81,156

Bruce E. Stern                1999      215,000      300,000        352,941      1,816,906       54,429
  Managing Director,          1998      200,000      365,000         88,235      1,316,755       46,694
  General                     1997      200,000      272,500         67,649        824,910       46,299
  Counsel and Secretary

Russell B. Brewer II          1999      215,000      475,000        147,059      1,821,194       51,404
  Managing Director and       1998      200,000      365,000         88,235      1,308,949       49,844
  Chief Underwriting          1997      200,000      280,000         70,590        804,971       49,505
  Officer
</TABLE>

(1)   No awards of restricted stock or options/SARs were made to any of the
      executives named in the table during the period covered by the table.

(2)   Figures represent the value of phantom stock granted as "equity bonus"
      awards under the Company's 1993 Equity Participation Plan, as amended, and
      deferred for a minimum of five years. Payment following the deferral
      period will be in cash or Common Stock, at the Company's option.

(3)   Payouts were made to or deferred by each named executive in January 2000
      with respect to performance shares for the three-year performance cycle
      ending December 31, 1999. Payouts were made in shares of Common Stock or
      cash. For purposes of this table, shares of Common Stock are valued for
      1999, 1998 and 1997 at $49.1875, $53.625 and $46.0625


                                       29
<PAGE>

      per share, respectively, the New York Stock Exchange closing price per
      share on the day preceding approval of the payout by the Human Resources
      Committee of the Board of Directors and the per share value employed for
      those receiving cash payments.

(4)   All Other Compensation includes contributions by the Company to a defined
      contribution pension plan ("Pension Plan") and supplemental executive
      retirement plan ("SERP") as follows:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
    Officer                      1999                   1998                    1997
--------------------------------------------------------------------------------------------
                      Pension Plan     SERP   Pension Plan     SERP   Pension Plan       SERP
--------------------------------------------------------------------------------------------
<S>                      <C>         <C>         <C>         <C>         <C>         <C>
Robert P. Cochran        $14,400     $75,600     $14,400     $75,735     $14,400     $75,600
--------------------------------------------------------------------------------------------
Roger K. Taylor           14,400      75,600      14,400      75,600      14,400      76,950
--------------------------------------------------------------------------------------------
Sean W. McCarthy          14,400      75,600      14,400      75,600      14,400      53,100
--------------------------------------------------------------------------------------------
Bruce E. Stern            14,400      33,300      14,400      30,600      14,400      30,600
--------------------------------------------------------------------------------------------
Russell B. Brewer II      14,400      34,200      14,400      33,750      14,400      33,750
--------------------------------------------------------------------------------------------
</TABLE>

      All Other Compensation also includes amounts paid by the Company to gross
      up employees for medicare tax paid in respect of equity bonus awards. In
      addition, the figure included in this column for Mr. McCarthy includes
      $5,820.27 for 1999, $7,329 for 1998 and $8,838 for 1997, representing the
      benefit conveyed to him under a loan provided to him by the Company at a
      below market interest rate in connection with his relocation to New York.
      See "Executive Compensation -- Other Relationships" in this Item 11 below.

Employment Agreements and Arrangements; Change in Control Provisions

      The Company does not currently have employment agreements with any of its
executive officers. If the Company terminates any of the named executive
officers without cause, Messrs. Cochran and Taylor would be entitled to 18
months of compensation and Messrs. McCarthy, Stern and Brewer would be entitled
to 12 months of compensation, in each case based upon current compensation (or,
in certain events, prior compensation if higher) in accordance with the
Company's severance policy.

      The Company's 1993 Equity Participation Plan, as amended (the "Equity
Plan"), provides for accelerated vesting and payment of equity bonus shares,
performance shares and stock options awarded thereunder upon the occurrence of
certain change in control transactions involving the Company. These provisions
are generally applicable to all participants in the Equity Plan. Each of the
named executive officers holds equity bonus shares and performance shares
awarded under the Equity Plan.

Other Relationships

      In February 1992, the Company provided a loan to Mr. McCarthy in
connection with his relocation to New York City. Mr. McCarthy is the Executive
Vice President and a director of the Company, and Executive Vice President and
Chief Operating Officer of FSA. The loan was amended in December 1993 to allow
for the repayment of the remaining principal balance over a ten-year period in
equal installments of $36,282 at an interest rate of 5.20% per annum. At
December 31, 1999, the outstanding principal balance was $145,131.

Forward Shares

      The Company is party to forward arrangements with several financial
institutions. The Company entered into the first forward arrangement in May
1996, and additional forward arrangements in December 1999. The financial
institution counterparties to the forward arrangements are generally obligated
to hold shares of the Company's Common Stock ("Forward Shares") for a five-year
term. Under the forward arrangements, the Company has the obligation before the
end of the term to either (a) purchase the Forward Shares from the
counterparties for a specified price per share (the "Purchase Price") plus
carrying costs (less dividends paid on the Common Stock) or (b) direct the
counterparties to sell the Forward Shares, receiving any excess of the sale
proceeds over the Purchase Price (or making up any shortfall) in cash or
additional shares, at its option. The Purchase Price is $26.50 and $53.50 under
the 1996 and 1999 forward arrangements, respectively.

      At the time the Company entered into each forward arrangement, it made the
economic benefits of the forward shares available under a subscription program
to the Company's management and directors, who have parallel investments in
phantom Forward Shares under the Company's Deferred Compensation Plan or SERP.
All 750,000 shares covered by the 1999 program were made available under the
subscription program, and continue to be outstanding. Of the initial 1,750,000
shares covered by the 1996 program, 750,000 were made available under


                                       30
<PAGE>

the subscription program. When an individual participant exercises Forward
Shares under the subscription program, the Company settles with the participant
but does not necessarily close out the corresponding forward share position with
the counterparties. As a result of the repurchase of Forward Shares from
management and directors participating in the 1996 forward share subscription
program, 33,078 shares were held for the benefit of the Company and 529,122
shares continued to be held for the benefit of the participants on December 31,
1999.

Performance Shares

      Performance shares are awarded under the Equity Plan. The Equity Plan
authorizes the discretionary grant of performance shares by the committee
administering the Equity Plan (the Human Resources Committee) to key employees
of the Company and its subsidiaries. Each performance share potentially
represents the economic value of up to two shares of Common Stock, and not just
appreciation, as is the case with a stock option. The number of shares of Common
Stock actually earned for each performance share depends upon the attainment by
the Company and its subsidiaries (on a consolidated basis) of "performance
objectives" during the time period specified by the Committee at the time an
award of performance shares is made.

      The following table sets forth (a) a summary of performance shares awarded
to each of the named executive officers for the year ended December 31, 1999
(which awards were made in January 2000), (b) the applicable performance period
until payout and (c) the related estimated future payouts at the stated assumed
annual rates of adjusted book value per share and stock price appreciation.

                  LONG-TERM INCENTIVE PLANS - AWARDS IN 1999(1)

<TABLE>
<CAPTION>
                                                          Estimated Future Payouts(3)
                                                       -------------------------------
                            Performance  Performance   Threshold   Target      Maximum
                            Shares       Period Until  (no. of     (no. of     (no. of
   Name                     Granted      Payout         shares)    shares)     shares)
   ----                     -------      ------         -------    -------     -------
<S>                         <C>          <C>            <C>        <C>         <C>
Robert P. Cochran ......... 70,000       (2)            0          70,000      140,000
Roger K. Taylor ........... 50,000       (2)            0          50,000      100,000
Sean W. McCarthy .......... 50,000       (2)            0          50,000      100,000
Bruce E. Stern ............ 15,000       (2)            0          15,000       30,000
Russell B. Brewer II ...... 15,000       (2)            0          15,000       30,000
</TABLE>

(1)   These performance shares were awarded under the Equity Plan in January
      2000 for the year ended December 31, 1999. The table excludes performance
      shares awarded in January 1999 for the year ended December 31, 1998, which
      are set forth in a table in the Company's proxy statement dated March 26,
      1999, for the Company's 1999 Annual Meeting of Shareholders.

(2)   One-third of each award relates to the three-year performance cycle ending
      December 31, 2002; and two-thirds of each award relates to the three-year
      performance cycle ending December 31, 2003. Awards are payable shortly
      following completion of the applicable performance cycle, subject to
      earlier payment in certain circumstances or to deferral. Such performance
      shares vest at the completion of the applicable performance cycle, subject
      to rules pertaining to the recipient's death, disability, retirement or
      termination of employment, or change-in-control transactions.

(3)   The actual dollar value received by a holder of performance shares, in
      general, varies in accordance with the annual rate of growth in adjusted
      book value per share ("ROE") of Common Stock during an applicable
      "performance cycle" and the market price of Common Stock at the time of
      payout of such performance shares. At the election of the holder at the
      time of the award, ROE may be determined including or excluding realized
      and unrealized gains and losses in the Company's investment portfolio.
      With respect to the performance shares described in the table above, if
      ROE is 7% or less per annum for any performance cycle, no shares of Common
      Stock will be earned for the performance cycle; if ROE is 13% per annum
      for any performance cycle, a number of shares of Common Stock equal to
      100% of the number of performance shares will be earned for that
      performance cycle; and if ROE is 19% per annum or higher for any
      performance cycle, a number of shares of Common Stock equal to 200% of the
      number of performance shares will be earned for that performance cycle. If
      ROE is between 7% and 19%, the payout percentage will be interpolated.
      Recipients of performance share awards may elect to receive cash in lieu
      of shares of Common Stock in an amount equal to the product of (i) the
      number of shares of Common Stock that would be distributed absent an
      election to receive cash, multiplied by (ii) the New York Stock Exchange
      closing price per share of Common Stock on the trading day prior to the
      date that the Human Resources Committee approves the payout percentage for
      the applicable performance cycle. However, notwithstanding an election to
      receive cash, the Company may deliver shares of Common Stock if available
      under the Equity Plan.


                                       31
<PAGE>

--------------------------------------------------------------------------------

                                    Report of
             The Human Resources Committee of The Board of Directors
                  of Financial Security Assurance Holdings Ltd.

                                                               February 17, 2000

      The Human Resources Committee of the Board of Directors (the "Committee")
determines the compensation of the Chief Executive Officer, the Chief Operating
Officer and the Executive Vice President of the Company, and reviews and
approves management's compensation recommendations for other employees of the
Company. The Committee is comprised entirely of independent directors.

      Compensation of executive officers of the Company is comprised primarily
of salary, cash bonus, equity bonus awards and performance share awards, as well
as employee benefits such as retirement and health benefits. The Committee
adheres to a compensation philosophy aimed at aligning the interests of
management with those of the owners, reflected by an emphasis on equity-based
rather than cash-based compensation.

      In 1999, the Committee engaged Johnson Associates, Inc., professional
compensation consultants, to review the market compensation environment and to
evaluate the Company's performance share strategy. Johnson Associates, Inc.
prepared a report reviewed by the Committee in November 1999. The report was
intended as a background for review prior to approval of 1999 bonuses, 2000
salaries and 2000 performance share awards under the Company's 1993 Equity
Participation Plan (the "Equity Plan") at the Committee's January 2000 meeting.
On the subject of cash compensation, the report concluded, among other things,
that:

      o     the Company expected strong results and an increased bonus pool
            based on agreed upon performance measures,

      o     1999 compensation levels for the financial services industry were
            expected to surpass 1998's high levels due to strong industry
            performance, and

      o     the Company needed to address competitive alternatives available to
            key professionals.

On the subject of the Company's performance share strategy, the report
concluded, among other things, that:

      o     management's performance share strategy appeared to be thoughtful
            and directionally appropriate given market factors,

      o     the proposed strategy is competitive at the 75th percentile of
            market comparables and continues to make up a significant portion of
            the Company's executive compensation,

      o     the approach to performance share awards helps to maintain
            competitive long-term compensation delivery and significant
            ownership/at-risk compensation, and

      o     overall, the philosophy and structure of the Equity Plan continues
            to be competitive and effective for motivating and retaining the
            Company's senior professionals.

The report reinforced the Committee's belief that its compensation philosophy
and practices were accomplishing the results intended by the Committee, on both
an absolute and comparative basis.

      Salaries. Generally, salaries of executive officers are reviewed by the
Committee every other year. Salaries of the five most highly compensated
executive officers were last reviewed for 1999 and, accordingly, were not
reviewed again for 2000 and thus remained unchanged from the prior year. The
Company, like other participants in the financial services sector, allocates
most of executive officer compensation to year-end bonuses rather than

--------------------------------------------------------------------------------


                                       32
<PAGE>

--------------------------------------------------------------------------------

salaries, with annual bonuses (including equity bonuses) exceeding annual
salaries for each of the five most highly compensated executive officers of the
Company.

      Cash Bonuses. At its February 1999 meeting, the Committee determined the
guidelines to be applied in determining the potential 1999 bonus pool available
for Company employees. The Committee, however, retained discretion regarding the
size of the actual 1999 bonus pool and the allocation of bonus amounts to
particular employees.

      As in the prior year, the Committee established a target bonus pool equal
to approximately 7% of the after tax growth in adjusted book value ("ABV") for
the year, subject to adjustment based upon the quality of return of capital
deployed. Growth in ABV was determined after all operating expenses, including
the cost of the bonus pool itself. The quality of return adjustment was intended
to motivate management to use the Company's capital prudently in building
adjusted book value per share. Under this guideline, the bonus pool would be
unchanged so long as transactions insured by the Company's subsidiaries had a
weighted average return on equity under the Company's return on equity model
("Transaction ROE") equal to a specified target Transaction ROE (the "Target
ROE"), provided that a Transaction ROE 2% or more above such target would result
in a 2% increase in ABV per share, while a Transaction ROE 2% or more below such
target would result in a 2% decrease in ABV per share, with Transaction ROE's
within such range interpolated on a straight-line basis.

      The effect of the 1999 target bonus pool was to require a substantial
increase in ABV growth and/or Transaction ROE from prior year performance to
maintain the bonus pool at the level paid in the prior year. If the Company
performed in accordance with its 1999 financial plan at the Target ROE, then the
bonus pool for 1999 would have been approximately $18 million. A 1999 bonus pool
of $18 million would have been less than the actual 1998 bonus pool accrual of
$24 million, of which approximately $22 million was distributed. In establishing
these guidelines, the Committee recognized that non-distributed bonus pool
amounts from prior years may be carried over into future years. The Committee
also recognized that compensation matters in connection with new ventures would
be arranged outside the bonus pool, and that adjustments to the target bonus
pool may be recommended by management, subject to approval of the Committee, to
reflect changes in circumstances. No such arrangements or adjustments were
implemented in 1999.

      The Company experienced record PV premium growth in 1999, coupled with
record Transaction ROE, resulting in a 1999 bonus pool of approximately $30.4
million under the guidelines described above. Of this amount, approximately $27
million was paid for 1999, with the balance carried over into future years. By
comparison, the actual bonus pool for 1998 was approximately $24 million, of
which approximately $22 million was distributed, with the balance carried over
to the subsequent year. The 1999 bonus (including equity bonus) for the Chief
Executive Officer increased approximately 27% from 1998. The Committee found
this bonus amount to be warranted in view of the record level of premium
production at well above the Target ROE and other accomplishments which
contributed substantially to shareholder value in 1999.

      Equity Bonuses. 1999 was the sixth year that bonuses were paid part in
cash and part as equity bonus awards under the Equity Plan. Equity bonuses
represent "phantom shares" of the Company's common stock. Each bonus is
determined as discussed above under the caption "Cash Bonuses", and a specified
percentage of such bonus is paid in the form of an equity bonus in lieu of cash.
Equity bonus awards are deemed invested in the Company's common stock at 85% of
fair market value, and payment of such awards is deferred for a minimum of five
years. For 1999, as in the prior year, each employee had the option, exercisable
approximately six months prior to year-end, to increase his or her equity bonus
percentage to up to 50% of his or her total bonus, subject to Committee
approval. The Committee also determined that bonuses to executive officers would
be paid as equity bonuses to the extent that such bonuses, if paid in cash,
would result in the loss of a material federal income tax deduction under
Section 162(m) of the Internal Revenue Code of 1986. The Equity Plan also
provides for mandatory deferral of equity bonus award payouts to the extent that
such payouts, if made, would not be deductible by the Company due to the
limitation imposed by Section 162(m). The amount of the Chief Executive
Officer's bonus paid in the form of an equity bonus for 1999 was $1,830,598,
representing approximately 96% of his total bonus.

      The minimum equity bonus percentages employed in 1999 (unchanged from
1998) are set forth below:

--------------------------------------------------------------------------------


                                       33
<PAGE>

--------------------------------------------------------------------------------

                Equity Bonus Award as a Percentage of Total Bonus

       Total Bonus                      Marginal Rate
       -----------                      -------------
    $0 to $50,000                       10% (optional for bonuses below $50,000)
    $50,001 to $150,000                 15%
    $150,001 to $300,000                20%
    Over $300,000                       25%

      Performance Shares. The Equity Plan provides for the award of performance
shares. Each performance share represents a right to receive up to two shares of
the Company's common stock, with the actual number of common shares receivable
determined on the basis of the increase in adjusted book value per share over a
specified performance cycle. The performance shares were designed to provide
less compensation to participants than stock options if the Company performs
poorly and more compensation to participants if the Company performs well. In
particular, the performance shares were designed to have no value if the Company
fails to generate a return on equity in excess of 7%, which at the time was a
proxy for the risk-free yield on treasury securities. Holders of performance
shares are entitled at the time of grant to elect to have their performance
shares valued at the time of payout either including or excluding realized and
unrealized gains and losses on the Company's investment portfolio. The
Committee's approach generally has been to refrain from awarding performance
shares to the same individuals in successive years. 2000 performance share
awards were allocated 1/3 to a 2000/2001/2002 performance cycle and 2/3 to a
2001/2002/2003 performance cycle. The Company has implemented a program of share
purchases through a "rabbi trust" for the purpose of funding in advance its
obligations in respect of outstanding performance shares. The Chief Executive
Officer, who last received an award of performance shares in January 1998,
received an award of 70,000 performance shares in January 2000. In January 2000,
the Committee also approved performance share payouts for the three-year
performance share award cycle ended December 31, 1999 based upon growth in ABV
per share during the cycle. The Committee determined that each performance share
for such award cycle was equal to 153.36% (including portfolio gains and losses)
or 169.65% (excluding portfolio gains and losses) of a common share of the
Company. Performance shares were paid in Company common shares or cash, or such
amounts were deferred, in accordance with the provisions of the Equity Plan and
the Company's Deferred Compensation Plan.

      Stock Ownership Guidelines. The Committee has implemented stock ownership
guidelines for senior executives, including the five most highly compensated
executive officers, of the Company. The guidelines establish share ownership
objectives for senior executives, with the expectation that senior executives
would retain at least 50% of the net after-tax shares from Company compensation
plans until the objective has been met (absent any hardship situation). The
share ownership objective calls for ownership of Company shares having a market
value, (i) in the case of the Chief Executive Officer and Chief Operating
Officer, equal to the sum of three times annual compensation up to $500,000 and
four times additional compensation and (ii) in the case of other senior
executives, equal to the sum of two times annual compensation up to $300,000 and
three times additional compensation. For purposes of the guidelines, share
ownership (i) includes common stock owned, vested equity bonus shares, and
common stock deferred and phantom common stock investments under the Company's
benefit plans and (ii) excludes outstanding performance shares or stock options.

      The Committee reviewed compliance with Section 162(m) of the Internal
Revenue Code of 1986, relating to the deductibility of compensation paid to the
Chief Executive Officer and the other most highly compensated officers of the
Company. Performance share awards under the Equity Plan were designed, on advice
of counsel, to comply with the requirements of Section 162(m). Given the
Committee's intention to continue employment of deferred equity bonus awards in
lieu of a portion of cash bonuses in determining 2000 compensation for the
Company's senior management or to develop an alternative approach to maintain
the availability of federal income tax deductions for executive compensation,
the Committee has determined that it is unlikely that the Company will pay
compensation in 2000 that would result in the loss of any material federal
income tax deduction under Section 162(m) and has not recommended that any other
action be taken as a consequence of such provision.

                                            Human Resources Committee
                                            K. Thomas Kemp (Chairperson)
                                            Robert N. Downey
                                            David O. Maxwell
                                            James H. Ozanne

--------------------------------------------------------------------------------


                                       34
<PAGE>

Stock Price Performance

      The following graph compares the cumulative total return for an investment
of $100 on May 6, 1994 (the effective date of registration of the Company's
Common Stock) through December 31, 1999 in (i) the Company's Common Stock, (ii)
Standard & Poor's 500 Composite Index and (iii) the NYSE Financials Index. The
graph assumes that all dividends were reinvested (except for NYSE Financials
Index).

              Cumulative Total Return on Common stock compared to
        Standard & Poor's 500 Composite Index and NYSE Financials Index
                       (May 6, 1994 to December 31, 1999)

 [The following was depicted as a line graph in the original printed material.]

                              [PERFORMANCE GRAPH]

        Dec-94  Dec-95  Dec-96  Dec-97  Dec-98  Dec-99
FSA     104.49  126.09  167.86  237.34  282.2   271.85
S&P     104.59  145.35  180.72  227.58  303.37  358.98
NYSE     93.73  132.74  171.24  229.03  249.61  239.15

Compensation Committee Interlocks and Insider Participation

      The Human Resources Committee consisted of Messrs. Kemp, Downey, Maxwell
and Ozanne throughout 1999. None of such persons is currently or has ever been
an officer or employee of the Company or any subsidiary of the Company. Mr. Kemp
is Deputy Chairman of White Mountains, and was President and Chief Executive
Officer of White Mountains and Chairman and Chief Executive Officer of WMH
during 1999. Mr. Cochran, Chairman and Chief Executive Officer of the Company,
is a director of White Mountains and WMH, and a member of the compensation
committee of White Mountains. Mr. Taylor, President and Chief Operating Officer
of the Company, was a director and member of the compensation committee of
Source One, a subsidiary of White Mountains, until May 1999. Mr. Ozanne was
Chairman of Source One until May 1999.

Item 12. Security Ownership of Certain Beneficial Owners and Management.

5% Shareholders

      The following table sets forth certain information regarding actual,
beneficial and voting ownership of the Company's equity at February 10, 2000 as
to each person known by the Company to beneficially own, within the meaning of
the Securities Exchange Act of 1934 (the "Exchange Act"), 5% or more of the
outstanding shares of the Common Stock or Preferred Stock.


                                       35
<PAGE>

<TABLE>
<CAPTION>
                                                            Number of Shares Owned(1)
                                                            -------------------------
5% Shareholders                                          Actual                 Beneficial(2)        Voting
---------------                                          ------                 -------------        Power
                                                 Number         Percent(3)  Number     Percent(3)  Percent(4)
                                                 ------         ----------  ------     ----------  ----------
<S>                                             <C>               <C>      <C>            <C>         <C>
White Mountains Insurance Group, Ltd. .......   6,943,316         20.7%    8,943,316      25.2%       25.2%
    80 South Main Street
    Hanover, NH 03755(2)

The Tokio Marine and Fire Insurance Co., Ltd.   2,629,000          7.8%    2,629,000       7.8%        7.4%
    2-1, Marunouchi 1-Chome
    Chiyoda-ku, Tokyo 100 Japan

XL Capital Ltd ..............................   2,555,133          7.6%    2,555,133       7.6%        7.2%
    Cumberland House
    1 Victoria Street
    Hamilton HM11 Bermuda D2(5)

MediaOne Capital Corporation ................   1,721,199          5.1%    1,721,199       5.1%        4.8%
    c/o MediaOne Group
    188 Inverness Drive West
    Englewood, CO 80112(1)
</TABLE>

(1)   Number of shares owned is based on Schedules 13D or 13G filed by such
      entities with the Securities and Exchange Commission (the "SEC"), except
      for MOCC, which confirmed to us on March 1, 2000, that it owns the number
      of shares set forth in the table.

(2)   A person is deemed to have "beneficial ownership" as of a given date of
      any shares which such person has the right to acquire within 60 days after
      such date or over which such person has voting or investment power. In
      computing the percentage of outstanding shares beneficially held by each
      shareholder listed above, any share of Common Stock which such shareholder
      beneficially owns is deemed to be outstanding for such shareholder, but is
      not deemed to be outstanding for the purpose of computing the percentage
      ownership of any other shareholder unless such share is actually
      outstanding. The only shareholder listed above which is deemed to have
      beneficial ownership of shares of Common Stock not actually owned by such
      shareholder is White Mountains. On February 10, 2000, White Mountains or
      its subsidiaries owned (subject to anti-dilutive adjustment) 2,000,000
      shares of Preferred Stock, constituting all the outstanding Preferred
      Stock, which are convertible into an equal number of shares of Common
      Stock at the conversion price of $29.65 per share. Please see Note (3)
      below for additional information regarding shares beneficially owned by
      White Mountains.

(3)   Ownership percentages are calculated based on 33,517,995 shares of Common
      Stock outstanding at February 10, 2000, which (a) includes 511,031 shares
      purchased by a "rabbi trust" for purposes of funding in advance the
      Company's obligations with respect to its 1993 Equity Participation Plan,
      as amended, and excludes 158,306 shares of treasury stock and (b) excludes
      2,000,000 shares of Preferred Stock outstanding at February 10, 2000,
      except that such Preferred Stock is included for determining the
      beneficial ownership and voting power percentages of White Mountains
      (which holds such Preferred Stock).

(4)   Voting power percentages are calculated based on 35,517,995 shares of
      Common Stock outstanding at February 10, 2000, which (a) includes 511,031
      shares purchased by a "rabbi trust" for purposes of funding in advance the
      Company's obligations with respect to its 1993 Equity Participation Plan,
      as amended, and excludes 158,306 shares of treasury stock and (b) includes
      2,000,000 shares of Preferred Stock outstanding at February 10, 2000.

(5)   According to the amended Schedule 13G filed on January 24, 2000, by XL
      with the SEC, the shares beneficially owned by XL are held by a Cayman
      Islands affiliate of XL and were not acquired and are not held for the
      purpose or effect of changing or influencing control of the Company.

Directors and Executive Officers

      The following table sets forth certain information regarding beneficial
ownership of the Company's equity at February 10, 2000 for (a) each director and
nominee for director of the Company, (b) each executive officer named under
"Executive Compensation -- Summary Compensation Table" and (c) all such
executive officers and directors of the Company as a group. The table also
provides information regarding economic ownership. Voting power is less than 1%
of voting shares outstanding for each executive officer and director listed,
individually and as a group.


                                       36
<PAGE>

                                             Number of Shares Owned
                                    --------------------------------------------
                                                                    Percent of
                                                                    Economic
Directors and Executive Officers    Beneficial(1)   Economic(2)     Ownership(3)
--------------------------------    -------------   -----------     ------------
Terry L. Baxter (4) .............       1,000        21,397               *
Robert P. Cochran (2) ...........     145,225       789,286             2.2%
Robert N. Downey ................      75,000       114,079               *
Anthony M. Frank ................       2,671        39,918               *
Fudeji Hama .....................          --            --               *
K. Thomas Kemp (4) ..............       1,600        41,124               *
David O. Maxwell ................         783        35,783               *
Sean W. McCarthy ................      67,284       363,819             1.0%
James M. Osterhoff ..............       1,000        39,474               *
James H. Ozanne .................      15,800        58,715               *
Richard A. Post .................         200        38,945               *
Roger K. Taylor .................      30,520       496,361             1.4%
Howard M. Zelikow ...............       5,037        40,037               *
Russell B. Brewer II ............       8,601       118,180               *
Bruce E. Stern (1) ..............       6,114       128,167               *
All executive officers and
directors as a group (17 persons)     411,490     2,472,334             6.6%

* denotes less than 1%

(1)   All beneficially owned shares are actually outstanding and directly owned
      by the listed directors and executive officers, except that (a) with
      respect to Mr. Cochran, 3,675 shares are held in trust for the benefit of
      his children, and (b) with respect to Mr. Stern, all shares are held in
      trust for the benefit of his children. At February 10, 2000, shares
      actually and beneficially owned represented less than 1% of total shares
      of Common Stock outstanding for each executive officer and director listed
      individually, and as a group represented approximately 1.2% of total
      shares of Common Stock outstanding.

(2)   Shares economically owned by directors and executive officers include (a)
      vested and unvested performance shares with each performance share treated
      as one share of Common Stock, (b) equity bonus shares, (c) deemed
      investments in Common Stock under the Company's plans ("Phantom Shares")
      and (d) deemed investments in "Forward Shares" (defined below under
      "Executive Compensation - Forward Shares"). Phantom Shares represent
      voluntary investments in Common Stock by directors and executive officers.
      All such shares (other than Forward Shares) include accrued dividends. The
      table includes such shares economically owned by the Chief Executive
      Officer and the other four most highly compensated executive officers of
      the Company and its subsidiaries in the following amounts:

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
                                                                      Forward Shares
                          Performance  Equity Bonus   Phantom         --------------
     Officer                Shares       Shares       Shares       (1996)        (1999)
----------------------------------------------------------------------------------------------
<S>                         <C>          <C>          <C>          <C>           <C>
Robert P. Cochran           110,691      111,451      230,465      145,252       46,203
----------------------------------------------------------------------------------------------
Roger K. Taylor              80,518       67,311      216,809       55,000       46,203
----------------------------------------------------------------------------------------------
Sean W. McCarthy             95,749       45,927       33,254       29,200       92,406
----------------------------------------------------------------------------------------------
Bruce E. Stern               30,218       16,460       65,375           --       10,000
----------------------------------------------------------------------------------------------
Russell B. Brewer II         30,218       12,579       56,782        5,000        5,000
----------------------------------------------------------------------------------------------
All executive officers
  and directors as a
  group                     370,057      266,464      670,059      364,452      389,812
----------------------------------------------------------------------------------------------
</TABLE>

      To the extent that shares economically owned by any non-officer director
      exceed those beneficially owned, such economic ownership is attributable
      to (i) 15,000 1996 Forward Shares acquired by each director, other than
      Messrs. Baxter and Hama, (ii) 20,000 1999 Forward Shares acquired by each
      director, other than Mr. Hama, and (iii) shares deemed invested under the
      Company's Deferred Compensation Plan (together with accrued dividends).
      The table excludes fractional shares attributable to participation in
      various benefit plans.

(3)   Ownership percentages are calculated based on 33,517,995 shares of Common
      Stock outstanding at February 10, 2000, which (a) includes 511,031 shares
      purchased by a "rabbi trust" for purposes of funding in advance the
      Company's obligations with respect to its 1993 Equity Participation Plan,
      as amended, and excludes 158,306 shares of treasury stock and (b) excludes
      2,000,000 shares of Preferred Stock outstanding at February 10, 2000. In
      addition, in computing the percentage of shares economically owned by each
      person listed above, any share which is economically owned by such person
      is deemed to be an outstanding share of Common Stock for such person, but
      is not deemed to be outstanding for the purpose of computing the
      percentage ownership of any other person (except with respect to the group
      as a whole, for which all such shares are deemed to be outstanding).


                                       37
<PAGE>

(4)   Mr. Kemp is Deputy Chairman of White Mountains, and Mr. Baxter was
      Executive Vice President of White Mountains until February 2000. White
      Mountains beneficially owns 25.2% of the Company, through its ownership of
      Common Stock and Preferred Stock as described in Notes (2) and (3) to the
      "5% Shareholders" table above in this Item 12. Messrs. Kemp and Baxter
      disclaim direct beneficial ownership of Common Stock and Preferred Stock
      held by White Mountains or its subsidiaries.

Item 13. Certain Relationships and Related Transactions.

1999 Equity Sale

      In December 1999, the Company sold shares of Common Stock at a price of
$54.20 per share to three of its major shareholders, White Mountains, Tokio
Marine and XL. The purchase price represented 97.5% of the average of the high
and low sale price of our common stock on the New York Stock Exchange on October
29, 1999, the date on which a Special Committee of the Company's Board of
Directors approved the sale as part of a plan to raise approximately $140
million through sales of the Company's Common Stock. The table below sets forth
the number of shares purchased and aggregate purchase price for each of the
three shareholders, individually and in the aggregate. The remaining
approximately $27.1 million of shares were purchased by the counterparties under
the forward arrangements that the Company entered into in December 1999,
described above in Item 11, "Executive Compensation", under the caption "Forward
Shares".

--------------------------------------------------------------------------------
                         Number of Shares Purchased in
Shareholder              December 1999                  Aggregate Purchase Price
--------------------------------------------------------------------------------
White Mountains                    922,509                      $ 50,000,000
--------------------------------------------------------------------------------
Tokio Marine                       700,000                        37,940,000
--------------------------------------------------------------------------------
XL                                 461,255                        25,000,000
--------------------------------------------------------------------------------
  Total                          2,083,764                      $112,940,000
--------------------------------------------------------------------------------

White Mountains, MediaOne and Company Relationships

      In connection with its initial investment in the Company in 1994, White
Mountains:

      o     acquired 2,000,000 shares of the Series A Convertible Redeemable
            Preferred Stock of the Company (the "Preferred Stock") from the
            Company; the shares of Preferred Stock are convertible into an equal
            number of shares of Common Stock at a price of $29.65 per share
            (subject to anti-dilutive adjustment) until their redemption date of
            May 13, 2004; the Preferred Stock remains outstanding and its terms
            have not been amended since they were issued;

      o     acquired an option to acquire 666,667 shares of Common Stock from
            MOCC at an exercise price of $23.50 per share until May 13, 1999,
            which was exercised in May 1999;

      o     acquired an option to acquire 1,893,940 shares of Common Stock from
            MOCC at an exercise price of $26.40 per share until September 2,
            2004, which was exercised in September 1999;

      o     entered into a Registration Rights Agreement with MOCC and the
            Company; and

      o     entered into a Voting Trust Agreement with MOCC and The First
            National Bank of Chicago, as voting trustee, which related to the
            voting of the 1,893,940 shares subject to the option described above
            and which terminated upon the exercise by White Mountains of that
            option.

      Under the Registration Rights Agreement, at any time prior to May 13,
2004, each of White Mountains and MOCC is entitled to four demand registrations,
and the right to register certain shares on a "piggyback" basis on an unlimited
number of occasions if the Company proposes to have a public offering of Common
Stock. The Company has agreed to indemnify White Mountains and MOCC for certain
liabilities, including liabilities under the Securities Act of 1933, or to
contribute to payments White Mountains or MOCC may be required to make in
respect thereof, in


                                       38
<PAGE>

connection with sales by such person of Common Stock in a registration statement
prepared by the Company under the Registration Rights Agreement.

White Mountains and Company Relationships

      In March 1999, FSA Portfolio Management Inc. ("FSA Portfolio Management"),
a wholly owned subsidiary of the Company, terminated its investment management
services agreements with affiliates of White Mountains. No services were
provided and no fees were paid under those agreements during 1999.

      In addition, as described above in Item 11, "Executive Compensation",
under the caption "Compensation Committee Interlocks and Insider Participation,"
certain directors and executive officers of the Company are directors of White
Mountains or its subsidiaries, and certain present and former executive officers
of White Mountains and its subsidiaries are directors of the Company.

Tokio Marine and Company Relationships

Cooperation Agreement and Reinsurance

      Tokio Marine, the Company and FSA entered into a Cooperation Agreement
dated as of December 27, 1990 (the "Cooperation Agreement") in connection with
Tokio Marine's investment in the Company. The Cooperation Agreement contains
reinsurance provisions (discussed below) and reciprocal marketing provisions.
The Cooperation Agreement also entitles Tokio Marine to select one director of
the Company and of FSA and to place up to three of its employees in FSA's New
York offices and permits FSA to open a representative office on the premises of
Tokio Marine in Tokyo, Japan. The term of the Cooperation Agreement is
automatically renewed, but is subject to termination by one party upon default
by the other or upon 90 days' prior written notice by one party to the other.
Pursuant to the Cooperation Agreement, FSA has entered into a Master Reinsurance
Placement Memorandum (the "Memorandum") by which FSA has agreed to cede and
Tokio Marine has agreed to accept reinsurance equal to a specified percentage of
the principal amount of new business written by FSA in each calendar year, with
the cessions to be composed of treaty participations and facultative cessions,
including an automatic facility by which FSA at its option may make quota share
cessions, subject to certain conditions. Pursuant to the Memorandum, Tokio
Marine participates in FSA's non-municipal and municipal treaties and has
provided facultative reinsurance to FSA. The Company ceded premiums of $28.4
million, $23.8 million and $21.2 million to Tokio Marine for the years ended
December 31, 1999, 1998 and 1997, respectively. In the opinion of the management
of the Company and FSA, the terms of the Cooperation Agreement and reinsurance
with Tokio Marine are no less favorable to FSA than the terms that could be
obtained from unaffiliated parties. In anticipation of increased business
opportunities with Japanese sponsors, Tokio Marine and FSA entered into a
Memorandum of Understanding dated June 5, 1998 concerning the insurance and
reinsurance of transactions involving Japanese assets and obligors, and FSA
opened a representative office in Tokyo. During 1999, Tokio Marine agreed to
cede premiums to FSA in the aggregate amount of approximately $0.2 million (net
of ceding commissions).

Tokio Marine Stockholders Agreement

      Under a Stockholders Agreement dated December 27, 1990, as amended (the
"Tokio Marine Stockholders Agreement"), among Tokio Marine, the Company and
MOCC, MOCC has agreed to vote all stock in the Company owned by it to nominate
and to elect a senior employee of Tokio Marine designated by Tokio Marine to the
Board of Directors of the Company so long as Tokio Marine owns at least 5% (9.9%
in the event the Cooperation Agreement is terminated as a result of a breach by
Tokio Marine) of the outstanding Common Stock or the Cooperation Agreement is in
effect. As long as such conditions are met, to the extent permitted by law, the
Company has agreed to cause a senior employee of Tokio Marine to be nominated as
a director of the Company. So long as Tokio Marine owns any Common Stock, MOCC
has agreed to use commercially reasonable efforts to cause the maximum cash
dividends to be paid each year with respect to the Common Stock to the extent
payable without violating applicable law, causing the rating agencies to lower
or consider lowering the triple-A claims-paying ability ratings of FSA or
reducing the cash of the Company and its subsidiaries below the amount needed to
satisfy their reasonably anticipated business needs.

      The Tokio Marine Stockholders Agreement contains certain restrictions on
the ability of Tokio Marine, MOCC and the Company to sell or otherwise transfer
any stock of the Company or any subsidiary of the Company (and, under certain
circumstances, the stock of MOCC), or all or substantially all the assets of the
Company or FSA. Certain of the rights granted to Tokio Marine under the Tokio
Marine Stockholders Agreement may make it more


                                       39
<PAGE>

difficult for MOCC to sell additional shares of Common Stock or for the Company
to dispose of certain assets or raise funds from the sale of Common Stock and
therefore might be deemed to restrict a change in control of the Company.

Registration Rights

      In May 1996, the Company, MOCC and White Mountains entered into a letter
agreement in order to provide that Tokio Marine has the rights to register the
shares of Common Stock then held by Tokio Marine as if Tokio Marine were a party
to the Registration Rights Agreement among the Company, MOCC and White
Mountains.

XL and Company Relationships

Joint Venture

      In November 1998, the Company and XL entered into a joint venture to
establish two new Bermuda-based financial guaranty insurance companies. One
company, Financial Security Assurance International Ltd. ("FSA International"),
is an indirect subsidiary of FSA and the other company, XL Financial Assurance
Ltd ("XLFA"), is a subsidiary of XL. The Company has a minority interest in XLFA
and XL has a minority interest in FSA International.

Registration Rights

      In connection with the joint venture formation in November 1998, the
Company entered into a Registration Rights Agreement with XL. Under the
Registration Rights Agreement, at any time prior to the sale by XL of all Common
Stock of the Company that it owns or termination of the shareholders agreement
entered into by the Company and XL in respect of FSA International, XL is
entitled to three (or, under certain circumstances, four) demand registrations,
and the right to register certain shares on a "piggyback" basis on an unlimited
number of occasions if the Company proposes to have a public offering of Common
Stock. The Company has agreed to indemnify XL for certain liabilities, including
liabilities under the Securities Act of 1933, or to contribute to payments XL
may be required to make in respect thereof, in connection with sales by such
person of Common Stock in a registration statement prepared by the Company under
the Registration Rights Agreement.

Reinsurance

      XL Insurance Ltd ("XLI"), the principal operating subsidiary of XL, and
XLFA participated in four first loss treaties in 1999, under which FSA ceded a
portion of its first loss exposure under specified asset-backed transactions. In
1999, XLI also participated in a quota share and aggregate excess of loss treaty
covering specified emerging market collateralized debt obligations. In 1999, FSA
also made facultative quota share and first loss reinsurance cessions to XLI of
selected transactions. The Company ceded to XLI and XLFA premiums of $19.8
million, $7.3 million and $15,000 for the years ended December 31, 1999, 1998
and 1997, respectively. In the opinion of the management of the Company, the
terms of the existing reinsurance agreements with XLI and XLFA are no less
favorable to FSA and its subsidiaries than the terms that could be obtained from
unaffiliated parties.

MediaOne and Company Relationships

      In December 1993, the Company completed a restructuring (the
"Restructuring") which significantly reduced its risk of loss from its insured
portfolio of obligations backed by commercial mortgage loans (the "Commercial
Mortgage Portfolio"). As part of the Restructuring, FSA obtained reinsurance
from Commercial Reinsurance Company ("Commercial Re") in respect of the
Commercial Mortgage Portfolio. Commercial Re is an insurance company organized
for the purpose of the Restructuring that is owned approximately 91.6% by MOCC
and 8.4% by Tokio Marine. Various agreements were entered into among the Company
and its subsidiaries, Commercial Re and MediaOne in connection with the
Restructuring, all of which remain in force and have not since been amended.
These agreements include (i) a quota share reinsurance agreement, (ii) an
investment management agreement providing for the management by FSA Portfolio
Management of Commercial Re's investment portfolio and other matters in exchange
for a fee initially ranging from 15 to 30 basis points per annum on the market
value of Commercial Re's investment portfolio and (iii) a management agreement
pursuant to which the Company provides management services to Commercial Re,
including regulatory compliance and accounting services, for a fixed fee of
$100,000 per annum.


                                       40
<PAGE>

      The Company ceded to Commercial Re premiums of $0.1 million, $0.2 million
and $0.4 million for the years ended December 31, 1999, 1998 and 1997,
respectively. In the opinion of the management of the Company, the terms of the
existing reinsurance agreements with the MediaOne affiliates are no less
favorable to FSA and its subsidiaries than the terms that could be obtained from
unaffiliated parties.

                                     Part IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

      (a) Financial Statements and Financial Statement Schedules and Exhibits.

1. Financial Statements

               The Registrant has incorporated by reference from the 1999 Annual
               Report to Shareholders the following consolidated financial
               statements of Financial Security Assurance Holdings Ltd. and
               Subsidiaries:

                                                   1999 Annual Report  to
                                                    Shareholders (Pages)
                                                    --------------------

               Report of Independent Accountants             25

               Consolidated Balance Sheets at
               December 31, 1999 and 1998                    26

               Consolidated Statements of Income
               for the Years Ended
               December 31, 1999, 1998 and 1997              27

               Consolidated Statements of Changes in
               Shareholders' Equity for the Years Ended
               December 31, 1999, 1998 and 1997              28

               Consolidated Statements of Cash Flows
               for the Years Ended
               December 31, 1999, 1998 and 1997              29

               Notes to Consolidated Financial Statements    30 - 44

2. Financial Statement Schedules

      The following financial statement schedule is filed as part of this
Report.

Schedule    Title
--------    -----

   II       Condensed Financial Statements of the Registrant for the Years Ended
            December 31, 1999, 1998 and 1997.

            The report of the Registrant's independent auditors with respect to
            the above listed financial statement schedule is set forth on page
            48 of this Report.

            All other schedules are omitted because they are either inapplicable
            or the required information is presented in the consolidated
            financial statements of the Company or the notes thereto.


                                       41
<PAGE>

3. Exhibits

      The following are annexed as exhibits to this Report:

Exhibit No.           Exhibit
-----------           -------

   3.1        Restated Certificate of Incorporation of the Company. (Previously
              filed as Exhibit 3.1 to the Company's Registration Statement on
              Form S-3 (Reg. No. 333-74165) and incorporated herein by
              reference.

   3.2        Amended and Restated By-laws of the Company, as amended and
              restated on February 17, 2000. (Previously filed as Exhibit 3.2 to
              the Company's Registration Statement on Form S-3 (Reg. No.
              333-92985), and incorporated herein by reference.)

   4.1        Indenture dated as of September 15, 1997 (the "Senior QUIDS
              Indenture") between the Company and First Union National Bank, as
              Trustee (the "Senior Debt Trustee"). (Previously filed as Exhibit
              2 to the Company's Current Report on Form 8-K (Commission File No.
              1-12644) dated September 15, 1997 (the "September 1997 Form 8-K"),
              and incorporated herein by reference.)

   4.1(A)     First Supplemental Indenture dated as of November 13, 1998,
              between the Company and the Senior Debt Trustee. (Previously filed
              as Exhibit 6 to the Company's Current Report on Form 8-K
              (Commission File No. 1-12644) dated November 6, 1998 (the
              "November 1998 Form 8-K"), and incorporated herein by reference.)

   4.1(B)     Form of 7.375% Senior Quarterly Income Debt Securities due 2097.
              (Previously filed as Exhibit 3 to the September 1997 Form 8-K, and
              incorporated herein by reference.)

   4.1(C)     Officers' Certificate pursuant to Section 2.01 and 2.03 of the
              Senior QUIDS Indenture. (Previously filed as Exhibit 5 to the
              Company's Quarterly Report on Form 10-Q (Commission File No.
              1-12644) for the quarterly period ended September 30, 1997, and
              incorporated herein by reference.)

   4.1(D)     Form of 6.950% Senior Quarterly Income Debt Securities due 2098.
              (Previously filed as Exhibit 2 to the November 1998 Form 8-K, and
              incorporated herein by reference.)

   4.1(E)     Officers' Certificate pursuant to Section 2.01 and 2.03 of the
              Senior QUIDS Indenture. (Previously filed as Exhibit 5 to the
              November 1998 Form 8-K, and incorporated herein by reference.)

   4.1(F)     Amended and Restated Trust Indenture dated as of February 24, 1999
              between the Company and the Trustee. (Previously filed as Exhibit
              4.1 to the Company's Registration Statement on Form S-3 (Reg. No.
              333-74165), and incorporated herein by reference.)

   10.1       Credit Agreement dated as of August 31, 1998 among FSA, each of
              its insurance company affiliates listed on Schedule I attached
              thereto, the Banks from time to time party thereto and Deutsche
              Bank AG, New York Branch, as agent. (Previously filed as Exhibit
              10 to the Company's Quarterly Report on Form 10-Q (Commission File
              No. 1-12644) for the quarterly period ended September 30, 1998,
              and incorporated herein by reference.)

   10.2       Facility Agreement dated as of August 30, 1994, among FSA,
              Canadian Global Funding Corporation and Hambros Bank Limited.
              (Previously filed as Exhibit 2


                                       42
<PAGE>

              to the Company's Quarterly Report on Form 10-Q (Commission File
              No. 1-12644) for the quarterly period ended September 30, 1994,
              and incorporated herein by reference.)

   10.3       Second Amended and Restated Credit Agreement dated as of April 30,
              1999, among FSA, FSAIC, the Banks party thereto from time to time
              and Bayerische Landesbank Girozentrale, New York Branch, as Agent.
              (Previously filed as Exhibit 10 to the Company's Quarterly Report
              on Form 10-Q (Commission File No. 1-12644) for the quarterly
              period ended June 30, 1999, and incorporated herein by reference.)

   10.4+      Money Purchase Pension Plan and Trust Agreement dated as of
              January 1, 1989 between FSA and Transamerica, with Adoption
              Agreement No. 001 and Addendum. (Previously filed as Exhibit 10.7
              to the Company's Registration Statement on Form S-1 (Reg. No.
              33-70230), as such Registration Statement has been amended (the
              "Form S-1"), and incorporated herein by reference.)

   10.5+      Amended and Restated Supplemental Executive Retirement Plan as
              amended and restated as of February 25, 1999. (Previously filed as
              Exhibit 10.5 to the Company's Annual Report on form 10-K
              (Commission File No. 1-12644) for the fiscal period ended December
              31, 1998 (the "1998 Form 10-K"), and incorporated herein by
              reference.

   10.6+      Amended and Restated 1993 Equity Participation Plan (as amended
              and restated as of May 13, 1999). (Previously filed as Appendix A
              to the Company's proxy statement dated March 26, 1999, and
              incorporated herein by reference.)

   10.7+      Deferred Compensation Plan (Effective as of June 1, 1995).
              (Previously filed as Exhibit No. 3 to the Company's Quarterly
              Report on Form 10-Q (Commission File No. 1-12644) for the
              quarterly period ended June 30, 1995 (the "June 30, 1995 10-Q"),
              and incorporated herein by reference.)

   10.8+      Severance Policy for Senior Management (Effective as of February
              8, 1995). (Previously filed as Exhibit No. 3 to the Company's
              Quarterly Report on Form 10-Q (Commission File No. 1-12644) for
              the quarterly period ended March 31, 1996, and incorporated herein
              by reference.)

   10.9       Cooperation Agreement dated as of December 27, 1990 among Tokio
              Marine, the Company and FSA. (Previously filed as Exhibit 10.17 to
              the Company's Registration Statement on Form S-1, and incorporated
              herein by reference.)

   10.10      Tokio Marine Stockholders Agreement dated December 27, 1990 among
              Tokio Marine, the Company and USWCC. (Previously filed as Exhibit
              10.18 to the Form S-1, and incorporated herein by reference.)

   10.10(A)   Letter Agreement dated as of September 2, 1994 concerning the
              Tokio Marine Stockholders Agreement between U S WEST, Inc., and
              the Company. (Previously filed as Exhibit 10.18(A) to the Annual
              Report on Form 10-K (Commission File No. 1-12644) for the fiscal
              period ended December 31, 1994 (the "1994 Form 10-K"), and
              incorporated herein by reference.)

   10.10(B)   Amendment No. 1 dated December 23, 1993 to Tokio Marine
              Stockholders Agreement. (Previously filed as Exhibit 10.19 to the
              Form S-1, and incorporated herein by reference.)

   10.11      Master Reinsurance Placement Memorandum dated December 27, 1991
              between Tokio Marine and FSA. (Previously filed as Exhibit 10.20
              to the Form S-1, and incorporated herein by reference.)


                                       43
<PAGE>

   10.12      Amended and Restated Interests and Liabilities Contract concerning
              the Quota Share Treaty effective as of January 1, 1991 among Tokio
              Marine and FSA and its identified subsidiaries and affiliates,
              with Amendment No. 1 thereto. (Previously filed as Exhibit
              10.21(A) to the 1994 Form 10-K, and incorporated herein by
              reference.)

   10.13      Amended and Restated Interests and Liabilities Contract concerning
              the Municipal Bond Insurance Quota Share Treaty effective as of
              January 1, 1991 among Tokio Marine, FSA and its identified
              subsidiaries and affiliates, with Amendment No. 1 thereto.
              (Previously filed as Exhibit 10.22(A) to the 1994 Form 10-K, and
              incorporated herein by reference.)

   10.14+     Promissory Note between the Company and Sean W. McCarthy dated
              December 20, 1993. (Previously filed as Exhibit 10.30(A) to the
              Form S-1, and incorporated herein by reference.)

   10.15      Quota Share Reinsurance Agreement dated December 22, 1993, among
              Commercial Re, FSA and International. (Previously filed as Exhibit
              10.17 to the Form S-1, and incorporated herein by reference.)

   10.16      Share Purchase Agreement dated as of December 23, 1993 among
              Commercial Re, U S WEST and the Company. (Previously filed as
              Exhibit 10.32 to the Form S-1, and incorporated herein by
              reference.)

   10.17      Federal Income Tax Allocation Agreement dated as of December 23,
              1993 among Commercial Re, U S WEST and the Company. (Previously
              filed as Exhibit 10.33 to the Form S-1, and incorporated herein by
              reference.)

   10.18      Liquidity Facility dated as of December 23, 1993 among U S WEST,
              Inc., Commercial Re and the Company. (Previously filed as Exhibit
              10.34 to the Form S-1, and incorporated herein by reference.)

   10.19      Investment Management Agreement dated as of December 23, 1993
              among FSA Portfolio Management, Commercial Re and the Company.
              (Previously filed as Exhibit 10.35 to the Form S-1, and
              incorporated herein by reference.)

   10.20      Agreement for Management and the Provision of Personnel, Property
              and Services dated as of December 23, 1993 between Commercial Re
              and the Company. (Previously filed as Exhibit 10.36 to the Form
              S-1, and incorporated herein by reference.)

   10.21*     Registration Rights Agreement dated as of May 13, 1994 among the
              Company, MOCC and White Mountains.

   10.21(A)*  Letter Agreement dated May 14, 1996, from the Company, MOCC and
              White Mountains to Tokio Marine regarding the May 13, 1994
              Registration Rights Agreement among the Company, MOCC and White
              Mountains.

   10.22      Registration Rights Agreement dated as of November 3, 1998 between
              the Company and EXEL Limited. (Previously filed as Exhibit 10.22
              to the Company's Annual Report on Form 10-K (Commission File No.
              1-12644) for the period ended December 31, 1998 (the "1998 Form
              10-K"), and incorporated herein by reference.)

   10.23      Purchase Agreement dated October 29, 1999 between White Mountains
              and the Company. (Previously filed as Exhibit 1 to the Company's
              Current Report on Form 8-K dated October 29, 1999 and filed with
              the SEC on December 17, 1999 (the "October 1999 Form 8-K"), and
              incorporated herein by reference.)


                                       44
<PAGE>

   10.23(A)   Purchase Agreement dated November 2, 1999 between XL and the
              Company. (Previously filed as Exhibit 2 to the October 1999 Form
              8-K, and incorporated herein by reference.)

   10.23(B)   Purchase Agreement dated October 29, 1999 between Tokio Marine and
              the Company. (Previously filed as Exhibit 3 to the October 1999
              Form 8-K, and incorporated herein by reference.)

   13*        Annual Report to Shareholders for the Year Ended December 31,
              1999. Such report is furnished for the information of the
              Securities and Exchange Commission only and, except for those
              portions thereof which are expressly incorporated by reference in
              the Annual Report on Form 10-K, is not to be deemed filed as part
              of this Report.

   21*        List of Subsidiaries.

   23*        Consent of PricewaterhouseCoopers LLP.

   24*        Powers of Attorney. (Previously filed as Exhibit 24 to the
              Company's Annual Report on Form 10-K (Commission File No. 1-12644)
              for the fiscal period ended December 31, 1996, and incorporated
              herein by reference, other than the power of attorney (i) for Mr.
              Post, which was filed as Exhibit 24 to the 1997 Form 10-K and
              incorporated herein by reference, (ii) for Messrs. Hama and
              McCarthy, which was filed as Exhibit 24 to the 1998 Form 10-K, and
              (iii) for Mr. Baxter, which is filed herewith.)

   27*        Financial Data Schedules.

   99*        Financial Security Assurance Inc. and Subsidiaries 1999
              Consolidated Financial Statements and Report of Independent
              Accountants.

----------
+     Management contract or compensatory plan or arrangement required to be
      filed as an exhibit to this Form 10-K pursuant to Item 14(c).
*     Filed herewith.

(b) Reports on Form 8-K

      The Company filed a Current Report on Form 8-K dated October 29, 1999,
with the Securities and Exchange Commission on December 17, 1999, which
incorporated by reference the documents included as Exhibits thereto into the
Registration Statement relating to the Company's common stock and other
securities. The Company filed a Current Report on Form 8-K dated December 28,
1999, with the Securities and Exchange Commission on December 29, 1999, which
incorporated by reference the agreement included as an Exhibit thereto into the
Registration Statement relating to the Company's common stock and other
securities. Such Current Reports on Form 8-K were filed in connection with the
Company's fourth quarter sales of common stock to White Mountains, Tokio Marine
and XL and the sale of shares of common stock subject to the Company's 1999
forward share program.


                                       45
<PAGE>

                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.

                                        FINANCIAL SECURITY ASSURANCE
                                          HOLDINGS LTD. (Registrant)


                                        By: /s/ ROBERT  P.  COCHRAN
                                           -------------------------------------
                                        Name:  Robert P. Cochran
                                        Title: Chairman and Chief Executive
                                               Officer
                                        Dated: March 22, 2000

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
      Signature                           Title                        Date
      ---------                           -----                        ----
<S>                                <C>                           <C>
/s/ ROBERT P. COCHRAN*             Chairman, Chief               March 22, 2000
---------------------------        Executive Officer
Robert P. Cochran                  and Director (Principal
                                   Executive Officer)

/s/ ROGER K. TAYLOR*               President,                    March 22, 2000
---------------------------        Chief Operating Officer
Roger K. Taylor                    and Director

/s/ SEAN W. MCCARTHY*              Executive Vice President      March 22, 2000
---------------------------        and Director
Sean W. McCarthy

/s/ JOHN A. HARRISON*              Managing Director             March 22, 2000
---------------------------        and Chief Financial
John A. Harrison                   Officer (Principal
                                   Financial Officer)

/s/ JEFFREY S. JOSEPH*             Managing Director             March 22, 2000
---------------------------        and Controller (Principal
Jeffrey S. Joseph                  Accounting Officer)

/s/ TERRY L. BAXTER*               Director                      March 22, 2000
---------------------------
Terry L. Baxter

/s/ ROBERT N. DOWNEY*              Director                      March 22, 2000
---------------------------
Robert N. Downey

/s/ ANTHONY M. FRANK*              Director                      March 22, 2000
---------------------------
Anthony M. Frank

/s/ FUDEJI HAMA*                   Director                      March 22, 2000
---------------------------
Fudeji Hama

/s/ K. THOMAS KEMP*                Director                      March 22, 2000
---------------------------
K. Thomas Kemp
</TABLE>


                                       46
<PAGE>

<TABLE>
<S>                                <C>                           <C>
/s/ DAVID O. MAXWELL*              Director                      March 22, 2000
---------------------------
David O. Maxwell

/s/ JAMES M. OSTERHOFF*            Director                      March 22, 2000
---------------------------
James M. Osterhoff

/s/ JAMES H. OZANNE*               Director                      March 22, 2000
---------------------------
James H. Ozanne

/s/ RICHARD A. POST*               Director                      March 22, 2000
---------------------------
Richard A. Post

/s/ HOWARD M. ZELIKOW*             Director                      March 22, 2000
---------------------------
Howard M. Zelikow
</TABLE>

----------
* Robert P. Cochran, by signing his name hereto, does hereby sign this Annual
Report on Form 10-K on behalf of each of the Directors and Officers of the
Registrant named above after whose typed names asterisks appear pursuant to
powers of attorney duly executed by such Directors and Officers and filed with
the Securities and Exchange Commission as exhibits to this Report.


                                        By: /s/ ROBERT  P.  COCHRAN
                                           -------------------------------------
                                                  Robert P. Cochran,
                                                   Attorney-in-fact


                                       47
<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS
                         ON FINANCIAL STATEMENT SCHEDULE

To the Shareholders and Board of Directors
of Financial Security Assurance Holdings Ltd.:

Our audits of the consolidated financial statements referred to in our report
dated January 25, 2000, except for Note 22, as to which the date is March 14,
2000, appearing in the 1999 Annual Report to Shareholders of Financial Security
Assurance Holdings Ltd. (which report and consolidated financial statements are
incorporated by reference in this Annual Report on Form 10-K) also included an
audit of the financial statement schedule listed in item 14(a)(2) of this Form
10-K. In our opinion, this financial statement schedule presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements.


                                        /s/ PRICEWATERHOUSECOOPERS LLP
                                        ----------------------------------------
                                        PRICEWATERHOUSECOOPERS LLP

New York, New York
January 25, 2000


                                       48
<PAGE>

                                  Schedule II

                 Parent Company Condensed Financial Information

                            Condensed Balance Sheets
                             (Dollars in thousands)

                                                               December 31,
                                                               ------------
                                                            1999         1998
                                                            ----         ----
Assets:
   Investments and cash                                  $   33,781   $   59,512
   Investment in subsidiaries, at equity in net assets    1,315,856    1,119,235
   Notes receivable from subsidiary                         120,000      120,000
   Deferred taxes                                             8,326        6,190
   Due from subsidiaries                                     32,875       18,060
   Other assets                                              65,674       48,484
                                                         ----------   ----------
                                                         $1,576,512   $1,371,481
                                                         ==========   ==========
Liabilities and Shareholders' Equity:
   Notes payable                                         $  230,000   $  230,000
   Other liabilities                                         93,828       75,345
   Redeemable preferred stock                                   700          700
   Shareholders' equity                                   1,251,984    1,065,436
                                                         ----------   ----------
                                                         $1,576,512   $1,371,481
                                                         ==========   ==========

                         Condensed Statements of Income
                             (Dollars in thousands)

                                                     Year Ended December 31,
                                               1999         1998         1997
                                               ----         ----         ----

Total revenue                               $   4,761    $  11,515    $   3,553
Interest and amortization expense             (16,614)     (10,590)      (2,731)
Other expenses                                    913       (4,355)     (10,038)
Equity in earnings of unconsolidated
   affiliate                                    1,180          333           --
                                            ---------    ---------    ---------
                                               (9,760)      (3,097)      (9,216)
Equity in undistributed net income of
   subsidiaries                               131,350      117,374      100,678
                                            ---------    ---------    ---------
Income before income taxes                    121,590      114,277       91,462
Income tax benefit                              3,815        1,079        3,222
                                            ---------    ---------    ---------
Net income                                  $ 125,405    $ 115,356    $  94,684
                                            =========    =========    =========

      The Parent Company Condensed Financial Information should be read in
conjunction with the Consolidated Financial Statements and Notes to Consolidated
Financial Statements as incorporated by reference in Item 8 Financial Statements
and Supplementary Data.


                                       49
<PAGE>

                                  Schedule II

           Parent Company Condensed Financial Information (Continued)

                       Condensed Statements of Cash Flows
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                    Year Ended December 31,
                                                             -----------------------------------
                                                               1999         1998         1997
                                                               ----         ----         ----
<S>                                                          <C>          <C>          <C>
Cash flows from operating activities:
   Other operating expenses recovered, net                   $   1,821    $  35,168    $   4,291
   Net investment income received                                5,727        3,510        3,448
   Federal income taxes received (paid)                          5,035       (5,332)       7,237
   Interest paid                                               (16,306)      (9,614)      (2,716)
   Other                                                          (612)      (1,089)      (3,512)
                                                             ---------    ---------    ---------
      Net cash provided by (used for) operating activities      (4,335)      22,643        8,748
                                                             ---------    ---------    ---------

Cash flows from investing activities:
   Proceeds from sales of bonds                                186,696      170,513        2,812
   Proceeds from sales of equity investments                    12,878       73,042           --
   Purchases of bonds                                         (176,387)    (158,153)     (30,224)
   Purchases of equity investments                                  --      (92,087)      (1,690)
   Purchases of property and equipment                              (3)          (3)          (3)
   Investment in subsidiaries                                 (128,172)     (96,788)     (31,384)
   Net decrease (increase) in short-term securities                227       23,777       (9,890)
   Other investments                                             3,414      (21,502)          --
                                                             ---------    ---------    ---------
      Net cash used for investing activities                  (101,347)    (101,201)     (70,379)
                                                             ---------    ---------    ---------
Cash flows from financing activities:
   Issuance of notes payable, net                                   --       96,850      125,905
   Surplus notes purchased                                          --      (70,000)     (50,000)
   Dividends paid                                              (14,138)     (12,777)     (12,098)
   Treasury stock, net                                             628      (23,890)     (36,247)
   Sale of stock                                               151,385           --           --
   Issuance of stock for acquisition of subsidiary                  --       80,000           --
   Repurchase of stock by subsidiary                                --        8,500       39,500
   Other                                                       (32,520)         533       (5,567)
                                                             ---------    ---------    ---------
      Net cash provided by financing activities                105,355       79,216       61,493
                                                             ---------    ---------    ---------
Net increase (decrease) in cash                                   (327)         658         (138)
Cash at beginning of year                                          620          (38)         100
                                                             ---------    ---------    ---------
Cash at end of year                                          $     293    $     620    $     (38)
                                                             =========    =========    =========

Reconciliation of net income to net cash provided by
operating activities:
Net income                                                   $ 125,405    $ 115,356    $  94,684
   Equity in undistributed net income of subsidiary           (131,350)    (117,374)    (100,678)
   Decrease (increase) in accrued investment income              2,303       (2,607)      (1,394)
   Increase (decrease) in accrued income taxes                     756       (5,137)       6,944
   Provision (benefit) for deferred income taxes                   463       (1,275)      (2,930)
   Net realized losses (gains) on investments                    3,211       (5,206)      (1,405)
   Deferred equity compensation                                  8,725       17,765       14,112
   Depreciation and accretion of bond discount                    (432)      (1,077)      (1,174)
   Equity in earnings of unconsolidated affiliate               (1,180)        (333)          --
   Change in other assets and liabilities                      (12,236)      22,531          589
                                                             ---------    ---------    ---------
Cash provided by (used for) operating activities             $  (4,335)   $  22,643    $   8,748
                                                             =========    =========    =========
</TABLE>

      The Parent Company Condensed Financial Information should be read in
conjunction with the Consolidated Financial Statements and Notes to Consolidated
Financial Statements as incorporated by reference in Item 8 Financial Statements
and Supplementary Data.


                                       50
<PAGE>

                                   SCHEDULE II

           Financial Security Assurance Holdings Ltd. (Parent Company)

                     Notes to Condensed Financial Statements

1. Condensed Financial Statements

      Certain information and footnote disclosures normally included in
      financial statements prepared in accordance with generally accepted
      accounting principles have been condensed or omitted. These condensed
      financial statements should be read in conjunction with the Company's
      consolidated financial statements and the notes thereto.

2. Significant Accounting Policies

      The Parent Company carries its investments in subsidiaries under the
      equity method.


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