<PAGE>
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 period ended September 30, 1997
------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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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 Identification No.)
organization)
335 Madison Avenue, New York, New York 10017
---------------------------------------------
(Address and zip code of principal executive offices)
(Zip Code)
(212) 983-3100
- -----------------------------------------------------------------
(Registrant's telephone number, including area code)
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(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 No
---- ----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: 18,682,867 shares
of common stock, par value $.10 per share, as of November 12, 1997.
- ------------------------------------------------------------------
- ------------------------------------------------------------------
<PAGE>
ENHANCE FINANCIAL SERVICES GROUP INC.
INDEX
Page
-----
PART I - FINANCIAL INFORMATION (Unaudited)
Item 1. Financial Statements
Consolidated Balance Sheets -
September 30, 1997 and December 31, 1997................. 3
Consolidated Statements of Income -
Three and nine months ended September 30, 1997 and 1996.. 4
Consolidated Statements of Changes
in Shareholders' Equity -
Nine months ended September 30, 1997..................... 5
Consolidated Statements of Cash Flows -
Nine months ended September 30, 1997 and 1996............ 6
Notes to Consolidated Financial Statements................. 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................8-12
PART II - OTHER INFORMATION.................................................. 13
Signature........................................................... 14
Exhibit 27. Financial data schedules
2
<PAGE>
ENHANCE FINANCIAL SERVICES GROUP INC.
AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
ASSETS:
Investments:
Fixed maturities, held to maturity, at amortized cost
(market value $224,194 and $227,048)...................................................... $ 214,939 $ 217,692
Fixed maturities, available for sale, at market
(amortized cost $561,692 and $526,973).................................................. 585,459 539,884
Common stock, at market (cost $498)....................................................... 878 878
Investment in affiliates.................................................................. 30,866 24,182
Short-term investments.................................................................... 28,652 33,247
Cash and cash equivalents................................................................. 5,015 5,385
Total Investments....................................................................... 865,809 821,268
Premiums and other receivable.............................................................. 26,492 22,472
Accrued interest and dividends receivable.................................................. 13,405 11,434
Deferred policy acquisition costs.......................................................... 94,123 87,325
Federal income tax recoverable............................................................. 5,574 1,428
Prepaid reinsurance premiums............................................................... 6,067 2,793
Reinsurance recoverable on unpaid losses................................................... 1,694 1,823
Receivable from affiliates ................................................................ 4,333 22,205
Receivable for securities.................................................................. 8,954 2,370
Other assets.............................................................................. 67,099 10,325
------------- ------------
TOTAL ASSETS............................................................................ $ 1,093,550 $ 983,443
------------- ------------
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Loss and loss adjustment expenses............................................................ $ 30,595 $ 28,081
Reinsurance payable on paid losses and loss adjustment expenses.............................. 4,121 2,463
Deferred premium revenue..................................................................... 283,020 268,997
Accrued profit commissions................................................................... 3,595 3,050
Deferred income taxes........................................................................ 55,752 46,402
Long-term debt............................................................................... 75,000 75,000
Short-term debt.............................................................................. 49,750 42,575
Payable for securities....................................................................... 4,797 2,083
Accrued expenses and other................................................................... 32,524 26,443
------------- ------------
TOTAL LIABILITIES........................................................................ 539,154 495,094
------------- ------------
SHAREHOLDER' EQUITY:
Common stock-$.10 par value,
Authorized-30,000,000 shares............................................................... 1,922 1,853
Additional paid-in capital................................................................... 224,636 201,847
Retained earnings............................................................................ 325,927 283,791
Unearned compensation........................................................................ (20) (20)
Unrealized gains............................................................................. 15,695 8,636
Treasury stock............................................................................... (13,764) (7,758)
------------- ------------
TOTAL SHAREHOLDERS' EQUITY............................................................... 554,396 488,349
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............................................... $1,093,550 $ 983,443
------------- ------------
------------- ------------
</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 share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ------------------------
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES
Net premiums written........................................ $ 25,475 $ 20,836 $ 72,800 $ 66,455
Increase in deferred premium revenue........................ (4,169) (2,132) (10,720) (10,674)
------------- ------------- ------------- ----------
Premiums earned........................................... 21,306 18,704 62,080 55,781
Net investment income....................................... 12,825 11,856 37,530 35,010
Net realized gain (losses) on sale of investments........... (362) 445 (2,433) 686
Assignment sales............................................ 7,792 0 20,292 -
Other income................................................ 518 606 2,244 1,663
------------- ------------- ------------- ----------
Total revenues.......................................... 42,079 31,611 119,713 93,140
------------- ------------- ------------- ----------
EXPENSES
Losses and loss adjustment expenses.......................... 2,740 2,083 6,886 6,424
Policy acquisition costs..................................... 7,167 6,131 21,576 18,329
Profit commissions........................................... 174 150 546 611
Other operating expenses - insurance......................... 3,153 2,895 7,735 8,601
- insurance......................... 7,085 782 16,357 1,930
------------- ------------- ------------- ----------
Total expenses........................................... 20,319 12,041 53,100 35,895
------------- ------------- ------------- ----------
Income from operations....................................... 21,760 19,570 66,613 57,245
Equity in net income (loss)of affiliates..................... 3,818 197 4,070 (538)
Foreign currency losses...................................... 0 97 (3) (72)
------------- ------------- ------------- ----------
Interest expense............................................. (2,013) (1,208) (5,287) (4,080)
Income before income taxes............................... 23,565 18,656 65,393 52,555
Income tax expenses.......................................... 6,113 4,806 17,120 13,586
------------- ------------- ------------- ----------
Net income............................................... $17,452 $13,850 $48,273 $38,969
------------- ------------- ------------- ----------
Primary earnings per share.................................... $ 0.90 $0.77 $ 2.51 $ 2.19
------------- ------------- ------------- --------
------------- ------------- ------------- --------
Fully diluted earnings per share.............................. $ 0.90 $0.74 $ 2.49 $ 2.11
------------- ------------- ------------- --------
------------- ------------- ------------- --------
</TABLE>
See notes to unaudited consolidated financial statements
4
<PAGE>
ENHANCE FINANCIAL SERVICES GROUP INC.
AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(in thousands, except share amounts)
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK ADDITIONAL
---------------------- --------------------- PAID-IN UNEARNED UNREALIZED RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION GAINS (LOSSES) EARNINGS TOTAL
---------- ---------- ------------ --------- ------- ------------ -------------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31,
1996................ 18,533,325 $ 1,853 464,275 $(7,758) $ 201,847 $(20) $8636 $283,791 $488,349
Change in unrealized
gain (loss)......... -- -- -- -- -- -- 7,059 -- 7,059
Dividends paid ($0.11
per share).......... -- -- -- -- -- -- -- (6,137) (6,137)
Exercise of stock
options............. 265,505 27 -- -- 6,831 -- -- -- 6,858
Issuance of common
stock............... 416,912 42 -- -- 15,958 -- -- -- 16,000
Purchase of treasury (6,006)
stock............... -- -- 164,687 (6,006) -- -- -- --
Net income............ -- -- -- -- -- -- -- 48,273 48,273
---------- ---------- ------------ --------- ------------ ----------- ------------ ---------- ------
Balances, September
30, 1997............ 19,215,742 $ 1,922 628,962 $(13,764) $ 224,636 $(20) $15,695 $325,927 $554,396
---------- ---------- ------------ --------- ------------ ----------- ------------ ---------- -------
---------- ---------- ------------ --------- ------------ ----------- ------------ ---------- -------
</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>
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------
1997 1996
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................................... $ 48,273 $ 38,969
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization, net................................................. (6,717) (6,411)
(Gain) loss on sale of investments, net............................................ 2,433 (686)
Equity in (net income) loss of affiliates.......................................... (4,070) 538
Compensation, restricted stock award program....................................... - 63
Change in assets and liabilities net of effects from
consolidation of previously unconsolidated affiliate:
Premiums and other receivables................................................. (1,309) 4,407
Accrued interest and dividends receivable...................................... (1,971) 832
Accrued expenses and other liabilities......................................... 266 (1,937)
Deferred policy acquisition costs.............................................. (6,798) (3,573)
Deferred premium revenue, net.................................................. 10,749 10,597
Accrued profit commissions..................................................... 545 (819)
Losses and loss adjustment expenses, net....................................... 4,301 (4,549)
Other assets................................................................... (10,631) 165
Income taxes, net.............................................................. 1,407 5,915
------------- -------------
Net cash provided by operating activities............................................ 36,478 43,511
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment................................................... (1,325) (514)
Proceeds from sales of investments................................................... 452,836 917,083
Purchase of investments.............................................................. (489,644) (962,542)
Purchases of short-term investents, net.............................................. 4,953 1,304
Investment in affiliates............................................................. (6,341) (5,751)
Cash of previously unconsolidated affiliate.......................................... 147 -
------------- -------------
Net cash used in investing activities................................................ (39,374) (50,420)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Receivable from affiliates........................................................... 636 (16,993)
Capital stock........................................................................ 6,858 3,923
Short-term debt...................................................................... 7,175 8,100
Dividends paid....................................................................... (6,137) (5,393)
Reissuance of treasury stock......................................................... - 14,485
Purchase of treasury stock........................................................... (6,006) (38)
------------- -------------
Net cash provided by financing activities.............................................. 2,526 4,084
------------- -------------
Net change in cash and cash equivalents................................................ (370) (2,825)
Cash and cash equivalents, beginning of period......................................... 5,385 8,782
------------- -------------
Cash and cash equivalents, end of period............................................... $5,015 $5,957
------------- -------------
------------- -------------
</TABLE>
See notes to unaudited consolidated financial statements.
6
<PAGE>
ENHANCE FINANCIAL SERVICES GROUP INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
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, 1996 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 nine months ended September
30, 1997 may not be indicative of the results that may be expected for the
year ending December 31, 1997.
2. DIVIDENDS DECLARED
In March, June and September 1997, Enhance Financial declared and paid a cash
dividend of $.11 per share totaling approximately $6,137,000.
3. COMMON STOCK
In October 1997, Enhance Financial issued approximately 96,000 shares of
common stock to acquire an additional 12.25% stake in Singer Asset Finance
Company, L.L.C. ("Singer"), bringing Enhance Financial's total ownership
interest in Singer to 99.75%. In March of 1997, Enhance Financial issued
approximately 420,000 shares of common stock to acquire an additional 37.5%
interest in Singer bringing Enhance Financial's total ownership interest in
Singer at the time to 87.5%.
In April 1997, Swiss Reinsurance Company purchased from existing shareholders
an additional 700,000 shares of Enhance Financial common stock for $39.00 per
share. Swiss Reinsurance Company's ownership of Enhance Financial now
represents 9.1% of the total Enhance Financial common stock outstanding.
During the first, second and third quarters of 1997, Enhance Financial
repurchased 72,925, 55,000 and 25,000 shares, respectively, of its common
stock outstanding at prices ranging from $35.00 to $41.38 as part of its
stock repurchase program. Additionally, 11,762 shares of common stock
previously held in trust in connection with the first quarter 1997 Singer
transaction were transferred to treasury stock during the second quarter of
1997.
In June 1997, Enhance Financial entered into a forward purchase agreement on
128,197 shares of its common stock at the forward purchase price of $41.375
per share through December 1998. The agreement settles quarterly on a net
basis in shares of Enhance Financial stock or in cash at Enhance Financial's
election. Enhance Financial repurchased 25,000 shares under this agreement
during the third quarter and 25,000, of the 55,000 total for the second
quarter of 1997, under this agreement.
7
<PAGE>
ENHANCE FINANCIAL SERVICES GROUP INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
4. NEW ACCOUNTING STANDARD
In February 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share," which
becomes effective for interim and annual periods ending after December 15,
1997. SFAS No. 128 supersedes Accounting Principles Board Opinion No. 15 and
replaces the presentation of primary earnings per share ("EPS") with a
presentation of basic EPS.
Basic earnings per share and diluted earnings per share, calculated in
accordance with SFAS No. 128 for the periods presented are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1997
Basic earnings per share $0.94 $2.60
Diluted earnings per share $0.90 $2.51
5. RECLASSIFICATIONS
Certain of the 1996 amounts have been reclassified to conform to the current
year presentation.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
Enhance Financial Services Group Inc. ("Enhance Financial," and together with
its consolidated subsidiaries, the "Company") is a holding company that,
through its 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.
The Company acquired a majority ownership interest (increased from a 50%
interest) in Singer Asset Finance Company L.L.C., ("Singer") in March 1997.
The results of Singer have been consolidated since that date.
Results of Operations
THREE MONTHS ENDED SEPTEMBER 30, 1997 VS.
THREE MONTHS ENDED SEPTEMBER 30, 1996
Gross premiums written in the third quarter of 1997 were $29.3 million
compared with $21.8 million in the same period in 1996, representing an
increase of 33.9%.
Net premiums written increased 22.2% to $25.5 million in the third quarter of
1997 from $20.8 million in the same period in 1996. Of the Company's net
premiums written in the third quarter of 1997, 27.7%, 26.8% and 45.5% were
derived from the reinsurance of municipal bonds, the reinsurance of
non-municipal obligations and the Company's other insurance lines,
respectively, compared to 42.3%, 11.5% and 46.2% during the same period in
1996.
In the third quarter of 1997, municipal new-issue volume was $49.8 billion, a
28.7% increase over the same period in 1996. The insured portion of such new
issues was 52.8% and 48.4% during the third quarters of 1997 and 1996,
respectively. Total municipal bond refundings in the third quarter of 1997
represented 34.6% of new-issue volume, up from 26.0% for the 1996 third
quarter.
Earned premiums grew 13.9% to $21.3 million in the third quarter of 1997 from
$18.7 million in the 1996 third quarter. The increase in earned premiums
reflected in part the growth from the Company's other insurance lines, which
contributed $8.5 million of earned premiums in the 1997 third quarter,
compared to $7.7 million in the comparable 1996 quarter. Earned premiums from
refundings contributed $2.2 million (or 10.3%) of earned premiums in the 1997
third quarter compared to $1.9 million (or 10.2%) in the same period in 1996.
Deferred premium revenue grew to $276.9 million at September 30, 1997 from
$266.2 million at December 31, 1996.
Net investment income increased 8.2% to $12.8 million in the third quarter of
1997 from $11.9 million in the same period in 1996. This increase resulted
primarily from the growth in the Company's investment portfolio from $764
million at September 30, 1996 to $835 million at September 30, 1997. The
average yields on the Company's investment portfolio were 6.17% and 6.26% for
the third quarters of 1997 and 1996, respectively. In addition, the Company
realized $(0.4) million of capital losses in the third quarter of 1997
compared with $0.4 million of capital gains in the third quarter of 1996.
The Company recognized revenues from disposition of assignments, through
securitization and other sales, of $7.8 million in the third quarter of 1997.
Incurred losses and LAE were $2.7 million and $2.1 million in the third
quarters of 1997 and 1996, respectively.
The Company's expense ratio was 49.2% in the third quarter of 1997 compared
to 49.1% in the 1996 third quarter. Non-insurance expenses increased to $7.1
million in the third quarter of 1997 from $0.8 million during the same period
in 1996 reflecting the inclusion of Singer's expenses on a consolidated basis
in the
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
1997 third quarter. Non-insurance expenses include those expenses of Singer,
whose results have been consolidated following the Company's acquisition of a
majority interest in the first quarter of 1997, and those expenses
attributable to the Company's diversification activities. Policy acquisition
costs ("PAC") were $7.2 million and $6.1 million for the third quarter of
1997 and 1996, respectively, representing 33.6% and 32.8% of earned premiums
in those respective periods. The increase in PAC ratio and decrease in the
overall expense ratio reflects, in part, a greater proportion of internal
costs being directly attributable to the acquisition of new and renewal
business.
The Company realized net income of $3.8 million from its equity investments
in the third quarter of 1997 compared to $0.2 million in the 1996 third
quarter. The 1996 number includes the Company's share of the net income of
Singer prior to the purchase of its majority interest in March 1997, from
which time the results of Singer have been consolidated.
Interest expense totaled $2.0 and $1.2 million in the third quarters of 1997
and 1996, respectively.
The Company's effective tax rate for the third quarter of 1997 was 25.9%
compared to 25.8% for the 1996 comparable period.
The Company's 1997 third-quarter net income increased 26.0% to $17.5 million
from $13.8 million in the third quarter of 1996. Third-quarter 1997 primary
earnings per share increased 17.0% to $0.90 per share from $0.77 per share
for the third quarter of 1996. This increase reflects increases in premiums
earned and investment income together with the consolidation of Singer offset
in part by an increase in the weighted average number of shares outstanding
compared to the prior year. Operating earnings per share, which excludes the
impact of capital gains and losses, increased 21.7% to $0.91 from $0.75 in
the 1996 third quarter.
The weighted average shares outstanding during the third quarter of 1997 was
19.4 million compared to 18.0 million for the third quarter of 1996.
NINE MONTHS ENDED SEPTEMBER 30, 1997 VS.
NINE MONTHS ENDED SEPTEMBER 30, 1996
Gross premiums written in the first nine months of 1997 were $77.5 million
compared with $69.3 million in the same period in 1996, representing an
increase of 11.9%.
Net premiums written increased 9.6% to $72.8 million in the first nine months
of 1997 from $66.5 million in the same period in 1996. Of the Company's net
premiums written in the first nine months of 1997, 36.0%, 20.6% and 43.4%
were derived from the reinsurance of municipal bonds, the reinsurance of
non-municipal obligations and the Company's other insurance lines,
respectively, compared to 36.5%, 22.1% and 41.4% during the same period in
1996.
In the first nine months of 1997, municipal new-issue volume was $153.5
billion, a 17.6% increase over the same period in 1996. The insured portion
of such new issues was 50.7% and 47.3% during the first nine months of 1997
and 1996, respectively. Total municipal bond refundings in the first nine
months of 1997 represented 25.4% of new-issue volume, up from 25.3% for the
1996 first nine months.
Earned premiums grew 11.3% to $62.1 million in the first nine months of 1997
from $55.8 million in the 1996 first nine months. The increase in earned
premiums reflected growth from the Company's other insurance lines, which
contributed $25.9 million of earned premiums in the 1997 first nine months,
compared to $21.8 million in the comparable 1996 nine months. Earned premiums
from refundings contributed $6.6 million (or 10.6%) of earned premiums in the
1997 first nine months compared to $7.1 million (or 12.7%) in the same period
in 1996. Deferred premium revenue grew to $276.9 million at September 30,
1997 from $266.2 million at December 31, 1996.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Net investment income increased 7.2% to $37.5 million in the first nine
months of 1997 from $35.0 million in the same period in 1996. This increase
resulted primarily from the growth in the Company's investment portfolio from
$764 million at September 30, 1996 to $835 million at September 30, 1997.
The average yields on the Company's investment portfolio were 6.17% and 6.37%
for the first nine months of 1997 and 1996, respectively. In addition, the
Company realized $(2.4) million of capital losses in the first nine months of
1997 compared with $0.7 million of capital gains in the first nine months of
1996.
The Company recognized revenues from disposition of assignments, through
securitization and other sales, of $20.3 million in the nine months of 1997.
Incurred losses and LAE were $6.9 million and $6.4 million in the first nine
months of 1997 and 1996, respectively.
The Company's expense ratio was 48.1% in the first nine months of 1997
compared to 49.4% in the first nine months of 1996. Policy acquisition costs
("PAC") were $21.6 million and $18.3 million for the first nine months of
1997 and 1996, respectively, representing 34.8% and 32.9% of earned premiums
in those respective periods. The increase in PAC ratio and decrease in the
overall expense ratio reflects, in part, a greater proportion of internal
costs being directly attributable to the acquisition of new and renewal
business.
Non-insurance expenses increase to $16.4 million in the first nine months of
1997 from $1.9 million during the same period in 1996 reflecting the
inclusion of Singer's expenses on a consolidated basis in since March 1997.
The Company realized net income of $4.1 million from its equity investments
in the first nine months of 1997 compared to a loss of $(0.5) million in the
1996 first nine months. These numbers include the Company's share of the net
income of Singer prior to the purchase of its majority interest in March
1997, from which time the results of Singer have been consolidated.
Interest expense totaled $5.3 and $4.1 million in the first nine months of
1997 and 1996, respectively.
The Company's effective tax rate for the first nine months of 1997 was 26.2%
compared to 25.9% for the 1996 comparable period.
The Company's 1997 first nine months net income increased 23.9% to $48.3
million from $39.0 million in the first nine months of 1996. The first nine
months of 1997 primary earnings per share increased 14.7% to $2.51 per share
from $2.19 per share for the first nine months of 1996. This increase
reflects increases in premiums earned and investment income together with the
consolidation of Singer and offset in part by an increase in the weighted
average number of shares outstanding compared to the prior year. Operating
earnings per share, which excludes the impact of capital gains and losses,
increased 19.7% to $2.59 from $2.16 in the 1996 first nine months.
The weighted average shares outstanding during the first nine months of 1997
was 19.2 million compared to 17.8 million for the first nine months of 1996.
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 September 30, 1997, the maximum amount of dividends available
from the Insurance Subsidiaries without prior approval of the
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
insurance regulatory authorities was $37.6 million. The Insurance
Subsidiaries paid dividends of $6.0 million to Enhance Financial in March,
June and September 1997.
The Company's cash flow from operations for the first nine months of 1997 was
$36.5 million compared to $43.5 million for the same period in 1996. The
Company's investment portfolio increased to $835 million at September 30,
1997 from $797 million at December 31, 1996 as a result of the cash flows
from operations and an increase in the unrealized gain on the
available-for-sale component of the portfolio during the first nine months of
1997.
The Company maintains a credit agreement with two major commercial banks
providing for borrowings of up to $60 million to be used for general
corporate purposes. As of September 30, 1997, the Company had borrowed $49.8
million under the credit agreement including $7.2 million of drawn downs
during the first nine months of 1997.
In March, June and September 1997, Enhance Financial declared and paid a
regular quarterly dividend of $.11 per share, totaling $6.1 million.
12
<PAGE>
PART II - OTHER INFORMATION
None
13
<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.
Dated: November 14, 1997 By: /s/ Arthur Dubroff
-------------------------------------
Arthur Dubroff
Executive Vice President (duly
authorized officer) and
Principal Financial Officer
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<DEBT-HELD-FOR-SALE> 585,459
<DEBT-CARRYING-VALUE> 214,939
<DEBT-MARKET-VALUE> 224,194
<EQUITIES> 878
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 860,794
<CASH> 5,015
<RECOVER-REINSURE> 1,694
<DEFERRED-ACQUISITION> 94,123
<TOTAL-ASSETS> 1,093,550
<POLICY-LOSSES> 30,595
<UNEARNED-PREMIUMS> 283,020
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 124,750
0
0
<COMMON> 1,922
<OTHER-SE> 552,474
<TOTAL-LIABILITY-AND-EQUITY> 1,093,550
62,080
<INVESTMENT-INCOME> 37,530
<INVESTMENT-GAINS> (2,433)
<OTHER-INCOME> 22,536
<BENEFITS> 6,886
<UNDERWRITING-AMORTIZATION> 21,576
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 65,393
<INCOME-TAX> 17,120
<INCOME-CONTINUING> 48,273
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 48,273
<EPS-PRIMARY> 2.51
<EPS-DILUTED> 2.48
<RESERVE-OPEN> 28,081
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 30,595
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
