EXHIBIT 99.2


XL FINANCIAL ASSURANCE LTD
(Incorporated in Bermuda)

INTERIM FINANCIAL STATEMENTS
AS OF MARCH 31, 2007 AND FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2007 AND
2006
Unaudited
(expressed in U.S. dollars)












<PAGE>


XL FINANCIAL ASSURANCE LTD.
INTERIM BALANCE SHEETS
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                               (UNAUDITED)
                                                                                  AS OF                  AS OF
                                                                                MARCH 31,             DECEMBER 31,
                                                                                   2007                  2006
                                                                            -------------------   --------------------
<S>                                                                          <C>                    <C>
ASSETS:
Investments:
Debt securities, at fair value
(amortized cost: 2007 - $1,375,541; 2006 - $1,420,391) ....................     $ 1,364,110          $ 1,404,197
Short-term investments, at fair value
(amortized cost: 2007 - $183,540; 2006 - $207,951) ........................         182,889              206,923
                                                                                -----------          -----------
   Total investments available for sale ...................................       1,546,999            1,611,120

Cash and cash equivalents .................................................         205,503               86,528
Accrued investment income .................................................          10,778               13,355
Deferred acquisition costs ................................................         154,272              145,929
Prepaid reinsurance premiums ..............................................          55,913               41,915
Reinsurance balances receivable ...........................................          25,551               18,681
Unpaid losses and loss expenses recoverable ...............................          77,444               78,230
Amounts due from parent and affiliates ....................................              34                   37
Net receivable for investments sold .......................................             152                  112
Derivative assets .........................................................           8,390               11,148
Other assets ..............................................................             284                  340
                                                                                -----------          -----------
   TOTAL ASSETS ...........................................................     $ 2,085,320          $ 2,007,395
                                                                                ===========          ===========
LIABILITIES, REDEEMABLE PREFERRED SHARES AND SHAREHOLDER'S EQUITY
LIABILITIES:
Unpaid losses and loss expenses ...........................................     $   155,268          $   156,733
Deferred premium revenue ..................................................         740,608              699,264
Reinsurance balances payable ..............................................          10,449                7,308
Accounts payable and accrued liabilities ..................................             701                1,962
Amounts due to parent and affiliates ......................................           7,006                4,076
Derivative liabilities ....................................................           7,917                4,685
                                                                                -----------          -----------
   TOTAL LIABILITIES ......................................................         921,949              874,028
                                                                                -----------          -----------

Contingencies and Commitments

REDEEMABLE PREFERRED SHARES:
Series A Redeemable preferred shares ......................................     $    39,000          $    54,016
                                                                                -----------          -----------
SHAREHOLDER'S EQUITY:
Common shares (par value of $120 per share; 10,000 shares authorized;
2,449 issued and outstanding as at
March 31, 2007 and December 31, 2006, respectively) .......................             294                  294
Additional paid-in capital ................................................         659,665              659,665
Accumulated other comprehensive loss ......................................         (12,082)             (17,221)
Retained earnings .........................................................         476,494              436,613
                                                                                -----------          -----------
   TOTAL SHAREHOLDER'S EQUITY .............................................       1,124,371            1,079,351
                                                                                -----------          -----------
   TOTAL LIABILITIES, REDEEMABLE PREFERRED SHARES AND SHAREHOLDER'S EQUITY      $ 2,085,320          $ 2,007,395
                                                                                ===========          ===========
</TABLE>

             See accompanying Notes to Interim Financial Statements.


<PAGE>


XL FINANCIAL ASSURANCE LTD.
INTERIM STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(U.S. DOLLARS IN THOUSANDS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                  (UNAUDITED)
                                                                              THREE MONTHS ENDED
                                                                                   MARCH 31,
                                                                  --------------------------------------------
                                                                          2007                    2006
                                                                  --------------------    --------------------
<S>                                                               <C>                     <C>
REVENUES:
Net premiums earned ...........................................         $ 41,112                $ 35,454
Net investment income .........................................           20,530                  11,347
Net realized gains (losses) on investments ....................              112                  (5,208)
Fee and other income ..........................................             --                     1,134
Net realized and unrealized losses on derivative financial
   instruments ................................................           (6,521)                 (3,245)
                                                                        --------                --------

   Total revenues .............................................           55,233                  39,482
                                                                        --------                --------
EXPENSES:
Net losses and loss expenses ..................................             (336)                  3,684
Acquisition costs .............................................           10,876                  10,375
Operating expenses ............................................            3,699                   1,340
                                                                        --------                --------

   Total expenses .............................................           14,239                  15,399
                                                                        --------                --------

Net income ....................................................         $ 40,994                $ 24,083
                                                                        ========                ========

COMPREHENSIVE INCOME:
   Net income .................................................         $ 40,994                $ 24,083

   Unrealized gains (losses) on investments ...................            5,251                 (18,887)
   Less: reclassification for gains (losses) realized in income              112                  (5,208)
                                                                        --------                --------

Other comprehensive income (loss) .............................            5,139                 (13,679)
                                                                        --------                --------

   Comprehensive income .......................................         $ 46,133                $ 10,404
                                                                        ========                ========
</TABLE>

             See accompanying Notes to Interim Financial Statements.


<PAGE>


XL FINANCIAL ASSURANCE LTD.
INTERIM STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                              (UNAUDITED)
                                                                             THREE MONTHS                YEAR ENDED
                                                                                 ENDED                  DECEMBER 31,
                                                                            MARCH 31, 2007                  2006
                                                                         ----------------------     ----------------------
<S>                                                                      <C>                        <C>

COMMON SHARES - NUMBER ISSUED
Number of shares, beginning of year ....................................           2,449                      2,449
                                                                             -----------                -----------

   Number of shares, end of period .....................................           2,449                      2,449
                                                                             ===========                ===========

COMMON SHARES - ISSUED AT PAR
Balance - beginning of year ............................................     $       294                $       294
                                                                             -----------                -----------

   Balance - end of period .............................................             294                        294
                                                                             ===========                ===========

ADDITIONAL PAID-IN CAPITAL
Balance - beginning of year ............................................         659,665                    345,606
Capital contributions ..................................................            --                      314,059
                                                                             -----------                -----------

   Balance - end of period .............................................         659,665                    659,665
                                                                             ===========                ===========

ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance - beginning of year ............................................         (17,221)                   (17,953)
Other comprehensive income .............................................           5,139                        732
                                                                             -----------                -----------

   Balance - end of period .............................................         (12,082)                   (17,221)
                                                                             ===========                ===========

RETAINED EARNINGS
Balance - beginning of year ............................................         436,613                    323,127
Net income .............................................................          40,994                    132,958
Dividends on Series A redeemable preferred shares ......................          (1,113)                    (4,456)
Accumulated undeclared dividends on Series A redeemable preferred shares            --                      (15,016)
                                                                             -----------                -----------

   Balance - end of period .............................................         476,494                    436,613
                                                                             ===========                ===========

TOTAL SHAREHOLDER'S EQUITY .............................................     $ 1,124,371                $ 1,079,351
                                                                             ===========                ===========
</TABLE>

             See accompanying Notes to Interim Financial Statements.


<PAGE>


XL FINANCIAL ASSURANCE LTD.
INTERIM STATEMENTS OF CASH FLOWS
(U.S. DOLLARS IN THOUSANDS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                                        (UNAUDITED)
                                                                                                    THREE MONTHS ENDED
                                                                                                         MARCH 31,
                                                                                        --------------------------------------------
                                                                                                2007                    2006
                                                                                        --------------------    --------------------
<S>                                                                                     <C>                     <C>
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income ......................................................................           $  40,994               $  24,083
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized (gains) losses on investments ......................................                (112)                  5,208
Amortization of premium on debt maturities ......................................                 398                     936
Net realized and unrealized losses on derivative financial instruments ..........               5,990                   2,671
Accrued investment income .......................................................               2,577                     266
Unpaid losses and loss expenses .................................................              (1,465)                  3,645
Deferred premium revenue ........................................................              41,344                  31,058
Unpaid losses & loss expenses recoverable .......................................                 786                    (546)
Deferred acquisition costs ......................................................              (8,343)                 (7,410)
Amounts due from parent and affiliates ..........................................                   3                     804
Accounts payable and accrued liabilities ........................................              (1,261)                   (262)
Amount due to parent and affiliates .............................................               2,930                  (4,180)
Funds withheld ..................................................................                --                     4,859
Prepaid reinsurance premiums ....................................................             (13,998)                    729
Reinsurance balances receivable .................................................              (6,870)                (14,860)
Reinsurance balances payable ....................................................               3,141                  (8,856)
Other assets ....................................................................                  56                     206
                                                                                            ---------               ---------

Total adjustments ...............................................................              25,176                  14,268
                                                                                            ---------               ---------

Net cash provided by operating activities .......................................              66,170                  38,351
                                                                                            ---------               ---------

CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Proceeds from sale of debt securities ...........................................              32,931                  48,545
Proceeds from maturity of debt securities and short-term investments ............              82,402                  14,707
Net (purchases) sales of short-term investments .................................              (2,960)                    431
Purchase of debt securities .....................................................             (43,500)               (106,179)
                                                                                            ---------               ---------

Net cash provided by (used in) investing activities .............................              68,873                 (42,496)
                                                                                            ---------               ---------

CASH FLOWS USED IN FINANCING ACTIVITIES:
Dividends paid on Series A redeemable preferred shares ..........................             (16,068)                 (2,559)
                                                                                            ---------               ---------

Net cash used in financing activities ...........................................             (16,068)                 (2,559)
                                                                                            ---------               ---------

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................................             118,975                  (6,704)

CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR ...................................              86,528                  22,256
                                                                                            ---------               ---------

CASH AND CASH EQUIVALENTS - END OF THE PERIOD ...................................           $ 205,503               $  15,552
                                                                                            =========               =========
</TABLE>


             See accompanying Notes to Interim Financial Statements.


<PAGE>


XL FINANCIAL ASSURANCE LTD.
NOTES TO INTERIM FINANCIAL STATEMENTS
UNAUDITED
--------------------------------------------------------------------------------

1.   ORGANIZATION AND BUSINESS

          XL Financial Assurance Ltd (the "Company") was incorporated with
     limited liability under the Bermuda Companies Act 1981 on October 14, 1998
     and is registered as a Class 3 insurer under The Insurance Act 1978,
     amendments thereto and related regulations ("The Act"). Except for its
     preferred stock interests, through July 1, 2006, the Company was a wholly
     owned subsidiary of XL Insurance (Bermuda) Ltd ("XLI"), which in turn is an
     indirect wholly owned subsidiary of XL Capital Ltd ("XL Capital"), a public
     company whose shares are listed on the New York Stock Exchange. On March
     17, 2006, XL Capital formed Security Capital Assurance Ltd ("SCA"), a
     Bermuda based holding company, in anticipation of contributing its
     ownership interests in the Company and XL Capital Assurance Inc. ("XLCA"),
     a New York domiciled financial guarantee insurance company and selling an
     interest therein to the public through an initial public offering ("IPO")
     of SCA's common shares. The contribution by XL Capital of the Company and
     XLCA to SCA occurred on July 1, 2006 and the IPO was consummated on August
     4, 2006. After the IPO, a secondary offering by XL Capital, the exercise of
     the underwriters' over-allotment option and restricted share awards to
     management of SCA, XL Capital's ownership of SCA's outstanding common
     shares represents approximately a 63 percent economic interest. As a result
     of limitations on XL Capital's voting power contained in SCA's bye-laws,
     the votes conferred by the common shares owned by XL Capital will not
     exceed, with respect to elections of directors, 50.1% of the aggregate
     voting power of all common shares entitled to vote generally at any
     election of directors or, with respect to any other matter presented to our
     shareholders for their action or consideration, 47.5% of the aggregate
     voting power of all common shares entitled to vote on such matter. If,
     however, the rating agencies would permit XL Capital's voting rights to be
     commensurate with its economic interest in SCA, without adversely affecting
     the ratings of SCA or its operating subsidiaries, XL Capital's voting power
     would automatically increase and consequently the voting power of all other
     shareholders in the aggregate would correspondingly decrease, thereby
     eliminating preferential voting rights of all SCA's other shareholders.

          The Company is primarily engaged in the business of providing
     reinsurance of financial guarantees on asset-backed and municipal
     obligations underwritten by XLCA, XLI, and Financial Security Assurance
     Inc. ("FSA"), a New York domiciled financial guarantee insurance company,
     as well as other monoline and multiline insurance companies. FSA, through
     its parent and affiliates, own all of the Company's preferred shares, but
     otherwise is independent of the Company and XL Capital and its affiliates.
     Guarantees reinsured by the Company may be in the form of traditional
     financial guarantee insurance or credit default swaps. The Company's
     underwriting policy is to provide reinsurance of asset-backed and municipal
     obligations that would be of a lower investment-grade quality without the
     benefit of financial guarantee insurance. The asset-backed obligations
     reinsured by the Company 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
     ascertainable cash flows or market value. The municipal obligations
     reinsured by the Company consist primarily of general obligation bonds that
     are supported by the issuers' taxing power and of special revenue bonds and
     other special obligations of states and local governments that are
     supported by the issuers' ability to impose and collect fees and charges
     for public services or specific projects. Substantially all the Company's
     reinsurance is written on a proportional basis. Accordingly, in the event
     of a payment default on a reinsured obligation, the Company is generally
     required to pay its proportionate share of the principal, interest or other
     such amounts due in accordance with the insured obligations' original
     payment schedule or, at the ceding companies' option, to pay such amounts
     on an accelerated basis. The Company conducts surveillance on its exposures
     to try and ensure early identification of any loss events. In addition, in
     the normal course of business, the Company seeks to reduce the loss that
     may arise from such events by retroceding certain levels of risks in
     various areas of exposure with other insurance enterprises or reinsurers.

          Pursuant to an agreement on April 5, 2006 with Financial Security
     Assurance Holding Ltd. ("FSAH"), the parent company of FSA, the Company
     restructured the terms of its Series A Redeemable Preferred Shares and
     changed its bye-laws accordingly. In accordance with the agreement, the
     participating dividend and redemption provisions of the preferred shares
     were eliminated, the stated value of the preferred shares held by FSAH was
     increased to $54.0 million, and the fixed dividend rate of the preferred
     shares was increased from 5.00% to 8.25%. On March 30, 2007, the Company
     paid an extraordinary dividend of $15.0 million on its Series A Redeemable
     Preferred Shares, and reduced the stated value of the remaining outstanding
     Series A Redeemable Preferred Shares by a corresponding amount (see note
     6).

2.   BASIS OF PRESENTATION

          These unaudited interim financial statements have been prepared in
     accordance with U.S. generally accepted accounting principles ("GAAP") for
     interim financial information and with the instructions to Form 10-Q and
     Article 10 of Regulation S-X. Accordingly, they do not include all of the
     information and footnotes required by GAAP for complete financial
     statements. In the opinion of management, these unaudited interim financial
     statements reflect all adjustments (consisting of normal recurring
     accruals) considered necessary for a fair presentation of financial
     position, results of operations and cash flows as of and for the periods
     presented. The results of operations for any interim period are not
     necessarily indicative of the results for a full year. These statements
     should be read in conjunction with the Company's December 31, 2006 audited
     financial statements and notes thereto filed with the Securities and
     Exchange Commission as an Exhibit to the SCA's Form 10-K for the year ended
     December 31, 2006. The preparation of financial statements in conformity
     with GAAP requires management

<PAGE>

XL FINANCIAL ASSURANCE LTD.
NOTES TO INTERIM FINANCIAL STATEMENTS
UNAUDITED
--------------------------------------------------------------------------------

     to make estimates and assumptions that affect the reported amounts of
     assets and liabilities and disclosure of contingent assets and liabilities
     at the date of the financial statements and the reported amounts of
     revenues and expenses during the reporting period. Actual results could
     differ materially from these estimates.

3.   CREDIT DEFAULT SWAPS

          Credit default swaps reinsured by the Company meet the definition of a
     derivative instrument under FASB Statement of Accounting Standards No. 133,
     "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
     133"), as amended by SFAS No. 149. Credit default swaps are recognized at
     fair value and recorded as either assets or liabilities in the accompanying
     balance sheets.

          The fair value of credit default swaps is determined using a model
     which is dependent upon a number of market factors including changes in
     interest rates, credit spreads, changes in credit quality, and expected
     recovery rates. The change resulting from movements in these factors is
     unrealized as the credit default swaps are not traded to realize this
     value. Other elements of the change in fair value are based upon pricing
     established at the inception of the contract, as well as events triggering
     loss payments under the contracts by the Company.

          Changes in the fair value of credit default swaps attributable to
     earnings from reinsurance premiums received by the Company from the
     reinsurance of such contracts are recorded in the line item caption
     entitled "net premiums earned" in the accompanying interim statements of
     operations. In addition, changes in the fair value of credit default swaps
     attributable to losses from actual and expected payments to counterparties
     under such reinsured contracts are recorded in the line item caption
     entitled "net losses and loss expenses" in the accompanying interim
     statements of operations, and the remaining components of the change in
     fair value of reinsured credit default swaps, which are attributable to the
     market and other factors discussed above, are recorded in the line item
     caption entitled "net realized and unrealized losses on derivative
     financial instruments" in the accompanying interim statements of
     operations. This presentation is applicable only to credit default swaps
     reinsured by the Company where the underlying ceding company has the intent
     and ability to hold such contracts to maturity and is consistent with
     practices in the financial guaranty insurance industry for reporting the
     results of such instruments.

          The Company's reinsured credit default swap in-force portfolio
     generally requires the Company to meet its proportionate share of payment
     obligations for referenced credits within the portfolio in the event of
     specific credit events after exhaustion of various first-loss protection
     levels. These credit events are contract-specific, but generally cover
     bankruptcy, failure to pay and repudiation. The Company's reinsured credit
     default swap in-force portfolio consists of structured pools of corporate
     obligations that were awarded investment-grade ratings at the deals'
     inception. At March 31, 2007, on a net par basis, approximately 95.9% of
     the Company's reinsured credit default swap in-force portfolio was rated
     "AAA" with the remaining 4.1% rated at or above investment-grade. The
     weighted average term of the contracts in-force was 8.52 years.

                                                       (UNAUDITED)
                                                   THREE MONTHS ENDED
                                                        MARCH 31,
                                            --------------------------------
                                                   2007            2006
                                            --------------   ---------------
INCOME STATEMENT
Net earned premiums .......................      $ 6,880           $ 4,856
Net losses and loss expense ...............          895               370
Net realized and unrealized losses
  on derivative financial instruments .....       (5,982)           (2,274)



                                                (UNAUDITED)
                                                   AS OF           AS OF
                                                 MARCH 31,       DECEMBER 31,
                                                   2007            2006
                                             ---------------  ---------------
ASSETS
Derivative Assets..........................  $      8,390     $     11,148

LIABILITIES
Unpaid losses and loss expenses............        12,978           12,083
Derivative liabilities.....................         7,917            4,685

<PAGE>

XL FINANCIAL ASSURANCE LTD.
NOTES TO INTERIM FINANCIAL STATEMENTS
UNAUDITED
--------------------------------------------------------------------------------

          The Company reinsures interest rate swaps indirectly as part of
     financial guarantee reinsurance of XLCA. The swap portion of these
     insurance contracts is required to be measured and recorded at fair value.
     The valuation methodology comprises of a mark to model approach that
     measures the change in expected loss. The expected loss is driven by the
     valuation of the underlying derivative; the default probability of the
     underlying obligor and the expected recovery rate on the underlying asset
     class.

4.   RECENT ACCOUNTING PRONOUNCEMENTS AND DEVELOPMENTS

     PROPOSED STATEMENT OF FINANCIAL ACCOUNTING STANDARDS ("SFAS"), ACCOUNTING
     FOR FINANCIAL GUARANTEE INSURANCE CONTRACTS

          On April 18, 2007, the Financial Accounting Standards Board ("FASB")
     issued Proposed SFAS, Accounting for Financial Guarantee Insurance
     Contracts - an interpretation of FASB Statement No. 60. This proposed
     Statement would clarify how FASB Statement No. 60, ACCOUNTING AND REPORTING
     BY INSURANCE ENTERPRISES, applies to financial guarantee insurance
     contracts. This proposed Statement, among other things, would change
     current industry practices with respect to the recognition of premium
     revenue and claim liabilities. In addition, this proposed Statement would
     require that the measurement of the initial deferred premium revenue
     (liability) be the present value of the contractual premium due pursuant to
     the terms of the financial guarantee insurance contract, thereby changing
     current industry accounting practice with respect to insurance contracts
     priced on an installment basis by requiring that the present value of all
     contractual premiums due under such contracts, currently or in the future,
     be recorded on the company's balance sheet as premiums receivable. Under
     current industry practice such premiums are not reflected on the balance
     sheet.

          In regard to premium revenue recognition, the proposed Statement
     provides for premium to be recognized as revenue, for both upfront and
     installment paying policies, in proportion to the insured contractual
     principal and interest payments made by the issuer of the insured financial
     obligation, rather than being recognized over the term of each maturity for
     upfront premium paying policies, or over the installment period for
     installment premium paying policies. This change would generally result in
     a volatile revenue recognition pattern over the life of the insured
     obligation as premium would only be recognized as the insured obligation's
     principal or interest is paid. Furthermore, for certain bonds such as
     investor-owned utilities, CDOs and many other types of asset-backed
     securities that do not have periodic payments, this change would result in
     significantly slower and back-ended revenue recognition. The volatility
     would be most evident for insured securities whereby the principal payments
     are made at maturity but would also impact public finance insured
     securities with customized amortization schedules. For installment paying
     policies, the proposed Statement requires that the discount, equating to
     the difference between gross installment premiums and the present value of
     installment premiums, be recognized as investment income rather than
     premiums. We expect that the initial effect of applying the revenue
     recognition previsions of the Statement as currently proposed will be
     material to the Company's financial statements.

          In regard to the recognition of claim liabilities, the Statement
     provides that claim liabilities shall be established when the insurance
     enterprise expects that a claim loss will exceed the unearned premium
     revenue (liability) for a contract based on expected cash flows discounted
     using a risk-adjusted rate at initial recognition of the claim liability
     and, that, the assumptions underlying such liability be consistent with the
     information tracked and monitored through the company's surveillance list
     maintained by the insurance enterprise to evaluate credit deterioration in
     its insured financial obligations. We expect that implementation of this
     guidance as currently proposed would cause the Company to de-recognize its
     reserves for unallocated losses and loss adjustment expenses and preclude
     it from providing such reserves in the future.

          The FASB has indicated that the final Statement is expected to be
     issued in the third quarter of 2007 and become effective for financial
     statements issued for fiscal years beginning after December 15, 2007, and
     interim periods within those fiscal years. The Company is currently
     evaluating the effect of this proposed Statement on its financial
     statements.

     SFAS NO. 155, "ACCOUNTING FOR CERTAIN HYBRID FINANCIAL INSTRUMENTS" -

          In February 2006, the FASB issued SFAS No. 155, "Accounting for
     Certain Hybrid Financial Instruments" ("SFAS 155"), which amends SFAS No.
     133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
     133") and SFAS No. 140, "Accounting for Transfers and Servicing of
     Financial Assets and Extinguishments of Liabilities" ("SFAS 140"), and
     addresses issues raised in SFAS 133 Implementation Issue No. D1,
     "Application of Statement 133 to Beneficial Interests in Securitized
     Financial Assets." The primary objectives of SFAS 155 are: (i) with respect
     to SFAS 133, to address the accounting for beneficial interests in
     securitized financial assets and (ii) with respect to SFAS 140, to
     eliminate a restriction on the passive derivative instruments that a
     qualifying special purpose entity may hold. SFAS 155 is effective for all
     financial instruments acquired or issued after the beginning of an entity's
     first fiscal year that begins after September 15, 2006. The Company adopted
     SFAS 155 on January 1, 2007 and it had no effect on the Company's
     financial condition or results of operations.

     FASB ISSUED SFAS NO. 157, "FAIR VALUE MEASUREMENTS" -

          In September 2006, the FASB issued SFAS No. 157, "Fair Value
     Measurements" ("SFAS 157") which defines fair value, establishes a
     framework for measuring fair value in generally accepted accounting
     principles, and expands disclosures about fair value measurements. This
     Statement is applicable in conjunction with other accounting pronouncements
     that require or permit fair value measurements, where the FASB previously
     concluded in those accounting pronouncements that fair value is the
     relevant measurement attribute. Accordingly, this Statement does not
     require any new fair value

<PAGE>

XL FINANCIAL ASSURANCE LTD.
NOTES TO INTERIM FINANCIAL STATEMENTS
UNAUDITED
--------------------------------------------------------------------------------

     measurements. SFAS No. 157 is effective for financial statements issued for
     fiscal years beginning after November 15, 2007, and interim periods within
     these fiscal years. The Company is currently evaluating the effect the
     adoption of SFAS 157 will have on its financial statements

     SFAS 159, "THE FAIR VALUE OPTION FOR FINANCIAL ASSETS AND FINANCIAL
     LIABILITIES" -

          In February 2007, the FASB issued SFAS 159, "The Fair Value Option for
     Financial Assets and Financial Liabilities." SFAS 159 provides the Company
     an irrevocable option to report selected financial assets and liabilities
     at fair value with changes in fair value recorded in earnings. The option
     is applied, on a contract-by-contract basis, to an entire contract and not
     only to specific risks, specific cash flows or other portions of that
     contract. Upfront costs and fees related to a contract for which the fair
     value option is elected shall be recognized in earnings as incurred and not
     deferred. SFAS 159 also establishes presentation and disclosure
     requirements designed to facilitate comparisons between companies that
     choose different measurement attributes for similar types of assets and
     liabilities. SFAS 159 is effective for fiscal years beginning after
     November 15, 2007. The Company is currently evaluating the effect, if any,
     the adoption of SFAS 159 will have on its financial statements.

5.   PREMIUMS EARNED FROM REFUNDED AND CALLED BONDS

          When an insured issue is retired early, is called by the issuer or is
     in substance paid in advance through a refunding accomplished by placing
     U.S. Government securities in escrow, the remaining deferred premium
     revenue is earned at that time since there is no longer risk to the
     Company. Net premiums earned include $1.2 million and $3.5 million for the
     three months ended March 31, 2007 and 2006, respectively, related to
     refunded and called bonds.

6.   RELATED PARTY TRANSACTIONS

     CAPITAL TRANSACTIONS

          On August 4, 2006 and December 22, 2006, SCA contributed $175.0
     million and $123.1 million, respectively, to the Company from the net
     proceeds of its IPO. On August 4, 2006, XLI contributed $15.0 million to
     the Company. In addition, on April 5, 2007, the Company received a cash
     contribution of $225.0 million from SCA. There were no common or other
     shares of equity capital issued by the Company to SCA in exchange for such
     contributions.

          On March 30, 2007, the Company paid an extraordinary dividend of $15.0
     million on its Series A Redeemable Preferred Shares, and reduced the stated
     value of the remaining outstanding Series A Redeemable Preferred Shares by
     a corresponding amount. There was no change in the voting interest of the
     holders of the Series A Redeemable Preferred shares as a result of the
     extraordinary dividend and reduction in the stated value of the Series A
     Redeemable Preferred Shares.

     SERVICES ARRANGEMENTS

          The Company purchased various services from affiliates of XL Capital
     prior to the IPO under various agreements and continues to purchase certain
     services indirectly through SCA Administrative Bermuda Ltd, a wholly owned
     subsidiary of SCA. Such services principally include: (i) information
     technology support, (ii) actuarial, finance, internal audit services, and
     (iii) certain investment management services. For the period ended March
     31, 2007 and 2006, the Company incurred costs for such services aggregating
     $0.4 million, and $0.8 million, respectively, which are a component of
     "operating expenses" in the accompanying statements of operations.

     REINSURANCE TREATIES WITH AFFILIATES

     o    The Company has a facultative quota share reinsurance treaty
          ("Treaty") with XLCA. Under the terms of the Treaty, the Company
          agrees to reinsure up to 75% of business written by XLCA provided it
          meets certain specified parameters. Prior to July 1, 2006, the Company
          had agreed under the Treaty to reinsure up to 90% of such business. In
          addition, pursuant to the Treaty, XLCA charges up to a 30% ceding
          commission (or such other percentage on an arm's-length basis) on
          ceded premiums written under the agreement.

     o    XLI entered into an agreement with XLCA which unconditionally and
          irrevocably guarantees to XLCA the full and complete payment when due
          of all of the Company's obligations under its facultative quota share
          reinsurance agreement with XLCA, under which agreement the Company has
          assumed business from XLCA since December 19, 2000. The gross par
          value of business guarantied by XLI under this agreement was
          approximately $83.2 billion and $84.0 billion as of March 31, 2007 and
          December 31, 2006, respectively. The XLI guarantee agreement
          terminated with respect to any new business produced by XLCA and ceded
          to the Company pursuant to the facultative quota share reinsurance
          agreement after the effective date of the IPO.


<PAGE>

XL FINANCIAL ASSURANCE LTD.
NOTES TO INTERIM FINANCIAL STATEMENTS
UNAUDITED
--------------------------------------------------------------------------------

     o    The Company has entered into the following reinsurance agreements with
          XLI:

          (a)  Effective October 3, 2001, the Company entered into an excess of
               loss reinsurance agreement with XLI. This agreement covers a
               portion of the Company's liability arising as a result of losses
               on policies reinsured by the Company that are in excess of
               certain limits and are not covered by other reinsurance
               agreements. This agreement provides indemnification only for the
               portion of any loss covered by this agreement in excess of 10% of
               the Company's surplus, up to an aggregate amount of $500 million.
               For each of the three month periods ended March 31, 2007 and
               2006, the Company incurred expense under this agreement of
               approximately $0.1 million and $0.1 million, respectively.

          (b)  Effective August 17, 2001, the Company entered into a facultative
               quota share reinsurance treaty with XLI. This treaty allows the
               Company to propose to cede to XLI a portion of a risk, which risk
               XLI may then accept or reject in its sole discretion. Under this
               treaty, XLI pays the Company a ceding commission of 30% on the
               premiums ceded unless otherwise specified. On August 4, 2006, the
               Company and XLI terminated certain reinsurance cessions ceded
               under this agreement to XLI. As a result of the termination of
               the aforementioned cessions, XLI returned $26.5 million of
               premiums to the Company, the Company returned ceding commissions
               of $7.8 million to XLI, and XLI paid the Company $18.7 million.
               The net income impact of the termination was $0.2 million for the
               three months ended March 31, 2007.

          (c)  Effective December 31, 1999, the Company entered into a
               facultative quota share reinsurance treaty with XLI. This treaty
               allows XLI to propose to cede to the Company a portion of a risk
               it insured, which risk the Company may then accept or reject in
               its sole discretion. Under this treaty, the Company pays XLI a
               ceding commission of 12% on the premiums ceded under this treaty
               unless otherwise specified. On August 4, 2006, the Company and
               XLI agreed to cancel from inception the reinsurance of certain
               business ceded under this arrangement. As a result of this
               cancellation, the Company paid XLI $0.2 million, XLI assumed the
               Company's obligation for $1.2 million of reserves for losses and
               loss adjustment expenses, and the Company recorded a capital
               contribution of $1.0 million.

               In addition, on August 4, 2006, the Company entered into certain
               reinsurance cessions with XLI pursuant to the aforementioned
               facultative quota share reinsurance treaty. As a result of these
               cessions, the Company recorded assumed premiums of approximately
               $8.0 million, ceding commissions of approximately $1.0 million
               and received cash from XLI of approximately $7.0 million.

          (d)  Effective August 4, 2006, XLI, at no cost to the Company,
               indemnified the Company for all losses and loss adjustment
               expenses incurred in excess of its retained reserves at the
               effective date of the agreement relating to an insured project
               financing described in Note 8 (a).


     o    The Company has entered into the following reinsurance agreements with
          certain subsidiaries and affiliates of FSAH. Premiums assumed from
          FSAH affiliates represented 16.2% and 11.8% of the Company's total
          reinsurance premiums assumed for each of the three month periods ended
          March 31, 2007 and 2006, respectively. All of the agreements discussed
          below may be terminated under certain conditions, as defined in the
          agreements:

          (a)  Effective November 3, 1998, the Company entered into a master
               facultative reinsurance agreement with FSA. This agreement allows
               FSA to propose to cede a portion of a risk insured by it to the
               Company, which risk the Company may then accept or reject solely
               in its discretion. The ceding commission that the Company pays
               FSA on the premiums ceded under this agreement is determined on a
               case-by-case basis. The Company's obligations under this
               agreement are guarantied by XLI. The XLI guarantee agreement
               terminated with respect to any new business produced by FSA and
               ceded to the Company pursuant to the master facultative
               reinsurance agreement after the effective date of the IPO.

          (b)  Effective January 1, 2004, the Company entered into a reinsurance
               treaty with FSA to reinsure certain policies they issued insuring
               the timely payment of the principal of and interest on certain
               asset-backed securities and pools of consumer debt obligations.

          (c)  Effective January 1, 2004, the Company entered into a reinsurance
               treaty with FSA to reinsure certain policies they issued insuring
               the timely payment of the principal and interest on securities
               and obligations that provide financing for governmental or public
               purpose infrastructure projects located outside of the United
               States and its territories, excluding certain countries.

     o    The Company has guarantied certain of XLI's obligations in connection
          with certain transactions where XLI's customer required such credit
          enhancement. Each of these transactions has a "double trigger"
          structure, meaning that the Company does not have to pay a claim
          unless both the underlying transaction and XLI default. For each of
          these

<PAGE>

XL FINANCIAL ASSURANCE LTD.
NOTES TO INTERIM FINANCIAL STATEMENTS
UNAUDITED
--------------------------------------------------------------------------------

          transactions, the Company has entered into a reimbursement agreement
          with XLI, pursuant to which XLI pays the Company a fee for providing
          its guarantee and XLI grants the Company a security interest in a
          portion of the payments received by it from its client. As of March
          31, 2007, the Company's aggregate net par outstanding relating to such
          guarantees was $522.8 million.

7.   REINSURANCE

     The effect of reinsurance on premium written and earned for the three month
     periods ended March 31, 2007 and 2006 is shown below:

                                                      (UNAUDITED)
                                          -------------------------------------
                                            ASSUMED      CEDED        NET
                                          -------------------------------------
Three months ended March 31, 2007
     Premium written ...................   $ 85,202    $(16,744)   $ 68,458
     Premium earned ....................     43,858      (2,746)     41,112
     Losses and loss adjustment expenses     (1,121)        785        (336)

Three months ended March 31, 2006
     Premium written ...................     73,820      (6,580)     67,240
     Premium earned ....................     42,762      (7,308)     35,454
     Losses and loss adjustment expenses      4,230        (546)      3,684

8.   UNPAID LOSSES AND LOSS EXPENSES

          The Company's liability for losses and loss expenses consists of case
     basis reserves and unallocated reserves. Activity in the liability for
     losses and loss expenses is summarized as follows:
<TABLE>
<CAPTION>
                                                                           (UNAUDITED)
                                                                        AS AT AND FOR THE                  AS AT AND FOR THE
                                                                       THREE MONTHS ENDED                 TWELVE MONTHS ENDED
                                                                         MARCH 31, 2007                    DECEMBER 31, 2006
                                                                 -------------------------------    --------------------------------
                                                                      CASE         UNALLOCATED           CASE         UNALLOCATED
     (U.S. DOLLARS IN THOUSANDS)                                    RESERVES        RESERVES           RESERVES         RESERVES

<S>                                                                 <C>              <C>               <C>              <C>

Unpaid losses and loss expenses at beginning of year ......         $ 75,057        $ 81,676          $ 64,747          $ 69,297
Unpaid losses and loss expenses recoverable ...............          (64,359)        (13,871)          (52,317)          (14,077)
                                                                    --------        --------          --------          --------
Net unpaid losses and loss expenses at beginning of year ..           10,698          67,805            12,430            55,220
Increase (decrease) in net losses and loss expenses
   incurred in respect of losses occurring in:
   Current year ...........................................             --             2,496              --              12,585
   Prior years ............................................           (2,832)           --               1,474              --

Less net losses and loss expenses paid  & other relating to
   prior years ............................................             (343)           --              (3,206)             --
                                                                    --------        --------          --------          --------
Net unpaid losses and loss expenses at end of period ......            7,523          70,301            10,698            67,805
Unpaid losses and loss expenses recoverable ...............           64,359          13,085            64,359            13,871
                                                                    --------        --------          --------          --------

Unpaid losses and loss expenses at end of period ..........         $ 71,882        $ 83,386          $ 75,057          $ 81,676
                                                                    ========        ========          ========          ========
</TABLE>


<PAGE>

XL FINANCIAL ASSURANCE LTD.
NOTES TO INTERIM FINANCIAL STATEMENTS
UNAUDITED
--------------------------------------------------------------------------------

CASE BASIS RESERVES FOR LOSSES AND LOSS EXPENSES

     Set forth below is a discussion of certain case basis reserves established
by the Company. The Company has been indemnified with respect to loss
development relating to the reinsured transaction described under "(a)" below by
XLI in connection with SCA's IPO. As a result of such indemnification, all
adverse loss development on such reinsured transaction subsequent to the
effective date of the IPO, which is in excess of the Company's carried reserve
for such transaction at the date of the IPO, will be indemnified by XLI. Such
protection does not relieve the Company of its obligations under the
aforementioned reinsurance transaction. Accordingly, the Company is still liable
under the reinsurance transaction in the event that XLI does not meet its
obligations under the indemnification. For further information with respect to
the indemnification see Note 6.

A.   At December 31, 2006, the Company carried a gross case basis reserve for
     losses and loss adjustment expenses of approximately $70.3 million ($6.0
     million net of retrocession to XLI) relating to an insured project
     financing. There was no change in the reserve during the three months ended
     March 31, 2007. The total remaining par insured by the Company with respect
     to this transaction, which amortizes over many years into the future,
     aggregated approximately $249.5 million ($6.0 million net of retrocession
     to XLI) at March 31, 2007. The estimate of loss was based on assumptions
     and estimates extending over many years into the future. There is currently
     no payment default with respect to this transaction. Management continues
     to monitor the exposure and will revise its loss estimate, if necessary, as
     new information becomes available.

B.   In December 2005, certain notes collateralized by loans to medical
     providers that were insured by XLCA (the "Insured Notes") and reinsured by
     the Company defaulted upon their maturity. In satisfaction of the resulting
     claim, XLCA purchased the Insured Notes for $20.2 million, which
     represented the remaining outstanding principal and accrued interest on the
     Insured Notes. In connection therewith, the Company recorded a loss of $0.6
     million representing its share under the aforementioned reinsurance
     agreement of the difference between the estimated fair value of the Insured
     Notes at the date they were acquired by XLCA and the consideration paid by
     XLCA to acquire the Insured Notes. In addition, the Company paid XLCA its
     share of the cost of the Insured Notes and recorded such payment as funds
     withheld. At December 31, 2005, the carrying amount of the Company's funds
     withheld relating to this transaction was $15.9 million. During 2006, the
     Company recognized a charge of $12.6 million relating to the impairment of
     the Insured Notes and reduced it funds withheld by a corresponding amount.
     In addition, during 2006 the balance of its funds withheld was returned by
     XLCA to the Company.

C.   At December 31, 2006 the Company carried a case basis reserve for losses
     and loss adjustment expenses of $2.7 million representing the present value
     of the loss expected to be incurred in the future with respect to an
     insured residential mortgage securitization. During the three months ended
     March 31, 2007 the insured obligation was retired as a result of the
     exercise of a clean-up call by the sponsor of the securitization thereby
     eliminating the Company's exposure without loss. Accordingly, the Company
     recorded a reduction in its provision for losses and loss adjustment
     expenses for the three months ended March 31, 2007 of $2.7 million
     resulting from the elimination of the aforementioned reserve.

D.   The Company maintains a provision of $1.6 million in respect of reinsurance
     provided to a primary for a cash flow collateralized borrowing obligation.
     The estimate of loss is based on current assumptions, although no claim is
     expected to be paid until the legal maturity of principal in 2011 if at
     all.

     The financing vehicle through which the insured project financing discussed
in (a) above was issued is considered a variable interest entity under FASB
Interpretation 46/46R, "Consolidation of Variable Interest Entities", however,
the Company is not the primary beneficiary. If this transaction is restructured
or if the Company exercises its contractual rights in the event of a default,
the primary beneficiary in the transaction will have to be reconsidered. If such
events occur, the Company would likely be required to consolidate the financing
vehicle.

9.   EXPOSURES UNDER GUARANTEES

     The Company provides financial guarantee reinsurance to support public and
private borrowing arrangements. Financial guarantee reinsurance guarantees the
timely payment of principal and interest on insured obligations to third party
holders of such obligations in the event of default by an issuer. The Company's
potential liability in the event of non-payment by the issuer of a reinsured
obligation represents the aggregate outstanding principal reinsured under its
policies and contracts and related interest payable at the date of default. In
addition, the Company provides credit protection on specific referenced credits
or on pools of specific referenced credits through the reinsurance of credit
default swaps. Under the terms of credit default swaps, the seller of credit
protection makes a specified payment to the buyer of credit protection upon the
occurrence of one or more specified credit events with respect to a reference
obligation or entity. The Company's potential liability under credit default
swaps represents the notional amount of such swaps.

     At March 31, 2007, the Company's net outstanding par exposure under its
in-force financial guarantee reinsurance policies and contracts aggregated to
$83.2 billion and net reserves for losses and loss adjustment expenses relating
to such exposures was $7.5 million at such date. In addition, at March 31, 2007,
the Company's notional exposure under credit default swaps aggregated to $27.1
billion and the net asset for these credit default swaps reflected in the
Company's balance sheet at March 31, 2007 was $5.5 million.