<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 quarterly period ended June 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
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 No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 18,575,792 shares of common
stock, par value $.10 per share, as of August 1, 1997.
<PAGE>
ENHANCE FINANCIAL SERVICES GROUP INC.
INDEX
PAGE
Part I FINANCIAL INFORMATION (Unaudited)
Item 1. Financial Statements
Consolidated Balance Sheets -
June 30, 1997 and December 31, 1996.........................3
Consolidated Statements of Income -
Three and six months ended June 30, 1997 and 1996...........4
Consolidated Statements of Changes
in Shareholders' Equity -
Six months ended June 30, 1997..............................5
Consolidated Statements of Cash Flows -
Six months ended June 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 ...........8-11
Part II OTHER INFORMATION ............................................12
Signature................................................................13
Exhibit 27. Financial data schedules
<PAGE>
ENHANCE FINANCIAL SERVICES GROUP INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands except share amounts)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
--------------- ------------
<S> <C> <C>
Assets
Investments
Fixed maturities, held to maturity, at amortized cost
(market value $228,252 and $227,048)........................................ $219,759 $ 217,692
Fixed maturities, available for sale, at market
(amortized cost $547,073 and $526,973)...................................... 561,499 539,884
Common stock, at market (cost $498).......................................... 878 878
Investment in affiliates..................................................... 25,207 24,182
Short-term investments....................................................... 41,152 33,247
Cash and cash equivalents.................................................... 13,029 5,385
---------- ----------
Total investments........................................................ 861,524 821,268
Premiums and other receivables................................................. 23,950 22,472
Accrued interest and dividends receivable...................................... 13,075 11,434
Deferred policy acquisition costs.............................................. 91,804 87,325
Federal income taxes recoverable............................................... 2,584 1,428
Prepaid reinsurance premiums................................................... 2,882 2,793
Reinsurance recoverable on unpaid losses....................................... 1,660 1,823
Receivable from affiliates..................................................... 2,859 22,205
Receivable for securities...................................................... 2,690 2,370
Other assets................................................................... 49,090 10,325
---------- ----------
Total Assets............................................................. $1,052,118 $ 983,443
---------- ----------
---------- ----------
Liabilities and Shareholders' Equity
Liabilities
Losses and loss adjustment expenses............................................ $29,574 28,081
Reinsurance payable on paid losses and loss adjustment expenses................ 2,878 2,463
Deferred premium revenue....................................................... 276,445 268,997
Accrued profit commissions..................................................... 3,422 3,050
Current income taxes........................................................... 250 0
Deferred income taxes.......................................................... 46,011 46,402
Long-term debt................................................................. 75,000 75,000
Short-term debt................................................................ 49,282 42,575
Payable for securities......................................................... 5,172 2,083
Accrued expenses and other..................................................... 31,408 26,443
---------- ----------
Total Liabilities........................................................ 519,442 495,094
---------- ----------
Shareholders' Equity
Common stock-$.10 par value Authorized-30,000,000 shares....................... 1,917 1,853
Additional paid-in capital..................................................... 222,978 201,847
Retained earnings.............................................................. 310,501 283,791
Unearned compensation.......................................................... (20) (20)
Unrealized gains............................................................... 9,808 8,636
Treasury stock................................................................. (12,508) (7,758)
---------- ----------
Total Shareholders' Equity............................................... 532,676 488,349
---------- ----------
Total Liabilities and Shareholders' Equity............................... $1,052,118 $ 983,443
---------- ----------
---------- ----------
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
ENHANCE FINANCIAL SERVICES GROUP INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
<S> <C> <C> <C> <C>
1997 1996 1997 1996
--------- --------- --------- ---------
Revenues
Net premiums written.................................................. $ 25,698 $ 25,172 $ 47,325 $ 45,619
Increase in deferred premium revenue.................................. (4,426) (7,347) (6,551) (8,542)
--------- --------- --------- ---------
Premiums earned..................................................... 21,272 17,825 40,774 37,077
Net investment income................................................. 12,458 11,678 24,705 23,154
Net realized gains(losses) on sale of investments..................... 365 (1,119) (2,071) 241
Assignment sales...................................................... 10,332 0 12,500 --
Other income.......................................................... 732 576 1,726 1,057
--------- --------- --------- ---------
Total revenues...................................................... 45,159 28,960 77,634 61,529
--------- --------- --------- ---------
Expenses
Losses and loss adjustment expenses................................... 2,184 1,964 4,146 4,341
Policy acquisition costs.............................................. 7,440 5,876 14,409 12,198
Profit commissions.................................................... 173 132 372 461
Other operating expenses-insurance.................................... 2,755 2,863 4,582 5,706
-non-insurance................................ 7,424 434 9,272 1,148
--------- --------- --------- ---------
Total expenses...................................................... 19,976 11,269 32,781 23,854
--------- --------- --------- ---------
Income from operations................................................ 25,183 17,691 44,853 37,675
Equity in net income (loss) of affiliates............................. 174 (265) 252 (735)
Foreign currency losses............................................... (2) (122) (3) (169)
Interest expense...................................................... (1,918) (1,479) (3,274) (2,872)
--------- --------- --------- ---------
Income before income taxes.......................................... 23,437 15,825 41,828 33,899
Income tax expense.................................................... 6,484 3,945 11,007 8,780
--------- --------- --------- ---------
Net income.......................................................... 16,953 11,880 30,821 25,119
--------- --------- --------- ---------
--------- --------- --------- ---------
Primary earnings per share.............................................. $ 0.88 $ 0.66 $ 1.61 $ 1.42
--------- --------- --------- ---------
--------- --------- --------- ---------
Fully diluted earnings per share........................................ $ 0.88 $ 0.64 $ 1.61 $ 1.37
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See notes to 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, 1997
(In thousands except share amounts)
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK ADDITIONAL
---------------------- -------------------- PAID-IN UNEARNED UNREALIZED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION GAINS (LOSSES)
--------- ----------- --------- --------- ----------- ----------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996...... 18,533,325 $ 1,853 464,275 ($ 7,758) $ 201,847 ($ 20) $ 8,636
Change in unrealized gain
(loss)........................ 1,172
Dividends paid ($0.11 per
share)........................
Exercise of stock options....... 218,267 22 5,173
Issuance of common stock........ 416,912 42 15,958
Purchase of treasury stock...... 139,687 (4,750)
Net income......................
--------- ----------- --------- --------- ----------- --- ------
Balance, June 30, 1997.......... 19,168,504 $ 1,917 603,962 ($ 12,508) $ 222,978 ($ 20) $ 9,808
--------- ----------- --------- --------- ----------- --- ------
--------- ----------- --------- --------- ----------- --- ------
<CAPTION>
RETAINED
EARNINGS TOTAL
----------- ---------
<S> <C> <C>
Balance, December 31, 1996...... $ 283,791 $ 488,349
Change in unrealized gain
(loss)........................ 1,172
Dividends paid ($0.11 per
share)........................ (4,111) (4,111)
Exercise of stock options....... 5,195
Issuance of common stock........ 16,000
Purchase of treasury stock...... (4,750)
Net income...................... 30,821 30,821
----------- ---------
Balance, June 30, 1997.......... $ 310,501 $ 532,676
----------- ---------
----------- ---------
</TABLE>
5
<PAGE>
ENHANCE FINANCIAL SERVICES GROUP INC.
AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................................................................. $ 30,821 $ 25,119
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization, net.................................................. (4,488) (4,045)
(Gain)loss on sale of investments, net................................................ 2,071 (241)
Equity in (net income) loss of affiliates............................................. (252) 735
Compensation, restricted stock award program.......................................... -- 42
Change in assets and liabilities net of effects from consolidation of previously
unconsolidated affiliate:
Premiums and other receivables.................................................... 1,233 4,451
Accrued interest and dividends receivable......................................... (1,641) 581
Accrued expenses and other liabilities............................................ (850) (2,198)
Deferred policy acquisition costs................................................. (4,479) (2,922)
Deferred premium revenue, net..................................................... 7,359 8,467
Accrued profit commissions........................................................ 372 (969)
Losses and loss adjustment expenses, net.......................................... 2,071 (5,669)
Other assets...................................................................... 4,192 (1,235)
Income taxes, net................................................................. (1,640) 3,016
---------- ----------
Net cash provided by operating activities............................................... 34,769 25,132
---------- ----------
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment...................................................... (368) (387)
Proceeds from sales of investments...................................................... 298,321 540,108
Purchase of investments................................................................. (318,329) (546,198)
Purchases of short-term investments, net................................................ (7,547) (8,374)
Investment in affiliates................................................................ (4,500) (1,001)
Cash of previously unconsolidated affilliate............................................ 147 --
---------- ----------
Net cash used in investing activities................................................... (32,276) (15,852)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Receivable from affiliates.............................................................. 2,110 (6,466)
Capital stock........................................................................... 5,195 3,346
Short-term debt......................................................................... 6,707 (2,000)
Dividends paid.......................................................................... (4,111) (3,592)
Reissuance of treasury stock............................................................ -- 14,485
Purchase of treasury stock.............................................................. (4,750) (38)
---------- ----------
Net cash provided by financing activities................................................. 5,151 5,735
---------- ----------
Net change in cash and cash equivalents................................................... 7,644 15,015
Cash and cash equivalents, beginning of period............................................ 5,385 8,782
---------- ----------
Cash and cash equivalents, end of period.................................................. $ 13,029 $ 23,797
---------- ----------
---------- ----------
</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 JUNE 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 the 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 six months ended June 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 and June 1997, Enhance Financial declared and paid a cash dividend
of $.11 per share totaling approximately $4,111,000.
3. COMMON STOCK
In the first quarter of 1997, Enhance Financial issued approximately 420,000
shares of common stock to acquire an additional 37.5% interest in Singer Asset
Finance Company, L.L.C. ("Singer"), bringing Enhance Financial's total ownership
interest in Singer 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 and second quarters of 1997, Enhance Financial
repurchased 72,925 and 55,000 shares, respectively, of its common stock at
prices ranging from $35.00 to $41.38 per share as part of its stock
repurchase program. Additionally, 11,762 shares of common stock previously
held in trust in connection with the purchase of the additional interest in
Singer, 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, of the 55,000 total for the second
quarter of 1997, under this agreement.
4. RECLASSIFICATIONS
Certain of the 1996 amounts have been reclassified to conform to the current
year presentation.
7
<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 JUNE 30, 1997 VS.
THREE MONTHS ENDED JUNE 30, 1996
Gross premiums written in the second quarter of 1997 were $25.9 million
compared with $25.3 million in the same period in 1996, representing an increase
of 2.3%.
Net premiums written increased 2.1% to $25.7 million in the second quarter
of 1997 from $25.2 million in the same period in 1996. Of the Company's net
premiums written in the second quarter of 1997, 39.2%, 21.8% and 39.0% were
derived from the reinsurance of municipal bonds, the reinsurance of non-
municipal obligations and the Company's other insurance lines, respectively,
compared to 39.1%, 31.1% and 29.8% during the same period in 1996.
In the second quarter of 1997, municipal new-issue volume was $52.6 billion,
a 5.2% increase over the same period in 1996. The insured portion of such new
issues was 49.7% and 46.6% during the second quarters of 1997 and 1996,
respectively. Total municipal bond refundings in the second quarter of 1997
represented 15.5% of new-issue volume, down from 20.7% for the 1996 second
quarter.
Earned premiums grew 19.3% to $21.3 million in the second quarter of 1997
from $17.8 million in the 1996 second quarter. The increase in earned premiums
reflected growth from the Company's other insurance lines, which contributed
$9.2 million of earned premiums in the 1997 second quarter, compared to $7.2
million in the comparable 1996 quarter. Earned premiums from refundings
contributed $2.1 million (or 9.7%) of earned premiums in the 1997 second quarter
compared to $1.7 million (or 9.3%) in the same period in 1996. Deferred premium
revenue grew to $273.6 million at June 30, 1997 from $266.2 million at December
31, 1996.
Net investment income increased 6.7% to $12.5 million in the second
quarter of 1997 from $11.7 million in the same period in 1996. This increase
resulted primarily from the growth in the Company's investment portfolio from
$791 million at June 30, 1996 to $836 million at June 30, 1997. The average
yields on the Company's investment portfolio were 6.21% and 6.26% for the
second quarters of 1997 and 1996, respectively. In addition, the Company
realized $0.4 million of capital gains in the second quarter of 1997 compared
with $(1.1) million of capital losses in the second quarter of 1996.
The Company recognized revenues from disposition of assignments, through
securitization and other sales, of $10.3 million in the second quarter of 1997.
Incurred losses and LAE were $2.2 million and $2.0 million in the second
quarters of 1997 and 1996, respectively.
The Company's expense ratio was 48.7% in the second quarter of 1997 compared
to 49.8% in the 1996 second quarter. Non-insurance expenses increased to $7.4
million in the second quarter of 1997 from $0.4
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
million during the same period in 1996 reflecting the inclusion of Singer's
expenses on a consolidated basis in the 1997 second quarter. Non-insurance
expenses inlcude 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 $7.4 million and $5.9 million
for the second quarter of 1997 and 1996, respectively, representing 35.0% and
33.0% 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 $0.2 million from its equity investments
in the second quarter of 1997 compared to a loss of $(0.3) million in the 1996
second quarter. The 1996 amount 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 $1.9 and $1.5 million in the second quarters of
1997 and 1996, respectively.
The Company's effective tax rate for the second quarter of 1997 was 27.7%
compared to 24.9% for the 1996 comparable period. The increase in the tax rate
reflects, in part, the tax benefit from capital losses realized during the
second quarter of 1996.
The Company's 1997 second-quarter net income increased 42.7% to $17.0
million from $11.9 million in the second quarter of 1996. Second-quarter 1997
primary earnings per share increased 32.8% to $0.88 per share from $0.66 per
share for the second 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 22.6% to $0.87 from
$0.71 in the 1996 second quarter.
The weighted average shares outstanding during the second quarter of 1997
was 19.32 million compared to 17.98 million for the second quarter of 1996.
SIX MONTHS ENDED JUNE 30, 1997 VS.
SIX MONTHS ENDED JUNE 30, 1996
Gross premiums written in the first six months of 1997 were $48.3 million
compared with $47.5 million in the same period in 1996, representing an increase
of 1.7%.
Net premiums written increased 3.7% to $47.3 million in the first six months
of 1997 from $45.6 million in the same period in 1996. Of the Company's net
premiums written in the first six months of 1997, 40.5%, 17.3% and 42.2% were
derived from the reinsurance of municipal bonds, the reinsurance of non-
municipal obligations and the Company's other insurance lines, respectively,
compared to 33.8%, 26.9% and 39.3% during the same period in 1996.
In the first six months of 1997, municipal new-issue volume was $93.9
billion, a 2.2% increase over the same period in 1996. The insured portion of
such new issues was 51.6% and 46.8% during the first six months of 1997 and
1996, respectively. Total municipal bond refundings in the first six months of
1997 represented 19.1% of new-issue volume, down from 25.1% for the 1996 first
six months.
Earned premiums grew 10.0% to $40.8 million in the first six months of
1997 from $37.1 million in the first six months of 1996. The increase in
earned premiums reflected growth from the Company's other insurance lines,
which contributed $17.4 million of earned premiums in the first six months of
1997, compared to $14.2 million in the comparable 1996 period, offset in part
by a decrease in refunding activity from 1996 to 1997. Earned premiums from
refundings contributed $4.4 million (or 10.7%) of earned premiums in the
first six months of 1997 compared to $5.2 million (or 14.0%) in the same
period in 1996. Deferred premium revenue grew to $273.6 million at June 30,
1997 from $266.2 million at December 31, 1996.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Net investment income increased 6.7% to $24.7 million in the first six months
of 1997 from $23.2 million in the same period in 1996. This increase resulted
primarily from the growth in the Company's investment portfolio from $791
million at June 30, 1996 to $836 million at June 30, 1997. The average yields
on the Company's investment portfolio were 6.21% and 6.33% for the first six
months of 1997 and 1996, respectively. In addition, the Company realized
$(2.1) million of capital losses in the first six months of 1997 compared
with $0.2 million of capital gains in the first six months of 1996.
The Company recognized revenues from disposition of assignments, through
securitization and other sales, of $12.5 million in the six months of 1997.
Incurred losses and LAE were $4.1 million and $4.3 million in the first six
months of 1997 and 1996, respectively.
The Company's expense ratio was 47.5% in the first six months of 1997
compared to 49.5% in the first six months of 1996. Policy acquisition costs
("PAC") were $14.4 million and $12.2 million for the first six months of 1997
and 1996, respectively, representing 35.3% 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 $9.3 million in the first six months of
1997 from $1.1 million during the same period in 1996 reflecting the inclusion
of Singer's expenses on a consolidated basis since March 1997.
The Company realized net income of $0.3 million from its equity investments
in the first six months of 1997 compared to a loss of $(0.7) million in the
first six months of 1996. 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 $3.3 million and $2.9 million in the first six
months of 1997 and 1996, respectively.
The Company's effective tax rate for the first six months of 1997 was 26.3%
compared to 25.9% for the 1996 comparable period.
The Company's 1997 first six months net income increased 22.7% to $30.8
million from $25.1 million in the first six months of 1996. The first six months
of 1997 primary earnings per share increased 13.8% to $1.61 per share from $1.42
per share for the first six 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 19.0% to $1.68 from
$1.42 in the first six months of 1996.
The weighted average shares outstanding during the first six months of 1997
was 19.10 million compared to 17.72 million for the first six 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
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Insurance Subsidiaries are subject to restrictions relating to statutory capital
and surplus and net investment income. As of June 30, 1997, the maximum amount
of dividends available from the Insurance Subsidiaries without prior approval of
the insurance regulatory authorities was $14.2 million. The Insurance
Subsidiaries paid dividends of $6.0 million to Enhance Financial in March and
June 1997.
The Company's cash flow from operations for the first six months of 1997
was $34.8 million compared to $25.1 million for the same period in 1996. The
Company's investment portfolio increased to $836 million at June 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 six 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 June 30, 1997, the Company had borrowed $49.3 million under the
credit agreement including $7.0 million drawn down during the first six months
of 1997.
In March and June 1997, Enhance Financial declared and paid a regular
quarterly dividend of $.11 per share, totaling $4.1 million.
11
<PAGE>
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On June 5, 1997, 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 Withheld
Daniel Gross 17,529,841 39,296
Brenton W. Harries 17,529,697 39,440
David R. Markin 17,529,841 39,296
Robert P. Saltzman 17,528,250 40,887
Wallace O. Sellers 17,529,697 39,440
Richard J. Shima 17,527,526 41,611
Spencer R. Stuart 17,527,573 41,564
Adrian U. Sulzer 17,526,512 42,625
Allan R. Tessler 17,529,841 39,296
Frieda K. Wallison 17,529,841 39,296
Jerry Wind 17,528,250 40,887
(b) The 1997 Long-Term Incentive Plan for Key Employees was
approved by the shareholders by a vote of 13,538,274 in favor, 3,177,959
against and 20,324 abstaining.
(c ) The appointment of Deloitte & Touche LLP as the registrant's
outside auditor for fiscal year 1997 was ratified by a vote of 17,562,183 in
favor, 1,122 against and 5,832 abstaining.
<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, 1997 By: /s/ Arthur Dubroff
Arthur Dubroff
Executive Vice President (duly
authorized officer) and
Principal Financial Officer
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