Exhibit 99.1



XL Capital Assurance Inc. and SubsidiaryInterim Consolidated Financial Statementsfor the Three and Six Months PeriodsEnded June 30, 2007 and 2006(expressed in U.S. dollars)

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


|                                                                                                |  | (unaudited) |           |                        |  |     
|----------------------------------------------------------------------------------------------- |  | ----------- | --------- | ---------------------- |  | ----
|                                                                                                |  | As of       |           | As of                 
|                                                                                                |  | June 30,    |           | December
          31,
|                                                                                                |  |             | 2007      |                        |  | 2006
|ASSETS                                                                                          |  |             |           |                        |  |     
|Investments                                                                                     |  |             |           |                        |  |     
|Debt securities
        available for sale, at fair value                                       |  |             |           |                        |  |     
|(amortized
        cost: 2007 - $350,346; 2006 - $335,532)                                      |  | $           | 342,924   |                        |  | $   
|Short-term
        investments, at fair value                                                   |  |             |           |                        |  |     
|(amortized
        cost: 2007 - $15,818; 2006 - $14,979)                                        |  |             | 15,749    |                        |  |     
|Total
        investments                                                                       |  |             | 358,673   |                        |  |     
|                                                                                               
|Cash and cash equivalents                                                                       |  |             | 48,166    |                        |  |     
|Accrued investment income                                                                       |  |             | 3,194     |                        |  |     
|Prepaid reinsurance premiums                                                                    |  |             | 630,958   |                        |  |     
|Premiums receivable                                                                             |  |             | 14,211    |                        |  |     
|Reinsurance balances recoverable
        on unpaid losses                                       |  |             | 152,901   |                        |  |     
|Intangible assets - acquired
        licenses                                                   |  |             | 11,529    |                        |  |     
|Deferred tax asset                                                                              |  |             | 15,891    |                        |  |     
|Other assets                                                                                    |  |             | 34,068    |                        |  |     
|Total
        assets                                                                            |  | $           | 1,269,591 |                        |  | $   
|                                                                                               
|LIABILITIES AND SHAREHOLDERS
          EQUITY                                                  |  |             |           |                        |  |     
|Liabilities                                                                                     |  |             |           |                        |  |     
|Unpaid
        losses and loss adjustment expenses                                              |  | $           | 161,936   |                        |  | $   
|Deferred
        premium revenue                                                                |  |             | 726,100   |                        |  |     
|Deferred
        ceding commissions, net                                                        |  |             | 50,042    |                        |  |     
|Reinsurance
        premiums payable                                                            |  |             | 19,650    |                        |  |     
|Accounts
        payable and accrued expenses                                                   |  |             | 40,830    |                        |  |     
|Payable
        for investments purchased                                                       |  |             |          |                        |  |     
|Intercompany
        payable to affiliates                                                      |  |             | 29,422    |                        |  |     
|Total
        liabilities                                                                       |  |             | 1,027,980 |                        |  |     
|                                                                                               
|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    |                        |  |     
|Additional
        paid-in capital                                                              |  |             | 264,173   |                        |  |     
|Accumulated
        other comprehensive loss                                                    |  |             | (7,264    | )                      |  |     
|Accumulated
        deficit                                                                     |  |             | (30,298   | )                      |  |     
|Total
        shareholders equity                                                              |  |             | 241,611   |                        |  |     
|Total
        liabilities and shareholders equity                                              |  | $           | 1,269,591 |                        |  | $   

See accompanying notes to consolidated financial statements.

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


|                                                                                       |  | Three Months
          Ended |         | Six Months
          Ended
|-------------------------------------------------------------------------------------- |  | ---------------------------- | ------- | --------------------------
|                                                                                       |  | June
          30,           |         | June
          30,        
|                                                                                       |  | 2007                         |         | 2006                      
|Revenues                                                                               |  |                              |         |                           
|Gross premiums written                                                                 |  | $                            | 65,157  |                           
|Ceded premiums written                                                                 |  |                              | (52,883 | )                         
|Net premiums
        written                                                           |  |                              | 12,274  |                           
|                                                                                      
|Change in net deferred premium
        revenue                                         |  |                              | (5,570  | )                         
|Net premiums
        earned                                                            |  |                              | 6,704   |                           
|                                                                                      
|Net investment income                                                                  |  |                              | 5,184   |                           
|Net realized losses on investments                                                     |  |                              |        |                           
|Net realized and unrealized
        gains (losses) on derivative financial instruments |  |                              | (3,872  | )                         
|Fee income and other                                                                   |  |                              | 68      |                           
|Total
          revenues                                                               |  |                              | 8,084   |                           
|Expenses                                                                               |  |                              |         |                           
|Net losses and loss adjustment
        expenses                                        |  |                              | 1,000   |                           
|Net operating expenses                                                                 |  |                              | 11,025  |                           
|Total
          expenses                                                               |  |                              | 12,025  |                           
|Income
          (loss) before income tax expense                                      |  |                              | (3,941  | )                         
|                                                                                      
|Total income
        tax income (expense)                                              |  |                              | 530     |                           
|                                                                                      
|Net
          Income (loss)                                                            |  |                              | (4,471  | )                         
|                                                                                      
|Comprehensive income (loss)                                                            |  |                              |         |                           
|Net income (loss)                                                                      |  |                              | (4,471  | )                         
|Other comprehensive loss,
        (net of deferred tax benefit                         |  |                              |         |                           
|of $181
        in 2007 and $57 in 2006)                                               |  |                              | (5,335  | )                         
|Comprehensive
        income (loss)                                                    |  | $                            | (9,806  | )                         

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)             |         |                               | 
|------------------------------------------------------------ |  | ----------------------- | ------- | ----------------------------- | 
|                                                             |  | Six Months              |         |                               | 
|                                                             |  | Ended                   |         | Year Ended                   
|                                                             |  | June
          30, 2007 |         | December
            31, 2006
|Common shares                                                |  |                         |         |                               | 
|Number of shares - beginning
        of year                 |  |                         | 2,000   |                               | 
|Number
        of shares - end of period                     |  |                         | 2,000   |                               | 
|Common stock                                                 |  |                         |         |                               | 
|Balance - beginning of year                                  |  | $                       | 15,000  |                               | 
|Balance
        - end of period                              |  |                         | 15,000  |                               | 
|Additional Paid-In Capital                                   |  |                         |         |                               | 
|Balance - beginning
        of year                          |  |                         | 264,173 |                               | 
|Capital contribution                                         |  |                         |        |                               | 
|Balance
        - end of period                              |  |                         | 264,173 |                               | 
|Accumulated Other Comprehensive
          Income             |  |                         |         |                               | 
|Balance - beginning of year                                  |  |                         | (3,222  | )                             | 
|Net change in unrealized
        appreciation of investments |  |                         | (4,042  | )                             | 
|Balance
        - end of period                              |  |                         | (7,264  | )                             | 
|Accumulated Deficit                                          |  |                         |         |                               | 
|Balance - beginning of year                                  |  |                         | (25,446 | )                             | 
|Net loss                                                     |  |                         | (4,852  | )                             | 
|Balance
        - end of period                              |  |                         | (30,298 | )                             | 
|Total shareholders
        equity                           |  | $                       | 241,611 |                               | 

See accompanying notes to consolidated financial statements.

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


|                                                                                                       |  | (unaudited)                |        
|------------------------------------------------------------------------------------------------------ |  | -------------------------- | -------
|                                                                                                       |  | Six Months
          Ended |        
|                                                                                                       |  | June
            30,       |        
|                                                                                                       |  | 2007                       |        
|Cash flows (used in) provided
          by operating activities                                        |  |                            |        
|Net loss                                                                                               |  | $                          | (4,852 
|Adjustments to reconcile
        net loss to net cash (used in) provided by operating activities       |  |                            |        
|Net realized
        losses on sale of investments                                                     |  |                            |       
|Net realized
        and unrealized losses on derivative financial instruments, excluding
        cash |  |                            |        
|received
        and paid                                                                              |  |                            | 4,496  
|Amortization
        of (discount) premium on bonds                                                    |  |                            | (261   
|Decrease
        in unpaid losses and loss adjustment expenses, net                                    |  |                            | (275   
|Increase
        in deferred premium revenue, net                                                      |  |                            | 16,568 
|Increase
        (decrease) in deferred ceding commissions, net                                        |  |                            | (2,678 
|Increase
        (decrease) in reinsurance premiums payable                                            |  |                            | (2,898 
|Increase
        in premiums receivable                                                                |  |                            | (7,227 
|Increase
        in accrued investment income                                                          |  |                            | (83    
|Provision
        for deferred federal income tax asset                                                |  |                            | 1,981  
|Increase
        (decrease) in accounts payable and accrued expenses                                   |  |                            | 1,294  
|Increase
        in intercompany payable to affiliates                                                 |  |                            | 1,759  
|Other                                                                                                  |  |                            | (21,522
|Total
        adjustments                                                                              |  |                            | (8,846 
|Net
        cash (used in) provided by operating activities                                            |  |                            | (13,698
|Cash flows from investing
          activities                                                         |  |                            |        
|Proceeds from sale of debt                                                                             |  |                            | 4,719  
|Purchase of debt securities                                                                            |  |                            | (38,901
|Net sales of short term investments                                                                    |  |                            | (18,638
|Proceeds from maturity of
        debt securities and short-term investments                           |  |                            | 31,993 
|Net
        cash used in investing activities                                                          |  |                            | (20,827
|                                                                                                      
|Increase
        (decrease) in cash and cash equivalents                                               |  |                            | (34,525
|Cash and cash equivalents                                                                              |  |                            |        
|Beginning of year                                                                                      |  |                            | 82,691 
|End of Period                                                                                          |  | $                          | 48,166 
|                                                                                                       |  |                            |        
|Taxes paid (received)                                                                                  |  | $                          | 2,340  

See accompanying notes to consolidated financial statements.

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XL
        CAPITAL ASSURANCE INC. AND SUBSIDIARY  NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS  (U.S. dollars in thousands, except share amounts)


1. Organization and Ownership

Through
June 30, 2006, XL Capital Assurance Inc. ("XLCA") was a wholly owned subsidiary
of XL Reinsurance America, Inc. ("XL RE AM"), which is an indirect wholly owned
subsidiary of XL Capital Ltd ("XL Capital"), a public
company whose shares are listed on the New York Stock Exchange. On March 17,
2006, XL Capital formed Security Capital Assurance Ltd ("SCA"), a Bermuda based
holding company, in anticipation of contributing its ownership interests in its
financial  guarantee insurance and financial guarantee reinsurance operating
businesses to SCA and selling an interest therein to the public through an initial
public offering of SCA common shares (the "IPO"). The contribution of such businesses
to SCA  occurred on July 1, 2006 and the IPO was consummated on August 4, 2006.
The aforementioned operating businesses contributed to SCA by XL Capital consisted
of: (i) XLCA and its wholly-owned subsidiary, XL Capital Assurance (U.K.) Limited
("XLCA-UK")
(XLCA and XLCA-UK hereafter collectively referred to as the "Company") and (ii)
XL Financial Assurance Ltd. ("XLFA"). After the IPO, a secondary offering by
XL Capital, the exercise of the underwriters' over-allotment option and restricted
share  awards to management of SCA, XL Capital's ownership of SCA's outstanding
common shares 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 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 SUBSIDIARY  NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS  (U.S. dollars in thousands, except share amounts)


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

Credit default swaps and financial guarantees of interest rate swaps entered into by the Company meet the definition of a derivative instrument under Financial Accounting Standards Board
(FASB) Statement of Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133), as amended by SFAS No. 149. Credit default swaps are recognized at fair value and recorded
as either assets or liabilities in the accompanying consolidated balance sheets. The Company intends to hold these derivative instruments until maturity.

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

Changes in the fair value of credit default swaps attributable to earnings from premiums received by the Company from the issuance of such contracts are recorded in the line item caption
entitled net premiums earned in the accompanying consolidated statement of operations. In addition, changes in the fair value of credit default swaps attributable to losses from actual and expected payments to counterparties under such
contracts are recorded in the line item caption entitled net losses and loss adjustment expenses in the accompanying consolidated statement of operations, and the remaining components of the change in fair value of credit default swaps,
which are attributable to the market and other factors discussed above, are recorded in the line item caption entitled net realized and unrealized gains (losses) on derivative financial instruments in
the accompanying consolidated statement of operations. This presentation is applicable
only to credit default swaps issued by the Company that it has the intent and
ability to hold to maturity.

The Companys credit default swap portfolio generally requires the Company to meet payment obligations for referenced credits within the portfolio in the event of specific credit events
after exhaustion of various first loss protection levels. These credit events are contract-specific, but generally cover bankruptcy, failure to pay and repudiation. The credit default swap portfolio consists of structured pools of corporate
obligations that were awarded investment-grade ratings at the deals inception. At June 30, 2007, on a net par basis, approximately 98.3% of the portfolio is rated AAA with the remaining 1.7% allocated to other investment-grade ratings. The
weighted average term of the contracts in force was 8.4 years.

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                 
|                                                          |  | June 30,    |        | December
          31,
|                                                          |  | 2007        |        | 2006                  
|ASSETS                                                    |  |             |        |                        |  
|Reinsurance balances recoverable
        on unpaid losses |  | $           | 13,197 |                        | $
|Other assets                                              |  |             | 32,648 |                        |  
|Total Assets                                              |  | $           | 45,845 |                        | $
|                                                         
|LIABILITIES                                               |  |             |        |                        |  
|Unpaid losses and loss adjustment
        expenses        |  | $           | 14,750 |                        | $
|Other liabilities                                         |  |             | 36,839 |                        |  
|Total Liabilities                                         |  | $           | 51,589 |                        | $

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XL
        CAPITAL ASSURANCE INC. AND SUBSIDIARY  NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS  (U.S. dollars in thousands, except share amounts)


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

|                                                                                       |  | (unaudited)                  |       
|-------------------------------------------------------------------------------------- |  | ---------------------------- | ------
|                                                                                       |  | Three Months
          Ended |       
|                                                                                       |  | June
          30,           |       
|                                                                                       |  | 2007                         |       
|INCOME STATEMENT                                                                       |  |                              |       
|Gross premiums written                                                                 |  | $                            | 9,451 
|Net premiums earned                                                                    |  |                              | 1,545 
|Net realized and unrealized
        gains (losses) on derivative financial instruments |  |                              | (3,872
|Net losses and loss adjustment
        expenses                                        |  |                              | 193   
|                                                                                       |  |                              |       
|                                                                                      
|                                                                                       |  | (unaudited)                  |       
|                                                                                       |  | Six Months
          Ended   |       
|                                                                                       |  | June
          30,           |       
|                                                                                       |  | 2007                         |       
|INCOME STATEMENT                                                                       |  |                              |       
|Gross premiums written                                                                 |  | $                            | 18,611
|Net premiums earned                                                                    |  |                              | 2,743 
|Net realized and unrealized
        losses on derivative financial instruments         |  |                              | (4,496
|Net losses and loss adjustment
        expenses                                        |  |                              | 368   

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.

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XL
        CAPITAL ASSURANCE INC. AND SUBSIDIARY  NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS  (U.S. dollars in thousands, except share amounts)


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

SFAS No. 155, Accounting for Certain Hybrid Financial Instruments -

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

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

5.          Premiums
Earned from Refunded and Called Bonds

When an insured issue is retired early, is called by the issuer or is in substance paid in advance through a refunding accomplished by placing U.S. Government securities in escrow, the
remaining deferred premium revenue is earned at that time since there is no longer risk to the Company. Net premiums earned include $0.5 million and $0.5 million for the three and six months ended June 30, 2007, respectively, and $2.3
million and $2.6 million for the three and six months ended June 30, 2006, respectively, related to refunded and called bonds.

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XL
        CAPITAL ASSURANCE INC. AND SUBSIDIARY  NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS  (U.S. dollars in thousands, except share amounts)


6.          Income
Taxes

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

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 June 30, 2007 and December 31, 2006, the Company had a U.S. federal income tax payable of $0.6 million and $4.2 million, respectively.

As of June 30, 2007 and December 31, 2006, the Company had deferred income tax assets of $15.9 million and $17.9 million, respectively. Such deferred tax assets were net of a valuation
allowance of $4.2 million and $1.9 million as of June 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 June 30, 2007, the Company had net unrealized capital losses and a net realized capital loss carry forward of approximately $2.5 million and $1.9 million respectively, against which a valuation allowance has
been established. Management believes it is more likely than not that the tax benefit relating to the Companys deferred tax assets, net of the valuation allowance discussed above, will be realized. The net realized capital loss carry forward
will expire in 2012.

The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, on January 1, 2007. The 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 does not
have any accrued liabilities relating to interest and penalties as at June 30, 2007 or December 31, 2006, respectively.

7.          Treaties
and Agreement with Affiliates

Services Agreements with Affiliates

Substantially
all of the Companys personnel services are provided by XL Financial Administrative
Services Inc. (XLFAS). Prior to the IPO, substantially all of the
 Companys personnel services were provided by employees of affiliates of
 XL Capital. In connection with the IPO, such employees have become employees
 of SCA. In addition, the Company purchased various services from affiliates
 of XL Capital  prior to the IPO under various agreements and continues to purchase
 such services under new agreements that became effective at the date of the
 IPO. Such services principally include: (i) information technology support,
 (ii) reinsurance and  retrocessional consulting and management services, (iii)
 actuarial, finance, legal, internal audit services and certain investment management
 services and (iv) certain advertising services. The Company incurred costs under
 the aforementioned  agreements aggregating $16.6 million and $46.5 million
 for the three and six months ended June 30, 2007, respectively, compared to $14.1
 and $26.8 million for the three and six months ended June 30, 2006, respectively,
 which are  reflected in Net operating expenses in the accompanying
 consolidated statements of operations.

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XL
        CAPITAL ASSURANCE INC. AND SUBSIDIARY  NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS  (U.S. dollars in thousands, except share amounts)


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 June 30, 2007, the Company incurred costs under the aforementioned plans aggregating $1.5 million,
and $2.7 million for the three and six months ended June 30, 2007, respectively, compared to $0.5 million and $1.2 million for the three and six months ended June 30, 2006, respectively, which are reflected in Net operating
expenses in the accompanying consolidated statements of operations.

Reinsurance Agreements with Affiliates and Other Guaranties

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

| | 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 sheet in Reinsurance premiums
        payable and Prepaid reinsurance premiums, respectively.
        For the three and six months ended June 30, 2007, the Company incurred
        costs under the aforementioned agreements aggregating approximately $0.2
        million and $0.4 million, respectively and the balance of the aforementioned
    liability and deferred cost was $6.4 million at June 30, 2007.
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | Effective August 4, 2006, XLA indemnified the
        Company for any dimunition in value below their carrying value at June
        30, 2006 of the investment described in Note 8 (b), which investment
        was acquired in connection with the satisfaction of a claim under a financial
        guarantee insurance policy issued by XLCA. In addition, pursuant to the
        aforementioned indemnity, XLA agreed to indemnify the Company for any
        costs arising out of any litigation or future claim in connection with
        the aforementioned insurance policy. See Note 8 (b) for further information
    regarding amounts recovered or recoverable by XLCA under the indemnity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | 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 $81.9 billion and $83.1
        billion as of June 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       



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XL
        CAPITAL ASSURANCE INC. AND SUBSIDIARY  NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS  (U.S. dollars in thousands, except share amounts)


| | 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.                                                                                                                                                                                                                                                                                                                        
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | 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 June 30, 2007 and December 31, 2006, the aggregate face amount
        of such investment agreements insured by the Company was $4.7 billion
        ($824.2 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 June 30, 2007, the total
        notional value of such contracts insured was $170.0 million. For
        the three month period ended June 30, 2007 and 2006, the Company recorded
        earned premiums of $1.1 million ($0.2 net of reinsurance to XLFA)
        and $1.0 million ($0.1 net of reinsurance to XLFA), respectively.
        For the six months period ended June 30, 2007 and 2006, the company recorded
        earned premiums of $2.0 million ($0.3 net of reinsurance to XLFA)
    and $1.9 million ($0.2 net of reinsurance to XLFA), respectively.
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | XLI guarantees the obligations of XLCA in connection
        with certain transactions insured by XLCA-UK. As of June 30, 2007 and
        December 31, 2006, the gross par outstanding related to these transactions
        were approximately $1,045.5 million ($62.2 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
|                                                          |  | June
          30,          
|Statement of Operations                                   |  | 2007                        
|Ceded premiums written                                    |  | $                           
|Ceded premiums earned                                     |  |                             
|Ceded commission revenue                                  |  |                             
|Ceded losses and loss adjustment
        expenses         |  |                             
|                                                          |  |                             
|                                                         
|                                                          |  | (unaudited)                 
|                                                          |  | Six Months
          Ended  
|                                                          |  | June
          30,          
|                                                          |  | 2007                        
|Ceded premiums written                                    |  | $                           
|Ceded premiums earned                                     |  |                             
|Ceded commission revenue                                  |  |                             
|Ceded losses and loss adjustment
        expenses         |  |                             
|                                                          |  |                             
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          |  | (unaudited)                 
|                                                          |  | As of                       
|                                                          |  | June 30,                    
|Balance Sheets                                            |  | 2007                        
|Assets                                                    |  |                             
|Prepaid reinsurance premium                               |  | $                           
|Reinsurance balances recoverable
        on unpaid losses |  |                             
|Total Assets                                              |  | $                           
|                                                         
|Liabilities                                               |  |                             
|Deferred ceding commissions,
        net                  |  | $                           
|Reinsurance premiums payable                              |  |                             
|Total Liabilities                                         |  | $                           

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XL
        CAPITAL ASSURANCE INC. AND SUBSIDIARY  NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS  (U.S. dollars in thousands, except share amounts)


8.          Liability
for Losses and Loss Adjustment Expenses

The Companys liability for losses and loss adjustment expenses consists of case basis reserves and unallocated reserves. Activity in the liability for losses and loss adjustment expenses
is summarized as follows:

|                                                                        |  | (unaudited)                 |         |   |                               |   |         |          |  |   |            
|----------------------------------------------------------------------- |  | --------------------------- | ------- | - | ----------------------------- | - | ------- | -------- |  | - | -----------
|                                                                        |  | As of and
          for the |         |   | As of and
          for the   |  
|                                                                        |  | Six Months
          Ended  |         |   | Twelve Months
          Ended |  
|                                                                        |  | June
          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     
|Unpaid losses and loss expenses
        recoverable                     |  |                             | (82,283 | ) |                               |   | (73,314 | )        |  |   | (62,518    
|                                                                       
|Net unpaid losses and loss
        expenses at beginning of year        |  |                             | 1,500   |   |                               |   | 7,810   |          |  |   | 3,665      
|Increase (decrease) in net
        losses and loss expenses incurred in |  |                             |         |   |                               |   |         |          |  |   |            
|respect
        of losses occurring in:                                 |  |                             |         |   |                               |   |         |          |  |   |            
|Current year                                                            |  |                             |        |   |                               |   | 1,198   |          |  |   |           
|Prior years                                                             |  |                             | (649    | ) |                               |   |        |          |  |   | (66        
|                                                                       
|Less net losses and loss
        expenses (paid) received & other       |  |                             | (824    | ) |                               |   |        |          |  |   | (2,099     
|Net unpaid losses and loss
        expenses at end of period            |  |                             | 27      |   |                               |   | 9,008   |          |  |   | 1,500      
|Unpaid losses and loss expenses
        recoverable                     |  |                             | 74,789  |   |                               |   | 78,112  |          |  |   | 82,283     
|                                                                       
|Unpaid losses and loss
          expenses at end of period              |  | $                           | 74,816  |   |                               | $ | 87,120  |          |  | $ | 83,783     

Case Basis Reserves for Losses and Loss Adjustment Expenses

Set forth below is a discussion of certain case basis reserves established by the Company. The Company has been indemnified with respect to loss development relating to the insurance
transactions described under (a) and (b) below by affiliates of XL Capital in connection with SCAs IPO. As a result of such indemnifications, all adverse loss development on such insurance transactions subsequent to the
effective date of the IPO, which is in excess of the Companys carried reserves for such transactions at the date of the IPO, will be absorbed by the aforementioned affiliates of XL Capital. Such protection does not relieve the Company of its
obligations under the aforementioned insurance transactions. Accordingly, the Company is still liable under the insurance transactions in the event that the affiliates of XL Capital do not meet their obligations under the indemnifications. For
further information with respect to the indemnifications see Note 7.

|a. | At December 31, 2006, the Company carried a gross case basis reserve for losses and loss adjustment expenses of approximately $74.6 million ($2.8 million after reinsurance to XLFA and XL RE AM) relating to an
insured project financing. There was no change in the reserve during the six months ended June 30, 2007. The total remaining par insured by the Company with respect to this transaction, which amortizes over 11 years, aggregated approximately
$215.8 million at June 30, 2007. The estimate of loss was based on assumptions and estimates extending over many years into the future. There is currently no payment default with respect to this transaction. Management continues to monitor the
exposure and will revise its loss estimate, if necessary, as new information becomes available.                                            
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|b. | 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 principal 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 SUBSIDIARY  NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS  (U.S. dollars in thousands, except share amounts)


|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.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|9. | Exposures under Guarantees                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

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

At June 30, 2007, the Companys net outstanding par exposure under its in-force financial guarantee insurance and reinsurance policies and contracts aggregated to $21.3 billion. In
addition, at June 30, 2007, the Companys notional exposure under credit default swaps aggregated to $7.6 billion and the net liability for these credit default swaps reflected in the Companys balance sheet at June 30, 2007 was
$3.9 million.

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