The Company, excluding Singer, occupies 121,000 square feet of office space comprising its executive offices at 335 Madison Avenue, New York, New York pursuant to a lease expiring August 2015. The Company also occupies 1,300 square feet of office space in London, England. Singer occupies 2,000 square feet of office space at the same address that it subleases from the Company and a 35,000 square feet of office space in Boca Raton, Florida pursuant to a lease expiring August 2005. In addition to 1,812 square feet of the Company's office space in New York, New York comprising AGS's executive offices that AGS subleases from the Company, AGS occupies approximately 1,089 square feet of office space in Raleigh, North Carolina pursuant to a lease expiring June 2001. Van-Am occupies 3,400 square feet of office space comprising its executive offices in Lexington, Kentucky and Asset Guaranty UK Ltd. occupies approximately.
In addition, the Company has committed to making capital improvements to its New York City offices and to purchase fixtures and furniture for those offices, as more fully discussed in Note 13 to Notes to Consolidated Financial Statements.
The Company divides its business operations into two reportable operating segments: insurance businesses and asset-based businesses.
The insurance businesses of the Company, which are conducted through the Insurance Subsidiaries, include principally the reinsurance of financial guaranties of municipal and asset backed debt obligations issued by monoline financial guaranty insurers. In addition, the Company is engaged in other insurance, reinsurance and non-insurance businesses that utilize the Company's expertise in performing sophisticated analyses of complex, asset-based risks. The Company's other insurance businesses involve the issuance of direct financial guaranties of smaller municipal debt obligations, trade credit reinsurance, financial institutions credit insurance (which includes excess-SIPC/excess-ICS and related type bonds) and financial responsibility bonds. Some of these other insurance businesses are conducted by Van-Am, a Kentucky-domiciled insurer which writes reclamation bonds for the coal mining industry, and surety bonds covering the closure and post-closure obligations of landfill operators. The Company also provides surety and other credit-based insurance products through its 45% ownership of SBF Participacoes Ltda.
Interest rates increased in 1999, reducing refundings of bonds in place and also the volume of new issues decreased. Municipal new-issue volume was $225.9 billion in 1999, a decline of 21.0% from $286.0 billion in 1998. For the financial guaranty insurance industry in total, the insured portion of such new issues was 46.0% and 50.8% for these years respectively. Total municipal bond refundings for 1999 represented approximately 16.5% of the new-issue volume, down from 28.6% for 1998.
Gross premiums written in 1999 increased 6.6% to $139.0 million from $130.4 million in 1998. Net premiums written grew 2.9% to $133.0 million in 1999 from $129.3 million in 1998. The 80.3% growth in the direct financial guaranty premium and the 31.4% growth in the assumed trade credit premium offset the 23.5% decrease in the financial guaranty reinsurance premium. The decrease in reinsurance net premiums written in 1999 relative to 1998 is mainly due to an $11.0 million cession written in 1998 that was not repeated in 1999.
While adhering to its strict underwriting standards, the Company maintains its strong position within the financial guaranty reinsurance market. The decrease in reinsurance lines (other than trade credit) was primarily caused by non-recurring opportunities in 1998 and the Company's refinement of unearned premium reserve amortization methodology.
Deferred premium revenue, net of prepaid reinsurance premiums, grew to $337.3 million at year-end 1999 from $308.2 million at year-end 1998. The growth is attributable primarily to new premiums written.
Net investment income increased 8.8% to $58.1 million in 1999 from $53.4 million in 1998 reflecting the growth in invested assets in the period offset, in part, by a shift in the portfolio towards tax-exempt securities. Included in 1999 is $1.4 million from other invested assets. After-tax investment income increased 8.9% in 1999 over 1998. The average yields on the Company's investment portfolio, after deducting associated costs, was 6.1% for the years ended December 31, 1999 and 1998. The average yields on the Company's investment portfolio on an after-tax basis, net of associated costs were 5.0% and 5.1% for the years ended December 31, 1999 and 1998, respectively. In addition, the Company realized $3.0 million in capital losses compared to $2.4 million in capital gains in 1999 and 1998, respectively. Net investment income is presented after deduction of both external investment management fees and internal costs associated with managing the investment portfolio.
The Company recognized a decrease in revenues from assignments, through securitization and other sales, of $30.7 million in 1999 compared to $45.4 million in 1998. Assignment revenues declined in both the lottery and structured settlement lines of business.
The Company's insurance operating expense ratio for 1999 was 56.6% compared to 48.6% in 1998. The increase in the Company's insurance expense ratio resulted from higher operating expenses. Policy acquisition costs, which vary with and are directly related to the generation of new and renewal premiums, were $40.0 million and $35.0 million in 1999 and 1998, respectively, representing 38.5% and 34.2% of premiums earned in those respective periods. The development of new business lines, a higher expense base, and increased ceding commissions together accounted for these increases. Other insurance operating expenses increased to $17.8 million in 1999 from $13.7 million in 1998. Non-insurance expenses increased to $52.3 million in 1999 from $39.9 million in 1998 reflecting generally higher expenses in the non-insurance businesses and include the cost of ELB's start-up expenses in its new viatical settlement product.
The Company realized income of $19.7 million from its investments in affiliates in 1999 compared to $14.1 million in 1998, primarily reflecting continued strong performance by C-BASS.
While adhering to its strict underwriting standards, the Company maintained its strong position within the municipal and non-municipal assumed reinsurance markets while the direct financial guaranty line of business grew significantly.
The Company realized income of $14.1 million from its investments in affiliates in 1998 compared to $8.8 million in 1997 due to continued growth in the Company's asset-based businesses.
Interest expense of $8.5 million was incurred in 1998 compared to $7.3 million in 1997 reflecting an increase in the average borrowings outstanding under the Company's line of credit under a bank credit agreement (as amended, the "Credit Agreement") in 1998 compared to 1997.
Net income for 1998 increased 19.8% to $82.5 million from $68.8 million in 1997. On a per share basis, basic earnings per share increased 18.3% to $2.20 in 1998 from $1.86 in 1997, while diluted earnings per share increased 18.0% to $2.10 in 1998 from $1.78 in 1997. Basic operating earnings per share increased 19.2% to $2.20 in 1998, while diluted operating earnings per share increased 18.6% to $2.10 in 1998.
The weighted average shares outstanding for 1998 was 37.5 million compared to 37.1 million for 1997. The diluted weighted average shares outstanding for 1998 was 39.3 million compared to 38.6 million for 1997.
Payment of dividends to Enhance Financial by the Insurance Subsidiaries are subject to restrictions relating to statutory capital and surplus and net investment income. Enhance Re and Asset Guaranty declared and paid a total of $22.0 million and $4.0 million, respectively, in dividends in 1999. As of December 31, 1999, under the Insurance Law, the Insurance Subsidiaries had an additional $11.0 million available for dividends compared with $13.4 million available as of December 31, 1998.
Payments of dividends by Enhance Financial to its shareholders are further restricted by the terms of the Credit Agreement. At December 31, 1999, the maximum amount of quarterly dividends that may be paid by Enhance Financial to its shareholders in compliance with the terms of such agreement was $9.6 million. Enhance Financial paid dividends of $9.1 million to shareholders in 1999.
As of December 31, 1999, the statutory policyholders' surplus of Enhance Re and Asset Guaranty was $214.8 million and $90.6 million, respectively, compared to the minimum $68.4 million required by each under the Insurance Law and compared to $225.7 million and $98.5 million at December 31, 1998.
corporate purposes of which $25 million is due March 31, 2000 and $100 million is due June 27, 2000. The Credit Agreement provides for a revolving credit facility under which individual advances may be converted, at Enhance Financial's discretion, into a four-year term loan. The total outstanding under the Credit Agreement at year-end 1999 was $110 million, which increased to $125 million in first quarter of 2000.
The Company's cash flow from operations consists principally of insurance and reinsurance premiums collected, income earned on invested assets and sales of assignments, which in turn is applied to the payment of claims, operating expenses and income taxes. The Company's cash flow from operations was $34.6 million, $95.7 million and $67.8 million for the years 1999, 1998 and 1997, respectively. The Company paid a total of $10.2 million, $7.6 million and $5.0 million in claims in 1999, 1998 and 1997, respectively.
Based on the cash flow of the Company in recent years, the Company's current financial condition and the Company's expectation as to its net premiums written, the Company does not expect the dividends from the
Insurance Subsidiaries and other subsidiaries in 2000 will provide adequate liquidity to enable Enhance Financial to meet its debt obligations, its general overhead expenses, its expenditures for capital improvements and its commitments to fund the operations of its asset-based businesses. The Company proposes to address this situation in the short term through increased bank borrowings and in the longer term, both for 2000 and thereafter, through a combination of capital market transactions and the sale of assets. The success of this effort will depend on numerous factors, many beyond the Company's control, including general capital market conditions, interest rate environment, and insurance regulatory constraints, and there can be no assurance that the Company will be successful resolving the situation in a manner that will not involve substantial expense, dilution to its shareholders and/or a restructuring of the Company.
At December 31, 1999, 1998 and 1997, the carrying value of the Company's investment portfolio, total investments including cash and cash equivalents and excluding investment in affiliates and other invested assets, was $963 million, $948 million and $876 million, respectively, on which was earned $56.7 million, $53.4 million and $50.6 million in those years, respectively, excluding ($3.0) million, $2.4 million and $0.7 million of net realized capital gains/(losses) in those years, respectively. The increase in investments resulted principally from cash flows from operations generated during the period. As of December 31, 1999, the Company held approximately $34.7 million and $2.6 million in short-term investments and cash and cash equivalents, respectively, to meet liquidity needs.
In 1999, the Company incurred annual debt service on its long- and short-term borrowings of $11 million. Debt service expence is anticipated to increase in 2000 as a result of increased borrowings.
In August 1999, Moody's downdgraded Enhance Financial's senior long-term debt rating from Aa3 to A2. In February 2000, Moody's placed such debt rating under review for possible further downgrade. The Company does not believe that the August 1999 downgrade has had or should have a material adverse effect on the Company. However, the downgrade could result in increased cost to Enhanece Financial of borrowing funds of othewise raising capital. Similarly, any additional downgrade of senior long-term debt rating of Enhance Financial could increase the costs of borrowing funds or otherwise raising capital, or could make certain types of borrowings or capital unavailable to the Company, which could have a material adverse effect on the Company.
In prior periods, the Company discussed the nature and progress of its plans to become Year 2000 ready. In late 1999, the Company completed its remediation and testing of systems. As a result of those planning and implementation efforts, the Company experienced no significant disruptions in mission critical information technology and non-information technology systems and believes those systems successfully responded to the Year 2000 date change. The Company expensed approximately $1.5 million during 1999 in connection with remediating its systems. The Company is not aware of any material problems resulting from Year 2000 issues, either with its products, its internal systems, or the products and services of third parties. The Company will continue to monitor its mission critical computer applications and thoses of its suppliers and vendors throughout the year 2000 to ensure that any latent Year 2000 matters that may arise are addressed promptly.
We have audited the accompanying consolidated balance sheets of Enhance Financial Services Group Inc. and Subsidiaries as of December 31, 1999 and 1998 and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
Deloitte & Touche LLP March 27, 2000 New York, New York
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 accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP"), which, for the Insurance Subsidiaries, differ in certain material respects from the accounting practices prescribed or permitted by regulatory authorities (see Note 3). The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. The significant accounting policies of Enhance Financial and its subsidiaries are as follows:
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 115 "Accounting for Certain Investments in Debt and Equity Securities," management classifies all securities at the time of purchase as "held to maturity" or "available for sale." Fixed maturity securities held to maturity are those securities for which the Company has the intent and has the ability to hold until maturity and are carried at amortized cost. There were no sales of or transfers of securities classified as held-to-maturity for the years ended December 31, 1999, 1998 and 1997. All other fixed maturity securities are classified as available for sale and carried at fair value. Unrealized gains and losses, net of taxes, on the available for sale portfolio are charged or credited to accumulated other comprehensive income.
The counterparties to the Company's derivative agreements are substantial and creditworthy multinational commercial banks or other financial institutions which are recognized market makers.
Premiums are earned in proportion to the level amortization of insured principal over the contract period. Deferred premium revenue represents that portion of premiums which will be earned over the remainder of the contract period, based upon information reported by primary insurers and management's estimate of the amortization of insured principal in those instances where information has not been reported to the Company. When insured issues are refunded or called, the remaining deferred premium revenue is generally earned at that time, since the risk to the Company is considered to have been eliminated.
The following summarizes the effect of reinsurance on premiums written and earned (in 000s):
The effect of reinsurance on losses and loss adjustments expenses for the years ended December 31, 1999, 1998 and 1997 was a decrease of $1,369,000, $1,230,000 and $335,000, respectively.
The percentage of assumed premiums written as a part of net premiums written for the years ended December 31, 1999, 1998 and 1997 was 63.9%, 77.3% and 82.3% respectively.
The Company acquires financial assets from individuals, including the rights to receive lottery awards and structured settlement payments, and securitizes these payment streams. The Company recognizes revenue from assignment sales in accordance with the requirements of SFAS 125.
Through the securitization process, the Company transfers control over such financial assets and recognizes income to the extent that net sale proceeds upon such transfer of control exceeds amounts paid to individuals, after deducting commissions and other fees paid to third parties.
In accordance with SFAS No. 109, "Accounting for Income Taxes," deferred federal income taxes are provided for temporary differences between the tax and financial reporting basis of assets and liabilities that will result in deductible or taxable amounts in future years when the reported amount of the asset or liability is recovered or settled. In the case of the Company, such temporary differences relate principally to premium revenue recognition and deferred acquisition costs. See Note 6 for discussion relating to acquired deferred tax assets.
The Internal Revenue Code permits municipal bond insurance companies to deduct from taxable income, subject to certain limitations, the amounts added to the statutory mandatory contingency reserve during the year. The deduction taken is allowed only to the extent that U.S. Treasury non-interest-bearing tax and loss bonds are purchased at their par value prior to the original due date of the Company's consolidated federal tax return and held in an amount equal to the tax benefit attributable to such deductions. The amounts deducted must be included in taxable income when the contingency reserve is released, at which time the Company may redeem the tax and loss bonds to satisfy the additional tax liability. The purchases of tax and loss bonds are recorded as prepayments of federal income taxes and are not reflected in the Company's current tax provision.
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.
In accordance with SFAS No. 128, "Earnings per Share," the Company reports "basic" and "diluted" earnings per share ("EPS"). Basic EPS is determined by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that would occur if securities such as employee stock options were exercised. Diluted EPS is computed using the treasury stock method to determine the weighted average number of common stock equivalents outstanding during each year. For all periods presented common stock equivalents comprise outstanding options pursuant to the Company's stock option programs.
Following is a reconciliation of weighted average common shares outstanding to weighted average common and common equivalent shares outstanding for the years ended December 31, 1999, 1998 and 1997 (in 000s).
Effective in 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income." This pronouncement established new rules for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. The adoption of this statement had no impact on the Company's financial position or results of operations. SFAS No. 130 requires the Company's unrealized gains and losses and changes in foreign currency translation adjustment to be included in other comprehensive income.
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivatives Instruments and Hedging Activities," which becomes effective for the Company January 1, 2001. This pronouncement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. The Company will be required to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The accounting for a change in fair value of a derivative in earnings or other comprehensive income will depend on the intended use of the derivative and the resulting designation. Derivatives can be designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or a firm commitment, (b) a hedge of the exposure to variable cash flows of a forecast transaction. or (c) a hedge of foreign currency exposure of a net investment in foreign operations, an unrecognized firm commitment, an available-for-sale security, or a foreign currency denominated forecasted transaction. The Company is currently reviewing the impact of the implementation of SFAS No. 133 on its financial statements.
Goodwill represents the excess of cost of acquisitions over the tangible net assets acquired. Goodwill, which is substantially attributable to the acquisition of Singer, is amortized by the straight-line method over 20 years.
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.
Asset Guaranty was $51.7 million and $11.0 million, respectively, for the year ended December 31, 1998 and $40.7 million and $11.7 million, respectively, for the year ended December 31, 1997.
The New York Insurance Law 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.
The following is a summary of the Company's investments in fixed maturities at December 31, 1999 and 1998 (in 000s):
The amortized cost and estimated fair value of fixed maturities at December 31, 1999 by contractual maturity are shown below (in 000s). Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Unrealized appreciation of investments in equity securities at December 31, 1999 and 1998 includes gross unrealized gains of $341,000.
Under agreements with its primaries and in accordance with statutory requirements, the Insurance Subsidiaries maintain funds (fixed maturities and cash equivalents) in trust accounts principally for the benefit of reinsured companies and for the protection of policyholders in states in which the Insurance Subsidiaries are not licensed. The Company maintains full control over the management of assets held in trust accounts. The carrying amount of such restricted balances amounted to approximately $437 million and $312 million at December 31, 1999 and December 31, 1998, respectively.
The Company owns 360,000 shares of EIC Corporation Ltd. ("Exporters"), an insurance holding company which, through its wholly-owned insurance subsidiary licensed in Bermuda, insures foreign trade receivables. The Company's investment represented an equity interest of approximately 41% at the date of acquisition and approximately 36.5% (which represents 54% voting interest) at December 31, 1999. The Company accounts for its investment in Exporters in accordance with the equity method of accounting as the control of Exporters does not rest with the Company and since the minority shareholders have substantial participating rights.
decided in 1998 to exit the financial responsibility bond line of business. The Company sold a portion of Van Am business in 1999 and will either sell its remaining interest in Van Am or wind-down Van Am's operations, thereby exiting this line of business. A wind-down of Van Am's operation may take ten or more years. An estimated $4.5 and $2.3 million of expenses associated with this action have been recognized in 1999 and 1998, respectively.
In 1995, the Company acquired, for cash, a 50% joint venture interest in Singer, which originates, securitizes and sells various types of special assets such as lottery awards, structured settlement payments and similar obligations. In 1997, the Company acquired the remaining 50% of Singer in a series of all-stock transactions for an aggregate purchase price valued at $21.3 million. The excess (approximately $20.4 million) of the Company's aggregate cost over the fair value of the net assets of Singer represents goodwill.
Enhance Financial and Swiss Re, respectively, owns 45% equity interest in SBF Participacoes Ltda ("SBF"), a Brazilian insurance holding company, which is the parent holding company of UBF Garantias & Seguros SA, one of Brazil's largest credit insurance and surety insurance companies ("UBF"). The remainder of SBF is owned by UBF's management and private Brazilian investors. The Company anticipates that the business of UBF will expand in the Latin American insurance and other credit-related markets and opportunities. The Company's
In November 1998, the Company acquired through merger all of the outstanding shares of Alegis Group, Inc. ("Alegis"), the parent holding company of a Houston-based servicer and collector of delinquent consumer assets, the purchase price was approximately $11.7 million which approximated the fair market value of Alegis (see Note 8).
In December 1998, the Company and MGIC formed a joint venture, Sherman, with members of management thereof, to provide analytic and due diligence services to purchasers of unsecured delinquent consumer assets; purchases, services and securitizes unsecured delinquent consumer assets. The Company owns a 45.5% interest in Sherman, which is being accounted for on the equity basis of accounting. In December 1999 as part of its initial capital commitment, the Company contributed substantially all the assets of one subsidiary of Alegis and the capital stock of other subsidiaries to Sherman. At December 31, 1999, the Company had committed to contribute an aggregate $20.0 million to the capital of Sherman, approximately $9.1 million of which had been contributed as of December 31, 1999. At December 31, 1999 the Company has guaranteed $10.9 million of Sherman's credit facility, which has an outstanding balance of $21.8 million.
On April 8, 1999, the Company completed a $13.7 million purchase of a portfolio of approximately 500 residential mortgage-backed securities (classified as Investments - Other Invested Assets). Post-closing adjustments subsequently reduced the net purchase price to $9.4 million. The transaction was structured by C-BASS, which will also manage and service the portfolio for the Company. The purchase price was financed by a short-term credit facility with an initial principal balance of $10.3 million. As of December 31, 1999, the outstanding balance of that credit facility was $3.9 million. The transaction is expected to produce significant pre-tax economic profits over the life of the acquired portfolio, which is anticipated to be eight to ten years. Additionally, the transaction will provide ancillary tax benefits that are expected to lower the Company's effective tax rate in 1999 and beyond. The Company currently expects that it will continue to receive tax benefits from the portfolio at a level comparable to the current year at least through 2001 and will receive some additional tax benefits over a period of six to eight years thereafter. However, the amount of pre-tax economic profits and tax benefits recognized from year to year may vary significantly depending on a variety of factors relating to the portfolio, some of which are outside the control of the Company. For the year ended December 31, 1999, the portfolio produced $41.2 million in net tax losses and $1.4 million in investment income for financial reporting purposes.
One of the prior owners of the portfolio has been audited by the Internal Revenue Service ("IRS"). Upon completion of that audit, the IRS determined that certain tax strategies adopted by the prior owner with respect to the portfolio were improper and should be disallowed. The prior owner disputes the IRS's determination and has filed suit in the United States Tax Court to overturn the IRS's audit adjustments relating to the portfolio. The IRS has asserted a number of theories in support of its audit position, one of which conceivably could result in the loss of a material portion of the tax benefits that the Company expects to receive from the portfolio. After reviewing the pleadings filed in the pending litigation, Company counsel has reaffirmed its advice that the Company should be able to realize the expected tax benefits associated with the portfolio. Nonetheless, given the uncertainties involved in litigation, there can be no complete assurance that the pending Tax Court litigation will not have a material adverse effect on the tax benefits that the Company expects to realize from the portfolio.
With respect to the acquired tax benefits, at December 31, 1999, the Company has recorded a $138.0 million deferred tax assets and a related deferred credit. The deferred tax asset is reduced and the deferred credit is amortized to income (as a reduction of current tax expense) as the tax benefits are realized (approximately $14.4 million for the year ended December 31, 1999).
The investment in the portfolio ($10.9 million at December 31, 1999) is carried at estimated market value (which approximates cost) and is classified on the consolidated balance sheet as Investment - Other Investment Assets.
The components of the net deferred income tax asset and liability as of December 31, 1999 and 1998 are as follows (in 000s):
The carrying value of the Company's indebtedness is as follows (in 000s):
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
See Note 6 for credit facility relating to Other Invested Assets.
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).
Under the terms of the Credit Agreement, the maximum amount of dividends which may be paid by Enhance Financial as of December 31, 1999 was $9.6 million. In connection with the Company's two-for-one stock split in June 1998, an additional 40,000,000 shares of common stock were authorized.
OTHER INVESTED ASSETS - The fair value of the residential mortgage-backed securities is based on the present value of the estimated net future cash flows, including annual distributions of net cash proceeds from the exercise of call rights using relevant market information.
The carrying amounts and estimated fair values of these financial instruments are as follows (in 000s):
The composition of the Company's insurance in force by type of issue and by state of issue was as follows (in billions):
The Company maintains non-contributory defined benefit pension plans, including a non-qualified restoration pension plan effective July 1, 1999, for the benefit of all eligible employees. Employer contributions are based upon a fixed percentage of employee salaries determined at the discretion of the Company. Plan assets consist of domestic equity and high quality fixed income securities.
The actuarially computed net pension cost for 1999, 1998 and 1997, using the projected unit credit actuarial method of attribution includes the following components (in 000s):
The following table sets forth the funding status of the plans and the accrued pension cost recognized in the Company's consolidated balance sheets at December 31, 1999 and 1998 (in 000s):
At December 31, 1999 and 1998 the accumulated post-retirement benefit obligation was $896,000 and $715,000, respectively, and was not funded. At December 31, 1999, the discount rate used in determining the accumulated post-retirement benefit obligation was 8% and the health care trend was 10.5%, graded down to 5.5% after 12 years; at December 31, 1998, the discount rate used in determining the accumulated post-retirement benefit obligation was 7% and the health care trend was 12%, graded to 6% over 7 years. A one-percentage point change in assumed healthcare cost trend rates would have the following effects (In thousands):
The Company maintains a stock option program for its key employees. Substantially all options issued under the program vest in four equal annual installments commencing one year after the date of grant. The Company also maintains a directors' option program pursuant to which directors of Enhance Financial and the Insurance Subsidiaries who are not employees of the Company are granted non-qualified stock options. Options under this program vest in two equal annual installments commencing on December 31 next following the date of grant.
The Company applies the provisions of APB Opinion No. 25 "Accounting for Stock Issued to Employees" in accounting for its stock option program. Accordingly, no compensation expense has been recognized for options granted under its stock option program, and the Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." Had compensation cost for the Company's current and past stock option programs been determined based upon the fair value at the grant date for awards under these plans consistent with the methodology prescribed under SFAS No. 123, the Company's net
Rent expense, net of sublease income, was $3,228,000, $1,528,000, and $1,699,000, for the years ended December 31, 1999, 1998 and 1997, respectively.
The Company has committed to make capital improvements to its offices in New York, New York and to purchase fixtures and furniture for such offices, in the aggregate amount of $11.0 million, net of building owner's reimbursement.
The Company is a party to facultative agreements with all, and a party to treaty agreements with all except one of, the four largest primary financial guaranty insurance companies. The Company's facultative and treaty agreements are generally subject to termination (i) upon written notice (ranging from 90 to 120 days) prior to the specified deadline for renewal, (ii) at the option of the primary insurer if the Company fails to maintain certain financial, regulatory and rating agency criteria which are equivalent to or more stringent than those the Company is otherwise required to maintain for its own compliance with the New York Insurance Law and to maintain a specified claims-paying ability or financial strength rating for the particular Insurance Subsidiary or (iii) upon certain changes of control of the Company. Upon termination under the conditions set forth in (ii) and (iii) above, the Company may be required (under some of its reinsurance agreements) to return to the primary insurer all unearned premiums, less ceding commissions, attributable to reinsurance ceded pursuant to such agreements. Upon the occurrence of the conditions set forth in (ii) above, whether or not an agreement is terminated, the Company may be required to obtain a letter of credit or alternative form of security to collateralize its obligation to perform under such agreement.
In August 1999, the senior long-term debt rating of Enhance Financial and the insurance financial strength rating of Enhance Reinsurance were downgraded from Aa3 to A2 and from Aaa to Aa2, respectively.
This customer concentration results from the small number of primary insurance companies which are licensed to write financial guaranty insurance. Prior years' data has been restated to give retroactive effect to mergers between our primary insurers.
Activity in the liability for losses and loss adjustment expenses ("LAE") is summarized as follows (in 000s):
The following are reconciliations of reportable segment revenues and profit to Enhance Financial's consolidated totals (in 000s):
The Company has begun a review of its strategic alternatives in order to maximize shareholder value. In February 2000 Enhance Financial engaged Morgan Stanley Dean Witter & Co. to advise the Company in connection with such review. The Company's business strategy, including without limitation, its expectations regarding sources of future growth may be changed materially following such review of strategic alternatives.