10-Q/A 1 a2025978z10-qa.txt FORM 10-Q/A SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q/A /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) 0F THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2000 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the 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 proceeding 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: 38,152,607 shares of common stock, par value $.10 per share, as of May 9, 2000. ENHANCE FINANCIAL SERVICES GROUP INC. INDEX

Exhibit 4.2.6 Fifth Amendment to the Credit Agreement, dated as of March 31, 2000, among the registrant, Fleet National Bank as lender, swingline bank and as agent for the Banks, and The Bank of New York, Bank One, NA (Main Office Chicago) (formerly known as The First National Bank of Chicago), and Deutsche Bank AG, New York and/or Cayman Island Branches, as lenders. Exhibit 15. Letter from Deloitte & Touche LLP regarding unaudited interim financial information. Exhibit 27. Financial data schedules 2 ENHANCE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands except share amounts)

See notes to unaudited consolidated financial statements. 3 ENHANCE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In thousands except per share amounts) (unaudited) Three Months Ended March 31, ---------------------------- 2000 1999 ---- ---- REVENUES Net premiums written $ 34,147 $ 29,486 Increase in deferred premium revenue (7,892) (5,195) -------- -------- Premiums earned 26,255 24,291 Net investment income 15,537 13,554 Net realized losses (733) (3,890) Assignment sales 11,244 8,302 Other income 1,749 2,186 -------- -------- Total revenues 54,052 44,443 -------- -------- EXPENSES Losses and loss adjustment expenses 5,328 2,757 Policy acquisition costs 9,648 8,875 Profit commissions 431 114 Other operating expenses - insurance 5,122 2,924 - non-insurance 15,560 12,400 -------- -------- Total expenses 36,089 27,070 -------- -------- Income from operations 17,963 17,373 Equity in net income of affiliates 7,838 4,683 Minority interest 264 -- Foreign currency (losses)/gains (26) 13 Interest expense (3,825) (2,444) -------- -------- Income before income taxes 22,214 19,625 Income tax expense 1,866 1,472 -------- -------- Net income $ 20,348 $ 18,153 ======== ======== Basic earnings per share $ 0.53 $ 0.48 ======== ======== Diluted earnings per share $ 0.53 $ 0.46 ======== ======== Basic weighted average shares outstanding 38,108 37,919 ======== ======== Diluted weighted average shares outstanding 38,605 39,192 ======== ======== See notes to unaudited consolidated financial statements. 4 ENHANCE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY FOR THE THREE MONTHS ENDED MARCH 31, 1999 (In thousands except share and per share amounts) (unaudited)

See notes to unaudited consolidated financial statements. 5-A ENHANCE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY FOR THE THREE MONTHS ENDED MARCH 31, 2000 (In thousands except share and per share amounts) (unaudited)

See notes to unaudited consolidated financial statements. 5-B ENHANCE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (unaudited)

See notes to unaudited consolidated financial statements. 6 ENHANCE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PERIODS ENDED MARCH 31, 2000 AND 1999 (UNAUDITED) 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, 1999 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, 2000 may not be indicative of the results that may be expected for the year ending December 31, 2000. The Company retained Morgan Stanley Dean Witter & Company in February 2000 to work with the Company to identify and review options to increase shareholder value. The Company has identified and is implementing initiatives to (1) explore opportunities to exit and realize value from its non-insurance businesses and (2) explore opportunities that could maximize shareholder value for the entire Company. The Company's accounting estimates and assumptions used in the preparation of its financial statements may be materially affected if the Company completes a transaction resulting from any of these alternatives. 2. DIVIDENDS DECLARED In March 2000, Enhance Financial declared a cash dividend of $.06 per share totaling $2,288,676. 3. COMMON STOCK During the first quarter of 2000, Enhance Financial made no common stock repurchases. 4. COMPREHENSIVE INCOME Total comprehensive income for the three months ended March 31, 2000 and 1999 was $33.8 million and $13.7 million, respectively. Currently, other comprehensive income represents net income plus changes in unrealized gains and losses on available for sale securities, foreign currency translation adjustments and unearned compensation. 7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PERIODS ENDED MARCH 31, 2000 AND 1999 (UNAUDITED) 5. INCOME TAXES The Company files a consolidated federal income tax return with its includable subsidiaries. Subject to the provisions of a tax sharing agreement, income tax allocation is based upon separate return calculations. The Company has not recorded a deferred federal income tax liability for the three-month period ended March 31, 2000 of $5.2 million for the tax benefits associated with the Company's investment in a portfolio of residual mortgage-backed securities that consist of residual interests in real estate mortgage investment conduits ("REMICs"), which was acquired during the second quarter of 1999, because the Company believes that, through the use of a tax strategy, the tax law provides a means by which income tax benefits associated with this portfolio will not result in future tax obligations, and the Company intends to use such means. For the quarter ended March 31, 2000, the Company realized $5.2 million of tax benefits from the portfolio of REMICs and $0.3 million of investment income from the portfolio. The Company's effective tax rate for the first quarter of 2000 was 8.4% compared to 7.5% for the comparable period of 1999. 6. RECLASSIFICATIONS Certain of the 1999 amounts have been reclassified to conform to the current year presentation. 7. SEGMENT REPORTING The Company has two reportable segments: insurance and asset-based businesses. The insurance segment provides credit-related insurance coverage to meet the needs of customers in a wide variety of domestic and international markets. The Company's largest insurance business is the provision of reinsurance to the monoline primary financial guaranty insurers for both municipal bonds and non-municipal obligations. The Company also provides trade credit reinsurance, financial responsibility bonds, excess-SIPC insurance and direct financial guaranty insurance. The asset-based businesses segment deals primarily with credit-based servicing and securitization of assets in underserved markets, in particular, the origination, purchase, servicing and securitization of special assets, including lottery awards, viatical settlements, structured settlement payments, sub-performing/non-performing and seller financed residential mortgages and delinquent consumer assets. The Company's reportable segments are strategic business units that are managed separately as each business requires different marketing and sales expertise. The Company evaluates performance based on profit or loss from operating earnings, which it defines as net income excluding the impact of capital and foreign exchange gains and losses, and certain non-recurring items, net of taxes. Summarized financial information concerning the Company's operating segments is presented in the following tables: In thousands

8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PERIODS ENDED MARCH 31, 2000 AND 1999 (UNAUDITED) The following are reconciliations of reportable segment revenues and profit to Enhance Financial's consolidated totals: In thousands

8. LITIGATION A complaint was filed against Enhance Financial and Asset Guaranty Insurance Company ("Asset Guaranty") on April 4, 2000 in the United States District Court for the District of Maryland by Creditrust Corporation ("Creditrust") and its president alleging that a senior employee of Enhance Financial had posted messages on an internet message board containing derogatory, false, misleading, and/or confidential information regarding Creditrust, in violation of various state and federal common law and statutory duties. This misconduct alleged was unauthorized and contrary to Company policy, and the employee identified in the lawsuit no longer works for the Company. Nonetheless, the complaint alleges that the message board activity was undertaken on behalf of the Company to further its competitive interests. While analysis of this matter is ongoing, the Company believes that Creditrust's claims against Enhance Financial and Asset Guaranty are not well founded and that the outcome of this litigation will not be material to the Company's business. 9 INDEPENDENT ACCOUNTANTS' REVIEW REPORT To the Board of Directors and Shareholders of Enhance Financial Services Group Inc. New York, NY 10017 We have reviewed the accompanying consolidated balance sheet of Enhance Financial Services Group Inc. and subsidiaries (the "Company") as of March 31, 2000, and the related consolidated statements of income, shareholders' equity and cash flows for the three-month periods ended March 31, 2000 and 1999. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to such consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America. We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of the Company as of December 31, 1999, and the related consolidated statements of income, shareholders' equity and cash flows for the year then ended (not presented herein); and in our report dated March 27, 2000, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 1999 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. Deloitte & Touche LLP New York, New York May 15, 2000 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company divides its business operations into two reportable operating segments: insurance businesses and asset-based businesses. The insurance businesses of the Company, which are conducted through its subsidiaries Enhance Reinsurance Company ("Enhance Re") and Asset Guaranty Insurance Company ("Asset Guaranty" and collectively with Enhance Re, the "Insurance Subsidiaries"), include principally the reinsurance of financial guaranties of municipal and asset backed debt obligations issued by monoline financial guaranty insurers. In addition, the Company is engaged in other insurance, reinsurance and non-insurance businesses that utilize the Company's expertise in performing sophisticated analyses of complex, asset-based risks. The Company's other insurance businesses involve the issuance of direct financial guaranties of smaller municipal debt obligations, trade credit reinsurance, financial institutions credit insurance (which includes excess-SIPC/excess-ICS and related type bonds) and financial responsibility bonds. Some of these other insurance businesses are conducted by Van-American Insurance Company ("Van-Am"), a Kentucky-domiciled insurer that writes reclamation bonds for the coal mining industry, and surety bonds covering the closure and post-closure obligations of landfill operators. The Company also provides surety and other credit-based insurance products through its 45% ownership of SBF Participacoes Ltda. The Company operates its asset-based businesses primarily through its consolidated subsidiaries, Singer Asset Finance Company, LLC ("Singer") and Enhance Life Benefits LLC ("ELB"), and minority owned subsidiaries, Credit-Based Asset Servicing and Securitization LLC ("C-BASS") and Sherman Financial Group LLC ("Sherman"). The Company's asset-based businesses include the origination, purchase, servicing and/or securitization of special assets, including state lottery awards, structured settlement payments, and viatical settlements; sub-performing/non-performing and seller-financed residential mortgages, real estate and subordinated residential mortgage-backed securities; and delinquent unsecured consumer assets. The Company has followed a business strategy of maintaining its financial guaranty business, both primary and reinsurance, and its commitment to intensive and prudent credit underwriting and conservative investment policies; utilizing its expertise in underwriting credit risks to expand and develop its other insurance businesses; and continuing to pursue its asset-based businesses and diversification efforts utilizing its credit analysis skills in areas that the Company believes have strong profit and growth potential relative to risk. RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2000 VS. THREE MONTHS ENDED MARCH 31, 1999 Interest rates increased between the first quarters of 1999 and 2000, reducing refundings of bonds in place and also the volume of new issues. In the first quarter of 2000, municipal new-issue volume was $40.4 billion, a decline of 30.2% from the same period in 1999. The insured portion of such new issues was 41.6% and 50.9% during the first quarters of 2000 and 1999, respectively. Total municipal bond refundings were $3.2 billion in the first quarter of 2000, approximately 7.9% of new-issue volume, down from 23.7% for the first quarter of 1999 due to higher interest rates. Gross premiums written in the first quarter of 2000 increased 18.2% to $35.0 million from $29.6 million in the same period in 1999. Net premiums written increased 15.6% to $34.1 million in the first quarter of 2000 from $29.5 million in the same period in 1999. A 123.1% growth in the direct financial guaranty premium and 52.6% in other insurance premium offset the 23.6% decrease in municipal reinsurance premiums. 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table shows net premiums written by line of business for the periods presented: 1(ST) Quarter ----------------------------------------------------------------------------- Net Premiums Written (dollars in millions) 2000 1999 $ Change % Change ----------------------------------------------------------------------------- Municipal Reinsurance $ 8.4 $11.0 $(2.6) (23.6)% Non-Municipal Reinsurance 7.9 6.7 1.2 17.9 Direct Financial Guaranty 8.7 3.9 4.8 123.1 Trade Credit 6.2 6.0 0.2 3.3 Other 2.9 1.9 1.0 52.6 --------------------------------------------- Total $34.1 $29.5 $4.6 15.6% ============================================= Net premiums earned grew 8.2% to $26.3 million in the first quarter of 2000 from $24.3 million in the first quarter of 1999. The growth in premiums earned is attributable to increased writings in the direct financial guaranty and non-municipal reinsurance. Earned premiums from refundings contributed $2.2 million (or 8.4%) of earned premiums in the first quarter of 2000 compared to $2.0 million (or 8.2%) in the same period in 1999. Deferred premium revenue, net of prepaid reinsurance premiums, grew to $345.2 million at March 31, 2000 from $337.3 million at December 31, 1999 and $313.4 at March 31, 1999. The following table shows net premiums earned by line of business for the periods presented: 1(ST) Quarter ----------------------------------------------------------------------------- Net Premiums Earned (dollars in millions) 2000 1999 $ Change % Change ----------------------------------------------------------------------------- Municipal Reinsurance $ 7.9 $ 8.1 $(0.2) (2.5)% Non-Municipal Reinsurance 7.0 5.8 1.2 20.7 Direct Financial Guaranty 3.0 2.1 0.9 42.9 Trade Credit 5.2 5.1 0.1 2.0 Other 3.2 3.2 0.0 0.0 --------------------------------------------- Total $26.3 $24.3 $2.0 8.2% ============================================= Net investment income increased 14.0% to $15.5 million in the first quarter of 2000 from $13.6 million in the same period in 1999. This increase resulted primarily from the growth in the Company's fixed maturities portfolio and short-term investments from $941.0 million at March 31, 1999 to $1,024.6 million at March 31, 2000. The investment yields on the Company's investment portfolio were 5.9% and 6.1% for the first quarters of 2000 and 1999, respectively. In addition, the Company realized $0.7 million of capital losses in the first quarter of 2000 compared with $3.9 million of capital losses in the first quarter of 1999. The 2000 capital loss was due to net capital losses on sale of bonds, whereas the 1999 capital loss includes the recognition of a $4.7 million pre-tax write down of two holdings in Commercial Financial Services, Inc. ("CFS"). CFS is currently protected under Chapter 11 of the bankruptcy code as an outgrowth of allegations of improper activities. CFS continues to service the debt on a current basis, and the Company does not expect any further write-offs. The Company recognized revenues from disposition of assignments, through securitization and other sales, of $11.2 million in the first quarter of 2000 compared to $8.3 million in the first quarter of 1999. The increase is attributable to securitzed transactions by Singer in the states of Florida and Texas. Incurred losses and LAE were $5.3 million in the first quarter of 2000 compared to $2.8 million for the same period of 1999. The increase is primarily due to increases in losses for the Company's trade credit line of business of $1.0 million, non-specific reserves for $1.0 million and Van Am of $1.2 million. 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company's insurance expense ratio was 57.9% in the first quarter of 2000 compared to 49.0% in the first quarter of 1999. The increase in the insurance operating expense is due to expenses for severance, outplacement and other assistance related to Company-wide layoffs in the first quarter. Non-insurance expenses increased to $15.6 million in the first quarter of 2000 from $12.4 million during the same period in 1999. The increase reflects restructuring costs and expenses associated with the management of the Company's REMIC investment ($1.2 million), for which no comparable expense was included in the first quarter of 1999, and increased rent expense. Policy acquisition costs ("PAC") were $9.6 million and $8.9 million for the first quarters of 2000 and 1999, respectively, each representing 36.5% of earned premiums in the respective periods. The Company realized income of $7.8 million from its investments in affiliates in the first quarter of 2000 compared to $4.7 million in the first quarter of 1999, primarily as a result of increased income from C-BASS. Interest expense totaled $3.8 million and $2.4 million in the first quarters of 2000 and 1999, respectively, reflecting the increase in the Company's short-term debt outstanding. The Company's first quarter 2000 net income increased 11.5% to $20.3 million from $18.2 million in the first quarter of 1999. First quarter 2000 basic and diluted earnings per share increased 10.4% and 15.2%, respectively, to $.53 and $.53 from $.48 and $.46 in the first-quarter of 1999. The increase in net earnings is due to the increase in premiums earned, investment income, assignment sales and equity earnings partially offset by increased losses and operating expenses. For the three-month period ended March 31, 2000, the Company realized $5.2 million of tax benefits from the portfolio of residential mortgage-backed securities that consist of residual interests in real estate mortgage investment conduits ("REMICs") acquired in April 1999. With respect to the acquired tax benefits, as of March 31, 2000, the Company has recorded a $132.8 million deferred tax asset and a related deferred credit. The deferred tax asset is reduced and the deferred credit is amortized to income (as a reduction of current tax expense) as the tax benefits are realized (approximately $5.2 million for the three-month period ended March 31, 2000). In addition, for the three-month period ended March 31, 2000, the Company realized $0.3 million of investment income from the portfolio. At March 31, 2000, the Company did not record a deferred federal income tax liability of $5.2 million for tax losses of $15.0 million associated with the portfolio because the tax law provides a means, through the use of a particular tax strategy which the Company intends to use, by which income tax benefits associated with this portfolio will not result in future tax obligations. The tax strategy involves numerous assumptions and requires that certain steps occur in a specific order. Although the Company believes that the assumptions are reasonable and that the Company can cause the required steps to occur in the proper order, certain of the assumptions and steps are outside the control of the Company and therefore there is no assurance that all the assumptions will be satisfied or all of the steps will occur in the proper order. In addition, this tax strategy is based on current law and there is no assurance that new laws, regulations or court decisions will not be enacted or occur that render the tax strategy ineffective. If (i) the Company were to dispose of the portfolio other than in accordance with its currently anticipated tax strategy, (ii) the Company were to determine that the Company would be unable or it would be unadvisable to utilize the tax strategy, (iii) current tax law were to change, or (iv) there were an unfavorable determination by the IRS regarding the Company's tax strategy, the Company may be required to record a deferred federal income tax liability for and/or recapture all or a significant portion of the tax losses associated with the portfolio that the Company previously recognized (an aggregate of $19.6 million as of March 31, 2000). The diluted weighted average shares outstanding during the first quarter of 2000 were 38.6 million compared to 39.2 million during the first quarter of 1999. Singer and ELB combined contributed net income of $.03 per share in the first quarter of 2000 compared to a net loss of $.03 per share during the comparable period in 1999. C-BASS contributed $.19 per share to Enhance Financial's first quarter 2000 net income, compared to $.09 per share during the comparable period in 1999. Sherman had a $.01 per share loss, compared to $.02 per share loss during the comparable period in 1999. LIQUIDITY AND CAPITAL RESOURCES As a holding company, Enhance Financial funds 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 (as defined below). Payments of dividends by the Insurance Subsidiaries are subject to restrictions relating to statutory capital and surplus and net investment income. During the first quarter of 2000, Enhance Financial received $5.5 million in dividends from Enhance Re ($4.5 million) and Asset Guaranty ($1.0 million). As of March 31, 2000, the maximum amount of dividends that may be paid in the subsequent quarter ending June 30, 2000 from the Insurance Subsidiaries without prior approval of the insurance regulatory authorities is $12.4 million. Payments of dividends by Enhance Financial to its shareholders are further restricted by the terms of the credit agreement. At March 31, 2000, the maximum amount of the dividends that may be paid in the second quarter (6/30/00) by Enhance Financial to its shareholders in compliance with the terms of such agreement is $5.7 million. In the first quarter of 2000, Enhance Financial declared cash dividends of $.06 per share, aggregating $2,288,676. 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS As of March 31, 2000, the statutory policyholders' surplus of Enhance Re and Asset Guaranty was $221.5 million and $87.4 million, respectively, compared to the minimum $68.4 million required by each under the Insurance Law and compared to $214.8 million and $90.6 million at December 31, 1999, respectively. The Company's cash flow provided by operations for the first quarter of 2000 was $11.6 million compared to cash flow used for operations of $10.4 million for the same period in 1999. The increase in cash flow provided from operations of $22.0 million for the same period in 1999 was primarily due to a favorable change in accrued interest and expense of $1.1 million, an increase in accrued expenses of $14.0 million, and an increase in deferred premium revenue of $2.7 million. The carrying value of the Company's investment portfolio (total investments plus cash and cash equivalents) increased to $1,028.8 million at March 31, 2000 from $972.6 million at December 31, 1999 primarily as a result of the cash flows from operations and a decrease in unrealized losses. Enhance Financial is party to a credit agreement (amended March 31, 2000) (the "Credit Agreement") with major commercial banks providing for borrowing by Enhance Financial of up to $150 million to be used for general corporate purposes, of which $50 million is due May 30, 2000 and the balance of $100 million is due June 27, 2000. The Credit Agreement provides for a revolving credit facility under which individual advances may be converted, at Enhance Financial's discretion, into a four-year term loan. The total outstanding under the Credit Agreement at March 31, 2000 is $137 million. The Credit Agreement requires that the proceeds from asset sales be applied toward repayment of amounts outstanding. The Company and Mortgage Guaranty Insurance Company ("MGIC") each own 46% interests in C-BASS. The Company had contributed $55.5 million to C-BASS from its inception in 1996 through March 31, 2000 and expects that it will provide additional funding with MGIC on a pari passu basis with MGIC. In December 1998, the Company and MGIC formed Sherman, a joint venture in which the Company and MGIC, each own 45% interests. The Company has committed to contribute a total of $20.2 million to Sherman, of which $9.1 million has been contributed as of March 31, 2000, including $1.6 million in cash and the Company's contribution of the assets or equity in the subsidiaries of Alegis Group Inc. The Company expects that it will provide additional funding in addition to its original contribution to Sherman from time to time. In May 1999, the Company guaranteed repayment by Sherman of up to 50% of the amount outstanding under a $50 million revolving credit facility that Sherman obtained from a major commercial bank. As of March 31, 2000, the outstanding principal balance under the facility was approximately $47.0 million, of which the Company has guaranteed $23.5 million. In July 1998, the Company acquired an 80% ownership interest in AGS Financial LLC. The Company is obligated to pay $3.1 million, as and when needed, of which $2.1 million has been paid as of March 31, 2000. Based on the cash flow of the Company in recent years, the Company's current financial condition and the Company's expectation as to its net premium written, the Company does not expect the dividends from the Insurance Subsidiaries and other subsidiaries in 2000 will provide adequate liquidity to enable Enhance Financial to meet its debt obligations, its general overhead expenses, its expenditures for capital improvements and its commitments to fund the operations of its asset-based businesses. The Company for the short term has increased bank borrowings and proposes to address the situation in the longer term, both for 2000 and thereafter, through a combination of capital market transactions and the sale of assets. The success of this effort will depend on numerous factors, many beyond the Company's control, including general capital market conditions, interest rate environment, and insurance regulatory constraints, and there can be no assurance that the Company will be successful in resolving the situation in a manner that will not involve substantial expense, dilution to its shareholders and/or a restructuring of the Company. 14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In August 1999, Moody's Investor Service, Inc. ("Moody's") downgraded Enhance Financial's senior long-term debt rating from Aa3 to A2. In February 2000, Moody's placed such debt rating under review for possible further downgrade. The Company does not believe that the August 1999 downgrade has had or should have a material adverse effect on the Company. However, the downgrade could result in increased cost to Enhance Financial for borrowing funds or otherwise raising capital. Similarly, any additional downgrade of senior long-term debt rating of Enhance Financial could increase the cost of borrowing funds or otherwise raising capital, or could make certain types of borrowings or capital unavailable to the Company, which could have a material adverse effect on the Company. The Company retained Morgan Stanley Dean Witter & Company in February to work with the Company to identify and review options to increase shareholder value. The Company has identified and is implementing initiatives to (1) explore opportunities to exit and realize value from its non-insurance businesses and (2) explore opportunities that could maximize shareholder value for the entire Company. 15 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk. As of March 31, 2000 there have been no material changes in the Company's market risk exposure as described in the Management's Discussion and Analysis contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1999. PART II: OTHER INFORMATION ITEM 1. Legal Proceedings. A complaint was filed against Enhance Financial and Asset Guaranty on April 4, 2000 by Creditrust in the United States District Court for the District of Maryland. See Note 8 to Notes to Consolidated Financial Statements Periods Ended March 31, 2000 and 1999 (unaudited). ITEM 4. Submission of Matters to a Vote of Security Holders None. ITEM 6. Exhibits and reports on Form 8-K. (a) Exhibits Exhibit 4.2.6. Fifth Amendment to the Credit Agreement, dated as of March 31, 2000, among the registrant, Fleet National Bank as lender, swingline bank and as agent for the Banks, and The Bank of New York, Bank One, NA (Main Office Chicago) (formerly known as The First National Bank of Chicago), and Deutsche Bank AG, New York and/or Cayman Island Branches, as lenders. Exhibit 15. Letter from Deloitte & Touche LLP regarding unaudited interim financial information. Exhibit 27. Financial data schedules. (b) Reports on Form 8-K None. 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. Date: September 20, 2000 ENHANCE FINANCIAL SERVICES GROUP INC. By: /s/ Richard P. Lutenski ------------------------------------ Richard P. Lutenski Executive Vice President (duly authorized officer) and Chief Financial Officer 16

ENHANCE FINANCIAL SERVICES GROUP INC 10-Q/A