Exhibit 99.1

FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES

Consolidated
Financial Statements and
Report of Independent Auditors
December 31, 2003

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FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS
AND REPORT OF INDEPENDENT AUDITORS

YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

REPORT OF INDEPENDENT AUDITORS

1CONSOLIDATED FINANCIAL STATEMENTS:Consolidated Balance Sheets

2Consolidated Statements of Operations and Comprehensive Income

3Consolidated Statements of Changes in Shareholder's Equity

4Consolidated Statements of Cash Flows

5Notes to Consolidated Financial Statements

7


The
New York State Insurance Department recognizes only statutory accounting practices for determining and reporting the financial condition and results of operations of an insurance company, for
determining its solvency under the New York Insurance Law, and for determining whether its financial condition warrants the payment of a dividend to its stockholders. No consideration is given by the
New York State Insurance Department to financial statements prepared in accordance with accounting principles generally accepted in the United States of America in making such determinations.

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REPORT OF INDEPENDENT AUDITORS

To
the Shareholder and Board of Directors
    of Financial Security Assurance Inc.:

In
our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations and comprehensive income, changes in shareholder's equity, and cash flows present
fairly, in all material respects, the financial position of Financial Security Assurance Inc. and Subsidiaries (the Company) at December 31, 2003 and 2002, and the results of their
operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America.
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 accounting standards generally accepted in the United States of America, 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 our
opinion.

As
discussed in Note 20 to the consolidated financial statements, the Company changed its method of accounting for its interest in certain variable interest entities.

/s/
PricewaterhouseCoopers LLP

PricewaterhouseCoopers
LLP
New York, New York
February 5, 2004

1

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

|                                                                                                                   |                                                                  | December 31,
2003 |           | December 31,
2002
|------------------------------------------------------------------------------------------------------------------ | ---------------------------------------------------------------- | ----------------- | --------- | -----------------
|ASSETS                                                                                                             |                                                                  |                   |           |                  
|Bonds at fair value (amortized cost of $3,254,503 and $2,597,599)                                                  |                                                                  | $                 | 3,487,380 |                  
|Short-term investments                                                                                             |                                                                  |                   | 222,391   |                  
|Variable interest entities' bonds at fair value (amortized cost of $1,511,742)                                     |                                                                  |                   | 1,510,561 |                  
|Variable interest entities' guaranteed investment contracts at fair value (amortized cost approximates fair value) |                                                                  |                   | 559,853   |                  
|Variable interest entities' short-term investment portfolio                                                        |                                                                  |                   | 11,102    |                  
|                                                                                                                   |                                                                  |                   |           |                  
|                                                                                                                   | Total investment portfolio                                       |                   |           | 5,791,287        
|Cash                                                                                                               |                                                                  |                   | 11,640    |                  
|Securitized loans                                                                                                  |                                                                  |                   | 433,948   |                  
|Deferred acquisition costs                                                                                         |                                                                  |                   | 273,646   |                  
|Prepaid reinsurance premiums                                                                                       |                                                                  |                   | 695,398   |                  
|Investment in unconsolidated affiliate                                                                             |                                                                  |                   | 64,440    |                  
|Reinsurance recoverable on unpaid losses                                                                           |                                                                  |                   | 59,235    |                  
|Other assets                                                                                                       |                                                                  |                   | 759,204   |                  
|                                                                                                                   |                                                                  |                   |           |                  
|                                                                                                                   | TOTAL ASSETS                                                     |                   | $         | 8,088,798        
|                                                                                                                   |                                                                  |                   |           |                  
|LIABILITIES AND MINORITY INTEREST AND SHAREHOLDER'S EQUITY                                                         |                                                                  |                   |           |                  
|Deferred premium revenue                                                                                           |                                                                  | $                 | 1,861,960 |                  
|Losses and loss adjustment expenses                                                                                |                                                                  |                   | 233,408   |                  
|Variable interest entities' debt                                                                                   |                                                                  |                   | 2,537,466 |                  
|Deferred federal income taxes                                                                                      |                                                                  |                   | 180,687   |                  
|Notes payable to affiliate                                                                                         |                                                                  |                   | 434,723   |                  
|Surplus notes                                                                                                      |                                                                  |                   | 152,850   |                  
|Accrued expenses and other liabilities                                                                             |                                                                  |                   | 380,058   |                  
|                                                                                                                   |                                                                  |                   |           |                  
|                                                                                                                   | TOTAL LIABILITIES AND MINORITY INTEREST                          |                   |           | 5,781,152        
|                                                                                                                   |                                                                  |                   |           |                  
|Preferred stock (5,000.1 and 0 shares authorized; 0 shares issued and outstanding; par value of $1,000 per share)  |                                                                  |                   |           |                  
|Common stock (400 shares authorized, issued and outstanding; par value of $37,500 per share)                       |                                                                  |                   | 15,000    |                  
|Additional paid-in capitalcommon                                                                                  |                                                                  |                   | 819,918   |                  
|Accumulated other comprehensive income (net of deferred income tax provision of $78,340 and $70,899)               |                                                                  |                   | 151,725   |                  
|Accumulated earnings                                                                                               |                                                                  |                   | 1,321,003 |                  
|                                                                                                                   |                                                                  |                   |           |                  
|                                                                                                                   | TOTAL SHAREHOLDER'S EQUITY                                       |                   |           | 2,307,646        
|                                                                                                                   |                                                                  |                   |           |                  
|                                                                                                                   | TOTAL LIABILITIES AND MINORITY INTEREST AND SHAREHOLDER'S EQUITY |                   | $         | 8,088,798        
|                                                                                                                   |                                                                  |                   |           |                  

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

2

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FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(in thousands)

|                                                                      |                                                                                                                                        | Years Ended December 31,                                                                                                      |               
|--------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------- | --------------
|
|REVENUES:                                                             |                                                                                                                                        |                                                                                                                               |               
|                                                                      | Net premiums written                                                                                                                   |                                                                                                                               | $             
|                                                                      |                                                                                                                                        |                                                                                                                               |               
|                                                                      | Premiums earned                                                                                                                        |                                                                                                                               | $             
|                                                                      | Net investment income                                                                                                                  |                                                                                                                               |               
|                                                                      | Net realized gains                                                                                                                     |                                                                                                                               |               
|                                                                      | Variable interest entities' net interest income                                                                                        |                                                                                                                               |               
|                                                                      | Net realized and unrealized gains (losses) on derivatives                                                                              |                                                                                                                               |               
|                                                                      | Other income                                                                                                                           |                                                                                                                               |               
|                                                                      |                                                                                                                                        |                                                                                                                               |               
|                                                                      |                                                                                                                                        |                                                                                                                               | TOTAL REVENUES
|                                                                      |                                                                                                                                        |                                                                                                                               |               
|EXPENSES:                                                             |                                                                                                                                        |                                                                                                                               |               
|                                                                      | Losses and loss adjustment expenses                                                                                                    |                                                                                                                               |               
|                                                                      | Interest expense                                                                                                                       |                                                                                                                               |               
|                                                                      | Variable interest entities' net interest expense                                                                                       |                                                                                                                               |               
|                                                                      | Policy acquisition costs                                                                                                               |                                                                                                                               |               
|                                                                      | Other operating expenses                                                                                                               |                                                                                                                               |               
|                                                                      |                                                                                                                                        |                                                                                                                               |               
|                                                                      |                                                                                                                                        |                                                                                                                               | TOTAL EXPENSES
|                                                                      |                                                                                                                                        |                                                                                                                               |               
|Minority interest                                                     |                                                                                                                                        |                                                                                                                               | (9,291        
|                                                                      |                                                                                                                                        |                                                                                                                               |               
|Equity in earnings of unconsolidated affiliate                        |                                                                                                                                        |                                                                                                                               | 19,077        
|                                                                      |                                                                                                                                        |                                                                                                                               |               
|INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE |                                                                                                                                        |                                                                                                                               | 415,943       
|                                                                      |                                                                                                                                        |                                                                                                                               |               
|                                                                      | Provision (benefit) for income taxes:                                                                                                  |                                                                                                                               |               
|                                                                      |                                                                                                                                        | Current                                                                                                                       |               
|                                                                      |                                                                                                                                        | Deferred                                                                                                                      |               
|                                                                      |                                                                                                                                        |                                                                                                                               |               
|                                                                      | Total provision                                                                                                                        |                                                                                                                               |               
|                                                                      |                                                                                                                                        |                                                                                                                               |               
|INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE                  |                                                                                                                                        |                                                                                                                               | 316,140       
|                                                                      | Cumulative effect of accounting change, net of income taxes of $2,598                                                                  |                                                                                                                               |               
|                                                                      |                                                                                                                                        |                                                                                                                               |               
|NET INCOME                                                            |                                                                                                                                        |                                                                                                                               | 320,940       
|                                                                      |                                                                                                                                        |                                                                                                                               |               
|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 $8,830, $49,196 and $(7,133)] |               
|                                                                      | Less: reclassification adjustment for gains included in net income (net of deferred income tax provision of $1,389, $7,641 and $1,940) |                                                                                                                               |               
|                                                                      |                                                                                                                                        |                                                                                                                               |               
|                                                                      | Other comprehensive income (loss)                                                                                                      |                                                                                                                               |               
|                                                                      |                                                                                                                                        |                                                                                                                               |               
|COMPREHENSIVE INCOME                                                  |                                                                                                                                        | $                                                                                                                             | 329,405       
|                                                                      |                                                                                                                                        |                                                                                                                               |               

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

3

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FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
(in thousands)

|                                                                                                 |  | Common
Stock |        | Additional
Paid-In
Capital |   | Unrealized
Gain (Loss)
on
Investments |   | Accumulated
Earnings |         | Total |  
|------------------------------------------------------------------------------------------------ |  | ------------ | ------ | -------------------------- | - | ------------------------------------- | - | -------------------- | ------- | ----- | -
|BALANCE, December 31, 2000                                                                       |  | $            | 15,000 |                            | $ | 789,922                               |   | $                    | 69,553  |       | $
|Net income                                                                                       |  |              |        |                            |   |                                       |   |                      |         |       |  
|Net change in accumulated comprehensive income (net of deferred income tax provision of $5,193)  |  |              |        |                            |   |                                       |   |                      | (6,633  | )     |  
|Dividends paid                                                                                   |  |              |        |                            |   |                                       |   |                      |         |       |  
|Capital contribution from Parent                                                                 |  |              |        |                            |   | 4,875                                 |   |                      |         |       |  
|Other                                                                                            |  |              |        |                            |   |                                       |   |                      |         |       |  
|                                                                                                 |  |              |        |                            |   |                                       |   |                      |         |       |  
|BALANCE, December 31, 2001                                                                       |  |              | 15,000 |                            |   | 794,797                               |   |                      | 62,920  |       |  
|Net income                                                                                       |  |              |        |                            |   |                                       |   |                      |         |       |  
|Net change in accumulated comprehensive income (net of deferred income tax provision of $41,555) |  |              |        |                            |   |                                       |   |                      | 80,340  |       |  
|Capital contribution from Parent                                                                 |  |              |        |                            |   | 18,205                                |   |                      |         |       |  
|Dividends paid                                                                                   |  |              |        |                            |   |                                       |   |                      |         |       |  
|                                                                                                 |  |              |        |                            |   |                                       |   |                      |         |       |  
|BALANCE, December 31, 2002                                                                       |  |              | 15,000 |                            |   | 813,002                               |   |                      | 143,260 |       |  
|Net income                                                                                       |  |              |        |                            |   |                                       |   |                      |         |       |  
|Net change in accumulated comprehensive income (net of deferred income tax provision of $7,441)  |  |              |        |                            |   |                                       |   |                      | 8,465   |       |  
|Capital contribution from Parent                                                                 |  |              |        |                            |   | 10,521                                |   |                      |         |       |  
|Capital issuance costs                                                                           |  |              |        |                            |   | (3,605                                | ) |                      |         |       |  
|                                                                                                 |  |              |        |                            |   |                                       |   |                      |         |       |  
|BALANCE, December 31, 2003                                                                       |  | $            | 15,000 |                            | $ | 819,918                               |   | $                    | 151,725 |       | $
|                                                                                                 |  |              |        |                            |   |                                       |   |                      |         |       |  

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

4

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FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

|                                      |                                                                    | Years Ended December 31,                  |        
|------------------------------------- | ------------------------------------------------------------------ | ----------------------------------------- | -------
|
|Cash flows from operating activities: |                                                                    |                                           |        
|                                      | Premiums received, net                                             |                                           | $      
|                                      | Policy acquisition and other operating expenses paid, net          |                                           |        
|                                      | Termination fee on derivative                                      |                                           |        
|                                      | Recoverable advances paid                                          |                                           |        
|                                      | Losses and loss adjustment expenses paid                           |                                           |        
|                                      | Net investment income received                                     |                                           |        
|                                      | Variable interest entities' net investment income received         |                                           |        
|                                      | Variable interest entities' interest paid                          |                                           |        
|                                      | Federal income taxes paid                                          |                                           |        
|                                      | Interest paid                                                      |                                           |        
|                                      | Other, net                                                         |                                           |        
|                                      |                                                                    |                                           |        
|                                      |                                                                    | Net cash provided by operating activities |        
|                                      |                                                                    |                                           |        
|Cash flows from investing activities: |                                                                    |                                           |        
|                                      | Proceeds from sales of bonds                                       |                                           |        
|                                      | Purchases of bonds and securitized loans                           |                                           |        
|                                      | Purchases of property and equipment                                |                                           |        
|                                      | Net decrease (increase) in short-term investments                  |                                           |        
|                                      | Purchases of variable interest entities' bonds                     |                                           |        
|                                      | Net decrease in variable interest entities' short-term investments |                                           |        
|                                      | Other investments                                                  |                                           |        
|                                      |                                                                    |                                           |        
|                                      |                                                                    | Net cash used for investing activities    |        
|                                      |                                                                    |                                           |        
|Cash flows from financing activities: |                                                                    |                                           |        
|                                      | Surplus notes issued                                               |                                           |        
|                                      | Surplus notes repaid                                               |                                           |        
|                                      | Proceeds from issuance of variable interest entities' debt         |                                           |        
|                                      | Issuance of notes payable                                          |                                           |        
|                                      | Repayment of notes payable                                         |                                           |        
|                                      | Capital issuance costs                                             |                                           |        
|                                      | Dividends paid                                                     |                                           |        
|                                      |                                                                    |                                           |        
|                                      |                                                                    | Net cash provided by financing activities |        
|                                      |                                                                    |                                           |        
|Net increase (decrease) in cash       |                                                                    |                                           | (15,920
|Cash at beginning of year             |                                                                    |                                           | 27,560 
|                                      |                                                                    |                                           |        
|Cash at end of year                   |                                                                    | $                                         | 11,640 
|                                      |                                                                    |                                           |        

On
July 1, 2003, the Company consolidated $2.9 billion in assets and $2.9 billion in liabilities relating to variable interest entities with no
corresponding cash movement.

In
2003, 2002 and 2001, the Company received a tax benefit of $10,521, $18,205 and $4,875, respectively, by utilizing its Parent's losses. These amounts were recorded as a capital
contribution.

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

5

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

|                                                                          |                                                                              | Years Ended December 31, |        
|------------------------------------------------------------------------- | ---------------------------------------------------------------------------- | ------------------------ | -------
|
|Reconciliation of net income to net cash flows from operating activities: |                                                                              |                          |        
|Net income                                                                |                                                                              | $                        | 320,940
|                                                                          | Increase in accrued investment income                                        |                          |        
|                                                                          | Increase in deferred premium revenue and related foreign exchange adjustment |                          |        
|                                                                          | Increase in deferred acquisition costs                                       |                          |        
|                                                                          | Increase in current federal income taxes payable                             |                          |        
|                                                                          | Increase (decrease) in unpaid losses and loss adjustment expenses            |                          |        
|                                                                          | Decrease in amounts withheld for others                                      |                          |        
|                                                                          | Provision (benefit) for deferred income taxes                                |                          |        
|                                                                          | Net realized gains on investments                                            |                          |        
|                                                                          | Depreciation and accretion of discount                                       |                          |        
|                                                                          | Minority interest and equity in earnings of unconsolidated affiliates        |                          |        
|                                                                          | Change in other assets and liabilities                                       |                          |        
|                                                                          |                                                                              |                          |        
|                                                                          | Cash provided by operating activities                                        |                          | $      
|                                                                          |                                                                              |                          |        

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

6

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FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

1.     ORGANIZATION AND OWNERSHIP

Financial Security Assurance Inc. (FSA or the Company), a wholly owned subsidiary of Financial Security Assurance Holdings Ltd. (the Parent), is an
insurance company domiciled in the State of New York. The Company is engaged 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 receivables, securities or other assets having an ascertainable
cash flow or market value. The Company also insures synthetic asset-backed obligations that generally take the form of credit default swap (CDS) obligations or credit-linked notes that reference pools
of securities or loans, with a defined deductible to cover credit risks associated with the referenced securities or loans. In addition, the Company insures guaranteed investment contracts (GICs)
issued by FSA Capital Markets Services LLC and FSA Capital Management Services LLC (collectively, CMS), wholly owned subsidiaries of the Parent. The municipal obligations insured by the Company
consist primarily of general obligation bonds that are supported by the issuers' taxing power and 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
of America, but the Company has also written and continues to pursue business in Europe and the Asia Pacific region.

In
the third quarter of 2003, the Company consolidated FSA Global Funding Limited (FSA Global) and Canadian Global Funding Corporation (Canadian Global), as a result of Financial
Accounting Standards Board (FASB) Interpretation No. 46, "Consolidation of Variable Interest Entities, an interpretation of ARB No. 51" (FIN 46). The Company also consolidated Premier
International Funding Co. (Premier) in the third quarter of 2003, as a result of obtaining control rights (see Note 20). The Company's management believes that the assets held by FSA Global,
Canadian Global and Premier, including those that are eliminated in consolidation, are beyond the reach of the Company and its creditors, even in bankruptcy or other receivership.

On
July 5, 2000, the Parent completed a merger in which the Parent became a direct subsidiary of Dexia Holdings Inc. (Dexia Holdings) which, in turn, is owned 90% by Dexia
Crédit Local and 10% by Dexia S.A. (Dexia), a Belgium corporation whose shares are traded on the Euronext Brussels and Euronext Paris markets as well as on the Luxembourg Stock
Exchange.

2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP), which
differ in certain material

7

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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, 2003 and 2002 and the reported amounts of revenues and expenses in the consolidated statements of operations and comprehensive income for the years ended December 31,
2003, 2002 and 2001. Such estimates and assumptions include, but are not limited to, losses and loss adjustment expenses, fair value of financial instruments and the deferral and amortization of
policy acquisition costs. Actual results may differ from those estimates. Significant accounting policies under GAAP are as follows:



The consolidated financial statements include the accounts of the Company and its direct and indirect subsidiaries, FSA Insurance Company, Financial Security
Assurance International Ltd. (FSA International), and Financial Security Assurance (U.K.) Limited (collectively, the Subsidiaries). The consolidated financial statements also include the
accounts of FSA Global, Canadian Global and
Premier beginning July 1, 2003. All intercompany accounts and transactions have been eliminated. Certain prior-year balances have been reclassified to conform to the 2003
presentation.



Investments in debt securities designated as available for sale are carried at fair value. The unrealized gain or loss on the investments that are not hedged is
reflected as a separate component of shareholder's equity, net of applicable deferred income taxes. The unrealized gain or loss on the investments that qualify as fair value hedges is recorded in
income currently. All of the Company's debt securities 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 fair 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. Other than temporary impairments are
reflected in earnings as a realized loss.

Investments
in unconsolidated affiliates are based on the equity method of accounting (see Note 16). The company records its share of unrealized gains or losses, net of applicable
deferred taxes, in other comprehensive income.



Derivative instruments, which are primarily designated as fair-value hedges, are entered into to manage interest rate and currency exchange rate
exposure on FSA Global and Canadian Global investment and debt instruments. The derivatives are recorded at fair value. These derivatives generally include interest rate and foreign currency swap
agreements, which are primarily utilized to convert FSA Global and Canadian Global's fixed rate debt and investments into U.S. dollar floating-rate obligations. The gains and losses
relating to these fair-value hedges, including any ineffective portion, are included in variable interest entities' net interest income and net interest expense, as appropriate, along with
the offsetting change in fair value of the hedged item attributable to the risk being hedged, on the consolidated statements of operations and comprehensive income. Gains and losses relating to

8

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derivatives
that fail hedge effectiveness are recorded at fair value through earnings and included in variable interest entities' net interest income and net interest expense, as appropriate.

The
Company has also insured a number of CDS agreements that it intends, in each case, to hold for the full term of the agreement. It considers these agreements to be a normal extension
of its financial guaranty insurance business, although they are considered derivatives for accounting purposes. These agreements are recorded at fair value. The Company believes that the most
meaningful presentation of the financial statement impact of these derivatives is to reflect premiums as installments are received, to record losses and loss adjustment expenses as incurred and to
record changes in fair value as incurred. Changes in fair value are recorded in net realized and unrealized gains (losses) on derivative instruments and in other assets or other liabilities. The
Company uses quoted market prices, when available, to determine fair value. If quoted prices are not available, management uses internally developed estimates of fair value. Due to a lack of a quoted
market for the CDS obligations written by the Company, estimates generated from the Company's valuation process may differ materially from values that may be realized in market transactions.



Gross and ceded premiums received in up-front payouts 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 over the expected period of coverage. 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. For premiums received on an installment basis, the Company earns the premium over each installment period, typically less than one year, throughout the period of coverage. When the
Company, through its ongoing credit review process, identifies transactions where certain triggers have been breached, the Company ceases to earn premiums. The amount of any case reserve established
for these transactions will be net of the unearned premium for such transactions.



The Company establishes a case reserve for unpaid losses and loss adjustment expenses for the present value of the estimated loss, net of subrogation recoveries,
when, in management's opinion, the likelihood of a future loss on a particular insured obligation is probable and determinable at the balance sheet date. The estimated loss on a transaction is
discounted using the then current risk-free rates, which ranged from 4.94% to 6.1%. For insured collateralized debt obligations (CDOs), a case basis reserve is recorded to the extent that
the over-collateralization ratio (non-defaulted collateral at par value divided by the debt insured) has fallen below 100% and there is a projected loss when calculating the
present value of cash flows.

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 on particular insured obligations in the future. The general reserve is derived in two separate steps. The first step is to multiply loss factors by the Company's
total net par underwritten and to discount the result at the then current risk-free rates, which ranged from 1.2% to 7.953% at December 31, 2003. The loss factors used for this
purpose are obtained from an independent rating agency study of bond defaults and have been adjusted by the Company's portfolio characteristics and history. The second step pertains to the Company's
insured CDOs, where a present value "deterministic" approach (described in Note 15) is utilized to calculate the general reserve for the Company's insured CDOs.

9

---

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 net
present value of the ultimate net cost of claims. However, because of the uncertainty involved in developing these estimates the ultimate liability may differ from current estimates.



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. The Company does not defer acquisition costs relating to GICs issued by CMS, except for brokerage fees. Deferred acquisition costs and the cost of
acquired business are amortized over the period in which the related premiums are earned. When an insured issue is retired or defeased prior to the end of the expected period of coverage, the
remaining deferred acquisition cost is recognized. Recoverability of deferred acquisition costs is determined by considering deferred premium revenue and estimated installment premiums and the present
value of anticipated losses and loss adjustment expenses.



The debt is recorded at amortized cost. The Company may enter into associated transactions in order to reduce the Company's exposure to fluctuations in interest
and foreign currency rates and its related effect on the fair value of the debt. For fair value hedges, changes in the fair value of the hedging instrument are recognized in income currently. The
change in the fair value of the hedged item in a qualifying hedge, attributable to the hedged risk, adjusts the carrying amount of the hedged item and is recognized in income currently. VIE debt may
include hybrid debt instruments that contain embedded derivates. Under certain conditions, embedded derivatives are required to be accounted for separately, at fair value through earnings.



Assets
and liabilities denominated in foreign currencies are translated at the spot rate. Revenues and expenses denominated in foreign currencies are translated at average rates
prevailing during the year. Unrealized gains and losses, net of deferred taxes, resulting from translating investments denominated in foreign currencies are recorded in shareholders' equity. Gains and
losses from transactions in foreign currencies are recorded in income.



The provision for income taxes consists of an amount for taxes currently payable and a provision for the deferred tax consequences of temporary differences
between tax basis of assets and liabilities and that reported in the financial statement basis.

Non-interest
bearing tax and loss bonds are purchased for the tax benefit resulting from deducting contingency reserves as provided under Internal Revenue Code
Section 832(e). The Company records the purchase of tax and loss bonds as pre-payments of federal income taxes and includes them in other assets.

3.     INVESTMENTS

Bonds at amortized cost of $8.9 million and $8.5 million at December 31, 2003 and 2002, respectively, were on deposit with state regulatory
authorities as required by insurance regulations.

10

---

Consolidated
net investment income excluding income attributable to the variable interest entities' bond and short term portfolio (the VIE portfolio), consisted of the following (in
thousands):

Years Ended December 31,2003

2002

2001Bonds

$
152,977

$
136,352

$
125,531Equity investments





294


504Short-term investments


2,986


3,337


3,652Investment expenses


(2,892
)

(2,377
)

(2,275
)Net investment income

$
153,071

$
137,606

$
127,412


The
credit quality of bonds, excluding the VIE portfolio, at December 31, 2003 was as follows:

Rating(1)

Percent of BondsAAA

76.6
%AA

20.5A

2.9100.0
%


---

Of
the bonds included in the investment portfolio, excluding the VIE portfolio, 11.4% were AAA by virtue of insurance provided by the Company. Without giving effect to the FSA guaranty,
the weighted-average rating of the FSA-insured investments was in the Double-A range, and all of these investments were investment grade.

11

---

The
amortized cost and fair value of bonds, excluding the VIE portfolio, were as follows (in thousands):

December 31, 2003

Amortized Cost

Gross Unrealized Gains

Gross Unrealized Losses

Fair ValueU.S. Treasury securities and obligations of U.S. government corporations and agencies

$
96,003

$
3,367

$
(335
)
$
99,035Obligations of states and political subdivisions


2,506,380


218,929


(1,287
)

2,724,022Foreign


108,249


69


(2,368
)

105,950Mortgage-backed securities


220,022


4,438


(1,409
)

223,051Corporate securities


240,465


10,228


(589
)

250,104Asset-backed securities


83,384


1,860


(26
)

85,218Total

$
3,254,503

$
238,891

$
(6,014
)
$
3,487,380


December 31, 2002

Amortized Cost

Gross Unrealized Gains

Gross Unrealized Losses

Fair ValueU.S. Treasury securities and obligations of U.S. government corporations and agencies

$
60,101

$
7,178

$
(26
)
$
67,253Obligations of states and political subdivisions


2,034,691


186,352


(174
)

2,220,869Mortgage-backed securities


250,092


8,203


(141
)

258,154Corporate securities


177,934


10,547


(35
)

188,446Asset-backed securities


74,781


2,244





77,025Total

$
2,597,599

$
214,524

$
(376
)
$
2,811,747


12

---

The
following table shows the gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized
loss position, at December 31, 2003:

Less than 12 months

12 months or more

TotalFair Value

Unrealized
Losses

Fair Value

Unrealized
Losses

Fair Value

Unrealized
Losses(in thousands)U.S. Treasury securities and obligations of U.S. government corporations and agencies

$
15,536

$
297

$
6,953

$
38

$
22,489

$
335Obligations of states and political subdivisions


129,932


1,231


2,964


56


132,896


1,287Mortgage-backed securities


66,899


1,332


1,824


77


68,723


1,409Corporate securities


22,676


589








22,676


589Foreign


98,074


2,368








98,074


2,368Asset-backed securities


3,036


26








3,036


26Total

$
336,153

$
5,843

$
11,741

$
171

$
347,894

$
6,014


The
Company periodically monitors its investment portfolio for individual investments in an unrealized loss position in order to assess whether that investment is considered other than
temporarily impaired. In each case, the Company determines the nature and cause of the decline and whether the Company maintains the ability and intent to hold the security until the unrealized loss
may reverse or until
maturity. At December 31, 2003, the Company determined that no investments were considered other than temporarily impaired.

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

Years Ended December 31,2003

2002

2001Bonds

$
18,729

$
121,964

$
(12,156
)Equity investments





(70
)

330Change in net unrealized gains (losses)

$
18,729

$
121,894

$
(11,826
)


The
amortized cost and fair value of bonds at December 31, 2003, 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.

Amortized
Cost

Fair ValueDue in one year or less

$
18,820

$
19,128Due after one year through five years


424,780


431,250Due after five years through ten years


476,378


511,943Due after ten years


2,031,119


2,216,790Mortgage-backed securities (stated maturities of 1 to 30 years)


220,022


223,051Asset-backed securities (stated maturities of 1 to 14 years)


83,384


85,218Total

$
3,254,503

$
3,487,380


Proceeds
from sales of bonds, excluding the VIE portfolio, during 2003, 2002 and 2001 were $921.0 million, $733.9 million and $483.1 million, respectively. Gross
gains of $11.5 million,

13

---

$29.3 million
and $8.0 million and gross losses of $6.3 million, $1.1 million and $1.7 million were realized on sales in 2003, 2002 and 2001, 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):

Years Ended December 31,2003

2002

2001Balance, beginning of period

$
253,777

$
240,492

$
201,136Costs deferred during the period:Ceding commission income


(73,943
)

(68,464
)

(41,935
)Premium taxes


16,773


13,401


9,653Compensation and other acquisition costs


135,430


122,441


113,013Total


78,260


67,378


80,731Costs amortized during the period


(58,391
)

(54,093
)

(41,375
)Balance, end of period

$
273,646

$
253,777

$
240,492


14

---

5.     STATUTORY ACCOUNTING PRACTICES

GAAP for the Company differs in certain significant respects from accounting practices prescribed or permitted by insurance regulatory authorities, which are
applicable to the Company's insurance company subsidiaries. The principal differences result from the following statutory accounting practices:



15

---



A
reconciliation of net income for the calendar years 2003, 2002 and 2001 and shareholder's equity at December 31, 2003 and 2002, reported by the Company on a GAAP basis, to the
amounts reported by the Subsidiaries on a statutory basis, is as follows (in thousands):

Net Income:

2003

2002

2001GAAP BASIS

$
320,940

$
182,779

$
212,579Premium revenue recognition


(27,867
)

(19,624
)

(23,113
)Losses and loss adjustment expenses incurred


21,813


20,585


3,867Deferred acquisition costs


(19,868
)

(13,285
)

(39,356
)Deferred income tax provision


17,303


(23,888
)

15,949Current income tax benefit


(18,049
)

(8,162
)

(6,239
)Change in fair value of derivatives


(34,796
)

48,788Income and expenses of VIEs, net


(5,120
)Other


8,588


7,895


9,383STATUTORY BASIS

$
262,944

$
195,088

$
173,070


December 31,Shareholder's Equity:2003

2002GAAP BASIS

$
2,307,646

$
1,971,325Premium revenue recognition


(189,823
)

(162,788
)Loss and loss adjustment expense reserves


109,237


89,656Deferred acquisition costs


(273,646
)

(253,777
)Contingency reserve


(936,761
)

(691,955
)Unrealized gain on investments


(232,877
)

(214,148
)Deferred income taxes


199,346


168,452Net assets of VIEs


541Surplus notes


154,761


214,865Other


29,073


62,532STATUTORY BASIS SURPLUS

$
1,167,497

$
1,184,162SURPLUS PLUS CONTINGENCY RESERVE

$
2,104,258

$
1,876,117


6.     FEDERAL INCOME TAXES

Prior to the merger with Dexia, the Parent, the Company and its Subsidiaries, except FSA International, filed a consolidated federal income tax return. The
calculation of each company's tax benefit or expense was controlled by a tax-sharing agreement that based the allocation of such benefit or expense upon a separate return calculation.
Dexia Holdings, the Parent and the Company and its Subsidiaries, except FSA International, filed a consolidated federal income tax return for periods subsequent to the merger, under a new
tax-sharing agreement.

The
new tax sharing agreement provides that each member's tax benefit or expense is calculated on a separate return basis and that any credits or losses available to the Parent or Dexia
Holdings be allocated to the members based on the member's taxable income. At December 31, 2003 and 2002, the Company and its Subsidiaries received benefits from utilizing the Parent's credits
and losses of $10.5 million and $18.2 million, respectively. These amounts have been recorded as capital contributions and reductions in amounts payable to the Parent in the financial
statements.

Federal
income taxes have not been provided on substantially all of the undistributed earnings of FSA International, since it is the Company's practice and intent to reinvest such
earnings in the

16

---

operations
of these subsidiaries. The cumulative amount of such untaxed earnings was $86.7 million, $57.1 million and $41.9 million at December 31, 2003, 2002 and 2001,
respectively.

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

December 31,2003

2002Deferred acquisition costs

$
85,441

$
80,815Deferred premium revenue adjustments


16,520


17,663Unrealized capital gains


79,186


71,734Contingency reserves


96,481


78,433Undistributed earnings


3,484


2,195Other, net


2,802


574Total deferred federal income tax liabilities


283,914


251,414Loss and loss adjustment expense reserves


(34,304
)

(27,526
)Deferred compensation


(64,499
)

(54,990
)Fair value adjustments


(4,424
)

(15,565
)Total deferred federal income tax assets


(103,227
)

(98,081
)Total deferred federal income taxes

$
180,687

$
153,333


No
valuation allowance was necessary at December 31, 2003 or 2002.

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

Years Ended December 31,2003

2002

2001Tax at statutory rate

35.0
%
35.0
%
35.0
%Tax-exempt interest

(8.5
)
(13.2
)
(9.6
)Income of foreign subsidiary

(2.5
)
(2.3
)
(3.0
)Provision for income taxes

24.0
%
19.5
%
22.4
%


7.     DIVIDENDS AND CAPITAL REQUIREMENTS

Under the insurance laws of the State of New York, the Company may pay a dividend without the prior approval of the Superintendent of Insurance of the State of
New York (the New York Superintendent) 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 it during the preceding twelve months, may not exceed the lesser of 10% of its policyholders' surplus shown on its last filed statement, or adjusted net investment income, as defined,
for such twelve-month period. As of December 31, 2003, the Company had $112.6 million available for the payment of dividends over the next twelve months.

8.     CREDIT ARRANGEMENTS AND ADDITIONAL CLAIMS-PAYING RESOURCES

The Company has a credit arrangement aggregating $150.0 million, which is provided by commercial banks and intended for general application to transactions
insured by the Company and the Subsidiaries. At December 31, 2003, there were no borrowings under this arrangement, which expires on April 23, 2004, if not extended.

17

---

The
Company has a standby line of credit commitment in the amount of $325.0 million with a group of international banks to provide loans to the Company after it has incurred,
during the term of the facility, cumulative municipal losses (net of any recoveries) in excess of the greater of $325.0 million or the average annual debt service of the covered portfolio
multiplied by 5.00%, which amounted to $865.6 at December 31, 2003. 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
expiring on April 30, 2010 and contains an annual renewal provision subject to approval by the banks. No amounts have been utilized under this commitment as of December 31, 2003.

In
June 2003, $200.0 million of money market committed preferred trust securities (the CPS Securities) were issued by trusts created for the primary purpose of issuing the
CPS Securities, investing the proceeds in high quality commercial paper and providing the Company with put options for issuing to the trusts non-cumulative redeemable perpetual preferred
stock (the Preferred Stock) of the Company. If a put option were to be exercised by the Company, the applicable trust would use the portion of the proceeds attributable to principal received upon
maturity of its assets, net of expenses, and transfer such proceeds to the Company in exchange for Preferred Stock of the Company. The Company pays a floating put premium to the trusts. The cost of
the structure was $3.6 million for 2003 and was recorded in equity. The trusts are vehicles for providing the Company access to new capital at its sole discretion through the exercise of the
put options. The Company does not consider itself to be the primary beneficiary of the trusts under FIN 46 because it does not retain the majority of the residual benefits or expected losses.

The
Company had borrowed $152.9 million from its Parent in the form of Surplus Notes. These notes carry a simple interest rate of 5.0% per annum. Principal of and interest on the
Surplus Notes may be paid at any time at the option of the Company, subject to prior approval of the New York Superintendent and compliance with the conditions to such payments as contained in the New
York Insurance Laws. These notes have no stated maturity. The Company paid interest of $9.3 million, $7.4 million and $4.5 million in 2003, 2002 and 2001, respectively. In 2003,
with the approval of the New York Superintendent, the Company repaid $60.0 million of principal on such notes. In 2002, the Company repaid $28 million of principal on such notes and
issued an additional $96.9 million of notes to its Parent.

9.     EMPLOYEE BENEFIT PLANS

The Company and its Parent maintain both qualified and non-qualified, non-contributory defined contribution pension plans for the benefit
of all eligible employees. The Company and its Parent's contributions are based upon a fixed percentage of employee compensation. Pension expense, which is funded annually, amounted to
$4.3 million, $4.8 million and $3.3 million, respectively, for the years ended December 31, 2003, 2002 and 2001, respectively.

The
Company has 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 Internal Revenue Service Code, Section 401(k). The Company's contributions are discretionary, and none have been made.

Performance
shares are awarded under the Parent's 1993 Equity Participation Plan. The 1993 Equity Participation Plan authorizes the discretionary grant of performance shares by the Human
Resources Committee to key employees of the Company. The amount earned for each performance share depends upon the attainment by the Company of certain growth rates of adjusted book value (or, in the
case of performance shares issued after January 1, 2001, growth rates of adjusted book value and book value) per outstanding share over a three-year period. At the election of the
participant at the

18

---

time
of award, growth rates may be determined including or excluding realized and unrealized gains and losses on the Parent's consolidated investment portfolio. No payout occurs if the compound annual
growth rate of the Parents consolidated adjusted book value (or in the case of performance shares issued after January 1, 2001, growth rates of adjusted book value and book value) per
outstanding share is less than 7%, and a 200% payout occurs if the compound annual growth rate is 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 Beginning
of Year

Granted
During
the Year

Earned
During
the Year

Forfeited
During
the Year

Outstanding
at End
of Year

Price per
Share at
Grant Date2001

1,094,834

310,200

261,034

12,250

1,131,750

$
79.042002

1,131,750

372,775

380,279

13,901

1,110,345


85.632003

1,110,345

342,845

464,778

13,261

975,151


92.72


The
Company applies APB Opinion 25 and related Interpretations in accounting for the Parent's 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 $58.1 million, $55.8 million and $46.4 million, for the years ended
December 31, 2003, 2002 and 2001, respectively.

For
obligations under the Parent's Deferred Compensation Plan (DCP) and Supplemental Executive Retirement Plan (SERP), the Parent generally purchases investments expected to perform
similarly to the tracking investments chosen by the participants under the plans.

The
Company does not currently provide post-retirement benefits, other than under the Parent's defined contribution plans, to its employees, nor does it provide
post-employment benefits to former employees other than under its severance plans or employment agreements with members of senior management.

19

---

10.   COMMITMENTS AND CONTINGENCIES

The Company leases office space and equipment under non-cancelable operating leases, which expire at various dates through 2007.

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

Year Ended
December 31,2004

$
5,3972005


4,3492006


1,4602007


841Total

$
12,047


Rent
expense for the years ended December 31, 2003, 2002 and 2001 was $6.6 million, $5.7 million and $5.9 million, respectively.

During
the ordinary course of business, the Company and its Subsidiaries have become parties to certain litigation. The Company is not subject to any material pending legal proceedings.

11.   REINSURANCE

The Company obtains reinsurance to increase its policy-writing capacity on both an aggregate-risk and a single-risk basis; to meet rating agency, internal and
state insurance regulatory limits; to diversify risk; to reduce the need for additional capital; and to strengthen financial ratios. The Company reinsures portions of their risks with affiliated (see
Note 13) and unaffiliated reinsurers under quota share, first-loss and excess-of-loss treaties and on a facultative basis.

In
the event that any or all of the reinsuring companies were unable to meet their obligations to the Company, or contested such obligations, the Company would be liable for such
defaulted amounts. Certain of the reinsuring companies have provided collateral to the Subsidiaries to secure their reinsurance obligations.

20

---

Amounts
of ceded and assumed business were as follows (in thousands):

Year Ended December 31,2003

2002

2001Written premiums ceded

$
281,541

$
270,954

$
165,932Written premiums assumed


3,294


2,443


3,130Earned premiums ceded


159,350


134,093


99,251Earned premiums assumed


3,832


4,079


3,653Losses and loss adjustment expense payments ceded


16,993


(2,513
)

(4,199
)Losses and loss adjustment expense payments assumed











December 31,2003

2002Principal outstanding ceded

$
96,824,422

$
92,141,112Principal outstanding assumed


1,935,306


2,000,422Deferred premium revenue ceded


695,398


557,659Deferred premium revenue assumed


13,060


13,331Losses and loss adjustment expense reserves ceded


59,235


75,950Losses and loss adjustment expense reserves assumed


592


728


12.   OUTSTANDING EXPOSURE AND COLLATERAL

The Company's policies insure the scheduled payments of principal and interest on asset-backed (including insured credit default swaps) and municipal obligations.
The maturities below are based on estimates made by the issuers of the insured obligations. Actual maturities could differ from contractual maturities because borrowers have the right to call or
prepay certain obligations with or without call or prepayment penalties. The net par outstanding (in millions) as of December 31, 2003 and 2002 and the terms to maturity are as follows:

December 31, 2003

December 31, 2002Terms to MaturityAsset-Backed(1)

Municipal

Asset-Backed(1)

Municipal0 to 5 Years

$
58,500

$
8,174

$
64,158

$
8,7815 to 10 Years


33,063


20,248


33,908


18,22110 to 15 Years


6,806


36,841


4,781


31,93615 to 20 Years


1,450


45,145


1,667


33,80920 Years and Above


23,183


60,530


24,009


44,430Total

$
123,002

$
170,938

$
128,523

$
137,177


---

21

---

The
par amount ceded as of December 31, 2003 and 2002 and the terms to maturity are as follows (in millions):

December 31, 2003

December 31, 2002Terms to MaturityAsset-Backed

Municipal

Asset-Backed

Municipal0 to 5 Years

$
9,372

$
1,946

$
10,130

$
2,1305 to 10 Years


7,585


5,837


6,851


4,62810 to 15 Years


2,682


11,256


3,699


10,10515 to 20 Years


1,971


17,239


1,428


16,43320 Years and Above


3,590


35,346


5,906


30,830Total

$
25,200

$
71,624

$
28,014

$
64,126


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 net par outstanding of insured obligations in the asset-backed insured portfolio are backed by the following types of
collateral (in millions):

Net of Amounts Ceded(1)
December 31,

Ceded
December 31,Types of Collateral2003

2002

2003

2002Residential mortgages

$
20,682

$
23,379

$
4,031

$
5,954Consumer receivables


14,039


19,454


5,033


5,480Pooled corporate obligations


78,147


78,113


11,936


13,007Other asset-backed obligations


10,134


7,577


4,200


3,573Total asset-backed obligations

$
123,002

$
128,523

$
25,200

$
28,014


---

The
net par outstanding of insured obligations in the municipal insured portfolio includes the following types of issues (in millions):

Net of Amounts Ceded
December 31,

Ceded
December 31,Types of Collateral2003

2002

2003

2002General obligation bonds

$
67,212

$
54,563

$
20,184

$
18,388Housing revenue bonds


7,597


5,833


2,074


1,687Municipal utility revenue bonds


30,024


23,442


14,270


13,468Health care revenue bonds


7,051


5,970


6,971


6,683Tax-supported bonds (non-general obligation)


33,835


27,556


13,526


12,391Transportation revenue bonds


10,744


7,640


7,376


5,748Other municipal bonds


14,475


12,173


7,223


5,761Total municipal obligations

$
170,938

$
137,177

$
71,624

$
64,126


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

22

---

securitizations,
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 diversification.

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
those states in which municipalities located therein issued an aggregate of 2% or more of the Company's net par amount outstanding (in millions) of insured municipal securities as of
December 31, 2003:

State

Number
of Issues

Net Par
Amount
Outstanding

Percent of Total
Municipal Net Par
Amount Outstanding

Ceded Par
Amount
OutstandingCalifornia

895

$
24,789

14.5
%
$
8,692New York

575


15,727

9.2


8,858Texas

669


12,128

7.1


5,341Pennsylvania

643


10,550

6.2


2,948Florida

259


10,007

5.9


3,582New Jersey

524


8,673

5.1


3,879Illinois

622


7,774

4.5


3,253Washington

267


6,140

3.6


2,445Michigan

359


5,134

3.0


1,572Massachusetts

185


5,016

2.9


2,147Wisconsin

412


4,038

2.4


1,263Ohio

212


3,732

2.2


1,928Indiana

210


3,581

2.1


578All other U.S. jurisdictions

2,450


47,504

27.8


19,884International

70


6,145

3.5


5,254Total

8,352

$
170,938

100.0
%
$
71,624


13.   RELATED PARTY TRANSACTIONS

Allocable expenses are shared by the Company and its Parent on a basis determined principally by estimates of respective usage as stated in an expense sharing
agreement. The agreement is subject to the provisions of the New York Insurance Law. Amounts included in other assets at December 31, 2003 and 2002 are $31.5 million and
$8.2 million, respectively, for unsettled expense allocations due from the Parent.

The
Company ceded premiums of $48.8 million; $23.4 million and $12.8 million to XL Capital Ltd. (XL) and its subsidiaries, for the years ended
December 31, 2003, 2002 and 2001, respectively. The amounts included in prepaid reinsurance premiums at December 31, 2003 and 2002 for reinsurance ceded to XL and its subsidiaries were
$60.8 million and $32.0 million, respectively. The amounts included in reinsurance recoverable for unpaid losses at December 31, 2003 and 2002 for reinsurance ceded to
subsidiaries of XL were $10.9 million and $7.4 million, respectively.

The
Company had premiums earned of $2.5 million, $5.0 million and $4.4 million in the first half of 2003 and the years ended 2002 and 2001, respectively, relating to
the guarantees of debt issued or assets purchased by FSA Global. Intercompany premiums earned relating to FSA Global have been eliminated in consolidation for periods subsequent to July 1,
2003.

The
VIE portfolio contains $559.9 million of GICs issued by CMS. The Company recognized $5.6 million in VIE net interest income during 2003 related to these investments.

23

---

The
Company had premiums earned of $20.5 million, $17.3 million and $7.2 million for the years ended December 31, 2003, 2002 and 2001, respectively, relating
to business with affiliates of Dexia. Deferred premium revenue was $6.9 million and $7.7 million and gross par outstanding relating to those transactions was $16.8 billion and
$16.2 billion, at December 31, 2003 and 2002, respectively. For the year ended December 31, 2003, the Company, via its interest in VIE holdings, recorded net revenues of
$57.4 million relating to swaps where Dexia was the counterparty. At December 31, 2003, the Company recorded other assets of $240.9 million primarily relating to swaps where Dexia
was the counterparty. In addition, the Company had $154.3 million in VIE debt at December 31, 2003, relating to debt issued to Dexia. During 2003, the Company recorded
$3.3 million in VIE net interest expense relating to such debt.

The
Company had premiums earned of $7.5 million and $3.3 million at December 31, 2003 and 2002, respectively, relating to the guaranty of GICs issued by CMS.

14.   DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company determines fair values 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 variable interest entities' bondsThe carrying amount represents fair value. The fair value is based upon quoted fair price.

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

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

Securitized
loansThe fair value of the loans is the present value of the expected cash flows as of the reporting date.

24

---

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 received 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.

Variable
interest entity debtThe fair value is the present value of the expected future cash flows as of the reporting date.

Surplus
notesThe Company could not determine the fair value of the notes because the related party debt does not contain normal commercial terms such as a maturity date.

Notes
payable to affiliateThe fair value is the present value of the expected cash flows as of the reporting date.

Fair
value adjustments on derivativesThe carrying amount represents fair value. The Company uses quoted market prices, when available, to determine fair value. If quoted
market prices are not available, management uses internally developed estimates.

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

25

---

The
table below shows the carrying amount and fair value of the Company's financial instruments (in thousands):

December 31, 2003

December 31, 2002Carrying
Amount

Fair Value

Carrying
Amount

Fair ValueAssets:Bonds

$
3,487,380

$
3,487,380

$
2,811,747

$
2,811,747Variable interest entities' bonds


1,510,561


1,510,561Variable interest entities' GICs


559,853


559,853Short-term investments


222,391


222,391


364,565


364,565VIE short-term investments


11,102


11,102Cash


11,640


11,640


27,560


27,560Securitized loans


433,948


431,840


431,718


437,231Fair value adjustments on derivatives


407,742


407,742Receivable for securities sold


389


389


93


93Liabilities:Deferred premium revenue, net of prepaid reinsurance premiums


1,166,562


949,469


892,552


738,738Losses and loss adjustment expenses, net of reinsurance recoverable on unpaid losses


174,173


174,173


147,668


147,668Notes payable to affiliate


434,723


437,433


431,360


440,589VIE debt


2,537,466


2,537,466Surplus notes


152,850


N/A


212,850


N/APayable for investments purchased


6,828


6,828


2,481


2,481Fair value adjustments on derivatives


9,464


9,464


44,238


44,238Off-balance-sheet instruments:Installment premiums





424,964





412,758


26

---

15.   LIABILITY FOR LOSSES AND LOSS ADJUSTMENT EXPENSES

Activity in the liability for losses and loss adjustment expenses, which consists of the case basis and general reserves, is summarized as follows (in thousands):

Year Ended December 31,2003

2002

2001Balance at January 1

$
223,618

$
114,428

$
116,336Less reinsurance recoverable


75,950


28,880


24,617Net balance at January 1


147,668


85,548


91,719Incurred losses and loss adjustment expenses:Current year


22,375


21,133


8,203Prior years


12,111


44,480


4,294Restructured transaction


(2,231
)Paid losses and loss adjustment expenses, net:Prior years


(5,750
)

(3,493
)

(18,668
)Net balance December 31


174,173


147,668


85,548Plus reinsurance recoverable


59,235


75,950


28,880Balance at December 31

$
233,408

$
223,618

$
114,428


During
2001, the Company increased its general reserve by $12.5 million, of which $8.2 million was for originations of new business and $4.3 million was for the
accretion of the discount on prior years' reserves. Also during 2001, the Company transferred to the general reserve $0.1 million representing recoveries received on prior-year transactions and
transferred $8.7 million from the general reserve to case reserves. Giving effect to these transfers, the general reserve totaled $69.1 million at December 31, 2001.

In
the second quarter of 2002, as part of the Company's ongoing credit review process, management identified certain transactions not performing as expected in its portfolio of insured
collateralized debt obligations (CDOs). As a result, management undertook a quantitative analysis of all CDO transactions in its insured portfolio that breached senior overcollateralization triggers,
which were included in such transactions as one measure of adverse performance. A present value "deterministic" approach was utilized to estimate the loss inherent in this portfolio. The deterministic
model takes the average cumulative default rate produced by a Monte Carlo simulation and applies those defaults to a cash flow model using a timing sequence dependent upon the portfolio's rating and
maturity composition, and using an estimate of collateral recovery values for severity, and the LIBOR forward curve as a predictor of interest rates. Management assumed that current default rates on
CDO collateral would improve in a manner consistent with an economic recovery following a period of significant credit deterioration similar to that experienced in 1991/1992 and, as a result,
management utilized the Moody's idealized default curve, adjusted by a factor consistent with the relationship between the 1992 cohort experience and the Moody's 30 year average default rate.
The per-period default rate was calculated based on the Moody's weighted average rating factor for each piece of surviving collateral. Recovery rates were judgmentally established by the
Company. In considering the recovery rates to be utilized, management adjusted Moody's average recovery rates (observed since 1982) downward to reflect more recent adverse observations. At
June 30, 2002, this analysis produced a present value of expected losses of $51.5 million, net of reinsurance recoveries and net of unearned premiums and future ceding commissions. As
described in more detail below, management addressed

27

---

this
net present value of expected loss ($51.5 million) through (i) an increase in the Company's general reserve ($31.0 million) and (ii) amounts already existing in its
general reserve ($20.5 million), including general reserve amounts reallocated to case basis reserves ($11.3 million). The $31.0 million increase in the Company's general reserve
resulted in a corresponding increase to losses and loss adjustment expense in the income statement of $31.0 million. An additional adjustment of $10.1 million was made in the fourth
quarter of 2002 as a result of further deterioration of the CDO portfolio. Management established a methodology of recording case reserves on CDO transactions to the extent that the
overcollateralization ratio (non-defaulted collateral at par value divided by the debt insured) has fallen below 100%, since management believes that claims on such transactions are
probable and that the amount of the undercollateralization is a reasonable estimate of such claims. Such transactions may benefit from excess cash flow attributable in part to higher interest rates on
the underlying collateral than on the insured securities. In addition, such transactions generally require insured payments of principal only at the ultimate maturity of such transactions. As a
result, the Company does not expect to be required to pay claims in respect of these transactions for several years, but may elect to do so at an earlier date at its discretion. Application of this
methodology resulted in recording $68.8 million in gross case reserves and $29.8 million in reinsurance recoverable on unpaid losses, resulting in a $39.0 million increase in net
case reserves in 2002. Management, beginning in the second quarter of 2002, has refined the loss factor it applies to its net par underwritten when calculating the general reserve in order to reflect
its recent adverse experience. As a result, the general reserve accrual for the year ended December 31, 2002 was $65.6 million, rather than approximately $14.9 million that would
have been accrued using the prior assumptions.

During
2002, the Company increased its general reserve by $65.6 million, of which $41.1 million related to the CDO portfolio discussed above, $21.1 million was for
originations of new business and $3.4 million was for the accretion of the discount on prior years' reserves. Also during 2002, the Company transferred to the general reserve
$0.8 million representing recoveries received on
prior-year transactions and transferred $45.8 million from the general reserve to case reserves. Giving effect to these transfers, the general reserve totaled $89.7 million
at December 31, 2002.

During
2003, the Company charged $34.5 million to loss expense, comprised of $9.2 million related to the CDO portfolio discussed above, $22.4 million for
originations of new business and $2.9 million for the accretion of the discount on prior years' reserves. The general reserve increased by $21.8 million in 2003, consisting of the loss
expense, a transfer to the general reserve of $1.4 million representing recoveries received on prior-year transactions and a transfer of $14.1 million from the general
reserve to case reserves. In addition, the Company reclassified $2.2 million of case reserves relating to a restructured transaction to securitized loans on the balance sheet (see
Note 18). Giving effect to these transfers, the general reserve totaled $111.5 million at December 31, 2003.

The
cumulative amount of discount taken was approximately $65.9 million, $44.7 million and $29.6 million at December 31, 2003, 2002 and 2001, respectively.

16.   INVESTMENTS IN UNCONSOLIDATED AFFILIATE

The Company has a 15.0% interest in XL Financial Assurance Ltd. (XLFA). 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, 2003, 2002 and 2001 are as follows
(in thousands):

2003

2002

2001Investment in XLFA

$
64,440

$
52,206

$
49,726Equity in earnings from XLFA


19,077


9,145


8,356Dividends received from XLFA


6,640


6,665


1,492


28

---

At
December 31, 2003 and 2002, the Company's retained earnings included $25.7 million and $13.2 million, respectively, of accumulated undistributed earnings of XLFA.

17.   MINORITY INTEREST IN SUBSIDIARY

In November 1998, FSA International, a Bermuda-based financial guaranty subsidiary of the Company, sold to XL $20.0 million of preferred shares
representing a minority interest in FSA International. In December 1999, FSA International sold to XL an additional $10.0 million 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 $1.5 million per annum. In 2003 and 2002, FSA
International paid preferred dividends of $3.3 million and $8.7 million respectively, to XL. For the years ended December 31, 2003, 2002 and 2001, the Company recognized minority
interest of $9.3 million, $6.7 million and $8.9 million, respectively.

18.   SECURITIZED LOANS AND NOTES PAYABLE TO AFFILIATE

In 2003 and in 2002, the Company exercised certain rights available under its financial guaranty policies and the indentures relating to certain
loan-backed notes issued by trusts. Those rights allowed the Company to accelerate the insured notes and pay claims under its insurance policies on an accelerated basis. Refinancing
vehicles reimbursed the Company in whole for its claims payment in exchange for an assignment of certain of the Company's rights against the trusts. The refinancing vehicles obtained their funds to
purchase the notes by issuing refinanced notes, with interest rates ranging from 1.891% to 5.718%. These notes were purchased by FSA Asset Management LLC, a wholly owned subsidiary of the Parent. The
Company maintains significant first loss and quota share reinsurance on these transactions.

Since
the notes represented 100% of the debt capitalization of the trusts and since the Company maintains all the risk of further asset decline and maintains control over key decisions
regarding the trusts (such as removal of servicer, sale of assets and liquidation of the entity), the Company consolidated the trusts. The Company also consolidates the refinancing vehicles.

Although
the securitized loans are included on the Company's balance sheet, the securitized loans continue to support FSA-insured transactions exclusively, subject to
considerable first loss and quota share reinsurance. In accordance with AICPA Practice Bulletin 6, "Amortization of Discounts on Certain Acquired Loan", the Company has recorded the securitized loans
at cost net of losses at the date of purchase, has determined net cash flows from the pool of securitized loans and is recording income based upon the effective yield method. The cash flows on the
securitized loans will be monitored and the effective yield modified to reflect any change in cash flow estimates.

The
Company has recorded $433.9 million of securitized loans and $434.7 million of notes payable at December 31, 2003. For the years ended December 31, 2003
and 2002, the Company recorded $21.0 million and $5.3 million of other income on the securitized loans and $19.6 million and $4.9 million of interest expense on the notes
payable.

29

---

Principal payments due under these notes for each of the next five years ending December 31 and thereafter, are as follows (in thousands):

Expected
Withdrawal Date

Principal
Amount2004

$
54,0562005


64,8312006


58,7022007


53,2712008


49,549Thereafter


154,314Total

$
434,723


19.   DERIVATIVE INSTRUMENTS

In August 2002, the single-corporate-name CDS program was terminated in exchange for paying termination costs of $43.0 million,
$38.0 million of which was related to the Company's exposure.
The charge was included in net realized and unrealized gains (losses) on derivative instruments in the consolidated statements of operations and comprehensive income.

The
Company has also insured a number of credit default swap agreements that it intends, in each case, to hold for the full term of the agreement. It considers these agreements to be a
normal extension of its financial guaranty insurance business, although they are considered derivatives for accounting purposes. These agreements are recorded at fair value. The Company believes that
the most meaningful presentation of the financial statement impact of these derivatives is to reflect premiums as installments are received, to record losses and loss adjustment expenses as incurred
and to record changes in fair value as incurred. The Company recorded $57.7 million, $35.0 million and $15.4 million in net earned premium under these agreements for the years
ended December 31, 2003, 2002 and 2001, respectively. The change in fair value, which were gains of $34.8 million, losses of $50.2 million and gains of $6.7 million for the
years ended December 31, 2003, 2002 and 2001 respectively, were recorded in net realized and unrealized gains (losses) on derivative instruments in the consolidated statement of operations and
comprehensive income and in accrued expenses and other liabilities. The Company included the net par outstanding of $63.8 billion relating to these CDS transactions at December 31, 2003
in the asset-backed balances in Note 12. The losses or gains recognized by recording these contracts at fair value will be determined each quarter based on an estimate of fair value by
analyzing pricing of Super Triple-A (defined as having first-loss protection of 1.3 times the level required for Triple-A rating) swap guarantees and other
indicative market prices, as appropriate, for the implied rating of each underlying obligation. The Company does not believe the fair value adjustments are an indication of potential claims under the
Company's guarantees. The inception-to-date net unrealized loss was recorded in accrued expenses and other liabilities and was $9.4 million and $44.2 million at December 31, 2003
and 2002, respectively.

20.   VARIABLE INTEREST ENTITIES

In January 2003, the FASB issued FIN 46. FIN 46 addresses consolidation of VIEs that have one or both of the following characteristics: (i) the
equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties, which is provided through other
interests that will absorb some or all of the expected losses of the entity; and (ii) the equity investors lack the direct or indirect ability to make decisions about the entity's activities
through voting rights or similar rights, the obligation to absorb the expected losses of the entity if they occur or the right to receive the expected residual returns of the entity if they occur. In
December 2003, the FASB issued FASB Interpretation No 46 (revised December 2003),

30

---

"Consolidation
of Variable Interest Entities, an Interpretation of ARB 51" (FIN 46R). FIN 46R replaced FIN 46 and is effective for public companies for periods after December 15, 2003.

The
Company applied FIN 46 and consolidated for financial reporting purposes, effective July 1, 2003, FSA Global and Canadian Global. In addition, as a result of the Company
obtaining control rights of
another VIE, Premier, on July 1, 2003, the Company consolidated Premier beginning July 1, 2003. FIN 46R requires that, upon consolidation, the Company initially measure the VIE's assets,
liabilities and minority interest at their carrying amounts under existing GAAP as if the entity had been consolidated from the time the Company was considered its primary beneficiary (or parent). The
increase in total assets and total liabilities related to the consolidation of these entities was $2.6 billion. Any differences upon consolidation were reflected as a cumulative effect of a
change in accounting principle. The cumulative effect of a change in accounting principle for Canadian Global resulted in additional income of $4.8 million, net of income tax. There were no
cumulative income statement effects from consolidating FSA Global and Premier. FSA Global is managed as a "matched funding vehicle," in which the proceeds from the issuance of
FSA-guaranteed notes are invested in obligations having cash flows substantially matched to those of, and maturing prior to, such notes. The VIEs' permitted activities are limited by
charter and do not involve active management. The legal documents that establish the VIEs do not permit the sale or other disposal of the financial assets held by the VIEs except in automatic response
to the terms of such financial assets. The VIEs are structured as bankruptcy-remote entities. The Company's management believes that the assets held by the VIEs, including those that are eliminated in
consolidation, are beyond the reach of the Company and its creditors, even in bankruptcy or other receivership. All intercompany insured amounts between FSA and FSA Global and Canadian Global
previously included in the Company's outstanding exposure are excluded from the Notes to the Condensed Consolidated Financial Statements for December 31, 2003.

Following
is a summary of the impact of consolidating FSA Global, Canadian Global and Premier (in thousands) at December 31, 2003:

Premier/
FSA Global

Canadian
Global

Elimination

TotalBonds

$
1,475,561

$
35,000

$


$
1,510,561GIC assets


430,103


129,750





559,853Short-term investments


6,081


5,021





11,102Other assets


474,877


49,477





524,354Other financial guaranty assets








(632
)

(632
)Total Assets

$
2,386,622

$
219,248

$
(632
)
$
2,605,238Debt

$
2,335,902

$
201,564

$


$
2,537,466Other liabilities


51,647


17,684





69,331Other financial guaranty liabilities








(632
)

(632
)Total Liabilities

$
2,387,549

$
219,248

$
(632
)
$
2,606,165


31

---

Following
is a summary of the impact in the consolidated statement of operations of consolidating the for the year ended December 31, 2003 (in thousands):

Premier/
FSA Global

Canadian
Global

Intercompany
Eliminations

VIE
TotalVIE net interest income

$
25,754

$
1,729

$


$
27,483Other income





689


(675
)

14Net premiums written








(2,690
)

(2,690
)Total revenues

$
25,754

$
2,418

$
(3,365
)
$
24,807VIE net interest expenses

$
23,305

$
788

$


$
24,093Other expenses


2,232


1,528


(3,365
)

395Total expenses

$
25,537

$
2,316

$
(3,365
)
$
24,488


VIE Investments

All bonds in the VIE Portfolio are insured by FSA. The credit quality of the VIE Portfolio, without the benefit of FSA's insurance, at December 31, 2003
was as follows:

Rating(1)

Percent of BondsAAA

3.7
%AA

4.3A

72.0BBB

20.0100.0
%


The
amortized cost and fair value of bonds in the VIE Portfolio were as follows (in thousands):

December 31, 2003

Amortized
Cost

Gross
Unrealized
Losses

Fair ValueObligations of states and political subdivisions

$
16,200

$


$
16,200Corporate securities


181,163


(846
)

180,317Foreign


211,952


(335
)

211,617Asset-backed securities


1,102,427





1,102,427Total

$
1,511,742

$
(1,181
)
$
1,510,561


The
following table shows the gross unrealized losses and fair value (in thousands) of securities in the VIE Portfolio, aggregated by investment category and length of time that
individual securities have been in a continuous unrealized loss position, at December 31, 2003:

12 months or moreFair Value

Unrealized
LossesCorporate securities

$
88,262

$
846Foreign


61,206


335Total

$
149,468

$
1,181


32

---

The
Company periodically monitors its investment portfolio for individual investments in an unrealized loss position in order to assess whether that investment is considered
other-than-temporarily impaired. In each case, the Company determines the nature and cause of the decline and whether the Company maintains the ability and intent to hold the
security until the unrealized loss may reverse or until maturity. At December 31, 2003 there were nine securities that were in an unrealized loss position for a continuous twelve-month period
or longer. None of the nine securities had an unrealized loss that exceed book value by 20% or greater. At December 31, 2003, the Company determined that no investments were considered
other-than-temporarily impaired.

The
amortized cost and fair value of bonds in the VIE Portfolio at December 31, 2003, 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.

Amortized
Cost

Fair ValueDue in one year or less

$
20,000

$
19,972Due after one year through five years


362,796


361,731Due after five years through ten years


10,319


10,231Due after ten years


16,200


16,200Asset-backed securities (stated maturities of 1 to 18 years)


1,102,427


1,102,427Total

$
1,511,742

$
1,510,561


In
the VIE GIC portfolio, $273.3 million had contractual maturities due after one year through five years and $286.6 million had contractual maturities due after ten years.

At
December 31, 2003, the interest rates on VIE Debt were between 1.12% and 10.0% per annum.

Payments
due under the VIE Debt (including $1,020.5 million of interest accretion on zero coupon obligations and excluding $155.2 million of hedge accounting adjustments)
in each of the next five years ending December 31 and thereafter, are as follows (in thousands):

Year

Principal
Amount2004

$
211,9002005


205,9322006


67,6742007


185,1542008


39,788Thereafter


2,692,272Total

$
3,402,720


33

---

21.   OTHER ASSETS

The detailed balances that comprise other assets at December 31, 2003 and 2002 are as follows (in thousands):

2003

2002Other Assets:Fair value of VIE derivatives

$
407,742

$
Tax and loss bonds


85,512


67,763Accrued interest on VIE derivatives


59,100


Accrued interest income


27,635


37,539Other assets


179,215


101,156Total other assets

$
759,204

$
206,458


22.   RECENTLY ISSUED ACCOUNTING STANDARDS

In December 2003, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position
03-3: Accounting for Certain Loans or Debt Securities Acquired in a Transfer (SOP 03-3). SOP 03-3 addresses accounting for differences between contractual cash
flows and cash flows expected to be collected from an investor's initial investment in loans or debt securities (loans) acquired in a transfer if those differences are attributable, at least in part,
to credit quality. SOP 03-3 supersedes Practice Bulletin 6 for transactions entered into after the initial application of SOP 03-3. For loans acquired in fiscal years prior to
the effective date of SOP 03-3 and within the scope of Practice Bulletin 6 (such as securitized loans, see Note 18), SOP 03-3 amends the application of Practice Bulletin
6 with regard to accounting for decreases in cash flows expected to be collected.

SOP
03-3 requires that the investor recognize the excess of all cash flows expected at acquisition over the investor's initial investment in the loan as interest income on a
level-yield basis over the life of the loan. SOP 03-3 prohibits investors from displaying differences from expected cash flows in the balance sheet. Subsequent increases in cash flows
expected to be collected generally should be recognized prospectively through adjustment of the loan's yield over its remaining life. Decreases in cash flows expected to be collected should be
recognized as impairment.

SOP
03-3 is effective for loans acquired in fiscal years beginning after December 15, 2004. For loans acquired in fiscal years beginning on or before
December 15, 2004 and that fall within the scope of Practice Bulletin 6 as it applies to decreases in cash flows expected to be collected, SOP 03-3 should be applied prospectively for fiscal
years beginning after December 15, 2004. Management believes that the implementation of SOP 03-3 will not have a material effect on the Company's financial position, results of
operations or cash flows.

In
December 2003, the Emerging Issues Task Force (EITF) issued EITF Issue No. 03-01, "The Meaning of Other-Than-Temporary Impairment and
Its Application to Certain Investments" (EITF 03-01). EITF 03-01 requires the Company to disclose certain information about unrealized holding losses on its investment
portfolio that have not been recognized as other-than-temporary impairments. The requirements are effective for fiscal years ending after December 15, 2003, and require
the Company to make disclosure in its financial statements about investments in debt or marketable equity securities with market values below carrying values. See Notes 3 and 20 for disclosures
required by EITF 03-01.

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