Exhibit 99

                        FINANCIAL SECURITY ASSURANCE INC.
                                AND SUBSIDIARIES

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


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


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>
                               ASSETS                                December 31,   December 31,
                                                                         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                                                             144,105        103,421
                                                                      ----------     ----------

          TOTAL ASSETS                                                $2,382,489     $1,870,159
                                                                      ==========     ==========

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                                             95,398         90,387
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                      1,277,898        972,299
                                                                      ----------     ----------

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                         $2,382,489     $1,870,159
                                                                      ==========     ==========
</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                                                           46,736      21,838      16,798
   Deferred                                                             167      16,019      12,321
                                                                   --------    --------    --------
   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 (Loss)
                                                Common             Paid-In             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 subsidiaries                                                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 for deferred income taxes                      167       19,290       12,321

   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                27,965        5,337        5,807
                                                      ---------    ---------    ---------

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


                                        7
<PAGE>

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.

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

      Losses and Loss Adjustment Expenses

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

      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,


                                        8
<PAGE>

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.

      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.

      Reclassification

      Historically, purchases of tax and loss bonds were treated as charges to
current tax expense with a corresponding benefit to deferred taxes by setting up
tax and loss bonds as a deferred tax asset (i.e., reduction of the deferred tax
liability). These purchases have been reclassified to be treated as prepaid
federal income taxes and, as a consequence, tax and loss bonds have been
classified as an asset on the balance sheet and not as a reduction of the
deferred tax liability. Accordingly, the change had the effect of increasing
both assets and liabilities by $38,726,000 and $30,520,000 at December 31, 1998
and 1997, respectively. This reclassification has no effect on the Company's net
income or shareholder's equity.

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


                                        9
<PAGE>

                              Other                0.3

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

<TABLE>
<CAPTION>
                                                                 Gross            Gross
                                               Amortized      Unrealized       Unrealized       Estimated
December 31, 1998                                 Cost           Gains           Losses        Market 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
                                              ==========      ==========       ===========      ==========

December 31, 1997
-----------------

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)
                                               ========   ========   ========


                                       10
<PAGE>

      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.

<TABLE>
<CAPTION>
                                                                                    Estimated
                                                                 Amortized Cost   Market Value
                                                                 --------------   ------------
<S>                                                                <C>             <C>
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
                                                                   ==========      ==========
</TABLE>

      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.

4. DEFERRED ACQUISITION COSTS

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

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

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


                                       11
<PAGE>

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, including the purchase of tax
            and loss bonds;

      -     Accruals for deferred compensation are not recognized;

      -     Purchase accounting adjustments are not recognized;

      -     Bonds are carried at amortized cost;

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

      A reconciliation of net income for the calendar years 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):

Net Income:                                      1998        1997        1996
                                                 ----        ----        ----

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                       167      16,019      12,321
Current income tax benefit                       (8,206)     (7,994)    (11,410)
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
                                               ========    ========    ========


                                       12
<PAGE>

                                                    December 31,
                                                    -----------
Shareholder's Equity:                            1998          1997
                                                 ----          ----

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                             95,398       90,387
Tax and loss bonds                               (38,726)     (30,520)
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
                                             ===========    =========

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.

      Prior to 1998, purchases of tax and loss bonds were treated as charges to
current tax expense with a corresponding benefit to deferred taxes by setting up
tax and loss bonds as a deferred tax asset (i.e., reduction of the deferred tax
liability). Beginning in 1998, these purchases have been treated as prepaid
federal income taxes and, as a consequence, tax and loss bonds have been treated
as an asset on the balance sheet and not as a reduction of the deferred tax
liability. Accordingly, the change had the effect of increasing both assets and
liabilities by $38,726,000 and $30,520,000 at December 31, 1998 and 1997,
respectively. In addition, this change had the effect of increasing the deferred
tax provision and decreasing the current tax provision by $8,206,000,
$7,994,000, and $11,410,000 for the years ended December 31, 1998, 1997 and
1996, respectively.

      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)
Other, net                                       (411)        (619)
                                            ---------    ---------
     Total deferred tax assets                (51,044)     (32,956)
                                            ---------    ---------

Total deferred income taxes                 $  95,398    $  90,387
                                            =========    =========


                                       13
<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


                                       14
<PAGE>

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.

      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     Granted    Earned    Forfeited   Outstanding     Market
      at 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


                                       15
<PAGE>

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.

      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 impact on the Company's financial
position, results of operations or cash flows.

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-


                                       16
<PAGE>

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.

      Amounts reinsured were as follows (in thousands):

<TABLE>
<CAPTION>
                                                                 Year Ended December 31,
                                                                 -----------------------
                                                          1998            1997          1996
                                                          ----            ----          ----
<S>                                                     <C>             <C>           <C>
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
</TABLE>

<TABLE>
<CAPTION>
                                                                         December 31,
                                                                         ------------
                                                                     1998           1997
                                                                     ----           ----
<S>                                                              <C>            <C>
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
</TABLE>

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
                               =======      =======        =======      =======


                                       17
<PAGE>

      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
                                 ======      =======       =======       =======

      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 of
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 of 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.


                                       18
<PAGE>

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 Issues                                   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.

      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:

                                  Net Par       Percent of Total     Ceded Par
                     Number        Amount       Municipal Net Par      Amount
   State           of Issues    Outstanding    Amount Outstanding   Outstanding
   -----           ---------    -----------    ------------------   -----------
                               (in millions)                       (in millions)

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
                     =======        =======           =======           =======


                                       19
<PAGE>

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.

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 contract.

      Installment premiums -- Consistent with industry practice, there is no
carrying amount for installment premiums since the Company will receive premiums
on an installment basis over the term of the insurance contract. Similar to
deferred premium revenue, the fair value of installment premiums is the
estimated present value of the future contractual premium revenues that would be
paid under a reinsurance agreement with a third party to transfer the


                                       20
<PAGE>

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>

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
                                                          --------      --------      ---------
</TABLE>


                                       21
<PAGE>

<TABLE>
<S>                                                       <C>           <C>           <C>
     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 for the general reserve and for the case basis reserves at rates
between 5.5% and 6.1%. The amount of discount taken was approximately
$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.

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.


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