Exhibit 99.1

XL Capital Assurance Inc. and SubsidiaryInterim Consolidated Financial Statementsfor the Three and Nine Month Periods Ended September 30, 2007 and 2006(expressed in U.S. dollars)

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XL CAPITAL ASSURANCE INC. AND SUBSIDIARYINTERIM CONSOLIDATED BALANCE SHEETS(U.S. dollars in thousands, except share and per share amounts)

|                                                                                           |  |               |           |   |              |   |           |  
|------------------------------------------------------------------------------------------ |  | ------------- | --------- | - | ------------ | - | --------- | -
|                                                                                           |  | (unaudited)   |           |   |              |   |          
|                                                                                           |  | As of         |           |   | As of        |  
|                                                                                           |  | September 30, |           |   | December 31, |  
|                                                                                           |  | 2007          |           |   | 2006         |  
|ASSETS                                                                                     |  |               |           |   |              |   |           |  
|Investments                                                                                |  |               |           |   |              |   |           |  
|Debt securities available for sale, at fair value (amortized cost: 2007 - $364,223;        |  |               |           |   |              |   |           |  
|2006 -$335,532)                                                                            |  | $             | 361,881   |   |              | $ | 332,265   |  
|Short-term investments, at fair value (amortized cost: 2007 - $21,259; 2006 - $14,979)     |  |               | 21,173    |   |              |   | 14,978    |  
|Total investments                                                                          |  |               | 383,054   |   |              |   | 347,243   |  
|                                                                                          
|Cash and cash equivalents                                                                  |  |               | 39,368    |   |              |   | 82,691    |  
|Accrued investment income                                                                  |  |               | 3,041     |   |              |   | 3,111     |  
|Prepaid reinsurance premiums                                                               |  |               | 652,524   |   |              |   | 587,508   |  
|Premiums receivable                                                                        |  |               | 16,827    |   |              |   | 6,984     |  
|Reinsurance balances recoverable on unpaid losses                                          |  |               | 159,640   |   |              |   | 155,597   |  
|Intangible assets - acquired licenses                                                      |  |               | 11,529    |   |              |   | 11,529    |  
|Deferred tax asset                                                                         |  |               | 27,910    |   |              |   | 17,872    |  
|Derivative assets                                                                          |  |               | 133,629   |   |              |   | 11,668    |  
|Other assets                                                                               |  |               | 1,951     |   |              |   | 532       |  
|Total assets                                                                               |  | $             | 1,429,473 |   |              | $ | 1,224,735 |  
|                                                                                          
|LIABILITIES AND SHAREHOLDERS EQUITY                                                       |  |               |           |   |              |   |           |  
|Liabilities                                                                                |  |               |           |   |              |   |           |  
|Unpaid losses and loss adjustment expenses                                                 |  | $             | 168,782   |   |              | $ | 164,907   |  
|Deferred premium revenue                                                                   |  |               | 758,621   |   |              |   | 666,082   |  
|Deferred ceding commissions, net                                                           |  |               | 54,379    |   |              |   | 52,720    |  
|Reinsurance premiums payable                                                               |  |               | 18,569    |   |              |   | 22,548    |  
|Derivative liabilities                                                                     |  |               | 165,571   |   |              |   | 11,362    |  
|Accounts payable and accrued expenses                                                      |  |               | 9,466     |   |              |   | 23,513    |  
|Payable for investments purchased                                                          |  |               |          |   |              |   | 5,435     |  
|Intercompany payable to affiliates                                                         |  |               | 22,129    |   |              |   | 27,663    |  
|Total liabilities                                                                          |  |               | 1,197,517 |   |              |   | 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                                                       |  |               | (2,202    | ) |              |   | (3,222    | )
|Accumulated deficit                                                                        |  |               | (45,015   | ) |              |   | (25,446   | )
|Total shareholders equity                                                                 |  |               | 231,956   |   |              |   | 250,505   |  
|Total liabilities and shareholders equity                                                 |  | $             | 1,429,473 |   |              | $ | 1,224,735 |  

See accompanying notes to consolidated financial statements.

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XL CAPITAL ASSURANCE INC. AND SUBSIDIARYINTERIM CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)(unaudited)(U.S. dollars in thousands)

|                                                                   |  |                    |         |   |                   |   |         |      |  |   |          |   |  |   |          |  
|------------------------------------------------------------------ |  | ------------------ | ------- | - | ----------------- | - | ------- | ---- |  | - | -------- | - |  | - | -------- | -
|                                                                   |  | Three Months Ended |         |   | Nine Months Ended |  
|                                                                   |  | September 30,      |         |   | September 30,     |  
|                                                                   |  | 2007               |         |   | 2006              |   |         | 2007 |  |   | 2006     |  
|Revenues                                                           |  |                    |         |   |                   |   |         |      |  |   |          |   |  |   |          |  
|Gross premiums written                                             |  | $                  | 88,135  |   |                   | $ | 65,080  |      |  | $ | 242,787  |   |  | $ | 235,211  |  
|Ceded premiums written                                             |  |                    | (69,373 | ) |                   |   | (60,030 | )    |  |   | (195,484 | ) |  |   | (212,589 | )
|Net premiums written                                               |  |                    | 18,762  |   |                   |   | 5,050   |      |  |   | 47,303   |   |  |   | 22,622   |  
|                                                                  
|Change in net deferred premium revenue                             |  |                    | (10,954 | ) |                   |   | (1,130  | )    |  |   | (27,523  | ) |  |   | (8,928   | )
|Net premiums earned                                                |  |                    | 7,808   |   |                   |   | 3,920   |      |  |   | 19,780   |   |  |   | 13,694   |  
|                                                                  
|Net investment income                                              |  |                    | 4,770   |   |                   |   | 4,228   |      |  |   | 15,066   |   |  |   | 11,646   |  
|Net realized losses on investments                                 |  |                    |        |   |                   |   | (23     | )    |  |   |         |   |  |   | (1,407   | )
|Net realized and unrealized losses on derivative
financial         |  |                    |         |   |                   |   |         |      |  |   |          |   |  |   |          |  
|instruments                                                        |  |                    | (27,751 | ) |                   |   | (379    | )    |  |   | (32,247  | ) |  |   | (499     | )
|Fee income and other                                               |  |                    |        |   |                   |   |        |      |  |   | 68       |   |  |   | 1000     |  
|Total revenues (loss)                                              |  |                    | (15,173 | ) |                   |   | 7,746   |      |  |   | 2,667    |   |  |   | 24,434   |  
|Expenses                                                           |  |                    |         |   |                   |   |         |      |  |   |          |   |  |   |          |  
|Net losses and loss adjustment expenses                            |  |                    | 898     |   |                   |   | 496     |      |  |   | 1,434    |   |  |   | 1,410    |  
|Net operating expenses                                             |  |                    | 8,606   |   |                   |   | 8,128   |      |  |   | 29,791   |   |  |   | 20,878   |  
|Total expenses                                                     |  |                    | 9,504   |   |                   |   | 8,624   |      |  |   | 31,225   |   |  |   | 22,288   |  
|                                                                  
|Income (loss) before income tax expense                            |  |                    | (24,677 | ) |                   |   | (878    | )    |  |   | (28,558  | ) |  |   | 2,146    |  
|                                                                  
|Total income tax income (expense)                                  |  |                    | (9,960  | ) |                   |   | 2,423   |      |  |   | (8,989   | ) |  |   | 2,235    |  
|                                                                  
|Net loss                                                           |  |                    | (14,717 | ) |                   |   | (3,301  | )    |  |   | (19,569  | ) |  |   | (89      | )
|                                                                  
|Comprehensive (loss) income                                        |  |                    |         |   |                   |   |         |      |  |   |          |   |  |   |          |  
|Net loss                                                           |  |                    | (14,717 | ) |                   |   | (3,301  | )    |  |   | (19,569  | ) |  |   | (89      | )
|Other comprehensive income (loss), (net of deferred tax benefit of |  |                    |         |   |                   |   |         |      |  |   |          |   |  |   |          |  
|$181 in 2007 and $57 in 2006)                                      |  |                    | 5,062   |   |                   |   | 7,265   |      |  |   | 1,020    |   |  |   | (685     | )
|Comprehensive (loss) income                                        |  | $                  | (9,655  | ) |                   | $ | 3,964   |      |  | $ | (18,549  | ) |  | $ | (774     | )

See accompanying notes to consolidated financial statements.

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XL CAPITAL ASSURANCE INC. AND SUBSIDIARY
INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS
EQUITY(U.S.
dollars in thousands, except share amounts)

|                                                     |  |                    |         |   |              |   |         |  
|---------------------------------------------------- |  | ------------------ | ------- | - | ------------ | - | ------- | -
|                                                     |  | (unaudited)        |         |   |              |   |        
|                                                     |  | Nine Months        |         |   | Year Ended   |  
|                                                     |  | Ended              |         |   | December 31, |  
|                                                     |  | September 30, 2007 |         |   | 2006         |  
|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 Loss                 |  |                    |         |   |              |   |         |  
|Balance - beginning of year                          |  |                    | (3,222  | ) |              |   | (2,355  | )
|Net change in unrealized appreciation of investments |  |                    | 1,020   |   |              |   | (867    | )
|Balance - end of period                              |  |                    | (2,202  | ) |              |   | (3,222  | )
|Accumulated Deficit                                  |  |                    |         |   |              |   |         |  
|Balance - beginning of year                          |  |                    | (25,446 | ) |              |   | (24,870 | )
|Net loss                                             |  |                    | (19,569 | ) |              |   | (576    | )
|Balance - end of period                              |  |                    | (45,015 | ) |              |   | (25,446 | )
|Total shareholders equity                           |  | $                  | 231,956 |   |              | $ | 250,505 |  

See accompanying notes to consolidated financial statements.

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XL CAPITAL ASSURANCE
INC. AND SUBSIDIARYINTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS(U.S.
dollars in thousands)

|                                                                                                |                   |         |   |  |      |          |  
|----------------------------------------------------------------------------------------------- | ----------------- | ------- | - |  | ---- | -------- | -
|                                                                                                | (unaudited)       |        
|                                                                                                | Nine Months Ended |        
|                                                                                                | September 30,     |        
|                                                                                                | 2007              |         |   |  | 2006 |         
|Cash flows (used in) provided by operating activities                                           |                   |         |   |  |      |          |  
|Net loss                                                                                        | $                 | (19,569 | ) |  | $    | (89      | )
|Adjustments to reconcile net loss to net cash (used in) provided by operating activities        |                   |         |   |  |      |          |  
|Net realized losses on sale of investments                                                      |                   |        |   |  |      | 1,407    |  
|Net realized and unrealized losses on derivative financial instruments, excluding cash received |                   |         |   |  |      |          |  
|and paid                                                                                        |                   | 32,247  |   |  |      | 499      |  
|Amortization of premium on bonds                                                                |                   |        |   |  |      | 471      |  
|Decrease in unpaid losses and loss adjustment expenses, net                                     |                   | (168    | ) |  |      | (399     | )
|Increase in deferred premium revenue, net                                                       |                   | 27,523  |   |  |      | 9,003    |  
|Increase in deferred ceding commissions, net                                                    |                   | 1,659   |   |  |      | 2,737    |  
|Increase (decrease) in reinsurance premiums payable                                             |                   | (3,979  | ) |  |      | 23,931   |  
|Increase in premiums receivable                                                                 |                   | (9,843  | ) |  |      | (2,192   | )
|Decrease in accrued investment income                                                           |                   | 70      |   |  |      | 409      |  
|Change in deferred federal income tax asset                                                     |                   | (10,038 | ) |  |      | 2,951    |  
|Increase (decrease) in accounts payable and accrued expenses                                    |                   | (14,047 | ) |  |      | 1,182    |  
|Increase (decrease) in intercompany payable to affiliates                                       |                   | (5,534  | ) |  |      | 4,312    |  
|Other, net                                                                                      |                   | (111    | ) |  |      | 30       |  
|Total adjustments                                                                               |                   | 17,779  |   |  |      | 44,341   |  
|Net cash (used in) provided by operating activities                                             |                   | (1,790  | ) |  |      | 44,252   |  
|Cash flows from investing activities                                                            |                   |         |   |  |      |          |  
|Proceeds from sale of debt securities                                                           |                   |        |   |  |      | 79,620   |  
|Purchase of debt securities                                                                     |                   | (55,616 | ) |  |      | (134,854 | )
|Net purchase of short term investments                                                          |                   | (20,411 | ) |  |      | (733     | )
|Proceeds from maturity of debt securities and short-term investments                            |                   | 41,056  |   |  |      | 27,445   |  
|Decrease in payable for securities purchased                                                    |                   | (5,435  | ) |  |      |         |  
|Other, net                                                                                      |                   | (1,127  | ) |  |      | 73       |  
|Net cash used in investing activities                                                           |                   | (41,533 | ) |  |      | (28,449  | )
|Cash flows from financing activities                                                            |                   |         |   |  |      |          |  
|Capital contribution                                                                            |                   |        |   |  |      | 25,000   |  
|Net cash provided by financing activities                                                       |                   |        |   |  |      | 25,000   |  
|Increase (decrease) in cash and cash equivalents                                                |                   | (43,323 | ) |  |      | 40,803   |  
|Cash and cash equivalents                                                                       |                   |         |   |  |      |          |  
|Beginning of year                                                                               |                   | 82,691  |   |  |      | 32,337   |  
|End of Period                                                                                   | $                 | 39,368  |   |  | $    | 73,140   |  

See accompanying notes to consolidated financial statements.

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XL CAPITAL ASSURANCE INC. AND SUBSIDIARYNOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS(U.S. dollars in thousands)

1.      Organization and Ownership

On March 17, 2006, XL Capital Ltd (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) XL Capital Assurance Inc. (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 immediately after the IPO
represented approximately a 63 percent economic interest. In June 2007, XL Capital completed the sale of additional common shares of SCA from its holdings. Immediately after such sale XL Capital 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 SCA common shares in June 2007 its
voting interest in SCA was subject to limitations contained in SCAs bye-laws.

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 addition, the year-end balance
sheet data was derived from audited financial statements but does not include
all disclosures required by accounting principles generally accepted in the United
States of America. 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, including the
elimination of all significant inter-company accounts and transactions. 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 consolidated financial statements and notes

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XL CAPITAL ASSURANCE INC. AND SUBSIDIARYNOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS(U.S. dollars in thousands)

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. In addition, certain reclassifications have been made to prior period consolidated financial statement amounts to conform to current year presentation. There was no
effect on prior period reported net income as a result of these reclassifications.

3.      Derivative Financial Instruments

The Company
issues credit default swap contracts and certain other credit derivatives. Under
the terms of its credit default swap contracts the Company is generally required
to make payments to its counterparty in the event of specific credit
events relating to assets referenced in the contracts after exhaustion of various
first-loss protection levels. These credit events are contract-specific, but
generally cover bankruptcy and failure to pay. These credit derivatives are not
subject to collateral or margin requirements. Accordingly, credit default swap
contracts function like the guarantees
of debt obligations that the Company provides in the form of insurance.

Assets referenced
in the  Companys
in-force credit default swap contracts consist of structured pools of corporate
obligations. Such pools were awarded investment-grade ratings at the deals inception.
At  September 30, 2007, the notional amount outstanding of the Companys
in-force credit default swap contracts was $52.1 billion ($10.5 billion
net of reinsurance) and the weighted average term of such contracts was 8.7 years.
In addition,  based on such notional amount, as of September 30, 2007 approximately
95.4% of referenced assets underlying such in-force contracts were rated (based
on Standard & Poors ratings) AAA, with the remaining
4.6% rated at or  above investment-grade.

The Companys
policy is to hold its credit default swap contracts to maturity and not to trade
such contracts to realize or other gains or losses from periodic market fluctuations.
However, in certain circumstances, we may choose to terminate a credit derivative
prior to maturity for risk management or other purposes (for example, upon a
deterioration in underlying credit quality). With the exception of two transactions
which occurred in 2004 and 2003, respectively, there have been no such terminations
since the Companys inception.

As derivative
  financial instruments, credit default swap contracts are required to be reported
  at fair value in accordance GAAP, with changes in fair value during the period
  included in  earnings. The principal drivers of the fair value of the Companys credit default swap contracts include: (i) general market credit spreads for the type(s) of assets referenced in
  credit default swap contracts, (ii) the specific quality and performance of the
  actual assets referenced in the contracts, (iii) the amount of
  subordination in the transaction before liability attaches, (iv) the quality
  of the asset manager of the transaction, if applicable, (v) other customized
  structural features of such contracts (e.g. terms, conditions, covenants), (vi)
  the rating agency capital charge for the transaction, and (vii) supply and demand
  factors, including the volume of new issuance and financial guarantee market
  penetration, as well as the level of competition in the marketplace.

The fair
value of the Companys in-force portfolio of credit default swap contracts
represents managements estimate of the premium that would be required by
a market participant to assume the risks in the Companys credit derivative
portfolio as of the measurement date. Fair value is defined as the price at which
an asset or a liability could be bought or transferred in a current transaction
between willing parties. Fair value is determined based on quoted market prices,
if available. If quoted market prices are not available, fair value is estimated
based on the use of valuation techniques involving management judgment. There
are no observable readily available quoted market prices for the Companys
in-force guarantees under its credit default swap contracts since these contracts
are generally not traded by market participants. Accordingly, the Companys
estimate of the fair value of its in-force credit default swap contracts is based
on the use of valuation techniques involving management judgment, which considers
a number of factors, including: (i) credit price indices, published by non-affiliated
financial institutions, for the type(s) of assets referenced in the Companys
credit default swap contracts (both in terms of type of assets and their credit
rating), (ii) estimates of rates of return that would be required by a counterparty
to assume the risks in the Companys contracts in current market environment,
(iii) the quality of the specific assets referenced in the Companys
credit default swap contracts at the measurement date, (iv) the market perception
of risk associated with such asset classes, (v) the amount of subordination in
the transactions before the Companys liability attaches relative to that
required for similarly rated transactions in the current environment, (vi) the
remaining average life of the transaction, and (vii) prices of  guarantees executed
by the Company in its retail market in proximity to the measurement date. Because
it is the Companys policy to consider all available evidence in forming
its best estimate of the fair value of the Companys credit default swaps,
as new information becomes available the Company may consider new or different
factors than those listed above and revise its estimates in the future.

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XL CAPITAL ASSURANCE INC. AND SUBSIDIARYNOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS(U.S. dollars in thousands)

The weight ascribed by management to the aforementioned factors in forming its best estimate of the fair value of the Companys credit default swap contracts may vary under changing circumstances. In periods prior to
September 30, 2007, management principally considered price indices published by non-affiliated financial institutions in forming its best estimate of the fair value of the Companys
credit default swap contracts. The fair value of the guarantee was determined
by multiplying the percentage change in the applicable credit price index or
indices applicable to the assets referenced in the credit default swap by the
present value of the remaining expected future premiums to be received under
the contract. Management concluded that results from this calculation represented
a reasonable estimate of the fair value of the Companys credit default swap contracts at that time.

In forming
its best estimate of the fair value of the Companys credit default swap
contracts as of September 30, 2007, however, management concluded that, for the
majority of the Companys credit defaults swap
contracts, limited reliance could be placed on published credit price indices
because events and conditions in the credit markets associated with subprime
mortgage collateral and corporate loans resulted in limited transaction activity
in many financial instruments during the period (including collateralized debt
obligations (CDOs) of high grade asset-backed securities, collateralized
loan obligations, residential mortgage backed securities, and CDOs of  CDOs),
causing financial institutions which publish the indices that management historically
relied upon to estimate the fair value of the Companys credit derivatives
either to refrain from updating such indices or base changes in the  indices
partly on judgments in regard to estimated price levels and not actual executed
trades. In addition, evidence suggested that the limited price information available
in the marketplace in regard to such instruments was influenced by trades resulting
 from margin calls and liquidity issues that are not part of the risks associated
with the Companys business model or credit default swap contracts. Accordingly,
managements estimate of the fair value of the Companys credit default
 swap contracts as of September 30, 2007 ascribed significant weight to managements
 judgments regarding rates of return that would be required by a counterparty
 to assume the risks in the Companys contracts in the current market environment.
 Managements judgment in regard to such rates of return
considered all the factors discussed above. The Companys estimate of fair
value for the aforementioned financial instruments as of September 30, 2007 was
calculated by adjusting the present value of the expected remaining future net
cash flows  under such contracts (which are comprised of the remaining expected
future premiums to be received under the contract, less estimated maintenance
expenses and a provision for expected losses that will manifest in the future)
to reflect managements best estimate of the rates of return that would
be required by a counterparty to assume the risks on such contracts.

Present values
of the cash flows referred to above were determined using a discount rate of
6.0%, which reflects the weighted average life of our in-force credit default
swaps and the corporate  credit rating of the issuers of such contracts, XLCA,
at September 30, 2007.

Because management
views the credit derivative contracts that the Company issues and reinsures
as an extension of the Companys financial guarantee business, management
believes that the most meaningful presentation of these derivatives is to reflect:
(i) fees that the Company receives from the issuance of such contracts in the
line item captions in the statement of operations entitled gross premiums
written,
reinsurance premium assumed, net premiums written and net
premiums earned, as appropriate, (ii) losses from actual and expected payments
to counterparties under such contracts in the line item caption in the  statement
of operations entitled net losses and loss adjustment expenses and
(iii) changes in the fair value of such instruments which are attributable to
market factors in the line item caption in the statement of operations entitled
net unrealized losses on credit derivatives.

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

|                                                  |  |               |        |             
|------------------------------------------------- |  | ------------- | ------ | ------------
|                                                  |  | (unaudited)   |        |             
|                                                  |  | As of         |        | As of       
|                                                  |  | September 30, |        | December 31,
|                                                  |  | 2007          |        | 2006        
|                                                 
|Balance sheets:                                   |  |               |        |             
|Reinsurance balances recoverable on unpaid losses |  | $             | 15,024 |             
|Derivative assets                                 |  | 133,629       |        | 11,668      
|Unpaid losses and loss adjustment expenses        |  | 17,008        |        | 12,932      
|Derivative liabilities                            |  | 165,571       |        | 11,362      

---



XL CAPITAL ASSURANCE INC. AND SUBSIDIARYNOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS(U.S. dollars in thousands)

The components of the Companys net realized and unrealized gains (losses) on derivative financial instruments for the periods ended September 30, 2007 and 2006 are as follows:

|                                                                       |  |                    |        |       |  
|---------------------------------------------------------------------- |  | ------------------ | ------ | ----- | -
|                                                                       |  | (unaudited)        |       
|                                                                       |  | Three Months Ended |       
|                                                                       |  | September 30,      |       
|                                                                       |  | 2007               |        | 2006  |  
|Statements of Operations:                                              |  |                    |        |       |  
|Gross premiums written                                                 |  | $                  | 17,905 |       | $
|Net premiums earned                                                    |  | 2,508              |        | 627   |  
|Net realized and unrealized losses on derivative financial instruments |  | (27,751            | )      | (379  | )
|Net losses and loss adjustment expenses                                |  | 430                |        | 81    |  
|                                                                      
|                                                                       |  | (unaudited)        |       
|                                                                       |  | Nine Months Ended  |       
|                                                                       |  | September 30,      |       
|                                                                       |  | 2007               |        | 2006  |  
|Statements of Operations:                                              |  |                    |        |       |  
|Gross premiums written                                                 |  | $                  | 36,516 |       | $
|Net premiums earned                                                    |  | 5,251              |        | 1,653 |  
|Net realized and unrealized losses on derivative financial instruments |  | (32,247            | )      | (499  | )
|Net losses and loss adjustment expenses                                |  | 798                |        | 230   |  

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.

---



XL CAPITAL ASSURANCE INC. AND SUBSIDIARYNOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS(U.S. dollars in thousands)

The comment
period for the proposed Statement expired on June 18, 2007. A meeting between
the FASB and interested parties who provided comments on the proposed Statement
occurred in September 2007. Since the meeting, the FASB Staff has continued to
deliberate the matters raised in the comment letters and at the meeting.
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.

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.

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 No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities. (SFAS 159) 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, that
the adoption of SFAS 159 will have on its financial statements.

5.      Premiums Earned from Refunded Bonds and Other Accelerations

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. Net
premiums earned include $0.4 million and $0.9 million for the three and
nine months ended September 30, 2007, respectively, and
$0.1 million and $2.5 million for the three and nine months ended September
30, 2006, respectively, related to such refunded bonds and other accelerations.

---



XL CAPITAL ASSURANCE INC. AND SUBSIDIARYNOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS(U.S. dollars in thousands)

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 operations
in certain international jurisdictions that are subject to relevant taxes in
those jurisdictions.

The Company files a consolidated tax return with SCA Holdings U.S. Inc (the U.S. common parent of the SCA group) and its subsidiaries. Prior to July 1, 2006, XLCA was consolidated with XLA for
purposes of determining its income tax liability at, and prior to, such date (see Note 1). 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 September 30, 2007 and December 31, 2006, the Company had a U.S. federal income tax payable of $2.7 million and $4.2 million,
respectively.

As of September 30, 2007 and December 31, 2006, the Company had deferred income tax assets of $27.9 million and $17.9 million, respectively. Such deferred tax assets were net of a
valuation allowance of $1.5 million and $1.9 million as of September 30, 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 September 30, 2007, the Company had net unrealized capital losses and a net realized capital loss carry forward of approximately $2.4
million and $1.9 million respectively, against which valuation
allowances have been established.

The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, on January 1, 2007. The adoption of Interpretation No. 48 had no effect on the
Companys financial statements.

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 2003 in the U.S. and
2002 in the U.K.

Deferred income taxes have not been accrued with respect to undistributed earnings of foreign subsidiaries. If the earnings were to be distributed, as dividends or otherwise, such amounts may
be subject to withholding taxation in the state of the paying entity. Currently, however, no withholding taxes are accrued with respect to the earnings, as it is the intention of management that such earnings will remain reinvested
indefinitely.

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
did not have any accrued liabilities relating to interest and penalties as at
September 30, 2007 or December 31, 2006.

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 $15.9 million and $62.3 million for the three and nine months ended September 30, 2007, respectively, compared to $15.5 million and $42.3 million for the three and nine months ended September 30, 2006,
respectively, which are reflected in Net operating expenses in the accompanying consolidated statements of operations.

---



XL CAPITAL ASSURANCE INC. AND SUBSIDIARY
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in thousands)

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 September 30, 2007, the Company incurred costs under the aforementioned
plans aggregating $1.4
million, and $4.1 million for the three and nine months ended September 30,
2007, respectively, compared to $0.7 million and $1.8 million for the
three and nine months ended September 30, 2006, respectively, which are reflected
in
Net operating expenses in the accompanying interim consolidated statements
of operations.

Reinsurance
Agreements and Other Guarantees with
Affiliates

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.

| | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | 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 sheets
        in Reinsurance premiums payable and Prepaid
        reinsurance premiums, respectively. For the three and nine months
        ended September 30, 2007, the Company incurred
        costs under the aforementioned agreements aggregating approximately $0.2
        million and $0.6 million, respectively and
        the balance of the aforementioned liability and deferred cost was $6.3
    million at September 30, 2007.
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | Effective August 4, 2006, XLA indemnified the
        Company for any dimunition in value below their carrying value at September
        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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | 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 $80.5 billion and $83.1 billion
        as of September 30, 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | 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slength
    basis) on ceded premiums written under the terms of this agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      



---



XL CAPITAL ASSURANCE INC. AND SUBSIDIARYNOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS(U.S. dollars in thousands)

| | 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 September
        30, 2007 and December 31, 2006, the
        aggregate face amount of such investment agreements insured by the Company
        was $4.8 billion ($879.8 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 September 30, 2007,
        the total notional value of such contracts insured was $167.7 million.
        For the three month period ended September 30, 2007
        and 2006, the Company recorded earned premiums of $1.3 million ($0.2
        million net of reinsurance to XLFA) and $1.0 million
        ($0.1 million net of reinsurance to XLFA), respectively. For the
        nine months period ended September 30, 2007 and 2006,
        the company recorded earned premiums of $3.4 million ($0.6 million
        net of reinsurance to XLFA) and $2.9 million ($0.3
    million net of reinsurance to XLFA), respectively.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | XLI guarantees the obligations of XLCA in connection
        with certain transactions insured by XLCA-UK. As of September 30, 2007
        and December 31, 2006, the gross par outstanding related to these transactions
        were approximately $1,083.3 million ($86.5
        million net of reinsurance) and $1,017.8 million ($58.6 million
    net of reinsurance), respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

Amounts ceded to affiliate reinsures are as follows:

|                                                  |  |                    |               |  |      |             
|------------------------------------------------- |  | ------------------ | ------------- |  | ---- | ------------
|                                                  |  | (unaudited)       
|                                                  |  | Three Months Ended
|                                                  |  | September 30,     
|Statements of Operations                          |  | 2007               |               |  | 2006
|Ceded premiums written                            |  | $                  | 68,218        |  | $    | 51,907      
|Ceded premiums earned                             |  |                    | 46,477        |  |      | 35,311      
|Ceded commission revenue                          |  |                    | 13,727        |  |      | 13,022      
|Ceded losses and loss adjustment expenses         |  |                    | 7,085         |  |      | 4,293       
|                                                 
|                                                  |  | (unaudited)       
|                                                  |  | Nine Months Ended 
|                                                  |  | September 30,     
|                                                  |  |                    | 2007          |  |      | 2006        
|Ceded premiums written                            |  | $                  | 188,674       |  | $    | 203,210     
|Ceded premiums earned                             |  |                    | 126,900       |  |      | 123,567     
|Ceded commission revenue                          |  |                    | 34,473        |  |      | 37,992      
|Ceded losses and loss adjustment expenses         |  |                    | 8,937         |  |      | 11,175      
|                                                 
|                                                  |  |                    | (unaudited)   |  |      |             
|                                                  |  |                    | As of         |  |      | As of       
|                                                  |  |                    | September 30, |  |      | December 31,
|Balance Sheets                                    |  |                    | 2007          |  |      | 2006        
|Assets                                            |  |                    |               |  |      |             
|Prepaid reinsurance premium                       |  | $                  | 646,650       |  | $    | 582,798     
|Reinsurance balances recoverable on unpaid losses |  |                    | 157,520       |  |      | 153,017     
|Total Assets                                      |  | $                  | 804,170       |  | $    | 735,815     
|Liabilities                                       |  |                    |               |  |      |             
|Deferred ceding commissions, net                  |  | $                  | 157,093       |  | $    | 135,555     
|Reinsurance premiums payable                      |  |                    | 17,501        |  |      | 22,226      
|Total Liabilities                                 |  | $                  | 174,594       |  | $    | 157,781     

---



XL CAPITAL ASSURANCE INC. AND SUBSIDIARY
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in thousands)

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:

|                                                                |  |                    |         |   |                   |   |         |          |  |   |             |   |  |   |         |  
|--------------------------------------------------------------- |  | ------------------ | ------- | - | ----------------- | - | ------- | -------- |  | - | ----------- | - |  | - | ------- | -
|                                                                |  | (unaudited)        |         |   |                   |   |         |          |  |   |            
|                                                                |  | As of and for the  |         |   | As of and for the |  
|                                                                |  | Nine Months Ended  |         |   | Year Ended        |  
|                                                                |  | September 30, 2007 |         |   | December 31, 2006 |  
|                                                                |  | Case               |         |   | Unallocated       |   |         | Case     |  |   | Unallocated |  
|                                                                |  | Reserves           |         |   | Reserves          |   |         | Reserves |  |   | Reserves    |  
|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                                                    |  |                    | 113     |   |                   |   | 1,973   |          |  |   |            |   |  |   | 1,704   |  
|Prior years                                                     |  |                    | (652    | ) |                   |   |        |          |  |   | (66         | ) |  |   |        |  
|Less net losses and loss expenses (paid) received & other       |  |                    | (1,602  | ) |                   |   |        |          |  |   | (2,099      | ) |  |   | 242     |  
|Net unpaid losses and loss expenses at end of period            |  |                    | (641    | ) |                   |   | 9,783   |          |  |   | 1,500       |   |  |   | 7,810   |  
|Unpaid losses and loss expenses recoverable                     |  |                    | 75,423  |   |                   |   | 84,217  |          |  |   | 82,283      |   |  |   | 73,314  |  
|Unpaid losses and loss expenses at end of period                |  | $                  | 74,782  |   |                   | $ | 94,000  |          |  | $ | 83,783      |   |  | $ | 81,124  |  

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, was assumed 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 nine months ended September 30, 2007. The total remaining par insured by the Company with respect to this transaction, which amortizes over 11 years, aggregated approximately
$215.2 million, net of applicable carried gross case reserves, as of September 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.
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|b. | As of December 31, 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 principle among the parties to settle the dispute
in exchange for a payment by the Company of $3.9 million. The settlement
payment was made in May 2007 reducing the reserve and related recoverable to
zero.                 
|  



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XL CAPITAL ASSURANCE INC. AND SUBSIDIARYNOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS(U.S. dollars in thousands)

|c. | As of 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.
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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
assets referenced in its credit default swaps which consist of structured pools
of Corporate Obligations (See Note 3). 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 that it guarantees.

As of September 30,
2007, the Companys net outstanding par exposure under its in-force
financial guarantee insurance policies and contracts aggregated to $15.3 billion
and net
reserves for losses and loss adjustment expenses relating to such exposures was
$7.2
million consisting of case basis and unallocated reserves of ($0.6) million and
$7.8 million, respectively.
In addition, as of September 30, 2007, the Companys notional exposure under
credit default swaps aggregated to $10.5 billion and net reserves for losses
and loss adjustment
expenses relating to such exposures was $2.0 million consisting of case basis
and unallocated reserves of $0 and $2.0 million, respectively.

10.      Subsequent
      Event

The
    Company is exposed to risks associated with the deterioration in the credit
    markets. Recently, and continuing subsequent to September 30, 2007, credit
    spreads across most bond sectors have continued to widen reflecting broad
    concerns of potential credit erosion in U.S. residential mortgage loans,
    particularly to subprime borrowers, that are contained in the residential
    mortgage-backed securities (RMBS) and collateralized debt obligations
    of asset-backed securities (ABS CDOs) it insurers or reinsurers.
    Subprime residential mortgage loans originated in years subsequent to 2005
    are performing significantly worse than similar loans made prior to 2005.
    While the Company has sought to underwrite RMBS and ABS CDOs with levels
    of subordination designed to protect it from loss in the event of poor performance
    on the underlying collateral, no assurance can be given that such levels
    of subordination will prove to be adequate to protect the Company from material
    losses or preserve the Companys triple-A ratings in view of the significantly
    higher rates of delinquency, foreclosure and loss currently being observed
    among residential homeowners, especially subprime borrowers.



Transactions
    within the Companys insured RMBS and CDO portfolios also may be downgraded,
    placed on watch or subject to other actions by the three rating agencies
    that have granted the Company its Triple-A claims-paying ratings. Such
    ratings actions could require the Company to maintain a material amount of
    additional capital to support the exposures it has insured and reinsured.
    This could cause the Company to: (i) have to raise additional capital, if
    available, on terms and conditions that may be unfavorable, (ii) curtail
    the production of new business, or (iii) pay to reinsure or otherwise transfer
    certain of its risk exposure. The Company regards its triple-A ratings
    as fundamental to the execution of its business plan and the loss of one
    or more of its triple-A ratings could materially impair its ability of continue
    to execute that plan.



On
    November 5, 2007, Fitch, Inc. (Fitch) and on November 8, 2007,
    Moodys Investors Service Inc. (Moodys) announced
    that they would be reevaluating the adequacy of the capital position of companies
    comprising the financial guarantee insurance industry in view of recent developments
    adversely affecting the performance of subprime residential mortgage loans.
    Fitch observed that there is a moderate probability that the
    Company may experience pressure in its capital cushion under Fitchs
    updated stress analysis. Fitch noted that at the conclusion of its analysis,
    should a financial guarantors capital ratio fall below Fitchs AAA capital
    guidelines, Fitch would expect to place any such insurers financial
    strength rating on rating watch negative with a downgrade to
    follow if a risk mitigation strategy or capital raise is not completed within
    approximately one month. Moodys noted there is a moderate risk of
    the Company falling below Moodys Aaa capital adequacy benchmark under
    a stress scenario. Moodys stated that by the end of November 2007,
    it expects to complete its analysis on the financial guarantors capital
    ratios which, for some companies, could result in a rating affirmation, a
    change in outlook, a review for downgrade, or a downgrade.



On
    November 12, 2007, Fitch announced the downgrade of 352 structured finance
    CDO transactions, of which two transactions are insured by the Company. Such
    transactions represent $792 million in net par insured or approximately 0.5%
    of the Companys total net insured par outstanding.  One of
    the Companys insured transactions of approximately $371 million net
    par, originally rated AAA by Fitch on June 1, 2007, was downgraded to CCC.
    The other transaction of approximately $421 million net par, originally rated
    AAA by Fitch on March 29, 2007, was downgraded to BBB.  The Companys
    portfolio contains only one other SF CDO rated by Fitch.  This
    transaction of approximately $573 million net par, originally rated AAA by
    Fitch on June 27, 2006, remains under review.



Downgrades
    of credits that we insure, such as those made by Fitch on November 12, 2007,
    will result in higher capital charges to the Company under the relevant rating
    agency model or models. If the additional amount of capital required to support
    such exposures is significant, the Company could be required to raise additional
    capital, if available, on terms and conditions that may not be favorable
    to the Company, curtail current business writings, or pay to transfer a portion
    of its in-force business to generate capital for ratings purposes with the
    goal of maintaining its triple-A ratings. Among other things, such events
    or goals may not be obtainable, and such events or actions could adversely
    affect the results of operations and financial condition of the Company going
    forward.



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