1358164--3/15/2007--Security_Capital_Assurance

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{interest, director, officer}

{capital, credit, financial}

{tax, income, asset}

{loss, insurance, financial}

{provision, law, control}

{stock, price, operating}

{operation, natural, condition}

{acquisition, growth, future}

{stock, price, share}

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{debt, indebtedness, cash}

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Risks Related to Our Company A downgrade of our financial strength or financial enhancement ratings from triple-A would materially adversely affect our business and, consequently, our results of operations and financial condition. Increased rating agency capital charges may adversely affect us. A downgrade of the financial strength or financial enhancement ratings of any of our reinsurers, or a change in the treatment by the rating agencies of the reinsurance provided to us by subsidiaries of XL Capital would impact the value of the reinsurance that any such reinsurer provides to us and, therefore, could adversely affect us. The size of our capital base may adversely affect our ability to grow our business and execute our business strategy. We may require additional capital or liquidity in the future, which may not be available or may be available only on unfavorable terms. Some of our direct financial guarantee products may be riskier than traditional financial guarantee insurance, principally because these less traditional products may require us to make payments of the full guaranteed amount earlier than, or upon the occurrence of events not covered by, traditional products. Our insurance and reinsurance portfolio and financial guarantee products expose us to concentrations of risks, and a material adverse event or series of events with respect to one or more of these risks could result in significant losses to our business. Rules relating to certain accounting practices in the financial guarantee insurance and reinsurance industry are currently being reviewed by applicable regulatory bodies and any changes required by that review could have a material adverse effect on the reported operating results and financial condition of the industry or particular market participants, including us. Our ability to implement, for the fiscal year ended December 31, 2007, the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 in a timely and satisfactory manner could cause the price of our common shares to fall. We face significant competition in our business and our revenues and profitability could decline as a result. A substantial majority of our third-party reinsurance business consists of reinsuring risks from FSA and our ability to expand our third-party reinsurance business is constrained by rating agency restrictions. General economic factors, including fluctuations in interest rates, as well as terrorist acts or natural or other catastrophes, may adversely affect our loss experience or the demand for our products. If claims exceed our loss reserves, our financial position and results of operations could be materially adversely affected. If the counterparties to our reinsurance arrangements default on their obligations to us, we may be exposed to risks we had sought to mitigate, which could adversely affect our financial condition and results of operations. Our net income may be volatile because a significant portion of the credit risk we assume must be accounted for as credit derivatives under FAS 133, as amended by FAS 149, which requires that these instruments be marked to market quarterly. Because our financial guarantee insurance and reinsurance policies are unconditional and irrevocable, we may incur losses from fraudulent conduct relating to the securities that we insure or reinsure. Legislative and regulatory changes and interpretations could harm our business. Risks Related to Our Historical Ownership by XL Capital As Well As Our Continuing Relationships with XL Capital Our historical consolidated financial information is not necessarily representative of the results we would have achieved as a stand-alone, public company and may not be a reliable indicator of our future results. The terms of our current services, leasing, reinsurance, and other arrangements with XL Capital may be more or less favorable to us than we will be able to obtain in the future from an unaffiliated third-party. XL Capital owns approximately 63% of our outstanding common shares and will retain the ability to exert significant influence over us. Our financial strength or financial enhancement ratings may be negatively affected by a downgrade in XL Capital s ratings. If XL Capital engages in the same type of business we conduct, our ability to successfully operate and expand our business may be hampered. Conflicts may arise between us and XL Capital that could be resolved in a manner unfavorable to us or investors in our securities. U.S. taxation of XLFA could materially adversely affect our financial condition and results of operations. Our U.S. subsidiary may be subject to additional taxes. Our U.K. subsidiary may be subject to additional taxes. There is U.S. income tax risk associated with reinsurance between U.S. insurance companies and their Bermuda affiliates. There are U.S. income tax risks associated with the controlled foreign corporation rules under the U.S. Internal Revenue Code. There are U.S. income tax risks associated with the related person insurance income of our non-U.S. insurance subsidiaries. U.S. holders who hold our common shares will be subject to adverse tax consequences if we are considered to be a passive foreign investment company for U.S. federal income tax purposes. U.S. tax-exempt entities may recognize unrelated business taxable income. Changes in U.S. tax law might adversely affect an investment in our shares. Bermuda and the Organisation for Economic Co-operation and Development are considering measures that might change the manner in which we are taxed. Risks Related to Ownership of Our Common Shares Our subsidiaries ratings are not evaluations directed to the protection of investors in our common shares. Future sales of our common shares may adversely affect the market price of our common shares. There are provisions in our Bye-laws that, subject to certain exceptions, reduce the voting rights of common shares that are held by a person or group to the extent that such person or group holds more than 9.5% of the aggregate voting power of all common shares entitled to vote on a matter. There are provisions in our Bye-laws which may limit a shareholder s voting rights if our Board of Directors determines to do so to avoid certain material adverse legal, tax or regulatory consequences. There are provisions in our Bye-laws that may restrict shareholders ability to transfer common shares and, therefore, may affect the liquidity of common shares. Bermuda Law and our Bye-laws provide broad indemnity and exculpation protections for the benefit of our officers, directors and employees. Provisions in our Bye-laws could impede an attempt to replace or remove our directors or change the direction or policies of our company, which could diminish the value of our common shares. Shareholders of our company may have greater difficulties in protecting their interests than as a shareholder of a U.S. corporation. We are a Bermuda company and it may be difficult for our shareholders to enforce judgments against us or against our directors and executive officers.

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1358164--3/15/2007--Security_Capital_Assurance_Ltd