<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, 1998

                                       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: 37,389,871 shares of
common stock, par value $.10 per share, as of November 11, 1998.


<PAGE>


                      ENHANCE FINANCIAL SERVICES GROUP INC.

                                      INDEX

<TABLE>
<CAPTION>

                                                                                                PAGE
                                                                                                ----
<S>                                                                                           <C>
PART I        FINANCIAL INFORMATION (Unaudited)

Item 1.  Financial Statements

Consolidated Balance Sheets - September 30, 1998 and December 31, 1997 ......................    3

Consolidated Statements of Income - Nine months ended September 30, 1998 and 1997 ...........    4

Consolidated Statement of Shareholders' Equity - Nine months ended September 30 1998 ........    5

Consolidated Statements of Cash Flows - Nine months ended September 30, 1998 and 1997 .......    6

Notes to Consolidated Financial Statements ..................................................    7

Item 2.  Management's Discussion and Analysis of
         Financial Condition and Results of Operations ......................................    8-13


PART II  OTHER INFORMATION

Item 6. Exhibits ............................................................................    13

Signature ...................................................................................    14

Exhibit 27  Financial data schedules 

</TABLE>


                                       2


<PAGE>

                     ENHANCE FINANCIAL SERVICES GROUP INC.
                                AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS


                     (In thousands except per share amounts)


<TABLE>
<CAPTION>

                                                                        Sept 30,     December 31,
                                                                     -----------    --------------
                                                                         1998            1997
                                                                     -----------    --------------
                                                                     (unaudited)
<S>                                                                  <C>            <C>
Assets
   Investments:
      Fixed maturities, held to maturity, at amortized cost
         (market value $206,841 and $219,763)                        $   197,096    $   210,436
      Fixed maturities, available for sale, at market
         (amortized cost $639,757 and $577,388)                          685,344        608,077
      Common stock, at market (cost $498)                                    833            833
      Investment in affiliates                                            61,524         38,862
      Other invested assets                                               23,502         33,045
      Short-term investments                                              35,466         46,832
      Cash and cash equivalents                                           32,039         21,405
                                                                     -----------    --------------
        Total Investments                                              1,035,804        959,490

   Premiums and other receivables                                         32,757         29,958
   Accrued interest and dividends receivable                              15,684         13,388
   Deferred policy acquisition costs                                      97,949         95,645
   Federal income taxes recoverable                                        3,676          3,366
   Prepaid reinsurance premiums                                            6,749          6,281
   Reinsurance recoverable on unpaid losses                                2,069          2,688
   Receivable for securities                                              12,356            702
   Other assets                                                           69,360         45,975
                                                                     -----------    --------------
        TOTAL ASSETS                                                 $ 1,276,404    $ 1,157,493
                                                                     -----------    --------------
                                                                     -----------    --------------

Liabilities and Shareholders' Equity
LIABILITIES
   Losses and loss adjustment expenses                               $    36,785    $    33,675
   Reinsurance payable on paid losses and loss adjustment expenses         8,438          3,479
   Deferred premium revenue                                              299,454        287,535
   Accrued profit commissions                                              2,358          3,768
   Current income taxes                                                    4,223           --
   Deferred income taxes                                                  74,924         64,680
   Long-term debt                                                         75,000         75,000
   Short-term debt                                                        68,500         43,500
   Payable for securities                                                  7,636          5,318
   Accrued expenses and other liabilities                                 58,553         59,145
                                                                     -----------    --------------
       TOTAL LIABILITIES                                                 635,871        576,100
                                                                     -----------    --------------

SHAREHOLDERS' EQUITY
   Common stock-$.10 par value
      Authorized-100,000,000 shares
      Issued-39,244,596 and 38,671,870 shares                              3,924          3,867
   Additional paid-in capital                                            236,831        228,507
   Retained earnings                                                     400,505        344,402
   Unearned compensation                                                    (248)          --
   Unrealized gains                                                       29,556         19,396
   Treasury stock                                                        (30,035)       (14,779)
                                                                     -----------    --------------
      TOTAL SHAREHOLDERS' EQUITY                                         640,533        581,393
                                                                     -----------    --------------
      TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                     $ 1,276,404    $ 1,157,493
                                                                     -----------    --------------
                                                                     -----------    --------------

</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,
                                                      -----------------------   -----------------------
                                                         1998         1997         1998         1997
                                                      ---------    ---------    ---------    ----------
<S>                                                   <C>          <C>          <C>          <C>      
Revenues
 Net premiums written                                 $  27,619    $  25,475    $  88,582    $  72,800
 (Increase) decrease in deferred premium revenue          1,469       (4,169)     (11,452)     (10,720)
                                                      ---------    ---------    ---------    ----------
   Premiums earned                                       29,088       21,306       77,130       62,080
 Net investment income                                   13,752       12,825       39,991       37,530
 Net realized gains/(losses) on sale of investments       2,083         (362)       2,060       (2,433)
 Assignment sales                                        12,718        7,852       35,189       20,292
 Other income                                             1,534          458        4,535        2,244
                                                      ---------    ---------    ---------    ----------
   Total revenues                                        59,175       42,079      158,905      119,713
                                                      ---------    ---------    ---------    ----------

Expenses
 Losses and loss adjustment expenses                      4,647        2,740        8,514        6,886
 Policy acquisition costs                                10,158        7,167       26,826       21,576
 Profit commissions                                          97          174          901          546
 Other operating expenses - insurance                     3,334        2,949       10,011        7,119
                          - non-insurance                11,150        7,289       29,839       16,973
                                                      ---------    ---------    ---------    ----------
   Total expenses                                        29,386       20,319       76,091       53,100
                                                      ---------    ---------    ---------    ----------
 Income from operations                                  29,789       21,760       82,814       66,613
 Equity in net income of affiliates                       3,167        3,818        9,565        4,070
 Foreign currency losses                                     (6)        --            (15)          (3)
 Interest expense                                        (2,190)      (2,013)      (6,252)      (5,287)
                                                      ---------    ---------    ---------    ----------
   Income before income taxes                            30,760       23,565       86,112       65,393
 Income tax expense                                       8,033        6,113       23,633       17,120
                                                      ---------    ---------    ---------    ----------
   Net income                                         $  22,727    $  17,452    $  62,479    $  48,273
                                                      ---------    ---------    ---------    ----------
                                                      ---------    ---------    ---------    ----------

Basic earnings per share                              $    0.61    $    0.47    $    1.67    $    1.31
                                                      ---------    ---------    ---------    ----------
                                                      ---------    ---------    ---------    ----------

Diluted earnings per share                            $    0.58    $    0.45    $    1.59    $    1.26
                                                      ---------    ---------    ---------    ----------
                                                      ---------    ---------    ---------    ----------

Basic weighted average shares outstanding                37,422       37,166       37,484       36,957
                                                      ---------    ---------    ---------    ----------
                                                      ---------    ---------    ---------    ----------

Diluted weighted average shares outstanding              39,110       38,814       39,255       38,423
                                                      ---------    ---------    ---------    ----------
                                                      ---------    ---------    ---------    ----------

</TABLE>


           See notes to unaudited consolidated financial statements.


                                       4

<PAGE>


                             ENHANCE FINANCIAL SERVICES GROUP INC.

                                          AND SUBSIDIARIES

                       UNAUDITED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

                            FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998

                                (In thousands except share amounts)
                                             (unaudited)


<TABLE>
<CAPTION>

                                                                                Additional
                                                                            
                                        Common Stock          Treasury Stock     Paid-in    Unrealized                
                                   ---------------------   --------------------
                                     Shares      Amount     Shares     Amount    Capital   Gains (Losses) 
                                   ----------   --------   ---------  --------- ---------  --------------
<S>                               <C>           <C>       <C>        <C>       <C>         <C>           
Balance, December 31, 1997         38,671,870    $ 3,867   1,284,400  $(14,779) $ 228,507   $  19,396     

Change in unrealized gain                                                                      10,160     

Dividends paid ($0.17 per share)                                                                          

Exercise of stock options             564,596         56                           8,324                  

Issuance of common stock                8,130          1                                                  

Purchase of treasury stock                                   546,394   (15,256)                           

Net income                                                                                                
                                   ----------   --------   ---------  --------- ---------   ---------
Balance, September 30, 1998        39,244,596    $ 3,924   1,830,794  $(30,035) $ 236,831   $  29,556     
                                   ----------   --------   ---------  --------- ---------   ---------
                                   ----------   --------   ---------  --------- ---------   ---------
</TABLE>

<TABLE>
<CAPTION>

                                         Unearned     Retained

                                        Compensation   Earnings    Total      
                                       ------------- ----------  ---------
<S>                                    <C>           <C>         <C>
Balance, December 31, 1997              $   --       $ 344,402   $ 581,393   

Change in unrealized gain                                           10,160   

Dividends paid ($0.17 per share)                        (6,376)     (6,376)  

Exercise of stock options                                            8,380   

Issuance of common stock                  (248)                       (247)  

Purchase of treasury stock                                         (15,256)  

Net income                                              62,479      62,479   
                                       ------------- ----------  ---------
Balance, September 30, 1998             $ (248)      $ 400,505   $ 640,533   
                                       ------------- ----------  ---------
                                       ------------- ----------  ---------

</TABLE>


           See notes to unaudited consolidated financial statements.


                                       5

<PAGE>


                     ENHANCE FINANCIAL SERVICES GROUP INC.
                                AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                                 (IN THOUSANDS)
                                  (unaudited)


<TABLE>
<CAPTION>

                                                               Nine Months Ended
                                                                 September 30,
                                                              -------------------
                                                              1998           1997
                                                           ----------    ----------
<S>                                                        <C>           <C>      
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net income                                                $  62,479     $  48,273
 Adjustments to reconcile net income to net cash
  provided by operating activities:
  Depreciation and amortization, net                          (7,476)      (6,717)
  (Gain) loss on sale of investments, net                     (2,529)       2,433
  Equity in net income of affiliates                          (9,565)      (4,070)
  Compensation, restricted stock award program                  (248)        --
  Change in assets and liabilities, net of effects from
   consolidation of previously unconsolidated affiliate:
    Premiums and other receivables                            (2,799)      (1,309)
    Accrued interest and dividends receivable                 (2,296)      (1,971)
    Accrued expenses and other liabilities                      (592)         266
    Deferred policy acquisition costs                         (2,304)      (6,798)
    Deferred premium revenue, net                             11,451       10,749
    Accrued profit commissions                                (1,410)         545
    Losses and loss adjustment expenses, net                   8,688        4,301
    Other assets                                             (21,335)     (10,631)
    Income taxes, net                                          9,403        1,407
                                                           ----------    ----------
 Net cash provided by operating activities                    41,467       36,478
                                                           ----------    ----------

CASH FLOWS FROM INVESTING ACTIVITIES:
 Purchase of property and equipment                           (1,307)      (1,325)
 Proceeds from sales and maturities of investments           220,898      452,836
 Purchase of investments                                    (269,985)    (489,644)
 Sales of short-term investments, net                         11,366        4,953
 Purchases of other invested assets, net                       9,543         --
 Investment in affiliates                                    (13,097)      (6,341)
 Cash of previously unconsolidated affilliate                   --            147
                                                           ----------    ----------
 Net cash used in investing activities                       (42,582)     (39,374)
                                                           ----------    ----------

CASH FLOWS FROM FINANCING ACTIVITIES:
 Receivable from affiliates                                     --            636
 Capital stock                                                 8,381        6,858
 Short-term debt                                              25,000        7,175
 Dividends paid                                               (6,376)      (6,137)
 Purchase of treasury stock                                  (15,256)      (6,006)
                                                           ----------    ----------
Net cash used in financing activities                         11,749        2,526
                                                           ----------    ----------
Net change in cash and cash equivalents                       10,634         (370)
Cash and cash equivalents, beginning of period                21,405        5,385
                                                           ----------    ----------
Cash and cash equivalents, end of period                   $  32,039     $  5,015
                                                           ----------    ----------
                                                           ----------    ----------

</TABLE>


            See notes to unaudited consolidated financial statements


                                       6

<PAGE>


                      ENHANCE FINANCIAL SERVICES GROUP INC.
                                AND SUBSIDIARIES

              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                    PERIODS ENDED SEPTEMBER 30, 1998 AND 1997

1. BASIS OF PRESENTATION

         The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q under Rules and
Regulations of the Securities and Exchange Commission and do not include all of
the information and disclosures required by generally accepted accounting
principles. These statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Annual Report on Form
10-K for the year ended December 31, 1997 of Enhance Financial Services Group
Inc. ("Enhance Financial").

         The accompanying unaudited consolidated financial statements have not
been audited by independent auditors in accordance with generally accepted
auditing standards. However, in the opinion of management, such financial
statements include all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the financial position and results of
operations of Enhance Financial and Subsidiaries (collectively the "Company").
The results of operations for the nine months ended September 30, 1998 may not
be indicative of the results that may be expected for the year ending December
31, 1998.

2. DIVIDENDS DECLARED

         In the first six months of 1998, Enhance Financial declared and paid 
cash dividends of $.055 per share. (adjusted for the 2:1 split of the common 
stock of Enhance Financial effective June 26, 1998). In September 1998 the 
Company declared a dividend of $ .06 per share. The aggregate value of the 
dividends declared in 1998 through September 1998 was $6,376,523.

3. COMMON STOCK

         On April 8, 1998, the Board of Directors approved a two-for-one stock
split, which was effective on June 26, 1998. An amount equal to the par value of
common shares issued to effect the split was transferred from additional paid-in
capital to the common stock account. This transfer has been reflected in the
consolidated statement of shareholders' equity at January 1, 1998. On June 3,
1998, the Company's shareholders approved an increase in the number of shares of
common stock authorized for issuance to 100 million. All references to number of
common shares and to per-share information in the consolidated financial
statements and related notes have been adjusted to reflect the stock split on a
retroactive basis.

         During the first nine months of 1998, Enhance Financial repurchased
546,394 shares of its common stock outstanding at prices ranging from $21.00 to
$34.02 as part of its stock repurchase program, including 106,394 shares
repurchased under a forward purchase agreement.

4. NEW ACCOUNTING STANDARD

         The Company adopted Statement of Financial Accounting Standards No. 130
("SFAS 130"), "Reporting Comprehensive Income," during the first quarter of 1998
as required. SFAS 130 establishes standards for reporting and displaying
comprehensive income and its components in a set of financial statements.

         Total comprehensive income for the nine months ended September 30, 1998
and 1997 was $72.6 million and $55.3 million, respectively. Presently, other
comprehensive income represents net income plus changes in unrealized gains and
losses on available for sale securities.

5. RECLASSIFICATIONS

         Certain of the 1997 amounts have been reclassified to conform to the
current year presentation.


                                       7

<PAGE>


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


General

         Enhance Financial Services Group Inc. ("Enhance Financial," and
together with its consolidated subsidiaries, the "Company") is a holding company
that, through its subsidiaries, principally Enhance Reinsurance Company and
Asset Guaranty Insurance Company (the "Insurance Subsidiaries"), provides
financial guaranty insurance and reinsurance and other products and services
utilizing the Company's credit-related analytic skills.

         The Company acquired a majority ownership interest (increased from a
50% interest) in Singer Asset Finance Company, L.L.C. ("Singer") in March 1997.
The results of Singer have been consolidated since that date.

Results of Operations

Three Months Ended September 30, 1998 vs.
Three Months Ended September 30, 1997

         Gross premiums written in the third quarter of 1998 were $28.4 million
compared with $29.3 million in the same period in 1997, representing an decrease
of 3.1%.

         Net premiums written increased 8.2% to $27.6 million in the third
quarter of 1998 from $25.5 million in the same period in 1997. Of the Company's
net premiums written in the third quarter of 1998, 41.9%, 16.3% and 41.8% were
derived from the reinsurance of municipal bonds, the reinsurance of
non-municipal obligations and the Company's other insurance lines, respectively,
compared to 27.7%, 26.8% and 45.5% during the same period in 1997.

         In the third quarter of 1998, municipal new-issue volume was $59.1
billion, approximately even with the same period in 1997. The insured portion of
such new issues was 57.0% and 51.0% during the third quarters of 1998 and 1997,
respectively. Total municipal bond refundings in the third quarter of 1998
represented approximately 30% of new-issue volume, down from 35% for the third
quarter of 1997.

         Earned premiums grew 36.6% to $29.1 million in the third quarter of
1998 from $21.3 million in the third quarter of 1997. Earned premiums from
refundings contributed $5.3 million (or 18.2%) of earned premiums in the third
quarter of 1998 compared to $2.2 million (or 10.3%) in the same period in 1997.
Deferred premium revenue, net of prepaid reinsurance premiums, grew to $292.7
million at September 30, 1998 from $281.3 million at December 31, 1997.

         Net investment income increased 7.8% to $13.8 million in the third
quarter of 1998 from $12.8 million in the same period in 1997. This increase
resulted primarily from the growth in the Company's investment portfolio
(excluding investments in affiliates, other invested assets and restricted cash
of Singer) from $834.9 million at September 30, 1997 to $933.7 million at
September 30, 1998. The average yields on the Company's investment portfolio
were 6.2% and 6.4% for the third quarters of 1998 and 1997, respectively. In
addition, the Company realized $2.1 million of capital gains in the third
quarter of 1998 compared with losses of $0.4 million in the third quarter of
1997.

         The Company recognized revenues from disposition of assignments,
through securitization and other sales, of $12.7 million in the third quarter of
1998 compared to $7.9 million in the third quarter of 1997.

         Incurred losses and LAE increased to $4.6 million in the 1998 third
quarter from $2.7 million in the third quarter of 1997. This increase in the
third-quarter losses is mainly attributable to the addition of $1.6 million to
the non-specific reserve. In the third quarter of 1998 the Company also reduced
the non-specific reserve by $10 million after establishing a $10 million case
reserve for anticipated losses related to reinsurance of Delaware Valley
Obligated Group (DVOG) debt. DVOG is an entity comprising five hospitals and a
medical university in the Philadelphia area that is part of Allegheny Health,
Education and Research Foundation (AHERF), based in Pittsburgh.


                                       8

<PAGE>


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


         The Company's insurance expense ratio was 46.7% in the third quarter of
1998 compared to 48.3% in the third quarter of 1997. Non-insurance expenses
increased to $11.2 million in the third quarter of 1998 from $7.3 million during
the same period in 1997 reflecting the continued growth in its Singer operations
as well as the growth in expenses associated with the Company's diversification
activities. Policy acquisition costs ("PAC") were $10.2 million and $7.2 million
for the third quarters of 1998 and 1997, respectively, representing 34.9% and
33.6% of earned premiums in those respective periods.

         The Company realized income of $3.2 million from its investments in 
affiliates in the third quarter of 1998 compared to $3.8 million in the third 
quarter of 1997.

         Interest expense totaled $2.2 million and $2.0 million in the third
quarters of 1998 and 1997, respectively, reflecting the increase in the
Company's short-term debt outstanding.

         The Company's effective tax rate for the third quarter of 1998 was
26.1% compared to 25.9% for the comparable period of 1997.

         The Company's 1998 third-quarter net income increased 29.7% to $22.7 
million from $17.5 million in the third quarter of 1997. Third-quarter 1998 
basic and diluted earnings per share increased 29.8% and 28.9%, respectively, 
to $.61 and $.58 from $.47 and $.45 in the third quarter of 1997. This 
increase primarily reflects increases in premiums earned, net realized gains 
from the sale of investments and growth in the earnings of its Singer 
subsidiary. Diluted operating earnings per share, which excludes the impact 
of capital and foreign exchange gains and losses, increased 20.0% to $.55 in 
the third quarter of 1998 from $.46 in the third quarter of 1997.

         The diluted weighted average shares outstanding during the third
quarter of 1998 was 39.1 million compared to 38.8 million during the third
quarter of 1997.

         All references to number of common shares and per-share information
reflect the two-for-one stock split which was effective on June 26, 1998.

Nine Months Ended September 30, 1998 vs.
Nine Months Ended September 30, 1997

         Gross premiums written in the first nine months of 1998 were $89.4
million compared with $77.5 million in the same period in 1997, representing an
increase of 15.4%.

         Net premiums written increased 21.7% to $88.6 million in the first nine
months of 1998 from $72.8 million in the same period in 1997. Of the Company's
net premiums written in the first nine months of 1998, 45.8%, 17.3% and 36.9%
were derived from the reinsurance of municipal bonds, the reinsurance of
non-municipal obligations and the Company's other insurance lines, respectively,
compared to 36.0%, 20.6% and 43.4% during the same period in 1997.

         In the first nine months of 1998, municipal new-issue volume was $214.0
billion, a 37% increase over the same period in 1997. The insured portion of
such new issues was 51% during the first nine months of 1998 and 1997,
respectively. Total municipal bond refundings in the first nine months of 1998
represented approximately 30% of new-issue volume, up from 26% for the first
nine months of 1997.

         Earned premiums grew 24.2% to $77.1 million in the first nine months of
1998 from $62.1 million in the first nine months of 1997. Earned premiums from
refundings contributed $13.2 million (or 17.1%) of earned premiums in the first
nine months of 1998 compared to $6.6 million (or 10.6%) in the same period in
1997. Deferred premium revenue, net of prepaid reinsurance premiums, grew to
$292.7 million at September 30, 1998 from $281.3 million at December 31, 1997.


                                       9

<PAGE>


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


         Net investment income increased 6.4% to $40.0 million in the first nine
months of 1998 from $37.6 million in the same period in 1997. This increase
resulted primarily from the growth in the Company's investment portfolio from
$834.9 million at September 30, 1997 to $933.7 million at September 30, 1998.
The average yields on the Company's investment portfolio were 6.2% and 6.3% for
the first nine months of 1998 and 1997, respectively. In addition, the Company
realized $2.4 million of capital losses in the first nine months of 1997
compared with gains of $2.1 in the first nine months of 1998.

         The Company recognized revenues from disposition of assignments,
through securitization and other sales, of $35.2 million in the first nine
months of 1998 compared to $20.3 million in the first nine months of 1997. The
amount for the first nine months of 1997 reflects assignment sales for the
period following the Company's acquisition of a majority ownership interest in
Singer in March 1997.


         Incurred losses and LAE were $8.5 million and $6.9 million in the first
nine months of 1998 and 1997, respectively. This increase in the losses is
mainly attributable to a net contribution of $1.6 million to the non-specific
reserve. In the third quarter of 1998 the Company also reduced the non-specific
reserve by $10 million to offset a $10 million case reserve established for
anticipated losses related to reinsurance of Delaware Valley Obligated Group
(DVOG) debt. DVOG is an entity comprising five hospitals and a medical
university in the Philadelphia area that is part of Allegheny Health, Education
and Research Foundation (AHERF), based in Pittsburgh

         The Company's insurance-expense ratio was 48.9% in the first nine
months of 1998 compared to 47.1% in the first nine months of 1997. PAC were
$26.8 million and $21.6 million for the first nine months of 1998 and 1997,
respectively, representing 34.8% of earned premiums in each period.

         Non-insurance expenses increased to $29.8 million in the first nine
months of 1998 from $17.0 million during the same period in 1997 reflecting the
continued growth in the Singer operations, which expenses are included on a
consolidated basis since March 1997, as well as the growth in expenses
associated with the Company's diversification activities.

         The Company realized income of $9.6 million from its investments in 
affiliates in the first nine months of 1998 compared to $4.1 million in the 
first nine months of 1997. The 1997 amounts include the Company's share of 
the net income of Singer prior to the purchase of its majority interest in 
March 1997, from which time the results of Singer have been consolidated.

         Interest expense totaled $6.3 and $5.3 million in the first nine months
of 1998 and 1997, respectively, reflecting the increase in the Company's
short-term debt outstanding over the period.

         The Company's effective tax rate for the first nine months of 1998 was
27.4% compared to 26.2% for the comparable period of 1997.

         The Company's net income in the first nine months of 1998 increased 
29.4% to $62.5 million from $48.3 million in the first nine months of 1997. 
Basic earnings per share increased 27.5% to $1.67 in the first nine months of 
1998 from $1.31 in the first nine months of 1997. Diluted earnings per share 
increased 26.2% to $1.59 from $1.26. These increases primarily reflect 
increases in premiums earned, net realized gains from the sale of investments 
and growth in the earnings of its Singer subsidiary. Diluted operating 
earnings per share, which excludes the impact of capital and foreign exchange
gains and losses, increased 20.0% to $1.56 in the first nine months of 1998 
from $1.30 in the first nine months of 1997.

         The diluted weighted average shares outstanding during the first nine
months of 1998 was 39.3 million compared to 38.4 million for the first nine
months of 1997.


                                       10


<PAGE>


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


         All references to number of common shares and to per-share information
reflect the two-for-one stock split which was effective on June 26, 1998.

Liquidity and Capital Resources

         As a holding company, Enhance Financial funds the payment of its 
operating expenses, principal and interest on its debt obligations, dividends 
to its shareholders and the repurchase of Common Stock primarily from 
dividends and other payments from the Insurance Subsidiaries; manages cash 
flows associated with the Company's diversification activities and draws on 
its line of credit provided under the credit agreement described below. 
Payments of dividends to Enhance Financial by the Insurance Subsidiaries are 
subject to restrictions relating to statutory capital and surplus and net 
investment income. During the first nine months of 1998 the Insurance 
Subsidiaries paid dividends of $18.5 million to Enhance Financial. As of 
September 30, 1998, the maximum amount of dividends remaining available from 
the Insurance Subsidiaries without prior approval of the insurance regulatory 
authorities was $15.4 million.

         The Company's cash flow from operations for the first nine months of
1998 was $41.5 million compared to $36.5 million for the same period in 1997.
The Company's investment portfolio increased to $933.7 million at September 30,
1998 from $891.6 million at December 31, 1997 principally as a result of the
cash flows from operations and declining interest rates which increased the mark
to market for the period.

         The Company maintains a credit facility providing for borrowings to be
used for general corporate purposes. During the second quarter of 1998, the
Company entered into a new unsecured credit agreement with four major commercial
banks for up to $100 million of borrowings, an increase of $25 million over the
previous agreement (which was terminated). As of September 30, 1998, the Company
had $68.5 million outstanding under the credit agreement.

         In July 1996, the Company formed Credit-Based Asset Servicing and 
Securitization LLC ("C-BASS"), a joint venture in which the Enhanced Financial
and Mortgage Guaranty Insurance Company each own a 48% interest. Through 
September 30, 1998 the Company had contributed $36.1 million to C-BASS 
(including its 100% interest in Litton Loan Servicing Inc.) and expects that 
it will provide additional funding. In January 1998 the Company guarantied 
repayment of up to $25 million of the amount outstanding under a $50 million 
unsecured revolving credit facility that C-BASS obtained from a major 
commercial bank. The outstanding principal under the facility is currently 
due no later than January 29, 1999.

         In the first six months of 1998, Enhance Financial declared and paid 
cash dividends of $.055 per share (adjusted for the 2:1 split of the common 
stock of Enhance Financial effective June 26, 1998). Enhanced Financial 
declared a dividend of $ .06 per share in September, which was paid in 
October. The aggregate dividends declared through September 1998 were 
$6,376,523.

YEAR 2000

         As the Year 2000 approaches, management is assessing the Company's 
potential exposure to the so called "millenium bug" and the effects the 
century date change may have on its electronic systems and those of its 
significant business partners. Since certain computer programs were written 
using two digits rather than four to define the applicable year, computing 
devices and systems may recognize a date using the two digits "00" as 1900 
rather than the year 2000. Those that do not recognize a date correctly could 
generate erroneous data and/or cause systems to fail.

         As part of its firm-wide Year 2000 Project, the Company has 
established a Year 2000 Task Force consisting of senior management of the 
Company, led by the Chief Information Officer and General Counsel of Enhance. 
It has also retained an independent information technology consulting firm 
and outside legal counsel to provide assistance with Year 2000 compliance and 
has adequate staff to administer the Project. The progress of the Company's 
Year 2000 Project is being monitored by the Audit Committee of the board of 
directors.


                                       11

<PAGE>


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


         The Year 2000 Project covers both computer systems and 
infrastructure ("IT systems") as well as other systems and equipment which 
utilize embedded microchips ("non-IT systems"). It also considers the 
readiness of significant third parties on whom the Company depends such as 
clients, vendors and service providers. The Year 2000 Project has six phases: 
Project Development and Resource Mobilization, Assessment, Remediation, 
Testing, Contingency Planning and Implementation. The status of each phase is 
as follows: Project Development and Resource Mobilization is substantially 
complete; Assessment began in the third quarter of 1997 and is expected to be 
completed by the end of the first quarter of 1999; Remediation and Testing of 
IT systems, by the Company with the assistance of independent contractors, 
began in the fourth quarter of 1997 and are expected to be substantially 
complete by the end of the second quarter of 1999; Contingency Planning will 
begin in the first quarter of 1999 and is expected to be complete by the end 
of the third quarter of 1999; and Implementation of contingency plans will be 
made as and when needed.

         Based on the assessment of its major IT systems, the Company expects 
that all necessary remediation and testing will be completed in a timely 
manner to insure that it is substantially Year 2000 compliant. As part of its 
third-party due diligence, the Company is assessing the Year 2000 compliance 
of all major products and services purchased from vendors and service 
providers of non-IT components and systems. The failure of IT and non-IT 
systems associated with cash management, servicing, communications and 
building facilities would in varying degrees have a material adverse effect 
on the Company. Such failures could disrupt the Company's ability to conduct 
normal business operations, including financial transactions such as payment 
of claims or debts, collecting or funding of receivables and selling of 
commercial paper. The consequences of such failures could include business 
interruption, lost revenue and illiquidity. The magnitude of the financial 
impact of such potential failures is not known at this time. The Year 2000 
Project includes provision for contingency planning for systems and 
facilities that will generally involve processing that does not rely upon 
computer systems and will utilize additional staff as needed. The Company 
expects to complete its contingency plans and arrangements by the end of the 
third quarter of 1999.

         Since 1997, the Company has invested in a major initiative to 
replace and upgrade its technology. This project, which is ongoing, 
addresses, among other matters, many of the Year 2000 issues of the Company's 
internal IT systems. The Company has expended approximately $2 million on 
this project, which, accordingly, includes a portion of the cost of Year 2000 
compliance. Additional expenditures for Year 2000 compliance, which will be 
funded through operating cash flow, are expected to total approximately $1.5 
million. Such cost estimates are based upon information which is currently 
available and may change as the Year 2000 Project proceeds. However, the cost 
of Year 2000 compliance is not expected to affect materially the financial 
condition of the Company.

         The Company is communicating with third parties with which it has 
material dealings to determine the status of their Year 2000 readiness. 
Management is unable at this time to conclude whether all such third parties 
will successfully address their Year 2000 issues, and how their failure to do 
so, if any, would impact the Company. Management has determined that the 
following consequences to the Company could result from the failure of such 
third parties to successfully address their Year 2000 issues: Obligors of 
insured issues (see also next paragraph) - increased credit risk, claims, 
loss of premiums and renewals; Primaries and Reinsurers - increased credit 
risk, uncollected claims, premium loss, impaired liquidity; Counterparties 
and Issuers of Obligations - investment portfolio downgrade, loss of income 
and/or principal; Financial Institutions and Lenders - impaired liquidity, 
loss of income and/or principal; Vendors and Service Providers - interrupted 
power, building access, telecommunications, flow of goods, security and 
professional and technical services.

         The insurance policies issued or reinsured by the insurers of the 
Company do not contain specific exclusions for Year 2000-related defaults. 
Generally, a default by an obligor insured or reinsured by the insurers would 
be covered in such case. Although the insurers would expect to eventually 
recover the amounts paid in claims for Year 2000-related defaults by 
obligors, the coincidence of several such unanticipated claims could result 
in short-term liquidity risk for the insurers. Failure of a trustee or paying 
agent for an obligor insured by the insurers to make payment on a obligation 
as a result of a Year 2000-related event (or otherwise) would generally not 
be covered by policies insured or reinsured and no such claims are expected. 
However, since industry custom in this area has not been established, the 
Company is investigating whether its insured obligors as well as their 
trustees, paying agents and other related parties will be Year 2000 compliant 
and it will establish


                                       12


<PAGE>


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


appropriate contingency plans based upon the results of this inquiry and the
developing understanding of how such potential claims will be addressed by the
financial guaranty industry as a whole.

         In addition to other risks in connection with the Year 2000, general 
uncertainty among market participants could cause a decline in business 
activity and revenue in 1999 and 2000, as companies address their Year 2000 
issues. The Company cannot predict the magnitude of such possible decline or 
the impact that it may have on its financial results for those years, but it 
has undertaken a thorough review of third party risks inherent in Year 2000 
issues, and it is working with the industry group allied with its core 
business to identify and address credit and other business issues related to 
Year 2000. The Company is also assessing potential effects of unexpected 
failures in local, national or international systems, including power, 
communication and transportation systems, on which the normal conduct of 
business depends, and it will establish contingency plans to deal with such 
failures, although there can be no assurance that such plans can be effective 
in such circumstances. The failure of the efforts of the Company or its 
significant third parties to address material Year 2000 issues could result 
in the disruption of the Company's normal business activity and have a 
material adverse effect on the Company. While the Company does not believe 
that Year 2000 issues will have such an impact, there can be no assurance, 
due to the uncertain nature of potential Year 2000 problems and the Company's 
lack of control over some of them, that all Year 2000 issues will be foreseen 
and corrected in a timely fashion.

Part II: Other Information

Item 4.  Submission of Matters to a Vote of Security Holders

         None.

Item 6.  Exhibits and reports on Form 8-K

(a)      Exhibits

         Exhibit 27. Financial data schedules.

(b)      Reports on Form 8-K

         None.


                                       13


<PAGE>


                                    SIGNATURE

         Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by tbe
undersigned thereunto duly authorized.

Date: November l6, 1998      ENHANCE FINANCIAL SERVICES GROUP INC.

                             By: /s/ Arthur Dubroff
                             ----------------------------------------
                             Arthur Dubroff
                             Executive Vice President (duly authorized officer)
                             and Principal Financial Officer


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