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

FORM 10-K

Commission File Number 1-12644

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

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

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

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

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

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12-b2 of the Act). Yes o No ý

        The aggregate market value of common equity, excluding treasury shares, held by non-affiliates of the registrant at June 28, 2002 was $34,627,795. For purposes of the foregoing, directors are deemed to be affiliates of the registrant and the dollar amount shown is based on the price at which shares of the Company's common stock were valued under the Company's director share purchase program on June 30, 2002.

        At March 14, 2003, there were outstanding 33,220,337 shares of Common Stock, par value $0.01 per share, of the registrant (excludes 297,658 shares of treasury stock).

Documents Incorporated By Reference

        None

TABLE OF CONTENTS

PART I

Item 1. Business.

General

        Financial Security Assurance Holdings Ltd. (the "Company"), through its wholly owned subsidiary, Financial Security Assurance Inc. ("FSA"), is primarily engaged in the business of providing financial guaranty insurance on asset-backed and municipal obligations. The claims-paying ability of FSA is rated "Triple-A" by the major securities rating agencies and obligations insured by FSA are generally awarded "Triple-A" ratings by reason of such insurance. FSA was the first insurance company organized to insure 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, 2002, the Company had gross premiums written of $803.7 million, of which 37% related to insurance of asset-backed obligations and 63% related to insurance of municipal obligations. At December 31, 2002, the Company had net par outstanding of $263.3 billion, of which 48% represented insurance of asset-backed obligations and 52% represented insurance of municipal obligations. FSA is licensed to engage in the financial guaranty insurance business in all 50 states, the District of Columbia, Guam, Puerto Rico and the U.S. Virgin Islands. In addition, the Company offers FSA-insured guaranteed investment contracts and other investment agreements ("GICs") through its subsidiaries, FSA Capital Markets Services LLC and FSA Capital Management Services LLC (collectively, "CMS"). The amounts stated above exclude the inter-company insurance on GICs.

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

        FSA Global Funding Limited ("FSA Global"), in which the Company owns a 29% equity interest, is a special purpose funding vehicle engaged in the issuance of FSA-insured medium term notes. FSA Global is not consolidated with the Company for financial accounting purposes. FSA Global invests the proceeds from the sale of its notes in FSA-insured obligations with a view towards realizing the yield difference between the notes issued and the obligations purchased with the note proceeds. At December 31, 2002, FSA Global had $8.9 billion principal amount of outstanding notes.

        CMS, wholly owned subsidiaries of the Company, are engaged in issuing FSA-insured GICs. Proceeds from the sale of GICs are lent to FSA Asset Management LLC ("FSAM"). FSAM generally invests in obligations that would qualify for FSA insurance with a view towards realizing a yield difference between its investments and its obligations. At December 31, 2002, CMS had $2.4 billion principal of outstanding GICs.

        FSA Portfolio Management Inc. ("FSA Portfolio Management"), a wholly owned subsidiary of the Company, is engaged in the business of managing the investment portfolios of the Company and its affiliates. FSA Portfolio Management also owns various strategic and other investments originated from time to time by other members of the FSA group of companies.

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

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

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

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

        In 1994, the Company completed an initial public offering of common shares, at which time White Mountains Insurance Group, Ltd. ("White Mountains") (formerly known as Fund American Enterprises Holdings, Inc.) made an investment in the Company and entered into certain agreements providing, among other things, White Mountains options to acquire additional shares of the Company from MediaOne. In 1994, pursuant to these agreements, the Company issued to White Mountains shares of Series A non-dividend paying voting convertible redeemable preferred stock. In 1999, White Mountains exercised its stock options and acquired additional shares of common stock from MediaOne. White Mountains is an insurance holding company.

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

        On July 5, 2000, the Company completed a merger in which the Company became a direct subsidiary of Dexia Holdings, Inc., which is an indirect, wholly owned subsidiary of Dexia. At the merger date, each outstanding share of the Company's common stock was converted into the right to receive $76.00 in cash. Dexia also indirectly acquired the Company's redeemable preferred stock, which was then contributed to the Company's capital. At December 31, 2002, the only holders of the Company's common stock were Dexia Holdings, Inc., White Mountains and certain current and former directors of the Company who own shares of the Company's common stock or economic interests therein as described under the caption "Director Share Purchase Program" in Item 11. Although the Company's common stock is no longer listed on the New York Stock Exchange ("NYSE") as a consequence of the merger, the Company continues to file periodic reports under the Securities Exchange Act of 1934 because certain of its debt securities were sold through public offerings and are listed on the NYSE.

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

Industry Overview

        Financial guaranty insurance written by FSA typically guarantees scheduled payments on an issuer's obligations. Upon a payment default on an insured obligation, FSA is generally required to pay the principal, interest or other amounts due in accordance with the obligation's original payment schedule or, at its option, to pay such amounts on an accelerated basis. FSA's underwriting policy is to insure asset-backed and municipal obligations that would otherwise be investment grade without the benefit of FSA's insurance. Asset-backed obligations insured by FSA are generally issued in structured transactions backed by pools of assets such as residential mortgage loans, consumer or trade receivables, securities or other assets having an ascertainable cash flow or market value. Asset-backed obligations insured by FSA also include payment obligations of counterparties and issuers under synthetic

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obligations such as credit default swaps and credit-linked notes. Municipal obligations insured by FSA consist primarily of general obligation bonds supported by the issuers' taxing power and special revenue bonds and other special obligations of state and local governments supported by the issuers' ability to impose and collect fees and charges for public services or specific projects.

        The Company's business objective is to remain a leading insurer of asset-backed and municipal obligations employing transactional and financial skills to generate increased premium volume at attractive returns while minimizing the occurrence and severity of credit losses in its insured portfolio. The Company believes that the demand for financial guaranty insurance will remain strong over the long term as a result of the anticipated continuation of three trends: (i) expansion of asset securitization outside the residential mortgage sector; (ii) substantial volume of new domestic municipal bonds that are insured, due, in part, to the continued use of municipal bonds to finance repairs and improvements to the nation's infrastructure and municipal bond purchases by individuals who generally purchase insured obligations; and (iii) growing use of asset securitization and financial guaranty insurance in non-U.S. markets, due, in part, to a trend towards private financing initiatives for projects that have essential public purposes and regulatory changes encouraging or facilitating credit-enhanced transactions. The Company also anticipates continued demand over the long term for its GIC business and other asset management programs that employ financial guaranty insurance provided by FSA.

        The Company expects to continue to emphasize a diversified insured portfolio characterized by insurance of both asset-backed and municipal obligations, with a broad geographic distribution and a variety of revenue sources and transaction structures. In addition to its domestic business, the Company selectively pursues international opportunities primarily in Western European and Asia Pacific markets.

Business of FSA

General

        The business of FSA is managed by the Company's Management Committee, comprised of FSA's Chief Executive Officer, President, General Counsel, Chief Underwriting Officer, Chief Financial Officer and Managing Director in charge of its Asset Finance Group. FSA is primarily engaged in the business of writing financial guaranty insurance on asset-backed and municipal obligations. In 1998, FSA commenced insuring medium term notes issued by FSA Global. In 2001, FSA commenced insuring GICs issued by CMS.

Asset-Backed Obligations

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

        Asset-backed obligations include funded and synthetic transactions. Funded asset-backed obligations are typically payable from cash flow generated by a pool of assets and take the form of either "pass-through" obligations, which represent interests in the related assets, or "pay-through" obligations, which generally are debt obligations collateralized by the related assets. Both types of funded asset-backed obligations generally have the benefit of one or more forms of credit enhancement, such as overcollateralization and excess cash flow, to cover credit risks associated with the related assets. Synthetic asset-backed obligations generally take the form of credit default swap obligations or credit-linked notes that reference a pool of securities or loans, with a defined deductible to cover credit risks associated with the referenced securities or loans.

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        According to industry sources, the par volume of funded U.S. public asset-backed securities, including securities distributed under Rule 144A, since 1997, were as follows:

(1)

Information is from Asset-Backed Alert, January 11, 2002 and January 10, 2003, and includes corporate and consumer receivable-backed issues (including home equity loan issues) but excludes private-label mortgage-backed securities, collateralized debt obligations, commercial paper, synthetic transactions and non-Rule 144A private placements. Data is subject to revision as additional information becomes available.

        According to industry sources, par volumes in certain other asset-backed markets from 2000 through 2002 were as follows:

(1)

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

        According to industry sources, the annual total of asset-backed par insured of financial guaranty insurance originated by monoline guarantors since 1997 were as follows:

(1)

Information is from a news release distributed by the Association of Financial Guaranty Insurors, April 17, 2002, and includes all funded and synthetic primary-market and secondary-market U.S. insured transactions, except municipal obligations. Data is subject to revision as additional information becomes available.

(2)

Not available.

        Asset securitization often represents an efficient way for commercial banks to comply with capital requirements and for corporations to access the capital markets at more attractive rates and, frequently, with different accounting treatment. Banks have responded to increased capital requirements by selling certain of their assets, such as credit card receivables and automobile loans, in securitized structures to the financial markets. In addition, many corporations have found securitization of their assets to be a less costly funding alternative to traditional forms of borrowing or otherwise important in diversifying funding sources. Also, some finance companies fund consumer finance and home equity lending through securitization. In recent years, there has been substantial consolidation and contraction among finance companies, particularly in the subprime mortgage and auto loan finance sectors in which FSA operates.

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        Since the late 1990s, there has been significant growth in the market for funded and synthetic collateralized debt obligations ("CDOs"), which are securitizations of bonds, loans or other securities. CDOs are used by financial institutions to manage their risk profiles, optimize capital utilization and improve returns on equity. CDOs are also used by dealers or portfolio managers to provide leveraged investments in bond and loan portfolios tailored to conform to differing risk appetites of investors. The data with respect to funded CDOs in the table above excludes synthetic transactions and therefore fails to reflect the substantial growth in this sector. According to survey data published on the website of the International Swaps and Derivatives Association, Inc., www.isda.org, $1.6 trillion in notional principal amount of credit default swaps were outstanding in world markets at June 30, 2002, compared with $631.5 billion at June 30, 2001.

        Worldwide, the volume of asset-backed obligations insured by monoline guarantors exceeded the volume of municipal obligations insured by monoline guarantors for the first time in 1999 and again in 2000 and 2001, according to the Association of Financial Guaranty Insurors. Similarly, according to the December 31, 2002 statistical operating supplements published by the four largest monoline guarantors, those four companies insured, in the aggregate, asset-backed par volume of $216.1 billion, or 52% of the $413.8 billion total insured during 2002 by the four companies, despite a large increase in issuance of municipal bonds. The asset-backed financial guaranty business has grown because of expansion of U.S. and international asset-backed markets, the related opportunities for guarantors to improve the credit quality and diversification of their insured portfolios, high demand for credit enhancement on complex asset-backed issues, and the attraction of higher returns available in the asset-backed market.

Municipal Obligations

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

        Until 1999, insurance of municipal obligations represented the largest portion of the financial guaranty insurance business. Both total issuance and refundings of U.S. municipal obligations increased in 1996, 1997 and 1998, primarily because of lower interest rates. In 1999, rising interest rates caused a steep decline in refundings, which was responsible for much of the decline in total issuance that year. The year 2000 saw a further decline in both total municipal issuance and percentage of municipal par insured benefiting from bond insurance, attributable in part to budget surpluses reducing borrowing needs, with strengthened municipal issuers having less need to employ bond insurance. In 2001, new issue volume grew substantially due, in part, to a declining interest rate environment, and insurance penetration returned to approximately the same level as in 1999. Volume increased dramatically in 2002 as low interest rates, diminished tax revenues and continuing needs for infrastructure investment drove municipalities to borrow on an unprecedented scale.

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

Insured Municipal Obligations(1)

(1)

Information is based on data provided in The Bond Buyer, January 7, 2003. Volume is expressed in terms of principal insured. Data is subject to revision as additional information becomes available.

GICs/Medium Term Notes

        The Company's GIC business, conducted through CMS, provides GICs to municipalities and other market participants. GICs written by CMS are insured by FSA. Municipal GICs are primarily used by holders to invest bond proceeds required to be maintained in a debt service reserve fund or construction fund for a bond issue. GICs provide for the return of principal and the payment of interest at a guaranteed rate. Amounts raised through the issuance of GICs are generally raised at or converted into LIBOR-based floating rate obligations, with proceeds invested in or converted into LIBOR-based floating rate investments intended to result in profits from the positive difference between the borrowing rate (the floating rate on the GICs) and the floating rate interest on the investments. These investments are owned, and the related risk management function is performed, by FSAM.

        FSA-insured GICs subject the Company to risk associated with early withdrawal of principal allowed by the terms of the GICs. The majority of municipal GICs insured by FSA relate to debt service reserve funds and construction funds in support of municipal bond transactions. Debt service reserve fund GICs may be drawn unexpectedly upon a payment default by the municipal issuer. Construction fund GICs may be drawn unexpectedly when construction of the underlying municipal project does not proceed as expected. In addition, most FSA-insured GICs allow for withdrawal of GIC funds in the event of a downgrade of FSA, typically below AA- by S&P or Aa3 by Moody's, unless the GIC provider posts collateral or otherwise enhances its credit. The Company manages this risk through the maintenance of liquid collateral and liquidity agreements. At December 31, 2002, CMS had approximately $2.4 billion principal of GICs outstanding.

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        The Company owns 29% of the equity of FSA Global, a Cayman Islands domiciled issuer of FSA-insured notes and other obligations sold in international markets (generally referred to as medium term notes or "MTNs"). FSA Global issues securities at the request of interested purchasers in a process known as "reverse inquiry," which generally results in lower interest rates and borrowing costs than would apply to direct borrowings. FSA Global also issues securities in traditional private placements to institutional investors and to participants in lease financings in which Company affiliates may play a number of financing roles. FSA Global is managed as a "matched funding vehicle," in which the proceeds from the sale of FSA Global notes are invested in obligations chosen to provide cash flows substantially matched to those of the FSA Global notes (taking into account, in some cases, dedicated third party liquidity). The matched funding structure minimizes the market risks borne by FSA Global and FSA. FSA Global raises funds in U.S. dollars at LIBOR-based floating borrowing rates and invests its funds in obligations insured by FSA, maturing prior to the maturity of the related FSA Global notes and paying a higher interest rate than the interest rate on the related FSA Global notes. At December 31, 2002, FSA Global had total assets and total liabilities of $9.2 billion and $9.2 billion, respectively. The foregoing assets and liabilities include assets and matched liabilities that are "economically defeased" in lease financings in which Company affiliates may play a number of financing roles. These "economically defeased" liabilities, and associated assets, are held in separate special purpose entities, FSA Global and Premier International Funding Co. At December 31, 2002 and 2001, FSA Global's "economically defeased" obligations were $6.7 billion and $2.0 billion, respectively. FSA Global's net income for the year ended December 31, 2002 and 2001 was $1.0 million and $0.6 million, respectively. FSA Global's net income is determined net of premiums paid by FSA Global to FSA. For the years ended December 31, 2002 and 2001, FSA Global paid premiums to FSA and another insurer of $7.7 million and $7.5 million, respectively. All amounts insured by FSA relating to FSA Global are included in the Company's outstanding exposure, included in the Notes to the Consolidated Financial Statements for December 31, 2002. As of December 31, 2002, there were no case basis reserves required for any transactions related to FSA Global.

Types of Products

        FSA's insurance is employed in both the new issue and secondary markets. Insurance premium rates take into account the projected return to and risk assumed by FSA. Critical factors in assessing risk include the credit quality of the issuer, type of issue, sources of repayment, transaction structure and term to maturity. Each obligation is evaluated on the basis of such factors and subject to FSA's underwriting guidelines. The final premium rate is generally a function of market factors, including, in the case of funded transactions, the interest rate savings to the issuer from the use of insurance. In transactions under the Company's GIC and MTN programs, transactions involving "repackaging" of outstanding securities and other cases, FSA's premium may be arbitrage-based, equaling the difference between the effective borrowing cost at a Triple-A rate and the interest rate on the underlying securities.

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

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

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

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        The following table indicates the Company's percentages of par amount (net of reinsurance) outstanding at December 31, 2002 and 2001 with respect to each type of asset-backed and municipal program:

Net Par Amount and Percentage Outstanding by Program Type

(1)

Excludes $2,430 million and $479 million, in 2002 and 2001, respectively, relating to FSA-insured GICs issued by CMS that are included in FSA's exposures. The consolidated financial statements of the Company reflect the FSA-insured GICs as GIC liabilities instead of as insurance exposure because CMS is consolidated with the Company.

(2)

Excludes $1,171 million and $1,253 million net par amount outstanding assumed by FSA under reinsurance agreements at December 31, 2002 and 2001, respectively.

(3)

Excludes $766 million and $803 million net par amount outstanding assumed by FSA under reinsurance agreements at December 31, 2002 and 2001, respectively.

Insurance in Force

        FSA insures a variety of asset-backed obligations, including obligations backed by residential mortgage loans, consumer or trade receivables, corporate loans and bonds, government debt and multifamily mortgage loans. Asset-backed obligations insured by FSA include payment obligations of counterparties and issuers under synthetic obligations such as credit default swaps and credit-linked notes structured to have risks similar to more traditional forms of asset-backed structures. FSA has insured a broad array of municipal obligations. FSA has also insured investor-owned utility first mortgage bonds and sale/leaseback obligation bonds. In 1990, FSA ceased writing insurance backed by commercial mortgage loans, and today retains only minor net insurance in force in that sector. FSA has also insured obligations of financial institutions and, on a short-term basis, obligations of highly rated corporate obligors. In recent years, FSA has insured obligations in connection with various cross-border and municipal leases. In some cases, FSA has insured obligations already carrying insurance from other monoline guarantors, with FSA generally obligated to pay claims on a "second-to-pay" basis, following a default by both the underlying obligor and the first-to-pay financial guarantor.

        FSA has selectively expanded its insured portfolio in a manner intended to achieve diversification. At December 31, 2002, excluding $2.4 billion of net par outstanding of FSA-insured GICs, FSA and its subsidiaries had in force policies relating to 837 issues insuring approximately $152.9 billion in gross direct par amount outstanding of asset-backed obligations and 7,491 issues insuring approximately $200.5 billion in gross direct par amount outstanding of municipal obligations. In addition, at December 31, 2002, FSA had assumed pursuant to certain reinsurance contracts approximately $1.2 billion and $0.8 billion in par amount outstanding on asset-backed and municipal obligations, respectively, resulting in a total gross par amount outstanding of approximately $355.4

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billion. At such date, the total net par amount outstanding, determined by reducing the gross par amount outstanding to reflect reinsurance ceded of approximately $92.1 billion, was approximately $263.3 billion. Net par data does not distinguish between quota share and first loss reinsurance. In light of FSA's substantial use of first loss reinsurance in the asset-backed sector, net par data tends to overstate FSA's net risk exposure. At December 31, 2002, the weighted average life of the direct principal insured on these policies was approximately 3 and 13 years, respectively, for asset-backed and municipal obligations.

Asset-Backed and Other Non-Municipal Obligations

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

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

        Domestic Consumer Receivables.    Obligations primarily backed by consumer receivables include conventional pass-through and pay-through securities as well as more highly structured transactions. Consumer receivables backing these insured obligations include automobile loans and leases, manufactured housing loans and credit card receivables. Consumer receivable transactions insured by FSA have tended to be concentrated in the sub-prime auto loan and credit card receivable sectors.

        Domestic Pooled Corporate Obligations.    Obligations primarily backed by pooled corporate obligations include funded and synthetic obligations collateralized by corporate debt securities or corporate loans and obligations backed by cash flow or market value of non-consumer indebtedness, and include "collateralized bond obligations", "collateralized loan obligations" (collectively, "collateralized debt obligations" or "CDOs") and comparable risks under credit default swap obligations. Corporate obligations include corporate bonds, bank loan participations, trade receivables, franchise loans and equity securities. Obligations under credit default swaps ("CDS") represent a growing percentage of this sector, comprising approximately 67% at December 31, 2002 on the basis of net par outstanding. CDS obligations expose FSA to elements of market value risk arising from obligations to pay the difference between par and market value upon the occurrence of a payment default or other defined "credit events" specified in the credit default swap. FSA generally addresses these risks by requiring large "deductibles" as a condition to payment under CDS insured by FSA.

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

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

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Municipal Obligations

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

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

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

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

        Domestic Health Care Revenue Bonds.    Health care revenue bonds include both long-term maturities for capital construction or improvements of health care facilities and medium-term maturities for equipment purchase, typically secured by an underlying note of the not-for-profit corporation owning and operating the individual hospital or health care system.

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

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

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

        International Municipal Obligations.    International municipal obligations include obligations of sovereign and sub-sovereign non-domestic municipal issuers, project finance transactions involving projects leased to or supported by payments from non-domestic governmental or quasi-governmental entities, toll road transactions supported by toll revenues, obligations arising under leases of equipment or facilities by non-domestic municipal obligors, non-domestic municipal utility revenue bonds and other obligations having international aspects but otherwise within the municipal categories described above.

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        A summary of FSA's insured portfolio at December 31, 2002 is shown below. Please note that exposure amounts are expressed net of reinsurance but do not distinguish between quota share reinsurance and first loss reinsurance.

Summary of Insured Portfolio at December 31, 2002(1)(2)

(1)

Excludes $2,430 million and $3,199 million in net par amount outstanding and net par and interest, respectively, relating to FSA-insured GICs issued by CMS that are included in FSA's exposures. The consolidated financial statements of the Company reflect the FSA-insured GICs as GIC liabilities instead of as insurance exposure because CMS is consolidated with the Company.

(2)

Includes 837 asset-backed issues and 7,491 municipal issues directly insured by FSA with the balance having been assumed by FSA under reinsurance contracts.

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Obligation Type

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

Annual New Business Insured by Obligation Type

(1)

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

(2)

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

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Terms to Maturity

        The table below sets forth the estimated terms to maturity of FSA's policies at December 31, 2002 and 2001:

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