EXHIBIT 99

                        FINANCIAL SECURITY ASSURANCE INC.
                                AND SUBSIDIARIES

                      Consolidated Financial Statements and
                        Report of Independent Accountants

                                December 31, 1996
<PAGE>

                        FINANCIAL SECURITY ASSURANCE INC.
                                AND SUBSIDIARIES

                        CONSOLIDATED FINANCIAL STATEMENTS
                      AND REPORT OF INDEPENDENT ACCOUNTANTS

                  YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

    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.:

We have audited the accompanying consolidated balance sheets of Financial
Security Assurance Inc. and Subsidiaries as of December 31, 1996 and 1995 and
the related consolidated statements of income, changes in shareholder's equity,
and cash flows for each of the three years in the period ended December 31,
1996. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Financial Security
Assurance Inc. and Subsidiaries at December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.

COOPERS & LYBRAND L.L.P.

New York, New York
January 24, 1997
<PAGE>

                        FINANCIAL SECURITY ASSURANCE INC.
                                AND SUBSIDIARIES

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

<TABLE>
<CAPTION>

                               ASSETS                                  December 31,        December 31,
                                                                           1996                1995
                                                                        ----------          ----------
<S>                                                                     <C>                 <C>       

Bonds at market value (amortized cost of $1,054,678 and
   $1,006,084)                                                          $1,068,677          $1,036,382
Equity investments at market value (cost of $1,000)                          1,000
Short-term investments                                                      39,570              14,568
Cash equivalents                                                            16,129              35,277
                                                                        ----------          ----------

     Total investments                                                   1,125,376           1,086,227
Cash                                                                         7,517                 555
Deferred acquisition costs                                                 146,233             132,951
Prepaid reinsurance premiums                                               151,224             133,548
Reinsurance recoverable on unpaid losses                                    29,875              61,532
Other assets                                                                69,705              61,825
                                                                        ----------          ----------

          TOTAL ASSETS                                                  $1,529,930          $1,476,638
                                                                        ==========          ==========

                LIABILITIES AND SHAREHOLDER'S EQUITY

Deferred premium revenue                                               $   511,196         $   463,897
Losses and loss adjustment expenses                                         72,079             111,759
Deferred federal income taxes                                               41,682              43,205
Ceded reinsurance balances payable                                          12,599              13,664
Payable for securities purchased                                            14,142               9,516
Accrued expenses and other liabilities                                      62,900              44,611
                                                                        ----------          ----------

          TOTAL LIABILITIES                                                714,598             686,652
                                                                        ----------          ----------

COMMITMENTS AND CONTINGENCIES

Common stock (1,000 shares authorized; 660 and 750 shares issued
   and outstanding; par value of $22,727 and $20,000 per share)             15,000              15,000
Additional paid-in capital                                                 654,470             681,470
Unrealized gain on investments (net of deferred income tax
   provision of $4,899 and $10,604)                                          9,099              19,694
Accumulated earnings                                                       136,763              73,822
                                                                        ----------          ----------

          TOTAL SHAREHOLDER'S EQUITY                                       815,332             789,986
                                                                        ----------          ----------

          TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY                    $1,529,930          $1,476,638
                                                                        ==========          ==========

</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,
                                                                                -----------------------
                                                                    1996                  1995                 1994
                                                                    ----                  ----                 ----
                                                                                         
<S>                                                               <C>                  <C>                  <C>      
REVENUES:
   Net premiums written (net of premiums ceded of 
      $55,965, $33,166 and $28,692,
      of which $35,299, $20,582 and $15,999 were 
      ceded to affiliates)                                        $121,000             $  77,576            $  77,757
   Increase in deferred premium revenue                            (30,552)               (8,229)             (12,003)
                                                                  --------             ---------            ---------
   Premiums earned (net of premiums ceded of
      $38,723, $38,013 and $35,051)                                 90,448                69,347               65,754
   Net investment income                                            62,728                47,083               45,282
   Net realized gains (losses)                                       1,851                 5,032               (3,829)
   Other income                                                        502                 4,722                  732
                                                                  --------             ---------            ---------

                   TOTAL REVENUES                                  155,529               126,184              107,939
                                                                  --------             ---------            ---------

EXPENSES:
   Losses and loss adjustment expenses:
          Related to merger                                                               15,400
          Other (net of reinsurance recoveries of
             ($2,249), $9,101 and $56,895, of which
             ($3,084), $7,111 and $50,839 were ceded
             to affiliates)                                          6,874                 6,258                3,024
   Policy acquisition costs                                         23,829                16,888               15,057
   Other operating expenses                                         14,852                12,352               11,574
                                                                  --------             ---------            ---------

                   TOTAL EXPENSES                                   45,555                50,898               29,655
                                                                  --------             ---------            ---------

INCOME BEFORE INCOME TAXES                                         109,974                75,286               78,284
                                                                  --------             ---------            ---------

Provision (benefit) for income taxes:

   Current                                                          28,208                23,353               13,338
   Deferred                                                            911                (3,055)               4,682
                                                                  --------             ---------            ---------
   Total provision                                                  29,119                20,298               18,020
                                                                  --------             ---------            ---------
        NET INCOME                                                $ 80,855             $  54,988            $  60,264
                                                                  ========             =========            =========

</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>

                                                                Additional       Unrealized
                                             Common              Paid-In          Gains on           Retained
                                              Stock              Capital         Investments         Earnings           Total
                                              -----              -------         -----------         --------           -----

<S>                                          <C>                 <C>                <C>             <C>                <C>     
BALANCE, December 31, 1993                   $15,000             $497,506           $34,892         $  (4,930)         $542,468

Net income for the year                                                                                 60,264           60,264

Dividends paid on common stock                                                                         (17,500)         (17,500)

Net change in unrealized loss on
    investments (net of deferred income
    tax benefit of $30,292)                                                         (56,256)                            (56,256)
                                             -------             --------           -------         ---------          --------


BALANCE, December 31, 1994                    15,000              497,506           (21,364)            37,834          528,976

Net income                                                                                              54,988           54,988

Dividends paid on common stock                                                                         (19,000)         (19,000)

Net change in unrealized gain on
   investments (net of deferred income
   taxes of $22,108)                                                                 41,058                              41,058

Capital contribution of CGIC                                      233,964                                               233,964

Stock repurchase                                                  (50,000)                                              (50,000)
                                             -------             --------           -------         ---------          --------

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 unrealized loss on
   investments (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
                                             =======             ========           =======           ========         ========
</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,
                                                                                -----------------------
                                                                    1996                    1995                 1994
                                                                    ----                    ----                 ----
<S>                                                            <C>                     <C>                   <C>      
Cash flows from operating activities:
   Premiums received, net                                      $   124,540             $  85,481             $  58,191
   Policy acquisition and other operating expenses
     paid, net                                                     (49,261)              (41,730)              (31,696)
   Recoverable advances received (paid)                             10,213                (9,419)                 (939)
   Losses and loss adjustment expenses paid                        (15,473)               (4,954)               (5,124)
   Net investment income received                                   59,923                40,160                41,429
   Federal income taxes received (paid)                            (33,297)              (17,295)              (14,358)
   Interest paid                                                       (22)                  (38)                  (72)
   Other                                                             1,330                 2,552                (4,314)
                                                               -----------             ---------             ---------

          Net cash provided by operating activities                 97,953                54,757                43,117
                                                               -----------             ---------             ---------

Cash flows from investing activities:
   Proceeds from sales of bonds                                  1,095,929               603,545               790,517
   Proceeds from maturities of bonds                                 2,965                   606                    55
   Purchases of bonds                                           (1,139,129)             (685,984)             (758,254)
   Purchases of property and equipment                              (2,081)                 (958)                 (937)
   Cash of contributed subsidiary                                                            199
   Net decrease (increase) in short-term
     investments                                                    (3,675)               94,727               (58,095)
                                                               -----------             ---------             ---------
          Net cash provided by (used for) investing
             activities                                            (45,991)               12,135               (26,714)
                                                               -----------             ---------             ---------

Cash flows from financing activities:
   Stock repurchase                                                (27,000)              (50,000)
   Dividends paid                                                  (18,000)              (19,000)              (17,500)
                                                               -----------             ---------             ---------

          Net cash used for financing  activities                  (45,000)              (69,000)              (17,500)
                                                               -----------             ---------             ---------

Net increase (decrease) in cash                                      6,962                (2,108)               (1,097)

Cash at beginning of year                                              555                 2,663                 3,760
                                                               -----------             ---------             ---------

Cash at end of year                                            $     7,517             $     555             $   2,663
                                                               ===========             =========             =========
</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,
                                                                                -----------------------
                                                                       1996                  1995                   1994
                                                                       ----                  ----                   ----
<S>                                                                 <C>                     <C>                 <C>  
Reconciliation of net income to net cash flows 
   from operating activities:

Net income                                                          $80,855               $54,988                $60,264
   Decrease (increase) in accrued investment income                    (842)                   14                  1,773
   Increase in deferred premium revenue and related
      foreign exchange adjustment                                    29,622                 8,141                 12,585
   Decrease (increase) in deferred acquisition costs                (13,282)              (10,305)                (9,847)
   Increase (decrease) in current federal income
      taxes payable                                                  (5,090)                6,057                 (1,020)
   Increase (decrease) in unpaid losses and loss
      adjustment expenses                                            (8,023)               14,587                   (376)
   Increase (decrease) in amounts withheld for others                    52                    30                (24,675)
   Provision (benefit) for deferred income taxes                        911                (3,055)                 4,682
   Net realized losses (gains) on investments                        (1,851)               (5,032)                 3,829
   Depreciation and accretion of bond discount                       (1,616)               (5,564)                (4,082)
   Change in other assets and liabilities                            17,217                (5,104)                   (16)
                                                                    -------               -------                -------
    
Cash provided by operating activities                               $97,953               $54,757                $43,117
                                                                    =======               =======                =======
</TABLE>

In addition to the cash received from the contribution of the subsidiary, the
Company also received net assets of $233,765.

In 1996, the Company has recharacterized its cash equivalents as short-term
investments. The amounts of cash equivalents recharacterized were $16,129,
$35,277 and $13,457 as of December 31, 1996, 1995 and 1994, respectively.


       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, 1996, 1995 AND 1994

1.   ORGANIZATION AND OWNERSHIP

     Financial Security Assurance Inc. (the Company), a wholly owned subsidiary
of Financial Security Assurance Holdings Ltd. (the Parent), is an insurance
company domiciled in the State of New York. The Company is engaged in providing
financial guaranty insurance on asset-backed financings and municipal
obligations. The Company's underwriting policy is to insure asset-backed and
municipal obligations that would otherwise be investment grade 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 payment when due of 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 Pacific Rim.

     At December 31, 1993, the Parent was owned 92.5% by U S WEST and 7.5% by
Tokio Marine. The Parent completed an initial public offering of common shares
on May 13, 1994. In connection with the initial public offering, Fund American
Enterprises Holdings, Inc. (Fund American) acquired an interest in the Parent,
together with rights to acquire additional shares of the Parent from U S WEST
and shares of the Parent's Series A preferred stock. At December 31, 1994, the
Parent was owned 60.9% by U S WEST, 7.7% by Fund American, 7.4% by Tokio Marine
and 24.0% by the public and employees.

     On December 20, 1995, a subsidiary of the Parent merged (the Merger) with
Capital Guaranty Corporation (CGC). The Merger provided for each CGC share to be
exchanged for 0.6716 share of the Parent's common stock and cash of $5.69. The
Parent issued in the aggregate 6,051,661 common shares and paid aggregate cash
consideration of $51,300,000. In conjunction with the Merger, the Parent
contributed (the Contribution) the common stock of Capital Guaranty Insurance
Company (CGIC), a subsidiary of CGC, to the Company. As a result of the
Contribution, the Company's net assets increased by $233,964,000. Net premiums
written by CGIC in 1995 prior to the Contribution were $26,070,000. At December
31, 1995, the Parent was owned 50.3% by U S WEST, 7.8% by Fund American, 6.1% by
Tokio Marine and 35.8% by the public and employees. At December 31, 1996, the
Parent was owned 40.4% by U S WEST, 11.5% by Fund American, 6.4% by Tokio Marine
and 41.7% 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 6). The preparation of financial
statements in conformity with generally accepted accounting principles 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, 1996 and 1995 and the
reported amounts of revenues and expenses in 

                                       7
<PAGE>

the consolidated statements of income during the years ended December 31, 1996,
1995 and 1994. 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 wholly owned subsidiaries, Financial Security Assurance of Maryland Inc.
(which was named Capital Guaranty Insurance Corporation until the Merger),
Financial Security Assurance International Inc., 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 with
the 1996 presentation. The Merger, and the related Contribution to the Company,
were accounted for on a purchase accounting basis. In view of the short period
between the date of the Merger, December 20, 1995, and the year-end, the date of
the Contribution for accounting purposes is considered to be December 31, 1995.
As a result, the accounting for the Contribution has no effect on the Company's
consolidated statement of income for the year ended December 31, 1995, except
for the recording of $15,400,000 in losses and loss adjustment expenses to
increase the Company's general reserve to provide for the insured portfolio
assumed by the Company as a result of the Contribution (see Note 16).

     Investments

     Investments in debt securities designated as available for sale are carried
at market value. Any resulting unrealized gain or loss is reflected as a
separate component of shareholder's 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 resultant change in effective
yields are recognized in current income. Short-term investments, which are those
investments with a maturity of more than three months but 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.

     To manage adverse movements in interest rates, the company uses exchange
traded futures and options. These contracts are designated as hedges of specific
identified securities and any gains or losses on these hedges are deferred and
included as part of the Company's unrealized gains or losses in stockholders'
equity until the disposition of the hedged assets. The Company will discontinue
to account for these contracts as hedges if there ceases to be a high
correlation between the change in price of the hedged assets and the hedge.

     Cash equivalents represent amounts deposited in money market funds and
investments with a maturity at time of purchase of three months or less.

     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 that portion of premium which 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 outstanding 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.

                                       8
<PAGE>

     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 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.

3.   INVESTMENTS

     Bonds at amortized cost of $17,669,000 and $11,969,000 at December 31, 1996
and 1995, 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,
                                              -----------------------
                                       1996             1995              1994
                                       ----             ----              ----

   Long-term bonds                   $61,130          $43,114           $46,517
   Equity securities                      14
   Short-term investments and  
     cash equivalents                  3,525            5,705               778
   Investment expenses                (1,941)          (1,736)           (2,013)
                                     -------          -------           -------

   Net investment income             $62,728          $47,083           $45,282
                                     =======          =======           =======


        The credit quality of the investment portfolio at December 31, 1996 was
as follows:

                                                     Percent of
                       Rating                   Investment Portfolio
            ------------------------------      ----------------------

                        AAA                             69.9%
                         AA                             20.0
                          A                             10.1

                                       9
<PAGE>

     The amortized cost and estimated market value of long-term bonds were as
follows (in thousands):
<TABLE>
<CAPTION>

                                                                           Gross              Gross            Estimated
                                                     Amortized           Unrealized         Unrealized           Market
December 31, 1996                                      Cost                Gains              Losses             Value
-----------------                                      ----                -----              ------             -----
<S>                                                   <C>                   <C>                <C>             <C>       

U.S. Treasury securities and obligations
   of U.S. government corporations
    and agencies                                     $   55,319            $ 1,103            $  (557)        $   55,865

Obligations of states and political
    subdivisions                                        661,657             15,164             (2,887)           673,934

Foreign securities                                       15,019                196                (70)            15,145

Mortgage-backed securities                              177,818              1,432               (906)           178,344

Corporate securities                                     76,632                335               (319)            76,648

Asset-backed securities                                  68,233                680               (172)            68,741
                                                     ----------            -------            -------         ----------
                                                                                                           
     Total                                           $1,054,678            $18,910            $(4,911)        $1,068,677
                                                     ==========            =======            =======         ==========
</TABLE>

<TABLE>
<CAPTION>

                                                                           Gross              Gross            Estimated
                                                     Amortized           Unrealized         Unrealized           Market
December 31, 1995                                      Cost                Gains              Losses             Value
-----------------                                      ----                -----              ------             -----
<S>                                                   <C>                   <C>                <C>             <C>       


U.S. Treasury securities and obligations
   of U.S. government corporations
   and agencies                                      $   44,873            $ 2,231            $   -           $   47,104

Obligations of states and political

    subdivisions                                        635,872             20,112               (330)           655,654

Foreign securities                                       28,691              1,909                (17)            30,583

Mortgage-backed securities                              262,936              5,949                (51)           268,834

Corporate securities                                      1,254                 51                                 1,305

Asset-backed securities                                  32,458                444                                32,902
                                                     ----------            -------            -------         ----------

     Total                                           $1,006,084            $30,696            $  (398)        $1,036,382
                                                     ==========            =======            =======         ==========
</TABLE>

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

                                                  Year Ended December 31,
                                                  -----------------------
                                               1996        1995         1994
                                               ----        ----         ----

Long-term bonds                             $(16,299)    $63,166     $(86,564)
Short-term investments                                                     16
                                            --------     -------     -------- 
   Change in net unrealized gains (losses)  $(16,299)    $63,166     $(86,548)
                                            ========     =======     ========

                                       10
<PAGE>

     The amortized cost and estimated market value of long-term bonds at
December 31, 1996 and 1995, 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>

                                                           December 31, 1996                    December 31, 1995
                                                           -----------------                    -----------------
                                                                       Estimated                              Estimated
                                                    Amortized            Market            Amortized            Market
                                                       Cost              Value                Cost               Value
                                                       ----              -----                ----               -----

<S>                                                  <C>              <C>                  <C>               <C>        
Due in one year or less                              $   38,003       $    38,325          $     2,776       $     2,778
Due after one year through five years                    57,406            57,623               25,735            26,075
Due after five years through ten years                  105,494           105,849              157,161           162,573
Due after ten years                                     607,724           619,795              525,018           543,220
Mortgage-backed securities (stated
    maturities of 16 to 30 years)                       177,818           178,344              262,936           268,834
Asset-backed securities (stated
    maturities of 2 to 5 years)                          68,233            68,741               32,458            32,902
                                                     ----------        ----------           ----------        ----------
     Total                                           $1,054,678        $1,068,677           $1,006,084        $1,036,382
                                                     ==========        ==========           ==========        ==========
</TABLE>

     Proceeds from sales of long-term bonds during 1996, 1995 and 1994 were
$1,096,568,000, $587,516,000 and $808,143,000, respectively. Gross gains of
$13,420,000, $12,346,000 and $13,919,000 and gross losses of $11,569,000,
$7,314,000 and $17,748,000 were realized on sales in 1996, 1995 and 1994,
respectively.

     To hedge against changes in yields on certain one-year corporate
securities, the Company has entered into a series of Eurodollar futures
contracts, which are marked-to-market on a daily basis. These contracts are
accounted for as a hedge. As of year-end, the net unrealized loss on the
contracts, included in the Company's unrealized gains in stockholder's equity
section, is not material. The aggregate notional amount of these contracts is
$83,728,000 as of December 31, 1996.

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,
                                                                                 -----------------------
                                                                    1996                   1995               1994
                                                                    ----                   ----               ----

<S>                                                               <C>                  <C>                  <C>    
Balance, beginning of period                                      $132,951             $  91,839            $81,992
                                                                  --------             ---------            -------
Costs deferred during the period:
   Ceding commission income                                        (15,956)               (9,836)            (8,476)
   Assumed commission expense                                           38                    55                 84
   Premium taxes                                                     3,718                 2,537              2,589
   Compensation and other acquisition costs                         49,311                34,437             30,707
                                                                  --------             ---------            -------

                    Total                                           37,111                27,193             24,904
                                                                  --------             ---------            -------

Costs amortized during the period                                  (23,829)              (16,888)           (15,057)
                                                                  --------             ---------            -------

Balance of contributed subsidiary                                                         30,807
                                                                                       ---------
Balance, end of period                                            $146,233              $132,951            $91,839
                                                                  ========             =========            =======

</TABLE>

5.   OTHER OPERATING EXPENSES

     Total salary expense and related benefits included in other operating
expenses were $10,135,000, $10,976,000 and $9,187,000 for the years ended
December 31, 1996, 1995 and 1994, respectively.

                                       11
<PAGE>

6.   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 risk has 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 is computed based on the following statutory
     requirements (rather than establishing a general loss reserve):

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

          b. 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 percent 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.

          A reconciliation of the Company's net income for the calendar years
     1996, 1995 and 1994 and shareholder's equity at December 31, 1996, 1995 and
     1994, prepared on a GAAP basis, to the amounts reported on a statutory
     basis, is as follows (in thousands):

                                                1996         1995         1994
                                                ----         ----         ----
Net Income (Loss):

GAAP BASIS                                    $80,855      $54,988      $60,264
Premium revenue recognition                    (5,518)      (4,805)      (5,425)
Losses and loss adjustment expenses incurred   (2,138)      10,871      (13,908)
Deferred acquisition costs                    (12,482)     (10,305)      (9,847)
Deferred income tax provision (benefit)           911       (3,055)       4,682
Amortization of bonds                             566        1,195          520
Accrual of deferred compensation               12,737        5,663       (9,062)
Other                                           1,404       (1,580)        (274)
                                              -------      -------      -------

STATUTORY BASIS                               $76,335      $52,972      $26,950
                                              =======      =======      =======

                                       12
<PAGE>

                                                        December 31,
                                                        ------------
Shareholder's Equity:                          1996         1995          1994
                                               ----         ----          ----

GAAP BASIS                                  $815,332     $789,986      $528,976
Premium revenue recognition                  (51,760)     (46,248)      (29,891)
Loss and loss adjustment expense reserves     29,660       31,798        20,927
Deferred acquisition costs                  (146,233)    (132,951)      (91,839)
Contingency reserve                         (227,139)    (183,967)     (121,414)
Unrealized loss (gain) on investments, 
  net of tax                                 (14,084)     (30,298)       32,868
Deferred income taxes                         41,682       43,205        10,222
Accrual of deferred compensation              18,390        5,653
Other                                        (17,043)     (16,492)       (5,475)
                                            --------     --------      --------

STATUTORY BASIS (SURPLUS)                   $448,805     $460,686      $344,374
                                            ========     ========      ========

SURPLUS PLUS CONTINGENCY RESERVE            $675,944     $644,653      $465,788
                                            ========     ========      ========

7.   FEDERAL INCOME TAXES

     For periods prior to May 13, 1994, the date of initial public offering when
the Parent became less than 80% owned by U S WEST, the Parent, the Company and
its Subsidiaries joined with U S WEST and its subsidiaries in filing a
consolidated federal income tax return. For the Company, under a written tax
sharing agreement with U S WEST, the allocation of income taxes was based upon
separate return calculations which provided that benefits or liabilities created
by the Company are allocated to the Company regardless of whether the benefits
were usable or additional liabilities were incurred in the U S WEST tax returns.
For periods subsequent to May 12, 1994, the Parent and all members of its group
elected to file consolidated federal tax returns. The calculation of each
member's tax benefit or liability by the Company was controlled by a tax sharing
agreement that based 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,
                                                         ------------
                                                 1996                  1995
                                                 ----                  ----

Deferred acquisition costs                     $51,182               $46,533
Deferred premium revenue adjustments             3,520                 2,905
Contingency reserve                             29,492                11,542
Unrealized capital gains                         7,915                14,950
Market discounts                                 1,955                   900
                                               -------               -------
     Total deferred tax liabilities             94,064                76,830
                                               -------               -------

Loss and loss adjustment expense reserves      (10,381)              (11,129)
Deferred compensation                           (9,791)               (5,529)
Tax credits                                     (7,842)               (3,795)
Tax and loss bonds                             (22,526)              (11,116)
Other, net                                      (1,842)               (2,056)
                                               -------               -------
     Total deferred tax assets                 (52,382)              (33,625)
                                               -------               -------

Total deferred income taxes                    $41,682               $43,205
                                               =======               =======

     No valuation allowance was necessary at December 31, 1996 or 1995.


                                       13
<PAGE>

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

                                               Year Ended December 31,
                                               -----------------------
                                      1996              1995             1994
                                      ----              ----             ----

Tax at statutory rate                 35.0%             35.0%            35.0%
Tax-exempt interest                   (8.9)             (8.3)           (12.0)
Other                                  0.4               0.3
                                      ----              ----             ---- 

Provision for income taxes            26.5%             27.0%            23.0%
                                      =====             =====            =====

8.   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, and the dividend, which 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, 1996, the Company had $45,184,000 available for the payment of
dividends over the next twelve months. As a customary condition for approving
the application of Fund American for a change in control of the Company, the
prior approval of the Superintendent of the New York State Insurance Department
was required for any payment of dividends by the Company to the Parent for a
period of two years following such changed control. Such approval was provided
for the payment of dividends by the Company to the Parent in 1996, 1995 and 1994
in the ordinary course of business. Such prior approval requirement lapsed in
September 1996. In addition, the New York Superintendent has approved the
repurchase by the Company of up to $75,000,000 of its shares from the Parent
through December 31, 1998, pursuant to which the Company has repurchased
$27,000,000 of its shares through December 31, 1996. Future share repurchases
may not exceed cumulative statutory net income beginning January 1, 1996.

9.   CREDIT ARRANGEMENTS AND ADDITIONAL CLAIMS-PAYING RESOURCES

     The Company has a credit arrangement aggregating $150,000,000 at December
31, 1996, which is provided by commercial banks and intended for general
application to transactions insured by the Company and the Subsidiaries. At
December 31, 1996, there have been no borrowings under this arrangement. 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, the Company can arrange financing for transactions subject to certain
conditions. The amount of this facility was $186,911,000, of which $100,911,000
was unutilized at December 31, 1996.

     The Company has a standby line of credit commitment in the amount of
$125,000,000 with an international Aaa/AAA-rated bank 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
$200,000,000 or 5.75% of average annual debt service. 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 including certain installment premiums and other collateral.
This commitment has a term beginning on April 30, 1996 and expiring on January
31, 2003 and contains an annual renewal provision subject to approval by the
bank.

10.  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
$1,977,000, $1,784,000 and $1,888,000 for the years ended December 31, 1996,
1995 and 1994, respectively.

                                       14
<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.

     During 1991, the Company established the Profit Participation Plan as a
long-term incentive compensation plan for the benefit of certain of its
employees. Prior to the closing of the Initial Public Offering (see Note 15),
the Parent adopted a Supplemental Restricted Stock Plan. Pursuant to this plan,
awards of outstanding units to existing employees under the Profit Participation
Plan were valued at $0.20 per dollar of award ($0.70 per dollar of award in the
case of 1994 regular units granted thereunder) and, at the election of each
outstanding employee, were exchanged for restricted shares of the Parent's
common stock valued at the initial public offering price of $20.00 per share.
All employees of the Company, including all senior executives, exchanged their
outstanding interests in the Profit Participation Plan for restricted shares of
the Parent's common stock at the public offering price under the Supplemental
Restricted Stock Plan. In settlement of an accrued balance of $7,126,000 in such
Profit Participation Plan, the Company purchased 356,345 shares of restricted
stock from the Parent and awarded the shares to employees. The stock was
restricted because ownership of the shares by employees required continued
employment; the shares vested ratably over a three-year period on July 1, 1994,
1995 and 1996.

     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 May 1995. The
1993 Equity Participation Plan also contains provisions that permit the Human
Resources Committee to pay all or a portion of an employee's 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 equity bonus awards will be acquired by the
Parent through open-market purchases by a trust established for such purpose.

     During 1994, under the Parent's 1993 Equity Participation Plan, the Parent
granted to officers and employees, in respect of future performance,
non-qualified options to purchase an aggregate of 1,099,000 shares of the
Parent's common stock, of which 39,000 were forfeited and 1,060,000 were still
outstanding at December 31, 1994, substantially all of which have an exercise
price of $20.00 per share. (As described below, 1,025,500 of these options will
be converted to performance shares.) The foregoing options vest, subject to
continuation of employment and other terms of the option grants, at the rate of
20% per year, for five one-year periods, with the first period ending on July 1,
1994. Such options expire ten years after the effective dates of their grant. In
the fourth quarter of 1994, holders of outstanding stock options under the 1993
Equity Participation Plan were offered the right to exchange such stock options
for an equal number of performance shares under such Plan. Also, as a result of
the Merger, the Parent granted 169,956 of stock options with strike prices
ranging from $18.63 to $23.53 per share to employees of CGC in exchange for
outstanding stock options of CGC. Giving effect to such exchange, at December
31, 1996, there were outstanding 1,374,340 performance shares and 201,956
options to purchase shares of common stock.

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

        Outstanding      Granted       Forfeited     Outstanding      Market
       at Beginning       During         During        at End        Price at
          of Year        the Year       the Year       of Year      Grant Date
          -------        --------       --------       -------      ----------
 1994                   1,025,500                     1,025,500       $21.875

 1995     1,025,500        83,650                     1,109,150        19.250

 1996     1,109,150       282,490        17,300       1,374,340        25.250


                                       15
<PAGE>

     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
$12,737,000 and $5,663,000 for the years ended December 31, 1996 and 1995,
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
stockholders' 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. In
1996, the Company adopted disclosure provisions of FASB Statement 123. Had the
compensation cost for the Parent's performance shares been determined based upon
fair value at the grant dates for the awards consistent with the method of FASB
Statement 123, the effect on the Company's net income and earnings per share
would have been immaterial.

     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. During 1996, 1995 and 1994,
the total number of shares purchased by this trust was 529,131, 591,714 and
182,562, respectively, at a cost of $14,111,000, $14,444,000 and $3,730,000,
respectively. 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
pensions to its employees, nor does it provide post-employment benefits to
former employees.

11.  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,
                -----------------------             
                         1997                       $  2,257
                         1998                          2,267
                         1999                          2,229
                         2000                          2,169
                         2001                          2,014
                      Thereafter                       6,810
                                                     -------
             
                         Total                       $17,746
                                                     =======
  
     Rent expense for the years ended December 31, 1996, 1995 and 1994 was
$3,383,000, $3,493,000 and $3,430,000, 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.

                                       16
<PAGE>

12.  REINSURANCE

     The Company reinsures portions of its risks with affiliated (see Note 14)
and unaffiliated reinsurers under quota share treaties and on a facultative
basis. The Company's principal ceded reinsurance program consisted in 1996 of
three quota share treaties and three automatic facultative facilities. One
treaty covers all of the Company's approved regular lines of business, except
municipal obligation insurance. Under this treaty in 1996, the Company ceded
11.35% of each covered policy, up to a maximum of $22,700,000 insured principal
per policy. At its sole option, the Company could have increased, and in certain
instances did increase, the ceding percentage to 22.7% up to $45,400,000 of each
covered policy. A second treaty covers the Company's municipal obligation
insurance business. Under this treaty in 1996, the Company ceded 10% of each
covered policy that is classified by the Company as providing municipal bond
insurance as defined by Article 69 of the New York Insurance Law up to a limit
of $26,667,000 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. Under the third
treaty in 1996, the Company ceded 5% of its retention (i.e., after cessions of
policies under the municipal obligation insurance treaty) covering substantially
all teaching hospital and higher education risks, up to limits that range from
$7,500,000 to $30,000,000 per single risk (depending on the type of obligation).
At its sole option, the Company could have increased, and in certain instances
did increase, the ceding percentage from 5% to 15% of its retention, subject to
the same limits. This third treaty was canceled on a run-off basis as of
December 31, 1996. Under the three automatic facultative facilities in 1996, the
Company at its option could allocate up to $20,000,000 or $25,000,000 for each
reinsurer (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 three treaties and automatic facultative facilities allows the Company to
withhold a ceding commission to defray its expenses.

     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,
                                                                                    -----------------------
                                                                      1996                  1995                  1994
                                                                      ----                  ----                  ----
<S>                                                                 <C>                   <C>                   <C>    
Written premiums ceded                                              $55,965               $33,166               $28,692
Written premiums assumed                                              1,873                 1,684                 1,973

Earned premiums ceded                                                38,723                38,013                35,051
Earned premiums assumed                                               6,020                 2,759                 7,059

Loss and loss adjustment expense payments
   ceded                                                             29,408                 3,060                 1,483
Loss and loss adjustment expense payments
   assumed                                                                3                     3                     3

Incurred losses and loss adjustment expenses ceded                   (2,249)                9,101                56,895
Incurred losses and loss adjustment expenses
   assumed                                                               38                    81                   137
</TABLE>

                                                             December 31,
                                                             ------------
                                                      1996             1995
                                                      ----             ----

Principal outstanding ceded                       $20,292,615      $14,355,664
Principal outstanding assumed                       1,995,752        2,347,122

Deferred premium revenue ceded                        151,224          133,548
Deferred premium revenue assumed                       18,929            5,027

Loss and loss adjustment expense reserves ceded        29,875           61,532
Loss and loss adjustment expense reserves assumed         705              670


                                       17
<PAGE>

13.  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, 1996 and 1995 (net of amounts ceded to other
insurers of $9,601 and $6,093 of asset-backed and $10,691 and $8,263 of
municipal, respectively) and the terms to maturity are as follows:

<TABLE>
<CAPTION>

                                                December 31, 1996                    December 31, 1995
                                                -----------------                    -----------------
Terms to Maturity                         Asset-Backed        Municipal       Asset-Backed        Municipal
-----------------                         ------------        ---------       ------------        ---------

<C>                                          <C>              <C>                <C>              <C>    
0 to 5 Years                                  $ 7,424          $ 1,571            $ 5,931          $ 3,293
5 to 10 Years                                   3,920            3,841              3,679            4,713
10 to 15 Years                                  1,461            6,272              1,183            4,299
15 to 20 Years                                    714           11,433                423            6,986
20 Years and Above                              9,681           12,877              5,847            9,625
                                              -------          -------            -------          -------

                    Total                     $23,200          $35,994            $17,063          $28,916
                                              =======          =======            =======          =======
</TABLE>

     The principal amount ceded as of December 31, 1996 and 1995 and the terms
to maturity are as follows (in millions):
<TABLE>
<CAPTION>

                                                December 31, 1996                    December 31, 1995
                                                -----------------                    -----------------
Terms to Maturity                         Asset-Backed        Municipal       Asset-Backed        Municipal
-----------------                         ------------        ---------       ------------        ---------

<C>                                          <C>              <C>                <C>              <C>    

0 to 5 Years                                 $3,695           $    769           $2,297            $1,103
5 to 10 Years                                 2,413              1,192            1,503             1,775
10 to 15 Years                                  452              1,479              403             1,020
15 to 20 Years                                  302              2,345              126             1,514
20 Years and Above                            2,739              4,906            1,764             2,851
                                             ------           --------           ------            ------

                    Total                    $9,601            $10,691           $6,093            $8,263
                                             ======            =======           ======            ======
</TABLE>

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

<TABLE>
<CAPTION>
                                                                   Net of Amounts Ceded                     Ceded
                                                                      December 31,                        December 31,
                                                                      ------------                        ------------

Types of Collateral                                                1996             1995              1996           1995
-------------------                                                ----             ----              ----           ----

<S>                                                              <C>             <C>                 <C>            <C>   
Residential mortgages                                            $10,987         $  6,740            $3,077         $1,909
Consumer receivables                                               7,548            5,105             3,735          1,320
Government securities                                              1,477            1,651               449            263
Pooled corporate obligations                                       1,663            1,819               852            732
Commercial mortgage portfolio:
   Commercial real estate                                            113              148               463            640
   Corporate secured                                                  66               98               619            801
Investor-owned utility obligations                                   791              821               266            292
Other asset-backed obligations                                       555              681               140            136
                                                                 -------         --------            ------         ------

            Total asset-backed obligations                       $23,200          $17,063            $9,601         $6,093
                                                                 =======          =======            ======         ======
</TABLE>

                                       18
<PAGE>

     The asset-backed insured portfolio, which aggregated $32.8 billion
principal before reinsurance at December 31, 1996, was collateralized by assets
with an estimated fair value of $38.3 billion. At December 31, 1995, it
aggregated $23.2 billion principal before reinsurance and was collateralized by
assets with an estimated fair value of $28.0 billion. Such estimates of the
collateral's fair value, which is reduced as exposure expires, are based upon
information at the inception of the insurance policy. At December 31, 1996, the
estimated fair value of collateral and reserves over the principal insured
averaged from 100% for commercial real estate to 168% for corporate secured
obligations. At December 31, 1995, the estimated fair value of collateral and
reserves over the principal insured averaged from 100% for commercial real
estate to 164% 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 Issues                                                   1996             1995              1996           1995
---------------                                                   ----             ----              ----           ----

<S>                                                              <C>             <C>                 <C>            <C>   
General obligation bonds                                         $12,523         $  8,738          $  2,423          $1,764
Housing revenue bonds                                              1,794            1,674             1,033             685
Municipal utility revenue bonds                                    4,671            3,873             1,472           1,107
Health care revenue bonds                                          2,854            2,587             2,049           1,718
Tax-supported bonds (non-general obligation)                       8,805            7,090             2,152           1,741
Transportation revenue bonds                                       1,479            1,365               436             293
Other municipal bonds                                              3,868            3,589             1,126             955
                                                                 -------         --------          --------          ------

              Total municipal obligations                        $35,994          $28,916           $10,691          $8,263
                                                                 =======          =======           =======          ======
</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, 1996:

<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                                     337             $ 5,669                     15.8%               $ 1,091
Florida                                         96               2,189                      6.1                    772
New York                                       218               3,508                      9.7                  1,733
Pennsylvania                                   157               2,106                      5.9                    551
New Jersey                                     175               1,733                      4.8                    461
Louisiana                                       81                 908                      2.5                    379
Michigan                                       118               1,145                      3.2                    361
Minnesota                                      113               1,080                      3.0                    102
Massachusetts                                   84               1,093                      3.0                    393
Illinois                                       193               1,320                      3.7                    210
Texas                                          248               1,804                      5.0                    412
Wisconsin                                      114                 762                      2.1                    186
All Other States                               923              11,698                     32.5                  3,413
Non-U.S.                                        26                 979                      2.7                    627
                                             -----             -------                     ----                -------

             Total                           2,883             $35,994                    100.0%               $10,691
                                             =====             =======                    =====                =======
</TABLE>


                                    19
<PAGE>

14.  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, 1996 and 1995
are $4,205,000 and $3,322,000, respectively, for unsettled expense allocations
due from the Parent.

     The Company ceded premiums of $19,890,000, $13,061,000 and $6,609,000 to
Tokio Marine for the years ended December 31, 1996, 1995 and 1994, respectively.
The amounts included in prepaid reinsurance premiums at December 31, 1996 and
1995 for reinsurance ceded to Tokio Marine were $44,634,000 and $33,382,000,
respectively. Reinsurance recoverable on unpaid losses ceded to Tokio Marine was
$477,000 and $323,000 at December 31, 1996 and 1995, respectively.

     The Company ceded premiums of $15,409,000, $7,522,000 and $9,390,000 on a
quota share basis to affiliates of U S WEST for the years ended December 31,
1996, 1995 and 1994, respectively, of which $372,000, $629,000 and $1,838,000,
respectively, were ceded to Commercial Reinsurance Company (Commercial Re). The
amounts included in prepaid reinsurance premiums for reinsurance ceded to these
affiliates were $49,649,000 and $39,918,000 at December 31, 1996 and 1995,
respectively, of which $8,728,000 and $10,720,000, respectively, were ceded to
Commercial Re. The amounts of reinsurance recoverable on unpaid losses ceded to
these affiliates at December 31, 1996 and 1995 were $23,473,000 and $55,024,000,
respectively, of which $19,170,000 and $42,918,000, respectively, were ceded to
Commercial Re. The Commercial Re reinsurance agreement was subject to, and
received, the non-disapproval of the State of New York Insurance Department due
to its nature as an affiliate transaction. The Company has taken credit for the
reinsurance ceded to Commercial Re.

15.  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.

     Long-term bonds -- The carrying amount of long-term bonds represents fair
value. The fair value of long-term 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 and cash equivalents, 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 premium 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 


                                       20
<PAGE>

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, 1996                      December 31, 1995
                                                         -----------------                      -----------------
(In thousands)                                       Carrying        Estimated             Carrying          Estimated
                                                      Amount         Fair Value             Amount          Fair Value
                                                      ------         ----------             ------          ----------

<S>                                                  <C>              <C>                  <C>                <C>       
Assets:
   Long-term bonds                                   $1,068,677       $1,068,677           $1,036,382         $1,036,382
   Short-term investments                                39,570           39,570               14,568             14,568
   Cash and cash equivalents                             23,646           23,646               35,832             35,832
   Receivable for securities sold                                                               2,326              2,326

Liabilities:
   Deferred premium revenue, net of
      prepaid reinsurance premiums                      359,972          251,980              330,349            263,618
   Losses and loss adjustment expenses,
      net of reinsurance recoverable on
      unpaid losses                                      42,204           42,204               50,227             50,227
   Payable for investments purchased                     14,142           14,142                9,516              9,516

Off-balance-sheet instruments:
   Installment premiums                                                  102,988                                  82,212

</TABLE>

16.  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,
                                                                                -----------------------
                                                                     1996                  1995                  1994
                                                                     ----                  ----                  ----
<S>                                                              <C>                  <C>                     <C>    
   Balance at January 1                                           $111,759             $  91,130               $36,094
   Less reinsurance recoverable                                     61,532                55,491                    79
                                                                  --------             ---------               -------
   Net balance at January 1                                         50,227                35,639                36,015
   Incurred losses and loss adjustment expenses:
          Current year                                               5,300                 3,000                 3,024
          Prior years                                                1,574                 3,258
          Related to Merger                                                               15,400
   Paid losses and loss adjustment expenses:
          Current year                                                                                          (3,397)
          Prior years                                              (14,897)               (7,070)                   (3)
                                                                  --------             ---------               -------
   Net balance December 31                                          42,204                50,227                35,639
   Plus reinsurance recoverable                                     29,875                61,532                55,491
                                                                  --------             ---------               -------
        Balance at December 31                                    $ 72,079             $ 111,759               $91,130
                                                                  ========             =========               =======
</TABLE>

     In 1994, the Company increased its general reserve by $3,024,000 for
origination of new business and transferred $16,932,000 of the general reserve
to its case basis reserves for projected losses on certain transactions, the
majority of which are in its discontinued commercial mortgage portfolio.

                                       21
<PAGE>

     During 1995, the Company increased its general reserve by $6,258,000, of
which $3,000,000 was for originations of new business and $3,258,000 was to
reestablish the general reserve for transfers from general reserves to case
basis reserves. During 1995, the Company transferred $10,788,000 from its
general reserve to case basis reserves associated predominantly with certain
residential mortgage and timeshare receivables transactions. Also in December
1995, FSA recognized a one-time increase of $15,400,000 to the general reserve
to provide for the insured portfolio it had assumed in the Merger with CGC in a
manner consistent with the Company's reserving methodology. Prior to the Merger,
CGC did not maintain a general reserve. Giving effect to all the 1995 events,
the general reserve totaled $31,798,000 at December 31, 1995.

     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 the general reserve for transfers from general reserves 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.

     Reserves for losses and loss adjustment expenses are discounted at
risk-free rates. The amount of discount taken was approximately $17,944,000,
$15,276,000 and $14,588,000 at December 31, 1996, 1995 and 1994, respectively.

                                       22