Exhibit 99

                        FINANCIAL SECURITY ASSURANCE INC.
                                AND SUBSIDIARIES

                      Consolidated Financial Statements and
                        Report of Independent Accountants
                                December 31, 1998

<PAGE>

                        FINANCIAL SECURITY ASSURANCE INC.
                                AND SUBSIDIARIES

                        CONSOLIDATED FINANCIAL STATEMENTS
                      AND REPORT OF INDEPENDENT ACCOUNTANTS

                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

REPORT OF INDEPENDENT ACCOUNTANTS                                              1
                                                                         
CONSOLIDATED FINANCIAL STATEMENTS:                                       
                                                                         
Consolidated Balance Sheets                                                    2
Consolidated Statements of Income                                              3
Consolidated Statements of Changes in Shareholder's Equity                     4
Consolidated Statements of Cash Flows                                          5
Notes to Consolidated Financial Statements                                     7

<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS

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 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,
1998 and 1997, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. 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 generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.

New York, New York
January 26, 1999


                                       1
<PAGE>

                        FINANCIAL SECURITY ASSURANCE INC.
                                AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                  (Dollars in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                  December 31,  December 31,
                         ASSETS                                      1998          1997
                                                                     ----          ----
<S>                                                               <C>          <C>       
Bonds at market value (amortized cost of $1,631,094
   and $1,192,771)                                                $1,683,928   $1,235,441
Equity investments at market value (cost of $34,250 and
   $20,405)                                                           37,268       20,762
Short-term investments                                                92,241      103,926
                                                                  ----------   ----------

     Total investments                                             1,813,437    1,360,129
Cash                                                                   2,729       11,235
Deferred acquisition costs                                           199,559      171,098
Prepaid reinsurance premiums                                         217,096      173,123
Reinsurance recoverable on unpaid losses                               3,907       30,618
Receivable for securities sold                                         1,656       20,535
Other assets                                                         105,379       72,901
                                                                  ----------   ----------

          TOTAL ASSETS                                            $2,343,763   $1,839,639
                                                                  ==========   ==========

     LIABILITIES AND MINORITY INTEREST AND SHAREHOLDER'S EQUITY

Deferred premium revenue                                          $  721,699   $  595,196
Losses and loss adjustment expenses                                   63,947       75,417
Deferred federal income taxes                                         56,672       59,867
Ceded reinsurance balances payable                                    31,502       11,199
Payable for securities purchased                                     105,749       72,979
Long-term debt                                                       120,000       50,000
Minority interest                                                     20,388
Accrued expenses and other liabilities                               119,215       77,121
                                                                  ----------   ----------

          TOTAL LIABILITIES AND MINORITY INTEREST                  1,239,172      941,779
                                                                  ----------   ----------

COMMITMENTS AND CONTINGENCIES

Common stock (500 and 528 shares authorized, issued and
   outstanding; par value of $30,000 and $28,391 per
     share)                                                           15,000       15,000
Additional paid-in capital                                           694,788      617,870
Accumulated other comprehensive income (net of deferred
   income tax provision of $19,904 and $15,059)                       36,964       27,968
Accumulated earnings                                                 357,839      237,022
                                                                  ----------   ----------

          TOTAL SHAREHOLDER'S EQUITY                               1,104,591      897,860
                                                                  ----------   ----------

          TOTAL LIABILITIES AND MINORITY INTEREST AND
                         SHAREHOLDER'S EQUITY                     $2,343,763   $1,839,639
                                                                  ==========   ==========
</TABLE>

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


                                       2
<PAGE>

                        FINANCIAL SECURITY ASSURANCE INC.
                                AND SUBSIDIARIES

                        CONSOLIDATED STATEMENTS OF INCOME
                  (Dollars in thousands, except per share data)

<TABLE>
<CAPTION>
                                                               Year Ended December 31,
                                                               -----------------------
                                                           1998         1997         1996
                                                           ----         ----         ----
<S>                                                     <C>          <C>          <C>      
REVENUES:
   Net premiums written                                 $ 219,853    $ 172,878    $ 121,000
   Increase in deferred premium revenue                   (81,926)     (63,367)     (30,552)
                                                        ---------    ---------    ---------
   Premiums earned                                        137,927      109,511       90,448
   Net investment income                                   76,023       69,643       62,728
   Net realized gains                                      21,667        6,023        1,851

   Other income                                               381       10,774          502
                                                        ---------    ---------    ---------

                    TOTAL REVENUES                        235,998      195,951      155,529
                                                        ---------    ---------    ---------
EXPENSES:
   Losses and loss adjustment expenses                      3,949        9,156        6,874
   Policy acquisition costs                                35,439       27,962       23,829
   Other operating expenses                                28,502       20,717       14,852
                                                        ---------    ---------    ---------

                    TOTAL EXPENSES                         67,890       57,835       45,555
                                                        ---------    ---------    ---------

Minority interest                                            (388)   
                                                        ---------    

INCOME BEFORE INCOME TAXES                                167,720      138,116      109,974
                                                        ---------    ---------    ---------
Provision (benefit) for income taxes:
   Current                                                 54,942       29,832       28,208
   Deferred                                                (8,039)       8,025          911
                                                        ---------    ---------    ---------

   Total provision                                         46,903       37,857       29,119
                                                        ---------    ---------    ---------
        NET INCOME                                        120,817      100,259       80,855

   OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:

      Unrealized gains (losses) on securities:

         Unrealized holding gains (losses) arising
            during period (net of deferred income tax
            provision (benefit) of $12,428, $12,268
            and $(5,057))                                  23,080       22,784       (9,392)
         Less: reclassification adjustment for gains
            included in net income (net of deferred
            income tax provision
            of $7,583, $2,108 and $648)                   (14,084)      (3,915)      (1,203)
                                                        ---------    ---------    ---------

         Other comprehensive income (loss)                  8,996       18,869      (10,595)
                                                        ---------    ---------    ---------

      COMPREHENSIVE INCOME                              $ 129,813    $ 119,128    $  70,260
                                                        =========    =========    =========
</TABLE>

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


                                       3
<PAGE>

                              FINANCIAL SECURITY ASSURANCE INC.
                                       AND SUBSIDIARIES

                  CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
                                    (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                 Unrealized
                                                    Additional      Gain
                                        Common       Paid-In      (Loss) on    Retained
                                         Stock       Capital     Investments   Earnings       Total
                                         -----       -------     -----------   --------       -----
<S>                                    <C>        <C>            <C>         <C>         <C>        
BALANCE, December 31, 1995             $  15,000  $   681,470    $  19,694   $  73,822   $   789,986

Net income                                                                      80,855        80,855

Dividends paid on common stock                                                 (18,000)      (18,000)

Net change in accumulated
   comprehensive income 
   (net of deferred income
   tax benefit of $5,705)                                          (10,595)                  (10,595)

Stock repurchase                                      (27,000)                               (27,000)

Adjustment to prior-year disposal of
   subsidiary                                                                       86            86
                                       ---------  -----------    ---------   ---------   -----------

BALANCE, December 31, 1996                15,000      654,470        9,099     136,763       815,332

Net income                                                                     100,259       100,259

Net change in accumulated
   comprehensive income 
   (net of deferred income
   taxes of $10,160)                                                18,869                    18,869

Stock repurchase                                      (39,500)                               (39,500)

Deferred equity payout by Parent                        2,900                                  2,900
                                       ---------  -----------    ---------   ---------   -----------

BALANCE, December 31, 1997                15,000      617,870       27,968     237,022       897,860

Net income                                                                     120,817       120,817

Net change in accumulated
   comprehensive income 
   (net of deferred income
   taxes of $4,844)                                                  8,996                     8,996

Stock repurchase                                       (8,500)                                (8,500)

Capital contribution from Parent                       80,000                                 80,000

Deferred equity payout by Parent                        5,418                                  5,418
                                       ---------  -----------    ---------   ---------   -----------

BALANCE, December 31, 1998             $  15,000  $   694,788    $  36,964   $ 357,839   $ 1,104,591
                                       =========  ===========    =========   =========   ===========
</TABLE>

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


                                       4
<PAGE>

                        FINANCIAL SECURITY ASSURANCE INC.
                                AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                          Year Ended December 31,
                                                          -----------------------
                                                     1998         1997           1996
                                                     ----         ----           ----
<S>                                            <C>            <C>            <C>        
Cash flows from operating activities:
   Premiums received, net                      $   247,229    $   171,145    $   124,540
   Policy acquisition and other operating
     expenses paid, net                            (81,559)       (50,046)       (49,261)
   Recoverable advances received (paid)              1,473         (7,629)        10,213
   Losses and loss adjustment expenses
      recovered (paid)                              10,989         (6,463)       (15,473)
   Net investment income received                   67,268         63,207         59,923
   Federal income taxes paid                       (52,210)       (27,080)       (33,297)
   Interest paid                                                                     (22)
   Other                                              (877)         2,142          1,330
                                               -----------    -----------    -----------

          Net cash provided by operating
            activities                             192,313        145,276         97,953
                                               -----------    -----------    -----------

Cash flows from investing activities:
   Proceeds from sales of bonds                  1,735,585      1,071,845      1,095,929
   Proceeds from sales of equity investments        22,571          3,568
   Proceeds from maturities of bonds                               32,468          2,965
   Purchases of bonds                           (2,098,264)    (1,196,117)    (1,139,129)
   Purchases of equity investments                 (37,034)       (24,662)
   Gain on sale of subidiaries                                      9,486
   Purchases of property and equipment              (1,071)        (2,985)        (2,081)
   Net decrease (increase) in short-term
     investments                                    15,857        (45,661)        (3,675)
   Other investments                                20,037
                                               -----------    -----------    -----------
          Net cash provided by (used for)
           investing activities                   (342,319)      (152,058)       (45,991)
                                               -----------    -----------    -----------

Cash flows from financing activities:
   Stock repurchase                                 (8,500)       (39,500)       (27,000)
   Surplus notes issued                             70,000         50,000
   Capital contribution                             80,000

   Dividends paid                                                                (18,000)
                                               -----------    -----------    -----------
          Net cash provided by (used for)
            financing activities                   141,500         10,500        (45,000)
                                               -----------    -----------    -----------

Net increase (decrease) in cash                     (8,506)         3,718          6,962

Cash at beginning of year                           11,235          7,517            555
                                               -----------    -----------    -----------

Cash at end of year                            $     2,729    $    11,235    $     7,517
                                               ===========    ===========    ===========
</TABLE>

                                    Continued

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


                                       5
<PAGE>

                        FINANCIAL SECURITY ASSURANCE INC.
                                AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                      Year Ended December 31,
                                                      -----------------------
                                                  1998        1997         1996
                                                  ----        ----         ----
<S>                                           <C>          <C>          <C>      
Reconciliation of net income to net cash
   flows from operating activities:
Net income                                    $ 120,817    $ 100,259    $  80,855
   Increase in accrued investment income         (3,939)      (1,811)        (842)
   Increase in deferred premium revenue and
      related foreign exchange adjustment        82,530       62,101       29,622
   Increase in deferred acquisition costs       (28,461)     (24,865)     (13,282)
   Increase (decrease) in current federal
      income taxes payable                        2,732         (519)      (5,090)
   Increase (decrease) in unpaid losses and
      loss adjustment expenses                   15,240        2,596       (8,023)
   Increase in amounts withheld for others           81          133           52
   Provision (benefit) for deferred income
      taxes                                      (8,039)      11,296          911
   Net realized gains on investments            (21,667)      (6,023)      (1,851)
   Depreciation and accretion of bond
      discount                                   (3,540)      (1,736)      (1,616)
   Gain on sale of subsidiaries                               (9,486)
   Minority interest                                388
   Change in other assets and liabilities        36,171       13,331       17,217
                                              ---------    ---------    ---------

Cash provided by operating activities         $ 192,313    $ 145,276    $  97,953
                                              =========    =========    =========
</TABLE>

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


                                       6
<PAGE>

                        FINANCIAL SECURITY ASSURANCE INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

1. ORGANIZATION AND OWNERSHIP

      Financial Security Assurance Inc. (the Company), an indirect 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 or trade
receivables, securities or other assets having an ascertainable cash flow or
market value. The municipal obligations insured by the Company consist primarily
of general obligation bonds that are supported by the issuers' taxing power and
special revenue bonds and other special obligations of states and local
governments that are supported by the issuers' ability to impose and collect
fees and charges for public services or specific projects. Financial guaranty
insurance written by the Company guarantees scheduled payments on an issuer's
obligation. In the case of a payment default on an insured obligation, the
Company is generally required to pay the principal, interest or other amounts
due in accordance with the obligation's original payment schedule or, at its
option, to pay such amounts on an accelerated basis.

      The Company expects to continue to emphasize a diversified insured
portfolio characterized by insurance of both asset-backed and municipal
obligations, with a broad geographic distribution and a variety of revenue
sources and transaction structures. The Company's insured portfolio consists
primarily of asset-backed and municipal obligations originated in the United
States, but the Company has also written and continues to pursue business in
Europe and the Asia Pacific region.

      At December 31, 1996, the Parent was owned 40.4% by U S WEST Capital
Corporation (U S WEST), 11.5% by Fund American Enterprises Holdings, Inc. (Fund
American), 6.4% by The Tokio Marine and Fire Insurance Co., Ltd. (Tokio Marine)
and 41.7% by the public and employees. At December 31, 1997, the Parent was
owned 42.1% by U S WEST, 12.0% by Fund American, 6.7% by Tokio Marine and 39.2%
by the public and employees. At December 31, 1998, the Parent was owned 40.5% by
MediaOne Capital Corporation (MediaOne), formerly U S WEST, 11.6% by Fund
American, 6.4% by Tokio Marine, 5.5% by XL Capital Ltd (XL) and 36.0% by the
public and employees.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      The accompanying financial statements have been prepared in accordance
with generally accepted accounting principles (GAAP), which differ in certain
material respects from the accounting practices prescribed or permitted by
insurance regulatory authorities (see Note 5). The preparation of financial
statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities in the Company's consolidated
balance sheets at December 31, 1998 and 1997 and the reported amounts of
revenues and expenses in the consolidated statements of income during the years
ended December 31, 1998, 1997 and 1996. Such estimates and assumptions include,
but are not limited to, losses and loss adjustment expenses and the deferral and
amortization of deferred policy acquisition costs. Actual results may differ
from those estimates. Significant accounting policies under GAAP are as follows:

      Basis of Presentation

      The consolidated financial statements include the accounts of the Company
and its direct and indirect subsidiaries, FSA Insurance Company, Financial
Security Assurance International Ltd., Financial Security Assurance of Oklahoma,
Inc. and Financial Security Assurance (U.K.) Limited (collectively, the
Subsidiaries). All intercompany accounts and transactions have been eliminated.
Certain prior-year balances have been reclassified to conform to the 1998
presentation.


                                       7
<PAGE>

      Investments

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

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

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

      Premium Revenue Recognition

      Gross and ceded premiums are earned in proportion to the amount of risk
outstanding 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.

      Losses and Loss Adjustment Expenses

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

      The general reserve is calculated by applying a loss factor to the total
net par amount outstanding of the Company's insured obligations over the term of
such insured obligations and discounting the result at risk-free rates. The loss
factor used for this purpose has been determined based upon an independent
rating agency study of bond defaults and the Company's portfolio characteristics
and history. The general reserve is available to be applied against future
additions or accretions to existing case basis reserves or to new case basis
reserves to be established in the future.

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

      Deferred Acquisition Costs

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

      Federal Income Taxes

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


                                       8
<PAGE>

      Segment Reporting

      In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 131, Disclosure about Segments of an
Enterprise and Related Information, establishing standards for the way that
public business enterprises report information about operating segments in
annual and interim financial statements and requiring presentation of a measure
of profit or loss, certain specific revenue and expense items and segment
assets. The Company has no reportable operating segments as a monoline financial
guaranty insurer.

3. INVESTMENTS

      Bonds at amortized cost of $11,481,000 and $11,025,000 at December 31,
1998 and 1997, respectively, were on deposit with state regulatory authorities
as required by insurance regulations.

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

                                             Year Ended December 31,
                                             -----------------------
                                          1998        1997        1996
                                          ----        ----        ----

        Bonds                          $ 69,216    $ 65,149    $ 61,130
        Equity investments                  830         376          14
        Short-term investments            7,376       5,452       3,525
        Investment expenses              (1,399)     (1,334)     (1,941)
                                       --------    --------    --------

        Net investment income          $ 76,023    $ 69,643    $ 62,728
                                       ========    ========    ========

      The credit quality of the fixed-income investment portfolio at December
31, 1998 was as follows:

                                        Percent of Fixed-Income
                      Rating             Investment Portfolio
                -------------------     -----------------------
                        AAA                     68.7%
                        AA                      21.3 
                         A                       9.3  
                        BBB                      0.4  
                       Other                     0.3  

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

<TABLE>
<CAPTION>
                                                       Gross        Gross      Estimated
                                        Amortized   Unrealized   Unrealized      Market
December 31, 1998                         Cost         Gains       Losses        Value
-----------------                         ----         -----       ------        -----
<S>                                   <C>          <C>          <C>           <C>       
U.S. Treasury securities and
   obligations of U.S. government 
   corporations and agencies          $  134,910   $    2,297   $     (337)   $  136,870

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

Mortgage-backed securities               261,322        3,911         (180)      265,053

Corporate securities                     162,663        5,510         (463)      167,710

Asset-backed securities                   30,481          493          (25)       30,949
                                      ----------   ----------   ----------    ----------

     Total                            $1,631,094   $   54,476   $   (1,642)   $1,683,928
                                      ==========   ==========   ==========    ==========
</TABLE>


                                       9
<PAGE>

December 31, 1997

<TABLE>
<S>                                   <C>          <C>           <C>           <C>       
U.S. Treasury securities and
   obligations of U.S. government 
   corporations and agencies          $  120,314   $      800    $     (436)   $  120,678

Obligations of states and political
    subdivisions                         777,042       40,187          (135)      817,094

Foreign securities                         8,252                       (562)        7,690

Mortgage-backed securities               195,567        2,213           (28)      197,752

Corporate securities                      72,388        1,375        (1,093)       72,670

Asset-backed securities                   19,208          349                      19,557
                                      ----------   ----------    ----------    ----------

     Total                            $1,192,771   $   44,924    $   (2,254)   $1,235,441
                                      ==========   ==========    ==========    ==========
</TABLE>

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

                                                      Year Ended December 31,
                                                      -----------------------
                                                  1998        1997        1996
                                                  ----        ----        ----
Bonds                                          $ 10,164    $ 28,671    $(16,299)
Equity investments                                2,661         357            
Other                                             1,017                        
                                               --------    --------    --------
     Change in net unrealized gains (losses)   $ 13,842    $ 29,028    $(16,299)
                                               ========    ========    ========

      The amortized cost and estimated market value of bonds at December 31,
1998, 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.

                                                                       Estimated
                                                         Amortized      Market
                                                            Cost         Value
                                                            ----         -----

Due in one year or less                                  $    1,002   $    1,006
Due after one year through five years                       135,398      137,917
Due after five years through ten years                      211,500      219,185
Due after ten years                                         991,391    1,029,818
Mortgage-backed securities (stated maturities of 1 to
  30 years)                                                 261,322      265,053
Asset-backed securities (stated maturities of 3 to 30
  years)                                                     30,481       30,949
                                                         ----------   ----------
     Total                                               $1,631,094   $1,683,928
                                                         ==========   ==========

      Proceeds from sales of bonds during 1998, 1997 and 1996 were
$2,132,146,000, $1,124,848,000 and $1,096,568,000, respectively. Gross gains of
$26,373,000, $11,702,000 and $13,420,000 and gross losses of $4,156,000,
$6,007,000 and $11,569,000 were realized on sales in 1998, 1997 and 1996,
respectively.

      Proceeds from sales of equity investments during 1998 and 1997 were
$22,571,000 and $3,568,000, respectively. Gross gains of $973,000 and $33,000
and gross losses of $1,323,000 and $7,000 were realized on sales in 1998 and
1997, respectively.


                                       10
<PAGE>

4. DEFERRED ACQUISITION COSTS

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

<TABLE>
<CAPTION>
                                                     Year Ended December 31,
                                                     -----------------------
                                                  1998        1997        1996
                                                  ----        ----        ----
<S>                                           <C>          <C>          <C>      
Balance, beginning of period                  $ 171,098    $ 146,233    $ 132,951
                                              ---------    ---------    ---------
Costs deferred during the period:
   Ceding commission income                     (27,693)     (18,956)     (15,956)
   Assumed commission expense                        22           31           38
   Premium taxes                                  8,081        5,554        3,718
   Compensation and other acquisition costs      83,490       66,198       49,311
                                              ---------    ---------    ---------

                    Total                        63,900       52,827       37,111
                                              ---------    ---------    ---------

Costs amortized during the period               (35,439)     (27,962)     (23,829)
                                              ---------    ---------    ---------

Balance, end of period                        $ 199,559    $ 171,098    $ 146,233
                                              =========    =========    =========
</TABLE>

5. STATUTORY ACCOUNTING PRACTICES

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

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

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

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

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

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

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

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

            - Accruals for deferred compensation are not recognized;

            - Purchase accounting adjustments are not recognized;

            - Bonds are carried at amortized cost;

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


                                       11
<PAGE>

      A reconciliation of net income for the calendar years 1998, 1997 and 1996
and shareholder's equity at December 31, 1998 and 1997, reported by the Company
on a GAAP basis, to the amounts reported by the Subsidiaries on a statutory
basis, is as follows (in thousands):

<TABLE>
<CAPTION>
Net Income:                                        1998        1997          1996
                                                   ----        ----          ----
<S>                                            <C>          <C>          <C>      
GAAP BASIS                                     $ 120,817    $ 100,259    $  80,855
Premium revenue recognition                      (16,411)     (23,130)      (5,518)
Losses and loss adjustment expenses incurred      12,938        4,653       (2,138)
Deferred acquisition costs                       (28,461)     (24,865)     (12,482)
Deferred income tax provision (benefit)           (8,039)       8,025          911
Amortization of bonds                                              56          566
Accrual of deferred compensation, net             33,268       26,681       12,737
Other                                                100          (61)       1,404
                                               ---------    ---------    ---------

STATUTORY BASIS                                $ 114,212    $  91,618    $  76,335
                                               =========    =========    =========
</TABLE>

<TABLE>
<CAPTION>
                                                             December 31,
                                                             ------------
Shareholder's Equity:                                   1998            1997
                                                        ----            ----
<S>                                                 <C>             <C>        
GAAP BASIS                                          $ 1,104,591     $   897,860
Premium revenue recognition                             (91,297)        (74,863)
Loss and loss adjustment expense reserves                47,250          34,313
Deferred acquisition costs                             (199,559)       (171,098)
Contingency reserve                                    (367,454)       (287,694)
Unrealized gain on investments, net of tax              (55,851)        (43,027)
Deferred income taxes                                    56,672          59,867
Accrual of deferred compensation                         70,022          41,451
Surplus notes                                           120,000          50,000

Other                                                   (14,118)        (12,841)
                                                    -----------     -----------

STATUTORY BASIS SURPLUS                             $   670,256     $   493,968
                                                    ===========     ===========

SURPLUS PLUS CONTINGENCY RESERVE                    $ 1,037,710     $   781,661
                                                    ===========     ===========
</TABLE>

6. FEDERAL INCOME TAXES

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

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

                                                              December 31,
                                                              ------------
                                                          1998           1997
                                                          ----           ----
Deferred acquisition costs                            $  69,079      $  59,884
Deferred premium revenue adjustments                     10,354          8,424
Unrealized capital gains                                 20,749         16,998
Contingency reserves                                     46,260         38,037
                                                      ---------      ---------
     Total deferred tax liabilities                     146,442        123,343
                                                      ---------      ---------
                                                                 
Loss and loss adjustment expense reserves               (16,613)       (12,009)
Deferred compensation                                   (34,020)       (20,328)
Tax and loss bonds                                      (38,726)       (30,520)
Other, net                                                 (411)          (619)
                                                      ---------      ---------
     Total deferred tax assets                          (89,770)       (63,476)
                                                      ---------      ---------
                                                                 
Total deferred income taxes                           $  56,672      $  59,867
                                                      =========      =========


                                       12
<PAGE>

      No valuation allowance was necessary at December 31, 1998 or 1997.

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

                                                     Year Ended December 31,
                                                     -----------------------
                                                1998         1997         1996
                                                ----         ----         ----
Tax at statutory rate                           35.0%        35.0%        35.0%
Tax-exempt interest                             (8.1)        (7.9)        (8.9)
Other                                            1.1          0.3          0.4
                                                ----         ----         ----

Provision for income taxes                      28.0%        27.4%        26.5%
                                                ====         ====         ====

7. DIVIDENDS AND CAPITAL REQUIREMENTS

      Under New York Insurance Law, The Company may pay a dividend without the
prior approval of the Superintendent of the New York State Insurance Department
only from earned surplus subject to the maintenance of a minimum capital
requirement. In addition, the dividend, together with all dividends declared or
distributed by 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, 1998, the Company had $65,726,000 available for the payment of
dividends over the next twelve months.

      In 1998, the Company repurchased $8,500,000 of its shares from the Parent,
representing the balance remaining of $75,000,000 that had been approved for
repurchase by the New York Insurance Department.

8. CREDIT ARRANGEMENTS AND ADDITIONAL CLAIMS-PAYING RESOURCES

      The Company has a credit arrangement aggregating $150,000,000 at December
31, 1998, which is provided by commercial banks and intended for general
application to transactions insured by the Company and the Subsidiaries. At
December 31, 1998, there were no borrowings under this arrangement, which
expires on November 23, 1999. In addition, there are credit arrangements
assigned to specific insured transactions. In August 1994, the Company entered
into a facility agreement with Canadian Global Funding Corporation and Hambros
Bank Limited. Under the agreement, which expires in August 2004, the Company can
arrange financing for transactions subject to certain conditions. The amount of
this facility was $186,911,000, of which $44,974,000 was unutilized at December
31, 1998.

      The Company has a standby line of credit commitment in the amount of
$240,000,000 with a group of international Aaa/AAA-rated 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
$230,000,000 or 5.75% of average annual debt service of the covered portfolio.
The obligation to repay loans made under this agreement is a limited recourse
obligation payable solely from, and collateralized by, a pledge of recoveries
realized on defaulted insured obligations in the covered portfolio, including
certain installment premiums and other collateral. This commitment has a term
beginning on April 30, 1997 and expiring on April 30, 2004 and contains an
annual renewal provision subject to approval by the banks. No amounts have been
utilized under this commitment as of December 31, 1998.

      At December 31, 1998, the Company has borrowed $120,000,000 from its
Parent in the form of Surplus Notes. These notes carried 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
Insurance Department and compliance with the conditions to such payments as
contained in the New York Insurance Laws. These notes have no stated maturity.
The Company did not pay interest in 1998 or 1997.

9. EMPLOYEE BENEFIT PLANS

      The Company maintains both a qualified and a non-qualified
non-contributory defined contribution pension plan for the benefit of all
eligible employees. The Company's contributions are based upon a fixed
percentage of employee compensation. Pension expense, which is funded as
accrued, amounted to $2,380,000, $2,312,000 and $1,977,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.


                                       13
<PAGE>

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

      Pursuant to the 1993 Equity Participation Plan, 1,810,780 shares of the
Parent's common stock, subject to anti-dilutive adjustment, were reserved for
awards of options, restricted shares of common stock, and performance shares to
employees for the purpose of providing, through the grant of long-term
incentives, a means to attract and retain key personnel and to provide to
participating officers and other key employees long-term incentives for
sustained high levels of performance. Shares available under the 1993 Equity
Participation Plan were increased from 1,810,780 to 2,110,780 in December 1995.
The 1993 Equity Participation Plan also contains provisions that permit the
Human Resources Committee to pay all or a portion of employees' bonuses in the
form of shares of the Parent's common stock credited to the employees at a 15%
discount from current market value and paid to employees five years from the
date of award. Up to an aggregate of 10,000,000 shares may be allocated to such
equity bonuses. Common stock to pay performance shares, stock options and equity
bonus awards is acquired by the Parent through open-market purchases by a trust
established for such purpose.

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

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

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

1996   1,109,150     282,490                 17,300     1,374,340    $25.2500
1997   1,374,340     253,057     201,769     59,253     1,366,375     35.5000
1998   1,366,375     273,656     229,378     26,145     1,384,508     46.0625

      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
$39,480,000, $28,439,000 and $12,737,000 for the years ended December 31, 1998,
1997 and 1996, respectively. In tandem with this accrued expense, the Parent
estimates those performance shares that it expects to settle in stock and
records this amount in shareholders' equity as deferred compensation. The
remainder of the accrual, which represents the amount of performance shares that
the Parent estimates it will settle in cash, is recorded in accrued expenses and
other liabilities. The Company recognized a benefit for the difference between
the market value of the Parent's common stock and the cost of the stock when it
was purchased by the independent trustee (which amount was reimbursed by the
Company to its Parent) for shares distributed under the performance share plan.
This benefit was recorded by the Company as a capital contribution which totaled
$5,418,000 and $2,900,000 in 1998 and 1997, respectively. In 1996, the Parent
adopted disclosure provisions of SFAS No. 123. Had the compensation cost for the
Parent's performance shares been determined based upon the provisions of SFAS
No. 123, there would have been no effect on the Company's reported net income.

      In November 1994, the Parent appointed an independent trustee authorized
to purchase shares of the Parent's common stock in open market transactions, at
times and prices determined by the trustee. These purchases are intended to fund
future obligations relating to equity bonuses, performance shares and stock
options under the 1993 Equity Participation Plan and other employee benefit
plans and are presented as treasury stock in these financial statements. During
1998, 1997 and 1996, the total number of shares purchased by the trust was
496,940, 162,573 and 529,131, respectively, at a cost of $23,907,000, $5,434,000
and $14,111,000, respectively. In 1996, the Parent also repurchased stock from
its employees in satisfaction of withholding taxes on shares distributed under
its restricted stock plan.


                                       14
<PAGE>

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

10. COMMITMENTS AND CONTINGENCIES

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

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

             Year Ended December 31,
             -----------------------
                       1999                          $  2,489
                       2000                             2,327
                       2001                             2,014
                       2002                             1,739
                       2003                             1,739
                    Thereafter                          3,333
                                                     --------

                      Total                          $ 13,641
                                                     ========

      Rent expense for the years ended December 31, 1998, 1997 and 1996 was
$4,025,000, $3,708,000 and $3,383,000, respectively.

      During the ordinary course of business, the Company and its Subsidiaries
have become parties to certain litigation. Management believes that these
matters will be resolved with no material financial impact on the Company.

11. REINSURANCE

      The Company reinsures portions of its risks with affiliated (see Note 13)
and unaffiliated reinsurers under quota share and first-loss treaties and on a
facultative basis. The Company's principal ceded reinsurance program consisted
in 1998 of two quota share treaties, one first-loss treaty and four automatic
facultative facilities. One treaty covered all of the Company's approved regular
lines of business, except U.S. municipal obligation insurance. Under this treaty
in 1998, the Company ceded 6.75% of each covered policy, up to a maximum of
$13,500,000 insured principal per policy. At its sole option, the Company could
have increased, and in certain instances did increase, the ceding percentage to
13.5% up to $27,000,000 of each covered policy. A second treaty covered the
Company's U.S. municipal obligation insurance business. Under this treaty in
1998, the Company ceded 6% of each covered policy that is classified by the
Company as providing U.S. municipal bond insurance as defined by Article 69 of
the New York Insurance Law up to a limit of $16,000,000 per single risk, which
is defined by revenue source. At its sole option, the Company could have
increased, and in certain instances did increase, the ceding percentage to 30%
up to $80,000,000 per single risk. These cession percentages under both treaties
were reduced on smaller-sized transactions. The first-loss treaty applied to
qualifying U.S. mortgage-backed transactions. Under the four automatic
facultative facilities in 1998, the Company at its option could allocate up to a
specified amount for each reinsurer (ranging from $4,000,000 to $40,000,000
depending on the reinsurer) for each transaction, subject to limits and
exclusions, in exchange for which the Company agreed to cede in the aggregate a
specified percentage of gross par insured by the Company. Each of the quota
share treaties and automatic facultative facilities allowed the Company to
withhold a ceding commission to defray its expenses. The Company also employed
non-treaty quota share and first-loss facultative reinsurance on various
transactions in 1998.

      In the event (which management considers to be highly unlikely) that any
or all of the reinsuring companies were unable to meet their obligations to the
Company, the Company would be liable for such defaulted amounts. The Company has
also assumed reinsurance of municipal obligations from unaffiliated insurers.


                                       15
<PAGE>

      Amounts reinsured were as follows (in thousands):

                                                      Year Ended December 31,
                                                      -----------------------
                                                   1998        1997       1996
                                                   ----        ----       ----
Written premiums ceded                          $ 99,413    $ 63,513   $ 55,965
Written premiums assumed                             935       1,352      1,873

Earned premiums ceded                             55,939      41,713     38,723
Earned premiums assumed                            4,271       5,121      6,020

Loss and loss adjustment expense payments
   ceded                                          22,619       2,862     29,408
Loss and loss adjustment expense payments
   assumed                                             3           2          3

Incurred (recovered) losses and loss
   adjustment expenses ceded                      (4,673)      3,605     (2,249)
Incurred (recovered) losses and loss
   adjustment expenses assumed                      (139)        161         38

                                                             December 31,
                                                             ------------
                                                         1998            1997
                                                         ----            ----
Principal outstanding ceded                          $32,914,844     $24,547,361
Principal outstanding assumed                          1,360,916       1,670,468

Deferred premium revenue ceded                           217,096         173,123
Deferred premium revenue assumed                          10,799          14,128

Loss and loss adjustment expense reserves
   ceded                                                   3,907          30,618
Loss and loss adjustment expense reserves
   assumed                                                   723             865

12. OUTSTANDING EXPOSURE AND COLLATERAL

      The Company's policies insure the scheduled payments of principal and
interest on asset-backed and municipal obligations. The principal amount insured
(in millions) as of December 31, 1998 and 1997 (net of amounts ceded to other
insurers) and the terms to maturity are as follows:

                                   December 31, 1998        December 31, 1997
                                   -----------------        -----------------
Terms to Maturity             Asset-Backed   Municipal  Asset-Backed   Municipal
-----------------             ------------   ---------  ------------   ---------

0 to 5 Years                     $ 8,468      $ 2,756      $ 7,553      $ 2,230
5 to 10 Years                      7,516        7,495        5,637        5,683
10 to 15 Years                     5,661       12,427        2,858        8,257
15 to 20 Years                       670       20,265          524       14,340
20 Years and Above                15,308       24,107       11,917       16,479
                                 -------      -------      -------      -------

                Total            $37,623      $67,050      $28,489      $46,989
                                 =======      =======      =======      =======

      The principal amount ceded as of December 31, 1998 and 1997 and the terms
to maturity are as follows (in millions):

                                   December 31, 1998        December 31, 1997
                                   -----------------        -----------------
Terms to Maturity             Asset-Backed   Municipal  Asset-Backed   Municipal
-----------------             ------------   ---------  ------------   ---------

0 to 5 Years                      $ 2,727      $ 1,157      $ 3,828      $   965
5 to 10 Years                       1,859        2,143        2,118        1,693
10 to 15 Years                      1,116        3,022          553        2,078
15 to 20 Years                        591        4,852          257        3,005
20 Years and Above                  3,230       12,218        3,373        6,677
                                  -------      -------      -------      -------

                Total             $ 9,523      $23,392      $10,129      $14,418
                                  =======      =======      =======      =======


                                       16
<PAGE>

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

                                          Net of Amounts Ceded        Ceded
                                              December 31,        December 31,
                                              ------------        ------------
Types of Collateral                          1998      1997      1998      1997
-------------------                          ----      ----      ----      ----

Residential mortgages                      $15,647   $12,928   $ 3,324   $ 3,665
Consumer receivables                        12,539    10,659     3,663     4,601
Government securities                          821       787       267       120
Pooled corporate obligations                 6,776     3,004     1,388       540
Commercial mortgage portfolio:
   Commercial real estate                       15        98        49       418
   Corporate secured                            42        55       314       481
Investor-owned utility obligations             757       643       464       229
Other asset-backed obligations               1,026       315        54        75
                                           -------   -------   -------   -------

        Total asset-backed obligations     $37,623   $28,489   $ 9,523   $10,129
                                           =======   =======   =======   =======

      The asset-backed insured portfolio, which aggregated $47,146,604,000
principal before reinsurance at December 31, 1998, was collateralized by assets
with an estimated fair value of $53,754,485,000. At December 31, 1997, it
aggregated $38,618,244,000 principal before reinsurance and was collateralized
by assets with an estimated fair value of $44,382,716,000. Such estimates of
fair value are calculated at the inception of each insurance policy and are
changed only in proportion to changes in exposure. At December 31, 1998, the
estimated fair value of collateral and reserves over the principal insured
averaged from 110% for commercial real estate to 181% for corporate secured
obligations. At December 31, 1997, the estimated fair value of collateral and
reserves over the principal insured averaged from 100% for commercial real
estate to 172% for corporate secured obligations. Collateral for specific
transactions is generally not available to pay claims related to other
transactions. The amounts of losses ceded to reinsurers are determined net of
collateral.

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

<TABLE>
<CAPTION>
                                              Net of Amounts Ceded        Ceded
                                                  December 31,        December 31,
                                                  ------------        ------------
Types of Collateral                              1998      1997      1998      1997
-------------------                              ----      ----      ----      ----
<S>                                            <C>       <C>       <C>       <C>    
General obligation bonds                       $25,337   $17,101   $ 4,517   $ 3,182
Housing revenue bonds                            2,509     1,770     1,108       955
Municipal utility revenue bonds                  9,218     5,892     5,489     2,294
Health care revenue bonds                        5,812     3,924     3,348     2,175
Tax-supported bonds (non-general obligation)    14,731    11,210     5,238     3,526
Transportation revenue bonds                     2,937     1,972     2,154     1,041
Other municipal bonds                            6,506     5,120     1,538     1,245
                                               -------   -------   -------   -------

         Total municipal obligations           $67,050   $46,989   $23,392   $14,418
                                               =======   =======   =======   =======
</TABLE>

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


                                       17
<PAGE>

      The Company seeks to maintain a diversified portfolio of insured municipal
obligations designed to spread its risk across a number of geographic areas. The
following table sets forth, by state, those states in which municipalities
located therein issued an aggregate of 2% or more of the Company's net par
amount outstanding of insured municipal securities as of December 31, 1998:

<TABLE>
<CAPTION>
                                                     
                                          Net Par    Percent of Total    Ceded Par
                            Number        Amount    Municipal Net Par     Amount
    State                 of Issues    Outstanding  Amount Outstanding  Outstanding
    -----                 ---------    -----------  ------------------  -----------
                                      (in millions)                     (in millions)
<S>                        <C>           <C>              <C>             <C>    
California                   517         $10,233           15.3%          $ 3,103
New York                     388           5,836            8.7             4,137
Pennsylvania                 356           4,821            7.2               834
Texas                        414           4,128            6.1             1,441
Florida                      130           4,091            6.1             1,616
New Jersey                   275           3,475            5.2             1,486
Illinois                     359           3,125            4.7               628
Massachusetts                126           2,259            3.4               976
Michigan                     217           2,161            3.2               511
Wisconsin                    252           1,685            2.5               228
Indiana                      103           1,461            2.2               162
Minnesota                    146           1,340            2.0               191
All Other States           1,453          20,993           31.3             6,812
Non-U.S                       32           1,442            2.1             1,267
                           -----         -------          -----           -------
                                                                        
           Total           4,768         $67,050          100.0%          $23,392
                           =====         =======          =====           =======
</TABLE>

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, 1998 and 1997
are $1,625,000 and $4,702,000, respectively, for unsettled expense allocations
due from the Parent.

      The Company ceded premiums of $23,838,000, $21,216,000 and $19,890,000 to
Tokio Marine for the years ended December 31, 1998, 1997 and 1996, respectively.
The amounts included in prepaid reinsurance premiums at December 31, 1998 and
1997 for reinsurance ceded to Tokio Marine were $62,422,000 and $53,603,000,
respectively. Reinsurance recoverable on unpaid losses ceded to Tokio Marine was
$612,000 and $613,000 at December 31, 1998 and 1997, respectively. The Company
ceded losses and loss adjustment expenses of $603,000, $1,095,000 and $232,000
to Tokio Marine for the years ended December 31, 1998, 1997 and 1996,
respectively. The Company ceded premiums of $7,297,000 and $15,000 to X.L.
Insurance Company, Ltd., a subsidiary of XL, for the years ended December 31,
1998 and 1997, respectively. The amounts included in prepaid reinsurance
premiums at December 31, 1998 and 1997 for reinsurance ceded to X.L. Insurance
Company, Ltd. were $5,306,000 and $6,000, respectively.

      The Company ceded premiums of $25,862,000, $16,890,000 and $15,409,000 on
a quota share basis to affiliates of MediaOne (Enhance Reinsurance Company,
Asset Guaranty Insurance Company and Commercial Reinsurance Company) for the
years ended December 31, 1998, 1997 and 1996, respectively. The amounts included
in prepaid reinsurance premiums for reinsurance ceded to these affiliates were
$61,088,000 and $51,980,000 at December 31, 1998 and 1997, respectively. The
amounts of reinsurance recoverable on unpaid losses ceded to these affiliates at
December 31, 1998 and 1997 were $1,755,000 and $24,195,000, respectively. The
Company ceded losses and loss adjustment expenses (recoveries) of $(11,956,000),
$2,105,000 and $(3,316,000) to these affiliates for the years ended December 31,
1998, 1997 and 1996, respectively.


                                       18
<PAGE>

14. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

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

      Bonds -- The carrying amount of bonds represents fair value. The fair
value of bonds is based upon quoted market price.

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

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

      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 contracts.

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

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

<TABLE>
<CAPTION>
                                           December 31, 1998          December 31, 1997
                                           -----------------          -----------------
                                         Carrying    Estimated     Carrying    Estimated
(In thousands)                            Amount    Fair Value      Amount     Fair Value
                                          ------    ----------      ------     ----------
<S>                                    <C>          <C>          <C>          <C>       
Assets:
   Bonds                               $1,683,928   $1,683,928   $1,235,441   $1,235,441
   Short-term investments                  92,241       92,241      103,926      103,926
   Cash                                     2,729        2,729       11,235       11,235
   Receivable for securities sold           1,656        1,656       20,535       20,535

Liabilities:
   Deferred premium revenue, net of
      prepaid reinsurance premiums        504,603      417,130      422,073      347,855
   Losses and loss adjustment
      expenses, net of reinsurance
      recoverable on unpaid losses         60,040       60,040       44,799       44,799
   Notes payable                          120,000      120,000       50,000       50,000
   Payable for investments purchased      105,749      105,749       72,979       72,979

Off-balance-sheet instruments:
   Installment premiums                                163,239                   116,888
</TABLE>


                                       19
<PAGE>

15. LIABILITY FOR LOSSES AND LOSS ADJUSTMENT EXPENSES

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

<TABLE>
<CAPTION>
                                                               Year Ended December 31,
                                                               -----------------------
                                                           1998         1997         1996
                                                           ----         ----         ----
<S>                                                     <C>          <C>          <C>      
Balance at January 1                                    $  75,417    $  72,079    $ 111,759

Less reinsurance recoverable                               30,618       29,875       61,532
                                                        ---------    ---------    ---------
Net balance at January 1                                   44,799       42,204       50,227

Incurred losses and loss adjustment expenses:
       Current year                                         8,049        5,400        5,300
       Prior years                                         (4,100)       3,756        1,574

Recovered (paid) losses and loss adjustment expenses:
       Current year                                          (192)      (2,850)
       Prior years                                         11,484       (3,711)     (14,897)
                                                        ---------    ---------    ---------
Net balance December 31                                    60,040       44,799       42,204

Plus reinsurance recoverable                                3,907       30,618       29,875
                                                        ---------    ---------    ---------

     Balance at December 31                             $  63,947    $  75,417    $  72,079
                                                        =========    =========    =========
</TABLE>

      During 1996, the Company increased its general reserve by $6,874,000, of
which $5,300,000 was for originations of new business and $1,574,000 was to
reestablish a portion of the general reserve that had previously been
transferred to case basis reserves. During 1996, the Company transferred
$9,012,000 from its general reserve to case basis reserves associated
predominantly with certain residential mortgage and timeshare receivables
transactions. Giving effect to these transfers, the general reserve totaled
$29,660,000 at December 31, 1996.

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

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

      Reserves for losses and loss adjustment expenses are discounted at
risk-free rates. The amount of discount taken was approximately $16,029,000,
$19,779,000 and $17,944,000 at December 31, 1998, 1997 and 1996, respectively.

16. RECENTLY ISSUED ACCOUNTING STANDARD

      In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. SFAS No. 133 is effective January 1, 2000.

      The Company is in the process of determining the effect of these standards
on its financial statements, but management does not believe that it will have a
material effect on the Company's financial condition.


                                       20
<PAGE>

17. FINANCIAL SECURITY ASSURANCE INTERNATIONAL LTD. AND MINORITY INTEREST

      On November 3, 1998, the Parent funded the Company's $80,000,000
investment in Financial Security Assurance International Ltd. (International), a
new Bermuda-based financial guaranty insurer.

      In November 1998, XL made a minority investment in International for
$20,000,000. This interest is in the form of Cumulative Participating Voting
Preferred Shares, which in total have a minimum fixed dividend of $1,000,000 per
annum. For the period ended December 31, 1998, the Company recognized minority
interest of $388,000.


                                       21