SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

              |X|  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                   For the fiscal year ended December 31, 1998

                                       OR

              |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                         Commission File Number 1-12644

                   Financial Security Assurance Holdings Ltd.
             (Exact name of registrant as specified in its charter)

              New York                                   13-3261323
   (State or other jurisdiction of                    (I.R.S. Employer
    incorporation or organization)                   Identification No.)

               350 Park Avenue, New York, New York 10022 (Address
               of principal executive offices, including zip code)

                                 (212) 826-0100
              (Registrant's telephone number, including area code)

           Securities registered pursuant to Section 12(b) of the Act:

<TABLE>
<CAPTION>
                 Title of each class                     Name of each exchange on which registered
                 -------------------                     -----------------------------------------
<S>                                                          <C>
       Common Stock, par value $.01 per share                New York Stock Exchange, Inc.
7.375% Senior Quarterly Income Debt Securities Due 2097      New York Stock Exchange, Inc.
6.950% Senior Quarterly Income Debt Securities Due 2098      New York Stock Exchange, Inc.
</TABLE>

           Securities registered pursuant to Section 12(g) of the Act:
                                      None

      Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|

      Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|

      The aggregate market value of voting stock, excluding treasury shares,
held by non-affiliates of the registrant at March 11, 1999 was $1,609,291,128
(based upon the closing price of the registrant's shares on the New York Stock
Exchange on March 11, 1999, which was $53.875). For purposes of the foregoing,
only MediaOne Capital Corporation and Fund American Enterprises Holdings, Inc.
were deemed to be affiliates of the registrant.

      At March 11, 1999, there were outstanding 31,533,781 shares of Common
Stock, par value $0.01 per share, of the registrant (includes 1,360,159 shares
of Common Stock owned by a trust on behalf of the Company and excludes 742,520
shares of Common Stock actually held in treasury).

Documents Incorporated By Reference

      Portions of the registrant's Annual Report to Shareholders for the year
ended December 31, 1998 are incorporated by reference into Part II hereof.
Portions of the registrant's definitive Proxy Statement dated March 26, 1999 in
connection with the Annual Meeting of Shareholders to be held on May 13, 1999
are incorporated by reference into Part III hereof.

<PAGE>

                                TABLE OF CONTENTS

                                                                            Page

Item 1.  Business...........................................................   2

Item 2.  Properties.........................................................  23

Item 3.  Legal Proceedings..................................................  23

Item 4.  Submission of Matters to a Vote of Security Holders................  23

Item 5.  Market for Registrant's Common Equity and Related Stockholder 
           Matters..........................................................  24

Item 6.  Selected Financial Data............................................  24

Item 7.  Management's Discussion and Analysis of Financial Condition and 
           Results of Operations............................................  24

Item 7A. Qualitative and Quantitative Disclosures About Market Risk.........  24

Item 8.  Financial Statements and Supplementary Data........................  24

Item 9.  Changes in and Disagreements with Accountants on Accounting and
           Financial Disclosure.............................................  24

Item 10. Directors and Executive Officers of the Registrant.................  25

Item 11. Executive Compensation.............................................  25

Item 12. Security Ownership of Certain Beneficial Owners and Management.....  25

Item 13. Certain Relationships and Related Transactions.....................  25

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...  26


                                       1
<PAGE>

Item 1. Business.

General

      Financial Security Assurance Holdings Ltd. (the "Company"), through its
wholly owned subsidiary, Financial Security Assurance Inc. ("FSA"), is primarily
engaged in the business of providing financial guaranty insurance on
asset-backed and municipal obligations. The claims-paying ability of FSA is
rated "triple-A" by the major securities ratings agencies and obligations
dinsured by FSA are generally awarded "triple-A" ratings by reason of such
insurance. FSA was the first insurance company organized to insure asset-backed
obligations and has been a leading insurer of asset-backed obligations (based on
number of transactions insured) since its inception in 1985. FSA expanded the
focus of its business in 1990 to include financial guaranty insurance of
municipal obligations. For the year ended December 31, 1998, FSA had gross
premiums written of $319.3 million, of which 70% related to insurance of
municipal obligations and 30% related to insurance of asset-backed obligations.
At December 31, 1998, FSA had net insurance in force of $160.0 billion, of which
70% represented insurance of municipal obligations and 30% represented insurance
of asset-backed obligations. FSA is licensed to engage in the financial guaranty
insurance business in all 50 states, the District of Columbia and Puerto Rico.

      FSA owns FSA Insurance Company ("FSAIC"), which in turn owns Financial
Security Assurance International Ltd. ("FSA International"), Financial Security
Assurance (U.K.) Limited ("FSA-UK") and Financial Security Assurance of
Oklahoma, Inc. ("FSA Oklahoma"). FSA International is a Bermuda domiciled
insurance company that primarily provides financial guaranty insurance for
transactions outside United States and European markets as well as reinsurance
to FSA. FSA-UK is a United Kingdom domiciled insurance company that primarily
provides financial guaranty insurance for transactions in the United Kingdom and
other European markets. FSAIC is an Oklahoma domiciled insurance company that
primarily provides reinsurance to FSA. FSA Oklahoma ceased to be an operating
company in 1998. All such insurance company subsidiaries are wholly owned,
except that XL Capital Ltd owns a minority interest in FSA International as
described below.

      FSA Portfolio Management Inc. ("FSA Portfolio Management"), a wholly owned
subsidiary of the Company, is engaged in the business of managing the investment
portfolios of the Company and its affiliates.

      Transaction Services Corporation ("TSC"), a wholly owned subsidiary of the
Company, is engaged in the business of managing workout transactions within the
insured portfolios of the Company and its subsidiaries and of certain third
parties.

      When it commenced operations in 1985, the Company was owned by a number of
large insurance companies and other institutional investors. In 1989, the
Company was acquired by U S WEST Capital Corporation ("U S WEST"), which has
since changed its name to MediaOne Capital Corporation ("MediaOne"). MediaOne is
a subsidiary of MediaOne Group, Inc., with operations and investments in
domestic cable and broadband communications and international broadband and
wireless communication. In 1990, the Company established a strategic
relationship with The Tokio Marine and Fire Insurance Co. Ltd. ("Tokio Marine"),
which acquired a minority interest in the Company. Tokio Marine is a major
Japanese property and casualty insurance company.

      In 1994, the Company completed an initial public offering (the "IPO") of
common shares, at which time Fund American Enterprises Holdings, Inc. (together
with its wholly owned subsidiaries, "Fund American") made an investment in the
Company and entered into certain agreements providing, among other things, Fund
American certain rights to acquire additional shares of the Company from the
Company and MediaOne. Pursuant to these agreements, the Company issued to Fund
American 2,000,000 shares of Series A non-dividend paying voting convertible
preferred stock having a liquidation preference of $700,000. Fund American
primarily operates businesses in insurance and mortgage banking.

      In 1998, the Company and XL Capital Ltd ("XL") entered into a joint
venture, establishing two Bermuda domiciled financial guaranty insurance
companies--FSA International and XL Financial Assurance Ltd ("XLFA"). XL owns a
minority interest in FSA International and the Company owns a minority interest
in XLFA. In connection with such joint ventures, XL acquired an interest in the
Company and the Company acquired an interest in XL. XL is a major Bermuda
insurance company.

      At December 31, 1998, voting control of the Company was held 32.0% by
MediaOne, 23.1% by Fund American, 6.1% by Tokio Marine, 5.1% by XL and 33.7% by
the public and employees. MediaOne has previously 


                                       2
<PAGE>

announced its intention to dispose of its remaining interest in the Company as
part of its strategic plan to withdraw from businesses not directly involved in
telecommunications. Most of the Company's shares owned by MediaOne are either
subject to stock options held by Fund American or potentially deliverable in
satisfaction of DECS (Debt Exchangeable for Common Stock) securities issued by
MediaOne and maturing in May 1999.

      The principal executive offices of the Company are located at 350 Park
Avenue, New York, New York 10022. Subsidiaries of the Company also maintain
offices domestically in San Francisco and Dallas and abroad in London,
Singapore, Bermuda, Paris, Tokyo, Sydney and Madrid.

Industry Overview

      Financial guaranty insurance written by FSA typically guarantees scheduled
payments on an issuer's obligations. Upon a payment default on an insured
obligation, FSA 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. FSA's underwriting
policy is to insure asset-backed and municipal obligations that would otherwise
be investment grade without the benefit of FSA's insurance. Asset-backed
obligations insured by FSA are generally issued in structured transactions
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. Municipal obligations insured by FSA consist primarily of general
obligation bonds supported by the issuers' taxing power and special revenue
bonds and other special obligations of state and local governments supported by
the issuers' ability to impose and collect fees and charges for public services
or specific projects.

      The Company's business objective is to remain a leading insurer of
asset-backed and municipal obligations. The Company believes that the demand for
its financial guaranty insurance will grow over the long term in response to
anticipated growth in insured asset-backed and municipal obligations. The
Company expects continued growth in the insurance of asset-backed obligations,
due in part to the continued expansion of asset securitization outside of the
residential mortgage sector. In the long term, the Company also expects
continued growth in the insurance of municipal obligations, due in part to
increased issuance of municipal bonds to finance repairs and improvements to the
nation's infrastructure and increased municipal bond purchases by individuals
who generally purchase insured obligations. In addition, the percentage of new
domestic municipal bond volume which is insured has increased each year since
1986, to 50.8% for the year ending 1998 according to published sources.
Financial guaranty insurance has also begun to be applied to obligations of
municipal issuers located outside of the United States.

      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. In addition to its domestic business, the
Company selectively pursues international opportunities and currently operates
in the European and Asia Pacific markets.

Business of FSA

General

      The business of FSA is managed by its Management Committee, comprised of
its Chairman, President, Chief Operating Officer, Chief Underwriting Officer,
General Counsel and Chief Financial Officer. FSA is primarily engaged in the
business of writing financial guaranty insurance on asset-backed obligations as
described below.

Asset-Backed Obligations

      Asset-backed obligations are typically issued in connection with
structured financings or securitizations, in which the securities being issued
are secured by or payable from a specific pool of assets having an ascertainable
cash flow or market value and held by a special purpose issuing entity. While
most asset-backed obligations are secured by or represent interests in diverse
pools of assets, such as residential mortgage loans, auto loans and credit card
receivables, monoline financial guarantors also insure asset-backed obligations
secured by less diverse payment sources, such as utility mortgage bonds and
multifamily real estate.

      In general, asset-backed obligations are payable from cash flow generated
by a pool of assets and take the form of either "pass-through" obligations,
which represent interests in the related assets, or "pay-through" obligations,
which generally are debt obligations collateralized by the related assets. Both
types of asset-backed 


                                       3
<PAGE>

obligations generally have the benefit of overcollateralization, excess cash
flow or one or more forms of credit enhancement to cover credit risks associated
with the related assets.

      The following table sets forth certain industry information relating to
selected asset-backed obligations for the periods indicated:

                          New Asset-Backed Obligations

<TABLE>
<CAPTION>
                                                                               Asset-Backed
                  Volume of                                 Combined              Volume
                Private-Label       Volume of Other          Volume             Insured by
                 Residential            Public                 of                Monoline
                   Mortgage          Asset-Backed          Asset-Backed         Insurance
                Obligations(1)      Obligations(2)        Obligations(3)       Companies(4)
                --------------      --------------        --------------       ------------
                                          (dollars in billions)
<S>                <C>                  <C>                 <C>                   <C>   
1991..........    $ 49.3               $ 50.6               $  99.9               $  9.8
1992..........      89.5                 51.1                 140.6                 10.3
1993..........      98.5                 61.0                 159.5                 21.4
1994..........      63.2                 75.5                 138.7                 24.7
1995..........      37.0                108.0                 145.0                 44.7
1996..........      38.4                151.1                 189.5                 74.5
1997..........      63.3                176.0                 239.5                 92.6
1998..........     132.7                178.8                 311.5                N/A(5)
</TABLE>

----------
(1)   Information is from Inside Mortgage Securities, January 8, 1993, January
      14, 1994, January 20, 1995, February 2, 1996, and Inside MBS & ABS,
      February 14, 1997, January 16, 1998, and January 8, 1999, and includes all
      U.S. public and rated private residential first mortgage-backed
      transactions, except obligations issued or guaranteed by government
      related entities.
(2)   Information is from Asset Sales Report, January 18, 1993, January 25,
      1993, January 10, 1994, January 9, 1995, January 22, 1996, January 27,
      1997, January 5, 1998, and March 1 , 1999 and includes all U.S. public
      asset-backed obligations (other than commercial paper transactions) backed
      by consumer receivables (including home equity loans), pooled corporate
      obligations and commercial mortgages.
(3)   Combined volume excludes: (i) private placement non-residential
      asset-backed obligations, (ii) asset-backed commercial paper, and (iii)
      non-U.S. obligations.
(4)   Information is based on data provided by the Association of Financial
      Guaranty Insurors (AFGI).
(5)   Not available.

      The data set forth in the table above excludes privately placed
non-residential mortgage transactions as well as non-domestic issues. As a
result, the table omits information regarding most "collateralized debt
obligation" securitizations, which represented a significant sector in the
insured asset-backed market in 1998.

      The issuance of asset-backed obligations of the type included in the table
experienced substantial growth in each year from 1991 to 1998, with the
exception of 1994. The combined volume of such asset-backed obligations grew
from $99.9 billion in 1991 to $311.5 billion in 1998.

      The largest single component of public, non-residential asset-backed
obligations was credit card securitizations in 1991, automobile loan
securitizations in 1992 and 1993, credit card securitizations in 1994, 1995 and
1996, and home equity loan securitizations in 1997 and 1998.

      The par value of new asset-backed obligations insured by monoline
financial guaranty insurance companies rose in every year from 1991 through
1997.

      The growth in the issuance of asset-backed obligations since 1991 has been
due in part to increased capital requirements of commercial banks and insurance
companies and the contraction of credit extended to corporations. Banks have
responded to increased capital requirements by selling certain of their assets,
such as credit card receivables and automobile loans, in securitized structures
to the financial markets. Moreover, many corporations have found securitization
of their assets to be a less costly funding alternative to traditional forms of
borrowing.

      Residential mortgage-backed issuance declined in 1994 because interest
rates rose, causing a reduction in mortgage loan refinancings and therefore in
the amount of new loan originations available for securitization. The decline
continued in 1995, as interest rates stabilized, and ended in 1996. Issuance
increased in 1997 and 1998 due 


                                       4
<PAGE>

to falling interest rates. In addition, a substantial amount of residential
first mortgage loans were securitized in the home equity loan sector of the
asset-backed market in 1996, 1997 and 1998.

      The demand for asset securitizations continues to deepen and broaden as
issuers securitize new classes of assets through increasingly complex
structures. Properly structured credit enhancements are often attractive in
providing market acceptability, liquidity and security.

Municipal Obligations

      Municipal obligations include bonds, notes and other evidences of
indebtedness issued by states and their political subdivisions (such as
counties, cities or towns), utility districts, public universities and
hospitals, public housing and transportation authorities and other public and
quasi-public entities. Municipal obligations are supported by the issuer's
taxing power in the case of general obligation bonds, or by the issuer's ability
to impose and collect fees and charges for public services or specific projects
in the case of most special revenue bonds.

      Insurance of municipal obligations represents the largest portion of the
financial guaranty insurance business. Since the early 1980s, insured municipal
obligation volume has grown substantially in terms of insurance in force, the
number of municipalities issuing insured obligations and the types of municipal
obligations that are insured. The percentage of municipal obligations insured
has also increased substantially. From 1989 to 1993, municipal issuance
increased each year. The low market interest rates which prevailed during 1993
resulted in record levels of new issuances and refundings of municipal bonds. As
expected, these record levels of issuances and refundings were not sustained
when interest rates increased. Consequently, the volume of issuances and
refundings of municipal bonds, and opportunities to write insurance for such
bonds, fell significantly in 1994 and modestly in 1995. Both total issuance and
refundings increased in 1996, 1997 and 1998, primarily because of lower interest
rates.

      The following table sets forth certain information regarding long-term
municipal obligations, issued during the periods indicated:

                        Insured Municipal Obligations(1)

<TABLE>
<CAPTION>
                                                                       New Insured
                                                                          Volume
                                               New          New         as Percent
                                              Total        Insured     of New Total
Year                                          Volume       Volume         Volume
----                                          ------       ------         ------
                                            (dollars in billions)
<S>                                          <C>          <C>              <C>  
1989.......................................  $125.0       $ 31.1           24.9%
1990.......................................   127.8         33.5           26.2
1991.......................................   172.4         51.9           30.1
1992.......................................   234.7         80.8           34.4
1993.......................................   292.2        107.9           36.9
1994.......................................   165.0         61.5           37.3
1995.......................................   160.0         68.5           42.8
1996.......................................   185.0         85.7           46.3
1997.......................................   220.7        107.5           48.7
1998.......................................   284.2        144.4           50.8
</TABLE>

----------
(1)   Information is based on data provided in The Bond Buyer, January 7, 1999.
      Volume is expressed in terms of principal insured.

Types of Products

      FSA's insurance is employed in both the new issue and secondary markets.
Insurance premium rates take into account the projected return to and risk
assumed by FSA. Critical factors in assessing risk include the credit quality of
the issuer, type of issue, sources of repayment, transaction structure and term
to maturity. Each obligation is evaluated on the basis of such factors and
subject to FSA's underwriting guidelines. The final premium rate is generally a
function of market factors, including the interest rate savings to the issuer
from the use of insurance.


                                       5
<PAGE>

      In the case of new issues, the insured obligations are sold with FSA
insurance at the time the obligations are issued. For both municipal and
asset-backed obligations, FSA participates in negotiated offerings, where the
investment banker and often the insurer have been selected by the sponsor or
issuer. In addition, FSA participates in competitive offerings, where
underwriting syndicates bid for securities and submit bids that may include
insurance.

      In the secondary market, FSA's Triple-A Guaranteed Secondary Securities
(TAGSS(R)) Program provides insurance for uninsured asset-backed obligations
trading in the secondary market. TAGSS-insured securities include
mortgage-backed securities and utility first mortgage bonds. Likewise, FSA's
Custody Receipt Program provides insurance for uninsured municipal obligations
trading in the secondary market. The insurance of obligations outstanding in the
secondary market generally affords a wider secondary market and therefore
greater marketability to a given issue of previously issued obligations. FSA's
underwriting guidelines require it to apply the same underwriting standards on
secondary market issues that it does on new security issues, although the
evaluation procedures are typically abbreviated.

      FSA insures guaranteed investment contracts ("GIC's"), GIC equivalents and
obligations under interest rate, currency and credit default swap transactions,
both alone and in connection with asset-backed and municipal transactions
employing FSA insurance. FSA writes portfolio insurance for securities held by
investment funds, such as unit investment trusts and mutual funds. Such
insurance covers securities either while they are held by the fund or to their
maturity, whether or not held by the fund.

      FSA also issues surety bonds under its Sure-Bid(R) program, which provides
an alternative to issuers and financial advisors to traditional types of good
faith deposits on competitive municipal bond transactions.

      The following table indicates the percentages of par amount (net of
reinsurance) outstanding at December 31, 1998 and 1997 with respect to each type
of asset-backed and municipal program:

            Net Par Amount and Percentage Outstanding by Program Type

<TABLE>
<CAPTION>
                                              December 31, 1998
                            ------------------------------------------------------
                               Asset-Backed Programs         Municipal Programs
                            --------------------------  --------------------------
                                             Percent
                                                of                     Percent of
                                            Total Net       Net         Total Net
                                 Net           Par          Par            Par
                             Par Amount       Amount       Amount         Amount
                            Outstanding    Outstanding  Outstanding    Outstanding
                            -----------    -----------  -----------    -----------
                                            (dollars in millions)
<S>                           <C>              <C>        <C>              <C>  
New Issue ..............      $34,972          93.4%      $59,986          90.9%
Secondary Market .......        2,432           6.5         6,020           9.1
Portfolio Insurance ....           19           0.1            --           0.0
                              -------         -----       -------         -----
    Total ..............      $37,423(1)      100.0%      $66,006(2)      100.0%
                              =======         =====       =======         =====

<CAPTION>
                                               December 31, 1997
                            ------------------------------------------------------
                               Asset-Backed Programs         Municipal Programs
                            --------------------------  --------------------------
                                             Percent
                                                of                     Percent of
                                            Total Net       Net         Total Net
                                 Net           Par          Par            Par
                             Par Amount       Amount       Amount         Amount
                            Outstanding    Outstanding  Outstanding    Outstanding
                            -----------    -----------  -----------    -----------
                                            (dollars in millions)
<S>                           <C>              <C>        <C>              <C>  
New Issue ..............      $26,989          95.5%      $39,976          87.6%
Secondary Market .......        1,244           4.4         5,652          12.4
Portfolio Insurance ....           26           0.1            --           0.0
                              -------         -----       -------         -----
    Total ..............      $28,259(1)      100.0%      $45,628(2)      100.0%
                              =======         =====       =======         =====
</TABLE>

----------
(1)   Excludes $200 million and $231 million par amount outstanding assumed by
      FSA under reinsurance agreements at December 31, 1998 and 1997,
      respectively.
(2)   Excludes $1,044 million and $1,361 million par amount outstanding assumed
      by FSA under reinsurance agreements at December 31, 1998 and 1997,
      respectively.


                                       6
<PAGE>

Insurance in Force

      FSA insures a variety of asset-backed obligations, including obligations
backed by residential mortgage loans, auto loans, other consumer receivables,
corporate bonds, bank loans, government debt and multifamily mortgage loans. FSA
has insured a broad array of municipal obligations. FSA has also insured
investor-owned utility first mortgage bonds. In 1990, FSA ceased writing
insurance backed by commercial mortgage loans, and today retains only minor net
insurance in force in that sector.

      FSA has selectively expanded its insured portfolio in a manner intended to
achieve diversification. At December 31, 1998, FSA and its subsidiaries had in
force 631 issues insuring approximately $46.9 billion in gross direct par amount
outstanding of asset-backed obligations and 4,768 issues insuring approximately
$89.3 billion in gross direct par amount outstanding of municipal obligations.
In addition, at December 31, 1998, FSA had assumed pursuant to certain
reinsurance contracts approximately $0.2 billion and $1.2 billion in par amount
outstanding on asset-backed and municipal obligations, respectively, resulting
in a total gross par amount outstanding of approximately $137.6 billion. At such
date, the total net par amount outstanding, determined by reducing the gross par
amount outstanding to reflect reinsurance ceded of approximately $32.9 billion,
was approximately $104.7 billion. Net par data does not distinguish between
quota share and first loss reinsurance. In light of FSA's increasing use of
first loss reinsurance in the asset-backed sector, net par data tends to
overstate FSA's net risk exposure. At December 31, 1998, the weighted average
life of the direct principal insured on these policies was approximately four
and thirteen years, respectively, for asset-backed and municipal obligations.

Asset-Backed Obligations

      FSA's insured portfolio of asset-backed obligations is divided into seven
major categories:

      Residential Mortgages. Obligations primarily backed by residential
mortgages generally take the form of conventional pass-through certificates or
pay-through debt securities, but also include commercial paper obligations and
other highly structured products. Residential mortgages backing these insured
obligations include closed-end first mortgages and closed- and open-end second
mortgages or home equity loans on one-to-four family residential properties,
including condominiums and cooperative apartments.

      Consumer Receivables. Obligations primarily backed by consumer receivables
include conventional pass-through and pay-through securities as well as more
highly structured transactions. Consumer receivables backing these insured
obligations include automobile loans and leases, manufactured housing loans and
credit card receivables.

      Government Securities. Obligations primarily backed by government
securities include insured investment funds that invest in government securities
and insured bonds backed by letters of credit or repurchase agreements
collateralized by government securities. Government securities include full
faith and credit obligations of the United States and obligations of public and
quasi-public agencies of the United States, such as the Federal National
Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation
("Freddie Mac"), as well as obligations of non-U.S. sovereigns.

      Pooled Corporate Obligations. Obligations primarily backed by pooled
corporate obligations include obligations collateralized by corporate debt
securities or corporate loans and obligations backed by cash flow or market
value of non-consumer indebtedness, and include "collateralized bond
obligations" and "collateralized loan obligations". Corporate obligations
include corporate bonds, bank loan participations, trade receivables, franchise
loans and equity securities.

      Investor-Owned Utility Obligations. Obligations backed by investor-owned
utilities include, most commonly, first mortgage bond obligations of for-profit
electric or water utilities providing retail, industrial and commercial service,
and also include sale-leaseback obligation bonds supported by such entities. In
each case, these bonds are secured by a mortgage on property owned by or leased
to an investor-owned utility.


                                       7
<PAGE>

      Commercial Mortgage Portfolio. FSA ceased writing insurance in this sector
in 1990. Obligations backed by commercial mortgages include (a) commercial real
estate obligations primarily backed by commercial real estate, including hotel
properties, office buildings and warehouses, and secured by property cash flow,
property values, first loss letters of credit, cash reserves and other means and
(b) corporate secured obligations secured by mortgages on properties leased to
one or more affiliated corporate tenants, and supported primarily by lease cash
flow and secondarily by property values.

      Other Asset-Backed Obligations. Other asset-backed obligations insured by
FSA include bonds or other securities backed by a combination of assets that
include elements of more than one of the categories set forth above.

Municipal Obligations

      FSA's insured portfolio of municipal obligations is divided into seven
major categories:

      General Obligation Bonds. General obligation bonds are issued by states,
their political subdivisions and other municipal issuers, and are supported by
the general obligation of the issuer to pay from available funds and by a pledge
of the issuer to levy taxes sufficient in an amount to provide for the full
payment of the bonds to the extent other available funds are insufficient.

      Housing Revenue Bonds. Housing revenue bonds include both multifamily and
single family housing bonds, with multi-tiered security structures based on the
underlying mortgages, reserve funds, and various other features such as Federal
Housing Administration or private mortgage insurance, bank letters of credit,
and, in some cases, the general obligation of the issuing housing agency or a
state's "moral obligation" (that is, not a legally binding commitment) to make
up deficiencies.

      Municipal Utility Revenue Bonds. Municipal utility revenue bonds include
obligations of all forms of municipal utilities, including electric, water and
sewer utilities. Insurable utilities may be organized as municipal enterprise
systems, authorities or joint-action agencies.

      Health Care Revenue Bonds. Health care revenue bonds include both
long-term maturities for capital construction or improvements of health care
facilities and medium-term maturities for equipment purchase.

      Tax-Supported (Non-General Obligation) Bonds. Tax-supported (non-general
obligation) bonds include a variety of bonds that, though not general
obligations, are supported by the taxing ability of the issuer, such as
tax-backed revenue bonds and lease revenue bonds. Tax-backed revenue bonds may
be secured by a first lien on pledged tax revenues, such as those from special
taxes, including those on retail sales and gasoline, or from tax increments (or
tax allocations) generated by growth in property values within a district. FSA
also insures bonds secured by special assessments, levied against property
owners, which benefit from covenants by the district to levy, collect and
enforce collections and to foreclose on delinquent properties. Lease revenue
bonds or certificates of participation (COPs) may be secured by long-term
obligations or by lease obligations subject to annual appropriation. The
financed project is generally real property or equipment that, in the case of
annual appropriation leases, FSA deems to serve an essential public purpose
(e.g., schools, prisons, courts) or, in the case of long-term leases, is
insulated from the risk of abatement resulting from nontenantability.

      Transportation Revenue Bonds. Transportation revenue bonds include a wide
variety of revenue-supported bonds, such as bonds for airports, ports, tunnels,
parking facilities, toll roads and toll bridges.

      Other Municipal Bonds. Other municipal bonds insured by FSA include
college and university revenue bonds, moral obligation bonds, resource recovery
bonds and debt issued, guarantied or otherwise supported by non-domestic
national or local governmental entities.

      A summary of FSA's insured portfolio at December 31, 1998 is shown below.
Please note that exposure amounts are expressed net of reinsurance but do not
distinguish between quota share reinsurance and first loss reinsurance. In
recent years, FSA has tended to employ quota share reinsurance in the municipal
sector and first loss reinsurance in the asset-backed sector.


                                       8
<PAGE>

                Summary of Insured Portfolio at December 31, 1998

<TABLE>
<CAPTION>
                                        Number                                
                                          of                                    Percent
                                        Issues       Net Par         Net        of Net
                                          In         Amount        Par and      Par and
                                         Force     Outstanding     Interest     Interest
                                       --------    -----------     --------     --------
                                                       (dollars in millions)
<S>                                       <C>        <C>           <C>           <C>   
Asset-backed obligations
  Residential mortgages .........           339      $ 15,647      $ 20,694       12.9%
  Consumer receivables ..........           154        12,539        13,651        8.5
  Government securities .........            30           821         1,345        0.8
  Pooled corporate obligations ..            51         6,776         9,155        5.7
  Investor-owned utility
  obligations ...................            40           757         1,592        1.0
  Commercial mortgage portfolio .             9            57            69        0.0
  Other asset-backed obligations              8         1,026         1,164        0.9
                                       --------      --------      --------      -----
    Total asset-backed
    obligations .................           631        37,623        47,670       29.8
                                       --------      --------      --------      -----
Municipal obligations
  General obligation bonds ......         2,811        25,337        39,665       24.8
  Housing revenue bonds .........           229         2,509         5,066        3.2
  Municipal utility revenue bonds           492         9,218        15,772        9.9
  Health care revenue bonds .....           139         5,812        10,473        6.5
  Tax-supported (non-general
    obligation) bonds ...........           607        14,731        25,205       15.8
  Transportation revenue bonds ..            55         2,937         5,532        3.5
  Other municipal bonds .........           435         6,506        10,612        6.5
                                       --------      --------      --------      -----
    Total municipal obligations .         4,768        67,050       112,325       70.2
                                       --------      --------      --------      -----
        Total ...................         5,399      $104,673      $159,995      100.0%
                                       ========      ========      ========      =====
</TABLE>

Obligation Type

      The table below sets forth the relative percentages of net par amount
written of obligations insured by FSA by obligation type during each of the last
five years:

                 Annual New Business Insured by Obligation Type

<TABLE>
<CAPTION>
                                                Year Ended December 31,
                                      --------------------------------------------
                                      1998      1997      1996      1995      1994
                                      ----      ----      ----      ----      ----
<S>                                    <C>       <C>       <C>       <C>       <C>
Asset-backed obligations
  Residential mortgages ........       16%       19%       29%       26%       25%
  Consumer receivables .........       16        24        25        29        23
  Government securities ........        0         2         1         0         0
  Pooled corporate obligations .       10        10         1        10         4
  Commercial mortgage portfolio         0         0         0         0         0
  Investor-owned utility
  obligations ..................        0         0         0         0         2
  Other asset-backed obligations        2         0         2         1         2
                                      ---       ---       ---       ---       ---
    Total asset-backed
    obligations ................       44        55        58        66        56
                                      ---       ---       ---       ---       ---
Municipal obligations
  General obligations bonds ....       22        18        20        11        12
  Housing revenue bonds ........        2         1         1         2         1
  Municipal utility revenue
  bonds ........................        9         2         4         4         8
  Health care revenue bonds ....        6         4         2         3         4
  Tax-supported (non-general
    obligation) bonds ..........       10        10         9         6        11
  Transportation revenue bonds .        2         2         1         6         1
  Other municipal bonds ........        5         8         5         2         7
                                      ---       ---       ---       ---       ---
    Total municipal obligations        56        45        42        34        44
                                      ---       ---       ---       ---       ---
        Total ..................      100%      100%      100%      100%      100%
                                      ===       ===       ===       ===       ===
</TABLE>


                                       9
<PAGE>

Terms to Maturity

      The table below sets forth the estimated terms to maturity of FSA's
policies at December 31, 1998 and 1997:

        Estimated Terms to Maturity of Net Par of Insured Obligations(1)

<TABLE>
<CAPTION>
                                  December 31, 1998           December 31, 1997
                                ---------------------       ---------------------
                                                 (in millions)
        Estimated               Asset-                      Asset-
     Term to Maturity           Backed      Municipal       Backed      Municipal
     ----------------           ------      ---------       ------      ---------
<S>                            <C>           <C>           <C>           <C>    
0 to 5 Years ...........       $ 8,468       $ 2,756       $ 7,553       $ 2,230
5 to 10 Years ..........         7,516         7,495         5,637         5,683
10 to 15 Years .........         5,661        12,427         2,858         8,257
15 to 20 Years .........           670        20,265           524        14,340
20 Years and Above .....        15,308        24,107        11,917        16,479
                               -------       -------       -------       -------
  Total ................       $37,623       $67,050       $28,489       $46,989
                               =======       =======       =======       =======
</TABLE>

----------
(1)   Based on estimates made by the issuers of the insured obligations as of
      the original issuance dates of such obligations. Actual maturities could
      differ from contractual maturities because borrowers have the right to
      call or prepay certain obligations with or without call or prepayment
      penalties.

Issue Size

      The tables below set forth information with respect to the original net
par amount of insurance written per issue insured by FSA at December 31, 1998:

              Asset-Backed -- Original Net Par Amount Per Issue(1)

<TABLE>
<CAPTION>
                                                Percent                 Percent of
                                                  of                      Total
                                  Number         Total       Net Par     Net Par
       Original                     of          Number       Amount       Amount
    Net Par Amount               Policies     of Issues    Outstanding  Outstanding
    --------------               --------     ---------    -----------  -----------
                                                (dollars in millions)
<S>                                 <C>         <C>         <C>           <C>
Less than $10 million ......          477        37.3%      $   656         1.8%
$10 to $25 million .........          144        11.2         1,143         3.0
$25 to $50 million .........          151        11.8         1,801         4.8
$50 million or greater .....          508        39.7        33,823        90.4
                                  -------      ------       -------      ------
  Total ....................        1,280       100.0%      $37,423       100.0%
                                  =======      ======       =======      ======
</TABLE>

----------
(1)   Does not include $200 million net par amount outstanding assumed by FSA
      and its subsidiaries under reinsurance agreements.

                Municipal -- Original Net Par Amount Per Issue(1)

<TABLE>
<CAPTION>
                                                Percent                 Percent of
                                                  of                      Total
                                  Number         Total       Net Par     Net Par
       Original                     of          Number       Amount       Amount
    Net Par Amount               Policies     of Issues    Outstanding  Outstanding
    --------------               --------     ---------    -----------  -----------
                                                (dollars in millions)
<S>                                <C>          <C>          <C>          <C>   
Less than $10 million ........     6,644         75.9%       $18,190       27.6%
$10 to $25 million ...........     1,252         14.3         13,156       19.9
$25 to $50 million ...........       427          4.9          9,782       14.8
$50 million or greater .......       434          4.9         24,878       37.7
                                 -------        -----        -------      -----
  Total ......................     8,757        100.0%       $66,006      100.0%
                                 =======        =====        =======      =====
</TABLE>

----------
(1)   Does not include $1,044 million net par amount outstanding assumed by FSA
      and its subsidiaries under reinsurance agreements.


                                       10
<PAGE>

Geographic Concentration

      In its asset-backed business, FSA considers geographic concentration as a
factor in underwriting insurance covering securitizations of asset pools such as
residential mortgage loans or consumer receivables. However, after the initial
issuance of an insurance policy relating to such securitizations, the geographic
concentration of the underlying assets may change 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 considered to be a significant credit factor given other
more relevant measures of diversification such as issuer or industry
diversification.

      FSA seeks to maintain a diversified portfolio of insured municipal
obligations designed to spread its risk across a number of geographic areas. The
table below sets forth those jurisdictions in which municipalities issued an
aggregate of 2% or more of FSA's net par amount outstanding of insured municipal
securities:

                                    Municipal
                        Insured Portfolio by Jurisdiction
                              at December 31, 1998

<TABLE>
<CAPTION>
                                                                        Percent of
                                                                          Total
                                           Number         Net Par      Municipal Net
                                            of             Amount       Par Amount
       Jurisdiction                       Issues        Outstanding     Outstanding
       ------------                       ------        -----------     -----------
                                                   (dollars in millions)
<S>                                         <C>          <C>               <C>  
California ...................              517          $10,233           15.3%
New York .....................              388            5,836            8.7
Pennsylvania .................              356            4,821            7.2
Texas ........................              414            4,128            6.1
Florida ......................              130            4,091            6.1
New Jersey ...................              275            3,475            5.2
Illinois .....................              359            3,125            4.7
Massachusetts ................              126            2,259            3.4
Michigan .....................              217            2,161            3.2
Wisconsin ....................              252            1,685            2.5
Indiana ......................              103            1,461            2.2
Minnesota ....................              146            1,340            2.0
All other states .............            1,453           20,993           31.3
Non-U.S ......................               32            1,442            2.1
                                        -------          -------          -----
    Total ....................            4,768          $67,050          100.0%
                                        =======          =======          =====
</TABLE>

Issuer Concentration

      FSA has adopted underwriting and exposure management policies designed to
limit the net par insured for any one credit. In many cases, FSA uses
reinsurance to limit net exposure to any one credit. At December 31, 1998,
insurance of asset-backed obligations constituted 35.9% of FSA's net par
outstanding and insurance of municipal obligations constituted 64.1% of FSA's
net par outstanding. At such date, FSA's ten largest net insured asset-backed
transactions represented $6.2 billion, or 6.0%, of its total net par amount
outstanding, and FSA's ten largest net insured municipal credits represented
$3.6 billion, or 3.5%, of its total net par amount outstanding. For purposes of
the foregoing, different issues of asset-backed securities by the same sponsor
have not been aggregated. FSA has, however, adopted underwriting policies
establishing single risk guidelines applicable to asset-backed securities of the
same sponsor. FSA is also subject to certain regulatory limits and rating agency
guidelines on exposure to single credits.

      The following tables set forth the net par amount outstanding of FSA's
insurance for the ten largest asset-backed transactions and municipal credits
insured by FSA at December 31, 1998. Please note that exposure amounts are
expressed net of reinsurance but do not distinguish between quota share
reinsurance and first loss reinsurance. In recent years, FSA has tended to
employ quota share reinsurance in the municipal sector and first loss
reinsurance in the asset-backed sector.


                                       11
<PAGE>

       Ten Largest Insured Asset-Backed Transactions at December 31, 1998

<TABLE>
<CAPTION>
                                                                               Net Par
                                                                                Amount
           Transaction                                 Asset Type            Outstanding
           -----------                                 ----------            -----------
                                                                            (in millions)
<S>                                              <C>                         <C>      
IMC Home Equity Loan Trust 1998-3...........     Residential Mortgages       $   816.5
New Century 1998 - NC5......................     Residential Mortgages           816.0
WFS Financial 1998-C........................     Consumer Receivables            652.5
New Century 1998 - NC7......................     Residential Mortgages           645.7
IMC Home Equity Loan Trust 1998-6...........     Residential Mortgages           604.3
PAMCO CLO Series 1997-1.....................     Pooled Corporate                577.1
Americredit 1998-D..........................     Consumer Receivables            545.0
WFS Financial 1998-B........................     Consumer Receivables            541.8
Norse CBO...................................     Pooled Corporate                530.5
Arcadia Auto Receivable Trust 1998-C........     Consumer Receivables            497.8
                                                                              --------
  Total.....................................                                  $6,227.2
                                                                              ========
</TABLE>

           Ten Largest Insured Municipal Credits at December 31, 1998

<TABLE>
<CAPTION>
                                                                              Net Par
                                                                               Amount
           Credit                               Obligation Type             Outstanding
           ------                               ---------------             -----------
                                                                           (in millions)
<S>                                             <C>                         <C>      
Long Island Power Authority.................    Utility Revenue              $  430.7
New York State Dormitory Agency.............    Tax-Supported                   413.7
Puerto Rico Electric Power Authority........    Utility Revenue                 389.5
New York City...............................    General Obligation              363.9
Puerto Rico Municipal Finance Agency........    Other Obligation                355.3
Washington State Public Power Supply System.    Utility Revenue                 344.0
State of New Jersey Pension Obligations.....    Tax-Supported                   338.2
Florida State Department of Natural Resources   Tax-Supported                   332.8
State of California.........................    General Obligation              323.2
New  York   City   Municipal   Water   Finance
Authority...................................    Utility Revenue                 316.6
                                                                             --------
  Total.....................................                                 $3,607.9
                                                                             ========
</TABLE>

Credit Underwriting Guidelines, Standards and Procedures

      Financial guaranty insurance written by FSA relies on an assessment of the
adequacy of various payment sources to meet debt service or other obligations in
a specific transaction without regard to premiums paid or income from investment
of premiums. FSA's underwriting policy is to insure asset-backed and municipal
obligations that it determines are investment grade without the benefit of FSA's
insurance. To this end, each policy written or reinsured by FSA is designed to
meet the general underwriting guidelines and specific standards for particular
types of obligations approved by its Board of Directors. In addition, the
Company's Board of Directors has established an Underwriting Committee which
periodically reviews completed transactions to ensure conformity with
underwriting guidelines and standards.

      FSA's underwriting guidelines for asset-backed obligations are premised on
the concept of multiple layers of protection, and vary by obligation type in
order to reflect different structures and credit support. In this regard,
asset-backed obligations insured by FSA are generally issued in structured
transactions and backed by pools of assets such as consumer or trade
receivables, residential mortgage loans, securities or other assets having an
ascertainable cash flow or market value. In addition, FSA seeks to insure
asset-backed obligations that generally provide for one or more forms of
overcollateralization (such as excess collateral value, excess cash flow or
"spread," or reserves) or third-party protection (such as bank letters of
credit, guarantees, net worth maintenance agreements, indemnity agreements or
reinsurance agreements). This overcollateralization or third-party protection
need not indemnify FSA against all loss, but is generally intended to assume the
primary risk of financial loss. Overcollateralization or third-party protection
may not, however, be required in transactions in which FSA is insuring the
obligations of certain 


                                       12
<PAGE>

highly rated issuers that typically are regulated, have implied or explicit
government support, or are short term, or in transactions in which FSA is
insuring bonds issued to refinance other bonds insured by FSA as to which the
issuer is or may be in default. FSA's general policy has been to insure 100% of
the principal, interest and other amounts due in respect of asset-backed insured
obligations rather than providing partial or first loss coverage sufficient to
convey a triple-A rating on the insured obligations.

      FSA's underwriting guidelines for municipal obligations require that the
municipal obligor be rated investment grade by Moody's Investors Service, Inc.
("Moody's") or Standard & Poor's Ratings Services ("S&P") or, in the
alternative, such obligor is considered by FSA to be the equivalent of
investment grade. Where the municipal obligor is a governmental entity with
taxing power or providing an essential public service paid by taxes, assessments
or other charges, supplemental protections may be required if such taxes,
assessments or other charges are not projected to provide sufficient debt
service coverage. Where appropriate, the municipal obligor is required to
provide a rate or charge covenant and a pledge of additional security (e.g.,
mortgages on real property, liens on equipment or revenue pledges) to secure the
obligation.

      The rating agencies participate to varying degrees in the underwriting
process. Each asset-backed obligation insured by FSA is reviewed prior to
issuance by both S&P and Moody's to evaluate the risk proposed to be insured. In
the case of municipal obligations, prior rating agency review is a function of
the type of the insured obligation and the risk elements involved. In addition,
substantially all transactions insured by FSA are reviewed by at least one of
the major rating agencies after issuance to confirm continuing compliance with
rating agency standards. The independent review of FSA's underwriting practices
performed by the rating agencies further strengthens the underwriting process.

      The underwriting process that implements these underwriting guidelines and
standards is supported by its professional staff of analysts, underwriting
officers, credit officers and attorneys. Moreover, the approval of senior
management is required for all transactions.

      Each underwriting group in the Financial Guaranty Department has a senior
underwriting officer responsible for confirming that each transaction proposed
by the Financial Guaranty Department conforms to the underwriting guidelines and
standards. The evaluation by the senior underwriting officer is reviewed by the
chief underwriting officer for the particular sector. This review may take place
while the transaction is in its formative stages, thus facilitating the
introduction of further enhancements at a stage when the transaction is more
receptive to change.

      Final transaction approval is obtained from FSA's Management Review
Committee for asset-backed transactions and from FSA's Municipal Underwriting
Committee for municipal transactions. Approval is usually based upon both a
written and an oral presentation by the underwriting group to the respective
committee. The Management Review Committee is comprised of FSA's Chief Executive
Officer, President, Chief Operating Officer, Chief Underwriting Officer, Chief
International Underwriting Officer and General Counsel. The Municipal
Underwriting Committee is comprised of FSA's Chief Executive Officer, President,
Chief Municipal Underwriting Officer, an Associate General Counsel for Municipal
Transactions and the Managing Director for Municipal Surveillance. Following
approval, minor transaction modifications may be approved by the Chairs of the
underwriting groups. Major changes require the concurrence of the appropriate
underwriting committee. Subject to applicable limits, secondary market and
partial maturity asset-backed transactions that meet certain credit and return
criteria may be approved by the Chief Underwriting Officer and the head of the
department involved, with a third signature from a member of the Management
Review Committee for larger transactions. Subject to applicable limits,
municipal transactions that meet certain credit and return criteria may be
approved by a committee composed of the Chief Municipal Underwriting Officer or
the Head of Municipal Surveillance, an Associate General Counsel for Municipal
Transactions and any one of certain designated managing directors of the
Municipal Department.

Corporate Research

      FSA's Corporate Research Department is comprised of a professional staff
under the direction of the Chief Underwriting Officer. The Corporate Research
Department is responsible for evaluating the credit of entities participating or
providing recourse in obligations insured by FSA. The Corporate Research
Department also provides analysis of relevant industry segments. Members of the
Corporate Research Department generally report their findings directly to the
appropriate underwriting committee in the context of transaction review and
approval.


                                       13
<PAGE>

Transaction Oversight and Transaction Services

      FSA's Transaction Oversight Departments and Transaction Services
Corporation ("TSC") are independent of the analysts and credit officers involved
in the underwriting process. The Asset-Backed and Municipal Transaction
Oversight Departments are responsible for monitoring the performance of
outstanding transactions. TSC, together with the Transaction Oversight
Departments, is responsible for taking remedial actions as appropriate. The
managing directors responsible for the transaction oversight and transaction
services functions report to an Oversight Committee comprised of the Chairman,
the General Counsel, the Chief Underwriting Officer, the Chief Municipal
Underwriting Officer and the Chief Financial Officer. The Transaction Oversight
Departments review each insured transaction to confirm compliance with
transaction covenants, monitor credit and other developments affecting
transaction participants and collateral, and determine the steps, if any,
required to protect the interests of FSA and the holders of FSA-insured
obligations. Reviews for asset-backed transactions typically include an
examination of reports provided by, and (as circumstances warrant) discussions
with, issuers, servicers, trustees and other transaction participants. Reviews
of asset-backed transactions often include servicer audits, site visits or
evaluations by third-party appraisers, engineers or other experts retained by
FSA. The Transaction Oversight Departments review each transaction to determine
the level of ongoing attention it will require. These judgments relate to
current credit quality and other factors, including compliance with reporting or
other requirements, legal or regulatory actions involving transaction
participants and liquidity or other concerns that may not have a direct bearing
on credit quality. Transactions with the highest risk profile are generally
subject to more intensive review and, if appropriate, remedial action. The
Transaction Oversight Departments and TSC work together with the Legal
Department and the Corporate Research Department in monitoring these
transactions, negotiating restructurings and pursuing appropriate legal
remedies.

Legal

      FSA's Legal Department is comprised of a professional staff of attorneys
and legal assistants under the direction of the General Counsel. The Legal
Department plays a major role in establishing and implementing legal
requirements and procedures applicable to obligations insured by FSA. Members of
the Legal Department serve on the Management Review Committee and the Municipal
Underwriting Committee, which provide final underwriting approval for
transactions. An attorney in the Legal Department works together with a
counterpart in the Financial Guaranty Department in determining the legal and
credit elements of each obligation proposed for insurance and in overseeing the
execution of approved transactions. Asset-backed obligations insured by FSA are
ordinarily executed with the assistance of outside counsel working closely with
the Legal Department. Municipal obligations insured by FSA are ordinarily
executed without employment of outside counsel. The Legal Department works
closely with the transaction oversight and transaction services functions in
addressing legal issues, rights and remedies, as well as proposed amendments,
waivers and consents, in connection with obligations insured by FSA. The Legal
Department is also responsible for domestic and international regulatory
compliance, reinsurance, secondary market transactions, litigation and other
matters.

Loss Reserves

      FSA establishes a case basis reserve for the present value of an estimated
loss when, in management's opinion, the likelihood of a future loss is probable
and determinable at the balance sheet date. A case basis reserve for a
particular insured obligation represents FSA's estimate of the present value of
the anticipated shortfall, net of reinsurance, between (i) scheduled payments on
the insured obligations plus anticipated loss adjustment expenses and (ii)
anticipated cash flow from and proceeds to be received on sales of any
collateral supporting the obligation.

      In addition to its case basis reserves, FSA maintains a general reserve in
order to account for unidentified risks inherent in its overall portfolio. FSA
does not consider traditional actuarial approaches used in the property/casualty
insurance industry to be applicable to the determination of its loss reserves
because of the absence of a sufficient number of losses in its financial
guaranty insurance activities and in the financial guaranty industry generally
to establish a meaningful statistical base. The general reserve amount was
calculated by applying a loss factor to the total net par amount of FSA's
insured obligations outstanding over the term of such insured obligations and
discounting the result at a risk-free rate. The loss factor used for this
purpose has been determined based upon an independent rating agency study of
bond defaults and FSA's portfolio characteristics and history. FSA will, on an
ongoing basis, monitor the general reserve and may periodically adjust such
reserve based on FSA's actual loss experience, its future mix of business and
future economic conditions. 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. To the extent that any such
future additions to case basis reserves are applied from the available general


                                       14
<PAGE>

reserve, there will be no impact on the Company's earnings for that period. To
the extent that additions to case basis reserves for any period exceed the
remaining available general reserve or are not applied from the general reserve,
the excess will be charged against the Company's earnings for that period. Any
addition to the general reserve which results from applying the loss factor to
new par written or from replenishing amounts applied against new case basis
reserves will result in a charge to earnings at that time. Amounts released from
the general reserve as a result of the runoff of existing net insurance in force
may be applied against additions to the general reserve required for new
business written.

      FSA maintains reserves in an amount believed by its management to be
sufficient to pay the present value of its estimated ultimate liability for
losses and loss adjustment expenses with respect to obligations it has insured.
At December 31, 1998 and 1997, FSA's net loss reserves totaled $60.0 million and
$44.8 million, respectively. During 1996, the Company increased its general
reserve by $6.9 million, of which $5.3 million was for new business originations
and $1.6 million was to reestablish the general reserve for transfers from the
general reserves to case basis reserves. During 1996, the Company transferred
$9.0 million from its general reserve to case basis reserves associated
predominantly with certain residential mortgage transactions. The general
reserve was $29.7 million at December 31, 1996. During 1997, the Company
increased its general reserve by $9.2 million, of which $5.4 million was for new
business originations and $3.8 million was to reestablish the general reserve
for transfers from the general reserves to case basis reserves. During 1997, the
Company transferred $4.5 million from its general reserve to case basis reserves
associated predominantly with certain residential mortgage transactions. The
general reserve was $34.3 million at December 31, 1997. During 1998, the Company
increased its general reserve by $3.9 million, of which $8.0 million was for
originations of new business offset by a $4.1 million decrease in the amount
needed to fund the general loss reserve because of recoveries on certain
commercial mortgage transactions. During 1998, the Company transferred $18.4
million to its general reserve from case basis reserves due to those recoveries
on commercial mortgage transactions. Also during 1998, the Company transferred
$9.4 million from its general reserve to case basis reserves associated
predominantly with certain consumer receivable transactions. Giving effect to
these transfers, the general reserve totaled $47.3 million at December 31, 1998.

      Reserves for losses and loss adjustment expenses are discounted at
risk-free rates. The amount of discount taken was approximately $16.0 million
and $19.8 million at December 31, 1998 and 1997, respectively.

      Since reserves are necessarily based on estimates and because of the
absence of a sufficient number of losses in its financial guaranty insurance
activities and in the financial guaranty insurance industry generally to
establish a meaningful statistical base, there can be no assurance that the case
basis reserves or the general reserve will be adequate to cover losses in FSA's
insured portfolio.

Competition and Industry Concentration

      FSA faces competition from both other providers of third party credit
enhancement and alternatives to third party credit enhancement. The majority of
asset-backed obligations and almost half of all municipal obligations are sold
without third party credit enhancement. Accordingly, each transaction proposed
to be insured by FSA must generally compete against an alternative execution
which does not employ third party credit enhancement. FSA also faces competition
from other monoline primary financial guaranty insurers, primarily Ambac
Assurance Corp. ("Ambac"), Financial Guaranty Insurance Company ("FGIC") and
MBIA Insurance Corp. ("MBIA"). There has been consolidation in the financial
guaranty industry, with Capital Markets Assurance Corp. being acquired by MBIA
and Connie Lee Insurance Company being acquired by Ambac. As a result of this
consolidation, FSA is now the smallest of the major primary financial guaranty
insurers in terms of statutory capital. Traditional credit enhancers such as
bank letter of credit providers and mortgage pool insurers also provide
significant competition to FSA as providers of credit enhancement for
asset-backed obligations. While actions by securities rating agencies in recent
years have significantly reduced the number of triple-A rated banks that can
offer a product directly competitive with FSA's triple-A guaranty, and
risk-based capital guidelines applicable to banks have generally increased costs
associated with letters of credit that compete directly with financial guaranty
insurance, bank sponsored commercial paper conduits, bank letter of credit
providers and other credit enhancement, such as cash collateral accounts,
provided by banks, continue to provide significant competition to FSA. In
addition, government sponsored entities, including FNMA and Freddie Mac, have
begun to compete with the monoline financial guaranty insurers in the
mortgage-backed and multifamily sectors.

      Insurance law generally restricts multiline insurance companies, such as
large property/casualty insurers and life insurers, from engaging in the
financial guaranty insurance business other than through separately capitalized


                                       15
<PAGE>

affiliates. Entry requirements include (i) assembling the group of experts
required to operate a financial guaranty insurance business, (ii) establishing
the triple-A claims-paying ability ratings with the credit rating agencies,
(iii) complying with substantial capital requirements, (iv) developing name
recognition and market acceptance with issuers, investment bankers and investors
and (v) organizing a monoline insurance company and obtaining insurance licenses
to do business in the applicable jurisdictions.

      FSA's net insurance in force is the outstanding principal, interest and
other amounts to be paid over the remaining life of all obligations insured by
FSA, net of ceded reinsurance and refunded bonds secured by United States
government securities held in escrow or other qualified collateral. Qualified
statutory capital, determined in accordance with statutory accounting
principles, is the aggregate of policyholders' surplus and contingency reserves
calculated in accordance with statutory accounting principles. Set forth below
are FSA's aggregate gross insurance in force, net insurance in force, qualified
statutory capital and leverage ratio (represented by the ratio of its net
insurance in force to qualified statutory capital) and the average industry
leverage ratio at the dates indicated. Net insurance data does not distinguish
between quota share reinsurance and first loss reinsurance. In light of FSA's
increased use of first loss reinsurance in the asset-backed sector, the data
below may tend to overstate FSA's risk leverage in comparison to its industry
counterparts.

<TABLE>
<CAPTION>
                                                                 December 31,
                                                         ------------------------------
                                                           1998       1997       1996
                                                           ----       ----       ----
                                                              (dollars in millions)
<S>                                                      <C>        <C>        <C>     
Financial guaranty primary insurers, excluding FSA (1)
  Leverage ratio .....................................     N/A(2)      149:1      151:1

FSA
  Gross insurance in force ...........................   $216,564   $158,020   $125,423
  Net insurance in force .............................   $159,995   $117,429   $ 93,704
  Qualified statutory capital ........................   $  1,038   $    782   $    676
  Leverage ratio .....................................      154:1      150:1      139:1
</TABLE>

----------
(1)   Financial guaranty primary insurers for which data is included in this
      table are Ambac, Capital Markets Assurance Corporation (1997 and 1996),
      Connie Lee Insurance Company (1996 only), FGIC and MBIA. Information
      relating to the financial guaranty primary insurers is derived from data
      from statutory accounting financial information publicly available from
      each insurer at December 31, 1997 and 1996.
(2)   Not available.

Reinsurance

      Reinsurance is the commitment by one insurance company, the "reinsurer,"
to reimburse another insurance company, the "ceding company," for a specified
portion of the insurance risks underwritten by the ceding company in
consideration for a portion of the premiums received. The ceding company
typically but not always receives ceding commissions to cover costs of business
generation. Because the insured party contracts for coverage solely with the
ceding company, the failure of the reinsurer to perform does not relieve the
ceding company of its obligation to the insured party under the terms of the
insurance contract.

Reinsurance Ceded

      FSA obtains reinsurance to increase its policy writing capacity, both on
an aggregate risk and a single risk basis, to meet state insurance regulatory,
rating agency and internal limits, diversify risks, reduce the need for
additional capital and strengthen financial ratios. At December 31, 1998, FSA
had reinsured approximately 24.2% of its direct principal amount outstanding.
Most of FSA's reinsurance is on a quota share or first-loss basis, with a small
portion being provided on an excess of loss basis. Reinsurance arrangements
typically require FSA to retain a minimum portion of the risks reinsured.

      FSA arranges reinsurance on both a facultative
(transaction-by-transaction) and treaty basis. Treaty reinsurance provides
coverage for a portion of the exposure from all qualifying policies issued
during the term of the treaty. In addition, FSA employs "automatic facultative"
reinsurance which permits FSA to apply reinsurance to transactions selected by
it subject to certain limitations. The reinsurer's participation in a treaty is
either cancelable annually upon 90 days' prior notice by either FSA or the
reinsurer or has a one-year term. In addition, the treaties are 


                                       16
<PAGE>

cancelable by FSA upon specified financial deterioration of the reinsurer. As
required by applicable state law, reinsurance agreements may be subject to
certain other termination conditions.

      Treaties generally provide coverage for the full term of the policies
reinsured during the annual treaty period, except that, upon a financial
deterioration of the reinsurer and the occurrence of certain other conditions,
FSA generally has the right to reassume all of the business reinsured.

      In 1998, FSA's principal ceded reinsurance program consisted of two quota
share treaties, one first-loss treaty and automatic facultative facilities. One
quota share treaty (the "asset-backed treaty") covered all of FSA's approved
regular lines of business, except municipal bond insurance. In 1998, FSA ceded
6.75% of each covered policy under this treaty, up to a maximum of $13.5 million
insured principal per single risk. At its sole option, FSA was entitled to
increase the ceding percentage to 13.5% up to $27 million insured principal per
single risk which is defined by revenue source. The other quota share treaty
(the "municipal treaty") covered FSA's municipal bond insurance business. In
1998, FSA ceded 6% of each covered policy under this treaty that is classified
by FSA as providing municipal bond insurance as defined by Article 69 of the
insurance laws of New York up to a limit of $16 million insured principal per
single risk. At its sole option, FSA was entitled to increase the ceding
percentage to 30% up to $80 million insured principal per single risk. These
cession percentages under both treaties were reduced on smaller-sized
transactions. Under the first-loss treaty, FSA ceded a portion of its first-loss
exposure under specified asset-backed transactions. Under the four automatic
facultative facilities in 1998, FSA at its option could allocate up to a
specified amount for each reinsurer (ranging from $4 million to $40 million
depending on the reinsurer) for each transaction, subject to limits and
exclusions, in exchange for which FSA agreed to cede in the aggregate a
specified percentage of gross par insured by FSA. The two quota share treaties
and automatic facultative facilities allow FSA to withhold a ceding commission
to defray expenses. In 1998, FSA also utilized facultative quota share
first-loss reinsurance on selected transactions.

      Primary insurers, such as FSA, are required to fulfill their obligations
to policyholders if reinsurers fail to meet their obligations. The financial
condition of reinsurers is therefore important to FSA, and FSA's reinsurance is
placed with high quality and financially strong reinsurers. FSA's treaty
reinsurers at December 31, 1998 were Asset Guaranty Insurance Company, AXA Re
Finance S.A., Capital Credit Reinsurance Company, Ltd., Capital Reinsurance
Company, Employers Reinsurance Company, Enhance Reinsurance Company, Tokio
Marine and XL Insurance Ltd. In 1998, four reinsurers participated in the
asset-backed quota share treaty and three reinsurers participated in the
municipal quota share treaty and five reinsurers participated in the first-loss
treaty.

      FSA, FSAIC, FSA Oklahoma and FSA International have entered into a quota
share reinsurance pooling agreement pursuant to which, after reinsurance
cessions to other reinsurers, the FSA companies share in the net retained risk
insured by each of these companies. Prior to November 1, 1998, FSA, FSAIC and
FSA Oklahoma shared the net retained risk in proportion to their policyholders'
surplus and contingency reserve ("Statutory Capital") as of December 31 of the
prior year (with the percentages adjusted commencing April 1 of each year)
through September 30, 1996 and each calendar quarter thereafter. For the quarter
commencing October 1, 1998, FSA retained 65.63%, FSAIC retained 23.53% and FSA
Oklahoma retained 10.84% of each policy issued by these companies after cessions
to all other reinsurers. Commencing November 1, 1998, FSA Oklahoma ceased to be
a party and FSA International became a party to the agreement, with FSA
International assuming 20% of the business covered by the agreement during a
"ramp-up" period subject to applicable single risk limits. For transactions in
1998 where FSA International retained 20%, FSA's and FSAIC's shares were 58.88%
and 21.12%, respectively. For transactions in 1998 where FSA, FSAIC and FSA
International shared the risk in proportion to their Statutory Capital, the
respective shares were 66.83% for FSA, 23.96% for FSAIC and 9.21% for FSA
International. Following the ramp-up period, FSA, FSAIC and FSA International
will share in business covered by the agreement approximately in proportion to
their Statutory Capital at the end of the prior calendar quarter. FSA-UK and FSA
have entered into a quota share and stop loss reinsurance agreement pursuant to
which (i) FSA-UK reinsures with FSA its retention under its policies after third
party reinsurance based on an agreed-upon percentage that is substantially in
proportion to the policyholders' surplus and contingency reserve of FSA-UK to
the total policyholders' surplus and contingency reserves of FSA and its
subsidiary insurers (including FSA-UK) and (ii) subject to certain limits, FSA
is required to make payments to FSA-UK when FSA-UK's loss ratio and expense
ratio exceeds 100%. Under this agreement, FSA-UK ceded to FSA approximately 98%
of its retention after other reinsurance of its policies issued in 1998.

      FSA is party to a quota share reinsurance agreement with Commercial
Reinsurance Company ("Commercial Re") pursuant to which Commercial Re assumed
approximately 64.4% of FSA's exposure, on a weighted average 


                                       17
<PAGE>

basis, on transactions in FSA's commercial mortgage portfolio. Commercial Re is
owned by MediaOne and Tokio Marine and is engaged exclusively in the business of
reinsuring FSA's commercial mortgage portfolio.

Rating Agencies

      The value of the insurance product sold by FSA is generally a function of
the "rating" applied to obligations insured by FSA. The insurance financial
strength, insurer financial strength and claims-paying ability, as the case may
be, of FSA and its operating insurance company subsidiaries is rated "Aaa" by
Moody's Investors Service, Inc. and "AAA" by Standard and Poor's Ratings
Services, Standard & Poor's (Australia) Pty. Ltd., Fitch IBCA, Inc. and Japan
Rating and Investment Information, Inc. Such ratings reflect only the views of
the respective rating agencies, are not recommendations to buy, sell or hold
securities and are subject to revision or withdrawal at any time by such rating
agencies. These rating agencies periodically review the business and financial
condition of FSA, focusing on the insurer's underwriting policies and procedures
and the quality of the obligations insured. Each rating agency performs periodic
assessments of the credits insured by FSA, and the reinsurers and other
providers of capital support to FSA, to confirm that FSA continues to satisfy
such rating agency's capital adequacy criteria necessary to maintain FSA's
"triple-A" rating. See "Credit Underwriting Guidelines, Standards and
Procedures" above. FSA's ability to compete with other triple-A rated financial
guarantors, and its results of operations and financial condition, would be
materially adversely affected by any reduction in its ratings.

Insurance Regulatory Matters

General

      FSA is licensed to engage in insurance business in all 50 states, the
District of Columbia and Puerto Rico. FSA is subject to the insurance laws of
the State of New York ("New York Insurance Law"), and is also subject to the
insurance laws of the other states in which it is licensed to transact an
insurance business. FSAIC and FSA Oklahoma are Oklahoma domiciled insurance
companies also licensed in New York and subject to the New York Insurance Law.
FSA and its domestic insurance company subsidiaries are required to file
quarterly and annual statutory financial statements in each jurisdiction in
which they are licensed, and are subject to statutory restrictions concerning
the types and quality of investments and the filing and use of policy forms and
premium rates. FSA's accounts and operations are subject to periodic examination
by the New York Superintendent of Insurance (the "New York Superintendent") (the
last such examination having been conducted in 1995 for the period ended
December 31, 1994) and other state insurance regulatory authorities.

      FSA International is a Bermuda domiciled insurance company subject to
applicable requirements of Bermuda law. FSA International maintains its
principal executive offices in Hamilton, Bermuda. FSA International does not
intend to transact business or establish a permanent place of business in the
United States or Europe. FSA-UK is a United Kingdom domiciled insurance company
subject to applicable requirements of English law. FSA-UK maintains its
principal executive offices in London. Pursuant to European Union Directives,
FSA-UK is generally authorized to write business out of its London office in
other member countries of the European Union subject to the satisfaction of
perfunctory registration requirements.

Domestic Insurance Holding Company Laws

      The Company and its domestic insurance company subsidiaries (FSA, FSAIC
and FSA Oklahoma) are subject to regulation under insurance holding company
statutes of New York and Oklahoma, where these respective insurers are
domiciled, as well as other jurisdictions where these companies are licensed to
do insurance business. The requirements of holding company statutes vary from
jurisdiction to jurisdiction but generally require insurance holding companies
and their insurance company subsidiaries to register and file certain reports
describing, among other information, their capital structure, ownership and
financial condition. The holding company statutes also require prior approval of
changes in control, of certain dividends and other intercorporate transfers of
assets and of transactions between insurance companies and their affiliates. The
holding company statutes generally require that all transactions with affiliates
be fair and reasonable and that those exceeding specified limits require prior
notice to or approval by insurance regulators.

      Under the insurance holding company laws in effect in New York and
Oklahoma, any acquisition of control of the Company, and thereby indirect
control of FSA, FSAIC and FSA Oklahoma, requires the prior approval of the New
York Superintendent and the Oklahoma Insurance Commissioner. "Control" is
defined as the direct or indirect 


                                       18
<PAGE>

power to direct or cause the direction of the management and policies of a
person, whether through the ownership of voting securities, by contract or
otherwise. Any purchaser of 10% or more of the outstanding voting securities of
a corporation is presumed to have acquired control of that corporation and its
subsidiaries, although the insurance regulator may find that "control" in fact
does or does not exist when a person owns or controls either a lesser or greater
amount of voting securities.

New York Financial Guaranty Insurance Law

      Article 69 ("Article 69") of the New York Insurance Law, a comprehensive
financial guaranty insurance statute, governs all financial guaranty insurers
licensed to do business in New York, including FSA. This statute limits the
business of financial guaranty insurers to financial guaranty insurance and
related lines (such as surety).

      Article 69 requires that financial guaranty insurers maintain a special
statutory accounting reserve called the "contingency reserve" to protect
policyholders against the impact of excessive losses occurring during adverse
economic cycles. Article 69 requires a financial guaranty insurer to provide a
contingency reserve (i) with respect to policies written prior to July 1, 1989
in an amount equal to 50% of earned premiums and (ii) with respect to policies
written on and after July 1, 1989, quarterly on a pro rata basis over a period
of 20 years for municipal bonds and 15 years for all other obligations, in an
amount equal to the greater of 50% of premiums written for the relevant category
of insurance or a percentage of the principal guarantied, varying from 0.55% to
2.50%, depending upon the type of obligation guarantied, until the contingency
reserve amount for the category equals the applicable percentage of net unpaid
principal. This reserve must be maintained for the periods specified above,
except that reductions by the insurer may be permitted under specified
circumstances in the event that actual loss experience exceeds certain
thresholds or if the reserve accumulated is deemed excessive in relation to the
insurer's outstanding insured obligations. Financial guaranty insurers are also
required to maintain reserves for losses and loss adjustment expenses on a
case-by-case basis and reserves against unearned premiums.

      Article 69 establishes single risk limits for financial guaranty insurers
applicable to all obligations issued by a single entity and backed by a single
revenue source. For example, under the limit applicable to qualifying
asset-backed securities, the lesser of (i) the insured average annual debt
service for a single risk or (ii) the insured unpaid principal (reduced by the
extent to which the unpaid principal of the supporting assets exceeds the
insured unpaid principal) divided by nine, net of qualifying reinsurance and
collateral, may not exceed 10% of the sum of the insurer's policyholders'
surplus and contingency reserve, subject to certain conditions. Under the limit
applicable to municipal obligations, the insured average annual debt service for
a single risk, net of qualifying reinsurance and collateral, may not exceed 10%
of the sum of the insurer's policyholders' surplus and contingency reserve. In
addition, insured principal of municipal obligations attributable to any single
risk, net of qualifying reinsurance and collateral, is limited to 75% of the
insurer's policyholders' surplus and contingency reserve. Single risk limits are
also specified for other categories of insured obligations, and generally are
more restrictive than those listed for asset-backed or municipal obligations.

      Article 69 also establishes aggregate risk limits on the basis of
aggregate net liability insured as compared to statutory capital. "Aggregate net
liability" is defined as outstanding principal and interest of guarantied
obligations insured, net of qualifying reinsurance and collateral. Under these
limits, policyholders' surplus and contingency reserves must not be less than a
percentage of aggregate net liability equal to the sum of various percentages of
aggregate net liability for various categories of specified obligations. The
percentage varies from 0.33% for certain municipal obligations to 4% for certain
non-investment grade obligations.

Dividend Restrictions

      FSA's ability to pay dividends is dependent upon FSA's financial
condition, results of operations, cash requirements, rating agency approval and
other related factors and is also subject to restrictions contained in the
insurance laws and related regulations of New York and other states. Under New
York State insurance law, FSA may pay dividends out of earned surplus, provided
that, together with all dividends declared or distributed by FSA during the
preceding 12 months, the dividends do not exceed the lesser of (i) 10% of
policyholders' surplus as of its last statement filed with the New York
Superintendent of Insurance or (ii) adjusted net investment income during this
period. FSA has paid no dividends during 1997. Based upon FSA's statutory
statements for the quarter ended December 31, 1998, the maximum amount available
for payment of dividends by FSA without regulatory approval over the following
12 months is approximately $65.7 million.


                                       19
<PAGE>

Financial Guaranty Insurance Regulation in Other Jurisdictions

      FSA is subject to laws and regulations of jurisdictions other than the
State of New York concerning the transaction of financial guaranty insurance.
The laws and regulations of these other jurisdictions are generally not more
stringent in any material respect than the New York Insurance Law.

      The Bermuda Ministry of Finance regulates FSA International. The United
Kingdom Financial Services Authority regulates FSA-UK. Pursuant to European
Union Directives, FSA-UK has been authorized to provide financial guaranty
insurance for transactions in France and Ireland from its home office in the
United Kingdom. FSA has received a determination from the Australian Insurance
and Superannuation Commissioner that the financial guaranties issued by it with
respect to Australian transactions do not constitute insurance for which a
license is required. The Monetary Authority of Singapore regulates activities of
FSA's Singapore office, which is in the process of obtaining a license to
operate as a branch office in Singapore.

Investment Portfolio

      FSA manages its investments with the objectives of preserving its triple-A
ratings, capital and claims-paying ability, maintaining a high level of
liquidity and, within these constraints, obtaining a high long-term total
return. FSA's investment portfolio is managed primarily by unaffiliated
professional investment managers, with a portion of its municipal portfolio
managed by its affiliate, FSA Portfolio Management. The Company's investment
strategy is to emphasize total return rather than current income. To accomplish
its objectives, the Company has established guidelines for eligible fixed income
investments by FSA, requiring that at least 95% of such investments must be
rated at least "single A" at acquisition and the overall portfolio must be rated
"double A" on average. Fixed income investments falling below the minimum
quality level are disposed of at such time as management shall deem appropriate.
For liquidity purposes, the Company's policy is to invest FSA assets in
investments which are readily marketable with no legal or contractual
restrictions on resale. Eligible fixed income investments include U.S. Treasury
and agency obligations, corporate bonds, tax-exempt bonds and mortgage
pass-through instruments. The Company and FSA also invest a small portion of
their portfolios in equity securities and/or convertible debt securities.
Furthermore, the Company has investments in various strategic partners,
including XL, XLFA and Fairbanks Capital Holding Corp., which owns a residential
mortgage loan servicer. In addition, the Company has from time to time invested
in sponsors of, or interests in, transactions insured or proposed to be insured
by FSA, none of which investments is material to the Company.

      The weighted average maturity of the Company's investment portfolio at
December 31, 1998 was approximately 9.9 years. The Company's current investment
strategy is to invest in quality readily marketable instruments of intermediate
average duration so as to generate stable investment earnings with minimal
market value or credit risk.

        The following tables set forth certain information concerning the
investment portfolio of the Company:

                         Investment Portfolio by Rating
                             at December 31, 1998(1)

                                                   Percent of
                                                   Investment
                        Rating                     Portfolio
                        ----------------           ----------
                        AAA(2)..........             69.0%
                        AA .............             21.0
                        A  .............              9.3
                        BBB.............              0.4
                        Other...........              0.3
                                                    -----
                                                    100.0%
                                                    =====

----------
(1)   Ratings are for the long-term fixed income portfolio (95.1% of the entire
      investment portfolio as of December 31, 1998) and are based on the higher
      of Moody's or S&P ratings available at December 31, 1998.
(2)   Includes U.S. Treasury and agency obligations, which comprised 7.9% of the
      total portfolio at December 31, 1998.


                                       20
<PAGE>

                             Summary of Investments

<TABLE>
<CAPTION>
                                                                    December 31,
                                         -----------------------------------------------------------------
                                                 1998                   1997                 1996
                                         --------------------   --------------------  --------------------
                                                     Weighted               Weighted             Weighted
                                         Amortized   Average    Amortized   Average   Amortized   Average
   Investment Category                     Cost      Yield(1)     Cost      Yield(1)    Cost      Yield(1)
   -------------------                     ----      --------     ----      --------    ----      --------
                                                   (dollars in thousands)
<S>                                      <C>           <C>     <C>           <C>     <C>           <C>  
Long-term investments:
    Taxable bonds ....................   $  613,324    5.96%   $  453,437    6.52%   $  396,586    6.76%
    Tax-exempt bonds .................    1,041,718    5.26       777,042    5.58       661,831    5.70
                                         ----------            ----------            ----------         
     Total long-term investments .....    1,655,042    5.51     1,230,479    5.92     1,058,417    6.09
Short-term investments(2) ............       74,675    4.96       110,308    6.22        56,733    5.43
                                         ----------            ----------            ----------         
     Total investments(3).............   $1,729,717    5.49%   $1,340,787    5.95%   $1,115,150    6.06%
                                         ==========            ==========            ==========        
</TABLE>

----------
(1)   Yields are stated on a pre-tax basis.
(2)   Includes taxable and tax-exempt investments and excludes cash equivalents
      of $23.9 million, $22.6 million and $16.9 million, respectively.
(3)   Excludes stocks at cost of $64.3 million, $29.4 million and $8.3 million,
      respectively.

                      Investment Portfolio by Security Type

<TABLE>
<CAPTION>
                                                                    December 31,
                                         -----------------------------------------------------------------
                                                 1998                   1997                 1996
                                         --------------------   --------------------  --------------------
                                                     Weighted               Weighted             Weighted
                                         Amortized   Average    Amortized   Average   Amortized   Average
   Investment Category                     Cost      Yield(1)     Cost      Yield(1)    Cost      Yield(1)
   -------------------                     ----      --------     ----      --------    ----      --------
                                                   (dollars in thousands)
<S>                                      <C>           <C>     <C>           <C>     <C>           <C>  
U.S. government securities ....         $  148,669    $5.14%   $  122,817    $6.20%  $   55,619    $6.63%
Mortgage-backed securities ....            266,770     6.54       195,567     6.62      177,818     6.88
Municipal bonds ...............          1,041,718     5.26       777,042     5.58      661,831     5.70
Asset-backed securities                     33,188     7.07        20,961     6.69       71,370     6.82
Corporate securities ..........            164,697     5.34        66,014     5.72       76,760     6.55
Foreign securities ............                 --                 48,078     7.62       15,019     6.50
                                        ----------             ----------            ----------
    Total fixed maturities ....          1,655,042     5.51     1,230,479     5.92    1,058,417     6.09
Short-term investments(2) .....             74,675     4.96       110,308     6.22       56,733     5.43
                                        ----------             ----------            ----------
                                                                                                   
    Total investments(3) ......         $1,729,717     5.49%   $1,340,787     5.95%  $1,115,150     6.06%
                                        ==========             ==========            ==========
</TABLE>

----------
(1)   Yields are stated on a pre-tax basis.
(2)   Includes taxable and tax-exempt investments and excludes cash equivalents
      of $23.9 million, $22.6 million and $16.9 million, respectively.
(3)   Excludes stocks at cost of $64.3 million, $24.9 million and $8.3 million,
      respectively.

                           Distribution of Investments by Maturity

<TABLE>
<CAPTION>
                                                                        December 31,
                                        ----------------------------------------------------------------------------
                                                   1998                     1997                    1996
                                        -----------------------   -----------------------   ------------------------
                                                      Estimated                 Estimated                  Estimated
                                         Amortized      Market    Amortized      Market     Amortized       Market
    Investment Category                    Cost         Value        Cost         Value       Cost          Value
    -------------------                    ----         -----        ----         -----       ----          -----
                                                                       (in thousands)
<S>                                     <C>          <C>          <C>          <C>          <C>          <C>       
Due in one year or less(1) ..........   $   75,677   $   75,681   $  114,317   $  114,315   $   95,038   $   95,359
Due after one year
    through five years ..............      137,094      139,642       70,283       70,007       57,531       57,712
Due after five years
    through ten years ...............      225,259      233,080      208,986      208,170      105,495      105,848
Due after ten years .................      991,729    1,030,156      730,673      766,912      607,898      620,031
Mortgage-backed securities ..........      266,770      270,500      195,567      197,753      177,818      178,344
Asset-backed securities .............       33,188       33,656       20,961       21,309       71,370       71,878
                                        ----------   ----------   ----------   ----------   ----------   ----------
    Total investments(2).............   $1,729,717   $1,782,715   $1,340,787   $1,378,466   $1,115,150   $1,129,172
                                        ==========   ==========   ==========   ==========   ==========   ==========
</TABLE>

----------
(1)   Includes short-term investments in the amount of $74.7 million, $110.3
      million and $56.7 million at December 31, 1998, 1997 and 1996,
      respectively, but excludes cash equivalents of $23.9 million, $22.6
      million, and $16.9 million, respectively.
(2)   Excludes stocks at cost of $64.3 million, $29.4 million and $8.3 million,
      respectively.


                                       21
<PAGE>

                           Mortgage-Backed Securities
                  Cost and Market Value by Investment Category

<TABLE>
<CAPTION>
                                                       December 31, 1998
                                               ------------------------------------
                                                            Amortized   Estimated
        Investment Category                    Par Value      Cost     Market Value
        -------------------                    ---------      ----     ------------
                                                            (in thousands)
<S>                                             <C>         <C>         <C>     
Pass-through securities--U.S 
    Government agency                           $171,284    $170,069    $171,247
CMO's--U.S. Government agency                     32,901      32,489      33,935
CMO's--non-agency                                 64,003      64,212      65,318
                                                --------    --------    --------
    Total mortgage-backed securities            $268,188    $266,770    $270,500
                                                ========    ========    ========
</TABLE>

      The Company's investments in mortgage-backed securities consisted of
pass-through certificates and collateralized mortgage obligations ("CMO's")
which are secured by mortgage loans guarantied or insured by agencies of the
federal government. These securities are highly liquid with readily determinable
market prices. The Company also held triple-A rated CMO's which are not
guarantied by government agencies. Secondary market quotations are available for
these securities, although they are not as liquid as the government
agency-backed securities.

      At December 31, 1998, the Company held sequential pay CMO tranches and
Planned Amortization Classes of CMO's. The CMO's held at December 31, 1998 have
stated maturities ranging from 2 to 37 years, and expected average lives ranging
from 1 to 28 years based on anticipated prepayments of principal. None of the
Company's holdings of CMO's is subject to extraordinary interest rate
sensitivity. At December 31, 1998, the Company did not own any interest-only
stripped mortgage securities or inverse floating rate CMO tranches.

      Mortgage-backed securities differ from traditional fixed income bonds
because they are subject to prepayments at par value without penalty at the
borrower's option. Prepayment rates on mortgage-backed securities are influenced
primarily by the general level of prevailing interest rates, with prepayments
increasing when prevailing interest rates are lower than the rates on the
underlying mortgages. When prepayments occur, the proceeds must be re-invested
at then current market rates, which are generally below the yield on the prepaid
securities. Prepayments on mortgage-backed securities purchased at a premium to
par will result in a loss to the Company to the extent of the unamortized
premium.

Employees

      At December 31, 1998, the Company and its subsidiaries had 232 employees.
None of its employees are covered by collective bargaining agreements. The
Company considers its employee relations to be satisfactory.

Forward-Looking Statements

      The Company relies upon the safe harbor for forward looking statements
provided by the Private Securities Litigation Reform Act of 1995. This safe
harbor requires that the Company specify important factors that could cause
actual results to differ materially from those contained in forward-looking
statements made by or on behalf of the Company. Accordingly, forward-looking
statements by the Company and its affiliates are qualified by reference to the
following cautionary statements.

      In its filings with the SEC, reports to shareholders, press releases and
other written and oral communications, the Company from time to time makes
forward-looking statements. Such forward-looking statements include, but are not
limited to, (i) projections of revenues, income (or loss), earnings (or loss)
per share, dividends, market share or other financial forecasts, (ii) statements
of plans, objectives or goals of the Company or its management, including those
related to growth in adjusted book value per share or return on equity and (iii)
expected losses on, and adequacy of loss reserves for, insured transactions.
Words such as "believes", "anticipates", "expects", "intends" and "plans" and
similar expressions are intended to identify forward-looking statements but are
not the exclusive means of identifying such statements.

      The Company cautions that a number of important factors could cause actual
results to differ materially from the plans, objectives, expectations, estimates
and intentions expressed in forward-looking statements made by the Company.
These factors include: (i) changes in capital requirements or other criteria of
securities rating 


                                       22
<PAGE>

agencies applicable to financial guaranty insurers in general or to FSA
specifically; (ii) competitive forces, including the conduct of other financial
guaranty insurers in general; (iii) changes in domestic or foreign laws or
regulations applicable to the Company, its competitors or its clients; (iv) an
economic downturn or other economic conditions (such as a rising interest rate
environment) adversely affecting transactions insured by FSA or its investment
portfolio; (v) inadequacy of loss reserves established by the Company; (vi)
temporary or permanent disruptions in cash flow on structured transactions
attributable to legal challenges to such structures; and (vii) downgrade or
default of one or more of FSA's reinsurers. The Company cautions that the
foregoing list of important factors is not exhaustive. In any event, such
forward-looking statements made by the Company speak only as of the date on
which they are made, and the Company does not undertake any obligation to update
or revise such statements as a result of new information, future events or
otherwise.

Item 2. Properties.

      The principal executive offices of the Company and FSA are located at 350
Park Avenue, New York, New York 10022. The principal executive offices, which
consist of approximately 53,000 square feet of office space, are under lease
agreements which expire in 2005. The Company's telephone number at its principal
executive offices is (212) 826-0100. FSA or its subsidiaries also maintain
leased office space in San Francisco, Dallas, Hamilton (Bermuda), London
(England), Paris (France), Madrid (Spain), Singapore, Sydney (Australia) and
Tokyo (Japan). The Company and its subsidiaries do not own any real property.

Item 3. Legal Proceedings.

      In the ordinary course of business, the Company and certain subsidiaries
have become party to certain litigation. The Company believes that these matters
will be resolved with no material financial impact on the Company.

Item 4. Submission of Matters to a Vote of Security Holders.

      No matters were submitted to a vote of the Company's shareholders during
the fourth quarter of 1998.


                                       23
<PAGE>

                                     Part II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.

      Information relating to the principal market on which the Company's common
stock is tradable, the high and low sales prices per share for each quarterly
period for the past two years and the frequency and amount of any cash dividends
declared in the past two years is set forth on page 48 of the Company's 1998
Annual Report to Shareholders and such information is incorporated herein by
reference. Information concerning restrictions on the payment of dividends is
set forth in Item 1 above under the caption "Insurance Regulatory Matters --
Dividend Restrictions." At February 10, 1999, there were approximately 3,500
holders of the Company's Common Stock, which is listed on the New York Stock
Exchange.

      During the fourth quarter of 1998, the Company issued 1,632,653
unregistered shares of Common Stock in reliance upon an exemption from
registration under the Securities Act of 1933 (the "Act") pursuant to Section
4(2) of the Act. Further information about such issuance is contained in Item 5,
"Other Information," of the Company's quarterly report on Form 10-Q for the
quarter ended September 30, 1998.

Item 6. Selected Financial Data.

      Selected financial data for the Company and its subsidiaries for each of
the last five years is set forth under the caption "Five-Year Financial Summary"
on page 16 of the Company's 1998 Annual Report to Shareholders. Such information
is incorporated herein by reference and should be read in conjunction with the
Consolidated Financial Statements and the Notes thereto contained on pages 26 to
44 of such Annual Report.

Item 7. Management's Discussion and Analysis of Financial Condition and Results
        of Operations.

      Management's Discussion and Analysis of Financial Condition and Results of
Operations is set forth under the caption "Management's Discussion and Analysis
of Financial Condition and Results of Operations" on pages 18 through 24 of the
Company's 1998 Annual Report to Shareholders. Such information is incorporated
herein by reference and should be read in conjunction with the Consolidated
Financial Statements and the Notes thereto contained on pages 26 to 44 of such
Annual Report.

Item 7A. Qualitative and Quantitative Disclosures About Market Risks.

      Qualitative and quantitative disclosures about market risks is set forth
under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Results of Operations - Market Risks" on pages 20
and 21 of the Company's 1998 Annual Report to Shareholders. Such information is
incorporated herein by reference and should be read in conjunction with the
Consolidated Financial Statements and the Notes thereto contained on pages 26 to
44 of such Annual Report.

Item 8. Financial Statements and Supplementary Data.

      The 1998 Consolidated Financial Statements, together with the Notes
thereto and the Report of Independent Accountants thereon, are set forth on
pages 25 through 44 of the Company's 1998 Annual Report to Shareholders. Such
information is incorporated herein by reference.

Item 9. Changes in and Disagreements with Accountants on Accounting and
        Financial Disclosure.

      None.


                                       24
<PAGE>

                                           Part III

Item 10. Directors and Executive Officers of the Registrant.

      Information relating to the Company's directors and executive officers is
set forth under the captions "Election of Directors" on pages 1 through 4,
"Section 16(a) Beneficial Ownership Reporting Compliance" on page 16, and
"Executive Officers of the Company" on pages 5 and 6 of the Company's 1999 Proxy
Statement. Such information is incorporated herein by reference.

Item 11. Executive Compensation.

      Information relating to compensation of the Company's directors and
executive officers is set forth under the captions "Executive Compensation" on
pages 9 through 12, "Report of the Human Resources Committee of the Board of
Directors of Financial Security Assurance Holdings Ltd." on pages 12 through 15,
and "Stock Price Performance" on page 16 of the Company's 1999 Proxy Statement.
Such information is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management.

      Information relating to security ownership of certain beneficial owners of
the Company's equity securities and by the Company's directors and executive
officers is set forth under the caption "Ownership of the Company" on pages 6
through 9 of the Company's 1999 Proxy Statement. Such information is
incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions.

      Information relating to certain relationships and related transactions is
set forth under the captions "Compensation Committee Interlocks and Insider
Participation" on page 16 and "Certain Relationships and Related Transactions"
on pages 27 through 30 of the Company's 1999 Proxy Statement. Such information
is incorporated herein by reference.


                                       25
<PAGE>

                                     Part IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

      (a) Financial Statements and Financial Statement Schedules and Exhibits.

      1. Financial Statements

            The Registrant has incorporated by reference from the 1998 Annual
            Report to Shareholders the following consolidated financial
            statements of Financial Security Assurance Holdings Ltd. and
            Subsidiaries:

                                                        1998 Annual Report  to
                                                         Shareholders (Pages)
                                                         --------------------

            Report of Independent Accountants                     25

            Consolidated Balance Sheets at
            December 31, 1998 and 1997                            26

            Consolidated Statements of Income
            for the Years Ended
            December 31, 1998, 1997 and 1996                      27

            Consolidated Statements of Changes in
            Shareholders' Equity for the Years Ended
            December 31, 1998, 1997 and 1996                      28

            Consolidated Statements of Cash Flows
            for the Years Ended
            December 31, 1998, 1997 and 1996                      29

            Notes to Consolidated Financial Statements            30 - 44

      2. Financial Statement Schedules

            The following financial statement schedule is filed as part of this
Report.

            Schedule        Title
            --------        -----

            II          Condensed Financial Statements of the Registrant for the
                        Years Ended December 31, 1998, 1997 and 1996.

                        The report of the Registrant's independent auditors with
                        respect to the above listed financial statement schedule
                        is set forth on page 33 of this Report.

                        All other schedules are omitted because they are either
                        inapplicable or the required information is presented in
                        the consolidated financial statements of the Company or
                        the notes thereto.


                                       26
<PAGE>

      3. Exhibits

            The following are annexed as exhibits to this Report:

            Exhibit No.           Exhibit
            -----------           -------

               3.1      Restated Certificate of Incorporation of the Company.
                        (Previously filed as Exhibit 3.1 to the Company's Annual
                        Report on Form 10-K (Commission File No. 1-12644) for
                        the fiscal period ended December 31, 1994 (the "1994
                        Form 10-K"), and incorporated herein by reference.)

               3.1(A)   Certificate of Amendment of the Amended and Restated
                        Certificate of Incorporation of the Company. (Previously
                        filed as Exhibit 3.1(A) to the Company's Registration
                        Statement on Form S-1 (Reg. No. 33-70230), as such
                        Registration Statement has been amended (the "Form
                        S-1"), and incorporated herein by reference.)

               3.2      Amended and Restated By-laws of the Company, as amended
                        and restated on February 14, 1996. (Previously filed as
                        Exhibit 5 to the Company's Quarterly Report on Form 10-Q
                        (Commission File No. 1-12644) for the quarterly period
                        ended March 31, 1996 (the "March 31, 1996 10-Q"), and
                        incorporated herein by reference.)

               4.1      Indenture dated as of September 15, 1997 (the "Senior
                        QUIDS Indenture") between the Company and First Union
                        National Bank, as Trustee (the "Senior Debt Trustee").
                        (Previously filed as Exhibit 2 to the Company's Current
                        Report on Form 8-K (Commission File No. 1-12644) dated
                        September 15, 1997 (the "September 1997 Form 8-K"), and
                        incorporated herein by reference.)

               4.1(A)   First Supplemental Indenture dated as of November 13,
                        1998, between the Company and the Senior Debt Trustee.
                        (Previously filed as Exhibit 6 to the Company's Current
                        Report on Form 8-K (Commission File No. 1-12644) dated
                        November 6, 1998 (the "November 1998 Form 8-K"), and
                        incorporated herein by reference.)

               4.1(B)   Form of 7.375% Senior Quarterly Income Debt Securities
                        due 2097. (Previously filed as Exhibit 3 to the
                        September 1997 Form 8-K, and incorporated herein by
                        reference.)

               4.1(C)   Officers' Certificate pursuant to Section 2.01 and 2.03
                        of the Senior QUIDS Indenture. (Previously filed as
                        Exhibit 5 to the Company's Quarterly Report on Form 10-Q
                        (Commission File No. 1-12644) for the quarterly period
                        ended September 30, 1997, and incorporated herein by
                        reference.)

               4.1(D)   Form of 6.950% Senior Quarterly Income Debt Securities
                        due 2098. (Previously filed as Exhibit 2 to the November
                        1998 Form 8-K, and incorporated herein by reference.)

               4.1(E)   Officers' Certificate pursuant to Section 2.01 and 2.03
                        of the Senior QUIDS Indenture. (Previously filed as
                        Exhibit 5 to the November 1998 Form 8-K, and
                        incorporated herein by reference.)

               4.1(F)   Amended and Restated Trust Indenture dated as of
                        February 24, 1999 between the Company and the Trustee.
                        (Previously filed as Exhibit 4.1 to the Company's
                        Registration Statement on Form S-3 (Reg. No. 33-74165),
                        and incorporated herein by reference.)


                                       27
<PAGE>

               9        Voting Trust Agreement dated as of September 2, 1994
                        among Fund American, U S WEST Capital Corporation
                        ("USWCC") and First Chicago Trust Company of New York,
                        as voting trustee. (Previously filed as Exhibit 9 to the
                        1994 Form 10-K, and incorporated herein by reference.)

               10.1     Credit Agreement dated as of August 31, 1998 among FSA,
                        each of its insurance company affiliates listed on
                        Schedule I attached thereto, the Banks from time to time
                        party thereto and Deutsche Bank AG, New York Branch, as
                        agent. (Previously filed as Exhibit 10 to the Company's
                        Quarterly Report on Form 10-Q (Commission File No.
                        1-12644) for the quarterly period ended September 30,
                        1998, and incorporated herein by reference.)

               10.2     Facility Agreement dated as of August 30, 1994, among
                        FSA, Canadian Global Funding Corporation and Hambros
                        Bank Limited. (Previously filed as Exhibit 2 to the
                        Company's Quarterly Report on Form 10-Q (Commission File
                        No. 1-12644) for the quarterly period ended September
                        30, 1994, and incorporated herein by reference.)

               10.3     Credit Agreement dated as of April 30, 1996, among FSA,
                        Financial Security Assurance of Maryland Inc., Financial
                        Security Assurance of Oklahoma, Inc., the Banks
                        signatory thereto and Bayerische Landesbank
                        Girozentrale, New York Branch, as Agent. (Previously
                        filed as Exhibit 2 to the Company's Quarterly Report on
                        Form 10-Q (Commission File No. 1-12644) for the
                        quarterly period ended June 30, 1996, and incorporated
                        herein by reference.)

               10.4+    Money Purchase Pension Plan and Trust Agreement dated as
                        of January 1, 1989 between FSA and Transamerica, with
                        Adoption Agreement No. 001 and Addendum. (Previously
                        filed as Exhibit 10.7 to the Form S-1, and incorporated
                        herein by reference.)

               10.5+*   Amended and Restated Supplemental Executive Retirement
                        Plan as amended and restated as of February 25, 1999.

               10.6+    Amended and Restated 1993 Equity Participation Plan (as
                        amended and restated on February 26, 1998). (Previously
                        filed as Exhibit 10.6 to the Company's Annual Report on
                        Form 10-K (Commission File No. 1-12644) for the fiscal
                        period ended December 31, 1997 (the "1997 Form 10-K"),
                        and incorporated herein by reference.)

               10.7+    Deferred Compensation Plan (Effective as of June 1,
                        1995). (Previously filed as Exhibit No. 3 to the
                        Company's Quarterly Report on Form 10-Q (Commission File
                        No. 1-12644) for the quarterly period ended June 30,
                        1995 (the "June 30, 1995 10-Q"), and incorporated herein
                        by reference.)

               10.8+    Severance Policy for Senior Management (Effective as of
                        February 8, 1995). (Previously filed as Exhibit No. 3 to
                        the March 31, 1996 10-Q, and incorporated herein by
                        reference.)

               10.9     Cooperation Agreement dated as of December 27, 1990
                        among Tokio Marine, the Company and FSA. (Previously
                        filed as Exhibit 10.17 to the Form S-1, and incorporated
                        herein by reference.)

               10.10    Tokio Marine Stockholders Agreement dated December 27,
                        1990 among Tokio Marine, the Company and USWCC.
                        (Previously filed as Exhibit 10.18 to the Form S-1, and
                        incorporated herein by reference.)


                                       28
<PAGE>

               10.10(A) Letter Agreement dated as of September 2, 1994
                        concerning the Tokio Marine Stockholders Agreement
                        between U S WEST, Inc., and the Company. (Previously
                        filed as Exhibit 10.18(A) to the 1994 Form 10-K, and
                        incorporated herein by reference.)

               10.10(B) Amendment No. 1 dated December 23, 1993 to Tokio Marine
                        Stockholders Agreement. (Previously filed as Exhibit
                        10.19 to the Form S-1, and incorporated herein by
                        reference.)

               10.11    Master Reinsurance Placement Memorandum dated December
                        27, 1991 between Tokio Marine and FSA. (Previously filed
                        as Exhibit 10.20 to the Form S-1, and incorporated
                        herein by reference.)

               10.12    Amended and Restated Interests and Liabilities Contract
                        concerning the Quota Share Treaty effective as of
                        January 1, 1991 among Tokio Marine and FSA and its
                        identified subsidiaries and affiliates, with Amendment
                        No. 1 thereto. (Previously filed as Exhibit 10.21(A) to
                        the 1994 Form 10-K, and incorporated herein by
                        reference.)

               10.13    Amended and Restated Interests and Liabilities Contract
                        concerning the Municipal Bond Insurance Quota Share
                        Treaty effective as of January 1, 1991 among Tokio
                        Marine, FSA and its identified subsidiaries and
                        affiliates, with Amendment No. 1 thereto. (Previously
                        filed as Exhibit 10.22(A) to the 1994 Form 10-K, and
                        incorporated herein by reference.)

               10.14+   Promissory Note between the Company and Sean W. McCarthy
                        dated December 20, 1993. (Previously filed as Exhibit
                        10.30(A) to the Form S-1, and incorporated herein by
                        reference.)

               10.15    Quota Share Reinsurance Agreement dated December 22,
                        1993, among Commercial Re, FSA and International.
                        (Previously filed as Exhibit 10.17 to the Form S-1, and
                        incorporated herein by reference.)

               10.16    Share Purchase Agreement dated as of December 23, 1993
                        among Commercial Re, U S WEST and the Company.
                        (Previously filed as Exhibit 10.32 to the Form S-1, and
                        incorporated herein by reference.)

               10.17    Federal Income Tax Allocation Agreement dated as of
                        December 23, 1993 among Commercial Re, U S WEST and the
                        Company. (Previously filed as Exhibit 10.33 to the Form
                        S-1, and incorporated herein by reference.)

               10.18    Liquidity Facility dated as of December 23, 1993 among 
                        US WEST, Inc., Commercial Re and the Company.      
                        (Previously filed as Exhibit 10.34 to the Form S-1, and
                        incorporated herein by reference.)

               10.19    Investment Management Agreement dated as of December 23,
                        1993 among FSA Portfolio Management, Commercial Re and
                        the Company. (Previously filed as Exhibit 10.35 to the
                        Form S-1, and incorporated herein by reference.)

               10.20    Agreement for Management and the Provision of Personnel,
                        Property and Services dated as of December 23, 1993
                        between Commercial Re and the Company. (Previously filed
                        as Exhibit 10.36 to the Form S-1, and incorporated
                        herein by reference.)

               10.21    Securities Purchase Agreement among U S WEST, Inc.,
                        USWCC, Fund American and the Company (including Exhibit
                        A thereto). (Previously filed as Exhibit 10.38 to the
                        Form S-1, and incorporated herein by reference.)


                                       29
<PAGE>

               10.21(A) Amendment dated as of May 6, 1994 to Securities Purchase
                        Agreement among U S WEST, Inc., USWCC, Fund American and
                        the Company. (Previously filed as Exhibit 10.38(A) to
                        the 1994 Form 10-K, and incorporated herein by
                        reference.)

               10.22*   Registration Rights Agreement dated as of November 3,
                        1998 between the Company and EXEL Limited.

               10.23    Fund American Shareholders Agreement dated as of
                        September 2, 1994 among USWCC, Fund American and the
                        Company. (Previously filed as Exhibit 10.40 to the 1994
                        Form 10-K, and incorporated herein by reference.)

               10.24    Five-Year Option dated as of September 2, 1994.
                        (Previously filed as Exhibit 10.41 to the 1994 Form
                        10-K, and incorporated herein by reference.)

               10.25    Ten-Year Option dated as of September 2, 1994.
                        (Previously filed as Exhibit 10.42 to the 1994 Form
                        10-K, and incorporated herein by reference.)

               13*      Annual Report to Shareholders for the Year Ended
                        December 31, 1998. Such report is furnished for the
                        information of the Securities and Exchange Commission
                        only and, except for those portions thereof which are
                        expressly incorporated by reference in the Annual Report
                        on Form 10-K, is not to be deemed filed as part of this
                        Report.

               21*      List of Subsidiaries.

               23*      Consent of PricewaterhouseCoopers LLP.

               24*      Powers of Attorney. (Previously filed as Exhibit 24 to
                        the Company's Annual Report on Form 10-K (Commission
                        File No. 1-12644) for the fiscal period ended December
                        31, 1996, and incorporated herein by reference, other
                        than the power of attorney (i) for Mr. Post, which was
                        filed as Exhibit 24 to the 1997 Form 10-K and
                        incorporated herein by reference and (ii) for Messrs.
                        Hama and McCarthy, which are filed herewith.)

               27*      Financial Data Schedules.

               99*      Financial Security Assurance Inc. and Subsidiaries 1998
                        Consolidated Financial Statements and Report of
                        Independent Accountants.

---------------
+     Management contract or compensatory plan or arrangement required to be
      filed as an exhibit to this Form 10-K pursuant to Item 14(c).

*     Filed herewith.

(b) Reports on Form 8-K

      The Company filed a Current Report on Form 8-K dated November 6, 1998,
with the Securities and Exchange Commission on November 12, 1998, which
incorporated by reference the documents included as Exhibits thereto into the
Registration Statement relating to the Company's 6.950% Senior Quarterly Income
Debt Securities due 2098.


                                       30
<PAGE>

                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.

                                     FINANCIAL SECURITY ASSURANCE
                                        HOLDINGS LTD. (Registrant)


                                     By: /s/ ROBERT P. COCHRAN
                                         ---------------------------------------
                                     Name: Robert P. Cochran
                                     Title: Chairman and Chief Executive Officer
                                     Dated: March 25, 1999

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.

        Signature                        Title                        Date
-----------------------------      ---------------------------   ---------------

/s/ ROBERT P. COCHRAN*
----------------------------
     Robert P. Cochran             Chairman, Chief               March 25, 1999
                                   Executive Officer
                                   and Director (Principal
                                   Executive Officer)

/s/ JOHN J. BYRNE*
----------------------------
     John J. Byrne                 Vice Chairman of the          March 25, 1999
                                   Board and Director

/s/ ROGER K. TAYLOR*
----------------------------
     Roger K. Taylor               President,                    March 25, 1999
                                   Chief Operating Officer
                                   and Director

/s/ SEAN W. MCCARTHY*
----------------------------
     Sean W. McCarthy              Executive Vice President      March 25, 1999
                                   and Director

/s/ JOHN A. HARRISON*
----------------------------
     John A. Harrison              Managing Director             March 25, 1999
                                   and Chief Financial
                                   Officer (Principal
                                   Financial Officer)

/s/ JEFFREY S. JOSEPH*
----------------------------
     Jeffrey S. Joseph             Managing Director             March 25, 1999
                                   and Controller (Principal
                                   Accounting Officer)

/s/ ROBERT N. DOWNEY*
----------------------------
     Robert N. Downey              Director                      March 25, 1999


/s/ ANTHONY M. FRANK*
----------------------------
     Anthony M. Frank              Director                      March 25, 1999


                                       31
<PAGE>

/s/ FUDEJI HAMA*
----------------------------
     Fudeji Hama                   Director                      March 25, 1999


/s/ K. THOMAS KEMP*
----------------------------
     K. Thomas Kemp                Director                      March 25, 1999


/s/ DAVID O. MAXWELL*
----------------------------
     David O. Maxwell              Director                      March 25, 1999


/s/ JAMES M. OSTERHOFF*
----------------------------
     James M. Osterhoff            Director                      March 25, 1999


/s/ JAMES H. OZANNE*
----------------------------
     James H. Ozanne               Director                      March 25, 1999


/s/ RICHARD A. POST*
----------------------------
     Richard A. Post               Director                      March 25, 1999


/s/ HOWARD M. ZELIKOW*
----------------------------
     Howard M. Zelikow             Director                      March 25, 1999

----------
* Robert P. Cochran, by signing his name hereto, does hereby sign this Annual
Report on Form 10-K on behalf of each of the Directors and Officers of the
Registrant named above after whose typed names asterisks appear pursuant to
powers of attorney duly executed by such Directors and Officers and filed with
the Securities and Exchange Commission as exhibits to this Report.

                                                By: /s/ ROBERT P. COCHRAN
                                                    ----------------------------
                                                        Robert P. Cochran,
                                                        Attorney-in-fact


                                       32
<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS
                         ON FINANCIAL STATEMENT SCHEDULE

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

Our audits of the consolidated financial statements referred to in our report
dated January 26, 1999 appearing on page 25 of the 1998 Annual Report to
Shareholders of Financial Security Assurance Holdings Ltd. (which report and
consolidated financial statements are incorporated by reference in this Annual
Report on Form 10-K) also included an audit of the financial statement schedule
listed in the index on page 26 of this Form 10-K. In our opinion, this financial
statement schedule presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements.

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

New York, New York
January 26, 1999


                                       33
<PAGE>

Schedule II

Parent Company Condensed Financial Information

                            Condensed Balance Sheets
                             (Dollars in thousands)

                                                                 December 31,
                                                             ------------------
                                                             1998          1997
                                                             ----          ----
Assets:

   Investments and cash                                  $   59,512   $   65,044
   Investment in subsidiary, at equity in net assets      1,119,235      903,421
   Notes receivable from subsidiary                         120,000       50,000
   Deferred taxes                                               711        2,178
   Other assets                                              66,544       33,897
                                                         ----------   ----------
                                                         $1,366,002   $1,054,540
                                                         ==========   ==========
Liabilities and Shareholders' Equity:
   Notes payable                                         $  230,000   $  130,000
   Other liabilities                                         62,566       42,180
   Shareholders' equity                                   1,073,436      882,360
                                                         ----------   ----------
                                                         $1,366,002   $1,054,540
                                                         ==========   ==========

                         Condensed Statements of Income
                             (Dollars in thousands)

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

Dividends received from subsidiary          $      --    $      --    $  18,000
Other revenue                                  11,515        3,553        2,741
                                            ---------    ---------    ---------
Total revenue                                  11,515        3,553       20,741
Interest and amortization expense             (10,590)      (2,731)          --
Other expenses                                 (1,860)      (1,087)      (1,187)
Equity in earnings of unconsolidated
affiliate                                         333           --           --
                                            ---------    ---------    ---------
                                                 (602)        (265)      19,554
Equity in undistributed net income of
   subsidiary                                 117,374      100,678       61,697
                                            ---------    ---------    ---------
Income before income taxes                    116,772      100,413       81,251
Income tax benefit (provision)                    206           89         (491)
                                            ---------    ---------    ---------
Net income                                  $ 116,978    $ 100,502    $  80,760
                                            =========    =========    =========

      The Parent Company Condensed Financial Information should be read in
conjunction with the Consolidated Financial Statements and Notes to Consolidated
Financial Statements as incorporated by reference in Item 8 Financial Statements
and Supplementary Data.


                                       34
<PAGE>

Schedule II

Parent Company Condensed Financial Information (Continued)

                       Condensed Statements of Cash Flows
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                    Year Ended December 31,
                                                                -------------------------------
                                                                1998         1997          1996
                                                                ----         ----          ----
<S>                                                          <C>          <C>          <C>      
Cash flows from operating activities:
   Other operating expenses recovered, net                   $  35,168    $   4,291    $  14,700
   Dividends from subsidiary                                        --           --       18,000
   Net investment income received                                3,510        3,448        3,078
   Federal income taxes received (paid)                         (5,332)       7,237       (1,059)
   Interest paid                                                (9,614)      (2,716)          --
   Other                                                        (1,089)      (3,512)      (1,227)
                                                             ---------    ---------    ---------
      Net cash provided by operating activities                 22,643        8,748       33,492
                                                             ---------    ---------    ---------
Cash flows from investing activities:
   Proceeds from sales of bonds                                170,513        2,812       21,544
   Proceeds from sales of equity investments                    73,042           --           --
   Purchases of bonds                                         (158,153)     (30,224)      (3,554)
   Purchases of equity investments                             (92,087)      (1,690)      (7,336)
   Purchases of property and equipment                              (3)          (3)          (2)
   Investment in subsidiaries                                  (96,788)     (31,384)      (1,600)
   Net decrease (increase) in short-term securities             23,777       (9,890)     (15,895)
   Other investments                                           (21,502)          --           --
                                                             ---------    ---------    ---------
      Net cash used for investing activities                  (101,201)     (70,379)      (6,843)
                                                             ---------    ---------    ---------
Cash flows from financing activities:
   Issuance of notes payable, net                               96,850      125,905           --
   Surplus notes purchased                                     (70,000)     (50,000)          --
   Dividends paid                                              (12,777)     (12,098)     (10,536)
   Treasury stock, net                                         (23,890)     (36,247)     (40,610)
   Issuance of stock for acquisition of subsidiary              80,000           --           --
   Repurchase of stock by subsidiary                             8,500       39,500       27,000
   Other                                                           533       (5,567)      (2,435)
                                                             ---------    ---------    ---------
      Net cash provided by (used for) financing activities      79,216       61,493      (26,581)
                                                             ---------    ---------    ---------
Net increase (decrease) in cash                                    658         (138)          68
Cash at beginning of year                                          (38)         100           32
                                                             ---------    ---------    ---------
Cash at end of year                                          $     620    $     (38)   $     100
                                                             =========    =========    =========

Reconciliation of net income to net cash provided
      by operating activities:
Net income                                                   $ 116,978    $ 100,502    $  80,760
   Equity in undistributed net income of subsidiary           (117,374)    (100,678)     (61,697)
   Decrease (increase) in accrued investment income             (2,607)      (1,394)         264
   Increase (decrease) in accrued income taxes                  (5,137)       6,944         (932)
   Provision (benefit) for deferred income taxes                  (402)         203          365
   Net realized gains on investments                            (5,206)      (1,405)      (1,128)
   Deferred equity compensation                                 17,765       14,112        5,565
   Depreciation and accretion of bond discount                  (1,077)      (1,174)        (224)
   Minority interest and equity in earnings of
     unconsolidated affiliates                                    (333)          --           --
   Change in other assets and liabilities                       20,036       (8,362)      10,519
                                                             ---------    ---------    ---------
Cash provided by operating activities                        $  22,643    $   8,748    $  33,492
                                                             =========    =========    =========
</TABLE>

      The Parent Company Condensed Financial Information should be read in
conjunction with the Consolidated Financial Statements and Notes to Consolidated
Financial Statements as incorporated by reference in Item 8 Financial Statements
and Supplementary Data.


                                       35
<PAGE>

                                   SCHEDULE II

           Financial Security Assurance Holdings Ltd. (Parent Company)

                     Notes to Condensed Financial Statements

1.    Condensed Financial Statements

      Certain information and footnote disclosures normally included in
      financial statements prepared in accordance with generally accepted
      accounting principles have been condensed or omitted. These condensed
      financial statements should be read in conjunction with the Company's
      consolidated financial statements and the notes thereto.

2.    Significant Accounting Policies

      The Parent Company carries its investments in subsidiaries under the
      equity method.

3.    Reclassification

      Certain prior-year balances have been reclassified to conform to the 1998
      presentation.


                                       36