<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 June 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)
<TABLE>
<S> <C> <C>
Bermuda (441) 295 1683 N/A
(State or other Jurisdiction of (Registrant's telephone number, (I.R.S. Employer Identification
incorporation or organization) including area code) Number)
</TABLE>
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 August. 3, 1998, the Registrant had 4,079,014 shares of Common Stock
outstanding.
1
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DELPHI INTERNATIONAL LTD.
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION Page
-----
Consolidated Statements of Income for the three
months ended June 30, 1998 and the period from
January 27, 1998 to June 30, 1998 3
Consolidated Balance Sheet at June 30, 1998 4
Consolidated Statement of Cash Flows for the
Period from January 27, 1998 to June 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 11
2
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PART 1. FINANCIAL INFORMATION
DELPHI INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(EXPRESSED IN US DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Period from
Ended January 27, 1998
June 30, 1998 to June 30, 1998
------------- ----------------
<S> <C> <C>
REVENUE:
Premiums Written $ -- $120,833,950
Premiums Ceded -- --
------------ ------------
Net Written Premiums -- 120,833,950
------------
Change in Unearned Premiums -- --
------------ ------------
Premiums Earned -- 120,833,950
Net Investment (Loss) Income (1,390,109) 6,191,023
------------ ------------
Total Revenue (1,390,109) 127,024,973
------------ ------------
LOSSES AND EXPENSES:
Losses Incurred (4,370,993) 112,567,176
Underwriting and Acquisition Expenses 931,688 7,672,228
Interest Expense 673,151 1,183,562
General and Administrative Expenses 426,738 674,157
Incorporation Costs 166,484 1,320,588
------------ ------------
Total Losses and Expenses (2,172,932) 123,417,711
------------ ------------
Net Income 782,823 3,607,262
Other Comprehensive Income:
Unrealized Gains on Fixed Maturity Securities 258,052 376,102
------------ ------------
Comprehensive Income $ 1,040,875 $ 3,983,364
============ ============
Net Income per share of common stock $ 0.19 $ 0.88
Common shares outstanding 4,079,014 4,079,014
</TABLE>
See notes to consolidated financial statements
3
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DELPHI INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 1998
(EXPRESSED IN US DOLLARS)
(UNAUDITED)
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<CAPTION>
ASSETS
<S> <C>
Investments:
Balance with Independent Investment Managers $134,648,400
Fixed Maturity Securities available for sale 9,120,689
------------
Total 143,769,089
Cash and Cash Equivalents 9,345,575
Funds Withheld by Ceding Reinsurer 15,514,073
Reinsurance Premium Receivable 10,395,000
Other Assets 157,441
------------
TOTAL ASSETS $179,181,178
============
LIABILITIES
Reserve for Outstanding Losses $109,281,481
Provision for Annuity Reinsurance Payments 10,500,000
Reinsurance Balances Payable 1,661,634
Loans 30,000,000
Other Liabilities 3,499,752
------------
TOTAL LIABILITIES 154,942,867
------------
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 376,102
Retained Earnings 3,607,262
------------
TOTAL SHAREHOLDERS' EQUITY 24,238,311
------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $179,181,178
============
</TABLE>
See notes to consolidated financial statements
4
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DELPHI INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
PERIOD FROM JANUARY 27, 1998 TO JUNE 30, 1998
(EXPRESSED IN US DOLLARS)
(UNAUDITED)
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<CAPTION>
NET CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C>
Net Income $ 3,607,262
Adjustments to reconcile net income to net cash
provided by operating activities:
Net unrealized gains on balances with independent
investment managers (5,539,772)
Funds withheld by ceding reinsurer (15,514,073)
Reinsurance premium receivable (10,395,000)
Amortization on fixed maturity securities (1,634)
Incorporation and start-up costs 1,316,437
Accrued interest (93,158)
Prepaid expenses (64,282)
Reserve for outstanding losses 109,281,481
Provision for annuity reinsurance payments 10,500,000
Reinsurance balances payable 1,661,634
Other liabilities 3,499,752
-------------
Net cash provided by operating activities 98,258,647
-------------
CASH FLOWS FROM INVESTING ACTIVITIES
Balances with independent investment managers (129,108,629)
Purchase of fixed maturity securities (8,742,953)
-------------
Net cash used by investing activities (137,851,582)
-------------
CASH FLOWS FROM FINANCING ACTIVITIES
Loans 30,000,000
Proceeds from issue of common stock 20,254,947
Incorporation and start-up costs (1,316,437)
-------------
Net cash provided by financing activities 48,938,510
-------------
Increase in cash and cash equivalents 9,345,575
Cash and cash equivalents at beginning of period --
-------------
Cash and cash equivalents at end of period $ 9,345,575
=============
</TABLE>
See notes to consolidated financial statements
5
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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") 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 June 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 Reinsurance Company Ltd., a
Class 3 registered insurance company under the Bermuda Insurance Act 1978.
During the period ended June 30,1998, Oracle entered into loss portfolio
reinsurance agreements with two subsidiaries of Delphi Financial Group, Inc.,
("DFG") involving premiums of $81,000,000 and $39,833,950, respectively.
Premiums Written The reinsurance agreements entered into by the Company
involve the reinsurance of past liabilities and are considered to contain
sufficient element 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.
New business written in the three month period ended June 30, 1998 relates to 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.
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DELPHI INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Investments Balances with independent investment managers, which are
primarily investments in investment companies, are accounted for under the
equity method with earnings 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
the Company'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 & LOAN FINANCING
In January 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 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 issued 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 $30,000,000 was advanced to the
Company by members of DFG. These loans bear interest at 9% per annum, payable
semi-annually, and are repayable in January 2028.
NOTE C - INVESTMENTS
At June 30, 1998 the Company had fixed maturity securities available for sale
with a carrying value and a fair value of $9,120,689 and an amortized cost of
$8,744,587. At June 30, 1998, the Company had balances with independent
investment managers with a carrying value and a fair value of $134,648,400.
7
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DELPHI INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE D - NET INCOME PER SHARE OF COMMON STOCK
Net Income per share of common stock is computed by dividing net income by the
number of common shares outstanding for the period:
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<CAPTION>
Period from
Three months ended January 27, 1998
June 30, 1998 to June 30, 1998
<S> <C> <C>
Net Income $ 782,823 $3,607,262
Common shares outstanding 4,079,014 4,079,014
Net Income per share of common stock $ 0.19 $ 0.88
</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 ineffective portion of a derivative's change
in fair value 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
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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.
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
following 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. 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, among other important factors,
those affecting the insurance industry generally, such as legislative and
regulatory developments and market pricing and competitive trends, and those
relating specifically to the Company's business, such as the level of its
insurance premium production, the claims experience of its insurance products,
its investment strategy and the performance of its investment portfolio. 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.
RESULTS OF OPERATIONS
Underwriting Income. The company commenced underwriting through its wholly-owned
subsidiary, Oracle, on January 27, 1998. Deposits for the quarter ended June 30,
1998 of $10.5 million were derived from the reinsurance of annuity business and
have been recorded as a liability. Premiums written for the five month period
ended June 30, 1998 were $120.8 million. Premiums were derived from workers
compensation aggregate excess of loss reinsurance of Safety National Casualty
Corporation ("SNCC") in the amount of $81.0 million and from the quota share
reinsurance of Reliance Standard Life Insurance Company ("RSL") of $39.8
million. Oracle will focus on the reinsurance of group employee benefit
products, including group long-term disability and excess workers compensation
insurance. Oracle intends to expand its customer base and develop additional
products and services.
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Underwriting Expenses. Losses incurred of $112.6 million are 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
June 30, 1998, losses paid, and any changes in underlying loss reserves. The
company reviewed its methods for estimating and establishing its loss reserves
at June 30, 1998, which resulted in a $5.4 million reduction in the reserve for
outstanding losses and losses incurred.
Underwriting and Acquisition Expenses were $0.9 million for the quarter ended
June 30 1998 and $7.7 million for the five month period ended June 30, 1998. The
total for the five month period was 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) Income. The investment loss for the quarter ended June 30 1998
was $1.4 million. Investment income for the five month period ended June 30,
1998 was $6.2 million. Investment results are derived primarily from investment
vehicles of independent investment managers. The investment loss for the quarter
was caused by a decline in the equity markets within certain emerging market
countries.
Net Income. Net income for the quarter ended June 30, 1998, after interest
expense and general and underwriting expenses including incorporation and start
up costs of $1.3 million, was $0.8 million. Net income for the five month period
ended June 30, 1998, after interest, general and underwriting and incorporation
and start up expenses of $3.2 million, was $3.6 million.
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 the 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, a further $30.0 million was lent to the Company by DFG and
its subsidiaries. The stock was split two for one effective June 11, 1998.
The Company had $11.0 million of financial resources available at the holding
company level at June 30, 1998, after investing $40.0 million in Oracle at
inception. Funds were received from the rights offering and from loans advanced
from DFG and its subsidiaries. The financial resources available at the holding
company level are primarily composed of investments in fixed income and other
marketable securities. The assets of Oracle are primarily invested with
independent investment managers or in marketable securities. Substantially all
of the amounts invested with independent investment managers are withdrawable at
least annually, subject to applicable notice requirements.
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 the loans from DFG
and its subsidiaries. These loans 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.
10
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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: August 7, 1998
11
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<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1998 (UNAUDITED) AND THE CONSOLIDATED
STATEMENT OF INCOME FOR THE PERIOD FROM JANUARY 27, 1998 TO JUNE 30, 1998
(UNAUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-27-1998
<PERIOD-END> JUN-30-1998
<DEBT-HELD-FOR-SALE> 9,120,689
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 143,769,089
<CASH> 9,345,575
<RECOVER-REINSURE> 25,909,073
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 179,181,178
<POLICY-LOSSES> 109,281,481
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 30,000,000
0
0
<COMMON> 40,790
<OTHER-SE> 24,197,521
<TOTAL-LIABILITY-AND-EQUITY> 179,181,178
120,833,950
<INVESTMENT-INCOME> 6,191,023
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 0
<BENEFITS> 112,567,176
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 7,672,228
<INCOME-PRETAX> 3,607,262
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,607,262
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,607,262
<EPS-PRIMARY> 0.88
<EPS-DILUTED> 0.88
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
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</TABLE>
