U.S. Municipal Business Drives Record First-Half Originations

Reserve Increases and Impairment in FP Investment Portfolio Lead to

Net Loss of $331 Million

FSA EXITS ABS BUSINESS TO COMMIT FULL RESOURCES TO PUBLIC FINANCE

PARENT DEXIA INJECTS $300 MILLION IN THE COMPANY AND TAKES

RESPONSIBILITY FOR LIQUIDITY AND CREDIT RISK OF FINANCIAL PRODUCTS

BUSINESS

NEW YORK–(EMWNews)–Financial Security Assurance Holdings Ltd. (the Company), a member of

the Dexia group and the holding company for Triple-A bond insurer

Financial Security Assurance Inc. (FSA), announced net losses of $330.5

million for the second quarter of 2008 and $752.1 million for the first

half, due primarily to other-than-temporary impairment (OTTI) charges

related to the Financial Products (FP) Investment Portfolio and loss

expenses related to financial guarantees of second-lien residential

mortgage-backed securities (RMBS).

Robert P. Cochran, chairman and chief executive officer of FSA, said: “While

we are disappointed to report these losses, FSA’s

underlying business fundamentals remained strong in the first half of

2008 with record present value (PV) originations of $591.2 million,

primarily driven by originations in the U.S. municipal finance market,

and significant growth in earned premiums and credit derivative fees, as

well as investment income. At the same time, we dramatically decreased

our operating expense.”

On a comparable half-year basis, earned premiums and realized gains on

credit derivatives (fees for insuring credit derivatives, formerly

included in earned premiums) grew 18.1% to $207.1 million, excluding

refundings, and investment income increased by 14.2% to $132.2 million.

FSA’s operating expenses decreased $34.1

million in the first half, a 36.4% decrease from the comparable period

in 2007.

Strategic Review

In light of the credit deterioration in the residential mortgage-backed

portfolio and general economic conditions, FSA and Dexia undertook a

strategic business review during the second quarter, which has resulted

in a decision to exit the asset-backed business in order to devote full

resources to the global public finance sector.

“Comparing the significant volatility observed

in the ABS/RMBS markets against the broad and deep opportunities in the

lower risk public finance markets, we have concluded that we can create

greater value for issuers, investors and our shareholder by focusing

solely on public finance activities. The public sector’s

challenge of meeting the enormous needs for new public infrastructure

and replacement of aging projects throughout the world in the current

period of economic stress makes insured executions more cost-efficient

for issuers and more attractive to a broader group of investors,”

Mr. Cochran said.

Increased Loss Provisions for Insured RMBS

In the second quarter, FSA increased reserves primarily for estimated

losses on insured home equity line of credit (HELOC) and ALT-A

closed-end second-lien (CES) transactions and established a reserve for

three Option ARM insured transactions.

Commenting on the projected losses, Mr. Cochran said: “We

have increased loss provisions considerably to reflect the more severe

assumption that economic stress in the U.S. economy will continue at a

high level until the middle of 2009 and not return to normal until late

2010. Importantly, the increase in reserves between the first and second

quarters is principally due to revising our expectations about when

asset performance will recover rather than changes in the recent

performance of these transactions. As the loss potential of this

economic cycle develops over the next 12 to 18 months, the uncertainty

around reserves should reduce dramatically, and, at the same time, our

asset-backed and residential mortgage-backed exposure, which has a

remaining average life of approximately 3.5 years, will be running off

rapidly. This run-off should generate in excess of $700 million of

earned revenue and should release substantial capital as risk expires.”

Strengthening FSA’s Capital Position

Dexia has injected $300 million in the Company and will take

responsibility for the liquidity and credit risk of the Financial

Products business, which primarily issues guaranteed investment

contracts (GICs). Additionally, the Company will reduce the size of the

FP business line to rely on municipal funding only.

“The combination of these initiatives is

expected to reduce FSA’s future financial

statement volatility, and increase the capital and claims-paying

resources dedicated to our public finance business,”

Mr. Cochran said.

With these measures in place, FSA exceeds the Triple-A capital

requirements for all three rating agencies, and the Company will

continue to work closely with each of them to address the qualitative

and systemic issues raised in recent reports.

Financial Highlights

Non-GAAP operating earnings, which exclude fair-value adjustments

management considers to be non-economic, were negative $502.7 million

for the second quarter of 2008, compared with positive $102.4 million

for the second quarter of 2007, and negative $601.7 million for the

first half of 2008, compared with positive $197.4 million for the first

half of 2007. The decline in operating earnings was driven primarily by

increased estimated losses on insured RMBS transactions, economic OTTI

charges in the FP Investment Portfolio, an OTTI charge for the

write-down of the Company’s investment in XL

Financial Assurance Ltd. (XLFA) and credit impairment losses in its

insured credit derivative portfolio.

The table below reconciles net income to operating earnings.

NET INCOME (LOSS) AND RECONCILIATION TO
NON-GAAP OPERATING EARNINGS (LOSSES) (1)
(in millions)
		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2008				2007				2008				2007
Net income (loss)		$	(330.5	)		$	62.8			$	(752.1	)		$	148.0
Less after-tax non-economic adjustments:
Fair-value adjustments for instruments with economically hedged risks			(35.3	)			(7.2	)			(94.3	)			(7.2	)
Fair-value adjustments for credit derivatives in insured portfolio			184.1				(29.6	)			(133.8	)			(38.2	)
Fair-value adjustments attributable to the Company’s own credit risk			500.3				–				551.9				–
Fair-value adjustments attributable to impairment charges			(471.9	)			–				(471.9	)			–
Subtotal			(507.7	)			99.6				(604.0	)			193.4
IFRS adjustments			5.0				2.8				2.3				4.0
Operating earnings (losses)		$	(502.7	)		$	102.4			$	(601.7	)		$	197.4
[1] See “Non-GAAP Measures” below for a discussion of measures not promulgated in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP).

The table below highlights the noteworthy items included in both net

income and operating earnings.

NOTEWORTHY ITEMS IN NET INCOME (LOSS) AND OPERATING EARNINGS (LOSSES) (in millions)
		Three Months Ended June 30,
		2008								2007
After-tax:		Net Income (Loss)				Operating Earnings (Losses)				Net Income (Loss)				Operating Earnings (Losses)
Realized gains (losses) [1]		$	25.1			$	25.1			$	(1.2	)		$	(1.2	)
OTTI on XLFA investment			(24.7	)			(24.7	)			––				––
Net realized gains (losses)			0.4				0.4				(1.2	)			(1.2	)
Losses and loss adjustment expenses			(391.9	)			(391.9	)			(3.0	)			(3.0	)
Fair-value adjustments for instruments with economically hedged risks in FP segment			(35.3	)			––				(7.2	)			––
Fair-value adjustments for credit derivatives in insured portfolio			140.0				(44.1	)			(29.6	)			––
Fair-value adjustments on FP segment liabilities attributable to the Company’s own credit risk			476.3				––				––				––
Fair-value adjustments on committed preferred trust attributable to the Company’s own credit risk			24.0				––				––				––
OTTI in FP investment portfolio			(677.6	)			(205.7	)			––				––

		Six Months Ended June 30,
		2008								2007
After-tax:		Net Income (Loss)				Operating Earnings (Losses)				Net Income (Loss)				Operating Earnings (Losses)
Realized gains (losses) [1]		$	25.2			$	25.2			$	(1.1	)		$	(1.1	)
OTTI on XLFA investment			(24.7	)			(24.7	)			––				––
Net realized gains (losses)			0.5				0.5				(1.1	)			(1.1	)
Losses and loss adjustment expenses			(587.2	)			(587.2	)			(5.9	)			(5.9	)
Fair-value adjustments for instruments with economically hedged risks in the FP segment			(94.3	)			––				(7.2	)			––
Fair-value adjustments for credit derivatives in insured portfolio			(177.9	)			(44.1	)			(38.2	)			––
Fair-value adjustments on FP segment liabilities attributable to the Company’s own credit risk			495.9				––				––				––
Fair-value adjustments on committed preferred trust attributable to the Company’s own credit risk			56.0				––				––				––
OTTI in FP investment portfolio			(677.6	)			(205.7	)			––				––
[1] Includes realized gain (losses) from the General Investment Portfolio and the portfolio of assets acquired in refinancing transactions.

The primary driver of negative financial guaranty results in the second

quarter was additions to reserves on RMBS, including HELOC, Alt-A

closed-end second-lien (Alt-A CES) and option adjustable rate mortgage

(Option ARM) exposures, and, to a lesser extent, public finance

transactions. At June 30, 2008, the Company had net case reserves on ten

HELOC, five Alt-A CES and three Option ARM transactions totaling $728.6

million pre-tax, as a result of having increased the ultimate net loss

estimates on these RMBS insured transactions to $983.3 million pre-tax.

Loss and loss adjustment expenses totaled $602.9 million pre-tax for the

second quarter and $903.3 million pre-tax for the first half, driven

primarily by increases in these RMBS reserves and a $52.1 million

pre-tax loss incurred on public finance transactions in the second

quarter.

The Company estimated $44.1 million of after-tax credit impairment

losses (estimated economic losses) on two credit default swap (CDS)

transactions. The portion of the CDS fair-value adjustments attributable

to estimated economic loss is included in operating earnings, while the

portion of the fair-value adjustments expected to sum to zero over the

lives of the insured transactions is excluded from operating earnings.

The adverse FP results were due primarily to OTTI charges on certain

RMBS securities in the FP Investment Portfolio. When it is probable that

an investor will not recover all contractual cash flows from an

available-for-sale investment, GAAP requires the asset to be written

down to market value through income as a realized loss, regardless of

the estimate of economic loss expected. In the second quarter, the

after-tax effect on net income for such OTTI charges was $677.6 million.

Howe

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