<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    Form 10-K

                  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended                                   Commission file
December 31, 1999                                            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 of                            (I.R.S. Employer
incorporation or organization)                             Identification No.)

   335 MADISON AVENUE, NEW YORK, NY                              10017
   --------------------------------                              ------
(Address of principal executive offices)                       (Zip Code)

Registrant's telephone number,
including area code:  212-983-3100

Securities registered pursuant to Section 12(b) of the Act:

Common Stock, $.10 Par Value               New York Stock Exchange, Inc.
----------------------------         -------------------------------------------
      (Title of Class)               (Name of each exchange on which registered)

Securities registered pursuant to Section 12(g) of the Act:

                                      None
                                      ----
                                (Title of class)

Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/

The approximate aggregate market value of voting stock held by non-affiliates
of the registrant as of the close of trading on March 24, 2000 was
$507,974,660. The number of shares of Common Stock outstanding as of that
date was 38,168,008. For purposes of this calculation, shares of Common Stock
held by directors, executive officers and shareholders whose ownership
exceeds ten percent of the Common Stock outstanding on that date were
excluded. Exclusion of shares held by any person should not be construed to
indicate that such person possesses the power, direct or indirect, to direct
or cause the direction of the management or policies of the registrant, or
that such person is controlled by or under common control with the registrant.

<PAGE>

                                     PART I

ITEM 1. BUSINESS.

GENERAL

         Enhance Financial Services Group Inc. ("Enhance Financial," and
together with its consolidated subsidiaries, the "Company") is a holding
company primarily engaged, through its subsidiaries, in the reinsurance of
financial guaranties of municipal and asset-backed debt obligations issued by
the Major Monolines (as hereinafter defined). The Company is also engaged in
(i) other insurance and reinsurance businesses, including the issuance of
direct financial guaranties of debt obligations, trade credit reinsurance and
excess-SIPC/excess-ICS and similar types of bonds, and (ii) several
asset-based businesses that utilize the Company's expertise in performing
sophisticated analysis of complex, credit-based risks. The Company's
businesses are divided into two operating segments: insurance businesses and
asset-based businesses.

         Reinsurance of financial guaranties issued by the Major Monolines
represented 44.4% of the Company's gross premiums written for 1999. During
1999, the Company received 16.2% of the total reinsurance premiums ceded by
the Major Monolines financial guaranty insurers. The Company's other
insurance businesses represent 55.6% of the Company's gross premiums written
for 1999.

         The Company is also engaged in various asset-based businesses,
including the origination, purchase, servicing and/or securitization of special
assets, including state lottery awards, structured settlements, viatical
settlements, sub-performing/non-performing and seller-financed residential
mortgages and delinquent unsecured consumer assets. In recent years, the Company
expanded these asset-based businesses to diversify its products and services
into other areas that the Company believes have strong growth potential and in
which the Company's strengths in credit analysis and securitization can provide
a competitive advantage.

         The Company has followed a business strategy of maintaining its
financial guaranty business, both primary and reinsurance, and its commitment to
intensive and prudent credit underwriting and conservative investment policies;
utilizing its expertise in underwriting credit risks to expand and develop its
other insurance businesses; and continuing to pursue its asset-based businesses
and diversification efforts utilizing its credit analysis skills in areas that
the Company believes have strong profit and growth potential relative to risk.

         The Company has begun a review of its strategic alternatives in order
to maximize shareholder value. In February 2000, Enhance Financial engaged
Morgan Stanley Dean Witter & Co. to advise the Company in connection with such
review. The Company's business strategy described above, including its plans to
expand its businesses and to diversify its products and services, may be changed
materially following such review of strategic alternatives.

         Enhance Financial has since its inception conducted substantially its
entire insurance business through its wholly-owned financial guaranty insurance
subsidiaries, Enhance Reinsurance Company ("Enhance Re") and Asset Guaranty
Insurance Company ("Asset Guaranty"; together, the "Insurance Subsidiaries").
Enhance Re is rated by Standard & Poor's Corporation ("Standard & Poor's"),
Moody's Investors Service, Inc. ("Moody's") and Duff & Phelps Credit Rating
Company ("Duff & Phelps"). Standard & Poor's and Duff & Phelps each have
assigned Enhance Re an "AAA" claims-paying ability rating, their respective
highest


<PAGE>

ratings, and Moody's has assigned Enhance Re an "Aa2" financial strength
rating. Asset Guaranty has been assigned "AA" and "AAA" claims-paying ability
ratings by Standard & Poor's and Duff & Phelps, respectively.

         On August 17, 1999, Moody's announced that it had downgraded both the
senior long-term debt rating of Enhance Financial from Aa3 to A2 and the
insurance financial strength of Enhance Re from Aaa to Aa2. On February 29,
2000, Moody's advised the Company that it had placed on review for possible
further downgrade both the above ratings. Moody's explained that this review
will focus on the uncertainty surrounding management's strategy with respect to
the Company's higher risk specialty finance businesses, the reliance on these
business lines to achieve publicly stated earnings targets, the Company's future
capital plans and the Company's financial flexibility. Moody's indicated that
the outcome of the review will depend on the Company's future plans for
achieving a balance between the financial guaranty insurance operations and the
Company's other lines of business.

FINANCIAL GUARANTY INSURANCE INDUSTRY OVERVIEW

GENERAL

         Financial guaranty insurance provides an unconditional and irrevocable
guaranty to the holder of a debt obligation of full and timely payment of
principal and interest. In the event of a default under the obligation, the
insurer has recourse against the issuer and/or any related collateral (which is
a more common component in the case of insured asset-backed obligations or other
non-municipal debt) for amounts paid under the terms of the policy. Payments
under the insurance policy may not be accelerated by the holder of the debt
obligation. Absent payment in full at the option of the insurer, in the event of
a default under an insured obligation, the holder continues to receive payments
of principal and interest on schedule, as if no default had occurred. Each
subsequent purchaser of the obligation generally receives the benefit of such
guaranty.

         The issuer of the obligation pays the premium for financial guaranty
insurance either in full at the inception of the policy or, less commonly, in
installments on an annual basis. Premium rates are typically calculated as a
percentage of either the principal amount of the debt or total exposure
(principal and interest). Rate setting reflects such factors as the credit
strength of the issuer, type of issue, sources of income, collateral pledged,
restrictive covenants, maturity and competition from other insurers.

         Premiums are generally non-refundable and are earned over the life of
the insured obligation. This long and relatively predictable earnings pattern is
characteristic of the financial guaranty insurance industry and provides a
relatively stable source of future revenues and claims-paying ability to
financial guaranty insurers and reinsurers.

         The Company's financial guaranty reinsurance customers consist of four
major monoline primary U.S. financial guaranty insurers (the "Major Monolines"):
MBIA Insurance Corporation ("MBIA"), AMBAC Assurance Corporation ("AMBAC"),
Financial Guaranty Insurance Company ("FGIC") and Financial Security Assurance
Inc. ("FSA"). Two previous primary U.S. financial insurers, Capital Market
Assurance Corporation ("CapMAC") and Construction Loan Insurance Corporation
("Connie Lee"), were acquired by MBIA in February 1998 and by AMBAC in December
1997, respectively. There are two additional financial guaranty insurers that
are not customers of the Company, CGA Group, Ltd. and ACA Financial Guaranty
Corp.



                                        2
<PAGE>

         On March 14, 2000, The Dexia Group ("Dexia") announced that it had
signed a definitive agreement to acquire the corporate parent of FSA. In the
announcement of the transaction, Dexia stated that FSA would retain
its triple-A ratings from the major rating agencies. It is unclear what effect,
if any, this acquisition will have on the volume of business that FSA will
cede to the Company in the future or otherwise on the Company's relationship
with FSA.

FINANCIAL GUARANTY MARKET

         The primary financial guaranty insurance market consists of two main
sectors: municipal bond insurance and insurance on asset-backed debt.

         MUNICIPAL BOND MARKET. Municipal bond insurance provides credit
enhancement of bonds, notes and other evidences of indebtedness issued by states
and their political subdivisions (for example, counties, cities, or towns),
utility districts, public universities and hospitals, public housing and
transportation authorities, and other public and quasi-public entities.
Municipal bonds are supported by the issuer's taxing power in the case of
general obligation or special tax-supported bonds, or by its ability to impose
and collect fees and charges for public services or specific projects in the
case of most revenue bonds. Insurance provided to the municipal bond market has
been and continues to be the major source of revenue for the financial guaranty
insurance industry.

         The following table sets forth certain information regarding new-issue
long term (over one year) municipal bonds and new-issue insured long term
municipal bonds, in each case issued during the years indicated:

<TABLE>
<CAPTION>
                                                                                       New Insured Volume
                                           New                      New                  as Percent of
Year                                Total Volume (1)         Insured Volume (1)         New Total Volume
----                                ----------------         ------------------         ----------------
                                                  (Dollars in billions)
<S>                                 <C>                      <C>                        <C>
1995                                     $160.0                     $68.5                     42.8%
1996                                      185.0                      85.7                     46.3
1997                                      220.7                     107.5                     48.7
1998                                      286.0                     145.3                     50.8
1999                                      225.9                     103.9                     46.0
</TABLE>

-----------------------
(1) Based upon estimated data provided by The Bond Buyer, February 9, 2000.

         The overall decrease in the volume of municipal bond issuance in 1999
resulted from a decrease in refunding issues, which represented 16.5% of total
issuance compared to 28.6% in 1998, as well as reduced amount of bonds issued
for new money purposes, which decreased to $158.5 billion in 1999 from $160.2
billion in 1998.

         ASSET-BACKED DEBT MARKET. Asset-backed transactions or securitizations
constitute a form of structured financing which is distinguished from unsecured
debt issues by being secured by a specific pool of assets held by the issuing
entity, rather than relying on the general unsecured creditworthiness of the
issuer of the obligation. While most asset-backed debt obligations represent
interests in pools of assets, such as residential and commercial mortgages and
credit card and auto loan receivables, monoline financial guarantors have also
insured asset-backed debt obligations secured by one or a few assets, such as
utility mortgage bonds and multi-family



                                        3
<PAGE>

housing bonds. The asset-backed securities market has grown significantly in
recent years although consensus estimates are lacking as to the insured volume.

REINSURANCE

         Reinsurance is the commitment by one insurance company, the
"reinsurer," to reimburse another insurance company, the "ceding company," for a
specified portion of the insurance risks underwritten by the ceding company.
Because the insured party contracts for coverage solely with the ceding company,
the failure of the reinsurer to perform does not relieve the ceding company of
its obligation to the insured party under the terms of the insurance contract.

         While reinsurance provides various benefits to the ceding company,
perhaps most importantly it enables a primary insurer to write greater single
risks and greater aggregate risks without contravening the capital requirements
of applicable state insurance laws and rating agency guidelines. State insurance
regulators allow primary insurers to reduce the liabilities appearing on their
balance sheets to the extent of reinsurance coverage obtained from licensed
reinsurers or from unlicensed reinsurers meeting certain solvency and other
financial criteria. Similarly, the rating agencies permit such a reduction for
reinsurance in an amount that depends on the claims-paying ability or financial
strength rating of the reinsurer. See "Insurance Regulatory Matters" and
"Description of Business -- Rating Agencies" in this section.

         The principal forms of reinsurance are treaty and facultative. Under a
treaty arrangement the ceding company is obligated to cede, and the reinsurer is
correspondingly obligated to assume, a specified portion of a specified type of
risk or risks insured by the ceding company during the term of the treaty
(although the reinsurance risk thereafter extends for the life of the respective
underlying obligations). Under a facultative agreement, the ceding company from
time to time during the term of the agreement offers a portion of specific risks
to the reinsurer, usually in connection with particular debt obligations. A
facultative arrangement further differs from a treaty arrangement in that under
a facultative arrangement the reinsurer oftentimes performs its own underwriting
credit analysis to determine whether to accept a particular risk, while in a
treaty arrangement the reinsurer generally relies on the ceding company's credit
analysis. Both treaty and facultative agreements are typically entered into for
a term of one year, subject to a right of termination under certain
circumstances.

         Treaty and facultative reinsurance are typically written on either a
proportional or non-proportional basis. Proportional relationships are those in
which the ceding company and the reinsurer share the premiums, as well as the
losses and expenses, of a single risk or group of risks in an agreed percentage.
In addition, the reinsurer generally pays the ceding company a ceding
commission, which is typically related to the ceding company's cost of obtaining
the business being reinsured. Non-proportional reinsurance relationships are
typically on an excess-of-loss basis. An excess-of-loss relationship provides
coverage to a ceding company up to a specified dollar limit for losses, if any,
incurred by the ceding company in excess of a specified threshold amount.

         Reinsurers may also, in turn, purchase reinsurance under retrocessional
agreements to cover all or a portion of their own exposure for reasons similar
to those that cause primary insurers to purchase reinsurance. See "Description
of Business - Reinsurance Ceded" in this item.


                                        4
<PAGE>

INSURANCE BUSINESSES

REINSURANCE OF THE MAJOR MONOLINES

The Company's principal business is the reinsurance of financial guaranty
insurance written by the Major Monolines. The Company provides reinsurance on a
treaty and/or a facultative basis for such companies. See "Sources of Premiums"
in this item. The Company carefully evaluates the risk underwriting and
management of treaty customers, monitors the insured portfolio performance and
conducts a detailed underwriting review of the facultative insurance it writes.
The Company believes that the reinsurance of municipal bond guaranties, which
the Company expects will grow in response to the anticipated long-term growth in
the municipal bond market, provides a relatively stable source of premium income
for the Company. In addition, most premiums received are credited as deferred
premium revenue and are earned as the related risks amortize, thereby providing
a relatively stable, predictable source of earned premiums.

         PREMIUMS CEDED BY INDIVIDUAL PRIMARY INSURERS. The following table sets
forth certain information regarding gross written premiums ceded to the Company
in 1999, 1998 and 1997:

<TABLE>
<CAPTION>
                                                      Year Ended December 31,
                     -------------------------------------------------------------------------------------------
                                 1999                          1998                           1997
                                 ----                          ----                           ----
                           Percent of Total              Percent of Total               Percent of Total
Primary Insurer          Gross Premiums Ceded          Gross Premiums Ceded           Gross Premiums Ceded
---------------          --------------------          --------------------           --------------------
<S>                  <C>                           <C>                            <C>
MBIA                              44.9%                        30.8% (1)                        45.2% (1)
FSA                               30.3                         30.1                             29.4
AMBAC                             19.9                         30.0                             17.2  (2)
FGIC                               4.5                          8.7                              8.2
Other - Foreign                    0.4                          0.4                               --
                                 -----                        ------                           ------
Total                            100.0%                       100.0%                           100.0%
                                 ======                       ======                           ======
</TABLE>


-------------------
(1)  Includes 7.3% and 13.6% of total of gross premiums ceded for 1998 and 1997,
     respectively, by CapMAC, which was acquired by MBIA in February 1998.

(2)  Includes 0.5% of total of gross premiums ceded for 1997 by Connie Lee,
     which was acquired by AMBAC in December 1997.

         INSURANCE PORTFOLIO DATA. The Company seeks to maintain a diversified
insurance portfolio designed to spread its risk based on issuer, type of debt
obligation insured and geographic concentration. The following table sets forth
the distribution of the Company's reinsured monoline-guarantied obligations by
bond type as of December 31, 1999:



                                       5
<PAGE>


<TABLE>
<CAPTION>
                                                          As of December 31, 1999
                                              --------------------------------------------------
Type of Obligation                            Insurance in Force(1)       Percent of Total
                                              ---------------------  ---------------------------
                                                              (In billions)
<S>                                               <C>                        <C>
Municipal:

    General obligation/tax supported.........      $  22.9                       30.2%
    Water/sewer/electric/gas.................         12.0                       15.8
    Airports/transportation..................          9.2                       12.1
    Health care..............................          8.0                       10.5
    Investor-owned utilities.................          4.8                        6.3
    Housing revenue..........................          1.5                        2.0
    Other (2)................................          5.3                        7.0
                                                      ----                       ----
       Total municipal.......................         63.7                       83.9
                                                      ----                       ----

Non-municipal
    Consumer obligations.....................          7.3                        9.6
    Commercial mortgage......................          0.2                        0.3
    Other (3)................................          4.7                        6.2
                                                      ----                       ----
       Total non-municipal...................         12.2                       16.1
                                                      ----                       ----
       Total.................................       $ 75.9                      100.0%
                                                   ========                    ======
</TABLE>


----------------------
(1)  Represents the Company's proportionate share of the aggregate outstanding
     principal and interest payable on such insured obligations.

(2)  Represents other types of municipal obligations, none of which individually
     constitutes a material amount or percentage of the Company's insurance in
     force.

(3)  Includes $0.5 billion collateralized by corporate debt obligations. The
     balance represents other types of assets that collateralize obligations
     reinsured by the Company, none of which individually constitutes a material
     amount or percentage of the Company's insurance in force.

         The following table identifies by issuer the Company's ten largest
single-risk insurance in force amounts outstanding as of December 31, 1999 and
the credit rating assigned by Standard & Poor's as of that date (in the absence
of financial guaranty insurance) to each such issuer:



                                       6
<PAGE>


<TABLE>
<CAPTION>
                                                                                    Insurance in Force as
Credit                                     Credit Rating      Obligation Type       of December 31, 1999
------                                     -------------      ---------------       --------------------
                                                                                       (In millions)
<S>                                        <C>               <C>                    <C>
New York City Municipal Water Finance
   Authority ..........................        A-               Water & Sewer             $1,126
New York City, NY .....................        BBB+          General Obligation              923
Port Authority of New York and New
   Jersey .............................        AA              Transportation                771
State of California ...................        A+            General Obligation              741
Commerzbank - Citibank London .........        AAA           Consumer Obligation             658
Commonwealth of Puerto Rico ...........        A             General Obligation              636
Dade County, Florida Water & Sewer
   System .............................        A                Water & Sewer                603
Hydro Quebec - Province of Quebec
   Guaranteed .........................        A             General Obligation              597
Houston, TX Combined Water & Sewer
   System .............................        A                Water & Sewer                591
San Francisco International Airport,
   CA .................................        A+                  Airport                   558
</TABLE>

         The following table sets forth the distribution by state of the
Company's insurance in force in connection with its reinsurance of Major
Monolines-guarantied obligations as of December 31, 1999:

<TABLE>
<CAPTION>
                                               As of December 31, 1999
                                      ----------------------------------------
Jurisdiction                          Insurance in Force  Percent of Portfolio
------------                          ------------------  --------------------
                                         (In billions)
<S>                                   <C>                 <C>
California .......................          $   9.1           12.0%
New York .........................              8.3           10.9
Florida ..........................              4.8            6.3
Texas ............................              4.3            5.7
Pennsylvania .....................              3.5            4.6
Illinois .........................              3.3            4.4
New Jersey .......................              2.8            3.7
Massachusetts ....................              2.7            3.6
Puerto Rico ......................              2.3            3.0
Ohio .............................              1.9            2.5
Other (1) ........................             32.8           43.3
                                              -----          -----
         Total ...................          $  75.8          100.0%
                                              =====          =====
</TABLE>

---------------
(1)  Includes $16.4 billion related to pooled or foreign credits for which
     specific allocation by state is not available. The balance represents all
     remaining states, the District of Columbia and several foreign countries,
     in which obligations insured and reinsured by the Company arise, none of
     which individually constitutes a material portion of the Company's
     insurance in force.

         UNDERWRITING STAFFING, POLICIES AND PROCEDURES. The Company believes
that its underwriting discipline has been critical to its profitable growth. The
Company has a structured underwriting process to determine the characteristics
and creditworthiness of risks that it reinsures, which process supplements the
underwriting procedures of the primary insurers. Rather



                                       7
<PAGE>

than relying entirely upon the underwriting performed by the primary insurers,
both the Company and the rating agencies conduct extensive reviews of the
primary insurers. Moreover, the ceding insurer is typically required to retain
at least 25% of the exposure on any single risk assumed.

         The Company conducts periodic detailed reviews of each Major Monoline
and other carriers with which it does facultative business. That review entails
an examination of the primary insurer's operating, underwriting and surveillance
procedures; personnel; organization and existing book of business, as well as
the primary insurer's underwriting of a sample of business assumed under the
treaty. Facultative transactions are reviewed individually under procedures
adopted by the Company's credit committee. Any underwriting issues are discussed
internally by the Company's credit committee and with the primary insurer's
personnel.

         Limitations on the Company's single-risk exposure derive from state
insurance regulation, rating agency guidelines and internally established
criteria. The primary factor in determining single-risk capacity is the class or
sector of business being underwritten. For municipal credits, the Company has
self-imposed single-risk guidelines which range widely, depending upon the
perceived risk of default of the municipal obligation reinsured. For
asset-backed transactions, the Company's single-risk guidelines generally follow
state insurance regulation limitations, as well as self-imposed single risk and
cumulative servicer-related risk. On individual underwritings, the Company's
credit committee may limit its reinsurance participation to an amount below that
allowed by the single-risk guidelines noted above. Moreover, the Company relies
on ongoing oversight by its credit committee to avoid undue exposure
concentration in any given type of obligation or geographic area.

         The Company's surveillance procedures include reviews of those
exposures assumed as a reinsurer as to which it may have concerns. The Company
also maintains regular communication with the surveillance departments of the
ceding primary insurers.

OTHER INSURANCE BUSINESSES

         The Company services certain insurance specialty markets not served by
the Major Monolines. In certain of these business areas, the Company operates as
a primary insurer in areas or for transactions where the Major Monolines may
decline to provide coverage; others involve the Company serving as a reinsurer
for certain specialty primary insurers, in some of which the Company has
significant equity interests or is otherwise a participant.

         In writing these other insurance lines of business, the Company
utilizes its expertise in evaluating complex credit-based risks. These
businesses represented 55.6% of the Company's gross premiums written for the
year ended December 31, 1999, compared to 38.2% for the preceding year. The
Company's business strategy has been to expand and develop further these other
insurance lines, which the Company believes have strong profit and growth
potential and where the Company's expertise can be utilized.

         Premiums from certain of the Company's other insurance businesses are
earned over a significantly shorter period than those from the Company's
monoline reinsurance business. The Company's ability to realize consistent
levels of earned premiums in these insurance businesses will therefore depend on
its ability to write consistent levels of new insurance.

         The following tables set forth certain information concerning the
Company's other insurance businesses as of December 31, 1999 and for the year
then ended:



                                       8
<PAGE>


<TABLE>
<CAPTION>
                                           Insurance in Force (1)
Category of Other Insurance Business      as of December 31, 1999
------------------------------------      -----------------------
                                               (In billions)
<S>                                       <C>
Municipal bonds - direct .........               $  8.4
Asset-backed - direct ............                  0.2
Trade credit......................                  0.8
Financial institutions ...........                  0.1
Other (2).........................                  0.2
                                                   ----
         Total ...................               $  9.7
                                                   ====
</TABLE>

----------------------
(1)  Does not include insurance in force pursuant to the excess-SIPC/excess-ICS
     program described below in this section.

(2)  Includes $0.1 billion of financial responsibility bonds in force, a line of
     business that the Company is in the process of exiting.

<TABLE>
<CAPTION>
                                                     Year Ended December 31, 1999
                                         ---------------------------------------------------
                                                  Net Premiums
Category of Other Insurance Business                Written             Premiums Earned
------------------------------------     -------------------------  ------------------------
                                                         (In millions)
<S>                                      <C>                        <C>
Municipal bonds - direct ..........               $  32.1                $   8.3
Asset-backed - direct .............                   2.3                    2.3
Trade credit ......................                  22.2                   20.4
Financial institutions ............                  12.9                    9.4
Other (1) .........................                   1.7                    3.2
                                                    -----                  -----
       Total ......................               $  71.2                $  43.6
                                                    =====                  =====
</TABLE>

(1)  Includes $1.3 million of net premiums written and $1.6 million of premiums
     earned for financial responsibility bonds, a line of business that the
     Company is in the process of exiting.

         MUNICIPAL BONDS. The Company writes municipal bond insurance as a
primary insurer in certain transactions where the Major Monolines generally
elect not to participate. This writing is focused on various market sectors
including tax-backed obligations, infrastructure revenue bonds, health-care
bonds, higher education bonds and municipal lease obligations. Each such issue,
after being insured, is reviewed by Standard & Poor's and Duff & Phelps, which
determine the credit quality of the issue, provide the Company with a "shadow
rating" for the transaction and report their findings to the Company.

         ASSET-BACKED SECURITIZATIONS AND OTHER SECURED OBLIGATIONS. The Company
writes financial guaranty insurance as a primary insurer for asset-backed
transactions or securitizations. These are a form of structured financing which
are distinguished from unsecured debt issues by being secured by a specific pool
of assets held by the issuing entity, rather than relying on the general
unsecured creditworthiness of the issuer of the obligation. While the
securitizations that the Company insures represent interests in pools of assets,
such as residential and commercial mortgages and credit card and auto loan
receivables, the Company, has also insured debt obligations secured by one or a
few assets, such as utility mortgage bonds and multi-family housing bonds.
Generally, prior to being insured, each such transaction is reviewed by Standard
& Poor's and Duff & Phelps, which determine the credit quality of the issue and
report their



                                       9
<PAGE>

findings to the Company and provide the Company with a "shadow rating" and an
estimate of the required capital charge for the transaction.

         TRADE CREDIT REINSURANCE. Trade credit reinsurance protects sellers of
goods under certain circumstances against non-payment of the receivables they
hold from buyers of those goods. The Company covers receivables both where the
buyer and seller are in the same country as well as cross-border receivables.
Sometimes in the latter instance, the coverage extends to certain political
risks (foreign currency controls, expropriation, etc.) that interfere with the
payment from the buyer.

         The Company is a member-reinsurer, together with Great American
Insurance Company, of the Foreign Credit Insurance Association ("FCIA"), which
guaranties export financing for transactions primarily between U.S. exporters
and foreign purchasers.

         As of December 31, 1999, Enhance Financial owned an indirect 36.5%
equity interest in Exporters Insurance Company Ltd. ("Exporters"), an insurer of
primarily foreign trade receivables for multinational companies. While Enhance
Financial's equity interest in Exporters represents 54% of the voting interest,
Enhance Financial believes that it does not control Exporters. The Company
provides significant reinsurance capacity to this joint venture on a
quota-share, surplus share and excess-of-loss basis.

         In addition, the Company participates in proportional and
non-proportional reinsurance treaties with 27 credit insurers, including many in
Europe. The largest relationships in terms of premiums are with Gerling Globale
(domiciled in Germany), FCIA (domiciled in the United States), the Euler Group
(major subsidiaries domiciled in France, Belgium, the Netherlands, the United
Kingdom, Italy and the United States), the NCM Group (major subsidiaries
domiciled in the Netherlands, the United Kingdom, Scandinavia and the United
States) and Exporters (domiciled in Bermuda). In order to expand the trade
credit reinsurance business, in 1999 the Company established a contact office in
London, England, to market and manage relationships with trade credit primary
insurers. Upon receipt of appropriate authorizations in the United Kingdom, the
London office will also underwrite trade credit insurance and reinsurance.

         FINANCIAL INSTITUTIONS. In its principal product line for its financial
institutions group, the Company writes surety bonds for the protection of
customers of large securities brokers against the loss of securities, and in
some cases, cash, in their brokerage accounts in the event of the broker's
insolvency and liquidation. Bonds issued under this program typically provide
coverage for loss per account in excess of the $500,000 in the case of loss
covered by the U.S.-government-established Securities Investor Protection
Corporation ("SIPC"), or 48,000 pounds sterling (approximately $78,000) in the
case of loss covered by the U.K.-government-established Investors Compensation
Scheme ("ICS"). The coverage is offered only to the members of the securities
brokerage community that meet specific financial, legal and operating criteria
established by the Company.

         Although the dollar value of customer account assets protected by the
Company's excess-SIPC/excess-ICS policies totals in the billions, the Company's
estimated exposure is considerably lower. Losses in a brokerage account occur
only to the extent, if any, a covered broker-dealer becomes insolvent and
securities are missing and the individual customer losses, which are prorated
among all the customers of that broker-dealer, exceed the applicable deductible
amount, which ranges from $500,000 for losses covered by SIPC, or 48,000 pounds
sterling for losses covered by ICS. As part of its underwriting process, the
Company reviews the operations and



                                       10
<PAGE>

exposure amounts of each broker-dealer applying for coverage and calculates a
maximum loss based on the normal day-to-day operational exposures of that
broker-dealer.

         FINANCIAL RESPONSIBILITY BONDS. The Company owns substantially the
entire interest in Van-American Insurance Company ("Van-Am"), which writes
reclamation bonds for the coal mining industry, generally in strip mining
ventures, and surety bonds covering the closure and post-closure obligations of
landfill operators. Asset Guaranty reinsures the reclamation bonds for the coal
mining industry issued by Van-Am on both a treaty and facultative basis and
surety bonds for landfill operators issued by Van-Am on a facultative basis
only. Due to intense pricing competition in Van-Am's core business and a poor
strategic fit with the Company's other operations, the Company decided in 1998
to exit this line of business. The Company sold a portion of Van-Am's business
in 1999 and will either sell its remaining interest in Van-Am or wind-down
Van-Am's operations, thereby exiting this line of business. The Company has
engaged an investment advisor to assist in completing the divestiture of Van-Am,
which, if at all, is expected to occur in 2000.

         UNDERWRITING PROCESS AND SURVEILLANCE. The underwriting criteria
applied in evaluating a given issue for primary insurance coverage and the
internal procedures (for example, credit committee review) for approval of the
issue are substantially the same as for the underwriting of reinsurance. See
"Reinsurance of the Major Monolines -- Underwriting Staffing, Policies and
Procedures" in this section. The entire underwriting responsibility rests with
the Company as the primary insurer. As a result, the Company participates more
actively in the structuring of the transaction than it does as a reinsurer. The
Company conducts, in most cases annually, in-depth surveillance of issues
insured as a primary insurer.

SOURCES OF PREMIUMS

         The following table sets forth certain information regarding insurance
business assumed and written by the Company:


<TABLE>
<CAPTION>
                                                           Year Ended December 31, 1999
                            --------------------------------------------------------------------------------------------
                                                                                            Premiums
                                                                         Gross Premiums     Earned as
                                                                           Written as      Percent of
                                Gross           Net                        Percent of         Total      Premium Earned
                              Premiums       Premiums       Premiums      Total Gross       Premiums     as Percent of
   Sources of Premiums         Written        Written        Earned     Premiums Written     Earned      Total Revenues
   --------------------        ---------     --------       --------   ------------------   --------     ---------------
                                           (In millions)
<S>                              <C>            <C>            <C>            <C>              <C>            <C>
Financial guaranty
     reinsurance:                 $61.7          $61.7         $60.3           44.4%           58.0%           30.5%
Direct Insurance:
     Municipal bonds               32.2           32.1           8.3           23.2             8.0              4.2
     Asset-backed                   2.4            2.3           2.3            1.7             2.2              1.2
     Financial institutions        18.4           12.9           9.4           13.2            11.7              4.8
Other insurance (1)..              24.3           24.0          23.6           17.5            20.1             11.9
                                   ----           ----          ----           ----            ----             ----
                                 $139.0         $133.0        $103.9          100.0%          100.0%           52.6%
                                 ======         ======        ======          ======          ======           =====
</TABLE>
---------------
(1)    Includes business written by the Company as a primary insurer in lines
       other than municipal bond, asset-backed direct or financial institutions
       insurance lines. For the year ended December 31, 1999, no single primary
       insurer included in "Other insurance" provided greater than 2.9%, 3.0%
       and 3.9% of gross premiums written, net premiums written and premiums
       earned, respectively.



                                       11
<PAGE>



         The following table sets forth certain information regarding insurance
business assumed and written by the Company with respect to financial guaranty
reinsurance:

<TABLE>
<CAPTION>
                                              Gross Premiums
                                            Written as Percent    Premiums Earned as      Premium Earned
      Source of Financial Guaranty            of Total Gross       Percent of Total       as Percent of
          Reinsurance Premiums               Premiums Written      Premiums Earned        Total Revenues
      -----------------------------        ------------------    -------------------    -----------------
<S>                                        <C>                   <C>                    <C>
MBIA ....................                             19.9%               27.1%               14.3%
AMBAC ...................                             13.6                13.2                 6.9
FSA .....................                              8.8                10.5                 5.5
FGIC ....................                              2.0                 7.1                 3.7
Other - Foreign .........                              0.1                 0.1                 0.1
                                                      ----                ----                ----
  Total .................                             44.4%               58.0%               30.5%
                                                      ====                ====                ====
</TABLE>

         The Company has maintained close and long-standing relationships with
the Major Monolines, dating essentially from either the Company's or the given
primary insurer's inception. In the Company's opinion, these relationships
provide the Company with a comprehensive understanding of its clients'
procedures and reinsurance requirements and allow the clients to utilize the
Company's underwriting expertise effectively, thus improving the service they
receive.

         The Company is a party to facultative agreements with all, and a party
to treaty agreements with all except one of, the Major Monolines. The Company's
facultative and treaty agreements are generally subject to termination (i) upon
written notice (ranging from 90 to 120 days) prior to the specified deadline for
renewal, (ii) at the option of the primary insurer if the Company fails to
maintain certain financial, regulatory and rating agency criteria which are
equivalent to or more stringent than those the Company is otherwise required to
maintain for its own compliance with the New York Insurance Law (the "Insurance
Law") and to maintain a specified claims-paying ability or financial strength
rating for the particular Insurance Subsidiary or (iii) upon certain changes of
control of the Company. Upon termination under the conditions set forth in (ii)
and (iii) above, the Company may be required (under some of its reinsurance
agreements) to return to the primary insurer all unearned premiums, less ceding
commissions, attributable to reinsurance ceded pursuant to such agreements. Upon
the occurrence of the conditions set forth in (ii) above, whether or not an
agreement is terminated, the Company may be required to obtain a letter of
credit or alternative form of security to collateralize its obligation to
perform under such agreement. See "Rating Agencies" in this section for further
discussion of the impact of a ratings downgrade on the Company's facultative and
treaty reinsurance agreements.

REINSURANCE CEDED

         The Company is a party to certain facultative retrocession agreements,
pursuant to which it cedes to certain retrocessionnaires a portion of its
reinsurance exposure. Since it is required to pay its obligations in full to the
primary insurer regardless of whether it is entitled to receive payments from
its retrocessionnaire, the Company believes that it is important that its
retrocessionnaires be very creditworthy. The Company also cedes to reinsurers a
portion of its



                                       12
<PAGE>

direct insurance exposure, and the foregoing also describes in general the
relationship between the Company and its reinsurers.

         The Company has historically retroceded relatively little of its
financial guaranty reinsurance exposure for risk management reasons. In its
specialty insurance businesses, the Company in recent years has reinsured a
portion of its direct insurance exposure, particularly that incurred in its
excess-SIPC/excess-ICS program, principally in order to comply with applicable
regulatory single-risk limitations. Most of the reinsurance capacity for its
excess-SIPC/excess-ICS program is provided by certain of the Major Monolines. In
addition, the Company retrocedes a portion of its trade credit reinsurance
business from FCIA to several international reinsurance companies.

         Enhance Re is party to an excess-of-loss reinsurance agreement with
Hannover Ruckversicherungs AG ("Hannover Re") under which it is entitled,
subject to certain conditions, to draw from Hannover Re up to $25 million under
certain circumstances. The agreement has a term of one year and is cancelable
annually at the option of either party, except that the Company has the option
to force a seven-year run-off period. Hannover Re is a German reinsurance
company that has a claims-paying ability rating from Standard & Poor's of AA+.

         Gross written premiums of $6.0 million were ceded or retroceded by the
Insurance Subsidiaries to unaffiliated companies in 1999, of which amount 48.0%
was ceded or retroceded to insurance companies having AA claims-paying ability
ratings from Standard & Poor's.

LOSS EXPERIENCE

         The Company establishes a provision for losses and related loss
adjustment expenses ("LAE") as to a particular insured risk when the primary
insurer reports a loss on the risk or when, in the Company's opinion, the risk
is in default or a default is probable and the amount of the loss is reasonably
estimable. The Company bases a provision for losses and LAE on the estimated
loss, including expenses associated with settlement of the loss, through the
full term of the insured obligation. In the case of obligations with fixed
periodic payments, the provision for losses and LAE represents the present value
of the Company's ultimate expected losses, adjusted for estimated recoveries
under salvage or subrogation rights. On any given municipal and asset-backed
reinsurance transaction, the Company and its primary insurer customers
underwrite with a zero-loss underwriting objective. For the trade credit
reinsurance business, loss reserves are established based on historical loss
development patterns experienced by the Company and by ceding companies in
similar businesses. The estimate of reserves for losses and LAE, which includes
a non-specific loss reserve, is periodically evaluated by the Company, and
changes in estimate are reflected in income currently.

         As a result of a refinement in its reserving methodology for its
insured financial guaranty portfolio and relative risk-adjusted par exposure,
the Company increased its unallocated or non-specific reserve for losses and
LAE in the fourth quarter of 1999 by $12.5 million, bringing its total
unallocated or non-specific loss and LAE reserve for the financial guaranty
business to $19.2 million. The Company believes that after giving effect to
this increase, its reserves for losses and LAE, including case and
unallocated or non-specific reserves, are adequate to cover the ultimate net
cost of claims. However, the reserves are necessarily based on estimates, and
there can be no assurance that the ultimate liability will not exceed such
estimates. The Company

                                       13
<PAGE>

also recorded an increase in operating reserves of $1.2 million in the fourth
quarter of 1999 to reflect a re-evaluation of operating losses that would occur
were it unable to sell Van-Am.

         As it anticipated, the Company has experienced relatively higher loss
levels in certain of its other insurance businesses than it experienced in its
financial guaranty reinsurance business. See "Other Insurance Businesses" in
this section. The Company believes that the higher premiums it receives in these
businesses adequately compensate it for the risks involved.

         At December 31, 1999, the Company had established $49.7 million in net
reserves for losses and LAE (of which $30.3 represented incurred but not
reported and non-specific reserves). The following table sets forth certain
information regarding the Company's loss experience for the years indicated:



<TABLE>
<CAPTION>
                                                                   Year Ended December 31,
                                                 ------------------------------------------------------------
                                                        1999                1998                 1997
                                                        ----                ----                 ----
                                                                        (In millions)
<S>                                              <C>                    <C>                 <C>
Net reserve for losses and LAE beginning of
  year ......................................               $  33.7             $  31.0             $  26.3
Net provision for losses and LAE
    Occurring in current year ...............                  16.7                 6.0                 6.0
    Occurring in prior years ................                   9.5                 4.3                 3.7
                                                              -----               -----               -----
         Total ..............................                  26.2                10.3                 9.7
                                                              -----               -----               -----
Net payments for losses and LAE
   Occurring in current year ................                   1.5                 0.4                 0.7
   Occurring in prior years .................                   8.7                 7.2                 4.3
                                                              -----               -----               -----
         Total ..............................                  10.2                 7.6                 5.0
                                                              -----               -----               -----
Net reserve for losses and LAE at end of year
                                                            $  49.7             $  33.7             $  31.0
                                                              =====               =====               =====
</TABLE>

         The incurred loss and paid loss information presented above is
classified as "current year" and "prior year" based upon the year in which the
related reinsurance contract or insurance policy was underwritten. Therefore,
amounts presented as "Occurring in prior years" are not indicative of
redundancies or deficiencies in total reserves held as of prior year ends.
During the years ended December 31, 1999, 1998 and 1997, the actual adverse
(redundant) development of reserves held as of prior year-ends was $2.3 million,
$(0.2) million and $1.5 million, respectively.

         In 1999, 1998 and 1997, the Company recorded losses of $9.9 million,
$6.5 million, and $8.1 million, respectively, in connection with its credit and
surety businesses.



                                       14
<PAGE>


ASSET-BASED BUSINESSES

         The Company is engaged in several additional lines of business that
utilize its core skills in complex credit analysis and securitizations and, in
certain cases, its strategic relationships.

C-BASS

         The Company and MGIC each own 46% interest in Credit-Based Asset
Servicing and Securitization LLC (together with its subsidiaries "C-BASS"), a
New York City-based joint venture, with the remaining 8% owned by an entity
owned by certain senior managers of C-BASS.

         C-BASS is a mortgage investment and servicing firm specializing in
credit sensitive, single-family residential mortgage assets and residential
mortgage-backed securities. C-BASS invests in whole loans, single-family
residential properties that have been, or are being, foreclosed, subordinated
securities (or "B pieces") collateralized by residential loans and
seller-financed notes. By using sophisticated analytics, C-BASS essentially
seeks to take advantage of what it believes to be the mispricing of credit risk
for certain of these assets in the marketplace. In addition, its residential
mortgage servicing company, Litton Loan Servicing LP ("Litton"), which
specializes in loss mitigation, default collection, collection of insurance
claims and guaranty collections under government-sponsored mortgage programs,
services whole loans and real estate. Litton's subsidiaries service
seller-financed loans and buy and sell seller-financed loans. As part of its
investment strategy, C-BASS holds some assets on its books, securitizes certain
assets and sells other assets directly into the secondary market.

         The principal elements of C-BASS's business strategy include:

          -    the evaluation of whole loans and B pieces, using detailed
               loan-by-loan credit-based models and information derived from
               comprehensive databases, including foreclosure frequency rates
               and related data from MGIC;

          -    purchases of whole loans and B pieces from banks, thrifts,
               insurance companies, broker-dealers, and other investors;

          -    servicing of these assets through Litton and C-BASS's other
               subsidiaries, focusing on loss mitigation of delinquent and
               defaulted loans; and

          -    structuring/securitization of these assets to minimize funding
               costs and liquidity risks.

         C-BASS markets its products and services directly to financial
institutions, mortgage originators and institutional investors originating or
purchasing residential mortgages, to entities servicing residential mortgage
loans, and to entities originating or purchasing subordinated residential
mortgage-backed securities. In addition, in connection with its
seller-financed-mortgage business, C-BASS employs a direct sales force and
direct mailings to sell or purchase its products.

         C-BASS generate revenues from whole loans and B pieces, by earning net
interest income, i.e. the spread between (a) the interest rate on the whole
loans or the yield on the B pieces and (b) the cost of debt incurred to finance
the acquisition of these assets. C-BASS purchases whole loans in the secondary
market and records a gain or loss on sale of the assets



                                       15
<PAGE>

when they are liquidated or securitized. C-BASS purchases B pieces at a discount
or retains them from C-BASS's whole loan securitizations. If C-BASS securitizes
the B pieces, C-BASS generates profits on the gain on sale of the B pieces and
retains a subordinated tranche. Since commencing securitizations in February
1997, C-BASS has completed 14 such transactions, ranging in size from $30
million to $310 million. In addition, Litton and Litton's subsidiaries earn fees
for servicing loans and real estate owned by C-BASS or unrelated third parties.

         During the time that C-BASS owns an asset, which can be as short as 30
days, its value is vulnerable to interest rate risk, credit risk and prepayment
risk. Operational risks exist in the servicing of the credit-sensitive mortgage
assets in which C-BASS specializes, as well as the risk of reduced or uncertain
value or marketability of the mortgage-related assets C-BASS holds, especially
the B-pieces. C-BASS seeks to operate in a manner as to minimize interest rate
risk even at the expense of additional credit risk. However, C-BASS is still
exposed to interest rate risk. An increase in interest rates generally, because
it would increase the cost of borrowed funds, would decrease C-BASS's net
interest income and adversely affect, possibly materially, C-BASS's profitably
and liquidity. Interest rate increases would also adversely affect the price of
securities issued by C-BASS, especially investment grade securities, and thereby
the gain on sale realized from the securitization of C-BASS assets. A decrease
in interest rates could also adversely affect the price of securities issued by
C-BASS because the decrease may increase investors' expectation of faster
mortgage prepayments, reducing the cash flow expected to be received by the
investors. Performing and subperforming mortgages and B-pieces can change in
value due to changes in interest rates, with the relationship generally being
inverse, except in the case of certain extremely prepayment-sensitive
securities. C-BASS uses hedging strategies to mitigate the impact of interest
rate increases or decreases on its portfolio. In addition, the success of
C-BASS's business is highly dependent on residential housing prices in the
United States. Since one of C-BASS's major strategies is taking credit risk, a
substantial deterioration in the value of housing would adversely affect its
assets. Furthermore, investment in B-pieces, which, at December 31, 1999,
represented approximately 40% of the total assets of C-BASS, carries special
credit risks inasmuch as these securities absorb losses prior to all senior
securities in the pool of mortgages comprising the given security issue. C-BASS
attempts to mitigate this risk through detailed loss projections and intensive
sensitivity analysis on the purchase assumptions on a proposed pool in order to
project a range of possible values. Additionally, C-BASS actively monitors and
conducts surveillance of its owned B pieces.

         C-BASS faces direct competition in its whole loan acquisition
activities. Since C-BASS does not originate loans, it must purchase from third
parties the whole loans that it securitizes or sells generally in auctions in
competitive bid circumstances. C-BASS competes in these auctions with mortgage
companies, finance companies, savings and loan institutions and other financial
institutions. Many of its competitors are larger than C-BASS, have more
financial resources than C-BASS, or have more salespeople to call on sellers of
whole loans. New competitors that periodically enter C-BASS's markets and begin
to purchase whole loans, may influence the price at which C-BASS can purchase
whole loans. There are a limited number of direct competitors of C-BASS in its
seller-financed residential mortgages purchase and servicing programs.

         In addition to servicing the whole loans that C-BASS owns and
securitizes, from time to time Litton purchases servicing rights for loans held
by third parties. Litton competes with mortgage companies, commercial banks,
thrift institutions and other consumer finance companies for these servicing
rights on a national scale, and many of such competitors may be larger or
better-known than Litton.



                                       16
<PAGE>

SINGER ASSET FINANCE COMPANY, L.L.C. AND ENHANCE LIFE BENEFITS L.L.C.

         Enhance Financial's wholly-owned subsidiary, Singer Asset Finance
Company, L.L.C. ("Singer"), conducting business from New York City and Boca
Raton, Florida offices, is a specialty finance company that acquires
individuals' rights to receive deferred payments owed by investment-grade
obligors. Currently, Singer will buy (or lend against), pool and securitize: (i)
structured settlement payment rights, i.e. installment amounts payable to an
individual in settlement of his or her personal injury claim where highly-rated
insurance companies are the obligors, and (ii) state-operated lottery prize
payment rights, where governmental or quasi-governmental entities are the
obligors. Singer either purchases the right to the deferred payments from
individuals or buys loans secured by individuals' rights to receive the deferred
payments. Singer then packages these structured settlements and lottery prize
payment rights into pools and sells the pools to the capital markets.

         According to reliable industry sources, approximately $4 billion to $5
billion in new structured settlements are generated in the United States
annually. Structured settlements are an attractive option for claimants and
insurance companies because they (i) offer favorable tax treatment; (ii) permit
payment flexibility and incorporation of investment management features; and
(iii) lower the cost of compensating victims and thereby help foster timely
settlement of litigation. From the claimant's standpoint, however, structured
settlements also have the significant drawback of inflexibility. Should a
claimant's financial needs or circumstances change, the fixed payment schedule
of a structured settlement may no longer be satisfactory. Singer's funding
program offers those claimants the ability to convert their rights to future
payments into cash that they can use for such purposes as paying medical or
tuition expenses, purchasing or improving a home, starting a business or
repaying debt. Singer's underwriting standards prohibit it from knowingly
entering into transactions with individuals who depend on their structured
settlement payments for basic income maintenance or ongoing medical care and
treatment.

         A framework of state statutes is emerging that regulate the
structured settlement factoring and secured lending business. Twelve states
require that certain disclosure and notifications be given in connection with
each transaction. Another twelve states are considering similar statutes.
Most of the states that regulate transfers of structured settlement payment
rights further require that a court approve the transfer of structured
settlement payment rights. Enactment of these new laws and compliance with
their requirements is likely to raise the cost of processing transactions.
However, Singer has supported these legislative initiatives in the belief
that these new laws provide certainty to this business. This reduces Singer's
effective cost-of-funds by affording additional security to the institutional
investors that bid for interests in these payment streams in the secondary
market as described below. Singer's structured settlement business will
likely become subject to similar or other government regulation in additional
states or at the federal level.

         According to reliable industry sources, over $35 billion is spent
annually on lottery tickets in the United States, and over $18 billion is paid
out annually in lottery prizes. In the past, winners of large jackpots were
required to accept their prizes in annual installments extending over 20 or more
years. Many of these winners prefer to realize the benefits of their prize more
quickly by receiving a lump sum payment from a third party such as Singer in
exchange for all or designated installments of their lottery prizes. During
1999, Singer purchased future lottery payment streams aggregating over $224
million in undiscounted future values.



                                       17
<PAGE>

         There always has been significant state regulation of the purchase of
lottery prize payments, and the trend is toward increasing consumer safeguards.
All states that permit the sale of lottery prizes (which now number 19 plus the
District of Columbia) require the purchaser to obtain a court order to authorize
each such transfer, with some states also mandating standard forms of
disclosures to the sellers. The Company believes these laws benefit Singer and
other purchasers of lottery prizes by lifting prior bans on the sale of lottery
prizes and enhancing certainty of payment for the purchasers.

         While the changing regulatory environment has expanded the market
geographically, nearly every lottery has in recent years revised its game rules
to afford new lottery winners the option of a single-payment jackpot. In
December 1998, Congress enacted technical changes to the Internal Revenue Code
permitting lotteries to afford winners up to 90 days AFTER a prize drawing to
decide whether to accept cash or payment over time. Since that change has been
implemented by the states through 1999, nearly every new lottery winner has
elected to take "up-front" cash rather than payment over time. As a consequence,
the total number of lottery "millionaires" being paid over time is now
decreasing. In addition, a recent change in the federal income tax law has
allowed lotteries to offer their own PAST winners a limited opportunity to "cash
out" directly with the state. That "transition rule" has been in effect since
July 1, 1999 and will remain in effect (under current law) through December 31,
2000. Pursuant to that transition rule, a number of state lotteries (including
Georgia, Illinois, Iowa, Virginia and Wisconsin) are now offering to "cash out"
their own past winners. While additional states have allowed (and most likely,
will allow) more winners to sell prizes to third-party purchasers, that positive
effect on revenues has been offset by competition from the state lotteries
themselves, which now offer new players (and in some cases, past winners) a
direct "cash option."

         Singer relies on brokers to originate structured settlements and
lottery payment receivables, and it markets to individuals through direct
marketing activities, including the activities of its employee sales force.

         Working with leading financial institutions since 1995, Singer has
securitized $154 million and $637 million in structured settlement and lottery
prizes payment streams, respectively.

         As an "originator" of rights to receive these payments, Singer faces
competition from other specialty finance companies. Competition can take many
forms, including price, convenience and service. Overall volume, margins and
relative market share may be affected by fluctuations in interest rates and
general economic conditions. All other things being equal, rising market
interest rates are likely to depress demand for Singer's services and/or narrow
its margins. Furthermore, the level of gross profit realized upon the sale of
these types of receivables may attract additional competitors with the effect of
reducing the gains that may be realized by Singer on future sales and
securitizations.

         In August 1998, the Company acquired Enhance Life Benefits LLC ("ELB"),
which engages in the viatical settlement business (i.e., the purchase of, or
lending against life insurance policies owned by individuals suffering from
terminal illnesses) and utilizes marketing and securitization techniques similar
to those used by Singer for structured settlement payment streams and lottery
prizes. ELB has securitized viatical payment streams through two transactions,
both in 1999.



                                       18
<PAGE>

         ELB receives funding to purchase viatical settlements from
sophisticated institutional investors that invest in large pools of policies
with the expectation of modest, predictable returns. In contrast, most of ELB's
competitors rely upon funding provided by individuals who purchase single
policies with the hope of experiencing windfall returns. ELB's strategy has been
to use institutional investment funds to buy and pool portfolios of policies,
with investor risks mitigated through the use of reinsurance. The Company
believes that this approach will afford ELB an advantage over competitors, who
are now finding it increasingly difficult to persuade individuals to invest in
viatical settlements. Medical advances, particularly with respect to
AIDS-related diseases, will most likely create a slower growth rate in the
viatical settlement market in general. ELB relies primarily on brokers and
health caretakers to locate and originate the purchase of viatical settlements.
ELB adheres to strict underwriting guidelines in its purchase and pricing of
viatical settlements.

         ELB holds viatical settlement provider's licenses in 17 of the 22
states that have enacted viatical settlement acts requiring such a license
(as well as a broker's license) to do business in those states, and it either
has license applications pending or intends to file license applications in
the other five states. The viatical settlement laws vary widely from state to
state. Of the 22 states that have licensing requirements for viatical
settlement providers and brokers, most regulate the sale of life insurance by
the original insured or policy owner to a viatical settlement provider, but
do not regulate the sale of investments in life policies. The National
Association of Insurance Commissioners (the "NAIC") and the National
Conference of Insurance Legislators are expected to adopt comprehensive model
acts that would also regulate viatical settlement providers' re-sale of
interests in life policies to individual investors. Finally, some states have
enacted legislation defining viatical settlement contracts as a "security"
subject to those states' securities regulations when sold as an investment.
The Company supports the regulation of viatical settlements and is an active
participant across the country in the legislative and rule-making process.

OTHER ASSET-BASED BUSINESSES

         The Company and MGIC each own 45.5% interests in Sherman Financial
Group LLC ("Sherman"), a New York City-based joint venture, with the remaining
9% owned by certain senior managers of Sherman. Sherman is an integrated
financial services company which purchases, services and eventually securitizes
delinquent consumer assets acquired at deep discounts, including charged-off
credit card receivables, Chapter 13 bankruptcy plan receivables and other
delinquent consumer assets. To that end, in 1998, the Company acquired a leading
servicer and collector of delinquent consumer assets, which the Company
contributed to Sherman in November 1999, and in 1999, Sherman acquired the
assets of a leading provider of marketing analytics and diligence services to
purchasers of unsecured delinquent consumer assets. Sherman purchases delinquent
consumer assets from national financial institutions and major retail
corporations. In addition, Sherman provides capital markets sourcing services
(on a fee basis) for the purchase of bank card receivable portfolios. The
Company has committed to contribute an aggregate of $20.2 million to the capital
of Sherman, of which $9.0 million had been contributed as of December 31, 1999.

         Enhance Financial and Swiss Reinsurance Company ("Swiss Re") each own
45% interests in SBF Participacoes Ltda ("SBF"), a Brazilian insurance holding
company, which is the parent holding company of UBF Garantias & Seguros SA, one
of Brazil's largest credit insurance and surety insurance companies ("UBF"),
which owns Seguradora Brasileira de Fiancas, an entity previously owned 25% by
each of Enhance Financial and Swiss Re. The remainder of SBF is owned by UBF's
management and private Brazilian investors. The Company anticipates that the



                                       19
<PAGE>

business of UBF will expand in the Latin American insurance and other
credit-related markets and opportunities.

         The Company owns an 80% interest in AGS Financial LLC ("AGS"), a New
York City-based venture. with the remaining 20% owned by certain senior managers
and founders of the predecessor to AGS. AGS is focused on structured finance,
asset servicing and specialized investment banking services in Latin American
markets. The Company formed AGS in 1998 to utilize resources made available to
the Company through its interest in SBF. To date, AGS has been a major
participant in the development of some of the most innovative origination and
servicing capabilities critical to successful securitization programs in
selected Latin American markets.

INVESTMENTS AND INVESTMENT POLICY

         The Company's investment portfolio, consisting primarily of municipal
bonds, mortgage-backed securities, corporate bonds, asset-backed securities and
privately placed securities is managed with a view to maximizing after-tax
income. As of December 31, 1999, 81.6% of the portfolio is managed internally,
while the remaining 18.4% is allocated to two external specialty managers. All
investments are guided by the Company's general investment objectives and
policies, including guidelines relating to average maturities and quality, which
are periodically reviewed and revised as appropriate. The investment policies
are designed to achieve diversification of the portfolio. Investments are almost
entirely fixed income securities, with a mix of taxable and tax-exempt
investments looking to maximize the net income of the Company.

         The Company generally limits its investment in municipal debt of
issuers whose obligations it insures or reinsures ("Overlapping Investments").
However, given the increasing percentage of high-grade municipal debt
obligations that are insured and the Company's significant market share in the
insurance and reinsurance of municipal debt obligations, a portion of the
Company's investment portfolio consists of Overlapping Investments. It is the
Company's policy to comply with any and all state regulatory requirements that
govern such Overlapping Investments, and such regulations have been incorporated
into the Company's investment guidelines.

         The Company may from time to time be required to invest funds prior to
receiving current reinsurance exposure data from its primary insurers, which is
generally provided quarterly. The Company assures compliance with its investment
guidelines through periodic reviews of its investment portfolio, promptly
selling such Overlapping Investments as may be necessary to bring its investment
portfolio into compliance with such guidelines based on updated insurance and
reinsurance exposure data.

         Specifically, the Company's investment guidelines require, among other
things, that (a) no single investment represent greater than 10% of the
Company's admitted assets (as determined in accordance with statutory accounting
principles) and (b) investments in securities of any one entity not exceed 3%
percent of the Company's admitted assets as of the prior year-end. As of
December 31, 1999, such limits for Enhance Re were $72.0 million and $21.6
million, respectively and for Asset Guaranty were $27.3 million and $8.2
million, respectively.

         As of December 31, 1999, the Company had an aggregate investment in
Overlapping Investments of $177.7 million, representing 0.2% of the Company's
$85.6 billion total insurance exposure as of such date.



                                       20
<PAGE>

         The Company also complies with insurance risk exposure limits for any
single insured in accordance with the Insurance Law. At December 31, 1999, such
limits were $241.8 million for Enhance Re and $90.5 million for Asset Guaranty.
It is the Company's policy to review its investment portfolio in light of these
limits, and if the sum of the insurance risk exposure plus the investment
portfolio exposure of a single issuer exceeds the statutory limit for insurance
risk exposure, the Company reviews its investment portfolio of such issuer for
any necessary remedial action with respect to the Overlapping Investments.

         In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 115, Accounting for Certain Investments in Debt and Equity Securities, the
Company classifies all securities at the time of purchase as either "held to
maturity" or "available for sale." Securities held to maturity are those
securities that the Company intends and has the ability to hold until maturity
and are carried at amortized cost. All other fixed maturity securities are
classified as available for sale, are carried at fair value and may be sold in
response to changes in interest rates, prepayment risk, payment of losses and
other factors. Unrealized gains and losses, net of taxes, on the
available-for-sale portfolio are charged or credited to accumulated other
comprehensive income.

         The Company intends to hold 18.5% (based on carrying value) of its
invested assets, excluding Other Invested Assets, to maturity, and,
accordingly, in accordance with SFAS No. 115, they are accounted for on an
amortized cost basis.

         The following tables set forth certain information concerning the types
of investments and maturities composing the investment portfolio of the Company.

<TABLE>
<CAPTION>
                                                                   As of December 31, 1999
                                                      -----------------------------------------------
                                                                                      Weighted Average
            Investment Category (1)                   Carrying Value (2)                 Yield (3)
            -----------------------                   ------------------                 ---------
                                                     (Dollars in millions)
<S>                                                   <C>                          <C>
FIXED MATURITIES, HELD TO MATURITY
   Private placements .........................               $   90.7                     8.85%
   Municipal obligations - tax exempt .........                   77.2                     6.57
   Corporate securities .......................                    3.6                     8.41
   U.S. Government obligations ................                    6.1                     6.51
                                                              --------                    -----
     Total ....................................               $  177.6                     7.77%
                                                              --------
FIXED MATURITIES, AVAILABLE FOR SALE
   Municipal obligations - tax exempt .........               $  539.8                     5.42%
   Mortgage-backed securities .................                  117.5                     7.30
   Corporate securities .......................                   54.8                     7.61
   Asset-backed securities ....................                   19.5                     8.71

   U.S. Government obligations ................                   14.4                     5.81
                                                              --------
     Total ....................................               $  746.0                     5.97%
                                                              --------
Short-term investments.........................                   34.7                     5.25
Common stocks..................................                    0.8                     8.57
                                                              --------
     Total Investments .........................              $  959.1                     6.26%
                                                              ========
</TABLE>


                                       21
<PAGE>


-------------
(1)  Excludes Other Invested Assets. See Note 6 of
     Notes to Consolidated Financial Statements.

(2)  Investments in fixed maturities in the held-to-maturity portfolio are
     carried at amortized cost. Investments in fixed maturities in the
     available-for-sale portfolio are carried at market value. Short-term
     investments are carried at cost, which approximates their market values.
     Common stocks are carried at market value. Unrealized gains and losses on
     fixed maturities available for sale and common stocks are reflected in
     accumulated other comprehensive income, net of tax.

(3)  Represents yield to maturity on fixed maturities and current yield on
     common stocks and certain short-term investments. All amounts are stated on
     a pre-tax basis.


<TABLE>
<CAPTION>
             Maturity of Fixed Maturities                      Carrying Value as of December 31, 1999
             ----------------------------                      --------------------------------------
                                                                           (In millions)
<S>                                                            <C>
HELD TO MATURITY (1)
          Due in one year or less ........................               $   10.4
          Due after one year through five years ..........                   64.3
          Due after five years through ten years .........                   53.3
          Due after ten years ............................                   49.6
                                                                           ------
              Total (2) ..................................               $  177.6
                                                                           ======
AVAILABLE FOR SALE (3)
          Due in one year or less ........................               $     --
          Due after one year through five years ..........                   47.5
          Due after five years through ten years .........                  129.5
          Due after ten years ............................                  569.0
                                                                           ------
              Total (4) ..................................               $  746.0
                                                                           ======
</TABLE>

--------------
(1)  The weighted average maturity of the held to maturity portfolio is
     estimated to be 4.2 years as of December 31, 1999.

(2)  Investments in fixed maturities in the held-to-maturity portfolio are
     carried at amortized cost. Total market value as of December 31, 1999 of
     fixed maturities, held to maturity, was $181.5 million.

(3)  The weighted average maturity of the available for sale portfolio as of
     December 31, 1999 is estimated to be 14.2 years.

(4)  Investments in fixed maturities in the available-for-sale portfolio are
     carried at market value. Total amortized cost of fixed maturities,
     available for sale, as of December 31, 1999 was $778.8 million.

                                       22

<PAGE>

         The Company has an investment policy of maintaining an investment
portfolio having a weighted average credit rating of not lower than AA. The
Company's adherence to these policies is reflected in the following table
setting forth certain information concerning the rating of the Company's
investments by Standard & Poor's.

<TABLE>
<CAPTION>
                                                                     Percent of Investment Portfolio
Rating                                                                   as of December 31, 1999
------                                                                ------------------------------
<S>                                                                  <C>
AAA (1) ..................................................                           53.6%
AA .......................................................                           31.8
A  .......................................................                           10.6
Other (2) .................................................                           4.0
</TABLE>

----------------
(1)  Includes U.S. Treasury and agency obligations, which constituted 2.1% of
     the total portfolio as of December 31, 1999.

(2)  Consists of common stock, unrated securities and securities rated less than
     A.

         In April 1999, the Company purchased for a net purchase price of
$9.3 million a portfolio of approximately 500 residential mortgage-backed
securities. The transaction was structured by C-BASS, which also manages and
services the portfolio for the Company. The transaction is expected to
produce significant pre-tax economic profits over the life of the acquired
portfolio, which is anticipated to be for a period of eight to ten years.
Additionally, the transaction will provide ancillary benefits that will
result in a lowering of the Company's effective income tax rate in 1999 and
beyond. The Company currently expects that it will continue to receive tax
benefits from the portfolio at a level comparable to the current year at
least through 2001 and will receive some additional tax benefits over a
period of six to eight years thereafter. However, the amount of pre-tax
economic profits and tax benefits recognized from year to year may vary
significantly depending on factors relating to the portfolio, some of which
are outside the control of the Company. The Company does not consider this
investment a part of its investment portfolio and has classified it on its
balance sheet as Investment - Other Invested Assets. See Note 6 to Notes to
Consolidated Financial Statements for more information about this transaction
and the expected income tax ramifications resulting therefrom.

MARKETING

         Most of the Company's business derives from relationships it has
established and maintains with many of the primary insurance companies. These
relationships provide business for the Company in the following major areas: (1)
reinsurance for municipal bonds and asset-backed securities (in which area the
Company currently has either treaty or facultative agreements with all the
highest rated monoline primary companies); (2) trade credit reinsurance; and (3)
reinsurance for affiliated-companies reinsurance (including Exporters and FCIA).

         The Company markets directly to the monoline insurers writing credit
enhancement business and has direct relationships with their affiliated primary
insurers. Specialist reinsurance



                                       23
<PAGE>

intermediaries, most of whom are located in London, usually present to the
Company reinsurance opportunities in the credit insurance sector. These brokers
work with the Company's marketing personnel in introducing the Company to the
primary credit insurance markets and in structuring reinsurance to meet the
needs of the primary insurers. Intermediaries are typically compensated by the
reinsurer based on a percentage of premium assumed, which varies from agreement
to agreement.

         The Company markets its excess-SIPC/excess-ICS polices through
specialist intermediaries, primarily in New York and London. These brokers work
with the Company's marketing personnel in introducing the Company to large
securities brokers to meet the needs of such securities brokers. These brokers
are typically compensated by the Company based on a percentage of premium
collected, which varies from agreement to agreement.

COMPETITION

         REINSURANCE OF MONOLINE FINANCIAL GUARANTIES. The Company is subject to
competition from three companies that specialize in financial guaranty
reinsurance -- Capital Reinsurance Company ("Capital Re"), Axa Reassurance
Finance, S.A ("Axa") and RAM Reinsurance Co. Ltd ("Ram Re"), which the Company
believes provide, together with the Company, most of the reinsurance capacity to
the Major Monolines. In addition, several multiline insurers have recently
increased their participation in financial guaranty reinsurance. Certain of
these multiline insurers have formed strategic alliances with some of the U.S.
primary financial guaranty insurers. The Company believes that it and Capital Re
have the largest and roughly equivalent shares of financial guaranty premiums
ceded by the highest rated monoline primary insurers inclusive of both treaty
and facultative business. In December 1999, ACE Limited acquired Capital Re. The
financial strength ratings of Capital Re have to date not been affected by such
acquisition and remain the same as Enhance Re's. It is unclear the effect, if
any, of this acquisition on the Company, including its competitive position.

         Competition in the financial guaranty reinsurance business is based
upon many factors, including overall financial strength, pricing, service and
evaluation by the rating agencies of claims-paying ability or financial
strength. The agencies allow credit to a ceding primary insurer's capital
requirements and single-risk limits for reinsurance ceded in an amount that is a
function of the claims-paying ability or financial strength rating of the
reinsurer. See "Rating Agencies" in this section. The Company believes that
competition from multiline reinsurers and new monoline financial guaranty
insurers will continue to be limited due to (a) the declining number of
multiline insurers with the requisite financial strength and (b) the barriers to
entry for new reinsurers posed by state insurance law and rating agency criteria
governing minimum capitalization.

         Financial guaranty insurance, including municipal bond insurance, also
competes with other forms of credit enhancement, including letters of credit and
guaranties provided primarily by foreign banks and other financial institutions,
some of which are governmental entities or have been assigned the highest credit
ratings awarded by one or more of the major rating agencies. However, these
credit enhancements serve to provide primary insurers with increased insurance
capacity only for rating agency purposes. They do not qualify as capital for
state regulatory purposes, nor do they constitute credit against specific
liabilities that would allow the primary insurer greater single-risk capacity.

         OTHER INSURANCE BUSINESSES. The Company believes that there are a
number of direct competitors of the Company in its other insurance businesses,
some of which have greater



                                       24
<PAGE>

financial and other resources than the Company. The Company has limited its
activities in these market areas to those activities that are not served by the
Major Monolines. As a primary insurer, the Company writes insurance on those
types of municipal bonds with respect to which such primary insurers have
generally declined to participate because of the size or complexity of such bond
issuances relative to the anticipated returns. The Company also serves as a
reinsurer for certain specialty primary insurers that are not monoline financial
guaranty insurers, in which the Company has significant equity interests or is
otherwise a participant. Such reinsurance accounted for 3.2% of the Company's
gross premiums written in 1999. These specialty primary insurers are themselves
subject to competition from other primary insurers, many of which have greater
financial and other resources.

RATING AGENCIES

         The rating agencies allow credit to a ceding primary insurer's capital
requirements and single-risk limits for reinsurance ceded in an amount which is
dependent upon the claims-paying ability or financial strength rating of the
reinsurer. The rating criteria used by the rating agencies focus on the
following factors: capital resources; financial strength; commitment of
management to, and alignment of shareholder interests with, the financial
guaranty business; primarily in the case of a reinsurer whose common equity is
not publicly traded, shareholder composition and commitment of the reinsurer's
institutional stockholders; demonstrated management expertise in financial
guaranty and traditional reinsurance; credit analysis; systems development;
marketing; capital markets and investment operations, including the ability to
raise additional capital; and a minimum policyholders' surplus comparable to
primary company requirements, with initial capital sufficient to meet projected
growth as well as access to such additional capital as may be necessary to
continue to meet standards for capital adequacy. As part of their rating
process, Standard & Poor's, Moody's and Duff & Phelps test the capital adequacy
of the Insurance Subsidiaries by subjecting them to a "worst-case depression
scenario." Expected losses over a depression period are established by applying
capital charges to the existing and projected insurance portfolio.

         The claims-paying ability and financial strength ratings assigned by
the rating agencies to a reinsurance or insurance company are based upon factors
relevant to policyholders and are not directed toward the protection of the
reinsurer's or insurer's securityholders. Such a rating is neither a rating of
securities nor a recommendation to buy, hold or sell any security. Claims-paying
ability and financial strength ratings assigned to the Insurance Subsidiaries
should not be viewed as indicative of or relevant to any ratings which may be
assigned to the Company's outstanding debt securities by any rating agency and
should not be considered an evaluation of the likelihood of the timely payment
of principal or interest under such securities.

         On August 17, 1999, Moody's announced that it had downgraded both the
senior long-term debt rating of Enhance Financial from Aa3 to A2 and the
insurance financial strength of Enhance Re from Aaa to Aa2 (the "1999
downgrade"). On February 29, 2000, Moody's advised the Company that it had
placed on review for possible further downgrade both the above ratings. Moody's
explained that this review will focus on the uncertainty surrounding
management's strategy with respect to the Company's higher risk specialty
finance businesses, the reliance on these business lines to achieve publicly
stated earnings targets, the Company's future capital plans and the Company's
financial flexibility. Moody's indicated that the outcome of the review will
depend on by the Company's future plans for achieving a balance between the
financial guaranty insurance operations and the Company's other lines of
business.



                                       25
<PAGE>

         The Company does not believe that the 1999 downgrade has had or
should have a material adverse effect on Enhance Re's competitive position.
This is because many of Enhance Re reinsurance competitors do not have
financial strength ratings of Aaa from Moody's, and Enhance Re's principal
financial guaranty reinsurance competitor had previously been downgraded by
Moody's to the same rating level as Enhance Re. Although the Major Monolines
with treaty agreements with Enhance Re were entitled to "recapture" business
previously ceded to Enhance Re as a result of the 1999 downgrade, the Company
has variously (i) obtained waivers of such rights with respect to the 1999
downgrade, (ii) amended its existing treaties to eliminate such right as it
pertains to the 1999 downgrade, and (iii) negotiated a new treaty which would
not permit such right as it pertains to the 1999 downgrade on future
cessions. Certain of the foregoing actions have resulted in increases in
ceding commissions totaling $4.3 million.

         The Company does not believe that a downgrade of Enhance Re's
financial strength rating from Aa2 to Aa3, should it occur, should have a
material adverse effect on Enhance Re's competitive position or Enhance Re's
costs associated with cessions from primary insurers under their treaties
with Enhance Re. This is because many of Enhance Re's reinsurance competitors
do not have materially higher financial strength ratings from Moody's than
would Enhance Re and because of the terms of the amendments of certain of its
existing treaties and its new treaties with the Major Monolines described
above. In cases where a prior treaty with a Major Monoline remains in effect
or a Major Monoline had waived its rights with respect to the 1999 downgrade,
any additional downgrade could result in those Major Monolines recapturing
business previously ceded to Enhance Re. However, a downgrade in Enhance Re's
financial strength rating to (or below) A could have a material adverse
effect on Enhance Re's competitive position. A downgrade of that magnitude
may so diminish the value of Enhance Re's reinsurance to the Major Monolines
that they could either materially increase the costs to Enhance Re associated
with cessions under their treaties with Enhance Re or recapture business
previously ceded to Enhance. In either case, the effect of such changes could
materially adversely affect the Company's ability to continue to engage in
the reinsurance of monoline financial guaranty insurers business. While the
Company believes that the recapture of business by the primaries would
otherwise be inconsistent with their long-standing risk-management practices,
such action, if it occurs and depending on its magnitude, could have a
material adverse effect on the Company. See "Reinsurance of the Major
Monolines" in this section.

         A substantial portion of Asset Guaranty's written business is subject
to similar provisions with respect to any downgrade of its Standard & Poor's or
Duff & Phelps rating. The Company believes that the same consequences as set
forth above would occur were Asset Guaranty to experience any such downgrade,
which, in turn, could materially adversely affect the Company's ability to
continue to engage in certain specialty businesses, principally insurance of
municipal bonds. See "Other Insurance Businesses" in this section.

         See Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operation-Liquidity and Capital Resources for a
discussion of the impact of Moody's downgrade of Enhance Financial's senior
long-term debt rating.

DATA PROCESSING

         The Company believes that its data processing systems are adequate to
support its current needs and have the capacity to support a greater volume of
reinsurance business. The Company continued to strengthen its data processing
systems and technology infrastructure in 1999. The



                                       26
<PAGE>

Company initiated a redesign of its technology infrastructure in 1999, building
a state-of-the art data center, high-speed infrastructure and upgraded
communications. This redesign is anticipated to provide a more reliable and
resilient information technology environment. The Company also completed in 1999
multiple off-site disaster recovery tests of all mission-critical applications.
The Company has in progress major application development programs that will
provide operational support to many departments. One of the ultimate objectives
of these development programs is to restructure, streamline and strengthen the
Company's databases that support important reporting and decision-support
processes.

EMPLOYEES

         As of March 1, 2000, the Company had 265 employees, 115 at the
Company's offices New York, New York, 134 at Singer's and ELB's offices in Boca
Raton, Florida, 14 based at Van-Am's office in Lexington, Kentucky, and two at
AGS's office in Raleigh, North Carolina. None of the employees are covered by
collective bargaining agreements. The Company considers its employee relations
to be good.

INSURANCE REGULATORY MATTERS

FINANCIAL GUARANTY INSURANCE REGULATIONS

         The Insurance Subsidiaries are domiciled and licensed in the State of
New York as financial guaranty insurers under that portion of the Insurance Law
constituting the financial guaranty insurance statute. They are also subject to
the provisions of the Insurance Law and related rules and regulations governing
property-casualty insurers to the extent such provisions are not inconsistent
with the financial guaranty insurance statute. Both Insurance Subsidiaries are
also licensed under the Insurance Law to write surety insurance, credit
insurance and residual value insurance, which are the only other types of
insurance that a financial guaranty insurer licensed under the Insurance Law may
be authorized to write.

         The Insurance Subsidiaries are required by New York and each other
jurisdiction in which they are licensed to make various filings, including
quarterly and annual financial statements prepared in accordance with statutory
accounting practices, with those jurisdictions and with the NAIC.

         The Insurance Law requires that each financial guaranty insurer and
reinsurer maintain both a reserve for unearned premiums and for incurred losses
(similar to the reserve described in "Description of Business -- Loss
Experience" in this section) and a special, formulaically derived "contingency
reserve" to protect policyholders against the impact of excessive losses
occurring during adverse economic cycles. As of December 31, 1999, the statutory
contingency reserves of the Insurance Subsidiaries aggregated $239.7 million.
Each calculated reserve may be drawn on with the approval of the New York
Insurance Department (the "Department") under specified but limited
circumstances.

         The Insurance Law establishes single-risk limits applicable to all
obligations insured by a single entity and backed by a single revenue source and
aggregate risk limits on the basis of aggregate net liability and policyholders'
surplus requirements. The Insurance Law also regulates the types of securities
in which the Insurance Subsidiaries may invest their minimum policyholders'
surplus and imposes restrictions on the amount of dividends that the Insurance


                                       27
<PAGE>

Subsidiaries may pay. See Item 5. "Market for Registrant's Common Equity and
Related Stockholder Matters -- Dividend Policy."

         The Company believes that each of the Insurance Subsidiaries is in
material compliance with all applicable laws and regulations of the State of New
York and the laws and regulations of the other jurisdictions in which such
Insurance Subsidiary is licensed pertaining to its business and operations.

         The Insurance Subsidiaries are also subject to the insurance laws in
each jurisdiction in which they are licensed to transact insurance. Reinsurance
activities are generally not directly regulated by state law, but are generally
subject to limited indirect regulation in most states through the regulation of
ceding primary insurers domiciled in those states.

INSURANCE HOLDING COMPANY REGULATIONS

         Enhance Financial, as the parent, and the Insurance Subsidiaries, as
controlled insurers, are subject to regulation under the insurance holding
company laws of New York, which require the Insurance Subsidiaries to register
with the Department and to file with it certain informational reports.

         State holding company laws also require prior notice or regulatory
approval of direct or indirect changes in control of an insurer or its holding
company and of certain material intercorporate transfers within the holding
company structure. Upon obtaining control, the acquiror would become subject to
various ongoing regulatory requirements in New York and certain other states.

         The Company believes that Enhance Financial and each of the Insurance
Subsidiaries is in material compliance with all applicable insurance holding
company laws and regulations of the State of New York and the laws and
regulations of the other jurisdictions in which such Insurance Subsidiary is
licensed pertaining to its business and operations.

         Under the Insurance Law, any person holding or acquiring, directly or
indirectly, 10% or more of the voting securities of an insurance company is
presumed to be holding or acquiring "control" of such company and its
subsidiaries, unless the Department determines upon application that such
acquiror would not control such company.

NAIC/IRIS RATIOS

         The NAIC developed the Insurance Regulatory Information System
primarily to assist state insurance departments in executing their statutory
mandates to oversee the financial condition of insurance companies operating
in their respective states. The system identifies twelve industry ratios and
specifies "usual values" for each ratio. Departure from these "usual values"
on four or more of the ratios can lead to inquiries from individual state
insurance commissioners as to certain aspects of an insurer's business. The
values of such ratios of the Insurance Subsidiaries all fell within these
"usual values" except for two of such ratios for Enhance Re: the liabilities
to liquid assets ratio fell outside the "usual value" as a result of an
increase in the funds held by or deposited with reinsured companies, and the
investment yield ratio fell outside the "usual value" as a result of greater
than usual or expected income on funds held or deposited with reinsurance
companies; and one such ratio for Asset Guaranty: the change in net writings
ratio fell outside the "usual value" as a result of an increase in premium
writings by Asset Guaranty.

                                       28
<PAGE>

ACCREDITATION

         The NAIC has instituted the Financial Regulatory Accreditation
Standards Program ("FRASP") in response to federal initiatives to regulate the
business of insurance. FRASP provides standards intended to establish effective
state regulation of the financial condition of insurance companies. FRASP
requires states to adopt certain laws and regulations, institute required
regulatory practices and procedures, and have adequate personnel to enforce such
items in order to become "accredited." In accordance with the NAIC's Model Law
on Examinations, accredited states are not permitted to accept certain financial
examination reports of insurers prepared solely by the insurance regulatory
agency in states not accredited by January 1, 1994. Although the State of New
York is not accredited, no states where the Insurance Subsidiaries are licensed
have refused to accept the Department's Reports on Examination for the Insurance
Subsidiaries. However, there can be no assurance that, should the Department
remain unaccredited, other states that are accredited will continue to accept
financial examination reports prepared solely by New York. The Company does not
believe that the refusal by an accredited state to continue accepting financial
examination reports prepared by New York, should that occur, will have a
material adverse impact on the Company's insurance businesses.

ITEM 2. PROPERTIES.

         The Company, excluding Singer, occupies 121,000 square feet of office
space comprising its executive offices at 335 Madison Avenue, New York, New York
pursuant to a lease expiring August 2015. The Company also occupies 1,300 square
feet of office space in London, England. Singer occupies 2,000 square feet of
office space at the same address that it subleases from the Company and a 35,000
square feet of office space in Boca Raton, Florida pursuant to a lease expiring
August 2005. In addition to 1,812 square feet of the Company's office space in
New York, New York comprising AGS's executive offices that AGS subleases from
the Company, AGS occupies approximately 1,089 square feet of office space in
Raleigh, North Carolina pursuant to a lease expiring June 2001. Van-Am occupies
3,400 square feet of office space comprising its executive offices in Lexington,
Kentucky and Asset Guaranty UK Ltd. occupies approximately.

         In addition, the Company has committed to making capital improvements
to its New York City offices and to purchase fixtures and furniture for those
offices, as more fully discussed in Note 13 to Notes to Consolidated Financial
Statements.

ITEM 3. LEGAL PROCEEDINGS.

         The Company is not a party, nor is any of its property subject, to any
material legal proceedings.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.

         Not applicable.


                                       29
<PAGE>

                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

SHARE INFORMATION

         The following table sets forth the high and low sales prices for the
Common Stock for the calendar quarters indicated as reported in the New York
Stock Exchange consolidated transaction system. Sales prices reflect a 2:1 split
of Enhance Financial's stock effective June 1998.

<TABLE>
<CAPTION>
                                                                              High                 Low
                                                                              ----                 ---
<S>                                                                       <C>                     <C>
1998
----
            1st quarter .....................................              $35                    $26
            2nd quarter .....................................               37-19/32               30-5/8
            3rd quarter .....................................               37-5/16                25
            4th quarter .....................................               30-3/8                 17-5/16

1999
----
            1st quarter .....................................               30-1/8                 18
            2nd quarter .....................................               22-7/8                 18
            3rd quarter .....................................               22-5/8                 17
            4th quarter .....................................               19-5/16                15-1/2

2000
----
            1st quarter (through March 24) ..................               16-3/8                 10-3/4
</TABLE>

         As of March 24, 2000, there were 102 holders of record of the Common
Stock.

DIVIDEND POLICY

         Enhance Financial paid an aggregate dividend of $0.24 per share in
1999, and the board of directors declared a dividend in the first quarter of
2000 of $.06 per share. The amount of dividends payable in the future will be
reviewed periodically by the board of directors in light of the Company's
earnings, financial condition and capital requirements. The declaration and
payment of dividends are subject to the discretion of the board of directors of
Enhance Financial, and there is no requirement or assurance that dividends will
be paid.

         Enhance Financial's ability to pay dividends as well as its operating,
debt service and other expenses depends upon the ability of the Insurance
Subsidiaries to pay dividends to Enhance Financial. The Insurance Subsidiaries'
ability to pay dividends to Enhance Financial is subject to restrictions
contained in the Insurance Law. The Company expects that such restrictions will
not affect the ability of such subsidiaries to declare and pay dividends to
Enhance Financial to support the payment of dividends by Enhance Financial
consistent with the practice adopted in recent years. As of December 31, 1999,
up to $11.0 million was available for the payment of dividends to Enhance
Financial by the Insurance Subsidiaries without the prior approval of the
insurance regulatory authorities. See Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" and Note 8 of Notes to Consolidated Financial Statements.
Enhance Financial is limited by the agreements relating to indebtedness in its
ability to pay dividends under certain circumstances.


                                       30
<PAGE>



ITEM 6. SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION.

         The following table presents selected historical consolidated financial
information derived from the historical consolidated financial statements of the
Company as of and for each of the years in the five-year period ended December
31, 1999. This information should be read in conjunction with the historical
consolidated financial statements of the Company and the related notes thereto
and Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations. 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.

<TABLE>
<CAPTION>
                                                                Year Ended December 31,
                                             ---------------------------------------------------------------
                                                 1999         1998          1997         1996          1995
                                             ---------     ---------    ---------    ---------    ---------
                                                     (Dollars in millions except per share amounts)
<S>                                          <C>           <C>          <C>          <C>          <C>
Statement of Income Data:
Gross premiums written .................     $   139.0     $   130.4    $   108.2    $    98.6    $    87.2
Net premiums written ...................         133.0         129.3        100.5         95.7         83.0
Premiums earned ........................         103.9         102.3         85.4         77.4         63.0
Assignment sales .......................          30.7          45.4         29.2         --           --
Net realized gains (losses) on
sale of investments ....................          (3.0)          2.4          0.7          4.0          3.5
Net investment income (1)  .............          58.1          53.4         50.6         47.5         44.2
Total revenues .........................         197.6         207.5        170.4        131.6        112.5
Income before income taxes .............          69.4         112.8         94.0         76.4         63.8
Net income .............................          68.6          82.5         68.8         55.7         47.3
Basic earnings per share ...............           1.81          2.20         1.86         1.56         1.36
Diluted earnings per share .............           1.76          2.10         1.78         1.52         1.36

Selected Financial Ratios (2)
Loss ratio .............................          25.2%         10.1%        11.4%        11.9%        15.1%
Insurance expense ratio ................          56.6%         48.6%        50.3%        49.2%        50.9%
Combined ratio .........................          81.8%         58.7%        61.7%        61.1%        66.0%
</TABLE>

<TABLE>
<CAPTION>
                                                                      December 31,
                                             --------------------------------------------------------------
                                               1999           1998         1997        1996          1995
                                             ---------     ---------    ---------    ---------    ---------
                                                  (Dollars in millions except per share amounts)
<S>                                          <C>           <C>          <C>          <C>          <C>
Balance Sheet Data:
Investment portfolio (3) ...............     $   972.6     $   948.3    $   875.9    $   797.1    $   749.2
Total assets ...........................       1,453.9       1,340.7      1,172.3      1,003.0        903.9
Deferred premium revenue ...............         337.3         308.2        281.3        266.2        248.1
Total liabilities ......................         639.6         678.0        590.9        514.7        479.9
Deferred credit ........................         138.0            --           --           --           --
Total shareholders' equity .............         676.3         662.7        581.4        488.3        423.9
Book value per share ...................          17.77         17.50        15.55        13.52        12.30

Statutory Basis Reserves (4)
Contingency reserves ...................     $   239.7     $   207.9    $   171.7    $   149.8    $   120.8
Policyholders' surplus .................         305.4         322.6        323.2        312.0        294.5
                                               -------       -------      -------      -------      -------
Qualified statutory capital ............         545.1         530.5        494.9        461.8        415.3
Unearned premiums ......................         420.5         381.6        345.7        323.2        298.2
Losses and LAE reserves ................          37.8          30.8         22.5         17.7         22.0
                                               -------       -------      -------      -------      -------
Total policyholders'
reserves ...............................     $ 1,003.4     $   942.9    $   863.1    $   802.7    $   735.5
                                               =======       =======      =======      =======      =======
Leverage ratio (5) .....................         157:1         143:1        130:1        122:1        128:1
</TABLE>




                                       31
<PAGE>

         (1)      Excludes capital gains and losses.

         (2) The loss ratio is the quotient derived by dividing losses and LAE
incurred by premiums earned. The expense ratio is the quotient derived by
dividing underwriting and insurance related operating expenses by premiums
earned. The combined ratio is the sum of the loss and expense ratios. Such
ratios have been calculated using amounts determined in accordance with GAAP.

         (3) Includes cash and cash equivalents and excludes investments in
affiliates. See Note 5 of Notes to Consolidated Financial Statements for
information concerning Enhance Financial's investments in affiliates.

         (4) Represents the combined financial position of the Insurance
Subsidiaries presented on a statutory basis.

         (5) Represents the quotient derived by dividing net insurance in force
by qualified statutory capital.

ITEM 7. 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
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-Am, a Kentucky-domiciled insurer which writes
reclamation bonds for the coal mining industry, and surety bonds covering the
closure and post-closure obligations of landfill operators. The Company also
provides surety and other credit-based insurance products through its 45%
ownership of SBF Participacoes Ltda.

         The Company operates its asset-based businesses primarily through
its consolidated subsidiaries, Singer and ELB and minority owned subsidiaries,
C-BASS and Sherman. The Company's asset-based businesses include the
origination, purchase, servicing and/or securitization of special assets,
including state lottery awards, structured settlement payments and viatical
settlements; sub-performing/non-performing and seller-financed residential
mortgages, real estate and subordinated residential mortgage-backed
securities; and delinquent unsecured consumer assets.

         The Company's revenues consist primarily of (a) premiums earned on
insurance and reinsurance contracts, (b) investment income and (c) the sale of
securitized deferred payment streams.



                                       32
<PAGE>

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 1999 VERSUS YEAR ENDED DECEMBER 31, 1998

         Interest rates increased in 1999, reducing refundings of bonds in
place and also the volume of new issues decreased. Municipal new-issue volume
was $225.9 billion in 1999, a decline of 21.0% from $286.0 billion in 1998.
For the financial guaranty insurance industry in total, the insured portion
of such new issues was 46.0% and 50.8% for these years respectively. Total
municipal bond refundings for 1999 represented approximately 16.5% of the
new-issue volume, down from 28.6% for 1998.

         Gross premiums written in 1999 increased 6.6% to $139.0 million from
$130.4 million in 1998. Net premiums written grew 2.9% to $133.0 million in
1999 from $129.3 million in 1998. The 80.3% growth in the direct financial
guaranty premium and the 31.4% growth in the assumed trade credit premium
offset the 23.5% decrease in the financial guaranty reinsurance premium. The
decrease in reinsurance net premiums written in 1999 relative to 1998 is
mainly due to an $11.0 million cession written in 1998 that was not repeated
in 1999.

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

<TABLE>
<CAPTION>
Net Premiums Written
(Dollars in millions)                                  1999         1998      $ Change      % Change
----------------------------------------------- ------------ ------------ ------------- ---------------
<S>                                             <C>          <C>          <C>           <C>
Municipal Reinsurance                                  $39.5        $56.2        $(16.7)      (29.7)%
Non-Municipal Reinsurance                               22.2         24.4          (2.2)       (9.0)
Direct Financial Guaranty                               34.8         19.3          15.5        80.3
Trade Credit                                            22.2         16.9           5.3        31.4
Other                                                   14.3         12.5           1.8        14.4
                                                ------------ ------------ ------------- ---------------
TOTAL                                                 $133.0       $129.3        $  3.7         2.9%
                                                ============ ============ ============= ===============
</TABLE>

         Net premiums earned grew 1.6% to $103.9 million in 1999 from $102.3
million in 1998. This growth in premiums earned was attributable to increased
writings in the direct financial guaranty and trade credit reinsurance
business. Also included in 1998 municipal reinsurance result was a cession
generating approximately $11.0 in written premium. This opportunity did not
recur in 1999. Earned premiums for municipal reinsurance from refundings
contributed $13.0 million (or 12.5%) to earned premiums in 1999 compared to
$17.9 million in 1998.

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

<TABLE>
<CAPTION>
  Net Premiums Earned
  (Dollars in millions)                                1999         1998      $ Change        % Change
----------------------------------------------- ------------ ------------ ------------- ---------------
<S>                                                    <C>         <C>             <C>        <C>
  Municipal Reinsurance                                $33.3       $42.0          $(8.7)      (20.7)%
  Non-Municipal Reinsurance                             26.9        24.0            2.9        12.1
  Direct Financial Guaranty                             12.2         9.5            2.7        28.4
  Trade Credit                                          20.3        15.9            4.4        27.7
  Other                                                 11.2        10.9            0.3         2.8
                                                ------------ ------------ ------------- ---------------
  TOTAL                                               $103.9      $102.3          $ 1.6         1.6%
                                                ============ ============ ============= ===============
</TABLE>

         While adhering to its strict underwriting standards, the Company
maintains its strong position within the financial guaranty reinsurance
market. The decrease in reinsurance lines (other than trade credit) was
primarily caused by non-recurring opportunities in 1998 and the Company's
refinement of unearned premium reserve amortization methodology.

                                       33
<PAGE>

          Deferred premium revenue, net of prepaid reinsurance premiums, grew to
$337.3 million at year-end 1999 from $308.2 million at year-end 1998. The growth
is attributable primarily to new premiums written.

         Net investment income increased 8.8% to $58.1 million in 1999 from
$53.4 million in 1998 reflecting the growth in invested assets in the period
offset, in part, by a shift in the portfolio towards tax-exempt securities.
Included in 1999 is $1.4 million from other invested assets. After-tax
investment income increased 8.9% in 1999 over 1998. The average yields on the
Company's investment portfolio, after deducting associated costs, was 6.1% for
the years ended December 31, 1999 and 1998. The average yields on the Company's
investment portfolio on an after-tax basis, net of associated costs were 5.0%
and 5.1% for the years ended December 31, 1999 and 1998, respectively. In
addition, the Company realized $3.0 million in capital losses compared to $2.4
million in capital gains in 1999 and 1998, respectively. Net investment income
is presented after deduction of both external investment management fees and
internal costs associated with managing the investment portfolio.

         The Company recognized a decrease in revenues from assignments,
through securitization and other sales, of $30.7 million in 1999 compared to
$45.4 million in 1998. Assignment revenues declined in both the lottery and
structured settlement lines of business.

         Incurred losses and loss adjustment expenses ("LAE") were $26.2
million in 1999 unallocated compared with $10.3 million in 1998. Included in
1999 is a $12.5 million increase in unallocated or non-specific reserves to
reflect an improved and more refined reserving method, as well as adverse
development of $1.8 million relating to a claim reported in the prior year.

         The Company's insurance operating expense ratio for 1999 was 56.6%
compared to 48.6% in 1998. The increase in the Company's insurance expense
ratio resulted from higher operating expenses. Policy acquisition costs,
which vary with and are directly related to the generation of new and renewal
premiums, were $40.0 million and $35.0 million in 1999 and 1998,
respectively, representing 38.5% and 34.2% of premiums earned in those
respective periods. The development of new business lines, a higher expense
base, and increased ceding commissions together accounted for these
increases. Other insurance operating expenses increased to $17.8 million in
1999 from $13.7 million in 1998. Non-insurance expenses increased to $52.3
million in 1999 from $39.9 million in 1998 reflecting generally higher
expenses in the non-insurance businesses and include the cost of ELB's
start-up expenses in its new viatical settlement product.

         The Company realized income of $19.7 million from its investments in
affiliates in 1999 compared to $14.1 million in 1998, primarily reflecting
continued strong performance by C-BASS.

         Interest expense totaled $11.0 million in 1999 compared to $8.5
million in 1998 reflecting the increase in the Company's short-term debt
outstanding.

         The Company's effective tax rate was 1.2% for 1999 compared to 26.9%
in 1998. The 1999 tax rate is reflective of the April 1999 purchase of a
portfolio of residential mortgage-backed securities. The transaction is
expected to provide ancillary benefits that will result in a lowering of the
Company's effective tax rate through at least 2001. See Note 6 of Notes to
Consolidated Financial Statements.



                                       34
<PAGE>

         Net income for 1999 decreased 16.8% to $68.6 million from $82.5
million in 1998. On a per share basis, basic earnings per share decreased
17.7% to $1.81 in 1999 from $2.20 in 1998, while diluted earnings per share
decreased 16.2% to $1.76 in 1999 from $2.10 in 1998. Basic operating earnings
per share decreased 11.4% to $1.95 in 1999, while diluted operating earnings
per share decreased 9.5% to $1.90 in 1999. The Company defines operating
earnings as net income, less the effect of net realized capital gains and
losses, foreign exchange gains and losses, and certain non-recurring items.

         The weighted-average shares outstanding for 1999 was 38.0 million
compared to 37.5 million for 1998. The diluted weighted-average shares
outstanding for 1999 was 39.0 million compared to 39.3 million for 1998.

         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.

YEAR ENDED DECEMBER 31, 1998 VERSUS YEAR ENDED DECEMBER 31, 1997

         Municipal new-issue volume was $286.0 billion in 1998, an increase
of 29.6% from $220.7 million in 1997 for the financial guaranty insurance
industry in total. The insured portion of such new issues was 50.8% and 48.7%
for these years respectively. Total municipal bond refunds for 1998
represented approximately 28.6% of the new-issue volume, compared to 26.7%
from 1997.

         Gross premiums written in 1998 increased 20.5% to $130.4 million
from $108.2 million in 1997 due to substantial growth in financial guaranty
reinsurance and direct financial guaranty writings, including a non-recurring
cession of $11 million. Consequently, net premiums written also increased
28.7% to $129.3 million from $100.5 million in 1997. There was 63.8% growth
in municipal assumed reinsurance and a 103.2% growth in direct premium.

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

<TABLE>
<CAPTION>
  Net Premiums Written
  (Dollars in millions)                                1998         1997      $ Change        % Change
----------------------------------------------- ------------ ------------ ------------- ---------------
<S>                                             <C>          <C>          <C>           <C>
  Municipal Reinsurance                                $56.2       $34.3          $21.9           63.8%
  Non-Municipal Reinsurance                             24.4        22.2            2.2            9.9%
  Direct Financial Guaranty                             19.3         9.5            9.8          103.2%
  Trade Credit                                          16.9        19.6           (2.7)         (13.8%)
  Other                                                 12.5        14.9           (2.4)         (16.1%)
                                                ------------ ------------ ------------- ---------------
  Total                                               $129.3      $100.5          $28.8           28.7%
                                                ============ ============ ============= ===============
</TABLE>

         Net premiums earned grew 19.6% to $102.3 million in 1998 from $85.5
million in 1997. The growth in premiums earned was primarily attributable to
increased writings in assumed municipal and non-municipal reinsurance. In
1998, a one-time cession generated approximately $11.0 million in municipal
reinsurance premium. Earned premiums for municipal reinsurance from
refundings contributed $17.9 million (or 17.5%) of earned premium in 1998
compared to $8.6 million in 1997.

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


                                       35
<PAGE>


<TABLE>
<CAPTION>
  Net Premiums Earned
  (Dollars in millions)                                1998         1997      $ Change        % Change
----------------------------------------------- ------------ ------------ ------------- ---------------
<S>                                             <C>          <C>          <C>           <C>
  Municipal Reinsurance                                $42.0       $37.4           $4.6           12.3%
  Non-Municipal Reinsurance                             24.0        12.6           11.4           90.5%
  Direct Financial Guaranty                              9.5         6.0            3.5           58.3%
  Trade Credit                                          15.9        19.1           (3.2)         (16.8%)
  Other                                                 10.9        10.4            0.5            4.8%
                                                ------------ ------------ ------------- ---------------
  Total                                               $102.3       $85.5          $16.8           19.6%
                                                ============ ============ ============= ===============
</TABLE>


         While adhering to its strict underwriting standards, the Company
maintained its strong position within the municipal and non-municipal assumed
reinsurance markets while the direct financial guaranty line of business
grew significantly.

         Deferred premium revenue, net of prepaid reinsurance premium, grew to
$308.2 million at year-end 1998 from $281.3 million at year-end 1997. The growth
is attributable primarily to new premiums written.

         Net investment income increased 5.5% to $53.4 million in 1998 from
$50.6 million for 1997 reflecting the growth in invested assets in the period
offset, in part, by a shift in the portfolio towards tax-exempt securities.
After-tax investment income increased 7.6% in 1998 over 1997. The average
yields on the Company's investment portfolio, after deducting associated
costs, were 6.1% and 6.2% for the years ended December 31, 1998 and 1997,
respectively. The average yields on the Company's investment portfolio on an
after-tax basis, net of associated costs, were 5.1% and 5.1% for the years
ended December 31, 1998 and 1997, respectively. In addition, the Company
realized $2.4 million and $0.7 million of net capital gains in 1998 and 1997,
respectively. Net investment income is presented net of both external
investment management fees and internal costs associated with managing the
investment portfolio.

         The Company recognized revenues from assignments, through
securitization and other sales, of $45.4 million in 1998 compared to $29.2
million in 1997 due to substantial revenue growth in both lottery and
structured settlements products.

         Incurred losses and LAE were $10.3 million in 1998 compared with
$9.8 million in 1997.

         The Company's insurance operating expense ratio for 1998 was 48.6%
compared to 50.3% in 1997. Policy acquisition costs, totaled $35.0
million and $30.0 million in 1998 and 1997, respectively, representing 34.2% and
35.1% of premiums earned in those respective periods. Other insurance operating
expenses increased to $13.7 million in 1998 from $12.2 million in 1997.
Non-insurance expenses increased from $25.1 million in 1997 to $39.9 million in
1998 reflecting the continued growth in Singer's operations as well the growth
in expenses associated with the Company's diversification activities.

         The Company realized income of $14.1 million from its investments in
affiliates in 1998 compared to $8.8 million in 1997 due to continued growth in
the Company's asset-based businesses.



                                       36
<PAGE>

         Interest expense of $8.5 million was incurred in 1998 compared to $7.3
million in 1997 reflecting an increase in the average borrowings outstanding
under the Company's line of credit under a bank credit agreement (as amended,
the "Credit Agreement") in 1998 compared to 1997.

         The Company's effective tax rate was 26.9% for 1998 compared to 26.8%
in 1997.

         Net income for 1998 increased 19.8% to $82.5 million from $68.8
million in 1997. On a per share basis, basic earnings per share increased
18.3% to $2.20 in 1998 from $1.86 in 1997, while diluted earnings per share
increased 18.0% to $2.10 in 1998 from $1.78 in 1997. Basic operating earnings
per share increased 19.2% to $2.20 in 1998, while diluted operating earnings
per share increased 18.6% to $2.10 in 1998.

         The weighted average shares outstanding for 1998 was 37.5 million
compared to 37.1 million for 1997. The diluted weighted average shares
outstanding for 1998 was 39.3 million compared to 38.6 million for 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.

LIQUIDITY AND CAPITAL RESOURCES

         As a holding company, Enhance Financial finances the payment of its
operating expenses, principal and interest on its debt obligations, dividends,
if any, to its shareholders and the repurchase of its 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.

         Payment of dividends to Enhance Financial by the Insurance
Subsidiaries are subject to restrictions relating to statutory capital and
surplus and net investment income. Enhance Re and Asset Guaranty declared and
paid a total of $22.0 million and $4.0 million, respectively, in dividends in
1999. As of December 31, 1999, under the Insurance Law, the Insurance
Subsidiaries had an additional $11.0 million available for dividends compared
with $13.4 million available as of December 31, 1998.

         Payments of dividends by Enhance Financial to its shareholders are
further restricted by the terms of the Credit Agreement. At December 31, 1999,
the maximum amount of quarterly dividends that may be paid by Enhance
Financial to its shareholders in compliance with the terms of such agreement
was $9.6 million. Enhance Financial paid dividends of $9.1 million to
shareholders in 1999.

         As of December 31, 1999, the statutory policyholders' surplus of
Enhance Re and Asset Guaranty was $214.8 million and $90.6 million,
respectively, compared to the minimum $68.4 million required by each under
the Insurance Law and compared to $225.7 million and $98.5 million at
December 31, 1998.

         Enhance Reinsurance and Asset Guaranty increased their funds held
balances with ceding reinsurers to $437.3 million as of December 31, 1999
from $312.0 million as of December 31, 1998.

         Enhance Financial is party to a Credit Agreement with major commercial
banks providing for borrowing by Enhance Financial of up to $125 million to be
used for general



                                       37
<PAGE>

corporate purposes of which $25 million is due March 31, 2000 and $100
million is due June 27, 2000. The Credit Agreement provides for a revolving
credit facility under which individual advances may be converted, at Enhance
Financial's discretion, into a four-year term loan. The total outstanding
under the Credit Agreement at year-end 1999 was $110 million, which increased
to $125 million in first quarter of 2000.

        The Company's cash flow from operations consists principally of
insurance and reinsurance premiums collected, income earned on invested
assets and sales of assignments, which in turn is applied to the payment of
claims, operating expenses and income taxes. The Company's cash flow from
operations was $34.6 million, $95.7 million and $67.8 million for the years
1999, 1998 and 1997, respectively. The Company paid a total of $10.2 million,
$7.6 million and $5.0 million in claims in 1999, 1998 and 1997, respectively.

         Liquidity is also provided by the Company's sales of securities in its
available-for-sale portfolio as well as payments of principal on investments
upon maturity.

         The Company and Mortgage Guaranty Insurance Company ("MGIC") each
own 48% interest, which decreased to 46% effective January 1, 2000, in
C-BASS. The Company contributed $55.5 million to C-BASS from its inception in
1996 through December 1999, including its 100% interest in Litton Loan
Servicing Inc. during 1998, and expects that it will provide additional
funding to C-BASS, all on a pari passu basis with MGIC.

         In December 1998, the Company and MGIC formed Sherman, a joint
venture in which the Company and MGIC each own a 45% interest. The Company
has committed to contribute a total of $20.2 million to Sherman, of which
$9.0 million has been contributed as of December 31, 1999, including $1.6
million in cash and the Company's contribution of assets or equity in the
subsidiaries of Alegis Group, Inc. The Company expects that it will provide
additional funding in addition to its original capital commitment to Sherman
from time to time. In May 1999, the Company guaranteed repayment by Sherman
of up to 50% of the amount outstanding under a $50 million revolving credit
facility that Sherman obtained from a major commercial bank. As of December
31, 1999, the outstanding principal balance under the facility was
approximately $21.8 million, of which the Company hs guaranteed $10.9 million.

         In July 1998, the Company acquired an 80% ownership interest in AGS
Financial LLC. The Company is obligated to pay $3.1 million, as and when
needed, of which $2.1 million has been paid.

         In 1995, the Company acquired a 50% joint venture interest in
Singer. In 1997, the Company acquired the remaining 50% of Singer in a series
of all-stock transactions. The Company issued 1,006,228 shares of its common
stock in connection with the 1997 transactions.

         In December 1996, the board of directors terminated the existing
stock repurchase program and authorized the repurchase of up to 1,500,000
shares of Enhance Financial's common stock from that date. No shares were
repurchased during 1999 and the Company currently does not plan to repurchase
shares in 2000.

         Based on the cash flow of the Company in recent years, the Company's
current financial condition and the Company's expectation as to its net
premiums written, the Company does not expect the dividends from the



                                       38
<PAGE>

Insurance Subsidiaries and other subsidiaries in 2000 will provide adequate
liquidity to enable Enhance Financial to meet its debt obligations, its
general overhead expenses, its expenditures for capital improvements and its
commitments to fund the operations of its asset-based businesses. The Company
proposes to address this situation in the short term through increased bank
borrowings and in the longer term, both for 2000 and thereafter, through a
combination of capital market transactions and the sale of assets. The
success of this effort will depend on numerous factors, many beyond the
Company's control, including general capital market conditions, interest rate
environment, and insurance regulatory constraints, and there can be no
assurance that the Company will be successful resolving the situation in a
manner that will not involve substantial expense, dilution to its
shareholders and/or a restructuring of the Company.

         At December 31, 1999, 1998 and 1997, the carrying value of the
Company's investment portfolio, total investments including cash and cash
equivalents and excluding investment in affiliates and other invested assets,
was $963 million, $948 million and $876 million, respectively, on which was
earned $56.7 million, $53.4 million and $50.6 million in those years,
respectively, excluding ($3.0) million, $2.4 million and $0.7 million of net
realized capital gains/(losses) in those years, respectively. The increase in
investments resulted principally from cash flows from operations generated
during the period. As of December 31, 1999, the Company held approximately
$34.7 million and $2.6 million in short-term investments and cash and cash
equivalents, respectively, to meet liquidity needs.

         The Company has material commitments for capital or other
expenditure relating to office equal improvements during 2000 aggregating
$11.0 million.

         In 1999, the Company incurred annual debt service on its long- and
short-term borrowings of $11 million. Debt service expence is anticipated to
increase in 2000 as a result of increased borrowings.

         In August 1999, Moody's downdgraded Enhance Financial's senior
long-term debt rating from Aa3 to A2. In February 2000, Moody's placed such
debt rating under review for possible further downgrade. The Company does not
believe that the August 1999 downgrade has had or should have a material
adverse effect on the Company. However, the downgrade could result in
increased cost to Enhanece Financial of borrowing funds of othewise raising
capital. Similarly, any additional downgrade of senior long-term debt rating
of Enhance Financial could increase the costs 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.

                                       39
<PAGE>

IMPACT OF YEAR 2000

         In prior periods, the Company discussed the nature and progress of its
plans to become Year 2000 ready. In late 1999, the Company completed its
remediation and testing of systems. As a result of those planning and
implementation efforts, the Company experienced no significant disruptions in
mission critical information technology and non-information technology
systems and believes those systems successfully responded to the Year 2000
date change. The Company expensed approximately $1.5 million during 1999 in
connection with remediating its systems. The Company is not aware of any
material problems resulting from Year 2000 issues, either with its products,
its internal systems, or the products and services of third parties. The
Company will continue to monitor its mission critical computer applications
and thoses of its suppliers and vendors throughout the year 2000 to ensure
that any latent Year 2000 matters that may arise are addressed promptly.



                                       40
<PAGE>

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

MARKET RISK

         At December 31, 1999, the Company's investment portfolio holdings
were approximately 100% U.S. dollar-denominated fixed-income securities
consisting of municipal bonds, mortgage and asset-backed securities,
corporate bonds, and U.S. government bonds.

         The market values of the Company's reported financial instruments
change as interest rates change. In general, rate decreases cause the prices
of these assets to rise, while rate increases cause the prices of these
assets to fall. Interest rate sensitivity can be modeled using the assets'
effective duration and convexity to estimate price change for a given rate
change. To model such changes, both spreads and yield curve slope are held
constant while the portfolio is subjected to a hypothetical instantaneous
rate change. Embedded optionality is considered, and municipal rates are
assumed to change at a rate equal to the prevailing taxable/tax exempt ratio
multiplied by the assumed taxable rate change.

         Based on market values and prevailing interest rates as of year-end
1999, a hypothetical instantaneous increase in rates of 100 basis points
would produce an after-tax decrease in the market value of the financial
instruments of approximately $33.7 million, or 3.5% of the Company's investment
portfolio compared with $33.5 million, or 3.5% of the Company's investment
portfolio as of year-end 1998. Of this total, $29.7 million, or 3.1%, compared
with $28.4 million, or 3.8%, as of year-end 1998, of the portfolio, would be
attributable to assets held as Available for Sale under SFAS 115; the balance,
$4.0 million or 0.4%, compared with $5.0 million as of year-end 1998, of the
portfolio would be attributable to assets designated as Held to Maturity, which
are carried at book value. Since the Company has the ability to hold its
securities to maturity, it does not expect to suffer any material adverse
effect to its results of operations under such a scenario.



                                       41
<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

             ENHANCE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES

<TABLE>
<CAPTION>
                                                                                            Page
                                                                                            ----
<S>                                                                                       <C>
ENHANCE FINANCIAL SERVICES GROUP INC

Independent Auditors' Report                                                                 43

Consolidated Balance Sheets as of December 31, 1999 and 1998                                 44

Consolidated Statements of Income for the Years Ended
     December 31, 1999, 1998 and 1997                                                        45

Consolidated Statements of Shareholders' Equity for the Years Ended
     December 31, 1999, 1998 and 1997                                                        46

Consolidated Statements of Cash Flows for the Years Ended
     December 31, 1999, 1998 and 1997                                                        47

Notes to Consolidated Financial Statements                                                   48

CREDIT-BASED ASSET SERVICING AND SECURITIZATION LLC AND AFFILIATES, Combined
Financial Statements for the Years Ended December 31, 1999, 1998 and
1997                                                                                      Schedule I
</TABLE>

All schedules not included are omitted because they are either not applicable or
because the information required therein is included in Notes to Consolidated
Financial Statements.


                                       42
<PAGE>


INDEPENDENT AUDITORS' REPORT

To the Board of Directors
Enhance Financial Services Group Inc.

We have audited the accompanying consolidated balance sheets of Enhance
Financial Services Group Inc. and Subsidiaries as of December 31, 1999 and 1998
and the related consolidated statements of income, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Enhance Financial Services Group
Inc. and Subsidiaries as of December 31, 1999 and 1998 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with generally accepted accounting principles.

Deloitte & Touche LLP
March 27, 2000
New York, New York



                                       43
<PAGE>

                      ENHANCE FINANCIAL SERVICES GROUP INC.
                                AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                       (In thousands except share amounts)

<TABLE>
<CAPTION>
                                                                           December 31,        December 31,
                                                                               1999                1998
                                                                             --------            --------
<S>                                                                        <C>                 <C>
ASSETS
       Investments:
            Fixed maturities, held to maturity, at amortized cost           $ 177,607           $ 196,768
                     (market value $181,474 and $205,792)
             Fixed maturities available for sale, at market                   745,963             694,374
                     (amortized cost $778,751 and $657,644)
            Other invested assets                                              10,935                   -
            Common stock - at market (cost $498)                                  839                 839
            Short-term investments                                             34,657              50,794
                                                                             --------            --------
                Total Investments                                             970,001             942,775

      Investment in affiliates                                                108,001              96,867
      Cash and cash equivalents                                                 2,558               5,542
      Federal income taxes recoverable                                          7,859               9,717
      Premiums and other receivables                                           22,959              35,950
      Accrued interest and dividends receivable                                18,977              15,241
      Deferred policy acquisition costs                                       119,213             103,794
      Furniture, fixtures and equipment                                        10,206               4,506
      Prepaid reinsurance premiums                                              8,772               7,000
      Reinsurance recoverable on unpaid losses                                  2,286               2,500
      Receivable from affiliates                                                1,170              16,710
      Receivable for securities                                                     -               9,590
      Prepaid federal income tax                                               24,797              29,267
      Deferred income taxes-net                                                68,587                   -
      Goodwill                                                                 24,196              23,200
      Other assets                                                             64,350              38,025
                                                                             --------            --------
               Total Assets                                                $1,453,932          $1,340,684
                                                                           ==========          ==========

LIABILITIES, DEFERRED CREDIT AND SHAREHOLDERS' EQUITY
      Liabilities
            Losses and loss adjustment expenses                              $ 51,970            $ 36,239
            Reinsurance payable on paid losses and loss
                 adjustment expenses                                            8,997               5,994
            Deferred premium revenue                                          346,088             315,215
            Accrued profit commissions                                          2,554               2,511
            Deferred income taxes                                                  --             108,836
            Long-term debt                                                     75,000              75,000
            Short-term debt                                                   113,941              54,290
            Payable for securities                                                 --              11,557
            Accrued expenses and other liabilities                             41,078              24,843
            Payable to affiliates                                                  --              43,553
                                                                             --------            --------
                   Total Liabilities                                         $639,628            $678,038
                                                                             --------            --------
     Deferred Credit                                                          138,000                  --
                                                                             --------
     Shareholders' Equity
            Common stock - $.10 par value
                 Authorized - 100,000,000 shares
                 Issued - 40,007,404 and 39,812,937 shares                 $    4,001          $    3,981
            Additional paid-in capital                                        253,109             249,851
            Retained earnings                                                 477,715             418,214
            Accumulated other comprehensive income                           (25,935)              23,186
            Treasury stock                                                   (32,586)            (32,586)
                                                                             --------            --------
                 Total Shareholders' Equity                                   676,304             662,646
                                                                             --------            --------
                  Total Liabilities, Deferred Credit and
                     Shareholders' Equity                                  $1,453,932          $1,340,684
                                                                           ==========          ==========
</TABLE>

                  See notes to consolidated financial statements


                                       44
<PAGE>

                      ENHANCE FINANCIAL SERVICES GROUP INC.
                                AND SUBSIDIARIES

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


<TABLE>
<CAPTION>
                                                                                   Years ended December 31,
                                                                       -------------------------------------------------
                                                                            1999             1998             1997
                                                                       ---------------  ---------------  ---------------
<S>                                                                    <C>              <C>              <C>
REVENUES

    Net premiums written                                                     $132,953         $129,299         $100,506
    Increase in deferred premium revenue                                      (29,102)         (26,962)         (15,051)
                                                                       ---------------  ---------------  -----------------
         Premiums earned                                                      103,851          102,337           85,455
    Net investment income                                                      58,053           53,423           50,618
    Net realized (losses)gains on sale of investments                          (3,039)           2,434              657
    Assignment sales                                                           30,723           45,376           29,200
    Other income                                                                7,996            3,914            4,463
                                                                       ---------------  ---------------  ---------------
         Total revenues                                                       197,584          207,484          170,393
                                                                       ---------------  ---------------  ---------------

EXPENSES
    Losses and loss adjustment expenses                                        26,156           10,324            9,755
    Policy acquisition costs                                                   39,959           35,007           30,020
    Profit commissions                                                          1,019            1,073              719
    Other operating expenses - insurance                                       17,802           13,683           12,225
                             - non-insurance                                   52,320           39,873           25,141
                                                                       ---------------  ---------------  ---------------
         Total expenses                                                       137,256           99,960           77,860
                                                                       ---------------  ---------------  ---------------
    Income from operations                                                     60,328          107,524           92,533
    Equity in income of affiliates                                             19,708           14,066            8,778
    Minority interest                                                             429                -                -
    Foreign currency loss                                                         (32)            (283)             (38)
    Interest expense                                                          (10,989)          (8,500)          (7,317)
                                                                       ---------------  ---------------  ---------------
         Income before income taxes                                            69,444          112,807           93,956
    Income taxes                                                                  820           30,350           25,150
                                                                       ---------------  ---------------  ---------------
         NET INCOME                                                           $68,624          $82,457          $68,806
                                                                       ===============  ===============  ===============

Earnings per share - Basic                                                      $1.81            $2.20            $1.86
                                                                               -----            ------           -----
                   - Diluted                                                    $1.76            $2.10            $1.78
                                                                               -----            ------           -----
Weighted average shares outstanding - Basic                                    38,000           37,520           37,069
                                                                              -------          -------           ------
                                    - Diluted                                  39,024           39,275           38,627
                                                                              -------          -------           ------
</TABLE>


                 See notes to consolidated financial statements


                                       45
<PAGE>

                        ENHANCE FINANCIAL SERVICES GROUP INC.
                                AND SUBSIDIARIES

                   CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                 FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
                         (In thousands except share amounts)

<TABLE>
<CAPTION>
                                                      Common Stock               Treasury Stock
                                                 -------------------------   ------------------------
                                                                                                            Additional
                                                   Shares         Amount        Shares       Amount       Paid-in Capital
                                                 -----------   -----------   -----------   -----------    ---------------
<S>                                              <C>           <C>           <C>           <C>            <C>
Balance,  December 31, 1996                       37,066,650   $     3,706       928,550   $    (7,758)   $   199,994
  Comprehensive income:
    Net income for the period                             --            --            --            --             --
    Unearned compensation adjustment
      (net of tax of $7)                                  --            --            --            --             --
    Unrealized gains during the period
      (net of tax of $7,106)                              --            --            --            --             --
    Reclassification adjustment for gains
      included in net income (net of tax
      of $87)                                             --            --            --            --             --
  Total comprehensive income:                             --            --            --            --             --
  Dividends paid ($0.22 per share)                        --            --            --            --             --
  Exercise of stock options                          598,992            60            --            --          7,281
  Issuance of common stock                         1,006,228           101            --            --         21,232
  Purchase of treasury stock                              --            --       355,850        (7,021)            --
                                                 -----------   -----------   -----------   -----------    -----------
Balance,  December 31, 1997                       38,671,870         3,867     1,284,400       (14,779)       228,507
                                                 -----------   -----------   -----------   -----------    -----------
  Comprehensive income:
    Net income for the period                             --            --            --            --             --
    Unearned compensation adjustment
      (net of tax of $202)                                --            --            --            --             --
    Unrealized foreign currency translation
      adjustment (net of tax of $159)                     --            --            --            --             --
    Unrealized gains during the period
      (net of tax of $2,183)                              --            --            --            --             --
    Reclassification adjustment for gains
      included in net income (net of
      tax of $718)                                        --            --            --            --             --
  Total comprehensive income:                             --            --            --            --             --
  Dividends paid ($0.23 per share)                        --            --            --            --             --
  Exercise of stock options                          665,674            66            --            --          9,854
  Issuance of common stock                           475,393            48            --            --         11,490
  Purchase of treasury stock                              --            --       666,394       (17,807)            --
                                                 -----------   -----------   -----------   -----------    -----------
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 $1,573)                   --            --            --            --             --
    Unrealized losses during the period
      (net of tax of $25,582)                             --            --            --            --             --
    Reclassification adjustment for losses
      included in net income (net of tax
      of $1,075)                                          --            --
  Total comprehensive income:                             --            --            --            --             --
  Dividends paid ($0.24 per share)                        --            --            --            --             --
  Exercise of stock options                          192,349            19            --            --          3,233
  Issuance of common stock                             2,118             1            --            --             25
                                                 -----------   -----------   -----------   -----------    -----------
Balance,  December 31, 1999                       40,007,404   $     4,001     1,950,794   $   (32,586)   $   253,109
                                                 -----------   -----------   -----------   -----------    -----------

<CAPTION>
                                                               Accumulated
                                                        Other Comprehensive Income
                                                 -----------------------------------------
                                                                  Foreign
                                                                  Currency     Unrealized
                                                  Unearned       Translation  Holding Grant   Retained
                                                 Compensation    Adjustment     (Losses)       Earnings        Total
                                                 ------------    -----------  ------------    ----------      ---------
<S>                                               <C>                <C>       <C>             <C>            <C>
Balance,  December 31, 1996                      $       (20)   $        --    $     8,636    $   283,791    $   488,349
  Comprehensive income:
    Net income for the period                             --             --             --         68,806             --
    Unearned compensation adjustment
      (net of tax of $7)                                  20             --             --             --             --
    Unrealized gains during the period
      (net of tax of $7,106)                              --             --         10,894             --             --
    Reclassification adjustment for gains
      included in net income (net of tax
      of $87)                                             --             --           (134)            --             --
  Total comprehensive income:                             --             --             --             --         79,586
  Dividends paid ($0.22 per share)                        --             --             --         (8,195)        (8,195)
  Exercise of stock options                               --             --             --             --          7,341
  Issuance of common stock                                --             --             --             --         21,333
  Purchase of treasury stock                              --             --             --             --         (7,021)
                                                 -----------    -----------    -----------    -----------    -----------
Balance,  December 31, 1997                               --             --         19,396        344,402        581,393
                                                 -----------    -----------    -----------    -----------    -----------
  Comprehensive income:
    Net income for the period                             --             --             --         82,457             --
    Unearned compensation adjustment
      (net of tax of $202)                              (493)            --             --             --
    Unrealized foreign currency translation
      adjustment (net of tax of $159)                     --            714             --             --             --
    Unrealized gains during the period
      (net of tax of $2,183)                              --             --          5,318             --             --
    Reclassification adjustment for gains
      included in net income (net of
      tax of $718)                                        --             --         (1,749)            --             --
  Total comprehensive income:                             --             --             --             --         86,247
  Dividends paid ($0.23 per share)                        --             --             --         (8,645)        (8,645)
  Exercise of stock options                               --             --             --             --          9,920
  Issuance of common stock                                --             --             --             --         11,538
  Purchase of treasury stock                              --             --             --             --        (17,807)
                                                 -----------    -----------    -----------    -----------    -----------
Balance,  December 31, 1998                             (493)           714         22,965        418,214        662,646
                                                 -----------    -----------    -----------    -----------    -----------
  Comprehensive income:
    Net income for the period                             --             --             --         68,624             --
    Unrealized foreign currency translation
      adjustment (net of tax of $1,573)                   --         (2,942)            --             --             --
    Unrealized losses during the period
      (net of tax of $25,582)                             --             --        (48,175)            --             --
    Reclassification adjustment for losses
      included in net income (net of tax
      of $1,075)                                          --             21          1,975             --             --
  Total comprehensive income:                             --             --             --             --         19,503
  Dividends paid ($0.24 per share)                        --             --             --         (9,123)        (9,123)
  Exercise of stock options                               --             --             --             --          3,252
  Issuance of common stock                                --             --             --             --             26
                                                 -----------    -----------    -----------    -----------    -----------
Balance,  December 31, 1999                      $      (493)   $    (2,207)   $   (23,235)   $   477,715    $   676,304
                                                 -----------    -----------    -----------    -----------    -----------
</TABLE>

                 See notes to consolidated financial statements


                                       46
<PAGE>

                      ENHANCE FINANCIAL SERVICES GROUP INC.
                                AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                                  Years ended December 31,
                                                                 -----------------------------------------------------------
                                                                       1999                1998                 1997
                                                                 -----------------   ------------------  -------------------
<S>                                                              <C>                 <C>                 <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
      Net income                                                          $68,624              $82,457              $68,806
      Adjustments to reconcile net income to net cash
          provided by operating activities:
         Depreciation and amortization, net                                (6,272)               (7,696)              (8,869)
         Gain on sale of investments, net                                   3,039               (2,434)                (657)
         Equity in income of affiliates                                   (19,708)              (14,066)              (8,778)
         Compensation, restricted stock award program                           -                    -                   20
         Change in assets and liabilities, net of effects
           of purchase of Singer:
            Premiums receivable                                            12,991               (5,992)              (4,775)
            Accrued interest and dividends receivable                      (3,736)              (2,282)              (1,525)
            Accrued expenses and other liabilities                         16,235                8,699               12,072
            Deferred policy acquisition costs                             (15,419)              (8,149)              (8,320)
            Deferred premium revenue, net                                  29,101               26,961               15,050
            Accrued profit commissions                                         43               (1,257)                 718
            Losses and loss adjustment expenses,net                        18,948                5,267                5,745
            Payable to (receivable from) affiliates                       (28,013)              29,466               (5,671)
            Payable (receivable) for securities                            (1,967)              (2,649)               4,903
            Other assets                                                  (28,814)              18,932)             (15,700)
            Income taxes, net                                             (10,440)               6,281               14,789
                                                                          -------             --------             --------
      Net cash provided by operating activities                            34,612               95,674               67,808
                                                                          -------             --------             --------

CASH FLOWS FROM INVESTING ACTIVITIES:
      Purchase of property and equipment                                   (7,287)              (2,616)              (2,027)
      Proceeds from sales and maturities of investments                   362,863              309,582              412,892
      Purchase of investments                                            (459,900)            (364,674)            (444,793)
      Purchase of other invested assets                                    (9,531)                   -                    -
      Sales(purchases) of short-term investments, net                      16,137                   33              (16,211)
      Investment in affiliates                                                  -              (32,401)             (10,640)
      Return of capital from affiliates                                      6,317                   -                    -
      Cash of previously unconsolidated subsidiary                              -                    -                  147
                                                                          -------             --------             --------
      Net cash used in investing activities                               (91,401)             (90,076)             (60,632)
                                                                          -------             --------             --------

CASH FLOWS FROM FINANCING ACTIVITIES:
      Capital stock                                                         3,277                9,920                7,341
      Short-term debt                                                      59,651               10,790                1,000
      Dividends paid                                                       (9,123)              (8,645)              (8,195)
      Purchase of treasury stock                                                -              (17,807)              (7,021)
                                                                          -------             --------             --------
Net cash  provided by (used in) financing activities                       53,805               (5,742)              (6,875)
                                                                          -------             --------             --------
Net change in cash and cash equivalents                                    (2,984)                (144)                 301
Cash and cash equivalents, beginning of year                                5,542                5,686                5,385
                                                                          -------             --------             --------
Cash and cash equivalents, end of year                                     $2,558               $5,542               $5,686
                                                                          -------             --------             --------
                                                                          -------             --------             --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
      INFORMATION:
            Cash paid during the year for income taxes                    $14,114               $3,000              $10,678
                                                                          -------             --------             --------
                                                                          -------             --------             --------
            Cash paid during the year for interest                         $8,817               $8,591               $8,136
                                                                          -------             --------             --------
                                                                          -------             --------             --------
</TABLE>



                 See notes to consolidated financial statements


                                       47
<PAGE>


             ENHANCE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

NOTE 1 - ORGANIZATION

Enhance Financial Services Group Inc. ("Enhance Financial," and together with
its consolidated subsidiaries, the "Company") is a holding company which was
incorporated in the State of New York in December 1985 and commenced
operations in November 1986. The Company principally engages, through its
indirect wholly-owned, New York-domiciled insurance subsidiaries Enhance
Reinsurance Company ("Enhance Re") and Asset Guaranty Insurance Company
("Asset Guaranty") (together, the "Insurance Subsidiaries"), which are owned
by a wholly-owned subsidiary of Enhance Financial, Enhance Investment
Corporation ("EIC"), in the reinsurance of financial guaranties of municipal
and asset backed debt obligations issued by monoline financial guaranty
insurers. EIC was dissolved in March 2000 and its assets, which primarily
consist of the capital stock of the Insurance Subsidiaries, were transferred
to Enhance Financial. 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, credit-based risks.

The Company's other insurance businesses involve the issuance of direct
financial guaranties of smaller municipal debt obligations, trade credit
reinsurance, financial responsibility bonds and excess-SIPC/excess-ICS and
related type bonds. These other insurance businesses are conducted by the
Company's Insurance Subsidiaries, Van-American Companies, Inc. and subsidiaries
("Van-Am", See Note 5), and Enhance Reinsurance (Bermuda) Limited ("EnRe
Bermuda"), a Bermuda domiciled insurer.

The Company, through its consolidated subsidiaries, Singer Asset Finance
Company, L.L.C. ("Singer", See Note 5), Enhance Life Benefits LLC ("ELB") and
AGS Financial L.L.C. ("AGS Financial"), and partially-owned subsidiaries,
Credit-Based Asset Servicing and Securitization LLC ("C-BASS", See Note 5)
and Sherman Financial Group LLC ("Sherman" see Note 5), is also engaged in
the origination, purchase, servicing and/or securitization of special assets,
including lottery awards, structured settlement payments, viatical
settlements, sub-performing/non-performing residential mortgages and
unsecured delinquent consumer assets including credit cards receivables.

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES

The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles ("GAAP"), which, for
the Insurance Subsidiaries, differ in certain material respects from the
accounting practices prescribed or permitted by regulatory authorities (see Note
3). The preparation of the financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from those
estimates. The significant accounting policies of Enhance Financial and its
subsidiaries are as follows:

CONSOLIDATION

The accompanying financial statements include the accounts of Enhance
Financial, Enhance Investment Corporation, the Insurance Subsidiaries, AGS
Financial, Singer, ELB, Van-Am and EnRe Bermuda (collectively the "Company").
Investments in which the Company owns from 20% to 50% of those companies and
where the Company has a majority voting interest, but where the



                                       48
<PAGE>

minority shareholders have substantive participating rights, are accounted
for in accordance with the equity method of accounting (See Note 5). All
significant intercompany accounts and transactions, and intercompany profits
and losses, including these transactions with equity method investee
companies, have been eliminated.

INVESTMENTS

In accordance with Statement of Financial Accounting Standards ("SFAS") No. 115
"Accounting for Certain Investments in Debt and Equity Securities," management
classifies all securities at the time of purchase as "held to maturity" or
"available for sale." Fixed maturity securities held to maturity are those
securities for which the Company has the intent and has the ability to hold
until maturity and are carried at amortized cost. There were no sales of or
transfers of securities classified as held-to-maturity for the years ended
December 31, 1999, 1998 and 1997. All other fixed maturity securities are
classified as available for sale and carried at fair value. Unrealized gains and
losses, net of taxes, on the available for sale portfolio are charged or
credited to accumulated other comprehensive income.

Common stocks are carried at fair value. Short-term investments are carried at
cost, which approximates market. Unrealized gains and losses, net of taxes, on
common stocks are reflected in accumulated other comprehensive income. Realized
gains or losses on sales of investments are determined on the basis of specific
identification.

Other invested assets consist of residential mortgage-backed securities (See
Note 6), which are classified as trading securities and are carried at fair
value, with changes in fair value recognized in income currently. At December
31, 1999, the carrying value approximates cost.

DERIVATIVES

The Company uses interest rate swaps and forward treasury lock agreements to
hedge interest rate risk associated with unsecuritized assets held and
anticipated acquisitions of assets by Singer. Gains and losses on such
instruments that qualify as accounting hedges are deferred until the
underlying hedged asset is sold, at which time the gain or loss on the
related hedge is recognized in income.

The Company uses forward currency contracts to hedge foreign currency exchange
risk associated with fixed maturity investments denominated in foreign
currencies. Gains and losses on open forward currency exchange contracts, which
qualify as accounting hedges are deferred and recognized as an adjustment of the
carrying amount of the hedged assets. Gains and losses on expired contracts are
recognized currently.

The counterparties to the Company's derivative agreements are substantial and
creditworthy multinational commercial banks or other financial institutions
which are recognized market makers.

PREMIUM REVENUE RECOGNITION

Premiums are earned in proportion to the level amortization of insured
principal over the contract period. Deferred premium revenue represents that
portion of premiums which will be earned over the remainder of the contract
period, based upon information reported by primary insurers and management's
estimate of the amortization of insured principal in those instances where
information has not been reported to the Company. When insured issues are
refunded or called, the remaining deferred premium revenue is generally
earned at that time, since the risk to the Company is considered to have been
eliminated.



                                       49
<PAGE>

REINSURANCE

In the normal course of business, the Insurance Subsidiaries reinsure portions
of their direct and assumed exposures with other insurance companies through
contracts designed to limit losses from certain risks and to protect capital and
surplus.

The following summarizes the effect of reinsurance on premiums written and
earned (in 000s):

<TABLE>
<CAPTION>

                                                       Years Ended December 31,
                                  1999                           1998                           1997
                                  ----                           ----                           ----
                         Written         Earned         Written         Earned         Written         Earned
                         -------         ------         -------         ------         -------         ------
<S>                      <C>            <C>             <C>             <C>             <C>            <C>
Direct                   $ 53,999       $ 23,710        $ 30,484        $19,704         $25,477        $13,950
Assumed                    85,001         83,228          99,922         84,248          82,675         75,665
Ceded                     (6,047)        (3,087)          (1,107)        (1,615)         (7,646)        (4,160)
                          -------        -------      ----------        -------         -------        -------
Net premiums             $132,953       $103,851        $129,299       $102,337        $100,506        $85,455
                         ========       ========        ========       ========        ========        =======
</TABLE>

The effect of reinsurance on losses and loss adjustments expenses for the years
ended December 31, 1999, 1998 and 1997 was a decrease of $1,369,000, $1,230,000
and $335,000, respectively.

In the event that any or all of the reinsurers were unable to meet their
obligations, the Insurance Subsidiaries would be liable for such defaulted
amounts.

The percentage of assumed premiums written as a part of net premiums written for
the years ended December 31, 1999, 1998 and 1997 was 63.9%, 77.3% and 82.3%
respectively.

ASSIGNMENT SALES

The Company acquires financial assets from individuals, including the rights to
receive lottery awards and structured settlement payments, and securitizes these
payment streams. The Company recognizes revenue from assignment sales in
accordance with the requirements of SFAS 125.

Through the securitization process, the Company transfers control over such
financial assets and recognizes income to the extent that net sale proceeds upon
such transfer of control exceeds amounts paid to individuals, after deducting
commissions and other fees paid to third parties.

DEFERRED POLICY ACQUISITION COSTS

Deferred policy acquisition costs comprise those expenses that vary with and are
primarily related to the production of insurance premiums, including:
commissions paid on reinsurance assumed, salaries and related costs of
underwriting and marketing personnel, rating agency fees, premium taxes and
certain other underwriting expenses, offset by ceding commission income on
premiums ceded to reinsurers. Acquisition costs are deferred and amortized over
the period in which the related premiums are earned. Deferred policy acquisition
costs are reviewed periodically to determine that they do not exceed or be less
than recoverable amounts, after considering investment income.

LOSSES AND LOSS ADJUSTMENT EXPENSES ("LAE")

Reserves for losses and LAE in the financial guaranty business are established
based on the Company's best estimate of specific and non-specific losses,
including expenses associated with settlement of such losses on its insured and
reinsured obligations. The Company's estimation of total reserves considers
known defaults, reports and individual loss estimates reported by primary



                                       50
<PAGE>

insurers and annual increases in the total net par amount outstanding of the
Company's insured obligations ($85.6 billion as of December 31, 1999). The
Company records a specific provision for losses and related LAE when reported by
primary insurers or when, in the Company's opinion, an insured risk is in
default or a default is probable and the amount of the loss is reasonably
estimable. In the case of obligations with fixed periodic payments, the
provision for losses and LAE represents the present value of the Company's
ultimate expected losses, adjusted for estimated recoveries under salvage or
subrogation rights. The non-specific reserves represent the Company's best
estimate of total reserves, less provisions for specific reserves. Generally,
when a case basis reserve is established or adjusted, a corresponding adjustment
is made to the non-specific reserve. The Company discounts certain financial
guaranty liabilities at annual rates which correspond to the Insurance
Subsidiaries investment yields ranging from 5.95% to 6.35%. These discounted
liabilities at December 31, 1999 and 1998 were $14.9 million and $17.5 million
respectively, net of discounts of $12.0 million and $11.0 million, respectively.

Reserves for losses and LAE for the Company's other lines of business, primarily
trade credit reinsurance, are based on reports and individual loss estimates
received from ceding companies, net of anticipated estimated recoveries under
salvage and subrogation rights. In addition, a liability is included for losses
and LAE incurred but not reported.

The Company periodically evaluates its estimates for losses and LAE and may
adjust such reserves based on the Company's actual loss experience, mix of
business and economic conditions. Changes in total estimates for losses and LAE
are reflected in current earnings. The Company believes that its total reserves
for losses and LAE are adequate to cover the ultimate cost of all claims net of
reinsurance recoveries. However, the reserves are based on estimates of losses
and LAE, and there can be no assurance that the ultimate liability of the
Company will not exceed such estimates.

FEDERAL INCOME TAXES

In accordance with SFAS No. 109, "Accounting for Income Taxes," deferred
federal income taxes are provided for temporary differences between the tax
and financial reporting basis of assets and liabilities that will result in
deductible or taxable amounts in future years when the reported amount of the
asset or liability is recovered or settled. In the case of the Company, such
temporary differences relate principally to premium revenue recognition and
deferred acquisition costs. See Note 6 for discussion relating to acquired
deferred tax assets.

The Internal Revenue Code permits municipal bond insurance companies to
deduct from taxable income, subject to certain limitations, the amounts added
to the statutory mandatory contingency reserve during the year. The deduction
taken is allowed only to the extent that U.S. Treasury non-interest-bearing
tax and loss bonds are purchased at their par value prior to the original due
date of the Company's consolidated federal tax return and held in an amount
equal to the tax benefit attributable to such deductions. The amounts
deducted must be included in taxable income when the contingency reserve is
released, at which time the Company may redeem the tax and loss bonds to
satisfy the additional tax liability. The purchases of tax and loss bonds are
recorded as prepayments of federal income taxes and are not reflected in the
Company's current tax provision.

POST-RETIREMENT AND POST-EMPLOYMENT BENEFITS

The Company provides various post-retirement and post-employment benefits,
including pension, health and life insurance benefits covering substantially all
employees who meet certain age and service criteria. The Company accounts for
these benefits under the accrual method of



                                       51
<PAGE>

accounting. Amounts related to anticipated obligations under the defined benefit
pension plan and post-retirement benefits are recorded based on actuarial
determinations.

STOCK COMPENSATION PLANS

The Company has in effect a stock option program for key employees and a
directors' stock option program for the benefit of directors who are not
employees of the Company. In March 1998, the board of directors adopted the
Director Stock Ownership Plan pursuant to which directors are entitled to
elect to receive all or a portion of their directors fees in the form of
Enhance Financial common stock. Under these programs, awards are granted to
eligible employees and directors of the Company in the form of Incentive
Stock Options, where they qualify under the Internal Revenue Code, or
Non-Qualified Stock Options. The Company follows the intrinsic value based
method of accounting for stock based compensation as prescribed by APB
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). In
accordance with SFAS No. 123, "Accounting for Stock-Based Compensation", the
Company has provided pro forma disclosures of net income and earnings per
share as if the fair value based method of accounting had been applied (See
Note 12).

EARNINGS PER SHARE

In accordance with SFAS No. 128, "Earnings per Share," the Company reports
"basic" and "diluted" earnings per share ("EPS"). Basic EPS is determined by
dividing net income by the weighted average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that would occur if
securities such as employee stock options were exercised. Diluted EPS is
computed using the treasury stock method to determine the weighted average
number of common stock equivalents outstanding during each year. For all periods
presented common stock equivalents comprise outstanding options pursuant
to the Company's stock option programs.

Following is a reconciliation of weighted average common shares outstanding to
weighted average common and common equivalent shares outstanding for the years
ended December 31, 1999, 1998 and 1997 (in 000s).

<TABLE>
<CAPTION>
                                                                  1999             1998            1997
                                                                  ----             ----            ----
<S>                                                              <C>              <C>            <C>
Weighted average common shares outstanding                       38,000           37,520         37,069
Dilutive effect of common stock options                           1,024            1,755          1,558
                                                                 ------           ------         ------
Weighted average common and common equivalent
           shares outstanding                                    39,024           39,275         38,627
                                                                 ======           ======         ======
</TABLE>

NEW ACCOUNTING PRONOUNCEMENTS

During 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of
Enterprise and Related Information." This pronouncement requires a company to
present disaggregated information based on the internal segments used in
managing its business. The adoption of this statement did not impact the
Company's financial position or results of operations, but it did affect the
presentation of the Company's segment disclosures (See Note 17).

Effective in 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income." This pronouncement established new rules for the reporting and display
of comprehensive income and its components in a full set of general purpose
financial statements. The adoption of this statement had no impact on the
Company's financial position or results of operations. SFAS No. 130 requires the
Company's unrealized gains and losses and changes in foreign currency
translation adjustment to be included in other comprehensive income.



                                       52
<PAGE>

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. Derivatives can be
designated as (a) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or a firm commitment, (b) a hedge of the exposure
to variable cash flows of a forecast transaction. or (c) a hedge of foreign
currency exposure of a net investment in foreign operations, an unrecognized
firm commitment, an available-for-sale security, or a foreign currency
denominated forecasted transaction. The Company is currently reviewing the
impact of the implementation of SFAS No. 133 on its financial statements.

In March 1998, the National Association of Insurance Commissioners adopted the
Codification of Statutory Accounting Principles (the "Codification"). The
Codification is intended to standardize regulatory accounting and reporting for
the insurance industry and is proposed to be effective January 1, 2001. However,
statutory accounting principles will continue to be established by individual
state laws and permitted practices, and it is uncertain when or if, the State of
New York will require adoption of the Codification for the preparation of
statutory financial statements. The Company has not finalized the quantification
of the effects of Codification on its statutory financial statements.

GOODWILL

Goodwill represents the excess of cost of acquisitions over the tangible net
assets acquired. Goodwill, which is substantially attributable to the
acquisition of Singer, is amortized by the straight-line method over 20 years.

FURNITURE AND FIXTURES AND EQUIPMENT

Furniture, fixtures and equipment are carried at depreciated cost.
Depreciation is provided using the straight-line method over the estimated
economic lives of the assets, which range from 3 to 7 years. Leasehold
improvements are amortized over the lesser of 5 years or the lease term.

CASH AND CASH EQUIVALENTS

For purposes of the statements of cash flows, the Company considers all highly
liquid short-term investments with an original maturity of three months or less
to be cash equivalents.

STOCK SPLIT

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.

RECLASSIFICATIONS

Certain of the prior years' amounts have been reclassified to conform to the
current year presentation.

NOTE 3 -INSURANCE REGULATORY MATTERS

The consolidated financial statements are prepared on the basis of GAAP which,
for the Insurance Subsidiaries, differ in certain material respects from
accounting practices prescribed or permitted by insurance regulatory
authorities. The significant differences result from statutory accounting
practices which treat premiums earned, policy acquisition costs, deferred income
taxes, investments in fixed maturities and loss reserves differently.

The statutory basis policyholders' surplus of Enhance Re and Asset Guaranty,
as reported to insurance regulatory authorities, was $214.8 million and $90.6
million, respectively at December 31, 1999 and $225.7 million and $98.5
million, respectively, at December 31, 1998. Statutory net income of Enhance
Re and Asset Guaranty was $38.7 million and $8.4 million, respectively, for
the year ended December 31, 1999. Statutory net income of Enhance Re and



                                       53
<PAGE>

Asset Guaranty was $51.7 million and $11.0 million, respectively, for the
year ended December 31, 1998 and $40.7 million and $11.7 million,
respectively, for the year ended December 31, 1997.

The New York Insurance Law requires financial guaranty insurers to maintain a
minimum policyholders' surplus of $65 million. When added to the minimum
policyholders' surplus of $3.4 million separately required for the other lines
of insurance which it is licensed to write, each of the Insurance Subsidiaries
is required to have an aggregate minimum policyholders' surplus of $68.4
million.

Under the New York Insurance Law, the Insurance Subsidiaries may declare or
distribute dividends only out of earned surplus. The maximum amount of
dividends which may be paid by the Insurance Subsidiaries to Enhance
Financial without prior approval of the Superintendent of Insurance is
subject to restrictions relating to statutory surplus and net investment
income as defined by statute. Enhance Re declared and paid a dividend of $22
million and Asset Guaranty declared and paid a dividend of $4 million for the
year ended December 31, 1999. At December 31, 1999, the Insurance
Subsidiaries had an additional $11.0 million available for dividend
distribution.

The New York Insurance Law establishes single-risk limits applicable to all
obligations issued by a single entity and backed by a single revenue source.
Under the limit applicable to municipal bonds, the insured average annual debt
service for a single risk, net of reinsurance and collateral, may not exceed 10%
of the sum of the insurer's policyholders' surplus and contingency reserves. In
addition, insured principal of municipal bonds attributable to any single risk,
net of reinsurance and collateral, is limited to 75% of the insurer's
policyholders' surplus and contingency reserves. Additional single risk limits,
which generally are more restrictive than the municipal bond single risk limit,
are also specified for several other categories of insured obligations.

NOTE 4 - INVESTMENTS

The following is a summary of the Company's investments in fixed maturities at
December 31, 1999 and 1998 (in 000s):

<TABLE>
<CAPTION>

                                                          Gross             Gross
                                        Amortized      Unrealized         Unrealized
1999                                       Cost           Gains             Losses     Fair Value
----                                       ----           -----             ------     ----------
<S>                                  <C>              <C>               <C>            <C>
HELD TO MATURITY
  Private placements                      $ 90,711       $     --       $     --       $ 90,711
  Municipal obligations                     77,231          3,767             --         80,998
  Corporate securities                       3,593            102             --          3,695
  U.S. Government obligations                6,072             81             83          6,070
                                          --------       --------       --------       --------
Total held to maturity                    $177,607       $  3,950       $     83       $181,474
                                          ========       ========       ========       ========
AVAILABLE FOR SALE

  Municipal obligations                   $564,899       $  3,259       $ 28,381       $539,777
  Mortgage-backed securities               121,327             65          3,878        117,514
  Corporate securities                      56,213             82          1,490         54,805
  Asset-backed securities                   21,689            216          2,377         19,528
  U.S. Government obligations               14,623             --            284         14,339
                                          --------       --------       --------       --------
Total available for sale                  $778,751       $  3,622       $ 36,410       $745,963
                                          ========       ========       ========       ========
</TABLE>



                                       54
<PAGE>

<TABLE>
<CAPTION>
                                                            Gross             Gross
                                         Amortized        Unrealized        Unrealized
1998                                       Cost             Gains             Losses     Fair Value
----                                       ----             -----             ------     ----------
<S>                                  <C>              <C>               <C>            <C>
HELD TO MATURITY
  Private placements                      $ 96,289       $     --       $     --       $ 96,289
  Municipal obligations                     93,290          8,401             --        101,691
  Corporate securities                       4,695            394             --          5,089
  U.S. Government obligations                2,494            229                         2,723
                                          --------       --------       --------       --------
Total held to maturity                    $196,768       $  9,024       $     --       $205,792
                                          --------       --------       --------       --------
AVAILABLE FOR SALE
  Municipal obligations                   $489,477       $ 31,233       $     35       $520,675
  Mortgage-backed securities                95,956          2,644          3,640         94,960
  Corporate securities                      46,732          2,349            605         48,476
  Foreign securities                        22,203          4,497              3         26,697
  U.S. Government obligations                3,276            290             --          3,566
                                          --------       --------       --------       --------
Total available for sale                  $657,644       $ 41,013       $  4,283       $694,374
                                          ========       ========       ========       ========
</TABLE>


The amortized cost and estimated fair value of fixed maturities at December
31, 1999 by contractual maturity are shown below (in 000s). Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.


<TABLE>
<CAPTION>
                                                        Amortized Cost                  Fair Value
                                                        --------------                  ----------
<S>                                                     <C>                           <C>
Fixed maturities, held to maturity
Due in one year or less                                     $ 10,414                      $ 10,500
Due after one year through five years                         64,273                        65,890
Due after five years through ten years                        53,293                        54,745
Due after ten years                                           49,627                        50,339
                                                           ---------                     ---------
                                                           $ 177,607                     $ 181,474
                                                           =========                     =========

Fixed maturities, available for sale
Due in one year or less                                       $    -                        $    -
Due after one year through five years                         47,102                        47,520
Due after five years through ten years                       128,283                       129,450
Due after ten years                                          603,366                       568,993
                                                             -------                       -------
                                                           $ 788,751                     $ 745,963
                                                           =========                     =========
</TABLE>

Proceeds from sales of available for sale investments in fixed maturities during
1999, 1998 and 1997 were approximately $348 million, $301 million and $407
million, respectively. Gross gains of $5.5 million and gross losses of $3.3
million were realized in 1999. A write-down of book values for fixed income
securities, in the amount of $5.3 million, resulted in a net realized loss on
the sale of investments of $3.0 million in 1999. Gross gains of $5.0 million
and gross losses of $2.6 million were realized on those sales in 1998. Gross
gains of $4.8 million and gross losses of $4.2 million were realized on those
sales in 1997.

Sources of the Company's consolidated net investment income are as follows (in
000s):



                                       55
<PAGE>

<TABLE>
<CAPTION>

                                                                    Years Ended December 31,
                                                      ------------------------------------------------------
                                                           1999               1998               1997
                                                           ----               ----               ----
<S>                                                       <C>                <C>               <C>
Fixed maturities                                          $56,909            $53,312           $50,258
Short-term investments and cash equivalents                 1,658              2,148             1,872
Other invested assets                                       1,405                  -                 -
Other                                                         436                416               572
                                                           ------             ------            ------
    Total investment income                                60,408             55,876            52,702
Less investment expenses                                    2,355              2,453             2,084
                                                           ------             ------            ------
Net investment income                                     $58,053            $53,423           $50,618
                                                          =======            =======           =======

</TABLE>


The net unrealized appreciation (depreciation) of investments included as a
component of other accumulated comprehensive income at December 31, 1999 and
1998 is as follows (in 000s):

<TABLE>
<CAPTION>

                                                                              1999               1998
                                                                              ----               ----
<S>                                                                         <C>                 <C>
Difference between market value and amortized cost of
    available for sale portfolio

   Fixed maturities                                                         $(32,788)           $ 36,730
   Equity securities                                                             341                 341
                                                                            --------            --------
                                                                             (32,447)             37,071
Deferred tax asset (liability)                                                 9,212            (14,106)
                                                                            --------            --------
Net unrealized appreciation of investments                                  $ (23,235)          $ 22,965
                                                                            =========            =======

</TABLE>

Unrealized appreciation of investments in equity securities at December 31, 1999
and 1998 includes gross unrealized gains of $341,000.

Under agreements with its primaries and in accordance with statutory
requirements, the Insurance Subsidiaries maintain funds (fixed maturities and
cash equivalents) in trust accounts principally for the benefit of reinsured
companies and for the protection of policyholders in states in which the
Insurance Subsidiaries are not licensed. The Company maintains full control over
the management of assets held in trust accounts. The carrying amount of such
restricted balances amounted to approximately $437 million and $312 million at
December 31, 1999 and December 31, 1998, respectively.

See Note 6 for information relating to Other Invested Assets.

NOTE 5 - INVESTMENT IN AFFILIATES

The Company owns 360,000 shares of EIC Corporation Ltd. ("Exporters"), an
insurance holding company which, through its wholly-owned insurance
subsidiary licensed in Bermuda, insures foreign trade receivables. The
Company's investment represented an equity interest of approximately 41% at
the date of acquisition and approximately 36.5% (which represents 54% voting
interest) at December 31, 1999. The Company accounts for its investment in
Exporters in accordance with the equity method of accounting as the control
of Exporters does not rest with the Company and since the minority
shareholders have substantial participating rights.

The Company owns a controlling equity interest in the outstanding stock of
Van-Am and accounts for its investment on a consolidated basis. Due to intense
pricing competition in Van-Am's core business and a poor strategic fit with the
Company's other operations, the Company


                                       56
<PAGE>

decided in 1998 to exit the financial responsibility bond line of business. The
Company sold a portion of Van Am business in 1999 and will either sell its
remaining interest in Van Am or wind-down Van Am's operations, thereby exiting
this line of business. A wind-down of Van Am's operation may take ten or more
years. An estimated $4.5 and $2.3 million of expenses associated with this
action have been recognized in 1999 and 1998, respectively.

In 1995, the Company acquired all of the outstanding shares of Litton Loan
Servicing, Inc. ("LLSI"), a Houston-based loss mitigation residential mortgage
servicer. The purchase price approximated the fair market value of the acquired
assets and liabilities at the date of acquisition.

In 1996, the Company and MGIC Investment Corporation formed C-BASS, with members
of management thereof. C-BASS evaluates, purchases, services and securitizes
sub-performing, non-performing, and seller financed residential mortgages and
real estate and subordinated residential mortgage-backed securities. At December
31,1999 the Company owned approximately a 48% interest in C-BASS, which is being
accounted for on the equity basis of accounting. Effective January 1, 2000, the
Company owns approximately a 46% interest in C-BASS. In 1998, the Company
contributed substantially all of the assets of in LLSI to C-BASS as part of its
initial capital commitment. At December 31, 1999, the Company had contributed
$55.5 million of capital to C-BASS. The following table sets forth combined
C-BASS financial data as of the date indicated and for the periods then ended
(in millions):

<TABLE>
<CAPTION>

                                                                  December 31,
                                    -------------------------------------------------------------------------
                                             1999                     1998                     1997
                                             ----                     ----                     ----
<S>                                         <C>                      <C>                      <C>
Mortgage-related assets                     $773.0                   $550.1                   $189.6
Other assets                                 161.5                     73.4                     40.0
                                            ------                   ------                   ------
Total assets                                $934.5                   $623.5                   $229.6
                                            ======                   ======                   ======

Funding arrangements                        $617.2                   $360.8                   $121.9
Other liabilities                            127.6                    107.6                     45.0
                                             -----                    -----                   ------
Total liabilities                           $744.8                   $468.4                   $166.9
                                            ======                   ======                   ======


                                                    For the year ended December 31,

                                    -------------------------------------------------------------------------
                                             1999                      1998                    1997
                                             ----                      ----                    ----
Total revenues                              $114.1                    $69.7                    $36.2
Total expenses                                73.7                     43.7                     21.0
                                            ------                    -----                    -----
Net income                                  $ 40.4                    $26.0                    $15.2
                                            ======                    =====                    =====

</TABLE>

In 1995, the Company acquired, for cash, a 50% joint venture interest in Singer,
which originates, securitizes and sells various types of special assets such as
lottery awards, structured settlement payments and similar obligations. In 1997,
the Company acquired the remaining 50% of Singer in a series of all-stock
transactions for an aggregate purchase price valued at $21.3 million. The excess
(approximately $20.4 million) of the Company's aggregate cost over the fair
value of the net assets of Singer represents goodwill.

Enhance Financial and Swiss Re, respectively, owns 45% equity interest in SBF
Participacoes Ltda ("SBF"), a Brazilian insurance holding company, which is the
parent holding company of UBF Garantias & Seguros SA, one of Brazil's largest
credit insurance and surety insurance companies ("UBF"). The remainder of SBF is
owned by UBF's management and private Brazilian investors. The Company
anticipates that the business of UBF will expand in the Latin American insurance
and other credit-related markets and opportunities. The Company's


                                       57
<PAGE>

investment in SBF as of December 31, 1999 and December 31, 1998 was
approximately $3.4 and $4.5 million, respectively, and is being accounted for
on the equity methods of accounting.

In November 1998, the Company acquired through merger all of the outstanding
shares of Alegis Group, Inc. ("Alegis"), the parent holding company of a
Houston-based servicer and collector of delinquent consumer assets, the
purchase price was approximately $11.7 million which approximated the fair
market value of Alegis (see Note 8).

In December 1998, the Company and MGIC formed a joint venture, Sherman, with
members of management thereof, to provide analytic and due diligence services
to purchasers of unsecured delinquent consumer assets; purchases, services
and securitizes unsecured delinquent consumer assets. The Company owns a
45.5% interest in Sherman, which is being accounted for on the equity basis
of accounting. In December 1999 as part of its initial capital commitment,
the Company contributed substantially all the assets of one subsidiary of
Alegis and the capital stock of other subsidiaries to Sherman. At December
31, 1999, the Company had committed to contribute an aggregate $20.0 million
to the capital of Sherman, approximately $9.1 million of which had been
contributed as of December 31, 1999. At December 31, 1999 the Company has
guaranteed $10.9 million of Sherman's credit facility, which has an
outstanding balance of $21.8 million.

Total assets of the Company's unconsolidated subsidiaries and affiliates
accounted for by the equity method of accounting at December 31, 1999 and 1998
were $1,275.5 and $707.2 million, respectively. Total liabilities at December
31, 1999 and 1998 were $868.4 and $507.3 million, respectively. Total net income
for the years' ended December 31, 1999 and 1998 was $40.3 and $30.5 million,
respectively.

NOTE 6 - 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.

On April 8, 1999, the Company completed a $13.7 million purchase of a
portfolio of approximately 500 residential mortgage-backed securities
(classified as Investments - Other Invested Assets). Post-closing adjustments
subsequently reduced the net purchase price to $9.4 million. The transaction
was structured by C-BASS, which will also manage and service the portfolio
for the Company. The purchase price was financed by a short-term credit
facility with an initial principal balance of $10.3 million. As of December
31, 1999, the outstanding balance of that credit facility was $3.9 million.
The transaction is expected to produce significant pre-tax economic profits
over the life of the acquired portfolio, which is anticipated to be eight to
ten years. Additionally, the transaction will provide ancillary tax benefits
that are expected to lower the Company's effective tax rate in 1999 and
beyond. The Company currently expects that it will continue to receive tax
benefits from the portfolio at a level comparable to the current year at
least through 2001 and will receive some additional tax benefits over a
period of six to eight years thereafter. However, the amount of pre-tax
economic profits and tax benefits recognized from year to year may vary
significantly depending on a variety of factors relating to the portfolio,
some of which are outside the control of the Company. For the year ended
December 31, 1999, the portfolio produced $41.2 million in net tax losses and
$1.4 million in investment income for financial reporting purposes.

                                       58
<PAGE>

One of the prior owners of the portfolio has been audited by the Internal
Revenue Service ("IRS"). Upon completion of that audit, the IRS determined that
certain tax strategies adopted by the prior owner with respect to the portfolio
were improper and should be disallowed. The prior owner disputes the IRS's
determination and has filed suit in the United States Tax Court to overturn the
IRS's audit adjustments relating to the portfolio. The IRS has asserted a number
of theories in support of its audit position, one of which conceivably could
result in the loss of a material portion of the tax benefits that the Company
expects to receive from the portfolio. After reviewing the pleadings filed in
the pending litigation, Company counsel has reaffirmed its advice that the
Company should be able to realize the expected tax benefits associated with the
portfolio. Nonetheless, given the uncertainties involved in litigation, there
can be no complete assurance that the pending Tax Court litigation will not have
a material adverse effect on the tax benefits that the Company expects to
realize from the portfolio.

With respect to the acquired tax benefits, at December 31, 1999, the Company
has recorded a $138.0 million deferred tax assets and a related deferred
credit. The deferred tax asset is reduced and the deferred credit is
amortized to income (as a reduction of current tax expense) as the tax
benefits are realized (approximately $14.4 million for the year ended
December 31, 1999).

The investment in the portfolio ($10.9 million at December 31, 1999) is
carried at estimated market value (which approximates cost) and is classified
on the consolidated balance sheet as Investment - Other Investment Assets.

The components of the Company's consolidated provision for income taxes are as
follows (in 000s):

<TABLE>
<CAPTION>

                                                                    Year Ended December 31,
                                               ---------------------------------------------------------
                                                      1999                1998                1997
                                                      ----                ----                ----
<S>                                                 <C>                 <C>                 <C>
Current income taxes                                $ 14,569             $10,815             $10,311
Deferred income taxes                                (13,749)             19,535              14,839
                                                    --------             -------             -------
    Tax provision                                   $    820             $30,350             $25,150
                                                    ========             =======             =======

</TABLE>

A reconciliation from the tax provision calculated at the federal statutory rate
of 35% to the actual tax is as follows (in 000s):

<TABLE>
<CAPTION>

                                                                    Year Ended December 31,
                                                   ---------------------------------------------------------
                                                           1999               1998               1997
                                                           ----               ----               ----
<S>                                                    <C>                  <C>                <C>
Tax provision at statutory rate                        $  24,305            $ 39,482           $ 32,884
Tax exempt interest and dividends                        (10,283)             (9,796)            (7,878)
Residential mortgage backed securities                   (14,406)                  -                  -
Other, net                                                 1,204                 664                144
                                                       ---------            --------           --------
    Actual tax provision                               $     820            $ 30,350           $ 25,150
                                                       =========            ========           ========

</TABLE>

The components of the net deferred income tax asset and liability as of
December 31, 1999 and 1998 are as follows (in 000s):

                                       59
<PAGE>

<TABLE>
<CAPTION>

                                                  December 31, 1999                    December 31, 1998
                                                  -----------------                    -----------------
                                              Assets          Liabilities          Assets          Liabilities
                                              ------          -----------          ------          -----------
<S>                                           <C>               <C>                <C>               <C>
Contingency reserves                          $     -           $ 34,242           $     -           $ 49,129
Deferred policy acquisition costs                   -             41,816                 -             36,327
Deferred premium revenue                            -             13,693                 -             10,060
Unrealized capital gains                            -                  -                 -             14,106
Unrealized capital losses                       9,212                  -                 -                  -
Assignment sales income                             -             26,536                 -             16,689
Alternative minimum tax
     credit carry forward                           -                  -             8,545                  -
Losses and LAE reserves                         7,306                  -             4,241                  -
Deferred income                                   652                  -             1,455                  -
Impairment of investment asset                  1,855                  -                 -                  -
Accrued expenses                                4,686                  -             2,903                  -
Net operating loss                             22,689                  -             1,781                  -
Other - net                                     2,031              1,557             2,559              4,009
Residential mortgage-backed securities
     acquired tax benefits                    138,000                  -                 -                  -
                                              -------           --------           -------           --------
                                             $186,431           $117,844           $21,484           $130,320
                                              =======           ========           =======           ========

</TABLE>

Prepaid federal income taxes includes Tax and Loss Bonds of $24.8 million and
$29.3 million as of December 31, 1999 and 1998, respectively.

At December 31, 1999, the Company has net operating loss carryforwards of $12
million which expire in 2019.

NOTE 7 - LONG-TERM DEBT AND CREDIT FACILITY

The carrying value of the Company's indebtedness is as follows (in 000s):

<TABLE>
<CAPTION>

                                                                           December 31,
                                                        ----------------------------------------------------
                                                                  1999                       1998
                                                                  ----                       ----
<S>                                                             <C>                       <C>
Debentures, due 2003                                            $  75,000                 $  75,000
Short term debt                                                   113,941                    54,290
                                                                ---------                 ---------
    Total                                                       $ 188,941                 $ 129,290
                                                                =========                 =========

</TABLE>

The debentures were issued at par and bear interest at 6.75% payable in March
and September each year. The debentures are non-callable obligations of Enhance
Financial.

Enhance Financial maintains an unsecured credit facility through a credit
agreement (the "Credit Agreement") with major commercial banks providing for
borrowing by Enhance Financial of up to $100 million due June 27, 2000,
(which was temporarily increased by $25 million from September 29, 1999
through March 31, 2000) to be used for general corporate purposes. Advances
under the Credit Agreement bear interest at variable LIBOR-based rates. The
average interest rate paid on such advances in 1999 was 6.02%. The Credit
Agreement prohibits the Company from incurring additional indebtedness to the
extent the resulting total would exceed 25% of the Company's total
capitalization as defined or 50% of sum of the Insurance Subsidiaries
combined statutory surplus and contingency reserves, and includes certain
covenants, none of which significantly restricts the Company's operating
activities or dividend-paying ability. The total outstanding under the Credit
Agreement at December 31, 1999 was $110 million.

In 1995, the Company entered into a reverse interest-rate swap transaction based
on a notional amount of $50 million over the term equal to the remaining term of
Enhance Financial's 6.75% Debentures. On June 1, 1995, the Company terminated
the swap and realized a gain on


                                       60
<PAGE>

termination in the amount of $4.6 million. The gain ($1.8 million at December
31, 1999) has been deferred and is being amortized over the original term of the
swap.

See Note 6 for credit facility relating to Other Invested Assets.

NOTE 8 - SHAREHOLDERS' EQUITY AND DIVIDENDS

In December 1996, the board of directors terminated the then existing repurchase
program and authorized the repurchase of up to 1,500,000 shares of its common
stock from that date. Enhance Financial purchased 666,394 and 355,850 shares of
its common stock at an average price of $26.72 and $19.73 per share in 1998 and
1997 respectively. No shares were repurchased in 1999.

In connection with the repurchase program, Enhance Financial entered into a
forward purchase agreement during 1997 regarding 256,394 shares of its common
stock at a forward purchase price of $21.25 per share. The agreement settles
quarterly on a net basis in shares of Enhance Financial stock or in cash at
Enhance Financial's election. To the extent that the market price of Enhance
Financial common stock on a settlement date was higher (lower) than the forward
purchase price, the net differential was received (paid) by Enhance Financial.
During 1998, settlements resulted in Enhance Financial receiving 106,394 shares,
which were recorded as treasury shares. The agreement terminated in June 1998
after Enhance Financial repurchased the full amount under the program.

During 1998, Enhance Financial issued 454,473 shares of common stock in
connection with its acquisition of Alegis Group Inc. (See Note 5).

During 1997, Enhance Financial issued 1,006,228 shares of common stock in
connection with its acquisition of the remaining 50% ownership interest in
Singer (See Note 5).

In 1996, Swiss Reinsurance Company ("Swiss Re") acquired from Enhance Financial
and one of its shareholders, respectively 1,200,000 and 800,000 shares of
Enhance Financial common stock at a purchase price of $12.24 per share. In 1997,
Swiss Re acquired an additional 1,400,000 shares of Enhance Financial common
stock in the open market.

Under the terms of the Credit Agreement, the maximum amount of dividends which
may be paid by Enhance Financial as of December 31, 1999 was $9.6 million. In
connection with the Company's two-for-one stock split in June 1998, an
additional 40,000,000 shares of common stock were authorized.

NOTE 9 - FAIR VALUES OF FINANCIAL INSTRUMENTS

The following estimated fair value amounts have been determined by the Company
using available market information and appropriate valuation methodologies.
However, considerable judgment is necessarily required to interpret market data
to develop the estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of the amount the Company could realize in
a current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value
amounts.

FIXED MATURITY SECURITIES - The fair values of fixed maturity securities are
based on quoted market prices or dealer quotes. For private placements, fair
value approximates amortized cost.

SHORT-TERM INVESTMENTS - Fair values of short-term investments are assumed to
equal cost.

OTHER INVESTED ASSETS - The fair value of the residential mortgage-backed
securities is based on the present value of the estimated net future cash
flows, including annual distributions of net cash proceeds from the exercise of
call rights using relevant market information.



                                       61
<PAGE>


DEFERRED PREMIUM REVENUE - The fair value of the Company's deferred premium
revenue, net of prepaid reinsurance premium, is based on the estimated cost of
entering into a cession of the entire portfolio with third-party reinsurers
under market conditions. This figure was determined by using the statutory basis
unearned premiums adjusted for ceding commission based on current market rates.

LOSS AND LOSS ADJUSTMENT RESERVES - The carrying amount, net of reinsurance
recoverable on unpaid losses, is composed of the present value of the expected
cash flows for specifically identified claims combined with a general estimate
for non-specific reserves. Therefore, the carrying amount is a reasonable
estimate of the fair value of the reserve.

LONG-TERM DEBT - The fair value is estimated based on the quoted market prices
for the same or similar issue or on the current rates offered to the Company for
debt of the same remaining maturities.

SHORT-TERM DEBT -The fair value of short-term debt, which bears interest at
variable rates, is assumed to equal the carrying value of the debt.

DERIVATIVE INSTRUMENTS - The fair values of foreign currency contracts are
based on the estimated termination values as of the balance sheet date. The
fair values of interest rate swaps and forward treasury lock agreements
(notional amounts of $65 million and $15 million, respectively, at December
31,1999) are determined by the Company using relevant market information and
appropriate valuation methodologies.

The carrying amounts and estimated fair values of these financial instruments
are as follows (in 000s):

<TABLE>
<CAPTION>

                                            DECEMBER 31, 1999                    DECEMBER 31, 1998
                                            -----------------                    -----------------
                                        Carrying     Estimated Fair          Carrying      Estimated Fair
                                         Amount           Value               Amount            Value
                                         ------           -----               ------            -----
<S>                                    <C>                <C>                <C>               <C>
ASSETS:
Fixed maturity securities              $923,570           $927,437           $891,142          $900,166
Common stock                                839                839                839               839
Short-term investments                   34,657             34,657             50,794            50,794
Other invested assets                    10,935             10,935                  -                 -

LIABILITIES:
Deferred premium revenue (net)          337,316            294,667            308,215           267,574
Loss and loss adjustment
    expense reserve (net)                49,684             49,684             33,739            33,739
Long-term debt                           75,000             74,010             75,000            78,083
Short-term debt                         113,941            113,941             54,290            54,290

DERIVATIVE INSTRUMENTS:
Foreign currency contracts                    -                  -                256               256
Forward treasury lock
    agreements                                77                77               (664)             (664)
Interest rate swap agreements                536               536                  -                 -

</TABLE>


NOTE 10 - INSURANCE IN FORCE

The Company principally insures and reinsures financial guaranties issued to
support public and private borrowing arrangements, including commercial paper,
bond financings, and similar


                                       62
<PAGE>

transactions. Financial guaranties are conditional commitments which guaranty
the performance of a customer to a third party.

The Company's potential liability in the event of nonperformance by the issuer
of the insured obligation is represented by its proportionate share of the
aggregate outstanding principal and interest payable ("insurance in force") on
such insured obligation. At December 31, 1999, the Company's aggregate insurance
in force was $85.6 billion. The Company's insured portfolio as of December 31,
1999 was broadly diversified by geographic and bond market sector with no single
credit representing more than 1.3% of the Company's net insurance in force.

The composition of the Company's insurance in force by type of issue and by
state of issue was as follows (in billions):

<TABLE>
<CAPTION>


TYPE OF ISSUE                                                           December 31,
                                                 -----------------------------------------------------------
                                                             1999                          1998
                                                             ----                          ----
<S>                                                         <C>                           <C>
General obligation and other tax backed                     $22.9                         $21.0
Non-municipal                                                12.2                          15.3
Utilities                                                    16.8                          11.2
Health care                                                   8.0                           7.1
Airport/Transportation                                        9.2                           7.7
Housing                                                       1.5                           1.5
Other municipal                                               5.3                           5.1
Other insurance businesses                                    9.7                           6.8
                                                              ---                           ---
    Total                                                   $85.6                         $75.7
                                                            =====                         =====

STATE OF ISSUE                                                          December 31,
                                                 -----------------------------------------------------------
                                                             1999                          1998
                                                             ----                          ----
California                                                  $9.4                          $8.9
New York                                                     9.7                           8.1
Florida                                                      5.4                           4.7
Texas                                                        5.0                           4.3
Pennsylvania                                                 4.2                           3.7
Illinois                                                     3.5                           3.3
Other (each less than 3.5% for 1999 and
     3.3% for 1998)                                         48.4                          42.7
                                                            ----                          ----
         Total                                             $85.6                         $75.7
                                                           =====                         =====

</TABLE>

The Company manages its exposure to credit risk through a structured
underwriting process which includes detailed credit analysis, review of
primaries' underwriting guidelines, surveillance policies and procedures, and
the use of reinsurance.

NOTE 11 - EMPLOYEE BENEFITS

The Company maintains non-contributory defined benefit pension plans,
including a non-qualified restoration pension plan effective July 1, 1999,
for the benefit of all eligible employees. Employer contributions are based
upon a fixed percentage of employee salaries determined at the discretion of
the Company. Plan assets consist of domestic equity and high quality fixed
income securities.

The actuarially computed net pension cost for 1999, 1998 and 1997, using the
projected unit credit actuarial method of attribution includes the following
components (in 000s):



                                       63
<PAGE>

<TABLE>
<CAPTION>

                                                                          Year Ended December 31,
                                                                  -----------------------------------------
                                                                    1999            1998           1997
                                                                    ----            ----           ----
<S>                                                                 <C>            <C>              <C>
Service cost                                                        $1,707         $1,022           $900
Interest cost                                                          726            485            494
Expected return on plan assets                                        (394)          (415)          (377)
Amortization of  transition obligation                                   1              2              2
Amortization of prior service cost                                     246             53             53
Recognized net actuarial gain                                         (139)          (129)          (101)
                                                                     -----          -----           -----
Net periodic benefits cost                                          $2,147         $1,018           $971
                                                                    ======         ======           ====

</TABLE>

The following table sets forth the funding status of the plans and the
accrued pension cost recognized in the Company's consolidated balance sheets
at December 31, 1999 and 1998 (in 000s):

<TABLE>
<CAPTION>

                                                                                      December 31,
                                                                             -------------------------------
                                                                                 1999            1998
                                                                                 ----            ----
<S>                                                                            <C>               <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year                                        $13,241           $8,131
Service cost                                                                     1,707            1,022
Interest cost                                                                      726              485
Actuarial gains                                                                 (2,018)          (1,092)
Benefits paid                                                                   (2,294)          (1,463)
                                                                               -------          -------
Benefit obligation at year end                                                  11,362            7,083
                                                                               -------          -------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year                                   4,637            4,726
Actual return on plan assets                                                       628              810
Employer contribution                                                                -              565
Benefits paid                                                                   (2,294)          (1,463)
                                                                               -------          -------
Fair value of plan assets at end of year                                         2,971            4,638
                                                                                 -----          -------
Funded Status                                                                   (8,391)          (2,445)
Unrecognized transition obligation                                                  11               13
Unrecognized prior service cost                                                  6,820              907
Unrecognized net actuarial gain                                                 (4,057)          (3,624)
                                                                               -------          -------
Accrued benefit cost                                                           $(5,617)         $(5,149)
                                                                               ========         ========

</TABLE>


Actuarial assumptions utilized to determine the projected benefit obligation and
estimated unrecognized net actuarial gain were as follows:

<TABLE>
<CAPTION>

                                                                           Year ended December 31,
                                                                   ------------------------------------
                                                                   1999           1998             1997
                                                                   ----           ----             ----
<S>                                                                <C>             <C>             <C>
Discount rate                                                      8.0%            7.0%            7.0%
Expected return on plan assets                                     8.5%            8.5%            8.5%
Rate of compensation increase                                      6.0%            6.0%            6.0%

</TABLE>


In addition to pension benefits, the Company provides certain health care
benefits for retired employees. Substantially all employees of Enhance Financial
and the Insurance Subsidiaries may become eligible for these benefits if they
reach retirement age while working for the Company.


                                       64
<PAGE>

The net post-retirement benefit cost for 1999, 1998, and 1997 was $180,000,
$140,000, and $127,000, respectively, and includes service cost, interest cost
and amortization of the transition obligation and prior service cost.

At December 31, 1999 and 1998 the accumulated post-retirement benefit obligation
was $896,000 and $715,000, respectively, and was not funded. At December 31,
1999, the discount rate used in determining the accumulated post-retirement
benefit obligation was 8% and the health care trend was 10.5%, graded down to
5.5% after 12 years; at December 31, 1998, the discount rate used in determining
the accumulated post-retirement benefit obligation was 7% and the health care
trend was 12%, graded to 6% over 7 years. A one-percentage point change in
assumed healthcare cost trend rates would have the following effects (In
thousands):

<TABLE>
<CAPTION>

                                                                 1-Percentage Point     1-Percentage Point
                                                                       Increase               Decrease
                                                                       --------               --------
<S>                                                                     <C>                    <C>
Effect on total of service and interest cost components                 $  35                  ($  27)
Effect on post-retirement benefit obligation                              140                    (113)

</TABLE>

In January 1996, the Company implemented a 401(k) retirement savings plan
covering substantially all employees of the Company. Under this plan, the
Company provides a matching contribution of 50% on contributions up to 6% of
base salary made to the plan by eligible employees. The Company's matching
contributions were $275,000, $120,000, and $106,000 in 1999, 1998 and 1997,
respectively.

NOTE 12 - STOCK OPTION PROGRAMS

The Company maintains a stock option program for its key employees.
Substantially all options issued under the program vest in four equal annual
installments commencing one year after the date of grant. The Company also
maintains a directors' option program pursuant to which directors of Enhance
Financial and the Insurance Subsidiaries who are not employees of the Company
are granted non-qualified stock options. Options under this program vest in two
equal annual installments commencing on December 31 next following the date of
grant.

In March 1998, the board of directors adopted the Director Stock Ownership Plan,
which as amended, allows each outside director to elect to receive up to 100% of
his or her director fees in the form of shares of common stock valued at the
closing price of the common stock on the New York Stock Exchange on that date.
Each eligible director is entitled to make a new election annually for that
coming year's fee.

All options are exercisable at the option price, being the fair value of the
stock at the date of grant. The board of directors has authorized a maximum of
11,631,050 shares of common stock to be awarded as options, of which 9,172,435
options for shares (net of expirations and cancellations) had been awarded as of
December 31, 1999. Information regarding activity in the option programs
follows:


                                       65
<PAGE>

<TABLE>
<CAPTION>

                                                  Number of                                     Weighted Average
                1999 Options                       Shares           Option Price Per Share       Exercise Price
                ------------                       ------           ----------------------       --------------
<S>                                               <C>                <C>                              <C>
Outstanding at beginning of year                  6,055,604            $7.25-$34.281                  $17.38
Granted - Employees                               1,404,768          $16.438 - $29.375                 17.82
        - Directors                                  70,000              $16.25                        16.25
Exercised                                          (192,349)           $7.25-$28.21                    11.10
Expired or canceled                                (141,526)         $11.938 - $32.25                  25.79
Outstanding at year-end                           7,196,497            $7.25-$34.281                   17.50
                                                  ---------
Exercisable at year-end - Employees               3,969,601            $7.25-$34.281                   14.56
                                                  ---------
                        - Directors                 381,166          $8.563 - $29.75                   18.35

</TABLE>


<TABLE>
<CAPTION>

                                                  Number of                                     Weighted Average
                1998 Options                       Shares          Option Price Per Share       Exercise Price
                ------------                       ------          ----------------------       --------------
<S>                                               <C>                <C>                             <C>
Outstanding at beginning of year                  5,635,108          $7.25   -  $29.062              $ 14.81
Granted - Employees                               1,168,980          $24.937 -  $34.281                25.49
        - Directors                                  91,000                $30.00                      30.00
Exercised                                          (666,374)         $7.25   -  $20.75                  9.89
Expired or canceled                                (173,110)         $8.00   -  $28.813                24.07
                                                   ---------
Outstanding at year-end                           6,055,604          $7.25   -  $34.281                17.38
                                                  ---------
Exercisable at year-end - Employees               3,234,202          $7.25   -  $28.844                12.21
                        - Directors                 306,166          $8.563  -  $29.75                 14.46

</TABLE>


<TABLE>
<CAPTION>

                                                  Number of                                     Weighted Average
                1997 Options                       Shares           Option Price Per Share       Exercise Price
                ------------                       ------           ----------------------       --------------
<S>                                               <C>                <C>                              <C>
Outstanding at beginning of year                   5,106,220            $7.25  -  $18.25              $ 10.91
Granted - Employees                                1,220,374            $19.44 -  $28.844               27.21
        - Directors                                   91,000                 $29.75                     29.75
Exercised                                           (598,792)           $7.25  -  $17.00                 9.47
Expired or canceled                                 (183,694)           $8.00  -  $19.44                13.36
                                                   ---------
Outstanding at year-end                            5,635,108            $7.25  -  $29.75                14.81
                                                   ---------
Exercisable at year-end - Employees                3,117,688            $7.25  -  $19.44                10.27
                        - Directors                  256,666            $8.563 -  $18.25                11.07


</TABLE>

<TABLE>
<CAPTION>

                                        Options Outstanding                             Options Exercisable
                        -----------------------------------------------------     --------------------------------
                              Number           Weighted                             Number
                           Outstanding         Average           Weighted        Exercisable         Weighted
    Range of              at December          Remaining          Average        at December           Average
 Exercise Prices           31, 1999         Contract Life     Exercise Price      31, 1999         Exercise Price
 ---------------           --------         -------------     --------------      --------         --------------

<S>                         <C>                  <C>              <C>              <C>               <C>
$ 7.25 - $10.99             2,026,390            3.1              $ 9.07           2,026,390         $ 9.07
$11.00 - $19.99             2,677,568            8.1               15.52           1,291,495          14.27
$20.00 - $34.281            2,492,539            8.5               26.47           1,032,882          27.17
                            ---------                                              ---------
                            7,196,497                                              4,350,767
                            =========                                              =========

</TABLE>

The Company applies the provisions of APB Opinion No. 25 "Accounting for Stock
Issued to Employees" in accounting for its stock option program. Accordingly, no
compensation expense has been recognized for options granted under its stock
option program, and the Company has adopted the disclosure-only provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation." Had compensation cost
for the Company's current and past stock option programs been determined based
upon the fair value at the grant date for awards under these plans consistent
with the methodology prescribed under SFAS No. 123, the Company's net


                                       66
<PAGE>

income and earnings per share would have been reduced to the pro forma amounts
indicated below:

<TABLE>
<CAPTION>

                                                     1999                 1998                  1997
                                                     ----                 ----                  ----
<S>                                                 <C>                  <C>                   <C>
Net income - as reported                            $68,624              $82,457               $68,806
           - pro forma                               66,168              $80,906               $67,475
Basic earnings per share - as reported              $  1.81              $  2.20               $  1.86
                         -  pro forma                  1.74              $  2.16               $  1.82
Diluted earnings per share - as reported            $  1.76              $  2.10               $  1.78
                           - pro forma                 1.70              $  2.06               $  1.75

</TABLE>

The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model. The weighted average grant date fair value
of option grants were $6.78, $16.62, and $12.01 in 1999, 1998 and 1997,
respectively. The following assumptions were used for option grants awarded in
1999, 1998 and 1997:

<TABLE>
<CAPTION>

                                                                  Options Granted
                                        --------------------------------------------------------------------
                                                1999                   1998                   1997
                                                ----                   ----                   ----
<S>                                       <C>                     <C>                    <C>
Dividend yield                               0.8% to 1.5%           0.6% to 1.0%           0.8% to 1.1%
Volatility                                  43.7% to 54.3%         24.1% to 75.1%         18.7% to 30.3%
Risk-free interest rate                      4.7% to 6.3%           4.3% to 5.8%           5.8% to 6.7%
Assumed annual forfeiture rate                    3.0%                 3.0%                   3.0%
Expected life                                  10 years              10 years               10 years

</TABLE>


NOTE 13 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS

LEASE COMMITMENTS

The Company has committed to lease office space under non-cancelable leases
which expire at various dates through August 2015. The leases provided for
escalations resulting from increased assessments for taxes, utilities and
maintenance. Future minimum rental payments on all leases, before any deductions
for estimated sublease income, are as follows (in 000s):

<TABLE>
<CAPTION>


YEAR ENDED DECEMBER 31,                                        OPERATING LEASES
-----------------------                                        ----------------
<S>                                                                 <C>
2000                                                                $ 2,300
2001                                                                  5,400
2002                                                                  6,100
2003                                                                  6,300
2004                                                                  6,300
Thereafter                                                           67,800
                                                                   --------
                                                                   $ 94,200
                                                                   ========
</TABLE>



Rent expense, net of sublease income, was $3,228,000, $1,528,000, and
$1,699,000, for the years ended December 31, 1999, 1998 and 1997, respectively.

COMMITMENTS - OFFICE CAPITAL IMPROVEMENTS

The Company has committed to make capital improvements to its offices in New
York, New York and to purchase fixtures and furniture for such offices, in the
aggregate amount of $11.0 million, net of building owner's reimbursement.


                                       67
<PAGE>

REINSURANCE AGREEMENTS

The Company is a party to facultative agreements with all, and a party to
treaty agreements with all except one of, the four largest primary financial
guaranty insurance companies. The Company's facultative and treaty agreements
are generally subject to termination (i) upon written notice (ranging from 90
to 120 days) prior to the specified deadline for renewal, (ii) at the option
of the primary insurer if the Company fails to maintain certain financial,
regulatory and rating agency criteria which are equivalent to or more
stringent than those the Company is otherwise required to maintain for its
own compliance with the New York Insurance Law and to maintain a specified
claims-paying ability or financial strength rating for the particular
Insurance Subsidiary or (iii) upon certain changes of control of the Company.
Upon termination under the conditions set forth in (ii) and (iii) above, the
Company may be required (under some of its reinsurance agreements) to return
to the primary insurer all unearned premiums, less ceding commissions,
attributable to reinsurance ceded pursuant to such agreements. Upon the
occurrence of the conditions set forth in (ii) above, whether or not an
agreement is terminated, the Company may be required to obtain a letter of
credit or alternative form of security to collateralize its obligation to
perform under such agreement.

OTHER

In August 1999, the senior long-term debt rating of Enhance Financial and the
insurance financial strength rating of Enhance Reinsurance were downgraded from
Aa3 to A2 and from Aaa to Aa2, respectively.

The Company does not believe that the downgrade of the senior long-term debt
rating of Enhance Financial from Aa3 to A2 has had or should have a material
adverse effect on Enhance Financial, except to the extent that it could have a
material adverse effect on Enhance Re. However, such downgrade could result in
an increase, which could be significant, in the costs to Enhance Financial of
borrowing funds or raising capital. Similarly, any additional downgrade of the
senior long-term debt rating of Enhance Financial could increase costs of
borrowing funds or 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.

On February 29, 2000, Moody's advised the Company that it had placed on review
for possible further downgrade both the above ratings. Moody's explained that
this review will focus on the uncertainty surrounding management's strategy with
respect to the Company's higher risk specialty finance businesses, the reliance
on these business lines to achieve publicly stated earnings targets, the
Company's future capital plans and the Company's financial flexibility. Moody's
indicated that the outcome of the review will depend on the Company's future
plans for achieving a balance between the financial guaranty insurance
operations and the Company's other lines of business. The Company does not
believe that a downgrade of Enhance Re's financial strength rating from Aa2 to
Aa3, should it occur, should have a material adverse effect on Enhance Re's
competitive position or Enhance Re's costs associated with cessions from primary
insurers under their treaties with Enhance Re. This is because many of Enhance
Re's reinsurance competitors do not have materially higher financial strength
ratings from Moody's than would Enhance Re and because of the terms of the
amendments of certain of its existing treaties and its new treaties with the
Company's primary insurers. In cases where a prior treaty with a primary insurer
remains in effect or a primary insurer had waived its rights with respect to the
1999 downgrade, any additional downgrade could result in those primary insurers
recapturing business previously ceded to Enhance Re. However, a downgrade in
Enhance Re's financial strength rating to (or below) A could have a material
adverse effect on Enhance Re's competitive position. Such a downgrade may so
diminish the value of Enhance Re's reinsurance to the


                                       68
<PAGE>

primary insurers that they could either materially increase the costs to Enhance
Re associated with cessions under their treaties with Enhance Re or recapture
business previously ceded to Enhance. In either case, the effect of such changes
could materially adversely affect the Company's ability to continue to engage in
the reinsurance of monoline financial guaranty insurers business. While the
Company believes that the recapture of business by the primaries would otherwise
be inconsistent with their long-standing risk-management practices, such action,
if it occurs and depending on its magnitude, could have a material adverse
effect on the Company.


NOTE 14 - PARENT COMPANY FINANCIAL INFORMATION

The following are the condensed balance sheets of Enhance Financial as of
December 31, 1999 and 1998 and its condensed statements of income and cash flows
for the years ended December 31, 1999, 1998 and 1997 (in 000s).

CONDENSED BALANCE SHEETS

<TABLE>
<CAPTION>

                                                                              December 31,
                                                                ----------------------------------------
                                                                      1999                    1998
                                                                      ----                    ----
<S>                                                                 <C>                     <C>
ASSETS
Cash                                                                $     56                $  2,715
Investments                                                           19,497                   7,095
Investment in affiliated companies                                   807,848                 784,235
Other assets                                                          59,025                   4,865
                                                                    --------                --------
                                                                    $886,426                $798,910
                                                                    --------                --------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Long-term debt                                                      $ 75,000                $ 75,000
Other liabilities                                                    135,122                  61,264
Shareholders' equity                                                 676,304                 662,646
                                                                     -------                 -------
                                                                    $886,426                $798,910
                                                                    ========                ========

</TABLE>

CONDENSED STATEMENTS OF INCOME

<TABLE>
<CAPTION>

                                                                       Year Ended December 31,
                                                           --------------------------------------------
                                                               1999             1998             1997
                                                               ----             ----             ----
<S>                                                          <C>              <C>               <C>
Total revenues                                               $    690         $    812          $   510
Total expenses                                                 21,545           17,514           14,652
                                                               ------           ------           ------
                                                              (20,855)         (16,702)         (14,142)
Equity in income of affiliates                                 79,571          102,459           77,500
Minority interest                                                 306                -                -
                                                             --------         ---------        --------
Income before income taxes                                     59,022           85,757           63,358
Income tax (expense) benefit                                    9,602           (3,300)           5,448
                                                             --------         ---------        --------
Net income                                                   $ 68,624         $ 82,457          $68,806
                                                             ========         ========          =======

</TABLE>



                                       69
<PAGE>


CONDENSED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>

                                                                       Year Ended December 31,
                                                          --------------------------------------------------
                                                               1999             1998             1997
                                                               ----             ----             ----
<S>                                                                <C>           <C>           <C>
Cash flows from operating activities:
   Net income                                                      $  68,624     $  82,457     $  68,806
   Adjustments to reconcile net income to net cash from
     operating activities
   Equity in income of affiliates                                    (79,571)     (102,459)      (77,500)
   Other                                                             (40,273)       55,239        29,799
                                                                   ---------     ---------     ---------
Net cash provided by
  (used in) operating activities                                     (51,220)       35,237        21,105
                                                                   ---------     ---------     ---------
Cash flows from investing activities:
   Investment in affiliates net of dividends received
                                                                       6,317       (32,401)       (7,186)
   Investments activities                                            (14,852)          741        (2,396)
   Short-term investments, net                                         2,460         4,880        (4,648)
                                                                   ---------     ---------     ---------
     Net cash used in investing activities                            (6,075)      (26,780)      (14,230)
                                                                   ---------     ---------     ---------
Cash flows from financing activities:
   Capital stock                                                       3,277         9,920         7,341
   Short-term debt                                                    60,482        10,790         1,000
   Dividends paid                                                     (9,123)       (8,645)       (8,195)
   Principal payment - senior notes                                       --            --
   Reissuance of treasury stock                                           --            --
   Purchase of treasury stock                                             --       (17,807)       (7,021)
                                                                   ---------     ---------     ---------
   Net cash provided by (used in)
     financing activities                                             54,636        (5,742)       (6,875)
                                                                   ---------     ---------     ---------
Net increase (decrease) in cash                                       (2,659)         2,715            --
Cash, beginning of year                                                2,715            --            --
                                                                   ---------     ---------     ---------
Cash, end of year                                                  $      56     $   2,715     $      --
                                                                   =========     ==========    =========

</TABLE>

NOTE 15 - MAJOR CUSTOMERS

The Company derives a substantial portion of its premium writings from a small
number of primary insurers. The following table states the percentage of gross
premiums written for the years ended December 31, 1999, 1998 and 1997 for the
Company's four most significant primary insurers:

<TABLE>
<CAPTION>

    For year ended
     December 31,            Insurer #1           Insurer #2            Insurer #3           Insurer #4
     ------------            ----------           ----------            ----------           ----------
         <S>                    <C>                   <C>                   <C>                  <C>
         1999                   20%                   14%                   9%                   2%
         1998                   19%                   19%                  19%                   5%
         1997                   25%                   16%                   9%                   4%

</TABLE>

This customer concentration results from the small number of primary insurance
companies which are licensed to write financial guaranty insurance. Prior years'
data has been restated to give retroactive effect to mergers between our primary
insurers.


                                       70
<PAGE>

NOTE 16- LOSSES AND LOSS ADJUSTMENT EXPENSES

Activity in the liability for losses and loss adjustment expenses ("LAE") is
summarized as follows (in 000s):

<TABLE>
<CAPTION>

In thousands                                                      Year Ended December 31,
                                                ------------------------------------------------------------
                                                       1999                1998                 1997
                                                       ----                ----                 ----
<S>                                                   <C>                  <C>                 <C>
Balance at January 1,                                 $36,239              $33,675             $28,081
    Less reinsurance recoverables                       2,500                2,688               1,823
                                                        -----                -----               -----
Net balance at January 1,                              33,739               30,987              26,258
                                                       ------               ------              ------
Net incurred related to:
    Current year                                       16,645                6,000               6,002
    Prior years                                         9,511                4,324               3,753
                                                        -----                -----               -----
Net incurred                                           26,156               10,324               9,755
                                                       ------               ------               -----
Net paid related to:
    Current year                                        1,512                  352                 720
    Prior years                                         8,699                7,220               4,306
                                                        -----                -----               -----
Net paid                                               10,211                7,572               5,026
                                                       ------                -----               -----
Net balance at December 31,                            49,684               33,739              30,987
    Plus reinsurance recoverables                       2,286                2,500               2,688
                                                        -----                -----               -----
Balance at December 31,                               $51,970              $36,239             $33,675
                                                      =======              =======             =======

</TABLE>


The incurred loss and paid loss information presented above is classified as
"current year" and "prior year" based upon the year in which the related
reinsurance contract or insurance policy was underwritten. Therefore, amounts
presented as "net incurred related to prior years" are not indicative of
redundancies or deficiencies in total reserves held as of prior year ends.
During the years ended December 31, 1999, 1998 and 1997, the actual adverse
(redundant) development of reserves held as of prior year ends was $2.3
million, $(0.2) million, and $1.5 million, respectively.

NOTE 17 - SEGMENT REPORTING

The Company has two reportable segments: insurance and asset-based
businesses. The insurance segment provides credit-related insurance coverage
to meet the needs of customers in a wide variety of domestic and
international markets. The Company's largest insurance business is the
provision of reinsurance to the monoline primary financial guaranty insurers
for both municipal bonds and non-municipal obligations. The Company also
provides trade credit reinsurance, financial responsibility bonds,
excess-SIPC insurance and direct financial guaranty insurance. The
asset-based businesses segment deals primarily with credit-based servicing
and securitization of assets in underserved markets, in particular, the
origination, purchase, servicing and securitization of special assets,
including lottery awards, viatical settlements, structured settlement payments,
sub-performing/non-performing and seller financed residential mortgages and
delinquent consumer assets. The Company's reportable segments are strategic
business units which are managed separately as each business requires
different marketing and sales expertise.

The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company evaluates performance
based on profit or loss from operating earnings, which it defines as net income
excluding the impact of capital and foreign


                                       71
<PAGE>

exchange gains and losses, and certain non-recurring items, net of taxes.
Summarized financial information concerning the Company's operating segments is
presented in the following tables (in 000s):

<TABLE>
<CAPTION>

                                                                     1999
                                                                     ----

                                                    Insurance           Asset-based            Totals
                                                    ---------           -----------            ------
<S>                                                 <C>                    <C>                <C>
Revenues from external customers                    $ 103,557              $39,013            $142,570
Interest revenue                                       56,648                1,405              58,053
Interest expense                                        9,229                1,760              10,989
Equity in income of affiliates                          2,103               17,605              19,708
Income tax expense (benefit)                           10,417               (9,597)                820
Operating earnings                                     54,524               19,473              73,997
Investments in affiliates                               8,029               99,972             108,001
Deferred policy acquisition cost                      119,213                    -             119,213
Identifiable assets                                 1,091,154              362,778           1,453,932

                                                                     1998
                                                                     ----

                                                    Insurance           Asset-based            Totals
                                                    ---------           -----------            ------

Revenues from external customers                    $ 104,820              $46,807           $ 151,627
Interest revenue                                       53,423                    -              53,423
Interest expense                                        7,223                1,277               8,500
Equity in income of affiliates                          2,054               12,012              14,066
Income tax expense                                     23,558                6,792              30,350
Operating earnings                                     66,500               16,021              82,521
Investments in affiliates                               8,201               88,666              96,867
Deferred policy acquisition cost                      103,794                    -             103,794
Identifiable assets                                 1,143,293              197,391           1,340,684

                                                                     1997
                                                                     ----

                                                    Insurance           Asset-based            Totals
                                                    ---------           -----------            ------

Revenues from external customers                    $  88,966              $30,152           $ 119,118
Interest revenue                                       50,618                    0              50,618
Interest expense                                        5,881                1,436               7,317
Equity in income of affiliates                          1,076                7,702               8,778
Income tax expense                                     19,486                5,664              25,150
Operating earnings                                     60,029                8,374              68,403
Investments in affiliates                               6,086               32,776              38,862
Deferred policy acquisition cost                       95,645                    0              95,645
Identifiable assets                                 1,074,393               97,913           1,172,306

</TABLE>

The following are reconciliations of reportable segment revenues and profit to
Enhance Financial's consolidated totals (in 000s):



                                       72
<PAGE>

<TABLE>
<CAPTION>

                                                            1999             1998              1997
                                                            ----             ----              ----
<S>                                                         <C>              <C>            <C>
REVENUES
Total revenues from external customers for
     reportable segments                                    $142,570         $151,627       $ 119,118
Total interest revenue for reportable
     segments                                                 58,053           53,423          50,618
Realized (losses)/gains                                       (3,039)           2,434             657
                                                            --------         --------       ---------
     Total consolidated revenues                            $197,584         $207,484       $ 170,393
                                                            ========         ========       =========
NET INCOME
Operating earnings for reportable segments                  $ 73,997         $ 82,521         $68,403
Capital and foreign exchange (losses)/gains
     net of tax                                               (2,463)           1,398             403
Non-recurring Van-Am and other  non-recurring
     expenses, net of tax                                     (2,910)          (1,462)              -
                                                            --------         --------       ---------
  Net income                                                $ 68,624         $ 82,457         $68,806
                                                             =======          =======         =======

</TABLE>

The Company's revenues from external customers, by product line, are as follows
(in 000s):

<TABLE>
<CAPTION>

                                                            1999             1998              1997
                                                            ----             ----              ----
<S>                                                          <C>             <C>             <C>
INSURANCE:
Financial guaranty reinsurance                              $ 60,250         $ 66,264        $ 49,913
Financial guaranty direct                                     11,629           10,246           6,319
Trade credit reinsurance                                      20,234           15,973          19,165
Other                                                         11,444           12,337          13,569

ASSET-BASED                                                   39,013           46,807          30,152
                                                              ------           ------          ------

TOTAL REVENUES FROM EXTERNAL CUSTOMERS                      $142,570         $151,627        $119,118
                                                            ========         ========        ========

</TABLE>

NOTE 18- QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

In millions except per share amounts

<TABLE>
<CAPTION>

                                                  1st Qtr.    2nd Qtr.     3rd Qtr.    4th Qtr.        Year
                                                  --------    --------     --------    --------        ----
<S>                                                  <C>         <C>          <C>         <C>        <C>
1999
Net premiums written                                 $29.5       $34.9        $28.9       $39.7      $133.0
Premiums earned                                       24.3        26.1         24.9        28.6       103.9
Investment and other income                           11.9        17.5         13.9        19.7        63.0
Assignment sales                                       8.3         8.0         12.2         2.2        30.7
Losses and loss adjustment expenses                    2.8         2.6          3.8        17.0        26.2
Equity in income of affiliates                         4.7         7.9          4.5         2.6        19.7
Income before income taxes                            19.6        25.4         20.6         3.8        69.4
Net income                                            18.2        23.5         22.4         4.5        68.6

Earnings per share - Basic                           $0.48       $0.62        $0.59       $0.12       $1.81
                                                     -----       -----        -----       -----       -----
                   - Diluted                         $0.46       $0.61        $0.57       $0.12       $1.76
                                                     -----       -----        -----       -----       -----

</TABLE>


                                       73
<PAGE>

<TABLE>

<S>                                                <C>         <C>          <C>         <C>         <C>
1998
Net premiums written                               $33.7       $27.3        $27.6       $40.7       $129.3
Premiums earned                                     23.7        24.4         29.0        25.2        102.3
Investment and other income                         14.2        15.0         17.4        13.2         59.8
Assignment sales                                    10.4        12.1         12.7        10.2         45.4
Losses and loss adjustment expenses                  2.3         1.6          4.6         1.8         10.3
Equity in income of affiliates                       2.6         3.8          3.2         4.5         14.1
Income before income taxes                          27.1        28.2         30.8        26.7        112.8
Net income                                          19.2        20.5         22.7        20.1         82.5

Earnings per share - Basic                         $ 0.51      $ 0.55       $ 0.61      $ 0.53       $  2.20
                                                   ------      ------       ------      ------       -------
                   - Diluted                       $ 0.49      $ 0.52       $ 0.58      $ 0.51       $  2.10
                                                   ------      ------       ------      ------       -------

</TABLE>

NOTE 19- POST BALANCE SHEETS EVENTS

In February 2000, the Company announced that it had implemented cost control
initiatives and a reduction in staff. The Company estimates a first quarter
charge of approximately $1.9 million related to staff reductions.

The Company has begun a review of its strategic alternatives in order to
maximize shareholder value. In February 2000 Enhance Financial engaged Morgan
Stanley Dean Witter & Co. to advise the Company in connection with such review.
The Company's business strategy, including without limitation, its expectations
regarding sources of future growth may be changed materially following such
review of strategic alternatives.



                                       74
<PAGE>

ITEM 9. - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
DISCLOSURE

         Not applicable.



                                       75

<PAGE>

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

         Set forth below is certain information concerning directors and
executive officers of Enhance Financial. Each director holds office (subject to
Enhance Financial's by-laws) until the next annual meeting of shareholders and
until his or her successor has been elected and qualified. The information
concerning the directors has been furnished by them to Enhance Financial.

<TABLE>
<CAPTION>

      NAME                           AGE(1)                POSITION WITH ENHANCE FINANCIAL
-------------------                  -----                 --------------------------------
<S>                                  <C>                   <C>
Allan R. Tessler                       63                  Chairman of the Board

Wallace O. Sellers                     70                  Vice Chairman of the Board

Daniel Gross                           57                  President, Chief Executive
                                                              Officer and Director

Samuel Bergman                         52                  Executive Vice President and
                                                              Secretary

Ronald M. Davidow                      49                  Executive Vice President

Richard J. Dunn                        53                  Executive Vice President

Elaine J. Eisenman                     51                  Executive Vice President and
                                                              Chief Administrative Officer

Tony M. Ettinger                       43                  President, Credit-Based
                                                              Businesses, Alliances and
                                                              Ventures

Martin A. Kamarck                      50                  President, Insurance Businesses

Brian C. Kleinberg                     42                  Executive Vice President

Richard P. Lutenski                    49                  Executive Vice President and
                                                            Chief Financial Officer

Brenton W. Harries                     72                  Director

David R. Markin                        69                  Director

Jay A. Novik                           55                  Director

Robert P. Saltzman                     57                  Director

Richard J. Shima                       60                  Director

Spencer R. Stuart                      77                  Director

</TABLE>


                                       76
<PAGE>
<TABLE>

      Name                           Age(1)                Position With Enhance Financial
-------------------                  -----                 --------------------------------
<S>                                  <C>                   <C>
Frieda K. Wallison                     57                  Director

Jerry Wind                             62                  Director

</TABLE>
-------------------------
(1)      As of March 15, 2000.

         Mr. Tessler has held the position with Enhance Financial set forth
above since its inception. Since 1987 he has served as Chairman of the Board and
Chief Executive Officer of International Financial Group, Inc., a merchant
banking concern. From 1992 to December 1999 he served as Co-Chairman of the
Board and Co-Chief Executive Officer of Data Broadcasting Corporation ("DBC"), a
provider of market data services to the investment community, thereafter to
February 2000 as Co-Chairman of the Board of DBC and since then as director of
DBC. Since March 2000 Mr. Tessler has served as Chief Executive Officer of
Jackpot Enterprises, Inc. ("Jackpot"), a manufacturer of gaming devices and
Internet investment holding company which seeks to incubate innovative,
Internet-related business-to-business and e-service enterprises and to support
the migration of traditional businesses to the Internet. Mr. Tessler is also
Chairman of the Board of Jackpot and Checker Holdings Inc. and a director of The
Limited, Inc., Allis-Chalmers Corporation and Marketwatch.com.

         Mr. Sellers has held the position with Enhance Financial set forth
above since 1995, and he also serves as a consultant to the Company. Prior
thereto, he served as President, Chief Executive Officer and a director of
Enhance Financial and Chairman of the Board and Chief Executive Officer of
the Insurance Subsidiaries from their inception. Mr. Sellers also serves as a
director of Danielson Holding Corporation.

         Mr. Gross has held the positions with Enhance Financial set forth above
and has served as Chief Executive Officer of the Insurance Subsidiaries since
1995. Prior thereto he held senior executive positions with Enhance Financial
and Enhance Re from their inception and was among the founders of the Company in
1986. Previously, he held various insurance industry positions, including
serving as co-founder and Chairman of F.G. Holding Company, Kramer Capital
Consultants and various senior executive capacities for Colonial Penn Group. Mr.
Gross also serves as a director of MGIC.

         Mr. Bergman has held the positions with Enhance Financial set forth
above since 1991, and Secretary of each of the Insurance Subsidiaries since
their inception. He was a member of the law firm of Shea & Gould from 1980 to
1991.

         Mr. Davidow has held the position with Enhance Financial set forth
above since 1990 having previously served as a Senior Vice President of Enhance
Financial.

         Mr. Dunn has held the position with Enhance Financial set forth above
since April 1999, having previously, since 1995, served as Senior Vice President
of Enhance Financial. Prior thereto from 1992 to 1995, he was a consultant for
Lansco Management Consulting, providing consulting services to small and
mid-sized businesses.


                                       77
<PAGE>

         Ms. Eisenman has held the positions with Enhance Financial set
forth above since January 1998, having previously served as an
independent consultant to the Company. From 1994 to 1997 she served as
Senior Vice President - Worldwide  Staffing, Development and Succession of
American Express Company. From 1990 to 1994 she served as Vice President
and General Manager of the Eastern Region of Personnel Decisions
International, Inc. Ms. Eisenman also serves as a director of UST, Inc.

         Mr. Ettinger has held the position with Enhance Financial set forth
above since March 1999, having previously, since 1995, served as Executive Vice
President of Enhance Financial. From 1992 to 1994, he rendered independent,
strategic management consulting services to major financial services
institutions. From 1989 to 1991 he was a General Partner of Hannibal Management,
L.P., an investment partnership focused on undervalued, healthy community thrift
institutions. From 1985 to 1989, he was Vice President, Head of Mergers and
Acquisitions and Corporate Development, and holding company Chief Operating
Officer for seven financial services subsidiaries of the Mutual Insurance
Company of New York.

         Mr. Kamarck has held the position with Enhance Financial set forth
above since April 1999 and as President of the Insurance Subsidiaries since June
1999. He previously served from January 1999 to April 1999,as a consultant to
the Related Companies, Inc., advising the diversified real estate company on
strategic direction of financial services. Prior thereto, from 1997 to 1998, Mr.
Kamarck served as President and Chief Operating Officer of AEW Capital
Management, LP, a large real estate investment advisory firm. Prior thereto from
1994 to 1997, Mr. Kamarck, served in various positions at the Export-Import Bank
of the United States, most recently as President and Chairman and prior thereto
as First Vice President and as Vice Chairman and Chief Operating Officer.

         Mr. Kleinberg has held the position with Enhance Financial set forth
above as well as Chief Executive Officer of Singer since January 1999. From
1980 to 1998, Mr. Kleinberg served in various executive positions with
American Express Company, most recently as Executive Vice President, American
Express Financial Advisors, overseeing their Financial Direct Group and prior
thereto as Executive Vice President and General Manager, Travel Related
Services, responsible for new customers and products in the Consumer Card
Services Group.

         Mr.  Lutenski has held the positions with Enhance Financial set
forth above since November 1999. From 1995 to October 1999, Mr. Lutenski
served as Chief Financial Officer and Managing Director of Crum & Foster
Insurance Group, a group of insurance companies. Prior thereto from 1990 to
1995, Mr. Lutenski served as Chief Financial and Investment Officer of
Amerisure, Inc. and its parent company, Michigan Mutual Insurance Company.
Mr. Lutenski is a chartered financial analyst.

         Mr. Harries has served as a director of Enhance Financial since 1991,
having previously served as a director of the Insurance Subsidiaries since 1986.
He has been retired since 1986, having previously served from 1985 as President
of Global Electronic Markets Company, a joint venture of McGraw-Hill and
Citicorp dealing in electronic trading of commodities. Mr. Harries also serves
as a trustee of the Alliance Funds, Inc.


                                       78
<PAGE>


         Mr. Markin has served as a director of Enhance Financial since 1986.
He has served as President of Checker Motors Corporation for more than five
years. From 1989 to December 1996, he also served as President and Chief
Executive Officer of International Controls Corp. and its successor
corporation, Great Dane Holdings, Inc. Mr. Markin serves as a director of
Jackpot and DBC.

         Mr. Novik has served as a director of Enhance Group since June 1999.
He is currently a private investor and serves as a director and vice chairman
of several U.S. subsidiaries of Swiss Reinsurance Company ("Swiss Re"). From
1977 to January 1999, Mr. Novik served in various senior management
capacities with Swiss Re.

         Mr. Saltzman has served as a director of Enhance Financia since
1996. He has been President and Chief Executive Officer of Jackson National
Life Insurance Company since 1994.

         Mr. Shima has served as a director of Enhance Financial since 1993.
He has been an independent consultant since 1993, having  previously thereto
from 1992 served as Managing Director of Russell Miller, Inc., an investment
banking concern specializing in the insurance industry. Mr. Shima also serves
as a director of CTG Resources, Inc. and a trustee of the Evergreen Mutual
Funds.

         Mr. Stuart has served as a director of Enhance Financial since 1992,
having also served as a director of Asset Guaranty from its inception until
1995. He has for over ten years served as an independent consultant regarding
organizational and personnel matters. He served from 1990 to 1992 as Chairman
of the Council of Management Advisors of Dean Witter Reynolds Inc. He is the
founder and honorary chairman of Spencer Stuart Executive Recruiting
Consultants.

         Ms. Wallison has served as a director of Enhance Financial since
1992, having also served as a director of each of the Insurance Subsidiaries
since its inception until 1995. She currently is a private investor, having
retired from the law firm of Jones, Day, Reavis & Pogue in 1998, where since
1983 she had been a member, resident in its Washington, D.C. office.

         Mr. Wind has served as a director of Enhance Financial since 1996.
He has been on the faculty of the Wharton School of the University of
Pennsylvania since 1967, currently serving as The Lauder Professor and
Professor of Marketing. He also serves as a business consultant to several
publicly and privately held, U.S. and non-U.S.corporations and has served on
the editorial boards of and as a contributor to numerous journals on
marketing.


                                       79
<PAGE>


ITEM 11. EXECUTIVE COMPENSATION.

SUMMARY COMPENSATION TABLE.

         The following table sets forth certain information regarding
compensation paid during each of the Company's last three fiscal years to the
Company's Chief Executive Officer and each of the Company's four other most
highly compensated executive officers, based on salary and bonus earned
during 1999. Except as described below under "Agreements with Executive
Officers" and "Severance Plans," the Company has not entered with any
executive officer into (i) an employment agreement or (ii) any compensatory
plan or arrangement which is activated upon the resignation, termination or
retirement of the executive officer or upon a change in control of the
Company or change in the executive officer's responsibilities following a
change in control.

<TABLE>
<CAPTION>

                                                                                              Long-Term
                                                            Annual Compensation              Compensation
                                                         ------------------------        Securities Underlying
Name and Principal Position                 Year         Salary           Bonus               Options/SARS
---------------------------                 ----         ------           -----               ------------
<S>                                         <C>          <C>            <C>                     <C>
Daniel Gross                                1999         $660,000      $  561,000               125,000
   President and Chief                      1998          530,000       1,060,000               200,000
   Executive Officer                        1997          500,000       1,150,000               350,000

Tony M. Ettinger                            1999          450,000         600,000                95,000
   President, Credit-Based                  1998          288,850         360,000                70,000
   Businesses, Alliances and Ventures       1997          273,863         260,000                40,000

Richard J. Dunn                             1999          275,000         380,000                65,000
   Executive Vice President                 1998          227,370         227,370                33,000
                                            1997          214,500         140,000                24,000

Samuel Bergman                              1999          338,000         225,000                27,000
   Executive Vice President                 1998          331,250         210,000                30,000
   and Secretary                            1997          313,281         200,000                28,000

Brian C. Kleinberg (1)                      1999          300,000         250,000               129,000 (2)
   Executive Vice President
   and President of Singer
</TABLE>

------------------
(1)    Became an officer of the Company in January 1999.

(2)    Includes grants of stock options for an aggregate of 104,000 shares of
       Common Stock granted to Mr. Kleinberg upon and shortly after commencement
       of his employment. See "Agreements with Executive Officers."


                                       80
<PAGE>


OPTION/SAR GRANTS DURING 1999.

         The following table provides information regarding stock options/SARs
granted to the named executive officers during 1999:

<TABLE>
<CAPTION>

                                                               Individual Grants
                             --------------------------------------------------------------------------------------
                               Number of       Percent of
                              Securities     Total Options
                              Underlying       Granted to
Name and                        Options       Employees in     Exercise or     Expiration         Grant Date
Principal Position            Granted (1)     Fiscal Year      Base Price         Date          Present Value (2)
------------------            -----------     -----------      ----------      ----------       ----------------
<S>                             <C>                <C>           <C>             <C>               <C>
Daniel Gross                    125,000             8.9          $16.44          12/31/09           $6.47 (3)
   President and Chief
   Executive Officer

Tony M. Ettinger                 95,000             6.8           16.44          12/31/09            6.47 (3)
   President, Credit-Based
   Businesses, Alliances
   and Ventures

Richard J. Dunn                  65,000             4.6           16.44          12/31/09            6.47 (3)
   Executive Vice President

Samuel Bergman                   27,000             1.9           16.44          12/31/09            6.47 (3)
   Executive Vice
   President and Secretary

Brian C. Kleinberg               79,000             5.6           29.38          12/31/08           12.11 (4)
   Executive Vice                25,000             1.8           21.44           2/28/09            9.56 (5)
   President and President       25,000             1.8           16.44          12/31/09            6.47 (3)
   of Singer

</TABLE>
--------------------
(1)    Stock options granted pursuant to the 1997 Long Term Incentive Plan for
       Key Employees, as amended (the "1997 Incentive Plan"). These stock
       options vest, subject to continuation of employment, in 25% increments
       during the consecutive four-year period commencing on the last date of
       the month of grant. The stock options are not transferable except by the
       laws of descent and distribution and, accordingly, may be exercised
       during the life of the optionee only by the optionee or the optionee's
       legal representative and after the optionee's death only by the
       beneficiary previously designated by the optionee.

(2)    The present value is, as to each stock option grant, based upon the
       Black-Scholes option valuation model applied as of the date the grant is
       approved by the Compensation and Nominating Committee of Enhance
       Financial's board of directors. The valuation assumes no specific time of
       exercise since this is viewed by the Company as entirely indeterminate,
       but takes into account the term of the option, ten years in each case.
       The actual value, if


                                       81
<PAGE>


       any, an executive may realize will depend on the excess of the stock
       price over the exercise price on the date the option is exercised, so
       that there is no assurance the value realized will be at or near the
       value estimated by the Black-Scholes model.

(3)    The Black-Scholes option valuation assumes a volatility of 47.98% over a
       12-month daily volatility period, a risk-free rate of return of 6.03%, a
       dividend yield of 1.49% and a discount due to the risk of forfeiture of
       21.7%.

(4)    The Black-Scholes option valuation assumes a volatility of 55.03% over a
       12-month daily volatility period, a risk-free rate of return of 5.34%, a
       dividend yield of 0.87% and a discount due to the risk of forfeiture of
       21.7%.

(5)    The Black-Scholes option valuation assumes a volatility of 49.28% over a
       12-month daily volatility period, a risk-free rate of return of 5.29%, a
       dividend yield of 1.01% and a discount due to the risk of forfeiture of
       21.7%.

AGGREGATED OPTION/SAR EXERCISES DURING 1999
AND FISCAL YEAR-END OPTION VALUES

         The following table provides information as to the named executive
officers regarding stock option exercises and the number and value of stock
options/SARs held by them at December 31, 1999.

<TABLE>
<CAPTION>
                                                             No. of Securities Underlying
                                                                  Unexercised Stock            Value of Unexercised In-the
                                                                  Options/SARs at                 Money Options/SARs at
                                  Shares                         DECEMBER 31, 1999                DECEMBER 31, 1999 (1)
          Name and               Acquired        Value           -----------------                ---------------------
     Principal Position         On Exercise     Realized    Exercisable    Unexercisable      Exercisable     Unexercisable
     ------------------         -----------     --------    -----------    -------------      -----------     -------------
<S>                              <C>               <C>        <C>             <C>             <C>                 <C>
Daniel Gross                          -0-           -0-        932,500         487,500         $4,037,710            $0
  President and Chief
  Executive Officer

Tony M. Ettinger                      -0-           -0-        111,000         175,750            259,905             0
  President, Credit-Based
  Businesses, Alliances and
  Ventures

Richard J. Dunn                        -0-           -0-         48,000         106,000             64,680             0
  Executive Vice President

Samuel Bergman                        -0-           -0-        202,500          70,500          1,019,400             0
  Executive Vice President
  and Secretary

Brian C. Kleinberg                    -0-           -0-         19,750         109,250                  0             0
  Executive Vice President and
  President of Singer

</TABLE>
 -----------------------


                                       82
<PAGE>


(1)    Calculated on the basis of (a) the excess of the closing price of the
       Common Stock as reported by the New York Stock Exchange on December 31,
       1999 over the stock option exercise price multiplied by (b) the number of
       shares of Common Stock underlying the stock option.

PENSION PLAN AND RESTORATION PLAN

         The Company maintains a defined benefit pension plan named the "Enhance
Reinsurance Pension Plan" (the "Pension Plan") which is intended to be a
tax-qualified plan under Section 401(a) of the Internal Revenue Code of 1986, as
amended (the "Code"). All employees of the Company (other than Singer and
Van-American Companies, Inc.) who have attained age 21 and who have completed at
least one year of service are eligible to participate in the Pension Plan. The
Pension Plan provides a normal retirement benefit at normal retirement (the
earlier of the date on which a participant (a) has attained age 65 and completed
five years of participation or (b) has attained age 62 and completed 10 years of
participation) equal to 2.25% of the participant's compensation multiplied by
his or her years of service up to his or her first 15 years, plus 1.75% of the
participant's compensation multiplied by his or her years of service for his or
her next 10 years, plus 1% of the participant's compensation multiplied by his
or her years of service for his or her next five years. Compensation is defined
as the average of the participant's three highest consecutive years of earnings.
(See Note 2 to the table below regarding the maximum compensation considered
"earnings" for the foregoing purposes. No such maximum applies with respect to
the determination of compensation for purposes of the Summary Compensation Table
above.) A participant whose service terminates prior to normal retirement is
eligible for a benefit at the normal retirement date based on the participant's
compensation and years of service at the date of termination multiplied by the
vested percentage. The actuarial equivalent of such vested benefit may be
distributed in a lump sum prior to normal retirement age. The vested percentage
of a participant increases 20% per year beginning after two years of service,
such that his or her vested percentage is 100% after six years. For purposes of
determining a participant's retirement benefit and vested percentage, "years of
service" and "years of participation," while not synonymous, include service
with the Company and certain service with predecessor employers.

         The following table illustrates annual pension benefits payable under
the Pension Plan assuming retirement at normal retirement age at various levels
of compensation and years of service. Such benefits are based on a straight life
annuity and are not subject to any deduction for Social Security or other offset
amounts.


                                       83
<PAGE>


<TABLE>
<CAPTION>

                                                      PENSION PLAN TABLE
         Highest
        Average
        Earnings                                             Years of Service
        --------      ------------------------------------------------------------------------------------------------
                             15                  20                 25                  30                 35*
                      ------------------ ------------------- ------------------ ------------------- ------------------
<S>                        <C>                <C>                <C>                <C>                <C>
        $100,000           $33,750             $42,500             $51,250            $56,250            $56,250
         125,000            42,188              53,125              64,063             70,313             70,313
         150,000            50,625              63,750              76,875             84,375             84,375
         175,000(2)         59,063              74,375              89,688             98,438             98,438
         200,000(2)         67,500              85,000             102,500            112,500            112,500
         225,000(2)         75,938              95,625             115,313            126,563            126,563
         250,000(2)         84,375             106,250             128,125            140,625(1)         140,625(1)
         300,000(2)        101,250             127,500             153,750(1)         168,750(1)         168,750(1)
         400,000(2)        135,000(1)          170,000(1)          205,000(1)         225,000(1)         225,000(1)
         450,000(2)        151,875(1)          191,250(1)          230,625(1)         253,125(1)         253,125(1)
         500,000(2)        168,750(1)          212,500(1)          256,250(1)         281,250(1)         281,250(1)

</TABLE>
------------------------
*   Plan limits service to 30 years for benefit purposes.

(1)    These are hypothetical benefits based upon the Pension Plan's normal
       retirement benefit formula. The maximum annual benefit permitted under
       Section 415 of the Code in 1999 and 2000 is $130,000.

(2)    The benefits shown corresponding to these compensation ranges are
       hypothetical benefits based upon the Pension Plan's normal retirement
       benefit formula. Under Section 401(a)(17) of the Code, a participant's
       compensation in excess of a specified maximum (as such may change from
       time to time in the future, the "Code Maximum") is disregarded for
       purposes of determining highest average earnings. (Such specified maximum
       amount (as adjusted to reflect cost of living increases) was $235,840 for
       the plan year beginning November 1, 1993, decreased to $150,000 for plan
       years beginning November 1, 1994, November 1, 1995 and November 1, 1996
       increased to $160,000 for plan years beginning November 1, 1997, November
       1, 1998 and November 1, 1999, and will increase to $170,000 for plan
       years beginning November 1, 2000.)

         In addition, Enhance Financial adopted, effective July 1, 1999, a
non-qualified restoration pension plan (the "Restoration Plan"). All employees
of the Company eligible to participate in the Pension Plan and who receive total
annual compensation in excess of the Code Maximum and above are eligible to
participate in the Restoration Plan. The Restoration Plan provides a retirement
benefit supplemental to benefits provided by the Pension Plan equal to 1.75% of
the participant's compensation above the Code Maximum multiplied by his or her
years of service up to his or her first 25 years, plus 1.0% of the participant's
compensation above the Code Maximum multiplied by his or her years of service
for his or her next five years. Compensation is defined as the average of the
participant's three highest consecutive years of earnings. The vested percentage
of a participant will be the lower of (a) 20% per year of service beginning
after two years of service such that his or her vested percentage is 100% after
six years, and (b) such other rate per


                                       84
<PAGE>


year as will cause a given participant to be fully vested at age 60. For
purposes of determining a participant's retirement benefit and vested
percentage, "years of service" and "years of participation," while not
synonymous, include service with the Company and certain service with
predecessor employers. Also, for purposes of the Restoration Plan, in
addition to each such executive officer's actual years of service, upon
becoming fully vested under the terms of the Pension Plan, Mr. Ettinger will
be credited with five additional years of service, and each other participant
in the Restoration Plan who is or subsequently becomes an executive officer
of Enhance Financial at the level of Executive Vice President and above will
be credited with additional years of employment services under the
Restoration Plan equal to the excess of five over the actual years of
employment service credited to that officer under the Restoration Plan prior
to its effective date.

         As of December 31, 1999, Messrs. Gross, Ettinger, Dunn, Bergman and
Kleinberg had twelve, four, four, seven, and zero years of service and
participation, respectively, under both the Pension Plan and the Restoration
Plan.

AGREEMENTS WITH EXECUTIVE OFFICERS

         Enhance Financial and Elaine J. Eisenman are parties to an agreement
which entitles Ms. Eisenman to the following in the event of her discharge by
Enhance Financial or a material diminution in her title, authority, management
responsibilities or compensation for any reason other than for "Cause," as
therein defined leading to her resignation as an employee of the Company:

         o        One year's  severance  payment  equal to her then salary
                  plus that year's  target  bonus  (equal to 50% of her then
                  salary);

         o        Continued vesting during the one year's severance payment
                  period of outstanding stock options previously granted to her
                  under Enhance Financial's employee compensation plans; and

         o        Continuation at Enhance Financial's expense during the one
                  year's severance payment period of employee medical and other
                  benefits.

         Enhance Financial and Brian C. Kleinberg, Executive Vice President of
Enhance Financial and President and Chief Executive Officer of Singer are
parties to an agreement which provides for the payment of an annual base salary
of $300,000 per year, plus an annual target bonus of not less than 50% of his
then base salary (or such higher rate consistent with Enhance Financial's senior
executive compensation programs); provided that his bonus for 1999 was required
to equal or exceed $250,000 (to have been prorated should his employment have
been terminated prior to the expiration of twelve months by Enhance Financial
other than for cause or by Mr. Kleinberg for good reason). Also, in connection
with the Management Severance Protection Program described below, for 1999 Mr.
Kleinberg's prior year's annual bonus is to equal the average of the bonuses
awarded to Enhance Financial's Executive Vice Presidents for 1998. Under the
agreement, Mr. Kleinberg was granted options to purchase 85,000 shares of Common
Stock. In addition, in March 1999, Enhance Financial granted Mr. Kleinberg a
stock option under the 1997 Incentive Plan for 25,000 shares in lieu of
establishing at the start of 1999 a cash incentive compensation program for Mr.
Kleinberg based on the performance of the Singer businesses in 1999 and in order
to


                                       85
<PAGE>


compensate Mr. Kleinberg for a portion of the anticipated 1999 income which
he forewent by having departed his prior employment to become an employee of the
Company.

SEVERANCE PLANS

         In 1999, the Company established the Severance Pay Plan, pursuant to
which any employee of the Company whose employment is terminated by the Company
other than for cause or as a result of a sale of a business of the Company where
the acquirer makes a bona fide job offer to the employee is automatically
entitled to cash severance in a lump sum equal to two weeks' salary.

         The Company's Management Severance Protection Program provides for the
payments and benefits to be accorded to officers in the event of the termination
of their employment by the Company under certain circumstances. The program is
designed to attract new, highly qualified officers by establishing a competitive
level of severance, to reduce uncertainty and to retain officers who may
otherwise depart upon a potential change in ownership, to maintain the
objectivity of Enhance Financial's senior officers in the face of potential job
loss in a "change of control" (as defined below) transaction and to minimize the
need for negotiation of individual severance arrangements upon the termination
of an officer's employment with the Company.

         Under the Management Severance Protection Program, an officer of
Enhance Financial with a title of at least Vice President who is terminated by
the Company without cause or who departs with good reason (an "Involuntary
Termination Event") and who executes a severance agreement as requested by the
Company is entitled to cash severance equal, when added to that provided under
the Severance Pay Plan, to a number of months (up to one year) of base salary
plus, in the case of senior officers with a title of at least Senior Vice
President, a prorated bonus based on such officers' prior year's annual bonus,
such number of months of salary and proration of bonus to be based on such
officers' tenure with the Company. In addition, covered officers are entitled to
receive outplacement assistance and remain covered under the Company's welfare
benefit programs for a period of time after such termination.

         Under the program, senior executive officers of Enhance Financial who
undergo an Involuntary Termination Event within a specified time after a change
of control are entitled to cash severance in a lump sum equal to two or three
times (depending on level of seniority) their then annual compensation
(including a bonus component represented by the prior year's bonus). These
senior officers are also entitled to receive a bonus for the year of termination
pro rata through the date of termination and become immediately and fully vested
in the Restoration Plan. In addition, these senior officers are entitled to
receive outplacement assistance, will remain covered under the Company's welfare
benefit and perquisite programs and will be entitled to continue to participate
in the Company's 401(k) program (including the receipt of Company matching
contributions) for a period of time following termination. Furthermore, all
options and other long-term incentives previously granted to employees and
directors of the Company become immediately vested upon a change in control,
without regard to the termination of such employee or director. Enhance
Financial has entered with each officer entitled to benefits under the
Management Severance Protection Program upon a change of control into an
agreement setting forth such benefits in detail.


                                       86
<PAGE>


          As used in the Management Severance Protection Program, a "change of
control" means (a) the acquisition by one person or entity of at least 35% of
Enhance Financial's outstanding voting stock, (b) a change in the majority of
the board of directors of Enhance Financial, (c) the consummation of a merger,
consolidation or reorganization unless more than 65% of the continuing interest
in the surviving entity is retained by Enhance Financial's shareholders
immediately prior to such transaction, (d) a liquidation, dissolution or sale of
all or substantially all of the assets of the Company, or (e) the acquisition by
one person or entity of over 50% of the voting stock or assets of a given
subsidiary, which latter category qualifies as a change in control for purposes
of the program as concerns only an executive officer of the Company holding a
position of at least Senior Vice President and (i) for whom at least 90% of his
or her annual goals are attributable to the operations, results or performance
of that subsidiary or (ii) who is designated as corporate staff of the Company.

OTHER SENIOR EXECUTIVE OFFICER COMPENSATION

         The Company's flexible perquisite allowance program is intended to
encourage senior executive officers of the Company to avail themselves of a
range of business-related benefits for which they are not otherwise eligible for
reimbursement by the Company, including but not limited to, club memberships,
parking at the Company's offices, automobile transportation service to and from
the Company's offices, personal development and individual financial services.
Beginning in 1999, in January of each year, the President of Enhance Financial
is paid $30,000 and each President of a business unit and Executive Vice
President of Enhance Financial is paid $15,000 pursuant to this program on a
non-accountable basis.

         In addition, the Company has arranged and will pay the premium for
supplemental long-term disability insurance for each officer of Enhance
Financial holding a title of Executive Vice President or above, in addition to
the $7,500 maximum monthly benefit available to all employees of the Company, up
to an aggregate $25,000 maximum monthly benefit. The amount of such additional
coverage for each executive officer, which will be paid by the Company, will
vary depending on the premium for such executive officer's coverage as set by
the insurance provider. In addition, this insurance provides benefits for
partial disability and cost of living increases in payments under the policy.

DIRECTORS' COMPENSATION

          FEE COMPENSATION. Directors who are employees of the Company receive
no fees or other compensation for services rendered as members of the board of
directors of Enhance Financial. Mr. Tessler received a basic fee of $105,000 in
1999, and each other director of Enhance Financial who is not employed by the
Company received a basic fee of $16,000. In addition, each such outside director
who also served as chair of any committee of the board received in 1999 an
additional $5,000 for all committees chaired by such director. Each outside
director also received an additional $2,000 for each regular meeting of the
board of directors attended plus $1,250 for each committee meeting attended
which was held on a day other than a day on which the board met. No directors'
fees were payable to corporate shareholders in respect of directorships occupied
by their designees. All directors are reimbursed for travel and related expenses
incurred in attending meetings of the board or committees.


                                       87
<PAGE>


          The Director Stock Ownership Plan allows each outside director to
elect to receive up to 100% of the aforesaid fees in the form of shares of
Common Stock valued at the closing price of the Common Stock on the New York
Stock Exchange on that date. Each outside director is entitled to make a new
election annually for the coming year's fees.

         NON-EMPLOYEE-DIRECTOR STOCK OPTION PLAN. Pursuant to the
Non-Employee-Director Stock Option Plan (as amended, the "Directors' Option
Plan"), on each December 31, each outside director of Enhance Financial or
either Insurance Subsidiary is granted a non-qualified stock option to purchase
7,000 shares of Common Stock at an exercise price equal to the closing price of
the Common Stock on the New York Stock Exchange on that date. There are reserved
for issuance upon the exercise of options under the Directors' Option Plan
800,000 shares of Common Stock (subject to anti-dilutive adjustment), of which
options for 496,666 shares were subject to outstanding options after the option
grants made on December 31, 1999.

         Stock options granted under the Directors' Option Plan become
exercisable as to one half the shares subject thereto on each of the first and
second anniversaries of grant, subject to continuation of service on the board
of directors and other terms of the stock option grants; expire on the tenth
anniversary of the date of grant; are not transferable except by the laws of
descent and distribution; and, accordingly, may be exercised during the life of
the optionee only by the optionee or the optionee's legal representative and
after the optionee's death only by the beneficiary previously designated by the
optionee. The unvested portion of an outstanding stock option lapses upon the
resignation or removal of the optionee from the boards of directors of Enhance
Financial and the Insurance Subsidiaries.

INSIDER PARTICIPATION

         The persons who served as members of the  Compensation  and
Nominating  Committee  during 1998 are Spencer R. Stuart  (Chairman),  David
R. Markin,  Robert P.  Saltzman,  Richard J. Shima and Allan R. Tessler.  The
only person of the  foregoing  who is  currently  or has at any time been an
officer or employee of the  Company is Mr.  Tessler,  who serves as Chairman
of the Board of Enhance Financial.

NON-COMPETITION AGREEMENTS

         Messrs. Tessler, Sellers and Gross are parties to non-competition
agreements with Enhance Financial prohibiting them from, among other things,
competing with the Company for a period of two years following their respective
cessation of employment by or service to the Company.


                                       88
<PAGE>


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

         The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock as of March 17, 2000 by (a) each
shareholder known to Enhance Financial to be the beneficial owner, within the
meaning of Section 13(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), of more than 5% of the outstanding shares of Common Stock; (b)
each director of Enhance Financial; (c) the Chief Executive Officer and each of
the four other most highly compensated executive officers of Enhance Financial;
and (d) all executive officers and directors of Enhance Financial as a group.
Unless otherwise indicated, the address of each such person is c/o Enhance
Financial Services Group Inc., 335 Madison Avenue, New York, New York 10017.

<TABLE>
<CAPTION>

Name and Address                                            Number of Shares (1)             Percent of Class
----------------                                            --------------------             ----------------
<S>                                                          <C>                                 <C>
Swiss Reinsurance Company                                      3,400,000 (2)                        8.9
   Mythenquai 50/60
   8022 Zurich, Switzerland

Morgan Stanley Dean Witter & Co.                               2,597,080 (3)                        6.8
   1585 Broadway
   New York, New York 10036

Legg Mason, Inc.                                               2,213,235 (4)                        5.8
   100 Light Street
   Baltimore, Maryland 21202

Lazard Freres & Co. LLC                                        1,927,930 (5)                        5.1
   30 Rockefeller Plaza
   New York, New York 10020

Allan R. Tessler................................               506,500 (6)(7)                       1.3
Wallace O. Sellers..............................               843,800 (6)(7)                       2.2
Daniel Gross....................................             1,352,500 (6)                          3.5
Samuel Bergman..................................               211,700 (6)                            *
Richard J. Dunn.................................                48,093 (6)                            *
Tony M. Ettinger................................               111,200 (6)                            *
Brian C. Kleinberg..............................                 5,000 (6)                            *
Brenton W. Harries..............................                36,500 (7)                            *
David R. Markin.................................               245,477 (7)(8)                         *
Jay A. Novik....................................                28,000                                *
Robert P. Saltzman..............................               164,500 (7)(9)                         *
Richard J. Shima................................                36,500 (7)                            *
Spencer R. Stuart...............................                37,606 (7)(10)                        *
Frieda K. Wallison..............................                40,772 (7)                            *
Jerry Wind......................................                26,053 (7)                            *
All executive officers and directors as a group              4,018,451 (11)                        10.0
</TABLE>
----------------
* Less than 1%


                                       89
<PAGE>


(1)    The table in this section is based upon information supplied by
       directors, officers, and principal shareholders and Schedules 13D and
       13G, if any, filed with the Securities and Exchange Commission. Unless
       otherwise indicated in the footnotes to the table and subject to the
       community property laws where applicable, each of the shareholders named
       in this table has sole voting and investment power with respect to the
       shares shown as beneficially owned by him or her.

(2)    See "Certain Relationships and Related Transactions" for information
       regarding an agreement between Enhance Financial and Swiss Re regarding
       future sales and purchases by Swiss Re of voting shares of Enhance
       Financial.

(3)    On February 9, 2000, Morgan Stanley Dean Witter & Co. ("MSDW&Co") and its
       wholly-owned subsidiary, Morgan Stanley Dean Witter Investment Management
       Limited ("DWIM"), 25 Cabot Square, Canary Wharf, London E14 4QA, England,
       jointly filed an amendment to their joint Schedule 13G describing their
       respective ownership of shares of Common Stock at December 31, 1999 as
       follows: MSDW&Co has shared voting power over 2,097,780 shares of Common
       Stock and shared dispositive power over 2,597,080 shares of Common Stock,
       and DWIM has shared voting power over 1,784,322 shares of Common Stock
       and shared dispositive power over 2,245,722 shares of Common Stock.
       Accounts managed on a discretionary basis by DWIM, are known to have the
       right to receive or the power to direct the receipt of proceeds for the
       dividends from the sale of such shares of Common Stock. No such account
       holds more than 5% of outstanding shares of the Common Stock.

(4)    On February 16, 1999, Legg Mason, Inc. filed a Schedule 13G (as to which
       no amendment has been received by the Company) describing
       its ownership of shares of Common Stock at December 31, 1998 as follows:
       Legg Mason, Inc. has sole voting and dispositive power over 2,126,500
       shares of Common Stock and shared voting and dispositive power over
       86,735 shares of Common Stock. Such shares of Common Stock are held by
       various identified subsidiaries of Legg Mason, Inc. and by various of
       their clients, all of which have the power to dispose of the shares held
       by them.

(5)    On February 3, 2000, Lazard Freres & Co. LLC ("LF&Co.") filed a Schedule
       13G describing its ownership of shares of Common Stock at December 31,
       1999 as follows: LF&Co. has sole voting power over 1,589,605 and sole
       dispositive power over 1,927,930 shares of Common Stock. Clients of
       LF&Co. have the right to receive dividends and proceeds of sale of the
       Common Stock. To the knowledge of LF&Co., no such person has an interest
       relating to more than 5% of the Common Stock.

(6)    Includes the shares set forth in: (a) Column A below issuable to the
       named director or officer upon the exercise of currently exercisable
       stock options granted under Enhance Financial's employee stock option
       programs, and (b) Column B below owned by the named officer's spouse and
       children or in trusts of which such officer is a trustee (as to which
       shares such officer disclaims beneficial ownership).


                                       90
<PAGE>

<TABLE>
<CAPTION>

                     Name                                           A                  B
                     ----                                           -                  -
              <S>                                            <C>                 <C>
              Allan R. Tessler                                  44,000              4,000
              Wallace O. Sellers                               308,300            517,000
              Daniel Gross                                     932,500            204,000
              Samuel Bergman                                   202,500              9,200
              Richard J. Dunn                                   48,000                -0-
              Tony M. Ettinger                                 111,000                -0-
              Brian C. Kleinberg                                 5,000                -0-
</TABLE>

(7)    Includes shares issuable upon the exercise of the currently exercisable
       portion of options granted to such director under the Directors' Option
       Plan, as follows: Allan R. Tessler -- 18,500 shares; Wallace O. Sellers
       -- 14,500 shares; Brenton W. Harries -- 34,500 shares; David R. Markin --
       34,500 shares; Robert P. Saltzman -- 14,500 shares; Richard J. Shima --
       26,500 shares; Spencer R. Stuart -- 34,500 shares; Frieda K. Wallison --
       34,500 shares; and Jerry Wind -- 14,500 shares.

(8)    Includes 200,000 shares held in a limited partnership in which Mr. Markin
       and his wife are the limited partners and a trust controlled by Mr.
       Markin is the general partner.

(9)    Includes 150,000 shares held in a living trust account of which
       Mr. Saltzman and his wife are co-trustees.

(10)   Mr. Stuart's wife holds a durable power of attorney granting her joint
       voting and dispositive power over the shares owned by Mr. Stuart.

(11)   Includes 226,500 shares issuable to the directors of Enhance Financial
       who are not employees of the Company (as of the date of grant) upon the
       exercise of the currently exercisable portion of stock options granted to
       them under the Directors' Option Plan; 1,858,800 shares issuable to the
       executive officers upon the exercise of currently exercisable options
       granted to them under the 1987 Long Term Incentive Plan for Key
       Employees, as amended, and the 1997 Incentive Plan; and 734,200 shares
       owned by spouses of executive officers in trusts of which such officers
       are trustees or by executive officers or their spouses as custodians for
       their children. Such persons disclaim beneficial ownership of such shares
       owned by their spouses, individually or as custodians, or by such trusts.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         Enhance Financial and Swiss Re are parties to an agreement pursuant to
which Swiss Re has agreed that, subject to certain exceptions, neither Swiss Re
nor any of its affiliates will until the year 2006 (a) acquire, alone or as part
of a group, any voting securities of Enhance Financial (or securities
convertible into such voting securities) which would result in Swiss Re
(together with its affiliates) or such group owning beneficially more than 15%
of Enhance Financial voting securities outstanding or (b) dispose of Enhance
Financial voting securities to any person or group which disposition would give
such person or group beneficial ownership of or the right to acquire more than
15% of Enhance Financial voting securities outstanding.


                                       91
<PAGE>


         Pursuant to a registration rights agreement, dated October 31, 1986, as
amended, between Swiss Re and Enhance Financial, Swiss Re has one demand and
unlimited piggyback registration rights, subject to certain limitations.
Substantially all the expenses of any future demand or piggyback registration
are to be borne by Enhance Financial. The registration rights agreement contains
cross-indemnification covenants by Enhance Financial, on the one hand, and Swiss
Re, on the other hand, for damages sustained and expenses incurred resulting
from material misstatements or omissions in connection with any such offering.

         Since January 2000, Enhance Financial and Swiss Re have each owned 45%
equity interests in SBF Participacoes Ltda ("SBF"), a Brazilian insurance
holding company which is the parent holding company of UBF Garantias & Seguros
SA, one of Brazil's largest credit insurance and surety insurance companies
("UBF"). UBF owns a majority interest in Seguradora Brasileira de Fiancas SA, an
entity in which Enhance Financial and Swiss Re each owned a 25% equity interest
since November 1997, for which they purchased for respective initial investments
of $3.3 million. See Item 1. "Business - Description of Business - Asset-Based
Businesses - Other Businesses."


                                       92
<PAGE>


                                     PART IV

ITEM 14. - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

(a)      The following documents are filed as a part of this report:

         (1)  Financial Statements - See Part II, Item 8.

         (2)  Financial Statement Schedules:

                  I.       Credit-Based Asset Servicing and Securitization
                           LLC and Affiliates, Combined Financial Statements
                           for the Years Ended December 31, 1999, 1998 and
                           1997, and  Independent  Auditors' Report

                  All other schedules are omitted, as the required information
                  is nonapplicable or the information is presented in the
                  financial statements or related notes or in Financial
                  Statement Schedule I above.

         (3) Exhibits:

         3.1      Restated certificate of incorporation of the registrant filed
                  with the State of New York on July 7, 1999. (Incorporated by
                  reference to Exhibit 3.1. to the Quarterly Report on Form 10-Q
                  for the quarterly period ended June 30, 1999 of the registrant
                  (the "1999(Q2) Form 10-Q").)

         3.2      By-laws of the registrant, as amended through December 3,
                  1991. (Incorporated by reference to Exhibit 3.2 to Amendment
                  No. 1 filed with the Securities and Exchange Commission (the
                  "Commission") on January 21, 1992 ("Amendment No. 1") to the
                  registrant's Registration Statement on Form S-1 (File No.
                  33-44322) filed with the Commission on December 11, 1991 (the
                  "1991 Registration Statement").)

         4.1      Specimen certificate evidencing shares of Common Stock.
                  (Incorporated by reference to Exhibit 4.1 to Amendment No. 4
                  to the 1991 Registration Statement, filed with the Commission
                  on February 12, 1992 ("Amendment No. 4").)

         4.2.1    Credit Agreement dated as of June 30, 1998 (the "Credit
                  Agreement"), among the registrant; Fleet National Bank, as
                  lender, Administrative Agent and Administrator; and The Bank
                  of Tokyo-Mitsubishi, Ltd., New York Branch; The First National
                  Bank of Chicago; and Deutsche Bank AG, New York and/or Cayman
                  Island Branches, as lenders. (Incorporated by reference to
                  Exhibit 4.2 to the Quarterly Report on Form 10-Q for the
                  quarterly period ended June 30, 1998 of the registrant (the
                  "1998(Q2) Form 10-Q").)

         4.2.2    Amendment No.1 and Waiver Agreement, dated as of December 31,
                  1998, to the Credit Agreement. (Incorporated by reference to
                  Exhibit 4.2.2 to the Annual Report on Form 10-K for the year
                  ended December 31, 1998 of the registrant, as amended (the
                  "1998 10-K").)


                                       93
<PAGE>


         4.2.3    Amendment No. 2, dated as of February 15, 1999, to the Credit
                  Agreement. (Incorporated by reference to Exhibit 4.2.3 to the
                  1998 10-K.)

         4.2.4    Third Amendment to the Credit Agreement (Amending and
                  Restating Credit Agreement), dated as of June 29, 1999, among
                  the registrant, Fleet National Bank as lender, swingline bank
                  and as agent for the Banks, and The Bank of New York, The
                  First National Bank of Chicago, and Deutsche Bank AG, New York
                  and/or Cayman Island Branches, as lenders. (Incorporated by
                  reference to Exhibit 4.2.2 to the 1999(Q2) Form 10-Q")

         4.2.5    Fourth Amendment to the Credit Agreement, dated as of
                  September 29, 1999, among the registrant, Fleet National Bank
                  as lender, swingline bank and as agent for the Banks, and The
                  Bank of New York, Bank One, NA (Main Office Chicago) (formerly
                  known as The First National Bank of Chicago), and Deutsche
                  Bank AG, New York and/or Cayman Island Branches, as lenders.
                  (Incorporated by reference to Exhibit 4.2.5 to the Quarterly
                  Report on Form 10-Q for the quarterly period ended September
                  30, 1999 of the registrant.)

         4.3.1    Form of Indenture dated as of February ____, 1993 (the
                  "Indenture") between the registrant and Chase, as Trustee.
                  (Incorporated by reference to Exhibit 4.1 to Amendment No. 2
                  filed with the Commission on February 10, 1993 ("Amendment No.
                  2") to the Registration Statement on Form S-1 (File No.
                  33-55958) filed with the Commission on December 18, 1992 (the
                  "1992 Registration Statement").

         4.3.2    Form of Enhance Financial  Services Group Inc. ____%
                  Debentures due 2003. (Incorporated by reference to
                  Exhibit 4.3.3 to Amendment No. 2 to the 1992 Registration
                  Statement.)

         10.1.1   Non-competition agreement dated as of March 5, 1986 between
                  the registrant and Allan R. Tessler. (Incorporated by
                  reference to Exhibit 10.2.1 to the 1991 Registration
                  Statement.)

         10.1.2   Non-competition agreement dated as of March 5, 1986 between
                  the registrant and Wallace O. Sellers. (Incorporated by
                  reference to Exhibit 10.2.2 to the 1991 Registration
                  Statement.)

         10.1.3   Non-competition agreement dated as of March 5, 1986 between
                  the registrant and Daniel J. Gross. (Incorporated by reference
                  to Exhibit 10.2.3 to the 1991 Registration Statement.)

         10.2.1   1987 Long Term Incentive Plan for Key Employees, as amended
                  (the "1987 Incentive Plan"). (Incorporated by reference to
                  Exhibit 10.2.2 to the Annual Report on Form 10-K for the year
                  ended December 31, 1996 of the registrant (the "1996 Form
                  10-K").)


                                       94
<PAGE>


         10.2.2   1997 Long Term Incentive Plan for Key Employees (the "1997
                  Incentive Plan"), as amended and restated as of June 3, 1999.
                  (Incorporated by reference to Exhibit 10.2.2 to the 1999(Q2)
                  Form 10-Q.)

         10.2.3   Form of option grant certificate under the 1997 Incentive
                  Plan for options granted in December 1999.

         10.3.1   Non-Employee-Director Stock Option Plan, as amended (the
                  "Directors' Option Plan"). (Incorporated by reference to Annex
                  A to the definitive proxy statement of the registrant on Form
                  14A, as filed with the Securities and Exchange Commission on
                  May 4, 1998.)

         10.3.2   Form of option grant certificate under the Directors' Option
                  Plan for options granted in 1999.

         10.3.3   Director Stock Ownership Plan, as amended. (Incorporated by
                  reference to Exhibit 10.3.3 to the 1998 10-K.)

         10.4     Enhance Reinsurance Company Supplemental Pension Plan

         10.5     Initial Purchasers' Registration Rights Agreement dated as of
                  March 5, 1986 among the registrant and certain of its
                  employees. (Incorporated by reference to Exhibit 10.7 to the
                  1991 Registration Statement.)

         10.6.1   Subscribers' Registration Rights Agreement dated as of October
                  31, 1986 among the registrant and certain of its shareholders
                  (the "Registration Rights Agreement"). (Incorporated by
                  reference to Exhibit 10.8.1 to Amendment No. 1 to the 1991
                  Registration Statement.)

         10.6.2   Amendment No. 1 dated as of April 1, 1987 to the Registration
                  Rights Agreement. (Incorporated by reference to Exhibit 10.8.2
                  to the 1991 Registration Statement.)

         10.6.3   Amendment No. 2 dated as of May 10, 1988 to the Registration
                  Rights Agreement. (Incorporated by reference to Exhibit 10.8.3
                  to the 1991 Registration Statement.)

         10.6.4   Combined Amendments to Registration Rights Agreements dated as
                  of June 29, 1990 (including Amendment No. 3 to the
                  Registration Rights Agreement). (Incorporated by reference to
                  Exhibit 10.8.4 to the 1991 Registration Statement.)

         10.6.5   Amendment No. 4 dated as of December 19, 1991 to the
                  Registration Rights Agreement. (Incorporated by reference
                  to Exhibit 10.8.5 to Amendment No. 1 to the 1991 Registration
                  Statement.)

         10.6.6   Amendment No. 6 dated February 23, 1996 to the Registration
                  Rights Agreement. (Incorporated by reference to Exhibit 10.4
                  to the Registration Statement on Form S-3 (File No. 333-2064)
                  filed with the Commission on March 8, 1996 (the "1996
                  Registration Statement").).


                                       95
<PAGE>


         10.7.1   Agreement dated December 11, 1997 between the registrant
                  and Elaine J. Eisenman. (Incorporated by reference to
                  Exhibit 10.7 to the 1997 10-K)

         10.7.2   Agreement dated January 4, 1999 between the registrant and
                  Brian C. Kleinberg. (Incorporated by reference to Exhibit 10.7
                  to the 1998 10-K.)

         10.8.1   Form of Change-in-Control Protection Agreement by and between
                  the registrant and each Executive Vice President or more
                  senior executive officer of the registrant.

         10.8.2   Form of Change-in-Control Protection Agreement by and between
                  the registrant and each Senior Vice President of the
                  registrant.

         10.9     Stock purchase agreement dated February 9, 1996 among the
                  registrant, The Manufacturers Life Insurance Company, Manulife
                  (International) Limited and Swiss Reinsurance Company.
                  (Incorporated by reference to Exhibit 10.1 to the 1996
                  Registration Statement.)

         21.      Subsidiaries of the registrant.

         23.1     Consent of Deloitte & Touche LLP.

         24       Power of Attorney. (Included on signature page)

         27       Financial Data Schedule.

(b) Reports on Form 8-K.

         The Company did not file any reports on Form 8-K during the fourth
quarter of 1999.


                                       96
<PAGE>


                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) 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, on March 29, 2000.

                                      ENHANCE FINANCIAL SERVICES GROUP INC.

                                      By: /s/ DANIEL GROSS
                                          ---------------------------------
                                          Daniel Gross
                                          President and Chief Executive Officer

                                POWER OF ATTORNEY

         KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Daniel Gross and Samuel Bergman, and each
of them individually, as his or her true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him and his
name, place and stead in any and all capacities, to sign any or all amendments
to this report, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he or she might
or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or their substitutes, may lawfully do or cause to
be done by virtue hereof.

         Pursuant to the requirement of the Securities Exchange Act of 1934,
this report has been signed below on March 29, 2000 by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.



                                          /s/ DANIEL GROSS
                                          ---------------------------------
                                          Daniel Gross
                                          President and Chief Executive
                                           Officer and a director (principal
                                           executive officer)

                                          /s/ RICHARD P. LUTENSKI
                                          ---------------------------------
                                          Richard P. Lutenski
                                          Executive Vice President
                                           (principal financial officer
                                           and principal accounting
                                           officer)


                                       97
<PAGE>


                                          /s/ BRENTON W. HARRIES
                                          ---------------------------------
                                          Brenton W. Harries
                                          Director


                                          /s/ DAVID R. MARKIN
                                          ---------------------------------
                                          David R. Markin
                                          Director


                                          /s/ JAY A. NOVIK
                                          ---------------------------------
                                          Jay A. Novik
                                          Director


                                          /s/ WALLACE O. SELLERS
                                          ---------------------------------
                                          Wallace O. Sellers
                                          Director


                                          /s/ RICHARD J. SHIMA
                                          ---------------------------------
                                          Richard J. Shima
                                          Director


                                          /s/ ROBERT P. SALTZMAN
                                          ---------------------------------
                                          Robert P. Saltzman
                                          Director


                                          /s/ SPENCER R. STUART
                                          ---------------------------------
                                          Spencer R. Stuart
                                          Director


                                          /s/ALLAN R. TESSLER
                                          ---------------------------------
                                          Allan R. Tessler
                                          Director


                                          /s/ FRIEDA K. WALLISON
                                          ---------------------------------
                                          Frieda K. Wallison
                                          Director


                                          /s/ JERRY WIND
                                          ---------------------------------
                                          Jerry Wind
                                          Director


                                       98
<PAGE>

                                                                      SCHEDULE I



                            | --------------------------------------------------
                            | CREDIT-BASED ASSET
                            | SERVICING AND SECURITIZATION
                            | LLC AND AFFILIATES
                            |
                            | COMBINED FINANCIAL STATEMENTS FOR THE
                            | YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997,
                            | AND INDEPENDENT AUDITORS' REPORT




<PAGE>

CREDIT-BASED ASSET SERVICING AND SECURITIZATION LLC
AND AFFILIATES

TABLE OF CONTENTS
--------------------------------------------------------------------------------

                                                                           Page

INDEPENDENT AUDITORS' REPORT                                                 1

FINANCIAL STATEMENTS FOR THE YEARS ENDED
  DECEMBER 31, 1999, 1998 AND 1997:

  Combined Balance Sheets                                                    2

  Combined Statements of Operations                                          3

  Combined Statements of Owners' Equity                                      4

  Combined Statements of Cash Flows                                          5

  Notes to Combined Financial Statements                                    6-18

COMBINED SCHEDULE OF MORTGAGE-RELATED ASSETS                                 19


<PAGE>

INDEPENDENT AUDITORS' REPORT

To the Owners of
Credit-Based Asset Servicing and Securitization LLC and Affiliates

We have audited the accompanying combined balance sheets as of December 31, 1999
and 1998, including the combined schedule of mortgage-related assets as of
December 31, 1999, of Credit-Based Asset Servicing and Securitization LLC and
Affiliates (the "Company") and the related combined statements of operations,
owners' equity and cash flows for each of the three years in the period ended
December 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such combined financial statements present fairly, in all
material respects, the combined financial position of Credit-Based Asset
Servicing and Securitization LLC and Affiliates as of December 31, 1999 and
1998, and the combined results of their operations and their cash flows for each
of the three years in the period ended December 31, 1999 in conformity with
generally accepted accounting principles.

As explained in Note 1, at December 31, 1999 and 1998, the combined financial
statements include investments in mortgage-related assets valued at
approximately $773 million and $550 million, respectively (83% and 88% of
assets, respectively), whose values have been estimated by the Company's
management in the absence of readily ascertainable market values. We have
reviewed the procedures used by the Company's management in arriving at its
estimate of value of such investments and have inspected the underlying
documentation, and, in the circumstances, we believe the procedures are
reasonable and the documentation appropriate. However, those estimated values
may differ significantly from the values that would have been used had a ready
market for the mortgage-related assets existed, and the difference could be
material.


Deloitte & Touche LLP

January 6, 2000

New York, New York

<PAGE>

CREDIT-BASED ASSET SERVICING AND SECURITIZATION LLC
AND AFFILIATES

COMBINED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>

ASSETS                                                               1999              1998

<S>                                                              <C>               <C>
CASH AND CASH EQUIVALENTS                                        $  6,392,918      $  4,115,708

MORTGAGE-RELATED ASSETS                                           772,979,564       550,125,141

RECEIVABLE FROM BROKERS                                            59,635,548              --

LEASEHOLD IMPROVEMENTS, FURNITURE AND
  EQUIPMENT - Net                                                   9,718,224         5,857,488

SERVICING RIGHTS, GOODWILL AND OTHER
  INTANGIBLES - Net                                                38,356,757        32,078,103

SERVICING ADVANCES RECEIVABLE                                      20,920,484        12,531,238

ACCOUNTS RECEIVABLE AND OTHER ASSETS                               26,548,507        18,822,227
                                                                 ------------      ------------
TOTAL ASSETS                                                     $934,552,002      $623,529,905
                                                                 ============      ============


LIABILITIES AND OWNERS' EQUITY

LIABILITIES:
  Funding arrangements, including accrued interest               $340,563,022      $159,552,484
  Reverse repurchase agreements, including accrued interest       276,636,521       201,244,830
  Subordinated debt, including accrued interest                    52,850,625              --
  Guaranteed term agreement, including accrued interest                  --          50,300,000
  Payable for open trades                                          62,239,826        50,275,185
  Due to affiliates                                                 2,029,024           334,675
  Accrued expenses and other liabilities                           10,433,819         6,656,016
                                                                 ------------      ------------

          Total liabilities                                       744,752,837       468,363,190

COMMITMENTS AND CONTINGENCIES

OWNERS' EQUITY                                                    189,799,165       155,166,715
                                                                 ------------      ------------

TOTAL LIABILITIES AND OWNERS' EQUITY                             $934,552,002      $623,529,905
                                                                 ============      ============
</TABLE>

See notes to combined financial statements.


                                      -2-
<PAGE>

CREDIT-BASED ASSET SERVICING AND SECURITIZATION LLC
AND AFFILIATES

COMBINED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>

                                                              1999                           1998                            1997
<S>                                                      <C>                            <C>                            <C>
REVENUES:
  Gain on liquidation or securitization
    of mortgage-related assets                           $  56,382,412                  $  30,047,452                  $  22,780,440
  Unrealized (loss) gain on mortgage-
    related assets                                          (2,217,513)                     5,000,000                           --
  Servicing and subservicing fees                           28,770,067                     18,856,183                      4,723,886
  Interest income                         $ 67,280,609                   $ 33,713,981                   $ 10,288,524
  Interest expense                         (41,231,054)     26,049,555    (19,201,007)     14,512,974     (6,985,627)      3,302,897
                                          ------------                   ------------                   ------------
  Other income, net                                          5,080,029                      1,264,247                      5,373,345
                                                         -------------                  -------------                  -------------

          Total revenues                                   114,064,550                     69,680,856                     36,180,568
                                                         -------------                  -------------                  -------------

EXPENSES:
  Compensation and benefits                                 38,385,922                     21,982,160                     13,053,808
  Servicing costs                                            3,746,535                      2,752,443                      1,137,944
  Transaction costs                                          6,170,696                      3,358,550                      1,646,143
  Amortization of servicing rights,
    goodwill and other intangibles                           6,527,316                      3,952,975                      1,367,400
  Other expenses                                            18,915,336                     12,129,569                      3,770,881
                                                         -------------                  -------------                  -------------

          Total expenses                                    73,745,805                     44,175,697                     20,976,176
                                                         -------------                  -------------                  -------------

INCOME BEFORE TAXES                                         40,318,745                     25,505,159                     15,204,392

INCOME TAX BENEFIT                                             104,465                        478,571                           --
                                                         -------------                  -------------                  -------------

NET INCOME                                               $  40,423,210                  $  25,983,730                  $  15,204,392
                                                         =============                  =============                  =============
</TABLE>


See notes to combined financial statements.

                                      -3-

<PAGE>

CREDIT-BASED ASSET SERVICING AND SECURITIZATION LLC
AND AFFILIATES

COMBINED STATEMENTS OF OWNERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                            C-BASS
                                   ENHANCE              MGIC                HOLDING             TOTAL
                                -------------       -------------       -------------       -------------
<S>                             <C>                 <C>                 <C>                 <C>
BALANCE, JANUARY 1, 1997        $  18,797,361       $  15,823,337       $     497,820       $  35,118,518

  Contributions                     7,349,982           7,349,982              10,036          14,710,000

  Distribution                           --                  --              (535,825)           (535,825)

  Net income                        7,352,844           7,352,844             498,704          15,204,392
                                -------------       -------------       -------------       -------------

BALANCE, DECEMBER 31, 1997         33,500,187          30,526,163             470,735          64,497,085

  Contributions                    32,500,000          33,425,628             812,768          66,738,396

  Distribution                     (2,048,396)               --                (4,100)         (2,052,496)

  Net income                       12,455,734          12,455,734           1,072,262          25,983,730
                                -------------       -------------       -------------       -------------

BALANCE, DECEMBER 31, 1998         76,407,525          76,407,525           2,351,665         155,166,715

  Distribution                     (2,500,000)         (2,500,000)           (790,760)         (5,790,760)

  Net income                       19,377,128          19,377,128           1,668,954          40,423,210
                                -------------       -------------       -------------       -------------

BALANCE, DECEMBER 31, 1999      $  93,284,653       $  93,284,653       $   3,229,859       $ 189,799,165
                                =============       =============       =============       =============
</TABLE>


See notes to combined financial statements.

                                      -4-
<PAGE>

CREDIT-BASED ASSET SERVICING AND SECURITIZATION LLC
AND AFFILIATES

COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                 1999                1998                1997
<S>                                                         <C>                 <C>                 <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income                                                $  40,423,210       $  25,983,730       $  15,204,392
  Adjustments to reconcile net income to net cash used
    in operating activities:
    Unrealized loss (gain) on mortgage-related assets           2,217,513          (5,000,000)               --
    REMIC tax residual fee income                                    --                  --            (5,103,225)
    Depreciation and amortization                               9,333,189           5,543,864           2,041,901
    Deferred income taxes                                          (2,130)           (461,314)               --
    Equity in earnings of unconsolidated subsidiaries            (159,322)           (353,953)               --
    Changes in operating assets and liabilities:
      Increase in mortgage-related assets                    (225,071,936)       (348,000,842)       (106,374,849)
      (Increase) decrease in receivable from brokers          (59,635,548)         15,589,073         (13,514,815)
      Increase in servicing rights                            (11,911,900)         (9,333,988)           (295,550)
      Increase in accounts receivable and other assets        (16,203,350)        (17,294,505)         (8,620,733)
      Increase in payable for open trades                      11,964,641          27,440,335           8,660,581
      Increase (decrease) in due to affiliates                  1,694,349            (136,615)            (59,794)
      Increase (decrease) in accrued expenses and
        other liabilities                                       7,651,154          (2,179,771)          6,184,354
                                                            -------------       -------------       -------------
          Net cash used in operating activities              (239,700,130)       (308,203,986)       (101,877,738)
                                                            -------------       -------------       -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Investment in WSAT                                                 --           (17,317,638)               --
  Purchases of leasehold improvements, furniture
    and equipment                                              (6,666,609)         (4,664,828)         (1,536,562)
  Purchase of intangible assets                                  (894,070)         (1,173,450)               --
  Distributions from unconsolidated subsidiaries                  247,146             684,803                --
                                                            -------------       -------------       -------------
          Net cash used in investing activities                (7,313,533)        (22,471,113)         (1,536,562)
                                                            -------------       -------------       -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Net borrowings under reverse repurchase agreements
    and other funding facilities                              255,081,633         233,791,374          68,303,232
  (Repayments) borrowings under guaranteed term
    agreement                                                 (50,000,000)         30,000,000          20,000,000
  Issuance of subordinated debt                                50,000,000                --                  --
  Capital contributions from members                                 --            66,738,396          14,710,000
  Distributions to members                                     (5,790,760)         (2,052,496)           (535,825)
                                                            -------------       -------------       -------------
          Net cash provided by financing activities           249,290,873         328,477,274         102,477,407
                                                            -------------       -------------       -------------
NET INCREASE (DECREASE) IN CASH AND
  CASH EQUIVALENTS                                              2,277,210          (2,197,825)           (936,893)

CASH AND CASH EQUIVALENTS, BEGINNING
  OF YEAR                                                       4,115,708           6,313,533           7,250,426
                                                            -------------       -------------       -------------
CASH AND CASH EQUIVALENTS, END OF YEAR                      $   6,392,918       $   4,115,708       $   6,313,533
                                                            =============       =============       =============

SUPPLEMENTAL DISCLOSURES OF CASH FLOW
   INFORMATION:
   Interest and other financing costs                       $  37,359,833       $  18,231,531       $   6,190,477
                                                            =============       =============       =============
   Cash paid during the year for income taxes               $      37,292       $      57,217       $      39,998
                                                            =============       =============       =============
</TABLE>

See notes to combined financial statements.

                                      -5-
<PAGE>

CREDIT-BASED ASSET SERVICING AND SECURITIZATION LLC
AND AFFILIATES

NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
--------------------------------------------------------------------------------


1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    ORGANIZATION AND BASIS OF PRESENTATION - The accompanying financial
    statements present the financial position, results of operations and cash
    flows of Credit-Based Asset Servicing and Securitization LLC and its
    subsidiaries ("C-BASS") and of Litton Loan Servicing LP and its subsidiaries
    ("Litton") on a combined basis. All significant intercompany balances and
    transactions have been eliminated. C-BASS and Litton combined are
    hereinafter referred to as the "Company."

    Prior to January 2000, both C-BASS and Litton were owned by Enhance
    Financial Services Group, Inc. ("EFS") and a subsidiary of MGIC Investment
    Corporation ("MGIC"), each owning approximately 48%, with the remainder
    owned by C-BASS Holding LLC ("Holding") (collectively, the "Owners").
    Holding is owned by certain members of C-BASS and Litton management.
    Effective January 1, 2000, the Owners contributed their interests in Litton
    and its general partner, Litton GP LLC, to C-BASS and Litton became an
    indirect, wholly-owned subsidiary of C-BASS. Also, effective January 1,
    2000, each of MGIC and EFS sold 2% of its interest in the Company to certain
    members of senior management of C-BASS, which interests were contributed to
    Holding in exchange for additional interests in Holding. As a result,
    Holding's interest in C-BASS increased from approximately 4% to
    approximately 8%. Profits and losses are allocated to the Owners in
    accordance with their ownership percentages.

    C-BASS is a Delaware limited liability company that commenced operations on
    July 9, 1996. In connection with the formation of C-BASS, the Owners entered
    into a Transaction Agreement whereby Litton Loan Servicing, Inc. ("LLSI") (a
    wholly-owned subsidiary of EFS) would be transferred into a separate entity
    owned by the Owners in the same proportion as they owned C-BASS. To effect
    this transfer of ownership, a new entity, Litton, a Delaware limited
    partnership, was funded and capitalized by the Owners at approximately $1.0
    million.

    Pursuant to the Transaction Agreement, during 1998, EFS contributed the
    assets and liabilities of LLSI to Litton for approximately $2.9 million. At
    the time of this transaction, MGIC and Holding contributed capital to Litton
    of approximately $925,000 and $112,000, respectively, and EFS was
    distributed approximately $2.0 million in cash. Because of common ownership
    and a continuity of operations and management, the accompanying financial
    statements include the operations of LLSI prior to its transfer to Litton as
    described above.

    The Company engages in the acquisition and resolution of delinquent
    single-family residential mortgage loans ("Mortgage Loans"). The Company
    also purchases and sells seller-financed notes ("Notes") and real estate
    owned ("REO"), invests in mortgage-backed securities ("Mortgage Securities")
    and interests in real estate mortgage investment conduit ("REMIC")
    residuals, and performs mortgage loan servicing and mortgage and contract
    collections. In addition, the Company issues mortgage-backed securities
    collateralized by Mortgage Loans, Mortgage Securities and/or Notes. The
    Company maintains several subsidiaries to perform certain activities and to
    hold specific assets.

                                      -6-
<PAGE>

    USE OF ESTIMATES - The preparation of financial statements in conformity
    with generally accepted accounting principles ("GAAP") requires management
    to make estimates and assumptions that affect the reported amounts of assets
    and liabilities and disclosures of contingent assets and liabilities at the
    date of the combined financial statements and the reported amount of
    revenues and expenses during the reporting period. Actual results could
    differ from those estimates. Significant estimates in the combined financial
    statements include the valuation of mortgage-related assets, goodwill,
    servicing rights and solicitation rights and the amortization thereof.

    MORTGAGE-RELATED ASSETS - C-BASS considers itself a nonregistered investment
    company for financial reporting purposes. GAAP for investment companies
    requires that the Mortgage Loans, Mortgage Securities, Notes and REO
    (collectively, "Mortgage-Related Assets") owned by C-BASS be carried at
    their estimated fair values, with the resulting net unrealized gains and
    losses reflected in earnings. Litton does not own significant
    Mortgage-Related Assets. Mortgage-Related Assets are generally recorded as
    of the date of purchase or sale (trade date), unless the Company anticipates
    an extended period between the trade date and the settlement date, in which
    case the settlement date is used.

    In January 2000, Litton became an indirect subsidiary of C-BASS, and C-BASS
    therefore no longer met the requirement to be considered a nonregistered
    investment company for financial reporting purposes. Beginning in 2000,
    Mortgage Securities will be classified as trading securities, with
    unrealized gains and losses reflected in earnings. Mortgage Loans and Notes
    will be carried at the lower of cost or fair value, and REO will be carried
    at cost, subject to an impairment test. Implementation of this change in
    accounting will not have a significant impact on the Company's financial
    position or results of operations.

    a.  Mortgage Securities - Securities listed or traded on any United States
        national exchange are valued at the last sales price of the close of the
        principal securities exchange on which such securities are traded or, if
        there are no sales, at the mean of the last bid and asked prices.

        Many of the Mortgage Securities purchased by the Company or retained in
        the Company's securitizations consist of below-investment grade and
        nonrated subordinated interests ("B-Pieces"). The timing and amount of
        cash flows on these securities are significantly influenced by
        prepayments on the underlying loans and foreclosure losses. There is
        generally not an active public market for such securities, and market
        quotations are not readily available. The fair value of these securities
        is estimated by management by discounting future cash flows using
        discount rates and credit loss and prepayment estimates that approximate
        current market rates, and by comparison to values used by institutions
        providing financing to the Company on such securities. Given the complex
        nature of these securities and the market for them, the values estimated
        by management do not necessarily represent the amounts that would be
        received by the Company if it sold all or a portion of its portfolio.

                                      -7-
<PAGE>

        The following table sets forth the geographic distribution of the
        mortgage loans underlying the Company's Mortgage Securities as of
        December 31, 1999:

                                           PERCENTAGE OF
                STATE                    PRINCIPAL BALANCE

               California                       42%
               New York                          4
               Texas                             4
               Florida                           4
               All Other(1)                     46
                                              ----
                                               100%
                                              ====

        (1)No other state contains more than 5% of the properties securing loans
        in the Company's Mortgage Securities portfolio.

        As of December 31, 1999, the Company used discount rates for
        below-investment grade and nonrated B-Pieces of 11.5% to 20% and 20% to
        30%, respectively; annual prepayment estimates of 10% to 35% CPR for
        prime loans, 10% to 18% for FHA/VA loans, and 7.5% to 80% for sub-prime
        loans, and lifetime credit loss estimates of 0.15% to 15% of the
        original principal balances for prime loans, 0.1% to 1.5% for FHA/VA
        loans, and 2.5% to 6.0% for sub-prime loans.

    b.  MORTGAGE LOANS AND NOTES - Mortgage Loans and Notes purchased by C-BASS
        are carried at estimated fair value. Fair value is generally determined
        based upon price quotations, broker price opinions regarding the value
        of the underlying collateral, and the Company's valuation model that
        considers the yields, maturities and characteristics of such assets and
        third-party indications of value under borrowing arrangements. The
        acquisition cost for a pool of loans is allocated to each loan in the
        pool based upon the Company's valuation model. Interest is accrued on
        mortgage loans that are less than 90 days in arrears or are
        reperforming. The Company also accrues interest on loans guaranteed by
        the Federal government, up to the amount that the Company estimates is
        guaranteed by the Federal government. In situations where the collateral
        is foreclosed on, the loans are transferred to REO upon receipt of title
        to the property.

    c.  REAL ESTATE OWNED - Properties acquired directly are initially recorded
        at cost. Properties acquired through foreclosure are recorded at
        estimated fair value, less projected costs of disposal. Management
        periodically reviews each REO property's carrying value and adjusts it
        to fair value if changes in local real estate markets or the property's
        condition or situation warrant. Fair value is determined primarily on
        the basis of collateral value estimates obtained from real estate
        specialists. Sales proceeds and related costs are recognized when title
        has passed to the buyer.

    Interest income is recorded as earned, with purchase discounts or premiums
    amortized into income using the effective yield method. The gain on sale of
    mortgage-backed securities issued by the Company through securitization
    transactions is computed based on the price of the securities sold and the
    estimated fair value of any securities retained in accordance with Statement
    of Financial Accounting Standards ("SFAS") No. 125, ACCOUNTING FOR TRANSFERS
    AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENT OF LIABILITIES.

                                      -8-
<PAGE>

    Mortgage Loans, Notes, and Mortgage Securities are primarily collateralized
    by residential single-family properties. These assets expose the Company to
    the risk that the borrowers may be unable to repay principal of and interest
    on the amount borrowed. At the time of purchase of Mortgage Loans and
    Mortgage Securities, the Company evaluates the performance of the underlying
    collateral and, where appropriate, the ability and willingness of the
    borrower to repay principal of and interest on the amount of the loan
    outstanding.

    CASH AND CASH EQUIVALENTS - Cash and cash equivalents include cash held by
    depository institutions and short-term investments with remaining maturities
    at acquisition of less than three months.

    INTEREST RATE SWAPS - During 1999, the Company utilized interest rate swaps
    in a strategy intended to reduce the impact of changes in interest rates on
    the value of a portion of its Mortgage-Related Assets. At December 31, 1999,
    the Company had outstanding an aggregate notional amount of $510.0 million.
    During 1999, the Company had outstanding an average of $265.4 million. With
    respect to all such transactions, the notional amount represents the stated
    principal balance used as a basis for calculating payments. On the swaps
    outstanding at December 31, 1999, the Company receives a floating rate
    ranging from 5.404% to 5.608% based on various floating rate indices and
    pays fixed rates ranging from 4.755% to 6.140%. The swaps expire at various
    periods during 2000 and 2001. The Company incurred a net expense during the
    year ended December 31, 1999 of approximately $804,000 which is included in
    interest expense. The interest rate swaps are carried at their estimated
    fair values, determined using quotes obtained from dealers who make a market
    in such securities. The unrealized gain or loss on the swaps is included in
    earnings with the unrealized gain or loss on Mortgage-Related Assets. The
    fair value of the swaps was approximately $5.0 million at December 31, 1999,
    and is included in Mortgage-Related Assets at December 31, 1999. The Company
    had no interest rate swap contracts open at December 31, 1998. The interest
    rate swaps expose the Company to interest rate risk, as well as to credit
    loss in the event of non-performance by the counterparty to the swap. The
    Company does not anticipate non-performance by any counterparties.

    SHORT SALES - From time to time, the Company enters into contracts to sell
    securities it does not own ("short sales"), in a strategy intended to reduce
    the impact of changes in interest rates on the value of a portion of its
    Mortgage-Related Assets. Under these contracts, the Company sells
    securities, generally mortgage-backed securities or U.S. Treasury
    securities, borrowed from a broker. The proceeds from the sale are retained
    by the broker as collateral for the Company's obligation to deliver the
    borrowed securities at a specified date. The Company's obligation to deliver
    the borrowed securities is carried at fair value in the combined balance
    sheet as part of "payable for open trades," with changes in such fair value
    included in earnings with the unrealized gain or loss on Mortgage-Related
    Assets. The sales proceeds retained by the broker of $54.7 million, are
    included in "receivable from brokers" in the combined balance sheet. At
    December 31, 1999, the Company had an open obligation to deliver a FNMA TBA
    security on January 19, 2000 with a face amount of $55.0 million and a fair
    value of $54.4 million. The Company is exposed to credit risk in the event
    of nonperformance by a broker holding the sales proceeds as collateral for
    the securities borrowed. The Company does not anticipate nonperformance by
    any broker.

    LEASEHOLD IMPROVEMENTS, FURNITURE AND EQUIPMENT - Computer hardware and
    software, furniture and fixtures, and leasehold improvements are stated at
    cost. Depreciation and amortization is provided using the straight-line
    method over the estimated useful lives of the assets, which range from three
    to seven years. Leasehold improvements are amortized over the shorter of
    their useful lives or the lease term.

                                      -9-
<PAGE>

    CAPITALIZATION OF SOFTWARE COSTS - Costs related to the implementation of
    new software for internal use and costs related to development of software
    for external and internal use have been capitalized in accordance with
    Statement of Position 98-1, Accounting for the Costs of Computer Software
    Developed or Obtained for Internal Use, and Statement of Financial
    Accounting Standards No. 86, Accounting for the Costs of Computer Software
    to Be Sold, Leased, or Otherwise Marketed, respectively. Amortization is
    provided using the straight-line method over three years.

    ACCOUNTS RECEIVABLE - Accounts receivable consists of investor receivables,
    servicing receivables, advances and other receivables.

    Investor receivables consist primarily of amounts due from various companies
    which own the servicing rights on loans that the Company services under
    subservicing agreements. The balances in these accounts consist of
    subservicing fees, foreclosure advances and other miscellaneous charges
    incurred by the Company on behalf of the investors.

    Servicing receivables consist primarily of escrow advances and principal and
    interest advances.

    Escrow advances are Company payments made to escrow custodial accounts to
    avoid overdrafts in these accounts when tax or insurance payments are made
    for loans. The advances are recovered from future mortgage payments or from
    sale of the property or from investors if the mortgagee defaults.

    Principal and interest ("P&I") advances are Company payments to the P&I
    custodial accounts so that sufficient funds are available for the monthly
    remittance to security holders. These advances are recovered from future
    mortgage payments as they are received, or from sale of the property or from
    investors if the mortgagee defaults.

    Foreclosure advances represent foreclosure costs which are advanced by the
    Company as part of the mortgage loan foreclosure process and are recovered
    primarily from sale of the property, from investors or by filing claims with
    the various agencies or companies that insure the loans.

    SERVICING RIGHTS - Servicing rights ("SRs") are reported at the lower of
    amortized cost or fair value and are periodically evaluated for impairment
    based on the fair values of those rights determined by discounting estimated
    future net cash flows using a discount rate commensurate with the risks
    involved. This method of valuation incorporates assumptions that market
    participants would use in their estimates of future servicing income and
    expense, including assumptions about prepayment, default and interest rates.
    The fair value of SRs at December 31, 1999 was determined using discount
    rates ranging from approximately 10% to 15% and prepayment rates ranging
    from approximately 11% to 40%. For purposes of measuring impairment, the
    loans underlying the SRs are stratified on the basis of type (agency or
    nonagency). The amount of impairment, if any, is the amount by which the
    amortized cost of SRs by strata exceeds the fair value of that strata. SRs
    are amortized in proportion to, and over the period of, estimated net
    servicing revenues.

                                      -10-
<PAGE>

    REMIC RESIDUALS - The Company has acquired residual interests in REMICs
    which, at acquisition, are anticipated to generate substantial amounts of
    taxable income, with little, if any, cash flow, in the first several years
    after acquisition, and approximately equal amounts of taxable losses
    thereafter (REMIC residuals). Generally, issuers of REMICs do not retain
    such residuals, instead paying investors an inducement fee to take ownership
    of the residual and assume the tax liability. During 1999, 1998 and 1997,
    the Company sold REMIC residual interests, which resulted in a gain, after
    payment of inducement fees to the buyers, of $2.0 million, $0.2 million and
    $5.1 million, respectively. C-BASS no longer acquires REMIC residual
    securities for its own account.

    GOODWILL AND OTHER INTANGIBLES - Goodwill and other intangibles consist of
    goodwill and solicitation rights. Goodwill is stated at amortized cost and
    is being amortized over 12 years.

    The Company owns, through acquisitions, databases of names of
    seller-financed noteholders. These databases ("solicitation rights") are
    used to solicit, via direct mail, the purchase of the note from the
    noteholder. Solicitation rights are being amortized over the estimated life
    of the databases, which range from five to nine years.

    These assets are evaluated periodically to determine whether events and
    circumstances have developed that warrant revision of the estimated lives of
    the related assets or their write-off.

    LOAN SERVICING - The fees received for loan servicing or subservicing are
    generally based on either a monthly fee, payable on all loans serviced, or
    on a percentage of the outstanding principal balance of such loans, payable
    from interest collected from mortgagors. Such loan servicing fees are
    generally credited to income monthly or when the related mortgagor payments
    are collected. Late charges and other fees collected from mortgagors are
    credited to income when collected. Loan servicing costs are charged to
    expense as incurred.

    INCOME TAXES - Litton is a partnership. C-BASS is a limited liability
    company, and as such is generally treated as a partnership for Federal
    income tax purposes. Thus, the taxable income or loss of C-BASS and Litton
    is included in the tax returns of the Owners, and no provision or liability
    for income taxes has been recorded related to such companies' operations in
    the accompanying financial statements. Litton and C-BASS may be subject to
    state taxes in certain jurisdictions in which they operate.

    Income taxes applicable to the Company's C-corporation subsidiaries are
    accounted for under the liability method. Deferred income tax assets and
    liabilities are computed for differences between the financial statement and
    income tax basis of assets and liabilities that will result in taxable or
    deductible amounts in the future.

    The primary differences between taxable income and income under GAAP include
    those arising from REMIC residuals and the amortization of SRs, solicitation
    rights and goodwill.

    In 1997, LLSI was included in the consolidated Federal income tax return of
    its parent, EFS. Income taxes for 1997 were computed on a separate company
    basis, with any current tax liability or refund settled through intercompany
    accounts.

                                      -11-
<PAGE>

    REVERSE REPURCHASE AGREEMENTS - Transactions involving sales of securities
    under agreements to repurchase ("reverse repurchase agreements") are treated
    as collateralized financing transactions and are recorded at their
    contracted repurchase amounts plus accrued interest. The Company is
    generally required to deliver the securities that collateralize the reverse
    repurchase agreements to the counterparties. The Company is required to
    maintain agreed-upon amounts of collateral with these counterparties during
    the term of the reverse repurchase agreements.

    RECENT ACCOUNTING PRONOUNCEMENTS - The Company adopted SFAS No. 130,
    Reporting Comprehensive Income, in 1998. This statement established
    standards for reporting and display of comprehensive income and its
    components (revenue, expenses, gains and losses). SFAS No. 130 requires that
    all items that are required to be recognized under accounting standards as
    components of comprehensive income be reported in a financial statement that
    is displayed with the same prominence as other financial statements. The
    Company had no items of comprehensive income during 1999, 1998 and 1997.

    SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES,
    establishes accounting and reporting standards for derivative instruments,
    including certain derivative instruments embedded in other contracts and for
    hedging activities. SFAS No. 133 requires that an entity recognize all
    derivatives as either assets or liabilities in the statement of financial
    position and measure those instruments at fair value. This statement is
    effective for the Company beginning January 1, 2001. The Company is
    currently reviewing the impact of the implementation of SFAS No. 133 on its
    financial statements.

    INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES - Investments in unconsolidated
    subsidiaries are accounted for under the equity method.

    RECLASSIFICATIONS - Certain prior year amounts have been reclassified to
    conform with the current year presentation.

2.  ACQUISITIONS

    In February 1998, the Company established Wynwood Servicing and Technology
    LLC ("WSAT") with an initial capitalization of $18 million. In separate
    transactions, WSAT then acquired all of the shares of Wynwood, Inc.
    ("Wynwood") for approximately $15.0 million and all of the operations of
    South Plains Mortgage Company ("South Plains") for approximately $3 million.
    Wynwood and its subsidiaries are engaged primarily in the business of
    mortgage and contract collections. South Plains is engaged in the business
    of acquiring Notes for resale to investors.

    WYNWOOD ACQUISITION - The Wynwood purchase agreement provides for additional
    earn-out payments of a maximum of approximately $7.8 million to the sellers
    and certain members of management, if contract servicing, solicitation
    rights, and note or mortgage purchase thresholds specified in the agreement
    are met during the four-year period following the acquisition date. C-BASS
    has provided the sellers a guarantee of the earn-out payments required to be
    made. No payment has been made under such earn-out agreements. At December
    31, 1999, no liability has been recorded under the earn-out provisions.

    SOUTH PLAINS ACQUISITION - The South Plains purchase agreement provides for
    additional earn-out payments of a maximum of approximately $1.0 million to
    the sellers if certain note purchase thresholds are met during the two-year
    period following the acquisition date. Through December 31, 1999, the
    Company has paid $750,000 in earn-out payments.

                                      -12-
<PAGE>

3.  FAIR VALUE OF FINANCIAL INSTRUMENTS

    SFAS No. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS,
    requires the Company to report the estimated fair value of its financial
    instruments, as defined. At December 31, 1999 and 1998, substantially all of
    the Company's assets and liabilities are carried at estimated fair value or
    contracted amounts which approximate fair value.

    Mortgage Loans, Notes, Mortgage Securities and REO are carried at estimated
    fair value. Assets that are recorded at contracted amounts approximating
    fair value consist of receivables from affiliates and certain other
    receivables. Similarly, the Company's short-term liabilities consist
    primarily of reverse repurchase agreements, amounts payable to affiliates
    and certain other payables. Such amounts are recorded at contracted amounts
    approximating fair value. These instruments generally have variable interest
    rates and short-term maturities, or are payable upon demand, and accordingly
    are not materially affected by changes in interest rates. The carrying value
    of the Company's Senior Subordinated Notes approximates its fair value.

4.  INCENTIVE COMPENSATION

    The Company paid "sign-on" bonuses totaling approximately $1.4 million to
    its officers at the inception of their employment. The amounts paid were
    capitalized and were amortized to compensation expense over the vesting
    periods, which ranged from 12 to 18 months. Amortization was approximately
    $891,000 in 1997. The capitalized amounts were fully amortized at December
    31, 1997.

    The Company has established incentive bonus programs, which set forth the
    guidelines for computation of incentive bonus pools based on the Company's
    pretax, preincentive bonus return on equity for the twelve-month periods
    ending June 30, net of certain unrealized gains and losses, if any, and on
    the performance of certain managed portfolios (see Note 9). The allocation
    of the bonus pool is subject to review by the Company's Board of Managers.
    For each of the twelve-month periods ended June 30, 1999, 1998 and 1997, the
    Company paid incentive compensation of approximately $9.8 million, $8.0
    million and $3.4 million as payable under the incentive bonus pool in July
    of 1999, 1998 and 1997, respectively. The Company has accrued approximately
    $5.3 million at December 31, 1999 based on results of operations and
    estimated portfolio performance for the six months ended December 31, 1999.

5.  SERVICING RIGHTS

    The activity in the Company's SRs during 1999 and 1998 was as follows:

<TABLE>
<CAPTION>
                                  CONTRACT          MORTGAGE
                                 SERVICING          SERVICING
                                   RIGHTS             RIGHTS              TOTAL
<S>                             <C>                <C>                <C>
Balance, January 1, 1998        $       --         $  4,768,472       $  4,768,472
Acquisition of Wynwood             4,323,789               --            4,323,789
Additions                            326,446          9,007,542          9,333,988
Amortization                        (686,314)        (1,785,200)        (2,471,514)
                                ------------       ------------       ------------

Balance, December 31, 1998         3,963,921         11,990,814         15,954,735
Additions                            688,323         11,223,577         11,911,900
Amortization                        (784,347)        (3,875,713)        (4,660,060)
                                ------------       ------------       ------------

Balance, December 31, 1999      $  3,867,897       $ 19,338,678       $ 23,206,575
                                ============       ============       ============
</TABLE>

                                      -13-
<PAGE>

    In addition, the Company also accrued approximately $2.1 million at December
    31, 1999 as incentive to manage an asset portfolio for EFS and MGIC, for
    which C-BASS receive an incentive fee (see Note 9).

    Cost approximates fair value at December 31, 1999 and 1998.

    During 1997, additions to mortgage servicing rights totaled approximately
    $295,000 and accumulated amortization was approximately $1.6 million at
    December 31, 1997.

    The unpaid principal balance of mortgage loans serviced for others is not
    included in the accompanying combined financial statements. These balances
    were approximately $3.4 billion at December 31, 1999 and $3.0 billion at
    December 31, 1998.

    The following table sets forth the geographic distribution of the mortgage
    loans underlying the mortgage servicing rights portfolio as of December 31,
    1999:

                                             PERCENTAGE OF
                                           PRINCIPAL BALANCE
                    STATE                      SERVICED

                    California                     22%
                    Texas                          10%
                    New York                       10%
                    Florida                         5%
                    All other(1)                   53%
                                                 ----
                                                  100%
                                                 ====

        (1) No other state contains more than 5% of the properties securing
            loans in the Company's mortgage servicing rights portfolio.

    At December 31, 1999, the Company had errors and omissions insurance
    coverage of $5.0 million and fidelity insurance coverage of $5.0 million.

    Custodial escrow balances maintained in connection with the foregoing loan
    servicing were a net deficit of approximately $8.3 million and $3.1 million
    at December 31, 1999 and 1998, respectively. The Company has made advances
    to cover the deficit escrow balances. Included in accounts receivable at
    December 31, 1999 are $10.1 million of escrow advances due from borrowers
    and from investors. Escrow funds are held in trust for mortgagors at various
    financial institutions and are not included in the accompanying combined
    balance sheets.

6.  GOODWILL AND OTHER INTANGIBLES

    As of December 31, 1999, goodwill and other intangible assets were comprised
    of the following:

<TABLE>
<CAPTION>
                                                            1999            1998
<S>                                                     <C>             <C>
Goodwill and other intangibles                          $ 14,867,355    $ 14,765,408
Accumulated amortization - goodwill and other
  intangibles                                             (2,418,143)     (1,101,252)
Solicitation rights                                        3,631,544       2,839,421
Accumulated amortization - solicitation rights              (930,574)       (380,209)
                                                        ------------    ------------

Total                                                   $ 15,150,182    $ 16,123,368
                                                        ============    ============
</TABLE>

                                      -14-
<PAGE>

7.  DEBT OBLIGATIONS

    Debt obligations are summarized as follows:

                                                            DECEMBER 31,
                                                         1999          1998
     Warehouse Line of Credit with variable rates
       of interest. At December 31, 1999 and 1998,
       such rates were 5.44% and 5.50%, respectively.
       The weighted average interest rate during
       1999 and 1998 was 6.38% and 7.21%,
       respectively.  Borrowings are secured
       by Mortgage Loans, Notes, Mortgage
       Securities, mortgage servicing advances
       and SRs.                                      $303,376,222   $146,051,893

     Guaranteed Term Agreement with interest
       at the weekly Federal Funds rate plus
       0.1%, payable monthly.  At December
       31, 1998, such rates was 5.67%.  The
       weighted average interest rate during
       1998 was 5.86%.                                     --         50,000,000

     Senior Subordinated Notes due
       September 1, 2004, with interest at
       15.91% payable semi-annually.                   50,000,000         --

     Reverse repurchase agreements with various
       counterparties. Such agreements accrue
       interest at variable rates based on
       one-month LIBOR plus a range of 0.5% to
       2.25%. At December 31, 1999 and 1998, such
       rates ranged from 6.45% to 8.48% and 5.80%
       to 9.25%, respectively. The weighted
       average interest rate during 1999 and
       1998 was 6.15% and 6.82%, respectively.
       Borrowings under such agreements are
       secured by Mortgage Securities and
       Mortgage Loans.                                275,341,535    200,939,930

     Revolving Credit Agreement with variable
       rate of interest based on LIBOR plus
       2.50%. At December 31, 1999, such rate was
       8.98%, and at December 31, 1998, such rate
       was 7.50%. During the years ended
       December 31, 1999 and 1998, the weighted
       average interest rate was 8.59% and 9.12%,
       respectively. The borrowings are secured
       by Mortgage Loans, Notes and REO.               34,301,788     10,511,152

     Other notes and contracts payable with
       interest at rates ranging from 0% to             1,699,523      2,134,460
       18% per annum.


    The Company has a $400 million Warehouse Line of Credit Agreement (the
    "Warehouse Agreement") with a group of financial institutions, with a
    maturity date of June 19, 2000. The Warehouse Agreement provides for
    interest rates based on various indices, mainly Federal Funds and LIBOR, as
    selected by the Company. The Warehouse Agreement contains restrictive
    financial covenants that require the Company to meet, among other things,
    certain capital requirements and debt to adjusted equity ratios (as
    defined). The Warehouse Agreement also restricts the Company's ability to
    pay distributions.

                                      -15-
<PAGE>

    In 1997, the Company entered into a Guaranteed Term Agreement (the "Term
    Agreement") for a fixed amount of $20 million, later increased to $50
    million. The Term Agreement was guaranteed by EFS and MG1C. The Term
    Agreement was repaid on July 30, 1999.

    On August 23, 1999, the Company issued $50 million of 15.91% Senior
    Subordinated Notes due September 1, 2004. Net proceeds, after purchasers'
    discount and offering expenses, was $47.4 million, resulting in a yield of
    approximately 17%. The Senior Subordinated Notes indenture contains
    restrictive financial covenants, including minimum net worth, maximum total
    debt to net worth, and maximum subordinated debt to net worth (as defined).
    The indenture also restricts the Company's ability to pay distributions. The
    notes may be redeemed at par plus a "make-whole" amount determined with
    respect to the discounted value of remaining scheduled payments.

    Included in reverse repurchase agreements are $85.6 million with Bank of
    America, $81.9 million with Merrill Lynch, $39.2 million with Greenwich
    Capital and $27.0 million with Bear Stearns. Most repurchase agreements have
    stated maturities of less than one year.

    In October 1998, the Company entered into a Revolving Credit Agreement with
    a bank (the "Credit Agreement") with a one-year term and borrowing limit of
    $40 million; the Credit Agreement has been extended to December, 2000.

    Substantially all of the Company's Mortgage-Related Assets, servicing rights
    and servicing advances are pledged as collateral under its debt obligations.

The aggregate amount of minimum payments required on debt obligations for
periods after December 31, 1999 are as follows:

                    2000                                    $ 607,020,704
                    2001                                        6,449,972
                    2002                                          184,860
                    2003                                          253,459
                    2004                                       50,258,924
                    Thereafter                                    551,149
                                                            -------------
                                                            $ 664,719,068
                                                            =============

8.  INCOME TAXES

The Company has several C-Corporation subsidiaries, subject to income tax. The
components of the benefit for income taxes are as follows:


                                  1999         1998         1997

Current expense (benefit)       $ (102,335)   $ (17,257)   $ 228,083
Deferred benefit                    (2,130)    (461,314)    (228,083)
                                ----------   ----------    ---------

Total benefit                   $ (104,465)  $ (478,571)   $      --
                                ==========   ==========    =========

                                      -16-
<PAGE>

    At December 31, 1999 and 1998, the net deferred tax liability was comprised
    of the following temporary differences:

                                                 1999              1998

Deferred tax assets:
  Net operating losses                        $   173,950       $   447,425
                                              -----------       -----------

Total                                             173,950           447,425
                                              -----------       -----------
Deferred tax liabilities:
  Servicing rights and other intangibles         (772,729)       (1,012,010)
  Other                                          (154,419)         (190,743)
                                              -----------       -----------

Total                                            (927,148)       (1,202,753)
                                              -----------       -----------

Net deferred tax liability                    $  (753,198)      $  (755,328)
                                              ===========       ===========


The differences between the income tax benefit and the amount determined by
applying the statutory Federal income tax rate of 34% to the pretax loss of
taxable C-corporation subsidiaries at December 31, 1999 and 1998 are as follows:


                                                 1999              1998

Income tax benefit calculated at the
  statutory rate                              $  (448,062)      $  (780,095)
  Goodwill amortization (GAAP-nondeductible)      327,540           298,485
  Other                                            16,057             3,039
                                              -----------       -----------
Income tax benefit                            $  (104,465)      $  (478,571)
                                              ===========       ===========


    There was no significant difference between the 1997 tax provision and the
    provision determined by applying the statutory Federal income tax rate to
    pretax loss of taxable subsidiaries.

 9. RELATED PARTY TRANSACTIONS

    EFS - The Company occupies certain office facilities leased by EFS and
    reimburses EFS for its occupancy costs. The Company incurred costs totaling
    approximately $435,000, $288,000 and $180,000 in 1999, 1998 and 1997,
    respectively. The Company had an outstanding borrowing from EFS at December
    31, 1999 of approximately $786,000. These borrowings do not bear interest
    and are repayable upon demand.

    EFS acquired partnerships (the "EFS partnerships") holding interests in
    Mortgage Securities in the second quarter of 1999, and engaged C-BASS to
    manage the portfolio. C-BASS receives an annual base management fee and an
    incentive fee based on portfolio performance. The annual incentive fee is
    paid out over 4 years. The total management fee is estimated to be
    approximately $1.5 million for 1999.

    C-BASS, as manager for the EFS Partnerships, acquired and disposed of
    certain mortgage securities during 1999, resulting in net proceeds payable
    to the EFS Partnerships of approximately $1.1 million at December 31, 1999.

    MGIC - Affiliates of MGIC provide the Company with various services,
    including referral of investment opportunities. During 1999, 1998 and 1997,
    the Company paid MGIC approximately $7,000, $16,000 and $257,000 for such
    services, respectively.

                                      -17-
<PAGE>

    MGIC acquired partnerships (the "MGIC Partnerships") holding interests in
    Mortgage Securities in the second quarter of 1999, and engaged C-BASS to
    manage the portfolio. C-BASS receives an annual base management fee and an
    incentive fee based on portfolio performance. The annual incentive fee is
    paid out over 4 years. The total management fee is estimated to be
    approximately $0.9 million for 1999.

    C-BASS, as manager for the MGIC Partnerships, acquired and disposed of
    certain mortgage securities during 1999, resulting in net proceeds payable
    to the MGIC Partnerships of approximately $2.0 million.

10. COMMITMENTS AND CONTINGENCIES

The Company and its subsidiaries are obligated under leases for office space
through 2005. Minimum future lease commitments at December 31, 1999 are:

             2000                    $  2,700,490
             2001                       2,645,536
             2002                       2,350,106
             2003                       2,262,461
             2004                       1,908,471
             Thereafter                10,165,782
                                     ------------
                                     $ 22,032,846
                                     ============

WSAT leases its office space in Tacoma, Washington from WTE, L.L.C., which is
17% owned by officers and the former owners of Wynwood.

The Company is involved in various legal proceedings and pending claims arising
in the ordinary course of business. The final outcome is uncertain. However,
management does not expect the resolution of these matters to have a significant
effect on the financial statements as of December 31, 1999.

11. DEFINED CONTRIBUTION PLANS

    The Company maintains 401(k) plans, which were established in 1997, that
    cover substantially all of its eligible employees. The permitted employee
    contributions vary among the entities comprising the Company, as do the
    employer matching contribution percentages. The employer matching
    percentages are at the Company's discretion and are subject to change. The
    Company's matching contributions totaled approximately $408,000 in 1999,
    $255,000 in 1998 and $155,000 in 1997.

                                     ******

                                      -18-
<PAGE>


CREDIT-BASED ASSET SERVICING AND SECURITIZATION LLC
AND AFFILIATES

COMBINED SCHEDULE OF MORTGAGE-RELATED ASSETS
DECEMBER 31, 1999
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>

  NOTIONAL AMOUNT                       ISSUER                                   VALUE

MORTGAGE SECURITIES
<S>                                <C>                                        <C>
       $ 157,907,451               C-BASS                                     $ 109,412,894
         114,961,248               PNC                                           52,155,866
          48,222,491               Merrill Lynch                                 44,727,925
         323,213,936               Other                                        158,946,641
         510,000,000               Interest rate swaps                            4,980,614
                                                                              -------------

                                   Total Mortgage Securities                    370,223,940

MORTGAGE LOANS                     $448,380,000 unpaid principal balance        388,575,903

REAL ESTATE OWNED                  195 Properties                                14,179,721
                                                                              -------------

TOTAL MORTGAGE-RELATED ASSETS                                                 $ 772,979,564
                                                                              =============
</TABLE>


See notes to combined financial statements.






                                      -19-