<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, 1997                                                 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 27, 1998 was $867,917,400.
The number of shares of Common Stock outstanding as of that date was 18,794,519.
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 engaged, through its subsidiaries, principally in 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 analysis of complex,
credit-based risks. Enhance Financial has since its inception conducted the
major portion of its business through its wholly-owned financial guaranty
insurance subsidiaries, Enhance Reinsurance Company ("Enhance Re") and Asset
Guaranty Insurance Company ("Asset Guaranty" and together with Enhance Re, the
"Insurance Subsidiaries"). The Company conducts a smaller portion of its
business through other insurance and non-insurance subsidiaries and companies
(including a Brazilian surety company) in which it has equity investments.
The Company expects that a significant portion of its growth will come from
non-financial guaranty businesses.

      The Company's business strategy is to maintain its financial guaranty
business, both primary and reinsurance and its commitment to intensive and
prudent credit underwriting and conservative investment policies; to utilize its
expertise in underwriting credit risks to expand and develop its other insurance
businesses; and to continue to pursue its diversification efforts utilizing its
credit analysis skills in areas that the Company believes have strong profit and
growth potential relative to risk. As part of its diversification and global
expansion efforts, the Company expects to further develop the strategic
relationship with Swiss Reinsurance Company ("Swiss Re") which it initiated in
1996.

      Reinsurance of financial guaranties issued by monoline financial guaranty
insurers represented 54.3% of the Company's gross premiums written for the year
ended December 31, 1997. During the year ended December 31, 1997, the Company
received 25.4% of the total reinsurance premiums ceded by all monoline financial
guaranty insurers.

      The Company's other insurance businesses include the issuance of direct
financial guaranties of smaller debt obligations, trade credit reinsurance,
financial responsibility bonds and excess-SIPC/excess-ICS and related types of
bonds. These other insurance businesses represent 45.7% of the Company's gross
premiums written for the year ended December 31, 1997.

      The Company is also engaged in the origination, purchase, servicing and/or
securitization of special assets, including winning lottery tickets, structured
settlements and sub-performing/non-performing residential mortgages. The Company
is continuing to expand these businesses and is diversifying 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.

      Enhance Re has been rated by Standard & Poor's Corporation ("Standard &
Poor's"), Moody's Investors Service, Inc. ("Moody's") and Duff & Phelps Credit
Rating Company ("Duff & Phelps"), which have assigned it triple-A claims-paying
ability ratings, their highest rating. Asset Guaranty has been rated by Duff &
Phelps and Standard & Poor's, which have assigned it triple-A and double-A
claims-paying ability ratings, respectively.
<PAGE>

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.

      There are currently four major monoline primary U.S. financial insurers:
Municipal Bond Investors Assurance Corporation ("MBIA"), AMBAC Indemnity
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.


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.


                                      -2-
<PAGE>

      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>
1993                                  $ 292.0                    $ 107.9                     37.0%
1994                                    164.5                       61.3                     37.3
1995                                    160.3                       68.3                     42.6
1996                                    184.4                       85.2                     46.2
1997                                    220.4                      107.5                     48.8
</TABLE>

----------
(1)   Based upon estimated data provided by The Bond Buyer, February 9, 1998.

      The overall increase in the volume of municipal bond issuance in 1997
resulted from an increase in refunding issues, which represented 26.8% of total
issuance compared to 31.0% in 1996, as well as a higher amount of bonds issued
for new money purposes, which increased to $140.9 billion in 1997 from $124.0
billion in 1996.

      Asset-Backed Debt Market. Asset-backed transactions or securitizations
constitute 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 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 housing bonds. While the asset-backed
securities market has grown significantly in recent years, 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 rating of the
reinsurer. See "Insurance Regulatory Matters" and "Description of Business --
Rating Agencies."

      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


                                      -3-
<PAGE>

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 an indefinite term,
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 to the extent that losses exceed a certain amount,
in an amount up to a certain dollar limit.

      Reinsurers may also, in turn, purchase reinsurance under what are called
"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."

DESCRIPTION OF BUSINESS

Reinsurance of Monoline Financial Guaranty Insurers

      The Company's principal business is the reinsurance of financial guaranty
insurance written by the U.S. monoline financial guaranty insurers. The Company
provides reinsurance on a treaty and/or a facultative basis for such companies.
See "Sources of Premiums" in this item. As of December 31, 1997, 47.3% of the
Company's insurance in force attributable to the monoline financial guaranty
insurers represented business underwritten on a treaty basis, with the balance
being facultative. The reinsurance written by the Company is subject to a
detailed underwriting review. Most of the Company's reinsurance activity is
written on a proportional reinsurance basis.

      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, 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 premiums ceded by the monoline financial
guaranty insurers to the Company in 1997, 1996 and 1995:


                                      -4-
<PAGE>

<TABLE>
<CAPTION>
                                                    Year Ended December 31,
                   -------------------------------------------------------------------------------------------
                               1997                           1996                           1995
                               ----                           ----                           ----
                       Gross                          Gross                          Gross
Primary               Premiums      Percent of       Premiums      Percent of       Premiums      Percent of
Insurer                Ceded          Total           Ceded          Total           Ceded          Total
-------                -----          -----           -----          -----           -----          -----
                                                  (Dollar amounts in millions)
<S>                  <C>               <C>          <C>               <C>           <C>              <C>
AMBAC                $  9.8            16.7%        $  9.4            16.5%         $19.2            34.9%
CapMAC                  8.0            13.6            6.2            10.9            3.6             6.6
CGIC (1)                --              --             --              --             1.1             2.0
Connie Lee              0.3             0.5            2.3             4.0            0.9             1.6
FGIC                    4.8             8.2            7.3            12.8            6.7            12.2
FSA                    17.3            29.4           14.0            24.6            7.2            13.1
MBIA                   18.6            31.6           17.7            31.2           16.3            29.6
                      -----           -----          -----           -----          -----           -----
Total                 $58.8           100.0%         $56.9           100.0%         $55.0           100.0%
                      =====           =====          =====           =====          =====           =====
</TABLE>

----------
(1)   The corporate parent of FSA acquired CGIC in December 1995.

      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, 1997.

                                                   As of December 31, 1997
                                          --------------------------------------
Type of Obligation                        Insurance in Force    Percent of Total
------------------                        ------------------    ----------------
                                             (In billions)
Municipal:
    General obligation/tax supported...      $  18.8                  31.3%
    Water/sewer/electric/gas ..........         10.3                  17.1
    Health care .......................          6.8                  11.3
    Airports/transportation ...........          6.8                  11.3
    Housing revenue ...................          1.5                   2.5
    Other (2) .........................          2.4                   4.0
                                               -----                 -----

       Total municipal ................         46.6                  77.5
                                               -----                 -----

Non-municipal
    Consumer obligations ..............          6.8                  11.3
    Investor-owned utilities ..........          3.4                   5.7
    Commercial mortgage ...............          0.2                   0.3
    Other (3) .........................          3.1                   5.2
                                               -----                 -----

       Total non-municipal ............         13.5                  22.5
                                               -----                 -----

       Total ..........................        $60.1                 100.0%
                                               =====                 =====

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


                                      -5-
<PAGE>

(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 $1.3 billion collateralized by corporate debt obligations. The
      balance represents other types of assets which 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, 1997 and
the credit rating assigned by Standard & Poor's as of that date (in the absence
of financial guaranty insurance) to each such issuer:

<TABLE>
<CAPTION>
                                                                                      Insurance in Force as
Credit                                 Credit Rating            Obligation Type        of December 31, 1997
------                                 -------------            ---------------        --------------------
                                                                                           (In millions)
<S>                                        <C>                 <C>                            <C>
New York City Municipal Water
   Finance Authority..............          A+                    Water & Sewer               $891.6
New York City, NY.................          BBB+               General Obligation              670.9
State of California...............          A+                 General Obligation              621.6
Commonwealth of
   Puerto Rico....................          A                  General Obligation              611.7
Dade County, Florida Water &
   Sewer System...................          A                     Water & Sewer                602.7
Houston, TX Combined Water &
   Sewer System...................          A-                    Water & Sewer                598.1
Massachusetts Turnpike
   System.........................          A+                   Transportation                508.5
Commonwealth of
   Massachusetts..................          A+                 General Obligation              468.4
Nassau County, NY.................          A-                 General Obligation              465.6
Public Service Elec. & Gas of
   New Jersey.....................          BBB+             Investor Owned Utility            446.7
</TABLE>

      The following table sets forth the distribution by state of the Company's
insurance in force in connection with its reinsurance of monoline-guarantied
obligations as of December 31, 1997:

                                            As of December 31, 1997
                                 ----------------------------------------------
Jurisdiction                     Insurance in Force        Percent of Portfolio
------------                     ------------------        --------------------
                                    (In billions)
California......................        $7.8                     13.0%
New York........................         6.2                     10.3
Florida.........................         4.1                      6.8
Texas...........................         3.7                      6.2
Pennsylvania....................         2.9                      4.8
New Jersey......................         2.6                      4.3
Illinois........................         2.5                      4.2
Massachusetts...................         2.3                      3.8
Puerto Rico.....................         1.6                      2.7
Ohio............................         1.5                      2.5
Other (1).......................        24.9                     41.4
                                       -----                    -----
         Total..................       $60.1                    100.0%
                                       =====                    =====


                                      -6-
<PAGE>

----------

(1)   Includes $10.5 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 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.

      The Company conducts periodic detailed reviews of each monoline primary
carrier with which it does treaty or 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.

      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. Moreover, the ceding insurer is typically required to retain at
least 25% of the exposure on any single risk assumed.

      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 guidelines. On individual
underwritings, the Company's credit committee may limit the allocation of
capacity to an amount below that allowed by the single-risk guidelines noted
above.

      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
monoline financial guaranty industry. In certain of these new business areas,
the Company operates as a primary insurer in areas or for transactions where the
monoline financial guaranty primaries 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.


                                      -7-
<PAGE>

      In writing these other insurance lines of business, the Company utilizes
its expertise in evaluating complex credit-based risks. These businesses
represent 45.7% of the Company's gross premiums written for the year ended
December 31, 1997, compared to 40.0% for the year ended December 31, 1996. The
Company's business strategy is 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 in respect of certain of the Company's other insurance businesses
are earned over a significantly shorter period than those in respect of 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, 1997 and for the year
then ended:

Category of Other Insurance Business                 Insurance in Force*
                                                   As of December 31, 1997
                                                   -----------------------
                                                        (In billions)
Municipal bonds - direct.........................           $3.5
Multi-family housing-backed financings...........            0.3
Financial responsibility bonds...................            0.3
Other financial guaranty.........................            0.2
                                                            ----
         Total                                              $4.3
                                                            ====

----------
*     Does not include insurance in force pursuant to the excess-SIPC/excess-ICS
      program and credit reinsurance described below in this section.

                                               Year Ended December 31, 1997
                                            ----------------------------------
                                            Net Premiums
Category of Other Insurance Business          Written         Premiums Earned
------------------------------------          -------         ---------------
                                                      (In millions)
Credit reinsurance........................     $19.5                $19.2
Excess-SIPC/excess-ICS and other..........      12.2                  8.5
Municipal bonds - direct..................       9.0                  4.0
Financial responsibility bonds............       3.3                  3.8
                                               -----                -----
       Total                                   $44.0                $35.5
                                               =====                =====

      Municipal bonds. The Company writes municipal bond insurance as a primary
insurer in certain transactions where the financial guaranty monoline primary
insurers generally elect not to participate. This writing is focused on various
market sectors including tax-backed obligations, infrastructure revenue bonds,
healthcare bonds, higher education bonds and municipal lease obligations. Each
such issue, subsequent to its being insured, are reviewed by Standard & Poor's
and Duff & Phelps, which determine the credit quality of the issue and, after
their review, report their findings to the Company.

      Credit Reinsurance. 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


                                      -8-
<PAGE>

well as cross-border receivables. Sometimes in the latter instance, the coverage
extends to certain political risks (foreign currency controls, expropriation,
etc.) which interfere with the payment from the buyer.

      As of December 31, 1997, Enhance Financial owned an indirect 36.5% equity
interest (representing 55% of the voting interest) in Exporters Insurance
Company Ltd. ("Exporters"), an insurer of domestic and foreign trade receivables
for multinational companies. The Company provides significant reinsurance
capacity to this joint venture on a proportional quota-share basis.

      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 between exporters and foreign purchasers.

      In addition, the Company participates in proportional and non-proportional
reinsurance treaties with approximately 20 credit insurers, frequently in
Europe. The largest relationships in terms of premiums are with the FCIA
(domiciled in the United States) and the Euler Group (major subsidiaries
domiciled in France, Belgium, the Netherlands, the United Kingdom and the United
States).

      Financial Responsibility Bonds. The Company owns a controlling equity
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.

      Excess-SIPC/Excess-ICS. The Company writes surety bonds for the protection
of customers of large securities brokers against the loss of securities 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 $79,000) in the case of loss covered by
the U.K.-government-established Investors Compensation Scheme ("ICS"). Bonds
issued under this program generally provide coverage for customers of United
States-domiciled and United Kingdom-domiciled securities brokers, including
customers of their affiliated securities brokerage concerns domiciled in other
countries which clear transactions through them. Customers in the latter
category are entitled to payment for covered losses only upon the insolvency and
liquidation of the U.S.- or U.K.-domiciled broker clearing their account. The
coverage is offered only to 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 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.


                                      -9-
<PAGE>

      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 Monoline Financial Guaranty Insurers -- Underwriting
Staffing, Policies and Procedures." 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.

Other Businesses and Investments

      The Company owns the entire interest in Singer Asset Finance Company,
L.L.C. ("Singer"), having acquired its partner's 50% interest in 1997.
Conducting business from New York City and Boca Raton, Florida offices, Singer
purchases from individuals state lottery prizes, structured settlement payment
rights and other long-term payment streams. Working with leading financial
institutions, Singer securitizes lottery prizes and structured settlement
payment streams, i.e., sells pools of such assets into the securities market.

      In 1996, in furtherance of its diversification effort, the Company formed
Credit-Based Asset Servicing and Securitization LLC ("C-BASS"), a New York
City-based joint venture in which the Company and Mortgage Guaranty Insurance
Corporation ("MGIC"), a leading U.S. provider of private mortgage insurance
coverage, each own approximately 48% interests. Integrating modeling, analytic
and securitization skills and specialty servicing capabilities, C-BASS
evaluates, purchases, services and securitizes assets in the large market of
sub-performing and non-performing residential mortgages.

      Both Singer and C-BASS, which are larger scale opportunities than the
Company's previous diversification activities, utilize the Company's strategic
relationships and its core skills in complex credit analysis and securitization.

      In November 1997, the Company and Swiss Re, respectively, acquired 25%
equity interests in Seguradores Brasilieras de Fiancas ("SBF"), one of Brazil's
largest surety companies. The remaining interest in SBF is held by Banco
Pactual, S.A., one of Brazil's largest investment banks. The terms of the joint
venture call for the expansion of SBF in the Latin American insurance and other
credit-related markets and opportunities.

Sources of Premiums

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


                                      -10-
<PAGE>

<TABLE>
<CAPTION>
                                                            Year Ended December 31, 1997
                           ------------------------------------------------------------------------------------------
                                                                                           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
   -------------------        -------       -------        ------      ----------------     ------     --------------
                                     (Dollars in millions)
<S>                           <C>           <C>            <C>             <C>               <C>           <C>
Financial guaranty
     reinsurance
     AMBAC............        $  9.8        $  9.3         $  5.9            9.1%              6.9%          3.5%
     CapMAC...........           8.0           8.0            4.1            7.4               4.7           2.4
     Connie Lee.......           0.3           0.3            2.4            0.3               2.8           1.4
     FGIC.............           4.8           4.7            8.9            4.4              10.4           5.2
     FSA..............          17.3          16.9           10.9           16.0              12.8           6.4
     MBIA.............          18.6          17.5           17.0           17.2              19.9          10.0
Other insurance (1)...          49.4          44.0           36.5           45.6              42.7          21.4
XOL Retrocessions.....           --           (0.2)          (0.2)           --               (0.2)         (0.1)
                              ------        ------          -----          -----             -----         -----
                              $108.2        $100.5          $85.5          100.0%            100.0%         50.2%
                              ======        ======          =====          =====             =====         =====
</TABLE>

----------

(1)   Includes business written by the Company as a primary insurer. For the
      year ended December 31, 1997, no single primary insurer included in "Other
      insurance" provided greater than 4.2%, 4.5% and 5.3% of gross premiums
      written, net premiums written and premiums earned, respectively.

      The Company has maintained close and long-standing relationships with its
monoline financial guaranty insurer clients, 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 treaty agreements with all major monoline
primary insurers except one, which terminated its treaty with the Company in
1997, and it has facultative agreements with active monoline primary insurers.
The Company's treaty and facultative agreements usually are entered into for an
indefinite term, subject to termination (i) upon written notice (ranging from 90
to 120 days) prior to the specified deadline for renewal or (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, in the case of the
agreements with the primary monoline insurers, to maintain a specified
claims-paying ability rating for the particular Insurance Subsidiary. Upon
termination under the conditions set forth in (ii) above, the Company may be
required 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.


                                      -11-
<PAGE>

      Of the Company's aggregate monoline reinsurance exposure of $60.1 billion
as of December 31, 1997, $31.7 billion, or 52.7%, was derived through its treaty
relationships with the primary insurers.

Loss Experience

      The Company establishes a provision for losses and related loss adjustment
expenses ("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. Provisions for losses and LAE are
established based 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 clients underwrite with a zero-loss underwriting objective. For
the 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 the Company anticipated when it commenced its other insurance
businesses, it has experienced relatively higher loss levels in certain of these
businesses than it experienced in connection with 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, 1997, the Company had established $31.0 million in net
reserves for losses and LAE (of which $18.5 million comprised 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,
                                               -------------------------------------------------------------
                                                      1997                 1996                 1995
                                                      ----                 ----                 ----
                                                                      (In millions)
<S>                                                  <C>                  <C>                  <C>
Net reserve for losses and LAE beginning of
year.........................................        $26.2                $29.0                $26.7
Net provision for losses and LAE
    Occurring in current year ...............          6.0                  6.1                  3.5
    Occurring in prior years ................          3.8                  3.1                  6.0
                                                     -----                -----                  ---
         Total ..............................          9.8                  9.2                  9.5
                                                     -----                -----                  ---


Net payments for losses and LAE
   Occurring in current year ................          0.7                  0.6                  2.7
   Occurring in prior years .................          4.3                 11.3                  4.6
                                                     -----                -----                -----
         Total ..............................          5.0                 11.9                  7.3
                                                     -----                -----                -----

Net reserve for losses and LAE at end of
year.........................................        $31.0                $26.3                $28,9
                                                     =====                =====                =====
</TABLE>


                                      -12-
<PAGE>

      In 1997, 1996 and 1995 the Company recorded losses of $8.1 million, $7.3
million and $6.1 million, respectively, in connection with its credit and surety
businesses, commensurate with the continued growth in premiums written from
these businesses.

      The Company believes that the reserves for losses and LAE, including the
case and 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.

Investments and Investment Policy

      The Company's investment portfolio is managed with a view to maximizing
after-tax performance. While the Company allocates much of its portfolio to four
external specialty managers, a portion of the portfolio consisting of privately
placed securities and municipal bonds is managed internally. 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 and generally to preclude investments
in obligations insured by the Company. 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.

      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 which 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 shareholders' equity.

      The Company internally manages and controls invested assets representing
approximately 61.8% of the book value of the investment portfolio at December
31, 1997. The Company intends to hold 24.9% (based on carrying value) of its
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.

                                                As of December 31, 1997
                                          -------------------------------------
                                                               Weighted Average
           Investment Category (1)        Carrying Value (2)       Yield (3)
           -----------------------        ------------------       ---------
                                           (in millions)
Fixed Maturities, held to maturity
   Private placements...................       $ 105.1               8.94%
   Municipal obligations - tax exempt ..          97.0               6.65
   Corporate securities.................           5.8               8.17
   U.S. Government obligations .........           2.5               6.65
                                                 -----
     Total..............................         210.4               7.99
                                                 -----


                                      -13-
<PAGE>

                                                As of December 31, 1997
                                          -------------------------------------
                                                               Weighted Average
           Investment Category (1)        Carrying Value (2)       Yield (3)
           -----------------------        ------------------       ---------
                                           (in millions)
Fixed maturities, available for sale
   Municipal obligations - tax exempt...       439.1                  5.57
   Mortgage-backed securities...........        73.7                  7.58
   Corporate securities.................        46.9                  7.18
   Foreign securities...................        35.4                  7.58
   U.S. Government obligations .........        13.0                  6.20
                                               -----
     Total..............................       608.1                  6.07
                                               -----

Short-term investments (4)..............        56.5                  5.14
Common stocks...........................         0.8                  8.57
                                              ------

     Total Investments..................      $875.8                  6.49%
                                              ======

----------
(1)   Excludes investment in affiliates and other invested assets. See Note 5 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
      shareholders' equity 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.

(4)   Includes $5.7 million of cash and cash equivalents as of December 31,
      1997.

<TABLE>
<CAPTION>
            Maturity of Fixed Maturities                      Carrying Value as of December 31, 1997
            ----------------------------                      --------------------------------------
                                                                          (In thousands)
<S>                                                                        <C>
Held to Maturity (1)
     Due in one year or less...........................                    $ 18.8
     Due after one year through five years ............                      80.8
     Due after five years through ten years............                      79.0
     Due after ten years...............................                      31.8
                                                                           ------
              Total(2).................................                    $210.4
                                                                           ======
Available for Sale (3)
     Due in one year or less...........................                    $  7.9
     Due after one year through five years ............                      26.7
     Due after five years through ten years ...........                     167.6
     Due after ten years...............................                     405.9
                                                                           ------
              Total(4).................................                    $608.1
                                                                           ======
</TABLE>

                                      -14-
<PAGE>

----------
(1)   The weighted average maturity of the portfolio is estimated to be 4.9
      years as of December 31, 1997.

(2)   Investments in fixed maturities in the held-to-maturity portfolio are
      carried at amortized cost. Total market value as of December 31, 1997 of
      fixed maturities, held to maturity, was $219.8 million.

(3)   The weighted average maturity of the portfolio as of December 31, 1997 is
      estimated to be 13.3 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, 1997 was $577.4 million.

      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.

                                          Percent of Investment Portfolio
Rating                                        As of December 31, 1997
------                                        -----------------------

AAA (1) ................................              43.5%
AA .....................................              34.5%
A  .....................................              17.8%
Other (2) ..............................               4.2%

----------
(1)   Includes U.S. Treasury and agency obligations, which constituted 7.8% of
      the total portfolio as of December 31, 1997.

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

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 therefore believes that in most cases it is
vital that retrocessions be made only to very creditworthy retrocessionnaires.
The Company also cedes to reinsurers a portion of its 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 mainly because the economic gain was not deemed
sufficient to offset both the costs of developing a program and the additional
risks the Company would assume. These risks include that of the solvency of the
retrocessionnaire and possible additional risk if the retrocession is effected
on a non-proportional basis.


                                      -15-
<PAGE>

      Enhance Re is party to an excess-of-loss reinsurance agreement with
Hannover Ruckversicherungs AG ("Hannover Re") under which it will be 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 which has a claims-paying ability rating from Standard & Poor's of AA+.

      Gross written premiums of $7.6 million were ceded or retroceded by the
Insurance Subsidiaries to unaffiliated companies in 1997, of which amount 49.0%
was paid to insurance companies having AAA claims-paying ability ratings from
Standard & Poor's.

Marketing

      Most of the Company's business derives from relationships it has
established and maintains with 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 monoline
primary companies); (2) credit reinsurance (in which the Company collected
premiums from 20 credit insurers in 1997, primarily domiciled in Europe); and
(3) affiliated-company reinsurance (including Exporters and FCIA).

      The Company markets directly to the monoline insurers writing credit
enhancement business and has direct relationships with its affiliated primary
insurers. Specialist reinsurance intermediaries, most of which 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. 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
direct competition from one other U.S. company, Capital Reinsurance Company
("Capital Re"), and one foreign company, Axa Reassurance Finance S.A. ("Axa
Re"), specializing in the reinsurance of financial guaranty insurance. These
entities, together with the Company, provide most of the reinsurance capacity
for the monoline financial guaranty primary insurers, particularly with
respect to facultative insurance. In addition, a new Bermuda-based financial
guaranty reinsurer, RAM Reinsurance Co. Ltd. ("RAM Re"), commenced business
in February 1998. The Company believes that it and Capital Re have generally
participated in roughly equal percentages in treaties with primary insurers,
with AXA Re having participated to a significantly lesser extent.

      Almost all U.S. multiline insurers have declined to participate in this
reinsurance market, a decision which the Company ascribes primarily to their
lack of the special expertise and underwriting skills necessary for this line of
reinsurance. However, several foreign insurers and


                                      -16-
<PAGE>

reinsurers in addition to Axa Re and RAM Re do compete with the Company on
both treaty and facultative bases in the provision of reinsurance for
municipal and asset-backed transactions. Certain of these are companies with
which some of the U.S. primary financial guaranty insurers have formed
strategic alliances.

      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. The agencies
allow credit to a ceding primary insurer's capital requirements and
single-risk limits for reinsurance ceded in an amount which is a function of
the claims-paying ability rating of the reinsurer. See "Rating Agencies". 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 reinsurance also faces competition from other forms of
credit enhancement including letters of credit, credit derivatives and other
securitized structures, provided 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 generally do not qualify as capital for state
regulatory purposes, nor do they constitute credit against specific liabilities
which 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 financial and other resources than the Company. The Company
has limited its activities in these market areas to those activities which are
not served by the Company's financial guaranty monoline primary insurer clients.
As a primary insurer, the Company writes insurance on those 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 which are not monoline financial guaranty insurers,
in which the Company has significant equity interests or is otherwise a
participant. Such reinsurance accounted for 6.2% of the Company's gross premiums
written in 1997. 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 depending
on the claims-paying ability rating of the reinsurer. The rating criteria used
by the rating agencies focus on the following factors: capital resources,
financial strength and, primarily in the case of a reinsurer whose common equity
is not publicly traded, 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; 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


                                      -17-
<PAGE>

depression period are established by applying capital charges to the existing
and projected insurance portfolio.

      The claims-paying ability 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 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.

      The Company's ability to compete with other triple-A rated financial
guaranty reinsurers, and consequently its results of operations, would be
materially adversely affected by any downgrade in Enhance Re's or Asset
Guaranty's ratings. Moreover, in addition to the loss of new business that would
result from any such downgrade, several treaties to which either Insurance
Subsidiary is a party grant the respective primary insurers the right to
recapture business previously ceded to such Insurance Subsidiary should it
suffer a downgrade of a specified magnitude in its claims-paying ability rating.
This could result in a material adverse effect on the Company's deferred premium
revenue and its recognition of future income therefrom.

      The Company's ability to continue engaging in certain specialty insurance
businesses, principally insurance of municipal bonds, could be materially
adversely affected by a downgrade in Asset Guaranty's rating by Standard &
Poor's or Duff & Phelps. See "Specialty Insurance Businesses" in this section.

Data Processing

      The Company believes that its data processing system is adequate to
support its current needs and has the capacity to support a greater volume of
reinsurance business. The Company completed a significant upgrade of its
technology infrastructure in 1997, updating and modernizing its hardware,
software and network. This modernization program provides a more reliable and
resilient information technology environment. The Company has also improved the
speed, security and accessible volume of information available to the Company.
The Company also embarked in 1997 on application development programs that will
provide operational support to many departments. One of the ultimate objectives
of the major application development programs is to restructure, streamline and
strengthen the Company's databases.

Employees

      As of March 6, 1998, the Company had 232 employees. None of the employees
are covered by collective bargaining agreements. The Company considers its
employee relations to be good.


                                      -18-
<PAGE>

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 National Association
of Insurance Commissioners (the "NAIC").

      The Insurance Law requires that each financial guaranty insurer and
reinsurer maintain both a reserve for unearned premiums and for known 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, 1997, the statutory
contingency reserves of the Insurance Subsidiaries aggregated $171.7 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
Subsidiaries may pay. See Item 5. "Market for Registrant's Common Equity and
Related Stockholder Matters -- Dividend Policy."

      The Company believes that each of Enhance Financial and the Insurance
Subsidiaries is in material compliance with all applicable laws and regulations
of the State of New York 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.


                                      -19-
<PAGE>

      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.

      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. As a beneficial owner of more than 10%
of the voting shares of Enhance Financial, U S WEST, Inc. ("U S WEST") is
presumed under the Insurance Law indirectly to control the Insurance
Subsidiaries. Pursuant to applications made under Section 1501(c) of the
Insurance Law, the Department has determined, subject to certain conditions,
that U S WEST is not considered the ultimate controlling person of either
Insurance Subsidiary. See Item 12. "Security Ownership of Certain Beneficial
Owners and Management."

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 eleven industry ratios and
specifies "usual values" for each ratio. Departure from these "usual values"
on four or more of the ratios can lead to inquires from individual state
insurance commissioners as to certain aspects of an insurer's business. The
values of such ratios of the Insurance Subsidiaries fell within these
"usual values" except for the liabilities to liquid assets ratio for Enhance
Re. This one ratio fell outside the "usual value" as a result of an increase in
funds held by or deposited with reinsured companies.

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.


                                      -20-
<PAGE>

Item 2. Properties.

      The Company, excluding Singer and Van-Am, occupies 40,550 square feet
of office space comprising its executive offices at 335 Madison Avenue, New
York, New York pursuant to a sublease expiring April 2000. Singer occupies
2,165 square feet of office space at the same address pursuant to a sublease
expiring August 1999 and 25,000 square feet of office space at 700 Banyan
Trail Road, Boca Raton, Florida pursuant to a lease expiring August 2005.
Van-Am occupies 6,300 square feet of office space at 167 East Main Street,
Lexington, Kentucky pursuant to a lease expiring December 1999.

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.


                                      -21-
<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:

                                                       High             Low
                                                       ----             ---
      1996
                  1st quarter......................   $27-7/8         $23-1/8
                  2nd quarter......................    29-3/4          26
                  3rd quarter......................    33-1/8          26-1/2
                  4th quarter......................    36-1/2          32-3/8
      1997
                  1st quarter......................   $39-1/2         $34-1/4
                  2nd quarter......................    45-3/16         37-5/8
                  3rd quarter......................    56              44
                  4th quarter......................    62-1/8          49-1/8
      1998
                  1st quarter (through March 27)...   $70             $52

      As of March 27, 1998, there were 95 holders of record of the Common Stock.

DIVIDEND POLICY

      Enhance Financial paid an aggregate dividend of $0.44 per share in 1997,
and the board of directors, having decided not to increase the dividend for
1998, declared a dividend in the first quarter of 1998 of $0.11 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 and is subject to
restrictions contained in an agreement relating to Enhance Financial's
indebtedness. 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 sufficient to support the payment of dividends by
Enhance Financial consistent with the practice adopted in recent years. Enhance
Financial is limited by the agreements relating to indebtedness in its ability
to pay dividends under certain circumstances. As of December 31, 1997, up to
$14.4 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.


                                      -22-
<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, 1997. 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."

<TABLE>
<CAPTION>
                                                        Year Ended December 31,
                                            -----------------------------------------------
                                            1997      1996      1995        1994       1993
                                            ----      ----      ----        ----       ----
                                                (Dollars in millions except per share and
                                                             percentage amounts)
<S>                                         <C>       <C>       <C>         <C>      <C>
Statement of Income Data:
Gross premiums written..................... $108.2    $ 98.6    $ 87.2      $ 85.1   $ 89.8
Net premiums written ......................  100.5      95.7      83.0        80.7     86.6
Premiums earned............................   85.4      77.4      63.0        61.8     59.6
Assignment sales...........................   29.2         -         -           -        -
Net realized gains (losses) on
  sale of investments......................     .7       4.0       3.5        (5.8)    16.6
Net investment income (1)..................   50.6      47.5      44.2        38.2     32.2
Total revenues.............................  170.4     131.6     112.5        95.7    109.7
Income before income taxes.................   94.0      76.4      63.8        32.7     50.3
Net income.................................   68.8      55.7      47.3        26.6     38.0
Basic earnings per share...................   3.71      3.12      2.73        1.49     2.09
Diluted earnings per share.................   3.56      3.04      2.73        1.49     2.09
Diluted operating earnings per share (2)...   3.54      2.91      2.58        1.71     1.51

Selected Financial Ratios (3)
Loss ratio.................................   11.4%     11.9%     15.1%       37.0%    37.0%
Insurance expense ratio....................   50.3%     49.2%     50.9%       55.5%    53.8%
Combined ratio.............................   61.7%     61.1%     66.0%       92.5%    90.8%

<CAPTION>
                                                        Year Ended December 31,
                                            -----------------------------------------------
                                            1997      1996      1995        1994     1993
                                            ----      ----      ----        ----     ----
                                             (Dollars in millions except per share amounts)
<S>                                         <C>       <C>       <C>         <C>      <C>
Balance Sheet Data:
Investment portfolio (4)..................  $875.9    $797.1    $749.2      $639.9   $622.3
Total assets.............................. 1,147.5     983.4     886.0       749.4    725.0
Deferred premium revenue..................   281.3     266.2     248.1       227.9    209.0
Total liabilities.........................   566.1     495.1     462.0       389.1    360.6
Total shareholders' equity................   581.4     488.3     423.9       360.3    364.5
Book value per share......................   31.10     27.03     24.59       20.45    20.14
Statutory Basis Reserves (5):
Contingency reserves......................  $171.7    $149.8    $120.8       $98.6    $79.4
Policyholders' surplus....................   324.2     312.0     294.5       287.6    300.0
                                           -------   -------   -------     -------  -------
Qualified statutory capital...............   495.9     461.8     415.3       386.2    379.4
Unearned premiums.........................   345.7     323.2     298.2       269.8    243.0
Losses and LAE reserves...................    22.5      17.7      22.0        19.5      5.8
                                           -------   -------   -------     -------  -------
Total policyholders' reserves.............  $864.1    $802.7    $735.5      $675.5   $628.2
                                           =======   =======   =======     =======   ======
Leverage ratio (6)........................   130:1     122:1     128:1       124:1    108:1

</TABLE>

        (1) Excludes capital gains and losses.

        (2) Operating earnings is not a substitute for net income computed in
accordance with GAAP, but is an important measure used by management, equity
analysts and investors to measure the financial results of the Company.


                                      -23-
<PAGE>

        (3) 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.

        (4) Excludes investment in affiliates and other invested assets. See
Note 5 of Notes to Consolidated Financial Statements for information concerning
Enhance Financial's investment in affiliates.

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

        (6) 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 principally engages, through the Insurance Subsidiaries,
in 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, 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 resposibility
bonds and excess-SIPC/excess-ICS and related type bonds. These other
insurance businesses are conducted by Van-Am, a Kentucky domiciled insurer,
and ERE-Bermuda, a Bermuda domiciled insurer. The Company, through its
consolidated subsidiary, Singer and a partially owned affiliate, C-BASS, is
also engaged in the origination, purchase, servicing and/or securitization of
special assets, including lottery awards, structured settlement payments and
sub-performing/non-performing residential mortgages.

        The Company's revenues consist primarily of (a) premiums earned on
insurance and reinsurance contracts, (b) investment income and (c) the sale of
securitized lottery awards and structured settlement payments.

YEAR ENDED DECEMBER 31, 1997 VERSUS YEAR ENDED DECEMBER 31, 1996

        Gross premiums written in 1997 increased 9.7% to $108.2 million from
$98.6 million in 1996. Total premium writings in 1997 benefited from a 25.2%
increase in gross premiums derived from the Company's other insurance lines.

        Net premiums written increased 5.1% to $100.5 million in 1997 from $95.7
million in 1996, as a result of the increase in gross premiums partially offset
by an increase in ceded premiums written from $2.9 million in 1996 to $7.6
million in 1997. The following table shows net premiums written by line of
business for the periods presented:

Net Premiums Written (in millions)       1997         1996
----------------------------------       ----         ----
Municipal Reinsurance                 $  34.3      $  41.2
Non-Municipal Reinsurance                22.2         17.4
Other Insurance Lines                    44.0         37.1
                                      -------      -------
                                      $ 100.5      $  95.7
                                      =======      =======

        The Company's other insurance lines include direct bond insurance,
credit reinsurance, financial responsibility, excess-SIPC/excess-ICS and other
surety lines. Net premiums written from these businesses have grown from $8.6
million (15.6%) in 1991 to $44.0 million (43.8%) in 1997. The Company expects
that these other insurance lines will continue to comprise a significant
component of its written premiums. In connection with certain of its other
insurance lines, the Company underwrites with the anticipation of higher loss
levels than those associated with its core municipal and non-municipal
reinsurance business. The Company takes these higher loss levels into account in
determining appropriate premium rates.


                                    -24-
<PAGE>

        Net premiums earned grew 10.4% to $85.5 million in 1997 from $77.4
million in 1996. This growth in premiums earned was in large part attributable
to increased earnings from the Company's other insurance lines as discussed in
the preceding paragraph. The following table shows net premiums earned by line
of business for the periods presented:

Net Premiums Earned (in millions)                   1997        1996
---------------------------------                   ----        ----
Municipal Reinsurance ......................       $37.3       $34.4
Non-Municipal Reinsurance ..................        12.6        13.0
Other Insurance Lines ......................        35.5        30.0
                                                   -----       -----
                                                   $85.4       $77.4
                                                   =====       =====

        Monoline reinsurance earned premiums increased 5.3% as a result of a
$3.9 million (10.4%) growth in earned premiums before the effect of refundings.
This growth was partially offset by a decrease in refunded earned premiums from
$9.9 million in 1996 to $8.6 million in 1997. A refunding eliminates the
Company's reinsurance exposure to the refunded obligation and, as a result, the
Company recognizes in current earnings the remaining related deferred premium
revenue. The growth in premiums earned also reflects the amortization of the
deferred premium revenue balance which has grown to $281.3 million at year-end
1997 from $266.2 million at year-end 1996.

        Net investment income increased 6.6% to $50.6 million in 1997 from $47.5
million for 1996 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 9.4% in 1997 over 1996. The average yields on the
Company's investment portfolio, after deducting associated costs, were 6.2% and
6.4% for the years ended December 31, 1997 and 1996, respectively. The average
yields on the Company's investment portfolio on an after-tax basis, net of
associated costs were 5.1% and 5.0% for the years ended December 31, 1997 and
1996, respectively. In addition, the Company realized $0.7 million and $4.0
million of net capital gains in 1997 and 1996, respectively. Net investment
income is presented after deduction of both external investment management fees
and internal costs associated with managing the investment portfolio.

        Assignment sales for 1997 were $29.2 million. This revenue results from
Singer's operations being consolidated with the Company's, commencing
March 21, 1997.

        Incurred losses and loss adjustment expenses ("LAE") were $9.8 million
in 1997 compared with $9.2 million in 1996. Of these amounts, $8.1 million and
$7.3 million were incurred in connection with the Company's credit and surety
businesses in 1997 and 1996, respectively. The Company believes that the
reserves for losses and LAE, including case and 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 or be less than such estimates.

        The Company's insurance operating expense ratio for 1997 was 50.3%
compared to 49.2% in 1996. Policy acquisition costs, which vary with and are
directly related to the generation of new and renewal premiums, totaled $30.0
million and $26.7 million in 1997 and 1996, respectively, representing 35.1% and
34.5% of premiums earned in those respective periods. Other operating expenses
increased to $12.2 million in 1997 from $10.5 million in 1996.

        Interest expense of $7.3 million was incurred in 1997 compared to $5.5
million in 1996 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 1997 compared to 1996.

        The Company's effective tax rate was 26.8% for 1997 compared to 27.1% in
1996. The lower 1997 rate reflects the Company's strategy of migrating a greater
proportion of its investment portfolio to tax-exempt securities in 1997
partially offset by an increase in income taxed at the statutory rate.

        Net income for 1997 increased 23.5% to $68.6 million from $55.7 million
in 1996. On a per share basis, basic earnings per share increased 18.9% to $3.71
in 1997 from $3.12 in 1996, while diluted earnings per share increased 17.1% to
$3.56 in 1997 from $3.04 in 1996. Basic operating earnings per share


                                    -25-
<PAGE>

increased 24.2% to $3.69 in 1997, while diluted operating earnings per share
increased 22.1% to $3.54 in 1997. The Company defines operating earnings as
net income, less the effect of net realized capital gains and losses and
foreign exchange gains and losses.

        The per-share increases were offset, in part, by the higher weighted
average outstanding shares in 1997 following the issuance of 503,114 shares by
Enhance Financial to acquire its partner's 50% interest in Singer and 299,496
shares in connection with the exercise of employee stock options, partially
offset by the repurchase of 177,925 shares.

        The weighted average shares outstanding for 1997 was 18.53 million
compared to 17.88 million for 1996.

YEAR ENDED DECEMBER 31, 1996 VERSUS YEAR ENDED DECEMBER 31, 1995

        Gross premiums written in 1996 increased 13.1% to $98.6 million from
$87.2 million in 1995. Total premium writings in 1996 benefited from a 19.2%
increase in non-municipal reinsurance writings and a 22.8% increase in the
Company's other insurance lines.

        Net premiums written increased 15.3% to $95.7 million in 1996 from $83.0
million in 1995, consistent with the increase in gross premiums discussed above.
Of the Company's net premiums written in 1996, 43.0%, 18.2% and 38.8% were
derived from the reinsurance of municipal bonds, the reinsurance of asset-backed
debt obligations and the Company's specialty activities, respectively, compared
to 47.9%, 16.3% and 35.8% in 1995.

        Net premiums earned grew 23.0% to $77.4 million in 1996 from $62.9
million in 1995. This growth in premiums earned was in large part attributable
to increased earnings from the Company's other insurance lines as discussed in
the preceding paragraph.

        Monoline reinsurance premiums earned increased 21.8% due, in part, to
refundings which contributed $9.9 million (12.8%) of premiums earned in 1996
compared to $5.7 million (9.0%) in 1995. A refunding eliminates the Company's
reinsurance exposure to the refunded obligation and as a result, the Company
recognizes in current earnings the remaining related deferred premium revenue.
Excluding the impact of refundings, monoline reinsurance premiums earned
increased 18.0% over the prior year. The growth in premiums earned also reflects
the amortization of the deferred premium revenue balance which grew to $266.2
million at year-end 1996 from $248.1 million at year-end 1995.

        Net investment income increased 7.5% to $47.5 million in 1996 from $44.2
million for 1995 consistent with the growth in invested assets in the period.
The average yields on the Company's investment portfolio, after deducting
associated costs, were 6.4% for 1996 and 1995. In addition, the Company realized
$4.0 million and $3.5 million of net capital gains in 1996 and 1995,
respectively. Net investment income is presented after deduction of both
external investment management fees and internal costs associated with managing
the investment portfolio.

        Incurred losses and LAE were $9.2 million in 1996 compared with $9.5
million in 1995. Of these amounts, $7.3 million and $6.1 million were incurred
in connection with the Company's credit and surety businesses in 1996 and 1995,
respectively. The Company believes that the reserves for losses and LAE,
including case and 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 or be
less than such estimates.

        The Company's insurance operating expense ratio for 1996 was 49.2%
compared to 50.9% in 1995. Policy acquisition costs, which vary with and are
directly related to the generation of new and renewal premiums, totaled $26.7
million and $21.1 million in 1996 and 1995, respectively, representing 34.5% and
33.4% of premiums earned in those respective periods. Other operating expenses
decreased marginally to $10.5 million in 1996 from $10.6 million in 1995.


                                    -26-
<PAGE>

        Interest expense of $5.5 million was incurred in 1996 compared to $5.6
million in 1995.

        The Company's effective tax rate was 27.1% for 1996 compared to 25.9% in
1995. The higher 1996 rate reflected the continuing reduction in the percentage
of pre-tax income represented by income from tax-exempt assets. This impact has
been reduced in part by the Company's strategy of directing a greater proportion
of its new cash flow to the purchase of tax-exempt securities in 1996.

        Net income for 1996 increased 17.8% to $55.7 million from $47.3 million
in 1995. Basic earnings per share increased 14.3% to $3.12 in 1996 from $2.73 in
1995. Basic operating earnings per share, which excludes the impact of capital
gains and losses and foreign exchange gains and losses, increased 15.1% to $2.97
in 1996. Diluted operating earnings per share increased 12.8% to $2.91 from
$2.58 in 1995.

        The per-share increases were offset, in part, by the higher weighted
average shares in 1996 following the reissuance, in the first quarter of 1996,
of 600,000 treasury shares to Swiss Reinsurance Company and the issuance at
various times throughout 1996 of 231,275 new shares in connection with the
exercise of stock options.

        The weighted average shares outstanding for 1996 was 17.88 million
compared to 17.32 million for 1995.

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 and $2.0 million, respectively, in dividends in 1997.
As of December 31, 1997, under the Insurance Law, the Insurance Subsidiaries
had an additional $14.4 million available for dividends to Enhance Financial
compared with $21.2 million available as of December 31, 1996. Payments of
dividends by Enhance Financial to its shareholders are further restricted by
the terms of the Credit Agreement. At December 31, 1997, the maximum amount
of dividends which may be paid by Enhance Financial to its shareholders in
compliance with the terms of such agreement was $35.1 million. Enhance
Financial paid dividends of $8.2 million to shareholders in 1997.

        As of December 31, 1997, the statutory policyholders' surplus of Enhance
Re and Asset Guaranty were $228.3 million and $94.9 million, respectively,
compared to the minimum $68.4 million required by each under the Insurance Law
and compared to $225.3 million and $86.7 million at December 31, 1996.

        Enhance Financial is party to the Credit Agreement with major commercial
banks providing for borrowing by Enhance Financial of up to $75.0 million to be
used for general corporate purposes. 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 1997 was $43.5 million.

        The Company believes that the operating liquidity needs of the
Insurance Subsidiaries can be funded exclusively from their respective
operating cash flows. 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 $73.5 million, $59.8 million and $66.3 million for
the years 1997, 1996 and 1995, respectively. The Company paid a total of $5.0
million, $11.9 million and $7.3 million in claims in 1997, 1996 and 1995,
respectively. Of the claim payments made in 1997, $4.3 million related to
reserves established in prior years.

                                    -27-
<PAGE>

        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.

        In July 1996, the Company formed C-BASS, a joint venture in which the
Company and MGIC each own 48% interests. The Company contributed $15.8
million in cash in 1996, $6.8 million in cash in 1997 and is expected to
contribute an additional $2.4 million (including its 100% interest in LLSI)
in 1998. In addition, in January 1998 the Company guarantied repayment of up
to $25 million of the amount outstanding under a $50 million LIBOR-based
unsecured revolving credit facility that C-BASS obtained from a major
commercial bank. The outstanding principal under the facility currently is due
not later than January 29, 1999. As of March 27, 1998, the Company had
guaranteed $25 million under this facility. The Company believes there are now
more attractive financing alternatives available to C-BASS, which are being
pursued actively.

        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 503,114 shares of its common stock in
connection with the 1997 transactions.

        Enhance Financial makes available to Singer a $17 million LIBOR-based
secured revolving credit facility and a LIBOR-based working capital credit
line for its use in originating assets for securitization. At December 31,
1997, $11.2 million and $5.8 million were outstanding under the secured
credit facility and the working capital credit line, respectively. Since all
intercompany amounts are eliminated in consolidation, these amounts are
included in the borrowings outstanding under the Credit Agreement.

        In December 1996, the board of directors terminated the then existing
stock repurchase program and authorized the repurchase of up to 750,000 shares
of Enhance Financial's common stock from that date. In 1997, Enhance Financial
purchased 177,925 shares of its common stock for an aggregate consideration of
$7.0 million

        Based on the historical cash flow of the Company, the Company's
current financial results and the Company's expectation as to the level of
the Company's net premiums written during 1998, the Company believes that
cash flow provided by operating activities of the Insurance Subsidiaries
during 1998 will provide sufficient liquidity for the operations of the
Company, as well as funds to Enhance Financial so that Enhance Financial will
be able to meet its debt service and other obligations. The ability of
Enhance Financial to meet its debt service and other obligations after 1998
will depend upon the cash flow generated by its operating activities and the
availability to Enhance Financial of sufficient amounts of funds from
those operating activities in the form of dividends or other payments. The
Company's cash flow to Enhance Financial after 1998 may be influenced by a
variety of factors, including market changes, insurance regulatory changes
and changes in general economic conditions. Consequently, although the
Company currently anticipates that it will be able to meet all debt service
and other obligations over the long term, no assurance can be given that the
available net cash provided by the Company's operating activities will
provide sufficient liquidity for Enhance Financial to meet all its long-term
liquidity needs.

        At December 31, 1997, 1996 and 1995, the carrying value of the
Company's investment portfolio, total investments less investment in
affiliates and other invested assets, was $876 million, $797 million and $749
million, respectively, on which was earned $50.6 million, $47.5 million and
$44.2 million in those years, respectively, excluding $0.7 million, $4.0
million and $3.5 million of net realized capital gains in those years,
respectively. The increase in investments resulted principally from cash
flows from operations generated during the period. As of December 31, 1997,
the Company held approximately $50.8 million and $5.7 million in short-term
investments and cash and cash equivalents, respectively, to meet liquidity
needs.

        In 1997, the Company incurred annual debt service on its long- and
short-term borrowings of $7.3 million and is anticipated to incur similar debt
service expense in 1998.

        The Company has no other material commitments for capital or other
expenditures during 1998 or thereafter.


                                    -28-
<PAGE>

        On March 13, 1998, Enhance Financial filed a shelf registration
statement for up to $100 million of debt and/or equity securities. Enhance
Financial may issue these securities from time to time depending on market
conditions, providing capital flexibility for further growth.

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

        Not applicable.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
             ENHANCE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES

                                                                          Page
                                                                          ----

Independent Auditors' Report                                               30

Consolidated Balance Sheets as of December 31, 1997 and 1996               31

Consolidated Statements of Income for the Years Ended
     December 31, 1997, 1996 and 1995                                      32

Consolidated Statements of Shareholders' Equity for the Years
Ended December 31, 1997, 1996 and 1995                                     33

Consolidated Statements of Cash Flows for the Years Ended
     December 31, 1997, 1996 and 1995                                      34

Notes to Consolidated Financial Statements                                 35







                                    -29-
<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 (the "Company") as of December
31, 1997 and 1996 and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. 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 the Company as of December 31, 1997
and 1996 and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.


Deloitte & Touche LLP
February 17, 1998
New York, New York


                                       -30-

<PAGE>

<TABLE>
<CAPTION>

                        ENHANCE FINANCIAL SERVICES GROUP INC.
                                  AND SUBSIDIARIES

                             CONSOLIDATED BALANCE SHEETS
                         (In thousands except share amounts)

                                                                      December 31,   December 31,
                                                                      ------------   ------------
                                                                          1997           1996
                                                                          ----           ----
<S>                                                                  <C>              <C>
Assets
  Investments:
    Fixed maturities, held to maturity, at amortized cost
     (market value $219,763 and $227,048)...................          $  210,436       $217,692
    Fixed maturities, available for sale, at market
     (amortized cost $577,388 and $526,973).................             608,077        539,884
    Common stock, at market (cost $498).....................                 833            878
    Investment in affiliates................................              38,862         24,182
    Other invested assets...................................              29,050              0
    Short-term investments..................................              50,827         33,247
    Cash and cash equivalents...............................               5,686          5,385
                                                                      ----------       --------
     Total Investments......................................             943,771        821,268

  Premiums and other receivables............................              29,958         22,472
  Accrued interest and dividends receivable.................              12,959         11,434
  Deferred policy acquisition costs.........................              95,645         87,325
  Federal income taxes recoverable..........................               3,366          1,428
  Prepaid reinsurance premiums..............................               6,281          2,793
  Reinsurance recoverable on unpaid losses..................               2,688          1,823
  Receivable from affiliates................................              10,640         22,205
  Receivable for securities.................................                 702          2,370
  Other assets..............................................              41,499         10,325
                                                                      ----------       --------
     TOTAL ASSETS...........................................          $1,147,509       $983,443
                                                                      ==========       ========


Liabilities and Shareholders' Equity

LIABILITIES
  Losses and loss adjustment expenses.......................             $33,675        $28,081
  Reinsurance payable on paid losses and loss adjustment....               3,479          2,463
  Deferred premium revenue..................................             287,535        268,997
  Accrued profit commissions................................               3,768          3,050
  Deferred income taxes.....................................              64,680         46,402
  Long-term debt............................................              75,000         75,000
  Short-term debt...........................................              43,500         42,500
  Payable for securities....................................               5,318          2,083
  Accrued expenses and other................................              49,161         26,518
                                                                      ----------       --------
     TOTAL LIABILITIES......................................             566,116        495,094
                                                                      ----------       --------

SHAREHOLDERS' EQUITY
  Common stock-$.10 par value
    Authorized-30,000,000 shares
    Issued-19,335,935 and 18,533,325 shares.................               1,934          1,853
  Additional paid-in capital................................             230,440        201,847
  Retained earnings.........................................             344,402        283,791
  Unearned compensation.....................................                   0            (20)
  Unrealized gains..........................................              19,396          8,636
  Treasury stock............................................             (14,779)        (7,758)
                                                                      ----------       --------
     TOTAL SHAREHOLDERS' EQUITY.............................             581,393        488,349
                                                                      ----------       --------
     TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.............          $1,147,509       $983,443
                                                                      ==========       ========

</TABLE>

                 See notes to consolidated financial statements


                                      -31-

<PAGE>

<TABLE>
<CAPTION>

                      ENHANCE FINANCIAL SERVICES GROUP INC.
                                AND SUBSIDIARIES

                        CONSOLIDATED STATEMENTS OF INCOME

                (In thousands except share and per share amounts)


                                                               Years ended December 31,
                                                        ----------------------------------------
                                                           1997           1996           1995
                                                        ----------     ----------     ----------

Revenues
<S>                                                     <C>            <C>            <C>
 Net premiums written.............................       $100,506       $ 95,662       $ 82,988
 Increase in deferred premium revenue.............        (15,051)       (18,229)       (20,038)
                                                         --------       --------       --------
    Premiums earned...............................         85,455         77,433         62,950
 Net investment income............................         50,618         47,462         44,159
 Net realized gains on sale of investments........            657          4,008          3,478
 Assignment sales.................................         29,200              -              -
 Other income.....................................          4,463          2,738          1,869
                                                         --------       --------       --------
    Total revenues................................        170,393        131,641        112,456
                                                         --------       --------       --------

Expenses
 Losses and loss adjustment expenses..............          9,755          9,184          9,513
 Policy acquisition costs.........................         30,020         26,703         21,053
 Profit commissions...............................            719            850            359
 Other operating expenses - insurance.............         12,225         10,537         10,629
                          - non-insurance.........         25,141          2,660          2,086
                                                         --------       --------       --------
    Total expenses................................         77,860         49,934         43,640
                                                         --------       --------       --------
 Income from operations...........................         92,533         81,707         68,816
 Equity in income of affiliates...................          8,778            274            115
 Foreign currency gain(loss)......................            (38)           (69)           547
 Interest expense.................................         (7,317)        (5,522)        (5,638)
                                                         --------       --------       --------
    Income before income taxes....................         93,956         76,390         63,840
 Income taxes.....................................         25,150         20,686         16,543
                                                         --------       --------       --------
    Net income....................................       $ 68,806       $ 55,704       $ 47,297
                                                         ========       ========       ========

Earnings per share - Basic........................       $   3.71       $   3.12       $   2.73
                                                         --------       --------       --------

                   - Diluted......................       $   3.56       $   3.04       $   2.73
                                                         --------       --------       --------

Weighted average shares outstanding - Basic.......         18,534         17,875         17,316
                                                         --------       --------       --------

                                    - Diluted.....         19,314         18,353         17,316
                                                         --------       --------       --------

</TABLE>

                 See notes to consolidated financial statements


                                      -32-

<PAGE>

<TABLE>
<CAPTION>

                                                   ENHANCE FINANCIAL SERVICES GROUP INC.
                                                             AND SUBSIDIARIES
                                              CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                                           FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
                                                    (In thousands except share amounts)

                                                                                                                       Unearned
                                                                                                       Additional    Compensation/
                                            Common Stock               Treasury Stock                    Paid-in    Excess Pension
                                               Shares        Amount        Shares         Amount         Capital      Liability
                                            ------------   ----------  --------------   ----------     ----------   --------------
<S>                                         <C>             <C>         <C>             <C>            <C>               <C>
Balance, December 31, 1994..............     18,277,475      $1,828        657,875       $(11,311)      $192,466          $(264)

Amortization of unearned compensation
 (net of income tax benefit.............                                                                     229            160
Change in unrealized gains (losses).....
Dividends paid ($0.36 per share)........
Exercise of stock options...............         24,575           2                                          413
Registration costs of common stock......                                                                    (243)
Purchase of treasury stock..............                                   404,800         (6,732)
Net income..............................
                                             ----------      ------      ---------       --------       --------          -----
Balance, December 31, 1995..............     18,302,050       1,830      1,062,675        (18,043)       192,865           (104)

Amortization of unearned compensation
 (net of income tax benefit.............                                                                     282             84
Change in unrealized gains (losses).....
Dividends paid ($0.40 per share)........
Exercise of stock options...............        231,275          23                                        4,722
Registration costs of common stock......                                                                    (184)
Reissuance of treasury stock............                                  (600,000)        10,323          4,162
Purchase of treasury stock..............                                     1,600            (38)
Net income..............................
                                             ----------      ------      ---------       --------       --------          -----
Balance, December 31, 1996..............     18,533,325       1,853        464,275         (7,758)       201,847            (20)
                                             ----------      ------      ---------       --------       --------          -----

Amortization of unearned compensation
 (net of income tax benefit.............                                                                                     20
Change in unrealized gains (losses).....
Dividends paid ($0.44 per share)........
Exercise of stock options...............        299,496          30                                        7,311
Issuance of common stock................        503,114          51                                       21,282
Purchase of treasury stock..............                                   177,925         (7,021)
Net income..............................
                                             ----------      ------      ---------       --------       --------          -----
Balance, December 31, 1997..............     19,335,935      $1,934        642,200       $(14,779)      $230,440          $   0
                                             ==========      ======      =========       ========       ========          =====

<CAPTION>

                                               Unrealized      Retained
                                             Gains (Losses)    Earnings         Total
<S>                                          --------------    --------       ---------
                                              <C>            <C>            <C>
Balance, December 31, 1994..............        $(16,669)      $194,211       $360,261

 Amortization of unearned compensation
  (net of income tax benefit.............                                          389
 Change in unrealized gains (losses).....         28,773                        28,773
 Dividends paid ($0.36 per share)........                        (6,223)        (6,223)
 Exercise of stock options...............                                          415
 Registration costs of common stock......                                         (243)
 Purchase of treasury stock..............                                       (6,732)
 Net income..............................                        47,297         47,297
                                                --------       --------       --------
 Balance, December 31, 1995..............         12,104        235,285        423,937
                                                --------       --------       --------


Amortization of unearned compensation
 (net of income tax benefit.............                                           366
Change in unrealized gains (losses).....          (3,468)                       (3,468)
Dividends paid ($0.40 per share)........                         (7,198)        (7,198)
Exercise of stock options...............                                         4,745
Registration costs of common stock......                                          (184)
Reissuance of treasury stock............                                        14,485
Purchase of treasury stock..............                                           (38)
Net income..............................                         55,704         55,704
                                                --------       --------       --------
Balance, December 31, 1996..............           8,636        283,791        488,349
                                                --------       --------       --------

Amortization of unearned compensation
 (net of income tax benefit.............                                            20
Change in unrealized gains (losses).....          10,760                        10,760
Dividends paid ($0.44 per share)........                         (8,195)        (8,195)
Exercise of stock options...............                                         7,341
Issuance of common stock................                                        21,333
Purchase of treasury stock..............                                        (7,021)
Net income..............................                         68,806         68,806
                                                --------       --------       --------
Balance, December 31, 1997..............        $ 19,396       $344,402       $581,393
                                                ========       ========       ========
 </TABLE>

                See notes to consolidated financial statements.


                                     -33-

<PAGE>

<TABLE>
<CAPTION>

                          ENHANCE FINANCIAL SERVICES GROUP INC.
                                    AND SUBSIDIARIES

                          CONSOLIDATED STATEMENTS OF CASH FLOWS
                                     (in thousands)

                                                                     Years ended December 31,
                                                             ----------------------------------------
                                                                1997           1996           1995
                                                             ----------     ----------     ----------
<S>                                                         <C>            <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income...........................................      $  68,806      $  55,704      $  47,297
  Adjustments to reconcile net income to net cash
    provided by operating activities:
    Depreciation and amortization, net.................         (8,869)        (8,333)        (6,054)
    Gain on sale of investments, net...................           (657)        (4,008)        (3,478)
    Equity in income of affiliates.....................         (8,778)          (274)          (115)
    Compensation, restricted stock award program                    20             84            160
    Change in assets and liabilities, net of effects of
     purchase of Singer:
     Other invested assets.............................        (16,418)             -              -
     Premiums receivable...............................         (4,775)        (1,255)       (11,376)
     Accrued interest and dividends receivable.........         (1,525)          (695)          (147)
     Accrued expenses and other liabilities............         16,975          2,812         17,386
     Deferred policy acquisition costs.................         (8,320)        (6,128)        (7,174)
     Deferred premium revenue, net.....................         15,050         18,153         20,168
     Accrued profit commissions........................            718           (669)        (3,944)
     Losses and loss adjustment expenses,net...........          5,745         (2,870)           762
     Other assets......................................            718         (2,741)          (432)
     Income taxes, net.................................         14,789          9,999         13,220
                                                             ---------      ---------      ---------
  Net cash provided by operating activities............         73,479         59,779         66,273
                                                             ---------      ---------      ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of property and equipment...................         (2,027)          (599)          (345)
  Proceeds from sales and maturities of investment.....        412,892        663,573        546,218
  Purchase of investments..............................       (444,793)      (735,346)      (585,833)
  Sales(purchases) of short-term investments, net......        (16,211)        10,856        (15,633)
  Investment in affiliates.............................        (10,640)       (16,667)        (5,709)
  Cash of previously unconsolidated subsidiary.........            147              -              -
                                                             ---------      ---------      ---------
  Net cash used in investing activities................        (60,632)       (78,183)       (61,302)
                                                             ---------      ---------      ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Receivable from affiliates...........................         (5,671)       (21,260)             -
  Capital stock........................................          7,341          4,843            401
  Short-term debt......................................          1,000         27,575         12,000
  Dividends paid.......................................         (8,195)        (7,198)        (6,223)
  Principal payment long-term debt.....................              -         (3,400)        (1,400)
  Reissuance of treasury stock.........................              -         14,485              -
  Purchase of treasury stock...........................         (7,021)           (38)        (6,732)
                                                             ---------      ---------      ---------
Net cash  provided by (used in) financing activities...        (12,546)        15,007         (1,954)
                                                             ---------      ---------      ---------
Net change in cash and cash equivalents................            301         (3,397)         3,017
Cash and cash equivalents, beginning of year...........          5,385          8,782          5,765
                                                             ---------      ---------      ---------
Cash and cash equivalents, end of year.................      $   5,686      $   5,385      $   8,782
                                                             =========      =========      =========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW
  INFORMATION:
    Cash paid during the year for income taxes.........      $  10,678      $   4,608      $   3,772
                                                             =========      =========      =========
    Cash paid during the year for interest.............      $   8,136      $   6,326      $   6,233
                                                             =========      =========      =========

</TABLE>

                 See notes to consolidated financial statements


                                      -34-
<PAGE>

               ENHANCE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    Years Ended December 31, 1997, 1996 and 1995


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 wholly-owned,
New York-domiciled insurance subsidiaries Enhance Reinsurance Company ("Enhance
Re") and Asset Guaranty Insurance Company ("Asset Guaranty") (together, the
"Insurance Subsidiaries") in 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, 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 a consolidated subsidiary, Singer Asset Finance
Company, LLC ("Singer", see Note 5) and a partially owned affiliate,
Credit-Based Asset Servicing and Securitization LLC ("C-BASS", see Note 5), is
also engaged in the origination, purchase, servicing and/or securitization of
special assets, including lottery awards, structured settlement payments and
sub-performing/non-performing residential mortgages.

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 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:


                                      -35-
<PAGE>

CONSOLIDATION

The accompanying financial statements include the accounts of Enhance
Financial, the Insurance Subsidiaries, Singer, Van-Am and EnRe Bermuda
(collectively the "Company").  All significant intercompany accounts and
transactions have been eliminated. Investments in immaterial wholly owned
subsidiaries and in investments in which the Company owns from 20% to 50% of
those companies are accounted for in accordance with the equity method of
accounting (see Note 5).

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 which 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 and carried at fair value.  Unrealized gains
and losses, net of taxes, on the available for sale portfolio are charged or
credited to shareholders' equity.

     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 shareholders' equity.  Realized
gains or losses on sales of investments are determined on the basis of
specific identification.

     Other invested assets are trading securities and are carried at fair value,
which is determined as the net present value of the future cash flows purchased,
discounted at market rates.  Mark to market adjustments on these assets are
included in other income.

DERIVATIVES

The Company uses derivative financial instruments for hedging purposes as part
of its overall risk management strategy.  Gains and losses on the derivative
financial 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.

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.  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.


                                      -36-
<PAGE>

REINSURANCE CEDED

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 thousands                   Years Ended December 31,

                      1997                1996                1995
                      ----                ----                ----

                Written   Earned   Written    Earned   Written    Earned
                -------   ------   -------    ------   -------    ------
Direct         $ 25,477  $13,950   $16,946   $ 9,676   $12,313   $ 6,605
Assumed          82,675   75,665    81,642    70,145    74,846    58,865
Ceded            (7,646)  (4,160)   (2,926)   (2,388)   (4,171)   (2,520)
               --------  -------   -------   -------   -------   -------
Net premiums   $100,506  $85,455   $95,662   $77,433   $82,988   $62,950
               ========  =======   =======   =======   =======   =======

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.


ASSIGNMENT SALES

The Company, through its subsidiaries, acquires from individuals the right to
receive lottery awards and structured settlement payments and securitizes these
payment streams.  Income is recognized at the time of sale through the
securitization process for the difference between the net sales proceeds and the
purchase price paid to individuals.

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.


                                      -37-
<PAGE>

LOSSES AND LOSS ADJUSTMENT EXPENSES ("LAE")

Reserves for losses and LAE 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 records a 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
estimates for losses and LAE are periodically evaluated by the Company, and
changes in estimates are reflected in income currently.  The Company believes
that the reserves are adequate to cover the ultimate cost of all claims net of
reinsurance recoveries.  However, the reserves are necessarily based on
estimates, and there can be no assurance that the ultimate liability 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.

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


                                      -38-
<PAGE>

STOCK COMPENSATION PLANS

In 1991, the Company implemented a stock option program for key employees.  In
1992, the Company implemented a directors' stock option program for the benefit
of directors who are not employees of the Company.  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

Beginning in the fourth quarter of 1997, 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.  All prior period EPS data has been restated to
conform to the new standard.  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
are comprised of outstanding options pursuant to the Company's stock option
programs.

NEW ACCOUNTING PRONOUNCEMENTS

In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
131, "Disclosures About Segments of an Enterprise and Related Information
Footnotes", which became effective for the Company beginning January 1, 1998.
SFAS No. 131 establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders.  It also
establishes standards for related disclosures about products and services,
geographic areas and major customers.  Management believes that the presentation
of financial information under the new statement will not be materially
different than the current presentation.


                                      -39-
<PAGE>


      In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income", which became effective for the Company beginning January 1, 1998.
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full
set of general-purpose financial statements.  This Statement 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.  It does
not require a specific format for that financial statement but requires that
an enterprise display an amount representing total comprehensive income for
the period in that financial statement.

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.

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 generally
accepted accounting principles ("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.

      At December 31, 1997, the statutory basis policyholders' surplus of
Enhance Re and Asset Guaranty, as reported to insurance regulatory
authorities, was $228.3 million and $94.9 million, respectively.  Statutory
net income of Enhance Re and Asset Guaranty was $40.7 million and $11.7
million, respectively, for the year ended December 31, 1997.  At December 31,
1996, the statutory basis policyholders' surplus of Enhance Re and Asset
Guaranty, as reported to insurance regulatory authorities, was $225.3
million and $86.7 million, respectively.  Statutory net income of Enhance Re
and Asset Guaranty was $46.5 million and $8.8 million, respectively, for the
year ended December 31, 1996. Statutory net income of Enhance Re and Asset
Guaranty was $39.0 million and $10.5 million, respectively, for the year
ended December 31, 1995.

                                      -40-
<PAGE>

      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 and Asset Guaranty declared and
paid a total of $22.0 million and $2.0 million, respectively, in dividends to
Enhance Financial for the year ended December 31, 1997.  At December 31,
1997, the Insurance Subsidiaries had an additional $14.4 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, 1997 and 1996:

                                                Gross      Gross
In thousands                     Amortized Unrealized  Unrealized     Fair
1977                                  Cost      Gains      Losses     Value
                                 ---------  ---------  ----------  --------
HELD TO MATURITY

  Private placements            $ 105,125   $      -     $      -  $105,125
  Municipal obligations            96,959      8,877                105,836
  Corporate securities              5,832        324                  6,156
  U.S. Government obligations       2,520        126                  2,646
                                ---------   --------     --------  --------
Total held to maturity          $ 210,436   $  9,327     $         $219,763
                                =========   ========     ========  ========

AVAILABLE FOR SALE

  Municipal obligations         $ 415,131   $ 23,917    $       6 $ 439,042
  Mortgage-backed securities       71,361      2,375            -    73,736
  Corporate securities             44,836      2,077            2    46,911
  Foreign securities               33,282      2,663          516    35,429
  U.S. Government obligations      12,778        183            2    12,959
                                ---------   --------     --------  --------
Total available for sale        $ 577,388   $ 31,215     $    526  $608,077
                                =========   ========     ========  ========

                                      -41-
<PAGE>


                                   Gross        Gross        Gross
In thousands                   Amortized   Unrealized   Unrealized       Fair
1996                                Cost        Gains       Losses      Value
                               ---------    ---------    ---------  ---------
HELD TO MATURITY
  Private placements           $ 108,064    $       -    $       -  $ 108,064
  Municipal obligations           98,513        8,930            -    107,443
  Corporate securities             8,039          372            -      8,411
  U.S.Government obligations       3,076           94           40      3,130
                               ---------    ---------    ---------  ---------
Total held to maturity         $ 217,692    $   9,396    $      40  $ 227,048
                               =========    =========    =========  =========

AVAILABLE FOR SALE

  Municipal obligations        $ 347,575    $  10,038    $   1,087  $ 356,526
  Mortgage-backed securities      77,413          844           71     78,186
Corporate securities              46,197        1,100          146     47,151
  Foreign securities              46,108        2,158           36     48,230
U.S. Government obligations        9,680          120            9      9,791
                               ---------    ---------    ---------  ---------
Total available for sale       $ 526,973    $  14,260    $   1,349  $ 539,884
                               =========    =========    =========  =========

The amortized cost and estimated fair value of fixed maturities at December 31,
1997 by contractual maturity are shown below.  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.

In thousands                                Amortized         Fair
                                                 Cost        Value
                                           ----------   ----------
Fixed maturities, held to maturity
Due in one year or less                    $   18,782   $   18,808
Due after one year through five years          80,789       83,129
Due after five years through ten years         79,053       83,486
Due after ten years                            31,812       34,340
                                           ----------   ----------
                                           $  210,436   $  219,763
                                           ==========   ==========
Fixed maturities, available for sale
Due in one year or less                         7,914        7,895
Due after one year through five years          25,915       26,688
Due after five years through ten years        159,287      167,607
Due after ten years                           384,272      405,887
                                           ----------   ----------
                                           $  577,388   $  608,077
                                           ==========   ==========

Proceeds from sales of available for sale investments in fixed maturities during
1997, 1996 and 1995 were approximately $407 million, $640 million and $529
million, respectively.  Gross gains of $4.8 million and gross losses of $4.2
million were realized on those sales in 1997.  Gross gains of $7.7 million and
gross losses of $3.7 million were realized on those sales in 1996.  Gross gains
of $10.1 million and gross losses of $6.6 million were realized on those sales
in 1995.

                                      -42-
<PAGE>

Sources of the Company's consolidated net investment income are as follows:

In thousands                                        YEARS ENDED DECEMBER 31,
                                                 1997         1996       1995
                                              -------      -------    -------


Fixed maturities                              $50,258      $46,102    $42,188
Short-term investments and  cash equivalents    1,872        3,184      4,131
Other                                             572          188        261
                                              -------      -------    -------
    Total investment income                    52,702       49,474     46,580
Less investment expenses                        2,084        2,012      2,421
                                              -------      -------    -------
Net investment income                         $50,618      $47,462    $44,159
                                              =======      =======    =======

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 $286 million and $212 million
at December 31, 1997 and December 31, 1996, respectively.

Note 5 - INVESTMENT IN AFFILIATES

The Company owns 360,000 shares of EIC Corporation Ltd. ("EIC"), 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% at December 31, 1997.  The Company accounts for its
investment in EIC in accordance with the equity method of accounting.

      In 1997, as part of the recapitalization of Van-Am, the Company
contributed $2.0 million to Van-Am.  The Company owns a controlling equity
interest in the outstanding stock of Van Am and accounts for its investment
on a consolidated basis.

      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.

                                      -43-
<PAGE>

      In 1996, the Company and MGIC Investment Corporation formed a joint
venture C-BASS, which evaluates, purchases, services and securitizes
sub-performing and non-performing residential mortgages.  At December 31,
1997, the Company had contributed $22.6 million of its required initial
capital contribution of $24 million to the C-BASS joint venture.  The Company
owns a 48% interest in C-BASS, which is being accounted for on the equity
basis of accounting. As part of its commitment to capitalize C-BASS, the
Company will contribute the entire interest in LLSI to the joint venture.
Since Enhance Financial's current 100% ownership interest in LLSI is
temporary, the Company has also accounted for this investment on the equity
basis of accounting.

      In January 1998, C-BASS entered into a revolving credit facility
agreement with a major commercial bank.  Pursuant to this agreement, Enhance
Financial has guarantied repayment of up to $25 million of the amount
outstanding.  At February 17, 1998, Enhance Financial has guaranteed $25 million
under this facility.

      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 and is being amortized on a straight line basis over 20 years.

     In November 1997, the Company purchased a 25% interest of Seguradores
Brasilieras de Fiancas S.A. ("SBF") at book value.  SBF is a Brazilian-based
surety insurance company.  SBF is a joint venture among the Company, Swiss Re
and Banco Pactual S.A., through which the Company anticipates developing and
marketing innovative credit-based insurance products throughout Latin America.

     Total assets and total liabilities at December 31, 1997 and total net
income for the year then ended, of the Company's unconsolidated subsidiaries
and affiliates accounted for by the equity method of accounting, were $293.4
million $194.7 million and $17.1 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.

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

In thousands                                        YEARS ENDED DECEMBER 31,
                                                 1997         1996       1995
                                              -------      -------    -------

Current income taxes                          $10,311      $ 9,992    $ 5,447
Deferred income taxes                          14,839       10,694     11,096
                                              -------      -------    -------
    Tax provision                             $25,150      $20,686    $16,543
                                              =======      =======    =======


                                      -44-
<PAGE>

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

In thousands                                       Years Ended December 31,
                                                 1997         1996       1995
                                              -------      -------    -------

Tax provision at statutory rate              $ 32,884     $ 26,736   $ 22,344
Tax exempt interest and dividends              (7,878)      (6,492)    (5,816)
Other, net                                        144          442         15
                                              -------      -------    -------
    Actual tax                               $ 25,150     $ 20,686   $ 16,543
                                             ========     ========   ========

The components of the net deferred income tax liability as of December 31, 1997
and 1996 are as follows:

In thousands                         DECEMBER 31, 1997       DECEMBER 31, 1996
                                    -------------------    ---------------------
                                    ASSETS  LIABILITIES    ASSETS   LIABILITIES
                                    ------   ----------    ------    -----------

Contingency reserves                        $  43,027               $  36,920
Deferred policy acquisition costs              33,547                  30,564
Deferred premium revenue                       10,446                   7,841
Unrealized capital gains                       10,490                   4,522
Capitalized expenditures         $   1,183
Assignment sales income                         8,438
Tax and loss bonds                  24,797               $  19,565
Alternative minimum tax
     credit carryforward             6,334                   4,900
Losses and LAE reserves              5,509                   4,575
Deferred income                      1,883                   2,137
Other                                5,816      4,254        5,472      3,204
                                 ---------  ---------    ---------  ---------
                                 $  45,522  $ 110,202    $  36,649  $  83,051
                                 =========  =========    =========  =========

Note 7 - LONG-TERM DEBT AND CREDIT FACILITY

The carrying value of the Company's indebtedness is as follows:

In thousands                                       DECEMBER 31,
                                                 1997         1996
                                            ---------    ---------

Debentures, due 2003                        $  75,000    $  75,000
Short term credit facility                     43,500       42,500
                                            ---------    ---------
    Total                                   $ 118,500    $ 117,500
                                            =========    =========


                                      -45-
<PAGE>

     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 secured by shares of common stock of Enhance Re.

     Enhance Financial maintains a credit facility through a credit agreement
(the "Credit Agreement") with major commercial banks providing for borrowing by
Enhance Financial of up to $75 million 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 1997 was
6.15%.

     Enhance Financial has pledged shares of Enhance Re common stock
representing 46.8% of such class outstanding to secure equally and ratably the
indebtedness outstanding under the Credit Agreement and that outstanding under
the indenture dated as of March 5, 1993 (the "Indenture") governing the
debenture. The pledge of shares to secure the latter indebtedness was required
under the terms of the Indenture as a result of the increase in outstanding
borrowings under the Credit Agreement to a level exceeding $30 million.
Additionally, 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 and includes certain convenants,
none of which significantly restricts the Company's operating activities or
dividend-paying ability.

     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 termination in the amount of $4.6
million.  The gain has been deferred and is being amortized over the original
term of the swap.

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 750,000 shares of its common
stock from that date.  Enhance Financial purchased 177,925,  1,600 and 404,800
shares of its common stock at an average price of $39.46, $23.82 and $16.63 per
share in 1997, 1996, and 1995, respectively.

     In 1997, Enhance Financial entered into a forward purchase agreement
regarding 128,197 shares of its common stock at a forward purchase price of
$42.50 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 is higher (lower) than the forward purchase price, the net differential is
received  (paid) by Enhance Financial.  During 1997, settlements resulted in
Enhance Financial receiving 75,000 shares, which were recorded as treasury
shares.


                                      -46-
<PAGE>

     During 1997, Enhance Financial issued 503,114 shares of common stock in
connections 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, 600,000 and 400,000 shares
of Enhance Financial common stock at a purchase price of $24.48 per share.  In
1997, Swiss Re acquired an additional 700,000 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, 1997 was $35.1
million.

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 values of the Company's other invested assets
are based on the net present value, discounted at market rates, of the future
cash flows purchased.

DEFERRED PREMIUM REVENUE - The fair value of the Company's deferred premium
revenue 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 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.


                                      -47-
<PAGE>

The carrying amounts and estimated fair values of these financial instruments
are as follows:

In thousands                         DECEMBER 31, 1997      DECEMBER 31, 1996
                                     -----------------      -----------------
                                            Estimated               Estimated
                                  Carrying       Fair     Carrying       Fair
                                    Amount      Value       Amount      Value
                                    ------      -----       ------      -----
ASSETS:
Fixed maturity securities         $818,513   $827,840     $757,576   $766,932
Common stock                           833        833          878       878
Short-term investments              50,827     50,827       33,247     33,247

Other invested assets               29,050     29,050            -          -

LIABILITIES:
Deferred premium revenue           281,254    242,708      266,204    227,123
Loss and loss adjustment
  expense reserve                   30,987     30,987       26,258     26,258
Long-term debt                      75,000     75,458       75,000     74,933

Short-term debt                     43,500     43,500       42,500     42,500

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 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, 1997, the Company's aggregate
insurance in force was $64.4 billion.  The Company's insured portfolio as of
December 31, 1997 was broadly diversified by geographic and bond market sector
with no single credit representing more than 1.4% of the Company's net insurance
in force.


                                      -48-
<PAGE>

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

TYPE OF ISSUE
In billions                                          December 31,
                                                 1997         1996
                                                 ----         ----

General obligation and other tax backed         $18.8        $15.8
Non-municipal                                    13.5         12.2
Utilities                                        10.3          9.2
Health care                                       6.8          6.2
Airport/Transportation                            6.8          5.9
Housing                                           1.5          1.5
Other municipal                                   2.4          2.3
Other insurance businesses                        4.3          3.5
                                                -----        -----
Total                                           $64.4        $56.6
                                                =====        =====

STATE OF ISSUE
In billions                                         December 31,
                                                 1997         1996
                                                 ----         ----

California                                       $7.7         $6.9
New York                                          6.2          6.2
Florida                                           4.1          4.2
Texas                                             3.7          3.1
Pennsylvania                                      2.9          3.1
New Jersey                                        2.6          2.1
Illinois                                          2.5          2.6
Other (each less than 2.5%)                      34.7         28.4
                                                -----        -----
    Total                                       $64.4        $56.6
                                                =====        =====

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.


                                      -49-

<PAGE>

Note 11 - EMPLOYEE BENEFITS

The Company maintains a non-contributory defined benefit pension plan 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 1997, 1996, and 1995 using
the projected unit credit actuarial method of attribution includes the following
components:

In thousands                                        YEARS ENDED DECEMBER 31,
                                                 1997         1996       1995
                                                 ----       ------     ------
Service cost-benefits earned during the period   $900       $1,298     $1,225
Interest cost on projected benefit obligation     494          485        396
Actual return on plan assets                     (958)        (579)      (320)
Net amortization and deferral                     535          205         55
                                                 ----       ------     ------
    Net periodic pension cost                    $971       $1,409     $1,356
                                                 ====       ======     ======

The following table sets forth the funding status of the plan and the accrued
pension cost recognized in the Company's consolidated balance sheets:

In thousands                                       YEARS ENDED DECEMBER 31,
                                                 1997         1996       1995
                                              -------      -------    -------
Accumulated benefits obligation, including
    vested benefits of $4,666, $4,457
    and $4,879                                $(5,025)     $(4,635)   $(5,809)
                                              -------      -------    -------
Projected benefit obligation                  $(8,131)     $(6,475)   $(8,824)
Plan assets at fair value                       4,726        4,437      5,053
                                              -------      -------    -------
Projected benefit obligation in excess
    of plan assets                             (3,405)      (2,038)    (3,771)
                                              -------      -------    -------
Unrecognized prior service cost                   961        1,014      1,067
Unrecognized transition net asset                  14           16         17
Unrecognized net (gain)loss                    (2,266)      (2,717)       189
                                              -------      -------    -------
Accrued pension cost                          $(4,696)     $(3,725)   $(2,498)
                                              =======      =======    =======

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

                                                 1997         1996       1995
                                                 ----         ----       ----
Discount rate                                    7.0%         7.5%       5.5%
Expected long-term rate of return on plan assets 8.5%         8.5%       8.5%
Rate of increase in future compensation levels   6.0%         6.0%       6.0%

      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.

                                      -50-
<PAGE>

     The net post-retirement benefit cost for 1997, 1996, and 1995 was $127,000,
$118,000, and $105,000, respectively, and includes service cost, interest cost
and amortization of the transition obligation.

     At December 31, 1997, the accumulated post-retirement benefit obligation
was $592,000 and was not funded.  The discount rate used in determining the
accumulated post-retirement benefit obligation was 7% and the health care cost
trend rate was 13%, graded to 6% over 8 years.

     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 25% on contributions up to 6% of
base salary made to the plan by eligible employees.  The Company's matching
contribution was $106,000 and $98,000 in 1997 and 1996, respectively.

Note 12 - STOCK OPTION PROGRAMS

The Company maintains a stock option program for its key employees.  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.  All options are exercisable at
the option price, being the fair value of the stock at the date of grant.  The
board of directors of Enhance Financial has authorized a maximum of 4,850,000
shares of Enhance Financial common stock to be awarded as options of which
3,938,500 options for shares (net of expirations and cancellations) had been
awarded as of December 31, 1997.  Information regarding activity in the option
programs follows:


                                      -51-
<PAGE>

1997                                         NUMBER               OPTION PRICE
OPTIONS                                     OF SHARES             PER SHARE
-------                                     ---------             ---------

Outstanding at beginning of year           2,553,110$    $14.50   -  $36.50
Granted - Employees                           610,050    $38.875  -  $57.6875
             - Directors                       45,500          $59.50
Exercised                                    (299,496)   $14.50   -  $34.00
Expired or canceled                           (99,650)   $16.00   -  $38.875
                                           ----------
Outstanding at year-end                     2,809,514    $14.50   -  $59.50
                                           ----------
Exercisable at year-end - Employees         1,474,525    $14.50   -  $38.875
                         - Directors          125,333    $17.125  -  $36.50


1996                                         NUMBER          OPTION PRICE
OPTIONS                                     OF SHARES          PER SHARE
-------                                     ---------          ---------


Outstanding at beginning of year            2,415,721     $14.50   -  $26.625
Granted - Employees                           400,110     $26.875  -  $34.00
             - Directors                       26,000           $36.50
Exercised                                    (231,275)    $14.50   -  $20.25
Expired or canceled                           (57,446)    $16.00   -  $23.875
                                           ----------
Outstanding at year-end                     2,553,110     $14.50   -  $36.50
                                           ----------
Exercisable at year-end - Employees         1,321,457     $14.50   -  $23.875
                         - Directors          143,333     $17.125  -  $26.625

1995                                         NUMBER          OPTION PRICE
OPTIONS                                     OF SHARES          PER SHARE
-------                                     ---------          ---------


Outstanding at beginning of year            1,944,759     $14.50   -  $20.25
Granted - Employees                           490,350     $17.25   -  $23.875
              - Directors                      30,000           $26.625
Exercised                                     (24,575)    $14.50   -  $20.25
Expired or canceled                           (24,813)    $16.00   -  $20.25
                                           ----------
Outstanding at year-end                     2,415,721     $14.50   -  $26.625
                                           ----------
Exercisable at year-end - Employees         1,166,213     $14.50   -  $20.25
                         - Directors          114,333     $17.125  - $19.875


                                      -52-
<PAGE>

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

                                                 1997             1996
                                                 ----             ----

Net income - as reported                      $68,806          $55,704
           - pro forma                        $67,475          $55,046
Basic earnings per share - as reported          $3.71            $3.12
                         -  pro forma           $3.64            $3.08
Diluted earnings per share - as reported        $3.56            $3.04
                           - pro forma          $3.49            $3.00

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 $24.02, $10.88 and $7.27 in 1997, 1996 and 1995,
respectively.  The following assumptions were used for option grants awarded in
1997, 1996 and 1995:

                                          Options Granted

                               1997             1996             1995
                               ----             ----             ----

Dividend yield             0.8% to  1.1%    1.1% to  1.5%    1.4% to  2.0%
Volatility                18.7% to 30.3%   20.5% to 30.3%   26.5% to 31.1%
Risk-free interest rate    5.8% to  6.7%    6.2% to  6.8%    5.6% to  7.2 %
Assumed annual
   forfeiture rate             3.0%             3.0%              3.0%
Expected life                  10 years         10 years          10 years



                                      -53-
<PAGE>

Note 13 - LEASE COMMITMENTS

LEASES

The Company has committed to lease office space under non-cancelable leases
which expire in August 1999, December 1999, April 2000, August 2000 and August
2005.  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 thousands                      Operating
Years Ended December 31,             Leases
                                  ---------

1998                               $  2,595
1999                                  2,572
2000                                  2,366
2001                                    877
2002                                    442
Thereafter                            1,540
                                   --------
                                   $ 10,392
                                   ========
Rent expense was $1,699,000, $1,139,000 and $1,236,000 for the years ended
December 31, 1997, 1996 and 1995, respectively, net of sublease income.

Note 14 - PARENT COMPANY FINANCIAL INFORMATION

The following are the condensed balance sheets of Enhance Financial as of
December 31, 1997 and 1996 and its condensed statements of income and cash flows
for the years ended December 31, 1997, 1996 and 1995.



                                      -54-
<PAGE>

CONDENSED BALANCE SHEETS
In thousands                                                        December 31,
                                                               1997         1996
                                                          ---------    ---------
ASSETS
Investments                                               $  12,706    $  10,213
Investment in affiliated companies                          658,609      563,395
Other assets                                                 46,161       38,386
                                                          ---------    ---------
                                                          $ 717,476    $ 611,994
                                                          =========    =========

LIABILITIES AND SHAREHOLDERS' EQUITY:
Long-term debt                                            $  75,000    $  75,000
Other liabilities                                            61,083       48,645
Shareholders' equity                                        581,393      488,349
                                                          ---------    ---------
                                                          $ 717,476    $ 611,994
                                                          =========    =========

CONDENSED STATEMENTS OF INCOME
In thousands                                            Years Ended December 31
                                                  1997        1996         1995
                                             ---------   ---------    ---------

Total revenues                               $     510  $    1,312    $     272
Total expenses                                  14,652      12,343       11,321
                                             ---------   ---------    ---------
                                               (14,142)    (11,031)     (11,049)
Equity in income of affiliates                  77,500      61,727       55,873
                                             ---------   ---------    ---------
Income before income taxes                      63,358      50,696       44,824
Income tax benefit                               5,448       5,008        2,473
                                             ---------   ---------    ---------
Net income                                   $  68,806   $  55,704    $  47,297
                                             =========   =========    =========

CONDENSED STATEMENTS OF CASH FLOWS

In thousands                                           Years Ended December 31,
                                                  1997        1996         1995
                                              --------    --------     --------

Cash Flows from Operating Activities:
    Net income                                $ 68,806    $ 55,704     $ 47,297
    Adjustments to reconcile net income
     to net cash from operating activities
    Equity in income of affiliates             (77,500)    (61,727)     (55,873)
    Other                                       29,799     (22,188)      (3,577)
                                              --------    --------     --------
Net cash used in operating activities           21,105     (28,211)     (12,153)
                                              --------    --------     --------
Cash Flows from Investing Activities:
    Investment in affiliates net of
     dividends received                         (7,186)     (3,423)      14,328
    Purchase of investments                          -           -       (2,456)
    Sale of investments                         (2,396)        750        1,498
    Sales of short-term investments, net        (4,648)     (5,529)         837
                                              --------    --------     --------
Net cash provided by (used in)
 investing activities                          (14,230)     (8,202)      14,207
                                              --------    --------     --------
Cash Flows from Financing Activities:
    Capital stock                                7,341       4,843          401
    Short-term debt                              1,000      27,500       12,000
    Dividends paid                              (8,195)     (7,198)      (6,223)
    Principal payment - senior notes                 -      (3,400)      (1,400)
    Reissuance of treasury stock                     -      14,485
    Purchase of treasury stock                  (7,021)        (38)      (6,732)

                                              --------    --------     --------
Net cash provided by (used in)
 financing activities                           (6,875)     36,192       (1,954)
                                              --------    --------     --------
Net increase (decrease) in cash                      -        (221)         100
Cash, beginning of year                              -         221          121
                                              --------    --------     --------
Cash, end of year                             $      -    $      -     $    221
                                              ========    ========     ========

                                      -55-

<PAGE>


Note 15 -  MAJOR CUSTOMERS

The Company derives a substantial portion of its premium writings from a small
number of primary insurers. Specifically:

     -    In 1997 four primary insurers accounted for 17%, 16%, 9% and 7% of
          gross premiums written.

     -    In 1996 four primary insurers accounted for 19%, 13%, 10% and 7% of
          gross premiums written.

     -    In 1995 four primary insurers accounted for 22%, 18%, 8% and 8% of
          gross premiums written.

This customer concentration results from the small number of primary insurance
companies which are licensed to write financial guaranty insurance.
















                                      -56-
<PAGE>

Note 16-  LOSSES AND LOSS ADJUSTMENT EXPENSES

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

In thousands                                   Years Ended December 31,

                                              1997      1996      1995
                                             -------   -------   -------
Balance at January 1,                        $28,081   $30,799   $29,337
    Less reinsurance recoverables              1,823     1,853     2,620
                                             -------   -------   -------
Net balance at January 1,                     26,258    28,946    26,717
                                             -------   -------   -------

Net incurred related to:
    Current year                               6,002     6,087     3,491
    Prior years                                3,753     3,097     6,022
                                             -------   -------   -------
Net incurred                                   9,755     9,184     9,513
                                             -------   -------   -------
Net paid related to:
    Current year                                 720       587     2,705
    Prior years                                4,306    11,285     4,579
                                             -------   -------   -------
Net paid                                       5,026    11,872     7,284
                                             -------   -------   -------

Net balance at December 31,                   30,987    26,258    28,946
    Plus reinsurance recoverables              2,688     1,823     1,853
                                             -------   -------   -------

Balance at December 31,                      $33,675   $28,081   $30,799
                                             =======   =======   =======

The liability for losses and LAE increased by $6.0 million in 1995 principally
as a result of changes in estimates of ultimate loss on certain real
estate-backed transactions in the Company's discontinued commercial real estate
portfolio.  The terms "current year" and "prior years" in the foregoing table
refer to the year in which case reserves were established.


                                      -57-
<PAGE>

Note 17 -  SEGMENT REPORTING

The Company has two reportable segments: insurance and non-insurance 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 non-insurance businesses segment deals primarily with
credit-based servicing and securitization of assets in underserved markets, in
particular, the origination, purchase, servicing and/or securitization of
special assets, including lottery awards, structured settlement payments and
sub-performing/non-performing residential mortgages.

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 capital and foreign exchange gains and losses, net of taxes.  The
company also evaluates performance based on operating earnings after allocation
of corporate overhead expenses.

                                                      1997
                                                      ----

In thousands                       Insurance      Non- Insurance      Totals
                                   ---------      --------------      ------

Revenues from external customers   $   88,966       $  30,152       $  119,118
Interest revenue                       50,618               -           50,618
Interest expense                        5,881           1,436            7,317
Equity in income of affiliates          1,075           7,703            8,778
Income tax expense                     19,270           5,664           24,934
Operating income - pre-allocation      57,884          10,519           68,403
Operating income - post-allocation     60,029           8,374           68,403
Identifiable assets                 1,049,596          97,913        1,147,509

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


                                      -58-
<PAGE>

                                                                   1997
                                                                   ----
REVENUES

Total revenues for reportable segments                           $ 119,118
Total interest revenue for reportable segments                      50,618
Realized gains                                                         657
                                                                 ---------
Total consolidated revenue                                       $ 170,393
                                                                 =========

INCOME

Total income for reportable segments                             $  68,403
Capital and foreign exchange gains (losses), net of tax                403
                                                                 ---------
  Net income                                                     $  68,806
                                                                 =========


The non-insurance reportable segment information in 1996 and 1995 consisted of
equity in net income (loss) of affiliates of $(402,000) and $(393,000) and
investment in affiliates of $19,205,000 and $3,857,000, respectively.  All other
revenues and assets for those years were attributable to the company's insurance
segment.






                                      -59-
<PAGE>


Note 18-  QUARTERLY FINANCIAL INFORMATION (Unaudited)

<TABLE>
<CAPTION>

In millions except per share amounts
                                            1st Qtr.  2nd Qtr.  3rd Qtr.  4th Qtr.   Year
<S>                                          <C>       <C>       <C>       <C>      <C>
1997
Net premiums written                         $21.6     $25.7     $25.5     $27.7    $100.5
Premiums earned                               19.5      21.3      21.3      23.4      85.5
Investment and other income                   10.5      13.9      13.2      18.1      55.7
Assignment sales                               2.5       9.9       7.6       9.2      29.2
Losses and loss adjustment expenses            2.0       2.2       2.7       2.9       9.8
Equity in income of affiliates                 0.1       0.2       3.8       4.7       8.8
Income before income taxes                    18.4      23.4      23.6      28.6      94.0
Net income                                    13.9      17.0      17.5      20.4      68.8

Earnings per share - Basic                   $0.76     $0.91     $0.94     $1.10    $ 3.71
                                             -----     -----     -----     -----    ------
                   - Diluted                 $0.74     $0.88     $0.90     $1.05    $ 3.56
                                             -----     -----     -----     -----    ------
Operating earnings per share - Diluted       $0.82     $0.87     $0.91     $0.95    $ 3.54
                                             -----     -----     -----     -----    ------
1996
Net premiums written                         $20.4     $25.2     $20.8     $29.3     $95.7
Premiums earned                               19.3      17.8      18.7      21.6      77.4
Investment and other income                   13.3      11.0      13.1      16.8      54.2
Losses and loss adjustment expenses            2.4       1.9       2.1       2.8       9.2
Income before income taxes                    18.1      15.8      18.7      23.8      76.4
Net income                                    13.2      11.9      13.9      16.7      55.7

Earnings per share - Basic                   $0.76     $0.66     $0.77     $0.93     $3.12
                                             -----     -----     -----     -----    ------
                   -  Diluted                $0.74     $0.65     $0.75     $0.90     $3.04
                                             -----     -----     -----     -----    ------
Operating earnings per share - diluted       $0.69     $0.69     $0.73     $0.78     $2.90
                                             -----     -----     -----     -----    ------

1995
Net premiums written                         $11.6     $24.6     $18.4     $28.4     $83.0
Premiums earned                               14.2      15.9      15.3      17.6      63.0
Investment and other income                   11.0      10.4      12.3      15.8      49.5
Losses and loss adjustment expenses            2.4       2.3       2.0       2.8       9.5
Income before income  taxes                   13.7      14.6      15.8      19.7      63.8
Net income                                    10.5      11.1      11.7      14.0      47.3

Earnings per share - Basic                   $0.60     $0.64     $0.68     $0.81     $2.73
                                             -----     -----     -----     -----    ------
                   - Diluted                 $0.60     $0.64     $0.68     $0.81     $2.73
                                             -----     -----     -----     -----    ------
Operating earnings per share - diluted       $0.60     $0.65     $0.67     $0.67     $2.58
                                             -----     -----     -----     -----    ------
</TABLE>

                                      -60-
<PAGE>

Item 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

         Not applicable.

                                    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.

                                                    Position with Enhance
Name                                 Age(1)         Financial
-------                             --------        ---------------------------
Allan R. Tessler                       61           Chairman of the Board
Wallace O. Sellers                     68           Vice Chairman of the Board
Daniel Gross                           55           President, Chief Executive
                                                     Officer and Director
Samuel Bergman                         50           Executive Vice President and
                                                     Secretary
Ronald M. Davidow                      47           Executive Vice President
Arthur Dubroff                         47           Executive Vice President and
                                                     Chief Financial Officer
Elaine J. Eisenman(2)                  49           Executive Vice President
Tony M. Ettinger                       41           Executive Vice President
Paul C. Kwiatkoski                     42           Executive Vice President
Brenton W. Harries                     70           Director
David R. Markin                        67           Director
Robert P. Saltzman                     55           Director
Richard J. Shima                       58           Director
Spencer R. Stuart                      75           Director
Adrian U. Sulzer                       51           Director
Frieda K. Wallison                     55           Director
Jerry Wind                             60           Director

----------
(1)   As of March 31, 1998.
(2)   Commenced employment with the Company in January 1998.

      Mr. Tessler has held the position with Enhance Financial set forth above
since its inception. He has also since 1987 been Chairman of the Board and Chief
Executive Officer of International Financial Group, Inc., a merchant banking
concern, and since 1992 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. Mr. Tessler is also Chairman of the
Board of Checker Holdings Inc. and of Jackpot Enterprises Inc. ("Jackpot") and a
director of The Limited, Inc.


                                      -61-
<PAGE>

      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 and a
member of the compensation committee of Danielson Holding Corporation and as
Chairman of the Board of Directors of United Oilfield Services Inc.

      Mr. Gross has held the position 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. Mr. Gross also serves as a director of MGIC.

      Mr. Bergman has been Executive Vice President of the Company since 1991.
He has been Secretary of Enhance Financial 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.

      Messrs. Davidow and Kwiatkoski have each served as senior executive
officers of the Insurance Subsidiaries since such companies' inception, and as
officers of Enhance Financial since 1990.

      Mr. Dubroff has held the position with Enhance Financial set forth above
since 1996. From 1993 to 1996, Mr. Dubroff served in various senior management
capacities at First Data Corporation, a provider of high-volume information
processing and related services. Mr. Dubroff served as a director of Enhance
Financial from 1986 to 1991 and from 1992 to 1996 and of Enhance Re from 1986 to
1992.

      Ms. Eisenman has held the position with Enhance Financial set forth above
since January 1998, having previously served as an independent consultant to the
Company. She also previously served as Senior Vice President - Worldwide
Staffing, Development and Succession of American Express Company from 1994 to
1997. She previously served from 1990 to 1994 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 1995. From 1993 to 1995 he rendered consulting and strategic planning
services to life insurance companies.

      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. and the Hudson River Trust.

      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.


                                      -62-
<PAGE>

      Mr. Saltzman has served as a director of Enhance Financial since 1996. He
has been President and Chief Executive Officer of Jackson Life Insurance Company
since 1994. He previously served from 1983 as Executive Vice President of
SunAmerica Inc. and as President of its subsidiary life insurance company.

      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 the last 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 and also serves as a director of US Timberlands, L.P.

      Mr. Sulzer has served as a director of Enhance Financial since 1996. He
has since 1991 served in various management capacities with Swiss Re, a
shareholder of Enhance Financial, currently serving since July 1997 as Co-Head
of Underwriting in its New Markets Division of Swiss Re. From January 1991 to
that date he served as head of Swiss Re's Credit and Bonding Department. Mr.
Sulzer also served as a director of Societa Italiana Cauzioni, Rome, Italy, and
American Credit Indemnity.

      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 has since 1983 been a member of the law firm of Jones,
Day, Reavis & Pogue, 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.

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 1997. Except as
described below in this item under "Employment Agreement," the Company


                                      -63-
<PAGE>

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
Name and                                                                                   Underlying
Principal Position               Year            Salary                Bonus              Options/SARs
------------------               ----            ------                -----              ------------
<S>                              <C>           <C>                  <C>                     <C>
Daniel Gross                     1997          $500,000             $1,150,000              175,000
   President and Chief           1996           480,000                675,000               75,000
   Executive Officer             1995           450,000                420,000               60,000

Tony M. Ettinger                 1997           273,863                260,000               20,000
  Executive Vice                 1996           261,041                132,500               14,000
   President                     1995           211,718                100,000               15,000

Samuel Bergman                   1997           313,281                200,000               14,000
  Executive Vice                 1996           301,042                145,000               14,000
   President and                 1995           293,125                100,000               20,000
   Secretary

Arthur Dubroff                   1997           281,400                220,000               20,000
   Executive Vice                1996           123,462                175,000(2)            75,000(2)
   President and
   Chief Financial
   Officer(1)

Ronald M. Davidow                1997           268,838                180,000               13,500
   Executive Vice                1996           260,625                127,500               13,500
    President                    1995           250,833                 87,000               20,000
</TABLE>

----------
(1)   Became an officer of the Company in 1996.

(2)   Includes a bonus of $100,000 and a stock option for 55,000 shares of
      Common Stock granted to Mr. Dubroff upon commencement of his employment.
      See "Agreements with Executive Officers" in this section.


                                      -64-
<PAGE>

Option/SAR Grants During 1997

      The following table provides information regarding stock options/SARs
granted to the named executive officers during 1997:

<TABLE>
<CAPTION>
                                                       Individual Grants
                    ---------------------------------------------------------------------------------------
                                             Percent of
                               Number of   Total Options
                              Securities     Granted to
                              Underlying    Employees in                                       Grant Date
 Name and                      Options        Fiscal          Exercise or    Expiration       Present Value
 Principal Position           Granted(1)       Year           Base Price        Date               (2)
 ------------------           ----------       ----           ----------        ----               ---
<S>                             <C>            <C>              <C>            <C>           <C>
 Daniel Gross                   75,000         12.3             41.63          5/31/07       $1,352,070(3)
   President and Chief         100,000         16.4             57.44         12/31/07        2,495,350(4)
   Executive Officer

Tony M. Ettinger                20,000          3.3             57.63         12/31/07          509,834(5)
   Executive Vice
   President

Samuel Bergman                  14,000          2.3             57.63         12/31/07          356,884(5)
   Executive Vice
   President and
   Secretary

Arthur Dubroff                  20,000          3.3            57.63          12/31/07          509,834(5)
   Executive Vice
   President and
   Chief Financial
   Officer

Ronald M. Davidow               13,500          2.2            57.63          12/31/07          344,138(5)
   Executive Vice
   President
</TABLE>

----------
(1)   Options granted pursuant to the Incentive Plan. Such 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
      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, in each case, based upon the Black-Scholes option
      valuation model. 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.


                                      -65-
<PAGE>

      The actual value, if 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 19.3, a
      risk-free rate of return of 6.667%, a dividend yield of 1.1% and a
      discount due to the risk of forfeiture of 3%.

(4)   The Black-Scholes option valuation assumes a volatility of 28.2, a
      risk-free rate of return of 5.80%, a dividend yield of 0.76% and a
      discount due to the risk of forfeiture of 3%.

(5)   The Black-Scholes option valuation assumes a volitility of 29.1, a
      risk-free rate of return of 5.88%, a dividend yield of 0.76% and a
      discount due to the risk of forfeiture of 3%.

Aggregated Option/SAR Exercises During 1997
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, 1997.

<TABLE>
<CAPTION>
                                                                No. of Securities Underlying      Value of Unexercised In-The-
                                                                 Unexercised Stock Options/           Money Options/SARs as
                               Shares                               SARs at December 31,               December 31, 1997(1)
                              Acquired                         -------------------------------     ----------------------------
Name and                         on             Value
Principal Position            Exercise         Realized        Exercisable       Unexercisable     Exercisable    Unexercisable
------------------            --------         --------        -----------       -------------     -----------    -------------
<S>                           <C>              <C>             <C>               <C>               <C>
Daniel Gross
   President and Chief
   Executive Officer            -0-               -0-             271,250           276,250        $10,827,188      $4,702,500

Tony M. Ettinger
   Executive Vice
   President                   13,125          $208,828            13,500            47,375            464,016         912,281

Samuel Bergman
   Executive Vice
   President and
   Secretary                   12,400           282,600            71,000            39,500          2,796,188         867,750

Arthur Dubroff
    Executive Vice
    President and Chief
    Financial Officer            -0-              -0-              18,750            76,250            576,094       1,765,781

Ronald M. Davidow
   Executive Vice
   President                     -0-              -0-              61,500            38,000          2,397,938         830,063
</TABLE>

---------------

                                      -66-
<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,
      1997 over the option exercise price multiplied by (b) the number of shares
      of Common Stock underlying the option.

Enhance Reinsurance Pension 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 Code. All employees of the
Company (other than Singer and Van-Am) 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 ten 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 ten 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 in this item.) A participant whose
service terminates prior to normal retirement is also eligible for percentage of
his or her normal retirement benefit at normal retirement date multiplied by a
retirement benefit, payable at normal retirement age, in an amount equal to the
vested fraction, the numerator of which is the number of years of plan
participation by him or her as of the date of his or her termination and the
denominator of which is the number of years of participation he or she would
have had under the Pension Plan had he or she remained a participant until
normal retirement. 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.


                                      -67-
<PAGE>

                               PENSION PLAN TABLE

<TABLE>
<CAPTION>
                                                        Years of Service
                  ----------------------------------------------------------------------------------
 Highest
 Average              15                20                25               30                35*
Earnings
--------          ----------------------------------------------------------------------------------
<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(1)       112,500(1)        112,500(1)
 225,000(2)         75,938            95,625           115,313(1)       126,563(1)        126,563(1)
 250,000(2)         84,375           106,250(1)        128,125(1)       140,625(1)        140,625(1)
 300,000(2)        101,250(1)        127,500(1)        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 1997 is $100,000, which will increase in
      1998 to $104,000.

(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 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 on or prior to November 1, 1994, decreasing to
      $150,000 for plan years beginning November 1, 1995 and November 1, 1996
      and will increase to $160,000 for plan years beginning thereafter.)

      As of December 31, 1997, Messrs. Gross, Bergman, Dubroff, Davidow and
Ettinger had ten, five, one, thirteen and two years of service, respectively,
and ten, five, one, ten and two years of participation, respectively, under the
Pension Plan.


                                      -68-
<PAGE>

Agreements with Executive Officers

      Enhance Financial and Arthur Dubroff, Executive Vice President and Chief
Financial Officer, are parties to an employment agreement which provides for the
payment of an annual base salary to Mr. Dubroff of not less than $275,000 plus
an annual target bonus of 45% of such base salary. Under the employment
agreement, Mr. Dubroff was granted in 1996 and 1997 options to purchase 75,000
and 20,000 shares of Common Stock, respectively, and is entitled to a grant of a
stock option to purchase 20,000 shares of Common Stock in 1998 (or, at Enhance
Financial's election, the cash value thereof). If Mr. Dubroff's employment is
terminated by Enhance Financial within a 12-month period following a change of
control (as defined), Enhance Financial is required to pay Mr. Dubroff a
prorated portion of his annual bonus and, for the greater of the remainder of
the term of his employment agreement and 12 months from the date of termination
of his employment, his base salary. The employment agreement terminates on
December 31, 1999 unless renewed by the parties.

      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.

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
1997, 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 1997 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.

      In March 1998, the board of directors adopted the Director Stock Ownership
Plan, which provides each director who is not an employee of the Company with
the opportunity to receive, at such director's election, up to 100% of the
aforesaid fees in the form of shares of Common Stock. The shares will be issued
to electing directors on or as of the date of any payment by Enhance Financial
of director fees. The "purchase price" at which the shares will be issued will
be equal to 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 year's fees. The plan will take effect with


                                      -69-
<PAGE>

respect to fees payable from and after the regular meeting of directors
scheduled for June 1998.

      Non-Employee-Director Stock Option Plan. Pursuant to the Directors' Option
Plan, on each December 31 during the period in which the plan is in effect, each
director of Enhance Financial or either Insurance Subsidiary who is not an
employee of the Company was granted a non-qualified stock option to purchase
2,000 shares of Common Stock at an exercise price equal to the closing price of
the Common Stock on the New York Stock Exchange on such date. Pursuant to an
amendment to the plan adopted by the directors in December 1997, annual stock
option grants for 1997 and thereafter were increased to 3,500 shares. The
amendment and the additional 1,500 share grants in December 1997 are subject to
the approval of Enhance Financial shareholders, to be sought at their 1998
annual meeting. There are reserved for issuance upon the exercise of options
under the Directors' Option Plan an aggregate of 400,000 shares of Common Stock
(subject to anti-dilutive adjustment), of which options for 183,833 shares were
subject to outstanding options after the option grants made on December 31,
1997.

      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 option grants; expire on the tenth anniversary
of the date of grant; are not transferrable 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 option lapses upon the resignation or
removal of the optionee from the boards of directors of Enhance Financial and
the Insurance Subsidiaries.

Compensation Committee Interlocks and Insider Participation

      The persons who served as members of the Compensation Committee during
1997 are Spencer R. Stuart (Chairman), Brenton W. Harries, David R. Markin,
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.

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 27, 1998 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) each of the five most highly compensated
executive officers of Enhance Financial; and (d) all executive officers and
directors of Enhance Financial as a group.


                                      -70-
<PAGE>

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.

                                                     Number of         Percent
Name and Address                                     Shares(1)         of Class
----------------                                     ---------         --------

US WEST, Inc......................                    5,430,800(2)(3)    28.9
   7800 East Orchard Rd.
   Suite 200
   Englewood, Colorado 80111
FMR Corp..........................                    1,327,200(4)        7.1
   82 Devonshire St.
   Boston, MA 02109
Swiss Reinsurance Company ........                    1,700,000           9.1
   Mythenquai 50/60
   8022 Zurich
   Switzerland
Allan R. Tessler..................                      243,500(5)(6)     1.3
Wallace O. Sellers................                      417,500(5)(6)     2.2
Daniel Gross......................                      481,250(5)        2.5
Samuel Bergman....................                       72,350(5)         *
Ronald M. Davidow.................                      115,525(5)         *
Arthur Dubroff....................                       26,750(5)(7)      *
Tony M. Ettinger..................                       13,600(5)         *
Brenton W. Harries................                       12,000(6)         *
David R. Markin...................                      111,000(6)         *
Robert P. Saltzman................                       61,000(6)(8)      *
Richard J. Shima..................                        9,000(6)         *
Spencer R. Stuart.................                       12,000(6)(9)      *
Adrian U. Sulzer..................                        1,000(6)         *
Frieda K. Wallison................                       14,224(6)         *
Jerry Wind........................                        6,000(6)         *
All executive officers and
 directors as a group.............                    1,664,069(10)      8.5

----------
*     Less than 1%.

(1)   The table in this section is based upon information supplied by directors,
      officers, and


                                      -71-
<PAGE>

      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 stockholders named in this table has sole voting
      and investment power with respect to the shares shown as beneficially
      owned by him or her.

(2)   In 1995, U S WEST sold its 7.625% Exchangeable Notes due December 15, 1998
      ("Debt Exchangeable for Common Stock" or "DECS"). At maturity (including
      as a result of acceleration or otherwise), the principal amount of the
      DECS will be mandatorily exchanged by U S WEST for up to 5,430,800 shares
      of Common Stock (or, at US WEST's option under certain circumstances, the
      cash equivalent thereof).

(3)   See Item 13. "Certain Relationships and Related Transactions" for
      information regarding special powers of U S WEST under Enhance Financial's
      certificate of incorporation and the manner in which U S WEST has
      announced its intention to vote the shares owned by it.

(4)   On February 10, 1998, FMR Corp. filed a Schedule 13G stating its ownership
      of shares of Common Stock at December 31, 1997. According to such Schedule
      13G, beneficial ownership of 1,107,900 of the shares is a result of
      Fidelity Management & Research Company, a wholly-owned subsidiary of FMR
      Corp., acting as investment advisor to various investment companies (the
      "Fidelity Funds"), including 1,019,700 shares resulting from the assumed
      conversion of DECS owned by such Fidelity Funds into shares of Common
      Stock. According to such Schedule 13G, beneficial ownership of the
      remaining 219,300 of the shares is a result of Fidelity Management Trust
      Company, a wholly-owned subsidiary of FMR Corp., serving as investment
      manager of certain institutional account(s) (the "Institutional
      Accounts"), including 90,800 shares resulting from the assumed conversion
      of DECS owned by such Institutional Accounts into shares of Common Stock.
      According to such Schedule 13G, FMR Corp., directly or through
      subsidiaries, has the sole power to vote only 187,600 of the shares of
      Common Stock beneficially owned by it. FMR Corp. does not have sole power
      to vote or direct the vote the shares owned directly by the Fidelity Funds
      and 31,700 shares of Common Stock owned by the Institutional Accounts, as
      such power resides with the Fidelity Funds' board of trustees or by the
      institutions owning such accounts, as the case may be.

(5)   Includes the shares set forth in: (a) Column A below issuable to the named
      officer upon the exercise of presently exercisable options granted under
      the Incentive Plan and (b) Column B below owned beneficially by the named
      officer's wife and children or in trusts of which such officer is a
      trustee (as to which shares such officer disclaims beneficial ownership).

                  Name                         A                 B
                  ----                        ---               ---
            Allan R. Tessler                 18,500             2,000
            Wallace O. Sellers              156,000           258,500
            Daniel Gross                    271,250            93,500


                                      -72-
<PAGE>

            Samuel Bergman                   68,500             3,850
            Ronald M. Davidow                61,500               -0-
            Arthur Dubroff                   18,750               -0-
            Tony M. Ettinger                 13,500               -0-

(6)   Includes shares issuable upon the exercise of the currently exercisable
      portion of options granted to such director under the Directors' Option
      Plan, as follows: Brenton W. Harries -- 11,000 shares; David E. Markin --
      11,000 shares; Robert P. Saltzman -- 1,000 shares; Wallace O. Sellers --
      1,000 shares; Richard J. Shima -- 7,000 shares; Spencer R. Stuart --
      11,000 shares; Adrian U. Sulzer -- 1,000 shares; Allan R. Tessler -- 3,000
      shares; and Frieda K. Wallison -- 11,000 shares; and Jerry Wind -- 1,000
      shares.

(7)   Includes 7,000 shares issuable upon the exercise of the currently
      exercisable portion of options granted to Mr. Dubroff under the Directors'
      Option Plan prior to the commencement of his employment with the Company.

(8)   Held in a living trust account of which Mr. Saltzman and his wife are
      co-trustees.

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

(10)  Includes 65,000 shares issuable to the directors who are not employees of
      the Company (as of the date of grant) upon the exercise of the currently
      exercisable portion of options granted to them under the Directors' Option
      Plan; 656,250 shares issuable to the executive officers upon the exercise
      of currently exercisable options granted to them under the Incentive Plan;
      358,050 shares owned beneficially 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.

U S WEST

      The certificate of incorporation of Enhance Financial grants to U S WEST
the right to preclude the Company from entering into certain activities or
owning an equity interest in any entity that engages in any such activity unless
they are determined by U S WEST's legal counsel not to be prohibited to U S WEST
and its subsidiaries under the Modification of Final Judgment (the "Judgment")
entered in 1984 in connection with the settlement of the legal action entitled
United States v. Western Electric Company, Inc. These activities consist of
providing information services or long distance telephone service or
manufacturing telecommunications equipment.

      The Company has not entered, and does not intend to enter, into any of the
specified activities, and, accordingly, the aforesaid provision has not had, and
is not expected to have, any material effect on the business of the Company.
Enhance Financial intends to propose at the meeting


                                      -73-
<PAGE>

of shareholders next following the time at which US WEST ceases to own shares of
Common Stock the elimination of the aforesaid provision from the certificate of
incorporation, which will require the vote of the holders of a majority of
shares of Common Stock outstanding.

      U S WEST has advised Enhance Financial that it intends, but is not legally
obligated, to vote its shares of Common Stock proportionately to the votes cast
by non-U S WEST shareholders; provided, however, that if (i) a person or group
of persons other than U S WEST is deemed to own more than 15% of the Common
Stock within the meaning of Section 13(d) of the Exchange Act and (ii) there
occurs a contested proxy solicitation within the meaning of Rule 14a-11(a)
promulgated under the Exchange Act, U S WEST intends to vote its shares of
Common Stock in a manner U S WEST deems appropriate. In addition, although U S
WEST currently has no designees on the Enhance Financial board of directors, it
has retained the right to nominate directors.

Registration Rights Agreement

      The shares of Common Stock offered in connection with the sale of the DECS
were registered pursuant to a registration rights agreement, dated October 31,
1986, as amended, among Enhance Financial, U S WEST and Swiss Re. Each of U S
WEST and 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 U S WEST and Swiss Re on the other for
damages sustained and expenses incurred resulting from material misstatements or
omissions in connection with any such offering.

Seguradores Brasilieras de Fiancas

      In November 1997, Enhance Financial and Swiss Re each purchased 25% equity
interests in SBF for a respective initial investments of $3.3 million. It is
anticipated that Enhance Financial and Swiss Re will from time to time make
additional investments in SBF as its capital needs may require. See Item 1.
"Business - Description of Business - Other Businesses and Investments."

Reinsurance of FSA Business

      U S WEST owns a substantial interest in FSA, a financial guaranty insurer
which reinsures a portion of its business with the Company, all on terms and
provisions equivalent to those in comparable transactions currently in effect
with unaffiliated entities. FSA accounted for 16.0 % of the Company's total
gross premiums written in 1997. The Company believes that it and FSA conduct
their business with each other on an arms'-length basis and with terms no more
favorable to the other than would be the case absent the aforesaid relationship.
However, no assurance can be given that conflicts of interest may not develop in
the future or that the business conducted with FSA may not diminish in future
periods regardless of whether payment of the DECS is made in the form of shares
of Common Stock. See Item 1. "Business -- Description of Business -- Reinsurance
of Monoline Financial Guaranty Insurers" and Item 12. "Security Ownership of
Certain Beneficial Owners and Management."

Jones, Day, Reavis & Pogue

      Frieda K. Wallison, a director of Enhance Financial, is a member of Jones,
Day, Reavis & Pogue, a law firm retained by the Company during 1997.


                                      -74-
<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:

        All schedules are omitted, as the required information is nonapplicable
        or the information is presented in the financial statements or related
        notes.

(3)  Exhibits:

3.1.1   Restated certificate of incorporation of the registrant filed with the
        State of New York on February 18, 1992. (Incorporated by reference to
        Exhibit 3.3.1 to the Annual Report on Form 10-K for the year ended
        December 31, 1991 of the registrant.)

3.1.2   Certificate of amendment to the restated certificate of incorporation of
        the registrant filed with the State of New York on June 6, 1996.
        (Incorporated by reference to Exhibit 3.1.2 to the Annual Report on Form
        10-K for the year ended December 31, 1996 of the registrant (the "1996
        Form 10-K").)

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   Amended and restated credit agreement dated as of November 24, 1992, as
        amended and restated October 1, 1996 (the "Credit Agreement"), among the
        registrant and The Chase Manhattan Bank ("Chase"), as lender and
        administrative agent, and Fleet National Bank and Bank of
        Tokyo-Mitsubishi Trust Company, as lenders. (Incorporated by reference
        to Exhibit 4.2.1 to the 1996 Form 10-K.)

4.2.2   Amended and restated pledge agreement dated as of November 24, 1992
        amended and restated as of March 27, 1998 between the registrant and
        Chase, as agent.

4.2.3   Amendment No. 1, dated as of December 31, 1997 to the Credit Agreement.

4.2.4   Amendment No. 2, dated as of March 27, 1998, to the Credit Agreement.


                                      -75-
<PAGE>

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.)

4.4.1   Form of Indenture (Senior Debt Securities) dated as of March __, 1998
        between the registrant and Chase, as Trustee. (Incorporated by reference
        to Exhibit 4.1 to the registrant's Registration Statement on Form S-3
        (File No. 333-47895) filed with the Commission on March 13, 1998 (the
        "1998 Registration Statement").)

4.4.2   Form of Indenture (Subordinated Debt Securities) dated as of March __,
        1998 between the registrant and Chase, as Trustee. (Incorporated by
        reference to Exhibit 4.2 to the 1998 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
        1996 Form 10-K.)

10.2.2  Form of option grant certificate under the 1987 Incentive Plan for
        options granted in December 1997.

10.2.3  1997 Long Term Incentive Plan for Key Employees (the "1997 Incentive
        Plan").

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

10.3.1  Non-Employee-Director Stock Option Plan (the "Directors' Option Plan").
        (Incorporated by reference to Exhibit 10.6.4 to the 1992 Registration
        Statement.)

10.3.2  Form of option grant certificate under the Directors' Option Plan for
        options granted in 1992. (Incorporated by reference to Exhibit 10.6.5 to
        the 1992 Registration Statement.)

10.3.3  Director Stock Ownership Plan.


                                      -76-
<PAGE>

10.4    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.)

10.5.1  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.)

10.5.2  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.)

10.5.3  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.)

10.5.4  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.)

10.5.5  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.)

10.5.6  Letter agreement dated October 3, 1995 between the registrant and The
        Manufacturers Life Insurance Company constituting Amendment No. 5 to the
        Registration Rights Agreement. (Incorporated by reference to Exhibit
        10.3 to the Registration Statement on Form S-3 (File No. 333-2064) filed
        with the Commission on March 8, 1996 (the "1996 Registration
        Statement")).

10.5.7  Amendment No. 6 dated February 23, 1996 to the Registration Rights
        Agreement. (Incorporated by reference to Exhibit 10.4 to the 1996
        Registration Statement.)

10.6    Employment agreement dated July 16, 1996 between the registrant and
        Arthur Dubroff. (Incorporated by reference to Exhibit 10.6 of the 1996
        Form 10-K.)

10.7    Agreement dated December 11, 1997 between the registrant and Elaine J.
        Eisenman.

10.8    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.)

21.1    Subsidiaries of the registrant.

23.1    Consent of Deloitte & Touche LLP

24.1    Power of Attorney. (Included on signature page of this report.)

(b)  Reports on Form 8-K.

      The Company did not file any reports on Form 8-K during the fourth quarter
of 1997.

                                      -77-
<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 30, 1998.

                                   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 30, 1998 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/ Arthur Dubroff
                                     ------------------------------------
                                     Arthur Dubroff
                                     Executive Vice President
                                       (principal financial officer
                                       and principal accounting
                                       officer)


                                      -78-
<PAGE>

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



                                     /s/ David R. Markin
                                     ------------------------------------
                                      David R. Markin
                                      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/ Adrian U. Sulzer
                                     ------------------------------------
                                      Adrian U. Sulzer
                                      Director



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



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



                                     /s/ Jerry Wind
                                     ------------------------------------
                                      Jerry Wind
                                      Director


                                      -79-