Document:

Exhibit 10.1

    TWELFTH
      AMENDMENT TO THE

    FIRST
      AMENDED AND RESTATED

    AGREEMENT
      OF LIMITED PARTNERSHIP OF

    ESSEX
      PORTFOLIO, L.P.

    Dated
      as of July 26, 2006

     

    This
      Twelfth Amendment to the First Amended and Restated Agreement of Limited
      Partnership of Essex Portfolio, L.P., as amended (as amended, the "Partnership
      Agreement"), dated as of the date shown above (the "Amendment"), is executed
      by
      Essex Property Trust, Inc. a Maryland Corporation (the "Company"), as the
      General Partner and on behalf of the existing Limited Partners of Essex
      Portfolio, L.P. (the "Partnership"). 

     

    RECITALS

     

    WHEREAS,
      the
      Partnership was formed pursuant to the Partnership Agreement;

     

    WHEREAS,
      on the
      date hereof, the Company is selling and issuing 5,200,000 shares of 4.875%
      Series G Cumulative Convertible Preferred Stock pursuant to a public offering
      and the Company has granted to the underwriter an option to purchase up to
      an
      additional 780,000 shares of such stock; 

     

    WHEREAS,
      the
      Series A Preferred Stock has all been converted into Common Stock and the Series
      A Preferred Interest is no longer relevant; 

     

    WHEREAS,
      the
      Partnership has redeemed all of its outstanding Series C Preferred Units and
      Series E Preferred Units;

     

    WHEREAS,
      the
      Series C Preferred Stock and the Series E Preferred Stock, which relate to
      the
      redeemed Series C Preferred Units and the redeemed Series E Preferred Units,
      respectively, will not be issued;

     

    WHEREAS,
      the
      Series C Preferred Interest and the Series E Preferred Interest, which relate
      to
      the Series C Preferred Stock and the Series E Preferred Stock, respectively,
      are
      no longer relevant; and

     

    WHEREAS,
      pursuant
      to the authority granted to the General Partner under the Partnership Agreement,
      the General Partner desires to amend the Partnership Agreement to reflect (i)
      the issuance of the Series G Preferred Stock and (ii) certain other matters
      described herein.

     

    NOW
      THEREFORE,
      in
      consideration of the premises and for other good and valuable consideration,
      the
      receipt and sufficiency of which hereby are acknowledged, the General Partner
      hereby amends the Partnership Agreement as follows:

     

    
      	1.  	
              Definitions.
                Capitalized terms used herein, unless otherwise defined herein, shall
                have
                the same meanings as set forth in the Partnership
                Agreement.

            

    

     

    
      	2.  	
              Deleted
                Definitions.
                Section 1.1 of the Partnership Agreement is hereby amended to delete
                the
                following definitions: Series A Preferred Stock, Series C Preferred
                Interest, Series C Preferred Stock, Series C Preferred Units, Series
                E
                Preferred Interest, Series E Preferred Stock and Series E Preferred
                Units.

            

    

     

    
      	3.  	
              Percentage
                Interest.
                Section 1.1 of the Partnership Agreement is hereby amended to delete
                the
                definition of "Percentage Interest" in its entirety and to substitute
                the
                following definition of "Percentage Interest," in its
                place:

            

    

     

    "Percentage
      Interest"
      shall
      mean with
      respect to any Partner other than holders of Series B Preferred Units, Series
      D
      Preferred Units, Series Z Incentive Units or Series Z-1 Incentive Units, the
      undivided percentage ownership interest of such Partner in the Partnership,
      as
      determined by dividing
      (i) the number of Partnership Units owned by such Partner by
      (ii) the sum of (A) the total number of Partnership Units then outstanding
      (excluding the Series B Preferred Interest, the 

     

    
      
        1

      

      
         

        
          

        

      

      
         

      

    

    Series
      B
      Partnership Units, the Series D Preferred Interest, the Series D Preferred
      Units, the Series F Preferred Interest, Series G Preferred Interest, Series
      Z
      Incentive Units and the Series Z-1 Incentive Units), (B) the total number of
      outstanding Series Z Incentive Units multiplied by the Distribution Ratchet
      Percentage with respect to each such Series Z Incentive Unit, calculated on
      a
      unit-by-unit basis, and (C) the total number of outstanding Series Z-1 Incentive
      Units multiplied by the Series Z-1 Distribution Ratchet Percentage with respect
      to each such Series Z-1 Incentive Unit, calculated on a unit-by-unit basis.
      With
      respect to any holder of Series Z Incentive Units, such Partner's Percentage
      Interest shall be equal to such Partner's Series Z Percentage Interest. With
      respect to any holder of Series Z- 1 Incentive Units, such Partner's Percentage
      Interest shall be equal to such Partner's Series Z-1 Percentage Interest. If
      any
      Partner holds a combination of Common Units, Series Z Incentive Units and/or
      Series Z-1 Incentive Units, then such Partner's Percentage Interest shall
      be equal to the sum of (A) the Percentage Interest as calculated pursuant
      to the first sentence of this definition (assuming for purposes of such
      calculation that such Partner holds only Common Units, if any), (B) the
      Series Z Percentage Interest (assuming for purposes of such calculation that
      such Partner holds only Series Z Incentive Units, if any) and (C) the
      Series Z-1 Percentage Interest (assuming for purposes of such calculation that
      such Partner holds only Series Z-1 Incentive Units, if any).

     

    
      	4.  	
              Common
                Unit.
                Section 1.1 of the Partnership Agreement is hereby amended to delete
                the
                definition of "Common Unit" in its entirety and to substitute the
                following definition of "Common Unit," in its
                place:

            

    

     

    "Common
      Unit"
      shall
      mean a Partnership Unit representing an interest in the Partnership, other
      than
      a Series B Preferred Unit, Series B Preferred Interest, Series D Preferred
      Unit,
      Series D Preferred Interest, Series F Preferred Interest, Series G Preferred
      Interest, Series Z Incentive Unit, Series Z-1 Incentive Unit or any other
      Preferred Interest or Preferred Partnership Units.

     

    
      	5.  	
              Series
                Z Percentage Interest.
                Section 1.1 of the Partnership Agreement is hereby amended to delete
                the
                definition of "Series Z Percentage Interest" in its entirety and
                to
                substitute the following definition of "Series Z Percentage Interest,"
                in
                its place:

            

    

     

    "Series
      Z Percentage Interest"
      shall
      mean, with respect to any holder of Series Z Incentive Units, the undivided
      percentage ownership interest of such Partner in the Partnership as determined
      by dividing
      (A) the
      product resulting from multiplying the total number of outstanding Series Z
      Incentive Units owned by such Partner by the Series Z Distribution Ratchet
      Percentage attributed to such holder's Series Z Incentive Units, by
      (B) the
      sum of (x) the total number of Partnership Units then outstanding (excluding
      the
      Series B Preferred Interest, the Series B Partnership Units, the Series D
      Preferred Interest, the Series D Preferred Units, the Series F Preferred
      Interest, Series G Preferred Interest, the Series Z Incentive Units and the
      Series Z-1 Incentive Units), (y) the total number of outstanding Series Z
      Incentive Units multiplied by the Distribution Ratchet Percentage with respect
      to each Series Z Incentive Unit, calculated on a unit-by-unit basis, and (z)
      the
      total number of outstanding Series Z-1 Incentive Units multiplied by the Series
      Z-1 Distribution Ratchet Percentage with respect to each such Series Z-1
      Incentive Unit, calculated on a unit-by-unit basis.

     

    
      	6.  	
              Series
                Z-1 Percentage Interest.
                Section 1.1 of the Partnership Agreement is hereby amended to delete
                the
                definition of "Series Z-1 Percentage Interest" in its entirety and
                to
                substitute the following definition of "Series Z-1 Percentage Interest,"
                in its place:

            

    

     

    "Series
      Z-1 Percentage Interest"
      shall
      mean, with respect to any holder of Series Z-1 Incentive Units, the undivided
      percentage ownership interest of such Partner in the Partnership as determined
      by dividing
      (A) the
      product resulting from multiplying the total number of outstanding Series Z-
      1
      Incentive Units owned by such Partner by the Series Z-1 Distribution Ratchet
      Percentage attributed to such holder's Series Z-1 Incentive Units, by
      (B) the
      sum of (x) the total number of Partnership Units then outstanding (excluding
      the
      Series B Preferred Interest, the Series B Partnership Units, the Series D
      Preferred Interest, the Series D Preferred Units, the Series F 

    
      
        2

      

      
         

        
          

        

      

      
         

      

    

    Preferred
      Interest, Series G Preferred Interest, the Series Z Incentive Units and the
      Series Z-1 Incentive Units), (y) the total number of outstanding Series Z
      Incentive Units multiplied by the Distribution Ratchet Percentage with respect
      to each Series Z Incentive Unit, calculated on a unit-by-unit basis, and (z)
      the
      total number of outstanding Series Z-1 Incentive Units multiplied by the Series
      Z-1 Distribution Ratchet Percentage with respect to each such Series Z-1
      Incentive Unit, calculated on a unit-by-unit basis.

     

    
      	7.  	
              Series
                G Preferred Interest.
                Section 1.1 of the Partnership Agreement is hereby amended to include
                the
                following definition, to be inserted in alphabetical order in such
                Section
                1.1:

            

    

     

    "Series
      G Preferred Interest"
      shall
      mean the interest in the Partnership received by the General Partner in
      connection with the issuance of shares of Series G Preferred Stock, as and
      when
      issued, which Series G Preferred Interest includes and shall include the right
      to receive preferential distributions and certain other rights as set forth
      in
      this Agreement. 

     

    
      	8.  	
              Series
                G Preferred Stock.
                Section 1.1 of the Partnership Agreement is hereby amended to include
                the
                following definition, to be inserted in alphabetical order in such
                Section
                1.1:

            

    

     

    "Series
      G Preferred Stock"
      shall
      mean the preferred stock of the General Partner described in Article THIRD
      of
      the Articles Supplementary, reclassifying 5,980,000 shares of Common Stock
      as
      5,980,000 shares of 4.875% Series G Cumulative Convertible Preferred Stock
      filed
      with the Department on or about July 26, 2006.

     

    
      	9.  	
              Distributions.
                Section 6.2(a) of the Partnership Agreement is hereby deleted in
                its
                entirety, and the following is hereby substituted in the place
                thereof:

            

    

     

    
      	a.  	
              Distributions
                shall be made in accordance with the following order of
                priority:

            

    

     

    
      	i.  	
              First,
                on a pro
                rata
                basis, (based upon the same ratio that accrued distributions per
                share of
                Series B Preferred Stock, Series D Preferred Stock, Series F Preferred
                Stock and Series G Preferred Stock and per unit of Series B Preferred
                Units and Series D Preferred Units (which shall not include any
                accumulation in respect of unpaid distributions for prior distribution
                periods if such stock or units do not have cumulative distribution
                rights)
                bear to each other) (w) to the General Partner, on account of the
                Series B
                Preferred Interest, Series D Preferred Interest, Series F Preferred
                Interest and Series G Preferred Interest until the total amount of
                distributions made pursuant to this Section 6.2(a)(i)(w) equals the
                total
                amount of accrued but unpaid distributions (if any) payable with
                respect
                to the Series B Preferred Stock, the Series D Preferred Stock, the
                Series
                F Preferred Stock and Series G Preferred Stock as of the date of
                such
                distribution; (y) to the Limited Partners holding Series B Preferred
                Units, on account of the Series B Preferred Units until the total
                amount
                of distributions made pursuant to this Section 6.2(a)(i)(y) equals
                the
                total amount of accrued but unpaid distributions (if any) payable
                with
                respect to the Series B Preferred Units, in accordance with Exhibit
                N of
                the Partnership Agreement, as of the date of such distribution; and
                (z) to
                the Limited Partners holding Series D Preferred Units, on account
                of the
                Series D Preferred Units until the distributions made pursuant to
                this
                Section 6.2(a)(i)(z) equals the total amount of accrued but unpaid
                distributions (if any) payable with respect to the Series D Preferred
                Units, in accordance with Exhibit P of the Partnership Agreement,
                as of
                the date of such distribution.

            

    

     

    
      	ii.  	
              Next,
                to the Partners, pro
                rata
                in
                accordance with the Partners' then Percentage
                Interests.

            

    

     

    
      
        3

      

      
         

        
          

        

      

      
         

      

    

     

    Neither
      the Partnership nor the Limited Partners shall have any obligation to see that
      any funds distributed to the General Partner pursuant to
      subparagraph (a)(i) of this Section 6.2 are in turn used by the General
      Partner to pay dividends on the Series B Preferred Stock, Series D Preferred
      Stock, the Series F Preferred Stock or the Series G Preferred Stock (or any
      other Preferred Stock) or that funds distributed to the General Partner pursuant
      to subparagraph (a)(ii) of this Section 6.2 are in turn used by the General
      Partner to pay dividends on the Common Stock or for any other
      purpose."

     

    
      	10.  	
              Distributions
                in Kind.
                Section 8.5 of the Partnership Agreement is hereby amended by adding
                the
                following sentence to the end of such
                section:

            

    

     

    "Notwithstanding
      the foregoing, the Liquidating Trustee shall not distribute to the holders
      of
      Series B Partnership Units, Series D Partnership Units, Series B Preferred
      Interest, Series D Preferred Interest, Series E Preferred Interest, Series
      F Preferred Interest Partnership and Series G Preferred Interest assets other
      than cash."

     

    
      	11.  	
              Redemption
                Distribution.
                Section 6.2(c) of the Partnership Agreement is hereby deleted in
                its
                entirety, and the following is hereby substituted in the place
                thereof:

            

    

     

    (c)
      Notwithstanding the foregoing, the General Partner may, in its sole discretion,
      at any time when any Preferred Stock (including any Series B Preferred Stock,
      Series D Preferred Stock, Series F Preferred Stock, Series G Preferred Stock
      or
      any other Preferred Stock) is outstanding, make a special distribution to
      itself, alone, on account of the Preferred Interest relating to such Preferred
      Stock, for the sole purpose of, and in an amount no greater than such amount
      as
      will be used by the General Partner for, redemption of all or any part of such
      outstanding Preferred Stock (any such distribution shall be referred to as
      a
      "Redemption Distribution"). There shall be no adjustments of the Percentage
      Interests of the Partners on account of any Redemption
      Distribution.

     

    
      	12.  	
              Exhibit
                E.
                Exhibit E to the Partnership Agreement is hereby deleted in its entirety,
                and the attached Exhibit E is hereby inserted in the place
                thereof.

            

    

     

    
      	13.  	
              Exhibits
                O and Q.
                Exhibits O and Q set forth the terms of the Series C Preferred Units
                and
                Series E Preferred Units, which have been redeemed. Exhibits O and
                Q are
                hereby deleted in their entirety.

            

    

     

    
      	14.  	
              Agreement
                to Contribute Proceeds from Issuance of Series G Preferred
                Stock. Immediately
                upon receipt by the General Partner of the net proceeds from the
                sale of
                Series G Preferred Stock, as and when shares of Series G Preferred
                Stock
                are sold by the General Partner (after deducting all costs and expenses
                incurred by the General Partner in connection with the sale of such
                shares
                of Series G Preferred Stock including, without limitation, all
                underwriters’ commissions, and attorneys' and consultants' fees and
                costs), the General Partner shall contribute to the Partnership,
                as an
                additional Capital Contribution, the entire amount of such net proceeds.
                In exchange for each such additional Capital Contribution, the General
                Partner shall receive a Series G Preferred Interest in the Partnership,
                and the General Partner's Capital Account shall be increased by an
                amount
                equal to the number of shares of Series G Preferred Stock sold multiplied
                by the purchase price per share of the Series G Preferred Stock.
                Notwithstanding the provisions of Section 4.3(a) of the Partnership
                Agreement, there shall be no adjustment of the Percentage Interests
                of the
                Partners on account of any such additional Capital
                Contribution.

            

    

     

    
      	15.  	
              Continuing
                Effect of Partnership Agreement.
                Except as modified herein, the Partnership Agreement is hereby ratified
                and confirmed in its entirety and shall remain and continue in full
                force
                and effect, provided, however, that to the extent there shall be
                a
                conflict between the provisions of the Partnership Agreement and
                this
                Amendment the provisions in this Amendment will prevail. All references
                in
                any document to the Partnership Agreement shall mean the Partnership
                Agreement, as amended hereby.

            

    

     

    
      4

      
        

      

    

    

    

    
      	16.  	
              Counterparts.
                This Agreement may be executed in any number of counterparts, each
                of
                which shall be deemed to be an original and all of which shall constitute
                one and the same agreement. Facsimile signatures shall be deemed
                effective
                execution of this Agreement and may be relied upon as such by the
                other
                party. In the event facsimile signatures are delivered, originals
                of such
                signatures shall be delivered to the other party within three (3)
                business
                days after execution.

            

    

     

     

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        5

      

      
         

        
          

        

      

      
         

      

    

    IN
      WITNESS WHEREOF, the General Partner has executed this Amendment as of the
      date
      indicated above.

     

     

     

     

    GENERAL
      PARTNER

    ESSEX
      PROPERTY TRUST, INC.,

    a
      Maryland corporation as General Partner

    of
      Essex
      Portfolio, L.P. and on behalf of the 

    existing
      Limited Partners

     

     

    By:     
/s/
      Michael T. Dance_____ 

    Name:    
Michael
      T. Dance 

    Title:           
      Executive Vice President and 

                                  
      Chief Financial Officer 

     

     

    

     

    

    

    
      
        6

      

      
         

        
          

        

      

      
         

      

    

    EXHIBIT
      E

     

    ALLOCATIONS

     

    1. Allocation
      of Net Operating Income and Net Operating Loss.

     

    (a) Net
      Operating Income.
      Except
      as otherwise provided herein, Net Operating Income for any fiscal year or other
      applicable period shall be allocated in the following order and
      priority:

     

    (1) First,
      to
      the Partners, until the cumulative Net Operating Income allocated pursuant
      to
      this subparagraph
      1(a)(1)
      for the
      current and all prior periods equals the cumulative Net Operating Loss allocated
      pursuant to subparagraph
      1(b)(2)
      hereof
      for all prior periods, among the Partners in the same ratio and reverse order
      that such Net Operating Loss was allocated to the Partners pursuant to
subparagraph
      1(b)(2)
      hereof
      (and, in the event of a shift of a Partner's interest in the Partnership, to
      the
      Partners in a manner that most equitably reflects the successors in interest
      to
      the Partners).

     

    (2) Thereafter,
      the balance of the Net Operating Income, if any, shall be allocated to the
      Partners in accordance with their respective Percentage Interests.

     

    (b) Net
      Operating Loss.
      Except
      as otherwise provided herein, Net Operating Loss of the Partnership for each
      fiscal year or other applicable period shall be allocated as
      follows:

     

    (1) To
      the
      Partners in accordance with their respective Percentage Interests.

     

    (2) Notwithstanding
      subparagraph
      1(b)(1)
      hereof,
      to the extent any Net Operating Loss allocated to a Partner under subparagraph
      1(b)(1)
      hereof
      or this subparagraph
      1(b)(2)
      would
      cause such Partner (hereinafter, a "Restricted
      Partner")
      to
      have an Adjusted Capital Account Deficit as of the end of the fiscal year to
      which such Net Operating Loss relates, such Net Operating Loss shall not be
      allocated to such Restricted Partner and instead shall be allocated to the
      other
      Partner(s) (hereinafter, the "Permitted
      Partners")
      pro
      rata
      in
      accordance with their relative Percentage Interests.

     

    (c) Notwithstanding
      Sections
      1(a)
      and
(b)
      above,
      on any date on which any Series B Preferred Stock, any Series D Preferred Stock,
      any Series F Preferred Stock, any Series G Preferred Stock, any Series B
      Preferred Unit, any Series D Preferred Unit (or other Preferred Stock or other
      Preferred Units) is outstanding, Net Operating Income and Net Operating Loss
      shall be allocated as follows:

     

    (1) Net
      Operating Income for any fiscal year or other applicable period shall be
      allocated in the following order and priority:

     

    (i) First,
      to
      the Partners, until the cumulative Net Operating Income allocated pursuant
      to
      this subparagraph
      1(c)(1)(i)
      for the
      current and all prior periods equals the cumulative Net Operating Loss allocated
      pursuant to subparagraphs
      1(c)(2)(iii) and (iv) hereof
      for all prior periods, among the Partners in the same ratio and reverse order
      that such Net Operating Loss was allocated (and, in the event of a shift of
      a
      Partner's interest in the Partnership, to the Partners in a manner that most
      equitably reflects the successors-in-interest to such Partners).

     

    (ii) Second,
      to the General Partner, until the cumulative Net Operating Income allocated
      pursuant to this subparagraph
      1(c)(1)(ii)
      for the
      current and all prior periods equals the cumulative Net Operating Loss allocated
      pursuant to subparagraph
      1(c)(2)(ii)
      hereof
      for all prior periods;

     

    (iii) Third,
      on
      a pari passu basis, to (A) the General Partner until the cumulative amount
      of
      Net Operating Income allocated pursuant to this subparagraph
      1(c)(1)(iii)
      equals
      the total amount of dividends paid on the Series B Preferred Stock, the Series
      D
      Preferred Stock, the Series F Preferred Stock and the Series G Preferred Stock
      (and other Preferred Stock) as of or prior to the date of such allocation plus
      the total amount of accrued but unpaid dividends on the Series B Preferred
      Stock, the Series D Preferred Stock, the Series F Preferred Stock and the Series
      G Preferred Stock (and other Preferred Stock) as of such date; (B) to the
      holders of Series B Preferred Units until the cumulative amount of Net Operating
      Income allocated pursuant to this subparagraph
      1(c)(1)(iii)
      equals
      the total amount of Priority Return paid on the Series B Preferred Units as
      of
      or prior to the date of such 

    
      
        1

      

      
         

        
          

        

      

      
         

      

    

    allocation
      plus the total amount of accrued but unpaid Priority Return on the Series B
      Preferred Units; and (C) to the holders of Series D Preferred Units until the
      cumulative amount of Net Operating Income allocated pursuant to this
subparagraph 1(c)(1)(iii)
      equals
      the total amount of Priority Return paid on the Series D Preferred Units as
      of
      or prior to the date of such allocation plus the total amount of accrued but
      unpaid Priority Return on the Series D Preferred Units.

     

    (iv) Thereafter,
      the balance of the Net Operating Income, if any, shall be allocated to the
      Partners in accordance with their respective Percentage Interests.

     

    (2) Net
      Operating Loss of the Partnership for each fiscal year or other applicable
      period shall be allocated as follows:

     

    (i) First,
      to
      the Partners in accordance with their respective Percentage Interests until
      the
      Capital Account balances of the Limited Partners (not including the holders
      of
      the Series B Preferred Units and the Series D Preferred Units) are reduced
      to
      zero (for purposes of this calculation, each Partner's Capital Account balance
      shall be credited with the amount such Partner is obligated to restore pursuant
      to the provisions of Section 1.704-1(b)(2)(ii)(c) of the Regulations, or is
      deemed to be obligated to restore with respect to any deficit balance pursuant
      to the penultimate sentences of Sections 1.704-2(g)(1) and 1.704-2(i)(5) of
      the Regulations);

     

    (ii) Second,
      on a pari passu basis, to (A) the General Partner until its Capital Account
      balance has been reduced to zero; (B) to the holders of Series B Preferred
      Units
      until their Capital Account balances have been reduced to zero (for purposes
      of
      this calculation, such Partners' share of Partnership Minimum Gain shall be
      added back to their Capital Accounts); and (C) to the holders of Series D
      Preferred Units until their Capital Account balances have been reduced to zero
      (for purposes of each such calculation, each Partner's Capital Account balance
      shall be credited with the amount such Partner is obligated to restore pursuant
      to the provisions of Section 1.704-1(b)(2)(ii)(c) of the Regulations, or is
      deemed to be obligated to restore with respect to any deficit balance pursuant
      to the penultimate sentences of Sections 1.704-2(g)(1) and 1.704-2(1)(5) of
      the
      Regulations);

     

    (iii) Thereafter,
      to the Partners in accordance with their then Percentage Interests;

     

    (iv) Notwithstanding
      subparagraph 2(c)(2)(iii) hereof, to the extent any Net Operating Loss allocated
      to a Partner under subparagraph 2(c)(2) would cause such Partner (hereinafter,
      a
      "Restricted
      Partner")
      to
      have an Adjusted Capital Account Deficit as of the end of the fiscal year to
      which such Net Operating Loss relates, such Net Operating Loss shall not be
      allocated to such Restricted Partner and instead shall be allocated to the
      other
      Partner(s) (hereinafter, the "Permitted
      Partners")
      pro
      rata in accordance with their relative Percentage Interests.

     

    (d) Adjustment
      of Percentage Interests Upon Conversion of Convertible Preferred Stock to Common
      Stock.
      Upon
      the conversion of any Series G Preferred Stock to Common Stock of the General
      Partner, the Percentage Interests of the Partners shall be adjusted in
      accordance with the provisions of Article IV
      of the
      Partnership Agreement as if, on the date of such conversion, the General Partner
      had made an additional Capital Contribution to the Partnership in an amount
      equal to the number of shares of Common Stock issued as a result of such
      conversion multiplied by the fair market value of such shares on the date of
      conversion, and provided
      that in
      calculating such adjustments, the General Partner shall be deemed not to have
      incurred any expenses in connection with raising the funds used to make such
      additional Capital Contribution.

     

    2. Allocation
      of Net Property Gain and Net Property Loss.
      

     

    After
      the
      allocation of Net Operating Income or Net Operating Loss has been made pursuant
      to Section
      1
      above,
      Net Property Gain and Net Property Loss shall be allocated as
      follows:

     

    (a) Net
      Property Gain.
      Except
      as otherwise provided herein, Net Property Gain for any fiscal year or other
      applicable period shall be allocated in the following order and
      priority:

     

    (1) First,
      to
      the Partners, until the cumulative Net Property Gain allocated pursuant to
      this
subparagraph
      2(a)(1)
      for the
      current and all prior periods equals the cumulative Net Property Loss allocated
      pursuant to subparagraph
      2(b)(2)
      hereof
      for all prior periods, among the Partners in the same ratio and reverse order
      that 

    
      
        2

      

      
         

        
          

        

      

      
         

      

    

    such
      Net
      Property Loss was allocated to the Partners pursuant to subparagraph
      2(b)(2)
      hereof
      (and, in the event of a shift of a Partner's interest in the Partnership, to
      the
      Partners in a manner that most equitably reflects the successors in interest
      to
      the Partners).

     

    (2) Thereafter,
      the balance of the Net Property Gain, if any, shall be allocated to the Partners
      in accordance with their respective Percentage Interests.

     

    (b) Net
      Property Loss.
      Except
      as otherwise provided herein, Net Property Loss of the Partnership for each
      fiscal year or other applicable period shall be allocated as
      follows:

     

    (1) To
      the
      Partners in accordance with their respective Percentage Interests.

     

    (2) Notwithstanding
      subparagraph
      2(b)(1)
      hereof,
      to the extent any Net Property Loss allocated to a Partner under subparagraph
      2(b)(1)
      hereof
      or this subparagraph
      2(b)(2)
      would
      cause such Partner (hereinafter, a "Restricted
      Partner")
      to
      have an Adjusted Capital Account Deficit as of the end of the fiscal year to
      which such Net Property Loss relates, such Net Property Loss shall not be
      allocated to such Restricted Partner and instead shall be allocated to the
      other
      Partner(s) (hereinafter, the "Permitted
      Partners")
      pro
      rata
      in
      accordance with their relative Percentage Interests.

     

    (c) Notwithstanding
      Sections
      2(a) and (b)
      above,
      on any date on which any Series B Preferred Stock, any Series D
      Preferred Stock, any Series F Preferred Stock, any Series G Preferred Stock,
      any
      Series B Preferred Unit, or any Series D Preferred Unit (or other Preferred
      Stock or other Preferred Units) is outstanding, Net Property Gain and Net
      Property Loss shall be allocated as follows:

     

    (1) Net
      Property Gain for any fiscal year or other applicable period shall be allocated
      in the following order and priority:

     

    (i) First,
      to
      the Partners, until the cumulative Net Property Gain allocated pursuant to
      this
subparagraph
      2(c)(1)(i)
      for the
      current and all prior periods equals the cumulative Net Property Loss allocated
      pursuant to subparagraphs
      2(c)(2)(iii) and (iv)
      hereof
      for all prior periods, among the Partners in the same ratio and reverse order
      that such Net Property Loss was allocated (and, in the event of a shift of
      a
      Partner's interest in the Partnership, to the Partners in a manner that most
      equitably reflects the successors in interest to such Partners);

     

    (ii) Second,
      to the General Partner, until the cumulative Net Property Gain allocated
      pursuant to this subparagraph
      2(c)(1)(ii)
      for the
      current and all prior periods equals the cumulative Net Property Loss allocated
      pursuant to subparagraph
      2(c)(2)(ii)
      hereof
      for all prior periods;

     

    (iii) Third,
      on
      a pari passu basis, to (A) the General Partner until the sum of (x) the total
      cumulative amount of Net Operating Income allocated to the General Partner
      under
Section
      1(c)(1)(iii)
      for the
      current and all prior periods plus (y) the total cumulative amount of Net
      Property Gain allocated pursuant to this subparagraph
      2(c)(1)(iii)
      equals
      the total amount of dividends paid on the Series B Preferred Stock, the Series
      D
      Preferred Stock, the Series F Preferred Stock and the Series G Preferred Stock
      (and other Preferred Stock) as of or prior to the date of such allocation plus
      the total amount of accrued but unpaid dividends on the Series B Preferred
      Stock, the Series D Preferred Stock, the Series F Preferred Stock and the Series
      G Preferred Stock (and other Preferred Stock) as of such date; (B) to the
      holders of Series B Preferred Units until the sum of (x) the total cumulative
      amount of Net Operating Income allocated to the holders of the Series B
      Preferred Units under Section
      1(c)(l)(iii)
      for the
      current and all prior periods plus (y) the total cumulative amount of Net
      Property Gain allocated pursuant to this subparagraph
      2(c)(1)(iii)
      to the
      holders of the Series B Preferred Units equal the total amount of Priority
      Return paid on the Series B Preferred Units as of or prior to the date of such
      allocation plus the total amount of accrued but unpaid Priority Return on the
      Series B Preferred Units; (C) to the holders of Series D Preferred Units until
      the sum of (x) the total cumulative amount of Net Operating Income allocated
      under Section
      1(c)(1)(iii)
      for the
      current and all prior periods plus (y) the cumulative amount of Net Property
      Gain allocated pursuant to this subparagraph
      2(c)(1)(iii)
      to the
      holders of the Series D Preferred Units equals the total amount of Priority
      Return paid on the Series D Preferred Units as of or prior to the date of such
      allocation plus the total amount of accrued but unpaid Priority Return on the
      Series D Preferred Units.

    
      
        3

      

      
         

        
          

        

      

      
         

      

    

    (iv) Thereafter,
      the balance of the Net Property Gain, if any, shall be allocated to the Partners
      in accordance with their respective Percentage Interests.

     

    (2) Net
      Property Loss of the Partnership for each fiscal year or other applicable period
      shall be allocated as follows:

     

    (i) First,
      to
      the Partners in accordance with their respective Percentage Interests until
      the
      Capital Account balances of the Limited Partners (not including the holders
      of
      the Series B Preferred Units and the Series D Preferred Units) are reduced
      to
      zero (for purposes of this calculation, such Partners' share of Partnership
      Minimum Gain shall be added back to their Capital Accounts);

     

    (ii) Second,
      on a pari passu basis, to (A) the General Partner until its Capital Account
      balance has been reduced to zero (for purposes of this calculation, such
      Partner's share of Partnership Minimum Gain shall be added back to its Capital
      Account); (B) to the holders of Series B Preferred Units until their Capital
      Account balances have been reduced to zero (for purposes of this calculation,
      such Partners' share of Partnership Minimum Gain shall be added back to their
      Capital Accounts); and (C) to the holders of Series D Preferred Units until
      their Capital Account balances have been reduced to zero (for purposes of this
      calculation, such Partners' share of Partnership Minimum Gain shall be added
      back to their Capital Accounts); 

     

    (iii) Thereafter,
      to the Partners in accordance with their then Percentage Interests;

     

    (iv) Notwithstanding
      subparagraph 2(c)(2)(iii) hereof, to the extent any Net Property Loss allocated
      to a Partner under subparagraph 2(c)(2) would cause such Partner (hereinafter,
      a
      "Restricted
      Partner")
      to
      have an Adjusted Capital Account Deficit as of the end of the fiscal year to
      which such Net Property Loss relates, such Net Property Loss shall not be
      allocated to such Restricted Partner and instead shall be allocated to the
      other
      Partner(s) (hereinafter, the "Permitted
      Partners")
      pro
      rata in accordance with their relative Percentage Interests.

     

    (d) Special
      Allocation to Holders of Series Z Incentive Units.

     

    (1) Subject
      only to the provisions of Section
      2(c)(1)(iii)
      but
      notwithstanding any other provision of this Section
      2,
      in the
      year in which the Partnership sells or otherwise disposes of all or
      substantially all of its assets in a single transaction or a series of related
      transactions, Net Property Gain shall first be allocated to the holders of
      the
      Series Z Incentive Units pro
      rata
      in
      proportion to the number of such Series Z Incentive Units outstanding, until
      the
      Capital Account balance attributable to each such Series Z Incentive Unit is
      equal to (A) the aggregate Capital Account balance attributable to the Common
      Units outstanding (including any other Partnership Units convertible into Common
      Units) divided by (B) the number of such Common Units outstanding. If Net
      Property Gain is insufficient to make the full allocation provided in the
      preceding sentence, then, in lieu of such special allocation of Net Property
      Gain provided in the preceding sentence, items of gross capital gain shall
      be
      allocated to the holders of Series Z Incentive Units, and, if such gross items
      are insufficient to make the full required allocation, items of gross capital
      loss shall be allocated pro rata with respect to such Common Units. The
      allocations pursuant to this paragraph (d) shall be made after the allocation
      of
      Net Operating Income or Net Operating Loss for the applicable period in which
      such sale or other disposition occurs. For purposes of this clause (1) of this
      Section
      2(d)
      "all or
      substantially all" means assets representing not less than 95% of the aggregate
      fair market value of the Partnership's assets.

     

    (2) Notwithstanding
      anything herein to the contrary, for the 12-month period following the
      occurrence of a Change of Control (A) Net Operating Loss and Net Property Loss,
      if any, shall be allocated pursuant to Section
      1(b)
      or
1(c)(2),
      as
      applicable, or Section
      2(b)
      or
2(c)(2),
      as
      applicable, as if the Percentage Interest of each Series Z Partner were zero,
      and (B) with respect to each Series Z Partner at the earlier of (x) the date
      such Partner makes the election to convert his Series Z Incentive Units pursuant
      to Section
      10.9(b)(i)
      or (y)
      the expiration of a period of twelve (12) months after such Change in Control,
      items of income, gain, deduction and loss shall be allocated so as to cause
      the
      Capital Account balance of each such Series Z Partner, and, as soon as possible
      after the end of such twelve month period, the Capital Account balances of
      all
      Partners, to be in the same ratio and amounts as if the allocations required
      by
      clause (A) of this Section
      2(d)(2)
      had not
      been made.

     

    (e) Special
      Allocation to Holders of Series Z-1 Incentive Units.

    
      
        4

      

      
         

        
          

        

      

      
         

      

    

    (1) Subject
      only to the provisions of Section
      2(c)(1)(iii)
      but
      notwithstanding any other provision of this Section
      2,
      in the
      year in which the Partnership sells or otherwise disposes of all or
      substantially all of its assets in a single transaction or a series of related
      transactions, Net Property Gain shall first be allocated to the holders of
      the
      Series Z-1 Incentive Units pro rata in proportion to the number of such Series
      Z-1 Incentive Units outstanding, until the Capital Account balance attributable
      to each such Series Z-1 Incentive Unit is equal to (A) the aggregate Capital
      Account balance attributable to the Common Units outstanding (including any
      other Partnership Units convertible into Common Units) divided by (B) the number
      of such Common Units outstanding. If Net Property Gain is insufficient to make
      the full allocation provided in the preceding sentence, then, in lieu of such
      special allocation of Net Property Gain provided in the preceding sentence,
      items of gross capital gain shall be allocated to the holders of Series Z-1
      Incentive Units, and, if such gross items are insufficient to make the full
      required allocation, items of gross capital loss shall be allocated pro rata
      with respect to such Common Units. The allocations pursuant to this paragraph
      (d) shall be made after the allocation of Net Operating Income or Net Operating
      Loss for the applicable period in which such sale or other disposition occurs.
      For purposes of this clause (1) of this Section
      2(e)
      "all or
      substantially all" means assets representing not less than 95% of the aggregate
      fair market value of the Partnership's assets.

     

    (2) Notwithstanding
      anything herein to the contrary, for the 12-month period following the
      occurrence of a Series Z-1 Change of Control (A) Net Operating Loss and Net
      Property Loss, if any, shall be allocated pursuant to Section
      1(b)
      or
1(c)(2),
      as
      applicable, or Section
      2(b)
      or
2(c)(2),
      as
      applicable, as if the Percentage Interest of each Series Z-1 Partner were zero,
      and (B) with respect to each Series Z-1 Partner at the earlier of (x) the date
      such Partner makes the election to convert his Series Z- 1 Incentive Units
      pursuant to Section
      10.10(b)(i)
      or (y)
      the expiration of a period of twelve (12) months after such Series Z-1 Change
      in
      Control, items of income, gain, deduction and loss shall be allocated so as
      to
      cause the Capital Account balance of each such Series Z-1 Partner, and, as
      soon
      as possible after the end of such twelve month period, the Capital Account
      balances of all Partners, to be in the same ratio and amounts as if the
      allocations required by clause (A) of this Section
      2(e)(2)
      had not
      been made.

     

    (f) Definition
      of Percentage Interest.
      Solely
      for purposes of allocating Net Property Gain and Net Property Loss under this
      Section
      2,
      the
      Percentage Interest of a Series Z Incentive Unit holder attributable to such
      Units shall be deemed to be the undivided percentage ownership interest of
      such
      holder in the Partnership as determined by dividing (A) the total number of
      outstanding Series Z Incentive Units owned by such holder by (B) the total
      number of Partnership Units then outstanding (excluding the Series B Preferred
      Interest, the Series B Preferred Units, the Series D Preferred Interest, the
      Series D Preferred Units, the Series F Preferred Interest and the Series G
      Preferred Interest). Solely for purposes of allocating Net Property Gain and
      Net
      Property Loss under this Section
      2,
      the
      Percentage Interest of a Series Z-1 Incentive Unit holder attributable to such
      Units shall be deemed to be the undivided percentage ownership interest of
      such
      holder in the Partnership as determined by dividing (A) the total number of
      outstanding Series Z-1 Incentive Units owned by such holder by (B) the total
      number of Partnership Units then outstanding (excluding the Series B Preferred
      Interest, the Series B Preferred Units, the Series D Preferred Interest, the
      Series D Preferred Units, the Series F Preferred Interest and the Series G
      Preferred Interest).

     

    (g) Book-Up
      and Capital Account Adjustments.
      On any
      day on which (i) Series G Preferred Stock (or other Preferred Stock), any series
      of Preferred Units or Incentive Units are redeemed or converted into Common
      Stock or Common Units, (ii) Percentage Interests are adjusted in the manner
      required in subparagraph 1(d), or (iii) in connection with the issuance of
      the
      Series Z Incentive Units or the Series Z-1 Incentive Units, the Partnership
      shall adjust the Gross Asset Values of all Partnership assets to equal their
      respective gross fair market values and shall allocate the amount of such
      adjustment as Net Property Gain or Net Property Loss pursuant to Section
      2(c)
      hereof,
provided,
      however,
      that if
      no Series G Preferred Stock (or other Preferred Stock) is outstanding after
      such
      redemption or conversion, such Net Property Gain or Net Property Loss shall
      be
      allocated in such a manner that after such allocation the Capital Accounts
      of
      the Partners are in proportion to their Percentage Interests. 

     

    3. Special
      Allocations.

     

    Notwithstanding
      any provision of Sections
      1 and 2
      of this
Exhibit
      E,
      the
      following special allocations shall be made in the following order:

     

    
      
        5

      

      
         

        
          

        

      

      
         

      

    

    (a) Minimum
      Gain Chargeback (Nonrecourse Liabilities).
      If
      there is a net decrease in Partnership Minimum Gain for any Partnership fiscal
      year (except as a result of conversion or refinancing of Partnership
      indebtedness, certain capital contributions or revaluation of the Partnership
      property as further outlined in Regulation Sections 1.704-2(d)(4), (f)(2) or
      (f)(3)), each Partner shall be specially allocated items of Partnership income
      and gain for such year (and, if necessary, subsequent years) in an amount equal
      to that Partner's share of the net decrease in Partnership Minimum Gain. The
      items to be so allocated shall be determined in accordance with Regulation
      Section 1.704- 2(f). This paragraph
      3(a)
      is
      intended to comply with the minimum gain chargeback requirement in said section
      of the Regulations and shall be interpreted consistently therewith. Allocations
      pursuant to this paragraph
      3(a)
      shall be
      made in proportion to the respective amounts required to be allocated to each
      Partner pursuant hereto.

     

    (b) Minimum
      Gain Attributable to Partner Nonrecourse Debt.
      If
      there is a net decrease in Minimum Gain Attributable to Partner Nonrecourse
      Debt
      during any fiscal year (other than due to the conversion, refinancing or other
      change in the debt instrument causing it to become partially or wholly
      nonrecourse, certain capital contributions, or certain revaluations of
      Partnership property as further outlined in Regulations Sections 1.704-2(i)(4),
      each Partner shall be specially allocated Partnership income and gain for such
      year (and, if necessary, subsequent years) in an amount equal to that Partner's
      share of the net decrease in the Minimum Gain Attributable to Partner
      Nonrecourse Debt. The items to be so allocated shall be determined in accordance
      with Regulation Section 1.704-2(i)(4) and (j)(2). This paragraph
      3(b)
      is
      intended to comply with the minimum gain chargeback requirement with respect
      to
      Partner Nonrecourse Debt contained in said section of the Regulations and shall
      be interpreted consistently therewith. Allocations pursuant to this paragraph
      3(b)
      shall be
      made in proportion to the respective amounts required to be allocated to each
      Partner pursuant hereto.

     

    (c) Qualified
      Income Offset.
      In the
      event a Limited Partner unexpectedly receives any adjustments, allocations
      or
      distributions described in Regulation Section 1.704-1(b)(2)(ii)(d)(4), (5),
      or (6), and such Limited Partner has an Adjusted Capital Account Deficit, items
      of Partnership income and gain shall be specially allocated to such Partner
      in
      an amount and manner sufficient to eliminate the Adjusted Capital Account
      Deficit as quickly as possible. This paragraph
      3(c)
      is
      intended to constitute a "qualified income offset" under Regulation
      Section 1.704- 1(b)(2)(ii)(d) and shall be interpreted consistently
      therewith.

     

    (d) Nonrecourse
      Deductions.
      Nonrecourse Deductions for any fiscal year or other applicable period shall
      be
      allocated to the Partners in accordance with their respective Percentage
      Interests.

     

    (e) Partner
      Nonrecourse Deductions.
      Partner
      Nonrecourse Deductions for any fiscal year or other applicable period shall
      be
      specially allocated to the Partner that bears the economic risk of loss for
      the
      debt (i.e., the Partner Nonrecourse Debt) in respect of which such Partner
      Nonrecourse Deductions are attributable (as determined under Regulation Section
      1.704-2(b)(4) and (i)(1)).

     

    (f) Curative
      Allocations.
      The
      allocations set forth in paragraphs
      (a)-(e)
      and
Section 1(b)(2),
      Section 1(c)(2)(iv), Section 2(b)(2)
      and
Section
      2(c)(2)(iv),
      (the
      "Regulatory
      Allocations")
      are
      intended to comply with the requirements of Treasury Regulations Sections
      1.704-1 (b) and 1.704-2. Notwithstanding any other provisions of Sections
      1 and 2,
      the
      Regulatory Allocations shall be taken into account in allocating other items
      of
      income, gain, deduction and loss among the Partners so that, to the extent
      possible, the net amount of such allocations of other items and the Regulatory
      Allocations to each Partner shall be equal to the net amount that would have
      been allocated to each such Partner if the Regulatory Allocations had not
      occurred. This paragraph
      (f)
      shall be
      interpreted and applied in such a manner and to such extent as is reasonably
      necessary to eliminate, as quickly as possible, permanent economic distortions
      that would otherwise occur as a consequence of the Regulatory Allocations in
      the
      absence of this paragraph
      (f).

     

    4. Tax
      Allocations.

     

    (a) Generally.
      Subject
      to paragraphs
      4(b) and (c)
      hereof,
      items of income, gain, loss, deduction and credit to be allocated for income
      tax
      purposes (collectively, "Tax
      Items")
      shall
      be allocated among the Partners on the same basis as their respective book
      items.

    
      
        6

      

      
         

        
          

        

      

      
         

      

    

    (b) Sections
      1245/1250 Recapture.
      If any
      portion of gain form the sale of property is treated as gain which is ordinary
      income by virtue of the application of Code Section 1245 or 1250 ("Affected
      Gain"),
      then
      (A) such Affected Gain shall be allocated among the Partners in the same
      proportion that the depreciation and amortization deductions giving rise to
      the
      Affected Gain were allocated and (B) other Tax Items of gain of the same
      character that would have been recognized, but for the application of Code
      Sections 1245 and/or 1250, shall be allocated away from those Partners who
      are
      allocated Affected Gain pursuant to Clause (A) so that, to the extent possible,
      the other Partners are allocated the same amount, and type, of capital gain
      that
      would have been allocated to them had Code Sections 1245 and/or 1250 not
      applied; provided,
      however,
      that
      the net amount of Tax Items allocated to each Partner shall be the same as
      if
      this paragraph 4(b) did not exist. For purposes hereof, in order to determine
      the proportionate allocations of depreciation and amortization deductions for
      each fiscal year or other applicable period, such deductions shall be deemed
      allocated on the same basis as Net Property Gain and Net Property Loss for
      such
      respective period.

     

    (c) Allocations
      Respecting Section 704(c) and Revaluations.
      If any
      Partnership property is subject to Code Section 704(c) or is reflected in the
      Capital Accounts of the Partners and on the books of the Partnership at a book
      value that differs from the adjusted tax basis of such property, then the tax
      items with respect to such property shall, in accordance with the requirements
      of Regulations Section 1.704-1(b)(4)(i), be shared among the Partners in a
      manner that takes account of the variation between the adjusted tax basis of
      the
      applicable property and its book value in the same manner as variations between
      the adjusted tax basis and fair market value of property contributed to the
      Partnership are taken into account in determining the Partners' share of tax
      items under Code Section 704(c). The General Partner is authorized to choose
      any
      reasonable method permitted by the Regulations pursuant to Code Section 704(c),
      including the "remedial allocation" method, the "curative allocation" method
      and
      the traditional method; provided
      that the
      General Partner agrees to use reasonable efforts to minimize the amount of
      taxable income in excess of book income allocated to the holders of the Series
      B
      Preferred Units and the Series D Preferred Units.

     

    (d) Code
      Section 752 Specification.
      Pursuant to Regulations Section 1.752-3, the Partners' interest in Partnership
      profits for purposes of determining the Partners' shares of excess nonrecourse
      liabilities shall be their Percentage Interests.

     

     

     

    7Exhibit 10.43 

Note: Portions of this exhibit indicated by "[ * ]" are
    subject to a confidential treatment request, and have been omitted from this
    exhibit. Complete, unredacted copies of this exhibit have been filed with
    the Securities and Exchange Commission as part of the Company's confidential
    treatment request. 

  INDEMNIFICATION AGREEMENT

               THIS INDEMNIFICATION AGREEMENT (this “Agreement”), dated as of July ___, 2006, and effective as of the IPO Date (defined below) between XL Financial Assurance Ltd., a Bermuda insurance
corporation (“XLFA”), and XL Insurance (Bermuda) Ltd, a Bermuda insurance corporation (“XLIB”). 

  W I T N E S S E T H:

               WHEREAS, XLFA and XLIB are both indirect wholly-owned subsidiaries of XL Capital
Ltd, a Cayman Islands corporation (“XL Capital”); 

               WHEREAS, the stock of XLFA will be transferred to a newly-formed holding company which will become the subject of an initial public offering (“IPO”) by XL Capital or one of its wholly-owned
subsidiaries;

               WHEREAS, XL Capital Assurance Inc. (“XLCA”), another indirectly wholly-owned subsidiary of XL Capital, issued Financial Guaranty Insurance Policies Nos. [ * ] and [ * ] on [ * ]
(“Policies”), and XLCA has ceded certain portions of these risks to XLFA pursuant to the Third Amended and Restated Facultative Quota Share Reinsurance Treaty, dated as of July 1, 2006 (“QSA”); 

               WHEREAS, to facilitate the IPO, XLIB is prepared to indemnify XLFA in respect of future adverse development as respects the cessions of the Policies to it pursuant to the QSA. 

               NOW, THEREFORE, in consideration of the mutual promises herein contained and for other good and valuable consideration, and intending to be legally bound, the parties hereto agree as follows:

  ARTICLE I 

  COVERAGE

               Subject to the terms, conditions, and limitations of this Agreement, XLIB agrees to indemnify XLFA on an aggregate excess of loss basis for Aggregate Adverse Development
up to the Maximum Liability Amount on the Subject Business (as each such term is defined in Article V). 

               No payments shall be made under this Agreement unless XLFA has first paid Ultimate Net Loss in an amount in excess of the Retained Reserves. Under no circumstances shall the total liability of XLIB
under this Agreement exceed the Maximum Liability Amount (as that term is defined in Article V). 

               Nothing herein shall in any manner create any obligations or establish any rights against XLIB in favor of any third parties or any persons not parties to this Agreement except as provided in Article
XIX. 

-2-

  ARTICLE II

  TERM 

               This Agreement shall remain in full force and effect until
the expiry of all liabilities under this Agreement
or Commutation as provided for in Article IX. 

               The provisions of this Agreement shall continue to apply to all obligations and liabilities of the parties incurred hereunder to the end that all such obligations and liabilities shall be fully
performed and discharged. 

ARTICLE III

 TERRITORY 

               The territorial scope of this Agreement shall be worldwide.

  ARTICLE IV

  [RESERVED]

  

  

  ARTICLE V 

  DEFINITIONS

               The following definitions shall apply in respect of all use of the defined terms in this Agreement: 

               A.           “Aggregate Adverse Development” shall mean any increase in Total Incurred (as defined herein) on the Subject Business that will result in Ultimate Net Loss in an amount exceeding the
Retained Reserves. 

               B.           [RESERVED]

-3-

               C.           “IPO Date” means the effective date of the initial
public offering of Security Capital Assurance Ltd. 

               D.           [RESERVED] 

               E.           “Loss Adjustment Expense” shall mean expenses of XLCA ceded to XLFA and/or expenses of XLFA, in each case including all court costs, fees and expenses; fees for service of process; fees to attorneys; cost of undercover operative and detective services; fees and expenses for financial
advisors, attorneys, third party servicers and consultants; fees of independent adjusters or attorneys for investigation or adjustment of claims beyond initial investigation, cost of employing experts for preparation of reports, photographs,
diagrams, chemical or physical analysis or for advice, opinion or testimony concerning claims under investigation or in litigation; costs for legal transcripts of testimony taken at coroner's inquests, criminal or civil proceedings; costs for copies
of any public records; costs of depositions and court reported or recorded statements; and any other similar fees; cost or expense reasonably chargeable to the investigation, negotiation, settlement or defense of a claim or loss or to the protection
and perfection of the subrogation rights of any insured covered by the policies relating to the Subject Business. This amount shall not include overhead expenses of XLCA or XLFA or salaries or expenses of persons employed by XLCA or XLFA in an
administrative or supervisory capacity, nor for ordinary office expenses of XLCA or XLFA.

               F.           “Maximum Liability Amount” shall mean $300,000,000.

               G.           [RESERVED] 

-4-

               H.           “Retained Reserves” shall mean XLFA’s (a) gross case reserves of $[ * ], calculated as of June 30, 2006, and (b) loss adjustment expense reserve of $[ * ] arising from the
Subject Business before giving consideration to this Agreement, and after giving consideration to the facultative quota share reinsurance agreement effective August 17, 2001 between XLFA, as ceding company, and XLI, as reinsurer, as amended by
amendment no 1 effective as of the IPO Date (the “XLFA/XLI Agreement), and before giving effect to any other third party reinsurance. 

               I.           “Subject Business” shall mean the risks attaching under XLFA’s reinsurance pursuant to the QSA of certain portions of (a) Financial Guaranty Insurance Policy [ * ] issued by XLCA on
[ * ] and (b) Financial Guaranty Insurance Policy [ * ] issued by XLCA on [ * ].

               J.           “Term” shall mean the period from the IPO Date until the expiry of all liabilities under this Agreement, both days inclusive, in which increases to the Aggregate Adverse Development are
eligible for coverage under this Agreement. 

               K.           “Total Incurred” shall mean the sum of (i) Ultimate Net Loss paid after the IPO Date plus (ii) case reserves for Ultimate Net Loss unpaid.

               L.           “Ultimate Net Loss” shall mean the actual amount XLFA has paid or has become liable to pay with respect to the Subject Business including, without limitation, losses, Loss Adjustment
Expenses, and the amount of any Extra Contractual Obligations and/or Excess Limits Liability after giving consideration to the XLFA/XLI Agreement, and before giving effect to any other third party reinsurance.

-5-

               All salvages, recoveries, or payments recovered or received subsequent to a loss settlement under this Agreement shall be applied as if recovered or received prior to the aforesaid settlement and
pursuant to Article XIV and all necessary adjustments shall be made by the parties hereto, provided always that nothing in this definition shall be construed to mean that Ultimate Net Loss under this Agreement is not recoverable until XLFA’s
Ultimate Net Loss has been ascertained. 

  ARTICLE VI 

  EXTRA CONTRACTUAL OBLIGATIONS AND EXCESS LIMITS LIABILITY

               “Extra Contractual Obligations” as used in this Agreement shall mean those liabilities not covered under any other provision of this Agreement, including third party claims against XLCA,
which arise from the handling of any claim on business covered hereunder, such liabilities arising because of, but not limited to, the following: failure to settle within the limit of the Policies, by reason of alleged or actual negligence, fraud,
or bad faith in rejecting an offer of settlement, in the preparation of the defense, in the trial of any action against the insured or reinsured, or in the preparation or prosecution of an appeal consequent upon such action, all as determined by
XLCA in its sole discretion. 

               “Excess Limits Liability” as used in this Agreement shall mean damages payable in excess of the limit of the Policies as a result of alleged or actual negligence, fraud, or bad faith in
failing to settle and/or rejecting a settlement within the limit of the Policies, in the preparation of the defense, in the trial of any action against the insured or reinsured, or in the preparation or prosecution of an appeal consequent upon such
action. Excess Limits Liability is any amount for which XLCA would have been contractually liable to pay, as determined by XLCA in its sole discretion, had it not been for the limits of the reinsured Policy. 

-6- 

               The date on which any Extra Contractual Obligation and/or
Excess Limits Liability is incurred by XLCA shall be
deemed, in all circumstances, to be the date of the original loss.

               In the event any provision of this Article VI is rendered illegal or unenforceable by the laws, regulations, or public policy of any jurisdiction, such provision shall be considered void as respects
that jurisdiction only, and such a consideration shall not affect the validity or enforceability of any other provision of this Article VI in that jurisdiction nor the enforceability of such provision in any other jurisdiction. 

               In no event shall coverage be provided to the extent that such coverage is not permitted under New York Law. 

  ARTICLE VII

  [RESERVED] 

  

  

  ARTICLE VIII

  [RESERVED] 

  

  

  ARTICLE IX 

  COMMUTATION

               This Agreement may be commuted upon the mutual agreement of the Parties. Upon any commutation XLIB will receive a full and final release from all past, current and future liability under or related to
this Agreement. 

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  ARTICLE X 

  REPORTS AND REMITTANCES

               A.           As respects the Subject Business, XLFA shall furnish to XLIB within fifty (50) days after the end of each calendar quarter:

	               	               1.           The
          quarterly account of Ultimate Net Loss paid as of the end of the calendar
          quarter and on a cumulative basis from the effective date of this Agreement;
          and 

                      2.           XLFA’s
          estimate of case reserves for Ultimate Net Loss unpaid as of the end
    of the calendar quarter; 

               B.           Within thirty (30) days following receipt of XLFA's quarterly report as called for above, XLIB shall pay to XLFA the positive amount, if any, by which paid Ultimate Net Loss from the effective date
of this Agreement through the end of the calendar quarter, both dates inclusive, exceeds the Retained Reserves, minus any Ultimate Net Loss (net of any Ultimate Net Loss overpayments paid by XLFA) previously paid by XLIB under this Agreement. If
XLIB shall dispute the amount owing by the debtor party as set forth in the report, the debtor party nevertheless shall pay the amount in dispute to the creditor party as provided in this paragraph pending resolution of the dispute as provided in
this Agreement.

               C.           Notwithstanding the foregoing, at the option and upon the demand of XLFA, when the amount due in the aggregate as a result of any payment(s) on a claim under the policies relating to the Subject
Business (“Policy Payment”) exceeds US $500,000, XLFA shall be paid by special remittance within five (5) business days upon receipt of a special account, 

-8-

which shall be prepared by XLFA and shall contain all relevant details in connection with the claim.

               D.           RESERVED.

               E.           In addition to the foregoing, as soon as reasonably possible following the end of each calendar year, at XLIB’s request XLFA shall provide XLIB with a copy of XLFA’s Annual Report and/or
statutory Annual Statement. 

  ARTICLE XI 

  LOSS SETTLEMENTS AND LOSS ADJUSTMENT EXPENSES 

               XLCA shall be the sole judge as to what shall constitute a claim or loss covered under the Subject Business. XLCA shall, in its sole discretion, monitor, evaluate, negotiate, adjust, investigate,
settle, defend or compromise all claims or potential claims and all losses or potential losses, including Extra Contractual Obligations and Excess Limits Liability. All such negotiations, adjustments, investigations, settlements, defenses and
compromises shall be unconditionally binding on XLIB. In addition to amounts paid in settlement of losses, XLIB shall be liable for its proportionate share of all reasonable Loss Adjustment Expenses.

               XLFA shall at all times use reasonable best efforts to keep XLIB apprised of the status of any material events with respect to the Subject Business and shall consult with XLIB as respects exercise of
its rights and obligations under the QSA in respect of any material aspect of the Subject Business. 

-9- 

  ARTICLE XII 

  FOLLOW THE FORTUNES

               A.           XLIB’s liability shall attach simultaneously with that of XLFA and shall be subject in all respects to the same risks, terms, rates, conditions, interpretations, assessments, waivers, and to
the same modification, alterations and cancellations as the policies, the true intent of this Agreement being that XLIB shall, in every case to which this Agreement applies, follow the underwriting fortunes of XLFA and XLIB shall be bound, without
limitation, by any payments and settlements entered into by XLFA in good faith. 

               B.           Nothing shall in any manner create any obligations or establish any rights against XLIB in favor of any third parties or any persons not parties to this Agreement. 

  ARTICLE XIII

  OFFSET 

               In the event of insolvency of either XLFA or XLIB, offset shall be permitted in accordance with the terms of this Article. Subject to the foregoing, each party hereto shall have, and may exercise at
any time and from time to time, the right to offset any balances due from such party to the other party hereto under this Agreement or under any other agreement heretofore or hereafter entered into by and between them, and may offset the same
against any balance or balances due or to become due to the former from the latter under the same or any other agreement between them; and the party asserting the right of offset shall have and may exercise such right and regardless of the capacity
in which each party acted under the agreement or, if more than one, the different agreements involved.

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  ARTICLE XIV 

  SALVAGE AND SUBROGATION

  

  [RESERVED]

  

  

  ARTICLE XV 

  DELAYS, ERRORS, AND OMISSIONS

               Any inadvertent delay, error, or omission made in connection with this Agreement or any transaction hereunder shall not relieve either party from any liability that would have attached had such delay,
error, or omission not occurred, provided that any error or omission is rectified as soon as reasonably practical.

  ARTICLE XVI 

  AMENDMENTS AND ALTERATIONS

               This Agreement may be changed, altered, or amended as the parties may agree, provided such change, alteration, or amendment is evidenced in writing or by endorsement executed by XLFA and XLIB.

  ARTICLE XVII 

  ACCESS TO RECORDS

               Provided XLIB gives at least fifteen (15) days prior written notice, it or its designated representatives, provided such representatives are reasonably acceptable to XLFA, shall have the right to
inspect at any reasonable time, in the office of XLFA where the files are located, all records of XLFA that pertain in any way to this Agreement; XLIB’s right of inspection

-11-

shall survive expiration or cancellation of this Agreement,
so long as any claim or premium matters remain outstanding. 

               All non-public information provided in the course of the inspection shall be kept confidential by XLIB as against third parties, except as respects any obligation to do so by law or contract.

  ARTICLE XVIII 

  RESERVES AND FUNDING

  

  [RESERVED]

  

  

  ARTICLE XIX

  INSOLVENCY 

               In the event of the insolvency of XLFA and the appointment of a liquidator, receiver, conservator or statutory successor, reinsurance due under this Agreement shall be payable with reasonable
provision for verification, on the basis of the liability of XLFA resulting from claims allowed against XLFA by any court of competent jurisdiction or by any liquidator, receiver, conservator or statutory successor having authority to allow such
claims without diminution because of such insolvency or because such liquidator, receiver, conservator or statutory successor has failed to pay all or a portion of any claims. 

               Payments by XLIB as set forth above shall be made directly and exclusively to XLFA or to its liquidator, receiver, conservator or statutory successor except (a) where this Agreement specifies another
payee in the event of the insolvency, or (b) XLIB, with the consent

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of the direct insureds, has assumed such policy obligations of XLFA as direct obligations to the payees under such policies in substitution for the obligations of XLFA to such payees. 

               In the event of the insolvency of XLFA, the liquidator, receiver, conservator or statutory successor shall give written notice of the pendency of a claim against XLFA under policies reinsured within a
reasonable time after such claim is filed in the insolvency proceeding. During the pendency of such claim, XLIB has the right but not the duty to investigate said claim and interpose in the proceeding where the claim is to be adjudicated, at its own
expense, any defense or defenses that it may deem available to XLFA, or its liquidator, receiver, conservator or statutory successor. The expense thus incurred by XLIB will be chargeable against XLFA, subject to court approval, as part of the
expense of liquidation to the extent of a proportionate share of the benefit which may accrue to XLFA solely as a result of the defense undertaken by XLIB. Should XLFA go into liquidation or should a receiver be appointed, XLIB will be entitled to
exercise any offset rights specifically provided by this Agreement and to offset any other sums permitted under applicable law. 

  ARTICLE XX 

  ARBITRATION

               Any controversy or claim arising out of or relating to this Agreement, or any alleged breach thereof, shall be determined by a sole arbitrator in accordance with the Bermuda International Arbitration
and Conciliation Act 1992. The award of the arbitrator shall be final, binding and non-appealable, and judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. All parties to any arbitration pursuant
to this clause shall bear their own costs (but not the costs of any other party) unless the arbitrator shall otherwise decide. 

-13-

  ARTICLE XXI

  

  [RESERVED] 

  

  

  ARTICLE XXII

  

  [RESERVED] 

  

  

  ARTICLE XXIII 

  GOVERNING LAW 

               This Agreement shall be governed by and construed according to the internal laws of the State of New York without giving effect to the principles of conflicts of laws thereof.

ARTICLE XXIV 

CURRENCY 

               The currency to be used for all purposes of this Agreement shall be the currency of the United States of America. And the sign “$” in this Agreement refers to United States of America
dollars. 

-14- 

ARTICLE XXV 

COMMUTATION OF OTHER REINSURANCE

                XLFA must give prior written notice to XLIB and XLIB must consent in writing to the commutation of any reinsurance provided by the QSA with respect to the Subject Business. 

  ARTICLE XXVI

  NOTICE 

               All notices requests, demands, approvals and other communications under this Agreement shall be in writing and shall be delivered personally, sent by facsimile transmission or sent by certified,
registered or express mail, postage prepaid or sent by overnight courier or sent by email to an address specified by one party to the other in writing. Any such notice or other communication shall be deemed given: (a) upon actual delivery if
presented personally or sent- by overnight delivery or by facsimile transmission or sent by email and (b) three (3) business days following deposit in the United States mail, if sent by certified, registered or express mail, postage prepaid, in each
case to the following addresses: 

	
      If to XLFA: 
	      
	
XL House 
	
	

	  
	
One Bermudiana Road 
	
	

	  
	
Hamilton HM JX 
	
	

	  
	
Bermuda 
	
	

	  
	
Attention: Michael Rego 
	
	

	       

	
      If to XLIB: 
	    
	
XL House 
	
	 

		
One Bermudiana Road 
	
	 

		
Hamilton HM JX 
	
	 

		
Bermuda 
	
	 

		
Attention: Daniel Sussman 
	

-15-

  ARTICLE XXVII

  ASSIGNMENT 

               This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns and legal representatives. This Agreement is not assignable except by
operation of law or by mutual consent of the parties hereto; such consent not to be unreasonably withheld. 

-16-

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written. 

	 	
XL FINANCIAL ASSURANCE LTD. 
	
	 	 

	
	 	 

	
	 	
By: ________________________________
	
	 	
       Name: 
	
	 	
       Title: 
	
	 	 

	
	 	 

	
	 	
XL INSURANCE (BERMUDA) LTD 
	
	 	 

	
	 	 

	
	 	 By: ________________________________ 
	 	       Name:  
	 	       Title:  

-17-

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