Exhibit 99.2

XL Financial Assurance Ltd.(Incorporated in Bermuda)Interim Financial StatementsFor the Three and Six Month Periods Ended June 30, 2007 and 2006(expressed in U.S. dollars)

---



XL
        FINANCIAL ASSURANCE LTD.  INTERIM BALANCE SHEETS  (U.S. dollars in thousands, except share amounts)


|                                                                                               |  | (unaudited) |           |   |                        |   |          
|---------------------------------------------------------------------------------------------- |  | ----------- | --------- | - | ---------------------- | - | ---------
|                                                                                               |  | As of       |           |   | As of                  |  
|                                                                                               |  | June 30,    |           |   | December
          31, |  
|                                                                                               |  | 2007        |           |   | 2006                   |  
|ASSETS:                                                                                        |  |             |           |   |                        |   |          
|Investments:                                                                                   |  |             |           |   |                        |   |          
|Debt securities, at fair
        value                                                         |  |             |           |   |                        |   |          
|(amortized
        cost: 2007 - $1,909,940; 2006 - $1,420,391)                                 |  | $           | 1,875,207 |   |                        | $ | 1,404,197
|Short-term investments, at
        fair value                                                  |  |             |           |   |                        |   |          
|(amortized
        cost: 2007 - $39,377 2006 - $207,951)                                       |  |             | 39,223    |   |                        |   | 206,923  
|Total investments
        available for sale                                                   |  |             | 1,914,430 |   |                        |   | 1,611,120
|                                                                                              
|Cash and cash equivalents                                                                      |  |             | 99,720    |   |                        |   | 86,528   
|Accrued investment income                                                                      |  |             | 14,980    |   |                        |   | 13,355   
|Deferred acquisition costs                                                                     |  |             | 155,418   |   |                        |   | 145,929  
|Prepaid reinsurance premiums                                                                   |  |             | 58,222    |   |                        |   | 41,915   
|Reinsurance balances receivable                                                                |  |             | 17,744    |   |                        |   | 18,681   
|Unpaid losses and loss expenses
        recoverable                                            |  |             | 77,942    |   |                        |   | 78,230   
|Amounts due from parent and
        affiliates                                                 |  |             | -         |   |                        |   | 37       
|Net receivable for investments
        sold                                                    |  |             | 142       |   |                        |   | 112      
|Derivative assets                                                                              |  |             | 7,062     |   |                        |   | 11,148   
|Other assets                                                                                   |  |             | 141       |   |                        |   | 340      
|Total
          assets                                                                         |  | $           | 2,345,801 |   |                        | $ | 2,007,395
|LIABILITIES, REDEEMABLE
          PREFERRED SHARES                                             |  |             |           |   |                        |   |          
|AND SHAREHOLDERS
          EQUITY                                                             |  |             |           |   |                        |   |          
|Liabilities:                                                                                   |  |             |           |   |                        |   |          
|Unpaid losses and loss expenses                                                                |  | $           | 157,787   |   |                        | $ | 156,733  
|Deferred premium revenue                                                                       |  |             | 745,253   |   |                        |   | 699,264  
|Reinsurance balances payable                                                                   |  |             | 8,739     |   |                        |   | 7,308    
|Accounts payable and accrued
        liabilities                                               |  |             | 802       |   |                        |   | 1,962    
|Amounts due to parent and
        affiliates                                                   |  |             | 9,434     |   |                        |   | 4,076    
|Derivative liabilities                                                                         |  |             | 23,869    |   |                        |   | 4,685    
|Total
          liabilities                                                                    |  |             | 945,884   |   |                        |   | 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 June 30, 2007 and December 31, 2006, respectively)                   |  |             | 294       |   |                        |   | 294      
|Additional paid-in capital                                                                     |  |             | 884,665   |   |                        |   | 659,665  
|Accumulated other comprehensive
        loss                                                   |  |             | (34,887   | ) |                        |   | (17,221  
|Retained earnings                                                                              |  |             | 510,845   |   |                        |   | 436,613  
|Total
          Shareholders Equity                                                           |  |             | 1,360,917 |   |                        |   | 1,079,351
|Total
          Liabilities, Redeemable Preferred Shares and Shareholders Equity              |  | $           | 2,345,801 |   |                        | $ | 2,007,395

See accompanying Notes to Interim Financial Statements.

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XL
        FINANCIAL ASSURANCE LTD.  INTERIM STATEMENTS OF OPERATIONS AND COMPREHENSIVE
      INCOME  (U.S. dollars in thousands)


|                                                                                       |  | Unaudited                    |         |   | Unaudited                  |  
|-------------------------------------------------------------------------------------- |  | ---------------------------- | ------- | - | -------------------------- | -
|                                                                                       |  | Three Months
          ended |         |   | Six Months
          ended |  
|                                                                                       |  | June 30,                     |         |   | June 30,                   |  
|                                                                                       |  |                              | 2007    |   |                            |  
|                                                                                      
|Revenues:                                                                              |  |                              |         |   |                            |  
|Net premiums earned                                                                    |  | $                            | 47,487  |   |                            | $
|Net investment income                                                                  |  |                              | 24,424  |   |                            |  
|Net realized losses on investments                                                     |  |                              | (1,654  | ) |                            |  
|Fee and other income                                                                   |  |                              | -       |   |                            |  
|Net realized and unrealized
        gains (losses) on derivative financial instruments |  |                              | (17,880 | ) |                            |  
|                                                                                      
|Total
          revenues                                                               |  |                              | 52,377  |   |                            |  
|                                                                                      
|Expenses:                                                                              |  |                              |         |   |                            |  
|Net losses and loss expenses                                                           |  |                              | 2,027   |   |                            |  
|Acquisition costs                                                                      |  |                              | 11,982  |   |                            |  
|Operating expenses                                                                     |  |                              | 3,212   |   |                            |  
|                                                                                      
|Total
          expenses                                                               |  |                              | 17,221  |   |                            |  
|                                                                                      
|Net income                                                                             |  | $                            | 35,156  |   |                            | $
|                                                                                      
|Comprehensive income:                                                                  |  |                              |         |   |                            |  
|Net income                                                                             |  | $                            | 35,156  |   |                            | $
|                                                                                      
|Unrealized
        losses on investments                                               |  |                              | (24,459 | ) |                            |  
|                                                                                      
|Less: reclassification
        for losses realized in income                           |  |                              | (1,654  | ) |                            |  
|                                                                                      
|Other comprehensive loss                                                               |  |                              | (22,805 | ) |                            |  
|                                                                                      
|Comprehensive income                                                                   |  | $                            | 12,351  |   |                            | $

See accompanying Notes to Interim Financial Statements.

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XL
        FINANCIAL ASSURANCE LTD.  INTERIM STATEMENTS OF CHANGES IN SHAREHOLDERS
      EQUITY  (U.S. dollars in thousands, except share amounts)


|                                                                                 |  | (unaudited)             |           |   |                        |   |          
|-------------------------------------------------------------------------------- |  | ----------------------- | --------- | - | ---------------------- | - | ---------
|                                                                                 |  | Six Months              |           |   | Year Ended             |  
|                                                                                 |  | Ended                   |           |   | December
          31, |  
|                                                                                 |  | June
          30, 2007 |           |   | 2006                   |  
|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                                                            |  |                         | 225,000   |   |                        |   | 314,059  
|Balance
        - end of period                                                  |  |                         | 884,665   |   |                        |   | 659,665  
|                                                                                
|Accumulated Other Comprehensive
          Loss                                   |  |                         |           |   |                        |   |          
|Balance - beginning of year                                                      |  |                         | (17,221   | ) |                        |   | (17,953  
|Other comprehensive income
        (loss)                                        |  |                         | (17,666   | ) |                        |   | 732      
|                                                                                
|Balance
        - end of period                                                  |  |                         | (34,887   | ) |                        |   | (17,221  
|                                                                                
|Retained Earnings                                                                |  |                         |           |   |                        |   |          
|Balance - beginning of year                                                      |  |                         | 436,613   |   |                        |   | 323,127  
|Net income                                                                       |  |                         | 76,150    |   |                        |   | 132,958  
|Dividends on Series A redeemable
        preferred shares                        |  |                         | (1,918    | ) |                        |   | (4,456   
|Accumulated undeclared dividends
        on Series A redeemable preferred shares |  |                         |          |   |                        |   | (15,016  
|                                                                                
|Balance
        - end of period                                                  |  |                         | 510,845   |   |                        |   | 436,613  
|                                                                                
|Total Shareholders
        Equity                                               |  | $                       | 1,360,917 |   |                        | $ | 1,079,351

See accompanying Notes to Interim Financial Statements.

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XL
        FINANCIAL ASSURANCE LTD.  INTERIM STATEMENTS OF CASH FLOWS  (U.S. dollars in thousands)


|                                                                                          |  | (unaudited)                |         
|----------------------------------------------------------------------------------------- |  | -------------------------- | --------
|                                                                                          |  | Six Months
          Ended |         
|                                                                                          |  | June
          30,         |         
|                                                                                          |  | 2007                       |         
|Cash flows provided by
          operating activities:                                    |  |                            |         
|Net income                                                                                |  | $                          | 76,150  
|Adjustments to reconcile
        net income to net cash provided by operating activities: |  |                            |         
|Net realized losses on investments                                                        |  |                            | 1,542   
|Amortization of premium on
        debt maturities                                        |  |                            | 1,158   
|Net realized and unrealized
        losses on derivative financial instruments            |  |                            | 23,249  
|Net realized and unrealized
        losses on put option                                  |  |                            | 21      
|Accrued investment income                                                                 |  |                            | (1,625  
|Unpaid losses and loss expenses                                                           |  |                            | 1,054   
|Deferred premium revenue                                                                  |  |                            | 45,989  
|Unpaid losses & loss
        expenses recoverable                                         |  |                            | 288     
|Deferred acquisition costs                                                                |  |                            | (9,489  
|Amounts due from parent and
        affiliates                                            |  |                            | 37      
|Accounts payable and accrued
        liabilities                                          |  |                            | (1,160  
|Amount due to parent and
        affiliates                                               |  |                            | 5,358   
|Funds withheld                                                                            |  |                            |        
|Prepaid reinsurance premiums                                                              |  |                            | (16,307 
|Reinsurance balances receivable                                                           |  |                            | 937     
|Reinsurance balances payable                                                              |  |                            | 1,431   
|Other assets                                                                              |  |                            | 199     
|                                                                                         
|Total adjustments                                                                         |  |                            | 52,682  
|                                                                                         
|Net cash provided by operating
        activities                                         |  |                            | 128,832 
|                                                                                         
|Cash flows used in investing
          activities:                                        |  |                            |         
|Proceeds from sale of debt
        securities                                             |  |                            | 75,527  
|Proceeds from maturity of
        debt securities and short-term investments              |  |                            | 133,249 
|Net (purchases) sales of
        short-term investments                                   |  |                            | 118,057 
|Purchase of debt securities                                                               |  |                            | (650,600
|                                                                                         
|Net cash used in investing
        activities                                             |  |                            | (323,767
|                                                                                         
|Cash flows provided by
          (used in) financing activities:                          |  |                            |         
|Capital Contribution                                                                      |  |                            | 225,000 
|Dividends paid on Series
        A redeemable preferred shares                            |  |                            | (16,873 
|                                                                                         
|Net cash provided by (used
        in) financing activities                               |  |                            | 208,127 
|                                                                                         
|Increase in
          cash and cash equivalents                                           |  |                            | 13,192  
|                                                                                         
|Cash and cash equivalents
          - beginning of year                                   |  |                            | 86,528  
|                                                                                         
|Cash and cash equivalents
          - end of the period                                   |  | $                          | 99,720  

See accompanying Notes to Interim Financial Statements.

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XL
        FINANCIAL ASSURANCE LTD.
    NOTES TO INTERIM FINANCIAL STATEMENTS (unaudited)


1.          Organization
andBusiness

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 which are discussed below, through June 30,
2006, XL Financial Assurance Ltd (the Company) was a wholly owned
subsidiary of XL Insurance (Bermuda) Ltd (XLI),
which 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 its financial guarantee insurance and financial guarantee reinsurance operating
businesses to SCA and selling an interest therein to the public through an initial
public  offering of SCA common shares (the "IPO"). The contribution of such businesses
to SCA occurred on July 1, 2006 and the IPO was consummated on August 4, 2006.
The aforementioned operating businesses contributed to SCA by XL Capital consisted
of: (i)  XLCA and its wholly-owned subsidiary, XL Capital Assurance (U.K.) Limited
("XLCA-UK")
and (ii) the Company. 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
immediately after the IPO represented approximately a 63% economic interest.
In June 2007, XL Capital completed the sale of an additional common shares of
SCA from its holdings. Immediately after such sale XL Capitals ownership
of SCAs
common shares represented approximately a 46 percent voting and economic interest
in SCA, adjusted for restricted share awards to the  Companys employees
and management outstanding as of such date. Prior to XL Capitals sale of
its SCA common shares in June 2007 its voting interest in SCA was subject to
limitations contained in SCAs bye-laws. The Companys preferred
 stock interests are owned by Financial Security Assurance Holdings Ltd. (FSAH),
an entity which is otherwise not related to the Company, XL Capital or SCA.

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 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 conformity 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

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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.          Derivative
Financial Instruments

The Companys derivative financial instruments principally include credit default swaps issued to its customers and guarantees of interest rate swap contracts in connection with its
guarantees of certain debt obligations.

Credit default swaps and financial guarantees of interest rate swaps entered into by the Company meet the definition of a derivative instrument under Financial Accounting Standards Board
(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 Company intends to hold these derivative instruments until maturity.

The fair values of derivative instruments are determined using models developed by the Company and are 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 contracts 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 statement 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 adjustment
    expenses in
    the accompanying interim statement of operations, and the remaining components
    of the change in fair value of 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 gains (losses) on
    derivative financial instruments in the accompanying interim statement
    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.

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 June 30, 2007, on a net par basis, approximately 97.1% of the Companys reinsured
credit default swap in-force portfolio was rated AAA with the remaining 2.9% rated at or above investment-grade. The weighted average term of the contracts in-force was 8.22 years.

The
    following tables present the amounts related to credit default swaps and
    other derivative financial instruments reflected in the accompanying interim
    financial statements as of and for the periods indicated:

|                                                                               |  | (unaudited)                  |         |   | (unaudited)                |  
|------------------------------------------------------------------------------ |  | ---------------------------- | ------- | - | -------------------------- | -
|                                                                               |  | Three Months
          Ended |         |   | Six Months
          Ended |  
|                                                                               |  | June
          30,           |         |   | June
          30,         |  
|                                                                               |  | 2007                         |         |   | 2006                       |  
|Statement of Operations                                                        |  |                              |         |   |                            |  
|Net premiums earned                                                            |  | $                            | 7,608   |   |                            | $
|Net losses and loss expense                                                    |  |                              | 523     |   |                            |  
|Net realized and unrealized
        losses on derivative financial instruments |  |                              | (17,280 | ) |                            |  
|                                                                              
|                                                                               |  |                              |         |   |                            |  
|                                                                               |  |                              |         |   |                            |  
|                                                                               |  |                              |         |   |                            |  
|                                                                               |  |                              |         |   |                            |  
|                                                                               |  |                              |         |   |                            |  
|Assets                                                                         |  |                              |         |   |                            |  
|Derivative Assets                                                              |  |                              |         |   |                            |  
|                                                                              
|Liabilities                                                                    |  |                              |         |   |                            |  
|Unpaid losses and loss expenses                                                |  |                              |         |   |                            |  
|Derivative liabilities                                                         |  |                              |         |   |                            |  

---



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 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
comment period for the proposed Statement expired on June 18, 2007. A round table
    discussion between the FASB and interested parties who provided comments
    on the proposed Statement has been rescheduled to early September 2007 from
    mid-July of 2007. Currently the proposed Statement is due to be effective
    for fiscal years beginning after December 15, 2007. The Company is continuing
    to evaluate the effect of the 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.

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XL
        FINANCIAL ASSURANCE LTD.  NOTES TO INTERIM FINANCIAL STATEMENTS  (unaudited)


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 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 $5.0 million and $6.2
million for the three and six months ended June 30, 2007, respectively, and $20.7
 and $24.2 million for the three and six months ended June 30, 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. The Company incurred costs
under aforementioned agreements aggregating $0.2 million and $0.6 million for the three and six months ended June 30, 2007, respectively, compared to $1.7 and $2.5 million for the three and six months ended June 30, 2006,
respectively, which are a component of operating expenses in the accompanying statements of operations.

Reinsurance Treaties with Affiliates

| |  | 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.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     



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XL
        FINANCIAL ASSURANCE LTD.  NOTES TO INTERIM FINANCIAL STATEMENTS  (unaudited)


| | 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 $81.9 billion and $84.0 billion as of
June 30, 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.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | The Company has entered into the following reinsurance agreements with XLI:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| 
|  | (a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| 
|  | (b)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| 
|  | (c)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| 
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| 
|  | (d)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| 
| | The Company has entered into the following reinsurance agreements with certain subsidiaries and affiliates of FSAH. Premiums assumed from FSAH affiliates represented 10.81% and 8.17% of the Companys total reinsurance
premiums assumed for each of the six month periods ended June 30, 2007 and 2006, respectively. All of the agreements discussed below may be terminated under certain conditions, as defined in the agreements:                                                                                                                                                                                                                                                                                                       
| 
|  | (a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| 

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XL
        FINANCIAL ASSURANCE LTD.  NOTES TO INTERIM FINANCIAL STATEMENTS  (unaudited)


| |   | (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.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                                                                            
| |  | 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 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 June 30, 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 six month periods ended June 30, 2007 and 2006 is shown below:

|                                            |  | (unaudited)
|------------------------------------------- |  | -----------
|                                            |  | Assumed    
|Three months ended June 30,
        2007    |  |            
|Premium
        written                     |  | $          
|Premium
        earned                      |  |            
|Losses
        and loss adjustment expenses |  |            
|Three months ended June 30,
        2006    |  |            
|Premium
        written                     |  |            
|Premium
        earned                      |  |            
|Losses
        and loss adjustment expenses |  |            
|                                            |  |            
|                                            |  | (unaudited)
|                                            |  | Assumed    
|Six months ended June 30,
        2007      |  |            
|Premium
        written                     |  | $          
|Premium
        earned                      |  |            
|Losses
        and loss adjustment expenses |  |            
|Six months ended June 30,
        2006      |  |            
|Premium
        written                     |  |            
|Premium
        earned                      |  |            
|Losses
        and loss adjustment expenses |  |            

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XL
        FINANCIAL ASSURANCE LTD.  NOTES TO INTERIM FINANCIAL STATEMENTS  (unaudited)


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:

|                                                                     |  | (unaudited)                 |         |   |                               |   |         |          |  |   |            
|-------------------------------------------------------------------- |  | --------------------------- | ------- | - | ----------------------------- | - | ------- | -------- |  | - | -----------
|                                                                     |  | As at and
          for the |         |   | As at and
          for the   |  
|                                                                     |  | Six Months
          Ended  |         |   | Twelve Months
          Ended |  
|                                                                     |  | June
          30, 2007     |         |   | December
          31, 2006   |  
|                                                                     |  | Case                        |         |   | Unallocated                   |   |         | Case     |  |   | Unallocated
|(U.S. dollars in thousands)                                          |  | Reserves                    |         |   | Reserves                      |   |         | Reserves |  |   | Reserves   
|Unpaid losses and loss expenses
        at beginning of year         |  | $                           | 75,057  |   |                               | $ | 81,676  |          |  | $ | 64,747     
|Unpaid losses and loss expenses
        recoverable                  |  |                             | (64,359 | ) |                               |   | (13,871 | )        |  |   | (52,317    
|Net unpaid losses and loss
        expenses at beginning of year     |  |                             | 10,698  |   |                               |   | 67,805  |          |  |   | 12,430     
|Increase (decrease) in net
        losses and loss expenses incurred |  |                             |         |   |                               |   |         |          |  |   |            
|in respect
        of losses occurring in:                           |  |                             |         |   |                               |   |         |          |  |   |            
|Current
        year                                                 |  |                             |        |   |                               |   | 4,706   |          |  |   |           
|Prior years                                                          |  |                             | (3,000  | ) |                               |   |        |          |  |   | 1,474      
|Less net losses and loss
        expenses paid & other relating to   |  |                             |         |   |                               |   |         |          |  |   |            
|prior years                                                          |  |                             | (364    | ) |                               |   |        |          |  |   | (3,206     
|Net unpaid losses and loss
        expenses at end of period         |  |                             | 7,334   |   |                               |   | 72,511  |          |  |   | 10,698     
|Unpaid losses and loss expenses
        recoverable                  |  |                             | 64,359  |   |                               |   | 13,583  |          |  |   | 64,359     
|                                                                    
|                                                                     |  |                             |         |   |                               |   |         |          |  |   |            
|Unpaid losses and loss expenses
        at end of period             |  | $                           | 71,693  |   |                               | $ | 86,094  |          |  | $ | 75,057     

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, is 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 six months ended June 30, 2007. The total remaining par insured by the Company with respect to this transaction, which amortizes over many years into the future, aggregated approximately
$247.8 million ($6.0 million net of retrocession to XLI) at June 30, 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. 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,                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|  

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XL
        FINANCIAL ASSURANCE LTD.  NOTES TO INTERIM FINANCIAL STATEMENTS  (unaudited)


|   | 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 $1.2 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.

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
    June 30, 2007, the Companys net outstanding par exposure under its
    in-force financial guarantee reinsurance policies and contracts aggregated
    to $121.2 billion and net reserves for
losses and loss adjustment expenses relating to such exposures was $7.3 million
at such date. In addition, at June 30, 2007, the Companys notional exposure
under credit default swaps aggregated to $34.0
billion and the net liability for these credit default swaps reflected in the
Companys
balance sheet at June 30, 2007 was $14.2 million.

10.       Other Matters

On
    February 27, 2007, the board of directors of the Company approved: (i) an
    extraordinary dividend of $15.0 million on its Series A Redeemable Preferred
    Shares, and (ii) a reduction in the  stated value of the remaining outstanding
    Series A Redeemable Preferred Shares by a corresponding amount. Payment of
    the extraordinary dividend and the reduction in the stated value of the Series
    A Redeemable Preferred Shares occurred on March 30,  2007. This transaction
    was accounted for as a redemption of the preferred shares. As a result of
    the decrease in stated value, the Companys
annual fixed dividend requirement on the Series A Redeemable Preferred Shares
has been reduced from
$4.5 million to $3.2 million.

---