SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
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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.
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(Exact name of registrant as specified in its charter)
New York 13-3333448
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
335 Madison Avenue, New York, New York 10017
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(Address of principal executive offices)
(Zip Code)
(212) 983-3100
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(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: 18,785,505 shares of common
stock, par value $.10 per share, as of May 11, 1998.
ENHANCE FINANCIAL SERVICES GROUP INC.
INDEX
PAGE
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Part I FINANCIAL INFORMATION (Unaudited)
Item 1. Financial Statements
Consolidated Balance Sheets -
March 31, 1998 and December 31, 1997............... 3
Consolidated Statements of Income -
Three months ended March 31, 1998 and 1997......... 4
Consolidated Statements of Cash Flows -
Three months ended March 31, 1998 and 1997......... 5
Consolidated Statement of Shareholders' Equity -
Three months ended March 31, 1998.................. 6
Notes to Consolidated Financial Statements.............. 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........... 8-9
PART II OTHER INFORMATION.......................................... 10
Signature ........................................................... 11
Exhibit 27. Financial data schedules
2
ENHANCE FINANCIAL SERVICES GROUP INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands except share amounts)
March 31, December 31,
----------------- ----------------
1998 1997
----------------- ----------------
(unaudited)
Assets
Investments:
Fixed maturities, held to maturity, at amortized cost
(market value $210,592 and $219,763) ........................................ $201,723 $210,436
Fixed maturities, available for sale, at market
(amortized cost $609,619 and $577,388) ...................................... 639,955 608,077
Common stock, at market (cost $498) ............................................ 833 833
Investment in affiliates ....................................................... 41,551 38,862
Other invested assets .......................................................... 24,871 29,050
Short-term investments ......................................................... 51,219 50,827
Cash and cash equivalents ...................................................... 18,224 21,405
----------- -----------
Total Investments ............................................................ 978,376 959,490
Premiums and other receivables .................................................... 31,876 29,958
Accrued interest and dividends receivable ......................................... 13,050 13,388
Deferred policy acquisition costs ................................................. 96,092 95,645
Federal income taxes recoverable .................................................. 3,676 3,366
Prepaid reinsurance premiums ...................................................... 5,435 6,281
Reinsurance recoverable on unpaid losses .......................................... 2,495 2,688
Receivable for securities ......................................................... 12,292 702
Other assets ...................................................................... 51,283 45,975
----------- -----------
TOTAL ASSETS ................................................................. $1,194,575 $1,157,493
=========== ===========
Liabilities and Shareholders' Equity
LIABILITIES
Losses and loss adjustment expenses ............................................... $36,050 $33,675
Reinsurance payable on paid losses and loss adjustment expenses ................... 3,433 3,479
Deferred premium revenue .......................................................... 296,698 287,535
Accrued profit commissions ........................................................ 4,207 3,768
Deferred income taxes ............................................................. 69,309 64,680
Long-term debt .................................................................... 75,000 75,000
Short-term debt ................................................................... 43,500 43,500
Payable for securities ............................................................ 11,958 5,318
Accrued expenses and other ........................................................ 55,470 59,145
----------- -----------
TOTAL LIABILITIES ............................................................. 595,625 576,100
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SHAREHOLDERS' EQUITY
Common stock-$.10 par value
Authorized-30,000,000 shares
Issued-19,557,530 and 19,335,935 shares ........................................ 1,956 1,934
Additional paid-in capital ........................................................ 236,947 230,440
Retained earnings ................................................................. 361,556 344,402
Unrealized gains .................................................................. 19,233 19,396
Treasury stock .................................................................... (20,742) (14,779)
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TOTAL SHAREHOLDERS' EQUITY ..................................................... 598,950 581,393
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ..................................... $1,194,575 $1,157,493
=========== ===========
See notes to consolidated financial statements
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ENHANCE FINANCIAL SERVICES GROUP INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(unaudited)
Three months ended
March 31,
------------------------------------
1998 1997
----------------- ----------------
Revenues
Net premiums written .................................................. $33,664 $21,627
Increase in deferred premium revenue .................................. (10,009) (2,125)
----------- -----------
Premiums earned .................................................. 23,655 19,502
Net investment income ................................................. 12,928 12,247
Net realized losses on sale of investments ............................ (324) (2,436)
Assignment sales ...................................................... 10,424 2,500
Other income .......................................................... 1,624 662
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Total revenues ................................................... 48,307 32,475
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Expenses
Losses and loss adjustment expenses ................................... 2,255 1,962
Policy acquisition costs .............................................. 8,115 6,969
Profit commissions .................................................... 439 199
Other operating expenses - insurance .................................. 3,426 1,827
- non-insurance .............................. 7,728 1,848
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Total expenses ................................................... 21,963 12,805
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Income from operations ................................................ 26,344 19,670
Equity in net income of affiliates .................................... 2,601 78
Foreign currency losses ............................................... 0 (1)
Interest expense ...................................................... (1,851) (1,356)
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Income before income taxes ....................................... 27,094 18,391
Income tax expense .................................................... 7,876 4,523
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Net income ....................................................... $19,218 $13,868
=========== ===========
Basic earnings per share .................................................. $1.03 $0.76
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Diluted earnings per share ................................................ $0.98 $0.74
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Basic weighted average shares outstanding ................................. 18,738 18,234
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Diluted weighted average shares outstanding ............................... 19,625 18,859
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See notes to unaudited consolidated financial statements
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ENHANCE FINANCIAL SERVICES GROUP INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(unaudited)
Three Months Ended
March 31,
-----------------------------------
1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ........................................................ $19,218 $13,868
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization, net ............................. (1,338) (2,190)
Loss on sale of investments, net ............................... 324 2,436
Equity in (net income) of affiliates ........................... (2,601) (78)
Change in assets and liabilities net of effects from
consolidation of previously unconsolidated affiliate:
Premiums and other receivables ......................... (1,918) 2,461
Accrued interest and dividends receivable .............. 338 1,079
Accrued expenses and other liabilities ................. (3,675) (1,754)
Deferred policy acquisition costs ...................... (447) (1,796)
Deferred premium revenue, net .......................... 10,009 2,126
Accrued profit commissions ............................. 439 199
Losses and loss adjustment expenses, net ............... 2,522 2,169
Other assets ........................................... (888) (152)
Income taxes, net ...................................... 4,509 880
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Net cash provided by operating activities ......................... 26,492 19,248
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ................................ (561) (179)
Proceeds from sales and maturities of investments ................. 30,089 62,471
Purchase of investments ........................................... (58,881) (63,068)
Purchases of short-term investments, net .......................... (392) (2,528)
Sales of other invested assets, net ............................... 4,179 --
Investment in affiliates .......................................... (88) (4,500)
Cash of previously unconsolidated affilliate ...................... -- 147
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Net cash used in investing activities ............................. (25,654) (7,657)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Receivable from affiliates ........................................ (2,521) (9,343)
Capital stock ..................................................... 6,529 4,467
Dividends paid .................................................... (2,064) (2,047)
Principal payment long-term debt .................................. -- 7,000
Purchase of treasury stock ........................................ (5,963) (2,544)
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Net cash used in financing activities ................................. (4,019) (2,467)
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Net change in cash and cash equivalents ............................... (3,181) 9,124
Cash and cash equivalents, beginning of period ........................ 21,405 5,385
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Cash and cash equivalents, end of period .............................. $18,224 $14,509
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See notes to unaudited consolidated financial statements
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ENHANCE FINANCIAL SERVICES GROUP INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(In thousands except share amounts)
(unaudited)
Common Stock Treasury Stock Additional
------------------------------ ----------------------------- Paid-in
Shares Amount Shares Amount Capital
--------------- ------------- ------------- ------------- --------------
Balance, December 31, 1997........... 19,335,935 $1,934 642,200 ($14,779) $230,440
Change in unrealized gain (loss).....
Dividends paid ($0.11 per share).....
Exercise of stock options............ 221,595 22 6,507
Purchase of treasury stock........... 115,000 (5,963)
Net income...........................
--------------- ------------- ------------- ------------- ---------------
Balance, March 31, 1998.............. 19,557,530 $1,956 757,200 ($20,742) $236,947
=============== ============= ============= ============= ==============
Unrealized Retained
Gains (Losses) Earnings Total
---------------- --------------- -------------
Balance, December 31, 1997........... $19,396 $344,402 $581,393
Change in unrealized gain (loss)..... (163) (163)
Dividends paid ($0.11 per share)..... (2,064) (2,064)
Exercise of stock options............ 6,529
Purchase of treasury stock........... (5,963)
Net income........................... 19,218 19,218
----------------------------------------------------
Balance, March 31, 1998.............. $19,233 $361,556 $598,950
================ =============== =============
See notes to consolidated financial statements
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ENHANCE FINANCIAL SERVICES GROUP INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
PERIODS ENDED MARCH 31, 1998 AND 1997
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, 1997 of Enhance Financial Services Group Inc. ("Enhance
Financial").
The accompanying unaudited consolidated financial statements have not been
audited by independent auditors in accordance with generally accepted auditing
standards. However, in the opinion of management such financial statements
include all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the financial position and results of operations of
Enhance Financial and Subsidiaries (collectively the "Company"). The results of
operations for the three months ended March 31, 1998 may not be indicative of
the results that may be expected for the year ending December 31, 1998.
2. DIVIDENDS DECLARED
In March 1998, Enhance Financial declared and paid a cash dividend of $.11 per
share totaling approximately $2,064,000.
3. COMMON STOCK
During the first quarter of 1998, Enhance Financial repurchased 115,000 shares
of its common stock outstanding at prices ranging from $42.57 to $56.43 as part
of its stock repurchase program.
Of the 115,000 shares repurchased in the first quarter, 25,000 were repurchased
under the Company's forward purchase agreement.
4. NEW ACCOUNTING STANDARD
The Company adopted Statement of Financial Accounting Standards No. 130 ("SFAS
130"), "Reporting Comprehensive Income," during the first quarter of 1998 as
required. SFAS 130 establishes standards for reporting and displaying
comprehensive income and its components in a set of financial statements.
Total comprehensive income for the three months ended March 31, 1998 and 1997
was $19.1 million and $5.8 million, respectively. Presently, other comprehensive
income represents changes in unrealized gains and losses on available for sale
securities.
5. RECLASSIFICATIONS
Certain of the 1997 amounts have been reclassified to conform to the current
year presentation.
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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 March 31, 1998 vs.
Three Months Ended March 31, 1997
Gross premiums written in the first three months of 1998 were $33.4 million
compared with $22.4 million in the same period in 1997, representing an increase
of 49.3%. This increase was attributable in large part to a large facultative
reinsurance transaction with one of the Company's primary insurers.
Net premiums written increased 55.7% to $33.7 million in the first three months
of 1998 from $21.6 million in the same period in 1997. Of the Company's net
premiums written in the first quarter of 1998, 48.3%, 16.5% and 35.2% were
derived from the reinsurance of municipal bonds, the reinsurance of
non-municipal obligations and the Company's other insurance lines, respectively,
compared to 42.1%, 12.0% and 45.9% during the same period in 1997.
Premiums earned grew 21.3% to $23.7 million in the first quarter of 1998 from
$19.5 million in the 1997 first quarter. Premiums earned from refundings
contributed $4.4 million (or 18.6%) of premiums earned in the 1998 first quarter
compared to $2.3 million (or 11.8%) in the same period in 1997. Deferred premium
revenue grew to $291.3 million at March 31, 1998 from $281.3 million at the
beginning of 1998.
Net investment income increased 5.6% to $12.9 million in the first three months
of 1998 from $12.2 million in the same period in 1997. This increase resulted
primarily from the growth in the Company's investment portfolio from $804
million at March 31, 1997 to $899 million at March 31, 1998. The average yields
on the Company's investment portfolio were 6.1% and 6.2% for the first quarters
of 1998 and 1997, respectively. In addition, the Company realized $0.3 million
of capital losses in the first quarter of 1998 compared with $2.4 million of
capital losses in the first quarter of 1997.
The Company recognized revenues from disposition of assignments, through
securitization and other sales, of $10.4 million in the first three months of
1998 compared to $2.5 million in the same period in 1997. The 1997 first quarter
revenues represent assignment sales subsequent to the Company's acquisition of a
majority ownership interest in Singer in March 1997.
Incurred losses and LAE were $2.3 million and $2.0 million in the first quarters
of 1998 and 1997, respectively.
The Company's expense ratio was 50.6% in the first quarter of 1998 compared to
46.1% in the 1997 first quarter. Policy acquisition costs ("PAC") were $8.1
million and $7.0 million for the first quarter of 1998 and 1997, respectively,
representing 34.3% and 35.7% of earned premiums in those respective periods.
-8-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The increase in the Company's expense ratio in the first quarter of 1998
compared to the same period in 1997 reflects the Company's continued investment
in the resources necessary to grow its insurance operations. The corresponding
decrease in the PAC ratio is attributable to a greater percentage of earned
premiums in the first quarter of 1998 coming from product lines with lower
acquisition costs.
The Company realized net income of $2.6 million from its equity investments in
the first quarter of 1998 compared to $0.1 million in the 1997 first quarter.
The 1997 amount includes the Company's share of the net income of Singer prior
to March 1997, from which time the results of Singer have been consolidated.
Interest expense totaled $1.9 million and $1.4 million in the first quarters of
1998 and 1997, respectively, reflecting an increase in the average borrowings
outstanding under the Company's line of credit in the 1998 first quarter.
The Company's effective tax rate for the first quarter of 1998 was 29.1%
compared to 24.6% for the 1997 comparable period. The increase in the tax rate
is reflective of a greater proportion of the Company's net income being
attributable to its diversification activities.
The Company's 1998 first-quarter net income increased 38.6% to $19.2 million
from $13.9 million in the first quarter of 1997. First-quarter 1998 diluted
earnings per share increased 33.2% to $.98 per share from $0.74 per share for
the first quarter of 1997. Diluted operating earnings per share, which excludes
the impact of capital and foreign exchange gains and losses, increased 20.8% to
$0.99 from $0.82 in the 1997 first quarter.
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 to its
shareholders and the repurchase of Common Stock primarily from dividends and
other payments from the Insurance Subsidiaries; manages cash flows associated
with the Company's diversification activities and draws on its line of credit
provided under the credit agreement described below. Payments of dividends to
Enhance Financial by the Insurance Subsidiaries are subject to restrictions
relating to statutory capital and surplus and net investment income. As of March
31, 1998, the maximum amount of dividends available from the Insurance
Subsidiaries without prior approval of the insurance regulatory authorities was
$15.5 million. During the first quarter of 1998 the Insurance Subsidiaries paid
dividends of $6.0 million to Enhance Financial.
The Company's cash flow from operations for the first quarter of 1998 was $26.5
million compared to $19.2 million for the same period in 1997. The Company's
investment portfolio increased to $899 million at March 31, 1998 from $876
million at December 31, 1997 primarily from operating cash flows.
The Company maintains a credit agreement with three major commercial banks
providing for borrowings of up to $75 million to be used for general corporate
purposes. As of March 31, 1998, the Company had $43.5 million outstanding under
the credit agreement.
In March 1998, Enhance Financial declared and paid a regular quarterly dividend
of $.11 per share, totaling $2.1 million.
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PART II - OTHER INFORMATION
None
10
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ENHANCE FINANCIAL SERVICES GROUP INC.
Date: May 14, 1998 By: /s/ Arthur Dubroff
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Arthur Dubroff
Executive Vice President (duly
authorized officer) and
Principal Financial Officer
11