EXHIBIT 99.1




XL CAPITAL ASSURANCE INC.
AND SUBSIDIARY
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS PERIODS ENDED
MARCH 31, 2007 AND 2006
(EXPRESSED IN U.S. DOLLARS)






<PAGE>


XL CAPITAL ASSURANCE INC. AND SUBSIDIARY
INTERIM CONSOLIDATED BALANCE SHEETS
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                             (UNAUDITED)
                                                                                AS OF                  AS OF
                                                                              MARCH 31,             DECEMBER 31,
                                                                                 2007                  2006
                                                                          -------------------   --------------------
<S>                                                                             <C>                    <C>
ASSETS
Investments
   Debt securities available for sale, at fair value
     (amortized cost: 2007 - $321,618; 2006 - $335,532) .............       $   319,765            $   332,265
   Short-term investments, at fair value (amortized cost:
     2007 - $35,946; 2006 - $14,979) ................................            35,857                 14,978
                                                                            -----------            -----------
     Total investments ..............................................           355,622                347,243

Cash and cash equivalents ...........................................            68,362                 82,691
Accrued investment income ...........................................             2,507                  3,111
Prepaid reinsurance premiums ........................................           622,762                587,508
Premiums receivable .................................................            11,158                  6,984
Reinsurance balances recoverable on unpaid losses ...................           154,472                155,597
Intangible assets - acquired licenses ...............................            11,529                 11,529
Deferred tax asset ..................................................            17,575                 17,872
Other assets ........................................................             9,709                 12,200
                                                                            -----------            -----------
     Total assets ...................................................       $ 1,253,696            $ 1,224,735
                                                                            ===========            ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities
   Unpaid losses and loss adjustment expenses .......................       $   162,890            $   164,907
   Deferred premium revenue .........................................           712,335                666,082
   Deferred ceding commissions, net .................................            54,086                 52,720
   Reinsurance premiums payable .....................................            28,863                 22,548
   Accounts payable and accrued expenses ............................            18,747                 34,875
   Payable for investments purchased ................................              --                    5,435
   Intercompany payable to affiliates ...............................            25,358                 27,663
                                                                            -----------            -----------
     Total liabilities ..............................................         1,002,279                974,230
                                                                            -----------            -----------

Commitments and contingencies

Shareholder's Equity
   Common stock (par value $7,500 per share; 8,000 shares authorized;
     2,000 shares issued and outstanding) ...........................            15,000                 15,000
   Additional paid-in capital .......................................           264,173                264,173
   Accumulated other comprehensive loss .............................            (1,929)                (3,222)
   Accumulated deficit ..............................................           (25,827)               (25,446)
                                                                            -----------            -----------
     Total shareholder's equity .....................................           251,417                250,505
                                                                            -----------            -----------
     Total liabilities and shareholder's equity .....................       $ 1,253,696            $ 1,224,735
                                                                            ===========            ===========
</TABLE>

          See accompanying notes to consolidated financial statements.


<PAGE>


XL CAPITAL ASSURANCE INC. AND SUBSIDIARY
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(U.S. DOLLARS IN THOUSANDS)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                          THREE MONTHS ENDED
                                                                                               MARCH 31,
                                                                              --------------------------------------------
                                                                                      2007                    2006
                                                                              --------------------    --------------------
<S>                                                                                <C>                     <C>
REVENUES
Gross premiums written .....................................................       $ 89,495                $ 70,780
Ceded premiums written .....................................................        (73,228)                (63,430)
                                                                                   --------                --------
   Net premiums written ....................................................         16,267                   7,350

Change in net deferred premium revenue .....................................        (10,999)                 (3,459)
                                                                                   --------                --------
   Net premiums earned .....................................................          5,268                   3,891

Net investment income ......................................................          5,112                   3,716
Net realized losses on investments .........................................           --                      (475)
Net realized and unrealized losses on derivative financial instruments......           (624)                   (243)
Fee income and other .......................................................           --                       125
                                                                                   --------                --------
   Total revenues ..........................................................          9,756                   7,014
                                                                                   --------                --------
EXPENSES
Net losses and loss adjustment expenses ....................................           (464)                    521
Net operating expenses .....................................................         10,160                   7,132
                                                                                   --------                --------
   Total expenses ..........................................................          9,696                   7,653
   Income (loss) before income tax expense .................................             60                    (639)

   Total income tax expense ................................................            441                      15
                                                                                   --------                --------

   Net loss ................................................................           (381)                   (654)
                                                                                   --------                --------

COMPREHENSIVE INCOME (LOSS)
Net loss ...................................................................           (381)                   (654)
Other comprehensive income (loss), (net of deferred tax (expense) benefit of
  ($33) in 2007 and $57 in 2006) ...........................................          1,293                  (4,800)
                                                                                   --------                --------
   Comprehensive income (loss) .............................................       $    912                $ (5,454)
                                                                                   --------                --------
</TABLE>

          See accompanying notes to consolidated financial statements.


<PAGE>


XL CAPITAL ASSURANCE INC. AND SUBSIDIARY
INTERIM CONSOLIDATED 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 of shares - beginning of year ...............             2,000                    2,000
                                                             ---------                ---------
   Number of shares - end of period ................             2,000                    2,000
                                                             =========                =========
COMMON STOCK
Balance - beginning of year ........................         $  15,000                $  15,000
                                                             ---------                ---------
   Balance - end of period .........................            15,000                   15,000
                                                             ---------                ---------
ADDITIONAL PAID-IN CAPITAL
Balance - beginning of year ........................           264,173                  239,173
Capital contribution ...............................              --                     25,000
                                                             ---------                ---------
   Balance - end of period .........................           264,173                  264,173
                                                             ---------                ---------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance - beginning of year ........................            (3,222)                  (2,355)
Net change in unrealized appreciation of investments             1,293                     (867)
                                                             ---------                ---------
   Balance - end of period .........................            (1,929)                  (3,222)
                                                             ---------                ---------
ACCUMULATED DEFICIT
Balance - beginning of year ........................           (25,446)                 (24,870)
Net loss ...........................................              (381)                    (576)
                                                             ---------                ---------
   Balance - end of period .........................           (25,827)                 (25,446)
                                                             ---------                ---------
   Total shareholder's equity ......................         $ 251,417                $ 250,505
                                                             =========                =========
</TABLE>

          See accompanying notes to consolidated financial statements.


<PAGE>


XL CAPITAL ASSURANCE INC. AND SUBSIDIARY
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. DOLLARS IN THOUSANDS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                                (UNAUDITED)
                                                                                            THREE MONTHS ENDED
                                                                                                 MARCH 31,
                                                                                -------------------------------------------
                                                                                        2007                    2006
                                                                                -------------------       -----------------
<S>                                                                                  <C>                     <C>
CASH FLOWS (USED IN) PROVIDED BY OPERATING ACTIVITIES
Net loss .............................................................               $   (381)               $   (654)
Adjustments to reconcile net loss to net cash (used in)
  provided by operating activities
   Net realized losses on sale of investments ........................                   --                       475
   Net realized and unrealized losses on derivative financial
     instruments, excluding cash received and paid ...................                    624                     243
   Amortization of (discount) premium on bonds .......................                   (121)                    170
   Decrease in unpaid losses and loss adjustment expenses, net .......                   (892)                    (45)
   Increase in deferred premium revenue, net .........................                 10,999                   3,459
   Increase in deferred ceding commissions, net ......................                  1,366                   1,638
   Increase in reinsurance premiums payable ..........................                  6,315                  15,583
   Increase in premiums receivable ...................................                 (4,174)                 (4,317)
   Decrease in accrued investment income .............................                    604                     779
   Deferred tax expense (benefit) ....................................                    297                  (1,083)
   Decrease in accounts payable and accrued expenses .................                (16,667)                 (8,687)
   (Decrease) increase in intercompany payable to affiliates .........                 (2,305)                  4,292
   Other .............................................................                  2,374                    (591)
                                                                                     --------                --------
     Total adjustments ...............................................                 (1,580)                 11,916
                                                                                     --------                --------
     Net cash (used in) provided by operating activities .............                 (1,961)                 11,262
                                                                                     --------                --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of debt ...........................................                  3,789                   2,302
Purchase of debt securities ..........................................                 (5,435)                (17,867)
Net (purchase) sales of short term investments .......................                (28,456)                 (9,639)
Proceeds from maturity of debt securities and short-term investments .                 17,734                  11,635
                                                                                     --------                --------
     Net cash used in investing activities ...........................                (12,368)                (13,569)
                                                                                     --------                --------

     Decrease in cash and cash equivalents ...........................                (14,329)                 (2,307)
CASH AND CASH EQUIVALENTS
Beginning of year ....................................................                 82,691                  32,337
                                                                                     --------                --------
End of Period ........................................................               $ 68,362                $ 30,030
                                                                                     ========                ========
                                                                                     ========                ========
Taxes paid (received) ................................................               $    840                $   (738)
                                                                                     ========                ========
</TABLE>

          See accompanying notes to consolidated financial statements.


<PAGE>


XL CAPITAL ASSURANCE INC. AND SUBSIDIARY
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
--------------------------------------------------------------------------------

1.   ORGANIZATION AND OWNERSHIP

          Through June 30, 2006, XL Capital Assurance Inc. ("XLCA") was a wholly
     owned subsidiary of XL Reinsurance America, Inc. ("XL RE AM"), 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 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") (XLCA and XLCA-UK hereafter
     collectively referred to as the "Company") and (ii) XL Financial Assurance
     Ltd. ("XLFA"). 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% economic interest. As a result
     of limitations on XL Capital's voting power contained in SCA's by-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 SCA's
     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.

          XLCA is an insurance company domiciled in the State of New York and is
     licensed to conduct financial guarantee insurance business throughout all
     50 of the United States, as well as in the Commonwealth of Puerto Rico, the
     District of Columbia, and the U.S. Virgin Islands. In addition, XLCA
     through XLCA-UK, which is an insurance company organized under the laws of
     England, is permitted to conduct financial guarantee business in England,
     Ireland, Spain, France, Portugal, Italy, Norway, The Netherlands, Greece,
     and Germany. Also, to facilitate distribution of its products XLCA
     maintains a branch office in Singapore and XLCA-UK maintains a branch
     office in Madrid. In addition XLCA has an office in California. XLCA and
     XLCA-UK have triple-A financial strength ratings from Standard & Poor's
     Ratings Services, Moody's Investors Service, Inc., and Fitch Inc. The
     Company is primarily engaged in the business of providing credit
     enhancement on fixed and variable rate income securities through the
     issuance of financial guarantee insurance policies, and credit protection
     on specific referenced credits or on pools of specific referenced credits
     through guarantees of credit default swaps issued by trusts established to
     comply with New York State Insurance Law (the "Trusts").

          Financial guarantee insurance provides an unconditional and
     irrevocable guarantee to the holder of a debt obligation of full and timely
     payment of principal and interest. In the event of a default under the
     obligation, the insurer has recourse against the issuer and/or any related
     collateral (which is more common in the case of insured asset-backed
     obligations or other non-municipal debt) for amounts paid under the terms
     of the policy. Credit default swaps are derivative contracts which offer
     credit protection relating to a particular security or pools of specified
     securities. Under the terms of a credit default swap, 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
     referenced security. Derivative financial instruments typically provide
     protection to a buyer rather than credit enhancement of an issue as in
     traditional financial guarantee insurance. The Company's underwriting
     policies limit the Company to providing credit protection on obligations or
     referenced securities that it determines would be of investment-grade
     quality without the benefit of credit enhancement provided by the Company
     through the issuance of insurance policies and credit default swaps. See
     Note 3 for further details.

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     BASIS OF PRESENTATION AND CONSOLIDATION

          These unaudited interim consolidated financial statements include the
     accounts of the Company, its subsidiary and the Trusts and 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
     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 at the end 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. All
     significant inter-company accounts and transactions have been eliminated.
     These statements should be read in conjunction

<PAGE>

XL CAPITAL ASSURANCE INC. AND SUBSIDIARY
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
--------------------------------------------------------------------------------

     with the Company's December 31, 2006 consolidated financial statements and
     notes thereto filed with the Securities and Exchange Commission as an
     Exhibit to SCA's Form 10-K for the year ended December 31, 2006. The
     preparation of financial statements in conformity with GAAP requires
     management 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 defaults swaps issued to its customers, 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
     insured by the Company meet the definition of a derivative under FASB
     statement of Accounting Standards No. 133, "Accounting for Derivative
     Instruments and Hedging Activities" ("SFAS 133"), as amended by SFAS No.
     149. The Company has recorded these products at fair value, modeled on
     prevailing market conditions and certain other factors relating to the
     structure and credit quality of the transaction. The Company considers
     credit default swaps to be, in substance, financial guarantee contracts as
     the Company intends to hold them to maturity. The full change in fair value
     is included in net realized and unrealized gains (losses) on derivative
     financial instruments.

          Credit default swaps generally cover a portfolio of securities. The
     credit ratings of the underlying securities vary and a single rating is
     calculated for the Company's exposure at the inception of the transaction
     by an independent credit rating agency. In order to effectively price and
     market the transaction, different tranches are modeled for the purpose of
     assigning credit ratings based upon the level of subordination. Generally,
     a primary layer of first loss protection is created with the Company
     participating in the senior or higher quality rated tranches of the
     transaction.

          The Company's exposure is fair valued taking into account changes in
     credit spreads, current market conditions, as well as the overall credit
     quality of the underlying collateral.

          The Company's credit default swap portfolio generally requires the
     Company to meet 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 credit default swap portfolio consists of structured pools
     of corporate obligations that were awarded investment-grade ratings at the
     deals' inception. On a net par basis, approximately 97.3% of the portfolio
     is rated AAA with the remaining 2.7% allocated to other investment-grade
     ratings. The weighted average term of the contracts in force was 8.8 years.
     The components of the Company's net credit default swap asset and liability
     classified with other assets and accounts payable and accrued expenses,
     respectively, at March 31, 2007 and December 31, 2006 are as follows:

     (U.S. DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
                                                                              (UNAUDITED)
                                                                                 AS OF             AS OF
                                                                                MARCH 31,       DECEMBER 31,
                                                                                  2007              2006
                                                                            ---------------   ----------------
<S>                                                                             <C>               <C>
ASSETS
Reinsurance balances recoverable on unpaid losses ........................      $12,494           $11,746
Other assets .............................................................        8,818            11,668
                                                                                -------           -------
   Total Assets ..........................................................      $21,312           $23,414
                                                                                =======           =======

LIABILITIES
Unpaid losses and loss adjustment expenses ...............................      $13,855           $12,932
Other liabilities ........................................................        9,136            11,362
                                                                                -------           -------
   Total Liabilities .....................................................      $22,991           $24,294
                                                                                =======           =======
</TABLE>

          The components of the Company's net realized and unrealized gains
     (losses) on derivative financial instruments for the period ended March 31,
     2007 and 2006 are as follows:

     (U.S. DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
                                                                           (UNAUDITED)
                                                                        THREE MONTHS ENDED
                                                                              MARCH 31,
                                                              ------------------------------------------
                                                                      2007                  2006
                                                              ---------------------   ------------------
<S>                                                                <C>                    <C>
INCOME STATEMENT
Gross premiums written .........................................   $ 9,161                $ 5,477
Net premiums earned ............................................     1,197                    510
Net realized and unrealized gains (losses) on derivative
  financial instruments ........................................      (624)                  (243)
Net losses and loss adjustment expenses ........................       175                     73
</TABLE>


<PAGE>

XL CAPITAL ASSURANCE INC. AND SUBSIDIARY
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
--------------------------------------------------------------------------------

4.   NEW 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 INTERPRETATION NO. 48, "ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES -
     AN INTERPRETATION OF FASB STATEMENT NO. 109" -

          In July 2006, the FASB issued FASB Interpretation No. 48, "Accounting
     for Uncertainty in Income Taxes - an interpretation of FASB Statement No.
     109" ("FIN 48"). FIN 48 prescribes a recognition threshold and measurement
     attribute for financial statement recognition and measurement of a tax
     position taken or expected to be taken in a tax return, and also provides
     guidance on de-recognition, classification, interest and penalties,
     accounting in interim periods, disclosure, and transition. FIN 48 is
     effective for fiscal years beginning after December 15, 2006. The Company
     adopted FIN 48 on January 1, 2007 and it did not have any effect on the
     Company's financial condition or results of operations.

<PAGE>

XL CAPITAL ASSURANCE INC. AND SUBSIDIARY
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
--------------------------------------------------------------------------------

     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 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 $0.04 million and $0.34 million for
     the three months ended March 31, 2007 and 2006, respectively, related to
     refunded and called bonds.

6.   INCOME TAXES

          XLCA is subject to federal, state and local corporate income taxes and
     other taxes applicable to U.S. corporations. The U.S. federal income tax
     liability is determined in accordance with the principles of the
     consolidated tax provisions of the Internal Revenue Code and Regulations.
     XLCA has operations in subsidiary and branch form in certain international
     jurisdictions that are subject to relevant taxes in those jurisdictions.

          XLCA files a consolidated tax return with SCA Holdings U.S. Inc (the
     U.S. common parent of the SCA group) and its subsidiaries (which consists
     of XLCA and SCA's other U.S. based subsidiaries). XLCA maintains a tax
     sharing agreement with its subsidiaries, whereby the consolidated income
     tax liability is allocated among affiliates in the ratio that each
     affiliate's separate return liability bears to the sum of the separate
     return liabilities of all affiliates that are members of the consolidated
     group. In addition, a complementary method is used which results in
     reimbursement by profitable affiliates to loss affiliates for tax benefits
     generated by loss affiliates. As of March 31, 2007 and December 31, 2006,
     the Company had a U.S. federal income tax payable of $3.5 million and $4.2
     million, respectively.

          As of March 31, 2007 and December 31, 2006, the company had deferred
     income tax assets of $17.6 million and $17.9 million, respectively. Such
     deferred tax assets were net of a valuation allowance of $1.2 million and
     $1.9 million as of March 31, 2007 and December 31, 2006, respectively. The
     valuation allowance relates to net unrealized capital losses and a net
     realized capital loss carry forward that may not be realized within a
     reasonable period. At March 31, 2007, the Company had net unrealized
     capital losses and a net realized capital loss carry forward of
     approximately $2.1 million and $1.3 million respectively, against which a
     valuation allowance has been established. The net realized capital loss
     carry forward will expire in 2012.

          The Company adopted the provisions of FASB Interpretation No. 48,
     Accounting for Uncertainty in Income Taxes, on January 1, 2007. The Company
     did not recognize any liabilities for unrecognized tax benefits as a result
     of the implementation of Interpretation 48. With few exceptions, the
     Company is no longer subject to tax examinations by tax authorities in the
     major jurisdictions in which the Company operates for years prior to the
     following Dates:

     o    U.S. 2003

     o    U.K. 2002

<PAGE>

XL CAPITAL ASSURANCE INC. AND SUBSIDIARY
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
--------------------------------------------------------------------------------

          The Company's policy is to recognize any interest accrued related to
     unrecognized tax benefits as a component of interest expense and penalties
     in operating expenses. The Company does not have any accrued liabilities
     relating to interest and penalties as at March 31, 2007 or December 31,
     2006, respectively.

7.   TREATIES AND AGREEMENT WITH AFFILIATES

     SERVICES AGREEMENTS WITH AFFILIATES

          Substantially all of the Company's personnel services are provided by
     XL Financial Administrative Services Inc. ("XLFAS"). Prior to the IPO,
     substantially all of the Company's personnel services were provided by
     employees of affiliates of XL Capital. In connection with the IPO, such
     employees have become employees of SCA. In addition, the Company purchased
     various services from affiliates of XL Capital prior to the IPO under
     various agreements and continues to purchase such services under new
     agreements that became effective at the date of the IPO. Such services
     principally include: (i) information technology support, (ii) reinsurance
     and retrocessional consulting and management services, (iii) actuarial,
     finance, legal, internal audit services and certain investment management
     services and (iv) certain advertising services. The Company incurred costs
     under the aforementioned agreements aggregating $ 27.8 million and $12.7
     million for the three months ended March 31, 2007 and 2006, respectively,
     which are reflected in "Net operating expenses" in the accompanying
     consolidated statements of operations.

     EMPLOYEE BENEFIT PLANS

          Prior to the IPO, XL America, Inc ("XLA") maintained a qualified
     defined contribution pension plan and a non-qualified deferred compensation
     plan for the benefit of all XLFAS eligible employees (collectively, the
     "Plans"). Discretionary contributions to both Plans were based on a fixed
     percentage of employee contributions and compensation as defined by the
     Plans. Such plans were converted to SCA plans on the effective date of the
     IPO. The terms and provisions of SCA's plans are substantially the same as
     the aforementioned plans of XLA. For the period ended March 31, 2007 and
     2006, the Company incurred costs under the aforementioned plans aggregating
     $1.2 million, and $0.7 million, respectively, which are reflected in "Net
     operating expenses" in the accompanying consolidated statements of
     operations.

     REINSURANCE AGREEMENTS WITH AFFILIATES AND OTHER GUARANTIES

          The Company has the following reinsurance agreements with affiliates.
     Certain of the agreements discussed below may be terminated under certain
     conditions, as defined in the agreements.

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

     o    Effective August 4, 2006, XL RE AM 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). In consideration for the
          aforementioned indemnification the Company is obligated to pay XL RE
          AM approximately $9.8 million on an installment basis over the life of
          the aforementioned project financing. As this premium is due
          irrespective of any early termination of the underlying insurance
          transaction, the Company recorded a liability of approximately $7.0
          million at the effective date of the indemnification (representing the
          present value of the obligation discounted at 5.0%, which reflects the
          rate on treasury obligations with a term to maturity commensurate with
          that of the liability) and a corresponding deferred cost, which are
          reflected in the accompanying consolidated balance sheet in
          "Reinsurance premiums payable" and "Prepaid reinsurance premiums",
          respectively. For the three months ended March 31, 2007, the Company
          incurred costs under the aforementioned agreements aggregating
          approximately $0.2 million and the balance of the aforementioned
          liability and deferred cost was $6.6 million at March 31, 2007.

     o    Effective August 4, 2006, XLA indemnified the Company for any
          dimunition in value below their carrying value at June 30, 2006 of the
          investment described in Note 8 (b), which investment was acquired in
          connection with the satisfaction of a claim under a financial
          guarantee insurance policy issued by XLCA. In addition, pursuant to
          the aforementioned indemnity, XLA agreed to indemnify the Company for
          any costs arising out of any litigation or future claim in connection
          with the aforementioned insurance policy. See Note 8 (b) for further
          information regarding amounts recovered or recoverable by XLCA under
          the indemnity.

<PAGE>

XL CAPITAL ASSURANCE INC. AND SUBSIDIARY
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
--------------------------------------------------------------------------------

     o    Effective May 1, 2004, XL Insurance (Bermuda) Ltd ("XLI"), an indirect
          wholly owned subsidiary of XL Capital, entered into an agreement with
          XLCA which unconditionally and irrevocably guarantees XLCA the full
          and complete payment when due of all of XLFA's obligations under its
          facultative quota share reinsurance agreement with XLCA, under which
          agreement XLFA has assumed business from XLCA since December 19, 2000.
          The gross par value of business guaranteed by XLI under this agreement
          was approximately $83.2 billion and $83.1 billion as of March 31, 2007
          and December 31, 2006, respectively. The agreement terminated with
          respect to any new business produced by XLCA and ceded to XLFA
          pursuant to the faculative quota share reinsurance agreement after the
          effective date of the IPO, but the guarantee remains in effect with
          respect to cessions under such agreement prior to the IPO.

     o    Effective November 1, 2002, XLCA entered into a facultative
          reinsurance arrangement (the "XL Re Treaty") with XL RE AM. Under the
          terms of the XL Re Treaty, XL RE AM agrees to reinsure risks insured
          by XLCA under financial guarantee insurance policies up to the amount
          necessary for XLCA to comply with single risk limitations set forth in
          Section 6904(d) of the New York Insurance Laws. Such reinsurance was
          on an automatic basis prior to the effective date of the IPO and is on
          a facultative basis on and after the effective date of the IPO. The
          reinsurance provided by XL RE AM may be on an excess of loss or quota
          share basis. The Company is allowed up to a 30% ceding commission (or
          such other percentage on an arm's-length basis) on ceded premiums
          written under the terms of this agreement.

     o    The Company provides financial guarantee insurance policies insuring
          timely payment of investment agreements issued by XL Asset Funding
          Company I LLC ("XLAF"), an affiliate of the Company. As of March 31,
          2007 and December 31, 2006, the aggregate face amount of such
          investment agreements insured by the Company was $4.1 billion ($627.0
          million net of reinsurance to XLFA) and $3.9 billion ($554.8 million
          net of reinsurance to XLFA), respectively. In addition, the Company
          insures XLAF's obligations under certain derivative contracts issued
          and purchased by XLAF. As of March 31, 2007, the total notional value
          of such contracts insured was $179.1 million. For the period ended
          March 31, 2007 and 2006, the Company recorded earned premiums of $1.0
          million ($0.1 net of reinsurance to XLFA) and $1.0 million ($0.1 net
          of reinsurance to XLFA), respectively.

     o    XLI guarantees the obligations of XLCA in connection with certain
          transactions insured by XLCA-UK. As of March 31, 2007 and December 31,
          2006, the gross par outstanding related to these transactions were
          approximately $1,049.4 million ($60.1 million net of reinsurance) and
          $1,017.8 million ($58.6 million net of reinsurance), respectively.

     Amounts ceded to affiliate reinsures are as follows:


     (U.S. DOLLARS IN THOUSANDS)
     Statement of Operations

<TABLE>
<CAPTION>
                                                                   (UNAUDITED)
                                                                THREE MONTHS ENDED
                                                                      MARCH 31,
                                                      ------------------------------------------
                                                              2007                  2006
                                                      ---------------------   ------------------
<S>                                                        <C>                    <C>
Ceded premiums written ............................         $69,739               $62,796
Ceded premiums earned .............................          36,840                35,501
Ceded commission revenue ..........................           9,367                10,546
Ceded losses and loss adjustment expenses..........           1,224                 3,606
</TABLE>



     (U.S. DOLLARS IN THOUSANDS)
     Balance Sheets

<TABLE>
<CAPTION>
                                                           (UNAUDITED)
                                                              AS OF             AS OF
                                                             MARCH 31,       DECEMBER 31,
                                                               2007              2006
                                                         ---------------   ----------------
<S>                                                        <C>               <C>
ASSETS
Prepaid reinsurance premium ..........................       $618,108         $582,798
Reinsurance balances recoverable on unpaid losses.....        151,793          153,017
                                                             --------         --------
   Total Assets ......................................       $769,901         $735,815
                                                             ========         ========

LIABILITIES
Deferred ceding commissions, net .....................       $145,334         $135,555
Reinsurance premiums payable .........................         28,731           22,226
                                                             --------         --------
   Total Liabilities .................................       $174,065         $157,781
                                                             ========         ========
</TABLE>


<PAGE>

XL CAPITAL ASSURANCE INC. AND SUBSIDIARY
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
--------------------------------------------------------------------------------

8.   LIABILITY FOR LOSSES AND LOSS ADJUSTMENT EXPENSES

          The Company's liability for losses and loss adjustment expenses
     consists of case basis reserves and unallocated reserves. Activity in the
     liability for losses and loss adjustment expenses is summarized as follows:
<TABLE>
<CAPTION>
                                                                           (UNAUDITED)
                                                                        AS OF AND FOR THE                  AS OF 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 ......         $ 83,783         $ 81,124          $ 66,183         $ 65,419
Unpaid losses and loss expenses recoverable ...............          (82,283)         (73,314)          (62,518)         (59,555)
                                                                    --------         --------          --------         --------
Net unpaid losses and loss expenses at beginning of year ..            1,500            7,810             3,665            5,864
Increase (decrease) in net losses and loss expenses
   incurred in respect of losses occurring in:
   Current year ...........................................             --                206              --              1,704
   Prior years ............................................             (670)            --                 (66)            --

Less net losses and loss expenses (paid) received & other .             (428)            --              (2,099)             242
                                                                    --------         --------          --------         --------
Net unpaid losses and loss expenses at end of period ......              402            8,016             1,500            7,810
Unpaid losses and loss expenses recoverable ...............           78,611           75,861            82,283           73,314
                                                                    --------         --------          --------         --------

Unpaid losses and loss expenses at end of period ..........         $ 79,013         $ 83,877          $ 83,783         $ 81,124
                                                                    ========         ========          ========         ========
</TABLE>

CASE BASIS RESERVES FOR LOSSES AND LOSS ADJUSTMENT 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 insurance transactions described under "(a)" and
"(b)" below by affiliates of XL Capital in connection with SCA's IPO. As a
result of such indemnifications, all adverse loss development on such insurance
transactions subsequent to the effective date of the IPO, which is in excess of
the Company's carried reserves for such transactions at the date of the IPO,
will be absorbed by the aforementioned affiliates of XL Capital. Such protection
does not relieve the Company of its obligations under the aforementioned
insurance transactions. Accordingly, the Company is still liable under the
insurance transactions in the event that the affiliates of XL Capital do not
meet their obligations under the indemnifications. For further information with
respect to the indemnifications see Note 7.

a.   At December 31, 2006, the Company carried a gross case basis reserve for
     losses and loss adjustment expenses of approximately $74.6 million ($2.8
     million after reinsurance to XLFA and XL RE AM) 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 12 years, aggregated
     approximately $215.8 million 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.

<PAGE>

XL CAPITAL ASSURANCE INC. AND SUBSIDIARY
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
--------------------------------------------------------------------------------

b.   At December 2006, the Company carried a liability of $5.0 million relating
     to a dispute in regard to certain exposures associated with notes which
     were insured by the Company and collateralized by loans to medical
     providers. Because the Company's liability in regard to this dispute was
     fully indemnified by XLA pursuant to the indemnification discussed above
     and in Note 7, the Company also carried a receivable from XLA for $5.0
     million at December 31, 2006. During the three months ended March 31, 2007,
     the Company reduced the liability and corresponding receivable from XLA by
     $1.1 million to reflect an agreement in principal among the parties to
     settle the dispute in exchange for a payment by the Company of $3.9
     million.

c.   At December 31, 2006 the Company carried a case basis reserve for losses
     and loss adjustment expenses of $3.3 million ($0.6 million after
     reinsurance to XLFA) 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 $3.3 million ($0.6 million after reinsurance to
     XLFA) resulting from the elimination of the aforementioned reserve.

     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 insurance and reinsurance to
support public and private borrowing arrangements. Financial guarantee insurance
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
an insured or reinsured obligation represents the aggregate outstanding
principal insured or 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 issuance 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 insurance and reinsurance policies and contracts
aggregated to $17.4 billion and net reserves for losses and loss adjustment
expenses relating to such exposures was $0.4 million at such date. In addition,
at March 31, 2007, the Company's notional exposure under credit default swaps
aggregated to $5.4 billion and the net assets for these credit default swaps
reflected in the Company's balance sheet at March 31, 2007 was $0.3 million.