<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from______________to____________
Commission File Number 333-34829
DELPHI INTERNATIONAL LTD.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Bermuda (441) 295 3688 N/A
- --------------------------------------------------------------------------------
(State or other Jurisdiction (Registrant's telephone (I.R.S. Employer
of incorporation number, including Identification
or organization) area code) Number)
Chevron House, 11 Church Street, Hamilton, Bermuda HM HX
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
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 filing requirements
for the past 90 days:
Yes X No
----- -----
As of November 6, 1998, the Registrant had 4,079,014 shares
of Common Stock outstanding.
1
<PAGE> 2
DELPHI INTERNATIONAL LTD.
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION Page
----
Consolidated Statements of Loss for the three
months ended September 30, 1998 and the period
from January 27, 1998 to September 30, 1998 3
Consolidated Balance Sheet at September 30, 1998 4
Consolidated Statement of Cash Flows for the
Period from January 27, 1998 to September 30, 1998 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II. OTHER INFORMATION 12
2
<PAGE> 3
PART 1. FINANCIAL INFORMATION
DELPHI INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF LOSS
(EXPRESSED IN US DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Period from
Ended January 27, 1998 to
September 30, 1998 September 30, 1998
------------------ ------------------
<S> <C> <C>
Revenue:
Premiums Written $ 12,011,000 $ 132,844,950
Premiums Ceded (15,000) (15,000)
------------ -------------
Net Written Premiums 11,996,000 132,829,950
Change in Unearned Premiums -- --
------------ -------------
Premiums Earned 11,996,000 132,829,950
Net Investment Loss (16,054,905) (9,863,882)
------------ -------------
Total Revenue (4,058,905) 122,966,068
------------ -------------
Losses and Expenses:
Losses Incurred 13,462,778 126,029,954
Underwriting and Acquisition Expenses (10,777) 7,661,450
Interest Expense 756,986 1,940,548
General and Administrative Expenses 470,994 1,145,151
Incorporation Costs 17,447 1,338,035
------------ -------------
Total Losses and Expenses 14,697,428 138,115,138
------------ -------------
Net Loss (18,756,333) (15,149,070)
Other Comprehensive Income:
Unrealized Gains on Fixed Maturity Securities 592,237 968,339
------------ -------------
Comprehensive Loss $(18,164,096) $ (14,180,731)
============ =============
Net Loss per share of common stock $ (4.60) $ (3.71)
Common shares outstanding 4,079,014 4,079,014
</TABLE>
See notes to consolidated financial statements
3
<PAGE> 4
DELPHI INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1998
(EXPRESSED IN US DOLLARS)
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS
Investments:
Balances with Independent Investment Managers $125,793,340
Fixed Maturity Securities available for sale 18,651,391
------------
Total 144,444,731
Cash and Cash Equivalents 10,388,716
Funds Withheld by Ceding Reinsurer 15,225,651
Reinsurance Premium Receivable 11,481,000
Other Assets 361,568
------------
TOTAL ASSETS $181,901,666
============
LIABILITIES
Reserve for Outstanding Losses $121,236,194
Provision for Annuity Reinsurance Payments 10,500,000
Reinsurance Balances Payable 1,568,738
Loans 40,000,000
Other Liabilities 2,522,518
------------
TOTAL LIABILITIES 175,827,450
------------
SHAREHOLDERS' EQUITY
Preferred Stock $0.01 par value; 5,000,000 shares authorized --
Common Stock $0.01 par value; 10,000,000 shares authorized --
4,079,014 common shares issued and outstanding 40,790
Additional Paid-in Capital 20,214,157
Unrealized Gains on Fixed Maturity Securities 968,339
Earnings Deficit (15,149,070)
------------
TOTAL SHAREHOLDERS' EQUITY 6,074,216
------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $181,901,666
============
</TABLE>
See notes to consolidated financial statements
4
<PAGE> 5
DELPHI INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
PERIOD FROM JANUARY 27, 1998 TO SEPTEMBER 30, 1998
(EXPRESSED IN US DOLLARS)
(UNAUDITED)
<TABLE>
<S> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (15,149,070)
Adjustments to reconcile net loss to net cash provided by operating activities:
Realized losses on balances with independent investment managers 696,055
Net unrealized losses on balances with independent
investment managers 10,255,414
Realized gains on sale of fixed maturity securities (12,060)
Amortization on fixed maturity securities (13,958)
Funds withheld by ceding reinsurer (15,225,651)
Reinsurance premiums receivable (11,481,000)
Incorporation and start-up costs 1,338,035
Accrued interest (325,358)
Prepaid expenses (36,209)
Reserve for outstanding losses 121,236,194
Provision for annuity reinsurance payments 10,500,000
Reinsurance balances payable 1,568,738
Other liabilities 2,522,518
-------------
Net cash provided by operating activities 105,873,648
-------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of fixed maturity securities 1,794,130
Withdrawals from balances with independent investment managers 4,376,820
Balances with independent investment managers (141,121,629)
Purchase of fixed maturity securities (19,451,165)
-------------
Net cash used by investing activities (154,401,844)
-------------
CASH FLOWS FROM FINANCING ACTIVITIES
Loans 40,000,000
Proceeds from issue of common stock 20,254,947
Incorporation and start-up costs (1,338,035)
-------------
Net cash provided by financing activities 58,916,912
-------------
Increase in cash and cash equivalents 10,388,716
Cash and cash equivalents at beginning of period __________
Cash and cash equivalents at end of period $ 10,388,716
=============
</TABLE>
See notes to consolidated financial statements
5
<PAGE> 6
DELPHI INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation The consolidated financial statements include the
accounts of Delphi International Ltd. and its wholly-owned subsidiaries Oracle
Reinsurance Company Ltd. ("Oracle Re") and O.R. Investments Ltd. ("O.R.").
Delphi International Ltd. and its subsidiaries are herein collectively referred
to as the "Company". All significant intercompany accounts and transactions have
been eliminated. The financial statements included herein were prepared in
conformity with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. The information furnished includes all adjustments and accruals of a
normal recurring nature which are, in the opinion of management, necessary for a
fair presentation of results for the interim period. Operating results for the
period from January 27, 1998 to September 30, 1998 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1998.
Use of estimates The preparation of financial statements in conformity with
generally accepted accounting principles 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 period. Actual results could differ from these estimates.
Nature of operations The Company commenced underwriting operations in January
1998 through its wholly-owned subsidiary, Oracle Re, a Class 3 registered
insurance company under the Bermuda Insurance Act 1978. During the period ended
September 30,1998, Oracle Re entered into loss portfolio reinsurance agreements
with two subsidiaries of Delphi Financial Group, Inc. ("DFG"), and an aggregate
excess reinsurance agreement with a US professional liability insurer.
Premiums Written The reinsurance agreements entered into by Oracle Re involve
the reinsurance of past liabilities and are considered to contain sufficient
elements of risk for premiums received to be recognized immediately in the
income statement and for loss portfolios assumed together with commissions and
expenses to be correspondingly recognized immediately as losses incurred and
underwriting and acquisition expenses.
Oracle Re also entered into a Quota Share Annuity Reinsurance Treaty with a
subsidiary of DFG. The $10,500,000 deposit on this treaty, which is long term in
nature, has not been recorded as premium but has, instead, been recorded as a
liability since these products do not insure mortality or morbidity risk.
6
<PAGE> 7
DELPHI INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Investments Balances with independent investment managers, which are primarily
investments in investment companies, are accounted for under the equity method
with earnings or losses included in investment income. The carrying value of the
balances with investment managers approximates fair value. Fixed maturity
securities are available for sale and are carried at fair value with changes in
fair value reported as a separate component of comprehensive income.
Reserve for Outstanding Losses The reserve for outstanding losses represents
Oracle Re's share under its reinsurance contracts of the liability for unpaid
claims and claim expenses which includes amounts determined by the ceding
reinsurers on an individual basis for reported losses and estimates of incurred
but not reported losses developed on the basis of past experience. The reserves
which have been discounted at rates ranging from 5% to 6% are continually
reviewed and updated and any resulting adjustments are reflected in current
earnings.
NOTE B - CAPITAL SECURITIES & NOTE FINANCING
In January 1998, the Company issued rights to the shareholders of DFG to acquire
up to 2,039,507 shares of the Company at $10.25 per share. These shares were
effectively fully subscribed with the shares not initially being taken up by
shareholders of DFG being subscribed for by certain standby purchasers of the
rights offering. A two for one stock split to shareholders of record on May 27,
1998 was distributed on June 11, 1998 increasing the shares in issue from
2,039,507 to 4,079,014. The Company received a net amount of $20,254,947 from
the offering after the deduction of $650,000 in expenses. In addition to the
capital raised by the rights offering a further $40,000,000 has been received by
the Company from sales of subordinated notes to DFG and certain of its
subsidiaries. These notes bear interest at 9% per annum, payable semi-annually,
and are repayable in January 2028.
NOTE C - INVESTMENTS
At September 30, 1998 the Company had fixed maturity securities available for
sale with a carrying value and a fair value of $18,651,391 and an amortized cost
of $17,683,052. At September 30, 1998, the Company had balances with independent
investment managers with a carrying value and a fair value of $125,793,340.
Substantially all of the amounts invested with independent investment managers
are withdrawable at least annually, subject to applicable notice requirements.
7
<PAGE> 8
DELPHI INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
NOTE D - NET LOSS PER SHARE OF COMMON STOCK
Net Loss per share of common stock is computed by dividing net loss by the
number of common shares outstanding for the period:
<TABLE>
<CAPTION>
Period from
Three months ended January 27,1998
September 30, 1998 to September 30, 1998
<S> <C> <C>
Net Loss $(18,756,333) $(15,149,070)
Common shares outstanding 4,079,014 4,079,014
Net Loss per share of common stock $(4.60) $(3.71)
</TABLE>
NOTE E - RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", which is
required to be adopted in fiscal years beginning after June 15, 1999. SFAS No.
133 permits early adoption as of the beginning of any quarter after its
issuance. The Company has not yet determined when it will adopt this standard.
SFAS No. 133 will require all derivatives to be recognized on the balance sheet
at fair value. Derivatives that are not hedges must be adjusted to fair value
through income. If the derivatives are a hedge, depending on the nature of the
hedge, changes in fair value of the derivatives will either be offset against
the change in fair value of the hedged assets, liabilities or firm commitments
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. The portion of a derivative's change in fair
value not effective as a hedge will be immediately recognized in earnings. The
Company has not yet determined what the effects of SFAS No. 133 will be on the
earnings and financial position of the Company.
8
<PAGE> 9
DELPHI INTERNATIONAL LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
GENERAL
The following is an analysis of the results of operations and financial
condition of Delphi International Ltd. (the "Company", which term includes the
Company and its consolidated subsidiaries unless the context specifies
otherwise). This analysis should be read in conjunction with the Consolidated
Financial Statements and related notes included in this document.
RESULTS OF OPERATIONS
Underwriting Income. The company commenced underwriting through its wholly-owned
subsidiary, Oracle Re, on January 27, 1998. Premiums for the quarter ended
September 30, 1998 of $12.0 million were derived from professional liability
aggregate excess reinsurance and excess workers' compensation reinsurance.
Premiums written for the eight month period ended September 30, 1998 were $132.8
million. These premiums were derived primarily from workers' compensation
aggregate excess of loss reinsurance of business of Safety National Casualty
Corporation ("SNCC") in the amount of $82.1 million, from the quota share
reinsurance of the business of Reliance Standard Life Insurance Company ("RSL")
of $39.8 million and from the professional liability aggregate excess
reinsurance agreement of $10.9 million.
Oracle Re focuses on the reinsurance of group employee benefit products,
including group long-term disability and excess workers' compensation insurance.
Oracle Re intends to expand its customer base and develop additional products
and services.
Underwriting Expenses. Losses incurred of $126.0 million include the discounted
value of loss portfolios assumed under the reinsurance treaties with SNCC and
RSL (adjusted for the accretion of interest for the period from inception to
September 30, 1998, losses paid, and any changes in underlying loss reserves)
and a loss reserve provision for the professional liability aggregate excess
reinsurance referred to above.
Underwriting and acquisition expenses were $7.7 million for the eight month
period ended September 30, 1998 and were comprised of ceding commissions of $4.8
million, profit sharing commission and other underwriting expenses of $1.6
million and federal excise tax of $1.3 million.
Investment Loss. The investment loss for the quarter ended September 30, 1998
was $16.1 million. The investment loss for the eight month period ended
September 30, 1998 was $9.9 million. Investment results are derived primarily
from investment vehicles of independent investment managers. The investment
losses for the quarter and the eight month period were primarily caused by
significant declines in numerous sectors of the financial markets during the
quarter, which impacted adversely upon the investment portfolios of the
independent investment managers.
Net Loss. Net loss for the quarter ended September 30, 1998, after interest
expense and general and underwriting expenses, was $18.8 million. Net loss for
the eight month period ended September 30, 1998, after interest, general and
underwriting and incorporation and start up expenses of $4.4 million, was $15.1
million.
9
<PAGE> 10
DELPHI INTERNATIONAL LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
On January 27, 1998, the Company issued rights to each shareholder of DFG to
acquire up to 2,039,507 shares of the Company at $10.25 per share. These shares
were effectively fully subscribed. The shares not initially taken up by the
shareholders of DFG were subscribed for by standby purchasers of the rights
offering. The net proceeds from the offering were $20.3 million after deduction
of $0.6 million of incorporation expenses. In addition to the capital raised by
the rights offering, $40.0 million of subordinated notes were purchased from the
Company by DFG and certain of its subsidiaries. The Company's stock was split
two for one effective June 11, 1998.
The Company's current liquidity needs, in addition to meeting obligations under
reinsurance contracts and funding operating expenses, include repayment of
incorporation expenses paid by DFG and interest payments on subordinated notes
issued to DFG and certain of its subsidiaries. These notes bear interest at 9.0%
per annum payable semi-annually, and are repayable in January 2028. Sources of
liquidity available to the Company and its subsidiaries are expected to exceed
their cash requirements on both a short-term and long-term basis.
The terms of the reinsurance agreements between Oracle Re and the reinsureds
require Oracle Re to provide security in the form of letters of credit. Letter
of credit facilities have accordingly been provided by certain major financial
institutions on behalf of Oracle Re, which facilities are secured by Oracle Re's
investment portfolio with a mark-to-market collateral maintenance requirement of
up to 140% of the facility amounts. In the event that sufficient collateral
cannot be maintained relative to these requirements, Oracle Re may be required
to negotiate with its reinsureds to reduce the size of the reinsurance
transactions, thereby decreasing the amounts of the letters of credit and
related collateral requirements. Moreover, if Oracle Re defaults under the
letter of credit facilities, it may be required to liquidate all or a
substantial portion of its investment portfolio or otherwise secure its
obligations to its reinsureds, which would likely have a material adverse effect
on the business and operations of the Company.
10
<PAGE> 11
DELPHI INTERNATIONAL LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
IMPACT OF YEAR 2000
All of the Company's computer related systems are furnished by its third party
administrative services provider, a substantial and reputable firm which
provides similar services to other Bermuda based insurance companies. This firm
has provided to the Company an assurance that it has completed its Year 2000
assessment and that all of its computer related systems will be Year 2000
compliant by April 1999. The Company has also requested assurances of Year 2000
compliance from its other significant business partners and vendors in an effort
to resolve any potential problems with the products and services they provide.
In most cases, alternative vendors could be utilized in the event Year 2000
problems are encountered. During 1999, the Company will develop appropriate
contingency plans in the event any of the computer systems of its administrative
services provider, business partners and vendors are not Year 2000 compliant.
The costs of the Company's activities relating to the Year 2000 issue have not
been, and are not expected to be, material to the Company's financial condition
or results of operations. The Company does not believe that the Year 2000 issue
will have a material effect on its operations; however, no assurance can be
given in this regard.
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION
In connection with, and because it desires to take advantage of, the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995, the
Company cautions readers regarding certain forward-looking statements in the
foregoing discussion and elsewhere in this Form 10-Q and in any other statement
made by, or on behalf of, the Company, whether or not in future filings with the
Securities and Exchange Commission. Forward-looking statements are statements
not based on historical information and which relate to future operations,
strategies, financial results or other developments. Some forward looking
statements may be identified by the use of terms such as "expects", "believes",
"anticipates", "intends" or "judgment". Forward-looking statements are
necessarily based upon estimates and assumptions that are inherently subject to
significant business, economic and competitive uncertainties and contingencies,
many of which are beyond the Company's control and many of which, with respect
to future business decisions, are subject to change. Examples of such
uncertainties and contingencies include investment strategy, performance of the
Company's investment portfolio, business opportunities and submissions, and
underwriting profitability of the Company's business. These uncertainties and
contingencies can affect actual results and could cause actual results to differ
materially from those expressed in any forward-looking statements made by, or on
behalf of, the Company. The Company disclaims any obligation to update
forward-looking information.
11
<PAGE> 12
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
--------
11 - Computation of Earnings Per Share of Common Stock
(incorporated herein by reference to Note D to the
Consolidated Financial Statements included elsewhere herein)
27 - Financial Data Schedule
(b) Reports on Form 8-K
-------------------
None
SIGNATURES
Pursuant to the requirements 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.
DELPHI INTERNATIONAL LTD. (Registrant)
/s/ C. O'CONNOR
--------------------------------------------
C. O'Connor
President and Chief Executive Officer
(Principal Executive Officer)
/s/ D. EZEKIEL
--------------------------------------------
D. Ezekiel
Vice-President and Director
(Principal Accounting and Financial Officer)
Date: November 10, 1998
12
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1998 (UNAUDITED) AND THE
CONSOLIDATED STATEMENT OF INCOME FOR THE PERIOD FROM JANUARY 27, 1998 TO
SEPTEMBER 30, 1998 (UNAUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-27-1998
<PERIOD-END> SEP-30-1998
<DEBT-HELD-FOR-SALE> 18,651,391
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 144,444,731
<CASH> 10,388,716
<RECOVER-REINSURE> 26,706,651
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 181,901,666
<POLICY-LOSSES> 121,236,194
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 40,000,000
0
0
<COMMON> 40,790
<OTHER-SE> 6,033,426
<TOTAL-LIABILITY-AND-EQUITY> 181,901,666
132,844,950
<INVESTMENT-INCOME> (9,863,882)
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 0
<BENEFITS> 126,029,954
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 7,661,450
<INCOME-PRETAX> (15,149,070)
<INCOME-TAX> 0
<INCOME-CONTINUING> (15,149,070)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,149,070)
<EPS-PRIMARY> (3.71)
<EPS-DILUTED> (3.71)
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
