<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    Form 10-Q

                                   (Mark One)

           |X| QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) 0F THE
                         SECURITIES EXCHANGE ACT OF 1934

                For the quarterly period ended September 30, 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: 38,222,467 shares of
common stock, par value $.10 per share, as of November 14, 2000.
<PAGE>

                      ENHANCE FINANCIAL SERVICES GROUP INC.

                                      INDEX

<TABLE>
<CAPTION>

                                                                                                        PAGE
<S>                                                                                                     <C>
PART I   FINANCIAL INFORMATION


Item 1.  Financial Statements

Consolidated Balance Sheets - September 30, 2000 and December 31, 1999 ...............................    3

Consolidated Statements of Income - Three months and nine months ended September 30, 2000
and 1999 .............................................................................................    4

Consolidated Statements of Shareholders' Equity - Nine months ended September 30, 2000 and 1999 ......  5-6

Consolidated Statements of Cash Flows - Nine months ended September 30, 2000 and 1999 ................    7


Notes to Consolidated Financial Statements ...........................................................  8-16

Independent Accountants' Review Report................................................................   17


Item 2. Management's Discussion and Analysis of Financial Condition
            and Results of Operations .................................................................  18-28

Item 3. Quantitative and Qualitative Disclosures About Market Risk.....................................   29

PART II OTHER INFORMATION

Item 1. Legal Proceedings..............................................................................   29

Item 6. Exhibits and reports on Form 8-K...............................................................   29

Signature .............................................................................................   30
</TABLE>


Exhibit 2      Agreement and Plan of Merger, dated November 13, 2000, among the
               registrant, Radian Group Inc. and GOLD Acquisition Corporation

Exhibit 10.10. Partnership Interest Purchase Agreement, dated September 28,
               2000, by and among the Registrant and Enhance C-BASS Residual
               Finance Corporation, as sellers, Credit-Based Asset Servicing
               and Securitization LLC, as an accommodating party, and
               Residential Funding Corporation and RFC Acquisition Corp., as
               purchasers.

Exhibit 15     Letter from Deloitte & Touche LLP regarding unaudited interim
               financial information

Exhibit 27     Financial data schedules

                                       2
<PAGE>

                      ENHANCE FINANCIAL SERVICES GROUP INC.
                                AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                       (In thousands except share amounts)

<TABLE>
<CAPTION>

                                                                             September 30, 2000   December 31, 1999
                                                                             ------------------   -----------------
                                                                                (unaudited)
<S>                                                                             <C>                   <C>
ASSETS
   Investments:
     Fixed maturities, held to maturity, at amortized cost (market value
       $160,904 and $181,474)                                                   $   157,202           $   177,607
     Fixed maturities, available for sale, at market (amortized cost $819,406
       and $778,751)                                                                813,934               745,963
     Other invested assets                                                           11,055                10,935
     Common stock, at market (cost $498)                                                839                   839
     Short-term investments                                                          87,449                34,657
                                                                                -----------           -----------
   Total Investments                                                              1,070,479               970,001
   Cash and cash equivalents                                                          1,562                 2,558
   Accrued interest receivable                                                       13,694                18,977
   Investment in affiliates                                                         139,938               108,001
   Premiums receivable                                                               15,248                22,959
   Furniture, fixtures and equipment                                                  8,342                10,206
   Deferred policy acquisition costs                                                126,270               119,213
   Federal income taxes recoverable                                                   6,073                 6,713
   Prepaid federal income tax                                                        24,709                24,797
   Deferred income taxes - net                                                       67,634                68,587
   Prepaid reinsurance premiums                                                       6,663                 8,772
   Reinsurance recoverable on unpaid losses                                             264                 2,286
   Receivable from affiliates                                                         1,316                 1,170
   Goodwill                                                                              --                24,196
                                                                                -----------           -----------
   Other assets                                                                      71,440                65,496
                                                                                -----------           -----------
TOTAL ASSETS                                                                    $ 1,553,632           $ 1,453,932
                                                                                ===========           ===========

LIABILITIES, DEFERRED CREDIT AND SHAREHOLDERS' EQUITY
LIABILITIES
   Losses and loss adjustment expenses                                          $    66,087           $    51,970
   Reinsurance payable on paid losses and loss adjustment expenses                    6,797                 8,997
   Deferred premium revenue                                                         355,342               346,088
   Accrued profit commissions                                                         2,814                 2,554
   Long-term debt                                                                    75,000                75,000
   Short-term debt                                                                  174,382               113,941
   Payable to affiliates                                                              5,230                    --
   Accrued expenses and other liabilities                                            44,915                41,078
                                                                                -----------           -----------

TOTAL LIABILITIES                                                                   730,567               639,628
                                                                                -----------           -----------


DEFERRED CREDIT                                                                     122,250               138,000
                                                                                -----------           -----------

SHAREHOLDERS' EQUITY
   Common stock-$.10 par value, Authorized-100,000,000 shares,
     issued-40,158,025 and 40,007,404 shares                                          4,016                 4,001
   Additional paid-in capital                                                       254,763               253,109
   Retained earnings                                                                480,688               477,715
   Accumulated other comprehensive loss                                              (6,066)              (25,935)
   Treasury stock                                                                   (32,586)              (32,586)
                                                                                -----------           -----------

TOTAL SHAREHOLDERS' EQUITY                                                          700,815               676,304
                                                                                -----------           -----------
TOTAL LIABILITIES, DEFERRED CREDIT AND SHAREHOLDERS' EQUITY                     $ 1,553,632           $ 1,453,932
                                                                                ===========           ===========
</TABLE>

            See notes to unaudited consolidated financial statements.

                                       3
<PAGE>

                      ENHANCE FINANCIAL SERVICES GROUP INC.
                                AND SUBSIDIARIES

                        CONSOLIDATED STATEMENTS OF INCOME
                     (In thousands except per share amounts)
                                   (unaudited)

<TABLE>
<CAPTION>

                                                         Three Months Ended        Nine Months Ended
                                                           September 30,              September 30,
                                                           -------------              -------------
                                                         2000         1999         2000         1999
                                                         ----         ----         ----         ----
<S>                                                   <C>          <C>          <C>          <C>
REVENUES
   Net premiums written                               $  22,551    $  28,928    $  92,712    $  93,358
   Decrease (increase) in deferred premium
     revenue                                              3,450       (4,031)     (11,363)     (18,064)
                                                      ---------    ---------    ---------    ---------
     Premiums earned                                     26,001       24,897       81,349       75,294
   Net investment income                                 16,344       15,274       47,277       42,762
   Net realized gains (losses) on sale of
     investments                                            101         (140)      (1,357)      (4,480)
   Assignment revenue                                      (751)      12,215        9,125       28,521
   Other income                                            (597)      (1,271)       2,588        4,940
                                                      ---------    ---------    ---------    ---------
     Total revenues                                      41,098       50,975      138,982      147,037
                                                      ---------    ---------    ---------    ---------

EXPENSES
   Losses and loss adjustment expenses                    2,071        3,837       22,699        9,223
   Policy acquisition costs                              10,617        8,915       31,127       27,022
   Profit commissions                                       230          155        1,237          711
   Other operating expenses - insurance                   5,233        3,912       14,061       12,114
                            - non-insurance              15,772       14,914       79,875       41,332
                                                      ---------    ---------    ---------    ---------
        Total expenses                                   33,923       31,733      148,999       90,402
                                                      ---------    ---------    ---------    ---------

Income (loss) from operations                             7,175       19,242      (10,017)      56,635
   Equity in net income of affiliates                     1,691        4,460       21,128       17,026
   Minority interest                                         --           --          253           --
   Foreign currency losses                                  (50)         (27)         (98)         (33)
   Interest expense                                      (4,168)      (3,070)     (12,302)      (7,998)
                                                      ---------    ---------    ---------    ---------
   Income (loss) before income taxes                      4,648       20,605       (1,036)      65,630
   Income tax (benefit) expense                         (10,924)      (1,790)     (10,880)       1,587
                                                      ---------    ---------    ---------    ---------
     Net income                                       $  15,572    $  22,395    $   9,844    $  64,043
                                                      =========    =========    =========    =========

Basic earnings per share                              $    0.41    $    0.59    $    0.26    $    1.69
                                                      =========    =========    =========    =========

Diluted earnings per share                            $    0.40    $    0.57    $    0.25    $    1.64
                                                      =========    =========    =========    =========

Basic weighted average shares outstanding                38,182       38,031       38,163       37,981
                                                      =========    =========    =========    =========

Diluted weighted average shares outstanding              38,782       39,027       38,659       39,074
                                                      =========    =========    =========    =========
</TABLE>

            See notes to unaudited consolidated financial statements.

                                       4
<PAGE>

                      ENHANCE FINANCIAL SERVICES GROUP INC.
                                AND SUBSIDIARIES
                 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
                  FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
                (In thousands except share and per share amounts)
                                   (unaudited)

<TABLE>
<CAPTION>

                                                           Outstanding Common
                                                                  Stock                 Treasury Stock
                                                         -----------------------    ----------------------

                                                                                                              Additional
                                                                                                                Paid-in
                                                           Shares        Amount      Shares       Amount        Capital
                                                           ------        ------      ------       ------        -------
<S>                                                      <C>          <C>           <C>         <C>           <C>
Balance, December 31, 1998                               39,812,937   $    3,981    1,950,794   $  (32,586)   $  249,851
    Comprehensive income:
      Net income for the period                                  --           --           --           --            --
      Unrealized foreign currency translation
         adjustment (net of tax of $625)                         --           --           --           --            --
      Unrealized losses during the period
        (net of tax of $19,324)                                  --           --           --           --            --
      Reclassification adjustment for realized losses
         included in net income (net of tax of $1,580)           --           --           --           --            --
    Total comprehensive income                                   --           --           --           --            --
    Dividends paid ($0.18 per share)                             --           --           --           --            --
    Exercise of stock options                               183,600           18           --           --         2,083
                                                         ==========   ==========   ==========   ==========    ==========

Balance, September 30, 1999                              39,996,537   $    3,999    1,950,794   $  (32,586)   $  251,934
                                                         ==========   ==========   ==========   ==========    ==========

<CAPTION>

                                                                         Accumulated
                                                                 Other Comprehensive Income
                                                          ---------------------------------------
                                                                         Foreign
                                                                         Currency     Unrealized
                                                            Unearned    Translation     Gains        Retained
                                                          Compensation  Adjustment     (Losses)      Earnings        Total
                                                          ------------  ----------     --------      --------        -----
<S>                                                       <C>           <C>           <C>           <C>           <C>
Balance, December 31, 1998                                $     (493)   $      714    $   22,965    $  418,214    $  662,646
    Comprehensive income:
      Net income for the period                                   --            --            --        64,043            --
      Unrealized foreign currency translation
         adjustment (net of tax of $625)                          --        (1,161)           --            --            --
      Unrealized losses during the period
        (net of tax of $19,324)                                   --            --       (32,654)           --            --
      Reclassification adjustment for realized losses
         included in net income (net of tax of $1,580)            --            21         2,912            --            --
    Total comprehensive income                                    --            --            --            --        33,161
    Dividends paid ($0.18 per share)                              --            --            --        (6,840)       (6,840)
    Exercise of stock options                                     --            --            --            --         2,101
                                                          ==========    ==========    ==========    ==========    ==========

Balance, September 30, 1999                               $     (493)   $     (426)   $   (6,777)   $  475,417    $  691,068
                                                          ==========    ==========    ==========    ==========    ==========
</TABLE>

            See notes to unaudited consolidated financial statements.

                                       5
<PAGE>

                      ENHANCE FINANCIAL SERVICES GROUP INC.
                                AND SUBSIDIARIES
                 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
                  FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
                (In thousands except share and per share amounts)
                                   (unaudited)

<TABLE>
<CAPTION>

                                                           Outstanding Common
                                                                Stock                  Treasury Stock
                                                        ----------------------     ----------------------

                                                                                                               Additional
                                                                                                                Paid-in
                                                          Shares       Amount       Shares        Amount        Capital
                                                          ------       ------       ------        ------        -------
<S>                                                     <C>          <C>           <C>         <C>            <C>
Balance, December 31, 1999                              40,007,404   $    4,001    1,950,794   $  (32,586)    $  253,109
    Comprehensive income:
      Net income for the period                                 --           --           --           --             --
      Unrealized gains during the period
        (net of tax of $8,329)                                  --           --           --           --             --
      Reclassification adjustment for realized losses
         included in net income (net of tax $475)               --           --           --           --             --
    Total comprehensive income                                  --           --           --           --             --
    Dividends declared ($0.18 per share)                        --           --           --           --             --
    Exercise of stock options                              148,700           15           --           --          1,625
    Issuance of common shares                                1,921           --           --           --             29
                                                        ==========   ==========   ==========   ==========     ==========

Balance, September 30, 2000                             40,158,025   $    4,016    1,950,794   $  (32,586)    $  254,763
                                                        ==========   ==========   ==========   ==========     ==========

<CAPTION>

                                                                      Accumulated
                                                              Other Comprehensive Income
                                                        ---------------------------------------
                                                                       Foreign
                                                                       Currency      Unrealized
                                                          Unearned    Translation      Gains        Retained
                                                        Compensation   Adjustment     (Losses)      Earnings       Total
                                                        ------------   ----------     --------      --------       -----
<S>                                                     <C>           <C>           <C>           <C>           <C>
Balance, December 31, 1999                              $     (493)   $   (2,207)   $  (23,235)   $  477,715    $  676,304
    Comprehensive income:
      Net income for the period                                 --            --            --         9,844            --
      Unrealized gains during the period
        (net of tax of $8,329)                                  --            --        18,987            --            --
      Reclassification adjustment for realized losses
         included in net income (net of tax $475)               --            --           882            --            --
    Total comprehensive income                                  --            --            --            --        29,713
    Dividends declared ($0.18 per share)                        --            --            --        (6,871)       (6,871)
    Exercise of stock options                                   --            --            --            --         1,640
    Issuance of common shares                                   --            --            --            --            29
                                                        ==========    ==========    ==========    ==========    ==========

Balance, September 30, 2000                             $     (493)   $   (2,207)   $   (3,366)   $  480,688    $  700,815
                                                        ==========    ==========    ==========    ==========    ==========

</TABLE>

            See notes to unaudited consolidated financial statements.

                                       6
<PAGE>

                      ENHANCE FINANCIAL SERVICES GROUP INC.
                                AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)
                                   (unaudited)

<TABLE>
<CAPTION>

                                                                       Nine Months Ended September 30,
                                                                       -------------------------------
                                                                              2000         1999
                                                                              ----         ----
<S>                                                                        <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net income                                                                $   9,844    $  64,043
 Adjustments to reconcile net income to net cash provided by
     operating activities:
  Depreciation and amortization, net                                          (3,924)      (7,286)
  Write-off of goodwill                                                       22,051           --
  Net realized losses                                                          1,357        4,480
  Equity in net income of affiliates                                         (21,128)     (17,026)
  Loss on sale of assets                                                       1,390           --
  Change in assets and liabilities:
    Premiums and other receivables                                             7,711       11,541
    Accrued interest receivable                                                5,283       (1,648)
    Accrued expenses and other liabilities                                     1,544       23,019
    Deferred policy acquisition costs                                         (7,057)     (14,994)
    Deferred premium revenue, net                                             11,363       18,063
    Accrued profit commissions                                                   260         (128)
    Losses and loss adjustment expenses, net                                  13,940        4,334
    Payable to (receivable from) affiliates                                    5,084      (25,632)
    Payable for securities                                                        --       17,870
    Other assets                                                              (1,221)     (34,027)
    Income taxes, net                                                        (21,960)      (1,625)
                                                                           ---------    ---------
Net cash provided by operating activities                                     24,537       40,984
                                                                           ---------    ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
 Purchase of property and equipment                                             (687)      (4,368)
 Proceeds from sales and maturities of investments                           251,585      273,968
 Purchase of investments                                                    (266,352)    (350,927)
 Purchase of partnership interests                                                --      (13,720)
 (Purchases) sales of short-term investments, net                            (52,793)       4,570
 Other, net                                                                     (119)          --
 Investment in affiliates                                                    (14,700)      (2,497)
                                                                           ---------    ---------
 Net cash used in investing activities                                       (83,066)     (92,974)
                                                                           ---------    ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
 Capital stock                                                                 1,670        2,101
 Short-term debt                                                              60,441       51,660
 Dividends paid                                                               (4,578)      (4,557)
                                                                           ---------    ---------
Net cash provided by financing activities                                     57,533       49,204
                                                                           ---------    ---------
Net change in cash and cash equivalents                                         (996)      (2,786)
 Cash and cash equivalents, beginning of period                                2,558        5,542
                                                                           ---------    ---------
Cash and cash equivalents, end of period                                   $   1,562    $   2,756
                                                                                        =========

<CAPTION>

SUPPLEMENTAL DISCLOSURE OF CERTAIN NON-CASH TRANSACTIONS:                               September 30, 2000
                                                                                        ------------------
<S>                                                                                     <C>
Sale of interest in investment in affiliate including accrued interest                  $  3,954
                                                                                        ========
Consideration received - note receivable                                                $  3,954
                                                                                        ========
</TABLE>

            See notes to unaudited consolidated financial statements.

                                       7
<PAGE>

                      ENHANCE FINANCIAL SERVICES GROUP INC.
                                AND SUBSIDIARIES

              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                    PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
                                   (UNAUDITED)

1. BASIS OF PRESENTATION - MERGER AGREEMENT

         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/A for the year ended December 31, 1999 (the "1999 Form 10-K/A") 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 its subsidiaries (collectively the
"Company"). The results of operations for the nine months ended September 30,
2000 may not be indicative of the results that may be expected for the year
ending December 31, 2000.

         Certain of the 1999 amounts have been reclassified to conform to the
current period(s) presentation.


         MERGER AGREEMENT:

         On November 13, 2000, Enhance Financial and Radian Group Inc.
("Radian") entered into an agreement (the "Merger Agreement') providing for the
merger (the "Merger") of Enhance Financial with a wholly owned subsidiary of
Radian. The Merger Agreement provides for Enhance Financial shareholders at the
effective time of the Merger to receive .22 share of Radian common stock for
each share of Enhance Financial common stock owned by them. Consummation of the
Merger is subject to the satisfaction by each party of several conditions,
including the approval of Enhance Financial and Radian shareholders, for which
special meetings of shareholders are to be called as soon as practicable.

         The board of directors voted unanimously at a meeting held November 12,
2000 to approve the Merger and to recommend its approval to shareholders. At
that meeting, the board received the opinion of Morgan Stanley Dean Witter &
Company ("Morgan Stanley") that the Merger price was fair to the Enhance
Financial shareholders from an economic point of view.

         Enhance Financial's entry into the Merger Agreement was the culmination
of its efforts, for which it had retained Morgan Stanley in February 2000 to
assist it, to identify and review strategic options to increase shareholder
value.

         Radian provides private mortgage insurance coverage in the United
States on residential mortgage loans.

         The closing prices of Enhance Financial common stock and Radian common
stock on November 13, 2000, the last trading day prior to the announcement of
the execution of the Merger Agreement, were$13-13/16 and $64-3/16, respectively.

                                       8
<PAGE>

              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                    PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
                                   (UNAUDITED)

         The Merger Agreement requires that Enhance Financial pay Radian a
"break-up fee" of $20.0 million if the Enhance Financial board of directors
withdraws its recommendation to shareholders that they approve the transaction,
the shareholders fail to approve the transaction and the Company is sold to
another party within twelve months thereafter (which fee increases to $25.0
million if the Company is sold to any of certain specified competitors of
Radian). In addition, if Radian terminates the Merger Agreement for any of
certain other specified reasons as permitted by the Merger Agreement, Radian
will be entitled to reimbursement of its expenses in the transaction up to $5.0
million.

         On September 28, 2000, Enhance Financial and Residential Funding
Corporation ("GMAC-RFC") had entered into an agreement providing for the sale to
GMAC-RFC of Enhance Financial's wholly owned partnership (the "Partnership")
which, in turn, holds a 46% interest in Credit-Based Asset Servicing and
Securitization LLC ("C-BASS") and REMIC interests in securitizations. Enhance
Financial and GMAC-RFC are each permitted to terminate the agreement if Enhance
Financial enters into another agreement providing for the sale by Enhance
Financial of the Partnership (including through the sale of the Company as an
entirety) to another party. Enhance Financial is required to pay GMAC-RFC a
"break-up fee" of $4 million if either party tenders a notice of termination
prior to consummation of the sale. Pursuant to the terms of the Merger
Agreement, Enhance Financial is required to provide such notice prior to the
consummation of the Merger.

         The Merger Agreement requires that, if the Merger fails to be
consummated under certain circumstances, Radian will be required to purchase the
Company's interest in C-BASS for a purchase price equal to 90% of the
consideration to be paid by GMAC-RFC for the Partnership.

         The Merger Agreement was the result of the Company's efforts, commenced
in February 2000, to identify and review strategic options to increase
shareholder value. These efforts were, in turn, partly an outgrowth of a
decision by Moody's Investor Service, Inc. ("Moody's) in August 1999 to
downgrade the senior long term debt rating of Enhance Financial from Aa3 to A2
and the insurance financial strength rating of Enhance Financial's largest
insurance subsidiary, Enhance Reinsurance Company ("Enhance Re"), from Aaa to
Aa2. In February 2000, Moody's placed such debt and insurance financial strength
ratings under review for possible further downgrade. It is possible that Moody's
or the Company's other rating agencies may further downgrade Enhance Financial's
long term debt rating and the financial strength rating of Enhance Re. See Note
13 of Notes to Consolidated Financial Statements in the 1999 Form 10-K/A for
related issues and potential consequences as the foregoing may relate to the
Company's reinsurance contracts. The Company is continuing to address its
liquidity shortage, and its ability to meet its debt obligations and commitments
pending consummation of the Merger. See Notes 7 and 8 regarding issues related
to two non-insurance subsidiaries of Enhance Financial. Pending consummation of
the Merger, the financial flexibility of the Company is limited.

2. DIVIDENDS DECLARED

         In the first nine months of 2000, Enhance Financial declared cash
dividends of $.18 per share totaling $6,870,693. As a result of the net loss
incurred in the second quarter 2000, the Company was prohibited by the terms of
its bank credit agreement from declaring and paying a dividend to its
shareholders for the third quarter 2000 and is similarly constrained with
respect to a fourth quarter 2000 dividend. The dividend in the third quarter of
$2,292,523 was accrued during the third quarter and subsequently paid in October
2000 after the Company obtained a waiver from its bank lenders therefor.
However, the Company does not anticipate requesting a waiver from the bank
lenders to pay a dividend to its shareholders for the fourth quarter 2000.

3. COMMON STOCK

         During the first nine months of 2000, Enhance Financial made no common
stock purchases.

                                       9
<PAGE>

              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                    PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
                                   (UNAUDITED)

4. COMPREHENSIVE INCOME

         Comprehensive income for the three months and nine months ended
September 30, 2000 and 1999 is shown in the table below (in millions). Other
comprehensive income consists of unrealized gains and losses on available for
sale securities, foreign currency translation adjustments and unearned
compensation.

<TABLE>
<CAPTION>

                                          Three-months ended   Nine-months ended
                                             September 30,       September 30,
--------------------------------------------------------------------------------
                                              2000     1999     2000     1999
--------------------------------------------------------------------------------
<S>                                         <C>      <C>      <C>      <C>
Net income                                  $  15.5  $  22.4  $   9.8  $  64.0
Other comprehensive income:
Increase (decrease) in unrealized
   appreciation of investments                  9.7    (18.0)    27.3    (51.9)
     Applicable income taxes                   (3.3)     7.4     (8.3)    19.3
Reclassification adjustments for realized
   (gains) losses in net income                (0.1)     0.2      1.4      4.5
     Applicable income taxes                    0.1     (0.1)    (0.5)    (1.6)
Foreign currency translation losses:           --       --       --       (1.7)
     Applicable income taxes                   --       --       --        0.6
                                            ------------------------------------
Comprehensive income                        $  21.9  $  11.9  $  29.7  $  33.2
                                            ====================================
</TABLE>


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 tax liability for
the nine-month periods ended September 30, 2000 and September 30, 1999 of
$10.5 million (aggregate $24.9 million for the nine months ended September
30, 2000 and $14.4 million for the nine months ended September 30, 1999),
respectively, 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")
acquired in April 1999 because the Company believes that the tax law provides
a means, through the use of a tax strategy, 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 nine-month period ended September 30, 2000, the Company
realized $10.5 million of tax benefits and $0.3 million of investment income
from the portfolio of REMICs.

         For the nine-month period ended September 30, 2000, the Company
realized tax benefits of $10.9 million on a loss of $1.0 million. The tax
benefit includes $10.5 million realized from the REMICs. The effective tax rate
would have been 36.7% excluding the REMIC benefit.

         For the comparable period of 1999, the Company had an effective tax
rate of 2.4%, which included $14.4 million of tax benefits realized from REMICs.
The effective rate would have been 24.4% excluding the REMIC benefit.

                                       10
<PAGE>

              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                    PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
                                   (UNAUDITED)

         As discussed in Note 6 of Notes to Consolidated Financial Statements in
the 1999 Form 10-K/A, one of the prior owners of the REMICs was audited by the
Internal Revenue Service ("IRS") for taxable years during which such owner owned
the REMICs. Upon completion of that audit, the IRS determined that certain tax
strategies adopted by the prior owner with respect to the REMICs were improper
and should be disallowed. The prior owner disputed the IRS's determination and
filed suit in the United State Tax Court to overturn the IRS's audit adjustments
relating to the REMICs. In August 2000, the prior owner and the IRS reached a
settlement in their Tax Court litigation and the Tax Court entered a series of
stipulated decisions regarding the settlement. The stipulated decisions appear
to be a concession by the IRS of the incorrectness of its audit determination
that certain tax strategies adopted by the prior owner with respect to the
REMICs were improper and should be disallowed. After reviewing the stipulated
decisions, the Company's counsel has advised the Company that, at the present
time, it is not appropriate to conclude that the settlement or any potential
future IRS action will affect the Company's ability to realize the expected tax
benefits associated with the REMICs. Nonetheless, given the private nature of
the settlement, the lack of clarity regarding the basis for the settlement, and
the uncertainties regarding the IRS's potential future action, there can be no
complete assurance that the settlement or any potential future IRS action will
not have a material adverse effect on the tax benefits that the Company expects
to realize from the REMICs.


6. NEW ACCOUNTING PRONOUNCEMENTS

         In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivatives Instruments and Hedging Activities,"
which becomes effective for the Company January 1, 2001. This pronouncement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. The Company will be required to recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. The accounting for a change in fair value of a
derivative in earnings or other comprehensive income will depend on the intended
use of the derivative and the resulting designation. The Company is currently
reviewing the impact of the implementation of SFAS No. 133 on its financial
statements.

         In September 2000, the FASB issued SFAS No. 140 "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
which superceded SFAS No. 125. With respect to certain disclosure requirements,
SFAS No. 140 is effective subsequent to December 15, 2000, with full compliance
for its requirements by April 2001.

         SFAS No. 140 provides among other disclosure requirements, rules
relating to Special Purpose Entities. The Company is currently reviewing the
impact of the implementation of SFAS No. 140 on its financial statements.

                                       11
<PAGE>

              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                    PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
                                   (UNAUDITED)

7. SINGER ASSET FINANCE COMPANY, L.L.C. ("SINGER")/ENHANCE LIFE BENEFITS LLC
("ELB")

         As part of its review of strategic alternatives, the Company
assessed the continuing value or impairment of goodwill recorded at
approximately $22.1 million as of June 30, 2000, attributable to its wholly
owned subsidiaries, Singer and ELB. The strategic analysis, which was
performed by an investment banking firm, established that there is negligible
investor interest in purchasing these companies and that it is unlikely that
the Company would recover at minimum its recorded goodwill. In conjunction
with this assessment, the Company also completed a long-term cash flow
analysis. Additionally, Singer and ELB have continued to incur losses and
generate negative cash flows throughout the first nine months of 2000.
Accordingly, the Company determined as of June 30, 2000 that the entire
recorded value of goodwill has been impaired and should be charged off,
which charges has been included in non-insurance operating expenses.

         The Company is finalizing a plan to wind down, sell or otherwise
dispose of the Singer and ELB business activities, operations and assets while
meeting Singer's and ELB's servicing and financial obligations. A provision of
$7.5 million has been recorded at September 30, 2000 to reflect severance and
termination costs and other related wind-down costs, which charge has been
included in non-insurance operating expenses. Additionally in October 2000, the
Company sold certain assets and intangibles of ELB and has recorded an estimated
loss of $1.4 million, which charge has been included in non-insurance operating
expenses). As the Company continues to finalize this plan, it may incur further
restructuring charges.

         The Company is also analyzing and evaluating those of its obligations
that may remain in the event of run-off. This process includes the analysis and
evaluation of the fixed and contingent exposures of Enhance Financial, Singer,
ELB and the Company's non-consolidated entities (i.e. trusts and other special
purpose entities) under servicing agreements, debt obligations and credit
agreements. Enhance Financial has provided performance guarantees (in some cases
with a direct performance obligation) to the respective lenders on behalf of
Singer, ELB and related trusts, special purpose companies, etc. which were
formed in conjunction with a number of securitizations. The guarantees relate to
Singer and ELB's roles as originators and/or servicers of the securitized
assets. Additionally, Enhance Financial has provided other forms of programmatic
support, including the down-stream funding of tax credits related to the
securitization of assignable state lottery awards and the guarantee of certain
interest rate swap transactions entered into in connection with a number of the
securitizations and to hedge interest rate risk to assets in the pipeline. In
addition, Enhance Financial has indemnified many of Singer's and ELB's lenders
against non-credit-related losses resulting from any breach of Singer's or ELB's
representations, warranties or covenants.

         Enhance Financial will be responsible for servicing, in some cases for
15 years or longer, permanently financed securitized assets originated by Singer
and ELB having an aggregate value of approximately $590.0 million and an
additional $158.0 million currently placed in warehouse lines maturing before
the end of 2000. In connection with Singer's lottery servicing obligations,
related cash liquidity reserves of the Company totaling $7.5 million at
September 30, 2000, which, while not pledged as credit support with respect to
the assets, are at risk in the event of an uncured default by Singer or Enhance
Financial.

                                       12
<PAGE>

              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                    PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
                                   (UNAUDITED)

         Enhance Financial is obligated to fund federal and state tax credits
related to lottery payments, either which Enhance Financial utilizes in
connection with its tax obligations or for which Enhance Financial applies for
refunds, through 2016 as follows (in millions):

    Year              Tax Credits
    ----              -----------
    2000              $25.2 ($17.9 funded through September 30)
    2001               25.2
    2002               24.5
    2003               23.0
    2004               21.7
    Thereafter        138.8

         At September 30, 2000, Enhance Financial has guaranteed Singer's
performance under interest rate swap agreements with a notional amount of $40.0
million. The fair market value of these swaps was approximately $(261,000).
Deferred hedge losses as of September 30, 2000 totaled approximately $655,000.
Offsetting this liability was approximately $43.0 million of lottery receivables
residing in the pipeline or in an off-balance sheet warehouse.

         At September 30, 2000, Singer has arranged for approximately $158.0
million of over-collateralized debt, financed through two off-balance sheet
warehouse lines, secured by assets held by non-consolidated entities. The
financings mature on December 29 and 30, 2000. Should the respective lenders
elect not to renew the facilities, it will be necessary for the Company to
refinance or sell the assets. In the event of default, the Company is exposed to
the potential loss of its equity of approximately $21.9 million and the reversal
of gains previously recognized of approximately $13.0 million. Additionally, if
the Company reacquires these assets, they would be subject to current
mark-to-market adjustments. Also, Singer has arranged for approximately $590.0
million of off-balance sheet collateralized permanent financing, secured by
assets held by the non-consolidated entities.

         At September 30, 2000, Singer is obligated to purchase approximately
$21.0 million of lottery assets and $4.2 of structured settlements, at prices
that approximate their market value and are substantially protected by hedge
agreements.

         On August 10, 2000, the Company entered into a letter of intent with
certain members of Singer's management for the sale of certain of Singer's
off-balance sheet assets, including its pipeline of lottery and structured
settlement transactions and certain intangibles. Although the letter has
expired, the Company continues to negotiate the terms of such sale.

8. INVESTMENT IN NEW SUBSIDIARY

         In April 2000 Enhance Financial acquired a convertible preferred stock
representing a majority equity interest in Credit2B.com Inc. ("Credit2B"), a
newly formed corporation, in return for cash and future capital commitments
aggregating $14.0 million. Through September 30, 2000, Enhance Financial has
funded $3.4 million of the $14.0 million commitment. Additionally, in October
2000 Enhance Financial funded an additional $2.7 million.

         The goal of Credit2B is to facilitate business trade credit on the
Internet. It seeks to integrate data, analytics, scoring, and financial
alternatives for business-to-business exchanges and web sellers to approve
transactions and to offload risk in real time. Credit2B and Enhance Financial
have entered into employment agreements with several of Credit2B's officers
(including its President and Chief Executive Officer and its Chief Operating
Officer), which provide base and incentive compensation of approximately $3.3
million per annum ($1.7 million of which is attributable to the
aforementioned two officers). Each such agreement is cancelable upon 30 days
notice by either party.

                                       13
<PAGE>

              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                    PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
                                   (UNAUDITED)

         Enhance Financial currently intends to divest itself of its ownership
of its stock in Credit2B prior to the end of 2000 and obtain value for Enhance
Financial's shareholders. Accordingly, the Company at September 30, 2000 has
accounted for its investment in Credit2B on the equity method of accounting
notwithstanding that Enhance Financial's designees compose a majority of the
Credit2B board of directors resulting in Enhance Financial having effective
voting control of Credit2B. Enhance Financial's ability to complete its
divestiture of Credit2B is subject to the current market-related uncertainties
affecting the Internet businesses in general.

         Credit2B incurred a net loss for the period April 17, 2000 (date of
inception) to September 30, 2000 of $2.9 million, of which Enhance
Financial's share is $2.5 million ($2.1 million for the three-month period
ended September 30, 2000).

9. RESTRUCTURING AND SHUTDOWN EXPENSES

         In September 2000, the Company determined to place Singer into
wind-down and incurred $7.5 million for severance and related shutdown costs.
See Note 7 for additional information regarding the October 2000 sale of certain
assets of ELB.

         In May 2000, the Company ceased operations of its New Products and
Ventures Group and incurred $2.9 million for severance and related shutdown
costs.

         In May 2000, the Company transferred its entire equity interests in AGS
Financial Group LLC , the entity that conducted a significant portion of the
Company's South American operations, to the Company's partners (who constituted
senior management of the enterprise) for nominal consideration. In connection
with such transaction, the Company recognized a loss of $1.3 million.


10. LOSS RESERVE - CREDITRUST EXPOSURE

         The Company insured three securitization transactions in 1998 for
special purpose subsidiaries of Creditrust Corporation ("Creditrust"), which has
since filed for protection under the bankruptcy laws. In each case the Company
insured notes issued by the special purpose vehicle and secured by pledges of
receivables from pools of charged-off credit card obligations. The Company has
concluded that the proceeds of the pledged receivables will likely be
insufficient to satisfy the timely payment of the insured notes in two of those
transactions and has, accordingly, established the indicated case-basis reserves
aggregating $4.0 million of which $1.0 million has been charged to current
earnings. In addition, the Company has received information alleging that
certain of the data that Creditrust conveyed to the Company upon which the
Company relied to gauge collection performance in the insured transactions for
which reserves have been established had been altered and was therefore
unreliable. Primarily as a result of these allegations, the Company filed a
motion in Creditrust's bankruptcy proceeding seeking the appointment of a
trustee to manage Creditrust's affairs.

         The Company believes the reserve amounts to be reasonable based on the
information it currently has concerning the performance of the respective pools.
The Company will continue to monitor these transactions closely for fluctuations
in pool performance. See Note 13 for additional information regarding the
litigation with Creditrust.

                                       14
<PAGE>

              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                    PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
                                   (UNAUDITED)

11. 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, 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, which are managed separately as each
business requires different marketing and sales expertise.

         The Company evaluates performance based on net income. Summarized
financial information concerning the Company's operating segments is presented
in the following tables:

<TABLE>
<CAPTION>

In thousands
                                                              September 30, 2000
                                                              ------------------

                                                    Insurance           Asset-based            Total
                                                    ---------           -----------            -----
<S>                                                 <C>                   <C>                <C>
Revenues from external customers                      $82,607             $ 10,455             $93,062
Net investment income                                  46,995                  282              47,277
Net income (loss)                                      37,235              (27,391)              9,844
Segment assets                                      1,098,470              455,162           1,553,632

<CAPTION>

                                                              September 30, 1999
                                                              ------------------
In thousands
                                                    Insurance           Asset-based            Total
                                                    ---------           -----------            -----
<S>                                                 <C>                   <C>               <C>
Revenues from external customers                      $75,601             $ 33,154          $  108,755
Net investment income                                  42,762                   --              42,762
Net income                                             51,020               13,023              64,043
Segment assets                                      1,213,998              220,865           1,434,863
</TABLE>

         The following are reconciliations of reportable segment revenues and
profit to Enhance Financial's consolidated totals:

<TABLE>
<CAPTION>

In Thousands                                                              September 30,
                                                                          -------------
                                                                       2000         1999
                                                                       ----         ----
<S>                                                                  <C>          <C>
REVENUES

Total revenues from external customers for reportable segments       $ 93,062     $ 108,755

Net investment income for reportable segments                          47,277        42,762

Realized losses                                                        (1,357)       (4,480)
                                                                    ---------     ---------

     Total consolidated revenues                                    $ 138,982     $ 147,037
                                                                    =========     =========
</TABLE>

                                       15
<PAGE>

              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                    PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
                                   (UNAUDITED)

12. LITIGATION

         Creditrust and its president filed a complaint against Enhance
Financial and its wholly owned subsidiary, Asset Guaranty Insurance Company
("Asset Guaranty") on April 4, 2000 in the United States District Court for the
District of Maryland 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 alleged
misconduct would have been unauthorized and contrary to Company policy. The
employee identified in the lawsuit is no longer employed by the Company.
Nonetheless, the complaint alleges that the message board activity was
undertaken on behalf of the Company to further its competitive interests. On May
9, 2000, Enhance Financial and Asset Guaranty filed a motion to dismiss the
complaint, which has not yet been argued or decided.

         On October 19, 2000, Enhance Financial and Asset Guaranty entered into
a settlement agreement with Creditrust and its president, which provides for
dismissal with prejudice of the complaint against Enhance Financial and Asset
Guaranty with no payment of money by Enhance Financial or Asset Guaranty (the
"Settlement Agreement"). The Settlement Agreement was reached as part of a
global resolution of claims between and among parties including Enhance
Financial and Asset Guaranty and Creditrust and its president, which included
the claims brought by Asset Guaranty against Creditrust in Creditrust's
bankruptcy proceeding. The Settlement Agreement is subject to approval by the
Bankruptcy Court, and it will not become effective, and the complaint against
Enhance Financial and Asset Guaranty will not be dismissed (although it is
currently stayed) unless and until the Bankruptcy Court approves a plan of
reorganization filed by Creditrust, which incorporates the terms of the
Settlement Agreement. The settlement is also subject to certain other
contingencies, which may or may not be satisfied.

         In November 2000, the Official Committee of Unsecured Creditors of
Creditrust filed objections to the Settlement Agreement and a plan of
organization in connection with the Creditrust bankruptcy that does not
contemplate implementation of the Settlement Agreement, and Wells Fargo Bank
Minnesota, N.A., as trustee, filed certain objections to the plan of
reorganization filed by Creditrust.

         Even if the Settlement Agreement does not become effective and the
motion to dismiss is not granted, in whole or in part, the Company believes that
Creditrust's claims against the 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.

                                       16
<PAGE>

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 September
30, 2000, and the related consolidated statements of income for the three-month
and nine-month periods ended September 30, 2000 and 1999 and the consolidated
statements of shareholders' equity and cash flows for the nine-month periods
ended September 30, 2000 and 1999. These financial statements are the
responsibility of the Company's management.

We conducted our reviews 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 reviews, 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.


/s/ DELOITTE & TOUCHE LLP
New York, New York
November 17, 2000

                                       17
<PAGE>

                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. ("SBF").

         The Company operates its asset-based businesses primarily through its
consolidated subsidiaries, Singer Asset Finance Company, L.L.C. ("Singer") and
Enhance Consumer Services LLC as successor to the business of Enhance Life
Benefits LLC (which corporate entity was sold in October 2000) ("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. In May
2000 the Company divested its interest in AGS Financial LLC ("AGS"), resulting
in a $1.3 million loss (included in non-insurance operating expenses). In
October 2000, the Company sold certain assets and intangibles of ELB, including
the corporate entity, resulting in a $1.4 million loss (included in
non-insurance operating expenses). See Note 8 of Notes to Unaudited Financial
Statements in this report for information about the formation by the Company of
and its investment in Credit2B.com Inc. ("Credit2B").

         On November 13, 2000, Enhance Financial and Radian Group Inc.
("Radian") entered into an agreement (the "Merger Agreement') providing for the
merger (the "Merger") of Enhance Financial with a wholly owned subsidiary of
Radian. The Merger Agreement provides for Enhance Financial shareholders at the
effective time of the Merger to receive .22 share of Radian common stock for
each share of Enhance Financial common stock owned by them. Consummation of the
Merger is subject to the satisfaction by each party of several conditions,
including the approval of Enhance Financial and Radian shareholders, for which
special meetings of shareholders are to be called as soon as practicable.

         The board of directors voted unanimously at a meeting held November 12,
2000 to approve the Merger and to recommend its approval to shareholders. At
that meeting, the board received the opinion of Morgan Stanley Dean Witter &
Company ("Morgan Stanley") that the Merger price was fair to the Enhance
Financial shareholders from an economic point of view.

         Enhance Financial's entry into the Merger Agreement was the culmination
of its efforts, for which it had retained Morgan Stanley in February 2000 to
assist it, to identify and review strategic options to increase shareholder
value.

         Radian provides private mortgage insurance coverage in the United
States on residential mortgage loans.

                                       18
<PAGE>

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS

         The closing prices of Enhance Financial common stock and Radian common
stock on November 13, 2000, the last trading day prior to the announcement of
the execution of the Merger Agreement, were$13 13/16 and $64 3/16, respectively.

         The Merger Agreement requires that Enhance Financial pay Radian a
"break-up fee" of $20.0 million if the Enhance Financial board of directors
withdraws its recommendation to shareholders that they approve the transaction,
the shareholders fail to approve the transaction and the Company is sold to
another party with twelve months thereafter (which fee increases to $25.0
million if the Company is sold to any of certain specified competitors of
Radian). In addition, if Radian terminates the Merger Agreement for any of
certain specified reasons as permitted by the Merger Agreement, Radian will be
entitled to reimbursement of its expenses in the transaction up to $5.0 million.

         On September 28, 2000, Enhance Financial and Residential Funding
Corporation ("GMAC-RFC") entered into an agreement providing for the sale to
GMAC-RFC of Enhance Financial's wholly owned partnership (the "Partnership")
which, in turn, holds a 46% interest in Credit-Based Asset Servicing and
Securitization LLC ("C-BASS") and REMIC interests in securitizations. Enhance
Financial and GMAC-RFC are each permitted to terminate the agreement if Enhance
Financial enters into another agreement providing for the sale by Enhance
Financial of the Partnership (including through the sale of the Company as an
entirety) to another party. Enhance Financial is required to pay GMAC-RFC a
"break-up fee" of $4 million if either party tenders a notice of termination
prior to the consummation of the sale. Pursuant to the terms of the Merger
Agreement, Enhance Financial is required to provide such notice prior to the
consummation of the Merger

         The Merger Agreement requires that, if the Merger fails to be
consummated under certain circumstances, Radian will be required to purchase the
Company's interest in C-BASS for a purchase price equal to 90% of the
consideration to be paid by GMAC-RFC for the Partnership.

         The Merger Agreement was the result of the Company's efforts,
commenced in February 2000, to identify and review strategic options to
increase shareholder value. These efforts were, in turn, partly an outgrowth
of an August, 1999 decision by Moody's Investor Service, Inc. ("Moody's) to
downgrade the senior long term debt rating of Enhance Financial from Aa3 to
A2 and the insurance financial strength rating of Enhance Re from Aaa to Aa2.
In February 2000, Moody's placed such debt and insurance financial strength
ratings under review for possible further downgrade. It is possible that
Moody's or the Company's other rating agencies may further downgrade Enhance
Financial's long term debt rating and the financial strength rating of
Enhance Re. See Note 13 of Notes to Consolidated Financial Statements in the
Annual Report on Form 10-K/A for the year ended December 31, 1999 for related
issues and potential consequences as the foregoing may relate to the
Company's reinsurance contracts. The Company is continuing to address its
liquidity shortage, and its ability to meet its debt obligations, commitments
and to fund its operations pending consummation of the Merger. See Notes 7
and 8 of the Notes to Unaudited Financial Statements in this report regarding
issues related to two non-insurance subsidiaries of Enhance Financial.
Pending consummation of the Merger, the financial flexibility of the Company
is limited.

RESULTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 2000 VS. THREE MONTHS ENDED SEPTEMBER 30, 1999

         Interest rates increased between the third quarters of 1999 and 2000,
reducing refundings of bonds in place and also the volume of new issues. In the
third quarter of 2000, municipal new-issue volume was $46.0 billion, a decline
of 4.2% from the same period in 1999. The insured portion of such new issues was
46.9% and 46% during the third quarters of 2000 and 1999, respectively. Total
municipal bond refundings were $5.6 billion in the third quarter of 2000,
approximately 12.3% of new-issue volume, down from 14% for the third quarter of
1999, due to higher interest rates.

                                       19
<PAGE>

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS

         Gross premiums written in the third quarter of 2000 decreased 31.1% to
$23.7 million from $34.4 million in the same period in 1999. The decrease is
mainly attributable to declines in municipal reinsurance, financial institutions
business and direct financial guaranty business of $3.0 million, $7.3 million
and $1.7 million, respectively, partially offset by an increase in non-municipal
reinsurance of $1.5 million. As with other financial guaranty companies, the
Company experienced an increase in installment premiums relative to upfront
premiums, which allows for equivalent future earned premium with a smaller
written premium base.

         Net premiums written decreased $6.4 million to $22.5 million in the
third quarter of 2000 from $28.9 million in the same period in 1999. Decreases
in municipal reinsurance of $3.0 million, direct financial guaranty of $2.2
million and financial institutions of $2.3 million were partially offset by an
increase in net non-municipal reinsurance premiums.

         The following table shows net premiums written by line of business for
the periods presented:

<TABLE>
<CAPTION>

                                          3rd Quarter
--------------------------------------------------------------------------------
Net Premiums Written
(dollars in millions)                  2000      1999   $ Change    % Change
--------------------------------------------------------------------------------
<S>                                  <C>       <C>       <C>        <C>
Municipal Reinsurance                $   4.2   $   7.2   $ (3.0)    (41.7)%
Non-Municipal Reinsurance                6.5       5.0      1.5      30.0
Direct Financial Guaranty                6.7       8.9     (2.2)    (24.7)
Trade Credit                             4.6       4.8     (0.2)     (4.2)
Financial Responsibility                 0.1       0.3     (0.2)    (66.7)
Financial Institutions and Other         0.4       2.7     (2.3)    (85.2)
                                     -------------------------------------------
Total                                $  22.5   $  28.9   $ (6.4)    (22.1)%
                                     ===========================================
</TABLE>

         Net premiums earned grew 4.4% to $26.0 million in the third quarter of
2000 from $24.9 million in the third quarter of 1999. The growth in premiums
earned is mainly attributable to the increase writings in non-municipal
reinsurance and direct financial guaranty insurance. Earned premiums from
refundings contributed $1.4 million (or 5.4%) of earned premiums in the third
quarter of 2000 compared to $4.8 million (or 19.3%) in the same period in 1999.
Deferred premium revenue, net of prepaid reinsurance premiums, grew to $348.7
million at September 30, 2000 from $337.3 million at December 31, 1999 and
$326.3 at September 30, 1999.

         The following table shows net premiums earned by line of business for
the periods presented:

<TABLE>
<CAPTION>

                                           3rd Quarter
--------------------------------------------------------------------------------
  Net Premiums Earned
  (dollars in millions)                 2000      1999   $ Change   % Change
--------------------------------------------------------------------------------
<S>                                  <C>       <C>       <C>        <C>
Municipal Reinsurance                $   6.9   $   9.3   $ (2.4)    (25.8)%
Non-Municipal Reinsurance                7.9       6.8      1.1      16.2
Direct Financial Guaranty                4.2       2.2      2.0      90.9
Trade Credit                             4.2       4.4     (0.2)     (4.5)
Financial Responsibility                 0.2       0.4     (0.2)    (50.0)
Financial Institutions and Other         2.6       1.8      0.8      44.4
                                     -------------------------------------------
Total                                $  26.0   $  24.9   $  1.1    4.4 %
                                     ===========================================
</TABLE>

                                       20
<PAGE>

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS

         Net investment income increased 6.5% to $16.3 million in the third
quarter of 2000 from $15.3 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 $973.8 million at September 30, 1999 to $1,058.6
million at September 30, 2000. The investment yields on the Company's investment
portfolio were 6.2% and 6.3% for the third quarters of 2000 and 1999,
respectively. In addition, the Company realized $0.1 million capital gain in the
third quarter of 2000 compared with $0.1 million of capital losses in the third
quarter of 1999.

         The Company recognized revenues from disposition of assignments,
through securitization and other sales and other assignment revenues of ($0.8)
million in the third quarter of 2000 compared to $12.2 million in the third
quarter of 1999. The decrease in the third quarter compared to the prior period
is attributable to negative mark-to-market adjustments of $2.9 million on
retained interests of securitized assets held by non-consolidated subsidiaries
and a decrease in gains from disposition of assignments In August 2000, the
Company determined to place Singer, the subsidiary responsible for such
revenues, in wind-down.

         Incurred losses and loss adjustments expenses ("LAE") were $2.1 million
in the third quarter of 2000 compared to $3.8 million for the same period of
1999. The reduction in incurred losses and LAE resulted from an increase in loss
reserves in the Company's surety line of business in the third quarter of 1999.

         The Company's insurance expense ratio was 61.8% in the third quarter of
2000 compared to 52.1% in the third quarter of 1999. The increase in the
Company's insurance expense ratio is a result of an increase in policy
acquisition costs and an increase in insurance expenses. The Company ceased the
operations of its New Product and Ventures Group at the end of the second
quarter 2000. As a result various fixed expenses amounting to $1.1 million are
now allocated to the insurance group. Policy acquisition costs ("PAC") were
$10.6 million and $8.9 million for the third quarters of 2000 and 1999,
respectively, representing 40.8% and 35.8% of earned premiums in those
respective periods. The increase in PAC is primarily due to a reduction in
financial institutions writings thereby decreasing deferred costs.

         Non-insurance expenses increased to $15.8 million in the third quarter
of 2000 from $14.9 million during the same period in 1999. This increase
primarily reflects non-recurring expenses totaling $7.5 million in Singer
primarily for severance and related wind-down costs, a loss on sale of ELB
assets ($1.4 million) and a $4.0 million break-up fee associated with the
termination of the sale of C-BASS offset by higher 1999 expenses, including
expenses attributable to AGS and New Products and Ventures Group ("NPV") which
were sold/shut down in 2000, Singer's start-up expenses in its viatical
settlement product and operating expenses including payroll/benefits,
depreciation and advertising costs.

         The Company realized income of $1.7 million from its investments in
affiliates in the third quarter of 2000 compared to $4.5 million in the third
quarter of 1999, primarily as a result of losses from Credit2B and reduced
income from C-BASS.

         Interest expense totaled $4.2 million and $3.1 million in the third
quarters of 2000 and 1999, respectively, reflecting the increase in the
Company's short-term debt outstanding.

         The Company had a net tax benefit of $10.9 million (based on income of
$4.6 million) for the third quarter of 2000 versus a benefit of $1.8 million
(based on income of $20.6 million) for the prior year. The Company incurred a
taxable loss for the quarter excluding tax-exempt investment income of
approximately $7.7 million. The Company anticipates a lower effective tax rate
for the year 2000 due to benefits realized on operating losses generated by
Singer and Van Am.

                                       21
<PAGE>

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS

         The 2000 and 1999 effective tax rates are reflective of the April 1999
purchase of a portfolio of residential mortgage-backed securities that consist
of residual interests in real estate mortgage investment conduits ("REMICs"),
which is expected to provide tax benefits that will result in a lowering of the
Company's effective tax rate through at least 2001. For the three months period
ending September 30, 2000, the Company realized no tax benefits from the
portfolio of REMICs, compared with $5.3 million for the same period in 1999.
With respect to the acquired tax benefits, as of September 30, 2000, the Company
had recorded a $122.2 million deferred tax asset and a related deferred credit;
no such deferred credit was recorded as of September 30, 1999. 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 $10.5
million for the nine month period ended September 30, 2000 and none for the
three month period ended September 30, 2000). At September 30, 2000, the Company
did not record a deferred federal income tax liability of $10.5 million for tax
losses of $30.0 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 involved 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 and 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 $24.9
million as of September 30, 2000). See Note 6 of Notes to Consolidated Financial
Statements in the 1999 Form 10-K/A and Note 5 of the Notes to Unaudited
Consolidated Financial Statements contained in this report for additional
information regarding the federal income tax effect of the portfolio on the
Company.

         As discussed in Note 6 of Notes to Consolidated Financial Statements in
the 1999 Form 10-K/A, one of the prior owners of the REMICs was audited by the
IRS for taxable years during which such owner owned the portfolio. Upon
completion of that audit, the IRS determined that certain tax strategies adopted
by the prior owner with respect to the REMICs were improper and should be
disallowed. The prior owner disputed the IRS's determination and filed suit in
the United States Tax Court to overturn the IRS's audit adjustments relating to
the REMICs. In August 2000, the prior owner and the IRS reached a settlement in
their Tax Court litigation and the Tax Court entered a series of stipulated
decisions regarding the settlement. The stipulated decisions appear to be a
concession by the IRS of the incorrectness of its audit determination that
certain tax strategies adopted by the prior owner with respect to the REMICs
were improper and should be disallowed. After reviewing the stipulated
decisions, Company's counsel has advised the Company that, at the present time,
its is not appropriate to conclude that the settlement or any potential future
IRS action will affect the Company's ability to use the tax strategy.
Nonetheless, given the private nature of the settlement, the lack of clarity
regarding the basis for the settlement, and the uncertainties regarding the
IRS's potential future action, there can be no complete assurance that the
settlement or any potential future IRS action will not have a material adverse
effect on the Company's ability to use the tax strategy.

                                       22
<PAGE>

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS

         The Company had net income of $15.6 million in the third quarter of
2000 compared to net income of $22.4 million in the third quarter of 1999. Third
quarter 2000 basic and diluted earnings per share were $.41 and $.40,
respectively, compared to $.59 and $.57, respectively, in the third quarter of
1999. The decrease in net earnings is primarily due to loss on sale of ELB
assets ($1.4 million), restructuring costs including severance at Singer ($7.5
million), break-up fees of $4.0 million relating to the termination of the
agreement to sell C-BASS, an increase in operating expenses, higher policy
acquisition costs and a decrease in assignment sales partially offset by
increased income tax benefits of $10.9 million, an increase in earned premiums
and lower loss and loss adjustment expenses.

         The diluted weighted average shares outstanding during the third
quarter of 2000 were 38.8 million compared to 39.0 million during the third
quarter of 1999.

         Singer and ELB combined contributed net loss of $.31 per share in the
third quarter of 2000 compared to net earnings of $.03 per share during the
comparable period in 1999. C-BASS contributed $.09 per share to Enhance
Financial's third quarter 2000 net income, compared to $.10 per share during the
comparable period in 1999. Sherman contributed net income of $.01 per share
income, compared to $.00 per share loss during the comparable period in 1999.
Credit2B had a $.05 per share loss in the third quarter of 2000.


NINE MONTHS ENDED SEPTEMBER 30, 2000 VS. NINE MONTHS ENDED SEPTEMBER 30, 1999

         In the first nine months of 2000, industry-wide municipal new-issue
volume was $141.1 billion, a decline of 17.5% from the same period in 1999. The
insured portion of such new issues was 40.7% and 47.0% during the first nine
months of 2000 and 1999, respectively. Total municipal bond refundings in the
first nine months of 2000 represented approximately 9.4% of new-issue volume,
down from 18.0% for the first nine months of 1999.

         Gross premiums written in the first nine months of 2000 decreased 3.8%
to $95.3 million from $99.1 million in the same period in 1999. The decrease is
mainly attributable to declines in municipal reinsurance and financial
institutions businesses of $3.9 million and $10.9 million, respectively,
partially offset by an increase in direct financial guaranty (including
asset-backed), non-municipal reinsurance and trade credit of $6.0 million, $3.5
million and $1.9 million respectively. As with other financial guaranty
companies, the Company experienced an increase in installment premiums relative
to upfront premiums, which allows for equivalent future earned premium with a
smaller written premium base.

         Net premiums written decreased $0.7 million to $92.7 million in the
first nine months of 2000 from $93.4 million in the same period in 1999.
Decreases in municipal reinsurance of $4.1 million and financial institutions of
$5.9 million were offset by increases in non-municipal reinsurance of $3.5
million and direct financial guaranty of $4.7 million. Of the Company's net
premiums written in the first nine months of 2000, 28.0%, 24.2% and 47.8% were
derived from the reinsurance of municipal bonds, the reinsurance of
non-municipal obligations and the Company's other insurance lines, respectively,
compared to 32.2%, 20.2% and 47.6% during the same period in 1999.

                                       23
<PAGE>

                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:

<TABLE>
<CAPTION>

                                      Nine months ended September 30,
--------------------------------------------------------------------------------
Net Premiums Written
(dollars in millions)                  2000      1999    $ Change   % Change
--------------------------------------------------------------------------------
<S>                                  <C>       <C>       <C>        <C>
Municipal Reinsurance                $  25.9   $  30.0   $ (4.1)    (13.7)%
Non-Municipal Reinsurance               22.4      18.9      3.5      18.5
Direct Financial Guaranty               23.2      18.5      4.7      25.4
Trade Credit                            17.7      16.1      1.6       9.9
Financial Responsibility                 0.6       1.1     (0.5)    (45.5)
Financial Institutions and Other         2.9       8.8     (5.9)    (67.0)
                                     -------------------------------------------
Total                                $  92.7   $  93.4   $ (0.7)      0.7%
                                     ===========================================
</TABLE>

         Net premiums earned increased 8.0% to $81.3 million in the first nine
months of 2000 from $75.3 million in the first nine months of 1999. The increase
in premiums earned is mainly attributable to recognition of non-municipal and
direct financial guaranty writings. Earned premiums from refundings contributed
$6.0 million (or 7.4%) of earned premiums in the first nine months of 2000
compared to $9.7 million (or 12.9%) in the same period in 1999.

         The following table shows net premiums earned by line of business for
the periods presented:

<TABLE>
<CAPTION>

                                       Nine months ended September 30,
--------------------------------------------------------------------------------
  Net Premiums Earned
  (dollars in millions)                2000      1999   $ Change   % Change
--------------------------------------------------------------------------------
<S>                                  <C>       <C>       <C>         <C>
Municipal Reinsurance                $  23.5   $  25.7   $ (2.2)     (8.6)%
Non-Municipal Reinsurance               23.4      19.6      3.8      19.4
Direct Financial Guaranty               10.3       7.1      3.2      45.1
Trade Credit                            14.9      14.6      0.3       2.1
Financial Responsibility                 0.9       1.2     (0.3)    (25.0)
Financial Institutions and Other         8.3       7.1      1.2      16.9
                                     -------------------------------------------
Total                                $  81.3   $  75.3   $  6.0    8.0 %
                                     ===========================================
</TABLE>

         Net investment income increased 10.5% to $47.3 million in the first
nine months of 2000 from $42.8 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 $973.8 million at September 30, 1999 to $1,058.6
million at September 30, 2000. The average yields on the Company's investment
portfolio were 6.2% and 6.0% for the first nine months of 2000 and 1999,
respectively. In addition, the Company realized $1.4 million of capital losses
in the first nine months of 2000 compared with $4.5 million of capital losses in
the first nine months of 1999. The 1999 capital loss includes the recognition of
a $4.7 million pre-tax write down of asset-backed securities.

         The Company recognized revenues from disposition of assignments,
through securitization and other sales and other assignment revenues of $9.1
million in the first nine months of 2000 compared to $28.5 million in the first
nine months of 1999. The decrease in the first nine months of 2000 compared to
the prior period is attributable to negative mark-to-market adjustments of $12.3
million on retained interests of securitized assets held by non-consolidated
subsidiaries. In August 2000, the Company determined to place Singer, the
subsidiary responsible for such revenues, in wind-down.

                                       24
<PAGE>

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS

         Incurred losses and LAE were $22.7 million in the first nine months of
2000 compared to $9.2 million for the same period of 1999. This increase is
primarily due to an increase in loss reserves for financial responsibility
claims primarily Van-Am of $12.3 million, and a $4.0 million reserve for a
direct non-municipal reinsurance claim. An increase of $11.0 million in respect
to the financial responsibility claims in the second quarter of 2000 followed a
special reserve study and reflects adverse developments resulting primarily in
case reserve and IBNR (incurred but not reported) reserve increases for specific
bond coverage.

         The Company's insurance expense ratio was 57.1% in the first nine
months of 2000 compared to 52.9% in the first nine months of 1999. The Company
dissolved NPV (non-insurance group) at the end of the second quarter 2000.
Proportioned expenses amounting to $1.1 million were allocated to the insurance
group in the third quarter. PAC were $31.1 million and $27.0 million for the
first nine months of 2000 and 1999, respectively, representing 38.3% and 35.9%
of earned premiums in those respective periods. The increase in PAC is primarily
due to a reduction in FIT writing thereby decreasing deferred cost.

         Non-insurance expenses increased to $79.9 million in the first nine
months of 2000 from $41.3 million during the same period in 1999. This increase
primarily reflects non-recurring expenses including Singer-related items, which
consists of the write off of goodwill for $22.1 million, severance and related
shut-down costs of $7.5 million, $2.0 million for the recognition of a servicing
liability, $1.4 million relating to an employee arbitration award, and a
break-up fee of $4.0 million associated with the termination of the sale of
C-BASS, loss on sale of ELB assets of $1.4 million, NPV termination costs of
$4.2 million, including a $1.3 million loss on the sale of AGS and $1.7 million
of restructuring-related obligations to the current officers of Credit2B.com
Inc. These expenses were partially offset by higher 1999 expenses, including
expenses attributable to AGS and NPV which were sold and shut down,
respectively, in 2000, Singer's start-up expenses in its viatical settlement
product and payroll/benefit, depreciation and advertising costs.

         The Company realized income of $21.1 million from its investments in
affiliates in the first nine months of 2000 compared to $17.0 million in the
first nine months of 1999. The increase is primarily attributed to equity in
income earned from C-BASS of $22.9 million compared to $16.7 million received in
1999 offset by losses in Credit2B.

         Interest expense totaled $12.3 million and $8.0 million in the first
nine months of 2000 and 1999, respectively, reflecting the increase in the
Company's short-term debt outstanding.

         The Company's tax benefit for the first nine months of 2000 was $10.9
million primarily due to $30 million of permanent tax losses compared to a tax
expense of $1.6 million (effective tax rate of 2.4% which included a benefit of
$14.4 million from permanent tax losses) for the same period of 1999. The
Company incurred a taxable loss in the third quarter and reduced its effective
tax rate for the year in anticipation of lower taxable income.

         The 2000 and 1999 effective tax rates are reflective of the April 1999
purchase of a portfolio of residential mortgage-backed securities that consist
of residual interests in real estate mortgage investment conduits ("REMICs"),
which was expected to provide tax benefits resulting in a lowering of the
Company's effective tax rate through at least 2001. For the nine month period
ending September 30, 2000, the Company realized $10.5 million of tax benefits
from the portfolio of REMICs, compared with $14.4 million for the same period in
1999. With respect to the acquired tax benefits, as of September 30, 2000, the
Company had recorded a $122.2 million deferred tax asset and a related deferred
credit; no such deferred credit was recorded as of September 30, 1999. 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 $10.5 million for the nine month period ended September 30,
2000). At September 30, 2000, the Company did not record a deferred federal
income tax liability of $10.5 million for tax losses of $30.0 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

                                       25
<PAGE>

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS

portfolio will not result in future tax obligations. The tax strategy involved
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 and 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 was 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 $24.9
million as of September 30, 2000). See Note 6 of Notes to Consolidated Financial
Statements in the 1999 Form 10-K/A and Note 5 of the Notes to Unaudited
Consolidated Financial Statements contained in this report for additional
information regarding the federal income tax effect of the portfolio on the
Company.

         As discussed in Note 6 of Notes to Consolidated Financial Statements in
the 1999 Form 10-K/A, one of the prior owners of the REMICs was audited by the
IRS for taxable years during which such owner owned the REMICs. Upon completion
of that audit, the IRS determined that certain tax strategies adopted by the
prior owner with respect to the REMICs were improper and should be disallowed.
The prior owner disputed the IRS's determination and filed suit in the United
States Tax Court to overturn the IRS's audit adjustments relating to the REMICs.
In August 2000, the prior owner and the IRS reached a settlement in their Tax
Court litigation and the Tax Court entered a series of stipulated decisions
regarding the settlement. The stipulated decisions appear to be a concession by
the IRS of the incorrectness of its audit determination that certain tax
strategies adopted by the prior owner with respect to the REMICs were improper
and should be disallowed. After reviewing the stipulated decisions, Company
counsel has advised the Company that, at the present time, its is not
appropriate to conclude that the settlement or any potential future IRS action
will affect the Company's ability to use the tax strategy. Nonetheless, given
the private nature of the settlement, the lack of clarity regarding the basis
for the settlement, and the uncertainties regarding the IRS's potential future
action, there can be no complete assurance that the settlement or any potential
future IRS action will not have a material adverse effect on the Company's
ability to use the tax strategy.

         The Company had a $9.8 million net income for the first nine months of
2000 compared to net income of $64.0 million in the first nine months of 1999.
Basic and diluted earnings per share were $0.26 and $0.25, respectively, in the
first nine months of 2000 compared to $1.69 and $1.64, respectively, for the
same period of 1999.

         The diluted weighted average shares outstanding during the first nine
months of 2000 was 38.7 million compared to 39.1 million during the same period
of 1999.

         The Company experienced net pre-tax unrealized gains of $27.3 million
in its available-for-sale portfolio during the first nine months of 2000,
compared with unrealized losses of $47.5 million during the same period in 1999.
Such gains are directly attributable to a decrease in interest rates during such
period. The Company does not believe it is possible to predict changes in
interest rates or that the lower interest rates during such period are
necessarily indicative of a trend.

                                       26
<PAGE>

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS

         Singer and ELB combined a contributed net loss of $1.26. per share in
the nine months ended September 30, 2000 compared to a net loss of $.05 per
share during the comparable period in 1999. C-BASS contributed $.59 per share to
Enhance Financial's nine-month 2000 net income, compared to $.42 per share
during the comparable period in 1999. Sherman had a neglible impact on earnings
per share, compared to a $.04 per share loss during the comparable period in
1999. Credit2B had a $.06 per share loss in 2000.


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.
Enhance Financial also 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 nine months of 2000, Enhance Financial received $18.0
million in dividends from Enhance Re ($15.0 million) and Asset Guaranty ($3.0
million). As of September 30, 2000, the maximum amount of dividends that may be
paid in the subsequent quarter ending December 31, 2000 from the Insurance
Subsidiaries without prior approval of the insurance regulatory authorities is
$12.0 million.

         Payment of dividends by Enhance Financial to its shareholders are
further restricted by the terms of the Credit Agreement. In the first nine
months of 2000, Enhance Financial declared cash dividends of $.18 per share,
aggregating $6.9 million. As a result of a loss in second quarter 2000, the
Company was prohibited by the terms of its bank credit agreement from
declaring and paying a dividend to its shareholders for the third quarter
2000 and is similarly constrained with respect to a fourth quarter 2000
dividend. The dividend in the third quarter of $2,292,523 was accrued in the
third quarter and subsequently paid in October 2000 after the Company
obtained a waiver from its bank lenders therefor. However, the Company does
not anticipate requesting a waiver from the Company's bank lenders to pay a
dividend to its shareholders during the fourth quarter of 2000.

         As of September 30, 2000, the statutory policyholders' surplus of
Enhance Re and Asset Guaranty was $209.9 million and $89.9 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 nine
months of 2000 was $24.5 million compared to cash flow provided from operations
of $41.0 million for the same period in 1999. The decrease in cash flow provided
from operations of $16.5 million for the same period in 1999 was primarily due
to a decrease of $54.2 million in net income offset by favorable changes in
receivables from affiliates, other assets and other non cash items. The carrying
value of the Company's investment portfolio (total investments plus cash and
cash equivalents) increased to $1,072.0 million at September 30, 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.

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<PAGE>

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS

         Enhance Financial is party to a credit agreement (as amended, the
"Credit Agreement") with major commercial banks providing Enhance Financial with
a borrowing facility aggregating up to $175.0 million, the proceeds of which are
to be used for general corporate purposes. The outstanding principal balance
under the Credit Agreement at September 30, 2000 is $174.4 million. The Credit
Agreement requires that the net proceeds from sales of any of the Company's
operating units or other assets be applied toward repayment of the outstanding
balance thereunder.

         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 September 30, 2000.

         The Company and MGIC each own 45.5% interests in Sherman. At December
31, 1999 the Company committed to contribute a total of $11.25 million to
Sherman, all of which has been contributed as of September 30, 2000. 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 September 30, 2000, the outstanding
principal balance under the facility was approximately $36.2 million, of which
the Company has guaranteed $18.1 million.

         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 in 2000 from the Insurance
Subsidiaries and other subsidiaries will provide adequate liquidity to enable
Enhance Financial to meet its debt obligations, general overhead expenses,
expenditures for capital improvements and other funding commitments. To address
this concern in the short term, the Company increased available bank borrowings
under the Credit Agreement and proposes to address the situation in the longer
term, both for 2000 and thereafter, a wind down Singer, the divestiture of its
ownership of its stock in Credit2B and the sale of certain subsidiaries. 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.

         In August 1999, Moody's downgraded the senior long term debt rating for
Enhance Financial from Aa3 to A2 and the insurance financial strength rating of
Enhance Re from Aaa to Aa2. In February 2000, Moody's placed such debt and
financial strength ratings 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. Further, a downgrade of the current Moody's Aa2 rating of Enhance Re
would have material input on that Company's ability to effectively compete in
business.

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<PAGE>

ITEM 3.  Quantitative and Qualitative Disclosures About Market Risk

         As of September 30, 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/A for the year
ended December 31, 1999.

         In addition, at September 30, 2000 Enhance Financial has guaranteed
Singer's performance under interest rate swap agreements with a notional amount
of $40.0 million. At September 30, 2000, the fair market value of these swaps
was approximately ($261,000). Deferred hedge losses as of September 30, 2000
totaled approximately $655,000. Offsetting this liability was approximately
$43.0 million of lottery receivables residing in the pipeline or in an
off-balance sheet warehouse.

         Based on market values and prevailing interest rates as of September
30, 2000, a hypothetical instantaneous decrease (or increase) in rates of 100
basis points would produce an after-tax increase (or decrease) in the fair
market value of these swaps of approximately $2.56 million, and would decrease
(or increase) the deferred hedge losses by $2.56 million.

PART II: OTHER INFORMATION

ITEM 1.  Legal Proceedings.

            Creditrust and its president filed a complaint 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 12 of the Notes to
Unaudited Consolidated Financial Statements - Periods Ended September 30, 2000
and 1999.

ITEM 6.  Exhibits and reports on Form 8-K


         (a)      Exhibits

                  Exhibit 2      Agreement  and Plan of Merger, dated
                                 November 13, 2000, among the registrant, Radian
                                 Group Inc. and GOLD Acquisition Corporation

                  Exhibit 10.10. Partnership Interest Purchase Agreement,
                                 dated September 28, 2000, by and among the
                                 Registrant and Enhance C-BASS Residual Finance
                                 Corporation, as sellers, Credit-Based Asset
                                 Servicing and Securitization LLC, as an
                                 accommodating party, and Residential Funding
                                 Corporation and RFC Acquisition Corp., as
                                 purchasers.

                  Exhibit 15.    Letter from Deloitte & Touche LLP regarding
                                 unaudited interim financial information.

                  Exhibit 27.    Financial data schedules.

         (b)      Reports on Form 8-K

                  None.

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<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.

Date: November 17, 2000            ENHANCE FINANCIAL SERVICES GROUP INC.


                                   By: /s/ Richard P. Lutenski
                                       -----------------------------------------
                                       Richard P. Lutenski
                                       Executive Vice President (duly authorized
                                       officer)
                                       and Chief Financial Officer

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