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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-10967
ENHANCE FINANCIAL SERVICES GROUP INC.
(Exact name of registrant as specified in its charter)
New York 13-3333448
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
335 Madison Avenue, New York, New York 10017
(Address of principal executive offices)
(Zip Code)
(212) 983-3100
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes __X X__ No _____
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 17,949,025 shares of common
stock, par value $.10 per share, as of May 10, 1996.
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ENHANCE FINANCIAL SERVICES GROUP INC.
INDEX
PART I FINANCIAL INFORMATION (UNAUDITED)
Item 1. Financial Statements
<TABLE>
PAGE
<S> <C>
Consolidated Balance Sheets -
March 31, 1996 and December 31, 1995........................... 3
Consolidated Statements of Income -
Three months ended March 31, 1996 and 1995..................... 4
Consolidated Statements of Changes
in Shareholders' Equity -
Three months ended March 31, 1996............................. 5
Consolidated Statements of Cash Flows -
Three months ended March 31, 1996 and 1995...................... 6
Notes to Consolidated Financial Statements ........................ 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................... 8-10
PART II OTHER INFORMATION........................................................ 11
Signature .................................................................... 12
</TABLE>
2
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ENHANCE FINANCIAL SERVICES GROUP INC.
AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
March 31, December 31,
1996 1995
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<S> <C> <C>
ASSETS
Investments:
Fixed maturities, held to maturity, at amortized cost
(market value $220,962 and $218,036)........................ $211,609 $206,427
Fixed maturities, available for sale, at market
(amortized cost $473,741 and $471,011) ..................... 477,813 489,159
Common stock, at market (cost $498)............................ 729 729
Investment in affiliates....................................... 7,616 7,241
Short-term investments......................................... 38,529 44,103
Cash and cash equivalents...................................... 18,371 8,782
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Total Investments............................................ 754,667 756,441
Premiums receivable............................................... 18,234 21,217
Accrued interest and dividends receivable......................... 9,102 10,739
Deferred policy acquisition costs................................. 81,466 81,197
Federal income taxes recoverable.................................. 422 726
Property and equipment............................................ 1,732 1,709
Prepaid reinsurance premiums...................................... 3,779 4,448
Reinsurance recoverable on unpaid losses.......................... 1,845 1,853
Other assets...................................................... 29,966 9,229
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TOTAL ASSETS................................................. $901,213 $887,559
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LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Losses and loss adjustment expenses............................... $31,691 $30,799
Reinsurance payable on paid losses and loss adjustment expenses... 2,507 2,645
Deferred premium revenue.......................................... 252,948 252,499
Accrued profit commissions........................................ 2,617 3,719
Deferred income taxes............................................. 36,560 39,198
Long-term debt.................................................... 78,400 78,400
Short-term debt................................................... 15,000 15,000
Payable for securities............................................ 18,432 17,324
Accrued expenses and other........................................ 20,585 24,038
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TOTAL LIABILITIES............................................. 458,740 463,622
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SHAREHOLDERS' EQUITY
Common stock-$.10 par value
Authorized-30,000,000 shares................................... 1,840 1,830
Additional paid-in capital........................................ 199,112 192,865
Retained earnings................................................. 246,734 235,285
Unearned compensation/excess pension liability.................... (83) (104)
Unrealized gains(losses).......................................... 2,628 12,104
Treasury stock.................................................... (7,758) (18,043)
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TOTAL SHAREHOLDERS' EQUITY..................................... 442,473 423,937
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY..................... $901,213 $887,559
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</TABLE>
See notes to unaudited consolidated financial statements
3
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ENHANCE FINANCIAL SERVICES GROUP INC.
AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
Three months ended
March 31,
--------------------
1996 1995
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<S> <C> <C>
REVENUES
Net premiums written...................................... $20,447 $11,557
Increase(decrease) in deferred premium revenue............ (1,195) 2,655
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Premiums earned...................................... 19,252 14,212
Net investment income..................................... 11,530 10,520
Net realized gains on sale of investments................. 1,360 34
Other income.............................................. 481 472
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Total revenues....................................... 32,623 25,238
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Expenses
Losses and loss adjustment expenses....................... 2,377 2,400
Policy acquisition costs.................................. 6,322 4,902
Profit commissions........................................ 329 100
Other operating expenses.................................. 3,557 2,953
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Total expenses....................................... 12,585 10,355
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Income from operations.................................... 20,038 14,883
Equity in net income(loss) of affiliates.................. (470) 91
Foreign currency gain(loss)............................... (47) 46
Interest expense.......................................... (1,447) (1,340)
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Income before income taxes........................... 18,074 13,680
Income tax expense........................................ 4,835 3,226
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Net income........................................... $13,239 $10,454
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Primary earnings per share................................. $0.76 $0.60
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Fully diluted earnings per share........................... $0.73 $0.60
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</TABLE>
See notes to unaudited consolidated financial statements
4
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ENHANCE FINANCIAL SERVICES GROUP INC.
AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(In thousands except share amounts)
<TABLE>
Additional
Common Stock Treasury Stock Paid-in
Shares Amount Shares Amount Capital
---------- ------ --------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995............ 18,302,050 $1,830 1,062,675 ($18,043) $192,865
Amortization of unearned compensation.
Change in unrealized gain (loss)......
Dividends paid ($0.10 per share) .....
Exercise of stock options............. 99,425 10 1,909
Registration costs of common stock.... (27)
Reissuance of treasury stock.......... (600,000) 10,323 4,365
Purchase of treasury stock............ 1,600 (38)
Net income............................
---------- ------ ------- ------- --------
Balance, March 31, 1996............... 18,401,475 $1,840 464,275 ($7,758) $199,112
---------- ------ ------- ------- --------
---------- ------ ------- ------- --------
Unearned Unrealized Retained
Compensation Gains (Losses) Earnings Total
------------ -------------- -------- --------
Balance, December 31, 1995............ ($104) $12,104 $235,285 $423,937
Amortization of unearned compensation. 21 21
Change in unrealized gain (loss)...... (9,476) (9,476)
Dividends paid ($0.10 per share)...... (1,790) (1,790)
Exercise of stock options............. 1,919
Registration costs of common stock.... (27)
Reissuance of treasury stock.......... 14,688
Purchase of treasury stock............ (38)
Net income............................ 13,239 13,239
------------ -------------- -------- --------
Balance, March 31, 1996............... ($83) $ 2,628 $246,734 $442,473
------------ -------------- -------- --------
------------ -------------- -------- --------
</TABLE>
See notes to unaudited consolidated financial statements
5
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ENHANCE FINANCIAL SERVICES GROUP INC.
AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Three months ended
March 31,
------------------
1996 1995
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................... $13,239 $10,454
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization, net.............. (2,069) (741)
Loss on sale of investments, net................ (1,360) (34)
Equity in (net income) loss of affiliates....... 470 (91)
Compensation, restricted stock award program.... 21 41
Change in assets and liabilities:
Premiums receivable.......................... 2,983 (1,775)
Accrued interest and dividends receivable.... 1,637 1,586
Accrued expenses and other liabilities....... (2,245) 5,100
Deferred policy acquisition costs............ (269) 193
Deferred premium revenue, net................ 1,118 (2,614)
Accrued profit commissions................... (1,102) (3,950)
Losses and loss adjustment expenses,net...... 762 1,911
Other assets................................. (2,234) (4,094)
Income taxes, net............................ 2,597 2,361
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Net cash provided by operating activities.......... 13,548 8,347
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment................. (163) (109)
Proceeds from sales of investments................. 249,514 82,184
Purchase of investments............................ (254,039) (78,310)
Purchases of short-term investments, net........... (13,022) (16,318)
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Net cash used in investing activities.............. (17,710) (12,553)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Investment in affiliates........................... (1,001) -
Capital stock...................................... 1,892 -
Short-term debt.................................... - 9,000
Dividends paid..................................... (1,790) (1,567)
Reissuance of treasury stock....................... 14,688 -
Purchase of treasury stock......................... (38) (3,307)
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Net cash provided by financing activities........... 13,751 4,126
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Net change in cash and cash equivalents.............. 9,589 (80)
Cash and cash equivalents, beginning of period....... 8,782 5,765
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Cash and cash equivalents, end of period............. $18,371 $5,685
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See notes to unaudited consolidated financial statements
6
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ENHANCE FINANCIAL SERVICES GROUP INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
PERIODS ENDED MARCH 31, 1996 AND 1995
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q under Rules and
Regulations of the Securities and Exchange Commission and do not include all of
the information and disclosures required by generally accepted accounting
principles. These statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Annual
Report on Form 10-K for the year ended December 31, 1995 of Enhance Financial
Services Group Inc. ("Enhance Financial").
The accompanying unaudited consolidated financial statements have not
been audited by independent auditors in accordance with generally accepted
auditing standards. However, in the opinion of management such financial
statements include all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the financial position and results
of operations of Enhance Financial and Subsidiaries (collectively the
"Company"). The results of operations for the three months ended March 31,
1996 may not be indicative of the results that may be expected for the year
ending December 31, 1996.
2. DIVIDENDS DECLARED
In March 1996, Enhance Financial declared and paid a cash dividend of
$.10 per share totaling approximately $1,790,000.
3. COMMON STOCK ISSUANCE
In the first quarter of 1996, Swiss Reinsurance Company purchased from
Enhance Financial and one of Enhance Financial's shareholders, respectively,
600,000 and 400,000 shares of Enhance Financial common stock at a purchase
price of $24.48 per share.
4. RECLASSIFICATIONS
Certain of the 1996 amounts have been reclassified to conform to the
current year presentation.
7
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
Enhance Financial Services Group Inc. ("Enhance Financial"), is a holding
company that, through its wholly owned subsidiaries, principally Enhance
Reinsurance Company and Asset Guaranty Insurance Company (the "Insurance
Subsidiaries"), provides financial guaranty insurance and reinsurance and
other products and services utilizing the Company's credit-related analytic
skills.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 VS.
THREE MONTHS ENDED MARCH 31, 1995
Gross premiums written in the first three months of 1996 were $22.1 million
compared with $12.5 million in the same period in 1995, representing an
increase of 77.0%. This increase reflects growth in premiums written in each
of the Company's principal product lines.
Net premiums written increased 76.9% to $20.4 million in the first three
months of 1996 from $11.6 million in the same period in 1995, consistent with
the increase in gross premiums discussed in the preceding paragraph. Of the
Company's net premiums written in the first quarter of 1996, 27.3%, 21.8% and
50.9% were derived from the reinsurance of municipal bonds, the reinsurance
of non-municipal obligations and the Company's specialty businesses,
respectively, compared to 27.7%, 14.6% and 57.7% during the same period in
1995.
In the first quarter of 1996, industry new-issue volume was $40.2
billion, a 39.2% increase over the same period in 1995. The insured portion
of such new issues was 47.4% and 30.4% during the first quarters of 1996 and
1995, respectively. Total municipal bond refundings in the first three
months of 1996 represented 28% of new-issue volume, up from 15% for the 1995
first quarter.
Earned premiums grew 35.5% to $19.3 million in the first quarter of
1996 from $14.2 million in the 1995 first quarter. Earned premiums from
refundings contributed $3.5 million (or 18.2%) of earned premiums in the 1996
first quarter compared to $1.0 million (or 7.1%) in the same period in 1995. The
increase in earned premiums further reflected growth from the Company's
specialty businesses, which contributed $7.0 million of earned premiums in
the 1996 first quarter, compared to $5.3 million in the comparable 1995
quarter, as well as the earnings generated from the higher balance of
deferred premium revenue in the financial guaranty reinsurance business.
Deferred premium revenue grew to $253 million at March 31, 1996 from $228
million at the beginning of 1995.
8
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Net investment income increased 9.6% to $11.5 million in the
first three months of 1996 from $10.5 million in the same period
in 1995. This increase resulted primarily from the growth in the Company's
investment portfolio from $640 million at the beginning of 1995 to $747
million at March 31, 1996. The average yields on the Company's investment
portfolio were 6.3% and 6.7% for the first quarters of 1996 and 1995,
respectively. In addition, the Company realized $1.4 million capital gains in
the first quarter of 1996 compared with nominal gains in the first quarter of
1995.
Incurred losses and LAE were $2.4 million in each of the 1996 and 1995
first quarters.
The Company's expense ratio was 53.0% in the first quarter of 1996
compared to 56.0% in the 1995 first quarter. Policy acquisition costs were
$6.3 million and $4.9 million for the first quarter of 1996 and 1995,
respectively, representing 32.8% and 34.5% of earned premiums in those
respective periods. The decrease in the ratio reflects in part a change in
the product mix, with a higher proportion of 1995 earned premiums derived
from businesses with a higher acquisition cost structure. Other operating
expenses increased 20.4% to $3.6 million in the first quarter of 1996 from
$3.0 million during the same period in 1995 largely reflecting the increased
level of expenses associated with the Company's strategic diversification
activities.
The Company incurred net losses of $0.5 million from its equity
investments in the first quarter of 1996 compared to $0.1 million of profits
in the 1995 first quarter. The 1996 net losses reflect start-up costs
incurred in one of the Company's equity investments which commenced
operations in October 1995.
Interest expense totaled $1.4 million in the first quarter of 1996
compared to $1.3 million for the same period in 1995.
The Company's effective tax rate for the first quarter of 1996 was 26.8%
compared to 23.6% for the 1995 comparable period. The increase in the tax
rate reflects a higher rate of increase in the taxable components of net
income resulting primarily from higher underwriting income in the 1996 first
quarter, as well as higher capital gains.
The Company's 1996 first-quarter net income increased 26.7% to $13.2
million from $10.5 million in the first quarter of 1995. First-quarter 1996
primary earnings per share similarly increased 26.7% to $.76 per share from
$0.60 per share for the first quarter of 1995, while operating earnings per
9
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
share, which excludes the impact of capital gains and losses, increased 19.2%
to $0.71 from $0.60 in the 1995 first quarter. The increases reflected the
increased underwriting and investment income offset in part by losses from
equity in affiliates.
The weighted average shares outstanding during the first quarter of 1996
was 17.45 million compared to 17.47 million for the first quarter of 1995.
II. LIQUIDITY AND CAPITAL RESOURCES
As a holding company, Enhance Financial finances the payment of its
operating expenses, principal and interest on its debt obligations,
dividends, if any, to its shareholders and the repurchase of Common Stock
primarily from dividends and other payments from the Insurance Subsidiaries.
The Company also draws on the line of credit provided under the credit
agreement described below between Enhance Financial and its bank lenders.
Payments of dividends to Enhance Financial by the Insurance Subsidiaries are
subject to restrictions relating to statutory capital and surplus and net
investment income. As of March 31, 1996, the maximum amount of dividends
available from the Insurance Subsidiaries without prior approval of the
insurance regulatory authorities was $13.3 million.
The Company's cash flow from operations for the first quarter of 1996 was
$13.5 million compared to $8.3 million for the same period in 1995. The
Company's investment portfolio declined to $747 million at March 31, 1996
from $749 million at December 31, 1995 as a result of adjustments due to market
valuations in the available for sale portfolio.
The Company maintains the Credit Agreement with two major commercial banks
providing for borrowing of up to $30 million to be used for general corporate
purposes. As of March 31, 1996, the Company had borrowed $15.0 million under
the Credit Agreement. There were no drawdowns during the first quarter of
1996.
In March 1996, Enhance Financial declared and paid a regular quarterly
dividend of $.10 per share totaling $1.8 million, which represents an
increase from the 1995 first quarter dividend of $0.09 per share.
10
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PART II - OTHER INFORMATION
None
11
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ENHANCE FINANCIAL SERVICES GROUP INC.
Date: May 13, 1996 By: /s/ Robert M. Rosenberg
-------------------------
Robert M. Rosenberg
Executive Vice President (duly
authorized officer) and
Principal Financial Officer
12
