Exhibit 13

[page 16 of Annual Report]

<TABLE>
<CAPTION>
Dollars in millions, except
per share data                        1999          1998          1997         1996         1995
<S>                             <C>           <C>           <C>           <C>          <C>
Summary of Operations (a)
Gross premiums written          $     362.7   $     319.3   $     236.4   $    177.0   $    110.7
Net premiums written                  230.4         219.9         172.9        121.0         77.6
Net premiums earned                   175.0         137.9         109.5         90.4         69.3
Net investment income                  94.7          78.8          72.1         65.1         49.0
Net income                            125.4         115.4          94.7         78.0         55.0 (b)

Balance Sheet Data (a)
Total investments               $   2,140.0   $   1,874.8   $   1,431.6   $  1,154.4   $  1,110.7
Total assets                        2,905.6       2,452.3       1,931.2      1,560.2      1,501.4
Deferred premium revenue, net         559.0         504.6         422.1        360.0        330.3
Loss and loss adjustment
expense reserve, net                   77.8          65.6          44.8         42.2         50.2
Notes payable                         230.0         230.0         130.0         30.0         30.0
Preferred stock                         0.7           0.7           0.7          0.7          0.7
Common shareholders' equity         1,252.0       1,065.4         875.2        797.8        777.2

Per Common Share Data (a)
Earnings per share (c)          $      3.89   $      3.77   $      3.06   $     2.52   $     2.13
Book value per share                  38.27         35.63         30.44        26.62        24.67
Dividends paid                         0.47          0.44          0.41         0.35         0.32

Additional Data

Qualified statutory capital     $   1,320.1   $   1,037.7   $     781.7   $    675.9   $    644.7
Total claims-paying resources(d)    2,592.3       2,119.6       1,696.1      1,372.3      1,157.1
Net par outstanding               129,938.0     104,673.0      75,478.0     59,194.0     45,979.0
Net insurance in force
  (principal + interest)          195,571.0     159,995.0     117,430.0     93,704.0     75,360.0
Policyholders' leverage
  (risk-to-capital ratio)             148:1         154:1         150:1        139:1        117:1
</TABLE>

(a)   Prepared according to accounting principles generally accepted in the
      Unites States (GAAP).

(b)   Includes the effect of a one-time general reserve charge of $15.4 million
      ($10.0 million after taxes) related to the merger with Capital Guaranty
      Corporation.

(c)   Represents diluted earnings per share. All earnings per share have been
      restated to reflect the adoption of SFAS No. 128.

(d)   Statutory capital + statutory unearned premium reserve + present value of
      future net installment premiums + statutory loss reserve + standby line of
      credit facility.
<PAGE>

[page 18 of Annual Report]

Management's Discussion and Analysis of Financial Condition and Results of
Operations

Results of Operations

Year Ended December 31, 1999 versus Year Ended December 31, 1998

Adjusted book value per common share of Financial Security Assurance Holdings
Ltd. (the Company) was $52.57 at December 31, 1999, up 11.4% including dividends
since year-end 1998. Excluding realized and unrealized capital gains and losses,
adjusted book value per share rose 17.5% including dividends. Management and
some equity analysts use adjusted book value per common share as a proxy for the
Company's intrinsic value, exclusive of franchise value. It is defined as book
value plus the after-tax present value of all deferred premium income and the
change in value of forward shares, less deferred expenses. Adjusted book value
is not a substitute for GAAP book value.

The Company discusses its financial results by breaking out various levels of
its income statement in order to present a better analysis of underlying trends.
Core net income represents net income before the after-tax effects of refundings
and prepayments, net realized capital gains and losses, the cost of the
equity-based compensation programs and other non-recurring adjustments. Core net
income therefore represents the Company's normal operating results on a basis
comparable to that of its industry peers. Operating net income is core net
income plus the after-tax effect of refundings and prepayments. The distinction
between core and operating net income is important because higher-than-normal
volumes of refundings and prepayments disproportionately increase earned
premiums and could suggest a stronger earnings trend than the pace of
originations would warrant. Net income, as reported, is operating net income
plus the after-tax effects of capital gains and losses, the cost of the
equity-based compensation programs and other non-recurring items, if any.

The Company reports core, operating and reported net income per share results in
accordance with SFAS No. 128, which the Company adopted on December 31, 1997.
The standard defines "basic" and "diluted" earnings per share. Basic earnings
per share is based on average basic shares outstanding, which is calculated by
adding shares earned but not issued under the Company's equity bonus and
performance share programs to the average common shares outstanding. Diluted
earnings per share is based on average diluted shares outstanding, which is
calculated by adding shares contingently issuable under stock options, the
performance share program and the Company's redeemable preferred stock to the
average basic shares outstanding. Unless otherwise indicated, all earnings per
share results are diluted, and results reported in prior periods have been
restated accordingly.

The Company's 1999 net income was $125.4 million ($3.89 per share), compared
with $115.4 million ($3.77 per share) for 1998, an increase of 8.7%. Core net
income was $140.0 million ($4.34 per share) for 1999, compared with $107.5
million ($3.51 per share) for 1998, an increase of 30.3%. Total core revenues
increased in 1999 by $55.7 million, to $257.1 million for 1999 from $201.4
million for 1998, while total core expenses increased $15.0 million. Operating
net income was $146.7 million ($4.55 per share) for 1999 versus $114.9 million
($3.76 per share) for 1998, an increase of $31.8 million, or 27.6%.
<PAGE>

The Company employs two measures of gross premiums originated for a given
period. Gross premiums written captures premiums collected in the period,
whether collected up front for business originated in the period, or in
installments for business originated in prior periods. An alternative measure,
gross present value of premiums written (gross PV premiums written) reflects
future installment premiums discounted to their present value, as well as
upfront premiums, but only for business originated in the period. The Company
considers gross PV premiums written to be the better indicator of a given
period's origination activity because a substantial portion of the Company's
premiums is collected in installments, a practice typical of the asset-backed
business. To calculate PV premiums, management estimates the life of each
transaction that has installment premiums and discounts the future installment
premium payments. For all years prior to 1998, the Company used a fixed discount
rate of 9.5%. At the beginning of 1998, the Company

<PAGE>

[page 19 of Annual Report]

began calculating the discount rate as the average pre-tax yield on its
investment portfolio for the previous three years. The rates for 1999 and 1998
were 5.93% and 6.31%, respectively. Management intends to revise the discount
rate in future years according to the same formula, in order to reflect interest
rate changes.

The Company's principal operating subsidiary, Financial Security Assurance Inc.
(FSA), achieved exceptional results, as positive market trends created strong
and broad-based demand for insured transactions. With solid contributions from
its three core markets, FSA wrote insurance policies generating $517.2 million
of gross PV premiums, 32.2% more than the $391.2 million in 1998. The annual par
value of bonds insured by FSA rose just 1.9%, to $59.8 billion. The greater rise
in PV premiums reflects an improved municipal pricing environment and a higher
proportion of asset-backed and international transactions, which tend to have
higher premiums than municipal bonds. The credit quality and return
characteristics for the new business were extremely attractive.

The Company increased its production in the U.S. asset-backed market, which was
characterized by robust issuance and by lack of liquidity in the market for
subordinated securities. In this sector, FSA increased its PV premiums by 35.7%
to $200.4 million and its par originated by 14.7% to $24.8 million. FSA expanded
its business in the collateralized debt obligation (CDO) market, where it has
established a leadership position, benefited from its strong relationships with
repeat issuers in the sub-prime finance sector and completed a number of
innovative mortgage-backed transactions.

In the U.S. municipal bond market, the Company registered strong results,
despite a 21% decline in total market volume of new municipal bonds and reduced
insurance penetration. In an environment characterized by improved pricing, the
opportunities to earn higher returns increased, and FSA continued its commitment
to pricing and credit discipline. The U.S. municipal business contributed $183.0
million in PV premiums, compared with the record $220.3 million written in 1998.
The 16.9% decrease in U.S. municipal PV premiums is significantly less than the
23.8% decline in FSA's U.S. municipal par insured, which fell to $26.3 billion
in 1999 from $34.5 billion in 1998.

In international markets, FSA had a breakthrough year, as the asset-backed and
infrastructure markets expanded. FSA insured $8.7 billion of international par,
compared with $2.5 billion in 1998, to generate PV premiums of $133.8 million,
compared with $23.2 million in 1998. In its international business, FSA focuses
on Western Europe and on certain developed countries in the Asia Pacific region,
specifically Japan, Australia and New Zealand. During 1999 in Europe, FSA
expanded its participation in financings under the United Kingdom's Private
Finance Initiative (PFI), a government-sponsored program designed to privatize
public assets. It also guaranteed several large structured finance transactions
and was active in the synthetic CDO sector. In a synthetic transaction, FSA
guarantees a credit default swap that provides capital relief on a portfolio of
loans that remain on balance sheet. Proposed changes in international guidelines
for bank regulation are driving growth in the synthetic market. In Japan,
despite modest volume, FSA completed transactions in the consumer receivables
and CDO markets and prepared for greater participation as the Japanese
securitization market matures.

FSA's gross premiums written increased 13.6% to $362.7 million for 1999 from
$319.3 million for 1998. Net premiums written were $230.4 million during 1999,
an increase of 4.8% when

<PAGE>

compared with the 1998 result. Gross premiums written grew at a faster pace than
net premiums written because the Company used more reinsurance. This was the
result of joint venture transactions with XL Capital Ltd and The Tokio Marine
and Fire Insurance Co., Ltd., along with expansion of reinsurance capacity for
large transactions and capacity-constrained issuers. Reinsurance cessions
totaled 36.5% of 1999 gross premiums written, compared with 31.1% in 1998. Net
premiums earned in 1999 were $175.0 million, compared with $137.9 million in
1998, an increase of 26.8%. Premiums earned from refundings and prepayments were
$13.9 million for 1999 and $15.8 million for 1998, contributing $6.6 million and
$7.4 million, respectively, to after-tax earnings. Refundings declined in
response to the rising interest rate environment of 1999. Excluding the effects
of refundings, net premiums earned grew 31.9% over the comparable

<PAGE>

[page 20 of Annual Report]

1998 result. No assurance can be given that refundings and prepayments will
continue at the level experienced in 1999 or 1998.

Net investment income was $94.7 million for 1999 and $78.8 million for 1998, an
increase of 20.2%. This increase was due primarily to higher invested balances
as a result of new business writings and proceeds from a debt offering in the
fourth quarter of 1998. For further discussion, see Liquidity and Capital
Resources below. The Company's effective tax rate on investment income was 15.3%
for 1999, compared with 17.6% for 1998. In 1999, the Company realized $13.3
million in net capital losses, compared with $20.9 million of net capital gains
in 1998. Capital gains and losses are a by-product of the normal investment
management process and will vary substantially from period to period.

Interest expense in 1999 was $16.6 million, $6.0 million higher than in 1998,
reflecting the first full year of interest on debt issued in the fourth quarter
of 1998. For further discussion, see Liquidity and Capital Resources below.

The provision for losses and loss adjustment expenses in 1999 was $8.8 million,
compared with $4.0 million in 1998, representing additions to the Company's
general reserve. During 1998, the Company transferred $18.4 million to its
general reserve from case basis reserves due to recoveries on certain commercial
mortgage transactions. This recovery allowed for a decrease of $4.1 million in
the amount needed to fund the general reserve for originations of new business
in 1998. The additions to the general reserve represent management's estimate of
the amount required to cover the present value of the net cost of claims
adequately. The Company will, on an ongoing basis, monitor these reserves and
may periodically adjust such reserves, upward or downward, based on the
Company's actual loss experience, its future mix of business, and future
economic conditions. At December 31, 1999, the general reserve totaled $55.0
million.

Total policy acquisition and other operating expenses (excluding the cost of
equity-based compensation programs, which was $17.1 million for 1999 and $19.9
million for 1998) were $49.1 million in 1999, compared with $45.6 million in
1998, an increase of $3.5 million. Further excluding the effect of refundings,
total policy acquisition and other operating expenses were $45.4 million in
1999, compared with $41.2 million in 1998, an increase of $4.2 million. The
increase resulted from greater amortization of deferred acquisition costs due to
a higher level of core premiums earned, along with higher personnel costs. The
Company's core expense ratio fell to 28.2% from 33.8% in 1998 due to higher core
premiums earned.

Income before income taxes for 1999 was $164.0 million, up 4.3% from $157.3
million for 1998.

The Company's effective tax rate for 1999 was 23.5%, compared with 26.7% for
1998. The decrease in the effective tax rate is due to higher income from the
Company's international joint ventures and a higher proportion of tax-exempt
securities in the investment portfolio.

The weighted average number of diluted shares of common stock outstanding
increased to 32,250,000 for 1999 from 30,599,000 for 1998. This increase was
primarily due to the Company's issuance of stock in the fourth quarters of 1999
and 1998. For further discussion, see Liquidity and Capital Resources below.

<PAGE>

Market Risk

The primary objective in managing the Company's investment portfolio is
generation of an optimal level of after-tax investment income while preserving
capital and maintaining adequate liquidity. Investment strategies are based on
many factors, including the Company's tax position, fluctuation in interest
rates, regulatory and rating agency criteria and other market factors.
Investment decisions are carried out by one internal investment manager for
fixed-income investments and several external investment managers for
fixed-income and equity investments. These investment decisions are based on
guidelines established by management and approved by the board of directors.

Market risk represents the potential for loss due to adverse changes in the fair
value of financial instruments. The market risks related to financial
instruments of the Company relate primarily to its investment portfolio, of
which 99% was invested in fixed-income securities at
<PAGE>

[page 21 of Annual Report]

December 31, 1999. Changes in interest rates affect the value of the Company's
fixed-income portfolio. As interest rates rise, the fair value of fixed-income
securities decreases. Sensitivity to interest rate movements can be estimated by
projecting a hypothetical increase in interest rates of 1.0%. Based on market
values and interest rates at year-end 1999, this hypothetical increase in
interest rates would result in an after-tax decrease of $82.1 million in the net
fair value of the Company's fixed-income portfolio. Since the Company is able to
hold these investments to maturity, absent an unusually large demand for funds,
it does not expect to recognize any material adverse impact to income or cash
flows under the above scenario.

The Company's investment portfolio holdings are primarily U.S.
dollar-denominated fixed-income securities, including municipal bonds, U.S.
government bonds, and mortgage-backed, asset-backed and corporate securities. In
calculating the sensitivity to interest rates for the taxable securities, U.S.
Treasury rates are changed instantaneously by 1.0%, and the option-adjusted
spreads of the securities are held constant. Tax-exempt securities are subjected
to a change in the municipal Triple-A obligation curve that would be equivalent
to a 1.0% taxable interest rate change based on the average taxable/tax-exempt
ratios for the prior 12 months. The simulation for tax-exempts calculates
duration by taking into account the applicable call date if the bond is at a
premium or the maturity date if the bond is at a discount.

Year 2000 Disclosure

The Company encountered no problems in its systems or its vendors' systems due
to the arrival of Year 2000 (Y2K). The cost to the Company for Y2K compliance
was immaterial. Based on the information FSA has received from servicers and
trustees, management believes that FSA will not incur any claims under its
financial guaranty contracts as a result of Y2K.

Year Ended December 31, 1998 versus Year Ended December 31, 1997

Adjusted book value per common share was $47.62 at December 31, 1998, up 19.5%
including dividends from year-end 1997. Excluding realized and unrealized
capital gains and losses, adjusted book value per share rose 17.3% including
dividends.

The Company's 1998 net income was $115.4 million ($3.77 per share), compared
with $94.7 million ($3.06 per share) for 1997, an increase of 21.8%. Core net
income was $107.5 million ($3.51 per share) for 1998, compared with $90.7
million ($2.93 per share) for 1997, an increase of 18.5%. Total core revenues
increased in 1998 by $29.8 million, to $201.4 million for 1998 from $171.6
million for 1997, while total core expenses increased only $7.6 million.
Operating net income was $114.9 million ($3.76 per share) for 1998 versus $95.9
million ($3.10 per share) for 1997, an increase of $19.0 million, or 19.8%.

FSA benefited in 1998 from growth of its core markets and a flight to quality
created by volatility in worldwide capital markets. As credit spreads widened
for securities at all levels in the credit spectrum, the value of FSA's guaranty
increased, and the Company was able to increase production volume significantly
while maintaining pricing and underwriting standards.

<PAGE>

Business was well balanced across U.S. municipal and asset-backed markets.
International activity was limited during 1998 because the Company found
relatively few opportunities with returns on equity and risk profiles meeting
FSA standards.

Gross PV premiums written increased 56.3% to $391.2 million for 1998 from $250.3
million for 1997. In 1998, the Company insured $58.6 billion par value of bonds,
a 58.2% increase over par insured in 1997.

Asset-backed market conditions were favorable. Securitization volume was strong,
credit spreads widened, and competition from uninsured executions decreased as
demand fell for subordinated debt and residuals. As a result, FSA found a larger
number of appropriate transactions to guarantee and was able to expand its
product lines. In addition to maintaining strong production in the consumer and
residential mortgage finance sectors, FSA significantly increased its volume of
structured financings, such as collateralized debt obligations. Asset-backed
gross PV premiums written were $162.7 million in 1998, compared with $111.0
million in 1997, an increase of 46.6%. FSA's asset-backed par insured increased
20.8% to $23.5 billion.

FSA also increased its municipal bond insurance volume, returns and market
share, aided by higher market volume for new municipal bonds, increased market
penetration by bond insurance and strong trading value for FSA-insured bonds.
For the municipal business, gross PV premiums written increased to $228.5
million for 1998 from $139.3 million for 1997, an increase of

<PAGE>

[page 22 of Annual Report]

64.1%. FSA's municipal par insured increased 99.6% to $35.1 billion. Municipal
par increased more than municipal PV premiums written because of a reduction in
international transactions, which generally have high premium rates, and a
decrease in the average lives of domestic general obligations. In addition, the
capital charges assigned by Standard & Poor's to measure risk in FSA's municipal
transactions, which began the year at the lowest level of risk in the industry,
decreased further during the year because of the higher quality of the new
business insured.

FSA's gross premiums written increased 35.1% to $319.3 million for 1998 from
$236.4 million for 1997. Net premiums written were $219.9 million during 1998,
an increase of 27.2% when compared with the 1997 result. Gross premiums written
grew at a faster pace than net premiums written due to the Company's greater use
of reinsurance to expand capacity for large transactions and certain successful
securitization programs. Reinsurance cessions totaled 31.1% of 1998 gross
premiums written, compared with 26.9% in 1997. Net premiums earned in 1998 were
$137.9 million, compared with $109.5 million in 1997, an increase of 25.9%.
Premiums earned from refundings and prepayments were $15.8 million for 1998 and
$11.3 million for 1997, contributing $7.4 million and $5.2 million,
respectively, to after-tax earnings. Before the effects of refundings and
prepayments, net premiums earned grew 24.3% over the comparable 1997 result.

Net investment income was $78.8 million for 1998 and $72.1 million for 1997, an
increase of 9.3%. This increase was due primarily to higher invested balances as
a result of new business writings and proceeds from debt issued in the fourth
quarter of 1998. The Company's effective tax rate on investment income was 17.6%
for 1998, compared with 19.9% for 1997. In 1998, the Company realized $20.9
million in net capital gains, compared with $11.5 million in 1997. Capital gains
and losses are a by-product of the normal investment management process and will
vary substantially from period to period.

Other income was $0.5 million for 1998, compared with $9.3 million for 1997.
Other income in 1997 was largely due to the sale of two insurance subsidiaries
to realize the value of their redundant insurance licenses. All of the
subsidiaries' insurance policy obligations were assumed by FSA.

Interest expense in 1998 was $10.6 million, an increase of $6.2 million when
compared with 1997 results. The increase was due to the Company's increase in
debt outstanding. For further discussion, see Liquidity and Capital Resources
below.

The provision for losses and loss adjustment expenses in 1998 was $4.0 million,
compared with $9.2 million in 1997, representing additions to the Company's
general reserve. During 1998, the Company transferred $18.4 million to its
general reserve from case basis reserves due to recoveries on certain commercial
mortgage transactions. This recovery allowed for a decrease of $4.1 million in
the amount needed to fund the general reserve for originations of new business
in 1998. Also during 1998, the Company transferred $9.4 million from its general
reserve to case basis reserves due primarily to anticipated claims on two
sub-prime auto loan programs. The additions to the general reserve represent
management's estimate of the amount required to cover the present value of the
net cost of claims adequately. The Company will, on an ongoing basis, monitor
these reserves and may periodically adjust such reserves, upward or downward,
based on the Company's actual loss experience, its future mix of business, and
future economic conditions. At December 31, 1998, the Company's general reserve
was $47.3 million.

<PAGE>

Total policy acquisition and other operating expenses (excluding the cost of
equity-based compensation programs, which was $19.9 million for 1998 and $20.5
million for 1997) were $45.6 million in 1998, compared with $38.0 million in
1997, an increase of $7.6 million. Further excluding the effect of refundings,
total policy acquisition and other operating expenses were $41.2 million in
1998, compared with $34.7 million in 1997, an increase of $6.5 million. The
increase resulted from greater amortization of deferred acquisition costs due to
a higher level of core premiums earned, along with higher personnel costs. The
Company's core expense ratio fell to 33.8% from 35.3% in 1997.

Income before income taxes for 1998 was $157.3 million, up 21.4% from $129.5
million for 1997.
<PAGE>

[page 23 of Annual Report]

The Company's effective tax rate for 1998 was 26.7%, compared with 26.9% for
1997.

The weighted average number of diluted shares of common stock outstanding
decreased from 30,913,000 for 1997 to 30,599,000 for 1998. This decrease was
primarily due to stock repurchases by the Company's rabbi trust to fund
obligations under employee benefit plans, partially offset by an increase in the
dilutive effect of the Company's redeemable preferred stock and shares unissued
or contingently issuable for employee benefit plans.

Liquidity and Capital Resources

The Company's consolidated invested assets at December 31, 1999, net of
unsettled security transactions, were $1,937.1 million, compared with the
December 31, 1998 balance of $1,770.6 million. These balances include the change
in the market value of the investment portfolio, which had an unrealized loss
position of $73.5 million at December 31, 1999, compared with an unrealized gain
position of $58.0 million at December 31, 1998. At December 31, 1999, the
Company had, at the holding company level, an investment portfolio of $33.5
million available to fund the liquidity needs of its activities outside of its
insurance operations. Because the majority of the Company's operations are
conducted through FSA, the long-term ability of the Company to service its debt
and to declare and pay dividends will largely depend upon its receipt of
dividends from, or payment on surplus notes by, FSA and upon external
financings.

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 in 1999. Based upon FSA's statutory statements for the quarter ended
December 31, 1999, and considering dividends that can be paid by its subsidiary,
the maximum amount available for payment of dividends by FSA without regulatory
approval over the following 12 months is approximately $82.0 million. In
addition, the Company holds $120.0 million of surplus notes of FSA. Payments of
principal or interest on such notes may be made with the approval of the New
York Insurance Department.

Dividends paid by the Company to its shareholders increased to $14.1 million in
1999 from $12.8 million in 1998 and to $0.465 per common share in 1999 from
$0.44 in 1998. In addition to paying dividends, the Company uses funds to make
debt service payments and to repurchase shares of the Company's common stock to
fund employee benefit plans. During 1999 and 1998, the Company purchased $2.6
million and $23.9 million, respectively, of its stock for employee benefit
plans.

During the fourth quarter of 1999, the Company sold 2,583,764 shares at $54.20
per share for a total of $140.0 million. The Company issued 1,400,000 new shares
and also sold 1,183,764 shares from its treasury and rabbi trust accounts. The
proceeds augmented the Company's capital base for future growth and for
anticipated employee compensation payments at the beginning of

<PAGE>

2000. During the fourth quarter of 1998, the Company issued $100.0 million of
6.950% Senior Quarterly Income Debt Securities due November 1, 2098 and callable
on or after November 1, 2003. The Company used these proceeds to augment the
capital in its insurance company subsidiaries and for general corporate
purposes. The Company also has outstanding $130.0 million of 7.375% Senior
Quarterly Income Debt Securities due September 30, 2097 and callable on or after
September 18, 2002.

In May 1996, the Company entered into forward agreements with two financial
institutions (the Counterparties) in respect of 1,750,000 shares (the Forward
Shares) of the Company's common stock. Under the forward agreements, the Company
has the obligation either (i) to purchase the Forward Shares from the
Counterparties for a price equal to $26.50 per share plus carrying costs or (ii)
to direct the Counterparties to sell the Forward Shares, with the Company
receiving any excess or making up any shortfall between the sale proceeds and
$26.50 per share plus carrying costs (net of dividends) in cash or additional
shares, at its option. The Company made the economic benefit and risk of 750,000
of these shares available for subscription by certain of the
<PAGE>

[page 24 of Annual Report]

Company's employees and directors. 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. The cost of these settlements during 1999 and
1998 was zero and $0.7 million, respectively. At December 31, 1999, 562,200
Forward Shares remained in the program. Of these, 33,078 shares were held for
the benefit of the Company as a result of the repurchase of Forward Shares from
employees and directors, and 529,122 shares continued to be held for the benefit
of employees and directors. In the fourth quarter of 1999, the Company entered
into additional forward agreements with two counterparties to purchase 750,000
Forward Shares at an initial cost of $53.50 per share. These agreements are
similar to the Forward Share agreements described above, and the economic
benefit and risk of these shares are for the account of the Company's employees
and directors as described above. At December 31, 1999, all 750,000 shares were
outstanding. In total, for both plans, net income will be affected by
approximately $0.8 million, or $0.03 per share, for each dollar change in the
Company's share price.

In December 1999, Financial Security Assurance International Ltd., an indirect
subsidiary of FSA, received $50.0 million of additional capital. FSA contributed
$40.0 million, and XL Capital Ltd contributed the remaining $10.0 million to
maintain its minority interest in the subsidiary.

FSA's primary uses of funds are to pay operating expenses and to pay dividends
to, or repay surplus notes held by, its parent. FSA's funds are also required to
satisfy claims, if any, under insurance policies in the event of default by an
issuer of an insured obligation and the unavailability or exhaustion of other
payment sources in the transaction, such as the cash flow or collateral
underlying the obligations. FSA seeks to structure asset-backed transactions to
address liquidity risks by matching insured payments with available cash flow or
other payment sources. The insurance policies issued by FSA provide, in general,
that payments of principal, interest and other amounts insured by FSA may not be
accelerated by the holder of the obligation but are paid by FSA in accordance
with the obligation's original payment schedule or, at FSA's option, on an
accelerated basis. These policy provisions prohibiting acceleration of certain
claims are mandatory under Article 69 of the New York Insurance Law and serve to
reduce FSA's liquidity requirements.

The Company believes that FSA's expected operating liquidity needs, both on a
short- and long-term basis, can be funded from its operating cash flow. In
addition, FSA has a number of sources of liquidity that are available to pay
claims on a short- and long-term basis: cash flow from written premiums, FSA's
investment portfolio and earnings thereon, reinsurance arrangements with
third-party reinsurers, liquidity lines of credit with banks, and capital market
transactions.

FSA has a credit arrangement, aggregating $150.0 million at December 31, 1999,
that is provided by commercial banks and intended for general application to
transactions insured by FSA and its insurance company subsidiaries. At December
31, 1999, there were no borrowings under this arrangement, which expires on
April 28, 2000, unless extended. In addition, there are credit arrangements
assigned to specific insured transactions. In August 1994, FSA entered into a
facility agreement with Canadian Global Funding Corporation and Hambros Bank
Limited. Under the agreement, FSA can arrange financing for transactions subject
to certain conditions. The amount of this facility was $186.9 million, of which
$99.3 million was unutilized at December 31, 1999.

<PAGE>

FSA has a standby line of credit in the amount of $240.0 million with a group of
international banks to provide loans to FSA after it has incurred, during the
term of the facility, cumulative municipal losses (net of any recoveries) in
excess of the greater of $230.0 million or 5.75% of average annual debt service
of the covered portfolio. The obligation to repay loans made under this
agreement is a limited recourse obligation payable solely from, and
collateralized by, a pledge of recoveries realized on defaulted insured
obligations in the covered portfolio, including certain installment premiums and
other collateral. This commitment has a term beginning on April 30, 1999 and
expiring on April 30, 2006 and contains an annual renewal provision subject to
approval by the banks. No amounts have been utilized under this commitment as of
December 31, 1999.

The Company has no plans for material capital expenditures within the next
twelve months.
<PAGE>

[page 25 of Annual Report]

                        REPORT OF INDEPENDENT ACCOUNTANTS

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

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows present fairly, in all material respects, the financial position of
Financial Security Assurance Holdings Ltd. and Subsidiaries (the Company) at
December 31, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999 in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.

                                                  /s/ PRICEWATERHOUSECOOPERS LLP
                                                      PRICEWATERHOUSECOOPERS LLP

New York, New York
January 25, 2000, except for
Note 22, as to which the date
is March 14, 2000
<PAGE>

[page 26 of Annual Report]

                   FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
                                AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                  (Dollars in thousands, except per share data)

<TABLE>
<CAPTION>
                                                              December 31,   December 31,
ASSETS                                                           1999            1998
------                                                           ----            ----
<S>                                                           <C>            <C>
Bonds at market value (amortized cost of $1,919,677
and $1,655,042)                                               $ 1,852,669    $ 1,708,040
Equity investments at market value (cost of $30,104
and $64,292)                                                       23,606         68,243
Short-term investments                                            263,747         98,554
                                                              -----------    -----------

Total investments                                               2,140,022      1,874,837
Cash                                                                6,284          3,490
Deferred acquisition costs                                        198,048        199,559
Prepaid reinsurance premiums                                      285,105        217,096
Reinsurance recoverable on unpaid losses                            9,492          6,421
Receivable for securities sold                                     40,635          1,655
Investment in unconsolidated affiliates                            29,709         29,496
Other assets                                                      196,349        119,712
                                                              -----------    -----------

TOTAL ASSETS                                                  $ 2,905,644    $ 2,452,266
                                                              ===========    ===========

LIABILITIES AND MINORITY INTEREST, REDEEMABLE
PREFERRED STOCK AND SHAREHOLDERS' EQUITY

Deferred premium revenue                                      $   844,146    $   721,699
Losses and loss adjustment expenses                                87,309         72,007
Deferred federal income taxes                                      43,341         87,254
Ceded reinsurance balances payable                                 36,387         31,502
Payable for securities purchased                                  243,519        105,859
Notes payable                                                     230,000        230,000
Minority interest                                                  32,945         20,388
Accrued expenses and other liabilities                            135,313        117,421
                                                              -----------    -----------

TOTAL LIABILITIES AND MINORITY INTEREST                         1,652,960      1,386,130
                                                              -----------    -----------

COMMITMENTS AND CONTINGENCIES

Redeemable preferred stock (20,000,000 and 3,000,000 shares
  authorized; 2,000,000 issued and outstanding; par value
  of $.01 per share)                                                   20             20

Additional paid-in capital - preferred                                680            680
                                                              -----------    -----------

REDEEMABLE PREFERRED STOCK                                            700            700
                                                              -----------    -----------

Common stock (200,000,000 and 50,000,000 shares authorized;
  33,676,301 and  32,276,301 issued; par value of $.01 per
  share)                                                              337            323
Additional paid-in capital - common                               836,853        733,442
Accumulated other comprehensive income (loss) [net of
  deferred income tax provision (benefit)
  of $(25,727) and $20,288]                                       (47,779)        37,678
Accumulated earnings                                              436,417        325,150
Deferred equity compensation                                       52,670         43,946
Less treasury stock at cost (961,418
  and 2,372,839 shares held)                                      (26,514)       (75,103)
                                                              -----------    -----------

TOTAL  SHAREHOLDERS' EQUITY                                     1,251,984      1,065,436
                                                              -----------    -----------

TOTAL LIABILITIES AND MINORITY INTEREST,  REDEEMABLE
PREFERRED STOCK AND  SHAREHOLDERS' EQUITY                     $ 2,905,644    $ 2,452,266
                                                              ===========    ===========
</TABLE>

          The accompanying Notes to Consolidated Financial Statements
                   are an integral part of these statements.
<PAGE>

[page 27 of Annual Report]

                   FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
                                AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
                  (Dollars in thousands, except per share data)

<TABLE>
<CAPTION>
Year Ended December 31,
REVENUES:                                                        1999         1998         1997
                                                              ---------    ---------    ---------
<S>                                                           <C>          <C>          <C>
   Net premiums written                                       $ 230,435    $ 219,853    $ 172,878
   Increase in deferred premium revenue                         (55,476)     (81,926)     (63,367)
                                                              ---------    ---------    ---------

   Premiums earned                                              174,959      137,927      109,511
   Net investment income                                         94,723       78,823       72,085
   Net realized gains (losses)                                  (13,301)      20,890       11,522
   Other income                                                   1,323          474        9,303
                                                              ---------    ---------    ---------

                      TOTAL REVENUES                            257,704      238,114      202,421
                                                              ---------    ---------    ---------
EXPENSES:
   Losses and loss adjustment expenses                            8,829        3,949        9,156
   Interest expense                                              16,614       10,625        5,325
   Policy acquisition costs                                      39,809       35,439       27,962
   Other operating expenses                                      26,429       30,006       30,430
                                                              ---------    ---------    ---------

                      TOTAL EXPENSES                             91,681       80,019       72,873
                                                              ---------    ---------    ---------

Minority interest and equity in earnings of unconsolidated
   affiliates                                                    (2,045)        (844)          --
                                                              ---------    ---------    ---------

INCOME BEFORE INCOME TAXES                                      163,978      157,251      129,548
                                                              ---------    ---------    ---------
Provision (benefit) for income taxes:
   Current                                                       36,471       44,140       22,966
   Deferred                                                       2,102       (2,245)      11,898
                                                              ---------    ---------    ---------

   Total provision                                               38,573       41,895       34,864
                                                              ---------    ---------    ---------
      NET INCOME                                                125,405      115,356       94,684
   OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
      Unrealized gains (losses) on securities:
         Holding gains (losses) arising during period
            [net of deferred income tax provision (benefit)
            of $(51,221), $14,024 and $12,701]                  (95,125)      26,045       23,587
         Less:  reclassification adjustment for losses
            (gains) included in net income [net of deferred
            income tax benefit (provision) of $3,633,
            $(7,311) and $(4,033)]                                9,668      (13,579)      (7,489)
                                                              ---------    ---------    ---------

         Other comprehensive income (loss)                      (85,457)      12,466       16,098
                                                              ---------    ---------    ---------
      COMPREHENSIVE INCOME                                    $  39,948    $ 127,822    $ 110,782
                                                              =========    =========    =========
      As based upon net income:
        Basic earnings per common share                       $    4.08    $    3.96    $    3.16
                                                              =========    =========    =========
        Diluted earnings per common share                     $    3.89    $    3.77    $    3.06
                                                              =========    =========    =========
</TABLE>

         The accompanying Notes to Consolidated Financial Statements are
                      an integral part of these statements.
<PAGE>

[page 28 of Annual Report]

                   FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
                                AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                  (Dollars in thousands, except per share data)

<TABLE>
<CAPTION>
                                          Additional  Unrealized
                                           Paid-In      Gain                    Deferred
                                  Common   Capital-   (Loss) on   Accumulated    Equity     Treasury
                                  Stock    Common    Investments    Earnings  Compensation   Stock          Total
                                  -----    ------    -----------    --------  ------------   -----          -----
<S>                               <C>     <C>         <C>          <C>         <C>         <C>          <C>
BALANCE, December 31, 1996        $ 323   $ 695,118   $   9,114    $ 139,986   $ 12,069    $ (58,785)   $   797,825

Net income for the year                                               94,684                                 94,684

Net change in accumulated
comprehensive
   income (net of deferred
   income taxes of $8,667)                               16,098                                              16,098

Dividends paid on common
stock ($0.405 per share)                                             (12,099)                               (12,099)

Deferred equity compensation                                                     17,781                      17,781

Deferred equity payout                          187                              (3,287)          56         (3,044)

Purchase of 162,573 shares
of common stock                                                                               (5,434)        (5,434)

Issuance of 125,106 shares
of treasury stock for options
exercised                                       688                                (382)       3,042          3,348

Forward share settlements
with counterparties                                                                          (33,910)       (33,910)
                                  -----   ---------   ---------    ---------   --------    ---------    -----------
BALANCE, December 31, 1997          323     695,993      25,212      222,571     26,181      (95,031)       875,249

Net income for the year                                              115,356                                115,356

Net change in accumulated
comprehensive income (net
of deferred income taxes
of $6,713)                                               12,466                                              12,466

Dividends paid on common
stock ($0.44 per share)                                              (12,777)                               (12,777)

Deferred equity compensation                                                     23,970                      23,970

Deferred equity payout                          750                              (6,371)         204         (5,417)

Purchase of 496,940 shares of
  common stock                                                                               (23,907)       (23,907)

Issuance of 1,632,653 shares
of treasury stock for XL stock               36,721                                           43,279         80,000

Issuance of 13,295 shares of
treasury stock for options
exercised                                       (22)                                166          352            496
                                  -----   ---------   ---------    ---------   --------    ---------    -----------

BALANCE, December 31, 1998          323     733,442      37,678      325,150     43,946      (75,103)     1,065,436

Net income for the year                                              125,405                                125,405

Net change in accumulated
comprehensive income (net
of deferred income tax
benefit of $46,015)                                     (85,457)                                            (85,457)

Dividends paid on common
stock ($0.465 per share)                                             (14,138)                               (14,138)

Deferred equity compensation                                                     19,822                      19,822

Deferred equity payout                        1,535                             (11,087)       1,644         (7,908)

Purchase of 53,165 shares of
common stock                                                                                  (2,571)        (2,571)

Issuance of 450 shares of
treasury stock for options
exercised                                         3                                 (11)          18             10

Sale of 1,183,764 shares of
treasury stock and 1,400,000
shares of unissued common stock      14      95,986                                           43,715        139,715

Sale of 221,100 shares of
treasury stock                                5,887                                            5,783         11,670
                                  -----   ---------   ---------    ---------   --------    ---------    -----------

BALANCE, December 31, 1999        $ 337   $ 836,853   $ (47,779)   $ 436,417   $ 52,670    $ (26,514)   $ 1,251,984
                                  =====   =========   =========    =========   ========    =========    ===========
</TABLE>

        The accompanying Notes to Consolidated Financial Statements are
                     an integral part of these statements.
<PAGE>

[page 29 of Annual Report]

                   FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
                                AND SUBSIDIARIES
                      CONSOLIDATED 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:
   Premiums received, net                      $   230,394    $   247,229    $   171,145
   Policy acquisition and other operating
     expenses paid, net                            (51,702)       (53,306)       (43,279)
   Recoverable advances paid                        (2,335)        (4,073)        (7,629)
   Losses and loss adjustment expenses
     recovered (paid)                                3,302         16,535         (6,463)
   Net investment income received                   80,803         70,146         65,662
   Federal income taxes paid                       (39,603)       (54,020)       (19,797)
   Interest paid                                   (16,306)        (9,614)        (5,158)
   Other                                               357         (1,623)        (2,017)
                                               -----------    -----------    -----------

          Net cash provided by operating
            activities                             204,910        211,274        152,464
                                               -----------    -----------    -----------

Cash flows from investing activities:
   Proceeds from sales of bonds                  2,123,445      1,908,098      1,074,658
   Proceeds from sales of equity investments        87,471         33,613          3,568
   Proceeds from maturities of bonds                    --             --         32,468
   Purchases of bonds                           (2,303,633)    (2,257,947)    (1,229,612)
   Purchases of equity investments                 (46,581)       (48,475)       (24,662)
   Net gain on sale of subsidiaries                     --             --          7,986
   Purchases of property and equipment              (1,132)        (1,168)        (3,097)
   Net decrease (increase) in short-term
     investments                                  (161,147)        39,513        (55,551)

   Other investments                                (5,894)       (14,610)            --
                                               -----------    -----------    -----------

          Net cash used for investing
            activities                            (307,471)      (340,976)      (194,242)
                                               -----------    -----------    -----------

Cash flows from financing activities:
   Issuance of notes payable, net                       --         96,850        125,905
   Repayment of notes payable                           --             --        (30,000)
   Dividends paid                                  (14,138)       (12,777)       (12,099)
   Treasury stock, net                                 628        (23,686)       (36,246)
   Sale of stock                                   151,385
   Issuance of stock for acquisition of
     subsidiary (a)                                     --         60,000             --
   Other                                           (32,520)           330         (1,453)
                                               -----------    -----------    -----------

          Net cash provided by financing
            activities                             105,355        120,717         46,107
                                               -----------    -----------    -----------

Net increase (decrease) in cash                      2,794         (8,985)         4,329


Cash at beginning of year                            3,490         12,475          8,146
                                               -----------    -----------    -----------

Cash at end of year                            $     6,284    $     3,490    $    12,475
                                               ===========    ===========    ===========
</TABLE>

                                    Continued

(a) The Company exchanged $20,000 of its stock at fair market value for $20,000
of XL stock at fair market value.

        The accompanying Notes to Consolidated Financial Statements are
                     an integral part of these statements.
<PAGE>

                   FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
                                AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                       Year Ended December 31,
                                                       -----------------------
                                                    1999         1998         1997
                                                 ---------    ---------    ---------
<S>                                              <C>          <C>          <C>
Reconciliation of net income to net cash
flows from operating activities:
Net income                                       $ 125,405    $ 115,356    $  94,684
   Increase in accrued investment income            (4,136)      (3,613)      (2,504)
   Increase in deferred premium revenue and
     related foreign exchange adjustment            54,438       82,530       62,101
   Decrease (increase) in deferred
     acquisition costs                               1,511      (28,461)     (24,865)
   Increase (decrease) in current federal
     income taxes payable                            6,166       (1,674)       7,891
   Increase in unpaid losses and loss
     adjustment expenses                            12,231       20,786        2,596
   Increase in amounts withheld for others              --           82          133
   Provision (benefit) for deferred income
     taxes                                           2,102       (2,245)      15,170
   Net realized losses (gains) on investments       13,301      (20,890)     (11,522)
   Deferred equity compensation                      8,725       17,765       14,299
   Depreciation and accretion of bond discount      (2,837)      (4,523)      (2,802)
   Minority interest and equity in earnings of
     unconsolidated affiliates                       2,045          844           --
   Net gain on sale of subsidiaries                     --           --       (7,986)
   Change in other assets and liabilities          (14,041)      35,317        5,269
                                                 ---------    ---------    ---------
Cash provided by operating activities            $ 204,910    $ 211,274    $ 152,464
                                                 =========    =========    =========
</TABLE>

          The accompanying Notes to Consolidated Financial Statements
                   are an integral part of these statements.
<PAGE>

[pages 30 through 44 of Annual Report]

                   FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

              FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

1. ORGANIZATION AND OWNERSHIP

      Financial Security Assurance Holdings Ltd. (the Company) is a holding
company incorporated in the State of New York. The Company is principally
engaged, through its insurance company subsidiaries, in providing financial
guaranty insurance on asset-backed and municipal obligations. The Company's
underwriting policy is to insure asset-backed and municipal obligations that it
determines would be of investment-grade quality without the benefit of the
Company's insurance. The asset-backed obligations insured by the Company are
generally issued in structured transactions and are 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. The municipal
obligations insured by the Company consist primarily of general obligation bonds
that are supported by the issuers' taxing power and of special revenue bonds and
other special obligations of states and local governments that are supported by
the issuers' ability to impose and collect fees and charges for public services
or specific projects. Financial guaranty insurance written by the Company
guarantees scheduled payments on an issuer's obligation. In the case of a
payment default on an insured obligation, the Company 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.

      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. The Company's insured portfolio consists
primarily of asset-backed and municipal obligations originated in the United
States, but the Company has also written and continues to pursue business in
Europe and the Asia Pacific region.

      At December 31, 1997, the Company was owned 42.1% by U S WEST Capital
Corporation (U S WEST), 12.0% by Fund American Enterprises Holdings, Inc. (Fund
American), 6.7% by The Tokio Marine and Fire Insurance Co., Ltd. (Tokio Marine)
and 39.2% by the public and employees. On November 3, 1998, the Company issued
1,632,653 common shares out of treasury to XL Capital Ltd (XL), which was named
EXEL Limited until February 1999, in exchange for $80,000,000 of XL's common
stock in conjunction with the creation of a new subsidiary (see Note 7). At
December 31, 1998, the Company was owned 40.5% by MediaOne Capital Corporation
(MediaOne), formerly U S WEST, 11.6% by Fund American, 6.4% by Tokio Marine,
5.5% by XL and 36.0% by the public and employees. At December 31, 1999, the
Company was owned 5.3% by MediaOne, 21.2% by White Mountains Insurance Group,
Ltd. (White Mountains), formerly Fund American, 8.0% by Tokio Marine, 7.8% by XL
and 57.7% by the public and employees. These percentages are calculated based
upon outstanding shares, which are reduced by treasury shares as presented in
these financial statements.

<PAGE>

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      The accompanying financial statements have been prepared in accordance
with accounting principles generally accepted in the United States (GAAP),
which, for the insurance company subsidiaries, differ in certain material
respects from the accounting practices prescribed or permitted by insurance
regulatory authorities (see Note 5). The preparation of financial statements in
conformity with GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities in the Company's consolidated balance sheets
at December 31, 1999 and 1998 and the reported amounts of revenues and expenses
in the consolidated statements of income during the years ended December 31,
1999, 1998 and 1997. Such estimates and assumptions include, but are not limited
to, losses and loss adjustment expenses and the deferral and amortization of
deferred policy acquisition costs. Actual results may differ from those
estimates. Significant accounting policies under GAAP are as follows:

      Basis of Presentation

      The consolidated financial statements include the accounts of the Company
and its direct and indirect subsidiaries, FSA Portfolio Management Inc.,
Transaction Services Corporation, Financial Security Assurance Inc. (FSA), FSA
Insurance Company, Financial Security Assurance International Ltd., Financial
Security Assurance of Oklahoma, Inc. and Financial Security Assurance (U.K.)
Limited (collectively, the Subsidiaries). All intercompany accounts and
transactions have been eliminated. Certain prior-year balances have been
reclassified to conform to the 1999 presentation.

      Investments

      Investments in debt securities designated as available for sale are
carried at market value. Equity investments are carried at market value. Any
resulting unrealized gain or loss is reflected as a separate component of
shareholders' equity, net of applicable deferred income taxes. Except as
specified in Note 20, all of the Company's long-term investments are classified
as available for sale.

      Bond discounts and premiums are amortized on the effective yield method
over the remaining terms of the securities acquired. For mortgage-backed
securities, and any other holdings for which prepayment risk may be significant,
assumptions regarding prepayments are evaluated periodically and revised as
necessary. Any adjustments required due to the resulting change in effective
yields are recognized in current income. Short-term investments, which are those
investments with a maturity of less than one year at time of purchase, are
carried at market value, which approximates cost. Cash equivalents are amounts
deposited in money market funds and investments with a maturity at time of
purchase of three months or less and are included in short-term investments.
Realized gains or losses on sale of investments are determined on the basis of
specific identification. Investment income is recorded as earned.

      The Company holds derivative securities, including U.S. Treasury bond
futures contracts and call option contracts, that are not accounted for as
hedges and are marked to market on a daily basis. Any gains or losses are
included in realized capital gains or losses.

      Investments in unconsolidated affiliates are based on the equity method of
accounting (see Note 20).

      Premium Revenue Recognition

<PAGE>

      Gross and ceded premiums are earned in proportion to the amount of risk
outstanding over the expected period of coverage. The amount of risk outstanding
is equal to the sum of the par amount of debt insured. Deferred premium revenue
and prepaid reinsurance premiums represent the portion of premium that is
applicable to coverage of risk to be provided in the future on policies in
force. When an insured issue is retired or defeased prior to the end of the
expected period of coverage, the remaining deferred premium revenue and prepaid
reinsurance premium, less any amount credited to a refunding issue insured by
the Company, are recognized.

      Losses and Loss Adjustment Expenses

      A case basis reserve for unpaid losses and loss adjustment expenses is
recorded at the present value of the estimated loss when, in management's
opinion, the likelihood of a future loss is probable and determinable at the
balance sheet date. The estimated loss on a transaction is discounted using
current risk-free rates ranging from 5.5% to 6.1%.

      The Company also maintains a non-specific general reserve, which 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.
The general reserve is calculated by applying a loss factor to the total net par
amount outstanding of the Company's insured obligations over the term of such
insured obligations and discounting the result at risk-free rates. The loss
factor used for this purpose has been determined based upon an independent
rating agency study of bond defaults and the Company's portfolio characteristics
and history.

      Management of the Company periodically evaluates its estimates for losses
and loss adjustment expenses and establishes reserves that management believes
are adequate to cover the present value of the ultimate net cost of claims. The
reserves are necessarily based on estimates, and there can be no assurance that
the ultimate liability will not differ from such estimates. The Company will, on
an ongoing basis, monitor these reserves and may periodically adjust such
reserves based on the Company's actual loss experience, its future mix of
business, and future economic conditions.

      Deferred Acquisition Costs

      Deferred acquisition costs comprise those expenses that vary with, and are
primarily related to, the production of business, including commissions paid on
reinsurance assumed, compensation and related costs of underwriting and
marketing personnel, certain rating agency fees, premium taxes and certain other
underwriting expenses, reduced by ceding commission income on premiums ceded to
reinsurers. Deferred acquisition costs and the cost of acquired business are
amortized over the period in which the related premiums are earned.
Recoverability of deferred acquisition costs is determined by considering
anticipated losses and loss adjustment expenses.

      Federal Income Taxes

      The provision for income taxes consists of an amount for taxes currently
payable and a provision for tax consequences deferred to future periods
reflected at current income tax rates.

<PAGE>

      Earnings per Common Share

      In 1997, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 128, Earnings Per Share (EPS), specifying the computation,
presentation and disclosure requirements for EPS (see Note 19). The new standard
defines "basic" and "diluted" earnings per share. Basic earnings per share are
based on average basic shares outstanding, which is calculated by adding shares
earned but not issued under the Company's equity bonus and performance share
programs to the average common shares outstanding. Diluted earnings per share
are based on average diluted shares outstanding, which is calculated by adding
shares contingently issuable under stock options, the performance share program
and the Company's redeemable preferred stock to the average basic shares
outstanding.

      Segment Reporting

      As a monoline financial guaranty insurer, the Company has no reportable
operating segments.

3. INVESTMENTS

      Bonds at amortized cost of $10,979,000 and $11,481,000 at December 31,
1999 and 1998, respectively, were on deposit with state regulatory authorities
as required by insurance regulations.

      Consolidated net investment income consisted of the following (in
thousands):

                                                 Year Ended December 31,
                                                 -----------------------
                                            1999           1998           1997
                                            ----           ----           ----
Bonds                                    $ 88,867       $ 71,888       $ 65,422
Equity investments                          1,495          1,075          1,393
Short-term investments                      6,664          8,391          7,206
Investment expenses                        (2,303)        (2,531)        (1,936)
                                         --------       --------       --------

Net investment income                    $ 94,723       $ 78,823       $ 72,085
                                         ========       ========       ========

The credit quality of bonds at December 31, 1999 was as follows:

                           Rating                            Percent of Bonds
                    ---------------------                    ----------------
                            AAA                                   72.3%
                             AA                                   18.5
                             A                                     8.8
                            BBB                                    0.1
                           Other                                   0.3

      The amortized cost and estimated market value of bonds were as follows (in
thousands):

<PAGE>

<TABLE>
<CAPTION>
                                                    Gross       Gross     Estimated
                                       Amortized  Unrealized  Unrealized    Market
December 31, 1999                         Cost      Gains       Losses      Value
-----------------                         ----      -----       ------      -----
<S>                                   <C>          <C>        <C>         <C>
U.S. Treasury securities and
  obligations of U.S. government
  corporations and agencies           $   80,446   $    27   $   (568)   $   79,905

Obligations of states and political
  subdivisions                         1,189,115     5,469    (58,571)    1,136,013

Foreign securities                         2,277         1         (1)        2,277

Mortgage-backed securities               384,349       450     (9,339)      375,460

Corporate securities                     222,703     2,123     (5,371)      219,455


Asset-backed securities                   40,787        17     (1,245)       39,559
                                      ----------   -------   --------    ----------

     Total                            $1,919,677   $ 8,087   $(75,095)   $1,852,669
                                      ==========   =======   ========    ==========

December 31, 1998

U.S. Treasury securities and
  obligations of U.S. government
  corporations and agencies           $  148,669   $ 2,432   $   (336)   $  150,765

Obligations of states and political
  subdivisions                         1,041,718    42,265       (637)    1,083,346

Mortgage-backed securities               266,770     3,920       (190)      270,500

Corporate securities                     164,697     5,539       (463)      169,773

Asset-backed securities                   33,188       494        (26)       33,656
                                      ----------   -------   --------    ----------

     Total                            $1,655,042   $54,650   $ (1,652)   $1,708,040
                                      ==========   =======   ========    ==========
</TABLE>

The change in net unrealized gains (losses) consisted of (in thousands):

                                                    Year Ended December 31,
                                                    -----------------------
                                                 1999         1998        1997
                                              ---------      -------     -------
Bonds                                         $(120,006)     $15,319     $23,657

Equity investments                              (10,449)       2,842       1,109

Other                                            (1,017)       1,017          --
                                              ---------      -------     -------
     Change in net unrealized gains
       (losses)                               $(131,472)     $19,178     $24,766
                                              =========      =======     =======

      The amortized cost and estimated market value of bonds at December 31,
1999, by contractual maturity, are shown below (in thousands). 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.

<PAGE>

<TABLE>
<CAPTION>
                                                          Amortized    Estimated
                                                            Cost      Market Value
                                                            ----      ------------

<S>                                                      <C>          <C>
Due in one year or less                                  $    6,082   $    6,078
Due after one year through five years                       189,461      188,584
Due after five years through ten years                      154,121      153,523
Due after ten years                                       1,144,877    1,089,465
Mortgage-backed securities (stated maturities of 1 to
30 years)                                                   384,349      375,460
Asset-backed securities (stated maturities of 3 to 30
years)                                                       40,787       39,559
                                                         ----------   ----------
     Total                                               $1,919,677   $1,852,669
                                                         ==========   ==========
</TABLE>

      Proceeds from sales of bonds during 1999, 1998 and 1997 were
$2,162,425,000, $1,889,130,000 and $1,127,749,000, respectively. Gross gains of
$17,896,000, $27,439,000 and $12,437,000 and gross losses of $32,406,000,
$8,585,000 and $1,433,000 were realized on sales in 1999, 1998 and 1997,
respectively.

      Proceeds from sales of equity investments during 1999, 1998 and 1997 were
$87,471,000, $33,613,000 and $3,568,000, respectively. Gross gains of
$11,707,000, $2,684,000 and $33,000 and gross losses of $5,008,000, $1,331,000
and $7,000 were realized on sales in 1999, 1998 and 1997, respectively. Equity
investments had gross unrealized gains of $0 and $4,504,000 and gross unrealized
losses of $6,498,000 and $553,000 as of December 31, 1999 and 1998,
respectively.

      The Company held open positions in U.S. Treasury bond futures contracts
with an aggregate notional amount of $30,800,000 and $57,700,000 as of December
31, 1999 and 1998, respectively. The Company held open positions in Eurodollar
futures contracts with an aggregate notional amount of $155,500,000 and
$1,000,000 as of December 31, 1999 and 1998, respectively. The Company also held
open positions in municipal bond index futures with an aggregate notional amount
of $3,000,000 as of December 31, 1999. Such positions are marked to market on a
daily basis and, for the years ended December 31, 1999, 1998 and 1997, resulted
in net realized gains (losses) of $(5,490,000), $883,000 and $190,000,
respectively.

4. DEFERRED ACQUISITION COSTS

      Acquisition costs deferred for amortization against future income and the
related amortization charged to expenses are as follows (in thousands):

<TABLE>
<CAPTION>
                                                     Year Ended December 31,
                                                     -----------------------
                                                 1999         1998         1997
                                              ---------    ---------    ---------
<S>                                           <C>          <C>          <C>
Balance, beginning of period                  $ 199,559    $ 171,098    $ 146,233
                                              ---------    ---------    ---------
Costs deferred during the period:
   Ceding commission income                     (52,376)     (27,693)     (18,956)
   Assumed commission expense                        44           22           31
   Premium taxes                                  9,017        8,081        5,554
   Compensation and other acquisition costs      81,613       83,490       66,198
                                              ---------    ---------    ---------
                    Total                        38,298       63,900       52,827
                                              ---------    ---------    ---------

Costs amortized during the period               (39,809)     (35,439)     (27,962)
                                              ---------    ---------    ---------

Balance, end of period                        $ 198,048    $ 199,559    $ 171,098
                                              =========    =========    =========
</TABLE>
<PAGE>

5. STATUTORY ACCOUNTING PRACTICES

      GAAP for the Subsidiaries differs in certain significant respects from
accounting practices prescribed or permitted by insurance regulatory
authorities. The principal differences result from the following statutory
accounting practices:

      - Upfront premiums on municipal business are recognized as earned when
related principal and interest have expired rather than over the expected
coverage period;

      - Acquisition costs are charged to operations as incurred rather than as
related premiums are earned;

      - A contingency reserve (rather than a general reserve) is computed based
on the following statutory requirements:

            (i) For all policies written prior to July 1, 1989, an amount equal
to 50% of cumulative earned premiums less permitted reductions, plus;

            (ii) For all policies written on or after July 1, 1989, an amount
equal to the greater of 50% of premiums written for each category of insured
obligation or a designated percentage of principal guaranteed for that category.
These amounts are provided each quarter as either 1/60th or 1/80th of the total
required for each category, less permitted reductions;

      - Certain assets designated as "non-admitted assets" are charged directly
to statutory surplus but are reflected as assets under GAAP;

      - Federal income taxes are provided only on taxable income for which
income taxes are currently payable;

      - Accruals for deferred compensation are not recognized;

      - Purchase accounting adjustments are not recognized;

      - Bonds are carried at amortized cost;

      - Surplus notes are recognized as surplus rather than a liability.

      A reconciliation of net income for the calendar years 1999, 1998 and 1997
and shareholders' equity at December 31, 1999 and 1998, reported by the Company
on a GAAP basis, to the amounts reported by the Subsidiaries on a statutory
basis, is as follows (in thousands):

<TABLE>
<CAPTION>
Net Income:                                       1999         1998        1997
                                               ---------    ---------    --------
<S>                                            <C>          <C>          <C>
GAAP BASIS                                     $ 125,405    $ 115,356    $ 94,684
Non-insurance companies net loss                   7,812        5,461       5,575
Premium revenue recognition                      (19,397)     (16,411)    (23,130)
Losses and loss adjustment expenses incurred       4,171       12,938       4,653
Deferred acquisition costs                         1,511      (28,461)    (24,865)
Deferred income tax provision                      1,375          167      16,019
Current income tax                                (9,266)      (8,206)     (7,994)
Amortization of bonds                                 --           --          56
Accrual of deferred compensation, net             22,119       33,268      26,681
Other                                               (124)         100         (61)
                                               ---------    ---------    --------

STATUTORY BASIS                                $ 133,606    $ 114,212    $ 91,618
                                               =========    =========    ========
</TABLE>

                                                             December 31,
                                                     --------------------------
Shareholders' Equity:                                   1999           1998
                                                     -----------    -----------

GAAP BASIS                                           $ 1,251,984    $ 1,065,436
Non-insurance companies liabilities, net                  42,962         39,155
Premium revenue recognition                             (110,650)       (91,297)
Loss and loss adjustment expense reserves                 54,971         47,250
Deferred acquisition costs                              (198,048)      (199,559)
Contingency reserve                                     (473,387)      (367,454)
Unrealized loss (gain) on investments, net of
tax                                                       67,179        (55,851)
Deferred income taxes                                     53,357         95,398
Accrual of deferred compensation                          80,811         70,022
Surplus notes                                            120,000        120,000
Other                                                    (42,484)       (52,844)
                                                     -----------    -----------

STATUTORY BASIS SURPLUS                              $   846,695    $   670,256
                                                     ===========    ===========

SURPLUS PLUS CONTINGENCY RESERVE                     $ 1,320,082    $ 1,037,710
                                                     ===========    ===========

6. FEDERAL INCOME TAXES

      The Company and its Subsidiaries (except Financial Security Assurance
International Ltd.) file a consolidated federal income tax return. The
calculation of each member's tax benefit or liability is controlled by a
tax-sharing agreement that bases the allocation of such benefit or liability
upon a separate return calculation.

      Federal income taxes have not been provided on substantially all of the
undistributed earnings of non-U.S. subsidiaries, since it is the Company's
practice and intent to reinvest such earnings in the operations of these
subsidiaries. The cumulative amount of such untaxed earnings was $6,537,000 and
$0 at December 31, 1999 and 1998, respectively.

      The cumulative balance sheet effects of deferred tax consequences are (in
thousands):

                                                             December 31,
                                                             ------------
                                                          1999           1998
                                                       ---------      ---------
Deferred acquisition costs                             $  65,769      $  69,079
Deferred premium revenue adjustments                      14,860         10,354
Unrealized capital gains                                      --         21,134
Contingency reserves                                      55,028         46,260
                                                       ---------      ---------
     Total deferred tax liabilities                      135,657        146,827
                                                       ---------      ---------

Loss and loss adjustment expense reserves                (18,219)       (16,613)
Deferred compensation                                    (48,975)       (41,545)
Unrealized capital losses                                (24,882)            --
Other, net                                                  (240)        (1,415)
                                                       ---------      ---------
     Total deferred tax assets                           (92,316)       (59,573)
                                                       ---------      ---------

Total deferred income taxes                            $  43,341      $  87,254
                                                       =========      =========
<PAGE>

      No valuation allowance was necessary at December 31, 1999 or 1998.

      A reconciliation of the effective tax rate with the federal statutory rate
follows:

                                                  Year Ended December 31,
                                            ----------------------------------
                                             1999          1998          1997
                                            ------        ------        ------
Tax at statutory rate                         35.0%         35.0%         35.0%
Tax-exempt interest                          (10.1)         (8.6)         (8.4)
Income of foreign subsidiary                  (1.4)           --            --
Other                                           --           0.3           0.3
                                            ------        ------        ------

Provision for income taxes                    23.5%         26.7%         26.9%
                                            ======        ======        ======

7. SHAREHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK

      On September 2, 1994, the Company issued to White Mountains 2,000,000
shares of Series A, non-dividend paying, voting, redeemable preferred stock
having an aggregate liquidation preference of $700,000. The preferred stock is
redeemable, at the option of the holder upon payment of the conversion price
therefor, into an equal number of shares of common stock (subject to
anti-dilutive adjustment). The conversion price per share (subject to
anti-dilutive adjustment) is $29.65. The preferred stock will be redeemed (if
then outstanding) on May 13, 2004 at a redemption price of $0.35 per share.
White Mountains is entitled to one vote per share of redeemable preferred stock,
voting together as a single class with the holders of common stock on all
matters upon which holders of common stock are entitled to vote. As the holder
of the redeemable preferred stock, White Mountains is not entitled to receive
dividends or other distributions of any kind payable to shareholders of the
Company, except that, in the event of the liquidation, dissolution or winding up
of the Company, it is entitled to receive out of the assets of the Company
available therefor, before any distribution or payment is made to the holders of
common stock or to any other class of capital stock of the Company ranking
junior to the Company's preferred stock, liquidation payments in the amount of
$0.35 per share. White Mountains may not transfer the redeemable preferred
stock, except to one of its majority-owned subsidiaries.

      In May 1996, the Company repurchased 1,000,000 shares of its common stock
from MediaOne for a purchase price of $26.50 per share. At the same time, the
Company also entered into forward agreements with two financial institutions
(the Counterparties) in respect of 1,750,000 shares (the Forward Shares) of the
Company's common stock. Under the forward agreements, the Company has the
obligation either: (i) to purchase the Forward Shares from the Counterparties
for a price equal to $26.50 per share plus carrying costs or (ii) to direct the
Counterparties to sell the Forward Shares, with the Company receiving any excess
or making up any shortfall between the sale proceeds and $26.50 per share plus
carrying costs in cash or additional shares, at its option. At the same time it
entered into the forward agreements, the Company made the economic benefit and
risk of 750,000 of these shares available for subscription by certain of the
Company's employees and directors. 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. These settlements during 1999, 1998 and 1997
were $0, $733,000 and $2,142,000,

<PAGE>

respectively. By the fourth quarter of 1997, such exercises by participants had
increased the number of shares allocated to the Company from 1,000,000 shares to
1,187,800 shares. During the fourth quarter of 1997, the Company purchased
1,187,800 Forward Shares for $33,910,000 by exercising rights under the forward
agreements. At December 31, 1999, 562,200 Forward Shares remained in the
program. Of these, 33,078 shares were held for the benefit of the Company as a
result of the repurchase of Forward Shares from employees and directors, and
529,122 shares continued to be held for the benefit of employees and directors.
In the fourth quarter of 1999, the Company entered into additional forward
agreements with two counterparties to purchase 750,000 Forward Shares at an
initial cost of $53.50 per share. These agreements are similar to the Forward
Share agreements described above, and the economic benefit and risk of these
shares are for the account of the Company's employees and directors as described
above. At December 31, 1999, all 750,000 shares were outstanding. In total, for
both plans, net income will be affected by approximately $831,000, or $0.03 per
share, for each dollar change in the Company's share price. The Company has
recognized compensation expense for the difference between (i) the $26.50
per-share price for the 1996 Forward Shares and $53.50 per-share price for the
1999 Forward Shares, plus the carrying cost and (ii) the market value at
December 31, 1999, 1998 and 1997 of $(1,865,000), $2,495,000 and $8,951,000,
respectively.

      On November 3, 1998, the Company and XL closed a transaction to create two
new Bermuda-based financial guaranty insurance companies. Each of the new
companies was initially capitalized with approximately $100,000,000. One
company, Financial Security Assurance International Ltd., is an indirect
subsidiary of FSA, and the other company, XL Financial Assurance Ltd, is a
subsidiary of XL. The Company has a minority interest in the XL subsidiary, and
XL has a minority interest in the FSA indirect subsidiary. In conjunction with
forming the new companies, the Company and XL exchanged $80,000,000 of their
respective common shares, with the Company delivering to XL 1,632,653 common
shares out of treasury. Prior to the closing of the transaction with XL, the
Company had entered into an agreement with an unrelated third party to sell for
cash, at no gain or loss, $60,000,000 of the XL shares. This $60,000,000 was
used to fund, in part, the Company's investment in Financial Security Assurance
International Ltd.

8. DIVIDENDS AND CAPITAL REQUIREMENTS

      Under New York Insurance Law, FSA may pay a dividend to the Company
without the prior approval of the Superintendent of the New York State Insurance
Department only from earned surplus subject to the maintenance of a minimum
capital requirement. In addition, the dividend, together with all dividends
declared or distributed by FSA during the preceding twelve months, may not
exceed the lesser of 10% of its policyholders' surplus shown on FSA's last filed
statement, or adjusted net investment income, as defined, for such twelve-month
period. As of December 31, 1999, FSA had $81,960,000 available for the payment
of dividends over the next twelve months. In addition, the Company holds
$120,000,000 of surplus notes of FSA. Payments of principal or interest on such
notes may be made with the approval of the New York Insurance Department. In
1998, FSA repurchased $8,500,000 of its shares from its parent, representing the
balance remaining of $75,000,000 that had been approved for repurchase by the
New York Insurance Department.

9. CREDIT ARRANGEMENTS AND ADDITIONAL CLAIMS-PAYING RESOURCES

      FSA has a credit arrangement aggregating $150,000,000 at December 31,
1999, which is provided by commercial banks and intended for general application
to transactions insured by the Subsidiaries. At
<PAGE>

December 31, 1999, there were no borrowings under this arrangement, which
expires on April 28, 2000, if not extended. In addition, there are credit
arrangements assigned to specific insured transactions. In August 1994, FSA
entered into a facility agreement with Canadian Global Funding Corporation and
Hambros Bank Limited. Under the agreement, which expires in August 2004, FSA can
arrange financing for transactions subject to certain conditions. The amount of
this facility was $186,911,000, of which $99,302,000 was unutilized at December
31, 1999.

      FSA has a standby line of credit commitment in the amount of $240,000,000
with a group of international banks to provide loans to FSA after it has
incurred, during the term of the facility, cumulative municipal losses (net of
any recoveries) in excess of the greater of $230,000,000 or 5.75% of average
annual debt service of the covered portfolio. The obligation to repay loans made
under this agreement is a limited recourse obligation payable solely from, and
collateralized by, a pledge of recoveries realized on defaulted insured
obligations in the covered portfolio, including certain installment premiums and
other collateral. This commitment has a term beginning on April 30, 1999 and
expiring on April 30, 2006 and contains an annual renewal provision subject to
approval by the banks. No amounts have been utilized under this commitment as of
December 31, 1999.

10. LONG-TERM DEBT

      On September 18, 1997, the Company issued $130,000,000 of 7.375% Senior
Quarterly Income Debt Securities (Senior QUIDS) due September 30, 2097 and
callable without premium or penalty on or after September 18, 2002. Interest on
these notes is paid quarterly beginning on December 31, 1997. Debt issuance
costs of $4,320,000 are being amortized over the life of the debt. The Company
used the proceeds to repay $30,000,000 of outstanding notes, to augment capital
in the Subsidiaries, to repurchase Forward Shares (see Note 7) and for general
corporate purposes.

      On November 13, 1998, the Company issued $100,000,000 of 6.950% Senior
QUIDS due November 1, 2098 and callable without premium or penalty on or after
November 1, 2003. Interest is paid quarterly beginning on February 1, 1999. Debt
issuance costs of $3,375,000 are being amortized over the life of the debt. The
Company used the proceeds to augment capital in the Subsidiaries and for general
corporate purposes.

11. EMPLOYEE BENEFIT PLANS

      The Subsidiaries maintain both a qualified and a non-qualified,
non-contributory defined contribution pension plan for the benefit of all
eligible employees. The Subsidiaries' contributions are based upon a fixed
percentage of employee compensation. Pension expense, which is funded as
accrued, amounted to $1,788,000 (net of forfeitures of $1,316,000), $2,584,000
and $2,535,000 for the years ended December 31, 1999, 1998 and 1997,
respectively.

      The Subsidiaries have an employee retirement savings plan for the benefit
of all eligible employees. The plan permits employees to contribute a percentage
of their salaries up to limits prescribed by the Internal Revenue Service [IRS
Code, Section 401(k)]. The Subsidiaries' contributions are discretionary, and
none have been made.

      Pursuant to the 1993 Equity Participation Plan, 3,610,780 shares of common
stock, subject to anti-dilutive adjustment, were reserved for awards of options,
restricted shares of common stock, and

<PAGE>

performance shares to employees for the purpose of providing, through the grant
of long-term incentives, a means to attract and retain key personnel and to
provide to participating officers and other key employees long-term incentives
for sustained high levels of performance. The 1993 Equity Participation Plan
also contains provisions that permit the Human Resources Committee to pay all or
a portion of employees' bonuses in the form of shares of common stock credited
to the employees at a 15% discount from current market value and paid to
employees five years from the date of award. Up to an aggregate of 10,000,000
shares may be allocated to such equity bonuses.

      Performance shares are awarded under the Company's 1993 Equity
Participation Plan. The Plan authorizes the discretionary grant of performance
shares by the Human Resources Committee to key employees of the Company and its
subsidiaries. The number of shares of the Company's common stock earned for each
performance share depends upon the attainment by the Company of certain growth
rates of adjusted book value per outstanding share over a three-year period. At
each payout date, each performance share is adjusted to pay out from zero up to
two common shares. No common shares are paid out if the compound annual growth
rate of the Company's adjusted book value per outstanding share was less than
7%. Two common shares per performance share are paid out if the compound annual
growth rate was 19% or greater. Payout percentages are interpolated for compound
annual growth rates between 7% and 19%.

      Performance shares granted under the 1993 Equity Participation Plan were
as follows:

      Outstanding
          at         Granted      Earned    Forfeited   Outstanding   Market
       Beginning      During      During      During      at End     Price at
        of Year      the Year    the Year    the Year    of Year    Grant Date
        -------      --------    --------    --------    -------    ----------

1997   1,374,340     253,057     201,769     59,253     1,366,375   $35.5000
1998   1,366,375     273,656     229,378     26,145     1,384,508    46.0625
1999   1,384,508     236,915     352,726     45,672     1,223,025    53.6250

      The Company applies APB Opinion 25 and related Interpretations in
accounting for its performance shares. The Company estimates the final cost of
these performance shares and accrues for this expense over the performance
period. The accrued expense for the performance shares was $33,442,000,
$40,862,000 and $29,500,000 for the years ended December 31, 1999, 1998 and
1997, respectively. In tandem with this accrued expense, the Company estimates
those performance shares that it expects to settle in stock and records this
amount in shareholders' equity as deferred compensation. The remainder of the
accrual, which represents the amount of performance shares that the Company
estimates it will settle in cash, is recorded in accrued expenses and other
liabilities. In 1996, the Company adopted disclosure provisions of SFAS No. 123.
Had the compensation cost for the Company's performance shares been determined
based upon the provisions of SFAS No. 123, there would have been no effect on
the Company's reported net income and earnings per share.

      In November 1994, the Company created a rabbi trust and appointed an
independent trustee authorized to purchase shares of the Company's common stock
in open-market transactions, at times and prices determined by the trustee.
These purchases are intended to fund future obligations relating to equity
bonuses, performance shares and stock options under the 1993 Equity
Participation Plan and other employee benefit plans and are presented as
treasury stock in these financial statements.

      The Company does not currently provide post-retirement benefits, other
than under its defined contribution plans, to its employees, nor does it provide
post-employment benefits to former employees other than under its severance
plans.

<PAGE>

12. COMMITMENTS AND CONTINGENCIES

      The Company and its Subsidiaries lease office space and equipment under
non-cancelable operating leases, which expire at various dates through 2005.

      Future minimum rental payments are as follows (in thousands):

      Year Ended December 31,
                2000                                   $3,228
                2001                                    2,915
                2002                                    2,660
                2003                                    2,683
                2004                                    2,683
             Thereafter                                 2,459
                                                      -------

               Total                                  $16,628
                                                      =======

      Rent expense for the years ended December 31, 1999, 1998 and 1997 was
$4,352,000, $4,372,000 and $4,067,000, respectively.

      During the ordinary course of business, the Company and its Subsidiaries
become parties to certain litigation. Management believes that these matters
will be resolved with no material impact on the Company's financial position,
results of operations or cash flows.

13. REINSURANCE

      The Subsidiaries reinsure portions of their risks with affiliated (see
Note 15) and unaffiliated reinsurers under quota share, first-loss and
excess-of-loss treaties and on a facultative basis. The Subsidiaries' 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 the Subsidiaries' approved regular lines of business, except U.S.
municipal obligation insurance. Under this treaty in 1999, the Subsidiaries
ceded 7.25% of each covered policy, up to a maximum of $14,500,000 insured
principal per policy. At their option, the Subsidiaries could have increased,
and in certain instances did increase, the ceding percentage to 14.5% up to
$29,000,000 of each covered policy. A second quota share treaty covered the
Subsidiaries' U.S. municipal obligation insurance business. Under this treaty in
1999, the Subsidiaries ceded 6.5% of each covered policy that is classified by
the Subsidiaries as providing U.S. municipal bond insurance as defined by
Article 69 of the New York Insurance Law up to a limit of $17,333,000 per single
risk, which is defined by revenue source. At their option, the Subsidiaries
could have increased, and in certain instances did increase, the ceding
percentage to 35% up to $93,333,000 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 the Subsidiaries' net losses on
qualifying transactions in excess of $50,000,000, up to a limit of liability of
$200,000,000. 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, the Subsidiaries, at their option, could allocate up to a
specified amount for each reinsurer (ranging from

<PAGE>

$4,000,000 to $100,000,000 depending on the reinsurer) for each transaction,
subject to limits and exclusions, in exchange for which the Subsidiaries agreed
to cede in the aggregate a specified percentage of gross par insured by the
Subsidiaries. Each of the quota share treaties and automatic facultative
facilities allowed the Subsidiaries to withhold a ceding commission to defray
their expenses. The Subsidiaries also employed non-treaty quota share and
first-loss facultative reinsurance on various transactions in 1999.

      In the event that any or all of the reinsuring companies were unable to
meet their obligations to the Subsidiaries, or contested such obligations, the
Subsidiaries would be liable for such defaulted amounts. The Subsidiaries have
also assumed reinsurance of municipal obligations from unaffiliated insurers.

Amounts reinsured were as follows (in thousands):

<TABLE>
<CAPTION>
                                                        Year Ended December 31,
                                                        -----------------------
                                                    1999        1998       1997
                                                    ----        ----       ----
<S>                                               <C>          <C>         <C>
Written premiums ceded                            $ 132,236    $ 99,413    $63,513
Written premiums assumed                                995         935      1,352

Earned premiums ceded                                63,615      55,939     41,713
Earned premiums assumed                               2,514       4,271      5,121

Loss and loss adjustment expense payments ceded      (2,461)     22,619      2,862
Loss and loss adjustment expense payments
assumed                                                   1           3          2

Incurred (recovered) losses and loss adjustment
   expenses ceded                                     3,124      (4,673)     3,605
Incurred (recovered) losses and loss adjustment
   expenses assumed                                      40        (139)       161
</TABLE>

                                                           December 31,
                                                           ------------
                                                        1999          1998
                                                        ----          ----
Principal outstanding ceded                         $45,313,349   $32,914,844
Principal outstanding assumed                         1,245,430     1,360,916

Deferred premium revenue ceded                          285,105       217,096
Deferred premium revenue assumed                          9,100        10,799

Loss and loss adjustment expense reserves ceded           9,492         6,421
Loss and loss adjustment expense reserves assumed           762           723

14. OUTSTANDING EXPOSURE AND COLLATERAL

      The Company's policies insure the scheduled payments of principal and
interest on asset-backed and municipal obligations. The principal amount insured
(in millions) as of December 31, 1999 and 1998 (net of amounts ceded to other
insurers) and the terms to maturity are as follows:
<PAGE>

<TABLE>
<CAPTION>
                                  December 31, 1999                     December 31, 1998
                                  -----------------                     -----------------
Terms to Maturity        Asset-Backed          Municipal       Asset-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              8,741              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             26,979             15,308             24,107
                              -------            -------            -------            -------

            Total             $50,715            $79,223            $37,623            $67,050
                              =======            =======            =======            =======
</TABLE>

      The principal amount ceded as of December 31, 1999 and 1998 and the terms
to maturity are as follows (in millions):

<TABLE>
<CAPTION>
                                      December 31, 1999                    December 31, 1998
                                      -----------------                    -----------------
Terms to Maturity            Asset-Backed          Municipal      Asset-Backed          Municipal
-----------------            ------------          ---------      ------------          ---------
<S>                               <C>                <C>                <C>               <C>
0 to 5 Years                      $ 3,962            $ 1,477            $2,727            $ 1,157
5 to 10 Years                       4,055              2,307             1,859              2,143
10 to 15 Years                      1,777              3,995             1,116              3,022
15 to 20 Years                        769              7,423               591              4,852
20 Years and Above                  3,313             16,235             3,230             12,218
                                  -------            -------            ------            -------

                 Total            $13,876            $31,437            $9,523            $23,392
                                  =======            =======            ======            =======
</TABLE>

      The Company limits its exposure to losses from writing financial
guarantees by underwriting investment-grade obligations, diversifying its
portfolio and maintaining rigorous collateral requirements on asset-backed
obligations, as well as through reinsurance. The gross principal amounts of
insured obligations in the asset-backed insured portfolio are backed by the
following types of collateral (in millions):

<TABLE>
<CAPTION>
                                                      Net of Amounts Ceded                        Ceded
                                                          December 31,                         December 31,
                                                          ------------                         ------------
Types of Collateral                                  1999               1998               1999              1998
-------------------                               -------            -------            -------            ------
<S>                                               <C>                <C>                <C>                <C>
Residential mortgages                             $16,713            $15,647            $ 3,198            $3,324
Consumer receivables                               15,102             12,539              3,374             3,663
Government securities                               1,010                821                483               267
Pooled corporate obligations                       15,446              6,776              5,590             1,388
Commercial mortgage portfolio:
   Commercial real estate                              12                 15                 38                49
   Corporate secured                                   42                 42                300               314
Investor-owned utility obligations                    733                757                466               464
Other asset-backed obligations                      1,657              1,026                427                54
                                                  -------            -------            -------            ------

        Total asset-backed obligations            $50,715            $37,623            $13,876            $9,523
                                                  =======            =======            =======            ======
</TABLE>

      The gross principal amount of insured obligations in the municipal insured
portfolio includes the following types of issues (in millions):
<PAGE>

<TABLE>
<CAPTION>
                                               Net of Amounts Ceded         Ceded
                                                   December 31,          December 31,
                                                   ------------          ------------
Types of Issues                                   1999       1998       1999       1998
---------------                                 -------    -------    -------    -------
<S>                                             <C>        <C>        <C>        <C>
General obligation bonds                        $31,446    $25,337    $ 6,237    $ 4,517
Housing revenue bonds                             2,780      2,509      1,064      1,108
Municipal utility revenue bonds                  11,293      9,218      7,326      5,489
Health care revenue bonds                         5,950      5,812      4,674      3,348
Tax-supported bonds (non-general obligation)     17,719     14,731      7,095      5,238
Transportation revenue bonds                      3,482      2,937      2,918      2,154
Other municipal bonds                             6,553      6,506      2,123      1,538
                                                -------    -------    -------    -------

          Total municipal obligations           $79,223    $67,050    $31,437    $23,392
                                                =======    =======    =======    =======
</TABLE>

      In its asset-backed business, the Company considers geographic
concentration as a factor in underwriting insurance covering securitizations of
pools of such assets as residential mortgages or consumer receivables. However,
after the initial issuance of an insurance policy relating to such
securitization, the geographic concentration of the underlying assets may not
remain fixed 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 deemed by the
Company to be significant, given other more relevant measures of
diversification, such as issuer or industry.

      The Company seeks to maintain a diversified portfolio of insured municipal
obligations designed to spread its risk across a number of geographic areas. The
following table sets forth, by state, those states in which municipalities
located therein issued an aggregate of 2% or more of the Company's net par
amount outstanding of insured municipal securities as of December 31, 1999:

<TABLE>
<CAPTION>
                                                       Net Par       Percent of Total        Ceded Par
                                       Number           Amount       Municipal Net Par         Amount
            State                   of Issues        Outstanding     Amount Outstanding     Outstanding
            -----                   ---------        -----------     ------------------     -----------
                                                    (in millions)                          (in millions)
<S>                                     <C>              <C>                <C>                <C>
California                                575            $11,543             14.6%             $ 3,737
New York                                  428              7,006              8.8                4,918
Pennsylvania                              403              5,509              7.0                1,313
Texas                                     469              5,095              6.4                2,075
Florida                                   147              4,696              5.9                1,966
New Jersey                                317              4,444              5.6                2,500
Illinois                                  420              4,103              5.2                1,304
Massachusetts                             132              2,568              3.2                1,356
Michigan                                  274              2,543              3.2                  538
Wisconsin                                 298              2,184              2.8                  253
Washington                                167              1,736              2.2                  665
All Other U.S. Jurisdictions            1,758             26,390             33.3                9,559
International                              31              1,406              1.8                1,253
                                        -----            -------            -----              -------

           Total                        5,419            $79,223            100.0%             $31,437
                                        =====            =======            =====              =======
</TABLE>

<PAGE>

15. RELATED PARTY TRANSACTIONS

      The Subsidiaries ceded premiums of $28,388,000, $23,838,000 and
$21,216,000 to Tokio Marine for the years ended December 31, 1999, 1998 and
1997, respectively. The amounts included in prepaid reinsurance premiums at
December 31, 1999 and 1998 for reinsurance ceded to Tokio Marine were
$76,327,000 and $62,422,000, respectively. Reinsurance recoverable on unpaid
losses ceded to Tokio Marine was $4,889,000 and $612,000 at December 31, 1999
and 1998, respectively. The Subsidiaries ceded losses and loss adjustment
expenses of $3,376,000, $603,000 and $1,095,000 to Tokio Marine for the years
ended December 31, 1999, 1998 and 1997, respectively. The Subsidiaries ceded
premiums of $19,840,000, $7,297,000 and $15,000 to XL Insurance Company Ltd and
XL Financial Assurance Ltd, subsidiaries of XL, for the years ended December 31,
1999, 1998 and 1997, respectively. The amounts included in prepaid reinsurance
premiums at December 31, 1999 and 1998 for reinsurance ceded to XL Insurance
Company Ltd and XL Financial Assurance Ltd were $15,813,000 and $5,306,000,
respectively.

      The Subsidiaries ceded premiums of $84,000, $203,000 and $351,000 on a
quota share basis to Commercial Reinsurance Company, an affiliate of MediaOne,
for the years ended December 31, 1999, 1998 and 1997, respectively. The amounts
included in prepaid reinsurance premiums for reinsurance ceded to this affiliate
were $1,728,000 and $2,464,000 at December 31, 1999 and 1998, respectively. The
amounts of reinsurance recoverable on unpaid losses ceded to this affiliate at
December 31, 1999 and 1998 were $501,000 and $519,000, respectively. The
Subsidiaries ceded losses and loss adjustment expenses (recoveries) of
$(22,000), $(7,822,000) and $1,569,000 to this affiliate for the years ended
December 31, 1999, 1998 and 1997, respectively.

      The Subsidiaries ceded premiums of $25,659,000 and $16,539,000 on a quota
share basis to Enhance Reinsurance Company and Asset Guaranty Insurance Company,
former affiliates of MediaOne, for the years ended December 31, 1998 and 1997,
respectively. The amount included in prepaid reinsurance premiums for
reinsurance ceded to these former affiliates was $58,624,000 at December 31,
1998. The amount of reinsurance recoverable on unpaid losses ceded to these
former affiliates at December 31, 1998 was $1,236,000. The Subsidiaries ceded
losses and loss adjustment expenses (recoveries) of $(4,134,000) and $536,000 to
these affiliates for the years ended December 31, 1998 and 1997, respectively.

16. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

      The following estimated fair values have been determined by the Company
using available market information and appropriate valuation methodologies.
However, considerable judgment is necessary to interpret the data to develop the
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amount the Company could realize in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.

      Bonds and equity investments -- The carrying amount represents fair value.
The fair value is based upon quoted market price.

      Short-term investments -- The carrying amount is fair value, which
approximates cost due to the short maturity of these instruments.

<PAGE>

      Cash, receivable for investments sold and payable for investments
purchased -- The carrying amount approximates fair value because of the short
maturity of these instruments.

      Investments in unconsolidated affiliates -- The carrying amount is fair
value due to accounting for these investments on the equity method of
accounting.

      Deferred premium revenue, net of prepaid reinsurance premiums -- The
carrying amount of deferred premium revenue, net of prepaid reinsurance
premiums, represents the Company's future premium revenue, net of reinsurance,
on policies where the premium was received at the inception of the insurance
contract. The fair value of deferred premium revenue, net of prepaid reinsurance
premiums, is an estimate of the premiums that would be paid under a reinsurance
agreement with a third party to transfer the Company's financial guaranty risk,
net of that portion of the premiums retained by the Company to compensate it for
originating and servicing the insurance contract.

      Installment premiums -- Consistent with industry practice, there is no
carrying amount for installment premiums since the Company will receive premiums
on an installment basis over the term of the insurance contract. Similar to
deferred premium revenue, the fair value of installment premiums is the
estimated present value of the future contractual premium revenues that would be
paid under a reinsurance agreement with a third party to transfer the Company's
financial guaranty risk, net of that portion of the premium retained by the
Company to compensate it for originating and servicing the insurance contract.

      Losses and loss adjustment expenses, net of reinsurance recoverable on
unpaid losses -- The carrying amount is fair value, which is the present value
of the expected cash flows for specifically identified claims and potential
losses in the Company's insured portfolio.

<TABLE>
<CAPTION>
                                                December 31, 1999              December 31, 1998
                                                -----------------              -----------------
                                           Carrying        Estimated        Carrying       Estimated
(In thousands)                               Amount       Fair Value         Amount       Fair Value
                                             ------       ----------         ------       ----------
<S>                                       <C>             <C>             <C>             <C>
Assets:
   Bonds                                  $1,852,669      $1,852,669      $1,708,040      $1,708,040
   Equity investments                         23,606          23,606          68,243          68,243
   Short-term investments                    263,747         263,747          98,554          98,554
   Cash                                        6,284           6,284           3,490           3,490
   Receivable for securities sold             40,635          40,635           1,655           1,655
   Investment in unconsolidated
     affiliates                               29,709          29,709          29,496          29,496

Liabilities:
   Deferred premium revenue, net of
      prepaid reinsurance premiums           559,041         468,784         504,603         417,130
   Losses and loss adjustment
     expenses, net of reinsurance
     recoverable on unpaid losses             77,817          77,817          65,586          65,586
   Notes payable                             230,000         188,576         230,000         232,736
   Payable for investments purchased         243,519         243,519         105,859         105,859

Off-balance-sheet instruments:
   Installment premiums                           --         237,802              --         163,239
</TABLE>

<PAGE>

17. LIABILITY FOR LOSSES AND LOSS ADJUSTMENT EXPENSES

      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 $9,156,000, of
which $5,400,000 was for originations of new business and $3,756,000 was to
reestablish a portion of the general reserve that had been previously
transferred to case basis reserves. During 1997, the Company transferred
$4,503,000 to case basis reserves. Giving effect to these transfers, the general
reserve totaled $34,313,000 at December 31, 1997.

      During 1998, the Company increased its general reserve by $3,949,000, of
which $8,049,000 was for originations of new business offset by a $4,100,000
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 $18,403,000 to its general reserve from case basis reserves
due to those recoveries on commercial mortgage transactions. Also during 1998,
the Company transferred $9,414,000 from its general reserve to case basis
reserves associated predominantly with certain consumer receivable transactions.
Giving effect to these transfers, the general reserve totaled $47,251,000 at
December 31, 1998.

      During 1999, the Company increased its general reserve by $8,829,000, of
which $8,575,000 was for originations of new business and $254,000 was for the
reestablishment of the general reserve. Also during 1999, the Company
transferred to the general reserve $3,549,000 representing recoveries received
on prior-year transactions and transferred from the general reserve to case
basis reserves $4,580,000. Giving effect to these transfers, the general reserve
totaled $54,971,000 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
$31,113,000, $28,564,000 and $19,779,000 at December 31, 1999, 1998 and 1997,
respectively.
<PAGE>

18. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

<TABLE>
<CAPTION>
(In thousands, except share data)            First       Second       Third       Fourth     Full Year
                                             -----       ------       -----       ------     ---------
<S>                                         <C>          <C>         <C>          <C>         <C>
1999
   Gross premiums written                   $78,334      $71,925     $111,959     $100,453    $362,671
   Net premiums written                      49,910       51,835       70,853       57,837     230,435
   Net premiums earned                       41,294       42,774       42,701       48,190     174,959
   Net investment income                     22,024       22,736       24,432       25,531      94,723
   Losses and loss adjustment expenses        2,175        1,825        1,950        2,879       8,829
   Income before taxes                       42,849       29,296       38,396       53,437     163,978
             Net income                      32,157       23,472       29,707       40,069     125,405
   Basic earnings per common share             1.05         0.77         0.97         1.28        4.08
   Diluted earnings per common share           1.01         0.73         0.93         1.22        3.89

1998
   Gross premiums written                   $54,338      $89,242      $77,024      $98,662    $319,266
   Net premiums written                      37,947       62,121       54,462       65,323     219,853
   Net premiums earned                       31,921       32,452       32,618       40,936     137,927
   Net investment income                     18,683       19,255       19,710       21,175      78,823
   Losses and loss adjustment expenses        1,047        1,047        1,046          809       3,949
   Income before taxes                       32,817       36,184       48,016       40,234     157,251
             Net income                      24,314       26,739       34,604       29,699     115,356
   Basic earnings per common share             0.84         0.92         1.20         1.00        3.96
   Diluted earnings per common share           0.81         0.88         1.15         0.96        3.77
</TABLE>

19. EARNINGS PER SHARE

      The calculations of average basic and diluted common shares outstanding
are as follows (in thousands):

                                                    Year Ended December 31,
                                                    -----------------------
                                                 1999        1998        1997
                                                ------      ------      ------
   Average common shares outstanding            30,322      28,854      29,858
      Shares earned but unissued under
   equity-based compensation plans                 398         248         170
                                                ------      ------      ------
   Average basic common shares outstanding      30,720      29,102      30,028
      Shares contingently issuable under:
         Equity-based compensation plans           656         622         395
         Redeemable preferred stock                874         875         490
                                                ------      ------      ------
   Average diluted common shares
   outstanding                                  32,250      30,599      30,913
                                                ======      ======      ======

20. INVESTMENTS IN UNCONSOLIDATED AFFILIATES

      In June 1998, the Company invested $10,000,000 to purchase 1,000,000
shares of common stock, representing a 25% interest, in Fairbanks Capital
Holding Corp. (Fairbanks), which buys, sells and services residential mortgages.
In October 1999, the Company invested $4,517,000 to purchase 361,333 shares of
preferred stock in Fairbanks and holds an approximate 22.2% interest in
Fairbanks as of
<PAGE>

December 31, 1999. The Company's investment in Fairbanks is
accounted for using the equity method of accounting. Amounts recorded by the
Company in connection with Fairbanks as of December 31, 1999 and 1998 are as
follows (in thousands):

                                                          1999          1998
                                                        --------       -------

  Investment in Fairbanks                               $ 13,078       $ 9,263
  Equity in earnings (losses) from Fairbanks, net of
    goodwill amortization                                   (702)         (788)

      At December 31, 1999 and 1998, the Company's retained earnings included
$(1,490,000) and $(788,000), respectively, of accumulated undistributed earnings
(losses) of Fairbanks (net of goodwill amortization).

      In November 1998, the Company invested $19,900,000 to purchase a 19.9%
interest in XL Financial Assurance Ltd (XLFA), a financial guaranty insurance
subsidiary of XL (see Note 7). In February 1999, the Company sold $4,900,000 of
its interest back to XLFA, giving the Company a 15.0% interest in XLFA as of
December 31, 1999. The Company's investment in XLFA is accounted for using the
equity method of accounting because the Company has significant influence over
XLFA's operations. Amounts recorded by the Company in connection with XLFA as of
December 31, 1999 and 1998 are as follows (in thousands):

                                                         1999             1998
                                                        -------          -------

     Investment in XLFA                                 $16,631          $20,233
     Equity in earnings from XLFA                         1,372              333
     Dividends received from XLFA                            74               --

      At December 31, 1999 and 1998, the Company's retained earnings included
$1,631,000 and $333,000, respectively, of accumulated undistributed earnings of
XLFA.

21. MINORITY INTEREST IN SUBSIDIARY

      In November 1998, Financial Security Assurance International Ltd.
(International), a Bermuda-based financial guaranty subsidiary of FSA (see Note
7), sold to XL $20,000,000 of preferred shares representing a minority interest
in International. In December 1999, International sold to XL an additional
$10,000,000 of preferred shares to maintain its minority ownership percentage.
The preferred shares are Cumulative Participating Voting Preferred Shares, which
in total have a minimum fixed dividend of $1,500,000 per annum. For the years
ended December 31, 1999 and 1998, the Company recognized minority interest of
$2,715,000 and $388,000, respectively.

22. SUBSEQUENT EVENT

      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 shareholder
approval and satisfaction of regulatory and other closing conditions. Pursuant
to the merger, each outstanding share of the Company's common stock will be
converted into the right to receive $76.00 in cash. Dexia S.A., through its bank
subsidiaries, is primarily engaged in the business of public finance in France,
Belgium and other European countries.

<PAGE>

      In conjunction with this transaction, the Company anticipates, at closing,
valuing its liabilities under the Company's equity-based compensation plans at
the transaction price and changing its assumption regarding those plans by
assuming all future payments will be settled in cash or, as the case may be,
exchanged at the cash value for alternative investments and settled upon
expiration of any applicable deferral period. It also intends to settle its
Forward Share agreements at the merger price.

      While the effect on the Company's consolidated operating results and
financial position between December 31, 1999 and the closing date (assuming the
transaction closes) cannot be accurately predicted, had the above transaction
been effective at December 31, 1999, the pro forma effect would have been to
decrease reported 1999 net income and December 31, 1999 stockholders' equity by
$44,700,000 and $18,800,000, respectively.

      There can be no assurance that this transaction will close or that it will
close without modification.
<PAGE>

[page 48 of Annual Report]

Common Stock Data

<TABLE>
<CAPTION>
                                                              Market Price
                                               -------------------------------------------
                               Dividends per
                               Share               High           Low           Close
<S>                                  <C>           <C>           <C>           <C>
1999
Quarter ended March 31               $0.1125       $55.4375      $46.1250      $49.6250
Quarter ended June 30                $0.1125        59.1250       47.8125       52.0000
Quarter ended September 30           $0.1200        55.5000       46.6875       51.6875
Quarter ended December 31            $0.1200        60.2500       47.8750       52.1250

1998
Quarter ended March 31               $0.1075       $56.4375      $44.0000      $54.6250
Quarter ended June 30                $0.1075        60.3750       54.6250       58.7500
Quarter ended September 30           $0.1125        61.1250       45.2500       48.7500
Quarter ended December 31            $0.1125        56.7500       38.8750       54.2500
</TABLE>