DRAFT 081296 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 June 30, 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 XX No ___
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 18,014,075 shares of common
stock, par value $.10 per share, as of August 9, 1996.
<PAGE>
ENHANCE FINANCIAL SERVICES GROUP INC.
INDEX
PAGE
----
Part I FINANCIAL INFORMATION (Unaudited)
Item 1. Financial Statements
Consolidated Balance Sheets -
June 30, 1996 and December 31, 1995...................... 3
Consolidated Statements of Income -
Three and six months ended June 30, 1996 and 1995........ 4
Consolidated Statements of Changes
in Shareholders' Equity -
Six months ended June 30, 1996......................... 5
Consolidated Statements of Cash Flows -
Six months ended June 30, 1996 and 1995................... 6
Notes to Consolidated Financial Statements.................... 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................. 8-13
PART II OTHER INFORMATION.............................................. 14
Signature.............................................................. 15
Exhibit 27. Financial data schedules
<PAGE>
ENHANCE FINANCIAL SERVICES GROUP INC.
AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
(In thousands except share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
--------- -----------
1996 1995
--------- ---------
<S> <C> <C>
Assets
Investments:
Fixed maturities, held to maturity, at amortized cost
(market value $224,260 and $218,036) ............................................ $ 215,899 $ 206,427
Fixed maturities, available for sale, at market
(amortized cost $496,361 and $471,011) .......................................... 498,448 489,159
Common stock, at market (cost $498) ................................................ 878 729
Investment in affiliates ........................................................... 7,310 7,241
Short-term investments ............................................................. 52,477 44,103
Cash and cash equivalents .......................................................... 23,797 8,782
--------- ---------
Total Investments ................................................................ 798,809 756,441
Premiums receivable ................................................................... 16,766 21,217
Accrued interest and dividends receivable ............................................. 10,158 10,739
Deferred policy acquisition costs ..................................................... 84,119 81,197
Federal income taxes recoverable ...................................................... 2,018 726
Property and equipment ................................................................ 1,814 1,709
Prepaid reinsurance premiums .......................................................... 3,198 4,448
Reinsurance recoverable on unpaid losses .............................................. 1,866 1,853
Receivable from affiliates ............................................................ 7,411 945
Other assets .......................................................................... 26,100 8,284
========= =========
TOTAL ASSETS ..................................................................... $ 952,259 $ 887,559
========= =========
Liabilities and Shareholders' Equity
LIABILITIES
Losses and loss adjustment expenses ................................................... $ 25,781 $ 30,799
Reinsurance payable on paid losses and loss adjustment expenses ....................... 2,007 2,645
Deferred premium revenue .............................................................. 259,716 252,499
Accrued profit commissions ............................................................ 2,750 3,719
Deferred income taxes ................................................................. 36,656 39,198
Long-term debt ........................................................................ 78,400 78,400
Short-term debt ....................................................................... 13,000 15,000
Payable for securities ................................................................ 59,465 17,324
Accrued expenses and other ............................................................ 21,640 24,038
--------- ---------
TOTAL LIABILITIES ................................................................. 499,415 463,622
--------- ---------
SHAREHOLDERS' EQUITY
Common stock-$.10 par value
Authorized-30,000,000 shares ....................................................... 1,847 1,830
Additional paid-in capital ............................................................ 200,356 192,865
Retained earnings ..................................................................... 256,812 235,285
Unearned compensation/excess pension liability ........................................ (62) (104)
Unrealized gains(losses) .............................................................. 1,649 12,104
Treasury stock ........................................................................ (7,758) (18,043)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY ......................................................... 452,844 423,937
========= =========
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ......................................... $ 952,259 $ 887,559
========= =========
</TABLE>
See notes to unaudited consolidated financial statements
-3-
<PAGE>
ENHANCE FINANCIAL SERVICES GROUP INC.
AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------------ ------------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues
Net premiums written ............................................ $ 25,172 $ 24,622 $ 45,619 $ 36,179
Increase in deferred premium revenue ............................ (7,347) (8,674) (8,542) (6,019)
-------- -------- -------- --------
Premiums earned ............................................ 17,825 15,948 37,077 30,160
Net investment income ........................................... 11,624 10,645 23,154 21,165
Net realized gains(losses) on sale of investments ............... (1,119) (573) 241 (539)
Other income .................................................... 576 280 1,057 752
-------- -------- -------- --------
Total revenues ............................................. 28,906 26,300 61,529 51,538
-------- -------- -------- --------
Expenses
Losses and loss adjustment expenses ............................. 1,964 2,270 4,341 4,670
Policy acquisition costs ........................................ 5,876 6,193 12,198 11,095
Profit commissions .............................................. 132 (5) 461 95
Other operating expenses ........................................ 3,297 2,386 6,854 5,339
-------- -------- -------- --------
Total expenses ............................................. 11,269 10,844 23,854 21,199
-------- -------- -------- --------
Income from operations .......................................... 17,637 15,456 37,675 30,339
Equity in net income(loss) of affiliates ........................ (265) 75 (735) 166
Foreign currency gain(loss) ..................................... (122) 471 (169) 517
Interest expense ................................................ (1,425) (1,370) (2,872) (2,710)
-------- -------- -------- --------
Income before income taxes ................................. 15,825 14,632 33,899 28,312
Income tax expense .............................................. 3,945 3,512 8,780 6,738
======== ======== ======== ========
Net income ................................................. $ 11,880 $ 11,120 $ 25,119 $ 21,574
======== ======== ======== ========
Primary earnings per share ......................................... $ 0.66 $ 0.64 $ 1.42 $ 1.24
======== ======== ======== ========
Fully diluted earnings per share ................................... $ 0.64 $ 0.64 $ 1.37 $ 1.24
======== ======== ======== ========
</TABLE>
See notes to unaudited consolidated financial statements
-4-
<PAGE>
ENHANCE FINANCIAL SERVICES GROUP INC.
AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(In thousands except share amounts)
<TABLE>
<CAPTION>
Addi- Unreal-
Common Stock Treasury Stock tional Unearned ized
--------------------- --------------------- Paid-in Compen- Gains Retained
Shares Amount Shares Amount Capital sation (Losses) Earnings Total
---------- -------- ---------- -------- -------- ----- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 ........ 18,302,050 $ 1,830 1,062,675 ($18,043) $192,865 ($104) $12,104 $235,285 $423,937
Amortization of unearned
compensation 42 42
Change in unrealized gain (loss) .. (10,455) (10,455)
Dividends paid ($0.20 per share) .. (3,592) (3,592)
Exercise of stock options ......... 169,900 17 3,407 3,424
Registration costs of common stock (78) (78)
Reissuance of treasury stock ...... (600,000) 10,323 4,162 14,485
Purchase of treasury stock ........ 1,600 (38) (38)
Net income ........................ 25,119 25,119
---------- -------- ---------- -------- -------- ----- ------- -------- --------
Balance, June 30, 1996 ............ 18,471,950 $ 1,847 464,275 ($ 7,758) $200,356 ($ 62) $ 1,649 $256,812 $452,844
========== ======== ========== ======== ======== ===== ======= ======== ========
</TABLE>
See notes to unaudited consolidated financial statements
-5-
<PAGE>
ENHANCE FINANCIAL SERVICES GROUP INC.
AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Six months ended
June 30,
---------------------
1996 1995
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ........................................ $ 25,119 $ 21,574
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization, net ................ (4,045) (2,327)
(Gain)loss on sale of investments, net ............ (241) 539
Equity in (net income) loss of affiliates ......... 735 (166)
Compensation, restricted stock award program ...... 42 84
Change in assets and liabilities:
Premiums receivable .......................... 4,451 (4,830)
Accrued interest and dividends receivable .... 581 1,012
Accrued expenses and other liabilities ....... (2,198) 10,286
Deferred policy acquisition costs ............ (2,922) (2,627)
Deferred premium revenue, net ................ 8,467 6,052
Accrued profit commissions ................... (969) (4,085)
Losses and loss adjustment expenses,net ...... (5,669) (63)
Other assets ................................. (1,235) 1,266
Income taxes, net ............................ 3,016 5,914
--------- ---------
Net cash provided by operating activities .............. 25,132 32,629
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ................ (387) (167)
Proceeds from sales of investments ................ 540,108 215,213
Purchase of investments ........................... (546,198) (192,807)
Purchases of short-term investments, net .......... (8,374) (41,899)
--------- ---------
Net cash used in investing activities .................. (14,851) (19,660)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Investment in affiliates .......................... (1,001) --
Receivable from affiliates ........................ (6,466) --
Capital stock ..................................... 3,346 125
Short-term debt ................................... (2,000) 9,000
Dividends paid .................................... (3,592) (3,470)
Reissuance of treasury stock ...................... 14,485 --
Purchase of treasury stock ........................ (38) (5,886)
--------- ---------
Net cash provided by financing activities .............. 4,734 (231)
--------- ---------
Net change in cash and cash equivalents ................ 15,015 12,738
Cash and cash equivalents, beginning of period ......... 8,782 5,765
--------- ---------
Cash and cash equivalents, end of period ............... $ 23,797 $ 18,503
========= =========
</TABLE>
See notes to unaudited consolidated financial statements
-6-
<PAGE>
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security holders
On June 6, 1996, the registrant held an annual meeting of shareholders, at
which the shareholders voted as indicated on the following proposals:
(a) The election of the following persons as directors:
Name For Against
---- --- -------
Arthur Dubroff 15,614,404 1,144,799
Daniel Gross 15,984,401 774,802
Brenton W. Harries 15,614,552 1,144,651
David R. Markin 15,984,106 1,026,267
Wallace O. Sellers 15,984,401 774,802
Richard J. Shima 15,614,552 1,144,651
Spencer R. Stuart 15,614,552 1,144,651
Adrian U. Sulzer 15,983,662 775,541
Allan R. Tessler 14,664,827 2,160,086
Frieda K. Wallison 15,984,401 774,802
(b) An amendment to the certificate of incorporation of the registrant to
create a new class of preferred stock was approved by a vote of 11,333,534 in
favor, 3,875,117 against and 53,950 abstaining.
(c ) Certain amendments to the Long-Term Incentive Plan for Key Employees
of the registrant, including an amendment to increase the number of shares of
common stock of the registrant reserved for grants thereunder, were approved by
a vote of 11,963,928 in favor, 3,537,468 against and 59,707 abstaining.
(d) The appointment of Deloitte & Touche LLP as the registrant's outside
auditor for fiscal year 1996 was ratified by a vote of 16,761,554 in favor, 0
against and 1,849 abstaining.
<PAGE>
ENHANCE FINANCIAL SERVICES GROUP INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
PERIODS ENDED JUNE 30, 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 six months ended June 30, 1996 may
not be indicative of the results that may be expected for the year ending
December 31, 1996.
2. DIVIDENDS DECLARED
In March and June 1996, Enhance Financial declared and paid cash dividends of
$.10 per share aggregating approximately $3,592,000.
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. SUBSEQUENT EVENT
On July 9, 1996, the Company and MGIC Investment Corporation formed a joint
venture company, Credit-Based Asset Servicing & Securitization LLC ("C-BASS"),
which will evaluate, accumulate, service and securitize sub-performing and
non-performing residential mortgages. The Company will contribute $24.1 million
in cash and other assets including Litton Loan Servicing, Inc., a Houston-based,
loss mitigation, residential mortgage servicer purchased by Enhance in 1995,
for its 48.25% interest in C-BASS.
5. RECLASSIFICATIONS
Certain of the 1996 amounts have been reclassified to conform to the current
year presentation.
<PAGE>
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 reinsurance, reinsurance and insurance of certain
credit-related specialty lines of business and primary financial guaranty
insurance in certain markets.
Results of Operations
Three Months Ended June 30, 1996 vs.
Three Months Ended June 30, 1995
Gross premiums written in the second quarter of 1996 were $25.3 million compared
with $25.2 million in the same period in 1995. Gross premiums derived from
non-municipal reinsurance grew by more than 520% to $7.8 million and accounted
for 30.8% of second quarter gross premiums written. This was offset in part by a
31.2% decline in municipal reinsurance premiums and a 20.5% decline in premiums
derived from the Company's specialty businesses.
Net premiums written increased 2.2% to $25.2 million in the second quarter of
1996 from $24.6 million in the same period in 1995, consistent with the gross
premiums analysis discussed in the preceding paragraph. Of the Company's net
premiums written in the second quarter of 1996, 39.1%, 31.1% and 29.8% were
derived from the reinsurance of municipal bonds, the reinsurance of
non-municipal debt obligations and the Company's specialty businesses,
respectively, compared to 58.0%, 5.1% and 36.9% during the same period in 1995.
Facultative activity contributed $11.7 million of net premiums written in the
second quarter of 1996 compared to $9.5 million for the same period in 1995.
In the second quarter of 1996, industry new-issue municipal volume of $41.4
billion was recorded, compared to $40.0 billion in the 1995 second quarter. The
insured portion of such new issues was approximately 45% in both periods. Total
municipal bond refundings in the second quarter of 1996 decreased to 18.4% of
new-issue volume from approximately 20.0% for the 1995 comparable period.
Premiums earned grew 11.8% to $17.8 million in the second quarter of 1996 from
$15.9 million during the comparable period in 1995. This increase reflects in
part the growth in earned premiums derived from the Company's specialty
businesses which contributed $7.2 million of
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
earned premium in the second quarter of 1996, compared to $6.6 million in the
comparable 1995 quarter as well as a higher level of refundings which accounted
for an estimated $1.7 million of second quarter 1996 earned premiums versus $1.1
million in the second quarter of 1995.
The growth in earned premiums further reflects the earnings generated from the
higher balance of deferred premium revenue in the financial guaranty reinsurance
business. Deferred premium revenue grew to $256.5 million at June 30, 1996 from
$248.1 million at year-end 1995.
Net investment income increased 9.2% to $11.6 million in the second quarter of
1996 from $10.6 million in the same period in 1995. This increase primarily
reflects the growth in the Company's investment portfolio during the period. Net
investment income is presented after deduction of both external investment
management fees and internal costs associated with managing the portfolio.
The average yields on the Company's investment portfolio after all associated
costs, were 6.3% for each of the 1996 and 1995 second quarters. In addition, the
Company realized $1.1 million of capital losses in the second quarter of 1996
compared with $0.6 million in the same period in 1995.
Incurred losses and LAE were $2.0 million in the second quarter of 1996 compared
to $2.3 million during the same period in 1995.
The Company's operating expense ratio was 52.2% for the second quarter of 1996
compared to 53.8% in the 1995 second quarter. Policy acquisition costs ("PAC")
were $5.9 million and $6.2 million for the second quarters of 1996 and 1995,
respectively, representing 32.9% and 38.8% of premiums earned in those
respective periods. Other operating expenses were $3.3 million and $2.2 million
in the second quarter of 1996 and 1995, respectively. The higher 1995 second
quarter PAC ratio and lower operating expense ratio resulted in large part from
revised expense allocations following the Company's reorganization in the first
quarter of 1995.
The Company incurred net losses of $0.3 million from its equity investments in
the second quarter of 1996 compared to $0.1 million of profits in the 1996
second quarter. The 1996 net losses reflect start-up costs incurred in one of
the Company's equity investments which commenced operations in the fourth
quarter of 1995.
Interest expense totaled $1.4 million in each of the 1996 and 1995 second
quarters.
The Company's effective tax rate for the second quarter of 1996 was 24.9%
compared to 24.0% for the 1995 comparable period.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
The Company's 1996 second-quarter net income increased 6.8% to $11.9 million
from $11.1 million in the second quarter of 1995 reflecting increases in
premiums earned and investment income and a lower expense ratio. Second quarter
1996 earnings per share increased 2.9% to $0.66 per share from $0.64 per share
for the second quarter of 1995, while operating earnings per share, which
excludes the impact of capital losses and currency gains and losses, increased
9.1% to $0.71 from $0.65 in the 1995 second quarter.
The per-share increases were offset in part by the higher weighted average
shares during the 1996 second quarter following the issuance, in the first
quarter of 1996, of 600,000 shares to Swiss Reinsurance Company and the exercise
at various times throughout the second quarter of 70,475 stock options.
The weighted average shares outstanding during the second quarter of 1996 was
17.98 million compared to 17.31 million for the second quarter of 1995.
Six Months Ended June 30, 1996 vs.
Six Months Ended June 30, 1995
Gross premiums written in the first half of 1996 were $47.5 million compared to
$37.7 million in the same period in 1995, representing a 25.8% increase. This
increase is principally attributable to a 317% increase in non-municipal
reinsurance premiums and a 16.2% increase in premiums derived from the Company's
specialty businesses offset in part by a 12.9% decline in municipal reinsurance
premiums.
Net premiums written increased 26.1% to $45.6 million in the first half of 1996
from $36.2 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 half of 1996, 33.8%, 26.9% and 39.3% were derived
from the reinsurance of municipal bonds, the reinsurance of non-municipal debt
obligations and the Company's specialty businesses, respectively, compared to
48.3%, 8.2% and 43.5% during the same period in 1995.
Facultative activity contributed $16.0 million of net premiums in the first half
of 1996 compared to $11.5 million for the same period in 1995.
In the first six months of 1996, new-issue volume of $88.6 billion was recorded,
a 28.7% increase from the same period in 1995. The insured portion of such new
issues was 45.6% in the first six months of 1996 compared to 38.6% for the first
half of 1995. Total municipal bond refundings in the first six months of 1996
represented 24.3% of new-issue volume compared to 17.7% in the first half of
1995.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Premiums earned grew 22.9% to $37.1 million in the first half of 1996 from $30.2
million during the comparable period in 1995. Earned premiums from refundings
contributed $5.2 million (14.0%) of earned premiums in the 1996 first half
compared to $2.1 million (6.9%) in the same period in 1995. The increase in
earned premiums further reflects the growth in earned premiums derived from the
Company's specialty businesses which contributed $14.2 million of earned premium
in the first half of 1996, compared to $11.8 million in the comparable 1995
period, as well as the earnings generated from the growing deferred premium
revenue balance. Deferred premium revenue grew to $256.5 million at June 30,
1996 from $248.1 million at year-end 1995.
Net investment income increased 9.4% to $23.2 million in the first six months of
1996 from $21.2 million in the first half of 1995. This increase primarily
reflects the growth in the Company's investment portfolio during the period. The
average yields on the Company's investment portfolio after all associated costs
were 6.3% and 6.4% for the first half of 1996 and 1995, respectively. In
addition, the Company realized $0.2 million of capital gains during the first
half of 1996 compared with $0.5 million of realized capital losses in the 1995
first half. Net investment income is presented after deduction of both external
investment management fees and internal costs associated with managing the
portfolio.
Incurred losses and LAE were $4.3 million and $4.7 million in the first six
months of 1996 and 1995, respectively.
The Company's operating expense ratio decreased to 52.6% in the first six months
of 1996 from 54.8% in the same period in 1995. Policy acquisition costs ("PAC")
were $12.2 million and $11.1 million for the first half of 1996 and 1995,
respectively, representing 32.9% and 36.8% of premiums earned in those
respective periods. The higher 1995 first-half PAC ratio resulted in large part
from revised expense allocations following the Company's reorganization in the
first quarter of 1995.
Other operating expenses increased 28.4% to $6.9 million in the first half of
1996 from $5.3 million during the same period in 1995. The lower first-half 1995
operating expenses resulted primarily from the revised expense allocations noted
above.
Interest expense totaled $2.9 million in the first six months of 1996 compared
to $2.7 million for the same period in 1995. The increase reflects the interest
expense on the higher average outstanding balance during the first half of 1996
on the Company's line of credit under a bank credit agreement (the "Credit
Agreement").
The Company's effective tax rate for the first six months of 1996 was 25.9%
compared to 23.8% for the 1995 comparable period reflecting the growth
throughout 1995 and early 1996 in the taxable portion of the investment
portfolio.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
The Company's 1996 first-half net income increased 16.4% to $25.1 million from
$21.6 million in the first six months of 1995 reflecting increases in premiums
earned and investment income and a lower expense ratio. First-half 1996 primary
earnings per share increased 14.3% to $1.42 per share from $1.24 per share for
the 1995 first half, while operating earnings per share, which excludes the
impact of capital losses and foreign exchange gains and losses, also increased
14.0% to $1.42.
The per-share increases were offset in part by the higher weighted average
shares during the 1996 first half following the issuance, in the first quarter
of 1996, of 600,000 shares to Swiss Reinsurance Company and the exercise at
various times throughout the first six months of 1996 of 169,900 stock options.
The weighted average shares outstanding during the first half of 1996 was 17.72
million compared to 17.39 million for the 1995 comparable period.
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. 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 June
30, 1996, the maximum amount of dividends available from the Insurance
Subsidiaries without prior approval of the insurance regulatory authorities was
$19.9 million.
The Company's cash flow from operations for the first six months of 1996 was
$25.1 million compared to $32.6 million for the same period in 1995. The
Company's investment portfolio, excluding investments in affiliates, grew to
$791 million at June 30, 1996 from $749 million at December 31, 1995, including
adjustments due to market value.
The Company maintains the Credit Agreement with two major commercial banks which
provides for borrowings of up to $30.0 million to be used for general corporate
purposes. As of June 30, 1996, the Company had outstanding $13.0 million under
the Credit Agreement. The Company repaid $2.0 million in the second quarter of
1996.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
On July 9, 1996, the Company and MGIC Investment Corporation formed a joint
venture company, Credit-Based Asset Servicing & Securitization LLC ("C-BASS"),
which will evaluate, accumulate, service and securitize sub-performing and
non-performing residential mortgages. The Company will contribute $24.1 million
in cash and other assets for its 48.25% interest in C-BASS.
In March and June 1996, Enhance Financial declared and paid regular quarterly
dividends of $.10 per share aggregating $3.6 million.
<PAGE>
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: August 14, 1996 By: /s/ Arthur Dubroff
-------------------
Arthur Dubroff
Executive Vice President (duly
authorized officer) and
Principal Financial Officer
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0
0
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