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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

Commission File Number 1-12644

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

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. [    ]

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
Yes [    ] No [X]

        The aggregate market value of common equity, excluding treasury shares, held by non-affiliates of the registrant at June 30, 2003 was $41,172,860. For purposes of the foregoing, directors are deemed to be affiliates of the registrant and the dollar amount shown is based on the price at which shares of the Company's common stock were valued under the Company's director share purchase program on June 30, 2003.

        At March 25, 2004, there were outstanding 33,220,337 shares of Common Stock, par value $0.01 per share, of the registrant (excludes 297,658 shares of treasury stock).

Documents Incorporated By Reference
None

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TABLE OF CONTENTS

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PART I

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 financial strength of FSA is rated "Triple-A" by the major securities rating agencies and obligations insured by FSA are generally awarded "Triple-A" ratings by reason of such insurance. FSA was the first insurance company organized to insure non-municipal obligations and has been a major insurer of asset-backed and other non-municipal obligations since its inception in 1985. FSA expanded the focus of its business in 1990 to include financial guaranty insurance of municipal obligations and has since become a major insurer of municipal obligations. For the year ended December 31, 2003, the Company had gross premiums written of $895.8 million, of which 34% related to insurance of asset-backed and other non-municipal obligations and 66% related to insurance of municipal obligations. At December 31, 2003, the Company had net par outstanding of $289.5 billion, of which 41% represented insurance of asset-backed and other non-municipal obligations and 59% represented insurance of municipal obligations. FSA is licensed to engage in the financial guaranty insurance business in all 50 states, the District of Columbia, Guam, Puerto Rico and the U.S. Virgin Islands. In addition, the Company offers FSA-insured guaranteed investment contracts and other investment agreements ("GICs") through its subsidiary, FSA Capital Management Services LLC ("FSACMS"). The amounts stated above exclude the intercompany insurance on GICs.

        FSA owns FSA Insurance Company ("FSAIC"), which in turn owns Financial Security Assurance International Ltd. ("FSA International") and Financial Security Assurance (U.K.) Limited ("FSA-UK"). FSAIC is an Oklahoma domiciled insurance company that primarily provides reinsurance to FSA. 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. All such insurance company subsidiaries are wholly-owned, except that XL Capital Ltd ("XL") owns a minority interest in FSA International, as described below.

        FSA Global Funding Limited ("FSA Global"), in which the Company owns a 29% equity interest, is a special purpose funding vehicle. In the third quarter of 2003, the Company consolidated FSA Global for the first time as a result of the Company's adoption of Financial Accounting Standards Board ("FASB") Interpretation No. 46, "Consolidation of Variable Interest Entities, an interpretation of ARB No. 51" (FIN 46). The Company also consolidated Premier International Funding Co. (Premier) in the third quarter as a result of FSA obtaining control rights. FSA Global is engaged in the issuance of FSA-insured medium term notes and invests the proceeds from the sale of its notes in FSA-insured obligations with a view towards realizing the yield difference between the notes issued and the obligations purchased with the note proceeds. Premier is principally engaged in debt defeasance for lease transactions. The Company's management believes that the assets held by FSA Global and Premier, including those that are eliminated in consolidation, are beyond the reach of the Company and its creditors, even in bankruptcy or other receivership. At December 31, 2003, FSA Global had $2.3 billion principal amount of outstanding notes, after elimination of intercompany transactions.

        FSACMS and FSA Capital Markets Services LLC (collectively, the "GIC Subsidiaries") are wholly owned subsidiaries of the Company. Until April 2003, both companies issued GICs. FSACMS has conducted all GIC business since April 2003, following receipt of an exemption from the requirements of the Investment Company Act of 1940. Proceeds from the sale of GICs are lent to FSA Asset Management LLC ("FSAM"). FSAM generally invests in obligations that would qualify for FSA

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insurance with a view towards realizing a yield difference between its investments and its obligations. At December 31, 2003, the Company had $4.2 billion principal of outstanding GICs.

        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. FSA Portfolio Management also owns various strategic and other investments made from time to time by other members of the FSA group of companies.

        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 FSA and its subsidiaries.

        FSA Services (Australia) Pty Limited, a wholly owned subsidiary of the Company, provides representative services with respect to financial guaranties issued by FSA and its subsidiaries in connection with financial transactions that have obligors or assets located in Australia.

        The Company is a subsidiary of Dexia Holdings, Inc. ("Dexia Holdings"), which, in turn, is owned 90% by Dexia Crédit Local SA and 10% by Dexia S.A. ("Dexia"), a Belgian corporation whose shares are traded in the Euronext Brussels and Euronext Paris markets as well as on the Luxembourg Stock Exchange. Dexia is primarily engaged in the business of public finance, banking and investment management in France, Belgium, Luxembourg and other European countries, as well as in the U.S. Dexia Crédit Local is a wholly owned subsidiary of Dexia.

        When the Company commenced operations in 1985, it 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, which subsequently changed its name to MediaOne Capital Corporation ("MediaOne"). MediaOne was 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 of common shares, at which time White Mountains Insurance Group, Ltd. ("White Mountains") (formerly known as Fund American Enterprises Holdings, Inc.) made an investment in the Company, and the chairman of White Mountains became non-executive chairman of the Company.    White Mountains is an insurance holding company.

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

        On July 5, 2000, the Company completed a merger in which the Company became a direct subsidiary of Dexia Holdings. At the merger date, each outstanding share of the Company's common stock was converted into the right to receive $76.00 in cash. At December 31, 2003, approximately 99% of the Company's common stock was held by Dexia Holdings, and the only other holders were an affiliate of White Mountains and certain current and former directors of the Company who own shares of the Company's common stock or economic interests therein as described under the caption "Director Share Purchase Program" in Item 11. Although the Company's common stock is no longer listed on the New York Stock Exchange ("NYSE") as a consequence of the merger, the Company continues to file periodic reports under the Securities Exchange Act of 1934 because debt securities issued by the Company are listed on the NYSE.

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

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 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. Asset-backed obligations insured by FSA also include payment obligations of counterparties and issuers under synthetic obligations such as credit default swaps and credit-linked notes. 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. Municipal obligations insured by FSA include project finance obligations, consisting primarily of obligations of special purpose issuers backed by the cash flow from lease or other revenues from projects serving a substantial public purpose, including government office buildings, toll roads, healthcare facilities and utilities.

        The Company's business objective is to remain a leading insurer of asset-backed and municipal obligations employing transactional and financial skills to generate increased premium volume at attractive returns while minimizing the occurrence and severity of credit losses in its insured portfolio. The Company believes that the demand for financial guaranty insurance will remain strong over the long term as a result of the anticipated continuation of four trends: (i) expansion of asset securitization; (ii) growth of project finance in Europe through expansion of private finance for funding of infrastructure projects; (iii) substantial volume of new domestic municipal bonds that are insured, due, in part, to the continued use of municipal bonds to finance repairs and improvements to the nation's infrastructure and continued demand for credit enhancement by individuals who purchase municipal bonds; and (iv) growing use of financial guaranty insurance in non-U.S. markets. The Company also anticipates continued demand over the long term for its GIC business and other financial products programs that employ financial guaranty insurance provided by FSA. The Company believes that short term trends for financial guaranty insurance remain uncertain due, among other things, to (i) potential decline in municipal financings and refundings should interest rates rise; and (ii) increased competition among financial guarantors and other alternative providers of credit enhancement.

        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 primarily in Western European and Asia Pacific markets.

Business of FSA

General

        The business of FSA is managed by the Company's Management Committee, comprised of FSA's Chief Executive Officer, President, General Counsel, Chief Risk Management Officer and Chief Financial Officer as full-time members, and the heads of FSA's Municipal Finance, Corporate Finance, International Finance and Financial Products groups, as part-time members. Bruno Deletre, a director of the Company, was named an ex officio member of the Management Committee in 2003. FSA is

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primarily engaged in the business of writing financial guaranty insurance on asset-backed and municipal obligations. In 2001, FSA commenced insuring GICs issued by the GIC Subsidiaries.

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. The great majority of asset-backed obligations are secured by or represent interests in diverse pools of assets, such as residential mortgage loans, auto loans, credit card receivables, other consumer receivables, corporate loans or bonds, government debt and small business loans. Monoline financial guarantors also insure asset-backed obligations secured by less diverse payment sources, such as multifamily real estate.

        Asset-backed obligations include funded and synthetic transactions. Funded asset-backed obligations are typically 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 funded asset-backed obligations generally have the benefit of one or more forms of credit enhancement, such as overcollateralization and excess cash flow, to cover credit risks associated with the related assets. Synthetic asset-backed obligations generally take the form of credit default swap (CDS) obligations or credit-linked notes that reference a pool of securities or loans, with a defined deductible to cover credit risks associated with the referenced securities or loans.

        Asset securitization often represents an efficient way for commercial banks to comply with capital requirements and for corporations to access the capital markets at more attractive rates and, frequently, with different accounting treatment. 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. In addition, some corporations have found securitization of their assets to be a less costly funding alternative to traditional forms of borrowing or otherwise important in diversifying funding sources. Also, some finance companies fund consumer finance and home equity lending through securitization.

        Since the late 1990s, there has been significant growth in the market for funded and synthetic collateralized debt obligations ("CDOs"), which are securitizations of bonds, loans or other securities. CDOs are used by financial institutions to manage their risk profiles, optimize capital utilization and improve returns on equity. CDOs are also used by dealers or portfolio managers to provide leveraged investments in bond and loan portfolios tailored to conform to differing risk appetites of investors.

        According to industry sources, the par volume of funded U.S. public asset-backed securities, including securities distributed under Rule 144A, since 1999, were as follows:

(1)

Information is from Asset-Backed Alert, January 11, 2002, January 10, 2003 and January 9, 2004 and includes corporate and consumer receivable-backed issues (including home equity loan issues)

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but excludes private-label mortgage-backed securities, collateralized debt obligations, commercial paper, synthetic transactions and non-Rule 144A private placements. Data is subject to revision as additional information becomes available.

        According to industry sources, par volumes in certain other asset-backed markets from 2000 through 2003 were as follows:

(1)

Information is from Asset-Backed Alert, January 11, 2002, January 10, 2003 and January 9, 2004. Data is subject to revision as additional information becomes available.

(2)

Information is from Asset-Backed Alert, January 11, 2002, January 10, 2003 and January 23, 2004. Data is subject to revision as additional information becomes available.

        The data in the tables above exclude synthetic transactions and therefore does not reflect the substantial growth in the use of CDS. According to survey data published on the website of the International Swaps and Derivatives Association, Inc., www.isda.org, the notional principal amount of CDS outstanding in world markets at the dates indicated were as follows:

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        According to the Association of Financial Guaranty Insurers ("AFGI"), the annual totals of funded and synthetic asset-backed par insured of financial guaranty insurance originated by monoline guarantors since 1999 were as follows:

(1)

Information is from a news release distributed by AFGI, April 23, 2003, and includes all funded and synthetic primary-market and secondary-market U.S. insured transactions, except municipal obligations. Data is subject to revision as additional information becomes available.

(2)

Not available from the same source. According to the statistical operating supplements published by the four largest monoline guarantors, those four companies insured, in the aggregate, approximately $103.1 billion of U.S. asset-backed par volume and $47.3 billion of non-U.S. asset-backed par volume during 2003.

        In general, since the 1990s, the asset-backed financial guaranty business has grown because of a variety of factors, including expansion of U.S. and international asset-backed securities and CDS markets, the related opportunities for guarantors to insure high-quality business and diversify their insured portfolios, high demand for credit enhancement on complex asset-backed issues and attractive returns available in the asset-backed market.    Although the asset-backed market is now mature in the U.S., the Company expects it to continue to be a significant market for financial guarantors and to provide substantial growth opportunities outside the U.S.

        In recent years, there has been substantial consolidation and contraction among finance companies that originate securitizations, particularly in the subprime mortgage and auto loan finance sectors in which FSA operates. This consolidation appears to have been largely completed, and the surviving companies generally have stronger operating profiles than before the period of consolidation. In addition, narrowing spreads between the yields on Triple-A and lesser rated obligations generally reduced the number of appropriately priced opportunities for guarantors during 2003. In the CDO market, investor appetite and corresponding volumes are also dependent on the credit cycle and credit spreads, with narrower spreads generally slowing both the overall and insured volume of CDOs.

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 and public private infrastructure financings. Municipal obligations include project finance obligations, consisting of obligations backed by the cash flow from leases or other revenues from projects serving a substantial public purpose, including government office buildings, toll roads, healthcare facilities and utilities.

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        Until 1999, insurance of municipal obligations (primarily in the U.S.) represented the largest portion of the financial guaranty insurance business. In 1999, rising interest rates were responsible for much of the decline in total issuance that year and caused a steep decline in refundings. The year 2000 saw a further decline in both total municipal issuance and percentage of municipal par insured benefiting from bond insurance, attributable in part to budget surpluses reducing borrowing needs, with strengthened municipal issuers having less need to employ bond insurance. In 2001, new issue volume grew substantially due, in part, to a declining interest rate environment, and insurance penetration returned to approximately the same level as in 1999. Volume increased in 2002 and 2003 as low interest rates, diminished tax revenues and continuing needs for infrastructure investment drove municipalities to borrow on an unprecedented scale.

        The following table sets forth certain information regarding long-term U.S. municipal new issues sold during the periods indicated:

Insured U.S. Municipal Obligations(1)

(1)

Information is based on data provided in The Bond Buyer, March 8, 2004. Volume is expressed in terms of principal issued and insured on a sale-date basis. Data is subject to revision as additional information becomes available.

        Outside the United States, guarantors have become increasingly active in public infrastructure finance. These transactions frequently finance public-private partnerships, such as those authorized by the U.K. Private Finance Initiative.

        According to AFGI, the annual totals of non-U.S. municipal par insured of financial guaranty insurance originated by monoline guarantors since 1999 were as follows:

Non-U.S. Municipal Obligations Insured by Monoline
Insurance Companies(1)

(1)

Information is from a news release distributed by AFGI, April 23, 2003. Data is subject to revision as additional information becomes available.

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(2)

Not available from the same source. According to the statistical operating supplements published by the three monoline guarantors most active outside the United States, those three companies insured, in the aggregate, a principal amount of $17.0 billion of non-U.S. municipal obligations in 2003.

GICs/Variable Interest Entity (VIE) Debt

        The Company's GIC business provides GICs to municipalities and other market participants. All such GICs are insured by FSA. Municipal GICs are primarily used by holders to invest bond proceeds required to be maintained in debt service reserve funds or construction funds for bond issues. Non-municipal GICs insured by FSA include GICs acquired by issuers of credit linked notes and GICs acquired by FSA Global. GICs provide for the return of principal and the payment of interest at specified rates. Amounts raised by the GIC Subsidiaries through the issuance of GICs are generally raised at or converted into LIBOR-based floating rate obligations, with proceeds invested in or converted into LIBOR-based floating rate investments intended to result in profits from the positive difference between the borrowing rate (the floating rate on the GIC-related obligations) and the floating rate interest on the investments. These investments are owned, and the related risk management function is performed, by FSAM.

        FSA-insured GICs subject the Company to risk associated with unexpected withdrawals of principal from the GICs. The majority of municipal GICs insured by FSA relate to debt service reserve funds and construction funds in support of municipal bond transactions. Debt service reserve fund GICs may be drawn unexpectedly upon a payment default by the municipal issuer. Construction fund GICs, which fund the payment of project expenses in accordance with the underlying bond documents, may be drawn more quickly or more slowly than anticipated to pay such expenses. In addition, most FSA-insured GICs allow for withdrawal of GIC funds in the event of a downgrade of FSA, typically below AA- by S&P or Aa3 by Moody's, unless the GIC provider posts collateral or otherwise enhances its credit. The Company manages this risk through the maintenance of liquid collateral and liquidity agreements.

        FSA Global is a Cayman Islands domiciled issuer of FSA-insured notes and other obligations sold in international markets (generally referred to as medium term notes or "MTNs"). FSA Global issues securities at the request of interested purchasers in a process known as "reverse inquiry," which generally results in lower interest rates and borrowing costs than would apply to direct borrowings. FSA Global also issues securities in traditional private placements to institutional investors and to participants in lease financings in which Company affiliates may play a number of financing roles. FSA Global is managed as a "matched funding vehicle," in which the proceeds from the sale of FSA Global notes are invested in obligations chosen to provide cash flows substantially matched to those of the FSA Global notes (taking into account, in some cases, dedicated third party liquidity). The matched funding structure minimizes the market risks borne by FSA Global and FSA. FSA Global raises funds that are U.S. dollar denominated or converted into U.S. dollars at LIBOR-based floating borrowing rates, and invests its funds in U.S. dollar denominated LIBOR-based floating rate obligations insured by FSA, maturing prior to the maturity of the related FSA Global notes and paying a higher interest rate than the interest rate on the related FSA Global notes.

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, in the case of funded transactions, the interest rate savings to the issuer from the use of insurance. In

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transactions under the Company's GIC and MTN programs, transactions involving "repackaging" of outstanding securities and other cases, FSA's premium may be arbitrage-based, equaling the difference between the effective borrowing cost at a Triple-A rate and the interest rate on the underlying securities.

        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®) Program provides insurance for asset-backed obligations trading in the secondary market. Likewise, FSA's Custody Receipt Program provides insurance for municipal obligations trading in the secondary market. Investors and dealers generally obtain secondary-market insurance to upgrade or stabilize the credit ratings of positions they already hold or plan to acquire or to increase the market liquidity of such positions. FSA's underwriting guidelines require the same underwriting standards on secondary market issues as on new security issues, although control rights of FSA in the event of default are generally more limited and the evaluation procedures are typically abbreviated.

        FSA insures payment obligations of counterparties and issuers under GICs, GIC equivalents, credit-linked notes and obligations under interest rate, currency and credit default swaps. FSA also issues surety bonds under its Sure-Bid® program, which provides an alternative to traditional types of good faith deposits on competitive municipal bond transactions.

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        The following table indicates the Company's percentages of par amount (net of reinsurance) outstanding at December 31, 2003 and 2002 with respect to each type of asset-backed and municipal program:

Net Par Amount and Percentage Outstanding by Program Type

(1)

Excludes $4,474 million and $2,430 million in 2003 and 2002, respectively, relating to FSA-insured GICs issued by the GIC Subsidiaries. Such amounts are included in FSA's exposures. The consolidated financial statements of the Company reflect the FSA-insured GICs as GIC liabilities instead of as insurance exposure because the GIC Subsidiaries are consolidated with the Company.

(2)

Excludes $1,158 million and $1,171 million net par amount outstanding assumed by FSA under reinsurance agreements at December 31, 2003 and 2002, respectively.

(3)

Excludes $701 million and $766 million net par amount outstanding assumed by FSA under reinsurance agreements at December 31, 2003 and 2002, respectively.

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Insurance in Force

        FSA insures a variety of asset-backed obligations, including obligations backed by residential mortgage loans, consumer or trade receivables, corporate loans and bonds, government debt and multifamily mortgage loans. Asset-backed obligations insured by FSA include payment obligations of counterparties and issuers under synthetic obligations such as CDS and credit-linked notes structured to have risks similar to those of more traditional asset-backed structures. FSA has insured a broad array of municipal obligations. FSA has also insured investor-owned utility first mortgage bonds and sale/leaseback obligation bonds. FSA has insured obligations of financial institutions and, on a short-term basis, obligations of highly rated corporate obligors. In recent years, FSA has insured obligations in connection with various cross-border and municipal leases. In some cases, FSA has insured obligations already carrying insurance from other monoline guarantors, with FSA generally obligated to pay claims on a "second-to-pay" basis, following a default by both the underlying obligor and the first-to-pay financial guarantor. In recent years, FSA has reinsured a modest amount of business from other financial guaranty insurers.

        A summary of the Company's par outstanding at December 31, 2003 is as follows:

(1)

Excludes $4,474 million in direct par outstanding relating to FSA-insured GICs issued by the GIC Subsidiaries that are included in FSA's exposures. The consolidated financial statements of the Company reflect the FSA-insured GICs as GIC liabilities instead of as insurance exposure because the GIC Subsidiaries are consolidated with the Company.

        At December 31, 2003, the weighted average life of the direct par insured on these policies was approximately 3 and 13 years for asset-backed and municipal obligations, respectively.

Asset-Backed and Other Non-Municipal Obligations

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

        Domestic Residential Mortgage Loans.    Obligations primarily backed by residential mortgage loans generally take the form of conventional pass-through certificates or pay-through debt securities, but also include other structured products. Residential mortgage loans backing these insured obligations include closed-end first mortgage loans and closed- and open-end second mortgage loans or home equity loans on one-to-four family residential properties, including condominiums and cooperative apartments. Domestic residential mortgage loan obligations insured by FSA have tended to be concentrated in the "sub-prime" sector, characterized by lower quality borrowers and higher levels of structural credit protection through subordination and/or excess spread. In recent years, FSA has also insured "net interest margin" ("NIM") securities backed by the senior portion of residual cash flows from securitizations of domestic residential mortgage loans. FSA's policy is to decline participation in securitizations of so-called "high cost mortgage loans," characterized by very high interest rates or "points and fees" and subject to restrictive federal and state regulations.

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        Domestic 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, manufactured housing loans and credit card receivables. Consumer receivable transactions insured by FSA have tended to be concentrated in the sub-prime auto loan and credit card receivable sectors.

        Domestic Pooled Corporate Obligations.    Obligations primarily backed by pooled corporate obligations include funded and synthetic 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", "collateralized loan obligations" and comparable risks under CDS obligations (collectively, "collateralized debt obligations" or "CDOs"). Corporate obligations include corporate bonds, bank loan participations, trade receivables, franchise loans and equity securities. CDS obligations expose FSA to elements of market value risk arising from obligations to pay the difference between par and market value upon the occurrence of a payment default or other defined "credit events" specified in the CDS. FSA generally addresses these risks by requiring large deductibles as a condition to payment under pooled corporate CDS insured by FSA.

        Other Domestic Non-Municipal Obligations.    Other domestic non-municipal obligations include bonds or other securities backed by government securities, letters of credit, guarantees by other monoline insurers or repurchase agreements collateralized by government securities, securities backed by a combination of assets that include elements of more than one of the categories set forth above and unsecured corporate obligations satisfying FSA's underwriting criteria. Other domestic non-municipal obligations insured by FSA also include first mortgage bond obligations of for-profit electric or water utilities providing retail, industrial and commercial service, sale-leaseback obligation bonds supported by such utilities and other obligations backed by investor-owned utilities. In each case, these bonds are secured by a mortgage on property owned by or leased to an investor-owned utility.

        International Asset-Backed Obligations.    International asset-backed obligations include obligations of non-domestic portions of funded and synthetic CDOs, securitizations of perpetual floating rate notes of non-domestic banks, obligations of non-domestic investor-owned utilities and other obligations having international aspects but otherwise within the asset-backed categories described above.

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Municipal Obligations

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

        Domestic General Obligation Bonds.    General obligation or full faith and credit 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 ad valorem taxes in an amount sufficient to provide for the full payment of the bonds.

        Domestic 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, first loss guaranties, 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.

        Domestic 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.

        Domestic Health Care Revenue Bonds.    Health care revenue bonds include bonds of state and local municipal authorities issued on a conduit basis on behalf of not-for-profit hospitals and hospital systems for refinancings and capital acquisitions and construction, payable from amounts derived under loan agreements and notes of such health care providers with such authorities.

        Domestic Tax-Supported (Non-General Obligation) Bonds.    Tax-supported (non-general obligation) bonds include a variety of bonds that, though not full faith and credit general obligations, are supported by a specific or discrete source of taxation of the issuer, and include tax-backed revenue bonds and general fund obligations of the issuer, such as lease revenue bonds. Tax-backed revenue bonds may be secured by a lien on pledged tax revenues, such as revenues from special taxes, including retail sales and gasoline taxes, 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 issuer to levy, collect and enforce collections and to foreclose on delinquent properties. Lease revenue bonds or certificates of participation ("COPs") are usually general fund obligations subject to annual appropriation or abatement. The projects financed by lease revenue bonds or COPs are generally real property or equipment that, in the case of annual appropriation or abatement leases, FSA deems to serve an essential public purpose (e.g., schools, prisons, courts).

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

        Other Domestic Municipal Bonds.    Other domestic municipal bonds insured by FSA include college and university (primarily public or state-supported) revenue bonds, moral obligation bonds, financings for stadiums, resource recovery bonds and debt issued, guarantied or otherwise supported by domestic state or local governmental entities.

        International Municipal Obligations.    International municipal obligations include obligations of sovereign and sub-sovereign non-domestic municipal issuers, project finance transactions involving projects leased to or supported by payments from non-domestic governmental or quasi-governmental entities, toll road transactions supported by toll revenues, obligations arising under leases of equipment or facilities by non-domestic municipal obligors, non-domestic municipal utility revenue bonds and

15

other obligations having international aspects but otherwise within the municipal categories described above.

        A summary of FSA's insured portfolio at December 31, 2003 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.

Insured Portfolio

Summary of Insured Portfolio at December 31, 2003(1)

(1)

Excludes $4,474 million and $5,708 million in net par amount outstanding and net par and interest, respectively, relating to FSA-insured GICs issued by the GIC Subsidiaries. Such amounts are included in FSA's exposures. The consolidated financial statements of the Company reflect the FSA-insured GICs as GIC liabilities instead of as insurance exposure because the GIC Subsidiaries are consolidated with the Company.

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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

(1)

Percentages of 0 represent amounts that are less than .5% of the total.

(2)

Excludes $3.6 billion, $2.0 billion and $0.5 billion, in 2003, 2002 and 2001, respectively, relating to FSA-insured GICs issued by the GIC Subsidiaries. Such amounts are included in FSA's exposures. The consolidated financial statements of the Company reflect the FSA-insured GICs as GIC liabilities instead of as insurance exposure because the GIC Subsidiaries are consolidated with the Company.

17

Terms to Maturity

        The table below sets forth the contractual terms to maturity of FSA's policies at December 31, 2003 and 2002:

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

(1)

Actual maturities could differ from contractual maturities because borrowers have the right to call or prepay certain obligations with or without call or prepayment penalties. The average expected maturities for asset-backed obligations are expected to be considerably shorter than the contractual maturities for such obligations.

(2)

Excludes $4,474 million and $2,430 million, in 2003 and 2002, respectively, relating to FSA-insured GICs issued by the GIC Subsidiaries. Such amounts are included in FSA's exposures. The consolidated financial statements of the Company reflect the FSA-insured GICs as GIC liabilities instead of as insurance exposure because the GIC Subsidiaries are consolidated with the Company.

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, 2003:

Asset-Backed—Original Net Par Amount Per Issue(1)(2)

(1)

Excludes $1,158 million net par amount outstanding assumed by FSA and its subsidiaries under reinsurance agreements.

(2)

Excludes $4,474 million relating to FSA-insured GICs issued by the GIC Subsidiaries. Such amounts are included in FSA's exposures. The consolidated financial statements of the Company reflect the FSA-insured GICs as GIC liabilities instead of as insurance exposure because the GIC Subsidiaries are consolidated with the Company.

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Municipal—Original Net Par Amount Per Issue(1)

(1)

Excludes $701 million net par amount outstanding assumed by FSA and its subsidiaries under reinsurance agreements.

Geographic Concentration

        In its asset-backed business, FSA considers geographic concentration as a factor in underwriting insurance for securitizations of pools of assets, 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 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

19

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, 2003

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        The Company's revenues from external customers attributed to the United States and all foreign countries during each of the Company's last three fiscal years is shown below:

        See Note 23 to the Consolidated Financial Statements for revenues from external customers, income before income taxes and total assets by segment.

Issuer Concentration

        FSA has adopted underwriting and exposure management policies designed to limit the net par insured or net retained credit gap for any one credit. Credit gap is a concept employed by Standard & Poor's Ratings Services ("S&P") to measure the at-risk amount (worst-case risk) on an insured exposure. FSA has also established procedures to ensure compliance with regulatory single-risk limits applicable to bonds insured by it. In many cases, FSA uses reinsurance to limit net exposure to any one credit. At December 31, 2003, FSA's ten largest net insured asset-backed transactions represented $17.4 billion, or 6.0%, of the Company's total net par amount outstanding, and FSA's ten largest net insured municipal credits represented $9.0 billion, or 3.1%, of the Company's 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. In addition, individual corporate names may appear in more than one FSA-insured CDO transaction, but such exposures are not aggregated for purposes of identifying FSA's largest exposures. Instead, FSA addresses these risks by limiting its exposure to the CDO sector in the aggregate. FSA is also subject to regulatory limits and rating agency guidelines on exposures to single credits.

Credit Underwriting Guidelines, Standards and Procedures

        Financial guaranty insurance written by FSA generally 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 that reviews, generally on a quarterly basis, 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," reserves or, in the case of CDS, a deductible) or third-party protection (such as bank letters of credit, guarantees, net worth maintenance agreements, indemnity agreements or reinsurance agreements). This

21

overcollateralization or third-party protection need not protect FSA against all loss, but is generally intended to assume the primary risk of financial loss. Asset-backed obligations insured by FSA also often benefit from self-adjusting mechanisms, such as cash traps or accelerated amortization that take effect upon a failure of the transaction to satisfy performance based triggers. Asset-backed obligations insured by FSA may also benefit from third party protection such as letters of credit, mortgage guaranty insurance or financial guaranty insurance provided by other financial institutions. Overcollateralization or third-party protection may not be required in transactions in which FSA is insuring the obligations of certain 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 funded asset-backed obligations rather than providing partial or first-loss coverage sufficient to confer a Triple-A rating on the insured obligations.

        FSA's underwriting guidelines for municipal obligations require that a transaction be rated investment grade by Moody's Investors Service, Inc. ("Moody's") or S&P or, in the alternative, that the credit quality of the 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 may be required to provide a rate 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. Asset-backed obligations insured by FSA are 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 insured obligation and the risk elements involved. The independent review of FSA's underwriting practices performed by the rating agencies further strengthens the underwriting process.

        The Company's Risk Management Committee reviews the Company's insured portfolio on a periodic basis. The Risk Management Committee is comprised of FSA's Chief Risk Management Officer, Chief Domestic Underwriting Officer, Chief Municipal Underwriting Officer and Chief International Underwriting Officer, with FSA's Chief Executive Officer, President, General Counsel and Chief Financial Officer as ex officio members.

        The underwriting process that implements the Company's underwriting guidelines and standards is supported by FSA's 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. This evaluation 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 (the "MRC") for asset-backed transactions and municipal international project finance transactions and from FSA's Municipal Underwriting Committee (the "MUNC") for municipal transactions. Approval is usually based upon both a written and an oral presentation by the underwriting group to the respective committee. The MRC is comprised of FSA's Chief Executive Officer, President, Chief Risk Management Officer, Chief Domestic Underwriting Officer, Chief International Underwriting Officer,

22

General Counsel and Associate General Counsel for Asset-Backed Transactions. The Chief Executive Officer, President and General Counsel do not participate in MRC meetings for transactions not classified as presenting new issues. The MUNC is comprised of FSA's Chief Executive Officer, President, Chief Municipal Underwriting Officer, Municipal Underwriting Officer, Managing Director of Public Finance and Associate General Counsels for Municipal Transactions. The MUNC approval process generally requires approval by at least the Chief Executive Officer or President; the Chief Municipal Underwriting Officer or Municipal Underwriting Officer; and an Associate General Counsel for Municipal Transactions. Following approval, minor transaction modifications may be approved by the Chair of the applicable underwriting committee. Major changes require the concurrence of the applicable underwriting committee. Subject to applicable limits, guaranties of secondary market issues and portions of senior classes of asset-backed transactions that meet certain credit and return criteria may be approved by one member of FSA's Risk Management Committee and the head of the department involved, with a third signature required from a member of the Risk Management Committee for larger transactions. Subject to applicable limits, municipal transactions that meet certain credit and return criteria may be approved by a committee (the "Demi-MUNC") comprised of the Chief Municipal Underwriting Officer, Municipal Underwriting Officer or Managing Director for Municipal Operations; an Associate General Counsel for Municipal Transactions; and any one of certain managing directors and directors designated by the MUNC. The Demi-MUNC approval process generally requires approval by at least two voting members, with approval by the Chief Municipal Underwriting Officer or Municipal Underwriting Officer required for transactions exceeding a certain size.

Corporate Research

        FSA's Corporate Research Department is comprised of a professional staff under the direction of the Chief Risk Management Officer. The Corporate Research Department is responsible for evaluating the credit of entities participating or providing recourse on obligations insured by FSA. The Corporate Research Department also provides analysis of 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.

Transaction Oversight and Transaction Services

        FSA's Transaction Oversight Departments and 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 the Chief Risk Management Officer and Chief Municipal Underwriting Officer, as well as to the Risk Management Committee. The Transaction Oversight Departments review insured transactions 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

23

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. FSA's Legal Department is divided into three sectors (asset-backed transactions, municipal transactions and regulatory/reinsurance/corporate), each managed by an Associate 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 MRC and the MUNC, 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 reserve for the unpaid losses and loss adjustment expenses for the present value of the estimated loss when, in management's opinion, the likelihood of a future loss on a particular insured obligation is probable and determinable at the balance sheet date. For CDOs, a case reserve is recorded to the extent that the overcollateralization ratio (non-defaulted collateral at par divided by the debt insured) has fallen below 100% and there is a projected loss when calculating the present value of cash flows.

        The Company also maintains a non-specific general reserve, which is available to be applied against future additions or accretions to existing case reserves or to new case reserves to be established in the future. The general reserve is derived from two separate steps. The first step is to multiply loss factors by the Company's total net par underwritten and to discount the result at the then current risk-free rates. The loss factors used for this purpose are obtained from an independent rating agency study of bond defaults and have been adjusted by the Company's portfolio characteristics and history. The second step pertains to the Company's insured CDOs, where a present value "deterministic" approach, discussed below, is utilized to calculate the general reserve for the Company's insured CDOs.

        Management of the Company periodically evaluates its estimates for losses and loss adjustment expenses and establishes reserves that management believes are adequate to cover the net present value of the ultimate net cost of claims.

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        Activity in the liability for losses and loss adjustment expenses, consisting of case basis and general reserves, is summarized as follows:

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

        In the second quarter of 2002, as part of the Company's ongoing credit review process, management identified certain transactions not performing as expected in its portfolio of insured CDOs. As a result, management undertook a quantitative analysis of all CDO transactions in its insured portfolio that breached senior overcollateralization triggers, which were included in such transactions as one measure of adverse performance. A present value deterministic approach was utilized as a basis to estimate the loss inherent in this portfolio. The deterministic model takes the average cumulative default rate produced by a Monte Carlo simulation and applies those default rates to a cash flow model using (i) a timing sequence dependent on the portfolio's rating and maturity composition, (ii) an estimate of collateral recovery values for severity and (iii) the LIBOR forward curve as a predictor of interest rates. Management assumed that current default rates on CDO collateral would improve in a manner consistent with an economic recovery following a period of significant credit deterioration similar to that experienced in 1991/1992 and, as a result, management utilized the Moody's idealized default curve, adjusted by a factor consistent with the relationship between the 1992 cohort experience and the Moody's 30-year average default rate. The per-period default rate was calculated based on Moody's weighted-average rating factor for each piece of surviving collateral. Recovery rates were judgmentally established by the Company. In considering the recovery rates to be utilized, management adjusted Moody's average recovery rates (observed since 1982) downward to reflect more recent and more adverse observations. At June 30, 2002, this analysis produced a present value of expected losses of $51.5 million, net of reinsurance recoveries and net of unearned premiums and future ceding commissions. As described in more detail below, management addressed this net present value of expected loss ($51.5 million) through (i) an increase in the Company's general reserve ($31.0 million) and (ii) amounts already existing in its general reserve ($20.5 million), including general reserve amounts reallocated to case reserves ($11.3 million). The $31.0 million increase in the Company's general reserve resulted in a corresponding increase to losses

25

and loss adjustment expense in the income statement of $31.0 million. An additional adjustment of $10.1 million was made in the fourth quarter of 2002 as a result of further deterioration of the CDO portfolio. In addition, such transactions generally require insured payments of principal only at the ultimate maturity of such transactions. As a result, the Company does not expect to be required to pay claims in respect of these transactions for several years, but may elect to do so at an earlier date at its discretion. Over time, management expects to reallocate amounts in its general reserve (including accretions thereto) to case basis reserves as specific losses on its insured CDO portfolio become probable and estimable in accordance with the undercollateralization methodology described above. Application of this methodology in 2002 resulted in recording $68.8 million in gross case basis reserves and $29.8 million in reinsurance recoverable on unpaid losses, resulting in a $39.0 million increase in net case basis reserves.

        Beginning in the second quarter of 2002, management refined the loss factor it applies to its net par underwritten when calculating the general reserve in order to reflect its recent adverse experience. As a result, the general reserve accrual for the year ended December 31, 2002 was $65.6 million, rather than the approximate $14.9 million that would have been accrued using the prior assumptions. Management expects future reserve contributions to be approximately double the amounts under the prior practice, exclusive of the additions to the general reserve as a result of the insured CDO portfolio of $41.1 million in 2002.

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

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

        Reserves for losses and loss adjustment expenses are discounted at the then current risk-free rates, which ranged between 4.94% and 6.1% for case basis reserves and 1.2% to 7.953% for the general reserve. The cumulative amount of discount taken was approximately $65.9 million, $44.7 million and $29.6 million at December 31, 2003, 2002 and 2001, respectively.

Competition and Industry Concentration

        FSA faces competition from both other providers of and alternatives to third-party credit enhancement. The majority of asset-backed and municipal obligations are sold without third-party credit enhancement. Accordingly, each transaction FSA proposes to insure must generally compete against an alternative execution that does not employ third-party credit enhancement. FSA also faces competition from other Triple-A rated monoline financial guaranty insurers, primarily Ambac Assurance Corp. ("Ambac"), Financial Guaranty Insurance Company ("FGIC"), MBIA Insurance Corp. ("MBIA"), XL Capital Assurance Inc. ("XLCA") and CDC-IXIS Financial Guaranty ("CIFG"). Two market participants previously engaged directly or through affiliates primarily in reinsurance (ACE Guaranty Inc. and Radian Asset Guaranty Inc.) have announced a greater commitment to the primary financial guaranty insurance market. Although FGIC has limited its business in recent years primarily

26

to underwriting certain categories of municipal risks, FGIC was sold in December 2003 and its new management has indicated that FGIC will compete more broadly in asset-backed and municipal sectors not previously serviced by FGIC. Likewise, XLCA and CIFG, as relative new entrants to the market, may provide increasing competition to more established market participants such as FSA as they attempt to grow their market share. In addition, DEPFA Bank, plc, has announced its intentions to establish a monoline financial guaranty insurer to compete in the U.S. public finance market. DEPFA Bank, plc, an Irish bank, is a provider of financial services to public sector clients. The Company understands that other parties are also considering establishing new financial guaranty insurers that may compete with the Company.

        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 financial institutions 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, credit default swaps, credit-linked notes and other synthetic products provide coverage directly competitive with financial guaranty insurance, and expand the universe of participants in the financial risk market. Recent legislation may facilitate the direct participation by bank affiliates in the U.S. insurance business, including the financial guaranty insurance business. In addition, government sponsored entities, including Fannie Mae and Freddie Mac, compete with the monoline financial guaranty insurers, on a limited basis, in the mortgage-backed and multifamily sectors. Expansion of the business franchises by government sponsored entities, as well as potential new entrants into the financial guaranty sector such as Federal Home Loan Banks and state pension funds, present additional competitive challenges to private sector participants such as FSA.

        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 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 U.S. government securities held in escrow or other qualified collateral. Qualified statutory capital, determined in accordance with statutory accounting practices, is the aggregate of policyholders' surplus and contingency reserves calculated in accordance with statutory accounting practices. Set forth below are FSA's aggregate gross insurance in force, net insurance in force, qualified statutory capital and capital ratio (represented by the ratio of its net insurance in force to qualified statutory capital) and the average industry capital ratio at the dates indicated. Net insurance data does not distinguish between quota share reinsurance and first-loss reinsurance. In light of FSA's substantial use of first-loss

27

reinsurance in the asset-backed sector, the data below tends to overstate FSA's risk leverage in comparison with its industry counterparts.

(1)

Financial guaranty primary insurers for which data is included in this table are Ambac, 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, 2003, 2002 and 2001.

(2)

Includes gross and net insurance in force of $5,708 million, $3,199 million and $594 million for 2003, 2002 and 2001, respectively, relating to FSA-insured GICs issued by the GIC Subsidiaries. Includes gross and net insurance in force of $763 million and $415 million, respectively, relating to FSA Global investments and Canadian Global debt insured by FSA.

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.

        FSA obtains reinsurance to increase its policy writing capacity, both on an aggregate-risk and a single-risk basis, to meet internal, rating agency and state insurance regulatory limits; to diversify risks; to reduce the need for additional capital; and to strengthen financial ratios. At December 31, 2003, FSA had reinsured approximately 25.0% of its 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. Quota share reinsurance generally provides protection against a fixed specified percentage of all losses incurred by FSA. First-loss reinsurance generally provides protection against a fixed specified percentage of losses incurred up to a specified limit. Excess of loss reinsurance generally provides protection against a fixed percentage of losses incurred to the extent that losses incurred exceed a specified limit. 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 that 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. 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

28

and the occurrence of certain other conditions, FSA generally has the right to reassume all of the business reinsured. As required by applicable state law, reinsurance agreements may be subject to certain other termination conditions.

        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 important to FSA, and FSA endeavors to place its reinsurance with financially strong reinsurers. FSA's treaty reinsurers at December 31, 2003 were ACE Capital Re International Ltd., ACE Guaranty Corp., Radian Reinsurance Inc. (formerly Enhance Reinsurance Company), RAM Reinsurance Co. Ltd., Swiss Reinsurance America Corporation, Tokio Marine and XLFA.

        Securities rating agencies allow FSA "credit" for reinsurance based on the reinsurer's ratings. Generally, 100% credit is allowed for Triple-A reinsurance and 65-90% credit is allowed for Double-A reinsurance. In recent years, a number of FSA's reinsurers have been downgraded from Triple-A to Double-A or lower by one or more rating agencies. While ceding commissions or premium allocation adjustments may compensate in part for such downgrades, the effect of such downgrades, in general, is to decrease the financial benefits of using reinsurance under rating agency capital adequacy models.

        FSA, FSAIC and FSA International are party to 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. Under the pooling agreement, FSA, FSAIC and FSA International share the net retained risk in proportion to their policyholders' surplus and contingency reserves ("Statutory Capital") at the end of the prior calendar quarter. FSA-UK and FSA are party to 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 Statutory Capital of FSA-UK to the total Statutory Capital 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 annual net incurred losses and expenses exceeds FSA-UK's annual net earned premiums plus draws on FSA-UK's equalization reserves to pay incurred losses. Under this agreement, FSA-UK ceded to FSA approximately 99% of its retention after other reinsurance of its policies issued in 2003.

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 financial strength of FSA and its operating insurance company subsidiaries is rated "Aaa" by Moody's and "AAA" by S&P, Fitch Ratings and 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, and publish their ratings and supporting analyses. 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.

        Moody's and S&P apply their own capital adequacy models in assessing the financial strength of FSA. Financial factors considered in assessing capital adequacy include: (i) capital charges or other assessments of credit risks for FSA's insured portfolio; (ii) the quality of FSA's investment portfolio; (iii) the degree of risk embedded in FSA's GIC business; (iv) the credit quality of FSA's reinsurers and

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the type of reinsurance provided thereby; (v) credit lines and other capital support arrangements ("soft capital"); (vi) premium revenues expected to be generated from outstanding policies; and (vii) anticipated future new business originations and anticipated future losses. Given the importance of its ratings to its on-going business, underwriting and business decisions by FSA generally include an analysis of the impact on rating agency capital determinations in addition to other measures of creditworthiness. Reference is made to the published reports of Moody's and S&P regarding FSA, the Company, capital adequacy models and the bond insurance business in general for further information on such subjects, as well as FSA's relative standing to its industry peers using various yardsticks considered material by the rating agencies, including capital adequacy and profitability.

Insurance Regulatory Matters

General

        FSA is licensed to engage in insurance business in all 50 states, the District of Columbia, Guam, Puerto Rico and the U.S. Virgin Islands. FSA is subject to the insurance laws of the State of New York (the "New York Insurance Law"), and is also subject to the insurance laws of the other states in which it is licensed to transact insurance business. FSAIC is an Oklahoma domiciled insurance company also licensed in New York and subject to the New York Insurance Law. FSA and its domestic insurance company subsidiary 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 Superintendent of Insurance of the State of New York (the "New York Superintendent") and other state insurance regulatory authorities. The last completed examination was conducted in 2000 for the three-year period ended December 31, 1999. FSA's accounts are currently under examination for the three-year period ended December 31, 2002.

        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, England. 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. FSA has a Singapore branch authorized to transact insurance business in Singapore and subject to regulation by Singapore authorities.

Domestic Insurance Holding Company Laws

        The Company and its domestic insurance company subsidiaries (FSA and FSAIC) are subject to regulation under insurance holding company statutes of New York and Oklahoma, where these insurers are domiciled, as well as other jurisdictions where these insurers 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, certain dividends and other intercorporate transfers of assets and 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 and FSAIC, requires the prior

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approval of the New York Superintendent and the Oklahoma Insurance Commissioner. "Control" is defined as the direct or indirect 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 of the New York Insurance Law ("Article 69"), 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 on 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 reserves, 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 reserves. 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 reserves. 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.

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        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 on FSA's financial condition, results of operations, cash requirements, rating agency confirmation of non-impairment of FSA's ratings and other related factors, and is also subject to restrictions contained in the insurance laws and related regulations of New York ("New York Insurance Law") and other states. Under New York Insurance Law, FSA may pay dividends out of statutory 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 or (ii) adjusted net investment income during this period. Based on FSA's statutory statements for the year ended December 31, 2003, the maximum amount available for payment of dividends by FSA without regulatory approval over the following 12 months is approximately $112.6 million. In 2003 and 2002, FSA International paid a preferred dividend of $3.3 million and $8.7 million, respectively, to XL, its minority interest owner.

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 Belgium, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal and Spain 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 branch. FSA is in the process of seeking branch licenses in Canada (and its respective provinces) and Japan.

U.S. Bank Holding Company Act

        Dexia indirectly owns approximately 99% of the Company's common stock. Because Dexia has non-U.S. bank subsidiaries with banking offices in the U.S., Dexia and all of its subsidiaries, including the Company and its subsidiaries, are subject to the U.S. Bank Holding Company Act (the "BHC Act"). In general, the BHC Act restricts the activities of banking organizations and their affiliates to the ownership and operation of banks and to other activities that are "closely related to banking" as determined by the Board of Governors of the Federal Reserve System (the "Federal Reserve"). Insurance activities such as those conducted by certain of the Company's subsidiaries are generally not permissible under this restriction. Under the BHC Act, however, an organization that qualifies as a "financial holding company" is permitted to engage in a broader range of permissible "financial activities". "Financial activities" include insurance underwriting and agency activities as well as merchant banking. For a non-U.S. organization to qualify as a "financial holding company," it, if it has

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a U.S. banking office, and each of its non-U.S. bank subsidiaries with a U.S. banking office, must be both (i) "well-capitalized," which requires Tier 1 and total capital to risk-based asset ratios of at least 6% and 10%, respectively, as calculated under home country standards, and (ii) "well-managed," which requires a composite U.S. banking office examination rating by the relevant U.S. bank regulator of at least "satisfactory." Dexia holds its investment in, and operates, the Company and its subsidiaries under, the "financial activities" authorization permitted to "financial holding companies."

Investments

        In addition to its insurance company assets and other investments (the "investment portfolio"), the Company also maintains investments from proceeds of FSA-insured GICs (the "GIC Portfolio") and the portfolio of securities owned by FSA Global and Canadian Global (the "VIE Portfolio").

Investment Portfolio

        Management's primary objective in managing FSA's investment portfolio is generation of an optimal level of after-tax investment income while preserving capital and maintaining adequate liquidity. 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. FSA's investment management is overseen by an Investment Committee comprised of FSA's Chief Executive Officer, Chief Financial Officer, Chief Risk Management Officer and Treasurer. To accomplish its objectives, the Company has established guidelines for eligible fixed income investments by FSA, requiring that at least 95% of such investments be rated at least Single-A at acquisition and the overall portfolio be rated Double-A on average. Fixed income investments falling below the minimum quality level are disposed of at such time as management deems 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-backed securities. The Company has investments in various strategic partners, including (i) XLFA; (ii) Fairbanks Capital Holding Corp. (Fairbanks), which owns a residential mortgage loan servicer; (iii) creditex, Inc., which operates an exchange for credit-derivative products; and (iv) TheDebtCenter, L.L.C., which operates TheMuniCenter, L.L.C., an on-line exchange for municipal bonds. 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, 2003 was approximately 7.5 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.

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

Investment Portfolio by Rating
at December 31, 2003 (1)

(1)

Ratings are based on the higher of Moody's or S&P ratings available at December 31, 2003.

(2)

Includes U.S. Treasury and agency obligations, which comprised 3.5% of the portfolio at December 31, 2003. 11.4% of the portfolio was rated AAA by virtue of insurance provided by FSA. Without giving effect to the FSA guaranty, the weighted-average rating of the FSA-insured investments was in the Double-A range, and all of these investments were investment grade.

(1)

Yields are stated on a pre-tax basis.

(2)

Includes taxable and tax-exempt investments and excludes cash equivalents of $51.6 million, $125.0 million and $52.5 million for the years ended December 31, 2003, 2002 and 2001, respectively.

(3)

Excludes stocks at cost of $10.0 million for 2001 only.

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(1)

Yields are stated on a pre-tax basis.

(2)

Includes taxable and tax-exempt investments and excludes cash equivalents of $51.6 million, $125.0 million and $52.5 million for the years ended December 31, 2003, 2002 and 2001, respectively.

(3)

Excludes stocks at cost of $10.0 million for 2001.

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(1)

Includes short-term investments in the amount of $172.8 million, $250.7 million and $166.2 million at December 31, 2003, 2002 and 2001, respectively, but excludes cash equivalents of $51.6 million, $125.0 million and $52.5 million, respectively.

(2)

Excludes stocks at cost of $10.0 million 2001.

Mortgage-Backed Securities
Cost and Market Value by Investment Category

        The Company's investments in mortgage-backed securities consisted of pass-through certificates and collateralized mortgage obligations ("CMOs"), which are backed by mortgage loans guaranteed or insured by agencies of, or sponsored by, the federal government. These securities are highly liquid with readily determinable market prices. The Company also held, at December 31, 2003, Triple-A rated CMOs which are not guaranteed by government agencies. Secondary market quotations are available for these securities, although they are not as liquid as government agency-backed securities.

        The CMOs held at December 31, 2003 have stated maturities ranging from 3 to 41 years and expected average lives ranging from 3 to 11 years based on anticipated prepayments of principal. None of the Company's holdings of CMOs is subject to extraordinary interest rate sensitivity. At December 31, 2003, 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 mortgage interest rates, with prepayments increasing when prevailing interest rates are lower than the rates on the underlying

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mortgages. When prepayments occur, the proceeds must be reinvested at then current market rates, which may be below the yield on the prepaid securities.

VIE Portfolio

        The Company's management believes that the assets held by the VIEs, including those that are eliminated in consolidation, are beyond the reach of the Company and its creditors, even in bankruptcy or other receivership.

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

VIE Portfolio by Rating
at December 31, 2003(1)

(1)

Ratings are based on the higher of Moody's or S&P ratings available at December 31, 2003.

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        The amortized cost and estimated fair value of bonds in the VIE Portfolio were as follows at December 31, 2003:

GIC Portfolio

        The following tables set forth certain information concerning the GIC Portfolio:

GIC Portfolio by Rating
at December 31, 2003(1)

(1)

Ratings are based on the higher of Moody's or S&P ratings available at December 31, 2003. 11.3% of the GIC Portfolio is rated AAA by virtue of insurance provided by FSA. Without giving effect to the FSA guaranty, the weighted-average rating of the FSA-insured investments was in the Double-A range, and all of these investments were investment grade.

Summary of GIC Portfolio

(1)

Yields are stated on a pre-tax basis. Substantially all investments bear or were converted into LIBOR based floating rates.

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(2)

Excludes cash equivalents of $228.8 million and $4.6 million for the years ended December 31, 2003 and 2002, respectively.

Investment Portfolio by Security Type

(1)

Yields are stated on a pre-tax basis.

(2)

Excludes cash equivalents of $228.8 million and $4.6 million at December 31, 2003 and 2002, respectively.

Distribution of Investments by Maturity