Exhibit 99.2

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

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

|                                                                                           |  |               |           |   |              |   |           |  
|------------------------------------------------------------------------------------------ |  | ------------- | --------- | - | ------------ | - | --------- | -
|                                                                                           |  | (Unaudited)   |           |   |              |   |          
|                                                                                           |  | As of         |           |   | As of        |  
|                                                                                           |  | September 30, |           |   | December 31, |  
|                                                                                           |  | 2007          |           |   | 2006         |  
|ASSETS                                                                                     |  |               |           |   |              |   |           |  
|Investments:                                                                               |  |               |           |   |              |   |           |  
|Debt securities, at fair value                                                             |  |               |           |   |              |   |           |  
|(amortized cost:
    2007 - $1,971,255; 2006 - $1,420,391)                                 |  | $             | 1,960,339 |   |              | $ | 1,404,197 |  
|Short-term investments, at fair value                                                      |  |               |           |   |              |   |           |  
|(amortized cost:
    2007 - $27,235; 2006 - $207,951)                                      |  |               | 27,147    |   |              |   | 206,923   |  
|Total investments available for sale                                                       |  |               | 1,987,486 |   |              |   | 1,611,120 |  
|                                                                                          
|Cash and cash equivalents                                                                  |  |               | 118,836   |   |              |   | 86,528    |  
|Accrued investment income                                                                  |  |               | 14,568    |   |              |   | 13,355    |  
|Deferred acquisition costs                                                                 |  |               | 161,657   |   |              |   | 145,929   |  
|Prepaid reinsurance premiums                                                               |  |               | 77,052    |   |              |   | 41,915    |  
|Reinsurance balances receivable                                                            |  |               | 21,070    |   |              |   | 18,681    |  
|Unpaid losses and loss adjustment expenses recoverable                                     |  |               | 78,383    |   |              |   | 78,230    |  
|Amounts due from parent and affiliates                                                     |  |               | -         |   |              |   | 37        |  
|Net receivable for investments sold                                                        |  |               | 84        |   |              |   | 112       |  
|Derivative assets                                                                          |  |               | 2,386     |   |              |   | 11,148    |  
|Other assets                                                                               |  |               | 45        |   |              |   | 340       |  
|Total assets                                                                               |  | $             | 2,461,567 |   |              | $ | 2,007,395 |  
|LIABILITIES, REDEEMABLE PREFERRED SHARES                                                   |  |               |           |   |              |   |           |  
|AND SHAREHOLDERS
    EQUITY                                                               |  |               |           |   |              |   |           |  
|Liabilities:                                                                               |  |               |           |   |              |   |           |  
|Unpaid losses and loss adjustment expenses                                                 |  | $             | 163,663   |   |              | $ | 156,733   |  
|Deferred premium revenue                                                                   |  |               | 780,185   |   |              |   | 699,264   |  
|Reinsurance balances payable                                                               |  |               | 19,849    |   |              |   | 7,308     |  
|Accounts payable and accrued liabilities                                                   |  |               | 846       |   |              |   | 1,962     |  
|Amounts due to parent and affiliates                                                       |  |               | 2,849     |   |              |   | 4,076     |  
|Derivative liabilities                                                                     |  |               | 134,280   |   |              |   | 4,685     |  
|Total liabilities                                                                          |  |               | 1,101,672 |   |              |   | 874,028   |  
|                                                                                          
|Commitments and Contingencies                                                              |  |               |           |   |              |   |           |  
|                                                                                          
|Redeemable Preferred Shares:                                                               |  |               |           |   |              |   |           |  
|Series A Redeemable preferred shares                                                       |  | $             | 39,000    |   |              | $ | 54,016    |  
|                                                                                          
|Shareholders Equity:                                                                      |  |               |           |   |              |   |           |  
|Common shares (par value of $120
    per share; 10,000 shares authorized; 2,449 issued and |  |               |           |   |              |   |           |  
|outstanding as at September 30, 2007 and December 31, 2006, respectively)                  |  |               | 294       |   |              |   | 294       |  
|Additional paid-in capital                                                                 |  |               | 884,665   |   |              |   | 659,665   |  
|Accumulated other comprehensive loss                                                       |  |               | (11,004   | ) |              |   | (17,221   | )
|Retained earnings                                                                          |  |               | 446,940   |   |              |   | 436,613   |  
|Total Shareholders
    Equity                                                             |  |               | 1,320,895 |   |              |   | 1,079,351 |  
|Total Liabilities,
    Redeemable Preferred Shares and Shareholders Equity                |  | $             | 2,461,567 |   |              | $ | 2,007,395 |  

See Accompanying Notes to Interim Financial Statements.

2

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

|                                                             |  |      |                    |   |      |   |                   |      |  |   |          |   |  |   |         |  
|------------------------------------------------------------ |  | ---- | ------------------ | - | ---- | - | ----------------- | ---- |  | - | -------- | - |  | - | ------- | -
|                                                             |  |      | (Unaudited)        |   |      |   | (Unaudited)       |     
|                                                             |  |      | Three Months Ended |   |      |   | Nine Months Ended |     
|                                                             |  |      | September 30,      |   |      |   | September 30,     |     
|                                                             |  | 2007 |                    |   | 2006 |   |                   | 2007 |  |   | 2006     |  
|Revenues:                                                    |  |      |                    |   |      |   |                   |      |  |   |          |   |  |   |         |  
|Net premiums earned                                          |  | $    | 50,369             |   |      | $ | 41,534            |      |  | $ | 138,968  |   |  | $ | 126,647 |  
|Net investment income                                        |  |      | 26,310             |   |      |   | 16,292            |      |  |   | 71,264   |   |  |   | 40,065  |  
|Net realized gains (losses) on investments                   |  |      | 8                  |   |      |   | (133              | )    |  |   | (1,534   | ) |  |   | (15,149 | )
|Fee and other income                                         |  |      | -                  |   |      |   | -                 |      |  |   | -        |   |  |   | 1,228   |  
|Net unrealized losses on derivative financial instruments    |  |      | (115,646           | ) |      |   | (2,838            | )    |  |   | (140,047 | ) |  |   | (5,903  | )
|                                                            
|Total revenues                                               |  |      | (38,959            | ) |      |   | 54,855            |      |  |   | 68,651   |   |  |   | 146,888 |  
|                                                            
|Expenses:                                                    |  |      |                    |   |      |   |                   |      |  |   |          |   |  |   |         |  
|Net losses and loss expenses                                 |  |      | 6,467              |   |      |   | 4,497             |      |  |   | 8,158    |   |  |   | 10,651  |  
|Acquisition costs                                            |  |      | 14,478             |   |      |   | 14,822            |      |  |   | 37,336   |   |  |   | 38,124  |  
|Operating expenses                                           |  |      | 3,198              |   |      |   | 1,676             |      |  |   | 10,109   |   |  |   | 5,824   |  
|                                                            
|Total expenses                                               |  |      | 24,143             |   |      |   | 20,995            |      |  |   | 55,603   |   |  |   | 54,599  |  
|                                                            
|Net income (loss)                                            |  | $    | (63,102            | ) |      | $ | 33,860            |      |  | $ | 13,048   |   |  | $ | 92,289  |  
|                                                            
|Comprehensive income (loss):                                 |  |      |                    |   |      |   |                   |      |  |   |          |   |  |   |         |  
|Net income (loss)                                            |  | $    | (63,102            | ) |      | $ | 33,860            |      |  | $ | 13,048   |   |  | $ | 92,289  |  
|                                                            
|Unrealized gains (losses) on investments                     |  |      | 23,891             |   |      |   | 24,219            |      |  |   | 4,683    |   |  |   | (12,184 | )
|                                                            
|Less: reclassification for gains (losses) realized in income |  |      | 8                  |   |      |   | (133              | )    |  |   | (1,534   | ) |  |   | (15,149 | )
|                                                            
|Other comprehensive gains                                    |  |      | 23,883             |   |      |   | 24,352            |      |  |   | 6,217    |   |  |   | 2,965   |  
|                                                            
|Comprehensive income (loss)                                  |  | $    | (39,219            | ) |      | $ | 58,212            |      |  | $ | 19,265   |   |  | $ | 95,254  |  

See Accompanying Notes to Interim Financial Statements.

3

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

|                                                                         |  |                    |           |              |   |           |  
|------------------------------------------------------------------------ |  | ------------------ | --------- | ------------ | - | --------- | -
|                                                                         |  | (Unaudited)        |           |              |   |          
|                                                                         |  | Nine Months        |           | Year Ended   |  
|                                                                         |  | Ended              |           | December 31, |  
|                                                                         |  | September 30, 2007 |           | 2006         |  
|                                                                         |  |                    |           |              |   |           |  
|Common shares - number issued                                            |  |                    |           |              |   |           |  
|Number of shares, beginning of year                                      |  |                    | 2,449     |              |   | 2,449     |  
|                                                                        
|Number of shares, end of period                                          |  |                    | 2,449     |              |   | 2,449     |  
|                                                                         |  |                    |           |              |   |           |  
|Common shares - Issued at par                                            |  |                    |           |              |   |           |  
|Balance - beginning of year                                              |  | $                  | 294       |              | $ | 294       |  
|                                                                        
|Balance - end of period                                                  |  |                    | 294       |              |   | 294       |  
|                                                                        
|Additional Paid-In Capital                                               |  |                    |           |              |   |           |  
|Balance - beginning of year                                              |  |                    | 659,665   |              |   | 345,606   |  
|Capital contributions                                                    |  |                    | 225,000   |              |   | 314,059   |  
|Balance - end of period                                                  |  |                    | 884,665   |              |   | 659,665   |  
|                                                                        
|Accumulated Other Comprehensive Loss                                     |  |                    |           |              |   |           |  
|Balance - beginning of year                                              |  |                    | (17,221   | )            |   | (17,953   | )
|Other comprehensive income                                               |  |                    | 6,217     |              |   | 732       |  
|                                                                        
|Balance - end of period                                                  |  |                    | (11,004   | )            |   | (17,221   | )
|                                                                        
|Retained Earnings                                                        |  |                    |           |              |   |           |  
|Balance - beginning of year                                              |  |                    | 436,613   |              |   | 323,127   |  
|Net income                                                               |  |                    | 13,048    |              |   | 132,958   |  
|Dividends on Series A redeemable preferred shares                        |  |                    | (2,721    | )            |   | (4,456    | )
|Accumulated undeclared dividends on Series A redeemable preferred shares |  |                    |          |              |   | (15,016   | )
|                                                                        
|Balance - end of period                                                  |  |                    | 446,940   |              |   | 436,613   |  
|                                                                        
|Total Shareholders Equity                                               |  | $                  | 1,320,895 |              | $ | 1,079,351 |  

See Accompanying Notes to Interim Financial Statements.

4

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

|                                                                                  |  |                   |          |   |      |   |            |  
|--------------------------------------------------------------------------------- |  | ----------------- | -------- | - | ---- | - | ---------- | -
|                                                                                  |  | (Unaudited)       |         
|                                                                                  |  | Nine Months Ended |         
|                                                                                  |  | September 30,     |         
|                                                                                  |  | 2007              |          |   | 2006 |  
|Cash flows provided by operating activities:                                      |  |                   |          |   |      |   |            |  
|Net income                                                                        |  | $                 | 13,048   |   |      | $ | 92,289     |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                   |          |   |      |   |            |  
|Net realized losses on investments                                                |  |                   | 1,534    |   |      |   | 2,484      |  
|Amortization of premium on debt maturities                                        |  |                   | 2,101    |   |      |   | 2,252      |  
|Net realized and unrealized losses on derivative financial instruments            |  |                   | 138,337  |   |      |   | 3,939      |  
|Net realized and unrealized losses on put option                                  |  |                   | 20       |   |      |   | -          |  
|Accrued investment income                                                         |  |                   | (1,213   | ) |      |   | (1,252     | )
|Unpaid losses and loss adjustment expenses                                        |  |                   | 6,930    |   |      |   | 7,839      |  
|Deferred premium revenue                                                          |  |                   | 80,921   |   |      |   | 98,613     |  
|Unpaid losses & loss adjustment expenses
    recoverable                          |  |                   | (153     | ) |      |   | (156       | )
|Deferred acquisition costs                                                        |  |                   | (15,728  | ) |      |   | (28 ,749   | )
|Amounts due from parent and affiliates                                            |  |                   | 37       |   |      |   | 39,522     |  
|Accounts payable and accrued liabilities                                          |  |                   | (1,116   | ) |      |   | (198       | )
|Amount due to parent and affiliates                                               |  |                   | (1,227   | ) |      |   | (13,025    | )
|Funds withheld                                                                    |  |                   |         |   |      |   | 15,859     |  
|Prepaid reinsurance premiums                                                      |  |                   | (35,137  | ) |      |   | 28,670     |  
|Reinsurance balances receivable                                                   |  |                   | (2,389   | ) |      |   | (22,354    | )
|Reinsurance balances payable                                                      |  |                   | 12,541   |   |      |   | (11,096    | )
|Other assets                                                                      |  |                   | 295      |   |      |   | 357        |  
|                                                                                 
|Total adjustments                                                                 |  |                   | 185,753  |   |      |   | 122,705    |  
|                                                                                 
|Net cash provided by operating activities                                         |  |                   | 198,801  |   |      |   | 214,994    |  
|                                                                                 
|Cash flows used in investing activities:                                          |  |                   |          |   |      |   |            |  
|Proceeds from sale of debt securities                                             |  |                   | 60,144   |   |      |   | 1,224,175  |  
|Proceeds from maturity of debt securities and short-term investments              |  |                   | 206,266  |   |      |   | 33,783     |  
|Net sales (purchases)  of short-term investments                                  |  |                   | 136,278  |   |      |   | (30,465    | )
|Purchase of debt securities                                                       |  |                   | (776,504 | ) |      |   | (1,584,835 | )
|                                                                                 
|Net cash used in investing activities                                             |  |                   | (373,816 | ) |      |   | (357,342   | )
|                                                                                 
|Cash flows provided by financing activities:                                      |  |                   |          |   |      |   |            |  
|Capital Contribution                                                              |  |                   | 225,000  |   |      |   | 190,983    |  
|Dividends paid on Series A redeemable preferred shares                            |  |                   | (17,677  | ) |      |   | (3,685     | )
|                                                                                 
|Net cash provided by financing activities                                         |  |                   | 207,323  |   |      |   | 187,298    |  
|                                                                                 
|Increase in cash and cash equivalents                                             |  |                   | 32,308   |   |      |   | 44,950     |  
|                                                                                 
|Cash and cash equivalents - beginning of year                                     |  |                   | 86,528   |   |      |   | 22,256     |  
|                                                                                 
|Cash and cash equivalents - end of the period                                     |  | $                 | 118,836  |   |      | $ | 67,206     |  

See Accompanying Notes to Interim Financial Statements.

5

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

1.      Organization and Business

XL
  Financial Assurance Ltd. (the Company) was incorporated with limited liability under the Bermuda Companies Act 1981 on October 14, 1998 and is registered as a Class 3 insurer
under The Insurance Act 1978, amendments thereto and related regulations (TheAct).

Except
  for its preferred stock interests which are discussed below, through June 30,
  2006, XL Financial Assurance Ltd. (theCompany) was a wholly owned
  subsidiary of XL Insurance  (Bermuda) Ltd. (XLI), which is an indirect
  wholly owned subsidiary of XL Capital Ltd. ("XL Capital"), a public company
  whose shares are listed on the New York Stock Exchange. On March 17, 2006,
  XL Capital formed Security Capital Assurance  Ltd. ("SCA"), a Bermuda based
  holding company, in anticipation of contributing its ownership interests in
  its financial guarantee insurance and financial guarantee reinsurance operating
  businesses to SCA and selling an interest therein to the public  through an
  initial public offering of SCA common shares (the "IPO"). The contribution
  of such businesses to SCA occurred on July 1, 2006 and the IPO was consummated
  on August 4, 2006. The aforementioned operating businesses contributed to SCA
  by XL  Capital consisted of: (i) XLCA and its wholly-owned subsidiary, XL Capital
  Assurance (U.K.) Limited ("XLCA-UK") and (ii) the Company. After the IPO, a
  secondary offering by XL Capital, the exercise of the underwriters' over-allotment
  option and  restricted share awards to management of SCA, XL Capital's ownership
  of SCA's outstanding common shares immediately after the IPO represented approximately
  a 63% economic interest. In June 2007, XL Capital completed the sale of additional
  common  shares of SCA from its holdings. Immediately after such sale XL Capitals
  ownership of SCAs common shares represented approximately a 46 percent
  voting and economic interest in SCA, adjusted for restricted share awards to
  the  Companys employees and management outstanding as of such date. Prior
  to XL Capitals sale of its SCA common shares in June 2007 its voting
  interest in SCA was subject to limitations contained in SCAs bye-laws.
  The Companys
preferred stock interests are owned by Financial Security Assurance Holdings
  Ltd. (FSAH),
an entity which is otherwise not related to the Company, XL Capital or SCA.

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

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

2.      Basis of Presentation

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

6

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

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

3.      Derivative Financial Instruments

The Company
  reinsures 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, the credit
  default swap contracts function like the guarantees of debt obligations that
  the Company provides in the form of  reinsurance.

Assets
  referenced in the Companys reinsured credit default swap in-force portfolio
  consist of structured pools of corporate obligations. Such pools were awarded
  investment-grade ratings at the deals inception. At September 30, 2007,
  on a net par basis, the notional amount outstanding of the Companys in-force
  reinsured credit default swap contracts was $40.9 billion ($38.7 billion
  net of reinsurance) and the weighted average term of the contracts in-force
  was 8.17 years. In addition, based upon such notional amount, as of September
  30, 2007 approximately 95.7% of referenced assets underlying such in-force
  contracts were rated (based on Standard & Poors
ratings) AAA, with the remaining 4.3% 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 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 with 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 reinsured 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 most of 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 the 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 change its estimates in the future.

The
  weight ascribed by management to the aforementioned factors in forming its
  best estimate of the fair value of the Companys reinsured 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
reinsured 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 reinsured
  credit default swap contracts as of September 30, 2007, however, management
  concluded that, for the majority of the  Companys credit default 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

7

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

credit default swaps and the corporate credit rating
  of the issuers/reinsurer of such contracts, XLCA and XLFA, respectively, at
  September 30, 2007.

Because
  management views the credit derivative contracts that the Company reinsures
  as an extension of the Companys financial guarantee reinsurance business,
  management believes that the most meaningful presentation of these derivatives
  is to reflect: (i) fees that the Company receives from the reinsurance of such
  contracts in the line item caption in the statement of operations entitled net
  premiums earned, (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
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
realized and unrealized losses on derivative financial instruments.

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

|                                                                       |                    |          |                   |      |        |   |               |          |              |      |        |  
|---------------------------------------------------------------------- | ------------------ | -------- | ----------------- | ---- | ------ | - | ------------- | -------- | ------------ | ---- | ------ | -
|                                                                       | (Unaudited)        |          | (Unaudited)       |     
|                                                                       | Three Months Ended |          | Nine Months Ended |     
|                                                                       | September 30,      |          | September 30,     |     
|                                                                       |                    | 2007     |                   | 2006 |        |   | 2007          |          |              | 2006 |       
|                                                                       |                    |          |                   |      |        |   |               |          |              |      |        |  
|(U.S. dollars in thousands)                                            |                    |          |                   |      |        |   |               |          |              |      |        |  
|Statements of Operations:                                              |                    |          |                   |      |        |   |               |          |              |      |        |  
|Net premiums earned                                                    | $                  | 10,384   |                   | $    | 4,969  |   | $             | 24,805   |              | $    | 15,354 |  
|Net losses and loss expenses                                           |                    | 1,400    |                   |      | 131    |   |               | 2,818    |              |      | 1,012  |  
|Net realized and unrealized losses on derivative financial instruments |                    | (115,088 | )                 |      | (2,838 | ) |               | (138,358 | )            |      | (5,903 | )
|                                                                      
|                                                                       |                    |          |                   |      |        |   | (Unaudited)   |          |              |     
|                                                                       |                    |          |                   |      |        |   | As of         |          | As of        |     
|                                                                       |                    |          |                   |      |        |   | September 30, |          | December 31, |     
|                                                                       |                    |          |                   |      |        |   | 2007          |          | 2006         |     
|                                                                       |                    |          |                   |      |        |   |               |          |              |      |        |  
|Balance Sheets:                                                        |                    |          |                   |      |        |   |               |          |              |      |        |  
|Assets                                                                 |                    |          |                   |      |        |   |               |          |              |      |        |  
|Derivative assets                                                      |                    |          |                   |      |        |   | $             | 2,386    |              | $    | 11,148 |  
|Liabilities                                                            |                    |          |                   |      |        |   |               |          |              |      |        |  
|Unpaid losses and loss expenses                                        |                    |          |                   |      |        |   |               | 14,901   |              |      | 12,083 |  
|Derivative liabilities                                                 |                    |          |                   |      |        |   |               | 134,280  |              |      | 4,685  |  

8

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

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

4.      Recent Accounting Pronouncements and Developments

Proposed Statement of
  Financial Accounting Standards (SFAS), Accounting for Financial
Guarantee Insurance Contracts

On
  April 18, 2007, the Financial Accounting Standards Board (FASB)
  issued Proposed SFAS, Accounting for Financial Guarantee Insurance Contracts
  - an interpretation of FASB Statement  No. 60   (SFAS 60). This
  proposed Statement would clarify how SFAS 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 to evaluate credit deterioration in its
  insured financial obligations. We expect that implementation of this guidance
  as currently proposed would cause the Company to de-recognize its reserves
  for unallocated losses and loss adjustment expenses and preclude it from providing
such reserves in the future.

The comment period for the proposed Statement expired on June 18, 2007. A meeting between the FASB and interested parties who provided comments on the proposed Statement took place 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 (SFAS155), 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.

9

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

SFAS No. 157, Fair Value Measurements -

In
  September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157)
  which defines fair value, establishes a framework for measuring fair value
  in generally accepted accounting principles, and expands disclosures about
  fair value measurements. This Statement is applicable in conjunction with other
  accounting pronouncements that require or permit fair value measurements, where
  the FASB previously concluded in those accounting pronouncements that fair
  value is the relevant measurement attribute. Accordingly, this Statement does
  not require any new fair value measurements. SFAS No. 157 is effective for
  financial statements issued for fiscal years beginning after November 15, 2007,
  and interim periods within these fiscal years. The Company is currently evaluating
the effect the adoption of SFAS 157 will have on its financial statements.

SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities -

In
  February 2007, the FASB issued SFAS 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, 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 $1.9 million and $8.1 million for the three
  and nine months ended September 30, 2007, respectively, and $0.5 million and $24.7
  million for the three and nine months ended September 30, 2006, respectively,
related to such refunded bonds and other accelerations.

6.      Related Party Transactions

Capital Transactions

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

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

Services Arrangements

Prior to
  the IPO, the Company purchased certain services from affiliates of XL Capital
  under various agreements and continued to purchase certain services indirectly
  through SCA Administrative Bermuda Ltd, a wholly owned subsidiary of SCA. Such
  services principally included: (i) information technology support, (ii) actuarial,
  finance, internal audit services, and (iii) certain investment management services.
  Since the IPO, the Company has undertaken to perform certain of the services
  itself or to outsource such services to other vendors and has, accordingly,
  discontinued the purchase of many of the services that were provided by XL
  Capital. The Company incurred costs under aforementioned agreements aggregating $0.2
  million and $0.8 million for the three and nine months ended September
  30, 2007, respectively, compared to $0.7million and $3.2 million
for the three and nine months ended September 30, 2006, respectively, which are
  a component of operating expenses in
the accompanying statements of operations.

Reinsurance Treaties with Affiliates

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





10

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



| |  | XLI entered into an
        agreement with XLCA which unconditionally and irrevocably guarantees
        to XLCA the full and complete payment when due of all of the Companys
        obligations under its facultative quota share reinsurance agreement with
        XLCA, under which agreement the Company has assumed business from XLCA
        since December 19, 2000. The gross par value of business guarantied by
        XLI under this agreement was approximately $80.6 billion. and $84.0
        billion as of September 30, 2007 and December 31, 2006, respectively.
        The XLI guarantee agreement terminated with respect to any new business
        produced by XLCA and ceded to the Company pursuant to the facultative
    quota share reinsurance agreement after the effective date of the IPO.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | The Company has entered into the
    following reinsurance agreements with XLI:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |   | (a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |   | (b)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |   | (c)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |   | (d)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |   | (e)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | The Company has entered
        into the following reinsurance agreements with certain subsidiaries and
        affiliates of FSAH. Premiums assumed from FSAH affiliates represented
        15.0% and 10.4% of the Companys total reinsurance premiums assumed
        for each of the nine month periods ended September 30, 2007 and 2006,
        respectively. All of the agreements discussed below may be terminated
    under certain conditions, as defined in the agreements:                                                                                                                                                                                                                                                                                                                                        
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |   | (a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  





11

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

| |   | (b)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Effective January
        1, 2004, the Company entered into a reinsurance treaty with FSA to reinsure
        certain policies they issued insuring the timely payment of the principal
        and interest on certain asset-backed securities and pools of consumer
    debt obligations.                                                                                                                                    
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                
| |   | (c)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Effective January 1, 2004, the
        Company entered into a reinsurance treaty with FSA to reinsure certain
        policies they issued insuring the timely payment of the principal and
        interest on securities and obligations that provide financing for governmental
        or public purpose infrastructure projects located outside of the United
    States and its territories, excluding certain countries.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | The Company has guarantied
        certain of XLIs obligations in connection with certain transactions
        where XLIs customer required such credit enhancement. Each of these
        transactions has a double trigger structure, meaning that
        the Company does not have to pay a claim unless both the underlying transaction
        and XLI default. For each of these transactions, the Company has entered
        into a reimbursement agreement with XLI, pursuant to which XLI pays the
        Company a fee for providing its guarantee and XLI grants the Company
        a security interest in a portion of the payments received by it from
        its client. As of September 30, 2007, the Companys aggregate net
    par outstanding relating to such guarantees was $522.8 million.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                

7.      Reinsurance

The effect of reinsurance on premium written and earned for the nine month periods ended September 30, 2007 and 2006 is shown below:

|                                      |  |             |         |       |         |         |        
|------------------------------------- |  | ----------- | ------- | ----- | ------- | ------- | -------
|                                      |  | (Unaudited)
|                                      |  | Assumed     |         | Ceded |         | Net    
|Three months ended September 30, 2007 |  |             |         |       |         |         |        
|Premium written                       |  | $           | 90,864  |       | $       | (24,392 | )      
|Premium earned                        |  |             | 55,931  |       | (5,562  | )       | 50,369 
|Losses and loss adjustment expenses   |  |             | 6,920   |       | (453    | )       | 6,467  
|Three months ended September 30, 2006 |  |             |         |       |         |         |        
|Premium written                       |  |             | 72,015  |       | 23,412  |         | 95,427 
|Premium earned                        |  |             | 42,260  |       | (726    | )       | 41,534 
|Losses and loss adjustment expenses   |  |             | 358     |       | 4,139   |         | 4,497  
|                                     
|                                      |  | (Unaudited)
|                                      |  | Assumed     |         | Ceded |         | Net    
|Nine months ended September 30, 2007  |  |             |         |       |         |         |        
|Premium written                       |  | $           | 232,287 |       | $       | (47,534 | )      
|Premium earned                        |  |             | 151,365 |       | (12,397 | )       | 138,968
|Losses and loss adjustment expenses   |  |             | 8,323   |       | (165    | )       | 8,158  
|Nine months ended September 30, 2006  |  |             |         |       |         |         |        
|Premium written                       |  |             | 242,470 |       | 11,459  |         | 253,929
|Premium earned                        |  |             | 143,857 |       | (17,210 | )       | 126,647
|Losses and loss adjustment expenses   |  |             | 7,322   |       | 3,329   |         | 10,651 

12

---



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

8.      Unpaid 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 at and for the  |         | As at and for the |            
|                                                                            | Nine Months Ended  |         | Year Ended        |            
|                                                                            | September 30, 2007 |         | December 31, 2006 |            
|                                                                            | Case               |         |                   | Unallocated |   | Case     |   |   | Unallocated |  
|                                                                            | Reserves           |         |                   | Reserves    |   | Reserves |   |   | Reserves    |  
|                                                                            |                    |         |                   |             |   |          |   |   |             |   |  |   |        |  
|(U.S. dollars in thousands)                                                 |                    |         |                   |             |   |          |   |   |             |   |  |   |        |  
|Unpaid losses and loss adjustment expenses at beginning
    of year         | $                  | 75,057  |                   |             | $ | 81,676   |   | $ | 64,747      |   |  | $ | 69,297 |  
|Unpaid losses and loss adjustment expenses recoverable                      |                    | (64,359 | )                 |             |   | (13,871  | ) |   | (52,317     | ) |  |   | (14,07 | )
|Net unpaid losses and loss adjustment expenses
    at beginning of year     |                    | 10,698  |                   |             |   | 67,805   |   |   | 12,430      |   |  |   | 55,220 |  
|                                                                            |                    |         |                   |             |   |          |   |   |             |   |  |   |        |  
|Increase (decrease) in net losses and loss adjustment
    expenses incurred |                    |         |                   |             |   |          |   |   |             |   |  |   |        |  
|in respect of losses occurring in:                                          |                    |         |                   |             |   |          |   |   |             |   |  |   |        |  
|Current year                                                                |                    |        |                   |             |   | 10,156   |   |   |            |   |  |   | 12,585 |  
|Prior years                                                                 |                    | (1,998  | )                 |             |   |         |   |   | 1,474       |   |  |   |       |  
|Less net losses and loss adjustment expenses
    paid & other relating to   |                    |         |                   |             |   |          |   |   |             |   |  |   |        |  
|prior years                                                                 |                    | (1,381  | )                 |             |   |         |   |   | (3,206      | ) |  |   |       |  
|Net unpaid losses and loss adjustment expenses
    at end of period         |                    | 7,319   |                   |             |   | 77,961   |   |   | 10,698      |   |  |   | 67,805 |  
|Unpaid losses and loss adjustment expenses recoverable                      |                    | 64,348  |                   |             |   | 14,035   |   |   | 64,359      |   |  |   | 13,871 |  
|                                                                           
|Unpaid losses and loss adjustment expenses at end
    of period             | $                  | 71,667  |                   |             | $ | 91,996   |   | $ | 75,057      |   |  | $ | 81,676 |  

Case Basis Reserves for Losses and Loss Expenses

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

|a. | At December 31, 2006, the Company carried a
        gross case basis reserve for losses and loss adjustment expenses of approximately $70.3
        million ($6.0 million net of retrocession to XLI) relating to an
        insured project financing. There was no change in the reserve during
        the nine months ended September 30, 2007. The total remaining par insured
        by the Company with respect to this transaction, which amortizes over
        many years into the future, aggregated approximately $247.8 million
        ($5.9 million net of retrocession to XLI) at 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. | In December 2005, certain notes collateralized
        by loans to medical providers that were insured by XLCA (the Insured
        Notes) and reinsured by the Company defaulted upon their maturity.
        In satisfaction of the resulting claim, XLCA purchased the Insured Notes
        for $20.2 million, which represented the remaining outstanding principal
        and accrued interest on the Insured Notes. In connection therewith, the
        Company recorded a loss of $0.6 million representing its share under
        the aforementioned reinsurance agreement of the difference between the
        estimated fair value of the Insured Notes at the date they were acquired
        by XLCA and the consideration paid by XLCA to acquire the Insured Notes.
        In addition, the Company paid XLCA its share of the cost of the Insured
        Notes and recorded such payment as funds withheld. During 2006, the Company
        recognized a charge of $12.6 million relating to the impairment of
        the Insured Notes and reduced it funds withheld by a corresponding amount.
        In addition, during 2006 the balance of its funds withheld was returned
    by XLCA to the Company.
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|c. | At December 31, 2006 the Company carried a
        case basis reserve for losses and loss adjustment expenses of $2.7
        million representing the present value of the loss expected to be incurred
        in the future with respect to an insured residential mortgage securitization.
        During the three months ended March 31, 2007 the insured obligation was
        retired as a result of the exercise of a clean-up call by the sponsor
        of the securitization there by eliminating the Companys without
    loss. Accordingly, the Company recorded a reduction
        in its provision for losses and loss adjustment expenses for the three
        months ended March 31, 2007 of $2.7 million resulting from the elimination
    of the aforementioned reserve.                                                                                                                                                                                                                                                                                                                                                                                                                                    
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XL FINANCIAL ASSURANCE LTD.NOTES TO INTERIM FINANCIAL STATEMENTS(Unaudited)



|d. | The Company maintains a provision of $1.2
        million in respect of reinsurance provided to a primary for a cash flow
        collateralized borrowing obligation. The estimate of loss is based on
        current assumptions, although no claim is expected to be paid until the
    legal maturity of principal in 2011 if at all.
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9.      Exposures under Guarantees

The
  Company provides financial guarantee reinsurance to support public and private
  borrowing arrangements. Financial guarantee reinsurance guarantees the timely
  payment of principal and interest on insured obligations to third party holders
  of such obligations in the event of default by an issuer. The Companys
  potential liability in the event of non-payment by the issuer of a reinsured
  obligation represents the aggregate  outstanding principal reinsured under
  its policies and contracts and related interest payable at the date of default.
  In addition, the Company provides credit protection on specific 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 asset. The Companys potential liability under
credit default swaps represents the notional amount of such swaps that it reinsures.

At
  September 30, 2007, the Companys net outstanding par exposure under its
  in-force financial guarantee reinsurance policies and contracts aggregated
  to $128.4 billion and net
reserves for losses and loss adjustment expenses relating to such exposures was $7.3
million at such date. In addition, at September 30, 2007, the Companys
notional exposure under credit default swaps aggregated to $38.7 billion
and  the net liability for these credit default swaps reflected in the Companys
balance sheet at September 30, 2007 was $126.7
million.

10.      Other Matters

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

11.      Subsequent
      Events

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) the Company
	      reinsures. 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 reinsure 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 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 reinsured 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 its 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 to 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 reinsured by the Company.
    Such transactions represent $586 million in net par insured or approximately
    0.5% of the Companys total net reinsured par outstanding.  One
    of the Companys reinsured transactions of approximately $274 million
    net par, originally rated AAA by Fitch on June 1, 2007, was downgraded to
    CCC. The other transaction of approximately $312 million net par, originally
    rated AAA by Fitch on March 29, 2007, was downgraded to BBB.  The Companys
    portfolio contains only oneother
    SF CDO rated by Fitch.  This transaction of approximately $424
    million net par, originally rated AAA by Fitch on June 27, 2006, remains
under review.

Downgrades
    of credits that we reinsure, 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 goal 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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