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

FORM 10-K

Commission File Number 1-12644

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

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

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

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

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

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

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

Documents Incorporated By Reference
None

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TABLE OF CONTENTS

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PART I

Item 1.    Business.

General

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

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

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

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

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

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

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

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

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

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

        In 1994, the Company completed an initial public offering of common shares, at which time White Mountains Insurance Group, Ltd. ("White Mountains") (formerly known as Fund American Enterprises Holdings, Inc.) made an investment in the Company, and the chairman of White Mountains became non-executive chairman of the Company.    White Mountains is an insurance holding company.

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

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

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

Industry Overview

        Financial guaranty insurance written by FSA typically guarantees scheduled payments on an issuer's obligations. Upon a payment default on an insured obligation, FSA is generally required to pay the principal, interest or other amounts due in accordance with the obligation's original payment schedule or, at its option, to pay such amounts on an accelerated basis. FSA's underwriting policy is to insure obligations that would otherwise be investment grade without the benefit of FSA's insurance. Asset-backed obligations insured by FSA are generally issued in structured transactions backed by pools of assets such as residential mortgage loans, consumer or trade receivables, securities or other assets having an ascertainable cash flow or market value. Asset-backed obligations insured by FSA also include payment obligations of counterparties and issuers under synthetic obligations such as credit default swaps and credit-linked notes. Municipal obligations insured by FSA consist primarily of general obligation bonds supported by the issuers' taxing power and special revenue bonds and other special obligations of state and local governments supported by the issuers' ability to impose and collect fees and charges for public services or specific projects. Municipal obligations insured by FSA include project finance obligations, consisting primarily of obligations of special purpose issuers backed by the cash flow from lease or other revenues from projects serving a substantial public purpose, including government office buildings, toll roads, healthcare facilities and utilities.

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

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

Business of FSA

General

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

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

Asset-Backed Obligations

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

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

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

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

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

(1)

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

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

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

(1)

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

(2)

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

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

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

(1)

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

(2)

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

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

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

Municipal Obligations

        Municipal obligations include bonds, notes and other evidences of indebtedness issued by states and their political subdivisions (such as counties, cities or towns), utility districts, public universities and hospitals, public-housing and transportation authorities and other public and quasi-public entities. Municipal obligations are supported by the issuer's taxing power in the case of general obligation bonds, or by the issuer's ability to impose and collect fees and charges for public services or specific projects in the case of most special revenue bonds and public private infrastructure financings. Municipal obligations include project finance obligations, consisting of obligations backed by the cash flow from leases or other revenues from projects serving a substantial public purpose, including government office buildings, toll roads, healthcare facilities and utilities.

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

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

Insured U.S. Municipal Obligations(1)

(1)

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

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

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

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

(1)

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

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(2)

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

GICs/Variable Interest Entity (VIE) Debt

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

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

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

Types of Products

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

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

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

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

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

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

Net Par Amount and Percentage Outstanding by Program Type

(1)

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

(2)

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

(3)

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

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Insurance in Force

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

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

(1)

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

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

Asset-Backed and Other Non-Municipal Obligations

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

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

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

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

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

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

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Municipal Obligations

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

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

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

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

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

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

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

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

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

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

        A summary of FSA's insured portfolio at December 31, 2003 is shown below. Please note that exposure amounts are expressed net of reinsurance but do not distinguish between quota share reinsurance and first loss reinsurance.

Insured Portfolio

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

(1)

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

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Obligation Type

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

Annual New Business Insured by Obligation Type