The Company, excluding Singer, occupies approximately 45,000 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 approximately 9,000 square feet of office space at the same address pursuant to a sublease expiring August 1999 and approximately 35,000 square feet of office space at 700 Banyan Trail Road, Boca Raton, Florida pursuant to a lease expiring August 2005.
Net premiums written increased 28.7% to $129.3 million in 1998 from $100.5 million in 1997, as a result of the increase in gross premiums and a decrease in ceded premiums written from $7.6 million in 1997 to $1.1 million in 1998. The following table shows net premiums written by line of business for the periods presented:
Net Premiums Written (in millions) 1998 1997 - ---------------------------------- ---- ---- Municipal Reinsurance .................. $ 56.2 $ 34.3 Non-Municipal Reinsurance .............. 24.4 22.2 Other Insurance Lines .................. 48.7 44.0 ------ ------ $129.3 $100.5 ====== ======
Net Premiums Earned (in millions) 1998 1997 - -------------------------------------------- ------- ------- Municipal Reinsurance ...................... $ 42.0 $ 37.4 Non-Municipal Reinsurance .................. 23.8 12.6 Other Insurance Lines ...................... 36.5 35.5 ------- ------- $ 102.3 $ 85.5 ======= =======
Monoline reinsurance earned premiums increased $16.1 million (32.3%) as a result of refunded earned premiums more than doubling from $8.6 million to $17.9 million as well as a $7.6 million (9.9%) growth in earned premiums before the effect of refundings. Refunding activities increased throughout the year due to a favorable interest rate environment. 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, net of prepaid insurance premiums, which has grown to $308.2 million at year-end 1998 from $281.3 million at year-end 1997.
Incurred losses and loss adjustment expenses ("LAE") were $10.3 million in 1998 compared with $9.8 million in 1997. Of these amounts, $6.5 million and $8.1 million were incurred in connection with the Company's credit and surety businesses in 1998 and 1997, respectively. In addition, $10.6 million in municipal reinsurance losses were recorded, largely attributable to a $10 million case reserve established for anticipated losses related to reinsurance of Delaware Valley Obligated Group (DVOG) debt. The Company's non-specific reserve was reduced by $10 million accordingly. DVOG is an entity comprising five hospitals and a medical university in the Philadelphia area that is part of Allegheny Health, Education and Research foundation, based in Pittsburgh. 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 realized income of $14.1 million from its investments in affiliates in 1998 compared to $8.8 million in 1997 due to continued growth in the Company's asset-backed businesses.
The weighted average shares outstanding for 1998 was 37.52 million compared to 37.07 million for 1997. The diluted weighted average shares outstanding for 1998 was 39.28 million compared to 38.63 million for 1997.
All references to number of common shares and per-share information reflect the two-for-one stock split which was effective on June 26, 1998.
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:
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. The growth in premiums earned also reflects the amortization of the deferred premium revenue balance, net of prepaid insurance premiums, which grew to $281.3 million at year-end 1997 from $266.2 million at year-end 1996.
Incurred losses and 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.
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 $21.0 and $3.0 million, respectively, in dividends in 1998. As of December 31, 1998, under the Insurance Law, the Insurance Subsidiaries had an additional $13.4 million available for dividends to Enhance Financial compared with $14.4 million available as of December 31, 1997. Payments of dividends by Enhance Financial to its shareholders are further restricted by the terms of the Credit Agreement. At December 31, 1998, the maximum amount of quarterly dividends which may be paid by Enhance Financial to its shareholders in compliance with the terms of such agreement was $10.1 million. Enhance Financial paid dividends of $8.6 million to shareholders in 1998.
As of December 31, 1998, the statutory policyholders' surplus of Enhance Re and Asset Guaranty were $225.7 million and $98.5 million, respectively, compared to the minimum $68.4 million required by each under the Insurance Law and compared to $228.3 million and $94.9 million at December 31, 1997.
In 1995, Enhance Financial acquired a 50% joint venture interest in Singer. In 1997 Enhance Financial acquired the remaining 50% of Singer in a series of all-stock transactions. Enhance Financial issued 503,114 shares of its common stock in connection with the 1997
Enhance Financial makes available to Singer a $27 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, 1998, Singer had no outstanding liabilities under the combined credit facilities.
In December 1996, the board of directors terminated the then existing stock repurchase program and authorized the repurchase of up to 1,500,000 shares of Enhance Financial's common stock from that date. In 1998, Enhance Financial purchased 666,394 shares of its common stock for an aggregate consideration of $17.8 million.
At December 31, 1998, 1997 and 1996, the carrying value of the Company's investment portfolio (total investments less investment in affiliates) was $948 million, $876 million and $797 million, respectively, on which was earned $53.4 million, $50.6 million and $47.5 million in those years, respectively, excluding $2.4 million, $.7 million and $4.0 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, 1998, the Company held approximately $50.8 million and $5.5 million in short-term investments and cash and cash equivalents, respectively, to meet liquidity needs.
In 1998, the Company incurred annual debt service on its long- and short-term borrowings of $8.5 million and is anticipated to incur similar debt service expense in 1999.
The Company has no other material commitments for capital or other expenditures during 1999 or thereafter.
As the Year 2000 approaches, management is assessing the Company's potential exposure to the so called "millenium bug" and the effects the century date change may have on its electronic systems and those of its significant business partners. Since certain computer programs were written using two digits rather than four to define the applicable year, computing devices and
The Company has communicated with third parties with which it has material dealings to determine the status of their Year 2000 readiness and it is in the process of assessing its exposure to potential third party Year 2000 failures. Management has determined that the following consequences to the Company could result from the failure of such third parties to successfully address their Year 2000 issues: Obligors of insured issues (see also next paragraph) - increased credit risk, claims, loss of premiums and renewals; Primaries and Reinsurers - increased credit risk, uncollected claims, premium loss, impaired liquidity; Counterparties and Issuers of Obligations - investment portfolio downgrade, loss of income and/or principal; Financial Institutions and Lenders - impaired liquidity, loss of income and/or principal; Vendors and Service Providers interrupted power, building access, telecommunications, flow of goods, security and professional and technical services.
In addition to other risks in connection with the Year 2000, general uncertainty among market participants could cause a decline in business activity and revenue in 1999 and 2000, as companies address their Year 2000 issues. The Company cannot predict the magnitude of this possible decline or the impact that it may have on its financial results for those years. However, the Company has undertaken a thorough review of third party risks inherent in Year 2000 issues, and it is working with the industry group allied with its core business to identify and address credit and other business issues related to Year 2000. The Company is also assessing potential effects of unexpected failures in local, national or international systems, including power, communication and transportation systems, on which the normal conduct of business depends, and it will establish contingency plans to deal with such failures, although there can be no assurance that such plans can be effective in such circumstances, especially in the case of widespread economic disruption.
The Company believes that it will be substantially Year 2000 compliant on or before December 31, 1999. However, there can be no assurance, due to the uncertain nature of potential Year 2000 problems and the Company's lack of control over some of them, especially the readiness of third parties, that all Year 2000 issues will be foreseen and corrected in a timely fashion. While management does not believe that Year 2000 issues will have a material adverse effect on the Company, the failure of the efforts of the Company or its significant third parties to address material Year 2000 issues, could result in the disruption of the Company's normal business activities and have such a material adverse effect on the Company.
Consolidated Balance Sheets as of December 31, 1998 and 1997 40
Consolidated Statements of Income for the Years Ended December 31, 1998, 1997 and 1996 41
Deloitte & Touche LLP March 19, 1999 New York, New York
Enhance Financial Services Group Inc. ("Enhance Financial", and together with its consolidated subsidiaries, the "Company") is a holding company which was incorporated in the State of New York in December 1985 and commenced operations in November 1986. The Company principally engages, through its indirect wholly-owned, New York-domiciled insurance subsidiaries Enhance Reinsurance Company ("Enhance Re") and Asset Guaranty Insurance Company ("Asset Guaranty") (together, the "Insurance Subsidiaries"), which are owned by a wholly-owned subsidiary of Enhance Financial, Enhance Investment Corporation ("EIC"), in the reinsurance of financial guaranties of municipal and asset backed debt obligations issued by monoline financial guaranty insurers. 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, through a consolidated subsidiary, Singer Asset Finance Company, LLC ("Singer", see Note 5) and partially-owned affiliates, Credit-Based Asset Servicing and Securitization LLC ("C-BASS", see Note 5) and Sherman Financial Group LLC ("Sherman" see Note 5 ), is also engaged in the origination, purchase, servicing and/or securitization of special assets, including lottery awards, structured settlement payments, sub-performing/non-performing residential mortgages and unsecured delinquent consumer assets including credit cards receivables.
The accompanying financial statements include the accounts of Enhance Financial, EIC, 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).
The Company uses forward treasury lock agreements to hedge interest rate risk associated with unsecuritized assets held and anticipated acquisitions of assets by Singer. Gains and losses on such instruments that qualify as accounting hedges are deferred until the underlying hedged asset is sold, at which time the gain or loss on the related hedge is recognized in income.
The counterparties to the Company's foreign currency contracts and forward treasury lock agreements are substantial and creditworthy multinational commercial banks or other financial institutions which are recognized market makers.
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.
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.
The Company discounts certain financial guaranty liabilities at annual rates ranging from 5.14% to 6.36%. These discounted liabilities at December 31,1998 and 1997 were $17.5 million and $19.0 million, respectively, net of discounts of $11.0 million and $2.5 million, respectively.
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 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.
The Company has in effect a stock option program for key employees and a directors' stock option program for the benefit of directors who are not employees of the Company. In March 1998, the board of directors adopted the Director Stock Ownership Plan. 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).
In accordance with SFAS No. 128, "Earnings per Share," the Company reports "basic" and "diluted" earnings per share ("EPS"). Basic EPS is determined by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that would occur if securities such as employee stock options were exercised. Diluted EPS is computed using the treasury stock method to determine the weighted average number of common stock equivalents outstanding during each year. For all periods presented common stock equivalents are comprised of outstanding options pursuant to the Company's stock option programs.
In thousands 1998 1997 1996 ------ ------ ------ Weighted average common shares outstanding 37,520 37,069 35,750
Dilutive effect of common stock options 1,755 1,558 956 ------ ------ ------ Weighted average common and common equivalent shares outstanding 39,275 38,627 36,706 ====== ====== ======
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivatives Instruments and Hedging Activities," which becomes effective for the Company January 1, 2000. This pronouncement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. The Company will be required to recognize all derivatives
as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The accounting for a change in fair value of a derivative in earnings or other comprehensive income will depend on the intended use of the derivative and the resulting designation. Derivatives can be designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or a firm commitment, (b) a hedge of the exposure to variable cash flows of a forecast transaction. or (c) a hedge of foreign currency exposure of a net investment in foreign operations, an unrecognized firm commitment, an available-for-sale security, or a foreign currency denominated forecasted transaction. The Company is currently reviewing the impact of the implementation of SFAS No. 133 on its financial statements.
At December 31, 1998, the statutory basis policyholders' surplus of Enhance Re and Asset Guaranty, as reported to insurance regulatory authorities, was $225.7 million and $98.5 million, respectively. Statutory net income of Enhance Re and Asset Guaranty was $51.7 million and $11.0 million, respectively, for the year ended December 31, 1998. 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
Under the New York Insurance Law, the Insurance Subsidiaries may declare or distribute dividends only out of earned surplus. The maximum amount of dividends which may be paid by the Insurance Subsidiaries to Enhance Financial without prior approval of the Superintendent of Insurance is subject to restrictions relating to statutory surplus and net investment income as defined by statute. Enhance Re declared a dividend of $22 million and paid $21 million, and Asset Guaranty declared and paid a dividend of $3 million to Enhance Financial for the year ended December 31, 1998. At December 31, 1998, the Insurance Subsidiaries had an additional $13.4 million available for dividend distribution.
Fixed maturities, available for sale Due in one year or less $ 2,550 $ 2,581 Due after one year through five years 31,742 33,473 Due after five years through ten years 144,473 152,887 Due after ten years 478,879 505,433 -------- -------- $657,644 $694,374 ======== ========
Proceeds from sales of available for sale investments in fixed maturities during 1998, 1997 and 1996 were approximately $301 million, $407 million and $640 million, respectively. Gross gains of $5.0 million and gross losses of $2.6 million were realized on those sales in 1998. Gross gains of $4.8 million and gross losses of $4.2 million were realized on those sales in 1997. Gross gains of $7.7 million and gross losses of $3.7 million were realized on those sales in 1996.
In thousands Years Ended December 31, 1998 1997 1996 ------- ------- ------- Fixed maturities $53,312 $50,258 $46,102 Short-term investments and cash equivalents 2,148 1,872 3,184 Other 416 572 188 ------- ------- ------- Total investment income 55,876 52,702 49,474 Less investment expenses 2,453 2,084 2,012 ------- ------- -------
Unrealized appreciation of investments in equity securities at December 31, 1998 and 1997 includes gross unrealized gains of $341,000 and $335,000, respectively.
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 $312 million and $286 million at December 31, 1998 and December 31, 1997, respectively.
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, 1998. The Company accounts for its investment in EIC in accordance with the equity method of accounting.
In 1996, the Company and MGIC Investment Corporation formed C-BASS, with members of management thereof. C-BASS evaluates, purchases, services and securitizes sub-performing , non-performing, and seller financed residential mortgages and real estate and subordinated residential mortgage-backed securities. The Company owns approximately a 48% interest in C-BASS, which is being accounted for on the equity basis of accounting. In 1998, the Company contributed its interest in LLSI to C-BASS as part of its initial capital commitment. Due to the nature of servicing sub-performing mortgages, LLSI is an integral part of the operational activities of C-BASS. At December 31, 1998, the Company had contributed $55.5 million of capital to C-BASS. The following table sets forth combined C-BASS financial data for the three preceding years (In millions):
Funding arrangements 360.8 121.9 53.7 Other liabilities 107.6 45.0 15.2 ------ ------ ------ Total liabilities 468.4 166.9 68.9 ====== ====== ======
Total revenues 69.7 36.2 6.7 Total expenses 43.7 21.0 6.5 ------ ------ ------ Net income $ 26.0 $ 15.2 $ 0.2 ====== ====== ======
In 1997, the Company purchased at book value a 25% interest in Seguradores Brasilieras de Fiancas S.A. ("SBF"), 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. The Company's investment in SBF at December 31, 1998 was approximately $4.5 million.
In July 1998, the Company formed AGS Financial LLC ("AGS"), a New York-based venture with the management thereof. AGS provides structured finance, asset servicing and specialized investment-banking services in Latin American markets. At December 31, 1998, the Company had contributed of $300,000 of its required initial capital contribution commitment of $3.1 million.
In thousands Years Ended December 31, 1998 1997 1996 ---- ---- ---- Current income taxes $10,815 $10,311 $ 9,992 Deferred income taxes 19,535 14,839 10,694 ------- ------- ------- Tax provision $30,350 $25,150 $20,686 ======= ======= =======
Other, net 664 144 442 -------- -------- -------- Actual tax provision $ 30,350 $ 25,150 $ 20,686 ======== ======== ========
Contingency reserves $ 49,129 $ 43,027 Deferred policy acquisition costs 36,327 33,547 Deferred premium revenue 10,060 10,446 Unrealized capital gains 14,106 11,628 Capitalized expenditures $ 990 $ 1,183 Assignment sales income 16,689 8,438 Tax and loss bonds 29,267 24,797 Alternative minimum tax credit carryforward 8,545 6,334 Losses and LAE reserves 4,241 5,509 Deferred income 1,455 1,883
In December 1996, the board of directors terminated the then existing repurchase program and authorized the repurchase of up to 1,500,000 shares of its common stock from that date. Enhance Financial purchased 666,394, 355,850 and 3,200 shares of its common stock at an average price of $26.72, $19.73 and $11.91 per share in 1998, 1997, and 1996 respectively.
During 1997, Enhance Financial issued 1,006,228 shares of common stock in connection with its acquisition of the remaining 50% ownership interest in Singer (see Note 5).
In 1996, Swiss Reinsurance Company ("Swiss Re") acquired from Enhance Financial and one of its shareholders, respectively 1,200,000 and 800,000 shares of Enhance Financial common stock at a purchase price of $12.24 per share. In 1997, Swiss Re acquired an additional 1,400,000 shares of Enhance Financial common stock in the open market.
Under the terms of the Credit Agreement, the maximum amount of dividends which may be paid by Enhance Financial as of December 31, 1998 was $10.1 million. In connection with the Company's two-for-one stock split in June 1998, an additional 40,000,000 shares of common stock were authorized.
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.
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.
Long-Term Debt - The fair value is estimated based on the quoted market prices for the same or similar issue or on the current rates offered to the Company for debt of the same remaining maturities.
Short-Term Debt -The fair value of short-term debt, which bears interest at variable rates, is assumed to equal the carrying value of the debt.
Derivative Instruments - The fair values of foreign currency contracts are based on the estimated termination values as of the balance sheet date. The fair values of forward treasury lock agreements (notional amount of $40 million at December 31,1998) are determined by the Company using relevant market information and appropriate valuation methodologies.
interest payable ("insurance in force") on such insured obligation. At December 31, 1998, the Company's aggregate insurance in force was $75.7 billion. The Company's insured portfolio as of December 31, 1998 was broadly diversified by geographic and bond market sector with no single credit representing more than 0.9% of the Company's net insurance in force.
The actuarially computed net pension cost for 1998, 1997 and 1996, using the projected unit credit actuarial method of attribution includes the following components:
In thousands December 31, 1998 1997 Change in benefit obligation Benefit obligation at beginning of year $ 8,131 $ 6,475 Service cost 1,022 900 Interest cost 485 494 Actuarial (gain) losses (1,092) 931
Change in plan assets Fair value of plan assets at beginning of year 4,726 4,437 Actual return on plan assets 810 958 Employer contribution 565 -- Benefits paid (1,463) (669) ------- ------- Fair value of plan assets at end of year 4,638 4,726 ------- -------
Funded Status (2,445) (3,405) Unrecognized transition obligation 13 14 Unrecognized prior service cost 907 961 Unrecognized net actuarial gain (3,624) (2,266) ------- ------- Accrued benefit cost $(5,149) $(4,696) ======= =======
Actuarial assumptions utilized to determine the projected benefit obligation and estimated unrecognized net actuarial gain were as follows:
Years ended December 31, 1998 1997 1996 ------ ------ ------ Discount rate 7.0% 7.0% 7.5% Expected return on plan assets 8.5% 8.5% 8.5% Rate of compensation increase 6.0% 6.0% 6.0%
At December 31, 1998 and 1997 the accumulated post-retirement benefit obligation was $715,000 and $592,000, respectively, 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 12%, graded to 6% over 7 years. A one-percentage point change in assumed healthcare cost trend rates would have the following effects (In thousands):
1-Percentage 1-Percentage Point Increase Point Decrease Effect on total of service and interest cost components $29 ($22) Effect on post-retirement benefit obligation $144 ($113)
In January 1996, the Company implemented a 401(k) retirement savings plan covering substantially all employees of the Company. Under this plan, the Company provides a matching contribution of 50% on contributions up to 6% of base salary made to the plan by eligible employees. The Company's matching contributions were $120,000, $106,000 and 98,000 in 1998, 1997 and 1996, respectively.
All options are exercisable at the option price, being the fair value of the stock at the date of grant. The board of directors has authorized a maximum of 9,900,000 shares of common stock to be awarded as options, of which 6,055,604 options for shares (net of expirations and cancellations) had been awarded as of December 31, 1998. Information regarding activity in the option programs follows:
Option Price Per 1998 Options Number of Shares Share ------------ ---------------- -----
Outstanding at beginning of year 5,635,108 $ 7.25 - $29.062 Granted - Employees 1,168,980 $24.937 - $34.281 - Directors 91,000 $30.00 Exercised (666,374) $ 7.25 - $20.75 Expired or canceled (173,110) $ 8.00 - $28.813 --------- Outstanding at year-end 6,055,604 $ 7.25 - $34.281 --------- Exercisable at year-end - Employees 3,234,202 $ 7.25 - $28.844 - Directors 306,166 $ 8.563 - $29.75
Option Price Per 1997 Options Number of Shares Share ------------ ---------------- ----- Outstanding at beginning of year 5,106,220 $ 7.25 - $18.25 Granted - Employees 1,220,374 $19.44 - $28.844 - Directors 91,000 $29.75 Exercised (598,792) $ 7.25 - $17.00 Expired or canceled (183,694) $ 8.00 - $19.44 --------- Outstanding at year-end 5,635,108 $ 7.25 - $29.75 --------- Exercisable at year-end - Employees 3,117,688 $ 7.25 - $19.44 - Directors 256,666 $ 8.56 - $18.25
1998 1997 1996 ---- ---- ----- Net income - as reported $82,457 $68,806 $55,704 - pro forma $80,906 $67,475 $55,046 Basic earnings per share - as reported $2.20 $1.86 $1.56 - pro forma $2.16 $1.82 $1.54
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 $16.62, $12.01, and $5.44 in 1998, 1997 and 1996, respectively. The following assumptions were used for option grants awarded in 1998, 1997 and 1996:
Rent expense, net of sublease income, was $1,528,000, $1,699,000, and $1,139,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
The following are the condensed balance sheets of Enhance Financial as of December 31, 1998 and 1997 and its condensed statements of income and cash flows for the years ended December 31, 1998, 1997 and 1996.
LIABILITIES AND SHAREHOLDERS' EQUITY: Long-term debt $ 75,000 $ 75,000 Other liabilities 61,264 61,083 Shareholders' equity 662,646 581,393 -------- -------- $798,910 $717,476 -------- --------
In thousands Years Ended December 31, 1998 1997 1996 ---- ---- ---- Total revenues $ 812 $ 510 $ 1,312 Total expenses 17,514 14,652 12,343 --------- -------- --------
Cash flows from investing activities: Investment in affiliates net of dividends received (32,401) (7,186) (3,423) Sale of investments 741 (2,396) 750 Sales of short-term investments, net 4,880 (4,648) (5,529) --------- -------- -------- Net cash used in investing activities (26,780) (14,230) (8,202) --------- -------- -------- Cash flows from financing activities: Capital stock 9,920 7,341 4,843 Short-term debt 10,790 1,000 27,500 Dividends paid (8,645) (8,195) (7,198) Principal payment - senior notes -- -- (3,400) Reissuance of treasury stock -- -- 14,485 Purchase of treasury stock (17,807) (7,021) (38) ------- ------ --- Net cash provided by (used in) financing activities (5,742) (6,875) 36,192 --------- -------- -------- Net increase (decrease) in cash 2,715 -- (221) Cash, beginning of year -- -- 221 --------- -------- -------- Cash, end of year $ 2,715 $ -- $ -- ========= ======== ========
o In 1998 four primary insurers accounted for 19%, 19%, 19% and 5% of gross premiums written.
Net balance at December 31, 33,739 30,987 26,258 Plus reinsurance recoverables 2,500 2,688 1,823 ------- ------- -------
The terms "current year" and "prior years" in the foregoing table refer to the year in which case reserves were established.
---- In thousands Insurance Asset-Based Totals --------- ----------- ------ Revenues from external customer $ 88,966 $30,152 $ 119,118 Interest revenue 50,618 0 50,618 Interest expense 5,881 1,436 7,317 Equity in income of affiliates 733 8,045 8,778 Income tax expense 19,486 5,664 25,150 Operating earnings 60,029 8,374 68,403 Investments in affiliates 38,862 0 38,862 Deferred policy acquisition cost 95,645 0 95,645 Identifiable assets 1,049,596 97,913 1,147,509
Total revenues from external customers for reportable segments $ 151,627 $119,118 $ 80,171 Total interest revenue for reportable segments 53,423 50,618 47,462 Realized gains 2,434 657 4,008 --------- -------- -------- Total consolidated revenues $ 207,484 $170,393 $131,641 ========= ======== ========
The Company's revenues from external customers, by product line, are as follows:
In thousands 1998 1997 1996 --------- -------- -------- Insurance: Financial guaranty reinsurance $ 66,264 $ 49,913 $ 47,408 Financial guaranty direct 10,246 6,319 3,526 Trade credit reinsurance 15,973 19,165 16,581 Other 12,337 13,569 12,656