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, 1998. This information should be read in conjunction with the historical consolidated financial statements of the Company and the related notes thereto and
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 municipal 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 contribute a significant component of its premium revenues. 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 into account these higher loss levels in determining appropriate premium rates.
The weighted average shares outstanding for 1997 was 37.07 million compared to 35.75 million for 1996.
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.
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 $95.7 million, $67.8 million and $42.2 million for the years 1998, 1997 and 1996, respectively. The Company paid a total of $7.6 million, $5.0 million and $11.9 million in claims in 1998, 1997 and 1996, respectively. Of the claim payments made in 1998, $7.2 million related to reserves established in prior years.
In July 1996, the Company formed Credit-Based Asset Servicing and Securitization LLC ("C-BASS"), a joint venture in which Enhance Financial and MGIC each own 48% interests. The Company contributed $15.8 million in cash in 1996, $6.8 million in cash in 1997 and $32.9 million in cash (plus 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 full amount of $50 million was drawn down by C-BASS during the year. The outstanding principal under the facility currently is due not later than July 31, 1999.
The failure of IT systems and non-IT systems associated with cash management, servicing, communications and building facilities would in varying degrees have a material adverse effect on the Company. Such failures could disrupt the Company's ability to conduct normal business operations, including financial transactions such as payment of claims or debts, collecting or funding of receivables and selling of commercial paper. The consequences of such failures could include business interruption, lost revenue and illiquidity. The magnitude of the financial impact of such potential failures is not known at this time. The Year 2000 Project includes a provision for contingency planning for systems and facilities that will generally involve processing that does not rely upon computer systems and will utilize additional staff as
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.
During 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of Enterprise and Related Information". This pronouncement requires a company to present disaggregated information based on the internal segments used in managing its business. The adoption of this statement did not impact the Company's financial position or results of operations, but it did affect the presentation of the Company's segment disclosures (see Note 17).
In December 1998, the Company and MGIC formed a joint venture, Sherman Financial Group LLC ("Sherman") with members of management thereof, to provide analytic and due diligence services to purchasers of unsecured delinquent consumer assets and purchases, services and securitizes unsecured delinquent consumer assets. The Company owns a 45.5% interest in Sherman, which is being accounted for on the equity basis of accounting. As part of its commitment to capitalize Sherman, the Company will contribute its entire interest in Alegis to Sherman.
In thousands December 31, 1998 December 31, 1997 Assets Liabilities Assets Liabilities ------ ----------- ------ -----------
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
Income tax (expense) benefit (3,300) 5,448 5,008 --------- -------- -------- Net income $ 82,457 $ 68,806 $ 55,704 ========= ======== ========
o In 1996 four primary insurers accounted for 19%, 13%, 10% and 7% of gross premiums written.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on profit or loss from operating earnings, which it defines as net income excluding the impact of capital and foreign exchange gains and losses, and certain non-recurring items, net of taxes. Summarized financial information concerning the Company's operating segments is presented in the following tables:
---- In thousands Insurance Asset-Based Totals --------- ----------- ------ Revenues from external customers $ 104,820 $ 46,807 $ 151,627 Interest revenue 53,423 0 53,423 Interest expense 7,223 1,277 8,500 Equity in income of affiliates 1,623 12,443 14,066 Income tax expense 23,558 6,792 30,350 Operating earnings 66,500 16,021 82,521 Investments in affiliates 96,867 0 96,867 Deferred policy acquisition cost 103,794 0 103,794 Identifiable assets 1,242,758 93,659 1,336,417
Total Revenues from External Customers $151,627 $119,118 $ 80,171 ======== ======== ========