FINANCIAL SECURITY ASSURANCE HOLDINGS LTD/NY/, 424B1, 1996-05-08

FINANCIAL SECURITY ASSURANCE HOLDINGS LTD/NY/
424B1, 1996-05-08
INSURANCE CARRIERS, NEC

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<PAGE>
Filed Pursuant to Rule 424(b)(1)
Registration No. 033-80769

PROSPECTUS

[LOGO]
8,725,000 SHARES

FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.

COMMON STOCK
($.01 PAR VALUE)

Pursuant to the terms of the 7 5/8% Exchangeable Notes due May 15, 1999 (the
"Debt Exchangeable for Common Stock-SM- or "DECS-SM-") of Salomon Inc, a
Delaware corporation ("Salomon"), Salomon may deliver to the holders of the DECS
shares of common stock, par value $.01 per share (the "Common Stock"), of
Financial Security Assurance Holdings Ltd. ("FSA Holdings" and together with its
consolidated subsidiaries, the "Company"). This Prospectus relates to the
delivery by Salomon pursuant to the DECS of up to 8,725,000 shares of Common
Stock, plus up to an additional 1,071,303 shares with respect to DECS sold to
cover over-allotments, as Salomon may receive from U S WEST, Inc., a Delaware
corporation ("U S WEST"), under the terms of certain exchangeable notes of U S
WEST (the "U S WEST DECS") issued to Salomon. This Prospectus accompanies a
Prospectus Supplement and Prospectus (together, the "DECS Prospectus") of
Salomon relating to the sale of 8,725,000 DECS, plus up to an additional
1,071,303 DECS solely to cover over-allotments. FSA Holdings will not receive
any of the proceeds from the sale of the DECS or delivery thereunder of the
shares of Common Stock to which this Prospectus relates. FSA Holdings takes no
responsibility for any information included in or omitted from the DECS
Prospectus. The DECS Prospectus does not constitute a part of this Prospectus
nor is it incorporated by reference herein.

In connection with market-making activities in the DECS, Salomon Brothers Inc
("Salomon Brothers") may, subject to certain limitations, from time to time
borrow, return and reborrow up to 1,919,261 shares of Common Stock from U S
WEST. See "Plan of Distribution." Salomon Brothers is not under any obligation
to engage in any market-making transactions with respect to the DECS, and any
market-making in the DECS actually engaged in by Salomon Brothers may cease at
any time. The Registration Statement of which this Prospectus forms a part
includes a Prospectus relating to shares of Common Stock which may be offered
and sold by Salomon Brothers pursuant to such market making activities. The
Registration Statement of which this Prospectus forms a part also includes a
Prospectus relating to the resale by National Westminster Bank Plc or an
affiliate or designee thereof ("NatWest") of shares of Common Stock being
purchased by NatWest pursuant to the transactions described herein under "Recent
Developments -- The Sale Transactions."

FSA Holdings and U S WEST have agreed, subject to certain exceptions, not to
sell, without the prior written consent of Salomon Brothers, any shares of
Common Stock or any securities convertible into or exchangeable for Common Stock
for a period of 180 days after the date of this Prospectus. See "Plan of
Distribution."

The Common Stock is listed for trading on the New York Stock Exchange, Inc. (the
"NYSE") under the symbol "FSA". On May 7, 1996, the last reported sale price of
the Common Stock on the NYSE Composite Tape was $26.625 per share. See "Price
Range of Common Stock and Dividends."

SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CAREFULLY CONSIDERED BY PROSPECTIVE PURCHASERS.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

The date of this Prospectus is May 8, 1996.
<PAGE>
FSA HOLDINGS HAS BEEN ADVISED THAT IN CONNECTION WITH THE OFFERING BY
SALOMON OF THE DECS, THE UNDERWRITERS OF THE DECS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE DECS OR THE
COMMON STOCK OF FSA HOLDINGS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL
IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NYSE (WITH RESPECT
TO THE COMMON STOCK ONLY), IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

AVAILABLE INFORMATION

FSA Holdings is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by FSA Holdings may be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the Commission's regional offices at Room 3190, Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661; and Seven World Trade
Center, 13th Floor, New York, New York 10048. Copies of such material may be
obtained from the Public Reference Section of the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates. In addition, material filed by FSA Holdings can be inspected at the
offices of the NYSE, 20 Broad Street, New York, New York 10005.

FSA Holdings has filed with the Commission a Registration Statement on Form
S-3 (the "Registration Statement") under the Securities Act of 1933, as amended
(the "Securities Act"), with respect to the Common Stock offered hereby. This
Prospectus does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules filed as a part thereof, as permitted
by the rules and regulations of the Commission. For further information with
respect to FSA Holdings and the Common Stock, reference is hereby made to such
Registration Statement, including the exhibits and schedules filed as a part
thereof. Statements contained in this Prospectus as to the contents of any
contract or other document referred to herein are not necessarily complete and
where such contract or other document is an exhibit to the Registration
Statement, each such statement is qualified in all respects by the provisions of
such exhibit, to which reference is hereby made for a full statement of the
provisions thereof. The Registration Statement, including the exhibits and
schedules filed as a part thereof, may be inspected without charge at the public
reference facilities maintained by the Commission as set forth in the preceding
paragraph. Copies of these documents may be obtained at prescribed rates from
the Public Reference Section of the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549.

2
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following documents heretofore filed with the Commission (File No.
1-12644) are hereby incorporated by reference in this Prospectus:

1. FSA Holdings' Annual Report on Form 10-K for the year ended December 31,
1995;

2. FSA Holdings' Current Report on Form 8-K dated April 26, 1996;

3. The description of the Common Stock set forth in FSA Holdings'
Registration Statement on Form 8-A, declared effective on May 6, 1994, and any
amendment or report filed for the purpose of updating such description;

4. Annual Report on Form 10-K for the year ended December 31, 1994 of
Capital Guaranty Corporation ("Capital Guaranty"), a wholly owned subsidiary of
FSA Holdings;

5. Capital Guaranty's Quarterly Report on Form 10-Q for the three months
ended March 31, 1995;

6. Capital Guaranty's Quarterly Report on Form 10-Q for the three months
ended June 30, 1995; and

7. Capital Guaranty's Quarterly Report on Form 10-Q for the three months
ended September 30, 1995.

All documents filed by FSA Holdings pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of this offering shall be deemed to be incorporated by reference
in this Prospectus and to be a part hereof from the date of filing such
documents.

Any statement contained in a document incorporated by reference herein shall
be deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein modifies or supersedes such statement.
Any such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.

FSA Holdings hereby undertakes to provide without charge to each person to
whom a copy of this Prospectus has been delivered, on the written or oral
request of any such person, a copy of any or all of the documents referred to
above other than exhibits to such documents. Requests for such copies should be
directed to the Secretary of FSA Holdings, Financial Security Assurance Holdings
Ltd., 350 Park Avenue, New York, New York 10022, telephone number (212)
826-0100.

------------------------

"Debt Exchangeable for Common Stock" and "DECS" are service marks of Salomon
Brothers.

3
<PAGE>
PROSPECTUS SUMMARY

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
DETAILED INFORMATION AND FINANCIAL STATEMENTS CONTAINED ELSEWHERE OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS. FOR DEFINITIONS OF AND ADDITIONAL
INFORMATION CONCERNING CERTAIN TERMS USED IN THIS PROSPECTUS, SEE "GLOSSARY OF
INSURANCE TERMS."

THE COMPANY

FSA Holdings, through its wholly owned subsidiary, Financial Security
Assurance Inc. ("FSA"), is primarily engaged in the business of providing
financial guaranty insurance on asset-backed securities and municipal bonds. FSA
was the first insurance company organized to insure asset-backed obligations and
has been a leading insurer of asset-backed obligations (based on number of
transactions insured) since its inception in 1985. FSA expanded the focus of its
business in 1990 to include financial guaranty insurance of municipal
obligations.

FSA's underwriting policy is to insure asset-backed and municipal
obligations that would otherwise be investment grade without the benefit of
FSA's insurance. The asset-backed obligations insured by FSA are generally
issued in structured transactions and are backed by pools of assets such as
residential mortgage loans, consumer or trade receivables, securities or other
assets having an ascertainable cash flow or market value. The municipal
obligations insured by FSA consist primarily of general obligation bonds that
are supported by the issuers' taxing power and special revenue bonds and other
special obligations of state and local governments that are supported by the
issuers' ability to impose and collect fees and charges for public services or
specific projects. Financial guaranty insurance written by FSA guarantees
payment when due of scheduled payments on an issuer's obligation. In the case of
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.

The Company's business strategy is to remain a leading insurer of
asset-backed obligations and to become a more prominent insurer of municipal
obligations. 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 December 1995, FSA Holdings acquired Capital Guaranty in a merger
transaction in which Capital Guaranty became a direct wholly owned subsidiary of
FSA Holdings (the "Merger"). Capital Guaranty, through its wholly owned
subsidiary, Capital Guaranty Insurance Company ("CGIC"), provided financial
guaranty insurance on municipal bonds. In connection with the Merger, CGIC,
whose principal business is now as a reinsurer of policies written by FSA,
changed its name to Financial Security Assurance of Maryland Inc. ("FSAM").
Unless the context otherwise requires, financial information relating to Capital
Guaranty and CGIC as of December 31, 1995 is included herein as part of the
consolidated financial information relating to FSA Holdings and FSA included
herein as of such date. Except as otherwise expressly provided, all other
financial and other information contained in this Prospectus with respect to FSA
Holdings and FSA does not give effect to the Merger. For additional information
concerning Capital Guaranty, see "Capital Guaranty Corporation," "Selected
Financial Information of Capital Guaranty Corporation," and "Incorporation of
Certain Documents by Reference."

For the year ended December 31, 1995, FSA had gross premiums written of
$110.7 million, of which 49% related to insurance of municipal obligations and
51% related to insurance of asset-backed obligations. At December 31, 1995, FSA
had net insurance in force of $75.4 billion, of which 70% represented insurance
on municipal obligations and 30% represented insurance on asset-backed
obligations.

At December 31, 1995, the Company had total assets of $1,490.3 million, an
increase of 38.7% from December 31, 1994, and shareholders' equity of $777.9
million, an increase of 42.6% from December 31, 1994, which increases are
partially the result of the Merger.

For a summary of FSA Holdings' results for the three months ended March 31,
1996, see "Recent Developments."

4
<PAGE>
The claims-paying ability of FSA is rated "Aaa" by Moody's Investors
Service, Inc. ("Moody's") and "AAA" by Standard & Poor's Ratings Services
("S&P"), Nippon Investors Services and S&P (Australia) Pty. Ltd.

FSA is licensed to engage in the financial guaranty insurance business in
all 50 states, the District of Columbia and Puerto Rico. The principal executive
offices of FSA Holdings are located at 350 Park Avenue, New York, New York
10022, and its telephone number is (212) 826-0100.

THE OFFERING OF THE DECS

The DECS are being offered by Salomon pursuant to the DECS Prospectus.
Pursuant to the terms of the DECS, Salomon may deliver to the holders of the
DECS shares of Common Stock at maturity pursuant to the terms thereof. This
Prospectus relates to the delivery by Salomon pursuant to the DECS of up to
8,725,000 shares of Common Stock, plus up to an additional 1,071,303 shares with
respect to DECS sold to cover over-allotments, as Salomon may receive from U S
WEST under the terms of the U S WEST DECS. U S WEST Capital Corporation, a
wholly owned subsidiary of U S WEST ("USWCC"), currently owns in excess of
9,796,303 shares of Common Stock. The Tokio Marine and Fire Insurance Company,
Ltd. ("Tokio Marine") has a right of first offer with respect to all of the
shares of Common Stock owned by USWCC, including the shares which U S WEST may
choose to deliver pursuant to the terms of the U S WEST DECS. For a description
of the relationship between U S WEST and the Company, see "Security Ownership of
Certain Beneficial Owners and Management" and "Certain Relationships and Related
Transactions."

5
<PAGE>
SUMMARY OF SELECTED CONSOLIDATED FINANCIAL INFORMATION
OF FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------
1991 1992 (1) 1993 (2) 1994 1995 (3)
---------- ---------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT
Gross premiums written............................... $ 110,727 $ 131,131 $ 127,409 $ 106,449 $ 110,742
Net premiums written................................. 55,910 78,397 65,006 77,757 77,576
Net premiums earned.................................. 60,510 63,857 63,377 65,754 69,347
Net realized gains (losses).......................... 9,087 29,153 18,292 (3,773) 5,120
Net investment income................................ 45,059 47,024 47,948 46,592 48,965
Total revenues....................................... 116,967 142,506 127,654 109,350 127,273
Losses and loss adjustment expenses.................. 9,901 54,623 84,054 3,024 21,658
Amortization and write-off of goodwill............... 3,718 3,718 81,598
Policy acquisition and other expenses................ 32,222 31,323 40,459 28,036 16,888
Income (loss) before income taxes.................... 71,126 52,842 (163,866) 78,290 75,042
Net income (loss).................................... 52,803 43,457 (124,707) 60,375 55,038
Earnings (loss) per common share..................... 2.40 1.90 (5.44) 2.32 2.13
Cash dividends per common share...................... 0.26 0.16 0.32
SELECTED FINANCIAL RATIOS
GAAP BASIS (4)
Loss ratio........................................... 16.4% 85.5% 132.6% 4.6% 31.2%
Expense ratio........................................ 46.0 47.3 62.1 40.5 42.2
Combined ratio....................................... 62.4% 132.8% 194.7% 45.1% 73.4%
SAP BASIS(4)
Loss ratio........................................... 18.3% 67.7% 0.7% 28.1% 16.7%
Expense ratio........................................ 77.6 47.5 52.2 59.1 45.5
Combined ratio....................................... 95.9% 115.2% 52.9% 87.2% 62.2%
BALANCE SHEET
Total investments.................................... $ 659,880 $ 727,455 $ 786,723(5) $ 747,176(5) $ 1,110,742(5)
Prepaid reinsurance premiums......................... 71,288 98,225 127,849 121,668 133,548
Total assets......................................... 933,550 1,042,362 1,030,587 1,074,316 1,490,262
Unearned premiums.................................... 256,051 297,073 328,165 334,569 463,897
Total liabilities.................................... 361,811 433,166 488,615 528,880 712,315
Shareholders' equity................................. 571,739 609,196 541,972 545,436 777,947
Book value per common share.......................... 25.00 26.64 20.95 20.92 24.67
SELECTED FINANCIAL STATISTICS (4)
Gross insurance in force............................. $45,045,000 $52,592,000 $61,290,000 $65,824,000 $99,034,000
Net insurance in force............................... 33,447,000 37,334,000 41,667,000 45,825,000 75,360,000
Qualified statutory capital.......................... 420,326 461,443 454,048 465,787 644,653
Policyholders' leverage ratio........................ 80:1 81:1 92:1 98:1 117:1
ANALYTICAL DATA
Tangible book value per common share (6)(8).......... 21.27 23.07 20.95 20.92 24.67
Adjusted book value per common share (7)(8).......... 26.67 28.98 26.15 26.40 31.16
</TABLE>

- ------------------------------
(1)Results for full year 1992 were adversely affected by $54.6 million of
additional reserves, consisting of case basis reserves for three commercial
mortgage transactions insured by FSA and the establishment of the general
loss reserve.

(2)Results for the year ended December 31, 1993 were adversely affected by $63.7
million in net incurred losses for three commercial mortgage transactions
insured by FSA, $63.0 million of which losses were directly paid by a letter
of credit provided by U S WEST (the "U S WEST Letter of Credit"). The payment
under the U S WEST Letter of Credit was accounted for under generally
accepted accounting principles ("GAAP") as a contribution of capital (net of
related tax effect) and the related losses were reflected as an expense in
FSA's income statement, while for statutory accounting practices ("SAP")
income statement purposes the drawings under the U S WEST Letter of Credit
were netted against such losses. Results were also adversely affected by an
increase of $20.3 million in the nonspecific general loss reserve of FSA for
unidentified losses covering FSA's entire insured portfolio, a write-off of
$78.8 million of goodwill, a restructuring charge of $85.4 million resulting
from the premium payment by FSA to Commercial Reinsurance Company
("Commercial Re") under FSA's reinsurance agreement with Commercial Re and
non-recurring charges of approximately $10.0 million. Gross and net premiums
written were reduced due to the cession of $17.9 million of unearned premiums
from FSA to Commercial Re under such reinsurance agreement.

(3)Results for the year ended December 31, 1995 were adversely affected by a
one-time Merger-related general reserve charge of $15.4 million ($10.0
million after taxes). See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

6
<PAGE>
underwriting and operating expenses divided by net premiums earned. The SAP
expense ratio is underwriting and operating expenses divided by net premiums
written. The combined ratio on both a GAAP and SAP basis is the sum of the
applicable loss and expense ratios.

(5)Total investments at December 31, 1993, 1994 and 1995 included $54.1 million
net unrealized gains, $33.4 million net unrealized losses, and $30.7 million
net unrealized gains, respectively. In addition, the balance at December 31,
1993 included $24.3 million of funds withheld from the premium ceded by FSA
to Commercial Re, pending deposit of such funds in a trust account satisfying
the requirements of applicable insurance law. Total investments at December
31, 1991 and 1992 were recorded at amortized cost in accordance with GAAP and
therefore do not include unrealized gains or losses.

(6)Tangible book value per common share is book value per common share less
goodwill per common share.

(7)Adjusted book value per common share, which is tangible book value plus net
unearned premium reserve plus the present value of net future installment
premiums less deferred acquisition costs less tax effect (in each case, on a
per common share basis), is used by management and equity analysts as a
measurement of FSA Holdings' and Capital Guaranty's intrinsic value. Adjusted
book value per common share is not a substitute for GAAP book value per
common share.

(8)Tangible book value per common share and adjusted book value per common share
do not include the effect of unrealized gains on investments for the years
ended December 31, 1991 and 1992, which were $0.71 and $0.60 per common
share, respectively.

7
<PAGE>
SUMMARY OF SELECTED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
OF FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.

(UNAUDITED)

The following table presents selected unaudited pro forma consolidated
income statement information for FSA Holdings and Capital Guaranty after giving
effect to the Merger. This pro forma information is presented for illustrative
purposes only and is not necessarily indicative of the results that would have
been obtained if the Merger had been consummated on January 1, 1995, or that may
be obtained in the future. This pro forma data is derived from the Unaudited Pro
Forma Consolidated Condensed Financial Statements appearing elsewhere herein and
should be read in conjunction with those statements and the notes thereto. See
"Unaudited Pro Forma Consolidated Condensed Financial Statements."

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1995
-------------------
(UNAUDITED)
(IN THOUSANDS,
EXCEPT PER SHARE
DATA)
<S> <C>
PRO FORMA STATEMENT OF OPERATIONS DATA:
Revenues.................................................................................. $ 157,150
Net Income................................................................................ 80,605
Net Income Per Common Share............................................................... $ 2.53
Common Shares Used in Calculation of Above per Common Share Amount........................ 31,849
</TABLE>

8
<PAGE>
RISK FACTORS

ADEQUACY OF LOSS RESERVES

Like other financial guaranty insurers, FSA does not consider traditional
actuarial approaches used in the property/casualty insurance industry to be
applicable to the determination of its loss reserves because of the absence of a
sufficient number of losses in its financial guaranty insurance activities and
in the financial guaranty industry generally to establish a meaningful
statistical base. In the municipal area, a relatively small percentage of the
total amount of municipal obligations insured by the financial guaranty
insurance industry has experienced defaults in payment in recent years. There
can be no assurance, however, that these low default rates will be indicative of
future rates of default in insured municipal obligations. The statistical base
in the asset-backed area is even more limited than in the municipal area. In
addition, actual loss rates in the asset-backed area may over time prove to be
higher than in the municipal area. Although FSA currently maintains reserves in
an amount believed by its management to be sufficient to pay its estimated
ultimate liability for losses and loss adjustment expenses with respect to
obligations it has insured, there can be no assurance that losses in FSA's
insured portfolio will not exceed the loss reserves. Losses from future
defaults, depending on their magnitude, could have a material adverse effect on
the results of operations and financial condition of FSA Holdings.

CLAIMS-PAYING ABILITY RATINGS

As is customary in the financial guaranty insurance industry, the rating
agencies perform periodic assessments of the credits insured by a financial
guaranty insurer to confirm that such insurer continues to meet the requirements
of the rating agencies for a triple-A rating of the insurer's claims-paying
ability. Although FSA Holdings intends to continue to comply with the criteria
of the rating agencies, no assurance can be given that one or more of the rating
agencies will not reduce or withdraw its triple-A rating of the claims-paying
ability of FSA in the future. 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 a reduction in its ratings.

MARKET AND OTHER FACTORS

The demand for financial guaranty insurance depends upon many factors, some
of which are beyond the control of FSA.

While all the major financial guaranty insurers have triple-A claims-paying
ability ratings from major rating agencies, the marketplace may from time to
time distinguish between financial guarantors on the basis of various factors,
including size, insured portfolio concentration and financial performance. These
distinctions may result in differentials in trading levels for securities
insured by particular financial guarantors which, in turn, may provide a
competitive advantage to those financial guarantors with better trading levels.
Conversely, various investors may lack additional capacity to purchase
securities insured by certain financial guarantors, which may provide a
competitive advantage to guarantors with fewer insured obligations outstanding.

Prevailing interest rate levels affect demand for financial guaranty
insurance to the extent that lower interest rates are accompanied by narrower
spreads between insured and uninsured obligations. The purchase of insurance
during periods of relatively narrower interest rate spreads will generally
provide lower cost savings to the issuer than during periods of relatively wider
spreads. These lower cost savings generally are accompanied by a corresponding
decrease in demand for financial guaranty insurance. However, relatively low
interest rate levels may encourage the issuance of new or the refunding of
existing debt securities by companies and municipalities, which may increase the
demand for financial guaranty insurance.

Credit quality concerns among investors, especially during times of weak
economic conditions, typically result in an increase in demand for financial
guaranty insurance. During such times, investors generally prefer to purchase
higher rated investments, including those that achieve higher ratings through
financial guaranty insurance.

9
<PAGE>
The perceived financial strength of financial guaranty insurers also affects
demand for financial guaranty insurance. Should a major financial guaranty
insurer, or the industry generally, have its claims-paying ability rating
lowered, or suffer for some other reason a deterioration in investor confidence,
demand for financial guaranty insurance would be adversely affected.

In addition, the financial guaranty insurance industry has historically been
and will continue to be subject to the direct and indirect effects of
governmental regulation, including changes in tax laws affecting insurance on
asset-backed and municipal obligations. No assurance can be given that future
legislative or regulatory changes will not adversely affect FSA's business.

COMPETITION AND INDUSTRY CONCENTRATION

FSA faces competition from both other providers of third party credit
enhancement and alternatives to third party credit enhancement. The majority of
asset-backed and municipal obligations are sold without third party credit
enhancement. Accordingly, each transaction proposed to be insured by FSA must
generally compete against an alternative execution which does not employ third
party credit enhancement. FSA also faces competition from other monoline primary
financial guaranty insurers, primarily AMBAC Indemnity Corporation ("AMBAC"),
Capital Markets Assurance Corporation ("CapMAC"), Connie Lee Insurance Company
("Connie Lee"), Financial Guaranty Insurance Company ("FGIC") and MBIA Insurance
Corp. ("MBIA"). Traditional credit enhancers such as bank letter of credit
providers and mortgage pool insurers also provide significant competition to FSA
as providers of credit enhancement for asset-backed obligations. While actions
by securities rating agencies in recent years have significantly reduced the
number of triple-A rated banks that can offer a product directly competitive
with FSA's triple-A guaranty, and recently implemented risk-based capital
guidelines applicable to banks have generally increased costs associated with
letters of credit that compete directly with financial guaranty insurance, bank
letter of credit providers and other credit enhancement, such as cash collateral
accounts, provided by banks, continue to provide significant competition to FSA.

SUBSTANTIAL VOTING CONTROL

At March 1, 1996, voting control of FSA Holdings was held 41.9% by USWCC,
19.1% by Fund American Enterprises Holdings, Inc. ("Fund American") and 5.8% by
Tokio Marine (together, the "Substantial Shareholders"). Each of the Substantial
Shareholders has the ability to exercise significant influence over the policies
and corporate actions of FSA Holdings. For further information, see "Security
Ownership of Certain Beneficial Owners and Management." Consummation of the
transactions described under "Recent Developments -- The Sale Transactions" will
significantly reduce the number of shares of Common Stock owned by USWCC and
will increase the number of shares owned by Fund American. See "Recent
Developments -- The Sale Transactions." Shareholders of FSA Holdings do not have
cumulative voting rights with respect to the election of directors and,
accordingly, any shareholder or group of shareholders holding shares
representing in excess of 50% of the voting shares outstanding of FSA Holdings
would by itself have the power to elect the entire board of directors of FSA
Holdings.

HOLDING COMPANY STRUCTURE

The operations of FSA Holdings are conducted through FSA. Accordingly, FSA
Holdings' financial condition and results of operations are dependent upon FSA,
whose ability to declare and pay dividends to FSA Holdings is dependent upon
FSA's financial condition, results of operations, cash requirements and other
related factors and is also subject to restrictions contained in the insurance
laws and regulations of New York and other states. See "Price Range of Common
Stock and Dividends," "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" and
"Insurance Regulatory Matters -- Dividend Restrictions."

SHARES ELIGIBLE FOR FUTURE SALE

At March 1, 1996, the three largest shareholders of FSA Holdings, USWCC,
Fund American and Tokio Marine, together owned approximately 64.7% of the Common
Stock outstanding. U S WEST has the right to cause the delivery of 8,725,000
shares of Common Stock owned by USWCC (plus 1,071,303 shares solely to cover
over-allotments) to Salomon pursuant to the terms of the U S WEST DECS. All of
the shares of

10
<PAGE>
Common Stock owned by USWCC, Fund American and Tokio Marine will continue to be
tradeable in the open market subject to the volume limitations, manner of sale
and notice requirements of Rule 144 under the Securities Act or, without such
requirements or limitations through the exercise of registration rights
available under agreements with FSA Holdings. See "Certain Relationships and
Related Transactions -- Registration Rights Agreement." Consummation of the
transactions described under "Recent Developments -- The Sale Transactions" will
significantly reduce the number of shares of Common Stock owned by USWCC and
will increase the number of shares owned by Fund American. See "Recent
Developments -- The Sale Transactions."

Sales of substantial amounts of Common Stock in the public or private
market, or the perception that such sales could occur, could adversely affect
prevailing market prices of the Common Stock.

IMPACT OF THE DECS ON THE MARKET FOR THE COMMON STOCK

It is not possible to predict accurately how or whether any market that
develops for the DECS will influence the market for the Common Stock. For
example, the price of the Common Stock could become more volatile and could be
depressed by investors' anticipation of the potential distribution into the
market of substantial additional amounts of Common Stock upon the maturity of
the DECS, by possible sales of Common Stock by investors who view the DECS as a
more attractive means of equity participation in FSA Holdings and by hedging or
arbitrage trading activity that may develop involving the DECS and the Common
Stock.

RECENT DEVELOPMENTS

THE SALE TRANSACTIONS

On April 29, 1996, U S WEST and FSA Holdings announced plans to enter into a
series of transactions (the "Sale Transactions") pursuant to which USWCC will
sell up to 3,700,000 shares of the Common Stock it currently owns. Pursuant to
the Sale Transactions, (i) FSA Holdings will repurchase 1,000,000 shares of
Common Stock from USWCC at a price of $26.50 per share, (ii) Fund American will
purchase 1,000,000 shares of Common Stock from USWCC at a price of $26.50 per
share and (iii) NatWest will purchase between 1,000,000 and 1,700,000 shares of
Common Stock from USWCC (the "NatWest Shares") at a price of $26.50 per share
and will concurrently enter into a five-year forward agreement (the "Forward
Agreement") with FSA Holdings with respect to such shares pursuant to which FSA
Holdings will have an option to purchase such shares from NatWest at a price of
$26.50 per share plus carrying costs as described below.

Pursuant to the Forward Agreement, FSA Holdings will have the option either
(i) to purchase the NatWest Shares from NatWest at a price of $26.50 per share
plus Carrying Costs (as defined below) or (ii) to direct NatWest to sell the
NatWest Shares. If FSA Holdings directs NatWest to sell the NatWest Shares, if
the market value of the NatWest Shares exceeds the sum of $26.50 per share plus
Carrying Costs, FSA Holdings will receive such excess and if the market value of
the NatWest Shares is less than the sum of $26.50 per share plus Carrying Costs,
FSA Holdings will be required to pay such shortfall to NatWest in cash or shares
of Common Stock. "Carrying Costs" will equal a specified margin over LIBOR (plus
any LIBOR breakage fees) less any dividends paid by FSA Holdings on the NatWest
Shares (and interest thereon). Under the Forward Agreement, the obligation of
FSA Holdings with respect to 1,000,000 of the NatWest Shares will be for the
account of FSA Holdings and the obligation of FSA Holdings with respect to the
balance of the NatWest Shares will be for the account of FSA Holdings'
management.

Following consummation of the Sale Transactions, assuming USWCC sells
3,500,000 shares of Common Stock pursuant thereto, USWCC would thereafter own
12,356,910 shares of Common Stock. Assuming that U S WEST delivers to Salomon
9,796,303 shares of Common Stock at maturity of the U S WEST DECS (the maximum
number of shares U S WEST could deliver pursuant to the terms thereof, assuming
the Underwriters' over-allotment option is exercised in full), and that Fund
American exercises its rights to purchase 2,560,607 shares of Common Stock from
USWCC pursuant to the USWCC Options (as defined herein), USWCC would thereafter
own no shares of Common Stock. See "Security Ownership of Certain

11
<PAGE>
Beneficial Owners and Management" and "Certain Relationships and Related
Transactions." The number of shares of Common Stock which U S WEST actually
delivers at maturity of the DECS may be less than 9,796,303. For further
information, see the DECS Prospectus.

Following consummation of the Sale Transactions, Fund American would own
3,460,200 shares of Common Stock. In addition, Fund American owns 2,000,000
shares of Series A Convertible Redeemable Preferred Stock of FSA Holdings, which
vote together with the Common Stock and are convertible by Fund American into
shares of Common Stock ("Preferred Stock"), and has the right to purchase
2,560,607 shares of Common Stock from U S WEST upon exercise of the USWCC
Options. See "Security Ownership of Certain Beneficial Owners and Management"
and "Certain Relationships and Related Transactions."

Consummation of the Sale Transactions is expected by the end of May 1996,
subject to the satisfaction of customary closing conditions.

RESULTS FOR THREE MONTHS ENDED MARCH 31, 1996

Set forth below is a summary of FSA Holdings' results for the three months
ended March 31, 1996. This summary should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
(DOLLARS IN
THOUSANDS,
EXCEPT PER SHARE
DATA)
1995 1996
--------- ---------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net premiums earned................................................................... $ 15,215 $ 22,734
Net investment income................................................................. 12,354 15,682
Net realized gains (losses)........................................................... (4,793) 1,534
Total revenues........................................................................ 22,973 40,012
Policy acquisition costs.............................................................. 3,601 7,655
Other expenses........................................................................ 3,201 3,957
Income before income tax.............................................................. 14,414 26,234
Net income............................................................................ 10,805 19,543
Earnings per common share............................................................. 0.42 0.62
</TABLE>

<TABLE>
<CAPTION>
AT MARCH 31, 1996
----------------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C>
BALANCE SHEET DATA:
Total investments....................................................................... $ 1,151,679
Prepaid insurance premiums.............................................................. 139,014
Total assets............................................................................ 1,545,190
Unearned premiums....................................................................... 479,240
Notes payable........................................................................... 30,000
Total liabilities....................................................................... 774,807
Shareholders' equity.................................................................... 770,383
Book value per common share............................................................. 24.62
</TABLE>

In the first quarter of 1996, FSA Holdings' adjusted book value rose $0.32
per share to $31.48, reflecting a 1.3% increase, including dividends, since
December 31, 1995. Strong growth in core business originations fully offset a
decline in the market value of FSA Holdings' investment portfolio caused by a
steep increase in interest rates. From insurance operations alone, adjusted book
value per share increased 3.3%, including dividends, as a result of the addition
of $61.4 million in present value ("PV") premiums originated in the three-month
period.

12
<PAGE>
FSA Holdings' net income for the first quarter of 1996 was $19.5 million, or
$0.62 per share, as compared with $10.8 million, or $0.42 per share, for the
first quarter of 1995. Earnings results were positively affected by the Merger,
which increased the size of FSA's insured portfolio, created economies of scale,
and allowed for greater leveraging of resources.

In the first quarter of 1996, FSA insured an aggregate of $5.4 billion par
amount of bonds, a 34.6% increase over the first quarter of 1995. The first
quarter asset-backed component rose 4.6% to $3.0 billion. In the municipal bond
market, total-market new issuance was approximately $39.1 billion in the first
quarter of 1996, representing an increase of 35% compared with the first quarter
of 1995. Industry insured volume in the primary market was approximately $18.5
billion for the first quarter of 1996, as compared with $8.8 billion insured in
the first quarter of 1995.

Including new issues and secondary-market issues worldwide, FSA insured $2.4
billion par of municipal obligations with closing dates in the first quarter for
1996, an increase of 110.8% over the $1.1 billion insured by FSA in the first
quarter of 1995. Compared with the combined FSA and CGIC first quarter volume in
1995, FSA's insured municipal obligations increased 104.1% with respect to new
issues in the United States and 22.8% when secondary-market and international
transactions are included. On a sales date basis year-to-date, FSA estimates
that it insured approximately 12% of insured municipal new issues sold in the
United States.

The PV of gross premiums originated by FSA Holdings in the first quarter of
1996 was $61.4 million. Helped by the additional underwriting ability created by
the Merger, municipal PV premiums reached $24.2 million for the first quarter of
1996, an increase of 52.4% over the $15.9 million recorded in the first quarter
of 1995. The asset-backed portion of PV premiums for the first quarter of 1996
grew 47.4% to $37.2 million, primarily because of higher pricing. Because
asset-backed originations in the first quarter of 1996 included several large,
high-premium transactions, FSA Holdings does not necessarily expect to sustain
such level of premium growth.

Of the $19.5 million of net income for the first quarter of 1996, the
contribution from refundings totaled $1.0 million, or $0.03 per share, and the
contribution from capital gains was also $1.0 million, or $0.03 per share.
Operating net income, which excludes the impact of capital gains or losses, was
$18.5 million, or $0.59 per share, in the first quarter of 1996 as compared to
$13.9 million, or $0.54 per share, in the first quarter of 1995. The increase
was due to an increase in core net income of $0.06 per share offset by a lower
contribution from refundings of $0.01 per share. Core net income, which excludes
refundings as well as realized capital gains or losses, was $17.6 million, or
$0.56 per share, in the first quarter of 1996, 36.3% higher than in the first
quarter of 1995, when core net income was $12.9 million, or $0.50 per share.
This increase reflected an $8.4 million increase in total core revenues while
total core expenses increased only $2.8 million.

Net premiums earned in the first quarter of 1996 were $22.7 million, a 49.4%
increase over net premiums earned by FSA Holdings in the first quarter of 1995
and 24.7% higher than the combined net premiums earned by FSA Holdings and
Capital Guaranty in the first quarter of 1995. Refundings and prepayments in the
first quarter of 1996 were $4.3 million. Such refundings and prepayments
contributed $1.0 million to operating net income in the first quarter of 1996,
approximately equal to the contribution from refundings and prepayments in the
first quarter of the previous year.

Net investment income for the first quarter of 1996 was $15.7 million, an
increase of 26.9% over net investment income in the first quarter of 1995. Such
increase was primarily due to the additional invested assets acquired in the
Merger. Capital gains were $1.5 million in the first quarter of 1996, an
increase of $6.3 million from the $4.8 million in capital losses recognized by
FSA Holdings in the first quarter of 1995. FSA Holdings' effective tax rate on
investment income (excluding the effects of capital gains and losses) was 18.6%
for the first quarter of 1996 as compared to 22.9% for the first quarter of
1995. FSA Holdings' investment portfolio had a negative after-tax total return
of 0.55% during the first quarter of 1996.

Total operating expenses, consisting of interest, policy acquisition and
other operating expenses, for the first quarter of 1996 were $12.2 million, up
from $6.9 million in the first quarter of 1995. Core expenses,

13
<PAGE>
consisting of total operating expenses excluding the effects of refundings, rose
to $9.3 million, or $2.8 million higher than in the first quarter of 1995. Total
operating expenses and core expenses rose due to the addition of interest
expense related to the debt assumed in the Merger, higher amortization of
deferred acquisition costs ("DAC") and increased accruals for performance plan
payouts. The increase in DAC amortization results from an increase in first
quarter earned premiums, and the increase in performance plan payout accruals is
related to FSA Holdings' growth in adjusted book value per share versus
established targets and to the addition of another performance plan year to the
accrual base.

Core losses and loss adjustment expenses were $1.6 million in the first
quarter of 1996 and $1.7 million in the first quarter of 1995, reflecting
additions to the general loss reserve in both periods. At March 31, 1996, FSA's
unallocated general loss reserve totaled $33.3 million.

USE OF PROCEEDS

This Prospectus relates to the delivery by Salomon pursuant to the DECS of
such shares of Common Stock as Salomon may receive from U S WEST under the terms
of the U S WEST DECS. FSA Holdings will not receive any of the proceeds from the
sale of the DECS or delivery thereunder of the shares of Common Stock to which
this Prospectus relates.

14
<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDENDS

The following table sets forth for the calendar quarters indicated the high
and low sales prices for the Common Stock, as reported in the NYSE consolidated
transaction system, and the dividends paid per share since May 1994. Prior to
May 1994, the Common Stock was not publicly traded.

<TABLE>
<CAPTION>
SALES PRICES
-------------------- DIVIDENDS
HIGH LOW PAID
-------- -------- ------
<S> <C> <C> <C>
1994
May 6 -- June 30...................... $ 22 5/8 $ 20 $0.00
Third Quarter......................... 22 1/2 20 0.08
Fourth Quarter........................ 22 3/4 18 3/4 0.08
1995
First Quarter......................... $ 21 5/8 $ 19 $0.08
Second Quarter........................ 25 1/2 21 1/2 0.08
Third Quarter......................... 27 3/4 24 1/4 0.08
Fourth Quarter........................ 27 24 1/2 0.08
1996
First Quarter......................... $ 26 3/4 $ 24 $0.08
Second Quarter (through May 7,
1996)................................ 27 25 3/8
</TABLE>

As of April 28, 1996, there were approximately 2,100 holders of record of
the Common Stock and 31,268,660 shares outstanding, including 1,007,641 shares
held by or for the account of FSA Holdings and its subsidiaries.

The amount of dividends payable in the future will be reviewed periodically
by the Board of Directors in light of the Company's earnings, financial
condition and capital and other cash requirements. It is the policy of the Board
of Directors that FSA Holdings retain an adequate portion of its earnings to
support the growth of its business. There is no requirement or assurance that
dividends will be paid.

Most of the operations of FSA Holdings are conducted through FSA. FSA's
ability to declare and pay dividends to Capital Guaranty, which in turn declares
and pays dividends to FSA Holdings, is dependent upon FSA's financial condition,
results of operations, cash requirements and other related factors and is also
subject to restrictions contained in the insurance laws and related regulations
of New York and other states. See "Insurance Regulatory Matters -- Dividend
Restrictions" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."

FSA Holdings will ordinarily be required to withhold United States federal
income taxes in the amount of 30% of any dividends paid to non-United States
shareholders not otherwise subject to United States federal income taxation,
unless a tax treaty between the United States and the country of the
shareholder's residence provides for withholding at a reduced rate.

15
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL INFORMATION

BUSINESS OPERATIONS OF FSA HOLDINGS FOLLOWING THE MERGER

In connection with the Merger, FSA took a number of corporate actions, the
effect of which was to replace Financial Security Assurance International Inc.
("FSAI") with FSAM (formerly CGIC) in the corporate structure of the FSA group
of companies as a subsidiary of FSA, parent of Financial Security Assurance of
Oklahoma, Inc., and participant in the intercompany pooling agreement among the
domestic FSA insurance companies. Such transactions having been completed in
December 1995, FSAI is now an inactive company with no outstanding insurance or
reinsurance obligations, retaining the minimum capital necessary to maintain its
insurance licenses and intended for sale to a third party in 1996. The principal
business of FSAM going forward will be to serve as a reinsurer of policies
issued by FSA or reinsured by FSA from unaffiliated third parties.

FSA Holdings remains headquartered in New York and now has the benefit of a
significant west coast presence through its San Francisco office, the former
office of Capital Guaranty. The San Francisco office will be staffed to
underwrite transactions in coordination with the New York office. In line with
the plan established by FSA Holdings, the majority of the cost savings
associated with the Merger are expected to be brought about by the reduction in
personnel associated with the elimination of duplicative staff from the
accounting, information systems, marketing and human resource functions. FSA
Holdings expects to utilize its current staff levels in New York to support
these functions. In addition, but to a lesser extent, the Merger is also
expected to reduce the costs associated with redundant legal and surveillance
functions. These reductions in personnel are also expected to reduce related
overhead costs such as premises, equipment and similar costs.

The preceding cost savings result in the reduction of $0.4 million of policy
acquisition costs and $3.3 million in other operating costs as reflected in the
pro forma consolidated condensed statement of operations for the year ended
December 31, 1995.

STATEMENT OF OPERATIONS

The following pro forma consolidated condensed statement of operations
reflects the Merger of Capital Guaranty with a subsidiary of FSA Holdings. The
pro forma consolidated condensed statement of operations is unaudited and
combines the operations of FSA Holdings and Capital Guaranty for the year ended
December 31, 1995. The pro forma consolidated condensed statements of operations
assume the Merger occurred at January 1, 1995.

The historical financial information of FSA Holdings for the year ended
December 31, 1995 has been derived from the FSA Holdings financial statements
which are incorporated herein by reference. The historical financial information
of Capital Guaranty for the year ended December 31, 1995 has been derived from
the Capital Guaranty financial statements which are incorporated herein by
reference and has been adjusted for fourth quarter 1995 activity. The pro forma
consolidated condensed financial statement of operations should be read in
conjunction with the historical financial statements of FSA Holdings and Capital
Guaranty incorporated herein by reference. See "Available Information" and
"Incorporation of Certain Documents By Reference."

The unaudited pro forma consolidated condensed financial statement of
operations has been included as required by the Commission and is provided for
comparative purposes only. As further discussed in the accompanying notes, the
pro forma financial statement of operations does not purport to be indicative of
the financial operating results that would have been achieved had the Merger
been consummated as of the date indicated and should not be construed as
representative of future financial operating results.

16
<PAGE>
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1995
--------------------------------------------------------------
HISTORICAL PRO FORMA
----------------------- ADJUSTMENTS
FSA CAPITAL INCREASE NOTE
HOLDINGS GUARANTY * (DECREASE) REFERENCE PRO FORMA
---------- ----------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C>
REVENUES
Premiums Earned................................. $ 69,347 $ 12,213 $ $ 81,560
Net Investment Income (Loss).................... 48,965 19,136 (3,724) (a) 64,376
Net Realized Gains.............................. 5,120 2,208 7,328
Other Income.................................... 3,841 45 3,886
---------- ----------- ------------ -----------
TOTAL REVENUES.............................. 127,273 33,601 (3,724) 157,150
---------- ----------- ------------ -----------
EXPENSES
Losses and Loss Adjustment Expenses Related to
the Merger..................................... 15,400 (15,400) (b)
Losses and Loss Adjustment Expenses............. 6,258 850 (c) 7,108
Policy Acquisition Costs........................ 16,888 3,495 (371) (d) 20,012
Interest Expense................................ 2,115 2,115
Other Operating Expenses........................ 13,685 4,666 (3,347) (e) 15,004
---------- ----------- ------------ -----------
TOTAL EXPENSES.............................. 52,231 10,276 (18,268) 44,239
---------- ----------- ------------ -----------
INCOME BEFORE INCOME TAXES...................... 75,042 23,325 14,544 112,911
Provision for Income Taxes...................... 20,004 7,212 5,090 (f) 32,306
---------- ----------- ------------ -----------
NET INCOME (LOSS)........................... $ 55,038 $ 16,113 $ 9,454 $ 80,605
---------- ----------- ------------ -----------
---------- ----------- ------------ -----------
Weighted Average Common Shares Outstanding...... 25,797 31,849
Earnings Per Common Share....................... $ 2.13 $ 2.53
</TABLE>

- ------------------------
* The Capital Guaranty December 31, 1995 financial information was derived by
beginning with September 30, 1995 information incorporated herein by reference
and adjusting it for fourth quarter 1995 activity. As such, from September 30,
1995 through December 31, 1995, Capital Guaranty's premiums earned were
increased by $3,488, net investment income was increased by $4,939, net
realized gains were increased by $1,666, other income was increased by $10,
policy acquisition costs were increased by $856, interest expense was
increased by $529, other operating expenses were increased by $1,281 and
provision for income taxes was increased by $3,472.

17
<PAGE>
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS

The pro forma consolidated condensed statement of operations reflects the
Merger of Capital Guaranty with a subsidiary of FSA Holdings and assumes all
shares of Capital Guaranty Common Stock, $.10 par value ("Capital Guaranty
Common Stock"), were converted, pursuant to the Merger, into shares of FSA
Holdings Common Stock at a per share stock consideration of 0.6716 of a share of
FSA Holdings Common Stock (determined based on an average FSA Holdings Common
Stock price of $25.775), per share cash consideration of $5.69 and a total cash
consideration (the "Total Cash Consideration") of approximately $51.3 million.

With the exception of Item (c) described below, the pro forma consolidated
condensed statement of operations does not include adjustments to conform the
accounting policies of Capital Guaranty to those followed by FSA Holdings. The
nature and extent of additional adjustments, if any, will be based upon further
study and analysis and would not be expected to affect significantly the pro
forma financial results.

The following describes the pro forma adjustments reflected in the
accompanying pro forma consolidated condensed statement of operations:

(a) To reflect the reduction of investment income due to the payment of
$51.3 million to shareholders of Capital Guaranty and transaction costs of
the Merger.

(b) To eliminate the one-time charge FSA recognized in its December 31,
1995 statement of operations which provided a general loss provision on the
insured portfolio it had assumed in the Merger in a manner consistent with
FSA's general reserve methodology.

(c) To record the increase to FSA's general loss reserve for new
business underwritten by CGIC consistent with FSA's general reserve
methodology.

Based on FSA Holdings' detailed plans, certain costs and expenses of the
combined companies will be less than the historical expenses due to the
consolidation of certain operations and elimination of duplicative facilities.
The expense reductions are primarily related to the elimination of duplicative
facilities, equipment, personnel and functions.

The pro forma pre-tax expense reductions, based on FSA Holdings' detailed
plans, are estimated to total $6.3 million, of which $3.0 million is a reduction
of policy acquisition costs, for the year ended December 31, 1995. Adjustments
(d), (e) and (f) reflect these estimated cost savings.

(d) To adjust amortization policy acquisition costs for the reduction in
expenses.

(e) To reduce expenses due to elimination of duplicative facilities,
personnel and functions net of the effect of costs deferred or amortized.

(f) To record accrued taxes on all adjustments.

18
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION OF
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.

The following table sets forth selected consolidated historical financial
information of FSA Holdings and has been derived from and should be read in
conjunction with the audited consolidated financial statements of FSA Holdings
for each of the five years ended December 31, 1995, including the respective
notes thereto. See "Available Information" and "Incorporation of Certain
Documents by Reference." The income statement information set forth below does
not reflect the effects of the consummation in December 1995 of the Merger. See
"Capital Guaranty Corporation," "Selected Financial Information of Capital
Guaranty Corporation," "Incorporation of Certain Documents by Reference" and
"Unaudited Pro Forma Consolidated Condensed Financial Information."

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
1991 1992 (1) 1993 (2) 1994 1995 (3)
----------- ----------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT
Gross premiums written... $ 110,727 $ 131,131 $ 127,409 $ 106,449 $ 110,742
Net premiums written..... 55,910 78,397 65,006 77,757 77,576
Net premiums earned...... 60,510 63,857 63,377 65,754 69,347
Net realized gains
(losses)................ 9,087 29,153 18,292 (3,773) 5,120
Net investment income.... 45,059 47,024 47,948 46,592 48,965
Total revenues........... 116,967 142,506 127,654 109,350 127,273
Losses and loss
adjustment expenses..... 9,901 54,623 84,054 3,024 21,658
Amortization and
write-off of goodwill... 3,718 3,718 81,598
Policy acquisition and
other expenses.......... 32,222 31,323 40,459 28,036 16,888
Income (loss) before
income taxes............ 71,126 52,842 (163,866) 78,290 75,042
Net income (loss)........ 52,803 43,457 (124,707) 60,375 55,038
Earnings (loss) per
common share............ 2.40 1.90 (5.44) 2.32 2.13
Cash dividends per common
share................... 0.26 0.16 0.32
SELECTED FINANCIAL RATIOS
GAAP BASIS (4)
Loss ratio............... 16.4% 85.5% 132.6% 4.6% 31.2%
Expense ratio............ 46.0 47.3 62.1 40.5 42.2
Combined ratio........... 62.4% 132.8% 194.7% 45.1% 73.4%
SAP BASIS(4)
Loss ratio............... 18.3% 67.7% 0.7% 28.1% 16.7%
Expense ratio............ 77.6 47.5 52.2 59.1 45.5
Combined ratio........... 95.9% 115.2% 52.9% 87.2% 62.2%
BALANCE SHEET
Total investments........ $ 659,880 $ 727,455 $ 786,723(5) $ 747,176(5) $ 1,110,742(5)
Prepaid reinsurance
premiums................ 71,288 98,225 127,849 121,668 133,548
Total assets............. 933,550 1,042,362 1,030,587 1,074,316 1,490,262
Unearned premiums........ 256,051 297,073 328,165 334,569 463,897
Total liabilities........ 361,811 433,166 488,615 528,880 712,315
Shareholders' equity..... 571,739 609,196 541,972 545,436 777,947
Book value per common
share................... 25.00 26.64 20.95 20.92 24.67
SELECTED FINANCIAL
STATISTICS (4)
Gross insurance in
force................... $45,045,000 $52,592,000 $61,290,000 $65,824,000 $99,034,000
Net insurance in force... 33,447,000 37,334,000 41,667,000 45,825,000 75,360,000
Qualified statutory
capital................. 420,326 461,443 454,048 465,787 644,653
Policyholders' leverage
ratio................... 80:1 81:1 92:1 98:1 117:1
ANALYTICAL DATA
Tangible book value per
common share (6)(8)..... $ 21.27 $ 23.07 $ 20.95 $ 20.92 $ 24.67
Adjusted book value per
common share (7)(8)..... 26.67 28.98 26.15 26.40 31.16
</TABLE>

- ------------------------------
(1) Results for full year 1992 were adversely affected by $54.6 million of
additional reserves, consisting of case basis reserves for three commercial
mortgage transactions insured by FSA and the establishment of the general
loss reserve.

(2) Results for the year ended December 31, 1993 were adversely affected by
$63.7 million in net incurred losses for three commercial mortgage
transactions insured by FSA, $63.0 million of which losses were directly
paid by a letter of credit provided by U S WEST (the "U S WEST Letter of
Credit"). The payment under the U S WEST Letter of Credit was accounted for
under GAAP as a contribution of capital (net of related tax effect) and the
related losses were reflected as an expense in FSA's income statement, while
for SAP income statement purposes the drawings under the U S WEST Letter of
Credit were netted against such losses. Results were also adversely affected
by an increase of $20.3 million in FSA's general loss reserve for
unidentified losses covering FSA's entire insured portfolio, a write-off of
$78.8 million of goodwill, a restructuring charge of $85.4 million resulting
from the premium payment by FSA to Commercial under FSA's reinsurance
agreement with Commercial Re and non-recurring charges of approximately
$10.0 million. Gross and net premiums written were reduced due to the
cession of $17.9 million of unearned premiums from FSA to Commercial Re
under such reinsurance agreement.

19
<PAGE>
(3) Results for the year ended December 31, 1995 were adversely affected by a
one-time Merger-related general reserve charge of $15.4 million ($10.0
million after taxes). See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

(4) These ratios and statistics relate solely to FSA. The GAAP loss ratio is
losses and loss adjustment expenses incurred (inclusive of additions to the
general loss reserve) divided by net premium earned. The SAP loss ratio is
losses and loss adjustment expenses incurred (exclusive of additions to the
general loss reserve) divided by net premiums earned. The GAAP expense ratio
is underwriting and operating expenses divided by net premiums earned. The
SAP expense ratio is underwriting and operating expenses divided by net
premiums written. The combined ratio on both a GAAP and SAP basis is the sum
of the applicable loss and expense ratios.

(5) Total investments at December 31, 1993, 1994 and 1995 included $54.1 million
net unrealized gains, $33.4 million net unrealized losses, and $30.7 million
net unrealized gains, respectively. In addition, the balance at December 31,
1993 included $24.3 million of funds withheld from the premium ceded by FSA
to Commercial Re, pending deposit of such funds in a trust account
satisfying the requirements of applicable insurance law. Total investments
at December 31, 1991 and 1992 were recorded at amortized cost in accordance
with GAAP and therefore do not include unrealized gains or losses.

(6) Tangible book value per common share is book value per common share less
goodwill per common share.

(7) Adjusted book value per common share, which is tangible book value plus net
unearned premium reserve plus the present value of net future installment
premiums less deferred acquisition costs less tax effect (in each case, on a
per common share basis), is used by management and equity analysts as a
measurement of FSA Holdings' and Capital Guaranty's intrinsic value.
Adjusted book value per common share is not a substitute for GAAP book value
per common share.

(8) Tangible book value per common share and adjusted book value per common
share do not include the effect of unrealized gains on investments for the
years ended December 31, 1991 and 1992, which were $0.71 and $0.60 per
common share, respectively.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THE MERGER

On December 20, 1995, Capital Guaranty merged with a subsidiary of FSA
Holdings pursuant to the Merger. In connection with the Merger, Capital
Guaranty's operating subsidiary, CGIC, became a subsidiary of FSA and thereby a
member of the FSA group of insurance companies. Subsequent to the Merger, CGIC
changed its name to FSAM. The Merger provided for each Capital Guaranty share to
be exchanged for 0.6716 of a share of Common Stock and cash of $5.69. FSA
Holdings issued in the aggregate 6,051,661 shares of Common Stock and aggregate
cash of $51.3 million. The transaction value of the Merger, including
transaction costs, was $208.6 million. The Merger was accounted for on a
purchase accounting basis. In view of the short period between the date of the
Merger and year end, the date of the Merger for accounting purposes is
considered to be December 31, 1995. As a result, the accounting for the Merger
has no effect on the results of operations, except for the recording of a $15.4
million general reserve provision discussed below.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 1995 VERSUS YEAR ENDED DECEMBER 31, 1994

FSA Holdings' adjusted book value per share of Common Stock at December 31,
1995, was $31.16, up 19.4%, including dividends, since year-end 1994. Adjusted
book value per share of Common Stock is used by management and some equity
analysts as a measurement of FSA Holdings' intrinsic value. It is defined as
book value plus net unearned premiums plus the present value of future net
installment premiums less deferred acquisition costs less tax effect. Adjusted
book value is not a substitute for GAAP book value per share of Common Stock.

FSA Holdings discusses its financial results by breaking out the various
levels of its income statement in order to present a better analysis of the
underlying trends. CORE NET INCOME represents net income before the after-tax
effects of refundings and prepayments, net realized capital gains and losses,
gains or losses on the sale of subsidiaries, losses related to discontinued
business, goodwill amortization and non-recurring or one-time charges, if any.
Core net income therefore represents FSA Holdings' normal operating results.
OPERATING NET INCOME is core net income plus the after-tax effects of refundings
and prepayments. The distinction between core and operating net income is
important because higher-than-normal volumes of refundings and prepayments, as
occurred in 1994 and 1993, disproportionately increase earned premiums and could
suggest a stronger earnings trend than the pace of originations would warrant.
NET INCOME, as reported, is operating net income plus the after-tax effects of
realized capital gains and losses, gains or losses on the sale of subsidiaries,
goodwill amortization and non-recurring or one-time charges.

FSA Holdings' 1995 net income was $55.0 million, compared with $60.4 million
for 1994, a decrease of 8.8%. The decrease was due primarily to the one-time
charge of $15.4 million, or $10.0 million after taxes, to increase the general
reserve to provide for the CGIC insured portfolio acquired in the Merger. As an
independent company prior to the Merger, CGIC had not maintained a general
reserve. This one-time increase to the general reserve was consistent with FSA's
established reserving methodology. The decrease in earnings was partially offset
by (i) higher capital gains, which contributed $3.3 million to net income for
1995, compared with capital losses of $2.5 million for 1994; and (ii) the
realization of a net after-tax gain of $1.4 million on the sale of a subsidiary
after writing off certain previously capitalized expenses.

Operating net income was $60.3 million for 1995 versus $62.8 million for
1994. This 4.1% decrease can be traced to lower contributions from refundings of
$0.2 million and a decline in core net income to $53.7 million for 1995 from
$56.0 million for 1994. The 4.2% decline in core net income resulted primarily
from higher additions to FSA Holdings' general loss reserve and a higher
effective tax rate on investment income, both of which are discussed below.

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The weighted average number of shares of Common Stock outstanding decreased
to 25,797,000 for 1995 from 26,070,000 for 1994 because FSA Holdings repurchased
stock to fund various equity-based compensation plans. Earnings per share for
the year decreased to $2.13 for 1995 from $2.32 for 1994.

FSA Holdings considers two measures of gross premiums originated for a given
period. GROSS PREMIUMS WRITTEN captures premiums collected in the period,
whether collected upfront for business originated in the period, or in
installments for business originated in prior periods. An alternative measure,
the gross present value of premiums written ("GROSS PV PREMIUMS WRITTEN")
reflects future installment premiums discounted to their present value, as well
as upfront premiums, but only for business originated in the period. FSA
Holdings considers gross PV premiums written to be the better indicator of a
given period's origination activity because a substantial part of FSA Holdings'
premiums are collected in installments, a practice typical of the asset-backed
business. To calculate PV premiums, management estimates the life of each
transaction that has installment premiums and discounts the future installment
payments at an annual rate of 9.5%, a rate FSA Holdings has used consistently
since it began calculating PV premiums.

Overall business origination was strong in 1995. Gross PV premiums written
for the year 1995 increased by 34.4% to $139.1 million from the prior year's
result of $103.5 million. Almost all the growth came from asset-backed business,
where originations increased in all major product lines. Asset-backed gross PV
premiums written grew 88.1% to $73.8 million in 1995, compared with $39.3
million the prior year. FSA insured asset-backed obligations with an aggregate
gross par amount of $9.8 billion for 1995 and $5.6 billion for 1994.

For the municipal business, gross PV premiums written in 1995 increased 1.7%
to $65.3 million in 1995 from $64.2 million in 1994. Although FSA participated
selectively in the municipal market in order to mitigate the effects of price
competition and thereby achieved acceptable returns, municipal gross par insured
increased at a faster rate than PV premiums, to $5.4 billion for 1995 from $4.4
billion for 1994. While the estimated total market par volume of municipal new
issues was $156.2 billion, a decrease of 5% from the 1994 level, the par insured
by the financial guaranty industry grew to $68.1 billion in 1995, 11% higher
than in the prior year. FSA Holdings believes that the increased penetration of
municipal bond insurance reflects both increased investor demand for insurance
and efforts by some bond insurers to increase volume by reducing premiums.

Gross premiums written increased 4.0%, to $110.7 million for 1995 from
$106.4 million for 1994. Net premiums written were $77.6 million for 1995,
approximately equal to the $77.8 million written for 1994. Net premiums written
were flat despite the increase in gross premiums written because FSA Holdings
ceded more business under facultative reinsurance on asset-backed and
international business to meet its internal single-risk limits.

Net premiums earned for 1995 were $69.3 million, compared with $65.8 million
for 1994, an increase of 5.5%. Premiums earned from refundings and prepayments
were $13.8 million for 1995 and $14.2 million for 1994, contributing $6.6
million and $6.8 million, respectively, to after-tax earnings. Net premiums
earned for the year grew 7.9% relative to 1994 before the effects of refundings
and prepayments.

Net investment income was $49.0 million for 1995 and $46.6 million for 1994,
an increase of 5.1%, and has been affected by a general decline in market
interest rate levels. Net capital gains realized by FSA Holdings were $5.1
million for 1995, compared with a loss of $3.8 million for 1994. Realized
capital gains and losses are by-products of FSA Holdings' investment strategy
and may vary substantially from period to period. Over the past year, FSA
Holdings has repositioned its investment portfolio from long-dated tax-exempt
securities into shorter-term taxable securities, resulting in the tax rate on
investment income increasing to 21.9% for 1995 from 14.4% for 1994. The
investment portfolio at December 31, 1995, had unrealized gains of $30.7
million, compared with unrealized losses of $33.4 million at December 31, 1994.

The provisions for core losses and loss adjustment expenses during 1995 and
1994 were $6.3 million and $3.0 million, respectively, representing additions to
FSA Holdings' general loss reserve. In December 1995, FSA recognized the
one-time charge of $15.4 million to increase its general reserve to provide for
the CGIC insured portfolio in a manner consistent with FSA's reserving
methodology. Also in December, FSA

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reclassified $9.7 million from the general reserve to case reserves associated
predominantly with certain residential mortgage and timeshare receivables
transactions. The additions to the general reserve represent management's
estimate of the amount required to adequately cover the net cost of claims. FSA
Holdings will, on an ongoing basis, monitor these reserves and may periodically
adjust such reserves based on FSA Holdings' actual loss experience, its future
mix of business, and future economic conditions. At December 31, 1995, the
unallocated balance in the FSA Holdings' general loss reserve was $31.8 million.

Total policy acquisition and other operating expenses were $30.6 million for
1995, compared with $28.0 million for 1994, an increase of 9.1%. Eliminating the
effect of refundings and prepayments, total policy acquisition and other
operating expenses would have been 11.2% higher due to higher amortization of
deferred acquisition costs and increased accruals for performance-based
compensation plans.

Other income increased to $3.8 million for 1995 from $0.8 million for 1994.
This increase was primarily the result of a $2.2 million net gain recognized
from a sale of one of FSA Holdings' insurance subsidiaries, whose licenses were
no longer required, net of a write-off of certain previously capitalized costs.

Income before income taxes for 1995 was $75.0 million, down 4.1% from $78.3
million for 1994.

FSA Holdings' effective tax rate for 1995 was 26.7%, compared with 22.9% for
1994. The increase in effective tax rates was due to taxable interest income
contributing a higher proportion of pre-tax income for 1995 than for 1994.

YEAR ENDED DECEMBER 31, 1994 VERSUS YEAR ENDED DECEMBER 31, 1993

In December 1993, FSA Holdings, through its insurance subsidiary FSA,
significantly reduced its risk of loss from the commercial mortgage transactions
previously insured by FSA. By obtaining quota share reinsurance for $1.5 billion
of outstanding par, FSA reduced its net par exposure to $0.3 billion. The
reinsurance was provided by Commercial Re, an insurance company organized
specifically for this purpose and owned by U S WEST and Tokio Marine. In
connection with the Commercial Re cession, FSA Holdings recognized a special
charge of $85.4 million and ceded $17.9 million of its unearned premium for the
premium owed to Commercial Re under the reinsurance agreement. Also, FSA
Holdings sold 3.0 million shares of Common Stock to U S WEST at $19.68 per
share. This capital contribution was used to partially offset the $78.5 million
used by FSA Holdings to capitalize Commercial Re and the premium payment under
the Commercial Re reinsurance agreement (collectively, the "Restructuring").

In order to present a more complete comparison of the 1993 year-end results
with those of 1994, revenue, expense and per-share data affected by the
Restructuring are disclosed for the year ended 1993 on both an historical basis
and adjusted as if the Restructuring had taken place on January 1, 1993.

For the year ended December 31, 1994, FSA Holdings' core net income was
$56.0 million ($2.15 per share), compared with $55.2 million ($2.40 per share)
for 1993. When compared with 1993 adjusted core net income of $49.6 million
($1.92 per share), core net income increased 12.8%. The principal reasons for
the increase in 1994 were growth in core premiums and investment income (which
together caused core revenues to rise 9.2%) and a 5.6% decrease in core
expenses. These factors were partially offset by an increase in losses and loss
adjustment expenses of 13.9%.

For 1994, FSA Holdings' operating net income was $62.8 million ($2.41 per
share), compared with $60.2 million ($2.62 per share) for 1993. When compared
with 1993 adjusted operating net income of $54.7 million ($2.11 per share),
operating net income increased 14.9%. Operating net income increased more than
core net income because refunding and prepayment activity was higher in 1994.

Net income was $60.4 million for 1994, compared with a net loss of $124.7
million for 1993. The net loss in 1993 was due to $84.1 million of losses and
loss adjustment expenses incurred, an $85.4 million restructuring charge and a
$78.8 million write-off of goodwill.

Both gross premiums written and gross PV premiums written declined in 1994,
primarily because FSA Holdings wrote less municipal bond insurance. Gross
premiums written were $106.4 million during 1994, compared with $127.4 million
during 1993, a decrease of 16.5%. Gross PV premiums written during 1994 were
$103.5 million, versus $130.7 million during 1993, a decrease of 20.8%.

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While FSA Holdings' municipal insured par volume was down 40.3% to $4.4
billion in 1994, the overall municipal new issue market and the insured portion
of this market had even greater declines of 44% each. Gross PV premiums written
for the municipal business decreased only 30.1% to $64.2 million in 1994, as a
result of deliberate effort by FSA Holdings to maintain average premium rates
rather than reduce prices to increase volume.

Partially offsetting the decrease in municipal par volume was an increase in
FSA Holdings' asset-backed par volume for 1994, which totaled $5.6 billion, up
29.7% from 1993. Asset-backed premiums increased only slightly, however, because
premium rates were lower and transactions closed in 1994 generally had shorter
average lives. Gross PV premiums written for the asset-backed business were
$39.3 million in 1994, an increase of $0.5 million from the prior year.

Net premiums written were $77.8 million for 1994, compared with $65.0
million for 1993, an increase of 19.6%. Net premiums written for 1993 were
reduced $17.9 million by the cession of premiums to Commercial Re in connection
with the Restructuring. Adjusting for this cession, net premiums written would
have been $82.9 million for 1993, resulting in a decrease for 1994 of 6.2%. The
percentage decrease in net premiums written was less than that for gross
premiums written due to a reduction in FSA Holdings' need for facultative
reinsurance during 1994. FSA Holdings uses facultative reinsurance, in addition
to its reinsurance treaties, to comply with internal and external guidelines
limiting FSA Holdings' exposure to single risks and portfolio concentrations.

Net premiums earned for 1994 were $65.8 million, compared with $63.4 million
for 1993, an increase of 3.8%. This increase in net premiums earned was
primarily due to a greater recognition of premium earnings from refunded and
prepaid obligations than occurred in 1993, offset by a reduction during 1994 for
the effects of premiums ceded to Commercial Re. Adjusting for this cession, net
premiums earned would have been $58.1 million for 1993, resulting in an increase
of 13.3% when 1993 is compared with 1994. Net premiums earned from refunded or
prepaid obligations were $14.2 million and $10.4 million during 1994 and 1993,
respectively, contributing $6.8 million and $5.1 million to net income for the
respective periods.

Net investment income for 1994 was $46.6 million, compared with $47.9
million for 1993. If net investment income were adjusted as of January 1, 1993,
to reflect funds utilized in the Restructuring, net investment income for 1993
would have been $42.2 million, and 1994 results would have reflected an increase
of 10.5%. Consistent with FSA Holdings' emphasis on total return rather than
current income, management repositioned the investment portfolio during 1994 by
selling long-dated tax-exempt securities and buying shorter-dated taxable
securities. This repositioning caused the following changes: (i) the investment
yield decreased from an average yield of 6.53% for 1993 to an average yield of
6.50% for 1994, as FSA Holdings shortened the duration of its portfolio; (ii)
FSA Holdings realized capital losses of $3.8 million during 1994, compared with
capital gains of $18.3 million for 1993; and (iii) FSA Holdings' operating
effective tax rate (excluding the effect of capital gains and losses, losses and
loss adjustment expenses and restructuring charges) increased from 19.8% for
1993 to 23.4% for 1994. Investment and cash equivalent balances were $747.2
million at December 31, 1994, versus $786.7 million at December 31, 1993, a
decrease of $39.5 million or 5.0%. Because FSA Holdings designated its entire
investment portfolio as held for sale, it is required to mark-to-market its
investment portfolio, causing the reported investment balance to decline $87.5
million from year-end 1993 to year-end 1994.

Other income was $0.8 million for 1994, compared with a loss of $2.0 million
for 1993, due primarily to a $2.8 million write-down to net realizable value in
1993 of FSA Holdings' interest in the residual cash flow of the assets
collateralizing an insured transaction. FSA Holdings had received this interest
in connection with the insured transaction.

Losses and loss adjustment expenses for 1994 were $3.0 million, compared
with $84.1 million for 1993. The losses and loss adjustment expenses in 1994
were due to the increase in FSA Holdings' general reserve. Of the $84.1 million
in 1993, $63.7 million related to additional case basis reserves for three
transactions in FSA Holdings' commercial mortgage portfolio, and the remaining
$20.3 million related primarily to an increase in the general reserve to reflect
the potential for loss in the commercial mortgage portfolio. The increase to the
general reserve attributable to business underwritten in 1993 was $2.6 million.

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Total operating expenses (total expenses less goodwill, restructuring
charges and losses and loss adjustment expenses) were $28.0 million for 1994,
compared with $40.5 million for 1993. Had the Restructuring been in effect
during 1993 and the effects of approximately $7.2 million in non-recurring
charges eliminated, total operating expenses would have been $28.5 million.
Current direct costs (total operating expenses excluding the effects of deferral
and amortization of policy acquisition costs, interest expense and ceding
commission income) for 1994 were $45.7 million, compared with $55.3 million for
1993, or a decrease of 17.3%. This decrease was due to the $7.2 million in
non-recurring charges during 1993 and $3.4 million lower surveillance costs
during 1994 as a result of the Restructuring. The percentage of fixed costs
(those costs that are unrelated to the acquisition of business, such as the cost
of surveillance, accounting, EDP and administration) to total current direct
costs decreased to 27.2% for 1994 from 44.0% for 1993, and would have been 38.1%
for 1993 excluding the non-recurring charges discussed above. Compensation
expenses were $29.6 million and $33.5 million for 1994 and 1993, respectively,
representing 64.7% and 60.5%, respectively, of total current direct costs.

Federal income tax expense increased by $57.1 million, from a $39.2 million
federal income tax benefit for 1993 to a $17.9 million federal income tax
expense for 1994. The benefit in 1993 was due to the restructuring charge and to
loss and loss adjustment expenses. FSA Holdings' effective tax rate was 23.9% in
1993 and 22.9% in 1994.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 1995, FSA Holdings had, at the holding company level, an
investment portfolio of $24.5 million available to fund the liquidity needs of
its activities outside of its insurance operations. Because the majority of FSA
Holdings' operations are conducted through FSA, the long-term ability of FSA
Holdings to service its debt and to declare and pay dividends will be largely
dependent upon the receipt of dividends from FSA and upon external financings.

FSA's ability to pay dividends is dependent upon its financial condition,
results of operations, cash requirements and other related factors and is also
subject to restrictions contained in the insurance laws and related regulations
of New York and other states. Under New York State insurance law, FSA may pay
dividends out of earned surplus, provided that, together with all dividends
declared or distributed by FSA during the preceding 12 months, the dividends do
not exceed the lesser of (i) 10% of policyholders' surplus as of its last
statement filed with the New York Superintendent of Insurance or (ii) adjusted
net investment income during this period. Based upon FSA's statutory statements
for the quarter ended December 31, 1995, the maximum amount available for
payment of dividends by FSA without regulatory approval over the following 12
months is approximately $46.8 million. However, to meet a customary condition of
the September 1994 approval of Fund American's application for a change in
control of FSA, the prior approval of the New York Superintendent of Insurance
is required for payment of dividends by FSA to FSA Holdings for a period of two
years following the change of control. Such prior approvals for quarterly
dividends have been obtained by FSA since September 1994 in the ordinary course
of business. During 1995, FSA paid dividends totaling $19.0 million to FSA
Holdings.

The primary use of funds by FSA Holdings is the payment of dividends to its
shareholders which totaled $8.3 million in 1995 and $4.2 million in 1994.
Dividends were less in 1994 because FSA Holdings was not public during the first
part of the year and it declared only two quarterly dividends of $0.08 per
share. Dividends prior to 1994 are not comparable since FSA Holdings was not
publicly held. An additional use of funds in the future will be to meet its
annual debt service obligation of $2.1 million related to the obligation assumed
by FSA Holdings as a result of the Merger. In connection with the Merger, FSA
repurchased a portion of its shares from FSA Holdings for $50.0 million in
December 1995. These funds replenished funds used by FSA Holdings to meet the
cash consideration paid in the Merger. During 1995, FSA Holdings also paid to
current and former members of management $5.6 million in satisfaction of notes
that were received by them in connection with the sale of their interests in FSA
Holdings as a part of FSA Holdings' acquisition by U S WEST in 1989.

FSA's primary uses of funds are to pay operating expenses and to pay
dividends to FSA Holdings. FSA's funds are also required in order to satisfy
future claims, if any, under insurance policies in the event of

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a default by an issuer of an insured obligation and the unavailability or
exhaustion of other liquidity sources in the transaction, such as the cash flow
or collateral underlying such obligations. FSA seeks to structure asset-backed
transactions to address liquidity risks through the inclusion of such other
liquidity sources in transactions. The insurance policies issued by FSA provide,
in general, that payment of principal, interest and other amounts insured by FSA
may not be accelerated by the holder of the obligation but are paid by FSA in
accordance with the obligation's original payment schedule or, at FSA's option,
on an accelerated basis. These policy provisions prohibiting acceleration of
certain claims are mandatory under Article 69 of the New York Insurance Law and
serve to reduce FSA's liquidity requirements.

FSA Holdings believes that FSA's expected operating liquidity needs, both on
a short- and long-term basis, can be funded exclusively from its operating cash
flow. In addition, FSA has a number of sources of liquidity that are available
to pay claims on a short- and long-term basis: cash flow from written premiums,
FSA's investment portfolio and earnings thereon, reinsurance arrangements with
third-party reinsurers, liquidity lines of credit with banks and capital market
transactions.

FSA Holdings' consolidated invested assets and cash equivalents at December
31, 1995, net of unsettled security transactions, had a market value of $1,103.5
million, compared with the year-end 1994 market value of $708.7 million. The
increase resulted primarily from the Merger, which added invested assets of
approximately $276.0 million. Also contributing to the increase was a change in
the market value of the investment portfolio, which included an unrealized loss
position of $33.4 million at December 31, 1994, and an unrealized gain position
of $30.7 million at December 31, 1995, as well as net cash generated from
operations. FSA Holdings manages its investments with the objectives of
preserving its capital and claims-paying ability, maintaining a high level of
liquidity and, within these constraints, obtaining a high long-term total
return.

In connection with the Merger, FSA Holdings assumed $30.0 million of senior
notes payable of Capital Guaranty. Interest on these notes is paid semiannually
at the rate of 7.05% per annum. Principal payments on these notes are due in
three equal installments of $10.0 million beginning on the eighth anniversary of
the notes and ending in the year 2003.

In order to provide additional sources of liquidity to fund claims under
policies, FSA has a $150 million credit facility with a syndicate of banks
headed by Swiss Bank Corporation, New York Branch, as agent. Principal amounts
drawn under this credit facility will mature at the expiration of the facility.
Restrictive covenants under this credit facility include requirements that FSA's
retained risk in certain business segments not exceed certain percentages of
total insurance in force, and that FSA will not insure any transaction if doing
so would result in the loss of its Triple-A rating. FSA has complied with all
covenants under this facility. To date, FSA has not borrowed under this credit
facility, which will expire in November 1998, unless extended. FSA had similar
credit facilities in 1994, and it had a credit facility for $325 million in 1993
but reduced the size of the facility to its current $150 million as a result of
entering into the Canadian Global Funding Corporation facility agreement
described below.

In August 1994, FSA entered into a $186.9 million facility agreement with
Canadian Global Funding Corporation and Hambros Bank Limited. Pursuant to the
agreement, FSA can arrange for Canadian Global Funding Corporation to purchase
designated FSA-insured securities. Securities purchased under the agreement must
mature on or before August 30, 2004, and must be guaranteed as to principal and
interest by FSA. Restrictions on FSA's ability to arrange such financing include
requirements that FSA has paid all amounts owed under the agreement and that FSA
not be rated below investment grade by Moody's or Standard & Poor's. As of
year-end 1995, $100.9 million of this facility remained available for the
purchase of designated securities.

Reinsurance arrangements provide FSA with a further source of liquidity. FSA
is a party to many reinsurance agreements that include advance claims
provisions, which require the reinsurer to reimburse FSA in advance for
anticipated claims. These advance claims provisions allow FSA to pay the
reinsured portion of claims with funds provided by its reinsurers rather than
with FSA's own funds. In the event (which management considers to be highly
unlikely) that any or all of the reinsuring companies were unable to meet their
obligations to FSA, FSA would be liable for such defaulted amounts.

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FSA also has access to liquidity through the capital markets. Insured
refundings or refinancings of outstanding insured bonds may be employed in both
distress and non-distress situations, including the refunding of defaulted
obligations prior to maturity as a means of mitigating or eliminating loss. Such
advance refundings permit the refunding issuer to access the capital markets
when the market conditions are viewed favorably, rather than bear the risk that
less favorable market conditions may be present at maturity of the insured
obligations. Certain transactions in the commercial mortgage portfolio present a
liquidity risk to FSA in that the underlying assets may need to be sold or
refinanced by the issuer in order to repay the principal amount of FSA-insured
securities at maturity. As a result of the Restructuring, a substantial majority
of the liquidity risk inherent in the commercial mortgage portfolio has been
assumed by Commercial Re.

On November 10, 1994, FSA Holdings announced the appointment of an
independent trustee authorized to purchase shares of the Common Stock in open
market transactions, at times and prices determined by the trustee. These
purchases are intended to fund future obligations relating to equity bonuses,
performance shares and stock options under FSA Holdings' 1993 Equity
Participation Plan. FSA Holdings also repurchased Common Stock from its
employees in satisfaction of withholding taxes on shares distributed under its
restricted stock plan. During 1995, the total number of shares of Common Stock
repurchased was 591,714 at a cost of $14.4 million, compared with 182,562 shares
at a cost of $3.7 million in 1994.

FSA Holdings has no material commitments for capital expenditures within the
next twelve months.

FINANCIAL GUARANTY INDUSTRY OVERVIEW

GENERAL

Financial guaranty insurance provides an unconditional and irrevocable
guaranty to the holder of a debt obligation of full and timely payment of
principal and interest. Financial guaranty insurance is primarily offered on
municipal and asset-backed debt obligations. In the event of a default under the
obligation, the insurer has recourse against the issuer and/or any related
collateral (which is a more common component in the case of insured asset-backed
obligations or other non-municipal debt) for amounts paid under the terms of the
policy. Payments under the insurance policy may not be accelerated by the holder
of the debt obligation. Generally, absent payment in full at the option of the
insurer, in the event of a default under an insured obligation the holder
continues to receive payments of principal and interest on schedule, as if no
default had occurred. Each subsequent purchaser of the obligation generally
receives the benefit of such guaranty.

Financial guaranty insurance benefits both issuers and investors. The
principal economic value of financial guaranty insurance to an issuer of an
obligation is the savings in interest costs resulting from the difference
between the interest rates on an insured obligation and the interest rate on the
same obligation on an uninsured basis. Investors benefit from the greater
marketability of the insured obligation and a reduction in the risk of loss
associated with an issuer's default, as well as greater retention of value of
their investment should the issuer experience adversity. See "Risk Factors --
Market and Other Factors" for a discussion of factors affecting the demand for
and supply of financial guaranty insurance.

The premium for financial guaranty insurance is paid by the issuer of the
obligation either in full at the inception of the policy or in installments on
an annual basis. Premium rates are typically calculated as a percentage of
either the principal amount of the debt or total exposure (principal and
interest). Rate setting reflects such factors as the credit strength of the
issuer, type of issue, sources of income, collateral pledged, restrictive
covenants, maturity, prevailing market spreads between insured and uninsured
obligations and competition from other insurers, other providers of credit
enhancement and alternatives to credit enhancement.

Premiums are generally non-refundable and are recognized as income over the
life of the insured obligation. This long and relatively predictable earnings
pattern is characteristic of the financial guaranty insurance industry and
provides a relatively stable source of future revenues to financial guaranty
insurers.

In addition to FSA, there are currently five principal primary U.S.
financial guaranty insurers: AMBAC, CapMAC, Connie Lee, FGIC and MBIA.

27
<PAGE>
FINANCIAL GUARANTY MARKET

The primary financial guaranty insurance market consists of two main
sectors: municipal bond insurance and insurance on asset-backed securities.

MUNICIPAL BOND MARKET. Municipal bond insurance provides credit enhancement
of bonds, notes and other evidences of indebtedness issued by states and their
political subdivisions (for example, counties, cities or towns), utility
districts, public universities and hospitals, public housing and transportation
authorities and other public and quasi-public entities. Municipal bonds are
supported by the issuer's taxing power in the case of general obligation or
special tax-supported bonds or by its ability to impose and collect fees and
charges for public services or specific projects in the case of most revenue
bonds. Insurance provided to the municipal bond market has been and continues to
be the major source of revenue for the financial guaranty insurance industry.

The volume of municipal bonds issued in 1995, $156.2 billion, was 5% below
the $164.5 issued in 1994 and represented a substantial decline from the $292.0
billion issued in 1993. The steep decline in 1994 was due to the substantial and
rapid increase in interest rates, which caused a reduction in refunding issues
to the point where they represented only 24% of total issuance in 1994 compared
to 51% in 1993. Bonds issued for new money purposes, however, increased to
$114.3 billion in 1994 from the 1993 level of $97.0 billion. Refundings
continued to decline in 1995 to 21% of total issuance, while money issued
declined slightly to $111.1 billion. The insured volume of municipal bonds in
1995 increased 11% to $68.1 billion, representing 44% of total municipal bonds
issued during the year.

The following table sets forth certain information regarding new-issue long
term (over one year) municipal bonds and new-issue insured long term municipal
bonds, in each case issued during the years indicated:

<TABLE>
<CAPTION>
NEW INSURED
MUNICIPAL VOLUME
NEW TOTAL NEW INSURED AS PERCENT OF NEW
MUNICIPAL MUNICIPAL TOTAL MUNICIPAL
YEAR VOLUME VOLUME VOLUME
- ----------------------------------------------- ----------- ------------- ---------------------
(IN BILLIONS)
<S> <C> <C> <C>
1986........................................... $ 151.3 $ 24.8 16.4%
1987........................................... 105.4 21.6 20.5
1988........................................... 117.8 30.5 25.9
1989........................................... 125.0 30.6 24.5
1990........................................... 128.1 33.5 26.2
1991........................................... 174.1 52.0 29.8
1992........................................... 235.0 80.8 34.4
1993........................................... 292.0 107.9 37.0
1994........................................... 164.5 61.3 37.3
1995........................................... 156.2 68.1 43.6
</TABLE>

- ------------------------
Figures are based upon estimated data provided by The Bond Buyer, October 10,
1995 and January 2, 1996.

In addition to insurance of new issues, financial guaranty insurers have
provided insurance to certain investment vehicles, usually unit investment
trusts or mutual funds, which invest in outstanding issues of municipal bonds.
Although the insurer in such circumstances typically does not have the authority
to restructure the documents of an outstanding issue to conform to its preferred
format, it generally does apply stricter underwriting criteria in determining
which issuers qualify for insurance. Issues with no reserve funds or other
factors usually deemed important in assessing risk of non-payment will be
insured only if the underlying creditworthiness of the issuer is stronger than
usual.

ASSET-BACKED SECURITIES MARKET. Asset-backed transactions or
securitizations constitute a form of structured financing distinguishable from
unsecured debt issues by being supported by a specific pool of assets having an
ascertainable cash flow or market value that is held by the issuing entity,
rather than relying

28
<PAGE>
on the general unsecured creditworthiness of the issuer of the obligation. While
most asset-backed securities represent interests in pools of assets, such as
residential and commercial mortgages and credit card and auto loan receivables,
monoline financial guarantors have also insured asset-backed securities secured
by one or a few assets, such as utility mortgage bonds and multifamily housing
bonds.

The U.S. public asset-backed securities market experienced very substantial
growth in this decade, with new issuances increasing from approximately $25
billion in 1989 to approximately $75 billion in 1994 and $108 billion in 1995.
Monoline financial guarantors are also active in other asset-backed markets,
including private placements, commercial paper, residential mortgage-backed
securities and international markets. The principal amount of asset-backed
securities insured by monoline financial guarantors grew from $6.7 billion in
1989 to $24.7 billion in 1994 and at least $30 billion in 1995.

29
<PAGE>
BUSINESS

GENERAL

FSA Holdings, through its indirect wholly owned subsidiary, FSA, is
primarily engaged in the business of providing financial guaranty insurance on
asset-backed securities and municipal bonds. FSA Holdings and FSA were each
incorporated in 1984 under the laws of the State of New York. FSA received its
New York State insurance license and commenced operations in 1985. FSA is
licensed to engage in the financial guaranty insurance business in all 50
states, the District of Columbia and Puerto Rico. FSAM, a wholly owned
subsidiary of FSA, and Financial Security Assurance of Oklahoma, Inc.
("Oklahoma"), a wholly owned subsidiary of FSAM, provide reinsurance to FSA.
Financial Security Assurance (U.K.) Limited ("FSA-UK"), a wholly owned
subsidiary of Oklahoma, provides financial guaranty insurance for transactions
in the United Kingdom and other member countries of the European Union. FSA
Portfolio Management Inc. ("FSA Portfolio Management") is a wholly owned
subsidiary of FSA Holdings organized in December 1992 to provide investment
management services to FSA and to third parties. Transaction Services
Corporation is a wholly owned subsidiary of FSA Holdings organized in December
1995 to provide transaction management and workout services to FSA and third
parties. As used herein, unless the context otherwise requires, references to
FSA include FSA and its subsidiaries, including FSAM (formerly CGIC).

In December 1995, FSA Holdings acquired Capital Guaranty in a merger
transaction pursuant to which Capital Guaranty became a direct wholly owned
subsidiary of FSA Holdings. For additional information concerning Capital
Guaranty, see "Capital Guaranty Corporation," "Selected Financial Information of
Capital Guaranty Corporation" and "Incorporation of Certain Documents by
Reference."

Financial guaranty insurance written by FSA guarantees payment when due of
scheduled payments on an issuer's obligations. In the case of a payment default
on an insured obligation, FSA is generally required to pay only the principal,
interest or other amounts due in accordance with the obligation's original
payment schedule or, at FSA's option, on an accelerated basis.

The claims-paying ability of FSA is rated "Aaa" by Moody's and "AAA" by S&P,
Nippon Investors Services and S&P (Australia) Pty. Ltd. FSA was the first
insurance company organized to insure asset-backed obligations and has been a
leading insurer of asset-backed obligations (based on number of transactions
insured) since its inception in 1985. FSA expanded the focus of its business in
1990 to include financial guaranty insurance of municipal obligations. For the
year ended December 31, 1995, FSA had gross premiums written of $110.7 million,
of which 49% related to insurance of municipal obligations and 51% related to
insurance of asset-backed obligations. At December 31, 1995, FSA had net
insurance in force of $75.4 billion, of which 70% represented insurance on
municipal obligations and 30% represented insurance of asset-backed obligations.

The Company's business strategy is to remain a leading insurer of
asset-backed obligations and to become a more prominent insurer of municipal
obligations. The Company believes that the demand for its financial guaranty
insurance will grow over the long term in response to anticipated growth in
insured asset-backed and municipal obligations. The Company expects continued
growth in the insurance of asset-backed obligations due in part to the continued
expansion of asset securitization to meet the liquidity needs and increasingly
more stringent capital requirements of financial institutions. In the long term,
the Company also expects growth in the insurance of municipal obligations due in
part to increased issuance of municipal bonds to finance repairs and
improvements to the nation's infrastructure and increased municipal bond
purchases by individuals who generally purchase insured obligations. In 1994,
and continuing into 1995, however, there was a substantial decline in the
issuance of municipal bonds, and there can be no assurance as to when, if ever,
that trend will be reversed. The percentage of new domestic municipal bond
volume which is insured, however, has increased each year since 1986, to 44% in
1995. The Company expects to continue to emphasize a diversified insured
portfolio characterized by insurance of both asset-backed and municipal
obligations, with a broad geographic distribution and a variety of revenue
sources and transaction structures. The Company's acquisition of Capital
Guaranty was intended to increase the Company's presence in the insured
municipal bond sector.

30
<PAGE>
TYPES OF PRODUCTS

FSA's insurance is employed in both the new issue and secondary markets.
Insurance premium rates take into account the cost and the projected return to
and the 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 in accordance with,
and the final premium rate is a function of, such factors and subject to FSA's
underwriting guidelines. See "-- Credit Underwriting Guidelines, Standards and
Procedures."

In the case of new issues, the insured obligations are initially sold with
FSA insurance. 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-Registered Trademark-) Program provides insurance for uninsured
asset-backed obligations trading in the secondary market. TAGSS insured
securities have included utility first mortgage bonds, sale-leaseback bonds and
asset-backed securities supported by residential mortgages and receivables.
FSA's Custody Receipt Program provides insurance for uninsured municipal
obligations trading in the secondary market. The insurance on obligations
outstanding in the secondary market generally affords a wider secondary market
and therefore greater marketability to a given issue of previously issued
obligations. Premiums for secondary market insurance are payable either in full
at the time of policy issuance or over the life of the obligation. FSA's
underwriting guidelines require it to apply the same underwriting standards on
secondary market issues that it does on new security issues, although the
evaluation procedures are typically abbreviated.

FSA also writes portfolio insurance for securities held by investment funds
such as unit investment trusts and mutual funds. Such insurance covers
securities either while they are held by the fund or to their maturity, whether
or not held by the fund.

As of December 31, 1995, FSA's insurance on new issues with respect to
asset-backed obligations represented approximately 91.7%, of the aggregate net
par amount outstanding with respect to such obligations, (excluding $331 million
par amount outstanding assumed by FSA under reinsurance agreements at December
31, 1995) and its insurance on new issues with respect to municipal obligations
as of such dates represented approximately 83.5% of the aggregate net par amount
outstanding with respect to such obligations (excluding $1,891 million par
amount outstanding assumed by FSA under reinsurance agreements at December 31,
1995).

INSURANCE IN FORCE

FSA has insured a variety of asset-backed obligations, including obligations
backed by residential mortgages, consumer receivables, corporate bonds, bank
loans, government debt and commercial mortgages. FSA has also insured
investor-owned utility first mortgage bonds. FSA has insured a broad array of
municipal obligations.

FSA ceased writing insurance for commercial mortgage transactions in 1990
and announced its withdrawal from this sector of its business in 1992. In
December 1993, in anticipation of the IPO, the Company undertook the
Restructuring to reduce its risk of loss from commercial mortgage transactions
previously insured by FSA and its subsidiaries. As part of the Restructuring,
(i) the Company established Commercial Re, a newly formed reinsurance company;
(ii) the Company distributed all the outstanding shares of Commercial Re to the
existing shareholders of the Company in proportion to their ownership interests
in the Company at the time; and (iii) Commercial Re assumed approximately 64.4%
of the exposure of FSA and its subsidiaries, on a weighted average basis, on
commercial mortgage transactions previously insured by FSA and its subsidiaries.

FSA has selectively expanded its insured portfolio in a manner intended to
achieve diversification. At December 31, 1995, FSA had in force 388 issues
insuring approximately $22.8 billion in gross direct par amount outstanding of
asset-backed obligations and 1,536 issues insuring approximately $35.2 billion
in

31
<PAGE>
gross direct par amount outstanding of municipal obligations. In addition, at
December 31, 1995, FSA had assumed pursuant to certain reinsurance contracts
approximately $0.3 billion and $2.0 billion in par amount outstanding on
asset-backed and municipal obligations, resulting in a total gross par amount
outstanding of approximately $60.3 billion. At such date, the total net par
amount outstanding, determined by reducing the gross par amount outstanding to
reflect reinsurance ceded of approximately $14.3 billion, was approximately
$46.0 billion. At December 31, 1995, the weighted average life of the direct
principal insured on these policies was approximately six and thirteen years,
respectively, for asset-backed and municipal obligations.

ASSET-BACKED OPERATIONS

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

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

CONSUMER RECEIVABLES. Obligations primarily backed by consumer receivables
include conventional pass-through and pay-through securities as well as more
highly structured transactions. Consumer receivables backing these insured
obligations include automobile loans and leases, credit card receivables, mobile
home loans, timeshare loans and limited partnership investor notes.

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

POOLED CORPORATE OBLIGATIONS. Obligations primarily backed by pooled
corporate obligations include obligations collateralized by corporate debt
securities or corporate loans and obligations backed by cash flow or market
value of non-consumer assets. Corporate obligations include corporate bonds,
bank loan participations, trade receivables and equity securities.

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

COMMERCIAL MORTGAGE PORTFOLIO. FSA ceased writing insurance in this sector
in 1990 and as part of the Restructuring obtained reinsurance from Commercial Re
relating to risk of loss in this category. Obligations backed by commercial
mortgages are divided into commercial real estate and corporate secured.
Commercial real estate obligations are primarily backed by commercial real
estate including hotel properties, office buildings and warehouses and consist
of pay-through bonds, pass-through certificates and more structured products,
with credit protection provided by property cash flow, property values, first
loss letters of credit, cash reserves and other means. Corporate secured
obligations generally take the form of bond obligations secured by mortgages on
properties leased to one or more affiliated corporate tenants, in which the
obligations are secured primarily by the lease cash flow and secondarily by the
value of the mortgaged properties. Lease obligors on these transactions include
major food and clothing retailers, and properties securing these transactions
include retail and warehouse facilities.

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

MUNICIPAL OBLIGATIONS

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

32
<PAGE>
GENERAL OBLIGATION BONDS. General obligation bonds are issued by states,
their political subdivisions and other municipal issuers, and are supported by
the general obligation of the issuer to pay from available funds and by a pledge
of the issuer to levy taxes sufficient in an amount to provide for the full
payment of the bonds to the extent other available funds are insufficient.

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

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

HEALTH CARE REVENUE BONDS. Health care revenue bonds include both long-term
maturities for capital construction or improvements of health care facilities
and medium-term maturities for equipment purchase.

INTERNATIONAL MUNICIPAL BONDS. International municipal bonds include U.K.
housing authority obligations and debt issued or guarantied by the governments
of Australia, Denmark, France, Italy and Sweden and various local governments of
Australia, France and Spain.

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

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

OTHER MUNICIPAL BONDS. Other municipal bonds insured by FSA include college
and university revenue bonds and resource recovery bonds.

33
<PAGE>
SUMMARY OF INSURANCE PORTFOLIO AT DECEMBER 31, 1995

<TABLE>
<CAPTION>
NUMBER OF NET PAR NET PERCENT OF
ISSUES IN AMOUNT PAR AND NET PAR
FORCE OUTSTANDING INTEREST AND INTEREST
----------- ------------ ------------ -------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
ASSET-BACKED OBLIGATIONS
Residential mortgages.................................... 205 $ 6,740 $ 9,947 13.2%
Consumer receivables..................................... 83 5,105 5,647 7.5
Government securities.................................... 14 1,651 1,768 2.3
Pooled corporate obligations............................. 27 1,819 2,252 3.0
Investor-owned utility obligations....................... 59 821 2,157 2.9
Commercial mortgage portfolio:
Commercial real estate................................. 9 148 181 0.2
Corporate secured...................................... 4 98 140 0.2
Other asset-backed obligations........................... 7 681 710 0.9
----- ------------ ------------ -----
Total asset-backed obligations (1)..................... 408 17,063 22,802 30.2
----- ------------ ------------ -----
MUNICIPAL OBLIGATIONS
General obligation bonds................................. 900 8,738 14,606 19.4
Housing revenue bonds.................................... 276 1,674 3,875 5.1
Municipal utility revenue bonds.......................... 241 3,873 7,208 9.6
Health care revenue bonds................................ 86 2,587 5,125 6.8
Tax-supported (non-general obligation) bonds............. 315 7,090 12,852 17.1
Transportation revenue bonds............................. 43 1,365 2,715 3.6
Other municipal bonds.................................... 176 3,589 6,178 8.2
----- ------------ ------------ -----
Total municipal obligations (2)........................ 2,037 28,916 52,559 69.8
----- ------------ ------------ -----
Total.................................................. 2,445 $ 45,979 $ 75,361 100.0%
----- ------------ ------------ -----
----- ------------ ------------ -----
</TABLE>

- ------------------------
(1) Includes net par and net par and interest amounts outstanding of $0.2
billion and $0.5 billion of asset-backed obligations assumed by FSA and its
subsidiaries through the Merger.

(2) Includes net par and net par and interest amounts outstanding of $10.5
billion and $18.9 billion of municipal obligations assumed by FSA and its
subsidiaries through the Merger.

34
<PAGE>
OBLIGATION TYPE

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

ANNUAL NEW BUSINESS INSURED BY OBLIGATION TYPE (1)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
SECURITY TYPE 1991 1992 1993 1994
- --------------------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
ASSET-BACKED OBLIGATIONS
Residential mortgages.............................................. 24% 18% 14% 25%
Consumer receivables............................................... 12 9 12 23
Government securities.............................................. 9 9 0 0
Pooled corporate obligations....................................... 2 4 1 4
Investor-owned utility obligations................................. 2 0 3 2
Commercial Mortgage Portfolio:
Commercial real estate........................................... 0 0 0 0
Corporate secured................................................ 0 0 0 0
Other asset-backed obligations..................................... 0 1 3 2
--- --- --- ---
Total asset-backed obligations................................... 49% 41% 33% 56%
MUNICIPAL OBLIGATIONS
General obligations bonds.......................................... 11% 15% 14% 12%
Housing revenue bonds.............................................. 25 4 3 1
Municipal utility revenue bonds.................................... 1 9 10 8
Health care revenue bonds.......................................... 4 8 7 4
Tax-supported (non-general obligation) bonds....................... 8 12 17 11
Transportation revenue bonds....................................... 0 4 3 1
Other municipal bonds.............................................. 2 7 13 7
--- --- --- ---
Total municipal obligations...................................... 51% 59% 67% 44%
--- --- --- ---
Total.......................................................... 100% 100% 100% 100%
--- --- --- ---
--- --- --- ---

SECURITY TYPE 1995
- --------------------------------------------------------------------- -----------
<S> <C>
ASSET-BACKED OBLIGATIONS
Residential mortgages.............................................. 26%
Consumer receivables............................................... 29
Government securities.............................................. 0
Pooled corporate obligations....................................... 10
Investor-owned utility obligations................................. 0
Commercial Mortgage Portfolio:
Commercial real estate........................................... 0
Corporate secured................................................ 0
Other asset-backed obligations..................................... 1
---
Total asset-backed obligations................................... 66%
MUNICIPAL OBLIGATIONS
General obligations bonds.......................................... 11%
Housing revenue bonds.............................................. 2
Municipal utility revenue bonds.................................... 4
Health care revenue bonds.......................................... 3
Tax-supported (non-general obligation) bonds....................... 0
Transportation revenue bonds....................................... 6
Other municipal bonds.............................................. 8
---
Total municipal obligations...................................... 34%
---
Total.......................................................... 100%
---
---
</TABLE>

- ------------------------
(1) Does not include new business insured by FSAM (formerly CGIC).

GEOGRAPHIC CONCENTRATION

In its asset-backed business, FSA considers geographic concentration as a
factor in underwriting insurance covering securitizations of asset pools such as
residential mortgages 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 deemed by FSA to be a significant credit factor given other
more relevant measures of diversification such as issuer or industry
diversification.

35
<PAGE>
FSA seeks to maintain a diversified portfolio of insured municipal
obligations designed to spread its risk across a number of geographic areas. The
table below sets forth those jurisdictions in which municipalities issued an
aggregate of 2% or more of FSA's net par amount outstanding at December 31, 1995
of insured municipal securities:

MUNICIPAL
INSURED PORTFOLIO BY JURISDICTION
AT DECEMBER 31, 1995

<TABLE>
<CAPTION>
PERCENT OF TOTAL
NET PAR MUNICIPAL NET PAR
NUMBER OF AMOUNT AMOUNT
JURISDICTION ISSUES OUTSTANDING OUTSTANDING
- ---------------------------------------------------------------------- ----------- ------------ -----------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
California............................................................ 437 $ 4,692 16.2%
New York.............................................................. 245 2,743 9.5
Florida............................................................... 167 1,981 6.8
Pennsylvania.......................................................... 212 1,641 5.7
Texas................................................................. 276 1,449 5.0
New Jersey............................................................ 228 1,345 4.7
Louisiana............................................................. 116 882 3.1
Michigan.............................................................. 139 897 3.1
Minnesota............................................................. 131 866 3.0
Massachusetts......................................................... 98 777 2.7
Illinois.............................................................. 209 775 2.7
All other states...................................................... 1,344 8,722 30.1
Non-U.S............................................................... 38 2,146 7.4
----- ------------ -----
Total............................................................. 3,640 $ 28,916 100.0%
----- ------------ -----
----- ------------ -----
</TABLE>

ISSUER CONCENTRATION

FSA has adopted underwriting and exposure management policies designed to
limit the net insurance in force for any one credit. In many cases, FSA uses
reinsurance to limit net exposure to any one credit. At December 31, 1995,
insurance of asset-backed obligations constituted 30.3% of FSA's net insurance
in force and insurance of municipal obligations constituted 69.7% of FSA's net
insurance in force. As of such date, FSA's ten largest insured asset-backed
transactions represented $3.7 billion, or 8.1%, of its total net par amount
outstanding, and FSA's ten largest insured municipal credits represented $2.9
billion, or 6.3%, of its total net par amount outstanding. FSA is also subject
to certain regulatory limits and rating agency guidelines on exposure to single
credits.

36
<PAGE>
The following tables set forth the net par amount outstanding of FSA's
insurance for the ten largest asset-backed transactions and municipal credits
insured by FSA at December 31, 1995:

TEN LARGEST INSURED ASSET-BACKED TRANSACTIONS AT DECEMBER 31, 1995

<TABLE>
<CAPTION>
TRANSACTION ASSET TYPE
- ------------------------------------------------------------- ------------------------------ NET PAR
AMOUNT
OUTSTANDING
------------
(IN
MILLIONS)
<S> <C> <C>
Olympic Auto Receivables Trust 1995-E........................ Consumer Receivables $ 556.0
Olympic Auto Receivables Trust 1995-D........................ Consumer Receivables 448.2
Mid-State Trust II........................................... Residential Mortgages 407.1
First Source Financial LLP CP................................ Pooled Corporate 397.7
WFS Financial 1995-5 Grantor Trust........................... Consumer Receivables 381.5
HFC Home Equity Loan Asset-Backed Certificates Series
1991-2...................................................... Residential Mortgages 336.5
Western Financial 1995-4 Grantor Trust....................... Consumer Receivables 331.5
Merit Securities Corp. Series 4.............................. Residential Mortgages 297.5
Securitized Asset Sales Inc. 1993-6.......................... Residential Mortgages 281.4
Rural Housing Senior Mortgage
Pass-Through Certificates,
Series 1987-1.............................................. Residential Mortgages 267.8
------------
Total.................................................... $ 3,705.2
------------
------------
</TABLE>

TEN LARGEST INSURED MUNICIPAL CREDITS AT DECEMBER 31, 1995

<TABLE>
<CAPTION>
CREDIT OBLIGATION TYPE
- ------------------------------------------------------------- ------------------------------ NET PAR
AMOUNT
OUTSTANDING
------------
(IN
MILLIONS)
<S> <C> <C>
New York State Medical Care Facilities Finance Agency........ Tax-Supported $ 344.0
State of California.......................................... General Obligation 332.9
Commonwealth of Puerto Rico.................................. General Obligation 319.5
Republic of Finland.......................................... Other Municipal Bonds 315.5
Puerto Rico Electric Power Authority......................... Utility Revenue 288.7
New York City................................................ General Obligation 285.2
Iowa School Corporation...................................... General Obligation 266.7
Los Angeles County........................................... General Obligation 265.6
Maine Health and Higher Education............................ Other Municipal Bonds 228.7
Vermont Student Assistance Corporation....................... Other Municipal Bonds 225.0
------------
Total...................................................... $ 2,871.8
------------
------------
</TABLE>

CREDIT UNDERWRITING GUIDELINES, STANDARDS AND PROCEDURES

Financial guaranty insurance, as written by FSA, relies on an assessment of
the adequacy of various payment sources to meet debt service payments 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 would otherwise be investment grade without the
benefit of FSA's insurance. To this end, each policy written or reinsured by FSA
must meet the general underwriting guidelines and specific standards for
particular types of obligations approved by its Board of Directors. In addition,
the Company's Board of Directors has established an Underwriting Committee which
periodically reviews completed transactions to ensure conformity with
underwriting guidelines and standards.

37
<PAGE>
FSA's underwriting guidelines for asset-backed obligations are built 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 values, excess cash flow or "spread," or reserves) or third-party
protection (such as bank letters of credit, guarantees, net worth maintenance
agreements, indemnity agreements or reinsurance policies). This
overcollateralization or third-party protection need not indemnify FSA against
all loss, but is generally intended to assume the primary risk of financial
loss. Overcollateralization or third-party protection may not, however, be
required in transactions in which FSA is insuring the obligations of certain
highly rated issuers that typically are regulated or have implied or explicit
government support or in transactions in which FSA is insuring bonds issued to
refinance other bonds insured by FSA as to which the issuer is or may be in
default. FSA's general policy has been to insure 100% of the principal, interest
and other amounts due in respect of asset-backed insured obligations rather than
providing partial or first loss coverage sufficient to convey a triple-A rating
on the insured obligations.

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

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

The underwriting process that implements these underwriting guidelines and
standards is supported by approximately 74 analysts, underwriting officers and
credit officers and 12 attorneys. Moreover, the approval of senior management is
required for all transactions.

Each underwriting group in the Financial Guaranty Department has a senior
underwriting officer responsible for confirming that each transaction proposed
by the Financial Guaranty Department conforms to the underwriting guidelines and
standards. The evaluation by the senior underwriting officer is reviewed and
approved, in the case of asset-backed transactions, by the Chief Underwriting
Officer, and, in the case of municipal transactions, by the Chief Municipal
Underwriting Officer. This review may take place while the transaction is in its
formative stages, thus facilitating the introduction of further enhancements at
a stage when the transaction is more receptive to change.

Final transaction approval is obtained from FSA's Management Review
Committee for asset-backed transactions and from FSA's Municipal Underwriting
Committee for municipal transactions. Approval is usually based upon both a
written and an oral presentation by the underwriting group to the respective
committee. The Management Review Committee is comprised of the President, the
Chief Operating Officer, the Chief Underwriting Officer, the General Counsel
and, on a rotating basis, a senior officer from the Financial Guaranty
Department. The Municipal Underwriting Committee is comprised of the President,
the Chief Operating Officer, the Chief Municipal Underwriting Officer, the
Associate General Counsel for Municipal Transactions and the Managing Director
for the Financial Guaranty Group. Following approval, minor transaction
modifications may be approved by the Chairs of the underwriting groups. Major
changes require

38
<PAGE>
the concurrence of the Management Review Committee or the Municipal Underwriting
Committee, as applicable. Secondary market and partial maturity asset-backed
transactions of $25.0 million or less of gross principal insured that meet
certain credit and return criteria may be approved by the Chief Underwriting
Officer. Municipal transactions of $25.0 million or less of gross principal
insured that meet certain credit and return criteria may be approved by a
committee composed of the Chief Municipal Underwriting Officer, the Associate
General Counsel for Municipal Transactions and the municipal analyst for the
transaction.

CORPORATE UNDERWRITING AND RESEARCH

FSA's Corporate Underwriting and Research Department includes nine
professionals under the direction of the Chief Underwriting Officer. The
Corporate Underwriting and Research Department is responsible for evaluating the
credit of entities participating or providing recourse in obligations insured by
FSA. The Corporate Underwriting and Research Department also provides analysis
of relevant industry segments. Members of the Corporate Underwriting and
Research Department generally report their findings directly to the Management
Review Committee or Municipal Underwriting Committee in the context of
transaction review and approval.

INSURED PORTFOLIO MANAGEMENT

FSA's Insured Portfolio Management Department includes 18 professionals
under the direction of a managing director. The Insured Portfolio Management
Department is responsible for monitoring the performance of outstanding
transactions and taking remedial actions as appropriate. The Insured Portfolio
Management Department is independent of the analysts and credit officers
involved in the underwriting process. The managing director responsible for the
Insured Portfolio Management Department reports to an Oversight Committee
comprised of such managing director, the President, the General Counsel, the
Chief Underwriting Officer and the Chief Financial Officer. The Insured
Portfolio Management Department reviews each insured transaction to confirm
compliance with transaction covenants, monitors credit and other developments
affecting transaction participants and collateral and determines 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 or trustees. In some instances, reviews of asset-backed
transactions include servicer audits, site visits or evaluations by third-party
appraisers, engineers or other experts retained by FSA. The Insured Portfolio
Management Department reviews 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 Insured Portfolio Management Department works
together with the Legal Department and the Corporate Underwriting and Research
Department in monitoring these transactions, negotiating restructurings and
pursuing appropriate legal remedies.

LEGAL

FSA's Legal Department includes 11 attorneys and five legal assistants under
the direction of the General Counsel. The Legal Department plays a major role in
establishing and implementing legal requirements and procedures applicable to
obligations insured by FSA. Members of the Legal Department serve on both the
Management Review Committee and the Municipal Underwriting Committee, which
provide final underwriting approval for transactions. An attorney in the Legal
Department works together with a counterpart in the Financial Guaranty
Department in determining the legal and credit elements of each obligation
proposed for insurance and in overseeing the execution of approved transactions.
Asset-backed obligations insured by FSA are ordinarily executed with the
assistance of outside counsel working closely with the Legal Department.
Municipal obligations insured by FSA are ordinarily executed without employment
of outside counsel. The Legal Department works closely with the Insured
Portfolio Management Department 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.

39
<PAGE>
LOSS RESERVES

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

In addition to the case basis reserves, FSA established a general loss
reserve in December 1992, in order to account for the identified risks inherent
in its overall portfolio. FSA does not consider traditional actuarial approaches
used in the property/casualty insurance industry to be applicable to the
determination of its loss reserves because of the absence of a sufficient number
of losses in its financial guaranty insurance activities and in the financial
guaranty industry generally to establish a meaningful statistical base. The
general loss reserve amount is calculated by applying a loss factor to the total
net par amount outstanding of FSA's insured obligations outstanding over the
term of such insured obligations and discounting the result at a risk-free rate.
The loss factor used for this purpose has been determined based upon an
independent rating agency study of bond defaults and FSA's portfolio
characteristics and history. FSA monitors the general loss reserve on an ongoing
basis and may periodically adjust such reserve based on FSA's actual loss
experience, its future mix of business and future economic conditions. The
general loss reserve is available to be applied against future additions or
accretions to existing case basis reserves or to new case basis reserves to be
established in the future. To the extent that any such future additions to case
basis reserves are applied from the available general loss reserve, there will
be no impact on the Company's earnings for that period except to the extent that
increases to FSA's general loss reserve are implemented to replenish that
reserve. To the extent that additions to case basis reserves for any period
exceed the remaining available general loss reserve or are not applied from the
general loss reserve, the excess will be charged against the Company's earnings
for that period. Any addition to the general loss reserve which results from
applying the loss factor to new par written will also result in a charge to
earnings at that time. However, the release of amounts in the general loss
reserve as a result of the runoff of existing net insurance in force will be
available to be applied against additions to the general loss reserve required
for new business written.

FSA maintains reserves in an amount believed by its management to be
sufficient to pay its estimated ultimate liability for losses and loss
adjustment expenses with respect to obligations it has insured. At December 31,
1995 and 1994, FSA's net loss reserves totaled $50.2 million and $35.6 million,
respectively. In 1994, losses of $3.0 million were incurred to increase the
general loss reserve for new business written in 1994 and $16.9 million was
transferred from the general loss reserve to case basis reserves for projected
losses on certain transactions, the majority of which were in the FSA's
discontinued commercial mortgage portfolio. Giving effect to this transfer,
FSA's unallocated general loss reserve totaled $20.9 million at December 31,
1994. During 1995, FSA increased its general loss reserve by $6.3 million, of
which $3.0 million was for originations of new business and $3.3 million was to
reestablish the general loss reserve for transfers from general loss reserves to
case basis reserves. In December 1995, FSA transferred $9.7 million from its
general loss reserve to case basis reserves associated predominantly with
certain residential mortgage and timeshare receivables transactions. Also in
December 1995, FSA recognized a one-time increase of $15.4 million in the
general loss reserve to provide for the insured portfolio it assumed in the
Merger in a manner consistent with FSA's reserving methodology. Prior to the
Merger, CGIC did not maintain a general loss reserve. Giving effect to all the
1995 events, the unallocated general loss reserve totaled $31.8 million at
December 31, 1995.

Reserves for losses and loss adjustment expenses are discounted at risk-free
rates. The amount of discount taken was approximately $22.5 million and $14.6
million at December 31, 1995 and 1994, respectively.

40
<PAGE>
Inasmuch as reserves are necessarily based on estimates and because of the
absence of a sufficient number of losses in the Company's financial guaranty
insurance activities and in the financial guaranty insurance industry generally
to establish a meaningful statistical base, there can be no assurance that the
case basis reserves or the general reserve will be adequate to cover losses in
FSA's insured portfolio.

COMPETITION AND INDUSTRY CONCENTRATION

FSA faces competition from both other providers of third party credit
enhancement and alternatives to third party credit enhancement. The majority of
asset-backed and municipal obligations are sold without third party credit
enhancement. Accordingly, each transaction proposed to be insured by FSA must
generally compete against an alternative execution which does not employ third
party credit enhancement. FSA also faces competition from other monoline primary
financial guaranty insurers, primarily AMBAC, CapMAC, Connie Lee, FGIC and MBIA.
In terms of statutory surplus plus contingency reserves, FSA is the fourth
largest of the six major financial guaranty insurers. Traditional credit
enhancers such as bank letter of credit providers and mortgage pool insurers
also provide significant competition to FSA as providers of credit enhancement
for asset-backed obligations. While actions by securities rating agencies in
recent years have significantly reduced the number of triple-A rated banks that
can offer a product directly competitive with FSA's triple-A guaranty, and
recently implemented risk-based capital guidelines applicable to banks have
generally increased costs associated with letters of credit that compete
directly with financial guaranty insurance, bank letter of credit providers and
other credit enhancement, such as cash collateral accounts, provided by banks,
continue to provide significant competition to 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, refunded bonds secured by United States
government securities held in escrow or other qualified collateral, defeased
policy obligations and redemptions and repayments. Qualified statutory capital,
determined in accordance with statutory accounting principles, is the aggregate
of policyholders' surplus and contingency reserves calculated in accordance with
statutory accounting principles. Set forth below are FSA's aggregate gross
insurance in

41
<PAGE>
force, net insurance in force, qualified statutory capital and leverage ratio
(represented by the ratio of its net insurance in force to qualified statutory
capital) and the average industry leverage ratio at the dates indicated:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
FINANCIAL GUARANTY PRIMARY INSURERS, EXCLUDING FSA (1)
Leverage ratio.............................................. 146:1 145:1 N/A
FSA
Gross insurance in force.................................... $ 61,290 $ 65,824 $ 99,034
Net insurance in force...................................... 41,667 45,824 75,360
Qualified statutory capital................................. 454 466 645
Leverage ratio.............................................. 92:1 98:1 117:1
</TABLE>

- ------------------------
(1) Financial guaranty primary insurers for which data is included in this table
are AMBAC, CapMAC, CGIC, Connie Lee, FGIC and MBIA. Information relating to
the financial guaranty primary insurers is derived from data from the
Association of Financial Guaranty Insurors and from statutory accounting
financial information publicly available from each insurer at December 31,
1993 and 1994.

N/A Not Available

REINSURANCE

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

REINSURANCE CEDED

FSA obtains reinsurance to increase its policy writing capacity, both on an
aggregate risk and a single risk basis, to meet state insurance regulatory,
rating agency and internal limits, to diversify risks, to reduce the need for
additional capital and to strengthen financial ratios. At December 31, 1995, FSA
had reinsured approximately 27.4% of its direct principal amount outstanding
(excluding policies issued by FSAM). Most of FSA's reinsurance is on a quota
share basis, with a small portion being provided on a first loss or excess of
loss per risk basis. Reinsurance arrangements typically require FSA to retain a
specified amount of the risk.

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. The
reinsurer's participation in a treaty is cancelable annually upon 90 days' prior
notice by either FSA or the reinsurer and is cancelable by FSA upon specified
financial deterioration of the reinsurer. As required by applicable state law,
reinsurance agreements may be subject to certain other termination conditions.

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

FSA's principal ceded reinsurance program currently consists of three quota
share treaties. One treaty (the "asset-backed treaty") covers all of FSA's
approved regular lines of business, except municipal bond insurance. In 1995,
FSA ceded 14.5% of each covered policy under this treaty, up to a maximum of $29
million insured principal per policy. At its sole option, FSA was entitled to
increase the ceding percentage to 21.75% up to $43.5 million insured principal
per policy. A second treaty (the "municipal treaty") covers FSA's municipal bond
insurance business. In 1995, FSA ceded 14% of each covered policy under

42
<PAGE>
this treaty that is classified by FSA as providing municipal bond insurance as
defined by Article 69 of the insurance laws of New York up to a limit of $37.3
million insured principal per single risk which is defined by revenue source. At
its sole option, FSA was entitled to increase the ceding percentage to 30% up to
$80 million insured principal per single risk. A third treaty (the "teaching
hospital and higher education treaty") covers substantially all teaching
hospital and higher education risks (also covered under the municipal treaty).
In 1995, FSA ceded 5% or 15% (depending on the type of obligation) of its
retention (i.e., after cessions of policies under the municipal treaty) of each
covered policy under this treaty, up to limits that range from $7.5 million to
$30 million per single risk. At its sole option, FSA was entitled to increase
the ceding percentage from 5% to 15% or from 15% to 30% (depending on the type
of obligation) of its retention, subject to the same limits. Each of the three
treaties allowed FSA to withhold a ceding commission to defray its expenses.

Primary insurers, such as FSA, are required to fulfill their obligations to
policyholders if reinsurers fail to meet their obligations. The financial
condition of reinsurers is therefore evaluated carefully by FSA, and FSA's
reinsurance is placed with high quality and financially strong reinsurers. FSA's
treaty reinsurers at December 31, 1995 were Abeille Reassurances, Capital
Reinsurance Company ("Capital Re"), Compagnie Transcontinentale de Reassurance,
Connie Lee Insurance Company, Enhance Reinsurance Company ("Enhance"), Frankona
Reinsurance Company, Tokio Marine and Trade Indemnity plc. In 1995, seven
reinsurers participated in the asset-backed treaty, three reinsurers
participated in the municipal treaty (including health care and higher
education) and one reinsurer participated in a health care and higher education
treaty.

FSA, FSAM and Oklahoma have entered into a quota share reinsurance pooling
agreement pursuant to which, after reinsurance cessions to other reinsurers,
FSA, FSAM and Oklahoma share in the net retained risk insured by each of these
three companies in proportion to their policyholders' surplus and contingency
reserve as of December 31 of the prior year (with the percentages adjusted
commencing April 1 of each year). For the year commencing April 1, 1995, FSA
retained 60.48%, FSAM (as assignee of FSAI in the case of policies issued prior
to December 20, 1995) retained 27.03% and Oklahoma (as assignee of the prior
Oklahoma with respect to policies issued prior to December 20, 1995) retained
12.49% of each policy issued by these companies after cessions to all other
reinsurers. FSA-UK and FSA have entered into a quota share and stop loss
reinsurance agreement pursuant to which (i) FSA-UK reinsures with FSA its
retention under its policies after other reinsurance based on an agreed-upon
percentage that is substantially in proportion to the policyholders' surplus and
contingency reserve of FSA-UK to the total policyholders' surplus and
contingency reserves of FSA and its subsidiary insurers (including FSA-UK) and
(ii) subject to certain limits, FSA is required to make payments to FSA-UK when
FSA-UK's loss ratio exceeds 100%. Under this agreement, FSA-UK ceded to FSA 98%
of its retention after other reinsurance of its policies issued from January 1,
1995 through March 31, 1995 and 97.65% of policies issued from April 1, 1995
through December 31, 1995.

In connection with the Restructuring, FSA is party to a quota share
reinsurance agreement with Commercial Re pursuant to which Commercial Re assumed
approximately 64.4% of FSA's exposure, on a weighted average basis, on
transactions in FSA's commercial mortgage portfolio.

RATING AGENCIES

Moody's and S&P periodically review the business and financial condition of
FSA and other companies providing financial guaranty insurance. These rating
agency reviews focus on the insurer's underwriting policies and procedures and
the quality of the obligations insured. The rating agencies frequently perform
assessments of the credits insured by FSA to confirm that FSA continues to meet
the capital allocation criteria considered necessary by the particular rating
agency to maintain FSA's triple-A claims-paying ability 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.

43
<PAGE>
INVESTMENT PORTFOLIO

FSA manages its investments with the objectives of preserving its capital
and claims-paying ability, maintaining a high level of liquidity and, within
these constraints, obtaining a high long-term total return. During 1994, FSA
Holdings changed its investment strategy to emphasize total return rather than
current income. To accomplish its objectives, FSA Holdings has established
guidelines for eligible investments, requiring that each individual investment
must be rated at least "single A" at acquisition and the overall portfolio must
be rated "double A" on average. Investments falling below the minimum quality
level are required to be disposed of at the earliest opportunity that such
disposition will not adversely affect the portfolio. For liquidity purposes, FSA
Holdings' policy is to invest in investments which are readily marketable with
no legal or contractual restrictions on resale. Eligible investments include
U.S. Treasury and agency obligations, corporate bonds, tax-exempt bonds and
mortgage pass-through instruments.

The weighted average maturity of FSA Holdings' investment portfolio at
December 31, 1995 was approximately 13.3 years. FSA Holdings' current investment
strategy is to invest in quality readily marketable instruments of intermediate
average duration so as to generate stable investment earnings with minimal
market value or credit risk.

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

INVESTMENT PORTFOLIO BY RATING(1)

<TABLE>
<CAPTION>
PERCENT OF INVESTMENT
PORTFOLIO AT
RATING DECEMBER 31, 1995
- --------------------------------------------------------------------------------- -----------------------
<S> <C>
AAA (2).......................................................................... 71.1%
AA............................................................................... 22.5
A................................................................................ 5.6
BBB.............................................................................. 0.8
-----
100.0%
-----
-----
</TABLE>

- ------------------------
(1) Ratings are based on the higher of Moody's or S&P ratings available at
December 31, 1995.

(2) Includes U.S. Treasury and agency obligations, which comprised 4.3% of the
total portfolio at December 31, 1995.

SUMMARY OF INVESTMENTS

<TABLE>
<CAPTION>
DECEMBER 31, 1995
---------------------------
WEIGHTED
AMORTIZED AVERAGE
INVESTMENT CATEGORY COST YIELD (1)
- ---------------------------------------------------------------------------------------- ------------ -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Long-term investments:
Taxable bonds......................................................................... $ 383,790 7.00%
Tax-exempt bonds...................................................................... 643,624 5.62
------------
Total long-term investments......................................................... 1,027,414 6.13
Short-term investments (2).............................................................. 14,567 5.97
------------ ---
Total investments................................................................... $ 1,041,981 6.13%
------------ ---
------------ ---
</TABLE>

- ------------------------
(1) Yields are stated on a pre-tax basis.

(2) Includes taxable and tax-exempt investments and excludes cash equivalents of
$38.1 million.

44
<PAGE>
INVESTMENT PORTFOLIO BY SECURITY TYPE

<TABLE>
<CAPTION>
DECEMBER 31, 1995
---------------------------
WEIGHTED
AMORTIZED AVERAGE
INVESTMENT CATEGORY COST YIELD (1)
- ---------------------------------------------------------------------------------------- ------------ -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
U.S. government securities.............................................................. $ 45,139 6.27%
Mortgage-backed securities.............................................................. 265,213 7.15
Municipal bonds......................................................................... 643,624 5.62
Asset-backed securities................................................................. 43,493 6.83
Other securities........................................................................ 29,945 7.03
------------
Total fixed maturities.............................................................. 1,027,414 6.13
Short-term investments (2).............................................................. 14,567 5.97
------------ ---
Total investments................................................................... $ 1,041,981 6.13%
------------ ---
------------ ---
</TABLE>

- ------------------------
(1) Yields are stated on a pre-tax basis.

(2) Includes taxable and tax-exempt investments and excludes cash equivalents of
$38.1 million.

DISTRIBUTION OF INVESTMENTS BY MATURITY

<TABLE>
<CAPTION>
DECEMBER 31, 1995
--------------------------
AMORTIZED ESTIMATED
INVESTMENT CATEGORY COST MARKET VALUE
- ------------------------------------------------------------------------------------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Due in one year or less (1).......................................................... $ 17,343 $ 17,345
Due after one year through five years................................................ 26,036 26,375
Due after five years through ten years............................................... 157,161 162,573
Due after ten years.................................................................. 532,735 551,239
Mortgage-backed securities........................................................... 265,213 271,087
Asset-backed securities.............................................................. 43,493 44,024
------------ ------------
Total investments................................................................ $ 1,041,981 $ 1,072,643
------------ ------------
------------ ------------
</TABLE>

- ------------------------
(1) Includes short-term investments in the amount of $14.6 million at December
31, 1995, but excludes cash equivalents of $38.1 million.

45
<PAGE>
CAPITAL GUARANTY CORPORATION

In December 1995, FSA Holdings consummated the Merger, pursuant to which
Capital Guaranty became a direct wholly owned subsidiary of FSA Holdings.
Capital Guaranty was incorporated in June 1986 under the laws of the State of
Maryland. Capital Guaranty is an insurance holding company that insured
municipal bonds through its wholly owned subsidiary, CGIC. Following the Merger,
the name of CGIC was changed to FSAM, and its principal business is now to
reinsure policies issued by FSA or reinsured by FSA from unaffiliated third
parties. CGIC is authorized to write financial guaranty insurance in all 50
states, the District of Columbia, Puerto Rico, Guam and the U.S. Virgin Islands.
Municipal bond insurance written by CGIC guarantees payment to the investor when
due of principal and interest on the bond insured. CGIC sought to maintain a
diversified insurance portfolio which spreads its exposure to loss based upon a
number of criteria including issue size, type of bond, geographic area and
issuer. CGIC derived its revenues primarily from insurance premiums earned over
the life of the insured obligation and from investment income. Separate
financial information relating to Capital Guaranty and CGIC is included herein
as of September 30, 1995. Such information is the latest financial information
available for such companies on a stand-alone basis. Unless the context
otherwise requires, financial information relating to Capital Guaranty and CGIC
as of December 31, 1995 is included herein in the financial information relating
to FSA Holdings and FSA included herein as of such date.

CGIC has earned triple-A claims-paying ability ratings, the highest ratings
available from Moody's and S&P. For additional information concerning Capital
Guaranty and CGIC, see "Incorporation of Certain Documents by Reference."

TYPE OF PRODUCTS

CGIC's insurance was employed in both the new issue and secondary markets.
CGIC participated in both negotiated offerings, where the investment banker and
often the insurer were selected by the sponsor of the issuer, and competitive
offerings, where underwriting syndicates bid for securities and submitted bids
that may have included insurance.

Insurance on municipal bonds which are already issued and trading in the
secondary market is typically purchased by either a dealer or an institution to
facilitate the sale of municipal bonds in its portfolio. The insurance generally
increases the sale price of bonds (by an amount greater than the cost of the
policy) and affords a wider secondary market, and therefore greater
marketability. As with new issues, the premium is payable at the time of policy
issuance. CGIC employed the same underwriting standards on secondary market
issues that it did on newly issued municipal bond issues and primarily insured
the same bond categories as in the competitive bid market.

As of December 31, 1994, 81.3% of the aggregate net par amount of CGIC's
insurance outstanding insured was new issues.

INSURANCE IN FORCE

CGIC provided financial guarantees for municipal bond issues in the primary
and secondary markets. Financial guaranty insurance of the type written by CGIC
guaranteed to the holder of the underlying obligation the timely payment of
principal and interest on the obligation in accordance with the obligation's
original debt service schedule. Accordingly, payments under the insurance policy
cannot be accelerated by the bondholder in the case of a payment on the insured
obligation.

CGIC sought to maintain a diversified insurance portfolio designed to spread
its risk according to a variety of criteria, including issue size, type of bond,
geographic area, and issuer.

Since its formation in 1986, CGIC wrote 1,467 policies on 625 municipal
credits, of which 1,123 policies on 523 credits remained outstanding as of
December 31, 1994. A separate policy was generally written to cover each
separate bond issue. CGIC defined "credits" as any group of issues by the same
municipal issuer and supported by the same revenue source. At December 31, 1994,
CGIC's total insured debt service exposure, net of reinsurance of $2.4 billion,
was $15.8 billion and the net par amount outstanding of

46
<PAGE>
municipal securities insured by CGIC was $8.4 billion. At December 31, 1994, the
weighted average remaining life of CGIC's insurance in force was 13.6 years and
the average issue size by net par amount outstanding insured by CGIC was $7.5
million.

Approximately $6.8 billion, or 81.3%, of CGIC's net par insurance in force
at December 31, 1994, was comprised of primary policies underwritten and issued
by CGIC (or issued by United States Fidelity and Guaranty Company and reinsured
in full or assumed by CGIC, principally in connection with its formation and
initial operations). The remainder of CGIC's net par insurance in force at
December 31, 1994 was comprised of reinsurance assumed, most of which was
assumed from Capital Re under an excess of loss facility pursuant to which CGIC
is responsible for a layer of losses in excess of a specified minimum exposure
retained by Capital Re. The exposure retained on each individual credit by Cap
Re ranged from $40.0 million to $57.5 million par amount and associated interest
depending upon the bond category reinsured. CGIC's maximum exposure was $75.0
million par amount and associated interest for each individual credit insured.
Such reinsurance assumed generally carried lower S&P weighted average capital
charge than the remainder of CGIC's in force business. This excess of loss
facility was terminated on a run-off basis on January 1, 1992.

TYPE OF OBLIGATIONS

CGIC's insured portfolio was divided into eight major areas: General
Obligations, Special Revenue, Utilities, Leases, Healthcare, Asset-backed,
Colleges/Universities and Housing/Structured. The table below sets forth CGIC's
insured portfolio as of December 31, 1994 and September 30, 1995 by bond type:

SUMMARY OF INSURANCE PORTFOLIO

<TABLE>
<CAPTION>
AT DECEMBER 31, 1994 AT SEPTEMBER 30, 1995
----------------------------------------- ----------------------------------------
NET PAR % OF TOTAL NET NET PAR % OF TOTAL NET
NUMBER OF AMOUNT PAR AMOUNT NUMBER OF AMOUNT PAR AMOUNT
ISSUES OUTSTANDING OUTSTANDING ISSUES OUTSTANDING OUTSTANDING
----------- ----------- --------------- --------- ----------- --------------
(IN MILLIONS) (IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
General Obligation...................... 478 $ 2,976 35% 650 $ 3,878 37%
Special Revenue......................... 126 1,613 19 168 2,025 20
Utilities............................... 193 1,390 17 216 1,565 15
Leases.................................. 237 1,317 16 287 1,611 16
Healthcare.............................. 43 706 8 49 855 8
Asset-backed............................ 20 220 3 20 210 2
Colleges/Universities................... 19 133 2 27 215 2
Housing/Structured...................... 7 32 -- 7 31 --
----- ----------- ----- --------- ----------- -----
Total................................. 1,123 $ 8,387 100% 1,424 $10,390 100.0%
----- ----------- ----- --------- ----------- -----
----- ----------- ----- --------- ----------- -----
</TABLE>

General obligation bonds, which are supported by the full faith and credit
and taxing power of state and local government issuers, and utility revenue
bonds, which are supported primarily by a pledge of revenues imposed and
collected by state and local public entities for the provision of essential
services, generally represent a lower credit risk than other types of municipal
bonds. Due to CGIC's focus on these lower risk-weighted obligations and
financial guaranty reinsurance business assumed on an excess of loss basis from
Capital Re, CGIC's management believed that CGIC continued to have the lowest
weighted average capital charge under S&P's risk-weighted system of any
municipal bond insurer at December 31, 1994. S&P's risk-weighted system assigns
capital charges based on bond category (without considering differences among
issuers within a category) and average annual debt service, and takes into
account third-party capital support such as reinsurance. Accordingly, the fact
that CGIC had the lowest weighted average capital charge indicated that, on the
basis of S&P's capital allocation methodology, CGIC's insured portfolio had the
lowest risk profile of any of the municipal bond insurers (based on S&P's bond
categories).

47
<PAGE>
GEOGRAPHIC CONCENTRATION

CGIC had a geographically diversified portfolio that generally reflected
national issuance patterns. The table below sets forth a geographic analysis of
CGIC's portfolio as of December 31, 1994 and September 30, 1995.
INSURED PORTFOLIO BY STATE

<TABLE>
<CAPTION>
AT DECEMBER 31, 1994 AT SEPTEMBER 30, 1995
----------------------------------------- --------------------------------------------
NUMBER NET PAR % OF TOTAL NET NET PAR % OF TOTAL NET
OF AMOUNT PAR AMOUNT NUMBER OF AMOUNT PAR AMOUNT
ISSUES OUTSTANDING OUTSTANDING ISSUES OUTSTANDING OUTSTANDING
--------- ------------- --------------- ----------- ------------ -----------------
(IN MILLIONS) (IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
California................ 151 $ 1,497 18% 201 $ 1,980 19%
New York.................. 254 944 11 307 996 10
Pennsylvania.............. 60 699 8 72 765 7
Texas..................... 73 499 6 124 793 8
Minnesota................. 63 483 6 90 775 7
Illinois.................. 32 293 4 37 298 3
Puerto Rico............... 103 291 3 125 322 3
Iowa...................... 19 267 3 27 357 3
Missouri.................. 33 236 3 51 338 3
Michigan.................. 23 235 3 31 269 3
Other (1)................. 520 2,943 35 569 3,497 34
--------- ------ ----- ----- ------------ -----
Total................... 1,331(2) $ 8,387 100.0% 1,634 $ 10,390 100.0%
--------- ------ ----- ----- ------------ -----
--------- ------ ----- ----- ------------ -----
</TABLE>

- ------------------------
(1) Consists of those states in which CGIC had an exposure of less than 3.0% of
its total net par amount outstanding.

(2) This total differs from those in the previous tables because certain bond
insurance policies provide coverage in more than one state.

ISSUER CONCENTRATION

CGIC had adopted underwriting and reinsurance policies designed to limit the
net insurance in force for any one municipal credit. Such policies relied
primarily on the single risk limits set forth under the New York financial
guaranty insurance law, which specify that, for each bond issued by a single
entity and backed by a single revenue source (i) the insured average annual debt
service, net of reinsurance and collateral, may not exceed 10% of the aggregate
of the insurer's policyholders' surplus and contingency reserves, and (ii) the
insured unpaid principal, net of reinsurance and collateral, may not exceed 75%
of the aggregate of the insurer's policyholders' surplus and contingency
reserves. In addition, CGIC's underwriting and reinsurance policies took into
account rating agency guidelines on maximum exposure to single credits and
CGIC's internal policies regarding diversification of its portfolio based on
geography and bond category. CGIC's largest single credit exposure at December
31, 1994 was in connection with general obligation bonds issued by the City of
New York, which is rated A- by S&P and A by Moody's. The total net par amount
insured was $148.0 million for a total net exposure of $327.4 million including
both unpaid principal and interest. The average net exposure per issue at
December 31, 1994 was $14.0 million.

REINSURANCE CEDED

As of December 31, 1994, CGIC had retained 87.3% of its $9.6 billion gross
par amount outstanding and had ceded 12.7% to certain facultative and excess of
loss reinsurers. State insurance laws and regulations, as well as S&P and
Moody's, impose minimum capital requirements on financial guaranty companies
which limit the aggregate amount of insurance that may be written by an insurer
as well as the amount of exposure to any single revenue stream. CGIC used
reinsurance as a means of managing its exposure to single issuers and classes of
credits in order to comply with regulatory and rating agency requirements and
internal underwriting and portfolio management criteria.

48
<PAGE>
In general, CGIC conducted its reinsurance on a facultative basis under
which selected portions of CGIC's liabilities were ceded on an issue-by-issue
basis. Most of such reinsurance was ceded on a proportional basis. CGIC had, in
a few instances, participated in non-proportional reinsurance arrangements.
These arrangements were effected on an excess of loss basis and involve the
retention by CGIC of a first loss exposure (liability for all losses related to
a particular risk up to a stated dollar amount).

As a primary insurer, CGIC was required to honor its obligations to its
policyholders whether or not its reinsurers performed their obligations under
their reinsurance agreements with CGIC. The surveillance group of CGIC monitored
the financial positions of its reinsurers, both independently and through the
use of rating agency evaluations, on a regular basis. Moreover, the reinsurance
agreements typically entered into by CGIC provided CGIC with the right to
replace a reinsurer which had been downgraded or to demand that collateral
support be provided by such reinsurer. CGIC's primary reinsurers were Enhance
Reinsurance Company and Capital Re. In addition, CGIC ceded certain transactions
to USF&G, Continental Insurance Company, Hannover Ruckversicherungs AG and
Connie Lee.

CREDIT FACILITY

CGIC had a $25.0 million seven-year stand-by irrevocable limited recourse
credit facility with an international bank, as agent. The line provided
liquidity to CGIC in the event claims from municipal obligations exceeded
specified levels. Repayment of any amounts drawn under the facility was limited
primarily to the amount of any recoveries of claims paid. The credit facility
had no direct correlation to CGIC's underwriting guidelines since losses were
not anticipated and underwriting guidelines were designed to achieve an ultimate
zero-loss underwriting result. This credit facility was terminated upon the
consummation of the Merger.

49
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
OF CAPITAL GUARANTY CORPORATION

The following table sets forth selected consolidated historical financial
information of Capital Guaranty and has been derived from and should be read in
conjunction with the audited consolidated financial statements of Capital
Guaranty for each of the five fiscal years ended December 31, 1994 and the
unaudited interim consolidated financial statements of Capital Guaranty for the
nine-month periods ended September 30, 1995 and September 30, 1994, including
the respective notes thereto. See "Available Information" and "Incorporation of
Certain Documents by Reference." In the opinion of management, all adjustments,
consisting of normal recurring accruals, considered necessary for a fair
presentation, have been included in the unaudited interim data. Interim results
for the nine months ended September 30, 1995 are not necessarily indicative of
results which may be expected for future periods, including the year ended
December 31, 1995.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER
YEAR ENDED DECEMBER 31, 30,
--------------------------------------------------------------------- -----------
1990 1991 1992 1993 1994 1994
------------- ------------- ----------- ------------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT
Gross premiums written................ $ 23,520 $ 24,955 $ 24,747 $ 26,544 $ 24,671 $ 15,598
Net premiums written.................. 13,754 22,296 23,662 17,439 23,885 15,134
Net premiums earned................... 6,752 10,282 12,097 18,743 12,598 10,136
Net realized investment gains......... 16 2,676 1,553 1,218 1,138 663
Net investment income................. 12,821 12,874 13,710 14,957 16,655 12,330
Total revenues........................ 19,674 26,064 27,512 34,977 30,420 23,155
Income before income taxes and
cumulative effect of change in
accounting for income taxes.......... 7,787(1) 19,026 21,397 25,949 19,368 14,360
Income tax............................ 1,703(1) 5,650 7,321 8,475 4,679 3,554
Cumulative effect of change in
accounting for income taxes (2)...... 425
Net income............................ 6,084(1) 13,376 14,076 17,899 14,689 10,806
Net income per common share: (3)
Income before cumulative effect of
accounting change.................... $ 0.62(1) $ 1.47 $ 1.59 $ 1.96 $ 1.60 $ 1.17
Cumulative effect of accounting
change............................... 0.00 0.00 0.00 0.05 0.00 0.00
------------- ------------- ----------- ------------- ----------- -----------
Net income per common share........... $ 0.62(1) $ 1.47 $ 1.59 $ 2.01 $ 1.60 $ 1.17
------------- ------------- ----------- ------------- ----------- -----------
------------- ------------- ----------- ------------- ----------- -----------
Weighted average common shares
outstanding.......................... 9,199 8,857 8,659 8,741 8,943 8,993
SELECTED FINANCIAL RATIOS
GAAP BASIS (4)
Loss ratio............................ 0% 0% 0% 0% 0% 0%
Expense ratio......................... 176(1) 68 51 42 71 71
Combined ratio........................ 176(1) 68 51 42 71 71
SAP BASIS(4)
Loss ratio............................ 0% 0% 0% 0% 0% 0%
Expense ratio......................... 96 44 31 34 46 53
Combined ratio........................ 96 44 31 34 46 53
BALANCE SHEET
Cash and investments.................. $ 165,108 $ 184,295 $ 206,000 $ 278,488(5) $ 282,400 $ 276,506
Total assets.......................... 206,865 231,604 252,844 331,364(5) 334,387 327,753
Unearned premiums (6)................. 61,883 73,897 85,462 84,159 95,451 89,156
Senior notes payable.................. -- -- -- 30,000 30,000 30,000
Other liabilities..................... 6,704 11,716 9,942 13,059 8,690 9,822
Total liabilities..................... 83,358 101,778 109,112 145,636 151,061 145,943
Total stockholders' equity............ 123,507 129,826 143,732 185,728(5) 183,326 181,810
Total capitalization.................. 123,507 129,826 143,732 215,728(5) 213,326 211,810
Book value per common share........... N/A N/A N/A 19.79 20.25 20.08
SELECTED FINANCIAL STATISTICS
Gross insurance in force.............. $10,470,000 $12,944,000 $14,248,000 $15,398,000 $18,126,000 $16,868,000
Net insurance in force................ 8,646,000 10,919,000 12,365,000 12,929,000 15,764,000 14,588,000
Qualified statutory capital........... 113,000 118,000 133,000 191,000 197,000 193,000
Policyholders' leverage ratio......... 76:1 92:1 93:1 68:1 80:1 76:1
ANALYTICAL DATA
Adjusted book value per common share
(7).................................. N/A N/A N/A 24.02 25.30 24.75

1995
-----------

<S> <C>
INCOME STATEMENT
Gross premiums written................ $ 22,299
Net premiums written.................. 20,211
Net premiums earned................... 8,727
Net realized investment gains......... 542
Net investment income................. 14,196
Total revenues........................ 23,503
Income before income taxes and
cumulative effect of change in
accounting for income taxes.......... 15,893
Income tax............................ 3,740
Cumulative effect of change in
accounting for income taxes (2)......
Net income............................ 12,153
Net income per common share: (3)
Income before cumulative effect of
accounting change.................... $ 1.35
Cumulative effect of accounting
change............................... 0.00
-----------
Net income per common share........... $ 1.35
-----------
-----------
Weighted average common shares
outstanding.......................... 8,794
SELECTED FINANCIAL RATIOS
GAAP BASIS (4)
Loss ratio............................ 0%
Expense ratio......................... 69
Combined ratio........................ 69
SAP BASIS(4)
Loss ratio............................ 0%
Expense ratio......................... 37
Combined ratio........................ 37
BALANCE SHEET
Cash and investments.................. $ 316,465
Total assets.......................... 371,628
Unearned premiums (6)................. 106,935
Senior notes payable.................. 30,000
Other liabilities..................... 14,978
Total liabilities..................... 169,504
Total stockholders' equity............ 202,124
Total capitalization.................. 232,124
Book value per common share........... 22.39
SELECTED FINANCIAL STATISTICS
Gross insurance in force.............. $21,571,000
Net insurance in force................ 19,139,000
Qualified statutory capital........... 205,000
Policyholders' leverage ratio......... 94:1
ANALYTICAL DATA
Adjusted book value per common share
(7).................................. 28.13
</TABLE>

50
<PAGE>
(1) Reflects expenses incurred in connection with the repurchase and
accruals of vested units issued to management pursuant to a performance stock
rights plan. Without the effect of such expenses, income before taxes, net
income and net income per common share would have been $14.3 million, $10.4
million and $1.09, respectively, and Capital Guaranty's expense ratio and
combined ratio would have been 80%.

(2) Reflects the adoption of Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes," effective January 1, 1993. As
permitted by SFAS No. 109, Capital Guaranty elected not to restate the financial
statements of any prior years.

(3) Net income per common share and the weighted average number of common
shares outstanding have been calculated giving effect to recapitalization
transactions which occurred subsequent to December 31, 1992. See Notes 1 and 6
to Capital Guaranty's 1994 consolidated financial statements. Assumed conversion
of the Capital Guaranty Preferred Stock resulted in a $0.01 dilutive effect for
the year ended December 31, 1993.

(4) The GAAP loss ratio represents loss and loss adjustment expenses
incurred divided by net premiums earned. The GAAP expense ratio represents
underwriting and operating expenses divided by net premiums earned. The GAAP
combined ratio represents the total of the loss and expense ratios. The
statutory loss ratio represents loss and loss adjustment expenses incurred
divided by statutory net premiums earned. The statutory expense ratio represents
statutory underwriting and operating expenses divided by statutory net premiums
written. The statutory combined ratio represents the total of the statutory loss
and expense ratios.

(5) Reflects the adoption of SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" at December 31, 1993, resulting in an
increase in cash and investments and total assets of $9.0 million and
stockholders' equity and total capitalization of $5.9 million.

(6) Deferred premium revenue is presented net of prepaid reinsurance
premiums.

(7) Adjusted book value per common share, which is book value plus net
unearned premium reserve plus the present value of net future installment
premiums less deferred acquisition costs less tax effect (in each case, on a per
common share basis), is used by management and equity analysts as a measurement
of FSA Holdings' and Capital Guaranty's intrinsic value. Adjusted book value per
common share is not a substitute for GAAP book value per common share.

51
<PAGE>
INSURANCE REGULATORY MATTERS

GENERAL

FSA is licensed to engage in insurance business in all 50 states, the
District of Columbia and Puerto Rico. FSA is subject to the insurance laws of
the New York Insurance Law, FSAM is subject to the insurance laws of the State
of Maryland, International is subject to the insurance laws of the State of
Indiana, Oklahoma is subject to the insurance laws of the State of Oklahoma, and
FSA-UK is subject to the insurance laws of the United Kingdom, their respective
jurisdictions of incorporation. Each is also subject to the insurance laws of
the other states in which it is licensed to transact an insurance business. Each
of FSA and its domestic insurance subsidiaries are required to file periodic
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. In
addition, FSA's accounts and operations are subject to periodic examination by
the New York Superintendent (the last such examination having been conducted in
1995 for the period ended December 31, 1994) and other state insurance
regulatory authorities.

INSURANCE HOLDING COMPANY AND OTHER LAWS

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

Under the laws in effect in New York, Maryland, Indiana and Oklahoma, any
acquisition of control of FSA Holdings, and thereby indirect control of FSA,
FSAM, International and Oklahoma, requires the prior approval of the New York
Superintendent and the Maryland, Indiana and Oklahoma Insurance Commissioners. A
similar law applies to the United Kingdom, requiring approval of the United
Kingdom Department of Trade and Industry (the "DTI") for any change of control
of FSA-UK. "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

In 1989, New York enacted Article 69 ("Article 69") of the New York
Insurance Law, a comprehensive financial guaranty insurance statute, which
governs all financial guaranty insurers licensed to do business in New York,
including FSA. This statute limits the business of financial guaranty insurers
to financial guaranty insurance and related lines (such as surety).

Article 69 requires that financial guaranty insurers maintain a special
statutory accounting reserve called the "contingency reserve" to protect
policyholders against the impact of excessive losses occurring during adverse
economic cycles. Article 69 requires a financial guaranty insurer to provide a
contingency reserve (i) with respect to policies written prior to July 1, 1989
in an amount equal to 50% of earned premiums and (ii) with respect to policies
written on and after July 1, 1989, quarterly on a pro rata basis over a period
of 20 years for municipal bonds and 15 years for all other obligations, in an
amount equal to the greater of 50% of premiums written for the relevant category
of insurance or a percentage of the principal guarantied, varying from 0.55% to
2.50%, depending upon the type of obligation guarantied, until the

52
<PAGE>
contingency reserve amount for the category equals the applicable percentage of
net unpaid principal. This reserve must be maintained for the periods specified
above, except that reductions by the insurer may be permitted under specified
circumstances in the event that actual loss experience exceeds certain
thresholds or if the reserve accumulated is deemed excessive in relation to the
insurer's outstanding insured obligations. Financial guaranty insurers are also
required to maintain reserves for losses and loss adjustment expenses on a
case-by-case basis and reserves against unearned premiums.

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

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

DIVIDEND RESTRICTIONS

Pursuant to the New York Insurance Law, FSA may declare dividends, subject
to any restriction in its certificate of incorporation, out of its earned
surplus. "Earned surplus" is defined as the portion of policyholders' surplus
that represents the net earnings, gains or profits, after deduction of all
losses, that have not been distributed to shareholders as dividends, or
transferred to stated capital or capital surplus or applied to other purposes
permitted by law, but does not include unrealized appreciation or depreciation
of assets. FSA may not declare or distribute any dividend to shareholders which,
together with all dividends declared or distributed by it during the preceding
12 months, exceeds the lesser of (i) 10% of policyholders' surplus as of its
last statement on file with the New York Superintendent or (ii) adjusted net
investment income during such period unless, upon prior application therefor,
the New York Superintendent approves a greater dividend distribution based upon
his finding that FSA will retain sufficient policyholders' surplus to support
its obligations and writings. "Adjusted net investment income" is defined as net
investment income for the 12 months immediately preceding the declaration or
distribution of the current dividend increased by the excess, if any, of net
investment income over dividends declared or distributed during the period
commencing 36 months prior to the declaration or distribution of the current
dividend and ending 12 months prior thereto.

Approval of the New York Superintendent was required in connection with the
purchase by Fund American of Common Stock in 1994. As a customary condition to
approving the change in control, any dividend payment by FSA to FSA Holdings
during the two year period following such change in control requires the prior
approval of the New York Superintendent. Such approval was provided for the
payment of dividends by FSA to FSA Holdings since 1994 in the ordinary course of
business.

53
<PAGE>
FINANCIAL GUARANTY INSURANCE REGULATION IN OTHER JURISDICTIONS

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

In May 1994, the DTI issued an insurance license to FSA-UK. Pursuant to
European Community Directives, FSA-UK has since been authorized to provide
financial guaranty insurance for transactions in France and Ireland from its
home office in the United Kingdom. Previously, the London office of FSA operated
as a marketing and sales office with underwriting activities conducted through
FSA Holdings' New York office under a no-action response by the DTI to FSA
Holdings' filings. 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.

ACCOUNTING

GENERAL

The consolidated financial statements of FSA Holdings are prepared in
accordance with GAAP. For reporting to certain regulatory authorities, the
financial statements of FSA, FSAM, International and Oklahoma are prepared in
accordance with SAP, which consist of recording transactions and preparing
financial statements in accordance with the rules and procedures prescribed or
permitted by state regulatory authorities.

REVENUE RECOGNITION

Premiums for financial guaranty insurance policies are either payable up
front in full on the date the policy is written (as is primarily the case with
policies on municipal obligations) or on an installment basis over the life of
the policy (as is primarily the case with policies on asset-backed obligations).
FSA Holdings defers recognition of the premium received from an insurance policy
in which premiums are payable up front by crediting the premium to its unearned
premium reserve and amortizing the premium over the life of the underlying
insured obligation. FSA Holdings recognizes installment premiums as revenue over
the period to which such premiums apply. FSA Holdings credits installment
premiums as unearned premium reserve in the period in which such premiums are
due to FSA Holdings and recognizes revenue from the amortization of the premiums
over the period, generally one year or less, to which such premiums apply. The
revenue that FSA Holdings recognizes from its insurance premiums for each period
is its net premiums earned for that period.

When an insured issue has been refunded, the remaining unearned premiums on
the refunded issue in excess of the unearned premiums attributable to the
refunding issue (the "new issue") are recognized at that time, as the risk to
FSA on the refunded issue is considered to have been eliminated. If the new
issue is not insured by FSA, the entire amount of the remaining unearned premium
on the refunded issue is recognized as revenue when FSA receives proper
notification and documentation that the refunding has occurred. In the case of
the refunding, redemption or other prepayment of an insured obligation as to
which the premiums are payable in installments, FSA is generally not entitled to
receive further premiums in respect of the policy covering such obligation to
the extent prepaid.

DEFERRED ACQUISITION COSTS

In accordance with GAAP, in order to match expenses with revenues, FSA
defers certain policy acquisition costs and amortizes them over the period in
which the related premiums are earned. Deferred acquisition costs comprise those
expenses, generally incurred at the commencement of the term of the insurance
policy, that vary with and are primarily related to the production of new or
renewal business, including allocated amounts of salaries and related costs of
underwriting and marketing personnel, rating agency fees, premium taxes, legal
fees, underwriting report costs and association dues, offset by reinsurance
commissions received on premiums ceded to reinsurers. See the Consolidated
Balance Sheets included with the Consolidated Financial Statements of the
Company incorporated herein by reference for the amounts of unearned premiums
and deferred acquisition costs.

54
<PAGE>
RESERVES

RESERVES UNDER GAAP

Under GAAP, FSA Holdings defers recognition of the premium received from an
up front insurance policy by crediting the premium to its unearned premium
reserve and amortizing the premium over the life of the underlying insured
obligation. FSA Holdings' unearned premium reserve, net of reinsurance, at
December 31, 1995 was $330.3 million.

FSA establishes a case basis reserve for losses and related loss adjustment
expenses when, in its judgment, a particular insured obligation is in default or
a default and subsequent loss is probable, and the amount of the loss can be
reasonably estimated by FSA. FSA does not consider traditional actuarial
approaches used in the property/casualty insurance industry to be applicable to
the determination of its loss reserves because of the absence of a sufficient
number of losses in its financial guaranty insurance activities and in the
financial guaranty industry generally to establish a meaningful statistical
base. A case basis reserve for a particular insured obligation represents FSA's
estimate of the present value of the anticipated shortfall, net of reinsurance,
between (i) scheduled payments on the insured obligations plus the anticipated
loss adjustment expenses and (ii) the anticipated cash flow from and proceeds to
be received on sales of any collateral supporting the obligation. For a
description of the specific case basis reserves established by FSA, see
"Business -- Credit Underwriting Guidelines, Standards and Procedures -- Loss
Reserves."

In addition to the case basis reserves, FSA established in December 1992 the
general loss reserve, which was $31.8 million at December 31, 1995, in order to
account for the identified risks inherent in its overall portfolio. The general
loss reserve amount was calculated by applying a loss factor to the total net
par amount outstanding of FSA's insured obligations outstanding over the term of
such insured obligations and discounting the result at a risk-free rate. The
loss factor used for this purpose has been determined based upon an independent
rating agency study of bond defaults and FSA's portfolio characteristics and
history. FSA will on an ongoing basis monitor the general loss reserve and may
periodically adjust such reserve based on FSA's actual loss experience, its
future mix of business and future economic conditions. The general loss reserve
is available to be applied against future additions or accretions to existing
case basis reserves or to new case basis reserves to be established in the
future. To the extent that any such future additions to case basis reserves are
less than the available general loss reserve, there will be no impact on FSA
Holdings' earnings for that period. If additions to case basis reserves for any
period exceed the remaining available general loss reserve, the excess will be
charged against FSA Holdings' earnings for that period. Any addition to the
general loss reserve which results from applying the loss factor to new par
written will also result in a charge to earnings at that time. However, the
release of amounts in the general loss reserve as a result of the runoff of
existing net insurance in force will be available to be applied against
additions to the general loss reserve required for new business written.

RESERVES UNDER SAP

FSA establishes an unearned premium reserve relating to premiums received by
FSA but unearned. These premiums are generally earned in accordance with
regulatory requirements over the term of the obligations to which the premiums
relate. At December 31, 1995, FSA Holdings' SAP unearned premium reserve, net of
reinsurance, was $376.6 million.

The New York Insurance Law requires that financial guaranty insurers
maintain both a reserve for known incurred losses (similar to GAAP case basis
loss reserves discussed above) and a special SAP reserve called the "contingency
reserve" to protect policyholders against the impact of excessive losses
occurring during adverse economic cycles. At December 31, 1995, FSA had a
statutory contingency reserve totalling $184.0 million.

55
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS

Set forth below is certain information concerning directors and executive
officers of FSA Holdings. Each director holds office (subject to FSA Holdings'
by-laws) until the next annual meeting of shareholders and until his or her
successor has been elected and qualified. The management of FSA Holdings is
conducted by a Management Committee, the permanent members of which are Messrs.
Cochran, Taylor, Brain, Brewer, Harrison, McCarthy and Stern. The information
concerning the directors has been furnished by them to FSA Holdings.

<TABLE>
<CAPTION>
NAME AGE (1) POSITION WITH FSA
- ------------------------- ------------- -------------------------------------------------------------
<S> <C> <C>
John J. Byrne 63 Chairman of the Board and Director
Robert P. Cochran 46 President, Chief Executive Officer and Director
Roger K. Taylor 44 Managing Director, Chief Operating Officer and Director
Joshua Brain 40 Managing Director and head of Insured Portfolio Management of
FSA
Russell B. Brewer II 39 Managing Director and Chief Underwriting Officer of FSA
John A. Harrison 52 Managing Director and Chief Financial Officer
Sean W. McCarthy 37 Managing Director and head of Financial Guaranty Department
of FSA
Bruce E. Stern 42 Managing Director, General Counsel and Secretary
Michael Djordjevich 59 Vice Chairman of the Board and Director
Robert N. Downey 60 Director
Anthony M. Frank 64 Director
Barbara M. Japha 42 Director
K. Thomas Kemp 55 Director
Kozo Kusakari 53 Director
David O. Maxwell 65 Director
Richard D. McCormick 55 Director
James M. Osterhoff 59 Director
James H. Ozanne 52 Director
Staats M. Pellett, Jr. 65 Director
Richard A. Post 37 Director
Allan L. Waters 38 Director
Howard M. Zelikow 62 Director
</TABLE>

- ------------------------
(1) As of April 24, 1996

MR. BYRNE has been Chairman of the Board of Directors and a director of FSA
Holdings since May 1994. He has also been Chairman of the Board of Directors and
Chief Executive Officer of Fund American since 1985 and President of Fund
American since 1990. From 1989 through 1990, Mr. Byrne was Chairman of the Board
of Directors of Fireman's Fund Insurance Company ("Fireman's Fund"). Prior to
joining Fireman's Fund, Mr. Byrne was Chairman and Chief Executive Officer of
GEICO Corporation. Mr. Byrne is also Chairman of Fund American Enterprises, Inc.
("FAE") and White Mountains Holdings, Inc. ("White Mountain"), each a subsidiary
of Fund American. Mr. Byrne is a director of Terra Nova (Bermuda) Holdings Ltd.
and an advisory director of Lehman Brothers Holdings, Inc. and Mid America
Apartment Communities.

56
<PAGE>
MR. COCHRAN has been President and Chief Executive Officer of FSA Holdings
and of FSA since August 1990. Mr. Cochran has been Chairman of FSA since July
1994, and a director of FSA Holdings since August 1990 and of FSA since July
1988. From September 1990 until December 1993, Mr. Cochran was a director of
USWCC. Prior to August 1990, Mr. Cochran was Managing Director, Financial
Guaranty Department of FSA. Prior to joining FSA Holdings in 1985, Mr. Cochran
was managing partner of the Washington, D.C. office of the Kutak Rock law firm.
Mr. Cochran is a director of Fund American and of White Mountains.

MR. DJORDJEVICH has been Vice Chairman of the Board of Directors and
Director of FSA Holdings since February 1996. Mr. Djordjevich served as
President and Chief Executive Officer of Capital Guaranty and CGIC from 1986 to
December 1995, and as Chairman of the Board of Directors of Capital Guaranty
from 1992 until December 1995. Prior to 1986, Mr. Djordjevich was President and
Chief Executive Officer of USF&G Financial Security Company, which managed the
financial guaranty business of United States Fidelity & Guaranty. Prior thereto,
he held numerous positions at Fireman's Fund, including Vice President of
Financial Insurance from 1983 to 1985 and Vice President and Treasurer from 1974
to 1983.

MR. TAYLOR has been director of FSA Holdings since February 1995. Mr. Taylor
has been Chief Operating Officer of FSA Holdings since May 1993. Mr. Taylor has
been a Managing Director of FSA since January 1991 and was a consultant to FSA
from January 1990 to January 1991. He was a director of FSA Holdings from August
1993 until August 1994 and has been a director of FSA since January 1992. Prior
to joining FSA, Mr. Taylor was Executive Vice President of Financial Guaranty
Insurance Company, a financial guaranty insurer. Mr. Taylor is also a director
of Source One Mortgage Services Corporation ("Source One"), a subsidiary of FAE.

MR. BRAIN has been a Managing Director of FSA since March 1989 and head of
its Insured Portfolio Management Department since July 1992. He has been a
director of FSA since September 1993. Prior to joining FSA in March 1989, Mr.
Brain was an attorney with Cleary, Gottlieb, Steen & Hamilton.

MR. BREWER has been a Managing Director of FSA since March 1989 and the
Chief Underwriting Officer of FSA since September 1990. He has been a director
of FSA since September 1993. From March 1989 to August 1991, Mr. Brewer was
Managing Director, Asset Finance Group, of FSA. Prior to joining FSA in 1986,
Mr. Brewer was an Associate Director of Moody's.

MR. HARRISON has been a Managing Director and the Chief Financial Officer of
FSA since August 1991 and the Chief Financial Officer of FSA Holdings since
February 1993. He has been a director of FSA since September 1993. From April
1987 through August 1991, Mr. Harrison was Chief Financial Officer of Citibank,
N.A. -U.S. Consumer Banking Group, and prior thereto was Managing Director, Real
Estate Finance Group, of Merrill Lynch & Co. Inc.

MR. MCCARTHY has been a Managing Director of FSA since March 1989 and head
of its Financial Guaranty Department since April 1993. He has been a director of
FSA since September 1993. Prior to joining FSA in 1988, Mr. McCarthy was a Vice
President of PaineWebber Incorporated.

MR. STERN has been a Managing Director, the Secretary and the General
Counsel of FSA Holdings since April 1993. Since April 1993, he has been the
Secretary of FSA, and since March 1989, he has been a Managing Director of FSA.
He has been a director of FSA since August 1990. Prior to joining FSA as General
Counsel in 1987, Mr. Stern was an attorney with Cravath, Swaine & Moore.

MR. DOWNEY has been director of FSA Holdings since August 1994. Mr. Downey
has been a limited partner since 1990, and a general partner from 1976 until
1990, of Goldman, Sachs & Co. At Goldman, Sachs & Co., Mr. Downey served as head
of the Municipal Bond Department and Vice Chairman of the Fixed Income Division.
Mr. Downey was a Director of the Securities Industry Association from 1987
through 1991 and served as its Chairman in 1990 and Vice Chairman in 1988 and
1989.

MR. FRANK has been been director of FSA Holdings since February 1996. Mr.
Frank was a director of Capital Guaranty from February 1994 until December 1995.
He has been Chairman of Belvedere Partners, a financial consulting firm, since
1994. He was Postmaster General of the United States from 1988 to 1992 and,
prior thereto, he served as Chairman of the Board and Chief Executive Officer of
First Nationwide Bank

57
<PAGE>
from 1971 to 1988. Mr. Frank is a director of Charles Schwab Inc.; Bedford
Properties Inc.; Irvine Apartment Communities, Inc.; Living Centers of America,
Inc.; General American Investors, Inc.; Temple-Inland, Inc.; and Crescent Real
Estate Equities.

MS. JAPHA has been director of FSA Holdings since May 1994. Ms. Japha has
been Chief Financial Officer of the U S WEST Communications Group since January
1996. Prior to that time, Ms. Japha was Vice President -- Business Development
of U S WEST Communications Group since October 1995. From May 1995 to October
1995, Ms. Japha served as Vice President -- Law and Human Resources of U S West
Communications Group. Prior to that time, Ms. Japha served as Vice President --
Law and Associate General Counsel, General Corporation Section, U S WEST since
1994, and has been employed as counsel by U S WEST in other positions since
1989. Prior to joining U S WEST, Ms. Japha was Assistant Vice President and
Legal Counsel, of Columbia Savings, a Federal Savings and Loan Association.

MR. KEMP has been director of FSA Holdings since August 1994. Mr. Kemp has
served as Executive Vice President, Treasurer and Secretary of Fund American
since 1993 and Vice President, Treasurer and Secretary since 1991. Since 1995,
Mr. Kemp has served as President and Chief Executive Officer of White Mountains.
Mr. Kemp was a Vice President of Fireman's Fund from 1990 to January 1991. Prior
to joining Fireman's Fund, Mr. Kemp was President of Resolute Reinsurance
Company. Mr. Kemp is a director of Fund American, FAE, Centricut, Inc., Main
Street America Holdings, Inc., SDN Bancorp, White Mountains and White Mountains
Insurance Company.

MR. KUSAKARI has been director of FSA Holdings and FSA since June 1991. Mr.
Kusakari has been General Manager of the Guarantee and Credit Underwriting
Department of Tokio Marine since June 1993. From June 1990 through May 1993, he
was General Manager of the Credit & Guarantee Insurance Division and Non-Marine
Underwriting Department of Tokio Marine. From June 1988 through May 1990, Mr.
Kusakari was General Manager of the Credit & Guarantee Insurance Division of
Tokio Marine.

MR. MAXWELL has been director of FSA Holdings since August 1994. Mr. Maxwell
was Chairman of the Board and Chief Executive Officer of Federal National
Mortgage Association from 1981 until his retirement in 1991. Mr. Maxwell is a
director of Hechinger Company, Potomac Electric Power Company (PEPCO), Salomon
and SunAmerica Inc.

MR. MCCORMICK has been director of FSA Holdings since August 1994. Mr.
McCormick has been Chairman of U S WEST since May 1992 and President and Chief
Executive Officer of U S WEST since January 1991. He was President and Chief
Operating Officer of U S WEST from 1986 to 1991. Mr. McCormick is a director of
Norwest Corp. and UAL, Inc.

MR. OSTERHOFF has been director of FSA Holdings since April 1992. Mr.
Osterhoff was a director of FSA from September 1993 until July 1994. He was
Executive Vice President and Chief Financial Officer of U S WEST from December
1991 until September 1995. Prior to joining U S WEST, Mr. Osterhoff was Vice
President -- Finance and Chief Financial Officer of Digital Equipment Corp., a
computer manufacturer. Mr. Osterhoff is a director of GenCorp.

MR. OZANNE has been director of FSA Holdings since December 1989. Mr. Ozanne
was a director of FSA from December 1989 until July 1994. He was Chairman and
Director of Nations Financial Holdings Corporation from January 1994 through
January 2, 1996. During December 1993, Mr. Ozanne served as President and Chief
Operating Officer of Nations Financial Capital Corporation. He was President and
Chief Executive Officer of USWCC from September 1989 until December 1993. Prior
to joining USWCC, Mr. Ozanne was Executive Vice President of General Electric
Capital Corporation, a financial services company.

MR. PELLETT has been a director of FSA Holdings since February 1996. Mr.
Pellett was a director of Capital Guaranty from February 1994 until December
1995. Mr. Pellett is Senior Vice President of Bessemer Trust Company N.A.
("Bessemer"), a federally chartered bank engaged in investment management,
fiduciary and other financial services. Prior to joining Bessemer in 1976, Mr.
Pellett oversaw Fireman's Fund's municipal bond portfolio from 1965 to 1976. He
also served as a Public Member of the Municipal Securities Rulemaking Board.

58
<PAGE>
MR. POST has been director of FSA Holdings since April 1994. Mr. Post was a
director of FSA from April 1994 until July 1994. In addition, he has been
President of USWCC and U S WEST Financial Services Inc. since December 1993,
President of U S WEST Real Estate Inc. since September 1993, Vice President --
Capital Assets of U S WEST since August 1993, Vice President -- Commercial
Development of U S WEST Media Group since January 1996 and prior thereto was
employed by U S WEST in a number of other positions. In addition, Mr. Post has
been a director of a number of U S WEST-affiliated companies.

MR. WATERS has been director of FSA Holdings since August 1994. Mr. Waters
has been Senior Vice President and Chief Financial Officer of Fund American
since December 1993. He was Vice President and Controller of FAE from 1991 to
1993 and has been a member of the Fund American organization (formerly the
Fireman's Fund organization) since 1985. Mr. Waters is also a director of FAE,
Source One, White Mountains and White Mountains Insurance Company.

MR. ZELIKOW has been a director of FSA Holdings since February 1996. Mr.
Zelikow was a director of Capital Guaranty from February 1994 until December
1995. Mr. Zelikow has been a management and financial consultant doing business
as ZKA Associates since 1987 and has been a member of Kayne Anderson Investment
Management, Inc., an investment management company, since 1988. Mr. Zelikow was
Chief Financial Officer and Executive Vice President of The Progressive
Corporation from 1976 to 1987. Mr. Zelikow is a director of The Right Start,
Inc.

59
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information regarding ownership of
FSA Holdings' equity at March 1, 1996 as to (a) each person known by FSA
Holdings to beneficially own, within the meaning of the Exchange Act, 5% or more
of the outstanding shares of the Common Stock or Preferred Stock, (b) each
director and nominee for director of FSA Holdings, (c) each of the five most
highly compensated executive officers of FSA Holdings and (d) all such executive
officers and directors of FSA Holdings as a group. The table provides
information regarding actual, beneficial and voting ownership. In connection
with the IPO, the Company, Fund American and U S WEST entered into certain
arrangements affecting such ownership, which are summarized in Notes (4) and (5)
to the following table.

<TABLE>
<CAPTION>
NUMBER OF SHARES OWNED (1)(2)
----------------------------------------- VOTING
POWER
ACTUAL BENEFICIAL (3) (2)(4)
5% SHAREHOLDERS, DIRECTORS AND ------------------- ------------------- ---------
EXECUTIVE OFFICERS NUMBER PERCENT NUMBER PERCENT PERCENT
- ------------------------------------------------------------ ---------- ------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C>
U S WEST Capital Corporation................................ 15,856,910 50.6% 15,856,910 50.6% 41.9%
c/o U S WEST, Inc.
7800 East Orchard Road
Englewood, Colorado 80111 (5)(6)
Fund American Enterprises Holdings, Inc..................... 2,460,200 7.9 8,020,807 24.1 19.1
The 1820 House
Main Street
Norwich, Vermont 05055 (5)(7)
The Tokio Marine and Fire Insurance Co., Ltd................ 1,929,000 6.2 1,929,000 6.2 5.8
2-1, Marunouchi 1-Chome
Chiyoda-ku, Tokyo 100 Japan
John J. Byrne (7)........................................... 35,000 * 35,000 * *
Robert P. Cochran........................................... 46,954 * 288,751 * *
Michael Djordjevich......................................... 6,044 * 156,972 * *
Robert N. Downey............................................ 50,000 * 50,000 * *
Anthony M. Frank............................................ 2,671 * 2,671 * *
Barbara M. Japha............................................ -- * -- * *
K. Thomas Kemp (7).......................................... 1,600 * 1,600 * *
Kozo Kusakari............................................... -- * -- * *
David O. Maxwell............................................ 6,000 * 6,000 * *
Richard D. McCormick........................................ 1,000 * 1,000 * *
James M. Osterhoff.......................................... 1,000 * 1,000 * *
James H. Ozanne............................................. 3,000 * 3,000 * *
Staats M. Pellett, Jr....................................... 3,350 * 3,350 * *
Richard A. Post............................................. 200 * 200 * *
Roger K. Taylor............................................. 19,726 * 181,000 * *
Allan L. Waters (7)......................................... 2,000 * 2,000 * *
Howard M. Zelikow........................................... 5,037 * 5,037 * *
Russell B. Brewer II........................................ 5,010 * 75,109 * *
Sean W. McCarthy............................................ 6,984 * 122,180 * *
Bruce E. Stern.............................................. 4,672 * 75,892 * *
All executive officers and directors as a group (22
persons)................................................... 205,324 * 1,147,721 3.3% *
</TABLE>

- --------------------------
* Indicates less than 1%

(1) In the case of USWCC, Fund American and Tokio Marine, the number of shares
owned is based on Schedules 13D or 13G filed by such entities with the
Commission. Ownership percentages are calculated (a) based on 31,308,325
shares of Common Stock outstanding at March 1, 1996, which (i) excludes
875,632 shares held by or for the account of FSA Holdings and its
subsidiaries and (ii) includes 118,782 unvested shares of restricted stock,
(b) excluding 2,000,000 shares of Preferred Stock outstanding at March 1,
1996, except that such Preferred Stock is included for determining the
beneficial ownership percentage of Fund American, which holds such Preferred
Stock and (c) in accordance with Rule 13d-3 of the Exchange Act, including,
for the purpose of calculating beneficial

60
<PAGE>
ownership percentages for the holders thereof, (i) vested and unvested
performance shares with each performance share treated as one share of
Common Stock, (ii) equity bonus shares and (iii) vested stock options
exercisable within 60 days, in each case awarded under plans described in
note (2) below.

(2) Does not give effect to the consummation of the Sale Transactions, pursuant
to which USWCC will sell (i) 1,000,000 shares of Common Stock to FSA
Holdings, (ii) 1,000,000 shares of Common Stock to Fund American and (iii)
between 1,000,000 and 1,700,000 shares of Common Stock to NatWest, except
that the beneficial ownership of Fund American includes the 1,000,000 shares
of Common Stock which Fund American will purchase from USWCC pursuant to the
Sales Transactions. See "Recent Developments -- The Sale Transactions."

(3) A person is deemed to have "beneficial ownership" of any shares as of a
given date which such person has the right to acquire within 60 days after
such date. In computing the percentage of outstanding shares held by each
person named above on a given date any security which such person has the
right to acquire within 60 days after such date is deemed to be outstanding,
but is not deemed to be outstanding for the purpose of computing the
percentage ownership of any other person. See Notes (3) and (4) below for
additional information regarding shares beneficially owned by Fund American.
Shares beneficially owned by executive officers include (a) unvested
restricted shares issued under FSA Holdings' Supplemental Restricted Stock
Plan, (b) equity bonuses awarded under the FSA Holdings' 1993 Equity
Participation Plan and (c) vested and unvested performance shares awarded
under FSA Holdings' 1993 Equity Participation Plan assuming such performance
shares are paid out as one share of Common Stock for each performance share.
The table includes shares subject to vested and unvested performance shares,
and equity bonus awards, in the following amounts: Robert P. Cochran --
64,000 vested and 136,000 unvested performance shares, and 18,366 equity
bonus shares; Roger K. Taylor -- 40,000 vested and 90,000 unvested
performance shares, and 17,320 equity bonus shares; Russell B. Brewer II --
20,000 vested and 40,000 unvested performance shares, and 5,435 equity bonus
shares; Sean W. McCarthy -- 26,000 vested and 74,000 unvested performance
shares, and 9,027 equity bonus shares; Bruce E. Stern -- 20,000 vested and
40,000 unvested performance shares, and 6,863 equity bonus shares; all
executive officers and directors as a group -- 210,000 vested and 460,000
unvested performance shares, and 67,952 equity bonus shares. The table also
includes, in respect of Michael Djordjevich, (i) options to purchase 124,927
shares of Common Stock and (ii) 26,000 performance shares, in each case
awarded in the Merger.

(4) Under a Voting Trust Agreement among Fund American, USWCC and The First
National Bank of Chicago, as voting trustee thereunder (the "Voting
Trustee"), 1,893,940 shares of Common Stock deliverable upon the exercise in
full of an option granted by USWCC to Fund American were deposited into a
voting trust administered by the Voting Trustee, and Fund American has the
right to direct the voting of such shares prior to the exercise of the
option. In addition, at any time that Fund American owns at least 35% of the
issued and then outstanding shares of Common Stock (including, for this
purpose, the 1,893,940 shares subject to such option), in order that the
Company be considered a majority owned subsidiary of Fund American, USWCC
will deposit into the voting trust an additional number of shares, to the
extent USWCC beneficially owns such shares, so that Fund American will be
able to vote 50.1% of the then issued and outstanding shares of Common
Stock. Percents are calculated based on (a) 31,308,325 shares of Common
Stock outstanding at March 1, 1996, which (i) excludes 875,632 shares held
by or for the account of FSA Holdings and its subsidiaries and (ii) includes
unvested shares of restricted stock, and (b) 2,000,000 shares of Preferred
Stock outstanding at March 1, 1996.

(5) On March 1, 1996, Fund American owned (subject, in each case, to
anti-dilutive adjustment): (a) 2,000,000 shares of Preferred Stock,
constituting all the outstanding Preferred Stock, which are convertible into
an equal number of shares of Common Stock at the conversion price of $29.65
per share; (b) an option, which expires on May 13, 1999 and entitles Fund
American to purchase up to 666,667 shares of Common Stock from USWCC at an
exercise price of $23.50 per share; (c) an option, which expires on November
2, 2004 and entitles Fund American to purchase up to 1,893,940 shares of
Common Stock from USWCC at an exercise price of $26.40 per share; and (d)
certain voting rights with respect to certain shares of Common Stock as
described in Note (3) above. If Fund American were to exercise both such
options, USWCC's actual and beneficial ownership would be reduced to
13,296,303 shares, or 42.5%. The beneficial ownership of Fund American
includes the 1,000,000 shares of Common Stock which Fund American will
purchase from USWCC pursuant to the Sale Transactions.

(6) All of such shares are subject to the Fund American Shareholders Agreement
(as hereinafter defined) and the Tokio Marine Stockholders Agreement (as
hereinafter defined). See "Certain Relationships and Related Transactions --
Fund American Shareholders Agreement" and "-- Tokio Marine Stockholders
Agreement." 8,725,000 of such shares (plus an additional 1,071,303 if the
underwriters of the DECS exercise their over-allotment option) may be
delivered by U S WEST or USWCC, at U S WEST's option, to Salomon upon
maturity of the U S WEST DECS.

(7) Mr. Byrne is the Chairman, President and Chief Executive Officer, and a
major shareholder, of Fund American, Mr. Kemp is Executive Vice President,
Treasurer and Secretary of Fund American and Mr. Waters is Senior Vice
President and Chief Financial Officer of Fund American. Messrs. Byrne, Kemp
and Waters disclaim beneficial ownership of Common Stock and Preferred Stock
held by Fund American.

61
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

FUND AMERICAN, U S WEST AND FSA HOLDINGS RELATIONSHIPS

In May 1994, Fund American purchased 2,000,000 shares of Common Stock
directly from USWCC, and USWCC simultaneously consummated an initial public
offering of an additional 5,500,000 shares of Common Stock (plus 582,385 shares
of Common Stock pursuant to the underwriters' over-allotment option), at a price
of $20.00 per share. In September 1994, Fund American completed the second stage
(the "Second Closing") of its investment in FSA Holdings and acquired: (i)
50,000 shares of preferred stock, par value $1.00 per share, designated as
Series B Cumulative Redeemable Preferred Stock of U S WEST, Inc., a Colorado
corporation and U S WEST's predecessor (the "U S WEST Preferred Stock"); (ii)(A)
options to acquire 666,667 shares of Common Stock from USWCC at an exercise
price of $23.50 per share beginning November 13, 1994 and ending May 13, 1999
(the "Five-Year Option") and (B) options to acquire 1,893,940 shares of Common
Stock from USWCC at an exercise price of $26.40 per share beginning November 13,
1994 and ending September 2, 2004 (the "Ten-Year Option" and together with the
Five-Year Option, the "USWCC Options"); the number of shares and price per share
contained in the USWCC Options are, in each case, subject to anti-dilutive
adjustment); and (iii) 2,000,000 shares of the Series A Convertible Redeemable
Preferred Stock of FSA Holdings from FSA Holdings which are convertible into an
equal number of shares of Common Stock at a price of $29.65 per share beginning
November 13, 1994 and ending on the redemption date thereof, May 13, 2004. On
November 1, 1995, the U S WEST Preferred Stock was converted into 50,000 shares
of preferred stock, par value $1.00 per share, designated as Series C Cumulative
Redeemable Preferred Stock, of U S WEST, in connection with the implementation
of a recapitalization plan by U S WEST. The USWCC Options and the Preferred
Stock remain outstanding and their terms have not since been amended.

The aggregate purchase price paid by Fund American at the Second Closing was
$50,700,000 in cash, consisting of $50,000,000 paid for the U S WEST Preferred
Stock and the USWCC Options and $700,000 paid for the Preferred Stock. According
to the Schedule 13-D filed by Fund American, the source of such funds was
current assets of Fund American, and no part of such funds is or was represented
by funds or other consideration borrowed or otherwise obtained for the purpose
of acquiring, holding, trading or voting such securities.

In connection with the Second Closing, FSA Holdings entered into a
Registration Rights Agreement with USWCC and Fund American (the "Registration
Rights Agreement"). Under this Agreement, at any time prior to May 13, 2004,
each of Fund American and USWCC is entitled to four demand registrations and the
right to register certain shares on a "piggyback" basis at the expense of FSA
Holdings on an unlimited number of occasions if FSA Holdings proposes to have a
public offering of Common Stock. FSA Holdings has agreed to indemnify Fund
American and USWCC for certain liabilities, including liabilities under the
Securities Act, or to contribute to payments Fund American or USWCC may be
required to make in respect thereof, in connection with sales by such person of
Common Stock in a registration statement prepared by FSA Holdings under the
Registration Rights Agreement. The shares of Common Stock offered hereby are
being registered pursuant to a demand registration exercised by USWCC in
accordance with the terms of the Registration Rights Agreement.

FUND AMERICAN SHAREHOLDERS AGREEMENT

In connection with the Second Closing, Fund American entered into (i) a
Voting Trust Agreement with USWCC and The First National Bank of Chicago, as
voting trustee thereunder, and (ii) the Shareholders Agreement (the "Fund
American Shareholders Agreement") with USWCC and FSA Holdings. Pursuant to the
Voting Trust Agreement, Fund American has the right to direct the voting of the
1,893,940 shares of Common Stock deliverable upon the exercise in full of the
Ten-Year Option prior to the exercise of the Ten-Year Option. In addition, under
certain circumstances, Fund American may require USWCC to deposit additional
shares into the voting trust, to the extent USWCC beneficially owns such shares,
so that Fund American will be able to vote 50.1% of the then issued and
outstanding shares of Common Stock.

The Fund American Shareholders Agreement provides that Fund American and U S
WEST will use their best efforts to cause the Board of Directors of FSA Holdings
to consist of 11 directors and the persons

62
<PAGE>
nominated to serve on the Board of Directors to include (i) seven persons
designated by Fund American, four of whom must be approved by U S WEST in the
exercise of its sole discretion, (ii) two independent directors (within the
meaning of the rules of the NYSE), (iii) the President-Chief Executive Officer
of FSA Holdings and (iv) one person who is a senior employee of Tokio Marine,
for the period that such person is required to be designated as a director of
FSA Holdings in accordance with the Tokio Marine Stockholders Agreement referred
to below under "Certain Relationships and Related Transactions -- Tokio Marine
Stockholders Agreement." Fund American and U S WEST have agreed to use their
best efforts to cause Mr. Byrne to be Chairman of the Board of FSA Holdings (as
long as he is able to serve) and he will be deemed to be a designee not
requiring approval of U S WEST.

The Securities Purchase Agreement provides that from and after the 1996
annual meeting of shareholders of FSA Holdings and thereafter, or from an
earlier date in certain events, the parties will use their best efforts to cause
the Board of Directors of FSA Holdings to consist of 11 directors and the
persons nominated to serve on the Board of Directors to include (i) two
independent directors (within the meaning of the rules of the NYSE), (ii) the
President-Chief Executive Officer of FSA Holdings, (iii) one person who is a
senior employee of Tokio Marine, for the period that such person is required to
be designated as a director of FSA Holdings in accordance with the Tokio Marine
Stockholders Agreement, and (iv) seven persons designated by Fund American, of
whom U S WEST must approve a number based on the "voting power" held by Fund
American and U S WEST as of the date of the nominations as set forth in the
following table:

<TABLE>
<CAPTION>
FUND AMERICAN VOTING POWER AS A
PERCENTAGE OF FUND AMERICAN AND DESIGNEES TO BE APPROVED
U S WEST COMBINED VOTING POWER BY U S WEST
- ------------------------------------------------------------------ -----------------------------
<S> <C>
0% through 14.29%................................................. 6
Above 14.29% through 28.58%....................................... 5
Above 28.58% through 50.00%....................................... 4
Above 50.00% through 57.16%....................................... 3
Above 57.16% through 71.45%....................................... 2
Above 71.45% through 90.00%....................................... 1
Above 90.00%...................................................... 0
</TABLE>

FSA Holdings, U S WEST and Fund American are free to alter the foregoing
arrangements and have in fact provided for (a) three (rather than two)
independent directors, (b) the inclusion of FSA Holdings' Chief Operating
Officer as a director, for a total of thirteen directors (rather than eleven)
and (c) the inclusion of four nominees of Capital Guaranty as required pursuant
to the terms of the Merger, for a total of 17 directors.

Under the Fund American Shareholders Agreement, "voting power" means the
number of shares held outright by a party or its affiliates, except that shares
of Common Stock deliverable to Fund American upon exercise of the Ten-Year
Option, and any additional shares deposited by U S WEST in the voting trust
described above, will be deemed to be owned by Fund American and not by U S
WEST, provided that the votes attributed to the Preferred Stock will be excluded
from Fund American's "voting power." The Fund American Shareholders Agreement
requires Fund American and U S WEST to vote all shares of Common Stock over
which they exercise voting control in favor of the election of all persons
nominated as provided in such agreement.

The Fund American Shareholders Agreement terminates upon the earliest to
occur of (i) the cessation of the existence of FSA Holdings, (ii) September 2,
1997, (iii) the consent of U S WEST and Fund American, (iv) the sale,
disposition or other transfer of any shares of Common Stock by U S WEST that
causes U S WEST to own outright (excluding shares of Common Stock deliverable to
Fund American and its majority owned subsidiaries upon exercise of the Ten-Year
Option) less than 15% of the outstanding shares of Common Stock, or (v) such
time as U S WEST, Fund American and their permitted transferees own less than
50% of the outstanding shares of Common Stock.

63
<PAGE>
OTHER FUND AMERICAN AND COMPANY RELATIONSHIPS

FSA Portfolio Management Inc., a wholly owned subsidiary of FSA Holdings,
provides investment management services to several affiliates of Fund American
in exchange for payment of an investment management fee equal to 15 basis points
per annum on the principal amount of funds under management.

U S WEST, FSA HOLDINGS AND FSA RELATIONSHIPS

In December 1993, FSA Holdings completed the Restructuring, which
significantly reduced its risk of loss from its insured portfolio of obligations
backed by commercial mortgages (the "Commercial Mortgage Portfolio"). As part of
the Restructuring, FSA obtained reinsurance from Commercial Re in respect of the
Commercial Mortgage Portfolio. Commercial Re is an insurance company organized
for the purpose of the Restructuring that is owned approximately 91.6% by USWCC
and 8.4% by Tokio Marine. Various agreements were entered into among FSA
Holdings, Commercial Re and U S WEST in connection with the Restructuring, all
of which remains in force and have not since been amended. These agreements
include (i) a quota share reinsurance agreement, (ii) an investment management
agreement providing for the management by FSA Portfolio Management of Commercial
Re's investment portfolio and other matters in exchange for a fee initially
ranging from 15 to 30 basis points per annum on the market value of Commercial
Re's investment portfolio and (iii) a management agreement pursuant to which FSA
Holdings provides management services to Commercial Re, including regulatory
compliance and accounting services, for a fixed fee of $100,000 per annum.

FSA Holdings was also subject to the Modification of Final Judgment (the
"Judgment") entered in 1984 in connection with the settlement of the legal
action entitled UNITED STATES V. WESTERN ELECTRIC COMPANY, INC. Pursuant to the
Judgment, American Telephone and Telegraph Company divested itself of its
interest in the seven regional operating companies, including U S WEST. The
Judgment prohibited FSA Holdings from entering into certain activities or
obtaining an ownership interest in or exercising control over any entity that
engages in such activities. The Judgment was terminated in February 1996.

Since its acquisition of FSA Holdings, U S WEST has provided insurance
coverage for FSA Holdings under insurance policies issued to U S WEST, including
worker's compensation, property and general liability, business interruption,
directors and officer's liability and fiduciary liability coverage. FSA Holdings
pays an allocated share of the premiums for such coverages which are lower than
those FSA Holdings would have to pay were it separately covered for such
matters. FSA Holdings' allocated share of such premiums for 1995 was $0.1
million. In May 1994, U S WEST and FSA Holdings entered into an Insurance
Indemnification and Insurance Agreement that requires U S WEST to continue to
include FSA Holdings and its subsidiaries as insureds under certain insurance
policies until December 31, 1997, subject to earlier termination at the election
of either party.

TOKIO MARINE, FSA HOLDINGS AND FSA RELATIONSHIPS

Tokio Marine, FSA Holdings and FSA entered into a Cooperation Agreement
dated as of December 27, 1990 (the "Cooperation Agreement") in connection with
Tokio Marine's investment in FSA Holdings. The Cooperation Agreement contains
reinsurance provisions (discussed below) and reciprocal marketing provisions.
The Cooperation Agreement also entitles Tokio Marine to select one director of
FSA Holdings and of FSA and to place up to three of its employees in FSA's New
York offices. The term of the Cooperation Agreement is automatically renewed on
an annual basis for successive one-year terms unless notice is given, subject to
earlier termination by one party upon default by the other, prior to December 31
of the prior year. Pursuant to the Cooperation Agreement, FSA has entered into a
Master Reinsurance Placement Memorandum (the "Memorandum") dated December 27,
1990 by which FSA has agreed to cede and Tokio Marine has agreed to accept
reinsurance equal to 10% of the principal amount of new business written by FSA
in each calendar year, with the cessions to be composed of treaty participations
and facultative cessions, including an automatic facility by which FSA at its
option may cede up to $25.0 million per policy on a quota share basis subject to
certain condition. Pursuant to the Memorandum, Tokio Marine participates in
FSA's non-municipal and municipal treaties and has provided facultative
reinsurance to FSA. FSA

64
<PAGE>
Holdings ceded premiums of $6.6 million and $13.1 million to Tokio Marine for
the years ended December 31, 1994 and 1995, respectively. In the opinion of the
management of FSA Holdings and FSA, the terms of the Cooperation Agreement and
reinsurance with Tokio Marine are no less favorable to FSA than the terms that
could be obtained from unaffiliated parties.

TOKIO MARINE STOCKHOLDERS AGREEMENT

Pursuant to a Stockholders Agreement dated December 27, 1990, as amended
(the "Tokio Marine Stockholders Agreement"), among Tokio Marine, FSA Holdings
and USWCC, USWCC has agreed to vote all stock in FSA Holdings owned by it to
nominate and to elect a senior employee of Tokio Marine designated by Tokio
Marine to the Board of Directors of FSA Holdings as long as Tokio Marine owns at
least 5% (9.9% in the event the Cooperation Agreement is terminated as a result
of a breach by Tokio Marine) of FSA Holdings' outstanding Common Stock or the
Cooperation Agreement is in effect. As long as such conditions are met, to the
extent permitted by law, FSA Holdings has agreed to cause a senior employee of
Tokio Marine to be nominated as a director of FSA Holdings. So long as Tokio
Marine owns any Common Stock, USWCC has agreed to use commercially reasonable
efforts to cause the maximum cash dividends to be paid each year with respect to
the Common Stock of FSA Holdings which can be paid without violating applicable
law, causing the rating agencies to lower or consider lowering the triple-A
claims-paying ability ratings of FSA or reducing the cash of FSA Holdings and
its subsidiaries below the amount needed to satisfy their reasonably anticipated
business needs.

The Tokio Marine Stockholders Agreement contains certain restrictions on the
ability of Tokio Marine, USWCC and FSA Holdings to sell or otherwise transfer
any stock of FSA Holdings or any subsidiary of FSA Holdings (and, under certain
circumstances, the stock of USWCC), or all or substantially all of the assets of
FSA Holdings or FSA, including a right of first offer in the event of a proposed
sale of Common Stock by USWCC or Tokio Marine. Under such right of first offer,
Tokio Marine will have the right to purchase all of the shares of Common Stock
owned by USWCC which may be delivered upon maturity of the DECS. Certain of the
rights granted to Tokio Marine under the Tokio Marine Stockholders Agreement may
make it more difficult for USWCC to sell additional shares of Common Stock or
for FSA Holdings to dispose of certain assets or raise funds from the sale of
Common Stock and therefore might be deemed to restrict a change of control of
FSA Holdings.

REINSURANCE AGREEMENTS WITH ENHANCE REINSURANCE COMPANY

Enhance, a subsidiary of Enhance Financial Services Group Inc. ("Enhance
Financial") which was 30.3% owned by a subsidiary of U S WEST at March 21, 1996,
provides reinsurance to FSA by participating in the asset-backed and municipal
reinsurance treaties and through facultative cessions. On December 11, 1995, U S
WEST issued 5,430,800 of its 7.625% Exchangeable Notes due December 15, 1998
(the "Enhance DECS"). At maturity of the Enhance DECS, U S WEST may, at its
option, deliver to holders of the Enhance DECS the shares of common stock of
Enhance Financial owned by U S WEST's subsidiary. If U S WEST so elects to
deliver such shares, the interest of U S WEST in Enhance Financial will be
significantly reduced.

For 1994, FSA ceded to Enhance 4% of the principal amount of new business
written in the asset-backed area (which FSA may increase to 6%), subject to
certain treaty limitations and exclusions, and 5% of the principal amount of new
business written in the municipal area (which FSA may increase to 10%), subject
to certain treaty limitations and exclusions. Asset Guaranty Insurance Company
("Asset Guaranty"), which is also a subsidiary of Enhance Financial, previously
participated in the asset-backed treaty and assumed reinsurance through
facultative cessions. Pursuant to reinsurance agreements in effect in prior
years with Enhance and Asset Guaranty, FSA Holdings ceded to Enhance and Asset
Guaranty premiums of $10.0 million, $7.6 million and $6.9 million for the years
ended December 31, 1993, 1994 and 1995, respectively. In the opinion of the
management of FSA Holdings, the terms of the existing reinsurance agreements
with Enhance are no less favorable to FSA and its subsidiaries than the terms
that could be obtained from unaffiliated parties.

65
<PAGE>
OTHER RELATIONSHIPS

In connection with the 1989 acquisition of FSA by U S WEST, FSA Holdings
issued promissory notes and incurred other obligations to Mr. Cochran and to
several former members of the management of FSA Holdings, in exchange for all
their common stock of FSA Holdings. In addition, certain amounts of deferred
compensation were included in the notes and obligations to several of these
individuals. The aggregate principal amounts owed to Mr. Cochran and to certain
former members of management in the aggregate, at January 1, 1995, were $620,107
and $5,003,532, respectively. The respective principal balances were paid in two
equal installments on January 3, 1995 and March 31, 1995.

In February 1992, FSA Holdings provided a loan in the principal amount of
$630,000 to Mr. Sean W. McCarthy, a Managing Director of FSA, in connection with
his relocation to New York City at the request of FSA Holdings. In December
1993, the loan agreement was amended to (i) reduce the principal balance by
$141,173 (an amount equal to the loss on the sale of his home in connection with
such relocation) and (ii) allow for the repayment of the remaining principal
balance of $362,827.06 at December 31, 1993 over a ten-year period in equal
installments at an interest rate of 5.27% per annum. Installment payments were
made in January 1995 and January 1996.

66
<PAGE>
PLAN OF DISTRIBUTION

Subject to the terms and conditions set forth in the Underwriting Agreement
(the "Underwriting Agreement") among Salomon, FSA Holdings and the Underwriters
named below, for whom Salomon Brothers, Donaldson, Lufkin & Jenrette Securities
Corporation and Lehman Brothers Inc. are acting as representatives, Salomon has
agreed to sell to the Underwriters, and the Underwriters have agreed to
purchase, the aggregate number of DECS set forth opposite their names below:

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS DECS
- ------------------------------------------------------------------------------------------- -----------
<S> <C>
Salomon Brothers Inc....................................................................... 2,908,334
Donaldson, Lufkin & Jenrette Securities Corporation........................................ 2,908,333
Lehman Brothers Inc. ...................................................................... 2,908,333
-----------
Total.................................................................................... 8,725,000
-----------
-----------
</TABLE>

In the Underwriting Agreement, the several Underwriters have agreed, subject
to the terms and conditions set forth therein, that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will be obligated to purchase all of the DECS offered pursuant to
the DECS Prospectus if any of the DECS are purchased.

Salomon has been advised by the Underwriters that they propose to offer the
DECS directly to the public initially at the public offering price set forth on
the cover of the DECS Prospectus and to certain dealers at such prices less a
concession not in excess of $.47 per DECS. The Underwriters may allow, and such
dealers may reallow, a concession not in excess of $.10 per DECS to other
dealers. After the initial public offering, such public offering price and such
concession and reallowance may be changed.

FSA Holdings has agreed not to offer for sale, sell or contract to sell, or
otherwise dispose of, or announce the offering of, without the prior written
consent of Salomon Brothers, any shares of Common Stock or any securities
convertible into or exchangeable for, or warrants to acquire, Common Stock for a
period of 180 days after the date of this Prospectus; PROVIDED, HOWEVER, that
FSA Holdings may (i) issue Common Stock upon exercise of options or grant
options to purchase shares of Common Stock, in either case, if such options are
or were to be issued pursuant to the 1993 Equity Participation Plan or the
Supplemental Restricted Stock Plan of FSA Holdings as in effect at the date of
this Prospectus and (ii) issue Common Stock upon the conversion of securities or
the exercise of Warrants outstanding at the date of this Prospectus. U S WEST
has agreed not to offer for sale, sell or contract to sell, or otherwise dispose
of, or announce the offering of, without the prior written consent of Salomon
Brothers, any shares of Common Stock or any securities convertible into or
exchangeable for, or warrants to acquire, Common Stock for a period of 180 days
after the date of this Prospectus; PROVIDED, HOWEVER, that such restriction
shall not affect the ability of U S WEST to (i) take any such actions in
connection with the offering of the U S WEST DECS or any exchange at maturity
pursuant to the terms of the U S WEST DECS, (ii) lend shares of Common Stock
pursuant to the terms of the Securities Loan Agreement (as defined below), (iii)
deliver shares of Common Stock to Fund American upon exercise of the USWCC
Options or (iv) sell shares of Common Stock pursuant to the Sale Transactions.

In connection with the DECS Offering, U S WEST or an affiliate thereof
(referred to herein as the "Lender"), and Salomon Brothers intend to enter into
a Securities Loan Agreement (the "Securities Loan Agreement") which provides
that, subject to certain restrictions and with the agreement of the Lender,
Salomon Brothers may from time to time borrow, return and reborrow shares of
Common Stock from the Lender (the "Borrowed Securities"); PROVIDED, HOWEVER,
that the number of Borrowed Securities at any time may not exceed 1,919,261
shares, subject to adjustment to provide antidilution protection. The Securities
Loan Agreement is intended to facilitate market-making activity in the DECS by
Salomon Brothers. Salomon Brothers may from time to time borrow shares of Common
Stock under the Securities Loan Agreement to settle short sales of Common Stock
entered into by Salomon Brothers to hedge any long position in the DECS
resulting from its market-making activities. Such sales will be made on the NYSE
or in the over-the-counter market at market prices prevailing at the time of
sale or at prices related to such market prices.

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<PAGE>
Market conditions will dictate the extent and timing of Salomon Brothers'
market-making transactions in the DECS and the consequent need to borrow shares
of Common Stock. The availability of shares of Common Stock under the Securities
Loan Agreement, if any, at any time is not assured and any such availability
does not assure market-making activity with respect to the DECS and any
market-making actually engaged in by Salomon Brothers may cease at any time. The
foregoing description of the Securities Loan Agreement does not purport to be
complete and is qualified in its entirety by reference to the Agreement, a copy
of which is filed as an exhibit to the Registration Statement of which the
Prospectus is a part.

Salomon has granted to the Underwriters an option, exercisable for the
30-day period after the date of the DECS Prospectus, to purchase up to an
additional 1,071,303 DECS from Salomon, at the same price per DECS as the
initial DECS to be purchased by the Underwriters. The Underwriters may exercise
such option only for the purpose of covering over-allotments, if any, incurred
in connection with the sale of DECS offered pursuant to the DECS Prospectus. To
the extent that the Underwriters exercise such option, each Underwriter will
have a firm commitment, subject to certain conditions, to purchase the same
proportion of the DECS as the number of DECS to be purchased and offered by such
Underwriter in the above table bears to the total number of initial DECS to be
purchased by the Underwriters.

The DECS will be a new issue of securities with no established trading
market. The Underwriters intend to make a market in the DECS, subject to
applicable laws and regulations. However, the Underwriters are not obligated to
do so and any such market-making may be discontinued at any time at the sole
discretion of the Underwriters without notice. Accordingly, no assurance can be
given as to the liquidity of such market.

The Underwriting Agreement provides that Salomon and FSA Holdings will
indemnify the Underwriters against certain liabilities, including liabilities
under the Securities Act, or contribute to payments the Underwriters may be
required to make in respect thereof.

Pursuant to a Purchase Agreement between U S WEST and Salomon (the "Purchase
Agreement"), Salomon has agreed, subject to the terms and conditions set forth
therein, to purchase from U S WEST a number of U S WEST DECS equal to the
aggregate number of DECS to be purchased by the Underwriters from Salomon
pursuant to the Underwriting Agreement (including any DECS to be purchased by
the Underwriters upon exercise of the over-allotment option). Pursuant to the
terms of the U S WEST DECS, U S WEST will be obligated to deliver to Salomon at
or prior to maturity of the DECS a number of shares of Common Stock (or, at U S
WEST's option under certain circumstances, the cash equivalent) that are
expected to have the same value as the shares delivered pursuant to the DECS.
For further information, see the DECS Prospectus. Pursuant to the Purchase
Agreement, U S WEST has agreed to reimburse Salomon for certain expenses related
to the offering of the DECS and to pay a fee to Salomon equal to two-tenths of
one percent per annum of the principal amount of the DECS until their stated
maturity.

Salomon Brothers is an indirect wholly owned subsidiary of Salomon. The
participation of Salomon Brothers in the offer and sale of the DECS complies
with the requirements of Schedule E of the By-Laws of the National Association
of Securities Dealers, Inc. regarding the underwriting by Salomon Brothers of
the securities of its parent.

In the ordinary course of their respective businesses, certain of the
Underwriters and their respective affiliates have engaged in and may in the
future engage in commercial and investment banking transactions with Salomon,
FSA Holdings, U S WEST and their respective affiliates.

EXPERTS

FINANCIAL STATEMENTS

The consolidated financial statements of FSA Holdings and its subsidiaries
as of December 31, 1995 and 1994 and for each of the three years in the period
ended December 31, 1995, incorporated by reference in FSA Holdings' Annual
Report (Form 10-K), have been audited by Coopers & Lybrand L.L.P., independent
auditors, as set forth in their report thereon included therein and incorporated
herein by reference. Such consolidated financial statements are incorporated
herein by reference in reliance upon such report given upon the authority of
such firm as experts in accounting and auditing.

68
<PAGE>
The consolidated financial statements of Capital Guaranty and its
subsidiaries as of December 31, 1994 and 1993, and for each of the three years
in the period ended December 31, 1994, incorporated by reference in Capital
Guaranty's Annual Report (Form 10-K), have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon included therein and
incorporated herein by reference. Such consolidated financial statements are
incorporated herein by reference in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.

LEGAL MATTERS

The validity of the Common Stock being offered hereby will be passed upon
for FSA Holdings by Bruce E. Stern, Esq., General Counsel of FSA Holdings.

69
<PAGE>
GLOSSARY OF INSURANCE TERMS

<TABLE>
<S> <C>
Acquisition costs................. All expenses incurred that are primarily related to
acquiring new insurance policies.
Asset-backed debt obligation or
asset-backed debt security....... A debt instrument that is supported by a pool of assets,
such as automobile loans or single family mortgage
loans. The payments on the assets produce the revenue
stream that services the interest and principal on the
asset-backed debt obligation.
Capacity.......................... The measure of an insurer's financial strength to issue
contracts of insurance, usually determined by the
largest amount acceptable on a given risk or, in certain
other situations, by the maximum volume of business it
is prepared to accept.
Cede.............................. To pass on to a reinsurer all or part of the insurance
written by an insurer (the ceding insurer) with the
object of reducing the possible liability of the latter.
"Cessions" is the noun equivalent of the verb "cede."
Ceded premiums.................... Premiums transferred under reinsurance policies in
connection with the transfer by an insurance company of
a portion of its insured risk to another insurer (the
reinsurer).
Ceding commission................. The consideration paid by an assuming company to a
ceding company to cover acquisition costs related to
business assumed under a reinsurance or retrocession
contract.
Ceding company.................... An insurance company that cedes a portion of its insured
risk to a reinsurer.
Combined ratio.................... The sum of the loss ratio and the expense ratio on
either a SAP or a GAAP basis, as the case may be.
Contingency reserve............... A reserve used in SAP accounting designed to protect
policyholders against the effect of excessive losses
occurring during adverse economic cycles.
Credit enhancement................ Use of a financial guaranty to upgrade the credit
quality of a security such as by the use of an insurance
policy or letter of credit.
Credit rating..................... An alphabetic system used by major rating agencies to
categorize the creditworthiness of an issuer of a
specific obligation. A credit rating of BBB or Baa or
better is considered an investment grade rating, meaning
the securities have been analyzed and are regarded as
having adequate capacity to provide timely payment of
debt service. A credit rating below BBB or Baa is
considered a speculative grade rating, meaning there is
a greater vulnerability to default.
Deferred acquisition cost......... Those expenses, generally incurred at the commencement
of the term of the insurance policy, that vary with and
are primarily related to the production of new or
renewal business, including: salaries and related costs
of underwriting and marketing, rating agency fees,
premium taxes, and certain other underwriting expenses
offset by reinsurance commissions received on premiums
ceded to reinsurers.
</TABLE>

70
<PAGE>
<TABLE>
<S> <C>
Earned premium.................... The portion of net premiums that is recognized as income
during a given period. The amount of earned premium in a
given period is determined differently under SAP and
under GAAP.
Excess of loss reinsurance........ A form of non-proportional reinsurance which, subject to
a specified limit, indemnifies the ceding company
against loss in excess of a specified deductible with
respect to claims under a policy. This form of insurance
is also known as stop-loss insurance.
Expense ratio..................... On a SAP basis, the ratio of underwriting and operating
expenses divided by net premiums written. On a GAAP
basis, the ratio of underwriting and operating expenses
to net premium earned.
Facultative reinsurance........... Involves individual risks offered to the reinsurer which
the latter is under no obligation to accept.
Financial guaranty................ The promise to make payments to the holders of a debt,
loan or other similar financial instrument in the event
the borrower or underlying obligor fails to do so.
GAAP.............................. Generally accepted accounting principles as defined by
the American Institute of Certified Public Accountants,
the Financial Accounting Standards Board and other
recognized accounting literature.
GAAP expense ratio................ The quotient derived by dividing underwriting and
operating expenses by net premiums earned.
Gross insurance in force.......... The sum of all liabilities insured under insurance and
reinsurance policies in force. Gross insurance in force
in the case of a financial guaranty insurance policy is
the sum of all unpaid principal, interest and other
obligations, in respect of the obligations insured,
assuming payment at maturity in accordance with the
terms of such obligations, net of refunded bonds secured
by United States government securities held in escrow or
other qualified collateral and net of defeased policy
obligations and redemptions and repayments.
Gross par amount insured.......... The aggregate principal amount of obligations insured.
Gross par amount outstanding...... The outstanding principal amount of insured obligations,
net of refunded bonds secured by United States
government securities held in escrow or other qualified
collateral and net of defeased policy obligations.
Gross premiums written............ All premiums arising from policies issued directly by
the primary insurance company to its policyholders plus
assumed premiums.
Guarantor......................... The entity, such as an insurance company, that promises
to pay on an obligation in the event the obligor fails
to do so.
Incurred losses................... Losses which have already occurred and which have or
will result in a claim under the terms of an insurance
policy or a reinsurance agreement.
Insurance in force or exposure.... Principal outstanding and interest to be paid over the
remaining life of a given obligation in respect of
obligations insured and reinsured by the Company, net of
refunded debt obligations, retrocessions, redemptions
and repayments.
</TABLE>

71
<PAGE>
<TABLE>
<S> <C>
Issuer............................ A municipality or corporation or other entity that is
the obligor on a debt issuance to the capital markets.
Leverage ratio.................... The ratio of insurance in force to qualified statutory
capital.
Loss adjustment expenses or LAE... All of the costs associated with the settlement of
claims, except the claim payment itself.
Loss ratio........................ On a SAP basis, the ratio of losses and loss adjustment
expenses incurred (exclusive of additions to the general
loss reserve) to net premiums earned. On a GAAP basis,
the ratio of losses and loss adjustment expenses
incurred (inclusive of additions to the general loss
reserve) to net premiums earned.
Loss reserve...................... For an individual loss, an estimate of the amount the
insurer expects to pay for the reported claim. For total
losses, estimates of expected payments for reported and
unreported claims. May include amounts for loss
adjustment expenses. See "Incurred losses."
Monoline financial guaranty
insurer.......................... A property/casualty insurer which operates in areas of
bond insurance and closely related lines, and which has
no exposure resulting from other general
property/casualty lines of business. Monoline financial
guaranty insurer traditionally referred to a writer of
municipal bond insurance, but currently includes, as
well, insurers of asset-backed debt obligations.
Net insurance in force............ The gross insurance in force under outstanding insurance
and reinsurance policies issued by the insurer, net of
ceded reinsurance.
Net par amount outstanding........ Gross par amount outstanding, net of ceded reinsurance.
Net premiums earned............... Premiums earned, net of earned premiums ceded to
reinsurers.
Net premiums written.............. Gross premiums written, net of premiums ceded to
reinsurers.
Obligor........................... The entity required to make payments under a debt, loan
or other similar financial instrument.
Policyholders' surplus............ The amount remaining after all liabilities, including
loss and contingency reserves, are subtracted from all
assets, applying SAP.
Premiums earned................... The premiums written during a period plus the unearned
premiums at the beginning of the period less the
unearned premiums at the end of the period.
Proportional reinsurance.......... A generic term describing all forms of reinsurance in
which the reinsurer shares a proportional part of the
original losses and premiums of the reinsured.
Qualified statutory capital....... The aggregate of policyholders' surplus and contingency
reserves, calculated in accordance with SAP.
Quota share....................... A form of proportional reinsurance under which the
ceding insurer transfers to the reinsurer a specified
percentage of each risk within a defined category or
insurance business written by the insurer in return for
a similar percentage of the premium applicable thereto.
</TABLE>

72
<PAGE>
<TABLE>
<S> <C>
Reinsurance....................... The procedure whereby an insurer transfers ("cedes") to
another insurer a portion of the risk insured and a
portion of the related premiums. Reinsurance can be
effected by a "treaty," where reinsurance automatically
covers a portion of all risks of a defined category,
amount and type, or by "facultative" reinsurance, where
reinsurance is negotiated on a contract-by-contract
basis.
Residual value insurance.......... Insurance that guaranties a minimum value for an asset
or pool of assets at a particular point in time, such as
at the expiration date of a lease with respect to such
asset or assets.
SAP............................... Statutory Accounting Practices consisting of recording
transactions and preparing financial statements in
accordance with the rules and procedures prescribed or
permitted by state regulatory authorities.
Surety............................ A line of insurance in which the obligor promises to
perform the obligations of a third party under a
contractual agreement should the third party fail to do
so. A surety is similar in form to a financial guaranty,
the essential difference being that financial guaranties
apply to third-party obligations which are of a
financial nature.
Treaty reinsurance................ Reinsurance written on a treaty basis instead of
facultatively. A reinsurance treaty is a reinsurance
agreement between the ceding company and the reinsurer,
usually for one year or longer, which stipulates the
technical particulars applicable to the reinsurance of
some class or classes of business.
Underwriting...................... The insurer's or reinsurer's process of reviewing
submissions for insurance coverage, deciding whether to
accept all or part of the coverage requested and
determining the applicable premiums; also refers to the
acceptance of such coverage.
Unearned premiums................. The portion of premium attributable to the unexpired
period of policies that has been collected by an insurer
but has not yet been recognized as earned premiums and
accounted for as revenues.
</TABLE>

73
<PAGE>
NO DEALER, SALESPERSON OR ANY OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY FSA HOLDINGS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE FACTS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR
SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION.

------------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Available Information.......................... 2
Incorporation of Certain Documents by
Reference..................................... 3
Prospectus Summary............................. 4
Risk Factors................................... 9
Recent Developments............................ 11
Use of Proceeds................................ 14
Price Range of Common Stock and Dividends...... 15
Unaudited Pro Forma Consolidated Condensed
Financial Information......................... 16
Selected Consolidated Financial Information of
Financial Security Assurance Holdings Ltd..... 19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 21
Financial Guaranty Industry Overview........... 27
Business....................................... 30
Capital Guaranty Corporation................... 46
Selected Consolidated Financial Information of
Capital Guaranty Corporation.................. 50
Insurance Regulatory Matters................... 52
Accounting..................................... 54
Directors and Executive Officers............... 56
Security Ownership of Certain Beneficial Owners
and Management................................ 60
Certain Relationships and Related
Transactions.................................. 62
Plan of Distribution........................... 67
Experts........................................ 68
Legal Matters.................................. 69
Glossary of Insurance Terms.................... 70
</TABLE>

8,725,000 SHARES

FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.

COMMON STOCK
($.01 PAR VALUE)

[LOGO]

PROSPECTUS

DATED MAY 8, 1996
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
<PAGE>
[NATWEST PROSPECTUS]

SUBJECT TO COMPLETION
MAY 7, 1996
PROSPECTUS

[LOGO]

1,700,000 SHARES

FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.

COMMON STOCK
($.01 PAR VALUE)

This prospectus relates to the offer and resale of 1,700,000 shares of common
stock, par value $.01 per share (the "Common Stock"), of Financial Security
Assurance Holdings Ltd., a New York corporation ("FSA Holdings" and, together
with its consolidated subsidiaries, the "Company"). All of such 1,700,000 shares
of Common Stock are owned by National Westminster Bank Plc, together with its
subsidiaries or its designees (the "Selling Shareholder"). To the extent
required, the terms of the offering of such shares of Common Stock, the method
of distribution of such shares of Common Stock and any applicable discounts,
concessions or commissions will be set forth in a supplement to this Prospectus.
See "Plan of Distribution."

FSA Holdings will not receive any of the proceeds from the sale of such shares
of Common Stock by the Selling Shareholder.

The Registration Statement of which this Prospectus forms a part also includes a
Prospectus relating to the delivery by Salomon Inc ("Salomon") pursuant to the
% Exchangeable Notes due , 1999 (the "DECS") of Salomon of shares of
Common Stock which Salomon may receive from U S WEST, Inc. ("U S WEST") pursuant
to the terms of certain exchangeable notes of U S WEST and a Prospectus relating
to shares of Common Stock which may be offered and sold by Salomon Brothers Inc
in connection with market-making activities in the DECS.

The Common Stock is listed for trading on the New York Stock Exchange, Inc. (the
"NYSE") under the symbol "FSA". On May 3, 1996, the last reported sale price of
the Common Stock on the NYSE Composite Tape was $26 5/8 per share.

The date of this Prospectus is , 1996.
<PAGE>
[NATWEST PROSPECTUS]

AVAILABLE INFORMATION

2
<PAGE>
[NATWEST PROSPECTUS]

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following documents heretofore filed with the Commission (File No.
1-12644) are hereby incorporated by reference in this Prospectus:

1. FSA Holdings' Annual Report on Form 10-K for the year ended December 31,
1995;

2. FSA Holdings' Current Report on Form 8-K dated April 26, 1996;

4. Annual Report on Form 10-K for the year ended December 31, 1994 of
Capital Guaranty Corporation ("Capital Guaranty"), a wholly owned subsidiary of
FSA Holdings;

5. Capital Guaranty's Quarterly Report on Form 10-Q for the three months
ended March 31, 1995;

6. Capital Guaranty's Quarterly Report on Form 10-Q for the three months
ended June 30, 1995; and

7. Capital Guaranty's Quarterly Report on Form 10-Q for the three months
ended September 30, 1995.

------------------------

FSA Holdings' principal executive offices are located at 350 Park Avenue,
New York, New York 10022, telephone number (212) 826-0100.

"DECS" is a service mark of Salomon Brothers Inc.

3
<PAGE>
[NATWEST PROSPECTUS]

THE COMPANY

FSA Holdings, through its indirect wholly owned subsidary, Financial
Security Assurance Inc. ("FSA"), is primarily engaged in the business of
providing financial guaranty insurance on asset-backed securities and municipal
bonds.

RISK FACTORS

ADEQUACY OF LOSS RESERVES

CLAIMS-PAYING ABILITY RATINGS

MARKET AND OTHER FACTORS

The demand for financial guaranty insurance depends upon many factors, some
of which are beyond the control of FSA.

4
<PAGE>
[NATWEST PROSPECTUS]

The perceived financial strength of financial guaranty insurers also affects
demand for financial guaranty insurance. Should a major financial guaranty
insurer, or the industry generally, have its claims-paying ability rating
lowered, or suffer for some other reason a deterioration in investor confidence,
demand for financial guaranty insurance would be adversely affected.

COMPETITION AND INDUSTRY CONCENTRATION

FSA faces competition from both other providers of third party credit
enhancement and alternatives to third party credit enhancement. The majority of
asset-backed and municipal obligations are sold without third party credit
enhancement. Accordingly, each transaction proposed to be insured by FSA must
generally compete against an alternative execution which does not employ third
party credit enhancement. FSA also faces competition from other monoline primary
financial guaranty insurers, primarily AMBAC Indemnity Corporation, Capital
Markets Assurance Corporation, Connie Lee Insurance Company, Financial Guaranty
Insurance Company and MBIA Insurance Corp. Traditional credit enhancers such as
bank letter of credit providers and mortgage pool insurers also provide
significant competition to FSA as providers of credit enhancement for
asset-backed obligations. While actions by securities rating agencies in recent
years have significantly reduced the number of triple-A rated banks that can
offer a product directly competitive with FSA's triple-A guaranty, and recently
implemented risk-based capital guidelines applicable to banks have generally
increased costs associated with letters of credit that compete directly with
financial guaranty insurance, bank letter of credit providers and other credit
enhancement, such as cash collateral accounts, provided by banks, continue to
provide significant competition to FSA.

SUBSTANTIAL VOTING CONTROL

At March 1, 1996, voting control of FSA Holdings was held 41.9% by U S WEST
Capital Corporation ("USWCC"), 19.1% by Fund American Enterprises Holdings, Inc.
("Fund American") and 5.8% by the Tokio Marine and Fire Insurance Company, Ltd.
("Tokio Marine") (together, the "Substantial Shareholders"). Each of the
Substantial Shareholders has the ability to exercise significant influence over
the policies and corporate actions of FSA Holdings. Consummation of the
transactions described under "Recent Developments" will significantly reduce the
number of shares of Common Stock owned by USWCC and will increase the number of
shares owned by Fund American. See "Recent Developments." Shareholders of FSA
Holdings do not have cumulative voting rights with respect to the election of
directors and, accordingly, any shareholder or group of shareholders holding
shares representing in excess of 50% of the voting shares outstanding of FSA
Holdings would by itself have the power to elect the entire board of directors
of FSA Holdings.

HOLDING COMPANY STRUCTURE

SHARES ELIGIBLE FOR FUTURE SALE

5
<PAGE>
[NATWEST PROSPECTUS]

to cover over-allotments) to Salomon pursuant to the terms of the U S WEST DECS.
All of the shares of Common Stock owned by USWCC, Fund American and Tokio Marine
will continue to be tradeable in the open market subject to the volume
limitations, manner of sale and notice requirements of Rule 144 under the
Securities Act or, without such requirements or limitations through the exercise
of registration rights available under agreements with FSA Holdings.
Consummation of the transactions described under "Recent Developments" will
significantly reduce the number of shares of Common Stock owned by USWCC and
will increase the number of shares owned by Fund American. See "Recent
Developments."

Sales of substantial amounts of Common Stock in the public or private
market, or the perception that such sales could occur, could adversely affect
prevailing market prices of the Common Stock.

IMPACT OF THE DECS ON THE MARKET FOR THE COMMON STOCK

RECENT DEVELOPMENTS

On April 29, 1996, USWCC and FSA Holdings announced plans to enter into a
series of transactions (the "Sale Transactions") pursuant to which USWCC will
sell up to 3,700,000 shares of the Common Stock it currently owns. Pursuant to
the Sale Transactions, (i) FSA Holdings will repurchase 1,000,000 shares of
Common Stock from USWCC at a price of $26.50 per share, (ii) Fund American will
purchase 1,000,000 shares of Common Stock from USWCC at a price of $26.50 per
share and (iii) the Selling Shareholder will purchase between 1,000,000 and
1,700,000 shares of Common Stock from USWCC (the "NatWest Shares") at a price of
$26.50 per share and will concurrently enter into a five-year forward agreement
(the "Forward Agreement") with FSA Holdings with respect to such shares pursuant
to which FSA Holdings will have an option to purchase such shares from the
Selling Shareholder at a price of $26.50 per share plus carrying costs as
described below.

Pursuant to the Forward Agreement, FSA Holdings will have the option either
(i) to purchase the NatWest Shares from the Selling Shareholder for a price of
$26.50 per share plus Carrying Costs (as defined below) or (ii) to direct the
Selling Shareholder to sell the NatWest Shares. If FSA Holdings directs the
Selling Shareholder to sell the NatWest Shares, if the market value of the
NatWest Shares exceeds the sum of $26.50 per share plus Carrying Costs, FSA
Holdings will receive such excess and if the market value of the NatWest Shares
is less than the sum of $26.50 per share plus Carrying Costs, FSA Holdings will
be required to pay such shortfall to the Selling Shareholder in cash or shares
of Common Stock. "Carrying Costs" will equal a specified margin over LIBOR (plus
any LIBOR breakage fees) less any dividends paid by FSA Holdings on the NatWest
Shares (and interest thereon). Under the Forward Agreement, the obligation of
FSA Holdings with respect to 1,000,000 of the NatWest Shares will be for the
account of FSA Holdings and the obligation of FSA Holdings with respect to the
balance of the NatWest Shares will be for the account of FSA Holdings'
management.

Consummation of the Sale Transactions is expected by the end of May 1996,
subject to the satisfaction of customary closing conditions.

6
<PAGE>
[NATWEST PROSPECTUS]

UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL INFORMATION

STATEMENT OF OPERATIONS

In December 1995, FSA Holdings acquired Capital Guaranty in a merger
transaction in which Capital Guaranty became a direct wholly owned subsidiary of
FSA Holdings (the "Merger"). The following pro forma consolidated condensed
statement of operations reflects the Merger of Capital Guaranty with a
subsidiary of FSA Holdings. The pro forma consolidated condensed statement of
operations is unaudited and combines the operations of FSA Holdings and Capital
Guaranty for the year ended December 31, 1995. The pro forma consolidated
condensed statements of operations assume the Merger occurred at January 1,
1995.

7
<PAGE>
[NATWEST PROSPECTUS]

PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE DATA)

8
<PAGE>
[NATWEST PROSPECTUS]

NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS

The following describes the pro forma adjustments reflected in the
accompanying pro forma consolidated condensed statement of operations:

(a) To reflect the reduction of investment income due to the payment of
$51.3 million to shareholders of Capital Guaranty and transaction costs of
the Merger.

(c) To record the increase to FSA's general loss reserve for new
business underwritten by Capital Guaranty Insurance Company consistent with
FSA's general reserve methodology.

(d) To adjust amortization policy acquisition costs for the reduction in
expenses.

(e) To reduce expenses due to elimination of duplicative facilities,
personnel and functions net of the effect of costs deferred or amortized.

(f) To record accrued taxes on all adjustments.

9
<PAGE>
[NATWEST PROSPECTUS]

SELLING SHAREHOLDER

The Selling Shareholder is engaged in a wide range of banking, financial and
related activities in the United Kingdom and throughout the world. This
Prospectus relates to the offer and resale by the Selling Shareholder of the
NatWest Shares. Upon consummation of the Sale Transactions, the Selling
Shareholder will own the NatWest Shares and will not own any other shares of
Common Stock. Upon consummation of this offering, the Selling Shareholder will
not own any shares of Common Stock, assuming all of the NatWest Shares are sold
by the Selling Shareholder. The Selling Shareholder does not hold, and during
the past three years has not held, any position or office with FSA Holdings or
any of its predecessors or affiliates and the Selling Shareholder does not have,
and during the past three years has not had, any material relationship with FSA
Holdings or any of its predecessors or affiliates.

PLAN OF DISTRIBUTION

As contemplated by the Forward Agreement, shares of Common Stock may be
offered and sold from time to time in brokerage transactions on the NYSE at
market prices prevailing at the time of sale, or by such other means as may be
agreed by FSA Holdings. The supplement to this Prospectus (each such supplement,
a "Prospectus Supplement") with respect to the shares of Common Stock offered
thereby describes, if and to the extent required, the terms of the offering of
such shares of Common Stock and the method of distribution of the shares of
Common Stock offered thereby and identifies any firms acting as underwriters,
dealers or agents in connection therewith.

In connection with the sale of shares of Common Stock, underwriters,
dealers, brokers or agents may be deemed to have received compensation from the
Selling Shareholder in the form of underwriting discounts, concessions or
commissions and may also receive commissions from purchasers of shares of Common
Stock for whom they may act as agent. Underwriters may sell shares of Common
Stock to or through dealers, and such dealers may receive compensation in the
form of discounts, concessions or commissions from the underwriters or
commissions from the purchasers for whom they may act as agent. Certain of the
underwriters, dealers or agents who participate in the distribution of shares of
Common Stock may engage in other transactions with, and perform other services
for, the Selling Shareholder or FSA Holdings in the ordinary course of business.

Any underwriting compensation paid by the Selling Shareholder to
underwriters or agents in connection with the offering of shares of Common
Stock, and any discounts, concessions or commissions allowed by underwriters to
dealers, are set forth in the Prospectus Supplement. Underwriters, dealers,
brokers and agents participating in the offer and sale of shares of Common Stock
may be deemed to be underwriters under the Securities Act, and any discounts and
commissions received by them and any profit realized by them on the resale of
shares of Common Stock may be deemed to be underwriting compensation under the
Securities Act. To the extent the Selling Shareholder may be deemed an
underwriter under the Securities Act, it may be subject to certain statutory
liabilities under the Securities Act, including without limitation Sections 11
and 12 of the Securities Act. The Selling Shareholder may be entitled under
agreements with FSA Holdings to indemnification against and contributions toward
certain liabilities, including liabilities under the Securities Act.

10
<PAGE>
[NATWEST PROSPECTUS]

EXPERTS

The consolidated financial statements of Capital Guaranty and its
subsidiaries as of December 31, 1994 and 1993, and for each of the three years
in the period ended December 31, 1994, incorporated by reference in Capital
Guaranty's Annual Report (Form 10-K), have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon included therein and
incorporated herein by reference. Such consolidated financial statements are
incorporated herein by reference in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.

LEGAL MATTERS

The validity of the Common Stock being offered hereby will be passed upon
for FSA Holdings by Bruce E. Stern, Esq., General Counsel of FSA Holdings.

11
<PAGE>
[NATWEST PROSPECTUS]
NO DEALER, SALESPERSON OR ANY OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY FSA HOLDINGS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE FACTS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR
SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION.

------------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
---------

<S> <C>
Available Information.......................... 2

Incorporation of Certain Documents by
Reference..................................... 3

The Company.................................... 4

Risk Factors................................... 4

Recent Developments............................ 6

Unaudited Pro Forma Consolidated Condensed
Financial Information......................... 7

Selling Shareholder............................ 10

Plan of Distribution........................... 10

Experts........................................ 11

Legal Matters.................................. 11
</TABLE>

1,700,000 SHARES

FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.

COMMON STOCK
($.01 PAR VALUE)

[LOGO]
PROSPECTUS
DATED , 1996